BAR REVIEW

MATERIALS
IN
COMMERGIAL LAW

FIFTEENTH EDITION

2013

JORGE V. MIRAVITE
Practicing Lawyer
A.8., LL.B. (Ateneo de Manila University)
 COVERAGE H. Liabilities of Parties
1. Maker
MERCANTILE LAW
2. Drawer
2013 BAR EXAMINATIONS 3. Acceptor
l. Letters of Credit 4. lndorser
A. Definition and Nature of Letter of Credit 5. Warranties
B. Parties to a Letter of Credit l. Presentment for Payment
1. Rights and Obligations of Parties 1. Necessity of Presentment for Payment
C. Basic Principles of Letter of Credit 2. Parties to Whom Presentment for Payment Should Be Made
1. Doctrine of lndePendence 3. Dispensation with Presentment for Payment
2. Fraud Exception PrinciPle 4. Dishonor by Non-Payment
3. Doctrine of Strict ComPliance J. Notice of Dishonor
ll. Trust Receipts Law 1. Parties to Be Notified
A. Definition/Concept of a Trust Receipt Transaction 2. Parties Who May Give Notice and Dishonor
1. LoaniSecurity Feature 3. Effect of Notice
2. Ownership of the Goods, Documents and lnstruments under a Trust 4. Form of Notice
Receipts 5. Waiver
B. Rights of the Entruster 6. Dispensation with Notice
1. Validity of the Security lnterest as Against the Creditors of the 7. Effect of Failure to Give Notice
Entrustee/lnnocent Purchasers for Value K. Discharge of Negotiable lnstrument
C. Obligation and Liabilfty of the Entrustee - 1. Discharge of Negotiable lnstrument
1. PaymenUDelivery of Proceeds of Sale or Disposition of Goods, 2. Discharge of Parties Secondarily Liable
Documents or I nstruments 3. Right of Party Who Discharged lnstrument
2. Return of Goods, Documents or lnstruments in Case of Sale 4. Renunciation by Holder
3. Liability for Loss of Goods, Documents or lnstruments L. Material Alteration
4. Penal Sanction if Offender is a Corporation 1. Concept
D. Remedies Available 2. Effect of Material Alteration
lll. Negotiable lnstrurnents Law M. Acceptance
A. Forms and lnterPretation 1. Definition
1. Requisites of NegotiabilitY 2. Manner
2. Kinds of Negotiable lnstruments 3. Time for Acceptance
B. Completion and Delivery 4. Rules Governing Acceptance
1. lnsertion of Date N. Presentment for Acceptance
2. Completion of Blanks 1 . Time/Place/Manner of Presentment
3. lncomplete and Undelivered lnstruments 2. Effect of Failure to Make Presentment
4. Complete but Undelivered lnstruments 3. Dishonor by Non-Acceptance
C. Signature O. Promissory Notes
1. Signing in Trade Name P. Checks
2. Signature of Agent 1. Definition
3. lndorsement by Minor or Corporation 2. Kinds
4. Forgery 3. Presentment for Payment
D. Consideration a. Time t
E. Accommodation Party b. Effect of Delay
F. Negotiation lV. lnsurance Code
1,'Distinguished from Assignment A. Concept of lnsurance
2. Modes of Negotiation B. Elements of an lnsurance Contract
3. Kinds of lndorsements C. CharacteristicsiNature of lnsurance Contracts
G. Rights of the Holder
1. Holder in Due Course
2. Defenses Against the Holder

XX xxi
 5. Liability for Baggage of Passengers
D. Classes
a. Checked-ln Baggage
1. Marine
b. Baggage in Possession of Passengers
2. Fire
C. Safety of Passengers
3. CasualtY
1. Void Stipulations
4. SuretyshiP
2. Duration of Liability
5. Life
a. Waiting for Carrier or Boarding of Carrier
6. Compulsory Motor Vehicle Liability lnsurance
b. Arrival at Destination
E. lnsurable lnterest
3. Liability for Acts of Others
1. ln Life/Health
a. Employees
2. ln PropertY
b. Other Passengers and Strangers
3. Double lnsurance and Over lnsurance
4. Extent of Liability for Damages
4. Multiple or Several lnterests on Same Property
D. Bill of Lading
F. Perfection of the Contract of lnsurance
1. Three-Fold Character
1 . Offer and Acceptance/Consensual
2. Delivery of Goods
a. DelaY in AccePtance
b. Delivery of PolicY a. Period of Delivery
b. Delivery Without Surrender of Bill of Lading
2. Premium Payment
c. Refusal of Consignee to Take Delivery
3. Non-Default Options in Life lnsurance
3. Period for Filing Claims
4. Reinstatement of a Lapsed Policy of Life lnsurance
5. Refund of Premiums 4. Period for Filing Actions
E. Maritime Commerce
G. Rescission of lnsurance Contracts
1. Charter Parties ,
1. Concealment
a. BareboaVDemise Charter
2. MisrepresentationiOmissions
b" Time Charter
3. Breach of Warranties
c. Voyage/Trip Charter
H. Claims Settlement and Subrogation
2. Liability of Ship Owners and Shipping Agents
1. Notice and Proof of Loss
a. Liability for Acts of Captain
2. Guidelines on Cl,aims Settlement
b. Exceptions to Limited Liability
a. Unfair Claims Settlement; Sanctions
3. Accidents and Damages in Maritime Commerce
b. PrescriPtion of Action
a. General Average
c. Subrogation
b. Collisions
V. Transportation Laws
4. Carriage of Goods by Sea Act
A. Common Carriers
a. Application
1. Diligence Required of Common Carriers
b. Notice of Loss or Damage
2. Liabilities of Common Carriers
c. Period of Prescription
B. Vigilance over Goods
d. Limitation of Liability
1. Exempting Causes
F, The Warsaw Convention
a. Requirement of Absence of Negligence
1. Applicability
b. Absence of DelaY
2. Limitation of Liability
c. Due Diligence to Prevent or Lessen the Loss
a. Liability to Passengers
2. Contributory Negligence
b. Liability for Checked Baggage
3. Duration of LiabilitY
c. Liability for Hand-Carried Baggage
a. Delivery of Goods to'Common Carrier
3. Willful Misconduct
b. Actual or Constructive Delivery
, c. TemPorary Unloading or Storage Vl. The Gorporation Gode
A. Corporation
4. Stipulation for Limitation of Liability
1. Definition
a. Void StiPulations
2. Attributes of the Corporation
b. Limitation of Liability to Fixed Amount
B. Classes of Corporations
c. Limitation of Liability in Absence of Declaration of Greater Value

xxll xxlll
C. Nationality of Corporations 3. How Exercised
1t Place of lncorporation Test a. By the Shareholders
2. Control Test b. By the Board of Directors
3. Grandfather Rule c. By the Officers
D. Corporate Juridical Personality 4. Trust Fund Doctrine
1. Doctrine of Separate Juridical Personality G. Board of Directors and Trustees
a. Liability for Torts and Crimes 1. Doctrine of Centralized Management
b. Recovery of Moral Damages 2. Business Judgment Rule
2. Doctrine of Piercing the Corporate Veil 3. Tenure, Qualifications and Disqualifications of Directors or Trustees
a. Grounds for Application of Doctrine 4. Elections
b. Test in Determining Applicability a. Cumulative Voting/Straight Voting
E. lncorporation and Organization b. Quorum
1. Promoter 5. Removal
a. Liability of Promoter 6. Filling of Vacancies
b. Liability of Corporation for Promoter's Contracts 7. Compensation
2. Number and Qualifications of lncorporators 8. Fiduciaries Duties and Liability Rules
3. Corporate Name-Limitations on Use of Corporate Name 9. Responsibility for Crimes
4. Corporate Term 10. lnside lnformation
5. Minimum Capital Stock and Subscription Requirements 1 1. Contracts

6. Articles of lncorporation a. By Self-Dealing Directors with the Corporation

a. Nature and Function of Articles b. Between Corporations with lnterlocking Directors
b. Contents c. Management Contracts
c. Amendment 1 2. Executive Committee

d. Non-Amenable ltems 13. Meetings

7. Registration and lssuance of Certificate of lncorporation a. Regular or Special
8. Adoption of By-Laws i. When and Where
a. Nature and Functions of BY-Laws ii. Notice
b. Requisitet 6f Valid By-Laws b. Who Presides
c. Binding Effects c. Quorum
d. Amendment or Revision d. Rule on Abstention
F. Corporate Powers H. Stockholders and Members
1. General Powers, Theory of General Capacity 1. Rights of a Stockholder and Members
2. Specific Powers, Theory of Specific Capacity a. Doctrine of Equality of Shares
a. Power to Extend or Shorten Corporate Term 2. Participation in Management
b. Power to lncrease or Decrease Capital Stock or lncur, Create, . a. Proxy
lncrease, Bonded lndebtedness b. Voting Trust
c. Power to Deny Pre-Emptive Rights c. Cases When Stockholders' Action is Required
d. Power to Sell or Dispose of Corporate Assets i. By a Majority Vote
e. Power to Acquire Own Shares ii. By a Two-Thirds Vote
f. Power to lnvest Corporate Funds in Another Corporation or iii. By Cumulative Voting
Business 3. Proprietary Rights
g. Power to Declare Dividends a. Right to Dividends
h. Power to Enter lnto Management Contract b. Right of Appraisal
Vires Acts c. Right to lnspect
' i. Ultra i. Applicability of Ultra Vires Doctrine d. Pre-Emptive Right
ii. Consequences of Ultra Vires Acts e. Right to Vote
f. Right to Dividends
g. Right of First Refusal

XXIV XXV
 4. Remedial Rights d. Sale of All of Shares Not Fully Paid
a. lndividualSuit e. Sale of Fully Paid Shares
b. Representative Suit , f. Requisites of a Valid Transfer
c. Derivative Suit g. lnvoluntary Dealings with Shares
5. Obligation of a Stockholder J. Dissolution and Liquidation
6. Meetings 1. Modes of Dissolution
a. Regular or Special a. Voluntary
i. When and Where i. Where No Creditors Are Affected
ii. Notice ii. Where Creditors Are Affected
b. Who Calls the Meetings iii. By Shortening of Corporate Term
c. Quorum b. lnvoluntary
d. Minutes of the Meetings i. By Expiration of Corporate Term
L Capital Structure ii. Failure to Organize and Commence Business Within 2 Years
1. Subscription Agreements from lncorporation
2. Consideration for Stocks iii. Legislative Dissolution
3. Shares of Stock iv. Dissolution by the SEC on Grounds under Existing Laws
a. Nature of Stock 2. Methods of Liquidation
b. Subscription Agreements a. By the Corporation ltself
c. Consideration for Shares of Stock b. Conveyance to a Trustee within a 3-Year Period
d. Watered Stock c. By Management Committee or Rehabilitation Receiver
i. Definition d. Liquidation after Three Years
ii. Liability of Directors for Watered Stocks K. Other Corporations
iii. Trust Fund Doctrine for Liability for Watered Stocks 1. Close Corporations
e. Situs of the Shares of Stock a. Characteristics of a Close Corporation ;
f. Classes of Shares of Stock b. Validity of Restrictions on Transfer of Shares
4. Payment of Balance of Subscription c. lssuance or Transfer of Stock in Breach of Qualifying Conditions
a. Call by Board of Directors d. When Board Meeting is [.lnnecessary or lmproperly Held
b. Notice R6q'uirement e. Pre-Emptive Right
c. Sale of Delinquent Shares f. Amendment of Articles of lncorporation
i. Effect of Delinquency g. Deadlocks
ii. Call by Resolution of the Board of Directors 2. Non-Stock Corporations
iii. Notice of Sale a. Definition
iv. Auction Sale and the Highest Bidder b. Purposes
5. Certificate of Stock c. Treatment of Profits
a. Nature of the Certificate d. Distribution of Assets upon Dissolution
b. Uncertificated Shares 3. Religious Corporations - Exclude
c. Negotiability 4. Foreign Corporations
i. Requirements for Valid Transfer of Stocks a. Bases of Authority over Foreign Corporations
d. lssuance i. Consent
i. Full Payment ii. Doctrine of "Doing Business" (relate to definition under the
ii. Payment Pro-Rata Foreign lnvestments Act, R.A. No. 7042)
e. Lost or Destroyed Certificates b. Necessity of a License to Do Business
6. Stock and Transfer Book i. Requisites for lssuance of a License
Contents
' a. b. Who May Make Valid Entries
ii. Resident Agent
c. Personality to Sue
7. Disposition and Encumbrance of Shares d. Suability of Foreign Corporations
a. Allowable Restrictions on the Sale of Shares e. lnstances When Unlicensed Foreign Corporations May Be
b. Sale of Partially Paid Shares Allowed
c. Sale of a Portion of Shares Not Fully Paid f. Grounds for Revocation of License

XXVI XXVII
L. Mergers and Consolidations 3. Bank Powers and Liabilities
1. Definition and Concept a. Corporate Powers
2. Constituent vs. Consolidated Corporation b. Banking and lncidental Powers
4. Diligence Required of Banks
3. Plan of Merger or Consolidation
4. Articles of Merger or Consolidation 5. Nature of Bank Funds and Bank - Relevant
Deposits
Jurisprudence

5. Procedure 6. Stipulation on lnterests

6. Effectivity 7. Grant of Loans and Security Requirements
7- Limitations a. Ratio of Net Worth to Total Risk Assets
8. Effects b. Single Borrower's Limit
Vll. Securities Regulation Code (R.A. No.8799) c. Restrictions on Bank Exposure to DOSRI (Directors, Officers,
A. State Policy, Purpose Stockholders and their Related lnterests)
B. Securities Required to Be Registered lX. lntellectual Property Code (Exclude lmplementing Rules &
1. Exempt Securities Regulations)
2. Exempt Transactions A. lntellectual Property Rights in General
C, Procedure for Registration of Securities 1. lntellectual Property Rights
D. Prohibitions on Fraud, Manipulation and lnsider Trading 2. Differences between Copyrights, Trademarks and Patent
1. Manipulation of Security Prices 3. Technology Transfer Arrangements
2. Short Sales B. Patents
3. Fraudulent Transactions 1. Patentable lnventions
4. lnsider Trading 2. Non-Patentable lnventions
E. Protection of lnvestors 3. Ownership of a Patent
1. Tender Offer Rule a. Right to a Patent
2. Rules on Proxy Solicitation b. First-to-File Rule
3. Disclosure Rule c. lnventions Created Pursuant to a Commission
F. Civil Liability d. Right of Priority
Vlll. Banking Laws 4. Grounds for Cancellation of a Patent
A. The New Central Bank Act (R.A. No. 7653) 5. Remedy of the True and Actual lnventor
1. State Policies 6. Rights Conferred by a Patent
2. Creation of the Bangko Sentral ng Pilipinas (BSP) 7. Limitations of Patent Rights
3. Responsibility and Primary Objective a. Prior User
4. Monetary Board-Powers and Functions b. Use by the Government
5. How the BSP Handles Banks in Distress 8. Patent lnfringement
a. Conservatorship a. Tests in Patent lnfringement
b. Closure . i. Literal lnfringement
c. Receivership ii. Doctrine of Equivalents
d. Liquidation b. Defenses in Action for lnfringement
6. How the BSP Handles Exchange Crisis 9. Licensing
a. Legal Tender Power a. Voluntary
b. Rate of Exchange b. Compulsory
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended) 10. Assignment and Transmission of Rights
1. Purpose C. Trademarks
2. Prohibited Acts 1. Definition of Marks, Collective Marks, Trade Names
3. Deposits Covered 2. Acquisition of Ownership of Mark
4. Exceptions 3. Acquisition of Ownership of Trade Name
5. Garnishment of Deposits, lncluding Foreign Deposits 4. Non-Registrable Marks
C. General Banking Law of 2000 (R.A. No. 8791) 5. Prior Use of Mark as a Requirement
1. Definition and Classification of Banks 6. Tests to Determine Confusing Similarity between Marks
2. Distinction of Banks from Quasi-Banks and Trust Entities a. Dominancy Test
b. Holistic Test

xxviii XXIX
 7. Well-Known Marks IMPORTANT NOTES:
8. Rights Conferred by Registration 1. This listing of covered topics is not intended and should not be used by
9. Use by Third Parties of Names, etc. Similar to Registered Mark the law schools as a course outline. This was drawn up for the limited
10. lnfringement and Remedies purpose of ensuring that Bar candidates are guided on the coverage of the
a. Trademark lnfringement 2013 Bar Examinations. Listings whose subject matters run across several
b. Damages Bar Subjects shall be deemed to include only the subject matters specific to
c. Requirement of Notice the given Bar Subject. For example, 'ilmpeachment" is generally a topic
11. Unfair Competition under Political Law but is listed also under Legal and Judicial Ethics for
12. Trade Names or Business Names the ethical components of this Bar Subject. Note that there may be specific
13. Collective Marks identification of the covering Bar Subject where a topic may be common to
D. Copyrights several Bar Subjects. For example, "lndependent Civil Actions" mentioned in
1 . Basic Principles, Sections 172.2, 175 and 181 the Civil Code shall be included as a topic in Remedial Law rather than in
2. Copyrightable Works Civil Law. Note also that many special laws, rules or specific topics,
a. Original Works otherwise covered by the different examinable Bar Subjects, have been
b. Derivative Works omitted or are expressly excluded from the coverage of the 2013 Bar
3. Non-Copyrightable Works Examinations.
4. Rights of Copyright Owner 2. The appreciation of the fact situations in, and the answers to, some
5. Rules on Ownership of Copyright questions in every Bar Subject may require the consideration of underlying
6. Limitations on Copyright ethical rules and values.
a. Doctrine of Fair Use 3. All Supreme Court decisions - pertinent to a given Bar subject and its
b. Copyright lnfringement listed topics, and promulgated up to January 37, 2013 - are examinable
X. Special Laws materials within the coverage of the 20'13 Bar Examinations.
A. The Chattel Mortgage Law and Real Estate Mortgage Law (Excluded
and made a part of Givil Law coverage)
B. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No.
91 e4)
1. Policy of the Law
2. Covered lnstitutions
3. Obligations of Covered lnstitutions
4. Covered Transactions
5. Suspicious Transactions
6. When ls Money Laundering Committed
7. UnlaMul Activities or Predicate Crimes
8. Anti-Money Laundering Council
9. Functions
10. Freezing of Monetary lnstrument or Property
11. Authority to lnquire lnto Bank Deposits
C. Foreign lnvestments Act (R.A. No. 7042)
1. Policy of the Law
2. Definition of Terms
a. Foreign lnvestment
b. "Doing Business" in the Philippines
c. Export Enterprise
d. Domestic Market Enterprise
'3. Registration of lnvestments on Non-Philippine Nationals
4. Foreign lnvestments in Export Enterprise
5. Foreign lnvestments in Domestic Market Enterprise
6. Foreign lnvestment Negative List

xxx xxxi
 TABLE OF CONTENTS

Dedication.. i

Preface...... ii
Coverage of 2013 Bar Examination in Commercial Law ...... xx
l. lntroductory Chapter.. .................. 1

ll. Letters of Credit.. 4

lll. Trust Receipts Law... ....,........... 1g
lV. Negotiable lnstruments Law... .....,... 30
V. lnsurance Code. ..........151
Vl. Transportation Law........... .........277
Vll. Bill of Lading... ....246
Vlll. Maritime Commerce......... ........... 363
lX.CarriageofGoodsBySeaAct.'.....'.....|.'''
X. Warsaw Convention. ......406
Xl. Corporation Code.... ...... 417
Xll. Securities Regulation Code... .........669
Xlll. New Central Bank Act.... .........693
XlV. Law on Secrecy of Bank Deposits..... ........... 715
XV. General Banking Act...... .............. 73.4
XVl. lntellectual Property Code. ............... 745
XVll. Anti-Money Laundering Act.... .............923
XVlll. Foreign lnvestments Act...... ....930
2011 Bar Examination for Gommercial Law with Answers..... g3S
2012Bar Examination for Commercial Law with Answers..... 960
lndex... ...g91
 CHAPTER I

INTRODUCTORY CHAPTER

General Concepts

A. Gommerce Defined

Bar Question: Explain the meaning of commerce in legal parlance.

(1956 Ba)

Answer: Commerce is that branch of human activity, the purpose of

which is to bring products to the consumer by means of exchanges
or operations which tend to supply and extend them to him,
habitually, with intent of gain, at the proper time and place and in
good quality and quantity (1 Blanco 36).

1. Acts of Commerce

a. Defined
Bar Question: What are "acts of commerce?" (1963 Bar)
Bar Question: What are commercialtransactions? (2003, 1956 Bar)

Answer: Acts of commerce/iommercial transaction are those

contained in the Code of Commerce and all others of analogous
character (Article 2, Code of Commerce).

b. How Governed

Acts of commerce/commercial transactions shall be governed by

the provisions contained in the Code of Commerce; in their absence,
by the usages of commerce generally observed in each place; and in
the absence of both rules, by those of the civil law (lbid.; Feati Bank
vs. CA, 196 SCRA 576).

B. GommercialLaw

1. Defined
Bar Question: Define commercial law? What are the sources of
commercialtaw? What are the printcipat characteristics of said taw?
(1956 Bar)

Answer: Commercial law is that branch of private law which

re4lulates the juridical relations arising from commercial acts.
 INTRODUCTORY CHAPTER INTRODUCTORY CHAPTER

The sources of commercial law are: (a) Principal: Statute law,
agreements, customs and couri decislons, and (b) Auxiliary: Natural
taw, scientific law, foreign statutory law and iudicial decisions, and
opinions of authorities.
The principal characteristics of commercial law are: (a) it is
uniform - applies to all; (b) it is universal - used in all countries; (c)
it is equitable - just and tair; (d) it is customary - evolved by the lapse
of time; and (e) it is progressive - changes to meet everyday needs.
G. Gommercial Laws of the Philippines
2. Special Commercial Laws
The special commercial laws may be grouped under five
headings: (a) Private Corporations, Banking and Allied Laws; (b)
Negotiable lnstruments, Merchants and Allied Laws; (c)
Transportation and Allied Laws; (d) lnsurance Code and Allied Laws;
and (e) Other Special Commercial Laws.
Bar Question: Mention ten special laws embraced in the subiect
Mercantile Law. (1965 Bar)

1. Code of Commerce of the Philippines of 1888
a. Origin
The Code of Commerce of the Philippines was promulgated by
Queen Maria Cristina on August B, 1888, and except for differences
occasioned by culture and geography, was patterned after the
Spanish Code of Commerce of 1885. The latter is a revision of the
Spanish Code of 1829, which in turn was modeled afterthe Code of
Napoleon of 1807.
b. Portions Still in Force
Answer: The following are some of the special laws embraced in
the subject Mercantile Law: (1) Corporation Code; (2) Negotiable
lnstruments Law; (3) lnsurance Code; (4) Public Servlce Law; (5)
General Banking Law; (6) Secun1les Regulation Code; (7)
lnsolvency Law; (B) RetailTrade Nationalization Law; (9) Chattel
Morlgage Law; and (10) Warehouse Receipts Law
3. Effect of the New Givil Code on the Code of Commerce
Bar Question: What contracts formerly treated in the Code of
Commerce have been expressly repealed by the New Civil Code of
the Philippines? (1965, 1959 Bar)

The Code of*Commerce of 1888 has been altered, modified or
amended by the passage of many special commercial laws since the
establishment of American sovereignty in the Philippines. The
passage of the Civil Code in 1950 also took away from the
application of the Code of Commerce many contracts.
Answer: The provisions of the Code of Commerce on sa/es,
partnership, agency, loan, deposit and guaranty have been expressly
ropealed by the New Civil Code (Article 2270 [2], Civil Code).

Bar Question: ts the Code of Commerce still appticabte to present

day commercial transactions? Explain. (1 969 Ba)

Answer: Yes, portions of the Code of Commerce still in force, partly

or in whole, are as follows:
1) Merchanfs, Books of Merchants and General Provisions on
Contracts (Ariicles 1 -63)
2) Joint Account Associations (Ariicles 239-243)
3) Commercial Barter (Afticle 346)
' 4) Transfers of Non-Negotiable Credits (Articles 347-348)
5) Commercial Contracts of Transportation Overland (Arlicles
349-379)
6) Letters of Credit (Articles 567-572)
7) Maritime Commerce (Afticles 573-869)
 CHAPTER II
LETTERS OF CREDIT
l. Definition and Nature
A letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the letter of
credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit. The buyer and
the seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer. Once the credit is
established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of
title. To get paid, the seller execUtes a draft and presents it together
with the required documents to the issuing bank. The issuing bank
redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents
upon paying thdseller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling
him to the goods. Under this arrangement, the seller gets paid only if
he delivers the documents of title over the goods, while the buyer
acquires the said documents and control over the goods only after
reimbursing the bank (BA vs. CA,228 SCRA 357).
Bar Question: Ricardo mortgaged his fishpond to AC Bank to
secure a 1 million loan. ln a separate transaction, he opened a letter
of credit with the same bank for $500,000.00 in favor of HS bank, a
foreign bank, to purchase outboard motors. Likewise, Ricardo
executed a Surety Agreement in favor of AC Bank.
The outboard motors arrived and were delivered to Ricardo, but
he was not able to pay the purchase price thereof.
a) Can AC Bank take possession of the outboard motors?
b| Can AC Bank also foreclose fhe mortgage over the fishpond?
(2005 Ba)
Answer: a) AC Bank cannot take possesslon of the outboard
motors. A letter of credit is a mere financial device developed by
LETTERS OF CREDIT
merchants as a convenient and relatively safe mode of dealing with
fhe sa/es of goods to satisfy the seemingly irreconcilable interests of
a seller, who refuses to paft with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying (See
Transfield vs. Luzon, 443 SCRA 307). As such, the mere opening of
a letter of credit does not vest ownership of the outboard motors in
the bank in the absence of a trust receipt agreement.
b) Yes, in order to enforce payment of the principal loan of 1
million secured by the real estate mortgage on the said fishpond.
A letter of credit is an engagement by a bank or other person made
at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified
in the credit. Through a letter of credit, the bank merely substitutes
its own promise for the promise to pay of one of its customers who
in turn promises to pay the bank the amount of funds mentioned in
the letter of credit plus credit or commitment foes mutually agreed
upon (Prudential vs. lAC, 216 SCRA 257).
A letter of credit is one whereby one person requests some other
person to advance money or give credit to a third person, and
promises that he will repay the same to the person making the
advancement, or accept the bills drawn upon himself for the like
amount (BPl vs. Commissioner, 496 SCRA 601).
The use of credits in commercial transactions serves to reduce the
risk of nonpayment of the purchase price under the contract for the
sale of goods. However, credits are also used in non-sale settings
where they serve to reduce the risk of nonperformance. Generally,
credits in the non-sale settings have come to be known as standby
credits (Transfield vs. Luzon, supra)
There are three significant differences between commercial and
standby credits. First, commercial credits involve the payment of
money under a contract of sale. Such credits become payable upon
the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to cgmply with the sales agreement. ln
the standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany
the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate
by documents that he has performed his contract. The beneficiary of
the standby credit must certify that his obligor has not performed the
contract (lbid.).
 LETTERS OF CREDIT
A clear distinction exists between a letter of credit and
guarantee in that the settlement of a dispute between the parties is
not a prerequisite for the release of funds under a letter of credit
(rbid.).
An irrevocable letter of credit is not synonymous with a confirmed
credit. A credit may be an irrevocable credit and at the same time a
confirmed credit or vice versa (Feati vs. CA, 196 SCRA 576).
An irrevocabte credit refers to the duration of the letter of credit.
What it simply means is that the issuing bank.may not without the
consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve
the right to revoke the credit. On the other hand, a confirmed letter
of credit pertains to the kind of obligation assumed by the
correspondent bank. ln this case, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the
issuing bank's obligation as its own according to the terms and
conditions of the credit (Agbayani, Commercial Laws of the
Philippines, Volume 1, Pages 81-83).
Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents and is thus a commitment by the issuer that the party in
whose favor it is. issued and who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount
specified in the letter. They are in effect absolute undertakings to
pay the money advanced or the amount for which credit is given on
the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they
are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts is the
engagement of the issuing bank to pay the seller once the draft and
other required shipping documents are presented to it (Metrobank
vs. Daway, 432 SCRA 553).
A letter of credit is one of the modes of payment, set out in Sec. B,
Central Bank Circular No. 1389, "Consolidated Foreign Exchange
Rules and Regulations", by which commercial banks sell foreign
exchange to service payments for, e.9., commodity imports.' The
primary purpose of the letter of credit is to substitute for, and
therefore support, the agreement of the buyer/importer to pay money
under a contract or other arrangement (Reliance vs. Daewoo, 228
scRA 545).
LETTERS OF CREDIT
a The opening of a letter of credit in favor of a vendor is only a
mode of payment; it is not among the essential requirements of a
contract of sale enumerated in Articles 1305 and 1474 of the Civil
Code, the absence of any of which will prevent the perfection of the
contract from taking place (Johannes vs. CA,227 SCRA 717).
A standby letter of credit is a security arrangement, not a contract
of guaranty. Payment by the debtor direct to the creditor does not
change the letter of credit although the amount the creditor can
collect from the bank under the letter of credit can ultimately be
reduced (IBAA vs. lAC, 167 SCRA 450).
ll. Governing Laws
Letters of credit transactions are governed by:
a. Code of Commerce (Articles 567-572); and
b. Customs, principally the rules found in the Uniform Customs
and Practices (UCP) for Documentary Credits, which were adopted
by the lnternational Chamber of Commerce (lCC). (Banking Laws of
the Philippines, The General Banking Law, Annotated, BSP, Pages
1 79-1 80).
The observance of the UCP is justified by Article 2 of the Code of
Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. There
being no specific provisions which govern the legal complexities
arising from transactions involving letters of credit, not only between
banks and the seller or buyer, as the case may be, the applicability
of the UCP is undeniable (BA vs. CA,22B SCRA 357).
Letters of credits have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary
Credits of the lnternational Chamber of Commerce. The expressions
Documentary Credit(s) and Standby Lette(s) of Credit mean any
arrangement, however made or described, whereby a bank acting at
the request and on instructions of a customer or on its own behalf is
to make payment against stipulated document(s). The liability of the
issuing banks on an irrevocable letter of credit is a definite
undertaking of the issuing bank, provided that the stipulated
documents are presented to the norhinated. bank or the issuing bank
and the terms and conditions of the Credit are complied with, to pay
at sight if the Credit provides for sight payment (Metrobank vs.
Daway, supra).
 LETTERS OF CREDIT
lll. Under the Gode of Gommerce
A. Defined
Bar Question: What is a letter of credit? (1965 Bar)
Answer A letter of credit is a letter issued by onemerchant to
another for the purpose of attending to a commercial transaction
(Article 567, Code of Commerce).
Bar Question: ls a letter of credit a commercial transaction?
Explain your answer. ts it governed by the Negotiable lnstruments
Law? Reason. (1976, 1968 Ba)
Answer: Yes, a letter of credit is a commercial transaction. The
Code of Commerce contains provisions on Letters of Credit which
are still in force.
The letter of credit is not a negotiable instrument because it is not
payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable (Transfield vs. Luzon, 443
SCRA 307). Hence, it is not governed by the Negotiable lnstrurpents
Law.
B. Essential Gonditions
a. lssued in favor of a definite person and not to order
b. Limited to fixed or specified amount, or to one or more amounts,
but with maximum stated limit. lf any circumstance is missing, the
letter is a mere letter of recommendation (Article 568, Code of
Commerce).
G. Liabilities of Parties
a. Drawer liable to person on whom it was issued provided identity
proven, for the amount paid within fixed maximum.
b. Bearer has no right of action if not paid by person who issued it
(Article 569, lbid.)
c. Drawer may annul letter of credit, informing the bearer and person
to whom addressed (Article 570, lbid.)
d. Bearer shall pay amount received to drawer, otherwise action for
execution may be filed with interest and current exchange in place
where payment made on place where repaid (Article 571, lbid.)
e. lf bearer does not make use of letter of credit within agreed
period, or if none, within 6 months from date if in the Philippines, and
LETTERS OF CREDIT
12 months if outside the Philippines, it shall be void (Article 572,
rbid.)
lV. Under the Uniform Gustoms and Practices (UCP)
A. Parties
There are at least three (3) parties in a letter of credit transaction:
(i) Buyer - This party procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipt of the documents
of title.
(ii) Bank - This party issues the letter of credit, 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.
(iii) Seller - This party, 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 (BA vs. CA, supra).
The number of the parties, not infrequently and almost invariabl/
in international trade practice, may be increased to include the
following:
(i) Advising (notifying) Bank - This party is utilized to convey to
the seller the existence of the credit.
(ii) Confirming Bank - This bank will lend credence to the letter
of credit issued by a lesser known issuing bank.
(iii) Paying Bank - This bank undertakes to encash the drafts
drawn by the exporter.
(iv) Negotiating Bank - This bank may be approached by the
buyer to have the draft discounted instead of going to the place of
the issuing bank to claim payment (lbid.)
B. Rights and Obligations of Parties
A notifying bank'assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.
The notifying bank may suggest to the seller its willingness to
negotiate, but this fact alone does not imply that the notifying bank
promises to accept the draft drawn under the documentary credit
(Feati vs. CA, 196 SCRA 576).
A negotiating bank buys or discounts a draft under the letter of
credit. lts liability is dependent upon the stage of the negotiation. lf
l0 LETTERS OF CREDIT
before the negotiation, it has no liability with respect to the seller, but
after negotiation, a contractual relationship will prevail between the
negotiating bank and the seller. A confirming bank assumes a direct
obligation to the seller, and its liability is a primary one as if the bank
itself had issued the letter of credit (lbid.)
A notifying bank is not a privy to the contract of sale between the
buyer and the seller, its relationship is only with that of the issuing
bank and not with the beneficiary to whom he assumes no liability
(Feativs. CA, 576 SCRA 590).
The acceptance by a notifying bank of instructions of the issuing
bank will not create estoppel on its part resulting in the acceptance of
the trust. Precisely, as a notifying bank, its only obligation is to notify
the seller of the existence of the letter of credit (lbid.).
A notifying bank does not have any contractual relationship with
the buyer, it has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of the letter of
credit (lbid.).
Bar Question: Bravo Bank received from Cisco Bank by registered
mail an irrevocable letter of credit issued by Delta Bank for the
account of Y CoSnpany in the amount of US $10,000,000.00 to cover
the sale of canned fruit juices. The beneficiary of the lefter of credit
was X Corporation which later on partially availed itself of the letter of
credit by submitting to Bravo Bank all documents relative to the
shipment of the cans of fruit juices. Bravo Bank paid X Corporation
for its partial availment. Later, however, it refused fufther availment
because of suspicions of fraud being practiced upon it and, instead,
sued X Corporation to recover what it had paid the latter. How would
you rule if you were the judge to decide the controversy? (2003 Bar)
Answer: lf I were the judge, I would rule that Bravo Bank may
recover from X Corporation. Bravo Bank was only an advising or
notifying bank, and did not assume the responsibility of a confirming
bank. When Bravo Bank later paid X Corporation upon the lafter's
submrssion of the required documents, a discounting arrangement
occurred. Bravo Bank, this time, acted as a negotiating bank,
thereby saving X Corporation from the hardship of presenting the
documents directly to Delta Bank to recover payment. As a
negotiating bank, Bravo Bank has a right of recourse against Delta
Bank and until reimbursement is obtained, X Corporation, as the
LETTERS OF CREDIT l1
drawer of the draft, continues to assume a contingent liability thereon
(See BA vs. CA,22B SCRA 357).
Bar Question: ln letters of credit in banking transactions,
distinguish the liability of a confirming bank from a notifying bank-
(2003, 1994 Bar)
Answer: An advising or notifying bank does not incur any obligation
more than just notifying the beneficiary of the letter of credit issued in
its favor. tt is not liable for a breach of the letter of credit' An
advising bank is bound only to check the "apparent authenticity" of
the letter of credit. A confirming bank assumes a direct obligation to
the setler, and its liability is a primary one as if the bank ifself issued
the tetter of credit. A confirming bank is to honor all drafts drawn in
conformity with the letter of credit (See Feati vs. CA, 196 SCRA
576).
Bar Question: BV agreed to sell to AC, a Ship and Merchandise
Broker, 2,500 cubic meters of logs at $27 per cubic meter FOB.
After inspecting the logs, CD issued a purchase order.
On the arrangements made upon instruction of the consignee, H
&T Corporation of Los Angeles, California, the SP Bank of Los
Angeles rssued an irrevocable letter of credit available at sight in
favor of BV for the total purchase price of the logs. The letter of
credit was mailed to FE Bank with the instruction "to forward it to the
beneficiary." The tetter of credit provided that the draft to be drawn is
on SP Bank and that it be accompanied by, among other things, a
certification from AC, stating that the logs have been approved prior
to shipment in accordance with the terms and conditions of the
purchase order.
Before loading on the vesse/ chartered by AC, the logs were
inspected by customs rnspecfors and representatives of the Bureau
of Forestry, who cerTified to the good condition and exportability of
the togs. After the loading was completed, the Chief Mate of the
vesse/ issued a mate receipt of the cargo which stated that the logs
are in good condition. However, AC refused fo issue the required
certification in the tetter of credit. Because of the absence of the
ceftification, FE Bank refused to advance payment on the letter of
credit.
(1) May FE Bank be held liable under the letter of credit?
Explain.
(2) lJnder the facts stated above, the seller, BV, argued that FE
Bank, by accepting the obligation to notif him that the irrevocable
tetter of credit has been transmitted to it on his behalf, has confirmed
t2 LETTERS OF CREDIT
the letter of credit. Consequently, FE Bank is liable under the letter
of credit. ls the argument tenable? Explain. (1993 Bar)
Answer: (1) No, FE Bank is not liable. The absence of the
Ceftification justifies the refusal by FE Bank to negotiate, accept or
pay the beneficiary, BV, as it is not its obligation to look beyond the
documents. (See Feativs. CA, 196 SCRA 576).
(2) BV's argument is not tenable. FE Bank is not a confirming bank,
there being no express confirmation, but a mere notifying bank,
hence not liable for breach of the letter of credit. Assuming it is a
confirming bank, it ls sf// not liable because of the absence of a
condition, that is, the certification from AC (lbid.).
Bar Question: X Corporation entered into a contract with PT
Construction Corp. for the latter to construct and build a sugar mill
within six (6) months. They agreed that in case of delay, PT
Construction Corp. will pay X Corporation P100,000 for every day of
delay. To ensure payment of the agreed amount of damages, PT
Construction Corporation secured from Atlantic Bank a confirmed
and irrevocable letter of credit which was accepted by X Corporation
in due time. One week before the expiration of the six (6) month
period, PT Construction Corp. requested for an extension of time to
deliver claiming that the delay was due to the fault of X Corporation.
A controversy as to the cause of the delay which involved the
workmanship of the building ensued. The controversy remained
unresolved. Despite the controversy, X Corporation presented a
claim against Atlantic Bank by executing a draft against the letter of
credit. a) Can Atlantic Bank refuse payment due to the unresolved
controversy? Explain. b) Can X Corporation claim directly from PT
Construction Corporation? Explain. (2008 Bar)
Answer: a) No, Atlantic Bank cannot refuse payment. By definition,
a letter of credit is a written instrument whereby the writer requesfs
or authorizes the addressee fo pay money or deliver goods to a third
person and assumes responsibilily for payment of debt therefor to
the addressee. A lefter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends
up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes
between the parties thereto (See Transfield vs. Luzon, 443 SCRA
307)
b) Yes, X Corporation can still claim directly from PT Construction.
By its nature, a letter of credit is merely a security arrangement. lt did
not override or replace the main contract between the parties.
LETTERS OF CREDIT t3
Bar Question: Explain the three (3) distinct but intertwined contract
relationships that are indispensable in a letter of credit transaction
(2002 Bar)
Answer: A lefter of credit transaction may be seen to be a
composite of at least three distinct but inteftwined relationships, each
relationship being concretized in a contract: (a) one contract links the
party applying for the letter of credit (the account party or buyer or
impoftef and the party for whose benefit the letter of credit rs lssued
(the beneficiary or seller or exporter). ln this contract, the account
pafty agrees, among other things and subject to the terms and
conditions of the contract, to pay money to the beneficiary; @) a
second contract relationship is between the account party and the
issurng bank. Under this contract (sometimes called the "Application
and Agreement" or the "Reimbursement Agreement"), the account
party, among other things, applies to the issuing bank for a specified
letter of credit and agrees to reimburse the bank for amounts paid
by that bank pursuant to the letter of credit; (c) the third contract
relationship ls esfab/rshed between the issuing bank and the
beneficiary, in order to support the contract, under (a) above, of the
account party and the beneficiary to, inter alia, pay certain monies to
the lafter (Reliance vs. Daewoo, 228 SCRA 545).
Letters of credit and contracts for the issuance of such letters are
subject to the same rules of construction as are ordinary commercial
contracts. They are to receive a reasonable and not a technical
construction and although usage and custom cannot control express
terms in letters of credit, they are to be construed with reference to
all the surrounding facts and circumstances, to the particular and
often varying terms in which parties to them, and the usages of the
particular trade of business they may be expressed, the
circumstances and intension of the contemplated." (IBAA vs. lAC,
167 SCRA 450)
Letters of credit are strictly construed to the end that the rights of
those directly parties to them may be preserved and their interest
safeguarded. Like any other writing, it will be construed most strongly
against the writer and so as to be reasona6le and consistent with
honedt intentions. On the whole, the construction will be generally a
strict one (lbid.)
A standby letter of credit is a security arrangement, not a contract
of guaranty. Letters/mail are, in effect an absolute undertaking to
pay the money advanced or the amount for which credit is given on
t4 LETTERS OF CREDIT
the faith of the instrument. They are primary obligations and not
accessory contracts. Being separate and independent agreements,
the payments made by the debtor to the creditor still makes the
issuer of the letters of credit liable although these payments could
result in the reduction of the actual amount which could ultimately be
collected from the issuer (lbid.)
The concept of guarantee vis-ir-vis the concept of an irrevocable
letter of credit are inconsistent with each other. First, the guarantee
theory destroys the independence of the bank's responsibility from
the contract upon which it was opened. Second, the nature of both
contracts is mutually in conflict with each other. ln contracts of
guarantee, the guarantor's obligation is merely collateral and it arises
only upon the default of the person primarily liable. On the other
hand, in an irrevocable letter of credit, the bank undertakes a primary
obligation (Metrobank vs. Daway, 432 SCRA 559).
Article 3 of the UCP provides that letters of credit, by their nature,
are separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned with or
bound by such contract(s), even if any reference whatsoever to such
contract(s) is included in the letter of credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any. other obligation under the letter of credit is not
subject to claims or defenses by the applicant resulting from his
relationship with the issuing bank or the beneficiary. A beneficiary
can in no case avail himself of the contractual relationship existing
between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required documents
are presented to it (Transfield vs. Luzon, 443 SCRA 307).
Except when a letter of credit specifically stipulates otherwise, the
obligation of the banks issuing letters of credit are solidary with that
of the person or entity requesting for its issuance, the same being a
direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required
therein (lbid.).
Bar Quesfion: Does a foreign tetter of credit become
consummated contract upon payment by the debtor to the bank in
his coUntry of the amount of foreign exchange sold? Explain fully.
(1972 Bar)
LETTERS OF CREDIT l5
Answer: Yes, the payment by the debtor of a letter of credit in his
country of the amount of foreign exchange sold will operate to
con su m m ate the contract.
lJnder the Negotiable lnstruments Law, which is uniform all over
the world, payment by the debtor of the negotiable instrument (a
letter of credit is a variation of a bill of exchange) will operate to
discharge the negotiable instrument and all parties thereto.
Bar Question: B applied for a letter of credit with the Bank of
America in favor of an export company located in Paris, France. The
application provides that the draft must be drawn and presented not
later than May 31, 1978, and X agreed to pay at maturity any amount
that might be drawn or paid upon faith of the applicant's credit and to
reimburse the bank in said manner. On May 30, 1978, a draft was
negotiated by the Bank of America's correspondent bank
in Paris against X's credit;fhls was then paid by the Bank of America
at the rate prevailing. The date of maturity of the draft was August
26, 1978. Before the date of maturity but after the correspondent
bank had paid the draft, the French franc devaluated. At what rate
should X pay the Bank of America in Philippine pesos, at the rate of
the franc prevailing on May 30, 1978, or at its devaluated rate on
August 26, 1978? (1979 Bar)
Answer: X is obliged to pay Bank of America at the rate of
exchange prevailing on May 30, 1978, the date when the draft was
negotiated by the Bank of America's correspondent bank in Paris
against X's credit.
The sale of foreign exchange is consummated upon payment or
delivery to the creditor by the agent or correspondent bank of the
amount in foreign currency authorized by the transmitting bank to be
paid or drawn under the letter of credit.
The determinative factor is not the date of maturity to pay of the
foreign currency involved, but the date the foreign .currency
allowed under the draft is delivered to the drawee or becomes
obligated or committed upon the acceptance of the draft.
V. Basic Principles
A. Doctrine of lndependence
a
What characterizes a letter of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay
the seller once the draft and the required shipping documents are
presented to it. ln turn, this arrangement assures the seller of
16 LETTERS OF CREDIT LETTERS OF CREDIT t7

prompt payment, independent of any breach of the main sales q. Fraud Exception Principle \
contract. By this so-called "independence principle", the bank
determines compliance with the letter of credit only by examining the A creditor who is not a party to a contract can sue to rescind the
shipping documents presented; it is precluded from determining contract to prevent fraud upon him or the same creditor can instead
whether the main contract is actually accomplished or not (BA vs. choose to enforce the contract if a specific provision in the contract
cA,22B SCRA 357). allows him to collect his claim and thus protect from fraud (Caltex vs.
PNOC, 498 SCRA 400).
Bar Question: The Supreme Couri has held that fraud is an
exception to the "independence principle" governing letters of credit. C. Doctrine of Strict Compliance
Explain this principle and give an example of how fraud can be an J

exception. (2010 Bar)
Answer: The "independence principle" in a letter of credit assures
the seller or the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or
not. Under this principle, banks assurne no liability or responsibility
for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor
do they assurne any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or
existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers of the goods,
or any other person whomsoever.
Fraud exception exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presenfs to the confirming bank
documents that contain, expressly or by implication, material
The letter of credit evolved as a mercantile specialty, and the only
way to understand all its facets is to recognize that it is an entity unto
itself. The relationship between the beneficiary and the issuer of the
letter of credit is not strictly contractual, because both privity and a
meeting of the minds are lacking, yet strict compliance with. each
term is an enforceable right. Thus, upon receipt by the issuing bank
of the documents of title which conform with what the letter of credit
requires, it is duty bound to pay the seller (LBp vs. Monet's, 453
SCRA 173). Nor is it a third-party beneficiary contract, because the
issuer must honor drafts against a letter regardless of problems
subsequently arising in the underlying contract. Since the bank,s
customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor is it a contract of
suretyship or guarantee, because it entails a primary liability
following a default (Transfield vs. Luzon, supra).
'

representations of fact that to his knowledge are untrue (See

Transfield vs. Luzon, 443 SCRA 307).

The independent nature of the letter of credit may be: (a)

independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence
may be only as to the justification aspect like in a commercial letter
of credit or repayment standby, which is identical with the same
obligations under the underlying agreement. ln both cases, the
payment may be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent abuse of the
credit (lbid.)
Itt CHAPTER III
TRUST RECEIPTS LAW
(Presidential Decree 115)
l. Definition/Goncept of a Trust Rece-ipt Transaction
Bar Question: What is a trust receipt? (2007, 1951, 1949 Bar).
Answer: A trust receipt is a document executed by and between a
person referred to as the entruster, and another person referred to
as the entrustee, whereby the entruster who owns or holds absolute
title or security interests over specified goqds, documents or
instruments. releases the subject goods to the possession of the
entrustee. The release of such goods to the entrusfee is conditioned
upon his execution and delivery to the entruster of a trust receipt
wherein the former binds himself to hold the specific goods,
documents or instruments in trust for the entruster and to sell or
othenuise dlspose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds to the extent of
the amount owing to the entruster, or the goods, documents or
instruments themselves if they are unsold. The entruster is entitled
only to the proceeds derived from the sale of goods released under a
trust receipt to the entrustee (See Ng vs. People, 619 SCRA 291).
The true nature of a trust receipt transaction can be found in the
"Whereas" clau$e of PD 115 which states that a trust receipt is to be
utilized as a convenient business device to assist importers and
merchants solVe their financing problems. The State sought to find a
way to assist importers and merchants in their financing in order to
encourage commerce in the Philippines (lbid.).
A trust receipt is considered a security transaction intended to aid
in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or
purchased. Trust receipt transactions always refer to a method of
financing importations or financing sales. The principle is of course
not limited in its application to financing importations, since the
principle is equally applicable to domestic transactions. Regardless
of whether the transaction is foreign or domestic, it is important to
note that the transactions discussed in relation to trust receipts
mainly involved sales (lbid.).
TRUST RECEIPTS LAW t9
A trust receipt is inextricably linked with the primary agreement
between the parties. A trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as security for a loan
(Landl vs. Metrobank, 435 SCRA 639).
The enactment of P.D. 1 15 with its penal provision under Section
13 (Trust Receipts Law) is merely confirmatory of existing
jurisprudence (Colinares vs. CA, 339 SCRA 609).
The trust receipt is a separate and independent security
transaction intended to aid in financing importers whereby the
imported goods are held as security by the lending institution for the
loan obligation (lbid.).
Acts involving the violation of trust receipts agreements occurring
after January 29, 1975 (when P.D. 115 was issued) render the
offender liable for estafa under Paragraph 1-b, Article 315 of the
Revised Penal Code, the act being malum prohibitum (People vs.
Nitafan, 207 SCRA 726).
The Trust Receipts Law does not violate the constitutional
proscription against imprisonment for non-payment of debts (Tiomico
vs. CA, 304 SCRA 216).
PD 115 is a declaration by the legislative authority that, as a
matter of public policy, the failure of a person to turn over the
proceeds of the sale of goods covered by a trust receipt or to return
said goods if not sold is a public nuisance to be abated by the
imposition of penal sanctions (Ching vs. Secretary, 481 SCRA 609).
A trust receipt partakes the nature of a security transaction. lt
could never be a mere additional or side document. Otherwise, a
party to a trust receipt agreement could easily renege on its
obligation thereunder, thus undermining the importance and
defeating with impunity the purpose of such an indispensable tool in
commercialtransactions (Ching vs. CA, 331 SCRA 16).
A trust receipt is a security agreement, pursuant to which a bank
acquires a "security interest" in the goods. lt secures an
indebtedness and there can be no such thing as security interest that
secures no obligation (Rosario vs. Home, 462 SCRA 88). By virtue
of the trust receipt agreement, the bank theoretically acquired
ownership (Garcia vs. CA, 258 SCRA 446).
20 TRUST RECEIPTS LAW
There are two obligations in a trust receipt transaction: the first
refers to money received under the obligation involving the duty to
turn it over (entregarla) to the owner of the merchandise sold, while
the second refers to the merchandise received under the obligation
to return it (devolvera) to the owner. A violation of any of these
undertakings constitutes estafa defined under Article 315, paragraph
1(b) of the Revised Penal Code, as provided in Section 13 of PD 115
(Ng vs. People, supra)
ln a trust receipt transaction, the goods are released by the
entruster (who owns or holds absolute title or security interests over
the said goods) to the entrustee on the latter's execution and delivery
to the entruster of a trust receipt. The trust receipt evidences the
absolute title or security interest of the entruster over the goods. As a
consequence of the release of the goods and the execution of the
trust receipt, a two-fold obligation is imposed on the entrustee,
namely: (1) to hold the designated goods, documents or instruments
in trust for the purpose of selling or otherwise disposing of them, and
(2) to turn over to the entruster either 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. ln the case of
goods, they may also be released for other purposes substantially
equivalent to (a)-their sale or the procurement of their sale; or (b)
their manufacture or processing with the purpose of ultimate sale, in
which case the entruster retains his title over the said goods whether
in their original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) the loading,
unloading, shipment or transshipment or otherwise dealing with them
in a manner preliminary or necessary to their sale. Thus, in a trust
receipt transaction, the release of the goods to the entrustee, on his
execution of a trust receipt, is essentially for the purpose of their sale
or is necessarily connected with their ultimate or subsequent sale
(DBP vs. Prudential, 475 SCRA 623).
A letter of credittrust receipt arrangement is endowed with its
own distinctive features and characteristics. Under the set up, a bank
extends a loan covered by the letter of credit, with the trust receipt as
a security for the loan. ln other words, the transaction involves a loan
feature represented by the letter of credit, and a security feature
which is in the covering trust receipt (Lee vs. CA, 375 SCRA 579).
TRUST RECEIPTS LAW 2l
A letter of credit is a separate document from a trust receipt.
While the trust receipt may have been executed as a security on the
letter of credit, still the two documents involve different undertakings
and obligations. A letter of credit is an engagement by a bank or
other person made at the request of a customer that the issuer will
honor drafts or other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the bank
merely substitutes its own promise to pay for the promise to pay of
one of its customers who in return promises to pay the bank the
amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. By contrast, a trust receipt
transaction is one where the entruster, who holds an absolute title or
security interests over certain goods, documents or instruments,
releases the same to the entrusteo, who executes a trust receipt
binding himself to hold the goods, documents or instruments in trust
for the entruster and to sell or otherwise dispose of the goods,
documents and 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 return 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 (Bank vs. Serrano, 451 SCRA 484).
A trust receipt is a receipt signed by an importer or retail dealer
for goods imported or purchased by them with money furnished by a
bank in whose favor the goods are held in trust by the importer or
dealer with right to sell them, and the obligation to account to the
bank for the proceeds of said sale until all amounts advanced by the
bank are paid, or to return the goods, if unsold.
A trust receipt is a document in which is expressed a security
transaction where the lender, having no prior title to the goods on
which the lien is to be constituted, and not having possession over
the same since possession thereof remains in the borrower, lends
his money to the borrower on security of the goods which the
borrower is privileged to sell, clear of the lien, with an agreement to
pay all or part of the proceeds of the sale to the lender (Metrobank
vs. Go, 538 SCRA 337)
Negotiable instruments include promissory notes, bills of exchange
irnd checks. Letters of credit and trust receipts are, however, not
nogotiable instruments. But drafts issued in connection with letters
of credit are negotiable instruments (Lee vs. CA, 375 SCRA 579).
 TRUST RECEIPTS LAW
The nature of trust receipt agreements and the damage caused to
trade circles and the banking community in case of violation thereof
was explained as follows: trust receipt arrangements do not involve
a simple loan transaction between a creditor and a debtor-importer.
Apart from a loan feature, the trust receipt arrangement has a
security feature that is covered by the trust receipt itself. The second
feature is what provides the much needed financial assistance to
traders in the importation or purchase of goods or merchandise
through the use of those goods or merchandise as collateral for the
advancements made by the bank. The title of the bank to the
security is the one sought to be protected and nOt the loan which is a
separate and distinct agreement. Trust receipts are indispensable
contracts in international and domestic business transactions. The
prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of
goods, documents or instruments held in trust for entruster-banks,
and the need for regulation of trust receipt transactions to safeguard
the rights and enforce the obligations of the parties involved, are the
main thrusts of P.D. 115. P.D. 115, like Batas Pambansa Blg.22,
punishes the act not as an offense against property, but as an
offense against public order. The misuse of trust receipts therefore
should be deterred to prevent any possible havoc in trade circles and
the banking community. lt is in the context of upholding public
interest that the law now specifically designates a breach of a trust
receipt agreern*eht to be an act that shall make one liable for estafa
(Metrobank vs. Tonda, 338 SCRA 254).
ln a certain manner, trust receipts partake of the nature of a
conditional sale where the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price. The Trust
Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether
the latter is the owner. A trust receipt which is vagueous and
ambiguous should not be the basis for criminal prosecution in the
event of violation of its provisions. The practice of banks of making
borrowers sign trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should they be unable
to pay it may be unjust and inequitable, if not reprehensible
(Consolidated vs. CA, 356 SCRA 671).
The initial repossession by the bank of the goods subject of the
trust receipt did not result in the full satisfaction of the petitioners'
loan obligation. Petitioners are apparently laboring under the
mistaken impression that the full turn-over of the goods suffices to
TRUST RECEIPTS LAW 23
divest them of their obligation to repay the principal amount of their
loan obligation (Landl vs. Metrobank, 435 SCRA 639).
Bar Question: C contracted D to renovate his commerciat building.
D ordered construction materials from E and received detivery
thereof. The following day, C went to F Bank to apply for a loan to
pay the construction materials. As security for the toan, C was made
to execute a trust receipt. One year later, after C failed to pay the
balance on the loan, F Bank charged him with violation of the Trust
Receipts Law. Will the case against C prosper? Reason briefly.
(2007 Bar)
Answer: The case against C witt not prosper. This situation belies
what normally obtains in a pure trust receipt transaction where goods
are owned by the bank and only released to the importer in trust
subsequent to the grant of the loan. The bank acquires a "security
interest" in the goods as holder of a security tiile for the advances it
had made to the entrustee. The ownership of the merchandise
continues to be vested in the person who had advanced payment
until he has been paid in full, or if the merchandise has atready been
sold, the proceeds of the sale should be turned over to him by the
importer or by his representative or successor rn interest. To secure
that the bank shall be paid, it takes full tiile to the goods at the very
beginning and continues to hold that tiile as hls indispensable
security until the goods are sold and the vendee is catted upon to
pay for them; hence, the imporier has never owned the goods and is
not able to deliver possession. ln the present case, C received the
construction materials from E prior to the execution of the trust
receipt transaction;as such the transaction is just a simple toan (See
Consolidated vs. CA, supra).
ll. Rights and Obligations of Parties
An entrustee is one having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any
successor in interest of such person for the purpose of payment
specified in the trust receipt agreement. The entrustee is obliged to:
(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
24 TRUST RECEIPTS LAW
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 re.ceipt not contrary to the provisions of the
decree (Ching vs. Secretary, 481 SCRA 609).
Bar Question: Explain briefly the general liabilities and obligations
of thetrustee? (1951 Ba)
Answer: The general liabilities and obligations of the trustee are:
the entrustee receives the goods from the entruster under a trust
receipt executed in favor of the latter, and said entrustee se//s fhe
goods and accounts for the proceeds to the entruster until the
whole amount advanced o'y the latter ls seft/ed, or to return the
goods, if unsold.
Bar Question: What are the acts or omissions penalized under the
Trust Receipts Law? (2006 Bar)
Answer: The Trust Recerpfs Law is violated whenever the entrustee
fails to: (1) turn over the proceeds of the sale of the goods, or (2)
return the goods covered by the trust receipts if the goods are not
so/d (See Gonza.les vs. Hongkong, 537 SCRA 255).
Bar Question: ls the lack of intent to defraud a bar to the
prosecution of these acts oi omisslons? (2006 Bar)
Answer: No The mere failure to account or return gives rise to the
crime which is malum prohibitum. There is no requirement to prove
intent to defraud (lbid.).
The entrustor in a trust receipt is not the owner of the goods but
merely a holder of a security title. lf in the trust receipt the entrustor
bank is made to appear as owner, it was an artificial expedient, more
of fiction than fact. The entrustee merchant is the owner of the goods
and its return because of inability to sell the goods does not relieve it
of its obligation to pay for the money borrowed. The surrender of
the goods to the bank, if unsold, merely extinguishes the entrustee's
criminal liability under the Trust Receipts Law (PNB vs. Pineda, 197
scRA 1).
Presidential Decree No. 115, otherwise known as the Trust
Receipts Law, expressly allows the bank to take possession of the
TRUST RECEIPTS LAW 25
goods covered by the trust receipts. Thus, even though the bank
took possession of the goods covered by the trust receipts, the
entrustees remained liable for the entire amount of the loans covered
by the trust receipts (Phil. Blooming vs. CA, 413 SCRA 445).
The finding that there was no fraud and deceit is likewise
is punished as a malum
misplaced considering that the offense
prohibitum regardless of the existence of intent or malice
(Metropolitan vs. Tonda, 338 SCRA 254).
i
ln the event of default by the entrustee on his obligations under \
the trust receipt agreement, it is not absolutely necessary that the
entruster cancel the trust and take possession of the goods to be 1
able to enforce his rights thereunder. The law uses the word "ma/'
in granting to the entruster the right to cancel the trust and take
possession of the goods. Consequently, the entruster has the
discretion to avail of subh right or seek any alternative action, such
as a third party claim or a separate civil action which it deems best to
protect its right, at any time upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust agreement.
(South City vs. BA Finance, 371 SCRA 603).
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 owed 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 these are not contrary to the provisions of the document. A
violation of any these undertakings constitutes estafa defined under
Article 315(1Xb) of the Revised Penal Code, as provided by Section
13 of Presidential Decree No. 115 (Metrobank vs. Gonzales, 584
scRA 831).
The offense punished under Presidential Decree No. 115 is in the
nature of malum prohibitum. A mere failure to deliver the proceeds
of the sale or the goods if not sold, constitutes a criminal offense that
causes prejudice not only to another, but more to the public interest.
This is a matter of public policy as declared by the legislative
authority (Tiomico vs. CA, 304 SCRA 216). Moreover, this Court
already held previously that failure of the entrustee to turn over the
proceeds of the sale of the goods, covered by the trust receipt, to the
entruster or to return said goods if they were nqt disposed of in
accordance with the terms of the trust receipt shall be punishable as
26 TRUST RECEIPTS LAW
estafa under Art. 315(1Xb) of the Revised Penal Code without need
of proving intent to defraud.
Bar Question: PB & Co., lnc., a manufacturer of steel and steel
products, imported certain raw materials for use by it in the
manufacture of its producfs. Ihe importation was effected through a
trust receipt arrangement with AB Banking Corporation. When it
applied for the issuance by AB Banking Corporation of a letter of
credit, PB & Co., lnc. did not make any representation to the bank
that it would be selling what it had imporied. lt failed to pay the bank-
When demand was made upon it to account for the imporiation, to
return the artictes, or to turn-over the proceeds'of the sale thereof to
the bank, PB & Co., lnc. also failed. The bank sued PB & Cob
President who was the signatory of the trust receipt for estafa. The
President put up the defense that he could not be made liabte
because there was no deceit resulting in the violation of the trust
receipt. He also submitted that there was no violation of the trust
receipt because the raw materials were not sold but used by the
corporation in the manufacture of its products. Would those
defenses be sustainable? Why? (2003 Bar)
Answer: The defenses of PB & Co.'s President cannot be
sustained. The contention that there was no deceit is misplaced
considering that the offense is punished as a malum prohibitum
regardless of the existence of deceit. /t rs a/so immaterial if the raw
materials were not sold but used by the corporation, since a mere
failure to deliver the proceeds of the sale, or the goods, if not sold,
constitutes a criminal offense that causes prejudice not only to
another, but more to the public interest.
Bar Question: "X" & Co. obtained a loan from a local bank in the
amount of P500,000.00, moftgaging as security therefor its real
property. Subsequently, the company applied with the same bank for
a Letter of Credit (UC) for $200,000.00 in favor of a foreign bank to
cover the importation of machinery. To guarantee payment of the
obligation under the UC, the company and its President and
Treasurer executed a Surety Agreement in the local bank's favor.
The machinery arrived and was released to the company under a
trust receipt agreement. As the company defaulted in the payment of
its obligations, the bank fook possession of the imported machinery.
At the same time, it sought to foreclose the mortgaged propefty and
to hold the company, as wellas ifs Presldent and Treasurer, liable
undei the Surety Agreement.
TRUST RECEIPTS LAW 27
Did the taking of possessio n of the machinery by the bank result
in the 1) tull payment of the obligations of the company and its
officers, and 2) foreclosure of the morigage? Why? (1992 Bar)
Answer: (1 ) The taking of possessio n by the bank of the machinery
is an exercise by it of its rights as entruster in the trust receipt
agreement. The default by "X" and Co. in the payment of its
obligations to the bank gives the bank the right to take over
possession of the machinery.
The taking by the bank of the machinery cannot result in the
payment of the obligations of "X" and Co. and its officers with the
bank. "X" and Co.'s obligation with the bank proceeds from the Letter
of Credit granted by the bank to "X" and Co.. The taking by the bank
of possession of the machinery merely extinguishes "X" and Co.'s
criminal liability under the Trust Receipts law.
(2) The taking of possesslon of the madhinery is not a foreclosure
of the mortgage. The subject matter of the mortgage of "X" and Co.
in favor of the bank is real property, to guarantee a loan of P500,000,
which is different from the $200,000 involved in the Letter of Credit.
Hence, the taking of the machinery by the bank is not a
foreclosure of the mortgage constituted by 'X" and Co. to guarantee
another obligation to the bank.
Bar Question: H opens a lefter of credit with ABC Banking
Corporation for the importation of 500 cases of Black Label Whisky
with an invoice value of US$50,000.00. The goods and the covering
documents arrive and H would like to fake possession of the 500
cases of whisky under a trust receipt. The bank agrees to release the
goods to him under trust receipt, subject to the condition that H holds
the 500 cases in trust for the bank, and for him to turn over the
proceeds of the sale of said whisky, or to return the goods in the
event of their non-sale within g0 days from the date thereof.
H se//s the 500 cases to various customers but fails to turnover
the proceeds within the period stipulated, despite repeated demands
from ABC Banking Corporation.
The bank files an estafa case agarnst H with the City Fiscal of
Manila. ln his defense, H contends that he should not be held liable
because the transaction emanates from a letter of credit, which he
claims is civil in nature. He invokes the constitutional provision that
no one should be imprisoned for non-payment of indebtedness.
lf you were the City Fiscal, would you file the case? (1997, 1991,
1980 Bar)
28 TRUST RECEIPTS LAW
Answer: lf I were the City Fiscal, I willfile an estafa case against H.
The criminal liability of H springs from the trust receipt executed, not
from the letter of credit.
The Trust Recepfs Law expressly declares as constituting the
crime of estafa the failure of the entrustee (H in the problem) to turn
over the proceeds of the sale of the goods covered by the trust
receipt up to the amount owing the entruster (ABC Banking
Corporation in the problem), or to return to the entrusfer sard goods,
if unsold. H did not comply with any of these alternatives, hence, he
commits estafa as defined by said law.
Bar Question: Tom Cruz obtained a loan of'Pl Miltion from XYZ
Bank to finance his purchase of 5,000.ba7s of fertilizer. He executed
a trust receipt in favor of XYZ Bank over the 5000 bags of fertilizer.
Tom Cruz withdrew the 5,0Q0 bags from the warehouse to be
transpofted to Lucena City where his store was located. On the way,
armed robbers took from Tom Cruz the 5,000 bags of feftilizer. Tom
Cruz now claims that his obligation to pay the loan to XYZ Bank is
extinguished because fhe /oss was not due to his fault. ls Tom Cruz
correct? Explain. (2008, 1982 Bar)
Answer: No, Tom is not correct. He is sf// obliged to pay the loan
secured by the trust receipt. Under the Trust Receipts Law, the risk
of /oss is borne by Tom the entrustee, who ls fhe person having or
taking possessbn of the goods, documents or instruments under a
trust receipt transaction. Ihe /oss of the goods which are the subject
of the trust rxeipt, pending their disposition, irrespective of whether
it was due or not to the fault or negligence of Tom, shall not
extinguish the obligation of the entrustee to the entruster for the
value thereof. The entruster in a trust receipt is not the owner of the
goods but merely a holder of a security title.
lll. Penalty for Breach by Entrustee
What the law punishes is the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of another,
whether the latter is the owner (Metrobank vs. Go, 538 SCRA 337)
It is a well-settled doctrine long before the enactment of the Trust
Receipts Law that the failure to account, upon demand, for funds or
property held in trust is evidence of conversion or misappropriation.
Under the law, mere failure by the entrustee to account for the goods
received in trust constitutes estafa (Ong vs. CA, 401 SCRA 648).
TRUST RECEIPTS LAW
There is no need to allege in the lnformations in what capacity
an agent participated to hold him responsible for the offense. Under
the Trust Receipts Law, it is sufficient to allege and establish the
failure of the corporation, who the agent represented, to remit the
proceeds or to return the goods to the bank (lbid.). ,
The person signing the trust receipt for the corporation is not
solidarily liable with the entrustee-corporation for the civil liability
arising from the criminal offense (lbid.).
The penal provisions of P.D. 115 encompasses any act violative
of the obligation covered by the trust receipt. lt is not limited to
transactions in goods which are to be sold (retailed), reshipped or
stored, but also applies to goods processed as a component of a
product ultimately sold to the general public (Allied vs. Ordonez, 192
scRA 246).
Under the Trust Receipts Law, the failure of the entrustee to
surrender the goods held under trust, or to account for the proceeds
of the sales thereof, to the entruster, is estafa, which can make the
entrustee criminally liable under both the Trust Receipts Law and the
Revised Penal Code, and liable to the payment of damages under
Article 33 of the'Civil Code (Prudentiat vs. tAC, 216 SCRA 257).
Though a person signed the Trust Receipts merely as a corporate
officer and had no physical possession of the goods subject of such
roceipts, he cannot avoid responsibility for violation of presidential
Dccree No. 115 for two unpretentious reasons: first, that the last
sontence of Section 13 of the "Trust Receipts Law,,' explicifly
lrnposes the penalty provided therein upon "directors, officers,
ornployees or other otficials or persons therein responsible for the
.ffense, without prejudice to the civil liabilities arising from the
r;rirninal offense," of a corporation, partnership, association or other
Irrridical entities found to have violated the obligation imposed under
llro law. The rationale for making such officers and employees
rosponsible for the offense is that they are vested with the authority
rilr(l responsibility to devise means necessary to ensure compliance
wltlr the law and, if they fail to do so, are held criminally accountable;
llrrrs, they have a responsible share in the violations of the law. And
Hor;ond, a corporation or other juridical entity cannot be arrested and
Irngrrisoned; hence, cannot be penalized for a crime punishable by
Irrrprisonment (Gonzales vs. HSBC, 537 SQRA 255).
30 CHAPTER IV
NEGOTIABLE INSTRUMENTS LAW
(Act 2031)
l. Brief History of the Law
Act No. 2031, the Negotiable lnstruments Law, took effect on
June 2, 1911, and is patterned after the U.S. Uniform Negotiable
lnstruments Law, which in turn is copied from the English Bill of
Exchange Act of 1882.
The Negotiable lnstruments Law was enactgd for the purpose of
facilitating, not hindering or hampering, transactions in commercial
paper (Osmena vs. Citibank,426 SCRA 159)
ll. Nature of Negotiable lnstruments
Bar Question: What is a negotiable instrument? (2005, 1949, 1946
Ba0
Answen A negotiable instrument is a written contract for the
payment of money which by its form and on its face is intended as a
substitute for money and passes from hand to hand as money, so as
to give the holder in due course the right to hold the instrument and
collect the sum*for himself.
Bar Question: Sfafe in brief the commercial functions of negotiable
paper. (1951 Ba)
Answer: The commercial functions of negotiable paper are: (1)To
supplement the currency of the government; and (2) To substitute
for money and increase the purchasing medium.
ln commercial usage, they are regarded as substitutes for cash,
although not legal tender (Sy vs. People, 172 SCRA 685).
Settled is the rule that payment must be made in legal tender. A
check is not legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute
for money and not money, the delivery of such an instrument does
not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by
commercial document is actually realized (BPl vs. Royeca, 559
scRA 207).
NEGOTIABLE INSTRUMENTS LAW 31
A certified personal check is not legal tender, nor the currency
stipulated in the contract, and therefore cannot constitute a valid
tender of payment. A check, whether a manager's check or an
ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be
refused by a creditor (Roman vs. lAC, 191 SCRA 41 1).
There is an element of certainty or assurance in an ordinary check
that it will be paid upon presentation that is why it is perceived as a
convenient substitute for currency in commercial and financial
transactions (Tan vs. CA, 239 SCRA 310).
Under the Civil Code, where a check, one of the popular forms of
rregotiable instruments, is accepted by a creditor in payment of an
obligation, it produces the effect of payment when encashed, or
when it loses its value due to the fault of the creditor (Pio Barretto vs.
cA, 360 SCRA 127).
An obligee may validly refuse the tender of payment made partly
ln check and partly in cash for the satisfaction of the monetary
obligation (Tibajia vs. CA, 223 SCRA 163).
As to legal character of checks, Section 63 of Republic Act No.
265 (now Sec. 60 of RA 7653, otherwise known as the New Central
Itnnk Act) provides that checks representing deposit money do not
Irnve legal tender power and their acceptance in the payment of
tkrlrts, both public and private, is at the option of the creditor. lt
hrrther provides, however, that a check which has been cleared and
rrrodited to the account of the creditor shall be equivalent to a
rkrlivery to the creditor of cash in an amount equal to the amount
crodited to his account (Far East vs. Diaz, 363 SCRA 659).
While a check does not constitute legal tender, and that a creditor
rrrrry validly refuse it, this dictum does not prevent a creditor from
rrr;r:opting a check as payment -the creditor has the option and the
rlllr:rotion of refusing or accepting it (lbid.).
8er Question: What are the characferisfics of a negotiable
Itt:ilttnnent? (1967 Bar)
Anawer. The characfensflcs of a negotiabte instrument are: (1)
- The right of transferees to hold the instrument and to
Nr4yiliability
rtilhxl the sum payable; qnd (2) Accumulation of secondary
32 NEGOTIABLE INSTRUMENTS LAW
contracts - Secondary contracts are picked up and carried along by
the instrument as it is negotiated from person to person.
A negotiable instrument of which a check is, is not only a written
evidence of a contract right but is also a species of property (Tibajia
vs. CA, supra).
The language of negotiability which characterize a negotiable
paper as a credit instrument is its freedom to circulate as a substitute
for money. Hence, freedom of negotiability is the touchstone relating
to the protection of holders in due course, and the freedom of
negotiability is the foundation for the protection which the law throws
around a holder in due course (Traders vs. CA,269 SCRA 15).
The accepted rule is that the negotiability or non-negotiability of
an instrument is determined from the writing, that is, from the face of
the instrument itself. ln the construction of a bill or note, the intention
of the parties is to control, if it can be legally ascertained. While the
writing may be read in the light of surrounding circumstances in order
to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added
to it or substituted in its stead. The duty of the court in such case is
to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must
be determined by what they said (Caltex vs. CA, 212 SCRA 448).
B. Classes of lnstrument
1. Principal Classes
a. Promissory Note, Bill of Exchange, and Gheck
Bar Question: Negotiable instruments: (a) State the common forms
of negotiable instruments. (1951, 1949 Bar)
Answer: The common forms of negotiable instruments are: (a)
promissory note; (b) bill of exchange; and (c) check, which is just a
special form of a bill of exchange.
Bar Question: Define (1) a negotiable promissory note; (2) a biit ot
exchange; and (3) a check. (2002, 1965, 1953 Bar)
NEGOTIABLE INSTRUMENTS LAW 33
Answer: (1) A negotiable promissory note is an unconditional
in writing by one person to another signed by the maker
promise
engaging to pay on demand or at a fixed or determinabte future time,
a sum certain in money, to order or to bearer.
(2) 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 rt is addressed to pay on demand or at
a fixed or determinable future tlme a sum certain in money to order
or to bearer.
(3) A check is a bitl of exchange drawn on a bank payable on
demand.
The Problem.' Some busrnessmen with an available starting capitat
totalling only Pl00,000.00 ask you to help organize a buslness firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassisfance by way
of direct investments and/or loans. Your professionalassisfance is
solicited on the following various questions that may arise.
Bar Question: The XYZ Bank is witting to tend your firm the sum of
P500,000.00 payable in five (5) years with interest at 12% per
annum, secured only by a surety bond.
Prepare the promissory note for said loan, complete in every respect
to make it negotiable. (1973 Ba).
Answer: The promissory note would be as follows:
October 31, 1973
Manila
P500,000.00
Five years after date, I promise to pay to the order of XyZ Bank the
sum of Five Hundred Thousand Pesos, with interest at 12% per
annum, secured by a surety bond attached to this note.
MY FIRM
By: (Sgd.) AB
President and
Auth orized Re presentative
As long as a commercial paper conforms with the definition of a
bill of exchange, that paper is considered a bill of exchange. The
nature of acceptance is important only in the determination of the
kind of liabilities of the parties involved, but not in the determination
of whether the commercial paper is a bill of exchange or not (pBCom
vs. Aruego, 102 SCRA 530).
34 NEGOTIABLE INSTRUMENTS LAW
A promissory note is a solemn acknowledgment of a debt and a
formal commitment to repay it on the date and under the conditions
agreed upon by the borrower and the lender. A person who signs
such an instrument is bound to honor it as a legitimate obligation
duly assumed by him through the signature he affixes thereto as a
token of his good faith. lf he reneges on his promise without cause,
he forfeits the sympathy and assistance of this Court and deserves
instead its sharp repudiation (Dela Pefra vs. CA, 579 SCRA 396).
The promissory note clearly satisfies the requirements of
negotiable instrument under the NlL. lt is in.writing; signed by the
Violago spouses; has an unconditional promise to pay a certain
amount, i.e., PhP 209,601, on specific dates in the future which
could be determined from the terms of the note; made payable to the
order of VMSC; and names the drawees with certainty. The
indorsement by VMSC to BA Finance appears likewise to be valid
and regular (Violago vs. BA, 559 SCRA 69).
A check is a bill of exchange drawn on a bank payable on
demand. Thus, a check is a written order addressed to a bank or
persons carrying on the business of banking, by a party having
money in their hands, requesting them to pay on presentment, to a
person named therein or to bearer or order, a named sum of money
(Moran vs. CA,230 SCRA 799).
A check, as distinguished from an ordinary bill of exchange,
supposed tcj be drawn against a previous deposit fund for it
ordinarily intended for immediate payment (lbid.).
b. Differences Between Promissory Note and Bill
of Exchange
Bar Question: State the differences between a bill of e*change and
a promissory note. (1947 Bar)
Answen The differences between a bill of exchange and a
promissory note are:
1) A note contains an unconditional promise; a bill, an
unconditional order;
2) ln a note, there are two original parties; in a bill, there are
three;
3). ln a note, the originalissuer (maker) is primarily liable; in a bill,
the originalissuer (drawer) is only secondarily liable;
NEGOTIABLE INSTRUMENTS LAW 35
4) ln a note, only one presentment (for payment) is needed; in a
bill, two presentments (for acceptance and for payment) are
generally needed.
2. Other Forms
-r
Other forms of instruments held negotiable are: (a) certificate of
deposit issued by banks, payable to the depositor or his order, or to
bearer (Caltex vs. CA, 212 SCRA aa8); (b) trade acceptance; (c)
a bonds, which are in the nature of promissory notes; (d) drafts, which
are bills of exchange drawn by one bank upon another; and (e) letter
of credit.
a. Letter of Gredit (L/C) - (Supra, Chapter ll)
b. Certificate of Time Deposit
Where a bearer Certificate of Time Deposit (CTD) is delivered to
another to guarantee certain transactions in writing, title over the
CTD is not transferred to the holder and merely constitutes him as
holder for value to the extent of the lien. As such holder, he would be
a pledgee but the requirements of Article 2096, Civil Code, must be
complied with (Caltex vs. CA, supra).
3. Non-negotiable Documents and lnstruments
is
is There are some documents very similar to, but not, negotiable
instruments, because they lack one, some, or all the requirements of
a negotiable instrument under Section 1 of the Negotiable
lnstruments Law.
Examples are: (a) treasury warrants, (b) money orders, (c)
warehouse receipts, (d) bills of lading, (e) trust receipts,(f) non-
rregotiable credits, and (g) sales invoices.
a. Warehouse Receipts
Bar Question: What is a warehouse receipt? (1967, 1954, 1949
l)ar)
Answer: A warehouse receipt is a wriften acknowledgment by a
in his
warehouseman that he has received and holds ceftain goods
witrehouse for the person to whom the documenf is issued.
36 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENTS LAW 37

b. Postal MoneY Order Answer: (e) Treasury warrants are not negotiable instruments
because there is an indication of the fund as the source of payment
Bar Question: A book store received five postal money orders of the disbursement.
totatling Pl,000.0A as pari of ifs sa/es receipts, and deposited the
same with a bank. A day after, the bank tried to clear them with the d. Trust Receipts - (Supra, Chapter llt)
Bureau of Posfs. tt turned out however, that the postal money orders
were irregularly issued prompting the Bureau of Posfs to serue notice e. Bills of Lading - (lnfra, Chapter Vll)
upon all banks not to pay the money orders if presented for payment'
The Bureau of Posfs further informed the bank that the amount of f. Non-Negotiable Credits
P1,000.00 had been deducted from the bank's clearing account. For
its paft, the bank debited the book sfore's account with the same
g. Sales lnvoices
amount.
A complaint was fited by the book store against the Bureau of Neither can it be denied that the Saies lnvoice is also
Posfs and the bank for the recovery of the sum of Pl,000.00 which, commercial document. Commercial documents or papers are those
however, was dismissed by the triat court' The book store appealed used by merchants or businessmen to promote or facilitate trade or
contending that postal money orders are negotiable instruments and credit transactions. These commercial forms [receipts, order slips
that their nature could not have been affected by the notice sent by and invoicesl are not always fully accomplished to contain all the
the Bureau of Posfs to the banks necessary information describing the whole business transaction.
How would you resolve the controversy? (2005, 1980' 1975 Bar) The sales clerks merely indicate a description and the price of each
item sold without bothering to fill up all the available spaces in the
particular receipt or invoice, and without proper regard for any legal
Answer: The contentions of the book store that postal money
orders are negotiabte instruments and that their nature could not repercussion for such neglect. Certainly, it would not hurt if
have been affected by the notice sent by the Bureau of Posfs and all businessmen and traders would strive to make the receipts and
banks, are incorrect and are therefore not tenable.
invoices they issue complete, as far as practicable, in material
is" not a negotiable instrument because the
particulars. These documents are not mere scraps of paper bereft of
A postal m6ney order
probative value but vital pieces of evidence of commercial
government, "in establishiitg and operating a postal money order
iystem, is nof engaged in commercial transactions, but merely transactions. They are written memorials of the details of the
r:onsummation of contract (Monteverde vs. People, 387 SCRA 196).
exercises a governmental power for the public benefit- Besldes,
restrictions imposed by postal laws and regulations on postal money
orders like timiting indorsements to one only, or withholding payment
lll. Form and Interpretation of Negotiable lnstruments
to hotders for various reasons, are inconsistent with the character of
negotiabte instruments (See Phil. Education vs. Soriano, 39 SCRA A. Requisites of Negotiability
587).
1. Of Negotiable lnstruments in General
Hence, I witt resotve the controversy against the book store by
dlsmrssrng, for tack of merit, the appeal of the book store from the
Bar Quesfion: What are the requirements to make an instrument
rtrttlotiable? (1996, 1968, 1964, 1954, 1953 Bar)
decision of the triat courT dismissrng ifs complaint against the Bureau
ofPosfs and the bank.
Answer: An instrument to be negotiable must conform to the
k illow ing req uirements:
c. Treasury Warrants
(1) lt must be in writing and signed by the maker or drawer;
Bar Question;Sfafe and explain whether the following are (2) lt must contain an unconditional promise or order to pay a
:ittttt csrlain in money;
negotiabte instruments under the Negotiable lnstruments Law
(Q Treasury warrants payable from a speciftc fund. (2005 Bar)
38 NEGOTIABLE INSTRUMENTS LAW
(3) tt must be payable on demand or at a fixed or determinable
future time;
(4) lt must be payable to order or to bearer;
@ Where the instrument is addressed fo a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
Bar Question: whatis fhe fesf to determine whether an instrument
is negotiable or not? (1989 Bar)
Answer: The test is whether or not the instrument contains all the
requisites enumerated in section 1 of the Nqgotiable lnstruments
Law. Among others, the instrument should contain words or terms of
negotiability which consist of the instrument being so worded that it is
payabte to bearer (or its variations) or that it is payable to the order
of a specified person, or made payable to him or order.
Bar Question: True Or Fatse? A document, dated July 15, 2009,
that reads: "Pay to X or order the sum of P5,000.00 five days after
his pet dog, Sparky, dies. Signed Y." is a negotiable instrument'
(2009 Bar)
Answer: True. The document is negotiable since it complies with
the requifements of section 1 of the Negotiable lnstruments Law.
The order to pay is unconditional since the death of the dog Sparky
is a day which*would certainly come.
Bar Questioh: R rssued a check for P1M which he used to pay S
for killing his politicalenemy.
a.Cin the check be considered a negotiable instrument? (2007
Ba0
Answer: (a) Yes, the check is a negotiable instrument- The
ilticitness of the consideration invotved is of no moment. An
instrument is considered negotiable if it has all the requisites of
negotiabitity under Section 1 of the Negotiable lnstruments Law.
Bar Question: Perla bought a motor car payable in installments
from Automotive Company for P250,000'00' She made a down
payment of P50,000.00 and executed a promissory note !o1 the
bitance. The company subsequently indorsed the note to Reliable
Finance Corporation which financed the purchase. The promissory
note reads:
For value received, t promise to pay Automotive Company or
order at its office in Legaspi City, the sum of P200,00A.00 with
NEGOTIABLE INSTRUMENTS LAW 39
interest at twelve (12%) per cent per annum, payable in equal
installments of P20,000.00 monthly for ten (10) months stafting
October 21, 1991.
Manila, September 21, 1 991.
(Sgd.) Perla
Pay to the order of Reliable Finance Corp.
Automotive Company
By:
(Sgd.) Manager
in the payment of her installments,
Because Perla defaulted
a case against her for a sum
Retiabte Finance Corporation initiated
of money. Perla argued that the promissory note is merely an
assignment of credit, a non-negotiable instrument open to all
defenses available to the assignor and therefore, Reliable Finance
Corporation is not a holder in due course.
ls the promissory note a mere assignment of credit or a
negotiable instrument? Why? (1992 Bar)
Answer: The promissory note is a negotiable instrument, not an
assignment of credit because all the requisites of a negotiable
instrument under Section 1 of the Negotiable lnstruments Law, are
present, which are (1) it is in writing and signed by the maker, (2) it is
an unconditional promise to pay a sum certain in money, (3) it is
payable at a fixed or determinable future time, and @ it is payable to
order.
'2. Ot a Promissory
Note
Bar Question: Give the requisites of a promissory note. (1961 Bar)
Answer: The requisites of a promissory note are: (a)it must be in
writing and signed by the maker; (b it must contain an unconditional
promise to pay a sum certain in money; (c) it must be payable on
tlemand or at a fixed or determinable future time; (d) it must be
ltayable to order or to bearer.
Bar Question: MP,bought a used cellphone from JR. JR prefeired
cash but MP is a friend so JR accepted MP's promissory note for
P10,000.00. JR thought of converting the note into cash by
ttndorsing it to his brother KR. The promissory note is a piece of
t)aper with the following hand-printed notation: 'MP WILL PAY JR
rEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1
WEEK FROM TODAY". Below this notation MP's signature with
40 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENTS LAW 4t

"8/1/00" next toindicating the date of the promissory note' t(hen

it, PN as shown below and your corresponding answer, . either
JR pr"r"rr"d Mp,s note to-KR, the latter said it was not a negotiable "Affected" or "Not affected." Explain. (2002 Bar)
substitute for (1) The date of the PN is "February 30, 2002.'
insirument under the law and so could not be a valid
cash. JR took the opposite view, insisting on the note's negotiability' (2) The PN bears interest payable on the last day of each
iiu asked to reieree. Which of the opposing views is correct? calendar quarter at a rate equalto five percent (5%) above the then
"r"(2000 Bar)
Explain prevailing 91-day Treasury Bill rate as published at the beginning of
such calendar quarter.
Answer:KR'sviewiscorrect.Thepromissorynoteisnotneg.otiable (3) The PN gives the maker the option to make payment either
1 of the
because lt does not contain att the requirements of section in money or in quantity of palay of equivalent value.
as being payable to order or to (4) The PN gives the holder the option either to require payment
Negotiable lnstruments Law, such
bearer. in money or to require the maker to serue as the bodyguard or escoti
of the holder for 30 days (2002 Ba)
Bar Question: Discuss the negotiabitity or non-negotiabitity of
the
fottowing nofes.' (1993 Bar) Answer:
1) Manita, SePtember 1' 1993 (1) "Not Affected" - The erroneous date (there is no February
P2,500.00 30) is immaterial. The date is not a requirement under Section 1 of
I promise Pedro San Juan or order the sum of P2'500'00
to pay the Negotiable lnstruments Law.
(Sgd) N2EL OASIRO (2) "Not Affected" - The sum payable' r.s sf// a sum ceftain
atthough it is still to be paid with interesf (Sec. 2[a], Act 2031). The
2) Manita, June 3, 1993 ctate from which the interest is to be reckoned is clearly
P10,000.00 determinable.
For value received, I promise to pay Serglo Dee or order the (3) "Affected" - lt the maker has the option to pay in money or
sum of P10,000.00 in'five (5) instatlments' with the
first in goods, the promise to pay is conditional.
instattmeryt . payabte on October 5, 1993 and the other (4) "Not Affected - The negotiable character of an instrument
instattments on or before the fifth day of the succeeding
month is not affected by a provision which gives the holder an election to
thereafter. require something to be done in lieu of payment of money (Sec. 5[d],
(sgd.) L|TO VTLLA tbid.).

Answer: (1) promissory note is negotiable since. all the By its terms, the note was made payable to a specific person
-iqiinr"rfs 'ofThe
Seciio n 1 of the Negotiable lnstruments Law are rather than to bearer or to order - a requisite for negotiability under
iii"nt. lt is signed by the maker; .there is an unconditional
promise the Negotiable lnstruments Law. Hence, petitioner cannot avail
'io no date of maturity appears; lrimself of the NIL's provisions on the liabilities and defenses of an
p"y; it is paiabte o-n demand, since
;rccommodation party. Besides, a non-negotiable note is merely a
- - it is PaYable to order.
and
promissory note is atso negotiable since .all the simple contract in writing and is evidence of such intangible rights as
d'Tie
,eqiiiements'of Sectioi 1 of the Negotiable lnstruments Law are ntay have been created by the assent of the parties. The promissory
present.ttissignedbythemaker;theyisanunconditionalpromise rrote is thus covered by the general provision of the Civil Code, not
io puy; it is paiabte it d"t"rrined future time, that is' October 5'
'ig6i'ip lry the NIL (Garcia vs. Llamas, 417 SCRA 292).
to on or before "February 5, 1994; and it is payabte to order.
The Court of Appeals correctly relied on the acknowledgment
BarQuestion:Whichofthefottowingstipulationsorfeature.sofa roceipt to hold petitioners liable for the amount of money loaned,
irirnl"rii n t" (pN) affect or do not affect its negotiability,
'assuming'thatthe PN is otherwise negotiable? Indicate your answer
firrcJing it to be a valid and binding promissory note. lt is valid and
lrincJing between the parties who executed it, as a document
bywritingtheparagraphnumberofthestipulationorfeatureofthe ovidencing the loan agreement they had entered into. Petitioner's
rkrfnnse that it is a simulated document which does not reflect the
42 NEGOTIABLE INSTRUMENTS LAW
true intent and agreement of the parties is not persuasive.
Petitioner's testimonial evidence cannot stand against the
acknowledgment receipt presented by respondent (Reyes vs. CA,
383 SCRA471)
Bar Question: Exptain whether or not the fotlowing instrument
negotiable.
P1,000.00
Manila, October 5, 1970
I acknowledge to have received from Jose Cruz one thousand pesos
(P1,000.00) which I promise to pay on demand or in five months
from date with one percent interest per month payable within the first
five days of every month. lf the interesf is nof paid when due, then
both principal and interest shall become due at the option of the
holder.
(Sgd.) Pedro Garcia (1970 Bar)
Answer: The note is non-negotiable for the following reasons.'
(1) lt is not payable to order or to bearer. The note as worded is
payable to a specified person;
(2) lt is not payable on demand or at a fixed or determinable
future time. As worded, the note is payable in the alternative - - on
demand or in five months, obviously granting to the debtor the option
whether to pay*on demand or in five months.
Bar Question: Assuming that the above note were negotiable, how
would the follbwing additional stipulations affect its negotiability:
(1) "This note is given in consideration of a promise of Jose Cruz
to fumigate against rnsecfs on the posts of my house at No. I Pasay
Road, Makati."
(2) "At my option, this note may be redeemed with the payment
of palay at the market price prevailing when the note falls due."
(1970 Bar)
Answer: (1) The first stipulation that the note is given as
consideration for a promise to perform fumigation work will make the
note non-negotiable. The stipulation does not merely cross refer to
the contract which is the origin of the note, but makes the note the
consideration of a promise. Hence, the note becomes conditional.
(2) The note is rendered non-negotiable by giving to the debtor
the option to pay in palay. lf the option is reserved to the creditor
(holder), negotiability is unaffected.
Hence, any one or both of the above-stated additional stipulations
will affect the negotiability of an otherwise negotiable instrument.
NEGOTIABLE INSTRUMENTS LAW 43
Bar Question: A promissory note reads as follows: "l promise to
pay Gabriela Silangan P1,000.00 three years after unconditional
withdrawal of the U.S. of its military bases in the Philippines."
A. Discuss the negotiability or non-negotiability of the above note.
B. Dlscuss the effect of each of the following upon the nofe's
is negotiability : (1) no date is given; (2)the place where drawn and
where payable are not stated. (1988, 1966 Bar)
Answer: (A) Assuming the note is duty signed by the maker, the
Irofe rs non-negotiable for the following reasons.'
rn The note is conditional because its enforceability is subiected to
the happening of an event - the unconditional surrender of the U.S.
of its military bases in the Philippines - which may or may not
happen; and
(2) The note is not payable to bearer, or to the order of a specified
person. As worded, the note is payable to Gabriela Silangan, but not
lo her or order, or to the order of Gabriela Silangan.
(B) (1) lf the note is otherwise negotiable (under the stated
facts, it is
not negotiable), the absence of the date will not affect
negotiability. The validity and negotiable character of an instrument
is not affected by the fact that it is not dated (Section 6, Act 2031).
The taw authorizes the payee or subsequent holder to insert the true
date.
(2) The absence in the note of the place where the note was
clrawn or where it is payable will not affect negotiability, if the note is
otherwise negotiable. These are not required under Section 1 of the
Negotiable lnstruments Law.
Bar Question: X bought a jeep from Reliable Motors Company for a
txtnsideration of P50,000.00. He paid P25,000.00 in cash and
oxecuted the following promissory note on the balance:
September 1, 19Bg
t promise to pay the sum of P25,000.00 to Reliable Motors Company
tnt or before December 31, 1989.
a (sgd.) x
At the bottom of the note, X wrote in his own handwriting the
"l
loltowing" will not sell the jeep until I shall have paid in full." ls the
txile negotiable? Reasons. (1989 Bar)
Answer: The note is non-negotiable for the following reasons.'
(1) The words of negotiability "pay to bearer" or "pay to Reliable
Molors or order" are not in the note.
 NEGOTIABLE INSTRUMENTS LAW
(2) The note is conditional. Not only is the contract giving rise to
the promissory note cross referred to, but the terms and conditions of
the sale of the jeep are made a part and parcel of the note.
Bar Question: TH is an indorsee of a promissory note that simply
sfates; "PAY TO JUAN TAN OR ORDER 400 PESOS." The note
has no date, no place of payment and no consideration mentioned.
It was signed by MK and written under his letterhead specifying the
address, which happens fo be his residence. TH accepted the
promissory note as payment for services he rendered to SH, who in
turn received the note from Juan Tan as payment for a prepaid
cellphone card worth 450 pesos. The payee acknowledged having
received the note on August 1, 2000. A Bar reviewee had told TH,
who happens fo be your friend, that TH is not a holder in due course
under Article 52 of the Negotiable lnstruments law (Act 2031) and
therefore does not enjoy the rights and protection under the statute.
IH asks for your advice specifically in connection with the note being
undated and not mentioning a place of payment and any
consideration. What would your advice be? (2000 Bar)
Answer: The absence of a date will not affect the note's
negotiability as the instrument is considered dated on date of rssue.
The law also allows the holder to insert the true date of lssue or
acceptance and the instrument will be payable accordingly.
The absenCe" of a place of payment will also not affect its
negotiability, since it is not a requirement for negotiability.
The absence of consideration will not affect its negotiability since
consideration is presumed.
Bar Question: Jenny Yap executes in favor of Josie Bacorro the
following promissory note:
P100,000.00 MakatiCity
04 January 2002
PROMISSORYNOIE
For value received, I hereby promise to pay Josie Bacorro, or order,
the sum of Pl00,000.00, in two equal monthly installments.
(Sgd.) JENNY YAP
ls it a negotiable instrument? Explain. (2003 Bar)
Answer: The promissory note is a negotiable instrument since it
complies with all the requirements of negotiability, as follows:
1. lt is in writing and signed by the maker, Jenny Yap
NEGOTIABLE INSTRUMENTS LAW 45
2. lt contains an unconditional promise to pay a sum certain in
money, P100,000.00. The sum payable rs st// a sum certain
although indicated therein that payment ls to be made by
installments
3. /f ls payable on demand since no time for payment rs expressed
(Section 7, NIL)
4. lt is payable to order
3. Of a Bill of Exchange
Bar Question: Give the requisites of a bill of exchange. (1g61 Bar)
Answer: The requisites of a bill of exchange are: (1) lt must be in
writing and signed by the drawer; (2) lt must contain an
ttnconditional order to pay a sum certain in money; (3) lt must be
ltayable on demand or at a fixed or determinable future time; (4) tt
rrrusf be payable to order or to bearer; (S) The drawee must be
rtamed or otherwise indicated with reasonable ceftainty.
4. Application of the Requisites
Bar Question: Give all the reasons you know why the following
nrstrument is not negotiable:
February thirty first, 1959.
I promise to pay Pedro Esfudios upon reaching the age of majority
llro sum of P100 or give him a house, whichever he chooses,
lttovided he does not stop studying up to that time.
Juan Padre." (1959 Bar)
Atrswen The above-stated instrument is non-negotiable for the
hillowing reasons.' (l)lt is not payable to order or to bearer. The
htstntment is made payable to a specified person, pedro Estudios.
1l') The promise is conditional. The sum is payable only if pedro
thxts not stop studying up to that time.
l-he error in the date (February 31, 1959); the phrase "upon
ttrttt:lring the age of majority"; the option given to pedro to be paid
,n(,ttoy or to be given a house, will not affect the negotiability of the
ttt:;ltrttnent, if it is otherwise negotiable.
flor Question: You are Pedro Cruz. Draft the appropriate contract
IrilttluitQ€ for (1) your negotiable promissory note, and (2) your
r:lnx:k, each containing the essenfia/ elements of a negotiable
It t:ilr tttr rcnt. (2002 Bar)
46 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUM ENTS LAW 47

Answer: collection, and said debtor dies before the maturity of the note, his
(1)Promissory Note Sepiember 11, 2002 estate is not liable to pay the stipulated attorney's fees in case a
I promise to pay to the order of Jose Reyes the amount of claim for the value of said note is filed by the bank's lawyer before
P5,000.00 on September 21, 2002. the maturity of the note. The phrase "for collection" implies a claim
(Sgd.) Pedro Cruz for payment after the maturity of the note (Zaballero vs. Rural Bank,
18 SCRA 1073).
(2) Check
Account No. 6789 Check No. 12345 3. ln Money
September 21, 2002 General rule: lf some other act besides payment of money is
P5,000.00 promised or ordered, the instrument becomes non-negotiable. The
Pay to the order of Jose Reyes FIVE THOUSAND PESOS following additional acts, however, do not affect negotiability: (a)
(Sgd.) Pedro Cruz authorizes the sale of collateral securities on default; (b) authorizes
BPI Family Savings Bank confession of judgment on default; (c) waives the benefit of law
Roces Avenue Branch intended to protect the debtor; and (d) allows the creditor the option
to require something in lieu of money.
B. Meaning of Particular Requisites
4. Payable on Demand
1. Unconditional Promise or Order
An instrument is payable on demand: (a) where expressed to be
Where the promise or order to pay is made to depend on a payable on demand, at sight or on presentation; (b) where no period
contingent event, it is conditional, and makes the instrument non- of payment is stated; (c) where issued, accepted or indorsed after
negotiable. maturity.

The uncondtional nature of the promise or order is not affected
by: (a) An indication of a particular fund from which the acceptor
reimburses himself after paying,the holder; and (b) A statement of
the transaction which gives rise to the instrument.
The indication of Fund 501 as the source of payment to be made
on the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves, non-negotiable
(Metrobank vs. CA, 194 SCRA 169).
Bar Question: 'When are the following notes payable? Sfafe
reasons for your answer:
(1) The note reads as follows:
etc."
(2) On January 15, 1952, "A" made a promissory note to the order
of "8", payable on January 30, 1952, and delivered it to the payee.
On March 30, 1952, "B" endorsed and delivered the note to "C". As
regards "B", when is the note payable? (1952 Bar)

2. Certainty of Sum
The sum is certain if the amount is fixed. The certainty is,
however, not affected although to be paid: (1) with interest, (2) by
stated installments, (3) by stated installments with acceleration in
case of default, (4) with exchange, (5) with costs of collection or
attorney's fees.
Where a debtor promised to pay a bank ten percent of the amount
due in case his promissory note is placed in the hands of a lawyer for
Answer: (1) The note is payable on demand as there is no date
indicated as to when it would be payable"
(2) The note is also payable on demand as regards "B" because it
was indorsed by him after its maturity.
A promissory note payable on demand is immediately due and
demandable, and an action thereon prescribes in ten years (Pay vs.
Palanca, 57 SCRA 618).
48 NEGOTIABLE INSTRUMENTS LAW
Promissory notes, evidencing crop loans, to be used for the crop-
year 1943-44, would mature on the expiration of the crop-year, if the
mortgagor adhered to the conditions in the chattel mortgage contract
securing their payment. The loans would become due and
demandable immediately only if the mortgagor used the loans for
purposes other than those specified or if he failed to comply with the
conditions of the chattel mortgage (Gaston vs. Republic, 19 SCRA
684).
5. Determinable Future Time
Future time is determinable in the following cases: (a) At a fixed
period after date or sight; (b) On or before a specified fixed or
determinable future time; (c) On or at a fixed period after the
occurrence of a specified event, certain to happen, although the
exact date is not certain.
6. Payable to Order
The instrument is payable to order where drawn payable to the
order of a specified person, or to him or his order.
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NlL, an order
instrument reqriirds an indorsement from the payee or holder before
it may be validly negotiated. A bearer instrument, on the other hand,
does not reqirire an indorsement to be validly negotiated. lt is
negotiable by mere delivery (PNB vs. Rodriguez, 566 SCRA 513)
7. Payable to Bearer
An instrument is payable to bearer: (a) when expressed to be so
payable; (b) when payable to a person named therein or bearer; (c)
when payable to the order of a fictitious or non-existing person, and
such fact was known to the drawer or maker; (d) when the name of
the payee is not the name of a person; (e) when the only and last
indorsement is an indorsement in blank (lbid.)
A check is a bill of exchange drawn on a bank payable on
demand. lt is either an order or a bearer instrument (lbid.)
A check that is payable to a specified payee is an order
instrument. However, under Section 9(c) of the NlL, a check payable
to a specified payee may nevertheless be considered as a bearer
NEGOTIABLE INSTRUMENTS LAW 49
instrument if it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable.
Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si
Maganda," who are well-known characters in Philippine mythology,
are bearer instruments because the named payees are fictitious and
non-existent (lbid.).
An actual, existing, and living payee may also be "fictitious" if the
maker of the check did not intend for the payee to in fact receive the
proceeds of the check. This usually occurs when the maker places a
name of an existing payee on the check for convenience or to cover
up an illegal activity. Thus, a check made expressly payable to a
non-fictitious and existing person is not necessarily an order
instrument. lf the payee is not the intended recipient of the proceeds
of the check, the payee is considered a "fictitious" payee and the
check is a bearer instrument. ln a fictitious-payee situation, the
drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as
a bearer instrument that can be negotiated by delivery. The
underlying theory is that one cannot expect a fictitious payee to
negotiate the check by placing his indorsement thereon. And since
the maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule is
justified for otherwise, it will be most convenient for the maker who
desires to escape payment of the check to always deny the validity
of the indorsement. This despite the fact that the fictitious payee
was purposely named without any intention that the payee should
receive the proceeds of tpe check (lbid.)
Where the payee is vaguely designated, the loss will be borne by
the partywho caused it- -the drawer (Equitable vs. lAC, 161 SCRA
518).
lf the note is payable to a specified person, and not to order or to
bearer, it is non-negotiable, and therefore governed by the Civil
Code and the special laws on mortgages (GSIS vs. CA, 170 SCRA
l-r33).
Where the questioned checks were payable to "cash", appeared
rcgular on their face and the bank found nothing unusual in the
lransaction, as the drawer usually issued checks in big amounts
rrrade payable to cash or to a particular person or to a company, the
50 NEGOTIABLE INSTRUMENTS LAW
bank cannot be faulted for paying the value of the disputed checks
(Security vs. Triumph, 301 SCRA 537).
Bar Question: Can a bill of exchange o'r a promissory note quatify
as a negotiable instrument if - (a) it is not dated; or (b) the
day and the month, but not the year of its maturity, is
given; or (c) it is payable to "cash"; or (d) it names two
alternative drawees. (1997 Bar)
Answer: a) Yes. Paragraph (a) of Section 6 of the Negotiable
lnstruments Law states that the validity and negotiable character of
an instrument are not affected by the fact that it is not
dated.
(b) No. An instrument to be negotiable must be payabte
on demand or at a fixed or determinable future time.
(c) Yes. Paragraph (d) of Secflon g of the Negotiable
lnstruments Law sfafes that the instrument is payable to
bearer when the name of the payee does not purport to be
the name of any person. An instrument payable to "cash"
is a bearer instrument and is a negotiable one.
(d) No. A bill may be addressed to two or more drawees
jointly, whether they are partners or not, but not to two or
more drawees in the alternative or in succession (Sec.
128, NIL)
Bar Question: What is the significance of a check payable to the
order of "cash"? ls the bank justified in paying it to a person
presenting it for payment without the drawer's indorsement? Why?
(1960 Bar)
Answer: The check is payable to bearer because the name of the
payee does not purport to be the name of a person. The bank is
therefore justified in paying it to a person presenting it for payment
without the drawer's indorsement.
Bar Question: Juan de la Cruz srgns a promissory note payabte to
Pedro Lim or bearer, and delivers it personally to pedro Lim. The
lafter somehow misplaces the said note and Carlos Ros finds the
note lying around the corridor of the building. Carlos Ros endorses
the promissory note to Juana Bond for value by forging the signature
of Pedro Lim.
May Juana Bond hold Juan de la Cruz liable on the note? (1980
Ba0
NEGOTIABLE INSTRUMENTS LAW 51
Answer: Yes, Juana Bond may hold Juan de la Cruz liable on the
promissory note for the reason that the note is a bearer note, and
enforcement ls sought against the maker whose signature is
admiftedty genuine. As bearer notes are negotiable by mere
delivery, Juana Bond had a perfect right to assume that Carlos Ros
was the tawfut hotder of the note at the time of its negotiation to her
(Juana Bond). She acquired the rights of a holder of the bearer note
by the mere fact of its delivery to her, not through the forged
indorsement of the signature of Pedro Lim by Carlos Ros.
Bar Question: AB issued a promissory note for P1,000'00 payable
to CD or his order on September 15, 2002. CD indorsed the note in
btank and detivered the same to EF. GH stole the note from EF and
on September 14, 2002 presented it to AB for payment. When
asked by AB, GH said CD gave. him the note in payment for two
cavans of rice. AB therefore paid GH P1,000'00 on the same date.
On September 15, 2002, EF discovered that the note of AB was not
rn hls posse ssion and he went to AB. lt was then that EF found out
that AB had atready made payment on the note. Can EF still claim
payment from AB? Why?
B. As a sequel to the same facts narrateQ above, EF, out of pity for
AB who had already paid Pl,000.00 to GH, decided to forgive AB
and instead go after CD who indorsed the note in blank to him- /s
CD stitt tiabte to EF by virtue of the indorsement in blank? Why?
(2002 Ba) .
Answer:
A. No. EF cannot anymore claim payment from AB. The note was
a bearer note since the only and last indorsement was in blank- CD
can demand payment upon delivery of the same to AB- AB cannot
be faulted for paying the value of the note, hence he cannot be
t:ompelled to pay again to EF. The presentment of the note on
September 14, 2002, or before its maturity on September 15, 2002,
ltecomes immaterial because AB paid the same, even though he
knew that the maturity date was still on the next day.
tl. No, because the note was a bearer note, hence it could be
ttcgotiated by mere delivery.
8. Samples of Negotiable lnstruments
Bar Question: "M", who lives in Baguio, deslres to borrow Pl'000
lrctm his friend "P", who lives in Manila, payable within one year, with
stx;h interest as "P" may wish to charge. Assume that you are "P's"
hwyor. Prepare a promissory note to be signed by "M" and include in
 NEGOTIABLE INSTRUMENTS LAW
it such provisions as you believe will best protect your client's
rnferesfs. (1950 Bar)
Answer: I will prepare the following promissory note for my ctient
"P":
Manila, August 10, 1g50
One year from date, I promise to pay to "p" or order the sum of
ONE THOUSAND PESOS (P1,000.00) with interest at 14% per
annum, payable in advance, with 10% of the amount due for cosfs of
collection and attorney's fees in case of defautt.
Presentment and notice of dishonor waived.
' fssd.) "M"
Bar Question: Draft a promissory note which provides for
compounded interest. (1949 Bar)
Answer: Promissory note with compounded interest:
Manita, August 10, 1949
Pl,000.00
One year from date, I,promise to pay to A or order the sum of
P1,000.00 with interest at 14% per annum, compounded monthly.
(ssd.) "x"
9. Rule$as to Dates
There are several important principles as to dates in negotiable
instruments. These are:
(1) Where the instrument, its acceptance, or indorsement is
dated, such date is presumed to be the corresponding true date;
(2) Date is important (a) where the instrument is payable within a
specified period after date, or after acceptance, in which case the
date of the instrument and the date of acceptance are needed to
determine the date of maturity of the instrument; in these cases, the
holder may insert the true date; (b) when the instrument is payable
on demand, date is necessary to determine whether the instrument
was presented within a reasonable time from issue in case of notes
or from last negotiation in case of bills, as these factors will show
whether the last holder is a holder in due course or not; and (c) when
the instrument is an interest-bearing one, to determine when the
interest starts to run; and
NEGOTIABLE INSTRUMENTS LAW
(3) Antedating or postdating an instrument does not affect validity
or negotiability, unless done for an illegal or fraudulent purpose.
G. Rules on lnterpretation of lnstruments
(1) Discrepancy between the amount in figures and in words - the
words prevail, but if the words are ambiguous, reference will be
made to the figures to fix the amount
(2) lnstrument not dated - considered dated on date of issue
(3) Conflict between written and printed provisions - written
provisions prevail
(4) lnterest provided for, but no starting date specified - starting
date is the date of instrument; in the absence of said date, from date
of issue
Bar Question: For value received, "X" executed a promissory note
in favor of 'Y" for P10,000 agreeing to pay interest thereon but
without specifying the rate thereof. Can "Y" collect interest on the
note? Why? (1965 Bar)
Answer: Yes. "Y" can collect interest on the note at the legal rate of
6% per annum. Under the Civil Code,.if interest is agreed, but not
the rate, the rate applicable is the legal rate which is 6% per annum.
(Note: Under C.B. Circular 416, legal interesf is now 12% per
annum, for loan or forbearance of money.)
(5) lnstrument ambiguous
Bar Question: When a negotiable instrument is so ambiguous that
there is doubt whether it is a bill or a note, what is it? (1998, 1946
Ba0
Answer: lf the instrument is so ambiguous that there is doubt
whether it is a bill or a note, the holder may treat it as a note or a bill
trt his option (Section 17[e], Act 2031).
(6) Signature on instrument does not indicate capacity in which
made
Bar Question: When a signature is so placed upon a negotiable
nrstrument that it is not clear in what capacity the person making the
sume intended to sign, what is his liability? (1946 Bar)
 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENTS LAW 55

Answer: Where it cannot be determined in what capacity a person A's defense that the note is void because paid for a gambling debt
affixed his signature to a negotiable instrument, he is deemed to will prosper, B is sf/ liable for the whole amount as a solidary maker
have signed as an indorser (Section 17, Act 2031; See Sapiera vs.
cA, 314 SCRA 370). Bar Question: X, Y, Z signed a promissory note in favor of A
As indorser, his liability under the instrument is secondary, stating: "We promise to pay A on December 31, 2001 the sum of
meaning that if the party primarily liable cannot pay, the indorser can P5,000.00" When the note fell due, A sued X and Y who put up the
be made to pay by the holder of the instrument. defense that A should have impleaded Z. /s fhe defense valid?
Why? (2001 Ba)
(7) Where Promissory Note Worded "l Promise to Pay" is Signed
by Two Makers Answer: The defense is not valid because the liability of X, Y and Z
Bar Question: "A" and "8" executed and detivered to "C" a joint. Therefore A may choose fo sue only X and Y but only for
is
promissory note which reads thus: "l promise to pay "C" or bearer the their proportionate shares.
sum of P2,000, with interest at 12% on or before June 30, 1969
Manila, February 1, 1969. (Sgd.) A and 8." - lV. Abnormal and Similarly Deficient Negotiable lnstruments
Two months later, for -value received. "C" delivered to "D" the
aforesaid note with the endorsement: "Pay to "D"; and on April 15,
A. Causes for Abnormality and Deficiency
1969, the said note was endorsed in blank by "D", and delivered to
X, without consideration. Upon "A's" refusalto pay despite demand,
1. Lack of essential requisites to a contract which are
"X" filed an action to collect from "A" the total amount of the
promissory note, with 12%o interest per annum from Feb. 1, 1969, a. LaMul subject matter
and the cosfs. '?3" defenses are that the note is null and void b. Consideration
because the same was issued to pay a gambling debt and that in
Section 25 of the Negotiable lnstruments Law states that value is
any event, his tiability cannot exceed more than one half of the
'any consideration sufficient to support a simple contract. An
amount due. - .
antecedent or pre-existing debt constitutes value, and is deemed as
1) Are A's defenses valid?
2) ls "X'! entitled to the whole amount of the note? Explain. such whether the instrument is payable on demand or at a future
(1969,1946 Bar) time. Value in general terms may be some right, interest, profit or
benefit to the party who makes the contract or some forbearance,
detriment, loan, responsibility, etc. on the other side (BPl vs. Roxas,
Answer: 1) The defense of A that the note is null and void for
536 SCRA 168).
having been issued to pay a gambling debt, if proven by A, is a valid
defense and can free A from liability to X because ff is a real
defense, and therefore available against all holders, including c. Consent
holders in due course. A's defense that he is liable,for 1/2 of the
2. Lack of regularity in isque by absence of
note only will not hold. When he, together with B, signed on a
promissory note worded "l promise to pay x x x," he became
solidarily liable with B, meaning that a holder could sue either him (A)
a. the material particulars of the questioned instrument, or in their
correctness;
or B or both of them for the full amount of the obligation (See Section
t. the delivery of instrument made with the knowledge and/or
[17]9, Negotiable lnstruments Law; Article 1216, Civil Code;PNB vs. conformity of the maker or the drawer and with intention of making
Concepcion, 5 SCRA 745).
the transferee a holder of the instrument.
2) X is entitled to the whole amount of the note. That X may have
received the note without consideration from D does not entitle A or
B. Situations Where Subsequent Holder in Due Course
B to utilize that defense against X, as this defense is a personal
defense, hence, available only against immediate pafties. Even
not Affected by Abnormality or Deficiency
if
56 NEGOTIABLE INSTRUMENTS LAW
1. lncomplete but Delivered Negotiable lnstrument
Example: M makes a promissory note leaving the amount blank,
and delivers sarne to P, the payee, with instructions to fill up the
amount with his loan account which does not exceed P600 including
interest. P inserts P2,000 on the space for amount in breach of the
instructions, and negotiates the note.
A person in possession of a check has prima facie authority to
complete it by filling up the blanks therein (Pacheco vs. CA, 319
scRA 595).
The fact that a Deed of Assignment is dated January 16, 1974
while the questioned signature was found to be circa 1954-1957, and
not that of 1974, does not necessarily 'mean that the deed is a
forgery, as where it was clearly intended to be signed in blank to
facilitate the assignment of shares from one person to another at any
future time, similar to Section 14 of the Negotiable lnstruments Law
where the blanks may be filled up by the holder, the signing in blank
being with the assumed authority to do so (Borromeo vs. Suh, 317
scRA 176).
2. Complete but Undelivered Negotiable Instrument
Example: M makes a bearer promissory note, completes it with
all material particulars, and places the same inside an unlocked
drawer in his office table. P, his office secretary, steals the note, and
negotiates the note.
3. Gomplete and Delivered Negotiable lnstrument lssued
Without Consideration, or With a Gonsideration
Gonsisting of a Promise Which the Payee Failed to
Comply with
a. Example of an lnstrument Without Gonsideration
M makes a bearer promissory note and delivers without
consideration the same to P, a long lost friend which P subsequently
negotiates.
b. Example of an lnstrument Where There is a Failure
of Consideration
NEGOTIABLE INSTRUMENTS LAW s7
M makes a promissory note payable to P in the amount of P1,000
on P's promise to deliver merchandise to M in five days. The note
was negotiated by P, who failed to comply with his promise to deliver
the merchandise.
4. Consequences Common to Situations 1, 2 and 3
at lf P negotiated the note to A, who has knowledge of the
abnormality or deficiency, A is a holder not in due course;
consequently, M can prevent A from enforcing the note against him
(M) by asserting the abnormality or deficiency involved.
b) lf A negotiated the note to B, who pays value for the same,
and had no knowledge of the abnormality or deficiency involved,
then he (B) is a holder in due course, and may enforce the
instrument against M. M cannot invoke the abnormality or deficiency
as a defense against B, because the abnormalities (incomplete but
delivered; complete but undelivered) and the deficiencies (absence
or failure of consideration) are personal or equitable defenses, and
therefore available only against the parties who are directly
responsible for the above-stated abnormalities or deficiencies, or
their immediate transferees who are aware of aforesaid
abnormalities and deficiencies committed by their transferors.
c) lf B, the holder in due course, negotiates the note to C, who
pays value, but who has knowledge of the above stated abnormality
or deficiency, he (C) can enforce the note according to its tenor
against M, the maker. Under the second sentence of Section 58 of
the Negotiable lnstruments Law, a transferee from a holder in due
course of a negotiable instrument suffering from any of the above
stated abnormalities and deficiencies acquires (inspite of his
knowledge of the abnormality or deficiency) all of the rights of the
transferee, including the right to enforce the instrument against M,
according to its tenor.
5. Exceptions to Gonsequences of lnstrument lssued
Without Consideration
a) The exception is in the case of accommodation.
b) Example: Where M made a promissory note payable to P, to
irccommodate P in his credit arrangements with A, to whom he (P)
orrdorsed the note, and (A) has knowledge of the lack of
r;onsideration to the note due to the accommodation of P by M.
 NEGOTIABLE INSTRUMENTS LAW
c) Consequence: A can enforce the note against M, inspite of A's
knowledge of the absence of consideration between M and P.
C. Situations Where a Subsequent Holder in Due Course is
Affected by the Abnormality or Deficiency
1. lncomplete and Undelivered Negotiable lnstrument
Example: M makes a bearer promissory note, leaves the
amount blank, places said note inside the drawer of his unlocked
office table, where it was stolen by P, his office secretary, who
inserts P1,000 on the blank space for amourit, and negotiates the
note.
2. Signature of Maker or Drawer Forged
Example: The signature of M is forged on a promissory note
where P, the forger, is also the payee.
3. Consequences Common to Situations 1 and 2
a) lf P negotiated the note to A, who has knowledge of the
abnormality (incomplete and undelivered) or deficiency (maker's
signature forged), A is a holder not in due course hence, A cannot
enforce the no!e"against M.
b) lf A, in turn, negotiated the note to B, who paid value dnd was
unaware of the above stated abnormality or deficiency, B is a holder,
in, due course, but B cannot enforce the note against M. The
abnormality (incomplete and undelivered note) or deficiency
(signature of maker forged) creates a real defense (a defense
attaching to the instrument itself) which M, the maker, can invoke
against all holders, whether holders in due course or not.
c) lf B negotiated to C, who paid value, but who was aware of the
abnormality or deficiency, C cannot invoke the derivative rights under
Section 58 of the Negotiable lnstruments Law, because B, from
whom C derived his rights, did not acquire the right to enforce the
note against M as explained above.
Bar Question: PN makes a promissory note for P5,000"00 but
leaves the name of the payee in blank because he wanted to verify
its correct spelling first. He mindlessly left the note on'top of his desk
at the end of the workday. When he returned the following morning,
NEGOTIABLE INSTRUMENTS LAW 59
the note was missing. lt turned up later when X presented it to PN
for payment. Before X, T, who turned out to have filched the note
from PN's office, had endorsed the note after insefting his own name
in the blank space as the payee. PN dishonored the note,
contendihg that he did not authorize its completion and delivery. But
X said he had no participation in, or knowledge about, the pilferage
and alteration of the note and therefore he enjoys the rights of a
holder in due course under the Negotiable lnstruments Law. Who is
correct and why? (2000 Bar)
Answer: PN is correct. He is not tiabte to X. Tn" in"orptete and
undelivered note is a real defense, and can be invoked against all
holders, whether in due course or not.
4. Exception to the Consequences of an lnstrument
Which is Forged
The exception is where the forgery consists of an alteration of a
material particular in the instrument.
Example: Where a promissory note made for five thousand
pesos (P5,000) payable to P was altered in amount by P or
subsequent holder to nine thousand pesos (P9,000).
Consequence: The instrument is null and void because of the
material alteration, unless it reaches the hands of a holder in due
course, who can enforce it according to the tenor of the instrument
before it was altered (for P5,000 only instead of P9,000).
D. Rules Under the Negotiable lnstruments Law
1. lncorirplete but Delivered lnstrument
a) Holder has prima facie authority to complete the instrument;
b) Completion to be done within a reasonable time and according
to the authority given;
c) Holder in due course of the instrument previously completed in
lrreach of instructions can enforce the same as if regularly
r;ompleted.
2. Gomplete but Undelivered lnstrument
a) Between immediate parties and a remote party not a holder in
due course, delivery to be effectual must be made by or under the
 60 NEGOTIABLE INSTRUMENTS LAW
authority of the maker, drawer, acceptor or indorser, as the case may
be;
b) lf the instrument is in the hands of a holder in due course, all
prior deliveries are conclusively presumed valid;
c) lf the instrument is out of the hands of the person who signed
it, a valid and intentional delivery is disputably presumed.
3. lncomplete and Undelivered Instrument
a) lf completed.and delivered without authority, the instrument is
not a valid contract against any person who signed before delivery.
4. Absence or Failure of Gonsideration
a) Absence of consideration is the total lack of consideration, no
consideration, or illegal consideration.
b) Failure of consideration is failure of the agreed consideration
to materialize.
c) Both absence and failure of consideration are defenses
personal to the prejudiced party, and available against any person
not a holder in due course.
5. Forgery
a) Forgery is'the counterfeit making or fraudulent alteration of any
writing.
b) lt may consist of: (1) signing of another,s name with intent to
defraud; and (2) alteration of an instrument in the name, amount,
description of payee, etc. with intent to defraud;
c) The signature is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to e4force payment
thereof against any party to it, is acquired through or undei such
signature.
The general rule is that a forged deed is a nullity and conveys no
title. A forged deed may be defined as an instrument which puiports
to have been executed by the person or persons whose signatures
appear thereon, but which, in fact, was not executed, and the
signatures thereon had been merely imitated so as to give them the
deceptive appearance of genuineness (Barstowe vs. Republic, 519
scRA 148).
An allegation of forgery and a perfunctory comparison of the
signatures by themselves cannot support the claim of forgery, as
NEGOTIABLE INSTRUMENTS LAW 6t
forgery cannot be presumed and must be proved by clear, positive
and convincing evidence, and the burden of proof lies in the party
alleging forgery. Even in cases where the alleged forged signature
was compared to samples of genuine signatures to show its variance
therefrom, such evidence is insufficient. lt must be stressed that the
mere variance of the signatures cannot be considered as conclusive
proof that the same were forged. To determine forgery, the following
criteria has been laid down: The process of identification, therefore,
must include the determination of the extent, kind, and significance
of this resemblance as well as of the variation. lt then becomes
necessary to determine whether the variation is due to the operation
of a different personality, or is only the expected and inevitable
variation found in the genuine writing of the same writer. lt is also
necessary to decide whether the resemblance is the result of a more
or less skillful imitation, or is the habitual and characteristic
resemblance which naturally appears in a genuine writing. When
these two questions are correctly answered the whole problem of
identification is solved (Rivera vs. Turiano, 517 SCRA 668).
Resort to experts is not mandatory or indispensable to the
examination or the comparison of handwriting. A finding of forgery
does not depend entirely on the testimonies of handwriting experts,
because the judge must conduct an independent examination of the
questioned signature in order to arrive at a reasonable conclusion as
to its authenticity. No less than Section 22, Rule 132 of the Rules of
Court explicitly authorizes the court, by itself, to make a comparison
of the disputed handwriting with writings admitted or treated as
genuine by the party against whom the evidence is offered or proved
to be genuine to the satisfaction of the judge.
The value of the opinion of a handwriting expert depends not upon
his mere statements of whether a writing is genuine or false, but
upon the assistance he may afford in pointing out distinguishing
marks, characteristics and discrepancies in and between genuine
irnd false specimens of writing which would ordinarily escape notice
or detection from an unpracticed observer (Bacalso vs. padigos, 552
scRA 185).
The opinions of handwriting experts are not binding upon courts,
ospecially when the question involved is mere handwriting similarity
or dissimilarity, which can be determined by a visual comparison of
specimens of the questioned signatures with those of the currenfly
oxisting ones (Pontaoe vs. Pontaoe, 552 SCRA 261)
62 NEGOTIABLE INSTRUMENTS LAW
He who disavows the authenticity of his signature on a public
document bears the responsibility to present evidence to that effect'
Mere disclaimer is not sufficient. At the very least, he should present
corroborating witnesses to prove his assertion. At best, he should
present an expert witness (Libres vs. Delos Santos, 554 SCRA 642).
Handwriting experts are usually helpful in the examination of
forged documents because of the technical procedure involved in
analyzing them. But resort to these experts is not mandatory or
indispensable to the examination or the comparison of handwriting.
The findings of handwriting experts are not. conclusive upon the
courts. The authenticity of signatures is not a highly technical issue
in the same sense that questions concerning, e.9., quantum physics
or topology or molecular biology, would constitute matters of a highly
technical nature. The opinion of a handwriting expert on the
genuineness of a questioned signature is certainly much less
compelling upon a judge than an opinion rendered by a specialist on
a highly technical issue (Deheza-lnamarga vs. Alano, 574 SCRA
651).
6. Material Alteration of lnstrument
a. Definition
Any alteralion which changes the date, the sum payable, the time
or place of payment, number or relation of the parties, or medium or
currency of payment, or adds a place of payment where none is
specified, or which alters the effect of the instrument in any respect is
a material alteration.
Under Section 125 (f) of the Negotiable lnstruments Law, an
alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in an instrument that purports to
modify in any respect the obligation of a party or an unauthorized
addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. ln other words, a
material alteration is one which changes the items which are
required to be stated under Section 1 of the Negotiable lnstruments
Law (Metrobank vs. Cablizo,510 SCRA 259).
Bar Question: A check for Fifty Thousand (P50,000.00) Pesos was
drawn against drawee bank and made payable to XYZ Marketing or
order. The check was deposited with payee's account at ABC Bank
which then sent the check for clearing to drawee bank.
NEGOTIABLE INSTRUMENTS LAW 63
Drawee bank refused to honor the check on ground that the serial
number thereof had been altered
XYZ Marketing sued drawee bank.
ls it proper for the drawee bank to dishonor the check for the
reason that it had been altered? Explain (1999 Bar).
Answer: No, since the seriat rlumber is an item which is not an
essential requisite for negotiability under Section 1 of the Negotiable
lnstruments Law. The alteration of the serial number is not a
material alteration (See PNB vs. CA, 256 SCRA 491).
b. Effect
A material alteration avoids the instrument except as against the
party who made, authorized or assented to the alteration, and
subsequent indorsers.
Where the altered instrument, however, 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.
ln his book entitled "Pandect of Commercial Law and
Jurisprudence," Justice Jose C. Vitug opines that "an innocent
alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.l.L.) and spoliation (alterations done by a
stranger) will not avoid the instrument, but the holder may enforce it
only according to its original tenor (lnternational vs. CA, 501 SCRA
20)
The bank on which the check is drawn, known as the drawee
bank, is under strict liability to pay to the order of the payee in
accordance with the drawer's instructions as reflected on the face
and by the terms of the check. Payment made under materially
altered instrument is not payment done in accordance with the
instruction of the drawer. When the drawee bank pays a materially
altered check, it violates the terms of the check, as well as its duty to
charge its client's account only for bona fide disbursements he had
rnade. Since the drawee bank did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right
to claim reimbursement from the drawer, much less, the right to
tleduct the erroneous payment it made from the drawer's account
which it was expected to treat with utmost fidelity (Metrobank vs.
Cablizo, 510 SCRA 259).
64 NEGOTIABLE INSTRUMENTS LAW
When the drawee bank pays a person other than the payee named
on the check, it does not comply with the terms of the check and
violates its duty to charge the drawer's account only for properly
payable items. A drawee should charge to the drawer's accounts
only the payables authorized by the latter; otherwise, the drawee will
be violating the instructions of the drawer and shall be liable for the
amount charged to the drawer's account (BA vs. Associated, 588
scRA 51).
A drawee bank, having paid to an innocent holder the amount of
an uncertified, altered check in good faith and without negligence
which contributed to the loss, could recover froh the person to whom
payment was made as for money paid by mistake (Far East vs. Gold,
562 SCRA 604).
Commercial policy favors the protection of any one who, in due
course, changes his position on the faith of the drawee bank's
clearance and payment of a check or draft. This construction and
application of the law gives effect to the plain language of the NIL
and is in line with the sound principle that where one of two innocent
parties must suffer a loss, the law will leave the loss where it finds it.
It further reasserts the usefulness, stability and currency of
negotiable paper without seriously endangering accepted banking
practices. lndeed, banking institutions can readily protect
themselves against liability on altered instruments either by
qualifying their acceptance or certification, or by relying on forgery
insurance and special'paper which will make alterations obvious.
This is not to mention that the drawee bank, in most cases, is in a
better position, compared to the holder, to verify with the drawer the
matters stated in the instrument (lbid.).
E. Gonsequences and Rules as Applied
1. lncomplete but Delivered Instrument
Bar Question: Maria issued a negotiable promissory note and
authorized Pilar to fill up the amount in blank up to P2,000 only.
However, Pilar filled it.up to P4,0000 and negotiated the note to
Pepe. For what amount are Maria and Pilar liable to Pepe? Explain.
(1972 Bar)
Answer: Maria is tiabte to Pepe for P4,000. lf Maria dishonors the
note', Pilar as a secondary pafty is liable to Pepe for the full amount
of the note P4,000.
NEGOTIABLE INSTRUMENTS LAW 65
The problemis a case of an incomptete but detivered instrument.
No mention is made by the problem of any circumstance which
would make Pepe not a holder in due course. Hence, we have to
proceed on the assumption that he is a holder in due course. As
sttch hcilder, he may enforce the instrument as if it had been filled up
strictly in accordance with the authority given, meaning that he can
collect P4,000, the amount mentioned in the note.
Bar Question: Brad was in desperate need of money to pay his debt
lo Pete, a loan shark. Pete threatened to take Brad's life if he failed
lo pay. Brad and Pete went fo see Senorita lsobel, Brad's rich
cousin, and he asked her if she could sign a promissory note in his
lnvor in the amount of P10,000.00 to pay Pete. Fearing that Pete
would kill Brad, Senorita lsobel acceded to the requesf. She affixed
lrcr signature in a piece of paper with the assurance of Brad that he
willjust fill it up later. Brad then filled up the blank paper, making a
promissory note for the amount of Pl00,000.00. He then indorsed
tvtd delivered the same to Pete, who accepted the note as payment
lor the debt.
What defense or defenses can Senorita lsobel set up against
Pete? Explain. (2005 Bar)
Answer: The promissory note executed by Senorita tsobel is an
hrcomplete delivered instrument which falls under Section 14 of the
Negotiable lnstruments Law. Brad, however, filled it up beyond his
trttthority since instead of placing the amount of P10,000.00, he
ltlaced P100,000.00. Pete is not a holder in due course as he was
lrresenf when Brad asked Senorita lsobel to sign the note for
P10,000.00. Clearty, Pete was aware of the infirmity of the
iltstrument.'
Senorita lsobel can raise the personal defense of breach of trust
tulainst Pete.
Bar Question: Jun was about to leave for a business fflp. As his
rmnl practice, he signed several blank checks. He instructed Ruth,
lis secretary, to fill them as payment for his obligations. Ruth filled
orrc check with her name as payee, placed P30,000.00 thereon,
tlrdorsed and delivered it to Marie. She accepted the check in good
Itttllr as payment for goods she delivered to Ruth. Eventually, Ruth
rtvretted what she did and apologized to Jun. lmmediately he
rlrocted the drawee bank to dishonor the check. When Marie
orrr;ashed the check, it was dishonored. ls Jun liable to Marie?
()006 Ba)
66 NEGOTIABLE INSTRUMENTS LAW
Answer: Yes. The check involved herein is a delivered but
incomplete instrument which is within the puruiew of Section 14 of
the Negotiable lnstruments Law, which provides that there was prima
facie authority on the part of Ruth to fill-up any of the material
particulars thereof. Marie being a holder in due course may treat the
instrument as valid for all intents and purposes, as ff it was filled up
in accordance with the authority of the drawer. Marie may enforce it
provided she does so within a reasonable time.
Bar Question: AB Corporation drew a'check for payment to XY
Bank. The check was given to an officer of AB Corporation who was
instructed to detiver it to XY Bank. tnstead, the officer, intending to
defraud the Corporation, filled up the check by making himself as the
payee and delivered it to XY bank for deposit to his personal
account. XY Bank debited AB Corporation's account. AB Corporation
came to know of the officer's fraudulent act after he absconded. AB
Corporation asked XY Bank to credit its amount. XY Bank refused.
a) lf you were the judge, whaf rssues would you consider relevant to
resolve the case? Explain.
b) How would you decide the case? (2008 Bar)
Answer: (a) The issues I will consider are (1) the extent of the
authority granted to the officer; (2) the good faith of XY Bank; (3) the
negligence of AB Corporation; and (4) the criminal and civil liabilities
of the offic{r. 'Ihls case falls squarely within the ambit of the
provisions of Section 14 of the Negotiable lnstruments Law, which
provides thht where the instrumenf is wanting in any material
particular, the person rn 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." Hence, the law merely requires that the instrument be
in the possesslon of a person other than the drawer or maker. From
such possession, together with the fact that the instrument is wanting
in a material particular, the law presumes agency to fill up the blanks.
Because of this, the burden of proving want of authority or that the
authority granted was exceeded, is placed on the person questioning
such authority. (See Dy vs. People, 571 SCRA 59).
(b) I would rule that AB Corporation should bear the /oss since the
same was predicated from its own negligence in delivering an
incomplete instrument to XY Bank, without prejudice to running after
the officer. XY Bank had the right to rely on what appears on the
face of the check.
NEGOTIABLE INSTRUMENTS LAW 67
Bar Question: Marlon deposited with LYRIC Bank a money market
placement of P1 million for a term of 31 days. On maturity date, one
claiming to be Marlon called up the LYRIC Bank account officer and
instructed him to give the manager's check representing the
proceeds of the money market placement to Marlon's girlfriend
lngrid. The check, which bore the forged signature of Marlon, was
deposited in lngrid's account with YAMAHA Bank. YAMAHA Bank
stamped a guaranty on the check reading: "All prior endorsements
and/or lack of endorsement guaranteed." Upon presentment of the
check, LYRIC Bank funds the check. Days later, Marlon goes fo
LYRIC Bank to collect his money market placement and discovers
the foregoing transactions. Marlon thereupon sues LYRIC Bank
which in turn files a third-party complaint against YAMAHA Bank.
Discuss the respective rights and liabilities of the two banks. (2010
Bar)
Answer: ln the present case, the signature of Marlon, the maker of
the check, was forged. Thus, when a signature is forged or made
without the authority of the person whose signature it purpofts 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
pafty thereto, can be acquired through or under such signature.
Consequently, if a bank pays a forged check, it must be considered
as paying out of its funds and cannot charge the amount so paid to
the account of the depositor.
LYRIC Bank, since it is guilty of negligence for delivering an
incomplete instrument to lngrid is not entitled to be reimbursed of the
money it used to fund the check. However, LYRIC has a cause of
action against the forger to claim the money it advanced. On the
other hand, since the signature of Marlon is a forgery YAMAHA is
considered to have paid the check out of its own funds. Butit is
entitled to be reimbursed by LYRIC Bank.
Even if we assume that both parties were guilty of negligent acts
lhat led to the loss, petitioner will still emerge as the party foremost
liable in this case. ln instances where both parties are at fault, the
doctrine of last clear chance is applied in order to assign liability. lt is
lretitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due
rliligence and followed the proper and regular banking procedures in
r;learing checks. The one who had a last clear opportunity to avoid
the impending harm but failed to do so is chargeable with the
oonsequences thereof. ln the case at bar, petitioner cannot evade
'negligence
responsibility for the loss by attributing on the part of
respondent because, even if we concur that the latter was indeed
68 NEGOTIABLE INSTRUMENTS LAW
negligent in pre-signing blank checks, the former had the last clear
chance to avoid the loss. To reiterate, petitioner's own operations
manager admitted that they could have called up the client for
verification or confirmation before honoring the dubious checks.
Verily, petitioner had the final opportunity to avert the injury that
befell the respondent. Failing to make the necessary verification due
to the volume of banking transactions on that particular day is a
flimsy and unacceptable excuse, considering that the banking
business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such
that the appropriate standard of diligence mu$t be a high degree of
diligence, if not the utmost diligence. The petitioner must suffer the
consequence of its negligence (BA vs. Phil. Racing, 594 SCRA 301).
2. Complete but Undelivered lnstrument
Bar Question: "A" succeeded in making "B" affix his signature on a
check without his (B's) knowing that it was a check. At the time of
signing, the check was complete in allrespecfs. "A" intended to cash
the check the following morning, but that night, it was stolen by "C"
who succeeded in negotiating the same to "D", a holder in due
course. "D" cashed the check the following morning. "8" refused to
have the amount of the check deducted from his bank deposit.
Who may properly be charged with the amount of the check?
Reason out y6ur answer. (1961 Bar)
Answer: Ihis is a case of a complete but undelivered instrument. lf
this instrument reaches a holder in due cotJrse, the law conclusively
presumes that all prior deliveries are valid. ln the hands of "D", the
holder in due course, no defense can be availed of by "8". Hence,
"D's" encashment with the drawee bank being atso vatid, the said
drawee bank can properly charge the check against "B's" account.
Section 191 of the Negotiable lnstruments Law defines issue as
the first delivery of an instrument, complete in form, to a person who
takes it as a holder. Significantly, delivery is the final act essential to
the negotiability of an instrument. Delivery denotes physical transfer
of the instrument by the maker or drawer coupled with an intention to
convey title to the payee and recognize him as a holder. lt means
more than handing over to another; it imports such transfer of the
instrument to another as to enable the latter to hold it for himself (Dy
vs. People, 571 SCRA 59).
NEGOTIABLE INSTRUMENTS LAW 69
3. lncomplete and Undelivered lnstrument
Bar Question: A, single proprietor of a business concern, is about
to leave for a business fnp and, as he so often does on these
occasions, signs several checks in blank. He instructs B, his
secretary, to safekeep the checks and fill them out when and as
required to pay accounts during his absence. B fills out one of the
checks by placing her name as payee, fills in the amount, endorses
and delivers the check to C who accepfs it in good faith as payment
for goods sold to B. B regrets her action and tells A what she did. A
directs the bank in time to dishonor the check. When C encashes
the check, it is dishonored.
Can A be held liable to C? (2004, 1997, 1982, 1971 Bar)
Answer: No. The instrument is incomplete and undelivered.
lncomplete because at the time the drawer pafted with it, it lacked a
material particular the amount was blank. Undelivered because it
was delivered to B-not for the purpose of making B the holder of the
instrument, but for safekeeping only. Hence, the subsequent
possesslon by C of the check, whether he lawfully or unlawfully took
it from B, was without the authority of A.
lf an instrument is incomplete but delivered without authority of the
drawer, the instrument is not a valid contract against any person who
signed the instrument before the unauthorized delivery.
Bar Question: "A" signed a blank check which he inadvertentty left
on his desk at his Escolta office. The same was later stolen by B,
who filled in the amount of P22,300.00 and a fictitious name as
payee. B then endorsed the check in the payee's name and passed
the check to C; thereafrer C passed it to D; then D to E, and E to F.
a. Can F enforce the instrument against A? Explain.
b. Suppose that F is a holder in due course what will be your
'Give
"'i:"':#o/"Jtrorce the instrument asainst B? Against c?
reasons. (1985, 1978 Bar)
Answer: (a) F cannot enforce the instrument against A, the drawer.
Ihis is a case of an incomplete and undelivered instrument, and
under the Negotiable lnstruments Law, said instrument, if completed
and negotiated without authority, will not be a valid contract in the
hands of any holder, as against any person whose signature was
placed thereon before delivery. This defense is a real defense and is
therefore available against all holders, whether in due course or not.
 NEGOTIABLE INSTRUMENTS LAW
A's signature was placed by him on the instrument before its
unauthorized completion and negotiation by B. F, being the holder of
the instrument after the said unauthorized completion and delivery of
it, cannot enforce the instrument against A.
(b) That F is a holder in due course will not change the conclusion.
A's defense, being a real defense, is available against all holders,
whether in due course or not.
(c) F can enforce the instrument against B and C; against B,
because he was the one who completed and negotiated the
instrument without authority, and against C, because he has a party
to the instrument after its unauthorized completion and negotiation.
Bar Question: Jun was about to leave for a business fflp. As his
usual practice, he signed several blank checks. He instructed Ruth,
his secretary, to fill them as payment for his obligations. Ruth filled
one check with her name as payee, placed P30,000.00 thereon,
endorsed and delivered it to Marie. She accepted the check in good
faith as payment for goods she delivered to Ruth. Eventually, Ruth
regretted what she did and apologized to Jun. lmmediately he
directed the drawee bank to dishonor the check. When Marie
encashed the check, it was dishonored. Supposing the check was
stolen while in Ruth's possession and a thief filled the blank check,
endorsed and delivered it to Marie in payment for the goods he
purchased from her, is Jun liable to Marie if the check is dishonored?
(2006 Bar)
Answer: No.' The check involved herein is an incomplete and
undelivered instrument which is within the ambit of Secfion 15 of the
Negotiable lnstruments Law. Where an incomplete instrument has
not bee,n delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as agarnsf
any person, including Jun, whose signature was placed thereon
before delivery. Such defense is a real defense, which may be
invoked even against a holder in due course like Marie.
4. Forgery in Signature
A forged signature, whether it be that of the drawer or the payee,
is wholly inoperative and no one can gain title to the instrument
through it. A person whose signature to an instrument was forged
was never a party and never consented to the contract which
allegedly gave rise to such instrument. Section 23 does not avoid
the instrument but only the forged signature. Thus, a forged
NEGOTIABLE INSTRUMENTS LAW 7l
indorsement does not operate as the payee's indorsement
(Associated vs. CA, 252 SCRA 620).
ln bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged
can raise the defense of forgery against a holder in due course.
Where the instrument is payable to order at the time of the forgery,
the signature of its rigntfut holder is essential to transfer title to the
same instrument. When the holder's indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto (lbid.).
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. Consequently, if a bank pays a
forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor
(Traders vs. Radio, 390 SCRA 608).
a. Of the Maker
Bar Question: Juan makes a negotiable promissory note payable to
his order, signing Pedro's name thereon as maker without Pedro's
knowledge and consent. Juan then indorses the note to Jose, who,
in turn, indorses it to Carlos under circumstances which make Carlos
a holder in due course. May Carlos enforce the note against Pedro?
And if the note is dishonored by Pedro, may Carlos hold Juan and
Jose liable on their respective indorsemenfs? Reason out your
answer. (1989 Ba)
Answer: Carlos cannot enforce the note against Pedro, because
Pedro's purported signature on the note is a forgery, and no right to
enforce payment under such signature can be acquired by any
holder, even by a holder in due course like Carlos.
Carlos however can enforce the instrument against Juan and
Jose, the signatures of these two being genuine.
b. Of the lndorser
Bar Questidn: Juan makes a promissory note payable to the order
tl Pedro, who indorses lf fo Jose. Somehow, Robefto obtains
 72 NEGOTIABLE INSTRUMENTS LAW
possession of the note and, forging the signature of Jose, indorses it
to Amado. Amado then indorses the note to Nilo, the hotder.
State the rights and liabilities of the parties. (1995, 1989, 1954 Bar)
Answer: Jose, being the indorsee of the note, has a right to
demand payment from Juan, the party primarity tiabte, and ii Juan
dishonors by non-payment, Jose has a right of recourse against
Pedro, provided Pedro is given by Jose a notice of dishonor by non-
payment. Jose became a party after Juan and pedro. Jose has no
right against Nilo because N/o became a party after Jose (See
Secfions 60 and 66, Negotiable tnstruments Law).
Nilo has no right of recourse against Juai, pedro or Jose, Nito
having derived h/s right to the instrument from the forged
indorsement made by Roberto. A forged , signature is whblly
inoperative and cannot vest any right to the forger or any person who
derived his right from the forged signature, as against those who
became parties to the instrument before the forgery was committed.
Nilo, however can proceed against the forger, and Amado (Jose,s
indorsee), because they are precluded from asserting forgery as a
defense (See Secflon 124, tbid.).
Bar Question: Pancho drew a check to Bong and Gerard jointty.
Bong indorsed the che.ck and also forged Gerard,s indorsement. The
payor bank paid the check and charged pancho,s account for the
amount of the check. Gerard received nothing from the payment.
Pancho asked the payor bank to credit his account. shoutd the bank
comply? ExpLain tully. (2008 Bar)
Answer: Yes, the bank shoutd credit pancho's account. Ail payees
or indorsees who are not partners must indorse joinily, untesi the
one indorsing has authority to indorse for the others. since Gerard,s
indorsement was forged, the check is deemed inoperative. A forged
signature, whether it be that of the drawer or the payee, is wioily
inoperative and no one can gain tiile to the instrument through it. A
person whose signature to an instrument was forged was never a
party and never consented to the contract which attegedty gave rise
to such instrument. Also, where the instrument is payabte to order at
the time of the forgery, the signature of its rightfut hotderis essenfia/
to transfer title to the sa/ne instrument. When the hotder,s
indorsement is forged, all parties prior to the forgery may raise the
real defense of forgery against ail parties subsequent thereto.
(Associated vs. CA, supra)
NEGOTIABLE INSTRUMENTS LAW 73
5. Alteration of the lnstrument
a. Of the Amount
Bar Question: Larry rssued a negotiabte promissory note to Evelyn
and authorized the iatter to filt up the amount in blank with his loan
account in the sum of P1,000.00. However, Evelyn inserted
P5,000.00 in viotation of the instruction. she negotiated the note to
Juiie who had knowtedge of the infirmity. Julie in turn negotiated
said note to Devi for value and who had no knowledge of the
infirmity.
a.CanDevienforcethenoteagainstLarryandifshecan,for
how much? ExPlain.
b.SupposingDeviendorsesthenotetoBabyforvaluebutwho
has knowtedge of tne infirmity, can the latter enforce the note against
Larry? fl993 Bar)
Answer: (a) Yes. Devi can enforce the note against Larry for
p5,000.00 because she is a hotder in due course hence free from
any defect of titte of prior parties and from-defenses available to prior
pirti"" among themsetves, and may enforce the instrument for the
'futtamount
(See Secfion 57, Negotiabte lnstruments Law)'
(b) the note agalnst Larry' Even ff she ls
'a Yes. Baby can enforce
noi hotder in due course because she has knowledge of the
infirmity of the note, she has att the rights of a holder in due course
becauie she derived her title from Devi, a hotder in due course, and
was not party to the fraud or itlegatity of the instrument (see secfion
58, Ibid.).
Bar Question: A executed a bill of exchange for P500.00 in favor of
B, who altered the amount to P5,000.00 and presented the bill to the
drawee for acceptance. The drawee, not knowing of the alteration
which was neatty done, accepted the bitl. Thereafter, B negotiated
the biil to C, wio now seeks to hotd the drawee liable for P5,000
The drawee contends that under the rule on alteration, he can only
be liable up to P500.00-
a. ts the drawee's contention tenable? Reason'
b.CanthedraweedebittheaccountofAand,ifso,towhat
extent? Reason. (1971 Bar)
Answer: (a) Yes, the drawee,s contention is tenabte. Even if C ls a
hotder in due course, he can enforce payment only according to the
originat tenor of the instrument. As the instrument was originally
 74 NEGOTIABLE INSTRUMENTS LAW
drawn for P500.00, C can enforce the instrument for p500.00 only,
its originaltenor.
(b) Yes, the drawee can debit A's account but onty up to p500,
because the bill binds A also up to that amount only.
b.Of the Name of lndorsers
The collecting bank which presents for clearing a check
containing the forged signature of the payee or any subsequent
indorser will bear the loss because of its guarantee, as a prerequisite
to clearing of all prior indorsements. where said check is cleared by
the drawee bank (which guarantees the genuineness of the drawer,s
signature) and payment thereof made to the collecting bank, said
payment thereof is a case of "solutio indebiti" entiiling the drawee
bank to get back from the collecting bank the amount thus paid even
if the collecting bank allowed its depositor to draw from the deposit of
said check. The collecting bank can in turn run after its depositor fof
the return of the questioned amount, because being a mere
collecting agent unable to collect the proceeds of the check
deposited by its depositor, the withdrawal by said depositor would
also be a case of "solutio indebiti" (Banco vs. Equitable, 157 SCRA
188).
The warranty that the instrument is genuine and in all respects
what it purpofts to be covers all the defects in the instrument
affecting the validity thereof, including a forged indorsement. Thus,
the last indoiser will be liable for the amount indicated in the
negotiable instrument even if a previous indorsement was forged. A
collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement itself, and ultimately
should be held liable therefor (Ailied vs. Lim, S49 SCRA 504)
A collecting bank where a check is deposited, and which endorses
the check upon presentment with the drawee bank, is an endorser.
An endorser warrants "that the instrument is genuine and in all
respects what it purports to be; that he has good tifle to it; that all
prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting." ln check
transactions, the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all
prior endorsements considering that the act of presenting the check
for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
NEGOTIABLE INSTRUMENTS LAW 75
endorsements. The law imposes a duty of diligence on the collecting
bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting .bank
being primarily engaged in banking holds itself out to the public as
the Sxpert anb tne tiw holds it to a high standard of conduct. ln
pr"r"nting the checks for clearing and for payment, the collecting
bant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the
collecting bank's clear warranty: ALL PRIOR ENDORSEMENTS
AND/oR-LACKoFENDoRSEMENTSGUARANTEED.Without
such warranty, the drawee would not have paid on the checks' No
amount of legal jargon can reverse the clear meaning of the
collecting banli's warranty. As the warranty has proven to be false
and inaCcurate, the collecting bank is liable for any damage arising
out of the falsity of its representation (BA vs. Associated, 588 SCRA
51) One such exception is when the issuance of the check itself
was attended with negligence. Thus, where the collecting bank is
generally held liable, in cases where the checks were negligently
issued, ihe institution issuing the check is just as liable as or more
liable than the collecting bank. ln isolated cases where the checks
were deposited in an account other than that of the payees on the
strength of forged indorsements, the collecting bank is solely liable
for the whole amount of the checks involved for having indorsed the
same (Allied vs. Lim, 549 SCRA 504).
Bar Question: Pedro writes out a check for Pl,000.00 in favor of
Jose or order againsf his current account with Bank of America.
Juan steals the Checks, erases the name of Jose and superimposes
his own name. Juan deposits the check at citiBank and after
clearing, Juan withdraws the amount and absconds. upon discovery
by pedro of the material atteration, he lodged a complaint at the
tiank of America, who credited the amount to Pedro. Bank of
America demands reimbursement from citiBank which refuses on
the ground that it onty acted as an agent for collection. who bears
the /oss? Why? (1977,1972 Ba)
Answer: Between Bank of America, the drawee bank, and citiBank,
the bank which received for deposit the materially altered check
(collecting bank),
' the latter will have to bear fhe /oss'
'Negotiabte
Undei the tnstruments Law, where a negotiable
instrument is mateliatly attered without fhe assenf of the parties liable
ilrcreon (Pedro, the drawer, in the problem), it is avoided, exc.ept as
againsf ) party who has himsetf made, authorized or assented to the
nlteration and subsequent indorsers-
 76 NEGOTIABLE INSTRUMENTS LAW
ln banking practice the coilecting bank (Citibank in the probtem)
"guarantees all prior indorsements." By viftue of said indorsement,
the collecting bank becomes liable to the drawee bank under the
said indorsement, and therefore witt have to reimburse the drawee
bank the amount of the materially altered check.
It is true that Citibank acted only as cottecting agent for its
depositor, but since the check was materially altered after it left the
drawer's hands, the collecting bank had no right at altto pay the sum
stated therein to the person responsible for the materiat alteration or
anyone else deriving his right from the materialty attered instrument.
Citibank which previously had been paid by.Bank of America the
amount of the materially altered check has to reimburse Bank of
America the said amount, without prejudice to citibank running after
Juan, the person who materially altered the check anct who
deposited the check with it (Citibank).
The drawee bank is not similarly situated as the collecting bank
because the former makes no warranty as to the genuineness of any
indorsement. The drawee bank's duty is but to verify the
genuineness of the drawer's signature and not of the indorsement
because the drawer is its client. Moreover, the collecting bank is
made liable because it is privy to the depositor who negoiiated the
check. The bank knows him, his address and history because he is a
client. lt has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check
bearing a forged indorsement from the collecting bank. However, a
drawee bank has the duty to prompfly inform the presentor of the
forgery upon discovery. lf the drawee bank delays in informing the
presentor of the forgery, thereby depriving said presentor of the right
to recover from the forger, the former is deemed negligent and can
no longer recover from the presentor (Associated vs. CA, 252 SCRA
620).
When Gold Palace deposited the check with the collecting bank,
the latter, under the terms of the deposit and the provisions of the
NlL, became an agent of the former for the collection of the amount
in the draft. The subsequent payment by the drawee bank and the
collection of the amount by the collecting bank closed the transaction
insofar as the drawee and the holder of the check or his agent are
concerned, converted the check into a mere voucher and foreclosed
the recovery by the drawee of the amount paid. This closure of the
transaition is a matter of course; otherwise, uncertainty in
commercial transactions, delay and annoyance will arise if a bank at
NEGOTIABLE INSTRUMENTS LAW 77
some future time will call on the payee for the return of the money
paid to him on the check (Far East vs. Gotd, 562 SCRA 604).
The Philippine Clearing House Corporation (PCHC) has
jurisdiction over checks presented for clearing, whether these checks
are negotiable or not (Banco vs. Equitable,lST SCRA 1Sg).
The PCHC rules mandates that the checks be returned within
twenty-four hours after discovery of the forgery but in no event
beyond the period fixed by law for filing a legal action. The rationale
of the rule is to give the collecting bank (which indorsed the check)
adequate opportunity to proceed against the forger. lf prompt notice
is not given, the collecting bank may be prejudiced and lose the
opportunity to go after its depositor (Associated vs. CA, supra).
Bar Question: ln consideration of some goods he bought, A issued
to B a personal check in tQe amount of p280.00. Without the
knowledge of A, B raised the amount of p2,800.00. The atteration is
not apparent to the naked eye. B then deposited the attered check in
his account with the PNB, which released it for ctearing. The Bank of
P.l. which is the drawee bank, did not notice the atteration and the
check was therefore cleared.
B was able to withdraw the P2,800.00, after which he ctosed his
account. when A received his bank statement and cancelled checks
for that month, he noticed the discrepancy in the amount when he
compared the altered check with his check stub. He immediatety
notified the Bank of P.l. and demanded a recredit. The Bank of p.t.
in turn demanded recredit from the PNB, which cannot now locate B.
Discuss the rights and liabilities of the parties under the
circumstances. (1 996, 1 983 Bar)
Answer: Ihis rs a case of an altered check. lJnder the Negotiable
Irtstruments Law, when an altered check reaches the hands of a
lrclder in due course, the latter may enforce the instrument according
Io its tenor before it was altered.
Applied to the case at bar, PNB would have the sfafus of a holder
trt due course and can enforce payment of the check against the
tlrawee bank, BPl, for P280.00, the originat unaltered tenor of the
clrock, but it cannot collect the,difference (p2,520.00) from Bpt. Bpt
irt turn will have to recredit A's account with p2,520.00, the increase
rrr amount consequent to the alteration.
As BPI cleared the check, in effect paying pNB the amount of the
tiltered check, PNB will have to recredit Bpl with the p2,S2O.0O
 NEGOTIABLE INSTRUMENTS LAW
difference. PNBrs recourse for P2,520.00 is against B if he can be
found.
6. Lack or Failure of Gonsideration or lllegal Gonsideration
The existence of consideration in the issue of checks and their
indorsements is presumed. lt is not the holder's burden to prove the
existence of such consideration (Travel-On vs. CA, 210 SCRA 351).
lf the accounts receivable, like postdated checks, are sold for a
consideration less than their face value, the. transaction is one of
discounting, and is subject to the provisions of the Financing
Company Act (Great vs. CA, 381 SCRA 557).
The NIL considers every negotiable instrument prima facie to have
been issued for a valuable consideration. A party holding an
instrument may enforce payment of the instrument for the full amount
thereof. As such, the maker cannot set up the defense of nullity of
the contract of sale (Violago vs. BA, 559 SCRA 69).
Bar Question: Sumabod lssued a promissory note to the order of
Panloob as consideration for the textiles purchased from the latter.
The promissory note recites that the'amount of P100,000.00 is
payable in five monthly installments of P20,000 each, beginning on
December 1,*tgBO and every first day of the month thereafter until
fully paid, provided that the holder may declare the entire amount
due and demandable in the event the maker fails to pay on time any
installment in full, or whenever the holder for valid reasons finds his
claim unsecured. Panloob indorsed and delivered the note for value
to Humabolwho acted in good faith.
Panloob's factory burns down and he is unable to deliver the
textiles. Sumabod does not pay as promised.
Can Humabol as an innocent purchaser for value hold Sumabod
liable on the promissory note? Explain. (1986 Bar)
Answer: Yes, Humabol, as an innocent purchaser for value of the
promissory note issued by Sumabod, can hold Sumabod liable.
The note was rssued by Sumabod as consideration of textiles
purchased by Sumabod from Panloob. Obviously, the textiles
purchased were not at all delivered by Panloob to Sumabod, as
Panloob's textile factory was burned down.
Between Panloob and Sumabod, there is a failure of
consideration - the promise to deliver the textiles bought not having
materialized.
NEGOTIABLE INSTRUMENTS LAW 79
The failure of consideration between the original parties to a
promissory note does not in any manner affect the right of an
innocent holder for value in good faith (in short, a holder in due
course) from asserting his right to collect from the party primarily
liable under the said note.
Bar Question: tf a candidate in an election for public office indorses
a negotiable instrument at the request of a leader who promises to
make all the voters in a given precinct vote for him, and the
candidate actually gets only one vote, can the indorsee hold the
drawer of the check liable? (1968 Bar)
Answer: Assuming that the check was dishonored by the drawee,
the indorsee can proceed against any of the secondary parties
including the drawer. The failure of consideration or the illegality of
the promise is a defense against the enforcement of the check by the
indorsee against the indorser-candidate, but not by the drawer
against whom the presumption of consideration for the issuance of
the check operates.
Bar Question: Lorenzo drew a bill of exchange in the amount of
P100,000.00 payable to Barbara or order, with his wife, Diana, as
drawee. At the time the bill was drawn, Diana was unaware that
Barbara is Lorenzo's paramour. Barbara then negotiated the bill to
her sister, Elena, who paid for it for value, and who did not know who
Lorenzo was. On due date, Elena presented the bill to Diana for
payment, but the latter promptly dishonored the instrument because,
by then, Diana had already learned of her husband's dalliance.
[a]Was the billlawfully dishonored by Diana? Explain.
[b] Does the illicit cause or consideration adversely affect the
negotiability of the bill? Explain. (2009 Bar)
Answer: (a) No. The bill was not lavvfully dishonored. Elena is a
in due course hence Diana was not justified when she
holder
dishonored the bill.
(b) No, the illicit consideration does not affect the negotiability of the
bill. lt is sufficient that a bill complies with the requirements of
Secfion 1 of the NIL for it to be negotiable. The legality of the
consideration is not a requirement under Section 1.
Bar Question: A executed a promissory note for P5,000.00 payable
to the order of B for the purchase of a certain merchandise from B.
Only one half of the merchandise was delivered; but B nonetheless
indorsed the promissory note to C for value. Prior to maturity, C
80 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENTS LAW 81

Provided the check was funded at the time Juliet presented the
indorsed the note at a discount to D, who had knowledge of B's
same to the drawee bank for payment, the bank has no reason at all
partial failure to deliver the merchandise.
a. Can D now recover the full amount of the promissory note? for refusing to pay the payee, Juliet. The possible lack of
consideration in the lssue of the check by Romeo to Juliet cannot be
why?
tttilized as a ground by the bank to dishonor the check because in all
b. lf instead of being indorsed to D, the promissory note was negotiable instruments, the existence of a valuable consideration is
reacquired by B. Can B now hold A liable on his promlssory note?
presumed.
Why? (1971 Bar)

Answer: (a) Yes, D can recover the full amount of the promissory 7. Accommodation
note. Partial failure of consideration is a personal defense against
an immediate. party, or against a remote party not a holder in due a. Requisites of an Accommodation
course, except where said remote party derived his right from a
holder in due course. D, although having knowledge of the partial An accommodation party, i.e., a person who has'signed the
instrument as maker, drawer, acceptor or indorser without receiving
failure of consideration, derived his rights from a holder in due
value therefor, and for the purpose of lending his name to some
course.
' (b) lt B reacquired the note from C, B can hold A liable under the
other person, is liable on the instrument to a holder for value
rrotwithstanding that such holder at the time of taking the instrument
note but only for one half of the amount of the note or for P2,500. B
knew him only to be an accommodation party, as if that contract was
cannot collect the whole of the P5,000 in spite of the fact that he
not for accommodation (Ang vs. Associated, 532 SCRA 244). He
derived his rights from C, a holder in due course, because B himself
has the right, after paying the holder, to obtain reimbursement from
was a party to the partial failure of consideration.
the party accommodated since the relation between them is that of
principal and surety, the accommodation party being the surety. He
Where the consideration of a promissory note is illegal (to lends his name to enable the accommodated party to obtain credit or
influence a public officer in the performance of his duties), the note is
void ab initio-and no cause of action for collection can arise from it to raise money. He receives no part of the consideration for the
(Pineda vs. dela Rama, 121 SCRA 671). instrument but assumes liability to the other parties thereto because
he wants to accommodate another (Bautista vs. Auto, 561 SCRA
223).
A promissory note with an accommodation maker, utilized to settle
an estafa case, has an illegal consideration, and does not make the
accommodation co-maker liable (United vs. Paler, 112 SCRA 404). An accommodation party is one who meets all the three requisites
(1)he must be a partyto the instrument, signing as maker, drawer,
acceptor or indorser, (2) he must not receive value therefor, and (3)
Bar Question: Romeo had P100,000.00 in his current account at
he must sign for the purpose of lending his name or credit to some
the Matatag Banking Corporation. Romeo learned that his enemy
had hired a contract killer to liquidate him. Fearful for his life, he other person.
mailed to his fiancee, Juliet, a check for his P|00,000.00 in the bank.
The check was payable to Juliet or order and was accompanied by a
It is a settled rule that a surety is bound equally and absolutely
letter stating that he was giving her his money out of his great love with the principal and is deemed an original promissor and debtor
from the begipning. The liability is immediate and direct (Garcia vs.
for her and because something would happen to him anytime now.
Llamas, 417 SCRA292).
Juliet presented the check for payment but the bank refused to
honor it. Does Juliet have any right of action against the bank?
Explain. (1986 Bar)
Bar Question: Define accommodation party. (1952 Bar)

Answer: Juliet, as payee of the check, has a right of action against Answer: An accommodation party E one who has signed the
irtstrument as maker, drawer, acceptor, or indorser, without receiving
the bank which refused to honor the check.
82 NEGOTIABLE INSTRUMENTS LAW
value therefor from the accommodated party, and for the purpose of
lending his name to the latter.
An accommodation party to a negotiable instrument, inspite of the
lack of consideration between him and the accommodated party, is
liable to any other holder not the accommodated party (Travel-On vs.
cA,210 SCRA 351).
While not exonerating his solidary liability, the accommodation
party has a right to be properly apprised of the default or delinquency
of the loan precisely because he is a co-signatory of the promissory
notes and of his solidary liability (Gonzales vs. PCIB, 644 SCRA
1Bo).
An accommodation party's liability as a solidarily party is
unconditional and is not affected by an extension of payment granted
by the creditor to the debtor. However, where the holder allowed
payments by the drawer direct to the contractor without availing of
the deed of assignment in its favor, said holder is a bad faith holder,
not a holder in due course against whom an extension to pay
granted by the drawer is a defense by the accommodation party
(Prudencio vs. CA, 143 SCRA 7).
Bar Question: To accommodate Carmen, drawer of a promissory
note, Jorge Signed as indorser thereon, and the instrument was
negotiated to Raffy, a holder for value. At the time Raffy took the
instrument, .he knew Jorge to be an accommodation party onty"
When the promissory note was not paid, and Raffy discovered that
Carmen had no funds, he sued Jorge. Jorge pteads in defense the
fact that he had indorsed the instrument without receiving value
therefor, and the further fact that Raffy knew that at the time he took
the instrument, Jorge had not received any value or consideration of
any kind for his indorsement.
ls Jorge liable? Discuss with reason. (1996, .1990, 1975 Bar)
Answer: Jorge is liable to Raffy. An accommodation party (like
Jorge in the example) is liable on the instrument to a hotder for value
(which Raffy is) notwithstanding the fact that such holder at the time
of the taking of the instrument knew him only to be an
accommodation party.
Ihls is not only by express provision of the law, but also because
the accommodated and the accommodation parties stand to each
other as principal and surety such that if the accommodation party is
NEGOTIABLE INSTRUMENTS LAW 83
rnade to pay the obligation, he can claim reimbursement from the
accommodated party.
Bar Question: As a rule under the Negotiable lnstruments Law, a
subsequent pariy may hold a prior party liable but not vice versa.
Give two (2) instances where a prior party may hold a subsequent
pafty liable. (2008 Bar)
Answer: ln the following rnsfances a prior pafty may hold a
subsequent party liable: 1) where an instrument is negotiated back to
a prior party, and he reissues and further negotiates the same, he is
entitled to enforce payment against a subsequent party who quatifies
as an interuening party to whom the prior party is not liable; and 2) in
the case of an accommodation party arrangement, where the
accommodation party may recover from the party accommodated,
even when the latteris a subsequent party.
Bar Question: Juan Sy purchased from "A" Appliance Center one
(1) generator set on installment with chattel mortgage in favor of the
vendor. After getting hold of the generator set, Juan Sy immediately
sold it without consent of the vendor. Juan Sy was criminaily
charged with estafa.
To settle the case extra-judicially, Juan Sy paid the sum of
P20,000.00 and for the balance of P5,000.00, he executed a
promissory note for sard amount with Ben Lopez as an
accommodation pafty. Juan Sy failed to pay the balance.
a. What is the liability of Ben Lopez as an accommodation party?
Explain.
b. What is the liability of Juan Sy? (1993, 1952 Bar)
Answer: (a) Ben Lopez, as an accommodation party, iS liable to the
Itolder of the promissory note even if he did not receive any
conside ratio n th erefor.
(b) Juan Sy is liable to the holder of the promissory note, or to
Ben Lapuz for reimbursement.
The liability of an accommodation party does not extend to
r;orporate accommodation because the act of the corporate officers
is ultra vires. However, these officers are personally liable (Jose vs.
cA,177 SCRA 594).
An accommodating party warrants to the holder in due course that
Ire will pay the note according to its tenor. lt is no defense to state on
his part that he did not receive any value therefor because the
84 NEGOTIABLE INSTRUMENTS LAW
phrase "without receiving value therefor" used in Sec. 29 of the NIL
means "without receiving value by virtue of the instrument" and not
as it is apparently supposed to mean, "without receiving payment for
lending his name." Stated differently, when a third person advances
the face value of the note to the accommodated party at the time of
its creation, the consideration for the note as regards its maker is the
money advanced to the accommodated party. lt is enough that value
was given for the note at the time of its creation. lf a sum of money
was received by virtue of the note, it is immaterial so far as the bank
is concerned whether one of the signers has or has not received
anything in payment of the use of his name (Ang vs. Associated, 532
scRA 244)
Since the liability of an accommodation party remains not only
primary but also unconditional to a holder for value, even if the
accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter
is still liable for the whole obligation and such extension does not
release him because as far as a holder for value is concerned, he is
a solidary co-debtor (lbid.).
Bar Question: On 1 June 1990, A obtained a loan of P100,000.00
from B, payable not later than 20 December 1990. Since he does
not have any checking account, A, with the knowledge of B,
requested his*friend, C, President of the Saad Banking Corporation
(SAAD), to accommodate him. C agreed; he signed a check for the
aforesaid amount, dated 20 December 1990, drawn against SAAD'S
account with ABC Commercial Banking Corporation. The By-laws of
SAAD requires that checks issued by it must be signed by the
president and the treasurer or the vice-president. Since the
treasurer was absent, C requested the vice-president to co-sign the
check, which the latter reluctantly did. The check was delivered to B;
the check was dishonored upon presentment on due date for
i nsufficie n cy of fu nds.
a. ls the SAAD Banking Corporation liable on the check as an
accommodation party?
b. lf it is not, who then, under the above facts, is/are the
accommodation party? (1991 Bar)
Answer: (a) SAAD Banking Corporation is not tiabte on the check
issued by it to accommodate another person. The act of the bank in
issuing a check for accommodation purposes is ultra vires.
(b) As the check does not bind SAAD Banking, then the
signatories to the check, the President and the Vice President of said
NEGOTIABLE INSTRUMENTS LAW 85
bank, become liable in their personal capacities as accommodation
parties to said check.
Bar Question: Without receiving value for the purpose of lending
his name, A makes a note of P500.00 payable to the order of B who
rrcgotiates it to C, the latter knowing that A is not a pafty for value.
a. May C recover from A if the latter interposes the defense of
rrbsence or failure of consideration? Reason?
b. Supposing A received P30.00 for lending his name, will it alter
lhe result of the case? Reason?
c. Supposrng A pays without obiection the said P500.00, may he
recover what he paid from B? Reason. (1971 Bar)
Answer: (a) Yes, C may recover from A in spite of C's knowledge of
lhe absence of consideration. An accommodation party is,liable to a
hotder for value, even if at the time the latter took the instrument, he
knew of such accommodation arrangement.
(b) lf A received P30.00 for tending his name, accommodation
.sf// exisfs, and the result will be the same.
(c) tf A pays the P50A, he can recover the amount from B, the
retationship between them being that of principal artd surety.
Bar Question: "A" likes to buy the Ford car of "8" for P7,000.00 but
"A" has only P2,000.00 and so he asks for a loan of P5,000.00 from
"C". Before giving P5,000.00 to "A", "C" required "D" and "E" to sign
jointty and severally the promissory note for P5,000.00 in favor of "C"
-''fi;?',:i::;l''ft,, "s"
b pay Ps,ooo oo, "c" sued "p" tn
nnswering the complaint, "D" and "E' stated that they never",6received
n single centavo from the P5,000.00 which 'C" loaned to "A" and that
Itrcy signed the note just to help "A" get the loan from "C" and fhls ls
lrue-
Will you absolve "D" and "E" from the complaint of "C"? Reason
lor your answer. (1964 Ba)
Answer: No. D and E
cannot be absolved from the comptaint
Irocause they signed on the promissory note as accommodation co-
rnakers. Accommodation co-makers D and E are liable on the
nstrument to B, the holder for value, in spite of the fact that said
lnlder B knew D and E to be only accommodation co'makers.
Bar Question: Sanfos purchased Vera's car for P50,000.00. Nof
tmving enough cash on hand, Santos offered to pay in check. Vera
rofused to accept the check unless it is endorsed by Reyes, their
86 NEGOTIABLE INSTRUMENTS LAW
mutual friend. Reyes, endorsed Sanfos' check and Vera, knowing
Reyes had not received any value for endorsing the check, accepted
it. The next day, Vera presented the check to the drawee bank for
payment. Payment was refused for lack of funds. Vera gave notice
of dishonor fo Reyes, but Reyes refused to pay, saying that he
endorsed merely as a friend.
a. /s Reyes liable to Vera? Explain.
b. ln the event Reyes voluntarily pays Vera, does Reyes have the
right to recover from Santos? Explain. (1985,1976 Bar)
Answer: (a) Yes, Reyes is liable to Vera. Hls liability springs from
the fact that he (Reyes) is an accommodation indorser. An
accommodation indorser to an instrument is secondarily liable to the
holder, inspite of the fact that the holder, at the time of the affixing of
the accommodation indorsement knew that the accommodation
indorser did not receive any consideration for his being an indorser
to the instrument.
(b) ln the event Reyes pays Vera, he (Reyes) has a right of
reimbursement from Sanfos, the person he has accommodated
the relationship between the two being that of principal and surety.
- accommodation maker, this deficiency should be supplied by Article
Bar Question: Susan Kawada borrowed P500,000.00 from XYZ
Bank which required her, together with Rose Reyes who did not
receive any amount from the bank, to execute a promissory note
payable to thb bank, or its order, on stated maturities. The note was
executed as so agreed. What kind of liability was incurred by Rose,
that of an accommodation party or that of a solidary debtor? Explain.
(2003 Bar)
Answer: Rose rs tiabte as a solidary debtor and not as an
accommodation party. Rose may not have been able to receive any
value and she may have signed as a maker together with Susan, but
there is no indication that Rose executed the instrument to lend her
name to Susan. By reason thereof, Rose cannot be considered an
accommodation party.
Bar Question:Dagul has a buslness arrangement with Facundo.
The latter would lend money to another, through Dagul, whose name
would appear in the promissory note as the lender. Dagul would
immediately indorse the note to Facundo.
ls Dagulan acc.ommodation party? Explain. (2005 Bar)
Answer: No. According to Section 29 of the Negotiabte lnstruments
Law, an accommodation pafty is one who signs the instrument as a
NEGOTIABLE INSTRUMENTS LAW 87
maker, drawer, or indorser, without receiving any valuable
consideration and for the purpose of lending his name or credit to
another. tn the case at bar, Dagul cannot be deemed as an
accommodation party since the facts indicate that the pafty
supposedly accommodated (Facundo) is the one extending the
credit. The above arrangement is totally repugnant to the concept of
an accommodation PartY.
b. Rights of an Accommodation Party
1. Against the Accommodated PartY
The accommodation party, if obliged to pay to a holder of value,
can seek reimbursement from the accommodated party.
2. Against the Co-accommodation Party
Since the Negotiable lnstruments Law does not define the right of
an accommodation maker to seek reimbursement from another
2073 of the New Civil Code. Where a solidary accommodation maker
paid to the bank the balance due on a promissory note, he may seek
contribution from the other solidary accommodation maker, in the
absence of a contrary agreement between them. This right springs
from an implied promise between the accommodation makers to
share equally the burdens resulting from their execution of the note.
They are joint guarantors of the principal debtor (Sadaya vs. Sevilla,
19 SCRA 924).
A solidary accommodation maker (1) may demand from the
principal debtor reimbursement of the amount which he paid on the
promissory note, and (2) he may demand contribution from his co-
accommodation maker, without first directing his action against the
principal debtor, provided that (a) he made the payment by virtue of
a judicial demand, or (b) the principal debtor is insolvent (lbid.).
A solidary accommodation maker who paid the balance due on a
promissory note is not entitled to demand contribution from his co-
accommodation maker where he made the payment voluntarily and
without any judicial demand and there is no proof that the principal
debtor is insolvent (lbid.).
88 NEGOTIABLE INSTRUMENTS LAW
V. Forgery in Checks
A. Forgery in Signature of the Drawer on a Check
The drawer is not liable and his drawee bank cannot charge the
drawer's account for said check because a bank is supposed to
know the signatures of its customers, and bears the damage in case
it pays under a forged signature of its drawer-customer.
The general rule is to the effect that a forged signature is wholly
inoperative, and palrment made through or under such signature is
ineffectual or does not discharge the instrument. lf payment is
made, the drawee cannot charge it to the drawer's account. The
traditionaljustification for the result is that the drawee is in a superior
position to detect a forgery because he has the maker's signature
and is expected to know and compare it. The rule has a healthy
cautionary effect on banks by encouraging care in the comparison of
the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the
drawee an ideal party to spread the risk to insurance (Samsung vs.
Far East, 436 SCRA 402).
Where the signatures of the GSIS Manager and Auditor are
forged on a Cl'reck drawn on the PNB and the instrument reaches a
holder in due course who deposits the check with pClB, the clearing
of the check by PNB makes PNB liable'for damages to GSIS under
the forged check, on the ground that a bank is supposed to know the
signatures of its customers (PNB vs. CA, 25 SCRA 693). The
drawee bank is considered as paying out of its own funds and cannot
charge the drawer's account (PNB vs. Quimpo, 158 SCRA 582).
The highest degree of diligence is expected, and high standards
of integrity and performance are even required of it. By the nature of
its functions, a bank is under obligation to treat the accounts of its
depositors with meticulous care. The degree of diligence required of
banks is more than that of a good father of a family where the
fiduciary nature of their relationship with their depositors is
concerned. lndeed, the banking business is vested with the trust
and confidence of the public; hence the appropriate standard of
diligence must be very high, if not the highest, degree of diligence.
The standard applies, regardless of whether the account consists of
only a few hundred pesos or of millions (Associated vs. Tan, 446
scRA 282).
NEGOTIABLE INSTRUMENTS LAW 89
Assuming that the PCIB had been guilty of negligence in not
rliscovering that the check was forged, it is undeniable that the PNB
lri:d also been guilty of a greater degree of negligence, because it
had a previous and formal notice from the GSIS that the check had
boen lost, with the request that payment thereof be stopped. Thus,
by not returning the check to the PCIB, by thereby indicating that the
l'NB had found nothing wrong with the check and would honor the
nnme, and by actually paying its amount to the PCIB, the PNB
lrrrluced the latter, not only to believe that the check was genuine
rrnd good in every respect, but also to pay its amount. The PNB
was, therefore, the primary or proximate cause of the loss, and
hence may not recover from the PCIB (PNB vs. CA, supra)'
The question whether or not the indorsements have been falsified
ls immaterial to PNB's liability as a drawee, or to its right to recover
from PCIB, for, as against the drawee, the indorsement of an
irrtermediate bank does not guarantee the signature of the drawer,
nince the forgery of the indorsement is not the cause of the loss
(rbid.).
The risk of loss must fall on the drawee bank. However, if the
rtrawee bank can prove a failure by the customer/drawer to exercise
ordinary care that substantially contributed to the making of the
frrrged signature, the drawer is precluded from asserting the forgery.
lf at the same time the drawee bank was also negligent to the point
of contributing to the loss, then such loss from the forgery can be
npportioned between the negligent drawer and the negligent bank
(Associated vs. CA, 252 SCRA 620).
The mere fact that the forgery was committed by a drawer-payor's
r;onfidential employee or agent, who by virtue of his position had
rnusual facilities for perpetrating the fraud and imposing the forged
l)nper upon the bank, does not entitle the bank to shift the loss to the
rlrnwer-payor, in the absence of some circumstances raising
ostoppel against the drawer (PCIB vs. CA, 350 SCRA 446).
The banking business is imbued with public interest such that the
lriryhest degree of diligence and highest standards of integrity and
porformance are expected of banks in order to maintain the trust and
r:qnfidence of the public in general in the banking sector (Metrobank
vs. BA, 607 SCRA 620).
Every bank that issues checks for the use of its customers should
krrow whether or not the drawer's signature thereon is genuine,
 90 NEGOTIABLE INSTRUMENTS LAW
whether there are sufficient funds in the drawer's account to cover
checks issued, and it should be able to detect alterations, eiasures,
superimpositions or intercalations thereon, for these instruments are
prepared, printed and issued by itself; it has control of the drawer's
account, and it is supposed to be familiar with the drawer's signature.
It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments. Unless a forgery or
alteration is attributable to the fault or negligence of the drawer
himself, the remedy of the drawee bank that negligenfly clears a
forged and/or altered check for payment is against the party
responsible for the forgery or alteration, otherwise, it bears the loss.
There is nothing inequitable in such a rule foi if in the regular course
of business the check comes to the drawee bank which, having the
opportunity to ascertain its character, pronounces it to be valid and
pays it, it is not only a question of payment under mistake, but
payment in neglect of duty which the commercial law places upon it,
and the result of its negligence must rest upon it (Bpl vs.
Buenaventura, 47 1 SCRA 431 ).
Bar Question: Placido, a bank depositor, left his checkbook in
his house. Unknown to him, a visitor at the time, noticing the
same, took a check therefrom, filled it up in the amount of p3,000.00
and succeeded in encashing the check on the same day. ptacido's
account was thereby debited in the same amount.
Discovering the erroneous debit, Placido demanded that the bank
credit him with a like amount. The bank refused on the ground that
Placido was negligent in leaving his checkbook on his desk so that
he could not put up the defense of forgery or want of authority under
the Negotiable lnstruments Law.
The facts disclose that even to the naked eye, there were marked
differences between Placido's signature and the one on the check
forged by the visitor.
As between Placido and the bank, who should bear the toss?
Explain. (1992, 1949 Ba)
Answer: The bank witt bear fhe /oss. The bank in the problem is
the drawee. bank. lt is a paft of the drawee bank's obtigation fo see
to it that the drawer's signature on the check when checked with
bank records, like the specimen signature of the drawer on fite with
the bank, should tally with the signature on the questioned check. lf,
as in the problem above, there are marked differences between
Placido's signature as verified from bank records, and the signature
on the questioned check, then it is the bank which is negtigent in
allowing the encashment of the check, and therefore, it (the bank)
NEGOTIABLE INSTRUMENTS LAW 91
the consequences of the forgery of the questioned
:tltottld bear
rltock. fhls without preiudice to the bank proceeding against the
is
ku-ger.
8ar Quesfion: Fernando forged the name of Daniel, manager of a
lrading Company, as the drawer of a check. The Bank of the
Philippine /s/ands, the drawee bank, did not detect the forgery and
lnid the amount.
May the bank charge the amount paid against the account of the
ntteged drawer? Reasons. (2004, 1977 Bar)
Answer: No, the bank (BPI) cannot charge the amount paid against
tlrc account of the drawer of the check.
A drawee bank, under the law, is required to be familiar with the
drawer's signature, and if the said signature turns out to be a forgery,
tt (drawee bank) will have to bear the consequences of the forgery.
Where a signature to an instrument is forged, it is wholly
lnoperative, and no right to enforce payment can be acquired by any
person through or under such forged signature. Fernando, therefore,
ls not entitted to be paid, and if BPl, the drawee bank, paid Fernando
ttnder the said forged signature of the drawer of the check, it cannot
charge the amount it paid to Fernando against the account of the
drawer.
Bar Question: "8" forged "A's" signature as drawer of a check
clrawn on Citibank. The check was purportedly payable to the order
of "8". B then indorsed the check to "C", a holder in due course, who
rteposited the same to his account with Bank of P.l. The check
passed through the normal course of clearing and accordingly the
clrawee, Citibank, credited the collecting bank, Bank of P.l', with the
amount of the check which Citibank in turn debited from "A's" deposit
uccount. IJpon receiving his monthly statement from Citibank,
together with the cancelled checks debited from his deposit account,
"A" discovered the forgery.
a. Can "A" compel Citibank to recredit to his account the amount
of the forged check?
b. Does Citibank in turn have a recourse against the collecting
bank, Bank of P.l.? Explain.
c. Can Citibank or Bank of P.1., as the case may be, proceed
against "C" as indorser? Explain. (1987 Bar)
Answer: (a) A can compel Citibank to recredit A's account for the
amount of the forged check. The drawee, Citibank, becomes liable
on the forgery of the drawer's signature because Citibank, as
92 NEGOTIABLE INSTRUMENTS LAW
drawee, is under obligation to be ceftain that the drawer's signature
is his true and genuine signature, the drawer being a client of the
drawee bank.
(b) Yes, Citibank, in turn has a right to recourse against BPl, the
collecting bank. The forged signature of the drawer, A, is wholly
inoperative, and any transferee of the instrument acquired no right at
all to enforce the instrument. The act of Citibank of crediting the
account of BPI for the amount of the check is a case of "solutio
indebiti", hence, Citibank is entitled to its return.
(c) Yes, BPI has a right to recourse against C, the indorser, who
deposited the questioned check with it (BPl). When BPI accepted
the check for deposit, it acted as cottectinQ agent for C. As the
signature of A on the check is forged, that signature is inoperative
and does not obligate A to pay under the check. BPI therefore was
unable to collect for C any amount under the questioned check.
BPI's act of crediting C's account was a mistake and said error can
be corrected by debiting C's account with BPl, or making C pay back
the amount, if C has already withdrawn the questioned amount from
his BPI account.
Citibank, if it has not yet run after BPl, has a right to recourse
against C. As Citibank can be made to credit A's account with it for
the amount in the forged check, which amount Citibank has not yet
recovered from BPl, Citibank can make C directly pay to it the
amount involved.
Where there is no clear indication in the checks issued that the
drawer's signatures are forgeries, and the drawef uses personalized
checks not issued by the drawee bank, and where no security
measures were provided by the drawer for the printing of the checks
by a private printing press, the drawee bank cannot be blamed for
not detecting the fraud, and cannot be made liable thereunder
(MWSS vs. CA, 143 SCRA 20).
Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary evidence or
substitutionary evidence may inceptively be introduced, as the
original writing itself must be produced in court, but when, without
bad faith on the part of the offeror, the original checks have already
been destroyed or cannot be produced in court, secondary evidence,
like microfilm copies may be produced (BPl vs. Casa Montessori,
430 SCRA 261)
NEGOTIABLE INSTRUMENTS LAW 93
Even with respect to documentary evidence, the best evidence
rule applies only when the contents of the document - such as the
drawer's signature on a check -- is the subject of inquiry (lbid.).
Of no consequence is the fact that the depositor did not present
the signature card containing the signatures with which those on the
checks were compared. Specimens of standard signatures are not
limited to such a card (lbid.).
For allowing payment on the checks to a wrongful and fictitious
payee, the drawee bank becomes liable to its depositor-drawer
(rbid.).
B. Forgery in the Signature of lndorsers
As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of
cases: (1) where forgery was accomplished by a person not
associated with the drawer - for example a mail robbery; and (2)
where the indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements (Gempesaw vs. CA,
218 SCRA 682).
As a rule, a drawee bank who has paid a check on which an
indorsement has been forged cannot charge the drawer's account for
the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor
such a check or checks. lf a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This
accounts for the rule that although a depositor owes a duty to his
drawee bank to examine his cancelled checks for forgery of his own
signature, he has no similar duty as to forged indorsements (lbid.).
A different situation arises where the indorsement was forged by
;rn employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an
agent or employee deal with the payee's indorsement. The drawer
and the payee oftentimes have business relations of long standing.
fhe continued occurrence of business transactions of the same
nature provides the opportunity for the agenVemployee to commit the
fraud after having developed familiarity with the signatures of the
parties. However, sooner or later, some leak will show on the
94 NEGOTIABLE INSTRUMENTS LAW
drawer's books. lt will then be just a question of time until the fraud is
discovered. This is especially true when the agent perpetrates a
series of forgeries. The negligence of a depositor which will prevent
recovery of an unauthorized payment is based on failure of the
depositor to act as a prudent businessman would under the
circumstances (lbid.).
The payment of an instrument over a missing indorsement is the
equivalent of payment on a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees (Metrobank vs. BA,
607 SCRA 620).
lf the forgery is in the signature of the indorser, the loss will be
borne by the forger or by parties subsequent to said forger including
the collecting bank where the check was eventually deposited.
Where the payee's signature is forged, payments by the drawee
bank to the collecting bank is ineffective. Hence no debtor-creditor
relationship is created. An agency to collect between the person
who deposited the check and the collecting bank where the check
was deposited is instead created. The drawee bank can recover
from the collecting bank the amount lost, and the latter can in turn
recover from the person who deposited the check but cannot recover
from a holder who did not participate in the fraud (Jai Alai vs. BPl, 66
scRA z?). -
It is only the negotiation predicated on the forged indorsement that
should be declared inoperative. lf the drawee bank discovers the
payee's signature to be forged after it had paid the amount to the
holder, it can recover the amount paid from said holder (Republic vs.
Ebrada, 65 SCRA 680).
Acollecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement itself, and ultimately
should be held liable therefor (Traders vs. RPN, 390 SCRA 608)
A bank who did not pay the rightful holder or other person or
entity entitled to receive payment has no right to reimbursement
(rbid.).
Bar Question: A check for P1,000.00 was drawn on the Philippine
National Bank by X in favor of Y. Y's signature was forged by Z who
afterwards cashed the check at the China Banking Corporation.
NEGOTIABLE INSTRUMENTS LAW 95
fhereafter, the check was cleared at the Philippine National Bank.
As between X, PNB, and the China Banking Corporation, who should
hear the loss? (1948 Bar)
Answer: As between X, PNB and China Banking Corporation, the
last one, China Banking Corporation should bear the /oss, because
Itaving allowed the encashment of the check, and having indorsed it
lo PNB for clearing, it warranted the genuineness of fhe signatures of
prior indorsers. PNB cannot charge the account of X, but can
tecover from China Banking who in turn can proceed against the
ktrger, Z.
Bar Question: Jose loaned Mario some money and, to evidence his
indebtedness, Mario executed and delivered to Jose a promissory
rrote payable to his order.
Jose indorsed the note to Pablo. Bert fraudulently obtained the
rrcte from Pablo and indorsed it to Julian by forging Pablo's
signature. Julian then indorsed the note to Camilo.
a. May Camilo enforce the said promissory note against Mario
and Jose?
b. May Camilo go against Pablo?
c. May Camilo enforce said note against Julian?
d. Against whom can Julian have the right to recourse?
e. May Pablo recover from either Mario or Jose? Explain your
onsrers. (1990 Bar)
Answer: (a) Camilo cannot enforce the promissory note against
Mario and Jose because Camilo derived his rights from the forged
signature of indorsement of Pablo. A forged signature is wholly
hrcperative and cannot vest any right to the forger or any person who
tlerived his right from the forged signature, as against those who
ltccame parties to the instrument before the forgery was committed.
(b) Camilo may not go against Pablo,'because Pablo's signature
ril indorsement is a forgery, having been effected by Bert, the forger.
A forged signature is inoperative against the person whose signature
was forged.
(c) Camilo can enforce the note against Julian, the latter being an
ttdorser of the instrument, hence secondarily liable.
(d) Julian has a right of recourse against Beft, the forger, who
lxtcame primarily liable by such forgery.
(e) Pablo, being an indorsee of the note, can recover from either
Mario or Jose.
96 NEGOTIABLE INSTRUMENTS LAW
Bar Question: ltlhere the indorsement of a payee on a check is
forged and payment of the check is made by the drawee bank, may
the drawee bank debit the drawer's account for the amount of the
check? Explain. (1970 Bar)
Answer: Yes, the drawee bank may debit the drawer's account.
While the drawee bank must be cautious in the scrutiny of the
signatures of drawers of checks drawn on it under the theory that it
should know the signatures of its own clients, it has however no
responsibility for the signatures of indorsers, the payee being one of
them.
ln banking practice, the signatures of the indorsers, as
prerequisite to clearing, are guaranteed by the bank where the check
may be deposited by the last holder. lf any of these indorsements
are forgeries, immediate responsibility will be on that bank which
guaranteed the indorsements, not on the drawee bank of the check.
Bar Question: Hernan lssued a check payabte to the order of
Fernando in the sum of Pl2,000.00, and drawn on "X'Bank. The
check was delivered to Matilde by Adriano for encashment. At that
time, the check had the indorsements of (1) Fernando and (2) Rose.
When Matilde encashed it with "X" Bank, she affixed her signature
on the check. Upon Matilde's receipt of the cash proceeds of the
check,' she turned over the amount to Adriano. "X" Bank was
informed by Hernan that the alleged indorsement of the payee
Fernando, was a forgery, since the latter has died two (2) years ago.
"X" Bank,.having refunded the amount to Hernan, sued Matilde, who
refused to return the money.
a. Was "X" Bank correct in paying Hernan?
b. Does "X" Bank have a cause of action against Matilde? Give
reasons for your answers. (1982 Bar)
Answer (a) "X" Bank was correet in paying Hernan. tf a check
drawn on a bank is presented to it for encashment, it is its obligation
fo see to it that the one presenting the check for payment derives his
title from prior parties who have validly negotiated the check. As the
signature of Fernando was forged, lhe issue of the check by Hernan
to him did not produce the effect of payment. Fernando or his heirs
can therefore again demand payment from him (Hernan).
The payment by "X" Bank to Hernan is to reptace the amount
debited from Hernan's account on a check drawn by him which did
not accomplish its objective because of a forgery of the payee's
(Fernando) signature.
NEGOTIABLE INSTRUMENTS LAW 97
(lt) X bank has a cause of action against Matilde because Matilde
tll indorser of the questioned check.
'ttt
Har Question: Gonzales & Co. oures Jose Garcia P10,000 and
rltttws a check for that amount on the Manila Banking Corporation
ltrtvttble to Garcia. The check is delivered to Antonio Cruz,
ptrtltloyee of Garcia. Cruz forges the signature of Garcia, as an
ilnlttrser, then endorses it personally, cashing it at the lnternational
lhrrtking Corporation. The lafter collects the amount of the check
Irurtr the Manila Banking Corporation, and the latter charges the
etn(iltnt of the check against the account of Gonzales & Co. Discuss
a llrt tospective rights of all the pafties in relation to the check and the
ttillorsements and payments made in relation thereto, as well as their
ro:;lxtctive obligations. Give reasons for your answer. (1957 Bar)
lltrswer: Ihis /s a case of forgery in the indorsement. Between
Mttrila Banking Corporation and lnternational Banking Corporation,
llnt latter bears the /oss because the forger and parties after him do
tril acquire any right to enforce the instrument under the forged
Itttlorsement.
As Manila Banking has paid the instrument to lnternational
lhtt/ring, it can proceed against the latter. lnternational Banking can
ht lttrn proceed against Cruz, the forger.
Manila Banking cannot charge the account of Gonzales and Co.,
rr,.; .sald bank will not suffer damage after being paid by lnternational
lhutk.
Gonzales and Co. still owes Garcia P10,000.00, which the latter
.:tttt collect.
Bar Question: Pedro Sanfos in Cebu has worked for many years
wtllr Company X, and has saved money which he has left with
(:t)tnpany X for safekeeping. He asks Company X to transmit
l"?,000 of his savings fo hrs brother Juan Santos, who is a student in
Mtrrtila living in a boarding house. Company X instructs its Manila
Itrtrtrch to pay P2,000 to Juan Sanfos. Company X in Manila writes a
hilktr to Juan Santos requesting him to call at their office. Ricardo
l\tez, a fellow boarder, intercepts this letter. He goes first to the
{)tty Hall, and saying that his name is Juan Santos, succeeds rn
ttltlitining a residence certificate in that name. Then Ricardo goes fo
llto Philippine National Bank (PNB) and opens a savings account
willr an initial deposit of P75 in the name of Juan Santos. He
oxltibits the residence certificate which he had just obtained in order
/rr rr.slab/ish his faked identity. Two days later he presenfs himself at
llxt office of Company X and, in order to establish his identity as
 98 NEGOTIABLE INSTRUMENTS LAW
Juan Santos, exhibits his residence certificate, his pNB saving bank
book, and the tetter addressed to Juan Santos which hZ haa
previously intercepted. company X thereuponissues to him a check
payable to Juan Sanfos for P2,000 drawn against the pNB. Ricardo
deposifs this check in his savings account. Two days later he
withdraws P2,000 and flees to the province. Reatizing that it could
not properly charge fhe /oss to Pedro Sanfos, Company X paid his
brother Juan when he was finally located. As between the pNB and
Company X, who should bear the /oss? Io put it in another way, did
the PNB properly charge the check against the account of the
Company X, or must it assume fhe /oss because it paid Ricardo
Perez and not Juan Santos? (1950 Bar)
Answer: Company X should bear the /oss, so that pNB may
properly charge the check against the account of Company X.
fhls is a case of forgery in the indorsement consisting not of the
forging of a signature but of the placing of a signature without the
authority of the person whose signature it purpofts to be.
Company X is esfopped from claiming reimbursement against
PNB because by ifs own act of altowing the check to be receiied by
somebody not the payee, it gave the opportunity for the unauthorized
person to do what he did.
Besrdes, Company X, the drawer of the check, warranted when it
drew the cQeck, the existence of the payee and the payee,s then
capacity to endorse. By warranting the existence of the payee,
Company X, in effect, identified the payee, and by attowing perez to
receive the check, Company X placed pNB in a position where it had
no alternative but to make payment to perez, who was armed with
documents identifying him as Juan Santos.
It will be noted that the signature of the proper officials of
Company X are not forgeries at ail.
Bar Question: Monsanto, tnc. drew a check for p5,000.00 payable
to Daez, lnc. drawn against the Manila Bank. The checi was
endorsed and delivered to Martel and co., which in turn deposited
the check in its current account with the pNB. The check was
cleared in due course, and Manila Bank paid pNB the amount of the
check. Twenty days later, it was discovered that the signature of
Daez, lnc. was forged. PNB paid Manita Bank, and notified Martel &
Co. that it had debited its account with the corresponding amount.
Who, as between Martel & Co. and pNB, shoutd bear the toss?
Why? (1976 Bar)
NEGOTIABLE INSTRUMENTS LAW 99
Answer: Between Martet & Co. (the depositor of the check with a
hugoc! payee signature) and PNB (the bank where the said check
wts deipo,sited by Martel & Co.), the former (Martel & Co.) will bear
l/rrr /oss.
Ilrc relationship between Martel and PNB is one of agency, that
Itt, t'NB was to cotlect from the drawee Manila Bank the proceeds of
llnt questioned check. As the payment by Manila Bank to PNB was
Itntlloctive because of the forged payee signature, PNB is liable to
Mttrrila Bank for reimbursement, and Martel & Co' has to bear the
hris, which its collecting agent, PNB, has to reimburse to the drawee
Ittutk, Manila Bank.
Har Question: To cover his medical bill, A issued a check payable
ht t)r. Prospero Fuego. He put the check in a sealed envelope and
gttvtt it to X, his trusted r??essenger for eight years, for delivery to Dr'
I rntqo. X, suspecting that the envetope contained a check, opened
tl, lorged Dr. Fuego's signature on the back of the check, and
thtlxtiited the check in his own savlngs account with the PNB. The
ltNB credited the amount of the check to X's account after it had
lrnttt cleared by the drawee, the Philippine Commercial and
Itnltrctrial Bank (PC\B). When A asked X for Dr. Fuego's receipt, X
rnlilied that Dr. Fuego was out of town but his secretary received the
t:ltttt;k.
One week tater, A called Dr. Fuego and was surprised to discover
lltttl lhe latter never got the check- X, feigning //ness, had been
nlrsopf for the last two days and, therefore, could not be questioned.
A turtnediatety went to the PCIB and found that his check had been
t:kttrecl four days before. lJpon PCIB's immediate inquiry from the
I'NB, the tatter informed the former that X had already been paid the
,r,totvtt of the check and had in fact c/osed his account two days
lntltto.
A clemands that the PCIB recredit his account with the amount of
llut t;lrcck. PCIB, in turn, demands that PNB reimburse it. Decide
w/l/r ru;asons. (1983 Bar)
Artswer: When a check is presented to the drawee bank (PCIB) by
llttt lttrnk (PNB) where the last holder deposited it for clearing, the
htllttt, which is the cottecting bank, guarantees all prior indorsements'
lhtlwoen PC\B and PNB, the tatter is initially liable for the forgery
/rrrrrrrr/se of said guarantee, and therefore must credit PCIB's
rtr:t:t)ttnt for the amount of the forged check'
A in turn may require PCIB to recredit his account with the amount
ril lln forged check because A can again be made to pay by Dr'
I rttttlts the amount of the forged check which he never got hold of'
100 NEGOTIABLE INSTRUMENTS LAW
Vl. Execution and Negotiation of the Instrument by Agents and
Others
A. By Agents
1. Requisites \ nlg;natures.
a The agent must be authorized
b) He must disclose his principal
c) He must sign for and in behalf of his principal
Where an alleged agent affixes his sijnature to an instrument
without stating that he does so as representative of his principal, his
liability is governed by Section 20 of the Negotiable lnstruments Law,
which provides that where the instrument contains or a person adds
to his signature words that he signs for or in behalf of a principal or in
a representative capacity, he is not liable on the instrument, if he was
duly authorized; but the mere addition of words describing him as
agent or as filling a representative character without disclosing his
principal does not exempt him from personal liability (pBCom vs.
Aruego, 102 SCRA 530).
The Negotiable lnstruments Law provides that where any person
is under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. An agent,
when so signing, should indicate that he is merely signing in behalf
of the principal and must disclose the name of his principal;
otherwise he shall be held liable (Francisco vs. CA,319 SCRA 354).
2. Signature per Procuration
A signature per procuration is one made by an agent with a limited
authority to sign, and the principal is bound only if the agent acts
within the limits of the authority. lt is made by adding "per
procuration", "per proc." or "p.p." under the agent's signature.
B. Under a Trade Name or Assumed Name
The person signing his trade name or assumed name is liable as
if the name were his own.
NEGOTIABLE INSTRUMENTS LAW 101
C. lndorsements by Minors and Disqualified Corporations
Minors and disqualified corporations, although incapacitated to
rrrrke or draw instruments, can negotiate instruments, transferring
vnlid titles thereto, but are not liable as indorsers under the said
8ar Quesfio n: (1) X makes a promissory note for P500.00 payabte
kt A, a minor, to help him buy school books. A indorses the note to
ll who, in turn, rndorses the note to C. C knows A's minority. lf C
rirros X on the note, can X set up the defenses of minority and lack of
xnrsideration? (1998, 1989 Ba)
Answer: Lack of consideration between X and A cannot be set up
Ity X as a defense against C because it is a personal defense
nllainst an immediate party or against a party not a holder in due
(,y){/rse. There is nothing in the problem to indicate that C is not a
lnlder in due course, hence C can collect from X.
X cannot set up the minority of A as a defense. Only A can invoke
his minority. While a minor cannot make a promissory note for lack
ol contractual capacity, he (the minor) may, however, validly indorse
llrc note and vest title in the transferee.
Vll. Liabilities of Parties
A. Parties Primarily Liable
1. Maker
a. Engages to pay according to the tenor of the instrument
b. Admits the existence of the payee and his capacity to indorse
Under the Negotiable lnstruments Law, persons who write their
nilmes on the face of promissory notes are makers, promising that
ttrey will pay to the order of the payee or any holder according to its
tonor (Astro vs. Phil. Export, 411 SCRA 462).
2. Acceptor or the Drawee Who Accepts the Instrument
a. Engages to pay according to the tenor of his acceptance
b. Admits the existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the instrument
c. Admits the existence of the payee and his capacity to
indorse
t02 NEGOTIABI=E INSTRUMENTS LAW
The Negotiable lnstruments Law explicitly provides that the
acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance. This provision applies with
equal force in case the drawee pays a bill without having previously
accepted it. His actual payment of the amount in the check implies
not only his assent to the order of the drawer and a recognition of his
corresponding obligation to pay the aforementioned sum, but also his
clear compliance with that obligation. Actual payment by the drawee
is greater than his acceptance, which is merely a promise in writing
to pay. The payment of a check includes its acceptance (Far East vs.
Gold, 562 SCRA 604)
Bar Question: A check for Fifty Thousand (P50,000.00) Pesos was
drawn against drawee bank and made payable to XYZ Marketing or
order. The check was deposited with payee's account at ABC Bank
which then sent the check for clearing to drawee bank.
Drawee bank refused to honor the check on the ground that the
serial numberthereof had been altered.
XYZ Marketing sued drawee bank.
In the instant suit, drawee bank contented that XYZ Marketing as
payee could not sue the drawee bank as there was no privity
between them. Drawee theorized that there was no basis fo make it
liable for the check. /s thls contention correct? Explain. (1ggg, 1947
Ba0
Answer: Yes. The drawee who has not accepted the bitt of
exchange is not a party to the instrument, and is therefore not tiable,
p ri marily or se co ndarily.
It is a drawee's acceptance of the bill which makes him primarily
liable under it.
B. Parties Secondarily Liable
1. The Drawer
a) Admits the existence of the payee and his capacity to endorse
b) Engages that the instrument will be accepted or paid by the
party primarily liable
c) Engages that if the instrument is dishonored and proper
proceedings are brought, he will pay to the party entitled to be paid
Bar Question: As payment for goods received, Masikap gave to
Hurhimok on November3, his check drawn on the Eternat Bank of
Manila. On November 4, Humimok negotiated the check to Dr.
NEGOTIABLE INSTRUMENTS LAW 103
lltlrttsayan in payment of dental work pefformed by the latter. On
November 11, Kahusayan wentto Eternal Bankto encash the check.
lltt could not cash the check because on November 10, Central
lilnk had forbidden Eternal Bank to do busrness in the Philippines
ott grounds of insolvency. Masikap, Humimok, and Kahusayan all
ttside in Manila.
{r. Can Kahusayan hold Masikap liable on the uncashed check?
I xplain briefly.
l). Can Kahusayan hold Humimok liable on the check? Explain
Itriofly.
r:. Can Kahusayan still collect from Humimok for the dental work
&nrc on the latter? Explain briefly.
r1. Assume that Eternal Bank was not closed by Central Bank but
nlmply refused to honor and encash the check. Can Kahusayan hold
Masikap liable? Explain briefly. (1980 Ba)
Answer: (a) Kahusayan can hold Masikap liable on the uncashed
tlreck. The failure by Eternal Bank to honor the check, whatever
nmy be its reason, amounts to a dishonor by the drawee. An
lnunediate right of recourse in favor of the holder (Kahusayan)
trccrues against the parties who are secondarily liable and who are
ttotified of the dishonor. Masikap, the drawer of the check, is
socondarily liable to the holder, Kahusayan, and therefore can be
nmde to pay after the dishonor of his (Masikap's) check by Eternal
llank.
(b) Kahusayan can hold Humimok liable on the check. Assuming
Itrat Kahusayan prefers to run after Humimok, the lafter is liable
lncause as indorser, he is secondarily liable to the holder, especially
ir.s rn fhls case when the drawee, Eternal Bank, dishonored the
t:lrcck.
(c) Kahusayan can still collect for dental work performed on
lhmimok. A check when used to pay ai obligation does not
produce the effect of payment unless it is encashed by the creditor,
tr cleposited to his bank account which is eventually credited with the
trrrtount of the check.
(d) Yes, Kahusayan can hold Masikap liable. Whatever may be
llrc cause for the dishonor of the check by the drawee bank has no
tffect on the right of a holder to seek recourse for payment against
iu,yone of the parties who is secondarily liable to the holder and who
ts notified of the dishonor, if as in this case, the check is dishonored
lty the drawee (Eternal Bank).
Bar Question: A delivers a bearer instrument to B. B then specially
lrclorses it to C, and C later indorses it in blank to D. E sfea/s fhe
 104 NEGOTIABLE INSTRUMENTS LAW
instrument from D and, forging the signature of D, succeeds in
"negotiating" it to F who acquires the instrument in good faith and for
value.
a. lf, for any reason, the drawee bank refuses to honor the check,
can F enforce the instrument against the drawer?
b. ln case of the dishonor of the check by both the drawee and the
drawer, can F hold any of B, C and D liabte secondarily on the
instrument? (1997 Bar)
Answer: (a) Yes. The refusal by the bank to honor the check gives
F the right of recourse against the parties who are secondarity iiabte
and who are notified of the dishonor. A, the'drawer of the check, is
secondarily liable to the holder.
(b) F can hold B or C, but not D, secondarily tiable. D has.no
liability to F as his signature as indorser does not appear on the note.
As the check is a bearer instrument, his liability as a party
secondarily liable extends only to the person to whom he may have
negotiated the note by mere delivery.
As D's signature was forged, he can defend himsetf
by stating that
his signature is inoperative and no right to enforce payment of the
instrument against him can be made.
2. The General lndorser
a) Warrants (1) the genuineness of the instrument, (2) his good
title to it, (3) the capacity to contract of prior parties, and (4) the
instrument is valid and subsisting (Metrobank vs. pBCom, 536 SCRA
556)
b) Engages that the instrument will be paid by the party primarily
liable
c) Engages that if the instrument is dishonored, and piroper
proceedings are taken, he will pay to the party entifled to be paid
Bar Question: Distinguish an irregular
indorser from a general
indorser. (2005 Bar)
Answer: An irregular indorser is not otherwise a party to the
instrument, but ptaces his signaiure thereon in btank prior to detivery
to add credit thereto and thereby becomes liabte as an indorser. A
general indorser is a regular party to the instrument like a maker,
drawer or acceptor and he signs upon delivery of the instrument.
such signature may be in blank, absolute, conditional or restrictive.
unlike an irregular indorser who signs for accommodation, a general
LAW
NEGOTIABLE INSTRUMENTS 105
trttlorser srgns for vatuabte consideration (See Secfion 64[2],
Noqotiable I nstruments Law).
A general indorser of a negotiable instrument engages that if the
Irrstrument - the check in this case - is dishonored and the
nrx)essary proceedings for its dishonor are duly taken, he will pay the
rrrrrount thereof to the holder (Section 66, Negotiable lnstruments
I nw). Notice of dishonor is necessary to charge an indorser and that
llrc right of action against him does not accrue until the notice is
1liven (Associated vs. Tan, 446 SCRA 282).
Under Section 66 of the Negotiable lnstruments Law, the
wilrranties for which general endorsers are liable in favor of
urrbsequent endorsers extend only to the state of the instrument at
llrc time of their endorsements. This provision, however, cannot be
rrsed by the party which introduced a defect on the instrument, which
rlrralifiedly endorsed the same, to hold prior endorsers liable on the
Irrstrument because it results in the absurd situation whereby a
r;trbsequent party may render an instrument useless and inutile and
lot innocent parties bear the loss while he himself gets away scot-
lrce (Gonzales vs. RCBC, 508 SCRA 459).
By reason of the statutory warranty of a general indorser in
Section 66of the Negotiable lnstruments Law, a collecting bank
which indorses a check bearing a forged indorsement and presents it
lo the drawee bank guarantees all prior indorsements, including thb
forged indorsement. lt warrants that the instrument is genuine, and
tlrat it is valid and subsisting at the time of his indorsement. Because
tlre indorsement is a forgery, the collecting bank commits a breach of
lhis warranty and will be accountable to the drawee bank. This
liability scheme operates without regard to fault on the part of the
t:ollecting/presenting bank. Even if the latter bank was not negligent,
rt would still be liable to the drawee bank because of its indorsement
(Associated vs. CA, 252 SCRA 620).
The collecting bank or last endorser generally suffers the loss
lrecause it has the duty to ascertain the genuineness of all prior
rndorsements considering that the act of presenting the check for
lrayment to the drawee is an assertion that the party makinQ the
presentment has done its duty to ascertain the genuineness of the
rrdorsements (lbid.).
The law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining
 106 NEGOTIABLE INSTRUMENTS LAW
their genuineness and regularity. The collecting bank, being primarily
engaged in banking, holds itself out to the public as the expert on
this field, and the law thus holds it to a high standard of conduct
(Associated vs. CA, 208 SCRA 465)
Bar Question: "A" makes a promissory note payabte to "B', or
bearer. "A" delivers the note to "8". "8" indorses the note to "C". 'C"
places the note in his wallet, which was stolen by "X", who finding the
note, indorses it to "D", by forging "C's" signature. "D" indorses the
note to "E", who in turn delivers the note to "F", a hotder in due
course, without indorsemenf. . ,rn indorser of the instrument, such an indorser who indorses
What are the liabilities of "A", "8", and "C" to 'F"? Explain briefly.
(2001, 1981 Bar)
Answer: A is primarily liable to F as maker of the bearer promissory
note. A, as maker, is the person to whom the holder of the note will
have to make a presentment for payment on the date of maturity.
B, as indorser of the promissoiry note, is secondarily tiable to F.
This means that if the note is dishonored by A, the maker, when a
presentment for payment is made by F on maturity to him (A), and
notice of dishonor is senf by F to B, a right of recourse against B
accrues in favor of F. F may thereafter present the note to B for
payment, because B by then is already liable under the note.
C has no liability to F. As prior holder of the promrsso4y note, his
signature a{indorser does not appear on the note. White it is true
that the note, in spite of the special indorsement to him, can continue
to be negotiated by mere delivery, the note being a bearer note, his
liability as a party secondarily liable extends only to the person to
whom he may have negotiated the note by mere delivery.As he (C)
is however sought to be secondarily liable under his indorsement,
which however is forged, then C can defend himself by stating that
under the law, his signature is inoperative, and no right to enforce
payment of the instrument against him is acquired through or under
his forged signature.
A bank check is indisputably a negotiable instrument and should
be governed solely by the Negotiable lnstruments Law. Section 63
of the Negotiable lnstruments Law makes a person placing his
signature upon an instrument otherwise than as maker, drawer or
acceptor an indorser unless he clearly indicates by appropriate
words his intention to be bound in some other capacity. Section 66 of
the same law ordains that every indorser who indorses without
qualification, warrants to all subsequent holders in due course (a)
that the instrument is genuine and in all respects what it purports to
NEGOTIABLE INSTRUMENTS LAW 107
lre; (b) that he has a good title to it; (c) that all prior parties had
,,apacrty to contract; and (d) that the instrument is, at the time of his
rrrdorsement, valid and subsisting. ln addition, he engages that, on
rlue presentment, it shall be accepted or paid or both, as the case
and if it be dishonored, he will pay the amount thereof to the
'ilay'be,
lrolder (Ang vs. Ting ,22 SCRA 713).
The holder or last indorsee of a negotiable instrument has the
nght to enforce payment of the instrument for the full amount thereof
ngainst all parties [iable thereon. Among the parties liable thereon is
without qualification inter alia engages that on due presentment, the
irrstrument shall be accepted or paid, or both, as the case may be,
irccording to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount
inereof to tne holder, or any subsequent indorser who may be
t;ompelled to pay it (BPl vs. CA, 326 SCRA 641).
Bar Question: what are the warrantles of a general indorser?
11946 Ba)
Answen The warranties of a general indorser are: (a) that the
instrument is genuine and in all respects what is purports to be; (b)
ilnt he has good titte to it; (c) that all prior parties had capacity to
contract; and d) that the instrument, at the time of indorsement,
was valid and subsisting.
There are well-defined distinctions between the contract of an
rndorser and that of a guarantor/surety of a commercial paper' The
r:ontract of indorsement is primarily that of transfer, while the contract
of guaranty is that of personal security' The liability . of a
,lrrar'antor/surety is broader than that of an indorser. Unless the bill
ii; promply presented for payment at maturity and due notice of
,lrshonor given to the indorser within a reasonable time, he will be
rtischarged from liability thereon. on the other hand, except where
rcquired by the provisions of the contract of suretyship, a demand or
rroiice of default is not required to fix the surety's liability. He cannot
r:omplain that the creditor has not notified him in the absence of a
:rlrecial agreement to that effect in the contract of suretyship (Allied
vs. CA, 494 SCRA 467).
 I08 NEGOTIABLE INSTRUMENTS LAW
3. The lrregular lndorser
a) Defined an irregular indorser is one who affixes his signature
in blank on an-instrument before delivery.
b) Rules as to liability:
1. lnstrument payable to order of third person - irregular indorser
liable to payee and to subsequent parties
2. lnstrument payable to order of maker or drawer he is liable
to all parties subsequent to the maker or drawer
-
3. lrregular indorser signs for accommodation of payee _ he is
liable to all parties subsequent to the payee
G. Parties with Limited Liabitity
1. The Qualified lndorser
Bar Question: what are the warranties of a quatified indorser?
(1946 Bar)
Answer: The warranties of a qualified indorser are: (a) that the
instrument is genuine and in all respects what is purports io be; (b)
that he has good titte to it; (c) that att prior parties had capacity'to
contract; and (d) that he has no knowledge of any fact which would
impair the validity of the instrument, or ,"16", it vaiuitess.
A qualified indorsement constitutes the indorser a mere assignor
of the title to the instrument. lt may be made by adding to the
indorser's signature the words "without recourse" or any word of
similar import. such an indorsement relieves the indorier of the
general obligation to pay if the instrument is dishonored but not of
the liability arising from warranties on the instrument as provided in
_s99tio1
0s of the Negotiabre rnstruments Law (Metropor vs. sambok,
120 SCRA 864).
Recourse means resort to a person who is secondarily liable after
the default of the person who is primarily liable, The payee, by
indorsing the note "with recourse", does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by
such indorsement, it agreed that if the maker fails to pay the note,
the indorser can go after said payee. The effect of such indorsement
is that the note was indorsed without qualification. A person who
indorses without qualification engages that on due presentment, the
note shall be accepted or paid, or both as the case may be, and that
if it be dishonored, he will pay the amount thereof to the holder. The
NEGOTIABLE INSTRUMENTS LAW 109
lrrrfe€'s intention of indorsing the note without qualification is made
nvrtn more apparent by the fact that the notice of demand, dishonor,
protest and presentment were all waived. The words added by said
lriryee do not limit his liability, but rather confirm his obligation as a
gnrreral indorser. The payee is only secondarily liable because after
irrr instrument is dishonored by non-payment, the person secondarily
lhrble thereon ceases to be such and becomes a principal debtor.
llrs liability becomes the same as that of the original obligor.
(lrrrsequently, the holder need not even proceed against the maker
lrolore suing the indorser (lbid.).
2. Person Negotiating by Delivery
a) Warranties - same as those of a qualified indorser
b) Warranties extend to immediate transferee only
Bar Question: A
makes a promissory note payable to bearer and
rhilivers it to B.
In turn, B negotiates it by mere delivery to C, who
nrrr/orses it specially to D. D negotiates it by special indorsement to
I who negotiates it to F by mere delivery. A did not pay. To whom
no B, C, D, and E liable? Explain your answer. (1979 Bar)
Answer: B is liable to C only for breach of any of the following
wnrranties: (a)that the instrument is genuine and in all respects what
tt trports to be; (b) that he has good title to it; (c) that all prior
lrrrrfles had capacity to contract; and (d) that he has no knowledge
ril any fact which would impair the validity of the instrument and
rnttder it valueless.
C, by viriue of his indorsement, is liable as a general indorser to D
tutd E only because the latter obtained their titles through C's specra/
rrxlorsement. As C ls a general indorser, D and E can hold him liable
to pay by reason of A's non-payment, or by reason of breach of the
wivranties of a general indorser.
D, because of his special indorsement, is liable as a general
lnlorser to E, because the latter obtained his title through the said
:;1x:cial indorsement of D. E can make D pay if A, the maker and
lnttly primarily liable, fails to pay or if D commits a breach of any of
llnt warranties of a general indorser.
E is liable to F only if he (E) commits a breach of any of the
wirranties mentioned in the first paragraph hereof. lf he does not
Ittcttch any of said warranties, then he does not have any liability to
I lty the mere fact alone of A's non-payment of the note.
110 NEGOTIABLE INSTRUMENTS LAW
D. When Secondary Liability Attaches
1. Acts Needed Before Secondary Liability Attaches
a) Presentment for payment in notes and presentment for
acceptance and/or payment in bills of exchange
b) Dishonor by non-payment in notes and dishonor by non-
acceptance and/or non-payment in bills of exchange
c) Notice of dishonor to secondary parties
Bar Question: "X" draws a bitt of exchange atgainst "Y" in favor of
"W" for P1,000.00, requesting the drawee to pay on December 24,
1962. "W" indorses the instrument to "P" on September 1 and on
September 15 presents it for acceptance. The bill is dishonored. "P"
promptly sLtes "W" for payment. Will the case prosper? Give
reasons foryour answer. (1963, 1946 Bar)
Answer: No, the case will not prosper for the reason that no notice
of dishonor, which is a prerequisite to enforcement against a
secondary party, has been made by D, the holder, to W, who is a
secondary party.
Bar Question: A issued a promissory note to B in the fotlowing
tenor "l promise to pay to the order of B P1,000.00 sixty days after
date. (Sgd.f A." The note was subseguently negotiated with prior
indorsement to B to C, to D, and E, the holder. When E presented
the note for payment to A, the latter refused to pay. E then gave a
notice of dishonor to C only.
May E immediately proceed against B, C, and D? (1984 Bar)
Answer: E, the hotder, may proceed atgainst C only, because it was
to him that he gave the notice of dishonor. He (E) cannot proceed
against B and D for his failure to notify them of the dishonor by non-
payment.
ln order that C may protect his rights, he may, after receiving
notice of dishonor from E, in turn give notice of dishonor to the prior
parties A and B. lt was nof necessary for him (C) to notify D,
because D is a party subsequent to him (C) and D is therefore not
liable to him (C).
2. Order in Which lndorsers Liable
NEGOTIABLE INSTRUMENTS LAW 111
lhey are liable in the order in which their indorsements appear in
llro instrument - the latter ones having a right of recourse against the
lrrl<lr ones.
Vlll. lncidents in the Life of an Instrument After lts lssue
A. Negotiation
l.Defined
Negotiable instruments are negotiated by transfer to one person or
riltother in such a manner as to constitute the transferee the holder
llroreof. lf payable to bearer, it is negotiated by delivery. lf payable to
nrrler, it is negotiated by indorsement completed by delivery (BPl vs.
(;A, 512 SCRA 620).
The weight of authority is that the mere possession of a negotiable
Irrstrument does not in itself conclusively establish either the right of
lhe possessor to receive payment, or of the right of one who has
rrrade payment to be discharged from liability. Thus, something more
llri:n mere possession by persons who are not payees or. indorsers
of the instrument is necessary to authorize payment to them in the
irlrsence of any other facts from which the authority to receive
;riryment may be inferred (lbid.).
a. Negotiation Must be of Whole lnstrument
Bar Question: "A", disbursing officer of the IJSAIFE, was the payee
rf a check of P100,000.00 issued to him in 1942, ln 1944 he sold
l'30,000.00 of the said check to "8" for P90,000.00 in Japanese
rttilitary notes, of which only P45,000.00 was paid. The writing made
Ity "A" at the back of the check was an instruction to the bank to pay
t'30,000.00 to "8" and to deposit the balance of P70,000.00 to his
("A's") credit. Was the check legally negotiated within the meaning
ril Negotiable Instruments Law? Reason. (1963 Bar)
Answer: No, the check was not legally negotiated within the
trrcaning of the Negotiable lnstruments Law.
A negotiation to Oe vatid under the taw must be of the whote
rtstrumenL A, in effect has endorsed to two lndorsees; P30,000.00
Ior B, and P70,000.00 to his bank for his account. This indorsement
tkrcs not operate as a negotiation of the whole instrument.
2. Rights Transferred by Negotiation
II2 NEGOTIABLE INSTRUMENTS LAW
Bar Question: What rights may be transferred by
negotiation?
(1949 Bar)
Answer: Negotiation constitutes the transferee a hotder of the
instrument. A holder is entitled to collect the instrument from the
party primarily liable, and if dishonored, from the secondary parties.
He can sue, in court on the instrument. lf the holder is a holder in
due course, he takes the instrument free from defects,of tiile of prior
parties, free from defenses of prior parties among themselves, and
he can enforce the instrument for the full amount thereof against att
parties liable thereon. .
3. Classes of Negotiation
a. By Delivery of the lnstrument Alone
Negotiation of negotiable instrument may be effected by the
delivery alone of the instrument to the transferee in those negotiable
instruments which are originally payable to bearer, or originally
payable to order instruments where the last indorsement is an
indorsement in blank.
Bar Question: "A" makes a promissory note payable to bearer, and
delivers it to "8", who endorsed it to "C", Sgd.'ts". Subseguenily, "C"
without indofsing the note, transfers it to "D". I.tpon presentation for
payment by "D", "A" dishonored the note. May "D" hold "A" liable?
Reason ouf your answer- (1998, 1975,1967 Bar)
Answer: "D" may hold "A" liable. The note is a payable to bearer
note and is negotiable by delivery. Even if a subsequent hotder
negotiates it further by a special indorsement, it is nevertheless
further negotiable by delivery. Hence, the indorsement by the
special indorsee, "C', to negotiate the instrument to "D" was not
necessary and a mere delivery of the instrument by him to "D" was a
valid negotiation. As "D" was constituted holder by said delivery of
the instrument to him by C, he (D) can enforce the instrument
against A, the party primarily liable.
Bar Question: Sanfos Jr. finds and pockets a bearer check tying
with other papers on his father's (Sanfos Sr.'s) desk. Sanfos Sr.'s
special indorsement to Reyes is at the back of the check. Sanfos Jr.
crosses out the special indorsement and writes his own special
indorsement as follows. "Pay to Rev. Fr. Cruz for his chapel project,
Sanfos Jr.", and gives the check as a gift to Fr. Cruz. Fr. Cruz
NEGOTIABLE INSTRUMENTS LAW 113
/rrrlrrrses the check to Omega Hardware Co. in payment of
lrlrr;hases of cement. Omega Hardware tndorses the check to Tan
iitrl"tply Co., in payment of purchase of deliveries. Tan Supply,
rtlllrough previously told by Sanlos Sr. that the check had been lost,
tnutds funds very badly and therefore accepts the check. ln the
lurrtds of the Tan Supply the check is dishonored by non-payment by
llto drawee-bank, acting on the drawer's stop-payment order
:irtltported by Santos Sr.'s affidavit of /oss earlier received by the
rhtwee-bank. Against whom may Tan Supply enforce its rights on
llnt instrument, assuming due compliance with all proceedings on
tlt:;ltonor? (1975 Ba)
Arrswer: Tan Supply can enforce the instrument against all prior
luulies, including Sanfos Sr. because Tan Supply, having derived its
rullrts from Omega Hardware, a holder in due course, acquires and
utjoys all the rights of such holder in due course.
The cancellation by Sanfos Jr. of his father's special indorsement
rhns not have any material effect on the further negotiability of the
clrcck by any holder, the check being a bearer check such that.any
nrrtorsement thereon may be disregarded and even cancelled by
:tttltsequent holders, such indorsements not being necessary to their
llllos.
b. By Indorsement Followed by Delivery
A negotiable instrument payable to the order of a specified
l,orson, or to him or his order, may be negotiated by the payee by
Irrrlorsement followed by delivery of the instrument to the indorsee.
iirrbsequent negotiations may be made in this manner if the holder
wlro indorses acquired the instrument under a special indorsemeni.
The payee of a negotiable instrument acquires no interest with
rospect thereto until its delivery to him (Development vs. Sima, 219
lioRA 736).
Courts have long recognized the business custom of using printed
r;lrr:cks where blanks are provided for the date of issuance, the name
ol the payee, the amount payable and the drawer's signature. All the
rlrirwer has to do when he wishes to issue a check is to properly fill
rp the blanks and sign it. However, the mere fact that he has done
llrcse does not give rise to any liability on his part, until and unless
llro check is delivered to the payee or his representative (lbid.).
Delivery of an instrument means transfer of possession, actual or
r;orrstructive, from one person to another. Without the initial delivery
II4 NEGOTIABLE INSTRUMENTS LAW
of the instrument from the drawer to the payee, there can be no
liability on the instrument. Moreover, such delivery must be intended
to give effect to the instrument (lbid.).
Bar Question: Anna makres a promiss ory note payabte to bearer
and delivers it to Bing. ln turn, Bing negotiates it by mere delivery to
Carmen, who endorses ff specrally to Dong. Dong negotiates it by
special indorsement to Emma, who negotiates it to Fe by mere
delivery. Anna did not pay. To whom are Bing, Carmen, Dong, and
Emma liable? Explain your answerfully. (1988 Bar)
Answer: The tiabilities of the parties are as follows:
BING - is liable for breach of the warranties of a qualified indorser
because not being a general indorser, his liability for breach of
warranty extends to his immediate transferee only, Carmen.
CARMEN - ls liable, because of her indorsement, to all
subsequent parties: Dong, Emma and Fe. The secondary liability of
an indorser makes such indorser liable to allsubsequent parties.
DONG - is liable as an indorser to all parties subsequent to him,
Emma and Fe because the secondary liability of an indorser extends
to all subsequent pafties.
EMMA - is liable for breach of warranties of a qualified indorser to
Fe only, Fe being her immediate transferee.
The warranties for which Bing or Emma could be made liable, if
breached, to-their respective immediate transferees, conslsf of the
following: (a) That the instrument is genuine and in all respects what
is purports to be; (b) that he has gootJ title to it; (c) that all prior
parties had capacity to contract; and (d) that he has no knowtedge of
any fact which would impair the validity of the instrument and render
it valueless.
1. Glasses of lndorsements
Bar Question: State the different ways of indorsing checks. (1969
Ba0
Answer: An indorsement whether of a check or other negotiable
instrument may be special or in blank or it may be restrictive,
qualified, conditional, general, regular or irregular.
Bar Question: Assume now that you are "P". lndorse the
promissory note as follows: (a) conditionally; (b) specially; (c)
restrictively. Explain what each indorsement means. (1960 Bar)
NEGOTIABLE INSTRUMENTS LAW 115
Artswer: (a) Conditional lndorsement.
"Pay to X if he passes the bar examination of 1960."
(b) Special lndorsement
"Pay to X
(ssd.) P."
(c) Restrictive lndorsement
"Pay to X only.
(ssd.) P."
ln a conditional indorsement, the right of the indorsee under the
nmlrument is made to depend on the happening of the contingent
nvtntt stated in the instrument. Said indorsee may however
rtutlotiate the instrument, succeeding indorsees acquiring right to it
'ttrltject to the condition in the original indorsement.
Irt a special indorsement, the name of the indorsee is specified.
A restrictive indorsement limits the right of the indorsee by
tttstricting further negotiation, or making the indorsee the collecting
trtlcttt of the indorser, or making him (indorsee) a trustee of a person
trtnned in the indorsement.
Bar Quesfio n: "After an indorsement, a promissory note is like a bilt
tl exchange." Explain what this means. (1950 Bar)
Answer: A promissory note is like a bill of exchange after an
uxtorsement. This means that after the first indorsement of a
luomissory note, it is transacted like a bill of exchange, because after
llutt act (the first indorsement), the note starts to have three parties
lxtrforming functions akin to the original three parties of a bill. Thus,
llr,' maker of the note is equivalent to the acceptor of the bill in that
lnth are primarily liable; the payee of the note, who is a/so the first
ttdorser is equivalent to the drawer of the bill; and the first indorsee
ril the note is equivalent to the payee of the bill of exchange entitled
kt be paid underthe said note.
2. Other Forms of lndorsement not lncluded Above
a. Blank lndorsement
Bar Question: Define or explain and then exemplify "indorsement
ut blank" of a negotiable instrument. (1948 Bar)
Answer: A blank indorsement is an indorsement which does not
specify the name of the indorsee, and usually conslsfs of the
trxlorser'o signature, and nothing else, found at the back of the
rrtstrument.
ll6 NEGOTIABLE INSTRUMENTS LAW
Example:
"(Sgd.) AB"
The signaiure is found written across the back of the negotiable
instrument.
The blank indorsement allows the transferee the right to negotiate
the instrument further by mere delivery of the instrument to the next
transferee.
b. Regular lndorsement
A regular indorsement is one placed after the issue of the
instrument.
c. lrregular lndorsement
An irregular indorsement is one placed in blank before the issue of
the instrument.
The Problem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have future plans to invite atien
investors who are agreeable to rendering financialassisfance by way
of direct investments and/or loans. Your professionalassisfance is
solicited on the following various guesflons that may arise.
Bar Question: The XYZ Bank is willing to lend your firm the sum of
P500,000.00 payable in five (5) years with interest at 12%.
Suppose the bank requires your firm to secure the signature of a
person who is well-knowrf to it before your firm's promissory note can
be accepted, what do you call that person and what are his
liabilities? (1 975 Bar)
Answer: The person known to XYZ Bank and whose signature
appears on the note is called as an irregular indorser, because hrs
indorsement was affixed before fhe issue of the note.
An irregular indorser is liable to the payee and to subsequent
holders. Hence, in the problem above, an irregular indorser is liable
secondarily to XYZ bank, the payee, if my firm dishonors said
promissory note, and to subsequent holders.
d. Qualified lndorsement
NEGOTIABLE INSTRUMENTS LAW rt7
A qualified indorsement is one where the indorser places under
lrtr; signature the words "without recourse" or the like. The qualified
Irrrlorser does not become liable secondarily under his indorsement.
Hur Question: ln payment of canned goods he had purchased,
l\xlro Flores of Cabanatuan drew,a check upon the Philippine
Milional Bank for Pl,000 payable to the order of Veraz and Co., the
:tiller ir1 Manila. He sent the check "without recourse" to Juan
li.r,rfos. The lafter indorsed it in blank, for consideration, to Pablo
lilryes, who in turn sold it for P800, by delivery to Antonio Gomez.
llnt canned goods were never forwarded to Flores.
ir. Gomez presented the check to the bank; but payment was
rnltrced because Reyes had not indorsed it.
1) ls the bank right in so refusing? Why?
2) May Gomez successfully sue the bank if he can prove that
Flores has enoug.h funds there? WhY?
b. lf Gomez gave due notice to Veraz and Co., may he recover
Irotn the latter? Reasons.
c. lf Gomez gave the notice to Flores, may he recover from the
hiller even if, as stated, the canned goods were never delivered?
/loasons.
ct. May Gomez recover from Santos? Why? May he recover from
lloyes? Why? (1968 Bar)
Answer: (a) 1. No, the bank has no right to refuse payment to
(;omez on the ground that Reyes had not indorsed the check.
lirrntos (the holder before Reyes) indorsed it to Reyes in blank,
lnlrce, Reyes could negotiate it further by delivery.
(a) 2. Yes, Gomez can successfully sue the bank if he can prove
llritt Flores had enough funds there, because a drawee bank is liable
kt ir holder unless the drawer lssues a stop payment order.
(b) No, Veraz & Co. is not liable to Gomez as sald Company
rtritde a qualified indorsement and therefore does not answer for the
Ittilure to pay of the party primarily liable.
(c) Yes, Gomez can recover from Flores, even if the canned
rlrrnds were not received by Flores. There is here a failure of
r:otrsideration, but this defense is not available against a holder in
rlttr': course, like Gomez.
(d) Yes, Gomez may recover from Sanfos, as Sanfos is
:;ocondarily liable by virtue of his indorsement.
Yes, Gomez can recover'from Reyes because Gomez is an
rrtrtnediate transferee of Reyes.
The recovery by Gomez from any one of the secondary parties
Iuiltle witl bar recovery from the other secondary parties.
118 NEGOTIABLE INSTRUMENTS LAW
3. Effect of Indorsement on lnstrument Negotiable by
Delivery
Where an instrument negotiable by delivery is indorsed by the
holder, he becomes liable as an indorser.
4. Effect of Lack of lndorsement on an lnstrument
Negotiable by Indorsement Followed by Delivery
Where a holder of an instrument payable to order transfers it for
value without indorsing it, the transferee is vested with the title, and
acquires the right to have the indorsement of the transferor. For the
purpose of determining whether the transferee is a holder in due
course or not, the negotiation takes effect on the date indorsement
was actually made.
5. Striking Out of lndorsements
The holder may strike out indorsements not necessary to his title.
The indorser whose indorsement is struck out and all indorsers
subsequent to him are relieved from liability on the instrument.
4. Rights of Holder
a. ln General
The holder of a negotiable instrument may sue thereunder in his
own name, and payment to him in due course discharges the
instrument.
lf a bank refuses to pay a check (notwithstanding the sufficiency of
funds), the payee-holder cannot sue the bank. The payee should
instead sue the drawerwho might in turn sue the bank. Section 189
is sound law based on logic and established legal principles: no
privity of contract exists between the drawee-bank and the payee.
(Villanueva vs. Nite, 496 SCRA 459)
lf a promissory note is non-negotiable, subsequent holders can
never be holders in due course, but are mere assignees against
whom defenses may be raised by prior parties (Consolidated vs.
rFc, 149 SCRA 448).
NEGOTIABLE INSTRUMENTS LAW ll9
The fact that the promissory note was executed after the effectivity
tlate of the merger does not militate against the surviving bank. The
;rgreement itself clearly provides that all contracts - irrespective of
lhe date of execution - entered into in the name of CBTC' shall be
rrrrderstood as pertaining to the surviving bank. Although the subject
lrromissory note names CBTC as the payee, the reference to CBTC
irr the note shall be construed, under the very provisions of the
nrerger agreement, as a reference to the surviving bank, as if such
roference was a direct reference to the latter for all intents and
t)rrrposes (lbid.).
A note issued to the absorbed corporation after the merger
rrt;reement has been executed can be enforced by the surviving
r;orporation (Associated vs. CA, 291 SCRA 511)'
b. Classes of Holders
1. Holder in Due Gourse
a. Requisites
A holder in due course is a holder who has taken the instrument
rrrrder the following conditions: (a) it is complete and regular on its
hrce; (b) he became the holder of it before it was overdue, and
without notice that it has previously been dishonored, if such was the
hrrl; (c) he took it in good faith and for value; and (d) at the time it
wirs negotiated to him, he had no notice of any infirmity in the
Irrstrument or defect in the title of the person negotiating it (Hi-
{ )ornent vs. lnsular, 534 SCRA 269).
Every holder is presumed prima facie to be a holder in due
r;orrrse. One who claims otherwise has the onus probandi to prove
llrirt one or more of the conditions required to constitute a holder in
rhrc course are lacking (BPlvs. Roxas,536 SCRA 168).
When it is shown that the title of any person who has negotiated
llro instrument was defective, the burden is on the holder to prove
tlrirt he or some person under whom he claims, acquired the title as
Irolrler in due course (Bataan vs. CA, 230 SCRA 643).
This presumption arises only in favor of a person who is a holder,
lroirning a "payee or indorsee of a bill or note, who is in possession
r rl il, or the bearer thereof." lf a person was the payee of the checks
trr tluestion, he may be a holder in due course. Hence, the
 120 NEGOTIABLE INSTRUMENTS LAW
presumption that he is a prima facie holder in due course applies in
his favor. However, said presumption may be rebutted. Hence,
what is vital is whether he took possession of the checks under the
conditions provided for in Section 52 of the Negotiable lnstruments
Law. All the requisites provided for in Section 52 must concur,
otherwise he cannot be deemed a holder in due course (yang vs.
cA,409 SCRA 159)
Bar Question: When is a hotder of an instrument a holder in due
course. Drscuss briefly. (1996, 1966, 1952, 1946 Bar)
Answer: A holder in due course is a hotder 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 had been previously
dishonored if such was the fact; (c) That he took it for value and in
good faith; (d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the tiile of the
person negotiating it.
Bar Question: What constitutes notice
" (1966 of defect? Dlscuss briefly.
Bar)
Answer: To constitute notice of defect in the title of the person
negotiating the same, the person to whom it is negotiated must have
actual knowledge of the defect, or knowledge of such facts that his
action in taking the instrument amounts to bad faith.
Bar Question.' R lssued a check for PlM which he used to pay S
for killing his political enemy. (a) Does S. have a cause of action
against R in case of dishonor by the drawee bank? (b) lt S
negotiated the check to T, who accepted it in good faith and for
value, may R be held secondarily liable by T? (2007 Bar)
Answer: (a/ S does not have a cause of action against R in case of
dishonor of the check. Srnce S is aware of the irregularity of the
consideration, S is not a holder in due course, as such, the defense
of illegality of consideration may be raised by R (Section 58, NIL)
(b) Yes, R may be held secondarily liable. Since f is a hotder in due
course, the defense of illegality of consideration may not be raised
against him (Section 57, NIL).
NEGOTIABLE INSTRUMENTS LAW tzt
Bar Question: Perla bought a motor car payable in installments
lrom Automotive Company for P250,000.00. She made a down
payment of P50,000.00 and executed a promissory note for the
halance. The company subsequently indorsed the note to Reliable
l'inance Corporation which financed the purchase.
[he promissory note reads:
"For value received, I promise to pay Automotive Company or
order at its office in Legaspi City, the sum of P200,000.00 with
hterest at twelve (12%) percent per annum, payable in equal
nstallments of P20,000.00 monthly for ten (10) months starting
October 21, 1991.
Manila, September 21, 1991.
(Sgd.) Perla
[)ay to the order of Reliable Finance Corp.
Automotive Company
By:
(Sgd.) Manager
Because Perla defaulted in the payment of her installments,
Reliable Finance Corporation initiated a case against her for a sum
of money. Perla argued that the promissory note is merely an
nssignment of credit, a non-negotiable instrument open to all
defenses available to the assignor and, therefore, Reliable Finance
Corporation is not a holder in due course. ls Reliable Finance
Corporation a holder in due course? Explain briefly. (1992 Bar)
Answer: Reliable Finance Corporation is a holder in due course, as
lhere is no,circumstance in the problem above to prevent it from
lrccoming a holder in due course, the requisites being that: (1) the
ilrstrument is complete and regular on its face, (2) that it became the
trclder of it before it was overdue, (3) that it took it for value and in
eood faith, @ that at the time the instrument was negotiated to it, it
Irad no notice of any infirmity to the instrument, or defect of title'of
llrc person negotiating it.
Bar Question: Can the payee in a promissory note be a "holder in
drrc course" within the meaning of the Negotiable lhstruments Law
(Act 2031)? Explain your answer. (2000 Bar)
Answer: A payee who is in possessio n of a note or the bearer
llrcreof is deemed a holder. Being a holder, he is deemed prima
lacie a holder in due course.
122 NEGOTIABLE INSTRUMENTS LAW
b. Rights of Holder in Due Course
Bar Question: What are the rights of a holder in due course of a
negotiable instrument (1946 Bar)
Answer: Like any holder, a holder in due course may enforce the
instrument and sue thereon in his own name.
He also holds the instrument free from any defect of title of prior
parties, free from defenses of prior parties affiofiQ themselves, and
he may enforce payment of the instrument for full amount thereof
against all parties tiabte thereon (Violago vs. BA, 559 SCRA 69).
ln the hands of one other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were
non-negotiable (lbid.).
The fact that the postdated checks were merely issued as security
is not a ground for the discharge of the instrument as against a
holder in due course. The only grounds are those outlined in Section
119 of the Negotiable lnstruments Law (State vs. CA, 217 SCRA 32).
Bar Question: Eva issued to lmelda a check in the amount of
P50,000.00 postdated September 30, 1995, as security for a
diamond'ring to be sold on commission. On September 15, 1995,
lmelda negotiated the check to 'MT lnvestment which paid the
amount of P40,000.00 to her.
Eva failed to sell the ring, so she returned it to lmelda on
September 19, 1995. Unable to retrieve her check, Eva withdrew
her funds from the drawee bank. Thus, when MT lnvestment
presented the check for payment, the drawee bank dishonored it.
Later on, when MT lnvestment sued her, Eva raised the defense of
absence of consideration, the check having been issued merely as
security for the ring that she could not sell.
Does Eva have a valid defense? Explain. (1996 Bar)
Answer: Eva's defense of absence of consideration is not valid
against MT because the lafter is a holder in due course. Likewise,
the fact that the check uyas issued merely as security is not a ground
to discharge the check as against MT lnvestment, a holder in due
caurse. The check can only be discharged under the grounds in
Section 119 of the Negotiable lnstruments Law.
NEGOTIABLE INSTRUMENTS LAW 123
2. Holder Not in Due Course
a. Defined
A holder not in due course is one who became a holder of an
instrument without any, some, or all of the requisites under Section
52 of the Negotiable lnstruments Law.
Where a holder's title is defective or suspicious, it cannot be
stated that the payee acquired the check without the knowledge of
said defect in the holder's title and for this reason the presumption
that it is a holder in due course or that it acquired the instrument in
good faith does not exist (Ocampo vs. Gatchalian, 3 SCRA 596).
A holder for value is one who has all the requisites for a holder in
due course except notice of want of consideration. He is not
necessarily a holder in due course, hence, prior parties may avail of
defenses against said holder (Prudencio vs. CA, 143 SCRA 7).
ln a sale on installment, financed by a financing company, the
latter is not a holder in due course, and the defense of failure of
consideration may be invoked against it, if the goods bought are
defective and cannot be used by the buyer for the purpose for which
he bought it (Consolidated vs. lFC, 149 SCRA 448).
A person who became a holder of a cashier's check indorsed by
the person who stole it, is not a holder in due course, and the issuing
bank may refuse to pay the same (Mesina vs. lAC, 145 SCRA 497).
Where the payee acquired the check under circumstances which
should have put it to inquiry, why the holder had the check and used
it to pay his own personal account, the duty devolved upon it to
prove that it actually acquired said check in good faith (Ocampo vs.
Gatchalian, supra).
Where a note is acquired by the contract of merger or sale
between two banks, and the note is subject to a Holdout Agreement,
the holder of that note is not a holder in due course (BPl vs. CA ,232
scRA 305).
The indorsee of a crossed check is a holder not in due course,
and is subject to defenses as if the instrument is non-negotiable
(State vs. lAC, 175 SCRA 310).
124 NEGOTIABLE INSTRUMENTS LAW
Bar Question: Rolando, intending to buy a car, saw an old friend,
Roger, who is an agent to sell the car belonging to Delgado Clinic.
After negotiation, Rolando decided to buy said car. He drew upon
request of Roger a crossed check for P600.00 payable to Delgado
Clinic as evidencB of his good faith, but which will merely be shown
to Delgado Clinic by Roger who received said check. The check
would then be returned when Roger brings the car and its
registration certificate for Rolando's inspection.
For failure of Roger to bring the car and its certificate of
registration, and to return the check, Rolando issued a "stop
payment order" to the drawee bank. ln the meantime, Roger paid
the check to the Detgado Ctinic for ihe hospitat bill of his wife and
was given P158.25 as change. Delgado Clinic filed suit against
Rolando to recover the value of the check. May Delgado Clinic be
considered a holder in due course, hence, entitled to recover?
Decide with reasons. (1977, 1962 Bar)
Answer: No, Delgado Clinic cannot be considered a holder in due
course, and hence, cannot recover under the instrument.
It will be noted from the problem that (1) the check is payable to
Delgado Clinic, but drawn by Rolando, who had no account at all
with Delgado Clinic, (2) it was a crossed check, meaning {hat it could
only be deposited by its holder but could not be converted into cash,
(3) the check yyas used to pay the account, hot of the drawer,
Rolando, but of a third person, Roger, and (4) the amount of the
check was more than the amount paid to Delgado Clinic.
A'll these circumstances should have put Delgado Clinic to inquiry
as to the whys and wherefores of the possesslon of the check by
Roger and why Roger used it to pay for the account of his wife with
Delgado Clinic, and the latter (Delgado Clinic) not having done so, it
was a holder with knowledge of the defect of title of the person
negotiating the check. At teast one of the requisites for a hotder to
be considered a holder in due course - that he has no knowledge of
the defect of title. of the person negotiating the instrument - is absent.
Hence, Delgado Clinic is not a holder in due course, and
therefore, not entitled to recover from Rolando, the drawer of the
check.
Bar Question: How does the "shelter principle" embodied in
Negotiable lnstruments Law operate to give the rights of a holder-in-
due course to a holder who does not have the status of a holder-in-
due course? Briefly explain. (2008 Bar)
NEGOTIABLE INSTRUMENTS LAW 125
Answer: The "shelter principle" pt'ovides that a holder who is not
himself a holder in due course but is not a party to any frqud or
illegality affecting the instrument, and who derives his title from a
holder in due course, acquires the rights of a holder in due course.
(See Secfion 58, NIL)
b. Rights of Holder Not in Due Course
Bar Question: What are the rights of a hotder of a negotiabte
instrument if not in due course? (1946 Bar)
Answer: A holder not in due course can enforce the instrument and
sue under it in his own name. Prior pafties, however, even though
remote, can avail against him any defense among these prior parties
and prevent the said holder from collecting in whole or in part the
amount sfafed in said instrument.
That a holder is not a holder in due course does not mean that he
cannot recover under the instrument. The Negotiable lnstruments
Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument. The only
disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-
negotiable. Holders not in due course can collect from the
immediate indorser (Dino vs. Judal-Loot, 618 SCRA 393).
5. Defenses of Prior Parties Against the Holder
a. Classes of Defenses
1. Real or Absolute Defenses
a. Defined
A real or absolute defense is a defense which attaches to the
instrument irrespective of the parties and is predicated on the
principle that the right sought to be enforced has never existed or
has ceased to exist.
the
b. Examples
Examples of real defenses are forgery or unauthorized signature,
void contract, material alteration, and incomplete and undelivered
instrument.
126 NEGOTIABLE INSTRUM ENTS LAW
A forged signature is a real or absolute defense, and a person
whose signature on a negotiable instrument is forged is deemed to
have never become a party thereto and to have never consented to
the contract that allegedly gave rise to it. The counterfeiting of any
writing, consisting in the signing of another's name with intent to
defraud, is forgery (Samsung vs. Far East, 436 SCRA 402).
c. Against Whom Available
A real defense is available against all holders, whether in due
course or not.
Bar Question: On April 1, 1954, "A" delivered to "8" the following
document "l promise to pay to the order of "8" the sum of P1,000.00
on or before June 30, 1954. (Sgd.) "A." Two weeks later, "8"
endorsed and delivered the note to .X". "X" demanded payment
from "A", who refused to pay alleging nullity of the note but adding
"give me 10 days, and I will pay," whereupon "X" immediately left and
informed " B" accordingly.
On July 15, 1954, "X" filed suit to recover from "A" and "8", jointly
and severally, the amount of the note. "A's" defense is that the note
is void, it representing money won in a game of chance (duly
proved), while "B's" defense is that he has been discharged because
"X" granted "A" an extension for payment. How would you decide
the case? State your reason fully but briefly. (1955 Bar)
Answer: The defense of "A" that the note is void because it
represented money won in a game of chance which was proved,
would have been a real defense available against all holders.
However, by his telling "X" "Give me 10 days and I will pay," he is
estopped from now alleging any defense to the enforcement of the
note. Because of fhese circumstances, I submit "A" is liable to "X".
The defense of "8" that he is discharged because "X" accepted
an extension from "4" of 10 days, is not a valid defense as "8", by his
failure to object to said extension after he was informed about it,
ratified said extension impliedly, and is deemed to have conformed
to it. Hence, B is not discharged by said extension.
2. Personal or Equitable Defenses
a. Defined
A personal or equitable defense is a defense growing out of an
agreement or conduct of a particular person in regard to an
NEGOTIABLE INSTRUMENTS LAW 127
rrrstrument which renders it inequitable for him, although owner of it,
Io enforce it against the defendant.
b. Examples
Examples of personal defenses are complete but undelivered
rrrstrument, delivered but incpmplete instrument, absence or failure
of consideration, and defect of title.
c. Against Whom Available
The defense is available against all holders not in due course,
except those who derive their rights from holders in due course and
who are not parties to any fraud or illegality affecting the instrument.
Bar Question: "A" induces "8" by fraud to make a promissory note
payable on demand to the order of "A" in the sum of P5,000.00.
a) Can "A" file an action successfully against the maker "B" for the
amount of the note?
b) Going fufther, "A" transfers the note to "C" who pays P5,000.00
therefor and acquires the note under circumstances that make him
(C) a holder in due course. Can C file an action successfully against
B, the maker of the note, for the amount of the note? Explain.
c) What defense/defenses can B interpose? Reasons. (1978 Bar)
Answer: (a) No A, the payee of the promissory note who induced
by fraud B to make the questioned promissory note, cannot
successfully file an action against B. The fraud committed by A is q
defense (personal defense), which B, under the law, is allowed to
invoke against A.
(b) C, who is a holder in due course of the note, can file an action
successfully and collect against B. A holder in due course (ike C in
the problem), holds the instrument free from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all pafties liable
thereon (like B the drawer, in the problem).
(c) The problem ifself does not mention any circumstance which
could be a possible defense against a holder in due course. lf
besrdes the facts mentioned in the problem, B can show that the
fraud commifted by A was fraud in factum, or misrepresentation as to
the nature of the instrument, or that he (B) lacked contractual
capacity, these defenses, being real defenses, may prevent recovery
against B, even if the instrument is in the hands of a holder in due
course, like C in the problem.
128 NEGOTIABLE INSTRUMENTS LAW
B. Presentment
1.ln Promissory Notes
a. Presentment for Payment
1. Purpose
Not necessary to make the maker liable, but it is necessary to
make the secondary parties liable.
2. Requisites
For a valid presentment for payment of a promissory note, the
following are necessary: (1) made within a reasonable time after
issue; (2) by the holder or his agent; (3) to the party liable under it;
(4) at a reasonable hour on a business day; and (5) at the proper
place.
The holder must exhibit the instrument to the debtor and should
deliver it to said debtor if the latter pays.
Bar Question: PN ls the holder of a negotiable promissory note
within the meaning of the Negotiable lnstruments Law (Act 2031).
The note was originally issued by RP to XL as payee. XL indorsed
the note to PN for goods bought by XL. The note mentions the place
of payment on the specified maturity date as the office of the
corporate secretary of PX Bank during banking hours. On maturity
date, RP was at the aforesaid office ready to pay the note but PN did
not show up. What PN tater did was to sue XL for the face value of
the note, plus interesf and cosfs the suit prosper? Explain.
(2000 Bar)
Answen Yes, the suit will prosper. PN can still collect from RP
who, as maker engages to pay according to the tenor of the note.
But PN cannot sue for interest and cosfs because RP was not at
fault for the delay in payment; it was PN who did not show up at the
specific place on the specified maturity date.
3. When Made
When the instrument is not payable on demand, presentment
must be made on the day it falls due. When it is payable on
NEGOTIABLE INSTRUMENTS LAW 129
rkrmand, presentment must be made within a reasonable time after
trisue (Sec. 71, NIL).
4. When Not Required
Presentment is not required: (1) when after due diligence,
lrrcsentment cannot be made, (2) when presentment is waived, and
(:l)when the indorser is an accommodated party.
5. When lnstrument Considered Dishonored
The instrument is considered dishonored: (1) when after due
lrrcsentment for payment, payment is refused, and (2) when
prt:sentment being excused, the instrument is overdue and unpaid.
2. In Bills of Exchange
a. Presentment for Acceptance
1. Purpose
To get acceptance of the drawee for the purpose of making him
ltrrble primarily as an acceptor. lt is also a prerequisite to the accrual
rrl secondary liability against the drawer and the indorsers.
2. When Necessary
It is necessary in the following cases: (1) to fix the maturity date,
(lt) where the bill expressly stipulates presentment, and (3) where
llro bill is drawn payable elsewhere than at the residence or place of
lrrrsiness of the drawee.
3. Requisites
Presentment for acceptance must be made within a reasonable
ltrno, by the holder or his agent, to the drawee or his agent at a
rnir;onable hour on a business day, before the bill is overdue.
4. What is Gonsidered Reasonable Time
No hard and fast demarcation line can be drawn between what
rrrrry be considered as a reasonable or an unreasonable time,
lrnr;ir.lse reasonable time depends upon the peculiar facts and
r trcrrnstances in each case (Far East vs. CA, 166 SCRA 256).
130 NEGOTIABLE INSTRUMENTS LAW
Bar Question: Gemma drew a check on Septemb", 13, 1gg0. Th,"
holder presented the check to the drawee bank only on March 5,
1994. The bank dishonored the check on the same date. After
dishonor by the drawee bank, the holder gave a formal notice of
dishonor to Gemma through a letter dated April 27, 1994.
a) What is meant by "unreasonable time" as applied to
presentment?
b) ls Gemma liable to the holder? (1994 Bar)
Answer: (a) "Reasonable time" has been defined as so much time
as ls necessary under the circumstances.for a reasonably prudent
and diligent man to do conveniently, what the contract or duty
requires should be done, having a regard for the rights and
possibility of /oss, if any, to the other pafty (See Far East vs. CA,
supra).
As applied to presentment for payment, general banking practice
requires that a check be presented for payment before six months
from the date of the check, otheruvise, it becomes stale.
(b) No. Gemma is not liable to the holder. As drawer, Gemma
engages that if the check is dishonored and proper proceedings on
dishonor taken, she will pay the party entitled to it. One requirement
upon dishonor is that notice be given as soon as the check is
dishonored, unless excused. In the problem, notice of dishonor was
not made yithin a reasonable time.
A stale check is one which has not been presented for payment
within a reasonable time after its issue. lt is valueless and, therefore,
should not be paid. Under the Negotiable lnstruments Law, an
instrument not payable on demand must be presented for payment
on the day it falls due. When the instrument is payable on demand,
presentment must be made within a reasonable time after its issue.
ln the case of a bill of exchange, presentment is sufficient if made
within a reasonable time after the last negotiation thereof
(lnternational vs. Gueco, 351 SCRA 516).
ln determining what is a "reasonable time", regard is to be had on
the nature of the instrument, the usage of trade or business with
respect to such instruments, and the facts of the particular case.
The test is whether the payee employed such diligence as a prudent
man exercises in his own affairs. This is because the nature and
theory behind the use of a check points to its immediate use and
payability (lbid.).
NEGOTIABLE INSTRUMENTS LAW 13I
l ven assuming that presentment is needed, failure to present for
lraynrent within a reasonable time will result to the discharge of the
rhnwer only to the extent of the loss caused by the delay (lbid.)
After more than ten years from the payment in part by cash and in
;rErt by check, the presumption is that the check had been encashed.
f alhrre of a payee to encash a check after more than ten years
rrnrloubtedly resulted in the impairment of the check through his
muoirsonable and uhexplained delay (Papa vs. Valencia, 284 SCRA
n4:r).
I he acceptance of a check implies an undertaking of due
rllllllonce in presenting it for payment, and if he from whom it is
recnived sustains loss by want of such diligence, it will be held to
lgrurate as actual payment of the debt or obligation for which it was
glvon (lbid.).
hly current banking practice, a check becomes stale after more
llurn six (6) months (Wong vs. CA, 351 SCRA 100).
While delivery of a check produces the effect of payment only
wlrein it is encashed, the rule is otherwise if the debtor was
;rrojudiced by the creditor's unreasonable delay in presentment.
Ar:coptance of a check implies an undertaking of due diligence in
lrrosenting it for payment. lf no such presentment was made, the
rlrrrwer cannot be held liable irrespective of loss or injury sustained
lry the payee. Payment will be deemed effected and the obligation
ftr which the check was given as conditional payment will be
rllr.t;harged (Pio Barretto vs. CA, 360 SCRA 127).
Ihe Civil Code provides that the delivery of bills of exchange and
rrrorcantile documents such as checks shall produce the effect of
prryrnent only when they have been cashed. lt is only after the
r:lrucks have produced the effect of payment that the contract of loan
rrriry be deemed perfected (Naguiat vs. CA, 412 SCRA 591)
5. When Excused
Presentment for acceptance is excused: (1) where the drawee is
rkr;rd, hides, or is a fictitious or incapacitated person, (2) when after
rlrrc diligence, presentment cannot be made, and (3) when
rrr:r:optance is refused on another ground although presentment is
lr ro1;ular.
132 NEGOTIABLE INSTRUMENTS LAW
6. When lnstrument Dishonored By Non-acceptance
The instrument is considered dishonored by non-acceptance: (1)
where such acceptance is refused or cannot be obtained, and (2)
where acceptance being excused, the bill is not accepted.
b. Presentment for Payment of Accepted Bill
1. Purpose
The purpose of presentment for payment of an accepted bill is to
collect from the acceptor; and if refused, to collect from the
secondary parties.
2. Requisites
The accepted bill must be presented for payment within a
reasonable time from the last negotiation by the holder or his agent,
to the acceptor or his agent, at a reasonable hour on a business day,
and at the proper place as defined. The bill must be exhibited to the
acceptor and surrendered to him when he pays.
3. When Excused
Presenfment for payment is excused: (1) when after due
diligence, it cannot be made, (2) when the drawee is a fictitious
person, and (3) where there is a waiver of presentment.
Bar Question: A bank rssuei its own check. May the hotder hotd
the bank liable thereunder if he fails to-
(a) prove presentment for payment, or
(b) present the bill to the drawee for acceptance?
Explain your answers. (2003 Bar)
Answer: (a) Yes, the hotder may stilt hold the bank tiabte even if he
fails to prove presentment for payment. The law provides fhaf
presentment for payment is not necessary in order to charge the
person primarily liable on the instrumenf (Sec. 70, NIL). Since in the
case af bar, both the drawer and the drawee (a party primarily liable)
is the bank itself, then presentment is no longer necessary.
(b) No, the holder may not hold the bank liable should'he fail to
present the bill to the drawee for acceptance, for it is the drawee's
acceptance of the check which makes him primarily liable under it. ln
NEGOTIABLE INSTRUMENTS LAW 133
ithtrtion, even if the bank is the drawer of said check, it makes him
| | ily secondarily liable
C. Acceptance in Bills of Exchange
1. Defined
At;ceptance is the signification by the drawee of his assent to the
nrrlrlr of the drawer.
2. Requisites
Ihe acceptance must be in writing, signed by the drawee, and
that the drawee will perform his promise by means
rrrrrst not express
rllror than money payment.
3. How Made
lhe acceptance may be on the bill, on a separate paper, and may
svon be made in writing before the bill is drawn.
lhe drawee, if he wants to dishonor, must do so expressly within
lwlnty four hours from presentment to him. lf he refuses to act,
lnrrrs the bill, or refuses to return the bill within said period of twenty
lnur hours, he is deemed to have accepted the bill.
A sight draft (usually accompanying a letter of credit in
Irrrgrortations) is payable on demand, and needs no acceptance by
llrrr rlrawee (Prudential vs. lAC, 216 SCRA 257).
A sight draft made payable outside the Philippines is a foreign bill
nl nxr:hange. When a foreign bill is dishonored by non-acceptance
or non-payment, protest is necessary to hold the drawer and
Irrrlorsers liable. Respondent's failure to protest the non-acceptance
nt llrc sight draft resulted in the discharge of the petitioner from
llnlrllily under the instrument.(Velasquez vs. Solid, 550 SCRA 119).
Eer Question: A bill of exchange was delivered to a drawee for
art:ttltltrnce; he tore it to pieces and threw it away. Can he be. held
lktltht on said bill? Give your reason. (1947 Bar)
Answer: The drawee, by tearing the bill of exchange presented to
lttr acceptance, is deemed to have accepted the bill. He
Itltrt
llttttrrlore becomes liable on the bill as a primary pafty, being now the
a'r:ttltktr of it.
134 NEGOTIABLE INSTRUMENTS LAW NEGOTIABLE INSTRUMENTS LAW 13s

4. Classes of Acceptance ;rrr,nptance by the drawee of a bill, or by non-payment by the

rrr r:ol)tor of a bill or by non-payment by the maker of a note.
a. General and Qualified
2.Purpose
A general acceptance assents without qualification to the order of
the drawer. I he notice of dishonor is given by the holder to the parties
A qualified acceptance varies the effect of the bill as drawn. The aourndarily liable, for the purpose of preserving his right of recourse
acceptance is qualified if it is: (a) conditional, (b) partial, (c) local, (d) rr1;rrrrrst them.
qualified as to time, or (e) accepted by some or more of the drawees
but not by all. lhe drawer or maker of a check has a right to demand that a
wrtllon notice of dishonor be sent to and received by him to enable
b. Express and Gonstructive Irtrrr to avoid indictment for violation of Batas Pambansa Blg. 22.
Nr rlir;e of dishonor of a check to the maker must be in writing (Sia vs.
Acceptance is express if written on the instrument by the drawee; I'nople, 428 SCRA 206)
and constructive, if the drawee, within twenty four hours from
presentment to him of the instrument, destroys the same, or refuses After an instrument is dishonored by non-payment, indorsers
or fails to return the bill accepted or unaccepted. r nrrse to be merely secondarily liable; they become principal debtors
wlrose liability becomes identical to that of the original obligor. The
D. Dishonor Irokler of a negotiable instrument need not even proceed against the
rrrrrker before suing the indorser (Tuazon vs. Heirs, 463 SCRA 408).
1. ln Promissory Notes
3. Requisites
ln a promissory note, dishonor by non-payment takes place when
it is duly presented for payment and payment is refused or cannot be Itre notice is given: (1) by the holder or his agent, or by any party
obtained;"or if presentment is excused, the instrument is overdue wlro may be compelled by the holder to pay, (2) to the secondary
and unpaid. lrnrly or his agent, (3) within the periods provided for by law, and (4)
rrl the proper place.
2. In Bills of Exchange
4. When Dispensed With
ln bills of exchange, where the bill is presented for acceptance
and is returned dishonored, or within twenty four hours from Notice of dishonor may be dispensed with: (1) if waived, (2) when
presentment is not returned accepted or unaccepted, there is a due diligence, it cannot be given, and (3) when the party to be
'rll(,r
dishonor by non-acceptance. rrolrlied knows about the dishonor, actually or constructively.

There is a dishonor by non-payment if the bill, after it has been a. ln the Case of the Drawer
accepted, is not paid when presented for payment, or presentment
being excused, is not paid on the date of maturity. llar Question: When is notice of dishonor not required to be given
6ru*"r? (1996,1952 Ba)
Irt ll11'
E. Notice of Dishonor
Atrswer: Notice of dishonor need not be given to the drawer in the
1. Defined l,illowirtg cases.' (a) when the drawer and the drawee are the same
/,r/.sor]; (b) when the drawee is a fictitious or incapacitated person;
It is a notice given by the holder or his agent to the party or parties g:) when the drawer is the person to whom the instrumenf is
secondarily liable that the instrument was dishonored by non- ltrostlted for payment; or (d) when the drawer has no right to
136 NEGOTIABLE INSTRUMENTS LAW
expect that the drawee will accept, or that the acceptor will pay, the
instrument.
lf the dralver or maker is an officer of a corporation, the notice of
dishonor to the said corporation is not notice to the employee or
officer who drew or issued the check for and in its behalf (Marigomen
vs. People,459 SCRA 169).
Notice of dishonor is not an absolute procedure. By withdrawing
the funds from the bank, the drawer could not have expected her
checks to be honored. ln other words, she!'was responsible for the
dishonor of her checks; henee, no need to serve her Notice of
Dishonor, which is simply bringing to the knowledge of the drawer or
indorser of the instrument, either verbally or by writing, the fact that a
specified instrument, upon proper proceedings taken, has not been
accepted or has not been paid, and that the party notified is
expected to pay it (State vs. CA, 217 SCRA 32).
The failure of an assignee of a check to notify the drawer of the
fact of dishonor of said check will not absolve the drawer from
liability, if the cause of action stems from the breach of warranties
embodied in the Deed of Assignment, and not from the dishonoring
of the check alone (Nyco vs. BA, 200 SCRA 637).
Under the Negotiable lnstruments Law, notice of dishonor is not
required if the drawer has no right to expect or require the bank to
honor the check, or if the drawer has countermanded payment
(Great vs. CA, 381 SCRA 557)
It is worth mentioning that notice of dishonor is required under
both paragraph 2(d) of Article 315 of the RPC and Section 2 of BP
22. While the RPC prescribes that the drawer of the check must
deposit the amount needed to cover his check within three days from
receipt of notice of dishonor, BP 22, on the other hand, requires the
maker or drawer to pay the amount of the check within five days from
receipt of notice of dishonor. Under both laws, notice of dishonor is
necessary for prosecution (for estafa and violation of BP 22). Without
proof of notice of dishonor, knowledge of insufficiency of funds
cannot be presumed and no crime (whether estafa or violation of BP
22) can be deemed to exist (People vs. Ojeda, 430 SCRA 436)
NEGOTIABLE INSTRUMENTS LAW r37
b. ln the Gase of the lndorser
Notice of dishonor is not required to be given to the indorser in the
lrllowing cases: (1) when the drawee is a fictitious or incapacitated
l,rlrson, and the indorser was aware of it at the time of his
Irulorsement, (2) where the indorser is the person to whom the
Irrslrument was presented for payment, and (3) where the instrument
wrrs made or accepted for his accommodation.
5. Effect of Delay ln lssuance of Notice of Dishonor
l)elay in notice of dishonor, where such notice is required,
rltsr;harges the drawer only to the extent of the loss caused by the
rlnlay. This rule finds application in this jurisdiction pursuant to
liorlion 196 of the Negotiable lnstruments Law which states, "Any
r:rrse not provided for in this Act shall be governed by the provisions
nl existing legislation, or in default thereof, by the rules of the Law
Morchant." Under Section 186 of the Negotiable lnstruments Law,
rlnlay in the presentment of checks discharges the drawer.
lltrwever, Section 186 refers only to delay in presentment of checks
lrrrt is silent on delay in giving notice of dishonor. Consequently, the
l()rnmon law or Law Merchant can supply this gap in accordance
wllh Section 196 of the Negotiable lnstruments Law (Great vs. CA,
trtrllra).
F. Protest in Lieu of Dishonor in Foreign Bills
1. Foreign Bill Defined
A foreign bill is a bill of exchange which is not on its face drawn
rrr(l made payable within the Philippines.
2. Protest
a. Defined
A protest is a formal instrument, executed by a notary or other
rorrrpetent person, certifying that the facts necessary to the dishonor
rrl lhe instrument by non-acceptance or non-payment have taken
I rl; ttxl.
138 NEGOTIABLE INSTRUMENTS LAW
b. When Required
When a foreign bill is dishonored by non-acceptance, it must be
protested for non-acceptance. lf dishonored by non-payment, it must
be protested for non-payment. lf not so protested, the drawer and
indorsers are discharged. lt must be made on the day of dishonor.
There may also be a protest for better security.
. c. HowMade
A protest is made by a notary or by a respectable citizen of the
place of dishonor of the bill in the presence of two or more credible
witnesses.
It must be annexed to the bill, or must contain a copy thereof, and
must specify: (1) the time and place of presentment, (2) the fact that
presentment was made and the manner thereof, (3) the cause of
protest, and (4) the demand made and answer given, or that the
drawee or the acceptor could not be found.
Bar Question: When a foreign bill of exchange is dishonored by
non-acceptance, what should the payee do, if anything is required of
him by the law, in order to protect his rights? (1948 Bar)
Answen frth"n foreign bitt is dishonored by non-acceptance, the
payee should, on" the same date of dishonor, cause a protest to be
made by a notary public or by a respectable citizen of the place
where the dishonor took place, in the presence of two wilnesses
stating the facts and circumstances of dishonor.
This protest will preserve his right of recourse against the parties
secondarily liable under the instrument.
d. When Protest Dispensed with
Protest is dispensed with in those cases where notice of dishonor
is dispensed with.
G. Discharge of the lnstrument and of the Parties
1. Gauses for Discharge of the lnstrument and Discharge
of All Parties
a) Payment by the debtor
b) Payment by the accommodated party
NEGOTIABLE INSTRUMENTS LAW 139
c) lntentional cancellation by the holder of the instrument
d) Any other act discharging a simple money obligation
e) Debtor becomes holder of the instrument at or after maturity
in his own right
2. Causes for Discharge of Secondary Parties
a) Any act discharging the instrument
b) Cancellation of indorser's signature by the holder
c) Discharge of a prior PartY
d) Tender of payment by a prior party
e) Release of the princiPal debtor
f) Extension of payment by the holder, or postponement of his
right to enforce, without the assent of the secondary parties,
and without reservation of any right of recourse against the
secondary parties
The Problem: Some busrnessmen with an available starting capital
kilatting only P100,000.00 ask you to help organize a business firm.
*bject to legal limitations, they have future plans to invite alien
lrrvesfors who are agreeable to rendering financialassisfance by way
of direct investment and/or loans. Your professional asslsfance is
:toticited on the following various questions that may arise.
Bar Question: The XYZ bank is willing to lend your firm the sum of
I'500,000.00 payable in five years with interest at 12% per annum
:;ttr:ured only by a surety bond.
Prior to its maturity, the bank rndorses the note to Mr. Ramos,
wln in turn indorses ff fo Mr. Santos. Thereafter, Mr. Santos
lr(/orses the note back to the bank upon maturity' Explain the
lutbitity of Mr. Ramos to the bank if the note is not paid by your firm.
1t973 Bar)
Answer: Mr. Ramos is not liable to XYZ bank even if the note is not
ltitid by my firm on maturity of the note.
The indorsement by Sanfos to XYZ Bank which was a party to the
ttr:;lntment prior to Ramos and over whom indorser Ramos has a
rttllrl recourse, discharged the intermediate parties, Sanfos and
of
/{rrnos. Hence, Ramos is not liable to XYZ Bank.
lX. Check
 140 NEGOTIABLE INSTRUMENTS LAW
A. Defined
A check is a bill of exchange drawn on a bank and payable on
demand.
At all events, a check, the entries of which are no doubt in writing,
could prove a loan transaction (Tan vs. Villapaz,4Tb SCRA 220).
Upon issuance of a check, in the absence of evidence to the
contrary, it is presumed that the same was issued for valuable
consideration which may consist either in some r:ight, interest, profit
or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor,
or service given, suffered or undertaken by the other side (Cayarran
vs. North, 658 SCRA 644).
B. Differentiated from an Ordinary Bill of Exchange
A check is differentiated from an ordinary bill of exchange in
several ways:
1) A check always has a bank for its drawee; an ordinary bill of
exchange may have any capacitated person for its drawee;
2) A check is always payable on demand; a bill need not be so
payable;
3) lf a theck is certified or accepted, the drawer and indorsers
are discharged; if a bill is accepted, the drawer and indorsers remain
liable.
G. Dishonor of Funded Checks
Bar Question: Romeo had P100,000.00 in his current account in
the Matatag Banking Corporation. Romeo tearned that his enemy
had hired a contract killer"to liquidate him. Fearfut for his tife, he
mailed to his fiancee, Juliet, a check for his P100,000.00 in the bank.
The check was payable to Juliet or order and was accompanied by a
letter stating that he was giving her money out of his great love for
her and because something would happen to him anytime now.
The hit contract was called off by Romeo's enemy. Meanwhile,
Juliet broke off her engagement to Romeo because of the humitiation
she suffered at the bank. Does Romeo have a right to action against
the bank? Explain. (1986 Bar)
Answer: Yes, Romeo has a right of action against the bank. He has
the alternative action of running after the bank for damages for its
NEGOTIABLE INSTRUMENTS LAW t4t
rlt:;lnnor of the check inspite of the fact that it was funded when it
wts presented for payment by Juliet, or for the withdrawal of his
rh4tosit with its increments, as all these belong to him.
D. Stop Payment Order By Drawer
Bar Quesfio n: A drew a check for P1,000 on B, the bank, payable
ht lhe order to C and delivered the check to the latter for value. C
ttxlorsed the check in blank and negotiated it to D, who lost it. At D's
rrrr;11s"1 A ordered payment stopped by notifying B. The stop order
wtts overlooked and the check was paid to E, who had taken the
r lrock, without actual knowledge of the loss, in payment of
ttrrchandise sotd to a stranger whom he thought owned the check.
lt trow sues fhe bank, B, for the amount of the check. Decide the
r tt:;e with brief reasons. (1979 Bar)
Answer: B, the bank, is liable to D. A check by itself does not
t\,orate as an assig nment of any part of the funds to the credit of the
rlrtwer with a bank. Before the bank accepts or certifies the check,
lltt drawer may countermand or stop payment of a check issued by
Ittrrt, which A, the drawer in the problem did. lf the bank for any
nrr.son, and in spite of sard sfop payment order, allowed, as in this
r ,rio, fhe check to be encashed, then it becomes liable to the drawer
t\ lo any subsequent lawful holder like D in the problem.
llar Quesfio n: Mr. Lim issued a check drawn against BPI in favor of
Mt Ytt as payment for certain shares of sfocks which he purchased.
(\t the same day that he issued the check to Mr. Yu, Mr. Lim
ttrtlored BPI to stop payment. Per standard banking practice, Mr.
Irrtt was made to sign a waiver of BPI's liability in the event that it
,:ltttttld pay Mr. Yu through oversight or inadvertence. Despite the
',h4t order by Mr. Lim, BPI neveriheless paid Mr. Yu upon
ltrtr:;tntation of the check. Mr. Lim sued BPI for paying against his
turhtr'. Decide the case. (1991 Bar)
Atrcwer: BPI should answer to Mr. Lim for the bank's failure to
lrilK,r the stop payment order of Mr. Lim.
A clrawee bank is liable on a check drawn by it upon the check's
ltrtt:;ontmefit to the bank for payment. lf before such presentment,
llttt tlrawer made a stop payment order to the bank, then the bank
.,ltottltl not pay the check when presented.
Itrc signed waiver by Mr. Lim of the bank's liability in case of
ttttynrcnt through oversight or inadveftence by the bank will not free
llttt ltut'rk from liability.
t42 NEGOTIABLE INSTRUMENTS LAW
lf a check lawfully lssued is not honored due to a stop payment
order of the drawer, the drawer is guilty of estafa under the Revised
Penal Code (See Sa/es vs. CA, 164 SCRA 717).
E. Certification of Check
1. Defined
It is an agreement whereby the bank binds itself to pay the check
at any future time when presented for payment.
2. Effect of Gertification
Bar Question: What is the effect on the drawer and al! indorsers of
a check if the holder thereof procures it to be certified or accepted by
the drawee bank? (1965 Bar)
Answer: The certification is equivalent to an acceptance of the
check by the drawee bank, and the drawer and the indorsers are
d i sch arged from I i abil ity the reon.
Bar Question: "A" drew a check against his current account at
Katipunan Bank in favor to "C". Although 'A" did not have sufficient
funds, the , bank honored the check when it was presented for
payment. Apparentty, "A" had conspired with the bank's bookkeeper
so that his ledger cards would show that he still had sufficient funds.
May the b'ank recover from "C"? (1998, 1970 Bar)
Answer: No, the bank may not recover against C. The act of the
bank in honoring the check in favor of C amounls fo a certification of
the check. By this certification, the indorsers (including C, the
payee) are discharged from liability on the check.
F. Gheck Used as Payment of Obligation
Bar Question: For an indebtedness owing by "X" to "2", "X" gave
"2" a check covering the entire amount. "2" refused to accept it. "X"
claimed that the check is legal tender and because of such refusal
he was discharged from further liability. ls "X's" contention correct
and why? (1960 Bar)
Answer: "X's" contention is not correct. A check is not legaltender,
hence, a creditor can validly refuse to accept it from the debtor in
payment of an obligation of said debtor to the creditor.
NEGOTIABLE INSTRUMENTS LAW 143
Irr a loantransaction, the obligation to pay a sum certain in
lnn('y may be paid in money, which is the legal tender, or by the
len of a check. A check is not a legal tender, and therefore cannot
r lrnrlitute valid tender of payment. Since a negotiable instrument is
unly a substitute for money and not money, the delivery of such an
lrtnlrrrment does not, by itself, operate as payment. A check,
wltolher a manager's check or ordinary check, is not a legal tender,
arrrl irn offer of a check in payment of a debt is not a valid tender of
frrrfilrent and may be refused receipt by the obligee or creditor.
Mnro delivery of checks does not discharge the obligation under a
Irrrlllnent. The obligation is not extinguished and remains
arrrrpended until the payment by commercial document is actually
rtrrrlized (Cebu vs. CA, 316 SCRA 488; Article 1249, Civil Code).
1. Ordinary Checks
olrecks representing demand deposits do not have legal tender
lr()wer, and their acceptance in the payment of debts, both public and
prlvirte, is at the option of the creditor; Provided, however, that a
r:lror:k which has been cleared and credited to the account of the
r:rorlitor shall be equivalent to a delivery to the creditor of cash in an
srrrount equal to the amount credited to his account (Section 60, RA
/1i53)
l)elivery of notes payable to order shall produce the effect of
lrrtynrent only when realized or when by the creditor's fault, the
rrrrllotiable character of the note is impaired (Article 1170, Civil
( iorle). The last clause applies to instruments created by third
porrions and delivered by the debtor himself to the creditor
(Nirnrarco vs. Federation, 49 SCRA 238).
a. lf Used for Redemption in Foreclosures
A reddmption is not rendered invalid by the fact that the sheriff
rtr.(:()pted a check rather than cash.
lf in good faith, the redemptioner pays, and the officer receives
lrckrre the expiration of the time of the redemption, an ordinary
lrrrrrker's check, the payment is regarded as sufficient (Fortunado vs.
r ;A, 196 SCRA 269).
A right of redemption is not an obligation but an absolute privilege,
iur(l no tender of the redemption price nor formal offer to redeem is
n{'(:ossary where redemption is being exercised by judicial action.
 t.t.f
NEGOTIABLE INSTRUMENTS LAW
Hence, a stop payment of said check is merely an indication that the
mortgagor does not want to exercise an optional right (Tolentino vs.
cA, 106 SCRA 513).
Where a check accepted for redemption by the mortgagee-
creditor is dishonored, the redemption is null anb void. lf, 6n the
other hand, the check became stale in the mortgagee's possession
of his failure to
because present it for paymlnt without the
mortgagor's fault, it would be unfair to deprive nim or the rights he
has acquired as a redemptioner, if, after ail, the varue of thi check
had otherwise been received or realized by the mortgagee-creditor
(Crystalvs. CA, 62 SCRA 501)
b. lf Used as Discounted Checks
,,discounting
ln lhe financing industry, the term line', means a
credit facility with a financing company or bank, which allows a
business entity to sell, on a continuing basis, its accounts receivable
at a discount. The term "discount" means the sale of a receivable at
less lhan its face value. The purpose of a discounting line is to
enable a business entity to generate instant cash -out of its
receivables which are still to mature at future dates. The financing
company or bank which buys the receivables makes its profits out of
the difference between the face value of the receivable and the
discountedlrice (Great vs. CA, 381 SCRA 552).
There is a fine distinction between a discounting line and a loan
accommodation. lf the accounts receivable, like postdated checks,
are sold for a consideration less than their face value, the transaction
is one of discounting, and is subject to the provisions of the
Financing company Act. The assignee is immediatery subrogated
as creditor of the accounts receivable. However, ir ine acc6unts
receivable are merely used as collateral for the loan, the transaction
is only a simple loan, and the lender is not subrogated as creditor
until there is a default and the collateral is foreclosed (lbid.).
2. Gashier's, Manager's or Certified Ghecks
Payment by even a certified check, which is not regar tender,
cannot support a valid tender of payment (Roman vs. tRC, tgt
scRA 411).
since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itseli
NEGOTIABLE INSTRUMENTS LAW 745
rrlrerate as payment (Sec. 189, NIL; Art. 1249, Civil Code; Bryan vs.
Arnerican, 7 Phil. 255; Tan, v. Santos, I Phil. 44; Citibank vs'
ii;rbeniano, 504 SCRA 378)
A cashier's or manager's check is really the bank's own check and
rrny be treated as a. promissory note with the bank as the maker.
llre check becomes the primary obligation of the bank which issues
ll and constitutes a written promise to pay upon demand' The
ogurt takes judicial notice of the "well-known and accepted practice
trr the business sector that a cashier's check is deemed as cash."
llris is because the mere issuance of a cashier's check is
lonsidered acceptance thereof (BPl vs. Roxas, 536 SCRA 168).
A manager's check is an order of the bank to pay, drawn upon
llrielf, committing in effect its total resources, integrity and honor
lxrhind its issuance. By its peculiar character and general use in
ri()mmerce, a manager's check is regarded substantially to be as
1lood as the money it represents. A manager's check stands on the
nirme footing as a certified check (Equitable vs. Ong, 502 SCRA
I 19), which is deemed to have been accepted by the bank that certified
ll (Security vs. RCBC, 577 SCRA 407).
As the banks own the check, a manager's check becomes the
||rirnary obligation of the bank and is accepted in advance by the act
of
rl,r issuance (lbid.).
A manager's check is similar to a cashier's check both as to effect
rrn(l use. A cashier's check is a check of the bank's cashier on his
own or another check (lnternationalvs. Gueco, 351 SCRA 516).
While it is true that in general, a manager's check is not legal
krnder, the creditor has the option of refusing or accepting it, and
lriryment in check by the debtor may be acceptable as valid, if no
lrrornpt objection to said payment is made (Pabugais vs. Sahijwani,
,r7:i scRA 596).
a. lf Used for Redemption in Foreclosures
Redemption by a mortgagor using a bank manager's check of a
r rrrrmercial banking corporation cannot be refused by the
r
rrrortgagee, as said method has already been sanctioned by the
r nrrrts (Co vs. PNB, 114 SCRA 842).
146 NEGOTIABLE INSTRUMENTS LAW
2. Uncleared Gheck Paid by Foreign Bank
Payment of checks by a foreign bank without previously clearing
checks with the drawee bank is contrary to normal or ordinary
practice especially where the drawee bank is a foreign bank and the
amounts involved are large and bars recovery (Banco vs. Auditor,
81 SCRA 335).
The collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements. The rule finds more meaning where the check
involved is drawn on a foreign bank and therefore collection is more
difficult than when the drawee bank is a local one even though the
check in question is a manager's check (BPlvs. CA, supra).
I Crossing
4. Ghecks Drawn on Banks Under Liquidation
A separate action against a bank under liquidation to compel it to
honor a check to pay an obligation to it is not maintainable. The
action should be filed with the court where liquidation proceedings
have been filed by the Central Bank through the Solicitor General
(Hernandez ys. Rural Bank, 81 SCRA 75).
G. Crossed Checks
l.Defined
The Negotiable lnstruments Law is silent with respect to crossed
checks, although the Code of Commerce makes reference to such
instruments. A check with two parallel lines in the upper left hand
corner means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates to
the mode of payment, meaning that the drawer had intended the
check for deposit only by the rightful person, i.e., the payee named
therein. The crossing may be "special" wherein between the two
parallel lines is written the name of a bank or a business institution,
in which case the drawee should pay only with the intervention of
that bank or company, or "general" wherein between two parallel
diagonal lines are written the words "and Co." or none at all, in which
cdse the drawee should not encash the same but merely accept the
same for deposit (BA vs. Associated, 588 SCRA 51)
NEGOTIABLE INSTRUMENTS LAW 147
A crossed check (a) may not be encashed but only deposited in
llre bank; (b) may be negotiated only once to one who has an
rrr;count with a bank; and (c)warns the holder
-that it has been issued
krr a definite purpose so that the holder thereof must inquire if he has
rrrceived the check pursuant to that purpose; otherwise, he is not a
lrolder in due course. (Dino vs. Judal-Loot, 618 SCRA 383)
8ar Quesfio n: What ls a crossed check? (2005 Bar)
Answer: A crossed check is a check which in addition to the usual
r;ontenfs of an ordinary check contains also the name of a certain
Itnnker or busrness entity through whom it must be presented for
ltnyment. The banker's or entity's name is usually stamped across
llrc face of the check.
2. How Made
a check is a good precaution when the check is
hrrwarded by mail in payment of an obligation, or sent to an agent for
llro payment of specified obligations. The crossing will ward off
orrcashment by unauthorized persons.
The payee of a crossed check should not encash the check but
rrlruuld deposit it to his account (State vs. lAC, 175 SCRA 310)
lf it was not the payee who presented the same for payment, there
w/rs no proper presentment hence the liability did not qttach to the
rlrirwer (State vs. lAC, suPra).
When a bank pays a crossed check on the indorsement of a
txlrson not the payee, it did so at its peril and became liable to the
lrrryrle for the value of the check. This liability attaches whether or
rrol the bank was aware of the unauthorized indorsement
(Ar;sociated vs. CA, 208 SCRA 643).
lhe crossing of a check should put a bank on guard (Traders vs.
t{t,N, 390 SCRA 608).
I lre crossing of a check with the phrase "Payee's Account Only"
trr rr warning that the check should be deposited in the account of the
prry()o. lt is the collecting bank which is bound to scrutinize the
, lror;k and to know its depositors before it can make the clearing
Inrkrrsement, "all prior indorsements and/or lack of indorsement
urrirritttteed (Metrobank vs. PBCom, 536 SCRA 556).
 148 NEGOTIABLE INSTRUMENTS LAW
Petitioner argues that respondent drawee bank should not have
honored the checks because they were crossed checks. lssuing a
crossed check imposes no legal obligation on the drawee not to
honor such a check. lt is more of a warning to the holder that the
check cannot be presented to the drawee bank for payment in cash,
lnstead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank in
the course of normal banking transactions between banks
(Gempesaw vs. CA, 218 SCRA 682).
The crossed check cannot be presented for payment, but it can
only be deposited and the drawee bank"may only pay to another
bank in the payee's or indorserrs account (Citibank vs. Sabeniano,
504 SCRA 378).
Crossing of checks puts the holder on inquiry and upon him
devolves the duty to ascertain the indorser's tifle to the checks or the
nature of his possession (Bataan vs. CA, 230 SCRA 643).
Bar Question: lllustrate a crossed check. (1g65 Bar)
Answer:1f n i t a Ba nki ng
"orOo#::;"
June 15, 1970
Pay to Pedro Roe or order the sum of One Hundred pesos Only
(Ploo'oo)'
, John Doe
Bar Question: Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint which Jose promised to
deliver. Jose so/d and negotiated the check to Excet lnc. at a
discount. Excel did not ask Jose the purpose of crossing the check.
Srnce Jose failed to deliver the newsprint, po ordered the drawee
bank to stop payment on the check.
Efforts of Excel to collect from Po failed. Excel wants to know
from you as counsel:
a. What are the effects of crossing a check?
b. Whether as second indorser and holder of the crossed check,
it is a holder in due course?
c. Whether Po's defense of lack of consideration as against Jose
is a/so available as against Excel? (1996, 1gg4 Bar)
Answer: (a) The effects of crossing a check are as follows: (a) the
check may not be encashed but only deposited in a bank; (b) the
NEGOTIABLE INSTRUMENTS LAW 149
t ltttt;k may be negotiated only once --- to one who has an account
wtltt a bank; and (c) the act of crossing a check serves as a warning
ht llrc holder that the check has been issued for a definite purpose
nrt tlrat he must inquire if he has received the check pursuant to that
,rlrl)ose (Traders vs. Radio, 390 SCRA 608)'
(b) No. Excel is not a hotder in due course because the check
wrr,.i crossed, hence, issued fora specific purpose. Excel did not
lnho the check in accordance with said purpose, hence, it cannot be
a lttilder in due course.
(t) Yes. Po can set up the defense of lack of consideration
Irrrr;r)use Excel is not a holder in due course-
Ear Question: On March 1, 1996, Pentium Company ordered a
t rurrputer from CD Bytes, and issued a crossed check in the amount
ril l'30,000.00 postdated March 31, 1996. Upon receipt of the check,
(;l) Byfes discounted the check with Fund House-
On April 1, 1996, Pentium stopped payment of the check for
luthre of CD Bytes to detiver the computer' Thus, when Fund House
rhtlxtsited the check, the drawee bank dishonored it.
lf Fund House fttes a complaint against Pentium and CD Bytes
Ittr lhe payment of the dishonored check, willthe complaint prosper?
I 4ilain. (1996,1995 Bal
Attswer: The comptaint against petitioner witt nott prosper. Fund
I ftruse is not a hotder in due course, not having checked the purpose
htt lhe lssuance of the check, which was crossed. Being a holder
tttil in due course, Pentium can set up the defense of lack or failure
rl tonsideration against Fund House.
llrtt the complaint against cD Bytes will prosper because the latter
wrrs the immediate endorser of the check.
llnr Question: Mr. Pablo sought to borrow P200,000.00 from Mr'
(:.r,/os. The tafter agreed to loan the amount in the form of a
1nr;lrlated check which was crossed (i.e. two
parallel lines
rlttttlonally drawn on the top portion of the check). Before the due
of t'he check, Mr. Pabto discounted it with Mr. Noble. On due
rlttlitt
Mr. Nobte deposited the check with his bank' The check was
rlttltt,
rlr:;lxtnored. Mr. Nobte sued Mr. Pablo. The court dismissed Mr'
Nrr/r/c. s comptaint. Was the court decision correct? (1991 Bar)
Answer: The court's decision dlsmlssrng the case was correct'
A crossed check may not be encashed but only deposited with a
ltttnk. when a bank pays a crossed check on the indorsement of a
tntt:;on, not the payee, lf does so af ifs peril, and becomes liable to
150 NEGOTIABLE INSTRUM ENTS LAW CHAPTER V t5l

the payee for the value of the check. This liability of the bank INSURANCE CODE
attaches whether or not the bank was aware of the unauthorized
indorsement. I Laws Governing Insurance
Bar Question: Distinguish clearly (1) crossed checks from A. Principal Law
cancelled checks. (2004 Bar)
lhe principal law on insurance is the
lnsurance Code,
Answer: A crossed check has two parallel lines on the upper teft
lrrrrrrrulgated as P.D. 612 on December 18, 1974. Since that date,
hand portion thereof. A cancelled check has the word "cancelled,,on llrer r;ode has gone through five major amendments.
check A crossed check may still be negotiated, but
the face of the
only once, to one who has an account.. with the bank, white a llren, on June 11, 1978, P.D. 1460 was promulgated,
cancelled check cannot be negotiated. A crossed check may only be r'rrrrrrolidating P.D. 612 (lnsurance Code of 1974) with the
deposited and not encashed, while a cancelled check cannot ba nrrrondatory decrees and executive orders into a single code now
deposited nor encashed (See Bataan vs. CA, 230 SCRA 643). hrrown as the lnsurance Code of 1978.

Itre latest amendment to the lnsurance Code is B.P. 874

e;rlrroved on June 12,1985

llofore December 18, 1974, the lnsurance Law of the Philippines

wrrn Act 2427 , which took effect on July 1 , 1915. This law itself was
arrlrjected to amendments, the last being P.D. 63, which took effect
rrrr November 29, 1972. Act 2427, as amended, repealed the
tnnirrance provisions of the Code of Commerce of 1888.

Ar1 2427 was taken verbatim from the lnsurance Law of

t,rrlihrnia. Most of the insurance concepts of that law are retained
lry 1).D. Decree No. 1460, the new lnsurance Code, hence, decisions
nl California courts on insurance have a persuasive effect on courts
trr llrc Philippines.

B. Supplementary Laws

lhe supplementary laws are found in (1) the Civil Code (Arts. 789,
,'{)ll, and 2012), (2) Act 2573 on Mutual lnsurance on Work
Arrrrrrals, (3) R.A. 8291 (Government Service. lnsurance Act of
l,11l/), (4) R.A.656 (Property lnsurance Law), (5) R.A.8282 (Social
f ,rrr;rrrit! Act of 1997), (6) R.A. 3124, on lndustrial Life lnsurance, (7)

l' l) 317 on lnsurance Cooperatives, and (8) P.D. 1467 ' as

R.A. 8175, on Crop lnsurance.
'ilil()nded by
Article 2011 of the Civil Code expressly provides that insurance
r orrlracts shall be governed by special laws, i.e., the lnsurance Code
llhrirs vs. Maramag, 588 SCRA 774).
I52 INSURANCE CODE
ll. Nature of lnsurance
A. Concepts Defined
1. Gontract of lnsurance
A contract of insurance is an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. A contract of
suretyship is an insurance contract if the surety is doing an insurance
business (Sec. 2 [1], lnsurance Code; Philamcare vs. CA, 329 SCRA
356).
An insurance contract exists where the following elements concur:
(1) The insured has an insurable interest; (2)The insured is subject
to a risk of loss by the happening of the designated perit; (3) The
insurer assumes the risk; (4) Such assumption of risk is part of a
general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and (5) ln consideration of the
insurer's promise, the insured pays a premium (Philamcare vs. CA,
supra)
Where there was no perfected contract of insurance, the insurer
cannot be held liable on the contract that does not exist (DBp vs.
cA, 231SCRA 37d).
There are certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only
participation of the other party is the signing of his signature or his
"adhesion" thereto. lnsurance contracts, bills of lading, contracts of
sale of lots on installment plan fall into this category. lt is sought to
be accepted or adhered to by the other party, who cannot change
the same and who are thus made to adhere thereto on the 'take it or
leave it' basis (Ruiz vs. CA, 401 SCRA 410). .
It is an established rule in insurance contracts that when their
terms contain limitations on liability, they should be construed stricfly
against the insurer. These are contracts of adhesion the terms of
which must be interpreted and enforceQ stringenfly against the
insurer which prepared the contract (Blue vs. Olivares, 544 SCRA
590).
INSURANCE CODE 153
While it is a cardinal principle of insurance law that a policy or
rurrtract of insurance is to be construed liberally in favor of the
Inrrrrred and strictly as against the insurer company, yet, contracts of
hrtrrrrance, like other contracts, are to be construed according to the
snrrse and meaning of the terms, which the parties themselves have
uaod. lf such terms are clear and unambiguous, they must be taken
errrl understood in their plain, ordinary and popular sense (Lalican
vn lnsular, 597 SCRA 159).
Irr contracts of adhesion, the parties do not bargain on equal
lrxrting, the weaker party's participation being reduced to the
elhrrnative to take it or leave it. Thus, these contracts are viewed as
Ilrps for the weaker par:ty whom the courts of justice must protect.
(irxrsequently, any ambiguity therein is resolved against the insurer,
nr r:onstrued liberally in favor of the insured (Gulf vs. Phil. Charter,
4rrll SCRA 550).
An insurance contract should be so interpreted as to carry out the
lrrrl)ose for which the parties entered into the contract which is to
Irrnure against risks of loss or damage to the goods. Limitations of
lhrbility should be regarded with extreme jealousy and must be
r,urrstrued in such a way as to preclude the insurer from
rrurrcompliance with its obligations (DBP vs. Radio, 480 SCRA 314)-
ln insurance cases, once an insured makes out a prima facie case
tn lls favor, the burden of evidence shifts to the insurer to controvert
llro insured's prima facie case. An insurer who seeks to defeat a
r lirlrn because of an exception or limitation in the policy has the
lrrrrrlen of establishing that the loss comes within the purview of the
oxr:option or limitation (lbid.).
lhe test to determine if a contract is an insurance contract or not
'hrlronds on the nature of
the promise, the act required to be
;rnrlormed, and the exact nature of the agreement in the light of the
or(;rrrrence, contingency, or circumstances under which the
;rrrlormance becomes requisite. lt is not bywhat it is called (White
v" l)ioneer, 464 SCRA 448).
2. Doing or Transacting an lnsurance Business
I lre term "doing an insurance business" or "transacting an
tnf ,rrrilnce business" includes:
l) Making or proposing to make, as insurer, any insurance
r I rntfact:
 INSURANGE CODE 155
154 INSURANCE CODE

2) Making or proposing to make, as surety, any contract of

suretyship as a vocation, not as a mere incident to any other A mutual life insurance company is conducted for the benefit
of its
premiums'
legitimate business of the surety; rlrrrrrber-policyholders, who pay into its capital by way of
3) Doing any other insurance business like reinsurance and lrr llrat extent, they are responsible for the payment of all its losses.
similar acts; and llro cash paid in for premiums and the premium notes constitute
ln the event that the company itself fails before the
4) Doing or proposing to do any business equivalent to the above ilrotr assets.
(Sec. 2 [2], lnsurance Code). lnrrrrs of the policies expire, the member-policyholders do not acquire
for
llrr status of creditors. Rather, they simply become debtors
The lnsurance Code of 1978 is very clear on what constitutes an agreed pay the
wlrrrlever premiums that they have originally .to-
insurance company. lt provides that an insurer or insurance r nnrpany, it tn"y have not yef paid those amounts in
full' for mutual
company "shall include all individuals, partnerships, associations or lrrrrpanies depend solely upon premiums' Only when.the premiums
corporations xxx engaged as principals in.the insurance business, pay for
wtll irave accumulated to a sum larger than that required to
excepting mutual benefit associations." ,,,,,'1,uny losses will the member-policyholders be entitled to a "pro
rnlrr tlivision thereof as profits." (lbid.).
lnsurance companies and lending investors are different
enterprises in the eyes of the law. Lending investors cannot, for a oontributing to its capital, the member-policyholders are obviously
consideration, hold anyone harmless from loss, damage or liability, nlno its o*n"-rs. They not only contribute to the
payment of its
nor provide compensation or indemnity for loss. The underwriting of hrlrios, but are also entjtled to a proportionate share and participate
risks is the prerogative of insurers, the great majority of which are altko in its profits and surplus (lbid.).
incorporated insurance companies.
Unlike the practice of lending investors, the lending activities of
Wheretheinsuranceistakenatcost,,itisimportantthattherates
insurance companies are circumscribed and stricfly regulated by the
nl premium charged by a mutual company be larger than might
Irlrt$onably ue expected to carry the insurance, in order to constitute
State. lnsurance companies cannot freely lend to "themselves or a mutual
u ,i,,irgin of safety. This course of action is taken because
others" as lending investors can, nor can insurance companies grant solely upon its premiums to
,',,'r,1,Jny has notapital stock and relies
simply anf t<inO of loan. Even prior to 1978, the lnsurance Code and expenses (lbid')'
prescribed strict rules for the granting of loans by insurance ,,,,,,,i ,nl*p"cted losses, contingencies
companies. These provisions on mortgage, collateral and policy
liharing in the common fund, any member-policyholder. may
loans were reiterated in the lnsurance Code of 1g7B and are still in
rlur11se to withdraw dividends in cash or to apply them in order
to
force today (Commissioner vs. Phil. American, 453 SCRA 66S). insurance, or
|trrlrrr;e a subsequent premium, purchase additional
nr r;rrlrtrate the payment period (lbid')'
Bar Question: What is a mutual insurance company or association?
(2006 Bar)
llre so-called dividend that is received by member-policyholders
Answer: A mutual life insurance corporation is a cooperative that lstttttaportionofprofitssetasidefordistributionstothe of
qtor;kholders in proportion to their subscription to the capital stock
promotes the welfare of its own members. lt does not operate for
profit, but for the mutual benefit of its member-policyhotders. They llrn r;orporation. One, a mutual company has no capital stock to
wlrtr;lr subscription is necessarY; there are no stockholders
to speak
receive their insurance at cost, while reasonably and property does not
guarding and maintaining the stability and sol,vency of the company.
nl lrrrt only members. And, two, the amount they receive
prrrlrrko of ihe nature of a profit or income' The quasi-appearance of
The economic benefits filter to the cooperative members. Either
irrollt will not change its character. lt remains
an overpayment' a
equally or proportionally, they are distributed among members in is equitably entitled (lbid.).
i,err,fit to which the member-policyholder
correlation with the resources of the association utilized (See
Republic vs. Sunlife, 473 SCRA 129).
ll|(r main difference between a Health Maintenance organization
(llM())andaninsurancecompanyisthatHMosundertaketo
156 INSURANCE CODE INSURANCE CODE 157

provide or arrange for the provision of medical services through

participating physicians wh ile insurance com panies sim ply u ndertake n: ln a sate of land on the installment plan, the contract
Hrr Quesfio
to indemnify the insured for medical expenses incurred up to a pre. lrrrrvtrlrr.sthat in case of the death of the vendor before the
agreed limit (Phil. Health vs. Gommissioner, 600 SCRA 413) t tilt1tlt,lion of all the installment payments, the vende.e's
tqnrtst;ntatives or hls heirs could either complete payment and
The mere presence of risk would be insufficient to override the trtrntvu the titte to the tand from the vendor or rescind the contract
primary purpose of the business to provide medical services ag atnl rttr:over back payments made. /s fhls an insurance contract?
needed, with payment made directly to the provider of these rJ,vr, ,oAsons. (1968 Bar)
services. ln short, even if the HMO assumes the risk of paying the
cost of these services even if significantly more than what the Answer: There is no insurance contract in the problem for several
member has prepaid, it nevertheless cannot be considered as being rfirrr;(,,r.s.' Firstty, the vendor does not have any ceftificate to be an
engaged in the insurance business. tn\ut.n Secondly, the death of the vendee does not vest in his heirs
trtty rt11ht to indemnity. The only right given to them is to continue the
By the same token, any indemnification resulting from the t rutlttx;t or to rescind with right to reimbursement-assignment rights
payment for services rendered in case of emergency by non-
wlrh:lt they possess as helrs, with or without the contract with the
participating health providers would still be incidental to the HMO's
tttrnhil.
purpose of providing and arranging for health care services and doeg
not transform it into an insurer. To fulfill its obligations to its B. Characteristics of lnsurance Contract
members under the agreements, the HMO is required to set up a
system and the facilities for the delivery of such medical services. ll ls basic that all the provisions of the insurance policy should be
This indubitably shows that indemnification is not its sole object. Enrlrined and interpreted in consonance with each other. All its parts
arrr roflective of the true intent of the parties. The policy cannot be
Even if a contract contains all the elements of an insurance nrrrilrued piecemeal. Certain stipulations cannot be segregated and
contract, under Section 2(1) of the lnsurance Code, if its primary llrnrr made to control; neither do particular words or phrases
purpose is the rendering of service, it is not a contract of insurance. character (Gulf vs. Phil. Charter, 458 SCRA
ner ossarily determine its
It does not necessarily follow, however, that a contract containing all h,rl ))
the four elements mentioned above would be an insurance contract.
The primary purpose of the parties in making the contract may Har Question: What are the characterlsfrcs of an insurance
negate the existence of an insurance contract. For example, a law r trtlritct? Explain each characteristic briefly. (1970 Bar)
firm which enters into contracts with clients whereby in consideration
of periodical payments, it promises to represent such clients in all Atnrwer: An insurance contract has the foltowing characteristics:
suits for or against them, is not engaged in the insurance business. (r) a predominant factor;
tt is ateatory - chance is
Its contracts are simply for the purpose of rendering personal
1lt) tt is voluntary - it depends on the willingness of the parties to
services. On the other hand, a contract by which a corporation, in :tttlttt itlto it,
consideration of a stipulated amount, agrees at its own expense to (:) lt is executory - the insurer merely promises to pay when the
defend a physician against all suits for damages for malpractice is tt',h ,illaches;
one of insurance, and the corporation will be deemed as engaged in (t) lt is synaltagmatic - both parties have reciprocal obligations of
the business of insurance. Unlike the lawyer's retainer contract, the ,tr1rriil value to each other;
essential purpose of such a contract is not to render personal (,,) /f ls compensatory - because generally actual /oss or
services, but to indemnify against loss and damage resulting from tl(ilnitqe only is compensated;
the defense of actions for malpractice (lbid.).
1l) lt is a contract of perfect good faith for both parties;
(q) tt is personal - it binds only the parties to it and their
rri:;lt;llees.
158 INSURANCE CODE
1. Aleatory
lnsurance is an aleatory contract whereby one undertakes for a
consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event.
Bar Question: Luis was the holder of an accident insurance policy
effective November 1, 19BB to October 31, 1989. At a boxing
contest held in January 1, 19Bg and sponsored by his employers, he
slipped and was hit on the face by his opponent so he fell and his
head hit one of fhe posfs of the boxing ring. He was rendered
unconscious and was dead on arrivai at the hospitat due to
" i ntracran i al he morrh ag e. "
Can his father who is beneficiary under said insurance policy
successfully claim indemnity from the insurance company? Explain
your answer. (1990 , 1975 Bar)
Answer: Yes, the father can claim indemnity as the designated
beneficiary in the policy.
A boxer entering a ring does not expect to die from his act. Hls
slipping, with his head hitting one of the posts, is accidental, and
therefore covered by his accident insurance policy.
2. Voluntary, as a General Rule
Under the new contract of "compulsory insurance" introduced by
R.A. 4'119 to the Workmen's Compensation System, the insurance
company is liable for compensation payments regardless of
conditions incorporated in the policy limiting its coverage to certain
named locations, classes of employees, or specified operations, in
view of the fact that we follow the "full coverage" rule in compulsory
insurance (Manila vs. Workmen's, 34 SCRA 68).
This compulsory insurance concept exists also in the motor
vehicle liability insurance under Sec. 373 of the Code.
Where the insurance contract as a Motor Vehicle lnsurance
provides for indemnity against liability to a third party, such third
party can directly sue the insurer. Such a provision (pour autrui)
creates a contractual relation which inures to the benefit of any and
every person who may be negligently injured by the narned insured
as if such injured person were specifically named in the policy (First
vs. Hernando, 199 SCRA 796).
INSURANCE CODE 159
llre general purpose of statutes enabling an injured person to
;rtor;ced directly against the insurer is to protect injured
persons
Hurrinst the insolvency of the insured who causes such injury, and to
glvo such injured person a certain beneficial interest in the proceeds
ll llrc. policy, and statutes are to be liberally construed so that their
Itrlorrtjed purpose may be accomplished (Shafer vs. RTC, 167 SCRA
tlil i)
the insurer assumed the
lrr a third party liability vehicle insurance,
llrlllyation of paying the injured third party to whom the insured is
llslrkr. The insurer becomes liable as soon as the liability of the
Irrnrrrod to the injured third person attaches. Prior payment by the
Innrrred to the injured third person is not necessary in order that the
llrlllyation of the insurer may arise. From the moment that the
Irrrirrrcd became liable to the third person, the insured acquired an
Inhrrost in the insurance contract, which interest may be garnished
llhn irny other credit (Perla vs. Ramolete, 203 SCRA 487)'
Aar Question: Are the heirs of a taxicab driver covered by an
hriltrance poticy issued by an insurance company entitled to an
Irnhnnnity after having recovered compensation under the
Wrtrkmen's Compensation Law, because the policy in question
r rtttlained a stiputation that "the company will indemnify any
rtttllnrized driver provided that such authorized driver is not entitled
Irt rrxlemnity under any other policy? (1970 Bar)
Answer: Yes, the heirs of the driver are entitted to recover. The
r rtrt<litiorl imposed in the policy is null and void, because prior
tttr:tNery by the driver's heirs on the Workmen's Compensation
Itt:;rttitnce is a recovery under a "compulsory insurance", a concept
rttlrtxluced by the Workmen's Compensation Law. The second
iu',urance being compulsory, recovery under it cannot be'a limitation
ht ;rrty other insurance which may have been procured by an
tt t"t lt cd.
3. Uberrima Fides (Perfect Good Faith) Gontract
I lre contract of insurance is one of perfect good faith (uberrima
llrlrx;) not for the insured alone, but equally so for the insurer; in fact,
rl r:; rnore so for the latter since its dominant bargaining position
r;uros with it a stricter responsibility (Fieldmen's vs. Vda' de
',, r)(tco, 25 SCRA 70).

160 INSURANCE CODE
4. Personal
Contracts take effect only between the parties thereto, except
some specific instances provided by law where the contract containg
some stipulations pour autrui or a provision in favor of a third person
not a party to the contract. Under this doctrine, a third person ie
allowed to avail himself of a benefit granted to him by the terms of
the contract, provided that the contracting parties have clearly and
deliberately conferred a favor upon such person. Consequently, a
third person, not a party to the contract, has no cause of action
against the parties thereto, and cannot generally demand the
enforcement of the same (Bonifacio vs. Mora, 20 SCRA 261).
lf there is no condition in the policy that an action should be filed
by the insured against the agent for his claim, the filing of such action
has no legal effect and serves no other purpose except that of
notifying the agent of the claim. There is no law giving an effect to
such action upon the principal, and courts cannot by interpretation
extend the clear scope of the agreement beyond what is agreed
upon by the parties (Ang vs. Fulton, 2 SCRA 945).
An insurance contract provision for prior arbitration before resort
to court action applies only where the insurer disputes his liability,
not where it totally disclaims liability (Bayview vs. Ker, 116 SCRA
327).
lnsurance is a contract of indemnity. An insurance is the law
between the parties, its terms and conditions constitute the measure
of the insurer's liability and compliance therewith is a condition
precedent to the insured's right to recovery from the insurer
(Verendia vs. CA, 217 SCRA417).
C. Classes of lnsurance
1. Life insurance - dependent upon human life
2. Non-life insurance, which may be
a. Fire insurance
b. Marine insurance
c. Casualty insurance
d. Suretyship
e. Compulsory motor vehicle liability insurance
Retirement insurance is primarily intended for the benefit of tho
employee-to provide for his old age, or incapacity, after rendering
INSURANCE CODE l6l
anrviss in the government for a required number of years. lf the
ulrlrloyee reaches the age of retirement, he gets the retirement
lrnrrcfit even to the exclusion of the beneficiaries named in his
in
nlrplication of insurance. The beneficiary of the retirement insurance
rtrrr only claim the proceeds of the retirement insurance if the
ornlrloyee dies before retirement. lf the employee failed or
rvrrrlooked to state the beneficiary of his retirement insurance, the
rrrllrt:ment bejnefits will accrue to his estate and will be given to his
ln1;irl heirs in accordance with law.
lhe beneficiary in a life insurance of an employee does not
rltlornatically become the beneficiary in the retirement insurance
rrrrkrss the said person is so designated in the application for
rnlrrement insurance (Vda. de Consuegra vs. GSIS, 37 SCRA 315).
A health care agreement is in the nature of non-life insurance,
wlrrr;h is primarilya contract of indemnity. Once the member incurs
lrnripital, medical or any other expense arising from sickness, injury
rrr other stipulated contingent, the health care provider must pay for
llro same to the extent agreed upon under the contract (Philamcare
vrr CA, 379 SCRA 356)
D. What May be lnsured Against
1. A Future Contingent Event Resulting in Loss or Damage
lhis is illustrated by a fire insurance or life insurance where the
is made to depend on the happening of an
ltrrlrility of the insurer
nvurrt (destruction by fire of the insured building or death of the
trr:;trred) in the future
l-he word "loss" in the lnsurance Law embraces injury or damage.
A krss may be total or partial (Bonifacio vs. Mora, supra).
2. A Past Unknown Event Resulting in Loss or Damage
llar Question: What past event may be insured? Give example.
1t!)59 Bar)
Answer: A past event the happening or non-happening of which is
trr*trcwn to the parties at the time of the peffection of the contract
rrtity be insured against. Ihis is illustrated in marine insurance
wlxtre at the time the policy is executed, fhe vesse/ subject of the
 162 INSURANCE CODE
insurance.may have already sunk, but that fact was unknown to tha
parties at the time of the execution of the poticy.
Bar Question: The agent in Davao of the insured "A,' was emptoyed
to ship "A's" copra to Manila and to communicate the shipment to ths
buyer "A" in Manila. The said agent wrote the owner of the copra
annauncing the sailing of the ship, but failed to state that the shlp
had run aground, which fact he atready knew before announcing thtc
sailing. "A", the buyer of the copra, in att good faith, took out a llrr; lnsurance Commissioner.
marine insurance on the copra. The copra was badty damaged and
was a total loss. Can the insured recover on the poticy? Reason.
(1979 Bar)
Answer: No, the insured cannot recover under the poticy.
A past event, unknown to both parties at the time the insuranco
was procured, may be insured against, and recovery thereon may ba
had if the terms of the policy coyer /oss of this nature.
However, in the above, the past event (the grounding of tho
yesse/ and consequent damages to the copra) was not entirely
unknown to the insured (the owner of the copra), his buying agent in
Davao having had knowledge of the grounding.of the vesseT even
before the owner procured insurance on the copra, which information
his agent failed to relay to him. His agent's knowtedge is equivalenl
to knowledge by him of the grounding, the past event insured
against.'
Besrdes, nothing is mentioned in the problem that the insurance
would cover a past event whether or not the subject mafter existed.
3. Contingent Liability
This is best illustrated in reinsurance where the liability of the
insurer is in turn insured by him with a second insurer. This is also
true in workmen's compensation lnsurance and Employer's Liability
lnsurance.
Bar Question: ls the insurer liabte for forluitous event? (Answer
yes or no, then give reasons). (1962 Bar)
Answer: Yes, the insurer is liable for fortuitous event. By its very
nature, the liability of the insurer aftaches on the happening of a
contingent event insured against, and that event shoutd have
happened without intervention in any manner by the insured. An
insurance contract ls one involving an assumption of risk by the
insurer.
INSURANCE CODE 163
E. Parties to an lnsurance Contract
1. The lnsurer
The insurer is the person who undertakes to indemnify another by
ir contract of insurance, and may be a natural person, company,
r:orporation, or association who holds a certificate of authority from
2. The lnsured
Generally, any person with capacity to contract and having an
Irrsurable interest in the life or property insured may be the insured.
a. Minors
A minor under certain circumstances may be an insured, and can
uxercise all the rights and privileges of an owner under the policy.
lf a policy is taken by a person on the life or health of a minor, the
procured
lrolicy vests in the minor on the death of that person who
llre policy (Sec. 3, lnsurance Code).
Bar Question: May a minor contract for tife, heatth and accident
trtsurance? Explain fully. (1953 Bar)
Answer: A minor may contract for life, health and accident
iltsurance underthefoltowing conditions: (a)he must be at least 18
yt:ars old; (b) the insurance rs on his life; (c) the beneficiary is his
rr.stafe, his parents, his spouse, children, brothers orsisfers.
(Note: A person 18 years or above now has contractual capacity
rrrrder R.A. 6809, hence cannot be considered a minor).
Bar Question: Who may be appointed as beneficiaries in a life
1 I years old? (1 946 Bar)
tttsurance poticy taken by a minor,
Answer: The fottowing may be designated as beneficiaries to a life
iltsurance taken by a minor: hls esfafe, his wife, his children, his
rrrtfther, his father, his brothers and his sisters.
(Note: A person 18 years or above now has contractual capacity
rrrrder R.A. 6809, hence cannot be considered a minor).
t64 INSURANCE CODE
b. Married Woman
A married woman may take insurance on her life or on that of her
children, without need of her husband's consent (Sec. 3, lnsurance
Code).
Under Sec. 5 of R.A. 7192, women, single or married, now have
the same contractual rights as men in entering into insurance
contracts.
c. Public Enemy
A public enemy cannot be insured. By public enemy is meant
any citizen or juridical entity of the country with which the Philippines
may be at war.
Bar Question: May a member of the Moro Islamic Liberation Front
(MILF) or its breakaway group, the Abu Sayyaf, be insured with a
company licensed to do business under the lnsurance Code of tha
Philippines (P.D. 1460)? (2000 Ba)
Answer: Yes, a member of the MILF or the Abu Sayyaf may be
insured. The prohibition pertains to a public enemy, who is meant to
be arry -citizen or judicial entity of the country with which the
Philippines may be at war with them.
Such rs not the case at bar, members of the MILF or the Abu
Sayyaf being citizens of the Philippines and not of another country,
hence, may still be insured.
3. The Beneficiary
The beneficiary is the person designated to receive the proceeds
of the policy when the risk attaches. He may be the insured himself
in property insurance, or the insured or a third person in lifs
insurance.
It is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the
insured is already deceased, upon the maturation of the policy
(Heirs vs. Maramag, 588 SCRA 774).
INSURANCE CODE 16s
a. Beneficiary of One Who Insures His Own Life
The insured who insures his own life, as a general rule, may
rlesignate any person including his estate as his beneficiary, whether
or not the beneficiary has an insurable interest in the life of the
lrrsured. The insured shall have the right to change his designation
of beneficiary, unless he has expressly designated an irrevocable
beneficiary in his policy.
Bar Question: ls it necessary for a beneficiary to have. an insurable
urterest in the life of the insured? (1949 Bar)
Answer: lf the policy is taken by the insured on his own life, the
beneficiary designated by him need not have an insurable interest in
llrc life of the insured.
Where the policy is taken by a third person not the insured, on
llte life of the insured, and said third person desrgnafes himself at the
lrcneficiary, he (the third person) must have an insurable interest on
lhe life of the insured, at the time the policy became effective.
Bar Question: Blanco took out a Pl million life insurance policy
rtaming his friend and creditor, Montenegro, as his beneficiary.
When Blanco died, his outstanding loan obligation to Montenegro
was only P50,000. Blanco's executor contended that only P50,000
out of the insurance proceeds should be paid to Montenegro and the
balance of P950,000 should be paid to Blanco's esfafe. ls the
cxecutor's contention correct? Reason out your answer. (1987 Bar)
Answer: The executor's contention is not corre.ct. When a person,
like Blanco, took out a P1 million insurance on his life, he can, under
lhe law, designate any person, provided not disqualified to become a
<lonee to him, to be his beneficiary to his life insurance.
It is not necessary for the beneficiary thus designated to have an
irtsurable interest in the life of the insured nor is it necessary that the
beneficiary thus designated should be an heir or should be related to
lhe insured. Hence, in the provision, Montenegro would be entitled
lo the whole P1 million proceeds of the policy.
Bar Question: Assuming a man has a wife, several children, some
legitimate, others illegitimate (spurious as well as natural) and a
close friend who has helped him in hls busrness very much and
whom he would like to repay. Can he make all or any of them the
beneficiary or beneficiaries in his insurance policy? (1969 Bar)
166 INSURANCE CODE
Answer: Yes, he can designate all of them as his beneficiaries,
Beneficiaries designated by the insured are not required to have any
insurable interest on his life.
Bar Question: A obtains insurance over his tife and names'his
neighbor B the beneficiary because of A's secref love for B. lf A
dies, can B successfully claim against the policy? (1997 Bar)
Answer: Yes, B can successfully claim against the policy of A. As a
general rule, the insured who insures his own life may designate any
person including hls esfafe as his beneficiary, whether or not the
beneficiary has an insurable interest in the life of the insured
provided the beneficiary is not disqualified under the rules on
donation. As B is only a secret love and not a concubine of A, B is
not disqualified.
The proceeds of a life insurance policy belong to the designated
beneficiary to the exclusion of the heirs of the insured (Picar vs.
GS|S, 33 SCRA 324).
The father or mother of a minor who is an insured or beneficiary in
a life policy, may exercise, for said minor, all rights under the policy
up to P20,000 without need of a court authority or a bond (Sec. 180,
lnsurance Code).
1. Exceptions to the General Rule - Persons Disqualified
. as Beneficiaries
The only exceptions are found in Article 739 of the Civil Code,
consisting of persohs disqualified from giving donations to each
other. These are: ('1) between persons guilty of adultery or
concubinage; (2) between persons found guilty of adultery or
concubinage in consideration thereof; and (3) those made to a public
officer, his wife, ascendants or descendants, by reason of his office.
A beneficiary in life insurance is like a donee; hence, the
provisions on the disqualifications of a donee under the Civil Code
applies to a beneficiary to the life insurance of the common-law
husband as she is disqualified under Article 739 of the Civil Code to
be his donee (lnsular vs. Ebrado, 80 SCRA 181).
Bar Question: Eduardo Fernandez applied for and uras issued
Policy No. 0777 by Atlas Life lnsurance Corporation on a whote tife
plan for P200,000.00. Although he was married to Clara, with whom
INSURANCE CODE t67
trtt ltrttl five (5) legitimate children, he designated his common-law-
*+tlo, l)iana Cruz, as his revocable beneficiary in the policy, and
rrlatttxt to Diana, in his application and policy, as his wife. Five (5)
letat:; lhereafter, he died. Diana immediately filed her claim for the
,rror:r,r,ds of the policy as the designated beneficiary. Clara also filed
Ilor t:ltim as legal wife. The insurance company filed a Petition for
Itrle'rlfunder before the Regional Trial Court of Rizal to determine
wlrt :;ltould be entitled to the proceeds of the policy.
ll ytnt were the judge, how would you decide the said interpleader
*tt thtn'/ Explain. (1998,1985, 1981, 1962, 1955 Bar)
Answer: lf I were the judge, I rgvill resolve the interpleader action in
lnvtn of the legitimate wife, Clara, and her five legitimate children
wtllt llro insured.
l)ttrtta Cruz, insured's common-law-wife, /s disqualified as
lwtrtlrr:iary to the insured's life policy reason for the
tltaltttrlification being her living in concubinage- thewith the insured
rlrtrlt4y his lifetime. A beneficiary in life insurance is like a donee, and
et rhrne disqualified by the Civil Code is a/so disqualified to be the
Itntn{iciary in life insurance.
Ilnre being no qualified beneficiary, the proceeds of the policy
wlll 11o to the legal heirs of the insured - his legitimate wife, Clara and
ltlh llvo children with Clara.
2. Vested Right of Beneficiary
Fnl Quesfio n: "A" took an insurance on his own life, appointing his
wtht "f)" as beneficiary. During the battle of Manila, "A" died a few
rrrrrrrrc,nts after "8". Who are entitled to the insurance proceeds?
1ltl,l0 Bar)
Anxwer: The heirs of "8", the beneficiary wife, will be entitled to the
yrr'rr;rrr.'ds of the policy. The designation here, being irrevocable,
llntt,r heing no reseruation to revoke by the insured of the
rltt:;rtlrration, vested in "8" a right to the insurance from the time of
r',';rto of the policy.
(l.l rkr Under the new lnsurance Code, the designation of
lrnrrcliciary in a life policy is revocable unless the insured expressly
;rrovrrkls that it is irrevocable.)
llrr Question: On December 20, 1974, "A" took out a life insurance
1xiltr:y and named his wife "8", as beneficiary. The policy was silent
wrllr togard to any change of beneficiary. Suspecfrng that "8" was
ottrttrilting adultery, "A" immediately notified the insurance company
'
 l6N INSURANCE CODE
in writing that he is substituting his brother "C" as his beneficiary in
place of "8". "A" died on June 30, 1975. "8" claims the proceeds ol
the insurance policy, contending that as designated beneficiary, she
cannot be changed without her consent, she having acquired a
vested right to the proceeds of the policy. Decide and give reasons
for your answer. (1988, 1978 Bar)
Answer: The policy was taken on December 20, 1g74, when the
New lnsurance Code was already in effect. lJnder this Code, the
designation of a beneficiary to a life insurance policy taken by a
person on his life is revocable, unless he (the insured) expressly
waived his right to change beneficiaries.
As there is no express reseruation not to change beneficiaries in
the policy, the change made by the insured A, constituting C as his
beneficiary operated to revoke the designation of B.
Hence, 8 does not have any right to ctaim the proceeds of A,s
policy as she was no longer the beneficiary when A the insured died
on June 30, 1975.
The vested interest or right of the beneficiaries in a life insurance
policy should be measured on its full face value and not on its cash
surrender value, for, in case of death, the beneficiaries may continue
paying the same and they are entitled to automatic extended term on
paid up insurance options, etc.. Said vested right under the policy
cannot berdivisible at any given time (Nario vs. philam, 20 SCRA
434).
A beneficiary designated in a GSIS life policy is governed in his
rights by the GSIS law. While generally, a designated beneficiary is
entitled to the whole proceeds of the insured's policy, in a GSIS
policy, the law makes the proceeds liable to attachment, garnishment
and other legal processes, when obligations or indebtedness to the
GSIS and the employer, that is, the governmenl, is concerned (picar
vs. GSIS, supra).
3. lrrevocable Designation
Bar Question: What are the effects of an irrevocable designation of
a beneficiary under the lnsurance Code? Exptain. (2005 Bar)
Answer: lf the designation of beneficiary is irrevocabte, the insured
cannot (1) assign the policy, (2) take the cash surrender value of the
policy, (3) allow his creditors to attach or execute on the policy, (4)
add a new beneficiary, or (5) change the irrevocable designation to
INSURANCE CODE 169
tpwx;able, even though the change is Tusf and reasonable- Ihis ls
crt lxtcause the irrevocably designated beneficiary and his heirs have
ar rlttired from the date of the policy vested rights over the policy
liiw Philam vs. Pineda, 175 SCRA 416)
A person who insures his own life may designate his beneficiary
rtrvrx;ably or irrevocably.
I rrr the designation to be irrevocable, the insured should
erprr:ssly state the irrevocable designation in the policy itself (Sec.
I l, lrrsurance Code).
Hnr Quesfio n: Jacob obtained a life insurance policy for P1 million
rkx;rtnating irrevocably Diwata, a friend, as his beneficiary' Jacob,
lntwL'ver, changbd his mind and wants Yob and Joio, his other
Ithttxls, to be inctuded as beneficiaries considering that the proceeds
tl lttc policy are sufficient for the three friends'
oun Jacob stitl add Yob and Joio as his beneficiaries? (2005 Bar)
Answer: The addition of two other beneficiaries would diminish
l,twrrfa's interest, consequently,Jacob can only add Yob and Jajo as
lnttoficiaries if Diwata consenfs to the same. Ihls is due to the
Ittrtvt'tcable designation of Diwata as Jacob's beneficiary'
A creditor bank as attorney-in-fact of the insured and as
Irrrrvocable beneficiary of the insured had the obligation to collect
flrrrrr the insurer. lf it failed to do so after the lapse of a considerable
prrrrod of time, it is barred from enforcing the obligation of the insured
(l'NB vs. CA, 158 SCRA 201).
4. Distribution of Proceeds of Policy if Premiums Paid
from Salaries
a. Where a Specified Person is Beneficiary
llnr Question: "A" took out a P30,000.00 life insurance policy and
,tut:;nrlated his wife, "8" as the sote beneficiary' All the premiums in
tlnt ltolicy were paid out from hls sa/aries. The spouses have three
1 t) ctrildren, "X", "Y" and "2".
"A" died intestate.
;t. Divide the proceeds of the policy.
h tn the sa/ne case, suppose "A", instead of designating his wife
,r';.,;rrle beneficiary, designated his child "X" only as so/e beneficiary?
/irrir.son out your answers. (1961 Bar)
 170 INSURANCE CODE
Answer: (a) All of the proceeds of the poticy wilt go to the
designated beneficiary, "8". The source of the premium here is
immaterial.
(b) All of the proceeds of the policy here witt go to "X,', tha
designated beneficiary. The source of the premium again is
immaterial.
b. Where the Estate of the lnsured is the Beneficiary
Bar Question: When are the proceeds of a tife insurance policy
considered conjugaleven though the policy was made payabte to the
decedent's estate? (1951 Bar)
Answer: Even though the proci;eeds of a life insurance poticy were
made payable to the decedenf's esfafe, said proceeds are stitt
conjugal if the premiums are paid (1) from salaries of the insured or
(2) from other conjugalfunds or properties.
Bar Question: "2" during his marriage to y, obtained a tife
insurance policy for P10,000.00. payable to his estate. premiums
thereon were paid from his salary as a teacher. White the policy was
in effect, Z died survived by Y and two children, A and B. How would
you generally apportion the proceeds of the policy? (1g48 Bar)
Answer: The proceeds of the policy are conjugal.
So, it will be divided as follows:
P5,000 or 1/2 of the proceeds to Y, as y's conjugal share.
The remaining P5,000 to be divided into three, as follows:
Pl,666.67 to Y, as her share as heir of X; p1,666.67 to A, as hls
share as heir of X; and Pl,666.67 to B, as hr's share as heir of X.
While it is true that under general principles in the law on
insurance, if a policy provides that the proceeds shall be payable to
the insured, if he lives up to a certain date, and in case of his death
before that date, then they shall be payable to the beneficiary
designated, the benefit of said policy will inure to such beneficiary in
case the assured dies before the end of the period designated in the
policy, and, generally, that the proceeds of a life insurance while a
third person is named beneficiary belong exclusively to such
beneficiary as an individual; they are not the property of the heirs of
the insured, are not subject to administration, and cannot properly be
claimed by the administrator or other legal representative of the
insured as assets of his estate.
INSURANCE CODE t7t
Where the deceased married for a second time without the
aerond wife knowing of the existence of the first marriage of the
rlnr:oased, the proceeds of his life insurance policy, where no
lrerrgficiary was designated, will be divided equally between his two
larrrilies (Vda. de Consuegra vs. GSIS, 37 SCRA 315).
c. Beneficiary of Life lnsurance on the Life of
Another Person
Where life insurance is procured by a person over the life of
qll)tller, the former must have an insurable interest in the life of the
lallor as specified by law, at the time the policy was taken.
d. Beneficiary of Property lnsurance
Ilre beneficiary of a property insurance must have an insurable
Irrlorest over the subject matter of the insurance existing at the time
llrn policy was taken, and at the time the loss took place.
Har Question: A obtains a fire insurance on his house and as a
Lfttnrous gesture names his neighbor as the beneficiary. lf A's
Irrril.se is destroyed by fire, can B successfully claim againsf fhe
1xiltt:y? (1997 Bar)
Answer: No, B cannot successfully claim against the policy because
ttt ltroperty insurance, the beneficiary must have an insurable interest
rvttt the subject of the insurance existing at the time the policy was
Itrlr,t,tt, ottd at the time fhe /oss took place.
F. Insurable lnterest
1. lnsurable lnterest Defined
llar Quesfio n: Define insurable interest' (1965 Bar)
Atrswer: tnsurable interest is every interest in property, whether real
rtr ltorsotlol, or any relation thereto, or liability in respect thereof, of
'trt:lt nature that a contemplated peril might directly damnify the
ttt:;ttred (Sec. 13, lnsurance Code; See Galsano vs. lnsurance, 490
:;oRA 286).
llar Quesfio n: BD has a bank deposit of half a million pesos. Srnce
tlttr limit of the insurance coverage of the Philippine Deposit
Itt:;rtrance Corporation Act (R.A. 3591) is only one tenth of BD's
 172 INSURANCE CODE
deposit, he would like some protection for the excess by taking out
an insurance against all risks or contingencies of loss arising from
any unsound or unsafe banking practices including unforeseen
adverse effects of the continuing crisis involving the banking and
financial sector in the Asian region. Does BD have an insurable
interest within the meaning of the lnsurance code of the philippines
(P.D. 1460)? (2000 Bar)
Answer: Yes. The Philippine Deposit lnsurance Corporation Act as
amended by R.A.7400 has a liabitity onty up to p100,000 per
deposit, hence BD has insurable interest in his bank deposit more
particularly to the excess of the PDIC coverage, or the amount of
P400,000, in case of any unforeseen crisis rn the bank.
(Note: Under R.A. 9576, coverage under the pDlC has been
increased to P500,000.00 per deposit.)
An insurable interest is one of the most basic and essential
requirements in an insurance contract. ln general, an insurable
interest is that interest which a person is deemed to have in the
subject matter insured, where he has a relation or connection with or
concern in it, such that the person will derive pecuniary benefit or
advantage from the preservation of the subject matter insured and
will suffer pecuniary loss or damage from its destruction, termination,
or injury by the happening of the event insured against. The
existence ef. an insurable interest gives a person the legal right to
insure the subject matter of the policy of insurance. Section 10 of the
lnsurance Code indeed provides that every person has an insurable
interest in his own life. section 19 of the same code also states that
an interest in the life or health of a person insured must exist when
the insurance takes effect, but need not exist thereafter or when the
loss occurs (Lalican vs. lnsular, 597 SCRA 157)
2. Insurable lnterest in Life
a. Defined
Bar Question: What is insurable interest in life? (1966 Bar)
Answer: lnsurable interest in life is the interest which a person has
in his life, or the
interest wHich he may have in the tives of other
persons (1) on whom he depends wholly or in paft for education or
support, (2) under legal obligation to him to pay money, to deliver
property, or to render service, (3) upon whose life any estate or
interest vested in him depends.
INSURANCE CODE 173
b. lnsurable lnterest in One's Life
I vory person has an insurable interest in the life and health of
lrnurolf (Philamcare vs. CA, 379 SCRA 356)
c. lnsurable lnterest in the Life of Others
Far Question: When may there be an insurable interest in the life of
iunillter? Dlscuss briefly. (1966 Bar)
Anrwer: A person may have an insurable interest in the life of
tut(tllrcr in the following cases.'
(d Of any person on whom he depends wholly or in part for
.llttt:tttion or support. Example: Wife insuring the husband's life'
(ll Of any person under a legal obligation to him for payment of
nh,ttoy, or respecting property or service, of which death or //ness
rtttrtlil detay or prevent performance. Example: A creditor insuring
lll" Iifc of its general manager. A buyer insuring the life of the seller
til tuilay promised to be delivered in the future.
() Of any person upon whose life any estate or interest vested
nt liltn depends. Example: Legatee of a usufruct insuring the life of
llttt ttsufructuary on whose death the usufruct will be extinguished.
I ln Problem.' Sorne busrnessme n with an available starting capital
hlttllittg onty Pl00,000.00 ask you to help organize a business firm'
t,ttltytct to tegal limitations, they have future plans to invite alien
turvrrslors who are agreeable to rendering financialassisfance by way
ril tltrect investments and/or loans. Your professional assistance is
*ill:ited on the following various guesflons that may arise:
llar Question: An insurance agent contracts the manager of your
lirrrt lo sett life and property insurance. Your advice is sought on the
l,ilhwing matters:
Mtty your firm at lts expense insure the life of its manager with a
lttrtvisiofi that the insurance proceeds shall be paid to the company
t,rr! ltis heirs in equal proportions? Why? (1973, 1965 Bar)
Atrswer: Yes, my firm may insure at its expense fhe life of its
nttttilxler, it having an insurable interest on the servrces of the said
ntttnt\Jer to the firm, whose death or //ness would materially and
rttlrttiottsly affect the corporation. The provision on the contract that
lltt' l)roceeds shatt be equatly divided between the company and the
lnttt:: of its manager is valid, the company having an insurable
 174 INSURANCE CODE
interest as before stated, being entitled to the insurance proceeds.
The same insurable interest may be said to exist in favor of the heirs.
The grant by the firm to the heirs of the manager of one half of the
proceeds of the policy can be justified by the implied powers of a
corporation, if it is a corporate entity.
Bar Question: On Juty 14, 1985, X, a hotmosexual, took an
insurance policy on the life of his boy friend, y. ln the insurance
application, X misrepresented that Y was in perfect health atthough
he knew all the time that Y was afflicted with AIDS. On October 18,
1987, Y died in a motor accident. Shorily thereafter, X fited his
insurance claim.
Should the insurer pay? Reasons. (1987, 1946 Bar)
Answer: No, the insurer should not pay because it has no liabitity
under the policy taken.
A person may insure the life of another provided the former (the
one taking the policy) has an insurable interest in the life of the
person insured.
That insurable interest exists only jn the following cases..
(a) Over the life of a person upon whom he depends for
education or support;
(b) Over the life of a person under a legat obtigation to pay him
money, to deliver property, or to render service;
(c) Orer the life of a person up.on whose life any estate or
interest vested in him (the one procuring the poticy) depends.
A person does not have an insurable interest in the tife of another
who is a mere friend - friendship alone not falting under any one of
the th ree categories above-stated.
Hence, the insurer is not liable because of the absence of
insurable interest by the one who took the life policy over the tife of
the person whose life.was insured.
X is a/so guilty of misrepresentation that Y was in pertect health,
hence the insurer is not liable.
Bar Question: A lender of money, not licensed as an insurance
company, exacted from each borrower as part of the loan
agreement, an amount sufficient to pay, and with it did pay, the
premium on a policy of the life insurance on a borrower's tife issued
by a licensed insurance company. The loan agreement provided
that in case of death of the borrower, the debt woutd be paid out of
the proceeds of the life insurance. Could the tender be prosecuted
for doing insurable busrness without the corresponding certificate of
authority? Explain your answer. (1g68 Bar)
INSURANCE CODE 175
Answer: The tender in the problem is not acting as an insurer hence
thxts not need any ceftificate of authority from the lnsurance
r,rxnmlssion. He therefore cannot be prosecuted for doing insurance
lrrrsirtess.
Better stitt, the money lender has an insurable interest in the lives
rl ltis borrowers, to the extent of the amount each of them owes him.
lhtrce, his act of requiring each of the borrowers to procure life
tnt;trance, for an amount equivalent to the debfs, and making him
llrt beneficiary up to the extent of these debfs, is allowed by law.
d. Purpose of lnsurable lnterest in the Life of Others
Har Question: What is the purpose of the law in requiring that the
tnt;ttred must have an insurable interest in the life of the person
ttt:ttred? (1949 Bar)
Answer: The purpose of the law in requiring that the person
ptx;ttring the insurance must have an insurable interest in the life
ttt:;rred is to take off all temptation to destroy the life of the insured
,rr(;rruse of his tife insurance. This also prevents the contract from
lnxxtming a wagering contract.
e. When lnsurable lnterest Should Exist
lrr life insurance, it is sufficient that the insurable interest over the
llhr of another exist at the time the insurance is taken.
tlnr Question: When must insurable interest exist? (1967, 1965 Ba)
Answer: tn tife insurance over another's life, it must exist at the time
llnt itrsurance is taken.
hr property insurance, the insurable interest must exist at the time
llttt irtsurance is taken, and when the /oss occurs, but need not exist
ttt llrc meantime.
llnr Question: On January 4, 1983, Mr. P ioined Alpha Corporation
1At1iln) as President of the Company. Alpha took out a life
tn:;utance poticy on the life of Mr. P with Mutual Life lnsurance
t .t,ntpany, designating Atpha as the beneficiary. Alpha also carried a
Ittu i11s117sr"e with Beta lnsurance Company on a house owned by it,
ltrtl lemporarity occupied by Mr. P, again with Alpha as the
luttl1sfi5lur.
t)n September 1, 1983, Mr. P resigned from Alpha and purchased
tlttt t:ompany house he had been occupying. A few days later, a fire
175 INSURANCE CODE
occurred resulting in the death of Mr. P and the destruction of the
house.
What are the rights of Alpha (a) against Mutual Life lnsurance
Company on the life insurance policy? (b) against Beta lnsurance
Company on the fire insurance? (1984 Bar)
Answer: Alpha has a right to recover from Mutual Life the proceeds
of the life insurance policy taken by Alpha on the life of P.
While it is true that the basis for the taking by Alpha of insurance
on the life P was the service P would render as President to Alpha
and while it is equally true that P died after he resigned from Alpha,
the rule in life insurance taken on the life of others is that the
insurable interest on said tife must exist onty at the time the
insurance was taken. A subsequent termination of the relationship
from which the insurable interest arises will not affect the policy.
Alpha cannot recover against Beta lnsurance on the fire insurance
since at the time of /oss, Alpha was no longer the owner of the house
because P already bought it when he resigned. Hence, Alpha had
no insurable interest over the property at the time of /oss. ln property
insurance, insurable interest must exist at the time the insurance is
taken and when the /oss occurs, but need not exist in the meantime.
f. lnsurable lnterest in Life lnsurance and in Property
lnsurance Compared
Bar Question: Distinguish insurable interest in life from insurable
interest in property. (2002, 1961 Bar)
Answer: The differences between insurable interest in life insurance
and in propefty insurance are:
(a) ln life insurance, the insurable interest must exist only at the
time the policy is taken; in property insurance, that interest musf exlst
at the time the policy is taken and at the time fhe /oss occurs.
(b) ln life insurance taken on the insured's life, his beneficiary
need not have an insurable interest on his (insured's) life; in property
insurance, the beneficiary must have an insurable interest in the
propefty insured.
(c) ln life insurance over one's life, there is no limit to the amount
of insurable interest. ln property insurance, insurable interest is
limited to the actual value of the interest in the property.
Bar Question: IS, an elderly bachelor with no known relatives,
dbtained life insurance coverage for P250,000.00 from Starbrite
lnsurance Corporation, an entity licensed to engage in the insurable
INSURANCE CODE 177
l,r/ri/,ress under the lnsurance Code of the Philippines (P.D 1460).
l/rr rrlso insured his residential house for twice that amount with the
4ann) corporation. He immediately assigned all his rights to the
nt:iutance proceeds to BX, a friend-companion living with him. Three
yntus later, /S dled in a fire that gutted his insured house two days
afltr he had sold it. There is no evidence of suicide or arson or
ttwrilvement of BX in these events. BX demanded payment of the
tutilrance proceeds from the two poticies, the premiums for which lS
lnd been faithfully paying during all the time he was alive. Starbrite
ru/rr,sed payment, contending that BX had no insurable interest and
llrntofore was not entitled to receive the proceeds from /S's
tntitnance coverage on his life and also on his property. /s Sfarbrifeb
t rtrtlontion valid? Explain. (2000 Bar)
Arrrwer: Starbrite's contention is not vatid as to the life insurance.
ltX trced not have insurable interest on the life of lS to be a
Itettutficiary in an insurance taken by lS on his own life. Starbrite
trtrtsl therefore pay BX the life insurance proceeds.
Slarbrite's contention, however, is valid as fo the property
ttritttonce. BX, a mere friend-companion, does not have insurable
ll,,r,()sf on the property insured. Starbrite therefore can refuse to
ptty BX the property insurance proceeds.
3. lnsurable lnterest in Property
a. What it Consists of
Arr insurable interest in property does not necessarily imply a
prolxlrty interest in, or a lien upon, or possession of, the subject
nritllor of the insurance, and neither the title nor a beneficial interest
ta rorlrisite to the existence of such an interest; it is sufficient that the
rn,rrrr{}d is so situated with reference to the property that he would be
ltrrlrkr to loss should it be injured or destroyed by the peril against
wlrtr:lr it is insured. Anyone has an insurable interest in property who
rl'rtvcs a benefit from its existence or would suffer loss from its
,lrr';lrrrction (Gaisano vs. lnsurance, 490 SCRA 286).
llur stipulation in Section 14 of the lease contract that the
,'rprprrrent shall be insured at the cost and expense of the lessee
illrunst loss, damage, or destruction from fire, theft, accident, or
r'llror insurable risk for the full term of the lease, is a binding and
vrrlrr I stipulation. The lessee has an insurable interest in the
r!,lurl)nlent and motor vehicles leased. Section 17 of the lnsurance
r rrrhr proVides that the measure of an insurable interest in property
178 INSURANCE CODE
is the extent to which the insured might be damnified by loss or injury
thereof. lt cannot be denied that the lessee will be direcfly damnified
in case of loss, damage, or destruction of any of the properties
leased (Ong vs. FEB, 524 SCRA 333).
" Irrrrrse, because the policy of A over the house was assrErned to him
Bar Question: lnsurance: What is considered as an insurable
interest in property. (1951 Bar)
Answer: lnsurable interest in property is every interest in property
whether real or personal, or any relation thereto, or liability in respect
thereof, of such a nature that the contem.plated peril might direcily
cause damage to the insured.
Bar Question: What does insurabte interest in property consisf of.
Explain your answer. (1967, 1953 Bar)
Answer: An insurable interest in property may consist of: (a) An
existing interest; (b) An inchoate interest founded on an existing
interest; and (c) An expectancy coupled with an existing interest in
that out of which the expectancy arises.
b. Examples
Bar Question: "A" owns a house valued at P50,000.00 which ha
had insur€d against fire for P100,000.00, and to secure payment
thereof he executed a deed of mortgage on the house, but without
assigning the insurance policy to the latter. For "A's" failure to pay
the loan upon maturity, "8" initiated foreclosure proceedings and in
the ensuing public sale, the house vyas so/d by the sheriff to "8" as
highest bidder. lmmediately upon issuance of the sheriff's certificate
of sale in his favor, "8" insured the house against fire for
Pl20,000.00 with another insurance company. ln order to redeem
the house, "A" borrowed P100,000.00 from "C" and, as a security
device, he assigned the insurance policy of p100,000.00 to 'C".
However, before "A" could pay "B" his obligation of p100,000.00, the
house was accidentally and totally burned.
Does "A", "8" or "C" have any insurable interest in the house?
May "A", "8" and "C" recover under the policies? lf so, how much?
(1982 Bar)
Answer: A, the owner of the house still has an insurable right to the
property - his right of redemption, which however was not the subject
of insurance at the time of the loss, A having assigned the policy to
C.
INSURANCE CODE r79
l), the lender - mortgagee's insurable interest in the house
r rrrr.slsfs of his conditional right to become owner if the house is not
ttthrcmed by A within the redemption period.
o, as lender of P100,000 to B, has an insurable interest in the
l(:)
A cannot recover under his fire policy because at the time of the
ltro, he had already assigned the policy to C.
ll can recover under his fire policy, but the recovery cannot be up
ht llls 1tt. value of the policy. The admitted true value of the house
t:, l'50,000 only, which amount an insured can recover if he is the
alt:;olute owner. The insurable interest of B in the house is not his
tnil right as mortgagee, but his being highest bidder at auction, to
lru:ome owner of the house, if the mortgagor fails to redeem. The
v(iltrc of this right certainly cannot be an amount more than what an
alt:xtlute owner can recover (P50,000).
o cannot recover under the policy assrgned to him because there
rrr rx) assenf of the insurer to the assignment.
6ar Quesfio n: Give an example of an insurable inchoate right in the
ltt
(,1)erty. (1 955 Bar)
Answer: The following are the examples: lnchoate interest founded
t,n itn existing interest: (a) Contractor's interest to the completed
lttttkting for unpaid construction cost; (b/ Lessors interest on
lntl,tovements made by /essee; and (c) Naked owner's interest
ttvot property over which another person has beneficial title.
llnr Question'. A owns a house worth P500,000.00. He insured it
nr;rrrrsf fire for P250,000.00 for the period from January 1, 1977 to
ltuntitry 1, 1978. At the instance of B, who is a judgment creditor of
A llrc said house was levied upon by the sheriff and sold at public
,ur:lion on March 15, 1977. lt was adjudicated to B for Pl50,000 at
tlnt itttction sale. B insured the house against fire for Pl50,000.00
Irr lltc period from March 16, 1977 to March 16, 1978. The house
wit:: ttccidentally burned on April 1, 1977.
tt May A recover under his policy? Give reasons.
lr May B recover under his policy? Give reasons. (1977,1947
ll,rr )
Atrswer: (a) Yes, A the owner may recover under his policy. The
rtt,,rtrirble interest of A on the house is his ownership over it.
This
rtr,;tttirble interest existed inspite of the sale at auction of the house
180 INSURANCE CODE
on March 15, 1977, because the property, being real property, A, the
owner, still had a one year period of redemption.
(b) Yes, B, the buyer at auction, may recover under his policy. He
has an inchoate right founded on an existing right, hence, an
insurable interest in A's house, even while the period of B'g
redemption was running, up to the extent of P150,000, the amount B
paid at the auction.
Bar Question: "X", a general creditor to "Y", insured the latter's
property because the destruction of such property would render
wofthless any judgment he might obtain agalnst hls sard debtor. /s
such contract of insurance valid or not? Why? (1965 Bar)
Answen No, the contract is not valid. "X", the general creditor of
"Y", has no insurable interest in any of the specific properties of "y"
because his expectant interest is not founded on any actual right to
the thing nor upon any valid contract for it.
Bar Question: Ciriaco /eased a commercial apartment from
Supreme Building Corporation (SBC). One of the provisions of the
one-year lease contracf sfafes;
"18. x x x The LESSEE shall not insure against fire the chattels,
merchandise, textiles, goods and effects placed at any stalt or store
or space in the leased premrses without first obtaining the written
consent of the LESSOR. /f fhe LESSEE obtains fire insurance
coverage without the consent of the LESS OR, the insurance policy is
deemed assrgned and transferred to fhe LESSO R for the latter's
benefit."
Notwithstanding the stipulation in the contract, without the consent of
SBC, Ciriaco insured the merchandise inside the teased premises
against /oss by fire in the amount of P500,000.00 with First united
I nsurance Corporation (F U I C).
A day before the lease contract expired, fire broke out inside the
leased premises, damaging Ciriaco's merchandise. Having learned
of the insurance earlier procured by Ciriaco, SBC demanded from
FUIC that the proceeds of the insurance policy be paid direcily to it,
as provided in the lease contract. Who is legally entiiled to receive
the insurance proceeds? Explain, (2009 Bar)
Answer: Ciriaco is legally entitled to the proceeds of the insurance.
It is Ciriaco, as /essee, who has insurable interest over the chattels,
merchandise, textiles, goods and effects, even if the premises
wherein such merchandise is placed r's /eased. SBC has no insurabte
interest over the same, although he has a separate and distinct
INSURANCE CODE 181
rrt,,rtr irble interest over the premises. ln case of /oss, therefore, of
aetkl tloods, it is Ciriaco who should receive the proceeds of the
tn2utnnce notwithstanding the provision in the /ease contract.
llnt hrcurer cannot be compelled to pay the proceeds to a person
w/ro has no insurable interest in the property The liability of the
tnritned for violating their lease contract in that he obtained a fire
tu:iutivtce policy over their own merchandise, without the consent of
lltet owner of the leased premises, is a separate and distinct issue
liitut Cha vs. CA, 277 SCRA 690). SBC cannot be entitled to the
tn\tilitnce proceeds because it has no insurable interest in the
arrltytct matter of the insurance.
Her Question: A, a widower sixty years old, owns various houses.
llo r/oes not believe in insurance. B ls his only son. Does B have an
ur:trable interest in those houses? (1960 Bar)
Answer: No, B does not have an insurable interest in any of the
,rlr/.sos of A, his father. He does not have any actual property right
t1 lt,y of the properties of his father during the latter's lifetime to
r rtrrstitute as an insurable interest over the same.
Har Question: Juan insures agarnsf fire the property of his friend
I ur.s /s this policy valid. Explain. (1946 Bar)
Answer: No, the policy is not valid. Juan does not have any
nxr:;ling interest, nor even any expectancy on the thing founded on
rttr oxisting right to the thing. Hence, he does not have any insurable
/rrlrrrcst over the thing.
llar Quesfion: JQ, owner of a condominium unit, insured the same
rrr;rrirrsffire with XYZ lnsurance Co., and made fhe /oss payable to
Itt:; brother, MLQ. ln case of /oss by fire of the said condominium
rrrtrl, who may recover on the fire insurance policy? State the
rrrrr.son(s) for your answer. (2001 Bar)
Answer: JQ can recover on the fire insurance policy because as
ttwtft)r, he has insurable interest over the property' MLQ cannot
tt,t:over on the fire insurance policy because he does not have
ttt:;rrable interest on the property.
A non-life insurance policy such as the fire insurance policy taken
,vur merchandise is primarily a contract of indemnity. lnsurable
rnkrrest in the property insured must exist at the time the insurance
l,rkcs effect and atthe time the loss occurs (Section 19). The basis
t82 INSURANCE CODE
of such requirement of insurable interest in property insured is based
on sound policy: to prevent a person from taking out an insurance
policy on property upon which he has no insurable interest and
collecting the proceeds of said policy in case of loss of the property.
ln such a case, the contract of insurance is a mere wager which is
void under Section 25 of the lnsurance Code (Cha vs. CA, supra).
The vendee-consignee of goods in transit under a perfected
contract of sale is vested with an equitable title to the goods even
before receipt by him of the goods to constitute an insurable interest
in property (Filipino vs. CA, 179 SCRA 638).
Bar Question: A piece of machinery was shipped to Mr. Pablo on
fhe basls of C & F, Manila. Mr. Pablo insured said machinery with
the Tataga Merchants lnsurance Corp. (TAMIC) for /oss or damage
during the voyage. Ihe vesse/ sank en route to Manila. Mr. Pablo
then filed a claim with TAMIC which was denied for the reason that
prior to delivery, Mr. Pablo had no insurable interest. Decide the
case. (1991 Bar)
Answer: Even before the receipt by Mr. Pablo of the machinery he
bought, he has an equitable title to the said machinery, which
cOnstitutes his insurable interest.
Mr. Pabto can therefore claim from TAMIC the proceeds of the
insurance policf on said machinery.
c. When lt Must Exist
Bar Question: ln a civil suit, the Court ordered Beniie to pay Nat
P500,000.00. To execute the iudgment, the sheriff levied upon
Benjie's registered property (a parcel of land and the building
thereon), and sold the same at public auction to Nat, the highest
bidder. The latter, on March 18, 1992, registered with the register of
deeds the certificate of sale lssued to him by the sheriff. Meanwhile,
on January 27, 1993, Beniie insured with Garapal lnsurance for
P1,000,000.00 the same building that was so/d at public auction to
Nat. Benjie failed to redeem the property by March 18, 1993.
On March 19, 1993, a fire razed the building to the ground.
Garapat lnsurance refused to make good its obligation to Beniie
under the insurance contract.
a. ls Garapal lnsurance legally iustified in refusing payment to
Benjiel
b. /s Naf entitled to collect on the insurance policy? (1994 Bar)
INSURANCE CODE I83
Answer: (a) Yes, Garapal lnsurance is iustified in refusing payment
to Benjie because Benjie had no insurable interest at the time of /oss
since he failed to redeem the same by March 18, 1993. Even if he
has insurable interest at the time the policy was rssued, he had no
incurable interest at the time of /oss.
(b) Nat is not entitled to collect on the insurance policy because
he had no insurable interest at the time the policy was issued. He
was not the owner then. The transfer of the property to him did not
automatically transfer to him the insurance thereon.
Bar Question: On February 3, 1987, while Jose Palacio was in the
hospital preparatory to a heart surgery, he called his only son, Boy
Palacio, and showed the latter a will naming the son as so/e heir to
all the father's esfafe including the family mansion in Forbes Park.
The following day, Boy Palacio took out a fire insurance on the
Forbes Park mansion. One week later, the father died. After his
father's death, Boy Palacio moved his wife and children to the family
mansion which he inherited. On March 30, 1987, a fire occurred
razing the mansion to the ground. Boy Palacio then proceeded to
collect on the fire insurance he took earlier on the house.
Should the insurance company pay? Reasons. (1987 Bar)
Answer: The insurance company should not pay because it is not
liable under the fire policy taken by Boy Palacio.
ln property insurance policies, like fire insurance, it is necessary
that the insured (who also is the beneficiary as a general rule) should
have an insurable interest on the property insured, both at the time
the policy took effect and at the time fhe /oss took place.
While it is true that the insured Boy Palacio was owner of the
insured house when the fire accurred, he however, had no insurable
interest yet at the time he took out a fire insurance policy, as on the
said date, his father, Jose Palacio, owner of the house, was still
living. His having been designated in his father's will as sole heir did
not make him, Boy Palacio, owner of the house; neither did it create
for him any insurable interest in the house. The policy is therefore
null and void and cannot bind the insurer.
Bar Question: A insured against fire his ten-storey building on
Ayala Avenue, with X and Company for P5 million on September 1,
1970. He sold the building to B on September 20, 1970 for P6
million without endorsing the fire policy. On September 25, 1970, the
building was gutted by an accidentalfire.
a. Can A collect from X and Company the proceeds of the fire
policy? Reason.
184 INSURANCE CODE
b. Can B, as new owner of the building, collect the proceeds?
Reason.
c. Assuming that the building was mortgaged to Bank Y to secure
the debt of A for P4 mittion and the sa/e was made without the
knowtedge of Bank Y, would your answer be the sarne as in (a) and
(b)' above? Reason.
' d. Can Bank Y cottect from X and Company? Explain' (1972,
1971 Bar)
Answen (a) A cannot cotlect from X and Company the proceeds of
the fire poiicy because he had no insurable interest in the building at
the time the buitding was burned
(b) B, the new owner, cannot collect because he had no
insurabte interest at the time the policy uras rssued. The policy taken
by A on the building was not assrgtned to him when he (B) bought the
building from A.
(c) No, my answer witt not be the same' Bank Y which
. necessarily ls fhe assrgnee of the fire policy taken by A over the
buitding as reguired by banking laws, has an insurable interest (its
mortgige right) even if the buitding changes ownership without its
Xnoircage.- tts mortgage right, being real, attaches to the property
irrespective of ownership changes.
Bank y can collect the true value of the building (if a total
fill
toss)' which cannot exceed P4 million, the value of lfs insurable
interest.
d. Amount of lnsurance
Bar Question: Juan has a property worth Pl0,000.00. He insures it
against fire for P8,000.00. ln case of total loss, how much shall he
clorcct from the insurance? ln case of partialloss ln the amount of
P8,000.00, how much shatthe cottect? Explain. (9a6 Ba)
Answer: ln case of totatloss, he will collect the face value of the fire
policy
'witt - P8,000.00. tf the actualloss is partial at P8,000'00, then he
cottect onty the amount in proportion fo hls /oss if the policy is a
valued poticy. tn the probtem, he is entitled to collect 8/10 of
P8,000.00 or P6,400.00. Ihis is so because an owner of property
who insures the same for /ess than its true value is co-insurer for the
uninsured portion of the property if the policy is a valued one'
lf the'poticy is an open one, he can collect his actual partial loss
not exceieding the faCe value of the policy. ln the problem, he can
collect nis pa,ooo paftialloss, fhe amount being within the face value
of his policy.
INSURANCE CODE 185
Bar Question: A shipped 1,000 sacks of palay with an estimated
value of P10,000. He insured it for the same amount. On the way,
however, the entire shipment was damaged. Suppose that the
market price that it would have brought undamaged was Pl5,000 but
its market value in its damaged state was P7,500. How much can
the insured collect? (1970 Bar)
Answer: The insured can recover onty P5,000 or 1/2 of the face
value of the policy of Pl0,000, if the policy is a valued policy.
Where an owner under-insures his property, he acts as co-insurer
for the uninsured portion, hence, when a partialloss fakes place, the
value of said /oss is not fully recoverable from the insurer. Hrs /oss
is one-half of the true value of the property, hence, his recovery is
one half of the face value of his policy.
lf the policy is open, he can recover the full amount of his partial
loss provided it is within the face value. He can therefore recover
P7,500, his partial loss.
The Problem: Some busrnessmen with an available stafting capital
totalling only P100,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassisfance by way
of direct investment and/or loans. Your professional assisfance is
solicited on the following various questions that may arise.
Bar Question: An insurance agent contacts the manager of your
firm to sell life and property insurance. Your advice is sought on the
following matters:
Your firm's car worth P20,000.00 was insured against damage by
accidents for P30,000.00. lf the car was completely wrecked in a
collision, how much can your firm recover on the policy? Why?
(1973 Ba)
Answer: My firm can recover only the true value of the car of
P20,000, not the P30,000 face value of the policy. lnsurance
contracts, especially of the non-life variety, are contracts of indemnity
and the insured can only recover as maximum the true value of that
which he has /osf.
e. lnsurable lnterest in Mortgaged.Properties
The mortgagor has an insurable interest on his property as owner
up to the full value of his property, irrespective of any mortgage on
 INSURANCE CODE INSURANCE CODE r87
186

Answer: Being a mortgagee, Armando's insurable interest is up to

said property in general. The exception is in marine insurance
(Servicewide vs. CA, 256 SCRA 649).
the extent of his credit or up to 10 million pesos. However, in the
present case, he can only recover 5 million pesos from the insurance
he took from Second lnsurance Company. He may not recover from
The mortgagee's insurable interest is up to the extent of his credit
the insurance taken by Mario because the latter violated the contract
(rbid.).
of insurance when he intentionally stafted the fire. Where the
Each may take separate insurances over the same property up to
mortgagor takes insurance on the propertyin his own right making
the extent oi their respective insurable interests. The mortgagor may
fhe /oss payable to the mortgagee, the insurance is on the
take insurance on the property, and assign the same to the mortgagor's interest, and he (the mortgagor) continues fo be a party
to the contract, and any act of his which would avoid the policy, will
mortgagee; or constitute the mortgagee as beneficiary as his interest
thus avoid the policy.(See Seruicewide vs. CA, supra)
may appear (lbid.).

Where the mortgagor takes insurance on the property in his.own

1. Right of a Mortgagee as a Beneficiary
of lnsurance Policies with Subsequent
right making the loss-payable to the mortgagee, the insurance is on
Endorsements and Delivery
th-e mortgalor's interest, and he (the mortgagor) continues to be a
party to inJcontract, and any act of his which would avoid the policy,
It is settled that a mortgagor and a mortgagee have separate and
will ihus avoid the policy. Conversely, any act to be done by him, but
distinct insurable interests in the same mortgaged property, such that
done by the mortgagee, produces the same effect as if performed by
each one of them may insure the same property for his own sole
him (lbid.).
benefit. The intentions of the parties as shown by their
lf the mortgagor assigns the policy to the mortgagee with the contemporaneous acts must be given due consideration in order to
better serve the interest of justice and equity (RCBC vs. CA, 289
insurer,s assent, but the latter imposes new conditions on the
assignee, the acts of the mortgagor will not affect the assignee's
scRA 292).
rights (lbid.). * It is basic and fundamental that the first mortgagee has superior
rights over junior mortgagees or attaching creditors (lbid.).
where the chattel Mortgage does not authorize the mortgagee to
apply previous payments for the car to the insurance, the mortgagee
Section 53 of the lnsurance Code ordains that the insurance
nis io send notice to the mortgagor if it decides to convert any of proceeds of the endorsed policies shall be applied exclusively to the
the installments made by the latter for the renewal of the insurance
proper interest of the person for whose benefit it was made (lbid.).
(rbid.).

Bar Question: To secure a loan of P10 mittion, Mario mortgaged his

Bar Question: A businessman in the grocery busrness obtained
from First lnsurance an insurance policy for five million pesos to fully
building to Armando. ln accordance with the loan arrangements,
cover his stocks-in-trade from the risk of fire.
Marioltad the buitding insured with First lnsurance Company for P10
irmando as the beneficiary. Armando als_o took Three months thereafter, a fire of accidental origin broke out and
miltion, designating-the
building upon his own interest with Second completely destroyed the grocery including hls sfocks-ln-trade. This
an insuranie on
prompted the businessman to file with First lnsurance a claim for five
!nsurance company for P5 mitlion. The building was totally
million pesos representing the full value of his goods.
destroyed by fire, a perit insured against under both insurance
First lnsurance denied the claim because it discovered that at the
poticies. lt was subsequentty determined that the fire had been
'intentionatly
started by Mario and that in violation of the loan time of /he /oss, the stocks-in-trade were mortgaged to a creditor
agreemen{, he had been storing inftammable materials in the
who likewise obtained from Second lnsurance Company fire
insurance coverage for the sfocks at their full value of five million
b"uitding. Hiow much, if any, can Armando recover from either or both
pesos.
insurance comPanies? (2010 Bar)
 INSURANCE CODE INSURANCE CODE 189
188

(a) May the businessman and the creditor obtain separate O does not cease to be a party to the agreement by his
-in-trade? Explain. designating the mortgagee, C, as beneficiary, and any act of O like
insurance coverages over the same sfocks
intentionally burning the building or storing inflammables in it, will
(c) Suppose you are the Judge, how much would you allow the avoid the policy and prevent the beneficiary from collecting the
proceeds under the policy taken by O.
buslnessrna n and the creditor to recover from their respective
The amount recoverable by C under the P5 million policy procured
insurers. Explain. (1999 Bar)
by him on his mortgage interest will only be V3 of P5 million. This
reduction rs caused by the fact that the extent of his interest being
Answer: (a) Yes. The businessman, as mortgagor, and the creditor,
P10 million only, the two insurances, one for P10 million and second
as mortgagee, have separate and distinct insurable interests in the
for P5 million, is a case of over-insurance. Ihese insurances will be
same ioigaged property, the stocks-in-trade, such that each one of
proportionally reduced such that the total will not exceed P10 million.
them qnay insure the same property for their respective interests.
The P1A miilion debt of O to C can still be collected by C /ess
xxx
(c) As the Judge, t woutd attow the buslnessma n to recover sfocks
what C collected from the insurer, without prejudice to the insurer
being subrogated to the right of C to collect from O what C got from
-ini-trade which were lost. On the other hand, I would allow
the
the insurer.
creditor to recover only the amount he extended to the businessrnan,
rf /ess than five mittion pesos, because that is his only insurable
Bar Question: "A", the registered owner of a house and lot tocated
interest.
in Baguio City, mortgaged the same to "8", to secure the payment of
Bar Question: To secure a loan of P10 million, O mortgaged his a debt in the sum of P20,000, the mortgage being duly registered.
The house was totally destroyed by accidental fire, but it is insured in
building to C. tn accordance with the loan arrangements, O had the
propeiy insured with Acme lnsurance Company for Pl0 million, with the sum of P30,000.
Who would be entitled to the insurance proceeds:
C as the beneficiary. C atso took an insurance on the building upon
his own interest with Beta lnsurance Company for P5 million.
a. if the policy had been taken by "8", and
The buitding was totatty destroyed by fire, a peril insured against
b. if it had been taken by "A"? Reason. (1969 Bar)
in both insuranc| poticies. lt was subsequently determined that the
fire had been intentionally started by o and that in violation of the
Answen (a) lf the policy is taken by B, the mortgagee, he will be
entitled to the proceeds of the policy up to the extent of his insurable
loan agreement, o had been storing inflammable materials in the
interest which is the amount of his credit against the moftgagor.
building.
How much can C recover from either or both insurance (b) lf taken by A, the owner, he is entitled to the proceeds. B, the
mortgagee, can collect from A, his credit, but not from the insurance
companies? What happens to the P10 million debt of O to C? (1984
company, as there is no assrElnment of the policy to him.
Ba0

Answer: C can recover under the insurance policy procured by him

Bar Question: Pedro obtained a loan of P50,000.00 from, and
mortgaged his P75,000 house as security for the loan to, Juan.
but not under the policy taken by O, the mortgagor, wherein C was
Thereafter, Pedro insured the house against fire with the insurer "X"
designated as beneficiary.
for P70,000. Juan also insured the house with insurer "Y" against
C, tne mortgagee, can recover on the policy procured by him, with
fire for P50,000. While the policies were in force, the house was
his mortgage credit as hls insurable interest, because the actuations
totally burned accidentally. Sfafe the respective rights of Pedro and
of O do hot bind him (C), and produce no adverse effect at all on the
enforceability and vatidity of the fire policy procured by him (C).
Juan, and the rights and/or obligations of insurers "X" and "Y".
Explain your answer. (1972 Ba)
On the other hand, the policy taken by O on the building wherein
C was designated as beneficiary, is nullified by the acts of O in
Answer: Pedro can recover P70,000 from his insurer X, the amount
intentionaily starting the fire and in storing inflammables in the
being the face value of his fire policy and within its true value of
building in violation of the agreement.
P75,000.
190 INSURANCE CODE
Juan can recover P50,000 from Y, his insurer, the amount being
equiva,lent to his mortgage credit, over which he has an insurable
interest.
Y, the insurer of Juan, is however subrogated to the right of Juan
to collect the P50,000 loan from Pedro.
Bar Question: "JC" obtained a loan from "PR" in the sum of
P10,000 mortgaging a residentiat building as security' "PR" insured
the buitding Against fire for P12,000. The building was paftly
destroyed ny fie and "PR" cottected P9,000-00 on the policy'
"JC"
demanded inat tne sum received by "PR" should be credited to him
and his indebtedness correspondingty reduced- Was "JC's" demand
justified? What rights are acquired, if any, by the insurer' (1980 Bar)
Answer: No, "JC's" demand is not iustified. The insurance by "PR",
"JC"
the mortgagee, was procured by him on his insurable interest.
is a stringer to the policy, and therefore cannot claim any benefit
under it.
The insurer who paid "PR" is subrogated to the right of "PR" to
collect Pg,000 from "JC". "PR" can stitt collect Pl,000 directly from
"JC", the balance of the obligation not recovered by the insurance
policy procured bY "PR".
Bar Question: M's house has a market value of P30,000' He
rnsures it for PT5,000. when the policy is in force, M succeeds in
mortgaging the house to a weatthy friend for P20,000. The next day,
fire fiaiiaUy d1stroys the house, tt is estimated that it would cost
P15',000 to repair the house. Who may recover on the policy? How
much? (1950 Bar)
Answer: M, the owner of the house, who insured the house, can
recover under the policy which is an open policy' The mortgagee
cannot recover on the poticy as there ls no assrgn ment to him of the
policy.
' t'ne amount of recovery by M, atthough fhe /oss is paftial, is
Pl5,000 (which is within the face value of the policy), the policy here
being an open one.
f. Change of Interest in Property Insured
Rule. A change of interest in any part of the thing insured
unaccompanied by a corresponding change of interest in the
insurance suspends the insurance to an equivalent extent, until the
interests in the thing and in the insurance vest in the same person.
INSURANCE CODE l9l
Exceptions: (1) change of interest after the loss; (2) change of
interest in one or more of several things separately insured-; (3)
change of interest by will or succession; and (4) transfer of interest
by a partner, joint owner, or common owner, to another partner, joint
owner or common owner.
The Problem: some busrnessmen with an available stafting capitat
totalling only P100,000.00 ask you to help organize a business firm.
subject to legal limitations, they have future plans to invite atien
investors who are agreeable to rendering financiatassisfance by way
of direct investments and/or loans. your professionalassisfance r's
solicited on the following various questions that may arise.
Bar Question: An insurance agent contacts the manager of your
flrm to sell life and property insurance. your advice is sought on the
following matters:
The office building of your firm is insured against damage by fire
and earthquakes. without the previous consent of the insirer,'your
firm assigns the fire policy after the buitding is burned totaily. Does
the assignee have a right against the insurer? Give tegat-reasons.
(1973 Bar)
Answer: The assignee may collect the proceeds from the insurer
because the change of interest (assignment) occurred after the toss.
Bar Question: "A" insures his house for p10,000 commencing
January 1, 1952. On February 15, 1952,',A,'seils the house to "8"
for P15,000 without endorsing or transferring the fire poticy to "8".
On April 20, 1952, the house is completety destroyed on account of
an accidental fire. Can "A" or "8" coilect the proceeds of the poticy
from the insurer? Explain and give reasons for your answer.
1959,1952 Bar)
hgA0,
Answer: Neither A, the seller, nor B, the buyer, can collect under
the policy. A transfer of interest in property without any transfer of
interest in the insurance suspends the tatter untit the inierests in the
property and in the insurance vest in the same person. A has
transferred his interest in the object of the insurance (the house) to B
without a transfer of his interest in the insurance to B. A,s lhe
interests in the object and in the insurance are in different persons at
the time of the loss, none can recover under the poticy.
lll. Devices to Delimit Subject Matter of lnsurance
192 INSURANCE CODE
A. Concealment
1. Defined
Bar Question: Define or explain and exemplify concealment in
insurance contracts. (1948 Bar)
Answer: concealment is a negtect to communicate that which a
party knows and ought to communicate to the other party'
' Example: Faiture by the insured to inform the insurer that he has
been hospitatized for cancer or some other seriou.s disease'
2. Requisites
For concealment contract of insurance, several
to vitiate a
requisites must be present: (1) the matter concealed must be
material, and (2) there must be an obligation for the insured to reveal
the concealed matter to the insurer.
The fraudulent intent on the part of the insured must be
established to warrant rescission of the insurance contract.
concealment as a defense for the health care provider or insurer to
avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the
provider oi insuier. The liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by
the agreement'or whenever he avails of the covered benefits which
he has prepaid (Philamcare vs. CA, 379 SCRA 356)
3. Test of MaterialitY
A fact is material if knowledge of it would have affected the
decision of the insurer to enter into the contract, in estimating the
risk, or in fixing the premium (Great vs. CA, 89 SCRA 543)'
where the person procuring the insurance concealed the fact that
the insured was a Mongoloid, the concealment is material and gives
to the insurer the right t,o rescind. Material concealment can rescind
the insurance contract, whether intentional or unintentional (lbid.).
where the person procuring life insurance on the life of an
illiterate old woman concealed the advanced stage of lung cancer of
the insured who died of said disease seven months later, the insurer
may rescind the policy. Lack of understanding by the illiterate
INSURANCE CODE 193
insured of the statements and her application as to her state of good
health does not negate the insurer's right to rescind (Tang vs. CA,
90 scRA 236).
The waiver of a medical examination in a non-medical insurance
contract renders even more material the information required of the
applicant concerning previous condition of health and diseases
suffered (Sunlife vs. CA, 245 SCRA 268).
Matters relating to the health of the insured are material and
relevant to the approval and issuance of the life insurance policy as
they definitely affect the insurer's action on the application (lbid.).
It is well-settled that the insured need not die of the disease he
had failed to disclose to the insurer, as it is sufficient that his non-
disclosure misled the insurer in forming his estimates of the risks of
the proposed insurance policy or in making inquiries (lbid.).
The information was material to the ability of the insurer to
estimate the probable risk the insured presented as a subject of life
insurance when he did not disclose his visits to his doctor, the
diagnosis made and the medicines prescribed by such doctor, in the
insurance application. lt may be reasonably assumed that the insurer
would have made further inquiries and would have probably refused
to issue a non-medical insurance policy or, at the very least, required
a higher premium for the same coverage (Vda. De Canilang vs. CA,
223 SCRA 443).
Concealment exists where the assured had knowledge of a fact
material to the risk, and honesty, good faith, and fair dealing requires
that he should communicate it to the assured, but he designedly and
intentionally withholds the same (Great vs. CA, 316 SCRA 677).
Bar Question: "P" filed an application with an insurance company
for a 20-year endowment policy in the amount of P50,000.00 on the
life of his one-year-old daughter, supplying all the essenfla/ data in
the application form, but without disclosing that his daughter was a
Mongoloid child. Upon "P3" payment of the annual premium, a
binding deposit receipt was issued to "P" by the insurance agent
subject to processing by the company. The insurance company
disapproved the insurance application stating that the plan applied
for was not available for minors below seven years old, and offered
another plan. The insurance agent did not inform "P" of the
disapproval nor of the alternative plan offered, and instead, strongly
194 INSURANCE CODE
recommended that the company reconsider and approve the
in su rance ap pl ication.
As fate wautd have it, "P's" daughter died. "P" sought payment of
the proceeds of the insurance but the company refused on the
grounds that there was concealment of a material fact in the
insurance application form and that it had reiected the application.
"P" contended, on the other hand, that the binding deposit receipt
constituted a temporary contract of life insurance.
How would you resolve the issue? (1980 Bar)
Answer: There can be no recovery under the policy for two
reasons.' firstly, the binding deposit contains the condition that the
apptication would be subiect to processing by the company. At most,
therefore, it was a conditional acceptance subordinated to the act of
the company to approve or disapprove the application' lt therefore
coutd not have bound the company unless the company approved
the apptication. The faiture of the agent to inform the insured of the
disapprovat of the application cannot result in the company being
considered as having approved the application.
Besrdes, even if the company had approved the application, there
was a concealment on a material matter - that the insured child was
a Mongotoid chitd. This can give the insurer the right to rescind the
insurance contract and prevent liability from attaching.
For these reasons, no recovery can be had by the insured's
beneficiaries fnder the policy.
Bar Questicin: A fire insurance policy in favor of the insured
contained a stipulation that the insured shall give notice to the
company of any insurances already effected or which may
subsequentty be effected, covering the propefty insured and that
unless such notice be given before the occurrence of any loss, all
benefits shatt be forfeited. The face of the policy bore the annotation
"Co-insurance declared." The things insured were burned. lt turned
out that several insurances were obtained on the same goods for the
same term. The insurer refused to pay on the ground of
concealment. Maythe insured recover? Reason. (1979 Bar)
Answer: No, the insured cannot recover under the policy-
No doubt, the contract considered non-declaration of other
existing insurances on the same property as material concealment to
the extent of the contract declaring that benefits therein shall be
forfeited.
tf, as in fhls case, the insured did not reveal to the insurer the
existence of other insurances he procured over the same subiect
INSURANCE CODE t95
matter, there is a concealment of a material matter, and this gives
the insurer the right to rescind (See Pacific vs. CA, 168 SCRA 1).
Bar Question: On October 18, 1980, P took out a life insurance
policy and named his only son Q, as beneficiary. The policy was
silent with regard to any change of beneficiary. P later learned that
Q was hooked on drugs and immediately notified the insurance
company in writing thal he is substituting his slster R as his
beneficiary in place of Q. P later died of'advanced tuberculosis. ln
the application form filled up by the agent of the insurance company
prior to the issuance of the life insurance policy by the insurance
company, the agent, with the knowledge of P, filled in a false answer
and made it appear that P was in good health. Upon P's death, Q
claimed the proceeds of the insurance policy contending that as
designated beneficiary, he cannot be changed without his consent,
he having acquired a vested right to the proceeds of the policy.
Can the insurance company refuse liability on the policy. (1988
Ba0
Answer: As P died of advanced tuberculosls, his ailment was
known to him in 1980 when he took out an insurance policy on his
life. When the application was filed wherein vvas sfafed that he was
in good health, there was a material concealment on his part entitling
the insurer to the right to rescind the policy, whether the concealment
was done intentionally or not by the insured.
The above answer will however apply if the insurer discovered
the concealment on or before October 18, 1992, because if the
discovery was made beyond October 18, 1982, the incontestability
clause will operate to prevent the insurer from rescinding.
It is unfortunate that the problem makes no mention of the date of
the death of P, or the date of discovery by the insurer of the
co n ce a I me n Um i s re p rese nt atio n.
Bar Question: ln June 1981, Juan applied for a life insurance policy
with a double indemnity provision in case of death by accident.
Despite an express inquiry in the application form for insurance, he
did not mention the fact that he had suffered from viral hepatitis the
previous year. As Juan had fully recovered from the disease, the
medical examination performed by the insurance company's
physician did not reveal such previous //ness, and showed that Juan
was healthy and was an insurable risk. The policy was issued
forthwith.
196 INSURANCE CODE
tn March 1983, Juan died in an automobile accident. Subsequent
investigation revealed that Juan was negligent in not having his
brakes checked.
The insurance company refused to pay Juan's wife, the
designated beneficiary, on two grounds: that Juan was guilty of
fraudutent concealment of his liver ailment, and that Juan's death
was caused by his own negligenc.e.
The policy is s/enf as to the effect of the insured's negligence on
the right to recover thereunder. JLtan's razife rnslsfs that she has a
right to recover because Juan's death was caused by an accident
which had nothing to do whatsoever with his ailment. She therefore
inslsfs on double indemnity.
a. /s she entitled to any indemnity. Explain.
b. tf Juan's accident occurred in July, 1983, would your answer be
the same? Explain. (2001, 1997, 1983 Bar)
Answer: (a) Juan's wife is not entitled to any indemnity under the
policy. The fraudutent concealment of his having suffered from viral
hepatitis, which is a material matter, gave the insurer the right to
resclnd the contract, even if the insured did not die from the
concealed mafter.
Negtigence by the insured resulting in his death, by itself would
not avoid the poticy. But in the case at bar, the policy is avoided
because of the fraudulent concealment of a material matter.
(b)My answ1r will be different. lf Juan's accident occurred in
July 1983, the insurer under the incontestability clause is barred from
reslsfing the policy, because of the lapse of more than two years
from the issue (June 1981) of the policy.
4. Consequences of Goncealment
Concealment vitiates the contract of insurance and entitles the
insurer to rescind, even if the death or loss was due to a cause not at
all related to the concealed matter. This is the rule whether the
concealment is intentional or unintentional (Sec. 1, B.P. 874).
The right to rescind should be exercised previous to the
commencement of an action on the contract. Besides, the
cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions: (1) Prior notice
of cancellation to insured; (2) Notice must be based on the
occurrence after effective date of the policy of one or more of the
grounds mentioned; (3) Must be in writing, mailed or delivered to
the insured at the address shown in the policy; (4) Must state the
INSURANCE CODE 197
grounds relied upon provided in Section 64 of the lnsurance Code
and upon request of insured, to furnish facts on which cancellation is
based (Philamcare vs. CA, 379 SCRA 356)
Bar Question: X applied for life insurance with Metropolitan Life
lnsurance Company. The application contained this question: "Have
you ever had any ailment or disease of x x x (b) the stomach or
intestines, liver, kidney or gentourinary organ?" X, a laundry woman
who has no medical knowledge answered "No." The application was
approved, premium was paid and six months later, X died from
cancer of the stomach. The post medical examination of X shows
that she had a cancer at the time she applied for a policy. Can the
beneficiary of X collect on the policy? Reasons. (1989 Bar)
Answer: No, the beneficiary cannot collect. The policy can be
rescinded by the insurer on the ground of concealment. Under an
amendment of the Code, the concealment on a material matter,
whether done intentionally or unintentionally, entitles the insurer to
rescind, without prejudice however to the application of the
incontestability clause in the proper cases.
Good faith rs no defense in concealment (Sunlife vs. CA, 245
scRA 268).
Bar Question: Juan procured a "non-medical" life insurance from
Good Life lnsurance. He designated his wife, Petra, as the
beneficiary. Earlier, in his application in response to the question as
to whether or not he had ever been hospitalized, he answered in the
negative. He forgot to mention his confinement at the Kidney
Hospital.
After Juan died in a plane crash, Petra filed a claim with Good
Life. Discovering Juan's previous hospitalization, Good Life rejected
Petra's claim on the ground of concealment and misrepresentation.
Petra sued Good Life, invoking good faith on the part of Juan.
WillPetra's suit prosper? Explain. (1996, 1975 Bar)
Answer: No, Petra's suit will not prosper. Juan was guilty of
concealment. Good faith is not a defense in concealment. This
assurnes that the policy has been in effect for /ess than two years
from date of lssue.
a. Exceptions
198 INSURANCE CODE
1. lncontestability Clause
ln life insurance, after a policy has been in force for at least two
years, the insurer cannot rescind the policy due to fraudulent
concealment or misrepresentation of the insured.
lf the insured dies within two years from the effectivity of the
policy, rescission due to concealment or misrepresentation of
material matters may still be invoked by the insurer (Tan vs. CA,174
scRA 403).
Bar Question: Renato was issued a life iisurance policy on
January 2, 1990. He concealed the fact that three years prior to the
issuance of his life insurance policy, he had been seeing a doctor
about his heart ailment.
On March 1, 1992, Renato died of heart failure. May the heirs file
a claim on the proceeds of the life insurance policy of Renato?
(1998, 1966, 1953, 1947 Bar)
Answer: Yes, the heirsof Renato may file a claim on the proceeds
of the life insurance policy. The insured died more than two years
after the effectivity of the policy, hence the insurer cannot rescind the
poticy even if there was concealment. The incontestability clause in
life insurance contracts applies.
2. Certain Concealments in Marine Insurance
The following matters although concealed will not vitiate the
contract of marine insurance except when they caused the loss:
1. National character of insured
2. Liability of insured thing to capture or detention
3. Liability to seizure from breach of foreign laws
4. Want of necessary documents
5. Use of false or simulated Papers
B. Representation
1. Defined
A representation is an oral or written statement of a fact or
condition, affecting the risk, made by the insured to the insurer,
tending to induce the insurer to assume the risk.
INSURANCE CODE 199
lf the insured misstated his age, the amount payable under the
policy will be adjusted to his correct age (Sec. 227 [d], lnsurance
Code).
2. Classes
There are two classes of representations: (a) affirmative, which is
an affirmation of a fact existing when the contract begins, and (b)
promissory, which is a promise to be performed after the policy is
issued.
Representations may also be (1) objective, or representations of
present and past events susceptible of exact and actual knowledge
and correct statement, and (2) subjective, or opinions, beliefs or
intentions of the insured.
3. Differentiated from Warranty
Bar Question: To what kind of contracts does the distinction
between a warranty and a representation apply? (1949 Bar)
Answer: The distinction between warranty and representation
applies to, and is important, in the contract of insurance.
Bar Question: Distinguish a warranty from a representation. (1949
Ba0
Answer: Warranty is distinguished from representation in the
following respecfs:
(a) Warranties are parts of contracts; representations are mere
col I ate ral i nd uce me nts;
(b) Warranties are written on the policy, actually or by reference;
representations may or may not;
(c) Warranties are conclusively presumed material;
representations musf be proved to be material;
(d) Warranties musf be strictly complied with; representations
require only substantialtruth or compliance.
4. Test of Materiality
Bar Question: Pedro Reyes applied for a fire insurance on his
house. ln his application, it was asked the following question. "ls the
house insured with another lnsurance Company? lf so, for how
much? His answer was "No." The fact however, is that the house
200 INSURANCE CODE
INSURANCE CODE 20t
had been insured with the FGU for Pl00,000.00. The application The correction of errors by Juan did not reach Acme,
was approved and made a part of the policy. Subsequently, a fire h.ad..no ogOolunity.of
and Acme
occurred in a neighboring house, and spread to the house of Pedro
reevatiating its decision to insure-juai and to
fix the rate of premiums, in accordance with tn"
Reyes which was completely burned. Demand for payment having
Acme therefore entered into the contract under "oiri""i"pptiiLtion.
tne"iaiii netier
been refused by the insurer, Pedro Reyes filed a complaint. May he that Juan's apptication dated May 15, 1s84
recover? Reason. (1976 Bar) fhe basis of which it (Acme) couid decide on"oi,t"i"i
irii,iJtio, on
whether or not it shourd
enter into the contract, and prescribe the rate of premiums.
Answer: Yes, Pedro Reyes may recover under his fire policy from
The good faith or bad faitn of Luan is immateriat.
the insurance company. His recovery, however from both FGU and Hence, Acme, the insurer can varidry refuse to pay
the insurance company will be limited to the agreed valuation of the the beneficiary
of Juan.
propefty, if the policy is valued, or to the true value if the policy is
open.
Bar Question: pabaya paid for a fire insurance on his
There being no prohibition in both insurance against the taking of
building. At the time he apptied for the insurance, multi-storey
hi:lon
"other insurance", fhe issue boils down to whether or not the representative of the insurance gompany that he pranned
the
misrepresentation by Reyes as fo hrs having already insured his security guard on every ftoor of the buitding ,igit
io r"",g,
-Licept
house is material. I submit that it is not material, because the prior the ground froor, no security guards were issigned.
iiai "
ror
insurances not being a factor in the determination of the risk, or the iteven months
after the poricy was buiuing was gutted by fire which
condition of the property insured, no extra prejudice will be suffered started on the third.issued,lne
by the insurance company even if the risk attaches, as fhe amount of ftoor. tJnknown-to paiaya, tne insurance
company_had incorporated his planned undertaking
recovery by Reyes from both insurance companies will be limited as i, tn" p,o,ii4
can Pabaya recover on the fire insurance poticy. Exprain.'(1ggl
aforesaid to the agreed valuation, or the true value, depending on ^
Ba0
whether the policy is valued or open, respectively.
Answer: Pabaya can recover on the fire insurance policy.
Bar Question: On May 15, 1984, Juan applied for a life insurance The p-lan to assrgn a security guard on every froor
policy with Acme Eife lnsurance Company. "The policy was issued fo .
by the fact that it is a mere ptin, cannot amount to
of"the buitding,
Juan on June 30, 1984 but the date of issue, as appearing in the representation or warranty.
a priiii""ory
policy, was May 15, 1984, the date of his application. Juan
The inclusion in the poricy of the said pran, if worded
subsequently realized that some of his answers in the insurance plan in the policy, does not amount to a promissory
as a mere
application were erroneous. Accordingly, he supplied the insurance representation or
a warranty, and the fairure of pabaya to push throigh'with
company with the correct replies. However his lefter to the insurance the lhn is
not violative of the insurance contract.
company giving the c.orrect answers was /ost in the mails. Juan died
Tlelefore, Pabaya is entitted to recover under the poticy inspite
on June 1,1984. .. of
his fail-ure to-compry with his pran to assrgn ,""'uiiy'g'uiia
The insurance company now refuses to pay Juan's beneficiary on
contending that he (Juan) misrepresented the state of his health at
every floor of the insured building. "
the time of his apptication. ls the insurance company liable? State
your reasons. (1984 Ba)
5. Consequences of Misrepresentation
lf the representation is farse on a materiar point, the injured party
Answer: The insurance company, Acme Life, can refuse to pay
is entitled to rescind from the time when the representation
Juan's beneficiary because of his misrepresentations or errors made becomes
false.
in his application.
The bases for Acme in accepting Juan's application, and issuing a
policy at the rate stated in the policy, are the representations and . The right to rescind granted by the rnsurance code is waived by
the acceptance of premium payments despite knowledge
sfafemenfs made by Juan in his application filed and received by oi tn"
Acme on May 15, 1984.
ground of rescission (As inserted by Section
2, B.p. g74). "
202 INSURANCE CODE
An insurer which issues a life policy and receives the full initial
premiums but four months later on informs the insured that the policy
had never been in force, commits a serious breach of contract,
entitling the insured not only to recover the premiums paid with
interest, but also moral and other damages (Great vs. CA, 184
scRA 501).
Where matters of opinion are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though
they are untrue. Thus, although false, a representation of the
expectation, intention, belief, opinion, or judgment of the insured will
not avoid the policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a lower rate of premium,
and this is likewise the rule although the statement is material to the
risk, if the statement is obviously of the foregoing character, since in
such case the insurer is not justified in relying upon such statement,
but is obligated to make further inquiry. There is a clear distinction
between such a case and one in which the insured fraudulently and
intentionally states to be true, as a matter of expectation or belief,
that which he then knows, to be actually untrue, or the impossibility
of which is shown by the facts within his knowledge, since in such
case the intent to deceive the insurer is obvious and amounts to
actual fraud (Philapcare vs. CA, 379 SCRA 356)
Bar Question: "A" applied for a life insurance policy on October 12,
1956, stating at the time that he had never suffered from any of the
enumerated diseases, including typhoid fever. On November 3,
1956, he became ill with typhoid fever and completely recovered on
November 18, 1956. On November 20, 1956, the policy was
delivered and the first premium paid by him without disclosure of the
typhoid //ness. Three months later, "A" died from appendicitis. /s
the policy void or valid? What are the rights of the parties in the
case? Give the reasons for your answer. (1959 Bar)
Answer: The policy is void because of material misrepresentation.
Although he filed his application before he got sick of typhoid, his
representations therein are presumed to refer to the date when the
contract went into effect - the date of delivery of the policy to him and
payment by him of the first premium. That he died, not of typhoid,
but of appendicitis, does not alter the conclusion.
INSURANCE CODE 203
a. lncontestability Clause
Bar Question: Atty. Roberto took out a life insurance policy from
the Dana lnsurance Corp. (DIC) on September 1, 1989. On August
31, 1990, Robert died. DIC refused to pay his beneficiaries because
it discovered that Roberto had misrepresented certain material facts
in his application. The beneficiaries sued on the basis that DIC can
contest the validity of the insurance policy only within two (2) years
from date of rssue and during the lifetime of the insured. Decide the
case. (1994,1991 Bar)
Answer: The beneficiaries of Atty. Roberto cannot recover from
D an a I n su ran ce Corporatio n.
It is true that in life insurance policies the insurer cannot invoke
the material misrepresentation of the insured to rescind the contract
after the lapse of two years from the date the policy became
effective, because of the incontestability clause.
ln the problem above, the material misrepresentation of the
deceased insured was discovered by the insurer within the two year
period from the effectivity of the policy. The two year period is not
shortened by the death of the insured within that period.
The beneficiaries of Atty. Roberto cannot therefore recover.
Bar Question: Manpower Company obtained a group life insurance
policy for its employees from Phoenix lnsurance Company. The
master policy lssued by Phoenix on June 1, 1986 contained a
provision that eligible employees for insurance coverage were all full
time employees of Manpower regularly working at least 30 hours per
week. The policy had also an incontestable clause. Beforehand,
Phoenix sent enrollment cards to Manpower for distribution to its
etigible employees. X filted out the card which contained a printed
clause: "l request the insurance for which I may become eligible
under said Group Policy." The cards were then sent to Phoenix and
X was among the employees of Manpower who was issued a
ceftificate of coverage by Phoenix.
On July 3, 1988, X was killed on the occasion of a robbery in their
house. While processrng fhe claim of X's beneficiary, Phoenix found
out that X was not an eligible employee as defined in the group
policy since he has not been employed 30 hours a week by
Manpower. Phoenix refused to pay. May X's beneficiary invoke the
incontestability clause against Phoenix? Reasons. (1989 Bar)
Answer: Yes, the beneficiary of X may invoke the incontestability
clause.
 INSURANCE CODE
While it is true that the master policy contained an exclusionary
clause (excluding from coverage employees working less than 30
hours), X filled up an enrollment card where h/s personal
circumstances and working schedule were obviously contained. The
failure by Phoenix to exclude X, who instead uras lssued a ceftificate
of coverage, is deemed as a waiver by Phoenix of said exclusionary
clause.
Hence, the beneficiary of X can recover under the policy.
b. Misrepresentation by Collusion with
lnsurer's Agent
Bar Question: "A", agent of life insurance "B" induced "C" who had
been suffering from advanced tuberculosis to apply for P10,000.00
life insurance which "C" did and he (C) requested "A" to fill up the
application form. Thru the connivance of the physician, it was made
to appear in the application that "C" is in good health and the
Pl0,000.00 life insurance policy yyas rssued by "8" to "C".
a. ls the policy issued to "C" valid?
b. /s B bound by the acts of his agent "A"? Give reasons for your
answer. (1977, 1964 Bar)
, deemed included in the contract, although not expressly mentioned
Answer: (a) The policy lssued to "C" is void, because it was issued
on a misrepresentation through his connivance with two agents of
the insurer-the ihsurance agent and the insurance physician. It is
the pafticipation of C in the misrepresentation which avoids the
policy. C, by co,nniving with two agents of the insurer, A, the agent,
and the physician of the insurer, made the two his own agents, and
the misrepresentation of the two is equivalent to hls own
misrepresentation, material enough to avoid the policy.
(b) B, the insurer, is normally bound by the acfs of hls agents, but
in the problem above, the participation of the insured in the
commission of the misrepresentation avoids the policy and witt not
bind the insurer.
G. Warranty
1. Defined
A 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 the insurer was in
fact prejudiced by such untruth or non-fulfillment, renders the policy
voidable.
INSURANCE CODE 205
2. Classes
There are two classes of warranties: (1) the express, and (2) the
implied.
a. Express Warranty
An express warranty is an agreement expressed in a policy,
whereby the assured stipulates that certain facts relating to the risk
are or shall be true, or certain acts relating to the same subject have
been or shall be done.
An express warranty must appear on the face of the policy of
insurance, or in an authentic document, clearly incorporated therein
and made part thereof by explicit reference, or by words clearly
evidencing such intention.
b. lmplied Warranty
Only found in marine insurance, implied warranties are warranties
therein.
These implied warranties in marine insurance are: (1) sea-
worthiness, (2) non-deviation from the agreed voyage, and (3) non-
indulgence in illegal ventures.
3. Effect of Breach of Warranty
All breaches of warranty give to the insurer the right to rescind.
lf fraud intervenes in the breach, the insurer is freed from liability
from the start, as the contract is void ab initio.
lf there is no fraud in the breach, the insurer is freed from the
contract the moment the breach occurs, and is entitled to retain the
premiums corresponding to the period up to the time of the breach.
While the payment by the insurer for the insured value of the lost
cargo operates as a waiver of the insurer's right to enforce the term
of the implied warranty against the assured under the marine
insurance policy, the same cannot be validly interpreted as an
automatic admission of the vessel's seaworthiness by the insurer as
206 INSURANCE CODE
to foreclose recourse against the common carrier for any liability
under contractual obligation as such common carrier (Delsan vs. CA,
369 SCRA 24).
Breach of a warranty or of a condition renders the contract
defeasible at the option of the insurer; but if he so elects, he may
waive his privilege and power to rescind by the mere expression of
an intention so to do. ln that event his liability under the policy
continues as before (Prudential vs. Trans Asia, 491 SCRA 41 1).
Bar Question: Plaintiff had insured his residential building with
defendant company. A warranty clause in the policy reads as
follows. "lt is hereby declared and agreed that during the pendency
of this policy no hazardous goods shall be stored in the premises
covered by this policy." Late one evening a friend of plaintiff
engaged in the business of selling petroleum in the province, arrived
in plaintiff's house with a truckload of S-gallon drums filled with
kerosene. He obtained plaintiff's permission to leave the truck in
plaintiff's garage for two days. The garage was located under
plaintiff's house. During the second night, fire broke out in plaintiff's
kitchen. Before the fire reached the garage, however, plaintiff was
able to remove his friend's truck with its contents to a place of safety.
Owing to the delay in the arrival of fire engines, however, the fire
finally consumed the entire building. ls plaintiff entitled to recover
under the terms of tfte policy? (1950 Bar)
Answer: No, the'plaintiff is not entitled to recover under the policy
because of a breach by him of an express warranty that during the
effectivity of the policy, no hazardous goods will be stored in the
insured premises.
That the truckload of kerosene drums was in the insured's house
for two days only to accommodate a friend, that the fire did not come
from the kerosene truck, and that the insured was able to drive out
from his house the kerosene truck, are of no moment.
A warranty has to be strictly complied with, and a breach thereof,
even if not grave, will entitle the insurer to rescind.
Bar Question: Jutie and Alma formed a business partnership.
Under the business name Pino Shop, the partnership engaged in a
sale of construction materials. Julie insured the stocks in trade of
Pino Shop with WGC lnsurance Company for P350,000.00.
Subsequen.tly, she again got an insurance contract with RSI for
P1,000,000.00 and then from EIC for P20A,000.00. A fire of
unknown origin gutted the store of the partnership. Julie filed her
INSURANCE CODE 207
claims with the three insurance companies. However, her claims
were denied separately for breach of policy condition which required
the insured to give notice of any insurance effected covering the
sfocks in trade. Julie went to court and contended that she should
not be blamed for the omission, alleging that the insurance agents
for WGC, RSI and EIC knew of the existence of the additional
insurance coverages and that she waS not informed about the
requirement that such other or additional insurance should be stated
in the policy.
a. Is the contention of Julie tenable? Explain.
b. May she recover on her fire insurance,policies? Explain.
(1993 Ba)
Answer: (a) No. Julie's first contention is not tenable. Even if the
insurance agents for the three insurers knew of the existence of
additional insurance coverages, Julie was still guilty of concealment
in not giving notice of the other insurance. Her second contention is
also not tenable. The requirement to give notice of other insurance
appears in the policy so she cannot claim that she was not informed
thereof.
(b) No, she may not recover on her policies because she
viotated a warranty in the contracts that she would inform them of
other insurances.
4. Construction of Warranties
Not only are warranties strictly construed against the insurer, but
they should, likewise, by themselves be reasonably interpreted
(American vs. Tantuco, 366 SCRA 740)
lV. Policy of lnsurance
A. Policy Defined
A policy of insurance is the written instrument in which a contract
of insurance is set forth (Section 48, lnsurance Code).
1. Form
The policy shall be in printed form and may contain blank spaces
wherein shall be written the word, phrase, clause, mark, sign,
signature, symbol or number necessary to complete the policy.
208 INSURANCE CODE
Any rider, clause, warranty or endorsement purporting to be a part
of the contract and pasted on the policy shall not bind the insured
unless its title or name is mentioned and written on the blank spaces
in the policy.
A rider, clause, warranty or endorsement issued after the original
policy was in force shall not bind the insured, unless he
countersigned it or unless he applied for it (Section 5, lbid.).
Any rider, clause, warranty or endorsement pasted or attached
to the policy is considered part of such policy or contract of insurance
(Commissioner vs. Lincoln, 379 SCRA 423).
2. Cover Notes
Cover notes, also known as interim policies or binding slips, may
be issued to bind the parties temporarily pending issue of the policy.
These notes are good for sixty days only, unless renewed with the
written approval of the lnsurance Commissioner. Before the lapse of
said period or its renewal, a policy'sfratl ne issued by the insurer or
the application rejected.
A premium deposit receipt issued to a life insurance applicant,
containing the condition that the receipt shall bind the company even
before the medicaT examination provided the company shall be
satisfied that on said date, the applicant was insurable, on standard
rates, was not a binding contract and at the most was merely a
conditional acceptance subordinated to the act of the company to
approve or disapprove the application, before the death of the
insured (Great vs. CA, 89 SCRA 543).
A cover note issued in advance of the issuance of a marine policy
is binding as an insurance contract although no separate premium
was paid therefor (Pacific vs. CA, 112 SCRA 199).
Bar Question: Antarctica Life Assurance Corporation (ALAC)
publicly offered a specially designed insurance policy covering
persons between the ages of 50 to 75 who may be afflicted with
serious and debilitating illnesses. Quirico applied for insurance
coverage, stating that he was already 80 years old. Nonethetess,
ALAC approved his application.
Quirico then requested ALAC for the rssuance of a cover note white
he was trying to raise funds to pay the insurance premium. ALAC
granted the request. Ten days after he received the cover note,
INSURANCE CODE 2t)9
Quirico had a heart seizure and had to be hospitalized. He then filed
a claim on the policy. Did ALAC's issuance of a cover note result in
the perfection of an insurance contract between Quirico and ALAC?
Explain. (2009 Bar)
Answer: Yes, the issuance of the cover note resulted in the
perfection of the contract of insurance. The company's act of
granting the request for a cover note while Quirico was trying to raise
funds to pay the insurance premium amounts to the granting of a
credit term for the payment of the said premiums. As such, the
company is bound to pay out the proceeds of the policy despite the
non-payment of the premium (See IJCPB vs. Masagana, 356 SCRA
s07).
B. Contents of the Policy
1. A policy contains, among others, the following:
a. The parties
b. Amount of insurance (except in open or running policies)
c. Rate of premium
d. The property or life insured
e. The interest of the insured in the property if he is not the
owner
f. Risks insured against
g. Duration of the insurance
2. Contractual Limitations Prevail over Statutory Ones
Contractual limitations in insurance policies prevail over the
statutory limitations, as well as over the exceptions to the latter,
because the rights of the parties flow from the contract of insurance.
Their contract is the law between the parties, and their agreement
that an action on a claim denied by the insurer must be brought
within one year from the denial, governs, not the rules on the
prescription of actions (Philam vs. Ansaldo, 234 SCRA 51 1).
It is settled that the terms of the policy constitute the measure of
the insurer's liability (Fortune vs. CA, 244 SCRA 308)
3. How Ambiguity Settled
It is a well-known rule that ambiguities or obscurities must be
strictly interpreted against the party that caused them. This rigid
application of the rule on ambiguities has become necessary in view
210 INSURANCE CODE
of current business practices. The courts are aware that nowadays
monopolies, cartels, and concentration of capital, endowed with
overwhelming power, manage to impose upon parties dealing with
them cunning prepared 'agreements' that the weaker party may not
change one whit, his participation in the'agreement' being reduced
to the alternative to 'take it or leave it', labelled as 'contracts by
adherence'. ln contrast to those entered into by parties bargaining
on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime examples) obviously call for
greater strictness and vigilance on the part of the courts of justice
with a view to protecting their becoming traps. for the unwary
(Finman vs. CA, 213 SCRA 493).
Any construction of a marine policy rendering it void should be
avoided. Such policies will, therefore, be construed strictly against
the company in order to avoid a forfeiture, unless no other result is
possible from the language used (Fortune vs. CA, supra).
Exceptions to the general coverage are construed most strongly
against the company. Even an express exception in a policy is to be
construed against the undenvriters by whom the policy is framed,
and for whose benefit the exception is introduced (lbid.).
lf a marine insurance company desires to limit or restrict the
operation of the general provisions of its contract by special proviso,
exception, or exemption, it should express such limitation in clear
and unmistakable language (lbid.).
Although in this jurisdiction, contracts of adhesion have been
consistently upheld as valid per se as binding as an ordinary
contract, there are instances when reliance on such contracts cannot
be favored especially where the facts and circumstances warrant
that subject stipulations be disregarded. The facts and
circumstances vis-d:vis the nature of the provision sought to be
enforced should be considered, bearing in mind the principles of
equity and fair play (Cebu vs. William, 306 SCRA 762).
The doubt in the stipulation as to the coverage of the policy should
be resolved against the insurer, whose lawyer or managers drafted
the policy contract under scrutiny. This is particularly true as regards
'insurance policies so as to effect the dominant purpose of indemnity
or payment to the insured, especially where forfeiture is involved,
and the rbason for this is that the insured usually has no voice in the
selection or arrangement of the words employed and that the
INSURANCE CODE 2n
language of the contract is selected with great care and deliberation
by experts and legal advisers employed by, and acting exclusively in
the interest of, the insurance company (Rizal vs. CA, 336 SCRA 12).
ln construing the words used descriptive of a building insured, the
greatest liberality is shown by the courts in giving effect to the
insurance (American vs. Tantuco, 366 SCRA 740)
ln determining what the parties intended, the courts will read and
construe the policy as a whole and if possible, give effect to all the
parts of the contract, keeping in mind always, however, the prime
rule that in the event of doubt, this doubt is to be resolved against the
insurer (lbid.).
4. Particular Stipulations lnterpreted
The clause in an insurance policy authorizing the owner of the
damaged vehicle to contract for its repair does not mean that the
repairman is entitled to collect the cost of repair out of the proceeds
of the insurance. lt merely establishes the procedure that the
insured has to follow in order to be entitled to indemnity for repair
(llao vs CA, 218 SCRA 433).
Bar Question: ln line with the loan clause contained in a validly
existing life insurance policy, X applied for a loan of P50,000.00.
The insurance company denied the loan application notwithstanding
the fact that the cash surrender value of the policy was more than
sufficient to justify the loan applied for. X sued the insurance
company demanding resclssion of the contract of insurance and the
return of all premiums previously paid by him. The insurance
company claimed that A had fully enjoyed the protection of the
insurance on his life while the policy was in force and that the
company had assumed the risk of death of X in the meantime.
Decide the case. Explain. (1971 Bar)
Answer: While it is true that the company had already assumed a
risk while the policy was in force, the premium collected included a
loading rate (for extra benefits like the right to borrow) to which the
company would not be entitled if there were no such extra rights, as
it is not at all related to its risk.
I submit therefore that X is entitled to a refund to him of that
poftion of the premium already paid by X corresponding to this
loading rate and he may likewise recover damages because of the
breach.
212 INSURANCE CODE
The intention of the parties to make each other a co-assured
under an insurance policy is to be gleaned principally from the
insurance contract or policy itself and not from any other contract or
agreement because the insurance policy denominates the assured
and the beneficiaries of the insurance. Thus, when the insurance
policy names only one party as the assured thereunder, the claim of
another that it is a co-assured is unfounded (Cebu vs. William,
supra).
The rule that ambiguity must be strictly interpreted against. the
insurer and liberally in favor of the insured, especially to avoid
forfeiture, is equally applicable to Health Care Agreements
(Philamcare vs. CA, 379 SCRA 356).
Since a health care agreement is in the nature of a contract of
indemnity, payment should be made to the party who incurred the
expenses (lbid.).
5. Effectivity of Policy
a. General Rule
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding untilthe plemium thereof has been paid, except in the case
of a life or industrial life policy whenever the grace period applies
(Section 77, lnsurance Code).
Where a fire policy was issued without payment of premiums, but
which premiums five months later were paid to an authorized agent
of the insurer, the policy is valid and the insurer is liable for the loss
taking place after said payment (Malayan vs. Arnaldo, 154 SCRA
672).
The phrase "unless there is a clear agreement to grant the insured
credit extension of the premiums due" found in Act 2427 is deleted
from the lnsurance Code (Velasco vs. Apostol, 173 SCRA 228).
The actual payment of premium is a condition precedent to the
validity of an insurance contract (Ayala vs. Ray Burton, 355 Phil.
475).
INSURANCE CODE 213
Under the GSIS Law, the retired employees earned a vested right
under their contract of insurance after they religiously paid premium
to GSIS (Betoy vs. The Board, 658 SCRA 420).
ln a pension plan, where the employee participation is mandatory,
the prevailing view is that employees have contractual or vested right
in the pension where the pension is part of the terms of employment
(GSIS vs. Monteclaros, 478 Phil. 573; GSIS vs. De Leon, 635 SCRA
321).
b. Exceptions
1. Life and lndustrial Life Policy
The general rule in insurance laws is that unless the premium is
paid, the insurance policy is not valid and binding. The only
exceptions are life and industrial life insurance (UCPB vs.
Masagana, 356 SCRA 307).
2. Written Acknowledgment of the Receipt
of Premium by Insurer
The renewal certificate issued to respondent contained the
acknowledgment that premium had been paid. lt is not disputed that
the check drawn by respondent in favor of petitioner and delivered to
its agent was honored wh-en presented and petitioner forthwith
issued its official receipt to respondent. Section 306 of the lnsurance
Code provides that any insurance company which delivers a policy
or contract of insurance to an insurance agent or insurance broker
shall be deemed to have authorized such agent or broker to receive
on its behalf payment of any premium which is due on such policy or
contract of insurance at the time of its issuance or delivery or which
becomes due thereon [Malayan vs. Arnaldo, supra]. ln the instant
case, the best evidence of such authority is the fact that petitioner
accepted the check and issued the official receipt for the payment. lt
is bound by its agent's acknowledgment of receipt of payment
(American vs. Chua, 309 SCRA 250).
Section 78 of the lnsurance Code explicitly provides: An
acknowledgment in a policy or contract of insurance of the receipt of
premium is conclusive evidence of its payment, so far as to make.the
policy binding, notwithstanding any stipulation therein that it shall not
be binding until the premium is actually paid. This Section
214 INSURANCE CODE
establishes a legal fiction of payment and should be interpreted as
an exception to Section 77 (UCPB vs. Masagana, supra).
Bar Question: Josie Gatbonton obtained from Warranty Insurance
Corporation a comprehensive motor vehicle insurance to cover her
brand new automobile. She paid, and the insurer accepted payment,
in check. Before the check could be encashed, Josie was involved
in a motor vehicle accident where her car became a total wreck. She
sought payment from the insurer. Could the insurer be made liable
under the insurance coverage? (2003 Bar)
Answer: Yes, the insurer can be made tiable under the insurance
coverage. The fact that the insurer accepted the check payment is
an acknowledgement that the premium has been paid, hence the
policy is binding (See American vs. Chua, supra).
3. Payment in lnstallments of the Premium and
Partial Payment Made at the Time of Loss
A third exception where Section 77 may not apply is if the parties
have agreed to the payment in installments of the premium and
partial payment has been made at the time of loss. The subject
policies are valid even if the premiums were paid on installments.
The records clearly show that the petitioners and private respondent
intended subject* insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in
1984. ln those three years, the insurer accepted all the installment
payments. Such acceptance of payments speaks loudly of the
insurer's intention to honor the policies it issued to petitioner.
Certainly, basic principles of equity and fairness would not allow the
insurer to continue collecting and accepting the premiums, although
paid on installments, and later deny liability on the lame excuse that
the premiums were not prepaid in full.
While the import of Section 77 is that prepayment of premiums is
strictly required as a condition to the validity of the contract, the
request to make installment payments duly approved by the insurer
would not prevent the entire contract of insurance from going into
effect despite payment and acceptance of the initial premium or first
installment. Section 78 of the lnsurance Code in effect allows waiver
by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as
conclusive evidence of payment so far as to make the policy binding
INSURANCE CODE 2t5
despite the fact that premium is actually unpaid. Section 77 merely
precludes the parties from stipulating that the policy is valid'even if
premiums are not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not contrary to
morals, good customs, public order or public policy. So is an
understanding to allow insured to pay premiums in installments not
so proscribed. At the very least, both parties should be deemed in
estoppel to question the arrangement they have voluntarily accepted
(UCPB vs. Masagana, supra).
Bar Question: The Peninsula lnsurance Company offered to insure
Francis' brand new car against all risks in the sum of Pl Million for 1
year. The policy uzas lssued with the premium fixed at P60,000.00
payable in 6 months. Francis only paid the first two months
installments. Despite demands, he failed to pay the subsequent
installments. Five months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the insurance company a
claim for its value. However, the company denied his claim on the
ground that he failed to pay premium resulti1g in the cancellation of
the policy.
Can Francis recover from the Peninsula lnsurance Company?
(2006 Bar)
Answer: Yes, the insurance company is liable srnce fhe /oss
happened on the Sth month which is within the agreed six-month
period of payment. The partial payment made by Francis prior to the
time of fhe /oss makes the liability shift to the insurer. The partial
payments constitute payment by installment which was duly agreed
upon by the parties. The basic principles of equity and fairness
would not allow the insurer to continue collecting and accepting
premiums, although paid on installments, and later deny liability on
the lame excuse that the premiums were not paid in full.
4.Credit Extension for the Payment
of the Premium
There is a fourth exception to Section 77, namely, that the insurer
may grant credit extension for the payment of the premium. This
simply means that if the insurer has granted the insured a credit term
for the payment of the premium and loss occurs before the expiration
of the term, recovery on the policy should be allowed even though
the premium is paid after the loss but within the credit term. There is
nothing in Section 77 which prohibits the parties in an insurance
contract to provide a credit term within which to pay the premiums.
216 INSURANCE CODE
That agreement is not against the law, morals, good customs, public
order or public policy. The agreement binds the parties. lt would be
unjust and inequitable if recovery on the policy would not be
permitted against the insurer which had consistently granted a 60-to-
90-day credit term for the payment of premiums despite its full
awareness of Section 77 (UCPB vs. Masagana, supra.).
Bar Question: Alfredo took out a policy to insure his commercial
building against fire. The broker for the insurance company agreed to
give a 15-day credit within which to pay the insurance premium.
Upon delivery of the policy on May 15, 2006, .Alfredo issued a
postdated check payable on May 30, 2006. On May 28, 2006, a fire
broke out and destroyed the building owned by Alfredo. May Alfredo
recover on the insurance policy? (2007 Bar)
Answer: Yes, Alfredo may recover on the insurance policy. The
insurance company's act of granting a 15-day credit term is a
recognized exception to the provisions of Section 77 of the lnsurance
Code on the binding effect of policies upon payment of the premium.
(See UCPB vs. Masagqna, supra). Hence, the policy is valid even if
the premium is not paid.
5.Estoppel
Estoppel bars insurer from taking refuge under Section 77 since
respondent reliedln good faith on such practice. Estoppel then is
the fifth exception to Section 77 (lbid.).
Bar Question: On Dec. 17, 1975, a fire policy, insuring a building
and its contents, was delivered to the insured company. By
agreement, it was allowed to pay the premium within 30 days. On
Jan. B, 1976, it paid the premium by means of a check postdated
Jan. 16, 1976. The check was deposited by the insurance company
only on Feb. 20, but the check bounced, although on January 19, the
insured had a sufficient bank balance. On January 18, two (2) days
after the premium became due, the insured property was burned and
became a total loss.
Can the insurance company cancel the policy for non-payment of
premium? Give reasons for your ansvvers. (1978 Bar)
Answer: Yes, the insurance company can cancel the policy. Non-
payment of the initial premium prevents the policy from taking effect.
ln the pro.blem, however, that the insured was extended credit for 30
days which it complied with the issue of a check postdated within the
said period, will not operate to make the policy effective, because the
INSURANCE CODE 2t7
clause of "unless there is a clear agreement to grant the insured
credit extension" found in Act 2427 .has been deleted in the
lnsurance Code. This means that the policy is not valid and binding
untilthe premium (initial) is paid.
Bar Question: "A" insured his house against /oss by fire for
P100,000.00. The policy provides that the insurer shall be liable "if
the property insured shall be damaged or destroyed by fire after the
payment of premium, at anytime, from June 15, 1976 to June 15,
1977." The policy was delivered to "A" on June 14, 1976. lnstead of
paying the premium in cash, "A" issued a promissory note dated
June 15, 1976, for the amount of the premium payable within 30
days. The note was accepted. On June 29, 1976, the property
insured was burned. The insurer refused to pay on the ground that
the premium had not been paid, and the note did not have the effect
of payment as its value had not been realized at the time the house
was burned. Decide with reasons. (1976 Bar)
Answen I submit that the insurer is not liable. The acceptance by
the insurer of the post-dated promissory note is not a payment.
Hence, the policy was not valid and binding at the time of /oss.
Bar Question Enrique obtained from Seguro lnsurance Company a
comprehensive motor vehicle insurance to cover his top of the line
Aston Martin. The policy was issued on March 31, 2010 and, on
even date, Enrique paid the premium with a personal check
postdated April 6, 2010. On April 5, 2010, the car was involved in an
accident that resulted in its totalloss. On April 10, 2-010, the drawee
bank returned Enrique's check with the notation "lnsufficient Funds."
Upon notification, Enrique immediately deposited additional funds
with.the bank and asked the insurerto redepositthe check. Enrique
thereupon claimed indemnity from the insurer. ls the insurer liable
under the insurance coverage? Why or why not? (2010 Bar)
Answen The insureris not tiabte. Secfron 77 of the lnsuranceCode
provides that no policy or contract of insurance issued by an
insurance company is valid and binding until the premium thereof
has been paid. The acceptance by the insurer of the post-dated
check note is not the payment contemplated by law.
Hence, the policy was not valid and binding at the time of /oss.
2t8 INSURANCE CODE
6. Cancellation and Renewal of Non-Life Policies
No insurance policy, except life, may be cancelled except upon
prior notice to the insured and for any of the following grounds: (1)
non-payment of premium, (2) conviction of a crime out of acts
increasing the hazard insured against, (3) discovery of fraud or
material misrepresentation, (4) discovery of wilful or reckless acts or
omissions increasing the risk insured against, (5) physical changes
in the property making the property uninsurable, and (6) a
determination by the lnsurance Commissioner that the policy would
violate the Code (Section 64, lnsurance Code).
ln a non-life insurance, the named insured shall be entitled to
renew the policy upon payment of the premium due, unless 45 days
in advance before the end of the original period, the insurer notifies
the insured of its intentiqn not to renew (Section 66, lbid.).
The claim of the insurer that the policy was cancelled is without
merit, it not having been shown that written notice was received by
the insured, nor the requirements of a valid cancellation complied
with by the insurer (Malayan vs. Arnaldo, 154 SCRA 672).
C. Kinds of Policies
There are three classes of policies in non-life insurance: (1) open,
(2) valued, and (3) running.
When the policy states that the liability of the insurer is the amount
of the loss, whether total or partial, provided the loss is within the
face value of the policy, the policy is an open policy, and the insurer
is liable for the loss if within the covered amount (Development vs.
rAc, 143 SCRA 62).
Bar Question: What is : a) an open policy, b) a valued policy, c) a
running policy? (1953 Bar)
Answer: (a) An open policy is one in which the value of the thing
insured is not agreed upon, but is left to be asceftained at the time of
/oss.
A certain agreed sum may be written on the face of an open
policy, not as the value of the property insured, but as the maximum
limit of recovery in case of destruction due to the occurrence of the
peril insured against.
INSURANCE CODE 219
(b) A valued policy is one in which a definite valuation is, by the
agreement of both parties, put upon the subiect matter of the
insurance and written on the face of the policy. The valuation, in the
absence of fraud or mistake, is conclusive on the pafties.
(c) A running policy is one which contemplates successive
insurances and which provides that the subiect of the policy may
from time to time be defined.
Bar Question: a/ Suppose that Fortune owns a house valued at
P600,000.00 and insured the same against fire with three (3)
insurance companies as follows:
x ............... P400,000.00
Y ............... P200,000.00
2 ............... P600,000.00
ln the absence of any stipulation in the policies, from which
insurance company or companies may Fortune recover in case fire
should destroy his house completely?
b. lf each of the fire insurance policies obtained by Fortune in
problem (a) is a valued policy and the value of his house was fixed in
each of the policies at P1 million, how much would Fortune recover
from X, if he has already obtained full payment on the insurance
policies insured by Y and Z?
c. If each of the policies obtained by Foftune in problem (a)
above is an open policy and it was immediately determined after the
fire that the value of Fortune's house was P2.4 million, how much
may he collect from X, Y and Z?
d. ln problem (a), what is the extent of the liability of the insurance
com pan ie s among the m se lve s?
e. ln problem (a), what is the extent of the liability of Fortune to
collect from both Y and Z? May he keep the entire amount he was
able to collect from the said two insurance companies?
Explain your answers. (1990 Bar)
Answer: (a) Fortune can collect from any one or some of the three
insurers up to P600,000.00 only, without preiudice to those who have
overpaid claiming from the other insurers the amount of their
proportionate shares.
(b) lf the policies are valued at P1 million each, recovery by
Foftune from any one of the three of P1 million will cut off Fortune's
right to recover from the other two. Foftune is entitled to recover the
Pl million agreed valuation, and nothing more, irrespective of which
insurance company made the payment to Fortune.
Ihis /s without prejudice to the paying insurer getting from the
othe rs th e ir proportion ate sh ares.
220 INSURANCE CODE
(c) lf each of the policies ls an open policy, Fortune can recover
from all three the face value of their respective policies, the total of
the three policies (P1.2 million) not exceeding the true value of the
house determined at P2.4 million after the fire.
(d) As the house was valued at P600,000.00 but insured with
three insurers for a total of Pl,200.000.00, the share of each insurer
is 50% of the face value of their respective policies. Fortune, for
example, if it collects all of the P600,000.00 from Z, would entitle Z
to collect P200,000 from X (1/2 of P400,000) and Pl00,000 from Y
(1/2 of P200,000), the proportionafe shares of X and Y.
(e) lf Fortune collected from Y and Z a total. of P800,000, the
excess of P200,000 over the value of P600,000 will have to be
returned by him. He cannot claim from the three insurers more than
the true value of P600,000.
Bar Question: A owns a house valued at P50,000 and is insured in
two companies, X and Y, for P45,000 and Pl0,000 respectively. ln
the policies, it stated that the value of the house is P25,000.
a. ln lnsurance Law, how are these policies denominated? Why?
b. How much is the owner of the house, if destroyed by fire,
entitled to collect from each of the insurance companies?
c. lf the actual loss amounfs fo P30,000 only, how much is A
entitled to receive from each of the insurance companies? (1957
Ba0
Answer: (a) The policies are valued policies because on the face of
the policies there are values stated.
(b) As the policies fix the value of the house at P25,000, that
amount is the maximum the insured can collect from the companies.
The first insurer pays 45/55 or 9/11 of P25,000 or P20,450.04. The
second insurer pays 10/55 or V11 of P25,000 or P4,550.00.
(c) lt the actual loss amounts to P30,000 only, A, the owner will
receive 3/5 of P25,000 only or P15,000 from both insurers. The
insurers will divide the P15,000 in the proportion of 9/11 and All,
respectively, for which they are liable to the insured.
Bar Question: ln 1965, Jose constructed a house worth P50,000,
which he insured against fire for the same amount. The insurance
for the same amount was renewed every year. ln 1974, when the
house was already worth Pl00,000 on account of inflationary prices
(in case of a rebuilding), one-fifth (1/5) of the house was destroyed
by fire. Assuming that Jose was completely blameless and that
there was nothing illegal about the contract, how much, if any, can
INSURANCE CODE 221
Jose successfully recover from the lnsurance Company? Reasons.
(1975 Ba)
Answer: lf the policy is a valued policy, and the face value is the
agreed valuation between the parties, then Jose is entitled to recover
only P10,000, 1/5 of the face value of the policy, said valuation being
conclusive on the parties.
D. Premium
1. Premium Defined
An insurance premium is the consideration paid an insurer for
undertaking to indemnify the insured against a specified peril (Gulf
vs. Phil. Charter, 458 SCRA 550).
The premium, also called the gross premium, consists of two
parts: the net premium which is the sum paid periodically to meet
the cost of the insurance and carry it from period to period, and the
loading rate which answers for administration, management,
operating expenses and profits of the insurer.
2. Duty to Pay Premium
Bar Question: What is meant by "cash to carry" in the business of
insurance? (2003 Ba)
Answer: The principle of "cash to carry" requires payment of the
premium before the contract of insurance can be valid and binding.
The philosophy behind this principle is that the insurer, upon
issuance of the policy, is immediately exposed to liability for the risks
insured against, hence it is entitled to be paid premium for extending
protection to the insured immediately upon such exposure.
The payment of the premium is a condition to the initial validity
and binding effect of the policy.
Payment of the premium is a condition precedent to, and essential
for, the efficaciousness of the contract of insurance (South vs. CA,
244 SCRA.744).
ln surety bonds, like that of an administrator, their continued
effectivity is not dependent on the payment of premiums (Luzon vs.
Quebrar, 127 SCRA 295).
t7) INSURANCE CODE
ln life policies, the contract is kept alive by payment of subsequent
premiums within the statutory grace period of one month (Arce vs.
Capital, 117 SCRA 63).
Where the insurer gave to the insured a grace period to pay the
premium, but no payment was made during said grace period, the
contract of insurance does not take effect (lbid.)
Failure of the office of the insured to collect and remit the
premiums to GSIS, because GSIS failed to inform the insured's
office to do so, will not prevent the policy from being effective.
The act of GSIS of paying dividends to the insured estops it from
denying that the insured had an effective poli6y (Landicho vs. GSIS,
44 SCRA 7).
The non-payment of premiums does not merely suspend but puts
an end to an insurance contract, since the time of pa'yment is
peculiarly the essence of the contract.
The rule is that under policy provisions, upon failure to make
payment of premium or assessment at the time provided for, the
policy shall become void or forfeited, or the obligation of the insurer
shall cease, or words to like effect, because the contract so
prescribes and decause such stipulation is a material and essential
part of the contract (Phil. Phoenix vs. Woodworks, 92 SCRA 419).
The acceptance by the insurer of premium payments does not
stop it from interposing a valid defense under the terms of the policy
(Stokes vs. Malayan, 127 SCRA 766).
The acceptance by the insurer of premium payments after he has
knowledge of a ground for rescission will bar him from rescinding the
policy (Section 2, B.P. 874).
A rebate agreement between the insured and the insurer
(represented by its agent) is a contract void ab initio, being in
violation of Section 361 of the lnsurance Code, and does not give
rise to enforceable rights and obligations as between the parties
(Lumibao vs. lAC, 189 SCRA 469).
INSURANCE CODE 223
a. Non-payment Due to War
Bar Question: ln 1940, "G" insured his life for P50,000 with Crown
lnsurance Company, an American corporation licensed to do
busrness in the Philippines. He religiously paid all premiums due
until the war broke out in 1941, when all American companies,
including Crown lnsurance Company, were closed. Hence "G" could
not pay his premiums thereafter. "G" died in 1944. After the war,
"G's" heirs filed a claim with the company on "G's" life policy. Could
"G's" heirs recover the amount of insurance of "G"? Decide the case
with reasons. (1968 Bar)
Answer: No, the heirs of G cannot recover on Gb life insurance
policy. Non-payment of premiums pufs an end to an insurance
contract since the terms of payment is peculiarly fhe essence of the
contract. This rule is not affected by the fact that the non-payment is
due to war or that the insured was not negligent.
Hence, Gb helrs cannot recover under G's policy.
However, following the U.S. rule, the insured's beneficiary is
entitled, when normalcy returns, to the equitable value of the policy
arising from the premiums actually paid by the insurer when the
policy was in force.
3. Return of Premiums
The insured is entitled to a pro rata return of the premium where
the insurance (except life) being for a specified period, the insured
surrenders his policy ahead of the period unless the policy provides
for a short period rate, in which case the rate therein will be
applicable.
ln over-insurance, the insurer or insurers will have to refund the
premiums corresponding to the amount over-insured.
Bar Question: Name at least three instances when an insured is
entitled to a return of the premium paid. (2000 Ba)
Answer: The insured is entitted to a return of the whote premium:
(1) it the thing insured was never exposed to the risks insured
against, (2) when the contract is voidable due to the fraud or
misrepresentation of the insurer, and (3) when the insurer never
incurred a liability.
224 INSURANCE CODE
a. ln Rescission for Breach of Warranty
A breach of warranty without fraud merely exonerates an insurer
from the time it occurs, or where it is broken, prevents the policy from
attaching to the risk (Section 76, lnsurance Code).
V. Double lnsurance and Reinsurance
A. Double lnsurance
1. Defindd
Bar Question: When does double insurance exist? (2005, 1954
Ba0
Answer: A double insurance exists where the same person is
insured by several insurers separately in respect to the same subject
and interest. The requisites for double insurance to arise are (1) the
person insured is the same; (2) two or more insurers insuring
separately; (3) there is identity of subject matter; (4) there is identity
of interest insured; and (5) there is identity of the risk or peril insured
against)
Bar Question: What is the nature of the liability of the several
insurers in double insurance? (2005 Bar)
Answer: The insurers are deemed co-insurers. Each one is bound
to contribute ratably /o fhe /oss in proportion to the amount for which
he is liable under his contract (See Secfion 94 [e], lnsurance Code).
The parties may validly provide that other insurances taken by
the insured without the consent of the insurer will ipso facto avoid the
contract (Pioneer vs. Yap, 61 SCRA 426).
The rationale behind the incorporation of "othei insurance" clause
in fire policies is to prevent over-insurance and thus avert th€
perpetration of fraud (Geagonia vs. CA, 241 SCRA 152).
2. Differentiated from Reinsurance
Bar Question: What is the difference between "double insurance" &
"reinsurance"? (1952, 1946 Bar)
INSURANCE CODE 225
Answer: The difference between double insurance and reinsurance
are:
(a) Double insurance involves the same interest. Reinsurance is
an insurance of different interests;
(b) ln double insurance, the insurer remains in such capacity; in
reinsurance, he becomes an insured in relation to the reinsurer; and
(c) ln double insurance, the insured in the first contract is a party
in interest in the second contract; in reinsurance the original insured
has no interest in the reinsurance contract.
3. Effect of Double lnsurance
The insured can insure with two or more companies unless
prohibited by prior policies. Where he is allowed, but over-insurance
results, he can claim, in case of loss, only up to the agreed valuation
(in valued policies) or up to the full insurable value (in open policies)
from any, some or all insurers, without prejudice to the insurers
ratably apportioning the payments.
The insured can also claim a ratable return of the premiums on
the over-insured amount.
Bar Question: Terrazas de Patio Verde, a condominium building,
has a value of P50 Million. The owner insured the building against
fire with three (3) insurance companies for the following amounts:
Northern lnsurance Corporation P20 Million
Southern lnsurance Corporation : P30 Million
Eastern lnsurance Corporation P50 Million
a) ls the owner's taking of insurance for the building with three (3)
insurers valid? Discuss.
b) The building was totally razed by fire. lf the owner decides to claim
from Eastern lnsurance Corp. only P50 Million, will the claim
prosper? Explain. (2008 Bar)
Answer: a) Yes, the taking of insurance with three (3) insurers is
valid. The same partakes of a double insurance, which exists where
the same person is insured by several insurers separately in respect
to the same subject and interest.
b) Yes, the claim is valid. Ihis ls a case of over-insurance where the
insured can claim up to the agreed valuation. Since the claim with
Eastern lnsurance covers the full insurable value, the insured cannot
claim anymore from Northern and Southern. Each one of the 3
insurers, called co-insurers, is bound to contribute ratably fo fhe /oss
226 INSURANCE CODE
in proportion to the amount for which he is liable under his contract
(See Secflon 94 [e], lnsurance Code).
Bar Question: A business/nan in the grocery busrness obtained
from First lnsurance an insurance policy for five million pesos to fully
cover his stocks-in-trade from the risk of fire.
Three months thereafter, a fire of accidental origin broke out and
completely destroyed the grocery including his stocks-in-trade. This
prompted the businessman to file with First lnsurance a claim for five
million pesos representing the full value of his goods.
First lnsurance denied the claim because it discovered that at the
time of fhe /oss, the stocks-in-trade were mortgjaged to a creditor
who likewise obtained from Second lnsurance Company fire
insurance coverage for the sfocks at their full value of five miltion
pesos.
First lnsurance refused to pay claiming that double insurance is
contrary to law. /s fhis contention tenable? (l ggg Bar)
Answer: Double insurance is not contrary to law. lt may be altowed
if not prohibited in the policy. But in the problem, there is no doubte
insurance because the insured are not the same (the businessman
in the insurance with First, and the creditor in the insurance with
Second) and because the interesfs of the businessman and the
creditor are not the same.
B. Reinsurance
1. Defined
Bar Question: What is a contract of reinsurance? (1954 Bar)
Answer: Reinsurance is a contract by which an insurer procures a
third person to insure him against /oss or liability by reason of such
original insurance.
2. Distinguished from Go-insurance
Bar Question: Distinguish co-insurance from re-insurance. (1994
Ba0
Answer: lf the insured procures insurance af /ess than the value of
the insured property, he is deemed to be a co-insurer as to the
deficiency. ln case of /oss, the insurer and the insured witt share the
same pro rata.
INSURANCE CODE 227
ln reinsurance, the insurer procures a third person to insure him
ln case
against /oss or liability by reason of such original insurance'
of /oss, the reinsurer will pay the insurer for the risk reinsured'
3. Distinguished from Reinsurance Treaty
A reinsurance policy is a contract of indemnity one insurer makes
with another to protect the first insurer from a risk it has already
assumed. ln contradiction, a reinsurance treaty is merely an
agreement between two insurance companies where one agrees to
cede and the other to accept reinsurance business pursuant to
provisions specified in the treaty. Reinsurance treaties are contracts
for insurance; reinsurance policies or cessions are contracts of
insurance (Phil. American vs. Auditor,22 SCRA 135).
Bar Question: Gamma lnsurance Companyissued a P3 miltion fire
policy covering Delta Building owned by Madam-Butterfly. Under a
reinsurance treaty, the British Reinsurance Company accepted fifty-
percent reinsurance coverage over the fire policy. A week later,
Madam Butterfly married Frederick Match, an ex-convict for arson.
Att the members of the board of directors of Gamma were invited
guesfs at the wedding and knew who Match was, but completely
ignored the matter as Madam's personalbusrness. The matter was
not even discussed nor mentioned in Gamma's board meeting- One
month after the wedding, the Delta Building was completely burned
down. The finding of the police was that the "fire was due to faulty
electrica! wiring." Gamma notified British Reinsurance of the fire loss
and demanded the lafter's reinsurance liability. British Reinsurance
reinvestigated and learned for the first time about Match's previous
conviction for arson, and so advised Gamma fo resrst Madam's
insurance ctaim. Gamma neveftheless pard Madam in full, and then
brought an action to recover from British Reinsurance. Will this
action prosper? (1974 Bar)
Answer: Yes, Gamma can recover from British Reinsurance the
face value of its reinsurance policy of P1.5 million or 50% of the face
vatue of the fire policy between Gamma and Madam Butterfly'
pursuant to the reinsurance treaty.
White an insurer obtaining reinsurance must communicate all
representations of the original insured and all knowledge and
information he possesses whether previously or subsequently
acquired material to the risk, the fact of marriage by the original
insured Madam Butterfly to Match, an arson ex-convict, is not
 228 INSURANCE CODE
material to the risk, especially it being established that the fire was
due to faulty wiring.
Bar Question: What is meant by facultative reinsurance agreement?
(1972 Bar)
Answer: A facultative reinsurance agreement is a contract wherein
the reinsurer may or may not accept pariicipation in the risk insured.
The term "facultative" is used in reinsurance contracts and it is so
used in this particular case merely to define the right of the reinsurer
to accept or not to accept participation in the risk insured. But once
the share is accepted, the obligation is absolute and the tiability
assumed thereunder can be discharged by the one and onty way -
payment of the share of fhe /osses. There is no alternative nor
subsfrlufe prestation (See Equitable vs. Rural, 4 SCRA 343).
4. Right of Reinsurer
A reinsurer is entitled to avail of every defense which the
reinsured may avail of against the original insured (Gibson vs.
Revilla, 92 SCRA 219).
Vl. Loss
A. Terms Defined
1. Loss
Loss is the injury or damage sustained by the insured from the
perils insured against.
2. Proximate Cause
Proximate cause is the active efficient cause which sets in motion
a train of events which in turn brings about a result without the
intervention of any force operating and working actively from a new
and independent force.
Proximate cause is defined as that cause, which, in natural and
continuous sequence, unbroken by any efficient cause, produces the
injury, and without which the result would have not occurred. And
more comprehensively, the proximate legal cause is that acting first
and producing the injury, either immediately or by setting other
events in motion, all constituting a natural and continuous chain of
INSURANCE CODE 229
events, each having a close connection with its immediate
predecessor, the final event in the chain immediately affecting the
injury a natural and probable result of the cause which first acted,
under such circumstances that the person responsible for the first
event should, as an ordinary prudent and intelligent person, have a
reasonable ground to expect at the moment of his actor default that
an injury to some person might probably result therefrom (Vallacar
vs. Catubig, 649 SCRA 281; Ramos vs. C.O.L., 597 SCRA 526).
Proximate cause is determined from the facts of each case, upon
a combined consideration of logic, common sense, policy and
precedent (Calinutan vs. People, 482 SCRA 44).
Bar Question: Alfredo took out a policy to insure his commercial
building against fire. The broker for the insurance company agreed to
give a 15-day credit within which to pay the insurance premium.
Upon delivery of the policy on May 15, 2006, Alfredo issued a
postdated check payable on May 30, 2006. On May 28, 2006, a fire
broke out and destroyed the building owned by Alfredo. What would
be your answer if it was found that the proximate cause of the fire
was an explosion and that fire was but the immediate cause of /oss
and there is no excepted peril under the policy? (2007 Bar)
Answer: Yes, my answer would be the same. The lnsurance Code
(Section 86) allows recovery if the cause of fhe /oss was either the
proximate or the immediate cause as long as an excepted peril was
not the proximate cause of the loss.
B. Loss for Which lnsurer Liable
1. Loss the proximate cause of which is the peril insured
against
2. Loss the immediate cause of which is the peril insured
against except where the proximate cause is'an excepted peril
3.Loss through the negligence of the insured
4.Loss caused by efforts to rescue the thing from the peril
insured against
C. Loss for Which lnsurer not Liable
1. Loss by the insu.red's wilful act
2. Loss due to connivance of the insured
3. Loss where the excepted peril is the proximate cause
230 INSURANCE CODE
lf a proof is made of a loss apparently within a contract of
insurance, the burden is upon the insurer to.prove that the loss arose
from a cause of loss which is excepted or for which it is not liable, or
from a cause which limits its liability (Country vs. Lianga, 374 SCRA
653).
D. Prerequisites to Recovery for Loss in lnsurance
Against Fire
1. Notice of Loss - Must be immediately given, unless delay is
waived expressly or impliedly by the insurer.
Absolute absence of notice (if notice is specified as one of the
conditions) makes the policy null and void (Union vs. Phil. Guaranty,
47 SCRA271).
2. Proof of Loss - According to best evidence obtainable. Delay
may be also waived expressly or impliedly by the insurer.
Where the insurer introduced as its evidence the report of the
adjuster, it is an admission against interest, and it is grave abuse of
discretion on the part of the lnsurance Commissioner to disregard
the said report in the decision (Noda vs. lnsurance, 151 SCRA 227).
As regards the submission of documents to prove loss,
substantial, not strict, compliance with the requirements will always
be deemed sufficient (Finman vs. CA, 361 SCRA 214).
E. Payment of Glaims
1. Life lnsurance
a. Where lnsured Outlives Maturity Due
The claim is payable immediately on maturity of the policy. This is
true in endowment insurance.
b. Where Policy Matures by lnsured's Death
The claim is payable within 60 days after presentation of the claim
and filing of the proof of death of the insured. Delay entitles the
insured to damages double the legal rate of interest per annum as
fixed by the Monetary Board, unless the delay is due to a fraudulent
claim (Section 242, lnsurance Code).
INSURANGE CODE 231
Sections 242 and 243 of the lnsurance Code apply only when the
court finds an unreasonable delay or refusal in the payment of the
insurance claims. The legal rate for this purpose is 6% per annum,
not 12o/o as provided for by CB Cir. 416, which applies only to loans
or forbearances of money (Tio vs. CA, 202 SCRA 1 19).
ln case of unreasonable delay in the payment of the insured's
claim bythe insurer, the insured can recover: (1) attorney's fe.es, (2)
expenses incurred by reason of the unreasonable withholding, (3)
interest at double the legal interest rate fixed by the Monetary Board,
and (4) amount of the claim. Moral and exemplary damages are
recoverable under the Civil Code depending on the presence of
fraud and bad faith (in the claim for moral damages) or wantonness
or oppressiveness (in claims for exemplary damages) (Zenith vs.
cA, 185 SCRA 398).
An insurance company, even in the absence of bad faith, may be
liable for moral, actual, and consequential damages, if shown that its
persistent acts of denial amount to unreasonable obstinacy and
caused damage to the heirs of the insured. This is based on the
general principles of equity, fairness and justice (Evangelista vs.
GS|S, 66 SCRA 71).
Bar Question: ln life insurance, when does the policy mature, or
when does the obligation of the insurer to pay arise? (1972 Bar)
Answer: tn tife insurance, the policy matures on the death of the
insured, if the policy sfr// subsisfs, or on his suruiving a specified
period in endowment insurance or otherwise contingently on the
continuance or cessation of life.
Evidence is utterly wanting to establish that the insured suffered
from an accidental death, the risk covered by the policy. ln an
accident insurance, the insured's beneficiary has the burden of proof
in demonstrating that the cause of death is due to the covered peril.
Once that fact is established, the burden then shifts to the insurer to
show any excepted peril that may have been stipulated by the
parties (Vda. De Gabrielvs. CA, 264 SCRA 137).
An "accident insurance" is not to be likened to an ordinary life
insurance where the insured's death, regardless of the cause
thereof, would normally be compensable. The latter is akin in
property insurance to an "all risk" coverage where the insured, on the
aspect of burden of proof, has merely to show the condition of the
232 INSURANCE CODE
property insured when the policy attaches and the fact of loss or
damage during the period of the policy and where, thereafter, the
burden would be on the insurer to show any "excluded peril." When,
however, the insured risk is specified, it lies with the claimant of the
insurance proceeds to initially prove that the loss is caused by the
covered peril (lbid.).
2. Property lnsurance
a. lf Amount of Loss Determined by Agreement or
by Arbitration
The claim is payable within 30 days after proof of loss is received
by insurer.
b. lf Ascertainment of Loss not Made Within
Sixty (60) Days
The claim is payable within 90 days from receipt of proof of loss
by the insurer. lf not paid, unreasonable delay is presumed (Cathay
vs. CA, 174 SCRA 11).
The condition contained in an insurance policy that claims must
be presented within one year after rejection is not merely a
procedural requitement but an important matter essential to prompt
settlement of claims against insurance companies as it demands that
insurance suits be brought by the insured while the evidence as to
the origin and cause of destruction have not yet disappeared. lt is in
the nature of a condition precedent to the liability of the insurer, or in
other terms, a resolutory clause, the purpose of which is to terminate
all liabilities in case the action is not filed by the insured within the
period stipulated (Ang vs. Fulton, 2 SCRA 945). This is to enable
the insurance companies to make proper assessment of whether or
not the insured can recover and, if so, to determine the amount
recoverable. However, where the delay in bringing the suit against
the insurance company was not caused by the insured or its
subrogee but by the insurance company itself, it is unfair to penalize
the insured or its subrogee by dismissing its action against the
insurance company on the ground of prescription. The latter should
bear the consequences of its failure to act promptly on the insured's
claim. Under the law, insurance companies are duty bound to adopt
and implement reasonable standards for the prompt, fair and
equitable settlement of claims [Section 241, lnsurance Code]
(Country vs. Travellers, 176 SCRA 523).
INSURANCE CODE 233
The rationale for the necessity of bringing suits against the
insurer within one year from the rejection of the claim has been
settled. The contention that the one-year prescriptive period does
not start to run until the petition for reconsideration had been
resolved by the insurer runs counter to the declared purpose for
requiring that an action or suit be filed in the lnsurance Commission
or in a court of competent jurisdiction from the denial of the claim.
To uphold the contention would contradict and defeat the very
principle which this Court had laid down. Moreover, it can easily be
used by insured persons as a scheme or device to waste time until
any evidence which may be considered against them is destroyed
(Sun vs. CA, 195 SCRA 193).
Bar Question: Robin insured his building against fire with EFG
Assurance. The insurance policy contained the usual stipulation that
any action or suit must be filed within one year after the reiection of
the claim.
After his building burned down, Robin filed his claim fol flre /oss
with EFG. On February 28, 1994, EFG denied Robin's claim. On
April 3, 1994, Robin sought reconsideration of the denial, but EFG
reiterated its position. On March 20, 1995, Robin commenced
judicial action against EFG.
Should Robin's action be given due course? Explain. (1996 Bar)
Answer: No, Robin's action should not be given due course.
Pursuant to the policy, Robin should have filed iudicial action within 1
year after rejection of the claim. His claim was reiected in February
28, 1994, hence he had only until February 28, 1995 within which to
file his action. The filing on March 20, 1995 was beyond the one
year period. The filing of a reconsideration after the denial of the
claim did not affect his one year period to file the action.
3. Right of Beneficiary to be Paid Directly by lnsurer
lf the insurance policy provides that the insurance company "will
indemnify any authorized driver who is driving the motor vehicle" of
the insured and, "in the event of death of said driver," the company
shall, likewise, "indemnify.his personal representatives," and the
company "may, at its option, make indemnity payable directly to the
claimants or heirs of the claimants x x x it being the true intention of
this policy to protect x x x the liabilities of the insured towards the
passengers of the motor vehicle and the public, in other words, third
parties", the policy is typical of contracts pour autrui, hence the sole
heirs of the deceased have a direct cause of action against the
234 INSURANCE CODE
company, and since they could have maintained this action by
themselves without the assistance of the insured, it goes without
T
saying that they could and did properly join the latter in filing the
complaint herein (Coquia vs. Fieldmen's, 26 SCRA 178).
Where the insurance contract provides for indemnity against
liability to third persons, the liability of the insurer is direct and such
third persons can directly sue the insurer. The direct liability of the
insurer under indemnity contracts against third party liability does not
mean that the insurer can be held solidarily liable with the insured
and/or the other parties found at fault, since they are being held
liable under different obligations. The liability of the insured carrier or
vehicle owner is based on tort, according to the Civil Code, while that
of the insurer arises from contract, particularly the insurance policy
(Heirs vs. Malayan, 584 SCRA '152).
Under the compulsory motor vehicle liability insurance provisions
of the lnsurance Code, direct payments may be made by the insurer
to an accident victim of an insured vehicle (Sections 378, 384 and
385, lnsurance Code).
4. Right of Subrogation of Insurer Who Pays
Subrogation is the substitution of one person by another with
reference to a la*ruful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. The principle covers a situation
wherein an insurer has paid a loss under an insurance policy is
entitled to all the rights and remedies belonging to the insured
against a third party with respect to any loss covered by the policy. lt
contemplates full substitution such that it places the party subrogated
in the shoes of the creditor, and he may use all means that the
creditor could employ to enforce payment. Payment by the insurer to
the insured operates as an equitable assignment to the insurer of all
the remedies that the insured may have against the third party
whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any
privity of contract. lt accrues simply upon payment by the insurance
company of the insurance claim. The doctrine of subrogation has its
roots in equity. lt is designed to promote and to accomplish justice;
and is the mode that equity adopts to compel the ultimate payment of
a debt by one who, in justice, equity, and good conscience, ought to
pay (Keppel vs. Pioneer, 601 SCRA 96).
INSURANCE CODE 235
Subrogation may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional subrogation
is that which takes place by agreement of the parties (Chemphil vs.
cA,251SCRA 257).
The rights to which the subrogee succeeds are the same as, but
not greater than, those of the person for whom he is substituted, that
is, he cannet acquire any claim, security or remedy the subrogor did
not have. ln other words, a subrogee cannot succeed to a right not
possessed by the subrogor. A subrogee in effect steps into the
shoes of the insured and can recover only if the insured likewise
could have recovered (Sulpicio vs. First,462 SCRA 125).
Under Article 2207 of the Civil Code, the insurance company can
recover from the offender in full the amount it paid to the insured.
The literal language of Article 2207 makes it clear that the insurance
company that has paid the indemnity for the injury or loss sustained
by the property insured shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. The insurer who pays the insured is an assignee in equity
of the insured against the offender (Malayan vs. CA, 165 SCRA
536).
Upon payment to the consignee of an indemnity for the loss of or
damage to the insured goods, the insurer's entitlement to
subrogation pro tanto - being of the highest equity - equips it with a
cause of action in case of a contractual breach or negligence.
Further, the insurer's subrogatory right to sue for recovery under the
bill of lading in case of loss of or damage to the cargo is
jurisprudentially upheld. ln the exercise of its subrogatory right, an
insurer may proceed against an erring carrier. To all intents and
purposes, it stands in the place and in substitution of the consignee.
A fortiori, both the insurer and the consignee are bound by the
contractual stipulations under the bill of lading (Federal vs. American,
437 SCRA 50).
lf the insured property is destroyed or damaged through the fault
or negligence of a party other than the assured, then the insurer,
upon payment to the assured, will be subrogated to the rights of the
assured to recover from the wrongdoer to the extent that the insurer
has been obligated to pay (Coastwise vs. CA, 245 SCRA 796).
Presentation in evidence of the marine insurance policy is not
indispensable before the insurer may recover from the common
 236 INSURANCE CODE
carrier the insured value of the lost cargo in the exercise of its
subrogation right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of the insurer and the assured
shipper of the lost cargo, but also the amount paid to setfle the
insurance claim (lbid.)
Payment made by the insurer to third persons gave the former the
right to bring an action as subrogee against the insured. Having
failed to rebut the presumption of fault, the liability of the shipping
agent for the loss of the cargo is inevitable (Phil. American vs. CA,
273 SCRA 262).
The signing of the Loss and Subrogation Receipt was a valid pre-
condition before the insurer could be compelled to turn over the
whole amount of the insurance to the two insured (Rizal vs. CA, 261
scRA 69).
Release of claim with loss and subrogation released the insurance
company from further liability (llao vs. CA, 218 SCRA 433)
The insurer, after paying the claim of thb insured for damages
under the insurance, is subrogated merely to the rights of the insured
and therefore can necessarily recover only what was recoverable by
the insured. Should there be a deficiency in the amount recovered
by the insured ffom the insurer, the deficiency is recoverable from
the offender (Pioneer vs. CA, 175 SCRA 668).
When the insurer, after due verification of the merit and validity of
the insurance claim of the assured, pays the latter the total amount
covered by its insurance policy, it becomes subrogated to the right of
the latter to recover the insured loss from the liable party (Cebu vs.
William, 306 SCRA 762).
This right of subrogation is not dependent upon written
assignment of the claim, and payment to the insured makes the
insurer an assignee in equity (Fireman's vs. Jamilla, 70 SCRA 323);
the insurer can recover only that which was recoverable by the
insured, even without the insured assigning his rights to the insurer
against the carrier (St. Paul vs. Macondray, T0 SCRA 122).
Where the insured was paid by the insurer, the latter is
subrogated to all rights of the former against the wrongdoer. lf the
insured, after being paid by the insurer, releases the wrongdoer
without the insurer's consent, the insurer loses his right of
INSURANCE CODE 237
subrogation against the wrongdoer. The insurer will however be
entitled to recover from the insured what the insured originally
received from the insurer as the proceeds of the policy (Manila vs.
cA, 154 SCRA 650).
While Manila vs. CA, supra, is silent on whether the existence of
good faith or bad faith on the tortfeasor's part affects the insurer's
right of subrogation, there is jurisprudence that whenever the
wrongdoer settles with the insured without the consent of the insurer
and with knowledge of the insurer's payment and right of
subrogation, such right is not defeated by the settlement (Danzas vs.
Abrogar, 478 SCRA B0).
Payment by the insurer to the insured for loss under the policy
entitles the insurer to be subrogated to the rights of the insured
against the wrongdoer, as a general rule. The exceptions are: (1)
where the insured releases the wrongdoer from liability, (2) where
the insurer pays without notifying the carrier, which in good faith had
already paid the insured, and (3) where the insurer pays the insured
for a loss which is not included in the risks insured against, by the
policy (Pan Malayan vs. CA, 184 SCRA 54).
An insurer, as subrogee under Article 2207 of the Civil Code, is
not exempt from the reservation requirement with respect to its
damage suit based on quasi-delict arising from the same act or
omission complained of in the criminal case (San lldefonso vs. CA,
28e SCRA 568)
This right of subrogation has its limitations. First, both the insurer
and the consignee are bound by the contractual stipulations under
the bill of lading. Second, the insurer can be subrogated only to the
rights as the insured may have against the wrongdoer. lf by its own
acts after receiving payment from the insurer, the insured releases
the wrongdoer who caused the loss from liability, the insurer loses its
claim against the latter (Aboitiz vs. lnsurance, 561 SCRA 262).
Bar Question: A helicopter of ABC Co. collided with XYZ's tramway
sfee/ cables in its logging area in Surigao resulting in the destruction
of the helicopter and death of two pilots. ABC Co. insured at its
expense the helicopter for P80,000 and the two pilots (life insurance)
for P50,000 each, and as a result of the crash, the insurer paid ABC
Co. an indemnity of Pl80,000. Nevertheless, ABC Co. sustained
additional damages of about Pl00,000 which were not covered by
insurance.
238 INSURANCE CODE
a. ABC Co. sued XYZ to recover not only the additional
damages, but also the P180,000 which was already compensated by
the insurer. Decide. Give reasons.
b. What right/recourse, if any, has the insurer in order to be
reimbursed for the amount it paid to ABC Co? Give reasons. (1978
Ba0
Answer: (a) ABC Co., if it can prove XYZ's fault or negtigence, has
a cause of action against XYZ, but only for the additional damage of
Pl00,000 it did not recover from the insurer (ABC Co).
ABC Co. has no cause of action for the recovery from XYZ of the
Pl80,000 already paid to ABC Co. by its (ABC Co's) insurer. The
effect of payment to ABC Co. by its insurer is to automatically
subrogate said insurer to ABC Co's right to collect against XYZ the
amount of P180,000 already paid by said insurer to ABC Co.
(b) The insurer of ABC Co. may intervene in the suit already filed
by ABC Co. against XYZ, in order that it can show to the court that it
has already paid ABC Co. P180,000 so that the amount may be
awarded to it in the decision.
The other alternative is for said insurer to file a separate civil suit
against XYZ for payment to it of Pl80,000 said insurer had already
paid to ABC Co. Both remedies are justified by the insurer's right of
automatic subrogation to the right of the insured to collect against
XYZ.
Bar Question: "L" borrows P50,000.00 from "M" payable 360 days
after date, at 12% interest per annum. To secure the loan, "L"
mortgages his house and lot in favor of "M". To protect himself from
ceftain contingencies, "M" insures the house for the full amount of
the loan with Rock lnsurance Company. A fire breaks out and burns
the house and "M" collects from the insurance company the full value
of the insurance.
Upon maturity of the loan, the insurance company demands
payment from "L". The latter refuses to pay on the ground that the
loan had been extinguished by the insurance payment which .M"
received from the insurance company. He argues that he has not
entered into any loan or contract of whatever nature with the
insurance company. He further contends that it is bad enough to
lose a house but it is worse if one has to pay off a paid obligation to
somebody who has not extended any loan to hirn. Besides, he
sfafes that the insurance payment should inure to his benefit
because .he owns the house. Pass upon the merits of "L's"
contentions. (1 980 Bar)
INSURANCE CODE 239
Answer: I would resolve the contentions of L, as follows:
1) First contention - The loan is extinguished by the insurance
payment which M, the moftgagee, received from the insurance
company.
My Answer: The payment by M's insurer to M is a payment by virtue
of the fire policy by M over his mortgage right, and is not a payment
by M's insurer of L's loan. Hence, L's loan still remains unpaid.
2) Second Contention - L has not entered into a contract of loan
with the insurance company.
My Answer: The insurer of a mortgagee who pays him is
subrogated to all rights of the mortgagee over the mortgagor. This
includes the right to collect the loan obligation of the mortgagor by
the moftgagee.
The insurer who pays becomes the assignee in equity of the right
of the insured to collect, even in the absence of a deed of
assignment or any contract.
3) Third Contention - L cannot be made to pay to somebody who
has not extended any loan to him.
My Answer: The right of an insurer to collect from the insured's
debtor flows from subrogation, which operates automatically after the
insurer makes payment to the insured mortgagee under the policy.
The insurer of M collecfs because lf sfeps into M's shoes by
subrogation.
4) Fourth Contention - The insurance payment should inure to L
because he owns the house.
My Answer: When M procured insurance, what he insured was his
mortgage right, which belonged to him. He did not insure the house
over which he had no insurable interest. The payment to M by his
insurer was because of the /oss of his mortgage right, not because of
fhe loss of L's house by fire.
The insurable interests of L and M over the house are different
from each other.
Hence, M's insurer, by subrogation, can collect from L the
P50,000.00 which L initially borrowed from M.
Bar Question: Raul's truck bumped the car owned by Luz. The car
was insured by Cala lnsurance. For the damage caused, Cala paid
Luz P5,000.00 in amicable settlement. Luz executed a release of
claim, subrogating Cala to all her rights against Raul. When Cala
demanded reimbursement from Raul, the latter refused saying that
he had already paid Luz P4,500.00 for the damage to the car as
evidenced by a release of claim executed by Luz discharging Raul.
So Cala demanded reimbursement from Luz, who refused to pay,
saying that the total damage to the car was P9,500.00. Since Cala
240 INSURANCE CODE
paid P5,000.00 only, Luz contends that she was entitled to go after
Raulto claim the additional P4,500.00.
a. ls Cala, as subrogee of Luz, entitled to reimbursement from
Raul?
b. May Cala recover what it has paid Luz? (1994 Bar)
Answer: (a) No, Cata is not entitted to reimbursement from Raul
because, by virtue of Luz' execution of a release of claim, Cala did
not incur any liability to Luz since Raul paid the lafter, hence Cala
has no right to collect from Raul.
(b) Yes, Cala may recover from Luz the amou.nt of P5,000.00
because, by Luz' execution of the release of claim, Cala lost its right
of subrogation against Raul.
5. Liability of lnsurance Company for Delay in
Payment of Insurance Proceeds
For an insurance company to be held liable for unreasonably
delaying and withholding payment of insurance proceeds, the delay
must be wanton, oppressive, or malevolent. lt is generally agreed,
however, that an insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly, the statutory
penalty for vexatious refusal of an insurer to pay a claim should not
be inflicted unle* the evidence and circumstances show that such
refusal was wilful and without reasonable cause as the facts appear
to a reasonable and prudent man. The case at bar does not show
that MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the actual
beneficiary of the insurance policies, aggravated by the claim of
various creditors who wanted to partake of the insurance proceeds,
not to mention the importance of the endorsement to RCBC, justified
MICO in withholding payments to GOYU (RCBC vs. CA, 289 SCRA
2e2).
Aprima facie evidence of unreasonable delay in payment of the
claim is created by the failure of the insurer to pay the claim within
the time fixed in both Sections 243 and 244 of the lnsurance Code
(Finman vs. CA, 361 SCRA 214).
Vll. Particular lnsurances
A. Marine lnsurance
INSURANCE CODE 241
1. Goverage of Marine lnsurance
Marine insurance includes:
a. lnsurance against Loss or Damage to:
1. Vessels, goods, freight, cargo, merchandise, profits, money,
valuable papers, bottomry and respondentia, and interests in respect
to all risks or perils of navigation
2. Persons or property in connection with marine insurance
3. Precious stones, jewel, jewelry and precious metals whether in
the course of transportation or otherwise
4. Bridges, tunnels, piers, docks and other aids to navigation and
transportation.
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 (Roque vs. lAC, 139 SCRA 596).
A marine risk note is not an insurance policy. lt is only an
acknowledgment or declaration of the insurer confirming the specific
shipment covered by its marine open policy, the evaluation of the
cargo and the chargeable premium. lt is the marine open policy
which is the main insurance contract (lnternational vs. FGU, 556
scRA 194).
The marine risk note is insufficient to prove a claim (Eastern vs.
Prudential, 599 SCRA 565)
The insurance contract must be prescribed to prove one's claim
(Wallen vs.Prudential, 397 SCRA 158)
b. Marine Protection and lndemnity lnsurance
This is an insurance against the legal liability of the insured for
loss, damage, or expense incident to the ownership, chartering, use
of repair of a vessel or instrumentality in use in oceans and/or sea
(rbid.).
The fact that the seaworthiness of the ship was unknown to the
insured is immaterial in ordinary marine insurance, and may not be
used by him as a defense in order to recover on the marine
insurance policy. lt therefore becomes the obligation of a cargo
 INSURANCE CODE
owner to look for a reliable common carrier which keeps its vessels
in seaworthy condition. The shipper of the cargo may have no
control over the vessel, but he has full control in the choice of the
common carrier that will transport his goods (lbid.).
The ship agent is liable for the negligent acts of the captain in the
care of goods loaded on the vessel. This liability however can be
limited through abandonment of the vessel, its equipment and
freightage as provided in Article 587, Code of Commerce.
Nonetheless, there are exceptional circumstances wherein the ship
agent could still be held answerable despite the abandonment, as
where the loss or injury was due to the fault of the shipowner and the
captain. The international rule is to the effect that the right of
abandonment of vessels, as a legal limitation of a shipowner's
liability, does not apply to cases where the injury or average was
occasioned by the shipowner's own fault. lt must be stressed at this
point that Article 587 speaks only of situations where the fault or
negligence is committed solely by the captain. Where the shipowner
is likewise to be blamed, Article 587 will not apply, and such situation
will be covered by the provisions of the Civil Code on common
carrier (Phil. American vs. CA,273 SCRA 262).
Bar Question: Jacob, the owner of a barge, offered to transport the
/ogs of Essau from Palawan to Manila. Essau accepted the offer not
knowing that the barge would be manned by an irresponsible crew
with deep-seated resentments against Jacob, their employer.
Essau insured his cargo of logs against both perils of the sea and
barratry.
The logs were improperly loaded on one side thereby causing the
barge to tilt and to navigate on an uneven keel. When the strong
winds and high waves, normal for the season, started to pound the
barge, the crew took advantage of the situation and unbolted the sea
valves of the barge causing sea water to come in. The barge sank.
When Essau tried to collect from the insurance firm, the latter
stated that itcould not be held responsible considering the
unwofthiness of both the barge and its crew. Essau countered that
he was not .the owner of the barge and he could not be held
responsible for conditions about which he was innocent.
ls the insurance company liable? Decide with reasons. (1956
Bar)
Answer: No, the insurance company is not tiabte. tt is the obtigation
of the caigo owner to look for a reliabte common carrier which keeps
lfs yesse/s in seaworthy condition. The shipper of the cargo may
INSURANCE CODE 243
have no control over the vesse/, but he has full control in the choice
of the common carrier that will transport his goods.
The shipper's choice of the vesse/ which turns out to be
unseaworthy will free the insurer from liability under the insurance
contract.
Bar Question: Paolo, the owner of an ocean-going vesse/, offered
to transport the logs of Constantino from Manila to Nagoya.
Constantino accepted the offer, not knowing that the vesse/ uras
manned by an irresponsible crew with deep-seated resentments
against Paolo, their employer. Constantino insured the cargo of logs
against both perils of the sea and barratry. The logs were improperly
loaded on one side, thereby causing fhe vesse/ to tilt on one side. On
the way to Nagoya, the crew unbolted the sea valves of the vessel
causing water to flood the ship hold. The vessel sank. Constantino
tried to collect from the insurance company which denied liability,
given the unworthiness of both fhe vesse/ and its crew. Constantino
countered that he was not the owner of the vesse/ and he could
therefore not be responsible for conditions about which he was
innocent. ls the insurance company liable? Why or why not? (2010
Ba0
Answer: No, the insurance company is not liable. lt is the obligation
of the cargo owner to look for a reliable common carrier which keeps
ifs vesse/s in seaworthy condition. The shipper of the cargo may
have no control over the vessel but he has full control in the choice
of the common carrier that will transport hrs goods.
The shipper's choice of the vesse/ which turns out to be
unseaworthy will free the insurer from liability under the insurance
contract.
"Perils of the sea" extend only to losses caused'by sea damage,
or by violence of the elements, and does not embrace all losses
happening at sea. They insure against losses from extraordinary
occurrences only, such as stress of the weather, winds and waves,
lighting, tempest, rocks and the like. They are said to include only
such losses as are of extraordinary nature, or arise from some
overwhelming power, which cannot be guarded against by the
ordinary exertion of human skill and prudence. Damage done to the
vessel by perils of the sea include every specie of damages done to
a vessel at sea, as distinguished from ordinary wear and tear of the
voyage, and distinct .from the injuries suffered by the vessel in
consequence of her not being seaworthy at the onset of her voyage.
Also considered not perils of the sea are those which happen
244 INSURANCE CODE
through inherent vice of the trip, by the act of the owners, master or
shipper (Roque vs. lAC, 139 SCRA 596).
Bar Question: A shipped 100 pieces of plywood from Davao City to
Manila. He took a marine insurance policy to insure the shipment
against /oss or damage due to "perils of the sea, barratry, fire,
jettison, pirates and other such perils."
When the ship left the port of Davao, the shipman in charge forgot
to secure one of the portholes thru which sea water seeped during
the voyage, damaging the plywood. A filed a claim against the
insurance company which refused to pay on the gfound that the loss
or damage was not due to a peril of the sea or any of the risks
covered by the policy. lt was admitted that the sea was reasonably
calm during the voyage and that no strong winds or waves were
encountered by the yesse/.
How would you decide the case? Explain. (1998, 1983, 1960 Bar)
Answer: Recovery under the policy will not prosper. The policy
enumerates the perils insured against: perils of the sea, barratry, fire,
jettison, pirates, and other such perils. The last phrase "and other
perils" must necessarily have common characterisfics as the first five
mentioned. lmmediately noticeable is that the five do not cover
/osses due to the fault or negligence of the members of the crew, like
the failure to secure one of the poftholes of the vesse/s, causing the
sea water to seepTn.
ln marine insurance, the risk, unless othenuise expressly
specified, must be connected with navigation, or with the perils of the
sea. The damage in the problem is a consequence of the perils of
the ship, hence, A cannot recoverfrom the insurer.
Bar Question: What is "barratry" in marine insurance? (2010 Bar)
Answer: Barratry is any witful misconduct on the part of the master
or crew in pursuance of some unlawful or fraudulent purpose without
the consent of the owners, and to the prejudice of the owner's
interest. Barratry requires a wilful and intentional act in its
commission No honest error or judgment or mere negligence,
unless criminally gross, can be barratry (Roque vs. lAC, supra).
Bar Question: Marine insurance for a sugar shipment was procured
by a shipper-consignee on the basis of a sales invoice of the supplier
stating that the sugar is in waterproof plastic bags. The insurer,
relying on the sales invoice, did not examine the shipment, and
issued the covering policy forthwith. Later, the ship carrying the
INSURANCE CODE 245
sugar shipment sank af sea due to a fire of unknown origin. May the
shipper-consignee recover on the policy? (1974 Bar)
Answer: No, the shipper-consignee may not recover under the
marine insurance policy. An ordinary marine insurance policy is an
insurance against /oss or damage arising from the perils of the sea.
The fire which burned the cargo of sugar is not a peril of the sea.
The rusting of steel pipes in the course of the voyage is a peril of
the sea, in view of the effect on the cargo of wind, water and salt
conditions (Cathay vs. CA, 151 SCRA 710).
2. Special Marine lnsurance Contracts
a. lnsurance Against All Risks
lf the marine insurance is against all risks, it covers all losses
during the voyage whether arising from a marine peril or not,
including pilferage losses during the war. However, it does not cover
loss through the wilful and fraudulent act of the insured (Filipino vs.
cA, 179 SCRA 638).
When the insurance is against all risks, the initial burden is on the
insured to show that the goods were loaded in good condition. lf on
unloading, the cargo is damaged, the burden shifts to the insurer to
show that the loss was due to an excepted risk (lbid.).
b. lnchamaree Glause
This clause covers loss or damage to the hull or machinery
through (1) negligence of the captain, engineers, etc., (2) explosions,
breakage of shafts, and (3) latent defect of the machinery or hull.
3. lnsurable lnterest in Marine Insurance
1. Shipowner - over the vessel, except that if chartered, the
insurance is only up to the amount not recoverable from the
charterer; and if hypothecated by a bottomry loan, the insurable
interest is only up to the excess of the value of the vessel over the'
loan. He also has an insurable interest on expected freightage.
2. Cargo owner - over the cargo and on expected profits.
3. Charterer - over the amount he is liable to the shipowner if the
ship is lost or damaged during the voyage.
 INSURANCE CODE INSURANCE CODE 247

4. Goncealment 1. National character of the insured

a.Defined
ln marine insurance, it is the failure to disclose any material fact or
circumstance which is within or ought to be within the knowledge of
one party, and of which the other party has no actual or presumptive
knowledge.
b. Effect of Concealment
lf material, the concealment entitles the innocejnt party to rescind.
Bar Question: Marine insurance was secured upon goods on board
a ship which departed from Madagascar to Manila, without any
disclosure to the insurer of the fact that the ship had been reported at
Lloyds of London as seen at sea, deep in water and leaky. This
reporl turned out later to be wrong because the ship was at no time
during the voyage leaky or in trouble but was tost thru another
insured risk. The insurer refuses to pay the insured, claiming
concealment. The insured counters that the fact not disclosed was
erroneous and did not increase the risk and therefore immaterial.
Decide the dispute with reasons. (1979 Bar)
Answer: The insured cannot recover because of concealment of a
materialmatter.
The failure o.f the insured to reveal to the insurer a matter within
his knowledge that the ship had been repofted at Lloyds of London
as seen at sea, deep in water and leaky, is a concealment of a
material mafter, even though this report turned out later on to be
erroneous.
ln order that concealment may entitle the insurer to rescind, it is
not necessary that fhe /oss should be a consequence of the matter
concealed. lt is enough that there be a concealment of a material
matter, and this concealment could avoid the contract ab initio, at the
instance of the innocent party without regard to the toss, if any, to the
cause of said /oss, or to the influence of the concealed matter to said
/oss.
c. Concealed Matters not Violating the Contract
But Frees lnsurer if Loss Due to Goncealed Matter
The following matters, although concealed, will not vitiate the
contract except when they caused the loss:
2. Liability of the insured thing to capture or detention
3. Liability to seizure from breach of foreign laws
4. Want of necessary documents
5. Use of false or simulated papers
5. Warranties
a. Classes in Marine lnsurance
1. Express - if provided for on the face of the contract or by
reference to another document.
2. lmplied.
Bar Question: What wananties are implied in marine insurance?
(2000 Bar)
Answer: There are three implied warranties in a marine insurance:
(a) seaworthrness of the vessel at the inception of the insurance; (b)
that the vesse/ will not deviate from the agreed voyage; and (c) that
fhe vesse/ will not engage in any illegalventure.
Bar Question: What is deviation in marine insurance policy? (1958
Ba0
Answer: Deviation is a departure of the vesse/ from the course of
the voyage, or an unreasonable delay in pursuing the voyage, or the
commencement of an entirely different voyage.
lf the deviation is proper, the contract remains valid. lf improper,
the insurer is not liable for /oss subsequent to the deviation.
A deviation is proper in the following cases.' (1) lf due to
circumstances oufslde of the control of the captain or ship owner; (2)
lf done to comply with a warranty; (3) lf made in good faith to avoid
a peril; and (4) lf made to save human life or another dlsfressed
vesse/.
Bar Question: On a clear weather, MN Sundo, carrying insured
cargo, left the port of Manila bound for Cebu. While at sea, the
vesse/ encountered a strong typhoon forcing the captain to steer the
vesse/ to the nearest island where it stayed for seven days. The
vesse/ ran out provisions for lfs passengers. Consequently, the
of
vesse/ proceeded to Leyte to replenish lfs supplies.
248 INSURANCE CODE
a.) Assuming the cargo was damaged because of such deviation,
who between the insurance company and the owner of the cargo
bears the loss?
b.) Under what situations can a yesse/ proceed to a poft other
than its port of destination? (2005 Ba)
Answer: a.) The insurance company should bear the loss. The
deviation made was proper pursuant to Section 145(a) of the
lnsurance Code. Due to the strong typhoon, the captain was forced
to deviate in order to avoid a peril.
b.,) A vessel can properly proceed to a port other than itS port of
destination in the following rnsfances.' (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 avoid peril, whether or not the peril is insured against; (c) when
made in good faith, and upon reasonable grounds of belief in its
necessity to avoid a peril; or (d) when in good faith, for the purpose
of saving human life, or relieving another yesse/ rn disfress. (See
Secfion 124, lnsurance Code)
b. Meaning of Seaworth iness/Cargoworthiness
For a vessel to be seaworthy, it must be adequately equipped for
the voyage and manned with a sufficient number of competent
officers and crew. , Seaworthiness is defined as the sufficiency of the
vessel in materials, construction, equipment, officers, men, and
outfit, for the trade or service in which it is employed. lt includes the
its physical
fitness of a ship for a particular voyage with reference to
and mechanical condition, the extent of its fuel and provisions
supply, the quality of its officers and crew, and its adaptability for the
time of voyage proposed (SMC vs. Heirs, 384 SCRA B7).
To be seaworthy, a vessel must have that degree of fitness which
an ordinary, careful and prudent owner would require his vessel to
have at the commencement of her voyage, having regard to all the
probable circumstances of it. Thus the degree of seaworthiness
varies in relation to the contemplated voyage. Crossing the Atlantic
calls for stronger equipment than sailing across the Visayan Sea. lt
is essential to consider that once the necessary degree of
seaworthiness has been ascertained, this obligation is an absolute
one, i.e., the undertaking is that the vessel actually is seaworthy. lt
is no excuse that the shipowner took every possible precaution to
make her so, if in fact he failed (lbid.).
INSURANCE CODE 249
ln examining what is meant by seaworthiness, the dual nature of
the carrier's obligations under a contract of affreightment must be
considered. To satisfy these duties, the vessel must be efficient (a)
as an instrument of transport, and (b) as a storehouse for her cargo.
The latter part of the obligation is sometimes referred to as
cargoworthiness.
A ship is efficient as an instrument of transport if its hull, tackle
and machinery are in a state of good repair, if she is sufficiently
provided with fuel and ballast, and is manned by an efficient crew.
And a vessel is cargoworthy if it is sufficiently strong ahd equipped to
carry the particular kind of cargo which she has contracted to carry,
and her cargo must be so loaded that it is safe for her to proceed on
her voyage. A mere right given to the charterer to inspect the vessel
before loading and to satisfy himself that she was fit for the
contracted cargo does not free the shipowner from his obligation to
provide a cargoworthy ship (Santiago vs. CA, 432 SCRA 492).
Certificates tending to show that at the time of dry-docking and
inspection by the Philippine Coast Guard, the vessel was fit for
voyage do not necessarily take into account the actual condition of
the vessel at the time of the commencement of the voyage. The
certificates issued, however, do not negate the presumption of
unseaworthiness triggered by an unexplained sinking. Of certificates
issued in this regard, authorities are likewise clear as to their
probative value, thus seaworthiness relates to a vessel's actual
condition. Neither the granting of classification or the issuance of
certificates establishes seaworthiness. Authorities are clear that
diligence in securing certificates of seaworthiness does not satisfy
the vessel owner's obligation. Also, securing the approval of the
shipper of the cargo, or his surveyor, of the condition of the vessel or
her stowage does not establish due diligence if the vessel was in fact
unseaworthy, for the cargo owner has no obligation in relation to
seaworthiness (Delsan vs. CA, 369 SCRA 24)
6. Loss
a. Total - which may be:
1. Actual total loss, involving total destructign, loss by sinking,
damage rendering the thing valueless, or total deprivation of the
owner of possession or part of the destruction, or
 INSURANCE CODE
2. Constructive total loss, involving actual loss of more than 3/4 of
the object; damage reducing the value by more lhan 314 of the value
of the vessel and if cargo, the expense to transship exceeds 314 of
the value of the cargo.
b. Partial - loss which is not total
The logs having been insured as one separable unit, the basis for
determining the existence of constructive total loss is the totality of
the shipment of the logs even if the shipment was carried in two
barges, one of which totally sank in the course of the voyage
(Oriental vs. CA, 200 SCRA 459).
The presentation in evidence of the marine insurance policy so
that its terms and conditions can be scrutinized and the extent of
coverage can be determined is necessary. The contents thereof can
be scrutinized for the purpose of determining the terms of its validity
or effectivity, among other things (Malayan vs. Jardine, 600 SCRA
706)
Bar Question: MN Pearly She//s, a passenge r and cargo vessel
was insured for P40,000,000.00 against "constructive totat loss,,.
Due to typhoon, it sank near Palawan. Luckily, there were no
casualties, only injured passengers. The ship-owner sent a notice of
abandonment bf his interest over the vesse/ to the insurance
company which then hired professionals to aftoat the vessel for
P900,000.00. When refloated, fhe yesse/ needed repairs estimated
at P2,000,000.00. The insurance company refused to pay the ctaim
of the ship owner, stating that there was "no constructive totat toss".
a. Was there "constructive total loss" to entitte the ship owner to
recover from the insurance company?
b. Was it proper for the ship owner to send a notice of
abandonment to the insurance company? (2005 Bar)
Answer: a. There was no constructive fofal /oss. To be considered
such, the /oss musf be more than % of its vatue or a damage
reducing the value by more than %. (section 131 in relation to 13g,
lnsurance Code). ln the case at bar, fhe /oss is not more than % the
value of fhe yesse/ which was insured for p40,000,000.00. The cost
of the refloating is P900,000.00 and the needed repairs amount to
P2,000,000.00, or a totat of onty p2,900,000.00 which does not
constitute more than % of the value of the yesse/.
b. No. The notice of abandonment was not proper. To be proper,
the amount to be expended to recover the yesse/ must have been
INSURANCE CODE 251
more than % its value. MN Pearly She//s needed only P2.9 Million,
which is far from the amount needed to merit abandonment.
Bar Question: An insurance company lssued a marine insurance
policy covering a shipment by sea from Mindoro to Batangas of
1,000 pieces of Mindoro garden sfones against total loss only. The
sfones were loaded in two lighters, the first with 600 pieces and the
second with 400 copies. Because of rough seas, damage was
caused to the second lighter resulting rn fhe /oss of 325 out af 400
pieces. The owner of the shipment filed claims against the insurance
company on the ground of constructive totalloss tnasmuch as more
than three-fourth p/Q of the value of the stones has been lost in one
of the lighters. Is the insurance company liable under its policy?
Why? (1992 Bar)
Answer: As the policy taken is an insurance for total loss only, there
can be no recovery on the ground of constructive total loss. The
insured shipment of 1,000 pieces of Mindoro garden sfones,
although carried in two barges, was insured under one policy only.
As a construcfive /oss would involve a /oss of at least 3/4, the loss
of 325 out of 1,000 pieces would not be a constructive total loss.
Hence, there can be no recovery by the insured for constructive total
/oss.
Bar Question: An interisland vessel insured for P2 M against "total
and constructive total /oss, " sank in 1 50 feet of water one mile off
Paranaque during typhoon. After the typhoon, the ship owner gave
written notice of abandonment of his interest in the entire sunken
ship to the insurance company. Refusing to accept the offer of
abandonment, the insurer hired sailors to refloat fhe vesse/ at a total
cost of P40,000.00. Because the refloated vesse/ needed repair, the
insurer lssued invitations of bid for repairs. Several firms submitted
separate sealed bids ranging from P1.2M to Pl.3M for the complete
refurbishing and/or restoration of fhe vessel to its original condition.
On the basis of the following facts, the insurance company reiected
the claim of the ship owner for payment of totalloss on the ground
that there was no constructive fofal /oss.
a. Was the notice of abandonment given by the owner properly
made?
b. ls the position of the insurance company as to the absence of
constructive total loss well-taken? Reason.
c. Assuming that the ship owner failed to give the proper notice
of abandonment, may he still recover from the insurer? lf so, what
amount can be recovered? Why? (1982 Bar)
252 INSURANCE CODE
Answer: ( a) Although the sinking of a yesse/ generally amounts to
a total loss, however, in many instances, fhe yesse/ may be easily
salvaged as in the problem at bar where the sinking rs Tusf one mile
from Paranaque, and in 150 feet,of water only. This, for the owner,
is not a total actualloss, buf it could amount to a total constructive
/oss.
The notice of abandonment given by the owner on his
assumption that the /oss nras a total constructive loss, being a
unilateral act of the shipowner, was properly made.
(b) The position of the insurance company is well-taken. The
circumstances of the sinking (one mile off Paranaque, and in 150
feet of water) making its refloating and repair easy, can prevent the
loss from being a total actual /oss. "Perils of the sea" extend only to
/osses caused by sea damage, or by violence of the elements, and
does not embrace a// /osses. And the /oss, nof being a total actual
loss, abandonment by the owner will only be proper if the total
constructive loss amounts to 3/4 or more of the value of the vessel.
The expenses for refloating (P40,000) and refurbishing (P1.3
million) do not amount to 3/4 or more of the value of the ship.
Hence, claiming for total constructive /oss is not proper.
(c) lf the ship owner failed to give the proper notice of
abandonment, he can still recover for partialloss. /4 as the problem
sfafes, P40,000 was spenf for refloating and P1.2 to P1.3 million
would be the efrense for refurbishing and/or restoring the vessel to
its original condition, these amounts are recoverable from the
insurance company as the actual partialloss of the insured without
abandonment of the yesse/.
The Probtem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have plans to invite atien investors
who are agreeable to rendering financialasslstance by way of direct
investment and/or loans. Your professional assrsfance is solicited
on the following various questions that may arise.
Bar Question: Assume that your firm is engaged in the commercial
transportation of coconut oil produced exclusively in Mindanao.
Briefly explain with legal reasons:
lf a vessel of your firm is insured and is damaged partially by a
typhoon at sea, may your firm recover the full amount of the
insurance? Why? (1973 Bar)
INSURANCE CODE 2s3
Answer: lf the vessel is insured and is partially daimaged by a
typhoon at sea, the full amount of the insurance is recoverable if the
paftial damage amounts to a constructive total /oss, and my firm
abandons the vessel to the insurer.
B. Fire lnsurance
l.Defined
A fire insurance is a contract by which the insurer for a
consideration agrees to indemnify the insured against loss of, or
damage to, property by fire, but may include loss by lightning,
windstorm, tornado, or earthquake.
Bar Question: Queens lnsurance Company insured X's house, a
resident of Baguio City, "against all direct /oss and damage by fire."
X lived in a house heated by a furnace. His servant built a fire in the
furnace using material that was highly flammable. The furnace fire
caused intense heat and great volume of smoke and soot that
damaged the furnishings in the rooms of X. When X tried to collect
on the policy, Queens lnsurance refused to pay contending that the
damage is not covered by the policy where the fire is confined within
the furnace. Decide. (1989 Bar)
Answer: Queens lnsurance would not be liable. The coverage of
the policy is "direct /oss or damage by fire." This presupposes fhaf
the insured building or a part of it was burned by fire. There was no
such fire. The damage to room furnishings due to smoke and soot
from the furnace is not within the contemplation of the fire insurance
contract.
2. Alteration in Use or Condition
a. Alteration Resulting in Rescission
An alteration in the use or condition of a thing insured from that to
which it is limited in the policy made without the consent of the
insurer, by means within the control of the insured, and increasing
the risk, entitles the insurer to rescind.
b. Alteration not Resulting in Rescission
1. Alterations not increasing the risk
2. Alterations increasing the risk but not violating the contract
2s4 INSURANCE CODE
3. Measure of Indemnity
1. Open policies - the expense necessary to replace the thing
lost or injured in the condition it was at the time of the injury.
2. Valued policies - the parties are bound by the valuation, in the
absence of fraud or mistake.
The falsity of invoices submitted by the insured to prove actual
existence at the burned premises of the stocks mentioned in its
inventory is evidence of a fraudulent claim and will avoid the
insurer's liability (Yu vs. Fieldmen's, 14 SCRA 491).
The insured's inventory of stocks is not binding on the insurer
where it was prepared without their intervention (lbid.).
4. Other lnsurances
Failure of an insured to disclose any other insurance on the same
property, inspite of the express provision of the policy, even if with
the knowledge of the insurer's agents, prevents liability from
attaching (New Life vs. CA, 207 SCRA 669).
Ordinarily, where the insurance policy specifies as a condition the
disclosure of existing co-insurers, non-disclosure thereof is
violation that entitles the insurer to avoid the policy. This condition is
common in fire insurance policies and is known as the "other
insurance clause." The purpose for the inclusion of this clause is to
prevent an increase in the moral hazard. This is a valid provision but
there is one exception, that is, when the failure to disclose was not
intentional and fraudulent. The relevant provision is Section 75,
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. To constitute a
violation, the other existing insurance contracts must be upon the
same subject matter and with the same interest and risk. The
insurer is estopped from invoking this argument if his own loss
adjuster had admitted previous knowledge of the co-insurers . There
was no violation of the "other insurance clause" (American vs. Chua,
309 SCRA 250).
G. Gasualty lnsurance
INSURANCE CODE 255
1. Defined
Casualty insurance is insurance covering loss or liability arising
from accident or mishap, excluding those falling under other types of
insurance as fire or marine.
The death of an insured under a personal accident insurance due
to a stabbing by unknown malefactors, is not the natural and
probable result of the insured's voluntary act; hence it is covered by
the policy, making the insurer liable (Finman vs. CA, 213 SCRA
4e3).
Bar Question: CNt insured SAM under a homeowner's policy
against claims for accidental injuries by neighbors. SAM'S minor
son, BOY, injured 3 children of POS, a neighbor, who sued SAM for
damages.
SAM's lawyer was ATT, who was paid for his servrces by the
insurer for reporting periodically on the case to CNl. ln one report,
ATT disclosed to CNI that after his investigations, he found the
injuries to the 3 children not accidental but intentional.
SAM /ost the case in court, and POS was awarded one million
pesos in damages which he sought to collect from the insurer. But
CNI used ATT's report to deny the claim on the ground that the
injuries fo POS's 3 children were intentional, hence excluded from
a the policy's coverage. POS countered that CNI was estopped from
using ATT's repoft because it was unethical for ATT to provide
prejudicial information against his client to the insurer, CNl.
Who should prevail: the claimanf, POS; or the insurer, CNI?
Decide with reasons briefly. (2004 Bar)
Answer: POS should prevail.
The insurance taken by SAM is for the benefit of persons who
may claim against SAM for injuries inflicted on others. Srhce SAMS
son caused injuries to POS3 children, CN/ is liable under the policy.
ATT's report can be used by CNl, but it is immaterial and not binding
on POS. So POS could still hold CNI liable under the policy.
Where there is an exclusionary clause in an accident insurance
policy excluding from coverage persons above 65 years, but the
insurer issued a policy after payment of premiums, despite the fact
that the date of birth of the insured was stated in the application, the
company is liable under the policy where the insured dies 45 days
after the issue of said policy, the company's failure to cancel the
256 INSURANCE CODE
policy being deemed a waiver of aforesaid exclusionary clause
(Edillon vs. Manila, 117 SCRA 187).
2. Examples
The examples are employer's liability insurance, workmen's
compensation insurance, public liability insurance, and motor vehicle
liability insurance.
3. Gompulsory Motor Vehicle Liability
(As amended by P.D. 1814)
a. Method of Goverage
1. lnsurance Policy
2. Surety Bond
3. Cash Deposit
The cash deposit or surety bond shall be resorted to by the
lnsurance Commissioner in vehicular accident the indemnities to
which are not settled by the vehicle owner.
The nature of Compulsory Motor Vehicle'Liability lnsurance is
such that it is primarily intended to provide compensation for the
death or bodil! injuries suffered by innocent third parties or
passengers as a result of the negligent operation and use of motor
vehicles. The victims and/or their dependents are assured of
immediate financial assistance, regardless of the financial capacity of
motor vehicle owners (Tiu vs. Arriesgado, 437 SCRA 426).
b. Vehicles Govered
1. Public utility vehicles third party liability
2. Owner vehicles minimum third party liability
3. Other vehicles minimum third party liability
(Note: By virtue of lnsurance Commission Memorandum Circular
No. 1-96 dated November 4, 1996, the limits for all CMVLI covers
have been increased. ln accordance with Section 377 (as amended
by PD No. 1814), the Commissioner has setforth a newschedule of
indemnities for the payment of claims for death or bodily injuries.)
INSURANCE CODE 257
c. Non-Fault Glause
Any claim for death or injury shall be paid up to P5,000 without the
necessity of proving fault or negligence, provided the following proofs
of loss under oath are submitted: (1) death certificate and evidence
sufficient to establish the proper payee; (2) police report; and (3)
medical report and evidence of medical or hospital disbursement.
The claim is collected from the insurer of the vehicle where the
claimant is riding, mounting or dismounting from. ln all other cases,
the claim is against the insurer of the offending vehicle.
The insurer who pays can claim against the offending vehicle
(Perla vs. Ancheta, 164 SCRA 144).
The recovery by the injured from the insurer is direct and not
dependent on the recovery against the insured by the injured party
(Vda. De Maglana vs. Consolacion,2l2 SCRA 268).
While technically a court may not order the carrier and the surety
company to pay the hospital where an injured passenger-. was
confined, especially where the hospital was not a party to the case,
in the interest of justice, courts may do so, and prevent the filing of
separate actions by the procedure of filing a proceeding
supplementary to execution (Vda. de Chi vs. Tanada, 111 SCRA
1 e0)
The injured or the heirs of a deceased victim of a vehicular
accident may sue directly the insurer of the vehicle. Note that
common carriers are required to secure Compulsory Motor Vehicle
Liability lnsurance [CMVLI] coverage as provided under Section 374
of the lnsurance Code, precisely for the benefit of victims of vehicular
accidents and to extend them immediate relief (GSIS vs. CA , 308
scRA 559).
Although the victim may proceed directly against the insurer for
indemnity, the third party liability is only up to the extent of the
insurance policy and those required by law. While it is true that
where the insurance contract provides for indemnity against liability
to third persons, and such third persons can directly sue the insurer,
the direct liability of the insurer under indemnity contracts against
third party liability does not mean that the insurer can be held liable
in solidum with the insured and/or the other parties found at fault.
258 INSURANGE GODE
For the liability of the insurer is based on contract; that of the insured
carrier or vehicle owner is based on tort (lbid.).
Bar Question: What do you understand by the "no fault indemnity"
provision in the lnsurance Code? What are the rules on claims
underthe said provision? (1994, 1989 Ba)
Answer: The "no fault liability" provision of the lnsurance Code has
reference to third party liability in motor vehicle insurance under
which the insurer of the vehicle the injured or deceased person was
boarding, was a passenger of, or was disembarking from, becomes
liable for physical injuries or death up to P5,000, without regard to
whether or not the vehicle was negligent or at fault at the time of the
accident.
The rules are:
(a) The suit or claim of rxovery is directed at one vehicle only;
(b) The sulf is directed against the insurer of the vehicle where the
victim was a passenger of, or against the insurer of the vehicle which
bumped the victim;
(c) The insurer who pays can claim against the vehicle at fault.
The claim shall be under oath with sufficient proofs as follows: (1)
police repoft of the accident; (2) death certificate and evidence
sufficient to establish the proper payee; or (3) medical repoft and
evidence of medical or hospital disbursement in respect of which
refund is claimed.
Bar Question: Driving his car one night, A crossed an intersection
as the signal light turned green. Suddenly he saw an old woman
crossrng the street just a few feet from his car. He applied his brakes
immediately, but just the same, he hit the woman who turned out to
be senile already. He brought her to the nearest hospital where she
was confined for three days due to her injuries. Upon her discharge,
A had to pay the hospital billwhich amounted to P2,000.00, including
X-rays, doctor's fees and medicines.
Being covered by the compulsory liability policy required of all
vehicle owners under the lnsurance Code, A referred the matter to
his insurance company, which refused to reimburse him, claiming
that since A was not at fault (it was admitted that he was not
speeding or in any way negligent), there was no third-party liability
for which the insurance company could be liable under A's policy.
ls the insurance company liable to reimburse A for the hospital
expense? Explain. (1983 Bar)
INSURANCE CODE 259
Answer: Yes, the insurance company is liabte to reimburse A for
the hospitalexpenses of the pedestrian.
Ihrs is a case for recovery under the no-fautt clause provisions of
the lnsurance Code. Without regard to the fault or negtigence of any
person involved in the accident, the insurer of the only vehicle
involved in the accident is liable up to a maximum of p5,000.00 upon
submission by the insured of the potice repoft, the medical report,
and evidence of medicalor hospital disbursement.
The reimbursement claim of A, owner of the insured vehicte, for
P2,000.00 is within the maximum amount, hence, the insurance
company should reimburse the amount to him.
Bar Question: Jose, driving his own car together with his wife,
Maria, were on their way home from their respective offices when a
car driven by Pedro hit them from behind which was in turn hit by a
gasoline tanker driven by Mario, causing the car of Jose to turn-
turile, thus resulting to the death of Maria. Alt motor vehicles being
insured, Jose filed his claim for the death of Maria against the
insurers of the said three motor vehicles under the "NO-FAIJLT,,
insurance, Section 378, of the lnsurance Code.
a. Will Jose's claim for the death of Maria against the insurers of
said three motor vehicles prosper and up to what amount? Reasons.
b. lf Jose includes in the claim damage for his car, wittthe ctaim
prosper? Why? (1977 Bar)
Answer: (a) AsJose has invoked the "No-Fault,'provisionsofthe
lnsurance Code (Section 3781, Jose can onty claim against the
insurer of his own car, the vehicle Maria was riding in at the time of
the incident.
The amount recoverable under this provision with respect to the
death of Maria, Jose's wife, cannot exceed p5,000.
(b) /f Jose's claim includes damage to his car, the claim may
prosper if brought against the insurers of the other vehictes, not
his own, unless of course, Jose's insurance on his car is a
comprehensive one, and not just the required compulsory third pafty
liability coverage.
Jose's claim against the insurers of the other vehictes however
cannot be paid under the "No-Fault" provision, as fhr.s covers
death or physical injuries to third persons only.
Bar Question: "X" owns and operates several passenger jeepneys
in Metro Manila. He entered into a contract with the Gotd Mine
lnsurance & Surety Co., insuring the operation of his jeepneys
ag a in st acc i d e nts w ith th i rd - p a rty I i ab i I ity.
260 INSURANCE CODE
During the effectivity of the insurance, one of his ieepneys
bumped "8" who had just alighted from another passenger ieepney
whose driver unloaded passengers in the middle of the street. "8"
suffered bodily injury as a consequence and filed a claim against the
insurance company. The latter refused to pay on the ground that the
driver of the jeepney from which passenger "8" alighted was guilty of
negligence in unloading in the middle of the street, and that the
driver of the insured operator was not at fault.
Can passenger "8" recover from the insurance company?
Explain. (1981 Bar)
Answer: B cannot recover from the insurance company Gold Mine
lnsurance and Surety Co.
The compulsory motor vehicle insurance provisions of the
lnsurance Code allow a passenger recovery from the insurance of
the vehicle where he was riding.
The contract of transportation between B and the ieepney, a
common carrier he rode in, and which unloaded him in the middle of
the street, subsisfs up to the time B, the passenger, is unloaded in a
safe place. To all intents and purposes, B was sf// a passenger of
the jeepney he rode in, and which unloaded him in the middle of the
sfreef, at the time he (B) was bumped by one of the ieepneys of X.
As 8 was still such passenger, the jeep he rode in would be liable to
B, as a common carrier, and necessarily, the insurer of said
jeepney, becauSe of the compulsory insurance coverage, would be
liable to B.
B cannot therefore recover from X's insurer, the Gold Mine
lnsurance and Surety Co.
Bar Question: While driving his car along EDSA, Cesar sideswiped
Roberto, causing injuries to the latter. Robefto sued Cesar and the
third pafi liability insurer for damages and/or insurance proceeds.
The insurance company moved fo dismiss the complaint, contending
that the liability of Cesar has not yet been determined with finality.
a. ls the contention of the insurer correct? Explain.
b. May the insurer be held liable with Cesar? (1996 Bar)
Answen (a) No, the contention of the insurer is not correct.
The injured may immediately sue the insurer of the guilty vehicle
upon the occurrence of the accident up to the extent of its liability in
the policy. There is no need to determine with finality the liability of
Cesar. The purpose of the compulsory motor vehicle insurance
liability is to extend to them immediate relief.
INSURANCE CODE 261
(b) The insurer may be held liable with Cesar. lts liability is direct
and solidary with the operator but only up to the amount stated in the
policy. /n excess of said amount, Cesar will be liable therefor, unless
Cesar's insurance is comprehensive and the claim is within the limit
(See Frrsf vs. CA, 218 SCRA 525).
Bar Question: X was riding a suburban utility vehicle (SUV)
covered by a eomprehensive motor vehicle liability insurance
(CMVLI) underwritten by FastPay lnsurance Company when it
collided with a speeding bus owned by RM Travel, lnc. The collision
resulted in serious injuries to X; Y, a passenger of the bus; and Z, a
pedestrian waiting for a ride at the scene of the collision. The police
report established that the bus uras the offending vehicle. The bus
had a CMVLI policy issued by Dragon Insurance Corporation. X,Y,
and Z jointly sued RM Travel and Dragon lnsurance for indemnity
underthe lnsurance Code of the Philippines (P.D. 1460). The lower
couri applied the "no-fault" indemnity policy of the statute, dismissed
the suit against RM Travel, and ordered Dragon lnsurance to pay
indemnity to all three plaintiffs. Do you agree with the court's
judgment? Explain.(2000 Bar)
Answer: No, the court's judgment was erroneous. Since the driver
of RM Travel was at fault, Dragon lnsurance should pay for the
damages to X, Y and Z up to the extent of its liability under the
policy. /n excess thereof, RM Travel should be held liable.
1. Period of Filing Claim and Action
to Recover Damages
The written notice of claim must be filed with the insurer within six
months from the date of the accident otherwise the claim is deemed
waived. The suit for damages either with the proper court or with the
lnsurance Commissioner should be filed within one year from the
date of the denial of the claim by the insurer, otherwise claimant's
right of action shall prescribe (Section 384, lnsurance Code, as
amended by Sec. 4, B.P. 874; Vda. de Gabriel vs. CA, 264 SCRA
137).
The prescriptive period to bring suit in court under an insurance
policy begins to run from the date of the insurer's rejection of the
claim filed by the insured, the beneficiary or any person claiming
under an insurance contract. This ruling is premised upon the
compliance by the persons suing under an insurance contract with
the indispensable requirement of having filed the written claim.
 262 INSURANCE CODE
Absent such written claim filed by the person suing under an
insurance contract, no cause of action accrues under such insurance
contract, considering that it is the rejection of that claim that triggers
the running of the one-year prescriptive period to bring suit in court,
and there can be no opportunity for the insurer to even reject a claim
if none has been filed in the first place (Travellers vs. CA,272 SCRA
536).
2. Applicability
The compulsory third party motor vehicle. liability insurance
provision of the lnsurance Code is applicable to motor vehicles
owned by the U.S. Government (Opinion 73, Secretary of Justice,
May 17, 1976).
The right of the person injured to sue the insurer of the party at
fault (insured) depends on whether the contract of insurance is
intended to benefit third persons also or only the insured. And the
test applied has been this: Where the contract provides for
indemnity against liability to third persons, then third persons to
whom the insured is liable can sue the insurer. Where the contract is
for indemnity against actual loss or payment, then third persons
cannot proceed against the insurer, the contract being solely to
reimburse the insured for liability actually discharged by him thru
payment to third persons, said third persons' recourse being thus
limited to the insured alone (Guingon vs. Del Monte, 20 SCRA 1043).
ln a case arising from a vehicular collision where the driver, the
registered owners, the beneficial owners and the insurer were sued,
a compromise agreement entered into between the plaintiff and the
insurer resulting in the dismissal of the case as against the insurer
did not redound to the benefit of the other defendants (lmson vs. CA,
239 SCRA 59).
3. Expired Driver's License as Affecting Recovery
An expired traffic violation ticket of a driver of a vehicle involved
in an accident violates a provision of an accident insurance policy
that the driver of a covered jeepney must be a holder of a valid and
subsisting professional driver's license, and prevents liability from
attaching against the insurer (Gutierrez vs. Capitat, 130 SCRA 100).
A foreigner without a valid driver's license because of his stay in
the Philippines for more than 90 days is disqualified to drive and the
INSURANCE CODE 263
insurer may refuse to pay if the insured car is involved in an accident
(Stokes vs. Malayan, 127 SCRA 766).
Where, however, the driver of the involved vehicle is the insured
himself, the qualified driver requirement is not a prerequisite to
recovery (Palermo vs. Pyramid, 161 SCRA 677).
Bar Question: Rick de Ia Cruz insured hls passenger ieepney with
Asiatic lnsurers, lnc. The policy provided that the authorized driver
of the vehicte shoutd have a valid and existing driver's license. The
passenger jeepney of Rick de la Cruz which was at the time driven
by Jay Cruz, figured in an accident resulting in the death of a
ptassenger. At the time of the accident, Jay Cruz was licensed to
drive but it was confiscated by an LTO agent who issued him a
Traffic Violation Report (TVR) iust minutes before the accident.
Could Asiatic lnsurer, tnc. be made liable under its policy? Why?
(2003 Bar)
Answer: Yes, Asiatic can be made tiable under its policy.
Jay Cruz is sf/ considered to have a valid and existing driver's
license, which is not expired, even if his license was confiscated iust
minutes before the accident. The fVR issued to Jay Cruz is
equivalent to his confiscated driver's license (See Gutierrez vs.
Capital, supra).
Bar Question: Sherly insured her newly acquired car, a Nissan
Maxima, against any loss or damage for P50,000 and against third
party tiabitity for P20,000 with the XYZ lnsurance Corp' (XYZ).
tJnder the policy, the car must be driven only by an authorized driver
who is either: (1) the insured, or (2) any person driving on the
insured's order or with his permission, provided that the person
driving is permitted in accordance with the licensing or other laws or
of regulations to drive the motor vehicle and is not disqualified from
driving such motor vehicte by order of the court. During the
effectivity of the policy, the car, then driven by Sheryl herself who
had no driver's license, met an accident and was extensively
damaged. The estimafed cosf of repair was P40,000- Sheryl
immediately notified XYZ, but the latter refused to pay on the policy
atteging that Sheryl viotated the terms thereof when she drove it
without a driver's license.
tsthe insurer correct? (1991 Bar)

264 INSURANCE CODE
Answer: No, the insurer is not correct. The authorized driver
requirement in car insurance applies to persons other than the
insured himself,
tn the problem above, the insured herself, Sheryl, was the driver
of the car at the time of the accident. The authorized driver
requirement does not apply to her, and the car damage of p40,000,
being within the P50,000 /oss or damage limit set in the policy,
sheryl can recover the said amount even if she had no ticense at the
time of the accident.
Bar Question: Mayari obtained a comprehensive insurance poticy
on his car. The policy carried the standard "authorized driver,,clause
which states that the insurance company is not liable for any loss,
accidents, or damage sustained while the car is being driien by
someone other than a duly authorized driver. One day, Mayari
allowed his friend, Kaibigan, to drive the car. Kaibigan figured in a
mishap and the car was a total loss.
Kaibigan has been driving for the past five years but it appears
that his driver's license was irregularly issued because he cannot
read nor write; neither did he take any of prescribed driver's tests.
After the initial license was issued, he merety asked his wife to go to
the LTC office to get a renewal of his license. Mayari did not know
about the irregularity in the driver's /icense of Kaibigan.
Can Mayari r&over on the insurance policy? Explain. (1gg6 Ba)
Answer: Mayari cannot recover on the poticy. Kaibigan possessed
an irregularly issued license which is not at ail a vatid license. At the
time of the accident, the insured car was driven by a person who was
not an authorized driver, and therefore violates the "authorized driver
Iicense" provisions of the policy, entitting the insurer to rescind the
insurance contract.
4. Effect of lnsurance paid to
lnjured Passenger
lnsurance paid to an injured passenger from the compulsory third
party liability coverage of the motor vehicle is credited tio the
subsidiary liability coverage of the owner for the offense of his driver
(de Caliston vs. CA, 122 SCRA 958).
i
INSURANCE CODE 265
d. Comprehensive Motor Vehicle lnsurance
Aside from compulsory motor vehicle liability insurance, the
lnsurance Code contains no other provision applicable to casualty
insurance or to robbery insurance in particular.
ln burglary, robbery, and theft insurance, the opportunity to
defraud the insurer is so great that insurers have found it necessary
to fill up their policies with countless restrictions (Fortune vs. CA,244
scRA 308).
Where a car, covered by a comprehensive insurance policy
including theft and burglary, was placed by the owner on display for
sale at gas station, taken by a service station boy without the station
owner's permission, and bumped against an electric post, the
damage is covered by the theft clause (Association vs. Fieldman's,
124 SCRA 618).
Where a car is admittedly unlawfully and wrongly taken without
the knowledge and consent of the owner, such taking constitutes
"theft" and it is the theft clause, not the authorized driver clause,
which should apply (Perla vs. CA, 208 SCRA 487).
A car in a motor shop, taken by an employee for a drive, meeting
an accident, is theft, covered by a comprehensive insurance making
the insurer liable, although there is no conviction yet for theft filed by
the employer against the employee (Malayan vs. CA, 146 SCRA 45).
Bar Question: HL insured his brand new car with P lnsurance
Company for comprehensive coverage wherein the insurance
company undertook to indemnify him against /oss or damage to the
(a) by accidental collision xxx (b) by fire, external explosion, burglary,
or theft, and (c) malicious act.
After a month, the car was carnapped while parked in the parking
space in front of the lntercontinental Hotel in Makati. HL's wife who
was driving said car before it was carnapped reported immediately
the incident to various government agencies in compliance with the
i nsu rance req u ire m e nts.
Because the car could not be recovered, HL filed a claim for the
/oss of the car with the insurance company but it was denied on the
ground that his wife who was driving the car when it was carnapped
was in possesslon of an expired driver's license, a violation of the
"authorized driver" clause of the insurance company.
266 INSURANCE CODE
a. May the insurance company be held liable to indemnify HL for
fhe /oss of the insured vehicle? Explain.
b. Supposing that the car was bought by HL on installmenf basis
and there were installments due and payable before fhe /oss of the
car as well as installments not yet payable. Because of the loss of
the car, the vendor demanded from HL the unpaid balance of the
promissory note. HL resrsfed the demand and claimed that he was
only liable for the installments due and payable before the loss of the
car but no longer liable for the other installments not yet due at the
time of the /oss of fhe car. Decide. (1993 Bar)
Answer: (a) Yes, the insirance company may be hetd liabte for the
/oss of fhe insured vehicle.
The vehicle was /osf due to theft, hence it is the "theft" clause and
not the "authorized driver clause" which applies. Even if the driver
had an expired license, the same is immaterial under the "theft"
clause.
(b) The loan obtained to buy the vehicle is not affected by the
accident. HL must still pay his loan under the terms of the
promissory note. lf there is an unpaid balance on the note, HL must
pay the same.
Bar Question: Mr. Gonzales was the owner of a car insured with
Masagana lnsurance Company for "Own Damage", "Theft", and
"Third Party LiaBility" effective May 14, 1986 to May 14, 1987. On
May 2, 1987, the car was brought to a machine shop for repairs. On
May 1 1 , 1 987, while in the custody of the machine shop, the car was
taken by one of the employees (of the machine shop) to show off
to his girlfriend. While on the way to his girlfriend s house, the car
smashed into a parked truck and was extensively damaged. Mr.
Gonzales filed a claim for recovery under the policy but was refused
payment. The insurance company averred that the car was not
stolen, and therefore was not covered by the "Theft Clause".
Decide the merits of the insurer's contention, with reasons. (1988,
1985,1981 Bar)
Answer: Where the insured's car is wrongfully taken without his
consent by an employee of the machine shop to which it was
entrusted for repairs, in the course of which it was smashed in an
accident, the insurer is liable and must pay the insured for the total
/oss of the insured's vehicle, under the theft clause of the policy
(See Villacorta vs. lnsurance, 100 SCRA 467).
D. Suretyship
INSURANCE CODE 267
1. Defined
Suretyship is a contractual relation resulting from an agreement
whereby one person, the surety, engages to be answerable for the
debt, default or miscarriage of another, known as the principal. The
surety's obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to the
obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promise of the principal is
said to be direct, primary and absolute; in other words, he is directly
and equally bound with the principal. The surety therefore becomes
liable for the debt or duty of another although he possesses no direct
or personal interest over the obligations nor does he receive any
benefit therefrom (Security vs. Tria-lnfante, 468 SCRA 526).
Suretyship is a contract or agreement whereby a party, called the
suretyship, 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 (Stronghold vs. Tokyu, 588 SCRA 410). lt
includes official recognizances, stipulations, bonds, or undertakings
issued under Act 536. Corollarily, Article 2047 ot the Civil Code
provides that suretyship arises upon the solidary binding of a person
deemed the surety with the principal debtor for the purpose of
fulfilling an obligation (Prudential vs. Equinox, 533 SCRA 257).
The surety is considered in law as possessed of the identity of the
debtor in relation to whatever is adjudged touching upon the
obligation of the latter. Their liabilities are so interwoven as to be
inseparable.
lndeed, a surety is released from its obligation when there is a
material alteration of the principal contract in connection with which
the bond is given, such as a change which imposes a new obligation
on the promising party, or which takes away some obligation already
imposed, or one which changes the legal effect of the original
contract and not merely its form. However, a surety is not released
by a change in the contract, which does not have the effect of
making its obligation more onerous (Stronghold vs. Tokyu, supra).
A contract of suretyship includes among its various species bonds
such as those issued pursuant to Section 1904 of the Code.
Significantly, pertinent provisions of the Civil Code of the Philippines
shall be applied in a suppletory character whenever necessary in
268 INSURANCE CODE
interpreting the provisions of a contract of suretyship (lntra-Strata vs.
Republic, 557 SCRA 363)
Bar Question: Distinguish clearly cash bond from surety bond.
(2004 Bar)
Answer: A cash bond is a security in cash put up by a debtor
himself, while a surety bond is a security put up by a surety or
insurance company in behalf of a principal, to guarantee the
performance by such principal of some act or undertaking.
2. Nature of Surety's Undertaking
The nature of suretyship actually involves two types of relationship
- the underlying principal relationship between the creditor and the
debtor and the accessory surety relationship between the principal
and the surety. The creditor accepts the surety's solidary
undertaking to pay if the debtor does not pay. Such acceptance,
however, does not change in any material way the creditor's
relationship with the principal debtor nor does it make the surety an
active party to the principal creditor-debtor relationship. ln other
words, the acceptance does not give the surety the right to intervene
in the principal contract. The surety's role arises only upon the
debtor's default, at which time, it can be directly held liable by the
creditor for paym6nt as a solidary obligor (Stronghold vs. Tokyu,
supra).
By its very nature under the terms of the laws regulating
suretyship, the liability of the surety is joint and several but limited to
the amount of the bond, and its terms are determined strictly by the
terms of the contract of suretyship in relation to the principal contract
between the obligor and the obligee (lbid.). The definition and
characteristics of a suretyship bring into focus the fact that a surety
agreement is an accessory contract that introduces a third party
element in the fulfillment of the principal obligation that an obligor
owes an obligee. ln short, there are effectively two (2) contracts
involved when a surety agreement comes into play - a principal
contract and an accessory contract of suretyship. Under the
accessory contract, the surety becomes directly, primarily, and
equally bound with the principal as the original promissor although
he possesses no direct or personal interest over the latter's
obligations and does not receive any benefit therefrom (lbid.).
INSURANCE CODE 269
A surety contract is made principally for the benefit of the
creditor-obligee and this is ensured by the solidary nature of the
sureties' undertaking. Under these terms, the surety is not entitled as
a rule to a separate notice of default, nor to the benefit of excussion,
and may be sued separately or together with the principal debtor
(rbid.)
The extent of a surety's liability is determined by the language of
the suretyship contract or bond itself. lt cannot be extended by
implication, beyond the terms of the contract. To determine if the
surety is liable under the surety bond, it becomes necessary to
examine the terms of the contract itself (First vs. Chevron, 663
scRA 30e).
A surety contract is merely a collateral one, its basis is the
principal contract or undertaking which it secures. Necessarily, the
stipulations in such principal agreement must at least be
communicated or made known to the surety. Non-compliance by the
creditor impacts not on the validity or legality of the surety contract
but on the creditor's right to demand performance (lbid.)
The lnterim Rules of Procedure of Corporate Rehabilitation
provides that a stay order does not apply to sureties who are
solidarily liable with the debtor (JAPRI vs. Security, 650 SCRA 654).
The surety can demand from the principal upon the latter's
default, even before payment by the surety to the creditor (Pioneer
vs. CA, 180 SCRA 156).
A surety on a counter-bond given to secure the payment of a
judgment becomes liable for the payment of the amount due upon
(1) demand made upon the surety; and (2) notice and summary
hearing on the same action (United vs. Acropolis, 664 SCRA 65).
lf a surety upon demand fails to pay, he can be held liable for
interest, even if in thus paying, the liability becomes more than that
in the principal obligation. The increased liability is not because of
the contract, but because of the default, and the necessity of judicial
collection (Manila vs. CA, 191 SCRA 805).
3. Effectivity
270 INSURANCE CODE
. The suretyship contract is binding upon payment of the premium,
or upon acceptance by the creditor of the bond, whether or not
premium has been paid.
Where the obligee has accepted the surety bond, it becomes valid
and enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety (Phil. Pryce vs. CA, 230 SCRA 164).
E. Life lnsurance
1. Defined
A life insurance is an insurance on human life and insurance
appertaining thereto or connected therewith. It includes every
contract or pledge for the payment of endowments or annuities.
2. Kinds
a. Ordinary Life, General Life or Old Line Policy
Under this policy, the insured pays a specific premium every year
until he dies. The policy acquires a surrender value after three
years.
b. Limited Payment Policy
The insured pays premiums for a limited period. lf he dies within
the period, his beneficiary is paid; if he outlives the period, he does
not get anything from the policy.
c. Endowment Policy
The insured pays premiums for a specified period. lf he ouflives
the period, the face value of the policy is paid to him; if not, his
beneficiary receives the benefit.
d. Term lnsurance
The insured pays once only, and he is insured for a specified
period. lf he dies within the period, his beneficiary benefits. lf he
outlives the period, no person benefits from the insurance.
INSURANCE CODE 271
e. lndustrial Life lnsurance
It is a life insurance entitling the insured to pay premiums weekly,
or where premiums are payable monthly or more often (but not less
than weekly), if the face value is P2,000 or less, and the words
"industrial policy" are printed upon the policy.
f. Variable Gontract
A variable contract is any policy or contract on either a group or
individual basis issued by an insurance company providing for
benefits or other contractual payments or values thereunder to vary
so as to reflect investment results of any segregated portfolio of
investment.
3. Amount of lnsurance
1. On one's life no limit.
- another, over whom the person procuring the
2. On the life of
of the
insurance has an insurable interest
insurable interest.
- up to the extent
A life insurance policy is a valued policy' 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 (Great vs. CA, 316 SCRA 677).
4. The Beneficiary (SuPra)
5. The Assignee
Bar Question: /s ff necessary for (1) an assrgnee to have an
insurable interest in the life of insured? Why? (1949 Bar)
Answer: tn those rnsfances where the insured can assign his policy,
hls asslgnee may be any person, whether or not he (the assignee)
has an insurable interest in the life of the insured. A life insurance is
a property right within the capacity of its owner fo dlspose of, like his
other properties.
Bar Question: A man insures his life and later transfers the policy
to one who has no insurable interest. lf the insured dies before the
transfer is notified to the insurer, may the transferee collect the
insurance? (1959 Bar).
272 INSURANCE CODE
Answer: Yes, the transferee may collect the insurance. Unless
required by the policy, the transfer by the insured of his policy to his
assrgnee does not need the knowledge, much less, the conformity,
of the insurer.
Bar Question: The policy insurance upon his life, with the face value
of Pl00,000.00, was assrgned by Jose, a married man with two (2)
legitimate children, to his nephew, Y, as security for a loan of
P50,000.00. He did not give the insurer any written notice of such
assignment despite the explicit provision to that effect in the poticy.
Jose died. IJpon the claim on the policy by the assrpnee, the insurer
refused to pay on the ground that it was not notified on the
assignment. Upon the other hand, the heirs of Jose contended that
Y is not entitled to any amount because the assignment without due
notice to the insurer was void. Reso/ye fhe issues. (1gg1 Bar)
Answer: The problem will have to be resolved in favor of the heirs
of Jose.
While assignment of the policy is a prerogative belonging to the
insured, rn cases however where the policy expressly provides that
notice to the insurer must be made by the insured in case of
assignment of the policy, the failure of the insured to notify the
insurer of the said assignment will not bind the insurer. The insurer
therefore may pay to the heirs of Jose, as there is no beneficiary
named in the policf.
6. Effect of Death of lnsured Through:
a. Suicide
The insurer in a life insurance contract shall be liable in case of
suicide 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 the commission (lnserted as
Section 180-A by Section 3 of B.P. 874).
Bar Question: S lnsurance Company issued a personal Accident
Policy to Bob Tan with a face value of P500,000.00.
ln the evening of September 5, 1992, after his birthday party, Tan
was in a happy mood but not drunk. He was playing with his hand
gun, from which he previously removed the magazine. As hrs
secretary was watching television, he stood in front of her and
INSURANCE CODE 273
her. She pushed it aside and said that it may be
pointed the gun at
loaded. He assured her that it was not and then pointed it at his
temple. The next moment, there was an explosion and Tan slumped
to the floor lifeless.
The wife of the deceased sought payment on the poticy but her
claim was rejected. The insurance company agreed that there was
no suicide. However, it was the submission of the insurance
company that there was no accident. ln support thereof, it
contended (a) that there was no accident when a deliberate act was
performed unless some additional, unexpected, independent and
unforeseen happening occur which produces or brings about the
injury or death; and (b) that the insured wilfulty exposed himself to
needless peril and thus removed himself from the coverage of the
insurance policy. Are the two contentions of the insurance company
tenable? Explain. (1995, 1993 Bar)
Answer: No, ihe two contentions of the insurance company are not
tenable. Even if the act of the insured was deliberate, it may stitt be
considered an accident happening by chance or fortuitously, without
intention or design, and which is unexpected and unforeseen,
because he removed the magazine so rt is clear he had no intention
to expose himself to peril. He can be considered grossty negligent,
but in such case, the insurer is sfiT/ Iiable (See Sun ys. CA, 211
scRA 554).
b. Death at the Hands of the Law
The beneficiary of an insured who is executed for a crime he
committed cannot recover from the insurer for two reasons: (1) his
death is caused through his connivance, and (21 any stipulation to
render the insurer liable under these circumstances would be
contrary to public policy.
c. Killing of lnsured By Beneficiary
The beneficiary who is a principal, accomplice or accessory to the
killing of the insured cannot recover by reason of public policy for the
death of the insured. The nearest relatives of the insured, if not
disqualified, shall receive the proceeds (Section 12, lnsurance
Code).
The rule however admits of exceptions, which are: (1) accidental
killing, (2) killing in self-defense, and (3) the beneficiary was insane
at the time he killed the insured.
274 INSURANCE CODE
Bar Question: On January 1, 2000, Antonio Rivera secured a life
insurance form SOS lnsurance Corp. for Pl Million with Gemma
Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died
on March 4, 2005 and in the police investigation, it was ascertained
that Gemma Rivera participated as an accessory in the killing of
Antonio Rivera. Can SOS lnsurance Corp. avoid liability by sefting
up as a defense the participation of Gemma Rivera in the killing of
Antonio Rivera? Discuss with reasons. (2008 Bar)
Answer: The beneficiary who is a principal, accomplice or
accesso4f to the killing of the insured cannot reQover by reason of
public policy for the death of the insured. The nearest relatives of
the insured, if not disqualified, shall receive the proceeds (Section
12, tnsurance Code). Ihus, SOS lnsurance Corp. can avoid liability
as to Gemma Rivera, however, they must still pay out the proceeds
to the nearest relatives of the insured who are not disqualified.
F. Group Insurance
Group insurance is essentially a single insurance contract that
provides coverage for many individuals. ln its original and rhost
common form, group insurance provides life or health insurance
coverage for the employees of one employer (Pineda vs. CA, 226
scRA 754).
The coverage terms for group insurance are usually stated in a
master agreement or policy that is issued by the insurer to a
representative of the group or to an administrator of the insurance
program, such as an employer. The employer acts as a functionary
ifi the collection and payment of premiums and in performing related
duties. Likewise falling within the ambit of administration of group
policy is the disbursement of insurance payments by the employer to
the employees. Most policies require an employee to pay a portion of
the premium, which the employer deducts from wages while the
remainder is paid by the employer. This is known as a contributory
plan as compared to a non-contributory plan where the premiums
are solely paid by the employer (lbid.).
,
Although the employer may be the titular or named insured, the
insurance is actually related to the life and health of the employee.
lndeed, the employee is in the position of a real party to the master
policy, and even in a non-contributory plan, the payment by the
employer of the entire premium is a part of the total compensation
paid for the services of the employee. Put differently, the labor of the
INSURANCE CODE 275
employees is the true source of the benefits, which are a form of
additional compensation to them (lbid.).
The employer, through its officer, acted as the agent of the
insurer. The latter is bound by the misconduct of its agent (tbid.).
The rationale of a group insurance policy of mortgagors,
otherwise known as the "mortgage redemption insurance," is a
device for the protection of both the mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of
contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the
proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from
paying the obligation. ln a similar vein, ample protection is given to
the mortgagor under such a concept so that in the event of death,
the mortgage obligation will be extinguished by the application of the
insurance proceeds to the mortgage indebtedness. Consequenfly,
where the mortgagor pays the insurance premium under the group
insurance policy, making the loss payable to the mortgagee, the
insurance is on the mortgagor's interest, and the mortgagor
continues to be a party to the contract. ln this type of policy
insurance, the mortgagee is simply an appointee of the insurance
fund, such loss-payable clause does not make the mortgagee a party
to the contract (Great vs. CA, 316 SCRA 677).
The insured did not cede to the mortgagee all his rights or interests
in the insurance, the policy stating that: "ln the event of the debtor's
death before his indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be
paid to the creditor and the balance of sum assured, if there is any,
shall then be paid to the beneficiary/ies designated by the debtor.
The insured, being the person with whom the contract was made, is
primarily the proper person to bring suit thereon. Subject to some
exceptions, the insured may sue, although the policy is taken wholly
or in part for the benefit of another person named or unnamed, and
although it is expressly made payable to another as his interest may
appear or otherwise. Although a policy issued to a mortgagor is
taken out for the benefit of the mortgagee and is made payable to
him, yet the mortgagor may sue thereon in his own name, especially
where the mortgagee's interest is less the full amount recoverable
under the policy, the insured may be regarded as the real party in
interest, although he has assigned the policy for the purpose of
collection, or has assigned as collateral security any judgment he
276 INSURANCE CODE

may obtain. And since a policy of insurance upon life or health may
T CHAPTER VI

TRANSPORTATION LAW
277

pass by transfer, will or succession to any person, whether he has an

insurable interest or not, and such person may recover it whatever l. Preliminary Concepts
the insured might have recovered, the widow of the insured may file
the suit against the insurer (lbid.). A. Transportation Defined

Bar Question: X Company procured a group accident insurance Acontract of transportation is a contract whereby a person,
policy for its construction employees variously assrgned fo tfs natural or juridical, obligates himself to transport persons or goods,
provincial infrastructure projects. Y lnsurance Company underwrote or both, from one place to another, by land, water, or air, for a pribe
the coverage, the premiums of which were paid for entirely by X or compensation.
Company without any employee contributions. While the policy was
in effect, five of the covered employees perished af sea on their way 1. When Commercial
to their provincial assignments. Their wives sued Y lnsurance
Company for payment of death benefits under the policy. While the Bar Question: Give two instances when a contract of transportation
suft was pending, the wives signed a power of aftorney designating by tand or waterways of any kind shall be considered commercial?
an X Company executive, PJ, as their authorized representative to (1961,1952 Bar)
enter into a settlement with the insurance company. When a
settlement was reached, PJ instructed the insurance company to Answer: lt is commercial: (1) when the obiect is merchandise or any
rssue the settlement check to the order of X Company, which will articte of commerce; or (2) when whatever its obiect may be, the
undertake the payment to the individual claimants of their respective carrier is a merchant or is habitually engaged in commerce.
shares. PJ misappropriated the settlement amount and the wives
pursued their case against Y lnsurance Company. Will the suit B. Classes
prosper? Explain. (2000 Bar)
1. According to Object Garried
Answer: Yes, thb suit will prosper.
X Company, through its executive, PJ, was acting as an agent of a. Transportation of things
Y lnsurance Company. The latter is, fhus, bound by the misconduct b. Transportation of Passengers
of its agent. c. Transportation of news
2. According to Mode of Travel

a. Transportation bY land
b. Transportation by water
c. Transportation bY air
C. Parties to Contract
1. Carrier - the party which agrees to transport
2. Shipper - the party whose goods are transported
3. Passenger - the person object of the transportation
4. Consignee - the person to whom the goods are sent
278 TRANSPORTATION LAW TRANSPORTATION LAW

D. Laws Applicable
T
I 2) Code of Commerce - suppletory law
1

I
3) Carriage of Goods by Sea Act - suppletory law
1. Land Transportation
The laws of the country to which the goods are transported
Bar Question: By what laws are contracts for transportation by land govern liability in case of loss, destruction or deterioration of the
governed? (1955 Bar) cargo carried.

Answer: The following laws, in outline form, govern contracts for The Civil Code is the primary law. The Code of Commerce and
transportation by land: the Carriage of Goods by Sea Act apply suppletorily. Hence, the
a. Common carriers standard of extraordinary diligence to be observed by a common
1) CivilCode - primary law carrier in the carriage of the goods set by the Civil Code will apply
2) Code of Commerce - suppletory law (American vs. CA, 208 SCRA 343).
b. Private carriers
Object merchandise The Civil Code, as the primary law, will apply as to the diligence in
1) Code of Commerce - primary law the carriage of goods from Japan to the Philippines. The collision,
2) Civil Code - suppletory law however, will be governed by the Code of Commerce, being the
Object non-commercial suppletory law at destination, even if said maritime accident occurred
1) Civil Code provisions on deposds - if object is property outside of Philippine waters (National vs. CA, 164 SCRA 593).
2) Civil Code provisions on contracts - if object rs passenger
Since the subject cargoes were lost while being transported by
Bar Question: What law governs the transporiation of goods on the comlnon carrier from Hong Kong to the Philippines, Philippine
board a public utility bus licensed by the Public Service Commission law applies. The rights and obligations of the common carrier are
(now Land Transpoftation Franchising and Regulatory Board)? thus governed by the provisions of the Civil Code, and the COGSA,
Drscuss briefly. (1967 Bar) which is a special law, applies suppletorily (Phil. Charter vs.
Neptune, 554 SCRA 335)
Answer: A public utility bus, being a common carrier, is governed
first by the Civil Code, and suppletorily by the Code of Commerce. Bar Question: ln the transportation of goods by a Philipprne vesse/
On the nature and quality of the service it should give the public, it is from a foreign country to the Philippines, and vice-versa, what laws
governed by the Public Service Law. are applicable? Explain. (1972, 1966 Bar)

2. Transportation By Sea Answer: The law of the country of destination is the law applicable.
From foreign ports to the Philippines, our laws govern in the following
Bar Question: By what taw are contracts for transportation by sea order: Civil Code, Code of Commerce, and Carriage of Goods by
governed? (1955 Bar) Sea Acf. From the Philippines to a foreign country, the law of the
country of destination will apply.
Answer: The following laiws, in outline form, govern contracts for
transpoftation by sea: Bar Question: State in the order of their priority, what laws are to
a. Coasfwise be applied by a Court of First lnstance in the exercise of ifs admiralty
1) CivilCode - primary law jurisdiction. (1 969 Bar)
2) Code of Commerce - suppletory law. Carriage of Goods by
Sea Act inapplicable even if the parties expressly provide for it. Answer: The order of priority of laws to be applied by a Court of
b. Philippine ports to foreign ports - law of the country of destination First lnstance (now Regional Trial Court) exercising its admiralty
c. Foreign Ports to Philippine Ports jurisdiction is as fol/otvs;
1) CivilCode - primary law 1. Transportation from Abroad to a Philippine Poft
280 TRANSPORTATION LAW
a. CivilCode
b. Code of Commerce
c. Carriage of Goods by Sea Act
2. lnter-island Maritime Transpoftation
a. CivilCode
b. Code of Commerce
3. Philippine Port to Abroad
a. Law of country of destination
The provisions owed their conception to the nature of the business
of common carriers. This business is impressed with a special public
duty. The public must of necessity rely on the care and skill of
common carriers in the.vigilance over the goods and safety of the
passengers, especially because with the modern development of
science and invention, transportation has become more rapid, more
complicated and somehow more hazardous. For these reasons, a
passenger or a shipper of goods is under no obligation to conduct an
inspection of the ship and its crew, the carrier being obliged by law to
impliedly warrant its seaworthiness (Vector vs. Macasa, 559 SCRA
e7).
3. Air Transportation
When an airline issues a ticket to a passenger, confirmed for a
particular flight on a certain date, a contract of carriage arises. The
passenger has every right to expect that he be transported on that
flight and on that date, and it becomes the airline's obligation to carry
him and his luggage safely to the agreed destination without delay.
lf the passenger is not so transported or if in the process of
(ransporting, he dies or is injured, the carrier may be held liable for a
breach of contract of carriage (PAL vs. CA, 566 SCRA 124).
Contract of carriage is imbued with public interest requiring
common carriers to carry passengers safely using utrnost diligence
of very cautious persons with due regard for all circumstances. The
contract to transport passengers is quite different in kind and degree
from any other contractual relation. And this because of the relation
which an air carrier sustains with the public. lts business is mainly
with the traveling public. lt invites people to avail of the comforts and
advantages it offers. The contract of air carriage, therefore,
generates a relation attended with a public duty (PAL vs. CA,417
scRA 196).
TRANSPORTATION LAW 281
Failure of the carrier to observe this high degree of care and
extraordinary diligence renders it liable for any damage that may be
sustained by its passengers (lbid.).
ln an action for breach of contract of carriage, the aggrieved party
does not have to prove that the common carrier was at fault or was
negligent. All that is necessary to prove is the existence of the
contract and the fact of its non-performance by the carrier (lbid.), in
order to be awarded compensatory and actual damages (Northwest
vs. Chiong, 543 SCRA 308).
The nature of an airline's contract of carriage partakes of two
types, namely: a contract to deliver a cargo or merchandise to its
destination and a contract to transport passengers to their
destination. A business intended to serve the traveling public
primarily, it is imbued with public interest, hence, the law governing
common carriers imposes an exacting standard. Neglect or
malfeasance by the carrier's employees could predictably furnish
bases for an action for damages (China vs. CA, 406 SCRA 113).
The airline company is not completely exonerated from any liability
for the tort committed by its agent's employees. A prior
determination of the nature of the passenger's cause of action is
necessary. lf the passenger's cause of action is premised on quasi-
delict for a tort, there must be an independent showing that the
airline company was at fault or negligent or has contributed to the
negligence or tortuous conduct. The mere fact that the employee
has committed a tort is not sufficient to hold the airline company
liable. There is no vinculum juris between the airline company and
its agent's employees and the contractual relationship between the
airline company and the its agent does not operate to create a
judicial tie between them. Article 2180 of the Civil Code does not
make the principal vicariously liable for the tort committed by its
agent's employees and the principal-agency relationship per se does
not make the principal a party to such tort; hence, the need to prove
the principal's own fault or negligence. But if the passenger's cause
of action is based on contractual breach, it is not necessary that
there be evidence of the airline company's fault or negligence. All
that the aggrieved party has to prove is the existence of the contract
and the fact of non-performance by the carrier (Viloria vs.
Continental, 663 SCRA 57).
A common carrier must exercise extraordinary diligence in
informing all of its passengers of all the terms and conditions
282 TRANSPORTATION LAW
governing their contract of carriage. lt cannot take advantage of any
ambiguity in the contract of carriage to impute knowledge on its
passengers of and dernand compliance with a certain condition or
undertaking that is not cleady stipulated (lbid.).
The business of PAL is air transportation. As such, it has
committed itself to safely transport its passengers. ln order to
achieve this, it must necessarily rely on its employees, most
particularly the cabin flight deck crew who are on board the aircraft.
The weight standards of PAL should be viewed as imposing strict
norms of discipline upon its employees. ln other.words, the primary
objective of PAL in the imposition of the weight standards for cabin
crew is flight safety. lt cannot be gainsaid that cabin attendants must
maintain agility at all times in order to inspire passenger confidence
on their ability to care for the passengers when something goes
wrong. lt is not farfetched to say that airline companies, just like all
common carriers, thrive due to public confidence on their safety
records. People, especially the riding public, expect no less than
that airline companies transport their passengers to their respective
destinations safely and soundly. A lesser performance is
unacceptable (Yrasuegui vs. PAL, 569 SCRA 467).
a. lnternational Flights / Warsaw Convention
(lnfra, Chapter X)
b. Domestic Gommercial Airlines
1. ln Carriage of Goods
Under Article 1750 of the New Civil Code, the pecuniary liability of
a common carrier may by contract be limited to a fixed amount
provided that the contract is reasonable and just under the
circumstances and has been fairly and freely agreed upon. Where
the conditions printed at the back of a ticket stub are in letters so
small that they are hard to read, this would not warrant the
presumption that the passenger was aware of those conditions such
that he had "fairly and freely agreed" to them. He is not and cannot,
therefore, be bound, by the conditions of a contract of carriage found
at the back of the ticket stub (Shewaram vs. PAL, 17 SCRA 606).
A provision in a plane ticket limiting liability to P1O0 for lost goods
is binding on the passenger in spite of the absence of his signature
on the plane ticket (Ong vs. CA, 91 SCRA 223).
TRANSPORTATION LAW 283
Bar Question: A takes a plane from Manila bound for Cagayan de
Oro via Cebu, where there is a change of planes. A arrives at
Cagayan de Oro safely, but to his dismay, his two suitcases were
left behind in Cebu. The airline company assured him that the
suifcases would come in the next flight, but they never did.
A claims Pl,000.00 damages for the /oss of both suitcases, but
the airline is willing to pay only P400.00 on the ground that the airline
ticket stipulates that unless a higher value is declared, any claim for
Ioss cannot exceed P200.00 for each piece of baggage.
A had not declared a greater value, despite the fact that the clerk
had called his aftention to the stipulation in the ticket.
ls A entitled to P1,000.00 or only P400.00? Explain. (1998,
1985,1983,1978 Bar)
Answer: A is entitled to P400.00 only at the rate of P200.00 for
each of the two sulfcases he lost. The provision in the plane ticket
that unless a higher value is declared, the claim for /oss cannot
exceed P200.00 for each piece of luggage, is a valid limitation to the
carrier's liability. lt 'is the passenger's obligation to make a
declaration at a higher value, and to pay the ad valorem charge for
fhe excess in value. Having failed to do so, A is bound by the
limitation and cannot make the airline pay more than P200.00 each
or P400.00 for the two lost suifcases.
ll. Gommon Garrier
A. Defined
Bar Question: Define a common carrier? (1996 Bar)
Answer: A common carrier is a person, corporation, firm or
association engaged in the busrness of carrying or transporting
passengers or goods or both, by land, water or air for compensation,
offering lfs seruices to the public (Article 1732, Civil Code; Lea Mer
vs. Malayan, 471 SCRA 698).
A carrier is a person or corporation who undertakes to transport or
convey goods or persons from one place to another, gratuitously or
for hire. The carrier is classified either as a private/special carrier or
as a common/public carrier. A private carrier is one who, without
making the activity a vocation, or without holding himself or itself out
to the public as ready to act for all who may desire his or its services,
undertakes, by special agreement in a particular instance only, to
transport goods or persons from one place to another either
284 TRANSPORTATION LAW
gratuitously or for hire. The provisions on ordinary contacts of the
Civil Code govern the contract of private carriage. The diligence
required of a private carrier is only ordinary, that is, the diligence of a
good father of the family (Perena vs. Zarate, 679 SCRA 208).
The true test for a common carrier is not the quantity or extent of
the business actually transacted, or the number and character of the
conveyances used in the activity, but whether the undertaking is a
part of the activity engaged in by the carrier that he has held out to
the general public as his business or occupation. lf the undertaking
is a single transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the general
public, the individual or the entity rendering such service is a private,
not a common, carrier. The question must be determined by the
character of the business actually carried on by the carrier, not by
any secret intention or mental reservation it may entertain or assert
when charged with the duties and obligations that the law imposes
(rbid.).
A customs broker is a common carrier - the concept of "common
carrier" under Article 1732 of the Civil Code may be seen to coincide
nearly with the notion of "public service" under the Public Service Act
(C.A. 1416) which at least partially supplements the law on common
carriers set forth in the Civil Code (Calvo vs. UCPB, 379 SCRA 510).
A custom broker is also regarded as a common carrier, the
transportation of goods being an integral part of its business.
(Loadmaster vs. Global, 639 SCRA 69).
The distinctive characteristic of a common carrier is that it
undertakes to carry for all people indifferently.
A common carrier becomes a private carrier when it undertakes to
cafty a special cargo or chartered to a special person only (Malayan
vs. Phil. First, 676 SCRA 268).
Article 1732 carefully avoids making any distinction between a
person or enterprise offering transportation service on a regular or
scheduled basis and one offering such service on an occasional,
episodic or unscheduled basis. Neither does Article 1732 distinguish
between a carrier offering its services to the "general public," i.e.,,the
general community or population, and one who offers services or
solicits business only from a narrow segment of the general
TRANSPORTATION LAW 28s
population. Article 1732 deliberately refrained from making such
distinctions (lbid.)
Article 1732 does not distinguish between one whose principal
business activity is the carrying of goods and one who does such
carrying only as an ancillary activity (sideline). lt suffices that one
undertakes to deliver the goods for pecuniary consideration (A.F. vs.
cA,447 SCRA 427).
The definition of common carriers in the Civil Code makes no
distinction as to the means of transporting, as long as it is by land,
water or air. lt does not provide that the transportation of the
passengers or goods should be by motor vehicle. ln fact, in the
United States, oil pipe line operators are considered common
carriers (First vs. CA, 300 SCRA 661).
The test for determining whether a,party is a common carrier of
goods is: (1 ) He must be 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 persons generally
as a business and not as a casual occupation; (2) He must
undertake to carry goods of the kind to which his business is
confined; (3) He must undertake to carry by the method by which his
business is conducted and over his established roads; and (4) The
transportation must be for hire (lbid.).
The fact that one has a limited clientele does not exclude it from
the definition of a common carrier (lbid.).
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 transported by them.
Subject to certain exceptions enumerated under Article 1734 of the
Civil Code, common carriers are responsible for the loss, destruction,
or deterioration of the goods. 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. Cargoes while being unloaded generally remain under
the custody of the carrier (Phil. First vs. Wallem, 582 SCRA 457).
Bar Question: X has a Tamaraw FX among other cars. Every other
day during the workweek, he goes to his office in Quezon City using
286 TRANSPORTATION LAW
his Tamaraw FX and picks up friends as passengers at designated
points along the way. Hls passengers pay him flat fee for the ride,
usually P20 per person, one way. Although a lawyer, he never
bothered to obtain a license to engage in this type of income-
generating activity. He believes that he is not a common carrier
within the puruiew of the law. Do you agree with him? (2000 Bar)
Answer: No, I do not agree with X. X is a common carrier. Article
1732 of the Civil Code which defines a common carrier makes no
distinction between one whose principalbusrness is the carrying of
persons and one who does such carrying only as an ancillary activity
(sideline), nor does it distinguish between a carrier serving the
general public and one who serves a segment of the general public,
nor between a person offering service on a regular or scheduled
basis and one on an occasional, episodic or unscheduled basls.
B. Differentiated from Private Garrier
Bar Question: Name two (2) characteristics which differentiate a The object of petitioner's contractual relation with respondent is
common carrier from a private carrier. (2002 Bar)
Answer: Common carriers and private carriers are differentiafed as
follows:
1. Obligation to carry: a common carrier is bound to carry all who
choose to employ it; a private carrier can choose the persons with
whom it may contract.
2. Diligence required: a common carrier is obliged to employ
extraordinary ditigence; a private carrier shoutd emptoy ordinary
diligence. By agreement, however, the private carrier may be
absolv$ from liability through negligence.
A private carrier is one who, without being engaged in the
business of carrying as a public employment, undertakes to deliver
goods or passengers for a compensation.
Much of the distinction between a "common or public carrier" and
a "private or special carrier" lies in the character of the business,
such that if the undertaking is an isolated transaction, not a part of
the business or occupation, and the carrier does not hold itself out to
carry the goods for the general public or to a limited clientele,
although involving the carriage of goods for a fee, the person or
corporation providing such service could very well be just a private
carrier (Phil. American vs. PKS, 401 SCRA 222).
TRANSPORTATION LAW 287
The concept of a common carrier does not change merely
because individual contracts are executed or entered into with
patrons of the carrier - such restrictive interpretation would make it
easy for a common carrier to escape liability by the simple expedient
of entering into those distinct agreements with clients (lbid.).
A trucking company which is an exclusive contractor and hauler
of another company, rendering or offering its services to no other
individual or . entity, cannot be considered a common carrier.
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 hire or compensation,
offering services to the public, whether to the public in general or to a
limited clientele in particular, but never on an exclusive basis. The
true test of a common carrier is the carriage of passengers or goods,
providing space for those who opt to avail themselves of its
transportation service for a fee (FGU vs. G.P., 386 SCRA 312).
the latter's service of arranging and facilitating petitioner's booking,
ticketing and accommodation in the package tour. ln contrast, the
object of a contract of carriage is the transportation of passengers or
goods. lt is in this sense that the contract between the parties in this
case was an ordinary one for services and not one of carriage. The
respondent is not a common carrier but a travel agency. lt is thus
not bound under the law to observe extraordinary diligence in the
performance of its obligation but that of a good father of a family
under Article 1173 of the Civil Code (Crisostomo vs. CA, 409 SCRA
528).
It is imperative that a public carrier shall remain as such,
notwithstanding the charter of the whole or portion of a vessel by one
or more persons, provided the charter is limited to the ship only, as in
the case of a time-charter or voyage-charter. lt is only when the
charter includes both the vessel and its crew, as in a bareboat or
demise that a common carrier becomes private, at least insofar as
the particular voyage covering the charter-party is concerned.
lndubitably, a shipowner in a time or voyage charter retains
possession and control of the ship, although her holds may, for the
moment, be the property of the charterer (Loadstar vs. Pioneer, 479
scRA 655).
Bar Question: What rs fhe fesf for determining whether or not one ls
a common carrier? (1996 Ba)

288 TRANSPORTATION LAW
Answer: The true test of a
common carrier is the carriage of
passengers or goods, provided it has space, for all who opt to avail
themselves of its transportation seruice for a fee. A carrier which
does not qualify under the above fesf is deemed a private carrier.
(See FGU vs. G.P. Sarmiento, supra)
Bar Question: AM Trucking, a small company, operates two trucks
for hire on selective basls. /f caters to only a few customers, and its
trucks do not make regular or schedule trips. lt does not even have
a certificate of public convenience.
On one occasion, Reynaldo contracted AM to transport, for a fee,
100 sacks of rice from Manila to Tarlac. However, AM failed to
deliver the cargo, because its truck was hiiacked when the driver
stopped in Bulacan to visit his girlfriend.
May Reynaldo hold AM liable as a common carrier? Explain.
(1996, 1991 Bar)
Answer: Yes, Reynaldo may hold AM Trucking liable as a common
carrier.
Article 1732 of the Civil Code which defines a common carrier
makes no distinction between one whose principal busrness ls fhe
carrying of persons and one who does such carrying only as an
ancillary activity (sideline), nor does it distinguish between a carrier
serving the general public and one who serues a segment of the
general public, nbr between a person offering service on a regular or
scheduled basis and one on an occasional, episodic or unscheduled
basis.
The quality or extent of the busrness transacted is also
immaterial.
to the conduct which creates undue risk of
Negligence refers
harm another, the failure to observe that degree of care,
to
precaution and vigilance that the circumstance justly demand,
whereby that other person suffers injury (PNCC vs. CA, 467 SCRA
56e).
The test by which to determine the existence of negligence in a
particular case may be stated as follows: Did the defendant in doing
the alleged negligent act use that reasonable care and caution which
an ordinary person would have used in the same situation? lf not,
then he is guilty of negligence. The law here in effect adopts the
standard supposed to be supplied by the imaginary conduct of the
discreet pater familias of the Roman law. The existence of
negligence in a given case is not determined by reference to the
\
TRANSPORTATION LAW 289
personal judgment of the actor in the situation before him. The law
considers what would be reckless, blameworthy, or negligent in the
man of ordinary intelligence and prudence and determines liability by
that. (lbid.)
Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something which
a prudent and reasonable man would not do. Negligence is want of
the care required by the circumstances. lt is a relative or
comparative, not an absolute, term and its application depends upon
the situation of the parties and the degree of care and vigilance
which the circumstances reasonably require (PNR vs. Brunty, 506
scRA 685).
lntent is immaterial in negligence cases because where
negligence exists and is proven, it automatically gives the injured a
right to reparation for the damage caused (Cantre vs. Go, 522 SCRA
547).
Negligence has been defined as "the failure to observe for the
protection of the interests of another person that degree of care,
precaution, and vigilance which the circumstances justly demand,
whereby such other person suffers injury." Using the aforementioned
philosophy, it may be reliably concluded that there is no hard and
fast rule whereby such degree of care and vigilance is calibrated; it is
dependent upon the circumstances in which a person finds himself.
All that the law requires is that it is perpetually compelling upon a
person to use that care and diligence expected of sensible men
under comparable circumstances (PNR vs. CA, 536 SCRA 147).
Every person or motorist crossing a railroad track should use
ordinary prudence and alertness to determine the proximity of a train
before attempting to cross. The circumstances were beyond the
control of the victim for no person would sacrifice his precious life if
he had the slightest opportunity to evade the catastrophe. Besides,
the failure of a railroad company to install a semaphore or, at the
very least, to post a flagman or watchman to warn the public of the
passing train amounts to negligence. (lbid.)
A negligent act is an inadvertent act; it may be merely carelessly
done from a lack of ordinary prudence and may be one which
creates a situation rnvolving an unreasonable risk to another
because of the expectable action of the other, a third person, an
290 TRANSPORTATION LAW
animal, or a force of nature. A negligent act is one from which an
ordinary prudent person in the actor's position, in the same or similar
,circumstances, would foresee such an appreciable risk of harm to
others as to cause him not to do the act or to do it in a more careful
manner (Corinthian vs. Tanjangco, 556 SCRA 154).
Gross negligence implies a want or absence of or failure to
exercise even slight care or diligence, or the entire absence of care.
It evinces a thoughtless disregard of consequences without exerting
any effort to avoid them (PAL vs. CA, 566 SCRA 124)
Fault or negligence consists in the omission of that diligence
which is demanded by the nature of an obligation and corresponds
with the circumstances of the person, of the time, and of the places
(Sabena vs. CA, 255 SCRA 38).
When the source of an obligation is derived from a contract, the
mere breach or non-fulfillment of the prestation gives rise to the
prbsumption of fault on the part of the obligor (lbid.).
The ruies in extraordinary responsibility of common carriers
remain basically unchanged even when the contract is breached by
tort although non-contradictory principles on quasi-delict may then be
assimilated as also forming part of the governing law (lbid.).
Bar Question: Mabuhay Lines, lnc., a common carrier, entered into
a contract with Company X, whereby it agreed to furnish Company
X, for a fixed amount, a bus for a company excursion on its
anniversary day. lt was agreed that Company X would have the use
of the bus and its driver from 7:00 A.M. to 7:00 P.M. on the stipulated
date, and that the bus driver would be obliged to follow the
instructions of the company's general manager as to the places to be
visited. Company X agreed to bear the cost of the gasoline
consumed.
The transpoftation contract signed by Company X contained a
stipulation that Mabuhay Lines, lnc. would be exempt from liability on
account of acts or omissions of its emptoyees.
On the return trip from the excursion site, the bus had an accident
and several employees of Company X were injured.
State the liability, if any, of Mabuhay Lines, lnc.. (1987, 1984,
1981, 1980, 1974 Bar)
Answeri Mabuhay Lrnes is not tiabte for injuries to employees of
Company X arising from the accident.
TRANSPORTATION LAW 291
The agreement between Company X and Mabuhay Lines for the
use of ifs bus exclusively for employees of Company X in an
excursion made said carrier a private carrier.
The obligation imposed on common carriers to employ
extraordinary diligence in the carriage whether of passengers or of
goods has no force where the public at large is not involved as in the
case of a bus chartered for the use exclusively of employees of a
company. The stipulation exempting the owner of the bus from
liability for the acts or omisslons of its employees, as in the problem
at bar, is not against public policy, and is valid.
Hence, Mabuhay Lines incurs no liability at all for iniuries to the
employees of Company X.
The Problem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a business firm.^
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialasslsfance by way
of direct investments and/or loans. Your professionalassisfance ls
solicited on the following various quesfions that may arise.
Bar Question: The articles of incorporation of your firm empower it
to engage in the business of shipping, warehousing and salvage
work. The management, facing various problems, seeks your legal
advice on the following:
The management plans fo rssue bills of lading which provide that
the firm shall be liable as a good father of the family in the carriage of
goods. ls it valid to provide for this measure of liability? Why?
(1973 Bar)
Answer: No, lf ls not a valid provision. Bills of Lading are issued by
common carriers which under the Civil Code are required to employ
not just ordinary diligence (diligence of a good father of the family)
but extraord in ary d il ige nce.
Hence, my firm cannot print on the bill of lading that it shall be
liable only as a good father of a family.
'1. Status of a Driver Under "Boundary System"
Arrangement
Bar Question: Is the driver of a passenger ieepney under a
"Boundary System" arrangement (the driver pays for the gasoline
consumed and does not receive a fixed wage but gets the excess of
the amount of the fares collected by him over the amount that he has
292 TRANSPORTATION LAW
agreed to pay the jeepney owner) considered a /essee or an
employee of the jeepney owner? (2005 Bar)
Answer: From the viewpoint of the Civil Code, the driver is a /essee,
because he pays a fixed amount of rental for his use of the jeepney.
From the viewpoint of labor laws, he is an employee, being entitled
to all privileges going along with the employer-employee retati1nship.
The practice (boundary system), although outlawed, is still in vogue,
the drivers claiming that they earn more under the system than by
being paid under minimum wage laws. From the viewpoint of the law
on common carriers, he is an employee of the operator for purpose
of the latter's liability fo pa-ssengers.
The jeepney owner/operator-driver relationship under the
boundary system is that of employer-employee and not lessor-
lessee. This doctrine was affirmed and was analogously applied to
govern the relationships between auto-calesa owner/operator and
driver, bus owner/operator and conductor, and taxi owner/operator
and driver. The boundary system is a scheme by an owner/operator
engaged in transporting passengers as a common carrier to primarily
govern the compensation of the driver, that is, the latter's daily
earnings are remitted to the owner/operator less the excess of the
boundary which represents the driver's compensation. Under this
system, the owner/operator exercises control and supervision over
the driver. lt is uhlike in lease of chattels where the lessor loses
complete control over the chattel leased but the lessee is still
ultimately responsible for the consequences of its use. The
management of the business is still in the hands of the
ownerioperator, who, being the holder of the certificate of public
convenience, must see to it that the driver follows the route
prescribed by the franchising and regulatory authority, and the rules
promulgated with regard to the business operations. The fact that
the driver does not receive fixed wages but only the excess of the
"boundary" given to the owner/operator is not sufficient to change the
relationship between them. lndubitably, the driver performs activities
which are usually necessary or desirable in the usual business or
trade of the bwner/operator (Villamaria vs. CA, 487 SCRA 571).
lndeed to exempt from liability the owner of a public vehicle who
operates it under the "boundary system" on the ground that he is a
nrere lessor would be not only to abet flagrant violations of the Public
Service Law, but also to place the riding public at the mercy of
reckless and irresponsible drivers because thb measure
- reckless
of their earnings depends largely upon the number of trips they make
TRANSPORTATION LAW 293
and, hence, the speed at which they drive; and irresponsible
because most if not all of them are in no position to pay the damages
they might cause (Hernandez vs. Dolor, 435 SCRA 668).
The employer is subsidiarily answerable for the adjudicated civil
liability ex delicto of his employee in the event of the latter's
insolvency; and the judgment in the criminal action pronouncing the
employee to be also civilly liable is conclusive on the employer not
only as to the actuality of that liability but also as to its amount
(Philippine Rabbit vs. Heirs, 458 SCRA 684).
2. Registered Vehicle Already Sold
The registered owner of a vehicle, even if not used for public
service, is primarily responsible to the public and to third persons for
injuries caused to the latter while the vehicle is being driven on the
public highways, even if the registered owner was no longer owner of
the vehicle because of a prior sale to another and this is true even if
the vehicle is leased to third persons (Aguilar vs. Commercial, 360
scRA 395).
ln case a separate civil action is filed, the long-standing principle is
that the registered owner of a motor vehicle is primarily and directly
responsible for the consequences of its operation, inqluding the
negligence of the driver, with respect to the public and all third
persons. ln contemplation of law, the registered owner of a motor
vehicle is the employer of its driver, with the actual operator and
employer, such as a lessee, being considered as merely the owner's
agent. This being the case, even if a sale has been executed before
a tortious incident, the sale, if unregistered, has no effect as to the
right of the public and third persons to recover from the registered
owner. The public has the right to conclusively presume that the
registered owner is the real owner, and may sue accordingly (PCl vs.
United,557 SCRA 141).
Well-settled is the rule that the registered owner of the vehicle is
liable for quasi-delicts resulting from its use. Thus, even if the
vehicle has already been sold, leased, or transferred to another
person at the time the vehicle figured in an accident, the registered
vehicle owner would still be liable for damages caused by the
accident. The sale, transfer or lease of the vehicle, which is not
registered with the Land Transportation Office (LTO), will not bind
third persons aggrieved in an accident involving the vehicle. The
compulsory motor vehicle registration underscores the importance
294 TRANSPORTATION LAW
of registering the vehicle in the name of the actual owner. The policy
behind the rule is to enable the victim to find redress by the
expedient recourse of identifying the registered vehicle owner in the
records of the LTO. The registered owner can be reimbursed by the
actual owner, lessee or transferee who is known to him. Unlike the
registered owner, the innocent victim is not privy to the lease, sale,
transfer or encumbrance of the vehicle. Hence, the victim should not
be prejudic'ed by the failure to register such transaction or
encumbrance (FEB vs. Baylon, 653 SCRA 22).
The main aim of motor vehicle registration is tq identify the owner
so that if any accident happens, or that any damage or injury is
caused by the vehicle on the public highways, responsibility therefor
can be fixed on a definite individual, the registered owner. lnstances
are numerous where vehicles running on public highways caused
accidents or injuries to pedestrians or other vehicles without positive
identification of the owner or drivers, or with very scant means of
identification. lt is to forestall these circumstances, so inconvenient
or prejudicial to the public, that the motor vehicle registration is
primarily ordained, in the interest of the determination of persons
responsible for damages or injuries caused on public highways (BA
vs. CA,215 SCRA 715).
Whether the driver is authorized or not by the actual owner is
irrelevant to determining the liability of the registered owner who the
law holds primarily and directly responsible for any accident, injury or
death caused by the operation of the vehicle in the streets and
highways. To require the driver of the vehicle to be authorized by the
actual owner before the registered owner can be held accountable is
to defeat the very purpose why motor vehicle legislations are
enacted in the first place. Regardless of who the actual owner is of a
motor vehicle might be, the registered owner is the operator of the
same with respect to the public and third persons, and as such,
directly and primarily responsible for the consequences of its
operation. ln contemplation of law, the owner/operator of record is
the employer of the driver, the actual operator and employer being
considered merely as his agent (Villanueva vs. Domingo, 438 SCRA
485).
Were a registered owner allowed to evade responsibility by
proving who the supposed transferee or owner is, it would be easy
for him, by collusion with others or otherwise, to escape said
responsibility and transfer the same to an indefinite person, or to one
who possesses no property with which to respond financially for the
damage or injury done. A victim of recklessness on the public
TRANSPORTATION LAW 295
highways is usually without means to discover or identify the person
actually causing the injury or damage. He has no means other than
by a recourse to the registration in the Motor Vehicles Office to
determine who is the owner. The protection that the law aims to
extend to him would become illusory were the registered owner
given the opportunity to escape liability by disproving his ownership.
(Cadiente vs. Macas, 571 SCRA 105).
C. Diligence Required of Common Carriers
1. ln Transportation of Goods
The rules for the liability of a common carrier for lost or damaged
cargo are as follows: (1) Common carriers are bound to observe
extraordinary diligence over the goods they transport, according to
all the circumstances of each case; (2) ln the event of loss,
destruction, or deterioration of the insured goods, common carriers
are responsible, unless they can prove that such loss, destruction, or
deterioration was brought about by, among others, "flood, storm,
earthquake, lightning, or other natural disaster or calamity"; and (3)
ln all other cases not specified under Article 1734 of the Civil Code,
common carriers are presumed to have been at fault or to have
acted negligently, unless they observed extraordinary diligence
(Regional vs. Netherlands, 598 SCRA 304).
A common carrier is presumed to have been negligent if it fails to
prove that it exercised extraordinary vigilance over the goods it
transported. When the goods shipped are either lost or arrived in
damaged condition, a presgmption arises against the carrier of its
failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable. To overcome the presumption
of negligence, the common carrier must establish by adequate proof
that it exercised extraordinary diligence over the goods. lt must do
more than merely show that some other party could be responsible
for the damage. (lbid.)
Common carriers are bound to observe extraordinary diligence in
their vigilance over the goods and the safety of the passengers they
transpoft, as required by the nature of their business and for reasons
of public policy. Extraordinary diligence requires rendering service
with the greatest skill and foresight to avoid damage and destruction
to the goods entrusted for carriage and deliyery (Lea Mer vs.
Malayan, 471 SCRA 698).
 TRANSPORTATION LAW
To prove the exercise of extraordinary diligence, one must prove
that used "all reasonable means to ascertain the nature and
it
characteristic of the goods tendered for transport and that it
exercised due care in handling them. Extraordinary diligence must
include safeguarding the shipment from damage coming from natural
elements such as rainfall (Aboitiz vs. lnsurance, 561 SCRA 262).
It is settled that the extraordinary diligence in the vigilance over
the goods tendered for shipment requires the common carrier to
know and to follow required precaution for avoiding damage to, or
destruction of the goods entrusted to it for safe carriage and delivery.
It requires common carriers to render service with the greatest skill
and foresight and to use all reasonable means to ascertain the
nature and characteristics of goods tendered for shipment, and to
exercise due care in the handling and stowage, including such
methods as their nature requires. Under Article 1742 of the Civil
Code, even if the loss, destruction, or deterioration of the goods
should be caused, among others, by the character of the goods, the
common carrier must exercise due diligence to forestall or lessen the
loss (lron vs. Remington,417 SCRA 229).
The falling of the crate during the unloading is evidence of the
carrier's negligence in handling the cargo (lSutpicio vs. First, 462
scRA 125).
Common carriJrs must observe extraordinary diligence and they
are responsible for loss or damage to the goods unless they show
that the same was due to fortuitous event or to a fault traceable to
the shipper (Phil. American vs. PKS, 401 SCRA 222).
Railroad companies owe to the public a duty of exercising a
reasonable degree of care to avoid injury to persons and property at
railroad crossings, which duties pertain both in the operation of trains
and in the maintenance of the crossings. Moreover, every
corporation constructing or operating a railway shall make and
construct at all points where such railway crosses any public road,
good, sufficient, and safe crossings and erect at such points, at a
sufficient elevation from such road as to admit a free passage of
vehicles of every kind, a sign with large and distinct letters placed
thereon, to give notice of the proximity of the railway, and warn
persons of the necessity of looking out for trains (PNR vs. Brunty,
506 SCRA 685)
When a passenger dies or is injured in the discharge of a contract
of carriage, it is presumed that the common carrier is at fault or
TRANSPORTATION LAW 297
negligent. ln fact, there is even no need for the court to make an
express finding of fault or negligence on the part of the common
carrier. This statutory presumption may only be overcome by
evidence that the common carrier exercised extraordinary diligence
(Cruz vs. Sun, 622 SCRA 389; Diaz vs. CA, 496 SCRA 468).
The provision of Article 362 of the Code of Commerce imposing a
mere ordinary diligence on common carriers has been modified by
Article 1733 of the Civil Code, now imposing extraordinary diligence
(Planters vs. CA, 226 SCRA 476).
There is greater reason for holding a person who is a customs
broker to be a common carrier because the transportation of goods
is an integral part of her business. To uphold her contention would
be to deprive those with whom she contracts the protection which the
law affords them notwithstanding the fact that the obligation to carry
goods for her customers is part and parcel of her business (Calvo vs.
ucPB,379 SCRA510).
lf the improper packing or the defects in the container are known
to the carrier or his employees or apparent upon ordinary
observation, but he nevertheless accepts the same without protest or
exception notwithstanding such condition, he is not relieved of
liability for damage resulting therefrom (lbid.).
There was lack of care when the cause of the loss was the
carrier's negligence in not ensuring that the doors of the baggage
compartment of its bus were securely fastened (Sarkies vs. CA, 280
scRA 5B).
Mere proof of delivery of the goods in good order to a common
carrier and of their arrival in bad order at their destination constitutes
a prima facie case of fault or negligence against the carrier. lf no
adequate explanation is given as to how the deterioration, the loss or
the destruction of the goods happened, the transporter shall be held
responsible (Belgian vs. Phil. First, 383 SCRA 25).
The requirement of giving notice of loss of or injury to the goods is
not an empty formalism. The fundamental reasons for such a
stipulation are (1) to inform the carrier that the cargo has been
damaged, and that it is being charged with liability therefor; and (2)
to give it an opportunity to examine the nature and extent of the
injury. This protects the carrier by affording it an opportunity to make
an investigation of a claim while the matter is fresh and easily
298 TRANSPORTATION LAW
investigated so as to safeguard itself from false and fraudulent
claims (Federal vs. American,437 SCRA 50).
The giving of notice of loss or injury is a condition precedent to the
action for loss or injury or the right to enforce the carrier's liability
(Aboitiz vs. lnsurance, 561 SCRA 262).
Under the Code of Commerce, the notice of claim must be made
within twenty four (24) hours from receipt of the cargo if the damage
is not apparent from the outside of the package. For damages that
are visible from the outside of the package, the claim must be made
immediately (lbid.).
The filing of a claim with the carrier within the time limitation
therefore actually constitutes a condition precedent to the accrual of
a right of action against a carrier for loss of, or damage to, the
goods. The shipper or consignee must allege and prove the
fulfillment of the condition. lf it fails to do so, no right of action
against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it
does not constitute a limitation of action (Phil. Charter vs. Chemoil,
462 SCRA 77).
Equipped with the proper knowledge of the nature of steel sheets
in coils and of the"proper way of transportihg them, the master of the
vessel and his crew should have undertaken precautionary
measures to avoid possible deterioration of the cargo (Belgian vs.
Phil. First, supra).
Between a finding by an administrative body, the Board of Marine
lnquiry (BMl), where the insurer had no opportunity to participate,
that the loss of goods was due to fortuitous events, and the findings
of facts by both the trial court and the Court of Appeals, that the
common carrier failed to observe extraordinary diligence in the
carriage of goods, the findings of the two courts will have to be relied
upon and are binding on the Supreme Court (Aboitiz vs. CA, 188
scRA 387)
a. Exceptions to the Presumption of. Fault or
Negligence
The presumption of fault or negligence will not arise if the loss is
due to any of the following cases: (1) flood, storm, earthquake,
lightning, or other natural disaster or calamity; (2) an act of the public
TRANSPORTATION LAW 299
enemy in war, whether international or civil; (3) an act or omission of
the shipper or owner of the goods; (4) the character of the goods or
defects in the packing or the container; or (5) an order or act of
competent public authority. This is a closed list. lf the cause of
destruction, loss or deterioration is other than the enumerated
circumstances, then the carrier is liable therefor (Phil. American vs.
PKS, 401 SCRA 222; Arlicle 1734, Civil Code).
The exemption provided in Article 1734 of the Civil Code refers to
cases when goods are lost or damaged while on transit as a result of
the natural decay of perishable goods or the fermentation or
evaporation of substances liable therefor, the necessary and natural
wear of goods in transport, defects in packages in which they are
shipped, or the natural propensities of animals (Asia vs. CA, 409
scRA 340).
Even if the weather encountered by the ship is to be deemed a
natural disaster under Article 1739 of the Civil Code, petitioner failed
to show that such natural disaster or calamity was the proximate and
only cause of the loss. Human agency must be entirely excluded
from the cause of injury or loss. ln other words, the damaging
effects blamed on the event or phenomenon must not have been
caused, contributed to, or worsened by the presence of human
participation. The defense of fortuitous event or natural disaster
cannot be successfully made when the injury could have been
avoided by human precaution (Central vs. lnsurance, 438 SCRA
438).
Hence, if a common carrier fails to exercise due diligence to
prevent or minimize the loss before, during and after the occurrence
of the natural disaster, the carrier shall be deemed to have been
negligent. The loss or injury is not, in a legal sense, due to a natural
disaster under Article 1734(1) (lbid.).
Fortuitous events by definition are extraordinary events not
foreseeable or avoidable. lt is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same. To constitute a fortuitous event, the following elements
must concur: (a) the cause of the unforeseen and unexpected
occurrence or of the failure of the debtor to comply with obligations
must be independent of human will; (b) it must be impossible to
foresee the event that constitutes the caso fortuito or, if it can be
300 TRANSPORTATION LAW
foreseen, it must be impossible to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill obligations in a
normal manner; and, (d) the obligor must be free from any
participation in the aggravation of the injury or loss. The burden of
proving that the loss was due to a fortuitous event rests on him who
invokes it. And, in order for a fortuitous event to exempt one from
liability, it is necessary that one has committed no negligence or
misconduct that may have occasioned the loss (Sicam vs. Jorge,
529 SCRA 443).
To fully free a common carrier from any liability, the fortuitous
event must have been the proximate and only cause of the loss
(Cruz vs. Sun, 622 SCRA 3Bg).
lf the negligence or fault of the obligor coincided with the
occurrence of the fortuitous event, and caused the loss or damage or
the aggravation thereof, the fortuitous event cannot shield the obligor
from liability for his negligence (College vs. Belfranlt, 538 SCRA 27).
While the law requires the highest degree of diligence from
common carriers in the safe transport of their passengers and
creates a presumption of negligence against them, it does not,
however, make the carrier an insurer of the absolute safety of its
passengers (Mariano vs. Callejas, 594 SCRA 569).
For the defense of force majeure to prosper, it is necessary that
one has committed no negligence or misconduct that may have
occasioned the loss. An act of God cannot be invoked to protect a
person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have concurred
with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the
damage or injury was a fortuitous event would not exempt one from
liability. When the effect is found to be partly the result of a person's
participation - whether by active intervention, neglect or failure to act
- the whole occurrence is humanized and removed from the rules
applicable to acts of God (RCPI vs. Verchez, 481 SCRA 384).
b. Liability for Failure to Observe Extraordinary
Diligence
Bar Question: Under what circumsfances is the carrier liable for the
/osses and deteriorations suffered by the goods transported by
TRANSPORTATION LAW 301
reason of fortuitous event, force majeure or the inherent nature and
defects of the goods? (1957 Bar)
Answer: The fortuitous event may not excuse the carrier from
liability if it is shown that it was not the proximate and only cause of
fhe /oss, or it is shown that the carrier did not exercise due diligence
to prevent or minimize loss before, during and after the occurrence of
the fortuitous event, or that it was already delayed when the
fortuitous event occurred.
The occurrence of a fortuitous event does not terminate an airline
company's contract with its passengers who must still necessarily
have to exercise extraordinary diligence in safeguarding the stranded
passengers until they have reached their final destination (PAL vs.
cA,226 SCRA 423).
Bar Question: Philip Mauricio shipped a box of cigarettes fo a
dealer in Naga City through Bicol Bus Company (BBC). When the
bus reached Lucena City, the bus developed engine trouble. The
driver brought the bus to a repair shop in Lucena where he was
informed by the mechanic that an extensive repair was necessary,
which would take at least two days. While the bus was in the repair
shop, Typhoon Coring lashed at Quezon province. The cargoes
inside the bus, including Mauricio's cigarettes, got wet and were
totally spoiled. Mauricio sued BBC for damage to his cargoes.
Decide. (1987 Bar)
Answer: Bicot Bus Company (BBC) carried the goods of Phitip
Mauricio as a common carrier which under the law is under the
obligation to employ extraordinary diligence in the carriage of the
goods.
BBC should therefore have seen to it that the goods involved in
the contract are delivered safely to their intended destination. The
only circumstance which could have excused BBC from liability
would be the existence of fortuitous event as the proximate and only
cause preventing BBC from complying with its said obligation.
When the bus developed engine trouble while in Lucena City,
necessitating repair for two days, BBC already incurred in delaylhe
engine trouble not being a fortuitous event.
Even on the assumption that typhoon Coring was a fortuitous
event which totally destroyed the cargo, its occurrence after BBC
was in mora will not free BBC from liability for damage to the cargo
of Mauricio.
302 TRANSPORTATION LAW
BBC ls therefore liable to Mauricio for damage to the latter's
cargo.
Bar Question: Antonio, a paying passenger, boarded a bus bound
for Batangas City. He chose a seat at the front row, near the bus
driver, and told the bus driver that he had valuable items in his hand-
carried bag which he then placed besrde the driver's seat. Nof
having slept for 24 hours, he requested the driver to keep an eye on
the bag should he doze off during the trip. While Antonio was
asleep, another passenger took the bag away and alighted at
Calamba, Laguna. Could the comrnon carrier be held liable by
Antonio for the loss? (1 997, 1 986 Bar)
Answer: The common carrier is not liable to Antonio for the /oss of
his bag. The bag of Antonio was never turned over by him to the
common carrier under a bill of lading or similar arrangement, and
Antonio's mere request to the bus driver to keep an eye on the bag
while Antonio dozed off (without even the driver acceding to the
request) could not possibly make the comman carrier accountable
for the loss.
A common carrier is not liable for loss by fire of the goods stored
in a government (customs) warehouse, awaiting pickup by the
consignee, the loss being due to fortuitous event (Servando vs.
Philippine, 1 17 SCRA 832).
Failure of common carrier to deliver luggage of passenger at
designated place and time constitutes a breach of contract of
carriage. A common carrier has th6 obligation to carry its
passengers and their luggage safely to their destination, which
includes the duty not to delay their transportation (Cathay vs. CA,
219 SCRA 520).
Exoneration of the vessel's officers and crew by the Board of
Marine lnquiry merely concerns their respective administrative
liabilities. lt does not in any way operate to absolve the common
carrier from its civil liability arising from its failure to observe
extraordinary diligence in the vigilance over the goods it was
transporting and for the negligent acts or omissions of its employees,
the determination of which properly belongs to the courts (Delsan vs.
cA, 369 SCRA 24).
Where goods carried by a common carrier have not been turned
over to the arrastre operator, although already unloaded from the
TRANSPORTATION LAW 303
carrier, and are lost, responsibility is still with the carrier against
whom the presumption of fault and negligence exists, unless it can
be shown by the carrier that the loss was due to fortuitous event or
other excepted cause (Citadel vs. CA, 184 SCRA 544).
Hijacking on land is not a fortuitous event. The carrier is liable
unless proof is presented by the carrier that the hijackers acted with
irresistible force, threat or violence (Bascos vs. CA, 221 SCRA 318).
Explosion of a new tire may not be considered a fortuitous event if
there are human factors involved in the situation. The fact that the
tire was new did not imply that it was entirely free from
manufacturing defects or that it was properly mounted on the
vehicles. Neither may the fact that the tire bought and used in the
vehicle is of a brand name noted for quality, resulting in the
conclusion that it could not explode within five days' use (Yobido vs.
cA,2BI SCRA 1).
It is settled that an accident caused either by defects in the
automobile or through the negligence of its driver is not a caso
fortuito that would exempt the carrier from liability for damages
(rbid.).
A common carrier may not be absolved from liability in case of
force majeure or fortuitous event afone. The common carrier must
still prove that it was not negligent in causing the death or injury
resulting from an accident (lbid.).
Bar Question: AM Trucking, a small company, operates two trucks
for hire on selective basis. /f caters to only a few customers, and its
trucks do not make regular or schedule trips. lt does not even have
a certificate of public convenience.
On one occasion, Reynaldo contracted AM to transport, for a fee,
100 sacks of rice from Manila to Tarlac. However, AM failed to
deliver the cargo, because its truck was hiiacked when the driver
stopped in Bulacan to visit his girlfriend.
' May AM sef up the hijacking as a defense to defeat Reynaldo's
claim? (1996 Bar)
Answer: AM Trucking may not set up the hiiacking as a defense to
defeat Reynaldo's claim because hijacking is not a fortuitous event
unless proof is presented by the carrier that the hiiackers acted with
irresistible force, threat or violence.
304 TRANSPORTATION LAW
Bar Question: M. Dizon Trucking (DIZON) entered into a hauting
contract with Fairgoods Corporation (FAIRGOODS) whereby the
former bound itself to haul the latter's 2,000 sacks of soya bean meal
from Manila Port Area to Calamba, Laguna. To carry out faithfutty its
obligation DIZON subcontracted with Enrico Reyes the delivery of
400 sacks of the soya bean meal. Aside from the driver, three male
employees of Reyes rode on the truck with the cargo. While the truck
was on its way to Laguna two strangers suddenly stopped the truck
and hijacked the cargo. lnvestigation by the potice disctosed that
one of the hijackers was armed with a bladed weapon while th6 other
was unarmed. For failure to deliver the 400 sacks, FAIRGOODS
sued Dizon for damages. DIZON in turn sef up a third-party
complaint against Reyes which the latter resisted on the ground that
fhe /oss was due to force majeure.
Did the hijacking constitute force majeure to exculpate Reyes
from any liability to DIZON? Discuss fully. (1995 Bar)
Answer: No, the hijacking did not constitute force majeure. There
was no irresistible force, threat or violence because only t hijacker
was armed, and only with a bladed weapon. His companion was
unarmed and the driver was accompanied by 3 other employees.
The 4 of them could have easily overpowered the one armed
hijacker.
Bar Question: Alejandro Camaling of Alegria, Cebu, is engaged in
buying copra, charcoal, firewood and also bottles and in reseiling
them in Cebu City. He uses two (2) big lsuzu trucks for the purpose;
however, he has no certificate of public convenience or franchise to
do busrness as a common carrier. On the return trips to Ategria,
Cebu, he loads his trucks with various merchandise of other
merchants in Alegria and the neighboring municipalities of Badian
and Ginatilan. He charges them freight rates much tower than the
regular rates. ln one of the return trips, which left Cebu City at 8:30
PM, one (1) cargo truck was loaded with severalboxes of sardines,
valued at P100,000.00, belonging to one of his customers, pedro
Rabor. While passing the zigzag road between Carcar and Bafiti,
Cebu, which is midway between Cebu City and Ategria the truck was
hijacked by three (3) armed men who took all the boxes of sardines
and kidnapped the driver and his helper, releasing them in Cebu City
only two (2) days later.
Pedro Rabor sought to recover from Alejandro the value of the
sardrnes. The latter contends that he is not liable therefor because
he is not a common carrier under the Civit Code and even granting
TRANSPORTATION LAW 305
for the sake of argument that he is, he is not liable for the occurrence
of fhe /oss as lt was due to a cause beyond his control.
tf you were the iudge, would you sustain the contention of
Alejandro? (1991 Bar)
Answer: With respect to the truck owner's contention that he is not a
common carrier because he holds no ceftificate of public
convenience, this contention will not prosper. A carrier is a common
carrier if it offers ifs servlces to the general public for a fee, with or
without lfs possesslng a certificate of public convenience.
With respect to the contention that the /oss was due to a cause
beyond his control, the truck owner is correct, for a common carrier
is not an insurer of the cargo. The hiiacking constitutes caso fortuito
because the hijackers acted with the use of irresistible force, threat
or violence. And if it can be proven that despite the exercise of
extraordinary diligence, the incident could not have been foreseen as
it was one independent of human will, the truck owner shall be
exempted from liability.
lf the fact of improper packing is known to the carrier or his
servants, or apparent upon ordinary observation, but he accepts the
goods notwithstanding such condition, he is not relieved of liability for
loss or injury resulting therefrom (A.F. vs. CA,447 SCRA 427).
ln the common carriage of highly soluble goods, like fertilizer, it is
the shipper or owner of the goods that commonly face risk of loss or
damage (Planters vs. CA, 226 SCRA 476).
Bar Question: Archipelago Lines, lnc., a carrier, accepted for
shipment from lloilo to Manila a cargo consisting of 800 sacks of rice,
knowing that some sacks had big holes and others had their
openings just loosely tied with sfnngs. Due to spillage of the rice
during the trip, there was shortage in the rice delivered by the carrier
to the consignee. When sued, Archipelago Lines, lnc. interposed the
defense that the carrier is not liable because the spillage was due to
the defective condition of the sacks.
As a judge, how would you rule on the liability of the carrier?
Ba)
Reasons. (1 985,1 978
Answer: The carrier is liable for the shortage in delivery. Where
goods are brought to a carrier in bad order, it may refuse to accept
the same for carriage, and when the shipper rnsrsfs, the carriage
may be effected at the risk of the shipper.
306 TRANSPORTATION LAW
In the case at bar, however, in spite of the knowledge by the
carrier that some sacks had big holes, and that the opening were
loosely tied with sfnngs, it accepted the carriage, and there is no
indication that the bad order nature of the cargo was at alt noted in
the bill of lading or other carriage documents. The carrier is not
relieved of its liability and is therefore deemed to have received the
cargo in good condition. A shortage in its delivery at destination will
make it liable to the consignee.
Bar Question: X took the Benguef 8us from Baguio going to
Manila. He deposited his maleta in the baggage cpmpartment of the
bus common to allpassengers.'He did not declare his baggage nor
pay its charges contrary to the regulations of the bus company.
When X got off, he could not find his baggage which obviously was
taken by another passenger. Determine the liability of the bus
company. (1989 Bar)
Answer: The bus company will not be liable. The contract of
carriage involved in the problem is only a carriage of the person of X.
There was no contract of carriage involving his maleta because,
contrary to company regulations, he did not declare it, nor pay
charges for its carriage. The bus company cannot therefore be
made liable for the /oss of sard maleta.
2. In Carriage of Passengers
a. Degree of Diligence Required
Common carriers are bound to carry the passengers safely as
far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with due regard for all the
circumstances. When a passenger dies or is injured in the discharge
of a contract of carriage, it is presumed that the common carrier is at
fault or negligent. ln fact, there is even no need for the court to make
an express finding of fault or negligence on the part of the common
carrier. This statutory presumption may only be overcome by
evidence that the carrier exercised extraordinary diligence (Cruz vs.
Sun, 622 SCRA 389).
The negligent acts of PAL signified more than inadvertence or
inattention and thus constituted a radical departure from the
extraordinary standard of care required of common carriers (pAL vs.
cA, 566 SCRA 124).
TRANSPORTATION LAW 307
The law leaves no room for mistake or oversight on in" part of a
common carrier. Thus, it is only logical to hold that the weight
standards of PAL show its effort to comply with the exacting
obligations imposed upon it by law by virtue of being a common
carrier (Yrasuegui vs. PAL, 569 SCRA 467).
Upon the happening of the accident, the presumption of
negligence at once arises, and it becomes the duty of a common
carrier to prove that he observed extraordinary diligence in the care
of his passengers. lt must be stressed that in requiring the highest
possible degree of diligence from common carriers and in creating a
presumption of negligence against them, the law compels them to
curb the recklessness of their drivers (Tiu vs. Arriesgado, 437 SCRA
426).
ln actions for breach of contract, only the existence of such
contract, and the fact that the common carrier failed to transport his
passenger safely to his destination are the matters that need to be
proved. Any injury suffered by the passengers in the course thereof
is immediately attributable to the negligence of the carrier (lbid.).
Such duty ef a common carrier to provide safety to its passengers
so obligates it not only during the course of the trip but for so long as
the passengers are within its premises and where they ought to be in
pursuance to the contract of carriage (LRT vs. Natividad, 397 SCRA
75).
Employers may be relieved of responsibility for the negligent acts
of their employees acting within the scope of their assigned task only
if they can show that "they observed all the diligence of a good father
of a family to prevent damage." For this purpose, they have the
burden of proving that they have indeed exercised such diligence,
both in the selection of the employee and in the supervision of the
performance of his duties (Victory vs. Heirs, 394 SCRA 520).
. JAL has the duty to inspect whether its passengers have the
necessary travel documents, however, such duty does not extend to
checking the veracity of every entry in these documents. JAL could
not vouch for the authenticity of a passport and the correctness of
the entries therein. The power to admit or not an alien into the
country is a sovereign act which cannot be interfered with even by
JAL. This is not within the ambit of the contract of carriage entered
into by JAL and its passengers. As such, JAL should not be faulted
for the denial of its passengers' shore pass applications (lbid.).
 TRANSPORTATION LAW 309
308 TRANSPORTATION LAW

To permit a passenger in a bus to disembark, at a time when a

Bar Question; Suppose "A" was ri.ding on an airplane of a common "calesa" is coming from an opposite direction, with another bus about
carrieir when the acc;ident happened and "A" suffered serlous
iniuries'
the latter claimed 100 meters behind the rig, cruising at a good speed and about to
ln an action by "A" against the common carrier,
ticketissued to "A" absolutely overtake said rig, the first bus driver should drive his bus towards
that - (1) there was a stipulation in the
the carrier from liabitity from the passengers death or the right shoulder of the road and exercise extraordinary diligence in
"r"riting
injuries alnd notices were posted by the c.ommon carrier dispensing
a manner that the first bus will be completely and fully within the
iitntn" extraordinaiy ditigence of the carrier, and (2) 'A" was given a
shoulder thereof to afford the second bus sufficient space to
discount on his plane Tare thereby reducing the liability of the
overtake the calesa and go through safely. And if under the situation
stated, said first bus driver failed to exercise that degree of diligence
commoncarrierwithrespectto"A"inparlicutar.Arethosevalid required of him by law, and the calesa and the first bus itself were hit
defenses? (2001 Bar)
and wrecked by the second bus as the latter attempted to pass and
overtake the rig, as a consequence of which two (2) passengers of
Answer: No, thedefenses are not vatid. The common carrier cannot
stiputate in the contract exempting it from tiability or iniury, even
if the first bus died (apart from others who were injured), it is clear that
posfed such stiputation is conla2r to the said carrier - the first bus - is liable for damages. lt is clear that the
notice thereof is because
piivisions of Artictes 1757 and 1758 of the New Civil Code which driver of the second bus should have slowed down or stopped, and,
'require hence, was reckless in not doing so; he had no special obligations
extraordinary ditigence of common carriers. The fact that a
towards the passengers of the first bus, unlike the driver of the latter
discount was given to-A is immateriat and will not reduce the
whose duty was to exercise "utmost" or "extraordinary" diligence for
com mon carrier's li abi I itY.
their safety. The driver of the first bus was thus under obligation to
avoid a situation which will be hazardous for his passengers, and not
By requiring the highest degree of diligence from common carriers
passengers and by creating make their safety dependent upon the diligence of the second bus
in the safe lransport of their a
driver (Batangas vs. Caguimbal, supra).
recklessness of their
fresumption of negligence against them, the
drivers which is iorro'i sight even in crowded areas and,
particularly, on tlle"highways throughout the country may, somehow'
A common carrier neglects its duty to transport its passengers
safely where one of its passengers died because the floor of its bus
if not in a"t'arge meaJure,-be curbed (Nocum vs' Laguna, 30 SCRA gave way after a tire blowout caused by overcrowding, overspeeding
6e).
and weak flooring (Ruiz vs. CA, 11 SCRA 9B).
courts may take judicial cognizance of the fact that our motor
The announcement by a train conductor of the next flag stop,
vehicle drivers, particularly those of public utilities, hgve not
three minutes ahead of time, causing the passengers to rise from
distinguished themselves for their concern over the safety, the
their seats, and the subsequent fall by them as a consequence of the
comfort or the convenience of others (Batangas vs. caguimbal, 22 jerking of the train, resulting in deaths and injuries to them, is
scRA 171).
negligence (Brinas vs. People, 125 SCRA 687).
The court takes judicial notice of the dreadful regularity with
The sideswiping of a jeepney by a truck where both were running
which grrevous maritime disasters occur in our waters with massive
parallel to each other to approach a narrow bridge which cannot
loss oflives (Sulpicio vs. CA' 246 SCRA 316)'
accommodate both vehicles, is not a fortuitous event to free the
jeepney operator from liability for injury to passengers (Bacarro vs.
b. Examples of Failure to Observe Extraordinary
Diligence Castano, 118 SCRA 187).

A factory defect to a motor vehicle or its parts (like a tire) is not a

Wherethedriverimproperlyparkedhisjeepneyonthepavement,
fortuitous event, and will not exempt the carrier from liability because
he was negligent (Anuran vs. Buno, 17 SCRA 224)'
the manufacturer of the vehicle or any of its parts is deemed a
310 TRANSPORTATION LAW
servant or agent of the common carrier (Juntilla vs. Fontanar, 136
scRA 624).
Where the cause of the blowout, which precipitated the accident,
was known in that the inner tube of the left front tire was pressed
between the inner circle of the left wheel and the rim which had
slipped out of the wheel, a mechanical defect of the conveyance or a
fault in its equipment which was easily discoverable if the bus had
been subjected to a more thorough or rigid checkup before it took to
the road, the owner of the vehicle is liable for the accident. lt was
not due to force majeure. Moreover, the bus wqs running fast (La
Mallorca vs. De Jesus, 17 SCRA 23).
The mere fact that a bus is inspected the day before the accident
is not sufficient to rebut the presumption of negligence, where the
bus was overloaded in spite of the fact that its route consisted of
mountainous, circuitous and ascending roads (Landingin vs.
Pangasinan, 33 SCRA 284).
Apart from the fact that respondent's plane ticket, boarding pass,
travel authority and personal articles already passed the rigid
immigration and security routines, JAL, as a common carrier, ought
to know the kind of valid travel documents its passenger carried.
JAL's defense of verification of the passenger's documents in its
breach of contratt of carriage is untenable (JAL vs. Simangan, 552
scRA 341).
Where a vessel's departure was delayed by repairs, and on
management's instruction, the first port of call was bypassed, the
event is not fortuitous to exempt the ship from liability (Sweet vs.
cA,121SCRA 769).
Where the driver of a common carrier went to the left in a curve,
he is negligent, and his liability to the passengers springs from tort.
That of the operator emanates from a contract of carriage as a
common carrier (Batangas vs. lAC, 167 SCRA 379).
Where the brakes of a passenger bus are defective, an accident
consequent to the defect is not fortuitous.
Under Article 2185 of the Civil Code, unless there is proof to the
contrary, it is presumed that a person driving a motor vehicle has
been negligent if at the time of the mishap he was violating a traffic
regulation (Mallarivs. CA, 324 SCRA 147).
TRANSPORTATION LAW 3il
Ensuring the seaworthiness of the vessel is the first step in
exercising the required vigilance. Petitioner did not present sufficient
evidence showing what measures or acts it had undertaken to
ensure the seaworthiness of the vessel (Edgar Cokaliong vs. UCPB,
404 SCRA 706).
When a passenger contracts for a specific flight, he has a purpose
in making that choice which must be respected. This choice, once
exercised, must not be impaired by a breach on the part of the airline
without the latter incurring any liability. For the airline's failure to
bring the passenger to her destination, as scheduled, the airliner is
clearly liable for the breach of its contract of carriage with the
passenger (Singapore vs. Fernandez,417 SCRA 474)
Bar Question: Are carriers tiabte for injuries to passengers even if
they have obserued ordinary diligence and care? Reasons for
answer. (1957 Bar)
Answer: Yes, the carrier is still liable for injuries fo passengers even
if it observed ordinary diligence and care in the carriage of said
passengers
The Civil Code requires common carriers to employ extraordinary
diligence in the carriage of passengers. lf they fall short of this
obligation, such as when they use ordinary diligence only, they are
liable to the passengers for injuries suffered by the latter in the
course of the carriage.
Bar Question: X, a busrnessman, boarded a Pantranco bus bound
for Dagupan City where he would meet Y, to arrange a busrness
transaction. Somewhere in San Fernando, Pampanga, Z, the
Deputy Sheriff of Pampanga, intercepted and seized the Pantranco
bus at the instance of W who had earlier obtained from the court a
writ of attachment. As a result of the seizure by the Sheriff, X failed
to reach Dagupan City where he was supposed to transact buslness.
Feeling aggrieved by the /oss of an othenuise juicy transaction, .he
filed an action for damages against Pantranco for breach of contract.
Decide with reasons. (1977 Bar)
Answer: Pantranco is liable for damages to X, the businessman.
Pantranco is a common carrier, and under the Civil Code, it is
obliged to employ extraordinary diligence in the discharge of its
contractual obligation to carry the passenger promptly and safely to
his destination. The only defense allowable is fortuitous event where
the carrier has no contributory fault. The levy by the Sheriff of the
312 TRANSPORTATION LAW
bus is an occurrence foreseeable by Pantranco, hence not a Hence, the bus company is liable for the death of A, and for
fortuitous event.
Consequently, Pantranco is liable to X for breach of contract.
Bar Question: Why is the defense of due diligence in the selection
and superuision of an employee not available to a common carrier?
(2002 Bar)
Answer: The defense of due diligence in the selection and
supervision of an employee is nof available to a common carrier
because the Civil Code expressly requires a common carrier to
exercise extraordinary diligence, and not just due diligence, in the
carriage of passengers. This means that a common carrier is obliged
to carry passengers safely as human care and foresight can provide,
using the utmost diligence of very cautious persons, with due regard
for all the circumstances.
Bar Question: A and his classmates take a bus from U.P. to Quiapo.
On the way, another Quiapo-bound bus tries to oveftake them. A
and his c/assmafes dare the bus driver to run faster and race with
the other bus. The driver takes their dare, to the delight of A and his
friends who cheered him. On rounding a curve, the bus driver fails to
slow down and the bus turns tuftle resulting in the death of A and
injuries to the other passengers.
The bus carri9d the following sign: "Do not talk to driver while the
bus ls in motion, othenuise the company will not assu/ne liability for
any accident."
Explain briefly the extent of the liability, if any, of the bus
company, giving the legal provisions and principle involved. (1983
Bar)
Answer: The bus is a common carrier, and under the Civil Code, it is
under the obligation to employ extraordinary diligence in bringing its
passengers safely to their destination. The only allowable
justification for any carrier's failure to comply with this obligation of
employing extraordinary diligence is the intervention of fortuitous
events. No such fortuitous event occurred in the course of the transit.
The presence of the sign in the bus absolving the carrier from liability
for accident should passengers talk to the driver while the bus is ln
motion, or the fact that it was the passenger who dared the bus
driver to race with the other bus, do not free the bus from
responsibility for the accident.
TRANSPORTATION LAW 3r3
injuries to other passengers by reason of its failure to observe
extraordinary diligence in the course of the carriage.
Bar Question: A bus of GL Transit on its way to Davao stopped to
enable a passenger to alight. At that moment, Santiago, who had
been waiting for a ride, boarded the bus. However, the bus driver
failed to notice Santiago who was still standing on the bus platform,
and stepped on the accelerator. Because of the sudden motion,
Santiago slipped and fell down, suffering serious iniuries.
May Santiago hold GL Transit liable for breach of contract of
carriage? Explain. (1996 Bar)
Answer: Yes, Sanfiago may hold GL Transit liable for breach of
contract of carriage because the bus driver of GL Transit did not
exercise extraordinary diligence in the carriage of passengers. The
relationship between the common carrier and the passenger starfs
when the former gives to the latter the opportunity to avail of its
services without need for sald passenger to have boarded the
vehicte, to have seated himself or to have been given a ticket. lf in
the course of boarding a vehicle which had slowed down to allow a
prospective passenger to board, the passenger suffers an iniury or is
killed, the liability of the carrier is contractual. The victim becomes a
passenger from the moment he steps on the platform of the bus, and
entitled to all rights as such, including the observance by the
common carrier of extraordinary diligence (See Dangwa vs. CA, 202
scRA 574).
c. Obligation Extends to Employees
Whenever an employee's negligence causes damage or injury to
another, there instantly arises a presumption iuris tantum that the
employer failed to exercise diligentissimi patris familias in the
selection (culpa in eligiendo) or supervision (culpa in vigilando) of ils
employees. To avoid liability for a quasi-delict committed by his
employee, an employer must overcome the presumption by
presenting convincing proof that he exercised the care and diligence
of a good father of a family in the selection and supervision of his
employee (Real vs. Belo, 513 SCRA 111).
Article 21BO of the Civil Code provides that a person is not only
liable for one's own quasi-delictual acts, but also for those persons
for whom one is responsible for. This liability is popularly known as
vicarious or imputed liability. To sustain claims against employers
314 TRANSPORTATION LAW
for the acts of their employees, the following requisites must be
established: (1) That the employee was chosen by the employer
personally or through another; (2) That the service to be rendered in
accordance with orders which the employer has the authority to give
at all times; and (3) That the illicit act of the employee was on the
occasion or by reason of the functions entrusted to him.
Significantly, to make the employee liable under paragraphs 5 and 6
of Article 2180, it must be established that the injurious or tortuous
act was committed at the time the employee was performing his
functions. Furthermore, the employer-employee relationship cannot
be assumed. lt is incumbent upon the plaintiff to prove the
relationship by preponderant evidence (Jayme vs. Apostol, 572
scRA 41).
Passengers have the right to be treated by a carrier's employees
with kindness, respect, courtesy and due consideration. They are
entitled to be protected against personal misconduct, injurious
language, indignities and abuses from such employees. So it is that
any discourteous conduct on the part of these employees toward a
passenger gives the latter an action for damages against the carrier
(Northwest vs. Catapang, 594 SCRA 401).
ln the selection of prospective employees, employers are
required to examine them as to their qualifications, experience, and
service records. On the other hand, due diligence in the supervision
of employees includes the formulation of suitable rules and
regulations for the guidance of employees and the issuance of
proper instructions intended for the protection of the public and
persons with whom the employer has relations through his or its
employees and the imposition of necessary disciplinary measures
upon employees in case of breach or as may be warranted to ensure
the performance of acts indispensable to the business of and
beneficial to their employer. To this is added that actual
implementation and monitoring of consistent compliance with said
rules should be the constant concern of the employer, acting through
dependable supervisors who should regularly report on their
supervisory functions. To establish these factors in a trial involving
the issue of vicarious liability, employers must submit concrete proof,
including documentary evidence (Safeguard vs. Tangco, 511 SCRA
67).
To allow the respondent to drive the petitioner's bus under such
uncertain condition would, undoubtedly, expose to danger the lives
of the passengers and the property of the petitioner. This would
place the petitioner in jeopardy of violating its extra-ordinary
TRANSPORTATION LAW 315
diligence obligation and, thus, may be subjected to numerous
complaints and court suits. lt is clear therefore that the
reinstatement of respondent not only would be deleterious to the
riding public but would also put unreasonable burden on the
business and interest of the petitioner. ln this regard, it should be
remembered that an employer may not be compelled to continue to
employ such persons whose continuance in the service will patently
be inimicalto his interests (Victory vs. Race, 519 SCRA 356).
Bad faith means a breach of known duty through some motive of
interest or ill will. Self-enrichment or fraternal interest, and not
personal ill will, may well have been the motive, but it is malice
nevertheless. lnattentiveness and rudeness of an airline's personnel
to a passenger's plight may amount to bad faith (Singapore vs.
Fernandez, 417 SCRA 47 4).
The duty to exercise the utmost diligence on the part of the
common carrier is for the safety of the passengers as well as for the
members of the crew or complement operating the carrier. And this
must be so for any omission, lapse or neglect thereof will certainly
result to the damage, prejudice, injuries and even death to all aboard
the plane, passengers and crew members alike (PAL vs. CA, 106
scRA 391).
The law on the matter is clear: only the negligent driver, the
driver's employer, and the registered owner of the vehicle are liable
for the death of a third person resulting from the negligent operation
of the vehicle (Jayme vs. Apostol, 572 SCRA 41).
d. Presumption of Fault or Negligence
Article 1756 of the Civil Code, in creating a presumption of fault or
negligence on the part of the common carrier when its passenger is
injured, merely relieves the latter, for the time being, from introducing
evidence to fasten the negligence on the former, because the
presumption stands in the place of evidence. Being a mere
presumption, however, the same is rebuttable by proof that the
common carrier had exercised extraordinary diligence as required by
law in the performance of its contractual obligation, or that the injury
suffered by the passenger was solely due to a fortuitous event. ln
fine, it can be inferred from the lbw the intention of the Code
Commission and Congress to curb the recklessness of drivers and
operators of common carriers in the conduct of their business.
(Mariano vs. Callejas, 594 SCRA 569)
316 TRANSPORTATION LAW
ln case of death or injury to passengers, common carriers are
presumed to have been at fault, or negligent, unless they prove that
they observed extraordinary diligence. This provision applies the
doctrine of res ipsa loquitor for several reasons:
(a) The contract between the carrier and the passenger imposes
on the carrier the obligation to transport the passenger safely, hence
the burden of explaining should fall on the carrier;
(b) The cause of the accident is better known to the carrier than
to the passenger; and
(c) The accident could not have happened if due care was
exercised by the carrier.
Negligence on the part of the common carrier is presumed where
the passenger suffers injuries (Baritua vs. Mercader, 350 SCRA 86).
Consequently, in quasi-delict, the negligence or fault should be
clearly established because it is the basis of the action, whereas in
breach of contract, the action can be prosecuted merely by proving
the existence of the contract and the fact that the common carrier,
failed to transport his passenger safely to his destination (Calalas vs.
cA, 332 SCRA 356).
A common carrier becomes liable for death of or injury to
passengers (a) through the negligence or willful acts of its
employees or (b) on account of willful acts or negligence of other
passengers or of strangers if the common carrier's employees
through the exercise of due diligence could have prevented or
stopped the act or omission (LRT vs. Natividad, 397 SCRA 75; Art.
1763, CivilCode).
ln an action against a private carrier for loss of, or injury to, cargo,
the burden is on the plaintiff to prove that the carrier was negligent or
unseaworthy, and the fact that the goods were lost or damaged while
in the carrier's custody does not put the burden of proof on the
carrier (National vs. CA, 283 SCRA 45).
The report showed that the truck, while making the Uturn, failed
to signal, a violation of traffic rules. The police records also stated
that, after the collision, the truck driver escaped and abandoned the
occupants of the other vehicle and his truck. This is another violation
of a traffic regulation. Therefore, the presumption arises that the
truck driver was negligent at the time of the mishap (Guillang vs.
Bedania, 5BB SCRA 73).
I
TRANSPORTATION LAW 3t7
There is no exact mathematical formula to determine prox.imate
cause. lt is based upon mixed considerations of logic, common
sense, policy and precedent. Plaintiff must, however, establish a
sufficient link between the act or omission and the damage or injury.
That link must not be remote or far-fetched; otherwise, no liability will
attach. The damage or injury must be a natural and probable result
of the act or omission. (lbid.)
Proximate cause is "that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the
injury and without which the result would not have occurred." Thus,
there is an efficient supervening event if the event breaks the
sequence leading from the cause to the ultimate result. To
determine the proximate cause of a controversy, the question that
needs to be asked is: lf the event did not happen, would the injury
have resulted? lf the answer is NO, then the event is the proximate
cause (Allied vs. Lim, 549 SCRA 504).
The doctrine of proximate cause is applicable only in actions for
quasi-delict, not in actions involving breach of contract. The doctrine
is a device for imputing liability to a person where there is no relation
between him and another party. ln such a case, the obligation is
created by law itself. But, where there is a pre-existing contractual
relation between the parties, it is the parties themselves who create
the obligation, and the function of the law is merely to regulate the
relation thus created. lnsofar as contracts of carriage are concerned,
some aspects regulated by the Civil Code are those respecting the
diligence required of common carriers with regard to the safety of
passengers as well as the presumption of negligence in cases of
death or injury to passengers (Calalas vs. CA, 332 SCRA 356).
Bar Question: ln an action grounded on the contract of carriage, is
there need for the court to make an express finding of fault or
negligence on the part of the carrier in order to hold it liable for
claims filed in behalf of the injured or deceased passengers?
Explain. ls there any exception to any answer you may give on this
question? (1990, 1989 Bar)
Answer: ln an action grounded on the contract of carriage, it is not
necessary for the court to make an express finding of fault or
negligence on the part of the carrier to hold it responsible to pay the
damages sought by a passenger. By the contract of carriage, the
carrier assu/nes the express obligation to transport the passenger to
his destination safely and to observe extraordinary diligence with
318 TRANSPORTATION LAW
due regard for all the circumstances, and any injury that might be
suffered by the passenger is right away aftributable to the fault or
negligence of the carrier (Article 1756, New Civil Code). This is an
exception to the general rule that negligence must be proved (See
Abeto vs. PAL, 115 SCRA 489).
The only possib/e rnsfances where a declaration by the court of
negligence or fault is necessa4u, are where concomitant fault is also
aftributed to the passenger or cargo owner, or where fortuitous event
was not the only factor for the failure of the carrier to properly
d isch arge h is obl ig ation.
Bar Question: ln a court case invotving claims for damages arising
from death and injury of bus passengers, counsel for the bus
operator files a demurrer to evidence arguing that the complaint
should be dlsmlssed because the plaintiffs did not submit any
evidence that the operator or its employees were negligent. lf you
were the judge, would you dismiss the complaint? (1997 Bar)
Answer: No, for in case of death of or injuries fo passengers,
common carriers are presumed to have been at fault or to have
acted negligently unless they prove that they observed the required
extraordinary diligence. With this presumption, the burden to prove
othenuise is on the carrier and it is nof necessary for the injured party
to first show negligence on the part of the common carrier.
The failure of the driver and conductor to immediately bring the
gravely injured victim to the hospital for medical treatment is a patent
and incontrovertible proof of the negligence (Dangwa vs. CA, 202
scRA 574).
Res rpsa loquitur is a Latin phrase which titerally means "the thing
or the transaction speaks for itself." lt relates to the fact of an injury
that sets out an inference to the cause thereof or establishes the
plaintiff's prima facie case. The doctrine rests on inference and not
on presumption. The facts of the occurrence warrant the supposition
of negligence and they furnish circumstantial evidence of negligence
when direct evidence is lacking. The doctrine is based on the theory
that the defendant either knows the cause of the accident or has the
best opportunity of ascertaining it and theplaintiff, having no
knowledge thereof, is compelled to allege negligence in general
terms. ln such instance, the plaintiff relies on proof of the happening
of the accident alone to establish negligence. The doctrine provides
a means by which a plaintiff can pin liability on a defendant who, if
innocent, should be able to explain the care he exercised to prevent
TRANSPORTATION LAW 319
the incident complained of. Thus, it is the defendant's responsibility
to show that there was no negligence on his part (Perla vs.
Sarangaya, 474 SCRA 191 ).
Res rpsa loquitur recognizes that parties may establish prima facie
negligence without direct proof, thus, it allows the principle to
substitute for specific proof of negligence. lt permits the plaintiff to
present along with proof of the accident, enough of the attending
circumstances to invoke the doctrine, create an inference or
presumption of negligence and thereby place on the defendant the
burden of proving that there was no negligence on his part. The
doctrine can be invoked only when under the circumstances, direct
evidence is absent and not readily available. The inference which
the doctrine permits is grounded upon the fact that the chief
evidence of the true cause, whether culpable or innocent, is
practically accessible to the defendant but inaccessible to the injured
person (Macalinao vs. Ong, 477 SCRA 740).
Literally, res ipsa loquitur means "the thing speaks for itself." lt is
the rule that the fact of the occurrence of an injury, taken with the
surrounding circumstances, may permit an inference or raise a
presumption of negligence, or make out a plaintiff's prima facie case,
and present a question of fact for defendant to meet with an
explanation. Stated differently, where the thing which caused the
injury, without the fault of the injured, is under the exclusive control of
the defendant and the injury is such that it should not have occurred
if he, having such control used proper care, it affords reasonable
evidence, in the absence of explanation that the injury arose from the
defendant's want of care, and the burden of proof is shifted to him to
establish that he has observed due care and diligence. From the
foregoing statements of the rule, the requisites for the applicability of
the doctrine of res ipsa loquitur are: (1) the occurrence of an injury;
(2) the thing which caused the injury was under the control and
management of the defendant; (3) the occurrence was such that in
the ordinary course of things, would not have happened if those who
had control or management used proper care; and (4) the absence
of explanation by the defendant. Of the foregoing requisites, the
most instrumental is the "control and management of the thing which
caused the injury. ln this jurisdiction, res ipsa loquitur is not a rule of
substantive law, hence, does not per se create or constitute an
independent or separate ground of liability, being a mere evidentiary
rule. ln other words, mere invocation and application of the'doctrine
does not dispense with the requirement of proof of negligence (Tan
vs. JAM, 605 SCRA 659; Professional vs. Agana, 513 SCRA 478).
320 TRANSPORTATION LAW
1. When Presumption Rebutted
Bar Question; Suppose "A" was riding on an airplane of a common
carrier when the accident happened and "A" suffered se.'lous injuries.
ln an action by "A" against the common carrier, the latter claimed
that - (1) there was a stipulation in the ticketissued to "A" absolutely
exempting the carrier from liability from the passengerb death or
injuries and notices were posted by the common carrier dispensing
with the extraordinary diligence of the carrier, and (2) "A" was given a
discount on his plane fare thereby reducing the liability of the
common carrier with respect to "A" in particul.ar. What are the
defenses available to any common carrier to limit or exempt it from
liability? (2001 Bar)
Answer: The common carrier can avail of the following defenses to
limit or exempt it from liability. (1) naturaldisasfer like flood, storm,
lightning, etc.; (2) act or omission of the shipper; (3) act of the public
enemy in time of war; (4) character of the goods or defect in their
packing; and (5) order of the competent authority, under the
provisions of Article 1734 of the Civil Code. lf the cause appears to
be fortuitous but is not included in Article 1734 of the Civil Code, then
Article 1735 applies (See Maritime vs. CA, 171 SCRA 61).
The hijacking of a PAL plane by the MNLF during martial law is
attributable not tdPAL but to the military authorities who seemed to
have relaxed in the frisking of passengers and in inspecting their
baggage (Gacal vs. PAL, 183 SCRA 189).
Where a domestic commercial plane is hijacked and valuables of
a passenger taken by the hijackers, the armed robbery is a case of
force majeure, freeing the carrier from liability for said loss
(Quisumbing vs. CA, 189 SCRA 605).
This is not to say that common carriers are absolutely responsible
for all injuries or damages even if the same were caused by a
fortuitous event. To rule otherwise would render the defense of
"force majeure," as an exception from any liability, illusory and
ineffective (JAL vs. C4,294 SCRA 19).
There is no question that when a party is unable to fulfill his
obligation because of "force majeure," the general rule is that he
cannot be held liable for damages for non-performance (lbid.).
TRANSPORTATION LAW 321
A bus driver could not be considered a hit-and-run driver where he
exerted efforts to see to it that the victim had been attended to, such
as where there were several people assisting the victim, including his
co-employee working for the bus company (Abueva vs. People, 390
scRA 62).
The doctrine of limited liability under Article 587 of the Code of
Commerce does not apply to situations in which the loss or the injury
is due to the concurrent negligence of the shipowner and the captain.
It has already been established that the sinking of MN Central Bohol
had been caused by the fault or negligence of the ship captain and
the crew, as shown by the improper stowage of the cargo of logs.
Closer supervision on the part of the shipowner could have
prevented this fatal miscalculation. As such, the shipowner was
equally negligent. lt cannot escape liability by virtue of the limited
liability rule (Central vs. lnsurance, 438 SCRA 438).
An excepiion to the limited liability doctrine is when the damage is
due to the fault of the shipowner or to the concurrent negligence of
the shipowner and the captain. ln which case, the shipowner shall
be liable to the full extent of the damage. Where the shipowner fails
to overcome the presumption of negligence, the doctrine of limited
liability cannot be applied (Aboitiz vs. New lndia, 488 SCRA 563).
lf a passenger commits contributory negligence, such contributory
negligence, while not exempting the common carrier from liability,
does not entitle the passenger to recover moral and exemplary
damages (PNR vs. CA, 139 SCRA B7).
To hold a person as having contributed to his injuries, it must be
shown that he performed an act that brought about his injuries in
disregard of warnings or signs of an impending danger to health and
body. To prove contributory negligence, it is still necessary to
establish a causal link, although not proximate, between the
negligence of the party and the succeeding injury. ln a legal sense,
negligence is contributory only when it conttibutes proximately to the
injury, and not simply a condition for its occurrence (Anonuevo vs.
cA,441SCRA 24).
The underlying precept on contributory negligence is that a
plaintiff who is partly responsible for his own injury should not be
entitled to recover damages in full but must bear the consequences
of his own negligence. The defendant must thus be held liable only
for the damages actually caused by his negligence. The
322 TRANSPORTATION LAW
determination of the mitigation of the defendant's liability varies
depending on the circumstances of each case (Lambert vs. Heirs,
452 SCRA 285).
Contributory negligence is conduct on the part of the injured
party, contributing as a legal cause to the harm he has suffered,
which falls below the standard to which he is required to conform for
his own protection (PNR vs. Brunty, 506 SCRA 685).
The doctrine of last clear chance states that where both parties
are negligent but the negligent act of one is appreciably later than
that of the other, or where it is impossible to determine whose fault or
negligence caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is chargeable with
the loss. Stated differently, the antecedent negligence of plaintiff
does not preclude him from recovering damages caused by the
supervening negligence of defendant, who had the last fair chance to
prevent the impending harm by the exercise of due diligence (lbid.).
The defense of contributory negligence does not apply in criminal
cases committed through reckless imprudence, since one cannot
allege the negligence of another to evade the effects of his own
negligence (Manzanares vs. People, 504 SCRA 354).
Driving exacts g more than usual toll on the senses. Physiological
"fight or flight" mechanisms are at work, provided such mechanisms
were not dulled by drugs, alcohol, exhaustion, drowsiness, etc
(Valenzuela vs. CA, 253 SCRA 303).
An actor who is confronted with an emergency is not to be held
up to the standard of conduct normally applied to an individual who is
in no such situation. The law takes stock of impulses of humanity
when placed in threatening or dangerous situations and does not
require the same standard of thoughtful and reflective care from
persons confronted by unusual and oftentimes threatening conditions
(rbid.).
The circumstances in a situation wherein a person is driving a
vehicle overtaking another require of that person a greater amount of
diligence for the following reasons: (1) it was the overtaker's decision
to assume the risks involved in overtaking another; and (2) the
overtaker, being behind the vehicle sought to be overtaken, is in a
better position to ensure the safety of the vehicles concerned. lt is
therefore the responsibility of the person driving a vehicle overtaking
ahother to ensure the safety of all vehicles, passengers, and
TRANSPORTATION LAW
pedestrians in the immediate vicinity (Alvero vs. People, 490 SCRA
226).
One who suddenly finds himself in a place of danger, and is
required to act without time to consider the best means that may be
adopted to avoid the impending danger, is not guilty of negligence if
he fails to adopt what subsequently and upon reflection may appear
to have been a better method unless the emergency in which he
finds himself is brought about by his own negligence (Marikina vs.
People, 4BO SCRA 284).
The doctrine of last clear chance does not apply where the party
charged is required to act instantaneously, and the injury cannot be
avoided by the application of all means at hand after the peril is or
should have been discovered. The doctrine of last clear chance
does not apply when Valdez, who had the last chance to avoid the
mishap when the owner-type jeep encroached on the western lane
of the passenger jeep, no longer had the opportunity to avoid the
collision. When the ownertype jeep encroached on the lane of the
passenger jeep, Valdez maneuvered his vehicle towards the
western shoulder of the road to avgid a collision, but the owner-type
jeep continued to move to the western lane and bumped the left
side of the passenger jeep. Thus, considering that the time the
owner-type jeep encroached on the lane of Valdez to the time of
impact was only a matter of seconds, he no longer had the
opportunity to avoid the collision. Although the records are bereft of
evidence showing the exact distance between the two vehicles when
the owner-type jeep encroached on the lane of the passenger jeep, it
must have been near enough, because the passengerjeep driven by
Valdez was unable to avoid the collision (Achevara vs. Ramos, 601
scRA 270).
The last clear chance doctrine can never apply where the party
charged is required to act instantaneously, and if the injury cannot be
avoided by the application of all means at hand after the peril is or
should have been discovered (lbid.).
Fire is not a fortuitous event to exempt a common carrier (a
merchant vessel) from liability for loss, unlegs the fire is caused by
lightning or by any other natural disaster (Eastern vs. lAC, 150
scRA 463).
lf a passenger was injured as a consequence of the explosion of
firecrackers, contained in a box loaded in the passenger bus and
324 TRANSPORTATION LAW
declared to its conductor as containing clothes and miscellaneous
items by a co-passenger, fairness demands that in measuring a
common carrier's duty towards its passengers, allowances must be
given to the reliance that should be reposed on the sense of
responsibility of all the passengers in regard to their common safety.
It is to be presumed that a passenger will not take with him anything
dangerous to the lives and limbs of his co-passengers, not to speak
of his own. Not to be lightly considered must be the right to privacy
to which each'passenger is entitled. He cannot be subjected to any
unusual search, when he protests the innocuousness of his baggage
and nothing appears to indicate the contrary. There is need for
evidence of circumstances indicating the cause or causes for
apprehension that the passenger's baggage is dangerous and that it
is the failure of the common carrier's employee to act in the face of
such evidence that constitutes the cornerstone of the common
carrier's liability (Nocum vs. Laguna, 30 SCRA 70).
Bar Question: X brought seven (7) sacks of patay to the PNR. He
paid its freight charge and was issued Way Bill No. 1. The cargo
was loaded on the freight wagon of the train. Without any
permission, X boarded the freight wagon and not the passenger
coach. Shortly after the train started, it was derailed. The freight
wagon fell on lts srde, killing X. There is no evidence that X bought a
ticket or paid his fare at the same time that he paid the freight
charges for his Cargo. /s X a passenger of PNR? (1989 Bar)
Answer: X is not a passenger of PNR. His contract for the carriage
of his goods by PNR did not carry the right to board PNR as a
passenger. As a matter of fact he boarded clandestinely, not in the
passenger coach but in the freight wagon, which does not at all load
passengers.
a passenger, his heirs cannot claim for damages
Since he is not
as a conseguence of breach of contract of carriage ofpassengers,
as exisfs no such contract.
.there
Bar Question: Marino was a passenger on a train. Another
passenger, Juancho, had taken a gallon of gasoline placed in a
plastic bag into the same coach where Marino was riding. The
gasoline ignited and exploded causing injury to Marino who filed a
civil suit for damages agarnsf the railway company claiming that
Juancho should have been subjected to inspection by its conductor.
The railway company disclaimed liability resulting from the
explosion contending thatit was unaware of the contents of the
plastic bag and invoking the right of Juancho to privacy.
TRANSPORTATION LAW 32s
Should the railway company be liable for damages?
lf it were an airline company involved, would your answer be the
same? Explain your answers briefly. (1992 Bar)
Answer: The raitway company witl not be liabte for the damage.
The one gallon gasoline was placed in a plastic bag, and there is
nothing'in the problem above to indicate that the plastic bag itself
could give rise to the suspicion that the cargo was dangerous
because the gasoline was inside that plastic container. The right to
privacy of a passenger prevents him from being subjected to any
unusual search of his baggage.
lf it were an airline company involved, then its acceptance of the
package for carriage is negligence on its part, if it failed with the use
of its gadgets of detection to notice that said baggage contained
gasoline, an inflammable. The airline company would therefore be
liable to passengers injured by the explosion.
e. Duration of Exercise of Extraordinary Diligence
The relationship ends when the passenger, after reaching his
destination, safely alighted and had the reasonable opportunity to
leave the common carrier's premises, which includes the time to look
for his baggage and claim them (Aboitiz vs. CA, 179 SCRA 95).
Plaintiffs, husband and wife, together with minor daughters,
namely, Milagros, 13 years old, Rafaela, about 4-112 years old, and
Fe, over 2 years old, boarded a Pambusco bus. Upon reaching their
destination, plaintiffs and all their daughters alighted from the bus
and the father led his companions to a shaded spot about four to five
meters away from the vehicle. The father returned to the bus to get
a piece of baggage which was not unloaded when he alighted from
the bus. Rafaela, child that she was, must have followed the father.
However, although the father was still on the running board of the
bus waiting for the conductor to give him the bag or bayong, the bus
started to run, so that the father had to jump down from the moving
vehicle. lt was at this instance that the child, who must be near the
bus, was run over and killed. Held: ln the circumstances, it cannot
be said that the carrier's agent had exercised the utmost diligence of
a very cautious person required by Article 1755 of the Civil Code to
be observed by a common carrier in the discharge of its obligation to
transport safely its passengers. ln the first place, the driver, although
stopping the bus, nevertheless did not put off the engine. Secondly,
he started to run the bus even when the bus was still unloading part
of the baggage of the passengers. The presence of said passengers
326 TRANSPORTATION LAW
near the bus was not unreasonable and they are therefore to be
considered,still passengers of the carrier, entitled to protection under
their contract of carriage (La Mallorca vs. CA, 17 SCRA 739).
The common carrier's duty to observe the requisite diligence in the
shipment of goods lasts from the time the articles are surrendered to
or unconditionally placed in the possession of, and received by, the
carrier for transportation until delivered to, or until the lapse of a
reasonable time for their acceptance, by the person ehtitled to
receive them. When the goods shipped are either lost or arrive in
damaged condition, a presumption arises against the carrier of its
failure to observe that diligence (Phil. Charter vs. Unknown Owner,
463 SCRA 202).
The carrier still has the responsibility to guard and preserve the
goods, a duty incident to its having the goods transported. Common
carriers are bound to observe extraordinary diligence in vigilance
over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case. The mere
proof of delivery of goods in good order to the carrier, and their
arrival in the place of destination in bad order, make out a prima
facie case against the carrier, so that if no explanation is given as to
how the injury occurred, the carrier must be held responsible. lt is
incumbent upon the carrier to prove that the loss was due to accident
or some other circumstances inconsistent with its liability (Delsan vs.
American, 498 SCRA 603).
f. Liability for Assaults of Employees
Where a passenger in a taxicab was killed by the driver, the cab
owner is liable to the heirs of the deceased passenger for damages
on the basis of breach of the contract of carriage. The driver is not
liable to the heirs contractually, because the driver was not a party to
the contract of carriage. His civil liability is covered by the judgment
of conviction in the criminal case (Maranan vs. Perez, 20 SCRA
412).
The common carrier is liable for intentional assaults committed by
its employees upon its passengers. This rule was adapted from
Anglo-American Law, where the majority view, as distinguished from
the minority view based on respondeat superior, is that the carrier is
liable as long as the assault occurs within the course of the
performdnce of the employee's duty. lt is no defense for the carrier
that the act was done in excess of authority or in disobedience of the
TRANSPORTATION LAW 327
carrier's orders. The carrier's liability is absolute in the sense that it
practically secures the passengers from assaults committed by its
own employees (lbid.).
The special undertaking of the carrier requires that it furnish its
passengers that full measure of protection afforded by the exercise
of the high degree of care prescribed by law, inter alia, from violence
and assaults at the hands of strangers and other passengers, but
above all from the acts of the carrier's own servants charged with the
passenger's safety. The performance of that undertaking is confided
by the carrier to its employees. As between the carrier and the
passenger, the former must bear the risk of wrongful acts of the
former's employees against passengers, since the carrier, not the
passengers, has the power to select and remove them (lbid.).
A common carrier is liable as such to a stevedore who was hired
by a shipper to help load cargo, even if such stevedore was not
hirnself a passenger (Sulpicio vs. CA, 246 SCRA 299).
Bar Question: City Railways, lnc. (CRI) provides train service, for a
fee, to commuters from Manila to Calamba, Laguna. Commuters are
required to purchase tickets and then proceed to designated loading
and unloading facilities to board the train. Ricardo Sanfos purchased
a ticket for Calamba and entered the station. While waiting, he had
an altercation with the security guard of CRI leading to a fistfight.
Ricardo Sanfos fell on the railway iusf as a train was entering the
station. Ricardo Sanfos was run over by the train. He died.
ln the action for damages filed by the heirs of Ricardo Sanfos, CR/
interposed lack of cause of action, contending that the mishap
occurred before Ricardo Sanfos boarded the train and that it was not
guilty of negligence. Decide. (2008 Bar)
Answer: CR/ is liabte for damages. tt is undeniabty apparent that
CR/ is a common carrier which is obliged to observe extraordinary
diligence in the conduct of its busrness. Ricardo Sanfos is deemed a
passenger of CRI notwithstanding the fact he has yet to board the
train when the mishap happened. As held in the case of Dangwa vs.
CA (202 SCRA 574), the contract of carriage began when the
passenger purchased a ticket and proceeded to the designated
loading facilities to board the carrier. Although CR/ is not directly
guitty of negtigence, under Afticte 2180 of the Civil Code, employers
are liable for the damages caused by their employees acting within
the scope of their assrgned fasks. The liability adses due to the
presumed negligence of the employers in supervising their
employees unless they prove that they observed all the diligence of a
328 TRANSPORTATION LAW
good father of a family to prevent the damage (Mendoza vs. Soriano,
524 SCRA 260).
The bus company and the driver are jointly and severally liable for
damages for injuries suffered by a passenger (Fabre vs. CA, supra).
The mere formulation of various company policies on safety
without showing that they were being complied with is not sufficient
to exempt the carrier from liability arising from negligence of its
employees. ln order that the defense of due diligence in the selection
and supervision of employees may be deemed sufficient and
plausible, it is not enough to emptily invoke thb existence of said
company guidelines and policies on hiring and supervision. As the
negligence of the employee gives rise to the presumption of
negligence on the part of the employer, the latter has the burden of
proving that it has been diligent not only in the selection of
employees but also in the actual supervision of their work. The mere
allegation of the existence of hiring procedures and supervisory
policies, without anything more, is decidedly not sufficient to
overcome such presumption (lbid.)
Once evidence is introduced showing that the employer exercised
the required amount of care in selecting its employees, half of the
employer's burden is overcome, but the question of diligent
supervision depends on the circumstances of employrnent
(Valenzuela vs. CA, 253 SCRA 303).
Ordinarily, evidence demonstrating that the employer has
exercised diligent supervision of its employee during the
performance of the latter's assigned tasks would be enough to
relieve him of the liability imposed by Article 2180 in relation to
Article 2176 of the Civil Code (lbid.).
When a company gives full use and enjoyment of a company car
to its employee, it in effect guarantees that it is, like every good
father, satisfied that its employee will use the privilege reasonably. A
company owes a responsibility to the public to see to it that the
managerial or other employees to whom it entrusts virtually unlimited
use of a company issued car are able to use the company issue
capably and responsibly. Where no allegations were made as to
whether or not the company took the steps necessary to determine
or ascertain the driving proficiency and history of its employee to
whom it gave full and unlimited use of a company car, said company,
based on the principle of bonus pater familias, ought to be joinfly and
TRANSPORTATION LAW 329
severally liable with the former for the injuries caused to third
persons (lbid.).
lf the fortuitous event was accompanied by neglect and
malfeasance by the carrier's employees, an action for damages
against the carrier is permissible (JAL vs. CA, 294 SCRA 19).
Bar Question: A train guard, while on duty, killed a train passenger
for personal reasons, with the gun furnished by the railroad
company. May the heirs of the deceased passenger sue the railroad
company for damages? Decide the case with reasons. (1986 Bar)
Answer: Yes, the railroad company is liable for the act of its train
guard resulting in the death of the passenger. The extraordinary
diligence required of carriers extends fo acfs of the carrier's
employees performed while discharging their duties. As between the
carrier and the passenger, the carrier bears the risk of wrongful acts
of the carrier's employees agarnsf the passengers, since the carrier
se/ecfs and removes its employees. More so rn fhis case where the
gun is furnished by the railroad company. lt guarantees that the
employee will use the gun capably and responsibly. Misuse of the'
gun makes the carrier liable.
Bar Question: Juan, a paying passenger, noted the stipulation at the
back of the bus ticket stating that the liability of the bus company is
limited to P1,000.00 in case of injuries to ifs passengers and to
P500.00 in case of /oss or damage to baggage caused by the
negligence or wilfulacfs of lfs employees.
Upon arrival at his destination, Juan got into an altercation with
the ticket conductor, who pulled out a knife and inflicted several
wounds on Juan. The bus driver intervened, heaping abusive
language on Juan and completely destroying Juan's baggage which
contained expensive goods worth P3,000.00. The hospitalexpenses
for Juan would probably amount to at least P6,000.00.
Give the extent of the liability of the bus company, with reasons.
fl98a Bar)
Answer: The bus company, being a common carrier and therefore
under the obligation to employ extraordinary diligence in the carriage
of passengers and of goods, will be liable for all damages to the
goods, and for all medical expenses incurred by Juan arising from
the acts of the conductor and the driver, both employees of the
common carrier.
330 TRANSPORTATION LAW
Basis for the common carrier's liability is that while the carrier had
all the opportunity of selecting the persons he will employ, the
passengers, on the other hand, are not in a position to inbrtere with
such selection.
The stipulation in the ticket that the'bus company's liability for
injuries fo passengers shall be limited to Pl,000 is null and void,
being in violation of carrier's obligation fo assume all liability for
breach of its obligation to employ extraordinary diligence in the
carriage ofpassengers. '
ln the carriage of goods, a stipulation in a bill of lading (the ticket
in this case being considered as a bill of lading) limiting fhe carrier's
liability to P500.00 only, and without giving to the shipper (the
passenger Juan in this problem) the option to declare a higher
valu7tion, is null and void.
Hence, Juan can recover P3,000.00 for destruction of his goods,
and P6,000.00 or his actual hospital expenses for the iniuries he
sustained.
g. Liability for Acts of Strangers
Had petitioner and its employees been vigilant they would not
have failed to see that the malefactors had a large quantity of
gasoline with them. Under the circumstances, simple precautionary
measures to protect the safety of passengers, such as frisking
passengers and inspecting their baggages, preferably with non-
intrusive gadgets such as metal detectors, before allowing them on
board, could have been employed without violating the passenger's
constitutional rights. A common carrier can be held liable for failing to
prevent a hijacking by frisking passengers and inspecting their
baggages (Fortune vs. CA, 305 SCRA 14).
Bar Question: Mariter, a paying bus passenger, was hit above her
left eye by a stone hurled at the bus by an unidentified bystander as
the bus was speeding through the National Highway. The bus
owner's personnel lost no time in bringing Mariter to the provincial
hospital where she vvas confined and treated.
Mariter wants to sue the bus company for damages and seeks
your advice whether she can legally hold the bus company liable.
What willyou advise her? (1994 Bar)
Answer: Mariter cannot legally hold the bus company liable. While
a common carrier is liable for injury fo ifs passengers through the
willful acts of strangers, the same is true only if the carrier's
employees through the exercise of due diligence could have
TRANSPORTATION LAW 331
prevented such act. The act of the bystander is considered a
fortuitous event.
Bar Question: A, as a paying passenger, boarded a plane of X and
Company, a duly authorized air carrier bound from Manila to Cebu.
On the way, the plane exploded in midair and crashed, causing the
death of all persons on board. lt was determined that the midair
explosion was due to an explosive device contained in a suitCase
carried by another passenger in the ill-fated aircraft.
a. As counsel for the heirs of A, what arguments will you raise in
a suit for damages against the airline company?
b. lf you are counsel for X and Company, what defenses will you
raise?
c. lf yoi are the judge, how will you decide the case? Reasons.
(1971 Bar)
Answer: (a) As counsel for the heirs of A, I will argue that the airline
is liable for failure to o.bserve extraordinary diligence in the carriage
of passengers, its negligence being its failure to exhaust all steps to
examine the luggage of all its passengers to detect explosive or
other goods liable to destroy the plane while in flight.
(b) As counsel for the airline, X & Company, I will argue that the
constitutional rights of a passenger to privacy and against illegal
searches have to be respected by the company, preventing it from
exhausting all efforts to detect carriage of explosives.
(c) lf I were the judge, I will hold X & Company liable. Had its
employees frisked fhe passengers and inspected their baggages
with non-intrusive devices like metal detectors, they would have
discovered the explosive device.
Bar Question: X boarded an air-conditioned Pantranco Bus bound
for Baguio. X was given notice that the carrier is not liable for
baggage brought in by passengers. X kept in his custody his attache
case containing $10,000.00. ln Tarlac, allthe passengers, including
X, were told to get off and to take their lunch, the cost of which is
included in the ticket. X left his attache case on hls seaf as the door
of the bus was locked. After lunch and when X returned to the bus,
he discovered that his attache case was missing. A vendor said that
a man picked the lock of the door, entered the bus and ran away with
the attache case. What, if any, is the liability of the carrier? (1989
Ba0
Answer: The common carrier here is liable to X. Pantranco fell
short of its obligation to bring fhe passenger X and the personal
332 TRANSPORTATION LAW
belongings he carried with him as passenger to his destination
safely.
The notice given by Pantranco that it is not liable for baggage
brought in by passengers ls null and void. Pantranco is remiss in its
obligation to employ extraordinary diligence in failing to post an
employee to watch the bus, while the passengers ate lunch in a
restaurant, the cost of which was part of the fare paid by X, the
passenger.
Bar Question: Pasahero, a paying passenger, boarded a Victory
Liner bus bound for Olongapo. He chose a seat at the front near the
bus driver. Pasahero told the bus driver that he had valuable items
in his bag which was placed near his feet. Since he had not slept for
24 hours, he requested the driver to keep an eye on the bag should
he doze off during the trip.
a. Supposing two armed men staged a holdup while the bus was
speeding along the Nofth Expressu/ay. One of them pointed a gun
at Pasahero and stole not only his bag but his wallet as well. /s
Victory liner liable to Pasahero? Explain.
b. There have been incidents of unknown persons throwing
sfones at passing vehicles from the oyerpasses in the North
Expressway. While the bus was traversing the super highway, a
stone hurled from fhe Sfo. Domingo oyelpass smashed the front
windshield and hit Pasahero in the face. Pasahero lost an eye and
suffered other injiries. Can Pasahero hotd the bus company tiable
for damages? Explain. (1986 Bar)
Answer: (a) The occurrence of the holdup resulting in the
stealing of Pasahero's bag and wallet with the use by holduppers of
a gun is a case of Tuerza mayor' (force majeure) and will free Victory
Liner from any liability. While a common carrier could become liable
for acts of strangers which the carrier could have prevented by the
exercise of due diligence, the case at baris such that any attempt by
the carrier or its employees could have exposed them to the danger
of being killed or hurt by the holduppers. The attempt to prevent
therefore, would be a use/ess acf.
(b) Victory Liner could be held liable by Pasahero. There is
nothing stated in the problem of any attempt made by Victory Liner to
prevent the recurrence of stone throwing incidents from the
oveipasses at North Expressway, or protect ifs passengers from
such occurrence, inspite of the fact that these incidents (according to
the problem) seem to have become frequent.
TRANSPORTATION LAW 333
The sudden act of a passenger who stabbed another passenger
inside a bus is within the context of force majeure. However, to be
absolved from liability in case of force majeure, the common carriel
must prove that it was not negligent in causing the injuries resulting
from such accident, and observed extraordinary diligence in
safeguarding the lives of the passengers. The factual findings that
the driver did not stop the bus at the height of the commotion, the
victims fell from the bus door when it was opened while the bus was
still running, the conductor panicked and blew his whistle after
passengers had already fallen off the bus, and that the bus was not
properly equipped with doors in accordance with law are clear that
the common carrier failed to overcome fault and negligence found in
the law on common carriers (Bachelor vs. CA, 1BB SCRA 216).
h. Liability if Driver of Other Vehicle Negligent
ln case of injury to a passenger due to the negligence of the
driver of the bus in which he was riding and of the driver of another
vehicle, the drivers as well as the owners of the two vehicles are
jointly and severally liable for damages (Vinluan vs. CA, 16 SCRA
742).
The real owner of the vehicle at fault is liable for damages arising
from accident it is involved in (Occidentalvs. CA, 220 SCRA 169).
Lack of driver's license does not exempt negligent driver from
part (Manuel vs, CA, 227
liability when there was real fault on his
scRA 29).
i. Liability of Unregistered Owner of Public
Utility Vehicle
The registered owner or operator of a common carrier is liable for
injuries to passengers, solidarily with the driver regardless of any
alleged sale or lease made on the vehicle. The actual owner of the
vehicle becomes a mere agent of the registered operator, and does
not take away responsibility from the latter as regards the public and
third persons (MYC vs. Vda. de Caldo, 132 SCRA 10).
While a transfer of a certificate of public convenience to,operate a
transportation service is not effective and binding insofar as the
responsibility of the grantee under the franchise in its relation to the
public is concerned, without the approval of the transfer by the Public
Service Commission required by the Public Service Act, and that in
334 TRANSPORTATION LAW
contemplation of law, the transferor of such certificate continues to
be the operator of the service as long as the transfer is not yet
approved, and as such operator, he is the one responsible jointly and
severally with his driver for damages incurred by passengers or third
persons in consequence of injuries or deaths resulting from the
operation of such service, those rulings do not apply when the
parties have admitted that they are owners of the bus involved in the
incident in question and that the driver of said bus at the time of said
incident, was in their employ. Both the owner of record and the
actual operqtor of the bus in question should be adjudged jointly and
severally liable with the driver (Zamboanga vs. CA, 30 SCRA 719).
A jeepney registered in the name of an operator, but actually
owned by another under the "kabit" system, may be sold at public
auction to satisfy a court's award for damages to a pedestrian. The
vehicle cannot be considered "stranger's property" (Santos vs.
Sibug, 104 SCRA 520).
Bar Question.'Drscuss the "kabit system" in land transportation and
its legalconsequences. (2005 Bar)
Answer : The "kabit system" is an arrangement whereby a person
who has been granted a certificate of public convenience allows
another who owns a motor vehicle to operate under his ceftificate for
a fee or a percdntage of the earnings (See Lim vs. CA,3Z3 SCRA
394). A certificate of public convenience is a special privilege
conferred by the government. Abuse of this privilege by the grantees
thereof cannot be countenanced. The "kabit system" has been
identified as one of the root causes of the prevalence of graft and
corruption in the government transportation offices (Teja Marketing
vs. lAC, 148 SCRA 347). As a consequence of such arrangement,
the owner of the certificate of public convenience and the actual
owner of the motor vehicle should be held jointly and severally liable
for damages to third persons arising from the negligent operation of
the motor vehicle.
The true owner of a passenger jeep is solidarily liable with the
registered owner in a civil action for damages (Jereos vs. CA, 117
scRA 395).
A holder of a certificate of public convenience who transferred his
right without the approval of the Public Service Commission is still
responsible to said office and to the public. His transferee however
is liable to him (Perez vs. Gutierrez, 53 SCRA 149).
TRANSPORTATION LAW 335
Bar Question: "A" filed an action for damages agarnsf "8", owner
and operator of a bus that figured in a traffic rnishap. Upon his
motion, "C" was attowed to intervene and filed an answer in
intervention, praying among other things, that he be declared the
owner of the bus which was attached by the sheriff to answer for any
damages which might be awarded the plaintiff- The evidence shows
that the intervenor had sold the bus on installments to "D", who to
secure payment of the unpaid installments, mortgaged the bus in
favor of "C", and that the corresponding chaftel mortgage was
registered in the Registry of Deeds. lt is further shown that "D" later
sotd the bus to "8" who recorded the Deed of Sale in the Motor
Vehicte Office. Judgment was rendered sentencing "8" to pay
damages to plaintiff. /ssue: Who has a preferred right to the bus
under attachment: the intervenor or the plaintiffs? Reason out your
answer. (1963 Bar)
Answer: The plaintiffs have a preferred right to the bus under
attachment. Transactions affecting public utility vehicles have to be
approved by the Public Servlce Commission before they can affect
third persons like passengers. The mere registration of the
documents in the Registry of Deeds or Motor Vehicle Office is not
enough to take off tiability from the registered operator for iniuries or
death to passengers.
Bar Question: Johnny owns a Sarao ieepney. He asked his
neighbor Van if he could operate said ieepney under Van's ceftificate
of public convenience. Van agreed and, accordingly, Johnny
registered his ieepney in Van's name.
On June 10, 1990, one of the passenger ieepneys operated by
Van bumped Tomas. Tomas was iniured and in due time, he filed a
complaint for damages agarnsf Van and his driver for the iniuries he
suffered. The court rendered iudgment in favor of Tomas and
ordered Van and his driver, iointly and severally, to pay Tomas
actual and moral damages, attorney's fees, and cosfs.
The Sheriff tevied on the ieepney belonging to Johnny but
registered in the name of Van. Johnny filed a third'party claim with
the Sheriff alteging ownership of the ieepney levied upon and stating
that the jeepney was registered in the name'of Van merely to enable
Johnny to make use of Van's ceriificate of public convenience.
May the Sheriff proceed with the public auction of Johnny's
jeepney? Discuss with reason. (1990 Bar)
Answer: Yes, the sheriff may proceed with the sale of Johnny's
jeepney. From the viewpoints of third persons, and of the
336 TRANSPORTATION LAW
government, the registered owner, Van, is the owner of the jeepney.
Being such owner, said jeepney may be subject to attachment or
execution in favor of third persons. The vehicle cannot be
considered as property of a strange
Bar Question: Procopio purchased an lsuzu
passenger jeepney
from Enteng, a holder of a certificate of pubtic convenience for the
operation of public utility vehicle plying the Catamba-Los Banos
route. While Procopio continued offering the jeepney for
pubtic
transport services he did not have the registratio;n
of the vehicte
transferred in his name. Neither did he sec{/re for himself a
ceftificate of public convenience for its operation. Thus, per records
oj the Land Transportation Franchising and Regulatory Board,
Enteng remained its registered owner and operator. One day, white
the jeepney was traveling southbound, it cottided with a ten-wheeler
truck owned by Emmanuel. The driver of the truck admitted
responsibility for the accident, explaining that the truck lost its
brakes.
Procopio sued Emmanuel for damages, but the latter moved to
dlsmlss the case on the ground that Procopio is not the reat party in
interest since he is not the registered owner of the jeepney.
Reso/ye the motion with reasons. (2005 Bar)
Answer: The motion fo dismiss should be denied. The case arose
from the admitte{negligence of Emmanuel's truck driver, hence the
ownership and operation of the passenger jeepney is immateriat. ln
this particular instance, the riding public is not affected by the iltegal
arrangement between Procopio and Enteng. procopio, as the owner
of the jeepney, is a real party in interest since he stands to be
benefited or injured by the result of the action.
j. Liability of Common-Law Wife of Registered Owner
A common-law wife of a man, legally married to another, the man
being the registered owner of a passenger jeepney involved in a
traffic accident resulting in the death and injuries to passengers, is
not liable for damages for said accident (Juaniza vs. Jose, gg SCRA
306).
k. Liability of a Common Garrier Without a Certificate
of Public Convenience
TRANSPORTATION LAW 337
The liability of a common carrier is not dependent on whether or
not it holds a certificate of public convenience (Guzman vs. CA, 168
scRA 612).
A certificate of public convenience is not a requisite for the
inc.urring of liability under the Civil Code provisions governing
common carriers. That liability arises the moment a person or firm
acts as a common carrier, without regard to whether or not such
carrier has also complied with the requirements of the applicable
regulatory statute and implementing regulations and has been
granted a certificate of public convenience or other franchise. To
exempt the carrier from the liabilities of a common carrier because
he has not secured the necessary certificate of public convenience
or other franchise would be offensive to sound public policy; that
would be to reward the carrier precisely for failing to comply with
applicable statutory requirements. The business of a common
carrier impinges directly and intimately upon the safety and well
being and property of those members of the general community who
happen to deal with such carrier. The law imposes duties and
liabilities upon common carriers for the safety and protection of those
who utilize their services and the law cannot allow a common carrier
to render such duties and liabilities merely facultative by simply
failing to obtain the necessary permits and authorizations (Loadstar
vs. CA, 315 SCRA 339).
l. Extent of Liability for Damages
1. Actual and Gonsequential Damages
The claim for any form of damage should have a factual basis (Air
France vs. CA, 171 SCRA 399).
The liability of the carrier being contractual, the passenger or his
heirs can recover not only actual damages but also consequential or
compensatory damages.
The life expectancy of a deceased passenger of a common
carrier is 213 of 80 less his age at the time of his death (Davila vs.
PAL, 49 SCRA 497).
The award of damages for death is computed on the basis of the
life expectancy of the deceased passenger, not of his beneficiary
(PAL vs. CA, 185 SCRA 110).
338 TRANSPORTATION LAW
The amounts recoverable by the heirs of a deceased passenger
from a liable common carrier are: Loss of earning capacity
computed at 213 multiplied by B0 less age at the time of death
multiplied by the net earnings; straight death indemnity of P30,000
(now P50,000) under Article 2206 of the Civil Code; moral damages
for mental anguish of the heirs, and attorney's fees (Bachelor vs.
cA, 188 SCRA 216).
The heirs of a deceased passenger are entitled to recover from
the negligent bus operator (1) the total earnings for the life
expectancy of the deceased less expenses . necessary for the
creation of such earnings less living and other incidental expenses
the deceased passenger would have spent if he had lived a full life,
(2) P12,000.00 (now P50,000) as damages for his death, (3) burial
expenses, and (4) attorney's fees (Villa Rey vs. CA, 31 SCRA 511).
Where the parents of the victim filed a separate civil action
against the driver, the latter's insolvency does not give the victim's
heirs the right to claim against the employer of the driver for
subsidiary liability (Jamelo vs. Serfino, 44 SCRA 464).
A driver absolved from criminal liability for a collision may be
made to pay damages to the passengers (Ongsiako vs. lAC, 152
scRA 627).
A money clairn against a deceased operator of a public utility
vehicle should be filed in his estate proceedings, and cannot be filed
against the heirs (de Bautista vs. de Guzman, 125 SCRA676).
A contract of carriage generates a relation attended with a public
duty and any discourteous conduct on the part of a carrier's
employee toward a passenger gives the latter an action for damages
and, more so, where there is bad faith. An airline's unilateral and
voluntary act of providing cash assistance is deemed part of its
obligations as an air carrier, and is hardly anything to rave about
(PAL vs. CA,257 SCRA 33).
Discourteous and arbitrary conduct of common carrier's personnel
amounts to bad faith entitling passenger's recovery for moral
damages (Cathay vs. CA, 219 SCRA 520).
The airline company's failure to transport 93 contract workers
within the scheduled dates despite receipt of payment of their airfare
constituted malice and evident bad faith in the performance of its
obligation to transport the passengers as no prior notice was given
TRANSPORTATION LAW 339
that it could not comply with the scheduled transportation and that it
unilaterally cancelled the booking and rebooked their flight without
prior notice also (British vs. CA, 218 SCRA 699).
Overbooking amounts to bad faith, entitling the passengers to
award of moral damages (Zalamea vs. CA, 228 SCRA 23).
Even if overbooking is allowed, the airline company is still guilty of
bad faith if it did not properly inform the passengers that it could
breach the contract of carriage even if they were confirmed
passengers. Likewise, bad faith is also present in not informing its
passengers of its policy of giving less priority to discounted tickets
(rbid.).
Bad faith attended the performance of the contract of carriage
when the airline representatives claim that their contract with the
passenger ceased at a particular airport, in disregard of the fact that
the passenger was holding an airline ticket for the entire five-leg trip
and when despite its representatives' knowledge that such
passenger's seat was allowed to be given to another passenger,
notwithstanding clear proof that the airline confirmed his reservations
for the said flight (Lufthansa vs. CA, 238 SCRA 290).
The airline company undoubtedly committed a breach of contract
when it refused to confirm its passenger's flight reservation back to
the Philippines on account of his missing flight coupon. lts contention
that there was no contract of carriage that was breached because
petitioner's ticket was open-dated is untenable. To begin with, the
round trip ticket issued by the carrier to the passenger was in itself a
complete written contract by and between the carrier and the
passenger. lt had all the elements of a complete written contract
(Singson vs. CA, 282 SCRA 149).
Failure to give the endorsement needed by the passenger to fly
Cathay Pacific Airways constituted breach of contract of carriage
(Lufthansa vs. CA, 243 SCRA 600).
A common carrier, in allowing its unseaworthy vessel to leave the
port of origin and undertake the contracted voyage, with full
awareness that it was exposed to perils of the sea, deliberately
disregarded its solemn duty to exercise extraordinary diligence and
obviously acted with bad faith and in wanton and reckless manner,
thus making it liable for moral and exemplary damages (Trans-Asia
vs. CA, 254 SCRA 260).
340 TRANSPORTATION LAW
2. Moral Damages
Moral damages include moral suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, or similar injury. They may be recovered in
the cases enumerated in Article 2219 of the Civil Code, likewise, if
they are the proximate result of the petitioner's breach of the contract
of carriage. Anent a breach of a contract of common carriage, moral
damages may be awarded if the common carrier acted fraudulently
or in bad faith (Trans-Asia vs. CA, supra).
As a general rule, moral damages are not recoverable in actions
for damages predicated on a breach of contract for it is not one of
the items enumerated under Article 2219 of the Civil Code. As an
exception, such damages are recoverable: (1) in cases in which the
mishap results in the death of a passenger, as provided in Article
1764, in relation to Article 2206(3) of the Civil Code; and (2) in the
cases in which the carrier is guilty of fraud or bad faith, as provided
in Article 2220 (JAL vs. Simangan,552 SCRA 341).
It is firmly settled that moral damages are recoverable in suits
predicated on breach of a contract of carriage where it is proved that
the carrier was guilty of fraud or bad faith. lnattention to and lack of
care for the interests of its passengers who are entitled to its utmost
consideration, particularly as to their convenience, amount to bad
faith which entitles the passenger to an award of moral damages.
What the law considers as bad faith which may furnish the ground for
an award of moral damages would be bad faith in securing the
contract and in the execution thereof, as well as in the enforcement
of its terms, or any other kind of deceit (lbid.).
lnsufficient to warrant the award of moral damages is the fact
that complainants suffered economic hardships, or that they worried
and experienced mental anxiety (Savellano vs. Northwest, 405
scRA 416).
Where in breaching the contract of carriage the defendant airline
is not shown to have acted fraudulently or in bad faith, liability for
damages is limited to the natural and probable consequences of the
breach of obligation which the parties had foreseen or could have
reasonably foreseen. ln that case, such liability does not include
moral and exemplary damages (Cathay vs.CA, 219 SCRA 520).
TRANSPORTATION LAW 341
Bad faith does not simply connote bad judgment or negligence.
It imports a
dishonest purpose or some moral obliquity and
conscious doing of a wrong. lt means breach of a known duty
through some motive, interest or ill will that partakes of the nature of
fraud (China vs. CA, 406 SCRA 113).
Bad faith should be established by clear and convincing
evidence since the law always presumes good faith (lbid.).
Damages in excess of P3,000 (now P50,000) may be awarded for
the death of a passenger, and in addition, the heirs may demand
moral damages commensurate with the mental anguish suffered by
them (Mercado vs. Lira, 3 SCRA 124).
Bar Question: A passenger of bus "C" dies as a result of a collision
due to the fault or negligence of the bus driver.
Are the decedent's parents entitled to recover moral damages
against the common carrier? (Answer Yes or No, then give reasons.
(1962 Bar)
Answer: Yes, the heirs of the passenger are entitled to recover
moral damages from the carrier, commensurate with the mental
anguish suffered by them.
ln contracts of transportation of passengers, no moral damages
are recoverable as a rule except when the guilty party is in bad faith,
or when the passenger dies, and his heirs bring the suit against the
carrier.
The bumping off of a passenger with a confirmed ticket, ,with a
dishonest purpose and conscious doing of wrong on the part of the
airline's employees, amounts to bad faith, entitling the passenger to
moral and exemplary damages. Exemplary damages may be
awarded even though not expressly pleaded or prqved (PAL vs. CA,
188 SCRA 461).
Failure of common carrier to explain cause of delay in the delivery
of subject shipment makes it liable for breach of contract of carriage
through gross negligence amounting to bad faith, entitling recovery
of moral damages, and to wanton misconduct which justifies an
award for exemplary damages (Maersk vs. CA, 222 SCRA 108).
Apassenger who suffered physical injuries because of the
carrier's negligence (culpa contractual) is not entitled to moral
damages (Mercado vs. Lira, 3 SCRA 124).
342 TRANSPORTATION LAW
The carrier's negligence consisting in its failure to cover the right
side of the bus in question with a bar or some other contrivance to
safeguard and protect passengers makes it liable for moral damages
(Laguna vs. Cornista, 11 SCRA 181).
While contributory negligence on the part of the injured justifies
the reduction of moral damages in a breach of contract of carriage, it
does not justify the exemption from liability of the carrier (lbid.).
lnattention and lack of care by a carrier resulting in failure of the
passenger to be accommodated on the class contracted amounts to
bad faith entitling the passenger to moral damages. The breach
becomes graver where a foreign white passenger is given
preference over a Filipino (Ortigas vs. Lufthansa, 64 SCRA 610).
3. Exemplary Damages
Article 2232.of the Civil Code provides that in a contractual or
quasi-contractual relationship, exemplary damages may be awarded
only if the defendant had acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner (Singapore vs. Fernandez, 417
scRA 474).
Exemplary damages cannot be awarded if the requisite element of
compensatory dalnageswas not present (Morris vs. CA, 352 SCRA
428).
4. Attorney's Fees and lnterest
Where the awards for moral and exemplary damages are
eliminated, so must the award for attorney's fees (Cathay vs.
Vasquez, 399 SCRA 207).
Attorney's fees may be awarded in favor of the heirs of the
deceased passengers, on the following just and equitable grounds:
(1) the accident in question took place on April 25, 1954, and the
Caguimbals have been constrained to litigate for over thirteen (13)
years to vindicate their rights; and (2) it is high time to impress
effectively upon public utility operators the nature and extent of their
responsibility in respect of the safety of their passengers and their
duty to exercise greater care in the selection of drivers and
conductors and in supervising the performance of their duties
(Batangas vs. Caguimbal, 22 SCRA 171).
TRANSPORTATION LAW 343
Legal interest and attorney's fees may be awarded to a
complainant even if he did not appeal. lnterest starts from the
rendition by the trial court of the decision (de Lima vs. Laguna, 160
scRA 70).
5. Liability of lnsurer of Common Carrier
Bar Question: Maria boarded a passenger truck owned by Metro
Transit and driven by Juan. While the truck was proceeding to its
destination, it fell into a ravine and several passengers, including
Maria, were killed. The truck was insured under a common carrier's
policy with lsland lnsurance Company.
1) State the liabilities, if any, of Metro Transit to the heirs of
Maria.
(2) State the nature of liability of lsland lnsurance Company to
the heirs of Maria. Explain your answers. (1968 Bar)
Answer: (1) Metro Transit is liable to the heirs of Maria for (a) actual
damage of at least Pl2,000 (now P50,000), which is the value our
courts attach to the life of a person, (b) consequential or
compensatory damages which Maria's heirs could prove, (c) moral
damages commensurate with the mental anguish of the heirs, (d)
exemplary damages if Metro acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner, and (e) aftorney's fees.
(2) A common carrier's insurance policy is an insurance against
liabitity, and is a contract between the carrier and the insurer under
which, the insurer pays to the carrier whatever the latter is made to
pay to passengers or to their heirs, for iniuries or death, respectively,
in the cpurse of the carriage. lsland lnsurance is therefore liable only
to Metro but not to the heirs of Maria.
n. Other Available Remedies
Bar Question: What are the remedies ff a passenger is iniured or
dies due to the negligence of a common carrier? (1988 Bar)
Answer: A passenger who is iniured or who dies due to the
negligence of a common carrier is given by the law the right to
recover damages for breach by the carrier of its obligation to observe
extraordinary diligence in safely bringing the passenger to his
destination.
The damages he can recover may consist of actual damages,
compensatory damages, moral damages to hls heirs (if the
passenger dies), and in case of wanton recklessness on the part of
344 TRANSPORTATION LAW TRANSPORTATION LAW 345

the common carrier, he can recover even exemplary damages and
attorney's fees.
He can also file a tort case against the owner of the other car
which may have been negligent in the course of the operation of the
car.
A criminal case with civil liability can also be filed against the
negligent driver, whether of the car he was riding in, or of the other
car, should the driver be the one negligent.
Should these drivers be insolvenf, fhe passenger may run after
the employers of fhese drivers, under their subsidiary liability under
the Revised PenalCode.
The usual remedy, however, is to bring a case against the
common carrier for breach of a contract of transportation.
Bar Question: One of the passenger buses owned by Continental
Transit Corporation (CTC), plying its usual route, figured in a collision
with another bus owned by Universal Transport, lnc. (UTl). Among
tfiose injured inside the CTC bus were: Romeo, a stow away;
Samuel, a pickpocket then in the act of robbing his seatmate when
the collision occurred; Teresita, the bus driver's misfress who usually
accompanied the driver on his trips for free; and Uriel, holder of a
free riding pass he won in a raffle held by CTC. Do Romeo, Samuel,
Teresita, and Uriel have a cause of action for damages against UTI?
Explain. (2009 Bar)
filing of the civil action, or institute it with the criminal action, or file it
separately or independently of a criminal action; his only limitation is
that he cannot recover damages twice for the same act or omission
of the defendant (PCl vs. United, 557 SCRA 141).
The instant case is for tort, as governed by Article 2176 of the Civil
Code, which provides: ART. 2176. Whoever by act or omission
causes damage to another, there being fault or negligence, is
obliged.to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is
called a quasi-delict. ln every tort case, the plaintiff has to prove by
a preponderance of evidence: (1) the damages suffered by the
plaintiff; (2) the fault or negligence of the defendant or some other
person for whose act he must respond; and (3) the connection of
cause and effect between the fault or negligence and the damages
incurred (Corinthian vs. Tanjangco, 556 SCRA 154).

Answer: Romeo, Samuel, Teresita and Uriel may maintain an

action for quasi detict against lJTt. Articte 2176 of the Civit Code
provides that whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no pre-existing contractual
relation between the pafties, is called a quasi-delict. To sustain a
claim based on quasi-delict, the following requisites must concur: (a)
damage suffered by plaintiff; (b) tault or negligence of defendant; and
(c) connection of cause and effect between the fault or negligence of
defendant and the damage incurred by plaintiff (Dy vs. Ching, 543
scRA 560) .

For damage or injuries arising out of negligence in the operatibn of

a motor vehicle, the registered owner may be held civilly liable with
the negligent driver either 1) subsidiarily, if the aggrieved party seeks
relief based on a delict or crime under Articles 100 and 103 of the
Revised Penal Code; or 2) solidarily, if the complainant seeks relief
based on a quasi-delict under Articles 2176 and 2180 of the Civil
Code. lt is the option of the plaintiff whether to waive completely the
346 CHAPTER VII
BILL OF LADING
l. Defined
Bar Question: What do you understand by a "bill of lading?" (1998,
1965, 1962 Ba)
Answer: A bill of lading is a wriften acknowledgment of the receipt
of goods and an agreement to transport them to a specific place to a
person named or to his order.
ll. Three-fold Characte r
A bill of lading, aside from being a contract and a receipt, is.also
a symbol of the goods covered by it. A bill of lading which has no
notation of any defect or damage in the goods is called a "clean bill
of lading." A clean bill of lading constitutes prima facie evidence of
the receipt by the carrier of the goods as therein described (Lorenzo
vs. Chubb, 431 SCRA 266).
As a contract, its terms and conditions are conclusive on the
parties, including the consignee (Telengtan vs. CA, 236 SCRA 617).
A bill of lading serves as a receipt for the goods shipped. lt is also
a contract by wtich three parties, namely, the shipper, the carrier,
and the consignee, undertake specific responsibilities and assume
stipulated obligations (Belgian vs. Phil. First, 383 SCRA 23).
A bill of lading delivered and accepted constitutes the contract of
carriage even though not signed, because the acceptance of a paper
containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all its terms and conditions of
which the acceptor has actual or constructive notice. ln a nutshell,
the acceptance of a bill of lading by the shipper and the consignee,
with full knowledge of its contents, gives rise to the presumption that
the same was perfected and binding contract (lbid.; MoF vs. Shin,
608 SCRA521; Keng vs. CA,286 SCRA257).
ln sum, a consignee, although not a signatory to the contract of
carriage between the shipper and the carrier, becomes a party to the
contract by reason of either a) the relationship of agency between
the consignee and the shipper/consignor; b) the unequivocal
acceptance of the bill of lading delivered to the consignee, with full
knowledge of its contents, or c) availment of the stipulation pour
BILL OF LADING 347
autrui, i.e., when the consignee, a third person, demands before the
carrier the fulfillment of the stipulation made by the consignor/shipper
in the consignee's favor, specifically the delivery of the
goods/cargoes shipped. (MoF vs. Shin, supra).
The validity of provisions limiting the liability of carriers contained
in bills of lading have been consistently upheld, but caution must be
taken against blind reliance on adhesion contracts where the facts
and circumstances warrant that they should be disregarded (PAL vs.
cA, 255 SCRA 4B).
The bill of lading defines the rights and liabilities of the parties in
reference to the contract of carriage (Provident vs. CA,419 SCRA
480).
A bill of lading is in the nature of contract of adhesion, defined as
one where one of the parties imposes a ready-made form of contract
which the other party may accept or reject, but which the latter
cannot modify. One party prepares the stipulation in the contract,
while the other party merely affixes his signature or his "adhesion"
thereto, giving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. Nevertheless, these type of
contract has been declared as ordinary contract the reason being
that the party who adheres to the contract is free to reject it entirely
(rbid.).
The presumption that the bill of lading constitutes prima facie
evidence of the goods therein described may be rebutted was
correctly deemed by the appellate court to have been rebutted in
light of abundant evidence casting doubts on its veracity (Malayan
vs. Jardine, 600 SCRA 706).
Under the bill of lading, on a "said to weigh" basis, the shipper is
solely responsible for the loading of the cargo while the carrier is
oblivious of the contents of the shipment. Nobody really knows the
actual weight of the cargo inasmuch as what is written on the bill of
lading, as well as on the manifest, is based solely on the shipper's
declaration (lbid).
The bill of lading carried an added clause - the shipment's
weight, measure, quantity, quality, condition, contents and value
unknown." Evidently, the weight of the cargo could not be gauged
from the bill of lading (lbid.).
348 BILL OF LADING
Bar Question: Explain the two-fold character of a "bill of lading."
(1998, 1965 Bar)
Answer: A bill of lading has two-fold character. lt operates both as
a receipt and as a contract. lt is a receipt for the goods shipped and
a contract to transport and deliver the same as therein stipulated. As
a receipt, it recites the date and place of shipment, describes the
goods as td quantity, weight, dimensions, identification marks and
condition, quality and value. As a contract, it names the contracting
parties, which include the consignee, fixes the route, destination, and
freight rate or charges, and stipulates the rights and obligations
assumed by the parties (See lron vs. Remington, 417 SCRA 229;
Unsworth vs. CA, 625 SCRA 357).
Bills of lading, are either on board bill of lading or a received
shipment bill of lading. An on board bill of lading is one in which it is
stated that the goods have already been received on board the
vessel which is to carry the goods, whereas, a received shipment bill
of lading is one in which it is stated that the goods have been
received for shipment without specifying the vessel by which the
goods are to be shipped (Magellan vs. CA, 201 SCRA 102).
A bill of lading is not indispensable for the creation of a contract of
carriage (Compania vs. lnsurance, 12 SCRA 213).
ln cases where a Bill of Lading has been issued by a carrier
covering goods shipped aboard a vessel under a charter party, and
the charterer is also the holder of the bill of lading, "the bill of lading
operates as the receipt for the goods, and as documenl of title
passing the property of the goods, but not as varying the contract
between the charterer and the shipowner." The Bill of Lading
becomes, therefore, only a receipt and not the contract of carriage in
a charter of the entire vessel, for the contract is the Charter Party;
and is the law between the parties who are bound by its terms and
conditions provided that these are not contrary to law, morals, good
customs, public order and public policy (Cebu vs. Phil. Home, 512
scRA 667).
Freight tickets issued by bus companies may be regarded as bills
of lading, a term which includes the receipts for cargo transported
and which is not restricted to those issued by masters of vessels
alone but comprehends all forms of transportation (Mindanao vs.
Collector, 1 SCRA 538).
BILL OF LADING 349
Ambiguity in a bill of lading is construed against the carrier, the
contract being one of adhesion (Eastern vs. Margarine, 93 SCRA
257).
There are three classes of limitations usual in bills of lading: (1)
the first exempts the carrier from all liability arising from its own
negligence; (b) the second provides for an unlimited qualification of
such liability; (c) the third limits the liability of the carrier to an agreed
valuation unless the shipper declares a higher value and pays a
higher rate of freight. Authorities are agreed that the first two are null
and void and only the third is valid and enforceable.
The doctrine that a contract of carriage may limit the carrier's
liability for goods shipped to a certain amount, unless the shipper
declares a higher value and pays an ad valorem charge on said
value, applies to airway bills and luggage of a plane passenger (Ong
vs. CA, 91 SCRA 223).
Where the transistor radio and the camera of the passenger were
lost as a result of the negligence of the common carrier, its liability is
clear - it must pay the passenger the value of those two articles. The
carrier cannot limit its liability for injury to, or loss of, goods shipped
where such injury or loss was caused by its own negligence
(Shewaram vs. PAL, 17 SCRA 606).
The statement in the Bill of Lading that the shipment was in
apparent good condition is sufficient to sustain a finding of absence
of defects in the merchandise. Such statement will create a prima
facle presumption only as to the external condition and not to that not
open to inspection (Phil. Charter vs. Unknown Owner, 463 SCRA
202).
'lading
Bar Question.' Drscuss the vatidity of a stiputation in a bilt of
that the carrier's liability'for /oss or damage from any cause for any
reason" is limited to a specified sum. (1955 Bar)
Answer: The provision timiting the carrier's liability for loss or
damage for any cause to a specified amount is an invalid provision
because it is an unlimited qualification of the carrier's liability. The
carrier may limit its liability to an agreed valuation and a shipper who
would want to declare a value on the goods higher than the limit set
in the bill of lading should be given the option fo do so even if he has
to pay an additional charge for said higher valuation. The option
should be expressly stated in the billof lading.
350 BILL OF LADING
Of course, the carrier's liability for /oss or damage cannot go
beyond the true value of the goods, even if the declared value of the
goodS is higher.
Bar Question.' Discuss whether or not the following stipulations in a
contract of carriage of a common carrier are valid:
1) a stipulation timiting the sum that may be recovered by the
shipper or awner to 90% of the value of the goods in case of /oss
due to theft.
2) a stipulation that in the event of /oss, destruction or deterioration
of goods on account of the defective condition o.f the vehicle used in
the contract of carriage, the carrier's liability is limited to the value qf
the goods appearing in the bill of lading unless the shipper or owner
declares a higher value. (2002 Bar)
Answer: 1) The stipulation is not valid because it can be considered
unreasonable, unjust and contrary to public policy proscribed by
Article 1754 of the Civil Code.
2) The stipulation is valid and in fact is expressly allowed by Articles
1749 and 1950 of Civil Code.
The description of the nature and the value of the goods shipped
were declared and reflected in the bill of lading. This declaration is
considered as the basis of the carrier's liability and payment based
thereon is in orter. The carrier should not be held liable for more
than what was declared by the shippers/consignees as the value of
the goods in the bills of lading (Edgar Cokaliong vs, United, 404
scRA 706).
Even though the bill of lading contains a limitation ($500 per
package) as to the liability of the common carrier, this limitation will
not govern where the nature and value of such goods are inserted in
the bill of lading. Generally, where the amount of insurance is stated
in the bill of lading, this is taken as the true value of the shipment
(Aboitiz vs. CA, 188 SCRA 387).
Where a bill of lading fixes the carrier's liability to the C.l.F. value
of the goods lost, that amount is the extent of the recovery of the
shipper (St. Paul's vs. Macondray,T0 SCRA 122).
Bar Question: lf a shipper, without changing the place of delivery
changes the consignment or consignee of the goods (after said
goods had been delivered to the carrier), under what conditions will
BILL OF LADING 35t
the carrier be required to comply with the new orders of the shipper?
(1975 Ba)
Answer: A shipper who, after delivering the goods to the carrier and
having been issued a bill of lading designating a consignee and a
place of consignment, wants to change the consignee of the goods,
can be required by the carrier to surrender all copies of the bill of
lading in order that a new one may be issued now bearing the name
of the new consignee. Expenses incurred in the process w// have to
be borne by the shipper. This can only be done if shipment has not
been made yet.
The consignee may not defer payment of the transportation
charges and expenses after the lapse of 24 hours following their
delivery.
ln case of delay in payment, the carrier may demand the judicial
sale of part of the goods to pay for the expenses and cost of
transportation. The goods transported are bound for this obligation,
and the carrier acquires a 30 day lien over these goods during which
the goods may be sold to satisfy the credit of the carrier.
Bar Question: What lien attaches to the goods transported by a
carrier (overland) and within what time does sa/d lien exist? (1958
Ba0
Answer: The tien attaching to goods transporled by a carrier
(overland) is for transportation charges and expenses. The lien lasts
for 30 days counted from the date of delivery to the consignee.
Even where the consignee did not sign the bill of lading, he is
bound to pay the freight charges, as agent of the shipper, or by
ratification, if he presents the bill of lading to the carrier and accepts
the goods (Sea vs. lAC, 153 SCRA 552).
A bill of lading is prepared in four copies and contains the
following data: ('1) name and domicile of the captain, shipper and
consignee; (2) name, registry and tonnage of the vessel; (3) port of
loading and unloading; (4) quantity, quality, and number of
packages; and (5)freightage and primage stipulated.
Where the shipper delivered the cargo to the carrier and the latter
took possession thereof by placirrg it on a lighter or barge manned by
its authorized employees, there existed a completed contract of
352 BILL OF LADING
carriage the consummation of which had already begun (Compania
vs. lnsurance, supra).
Bar Question: The plaintiff, as subrogee of the consignee, sued the
defendant, a contractor and operator of arrastre seruice in the port of
Manila, for its failure to deliver one case of merchandise consisting of
electronic spare parts shipped from Europe which it received from
the carrier. The action was brought within the period of 4 years, but
after the lapse of one year from the date when the goods should
have been delivered. lnvoking the provisions of the Carriage of
Goods by Sea Act, the lower court dismissed the complaint on the
ground that it was filed after one year from the time that the cause of
action accrued.
Was the lower court justified in dismissing the complaint? Why?
(1978 Bar)
Answer: No, the lower court was not justified in dismissing the
complaint by invoking the one year period under the Carriage of
Goods by Sea Act.
Arrastre operations are not maritime transactions and the
provisions of the Carriage of Goods by Sea Act, which apply to
maritime carriage of goods to and from foreign ports, do not apply to
arrastre seryrces.
Carrier arrastle operator is liable in solidum for the proper delivery
of the goods to the consignee. Since it is the duty of the arrastre to
take good care of the goods that are in its custody and to deliver
them in good condition to the consignee, such responsibility also
devolves upon the carrier. Both the arrastre and the carrier are
therefore charged with the obligation to deliver the goods in good
condition to the consignee. This does not imply, however, that the
arrastre operator and the customs broker are themselves always and
necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule (Eastern vs.
cA,234 SCRA 78).
Bar Question: (1) X shipped thru MN Kalayaan, spare parts worth
P500,000.00. The bill of lading limits the liability of the carrier to
P500.00 and contains a notation indicating the amount of the letter of
credit (i.e., P500,000.00) which X obtained from a bank to import the
spare parts. The spare parts were not delivered to X so X sued the
carrier for P500,000.00. Decide. (1989 Bar)
BILL OF LADING 3s3
Answer: While a bill of lading may set a limit as to the carrier,s
liability per package, box, or any other form of container, before said
limitation can bind the shipper, the bill of lading should expressly
provide that should the shipper choose to declare a higher valuation,
he may do so, upon payment of the corresponding ad vatgrem
charge.
There is no such provision in the bill of lading expressly giving to
the shipper the option to declare a higher value. The timitation
therefore cannot bind X.
X can therefore run after the carrier for the true value (p500,000)
of the goods shipped.
Bar Question: Martin Nove shipped an expensive video equipment
to a friend in Cebu. Martin had bought the equipment from Hong
Kong for US $5,000. The equipment was shipped through M/S Lapu-
Lapu under a bill of lading which contained the following provision in
big bold letters:
"The limit of the carrier's liability for any /oss or damage to cargo
shall be P200 regardless of fhe actual value of such cargo, whether
declared by its shipper or othenuise."
The cargo was totally damaged before reaching Cebu. Martin
Nove claimed for the value of his cargo ($0,000 or about pl00,000)
instead of just P200 as per the timitation on the bill of tading
ls there any legal basis for Nove's claim? (1987 Bar)
Answer: Yes, there is a legal basis for Nove's claim.
For a limitation on a carrier's liability in a Bill of Lading to be vatid
as against the shipper, it should contain a provision ailowing the
shipper to declare a value higher than the limit.
The provision in the bill of lading in the case at bar timiting the
amount of recovery to P200 and preventing the shipper from
declaring a higher value even if that is its true value is a nutt and void
provision, and therefore cannot be enforced.
The shipper can therefore claim against the carrier the true vatue
of the cargo he lost.
A notation in the Bill of Lading which indicates the amount of the
Letter of Credit obtained by the shipper for the importation of the
articles does not effect a declaration of the value of the goods as
required by the bill -- that notation is made only for the convenience
of the shipper and the bank processing the Letter of Credit (Belgian
vs. Phil. First, 383 SCRA 25).
.154 BILL OF LADING
It is the duty of the shipper to disclose rather than for the carrier to
demand, the true value of the goods, and silence on the shipper's
part is sufficient to limit liability to what is stated in the bill of lading'
(Eastern vs. Great, 108 SCRA 248).
A provision printed in fine letters at the back of a bill of lading,
although not signed by the shipper, binds him. lt is a contract of
adhesion, a ready-made contract, which the shipper may or may not
accept. lf he adheres, he gives his consent (Servando vs. Philippine,
1 17 SCRA 832).
A common carrier is liable for goods discharged by it in bad order
condition, and the arrastre operatorfor goods damaged in its custody
(Metro Port vs. CA, 131 SCRA 365).
A bill of lading provision exempting a common carrier from
responsibility for loss or damage after the goods have left its custody
as a common carrier, is valid.
The vessel is required to observe extraordinary diligence being
considered as a common carrier by the Civil Code. lt may free itself
from liability by proof that the loss or damage is due to fortuitous
events.
lf a vessel, ifr spite of weather warnings, decided to still undertake
or continue the voyage, it failed to observe the extraordinary
diligence required for the safety of passengers and unnecessarily
exposed the vessel and its passengers to the tragic mishap. lt failed
to overcome that presumption of fault or negligence that arises in
cases of injuries or deaths of passengers (Arada vs. CA, 210 SCRA
624).
The failure of a common carrier to maintain in seaworthy condition
its vessel involved in a contract of carriage is a clear breach of its
duty prescribed in Article 1755 of the Civil Code (Trans-Asia vs. CA,
254 SCRA 250).
A common carrier, in allowing its unseaworthy vessel to leave the
port of origin and undertake the contracted voyage, with full
awareness that it was exposed to perils of the sea, deliberately
disregarded its solemn duty to exercise extraordinary diligence and
obviously acted with bad faith and in wanton and reckless manner,
thus making it liable for moral and exemplary damages (lbid.).
BILL OF LADING 355
Where the delay in a contracted voyage is incurred after the
commencement of such voyage, Article 698 of the Code of
Commerce, not Article '1 169 of the Civil Code, applies (lbid.).
Bar Question: /s a maritime carrier liable for fhe /oss of several
sacks of rice due to improper packing and the holes in many bags
which appear apparent upon ordinary observation at the time of the
acceptance of the shipment by the carrier? Reasons. (1972 Bar)
Answer: Yes, the maritime carrier is liable for /o.ss due to improper
packing which appears apparent upon ordinary obseruation, if it
accepted the goods without proper notation on the bill of lading to
such effect. lt could have refused the carriage, but having rlone so
without reservation, rt is assumed to have received the merchandise
in good condition, and the toss witl have to be borne by it.
Bar Question: RC Corporation purchased rice from Thailand, which
it intended to sell locally. Due to stormy weather, the ship carrying
the rice became submerged in sea water, and with it the rice cargo.
When the cargo arrived in Manila, RC filed a claim for total loss with
the insurer, because the rice was no longer fit for human
consumption. Admittedly, the rice could still be used as animalfeed.
/s RC's claim for fofal /ossiustified? Explain. (1996 Bar)
'ctaim
Answer: Yes, RC's is justified. Where the cargo, by the
process of decomposition or other chemical agency, no longer
remains the same kind of thing as before, an actual fofal /oss has
been suffered.
Since the primary purpose for which the rice was purchased (for
human consumption) could no longer be accomplished, RC is
considered to have suffered an actual total loss which entitles rt fo
recover from the insurer the whole amount (See Pan Malayan vs.
cA,201 SCRAss2).
A consignee may sue the carrier for the loss of a shipment,
notwithstanding the fact that the cargo receipt shows that the carrier
delivered the shipment to the arrastre contractor, which, however,
denied that the cargo receipt is genuine (Fireman's vs. Compania, 19
scRA 874).
Bar Question: A shipment of rice arrives in Manila from Thailand.
The agreement between the shipper and the ship owner is that
freight was to be paid upon the discharge of the cargo. The shipper,
however, does not pay the freight but offers a bond to respond
3s6 BILL OF LADING
therefor. Notwithstanding this offer, the owner of the vesse/ refuses
to detiver the rice. May not the charterer be ordered to deliver the
rice by the court before which the shipper brings action, upon
furnishing of the bond by the shipper? Reasons for your answer.
(1957 Bar)
Answer: No, the ship owner cannot be ordered to deliver the rice by
a mere offer to give a bond. The ship owner is entitled to be paid in
legal tender on delivery of the cargo.
A shipper may be held liable for bills of lading signed by another
person, where the shipper does not appear as shipper or consignee,
or where persons other than the shipper appear as the shipper, or
where the bill of lading is not signed by the shipper, if the evidence
shows that the goods actually shipped belonged to the shipper
(Compania vs. Limson, 141 SCRA407).
There are certain initials generally used in purchase contracts of
goods from abroad. They are: (1) C.l.F., meaning cost, insurance
and freight; (2) F.O.B., meaning free on Ooard; (3) F.A.S. meaning
free alongside ship; and (4) C and F, meaning cost and freight. They
usually follow the price quoted by the seller.
Bar Question: "X", a Manila merchant sold copra to "Y", a New York
Merchant, C.t.F. New York. The copra was loaded at the poft of
Manita on April 1, 1960 and arrived in New York on May 15, 1960.
Shipping documents are received by "Y" on May 1, 1960 and "Y's"
cusforns broker actually delivered the copra to "Y" on May 25, 1960.
tn the legal sense, on what date was the copra delivered to "Y'?
Explain briefly. (1960 Bar)
Answer: In the /egal sense, the copra is deemed to have been
delivered to "Y" on April 1, 1960, when it was loaded on the ship at
Manila. Unless the contract specffies otherwise, delivery to a carrier
is delivery to the buyer.
Where a common carrier of goods from Germany to Manila
becomes an agent in the transshipment goods from Manila to Davao,
it is not liable as a common carrier. Where the goods are lost in the
transshipment without the negligence, fraud or deceit by said agent,
it is not liable (Samar vs. Nordeutscher, 132 SCRA 529).
Transhipment or the act of taking cargo from one ship and loading
it in another, if done without legal excuse, however competent and
BILL OF LADING 3s7
safe the vessel into which the transfer is made, is a violation of the
contract and 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 vs. CA, 201 SCRA 102).
Bar Question: JRT, lnc. entered into a contract with C. Co. of
Japan to export anahaw fans vqlued at $23,000. As payment
thereof, a letter of credit was issued to JRT, lnc. by the buyer. The
letter of credit required the issuance of an on-board bill of lading and
prohibited the transhipment. The President of JRT, lnc. then
contracted a shipping agent to ship the anahaw fans through O
Containers Lrnes, specifying the requirements of the letter of credit.
However, the bill of lading issued by the shipping lines bore the
notation "received for shipment" and contained an entry indicating
transhipment in Hongkong. The President of JRT, lnc. personally
received and signed the bill of lading and despite the entries, he
delivered the corresponding check in payment of the freight.
The shipment was delivered at the poft of discharge but the buyer
refused to accept the anahaw fans because there was no on-board
bill of lading, and there was transhipment since the goods were
transferred in Hongkong from MV Pacific, the feeder vesse/, to MV
Oriental, a mother ves.se/. The same cannot be considered
transhipment because bofh vessels belong to the same shipping
company.
b. JRT, lnc. further argued that assuming there was transhipment,
it cannot be deemed to have agreed thereto even if it signed the bill
of lading containing such entry because it has made known to the
shipping lines from the start that transhipment was prohibited under
the letter of credit and that, therefore, it had no intention to allow
transhipment of the subject cargo. ls the argument tenable?
Reason. (1993 Bar)
Answer: (b) No, the argument is not tenable. A bill of lading, as a
contract, is the law between the parties who are bound by its terms
and conditions provided they are not contrary to law, morals, good
customs, public order and public policy. Hence, JRT, lnc., by signing
the bill of lading despite the stipulations therein, is bound thereby,
whether he reads the bill or not. The acceptance of the bill without
dlssenf rarses the presumption that all the terms therein were
brought to the knowledge of the shipper and agreed to by him and in
the absence of fraud or mistake, he is estopped from thereafter
denying that he assenfed to such ferms (See Magellan vs. CA,
supra).
358 BILL OF LADING
lll. Delivery of Goods
Mere proof of delivery of goods in good order to a carrier, as
evidenced by the clean bills of lading, and the subsequent arrival in
damaged condition at the place of destination raises a prima facie
case against the carrier (lbid.).
The obligation of a common carrier to pay for damages of the
goods shipped commences on the date it failed to deliver the
shipment in good condition (St. Paul vs. Macondray,T0 SCRA 122).
Bar Question: A, in Manita, shipped on board a vesse/ of B. chairs
to be used in the moviehouse of consignee C in Cebu. No date for
delivery or indemnity for delay was stipulated. The chairs however,
were not claimed promptly by C and were shipped by mistake back
to Manila, where it was discovered and reshipped to Cebu. By the
time the chairs arrived, the date of inauguration of the moviehouse
passed by and it had to be postponed. C brings action for damages
against B, claiming loss of profits during the Christmas season when
he expected the moviehouse to be opened. Decide the case with
reasons. (1979 Bar)
Answer: C's action against B for damages will prosper.
The carrier is under obligation, not only to transport the goods in
the first shipmeht'by it ot the same or similar merchandise, but also
to give to the consignee reasonable notice of the arrival of the goods
in order that the latter may be given the opportunity to remove them
from the vesse/.
lf after diligent efforts, the consignee cannot be found, it is the
carrier's fufther obligation to have the goods deposited at a proper
place, on application with the city or municipal judge, said goods to
be placed at the disposal of the consignee.
The act of the carrier in bringing back the chairs to Manila, even
by mistake, is inexcusable, and he commits a breach of the contract
of carriage, which is actionable.
C, the consignee, may therefore recover damages.
A. Period of Delivery
Mere delay in the delivery of the goods to the consignee by the
common carrier does not give to the consignee the right to refuse the
goods.. There is just a breach of contract, which entitles the
consignee to damages.
BILL CF LADING 3s9
lf the delay is unreasonable, the consignee may refuse to accept
the goods, and make the carrier liable for conversion.
ln the absence of an undertaking by a common carrier to deliver
at a given date or time, delivery of shipment or cargo should at least
be made within a reasonable time. A delay in delivery of gelatin
capsules for use in pharmaceutical products for a period of two (2)
months and seven (7) days is considered beyond the realm of
reasonableness (Maersk vs. CA, 222 SCRA 108).
B. Delivery Without Surrender of Bill of Lading
Where the shipper consigned the goods to "Shipper's Order", with
"address arrival notice to Consolidated Mines, 6479 Ayala Ave.,
Makati," as stated in the bill of lading, and Consolidated Mines and
the bank where the letter of credit was procured, entered into an
agreement where the goods when they arrived should be released to
the bank, the carrier having no knowledge of said arrangement until
five months after the release of the goods to the. designated
consignee, the release of the goods to said designated consignee,
even without the surrender of the Bill of Lading is laMul and the
carrier did not commit any fault sufficient to render it liable to the
bank (Eastern vs. CA, 190 SCRA 512).
Bar Question: For a cargo of machinery shipped from abroad to a
sugar central in Dumaguefe, Negros Oriental, the Bill of Lading (B/L)
stipulated "To Shipper's Order," with notice of arrivalto be addressed
to the Central. The cargo arrived at its destination and was released
to the Central without surrender of the B/L on the basis of the lafter's
undertaking to hold the carrier free and harmless from any liability.
Subsequently, a Bank to whom the Central was indebted, claimed
the cargo and presented the original of the B/L stating that the
Central had failed to seftle its obligations with the Bank.
Was there misdelivery by the carrier to the sugar central considering
the non-surrender of the B/L? Why? ("1992 Bar)
Answer: There is no misdelivery of the cargo. The bilt of tading was
so worded that the notice of arrival be given by the carrier to the
Central. The release of the cargo, even without surrender of the bill
of lading, was a valid delivery and release, the act being merely a
consequence of an express provision in the bill of lading.
C. Refusal of Consignee to Take Delivery
360 BILL OF LADING
Bar Question: Star Shipping lines accepted 100 cartons of sardines
from Master to be delivered to 555 Company of Manila. Only 88
cartons were delivered, however these were in bad condition.
555 Company claimed from Star Shipping Lines the value of the
missing goods, as wellas fhe damaged goods. Star Shipping Lines
refused because the former failed to present a bill of lading.
Reso/ve. (2005, 1964 Bar)
Answer: Under Article 353 of the Code of Commerce, the surrender
of the original bill of lading is not a condition precedent for a common
carrier to be discharged of its obligation. lf surrender of the original
bill of lading is not possib/e, acknowledgment of the delivery by
signing the delivery receipt sufflces. Star Shipping Lines should pay
the claim of 555 Company. The fact that some cartons were lost and
BB cartons were damaged is enough proof to fault Star Shipping
Lines. Failure of 555 Company to present the bill of lading is of no
moment since the latter is the actual consignee (See National vs.
Lorenzo, 450 SCRA 550).
The goods are deliverable to the consignee named in the blll of
lading, or to a person to whom he endorses the bill of lading, if
negotiable.
Where the customs broker's authorized representative accepted
the cargo "O.K.-and complete" as shown in the surveyor's report
countersigned by him, and it was obviously his assigned task to note
defects in the cargo, said acceptance, if not binding outright upon the
customs broker, is at least evidentiary of the condition of the goods
when thus received (lnsurance vs. C.F. Sharp, 1B SCRA 462).
lV. Period for Filing Claims
lf there was any failure to file the formal claim within the
prescriptive period contemplated in the airwaybill, this was largely
due to the carrier's own doing, the consequences of which cannot, in
all fairness, be attributed to the passenger (PAL vs. CA, 255 SCRA
48).
The carrier's responsibility starts from the moment he receives
unconditionally the merchandise personally or through an agent, and
lasts until he delivers them actually or constructively to the consignee
or to his agent.
BILL OF LADING 361
The extraordinary responsibility of the common carriers lasts until
actual or constructive delivery of the cargos to the consignee or to
the person who has a right to receive them (Macam vs. CA, 313
scRA 77).
The twenty-four-hour period prescribed by Article 366 of the
Code of Commerce within which claims must be presented does not
begin to run until the consignee has received such possession of the
merchandise that he may exercise over it the ordinary control
pertinent to ownership. ln other words, there must be delivery of the
cargo by the carrier to the consignee at the place of destination. lf
the consignee has not received possession of the cargo, and has not
physically inspected the same at the time the shipment was
discharged from the ship, there is no delivery (Lorenzo vs. Chubb,
431 SCRA 266).
Where the goods are damaged and the same are externally
visible, such fact should appear on the bill of lading on the date of
receipt of the damaged merchandise by the consignee. lf the
damage can be determined only upon opening of the packages, the
consignee must file a claim within 24 hours from his receipt of the
goods from the carrier.
A request by a consignee of goods for a bad order examination
within the period for filing a formal claim is equivalent to a formal
claim and tolls the running of the period. A formal claim filed 70 days
later retroacts to the date of request for a bad order examination
(New Zealand vs. lAC, 131 SCRA 482).
Even if the consignee was not a signatory to the contract of
carriage between the shipper and the carrier, the consignee can still
be bound bythe contract. To begin with, there.is no question of the
right, in principle, of a consignee in a bill of lading to recover from the
carrier or shipper for loss of, or damage to goods being transported
under said bill, although that document may have been --- as in
practice it oftentimes is --- drawn up only by the consignor and the
carrier without the intervention of the consignee. When the
consignee formally claims reimbursement for the missing goods from
the common carrier and subsequently files a case against the latter
based on the very same bill of lading, it accepts the provisions of the
contract and thereby makes itself a party thereto (Everett vs. CA,
297 SCRA 496).
362 BILL OF LADING
A claim for lost goods against a merchant vessel must be made
vvithin 30 days from receipt of the last package of the goods. Failure
of the shipper to do so is fatal as it is a condition precedent to the
accrual of the cause of action against the carrier (Phil. Am vs. Sweet
Lines,212 SCRA 194).
An action for misdelivery of cargo under the Civil Code, and not
under the Carriage of Goods by Sea Act, prescribes in 10 years. The
one year prescriptive period under the latter law is applicable to loss
or damage of cargo but not to its misdelivery (Ang vs. Compania,
133 SCRA 600).
Against the arrastre operator, the suit should be preceded by a
claim filed within 15 days from the discharge of the last cargo, and
the suit itself should be filed within two years from said discharge
(Union vs. Manila, 77 SCRA 359).
V. Period for Filing Actions
Bar Question: X shipped several boxes of goods from Manila to
Cebu on board a vesse/ owned by Mabuhay Lines, lnc. When the
boxes were delivered to Y Dry Goods, lnc., the consignee, several
boxes externatty appeared to have been damaged. The proprietor of
Y Dry Goods, lac. paid the freight charges upon receipt of the goods.
However, when the boxes were opened two days later, it was
discovered that the contents of all the boxes had been damaged.
The proprietor of Y Dry Goods, /nc. seeks your advice on
whether he may proceed against the carrier for damages. State your
answerwith reasons. (1984 Bar)
Answer: The proprietor of Y Dry Goods, lnc. can no longer proceed
against Mabuhay Lines for damage to the goods.
Where on receipt of the goods, the damage is externally visible,
the consignee (Y Dry Goods) is obliged to have said damage noted
on the delivery receipt.
Where the damage is not externally visible, the consignee is
obligated to report said damage within 24 hours from receipt of the
goods from the carrier.
Y Dry Goods, the consignee, failed to do any of these.
CHAPTER VIII 363
MARITIME COMMERCE
l. Merchant Vessel
A. Defined
A merchant vessel is a vessel engaged in maritime commerce,
whether foreign or otherwise.
B. Major Participants in Maritime Commerce
1. Ship Owner
A shipowner is the person who has possession, control and
management of the vessel and the consequent right to direct her
navigation and receive the freight earned and paid, while his
possession continues.
lf his ownership is a co-ownership with others, then a partnership
is presumed estabiished, and they shall be governed by the rule of
the major.ity - the co-owner with the smallest share being entitled to
one vote, and the others, that number of votes in proportion to the
smallest.
l"he rule is well-entrenched that a shipowner may be held liable
for injuries to passengers notwithstanding the exclusively real and
hypothecary nature of maritime law if fault can be attributed to the
shipowner (Negros vs. CA, 281 SCRA 534).
2. Ship Agent
A ship agent is a person entrusted with provisioning and
representing the vessel in the port in which it may be found.
The term "ship agent" also includes the shipowner (Chua vs. lAC,
166 SCRA 183)
a. Civil Liability of Ship Agent and/or Shipowner
As ship agent, it may be held civilly liable in certain instances such
as 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, and for the indemnities in favor of third persons which
364 MARITIME COMMERCE
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 (Macondray vs. Provident, 445
scRA 644).
Bar Question: Under a charter party, XXO Trading Company
shipped sugar to Coca-Cola Company through SS Negros Shipping
Corp., insured by Capitol lnsurance Company. The cargo arrived but
with shortages. Coca-Cola demanded from Capitol lnsurance Co.
Php 500,000 in settlement for XXO Trading. The MM Regional Trial
Coutt, where the civil suit was filed, absolved the insurance
company, declaring that under the Code of Commerce, the shipping
agent is civilly liable for damages in favor of third persons due to the
conduct of the carrier's captain, and the stipulation in the charter
party exempting the owner from liability is not against public policy.
Coca-Cola appealed. Will its appeal prosper? Reason briefly (2004
Bar)
Answer: The appeatwilt not prosper. The MM RegionalTriat Court
was correct in ruling that the claim for damages must be agarnsf SS
Negros Shipping Corp., the agent, because Article 587 of the Code
of Commerce makes the ship agent civilly liable for indemnities
suffered by tlTird persons arising from acts or omissions of the
captain in the caie of the goods.
The stipulation in the charter party absolving the owner from
liability for /oss due to the negligence of its agent would be void if the
strict public policy governing common carriers is applied. Such
policy has no force where the public at large is not involved, as in the
case of a ship totally chartered for the use of a single pafty. The
stipulation exempting the owner from liability for the negligence of its
agent is not against public policy and is deemed valid (Home vs.
American, 23 SCRA 24).
Abandonment of the vessel includes the following objects: (1) the
vessel itself, (2) equipment, (3) freightage, and (4) insurance
proceeds, if any (Chua vs. lAC, supra;.
Repairs made on a vessel ultimately redound to the benefit of the
new owner, for without said repairs, the vessel will be unseaworthy.
Such acts give rise to "solutio indebiti" under Article 2142 of the Civil
Code and should be paid by the party benefited (BPl vs. Pineda, 156
scRA 404).
MARITIME COMMERCE 365
The ship agent is jointly and severally liable with its principal for
loss or damage to the cargo. lts liability, being maritime in nature, is
limited by the value of the vessel, which also is the limit of the liability
of its principal under the doctrine of limited liability in maritime law
(Switzerland vs. Ramirez, 96 SCRA 297).
Bar Question: "S" shipped goods from Australia on board a foreign
vesse/ owned and operated by "X", a shipping company, based in
Australia and represented in the Philippines by "R". The goods were
consigned to "T" of Manila and insured by "U" against all risks. Upon
arrival in Manila Bay, the goods were discharged from the vessel .to a
lighter owned by the Bay Brokerage Company. When delivered to
and received by "7", the goods were found to have sustained /osses
or damages., Evidence dlsc/osed that the damage occurred while the
goods were in the custody of the carrier. The insurance company
paid the amount of the /oss buf sought reimbursement from "X"
and/or "R". "R" disclaimed any liability alleging that he is a mere
agent of "X", and, having acted as agent of a disclosed principal is,
therefore, not liable.
(a) Can the insurance company recover from "R"? Reasons
(b) What is the liability, if any, of Bay Brokerage Company?
Explain. (1981 Bar)
Answer: (a) The insurance company can recover from R. R is nof
a mere agent, but a ship agent for X Shipping Company. As such
ship agent, it is jointly and severally liable with its principal for loss or
damage to the cargo. The insurance company (U) therefore; has a
choice of whether to run after X or R for reimbursement of what it
paid to T, the consignee of the goods.
It is therefore not a defense on R's part that it is a mere agent of
X and therefore not tiabte, because R's tiability, as a shrp agent, is
solidary with that of X, its principal.
(b) Bay Brokerage Company, owner of the lighter which
discharged the goods from X's vesse/s, has no liability for the
damaged goods, it being evident that the goods got damaged while
still in the custody of the vessel owned and operated by X Company,
and not while in the custody of the lighter owned by Bay Brokerage
Company.
Bar Question: X Mining Company shipped a cargo of machineries
on board fhe S/S Good Ship which was chartered by the Able
Shipping Company, a foreign corporation represented in the
Philippines by its agent, Best Lines, lnc. When the goods were
delivered to the consignee, Y Corporation, they were found to have
 MARITIME COMMERCE
sustained /osses. The insurer, Sunshine lnsurance Company, paid
for the /osses, thereby subrogating itself to the rights of X Mining
Company or Y Corporation vis-a-vis the shipping company and the
shipping agent.
LJpon arrival of the S/S Good Ship in Manita, Best Lines, lnc. took
charge of the following: (a) unloading of the cargo and issuing of
cargo receipfs rn ifs own name for the purpose of evidencing the
condition and the discharge of the cargo frctm the vesse/ to the
arrastre operator and/or unto the barges/lighters; (b) filing and
processing of claims against the yesse/ S/S Good Ship for
losses/damages sus/arned by the cargo.
When Sunshine lnsurance Company sued both Able Shipping
Company and Best Lines, lnc., the latter contended that it was a
dlsc/osed agent and could not therefore be held liable, despite the
insolvency of Able Shipping Company. Rule on the contention of
Besf Lrnes, lnc. with reasons. (1984 Bar)
Answer: Best Lines, lnc. is liable inspite of the fact that it was a
dlsc/osed agent, and regardless of fhe financial condition of Able
Shipping Company.
Best Lines, lnc. is not a mere agent but a ship agent of Able
Shipping Company. Under the admiralty law, a ship agent is
solidarily liable with the owner of fhe yesse/ for /osses or damages to
the cargo. Hence, Besf Lrnes, lnc., as ship agent, is liable in spite of
the insolvency ofAble Shipping Company.
The maritime creditor may attach the vessel without waiting for
the settlement of his right (Chua vs. lAC, 166 SCRA 183).
An agent of a charterer whose obligation under the charter
contract is to unload the goods is not a ship agent and therefore not
solidarily liable for loss or damage to the goods during the voyage
(Maritime vs. CA, 187 SCRA 346).
b. Limited Liability or Hypothecary Rule
Bar Question: On October 30, 2007, MN Pacific, a Philippine
registered yesse/ owned by Cebu Shipping Company (CSC), sank
on her voyage from Hong Kong to Manila. Empire Assurance
Company (Empire) is the insurer of the lost cargoes loaded on board
fhe yesse/ which were consigned to Debenhams Company. After it
indemnified Debenhams, Empire as subrogee filed an action for
damages against CSC. a) Assume that the yesse/ was seaworthy.
Before departing, the yesse/ was advised by the Japanese
MARITIME COMMERCE 367
Meteorotogical Center that it was safe to travel to its destination. But
white at sea, the vesse/ received a report of a typhoon moving within
its general path. To avoid the typhoon, fhe vesse/ changed its
course. However, it was still at the fringe of the typhoon when it was
repeatedty hit by huge waves, foundered and eventually sank. The
captain and the crew were saved except three (3) who perished. ls
CSC tiabte to Empire? What principle of maritime law is applicable?
Exptain. b) Assume that the yesse/ was not seaworthy as in fact its
hutl had teaked, causing flooding in the vessel' Will your answer be
the same? Explain. (2008 Bar)
Answer: a) CSC cannot be held liable to Empire because fhe /oss
happened due to a fortuitous event. There is no question that when
a party is unable to fulfitl his obligation because of "force maieure,"
the generat rule is that he cannot be held liable for damages for non-
pertormance (Japan vs. CA, 294 SCRA 19)' Also, no futiher liability
can be attributed fo CSC pursuant to the hypothecary nature of the
obtigation of the vesse/. The real and hypothecary nature of
maritime taw simpty means that the liability of the carrier in
connection wifh /osses related to maritime contracts is confined to
fhe vessel which is hypothecated for such obligations or which
sfands as the guaranty for their settlement" Thus, the liability of the
vesse/ owner and agent arising from the operation of such vesse/
were confined to the vesset itself, its equipment, freight' and
insurance, if any, which timitation served to induce capitalists into
effectivety wagering their resources against the consideration of the
targe profits attainabte in the trade (Aboitiz vs. General, 217 SCRA
359).
b)No, my answer would be different. The doctrine of limited liability
does not appty where there was negligence on the part of fhe vesse/
owner or agent. CSC was at fault or negligent in not maintaining a
seaworthy yesse/ and in having allowed ifs yesse/ to sail. since it
was remlss in the performance of its duties, CSC cannot hide behind
the ,'timited tiability" doctrine to escape responsibility for the /oss of
the vesse! and its cargo (See Loadstar vs. CA,375 SCRA 339).
"No vessel, no liability" expresses tn a nutshell the limited liability
rule. The shipowner's or agent's liability is merely co-extensive with
his interest in the vessel such that a total loss thereof results in its
extinction. The total destruction of the vessel extinguisheb maritime
liens because there is no longer any res to which it can attach
(Monarch vs. CA, 333 SCRA 71).
368 MARITIME COMMERCE
Abandonment of a vessel is necessary to limit the liability of the
shipowner or the ship agent to the value of the vessel, its
appurtenances and freightage exacted. The only instance where
such abandonment is dispensed with is where the vessel is entirely
lost. ln such a case, the obligation as a general rule is thereby
extinguished. Where the vessel, not being a total loss, is not
abandoned by its owners, they are liable to its creditors (Luzon vs.
cA, 156 SCRA 169).
The basis of the liability of the vessel to the passengers is the
contract of carriage, not tort, and the vessel is liable for the
negligence or wilful act of the carrier's employees although they
acted beyond the scope of their authority, or even in violation of the
carrier's instructions. Damages may be imposed if the carrier acted
recklessly (Mecenas vs. CA, 180 SCRA 83),
The real and hypothecary nature of maritime law simply means
that the liability of the carrier in connection with losses related to
maritime contracts is confined to the vessel, which is hypothecated
for such obligations or which stands as the guaranty for their
settlement. Thus, the liability of the vessel owner and agent arising
from the operation of such vessel were confined to the vessel itself,
its equipment, freight, and insurance, if any, which limitation served
to induce capitalists into effectively wagering their resources against
the consideiatiofr of the large profits attainable in the trade lAUoitiz
vs. General, 217 SCRA 359).
The only time the Limited Liability Rule does not apply is when
there is an actual finding of negligence on the part of the vessel
owner or agent (lbid.).
The rights of a vessel owner or agent under the Limited Liability
Rule are akin to those of the rights of shareholders to limited liability
under our corporation law. ln both insolvency of a corporation and
'a
the sinking of vessel, the claimants or creditors are limited in their
recovery to the remaining value of accessible assets. For corporation
- the residual assets of the corporation left from its operations; for
lost vessel - the insurance proceeds and pending freightage for the
particular voyage (lbid.).
To limit petitioner's liability to the amount of the insurance
proceeds, it has the burden of showing that the unseaworthiness of
the vessel was not due to its fault or negligence. Where the
shipowner fails to overcome the presumption of negligence, the
MARITIME COMMERCE 369
doctrine of limited liability cannot be applied (Aboitiz vs. New lndia,
531 SCRA 134).
As a general rule, a ship owner's liability is merely co-extensive
with his interest in the vessel, except where actual fault is attributable
to the shipowner. Thus, as an exception to the limited liability
doctrine, a shipowner or ship agent may be held liable for damages
when the sinking of the vessel is attributable to the actual fault or
negligence of the shipowner or its failure to ensure the
seaworthiness of the vessel (Aboitiz vs. CA, 569 SCRA 294).
Bar Question: Toni, a copra dealer, loaded 1,000 sacks of copra on
board fhe vesse/ MN Tonichi (a common carrier engaged in
coasfwise trade owned by lchi) for shipment from Puerto Galera to
Manila.
The cargo did not reach Manila because fhe yesse/ capsized and
sank with all its cargo.
When Toni sued lchi for damages based on breach of contract,
the latter invoked the "limited liability rule."
a. What do you understand of the "rule" invoked by lchi?
b. Are there exceptions to the "limited liability rule"? (1997, 1994
Ba0
Answer: a. Under the limited liability rule (real or hypothecary nature
in maritime law), the liability of the shipowner or ship agent is co-
extensive with the value of the yesse/, its equipment including freight.
lf the ve;ssel is abandoned, said liability is extinguished and if the
vesse/ ls sank beyond recovery, the liability is extinguished without
prejudice to the insurels liability in appropriafe cases.
b. The following are the exceptions:
1) where the vessel is insured;
2) where the claims are under the Workmen's Compensation
Laws or similar labor laws;
3) repairs on the vesse/ before ifs /oss;
4) injury or damage due to the shipowner's fault or to the
concurrent negligence of the shipowner and the captain (See
Monarch vs. CA, 333 SCRA 71).
Bar Question: MV Mariposa, one of five passenger ships owned by
the Marina Navigation Company, sank off the coast of Mindoro while
en route to lloilo City. More than 200 passengers pe.rished in the
drsasfer. Evidence showed that the ship captain ignored typhoon
bulletins issued by PAGASA during the 24-hour period immediately
prior to fhe yesse/'s depafture from Manila. The bulletins warned all
370 MARITIME COMMERCE
types of sea crafts to avoid the typhoon's expected path near
Mindoro. To make matters worse, he took more load than was
allowed for the ship's rated capacity. Sued for damages by the
victim's surviving relatives, Marina Navigation Company contended
(1) that its liability, if any, had been eitinguished with the sinking of
MV Mariposa; and (2) that assuming it had not been so extinguished,
such liability should be limited to the /oss of the cargo. Are these
contentions meritorious in the context of applicable provisions of the
Code of Commerce? (2000, 1999, 1988, 1964 Bar)
Answer: The first contention of Marina Navigation Company is
meritorious, but the second is not.
Under Art. 587 of the Code of Commerce, where the fault or
negtigence is committed sotety by the captain, a shipowner or agent
has the right of abandonment, and by necessary implication, his
liability is confined to that which he is entitled as of right to
abandon-the vesse/ with all the equipment and the freight it may
have earned during the voyage.
Since only the captain is at fault, the owner of the vesse/ is free
from liability for /oss of the cargo, as such liability is limited to the
extent of his interest in the ship. The totalloss of the ship results in
the total /oss of his interest in the same. However, his liability for
/oss of life to the passengers is governed by the Civil Code which
provides for his dse of extraordinary diligence. The act of
overloading /he vesse/ is negligence on the part of his agent making
him liable to the heirs of fhe passengers under the contract of
transportation. The total /oss of the vessel, even under the
hypothecary rule, will not free him from liability fo passengers.
Bar Question: White docking his vessel "Taurus", the master, thru
negligence, damaged the wharf and the merchandise loaded on the
deck. The owner of the wharf and the owner of the damaged
merchandise sued the owner of the vesse/ and the master of the
yesse/ for the damage.
1. What ls /he basis of the liability of the owner of the vessel with
respect to the damage to the whart?
2. With respect to the damage to the merchandise?
3. Does the defense of the exercise of the diligence of a good
father of a family lie? Reason. (1986, 1976 Bar)
Answer: (l)The basis of liability of the owner of the vessel with
respect to the damage to the wharf is tort, the cause of it being the
extra-contractual negligence of the master of the vessel.
MARITIME COMMERCE 377
(2) The basis of liability with respect to damage to the
merchandise ls fhe contract of carriage between the owner of the
yesse/ and the owners of the cargo. The obligation of the carrier to
obserue the proper diligence starts from the time the carrier or his
agent receives fhe cargo from the shipper or cargo owner up to the
time the goods are carried safely to their destination.
(3) The defense by the owner of the yesse/ of the exercise of
diligence of a good father of a family in the selection and superuision
of his employees will lie with respect to the tort liability (damage to
the wharf), but will not lie with respect to the damage to the cargo,
the reason being that common carriers, like the merchant yesse/
Taurus, are imposed by law with the obligation to exercise
extraordinary diligence in the carriage of goods.
Bar Question: Thinking that the impending typhoan was still 24
hours away, MV Pioneer left port to sail for Leyte. That was a
miscalculation of the typhoon srgrna/s by both the ship-owner and the
captain as the typhoon came earlier and overtook the yesse/. The
vesse/ sank and a number of passengers disappeared with it.
Relatives of the missing passengers claimed damages against
the shipowner. The shipowner sef up the defense that under ihe
doctrine of limited liability, his liability was co-extensive with his
interest in the vessel. As the yesse/ was totally /osf, his liability had
al so bee n exti ng u ished.
Assuming that the yesse/ was insured, may the claimants go after
the insurance proceeds? (1999 Bar)
Answer: Yes, if the yesse/ is insured, the claimants may go after the
insurance proceeds. Ihis is one exception under the doctrine of
timited tiabitity. The shipowner is stitl liable even if the vesselis /osf.
Bar Question: ln a collision between M/T Manila, a tanker, and MN
Don Claro, an interisland vesse/, MN Don Claro sank and many of
ifs passengers drowned and died. All ifs cargoes were lost. The
collision occurred at nighttime but the sea was calm, the weather fair
and visibility was good. Prior to the collision, and while still four (4)
nautical miles apart, MN Don Claro already sighted M/T Manila on
its radar screen. MlT Manila had no radar equipment. As for speed,
MN Don Claro was twice as fasf as M/T Manila.
At the time of the coltision, MlT Manita faited to'fottow Rute 19 of
the lnternational Rules of the Road which requires two (2) yesse/s
meeting head on to change their course by each yesse/ steering to
starboard (right) so that each would pass by the port side (left) of the
other. Mff Manila signaled that it would turn to the portside and
372 MARITIME COMMERCE
steered accordingly, thus resulting in the collision. MN Don Claro's
captain was off duty and was having a drink at the ship's bar at the
time of the collision.
a) Who would you hold liable for the collision?
b) If MN Don Claro was at fault, may the heirs of the passengers
who die and the owners of the cargoes recover damages from the
owner of said vessel? (1991 Bar)
Answer: a) Both M/T Manita and MN Claro are guitty of negtigence,
hence, both are liable.
MT Manila failed to follow Rule 19 of the lnternational Rules of the
Road and did not have radar equipment, while MN Claro failed to
keep a "proper lookout" as required by the lnternational Rules of the
Road, and despite the fact that the captain was not under any
disability at the time of the collision.
Since the collision is imputable to both vesse/s, each one shall
suffer its own damages, but both are solidarily liable for the death or
injury of passengers and for fhe /osses and damages occasioned to
their cargoes (Article 827, Code of Commerce).
b) Yes. The law provides that if a vesse/ should collide with
another, through the fault, negligence or lack of skill of the captain,
the owner of the vesse/ at fault shall indemnify the /osses and
damages suffered, after an expert appraisat (Articte 826, Code of
Commerce). The heirs of the passengers who died and the cargo
owners can therefore recover damages from the shipowner.
Bar Question: fwo vesse/s collide due exclusively to the fault of
one of them. The vesse/ at fault sinks in water too deep for salvage
operations; the other vesse/ is only partially damaged.
The vessel at fault being a fofal /oss and uninsured, is her owner
still legally bound to pay for the damage caused to the other vessel?
And if there are unpaid bills for repairs done on fhe yesse/ at fault
previous to the collision, may her owner still be legally required to
pay such bills? Reason out your answer. (2000, 1978, 1959, 1948
Ba0
Answer: The liability of the owner of a vessel involved in a collision
generally is limited to his interest in the yesse/. When such yesse/
sunk due to its fault, the owner thereof continue to be liable to the
other vessel, as an exception to the limited liability rule.
Unpaid bills for repair of the vesse/ before it sank remain the
liability of the shipowner, and is also an exception to the limited
liability rule.
MARITIME COMMERCE 373
Bar Question: A Japanese vesse/ plies between Manila and Tokyo
carrying lumber. lt makes one trip each month and receives
Pl00,000 for freight alone. lt began lts frps in January, 1957. On the
third month and third trip, it collided with a Maritima vesse/ valued at
P500,000, because of the negligence of the Japanese vesse/'s
captain. The Maritima boat sank, and with it ten members of its crew.
This notwithstanding, the Japanese vesse/ continued its trip;thrs was
in the month of March. ln April it made still another trip. ln May,
action was brought against the owners of the vessel and when the
vesse/ came to the Philippines lf was attached. ln the action that
ensued, the owner of the vesse/ was sentenced to pay P500,000,
and so the Japanese vesse/ was so/d at public auction. But it could
be sold only for P300,000.
(a) How much is the owner of the Maritima boat entitled to receive,
aside from the P300,000 realized from the sale of Japanese vesse/?
(b) Are the heirs of the ten sailors who died entitled to receive any
amount, suppose the Workmen's Compensation awards to them
P5,000 for each of the dead sailor? Reasons for answer. (1957. Bar)
Answer: (a) The owner of the Maritima boat is entitled to receive
aside from the P300,000 realized from the auction sale of the vessel
at fault, the P100,000 earned from freightage on the voyage in March
1957, during which the collision occurred, after deducting payment to
the heirs of the ten deceased crew members.
The unpaid balance of the claim of the Maritima boat may still be
recovered, considering that the Japanese boat was negligent, hence
still liable, under an exception to the limited liability rule.
(b) Yes, the heirs of the 10 sailors who died as a conseguence of
the total sinking of the ship are entitled to be paid under the
Workmen's Compensation Act. They have a preferred right to all
amounts realized from the sale of fhe vesse/ at fault and from
freightage. The Maritima vesse/ is entitled only to the balance after
the heirs of the 10 deceased crew members are paid.
c. Liabilities of Ship Agent and of Ship Owner for Acts
Done by Captain Towards Passengers and Gargoes,
Making Them Solidarily Liable to Latter
(1) Damages to vessel and to cargo due to lack of skill and
negligence
(2) Thefts and robberies of the crew
(3) Losses and fines for violation of laws
(4) Damages due to mutinies
(5) Damages due to misuse of powers
374 MARITIME COMMERCE
(6) For deviations
(7) For arrivals under stress
(B) Damages due to non-observance of marine regulations
C. Charter Party
1. Defined
A charter party is a contract by virtue of which the owner or
agent of a vessel binds himself to transport merchandise or persons
for a fixed price. lt has also been defined as a contract by virtue of
which the cwner or the agent of the vessel leases for a certain price
the whole or a portion of the vessel for the transportation of goods or
persons from one port to another (SMC vs. Heirs, 384 SCRA B7).
A charter party is defined as a contract by which an entire ship, or
some principal part.thereof, is let by the owner to another person for
a specified time or use; a contract of affreightment by which the
owner of a ship or other vessel lets the whole or a part of her to a
merchant or other person for the conveyance of goods, on a
particular voyage, in consideration of the payment of freight (Caltex
vs. Sulpicio, 315 SCRA 709).
2. Nature
The Civil Code provisions on common carriers should not apply
where the common carrier is not acting as such but as a private
carrier. A common carrier undertaking to carry a special cargo or
chartered to a special person only, becomes a private carrier. As a
private carrier, a stipulation exempting the owner from liability for the
negligence of its agent is valid (Home vs. American, 23 SCRA 24).
3. Classes
a. Bareboat or Demise Gharter
ln a bareboat or demise charter, there is an entire surrender by
the owner of the vessel to the charterer, who provides the officers
and the provisions. Entire control and management is given to the
charterer. The owner loses his lien for freight and is substituted by
the charterer in whose favor the lien continues to exist when goods
are taken on freight (Ouano vs. CA, 211 SCRA 740).
MARITIME COMMERCE 375
Under the demise or bareboat charter of the vessel, the charterer
will generally be considered as owner for the voyage or service
stipulated. The charterer mans the vessel with his own people and
becomes, in effect, the owner pro hac vice, subject to liability to
others for damages caused by negligence. To create a demise, the
owner of a vessel must completely and exclusively relinquish
possession, command and navigation thereof to the charterer;
anything short of such a complete transfer is a contract of
affreightment (time or voyage charter party) or not a charter party at
all. The distinction is significant, because a demise or bareboat
charter indicates a business undertaking that is private in character.
Consequently, the rights and obligations of the parties to a contract
of private carriage are governed principally by their stipulations, not
by the larv on common carriers (Lea Mer vs. Malayan, 471 SCRA
6eB).
Bar Question: For the transpoftation of its cargo from the Port of
Manila to the Port of Kobe, Japan, Osawa & Co., chaftered
"bareboat" MN llog of Karagatan Corporation. MN llog met a sea
accident resulting in the loss of the cargo and in the death of some of
the seamen manning the vessel. Who should bear the /oss of fhe
cargo and the death of the seamen? Why? (2003 Bar)
Answer: Osawa & Co., the charterer, should bear the /oss of fhe
cargo and the death of the seamen because the transaction is a
bareboat charter, wherein there is an entire surrender by.the owner
(Karagatan) of the yesse/ to the chafterer (Osawa). Entire control
and management is given to the charterer. The owner /oses hrs /ien
for freight and is substituted by the chafterer in whose favor the lien
continues to exist when goods are taken on freight. Should there be
any loss, the charterer is liable for the consequences of the voyage
as if he were the owner except where the liability arises from
unseaworthiness
The said /osses not being indicated in the case at bar as due to
the unseaworthiness of the yessel Osawa & Co. should bear the
consequences.
Bar Question: X owns the ship MN Aguinatdo. He bareboat
chartered the ship to Y who appointed all its crew members from the
captain down to i/s /asf official. Y then transpofted a shipment of
10,000 bags of sugar belonging to Z. Thru the negligence of the ship
captain, half of the sugar was damaged due fo sea water. Since Y is
bankrupt, Z sued the captain and X. Will the suit succeed? (1988
Ba0
 MARITIME COMMERCE
Answer: ln a bareboat charter of a merchant vessel, the charterer is
liable for the consequences of the voyage as if he were the owner,
except where the accident was due to the unseaworthiness of the
vesse/.
Ihe /oss of part of the cargo due to the negtigence of the captain
is normally borne by the ship owner, but because in this case, the
boat is on bareboat charter to Y, he (Y) will be the one to bear the
consequences of the voyage, as if he were owner of the yesse/.
Bar Question: Explain the meaning of "owner pro hac vice" of the
vesse/. ln what kind of charter party does fhis obtain? (19g1 Bar)
Answer: An owner "pro hac vice" of fhe yesse/ means that a
charterer, in spite of the fact the somebody else is the true owner of
fhe vessef is treated as the owner of the chaftered vesse/, just for
that one particular purpose only. This situation exisfs rn "demise,' or
"bareboat" charter, wherein the shipowner turns oyerpossession of
fhe yesse/ to the charterer who then undeftakes to provide a crew
and victuals and supplies and fuel for the vessel for the duration of
the charter. Because the charterer is treated as owner pro hac vice,
the charterer assu/nes the customary rights and tiabitities of the
shipowner to third persons, and is held liable for the expense of the
voyage and the wages of the seamen.
b. Voyage Gharter
ln a voyage charter, it is usual for the parties to provide that
responsibility Tor cargo loss falls on the one who agreed to perform
the duty involved. lf the parties agreed that the charterer would be
responsible for the loading, stowage and discharging of the cargo at
the ports visited, while the owner was responsible for the care of the
cargo during the voyage, and the goods were shorflanded, this
means that the loss took place on board the vessel before unloading
of the shipment, for which the owner will be answerable. However,
goods damaged or lost during the unloading is the liability of the
charterer (Maritime vs. CA, 187 SCRA 346).
ln a time or voyage charter, in contrast to a bareboat charter, the
ship remains a common or public carrier. lt is therefore imperative
that a public carrier shall.remain as such, notwithstanding the charter
of the whole or portion of a vessel by one or more persons, provided
the charter is limited to the ship only, as in the case of a time-charter
or voyage-charter. lt is only when the charter includes both the
vessel and its crew, as in a bareboat or demise, that a common
MARITIME COMMERCE 377
carrier becomes private, at least insofar as the particular voyage
covering the charter-party is concerned (Caltex vs. Sulpicio, 315
scRA 709).
Contract of affreightment is one in which the owner of the vessel
leases part or all of its space to haul goods for others. lt is a contract
for a special service to be rendered by the owner of the vessel and
under such contract the general owner retains the possession,
command and navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in return for his
payment of the charter hire. lf the charter is a contract of
affreightment, which leaves the general owner in possession of the
ship as owner for the voyage, the rights, responsibilities of ownership
rest on the owner and the charterer is usually free from liability to
third persons in respect of the ship (lbid.)
Contract of affreightment may either be time charter, wherein the
vessel is leased to the charterer for a fixed period of time, or voyage
charter, wherein the ship is leased for a single voyage. ln both
cases, the charter party provides for the hire of the vessel only,
either for a determinate period of timd or for a single or consecutive
voyage, the shipowner to supply the ship's stores, pay for the wages
of the master and the crew, and defray the expenses for the
maintenance of the ship (Caltex vs. Sulpicio, supra).
ln a contract of affreightment, a comrhon carrier is not converted
into a private carrier but remains as a common carrier and still liable
as such (Coastwise vs. CA, 245 SCRA 796).
The charterer has no liability for damages under Philippine
Maritime Laws (Caltex vs. Sulpicio, supra).
The charter party agreement did not convert the common carrier
into a private carrier. The parties entered into a voyage charter,
which retains the character of the vessel as a common carrier (lbid.).
4. Rights and Obligations of Ship Owner or Ship Agent
The rights and obligations of the shipowner/ship agent are: (1) if
vessel chartered wholly - not to accept cargo from others; (2) to
observe represented capacity; (3) to unload cargo clandestinely
placed; (4) to substitute another vessel if load is less than 3/5 of
capacity; (5) to leave the'port if the charterer does not bring the
cargo within the lay days and extra lay days allowed; (6) to place the
378 MARITIME COMMERCE
vessel in a condition to navigate, otherwise freightage lost; and (7) to
bring cargo to nearest neutral port in case of war or blockade.
The respective rights and duties of a shipper and the carrier
depend not on whether the carrier is public or private, but on whether
the contract of carriage is a bill of lading or equivalent shipping
documents on the one hand, or a charter party or similar contract on
the other (Caltex vs. Sulpicio, 315 SCRA 709).
The carriers are deemed to vrrarrant impliedly the seaworthiness
of the ship. For a vessel to be seaworthy, it rnust be adequately
equipped for the voyage and manned with a sufficient number of
competent officers and crew. The failure of a common carrier to
maintain in seaworthy condition the vessel involved in its contract of
carriage is a clear breach of its duty prescribed in Article 1755 of the
Civil Code (lbid.).
5. Rights and Obligations of Charterer
The rights and obligations of a charterer are: (1) to pay the agreed
charter price; (2) to pay freightage on unboarded cargo; (3) to pay
losses to others for loading uncontracted cargo and illicit cargo; (4) to
wait if the vessel needs repair; and (5) to pay expenses for deviation.
Generally, pivate carriage is undertaken by special agreement
and the carrier does not hold himself out to carry goods for the
general public. The most typical, although not the only form of private
carriage, is the charter party, a maritime contract by which the
charterer, a party other than the shipowner, obtains the use and
service of all or some part of a ship for a period of time or a voyage
or voyages. The rights and obligations of the parties are determined
primarily by stipulations in their contract of private carriage or charter
party (National vs. CA, 283 SCRA 45).
Article 361 Code of Cornmerce provides, "Merchandise shall be
transported at the risk and venture of the shipper, if the contrary has
not been expressly stipulated (lbid.).
Deadfreight is the amount paid by or recoverable from a charterer
of a ship for the portion of the ship's capacity the latter contracted for
but failed to occupy. Liability for deadfreight is on the charterer (NFA
vs. CA,.31 1 SCRA 700).
MARITIME COMMERCE
Under the law, the cargo not loaded is considered dead freight.
(rbid.).
Demurrage is the sum fiied in a charter party as a remuneration
to the owner of the ship for the detention of his vessel beyond the
number of days allowed by the charter party for loading or unloading
or for sailing. Liability for demurrage, using the word in its strict
technical sense, exists only when expressly stipulated in the contract
(rbid )
Delay in loading or unloading, to be deemed as a demurrage,
runs against the charterer as soon as the vessel is detained for an
unreasonable length of time from the arrival of the vessel because
no available berthing space was provided for the vessel due to the
negligence of the charterer or by reason of circumstances caused by
the fault of the charterer (Republic vs. Forbes, 659 SCRA 537).
ln a contract of affreightment, the shipper or charterer merely
contracts a vessel to carry its cargo with the corresponding duty to
provide for the berthing space for the loading or unloading.
Charterer is merely required to exercise ordinary diligence in
ensuring that a berthing space be made available for the vessel.
The charterer does not make itself an absolute insurer against all
events which cannot be foreseen or are inevitable. The law only
requires the exercise of due diligence on the part of the charterer to
scout or look for a berthing space (lbid.).
The charterer of a vessel has no obligation before transporting its
cargo to ensure that the vessel it chartered complied with all legal
requirements. The duty rests upon the common carrier simply for
being engaged in the "public service" (Caltex vs. Sulpicio, supra).
The relationship between the parties is governed by special laws.
Because of the implied warranty of seaworthiness, shippers of
goods, when transacting with common carriers, are not expected to
inquire into the vessel's seaworthiness, genuineness of its licenses
and compliance with all maritime laws. To demand more from
shippers and hold them liable in case of failure exhibits nothing but
the futility of our maritime laws insofar as the protection of the public.
By the same token, passengers cannot be expected to inquire every
time they board a common carrier, whether the carrier possesses the
necessary papers or that all the carrier's employees are qualified.
Such a practice would be an absurdity in a business where time is
always of the essence. Considering the nature of transportation
380 MARITIME COMMERCE
business, passengers and shippers alike customarily presume that
common carriers possess all the legal requisites in its operation
(rbid.).
6. Rescission of Gharter Party
a. At Request of Charterer
The charter party may be rescinded at the request of the
charterer: (1) by abandoning the charter and paying half of the
freightage; (2) error in tonnage or flag; (3) failure to place the vessel
at the charterer's disposal; (4) return of the vessel due to pirates,
enemies or bad weather; and (5) arrival at a port for repairs.
b. At Ship Owner's Request
The contract may be rescinded at the ship owner's request: (1) if
the extra lay days terminate without the cargo being placed
alongside the vessel; and (2) sale by the owner of the vessel before
loading by the charterer.
Bar Question: (A) The SAAD Development Corp. enters into a
voyage charter with XYZ Shipping Corp. over the latter's vessel fhe
MN Lady Love. Before the Saad Development Corp. could load it,
XYZ Shipping eorp. sold MN Lady Love to Oslob Maritime Corp.,
which decided to load it for its own account.
a. May XYZ Shipping Corp. validly ask for rescrssion of the charter
party? lf so, can SAAD Development Corp. recover damages? To
what extent?
b. lf Oslob Maritime Corp. did not load it for its own account, is it
bound by the charter? (1991 Bar)
Answer: (a) Yes, XYZ Shipping Co., the owner of the chartered
boat, may validly ask for fhe rescrsslon of the charter party as /his is
one of the grounds for its resclssion, at the instance of the owner,
under the Admiralty Law. lf damages have been suffered as a
consequence of the rescisslon of the contract, the same may be
recovered by the chafterer from the owner of the boat.
(b) Oslob Maritime Corporation, not being a party to the charter
pafty between XYZ Shipping and SAAD Development Corp., cannot
be compelled to load SAADS cargo for its own account and cannot
be held liable for damages, if any, suffered by SAAD.
c. Fortuitous Gauses
MARITIME COMMERCE 381
The contract is also rescinded due to (1) war; (2) blockade; (3)
prohibition to receive cargo; (4) embargo; and (5) inability of the
vesselto navigate.
D. Accidents and Damages in Maritime Gommerce
1. Averages
a. Defined
Bar Question: What are averages in maritime commerce? (1961
Ba0
Answer: An average ls an extraordinary or accidental expense
incurred during the voyage in order to preserue the cargo, fhe vesse/
or both, and all damages or deterioration suffered by the vesselfrom
departure to the poft of destination, and to the cargo from the poft of
loading to the poft of consignment.
b. Glasses
Bar Question: What are the types of averages in maritime
commerce? (2010 Bar)
Answer: 1) Particular or Simple Average, which includes expenses
and damages caused to fhe vessel or cargo which have not inured to
the common benefit; and 2) Gross or General Average, which
include all damages and expenses which are deliberately caused in
order to save the vesse/ its cargo, or both at the same time, from a
realand known risk.
1. Particular or Simple Average
Simple or particular average includes expenses and damages
caused to the vessel or cargo which have not inured to the common
benefit, and borne by their respective owners.
Bar Question: A cargo of copra was loaded on board a Philippine
vesse/ bound for Holland. The owner of the vesse/ incurred the
following expenditures in the course of the trip: Pl5,000 for repairs to
the hull due to a collision with another vesse/ in the Gulf of Aden;
Pl0,000 for additional provisions for the crew and passengers while
repairs were being made; P10,000 for deterioration in the value of
the copra because of the delay caused by the repairs; and Pl0,000

380 MARITIME COMMERCE
business, passengers and shippers alike customarily presume that
common carriers possess all the legal requisites in its operation
(rbid.).
6. Rescission of Charter Party
a. At Request of Charterer
The charter party may be rescinded at the request of the
charterer: (1) by abandoning the charter and paying half of the
freightage; (2) error in tonnage or flag; (3) failure to place the vessel
at the charterer's disposal; (4) return of the vessel due to pirates,
enemies or bad weather; and (5) arrival at a port for repairs.
b. At Ship Owner's Request
The contract may be rescinded at the ship owner's request: (1) if
the extra lay days terminate without the cargo being placed
alongside the vessel; and (2) sale by the owner of the vessel before
loading by the charterer.
Bar Question: (A) The SAAD Development Corp. enters into a
voyage charter with XYZ Shipping Corp. over the latter's vesse/, fhe
MN Lady Love. Before the Saad Development Corp. could load it,
XYZ Shipping Corp. sold MN Lady Love to Oslob Maritime Corp.,
which decided to load it for its own account.
a. May XYZ Shipping Corp. validly ask for rescission of the charter
party? lf so, can SAAD Development Corp. recover damages? To
what extent?
b. lf Oslob Maritime Corp. did not load it for its own account, is it
bound by the charter? (1991 Bar)
Answer: (a) Yes, XYZ Shipping Co., the owner of the chartered
boat, may validly ask for fhe rescissio n of the charter party as /his /s
one of the grounds for its resclssion, at the instance of the owner,
under the Admiralty Law. lf damages have been suffered as a
consequence of the rescisslon of the contract, the same may be
recovered by the charterer from the owner of the boat.
(b) Oslob Maritime Corporation, not being a pafty to the charter
party between XYZ Shipping and SAAD Development Corp., cannot
be compelled to load SAAD'S cargo for its own account and cannot
be held liable for damages, if any, suffered by SAAD.
c. Fortuitous Gauses
MARITIME COMMERCE 38t
The contract is also rescinded due to (1) war; (2) blockade; (3)
prohibition to receive cargo; (4) embargo; and (5) inability of the
vesselto navigate.
D. Accidents and Damages in Maritime Gommerce
1. Averages
a. Defined
Bar Question: What are averages in maritime commerce? (1961
Ba0
Answer: An average' ls an extraordinary or accidental expense
incurred during the voyage in order to preserue the cargo, fhe vesse/
or both, and all damages or deterioration suffered by the vessel from
departure to the port of destination, and to the cargo from the port of
loading to the pori of consignment.
b. Classes
Bar Question: What are the types of averages in maritime
commerce? (2010 Bar)
Answer: 1) Particular or Simple Average, which includes expenses
and damages caused fo fhe vessel or cargo which have not inured to
the common benefit; and 2) Gross or General Average, which
include atl damages and expenses which are deliberately caused in
order to save the vesse/ its cargo, or both at the same time, from a
realand known risk.
1. Particular or Simple Average
Simple or particular average includes expenses and damages
caused to the vessel or cargo which have not inured to the common
benefit, and borne by their respective owners.
Bar Question: A cargo of copra was loaded on board a Philippine
vesse/ bound for Holland. The owner of the vesse/ incurred the
following expenditures in the course of the trip: P15,000 for repairs to
the hull due to a collision with another vesse/ in the Gulf of Aden;
P1A,000 for additional provisions for the crew and passengers while
repairs were being made; P10,000 for deterioration in the value of
the copra because of the delay caused by the repairs; and P10,400
382 MARITIME COMMERCE
for towing the vessel thru the Suez Canal. By whom and in what
amount shall each ofthe above expenses be borne? Reasons. (1966
Ba0
Answer: The repair expense of Pl5,000 is a particular average to be
borne by the owner of the resse/, without prejudice to said owner
running after the other vessel, if negligent. The average is parTicular
as ft uras not deliberately incurred for common benefit.
The additional provision for the crew and passengers of Pl0,000
is a/so particular average and is borne by the owner of the yesse/.
The expense ls a consequence of the repair of the vessel, which
ifself is a particular average.
The P10,000 deterioration in value of the copra is particular
average to be borne by the copra owner. The /oss ln value is not a
consequence of a sacrifice for common benefit.
The towage expense of Pl0,000 is an ordinary expense incident
to navigation and is borne by the owner of the vessel.
Bar Question: MN llog de Manila with a eargo of 500 tons of iron
ore left the Port of Zambaoanga City bound for Manila. For one
reason or another, MN llog de Manila hit a submerged obstacle
causing it to sink along with its cargo. A salvor, Salvador, lnc., was
contracted to refloat fhe vesse/ for Pl million. What kind of average
was the refloating fee of P1 million, and for whose account should it
be? Why? (20tr3 Bar)
Answer: The refloating fee is a particular average and should be
borne by the owner of MN llog de Manila, since the refloating was a
consequence of a maritime accident. ln addition, nowhere in the
case at bar was it indicated that there was deliberate sacrifice on the
part of the shipowner to save the ship and/or cargo and succeeded
in doing so, for the said refloating to be considered as a general
average.
2. Gross or General Average
As a rule, general or gross averages include all 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 (Phil.
Home vs. CA, 257 SCRA 468).
Bar Question: Global Transport Seryices, lnc. (GTSI) operates a
fleet oi cargo vessels plying interisland routes. One of lfs y,esse/s,
MV Dona Juana, left the port of Manila for Cebu laden with, among
MARITIME COMMERCE 383
other goods, 10,000 television sefs consrgned to Romualdo, a TV
retailer in Cebu. When the vesse/ was about ten nautical miles away
from Manila, the ship captain heard on the radio that a typhoon
which, as announced by PAG-ASA, was on its way out of the
country, had suddenly veered back into Philippine territory. The
captain realized that MV Dona Juana would traverse the storm's
path, but decided to proceed with the voyage. True enough, the
vesse/ sailed into the storm. The captain ordered the iettison of the
10,000 television sets, along with some other cargo, in order to
lighten fhe vesse/ and make it easier to steer fhe vesse/ out of the
path of the typhoon. Eventually, the vessel, with its crew intact,
arrived safely in Cebu.
a) Will you characterize the jettison of Romualdo's fV sefs as an
average? lf so, what kind of an average, and why? lf not, why not?
b) Against whom does Romualdo have a cause of action for
indemnity of his lost TV sets? Explain. (2009 Bar)
Answer: a) Yes, the jettison of the fV sefs resulted in a general
average loss. As a rule, general or gross averages include all
damages and expenses which are deliberately caused in order to
save the vesse/ its cargo, or both at the same time, from a real and
known risk (Philippine Home vs. CA, 257 SCRA 468).
b) Romualdo has a cause of action against the shipowner and the
other cargo owners benefitted by the iettison. Romualdo is entitled
to indemnity as a result of fhe /oss of his fVsefs
The requisites of general average are (1) common Oanger; (2)
deliberate sacrifice; (3) success; and (4) proper formalities and legal
steps.
Where the formalities prescribed under Articles 813 and 814 of
the Code of Commerce in order to incur the expenses and cause the
damage corresponding to gross average were not complied with, the
carrier cannot claim for contribution from the consignees for
additional freight and salvage charges (lbid.).
Bar Question: The MN Maliksi, laden with cargo, was on its way
from Manila to Davao. Typhoon Bebeng which had been last
reported as leaving the Philippines area, suddenly changed its
course without giving enough time for warning and met MN Maliksi
with all her strength. ln order to lighten fhe vesse/ and prevent it from
sinking, the captain, after taking the proper steps, decided to iettison
part of the cargo. Among fhose 7'etflsoned were 20 barrels of
petroleum which had been toaded on deck with the consent of the
 MARITIME COMMERCE
shipper, Juan Reyes. Some big crates below deck were also
jettisoned.
The storm gradually subsided and the MN Maliksi, although it
suffered some damage, remained seaworthy and continued on its
way to Davao. Visibility was still poor so that the yesse/ kept its light
on.
About two hours later, the captain and the crew of MN Matiksi
suddenly saw that another ship, without any lights on, was a few
meters away from its port side and apparently crossed its path. They
blew their whistles to warn the other yessel at the same time trying
to veer from its path. ln spite of this, the MN Maliksi was hit on its
port side and subsequently sank. lt appeared that the watch of the
other vessel, the MN Malakas, had fallen asleep.
The MN Malakas took the captain and the crew of MN Maliksi on
board, and was able to salvage paft of the MN Maliksi cargo and
carried this also on board.
Discuss briefly the rights and/or liabilities, if any, of Juan Reyes,
the owners of the crates jettisoned, the owners of the cargo saved,
and the owners of MN Maliksi and MN Malakas, respectively. (1983
Ba0
Answer: (1) Juan Reyes, the owner of the jettisoned goods, is
entitled under the provision of the law on general average, to
reimbursement of the value of his 20 barrels of petroleum, from
those benefitet by the jettison - the owner of the resse/, and the
owners of the goods which were saved as a consequence of the
sacrifice. The reimbursement however is not total, because Reyes
also will proportionately participate in the value of the goods
sacrificed.
(2) The owners of the crates jettisoned will have the same rights
and liabilities as Juan Reyes.
(3) The owners of the, cargo saved will contribute to the
reimbursement of the value of the goods jettisoned belonging to
Juan Reyes, the owners of the crates jettisoned, and the damage to
MN Maliksias a conseguence of the typhoon. The reimbursement
however is not total, as /hese persons also will share in the sacrifice.
(4) The owner of MN Maliksi, in so far as the general average is
concerned, is entitled to reimbursement for the damage to the vessel
resulting from the typhoon, /ess his own share of the sacrifice.
ln so far as the collision is concerned, the MN Malakas being the
yesse/ at fault, its owner is liable to the owner of MN Maliksi for the
value o.f MN Maliksi, fhe yesse/ which sank, and also for the value of
the goods loaded on MN Maliksi which were /osf as a consequence
of the collision.
MARITIME COMMERCE 385
Should no recovery be had from the owner of MN Malakas, or
should the recovery not be sufficient to pay in full the owners of the
goods saved from the typhoon, but lost in the collision, the owners of
the goods saved from both accidents (the typhoon and the collision)
shall continue to be liable for contribution to the general average,
/ess expenses for the salvage, if any.
Bar Question: The vesse/ "General Mascardo" was loaded with
5,000 tons of gold and copper concentrates by Syndicated Ores, lnc.
(the charterer) for delivery to the U.5.. The master of the vesse/
issued the corresponding bill of lading which contained a prohibition
against the loading of dangerous cargo per se or cargo which may
become dangerous and make the voyage unsafe. The master has
had 10 years of experience as a'captain, but fhr.s w-as his first
experience with cargo of gold and copper concentrates. The cargo
was loaded, stowed and trimmed at the sole risk and expense of
Syndicated Ores, lnc.. While en route to its destination, the vesse/
met a typhoon and because of the heavy sfress, the shifting boards
or compartments constructed by Syndicated broke, causing the
cargo of ore concentrates fo shrft Since the vesse/ was listing on its
srde fo almost 14' for several hours, the master, in the hope of
saving the vesse/, decided to jettison some cargo belonging to other
shrppers. At this point, a powerful tugboat offered to help in
maneuvering fhe vessel, which the master accepted on no-cure, no-
pay basr's. To save fhe vesse/ and the remaining cargo, the master,
after consulting with his officers, deviated to Japan instead of
proceeding to the U.5.. Thereafter, the cargo of gold and copper
concentrates were examined by international surveyors who
declared that the moisture content of said concentrates u/as beyond
transportable limit and that the same was much higher than as
certified by Syndicated. The master and the shipowner, after
declaring that the cargo was of dangerous nature and condition,
unloaded the cargo in Japan, abandoned the voyage and informed
the cargo owners to transship their cargo at their own cost and
expense. The master and the ship owner also slapped a lien on said
cargo for freight up to Japan as well as other expenses.
a. Was there a general average situation? Did the vesse/ have the
right to jettison other cargo, hire salvors and deviate the vessel to
Japan?
b. Assuming Syndicated Ores, lnc. refused general average, may
fhe yesse/ declare the cargo as dangerous, unload the same, store
the cargo in Japan and abandon the voyage, at the same time
slapping a lien on the cargo for freightage, expenses for unloading,
expenses for jettison, salvage and/or general average?
386 MARITIME COMMERCE
c. Does Syndicated Ores, lnc. have the right fo rnsisf that the
yesse/ carry the cargo to the U.S. per bill of lading or that the
shipowner hire a substitufe vesse/ to complete the contracted voyage
in accordance with the "extraordinary diligence" required of common
carriers in the carriage of goods? (1982 Bar)
Answer: (a) There was general average situation. The requisites of
general average: (1) common danger, (2) deliberate sacrifice, (3)
success, and (4) proper formalities and legalsfeps, are all present in
the problem. Ihe vessel had the right to jeftison the cargo, hire
sa/vors and deviate fhe vesse/ as part of the emergency measures
that had to be undertaken to save fhe vesse/ and the rest of the
cargo from fufther /oss or damage.
(b) General average is a situation which is declared by the master
of the vessel after compliance with the requiremenfs. No particular
shipper can refuse said declaration. The vesse/, through its master,
after a declaration of general average, can proceed to declare the
cargo as dangerous, unload the same, store the cargo in Japan,
abandon the voyage, and claim a lien on the cargo for freightage,
unloading expenses, for jettison, salvage and/or general average,
fhese acfs being the consequences of the dangerous nature of the
cargo of gold and copper concentrates.
(c) Syndicated Ores, lnc. cannot rnsist rn the carriage of cargo to
the U.S. per bill of lading or that the ship owner should hire a with stopover at Tacloban. Upon leaving the latter port but still within
subsflfufe vesSe/ in accordance with the "extraordinary diligence" of
common carriers in the carriage of goods because of the dangerous
nature of the cargo carried. The diligence reqbired does not obligate
the carrier to expose itself to dangerous risks oufsrde of the
contemplation of the contract of carriage.
Bar Question: An importer of textiles loads 20 bales aboard a ship
in Hongkong bound for Manila. With the intention of smuggling one-
half of his cargo, he takes a bill of lading for only 10 bales. On the
voyage to Manila all the 20 bales are ieftisoned to save the more
precious cargo. How much is the shipper entitled to receive as
average? Reasons. (1966 Bar)
Answer: He can only claim for the value of the 10 bales which are
included in the bill of lading. Only that cargo included in the bill of
lading which is jettisoned can be claimed as a general average.
Bar Question: "A" loaded on S.S. Liverpool belonging to "8" 300
cases of kerosene for consignment to Tacloban, placing them on the
deck and not in the hold of the vesse/. While in transit, a strong storm
MARITIME COMMERCE 387
occurred and the captain, as a means of avoiding the danger of
shipwreck, jettisoned the entire shipment of kerosene belonging to
"A". Because of his precaution, fhe vesse/ was saved, but only 50
cases of kerosene jettisoned were recovered. Under what kind of
average does the loss come? Who pays for it? Give reasons for your
answer. (1958 Bar)
Answer: Ihe /oss of the 250 cases of kerosene is a general average
as the sacrifice was deliberately made to save fhe yesse/ and the
rest of the cargo.
Ihe /oss, being general average, is borne by all who benefited
from the sacrifice, the owners of the cargo, including A, and of the
vesse/.
Bar Question: ls the expense incurred in putting a vessel afloat
general average? (1962 Bar)
Answer: lf the vessel was intentionally stranded to save it and its
cargo,,then the expense for putting it afloat is a general average;
otherwise, it is a particular average especially where the stranding is
a consequence of an accident.
Bar Question: The vesse/ S/S Orientat teft Manila bountd for Cebu
its waters, the ship ran aground and could not move by its own
power; hence, so that the ship may proceed to Cebu, the shipowner
had it refloated by another shipping company at a compensation of
P2,000.00. Does fhis expenditure constitute general average?
Explain your answer. (1955 Bar)
Answer: The expenditure does not constitute general average. The
stranding of the ship was a consequence of a maritime accident, and
certainly it was not deliberately incurred to save fhe yesse/ or lfs
cargo. Hence, it is particular average, not general average.
Bar Question: MV SuperFast, a passenger-cargo vesse/ owned by
SF Shipping Company plying the inter-island routes, was on its way
to Zamboanga City from the Manila port when it accidentally, and
without fault or negligence of anyone on the ship, hit a huge floating
object. The accident caused damage to the yesse/ and loss of an
accompanying crated cargo of passenger PR. ln order to lighten the
vesse/ and save it from sinking and in order to avoid risk of damage
to or /oss of the rest of the shipped items (none of which was located
388 MARITIME COMMERCE
on the deck), some had to be iettisoned. SF Shipping had the
vesse/ repaired at its port of destination. SF Shipping thereafter filed
a complaint demanding all the other cargo owners to share in the
total repair costs incurred by the company and in the value of the lost
and jettisoned cargoes. ln answer to the complaint, the shippers'
sole contention was that, under the Code of Commerce, each
damaged party should bear its or his own damage and those that did
not suffer any loss or damage were not obligated to make any
contribution in favor of those who did. ls the shippers' contention
valid? Explain. (2000 Bar)
Answer: No, the shippers'contention is not vatid. The iettisoning to
save the vesse/ and the rest of the cargo is a general average,
hence those who benefited by reason thereof, namely, the owner of
fhe vesse/ and the owners of the goods which were saved, are
obtiged to reimburse the owner/s of the lost and iettisoned cargo. SF
Shipping Company, however, is not entitled to contribution from the
cargo owners for the damage fo ifs vesse/.
c. Proof and Liquidation
1. Where Made
Proof is made at the port of repairs, if any is made, or in the port
of unloading.*Liquidation is done in the port of unloading if in the
Philippines; or in the port of arrival, if in a foreign country.
Common carriers cannot limit their liability for injury or loss of
goods where such injury or loss was caused by its negligence.
Otherwise stated, the law on averages under the Code of Commerce
cannot be applied where there is negligence (American vs. CA, 208
scRA 343).
2. How Done
Liquidation is done by private agreement, or if the parties cannot
agree, then by judicial authority.
2. Gollisions
. a. Terms Defined
Bar Question: Distinguish cotlision from allision. (1958 Bar)
MARITIME COMMERCE 389
Answer: Collision is the impact of two yesse/s, both of which are
moving. Allision is the impact between a moving yesse/ and a
stationary one.
b. Zones of Time in the Collision of Vessels
Bar Question: tn cottisions between yesse/s at sea, explain the
divisions or.zones of time, and give the rules to be observed where
the steamship and a sailing yesse/ are approaching each other from
opposite directions or in intersecting lines. (1958 Bar)
Answer: ln collision between yesse/s at sea, the zones of time are:
first zone, which covers all the time up to the moment when the risk
of collision begins; second zone, which covers the time between the
moment when the risk of collision begins and the moment it becomes
a practical certainty; and third zone, which covers the time when
collision is certain and the time of impact.
lf a steamship and a sailing yesse/ approach each other from
opposite directions, the sailing yesse/ should keep her course, and
the steamship should watch the movements of the sailing vessel and
adjust its own movements to the lafter.
lf they approach each other in intersecting lines, the steamship
must give way.
Bar Question: tn cotlision, explain the term "error in extremis." (1958
Bar)
Answer: An "error in extremis" is a sudden movement made by a
faultless yesse/ during the third zone of collision with another yesse/
which is at fault during the second zone. Even if this sudden
movement is wro.ng, no responsibility will.fallon said faultless yesse/.
c. Rules as to Liability
1. One Vesselat Fault
The owner of the vessel at fault during the second zone and his
ship agent are solidarily liable to the owner of the innocent vessel
and to the cargo owners for all of their losses and damages (National
vs. CA, 164 SCRA 593).
The vessel was negligent for two reasons: (1) it failed to follow
Rule 18 (a) of the lnternational Rules of the Road by not altering her
course to the starboard, and (2) it did not have a lookout properly
390 MARITIME COMMERCE
trained and who is given no other duty save to act as a lookout and
who is stationed where he can see and hear best and maintain good
communication with the officer in charge of the vessel, and who of
course must be vigilant (Smith vs. CA, 197 SCRA 201).
Rule 24-C, Regulations for Preventing Collisions at the Sea, ruled
that the duty to keep out of the way remained even if the overtaking
vessel cannot determine with certainty whether she is fonryard of or
abaft more than 2 points from the vessel. lt is beyond cavil that MA/
"Don Sulpicio" must assume responsibility as it was in a better
position to avoid collision. lt should have blown its horn or given
signs to warn the other vessel that it was to overtake it (Sulpicio vs.
cA, 305 SCRA 478).
2. Both Vessels at Fault
Bar Question: Two seagoing vesse/s, "A" and "B" were travelling at
four o'clock in the afternoon, at full speed, in clear weather, coming
from opposite directions. They did not /essen their speed and both
kept their courses as they approached each other. Ihe vesse/s
collided and were both damaged. The cargoes of both were also
damaged.
Who is liable for the damage suffered by:
a. Vessel"A";
b. Vessel"B";
c. The cargoes in vessel"A";
d. The cargoes in,vessel"B'. (1995, 1947 Bar)
Answer: Eofh vessels in the problem are at fault. Consequently,
vesse/ "A" bears its damage; vesse/ "8" bears its damage; and the
damage to the cargo in bofh vessels "A" and "8" will be borne
solidarily by the owners of vesse/s "A" and "8".
Bar Question: There was a severe typhoon where the vessel MN
Fortuna collided with MN Suerte. lt is conceded that the typhoon
was a major cause of the collision, although there was a strong
possibility that it could have been avoided if the captain of MN
Fortuna was not drunk and the captain of MN Suerte was not asleep
at the time of the collision.
Who should bear the damages fo fhe vessels and their cargoes?
(1998, 1987 Bar)
Answer: The owners of MN Fortuna will bear the damage to their
own vessel, while the owners of MN Suerfe will bear the damage to
their own vesse/.
MARITIME COMMERCE 391
The owners of both vesse/s will be jointly and severally liable to
the owners of the .cargo in both vesse/s.
These are the rules as to liability where bofh vesse/s are at fault.
While it is true that the major cause of the collision was the
typhoon, it is equally true that the captain of the MN Fortuna was
drunk, and the captain of the MN Suerte was asleep, at the time of
the collision. These acts of the captains are negligent acts which can
result in a solidary liability of both vesse/s to the cargo owners of
bofh vesse/s.
For a foftuitous event like a typhoon to free a common carrier like
the two vesse/s at bar from liability to passengers and cargo owners,
the fortuitous event should be the proximate and only cause for the
/oss.
As the cause of the /oss is not solely the typhoon but the
negligent acts of the captains of both vesse/s, each vessel will bear
its own damage, but both vesse/s will bear iointly and severally the
damage to the cargo of fhe vesse/s.
3. Fault Undeterminable
This is also called the principle of inscrutable fault -- it cannot be
determined which between the two vessels was at fault.
Both vessels bear their respective damage, but both are solidarily
liable for damage to the cargo of both vessels.
Bar Question: Explain the doctrine of lnscrutable Fault in Maritime
accidents. (1997, 1995 Bar)
Answer: Under the doctrine of inscrutable fault, both vessels bear
their respective damage in case of collision where it cannot be
determined which between the fwo vesse/s was at fault. However,
under the same doctrine, both shoutd be sotidarity tiabte for damage
to the cargo of both vesse/s.
Bar Question.' Vesse/s "U" and "V" collided with each other causing
damage to both vesse/s. Vesse/ "U" had the last clear chance to
avoid the collision but failed fo do so.
1. ts the -doctrine of last clear chance in tort applicable to
collisions of vesse/s af sea under the Code of Commerce? Which
vesse/ should shoulder liability for the damage suffered by both
vesse/s and by the cargo?
2. Assume that the negligence of the captain of Vessel "U" was
the proximate cause of the collision, while the negligence of the
392 MARITIME COMMERCE
captain of Vesse/ "V" was merely contributory. To which yesse/
should the collision be deemed imputable? (1980 Bgr)
Answer: (1) The doctrine of "last clear chance" is not applicable to
collisions of vesse/s. The Law on Admiralty sfafes that where both
yesse/s involved in a collision are at fault, or it cannot be determined
which one is at fault (inscrutable fault), neither can successfully
maintain a claim against each other for /oss or damage to their
respective yesse/s. Besldes, an "error in extremis" of an otherwise
faultless yesse/ would not make fhe yesse/ liable to the other yesse/.
Each yessel will shoulder the respective damage to their yesse/s,
but both are solidarily liable for damage or /oss of cargo in both
vesse/s.
(2) lf both yesse/s are negligent, it does not matter that the
negligence of one was the proximate cause, and the negligence of
the other was merely contributory. lf both negligence existed during
the second time zone in collisions, then the collision will be imputable
to both vesse/s, and both would become solidarily liable for /oss or
damage to all owners of the cargo in both yesse/s, and each will bear
the damage to their respective yesse/s.
4. Collision Due to Fortuitous Event
Bar Question: Which party should bear the damage fo the yesse/s
and the cargo* if the cause of the collision was a fortuitous event?
Explain. (1995 Bar)
Answer: ln case of a foftuitous event where none of fhe yesse/s is
at fault, each vessel and each cargo owner will bear their respective
damages.
5. Collision of a Moving Vessel Against a Stationary
Object
ln American jurisprudence, there is a presumption of fault against
a moving vessel that strikes a stationary object such as a dock or
navigational aid. ln admiralty, this presumption does more than
merely require the ship to go fonvard and produce some evidence on
the presumptive matter. The moving vessel must show that it was
without fault or that the collision was occasioned by the fault of the
stationary object or was the result of inevitable accident. Such
vessel must exhaust every reasonable possibility which the
circumstances admit and show that in each, they did all that
reasonable care required. ln the absence of sufficient proof in
MARITIME COMMERCE 393
rebuttal, the presumption of fault attaches to a moving vessel which
collides with a fixed object and makes a prima facie case of fault
against the vessel. Logic and experience support this presumption
(Far vs. CA,297 SCRA 30).
d. Prerequisite to Recovery
Bar Question: Explain a maritime protest. When and where should
it be filed? (2007, 1988, 1977 Bar)
Answer: A maritime protest is a written statement made under oath
by the captain or master of a vesse{ after the occurrence of an
accident or disaster in which fhe yesse/ or cargo is /osf or damaged,
with respect to the circumsfances attending such occurrence.
Protest is made within 24 hours before the competent authority at
the place where the accident or disaster happened or at the first port
of arrival, if the Philippines; or to a Philippine consul, if the incident
took place abroad.
lnjuries to persons and damage to the cargo of owners not on
board on collision time need not be protested.
Bar Question: On March 1, 1969 at about 10:00 P.M. and while
entering the inner harbor of Manila, the motorship .M/S Bulacan,"
owned by Luzon Shipping Co., collided with the "M/S lloilo" (a ship
owned by Visayas Shipping Corp.) which was at anchor. ln the
afternoon of March 2, 1969. Visayas Shipping Corp. filed an action
against Luzon Shipping Company for recovery of damages in the
sum of Pl0,000 caused to the "M/S lloilo." Will the action prosper?
State your reasons. (1969 Bar)
Answer: No, the action will not prosper. Any action for damages
arising from a collision should be preceded by a protest, which must
be filed within 24 hours from the time the collision took place before
the competent authorities at Manila where the collision took place.
Bar Question: ln the morning of April 2, 1977, the South-bound FS-
190 belonging to William Lines, lnc. reached the waters of Verde
lsland Passage. About the same time, the M/S General del Pilar,
another interisland yesse/ owned by the General Shipping was
likewise in the same waters, steaming northward to Manila. The
yesse/s, coming from opposite directions and towards each other,
suddenly collided at a cerTain point of the passage which resulted in
the sinking of the FS-190, together with all its cargoes, part of which
394 MARITIME COMMERCE
belonged to Tanya who is a paying passenger and Rafael who is a
shipper.
Tanya and Rafael now bring action in court to recover for their
/osses and for damages arising from the collision.
Were they under obligation to file a maritime protest for a
successfu/ maintenance of the action? (1977 Bar)
Answer: Tanya, being a mere passenger, and Rafael, a shipper of
cargo not on board at the time of the collision, are not required by the
Admiralty Law to file,a protest. After a collision, the person obliged to
file a maritime prote'st rs fhe masfer (captain) of fhe vessel involved
in the collision.
CHAPTER IX 395
CARRIAGE OF GOODS BY SEA ACT
(Gommonwealth Act 65)
l. Application
The law is suppletory to the Civil Code and the Code of
Commerce in the carriage of goods from foreign ports to the
Philippines (Eastern vs. lAC, 150 SCRA 463).
It is noted that the term carriage of goods covers the period from
the time when the goods are loaded to the time when they are
discharged from the ship; thus, it can be inferred that the period of
time when the goods have been discharged from the ship and given
to the custody of the arrastre operator is not covered by the COGSA
(lnsurance vs. Asian, 666 SCRA 226).
ll. Notice of Loss or Damage
As defined in Article 1 189 of the New Civil Code and as applied to
Paragraph 4, Section 3 (6) of the Carriage of Goods by Sea Act,
"loss" contemplates merely a situation where no delivery at all was
made by the shipper of the goods because the same had perished,
gone out of commerce, or disappeared in such a way that their
existence is unknown or they cannot be recovered. lt does not
include a situation where there was indeed delivery - but delivery to
the wrong person, or a misdelivery. Nondelivery should be
distinguished from misdelivery.
lf the damage is externally apparent, then notice of the damage
should be given on receipt of the goods; if the damage is not
externally visible, then within three days from receipt.
Under Section 3, paragraph 6 of the Carriage of Goods by Sea
Act, notice of claim need not be given if the state of the goods at the
time of their receipt has been subject of a joint inspection or survey
(Belgian vs. Phil. First, 383 SCRA 23).
Where delay in unloading of cargo is not due to negligence of
carrier but due to typhoon, the carrier cannot be held liable for
damages. Diligence shown by shipmaster to protect cargo from
typhoon and pilferage exempts carrier from damages (Phil. American
vs. CA, 222 SCRA 155).
396 CARRIAGE OF GOODS BY SEA ACT
The legal relationship between an arrastre operator and a The 24-hour claim requirement is a condition precedent to the
consignee is akin to that between a warehouseman and a depositor.
As to both the nature of the functions and the place of their
performance, an arrastre operator's services are clearly not maritime
in character (lnternational vs. Prudential, 320 SCRA 244).
lf the consigned goods were shipped under "Shipper's Load and
Count", this means that the shipper was solely responsible for the
loading of the container, while the carrier was oblivious to the
contents of the shipment. Protection against pilferage of the
shipment was the consignee's lookout. The afrastre operator was,
like any ordinary depositary, duty-bound to take good care of the
goods received from the vessel and to turn the same over to the
party entitled to their possession, subject to such qualifications as
may have validly been imposed in the contract between the parties.
The arrastre operator was not required to verify the contents of the
container received and to compare them with those declared by the
shipper. The arrastre operator was expected to deliver to the
consignee only the container received from the carrier (lbid.).
The relationship of the consignee and the arrastre operator is
much akin to that existing between the consignee or owner of
shipped goods and the common carrier (Summa vs. CA, 253 SCRA
175).
ln the performance of its job, an arrastre is bound by the
management contract it had executed with the Bureau of Customs
which is a sort of a stipulation pour autrui which is also binding on
the consignee (and the insurer, as successor-in-interest of the
consignee) - indeed, upon taking delivery of the cargo, a consignee
tacitly accepts the provisions of the management contract, including
those which are intended to limit the liability of the arrastre operator
(rbid.).
The requirement to give notice of loss or damage to the goods is
not an empty fcirmalism. The fundamental reason or purpose of such
a stipulation is not to relieve the carrier from just liability, but
reasonably to inform it that the shipment has been damaged and that
it is charged with liability therefor, and to give it an opportunity to
examine the nature and extent of the injury. This protects the carrier
by affording it an opportunity to make an investigation of a claim
while the matter is still fresh and easily investigated so as ,to
safeguard itself from false and fraudulent claims.
CARRIAGE OF GOODS BY SEA ACT
accrual of a right of action against a carrier for loss of, or damage to,
the goods. The shipper or consignee must allege and prove the
fulfillment of the condition. Otherwise, no right of action against the
carrier can accrue in favor of the former (lbid.).
Bar Question: Under the provisions of Sec. 3 of the Carriage of
Goods by Sea Act, notice must be given of /oss or damage to the
goods. Within what period must notice be given, if the loss or
damage is not apparent? Does the term "loss" in this Act cover
delivery to the wrong person? Explain. (1975 Bar)
Answer: lf the loss or damage is not apparent at the time of receipt
of the goods, then notice of fhe /oss will have to be given within three
days from receipt of the last package (See UCPB vs. Aboitiz, 578
scRA 251).
The term "/oss" does not include a situation where there was
delivery but to the wrong person, because in misdelivery, the goods
are still in existence and can be recovered.
Bar Question: Under the Carriage of Goods by Sea Act, what is the
effect of a provision inserted in the bill of lading that the carrier shall
not be liable for /oss or damage to the cargo unless wriften notice
thereof is given to the carrier within 30 days after receipt of the cargo
by the shipper or consignee? Reason out your answer. (1967 Bar)
Answer: The provision is null and void. Under the Carriage of Goods
by Sea Act, the lack of notice is not a bar to the filing of a suit for
damages within one year from receipt of the cargo, and any
provision in a contract reducing said one year period is null and void
and of no effect.
Bar Question: While in Hongkong, "X" shipped on the "S/S Burma
Maru" for Manila 500 cages of fine yellow colored canaries which he
intended to sell in his pet shop here. The shipment is worth
P4,000.00. Due to the lack of proper facilities in the hold of the ship,
all the birds died during the trip. Under the provisions of the Carriage
of Goods by Sea Act, what is the liability of the carrier to "X"? (1967
Ba0
Answer: The "S/S Burma Maru" is tiable to X for the death of the
birds. The obligation of the carrier to make the ship seaworthy
includes the making of the holds, refrigerating and cooling chambers,
fit and safe for the carriage and preservation of the goods. The
398 CARRIAGE OF GOODS BY SEA ACT
vesse/ failed to provide this, hence, it is liable for damages incurred
by X arising from the death of the birds.
Bar Question: RC imported computer motherboards from the
United Sfafes and had them shipped to Manila aboard an ocean-
going cargo ship owned by BC Shipping Company. When the cargo
arrived at the Manila seaport and delivered to RC, the crate
appeared intact; but upon inspection of the contenfs, RC discovered
that the items inside had all been badly damaged. He did not file any
notice of damage or anything with anyone, least of all with BC
Shipping Company. What he did was to proceed directly to your
office to consult you about whether he should have given a notice of
damage and how long a time he had to initiate a suit under the
provisions of the Carriage of Goods By Sea Act (C.A. 65). What
would your advice be? (2000 Bar)
Answer: t woutd advice RC to give notice of the damage. Whether
or not the notice is filed on time, I would also advice RC to file a suit
within 1 year from date of delivery to him.
The law clearly requires that the claim for damage or average
must be made within 24 hours from receipt of the merchandise if, as
in this case, damage cannot be ascertained merely from the outside
packaging of the cargo (See UCPB vs. Aboitiz, 578 SCRA 251).
lll. Period of Prescription
Where the imported goods were delivered to the wrong person,
the one-year time bar in paragraph 4, Section 3 (6) of the Carriage of
Goods by Sea Act, which refers to "loss or damage", does not apply.
Said one year period of limitation is designed to meet the exigencies
of maritime hazards. ln a case where the goods shipped were
neither lost nor damaged in transit but were, on the contrary,
delivered in port to someone who claimed to be entitled thereto, the
situation is different and the special need for the short period of
limitation in cases of loss or damage caused by maritime perils does
not obtain (Mitsuivs. CA, 287 SCRA 366).
Conformably with this concept of what constitutes "loss" or
"damage," it has been held that the deterioration of goods due to
delay in their transportation constitutes "loss" or "damage" within the
meaning of Section 3 (6), so that as suit was not brought within one
year, the action was barred: Whatever damage or injury is suffered
by the goods while in transit would result in loss or damage to either
the shipper or the consignee. As long as it is claimed, therefore, that
CARRIAGE OF GOODS BY SEA ACT 399
the losses or damages suffered by the shipper or consignee were
due to the arrival of the goods in damaged or deteriorated condition,
the action is still basically one for damage to the goods, and must be
filed within the period of one year from delivery or receipt (lbid.).
Failure to file a notice of claim within 3 days will not bar a recovery
if it is nonetheless filed within one year. This one year prescriptive
period applies to the shipper, the consignee, the insurer of the
goods, or any legal holder of a bill of lading. The arrastre operator
may not invoke the prescriptive period (Belgian vs. Phil. First, 383
scRA 23).
Sec. 3(6) of the COGSA provides a similar claim mechanism as
the Code of Commerce but prescribes a period of three (3) days
within which notice of claim must be given if the loss or damage is
not apparent (UCPB vs. Aboitiz, 578 SCRA 251).
The suit for loss or damage to the cargo should be brought within
one year from delivery, or from the date when the goods should have
been delivered, whether or not notice of the loss or damage was
made.
The one year period to file the action starts to run from the time
the damaged cargo is delivered to the consignee, if directly delivered
to him (Aetna vs. Luzon, 62 SCRA 1 1).
The one year period under Section 3 (6) of the Carriage of Goods
by Sea Act within which to file a claim against the carrier starts to run
from the date of delivery of goods to the arrastre operator, not
directly to the consignee (Union vs. Manila, 77 SCRA 359).
Having complied with the condition precedent for the filing of a
claim within the 15 day period, the claimant against the arrastre
operator could file the court action within one year either from Dec'
19, 1961 orfrom Dec. 19, 1962. This second date is regarded as the
expiration of the period within which the arrastre operator should
have acted on the claim. ln other words, the claimant or consignee
has a two year prescriptive period, counted from the date of the
discharge of the goods within which to file the action in the event the
contractor has not rejected or admitted liability (lbid.)
ln case of inaction on the part of the arrastre operator, he shall be
deemed to have rejected or denied the importer's claim upon
expiration of one year from the date when the last package was
400 CARRIAGE OF GOODS BY SEA ACT
discharged and that the one year period within which to file the suit
starts to run from the expiration of the one year period of inaction by
the arrastre operator (Filipro vs. Manila, 9Z SCRA 629).
The filing of the claim for toss within the 'tS-day period is in the
nature of a prescriptive period for bringing an action and is a
condition precedent to holding the arrastre operator liable. This
requirement is a defense made available to the arrastre operator,
who may use or waive it as a matter of personal discretion
(lnternational vs. Prudential, 320 SCRA 244).
The 1S-day period fof fiting claims should be counted from the
date the consignee learns of the loss, damage or misdelivery of
goods (lbid.).
The one year period allowed the shipper or consignee for the
filing of a suit against the carrier applies also to an insurer of the
cargo availing of his right of subrogation against the carrier (Filipino
vs. Alejandro, 145 SCRA 42).
The one year period to file a suit against the carrier counted from
the delivery of the last package is not suspended,by.the sending of a
letter of extrajudicial demand (Dole vs. Maritime, 148 SCRA 118).
lnasmuch S-neither the Civil Code nor the Code of Commerce
state a specific prescriptive period on the matter, the Carriage of
Goods by Sea Act (COGSA) -- which provides for a one-year period
of limitation on claims for loss of, or damage to, cargoes sustained
during transit - may be applied suppletorily. This one-year
prescriptive period also applies to the insurer of the goods. A
stipulation reducing the one-year period is null and void (Loadstar vs.
cA, 315 SCRA 339).
Bar Question: What is the prescriptive period for actions invotving
lost or damaged cargo under the Carriage of Goods by Sea Act?
(1995 Bar)
Answer: One (1) year after delivery of the goods or the date when
the goods should have been delivered. (Section 3 [6], COGSA)
Bar Question: Under the Carriage of Goods by Sea Act, the action
to enforce the carrier's liability in respect fo /oss or damage must be
brought within the prescriptive per'rcd of one year. Does the said
CARRIAGE OF GOODS BY SEA ACT {0I
period of prescription apply to actions for damages arislng fnnt
misdelivery or conversion of the goods involved? Why? (1969 Bar)
Answer: No, the one year period of prescription under the Carrlago
of Goods by Sea Act does not apply fo cases of misdelivary or
conversion of the goods, but to rnsfances where the goods were logl
or damaged in transit as a conseguence of maritime hazards.
Bar Question: AA entered into a contract with BB for the tatter to
transport ladies wear from Manila to France with transhipment via
Taiwan. Somehow the goods were not loaded in Taiwan on time;
hence, these arrived in France "off-season." AA was only paid for
one-half (1/2) the value by the buyer. AA claimed damages from BB.
BB invoked prescription as a defense under the Carriage of Goods
by Sea Act. Considering the 'Ioss of value" of the ladies wear as
claimed by AA,ls BBb defense tenable? Explain. (2010 Bar)
Answer: No, the one year period of prescription under the Carriage
of Goods by Sea Act does not apply fo cases of misdelivery or
conversion of the goods, but to rnstances where the goods were lost
or damaged in transit as a consequence of maritime hazards. The
one year period of limitation is designed to meet the exigencies of
maritime hazards. In a case where the goods shipped were neither
lost nor damaged in transit but were, on the contrary, delivered in
port to someone who claimed to be entitled thereto, the situation is
different and the special need for the short period of limitation in
cases of /oss or damage caused by maritime perils does not obtain
(See Mitsuivs. CA, supra).
Bar Question: A local consignee sought to enforce judicially a claim
against the carrier for /oss of a shipment of drums of lubricating oil
from Japan under the Carriage of Goods by Sea Act (COGSA) after
the carrier had rejected its demand. The carrler pleaded in its
Answer the affirmative defense of prescription under the provisions
of said Act inasmuch as the suft uvas brought by the consignee after
one (1) year from delivery of the goods. ln turn, the consignee
contended that the period of prescription was suspended by the
written extrajudicial demand it had made against the carrier within
the one'year period, pursuant to Article 1155 of the Civil Code
providing that the prescription of actions is interrupted when there is
a written extrajudicial demand by the creditors.
a. Has the action, in fact, prescribed? Why?
402 CARRIAGE OF GOODS BY SEA ACT
b. lf the consignee's action were predicated on misdelivery or
conversion of the goods, would your answer be the same? Explain
briefly. (1992 Bar)
Answer: (a) Yes, the action had prescribed. The Carriage of Goods
by Sea Act requires the consignee to file suit within one year from
receipt of the last package. This period is not interrupted by the
sending of a letter of demand to the carrier.
(b) My answer would not be the same. lf the action is predicated
on misdelivery or conversion of the goods, the one year period will
not apply. The ten year prescriptive period under the Civil Code may
be invoked.
Bar Question: AA entered into a contract with BB thru CC to
transport ladies' wear from Manila to France with transhipment at
Taiwan. Somehow the goods were not loaded at Taiwan on time.
Hence, when the goods arrived in France, they arrived "off-season"
and AA was paid only for one-half the value by the buyer; AA
claimed damages from the shipping company and its agent. The
defense of the respondents was prescription.
Considering that the ladies' wear suffered "/oss of value," as
claimed by AA, should the prescriptive period be one year under the
Carriage of Goods by Sea Act, or ten years under the Civil Code?
Explain briefly. (200a Bar)
Answer: The prescriptive period should be ten (10) years underthe
Civil Code. The one year period under the Carriage of Goods by
Sea Act does not apply because there was no /oss rn fhrs case.
There was actual delivery. Ihe /oss in the value of the goods is not
the "loss" referred to in the law.
Bar Question: The ptaintiff, as subrogee of the consignee, sued the
defendant, a contractor and operator of arrastre seruice in the poft of
Manila, for its failure to deliver one case of merchandise consisting of
electronic spare parts shipped from Europe which it received from
the carrier. The action was'brought within the period of 4 years, but
after the lapse of one year from the date when the goods should
have been delivered. lnvoking the provisions of the Carriage of
Goods by Sea Act, the lower court dlsmissed the complaint on the
ground that it was filed after one year from the time that the cause of
action accrued.
Was the lower court justified in dismissing the complaint? Why?
(1978 Bar)
CARRIAGE OF GOODS BY SEA ACT 403
Answer: No, the lower court was not justified in dismissinQ the
complaint by invoking the one year period under the Carriage of
Goods by Sea Act.
Arrastre operations are not maritime transactions and the
provisions of the Carriage of Goods by Sea Act, which apply to
maritime carriage of goods to and from foreign pofts, do not apply to
arrastre servrces.
lV. Limitation of Liability
ln the performance of its obligations, an arrastre operator should
observe the same degree of diligence as that required of a common
carrier and a warehouseman. Being the custodian of the goods
discharged from a vessel, an arrastre operator's duty is to take good
care of the goods and to turn them over to the party entitled to their
possession.
ln a claim for loss filed by the consignee (or the insurer), the
burden of proof to show compliance with the obligation to deliver the
goods to the appropriate party devolves upon the arrastre operator.
Since the safekeeping of the goods is its responsibility, it must prove
that the losses were not due to its negligence or to that of its
employees. To prove the exercise of diligence in handling the
subject cargoes, petitioner must do more than merely show the
possibility that some other party could be responsible for the loss or
the damage. lt must prove that it exercised due care in the handling
thereof. Petitioner failed to do this. lnstead; it insists that it be
exonerated from liability because the customs broker's
representative received the subject shipment in good order and
condition without exception (Asian vs. Daehan, 611 SCRA 555).
The arrastre operator, by reason of the payment to it of a
commensurate charge based on the higher declared value of the
merchandise, could and should take extraordinary care of the special
or valuable cargo. What would, indeed, be unfair and arbitrary is to
hold the arrastre operator liable for the full value of the merchandise
after the consignee has paid the arrastre charges only on a basis
much lower than the true value of the goods (lbid.).
When the Bill of Lading does not contain any declaration by the
shipper, the $500 per package limit set in Sec. 4 (5) of the Carriage
of Goods by Sea Act is deemed incorporated in the Bill of Lading,
and if the number of cartons inside a container is mentioned in the
Bill of Lading, the $500 limit per package applies to each carton, not
404 CARRIAGE OF GOODS BY SEA ACT CARRIAGE OF GOODS BY SEA ACT 4lllt

to the container where they are contained (Eastern vs. lAC, 150
scRA 463).
The admiralty law provision that a claim for average should be at
least 5% of the claimant's interest does not apply to carriage of
goods where the parties expressly agree to be bound by the
Carriage of Goods by Sea Act (Eastern vs. Margarine, 93 SCRA
257).
The Carriage of Goods by Sea Act, which is suppletory to the
provisions of the Civil Code, supplements the latter by establishing a
statutory provision limiting the carridr's liability in the absence of a
shipper's declaration of a higher value in the bill of lading - the
provisions on limited liability are as much a part of the bill of lading
as though physically in it and as though placed there by agreement
of the parties (Belgian vs. Phil. First, 383 SCRA 23).
Where the goods are delivered to the arrastre operator in gootl
order, the liability of the carrier under the contract terminates, and lt
cannot be sued for short delivery or damage to the same goodg
subsequentty detivered by, or withdrawn from the arrastre op.erator'E
custody. The provisions of the contract limiting the liability of the
carrier for shortages or damages to the goods as delivered to the
arrastre operator is in accord with the law, and is therefore not
contrary to morals and public policy.'
B, the carrier, is therefore not liable.

When what would ordinarily be considered packages are shipped

in a container supplied by the carrier and the number of such units is
disclosed in the shipping documents, each of those units and not the
container constitutes the "package" referred to in the liability
limitation provision of Carriage of Goods by Sea Act (lbid.).

Bar Question: A, in Holland, shipped on board a yesse/ owned by B,

five hundred cases of canned milk to consignee C in lloilo. Upon
arrival, fhe vdsse/ discharged the canned milk into the custody and
possession of the arrastre operator appointed by the Bureau of
Cus/oms. ln the Bill of Lading, it was stipulated that the yesse/ rs no
longer liable for the cargo upon its delivery to the hands of the
cusfoms authorities. The cargo checker of the arrastre operator
found the cargo to be in good order. Upon delivery to the consignee,
a marine surveyor found twenty cases of milk missing. C sued B for
the value of the twenty missing cases on the ground that under the
contract of carriage, B was obliged to deliver the cargo safely to the
consignee and that the stipulation limiting the liability of the carrier is
contrary to morals and public policy. B disclaims liability for short
delivery. Decide the dispute, with reasons. (1979 Ba)

Answer: B, the carrier, is not liable. Under the Carriage of Goods by

Sea Act, delivery is the discharge or landing of the cargo, and
because the Philippine Tariff and Customs Code prevents direct
delivery of the cargo by the yesse/ to the consignee, delivery of the
good.s to the arrastre operator is considered as delivery to the
consignee.
406 CHAPTER X
WARSAW GONVENTION
l. Applicability
ln international flights where the Philippines is merely one of the
itineraries of the commercial airline, the obligation of the parties is
governed by treaties or other international agreements.
The rights and obligations of the air carrier and the passengers in
international flights are governed by the Convention for the
Unification of Certain Rules Relating to the lnternational Carriage by
Air (Warsaw Convention, for short), signed on October 12, 1929,
coming into force on February 13, 1933, adhered to by the
Philippines on November 9, 1951. This Convention was partly
amended by the Hague Protocol of September 28, 1955, the
Montreal Agreement of 1966, the Guatemala Protocol of 1971 and
Montreal Protocols of 1975 (Alitalia vs. lAC, 192 SCRA 9). On
September 23, 1955, President Ramon Magsaysay issued
Proclamation No. 201, declaring our formal adherence thereto, "to
the end that the same and every article and clause thereof may be
observed and fulfilled in good faith by the Republic of the Philippines
and the citizens thereof." The Convention is thus a treaty
commitment voluntarily assumed by the Philippine government and,
as such, has the force and effect of law in this country (Lhuillier vs.
British, 615 S€RA 380).
The Warsaw Convention to which the Republic of the Philippines
is a party and which has the force and effect of law in this country
applies to all international transportation of persons, baggage or
goods performed by an aircraft gratuitously or for hire. As
enumerated in the Preamble of the Convention, one of the objectives
is to regulate in a uniform manner the conditions of international
transportation by air (American vs. CA, 327 SCRA 482).
The Warsaw Convention is as much a part of Philippine law as the
Civil Code, Code of Commerce and other municipal special laws,
and the provisions therein contained, specifically on the limitation of
carrier's liability, are operative in the Philippines but only in
appropriate situations (Philippine Airlines vs. CA, 257 SCRA 33).
Warsaw Convention denies to the carrier availment of the
provisions which exclude or limit his liability if the damage is caused
by his wilful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is
WARSAW CONVENTION 407
considered to be equivalent to wilful misconduct, or if the damage is
similarly caused by an agent of the carrier acting within the scope of
his employment (Sabena vs. CA, 255 SCRA 38).
The Warsaw Convention seeks to accommodate or balance the
interests of passengers seeking recovery for personal injuries and
the interests of air carriers seeking to limit potential liability. lt
employs a scheme of strict liability favoring passengers and
imposing damage caps to benefit air carriers. The cardinal purpose
of the Warsaw Convention is to provide uniformity of rules governing
claims arising from international air travel; thus, it precludes a
passenger from maintaining an action for personal injury damages
under local law when his or her claim does not satisfy the conditions
of liability under the Convention. Arlicle 19 of the Warsaw
Convention provides for liability on the part of a carrier for "damages
occasioned by delay in the transportation by air of passengers,
baggage or goods." Article 24 excludes other remedies by further
providing that "(1) in the cases covered by articles'18 and 19, any
action for damages, however founded, can only be brought subject
to the conditions and limits set out in this convention." Therefore, a
claim covered by the Warsaw Convention can no longer be
recovered under local law, if the statute of limitations of two years
has already lapsed. Nevertheless, the Warsaw Convention does not
"exclusively regulate" the relationship between passenger and carrier
on an international flight. Thee is a distinction between the (1)
damage to the passenger's baggage, and (2) humiliation he suffered
at the hands of the airline's employees. The first cause of action was
covered by the Warsaw Convention which prescribes in two years,
while the second was covered by the provisions of the Civil Code on
torts, which prescribes in.four years. Similar distinctions were made
in American jurisprudence. lf a passenger was denied access to an
airline flight between New York and Mexico, despite the fact that she
held a confirmed reservation, and claims damages based solely on
the delay she experienced - for instance, the costs of renting a van,
which she had to arrange on her own as a consequence of the delay
- the complaint would be barred by the two-year statute of
limitations. However, where the plaintiff alleged that the airlines
subjected her to unjust discrimination or undue or unreasonable
preference or disadvantage, then the plaintiff may claim purely
nominal compensatory damages for humiliation and hurt feelings,
which are not provided for by the Warsaw Convention. Actions for
damages for the "bumping off itself, rather than the incidental
damages due to the delay, fall outside the Warsaw Convention and
do not prescribe in two years (PAL vs. Savillo, 557 SCRA 66) .
408 WARSAW CONVENTION
When the place of departure and the place of destination in a
contract of carriage are situated within the territories of two High
Contracting Parties, said carriage is deemed an "international
carriage." The High Contracting Parties referred to herein were the
signatories to the WarSaw Convention and those which subsequently
adhered to it (Lhuillier vs. British, 615 SCRA 380).
The attendance of gross negligence (given the equivalent of fraud
or bad faith) holds the common carrier liable for all damages which
can be reasonably attributed, although unforeseen, to the non-
performance of the obligation, including moral and exemplary
damages (lbid.).
While the Warsaw Convention has the force and effect of law in
the Philippines, the same does not operate as an exclusive
enumeration of the instances when a carrier shall be liable for breach
of contract or as an absolute limit of the extent of liability, nor does it
preclude the operation of the Civil Code or other pertinent laws
(United vs. Uy, 318 SCRA 576).
The two (2) year limitation incorporated in the Warsaw
Convention was intended as an absolute bar to suit and not to be
made subject to the various tolling provisions of the laws of the
forum. This therefore forecloses the application of the forum's rules
on interruptioh of prescriptive periods. Article 29, par. (2) was
intended only to let local laws determine whether an action had been
commenced within the two (2) year period (lbid.).
Despite the express mandate of Article 29 of the Warsaw
Convention that an action for damages should be filed within two (2)
years from the arrival at the place of destinatiofi such rule shall not
be applied where the airline employed delaying tactics (lbid.).
The liability of a carrier for the loss, destruction or deterioration of
goods transported to the Philippines from a foreign country, is
governed primarily by the Civil Code not by the Warsaw Convention
which applies only to simple loss of baggage (PAL vs. CA, 207
scRA 100).
An agent is also responsible for any negligence in the
performance of its function and is liable for damages which the
principal may suffer by reason of its negligent act (British vs. CA, 285
scRA 450).
WARSAW CONVENTION 409
Under the Pool Arrangement among different airline companies
pursuant to the lnternational Air Transport Association (IATA)
agreement, member airlines are constituted agents of each other in
the issue of tickets and other matters. A company is bound by the
mistakes of another company which in behalf of the former confirmed
a passenger reservation (lbid.).
Where an airline accepts an unused portion of a conjunction
ticket, enter it in the IATA clearing house and undertakes to transport
the passenger over the route covered by the unused portion of a
conjunction ticket, such airline tacitly recognizes its commitment
under the IATA pool arrangement to act as agent of the principal
contracting airline as to the segment of the trip the former agreed to
undertake. When an airline constitutes itself as an agent of the
principal carrier, its undertaking should be taken as part of a single
operation under the contract of carriage executed by the passenger
and the principal carrier (American vs. CA, 327 SCRA 482).
Suits by a passenger of an international airline must be
prosecuted, under the Warsaw Convention, in any of the following
places, at the option of the plaintiff-passenger: (1) court of the
domicile of the carrier, (2) court of the principal place of business of
the carrier, (3) court where the carrier has a place of business
through which the contract was made, and (4) court of the place of
destination (lbid.).
An air carrier's acquiescence to take the place of the original
designated carrier binds it under the contract of carriage entered into
by the latter, including the determination of the place wherein the
contract was made (lbid.).
The passage issued by KLM provides that the carriage to be
performed thereunder by several successive carriers is to be
regarded as a single operation and as the passenger spouses
bought their tickets from KLM, the latter is responsible for the
conduct of AER Lingus in failing to honor confirmed reservations for
the Barcelona-Lourdes flight (KLM vs. CA, 65 SCRA 237).
According to the doctrine of lex loci contractus, as a general rule,
the law of the place where a contract is made or entered into
governs with respect to its nature and validity, obligation and
interpretation. This has been said to be the rule even though the
place where the contract was made is different from the place where
it is to be performed, and particularly so, if the place of the making
410 WARSAW CONVENTION
and the place of performance are the same. Hence, the court should
apply the law of the place where the airline ticket was issued, when
the passengers are residents and nationals of the forum and the
ticket is issued in such State by the defendant airline (United vs. CA,
357 SCRA 99).
Bar Question: Vivian Martin was booked by PAL, which acted as
ticketing agent of Far East Airlines, for a round trip flight on the
latter's aircraft, from Manila-Hongkong-Manila. The ticket was cut by
an employee of PAL. The ticket showed that Vivian was scheduled
to leave Manila at 5:30 p.m. on 05 January 2002 aboard Far East's
Flight F007. Vivian arrived at the Ninoy Aquino lnternational Airport
an hour before the time scheduled in her ticket, but was told that Far
Easf's Flight F007had left at 12:10 p.m. lt turned that the ticket was
inadvertently cut and wrongly worded. PAL employees manning the
airport's ground services neveftheless scheduled her to fly two hours
later aboard their plane. She agreed and arrived in Hongkong
safely. The aircraft used by Far East Airlines developed engine
trouble, and did not make it to Hongkong but returned to Manila.
Vivian sued both airlines, PAL and Far East, for damages because of
her having unable to take the Far East flight. Could either or both
airlines be held liable to Vivian? Why? (2003 Bar)
Answer: Yes, both airlines can be held liable. Under a general pool
partnership 1greement, the ticket-issuing airline is the principal in a
contract of carriage, while the endorsee-airline is the agent. As
principal, it is liable even when the breach of contract had occurred,
not on its own flight, but on that of another airline. The obligation of
the ticket-issuing airline remained and did not cease, regardless of
the fact that another airline had undertaken to carry the passenger to
one of their destinations. ln the case at bar, Far East was the
carrying agent of PAL, hence PAL cannot evade liability even
though it may have been only a ticket issuer for the flight (See China
vs. Chiok, 407 SCRA 432).
ll. Limitation of Liability
A. Liability to Passengers
Plaintiffs made first class reservations with defendant in its Tokyo-
San Francisco flight. The reservation having been confirmed, first
claqs tickets were subsequently issued in favor of plaintiffs. Through
mistake, however, defendant's agents cancelled the said
reservations. Expecting that some cancellations of bookings would
WARSAW CONVENTION 4il
be made before the flight time, the reservations supervisors decided
to withhold from plaintiffs the information that their reservations had
been cancelled. Upon arrival in Tokyo, defendant informed plaintiffs
that there was no accommodation for them in the first class stating
that they could not go unless they take the tourist class. Due to
pressing engagements in the United States, plaintiffs were
constrained to take the'flight as tourist passengers, but they did so
under protest. Query: Whether defendant acted in bad faith in the
breach of its contract with plaintiffs. Held: ln so misleading plaintiffs
into purchasing first class tickets in the conviction that they had
confirmed reservations for the same, when in fact they had none,
defendant wilfully and knowingly placed itself into the position of
having to breach its aforesaid contracts with plaintiffs should there be
no last minute cancellations by other passengers before flight time,
as it turned out in this case. Such actuation of defendant may
indeed have been prompted by nothing more than the promotion of
its self-interest in holding on the plaintiffs as passengers in its flight
and foreclosing their chances to seek the services of other airlines
that may have been able to afford them first class accommodations.
All the same, in legal contemplation, such conduct already amounts
to action in bad faith (Lopez vs. Pan American, 16 SCRA 431).
The misconduct, disrespect, indignities and injurious language of
a common carrier's employees entitles the passenger to damages
(Zulueta vs. Pan-Am,43 SCRA 397).
Mere breach of contract entitles the passenger to damages.
Exemplary damages are recoverable if the breach is tainted with bad
faith. Responsibility of the carrier for the safety of passengers
cannot be dispensed with by notice and stipulations (Zulueta vs. Pan
Am,49 SCRA 1).
Where a passenger with a confirmed ticket is bumped off by the
airline to give way to another passenger, there is a breach of
contract entitling the passenger to actual, moral and exemplary
damages (KAL vs..CA,154 SCRA 211).
Airline passengers have every right to decline an upgrade and
insist on the accommodation they had booked, and if an airline
insists on the upgrade, it breaches its contract of carriage with the
passengers (Cathay vs. Vasquez, 399 SCRA 207).
It is clear from Sec. 3 of Economic Regulation No. 7 of the Civil
Aeronautics Board that an overbooking that does not exceed ten

412 WARSAW CONVENTION
percent of the seating capacity of the aircraft is not considered
deliberate and therefore does not amount to bad faith (lbid.).
lf the breach is not wanton, fraudulent, oppressive or malevolent,
exemplary damages are not compensable (China vs. CA, 211 SCRA
Be7).
Moral damages are recoverable only when the passenger dies, or
even if alive, where the carrier acted in bad faith (Sabena vs. CA,
171 SCRA 620).
Where the date and erroneous hour of departure of a passenger
are reconfirmed by the common carrier (plane) and the passenger is
bumped off due to his arriving in the airport 1 and 112 hours before
the erroneous departure hour, there is gross negligence by the
carrier entitling the passenger to actual, moral and exemplary
damages. No nominal damages can be awarded as they cannot
coexist with actual damages (Armovit vs. CA, 184 SCRA 476).
Nominal damages are adjudicated in order that a right of a
plaintiff, which has been violated or invaded by the defendant, may
be vindicated or recognized and not for the purpose of indemnifying
any loss suffered by him. The court may award nominal damages in
every obligation arising from any source enumerated in Article 1157,
or in every cfse where any property right has been invaded (JAL vs.
cA,294 SCRA 1 9)
lf a passenger fails to take the standard procedure of confirming
his ticket, after a two day stopover in a city, the airline cannot be
faulted for the passenger's negligence (Sarreal vs. JAL, 207 SCRA
35e)
Where a passenger was fully aware of the need to send a letter to
a particular office of an airline for the extension of the period of
validity of his ticket, he cannot subsequently use what was done by
airline agents, who acted without authority, in confirming his flights
(Cervantes vs. CA, 304 SCRA 25)
The acts of an agent beyond the scope of his authority do not bind
the principal, unless the latter ratifies the same expressly and
impliedly. Furthermore, when the third person knows that the agent
was actin$ beyond his power or authority, the principal cannot be
held liable for the acts of the agent. lf the said third person is aware
of such limits of authority, he is to blame, and is not entitled to
WARSAW CONVENTION 4t.r
recover damages from the agent, unless the latter undertool< to
secure the principal's ratification (lbid.).
ln awarding moral damages for breach of contract of carriage, thl
breach must be wanton and deliberately injurious or the one
responsible acted fraudulently or with malice or bad faith (lbid.).
To warrant the award of exemplary damages, the wrongful act
must be accompanied by bad faith, and the guilty party acted in a
wanton, fraudulent, reckless or malevolent manner (lbid.).
The private respondents were not able to prove that they wero
subjected to coarse and harsh treatment by the ground crew ol
United Airlines. Neither were they able to show that there was bad
faith on part of the carrier airline. Hence, the award of moral and ,
exemplary damages is improper. Corollarily, the award of attorney's
fees is, likewise, denied for lack of any legal and factual basis
(United vs. CA, 357 SCRA 99).
Due to the nature of their business, airline companies must not
merely give cursory instructions to their personnel to be more
accommodating towards customers, passengers and the general
public; they must require them to be so (China vs. Chiok, 407 SCRA
432).
B. Liability for Baggage
Contracts of adhesion wherein one party imposes a ready made
form of contract on the other are not entirely prohibited. The one who
adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent. While it may be true that petitioner had not signed
the plane ticket, he is nevertheless bound by the provisions thereof.
Such provisions have been held to be a part of the contract of
carriage, and valid and binding upon the passenger regardless of the
latter's lack of knowledge or assent to the regulation (Telengtan vs.
cA, 236 SCRA 617).
A passenger whose baggage was lost by the airline is entitled to
recover damages allowed by Philippine laws. The Warsaw
Convention provisions on $20 recovery per package, presupposes
absence of misconduct, bad faith, recklessness or otherwise
improper conduct. The passenger can recover under both
(Lufthansa vs. lAC, 207 SCRA 350).
414 WARSAW CONVENTION
lf the contents of a baggage lost by an airline is not declared, the
Warsaw Convention allows a recovery of $20 per kilo, but if the
baggage is unchecked, a recovery up to $400 is allowed (Pan
American vs. Rapadas, 209 SCRA 67).
Where, however, the baggage of the passenger was lost but later
on found, preventing the passenger from participation in a special
technical convention to which the passenger was specially invited,
she is entitled to nominal damages (Alitalia vs. lAC, 192 SCRA 9).
It is the duty of the carrier to inquire as to the nature of the articles
shipped and their value before consenting to carry them, and its
failure cannot defeat the shipper's right to recover the full value of
the package if lost, in the absence of a showing of fraud or deceit on
the part of the shipper (Saludo vs. CA, 207 SCRA 498).
A claim for lost baggage, if acknowledged by the carrier inspite of
the fact that no baggage tags or checks could be presented by the
passenger, entitles the passenger to recovery under the provisions
of the Warsaw Convention (PAL vs. CA, 214 SCRA262).
ln determining the amount of compensatory damages in breach of
contract involving misplaced luggage, it is vital that the claimant
satisfactorily prove during the trial the existence of the factual bases
of the damages and its causal connection to defendant's acts (British
vs. CA, 285 SCRA 450)
An air carrier is not liable for the loss of baggage in an amount in
excess of the limits specified in the tariff which was filed with the
proper authorities, such tariff being binding on the passenger
regardless of the passenger's lack of knowledge thereof or assent
thereto (lbid.).
Admittedly, in a contract of air carriage a declaration by the
passenger of a higher value is needed to recover a greater amount.
Article 22(1) of the Warsaw Convention, provides as follows: "xxx (2)
ln the transportation of checked baggage and goods, the liability of
the carrier shall be limited to a sum of 250 francs per kilogram,
unless the consignor has made, at the time the packages was
handed over to the carrier, a special declaration of the value at
delivery and has paid a supplementary sum not exceeding the
declared sum, unless he proves that the sum is greater than the
actudl value to the consignor at delivery." (lbid.).
WARSAW CONVENTION 415
When an airline submits for summary judgment the matter of its
liability only to the maximum allowed is Section 22(2) of the Warsaw
Convention, it is deemed to have hypothetically admitted arguendo
that the articles claimed were lost, but did not waive the presentation
of evidence that it is not in fact liable for the alleged loss (Northwest
vs. CA, 284 SCRA 409)
The Warsaw Convention should be deemed a limit of liability only
in these cases where the cause of death or injury to person, or
destruction, loss or damage to property or delay in its transport is not
attributable to or attended by any wilful misconduct, bad faith,
recklessness, or otherwise improper conduct on the part of any
official or employee for which the carrier is responsible, and there is
otherwise no special or extraordinary form of resulting injury (lbid.).
Where in breaching the contract of carriage the defendant airline
is not shown to have acted fraudulently or in bad faith, liability for
damages is limited to the natural and probable consequences of the
breach of obligation which the parties had foreseen or could have
reasonably foreseen. ln that case, such liability does not include
moral and exemplary damages (Tan vs. Northwest, 327 $CRA 263).
Bar Question: A shipped thirteen (13) pieces of luggage through
LG Airlines from Teheran to Manila as evidenced by LG Air Waybill
which disclosed that the actual gross weight of the luggage was 180
kilograms. Z did not declare an inventory of the contents or the
value of the thirteen (13) pieces of luggage. After the said pieces of
luggage arrived in Manila, the consignee was able to claim from the
cargo broker only twelve (12) pieces, with a total weight of 174
kilograms. X advised the airlines of the /oss of one of the thirteen
(13) pieces of luggage and of the contents thereof. Efforts of the
airlines to trace the missing luggage were fruitless. Srnce the airlines
failed to comply with the demand of X to produce the missing
luggage, X filed an a'ction for breach of contract with damages
against the LG Airlines. ln its answer, LG Airlines alleged that the
Warsaw Convention which limits the liability of the carrier, if any, with
respect to cargo to a sum of $20 per kilo or $9.07 per pound, unless
a higher value is declared in advance and additional charges are
paid by the passenger and the conditions of the contract as set forth
in the air waybill, expressly subject the contract of the carriage of
cargo to the Warsaw Convention. May the allegation of LG Airlines
be sustained? Explain. (1993 Bar)
Answer: LG Airlines may be sustained.
416 WARSAW CONVENTION
X is bound by the Warsaw Convention which provides that in the
transportation of checked baggage and goods, the liability of the
carrier shall be limited to a sum specified therein unless the
consignor has made, at the time the package was handed over to
the carrier, a special declaration of the value at delivery and has paid
a supplementary sum not exceeding the declared sum, unless he
proves that the sum ls greater than the actual value to the consignor
at delivery. ln the case at bar, X did not make such declaration nor
paid the supplementary sum (See British vs. CA, supra).
lll. Wilful Misconduct
The Convention's provisions do not regulate or exclude liability for
other breaches of contract by the carrier or misconduct of its officers
and employees, or for some particular or exceptibnal type of
damage. Neither may the Convention be invoked to justify the
disregard of some extraordinary sort of damage resulting to a
passenger and preclude recovery therefor beyond the limits set by
said Convention. lt does not regulate, much less exempt, the carrier
from liability for damages for violating the rights of its passengers
under the contract of carriage, especially if wilful misconduct on the
part of the carrier's employees is found or established (United vs. Uy,
318 SCRA 576).
A cause oT action arising from the slashing and loss of personal
effects by an airline passenger is well within the bounds of the
Warsaw Convention while a cause of action arising from the shabby
and humiliating treatment received from the airline employees is not
(rbid.).
The liability limit for baggage lost is set at $1,000 and for the
death of a passenger at $100,000 under the Warsaw Convention
and the subsequent amendatory treaties, but the carrier cannot avail
of this limitation if the breach is attended by wilful misconduct, bad
faith, recklessness or improper behavior on the part of any official or
employee for which the carrier is responsible. lf there is satisfactory
evidence of malice or bad faith by the airline's officers and
employees, an air carrier may be sentenced to pay not only
compensatory but also moral and exemplary damages, and
attorney's fees (lbid.).
CHAPTER XI 411
CORPORATION CODE
L The Corporation Code of the Philippines
The New Corporation Code (N.C.C.) was approved on May 1,
1980, and under its Section 149 took effect also on the said date, as
Batas Pambansa Blg. 68. lt supplanted Act 1459.
ll. Nature
A. Defined
Bar Question: Define corporation. (1954, 1952 Bar)
Answer: Corporation is an arlificial being created by operation of law
having the right of succession, and the powers, attributes and
properties expressly authorized by law and incident to its existence.
(Note: This is still the statutory definition of a corporation even under
the N.C.C. [Section 2]).
A corporation is an artificial being vested by law with a personality
distinct and separate from those of the persons composing it as well
as from that of any other entity to which it may be related (General
vs. Alsons, 513 SCRA 225).
A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct legal
personality. ln organizing itself as a collective body, it waives no
constitutional immunities and prerequisites appropriate to such body.
As to its corporate and management decisions, therefore, the State
will generally not interfere with the same. Questions of policy and of
management are left to the honest decision of the 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 order are not reviewable by the courts
(Cua vs. Tan, 607 SCRA 645).
A mining company has no valid grounds to engage in the highly
speculative business of urban real estate development (Heirs vs. CA,
371 SCRA 587).
418 CORPORATION CODE
A corporation which hires optometrists who practice thelr
profession in the course of their employment in its optical shops,
does not translate into a practice of optometry by the corporation
itself. The corporation was created and organized for the purpose of
conducting the business of selling optical lenses or eyeglasses,
among others. lts clientele understandably would largely be
composed of persons with defective vision and thus need the proper
lenses to correct the same and enable them to gain normal vision.
The determination of the proper lenses to sell to the corporation's
clientele entails the employment of optometrists who have been
precisely trained for that purpose. The corporation's business is not
the determination itself of the proper lenses needed by persons with
defective vision. lts business, rather, is the buying and importing of
eyeglasses and lenses and other similar or allied instruments from
suppliers thereof and selling the same to consumers (Acebedo vs.
cA, 329 SCRA 315).
The corporation was not engaged in the practice of optometry
because there is no public policy forbidding the commercialization of
optometry, as in law and medicine, and recognized the general
practice of makinSj it a commercial business by advertising and
selling eyeglasses. ln analogy, it is noteworthy that private hospitals
are maintained by corporations incorporated for the purpose of
furnishing medical and surgical treatment. ln the course of providing
such treatm6nts, these corporations employ physicians, surgeons
and medical practitioners, in the same way that in the course of
manufacturing and selling eyeglasses, eye frames and optical
lenses, optical shops hire licensed optometrists to examine,
prescribe and dispense ophthalmic lenses. No one has ever
charged that these corporations are engaged in the practice of
medicine. There is indeed no valid basis for treating corporations
engaged in the business of running optical shops differently (lbid.).
National sports associations may be accorded corporate status,
but such does not automatically take place by the mere passage of
R.A. 3135 and P.D, 604. The Philippine Football Federation (PFF)
did not come into existence upon the passage of these laws.
Nowhere can be found in R.A.3135 or P.D.604 any provision
creating the PFF. These laws merely recognized the existence of
national sports associations and provided the manner by which these
entities may acquire juridical personality. The above cited provisions
require that before an entity may be considered as a national sports
association, such entity must be recognized by the accrediting
organization, the Philippine Amateur Athletic Federation under R.A.
CORPORATION CODE 419
3135, and the Department of Youth and Sports Developrnent under
P.D. 604. Accordingly, the PFF is not a national sports association
within the purview of the aforementioned laws and does not have
corporate existence of its own (lnternational vs. CA, 343 SCRA 674).
The legislature intended Republic Act No. 6971 (An Act to
Encourage Productivity and Maintain lndustrial Peace by Providing
lncentives to Both Labor and Capital) to cover only government-
owned and controlled corporations incorporated under the general
corporation law. Since the Home Development Mutual Fund is a
government-owned and controlled corporation performing proprietary
functions with original charter or created by special law, it is covered
by the Civil Service and, therefore, excluded from the coverage of
Republic Act No. 6971 (Home vs. Commission, 432 SCRA 126).
The National Development Corporation and the Polytechnic
University of the Philippines have their respective charters and
therefore each possesses a separate and distinct individual
personality. Beyond cavil, a government owned and controlled
corporation has a personality of its own distinct and separate from
that of the government (Polytechnic vs. CA, 368 SCRA 691).
It has been settled in Philippine National Construction Corporation
(PNCC) is an acquired asset corporation and not a government-
owned and/or controlled corporation (GOCC). PNCC did not lose its
status as a private corporation upon acquisition by the government
through GFls of the majority of its shares of stock. The
determination that PNCC is an acquired asset corporation removed it
from the category of a GOCC. Thus, while the SEC has no
jurisdiction over GOCCs with original charter or created by special
law primarily because they are governed by their charters, it retains
jurisdiction over government-acquired asset corporations. Therefore,
the SEC may compel PNCC to hold a stockholders' meeting for the
purpose of electing members of the latter's board of directors
(Cuenca vs. Atas, 535 SCRA 49).
B. Attributes
1. In General
a. Personality distinct from the persons composing it
b. Perpetual succession
C. Acquisition of property, contracting obligations, and bringing of
suits
420 CORPORATION CODE
d. Receipt and enjoyment in common of privileges and immunities
2. Particular Attributes
a. Distinct Personality A corporation is a creature without any
existence until it has
-
received the imprimatur of the state acting
according to law. lt is logically inconceivable therefore that it will
have rights and privileges of a higher priority than that of its creator.
More than that, it cannot legitimately refuse to yield obedience to
acts of its state organs, certainly not the judiciary, whenever called
upon to do so. A corporation is not in fact and in reality a person, but
the law treats it as though it were a person by process of fiction, or
by regarding it as an artificial person distinct and separate from its
individual stockholders (Tayag vs. Benguet, 26 SCRA 242).
The first consequence of the doctrine of legal entity of the
separate personality of the corporation is that a corporation may not
be made to answer for acts and liabilities of its stockholders or those
of legal entities to which it may be connected or vice versa.
A corporation has a personality distinct and separate from its
individual stockholders or members and from that of its officers who
manage and run its affairs. The rule is that obligations incurred by
the corporatioq acting through its directors, officers and employees,
are its sole liabilities. Thus, property belonging to a corporation
cannot be attached to satisfy the debt of a stockholder and vice
versa, the latter having only an indirect interest in the assets and
business of the former (Delima vs. Gois, 554 SCRA 731).
A corporation, upon coming to existence, is invested by law with a
personality separate and distinct from those of the persons
composing it. Thus, obligations incurred by corporate officers, acting
as corporate agents, are not theirs but direct accountabilities of the
corporation they represent. Solidary liability on the part of corporate
officers may at times attach, but only under exceptional
circumstances, such as when they act with malice or in bad faith
(Edsa vs. BF, 556 SCRA 25).
A corporation is an artificial being created by operation of law. lt
possesses the right of succession and such powers, attributes and
properties expressly authorized by law or incident to its existence
(Sarona vs. NLRC., 663 SCRA 394; General vs. Alsons, 513 SCRA
237).
CORPORATION CODE 421
A corporation has a personality separate and distinct from that of
its officers and stockholders. Officers of a corporation are not
personally liable for their acts as such officers unless it is shown that
they have exceeded their authority (Prudential vs. Alviar, 464 SCRA
353).
As an exception, directors or officers are'personally liable for the
corporation's debts only if they so contractually agree or stipulate
(Tupaz vs. CA, 475 SCRA 398).
ln labor cases, corporate directors and officers may be held
solidarily liable with the corporation for the termination of
employment if done with malice or in bad faith (Petron vs. NLRC,
505 SCRA 596). Bad faith does not connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity
and conscious doing of wrong; it means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of
fraud (Elcee vs. NLRC, 512 SCRA 602). Bad faith is a state of mind
affirmatively operating with furtive design or with some motive of self-
interest or ill will or for ulterior purpose (Phil. American vs. Gramaje,
442 SCRA274).
There is solidary liability of the officers with the company when
the obligation expressly so states, when the law so provides, or
when the nature of the obligation so requires (Alba vs. Yupangco,
622 SCRA 503).
A corporation is a juridical person, separate and distinct from its
stockholders. Being a juridical entity, a corporation may act through
its board of directors, as provided in Section 23 of the Corporation
Code of the Philippines. The corporation can also act through its
corporate officers who may be authorized either expressly by the by-
laws or board resolutions or impliedly such as by general practice or
policy or as are implied from express powers. The general principles
of agency govern the relation between the corporation and its
officers or agents. When authorized, their acts can bind the
corporation. Conversely, when unauthorized, their acts cannot bind
it. However, the corporation may ratify the unauthorized act of its
corporate officer. Ratification means that the principal voluntarily
adopts, confirms and gives sanction to some unauthorized act of its
agent on its behalf. lt is this voluntary choice, knowingly made,
which amounts to a ratification of what was theretofore unauthorized
and becomes the authorized act of the party so making the
ratification. The substance of the doctrine is confirmation after
422 CORPORATION CODE
conduct, amounting to a substitute for a prior authority. Ratification
can be made either expressly or impliedly. lmplied ratification may
take various forms or acquiescence, acts showing
approval or adoption - oflikethesilence
act, or acceptance and retention of
benefits flowing therefrom (Yasuma vs. Heirs, 499 SCRA 466).
Bar Question: [lelson owned and controlled Sonnel Construction
Company. Acting for the company, Ne/son contracted the
construction of a building. Without first installing a protective net atop
the sidewalks adjoining the construction sife, the company
proceeded with the construction work. One day a heavy piece of
lumber fell from the building. lt smashed a taxicab which at that time
had gone offroad and onto the sidewalk in order to avoid the traffic.
The taxicab passenger died as a result.
a) Assume that the company had no more accorJnt and property in
its name. As counsel for the heirs of the victim, whom will you sue for
damages, and what theory will you adopt?
b) lf you were the counsel for Sonnel Construction, how would you
defend your client? What would be your theory? Q008 Bar)
Answer: a) I would sue Ne/son. /f ls a fundamental principle of
corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be
connected. However, this separate and distinct personatity of a
corporation is Tnerely a fiction created by law for convenience and to
promote justice. Hence, when the notion of separate juridical
personality iS used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat labor
laws, this separate personality of the corporation may be disregarded
or the veil of the corporate fiction pierced. Ihis is true likewise when
the corporation is merely an adjunct, a busrness conduit or an alter
ego of another corporation. The corporate mask may be lifted and
the corporate veil may be pierced when a corporation is but the alter
ego of a person or another corporation. (Heirs vs. CA, 537 SCRA 96)
b) I would protect the interests of my client by attributing the liability
to the contractor, Ne/son. Srnce Sonnel is not guilty of any fraud or
negligence in undertaking the construction of the building, being a
mere client of the contractor, there can be no liability attributed to the
company. The fact that Nelson is the owner of the company is of no
moment because of the separate and distinct personality of
corporations and their stockholders.
Shareholders are not owners of corporate property which are
owned by the corporation. Accordingly, the property of the
CORPORATION CODE 423
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporation's board of directors (San Juan vs.
cA, 296 SCRA 631).
The distinction between the title of a corporation, and the interest
of its members or stockholders in the property of the corporation, is
familiar and well-settled. The ownership of that property is in the
corporation, and not in the holders of shares of its stock. The interest
of each stockholder consists in the right to a proportionate part of the
profits whenever dividends are declared by the corporation, during its
existence, under its charter, and to a like proportion of the property
remaining, upon the termination or dissolution of the corporation,
after payment of its debts (People vs. Fernandez,452 SCRA 736).
The suit against certain shareholders cannot ipso facto be a suit
against the unimpleaded corporation itself without violating the
fundamental principle that a corporation has a legal personality
distinct and separate from its stockholders (PCGG vs.
Sandiganbayan, 290 SCRA 639).
Being an officer or a stockholder does not make one's property
the property also of the corporation, for they are separate entities
(Traders vs. CA, 177 SCRA 7BB).
The interest of stockholders in corporate property is purely
inchoate, and will not entitle them to intervene in a litigation involving
corporate property (Saw vs. CA, 195 SCRA 740).
The fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated
as one entity. lf used to perform legitimate functions, a subsidiary's
separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary, shall be confined to those
arising from their respective businesses (Pantranco vs. NLRC, 581
SCRA 598). A corporation has a separate personality distinct from
its stockholders and other corporations to which it may be
conducted. Any claim or suit of the parent corporation cannot be
pursued by the subsidiary based solely on the reason that the former
owns the majority or even the entire stock of the latter (Borromeo vs.
cA, 550 SCRA 269)
The award of moral damages to corporations is not a hard and
fast rule. lndeed, while the Court may allow the grant of moral

424 CORPORATION CODE
damages to corporations, it is not automatically granted; there must
still be proof of the existence of the factual basis. of the damage and
its causal relation to the defendant's acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the wrongdoer
(Crystal vs. BPl, 572 SCRA 697).
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. The Court's statement that "a
corporation may have a good reputation which, if besmirched, may
also be a ground for the award of moral damages" is an obiter
dictum. Nevertheless, the claim for moral damages falls under item 7
of Article 2219 of the Civil Code. This provision expressly authorizes
the recovery of moral damages in cases of libel, slander or any other
form of defamation. Article 2219(7) does not qualify whether the
plaintiff is a natural or juridical person. Th,erefore, a juridical person
such as a corporation can validly complain for libel or any other form
of defamation and claim for moral damages (Filipinas vs. Ago, 448
scRA 413).
For breach of the fiduciary duty required of a bank, a corporate
client may claim such damages when its good reputation is
besmirched by such breach, and social humiliation results therefrom
(rbid.)
The statement that a corporation may recover moral damages if it
has a good reputation that is debased, resulting in social humiliation,
is an obiter dictum (ABS-CBN vs. CA, 301 SCRA 572).
As a rule, a corporation is not entitled to moral damages because,
not being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish
and moral shock. The only exception to this rule is when the
corporation has a reputation that is debased, resulting in its
humiliation in the business realm. But in such a case, it is imperative
for the claimant to present proof to justify the award. lt is essential to
prove the existence of the factual basis of the damage and its causal
relation to petitioner's acts (Meralco vs. T.E.A.M., 540 SCRA 62).
When payment on the delivered steel bars was demanded,
of complying with his obligation, denied having
petitioner, instead
"tcry
CORPORATION CODE {ll
transacted with private respondents. Such cold refusal to pay f lU*
debt amounts to a breach of contract in bad faith. Hence,.th6 Ofdff
to pay moral damages is in accordance with law, but only with rcAlf{
to respondent individual and not to respondent corporation. A
corporation cannot suffer nor be entitled to moral damages (LascenQ
vs. Universal, 431 SCRA 248).
lf an award is due a corporation from a party who has equity ln
such corporation, the same should be given sans deduction in view
of the doctrine that a corporation has a personality separate and
distinct from its individual stockholders or members (APT vs. CA,
300 scRA 579).
Since a corporation is an artificial person, it must have an officer
who can be presumed to be the employer, being the "person acting
in the interest of the employer" -- the corporation, in the technical
sense only, is the employer. The manager of the corporation falls
within the meaning of an "employer" as contemplated by the Labor
Code, who may be held jointly and severa{ly liable for the obligations
of the corporation to its dismissed employees (NYK vs. NLRC, 397
scRA 607).
Section 1, Rule 3 of the Rules of Court provides that only natural
or juridical persons or entities authorized by law may be parties to a
civil action. Under the Civil Code, a corporation has a legal
personality of its own (Article 44), and may sue or be sued in its
name, in conformity with the laws and regulations of its organization
(Article 46). Additionally, Article 36 of the Corporation Code similarly
provides, "Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity: (1) To
sue and be sued in its corporate name."
Bar Question: ln the complaint filed by XYZ Corporation, lfs
President alleged that he suffered mental anguish, fright, social
humiliation and serious anxiety as a result of the tortious acfs of ABC
Corporation. ln its counterclaim, ABC Corporation claimed to have
suffered moral damages due to besmirched reputation or goodwill.
1) May XYZ Corporation recover moral damages based on the
allegations in the complaint?
2) May ABC Corporation recover moral damages? Give reasons for
your answer. (1998, 1978, 1955 Bar)
Answer: 1) XYZ Corporation, by reason of its being a juridical
person, cannot possibly experience physical suffering, mental
426 CORPORATION CODE
anguish, fright, serious anxiety, wounded feelings, moral shock or
social humiliation.to entitle it to a recovery for moral damages,
because the above consequences can Qe suffered, inflicted, or'
experienced by naturalpersons only. Hence XYZ Corporation cannot
recover moral damages for the sufferings of its President.
Ihis is without prejudice to the President of XYZ Corporation filing
a suit in his own right and behalf, for recovery of moral damages
against ABC Corporation for the latter's tortious acts.
2) On the other hand, a corporation may have established a
reputation of its own, and created goodwill in the course of its
busrness operations over the years. Ihese are.its assefs, accruing to
it as a juridical person. Hence, if they get besmirched, the
corporation has a cause of action against the offender.
I submit therefore, that ABC Corporation may file a counterclaim
for moral damages, due to its besmirched reputation and goodwill.
Bar Question: PR Corporation owns a beach resort with several
cottages. Jaime, the President of PR, occupied one of the cottages
for residential purposes. After Jaime's term expired, PR wanted to
recover possession of the cottage. Jaime refused to surrender the
cottage, contending that as a stockholder and formqr President, he
has a right fo possess and enjoy the properties of the corporation.
ls Jaime's contention correct? Explain. (2000, 1996 Bar)
Answer: Jairie's contention is not correct. Jaime may have been
the President of the corporation, but that does not entitle him to
ownership of properties belonging to the corporation.
Propefties registered in the name of the corporation are owned by
it as an entity separate and distinct from its members. While shares
of stock constitute personal property, they do not represent property
of the corporation. The corporation has property of its own which
consisfs chiefly of real esfafe. A share of stock only typifies an
aliquot part of the corporation's property, or the right to share in its
proceeds to that extent when distributed according to law and equity,
but its holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite
portion of its propefty or assefs. The stockholder is not a co-owner
or tenant in common of the corporate property (See Rebecca vs. CA,
211 SCRA470).
Bar Question: Marulas Creative Technology lnc., an e-buslness
enterprise engaged in the manufacture of computer multimedia
accessorles, rents an office and store space at a commercial building
owned by X. Being a start-up company, Marulas enioyed some
CORPORATION CODE 427
leniency in its rent payments; but after three years, X put a stop to it
and asked Marulas president and general manager, Y, who is a
stockholder, to pay the back rentals amounting to a hundred
thousand pesos or to vacate the premises at the end of the month.
Marulas neither paid its debt nor vacated the premises. X sued
Marulas and Y for collection of the unpaid rentals, plus interest and
costs of litigation. Will the suit prosper against Marulas? Against Y?
(2000 Bar)
Answer: The suit will prosper against Marulas but not against Y.
Marulas, being the entity that leased the space, shall be liable. Y
has a legal personality separate and distinct from Marulas. By
reason thereof, X can only go after the properties of Marulas but not
the properties of Y.
A corporation is clothed with a personality separate and distinct
from that of the persons composing it. lt may not generally be held
liable for the personal indebtedness of ifs stockholders or those of
the entities connected with it. Conversely, a stockholder cannot be
made to answer for any of its financial obligations even if he should
be its president (See ARB vs. CA, 332 SCRA 427).
1. Doctrine of Piercing the Veil of Gorporate Fiction
Piercing the veil of corporate entity means looking through the
corporate form to the individual stockholders composing it (Robledo
vs. NLRC, 238 SCRA 52).
Under the doctrine of piercing the veil of corporate fiction, the
court looks at the corporation as a mere collection of individuals or
an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when
two business enterprises are owned, conducted and controlled by
the same parties, both law and equity will, when necessary to protect
the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as one
and the same. Whether the separate personality of the corporation
should be pierced hinges on obtaining facts appropriately pleaded or
proved. However, any piercing of the corporate veil has to be done
with caution, albeit the Court will not hesitate to disregard the
corporate veil when it is misused or when necessary in the interest of
justice. After all, the concept of corporate entity was not meant to
promote unfair objectives (Pantranco vs. NLRC, 581 SCRA 598).
428 CORPORATION CODE
It is of no consequence if the other business enterprise is a single
proprietorship and not a corporation. lt is the act of hiding behind the
separate and distinct personality of juridical entities to perpetuate
fraud, commit illegal'activities, and evade one's obligations that the
piercing doctrine was formulated (Sarona vs. NLRC 663 SCRA 394).
The principle of piercing the veil of corporate fiction, and the
resulting treatment of 2 related corporations as one and the same
juridical person with respect to a given transaction, is applied only to
determine established liability; it is not available to confer on the
court jurisdiction it has not acquired over a party not impleaded in a
case. Elsewise put, a corporation not impleaded in a suit cannot be
subject to the court's process of piercing the veil of corporate fiction.
ln that situation, the court has not acquired jurisdiction over the
corporation hence any proceedings taken against that corporation
and its property would infringe on its right to due process (Kukan vs.
reyes, 631 SCRA 596).
The doctrine of piercing the corporate veil applies only in three (3)
basic instances, namely: a) when the separate and distinct corporate
personality defeats public convenience, as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation; b) in
fraud.cases, or when the corporate entity is used to justify a wrong,
protect a fraud, or defend a crime; or c) is used in alter ego cases,
i.e., where a dorporation is essentially a farce, since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another
corporation. ln the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate
officer cannot be made personally liable for corporate liabilities
(Prisma vs. Menchavez, 614 SCRA 590).
Equally well settled is the principle that the corporate mark may
be removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation. For reasons of
public policy and in the interest of justice, the corporate veil will be
unjustifiably impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons (Sarona vs.
NLRC, supra; PNB vs. Andrada, 381 SCRA 244).
Juridical entities have personalities separate and distinct from its
officers and the persons composing it. Generally, the stockholders
and officers are not personally liable for the obligations of the
CORPORATION CODE 429
corporation except only when the veil of corporate fiction is being
used as a cloak or cover for fraud or illegality, or to work injustice
(Bautista vs. Auto, 561 SCRA 223).
The rationale behind piercing a corporation's identity in a given
case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of
those who use the corporate personality as a shield for undertaking
certain proscribed activities (Velarde vs. Lopez, 419 SCRA 422).
The substantial identity of the incorporators of two or more
corporations does not warrantly imply that there was fraud so as to
justify the piercing of the veil of corporate fiction (Martinez vs. CA,
438 SCRA 130).
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and circumstances
of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify
the application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both
corporations
2. ldentity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business (Concept vs. NLRC, 257
scRA 149).
Control, by itself, does not mean that the controlled corporation is
a mere instrumentality or a business conduit of the mother company.
Even control over the financial and operational concerns of a
subsidiary company does not by itself call for disregarding its
corporate fiction. There must be perpetuation of fraud behind the
control or at least a fraudulent or illegal purpose behind the control in
order to justify piercing the veil of corporate fiction (NASECO vs.
National, 629 SCRA 90).
lnstrumentality Rule. Where 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 of the 'instrumentality' may be disregarded. lt must be kept in
mind that the control must be shown to have been exercised at the
time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for
which the complaint is made.
 CORPORATION CODE
The test in determinirig the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff's legal rights;
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of. The absence of any
one of these elements prevents 'piercing the corporate veil (Republic
vs. Estate, 476 SCRA 20).
ln applying the 'instrumentality' or 'alter ego' doctrine, the courts
are concerned with reality and not form, with how the corporation
operated and the individual's relationship to that operation (Heirs vs.
Uy,344 SCRA 238).
The question of whether a corporation is a mere alter ego is purely
one of fact, essentially then a matter of proof (San Juan vs. CA, 296
scRA 631).
Courts are loathe to pierce the fictive veil of corporate personality,
cognizant of the core doctrine in corporation law vesting on
corporations legal personality distinct from their shareholders
(individual or corporate) thus facilitating the conduct of corporate
business. However, fiction gives way to reality when the corporate
personality is foisted to justify wrong, protect fraud, or defend crime,
thwarting the ends of justice. The fiction even holds lesser sway for
subsidiary corporations whose shares are wholly if not almost wholly
owned by its parent company. The structural and systems overlap
inherent in parent and subsidiary relations often render the
subsidiary as mere local branch, agency or adjunct of the forelgn
parent corporation (Mariano vs. Petron, 610 SCRA 4BZ).
a. When Applied
Corporate assets belong to the corporation and stockholders have
no claim on them as owners, but have merely an inchoate right to the
same should any remain upon the dissolution of the corporaiion after
all corporate creditors have been paid. Corporate personality is a
CORPORATION CODE 4lt
shield against the personal liability of its officers or the personal
indebtedness of its stockholders (D.R. vs. Ramos,477 SCRA 18).
The theory of corporate entity was not meant to promote unfair
objectives or otherwise to shield them (Sicam vs. Jorge, 529 SCRA
443).
While a corporation is clothed with a personality separate and
distinct from the persons composing it, the veil of separate corporate
personality may be lifted when it is used as a shield to confuse
legitimate issues, or where lifting the veil is necessary to achieve
equity or for the protection of the creditors (PCIB vs. Custodio, 545
scRA 367).
Under the Labor Code, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon
the guilty officer or officers of the corporation (Reahs vs. NLRC, 271
scRA 247).
Bar Question: what is the doctrine of "piercing the veil of corporate
entity" and in what cases did the Supreme Court apply the said
doctrine? (2006, 1985 Bar)
Answer: The principte requiring the piercing of the corporate veil
mandates courts to see through the protective shroud that
distinguishes one corporation from a seemingly separate one. The
corporate mask may be removed and the corporate veil pierced
when a corporation is the mere alter ego of another- Where badges
of fraud exist, where public convenience is defeated, where a wrong
rs soughf to be iustified thereby, or where- a separate corporate
identity ls used to evade financiat obligations to employees or to third
parties, the notion of separate legal entity should be sef aside and
the factuat truth upheld. when that happens, the corporate character
is not necessarily abrogated. lt continues for other legitimate
objectives. However, it may be pierced in any of the instances cited
in order to promote substantiat iustice (See Pamplona vs. Tinghil,
450 SCRA 421).
The doctrine of piercing the veil of corporate fiction allows the
state to disregard for certain iustifiable reasons the fiction of a
juridical personality for the corporation separate and distinct from the
persons composing it. The Supreme Court applied this doctrine in
the following cases and instances:
1. when used as a cloak to cover fraud, illegality, or it results in
injustice (Velarde vs. Lopez, 419 SCRA 422).
 CORPORATION CODE
2. to defeat public convenience, justify wrong, defend crime
(Secosa vs. Heirs, 433 SCRA 273).
3. where necessary to achieve equity or to protect creditors and
other valid grounds (Guatson vs. NLRC, 230 SCRA 815).
4. where two factories are made to appear as one and used as a
device to defeat the ends of law, or as a shield to confuse legitimate
rssues (Reynolds vs. CA, 169 SCRA 220).
5. where the parent corporation assu/nes complete controt of its
subsidiary's busrness (Phil. Veterans vs. CA, 181 SCRA 669).
6. when the corporation is an alter ego of one of the principat
stockholders (CKH vs. CA, 272 SCRA 333).
The circumstances which are useful in the determination of
whether a subsidiary is but a mere instrumentality of the parent-
corporation, to wit: 1.The parent corporation owns all or most of the
capital stock of the subsidiary; 2. The parent and subsidiary
corporations have common directors or officers, 3. The parent
corporation finances the subsidiary; 4. The parent corporation
subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation; 5. The subsidiary has grossly inadequate
capital; 6. The parent corporation pays the salaries and other
expenses or losses of the subsididry; T. The subsidiary has
substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation; g. ln
the papers of"the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of
the parent corporation, or its business or financial responsibility is
referred to as the parent corporations own; 9. The parent corporation
uses the property of the subsidiary as its own; 10. The directors or
executives of the subsidiary do not act independenfly in the interest
of the subsidiary, but take their orders from the parent corporation;
11. The formal legal requirements of the subsidiary are not observed
(Pantranco vs. NLRC, 581 SCRA 598).
The inclusion of a corporate officer or stockholder is not premised
on the assumption that the plaintiff corporation does not have the
financial ability to answer for damages, such that it has to share its
liability with individual defendants. Rather, such inclusion is based
on the allegations of fraud and bad faith on the part of the corporate
officer or stockholder. These allegations may Warrant the piercing of
the veil of corporate fiction, so that the said individual may not seek
refuge therein, but may be held individually and personally liable for
his or her actions (Lafarge vs. Continental, 443 SCRA 522).
CORPORATION CODE 433
When the fiction is urged as a means of perpetrating a fraud or
an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, the achievement or perfection of
monopoly or generally the perpetration of knavery or crime, the veil
with which the law covers and isolates the corporation from the
membelrs or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals (De Leon vs.
NLRC, 358 SCRA 274).
The organization of subsidiary corporations is usually resorted to
for the aggrupation of capital, the ability to cover more territory and
population, the decentralization of activities best decentralized, and
the securing of other legitimate advantages. But when the mother
corporation and its subsidiary cease to act in good faith and honest
business judgment, when the corporate device is used by the parent
to avoid its liability for legitimate obligations of the subsidiary, and
when the corporate fiction is used to perpetrate fraud or promote
injustice, the law steps' in to remedy the problem. When that
happens, the corporate character is not necessarily abrogated. lt
continues for legitimate objectives. However, it is pierced in order to
remedy injustice (Reynoso vs. CA, 345 SCRA 335).
The corporate veil cannot be used to shield an otherwise blatant
violation of the prohibition against forum-shopping - shareholders,
whether suing as the majority in direct actions or as the minority in a
derivative suit, cannot be allowed to trifle with court processes (First
vs. CA, 252 SCRA 259).
A subsidiary corporation may be made to answer for the liabilities
and/or illegalities done by the parent corporation if the former was
organized for the purpose of evading obligations that the latter may
have entered into. ln other words, this doctrine is in place in order to
expose and hold liable a corporation which commits illegal acts and
use the corporate fiction to avoid liability from the said acts (Apex vs.
Southeast, 492 SCRA 355).
The attempt to make the security agencies appear as two
separate entities, when in reality they were but one, was a devise to
defeat the law and should not be permitted, hence the veil of
corporate fiction may be pierced (Enriquez vs. Cabotaje, 496 SCRA
169).
The use of corporate fiction as a means to evade legal liability is
not new. This scheme or device has long been perceived to be used
434 CORPORATION CODE
in other fields of law, notably taxation to minimize payment of tax
with varying degrees of success and acceptability (Sta. Monica vs.
DAR, 555 SCRA 97).
Any application of the doctrine of piercing the corporate veil
should be done with caution (R & E vs. Latag, 422 SCRA 698).
Where a corporation and its president share an identity of
interests sufficient to make them privies-in-law, the former may be
bound by a previous decision in which the latter was party (Rovels
vs. Ocampo,391 SCRA 176).
Bar Question: How does one pierce the veil of corporate fiction?
(2004 Bar)
Answer: Upon showing that grounds exist, the corporate fiction or
veil may be lifted through any of the following:
1. By disregarding the separate personality of the corporation;
2. By holding the corporate officer personally liable for the
corporate obligation (See Francisco vs. Meiia, 362 SCRA 738);
3. By regarding the corporation as an association of persons or in
case of two corporations, merge them into one (See Development
vs. CA,363 SCRA 307) and hold them liable as such;
4. lt must be done with caution
(See R & E vs. Latag, supra), the
wrongdoing hust be clearly estabtished; it cannot be presumed
(Secosa vs. Heirs, supra).
b. When not Applied
The veil cannot be pierced when a director has no participation to
a representation made by the President, and the execution of a
promissory note with "we" as maker has a reference to the
corporation and not to the directors (Remo vs. lAC, 172 SCRA 405).
The mere fact that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate
personalitieS, absent a sufficient showing that the corporate entity
was purposely used as a shield to defraud creditors and third
persons of their rights (Umali vs. CA, 189 SCRA 529).
The participatidn by the general manager of a corporation, which
manager was also the chairman of the board of another corporation,
in an action involving the first corporation, cannot, by any stretch of
CORPORATION CODE 435
reasoning, equate to participation by the second corporation in the
same proceedings (Padilla vs. CA, 370 SCRA 208).
The fact that two corporations may be sister companies, and that
they may be sharing personnel and resources, without more, is
insufficient to prove that their separate corporate personalities are
being used to defeat public convenience, justify wrong, protect fraud,
or defend crime (lbid.).
Mere substantial identity of the incorporators of the two
corporations does not necessarily imply fraud nor warrant the
piercing of the veil of corporate fiction (Laguio vs. NLRC, 262 SCRA
715).
The mere fact that both of the corporations have the same
president is not in itself sufficient to pierce the veil of corporate fiction
of the two corporations (Secosa vs. Heirs, supra).
Fiction of separate and distinct entities cannot be disregarded
there being no indication that the second corporation is a dummy or
serves as a client of the first corporate entity (Yu vs. NLRC, 245
scRA 1340).
When the directors and officers of a corporation are unable to
compensate a party for a personal obligation, it is far-fetched to
allege that the corporation is perpetuating fraud or promoting
injustice, and be thereby held liable therefor by piercing its corporate
veil. While there are no hard and fast rules on disregarding separate
corporate identity, we must always be mindful of its function and
purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its erroneous
application (Francisco vs. CA, 309 SCRA 72).
The piercing of the corporate veil cannot be resorted to when
serving summons (Vlason vs. CA, 310 SCRA 26).
The doctrine can only come into play if summons is served on the
corporation through any one of the persons named in Section 13,
Rule 14 of the Rules of Court (Filmerco vs. lAC, '149 SCRA 193).
(Note: The officers allowed to receive summons for a corporation
organized under Philippine Laws are now the following: president,
managing partner, general manager, corporate secretary, treasurer,
or in -house counsel [Rule 14, Section '1 1, Rules of Court]).
436 CORPORATION CODE
The mere refusal of stockholders or directors to pay attorney's
fees does not make them guilty of fraud where, at the time of
demand, the amount due had not been finally determined (Compania
vs. CA, 318 SCRA 169).
Not because two foreign companies came from the same country
and closely worked together on certain projects would the conclusion
arise that one was the conduit of the other, thus piercing the veil of
corporate fiction (Marubeni vs. Lirag, 362 SCRA 620).
The doctrine of piercing the veil of corporat" fiction is resorted to
as a measure of protection against, and not to open the door to,
deception. ln the case at bar, it is petitioner (a natural person), as
the defendant, who is being charged of deception. lt is he who is
being made to answer for damages arising from fraud. The doctrine
thus finds no application to the private respondent, as President and
General Manager, who is enforcing, not avoiding or escaping, liability
on the basis of fraud (Tan vs. CA, 408 SCRA 470).
Petitioner's argument that it is not bound by the acts of its officials
who acted beyond the scope of their authority in allowing the blasting
works is correct. Petitioner is a government agency with a juridical
personality separate and distinct from the government. lt is not a
mere agency of the government but a corporate entity performing
proprietary functions. lt has its own assets and liabilities and
exercises corporate powers, including the power to enter into all
contracts, through its Board of Directors. ln this case, petitioner's
officials exceeded the scope of their authority when they authorized
FUCC to commence blasting works without an extra work order
properly approved in accordance with P.D. 1594. Their acts cannot
bind petitioner unless it has ratified such acts or is. estopped from
disclaiming them (NAPOCOR vs. Alonzo-Legasto, 443 SCRA 342).
Bar Question: What facts and circumstances musf be proved in
order that the stockholders may be held liable for the obligations
contracted by the corporation? (1962 Bar)
Answer: While a corporation has a personality separate and distinct
from the stockholders composing it, this veil of corporate fiction may
be disregarded, and the stockholders and the corporation considered
as one person, in the following instances:
1) When the stockholders created the corporation to evade taxes,
violate laws, commit fraud, evade just obligations; and
CORPORATION CODE
2) When the corporation is owned by the stockholder and his
dummies, and/or the immediate memberi of his family.
Bar Question: What ls a "one-man" corporation? Do such
corporations enjoy the attributes of corporations? What should be
done to assure this? (1970 Bar)
Answer: A one-man corporation is a corporate entity where one
person holds directly or indirectly all or substantially all of the stocks
of the corporation.
This form of corporation enjoys all of the attributes of a
corporation, although it always faces the risk of its corporate
existence being attacked if the said corporate fiction is utilized for
unlawful purposes under the doctrine of "Piercing the Veil of
Corporate Fiction."
Io assure that the corporation will continue to enjoy the attributes,
the corporation should have a duly constituted board which should
meet regularly to pass upon the problems of the corporation. The
stockholder who holds substantial sfocks should consider his
holdings as merely for investment purposes.
Bar Question: Richard owns 90%o of the shares of the capital stock
of GOM Corporation. On one occasion, GOM Corporation,
represented by Richard as President and General Manager,
executed a contract to sett a subdivision tot in favor of Tomas. For
failure of GOM Corporation to develop the subdivision, Tomas filed
an action forrescrssion and damages against GOM Corporation and
Richard.
Willthe action prosper? Explain. (1996 Bar)
Answer: The action against GOM Corporation will prosper.
However, the action against Richard willfail.
A corporation is a juridical person with a separate and distinct
personality from that of the stockholders or meinbers who compose
it. Only when the legal fiction of the separate corporate personality is
abused can the coutts pierce the corporate veil
Since there is no showing that Richard has used the corporate
fiction to defraud a thifd party or that he has acted negligently,
maliciously or in bad faith, he cannot be held personally liable.
Mere ownership by a single stockholder of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality (See Francisco ys.
Mejia, 362 SCRA 738).
438 CORPORATION CODE
Where a second corporation was created as a means to prevent a
first corporation from payirig obligations to employees, the veil of
corporate fiction must be pierced (NAFLU vs. Ople, 143 SCRA 124).
Bar Question: Tantalus Corporation, of which 97% of the issued
and outstanding shares of sfocks were owned by Roger Mano, had
financial obligations to its employees by way of unpaid wages and
allowances. Tantalus Corporation was dlsso/yed by shortening its
corporate life and a// ifs assefs turned over to Suceso Corporation of
which 95% of the subscribed shares were held by Roger Mano hnd
his wife. Then, Tantalus Corporation ceased to.operate.
May the employees of Tantalus Corporation proceed against the
Suceso Corporation to recovertheir unpaid claims? Drscuss. (1985,
1978 Ba)
Answer: The employees of Tantalus Corporation may proceed
against Suceso Corporation to recover their unpaid claims.
The grant of juridical personality to a group of persons is an act of
magnanimity by the state, which should not be abused by the
grantee. Hence, the privilege should not be used by the grantee to
evade payment of taxes, to further an end subversive to justice,
perpetuation of frauds or confuse legitimate issues. ln these cases,
the state may withdraw such privilege and consider the corporation
and its principal stockholders as one and the same person.
ln the casd at bar, Tantalus Corporation was dissolved and in its
place, Suceso Corporation was created by almost the same
stockholders. Obvious therefore ls the objective of Tantalus
Corporation of preventing its employees from proceeding with their
claim for unpaid wages against the dissolved corporation. The state
witt pierce the doctrine of corporate fiction, consider Tantdlus and
Suceso Corporations as one and the same, and allow the unpaid
employees of Tantalus Corporation to proceed with their claim
against Suceso Corporation.
Bar Question: E Corporation sold ifs assefs to M, lnc. after
complying with the requirements of the Bulk Sa/es Law.
Subsequently, one of the creditors of E Corporation tried to collect
the amount due it, but found out that E Corporation had no more
assefs /ert. The creditor then sued M, lnc. on the theory that M, lnc.
is a mere alter ego of E Corporation.
Willthe suit prosper? Explain. (1996 Bar)
Answer: The suit witl not prosper because the mere setling of att
assefs of a corporation to another corporation, if done in good faith,
CORPORATION CODE 439
does not automatically mean that one is an alter-ego of the other and
warrants piercing the veil of corporate fiction. E Corporation's
compliance with the requirements of the Bulk Sa/es Law negates any
notion that the sa/e vyas fraudulent.
E Corporation is still liable to the creditor.
c. Gonsequences if Veil is Pierced
The consequences where the veil is pierced are: (1) if only one
corporation is involved, to regard its existence as an association of
persons, and (2) if two corporations participate, to merge them, and
consider them only as one entity (Azcor vs. NLRC, 303 SCRA 26).
The members or stockholders of the corporation will be considered
as the corporation, that is, liability will attach directly to the officers
and stockholders (Francisco vs. CA, 309 SCRA 72).
b. Perpetual Succession -- A continued corporate existence
irrespective of death or withdrawal of its component members,
limited in duration to the periods stated in its charter.
The maximum period the articles of incorporation may provide is
50 years but under R.A. 3531, the period may be extended for
durations not exceeding 50 years per extension by amendment of
the articles made before the lapse of the original period. The
amendment of the articles to effect this extension cannot be made
after the lapse of the original period although the amendment is still
during the three-year statutory period for liquidation (Alhambra vs.
sEc, 24 SCRA 269).
Even assuming that there was serious threat to a corporation's
continued corporate existence, it was held that it is not tantamount
nor even similar to an impending death of a natural person. The
material existence of a juridical person is not on the same plain as
that of human life. The survival of juridical personality is clearly
outweighed by the long standing general policy of enforcing only final
and executory judgments (PBCom vs. CA, 279 SCRA 364).
Bar Question: A corporation is organized for a period of 25 years.
Stockholders holding more than two-thirds of the voting stock desire
to extend this period for another 21-year term in a special meeting of
stockholders to be called for the purpose. As a lawyer, what would
you inform your client? Explain fully. (1953 Bar)
440 CORPORATION CODE
Answer: As a lawyer, I would inform my client that the move by the
stockholders is allowable under the provisions of Rep. Act 3531, by
amendment of the articles of incorporation before the lapse of the
existing period, the extension being for durations not exceeding 50
years each.
(Note: Extension of corporate life now expressly allowed by Section
37, N.C.C.)
Bar Question: "A", a corporation, was organized for a term of 50
years, expiring in December 1969. Outline fhe sfeps to be taken in
order that it may extend its corporate life. (1968 Bar)
Answer: Ihe sfeps to be taken, all of which should be completed
before the end of December 1969, are as follows:
1. The board, by majority vote, should approve the amendment to
extend the life of the corporation.
2. The stockholders, by a vote of at least 2/3 of the subscribed
capital stock, must approve said amendment.
3. Copy of the amended articles must be certified by the President,
secretary and a majority of the board.
4. A certified copy of the amended afticles should be filed with the
SEC, paying the proper fees.
(Note: Answer still valid under the N.C.C.)
c. Use of Cbrporate Name - Sectton 18 of the Corporation Code
expressly prohibits the use of a corporate name which 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. The policy behind
the foregoing prohibition is to avoid fraud upon the public that will
have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporation. Pursuant thereto,
the Revised Guidelines in the Approval of Corporate and Partnership
Names specifically requires that: (1) a corporate name shall not be
identical, misleading or confusingly similar to one already registered
by another corporation with the Commission; and (2) if the proposed
name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of
the company already registered (lndustrial vs. CA, 390 SCRA 252).
The requisites to fall within the prohibition of the law are: (1) that
the complainant corporation acquired a prior right over the use of
such corporate name; and (2) the proposed name is either: [a]
CORPORATION CODE 441
identical, or [b] deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law;
or [c] patently deceptive, confusing or contrary to existing law. As
regards the first requisite, the right to the exclusive use of a
corporate name with freedom from infringement by similarity is
determined by priority of adoption. Anent the second requisite, in
determining the existence of confusing similarity in corporate names,
the test is whether the similarity is such as to mislead a person using
ordinary care and discrimination and the Court must look to the
record as well as the names themselves (lbid.).
Parties organizing a corporation must choose a name at their
peril. "Ang Mga Kaanib" and "Sa Bansang Pilipinas, lnc"" - which
are merely descriptive of and also referring to the members, or
kaanib, of a preexisting corporation who are likewise residing in the
Philippines, can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing the former
from the latter. The only difference between the corporate names
are the words "Saligan" and "Suhay," which words are synonymous -
both mean ground, foundation or support (Ang mga Kaanib vs.
lglesia,372 SCRA 171).
G. Nationality of Gorporations
1. Place of Incorporation Test
The place of incorporation determines whether a corporation is
domestic of foreign. Corporations 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 are foreign corporations (Section 123). Those
formed, organized or existing under laws of the Philippines are
domestic corporations.
2. ControlTest
Shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be
counted as of Philippine nationality (Banking Laws of the Philippines,
General Banking Lawof 2000, Annotated, BSP, Page100).
442 CORPORATION CODE
3. Grandfather Rule
ln determining the percentage of foreign-owned voting stock, the
basis of the computation shall be the citizenship of each stockholder,
and with respect to corporate owners of voting stock, the citizenship
of the individual owners of voting stock. lbid. Page 99).
Bar Question: What determines the nationality of a corporation? For
what matters are foreign corporations doing business in the
Philippines subject to the laws, rules and regulations of the country
of their creation? (1957 Bar)
Answer: The country where the corporation was incorporated
determines the nationality of a corporation. Ihis is called the
domiciliary test.
lh times of war or national emergency, another fesf is used the
control test. Under this fesf, if the controlling stock of a -
corporation is
owned by citizens of a particular country which is at war with the
Philippines, then that corporation, although organized in the
Phitippines, is a foreign corporation.
Foreign corporations classified under the domiciliary test are
subject to the laws of the country of their creation on the following
matters:
1. Creation, formation, organization, or dissolution of corporations;
2. Relations," liabilities, responsibilities and duties of members,
stockholders, or officers of corporations to each other or to the
corporation.
Bar Question: What is the nationatity of a corporatiitn organized
and incorporated under the laws of a foreign country, but owned
100% by Filipinos? (1998 Bar)
Answer: Following the domiciliary test, the corporation in the case
at bar shall be considered a corporation of the country where it was
incorporated, hence, it follows the nationality of such country.
However, if we are to follow the control test for the purpose of
controlling foreign ownership in nationalized corporations under E.O.
139, the said corporation is a Filipino corporation considering that it
is owned 100% by Filipinos.
A foreigner is not qualified to own capital stock in a rural bank.
Thrs renders the assignment of shares of stocks in a rural rank in
favor of a foreignerr void (Bulos vs. Yasuma,527 SCRA727).
CORPORATION CODE 443
Only citizens of the Philippines can own and hold, direcfly or
indirectly, the capital stock of a rural bank, subject only to the
exception also clearly stated in the law (Nunga vs. Nunga, 574
scRA 760).
Bar Question: Can a corporation engaged in the lumber busrness
elect an American or a Chinese as a member of its board of
directors? (1969 Bar)
Answer: Yes, an American or a Chinese citizen may become a
member of the Board of Directors of a corporation engaged in the
lumber busrness. There is no law prohibiting a foreigner from
becoming a stockholder and consequently from becoming a director
of a corporation engaged in the lumber busrness, irrespective of
whether the lumber utilized is taken from private forest lands or from
timber lands of the public domain, provided that in the latter case, at
least 60%o of the capital of said corporation is owned by Filipinos.
The corporation cannot however engage in the retailing of tumber.
Bar Question: May a corporation composed entirely of atiens be
organized and incorporated in the Philippines? Exptain. (1970, 1950
Ba0
Answer: Yes, a corporation composed entirely of aliens may be
organized in the Philippines. The Corporation Law, in general, onty
requires a majority of the incorporators to be residents, not
necessarily citizens of the Philippines.
However, in the nationalized corporations (retail trade, agriculture,
mining, transpoftation, shipping), no aliens or some but not all can
form the corporation depending on whether it is totally or partiatty
nationalized.
(Note: Answer valid under the N.C.C.)
Bar Question: May a Japanese corporation engaged in the
manufacture of steel, purchase shares of stock in a Philippine mining
corporation? lf so, to what extent. Explain. (1970 Bar)
Answer: A Japanese corporation engaged in steel manufacturing
may, within certain limits, purchase stock in Philippine mining
corporations.
Under a 1967 amendment to the Corporation Law, a foreign or
domestic corporation organized for any purpose other than mining
may acquire and hold not more than 30% of the capital stock of not
more than three corporations organized for the purpose of engaging
444 CORPORATION CODE
in mining in the Philippines. The stock, however, should be held by
the corporation sotety for investment, and not for the purpose of
bringing about a combination to exercise control of such corporation,
or to violate the mining and public land laws.
Bar Question: Globat KL Mataysia (GLOBAL), a 100% Malaysian-
owned corporation, desires to build a hotel beach resort in Samal
tstand, Davao City, to take advantage of the increased traffic of
fourlsfs and boost the tourism industry of the Philippines.
a) Assuming that GLOBAL has US$700 Million to invest in a hotel
beach resort in the Philippines, may it be allowed to acquire the land
on which to build the resort? lf so, under what terms and conditions
may GLOBAL acquire the land? Discuss fully.
b) May GLOBAL be attowed to manage the hotel beach resort?
Explain.
c) May GLOBAL be attowed to operate restaurants within the hotel
beach resort? Explain. (1995 Bar)
Answer: No, foreign corporations, like GLOBAL in the case at bar,
are forbidden to acquire lands in the Philippines, under the Philippine
Constitution. However, they are allowed by law to lease lands.
a) Yes, GLOBAL can manage the resort as ff is considered to be
"doing busrness" tn the Philippines.
b) Yes, the operation of a restaurant is incidental to the hotel
busrness and*is expressly exempted from the coverage of the Retail
Trade Nationalization Law.
(Note: Answer valid under the Retail Trade Liberalization Act of
2000)
D. Classes of Corporation
Bar Question: What are the c/asses of corporations? Differentiate
(1954 Bar)
Distinguish clearly (1) a private corporation from a Public
corporation (2004 Bar)
Answer: The first general classification of corporations rs rnlo Public
and Private. Public corporations are organized by the state to
pertorm functions to govern portions of the state, and functions
properly belonging to the state but are non-governmental in nature.
Private corporations, on the other hand, are corporations organized
by private persons or by the government or by both for private ends,
aims, benefit or purpose. The two are differentiated from each other
as follows:
CORPORATION CODE 445
a. As to organizers:
Public-by the state only;
Private-by private persons alone or with the state;
b. As to functions:
Public-governmental and other public functions;
Private-private, usual ly profit m aki ng f unction s ;
c. As to governing law:
Public-special laws;
P riv ate- Law of P riv ate Co rpo ration s
(Note: The N.C.C. classifies corporations into stock and non-stock
[Section 3] and into those created by special laws and those
incorporated under the N.C.C. [Section 4]. The N.C.C. in scattered
sections also provides for close corporations [Sections 96-105];
special corporations of which there are two: educational corporations
[Sections 106-108], and religious corporations [Sections 109-116];
foreign corporations [Sections 123-1361; de facto corporations
[Section 20], corporations by estoppel [Section 21]. No mention is
made by the N.C.C. of public corporations.)
1- Government Owned and/or Controlled Corporations
A private corporation, which is not owned nor controlled by the
government, is entirely private, and cannot be organized by special
Presidential Decree (P.D. 1717), but under the provisions of the
Corporation Law (now Corporation Code) (National vs. PVB, 192
scRA 257).
Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. Since
private corporations cannot have special charter, it follows that
Congress can create corporations with special charters only if such
corporations are government-owned or controlled. Private
corporations may exist only under a general law. lf the corporation is
private, it must necessarily exist under a general law. Stated
differently, only corporations created under a general law can qualify
as private corporations. Under existing laws, that general law is the
Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives. The Constitution authorizes Congress
to create government-owned or controlled corporations through
specialcharters (Feliciano vs. COA,419 SCRA 363).
Local Water Districts (LWDs) are not private corporations
because they are not created under the Corporation Code. LWDs
are not registered with the Securities and Exchange Commission.
446 CORPORATION CODE
LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to
elect the board of directors of LWDs as in the case of all corporationl
registered with the Securities and Exchange Commission. The local
mayor or the provincial governor appoints the directors of LWDs for a
fixed term of office (lbid.).
LWDs exist by virtue of PD 198, which constitutes their special
charter. LWDs can validly exist only if they are government-owned
or controlled. To claim that LWD's are private corporations with a
special charter is to admit that their existence.is constitutionally infirm
(rbid.).
The Philippine National Red Cross (PNRC) is a government
owned and controlled corporation, with an original charter under
Republic Act No. 95. The test to determine whether a corporation is
government owned or controlled, or private in nature is simple. ls lt
created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special
charters are government corporations subject to its provisions, and
its employees are under the jurisdiction of the Civil Service
Commission, and are compulsory members of the Government
Service lnsurance System (Camporedondo vs. NLRC, 312 SCRA
47).
When the State participates in a covenant, it is deemed to have
descended from its superior position to the level of an ordinary
citizen and thus virtually opens itself to judicial process (PNR vs.
tAc,217 SCRA416).
By engaging in a particular business through the instrumentality of
a corporation, the government divests itself pro hac vice of its
sovereign character, so as to render the corporation subject to the
rules of law governing private corporations (PNB vs. Pabalan, 83
scRA 595).
Government owned and controlled corporations have a personality
of their own, separate and distinct from the government, and their
funds, therefore, although considered to be public in character, are
not exempt from garnishment (lbid.).
When the government enters into a commercial business, it
abandons its sovereign capacity and is to be treated like any private
CORPORATION CODE 447
r;orporation. lt therefore cannot invoke immunity from suits brought
against it (Malong vs. PNRR, 138 SCRA 63).
A corporation is created by operation of law under the Corporation
Code while a government corporation is normally created by special
law referred to often as a charter. Bliss Development Corporation is
created under the Corporation Law. lt is without a charter, governed
by the Labor Code and not by the Civil Service Law (Bliss vs.
Calleja, 237 SCRA 273).
Section 1 of Proclamation No. 50 classifies two types of assets
that may be privatized: (1) Non-performing assets of government
financial institutions; and (2) Government-owned or controlled
corporations which have been found unnecessary or inappropriate
for the government sector to maintain (Bagatsing vs. Committee,246
scRA 335).
Section 131 (m) of the Local Government Code defines a
franchise as a right or privilege, affected with public interest which is
conferred upon private persons or corporations, under such terms
and conditions as the government and its political subdivisions may
impose in the interest of the public welfare, security and safety. ln its
specific sense, a franchise may refer to a general or primary
franchise, or to a special or secondary franchise. The former relates
to the rights to exist as a corporation, by virtue of duly approved
articles of incorporation, or a charter pursuant to a special law
creating the corporation. The right under a primary or general
franchise is vested in the individuals who compose the corporation
and not in the corporation itself. On the other hand, the latter refers
to the rights or privileges conferred upon an existing corporation
such as the right to use the streets of a municipality to lay pipes of
tracks, erect poles or string wires. The rights under a secondary or
special franchise are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use (Napocor vs.
City, 401 SCRA 259).
Bar Question: Distinguish between a corporation that is "going
public" and a corporation that is "going private." What provisions
would you expect to find in the articles of incorporation of a
corporation that organized itself under a narrow concept of "going-
private." (1986 Bar)
448 CORPORATION CODE
Answer: The following are the distinctions between a corporation
"going public" and a corporation "going private":
1) A corporation "going public" allows lfs sfocks to be issued to
persons other than its registered stockholders; a corporation "going
private" resfricfs fhe lssue of i/s stocks to its registered stockholders
only, and prevents the transfers by stockholders of their stocks
without first giving the corporation and/or its registered stockholders
the first opportunity of acquiring the same;
2) A corporation "going public" may allow ifs sfocks to be sold in
stock exchanges; a corporation "going private" may not allow its
stock already rssued to be traded in stock exchanges;
3) The articles of incorporation and/or by-laws of a corporation
"going private" usually contains the "right of first refusal" clause
giving the corporation and/or /ts registered stockholders
preference as against non-stockholders in the acquisition of
sfocks. The articles and/or by-laws of a corporation "going-public"
would not contain the "right of first refusal" clause.
lf a corporation is organized under the concept of "going private",
the usual provision which will be found in its afticles and/or by-laws
will be the "right of first refusal" clause.
Bar Question: What is the difference between government
deregulation and the privatization of an industry? Explain briefly.
(2004 Bar)
Answer: Government deregulation refers to the relaxation of rules
or restrictions affecting the business of individuals, while privatization
refers to the transfer of ownership or control of government-owned or
controlled corporations to the private sector.
2. Private Gorporations
'
Private Corporations are divided into:
1) Stock Corporations which are corporations which have capital
stock divided into shares, and are authorized to distribute profits on
the basis of the shares thus held. Stock corporations are in turn
divided into:
a. Par value stock corporations where the par value of shares
issued is stated in the articles and which value remains generally
unchangeable.
b. No par value stock corporations which have stocks where the
issue value, which changes from time to time, is left to the discretion
of the corporation to determine.
CORPORATION CODE 449
Bar Question: Distinguish clearly a stock corporation from a non-
stock corporation (2004 Bar)
Answer: A stock corporation has capital stock divided into shares
and is authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the
shares (Sec. 3 of NCC) while a non-stock corporation does not have
capital stock and where no paft of its income is distributable as
dividends to its members, frusfees, or officers (Sec. 87 of NCC).
As fo purpose, a stock corporation is incorporated for profit,
whereas a non-stock corporation is organized primarily for charitable,
religious, educational, fraternal, literary, trade, industry and
agriculture chambers or any combination thereof.
Bar Question: May "no par value" shares in the same corporation
be issued at different prices? How? How would such a circumstance
affect the rights of stockholders? (1970 Bar)
Answer: Yes, no par value shares in the same corporation may be
issued at different prices. The Corporation Law does not require the
articles to state fhe issue value of the no par value sfocks, hence,
they may be lssued from time to time at different prices.
A holder of one share of no par value sfock is entitled to the same
rights (voting, dividend, etc.) as another holder of one share of par
value stock irrespective of the difference rn issue values of the two
shares.
Bar Question: 'IXY" is a recreational club which was organized to
operate a golf course for its members with an original authorized
capital stock of P100M. The articles of incorporation nor by-laws did
not provide for distribution of dividends although there is a provision
that after lfs disso/uflon, the assefs shall be given to a charitable
corporation. ls "XY" a stock corporation? Give reasons for your
answer? (2001 Ba)
Answer: Yes, "XY" ls a sfock corporation because it has a capital
stock and is authorized to dectare dividends. The power to declare
dividends need not be expressly stated in the Articles or By-Laws
because in the absence thereof, the corporation is still authorized to
declare dividends, subject to compliance with the rules therefor.
The provision to give assefs to a charitable institution upon
dissolution is among the powers of the corporation, but does not
affect the power to declare dividends.
450 CORPORATION CODE CORPORATION CODE 451

2) Non-stock Corporation is a corporation organized for non-profit
purposes, and primarily for charitable, religious, educational,
fraternal, literary, trade, industry and agriculture chambers or any
combination thereof.
3) Aggregate and Sole
a. Aggregate - a corporation, with incorporators not less than five
(5) nor more than fifteen (15), in stock corporations, or up to
more than 15 in non-stock corporations.
b. Sole
Bar Question: Deftne corporation sote? (2004, 1954 Bar)
b. De facto Corporation - a corporation defectively formed from a
bona fide attempt to incorporate under existing laws, and which
exercises corporate powers (Section 20, N.C.C.).
Bar Question: CBY & Co., lnc. registered with the Securities and
Exchange Commission its articles of incorporation. lt failed,
however, for one reason or another, to have its by-laws filed with,
and registered by, the Commission. lt neveftheless fransacted and
drd buslness as a corporation for sometime. A suit was commenced
by its minority stockholders assailing the continued existence of CBY
& Co., lnc., because of the non-adoption and registration of its by-
laws. Would the action prosper? Why? (2003 Bar)

Answer: A corporation sole is a special form of corporation which
may be formed by the chief archbishop, bishop, priest, minister, rabbi
or other presiding elder of such religious denomination, sect or
church for the purpose of administering and managing, as trustee,
the affairs, propefty and temporalities of such denomination, sect or
church. (See Secfion.110, N.C.C.)
4) Ecclesiastical and Lay
a. Ecclesiastical - where the members are spiritual persons like
bishops and priests.
b. Lay includes all non-ecclesiastical corporations and may be:
1) Eleemosynary corporations which are charitable institutions
2) Civil corporations which are organized for profit.
Bar Question: Explain briefly: Eleemosynary corporation. (1967 Bar)
Answer: The suit will not prosper. CBY & Co., lnc. is a de facto
corporation since it was duly incorporated in good faith and
thereafter validly exercised its corporate powers (Section 20,
N.C.C.).
Bar Question: A corporation was created by a special law. Later,
the law creating it was declared invalid. May such corporation claim
to be a de facto corporation? (1994 Bar).
Answer: No, the corporation cannot be a de facto corporation
because there was no bonafide attempt to incorporate under
existing laws.
ln the case af bar, the corporation was created under a special
law, which is invalid because only government-owned or controlled
corporations can be created by special law.

Answer: An eleemosynary corporation is a non-religious corporation Where a private corporation is created under a special law, there
organized for charitable purposes. is no attempt at a valid incorporation. Such corporation cannot claim
a de facto status.
5) Domestic and Foreign
a. Domestic - a corporation organized according to Philippine The AIIBP was created by RA 6848. lt has a main office where it
laws. conducts business, has shareholders, corporate officers, a board of
b. Foreign - A corporation formed, organized, or existing under directors, assets, and personnel. lt is represented by the Office of
laws other than those of the Philippines and where the laws of the Government Corporate Counsel, "the principal law office of
said country allow Filipino citizens and corporations to do government-owned corporations, one of which is respondent bank."
business in that country or state. They are granted licenses At the very least, by its failure to submit its by-laws on time, the
to transact business in the Philippines (Section 123, N.C.C.). AIIBP may be considered a de facfo corporation whose right to
exercise corporate powers may not be inquired into collaterally in
6) De Jure, De Facto, By Estoppel, by Prescription any private suit to which such corporations may be a party
a. De juie Corporation - a corporation formed with all of the (Sawadjaan vs. CA, 459 SCRA 516).
requirements of law.
452 CORPORATION CODE
Where a person convinces others to form a corporation, which
however was not formed at all, the parties are partners inter se and
are governed by the Law on Partnerships. The relationship is not
that of a de facto corporation (Pioneer vs. CA, 175 SCRA 668).
Bar Question: Mamuhuman was invited by his friends to invest in
Adelantado Corporation, a newly organized firm engaged in money
market and financing operations. Because of his heavy investments,
Mamuhuman became the firm's President and, as such, purchased a
big number of computers, typewriters, and other equipment from
Taktak Corporation on installmenf basrs. Adelantado Corporation
paid the downpayment and Taktak Corporation issued fhe
corresponding receipt. To his chagrin, Mamuhuman discovered that
the articles of incorporation had not been filed by his friends at that
late date so he hurriedly attended to the matter. No sooner had the
ceftificate of incorporation been issued by the Securities and
Exchange Commission when three months later, Adelantado
Corporation became bankrupt.
in his personal capacity,
Upon being sued by Taktak Corporation
Mamuhuman raised among his defenses the doctrines of de facto
corporation and corporation by estoppel.
Can the two defenses be validly raised by Mamuhuman? Explain.
(1986 Bar)
Answer: The doctrine of de facto corporation cannot be validly
raised by Mamuhuman because af no instance in the life of
Adelantado Corporation was it a de facto corporation.
For a corporation to be considered as a de facto corporation, it is
necessary that the corporation should be defectively formed from a
bonafide attempt to incorporate under existing laws, and which body
exercises corporate powe rs.
Adelantado Corporation could not be said to have been
defectively formed because at the time it purchased the office
equipment, it was not at all formed; neither could it be said that there
was a bonafide attempt to incorporate at the time the purchase was
made because no attempt was at all made even to file the required
documents with the Securlfies and Exchange Commission.
However, it was a corporation by estoppel at the time it made
purchases with Taktak Corporation. Adelantado Corporation held
dse/f as a corporation when it entered into a purchase contract with
Taktak Corporation, and it was on the strength of that appearance
that Taktak Corporation entered into a contract with Adelantado
Corpoiration.
CORPORATION CODE 453
The principle (corporation by estoppel) cannot however be
invoked by Mamuhuman, who in effect misrepresented the
corporation as duly organized because only the victim (Taktak
Corporation in the problem), not the one who made the
misrepresentation (Adelantado Corporation), can invoke the
principle.
Hence, Mamuhuman can be made personally liable for the
obligations of Adelantado Corporation.
Bar Question: Sevenpersons form a corporation by registering their
artictes of incorporation with the Securties and Exchange
Commission. But after the certificate of incorporation has been
lssued, it is discovered that only five of the seven incorporators have
acknowledged the articles of incorporation before a notary public.
ts the corporation legally formed? Reason out your answer. (1959
Ba4
Answer: The corporation is a de facto corporation. Although
defectively formed as not to be de iure, it may nevertheless exercise
corporate powers validly until the sfafe disso/ves it by quo warranto
proceedings.
The Problem: Some busrnessrnen with an available starting capital
totatling only P100,000.00 ask you to help organize a busrness firm'
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassisfance by way
of direct investments and/or loans. Your professional assisfance rs
solicited on the following various questions that may arise:
Bar Question: Considering the above probtem, state the form of
buslness organization which you recommend should be created for
the purpose explaining specifically and briefly.
Whatever be the form of organization chosen, give instances
when it may be sued as a legal person even if irregularly organized.
Give legalreasons. (1973 Bar)
Answer: A corporation, although irregularly organized, may be sued
as a legal person, under the principle of estoppel.
A group of persons representing themselves to have been
organized as a corporation, and third persons, believing in said
representation, transact with said group, can be sued as a
corporation, and cannot later on deny that the group is not a
corporation.Ihls is a corporation by estoppel.
454 CORPORATION CODE
A defectively formed corporation organized in good faith under a
valid law under which it could have validly incorporated, and
proceeds to do business for the purpose for which it was organized
may sue and be sued. This is called as a de facto corporation.
The reason in both cases allowing these defectively formed
corporations to be sued is to give protection to innocent third persons
transacting busrness with these entities.
c. Corporation by Estoppel - a corporation by estoppel is a group
of persons which holds itself out as a corporation and enters
into a contract with third persons on the strength of such
appearance. lt cannot be permitted to deny its existence in an
action under said contract.
Conversely, a person who contracts with a group of persons in
such a way as to recognize and in effect admit the legal existence of
the group as a corporation, cannot be permitted to deny its corporate
existence in any action from said dealing.
The principle can be invoked by the victim but not by one who
misrepresented the corporation as duly organized as against the
victim of said misrepresentation. (Albert vs. University, 13 SCRA 84).
Even if the ostensible corporate entity is proven to be legally non-
existent, a par{y, may be estopped from denying its Lorporate
existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority
and at their own risk. And as it is an elementary principle of law that
a person who acts as an agent without authority or without a
principal is himself regarded as the principal, a person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts
performed as such agent (lnternational vs. CA, 343 SCRA 674).
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. ln the first instance, an
unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a
suit against it by a third person who relied in good faith on such
CORPORATION CODE 455
representation. lt cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of
which it received advantages and benefits. On the other hand, a
third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it,
may be barred from denying its corporate existence in a suit brought
against the alleged corporation. ln such case, all those who
benefited from the transaction made by the ostensible corporation,
despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of. Clearly,
under the law on estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without valid existence,
are held liable as general partners (Lim vs. Philippine,3lT SCRA
728).
Where a third person enters into a contract with an association
which represented itself to be a corporation, the association is
estopped from denying its corporate capacity (Christian vs' NLRC,
174 SCRA 681).
A corporation may be held in estoppel from denying as against
third persons the authority of its officers or agents who have been
clothed by it with ostensible or apparent authority (Hydro vs.
National, 441 SCRA 614).
The general rule remains that, in the absence of authority from
the board of directors, no person, not even its officers, can validly
bind a corporation. lf a corporation, however, consciously lets one of
its officers, or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officers authority
(Westmont Bank vs. lnland Construction, 582 SCRA 230).
A corporation should first prove by clear evidence that its
corporate officer is not in fact authorized to act on its behalf before
the burden of evidence shifts to the other party to prove, by previous
specific acts, that an officer was clothed by the corporation with
apparent authority (Westmont vs. lnland, 582 SCRA 230).
lf a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and
thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in good faith
dealt with the corporation through such agent, be estopped from
denying his authority; and where it is said 'if the corporation permits
 4s6 CORPORATION CODE
this means the same as 'if the thing is permitted by the directing
power of the corporation" (DBP vs. Ong, 460 SCRA 170).
Bar Question: Give example ittustrating the distinction between de
facto corporations, and corporations by estoppet. (1gSS Bar)
Answer: Five persons includintg one minor fited artictes of
incorporation with the sEC and were issued a certificate of
incorporation, the minor eventually finding out that he tacked the
requisite age on information furnished by his parents. This is a de
facto corporation and it can continue performing corporate functions
until stopped by the state by quo warranto proceedings.
A person, believing a groupof persons to be a duly organized
corporation because of representations the group made, entered into
a contract with said group. The group cannot invoke non-corporate
sfafus in a suit to enforce the contract. This is a corporation by
estoppel.
Bar Question.' /s there a difference between a de facto corporation
and a corporation by estoppel? Exptain briefly (2004 Bar)
Answer: Yes, there are differences between a de facto corporation
and a corporation by estoppel.
ln a de facto corporation, there is a corporation. There is a bona
fide attempt tNncorporate under existing laws in good faith, atthough
defectively formed (Sec. 20, NCC). lt may sue and be sued, as well
as validly exercise corporate powers until it rs disso/ved through quo
warranto proceedings.
ln a corporation by estoppel, there is no corporation. A group of
persons misrepresent themselves as a corporation knowing it is
without authority fo do so (Sec. 21, NCC). Ihese persons witt be
personally liable as general partners for all debts, tiabitities and
damages incurred or arising from their acts. The osfensrb/e
corporation can be sued on any transaction entered into by it or on
any tort committed by it, and cannot use as a defense its tack of
corporate personality. Neither can a person who assumes an
obligation with the osfensib/e corporation cannot resist performance
on the ground that there was no corporation.
Bar Question: yKS Trading filed a comptaint for specific
performance with damages against PWC Corporation for faiture to
deliver cement ordered by plaintiff. ln its answer, pWC denied
liability on the ground, inter alia, that YKS has no personality to sue,
not being incorporated, and that the President of pWC was n'ot
CORPORATION CODE 457
authorized to enter into a contract with plaintiff by the pWC Board of
Directors, hence the contract is ultra vires. YKS Trading replied that
ff is a so/e proprietorship owned by YKS, and that the president of
PWC had made it appear in several lefters presented in evidence
that he had authority to sign contracts on behatf of the Board of
Directors of PWC.
Will the suit prosper or not? Reason briefly (200a Bar)
Answer: Yes, the suit wilt prosper. YKS Trading, a sole
proprietorship, may sue as such and need not be incorporated to
have such right.
On the other hand, PWC Corporation is liable. lt is estopped from
denying the authority of its President since it had, in several letters,
made it appear that such President was authorized
d. Corporation by Prescription
Bar Question: What is a corporation by prescription? Give an
example of such corporation. (1964 Bar)
Answer: A corporation by prescription is a body which though not
lawfully organized as a corporation, has been recognized by
immemorial usage as a corporation, with rights and duties
maintainable at law. Example: The Roman Catholic Archbishop of
Manila before the law on corporation sole took effect was considered
as a corporation by prescription, it having antedated the state.
7) Quasi-Public and Quasi-Corporation
a. A quasi-public corporation is a private corporation performing
functions where the public has an interest. Example: public utility
corporations.
b. A quasi-corporation is a body or municipal society, which
though not vested with the general powers of corporations, is yet
recognized by statutes or immemorial usage as an aggregate
corporation with precise duties which may be enforced and
privileges which may be maintained at law.
8) Condominium Corporation
PD 902-4, Section 5(c) (now Sec. 1, A.M. No. 01-2-04-SC)
expressly covers both election and appointment of corporate
directors, trustees, officers and managers, including condominium
corporations.
458 CORPORATION CODE
The creation of the condominium corporation is sanctioned by
Republic Act No. 4726, olherwise known as the condominium Act.
Under the law, a condominium is an interest in real property
consisting of a separate interest in a unit in a residential, industrial or
commercial building and an undivided interest in common, directly or
indirecfly, in the land on which it is located and in other common
areas of the building. To enable the orderly administration over
these common areas which are jointly owned by the various unit
owners, the condominium Act permits the creation of a condominium
corporation, which is specially formed for the purpose of holding title
to the common area, in which the holders of separate interests shall
automatically be members or shareholders, to the exclusion of
others, in pioportion to the appurtenant interest of their respective
units. The"necessity of a condominium corporation has not gained
widespread acceptance, and even is merely permissible under the
Condominium Act (Yamane vs. BA Lepanto, 474 SCRA 258)'
Bar Question: Explain briefty: condominium corporation. (1967 Bar)
Answer: A condominium corporation is a private corporation
organized for the construction of a building with complete liuing or
oiice units which it sells, creating therein full ownership for the
buyers of the units thus sold, and a co-ownership over the land and
other portions of fhe building used in common by the unit buyers'
E. Components of a GorPoration
1. lncorporators
They are natural persons with contractual capacity who are
signatories to the articles of incorporation of a corporation. ln stock
cjrporations, they may or may not be subscribers but a majority of
them must be residents of the Philippines. lt is only under Rep. Act
720 (Rural Banks Law), (now R.A. 7353, New Rural Banks Act) that
an incorporator may be a juridical person. An incorporator remains
as such although no longer connected with, or no longer having an
interest in the corPoration.
Under Sec. 5 of R.A. 7192 (Law of lntegration of Women as Full
and Equal Partners in Development and Nation Building)' a Woman
of legal age (18 years) is given the equal capacityto act as a man,
and specifically can be an incorporator and a stock subscriber
without need of the husband's conformity, if married.
CORPORATION CODE
Bar Question: What is the minimum and maximum number of
incorporators required to incorporate a stock corporation? /s fhis
also the same minimum and maximum number of directors required
in a stock corporation? (2006 Bar)
Answer: Secflon 10 of the dorporation Code provides that any
number of naturalpersons nof /ess than five (5) but not more than
fifteen (15), all of legal age and a majority of whom are residents of
the Philippines, may form a private corporation for any lavvful
purpose.
Ihls ls the same minimum and maximum number of directors
required in a stock corporation under Secflon 14 of the Corporation
Code.
Bar Question: Must all incorporators and directors be residents of
the Philippines? (2006 Bar)
Answer: Not all directors and incorporators need to be residents of
the Philippines. Only a majority of the incorporators need to be
residents. The same is true in the case of members of the Board of
Directors.
2. Corporators
They are either stockholders in stock corporations or members in
non-stock corporations. The moment these persons cease to own
stocks in stock corporations, or terminate membership in non-stock
corporations, they cease to be corporators (Sec. 5, N.C.C.)
Bar Question: Differentiate between corporators and incorporators.
(1952 Bar)
Answer: The fottowing are the differences between a corporator and
an incorporator:
1) An incorporator is one who is a signatory to the Articles of
lncorporation of a corporation; a corporator is one who is a
stockholder of a stock corporation or a member of a non-stock
corporation.
2) An incorporator does not cease to be such by disconnecting
himself from the corporation; a corporator ceases to be such if he is
no longer a stockholder of a stock corporation or a member of a non-
stock corporation.
3) The number of incorporators of a stock corporation is 5 to 15;
there is no restriction as to the number of corporators after a
460 CORPORATION CODE
corporation is incorporated. A non-stock corporation can have more
than 15 persons as incorporators.
4) An incorporator must have contractual capacity; a corporator
may be such through his guardian in the case of sfock corporations.
The PCGG does not become ipso facto the owner of the shares
just because the same have been sequestered, nor does it become
the stockholder of record by virtue of such sequestration (Republic
vs. Sandiganbayan, 199 SCRA 39).
3. Stockholders and Members - See Corporators, supra
4. Promoter
A person who undertakes to form a corporation and to produce for
it the rights, instrumentalities, and capacity by which it is to carry out
the purposes set forth in its charter, and to establish it as fully able to
do its business.
Bar Question: A promoter, white organizing a corporation,
in
purchased certain mining claims his own name but expressly for
the benefit of the proposed corporation. There was a secref
agreement between the promoter and the vendors to give the
promoter a commission of 30% on the purchase price. After the
corporation was f6rmed the board of directors discovered the secret
agreement.
1) May the corporation refuse to accept the sale?
2) May the corporation claim the 30% commission for itself? (1949
Bai
Answer: 1) A promoter, although an agent of the incorporators, is
not an agent of the corporation. Unless prevented by estoppel or
ratification from honoring a contract executed by the promoter in its
behalf before incorporation, the corporation may validly refuse to
accept the sale.
2) The corporation, if it accepts the sale, may validly claim the 30%o
commission. The acceptance by the corporation of the sale ratifies
the agency relationship, and all benefits acquired by the agent inure
to the corporation.
Expenses incident to the promotion and organization of a
corporation subsequently incorporated pertain to the corporation and
not to the stockholders (Caram vs. CA, 151 SCRA 372).
CORPORATION CODE 461
5. The Board of Directors
The directors must be owners of at least one share of stock in a
stock corporation, must be subsisting members in non-stock
corporations. Cessation as stockholders or members, respectively,
automatically disqualifies them as directors. A majority of them must
be Philippine residents (Section 23, N.C.C.).
ln this jurisdiction, the members of the board of directors have a
three-fold duty: duty of obedience, duty of diligence, and duty of
loyalty. Accordingly, the members of the board of directors (1) shall
direct the affairs of the corporation only in accordance with the
purposes for which it was organized; (2) shall not willfully and
knowingly vote for or assent to patently unlaMul acts of the
corporation or act in bad faith or with gross negligence in directing
the affairs of the corporation, and (3) shall not acquire any personal
or pecuniary interest in conflict with their duty as such directors or
trustees (Strategic vs. Radstock, 607 SCRA 413).
ln approving the Resolutions, the Board caused undue injury to
the Government and gave unwarranted benefits to another utility,
through manifest partiality, evident bad faith or gross inexcusable
negligence of the Board. Such acts are declared under Section 3(e)
of RA 3019 or the Anti-Graft and Corrupt Practices Act, as "corrupt
practices xxx and xxx unlawful." Being unlawful and criminal acts,
these Resolutions are void ab initio and cannot be implemented or in
any way given effect by the Executive or Judicial branch of the
Government (lbid.).
Under Section 23, the power and the responsibility to decide
whether the corporation should enter into a contract that will bind the
corporation are lodged in the board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law.
However, just as a natural person may authorize another to do
certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or
agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate by-laws or authorization from
the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. A corporate officer
or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been
conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course
462 CORPORATION CODE
of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and
such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred (tbid.)
The corporate powers of a corporation, including the power to sue
and be sued in its corporate name, are exercised by the board of
directors. The physical acts of the corporation, like the"signing of
documents such as verification and certification of non-forum
shopping, can only be performed by natural persons duly authorized
for the purpose by corporate by-laws or by a specific act of the board
of directors (Tolentino vs. Shenton, 590 SCRA 24).
The requirement that a petitioner or principal party should sign the
certificate of non-forum shopping applies even to corporations,
considering that the mandatory directives of the Rules of Court make
no distinction between natural and juridical persons. A corporation,
however, exercises its powers through its board of directors and/or
its duly authorized officers and agents (Mediserv vs. CA, 617 SCRA
284).
a. Qualifications of Directors
Bar Question:*At the annual meeting of ABC Corporation for the
election of five directors as provided for in lfs artictes of
incorporation, A, B, C, D, E, F and G were nominated. A, B, C, D and
E received the highest number of iotes and were proctaimed
etected. F received ten votes less than E.
Subsequently, E sold all his shares to F. At the next Board of
Director's meeting following the transfer of the shares in the books of
the corporation, both E and F appeared; E, claimed that
notwithstanding the sale of his shares fo F, he remained a director
since the Corporation Code provides that directors "shall hold offiee
for one year and until their successors are elected and qualified." On
the other hand, F claimed that since he would have been etected as
a director had it not been for E's nomination and election, then he (F)
should now be considered a director as he has acquired all the
shares of E.
Decide with reasons. (1984 Bar)
Answer: Neither E nor F can sit as a director of the corporation.
E cannot be a director because he ceased to be a stockhotder by
the sale of all his sfocks to F. A director is required to be owner of at
CORPORATION CODE 463
least one share of stock in a corporation, and the moment he totally
dlsposes of hls sfocks, he automatically terminafes his directorship.
F cannot be a director because he was not elected as such'
Neither can he claim appointment as such to replace E, because he
was never appointed to the position by the remaining m,embers of
the board - his basls of ctaim being that he acquired all of the shares
of E, a director. The acquisition by a person of all of the stocks of an
incumbent director of a corporation will not make him (the transferee)
a director of that corPoration.
Bar Question: Primero, Segundo, Tercero; Pedro and Juan are the
five originat members of the Board of Directors of a stock
corporation. The only interest of Primero is that fifty percent of the
corporation's stocks were ptedged to him. Pedro and Juan died in a
vehicular accident.
Primero, Segundo and Tercero held an emergency board meeting
to fill up the two vacancies in the board. Primero and Tercero were
abte to push through the selection of Cuatro and Cinco as new
directors over the strong obiections of segundo who, as corporation
president, wanted two other persons as board members.
Subseguentty, the composition of the Board was validly increased
to six. At another board meeting, the four members of Primero's
group voted for Sels as the new sixth director, Segundo voted for
-another
person. when the six-member board convened, it decided
by a five-to-one vote to replace President segundo with Tercero as
the President.
Were the elections of 'Cuatro, Cinco, and Sers as directors valid?
Was the etection of Tercero as new President valid? Explain' (1986
Ba0
Answer: The etection of Cuatro, Cinco, and Seis as direcfors is
invalid.
At the outset, it will have to be stated that Primero's membership
in the board, atthough originat, is invalid, because a mere pledgee of
stock is not a stockhotder, and therefore disqualified to become a
candidate, and to be elected a director of the corporation.
When Pedro and Juan died, the filling up of the two vacancies in
the board, by the act of Primero, Segundo and Tercero, was invalid
because the remaining members of the board have the authority to
fiil up the vacancy only if they still constitute a quorum. As Primero
never could have been a director, the act of the two remaining
directors (segundo and Tercero) who did not anymore constitute a
quorum to fitl up the vacancy, was invalid, and did not make Cuatro
and Cinco directors of the corporation.
 464 CORPORATION CODE
The subsequent act of Primero, Tercero, Cuatro and Cinco of
electing seis as the sixth director is tikewise invatid as only one of
the four was a validly elected director. Hence, the later act of the five
(Primero, Tercero, Cuatro, Cinco and Sersi of electing Tercero as
the new President of the corporation is likewise invatid as only
Tercero's vote for himself was valid but not sufficient to etect him as
President of the corporation.
A corporation is authorized to prescribe qualifications for
directors (Gokongweivs. SEC, 39 SCRA 336).
A director stands in a fiduciary relation to the corporation and its
stockholders.. The disqualification of competitor from being elected to
the board is a reasonable exercise of corporate authority (lbid.).
Bar Question: The Board of Directors of "C" Corporation, engaged
in the manufacture and sale of food products, acting on a stancling
authority of the stockholders to amend the By-Laws, amended its By-
Lauvs so as to disqualify any stockhotder, who is also a stockhotder
and director of a competitor, from being etected to its Board of
Directors.
"5", a stockholder holding sufficient shares fo assure him a seat in
the Board, filed a petition with the Secunties and Exchange
Commission for a declaration of nullity of the amended By-Laws and
the cancellatifin'of the Certificate of Filing of Amended By-Laws. He
alleged, among others, that as a stockhotder, he had acquired rights
inherent in stock ownership, such as the right to vote and be voted
upon in the election of directors.
Reason out the merits of the stockhotder's petition. (2000, 1ggB,
1961 Bar)
Answer: The petition of s should be denied. lt is within the authority
of the stockholders of a corporation to enact by-taws which woutd
disqualify as a candidate for director, any of its stockholders who
holds a substantial equity in a competing corporation.
Matters taken up in board meetings could involve trade secrets
which ought not to go out of the board room for the protedtion of the
corporation's busrness interests. The presence as a member of the
Board of Directors of a person who hotds a substantiat interest in a'
competing corporation can destroy that secrecy on many busrness
matters.
When Section 23 of the Corporation Code declares that "the
board of directors...shall hold office for one (1) year until their
CORPORATION CODE arr
successors are elected and qualified," we construe ftre provlrlen
l€
mean that the term of the members of the board or oirectbri
only for one year; their term expires one year after erection
iili'br
office. The hordovei period - that time froh the tapse oi'onr6^uri
from a member's erection to the Board and untir'nis succffii nrr
election and quatification - is not part of the directors origi;ait€fr0i
office, nor is it a new^term; the hordover period, howevei.onttrtrrr
part of his tenure. coroilary, when an incumbent rero"r-JiTi
its board of directors continues to serve in a hordover capacity,lt irpriiii
that the office has a fixed term, which has expired,' flri
incumbent is hording the succeeding term (Vaile Verde vs."no'
rurror,
598 SCRA 202).
ln several cases, we have defined "term" as the time during which
the officer may craim to hord the office as of right, and fiies the
interval after which the severar incumbents siail' succe"J
one
another. The term of office is not affected by the holdover. The term
is fixed by statute and it does not change simpry because the office
may have become vacant, nor because-the inc,mbent holds over
in
office beyond the end of the term due to the fact that a successor
has not been erected and-has faired to quarify. Term is oistinguisneo
from tenure in that an officer's "tenure; represents the term during
which the incumbent actuaily hords office. The tenure may
be
shorter (or, in case of hordover, ronger) than the term for
within or beyond the power of the incumbent (lbid.). '."""on"
This theory of deregated power of the board of directors simirarry
explains why, under section 29 of the corporation code, in
cases
wh.e1e the vacancy in the corporation's board of directors
is caused
no!by the expiration of a member's term, the successor,,so erected
to fill in a vacancy shail be erected onry for the unexpireo term
or nis
predecessor in office." The raw has authorized
the remaining
members of the board to fill in a vacancy only in specified instances,
so as not to retard or. impair the corporation's operations; yet, in
recognition of the stockholders' right to elect the member,'oi
tn"
board, it limited the period during -which the successor shall serve
only to the "unexpired term of his predecessor in office (rbid.).
It also bears noting that the vacancy referred to in section 29
contemplates a vacancy occurring within the director's term
of office.
when.a vacancy is created uy tne expiration of a term, rogicarry,
there is no more unexpired term to speak of. Hence, s".iion
zg
declares that it shall be the corporation's stockholders who
shall
466 CORPORATION CODE
possess the authority to fill in a vacancy caused by the expiration of
a member's term (lbid.).
b. Number of Directors
Bar Question: How many directors may ordinary stock corporations
have? (1948 Bar)
Answer: A stock corporation may have nof /ess than five nor more
than fifteen directors.
c. Liability of Directors
It is basic that a corporation is a juridical entity with legal
personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. The general
rule is that obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities, and vice
versa (Magaling vs. Ong, 562 SCRA 152).
ln order to pierce the veil of corporate fiction, for reasons of
negligence by the director, trustee or officer in the conduct of the
transactions of the corporation, such negligence must be gross'
Gross negligence is one that is characterized by the want of even
slight care, bcting or omitting to act in a situation where there is a
duty to act, not inadvertently but willfully and intentionally with a
conscious indifference to consequences insofar as other persons
may be affected; and must be established by clear and convincing
evidence. Parenthetically, gross or willful negligence could amount to
bad faith (lbid.). lt evinces a thoughtless disregard of consequences
without exerting any effort and avoid them (Citibank vs' Gatchalian,
240 5CRA 212); lhe wanton absence of or failure to exercise slight
care or diligence, or the entire absence of care (National vs' CA, 378
scRA 194).
To hold a director, a trustee or an officer personally liable for the
debts of the corporation and, thus, pierce the veil of corporate fiction,
bad faith or gross negligence by the director, trustee or officer in
directing the corporate affairs must be established clearly and
convincingly. Bad faith is a question of fact and is evidentiary. Bad
faith does not connote bad judgment or negligence. lt imports a
dishonest purpose or some moral obliquity and conscious
wrongdoing. lt means breach of a known duty through some ill
CORPORATION CODE 467
motive or interest. lt partakes of the nature of fraud (lbid.; Urban vs.
Pena, 659 SCRA 418).
It is settled that in the absence of malice, bad faith, or specific
provision of law, a director or an officer of a corporation cannot be
made personally liable for corporate liabilities. Personal liability of
corporate directors, trustees or officers attaches only when (1) they
assent to a patently unlawful act of the corporation, or when they are
guilty of bad faith or gross negligence in directing its affairs, or when
there is a conflict of interest resulting in damages to the corporation,
its stockholders or other persons; (2) they consent to the issuance of
watered down stocks or when, having knowledge of such issuance,
do not forthwith file with the corporate secretary their written
objection; (3) they agree to hold themselves-personally and solidarily
liable with the corporation; or (a) they are made by specific provision
of law personally answerable for their corporate action (Lowe vs. CA,
596 SCRA 140).
The act of the Board in issuing the resolution demonstrates the
Board's Sross and willful disregard of the requisite care and diligence
in managing the affairs of the company, amounting to bad faith and
resulting in grave and irreparable injury to the company and its
stockholders. This reckless and treacherous move on the part of the
Board clearly constitutes a serious breach of its fiduciary duty to the
company and its stockholders, rendering the members of the Board
liable under Section 31 of the Corporation Code (Strategic vs.
Radstock, 607 SCRA 413).
It is basic that only corporate officers shown to have participated
in the alleged anomalous acts may be held criminally liable (Cruzvale
vs. Eduque, 589 SCRA 534).
. Before a stockholder may be held criminally liable for acts
committed by the corporation, it must be shown that he had
knowledge of the criminal act committed in the name of the
corporation and that he took part in the same or gave his consent to
its commission, whether by action or inaction (Espiritu vs. petron,
605 SCRA 245).
Unless they have exceeded their authority, corporate officers are,
as a general rule, not personally liable for their official acts (Delima
vs. Gois, 554 SCRA 731).
468 CORPORATION CODE
To hold a director or an officer personally liable for corporate
obligations, two requisites must concur; (1) the complainant must
allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of grave
negligence or bad faith; and (2) the complainant must clearly and
convincingly prove that such unlawful acts, negligence and bad faith
(Francisco vs. Mallen,631 SCRA 118; Urban vs. Pena,659 SCRA
418).
Obligations incurred as a result of the director's and officer's acts
as corporate agents, are not their personal. liability, but the direct
responsibility of the corporation they represent. As a rule, they are
solidarily liable with the corporation for the illegal termination of
dismissed employee if they acted with malice or bad faith (Penaflor
vs. Outdoor, 618 SCRA 708).
Petitioners' argument that they could not be held jointly and
severally liable for damages because only one voted for the
disapproval of respondent's application lacks merit because directors
or trustees who willfully and knowingly vote for or assent to patently
unlaMul 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 rdsirlting therefrom suffered by the corporation, its
stockholders or members and other persons (Cebu vs. Elizagaque,
542 SCRA 65).
A stockholder and director cannot be held personally liable for the
debts of the corporation if the bad faith or wrongdoing is not
established clearly and convincingly. Bad faith is never presumed
(Seaoilvs. Autocorp, 569 SCRA 387).
A person who merely acted as representative of a corporation in
signing a contract, could not be made personally liable for the
corporation's failure to comply with its obligation thereunder (D.M. vs.
Readycon, 433 SCRA 251 ).
Unless they have exceeded their authority, corporate officers are,
as a general rule, not personally liable for their official acts. Although
as an exception, corporate directors and officers are solidarily held
liable with the corporation, where terminations of employment are
done with malice or in bad faith, in the absence of evidence that they
acted with malice or bad faith herein, they are exempt from any
CORPORATION CODE 469
personal liability for the employees' illegal dismissal (Price vs.
lnnodata, 567 SCRA 269; AMA vs. lgnacio, 590 SCRA 633).
An entity which deals with corporate agents within circumstances
showing that the agents are acting in excess of corporate authority,
may not hold the corporation liable. This is only fair, as everyone
must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty
and good faith (Traders vs. CA, 269 SCRA 15).
"Employer" includes any person acting in the interest of an
employer, directly or indirectly. A person who was the president of a
corporation and who actively managed the business falls within the
meaning of an "employer' as contemplated by the Labor Code, who
may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees (Naguiat vs. NLRC, 269
scRA 564).
lf a corporation violates the Trust Receipts Law, the officers
thereof who executed the said trust receipt become criminally liable
under said law (Prudential vs. lAC,216 SCRA 257).
The members of the board and officers of a corporation who
purport to act for and in behalf of the corporation, keep within the
laMul scope of their authorfty in so acting, and act in good faith, do
not become liable, whether civilly or otherwise, for the consequences
of their acts, which are considered acts of the corporation itself
(Benguet vs. NLRC, 209 SCRA 55).
lf PHI suffered damage (liability for payment of additional
interests and penalties) due to the alleged negligence of its officers
and directors - the PCGG nominees - it is not correct to shift that
damage (loss of income from being prevented to collect additional
interests and penalties) to the creditor, DBP/APT. There is no law
authorizing such shifting of damage. What the law clearly provides is
that the guilty directors or officers are the ones who should be liable
for the damages, if any, suffered by the corporation (APT vs.
Sandiganbayan, 360 SCRA 437).
The unauthorized use or distribution of the Central Bank
Certificate of lndebtedness by a corporate officer cannot bind the
said corporation, not without the approval of its Board of Directors,
470 CORPORATION CODE
and the maintenance of the required reserve fund (Traders vs. CA,
269 SCRA 15).
An exception to the rule that officers and members of a from the busrness of ABC Piggery lnc. of raising and selling pigs.
corporation are not personally liable for acts done in the performance
of their duties is when the employer corporation is no longer existing
and is unable to satisfy the judgment in favor of the employee, the
officers should be held liable for acting on behalf of the corporation
(Restaurante vs. Llego, 314 SCRA 24).
The rule pertaining to transactions between corporations with
interlocking directors resulting in the prejudice to one of the
corporations does not apply where the corporation allegedly
prejudiced is a third party, not one of the corporations with
interlocking directors (Development vs. CA, 363 SCRA 307).
The powers to increase capitalization and to offer or give
collateral to secure indebtedness are lodged with the corporation's
board of directors. However, this does not mean that the officers of
the corporation other than the board of directors cannot be made
criminally liable for their criminal acts if it can be proven that they
participated therein (Singian vs. Sandiganbayan, 478 SCRA 348).
Bar Question: What liability, if any, may a director of a corporation
incur for misconduct or dishonesty of his co-directors or other officers
of the corporation? (1968 Bar)
Answer: Generally, a director is not liable for the misconduct or
dishonesty of his co-directors or other officers of the corporation,
because a director ls not an insurer of the fidelity of agents of the
corporation.
He may be held liable if it is shown that he neglected his duty to
supervise the business with attention or to use proper care in the
appointment of agents.
Bar Question: ABC Piggery, lnc. is engaged in raising and selling
hogs in the local market. Mr. De Dios, one of its directors, while
traveling abroad, met a leather goods manufacturer who was
interested in buying pig skins from the Philippines. Mr. De Dlos sef
up a separate company and stafted exporting pig skins to his foreign
contact but the pig skins exporied were not sourced from ABC. His
fellow directors from ABC complained that he should have given this
busmess to ABC. How would you decide this matter. (1991 Bar)
CORPORATION CODE 471
Answer: As the problem sfafes, ABC Piggery, lnc. is engaged in the
raising and selling of pigs in the local market.
The sale of pig skins for leather goods manufacture is different
The act of Director de Dios of organizing another company to
export pig skrns does not violate the doctrine of corporate
opportunity.
ABC Piggery lnc. cannot therefore complain of the pig skin
expoftation done by the separate company of De Dios.
Bar Question: When may a corporate director, trustee or officer be
held personally liable with the corporation? (1996 Bar)
Answer: ln the following instances, a corporate director, trustee or
officer can be held personally liable along (although not necessarily)
with the corporation:
(1) He votes or assenfs to a patently unlawful act of the corporation,
or is guilty of gross negligence or bad faith in directing its affairs, or
acquires any interest in conflict with his duty as such, resulting in
damages to the corporation, its stockholders or other persons
(Section 31, NCC);
(2) He consenfs to the issuance of watered sfocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto (Section 65, lbid.);
(3) He agrees to hold himself personally and solidarily liable with the
corporation (See De Asls vs. CA, 136 SCRA 599); or
(4) He is made, by a specific provision of law, to personally answer
for his corporate action, e.9., Section 144 of the Corporation Code,
orthe Trust Recerpfs Law (H.L. Carlos vs. Marina, 421 SCRA 428).
Bar Question: Ronal Sham doing business under the name of
SHAMRON Machineries (SHAMRON) sold to Turtle Mercantile
(TURTLE) a diesel farm tractor. ln payment, TURTLE's President
and Manager Dick Seldon issued a check for P50,000.00 in favor of
SHAMRON. A week after, TURTLE sold the tractor to Briccio
lndustries (BRICCIO) for P60,000.00. BRICCIO discovered that the
engine of the tractor was reconditioned so he refused to pay
TIJRTLE. As a result, Dick Seldon ordered "stop payment" of the
check to SHAMRON.
SHAMRON sued TURTLE and Dick Seldon. SHAMRON
obtained a favorable judgment holding co-defendants TURTLE and
Dick Seldon jointly and severally liable.
Comment on the decision of the trial court. Discuss fully. (1995
Ba0
472 CORPORATION CODE
Answer: The court was correct in holding TURTLE liable, but erred
in holding Seldon jointly and severally liable with it..
Seldon was a mere corporate officer who entered into a
transaction in behalf of the corporation. He cannot be held
personally liable for the liabilities of SHAMRON in the absence of
proof that he intended to evade a just obligation, or to justify a wrong,
or to perpetrate fraud, or to commit injustice.
Bar Question: As a result of perennial business /osses, a
corporation's net worth has been wiped out. ln fact, it is now in
negative territory. Nonetheless, the stockholders did not like to give
up.
Creditor-banks, however, do not share the confidence of
stockholders and refuse to grant more loans.
Assuming that the corporation continues to operate even with
depleted capital, would the stockholders or the mapagers be
solidarily liable for the obligations incurred by the corporation?
Explain. (1999 Bar)
Answer: No, the stockholders or the managers cannot be held
solidarily liable for the obligations incurred by the corporation
because the corporation is a judicial entity with legal personality
separate and distinct from those acting for and in its behalf and from
the people comprising it. The rule is that obligations incurred by the
corporation, rcting through its directors, officers and employees, are
ifs so/e liabilities.
Bar Question: What is the so-catled doctrine of corporate
opportunity? What is the underlying philosophy upon which such
doctrine resfs? (2005, 1985 Bar)
A,nswer: The doctrine of corporate opportunity is a rule expressly
provided for by the Corporation Code making a director account to
his corporation, gains and profits from any transaction entered into
by him or another competing corporation or entity where he has a
substantial interest, which should have been a transaction
undertaken by his corporation.
The doctrine rests fundamentally on the unfairness occasioned by
the said director or officer taking personal advantage of a busrness
opportunity which properly appeftains to the corporation, in breach
therefore of the fiduciary posture he is supposed fo obserue in
relation to his corporation and its stockholders. He cannot possibly
serue fuvo masters.
CORPORATION CODE 473
Bar Question: Malyn, Schiera and Jaz are directors of Patio
lnvestments, a close corporation formed to run Patio Caf6, an al
fresco coffee shop in Makati City. ln 2000, Patio Caf6 began
experiencing financialreyerses, consequently, some of the checks it
issued to its beverage distributors and employees bounced.
ln October 2003, Schiera informed Malyn that she found a
location for a second Caf6 in Taguig City. Malyn objected because
of the dire financial condition of the corporation.
Sometime in April 2004, Malyn learned about Fort Patio Cafe
Iocated at Taguig City and that its development has been underiaken
by a new corporation known as Fort Patio, lnc., where both Schiera
and Jaz are directors. Malyn also found that Schiera and Jaz, on
the
behalf of Patio lnvestments, had obtained a loan of P 500,000.00,
form PBCom Bank, for the purpose of opening Fort Patio Caf6. This
loan was secured by the assefs of Patio lnvestments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action before the Regional
Trial Court of Makati City against Schiera and Jaz, alleging that the
two directors breached their fiduciary duties by misappropriating
money and assefs of Patio lnvestments in the operation of Fort Patio
Cafe.
Did Schiera and Jaz violate the principle of corporate opportunity?
Explain. (2005 Bar)
Answer: Schiera and Jaz violated the principle of corporate
opportunity under Section 34 of the Corporation Code. They used
Patio lnvestmenfs fo obtain a loan, mortgaged.lfs assefs and used
the proceeds of the loan to acquire a coffee shop through the new
corporation they formed. Clearly, the two utilized the resources and
credit standing of Patio lnvestments for the advancement of their
personal lnferesfs.
d. Gompensation of Directors
Directors or trustees are not entitled to salary or other
compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a
presumption that directors/trustees render service gratuitously, and
the return upon their shares adequately furnishes the motives for
service, without compensation. There are only two (2) ways by which
members of the board can be granted compensation apart from
reasonable per diems: (1) when there is a provision in the by-laws
fixing their compensation; and (2) when the stockholders
representing a majority of the outstanding capital stock at a regular
474 CORPORATION CODE
or special stockholders' meeting agree to give it to them. This
proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Members
of the board may receive compensation, in addition to reasonable
per diems, when they render services to the corporation in a capacity
other than as directors/trustees (Western vs. Salas, 278 SCRA 216).
Bar Question: After many difficult years which called for sacrifices
on the part of the company's directors, ABC Manufacturing Inc. was
finally earning substantial profits. Thus, the President proposed to
the Board of Directors that the directors be paid a bonus equivalent
to fifteen percent (15%) of the company's net income before tax
during the preceding year. The president's proposal was
unanimously approved by the Board. A stockholder of ABC
questioned the bonus. Does he have grounds to obiect? (1991 Bar)
Answer: Yes, the stockholder has grounds to object to the board
resolution giving to the members of the board 15%6 as bonus based
on the company's income before tax for the preceding year. Ihese
grounds are: (1) the grant of the bonus should either appear in the by
laws, or should be approved by stockholders representing at least a
majority of the outstanding capital stock of the corporation, approved
in a regular or special meeting of the stockholders, and (2) the bonus
(or other form of compensation not per diem) should not exceed ten
percentum (10/6) of the net income before income tax of the
corporation during the preceding year.
6- The Executive Committee
The by-laws may create an executive committee composed of not
less than three directors, appointed by the board. By majority vote,
the committee can act on matters within the competence of the
board as may be delegated to it by the by-laws or by the board. lt
cannot however act on the following: (1) matters needing
stockholders' approval, (2) filling up of board vacancies, (3)
amendment, repeal or adoption of by-laws, (4) amendment of an
irrepealable board resolution, and (5) cash dividend declarations.
7. Officers
Corporate officers are given such character either by the
Corporation Code or by the corporation's by-laws. Under Section 25
of the Corporation Code, the corporate officers are the president,
secretary, treasurer and such other officers as may be provided in
CORPORATION CODE 475
the law by-laws. Other officers are sometimes created by the charter
or by-laws of a corporation, or'the board of directors may be
empowered under the by-laws of a corporation to create additional
offices as may be necessary WPP vs. Galera, 616 SCRA 436).
The by-laws may and usually do provide for other officers, e.9.,
vice-president, cashier, auditor, and general manager. One who is
included in the by-laws of an association in its roster of corporate
officers is an officer of said corporation and not a mere employee
(Union vs. NLRC, 314 SCRA 531; Pamplona vs. Acosta, 510 SCRA
249).
A suit for damages for illegal ouster of a corporate officer
prescribes in four years.
An officer appointed at the pleasure of the Board, per the
corporate by-laws, may be terminated at any time (Tavera vs. Phil.
Tuberculosi s, 1 12 SCRA 243).
An officer occupying a position in a hold over capacity can be
removed anytime, without cause, upon the election or appointment of
his successor (Barayuga vs. Adventist, 655 SCRA 640).
Where a loan was procured for corporate purposes, and an
official signed for and in behalf of the corporation solidarily with
himself in his personal capacity, both the corporation and the official
are solidarily liable (De Asis vs. CA, 136 SCRA 599).
There is no law which prohibits a corporate officer from binding
himself personally to answer'for a corporate debt. While the limited
liability doctrine is intended to protect a stockholder by immunizing
him from personal liability for corporate debts, he may nevertheless
divest himself of this protection by voluntarily binding himself to the
payment of corporate debts (Toh vs. Solid, 408 SCRA 544).
Ordinary company employees are generally employed not by
action of the directors and stockholders but by that of the managing
officer of the corporation who also determines the compensation to
be paid such employees. Corporate officers, on the other hand, are
elected or appointed by the directors or stockholders, and are those
who are given that character either by the Corporation Code or by
the corporation's by-laws (Gomez vs. PNOC, 606 SCRA 187).

.d76 CORPORATION CODE
A corporation is not prohibited from hiring a corporate officer to
perform services under circumstances which will make him an
employee. lndeed, it is possible for one to have a dual role of officer
and employee. The NLRC has jurisdiction over a complaint filed by
one who served both as corporate secretary and administrator,
finding that the money claims were made as an employee and not as
a corporate officer (lbid.).
From the documents submitted by respondents, petitioner was a
director and officer. The charges of illegal suspension, illegal
dismissal, unpaid commissions, reinstatement and back wages
imputed by petitioner against respondents fall squarely within the
ambit of intra-corporate disputes. ln a number of cases, we have
held that a corporate officer's dismissal is always a corporate act, or
an intra-corporate controversy which arises between a stockholder
and a corporation (Okol vs. Slimmers, 608 SCRA 97).,
For engaging in recruitment of workers without obtaining the
necessary license from the POEA, if the offender is a corporation,
partnership, association or entity, the penalty shall be imposed upon
the officer or officers of the corporation, partnership, association or
entity responsible for violation (People vs. Garcia, 271 SCRA 621).
Knowledge*of facts acquired or possessed by an officer or agent
of a corporati6ri in the course of his employment, and in relation to
matters within the scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not (Carrascoso vs'
cA,477 SCRA 666).
It is basic that only corporate officers shown to have participated
in the alleged anomalous acts may be held criminally liable'
(Cruzvale vs. Eduque, 5Bg SCRA 534).
a. The President
The President must be a director and his functions primarily
involve the implementation of board resolutions and policies.
While as a general rule the President as such may bind the
corporation by a contract in the ordinary course of business'
provided the same is reasonable under the circumstances, the
situation is quite different where a director or officer is dealing with
his own corporation. Where an individual was not just an ordinary
stockholder but was a member of the Board of Directors and Auditor
CORPORATION CODE 477
of the corporation as well, he was what is often referred to as "self-
dealing" director (Prime vs. lAC, 220 SCRA 103).
Under the present Corporation Code, all corporate powers shall
be exercised by the Board of Directors, except as otherwise provided
by law. Although it cannot completely abdicate its power and
responsibility to act for the juridical entity, the Board may expressly
delegate specific powers to its President or any of its officers. ln the
absence of such express delegation, a contract entered into by its
President, on behalf of the corporation, may still bind the corporation
if the board should ratify the same expressly or impliedly. lmplied
ratification may take various forms - like silence or acquiescence; by
acts showing approval or adoption of the contract; or by acceptance
and retention of benefits flowing therefrom. These rules are basic,
but are all general and thus quite flexible. They apply where the
President or other officer, purportedly acting for the corporation, is
dealing with a third person, i.e., a person outside the corporation
(rbid.).
A board director or qther corporate officer cannot readily enter
into a contract with his own corporation. On the other hand, a
director's contract with his corporation is not in all instances void or
is fair and reasonable
voidable. lf the contract under the
circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made. (lbid.).
The power to sue and be sued in any court by a corporation even
as a stockholder is lodged in the board of directors that exercises its
corporate powers and not in the president or officer thereof (Bitong
vs. CA, 292 SCRA 503).
The president of a corporation is considered as the corporation's
agent, and as such, his knowledge of the repeal of a resolution in
another juridical person in which his corporation has an interest, is
ascribed to his principal under the theory of imputed knowledge
(Rovels vs. Ocampo, 391 SCRA 176).
An officer of a corporation who is authorized to purchase the
stock of another corporation has the implied power to perform all
other obligations arising therefrom such as payment of the shares of
stock. By allowing its president to sign the Agreement on its behalf,
the corporation clothed him with apparent capacity to perform all acts
which are expressly, impliedly and inherently stated therein (lnter-
Asia vs. CA, 403 SCRA 452).
478 CORPORATION CODE
b. The Treasurer
The Treasurer may or may not be a director of the corporation.
His principal function involves the custody of funds and other
properties of the corporation.
c. The Secretary
The secretary need not be a director but must be a resident and a
citizen of the Philippines.
It is the corporate secretary's duty and obligation to register valid
transfers of stocks and if said corporate officer refuses to comply, the
transferor-stockholder may rightfully bring suit to compel
performance. ln the absence of provision to the contrary, the
corporate secretary is the custodian of corporate records. Corollarily,
he keeps the stock and transfer book and makes proper and
necessary entries therein (Torres vs. CA, 278 SCRA 793).
The fact that a stockholder holds 81 .28o/o of the outstanding
capital stock of a company is of no moment and is not a license for
him to arrogate unto himself a duty lodged to the corporate
secretary. All corporations, big or small, must abide by the provisions
of the Corporation Code. Being a simple family corporation is not an
exemption. Such'corporations cannot have rules and practices other
than those established by law (lbid.).
Being regular on its face, a Secretary's Certification is sufficient
for a third party to rely on - it does not have to investigate the truth of
the facts contained in such certifichtiort, otherwise business
transactions of corporations would become tortiously slow and
unnecessarily hampered (Esguerra vs. CA, 267 SCRA 380).
The proper custodian of the books, minutes and official records of
a corporation is usually the corporate secretary. Being the custodian
of corporate records, the corporate secretary has the duty to record
and prepare the minutes of the. meeting. The signature of the
corporate secretary gives the minutes of the meeting probative value
and credibility (People vs. Dumlao, 580 SCRA 409).
Bar Question: Can a Spanish citizen be (1) President, (2) director,
(3) secretary, @ manager of a corporation? Can an American citizen
occupy any of the above positions? (1946 Bar)
CORPORATION CODE 479
Answer: 1) A Spanish citizen can be President of a corporation
provided he ls. a director thereof. ln the 100% nationalized
corporation like those engaged in retail trade, a Spanlsh citizen
cannot be a stockholder, hence, cannot be a director and/or
President thereof.
2) A Spanish citizen can be a director of a corporation, except in
the 1 00% nationalized corporations.
3) A Spanish citizen cannot be a secretary of a corporation as the
Corporation Law requires a corporate secretary not only to be a
resident, but also to be a citizen of the Philippines.
4) He can be a manager of a corporation, except in the nationalized
corporations.
An American citizen can be a president, director or manager of a
corporation except in the nationalized corporations. He cannot be
corporate secretary, as Filipino citizenship is a requirement for that
position.
lll. Capital Structure of Stock Corporations
A. lmportant Goncepts Defined
1. GapitalStock
Capital stock is the amount stated in the articles of incorporation
of a corporation, divided into shares of stock and made available for
subscription
The capital stock of a par value stock corporation is called
"authorized capital stock", while that of a no par value stock
corporation is called "stated capital."
2. Gapital
Capital is the actual property or estate of a corporation whether in
property or in money, including surplus and undivided profits.
Capital refers to the value of the property or assets of a
corporation (NtC vs.CA, 311 SCRA 508).
Bar Question: Distinguish capital stock from capital of a corporation.
(1964, 1957 Bar)
Answer: Capitalsfock ls distinguished from capital as follows:
480 CORPORATION CODE
a) Capital sfock rs the amount of money stated in the articles of
incorporation to be subscribed and paid in; capital represents the
actual property of a corporation;
b) Capital stock remains fixed unless changed by proper
amendment of the articles; capital varies according to the results of
fhe busrness operations of a corporation.
3. Share of Stock
A share of stock is a unit of capital stock representing the
proportionate interest of its owner in the management, dividends,
and assets on liquidation of the corporation.
B. Prerequisites to lncorporation
1. Capital Stock
The capital stock of a corporation is stated in its articles of
incorporation. This capital stock is divided into shares with par value
indicated, if the corporation is a par value stock corporation; and with
no mention of the par value per share if the corporation is a no-par
value stock corporation.
While no-par value stocks have no fixed value per share for all the
number of shares stated in the articles, the corporation fixes the
issue value of these shares at the time of issue for a consideration
which shall not be less than five pesos (P5.00) per share. These
issued shares shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to
its creditors in respect thereto. The entire consideration received by
the corporation for these shares shall be treated as capital and shall
not be available for distribution as dividends (Section 6, .3rd
paragraph, N.C.C.).
Bar Question: The articles of incorpgration to be registered in the
Securlfles and Exchange Commission contained the following
provisions-
a) 'First Article. The name of the corporation shall be Toho Marketing
Company."
b) "Third Article. The principal office of the corporation shall be
Iocated in Region lll, in such municipality therein as ifs Board of
Directors may designate."
c) "Seventh Article. The capital stock of the corporation is One Million
Pesos (P1,000,000.00) Philippine Currency."
CORPORATION CODE 4flt
What are your comments and suggested changes to tha
proposed afticles? (1990 Bar)
Answer: My comments to the provisions stated above are:
a) The name of the corporation should contain the wotd
"lncorporated" or "Corporation." The suggested change is:
.First Article: The name of the
corporation shall be TOHO
MARKETI N G CO RP O RAT I O N. "
b) The principal office of the corporation should mention the town
and province, or the city where it is located.
The board by resolution cannot designate the principal office of
the corporation, or change the same from time to time. The
suggesfed change is:
"Third Article: The principal office of the corporation shall be
located in Cabanatuan City."
c) The Seventh Article should not only mention the amount of
capital stock, but also the number of shares into which said capital
sfock is divided, and the par value for each of the shares, if the
shares are of the par value type. The suggesfed change is:
"Seventh Article: The capital stock of the corporation is One Million
Pesos (Pl,000,000.00), Philippine cLtrrency, divided into ten
thousand (10,000) common shares, each with a par value of One
Hundred Pesos (Pl 00.00).
Bar Question: A client asks you what is the difference between "par
value" and "no par value" shares of stock. Explain it as simply as you
can. (1950 Bar)
Answer: A par value share is one where the subscription or issue
value of the share is fixed by the articles of incorporation, at which
amount all such shares are issued by the corporation.
A no par value share is one which gives to the corporation a
leeway to fix differenf issue values every time the shares are allowed
fo be lssued. Ihe issue value for the shares of the corporation may
therefore vary at every issue of the stock by the corporation.
Bar Question: The same client now tells you that he and his
assocrafeshave P500,000 which they wish to invest in a factory for
the manufacture of shoes. He asks for your opinion as to whether
they should organize a corporation with "par value" stock. What will
you tell him? (1950 Bar)
Answer: I will first ask my client whether he and his assocrafe s have
intentions to invite other investors after incorporation. lf he says yes,
482 CORPORATION CODE
I wilt advise him to organize a no-par value stock corporation,
then
otherwise, I witt suggest a par value stock corporation. Reason: If the
corporation is a no par value stock corporation, and it succeeds,
suisequentissues of stock may be at book value, to give protection
to the pioneer incorporators; if it fails, then subsequent issues may
be at values /ess than the originat issue value, to attract oufstders,
This reason witt not hotd if my ctient and hls assoclafe s intend to limit
stock ownership to themsetves, iit which.case shares with par value
would be the ideal set-uP.
Par Question: what private corporations may not issue no-par value
shares'of stock and what shares of stock may not be lssued without
a stated par value? (1959, 1958 Bar)
Answer: The fottowing private corporations may not issue no-par
value shares:.(1) banks, (2) insurance companies, (3) building and
loan associations, and (4) pubtic utility companies without approval
of any of the appropriate boards created to replace the PSC'
Tlte fotlowing shares of stock may not be issued without a stated
par value: () freferred shares of any corporation, (2) shares rssued
by the above-stated corporations.
(Note: lJnder Section 6, 1st paragraph of the N.C.C., tlust
companies also cannot issue no-par value shares. Public utilities
also cannof r'ssue sald shares even with the approval of their
app ropriate su Pe rui sory boards. )
Bar Question: Explain the nature and reason for no par value
shares of stock. (1958 Ba)
Answer: No par value shares are shares issued by a corporation at
rssue values varying with every issue.
No par value shares are issued to atlow flexibility in the price at
which they may be lssued, fhe issue value being usually pegged to
their book value.
2. Subscribed GaPital
The deposit on stock subscription is not a subscription
agreement. The deposit on stock subscription is merely an amount
oi money received by a corporation with a view of applying the same
as payment for additional issuance of shares in the future, an event
which may or may not happen. The person making a deposit on
stock subicription does not have the standing of a stockholder and
he is not entiileO to dividends, voting rights or other prerogatives and
CORPORATION CODE 483
attributes of a stockholder (Commissioner vs. Express, 5Bg SCRA
253).
Subscribed capital stock means the capital stock or a portion of it
which has been issued or subscribed, and paid for, in part or in
whole.
a. Trust Fund Doctrine
Bar Question.' Discuss the trust fund doctrine. (2007 Bar)
Answer: The trust fund doctrine considers the subscribed capital
sfock as a trust fund for the payment of the debts of the corporation,
and to which creditors have a right to look up to for the satisfaction of
their credits. Hence, the corporation cannot drssipafe it to the
prejudice of its creditors.
It is an established doctrine that subscriptions to the capital stock
of a corporation constitute a fund to which creditors have a right to
look up to for satisfaction of their claims, and that the assignee in
insolvency can 'maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts
(Ong vs. CA, 401 SCRA 648).
A corporation has no power to release a subscription to its capital
stock, without valuable consideration for such release, and as
against creditors, a reduction of the capital stock can take place only
in the manner and under the conditions prescribed by the statute or
the charter or the articles of incorporation (lbid.).
Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares and in Section 122
on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with
(rbid.)
The Trust Fund Doctrine is the underlying principle in the
procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital
only in three instances: (1) amendment of the Articles of
lncorporation to reduce the authorized capital stock, (2) purchase of
redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and eventual
liquidation of the corporation (Ong vs. Tiu,401 SCRA 1).
484 CORPORATION CODE
It is settled that the property of a corporation is not the property of
its stockholders or members. Under the trust fund doctrine, the
capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the distribution of
corporate assets (Yamamoto vs. Nishino, 551 SCRA 447).
The trust fund doctrine is not limited to reaching the stockholder's
unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but
also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts (Halley vs. Printwell' 649
scRA 116).
As between the corporation itself and its creditors, it is a simple
debtor, and as between the creditors and stockholcier, its assets are
in equity, a fund for the payment of its debt (Urban vs. Pena, 659
scRA 418).
The scope of the doctrine when the corporation is insolvent
encompasses only the capital stock and stockholder, its assets are in
equity for the payment of its debt (SMC vs. Sandiganbayan, 340
scRA 28e).
All assetidnd property belonging to the corporation held in trust
for the benefit of creditors that were distributed or in possession of
the stockholders regardless of full payment of the subscription may
be reached by the creditors in satisfaction of its claim (lbid.).
The capital subscribed is the total amount of the capital that
persons (subscribers or shareholders) have agreed to take and pay
for, which need not necessarily be, and can be more than, the par
value of the shares. ln fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in consideration of the
original issuance of the shares. ln the case of stock dividends, it is
the ameunt that the corporation transfers from its surplus profit
account to its capital account. lt is the same amount that can loosely
be termed as the trust fund of the corporation' The Trust Fund
doctrine considers this subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors may
look for satisfaction. Until the liquidation of the corporation, no part
of the subscribed capital may be returned or released to the
stockholder (except in the redemption of redeemable shares) without
violating this principle. Thus dividends must never impair the
CORPORATION CODE 48s
subscribed capital; subscription commitments cannot be condoned
or remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor (NTC vs.CA, 311
SCRA 508; PLDT vs. NTC, 539 SCRA 365).
ln the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in
part, is made out of corporate profits, such as stock dividends. The
capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine --- wherein the
capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors.
Once capital, it is always capital. That doctrine was intended for the
protection of corporate creditors (Commissioner vs. CA, 301 SCRA
152).
The distribution of corporate assets and property cannot be made
to depend on the whims and caprices of the stockholders, officers
and directors of the corporation, or by the court "to prevent further
squabbles and future litigations" unless the indispensable conditions
and procedures for the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors'
turn to engage in "squabbles and litigations" should the court order
an unlaMul distribution in blatant disregard of the Trust Fund
Doctrine (Ong vs. Tiu,401 SCRA 1).
Bar Question: A, B and C are shareholders of XYZ Company. A
has an unpaid subscription of P100,000.00, B's shares are fully paid
up, while C owns only nominal but fully paid up shares and is a
director and officer. XYZ Company becomes insolvent, and it is
established that the insolvency is the result of fraudulent practices
within the company. lf you were counsel for a creditor of XYZ
Company, would you advise legal action against A, B and C? (1997
Ba0
Answer: tf t were the counsel for a creditor of XYZ Company, I
would advise the former that his course of actions A, B, and C are as
follows:
A: He can claim against the unpaid subscription of A to answer for
the company's liability by virtue of the Trust Fund Doctrine.
B: He can no longer run after B because B's subscnption has been
fully paid up and being a mere stockholder, his personality and
liability is separafe and distinct from that of XYZ Company.
486 CORPORATION CODE
C: He may hold C personally liable, not as stockholder but as
director and officer of XYZ Company for the fraudulent practices in
the company that produced its insolvency.
Bar Question: A subscribed to 100 shares of stock of corporation X
with par value of P100.00 each, paying P1,500.00 on his
subscription. Subsequently, A asked B, the president of the
corporation, to release him from his subscription. B consented
provided that A forfeits to the company what he had already paid. A
agreed and B gave him a certificate of release. Not long afterwards,
X went into insolvency and an assrgnee was appointed. The
assrgnee now seeks to collect from A the unpaid balance of his
subscription. Decide the dispute with reasons. (1979, 1971 Bar)
Answer: The assignee of the insolvent corporation may collect from
A the unpaid balance of hls subscription.
Under the trust fund doctrine, subscriptions to the capital stock of
a corporation constitute a fund to which creditors have a right to look
up to for the satisfaction of their claims. The corporation, whether
through its board, or any of its officers, like the President in the
problem, cannot in any manner dlssipafe said fund, or condone the
stockholder's obligation, or release A from the payment of his
subscription, all of which are illegal, violating the trust fund doctrine.
A, therefore, can be made to pay by the assignee of the insolvent
corporation fofthe unpaid balance of his subscription.
Bar Question: After five years of operation, "P. lnc." became
insolvent. Corporate creditors brought suit against both the
corporation and its stockholders. Against the latter, on the ground
that all of them had accounts remaining unpaid on their subscriptions
to the capital stock. Will a cause of action in favor of corporate
creditors lie as against stackholders for their unpaid subscriptions?
Give reasons for your answer. (1960 Bar)
Answer: Yes, a cause of action will lie against the stockholders for
their unpaid subscriptions. Under the trust fund doctrine, the
subscribed capital stock of a corporation is considered as a trust
fund for the paymenl of ifs debts, and to which the creditors have a
right to look up to for the satisfaction of their credits.
Bar Question: The "Manila Cigar Company" was organized with a
capitql stock of P50,000, divided into 500 shares of P100 a share.
"X" subscribed for 20 shares and paid P500 upon his subscription
leaving unpaid on account thereof the sum of P1,50A. Five years
CORPORATION CODE 487
later, the company was declared insolvent and "A" was duly
appointed assrgnee who, upon assuming his position, found that "X,,
has an unpaid subscription in the amount of P1,500. prior to the
company's declaration of insolvency, its board of directors, by
resolution, released "W" (another subscriber) from the payment of his
(W's) remaining unpaid subscription. The assignee brought action to
recover from "X" the amount representing his unpaid subscription.
a) ls the action properly filed although there was no prior calt made
pursuant fo secfions 37 and 38 of the Corporation Law?
b) Has X been released from his obligation to pay because the
board of directors had prqviously released another stockhotder (W)
from the payment of his unpaid subscription? Reason out your
answer: (1961 Bar)
Answer: a) Yes, the action to recover the unpaid subscription of X is
proper, inspite of the lack of a prior call. This rs because in case a
corporation is insolvent, no call is necessary to cottect the unpaid
subscription.
b) X is not released from his obligation for unpaid subscription just
because another stockholder (W) was released by the board
resolution from the payment of his unpaid subscription. The release
of W by the board is null and void hence, X coutd not use it as an
argument for excusing himself from paying his unpaid subscription.
The trust fund doctrine is also applicable in case the appraisal
right of a withdrawing stockholder is involved. The corporation is
prohibited from paying the withdrawing stockholder if the rights of
creditors are affected. Only unrestricted retained earnings of the
corporation are available for said payment, otherwise the preference
of creditors to corporate assets is relocated (Boman vs. CA, 167
scRA 540).
Bar Question: A corporation executed a promissory note binding
itself to pay its President/Director, who had tendered his resignation,
a certain sum of money in payment of the latter's shares and interest
in the company. The corporation defaulted in paying the futt amount
so that said former President filed suit for the coltection of the
balance before fhe SEC.
ls the arrangement between the corporation and its president
covered by the trust fund doctrine? Explain your answers briefty.
(1992 Bar)
Answer: The agreement between the corporation and its president
of payment by the corporation
of said President's shares and interest
488 CORPORATION CODE
in the company is dependent on the existence of unrestricted
retained earnings (the.same fund available for dividends), otherwise,
the disbursement would result in a preference to persons other than
the creditors of the corporation, and hence, woutd constitute a
violation of the trust fund doctrine.
3. Paid up Capital
Paid-up capital is the amount actually paid in rnoney or property
on account of the subscribed capital stock.
For purposes of incorporation, at least 25oh of the subscribed
capital stock must be paid in by incorporators.
The paid-in amount should however not be less than P5,000.00
(Section 14, 2nd paragraph, N.C.C.).
Bar Question: Explain the difference between "authorized capital,"
"subscribed capital" and "paid-up capital" of a corporation' (1964 Bar)
Answer: Authorized capital ls a stafed amount in the articles of
incorporation of a corporation representing the maximum amount the
corporation can cottect from its stockholders on account of fhe sfocks
issued to them.
Subscribed tapnd is the capital stock or a portion of it, issued by
the corporation to its stockholders, paid for, or promised to be paid
by the latter.
Paid-up capital is the actual amount of money paid, or propefty
detivered to the corporation on account of the subscription of a
stockholder.
For purposes of incorporation, the law requires at least 25% of the
capitat stock to be subscribed, and at least 25%o of such subscription
to be paid by the incorporators.
(Note: Answered under the provisions of the N.C.C.)
Bar Question: While the incorporation papers of XYZ, lnc. were
pending before,the Securities and Exchange Commission (SEC) for
approval, A, the designated Treasurer in the Articles of lncorporation
held realesfafe property worth P20,000.00 which E turned over for
shares he (E) purchased in XYZ, lnc. Before the certificate of
incorporation for XYZ, tnc. coutd be issued, H, who claims to be the
owner of said real estate property, filed an action against XYZ, lnc.
for recovery of possesslon of the same.
Will H's suit prosper? Give reasons. (1978 Bar)
CORPORATION CODE 489
Answer: The action of H will not prosper. properties turned over by
an incorporator to the Treasurer of a corporation to pay a
subscription pending rssuance of its certificate of incorporation by the
securities and Exchange commission, are received and hetd in trust
by said Treasurer for the benefit of the corporation pending issue of
its certificate of incorporation; hence, being trust property, the
treasurer of the corporation cannot drspose of the same in any
manner.
The Prohlem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financiatassisfance by way
of direct investments and/or loans. Your professionalasslsfance is
solicited on the following various ques/ions that may arise.
Bar Question: Assume that you want to be a participant in the
busrness independently of your being its legal counset, and that
more investors are expected after the firm is formalty organized.
Explain briefly with legal reasons.'
Citing the proper law or laws, how may you tawfutty charge your
fees and apply them to the payment of your share in the capital of
the firm? (1973 Bar)
Answer: lJnder the Corporation Law, sfocks are paid in actual cash
or in exchange for property in an amount equal to the par value of
the shares lssued.
A lawyer who has already rendered service to the corporation is
entitled to be paid for such service which credit is considered as
propefty the value of which is ascertainable. Stocks may be issued
for this purpose.
(Note: Under Section 62, N.C.C., services actually rendered to the
corporation is a laMul consideration for the issuance of stocks.)
C. lncrease or Decrease of Capital Stock
1. Required Vote
The capital stock of a corporation may be increased or decreased
at a stockholders' meeting called for the purpose wherein two thirds
of the outstanding capital stock shall favor such increase or
decrease, after prior approval by a majority vote of the board of
directors (Section 39, N.C.C.)
490 CORPORATION CODE
Shares of stock in corporation may be divided into voting shares
and non-voting shares, which are generally issued to preferred or
redeemable shares (Section 6, Corporation Code)
Voting rights are exercised during regular or special meetings of
stockholders; regular meetings to be held annually on a fixed date,
while special meetings may be held at any time necessary or as
provided in the By-laws upon notice (Section 30, Corporation Code)
2. Procedure
Bar Question: Explain fhe sfeps to be taken for increasing the
capital stock of a corporation. (1947 Ba)
Answer: The following sfeps are taken for increasing the capital
stock of a corporation:
1. Notice to stockholders specifying the purpose of the meeting'
2. Affirmative vote of 2/3 of the entire corporate capital stock.
3. Certificate signed by maiority of the directors and countersigned
by the chairman and secretary of the stockholder's meeting.
4. Treasurer's certificate that 20% of the increase has been
subscribed and 25% of such subscription paid-up.
(Note: Under the N.C.C. prior board approval is required. Also,
subscription requirement is at least 25% of the authorized capital
stock.)
Bar Question: "X" Realty,'lnc., a corporation engaged in the
subdivision business, has an authorized capitalof P800,000.00, allof
which has been futty subscribed. At a speciat meeting of the board of
directors, the maiority vote decided, on the basls of the
recommendation of its Executive Committee, that the corporation
purchase a T-hectare property offered to it because it was ideal for
ifs subdlvis ion business, the price offered was lower than the
prevaiting market price and John Roque, the owner of the property,
was wilting to accept P200,000.00 worth of shares of the corporation
in exchange of, or as payment for, his property. No cash was
involved in the transaction. Thus, the Board approved a resolution
increas:ing the authorized capital stock from P800,000.00 to P1 M'
stiputating that the additional P200,000.00 worth of shares be issued
in exchange for the S-hectare property and that the existing
stockholders would have no preemptive right to subscribe to the
additionat shares as the same were being issued to pay for the
property.
CORPORATION CODE 49t
Was the action of the Bqard correct and sufficient? Explain your
answer. (1982 Bar)
Answer: The action of the board is not correct and is not sufficient.
The act to increase capital stock from P800,000 to P1 million is in
effect an amendment to the Seventh Article of the Afticles of
lncorporation. The approval of the board of this increase of capital
stock requires the further approval by stockholders representing 2/3
of the outstanding capital stock, in a meeting called for the purpose.
Furthermore the setting aside by the board of P200,000 worth of
shares (the whole of the increase) in exchange for a 5 hectare
property, at the same time stipulating that dxisting stockholders
would have no preemptive right to said increase, requires again the
vote of approval of stockholders, representing at least A3 of the
outstanding capital stock, in a meeting called for said purpose.
The board of directors of X Realty, lnc. did not have its approved
resolution go through these requirements. The resolution approved
by the board therefore is not correct and is very deficient.
Bar Question: The stockholders of People Power, lnc. (PPI)
approved the following two resolutions in a special stockholders
meeting: (i) resolution increasing the subscribed capital stock of PPl,
and (ii) resolution authorizing the Board of Directors fo issue for cash
payment the new shares from the proposed capital stock increase in
favor of outside investors who are non-stockholders. The foregoing
resolutions were approved by stockholders representing 99% of the
total outstanding capital stock. The so/e dissenter was Jose Estrada
who owned the rest (1%) of the stock.
a) Are the resolutions binding on the corporation and ifs
stockholders, including Estrada, the dissenting stockholder?
b) What remedies, if any, are available to Estrada? (1998, 1987
Ba0
Answer: a) The resolution increasing the capital stock, assuming
that the procedural prerequisites have been complied with for calling
the special stockholders' meeting and assuming further that there
was approval by the board (the resolution to increase being an
amendment to the articles) would bind both the corporation and
stockholder Estrada.
Amendments of the articles, including that to increase capital
stock need, among others, approval by stockholders holding at least
two thirds (2/3) of the outstanding capital stock of the corporation.
Ihis,s present in the case at bar.
492 CORPORATION CODE CORPORATION CODE 493

b) There is no way by which Estrada can prevent the resolution to D. Classes of Shares
increase capital stock from taking effect, as fhis is not one of the four
instances provided for by the law by which he can asserf hrs 1. Statutory Classification
appraisal right. However Estrada can assert his preemptive right to
the increase. This right is personal to him and cannot be waived by The Corporation Code enumerates the classes of shares which a
board and stockholders' resolutions. corporation may issue. These are:.

Bar Question: As a result of perennial business /osses, a
corporation's net worth has been wiped out. ln fact, it is now in
negative territory. Nonefheless, the stockholders did not like to give
up.
Creditor-banks, however, do not share the confidence of the
stockholders and refuse to grant more loans.
What tools are available to the stockholders to replenish capital?
(1999 Bar)
Answer: The stockholders may do the following to replenish capital:
1) lncrease the capital stock of the corporation
2) Demand payment of unpaid subscription from delinquent
stockholders.
3) Make advances to the corporation.
Bar Question: Suppose 'X" Corporation has an authorized capital
stock of P1M divided into 100,000 shares of stockwith par value of
P10 each.
a) Give two ways whereby said authorized capital stock may be
increased to about Pl.5 M.
b) Give three practical reasons for a corporation to increase its
capital stock. (2001 Bar)
Answer: a) Two ways to increase authorized capital are to increase
the number of shares from 100,000 to 150,000 without increasing
the par value, or to increase the par value to P15.00 each share,
without increasing the number of shares.
b) The fottowing may be reasons for a corporation to increase its
capitalsfock:
1. to increase its power to invest corporate funds in another
corporation or busrness, to further accomplish the primary purpose
for which it was incorporated or for a purpose other than the primary
purpose, subject to requirements provided by law
2. to increase working capital, hence, generate more income
3. . to maintain sfocks should there be a necessity to declare
stock dividends
a. Voting and Non-Voting Shares
A corporation may divide its shares into classes or series of
shares, or both, any of which classes or series may have such rights,
privileges or restrictions as may be stated in the corporate articles.
There shall always be a class or series which shall have complete
voting rights (Section 6, N.C.C.)
1. Voting Shares
a. Founder's Shares
A special class of voting shares, called the Founder's stocks,
may be provided for in the corporate articles. These shares may be
given rights and privileges not enjoyed by owners of other stocks.
Where, however, the exclusive right to vote and be voted for in the
election of directors is granted, said right cannot exceed five (5)
years, subject to SEC approval and counted from the date of said
approval (Section 7, N.C.C.)
2. Non-voting Shares
No share shall be deprived of voting rights except those classified
and issued as preferred or redeemable (lbid.). Treasury shares also
are non-voting (Section 9).
a, Preferred Shares
A preferred share is one which entitles the holder thereof to
certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares
of a corporation.
Preferences granted to preferred stockholders do not give them a
lien upon the property of the corporation nor make them creditors of
the corporation, the right of the former being always subordinate to
the latter.
494 CORPORATION CODE
Shareholders, both common and preferred, are considered risk
takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid
(Republic vs. Agana, 269 SCRA 1).
Preferred shares issued only with a par value may be given
preference in the distribution of assets in liquidation and in the
payment of dividends, or such'other preferences as may be stated in
the articles of incorporation. lf authorized by the corporate articles,
the board may fix the terms and conditions of the preferred shares or
any series thereof, which take effect upon the filing of a certificate
thereof with the SEC (Section 6, N.C.C.)
Bar Question: On September 15,2007, XYZ Corporation issued to
Paterno 800 preferred shares with the following terms:
"The Preferred Shares shall have the following rights, preferences,
qualifications, and limitations, to wit:
1. The right to receive a quarterly dividend of One Per Centum
(1 %), cumulative and participating;
2. Ihese shares may be redeemed, by drawing of lots, at any time
after two (2) years from date of issue, at the option of the
Corporation; x x x."
Today, Paterno sues XYZ Corporation for specific performance, for
the payment of dividends on, and to compel the redemption of, the
preferred shares, under the terms and conditions provided in the
stock certificates. Will the suit prosper? Exptain. (2009 Ba)
Answer: The suit will not prosper. Preferred shares take a
multiplicity of forms. The most common may be classified into two:
(1) preferred shares as fo assefs; and (2) preferred shares as fo
dividends. The former is a share which gives the holder thereof
preference in the distribution of fhe assefs of the corporation in case
of liquidation; the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before
any dividends at all are paid to the holders of common stock. There
is no guaranty, however, that the share will receive any dividends
(Republic vs. Agana, 269 SCRA 1).
1. Gommon Shares vs. Preferred Shares;
Doctrine of Equality of Shares
A common stock represents the residual ownership interest in
the corporation. lt is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges and entitles the
CORPORATION CODE 495
shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on dividends and
asset distribution. Both shares are part of the corporation's capital
stock. Both stockholders are no different from ordinary investors
who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the
profits and losses of the enterprise. Moreover, under the doctrine of
equalityof shares -- all stocks issued by the corporation are
presumed equalwith the same privileges and liabilities, provided that
the Articles of lncorporation is silent on such differences
(Commissioner vs. CA, 301 SCRA 152).
b. Redeemable Shares
Redeemable shares, issuable only if expressly provided for in the
corporate articles, have to be purchased or taken up by the
corporation on the expiration of the period specified in said shares.
The purchase takes place whether or not the corporation has
unrestricted retained earnings when the expiration date arrives
(Section 8, N.C.C.)
Redeemable shares are shares usually preferred, which by their
terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain
redemption price (Republic vs. Agana, supra).
A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. Redemption may not be
made where the corporation is insolvent or if such redemption will
cause insolvency or inability of the corporation to meet its debts as
they mature (lbid.).
While the stock certificate allows redemption, the option is vested
in the corporation, hence the stockholder cannot compel or refuse
the redemption (lbid.).
The redemption cannot be allowed as the corporation has been
suffering from chronic reserve deficiency. Redemption was
prohibited by the Central Bank for a just and valid reason (lbid')
Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for property, whether
496 CORPORATION CODE
or not the acquired stock is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and
continues in business as before the redemption of stock dividends
previously issued is used as a veil for the constructive distribution of
cash dividends (Commissioner vs. CA, supra).
c. Treasury Stocks
Treasury shares are stocks previously issued by the corporation,
fully paid for, and reacquired by it by laMul means. The board, after
fixing a reasonable price for them, may dispose of these shares
(Section 9, N.C.C.)
A treasury share or stock, which may be common or preferred,
may be used for a variety of corporate purposes, such as for a stock
bonus plan for management and employees or for acquiring another
company. lt may be held indefinitely, resold or retired. While held in
the company's treasury, the stock earns no dividends and has no
vote in company affairs. (Phil. Coconut vs. Republic, 600 SCRA 102)
Treasury shares are stocks issued and fully paid for and
reacquired by the corporation either by purchase, donation, forfeiture
or other means. They are therefore issued shares. But being in the
treasury they do not have the status of outstanding shares. The
limited nature of treasury share means that although a treasury
share, not having been retired by the corporation re-acquiring it, may
be reissued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself,
nor in the meetings of the corporation as voting stock, for othenvise
equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still foregoing essential features
of a treasury stock are lacking in the questioned shares (SMC vs.
Sandiganbayan, 340 SCRA 2Bg).
d. Voting Rights Exercisable by Owners
of Non-.Voting Shares
Except for treasury stocks which cannot be voted upon on any
corporate matter (Section 57, N.C.C.), holders of other non-voting
shares shall nevertheless be entitled to vote on the following
corporate matters: (1) amendment of the articles, (2) adoption and
CORPORATION CODE 497
amendment of the by-laws, (3) sale 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 with other corporations, (7)
investment of funds in another corporation or for a different purpose,
and (8) corporate dissolution (Section 6, paragraph 6, N.C.C.)
b. Par Value and No-Par Value Shares
All shares of a corporation may have a par value or have no par
value, as stated in the corporate articles, except that banks, trust
companies, insurance companies, public utilities, and building and
loan associations cannot issue no par value shares.
Bar Question: Name the differenf c/asses of shares of stock and
briefly discuss at least two of said c/asses. (1961 Bar)
Answer: Shares of stocks may be common, preferred or deferred;
no par value and par value shares,' watered stock, over-issued s/ock.
A common sfock is stock entitling the holder to proportionate
rights in voting, dividends and assefs in liquidation, along with other
common stockholders.
A preferred sfock is sfock issued entitling the holder to a
preference in (1) dividends up to a stated percentage, and/or (2)
assefs in liquidation, with generally no voting rights.
(Note: The principal N.C.C. classification of stocks is into the voting
and the non-voting. ([See supra]).
Bar Question: Mention two kinds of preferences that may be given
to preferred shares. (1949 Bar)
Answer: The preferences may be (1) on dividends up to a stated
percentage, and/or (2) on assets in liquidation.
Preferred stockholders with preference on dividend declarations
are paid first before common stockholders are paid their dividends, if
there are unrestricted retained earnings left for the purpose.
On liquidation, preferred stockholders are refunded their
investments, after the creditors are paid, but ahead of refunds, if any,
to com mon stockholders.
Bar Question: What is meant by preferred cumulative participating
share of stock? (1950 Bar)
498 CORPORATION CODE
Answer: A preferred cumulative participating share of sfock ls a
share entitling its holder to preference in the payment of dividends
ahead of the common stockholders, to be paid the specified rate of
dividends for prior years, if unpaid, and to participate with the
common stockholders in furiher dividend declarations tn excess of
the rate stated in the preferred stock certificate.
2. Other Classifications
a. Promotion Stock
Promotion stock is stock issued by the corporation usually a
mining company to (1) owners of the mining ground deeded to the
corporation, (2) promoters and other persons for services rendered
before incorporation.
b. Escrow Stock
Escrow stock is stock deposited with a third person to be
delivered to the stockholder or his assigns after complying with
certain conditions, usually the payment of the full subscription price.
c. Over-issued Stock
Over-issued stock is stock issued in excess of the authorized
amount or number of shares of the capital stock, hence, null and
void.
d. Watered Stock
Watered stocks are stocks issued by a corporation (1)
gratuitously, (2) 'tor money or property less than par value, (3) for
services less than par value, (4) in the form of dividends, when no
unrestricted retained earnings exist (Section 65, N.C.C.)
E. lssue and Transfer of Shares
1. lssue of Stocks
Stocks are deemed issued from the moment subscription is
accepted whether the subscriber has paid in part or in full for his
subscription.
CORPORATION CODE
a. Modes of lssue
There are several modes of issuing stocks: (1) by subscription, (2)
by sale or exchange of unissued stock, (3) in payment of obligations,
(4) stock dividends.
b. Consideration
Stocks shall not be issued for a consideration less than the par or
issue value. The consideration may take any of the following forms:
(1)cash paid, (2) property delivered at fair value to the corporation,
(3) labor or services actually rendered to the corporation, (4) prior
corporate obligations, (5) amounts transferred from unrestricted
retained earnings to stated capital, and (6) outstanding shares
exchanged for stocks in the event of reclassification or conversion
(Section 62, 1st paragraph, N.C.C.)
The use of stocks by a corporation to pay for real property
purchased by it, does not make the sale simulated or fictitious.
Where shares of the unissued stock are issued to some
stockholders before the exemption resolution or certificate is issued
by the SEC to the corporation, the stock issues are null and void,
and cannot be utilized to avail of stockholders' rights including the
right to vote foi directors in the annual stockholders' meeting
(Motoomul vs. de la Paz, 187 SCRA 743).
Bar Question: May shares of sfocks be lssued for services rendered
to the corporation? Explain and give reasons for your answer. (1952
Ba0
Answer: Yes, shares of stock may be issued for services rendered.
Services rendered are compensable in money, and money is a valid
consideration for the issuance of stocks.
(Note: Under the N.C.C., services rendered is expressly a
consideration for the issue of stocks.)
Bar Question: Janice rendered so,??e consultancy work for XYZ
Corporation. Her compensation included shares of stock therein.
Can XYZ Corporation lssue shares of sfock to pay for the
services of Janice as ifs consultant? Discuss your answer. (2005
Ba0
 CORPORATION CODE 501
5OO CORPORATION CODE

Code' until the bank returns sald certificate to R after R has paid in full his
Answer: Yes. According to Section 62[3] of the Corporation
pay for loan to the bank, S cannot recover the certificate from the bank.
the corporation can 1"""," shares of- itock to actually
'p",ti*zi or The certificate, however, if in fhe possession of R, can be
serylces to the corporation, but not for future seruices
recovered by S because of their contract.
servrces Yet to be rendered'
a 2. Preemptive Right of Stockholders
Bar Question: on January 7, 1972, Cruz&signed
written
Company' in the
iinr"iiptio, to the corptorate stock of Sanfos
The stockholders' preemptive right is the right of stockholders at
following terms: -!-^t. ^r o.
,,therebysubscribeforl00sharesofthecapitalstockofSanfos the time of the issue of capital stock, in preference to other persons,
first dividends dectared on any or all and as between themselves, to subscribe for, or purchase, the
a coipsni, payaotiiroi tn" unissued stocks in proportion to the number of shares of the original
shares of said comtpany owned by me at the time dividends are
p?iq " stock held by them respectivelY.
ieitarea,
-- untit the fu'tl amount of thii subscription has be.en.
in" question is inetner this stiputation to the first dividends
The right applies to all issues or disposition of shares of any
declatred'ontheshareshastheeffectofretievingthesubscriber class, unless such right is denied by the corporate articles or its
., (cruz) from personii ianitttv in an action to recover
the value of the
'J;;;;; ;iiuin ina sive reasons vour
for answer' (1e52 Bar) amendments. Excluded from the rule are stock offerings to the publii
in compliance with laws requiring such offerings, and stocks issued
in exchange for property needed for corporate purposes, or stocks to
'iiiiirt
Answer:No,thesubscrlberisnotrelievedfromliabilityforthe
or r's suosc iiptio, The to have the subscriptioi pay a previously contracted debt (Section 39, N.C.C.).
-pJyuiii" .stiputat'ron onlv
tne fiiit iiiiaends declared is nult and void as the
fio^
the of sfocks are The additional issue of unissued shares from the original stock
dividends which cai be the consideration for
r,ssue
may be made by the board without need of getting stockholders'
thosecomingfromavatidlyexistingsurplusprofitfromoperationsat approval. This is on the theory that when a corporation at its
contemplated in the
the time the stocki are r'ssued. The dividends inception offers its first shares, it is presumed to have offered all of
probtem have.no right to exist yet'
dividends is the those which it is authorized to issue. An original subscriber is
[*"i", uro"r *re il-c.c., the iource of the fund for deemed to have taken his shares knowing that they form a definite
unrestricted retained earnings') proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later re-offered, he cannot claim a
BarQuestion''sboughtsharesofstoekfromastockbrokerwho dilution of interest (Dee vs. SEC, 199 SCRA 238).
delivered a street certificate fo s. As security
for a- loan,.s delivered
to a bank to (Note: The events in the Dee vs. CA case transpired before 1980,
iie certificate to R, ino in turn ptedged the certificate the effectivity date of the New Corporation Code. See Section 39 of
securehisowntoant.A,fterSpa'idn,saemandedthereturnofthe the New Corporation Code.)
ceftificate from R iio, the bank. can s recover the certificate?
"ia
Exptain fullY. (1971 Ba) The purpose of the notice requirement in Article 10 of the ETPI
of the Articles of lncorporation is to give the stockholders knowledge of the
Answer: s cannot recover the certificate in the possession
intended sale of shares of stock of the corporation, in order that they
bank. may exercise their preemptive right. Where it is shown that a
Astreetcertificateisasfockcertificateendorsedbythe
is entitled stockholder had actual knowledge of the intended sale within the
transferee
registered hotder in-oianx and upon its face, the period prescribed to exercise the right, the notice requirement had
to demand its transier into his name from the issuing corporation.
been sufficiently met (Republic vs. Sandiganbayan, 346 SCRA 760).
Whensoindorsedinblank,thecertificateistransferablebymere
delivery. Bar Question: ABC Corporation has an authorized capital stock of
WhendeliveredbyRtothebankstittwiththeblankindorsement, One Million (P1,000,000.00,) Pesos divided into 50,000 common
thetatterhadaperfe"t,ignttoassumethatRwaslfsholder.Hence, shares and 50,000 preferred shares.
504 CORPORATION CODE
Answer: Yes, the contention of DX is correct. The purpose of the
notice requirement is to give the stockholders knowledge of the
intended sale of shares of sfock of the corporation, in order that they
may exercise their pre-emptive right (See Republic
San d ig an b ayan, su p ra).
3. issuance of Certificate of Stock
a. Nature of a Gertificate of Stock
A certificate of stock is the written acknowledgment by the
corporation of the stockholder's interest in the corporation. lt is
personal property and may be mortgaged or pledged. lt is however
not necessary that a person should hold a certificate of stock for that
person to be a stockholder. lt is quasi-negotiable in that title can be
transferred by indorsement but is non-negotiable in that the holder
takes it subject to the defensgs of the registered owner or
transferor's cieditor under the lawi except insofa-r as such rights or
defenses are subject to the limitations imposed by the principles
governing estoppel (Tan vs. SEC, 206 SCRA 740). lt binds the
corporation when the transfer is recorded in the corporate books.
A certificate of stock is the evidence of a holder's interest and
status in a corporation. lt is a written instrument signed by the
proper officer of a corporation stating or acknowledging that the
person named in the document is the owner of a designated number
of shares of its stock. lt is prima facie evidence that the holder is a
shareholder of a corporation (Lao vs. Lao, 567 SCRA 558).
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein. The
certificate is not a stock in the corporation but is merely evidence of
his ownership of the share represented thereby. lt is not in law the
equivalent of such ownership. lt expresses the contract between the
corporation and the stockholder, but is not essential to the existence
of a share of stock or the nature of the relation of shareholder to the
corporation (Makati vs. Cheng,621 SCRA 103). . ln fact, it rests on
the will of the stockholder whether he wants to be issued stock
certificates, and a stockholder may opt not to be issued a certificate
(Ponce vs. Alsons, 393 SCRA 602).
While it is true that the farmer is issued stock certificates and
does not directly own the land, the Corporation Code is clear that the
farmer becomes a stockholder who acquires an equitable interest in
CORPORATION CODE 505
the assets of the corporation, which include the agricultural lands. lt
was explained that the equitable interest of the shareholder in the
property of the corporation is represented by the term stock, and the
ys. extent of his interest is described by the term shares. The
expression shares of stock when qualified by words indicating
number and ownership expresses the extent of the owner's interest
in the corporate property. A share of stock typifies an aliquot part of
the corporation's property, or the right to share in its proceeds to that
extent when distributed according to law and equity and that its
holder is not the owner of any part of the capital of the corporation
(Hacienda vs. Presidential, 653 SCRA 154).
b. Formalities for lssuance
Section 63 of the Corporation Code envisions a formal certificate
of stock which can be issued only upon compliance with certain
requisites. FIRST, the certificates must be signed by the president
or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation. A mere
typewritten statement advising a stockholder of the extent of his
ownership in a corporation without qualification and/or authentication
cannot be considered as a formal certificate of stock. SECOND,
delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never
detached from the stock books although blanks therein are properly
filled up if the person whose name is inserted therein has no control
over the books of the company. THIRD, the par value, as to par
value shares, or the full subscription as to no par value shares, must
first be fully paid. FOURTH, the original certificate must.be
surrendered where the person requesting the issuance of a
certificate is a transferee from a stockholder (Bitong vs. CA, 292
scRA 503).
c. Right of Stockholder to a Gertificate
As soon as the. stockholder fully pays for the subscription, he is
entitled to the issuance of a certificate of stock.
Where stock certificates prepared by the corporation in the name
of a registered stockholder are claimed by another person who
alleges that they are merely held in trust by said registered
stockholder, an interpleader action filed by the issuing corporation
against the two claimants is a proper remedy (Lim vs. Continental,
69 SCRA 349).
 CORPORATION CODE
Bar Question: After subscribing to 3,000 shares of corporation stock
with a par value of P100 each, a stockholder paid for 1,000 shares or
a totat sum of P100,000. He then asked for the issuance to him of
ceftificates of sfocks for the 1,000 paid-up shares so that he may
have voting rights but the corporation refused. In the trial court, the
judge resolved the case against the stockholder, ruling that - "ln the
absence of special agreement to the contrary, a subscriber for a
ceftain number of shares of stock does not, upon payment of one-
third of the subscription price, become entitled to the issuance of
ceftificates for one-third of the number of shares subscribed for; the
subscriber's right consists only in equity entitling him to a certificate
upon payment of the remaining portion of the subscription price."
Comment on said ruling, with reasons. (1975 Bar)
Answer: The ruling is in accordance with law and applicable
jurisprudence.
As a general rule, a stockholder who pays partially his
subscription ls not entitled to the issue of prescribed stock
certificates to him, the requirement being that the total par value of
sfocks subscribed by him should first be paid.
The Lingayen Gulf case, which is the exception to the general
rule, prescribed two conditions under which a corporation may issue
a stock certificate for that number, equivalent in par value to the
payment made by said stockholder. These conditions are: (1) the by-
laws of the 1c;rporation does not prohibit the act, and (2) the
corporate board allows it.
Ihese two requisites are not present in the problem, hence the
stockholder cannot invoke the doctrine in the Lingayen Gulf case.
(Note: The rule under the N.C.C. is the general rule stated above.
The exception allowed by the Supreme Court in the Lingayen Gulf
case [14 SCRA 522] can no longer be applied because it would
violate the Code.)
Bar Question: Ace Cruz subscribe to 100,000 shares of stock of JP
Development Corporation, which has a par value of P1 per share. He
paid P25,000 and promised to pay the balance before December 31,
2008. JP Development Corporation declared a cash dividend on
October 15, 2008, payable on December 1, 2008. On December 1,
2008, can Ace Cruz compel JP Development Corporation to lssue fo
him the stock certificate corresponding to the P25,000 paid by him?
(2008 Bar)
Answer: No, he may not compe! the Corporation to issue him the
stock certificate. As a general rule, a stockholder who pays paftially
CORPORATION CODE 507
his subscription is not entitled to the lssue of prescribed stock
certificates to him, the requirement being that the totat par value of
sfocks subscribed by him should first be paid.
Bar Question: Pedro Sanfos, married to Maria de ta Cruz, is
planning to invest Pl0,000.00 in a corporation and comes to you for
advice as to whether he should have the certificate of stock rssued fo
"Pedro Sanfos and/or Maria de la Cruz" or to "pedro Santos and
Maria de la Cruz, joint tenants." What woutd be your advise? State
your reasons briefly. (1951 Bar)
Answer: I will advise Pedro Sanfos to forego with his desire to have
the certificafe issued to him and his wife joinily or in the alternative
as any of these modes would subject fhe spouses to inconvenience
and unwanted legal complications in the exercise of their right as
stockholders, and in the transfer by them of their shares to others in
the future.
I would suggesf to Pedro sanfos fhe issue of the certificate either
totally in his name, or one certificate each for him and his wife for
that number of shares corresponding to P5,000 each.
(Note: Under the N.C.C., stock certificates issued in an ,'andlor,,
capacity may be voted upon by any of its joint owners, who can also
appoint a proxy to vote for the stocks [Section 56])
d. Lost and Stolen Gertificates
A finder of a lost certificate, or one who steals a stock certificate,
does not become owner of the same and cannot vest in his
transferee a valid title, even if the latter acquires it in good faith and
for value.
The lost certificate may be reconstituted in accordance with the
provisions of Section 73, N.C.C.
Bar Question: What sfeps musf be taken in order that a new
ceftificate may be issued to a stockholder of a private corporation
who reports fhe /oss of his stock certificate? (1g6g Bar)
Aniwer: The procedure for reconstituting a lost, stolen, or destroyed
stock certificafe consrsfs of the following sfeps:
1) The stockholder executes an affidavit in triplicate stating the
circumstances of the /oss, desfruction or stealing, and submits the
same to the corporation;
s08 CORPORATION CODE
2) The corporation shall pubtish in a newspaper of general circulation
a notice of such /oss, sfea/rng or destruction, once a week for three
weeks;
3) lf after the lapse of one year from the last publication, no contest
is made by any third person, the corporation shall cancel from its
books the said lost, stolen or destroyed certificate and lssue a new
one to the stockholder, who however, may file a bond acbeptable to
the board, in which case the certificate may be rssued etlen before
the expiration of said period.
4) tf a contesf ls piesented to the corporation or a case is pending in
court, issuance shatl be suspended untilfinal decision is rendered.
(Note: Answered under the provisions of the N.C.C.)
Bar Question: Juan was a stockholder of "X" Corporation. He
owned a totat of 500 shares evidenced by certificate of stock No.
1001. He sotd the shares to Pedro. After getting paid, Juan
indorsed and delivered said certificate of stock No. 1001 to Pedro.
The fottowing day, Juan went to the offices of the corporation and
ctaimed that his certificate of stock No. 1001 was /osf and that,
despite ditigent ef.forts, the certificate could not be located- The
formatities-prescribed by'taw for the replacement of the "lost"
certificate were complied with. Eventually, "X" Corporation issued, in
substitution of the "lost" certificate, Ceftificate of Stock No. 2002.
Juan forthwith transferred for valuable consideration the new
certificate to J6se who knew nothing of the previous sa/e fo Pedro.
ln time, the corporation was confronted with the conflicting claims of
Pedro and Jose. The Board of Directors of 'X" Corporation invited
you to enlighten them on these questions; viz:
a) tf a suit were to be initiated in order to resolve the controversy
between Pedro and Jose, should the matter be submitted to the
Secunlies and Exchange Commission or to the regular courts?
b) Between Pedro and Jose, whom should the corporation so
recognize as the rightful stockholder?
How would you respond to the above queries? (1997 Bar)
a) The matter being an intracorporate controversy ls
Answer:
cognizable by the Secun1les and Exchange Commission, hence,
should be submitted thereto
(Note: Under R.A. 8799, jurisdiction is now with the Regional Trial Court)
b) Jose is the rightful stockhotder. Having done all the formalities
prior the issuance of a new certificate of stock in lieu of the loss,
stolen, or destroyed one, which include publication in a newspaper
and ivithout Pedro appearing and contesting, the corporation had to
cancelthe old one.
CORPORATION CODE 509
There was no valid transfer to Pedro of the stock certificate as far
as the corporation is concerned. Pedro should have the transfer
annotated in the books of the corporation.
No transfer of shares of stock shall be valid, except as between
the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transfer, the
date of the transfer and the number of the certificates and shares
transferred (Section 63 of the Corporation Code).
Bar Question: "A" is the registered owner of Stock Certificate No.
000011. He entrusted fhe possession of said certificate to hrs besf
friend "B" who borrowed the said endorsed cerlificate to support B's
application for passport (or for a purpose other than transfer).
But "8" sold the certificate to "X", a bona fide purchaser who
relied on the endorsed ceftificate and believed him to be the owner
thereof.
a)Can "A" claim the shares of stocks from "X'? Explain.
b)Would your answer be the same if "A" lost the stock certificate
in question or if it was stolen from him? (2001 Ba)
Answer: a) No, "A" cannot claim the shares of stock from "X"
because the same have been duly endorsed and delivered to "X",
who happens to be a bona fide purchaser and who validly relied on
the endorsement of .A". A certificate of stock is by nature quasi-
negotiable, meaning, it may be transferred by mere endorsement.
b) No, my answer will not be the same. lf "A" lost his certificate or it
was stolen from him, "A" has a right to claim or recover the certificate
of stock from the finder or thief who has no right or title to the same.
(See Article. 559, CivilCode).
4. Transfer of Shares
' A transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is
concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks to
its books for the purpose of determining who its shareholders are. lt
is only when the transfer has been recorded in the stock and transfer
book that a corporation may rightfully regard the transferee as one of
its stockholders From this time, the consequent obligation on the
part of the corporation to recognize such right arises (Ponce vs.
Alsons, 393 SCRA 602).
a. Nature of Right
510 CORPORATION CODE
A stockholder has an absolute and inherent right as an incident of
ownership to sell and transfer his stocks at will, except as may be
restricted by the articles, the general law, the by-laws, or the
agreement between him and the corporation (Remo vs. lAC, 172
scRA 405).
Mandamus may be maintained in the SEC (now RTC under R.A.
8799) to compel a corpbration to register stocks represented by
stock certificates, duly presented to the corporation, after
indorsement by the original stockholder, and the corporation cannot
inquire into or pass upon the legality of the transaction, nor can it
question the consideration upon which the transfer is made. The
secretary of the corporation acts on a purely ministerial capacity in
transferring stock. For a corporation to refuse registration of the
transferred shares in its stock and transfer book is to render nugatory
and ineffectual the spirit and intent of Section 63 of the Corporation
Code (Ruralvs. CA, 210 SCRA 510).
The election of a person to the board of directors of a corporation
does not necessarily mean that he has paid for the shares recorded
in his name. ln most cases, nominee directors do not pay for the
qualifying shares assigned to them. Likewise, the Corporation Code
does not require that one elected or appointed as vice-president of a
corporation should be the owner of shares of stock of the corporation
(Baguio vs. CA, 226 SCRA 366).
' For a valid transfer of stocks, the requirements are as follows: (a)
there must be delivery of the stock certificate; (b) the certificate must
be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (c) to be valid against
third parties, the transfer must be recorded in the books of the
corporation (Raquel-Santos vs. CA, 592 SCRA 169)
A person who has purchased stock, and who desires to be
recognized as a stockholder for the purpose of voting, must secure
such a standing by having the transfer recorded on the corporate
books. Until the transfer is registered, the transferee is not a
stockholder but an outsider (Batangas vs. Bitanga, 362 SCRA 635).
A stock certificate, already delivered to the transferee, recorded
in the stock and transfer book of the corporation, and reported to the
SEC, but returned to the transferor for indorsement which he refused
to make, does not prevent the transferee from being owner of the
CORPORATION CODE 511
stocks represented by said unindorsed stock certificate (Tan vs.
sEc, 206 scRA 740).
There is no law requiring a stockholder who sold his stock to
report the same to the Securities and Exchange Commission (Trieste
vs. Sandiganbayan, 145 SCRA 508).
The transfer is not valid against the corporation unless recorded
in the stock and transfer book, although valid as between the parties
(Labrador vs. CA, 180 SCRA 266).
The approval by the nominees is necessary for the validity and
effectivity of the transfer of the stock certificates registered under
their names (Neugene vs. CA, 303 SCRA 295).
Where what was assigned were voting shares as distinguished
from non-voting shares, it meant that the assignees of the shares
had the right as though they were the owners of the shares (APT vs.
Sandiganbayan, 341 SCRA 551 ).
Authority granted to a corporation to regulate the transfer of its
stock does not empower it to restrict the right of a stockholder to
transfer his shares, but merely authorizes the adoption of regulations
as to the formalities and procedure to be followed in effecting
transfer (Thomson vs. CA, 298 SCRA 280).
The Corporation Code, SEC rules and even the Rules of Court
provide for appropriate and adequate intra-corporate remedies, other
than rescission, in a breach of cbntract. Rescission is certainly not
one of them, especially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have
not been met. A contrary doctrine will tread on extremely dangerous
ground because it will allow just any stockholder, for just about any
real or imagined offense, to demand rescission of his subscription
and call for the distribution of some part of the corporate assets to
him without complying with the requirements of the Corporation
Code (Ong vs. Tiu,401 SCRA 1).
Bar Question: Four months before his death, PX assigned 100
shares of stock registered in his name in favor of his wife and his
children. They then brought the deed of assignment to the proper
corporate officers for registration with the request for the transfer in
the corporation's stock and transfer books of the assrgned shares,
the cancellation of the stock certificates in PX's name, and the
512 CORPORATION CODE
lssuance of new stock certificates in the names of his wife and his
chitdren as the new owners. The officers of the Corporation denied
the request on the ground that another heir is contesting the validity
of the deed of assignment.
May the Corporation be competted by mandamus to register the
shares of stock in the names of the assrgtnees? Explain briefly (2004
Ba0
Answer: Yes, the corporation may be competled by rnandamus to
register the stocks as there was proper assignment by PX, the
original stockholder. The corporation can refuse the transfer of
shares if it has unpaid claims against such shares. The question by
another heir of the validity of the assignment is not a ground to deny
the request.
Bar Question: One of the provisions of the by-laws of "Standard
Corporation" provides that no stockholder shall transfer any share of
the corporation to any other person without first notifying the
secretary-treasurer in writing, and under the same conditions the
corporation shall have the right to acquire for itself the shares
intended to be transferred. ls this provision of the by-laws valid?
Explain fully, and give reasons. (1953 Bar)
Answer: No, the provision is invalid as it constitutes an undue and
unreasonable lestriction on the right of a stockholder to transfer or
dispose of his shares, and as such is ultra vires, violative of the right
of stockholders and in restraint of trade, there being no period of time
within which the corporation is obliged to act.
(Note: Under recently decided cases, the right of first refusal is
recognized by the Supreme Court, under certain conditions, which
are: (1) besides the right appearing in the Articles or By-laws, it
should be stated in the stock certificate, (2) There should be a
reasonable time limit to the exercise of said right; and (3) The terms
and conditions for its exercise should be reasonable.)
Bar Question: Arnold has in his name 1,000 shares of the capital
stock of ABC Corporation as evidenced by a stock certificate. Arnold
delivered the stock certificate fo Sfeven who now claims to be the
real owner of the shares, having paid for Arnold's subscription. ABC
refused to recognize and register Sfeven's ownership.
ls the refusal justified? Explain, (1996 Bar)
Answer: Yes, the refusal is iustified. The taw is clear that in order
of stock certificate to be effective, the certificate must
for a transfer
CORPORATION CODE 513
be properly indorsed and that tiile
yesfed in the transferee by the delivery "to such certificate of sfock ls
of the duly indorsed
ceftificate of stock. since the ceftificate of stock was never indorsed
to steven, the inevitable conclusion is that the shares of stock betong
to Arnold. lndorsement of the certificate of stock is a mandatory
requirement for an effective transfer thereof (See Razon vs. tAC, 207
scRA 2s4).
A stock claimant cannot ask for lucrum cessans or profits earned
if the stocks are sold, because these are speculative in nature
(Batong Buhay vs. CA, 147 SCRA 4).
Where unissued stocks are exchanged for real property, there is
no transfer of ownership, but merely a change of form of ownership
in the same hands. The right of first refusal is not violated (Delpher
vs. lAC, 157 SCRA 349).
Stock issued without authority and in violation of law is void and
confers no rights on the person to whom it is issued and subjects him
to no liabilities. where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person
to whom the stock is issued is estopped to question its validity since
an estoppel cannot operate to create stock which under the law
cannot have existence (Bitong vs. CA, 292 SCRA 503).
b. Manner of Transfer
Absolute transfers may be effected by (1) indorsement of the
certificate followed by delivery, and (2) sale or assignment evidenced
by a notarial document. To bind the corporation, these transfers
should be registered in the stock and transfer book upon surrender
of the old certificates, and the subsequent issuance of a new
certificate to the transferee.
While it may be true that there was an assignment of shares, said
assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the owners,
their attorneys-in-fact or any other person legally authorized to make
the transfer. Moreover, the assignment of shares was not coupled
with delivery, the absence of which is a fatal defect. The rule is that
the delivery of the stock certificate duly endorsed by the owner is the
operative act of transfer of shares from the lawful owner to the
transferee. Thus, title may be vested in the transferee only by
st4 CORPORATION CODE
delivery of the duly indorsed certificate of stock (Rural vs. CA, 366
t"l:#:e
arsued that despite non-compliance with tne requisite
endorsement and delivery, the assignment was valid between the
parties. While the assignment may be valid and binding on the
parties, it does not necessarily make the transfer effective'
Consequently, the petitioners, as mere assignees, cannot enjoy the
status of a stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are concerned'
Parenthetically, the private respondents cannot, as yet, be deprived
of their rights as stockholders, until and unless the issue of
ownership and transfer of the shares in question is resolved with
finality (lbid.).
The sole issue is whether a bona fide transfer of the shares of a
corporation, not registered or noted in the books of the corporation,
is valid as against a subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had actual notice of said
transfer or not. lt was held that the attachment prevails over the
unrecorded transfer because the true meaning of the language is,
and the obvious intention of the legislature in using it was, that all
transfers of shares should be entered, as here required, on the
books of the corporation. And it is equally clear that all transfers of
shares not s6 entered are invalid as to attaching or execution
creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and, indeed, as to all persons
interested, except the parties to such transfers. All transfers not so
entered on the books of the corporation are absolutely void; not
because they are without notice or fraudulent in law or fact, but
because they are made so void by statute" (Garcia vs. Jomouad, 323
scRA 424).
Transfers of shares under subscriptions not yet fully paid to the
corporation are valid only if accepted by the corporation.
A transferee of 20 shares out of the 80 shares subscribed by his
transferor who has paid P2,000 or one fourth only of the par value of
said subscription cannot compel the corporation to record said sale
in the corporate stock and transfer book. Only transfers evidenced by
indorsements by the stockholder at the back of duly issued stock
certificates may be thus recorded, the indorsed stock certificates
cancelled, and a new one issued to said transferee (Nava vs. Peers,
74 SCRA 65).
CORPORATION CODE 515
Before a transferee may ask for the issuance of stock certificates,
he must first cause the registration of the transfer and thereby enjoy
the status of a stockholder insofar as the corporation is concerned.
A corporate secretary may not be compelled to register transfers of
shares on the basis merely of an indorsement of stock certificates.
With more reason, a corporate secretary may not be compelled to
issue stock certificates without such registration (Ponce vs Alsons,
393 SCRA 602).
Bar Question: Mr. Cruz purchased from Mr. Giuzman shares of
stock qf a mining corporation, which shares were covered by several
certificates indor5ed in blank by Mr. Virgilio Malic in whose name the
same were registered in the books of the corporation. lt was later
discovered that the sard shares had never been sold or otherwise
disposed of by Mr. Virgilio Malic, but had been stolen from where
they were kept.
Who is entitled to said shares, Mr. Cruz or Mr. Malic? (1982 Bar)
Answer: Mr. Malic is entitled to said shares being the registered
stockholder of the certificates of stock in the books of the
corporation.
of shares of Mr. Malic were stolen from him,
As sard ceftificate
the transferee of the stolen certificates acquires no right to the
certificate better than the one who stole the certificates.
As the thief holds no right at all to the stolen ceftificates, the
transferee of these certificates- Mr. Guzman, and eventually Mr.
Cruz, acquired nothing at all from the transfer to them of the stolen
certificates.
The concept of "holder in due course" in negotiable instrument is
not recognized in relation to certificates of stock.
5. Pledge or Mortgage of Shares
a. Pledge of Shares
It is enough that the pledge to affect third persons must be in a
public instrument containing among others a description of the thing
pledged and the date of the pledge. Registration either with the
Register of Deeds or with the books of the corporation is
unnecessary.
A pledgee or chattel mortgagee does not have voting rights in
stockholders' meetings unless such right is expressly given in the
516 CORPORATION CODE
contract and recorded in the books of the corporation (Section 55,
N.C.C.).
b. Chattel Mortgage of Shares
Both the Revised Rules of Court and the Corporation Code do not
require annotation in the corporation's stock and transfer books for
the attachment of shares of stock to be valid and binding on the
corporation and third parties (Chemphil vs. CA, 251 SCRA 257).
Attachments of shares of stock are not included in the term
"transfer" as provided in Section 63 of the Corporation Code. Chattel
mortgage over shares of stock need not be registered in the
corporation's stock and transfer book inasmuch as chattel mortgage
over shares of stock does not involve a "transfer of shares," and that
only absolute transfers of shares of stock are required to be recorded
in the corporation's stock and transfer book in order to have "force
and effect as against third persons" (Monserrat vs. Ceron, 58 Phil
46e).
Bar Question: A resident of Manila who owns shares of stock of a
Zamboanga corporation mortgages those shares fo a resident of
Naga City.
Where should the mortgage be registered? Would the mortgage
be valid if it i3 hot registered in the books of the corporation? Explain
your answer. (1959, 1946 Ba)
Answer: The mortgage should be registered with the Register of
Deeds of Zamboanga, the corporate domicile.
The mortgage will still be valid and can affect third persons even
though not registered in the books of the corporation. Ih,s ,s
because a corporation, although required to keep a book to record
absolute transfers, does not keep any book to register conditional or
non-absolute transfers like pledges and chattel mortgages.
Bar Question: What is the best procedure to protect the rights of
the mortgagee? (1946 Bar)
A,nswer: To protect the moftgagee, the chattel mortgage of the
certificate of stock should be registered with the Register of Deeds of
the province of the domicile of the moftgagor, and with the Register
of Deeds of the province of the corporate domicile; the corporation
should be notified of said mortgage and/or furnished a copy of the
contract.
CORPORATION CODE 517
6. Collection of Unpaid Subscription
a. Methods
1. Call, delinquency and sale at auction of delinquent shares
2. Ordinary court action
3. Collection from cash dividends and other amounts due to
the stockholder, if allowed by the by-laws, or agreed by him
Bar Question: Victor was employed in MAIA Corporation. He
subscribed to 1,500 shares of the corporation at Pl00.00 per share
or a total of P150,000.00. He made an initial down payment of
P37,500.00. He was appointed President and General Manager.
Because of his disagreement with the Board of Directors, he
resigned and demanded payment of his unpaid salaries, his cosf of
living allowance, his bonus, and reimbursement of his gasoline and
re p re se ntati on expenses.
MAIA Corporation admits that it owed Victor P40,000.00, but told
him that this will be applied to the unpaid balance of hls subscription
in the amount of Pl00,000.00. There was no call or notice for the
payment of the unpaid subscription. Victor questioned the set-off.
a) May MAIA set-off the unpaid subscription with Victor's claim for
salaries?
b) Would your answer be the same if indeed there had been a call
for the unpaid subscription? (1994 Bar)
Answer: a) No, MAIA cannqt set-off the unpaid subscription with
Victor's claim for sa/aries. For MAIA to do so, there must be a clear
showing that it has complied with the following rgquirements
provided by law:
1) a resolution of the board of directors of the corporation calling
for the payment of the unpaid subscription
2) notice must be senf fo the delinquent stockholder
Hence, until such call is made by the corporation, unpaid
subscriptions cannot be considered due and payable.
3) Yes, my answer would still be the same. Assuming there was
a call for payment of the unpaid subscription, MAIA still cannot
validly set it off against the wages and other benefits of Victor as fhis
is violative of Article 113 of the Labor Code. An obligation arising
from non-payment of stock subscriptions to a corporation cannot be
offset against a money claim of an employee against the employer
(See Apodaco vs. NLRC 172 SCRA 442)
s18 CORPORATION CODE
b. Call, Delinquency and Sale at Auction
Bar Question: State briefly the extraiudicial remedy whereby a
corporation may collect unpaid subscriptions to the capital stock.
(1969 Bar)
Answer: The extrajudicial remedy for collecting unpaid
subscriptions contains the following sfeps;
1) Call - subject to the provisions of the subscription contract, if any,
a declaration is made by the board as to the percentage of the
subscription due, and when it is to be paid;
2) lf no payment is made within 30 days from said date, the whole
subscription is declared delinquent and subject to sale;
3) The board shall fix the date, time, and place of sale which shall
not be less than 30 nor more than 60 days from the date thq sfocks
became delinquent;
4) Notice is senf to all delinquent stockholders and publication of
the dectaration of delinquency and fixing the date, time and place of
sa/e, is made in a newspaper of general circulation, once a week for
two weeks;
5) Sa/e af auction and award to highest bidder;
6) lssue of certificate of stock to highest bidder.
(Note: Answered under the provisions of Sections 67 and 68,'N.C.C,)
Section 63 provides that no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books
of the corporation. The term unpaid claim refers to any unpaid claim
arising from unpaid subscription, and not to any indebtedness which
a subscriber or stockholder may owe the corporation arising from
any other transaction (China vs. CA, 270 SCRA 503).
Bar Question: Mr. Balimbing signed a written subscription for 100
shares of stock of Laban and Company, paying 25% of the amount
thereof. The corporaflon subseguently became insolvent due to a
series of financial reverses. Mr. Balimbing demanded from the
Corporate Secretary the stock ceftificates corresponding to 25%
shares which he claimed was already paid. Since the corporation
was insolvent, Mr. Balimbing refused to pay for his remaining unpaid
subscription.
a) Can the Corporate Secretary validly refuse fo issue stock
certificates in the name of Mr. Balimbing for 25 shares despite the
payment of 25% of the subscription of 100 shares? Reasons.
b) ls Mr. Balimbing correct in refusing to pay for the remaining
shares, the Company being already insolvent? Reasons. (1988 Bar)
CORPORATION CODE s19
Answer: a) The Corporate Secretary can validly refuse fo rssue a
stock ceftificate for 25 shares to allegedly correspond to the 25% he
(Balimbing) paid on his subscription for 100 shares. When a
subscriber mtakes a partial payment on his subscription, the amount
is applied proportionately to all the number of shares subscribed by
him.
ln the above example, his 25% payment is applied to all of the
100 shares subscribed by him. Hence, none of the 100 shares
subscribed is deemed fully paid to entitle Mr. Balimbing to be issued
a stock ceftificate.
b) No, Mr. Balimbing rs nof correct in refusing to pay for the
balance of hls subscribed shares. The unpaid subscription is a frusf
fund the creditors of a corporation may look up to for the payment of
their credits should anything adversely affect the corporation.
As a matter of fact, the law allows a creditor to directly sue the
stockholder for his unpaid subscription if the corporation becomes
insolvent.
Bar Question: The Board of Directors of a corporation, by a vote of
ten in favor and one against, declared due and payable all unpaid
subscription to the capital stock. The lone dissenting director failed
to pay on due date, i.e., 19 September 1997, his unpaid subscription.
Other than the shares whereon he was unable to complete payment,
he did not own any share in the corporation. On 23 September
1997, he was informed by the Board of Directors that, unless due
payment is meanwhile received, he
a) could no longer serve as a director of the corporation forthwith;
b) would not be entitled to the cash and stock dividends which were
declared and payable on 24 September 1997; and
c) could not vote in the stockholders' meeting scheduled to take
place on 26 September 1997.
Was the action of the Board of Directors on each of the foregoing
matters valid? (1997 Bar)
Answer: a) lnvalid. The removal of the dissenting director is not
valid because of the requisite prior notice to the stockholders of the
company is missrng.
b) lnvalid. The shares of the dissenting director, although unpaid
has not yet become delinquent.
Section 67, paragraph 2 of the Corporation Code provides that a
share becomes delinquent only upon failure of the stockholder to pay
the unpaid subscription or balance thereof within the grace period of
30 days from the date stated in the call.
s20 CORPORATION CODE
Owners of delinquenf sfocks are entitled to cash dividends. Cash
dividends due on delinquent sfocks should be applied first to the
unpaid balance on the subscription p/us cosfs and expenses.
c) lnvalid. Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder (Section 72,
N.C.C.), including the right to vote.
Bar Question: Ace Cruz subs;cribe to 100,000 shares of stock of JP
Development Corporation, which has a par value of Pl per share. He
paid P25,000 and promised to pay the balance before December 31,
2008. JP Development Corporation declared a cash dividend on
October 15, 2008, payable on December 1, 2008. For how many
shares is Ace Cruz entitled to be paid cash dividends? Explain.
(2008 Bar)
Answer: Since Ace is not yet declared as a delinquent stockholder,
he is sfl// entitled to his complete rights as a stock holder, including
his rights to receive dividends. However, any cash dividend due on
a delinquent stock shall first be applied to the unpaid balance of the
subscription.
Article 1146 of the Civil Code which establishes four (4) years as
the prescriptive period for actions based upon injury to the rights of
the plaintiff on the hypothesis that the suit is purely for damages
does not apply.* Article 1149 o'f the Civil Code which sets five (5)
years as the period of prescription for all other actions whose
prescriptive periods are not fixed in the Civil Code or in any other law
also does not apply but Article 1140 of the Civil Code which provides
that an action to recover movables (a share of stock), plus damages,
shall prescribe in eight (8) years (Calatagan vs. Clemente, 585
scRA 300).
The sale is not valid if there was no proper notice to the club
shareholder-(lbid.).
7. Reacquisition by Corporation of its Stock
Bar Question: A corporation executed a promissory note binding
itself to pay its PresidenUDirector, who had tendered his resignation,
a ceftain sum in payment of the latter's shares and interests in the
company. The corporation defaulted in paying the full amount so that
said former President filed suit for collection of the balance before
fhe SEC.
CORPORATION CODE 521
Under what condition is a stock corporation empowered to
acquire its own shares? (2005, 1992, 1949 Bar).
Answer: The conditions under which a stock corporation can
acquire its own shares are: (1) that it be for a legitimate and proper
corporate purpose; (such legitimate purpose may either be, to
eliminate fractionalshares arising out of stock dividends; to collect or
compromise an indebtedness fo the corporation arising out of unpaid
subscription in a delinquency sale; to purchase delinquent shares
sold during the sale; or to pay dissenting or withdrawing stockholders
entitled to such payment), and (2) that there shall be unrestricted
retained earnings to purchase the same and its capital is not thereby
impaired (Section 41, Corporation Code). A corporation who
acquires its own shares without unrestricted retained earnings would
violate the Trust Fund Doctrine.
(Note: The N.C.C. has created a new right called as "appraisal right"
for a dissenting stockholder, and gives to him the right to demand
payment of the fair value of his shares in the following cases:
1) amendments to the articles changing, restricting, or enlarging
stockholder's rights, or extending or shortening the corporate life;
2) sale or other disposition of all or substantially all of the corporate
assets;
3) merger and consolidation [Section Bl, N.C.C.].
4) investment of funds in another corporation or for a different
purpose [Section 82, N.C.C.])
lV. lncorporationand Organization
A. Gontents of Articles of lncorporation
The articles of incorporation has been described as one that
defines the charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its
stockholders (Lanuza vs. CA, 454 SCRA 54).
Collateral attacks on the legality of the purposes for which a
corporation was organized are prohibited (Gala vs. Ellice, 418 SCRA
431).
The best proof of the purpose of a corporation is its articles of
incorporation and by-laws. The articles of incorporation must state
the primary and secondary purposes of the corporation, while the by-
1t) CORPORATION CODE
laws outline the administrative organization of the corporation, which,
in turn, is supposed to insure or facilitate the aqcomplishment of said
purpose. lf a corporation's purpose, as stated in the Articles of
lncorporation, is laMul, then the SEC has no authority to inquire
whether the corporation has purposes other than those stated, and
mandamus will lie to compel it to issue the certificate of incorporation
(rbid.).
1. Stock Gorporations
a. Name of the corporation
The use by a corporation of the dominant name of another
corporation created 22 years earlier is likely to cause confusion on
the general public especially considering that the purpose clause of
both corporations allows them to engage in the same kind of
business. The latter corporations may therefore be ordered to
change their names (Philips vs. CA, 206 SCRA 457).
The jurisdiction of the SEC is not merely confined to the
adjudicative functions provided in Section 5 of P.D. 902-4, as
amended. By express mandate, it has absolute jurisdiction,
supervision and control over all corporations. lt also exercises
regulatory and administrative powers to implement and enforce the
Corporation Cod6,'one of which is Section 18 on corporate name. lt
is the SEC's duty to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so
for the protection of the public, and it has authority to deregister at all
times and under all circumstances corporate names which in its
estimation are likely to generate confusion (lndustrial vs. CA, 390
scRA 252)
b. Purpose or purposes, indicating the primary and secondary
purposes
c. Place of principal office
d. Duration
e. Names, citizenship and residences of incorporators
f. Number, names, citizenship and residences of directors
g. lf stock corporation, amount of capital stock, number of shares
and in case of par value stock corporations, the par value of
each share
h. Names, residences, number of shares, and amounts of
subscription of the subscribers, which shall not be less than 25%
of the authorized capital stock
CORPORATION CODE
i. Names, residences, and amounts paid by each subscriber on
their subscriptions, which shall not be less than 25% of the total
subscription
j. Name of treasurer elected by subscribers
k. lf the corporation engages in a nationalized industry, a statement
that no transfer of stock will be allowed if it will reduce the stock
ownership of Filipinos to a percentage below the required legal
minimum
2. Non-Stock Corporations \
a) ltems (a) to (f) above, and in lieu of stock subscriptions and
payments, the names of donors, their citizenship, residences and
amounts contributed or donated should be indicated.
Bar Question: What matters should be contained in the articles of
incorporation of an agricultural corporation, and what in the by-laws?
(1965 Bar)
Answer: As the ownership of agriculturat tands in the Phitippnes rs
restricted by the Constitution to Filipino citizens and to corporations
and associations at least 60% per centum of the capital of which is
owned by such citizens, the stock ownership of the Filipino
incorporators should not be less than 60% of the whole subscription.
The purpose clause of the articles should not allow the
corporation to invest in the stocks of another agricultural corporation
exceeding 15% of the outstanding sfocks of the latter corporation.
The articles of an agriculture corporation should provide for a
restriction of stock transfers to foreigners such that at no given
moment should the stockholdings of Filipino citizens be less than
60%.
AII other standard provisions in the articles and by-laws of the
corporations may be embodied in the Afticles of lncorporation and
By-Laws of an agricultural corporation.
Bar Question: A group of individuals, desiring to organize a
corporation, asked for your advice on the following proposals:
a) As.to authorized capital stock - P1 million divided into 500,000
no par value shares of preferred stock to be offered at an issue value
of P1.00 per share, and 500,000 shares of common stock, with a par
value of Pl.00 per share.
b) As to voting rights - All shares shall have the same voting rights
except that the common shares shall not vote on any proposed
increase or decrease of the authorized capital stock.
524 CORPORATION CODE
What features of the foregoing proposa/s are not permifted by
law? (1984 Bar)
Answer: The features of the foregoing proposals not permitted by
law are:
a) The no-par value shares shou/d not have a fixed issue value.
Only that portion needed for incorporation purposes may have a
fixed issue value stated in the Ariicles of lncorporation, which shall
not be /ess fhan P5.00 share.
Ihe lssue value of subsequent rssues of the no-par value shares,
which may not necessarily be the same as the issue value of that
portion needed for incorporation purposes, may be fixed by the
board, if authorized by the articles or by the by-laws, or in the
absence thereof, by the stockholders in a meeting called for the
purpose for not less than P5.00 per share.
b) The prohibition on common shares not being entitled to vote on
any increase or decrease of capital stock ls violdtive of
Corporation Code.
3. Conversion from Stock to Non-stock and Vice-versa
Bar Question: "X" Company ls a sfock corporation composed of the
Reyes family engaged in the realesfafe busrness. Because of the
regional crisis, the stockholders decided to convert their stock
corporation into*a' charitable non-stock and non-profit association by
amending the articles of incorporation.
a) Could this be legally done? Why?
b) Would your answer be the same if at the inception, "X" company is
a non-stock corporation? Why? (2001 Bar)
Answer: a) Yes, "X" Company can be converted from a stock to a
non-stock corporation by mere amendment of the articles of
incorporation. By converting from stock to non-stock, there is no
distribution of assefs. lnstead, profits are retained by the
corporation.
b) No. Conversion from non-stock corporation to stock corporation
would mean distribufing assefs to members who previously were not
entitled to profits of the corporation. lnstead of conversion by mere
amendment of the afticles, the corporation must first be dissolved.
B. Documents Accompanying the Articles
The Articles of lncorporation should be accompanied by the
following documents: (1) treasurer's certificate, (2) statement of
CORPORATION CODE s2r
assets and liabilities, (3) bank statement of money paid ln for
subscriptions, (4) letter of authority for SEC examiners to examlno
the bank account, and (5) in the case of banks and institutions under
Central Bank supervision, insurance companies, public utillflea,
schools and other institutions governed by special laws, tho
favorable recommendation of the appropriate government agency
(Section 17, N.C.C.).
Bar Question: When may the Securities and Exchange Commission
register the Articles of lncorporation of a bank, or any amendment to
said Atiicles of lncorporation? (1965 Bar).
Answer: The Securities and Exchange Commission may register the
articles of incorporation of a bank, or any amendment thereto, if said
documents, among others, are accompanied by a certificate of
authority issued by the Monetary Board and bearing ifs sea/.
the
Bar Question: You have been asked to incorporate a new company
to be called FSB Savrngs & Mortgage Bank, lnc. List the docurnents
that you must submit to the Securities and Commission (SEC) to
obtain a certificate of incorporation for FSB Savings & Moftgage
Bank, lnc. (2002 Bar)
Answer: The documents to be submitted to the SEC to incorporate
FSB Sarings & Mortgage Bank, lnc. are the following:
1. Name verification slip
2. Articles of lncorporation and By-Laws
3. Treasurer's Affidavit
4. .Affidavit of undertaking to change corporate name
5. Registration Data Sheefs
6. Certificate of Authority from Bangko Sentral ng pilipinas
7. Bank certificate of deposit of paid-up capital
8. Cover Sheef
9. Letter confirming all corrections in the Articles
10. Letter authorizing examination of the paid-up capital deposit
1. Grounds for Rejection or Disapproval by SEG of
Articles or Amendments
The N.C.C. expressly provides for the following grounds for SEC
disapproval or rejection of the registration of the articles and/or its
amendments:
a. Not substantially in the prescribed form
526 CORPORATION CODE
b. Purpose(s) patently unconstitutional, illegal, immoral or contrary
to government rules and regulations
c. Treasurer's affidavit false
d. Non-compliance of required percentage of Filipino stock
ownership in nationalized corporations (Section 17, N.C.C.)
C. lssue of Certificate of Incorporation
Bar Question: When does the corporate life of a corporation begin?
(1965 Bar)
Bar Question: When does a corporation acquire corporate
existence? (2003 Bar)
Answer: The issuance by the Secunties and Exchange Commission
of the Certificate of lncorporatiOn is the last act needed to give the
corporation a de jure existence. lt is from the date of issuance of the
certificate that corporate life begins, fo /asf for the duration provided
for in the articles, unless sooner legally dissolved (Section 19,
N.C.C.:).
1. Visitorial Power
As the grant of juridical personality to a corporation is a privilege,
the exercise of the same is regulated by the state in the exercise of
its visitorial power. Thus, the law empowers the SEC to requiie
corporations to submit an annual report of its operations, financial
statements, and other documents, and to make rules and regulations
necessary to perform its duties, particularly in the prevention of fraud
and abuses.
bar Question: Where corporate existence is properly put in issue,
mention the various ways proof of such corporate existence may be
made. (1968 Bar)
Answer: The various ways of proving corporate existence where this
is put in issue are by producing:
1) The original of the Certificate of lncorporation with the seal of the
SEC, or a copy of the same ceftified by the SEC;
2) A copy of the Articles of lncorporation certified by the SEC;
3) A copy of the Afticles of lncorporation filed with some
government office like the Regisfer of Deeds, and certified by
the custodian of that document.
CORPORATION CODE 527
D. Election of the Board and Adoption of the By-laws
By-laws has traditionally been defined as regulations,
ordinances, rules or laws adopted by an association or corporation or
the like for its internal governance, including rules for routine matters
such as calling meetings and the like (SMC vs. Mandaue,467 SCRA
107).
There may be corporations in which there are unelected members
in the board but it is clear that the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they hold a
particular office (Grace vs. CA, 281SCRA 133).
lf the provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but, on the
contrary, appears to have been implemented by the members of the
association, cannot forestall a later challenge to its validity. Neither
can it attain validity through acquiescence because, if it is contrary to
law, it is beyond the power of the members of the association to
waive its invalidity. For that matter the members of the association
may have formally adopted the provision in question, but their action
would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law (lbid.).
Even if the Corporation Code provides a term of 5 years for
trustees, if the By Laws provides for a term of 2 years, the latter will
prevail (Barayuga vs.Adventist, 655 SCRA 640).
Tolerance cannot be considered ratification. Nor can a vested
right sit in the board on the basis of "practice." Practice, no matter
how long continued, cannot give rise to any vested right if it is
contrary to law (lbid.).
Within thirty (30) days from the issuance of the certificate of
incorporation, the corporation is required to adopt the by-laws
(Section 46). By-laws however may be adopted and filed prior to
incorporation and submitted together with the articles of
incorporation for registration and filing (Section 46, N'C.C.).
lmmediately after the first election of directors (no deadline is set by
the N.C.C. for this), the elected directors must organize by electing a
president, a treasurer, a secretary and such other officers as may be
provided for in the by-laws (Section 25). The corporate secretary is
required to submit to SEC a report of the election of the board and of
the officers within 30 days after said election (Section 26, N.C.C.).
 CORPORATION CODE
Failure to submit the By-Laws within thirty days from incorporation
is not a ground to automatically dissolve the corporation or to revoke
its certificate of incbrporation. lt may however be a ground for
suspension or revoeation after proper notice and hearing (Chung vs.
lAc, 163 SCRA 534).
Section 46 of the Corporation Code reveals the legislative intent
to attach a directory, and not mandatory, meaning for the word
"must" in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the by-laws
even prior to incorporation. This provision in the same section of the
Code rules out mandatory compliance with the requirement of filing
the by-laws "within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the SEC." lt necessarily
follows that failure to file the by-laws within that period does not imply
the "demise" of the corporation. By laws may be necessary for the
"government" of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and
related statutes. There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of
corporate powers. The absence of charter or statutory provisions to
the contrary, by-laws are not necessary either to the existence of a
corporation or to the valid exercise of the powers conferred upon it,
certainly in all cases where the charter sufficiently provides for the
government of the body; and even where the governing statute in
express terms confers upon the corporation the power to adopt by-
laws, the failure to exercise the power will be ascribed to mere non-
action which will not render void any acts of the corporation which
would otherwise be valid. Although the Corporation Code requires
the filing of by-laws, it does not expressly provide for the
consequences of the non-filing of the same within the period
provided for in Section 46. Even under the express grant of power
and authority of SEC to suspend or revoke, after proper notice and
hearing, certificate of registration of corporations for failure to file by-
laws within the required period, there can be no automatic corporate
dissolution simply because the incorporators failed to abide by the
required filing of by-laws embodied in Section 46 of the Corporation
Code. Proper notice and hearing are cardinal components of due
process. ln other words, the incorporators must be given the chance
to explain their neglect or omission and remedy the same (Loyola vs.
cp.,276 SCRA 681).
Where a provision in the by-laws of a corporation is one where
reasonableness may be subject to different interpretations, courts
CORPORATION CODE 529
cannot substitute their judgment for those authorized to make the by-
laws (Gokongweivs. SEC, Bg SCRA 336).
Bar Question: According to the Corporation Law, if a corporation
fails to organize within two years it shatt be ipso facto disso/ved
a) When is a corporation considered "organized?,'
b) How is the two-year period to be gauged? (1g63 Bar)
Answer: a) A corporation is considered "organized,' when after
issuance to it of its certificate of incorporation, it proceeds to adopt its
by-laws, elect its board, which in turn elects its president, secretary,
treasurer and other officers and occupies an office for the transaction
of busrness allowed it by its articles.
b) The two-year period sfarfs fo run from the date the certificate of
incorporation is issued to the corporation; if the corporation within
two years from said date fails to perform the organizational acts
above-indicated, then it is ground for involuntary dissotution.
Bar Question: ln the suit brought as above indicated, the
construction company claims that it may not be sued, as it has not
yet registered its by-laws. May not this fact be set up by it as a
defense in its answer? Reasons. (1957 Bar)
Answer: No, the failure of a corporation to register or even to adopt
its by-laws will not prevent it from acquiring juridical personatity with
the right fo sue and be sued. A corporation exrsfs as such from the
moment a certificate of incorporation is issued to it.
Bar Question: ln the articles of incorporation of T. Corporation,
eleven members were named to constitute the board of directors.
These eleven elected from among themselves a secretary-treasurer
but did not elect a president. The board used to hotd meetings to
transact busrness which was done through the secretary-treaiurer.
ln a proceeding to foffeit its charter, the question was posed as fo
whether the corporation may be considered to have formally
organized. Reso/ye the question. (197g Bar)
'corporation
Answer: Yes, I wilt consider the to have formally
organized /sefi so that proceedings instituted to forfeit its corporate
charter will not prosper.
From the date of its formation, the corporation had a governing
board, which directed its affair, as well as a secretaryireaiurer. The
corporation actually functioned and engaged in the busrness for
s30 CORPORATION CODE
which it was organized. lts charter cannot be forfeited on the ground
albne of its failure to elect a President.
The Problem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassisfance by way
of direct investments and/or loans. Your professiona/ assisfance is
solicited on the following various quesfions that may arise:
Bar Question: Considering the above problem, state the form of
busrness organization which you recommend should be created for
the purpose, explaining specifically and briefly:
The procedure for such organization and the documents to be
prepared by you.
Answer: The procedure for organizing a corporation involves the
following:
1) Execution of the Articles of lncorporation and accompanying
documents and filing them whether or not together with the by-laws,
with the Securities and Exchange Commission. The accompanying
documents conslsf of the treasurer's certificate of deposit of paid-up
capital, letter authorizing SEC to examine said deposit, and other
required documents.
2) lssue by the SEC of the certificate of incorporation.
3) Election of the b:oard and corporate officers and adoption of the
by-laws within 30 days from the issue of the certificate of
incorporation if the by-laws was not filed together with the articles of
incorporation.
As the court was evenly divided, or the necessary eight votes
cannot be had on the issue of validity of the provision of the by-laws
disqualifying from the directorship of any stockholder who holds
substantial interests in a competing corporation, the petition was
dismissed on said issue, in effect authorizing SEC to proceed with
the hearing before it on the disputed by-laws, and to resoJve the
issue of its legality (Gokongwei vs. SEC, supra).
Bar Question: The Board of Directors of "C" Corporation engaged in
the manufacture and sale of food products, acting on a standing
authority of the stockholders to amend the By-Laws, amended its By-
Laws so as to disqualify any stockholder, who is also a stockholder
and director of a competitor, from being elected to its Board of
Directors.
CORPORATION CODE 531
"5", a stockholder holding sufficient shares fo assure hirya seat
in the Board, filed a petition with the Securifies and Exchange
Commission for a declaration of nullity of the amended By-Laws and
the cancellation of the Ceftificate of Filing of Amended By-Laws. He
alleged, among others, that as stockholder, he had acquired rights
inherent in stock ownership, such as the right to vote and be voted
upon in the election of directors.
Reason out the merits of the stockholder's petition. (2000, 1961
Bar)
Answer: The petition of S should be denied.
It is within the authority of the stockholders of a corporation to
enact by-laws which would disqualify as a candidate for director any
of its stockholders who holds a substantial equity in a competing
corporation.
Matters taken up in board meetings could involve trade secrets
which ought not to go out of the board room for the protection of the
corporation's busrness interests. The presence as a member of the
Board of Directors of a person, who holds a substantial interest in a
competing corporation, can destroy that secrecy on many busrness
matters.
E. Amendment of Articles and By-laws
1. Procedure
Bar Question: Explain the procedure to be followed by the
stockholders of a corporation to amend: (a) the artictes of
incorporation, (b) the by laws. (1946 Bar)
Answer: (a) The following is the procedure to amend the Articles of
lncorporation of a corporation:
1) The board by majority vote approves the amendment;
2) Stockholders representing at least V3 of the outstanding capital
stock on proper notice, approve the amendment without
prejudice to the appraisal right of a dissenting stockholder;
3) A copy of the amended articles certified by the President, the
Corporate Secretary and a majority of the Board is filed with the
SEC. (Secflon 16, N.C.C.)
(b) The following is the procedure for amendment of the by-laws:
1) By majority vote of the board and approval of a majority of the
outstanding capital stock at a meeting called for the purpose:
ln the stockholders' meeting, those representing a majority
of the outstanding capital stock approve the amendment to the
532 CORPORATION CODE
by-laws. The amended by-laws duly certified to by the secretary
and a majority of the directors is then filed with fhe SEC.
2) By the Board of Directors:
ln a stockholders' meeting, those representing at least V3
of the outstanding capital stock approve a resolution delegating the
power to amend or adopt new by-laws to the board.
The board, by majority vote, then approves the amendments to
the by-laws. The amendments duly certified by a majortty of the
directors and countersigned by the Secretary are then filed with the
SEC.
ln the case of banks and other special corporations, the
amendments should be accompanied by a certificate of the
appro priate govern me nt ag e ncy.
The amended or new by-laws become effective upon issuance
by SEC of a certificate of filing.
2. Legal Effect of Ghange of Corporate Name
A corporation may change its name by merely amending its
Articles of lncorporation in the manner prescribed by law.
A change of name of a corporation has no more effect upon the
identity of the corporation than a change of name by a natural person
has upon the identity of such person. lt is a change of name, not a
change of beifig. The corporation, upon such change in its name, is
in no sense a new corporation nor the successor of an original one,
but remains and continues to be the original corporation. lt does not
affect the rights of a corporation or lessen or add to its obligations
(Phil. First vs. Hartigan, 34 SCRA 252).
A change in the corporate name does not make a new
corporation, whether effected by a special act or under a general
law. lt has no effect on the identity of the corporation, or on its
property, rights, or liabilities. lt is the same corporation with a
different name, and its character is in no respect changed (P.C. vs.
cA,462 SCRA 36).
ln a corporation sole, its one member in whom all the powers of
the corporation technically belongs, needs to get the concurrence of
2/3 of its membership (lglesia vs. Lazaro, 624 SCRA224).
3. Date of Effectivity of Amendment
The approval by the stockholders of the amendment of its Articles
changing its name did not automatically change the name of said
CORPORATION CODE'
corporation on that date. To be effective, $ec. 18 of the Corporation
Law requires a copy of the Articles as amended, duly certified to be
correct by the secretary, president and majority of its board, to be
filed with SEC, and it is only from the time the SEC issues a
certificate of such filing that the corporation shall have the same
powers, and it and the members and stockholders thereof shall
thereafter be subject to the same liabilities as if such amendment
has been embraced in the original articles of incorporation (Phil' First
vs. Hartigan, supra).
Under the N.C.C., the rule is that the amendments to the articles
take effect upon approval by the SEC, or from the date of filing with
the SEC if not acted upon within six months from the date of filing for
a cause not attributed to the corporation (Section 16).
Bar Question: Can a corporation validly change its corporate name
under its general power to amend its articles of incorporation?
Does a change in the name of a corporation result in its
dissolution? Explain your answer. (1976 Bar)
Answer: A corporation under its general power to amend its Articles
of lncorporation can validly change its corporate name.
The change of name however takes effect on rssue by the SEC of
the certificate of filing of the amended articles including the change
of the corporate name.
A change of name of the corporation does not result in the
dissolution of the corporation. The causes for dissolution are
provided for by law, and a change of name is not one of them.
The corporation, under its new name, -absorbs a// assefs,
tiabitities, rights and obligations of the same corporation before it
changed its name.
Bar Question: The proposed Amended By'Laws of CXT lnc., a
corporation listed in the Makati Stock Exchange, contain the
following provisions:
a) That the holders of a maiority of the outstanding capital stock may
elect all the members of the Board of Directors;
b)That no officer of the corporation shall be required to be a
stockholder;
c)That the directors' bonuses shall be equivalent to 10% of gross
revenues in any given year;
d) That a candidate for director must own at least 1,000 shares;
e) That meetings of the Board of Directors need not be held in the
principal office and may even be held outside the country.
 CORPORATION CODE 535
534 CORPORATION CODE

on the properties and liabilities are acquired by the surviving corporation.

As Corporate Secretary of CXT, you ar.e asked to comment your Although there is a dissolution of the absorbed corporations, there
be
vatiiity o,f tn" above proposed amendments' What will is no winding up of their affairs or liquidation of their assets, because
comments? (1987 Bar) the surviving corporation automatically acquires all their rights,
are: privileges and powers, as well as their liabilities. The merger,
Answer: My comment to the proposed amendments
to holders of however, does not become effective upon the mere agreement of the
a- ini proposat to restrict the' etection of att directors
sfock rs invalid because it constituent corporations. The procedure to be followed is prescribed
i' ialoirity of the outstanding capital
of their right to elegt a. directo4s) under the Corporation Code which requires the approval by the
a"p,riu"" tie minority stotckhotiers Securities and Exchange Commission (SEC) of the articles of
from their own group to represent them in the board' Ihis
ls on the
to..elect at least merger which, in turn, must have been duly approved by a majority
tnai tneir cum'utative vote is big enough
"i;ui,iion of the respective stockholders of the constituent corporations' The
onedirector.Moreover,ifthesfocksofthe'minorityarevoting same provision further states that the merger shall be effective only
"t,","",theirrighttovoteduringstockhotders,meetingscannotbe upon the issuance by the SEC of a certificate of merger. The
curtailed.
to allow even a non-stockholder to occupy any effectivity date of the merger is crucial for determining when the
@l tn" proposal
iiti"i pirnion in the corporation vlotltes the provision of the
from among
merged or absorbed corporation ceases to exist; and when its rights'
privileges, properties as well as liabilities pass on to the surviving
Coipoiation Code requirin7 the Pr.es,ilent to be elected
th6 stockhotlders. Other officers need not be corporation (Poliand vs. National, 467 SCRA 500).
tni'airectors etected'by
stockholders or di rectors.
proposat to give bonuses to dire.ctors equivalent to 10% of Where a party to the merger is a special corporation governed by
tij- ln" of the its own charter, the Code particularly mandates that a favorable
fhe gross revenues i, given uiotates the provision
.yea.r recommendation of the appropriate government agency should first
"ry
code restricting the tottat air6ctors' salaries to not more than 10% of
tax for be obtained. The issuance of the certificate of merger is crucial
iie net incohe oi tn" corporation before income the
because not only does it bear out SEC's approval but also'marks the
immediately preceding yearly period'
must have at least moment whereupon the consequences of a merger take place' By
i;) i;" piipo.sqt tntit'a ,inaia"t" for director of the operation of law, upon the effectivity of the merger, the absorbed
'i,'OOO
,i"r"s" ii vattid - it being within the prerogative.
qualifications for corporation ceases to exist but its rights and properties as well as
corporation to prescribe additioial reasonable
liabilities shall be taken and deemed transferred to and vested in the
stoickholders wanting to become a director'
the surviving corporation (lbid.).
f"l tn" proposat ti non directors' meetings not necessa rily .in
'iorporate o,
oifi"", outside of the Phitippines' i1 vatj!' lt is only
"irn where venue is restricted to the principal Consolidation is the union of two or more existing corporations to
in stockhotders, meetings form a new corporation called the consolidated corporation. lt is a
place of business menti'oned in the artictes of incorporation. combination by agreement between two or more corporations by
which their rights, franchises, and property are united and become
F. Merger and Gonsolidation of Corporations those of a single, new corporation, composed generally, although not
necessarily, of the stockholders of the original corporations. Merger,
1. Defined on the other hand, Js a union whereby one corporation absorbs one
remains in or more existing corporations, and the absorbing corporation
ln a "merger", one corpoiation absorbs the other and survives and continues the combined business' The parties to a
existence *iile tf'e other is dissolved; in "consolidation", a new
the corp-orations are merger or consolidation are called constituent corporations. ln
corporation is created, and consolidating
consolidation, all the constituents are dissolved and absorbed by the
Page 382)'
e*iiltguisneO (Black's Law Dictionary, 1968 Ed'' new consolidated enterprise. ln merger, all constituents, except the
corporations' surviving corporation, are dissolved. ln both cases, however, there
Ordinarily, in the merger of two or more existing is no liquidation of the assets of the dissolved corporations, and the
one of the comoining Jorporations survives and continues
the
their rights' surviving or consolidated corporation acquires all their properties,
combined business, *[it" tn" rest are dissolved and all
 536 CORPORATION CODE
rights and franchises and their stockholders usually become its
stockholders. The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless
of whether the creditors have consented or not to such m-erger or
consolidation (Mcleod vs. NLRC, 512 SCRA222).
2. Procedure for Merger or Consolidation
a. Approval of a plan of merger by the boards of directors or trustees
of the constituent corporations, setting forth the terms of the merger
or consolidation and a statement of changes in the articles of
incorporation of the surviving or consolidating corporation (section
76, N.C.C.).
b. Approval of the plan by stockholders of each of the constituent
corporations by a vote of at least 213 of the outstanding capital stock
of each in stock corporations , or 213 of {he members in a non-stock
corporation in meetings separately held on at least two weeks
advance notice stating the purpose of said meeting (section 77,
rbid.).
c. Execution of the articles of merger/consolidation by each of the
constituent corporations, signed by the presidentA/ice president of
each and certified by their respective secretaries/assistant
secretaries (Seetion 78, lbid.).
d. submission of 4 copies of the duly executed Articles of
Merger/consolidation to the sEC, and issuance by the sEC of the
certificate of merger/consolidation in the proper cases.
lf the SEC believes that the proposed merger or consolidation is
contrary to, or inconsistent with, law, a hearing thereof will be
conducted (Section 79, lbid.).
3. Effects of Merger or Consolidation
a. ln merger, the constituent corporations shall become one
corporation; in consolidation, the new consolidated corporation shall
be the remaining corporation;
b. The separate existence of the constituent corporations shall
cease;
c. The surviving or consolidated corporation shall possess all rights
and liabilities of a corporation organized under the N.C.C.;
CORPORATION CODE 537
d. All rights, privileges, immunities, and franchises of each of the
constituent corporations are transferred to the surviving/consolidated
corporation.
e. The surviving/consolidated corporation shall absorb and be liable
for liabilities and obligations of each of the constituent corporations
(Section 89, N.C.C.).
Bar Question: Two corporations agreed to merge. They then
executed an agreement specifying the surviving corporation and the
absorbed corporation. Under the agreement of merger dated
November 5, 1998, the surviving corporation acquired all the rights,
properties and liabilities of the absorbed corporation.
(a) What would happen to the absorbed corporation? Must the
absorbed corporation undeftake dissolution and the winding up
procedures?
(b) Pending the approval of the merger by the Securities and
Exchange Commission, may the surviving corporation already
institute suifs to collect all receivables due to the absorbed
corporation from its customers? Explain your answer.
(c) A case was filed against a customer to collect on the promissory
note issued by him after the date of the merger agreement. The
customer raised the defense that while the receivables as of the date
of the merger agreement were transferred to the surviving
corporation, those receivables which were created after the merger
agreement remained to be owned by the absorbed corporation.
These receivables would be distributed to the stockholders
conformably with the dissolution and liquidation procedures under
the New Corporation Code? Dlscuss the merits of this argument?
(1999 Bar)
Answer: (a) The absorbed corporation is disso/ved and att their
rights, properties and liabilities are acquired by the surviving
corporation. However, although the absorbed corporation is
dissolved, there is no negd to wind up their affairs or liquidate their
assefs, because the suruiving corporation automatically acquires all
their rights, privileges and powers, as well as their liabilities (See
Associated vs. CA, 291 SCRA 511).
(b) No action can be instituted, for the merger does not become
effective only by mere agreement of the constituent corporations.
The surviving corporation must initially (1) seek the approval of the
Secunties and Exchange Commission of the articles of merger,
which in turn, (2) must also be approved by a majority of their
respective stockholders. The merger shall be effective only upon
s38 CORPORATION CODE
lssuance by the sEC of a certificate of merger. only then can such
actions be instituted (lbid.).
(c) There is no merit to this argument. The absorbed corporation may
have been dissotved but there is no longer any dissolution and
tiquidation procedure by which such receivables may be distributed
to the stockholders. lnstead, the surviving corporation automatically
acquires alltheir rights, privileges and liabilities.
Hence, the surviving corporation may collect on the promissory
note as it acquired atl the rights of the absorbed corporation.
However, it may onty do so after a certificate of merger has been
issued by the SEC, for onty then may the rights of the absorbed
corporation pass on to the surviving corporation'
A corporation that purchases the assets of another will not be
liable for the debts of the selling corporation provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the
debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is
merely a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape liability for
those debts (Mcleod vs. NLRC, supra).
The general*rule is that a corporation has a personality separate
and distinct from those of its stockholders and other corporations to
which it may be connected. This is a fiction created by law for
convenience and to prevent injustice. Obviously, PNB, PNB-
Madecor, Mega Prime, and PNEI are corporations with their own
personalities. PNB was only a stockholder of PNB-Madecor which
later sold its shares to Mega Prime; and that PNB-Madecor was the
owner of the Pantranco properties. Moreover, these corporations are
registered as separate entities and, absent any valid reason, we
maintain their separate identities and we cannot treat them as one'
Neither can we merge the personality of PNEI with PNB simply
because the latter acquired the former. settled is the rule that where
one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the
debts and liabilities of the transferor (Pantranco vs. NLRC, 581
scRA 598).
ln legal parlance, human beings are never embraced in the term
assets and liabilities. Moreover, BPI's absorption of former FEBTC's
employees was neither by operation of law nor by legal consequence
CORPORATION CODE
of contract. There was no government regulation or law that
compelled the merger of the two banks or the absorption of the
employees of the dissolved corporation by the surviving corporation.
Had there been such law or regulation, the absorption of employees
of the non-surviving entities of the merger would have been
mandatory on the surviving corporation ((BPl vs. BPl, 627 SCRA
5e0).
It is contrary to public policy to declare the former FEBTC
employees as forming part of the assets or liabilities of FEBTC that
were transferred and absorbed by BPI in the Articles of Merger..'
Assets and liabilities, in this instance, should be deemed to refer only
to property rights and obligations of FEBTC and do not include the
employnnent contracts of its personnel. A corporation cannot
unilaterally transfer its employees to another employer like chattel.
Certainly, if BPI as an employer had the right to choose who to retain
among FEBTC;s employees, FEBTC employees had the
concomitant right to choose not to be absorbed by BPl. Even though
FEBTC employees had no choice or control over the merger of their
employer with BPl, they had a choice whether or not they would
allow themselves to be absorbed by BPl. Certainly nothing
prevented the FEBTC's employees from resigning or retiring and
seeking employment elsewhere instead of going along with the
proposed absorption (lbid.).
G. Corporate Books and Records
The books and records of the corporation are, ordinarily, the best
evidence of corporate acts and proceedings (Gala vs. ElJice, 418
scRA 431).
The books and records of a corporation are not conclusive even
against the corporation but are prima facie evidence , only. Parol
evidence may be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where no records were
kept, or in some cases where such records were contradicted. The
effect of entries in the books of the corporation which purport to be
regular records of the proceedings of its board of directors or
stockholders can be destroyed by testimony of a more conclusive
character than mere suspicion that there was an irregularity in the
manner in which the books were kept (Bitong vs. CA, 292 SCRA
503).
540 CORPORATION CODE
The transfer of title by means of succession, though effective and
valid between the parties involved (i.e., between the decedent's
estate and her heirs), does not bind the corporation and third parties.
The transfer must be registered in the books of the corporation to
make the transferee-heir a stockholder entitled to recognition as
such both by the corporation and by third parties (Reyes vs. RTC,
561 SCRA 593).
1. Books Required to be Kept
a. Book of Minutes
The book of minutes contains a record of proceedings in meetings
of the board of directors, and of the stockholders (Section 74, 1st
paragraph, N.C.C.).
Having been made by a public officer, the minutes carry the
presumption of regularity in the performance of his functions and
duties. Moreover, the entries contained in the minutes are prima
facie evidence of what actually took place during the meeting,
pursuant to Section 44, Rule 130 of the Revised Rule on Evidence
(People vs. Dumlao, 580 SCRA 409).
Without the signature of the corporate secretary, the minutes
taken by a mdre clerk has no probative value (NATU vs. Secretary,
109 SCRA 139).
A resolution is distinct and different from the minutbs of the
meeting. A board resolution is a formal action by a corporate board
of directors or other corporate body authorizing a particular act,
transaction, or appointment. lt is ordinarily special and limited in its
operation, applying usually to some single specific act or affair of the
corporation; or to some specific person, situation or occasion. On
the other hand, minufes are a brief statement not only of what
transpired at a meeting, usually of stockholders/members or
directors/trustees, but also at a meeting of an executive committee.
The minutes are usually kept in a book specially designed for that
purpose, but they may also be kept in the form of memoranda or in
any other manner in which they can be identified as minutes of a
meeting (People vs. Dumlao, 580 SCRA 409).
The Court accords full recognition to the minutes as the official
repository of what actually transpires in every proceeding. lt has
happened that the minutes may be corrected to reflect the true
CORPORATION CODE 54r
account of a proceeding, thus giving the Court more reason to
accord them great weight for such subsequent corrections, if any,
are made precisely to preserve the accuracy of the records. ln llght
of the conflicting claims of the parties the Court, without resorting to
the minutes, will encounter difficulty in resolving the dispute at hand
(Regidor vs. People, 579 SCRA 244).
The non-signing by the majority of the members of Board of
Trustees of the minutes does not necessarily mean that the
supposed resolution was not approved by the board. The signing of
the minutes by all the members of the board is not required. There is
no provision in the Corporation Code of the Philippines that requires
that the minutes of the meeting should be signed by all the members
of the board (People vs. Dumlao, 580 SCRA 409).
b. Books ofAccounts
This may consist of the books required to be kept of merchants by
the Code of Commerce such as the book of inventories and
balances, the journal and the ledger (Section 74, N.C.C.).
c. Stock and Transfer Book
This book records all stocks, the name of the stockholders,
installments paid on subscriptions, date of such payments, statement
or every sale, transfer or alienation of stock, by and to whom made,
and the stock certificate issued and cancelled and the dates when
done (Section 74, N.C.C.).
A transfer of shares of stock not recorded in the stock and transfer
book of the corporation is non-existent as far as the corporation is
concerned. As between the corporation on one hand, and its
shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders
are. lt is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee
as one of its stockholders. From this time, the consequent obligation
on the part of the corporation to recognize such rights as it is
mandated by law to recognize arises. Hence, without such recording,
the transferee may not be regarded by the corporation as one among
its stockholders and the corporation may legally refuse the issuance
of stock certificates (Nautica vs. Yummul, 473 SCRA 415).
542 CORPORATION CODE
Bar Question: Triple A Corporation (Triple A) was incorporated in
1960, with 500 founders'shares and 78 common shares as its initial
capitalsfock subscription. However, Triple A registered its stock and
transfer book only in 1978, and recorded merely 33 common shares
as the corporation's issued and outstanding shares.
a) ln 1982, Juancho, the sole heir of one of the original incorporators
filed a petition with the Securties and Exchange Commission (SEC)
for the registration of his property rights over 120 founders'shares
and 12 common shares. The petition was supported by a copy of the
Articles of lncorporation indicating the incorporators' initial capital
sfock subscription. Will the petition be granted? Why or why not?
b) What rs a sfock and transfer book? (2009 Bar)
Answer: a) The petition should not be granted. A transfer of shares
ofstock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is concerned. As
between the corporation on one hand, and its shareholders and third
persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are. lt is only when the
transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part
of the corporation to recognize such rights as if is mandated by law
to recognize &nses. Hence, without such recording, the transferee
may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of
stock certificates (Nautica vs. Yummul, supra). Also, between the
Afticles of lncorporation and the corporate books, the latter has more
probative value and is controlling. (See Lao vs. Lao, 567 SCRA 558)
b) A stock and transfer book is the book which records the names
and addresses of all stockholders arranged alphabetically, the
installments paid and unpaid on all stock for which subscription has
been made, and the date of payment thereof; 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 may be prescribed by
law. A stock and transfer book is necessa4y as a measure of
precaution, expediency and convenience since it provides the only
certain and accurate method of establishing the various corporate
acts and transactions hnd of showing the ownership of stock and like
matters (Lanuza vs. CA, 454 SCRA 54).
CORPORATION CODE s43
2. Probative Value of Gorporate Records and Books
Corporate records and books prove prima facie the contents
stated therein and may be utilized against the corporation, its
directors or officers, its members or stockholders, and against third
persons, subject to the rules on evidence.
While it may be true that petitioners were named as shareholders
in the General lnformation Sheet submitted to the SEC, that
document alone does not conclusively prove that they are
shareholders. The information in the document will still have to be
correlated with the corporate books. As between the General
lnformation Sheet and the corporate books, it is the latter that is
controlling (Lao vs. Lao, supra)
A stock and transfer book, like other corporate books and
records, is not in any sense a public record, and thus is not exclusive
evidence of the matters and things which ordinarily are or should be
written therein. ln fact, it is generally held that the records and
minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only, and may be
impeached or even contradicted by other competent evidence.
Thus, parol evidence may be admitted to supply omissions in the
records or explain ambiguities, or to contradict such records (Lanuza
vs. CA, supra).
3. Inspection of Books
Corporate books and records are open to the inspection of any
director, stockholder or member of a corporation, at reasonable
hour,s during any business day, including the right to copy excerpts
of the same. lt may be refused if shown that a prior right granted
was improperly used, or that he was not acting in good faith or for a
legitimate purpose (Section 74, N.C.C.).
The right may be exercised by the stockholder personally or
through his representative, and if refused without justification, the
corporate officers responsible may be criminally liable under Section
144 of the law.
The requisites before the penal provision under Section 144 of the
Corporation Code may be applied in a case of violation of a
stockholder or members right to inspect the corporate books/records
as provided for under Section 74 of the Corporation Code are: First.
 s46 CORPORATION CODE
Dlscuss the scope of this right (of a stockholder to inspect and
examine the books and records of the corporation) under Batas
Pambansa Bilang 68 otherwise known as the Corporation Code of
the Philippines. (1985 Bar)
Answer: Unlike the right of a stockholder under Act 1459 to inspect
the records of busrness transactions and minutes of any meeting,
during office hours on any buslness day, which was absolute in that
the right was exercisable for whatever purpose he may want it, the
present code allows the corporation to reject the request if it is
shown that in the past, the stockholder improperly used the
information he got from said inspection, or that he was not acting in
good faith or for a legitimate purpose in making the demand.
The unjustified refusal by the corporation or any of its officers or
agents to allow a stockholder the right of inspection opens up the
corporate officers or agents responsible for said unjustified refusal to
a suit for damages, and to a possib/e criminal action for violation of
the Code.
Bar Question: Don Mariano was able to secure a favorable
judgment against Nesfor Pe for recovery of a sum of money and the
said judgment had become final and executory. Don Mariano was
informed by someone that Nestor Pe might have a sizeable savings
'deposit with Xena Commercial Bank, of which Don Mariano is a
stockholder, wfth one (1) share registered in his name. lmmediately,
he rushed to the bank and demanded from the bank manager that he
be shown the bank records fo see if Nestor Pe really had such
sawngs deposit. When the bank manager refused and invoked
Republic Act No. 1405, Don Mariano cited his right as a stockholder
to inspect corporate records.
a) ls the stand of the bank manager legally tenable? Explain.
b) What remedy is available to Don Mariano? Explain. (1985, 1983
Ba0
Answer: a) The stand of the bank manager is legally tenable. A
stockholder's right to inspection of corporate books will have to bow
to the provisions of the Law on Non-Disclosure of Deposits, which
provides as a general rule that the deposit account of a depositor in
a bank cannot be inquired into, by any person, even including the
government.
While that general rule admits of exceptions, fhe case of Don
Mariano does not fall under any one of the exceptions.
b) The remedy of Don Mariano is to secure a writ of execution from
the court to be serued on the bank.
CORPORATION CODE 547
The remedy is not an inquiry into the bank deposit but merely an
order to the bank to inform the court whether or not the defendant
has a deposit therein. The disclosure of the deposit is purely
incidental to the execution process, and it is certainly inconceivable
for the law to be used as a shield by debtors to evade payment of
just obligations.
4. Right to Financial Statements
Within 10 days from request of a stockholder or member, the
corporation shall furnish him a copy of its most recent financial
statements including a balance sheet and profit and loss statement.
At regular meetings of stockholders and members, the
corporation should furnish them a financial report of pperations
including certified financial statements (Section 75, N.C.C.).
V. Corporate Powers and Liabilities
A. Theories on Corporate Powers
There are two theories on corporate powers: the theory of
of special capacities. Under the
general capacities and the theory
theory of general capacities, a corporation is said to hold such
powers as are not prohibited or withheld from it by general laws. The
theory of special capacities, on the other hand, advances the view
that the corporation cannot exercise powers except those expressly
or impliedly given to it. ln the Philippines, the second view applies.
B. Classes of Corporate Powers
Bar Question: What are the general powers of a corporation
organized in accordance with our laws? (1946 Bar)
Bar Question: Enumerate the powers of the Board of Directors.
(1949 Bar)
Answer: Corporate powers exercisable through the Board of
Directors fall under three classifications: express, implied, and
incidental powers.
Express powers are those expressly vested in the corporation by
purpose clause of its articles of incorporation, the corporation law,
and by speciallaws.
lmplied powers are those which can be fairly inferred from the
express powers, and fall under five classifications, to wit:
548 CORPORATION CODE
a. Acts in the usual course of busrness;
b. Acts to protect debts owing to the corporation;
c. Embarking in a differenf busrness;
d. Acts to aid employees;
e. Acfs to increase buslness.
tncidental powers are powers inherent in all corporations as legal
entities such as perpetual succession.
Bar Question: tn the creation of corporations, what iuristic principle
is fottowed in the Philippines, the gennossenschaft theory or the
concesslon theory? (972 Bar) ' The later act of the stockholders to revoke the donation is invalid,
Answer: The concession theory is followed in the Philippines in the
creation of corporations. Under this theory, a group of persons
wanting to create a corporation will have to execute documents and
compty with requirements set by the state before the latter gives to
the group corporate personality. The grant being a privilege, the
state provides for fhe causes and reasons by which such privilege
may later on be withdrawn by it.
The powers of a corporation are limited. lt can make no contract
not authorized by its charter. lts rights to act as a corporation are
only reserved to it as long as it obeys the law of its creation. There is
reserved a right in the legislature to investigate its contracts to find
out whether it ttas exceeded its powers (Bataan vs. PCGG, 150
scRA 181).
A corporation may exercise the powers expressly conferred upon
it by the Corporation Code and those that are implied by or are
incidental to its existence through its board of directors and/or duly
authorized officers and agents (San Pablo vs. ClR, 492 SCRA 192).
The opening of a post office to service its employees in remote
areas, and the establishment of a stevedoring service by the
National Power Corporation are exercises by the said corporation of
its implied powers (NPC vs. Vera, 170 SCRA 721).
Bar Question: A was general manager of X lnc. for thirty years
during which time the corporation made great progres.s. After the
death of A, the Board of Directors of X lnc. resolved to give the
chitdren of A P500,000.00 out of the proceeds of the insurance policy
taken by X tnc. on A's life. The donation was approved by the
stockhotders and accepted by the donees. Later on, the stockholders
CORPORATION CODE
voted to revoke the donation.'Can the donees recover? Explain fully.
(1971 Ba)
Answer: The donation in the problem, having become irrevocable by
its acceptance by the donee, the donor corporation can no longer
withdraw it.
The act of the board in giving the donatio;n is an exercise by it of
the implied power of the corporation to protect or aid employees and
the stockholders'subsequent approval of it erased all taints of being
ultra vires, if it was so.
and the donees who have not yet received the donation from the
corporation can recover the amount from the corporation.
(Note: Under Section 36, par. 10, N.C.C., the corporation may
establish a pension, retirement and other plans benefiting officers,
directors and employees.)
Bar Question: Pursuant to the request contained in a resolution of
the Board of Directors of a corporation, a post office branch was
opened within the mining camp of the corporation. lf the opening of
such posf office branch is outside of the scope of the powers
expressly conferred upon the corporation, is such an act of the Board
of Directors valid? Reason. (1972 Bar)
Answer: The act of the board of requesting by resolution, the
opening of a post office in its mining camp, although outside the
scope of the express powers of the corporation is valid.
No doubt, the opening of a post office in the corporation's mining
camp not only will provide facilities needed by the corporation in the
usual course'of its busrness, but alsa will aid its personnel and
employees. They are implied powers of the corporation which it can
exercise under the law.
Bar Question: ABC Corporation is engaged in the busrness of
manufacturing soft drinks. For the past 10 years, it has bought all its
bottles from XYZ Corporation. Considering the volume of its
production, it now finds that it will be more economical to
manufacturing its own bottles.
The Board of Directors, after studying and dlscussing the matter
thoroughly, decides fo sef asrde the amount of P1,000,000.00 for this
project. Most of this amount will go to the cosf of equipment and
materials.
M is a stockholder of ABC Corporation and is against this
investmentin the project and would like to withdraw from the
550 CORPORATION CODE
corporation by exercising his appraisal right if the projecf goes
through. He therefore demands that the project be submitted to the
stockholders for approval, but the Board refuses to do so on the
ground that there is no need for such approval and that the calling of
a special stockholders' meeting would entailtoo much expenses.
M thus cannot have the oppoftunity to exercise his appraisal right.
He wants to sue the Board to compel it to submit the matter to the
stockholders and to enjoin it from pursuing the project until the
stockholders shall approve it.
Do you think the matter needs the stockholders' approval or is the
action of the Board of Directors sufficient? Explain. (1983 Bar)
Answer: I submit that the matter needs no approval by the
stockholders. The corporation, being engaged in the soft drinks
busrness, the manufacture by it of bottles to contain the soft drinks
manufactured by it, is merely an exercise by it of an implied
corporate power, and this implied corporate power is exercisable by
the board of directors alone, without need of stockholders' approval.
B. How Corporate Powers Exercised
A corporation may act only through its board of directors or, when
authorized either by its by-laws or by its board resolution, through its
officers or agents in the normal course of business. The general
principles of agerrcy govern the relation between the corporation and
its officers or agents, subject to the articles of incorporation, by-laws,
or relevant provisions of law (Woodchild vs. Roxas, 436 SCRA 235).
There are three levels of control in a corporation:
1) the board of directors, which is responsible for corporate policies
and the general management of the business affairs of the
corporation;
2) the officers, who in theory execute the policies laid down by the
board, but in practice often have wide latitude in determining the
course of business operations; and
3) the stockholders who have the residual power over fundamental
corporate changes, like amendments of the articles of incorporation.
Just as a natural person may authorize another to do certain acts
in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents
appointed by it (BA vs. Sia, 336 SCRA 484). Thus, contracts or acts
of a corporation must be made either by the board of directors or by
a corporate agent duly authorized by the board. Absent such valid
CORPORATION CODE 551
delegation/authorization, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but not in
the course of, or connected with the performance of authorized
duties of such director, are held not binding on the corporation
(Manila vs. PNB, 511 SCRA 444).
The power of a corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate powers
(Premium vs. CA, 264 SCRA 11).
1. By the Board
The management of a corporation is vested in the Board. The
Board acts always by majority vote of that number present during
regular or special meetings constituting a quorum. For acts of the
board to be valid, it is necessary in general that the board should
meet in a regular or special meeting validly called (Section 25,
N.C.C.).
Under the Corporation Law, unless otherwise provided, corporate
powers are exercised by the Board of Directors (Yamamoto vs.
Nishino, 551 SCRA 447).
An individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from
the board of directors (Cagayan vs. Commissioner, 545 SCRA 10).
Bar Question: Pedro owns 70%o of the subscribed capital stock of a
company which owns an office building. Paolo and Juan own the
remaining stock equally between them. Paolo owns a security
agency, a janitorial company and a catering busrness. ln behalf of
the office building company, Paolo engaged his companies to render
their $ervices to the office building. Are the service contracts valid?
Explain. (2008 Bar)
Answer: The seruice contracts are invatid. Section 23 of the
Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Jusf as a
natural person may authorize another to do certain acts in his behalf,
so may the board of directors of a corporation validly delegate some
of its functions to individual officers or agents.appointed by it. Thus,
contracts or acts of a corporation must be made either by the board
of directors or by a corporate agent duly authorized by the board.
Absent such valid delegation/authorization, the rule is that the
552 CORPORATION CODE
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with the
performance of authorized duties of such director, is held not binding
on the corporation. Thus, a corporation can o.nly execute its powers
and transacf ifs business through its Board of Directors and through
its officers and agents when authorized by a board resolution or its
by-laws. (Manila MetaiJ vs. PNB, 511 SCRA 444)
A corporation exercises its powers through its board of directors
and/or its duly authorized officers and agents, except in instances
where the Corporation Code requires stockholders' approval for
certain specific acts. A corporation's board of directors is understood
to be that body which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and
(3) controls and holds all property of the corporation. lts members
have been characterized as trustees or directors clothed with a
fiduciary character. Moreover, the directors may appoint officers and
agents and as incident to this power of appointment, they may
discharge those appointed (Raniel vs. Jochico, 517 SCRA 221).
With the exception only of some powers expressly granted by law
to stockholders (or members, in case of non-stock corporations), the
board of directors (or trustees, in case of non-stock corporations) has
the sole authority to determine policies, enter into contracts, and
conduct the ordinary business of the corporation within the scope of
its charter, i.e., its articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board of directors is
restricted to the management of the regular business affairs of the
corporation, unless more extensive power is expressly conferred.
The raison d'etre behind the conferment of corporate powers on the
board of directors is not lost on the Court. lndeed, the concentration
in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of corporate
organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business (Filipinas
vs. Go, 518 SCRA 453).
The power to issue shares of stocks in a corporation is lodged in
the board of directors and no stockholder's meeting is required to
consider it (Majority vs. Lim, 650 SCRA 461; Dee vs. SEC, 199
scRA 238).
CORPORATION CODE 553
J
The Board may delegate corporate powers, such as the power to
enter into contracts, to either an executive committee or officials or
contracted managers. The delegation, except for the executive
committee, must be for specific purposes. Delegation to officers
makes the latter agents of the corporation; accordingly, the general
rules of agency as to the binding effects of their acts would apply.
For such officers to be deemed fully clothed by the corporation to
exercise a power oi tfre Board, the latter must specially authorize
them to do so (ABS-CBN vs. CA, 301 SCRA 572).
While a corporation may appoint agents to enter into a contract in
its behalf, the agent should not exceed his authority (APT vs. CA,
300 SCRA 579). When the corporate officers exceed their authority,
their actions cannot bind the corporation, unless it has ratified such
acts or is estopped from disclaiming them (San Juan vs. CA, 296
scRA 631).
The corporation transacts its business only through its officers or
agents. Whatever authority these agents may have is derived from
the board of directors or other governing body unless conferred by
the charter of the corporation. An officer's power as an agent of the
corporation must be sought from the statutes, by-laws or in the
delegation of authority to such officer from the acts of the board,
formally expressed or implied from a habit or custom of doing
business (lbid)
The power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in
the board of directors. However, the board may validly delegate
some of its functions and powers to officers, committees and agents.
The authority of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly, by habit, custom, or acquiescence, in
the general course of business. The authority of a corporate officer
or agent in dealing with third persons may be actual or apparent.
The doctrine of "apparent authority," with special reference to banks,
had long been recognized in this jurisdiction. Apparent authority is
derived not merely from practice. lts existence may be ascertained
through 1) the general manner in which the corporation holds out an
officer or agent as having the power to act, or in other words, the
apparent authority to act in general, with which it clothes him; or 2)
the acquiescence in his acts of a particular nature, with actual or
 CORPORATION CODE
constructive knowledge thereof, within or beyond the scope of his
ordinary powers (Associated vs. Pronstroller, 558 SCRA 1 13).
lf a corporation knowingly permits its officer, or any other agent, to
perform acts within the scope of an apparent authority, holding him
out to the public as possessing power to do those acts, the
corporation will, as against any person who has dealt in good faith
with the corporation through such agent, be estopped from denying
such authority (lbid.).
The Court has also recognized the rule that persons dealing with
an assumed agent, whether the assumed agency be a general or
special one, are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it. Unless duly authorized, a
treasurer, whose powers are limited, cannot bind the corporation in a
sale of its assets (Keeler vs. Rodriguez,4 Phil. 19).
The power to purchase real property is vested in the board of
directors or trustees. While a corporation may appoint agents to
negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the board, whose
approval will finalize the transaction (Firme vs. Bukal, 414 SCRA
1e0).
Authorization from the board of directors of a corporation is
not
necessary where a stockholder is not acting on behalf of the
corporation but in his own personal capacity (CMH vs. CA, 378
scRA 545)
Where the corporate officer's power as an agent of the corporation
did not derive from board resolution, it would nonetheless be
necessary to show a clear source of authority from the charter, the
by-laws or the implied acts of the governing body (SSS vs. COA, 384
scRA 548).
The complaint should be dismissed because it was not
established that the members of the board who authorized the filing
of the complaint were the lawfully elected officers of the corporation
(Monfort vs. Monfort, 434 SCRA 27).
GORPORATION CODE 555
The guilty directors or officers are the ones who should be liable
for the damages, if any, suffered by the corporation (APT vs.
Sandiganbayan, 360 SCRA 437).
lf so authorized by law, by-laws, articles of incorporation or board
resolution, an officer, not a director, may appoint an agent to act for a
corporation. Such are referred to as express powers (Citibank vs.
Chua, supra).
It is a fundamental principle in the law of agency that every
delegation of authority, whether general or special, carries with it,
unless the contrary be expressed, implied authority to do all of those
acts, naturally and ordinarily done in such cases, which are
reasonably necessary and proper to be done in order to carry into
effect the main authority conferred (lbid.).
A board resolution appointing an attorney-in-fact to represent the
corporation in the pre-trial is not necessary where the by-laws
authorizes an officer of the corporation to make such appointment
(rbid.).
The board of directors may also be empowered under the by-laws
to create additional officers as may be necessary (Nacpil vs.
lntercontinental, 379 SCRA 653).
Documents and admissions cannot have the effect of a ratification
of an unauthorized act. Ratification can never be made on the part of
the corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by the officer
as governing body having authority to make such contract (Aguenza
vs. lAC,271 SCRA 1).
The power to borrow money is one of those cases where even a
special ppwer of attorney is required. There is invariably a need of an
enabling act of the corporation to be approved by its Board of
Directors (lbid.).
lf the by-laws of the corporation requires the presence of four (4)
out of five (5) directors to constitute a quorum in special meetings,
the presence of three (3) only is not a quorum (Pena vs. CA, 193
scRA 717).
Courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have
556 CORPORATION CODE
legitimate power of action, and contracts entered into by the board of
directors are binding upon the corporation and courts will not
interfere unless such contracts are so oppressive and
unconscionable as to amount to a wanton destruction of the rights of
the minority (Sales vs. SEC, 169 SCRA 109).
lf a person acts for a corporation and deals with another not
having notice of the want of authority, if it is shown that the board of
directors had permitted the agent to exercise that authority, or
acquiesced in a contract entered into by said agent, and retained the
benefits consequent thereto, the corporation is bound,
notwithstanding the fact that actual authority may not have been
issued (BPl vs. lAC, 164 SCRA 630). .
Although an officer or agent acts without or in excess of his
authority, if he acts within the scope of his apparent authority with
which the corporation has clothed him by holdihg him out or
permitting him to appear as having such authority, as where an
officer is allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a
considerable time, the corporation will be in estoppel to deny that
such apparent authority is real, as to innocent third persons dealing
with such officers and agents (BPl vs. First, 429 SCRA 30).
Apparent authority is derived not merely from practice. lts
existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or an agent as having the
power to act or, in other words, the apparent authority to act in
general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his powers. lt requires
presentation of evidence of similar act(s) executed either in its favor
or in favor of other: parties. lt is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer
with the power to bind the corporation (People's vs. CA, 297 SCRA
170).
Under the doctrine of apparent authority, acts and contracts of
the agent, as are within the apparent scope of the authority conferred
on him, although no actual authority to do such acts or to make such
contracts has been conferred, bind the principal. The principal's
liability, however, is limited only to third persons who have been led
reasonably to believe by the conduct of the principal that such actual
authority exists, although none was given. ln other Words, apparent
CORPORATION CODE 557
authority is determined only by the acts of the principal and not by
the acts of the agent. There can be no apparent authority of an
agent without acts or conduct on the part of the principal; such acts
or conduct must have been known and relied upon in good faith as a
result of the exercise of reasonable prudence by a third party as
claimant, and such acts or conduct must have produced a change of
position to the third party's detriment (Banate vs. Phil. Countryside,
625 SCRA 21).
We would be unduly stretching the doctrine of apparent authority
were we to consider the power to undo or nullify solemn agreements
validly entered into as within the doctrine's ambit (lbid.).
Where the by-laws of a corporation reserves to the stockholders
the power to determine the compensation of the directors, it is not
within the power of the board to enact a resolution providing
themselves with compensation for additional duties (Central vs. Tibe,
33 SCRA 593).
When the officers or agents of a corporation exceed their powers
in entering into contracts or doing other acts, the corporation, when it
has knowledge thereof, must promptly disaffirm the contrAct or act
and allow the other party or third persons to act in the belief that it
was authorized or has been ratified. lf it acquiesces, with knowledge
of the facts, or fails to disaffirm, ratification will be implied or else it
will be estopped to deny ratification (Premiere vs^ CA, 427 SCRA
686).
All acts within the powers of a corporation may be performed by
agents of its selection; and, except so far as limitations or restrictions
which may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the
relation of agency for a natural person govern the officer or agent of
a corporation, of whatever status or rank, in respect to his power to
act for the corporation; and agents once appointed, or members
acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons
(Philippine Rabbit vs^ Aladdin, 494 SCRA 358).
Bar Question: A group of stockholders of Sesame Corporation filed
a court suit against the members of the Board of Directors to make
good to the shareholders, in proportion to their shareholdings, fhe
/osses incurred by the corporation because of the defendant Board
of D i rectors' m ism an age me nt.
558 CORPORATION CODE
Willthe action prosper? Reasons. (1988 Bar)
Answer: No, the action witt not prosper. tt is not enough to show
fhaf /osses were incurred due to mismanagement. lt is necessary
that the stockholders who brought the suit should show that the
/osses were incurred due to the fraud and malice of the defendant
directors. lf the cause for the /oss is merely error of buslness
judgment, the directors could not be held liable for fhe /oss.
The remedy in the situation is to remove the errant directors by
resolution of the stockholders representing 2/3 of the outstanding
capital stock, in a meeting duly called for the purpose.
Bar Question: Where the board of directors of a corporation
consisfs of nine members, two having died during their term of office,
one being abroad, what would be the quorum? How many affirmative
votes would be necessa ry to pass a resolution? Explain. (1970 Bar)
Answer: ln a board of nine members, the quorum would be five. And
it remains at five inspite of the death of two and the absence of one
who is abroad.
The majority of that number present and constituting a quorum
voting affirmatively for a resolution can validly pass fhe sard
resolution.
ln the above example, if all six of the remaining members of the
board of direct1rs are present in a duly called for meeting, the
affirmative vote of four can validly pass a resolution.
If only five are present, that number is still a quorum, and the
affirmative vote of three of the five can validly pass a resolution.
Bar Question: Can the president of a corporation or the chairman of
the board of directors bind the corporation? Explain. (1960 Bar)
Answer: No, the President of a corporation or the chairman of its
board of directors cannot bind the corporation because the powers of
a corporation generally reside in the board of directors unless the
board delegates specific powers to the President. Reso/uflons
passed by the board in a duly constituted meeting bind the
corporation.
Bar Question: Which of the following corporate acts are valid, void
or voidable? lndicate your answer by writing the paragraph number
of the .query, followed by your corresponding answer as "Valid,"
"Void," or "Voidable," as the case may be. lf your answer is "Void,'
explain your answer. ln the case of a "Voidable" answer, specif
CORPORATION CODE 559
what conditions must be present or complied with to make the
corporate act valid
1. XL Foods Corporation, which is engaged in the fastfood
busrness, entered into a contract with its President Jose Cruz
whereby the latter would supply the corporation with its meat and
poultry requirements.
2. The board of directors XL Foods Corporation declared and paid
cash dividends without the approval of the stockhotders.
3. XL Foods Corporation guaranteed the loan of ifs sisfer
company XL Meat Products, lnc. (2002, 1996, 1995 Bar)
Answer: (1) Voidable - The transaction with President Jose, a self-
dealing director, is voidable, at the option of the corporation, unless
allthe following conditions are present:
a. That the presence of such director in the board meeting in which
the contract was approved was nof necessa ry to constitute a quorum
for such meeting
b. That the vote of such director was not necessary for the approval
of the contract
c. That the contract is fair and reasonable under the circumstances
d. That in the case of an officer, the contracf has been previously
authorized by the board of directors
Where any of the first two conditions sef forth in the preceding
paragraph is absent, in the case of a contract with ei director, such
contract may be ratified by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock (Section. 32,
NCC)
(2) Valid - Cash dividends are declared by the board only. There is
no need of stockholders' approval (Section 43, NCC).
(3) Voidable - The guarantee of the loan of XL Foods Corporation to
lfs sisfer company is an ultra vires act being an act not within its
expressed, incidental or implied powers. However, such act may be
ratified. Ratification can be made by the corporate board either
expressly or impliedly. lmplied ratification may take various forms -
like silence or acquiescence by act showing approval or adoption of
the contract, or by acceptance and retention of benefits flowing
therefrom (See MtAlSS vs. CA, 297 SCRA 287).
Bar Question: Rodman, the President of TF Corporation, wrote a
letter to Gregorio, offering to sell to the latter 5,000 bags of feftilizer
at P100.00 per bag. Gregorio signed his conformity to the letter-
offer, and paid a downpayment of P50,000.00. A few days later, the
Corporate Secretary of TF informed Gregorio of the decision of their
Board of Directors not to ratify the letter-offer. However, since
s60 CORPORATION CODE
Gregorio had already paid the downpayment, TF delivered 500 bags
of ferlitizer which Gregorio accepted. TF made it clear that the
delivery should be considered an entirely new transaction.
Thereafter, Gregorio sought enforcement of the letter-offer.
Is there a binding contract for the 5,000 bags of feriilizer?
Explain. (1996 Bar)
Answer: There is no binding contract between TF Corporation and
Gregorio for the 5,000 bags of the fertilizer. The case at bar does not
indicate that Rodman was clothed with the authority to sell the 5.000
bags of fertitizer. ln the absence of an authority from the board of
directors, no person, not even the officers of the corporation, can
validty bind the corporation (See Premium vs. CA, 264 SCRA 11).
Likewise, TF Corporation, by delivering the 500 bags, made it
clear that it was an entirely new transaction since the previous
transaction with Rodman was not ratified by the corporation. By
Gregorio's acceptance of the bags without protest, he agreed that
the delivery of 500 bags was an entirely new transaction (See Yao
vs. CA, 209 SCRA 763).
Bar Question: Alpha corporation's board of directors, for
reasonable annual fee, enters into a 2}-year management contract
with Beta company, a top-rate corporation. The contract vesfs the
control and management of Alpha's busrness and affairs in Beta,
through the lattdr's president or another qualified executive the
president may designate. The contract also provides thaf it may be
terminated at any time upon final iudicial adiudication that the
management supplied is dishonest or grossly incompetenf. /s fhls
management contract valid? (1974 Bar)
Answer: No, the delegation by the board of directors of Alpha of
control and management of its busrness and affairs, without
timitations, in Beta through the latter's president, is invalid.
The total delegation of corporate powers by its board is not only
unnecessary but contrary to law. That the exercise of said delegated
powers cannot be terminated except by a court order all the more
emphasizes on the abdication, without reservation, by the board of
its power to supervise and manage the business of the corporation.
Hence, I submit that the management contract is invalid.
(Note: Under Section 44, N.C.C., a corporation may conclude a
management contract with another corporation for a period not
exceeding five years, which contract should be approved by the
board of both corporations, and by stockholders holding a majority of
the outstanding capital stock or by a majority of the members of both
CORPORATION CODE 561
corporations. The majority requirement is increased to 2/3 in case of
interlocking directors or ownership by the same persons of at least
1/3 of the stocks in both corporations.)
Bar Question: At an annual meeting of stockholders, a resolution
was approved empowering the president of the corporation to enter
into a contract with a New York firm. Can the president vatidly act by
virtue of said resolutians? Why? (1948 Bar)
Answer: No, the president cannot validly act by virtue of a resolution
passed by stockholders in their annual meeting. The powers of a
corporation, especially the execution of contracts, are exercised
through resolutions passed by the board of directors in a regular or
special meeting lawfully called.
Bar Question: tf a corporate lawyer who is at the same time the
administrative manager of the corporation enters into a compromise
agreement in court so that a case involving the corporation could be
settled, would the corporation itself be bound by such compromise
agreement? Reason. (1975 Bar)
a
Answer: No, the corporation will not be bound by the compromise
agreement in a court case entered by its corporate lawyer and
ad m i n istrative m an ager.
Only the board or a person delegated by said board to enter into
the compromise agreement can bind the corporati'on.
Bar Question: By a resolution .of the Board of Directors of a
corporation, its general manager is directed to purchase a quantity of
rice at P12 a cavan. To implement the resolution, the general
manager buys rice at that price. But the treasurer of the corporation
refuses to take Qelivery of the rice bought, exptaining that the
stockholders considered the price too high and in a meeting duly
called for the purpose, have approvgd a resolution repudiating the
purchase.
May the seller of the rice compel the corporation to respect the
sale and pay the price thereon? Explain your answer. (1g58 Bar)
Answer: Yes, the setler of the rice can compel the corporation to
respect the sale and pay the price thereof. A resolution passed by
the board of directors of a corporation binds the corporation, and
where the general manager of the corporation acts under authority of
that resolution, his actuation is the actuation of the board. The
562 CORPORATION CODE CORPORATION CODE 563

stockholders by their cottective act cannot countermand a resolution 3. Written notice to the stockholders of the time and ptace of
validly passed by the board. meeting, stating the purpose thereof
Hence, the corporation in the problem can be compelled to 4. Ratification by stockholders representing at teast 2/3 of
respect the sale and PaY the Price. outstanding capital stock.

Directors are entitled to reasonable per diems for atteridance of

Bar Question: The president of a domestic corporation hired a board meetings. Compensation other than per diems may be granted
private secretary at a salary of P300 a month fo asslsf him in his
office. The byJaws of his company were s/enf as to whether he had
to directors by resolution of stockholders representing at least a
majority of the outstanding capital, which total amount, however,
the authority to engage pmployees. Actually, the other employees of
shall not exceed 1Oo/o of net income before income tax during the
the company were engaged by the general manager with the
preceding year (Section 30, N.C.C.).
approval of the board. After working a month, said private secretary
tried to collect her salary but the company cashier refused to pay her
2. Acts Needing Stockholders'Vote or lntervention
atteging that there was no item in the budget for that purpose. The
said emptoyee thereupon filed suit against the corporation for the
cottection of her satary. /s she entitled to iudgment? (1950 Bar)
a. Vote of Stockholders Holding Majority of
Outstanding Capital Stock
Answer: No, the secretary is not entitled to collect her s)tary from '1) Fixing of issue value of no par value stocks (Section 62, N.C.C.).
the corporation. The hiring of employees rs done by the general
2) Adoption, amendment or repeal of by-laws (Section 56, N.C.C.).
manager with the approval'of the board, and not by the president-
Ihis is without preiudice to the secretary collecting her salary 3) Compensation, other than per diems, for directors (Section 30,
N.C.C.).
from the President personallY.

Bar Question: Stikki Cement Corporation (STlKKl) was organized

b. Vote of Stockholders Holding 213 of Subscribed
primarily for cement manufacturing. Anticipating substantial profits, Gapital Stock
its President prlposed that STIKKI invest in (a) a power plant
project, (b) a concrete road proiect, and (c) quarry operations for
1) Extension or shortening of corporate term (Section 37, N.C.C.).
2) Amendment of articles to increase or decrease capital stock
limestone used in the manufacture of cement.
(Section 38, N.C.C.).
a. What corporate approvals or votes are needed for the proposed 3) lncurring, creation or increase of bonded indebtedness (lbid.).
investments? Explain.
b. Describe the procedure in securing these approvals. (1995 Bar) Bar Question: Define bond and give its essential functions. (1956
Ba0
Answer: (a) Since the power plant and concrete road proiects are
not related to the manufacture of cement, which is the primary Answer: A bond, as used in the Corporation Law, is a certificate of
purpose for which STIKKI was incorporated, STIKKI must get the
indebtedness rssued by the corporation for money borrowed from the
approval of majority of the board of directors and ratification by public in general. lt is used by the corporation where the corporation
stockholders representing at least two-thirds of the outstanding
needs capital in big amounts but does not have any desire to
capitalstock.
crease its ca p ita I ization.
As to the quarry operations for limestone, lt ls related to in
the
manufacture of cement, hence STIKKI need only get the approval of
majority of the Board of Directors (Section 42, NCC)'
Bar Question.' /s registered bond transferabte? ls it negotiabte?
How? (1956 Bar)
(b) The procedure is as follows:
1. Notice to the directors of the meeting, stating the purpose
thereof
2. Approval by maiority of the directors
564 CORPORATION CODE
Answer: A registered bond, which by its nature is registered in the
books of the corporation in the name of the bondholder, can be
transferred but only by assignment.
tt is not negotiable because it is made payable in the name of a
specified, person only.
Bar Question: Define coupon bond and convertible bond, and
exptain briefly their utility and negotiability. (1956 Bar)
Answer: A coupon bond is one with detachable coupons bearing
dates and amounts, which on surrender to the corporation on the
dates stated, entitles the holder to receive cash which represents
interest on the bond up to that date. A coupon bond is payable to
bearer, and therefore negotiable by delivery.
A convertible bond is one entitling the holder to exchange it with
other types of bonds.
4) Approval of issue of shares in exchange for property needed for
corporate purposes or payment of prior debts (Section 39,
N.C.C.).
5) Sale or disposition of all or substantially all of the corporate
assets (Section 40, N.C.C.).
6) lnvestment of funds in another corporation (Section 42, N.C.C.)
7) lnvestment of funds for purposes different from those stated in
the articles ofincorporation (Section 42, N.C.C.)
S) Stock dividend declaration (Section 43, N.C.C.).
9) Execution of management contracts (Section 44, N.C.C.).
10) Delegation to the board of directors of the power to amend the
by-laws, or adopt new by-laws (Section 48, N.C.C.).
11) Other amendments to the articles of incorporation (Section 16,
N.C.C.)
12) Ratification of certain corporate contracts with a director or
officer (Section 32, N.C.C.)
13) Ratification of acquisition of business opportunity by a director or
officer (Section 34, N.C.C.)
14) Approval of merger or consolidation (Section 77, N.C.C.)
15) Removal of directors (Section 28, N.C.C.)
16) Voluntary dissolution of corporation (Sections 118 and 119,
N.C.C.)
3. The Executive Committee
The by-laws may create an executive committee composed of not
less than three directors to be appointed by the board. By majority
CORPORATION CODE 565
vote of said committee, it may act on specific matters within the
competence of the board, as may be delegated to it by the by-laws,
or by the board.
The following matters, however, cannot be acted upon by this
committee: (1) approval of any act which requires stockholders'
approval also, (2) filling up of vacancies in the board, (3)
amendment, repeal or adoption of new by-laws, (4) amendment or
repeal of an irrepealable board resolution, and (5) cash dividend
declaration (Section 35, N.C.C.).
D. Special Corporate Powers
1. Eminent Domain
a. Use of Private Property
No private corporation may occupy or use property without the
consent of the owners or prior condemnation proceedings and
paying or tendering just compensation.
2. Franchises
There are two classes of franchises in corporations '_ the general
or corporate franchise, also called the primary franchise, which is the
franchise to exist as a corporation; and the secondary franchise
which is the right granted by the state to use public property for
public use but with a private profit.
The special corporate power referred to here is the secondary
franchise.
The right to operate a messenger and delivery service by virtue of
a legislative enactment is a secondary franchise (JRS vs. lmperial,
11 SCRA 634).
3. lnvestment in Other Gorporations for Purposes Other
Than Those Stated in Articles
Bar Question: When may a corporation invest its funds in another
corporation or busrness or for any other purposes? (1996, 1947 Bar)
566 GORPORATION GODE
Answer: A corporation may invest its funds in another corporation
or busrness or for any other purposes only if they can comply with
the following requirements:
1) the investment must be apppved by a maiority of the board of
directors or frusfees.
2) the investment must be ratified by the stockholders representing
at least two-thirds (V3) of the outstanding capital stock, or by at least
two-thirds (2/3) of the members in the case of non'stock
corporations, at a stockholders' or members' meeting duly called for
the purpose.
3) written notice of the proposed investment and the time and place
of the meeting shall be addressed to each stockholder or member at
his place of residence.
(Note: Answered under the N.C.C.)
Plaintiffs-appellants contend that the investment of corporate
funds by the defendant-appellants in another corporation constitutes
a violation of Section 17 of the Corporation Law. The Supreme
Court held that such an act, if done in pursuance of the corporate
purposes, does not need the approval of the stockholders; but when
the purchase of shares of another corporation is done solely for
investment and not to accomplish the purpose of its incorporation,
the vote of approval of the stockholders is necessary, and further
states that when the purpose or purposes are stated in its articles of
incorporation, thb approval of the stockholders is not necessary (De
la Rama vs. Ma-ao, 27 SCRA247).
The lower court's order restraining the appellant corporation from
making investments in other companies whose purpose is not
connected with the sugar central business should be reversed. This
is because Section 17 of the Corporation Law allows a corporation to
invest its funds in any other corporation or business, or for any
purpose other than the main purpose for which it was organized,
provided that its board of directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power (lbid.).
Purely ultra vires acts of corporate officers in investing corporate
funds in another corporation may be ratified by stockholders holding
at least 2/3 of the voting power (Gokongwei vs. SEC, 89 SCRA 336).
Bar Qu.estion: M Corporation is a Philippine Corporation engaged in
deep sea fishing. tts operation resulted rn /osses. Because of the
unprofitabte operations in deep sea fishing, the corporation wants to
CORPORATION CODE 567
engage in general construction busrness, one of its secondary
purposes.
What are the rights of the minority stockholders who do not want
to diveft the corporate funds into a secondary purpose? (1977 Bar)
Answer: The stockholder who did not vote to allow the board such
authority may, within 40 days from the date of such action, object in
writing and demand payment of his shares for an amount agreed by
him and the corporation; if no agreement is reached, then for any
amount determined by three disinterested persons, one of whom
shatt be namied by the stockhotder concerned, a second, by the
corporation, and a third by the two thus chosen.
Within 30 days from said ascertainment of the price, the
corporation shall pay the amount to the stockholder.
(Note: The withdrawal right under the old law is now called the right
of appraisal. The periods to demand [now 30 days], and to refer the
matter to a committee of three disinterested persons [now 60 days],
have been modified. ([Section 82, N.C.C.]).
E. Special Limitations on Gorpor.ate Powers
Bar Question: What particular corporations are prohibited from
having any interest in other corporations? (1947 Ba)
Answer: Corporations engaged in agriculture are prohibited from
having any interest in any other corporation organized for the
purpose of engaging in agriculture. The same limitation extends to
mining corporations.
Bar Question: Extent and limitations of the power of Philippine
corporations to own real estate. (1958 Bar)
Answer: A Philippine corporation not a realty corporation can
acquire real estate only up to the extent that the purpose for which
the corporation was formed may permit; and up to the extent that the
lawfulbuslness of the corporation may require. lt cannot engage in
the buying and selling of public lands.
lf the foreign shareholdings of a landholding corporation exceeds
4O%, it is not the foreign stockholders' ownership of the shares which
is adversely affected but the capacity of the corporation to own land,
that is, the corporation becomes disqualified to own land. This finds
support under the basic corporate law principle that the corporation
s68 CORPORATION CODE
and its stockholders are separate juridical entities (J.G. vs. CA, 450
scRA 169).
F. Ultra Vires Acts
1. By the Gorporation ltself
Bar Question: What is an ultra vires act? Give an example. (1949
Ba0
Answer: An ultra vires act is an act done by a corporation outside of
the express and implied powers vesfed in it by its charier and by the
law. Example: a merchandise corporation engaging in the buying
and selling of real estate.
a. Settled Rules
1) A wholly executory ultra vires contract cannot be enforced;
2) A wholly executed ultra vires contract on both sides will not be
set aside nor interfered with by courts;
3) ln ultra vires contracts executed by one party but executory on the
other, recovery may be had under the principle of unjust
enrichment.
Contracts ultra"vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such
contracts are so oppressive and unconscionable as to amount to a
wanton destruction of the rights of the minority (Gamboa' vs.
Victoriano, 90 SCRA 40).
Ultra vires acts or acts which are clearly beyond the scope of one's
authority are null and void and cannot be given effect. The doctrine
of estoppel cannot operate to give effect to an act which is otherwise
null and void or ultra vires (MN4DA vs, Gancayco, 658 SCRA 853).
The general rule is that a corporation, through its board of
directors, should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. Thus, directors must
act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder (Lopez vs.
Fontecha, 247 SCRA 183).
CORPORATION CODE 569
An action of the board of directors during a meeting, which was
illegal for lack of notice, may be ratified either expressly, by the
action of the directors in subsequent legal meeting, or impliedly, by
the corporation's subsequent course of conduct (lbid.)
ln legal parlance, ultra vires act refers to one which is not within
the corporate powers conferred by the Corporation Code or articles
of incorporation or not necessary or incidental in the exercise of the
powers so conferred (lbid.).
Where stockholders, except for one, also sit as members of the
board of directors, it will be illogical and superfluous to require the
stockholders' approval of certain resolutions adopted by the board of
directors (lbid.).
An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law. The term ultra
vires is distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated (Atrium vs.
cA, 353 SCRA 23).
The plea of "ultra vires" will not be allowed to prevail, whether
interposed for or against a corporation, when it will not advance
justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith (Zomer vs.
lnternational, 581 SCRA 11 5).
Bar Question: Distinguish between ultra vires acts and illegal acts of
private corporations. lllustrate the distinction. (1970 Bar)
Answer: An ultra vires act of a private corporation may be
differentiated from an illegal act, in the following manner:
1. An ultra vires act is an act, not necessarily unlawful, but outside
the purposes and authority of the corporation to perform; an illegal
act is an act which goes against the law, morals, public policy and
public order and therefore unlawfulfor any corporation to perform;
2. An ultra vires act may be ratified; an illegal act cannot be ratified;
3" An ultra vires act, if fully or partly executed, can bind the pafties
to it; an illegal act can never be binding.
lllustration:
570 CORPORATION CODE
1. Ultra vires act - a corporation principally formed for general
merchandising, engaging in the real estate busrness, although that
purpose is not included in the purpose clause of its articles.
2. lllegal act a bank as an insurer for another person.
- ratified such acts expressly or taciily, or is estopped from denying
2. By Gorporate Officers
Where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager
may bind the company without formal authorization of the board of
directors. ln varying language, existence of such authority is
established by proof of the course of business, the usages and
practices of the company and by the knowledge which the board of
directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. Where the
practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities without
prior board approval, and the board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of prior
approval, the contracts of the general manager, under the given
circumstances, are valid corporate acts (Board vs. Heirs, 20 SCRA
e87).
A corporate officer, entrusted with the general management and
control of its busi'ness, has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of
the ordinary business of the corporation. As such officer, he may,
without any special authority from the board of directors, perform all
acts of an ordinary nature, which by usage or necessity are incident
to his office, and may bind the corporation by contracts in matters
arising in the usual course of business (lbid.).
Ratification by a corporation of an unauthorized act or contract by
its officers or others relates back to the time of the act or contract
ratified and is equivalent to the original authority. The corporation
and the other party to the transaction are in precisely the same
position as if the act or contract had been authorized at the time. The
adoption or ratification of a contract by a corporation is nothing more
or less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation to
contract, and ratification or adoption is equivalent to a grant of prior
and original authority (lbid.).
CORPORATION CODE 571
Generally, the acts of the corporate officers within the scope of
their authority are binding on the corporation. However, under Article
1910 of the New Civil Code, acts done by such officers beyond the
scope of their authority cannot bind the corporation unless it has
them. Thus, contracts entered into by corporate officers beyond the
scope of authority are unenforceable against the corporation unless
ratified by the corporation (Woodchild vs. Roxas, 436 SCRA 235).
Bar Question: X, a domestic corporation, owns and operates a
sugar central. ln 1965, ,the President of X invested p1 million of
company funds in shares of A, a domestic corporation engaged in
the manufacture of sugar bags out of bagasse as basic raw material.
X became the biggest consumer of the bags produced by A. tn 1g67,
A shut down its operations due to high cost of production and huge
/osses already suffered. stockholder B of X assai/ed the investment
as violative of the corporation Law. The Board of Directors of X then
met and ratified the investment made by the President.
a. What is the effect of the ratification by the Board? Reason.
b. /s B's claim valid? Reason. (1971 Bar)
Answer: a) The ratification by the board of the act of the president
investing the funds of the corporation did not operate to vatidate the
President's acL
The investment of funds of a corporation in the equity of another
corporation is an extraordinary corporate power which can be
exercised by ,ts board of directors onty on authority from
stockholders holding at least z3 of the outstanding capital stock of
the corporation, the decision being made in a regular or special
meeting of said stockholders.
b) The claim of B that the investment is violative of the corporation
Law is not valid.
Corporations are expressly authorized by the Corporation Law to
invest in the equity of other corporations. However, before either
boards can do so, they should be authorized by stockholders holding
at least A3 of the outstanding corporate capitat stock. This authority
from the stockholders is whatis mrssrng in the probtem.
a. Effect When There is No Ratification
Under Article 1898 of the Civil Code, the acts of an agent beyond
the scope of his authority do not bind the principal unless the latter
ratifies the same expressly or impliedly. lt also bears emphasizing
that when the third person knows that the agent was acting beyond
572 CORPORATION CODE
his power or authority, the principal can not be held liable for the acts
of the agent. lf the said third person is aware of such limits of
authority, he is to blame, and is not entitled to recover damages from
the agent, unless the latter undertook to secure the principal's
ratification.
There was no such ratification by the board hence the corporation
is not bound by the acts of its officer (Safic vs. lmperial, 355 SCRA
55e).
G. Constitutional Rights of Corporations
A corporation is entitled to immunity against unreasonable
searches and seizures. A corporation is, after all, but an association
of individuals under an assumed name and a distinct legal entity. ln
organizing itself as a collective body, it waives no constitutional
immunities appropriate to such body. lts property cannot be taken
without just compensation. lt can only be proceeded against by due
process of law, and is protected against unlawful discrimination
(Bache vs. Ruiz, 37 SCRA 823).
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises may
refuse to show its hands when charged with an abuse of the
privilege.
Corporations are not entitled to all the constitutional protections
which private individuals have. They are not at all within the privilege
against self-incrimination although that privilege runs very closely
with the search and seizure provisions (BASECO vs. PCGG, 150
scRA 181).
H. GorporateLiabilities
1. Contractual
A corporation is bound by contracts entered into, or authorized to
be entered into, by its board.
As between the estate of Buan and the corporation formed during
the pendency of estate proceedings to handle the transportation
business of the estate, the corporation would be liable for past and
pending obligations of the estate, as the transportation business
CORPORATION CODE 573
itself was being transferred to and placed in the name of the
corporation. That liability of the corporation should continue to
remain with it even after the percentage of the estate's shares of
stocks in the corporation should be diluted (Buan vs. Alcantara, 127
scRA 834).
Even though a judgment, decree or order is addressed to the
corporation only, the officers as well as the corporation itself may be
punished for contempt for disobedience to its terms, at least if they
knowingly disobey the court's mandate, since a lawful judicial
command to a corporation is in effect a command to the officers
(Heirs vs. CA,422 SCRA 101).
a. Venue
The principal place of business of the suing corporation, not the
place of residence of its President, determines venue for suits by the
corporation (Sy vs. Tyson, 119 SCRA 367).
A corporation has no residence in the same sense in which this
term is applied to a natural person. But for practical purposes, a
corporation is, in a metaphysical sense, a resident of the place
where its principal office is located as stated in the articles of
incorporation. The Corporation Code precisely requires each
corporation to specify in its articles of incorporation the place where
the principal office of the corporation is to be located which must be
within the Philippines (Section 14t31). The purpose of this
requirement is to fix the residence of a corporation in a definite place,
instead of allowing it to be ambulatory (Young vs. CA, 223 SCRA
670).
The residence of a corporation is the place where its principal
office is established (Clavecilla vs' Antillon,'19 SCRA 379). Actions
cannot be filed against a corporation in any place where the
corporation maintains its branch offices. To allow an action to be
instituted in any place where the corporation has branch offices
would create confusion and work untold inconvenience to said entity.
By the same token, a corporation cannot be allowed to file personal
actions in a place other than its principal place of business unless
such a place is also the residence of a co-plaintiff or a defendant
(rbid.). "
Bar Question: Under the Articles of lncorporation of Manila
lndustrial Corporation, its principal place of business shall be in
574 CORPORATION CODE
Pasig, Metro Manila. The principal corporate offices are at the
Ortigas Center, Pasig, Metro Manila while its factory processing
leather products is in Manila. The corporation holds its annual
stockholders' meeting at the Manila Hotel in Manila and its board of
directors meeting, at a hotel in Makati, Metro Manila. The by-laws
are silent as to the place of meetings of the stockholders and the
directors.
a) Who shall preside at the meeting of the directors?
b) Can Ting, a stockholder, who did not attend the stockholders
annual meeting in Manila, question the validity of the corporate
resolutions passed at such meeting?
c) Can the same stockholder question the validity of the resolutions
adopted by the board of directors at the meeting held in Makati?
(1993 Bar)
Answer: (a) The President shall preside at all meetings of
directors unless the by-laws provide othenuise (Section 54, NCC)
(b) No. While the law provides that stockholders' meetings shall be
held in the city or municipality where the principal office of the
corporation is located, which is Pasig City in the case af bar, the
holding of such meeting in Manila is valid since under Section. 51 of
the NCC, Metro Manila, to which Pasig City belongs, shall be
considered a city or municipality.
(c) No. The law provides that meetings of directors of corporations
can be held anywhere in or outside of the Philipprnes, unless the by-
laws provide otherwise (Section 53, NCC).
b. Jurisdiction
Under the 1997 Revised Rules of Civil Procedure, persons
eligible to receive service of summons for a domestic juridical entity
are now limited to the "president, managing partner, general
manager, corporate secretary, treasurer, or in-house counsel"
(Section 11, Rule 14).
The rule now states "general manager" instead of only "manager";
"cerporate secretary" instead of "secretar/'; and "treasurer" instead
of "cashier." The phrase "agent, or any of its directors" is
conspicuously deleted in the new rule (Villarosa vs. Benito, 312
scRA 65).
It should be noted that even prior to the effectivity of the 1997
Rules of Civil Procedure, strict compliance with the rules has been
enjoined. A strict compliance with the mode of service is necessary
CORPORATION CODE s75
to confer jurisdiction of the court over a corporation. The officer upon
whom service is made must be one who is named in the statute;
otherwise the service is insufficient. The purpose is to render it
reasonably certain that the corporation will receive prompt and
proper notice in an action against it or to insure that the summons be
served on a representative so integrated with the corporation that
such person will know what to do with the legal papers served on
him. ln other words, to bring home to the corporation notice of the
filing of the action. The liberal construction rule cannot be invoked
and be utilized as a substitute for the plain legal requirements as to
the manner in which summons should be served on a domestic
corporation (lbid.).
Service of summons upon persons other than those mentioned in
Section 13 of Rule 14 (old rule) has been held as improper. Even
the under the old rule, service upon a general manager of a firm's
branch office has been held as improper as summons should have
been served at the firm's principal office. The service of summons
on the general manager of the insurance firm's Cebu branch was
improper; default order could have been obviated had the summons
been served at the firm's principal office (lbid.).
For the guidance of the Bench and Bar, strictest compliance with
Section 11 of Rule 13 of the 1997 Rules of Civil procedure (on
priorities in modes of service and filing) is mandated and the Court
cannot rule otherwise, lest we allow circumvention of the innovation
by the 1997 Rules in order to obviate delay in the administration of
justice (lbid.).
The service of summons upon the branch manager of petitioner at
its branch office at Cagayan de Oro, instead of upon the general
manager at its principal office at Davao City is improper.
Consequently, the trial court did not acquire jurisdiction over the
person of the petitioner (lbid.).
Service of summons to a corporation upon counsel who
previously appeared to argue on a motion to dismiss, and who thus
became an agent of the corporation, is a valid service (Filoil vs.
Marine, 117 SCRA 86).
(Note: Under the 1997 Revised Rules of Civil procedure, service of
summons must be made upon the in-house counsel.)
Service on the wife of the secretary did not confer jurisdiction over
the corporation (Delta vs. Mangosing, 70 SCRA Sg8).
576 CORPORATION CODE
The mere appearance of its president in another case before the
court, without the requisite summons does not confer jurisdiction
over the corporation (Trimica vs. Polaris, 60 SCRA 321).
Summons served on a mere clerk of a corporation is not a valid
service on the corporation (ATM vs. Buencamino, 124 SCRA 434).
Under the old Rules, service of summons on a domestic juridical
entity may be made on the president, manager, secretary, cashier,
agent, or any of its directors and there are still jurisprudence to the
effect of upholding the validity of service of summons to said
persons. For instance, the actual receipt of the summons by
respondent's cash receiving clerk must be construed as receipt on
behalf of the officer of the corporation (Talsan vs. Baliwag,310
scRA 156).
Summons served on the secretary of a corporate president is a
valid service on the corporation (Vlason vs. CA, 310 SCRA 26). This
rule requires, however, that the secretary should be an employee of
the corporation sought to be summoned. Only in this manner can
there be an assurance that the secretary will bring home to the
corporation [the] notice of the filing of the action against it (lbid.).
Service of summons on an Asst. General Manager for operations
of a transportafron corporation, is a valid service on the corporation
(rbid.).
Service of summons to a house counsel of a corporation or to the
Chief Administrative and Finance Section, is service through an
agent, to bring the corporation within the jurisdiction of the court (Far
vs. Francisco, 146 SCRA 197).
Service of summons to a corporation, through an employee
thereof, described by the sheriff as authorized to receive said
summons, if uncontradicted by the corporation, raises the
presumption of regularity and said employee is deemed to be an
agent of said corporation (Mapa vs. CA, 214 SCRA 417).
A bookkeeper can be considered as an agent of the corporation
within the purview of Section 13, Rule 14 of the old Rules of Court.
The job of a bookkeeper is so integrated with the corporation that his
regular recording of the corporation's business accounts and
essential facts about the transactions of a business or enterprise
safeguards the corporation from possible fraud being committed
CORPORATION CODE 577
adverse to its own corporate interest (Pabon vs. NLRC, 296 SCRA
7).
The word "office" or the phrase "regular place of business" refers
to the office or place of business of the defendant at the time of
service. The rule specifically designates the persons to whom
copies of the process should be left. Substituted service of
summons in a person claiming to be authorized to receive service of
summons in behalf of the corporation was held to be invalid as far as
jurisdiction over the person of the chairman of the board was
concerned inasmuch as he was not holding office in the corporation
but in his residence. Thus, it does not necessarily follow that the
regular place of business of a chairman of the board of directors is
the same as the address of the corporation as it is possible for him to
hold office elsewhere (United vs. Ongpin, 368 SCRA 464)
A. Requirement of Certificate of Non-Forum Shopping
From Corporations
The following officials or employees of the company can sign the
verification and certification without need of a board resolution: (1)
the Chairperson of the Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case.
While the above cases do not provide a complete listing of
authorized signatories to the verification and certification required by
the rules, the determination of the sufficiency of the authority was
done on a case to case basis. The rationale applied in the foregoing
cases is to justify the authority of corporate officers or
representatives of the corporation to sign the verification or certificate
against forum shopping, being "in a position to verify the truthfulness
and correctness of the allegations in the petition" (Cagayan vs.
Commissio.ner, 545 SCRA 10)
We disagree with petitioner that a corporation cannot possibly
hope to comply with the requirement laid down by Revised Circular
No. 2B-91 because it is a juridical entity and not a natural person. lf
this were so, then it would have been impossible for a corporation to
do anything at all. Needless to say, this is the reason why
corporations have directors and officers, to represent it in its
transactions with others. The same is true for the certification
against forum shopping. lt could easily have been made by a duly
authorized director or officer of the corporation. That petitioner did
not in the first instance comply with the requirement of Revised
578 CORPORATION CODE
Circular No. 2B-91 by having the certification against forum shopping
signed by one of its officers, as it did after its petition before the
Court of Appeals had been dismissed, is beyond our comprehension
(Digital vs. CA, 328 SCRA 286).
The requirement that the petitioner should sign the certificate of
non-forum shopping applies even to corporations, considering that
the mandatory directives of the Circular and the Rules of Court make
no distinction between natural and juridical persons. The
Certification should have been signed by a duly authorized director
or officer of the corporation, who has knowledge of the matter being
certified. The Certification signed by the acting regional legal
counsel was not merely a retained lawyer, but an in-house counsel
and officer, whose basic function was to prepare legal pleadings and
to represent the corporation in legal cases. As regional legal
counsel, he was the officer who was in the best position to verify the
truthfulness and the correctness of the allegations in the Complaint
for expropriation. As internal legal counsel, he was also in the best
position to know and to certify if an action for expropriation had
already been filed and pending with the courts (Zulueta vs. Asia, 354
scRA 100).
Only individuals vested with authority by a valid board resolution
may sign the certificate of non-forum shopping in behalf of a
corporation. ln*addition, the Court has required that proof of said
authority must be attached. Failure to provide a certificate of non-
forum shopping is sufficient ground to dismiss the petition. Likewise,
the petition is subject to dismissal if a certification was submitted
unaccompanied by proof of the signatory's authority (PAL vs.
FASAP, 479 SCRA 605). Appending the board resolution to the
complaint or petition is the better procedure to obviate any question
on the authority of the signatory to the verification and certification
(Cagayan vs. ClR, 545 SCRA 10).
A board resolution purporting to authorize a person to sign
documents in behalf of the corporation must explicitly vest such
authority (Metropolitan vs. Adala, 526 SCRA 465).
The issue of whether a corporate officer may bring suit on behalf
of his corporation for violation of B.P. Blg. 22 is not novel. A
domestic corporation was the payee of the bum check, not the
stockholder or director. Therefore, it is the corporation which is the
injured party. Since the stockholder/director was neither a payee nor
a holder of the bad check, he had neither the personality to sue nor a
CORPORATION CODE 579
cause of action against the drawer. lt is clear that where a
corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. The stockholder/director failed to show
any proof that he was authorized or deputized or granted specific
powers by the corporation's board of director to sue the drawer for
and on behalf of the firm hence he had no such power or authority to
sue on the corporation's behalf (Mufroz vs. People, 548 SCRA 473).
Simultaneous with the filing of the complaint, Metrobank
submitted both a certification of non-forum shopping and proof that
Atty. Mendoza who signed it on its behalf was authorized to do so.
The proof of authorization of Atty. Mendoza was dated later than the
date of his signing of the certification of non-forum shopping,
however, thus giving the impression that he, at the time he affixed
his signature, was not authorized to do so. The passing on June 3,
2004 of a Board Resolution of authorization before the actual filing
on June 23,2004 of the complaint, however, is deemed a ratification
of Atty. Mendoza's prior execution on May 28, 2004 of the
verification and certificate of non-forum shopping, thus curing any
defects thereof (Median vs. Metrobank, 561 SCRA 622).
It is noteworthy that the Circular does not require corporate
officers to sign the certificate. More important, there is no prohibition
against authorizing agents to do so (BA vs. Sia, 336 SCRA 484).
Circular 28-91 was prescribed by the Supreme Court to prohibit
and penalize the evils of forum shopping. We see no circumvention
of this rationale if the certificate was signed by the corporation's
specifically authorized counsel, who had personal knowledge of the
matters required in the Circular. A literal interpretation of the Circular
should be avoided, if doing so would subvert its very rationale (lbid.).
Verily, the signatory in the Certification should not have been the
retained counsel, who would not know whether there were other
similar cases of the corporation. Otherwise, this requirement would
easily be circumvented by the signature of every counsel
representing corporate parties (Zulueta vs. Asia, supra).
Where the real party-in-interest is a body corporate, neither the
administrator of the agency or a project manager could sign the
certificate against forum-shopping without being duly authorized by
resolution of the board of the corporation (Eslaban vs. Vda. De
Onorio, 360 SCRA 230).
580 CORPORATION CODE
ln the absence of a board resolution authorizing a government
owned or controlled corporation's officer-in-charge to represent it in
the petition, the verification and certification of non-forum shopping
executed by said officer failed to satisfy the requirement of the Rules
(Public vs. Uy, 372 SCRA 180).
The requirement that the certification of non-forum shopping
should be executed and signed by the plaintiff or the principal means
that counsel cannot sign said certification unless clothed with special
authority to do so. The reason for this is that the plaintiff or principal
knows better than anyone else whether a petition has previously
been filed involving the same case or.substantially the same issues.
Hence, a certification signed by counsel alone is defective and
constitutes a valid cause for dismissal of the petition (BPl vs. CA,
416 SCRA4).
While the certificate of non-forum shopping may be signed, for
and on behalf of a corporation, by a specifically authorized lawyer
who has personal knowledge of the facts required to be disclosed in
such document, it does not mean that any lawyer, acting on behalf 0f
the corporation he is representing, may routinely sign a certification
of non"-forum shopping the lawyer must be "specifically
authorized" in order to validly sign the certification (lbid.).
A resolutidrl of the Board of Directors authorizing a particular
officer to represent the Gorporation in all suits of whatever kind and
nature brought for or against it and empowering him to engage the
services of counsel and to sign for and verify as well as authenticate
such petition, pleadings, documents, record and other papers
necessary in the successful prosecution of such suits, including the
verification'of such petitions and pleadings, is broad enough to
authorize such officer named to file the petition for and in behalf of
the corporation (Grand vs. Genuine, 406 SCRA 688).
Being the resident agent in the Philippines does not mean that he
is authorized to execute the requisite certification against forum
shopping. The authority of the resident agent of a foreign
corporation with license to do business in the Philippines is to
receive, for and in behalf of the foreign corporation, services and
other legal processes in all actions and other legal proceedings
against such corporation. The resident agent was not specifically
authorized to execute a certificate of non-forum shopping because
while he may be aware of actions filed against his principal, he may
not be aware of actions initiated by his principal, whether in the
GORPORATION CODE s81
Philippines against a domestic corporation or private individual, or in
the country where such corporation was organized and registered,
against a Philippine registered corporation or a Filipino citizen
(Expertravelvs. CA,459 SCRA 147).
2. For Torts
A corporation is liable for torts committed by its agents or
subordinates in the performance of their duties under the principle of
its negligence in the selection or supervision of its employees (Article
2180, Civil Code; Bahia vs. Litonjua, 30 Phil. 624).
A principal or master is liable for every tort which he expressly
directs or authorizes, and this is just as true of a corporation as of a
natural persons (PNB vs. CA, 83 SCRA 237).
3. For Grimes
Generally, a corporation may not be held liable for a crime
because being capable of performing only those acts expressly or
impliedly conferred on it, it cannot possibly commit a crime under any
of said powers.
a. Who Shall be Held Liable
lf the crime is committed by a corporation or other juridical entity,
the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for the
crime, precisely because of the nature of the crime and the penalty
therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment.
However, a corporation may be charged and prosecuted for a crime
if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted
and, if found guilty, may be fined (Ching vs. Secretary, 481 SCRA
609).
A crime is the doing of that which the penal code forbids to be
done, or omitting to do what it commands. A necessary part of the
definition of every crime is the designation of the author of the crime
upon whom the penalty is to be inflicted. When a criminal statute
designates an act of a corporation or a crime and prescribes
punishment therefor, it creates a criminal offense which, otherwise,
would not exist and such can be committed only by the corporation.
s82 CORPORATION CODE CORPORATION CODE 583

But when a penal statute does not expressly apply to corporations, it The Trust Receipts Law recognizes the impossibility of imposing
does not create an offense for which a corporation may be punished. the penalty of imprisonment on a corporation, hence, if the entrustee
On the other hand, if the State, by statute, defines a crime that may is a corporation, the law makes the officers or employees or other
be committed by a corporation but prescribes the penalty therefor to persons responsible for the offense liable to suffer the penalty of
be suffered by the officers, directors, or employees of such imprisonment (Ong vs. CA, 401 SCRA 648).
corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. Corporate officers or emplo/bes, Vl. Rights of Stockholders
through whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime (lbid.). A. ln General
The principle applies whether or not the crime requires the Bar Question: Enumerate the powers of stockholders. (1996, 1949
consciousness of wrongdoing. lt applies to those corporate agents Ba0
who themselves commit the crime and to those, who, by virtue of
their managerial positions or other similar relation to the corporation, Answer: They fall under three categories: (a) Direct or indirect
could be deemed responsible for its commission, if by virtue of their participation in management, (b) proprietary rights, and (c) remedial
relationship to the corporation, they had the power to prevent the act.
rights.
Moreover, all parties active in promoting a crime, whether agents or
A. Management rights \
not, are principals. Whether such officers or employees are 1. lndirect
benefited by their delictual acts is not a touchstone of their criminal
a. right to vote directors
liability. Benefit is not an operative fact (lbid.).
b. right to remove directors
2. Direct
It is true that a criminal case can only be filed against the officers
a. right to give approval to certain corporate actions like
of a corporation and not against the corporation itself. lt does not investment in another corporation
follow from this, however, that the corporation cannot be a real party-
B. Proprietary rights
in-interest for*the purpose of bringing a civil action for malicious
1. right to dividends
prosecution (Cometa vs. CA, 301 SCRA 459).
2. right of appraisal
3. right to issuance of stock certificate for fully paid shares
The persons who may be held liable for illegal recruitment are the
4.right to proportionately participate in the distribution of assefs on
principals, qccomplices and accessories. An employee of a
liquidation
company or corporation engaged in illegal recruitment may be held
5. right to transfer stocks
liable as principal, together with his employer, if it is shown that he
6. pre-emptive right or right of first refusal
actively and consciously participated in illegal recruitment. The 7. right to inspect books and records
existence of the corporate entity does not shield from prosecution the
B. right to financial statements
corporate agent who knowingly and intentionally causes the 9. right to recover sfocks unlawfully sold for delinquent payment of
corporation to commit a crime. The corporation obviously acts, and
subscriptions
can act, only by and through its human agents, and it is their conduct
11.right to commence suifs
which the law must deter. The employee or agent of a corporation
C. Remedialrights
engaged in unlawful business naturally aids and abets in the carrying
1. lndividual suit.
on of such business and will be prosecuted as principal if, with 2. Representative suit
knowledge of the business, its purpose and effect, he consciously
3. Derivative suit
contributes his efforts to its conduct and promotion, however slight
his contribution may be (People vs. Chowdury,325 SCRA 572).
The burden of proof lies with the corporation who refuses to grant
to the stockholder the right to inspect corporate records (Dee vs.
Lee,629 SCRA 145).
584 CORPORATION CODE
B. Management Rights
The management rights of a stockholder may be indirect or direct.
His indirect management rights include two important rights: t;
vote for directors, and to remove directors.
His direct management rights include his right to give his vote of
approval to certain corporate actions where he acts in conjunction
with other stockholders to give the required majority or 213 vote to
validate actuations of the board.
1. Voting Rights
a. Nature of Right
A court will not deprive a stockholder of his right to vote except
upon a clear showing of its denial under the Articles and By-Laws, as
it is an inherent right in stock ownership (Sales vs. SEC, 169 SCRA
10e).
The requirements and restrictions on voting rights were explicitly
provided for, such that "no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code" and that "there shall
always be a class or series of shares which have complete voting
rights" (Castillo vs. Balinghasay, 440 SCRA 442).
b. Meetings-How Called
Stockholders have two classes of meetings: the regular or annual
meetings, and the special meetings.
Unless provided otherwise in the by-laws, annual meetings are
held at the town or city of the principal corporate office on any date in
April, fixed by the Board, and notice of the same shall be sent two
weeks prior to the meeting unless the by-laws provide otherwise.
Special meetings may be called when necessary or as provided in
the by-laws, on one week prior notice unless the by-laws provide
otherwise.
CORPORATION CODE 585
lf no person is authorized to call a meeting, the SEC on petition of
a stockholder, for good cause shown, may allow him to call a
meeting by giving the required notice, and for him to preside thereat,
until a majority chooses another one for said purpose (Section SO,
N.C.C.).
Bar Question: At least 2/3 of the stockholders of Solar Corporation,
meeting upon the recommendation of the Board of Directors,
declared a 50% stock dividend during their annual meeting. The
notice of the annual stockholders' meeting did not mention anything
about a stock dividend declaration. The matter was taken up only
under the item "Other Eusrness" in the agenda of the meeting. C.K.
Senna, a stockholder, who received his copy of the notice but did not
attend the meeting, subsequently learned about the 50%o stock
dividend declaration. He desires to have the stock dividend
declaration cancelled and set aside, and urishes to retain your
servlces as a lawyer for the purpose.
Will you accept the case? Drscuss with reasons. (1990 Bar)
Answer: No, I will not accept the case. Although under ordinary
circumstances, a matter not normally taken up in the annual
stockholders meetings, should be included as paft of the agenda
stated in the notice of the meeting; however, in the case at bar, the
matter taken up was only the approval by the stockholders of a stock
dividend declaration previously made by the board. The vote
needed here is two thirds of the outstanding capital stock of the
corporation. There is no necessity for this resolution to be approved
by all of the stockholders representing the outstanding capital stock.
Unless therefore, the vote of Senna is determinative of whether or
not the 2/3 vote is secured, Senna cannot attack the validity of the
stockholders' resolution approving the stock dividend declaration
previously made by the board.
A. Right of Voting on Sequestered Shares
As a general rule, the registered owner of the shares of a
corporation, even if they are sequestered by the government through
the PCGG, exercises the right and the privilege of voting on them.
The PCGG as a mere conseryator cannot, as a rule, exercise acts of
dominion by voting these shares. The registered owner of
sequestered shares may only be deprived of these voting rights, and
the PCGG authorized to exercise the same, when there are
"demonstrably weighty and defensible grounds" or "when essential to
prevent disappearance or wastage of corporate property. A two-
s86 CORPORATION CODE
tiered" test was developed to determine whether the PCGG may vote
sequestered shares. At least two factual matters must be
determined: (1) whether there is a prima facie evidence showing
that the said shares are ill-gotten and thus belong to the state; and
(2) whether there is an immediate danger of dissipation thus
necessitating their continued sequestration and voting by the PCGG
while the main issue pends with the Sandiganbayan (Republic vs.
Sandiganbayan, 402 SCRA 84; Trans Middle vs. Sandiganbayan,
490 SCRA 455).
The twotiered test does not apply in cases involving funds of
"public character." ln such cases, the government is granted the
authority to vote said shares, namely: (1) Where government shares
are taken over by private persons or entities who/which registered
them in their own names, and (2) Where the capitalization or shares
that were acquired with public funds somehow landed in private
hands (lbid.).
The government should be allowed to continue voting the
sequestered shares inasmuch as they were purchased with coconut
levy funds - funds that are prima facie public in character or at the
very least, are clearly affected with public interest (Republic vs.
cocoFED, 372 SCRA 462).
c. HowVoting Rights Exercised
Each stockholder has as much votes as his number of shares,
and he may exercise his voting rights in the following manner:
1) Personal voting by the stockholder himself, including the pledgor
or chattel mortgagor, or
2) Representative voting, which may be by:
a) Proxy - is a person who votes for and thus represents the
corporate member or stockholder. lts life cannot exceed 5 years
(Section 58, N.C.C.).
b) Legal - Through guardians, executors, administrators, receivers,
or other court appointed legal representative.
c) Ordinary Voting Agreement - an agreement authorizing another
person to vote for him in stockholders' meetings. The purpose is not
to control voting.
CORPORATION CODE 587
3) Voting trust agreements
Bar Question: What is a "voting trust" and what are the legal
of the "voting trust agreement"? What is its purpose?
Iimitations
When is it illegal? (1985, 1951, 1949 Bar)
Answer: A voting trust agreement is a contract entered into by a
group of stockholders and a trustee wherein the stockholders, for a
specified period not exceeding five years, transfer their stocks to a
trustee and vest in him voting and other specified rights, in return for
fhe lssue by the trustee of voting trust certificafes fo the involved
stockholders.
The legal limitations to a voting trust agreement are:
1) lt must be in writing, notarized and filed with the corporation and
with the SEC;
2) lt shall be for a period not exceeding five years; and
3) lt cannot be entered into for the purpose of circumventing the law
on monopolies, illegal combinations in restraint of trade, or used for
the purpose offraud.
A voting frusf ls executed for the purpose of controlling voting
either to maintain board majority or to have assurance of
representation in the board.
It is illegal when created for the following pu4poses.' (1) to lessen
competition, (2) to control two or more mining or agricultural
corporations, (3) to place in one corporation the functions of two
corporations which cannot be joined.
Bar Question: A drsfressed company executed a voting trust
agreement for a period of three (3) years over sixty (60%) per cent of
its outstanding paid-up shares in favor of a bank to whom it was
indebted with the bank named as frusfee. Additionally, the company
moftgaged all its properties to the bank.
Because of the insolvency of the Company, the Bank foreclosed
the mortgaged properties, and as the highest bidder, acquired said
properties and assefs of the Company.
The three-year period prescribed in the Voting Trust Agreement
having expired, the Company demanded the turn-over and transfer
and operation of the Company, claiming that under the Voting Trust
Agreement, the Bank was constitttted as trustee of the management
and operations of the Company.
Does the demand of the Company tally with the concept of a
Voting Trust Agreement? Explain briefly. (1992 Bar)
s88 CORPORATION CODE
Answer: The demand of the company does not tally with the
concept of voting trust agreement.
Under a voting trust agreement, a person is designated as a
trustee to whom legal title fo sfocks is transferred by stockholders
who would want to eiter into the agreement. When the agreement
expires (under the law, it cannot be for more than five years), the
legal title to the stocks must be transferred back to the stockholders
involved in the agreement.
The expiration of the voting trust agreement does not give to the
company the right to demand the turnover and transfer to it of its
assefs, which were never the subject of the agreement. lf as in the
problem above, all properties were mortgaged to the trustee, and as
a consequence of a foreclosure of this mortgage, all properties
involved therein were acquired by the trustee, then there was nothing
by way of properties to be returned to the company.
The expiration'of the voting 'trust agreement woutd result in the
trustee returning to the involved stockholders their stocks, to the
point of making these stockholders the holders of the legal title to
fhese sfocks.
What form of management the stockholders would now want, if
their stocks are transferred back to them, is not anymore the concern
of the trustee whose office had terminated.
Bar Question: ls there any limitation as to the length of the period
of time a voting trust can be legally binding? ls it revocable for any
cause within the time agreed upon? Sfafe reasons briefly. (1951
Ba0
Answer: There is a limitation as to the duration a voting trust can be
binding - 5 years.
Generally, a voting frust is irrevocable. However, if the agreement
is subject to conditions which are violated by the trustee, then the
agreement may be revoked by the stockholders.
(Note: The voting trust also automatically expires when the loan for
which the trust was created is fully paid [Section 59, N.C.C.]).
Bar Question: A, as owner of a certain number of shares of sfocks
in X Corporation, entered into a voting trust agreement with B. On
fhe basls of the voting trust agreement, B announced his desire to
run for a seal in the Board of Directors of X Corporation. C, another
stockholder, objected and questioned the eligibility of B to be a
director of X Corporation.
/s C3'confention correct? Why? (1977 Bar)
CORPORATION CODE 589
Answer: The contention of C is not correct. lJnder the Corporation
Law, a trustee under a voting trust agreement, becomes registered
as a stockholder in the corporate books.
Unless therefore the voting trust agreement prohibits him from
becoming a candidate for director, he is entitted to voting rights and
this includes the right to vote and be voted upon.
(Note: Under the N.C.C., the trustee may designate a proxy to vote
for him [Section 59]).
A stockholder who transfers stocks to a trustee under a voting
trust agreement ceases to be holder of a legal tifle of said stocks,
and therefore becomes disqualified to be a director of said
corporation because his name does not appear anymore as a
stockholder in the stock and transfer book of the corporation (Lee vs.
cA, 205 SCRA 752).
4) Voting or Pooling Agreement
This is an agreement among stockholders to vote as a unit. This
right is exercisable not only in close corporations but also in ordinary
corporations (Aurbach vs. Sanitary, 180 SCRA 130).
d. Shares Entitled to be Voted Upon
The right to vote is acquired only when the shares are registered in
the stock and transfer book. Any unregistered transferee is not
entitled to vote, to dividends, and other stockholder's rights
(Labrador vs. CA, 180 SCRA 266).
Bar Question: X subscriged to 700 shares of stock in a singte
subscription to a corporation but paid only for 4a0 shares for which
he was issued fully paid certificates for 400 shares.
ls he entitled to vote the paid up shares notwithstanding the fact
that he has not paid the remaining 300 shares? Explain (1990, 1977
Ba0
Answer: Yes, X is entitled to vote for allof his subscribed shares,
including not only the 400 shares which he has paid but atso the 300
shares he has notyet paid.
A person becomes a stockholder and entitted to exercise all his
rights as such including the right to vote from the moment he
subscribes fo sfocks of the corporation irrespective of whether or not
any portion of said subscription had been paid by him to the
corporation. He enjoys voting rights to those subscribed shares, until
s90 CORPORATION CODE
he is declared delinquent in his subscription payments to the
corporation.
e. Election of Directors
The first set of directors are elected after the corporation is
incorporated.
Subsequent elections are done during the annual stockholders'
meetings on the date stated in the by-laws, and in its absence, on
any date.in April as set by the Board, with proper notice and at the
town or city of the principal place of business of the corporation
stated in the articles of incorporation in stock corporations (Section
51, N.C.C.) and any place in the Philippines as provided by the by-
laws, in non-stock corporations (Section 93, N.C.C.)
Bar Question: Explain cumulative voting. (1951 Bar)
Answer: A stockholder, being entitled to that number of votes that
his number of shares multiplied by the number of directors to be
elected will bring, may give all said votes to one candidate or he may
distribute them among as many candidates as he sees flf. Ihis is
cumulative voting.
Cumulative voting is a matter of right in stock corporations. ln
non-stock corpofations, it cannot be utilized unless expressly allowed
by.the by-laws or by the articles of incorporation.
Bar Question: "A" was one of the directors of "X" corporation. "8"
obtained a judgment against "A" and had all of "A's" shares of stock
in "X" corporation attached and sold at public auction. '8" bought all
the shares at the public auction sa/e. Subsequently, a meeting of the
board of directors of "X" corporation was held and both "A" and "8"
appeared in said meeting, each claiming the right to participate in the
deliberations of the board. "A" contended that he had the right to
continue as director until the stockholders could elect his successor.
"8", on the other hand, contended that having purchased all of "A's"
shares he had the right to take the latter's place in the board. Who of
the two claimants is entitled to sit in the board? Explain. (1965 Bar)
Answer: Neither A nor B is entitled to a seat as director in the
corporation.
A ceases to be director automatically from the time that he
ceased to hold at least one share of stock.
CORPORATION CODE 591
B cannot be a director, because to be one, he must be voted
upon as suah by the stockholders, or if allowed by the by-laws,
selected by the remaining directors to the position.
A stockholder, supposedly disqualified to become a candidate for
director under the by-laws of the corporation on the ground of
alleged substantial interest in a competing corporation, can continue
to run as such candidate until and after he shall have been given due
process and hearing by said board as to the matter of his
disqualification (Gokongwei vs. SEC, Bg SCRA 336).
Bar Question: To prevent the entry of Marlo Enriquez, whom it
considered as one antagonistic to its interesfs, rnfo its Board of
Directors, Bayan Corporation amended its articles of incorporation
and by-laws to add certain qualifications of stockholders to be
elected as members of its Board of Directors. When presented for
approval at a meeting of its stockholders duly called for the purpose,
the amendments were ovenuhelmingly ratified. Marlo Enriquez
brought suifs against Bayan Corporation to question the
amendments. Would the action prosper? Why? (2003 Bar)
Answer: No, the action would not prosper, A corporation may
prescribe in its by-laws the qualifications, duties and compensation
of directors, officers and employees provided these are reasonable
(See Gokongweivs. SEC, 89 SCRA 336)
2. Right to Remove Directors
Removal of a director by a stockholder may be had in any
stockholders' meeting whether regular or special, provided, special
notice of said proposed removal is given to the stockholders ahead
of the meeting.
The removal may be effected by a vote of stockholders holding at
least two thirds of the outstanding capital stock of the corporation
generally for any cause. Where, however, the subject of the removal
is a director representing the minority, there must be a good cause
for the removal (Section 28, N.C.C.)
Only stockholders or members have the power to remove the
directors or trustees elected by them (Raniel vs. Jochico, 517 SCRA
221).
s92 CORPORATION CODE
Bar Question: lf the minority stockholders in a stock corporation
aumulate their votes so that they could be assured of being
represented in the Board of Directors, what assurances do they have
that the director or directors representing them would not be
removed, considering that'under the Corporation Code, a director
may be removed from office (with or without cause) by the vote of
the stockholders holding or representing at least 2/3 of the
outstanding capital stock? (1991, 1983 Bar)
Answer: The assurance is the Corporation Code itself. While
removal of a director, with or without cause, is a power exercisable
by stockholders holding at least 2/3 of the outs{anding capital sto;ck
of a corporation, as a general rule, the same power cannot be
utilized to oust a director representing the minority, unless there is a
good cause for removing that minority director.
Bar Question: ln 1999, Corporation "A" passed a board resolution
removing "X" from his position as manager of said corporation. The
by-laws of "A" corporation provides that the officers are the
president, vice-president, treasurer and secretary. Upon complaint
filed with the SEC, it held that a manager could be removed by mere
resolution of the board of directors. On motion for reconsideration,
"X" alleged that he could pnly be removed by the affirmative vote of
the stockholders representing 2/3 of the outstanding capitalsfock. /s
"X's" contention l€gally tenable. Why? (2001 Bar)
Answer: X's contention is not tenable. The approval of the
stockholders rs necessa4z only in the removal of directors (Sec. 28,
NCC). ln the removal of a manager, like X in the case at bar, only the
approval of the board of directors is necessa4y.
C. Proprietary Rights of Stockholders
The proprietary rights of a stockholder are varied and many. Most
important of course is his right to dividends. Besides this, his other
proprietary rights are: (1) appraisal right, (2) issue of stock certificate
for fully paid shares, (3) proportionate participation in the distribution
of assets on liquidation, (4) transfer of stocks, (5) preemptive right,
(6) right to inspect books and records, (7) right to financial
statements, and (B) right to recover stocks unldwfully sold for
delinquent payment of subscriptions.
1. Right to Dividends
CORPORATION CODE s93
a. Defined
Dividend is defined as unrestricted retained earnings set apart
from the general mass of the funds of the corporation and distributed
among the stockholders in proportion to their shares or interest in the
corporation, in the form of cash, property or stocks (Section 43,
N.C.C.).
The term "dividend" in its technical sense and ordinary
acceptation is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for ratable
division among the holders of the capital stock. lt is a payment to the
stockholders of a corporation as a return upon their investment, and
the right thereto is an incident of ownership of stock (Cojuangco vs.
Sandiganbayan, 586 SCRA 790). lt means that the fund has actually
been set aside, and declared by the directors of the corporation as
dividend, and duly ordered by the directors, or by the stockholders,
at a corporate meeting to be divided or distributed among the
stockholders according to their respective interests. Only
stockholders of record are entitled to receive dividends (Nielson vs.
Lepanto, 26 SCRA 540).
Dividends are payable to the stockholders of record as of the date
of the declaration of dividends or holders of record on a certain future
date, as the case may be, unless the parties have agreed otherwise.
And a transfer of shares which is not recorded in the books of the
corporation is valid only as between the parties, hence, the transferor
has the right to dividends as against the corporation without notice of
transfer but it serves as trustee of the real owner of the dividends,
subject to the contract between the transferor and transferee as to
who is entitled to receive the dividends (Cojuangco vs.
Sandiganbayan, supra).
The Corporation Code provides that the board of directors of a
stock corporation may declare dividends only out of unrestricted
retained earnings. "Unrestricted retained earnings" is "surplus profits
arising from its business." Thus the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be (Republic vs. Agana, 269
scRA 1).
The issuance of any stock dividend is prohibited without the
approval of stockholders, representing not less than twothirds (2/3)
of the outstanding capital stock at a regular or special meeting duly
594 CORPORATION CODE
called for the purpose. These proviSions underscore the fact that
payment of dividends to a stockholder is not a matter of right but a
matter of consensus. Furthermore, "interest bearing stocks," on
which the corporation agrdes absolutely to pay interest before
dividends are paid to common stockholders, is legal only when
construed as requiring payment of interest as dividends from net
earnings or surplus only (lbid.).
Payment by a corporation of dividends to a wrong party will not
absolve the corporation from paying the party adjudged by the court
to be laMul owner of the stocks (Aranas vs. Tutaan, 127 SCRA B2B).
lf a company received dividends as a stockholder of another
corporation, the money thus received is income of the corporation
which can be reached by its creditors. lf, on the other hand, said
company distributes dividends to its stockholders, such dividends
would be the absolute property of its stockholders and are out of the
reach by creditors of the corporation (Madrigal vs. Zamora, 151
scRA 355).
When a dividend is declared, it belongs to the person who is the
substantial and beneficial owner of the stock at the time, regardless
of when the distribution profit was earned (Bitong vs. CA, 292 SCRA
503)
Bar Question: For the past three years of its commercial operation,
"X", an oil company, has been earning tremendously in excess of
100% of the corporation's paid in capital. All of the stockholders
have been claiming that they share in the profits of the corporation
by way of dividends but the Board of Directors failed to lift its finger.
a) ls Corporation "X" guilty of violating a law? lf in the affirmative,
sfafe fhe basis.
b) Are there instances when a corporation shall not be held liable for
not declaring dividends? (2001 Bar)
Answer: a) Yes, "X" is guilty of violating Section 43 of the NCC
which provides that stock corporations are prohibited from retaining
surplus profits rn excess of 100% of their paid in capital.
b) Three (3) instances where a corporation may retain surplus
profits rn excess of 100% of their paid in capital without being liable
are: (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
institutionor creditor, whether local or foreign, from declaring
CORPORATION CODE 595
dividends without its or his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention
ls necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for
probable conti nge ncies.
b. Distinguished from Profits
Bar Question: Distinguish dividend from profit. (2005, 1957 Bar)
Answer: A dividend has no existence until declared; profits are part
of fhe assefs'of a corporation, and do not belong to the stockholders
individually.
c. Declaring Authority
Bar Question: Who may authorize payments of such dividends.
(1953 Bar)
Answer: Dividends are declared by the board, but in the case of
stock dividends, approval by stockholders representing V3 of the
outstanding capital sfock is necessary, and in all cases only if
unrestricted retained earnings exist.
Bar Question: "X", "Y" and "Z" are stockholders rn Sanfos Company,
7lnc. For the past three years, no dividends, cash or stock, were
ever declared by the corporation. Upon examining its books,
however they found that the corporation had amassed vast net
profits. May they bring suit to compel the board of directors to
declare dividends from said net profit? Why? (1967 Bar)
Answer: Authority to declare dividends is in the board of directors of
a corporation. ln the absence of bad faith, abuse of discretion or
dishonesty, courts will not question the discretion of the board. There
is nothing in the problem which would indicate that the failure of the
board to declare dividends is due to bad faith, abuse of discretion, or
dishonesty. The existence of vast net profits does not automatically
justify the declaration of dividends because they may be declared
only if unrestricted retained earnings exlsf. Besrdes, the stockholders
have not yet exhausted intra-corporate remedies to entitle them to
bring a suit in court.
Hence, I submit that an action will not lie to compel the board to
declare dividends.
 CORPORATION CODE
Bar Question: During the annual stockholders meeting, Riza, a
stockholder, proposed to the body that a part of the corporation's'
unreserved earned surplus be capitalized and stock dividends be
distributed to the stockholders,, arguing that as owners of the
company, the stockholders, by majority vote, can do anything. As
chairman of the meeting, how would you rule on the motion to
declare stock dividends? (1991 Ba)
Answer: The prerogative of dividend declaration pertains exclusively
to the board of directors of the corporation. This power or prerogative
cannot be exercised by the stockholders irrespective of the number
or percentage of votes of the stockholders in favor of dividend
declaration.
All corporations having surplus profit in excess of requirements
shall declare same as dividends. The declaration is compulsory if the
surplus is equal to or more than the paid up capital, except in the
following instances: (1) when justified by approved expansion
projects, (2) when prohibited to declare dividends by creditors, and
(3) when retention is necessary under existing special circumstances
(Section 43, N.C.C.)
d. Funds Available for Dividends
Dividends are fius payable only where there are profits earned by
the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine whether
or not dividends are to be declared.
Bar Question: When and from what funds may a corporation pay (a)
cash dividends, (b) stock dividends? (2005, 1953 Bar)
Answer: A corporation can pay cash dividends when declared by
the board and can have stock dividends when declared by the board
and approved by stockholders owning 2J3 of the capital stock
outstanding.
Dividends, whether cash or stock, can be paid only from
unrestricted retained earnings. This fund is the balance of net profits,
income and gains of a corporation from the date of incorporation
after deducting /osses and contributions of stockholders and
transfers to capital stock accounts when made out of such surplus.
Bai Question: IJnder the Corporation Law nothing but surplus
profits may be distributed as dividends. lf a dividend was made from
CORPORATION CODE 597
any other source, what did it constitute? ls that lawful or not by the
positive provision of the Corporation Law? State the provision fully or
ifs subsfance. (1957 Bar)
Answer: lf the dividend was made from a source other than surplus
profits, it would constitute a violation of the trust fund doctrine, and
would be a fraud against creditors.
The act is not lawful under the provisions of Sec. 76 of the
Corporation Law, which in part sfafes that no corporation shall
declare dividends except from profits earned by the corporation and
not yet distributed to its stockholders.
(Note: Under the N.C.C., the provision violated would be Section 43.)
Bar Question: A company was incorporated in 1947 with an
authorized and paid-up capital in cash of Pl,000,000.00. lt has not
engaged rn busrness up to now and its cash of P1,000,000.00 ls
intact at the Philippine National Bank. May the board of directors
declare a dividend of P50,000.00 from that cash? (1948 Bar)
Answer: No, the board may not declare dividend from its paid-up
capital. The only fund available for dividends is the earned surplus
profit of the corporation. The corporation in the problem, not having
engaged rn busrness yet, cannot possibly have an earning, much
/ess, a profit from the said busrness.
(Note: Answer still valid under N.C.C., but the fund available for dividends is now
called unrestricted retained earnings. )
I
Bar Question: On December 9, 1985, Matatag Corporation revalued
ifs assefs. On the basrs of the reappraisal, the Board of Directors
also declared cash dividends for all stockholders. On December 16,
1985, Matatag Corporation amassed substantial profits in a highly
lucrative transaction. Some minority stockholders, however, did not
want to complicate their income tax problems for 1985 and refused
to accept the cash dividends. They also filed suit to compel the other
stockholders to return to Matatag Corporation the money received as
dividends. Not one of the stockholders who formed the majority
joined in the suit since they are happy with the money they received.
a) Willthe action prosper? Explain.
b) As one of its defenses in court, the Board of Directors raised the
"busrness judgment rule". What is the business judgment rule and
does lf have any relevance to this case? Explain (1989, 1987, 1986
Ba0
Answer: a) The action to declare the cash dividend invalid will
prosper.
598 CORPORATION CODE
Dividends can only be declared from unrestricted retained
earnings. The increase rn assefs due to revaluation is not an earning
of the corporation, and therefore, cannot become the basis for a
dividend declaration. The dividend declaration from revaluation of
assefs is in effect, a declaration of capital, not of earnings, as
dividend.Ihls is not allowed by the law.
b) The "busrness judgment rule" is a principle under which
judgments and decisions of the corporation, made by lfs
management body, the board of directors, should not be inteffered
with, even by courts unless such acfs are so oppressive and
unconscionable as to amount to a wanton destruction of the rights of
the minority.
The "business judgment rule" has no relevance to the problem
above. Dividend declarations are governed by ceftain rules provided
for by law. Compliance of these rules is mandatory on the
corporation, and gives no room at all for the exercise by the
corporation of a "business judgment".
A judicial order to decrease capital stock without the assent of
directors and stockholders is a violation of the "business judgment
rule" which states that contracts intra vires entered into by the board
of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the
minority, as whdn members of the board have concluded a
transaction among themselves as will result in serious injury to the
stockholders (Ong vs. Tiu, 401 SCRA 1).
e. Classes of Dividends
Bar Question: Distinguish between cash dividend and stock
dividend. When may the declarations of these dividends be revoked?
(2005, 19B9, 1957 Ba).
Answer: A cash dividend is differentiated from stock dividend as
follows:
a) Cash dividends withdraw assefs from the corporation; stock
dividends do not
b) ln cash dividend, money is received by the stockholder, in stock
dividend, stock instead of money is received
c) Cash dividend is taxable income; stock dividend is not
d) Cash dividend may be declared by the board alone; a stock
dividend is declared by the board, and the declaration is approved by
CORPORATION CODE s99
stockholders holding at least V3 of capital stock outstanding and
entitled to vote.
The declaration of stock dividends may be revoked for any of the
following reasons.' (1) the unissued sfocks cannot absorb the stock
dividend, and the corporation is not willing to increase the capital
stock of the corporation; (2) when the vote of stockholders in a
meeting called for the approval of said stock dividend declaration,
does not reach the required V3 of outstanding capital stock and (3)
no official notice has as yet been sent to the stockholders of
aforesaid stock dividend declaration.
Bar Question: The estafe of deceased "8", owner of 108,000shares
of stock of a mining company, received from the latter 54,000 shares
representing 50/o stock dividend on the 108,000 shares. The widow,
Mrs. "8", as usufructuary or life tenant of the estate, petitioned the
esfafe's administrator to indorse and deliver to her the corresponding
certificate to stock, claiming that the said dividend was fruit or
income. The legal heirs of "8" opposed, alleging that the said
dividend was part of the capital and, therefore, belonged to the
remainderman. Decide the case with reasons. (1958 Bar)
Answer: Dividends, whether cash or stock, are profits earned by the
corporation and distributed to the stockholders. Between the
usufrictuary and the naked owner (remainderman), the former
(usufructuary) is entitled because dividends are fruits. The widow of
B is entitled to the stock dividend.
Bar Question: "A", stockholder of "X Corporation", assrErns hrs
shares of stock to "8" for a valuable consideration. The ceftificate of
sfock was thereupon delivered to "8". A few days later, "A" died. The
heirs of "A", in a Deed of Extra-judicial Partition, adjudicated his
shares of sfocks to his son "C".
ln the meantime, "X Corporation" declared cash dividends and
sent the corresponding notice to "A's" address, "A" being the
registered owner of the shares of sfocks in the books of the
corporation.
"C" received the notice and by virtue of the aforesaid deed of
paftition claimed payment of the dividend. "8" likewise claimed
payment asserting ownership of the shares by virtue of the
assignment made by "A".
Who has the better right? Explain briefly. (1981 Bar)
Answer: For purposes of the corporation, there being no change in
ownership of the questioned shares in its stock and transfer book,
 600 CORPORATION CODE
the rightful owner of the dividends would be the esfate of the
deceased A.
There is no statement in the problem that C, the son of A,
presented the'Deed of Extrajudicial Partition to the corporation;
neither does the problem state that B, the assrgtnee, presented the
duly indorsed stock certificate to X corporation for cancellation, and
issue fo him (B) of a new certificate.
J The corporation is bound, in so far as ownership of its shares is
concerned, by its stock and transfer book, and as far as fhe
questioned shares are concerned, their owner ls sf// A, and it is
therefore to his estate that the dividends should be paid.
Neither B nor C under the circumstances mentioned in the
problem would be entitled to the dividends.
1. Nature and Concept of Stock Dividend
Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus,
the value of the declaration in the case of a stock dividend is the
actual value of the original issuance of said stocks. ln the case of
stock dividends, it is the amount that the corporation transfers from
its surplus profit account to its capital account or it is the amount that
the corporation receives in consideration of the original issuance of
the shares. lt isthe distribution of current or accumulated earnings
to the shareholders of a corporation pro rata based on the number of
shares owned. Such distribution in whatever form is valued at the
declared amount or monetary equivalent. Thus, it cannot be said
that no consideration is involved in the issuance of stock dividends.
ln fact, the declaration of stock dividends is akin to a forced purchase
of stocks. By declaring stock dividends, a corporation ploughs back
a portion or its entire unrestricted retained earnings either to its
working capital or for capital asset acquisition or investments. lt is
simplistic to say that the corporation did not receive any actual
payment for these. When the dividend is distributed, it ceases to be
a property of the corporation as the entire or portion of its
unrestricted retained earnings is distributed pro rata to corporate
shareholders. When stock dividends are distributed, the amount
declared ceases to belong to the corporation but is distributed
among the shareholders. Consequently, the unrestricted retained
earnings of the corporation are diminished by the amount of the
declared dividend while the stockholders' equity is increased.
Furthermore, the actual payment is the cash value from the
unrestricted retained earnings that each shareholder foregoes for
CORPORATION CODE 601
additional stocks/shares which he would otherwise receive as
required by the Corporation Code to be given to the stockholders
subject to the availability and conditioned on a certain level of
retained earnings. Elsewise put, where the unrestricted retained
earnings of a corporation are more than 1OO% of the paid-in capital
stock, the corporate Board of Directors is mandated to declare
dividends which the shareholders will receive in cash unless
otherwise declared as property or stock dividends, which in the latter
case the stockholders are forced to forego cash in lieu of property or
stocks. ln essence, therefore, the stockholders by receiving stock
dividendS are forced to exchange the monetary value of their
dividend for capital stock, and the monetary value they forego is
considered the actual payment for the original issuance of the stocks
given as dividends (PLDT vs. NTC, 539 SCRA 365).
Stock dividend is any dividend payable in shares of stook of the
corporation declaring or authorizing such dividend. lt is a distribution
of the shares of stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend paid in
shares of stock instead of cash, and is properly payable only out of
surplus profits (Section 16, Corporation Law). So, a stock dividend is
actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par. When
a corporation issues stock dividends, it shows that the corporation's
accumulated profits have been capitalized instead of distr:ibuted to
the stockholders or retained as surplus available for distribution in
money or kind, should opportunity offer. Far from being a realization
of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been
transferred from surplus to assets and no longer available for actual
distribution. Thus, it is apparent that stock dividends are issued only
to stockholders. This is so because only stockholders are entitled to
dividends. They are the only ones who have a right to a proportional
share in that part of the surplus which is declared as dividends. A
stock dividend really adds nothing to the interest of the stockholders;
the proportional interest of each stockholder remains the same. lf a
stockholder is deprived of his stock dividends -- and this happens if
the shares of stock forming part of the stock dividends are issued to
a non-stockholder -- then the proportion of the stockholder's interest
changes radically. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the civil fruits
(Article 441, Civil Code).
 CORPORATION CODE
Before the stocks of a deceased stockholder is distributed to
the heirs and the transfer recorded in the books, it is the
administration or executor who can exercise the rights of a deceased
stockholder (Puno vs. Puno, 599 SCRA 585).
Bar Question: ABC Management, lnc. presented to DEF Mining
Corp. the draft of its proposed Management Contract. As an
incentive, ABC included in the terms of compensation that ABC
would be entitled to ten percent (10%) of any stock dividend which
DEF may declare during the lifetime of the Management Contract.
Would you approve of such a provision? lf not, what would you
suggesf as an alternative? (1991 Bar)
Answer: I will not recommend approval of the proposal. Sfock
dividends belong to the stockholders only who get shares in
proportion to their registered stockholdings. Other persons, not
stockholders, cannot in any manner participate in stock dividends.
To however achieve the same objective, I will suggesf fhls
proposal: The stocks to be used are unissued shares, approved by
the board and tikewise approved by stockhotders hotding at least 2/3
of the outstanding capital stock of the corporation. The rule on
preemptive rights with its exception: sfocks issued to pay a
previously contracted debt, is the provision of law invoked.
2. Taxhbility of Stock Dividends
Stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. So that the mere issuance thereof
is not yet subject to income tax as they are nothing but an
enrichment through increase in value of capital investment. As
capital, the stock dividends postpone the realization of profits
because the fund represented by the new stock has been transferred
from surplus to capital and no longer available for actual distribution.
lncome in tax law is an amount of money coming to a person within a
specified time, whether as payment for services, interest, or profit
from investment. lt means cash or its equivalent. lt is gain derived
and severed from capital, from labor to from both combined --- so
that to tax a stock dividend would be to tax a capital increase rather
than the income. ln a loose sense, stock dividends issued by the
corporation, are considered unrealized gain, and cannot be
subjected to incomg tax until that gain has been realized. Before the
realization, stock dividends are nothing but a representation of an
interest in the corporate properties. As capital, it is not yet subject to
income tax. lt should be noted that capital and income are different.
CORPORATION CODE 603
Capital is wealth or fund; whereas income is profit or gain or the flow
of wealth. The determining factor for the imposition on income tax is
whether any gain or profit was derived from a transaction
(Commissioner vs. CA, 301 SCRA 152).
f. Procedure for Dividend Declaration
1. Cash Dividend Declaration
a) Existence of unrestricted retained earnings;
b) Cash dividend declaration by board;
c) Notice of declaration to stockholders.
2. Stock Dividend Declaration
Bar Question: "X" corporation has an authorized capital stock of
P500,000 divided into 50,000 shares with each share having a par
value of len Pesos (P10.00), 30,000 shares of which have been
subscribed. The total payment on these shares is P200,000 only. As
of September 30, 1970, the,corporation had a surplus of P150,000.
May the corporation declare a stock dividend? lf so, to what extent?
(1970 Bar)
Answer: Yes, the corporation can declare a stock dividend. lt can do
so up to the full extent of its surplus of Pl50,000 or 15,000 shares.
Reason.' the only limit is that the stock dividend can be absorbed by
the unissued shares of the corporation.
Only 30,000 of the 50,000 authorized number of shares were
issued by ,the corporation, leaving a balance unissued of 20,000
shares. 15,000 shares only are needed to absorb the P150,000
stock dividend.
Bar Question: Palmera Corporation has an authorized capital stock
of P500,000.00, all subscribed and outstanding as of December 31,
1981. The corporation a/so has an unrestricted retained earnings in
/s books amounting to P375,000.00. Since the corporation needed
the cash surplus to carry out its expansion projects, the board of
directors, in its meeting held on January 5, 1982, approved a
resolution declaring and ordering the lssuance of 50% sfock
dividends in lieu of cash dividends.
a) Was the resolution declaring the issuance of stock dividends
valid? Explain your answer.
 CORPORATION CODE
b) What step or steps needed should be taken in order that the
decision of the Board could be irnplemented? State the required
vote. (1982, 1955 Bar)
Answer: (a) No, the resolution of the board declaring a 50%o stock
dividend is invalid for the following reasons:
1) There ls no unissued stock to absorb the stock dividend;
2) Stock dividend declarations need further approval of stockholders
holding at least 2/3 of the outstanding capital stock of the
corporation.
(b) ln order that the stock dividend declaration may be implemented,
the following sfeps should be taken:
1) The articles should be amended to increase the capital stock by
at least P250,000. This needs approval by a majority of the board,
and approval by stockholders holding at least A3 of the outstanding
capital stock of the corporation filed with SEC.
2) The declaration of 50% stock dividend already approved by the
board, should be approved by stockholders holding at least 2/3 of the
outstanding capital stock of the corporation.
3) Notice to stockholders
4) lssuance to stockholders of stock certificates corresponding to
the stock dividends.
2. Appraisal Right
Bar Question: tn a
stockholder's meeting, S drssenfed from the
corporate act converting preferred voting shares to non-voting
shares. Thereafter, S submitted his certificafes of stock for notation
that his shares are dissenting. The next day, S transferred his shares
to T to whom new certificates were rssued. Now, T demands from
the corporation the payment of the value of his shares. What is the
meaning of a stockholder's appraisal right? (2007 Bar)
Answer: Appraisal right pertains to the right of a stockholder, who
dissenfs from a fundamental or extraordinary corporate action, to
demand payment of the value of his shares. /fs rs fhe right of a
stockholder 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 the corporate structure.
Bar Question: Under what circumsfances may a stockholder compel
the corporation of which he is a stockholder to buy his shares of
stock? (1950 Ba)
CORPORATION CODE 605
Answer: There are five instances in the Corporation Law where a
stockholder, not agreeable to ceftain corporate actuations may
protest and compel the corporation to buy hrs shares. These are:
1) When the articles of incorporation are amended to extend the
duration of existence of the corporation;
2) When the articles of incorporation are amended to change the
rights of stockholders, authorize preferences superior to those of
existing stockholders, or restrict the rights of any stockholder;
3) When the stockholders authorize the board to invest the
corporate funds in another corporation;
4) When the stockholders authorize the board to engage in a
purpose other than the main purpose(s) stated in the articles;
5) When the corporation decides fo se// or dispose of all or
substantially all of the assets of the corporation.
(Note: The right to withdraw under the old law is now called
"Appraisal Right" by the N.C.C. and is available in four instances in
favor of a stockholder who dissents to: (1) amendments of the
articles to change, restrict existing rights or to authorize new
preferences of stockholders; (2) sale or other dispositions of all or
substantially all of the corporate assets; (3) mergers or
consolidations [Section 81, N.C.C.] and (4) investment of
corporation funds in another corporation or for a different purpose
[Section 82, N.C.C.])
The disposition of all or substantially all of the assets of a
corporation is allowed under Section 40 of the Corporation Code.
Any dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code (Guanco vs. Antolo, 497 SCRA
273).
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 purposes for which it was incorporated. While the
Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The onllr way the transfer
can proceed without prejudice to the creditors is to hold the assignee
liable for the obligations of the assignor. The acquisition by the
assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's Iiabilities,
unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of
606 CORPORATION CODE
its creditors and without requiring the assignee to assume the
assignor's obligations will defraud the creditors. The assignment will
place the assignor's assets beyond the reach of its creditors (Caltex
vs. PNOC, 498 SCRA 400).
The right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of stockholders. lt does not vest
unless objectionable corporate action is taken (Turner vs. Lorenzo,
636 SCRA 13).
Bar Question: Under what conditions and circumstances may a
corporation acquire, by purchase or otherwise, its own sfocks? /s if
atlowed by our Corporation Law? Explain your answer. (1956 Bar)
Answer: A corporation may acquire its own sfocks in the following
instances:
1) Purchase at auction in a sale of delinquenf shares where there
are no other bidders;
2) When a stockholder, in any of the following instances, withdraws
from the corporation:
a) Amendment of the articles to extend corporate life;
b) Amendment of the articles to change or modify the rights of
stockholders;
c) lnvestmentof funds in another corporation;
d) IJse of funds for a purpose not the principal purpose(s) stated in
the articles; and
e) Sale or disposition of all or substantially all of the corporate
assefs.
(Note: Under Section 41, N.C.C., a corporation may acquire its own
shares in the following cases, among others; (1) to eliminate
fractional shares, (2) to compromise an indebtedness of the
corporation arising out of unpaid subscription, (3) to purchase
delinquent shares, (4) exercise by stockholders of the appraisal
right.)
Bar Question: X subscribed and paid for P10,000.00 worth of
shares of stock of Rainbow Mines, Inc. as an incorporator and
original subscriber. He was employed as the mine superintendent
and as such, made the design of ceftain equipment used in its
mines. Due to some technical error in the design, the corporation
suffered a loss of Pl M. The Board accused X of infidelity and
breach of trust, and confiscated his shares. ls the action of the Board
legal? Reasons. (1989 Bar)
CORPORATION CODE 607
Answer: The action of the Board is not legal. The rights of X as a
stockholder, and his obligation as a mine superintendent are two
different matters.
The Code provides for the manner by which the corporation may
become owner of the sfocks of a stockholder (tike where the
stockholder is declared delinquent, hls sfocks sold at auction, and
there is no person interested in the bidding, as a consequence of
which the corporation becomes owner of the stocks).
His being rerniss as an employee in his obligations is not a
ground for the corporation to confiscate his shares.
Bar Question: Authorized by a resolution of stockhotders owning
two-thirds of the stock entitled to vote, the board of directors of a
corporation rnyes/s the corporate funds in a business other than the
main business for which the corporation was organized.
lf you were a stockholder who did not vote to authorize the action
of the board of directors, what remedy would you have and how is
such remedy obtained? What is the reason behind that remedy?
(1959 Ba)
Answer: lf I were the stockholder who did not vote to authorize the
action by the Board, I will compel the corporation to buy my sfocks.
To avail of this remedy, I will have to do the fottowing:
a) Within 40 days after that action was taken by the corporation, I
should object in writing and demand payment of my shares.
b) lf I and the corporation agree with the price, or in case of
disagreement, where the committee of appraisers fiies the price,:the
corporation pays me the price within 30 days after such fixing.
c) Upon payment, I will indorse my certificate of stock and deliver
the same to the corporation.
(Note: This right is now called the appraisat right by the N.C.C. The
period to claim is reduced to 30 days from the date of corporate
action; if there is disagreement as to the price, within 60 days, a
three man committee of disinterested persons is created. payment to
the dissenting stockholders is made within 30 days from agreement,
or from the award, in case of disagreement as to the price [Section
82, N.C.C.l)
Bar Question: The board of directors of a corporation approves a
resolution to sell substantially all of its property and assefs. Dlscuss
the remedy or remedies available to a stockhotder who does not
conform to the resolution. (1957 Bar)
608 CORPORATION CODE
Answer: A stockholder who does not conform to said resolution
should object to the resolution within 40 days after it was approved
and demand payment of the value of his shares. He may compel the
corporation to pay him the price voluntarily agreed, or if no
agreement is reached as to the price, then the price as fixed by a
committee of appraisers, in which case, said amount will have to be
paid by the corporation to the withdrawing stockholder within 30 days
from the time the price was fixed by the committee.
(See Note to immediately preceding Bar Question)
Bar Question: ABC Corporation has an authorized capital stock of
One Million (Pl,000,000.00) Pesos divided into 50,000 common
shares and 50,000 preferred shares.
At its inception, the Corporation offered forsubscription all the
common shares. However, only 40,000 shares were subscribed.
Recently, the directors thought of raising additional capital and
decidbd to offer to the public all the authorized shares of the
Corporation at their market value.
Assuming a stockholder disagrees with the issuance of new
shares and the pricing for the shares, may the stockholder invoke his
appraisal rights and demand payment for his shareholdings?
Explain your answers. (1999 Bar)
Answer: No, hb may not. The grounds whereby a stockholder may
exercise his appraisal rights are restricted to three instances only as
provided for in Section 81 of the Corporation Code. The ground of
the stockholder in the case at bar is not among them.
Bar Question: In what instances may the right of appraisal be
availed of under the Corporation Code? (2003 Bar)
Answer: The appraisal right may be availed of by a stockholder 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 stockholders or
c/ass of shares, or of authorizing preferences in any respect superior
to those of outstanding shares of any c/ass, 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 propefty
and assefs as provided in this Code; and
3. ln case of merger or consolidations (Section 81, NCC)
CORPORATION CODE 609
3. lssuance of Stock Certificate
A stock certificate is merely a tangible evidence of ownership of
shares of stock. lts presence or absence does not affect the right of
the registered owner to dispose of the shares covered by the stock
certificate (Republic vs. Estate of Menzi, 476 SCRA 20).
The Corporation Code acknowledges that the delivery of a duly
indorsed stock certificate is sufficient to transfer ownership of shares
of stock in stock corporations. Such mode of transfer is valid
between the parties. ln order to bind third persons, however, the
transfer must be recorded in the books of the corporation (lbid.).
A stockholder is entitled to the issuance of a certificate of stock to
him after his compliance of the conditions for its issuance, usually full
payment of the subscription.
Bar Question: An employee of Juan Gutierrez sold in the Manila
Stock Exchange 100 shares of the Benguet Mining Company
belonging to his employer, without the knowledge of the latter. Jose
Lorenzo bought the said shares thru another broker of the exchange.
The Benguet Mining Company issued 100 shares in the name of
Jose Lorenzo, in lieu of the 100 shares of Juan Gutierrez (whose
signature at the back of the ceflificate was forged by the employee).
(1) Who has the befter right to said shares, Juan Gutierrez or Jose
Lorenzo? (2) What are the liabilities of the two brokers and the
Benguet Mining Company? (1949 Bar)
Answer: (1) Shares of stock, unlike negotiable instruments, do not
create the so-called holder in due course. Transferees of shares,
although the method of transfef to them is by indorsement followed
by delivery, become mere assignees, and as such assignees, they
acquire only those rights which their transferors had over the sfocks
transferred. As the forger had transferred nothing, I submit therefore
that Juan Gutierrez still has a better right to the shares.
(2) The brokers were negligent in the performance of their duties,
hence, they become liable to the prejudiced pafty, Jose Lorenzo,
without prejudice to these brokers running after the forger.
Benguet Mining Company becomes liable to Juan Gutierrez if it
does not cancel the certificate of stock if r'ssued fo Jose Lorenzo on
the basis of the forged signature of Juan Gutierrez, Benguet Mining
being in possesslon of necessary documents to determine for itself
the genuineness of the signature of one of its registered
stockholders.
6r0 CORPORATION CODE
A corporation against whom stocks are claimed by two different
persons should initiate an interpleader suit between the claimants,
and not wait for the claimants to file a suit against it (Dy vs. Enage,
70 scRA 96).
D. Stockholder's Suits and Remedies
There are three classes of suits which a stockholder may bring in
a corporation. These are:
1. lndividualSuit
An individual suit is gne brought to assert a right by a stockholder
peculiar to himself. Suits brought by a stockholder for the issuance to
him of a stock certificate, payment of his dividend, payment to him of
the book value of his stocks, in those instances where the law allows
him the right of appraisal, are individual suits.
Where a stockholder or member is denied the right of inspection,
his suit would be individual because the wrong is done to him
personally and not to the other stockholders or the corporation (Cua
vs. Tan, 607 SCRA 645).
It is elementary that a void contract produces no effect either
against or in favor of anyone; it cannot create, modify or extinguish
the juridical relation to which it refers (Gochan vs. Young, 354 SCRA
207).
2. Representative Suit
A representative suit is one brought by a stockholder in his own
behalf, and in behalf of other stockholders similarly situated, and
having a common cause against the corporation.
Where the wrong is done to a group of stockholders, as where
preferred stockholders' rights are violated, a class or representative
suit will be proper for the protection of all stockholders belonging to
the same group. (Cua vs. Tan, supra).
3. Derivative Suit
CORPORATION CODE 611
a. Defined
A derivative suit is a suit brought by a stockholder, for and in
behalf of the corporation and against any person be he also a
stockholder, director, officer, or third person. The right can be availed
of by the stockholder after he has exhausted intra-corporate
remedies, by requesting the board to act, and the board does not act
at all.
The board of directors of a corporation is a creation of the
stockholders. The board of directors, or the majority thereof, controls
and directs the affairs of the corporation; but in drawing to itself the
power of the corporation, it occupies a position of trusteeship in
relation to the minority of the stock. The board shall exercise good
faith, care, and diligence in the administration of the affairs of the
corporation, and protect not only the interest of the majority but also
that of the minority of the stock. Where the majority of the board of
directors wastes or dissipates the funds of the corporation of
fraudulently disposes of its properties, or performs ultra vires acts,
the court, in the exercise of its equity jurisdiction, and upon showing
that intracorporate remedy is unavailing, will entertain a suit filed by
the minority members of the board of directors, for and in behalf of
the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the
minority stockholders against the wrongdoing of the majority. The
action in such a case is said to be brought derivatively in behalf of
the corporation to protect the right of the minority stockholders
thereof (lbid.).
It is well settled in this jurisdiction that where corporate directors
are guilty of a breach of trust - not of mere error of judgment or
abuse of discretion - and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders (lbid.).
However, in cases of mismanagement where the wrongful acts
are committed by the directors or trustees themselves, a stockholder
or member may find that he has no redress because the former are
vested by law with the right to decide whether or not the corporation
should sue, and they will never be willing to sue thgmselves. The
corporation would thus be helpless to seek remedy. Because of the
frequent occurrence of such a situation, the common law gradually
612 CORPORATION CODE
recognized the right of a stockholder to sue on behalf of a ln a derivative suit, it is the corporation that is the indispensable
corporation in what eventually became known as a "derivative suit."
It has been proven to be an effective remedy of the minority against
the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the
ones to be sued or hold the control of the corporation. ln such
actions, the suing stockholder is regarded as the normal party, with
the corporation as thb party in interest (lbid.).
The general rule is that where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees.
Nonetheless, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stocks in
order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued, or hold
the control of the corporation. ln such actions, the suing stockholder
is regarded as a nominal party, with the corporation as the real party
in interest. A derivative action is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a necessary party to
the suit. And the relief which is granted is a judgment against a third
person in favor of the corporation. Similarly, if a corporation has a
defense to an action against it and is not asserting it, a stockholder
may intervene and defend on behalf of the corporation (Yu vs.
Yukayguan, 589 SCRA 588).
The Court has recognized that a stockholder's right to institute a
derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a
stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is
otherwise without redress. In effect, the suit is an action for specific
performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation has
been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. The
basis of a stockholder's suit is always one in equity. However, it
cannot prosper without first complying with the legal requisites for its
institution (lbid.).
CORPORATION CODE 613
party, while the suing stockholder is just a nominal party. Under
Rule 7, Section 3 of the Rules of Court, an indispensable party is a
party-in-interest, without whom no final determination can be had of
an action without that party being impleaded. lndispensable parties
are those with such an interest in the controversy that a final decree
would necessarily affect their rights, so that the court cannot proceed
without their presence. "lnterest," within the meaning of this rule,
should be material, directly in issue, and to be affected by the
decree, as distinguished from a mere incidental interest in the
question involved. On the other hand, a nominal or pro forma parly
is one who is joined as a plaintiff or defendant, not because such
party has any real interest in the subject matter or because any relief
is demanded, but merely because the technical rules of pleadings
require the presence of such party on the record. With the
corporation as the real party-in-interest and the indispensable party,
any ruling in one of the derivative suits should already bind the
corporation as res judicata in the other. Allowing two different
minority stockholders to institute separate derivative suits arising
from the same factual background, alleging the same causes of
action, and praying for the same reliefs, is tantamount to allowing the
corporation, the real party-in-interest, to file the same suit twice,
resulting in the violation of the rules against a multiplicity of suits and
even forum-shopping. lt is also in disregard of the separate-
corporate-entity principle, because it is to look beyond the
corporation and to give recognition to the different identities of the
stockholders instituting the derivative suits (Cua vs. Tan, 607 SCRA
645).
The requisites before a stockholder can file a derivative suit are:
a) the party bringing suit should be a shareholder as of the time of
the act or transaction complained of, the number of his shares not
being material; b) he has tried to exhaust intra-corporate remedies,
i.e., has made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and c) the
cause of action actually devolves on the corporation, the wrongdoing
or harm having been, or being caused to the corporation and not to
the particular stockholder bringing the suit. Even then, not every suit
filed on behalf of the corporation is a derivative suit. For a derivative
suit to prosper, the minority stockholder suing for and on behalf of
the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit
(Hi-Yield vs. CA, 590 SCRA 548).
614 CORPORATION CODE
The right to sue derivatively is an attribute of corporate ownership
which, to be exercised, requires that the injury alleged be indirect as
far as the stockholders/members are concerned, and direct only
insofar as the corporation is concerned. The whole purpose of the
law authorizing a derivative suit is to allow the stockholder/member
to enforce rights which are derivative (secondary) in nature. A
derivative action is a suit by a shareholder/member to enforce a
corporate cause of action (R.N. vs. Santos, 467 SCRA 312).
Allegations in the answer cannot defeat the petition as the cause
of action and jurisdiction depend on the allegations in the complaint
(Commart vs. SEC, 198 SCRA 73).
Bar Question: Atlantis Realty Corporation (ARC), a local firm
engaged in real estate development, plans to sell one of its prime
assefs --- a three-hectare land valued at about P1)}-million. For this
purpose, the board of directors of ARC unanimously passed a
resolution approving the sale of the property for P71-million to
Shangrila Real Estate Ventures (SREV), a rival realty firm. The
resolution also called for a special stockholders meeting at which the
proposed sale would be up for ratification. Atty. Edric, a stockholder
who owns only one (1) share in ARC, wants fo s/op the sale. He
then commences a derivative suit for and in behalf of the
corporation, to enjoin the board of directors and the stockholders
from approving 4he sale. Can Atty. Edric, who owns only one (1)
share in the company, initiate a derivative suit? Why or why not?
(2009 Bar)
Answer: Yes, Atty. Edric can initiate a derivative suit. The Supreme
Court has long recognized the right of a single stockholder to file
derivative suits. Where corporate directors have committed a breach
of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the
wrong, a single stockholder may institute that suit, suing on behalf of.
himself and other stockholders and for the benefit of the corporation,
to bring about a redress of the wrong done directly to the corporation
and indirectly to the stockholders (Gochan vs. Young, 354 SCRA
207).
b. Requisites
Section 1, Rule 8 of the lnterim Rules of Procedure Governing
lntra-Corporate Controversies lays down the following requirements
which a stockholder must comply with in filing a derivative suit:
CORPORATION CODE 61s
Sec. 1. Derivative action - A stockholder or member may bring an
action in the name of a corporation or association, as the case may
be, provided, that:
(1) He was a stockholder or member at the time the acts or
transaction subject of the action occurred and at the time the action
was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; (this must
be alleged with particularity in the complaint. The obvious intent
behind the rule is to make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief sought had
failed.
(3) No appraisal rights are available for the act or acts complained
of; and
(a) The suit is not a nuisance or harassment suit.
There are three requisites before a derivative suit can be filed by
'a stockholder. These are (1) cause of action in favor of the
corpoiation, (2) refusal of the corporation to sue, and (3) party filing
the suit is a stockholder (SMC vs. Kahn 176 SCRA 447).
The fact that no other stockholder has made common cause with
the plaintiff is irrelevant since the smallness of plaintiff's holding is no
ground for denying him relief (Republic vs. Cuaderno, 19 SCRA
671).
A stockholder has a cause of action to annul certain actions of the
boardof directors of a bank, which actions were considered
anomalous and a breach of trust prejudicial to the bank (lbid.).
The allegations of injury to a person can coexist with those
pertaining to the corporation. The personal injury suffered by that
person cannot disqualify him from filing a derivative suit on behalf of
the corporation. lt merely gives rise to an additional cause of action
for damages against the erring directors (Gochan vs. Young, supra).
A derivative suit will be dismissed if the petitioners fail to show
that they have a legal basis for representing their co-members and
have not shown what acts of the board are detrimental to the
interests of the corporation and its members (PPSTA vs.
Quisumbing, G.R. 72193, Nov. 17, 1990, Minute resolution).
616 CORPORATION CODE
The lnterim Rules of Procedure Governing lntra-Corporate
Controversies provides: "SEC. 5. Venue - All actions covered by
these Rules shall be commenced and tried in the Regional Trial
Court which has jurisdiction over the principal office of the
corporation partnership, or association concerned. Where the
principal office of the corporation, partnership or association is
registered in the Securities and Exchange Commission as Metro
Manila, the action must be filed in the city or municipality where the
head office is located."
Bar Question: Retiably informed that the properties of the
corporation are being wasted and fraudulently disposed of by the
management, the minority stockholders met and decided to seek
remedy in court either through an action in their own name or
through an action in behalf of themselves and other stockholders for
the benefit of the corporation.
lf you were counsel for the minority stockholders, which of these
actions would you file and what would you allege and prove? Explain
your answer. (1959 Bar)
Answer: lf t were counsel for theminority stockhotders, t witt fite an
action in behalf of my clients and other stockholders for the benefit of
the corporation. This is called as fhe stockholders' derivative suit.
To succeed in this action, I will have to prove the following (1) the
wasting away 6rid fraudulent disposition by the management of
corporate assefs,' (2) refusal of the board to sue, after the matter was
brought to the attention of the board; (3) iniury to the corporation; (4)
exhaustion of intra-corporate remedies; and (5) that they are suing
on a derivative cause of action on behalf of the corporation and all
other stockholders similarly situated.
Bar'Question: A group of minority stockholders of a corporation
brought action against the principal officer for damages alleging that
the latter as president and manager mismanaged its affairs and its
assets, and demanding that he pay to them the value of their
respective pafticipation in the corporafe assefs on the basis of their
respective holdings. Did the minority stockholders have the right to
bring this action for their own benefit? Reason out your answer
briefly. (1960 Bar)
Answer: No, the minority stockholders did not have a right to bring
this action in their own behalves. What should have been brought by
them is the stockholder's derivative suit, where the action is filed for
and in behalf of the corporation. But then other conditions must be
CORPORATION CODE 617
present besrdes the cause of action here. The stockholders shoutd
have exhausted intra-corporate remedies by informing the board to
take the proper remedies.
Bar Question: A became a of Prime Reat Estate
stockhotder
Corporation (PREC) on Juty tCi, tggt, he was given one share
whein
by another stockholder to qualify him as a director. A was not
reelected director in the July 1, 1992 annual meeting but he
continued to be a registered shareholder of PREC.
When he was still a director, A discovered that on January S,
1991, PREC rssued free of charge 10,000 shares to X, a lawyer who
assisfed in a court case involving PREC.
a) Can A now bring an action in the name of the corporation to
question the issuance of the shares to X without receiving any
payment?
b) Can X question the right of A to sue him in behalf of the
corporation on the ground that A has only one share in his name?
c) Can not the sharesissued to X be considered as watered stock?
(1993 Bar)
Answer: a) No. A requisite for one to file a derivative surt is that he
must be a stockholder of the corporation at the time of the act or
transaction complained of. Since the act being questioned by A
happened on January 5,1991, or months before he became a
stockholder, he cannot file the derivative suit. He may do so if such
action is a continuing practice until such time that A was already a
stockholder, assuming allother requisifes are complied with.
b) No, X cannot do so. lt is immaterial that A has only one share in
his name.
The argument that a stockholder, to be qualified to bring a
derivative suit must hold a substantial block of stock, finds no
support in the law. The bona fide ownership by a stockholder of
stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The number of his
shares is immaterial since he is not suing in his own behalf, or for the
protection or vindication of his own particular right, or the redress of
a wrong committed against him, individually, but in behalf and for the
benefit of the corporation (See San Miguel vs. Khan, 176 SCRA
447).
c) No. Watered stock refers to stock rssued for a consideration less
than its par or issued value. ln the case af bar, the value of the
shares issued to X must be compared to the value of his services in
the court case.
618 CORPORATION CODE
Bar Question: A corporation has Jose Santos and his son as ifs
president and manager respectively. ln 1947, the corporation
suffered /osses. The minority directors in the organization meeting of
the board in March 1948 exposed the incompetence and the
negligence of the management and moved that a new president and
a new manager be appointed. The motion was disapproved. ln 1948,
the corporation again suffered /osses due to the negligence'and
incompetence of the manager and president. Nothing could be said
however against their honesty. ln the organization meeting of the
board in Manila, the minority directors again moved for appointment
of a new president and a new manager. Motion was again turned
down. The busrness operations of 1947 impaired 10% of the capital
of the corporation, and those of 1948 impaired 40% of the capital. ln
January 1949, the corporation was in need of cash, and all the
directors including the minority directors loaned to the corporation
P2,000.00 each, payable on demand. After the organization meeting
of 1949, the minority directors demanded the payment of their
respective loans, but the corporation refused to pay. What can the
minority directors do to protect their interest? (1949 Bar)
Answer: The minority directors may bring a derivative suit, for and in
behalf of corporation to make the erring management officials
account for their management. They may also include as a
provisional remedy the creation of a receivership over fhe assefs of
the corporation. * -
Bar Question: AA, a minority stockholder, filed a suit against BB,
CC, DD and EE, the holders of majority shares of MOP Corporation,
for alleged misappropriation of corporate funds. The complaint
averred, inter alia, that MOP Corporation is the corporation in whose
behalf and for whose benefit the derivative surt is brought. ln their
capacity as members of the Board of Directors, the majority
stockholders adopted a resolution authorizing MOP Corporation to
withdraw the suit. Pursuant to said resolution, the corporate counsel
filed a Motion fo Drsmlss in the name of the MOP Corporation.
Should the motion be granted or denied? Reason briefly (2004
Ba0
Answer: A derivative sulf rs the remedy designed by equity for
those situations where the management, through fraud, neglect of
duty, or other cause, declines to take the proper and necessary
sfeps fo asserf the corporation's right. lndeed, to grant the
corporaiion, through its majority stockholders and the directors who
themselves are the persons alleged to have committed breaches of
CORPORATION CODE 619
trust, would be to emasculate the right of minority stockholders to
seek redress for the corporation and would defeat the very nature
and function of a derivative suit and render the right to institute the
action illusory (See Commart vs. SEC, 198 SCRA 73).
Bar Question: Gina Sevilla, a minority stockholder of Bayan
Corporati6n, felt that various investments of the company's capital
were ultra vires if not, indeed, made in violation of law. She filed a
derivative suit seeking to nullify the questioned investments. Would
her action prosper? Why? (2003 Bar)
Answer: Yes, the action would prosper. Regardless of the fact that
Gina Sevilla is a minority stockholder, a derivative suit may still be
brought in the name of the corporation to redress wrongs committed
against it, for which directors refuse fo sue (See Wesfern vs. Sa/as,
278 SCRA 216).
Gina must be certain though that she has complied with the
following basic requirements in order for a derivative suit to prosper:
that she has exhausted intra-corporate remedies, by requesting the
board to act, and the board does not act at all, and must allege in her
complaint before the proper forum that she is suing on a derivative
cause of action on behalf of the corporation and all ,other
shareholders similarly situated who wish to ioin (See Tan vs.
Makasiar, 350 SCRA 475).
Bar Question: Malyn, Schiera and Jaz are directors of Patio
lnvestments, a close corporation formed to run Patio Caf6, an al
fresco coffee shop in Makati City. ln 2000, Patio caf6 began
experiencing financial reverses, consequently, some of the checks it
rssued to its beverage distributors and employees bounced.
ln October 2003, Schiera informed Malyn that she found a
location for a second Cafe in Taguig City. Malyn obiected because
of the dire financial condition of the corporation.
Sometime in April 2004, Malyn learned about Fort Patio Caf6
located at Taguig City and that its development has been undertaken
by a new corporation known as Fort Patio, lnc., where both Schiera
and Jaz are directors. Malyn also found that Schiera and Jaz, on
behalf of Patio lnvestments, had obtained a loan of P 500,000.00,
form PBCom Bank, for the purpose of opening Fort Patio Caf6. This
loan was secured by the assefs of Patio lnvestments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action before the Regional
Trial Court of Makati City against Schiera and Jaz, alleging that the
two directors breached their fiduciary duties by misappropriating
620 CORPORATION CODE
money and assefs of Patio lnvestments in the operation of Fort Patio
Cafe
a.) Was it proper for Malyn to file a derivative suit with a prayer for
ctive rel ief? Expla in.
i nj u n
b.) Assuming that a derivative suft is proper, may the action
continue if the corporation is dissolved during the pendency of the
suit? Explain.(2005 Bar)
Answer: a.) The derivative suit along with the prayer for injunctive
relief was proper because Schiera and Jaz diverted fhe assefs of fhe
corporation for their own personal benefit.
b.) The case should be allowed to continue so that fhe assefs
and claims should be administered for the benefit of all concerned,
as they should have been administered before the dissolution of the
corporation. Despite /s disso/ufion, the corporation remains to be a
juridical entity for the purpose of winding-up its affairs, including the
continuation of pending suits until its termination.
1. When Exhaustion of Intra-corporate Remedies
Dispensed With
Bar Question: What is an intra-corporate controversy? (2006 Bar)
Answer: An intrc-corporate controversy involves fraudulent actions
and devices which are detrimental to the interest of stockholders,
directors and the corporation. lt is one which arises between
stockholders and the corporation. There is no distinction,
qualification nor any exemption whatsoever, as the provision is broad
and covers all kinds of controversies between stockholders and
corporations (See Fabia vs. CA, 388 SCRA 574).
An intra-corporate controversy is one which pertains to any of the
following relationships: (1) between the corporation, partnership or
association and the public; (2) between the corporation, partnership
or association and the State in so far as its franchise, permit or
license' to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members
or officers; and (4) among the stockholders, partners or associates
themselves. (Yujuico vs. Quiambao, 513 SCRA 243).
Where the corporate directors are guilty of a breach of trust, not of
mere eiror of judgment or abuse of discretion, and intra-corporate
remedy is futile or useless, a stockholder may institute a suit in
CORPORATION CODE 621
behalf of himself and of other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted direcfly
upon the corporation and indirectly upon the stockholders, (Reyes vs.
Tan, 3 SCRA 198).
Such a suit need not be authorized by the corporation where its
objective is to nullify the action taken by its manager and the board
of directors, in which case any demand for intra-corporate remedy
would be futile (Republic vs. Cuaderno, 19 SCRA 671).
Bar Question: A small stockhotder of a bank fited a suit praying for
an injunction to prevent the approval of the appointments of two
persons whom he claimed were being appointed to their posftlons
only for the purpose of shielding from criminal prosecution the
controlling stockholder, alleged to be committing fraud in the bank
affairs. Defendants were the Board of Directors of the bank, the two
persons whose appointments were being questioned, and the
controlling stockholder of the bank. These defendants moved to
dismr'ss the suit on the ground that a mere stockholder is not attowed
to question the appointments because they were corporate acts.
Should the case be dismrssed? (1975 Bar)
Answer: Yes, the case shoutd be dismisse d. Generally it is the
board which determines whether or not the corporation shoutd fite a
case in court. ln a situation, however, where the possible defendants
are members of the board itself, the law ailows the filing by a
stockholder of a derivative suit, for and in behatf of the corporation,
the stockholder appearing in the case as a nominal party. ln the case
at bar, however, the case is filed not as derivative suit but as an
individual suit of the plaintiff stockhotder. The suit wilt not proper as
such.
c. When a Suit is Not Considered a Derivative Suit
The suit of respondent cannot be characterized as derivative,
because she was complaining only of the violation of her preemptive
right under Section 39 of the Corporation Code. She was merely
praying that she be allowed to subscribe to the additional issuances
of stocks in proportion to her shareholdings to enable her to preserve
her percentage of ownership in the corporation. She was therefore
not acting for the benefit of the corporation. euite the contrary, she
was suing on her own behalf, out of desire to protect and preserve
her preemptive rights (Lim vs. Lim-Yu, supra).
622 CORPORATION CODE
Vll. Liabilities of Stockholders
A. To the corporation for unpaid subscription plus interest
B. To creditors for unpaid subscriptions
A stockholder may be sued directly by creditors to the extent of
their unpaid subscription to the corporation (Keller vs. COB, '141
scRA 86).
C. To the corporation for watered stock (Section 65, N.C.C.)
Stockholders are basically investors in a corporation. in"y do not
have a hand in running the day to day business operations of the
corporation unless they are at the same time directors or officers of
the corporation. Before a stockholder may be held criminally liable
for acts committed by the corporations, therefore, it must be shown
that he had knowledge of the criminal act committed in the name of
the corporation and that he took part in the same or gave his consent
to its commission, whether by action or inaction (Espiritu vs.Petron,
605 SCRA 256).
Vlll. Dissolution of Corporations
A. Dissolution Defined
Dissolution is the extinguishment of the franchise of a corporation
and the termination of its corporate existence.
B. Modes of Dissolution
1. Voluntary dissolution
a. Where no creditors are affected (Section 118, N.C.C.)
b. Where creditors are affected (Section 119; N.C.C.)
c. By shortening corporate term
2. lnvoluntary dissolution
a. Grounds:
1. Violation of the New Corporation Code (Section 144,
N.C.C.)
.2. Failure to organize and commence business within two
years from incorporation (Section 22, N.C.C.)
CORPORATION CODE 623
A corporation may be dissolved by the SEC upon the filing of a
verified complaint and after proper notice and hearing on grounds
provided by existing laws, rules and regulations (Section 121,
N.C.C.)
Liquidation is the process of setfling the affairs of said
corporation, More particularly, it entails the following: Winding up
the affairs of the corporation means the collection of all assets, the
payment of all its creditors, and the distribution of the remaining
assets, if any among the stockholders thereof in accordance with
their contracts, or if there be no special contract, on the basis of their
respective interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail unless it
is inconsistent with law (Yu vs. Yukayguan, 589 SCRA 588).
It may be undertaken by the cdrporation itself, through its Board
of Directors; or by trustees to whom 'corporate
all assets are
conveyed for liquidation; or by a receiver appointed by the SEC upon
its decree dissolving the corporation (lbid.).
Glaringly, a derivative suit is fundamentally distinct and
independent from liquidation proceedings. They are neither part of
each other nor the necessary consequences of the other (lbid.).
Bar Question: Name three (3) methods by which a stock
corporation may be voluntarily dissolved. Explain each method (S%)
Answer: Voluntary dissolution of a stock corporation may be done
through the following methods:
1. Where no creditors are affected (Section 118, NCC) - By
majority vote of the board of directors and by a resolution duly
adopted by the affirmative vote of the stockholders of at least two-
thirds (V3) of the outstanding capital stock at a meeting to be hetd
on the call of the directors after notice by publication. A copy of the
resolution must be certified by the board of directors, thereafter given
fo SEC, who shall then issue the certificate of dissolution.
2. Where creditors are affected (Section 119, NCC ) - A petition
for dissolution of a corporation shall be filed with the SEC, signed by
a majority of its board of directors, verified by its president or one of
its directors and shall set forth all claims and demands against it, and
that its dissolution was resolved by the affirmative vote of the
stockholders representing at least two-thirds (V3) of the outstanding
capital stock, at a meeting of its stockholders called for the purpose.
624 CORPORATION CODE
3. Shortening corporate term (Section 120, NCC) - By amending
the artictes of incorporation, whereby a copy of the amended articles
of incorporation shatl be submitted to the sEC. upon approval of the
amended articles of incorporation or the expiration of the shortened
term, the corporation shatl be deemed dissolved without any fufther
proceedings, subiect to the provisions of liquidation
A of an insolvent corporation should be
petition for liquidation
classiiied a special proceeding and not an ordinary action' A
liquidation proceeding resembles the proceeding for the settlement
of estate of deceased persons (Pacific vs' CA, 242 SCRA 493)'
A liquidation proceeding is commenced by the filing of a single
petition by the solicitor General with a court of competent jurisdiction
;Petition for Assistance in the Liquidation of e.9., Pacific
entitled,
Banking corporation." All claims against the insolvent are required to
be fited with the liquidation court. Although the claims are litigated in
the same proceeding, the treatment is individual. Each claim is heard
separately. And the order issued relative to a particular claim applies
oniy to said claim, leaving the other claims unaffected, as each claim
is considered separate and distinct from the others. Liquidation
proceedings cannot be summary in nature. lt requires the holding of
hearings and presentation of evidence of the parties concerned, i.e.,
creditois who must prove and substantiate their claims, and the
liquidator disputinf the same. lt also allows for multiple appeals, so
that each creditor may appeal a final order rendered against its
claim. Hence, liquidation proceedings may very well be highly-
contested and drawn-out, because, at the end of it all, all claims
against the corporation undergoing litigation must be settled
detinitivety and its assets properly disposed of (ln re: Petition for
Assistance vs. BlR, 511 SCRA 123).
3. Procedure for Voluntary Dissolution
a. Where no creditors are affected:
1) Affirmative vote of majority of Board;
2) Call for meeting of stockholders or members and
publication of notice of the same once a week for
three weeks;
3) Affirmative vote of 2/3 of members or of stockholders
holding at least 2/3 of the capital stock outstanding;
4) Certified copy of resolution signed by majority of the
directors and countersigped by the secretary filed
with SEC (Section 1 18, N.C.C')'
CORPORATION CODE 625
b. Where creditors are affected:
1) Call for meeting of stockholders or members for the
specific purpose of dissolving the corporation;
2) Affirmative vote of majority of members in non-stock
corporations and of stockholders holding at least 2/3
of outstanding capital stock in stock corporatlons;
3) Petition filed with SEC signed by majority of the
board and verified by the President or secretary or
director;
4) Order setting a date of filing objections, not less than
30 nor more than 60 days, after entry of the order;
5) Publication of the order in a newspaper once a week
for three weeks, and posting of the order in 3 public
places in the town or city where the principai
corporate office is located, for three weeks;
6) Hearing of Petition by the SEC;
7) Judgment (Section 119, N.C.C.).
c. By shortening corporate term
A voluntary dissolution may be done by amending the articles to
shorten corporate life, and submitting a copy to the SEC of said
amendment; when the shortened term expires, the corporation is
deemed dissolved without further proceedings (Section 120, N.C.C.).
Mere filing of the Articles of Dissolution with the Securities and
Exchange Commission, without more, is not enough to support the
conclusion that actual dissolution of an entity in fact took place.
(Avon vs. NLRC, 246 SCRA 733).
The Problem: Some buslnessmen with an available starting capital
totalling only Pl00,000.00 ask you to help organize a busrness firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassrsfance by way
of direct investments and/or loans. Your professional asslsfance is
solicited on the following various questions that may arise.
Bar Question: The management of your firm embarks on a long-
range plan to either discontinue or expand the business, depending
upon fast-changing economic conditions. Your legal advice is sought
on the following matters.
lf your firm petitions for insolvency, does that automatically
terminate its legal existence? Why? (1973 Bar)
626 CORPORATION CODE
Answer: The filing of a petition for insolvency by my firm will not
automatically disso/ve it. While the existence of insolvency may be a
good ground for dissolving my firm, the mere filing of the petition
does not disso/ve. After the insolvency proceedings are over, the
firm, unless fresh capital comes in, has no more reason to continue
to exist.
Although the cancellation of a corporation's certificate of
registration puts an end to its juridical personality, a corporation
whose corporate existence is terminated in any manner continues to
be a body corporate for three years after its dissolution for purposes
of prosecuting and defending suits by and against it and to enable it
to settle and close its affairs. Moreover, the rights of a corporation,
which is dissolved pending litigation, are accorded protection by law
pursuant to Sec. 145 of the Corporation Code (Paramount vs. A.C.,
561 SCRA 327).
Dissolution or even the expiration of the three-year liquidation
period should not be a bar to a corporation's enforcement of its rights
as a corporation (lbid.)
ln case of dissolution of a corporation, the period of prescription
should be reckoned from the date of filing of the return required by
Section 78 of the Tax Code (Bank vs. Commissioner, 363 SCRA
840).
Any corporation contemplating dissolution must submit tax return
on the income earned by it from the beginning of the year up to the
date of its dissolution or retirement and pay the corresponding tax
due upon demand by the Commissioner of lnternal Revenue (lbid.).
Bar Question: XYZ Corporation entered into a contract of lease
with ABC, lnc. over a piece of real esfafe for a term of 20 years,
renewable for another 20 years, provided that XYZ's corporate term
is extended in accordance with law. Four years after the term of
XYZ Corporation expired, but still within the period allowed by the
lease contract for the extension of the lease period, XYZ Corp.
notified ABC, lnc. that it is exercising the option to extend the lease.
ABC, lnc. objected to the proposed exfenslon, arguing that since the
corporate life of XYZ Corp. had expired, it could no longer opt to
renew the lease. XYZ Corp. countered that withstanding the lapse of
its corporate term it still has the right to renew the lease because no
CORPORATION CODE 627
quo warranto proceedings for involuntary dissolution of XyZ Corp.
has been instituted by the Office of the Soticitor General.
/s the contention of XYZ Corp. meritorious? Exptain briefly.
Answer: The contention of XYZ corp. is not meritorious. IJpon the
expiration of the period fixed in the Articte of lncorporation in the
absence of compliance with the requisites for extension of the
period, the corporafion ceases to exist and is dissotved ipso facto.
Upon expiration, the corporation ceases to be a body corporate for
the purpose of continuing the business for which organized, but it
shall be continued as a body corporate for 3 years after the time
when it would have been dissolved, to prosecute and defend suits by
or against it and to enable it gradually to settte and close its affairs,
dispose and convey property and divideifs assefs.
There is no need to institute a proceeding for quo warranto to
determine the time or date of the dissolution because the period of
existence is provided in the Articles.
The quo warranto proceeding may be instituted by the solicitor
General only for involuntary dissotution.
The option of extending the /ease was likewise terminated
because the corporation failed to extend its tife (phitippine vs. cFl,
209 SCRA 294).
C. Winding-up or Liquidation
1. Defined
Liquidation means the winding up of the affairs of the corporation
by getting in the assets, setfling with creditors arid debtors, and
apportioning the amount of profit and loss.
a. Liquidation vs. Rehabilitation
Liquidation, in corporation law, connotes a winding up or setfling
with creditors and debtors. lt is the winding up of a corporation so
that assets are distributed to those entifled to receive them. lt is the
process of reducing assets to cash, discharging liabilities and
dividing surplus or loss.
On the opposite end of the spectrum is .rehabilitation which
connotes a reopening or reorganization. Rehabilitation contemplates
a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful
operation and solvency.
628 CORPORATION CODE
It is crystal clear that the concept of liquidation is diametrically
opposed or contrary to the concept of rehabilitation, such that both
cannot be undertaken at the same time. To allow the liquidation
proceedings to continue would seriously hinder the rehabilitation of
the subject bank (PVB vs. Vega, 360 SCRA 33).
ln the liquidation of a corporation, after the payment of all
corporate debts and liabilities, the remaining assets, if any, must be
distributed to the stockholders in proportion to their interests in the
corporation. The share of each stockholder in the assets upon
liquidation is what is known as liquidating dividend (President vs'
Reyes, 460 SCRA 473).
Bar Question: Explain the phrase "equality is equity" in corporate
rehabilitation proceedings. (2008 Ba)
Answer: The term "equality is equity" means that when a
corporation threatened by bankruptcy is taken over by a receiver, all
the creditors should stand on equalfooting or in pari passu with each
other during rehabilitation. ln legal parlance, pari passu ls used
especially of creditors who, in marshalling assefs, are entitled to
receive out of the same fund without any precedence over each
other. Not anyone of them should be given any preference by
paying one or some of them ahead of the others. Ihis is precisely
the reason for tlie'suspension of all pending claims against the
corporation under receivership. Instead of creditors vexing the courts
with suits against fhe drsfressed firm, they are directed to file their
claims with the receiver who is a duly appointed officer of the SEC
(New Frontier vs. RTC Branch 39, lloilo, 513 SCRA 601).
The governing law concerning rehabilitation and suspension of
actions for claims against corporations is Presidential Decree (P.D')
No. 902-A, as amended (P.D. No. 902-4). Section 6(c) of P.D. No.
902-A mandates that, upon appointment of a management
committee, rehabilitation receiver, board, or body, all actions for
claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal,
board, or body shall be suspended. Stated differently, all actions for
claims against a corporation pending before any court, tribunal or
board shall ipso jure be suspended in whatever stage such actions
may be found. The justification for the suspension of actions or
claims pending rehabilitation proceedings is to enable the
management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extrajudicial
CORPORATION CODE 629
interference that might unduly hinder or prevent the "rescue" of the
debtor company. To allow such other action to continue would only
add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed
toward its restructuring and rehabilitation (Pacific vs. Puerto Azul,
605 SCRA 503).
The term "claim" has been construed to refer to debts or demands
of a pecuniary nature, or the assertion to have money paid. lt was
referred to as an action involving monetary considerations., The term
was identified as the right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or equitable, and secured
or unsecured. Furthermore, the actions that were suspended cover
all claims against a distressed corporation whether for damages
founded on a breach of contract of carriage, labor cases, collection
suits cjr any other claims of a pecuniary natuie. More importantly, the
new rules on corporate rehabilitation, as well as the interim rules,
provide an all-encompassing definition of the term and, thus, include
all claims or demands of whatever nature or character against a
debtor or its property, whether for money or otherwise. There is no
doubt that petitioner's claim in this case, arising as it does from his
alleged illegal dismissal, is a claim covered by the suspension order
issued by the SEC, as it is one for pecuniary consideration.
Jurisprudence is settled that the suspension of proceedings
referred to in the law uniformly applies to "all actions for claims" filed
against a cqrporation, partnership or association under management
or receiverdhip, without distinction, except only those expenses
incurred in the ordinary course of business. The law is clear and
makes no distinction as to the claims that are suspended once a
management committee is created or a rehabilitation receiver is
appointed. Since the law makes no distinction or exemptions, neither
should this Court. The automatic suspension of an action for claims
against a corporation under a rehabilitation receiver or management
committee embraces all phases of the suit, that is, the entire
proceedings of an action or suit and not just the payment of claims.
At this juncture, it must be conceded that the date when the claim
arose, or when the action was filed, has no bearing at all in deciding
whether the given action or claim'is covered by the stay or
suspension order. What matters is that as long as the corporation is
under a management committee or a rehabilitation receiver, all
630 CORPORATION GODE
actions for claims against it, whether for money or otherwise, must
yield to the greater imperative of corporate revival, excepting only, as
already mentioned, claims for payment of obligations incurred by the
corporation in the ordinary course of business (Castillo vs. Uniwide,
619 SCRA 641).
Rehabilitation proceedings have equitable and rehabilitative
purposes. On one hand, they attempt to provide for the efficient and
equitable distfibution of an insolvent debtor's remaining assets to its
creditors, and on the other, to provide debtors with a fresh start by
relieving them of the weight of their outstanding debts and permitting
them to reorganize their affairs (Wonder vs. PBCom, 676 SCRA
48e).
Rehabilitation is therefore available to a corporation who, while
illiquid, has assets that can generate more cash if used in its daily
operations than sold. lts liquidity issues can be addressed by a
practicable business plan that'will generate enough cash to sustain
daily operations, has a definite source of financing for its proper and
full implementation, and anchored on realistic assumptions and
goals. This remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole purpose is to
delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions,
targets and goals; (c) speculative capital infusion or complete lack
thereof for the execution of the business plan; (d) cash flow cannot
sustain daily operations; and (e) negative net worth and the assets
are near full depreciation or fully depreciated (lbid.). r
There is no prevailing party in rehabilitation proceedings which is
non-adversarial in nature. Unlike in adversarial proceedings, the
court in rehabilitation proceedings appoints a receiver to study the
best means to revive the debtor and to ensure that the value of the
debtor's property is reasonably maintained pending the
determination of whether or not the debtor should be rehabilitated, as
well as implement the rehabilitation plan after its approval. The main
thrust of rehabilitation is not to adjudicate opposing claims but to
restore the debtor to a position of successful operation and solvency.
Under the lnterim Rules, reasonable fees'and expenses are allowed
the Receiver and the persons hired by him, for those expenses
incurred in the ordinary course of business of the debtor after the
issuance of the stay order but excluding interest to creditors . The
rehabilitation receiver shall not take over the management and
CORPORATION CODE 63r
control of the debtor but shall closely oversee and monitor its
operations during the pendency of the rehabilitation proceeding. The
rehabilitation receiver shall be considered an officer of the court
(Express vs. Bayan, 687 SCRA 50).
The suspension of the enforcement of all claims against the
corporation is subject to the rule that it shall commence only from the
time the Rehabilitation Receiver is appointed (Equitable vs. DNG,
627 SCRA 125).
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. Presenfly, the
applicable law on rehabilitation petitions filed by corporations,
partnerships or associations, including rehabilitation cases
transferred from the Securities and Exchange Commission to the
RTCs pursuant to Republic Act No. 8799 or the Securities
Regulation Code, is the lnterim Rules of Procedure on Corporate
Rehabilitation (2000). Under the lnterim Rules, the RTC, within five
(5) days from the filing of the petition for rehabilitation and after
finding that the petition is sufficient in form and substance, shall
issue a Stay Order appointing a Rehabilitation Receiver, suspending
enforcement of all claims, prohibiting transfers or encumbrances of
the debtor's properties, prohibiting payment of outstanding liabilities,
and prohibiting the withholding of supply of goods and services from
the debtor. Any transfer of property or any other conveyance, sale,
payment, or agreement made in violation of the Stay Order or in
violation of the Rules may be declared void by the court upon motion
or motu proprio.
Further, the Stay Order is effective both against secure and
unsecured creditors. This is in harmony with the principle of
"equality is equity".
During rehabilitation receivership, the assets are held in trust for
the equal benefit of all creditors to preclude one from obtaining an
advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an alert
creditor, upon learning of the receivership, from rushing posthaste to
the courts to secure judgments for the satisfaction of its claims to the
prejudice of the less alert creditors (Express vs. Bayan, 687 SCRA
50)
632 CORPORATION CODE
It should be stressed that the lnterim Rules was enacted to
provide for a summary and non-adversarial rehabilitation
proceedings. This is in consonance with the commercial nature of a
rehabilitation case, which is aimed to be resolved expeditiously for
the benefit of all the parties concerned and the economy in general.
As provided in the lnterim Rules, the basic procedure is as follows:
(1) The petition is filed with the appropriate Regional Trial Court; (2)
lf the petition is found to be sufficient in form and substance, the trial
court shall issue a Stay Order, which shall provide, among others, for
the appointment of a Rehabilitation Receiver; the fixing of the initial
hearing on the petition; a directive to the petitioner to publish the
Order in a newspaper of general circulation in the Philippines once a
week for two (2) consecutive weeks; and a directive to all creditors
and all interested parties (including the Securities and Exchange
Commission) to file and serve on the debtor a verified comment on
or opposition to the petition, with supporting affidavits and
documents. 3) Publication of the Stay Order; 4) lnitial hearing on any
matter relating to the petition or on any comment and/or opposition
filed in connection therewith. lf the trial court is satisfied that there is
merit in the petition, it shall give due course to the petition; 5)
Referral for evaluation of the rehabilitation plan to the rehabilitation
receiver who shall submit his recommendations to the court; 6)
Modifications or revisions of the rehabilitation plan as necessary; 7)
Submission of final'rehabilitation plan to the trial court for approval;
8) Approval/disapproval of rehabilitation plan by the trial court (New
Frontier vs. RTC Branch 39, lloilo, 513 SCRA 601).
Corporate rehabilitation connotes the restoration of the debtor to a
position of successful operation and solvency, if it is shown that its
continued operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the
rehabilitation plan, more if the corporation continues as a going
concern than if it is immediately liquidated. lt contemplates a
continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation
and solvency, the purpose being to enable the company to gain a
new lease on life and allow its creditors to be paid their claims out of
its earnings. An essential function of corporate rehabilitation is the
mechanism of suspension of all actions and claims against the
distressed corporation, which operates upon the due appointment of
a management committee or rehabilitation receiver. The governing
law concerning rehabilitation and suspension of actions for claims
against corporations is P.D. No. 902-4, as amended. Section 6(c) of
CORPORATION CODE 633
the law mandates that, upon appointment of a management
committee, rehabilitation receiver, board, or body, all actions for
claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal,
board, or body shall be suspended (Castillo vs. Uniwide,619 SCRA
641).
An indispensable requirement ih the rehabilitation of a distressed
corporation is the rehabilitation plan. Successful rehabilitation of a
distressed corporation will benefit its debtors, creditors, employees,
and the economy in general. The court may approve a rehabilitation
plan even over the opposition of creditors holding a majority of the
total liabilities of the debtor if, in its judgment, the rehabilitation of the
debtor is feasible and the opposition of the creditors is manifestly
unreasonable. The rehabilitation plan, once approved, is binding
upon the debtor and all persons who may be affected by it, including
the creditors, whether or not such persons have participated in the
proceedings or have opposed the plan or whether or not their claims
have been scheduled (Pacific vs. Puerto, 605 SCRA 503).
Under the lnterim Rules of Procedure on Corporate Rehabilitation,
a stay order defers all actions or claims against the corporation
seeking rehabilitation from the date of its issuance until the dismissal
of the petition or termination of the rehabilitation proceedings (BDO
vs. JAPRL, 551 SCRA 342).
SEC has the power to regulate pre-need plans.
The lnterim Rules of Procedure on Corporate Rehabilitation apply
to petitions for rehabilitation filed by corporations pursuant to P.D.
902-4, whether the corporation is supervised or regulated by the
SEC or other government agencies. The lnterim Rules do not
distinguish so the courts are not authorized to distinguish either.
The term claim includes all claims, like payment of tuition fees,
which a trial court has the power to stay, whether the relationship
between the parties is one of trust or a debtor-creditor relationship.
Being a Petition for Rehabilitation, the Petition of respondent
ASBDC must comply with the jurisdictional requirements under Rule
lV of the Rules of Procedure on Corporate Recovery. Section 4-1 of
the said Rules provides that any of the following: (1) an actually
insolvent debtor; (b) a technically insolvent debtor; or (3) a creditor or
634 CORPORATION CODE
stockholder of the debtor, can file a petition for rehabilitation (Union
vs. ASD, 560 SCRA 578).
lf rehabilitation is no longer feasible and the assets of the
corporation are finally liquidated, secured creditors shall enjoy
preference over unsecured creditors, subject only to the provisions of
the Civil Code on concurrence and preference of credits. Creditors
of secured obligations may pursue their security interest or lien, or
they may choose to abandon the preference and prove their credits
as ordinary claims (Consuela vs. Planters, 555 SCRA 465).
Upon a showing that the creditor is lacking in protection, the court
shall order the rehabilitation receiver to take steps to ensure that the
property is insured or maintained or to make payment or provide
replacement security such that the obligation is fully secured. lf such
arrangements are not feasible, the court may allow the secured
creditor to enforce its claim against the debtor. Nonetheless, the
court may deny the creditor the foregoing remedies if allowing so
would prevent the continuation of the debtor as a going concern or
otherwise prevent the approval and implementation of a rehabilitation
plan (Express vs. Bayan, 687 SCRA 50).
Bar Question: Can a dlsfressed corporation file a petition for
corporate rehabilitation after fhe dismissal of its earlier petition for
insolvency? Why?(2008 Bar)
Answer: Yes, a corporation may still file for a petition for corporate
rehabilitation despite the earlier drsmrssa/ of a petition for insolvency.
Rehabilitation contemplates continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. The purpose of
rehabilitation proceedings ls precisely to enable the company to gain
a new lease on life and thereby allow creditors to be paid their claims
from its earnings. The rehabilitation of a financially distressed
corporation benefits its employees, creditors, stockholders and, in a
larger sense, the generatpubtic (Negros vs. CA, 523 SCRA 434) The
dismrssa/ of the insolvency petition may not bar a corporation from
attempting to regain its previous solvent sfafus.
2. Methods of Winding Up
There are three methods by which a corporation may wind-up its
affairs ('1) under Section 3, Rule 104, of the Rules of Court (which
superseded Section 66 of the Corporation Law), whereby, upon
CORPORATION CODE 635
voluntary dissolution of a corporation, the court may direct such
disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation,
(2) under Section 77 of lhe Corporation Law, whereby a corporation
whose corporate existence is terminated, shall nevertheless be
continued as a body corporate for three years after the time when it
would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to setfle
and close its affairs, to dispose of and convey its property and to
divide its capital stock, but not for the purpose of continuing the
business for which it was established, (3) under Section 78 of the
Corporation Law, by virtue of which the corporation, within the three-
year period just mentioned, is authorized and empowered to convey
all of its property to a trustee for the benefit of members,
stockholders, creditors, and others interested (Board vs. Heirs, 20
scRA e87).
(Note: These three methods of dissolution are maintained by Sec.
122, N.C.C.).
The corporation may, during the three-year term, appoint.a
trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the rights and liabilities of such entity nor
those of its owners and creditors (Clemente vs. CA, 2429CRA717).
lf the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within
that period, the board of directors (or trustee) itself, may be permitted
to so continue as trustees by legal implication to complete the
corporate liquidation (Pepsi vs. CA, 443 SCRA 580). Stitt in the
absence of a board of directors or trustees, those having any
pecuniary interest in the assets, including not only the shareholders
but likewise the creditors of the corporation, acting for and in its
behalf, might make proper representations with the Securities and
Exchange Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement
of the corporate concerns (lbid.).
Bar Question: The Securlfles and Exchange Commission approved
the amendment of the articles of incorporation of GHQ Corporation
shortening its corporate life to only 25 years in accordance with
Section 120 of the Corporation Code. As shoftened, the corporation
continued lfs busrness operations until May 30, 1997, the last day of
its corporate existence. Prior to said date, there were a number of
636 CORPORATION CODE
pending civil actions, of varying nature but mostly money claims filed
by creditors, none of which was expected to be completed or
resolved within five years from May 30, 1997.
lf the creditors had sought your professional help at that time about
whether or not their cases could be pursued beyond May 30; 1997,
whatwould have been your advice? (2000, 1973, 1968, 1963 Bar)
Answer: Ihe cases can stiil be pursued even beyond May 30,
1997. After a corporation is dlsso/ved, it still has a period of 3 years
for liquidation or winding up, to settle and c/ose lfs affairs and
distribute its remaining assefs. Prosecution of the cases within the 3
year period of liquidation is allowed.
a. By Corporation ltself
The corporation during the winding-up may negotiate and transfer
the assets of the dissolved corporation, provided the stockholders
give their consent (Chung vs. lAC, 163 SCRA 534).
Bar Question: The corporate life of "A" company expired on
December 31, 1958. On January 15, 1959, the company filed an
action against "8" to recover a sum of money. The action is sft//
pending trial. (August 12, 1962).
Should defendant's motion fo dlsmrss on the ground that plaintiff
no longer has ldgalbapacity to sue be granted? (Answer Yes of No,
then give reasons). (1962 Ba)
Answer: Yes, the trial court should grant defendant's motion to
dismiss on the ground that plaintiff corporation no longer has legal
capacity fo sue.
If the corporation after dissolution decides to wind up through its
own board, it should terminate all acts of winding up within three
years after dissolution. ln the case at bar, all pending actions should
have been terminated on or before December 31, 1961. The
corporation has no juridical personality to continue with any
corporate actuation after that period.
(Note: See however doctrine in Gelano vs. CA, infra.)
Bar Question: A group of stockholders of Sesame Corporation filed
a court suit against the members of the Board of Directors to make
good to the stockholders, in proportion to their shareholdings, the
/osses incu.rred by the corporation because of the defendant Board
of Directors' management.
CORPORATION CODE 637
while the case was pending, the corporation was dr'sso/ved.
D_yring the three-year period from its dissotution, the Board of
Directors decided to extend the corporate tife by an amendment of its
lrticles of lncorporation. can the Board of D-irectors do so? (1g86
Bar)
Answer: The Board of Directors cannot pass a resolution to extend
corporate life after the corporation was dissolved, for the fottowing
reasons.'
a. After a corporation is disso/ved, corporate life terminates. so fhere
is no more life to extend;
b. lf the board is given a three year grace period after its dissotution
to wind up and liquidate, that grace period can be utitized for nothing
more than for the liquidation of the corporation. The board cannot
pass a resolution not germane to the tiquidation process;
c. Even if the extension was done by the board before its dissotution,
the extension and filing of an amendment to the Artictes of
lncorporation need the approvat of stockhotders hotding at least 2/3
of the outstanding capitat stock of the corporation.
Bar Question: "X" Corporation shortened its corporate tife by
amending its articles of incorporation. tt has no debts but owns a
prime property located in euezon city. How woutd the said property
b_e liquidated among the five stockhotders of said corporation?
Drscuss two methods of liquidation. (2001 Bar)
Answer: The property of "X,' Corporation can be liquidated among
the five stockholders by selting the property to a titird person and
dividing the proceeds, or selling the propefty to one or'more of the
stockholders and paying the non-buying stockholder/s, both in
proportion to the shareholdings of each stockhotder.
The corporation can convey its properties to trustees or have a
receiver appointed by sEC who can continue suits beyond the three
year period. lf a case is filed before dissolution, it may however
continue even after the three year period, and said period is
necessarily prolonged until final determination of the litigation,
otherwise, corporations in liquidation would lose what jusfly b6longs
to them, or be exempt from the payment of just obrigatibns ihrougn u
mere technicality (Reburiano vs. CA, 301 SCRA 342).
The lawyer who handred the case in the triar court may be
considered as trustee for the dissolved corporation, with respett to
638 CORPORATION CODE
the matter in litigation only, although no appointment as such was
extended'to him (lbid.)
The time during which the corporation, through its own officers,
may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of
dissolution commences; but there is no time limit within which the
trustees must complete a liquidation placed in their hands. lt is
provided only (Corporation Law, Section 78 [now Section 122] that
the conveyance to the trustees must be made within the three-year
period. lt may be found impossible to complete the work of
liquidation within the three-year period or to reduce disputed claims
to judgment. The authorities are to the effect that suits by or against
a corporation abate when it ceased to be an entity capable of suing
or being sued; but trustees to whom the corporate assets have been
conveyed pursuant to the authority of Section 78 may sue and be
sued as such in all matters connected with the liquidation (Knecth vs.
United, 384 SCRA 45).
b. By Receivership
Under Section 6(c) of P.D. No. 902-4, receivers may be appointed
whenever: (1) necessary in order to preserve the rights of the
parties-litigants; and/or (2) protect the interest of the investing public
and cieditors. The-situations contemplated in these instances are
serious in nature. There must exist a clear and imminent danger of
losing the corporate assets if a receiver is not appointed. Absent
such danger, such as where there are sufficient assets to sustain the
rehabilitation plan and both investors and creditors are amply
protected, the need for appointing a receiver does not exist. Simply
put, the purpose of the law in directing the appointment of receivers
is to protect the interests of the corporate investors and creditors
(Pryce vs. CA, 543 SCRA 657).
A trial court has jurisdiction to order a receiver of a corporation
under receivership to do any act so as to protect and preserve its
properties, and to that end it may order the secretary of the
corporation to do an act within the internal affairs of the corporation
aimed at protecting the interests of the stockholders (Hodges vs.
Lezama,8 SCRA 717).
The relevant law dealing with the suspension of payments for
money claims against corporations under rehabilitation is
Presidential Decree (PD) No. 902-A, as amended. The term "claim"
CORPORATION CODE 63e
under said law refers to debts or demands of pecuniary nature. lt is
the assertion of rights for the payment of money. The raison d' 6tre
behind the suspension of claims pending rehabilitation should not be
to discover. lt is not really to enable the management
difficult
committee or the rehabilitation receiver to substitute the [corporation]
in any pending action against it before any court, tribunal, board or
body. Obviously, the real justification is to enable the management
committee or the rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extra-judicial interference that might
unduly hinder or prevent the "rescue" of the debtor [corporation]. To
allow such other action to continue would only add to the burden of
the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against
the corporation instead of being directed toward its restructuring and
rehabilitation (Uniwide vs. Jandecs, 541 SCRA 158).
All actions for claims against a corporation pending before any
court, tribunal or board shall ipso jure be suspended in whatever
stage such actions may be found upon the appointment by the SEC
of a management committee or a rehabilitation receiver (lbid.).
A.M. No. 00-8-1O-SC or the lnterim Rules on Corporate
Rehabilitation which defines the term "claim", limits the coverage of
the Rules on rehabilitation and consequently the rule of suspension
of action to those who stand in the category or debtors and creditors.
lf the relationship between the parties is not that of a debtor-creditor,
the case cannot fall within the purview of the rules on corporate
recovery (Metrobank vs. SLGT, 533 SCRA 516).
Section 6 [c] of P.D. No. 902-A provides that "upon appointment
of a management committee, rehabilitation receiver, board or body,
pursuant to this Decree, all actions for claims against corporations,
partnerships or associations under management or receivership
pending before any court, tribunal, board or body shall be
suspended." By that statutory provision, it is clear that the approval
of the Rehabilitation Plan and the appointment of a rehabilitation
receiver merely suspend the actions for claims against respondent
corporations. Petitioner bank's preferred status over the unsecured
creditors relative to the mortgage liens is retained, but the
enforcement of such preference is suspended. The loan
agreements between the parties have not been set aside. ln the
event that rehabilitation is no longer feasible and the claims against
the distressed corporation would eventually have to be settled, the
640 CORPORATION CODE
secured creditors, like petitioner bank, shall enjoy preference over
the unsecured creditors (Metrobank vs. ASB, 517 SCRA 1).
The purpose of rehabilitation proceedings is to enable the
company to gain new lease on life and thereby allows creditors to be
paid their claims from its earnings and to effect a feasible and viable
rehabilitation of ailing corporations which affect the public welfare
(rbid.).
The appointment of a receiver operates to suspend the authority
of a corporation and of its directors and officers over its property and
effects, such authority being reposed in the receiver (Yam vs. CA,
303 SCRA 1).
The suspension of action for claims against a corporation under
rehabilitation receiver or management committee embraces all
phases of the suit, be it before the trial court or any tribunal or before
this Court (PAL vs. PALEA, 525 SCRA 29).
A management committee is tasked to manage, take custody of
and control all existing assets, funds and records of the corporation,
and to determine the best way to proteet the interest of its
stockholders and creditors (Punongbayan vs. Punongbayan, 491
scRA 477).
ln a case, the validity of the closure and receivership'of the bank
was put in issue. But the pendency of the case did not diminish the
authority of the designated liquidator to administer and continue the
bank's transactions. The Court allowed the bank's liquidator to
continue receiving collectibles and receivables or paying off
creditor's claims and other transactions pertaining to normal
operations of a bank. Among these transactions were the
prosecution of suits against debtors for collection and for foreclosure
of mortgages. The bank was allowed to collect interests on its loans
while under liquidation, provided that the interests were legal (Banco
Filipino vs. Ybanez, 445 SCRA 482).
The creation and appointment of a management committee and a
receiver is an extraordinary and drastic remedy to be exercised with
care and caution; and only when the requirements under the lnterim
Rules are shown. lt is a drastic course for the benefit of the minority
stockholders., the parties-litigants or the general public are allowed
only under pressing circumstances and, when there is inadequacy,
ineffectual or exhaustion of legal or other remedies. The power to
CORPORATION CODE 641
intervene before the legal remedy is exhausted and misused when it
is exercised in aid of such a purpose. The power of the court to
continue a business of a corporation, partnership or association must
be exercised with the greatest care and caution. There should be a
full consideration of all the attendant facts, including the interest of all
the parties concerned. However, a
management committee or
receiver will not be appointed merely because of things done or
attempted at a past time when the present situation and the
prospects for the future are not such as to warrant taking the control
of the property out of the hands of its owners. The circumstances to
justify the appointment of a management committee/receiver must
be extraordinary and something more must be shown than past
misconduct and a mere apprehension based thereon of future
wrongdoing. To repeat, in the absence of a strong showing of an
imminent danger of dissipation, loss, wastage or destruction of
assets or other properties of a corporation and paralysis of its
business operations, the mere apprehension of future misconduct
based upon prior mismanagement will not authorize the appointment
of a management committee/receiver (Sy vs. Sy, 480 SCRA 465).
Misconduct of corporate directors or other officers is not a ground
for the appointment of a receiver where there are one olmore
adequate legal action against the officers, where they are solvent, or
other remedies. The appointment of a receiver for a going
corporation is a last resort remedy, and should not be employed
when another remedy is available. Relief by receivership is an
extraordinary remedy and is never exercised if there is an adequate
remedy at law or if the harm can be prevented by an injunction or a
restraining order. Bad judgment by directors, or even unauthorized
use and misapplication of the company's funds, will not justify the
appointment of a receiver for the corporation if appropriate relief can
otherwise be had (Ao-As vs. CA, 491 SCRA 339).
It must be emphasized at this point that as far as the criminal
aspect of the cases is concerned, the provisions of Sec. 6 (c) of P.D.
No. 902-A should not interfere with the prosecution of a case for
violation of B.P. Blg. 22, even if restitution, reparation or
indemnification could be ordered, because an absurdity would result,
i.e., one who has engaged in criminal conduct could escape
punishment by the mere filing of a petition for rehabilitation by the
corporation of which he is an officer. At any rate, should the court
deem it fit to award indemnification, such award would now fall under
the category of a claim Under Sec. 6 (c) of P.D. No. 902-A,
considering that it is already one for monetary or pecuniary
642 CORPORATION CODE
consideration. Only to this extent can ihe order of suspension be
considered obligatory upon any court, tribunal, branch or body where
there are pending actions for claims against the distressed
corporation (Rosario vs. Co, 563 SCRA 239).
c. By Trustees
At any time during the said three years (for winding up), said
corporation is authorized and empowered to convey all of its
properties to the trustee for the benefit of stockholders, creditors and
other interested persons. The trustee holds legaltitle to these assets,
but beneficial interest remains with the stockholders and creditors'
The dissolution of the corporation itself, or the expiration of its
three-year liquidation period, should not be a bar to the enforcement
of its rights as a corporation. One of these rights includes the right to
seek from the court the execution of a valid and final judgment -
through its trustee/liquidator - for the benefit of its stockholders,
creditors and any other person who may have legal claims against it.
To hold otherwise would be to allow one to unjustly enrich himself at
the expense of the corporation. This renders nugatory all the efforts
and expenses of the corporation in its quest to secure justice, not to
mention the undue delay in disposing of this case prejudicial to the
administration of justice (Knecth vs. United, 384 SCRA 45).
Bar Question: On February 15, 1970, "Acme Corporation" filed a
complaint for collection against "D". While the case was pending
':Acme Corporation" amended its Articles of lncorporation to shoften
its term of existence up to December 3, 1970. The Securities and
Exchange Commission approved the amendment.
The Trial Court, however, was not notified thereof, so that
proceedings continued until May 5, 1974, when "D", learning of the
dissotution, questioned the personality of the corporation to continue
prosecuting the case. "D" alleged that since the corporation had
already been drsso/ved but had not taken steps to wind up its affairs
and transfer lfs assets to a trustee or assignee within the three-year
period as provided under Secflons 77 and 78 of the Corporation Law
(now Section 122 of the Corporation Code), it had ceased to dxist
for all purposes.
Decide the case, with reasons. (1981 Bar)
Answer: The case can continue until it is decided by the court'
Where the case for collection was filed before the dissolution of
the corporation, it may continue even after the three year period for
CORPORATION CODE 643
winding up done by its corporate board, and said period is
necessarily prolonged until final determination of the litigation
otherwise, corporations in liquidation would lose what justly belongs
to them, or be exempt from payment through a mere technicality.
Besrdes, the lawyer who handled the case, may be considered as
a trustee for the dissolved corporation, and as such trustee can
continue with the prosecution of the case until final determination
thereof.
Bar Question: The corporation, once dissolved, thereafter
continues to be a body corporate for three years for purposes of
prosecuting and defending suifs by and against it and of enabling it
fo seff/e and close its affairs, culminating in the final disposition and
distribution of its remaimng assefs. lf the three-year extended life
expires without a trustee or receiver being designated by the
corporation within that period and by that time (expiry of the three-
year extended term), the corporate liquidation is not yet over, how, if
at all, can a final settlement of the corporate affairs be made? (1997
Ba0
Answer: lf the three-year extended life has expired without a trustee
or receiver having been express/y desrgnated by the corporation
within that period, the board of directors (or trustee) itself may be
permifted to so continue as trustees by legal implication to complete
the corporate liquidation. Still in the absence of a board of directors
or trustees, those having any pecuniary interest in the assefs,
including not only the shareholders but likewise the creditors of the
corpgration, acting for and in its behalf, might make proper
representations with the Securities and Exchange Commission, for
working out a final settlement of the corporate concerns (See
Clemente vs. CA, 242 SCRA 717).
3. How Assets Distributed
The assets are distributed in the following order: first, to creditors
starting with the preferred, and continuing with all common if the
assets can pay all; second, refund of the par value of stocks of
preferred stockholders; third, refund of the par value to common
stockholders; fourth, if assets still remain, then they are
proportionately distributed to all stockholders, common or preferred.
There can be no distribution of assets to stockholders without first
paying the creditors (Boman vs. CA, 167 SCRA 540).
644 CORPORATION CODE
Assets distributable to any creditor, stockholder or member who is
unknown or who cannot be located shall be escheated to the city or
municipality where such assets are located (Section 122, N.C.C.).
A buyer at foreclosure of assets of a corporation with a previously
approved application for clearance to terminate its employees, buys
such assets subject to the preferential right of laborers to be paid
their unpaid wages and salaries (PCIB vs. National, 115 SCRA 873).
ln the absence of liquidation proceedings, the vendor's lien on the
unpaid purchases cannot be enforced against the transferee of such
purchases (Development vs. CA, 363 SCRA 307).
4. Take Over of Assets of a Dissolved Corporation
A corporation taking over the assets of a dissolved corporation
becomes liable for the obligations of the dissolved corporation, even
if the charter of a corporation taking over limits its liabilities with
respect to obligations of the dissolved corporation (Gonzales vs.
Sugar, 174 SCRA 377).
lX. Other Gorporations
A. Foreign Gorporations
1. Defined
A 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 corporations to do business in
its own country or state.
2. License to Engage in Business in the Philippines
a. Meaning of Engaging in Business
Article 44 of the Omnibus lnvestments Code of 1987 defines the
phrase doing business to include soliciting orders, purchases,
service contracts, opening offices, whether called liaison offices or
branches; appointing representatives or distributors who are
domiciled in the Philippines or who in any calendar year stay in the
Philippines for a period or periods totaling one hundred eighty (180)
days or more; participating in the management, supervision or
control of any domestic business firm, entity or corporation in the
CORPORATION CODE 645
Philippines, and any other act or acts that imply a continuity of
commercial dealings or arrangements and contemplate to that extent
the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressing prosecution of,
commercial gain or of the purpose and object of the business
organization. As long as it can be shown that a foreign corporation
and a domestic corporation entered into a series of agreements, as
in the successive sales of the foreign corporation's regular products,
the foreign company shall be deemed as doing business in the
Philippines. lt is the performance by a foreign corporation of the acts
for which it was created, regardless of the volume of business, that
determines whether or not it needs a license to operate in the
Philippines (Agilent vs. lntegrated,42T SCRA 593).
To constitute "doing business," the activity undertaken in the
Philippines should involve profit-making. Other factors which support
the finding that the foreign corporation is not doing business in the
Philippines are: (1) petitioner does not have an office in the
Philippines; (2) petitioner imports products from the Philippines
through its non-exclusive local broker, whose authority to act on
behalf of petitioner is limited to soliciting purchases of products from
suppliers engaged in the sugar trade in the Philippines; and (3) the
local broker is an independent contractor and not an agent of
petitioner (Cargillvs. lntra, 615 SCRA 304).
Section 1 of the lmplementing Rules and Regulations of the
Foreign lnvestments Act provides that the following shall not be
deemed "doing business":
1. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of
rights as such investor;
2. Having a nominee director or officer to represent its interest in
such corporation;
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative's or
distributor's own name and account;
4. The publication of a general advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for export;
7. Collecting information in the Philippines; and
646 CORPORATION CODE
8. Performing services auxiliary to an existing isolated contract of
sale which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to operate
it, and similar incidental services.
To be doing or "transacting business in the Philippines" for
purposes of Section 133 of the Corporation Code, the foreign
corporation must actually transact business in the Philippines, that is,
perform specific business transactions within the Philippine territory
on a continuing basis in its own name and for its own account.
Actual transaction of business within the Philippine territory is an
essential requisite for the Philippines to acquire jurisdiction over a
foreign corporation and thus require the foreign corporation to secure
a Philippine business license. lf a foreign corporation does not
transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to
reciuire such foreign corporation to secure a Philippine business
license (8. Van vs. GTVL, 523 SCRA 233).
The series of transactions between petitioner and respondent
cannot be classified as "doing business" in the Philippines under
Section 3(d) of RA7042. An essential condition to be considered as
"doing business" in the Philippines is the actual perforrnance of
specific commercihl-acts within the territory of the Philippines for the
plain reason that the Philippines has no jurisdiction over commercial
acts performed in foreign territories. Here, there is no showing that
petitioner performed within the Philippine territory the specific acts of
doing business mentioned in Section 3(d) of RA7042. Petitioner did
not also open an office here in the Philippines, appoint a,
representative or distributor, or manage, supervise or control a local
business. While petitioner and respondent entered into a series of
transactions implying a continuity of commercial dealings, the
perfection and consummation of these transactions were done
outside the Philippines (lbid.)
An unlicensed foreign corporation doing business in the
Philippines cannot sue before Philippine courts. On the other hand,
an unlicensed foreign corporation not doing business in the
Philippines can sue before Philippine courts (lbid.)
The appointment of a distributor in the Philippines is not sufficient
to constitute doing business unless it is under the full control of the
foreign corporation. lf the distributor is an independent entity which
CORPORATION GODE 647
buys and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter cannot
be considered to be doing business in the Philippines (Steelcase vs.
Design, 670 SCRA 64).
It is not the absence of the prescribed license but the "doing (of)
business" in the Philippines without such license which debars the
foreign corporation from access to our courts. The question whether
or not a foreign corporation is doing business is dependent
principally upon the facts and ciicumstances of each particular case,
considered in the light of the purposes and language of the pertinent
statute or statutes involved and of the general principles governing
the jurisdictional authority of the state over such corporations (lbid;
MR vs. Bajar, 380 SCRA 617).
The mere ownership by a foreign corporation of a property in a
certain state, unaccompanied by its active use in furtherance of the
business for which it was formed, is insufficient in itself to constitute
doing business. A foreign corporation which becomes the assignee
of mining properties, facilities and equipment cannot be automatically
considered as doing business, nor presumed to have the intention of
engaging in mining business (lbid.)
Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a doing or carrying on of business.
Typical examples of these are the making of a single contract, sale,
sale with the taking of a note and mortgage in the state to secure
payment therefor, purchase, or note, or the mere commission of a
tort. ln these instances, there is no purpose to do any other
business within the country (lbid.).
A US corporation cannot unilaterally declare that it is not doing
business in the Philippines when in fact it has installed different
products in several Philippine corporations, registered its trade name
with the Philippine Patent Office and has made it known that it has a
designated distributor in the Philippines (Wang vs. Mendoza, 156
scRA 44).
Generally, a foreign corporation has no legal existence within the
state in which it is foreign, and this proceeds from the principle that
juridical existence of a corporation is confined within the territory of
the state under whose laws it was incorporated and organized, and it
has no legal status beyond such territory (SBMA vs. Universal, 340
scRA 359).
648 CORPORATION CODE
There is no exact rule or governing principle as to what
constitutes "doing" or "engaging" or "transacting" business. lndeed,
such case must be judged in the light of its peculiar circumstances,
upon its peculiar facts and upon the language of the statute
applicable. The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or
enterprise for which it was organized, or whether it has substantially
retired from it and turned it over to another (lbid.)
Compliance with the required Filipino owhership of a corporation
shall be determined on the basis of outstanding capital stock whether
fully paid or not but only such stocks which are generally entitled to
vote shall be considered (Gamboa vs. Teves, 652 SCRA 690).
For stocks to be deemed owned and held by Philippine citizen or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks,
voting rights which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine
nationals (lbid.).
Before a foreign corporation can transact business in this
country, it must first obtain a license to transact business in the
Philippines, and a cettificate from the appropriate government
agency. .lf it transacts business in the Philippines without such a
license, it shall not be permitted to maintain or intervene in any
action, suit, or proceeding in any court or administrative agency of
the Philippines, but it may be sued on any valid cause of action
recognized under Philippine laws (Sections 125, 126 and 133,
N.C.C.; lbid.).
A single act or transaction may be considered as "doing business"
when a corporation performs acts for which it was created or
exercises some of the functions for which it was organized. The act
of participating in a bidding process constitutes "doing business"
because it shows the foreign corporation's intention to engage in
business in the Philippines. ln this regard, it is the performance by a
foreign corporation of the acts for which it was created, regardless of
volume of business, that determines whether a foreign corporation
needs a license or not (European vs. lngenieuburo, 435 SCRA 246).
CORPORATION CODE 649
A foreign corporation is deemed to have been "engaged in" or
"doing business" in the Philippines where its arrangements with its
Philippine business contacts indicate convincingly its purpose to
bring about the situation among its customers and the general pubtic
that they are dealing directly with it and that it is actively engaging in
business in the country (Communication vs. CA, 260 SCRA 673).
The obtainment of a license prescribed by Section 125 of the
Corporation Code is not a condition precedent to the maintenance of
any kind of action in Philippine courts by a foreign corporation.
However, under the aforequoted provision, no foreign corporation
shall be permitted to transact business in the Philippines unless it
shall have the license required by law, and until it complies with the
law in transacting business here, it shall not be permitted to maintain
anysuit in local courts (Columbia vs. CA, 261 SCRA 145).
A foreign corporation will not be regarded as doing business in
the State simply because it enters into contracts with residents of the
State, where such contracts are consummated outside the State
(rbid.)
The grant and extension of 90-day credit terms by a foreign
corporation to a domestic corporation for every purchase made
inarguably shows an intention to continue transacting with the latter
since in the usual course of commercial transactions, credit is
extended only to customers in good standing or to those on whom
there is an intention to maintain long-term relationship (lbid.)
Activities that do not bring any direct receipts or profits to the
foreign corporation do not constitute doing business in the
Philippines (Cargill vs. lntra, 615 SCRA 304).
Foreign corporations licensed to do business in the Philippines
are governed by the same rules on attachments applicable to
domestic corporations (State vs. Citibank, 203 SCRA 9).
A foreign corporation entering into contract for the construction of
a lime plant can be considered as doing business in the Philippines,
under the provisions of R.A. 5455 (Foreign lnvestments Law) and its
implementing regulations, it being shown that the turnkey proposal
was initiated by the Manila Branch of said foreign corporation.
Besides, under our corporate laws, a foreign corporation, whether or
not it is licensed to engage in business in the Philippines, is subject
650 CORPORATION CODE
to the processes and jurisdiction of local courts (Marubeni vs.
Tensuan, 190 SCRA 105).
A foreign corporation which issued 12 marine policies covering
different shipments done through a settling agent and a foreign
corporation which collected premiums on outstanding policies were
regarded as doing business here (Wang vs. Mendoza, 156 SCRA
44).
A foreign insurance company not licensed to engage in business
in the Philippines may file collection claims assigned to it, as these
are isolated acts (Aetna vs. Pacific, B0 SCRA 635).
A foreign corporation, doing business through an indentor, is not
doing business in the Philippines and therefore needs no license to
engage in business in the Philippines (Schmid vs. Martinez, 166
scRA 493).
A foreign corporation performing acts pursuant to its primary
purpose and functions as regionallarea headquarters for its home
office is clearly doing business in the country (Avon vs. CA, 278
scRA 312).
Three transactions which are occasional, incidental and casual,
not of a character to jndicate a purpose to engage in a continuity of
tiansactions, do not constitute doing business (Gonzales vs.
Raquiza, 180 SCRA 254).
Bar Question: Equity Online Corporation (EOL), a New York
corporation, has a securities brokerage service on the lnternet after
obtaining all requisite U.S. /rcenses and permits fo do so. EOL's
website (www.eonlng-con), which ls hosfed by a seruer in Florida,
enables Internet users fo trade on-line in securities /isfed in the
various stock exchanges in the U.S. EOL buys and sells U.S.-listed
securities for the accounts of its clients all over the world, who
convey their buy and sell instructions to EOL through the lnternet.
EOL has no offices, employees or representatives outside the U.S.
The website has rcons for many countries, including an icon "For
Filipino Traders" containing the days prices of U.S.Jlsfed securities
expressed in U.S. dollars and in their Philippine peso equivalent.
Grace Gonzales, a resident of Makati, is a regular customer of the
website and has been purchasing and selling secunties through EOL
with the uie of her American Express credit card. Grace has never
traveled outside the Philippines. After a serles of erroneous sfock
CORPORATION CODE 651
picks, she had incurred a net indebtedness of US $30,000.00 with
EoL, at which time she cancelled her American Express credit card.
After a number of demand letters sent to Grace, alt of them,
unanswered, EOL, through a Makati taw firm, fited a comptaint for
collection against Grace with the Regional rrial court o,f Makati.
Grace, through her lawyer, fited a motion fo dismiss on the ground
that EoL (a) was doing business rn the phitippines without a iicense
and was therefore barred from bringing suit and (b) viotated the
securTres Regulation code by seiling or offering to sett securities
within the Philippines without registering the securities with the
Philippine SEC and thus came to courl "with unclean hands.', EOL
opposed the motion fo dismlss, contending that it had never
established a physical presence in the philippines, and that att of the
activities related to plaintiffs trading in tJ.s. securities att transpired
outside the Philippines. lf you are the judge, decide the motbn to
drsmlss by ruling on the respective contentions of the parties on the
basis of the facts presented above (2002 Bar)
Answer: Both contentions of Grace are untenable. EoL is a foreign
corporation not doing busrness in the phitippines, hence doee not
need a license fo sue before Philippine couris. Neither is it engaged
in selling securities in the country, hence, it does not need to register
ifs secunties with the Securities and Exchange Commission.
Oh the other hand, the contention of EOL is correct. tt did not do
any business in the Philippines since all its transactions transpired
outside the Philippines.
Bar Question:
A. what is the legal test for determining if an unlicensed foreign
corporation is doing busrness in the philippines?
B. Give at least three (3) examples of the acts or activities that are
specifically identified under our foreign investment laws as
constituting "doing business" in the phitippines (2002 Bar)
Answer: (A) There are two generalfesfs fo determine whether or
not a foreign corporation can be considered as'ldoing business,' in
the Philippines. The first is fhe substa nce test, that is, whether the
foreign corporation is continuing the body of the business or
enterprise for which it was organized or whether rt has subsfa ntiaily
retired from it and turned it over to another. The second is the
continuity test, that is, it impties a continuity of commerciat dealings
and arrangements, and contemplates, to that extent, the
per-formance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prose cution of,
652 CORPORATION CODE
the purpose and object of its organization (See Agilent vs.
lntegrated, 427 SCRA 593).
(B) The following acts may be considered as doing business in the
Philippines:
1. soliciting orders, purchases or seruice contracts
2. opening offices, whether called liaison offices or branches
3. appointing representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for a
period or periods totalling 180 days or more
4. participating in the management, supervision or control of any
domestic buslness firm, entity or corporation in the Philippines, and
any other act or acts that may imply a continuity of commercial
dealings or arrangements and contemplate to that extent the
pefformance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of
commercial gain or of the purpose and object of the busrness
organization (See Grangervs. Microwave, 189 SCRA 631).
Bar Question: a) Under what circumsfances are foreign enterprises
considered as "doing busrness in the Philippines"?
b) lf a foreign corporation which has been licensed to do busrness
in the Philippines (by the BOI and the SEC) wants to expand its
busrness activities in the Philipprnes, rs fufther approvalfrom the BOI
necessary? 0998, 197.1 Ba)
Answer: a) A foreign enterprise is considered to be doing business
in the Philippines if it indulges in a continuity of commercial dealings
and arrangements normally incident to and in the prosecution of its
purpose and object of its organization. While an isolated transaction
will not result in the enterprise being deemed as doing business rn
the Philippines, where, however, it is shown that the single act is not
merely incidental or casual, but of such character as to distinctly
indicate a purpose to make the Philippines a base of operations for
the conduct of the ordinary busrness of the corporation, the
transaction constitutes the doing of busrness for the purpose of the
law.
b) Board of lnvestment (BOI) approval of the expansion of busrness
of a foreign corporation already licensed on or before the effectivity
date of the Foreign lnvestments Law (1968) to engage in business in
the Philippines ls not necessary. BOI approval is ne.eded only in
situations where the foreign enterprise desfues to exceed the
permitted p.ercentage of equity of its investments under the Foreign
lnvestments Law.
CORPORATION CODE 653
The Problem: Some busrnessmen with an available stariing capital
totalling only Pl00,000.00 ask you to hglp organize a business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassls/ance by way
of direct investments and/or loans. Your professional assisfance ls
solicited on the following various questions that may arise.
Bar Question: Assume that your firm is incorporated under the laws
of Texas with power to engage in petroleum and oil exploration
activities. Your advice is solicited on various questions which affect
fhe busrness. Briefly explain with reasons:
ls the firm automatically entitled to drill for oil in the Philippines.
State the alternatives to enable your firm to do so lawfully under
existing laws, including the New Constitution.
(1973 Bar)
Answer: The American corporation is not automatically entitled to
drill for oil in the Philippines because the development and
exploitation of our natural resources is reserued by our Constitution
to Filipino citizens and to corporations and associations at least 60%
of the capital of which is owned by Filipinos.
However, under the constitution, a qualified Filipino citizen or
corporation may, with the approval of the President of the Philippines
enter into service contracts for financial, technical, management or
other forms of assisfance with the American corporation mentioned
in the problem.
b. How License Secured
The foreign corporation must file an application for a license
setting forth the information required by the SEC, and attaching to it,
the following documents:
1) Certified copy of its articles and by-lawsi
2) Verified certificate by an authorized official of the country where
the corporation is incorporated that Filipino citizens and
corporations can do business therein and that the applicant
corporation is a corporation of good standing;
3) Verified statement by the authorized representative of applicant
corporation that it is solvent and in sound financial condition,
setting forth its assets and liabilities;
4) Authority from the appropriate Philippine government agency.
(Section 125, N.C.C.)
654 CORPORATION CODE
lf the SEC is satisfied that all requirements are complied with by
the applicant, license is issued to it to transact business in the
Philippines.
Within 60 days from license issuance, the licensee (except banks
and insurance companies) shall deposit with SEC Philippine
government securities valued at P100,000 for the benefit of present
and future creditors. Within 6 months after each fiscal year, the
licensee shall deposit in government securities 2o/o of the amount by
which the licensee's income exceeds P5 million for that year.
(Section 126, N.C.C.)
Section 46 of the Corporation Code, in so far as it refers to the
effectivity of corporate by-laws, applies only to domestic corporations
and not to foreign corporations
Where SEC grants a license to a foreign corporation, it is deemed
to have approved its foreign enacted by-laws (Citibank vs. Chua, 220
scRA 75).
The Board of lnvestments under P.D. 1789 may impose
requirements on foreign corporations other than those set by the
Corporation Code (Continental vs. Santiago, 172 SCRA 490).
c. Consequences on Foreign Corporation Engaging in
Business in the Philippines Without License
1. lt shall not be permitted to transact business in the Philippines.
2. lt cannot sue, but it can be sued (Section 133, N.C.C.)
lf a foreign corporation, not engaged in business in the
Philippines, is not barred to seek redress from Philippine courts, with
more reason can said corporation not claim exemption from being
sued in Philippine courts (FBA vs. Zosa, 110 SCRA 1)
The primary purpose of the license requirement is to compel a
foreign corporation desiring to do business within the Philippines to
submit itself to the jurisdiction of the courts of the state and to enable
the government to exercise jurisdiction over them for the regulation
of their activities in this country. While foreign investors are always
welcome in this land to collaborate with us for our mutual benefit,
they must be prepared as an indispensable condition to respect and
be bound by Philippine law in proper cases. The requirement of a
license is not intended to put a foreign corporations al'a
CORPORATION CODE 055
disadvantage, for the doctrine of lack of capacity to sue is based on
considerations of sound public policy- Such foreign cororation must
be held to be incapacitated to bring a petition for injunction for it is a
foreign corporation doing business in the Philippines without the
requisite license (Hutchison vs. SBMA, 339 SCRA 434).
Bar Question: "A", a foreign corporation dealing in the sale of heavy
equipment entered into an isolated transaction for the sale and
delivery of twenty (20) compressors fo "8", a domestic corporation.
For failure of "A" to abide by the contract, "8" filed suit, serving
summons on the President of "A", who happened to be in Manila on
a pleasure trip. "A" confesfs the court's jurisdiction on two grounds:
(1) that there is no valid summons; (2) that because it has no license
to do business rn fhe Philippines and because the transaction is an
isolated one, it cannot be sued in Philippine courts. May the
objection to the courT's jurisdiction be upheld? Reason out your
answer (1963 Bar)
Answer: No, both objections to the court's jurisdiction cannot be
upheld because:
1) a summons against a foreign corpbration may be served on any
of its officers or agents found in the Philippines; and
2) a foreign corporation, transacting in the Philippines whether under
an isolated transaction or under a serles of transactions may be
sued in Philippine courts irrespective of whether or not it has a
license to operate in the Philippines.
3. Person Transacting Busrness for it are Criminally Liable
(Section 144, N.C.C.)
d. When Unlicensed Foreign Corporation Gan Sue
A foreign corporation not engaged in business in the Philippines
may exercise the right to file an action in the Philippine courts for an
isolated transaction (New York vs. CA, 249 SCRA 416).
A foreign corporation without a license is not rpso facto
incapacitated from bringing an action in Philippine courts. A license
is necessary only if a foreign corporation is "transacting" or "doing
business" in the country. The principles regarding the right of a
foreign corporation to bring suit in Philippine courts may thus be
condensed in four statements: (1) if a foreign corporation does
business in the Philippines without a license, it cannot sue before the
Philippine courts; (2) it a foreign corporation is not doing business in
the Philippines, it needs no license to sue before Philippine courts on
656 CORPORATION CODE
an isolated transaction or on a cause of action entirely independent
of any business transaction; (3) if a foreign corporation does
business in the Philippines without a license, a Philippine citizen or
entity which has contracted with said corporation may be estopped
from challenging the foreign corporation's corporate personality in a
suit brought before Philippine courts; and (4) if a foreign corporation
does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction (Agilent vs. lntegrated,
427 SCRA 593).
ln the following cases, actions may be filed by a foreign
corporation, in Philippine courts although said corporation is not
licensed to engage in business in the Philippines:
1. lsolated Transactions
The phrase "isolated transaction" has a definite and fixed
meaning, i.e., a transaction or series of transactions set apart from
the common business of a foreign enterprise in the sense that there
is no intention to engage in a progressive pursuit of the purpose and
object of the business"organization (Eriks vs. CA, 267 SCRA 567).
A foreign insurance company may sue in Philippine courts upon
the marine insuhnce policies issued by it abroad to cover
international-bound cargoes shipped by a Philippine carrier, even if it
has no license to do business in this country. lt is the act of
engaging in business without the prescribed license, and not the lack
of license per se, which bars a foreign corporation from access to our
courts (Aboitiz vs. lnsurance, 561 SCRA 262).
Where complaint alleges that defendant has an agent in the
Philippines, summons can validly be served thereto even without
prior evidence of the truth of such factual allegation. Summons may
be served upon an agent of the defendant who may not necessarily
be its "resident agent designated in accordance with law." The term
"agent," in the context it is used in Section 14, refers to its general
meaning, i.e., one who acts on behalf of a principal (Signetics vs.
cA,225 SCRA 737).
Even if two bills of lading, hence, two transactions, are included,
these two bills of lading spawned from the single marine insurance
policy. The execution of the policy is a single act, an isolated
CORPORATION CODE
transaction. The term "isolated transaction" does not literally mean
"one" or a mere single act (Lorenzo vs. Chubb, 431 SCRA 266)
A foreign corporation doing business in the Philippines without a
license may sue in the Phitippine courts a Filipino citizen or a
Philippine entity that had contracted with and benefited from it. A
party is estopped from challenging the personality of a corporation
after having acknowledged the same by entering into a contract with
it (European vs. lngenieuburo, supra). The principle is applied to
prevent a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes, chiefly in
cases where such person has received the benefits of the contract
(Merrill vs. CA, 211 SCRA 824).
Bar Question: "A" ls sued, in the Court of First lnstance of Manila,
by California Candy Corp., a corporation organized under the laws of
California, for damages in the sum of P50,000 arising from breach of
a contract whereby "A" had agreed fo se// to said corporation 500
tons of sugar to be delivered in San Francisco, where the contract
was entered into. Would you grant "A's" motion fo dismlss fhe
complaint on the ground that the plaintiff corporation has no capacity
to sue, it not having previously obtained a license to transact
busrness in the Philippines? State your reason briefly. (1955 Bar)
Answer: lf I were the judge trying the case, I will not grant "A's"
motion fo dlsmlss. lt is true that California Candy Corporation has not
obtained a license to transact busrness in the Philippines, but in
California. A license to engage ln busrness in the Philippines is
required only of those foreign corporations who have intentions of
transacting busrness with a degree of permanence and continuity in
the Philippines. Ihis is not the situation of California Candy
Corporation. Hence it can bring a suit in the Philippines arising from
an isolated transaction.
Bar Question: A California corporation takes part in bidding for the
construction of a building in Manila. The California corporation won
the bid, but the construction ,company which opened the bid refused
to sign a contract with the California corporation for the construction
of the building. As the California corporation did not previously obtain
a license to engage rn busrness in the Philippines, the construction
company moved fo dismiss the suit on the ground that the California
corporation has no right or personality fo sue in Philippine courts.
How should the motion fo dlsmlss be resolved? Reasons for your
answer. (1957 Ba)
658 CORPORATION CODE
Answer: The motion fo dismiss should be denied. One isolated act
of the California corporation in the Philippines does not constitute
"transacting" business in the Philippines. Hence, there is no need of
a license in the Philippines for it to be allowed fo sue in Philippine
Couris.
2. Action to Protect Good Name, Good Will and
Reputation of Foreign Gorporation
The disability of a foreign corporation from suing in the Philippines
is limited to suits to enforce any legal or contractual rights arising
from or growing from any business transacted in the Philippines.
Where the purpose of the suit is to protect its reputation, its
corporate name, and its good will acquired in the natural
development of trade, an unlicensed foreign corporation may sue.in
the Philippines (Puma vs. lAC, 158 SCRA 233).
Bar Quesfion.' Rubberworld, lnc. sought registration of the
trademark "Juggler" for its casual rubber shoes in lnter Partes Case
No.602 filed with the Patent Office. The registration was opposed by
a Betgian Corporation which alleges that' it owns and has not
abandoned the trademark "Juggler." Although it admits that it has no
license to do business ln the Philippines, ft is not presently selling
footwear under the trademark "Juggler" in the Phitippines,'and it has
no license nor do€s'it have any agreement with any locat entity or
firm to sell any of its products in the Philippines.
At the trial, it uzas esfab/ished that Rubberworld had spent a
considerable amount and effort in popularizing said trademark in the
Philippines, had been using the same since 1969 ttnd had built up
enormous goodwill.
Acting on the petition, the Patent Office dismissed the opposition
and ordered the registration of the trademark "Juggler" in the name
of Rubberworld.
Drscuss the validity of the aforesaid decision. (1985 Bar)
Answer: I submit that the dismrssa/ of the opposition of the Belgian
corporation wa s erroneo u s.
Admittedly, the Belgian corporation created the trademark
"Juggler" and used rt on shoes manufactured by it continuously. This
made it owner of the said trademark.
The opposition brought in the Bureau of Patents to prevent
Rubberworld from registering the trademark which it (Belgian
corporation) owns, does not amount to engaging tn busrness, but is
an act to protect its reputation, good will or corporate name; hence, it
CORPORATION CODE 6s9
may be filed (opposition) without need of the Belgian corporation
procuring a license to engage rn busrness in the philippines.
That the Belgian corporation is presenfly in the phitippines not
selling footwear with the questioned trademark, and that'ii does not
have Philippine agents to selt its products, are matters which do not
affect its right of ownership over the trademark which it has created
and continuously used abroad.
The right of a trademark owner to be protected extends even
beyond the territorial limits of the country where the trademark is
registered. Modern trade and commerce, and internationat
agreements demand that depredations on tegitimate trademarks
should not be countenanced.
A foreign corporation without license to engage.in business in the
Philippine may file a suit to question quashal of a search warrant
issued pursuant to a complaint filed with the National Bureau of
lnvestigation for infringement of its trademark in the philippines (La
Chemise vs. Fernandez,l2g SCRA 373)
3. Where Contract provides philippine Court as
Venue for Controversies
A foreign corporation without license to engage in business in the
Philippines may file a suit under a contract executed by it, which
provides as venue the proper philippine courts (Lingner vi. tRc, tzs
scRA 522)
4. License Subsequenfly Granted Enables Foreign
Gorporation to Sue on Gontracts Executed
Before Grant of License
A foreign corporation not licensed to engage in business in the
Philippines cannot sue. However, contracts entered into by it are
valid, and the subsequent license granted to it enables it to file suits
(Home vs. Herrera, 123 SCRA 424).
5. Recovery of Misdelivered property
There is nothing in the record to show that the foreign corporation
has been in the Philippines engaged in a continuing business or
enterprise for which it was organized when the sixteen bundles were
erroneously discharged in Manila, for it to be considered as
transacting business in the philippines. The fact is that the bundles,
the value of which is sought to be recovered, were landed not as a
660 CORPORATION CODE
result of a business transaction, isolated or otherwise, but due to a
mistaken belief that they were part of the shipment of forty similar
bundles consigned to persons or entities in the Philippines. The
foreign corporation can sue (Swedish vs. Manila, 25 SCRA 633).
6. Where the Unlicensed Foreign Corporation Has
Domestic Corporation for a Co'Plaintiff
Where the suit is filed by an unlicensed foreign corporation as
subrogor to an all risk marine insurance where co-plaintiff domestic
corporation is subrogee, the failure of the foreign corporation to
allege that it is licensed to engage in business in the Philippines or
that the transaction sued upon is isolated, will not result in the
dismissal of the case brought by the foreign corporation, one of the
plaintiffs being a domestic corporation, and there being a declaration
by the Court of Appeals of the absence of a valid defense (Olympia
vs. Razon, 155 SCRA20B).
7. Estoppel
It should be stressed that the licensing requirement was never
intended to favor domestic corporations who enter into solitary
transactions with unwary foreign firms and then repudiate their
obligations simply because the latter are not licensed to do business
in this country. i\fter contracting with a foreign corporation, a
domestic firm is estopped from denying the former's capacity to sue.
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a
contract with it. And the doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations; one
who has dealt with a corporation of foreign origin as a corporate
entity is estopped to deny its existence and capacity (SBMA vs.
Universal, 340 SCRA 359).
Any person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts performed
as such agent (lnternational vs. CA, 343 SCRA 674).
3. Acquisition by Philippine Courts of Jurisdiction Over
Foreign Corporation
Three modes of effecting service of summons upon private
foreign corporations are provided in Section 14, Rule 7 of the Rules
CORPORATION CODE 661
of Court (now Section 12, Rule 14, Rules of Court), to wit: (1)by
serving upon the resident agent designated in accordance with law
to accept service of summons; (2) if there is no resident agent, by
service on the government official designated by law to that effect;
and (3) by serving on any officer or agent of said corporation within
the Philippines (Far East vs. Nankai, 6 SCRA 725).
Under the N.C.C., the licensed foreign corporation is required to
designate a resident agent in the Philippines, either a resident
individual or domestic corporation, by means of a power of attorney.
Service of summons and other legal processes on said agent is
equivalent to service on the licensed foreign corporation.
lf for any reason, the licensed foreign corporation is without any
resident agent in the Philippines, service of summons or other legal
processes on the SEC shall have the effect of service on said
corporation. The SEC is required to transmit by mail a copy of said
summons, or legal process to the corporation at its home office,
within ten days (Sections 127 and 128, N.C.C.)
When a foreign corporation has designated a person to receive
service of summon pursuant to the Corporation Code, that
designation is exclusive and service of summons on any other
person is inefficacious (H.B. vs. CA, 232 SCRA 329).
It is not enough to merely allege in the complaint that a defendant
foreign corporation is doing business. For purposes of the rule on
summons, the fact of doing business must first be "established by
appropriate allegations in the complaint" and the court in determining
such fact need not go beyond the allegations therein. The
determination that a foreign corporation is doing business is merely
tentative and only to enable the local court to acquire jurisdiction
over the person of the foreign corporation through service of
summons. lt does not foreclose a subsequent finding to the contrary
depending on the evidence (French vs. CA, 295 SCRA 462).
4. Laws and Rules Governing Foreign Corporations Doing
Business in the Philippines
Bar Question: By what laws, rules and regulations are foreign
corporations doing business rn fhe Philippines governed? ( Ba)
Answer: They are bound by all laws, rules, and regulations
applicable to domestic corporations of the sarne c/ass except such
662 CORPORATION CODE
I
I
only as provide for the creation, formation, organization, or
dissolution of corporations, or such as fix the relations, liabilities and
responsibilities or duties of members, stockholders or officers of
corporations to each other or to the corporation.
The Problem: Some busrnessmen with an available starting capital
totalling only P100,000.00 ask you to help organize a busrness firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassrsfance by way
of direct investments and/or loans. Your professional assr'sfance is
solicited on the following various questions that may arise:
Bar Question: Assume that your firm is incorporated under the laws
of Texas with power to engage in petroleum and oil exploration
activities. Your advice is solicited on various operations which affect
the business. Briefly explain with reasons:
ln case of a dispute between the stockholders and officers on the
inspection by the former of the corporate books, what law will
govern? Give legalreasons. (1973 Bar)
Answer: ln the case of dispute between the stockholders and
officers of the American (Texas) corporation in the problem, on the
inspection by the stockholders of the corporate books, the laws of
Iexas (U.S.A.) will govern, because the matter is intracorporate.
There is no disputl ,nua a foreign corporation is disqualified to
own lands in the Philippines. Consequently, it is also disqualified to
own the rights to ownership of lands in the Philippines because it
cannot lawfully own the land itself. Otherwise, there will be a blatant
circumvention of the Constitution, which prohibits a foreign private
corporation from owning land in the Philippines. ln addition, it cannot
transfer the rights to ownership of land in the Philippines if it cannot
own the land itself. lt is basic that an assignor or seller cannot
assign or sell something he does not own at the time the ownership,
or the rights to the ownership, are to be transferred to the assignee
or buyer. The third party assignee under the Compromise
Agreement who will be designated by the foreign corporation can
only acquire rights duplicating those which its assignor is entitled by
law to exercise. Thus, the assignee can acquire ownership of the
land only if its assignor owns the land. Clearly, the assignment of
the real properties to a nominee to be designated by the foreign
corporation is a circumvention of the Constitutional prohibition
against a private foreign corporation owning lands in the Philippines.
T CORPORATION CODE 663
Such circumvention renders the Compromise Agreement void
(Strategic vs. Radstock, 607 SCRA 413).
B. Close Corporations
1. Defined
A close corporation is one whose articles provide:
a. that its shares shall not be held by a group of more than 20
persons;
b. that all of the issued stocks shall be subject to one or more
restrictions on transfer;
c. that the corporation shall not list in any stock exchange or
make public offering of any of its stocks
lf at least 213 of the voting stock of the above corporation is
owned or controlled by another corporation which is not a close
corporation, then the above corporation shall not be deemed a close
corporation.
The articles of incorporation of the corporation does not contain
any provision stating that (1) the number of stockholders shall not
exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited.
From its articles, it is clear that the corporation is not a close
corporation. lt does not become one either, just because the
spouses owned 99.860/o of its subscribed capital stock. The mere
ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personalities. So, too
a narrow distribution of ownership does not, by itself, make a close
corporation (San Juan vs. CA, 296 SCRA 631).
The concept of a close corporation organized for the purpose of
running a family business or managing family property has formed
the backbone of Philippine commerce and industry (Gala vs. Ellice,
418 SCRA 431).
2. Principal Characteristics
a. Stockholders act as directors without need of election and
therefore are liable as directors;
b. Quorum may be greater than a mere majority;
664 CORPORATION CODE
c. Transfers of stocks to others, which would increase the number of
stockholders to more than the maximum, are invalid;
d. Corporate actuations may be binding even without a formal board
meeting, if the stockholders had knowledge or ratify the informal
action of the others;
e. Preemptive right extends to all stock issues;
f. Deadlocks in the board are settled by the SEC, on written petition
by any stockholder;
g. A stockholder may withdraw and avail of his right of appraisal
(Sections 97 -105, N.C.C. )
At any rate, a corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed ratified by the
absent director unless the latter promptly files his written objection
with the secretary of the corporation after having knowledge of the
meeting (Dulay vs. CA, 225 SCRA 678).
Bar Q:uestion: Ten c/assmafes, all graduates of C/ass '78 of the Los
Banos Schoo/ of Agriculture and Husbandry, decided to form "Gatas
Atbp., lnc.", the principal purpose of which is to produce, package,
and sell carabao's milk. The Articles of lncorporation provided,
among others, that the busrness of the corporation shall be managed
by the stockholders of the corporation rather than by a board of
directors and restricts the transfer of shares to outsiders.
One of the ten c/assrnates, Mr. Sakit-ulo, disgruntled at the way
the affairs of the corporation was being handled, demanded that all
the ten stockholder meet to elect directors, citing Secflon 50 of the
Corporation Code. Meanwhile, Ms. Sakit-tiyan sued all the ten
c/assmafes stockholders for damages for violation of the Food,
Drugs and Cosmetics Act - a cockroach was found in the milk she
drank, the package bearing the inscription "produced, packaged and
sold by Gatas Atbp., Inc.".
a) Can Mr. Sakit-ulo demand that the stockholders' meeting be
called to elect directors of the corporation?
b) Does Ms. Sakit-tiyan have a cause of action against the ten
c/assma/es-stockholders, albeit no negligence has been proven?
(1988 Bar)
Answer:
a) Mr. Sakit-ulo cannot demand that a stockholders' meeting be
called to elect the directors.
Under the facts and circumsfances stated in the problem, the
corporation ls a c/ose corporation, under which the stockhotders,
without need of election, act as directors of the corporation.
CORPORATION CODE 665
b) lf no negligence or fault is proven against the corporation by Ms.
Sakit-tiyan, who found a cockroach in one of the packages
containing milk drank by her, then neither the corporation, nor all of
the directors, nor any one of them would be liable.
Bar Question: Rafael inherited from his uncle 10,000 shares of Sfa.
Ana Corporation, a close corporation. The shares have a par value
of P10.00 per share. Rafael notified Sta. Ana that he was selling his
shares at P70.00 per share. There being no takers among the
stockholders, Rafael sold the same to his cousin Vicente (who is not
a stockholder) tor P700,000.00.
The Corporatei Secretary refused to transfer the shares in
Vicente's name in the corporate books because Alberto, one of the
stockholders, opposed the transfer on the ground that the same
violated the by-laws. Alberto offered to buy the shares at P12.50 per
share, as fixed by the by-laws or a total price of Pl25,000.00 only.
While the by-laws of Sfa. Ana provides that the right of first refusal
can be exercised "at a price not exceeding 25% more than the par
value of such shares, the Articles of Incorporation simply provides
that the stockholders of record shall have preferential right to
purchase said shares." lt is silent as to pricing.
ls Rafael bound by the pricing proviso under the by-laws of Sfa.
Ana Corporation? (1994 Bar)
Answer: No, Rafael, presumed to be a purchaser in good faith, is
not bound by the pricing proviso. Even if corporations can provide
that when stockholders want to transfer their shares, the corporation
or other stockholders shall have the right of first refusal, the exercise
of such right should appear in the ariicles, in the by-laws, as well as
in the certificate of stock and can only be subject to reasonable
terms and conditions stated therein. Limiting the price to be paid,
when the right of first refusal is exercised, to not more than 25% of
par value, without any qualification whatsoever, is not in the afticles,
nor is it reasonable (Go Soc vs. lAC, GR 72342, Feb. 19, 1987,
Minute Resolution).
C. Non-StockCorporation
1. Defined
A non-stock corporation is one where no part of its income is
distributable to its members, trustees or officers.
666 CORPORATION CODE
Any profit earned by it incident to its operations shall be used for
the furtherance of the purposes for which it was organized (Section
87, N.C.C.)
2. Purposes
They may be organized for charitable, religious, educational,
professional, cultural, fraternal, literary, trade, industry, agricultural
and like chambers, or any combination thereof. (Section BB, N.C.C.)
As a non-stock corporation, it may only be formed or organized
for charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic or other similar purposes. lt may not
engage in undertakings such as the investment business where
profit is the main or underlying purpose. Although the non-stock
corporation may obtain profits as an incident to its operation such
profits are not to be distributed among its members but must be used
for the furtherance of its purposes (People vs. Menil, 340 SCRA
125).
3. Membership
Membership in a non-stock corporation and all rights arising
therefrom are personal-and non-transferable, unless otherwise
provided in the articles or by-laws (Section 90, N.C.C.), and may be
terminated for the causes provided for therein (Section 91, N.C.C.)
Courts cannot strip a member of a non-stock, non-profit
corporation of his membership therein without cause. Otherwise, that
would be an unwarranted and undue interference with the well
established right of the corporation to determine its membership
(Chinese vs. Ching, 71 SCRA 460).
A non-stock corporation is not exempt from the obligation in its
treatment of its members. The obligation of a corporation to treat
every person honestly and in good faith extends even to its
shareholders or members, even if the latter find themselves
contractually bound to perform certain obligations to the corporation.
A certificate of stock cannot be a character of dehumanization
(Calatagan vs. Clemente, 585 SCRA 300).
CORPORATION CODE 667
4. Voting
Each member shall be entitled to one vote, unless that right is
limited, broadened or denied by the articles or by-laws.
Voting may be done by proxy, unless denied by the articles or by
the by-laws. The voting may be conducted by mail or other similar
means as authorized by the articles or by-laws, and under such
conditions as may be fixed by the SEC (Section 89, N.C.C.)
5. Board of Trustees
The board may be more than 15 in number divided into three
groups, such that the term of one group after each other shall expire
every year. A trustee shall have a three year term of office (Section
e2, N.C.C.)
6. Officers
Officers of a non-stock corporation may be directly elected by the
members, unless the articles or the by-laws provide otherwise (lbid.).
7. Place of Members' Meetings
The meetings, special or regular of the members of non-stock
corporations, may be held anywhere in the Philippines not
necessarily its place of principal office, with proper notice to all
members (lbid.).
8. Distribution of Assets on Dissolution
Assets of a non-stock corporation on its dissolution shall be
distributed in the following manner:
a. All its creditors shall be paid;
b. Assets held subject to return on dissolution shall be delivered back
to their givers;
c. Assets held for charitable, religious, etc. without a condition for
their return on dissolution, shall be conveyed to one or more
organizations engaged in similar activities as the dissolved
corporation.
668 CHAPTER XII
SECURITIES REGULATION GODE
(Republic Act 8799)
l. The Securities Regulation Code
The Securities Regulation Code (S.R.C.) is found in Republic Act
8799 approved on July 19, 2000 and took effect on August 8,2000.
This repealed the Revised Securities Act (Batas Pambansa 178) in
its entirety, and Sections 2, 4 and 8 of P.D. 902-4, as amended.
ll. State Policy and Purposes
Bar Question: What are the main purposes of the Securities Act
(now Securities Regulation Code)? (1998, 1949 Bar)
Answer: The purposes of the Securities Regulation Code are to:
1. establish a socially conscious, free market that regulates /se/f
2. encourage the widest participation of ownership in enterprises
3. enhance the democratization of wealth
4. promote the development of the capital market
5. protect rnvesfors
6. ensure full and fair disclosure about securities
7. minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create
distortions in the free rfiarket (Section 2).
lll. Securities Required to be Registered
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 Securities and Exchange Commission (Section 8).
The rule, however, is subject to exceptions with respect to exempt
securities (Section 9) and exempt transactions (Section 10) where
the requirement of registration shall not apply.
Bar Question: 1) Define securities. (1996 Bar)
Answer: SecurTies are shares, participation or interesfs ln a
corporation or in a commercial enterprise or profit-making venture
and evidenced by a certificate, contract, instrument, whether written
or electronic in character. lt includes:
(a) Shares of stock, bonds, debentures, notes, evidences of
indebtedness, assef-bac ked securities
SECURITIES REGULATION CODE 669
(b) lnvestment contracts, certificates of interest or participation in a
profit sharing agreement, certificates of deposit for a future
subscription
(c) Fractional undivided rnferesfs in oit, gas or other mineral rights
(d) Derivatives like option and warrants
(e) Certificafes of assrgrnments, certificates of participation, trust
ceftificates, voting trust certificates or similar instruments
0 Proprietary or nonproprietary membership certificates in
corporations
(g) Other instruments as may in the future be determined by the
Commission (Section 3. I )
(Note: Answered under R.A. 8799)
Securities set forth in Section 2 of the Revised Securities Act
includes commercial papers evidencing indebtedness of any person,
financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another. A
check is a commercial paper evidencing indebtedness of any person,
financial or non-financial entity (Gabionza vs. CA, 565 SCRA 3B).
Bar Question: X has the following plans:
a) organize the Tagaytay Country Club lncorporated;
b) let the club buy a 10 hectare land for P10 M which will be developed into a
sports and health club complete with an Olympic size swimming pool, tennis and
pelota courts, bowling lanes, pool rooms, etc.
c) Five of the ten million pesos needed to devetop the club wilt be
raised thru the sale of certificates of membership.
d) The certificate of membership shall give the purchaser the right to
use all club facilities, and shall be transferable. lt shall not, however,
give the purchaser any right in the income or assefs of the ctub. The
purchaser must also pay monthly dues.
X wants to know whether the certificate of membership is an
investment contract and hence, a security within the meaning of the
Revised Securities Act. What is your opinion? (1g1g Bar)
Answer: A certificate of membership whether or not the member
becomes owner of the assefs or profits of the club, association or
corporation is a "security" under the Securities Code.
Consequently, the issuer of these certificates will have to file an
application with the SEC in order to register the securities about to
be issued to the general public.
An investment contract is a contract, transaction or scheme
whereby a person invests his money in a common enterprise and is
670 SECURITIES REGULATION CODE
led to expect profits primarily from the efforts of others (Power vs.
sEc, 546 SCRA 567).
For an investment contract to exist, the following elements,
to as the Howey test, must concur: (1) a contract,
referred
transaction or scheme; (2) an investment of money; (3) investment is
made in a common enterprise; (4) expectation of profits; and (5)
profits arising primarily from the efforts of others (SEC vs. Prosperity,
664 SCRA 28).
Bar Question: Andante Realty, a marketing company that promotes
and facilitates sa/es of real property through leverage marketing,
so/icrts rnvesfors who are required to be a Busrness Center Owner
(BCO) by paying an enrollment fee of $250. The BCO ls then entitled
to recruit two other investors who pay $250 each. The BCO receives
$90 from the $250 paid by each of his recruits and is credited a
certain amount for payments made by investors through the initial
efforts of his Busrness Center. Once the accumulated amount
reaches $5,000, the same is used as down payment for the reat
propefty chosen by the BCO.
a. Define an "investment contract.
b. What procedure must be followed under the Securities
Regulation Code to authorize the sale or offer for sale or distribution
of an investment contract? (2%)
c. What are the-legal consequences of failure to follow this
procedure? (2010 Bar)
Answer: a) An investment contract is defined in the Amended
lmplementing Rules and Regulations of R.A. No. 8799 as a
"contract, transaction or scheme (collectively 'contract') whereby a
person rnvesfs his money in a common enterprise and is led to
expect profits primarily from the efforts of others.
b) An investment contract that is a security under R.A. No. 8799
must be registered with the Secunlies and Exchange Commission
before lfs sa/e or offer for sale or distribution to the public. The strict
regulation of securities is founded on the premise that the capital
markets depend on the investing public's level of confidence in the
sysfem.
c) Failure to register empowers fhe SEC to enjoin the sale or
distribution of the said investment contracf. (See Power vs. SEC
supra).
Bar Quesfion; Philippine Palaces Reatty (PPR) had been
representing dse/f as a registered broker of securities, duly
SECURITIES REGULATION CODE 671
authorized by the Securlles and Exchange Commission (SEC). On
October 6, 1996, PPR sold fo spouses Leon and Carina one (1)
timeshare of Palacio del Boracay for US$7,500.00. However, its
Registration Statement became effective only on February 11, 1998
after the SEC lssued a resolution declaring that PPR was authorized
to sell securities, including timeshares. On March 30, 1998, Leon
and Carina wrote PPR rescinding their purchase agreement and
demanding the refund of the amount they paid, because fhe Palacio
del Boracay timeshare was sold to them by PPR without the requisite
license or authority from the SEC. PPR contended that the grant of
the SEC authority had the effect of ratifying the purchase agreement
(with Leon and Carina) of October 6, 1996. ls the contention of PPR
correct? Explain. (2009 Bar)
Answeir: PPR's contention is incorrect. 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 SEC. Prior
to such sale, information on the securities sha// be made available to
each prospective purchaser (Section 8.1). The rule, however, is
subject to exceptions with respect to exempt securities (Section 9)
and exempt transactions (Section 10) where the requirement of
apply. The subject matter of the sale in this
registration shall not
case is neither an exempt security nor an exempt transaction.
Bar Question: One day Jerry Haw, doing busrness under the name
Starlight Enterprises, a so/e proprietorship, finds himself short on
cash and unable to pay hrs debfs as they fall due although he has
sufficient property to cover such debts. He asks you, as his retained
counsel, for advice on the following queries:
Should he sell profit pafticipation certificates to his ten (10)
brothers and sis/ers in order to raise cash for hrs busrness? Explain
your answer. (1990 Bar)
Answer: No, he cannot sell profit participation certificates to his 10
brothers and slsfers.
A profit participation certificate is a "security" as defined by the
Secunlies Regulations Code. The issuer (Jerry Haw) is required by
to apply for a license fo rssue said certificates and should register the
same with fhe SEC.
He can however procure the financial assrsfance from his
brothers and sisfers, through means other than the issue by him of
p rof it p a ft i ci p ati o n ce rtifi cate s.
(Note: Answered under R.A. 8799)
672 SECURITIES REGULATION CODE
Under B.P. 178, the rules and regulations promulgated by the
Commission with respect to registration of securities shall be subject
to the approval of the Monetary Board of the Central Bank of the
Philippines (now Bangko Sentral ng Pilipinas). No such approval is
necessary under R.A. 8799.
Bar Question: Assurne that Greater Manila Telephone and
Telegraph Company, lncorporated has 10,000 employees. lt has a
policy of encouraging stock ownership among its employees. /fs
Board of Directors intends to se// P2 M worth of common sfocks fo
either (a) its managerial employees only numbering about 1,000 or
(b) indiscriminately to all its 10,000 employees. ln case it decides to
sell to its managerial employees only, does it have to register its
securities? How about if the intended sa/e is to al its employees?
(1989 Bar)
Answer: The securities (sfocks) intended to be issued by the
corporation have to comply with the registration requirements of the
code.
While the issuer (Greater Manila Telephone and Telegraph
Company, lnc.) is a public utility corporation, the lssue of sfocks /o rfs
employees, whether to the 1,000 managerial employees or to all of
its 10,000 employees, ls an lssue pursuant to the duty of the
corporation to encourage stock ownership to its employees. The
issue of the stocks does not have for its purpose, compliance with
any provision of law, regulation or decree to broaden its capital base
or to finance a part of the capital investment through the sale of
sfocks, hence it is not an issue of securities emanating from an
exempt transaction.
The issuer (the corporation) will have to apply for the registration
of the stocks to be issued.
The Probleri: Some buslnessrnen with an available stafting capitat
totalling only P100,000.00 ask you to help organize a busrness firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassisfance by way
of direct investments and/or loans. Your professional assisfance ls
solicited on the following various questions that may arise:
Bar Question: Assume that you want to be a participant in the
business independently of your being its legal counsel and that more
investors are expected after the firm is formally organized. Explain
briefly with legal reasons.
SECURITIES REGULATION CODE 673
lf the firm is to engage in mining, what steps do you advise to be
taken before the firm offers its shares to the public? Cite appticable
laws. (1973 Bar)
Answer: lf the corporation is to engage in mining, where the shares
are considered as speculative, the corporation shoutd secure a
license from the Secun1ies and Exchange Commission and shoutd
register also with said office the sfocks it intends to sett to the public.
A. Exempt Securities
Bar Question: What are the c/asses of securities under the Revised
Securities Act? (1988 Bar)
Answer: The Securities Code divides securities into two c/asses,
which are:
a. Exempt securities, and securities emanating from exempt
transactions;
b. Non-exempt securities.
Non-exempt securities are those which may be offered for sale or
othentrise dlsposed of to the general public by registration with the
SEC done by the filing by the issuer, dealer or undenuriter of an
application complying with the provisions of the code.
The securities exempt from registration consist of those which are
called by the law as "exempt securities" like those lssued by the
government, by banks, by a receiver or by a trustee in bankruptcy or
any security or its derivatives the sale or transfer is under the
supervision of the OlC, HLURB or the BIR under Secfion g of the
Code; and securities lssued emanating from exempt transactions
under Section 10 of the Code.
(Note: Answered under R.A. 87gg)
Bar Question: What are the so-called exempt securities under the
Securities Regulation Code? (2009 Bar)
Answer: The securities exempt from registration consist of those
which are called by the law as "exempt securities" tike those issued
by the government, by banks, by a receiver or by a trustee in
bankruptcy or any security or its derivatives the sale or transfer is
under the superuision of the OlC, HLURB or the BIR under Section g
of the Code; and securities lssued emanating from exempt
transactions under Secfion 10 of the Code.
674 SECURITIES REGULATION CODE SECURITIES REGULATION CODE 67s

Bar Question: Name sx c/asses of securities exempt from
regulation or licensing for purposes of sale (1970, 1966 Bar)
Answer: Registration shatt not apply to any of the following exempt
secuntles:
1. Any security lssued 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 the Government
2. 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
3. Certificates issued by a receiver or by a trustee in
bankruptcy
4. Any security or its derivatives the sale or transfer of which is
under the superuision and regulation of the Office of the lnsurance
Commission, Housing and Land Use Regulatory Board, or Bureau of
lnternal Revenue
5. Any security lssued by a bank except its own shares of stock
(Section 9).
(Note: Answered under R.A. 8799)
B. Exempt Transactions
Bar Question: Girie'five rnstances of exempt transactions under the
Securlfles AcL (1970 Bar)
Answer: Registration shall not apply in any of the following exempt
transactions:
1. At any judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or bankruptcy
2. By or for the account of a pledge holder, or moftgagee or
any simitar tien holder selling or offering for sale or delivery in the
ordinary course of busrness and not for the purpose of avoiding the
provision of this Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt
3. An isotated transaction in which any security ls so/d, offered
for sale, subscription or delivery by the owner thereof, or by his
representative for the owner's account, such sa/e or offer for sale,
subscription or delivery not being made in the coursQ of repeated
and successive transactions of a like character by such owner, or on
his account by such representative and such owner or representative
not being the underwriter of such security
4. The distribution by a corporation of securities to its
stockholders or other security holders as a sfock dividend or other
distribution out of surplus
5. The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or othe,r
remuneration is paid or given in connection with the sale of such
capitalstock
6. The issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, where the entire mortgage
together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale
7. The issue and delivery of any security in exchange for any
other security of the same rssuer pursuant to a right of conversion
entitling the holder of the security surrendered in exchange to make
such conversion
8. Broker's transactions on any registered Exchange or other
trading market
9. Subscriptions for shares of the capital stock of a corporation
prior to the incorporation thereof or in pursuance of an increase in its
authorized capital stock
10. The exchange of securities by the lssuer with its existing
security holders excl usively
11. The sale of securities by an issuer to fewer than 20 persons
in the Philippines during any 12 month period
12. The sale of securities to any number of the following buyers:
a) Bank
b) Registered investment house
c) lnsurance company
d) Pension fund or retirement plan maintained by the Government of
the Philippines or any political subdivision thereof or managed by a
bank or other person authorized by BSP to engage in trust functions
e) lnvestment company
f) Such other person as fhe SEC may determine as qualified buyers
(Section 10)
(Note: Answered under R.A. 8799)
lV. Procedure for Registration of Securities
a. Filing of sworn registration statement with respect to the
securities
b. ln promulgating rules on the content of any registration
statement, the SEC may require the registration statement to contain
such information or document as it may prescribe, or dispense with
such requirement, or require additional information or documents
676 SECURITIES REGULATION CODE
c. The information required for registration shall include the
effects of the securities issue on ownership, on the mix of ownership,
especially foreign and local ownership
d. The registration statement shall be signed by the issuer's
executive officer, principal operating officer, principal finance officer,
comptroller, principal finance officer, corporate secretary or persons
performing similar functions accompanied by a verified resolution of
the board of the issuer corporation. The written consent of the expert
named as having certified any part of the registration statement or
document used shall also be filed. Where the registration statement
includes shares to be sold by selling shareholders, a written
certification by the selling shareholders on the accuracy of the
registrations statement contributed by the selling shareholders shall
also be filed.
e. The issuer pays.the fee based on the maximum aggregate
price the securities are offered
f. Publication of the notice of filing registration statement, at
issuer's expense, that a registration statement has been filed
g. Within 45 days after filing of registration statement, the SEC
shall declare the registration statement effective or rejected
h. Upon effectivity of the registration statement, the issuer shall
state under oath in every prospectus that all registration
requirements have been met and that all information are true and
correct. Any untrue statement or omission to state a material fact
shall constitute fraud {Section 1 2).
V. Prohibitions on Fraud, Manipulation and lnsider Trading
A. Manipulation of Security Prices
It shall be unlawful for any person to:
a. Create a false or misleading appearance of active trading in
any listed security traded in the Exchange (i) By effecting any
transaction in security which involves no change in the beneficial
ownership,'(ii) By entering an order for the purchase or sale of
security with knowledge that a simultaneous order of substantially
the same size, time and price, for the sale or purchase of any other
security, has or will be entered by or for the same or different parties,
(iii) By performing similar act where there is no change in beneficial
owner
b. a series of transactions in securities that (i) raises
Effect
their price to induce the purchase of security; (ii) depresses their
price to induce the sale of security; or (iii) creates active trading to
induce such purchase or sale through manipulative devices such as
SECURITIES REGULATION CODE 677
marking the close, painting the tape, squeezing the float, hype and
dump, and boiler room operation
Marking the close means buying and selling securities at close of
market in an effort to alter the closing price of security.
Painting the tape means engaging in a series of transactions that
are reported publicly to give impression of activity or price movement
in a security
Squeezing the float means taking advantage of a shortage of
securities in he market by controlling demand side and exploiting
market congestion during such shortages in a way as to create
artificial prices.
Hype and dump means engaging in buying activity at increasingly
higher prices and then selling securities in the market at higher
prices.
Boiler room operation means a well-organized operation where in
a room there would be well-trained salesmen operating over several
phones and using high pressure sales talk to get investors to invest
in security offered (Villanueva, Commercial Law Review, 2OO4
Edition, Pages B1 5-816).
c. Circulate or disseminate information that the price of security
listed in the Exchange will or is likely to rise or fall because of
manipulative market operations of any person conducted for the
purpose of raising or depressing the price of security for the purpose
of inducing the purchase or sale of security
d. Make false or misleading statement 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 the Exchange
e. Effect any series of transactions for the purchase or sale of
security traded in the Exchange for the purpose of pegging, fixing or
stabilizing the price of the security
No person shall employ any manipulative or deceptive device or
contrivance in the purchase or sale of security, nor shall short sale
be effected nor any stop-loss order be executed except according to
rules prescribed by the SEC.
The SEC, for public interest or the protection of i,nvestors, may
allow certain acts or transactions that may otherwise be prohibited
under this section (Section 24).
Bar Question: Bus Lines lnc. sold 1,000 common shares for
P100,000 to Andres, who was persuaded to buy the shares after
learning of three previous sa/es at comparable prices made by
Guillermo (a major Bus Lines, lnc. stockholder) to Mutuat tnc., a 100-
percent Filipino-owned investment corporation. Andres later came to
678 SECURITIES REGULATION CODE
know that Guillermo owned a maiority interest in Mutual, /nc. Discuss
briefly the possible ground, and feasibility thereof, for invalidation by
Andres of his acquisition. (1974 Bar)
Answer: The possible ground for invalidation is the provision of the
Securities Act (now Securities Regulations Code) against
manipulation of security prices.
However, the problem above lacks some details for the case to be
considered as a violation of this provision, such as (1) nothing is
mentioned that the sale of Bus Lines lnc. to Mutual lnc. was a
manipulation; (2) it is not stated that Andres was preiudiced by the
transaction; and (3) who persuaded Andres to buy is not mentioned
at all by the problem.
If manipulation can be shown in this case, the sa/e ls voidable at
the option of Andres, the buyer. lf he chooses to invalidate the
purchase, he is entitled to a return of his payment plus interest from
the organization itself and from other persons responsible for the
manipulation, who are solidarily liable with the corporation for such
return.
Bar Question: Under the provision of the Securifles Act (now
Securfties Regulation Code), when is "market iuggling" or "rigging"
prohibited? (1972 Bar)
Answer: "Market juglgling" or "rigging" is prohibited if its purpose ls fo
create a false or misleading appearance of active trading in any
security.
Bar Question.' Suppose "A" is the owner of several inactive
securities. To create an appearance of active trading or such
securities, "A" connives with "8" by which "A" will offer for sa/e some
of his securities and "B" will buy them at a certain fixed price, with the
understanding that although there would be an apparent sale, "A'will
retain the beneficialownership thereof. (2001 Bar)
a) ls the arrangement lawful?
b) lf the sale materializes, what is it called?
Answer: a) The arrangement is unlawful. The law provides that it
shall be unlawful for any person acting for himself or through a
dealer or broker, directly or indirectly to create a false or misleading
appearance of active trading in any listed security traded in an
Exchange any other trading market by effecting any transaction in
o.r
such security which involves no change in the beneficial ownership
SECURITIES REGULATION GODE 679
thereof (Section 24.1, R.A. 8799)
b) lt is commonly known as a urash sa/e
B. Short Sales
Bar Question: Define or explain. (2) short sates. (1961 Bar)
Answer: 2) Short sa/e - any sale of a security which the se//er does
not own or any sale which is consummated by the delivery of a
security borrowed by, or for the account of the seller (PSE Rules and
Regulations)
C. Fraudulent Transactions
It shall be unlawful for any person, in connection with the
purchase and sale of any security to:
a. Employ any device, scheme or artifice to defraud
b. Obtain money or property by means of any untrue statement
of a material fact or any omission to state a material fact necessary
in order to make the statements made not misleading
c. Engage in any act, transaction, practice or course of
business which operates or would operate as a fraud or deceit upon
any person (Section 26).
D. lnsider Trading
It shall be unlaMul 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 (i) the insider proves that the information was not gained from
such relationship; or (ii) if the other party selling to or buying from the
insider is identified, the inside proves (a) that he disclosed the
information to the other party; or (b) that he had reason to believe
that the other party othenrvise is also in possession of the
information. A purchase or sale of security of the issuer made by an
insider or his spouse or relative by affinity or consanguinity within
the second degree shall be presumed to have been effected while in
possession of material nonpublic information if transacted after such
information came into existence but prior to dissemination of such
information to the public and the lapse of a reasonable time for the
market to absorb such information.
It shall be unlawful for an insider to communicate material
nonpublic information about the issuer or the security to any person
680 SECURITIES REGULATION CODE
who becomes an insider, where the insider communicating the
information knows or has reason to believe that such person will
likely buy or sell a security of the issuer while in possession of such
information.
It shall be unlawful where a tender offer has been commenced or
is about to be commenced for (i) any person other than the tender
offeror who is in possession of material nonpublic information
relating to the tender offer, to buy or sell the security of the issuer
that are sought or to be sought by the tender offer; and (ii) any
tender offeror, those acting on its behalf, the issuer of the security
sought or to be sought by the tender offer, and any insider of the
issuer to communicate material nonpublic information relating to the
tender offer to any person (Section 27).
Bar Question: Grand Gas Corporation, a publicly listed company,
discovered after extensive drilling a rich deposit of natural gas along
the coast of Antique. For five (5) months, the company did not
drsc/ose the discovery so that is could quietly and cheaply acquire
neighboring land and secure mining rights to the land. Between the
discovery and its disclosure of the information to the Securities and
Exchange Commission, all the directors and key officers of the
company bought shares in the company at very low prices. After the
disclosure, the price of the shares went up. The directors and officers
sold their shares athuge profits.
a) What provision of the Securities Regulation Code (SRC) did they
violate? Explain.
b) Assuming that the employees of the establishment handling the
printing work of Grand Gas Corporation saw the exploration reports
which were mistakenly sent to their establishment together with other
materials to be printed. They too bought shares in the company at
low prices and later sold them at huge profits. Will they be liable for
violation of the SRC? Why?
Answer: a) The directors and officers violated Section 30 of the
Revlsed Securities AcL The said provision provides that it shall be
unlawful for an insider to sell or buy a security of the issuer, if he
knows a fact of special significance with respect to the issuer or the
security that is not generally available. "lnsider" means (1) the
issuer, (2) a director or officer of, or a person controlling, controlled
by, or under common control with, the issuer, (3) a person whose
relationship or former relationship to the lssuer gives or gave him
access to a fact of special significance about the issuer or the
security that is not generally available, or (4) a person who learns
SECURITIES REGULATION CODE 681
such a fact from any of the foregoing insiders as'defined in this
subsection, with knowledge that the person from whom he learns the
fact is such an insider (See SEC vs. lnterport, 567 SCRA 354).
b) Yes, they too are liable for they are also "insiders" in the eyes of
the law. The employees rn fhis case fallwithin the category "persons
whose relationship or former relationship to the issuer gives or gave
him access to a fact of special significance about the lssuer or the
security that is not generally available" (lbid.). l
Section 30 of the Revised Securities Act reads: Sec. 30. lnsider's
duty to disclose when trading. - (a) lt shall be unlawful for an insider
to sell or buy a security of the issuer, if he knows a fact of special
significance with respect to the issuer or the security that is not
generally available, unless (1) the insider proves that the fact is
generally available or (2) if the other party to the transaction (or his
agent) is identified, (a) the insider proves that the other party knows
it, or (b) that other party in fact knows it from the insider or otherwise.
(b) "lnside/'means (1) the issuer, (2) a director or officer of, or a
person controlling, controlled by, or under common control with, the
issuer, (3) a person whose relationship or former relationship to the
issuer gives or gave him access to a fact of special significance
about the issuer or the security that is not generally available, or (4)
a person who learns such a fact from any of the foregoing insiders as
defined in this subsection, with knowledge that the person from
whom he learns the fact is such an insider. (c) A fact is "of special
significance" if (a) in addition to being material it would be likely, on
being made generally available, to affect the market price of a
security to a significant extent, or (b) a reasonable person would
consider it especially important under the circumstances in
determining his course of action in the light of such factors as the
degree of its specificity, the extent of its difference from information
generally available previously, and its nature and reliability. (d) This
section shall apply to an insider as defined in subsection (b) (3).
hereof only to the extent that he knows of a fact of special
significance by virtue of his being an insider. The provision explains
in simple terms that the insider's misuse of nonpublic and
undisclosed information is the gravamen of illegal conduct. The
intent of the law is the protection of investors against fraud,
committed when an insider, using secret information, takes
advantage of an uninformed investor. lnsiders are obligated to
disclose material information to the other party or abstain from
trading the shares of his corporation. This duty to disclose or abstain
is based on two factors: first, the existence of a relationship giving
access, directly or indirectly, to information intended to be available
682 SECURITIES REGULATION CODE
only for a corporate purpose and not for the personal benefit of
anyone; and second, the inherent unfairness involved when a party
takes advantage of such information knowing it is unavailable to
those with whom he is dealing (lbid.).
ln the United States, the obligation to disclose or abstain has been
traditionally imposed on corporate "insiders," particularly officers,
directors, or controlling stockholders, but that definition has since
been expanded. The term "insiders" now includes persons whose
relationship or former relationship to the issuer gives or gave them
access to a fact of special significance about the issuer or the
security that is not generally available, and one who learns such a
fact from an insider knowing that the person from whom he learns
the fact is such an insider. lnsiders have the duty to disclose
material facts which are known to them by virtue of their position but
which are not known to persons with whom they deal and which, if
known, would affect their investment judgment. ln some cases,
however, there may be valid corporate reasons for the nondisclosure
of material information. Where such reasons exist, an issuer's
decision not to make any public disclosures is not ordinarily
considered as a violation of insider trading. At the same time, the
undisclosed information should not be improperly used for non-
corporate purposes, particularly to disadvantage other persons with
whom an insider might transact, and therefore the insider must
abstain from entering'into transactions involving such securities
(rbid.).
Bar Question: Under the Revised Securffies Act, it is unlawful for
an insider to sell or buy a security of the issuer if he knows a fact of
special significance with respect to the lssuer or the security that is
not generally available, without disclosing such fact to the other
party. \
a) What does the term "insider" mean as used in the Revised
Securlfles Act (now Securftles Regulations Code)?
b) When is a fact considered to be "of special significance"
under the same Act?
c) What are the liabilities of a person who violates the pertinent
provisions of the Revlsed Securtles Act regarding the unfair use of
inside information? (1995, 1994 Bar)
Answer: a) "lnsider" means (i) the issuer, (ii) a director or officer (or
person performing similar functions) of, or a person controlling the
a person whose relationship or former relationship to the
lssuer; (iii)
lssuer gives or gave him access to material information about the
SECURITIES REGULATION GODE 683
issuer or the security that is not generally available to the public; (iv)
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 lssuer or a security that is not
generally available to the public; or (v) a person who learns such
information by a communication from any of the foregoing rnsrders
(Section 3.8, R.A. 8799)
b) "A fact of special significance" is now referred to under R.A.
8799 as "Material Nonpublic" and information is eonsidered as such
if: (i) 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 (ii) 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 (Section 27.2, R.A.
8799)
c) An insider who.buys or se//s a security of the lssuer while in
possession of material information not generally available to the
public shall be liable in a suit brought by any investor who,
contemporaneously with the purchase or sale of securities that is the
subject of the violation, purchased or sold securities of the same
c/ass unless such insider, proves that such investor knew the
information or would have purchased or sold at the same price
regardless of disclosure of the information to him (Section 61.1, R.A.
8799)
An insider who unlawfully communicates material nonpublic
information about the lssuer or the security to any person shall be
jointly and severally liable under subsection 61.1 with and to the
same extent as the insider to whom the communication was directed
and who is liable under subsection 61.1 by reason of his purchase or
sale of a security (Section 61.2, R.A. 8799).
Bar Question: A, B, and C are directors of XYZ Mining Corporation
whose shares of sfocks are listed in the Manila Stock Exchange. On
February 1,1984, A, B, and C each purchased thru a stockholder
1,000 shares of XYZ Mining Corporation at the then market price of
P4.00 a share. On May 1, 1984, B left for abroad for a medical
check-up and a vacation.
At the board meeting held on May 15, 1984, at which B was
absent but which both A and C attended, the directors were apprised
of an important discovery in an area covered by one of XYZ Mining
Corporation mining /eases. After the discovery was duly publicized in
the morning dailies, the market price of XYZ Mining Corporation
684 SECURITIES REGULATION CODE
stafted to rise. When it hit P8.00 per share on May 28, 1984, A sold
allhis 1,000 shares.
Upon his return to Manila in the middte of June, 1984, B sold 500
shares at P8.00 per share, just enough to cover the cost of the 1,000
shares he acquired in February, believing that the stock woutd
continue to rise. The price, however, started to drop.
On August 15, 1984, when the price was P5.00 a share, C sotd
1,000 shares of XYZ Mining Corporation.
What are the rights of XYZ Mining Corporation against A, B, and
C? Explain your answer. (1984 Bar)
Answer: The transactions of buying and selling shares of stock of
XYZ Corporation by A, B, and C, directors of said corporation,
having been done by them, all in the ordinary course of business and
without taking advantage of any fact of special significance, only
known to them as directors, and unknown to the persons with whom
they are dealing, no right of any kind at all is acquired by XYZ
Corporation over whatever profits A, B, and C may have acquired
from their transacting with stocks of XYZ Corporation.
Under the Securities Code, it is unlawful for an insider (like a
director of a corporation) to buy and se// stocks of his cprporation, if
he knows of a fact of speciitl significance and not known by the party
he deals with.
While the important discovery of one of the /eases of XYZ
Corporation is a faet- of special significance, the discovery was
publicized in the morning dailies immediately.
The purchase on February 1, 1984 by directors A, B, and C of
stocks of XYZ Corporation occurred before the important discovery,
hence is not covered by the prohibition. The dispositions by A, B,
and C of their sfocks on May 28, 1984 (tor A), in the middle of June
1984 (for 500 shares of B), and on August 15, 1984 (for C), att took
ptacb after the important discovery had become of public knowtedge
by its publication in the morning dailies. Besrdes, B, being abroad
and absent from the May 15, 1984 board meeting when the
impoftant discovery was first revealed, had no advance knowledge of
said important discovery he could have taken advantage of. Hence,
no rights of any kind are acquired by XYZ Corporation against any of
its directors A, B, or C.
(Note: Answer valid under R.A. 8799)
Bar Question: Give a case where a person who is not an issuing
corporation, director or officer thereof, or a person controlling,
controlled bi or under common control with the issurng corporation,
ls a/so considered an "insider" (1994 Bar)
T SECURITIES REGULATION CODE 68s
Answer: lt may be a case where a person whose retationship or
former relationship to the issuer gives or gave him access to material
information about the issuer or the security that is not generatty
available to the public; or a government emptoyee, or director, or
officer of an exchange, clearing agency and or setf-regutatory
organization who has access to material information about an issuer
or a security that is not generally available to the public; or a person
who learns such information by a communication from any of the
foregoing lnsrders (Section 3.8, R.A. 8799)
Bar Question: Ms. OB was employed in MAS lnvestment Bank.
WlC, a medical drug company, retained the Bank fo assess whether
it is desirable to make a tender offer for DOp company, a drug
manufacturer. OB overheard in the course of her work the ptans of
WlC. By herself and thru assocrafes, she purchased DOp sfocks
available at the stock exchange priced at Php 20 per share. When
WIC's tender offer was announced, DOP sfocks jumped to php 30
per share. Thus OB earned a sizable profit.
ls OB liable for breach and misuse of confidential or insider
information gained from her employment? ls she also liable for
damages to sellers or buyers with whom she traded? lf so what is
the measure of such damages? Explain briefly (2004 Bar)
Answer: Yes, Ms. OB is liable for breach and misuse of confidential
or insider information because she is considered an "insider" under
Secfibn 3.8, RA 8799, being a person whose retationship to the
issuer (DOP) gave her access to material information about the
rssuer or the security that is not generally avaitabte to the public.
Ms.OB is a/so liable for any damages to any seller or buyer with
whom she might have had dealt with in an amount not exceeding
triple the amount of the transaction plus actual damages attorney,s
fees not exceeding thirty percentum (30%) of the award.
Vl. Protection of lnvestors
Bar Question: State at teast five features of the Revised Securities
Act intended to protect the investing public. (1958 Bar)
Answer: The fottowing features are intended to give protection to
the investing public are:
1. 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 (except Exempt Securities and
Exempt Transactions). Prior to such sa/e, information on the
686 SECURITIES REGULATION CODE
securities, in such form and with such substance as the Commission
may prescribe, shall be made available to each prospective
purchaser (Section 8. 1 ) ;
2. A trust fund is established and facilitated by the Commission
for the purpose of compensating investors for extraordinary /osses or
damages suffered by them due to busrness failure, or fraud or
mismanagement of the persons with whom they transact (Section
36.5);
3. Civil liabilities against persons have been expanded to cover
the following:
a) those who are controlling persons, aider and abettor (Section
51);
b) those who are responsible for false registration statement
(Section 56);
c) for circulation of prospecfuses, communications and reports
violating the Code (Section 57);
d) for fraud in connection with securities transactions (Section 58);
e) for manipulation of security prices (Section 59);
0 for commodity futures contracts and pre-need plans engaged into
in violation of any rule or regulation of the Commission (Section 60);
g) for insider trading in violation of the Code (Section 61).
4. The Code enumerates and prohibits certain acts which may
be detrimental to the public such as manipulation of prices, devices
and practices (Secfion 24,), fraudulent transactions (Section 26),
failure of an insider to'disclose when trading (Section 27), and the
regulation of option trading (Section 25), use of an unregistered
exchange [over-the-counter market] (Section 32), and violation of the
provisions on segregation of functions of members, brokers, dealers
(Section 34)
5. The application for registration of an issuer iudicially declared
insolvent, has violated any of the provisions of fhis Code or has been
or is engaged in fraudulent transactions, has made any false or
misleading representation of material facts in any prospectus
concerning the issuer, among others, is reiected by SEC, and if after
registration is allowed, the issuer is eventually found to be in any of
the above situations, the registration may be revoked (Section 13).
(Note: Answered under R.A. 8799)
. A. Tender Offer Rule
Any person or group of persons acting in concert who intends to
acquire at least 15% of equity security of a listed corporation or
equity security of a corporation with assets of at least P50 million and
having 200 stockholders or more with at least 100 shares each, or
SECURITIES REGULATION CODE
who intends to acquire at least 30% of equity over a 12 month period
shall make a tender offer to stockholders by filing with the SEC a
declaration to that effect, and furnish the issuer a statement
containing such information as may be prescribed. Such person or
group shall publish all requests or invitations for tender, or materials
making a tender offer or requesting or inviting letters of such
security.
It shall be unlaMul for any person to make any untrue statement
of a material fact or omit to state any material fact necessary to make
the statements made, not misleading, or to engage in any fraudulent,
deceptive, or manipulative acts or practices, in connection with any
tender offer or request or invitation for tender, or any solicitation of
security holders in opposition to or in favour of any offer, request or
invitation (Section 1 9).
A "tender offer" is a publicly announced intention by a person
acting alone or in concert with other persons to acquire equity
securities of a public company, i.e., one listed on an exchange,
among others. The term is also defined as "an offer by the acquiring
person to stockholders of a public company for them to tender their
shares therein on the terms specified in the offer" Tender offer is in
place to protect the interests of minority stockholders of a target
company against any scheme that dilutes the share value of their
investments. lt affords such minority shareholders the opportunity to
withdraw or exit from the company under reasonable terms, a
chance to sell their shares at the same price as those of the majority
stockholders (Osmefra vs. SSS, 533 SCRA 313).
Bar Question: A. What is a tender offer?
B. What instances is a tender offer required to be made? (2002
Ba0
Answer:
A. Tender offer means a publicly announced intention by a person
acting alone or in concert with other persons to acquire equity
securities of a public company (Rule 19.1, R.A. 8799)
B. 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:
(1) The person intends to acquire 15%o or more of the equity share
of a public company pursuant to an agreement made between or
among the person and one or more se//ers.
688 SECURITIES REGULATION CODE
(2) The person intends to acquire 30% or more of the equity shares
of a public company within a period of 12 months.
(3) The person intends to acquire shares that would result in
ownership of more than 50% of the equity shares of a public
company (Rule 19.1 [2-a]; lbid.).
Bar Question: Union Mines, lnc. has fofal assefs of P60 million with
210 stockholders holding at least 100 shares each. The company
has two principal stockholders, ABC which owns 60% of the shares
of stock, and XYZ which owns 17%o. ABC in turn is owned to the
extent of 21.31% by Acme, lnc.; 29.69% by Golden Boy, lnc.; 9% by
XYZ; and the rest by individual stockholders. None of the parties is a
publicly-listed company. XYZ now proposes to buy Acme's and
Golden Boy's shares in ABC, which would give it direct control of
ABC and indirect control of Union Mines. ls the proposed acquisition
by XYZ subject to the mandatory tender offer rule? Why or why not?
What is a tender offer and when is it mandatory? Q010 Bar)
Answer: No, the proposed acquisition by XYZ is not subject to the
mandatory tender offer rule. Tender offer means a publicly
announced intention by a person acting alone or in concert with other
persons to acquire equity securities of a public company (Rule 19.1,
R.A. 8799). ln the present case, none of the corporations involved is
a publicly-listed company;as such the rule on mandatory tender offer
does not apply.
B. Rules on Proxy Solicitation
Proxies must be issued and proxy solicitation must conform to
rules issued by the SEC.
Proxies must be in writing, signed by the stockholder or his
representative andfiled 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 one time.
No 6roker or dealer shall give any proxy, consent or authorization
to any person other than the customer, without the express written
authorization of such customer.
SECURITIES REGULATION CODE 689
A broker or dealer who holds or acquires the proxy for at least
10oh, or such percentage the SEC may prescribe, of the outstanding
share of the issuer shall submit a report identifying the beneficial
owner within 10 days after such acquisition, for its own account or
customer, to the issuer of the security, to the Exchange where the
security is traded, and to the SEC (Section 20).
C. Disclosure Rule
All companies listed or applying for listing are required to divulge
truthfully and accurately all material information about themselves
and the securities they sell, for the protection of the investing public,
under pain of administrative, civil and criminal sanctions. A fact is
material if it tends to induce or otherwise effect the sale or purchase
of its securities (PSE vs. CA, 281 SCRA 232).
Vll. Civil Liability
A. On Account of False Registration Statement
Any person acquiring a security the registration statement of
which contains an untrue statement or omits to state a material fact
required or necessary to make such statements not misleading, and
who suffers damage,. may sue and recover from the following
persons, unless he knew of such untrue statement or omission (i) the
issuer and any person who signed the registration statement; (ii)
every person who was a director of, or a partner in, the issuer at the
time of filing of the registration statement with respect to which his
liability is asserted; (iii) every person named in the registration
statement as being a director of, or partner in, the issuer and whose
written consent is filed with the registration statement; (iv) every
auditor named as having certified any financial statements used with
the registration statement or prospectus; (v) every person who has
been named as having prepared any part of the registration
statement, or having prepared any report used with the registration
statement; (vi) every selling shareholder who contributed to and
certified as to the accuracy of the registration statement; (vii) every
underwriter with respect to such security (Section 56).
Action must be brought within 2 years aftgr the discovery of the
untrue statement or omission (Section 62).
Bar Question: Philippine Chromite, lncorporated, after registration
of its securities, so/d P10 M worth of common sfocks to the public at
690 SECURITIES REGULATION CODE
P.01 per share. ln its registration statement, it alleged that it holds a
peiected mining claim on 100 hectares of chromite land in Botolan,
Zambales. X, a Botolan resident, bought P50,000.00 worth of stock
of the corporation from the stock exchange. After its public offering,
the value of the stock dropped to half its price. X made some
investigations and discovered that the mining claims of the
corporation had not been perfected at the time of the issuance of its
securities. The stock, however, rallied and after two years,
commanded a price of one and one half centavo per share. On its
third year, the company collapsed and its sfocks became totally
valueless. What is the remedy of X? (1989 Bar)
Answer: The registration in the problem contains a false statement
that the corporation holds a perfected mining claim on 100 hectares
of chromite land in Botolan, Zambales, when in truth, the mining
claims were not perfected at the time of the issuance of the
ceftificate.
X, the buyer of the stocks has fhe following remedies:
a. Civil damages against:
1. The person who signed the registration statements;
2. The directors of the corporation of the issuer at the time of the
filing of the registration statement;
3. The persons named in the statement as [eing or about to become directors;
4. The accountant or auditor who prepared the statement;
b. The damages caninclude exemplary damages rn cases of bad
faith, fraud, malevolence, or wantonness rn the violation of the
code;
c. The amount of damage however cannot exceed double the price
at which the security was offered plus exemplary damages if
any;
d. The above described persons are solidarily liable to the victim.
B. Arising in Connection with Prospectus, Communications
and Reports
Any person who (a) offers to sell or sells a security without
registration, or (b) offers to sell or sells a security by the use of any
means of transportation or communication, by means of a
prospectus or other communication, which includes an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements not misleading, shall be liable to
the person purchasing such security from him.
SECURITIES REGULATION CODE 69r
Any person who shall make any statement in any report, which
statement was false or misleading with respect to any material fact,
shall be liable to any person who, not knowing that such statement
was false and misleading, and relying upon such statements have
purchased or sold a security at a price which was affected by such
statement (Section 57).
Action must be brought within 2 years after the discovery of the
untrue statement or omission. lf the action is to enforce liability for
non-registration of securities, it must be brought within 2 years after
the violation upon which it is based, but in no event shall such action
be brought more than 5 years after the security was offered to the
public (in case of non-registration of security) and 5 years after sale
(in case of prospectus or other communication with untrue statement
or omitted facts) (Section 62).
C. For Fraud in Connection with Security Transactions
Any person who engages in any act violating tender offers, proxy
solicitation and fraudulent transactions shall be liable to any person
who purchases or sells any security, grants or refuses to grant any
proxy, consent or authorization, or accepts or declines an invitation
for tender of security Section 58).
Action must be brought within 2 years after discovery of facts
constituting the cause of action and within 5 years after such cause
of action accrued (Section 62).
D. For Manipulation of Security Prices
Any person who wilfully participates in any act of manipulation of
security prices shall be liable to pay any person who shall purchase
or sell any security at a price which was affected by such act
(Section 59).
Action must be brought within 2 years after discovery of facts
constituting the cause of action and within 5 years after such cause
of action accrued (Section 62).
E. With Respect to Commodity Futures Contracts and Pre-
need Plans
692 SECURITIES REGULATION CODE CHAPTER XIII 693

Any person who engages in any act violating commodity futures
contracts and pre-need plans shall be liable to any other person
sustaining damage as a result of such act (Section 60).
Action must be brought within 2 years after discovery of facts
constituting the cause of action and within 5 years after such cause
of action accrued (Section 62).
F. On Account of lnsider Trading
Any insider who violates his duty to disclose when trading, by
purchasing, or selling a security while is possession of material
information not generally available to the public, shall be liable to any
investor who purchased or sold securities of the same class unless
such insider proves that such investor knew the information or would
have purchased or sold at the same price regardless of disclosure of
information to him. lf the insider, or any person in the case of tender
offer, communicates material nonpublic information, he (and any
person in the case of tender offer) shall be jointly and severally liable
by reason of his purchase or sale of security (Section 61).
Action must be brought within 2 years after discovery of facts
constituting the cause of action and within 5 years after such cause
of action accrued (Section 62).
NEW CENTRAL BANK ACT
(Republic Act No. 7653)
l. State Policies
The State shall maintain a central monetary authority to function
and operate as an independent and accountable body corporate in
discharging its mandated responsibilities concerning money, banking
and credit. The central monetary authority, while being government-
owned, shall enjoy fiscal and administrative autonomy (Section 1;
Reyes vs. Rural Bank, 424 SCRA 135).
ll. Creation of the Bangko Sentral ng Pilipinas
There is established an independent central monetary authority
which shall be a body corporate known as the Bangko Sentral ng
Pilipinas (Bangko Sentral) (Section 2).
The Central Bank of the Philippines (now Bangko Sentral ng
Pilipinas), through the Monetary Board, is the government agency
charged with the responsibility of administering the monetary,
banking and credit system of the country and is granted the power of
supervision and examination over banks and non-bank financial
institutions performing quasi-banking functions of which savings and
loan associations form part of (Busuego vs. CA, 304 SCRA 473).

The Bangko Sentral ng Pilipinas is an administrative agency

exercising quasi-jud icial functions th rou gh its Monetary Board (UCPB
vs. Ganzon, 591 SCRA 321).

Bar Question: By what laws are banking institutions governed? Do

they apply to banks wholly owned by the government? (1969 BaQ

Answer: Banking institutions are governed by the following laws:

A. General Banking Laws
1. The General Banking Abt of 2000 (R.A. 8791)
2. New Central Bank Act (R.A. 765)
B. Special Bank Laws
1. New Rural Banks' Act (R.A. 7353)
2. Private Development Banks'Act (R.A. 4093)
3. Savings and Loan Association Act (R.A. 3779)
4. Thrift Banks' Act (R.4. 7906)
C. Other Laws Affecting Banks
1. Law on Secrecy of Bank Deposlfs (R.A. 1405)
694 NEW CENTRAL BANK ACT
2. Unclaimed Balances Law (Act 3936)
3. Philippine Deposit lnsurance Corporation Act (R.A. 3591)
The general banking laws above-mentioned are applicable to
government banks like the Development Bank of the Philippines
(Section 28 of its Chafter) and the Philippine National Bank (Section
26 of its Charte).
The Al-Amanah lslamic Bank is subject to all banking and
pertinent laws (Section 46 of its Charter).
The other laws affecting banks above-mentioned are applicable to
all banks, including those wholly owned by the government.
Bar Question: Tell us which is the institution in charge as flscal
agent, its official depository and financial advisor, of the Philippine
Government. (1956 Bar)
Answer: The Central Bank (now Bangko Sentral ng Pilipinas), the
powers and functions of which are exercised by the Monetary Board,
is the fiscal agent, depository and financial advisor, among others, of
the Ph ili pp ine G ove rn me nt.
(Nofe; Answered under R.A.7653)
lll. Responsibility and Primary Objective
Bar Question: What arg the responsibilities and primary objectives
of the Bangko Sentral ng Pilipinas? (1998, 1953 Bar)
Answer: The Bangko Sentral shatt provide policy directions in the
areas of money, banking and credit. lt shall have supervision over
the operations of banks and exercise such regulatgry powers as
provided in the New Central Bank Act and other pertinent laws over
the operations of finance companies and non-bank financial
institutions performing quasi-banking functions, referred to as quasi-
banks, and institutions pertorming similar functions. The primary
objective of the Bangko Sentral is to maintain price stability
conducive to a balanced and sustainable growth of the economy. lt
shall also promote and maintain monetary stability and convertibility
of the peso (See Secfion 3)
(Note: Answered under R.A. 7653)
The banks have failed to show that they are entitled to copies of
the Report of Examinations (ROEs). They can point to no provision
of law, no section in the procedures of the BSP that shows that the
BSP is required to give them copies of the ROEs. Sec. 28 of RA
7653, or the New Central Bank Act, which governs examinations of
NEW CENTRAL BANK ACT 695
banking institutions, provides that the ROE shall be submitted to the
MB; the bank examined is not mentioned as a recipient of the ROE
(BSP vs. Antonio-Valenzuela, 602 SCRA 698).
ln Koruga vs. Arcenas, 590 SCRA 49, it was held that the law
vests in the BSP the supervision over operations and activities of
banks under Section 25 of the New Central Bank Act. Specifically,
the BSP's supervisory and regulatory powers include (a) the
issuance of rules of conduct or the establishment of standards of
operation for uniform applications 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;
(b) the conduct of examination to determine compliance with laws
and regulations if the circumstances so warrant as determined by the
Monetary Board; (c) overseeing to ascertain that laws and
regulations are complied with; (d) regular investigation shall not be
oftener than once a year from last date of examination to determine
whether an institution is conducting its business on a safe and sound
basis. Provided, that the deficiencies/irregularities found by or
discovered by an audit shall be immediately addressed; (e) inquiring
into the solvency and liquidity of the institution; (f) enforcing prompt
corrective action (Section 4).
Bar Question: Mention the corporate powers of the Central Bank.
(1968, 1958 Bar)
Answer: The corporate powers of the Central Bank (now Bangko
Sentral ng Pilipinas) are:
a.to adopt, alter and use a corporate seal which shall be judicially
noticed;
b.to enter into contracts;
c.to lease or own real and personal property;
d.to sell or otherwise dispose of the same;
e.to sue and be sued;
f. to acquire and hold such assefs and incur such liabilities in
connection with its operations authorized by R.A. 7653, or as are
essentialto the proper conduct of such operation
g. to compromise, condone or release, in whole or in part, any claim
of or settled liability to the Bangko Sentral;
h. to do and perform any and all things that may be necessary to
carry out the purposes of R.A. 7653 (See Section 5).
(Note: Answered under R.A.7653)
696 NEW CENTRAL BANK ACT
lV. Monetary Board - Powep and Functions
The Monetary Board has the following powers:
a. lssue rules and regulations necessary to discharge its
responsibilities and exercise its powers
b. Direct the management, operations, and administration of the
Bangko Sentral, and reorganize its personnel
c. Establish a human resource management system
d. Adopt an annual budget for and authorize expenditures by the
Bangko Sentral
e. lndemnify its members and other officials performing supervision
and examination functions against all costs and expenses incurred in
connection with any civil or criminal action to which he may be made
a party by reason of the performance of his functions, unless
adjudged to be liable for negligence or misconduct (Section 15).
The actions of the MB under Secs. 29 and 30 of RA 7653 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 writs of preliminary injunction are precisely what
cannot be done under the law by preventing the MB from taking
action under either Sec. 29 or Sec. 30 of RA 7653.
Bar Question: By what body are the powers and functions of the
Central Bank exercised? Give the composition or membership of
that body. (1956 Bar)
Answer: The powers and functions of the Central Bank (now
Bangko Sentral ng Pilipinas) are exercised by the Monetary Board.
The Monetary Board is composed of seven (7) members
appointed by the President of the Philippines, as follows:
1. Governor of the Bangko Sentral- Chairman
2. A member of the Cabinet to be designated by the President of
the Philippines
3. Five (5) members who shall come from the private sector, all
of whom shall serve fulllime(See Section 6)
(Note: Answered under R.A.7653)
V. How the BSP Handles Banks in Distress
NEW CENTRAL BANK ACT 697
A. Conservatorship
Whenever, on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds that
a bank or 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 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. The conservatorship shall not exceed one year.
The conservatorship can be terminated by the Monetary Board on
the ground that the institution can continue to operate on its own and
the conservatorship is no longer necessary, or should the Monetary
Board, on the basis of the report of the conservator or of its own
findings, determine that the continuance in business would involve
probable loss to its depositors or creditors, in which case
receivership or liquidation shall apply (Section 29).
Conservatorship is a tool in restoring the viability of banks and
quasi-banks. lt consists of carrying out a package of administrative,
organizational, financial and/or other measures to address the state
of continuing inability or unwillingness to maintain a condition of
liquidity deemed adequate to protect the interest of depositors and
creditors (Banking Laws of the Philippines, The New Central Bank
Act, Annotated, BSP, Page 122).
There are three (3) requisites in placing an institution under
conservatorship:
(i) There must be a report submitted by the appropriate
supervising or examining department of the Bangko Sentral
(ii) There must be a finding by the Monetary Board based on the
report that a bank or 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
(iii) The Board of Directors must be informed in writing of the
order of the Monetary Board directing conservatorship (lbid., Page
123).
Liquidity is generally understood as the ability to pay off
obligations when they fall due. lt refers to that condition wherein a
698 NEW CENTRAL BANK ACT
high percentage of the assets can be quickly converted into cash
without involving any considerable loss by accepting sacrifice prices
(F.L. Garcia, Glen G. Munn's Encyclopedia of Banking and Finance
414) (rbid.).
Aside from the foregoing enumeration, the conservator may also
exercise other powers, as the Monetary Board shall determine,
based on the powers of the board of directors under the Corporation
Code (lbid., Page 124).
Section 2B-A merely gives the conservator power to revoke
contracts that are, under existing law, deemed to be defective, that
is, void, voidable, unenforceable or rescissible. Hence the
conservator merely takes the place of the board of directors. What
the said board cannot do - such as repudiating a contract validly
entered into under the doctrine of implied authority - the conservator
cannot do either. His power is not unilateral and he cannot simply
repudiate valid obligations of the bank (First vs. CA,252 SCRA 259).
The conservatorship shall not exceed one (1) year (Section 29).
. 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, or when, on the basis of
the report of the c6nservator or of its own findings, the Monetary
Board should determine that the continuance in business of the
institution would involve probable loss to its depositors or creditors,
in which case, the provisions on receivership and liquidation shall
apply (lbid.).
After the Monetary Board has declared a bank insolvent and
ordered it to cease operations, the Board becomes the trustee of its
assets for the equal benefit of all its creditors including depositors.
The assets of the insolvent banking institution are held in trust for the
equal benefit of all creditors and after its insolvency, one cannot
obtain an advantage or preference over another by an attachment,
execution or otherwise (Vda de Ballesteros vs. Rural, 636 SCRA
119; Central vs. Morfe, 63 SCRA 114).
A conservator appointed by Central Bank (now Bangko Sentral)
may take over a bank or quasi-bank without the need of first
declaring the bank insolvent (P.D. 1937 , June 27 , 1984).
Nonetheless, the designation of a conservator is not a precondition
to the designation of a receiver (Section 30).
NEW CENTRAL BANK ACT 699
A bank placed under conservatorship by the Central Bank retains
its juridical personality and is neither replaced or substituted by the
conservator (Central vs. CA, 208 SCRA 652).
The powers granted to the conservator of a bank, enormous and
extensive as they are, cannot extend to the post-facto repudiation of
perfected transactions, otherwise they would infringe against the
non-impairment clause of the Constitution (First vs. CA, 252 SCRA
259).
Bar Question: Distinguish between the role of a conseruator and
that of a receiver of a bank. (2006 Bar)
Answer: The conseruator is appointed to take charge of fhe assefs,
liabilities, and the management of a bank or a quasi-bank in a sfafe
of continuing inability, or unwillingness fo maintain a condition of
liquidity deemed adequate to protect the interest of depositors and
creditors. The duration of the appointment is for a period not
exceeding one (1) year.
On the other hand, the Receiver is appointed to manage a bank or
quasi-bank that is unable to pay'its liabilities in the ordinary course of
busrness, or has insufficient realizable assefs to meet its liabitities, or
cannot continue busrness without probable /osses fo ifs depos itors or
creditors; or has willfully violated a final cease and desist order,
involving acts or transactions amounting to fraud or a dissipation of
fhe assefs of the institution. The main purpose of the Receiver is to
recommend the rehabilitation or liquidation of the bank.
Bar Question: A 1}-year old commercial bank during the past year
committed the following actions: (1) it opened letters of credit for
banned items of importation; (2) for the second consecutive year,
there was a deficiency in their reserue requirements; (3) exceeded
substantially that which they normally grant in one year; (4) the total
liabilities of one private company to the bank exceed 15% of the
unimpaired capital and surplus of the bank; and (5) the bank afficers
delayed submission of reporls required by law to the Central Bank.
(a) Assuming that the above facts did not result in any liquidity
problem or did not affect the financial condition of the bank, what
administrative sanctions may be imposed by the Monetary Board?
(b) Assuming that the above acts were done in good faith but
they nevertheless resu/fed in financial difficulties to the bank and in
fact affected the country's monetary stability due to a run on the
bank, what administrative sanctions or remedies may be taken by
the Monetary Board? (1982 Bar)
 -T
NEW CENTRAL BANK ACT 701
700 NEW CENTRAL BANK ACT

Answer: A conservator may be appointed by the Monetary Board to

Answer: (a) The above enumerated acts of the offending bank
which ail constitute serlous violations of existing applicable banking
laws, and rules and regulations promulgated by the Monetary Board,
give to the Monetary Board the power to impose the following
ad mi n i strative sa nction s :
1.fines in amounts as may be determined by the Monetary
Board to be appropriate, but in no case to exceed Thirty thousand
pesos (P30,000.00) a day for each violation, taking into
consideration the attendant circumstances, such as the nature and
gravity of the viotation or irregularity and the size of the bank or
quasi-bank;
2. suspenslon of tending or foreign exchange operations or
authority to accept new deposits or make new investments;
3. suspension of lending or foreign exchange operations or
authority to accept new deposits or make new investments;
4. suspension of interbank clearing privileges; and/or
5. revocation of quasi-bank license.
lf the above viotations were done in good faith but nevertheless
resulted in the bank's financiat difficulties and in a bank-run, the
Monetary Board may appoint a conservator, not connected with the
Centrat Bank (now Bangko Sentral), to take charge of the assefs,
tiabitities, and management of the bank, collect all receivables,
exercise all powers necessary to preserve ifs assefs, reorganize the
management and restore its viability with power to overrule or revoke
the actions of the*previous management and board.
He sfays with the said bank until the Monetary Board is satisfi'ed
that the bank can continue to operate on its own, or the Board
decides that proceedings on insolvency should be undertaken in any
of which cases, the conservatorship is terminated.
take charge of the assefs, liabilities and management of the bank,
with power to reorganize it and revoke actions of the previous board
and management.
lf he reports that the viability of the bank has been restored then
the new bank management takes over; othenuise proceedings on
insolvency will be undertaken.
It, on the other hand, he reports that the continuance of
operations will prejudice the public, creditors and stockholders, the
bank may be liquidated under the procedure set by law.
B. Closure
Under the law, the sanction of closure could be imposed upon a
bank by the BSP even without notice and hearing. The apparent
lack of procedural due process would not result in the invalidity of
action by the MB. This "close now, hear later" scheme is grounded
on a practical and legal considerations to prevent unwarranted
dissipation of the bank's assets and as a valid exercise of police
power to protect the depositors, creditors, stockholders, and the
general public (BSP vs. Antonio-Valenzuela, 602 SCRA 698).
The respondent banks cannot prevent their closure by the MB.
Their remedy is a subsequent one, which will determine whether the
closure of the bank was attended by grave abuse of discretion.
Judicial review enters the picture only after the MB has taken action;
it cannot prevent such action by the MB. The threat of the imposition
of sanctions, even that of closure, does not violate their right to due
process, and cannot be the basis for a writ of preliminary injunction.
(rbid.).

Bar Question: The Superintendent of Bank arrived at the following It is well settled that the closure of a bank may be considered as
findings regarding the Alexis Commercial Bank: first, a corporation
an exercise of police power. The action of the MB on this matter is
owned by the bank's principal stockholder has total liabilities to the
final and executory. Such exercise may nonetheless be subject to
bank equivatent to 20% of the bank's unimpaired capital and surplus: judicial inquiry and can be set aside if found to be in excess of
second the real esfafe securities on the same corporation's loans jurisdiction or with such grave abuse of discretion as to amount to
were overualued as much as 100%: third, the said loans, in principal
lack or excess of jurisdiction (lbid.; Rural vs. Monetary, 516 SCRA
and interests, have been delinquent for three years: and fourth, B0%
154).
of this borrower corporation's assefs are in unsecured receivables
owing from affitiate corporations with no visible assefs. To safeguard
The "close now, hear later scheme' has already been justified as a
the interest of the bank's depositors, creditors and stockholders, and
measure for the protection of the public interest. Swift action is called
the pubtic, what steps or measures may be taken against the bank
for on the part of the BSP when it finds that a bank is in dire straits.
and by whom? (197a Bar)
Unless adequate and determined qfforts are taken by the
government against distressed and mismanaged banks, public faith
702 NEW CENTRAL BANK ACT
in the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the
bank depositors, creditors and stockholders who deserve the
protection of the government (PVBEA vs.. PVB' 189 SCRA 14; BSP
vs. Antonio-Valenzuela, supra).
The Monetary Board may summarily and without need for prior
hearing forbid the banking corporation from doing business in the
Philippines, for causes enumerated in Section 30 of the New Central
Bank Act; and appoint the PDIC as receiver of the bank. PDIC shall
immediately gather and take charge of all the assets and liabilities of
the closed bank and administer the same for the benefit of its
creditors. The summary nature of the procedure for the involuntary
closure of a bank is especially stressed in Section 30 of the New
Central Bank Act, which explicitly states that the actions of the
Monetary Board under the said Section or Section 29 shall be final
and executory, and may not be restrained or set aside by the court
except on a Petition for Certiorari filed by the stockholders of record
of the bank representing a majority of the capital stock. PDIC, as the
appointed receiver, shall file ex parte with the proper RTC, and
without requirement of prior notice or any other action, a petition for
assistance in the liquidation of the bank. The bank is not given the
option to undertake its own liquidation (ln re: Petition for Assistance
vs. PDIC,511 SCRA 123).
Bar Question: Maharlikang Pilipino Banking Corporation (MPBC)
operates several branches of Maharlikang Pilipino Rural Bank in
Eastern Visayas. Almost allthe branch managers are close relatives
of the members of the Board of Directors of the corporation. Many
undeserving relatives of the branch managers were granted loans. ln
time, the branches could not settle their obligations to depositors and
creditors.
Receiving repofts of these irregularities, the Supervising and
Examining Depaftment (SED) of the Monetary Board prepared a
detailed report (SED Report) specifying the facts and the chronology
of events relative to the problems that beset MPBC rural bank
branches. The report concluded that the bank branches were unable
to pay their liabilities as fhey fell due, and could not possibly continue
rn business without incurring substantiallosses fo lfs depositors and
creditors. a) May the Monetary Board order the closure of the MPBC
rural banks relying only on the SED Report, without need of an
examination? Explain. b) lt MPBC hires you as lawyer because the
Monetary Board has forbidden it from carrying on its business due fo
NEW CENTRAL BANK ACT 703
its imminent insolvency, what action willyou institute to question the
Monetary Board's order? Explain. (2009 Bar)
Answer: a) Yes, the Monetary Board may order the closure of the
MPBC rural banks. The Monetary Board may summarily and without
need for prior hearing, forbid the banking corporation from doing
busrness in the Philippines, for causes enumerated in Section 30 of
the New Central Bank Act; and appoint the PDIC as receiver of the
bank. PDIC shall immediately gather and take charge of all the
assefs and liabilities of the closed bank and administer the same for
the benefit of its creditors.
b) The summary nature of the procedure for the involuntary closure
of a bank is especially sfressed in Section 30 of the New Centrat
Bank Act, which explicitly states that the actions of the Monetary
Board under the said Section or Section 29 shall be final and
executory, and may not be restrained or sef aside by the court
except on a Petition for Certiorari filed by the stockholders of record
of the bank representing a majority of the capital stock. PDIC, as the
appointed receiver, shall file ex parte with the proper RTC, and
without iequirement of prior notice or any other action, a petition for
assisfance in the liquidation of the bank. The bank is not given the
option to undertake its own liquidation (See ln re: Petition for
Assisfance vs. PDIC,511 SCRA 123).
It is well-settled in both law and jurisprudence that the Central
Monetary Authority, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition
of any bank, and finding such condition to be one of insolvency, or
that its continuance in business would involve a probable loss to its
depositors or creditors, forbid bank or non-bank financial institution to
do business in the Philippines; and shall designate an official of the
BSP or other competent person as receiver to immediately take
charge of its assets and liabilities (Miranda vs. PDIC, 501 SCRA
288).
The power and authority of the Monetary Board to close banks
and liquidate them thereafter when public interest so requires is an
exercise of the police power of the State. Police power, however, is
subject to judicial inquiry. lt may not be exercised arbitrarily or
unreasonably and could be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust, or is tantamount to a
denial of due process and equal protection clauses of the
Constitution (lbid.).
704 NEW CENTRAL BANK ACT
Bar Question: Give the basic requirements to be complied with by
the Central Bank (Bangko Sentral ng Pilipinas) before the Monetary
Board can declare a bank insolvent, order it c/osed and forbid it from
doing further business in the Philippines. (1997 Bar)
Answer: The law is explicit as to the conditions prerequisite to the
action of the Monetary Board to forbid the institution to do buslness
in the Philippines and to appoint a receiver to immediately take
charge of the bank's assefs and liabilities. Ihese atre: (a) an
examination made by the examining department of the Central Bank;
(b) report by said department to the Monetary Board; and (c) prima
facie showing that its continuance rn busrness would involve
probable /oss fo lfs deposlfors or creditors (See Central vs. CA, 220
scRA 539).
The following are the mandatory requirements to be complied with
before a bank found to be insolvent can be ordered closed: (1) an
examination shall be conducted by the appropriate CB department
as to the condition of the bank (2) disclosed in the examination is
that the condition of the bank is one of insolvency (3) thd director
shall inform the Monetary Board in writing of such fact, and (4) the
Monetary Board shall find the statement of the department to be true
(Banco vs. Monetary, 204 SCRA 767).
The test of insolvency laid down in Section 29 of the Central Bank
Act (now Section 30 of the New Central Bank Act) is measured by
determining whether the realizable assets, realizable within a
reasonable time by a reasonably prudent person of a bank are less
than its liabilities, not considering capital stock and surplus which are
not liabilities for such purpose (lbid.).
lnsolvency, as defined under the last paragraph of Section 29, RA
265, as amended by PD 1007, was understood to mean the inability
of a banking institution to pay its liabilities as they fall due in the
usual and ordinary course of business (General vs. Central, 490
scRA 703).
Upon the issuance of an order of closure, the burden of proving
non-insolvency is upon the bank which challenges the validity of
such closure (lbid.).
Where the Central Bank, in the course of the rehabilitation of a
commerbial bank, extended loans and advances, but subsequently
the bank was forced by CB to close, and subsequently allowed to
NEW CENTRAL BANK ACT 705
reopen, interest due on said loans and advances cannot be collected
because it should be deemed read into every contract of deposit with
a bank that the obligation to pay interest on a deposit ceases from
the moment the operation of the bank is completely suspended by
the duly constituted authority the Central Bank (Overseas vs. CA,
105 SCRA 49).
A deposit in a distressed bank already forbidden by CB to do
business does not become a preferred credit simply because some
depositors went to court and were able to secure judgments against
the bank (Central vs. Morfe, 63 SCRA 114).
Where in the course of a bank's distressed condition, the Central
Bank gave financial assistance to restore the bank's viability, but that
inspite of these moves, the bank was closed by CB, and allowed to
reopen under a new name, the obligation by the bank to pay interest
on the CB advances remained suspended during the whole period of
its closure. Hence, the interest obligation starts to run from the date
of the reopening of the bank (Ramos vs. Central, 137 SCRA 685).
C. Receivership
The appointment of a receiver operates to suspend the authority
of the bank and of its directors and officers over its property and
effects, such authority being reposed in the receiver, and in this
respect, the receivership is equivalent to an injunction to restrain the
bank officers from,intermeddling with the property of the bank in any
way (Abacus vs. Manila,455 SCRA 97).
When a bank is prohibited from continuing to do business by the
Central Bank and a receiver is appointed for such bank, that bank
would not be able to do new business, i.e., to grant new loans or to
accept new deposits. However, the receiver of the bank is in fact
obliged to collect debts owing to the bank, which debts form part of
the assets of the bank. The receiver must assemble the assets and
pay the obligation of the bank under receivership, and take steps to
prevent dissipation of such assets. Accordingly, the receiver of the
bank is obliged to collect pre-existing debts due to the bank, and in
connection therewith, to foreclose mortgages securing such debts
(Larrobis vs. PVB, 440 SCRA 34). A borrower's obligation to pay
interest subsists even when the bank was placed under receivership.
The bank's receivership is an extraneous circumstance and has no
706 NEW CENTRAL BANK ACT
effect on the borrower's obligation (Aguilar vs. Manila, 502 SCRA
354).
Bar Question: True or Fatse. A bank under receivership can stitt
grant new loans and accept new deposits. (2009 Bar)
Answer: False. When a bank is placed under receivership, it would
only not be able to do new busrness, that is, to grant new loans or to
accept new deposits. However, the receiver of the bank is in fact
obliged to collect debts owing to the bank, which debts form part of
fhe assefs of the bank.
May a Monetary Board resolution placing a private bank under
receivership be annulled on the ground of lack of prior notice and
hearing? ls absence of prior notice and hearing conStitutive of acts
of arbitrariness and bad faith? Under Section 29 of R.A. 265 (now
RA 7653), the Central Bank (now Bangko Sentral), through the
Monetary Board, is vested with exclusive authority to assess,
evaluate and determine the condition of any bank, and finding such
condition to be one of insolvency, or that its continuance in business
would involve probable loss to its depositors or creditors, forbid the
bank or non-bank financial institution to do business in the
Philippines and shall designate an official of the CB or other
competent person as receiver to immediately take charge of its
assets and liabilitie3.' Prior notice and hearing is not required before
placement of bank under receivership. Section 29 does not
contemplate prior notice and hearing before a bank may be directed
to stop operation and placed under receivership. When par. 4 (now
par. 5 as amended by E.O. 289) provides for the filing of a case
within ten (10) days after the receiver takes charge of the assets of
the bank, it is unmistakable that the assailed actions should precede
the filing of the case. Plainly, the legislature could not have intended
to authorize "no prior notice and hearing" in the closure of the bank
and at the same time allow a suit to annul it on the basis of absence
thereof (Central vs. CA, 220 SCRA 539).
Judicial review is allowed to determine the presence of
arbitrariness and bad faith in placing bank under receivership.
Admittedly, the mere filing of a case for receivership by Central Bank
can trigger a bank run. The procedure prescribed in Section 29 is
truly designed to protect the interest of all concerned, and the
summary.closure pales in comparison to the protection afforded
public interest. At any rate, the bank is given full opportunity to prove
arbitrariness and bad faith in placing the bank under receivership, in
NEW CENTRAL BANK ACT 707
which event, the resolution may . be properly nullified and the
receivership lifted as the trial court may determine (lbid.).
Section 29 of R.A. 265 is a sound legislation promulgated in
accordance with the Constitution in the exercise of police power of
the state. Consequently, the absence of notice and hearing is not a
valid ground to annul a Monetqry Board resolution placing a bank
under receivership. The absence of prior notice and hearing cannot
be deemed acts of arbitrariness and bad faith. Thus, an MB
resolution placing a bank under receivership, or conservatorship for
that matter, may only be annulled afier a determination has been
made by the trial court that its issuance was tainted with arbitrariness
and bad faith. Until such determination is made, the status quo shall
be maintained, i.e., the bank shall continue to be under receivership.
Only stockholders (representing the majority of capital stock) of a
bank have personality to file action for annulment of Monetary Board
resolution placing bank under receivership
ln a nutshell, the insolvency of a bank and the consequent
appointment of a receiver restrict the bank's capacity to act,
especially in relation to its property (Villanueva vs. CA, 244 SCRA
3e5).
Where a bank became insolvent before its acceptance of an offer
came to the knowledge of the offeror, the offer became ineffective
(rbid.).
The prescriptive period to institute the foreclosure proceeding was
legally interrupted when the mortgagee-bank was placed under
receivership with express prohibition from transacting business, a
circumstance considered as force majeure (Provident vs. CA, 222
scRA 125).
The dissolution of a corporation by the SEC is a totally different
proceeding from the receivership and liquidation of a bank by the
BSP (ln re: Petition for Assistance vs. PDIC, 511 SCRA 123).
Bar Question: Due to growing financial difficulties, Z Bank was
unable to finish construction of its 21-storey building on a prime lot
located in Makati City. lnevitably, the Bangko Sentral ordered the
closure of Z Bank and consequently placed it under receivership. ln
a bid to save the bank's propefty investment, the President of Z Bank
entered into a financing agreement with a group of investors for the
708 NEW CENTRAL BANK ACT
completion of the construction of the 21-storey building in exchange
for a ten year lease and the exclusive option to purchase the
building. a) ls the act of the President valid? Why or why not? b)
Will a suit to enforce the exclusive right of the investors to purchase
the property prosper? Reason briefly. (2007 Bar)
Answer: a) The act of the President is not valid. Receivership is
equivalent to an injunction to restrain the bank officers from
'
intermeddling with the property of the bank in any way. Thus, the
appointment of a receiver operates fo suspend the authority of the
bank and of its directors and officers over its property and effects
(See Villanueva vs. CA, 244 SCRA 395).
b) No, the suit will not prosper. Since the act of the President was
invalid, the exclusive option to purchase the building granted to the
investors is likewise invalid. Also, since the Bank is under
receivership, the properties of the Bank may only be administered for
the benefit of its creditors.
Bar Question: ln case the condition of any bank is one of
insolvency, or that its continuance in buSrness would involve
probabte /oss fo its depositors or creditors, what may the Central
Bank do? (1968 Bar)
Answer: ln case*iithe condition of a bank is one of insolvency or that
its continuance busrness would involve probable /oss fo the
depositors, the Monetary Board may summarily and without need for
prior hearing forbid the institution from doing business rn fhe
Philippines and designate the Philippine Deposit lnsurance
Corporation as receiver of the banking institution and, for a quasi-
bank, any person of recognized competence in banking or finance
may be designated as receiver.
The receiver shall gather and take charge of all the assefs and
liabilities of the institution, administer the same for the benefit af its
creditors, and exercise the general powers of the receiver under the
Ru/es of Court, but shall not pay or commit any act that will involve
the transfer or disposition of any asset of the institution.
Within 90 days from takeover, the receiver shall determine
whether the institution may be rehabilitated or permifted to resume
busrness with safety fo ds depositors and creditors and the general
public.
lf the receiver determines that the institution cannot be
rehabilitated or resume busrness, the Monetary Board shall notify in
writing the Board of Directors of its findings and thereafter the
receiver shall:
NEW CENTRAL BANK ACT
(1) file ex-parte with the proper regional trial court a petition for
assisfance in the liquidation of the institution.
(2) convert fhe assefs of the institution to money, dispose of the
same to creditors and other pafties, in order to pay the debts of such
institution in accordance with the rules on concurrence and
preference of credit under the Civil Code of the Philippines.
. The actions of the Monetary Board shall be final and executory
and may not be restrained or sef aside by the court except on
petition for certiorari. The petition for certiorari may only be filed by
the stockholders of r'ecord representing the majority of the capital
stock within 10 days from receipt by the board of directors of the
o rd e r d i recti n g re ce i ve rsh ip, I iq u id atio n o r co n se rv ato rs h ip.
(Note: Answered under R.A.7653)
D. Liquidation
A liquidation proceeding is a single proceeding which consists of a
number of cases properly classified as 'claims'. lt is basically a two
phased proceeding. The first phase is concerned with the approval
or disapproval of claims. Upon the approval of the petition seeking
the assistance of the proper court in the liquidation of a closed entity,
all money claims against the bank are required to be filed with the
liquidation court. The phase may end with the declaration by the
liquidation court that the claim is not proper or without legal basis. On
the other hand, it may also end with the liquidation court allowing the
claim. ln the latter case, the claim shall be classified whether it is
ordinary or preferred; and thereafter included liquidated. ln either
case, the order allowing or disallowing a particular claim is final
order, and may be appealed by the aggrieved party. The second
phase involves the approval by the court of the distribution plan
prepared by the duly appointed liquidator. The distribution plan
specifies in detail the total amount for distribution to creditors whose
claims were earlier allowed. The order finally disposes the issue of
how much property is available for disposal (Vda. De Ballesteros vs.
Rural, 636 SCRA 119).
A liquidation proceeding is commenced by the filing of a single
petition by the Solicitor General with a court of competent jurisdiction
entitled 'Petition for Assistance in the liquidation of e.g, Pacific
Banking Corp". All claims against the insolvent are required to be
filed with the liquidation court. Each claim is heard separately. And
the Order issued relative to a particular claim applies only to said
claim (ln Re: Petition for Assistance vs. PDIC, 511 SCRA 123).
7lo NEW GENTRAL BANK ACT
The principal role of the court in a liquidation of a bank is to assiSt
the Central bank in determining claims of creditors against the bank
the role of the court is not strictly as a court of justice but as an
-agent to assist the Central Bank in determining the claims of
creditors (PCGG vs. Sandiganbayan, 455 SCRA 526).
lf the Central Bank (now Bangko Sentral) through its Monetary
Board has promised to rehabilitate the distressed bank, and the
stockholders on said assurance proceeded to mortgage their real'
properties to guarantee CB promised loan advances to said bank,
CB cannot renege on said promise, under the doctrine of promissory
estoppel, and cannot insist in its liquidation (Ramos vs. Central, 41
scRA 565).
As a general rule, if there is a judicial liquidation of an insolvent
bank, all claims against the bank should be filed in the liquidation
proceeding. After considering the circumstances attendant to the
case, the general rule should not be applied if to order the aggrieved
party to refile or relitigate its case before the litigation court would be
"an exercise in futility." Among the circumstances the Court
considered is the fact that the claimants were poor and the disputed
parcel of land was their only property, and the parties' claims and
defenses were property ventilated in and considered by the judicial
court (Cudiamat vs. Batangas, 614 SCRA 735).
Bar Question: Under what circumsfances may a bank be ordered
liquidated and what is the procedure prescribed by law for the
purpose? (1969 Bar)
Answer: The circumstances to justify the liquidation of a bank are:
a.
The condition of the bank is one of insolvency or that its
continuance'would involve probable /oss fo its depositors and
creditors.
b. A determination by the Monetary Board that the bank cannot
resume busrness with safety to its creditors.
The procedure prescribed by the law for the liquidation of a bank
rs as fol/ours;
a. The receiver files ex parte with the proper regional trial court a
petition for assistance in the liquidation of the institution;
b. The receiver converts fhe assefs of the institution to money;
c. The receiver shall pay the debts of the institution in accordance
with the rules on concurrence and preference of credit as provided in
the CivilCode;
NEW CENTRAL BANK ACT 7lt
d. The receiver shall pay fhe cosfs, fees and expenses of the
institution in the order of their legal priority;
e. The Bangko Sentral, if public interest so requires, awards to
an institution as approved by the Monetary Board the banking
franchise of a bank under liquidation to operate in the area where
said bank or its branches were previously operating
(Note: Answered under R.A. 7653)
Bar Question: Family Bank was placed under statutory receivership
and subsequeqtly ordered liquidated by the Central Bank (CB) (now
Bangko Sentral) due to fraud and irregularities in the lending
operations which rendered it insolvent. JudiCial proceedings for
liquidation were thereafter commenced by the Centrat Bank before
the RegionalTrial Court (RTC). Famity Bank opposed the petition
. Shortly thereafter, Family Bank filed in the same court a speciat
civil action against the CB seeking to enjoin and dismiss the
liquidation proceedings on the ground of grave abuse of discretion by
the CB. The court was poised to: (1) restrain the CB from closing
Family Bank, and (2) authorize Family Bank to withdraw money from
/s deposds during the pendency ofthe case.
lf you were the Judge, would you issue such orders? Why?
(1992 Bar)
Answer: lf I were the judge, I will not issue fhe two orders.
Respecting the move to restrain CB from closing Famity Bank, it witt
not prosper because three prerequlsifes should be present for the
restraining purpose: (1) the action should be filed by stockhotders of
record representing majority capital stock; (2) the petition should be
filed within 10 days from receipt by the board of directors of the order
directing receivership, liquidation or conseruatorship; and (3) the
action of the Monetary Board was in excess of jurisdiction or with
grave abuse of discretion amounting to tack of jurisdiction. No
mention is at all made of the existence of all these prerequisites in
the problem above. The court therefore shoutd not restrain the
closure made by CB of the bank.
Respecting withdrawal by the disfressed bank of ds deposds
during the pendency of the case, the same should tikewise not be
allowed by the court. Once the petition for asslsfan ce
in the
liquidation of the bank is filed in court, the receiver shail immediatety
gather all the assefs and liabilities of the bank, administer the same
for the benefit of lfs creditors, and except for
administrative
expenditures, it shall not pay or commit any act that wilt involve the
transfer or disposition of any asset of the institution, deposlfs
 J
712 NEW CENTRAL BANK ACT
included. Hence, the withdrawal of money from its deposlfs cannot
be allowed.
(Note: Answered under R.A. 7653)
Vl. How the BSP Handles Exchange Grisis
A. Legal Tender Power
All notes and coins issued by the Bangko Sentral shall be fully
guaranteed by the Government of the Republic of the Philippines
and shall be legal tender in the Philippines for all debts, both public
and private. Coins shall be legal tender in amounts not exceeding
P50.00 for denominations of 25 centavos and above, and in amounts
not exceeding P20.00 for denominations of ten centavos or less
(Section 52).
The Bangko Sentral have the sole authority to replace currency
unfit for circulation and retire or call in for replacement all types of
notes which are more than five years old and coins which are more
than 10 years old. The BSP shall withdraw from circulation and shall
demonetize all notes and coins which for any reason are unfit for
circulation and shall replace them by adequate notes and coins
except those mutilated in condition which shall also be withdrawn in
circulation without comp-ensation to bearer (Sections 56 and 57).
Bar Question: Can a creditor be compelled to accept payment all ir1
25 centavo Central Bank coins of a forty (P40.00) peso debt?
Explain briefly. (1975 Bar)
Answer: Yes. Under the Central Bank Law (now The New Central
Bank Law) coins with denominations from P.25 and above are
legal tender in amounts not exceeding Fifty pesos (P50.00), and in
amounts not exceeding Twenty pesos (P20.00) for denominations of
Ten centavos orless (Section 52, R.A.7653)
Bar Question: After many years of shopping in the Metro Manita
area, housewife HW has developed the sound habit of making cash
purchases only, none on credit. ln one shopping trip to Mega Mall,
she got the shock of her shopping life - for the first time, a sforeS
smarf sa/esgirl refused to accept her coins in payment for a purchase
worth not more than one hundred pesos. HW was paying seventy
pesos in 25-centavo coins and twenty flve pesos in l1-centavo
coins. Strange as it may seem, the salesgirl told HW that her coins
NEW CENTRAL BANK ACT 713
were not "legal tender". Do you agree with the salesgirl in respect of
her understanding of "legal tendef'? (2000 Bar)
Answer: The salesgirl is not correct that coins are not legal tender
because all notes and coins shall be legal tender for all debts, public
and private. However, coins shall be legal tender in amounts not
exceeding P50.00 pesos for denominations of twenty five centavos
and above, and in amounts not exceeding P20.00 pesos for
denominations of ten centavos orless (R.A.7653)
Therefore, the salesgirl can accept only up to P50.00 in 25-
centavo coins and up to P20.0.0 in 10-centavo coins.
B. Rate of Exchange
The Monetary Board shall control any expansion or contraction in
monetary aggregates which is prejudicial to the attainment or
maintenance of prior stability (Section 61).
The Bangko Sentral shall exercise its powers to preserve the
international value of the peso and maintain its convertibility into
other freely convertible currencies by maintaining international
reserves adequate to meet any foreseeable net demands on the
Bangko Sentral for foreign currencies (Sections 64 and 65).
The Bangko Sentral may buy and sell gold in any form in the
national currency at the prevailing international market price as
authorized by the Monetary Board. lt may also buy and sell foreign
notes and coins and documents and instruments employed for the
international transfer of funds from banking institutions operating in
the Philippines, the Government, its political subdivisions and
instrumentalities, foreign financial institutions, foreign governments
and their instrumentalities and other entities or persons which the
Monetary Board authorizes as foreign exchange dealers (Sections
69 and 70).
The Monetary Board shall determine the exchange rate policy of
the country, and the rates at which the Bangko Sentral shall buy and
sell spot exchange, and establish deviation limits from the effective
exchange rate. The Monetary Board shall also determine the rates
for other types of foreign currency transactions by the Bangko
Sentral (Section 74).
The New Central Bank Act merely authot'izes the Monetary
Board to license or to restrict or regulate foreign exchange; said act
714 NEW CENTRAL BANK ACT
does not authorize it to commandeer foreign exchange earned by
exporters and pay for it the price it fixes, later selling it to importers at
the same rate of purchase. The power to commandeer amounts to a
confiscatory power that may not be exercised by the Central Bank
(now Bangko Sentral) under its charter; such confiscatory measures
if justified by a monetary crisis can be adopted by the legislature
alone under its police power (Bacolod-Murcia vs. Central, 9 SCRA
268).
CHAPTER XIV 715
LAW ON SECRECY OF BANK DEPOSITS
(Republic Act 1405)
l. Purpose
On September 9, 1955, the Philippine Legislature enacted R.A.
No. 1405. lts rationale is to discourage private hoarding and
encourage people to deposit money in banks to be utilized in
authorized loans. lt happened that after World War ll, capital and
credit facilities for agricultural and industrial development in the
country were lacking. Rehabilitation of the banking system became
a major government thrust. However, private hoarding of money
was rampant because people feared government inquiry into their
bank deposits and bond investments for tax collection purposes.
Thus, even if the members of Congress at that time recognized the
possible danger of R.A. No. 1405, such as providing a climate
conducive to tax evasion, still, they passed the law with the belief
that the benefits accruing to the economy with the influx of deposits
and bond investments would counterbalance immeasurably the
losses of the Government from such tax evasion (Ejercito vs.
Sandiganbayan, 509 SCRA 190).
R.A. No. 1405 has two allied purposes. lt hopes to discourage
private hoarding and at the same time encourage the people to
deposit their money in banking institutions, so that it may be utilized
by way of authorized loans and thereby assist in economic
development. Owing to this piece of legislation, the confidentiality of
bank deposits remains to be a basic state policy in the Philippines.
Section 2 of the law institutionalized this policy by characterizing as
absolutely confidential in general all deposits of whatever nature with
banks and other financial institutions in the country (BSP vs. Go, 612
scRA 596).
ll. Prohibited Acts, Deposits Govered and Exceptions
Section 2 of the Law on Secrecy of Bank Deposits declares that
all bank 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, government official, bureau or office except:
(1) ln an examination made in the course of a special or general
examination of a bank that is specifically authorized by the Monetary
716 SECRECY OF BANK DEPOSITS LAW
Board after being satisfied that there is reasonable ground to believe
that a bank fraud or serious irregularity has been or is being
committed and that it is necessary to look into the deposit to
establish such fraud or irregularity
(2) ln an examination made by an independent auditor hired by
the bank to conduct its regular audit provided that the examination is
for audit purposes only and the results thereof shall be for the
exclusive use of the bank
(3) Upon written permission of the depositor
(4) ln cases of impeachment
(5) Upon order of a competent court in cases of bribery or
dereliction of duty of public officials
(6) ln cases where the money deposited or invested is the subject
matter of the litigation (Marquez vs. Desierto, 359 SCRA 772)
(7) ln cases of unexplained wealth under Section 8, R.A. No. 3019
as (lbid.)
(B) ln inquiry into bank deposits, trusts or investment funds, or
banking transactions when there is reasonable ground to believe that
they have been used in support or in furtherance of the December
1989 coup d'etat, under R.A.6832.
Subsequent statutory enactments have expanded the list of
exceptions to this policy yet the secrecy of bank deposits still lies as
the general rule, falling as it does within the legally recognized zones
of privacy. Therd 'is, in fact, much disfavor to construing these
primary and supplemental exceptions in a manner that would
authorize unbridled discretion, whether governmental or otherwise, in
utilizing these exceptions as authority for unwarranted inquiry into
bank accounts. lt is then perceivable that the present legal order is
obliged to conserve the absolutely confidential nature of bank
deposits (BSP vs. Go, supra).
ln any given jurisdiction where the right of privacy extends its
scope to include an individual's financial privacy rights and personal
financial matters, there is an intermediate or heightened scrutiny
given by courts and legislators to laws infringing such rights. Should
there be doubts in upholding the absolutely confidential nature of
bank deposits against affirming the authority to inquire into such
accounts, then such doubts must be resolved in favor of the former.
This attitude persists unless congress lifts its finger to reverse the
general state policy respecting the absolutely confidential nature of
bank deposits (lbid.).
SECRECY OF BANK DEPOSITS LAW 717
Bar Question: Under Republic Act No. 1405 (The Bank Secrecy
Law), bank deposifs are considered absolutely confidentiat and may
not be examined, inquired or looked into by any person, government
official, bureau or office.
What are the exceptions? (2006 Bar)
Answer: The exceptions to the Bank Secrecy Law are:
1. upon written permission of the depositor (Section 2);
2. in cases of impeachment (Section 2);
3. upon order of a competent court rn cases of (a) bribery, (b)
dereliction of duty of pubtic officials, or (c) where the money
deposited or invested is the subject matter of the litigation (Section
2);
4. upon order of a competent court rn cases of unexplained
wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act
(See PNB vs. Gancayco, 15 SCRA 91).
5. when the inquiry is conducted under the authority of the
Commissioner of lnternal Revenue into the bank accounts of the
'following: (a) a decedent in order to determine
his gross estate; (b)
any taxpayer who has filed an application for compromlse of his tax
liability on the ground of financial incapacity, which application is
accompanied by a waiver of his privilege under RA 1405 or under
other general or special laws (Section 6(F) RA 8424 or the Nationat
lnternal Revenue Code of 1997);
6. in the following cases under the Anti-Money Laundering Act of
2001 (RA 9160): (a) when a banking and other covered institutions
are required to report to the Anti-Money Laundering Council (AMLC)
any single, series or combination of transactions involving a total
amount ln excess of P4, Million (or an equivalent in foreign currency)
within 5 working days from occurrence thereof unless the
Supervising Authority concerned prescribes a longer period not to
exceed 19 working days (Section 9(c), RA 9160); (b) when the
AMLC inquires into or examines any particular deposit or investment
upon order of any competent court, when it has been established
that there is probable cause that deposits or investments involved
are in any way related to money laundering offense, except that no
couft order is required in the following casesi (1) kidnapping for
ransom; (2) unlavvful activities under Secfions 4, 5, 6, B, 9, 10, 12,
13, 14, 15, and 16 of the Comprehensive Dangerous Drugs Act of
2002; (3) hijacking and other violations under RA 6235; and (4)
destructive arson and murder including those perpetrated by
terrorists against non-combatants and similar targets (Section 1, RA
91 60);
718 SECRECY OF BANK DEPOSITS LAW
7.
under Secfion 26 of RA 7653 or the New Central bank Act of
1993, when the examination is conducted pursuant to the required
waiver of the secrecy of bank deposrts made by any Director, Officer
or Stockholder who together with his Related lnterest, contracts a
loan or any other form of financial accommodation;
8.. disclosure of certain information about bank deposits which
have been dormant for at least ten years, to the Treasurer of the
Philippines in a sworn statement, a copy of which ls posfed in the
bank premrses (Secflon 2, Unclaimed Balances Law [Act No.
3926,as amendedl)
Any exception to the rule of absolute confidentiality must be
specifically legislated. Section 2 of the Bank Secrecy Act itself
prescribes exceptions whereby these bank accounts may be
examined by "any person, government official, bureau or office";
namely when: (1) upon written permission of the depositor; (2) in
cases of impeachment; (3) the examination of bank accounts is upon
order of a competent court in cases of bribery or dereliction of duty of
public officials; and (4) the money deposited or invested is the
subject matter of the litigation. Section B of R.A. Act No. 3019, the
Anti-Graft and Corrupt Practices Act, has been recognized by this
Court as constituting an additional exception to the rule of absolute
confidentiality, and there have been other similar recognitions as
well. The AMLA also provides exceptions to the Bank Secrecy Act.
Under Section 11, the AMLC may inquire into a bank account upon
order of any competent court in cases of violation of the AMLA, it
having been established that there is probable cause that the
deposits or investments are related to unlawful activities as defined
in Section 3(i) of the law, or a money laundering offense under
Section 4 thereof. Further, in instances where there is probable
cause that the deposits or investments are related to kidnapping for
ransom, certain violations of the Comprehensive Dangerous Drugs
Act of 2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder, then there is no need for the AMLC to
obtain a court order before it could inquire into such accounts. lt
cannot be successfully argued that the proceedings relating to the
bank inquiry order under Section 11 of the AMLA is a "litigation"
encompassed in one of the exceptions to the Bank Secrecy Act
which is when "the money deposited or invested is the subject matter
of the litigation." The orientation of the bank inquiry order is simply to
serve as a provisional relief or remedy. As earlier stated, the
application for such does not entail a full-blown trial. Nevertheless,
just because the AMLA establishes additional exceptions to the Bank
Secrecy Act, it does not mean that the later law has dispensed with
SECRECY OF BANK DEPOSITS LAW 719
the general principle established in the older taw that "[a]ll deposits
of whatever nature with banks or banking institutions in the
Philippines x x x are hereby considered as of an absolutely
confidential nature." lndeed, by force of statute, all bank deposits are
absolutely confidential, and that nature is unaltered even by the
legislated exceptions referred to above. There is disfavor towards
construing these exceptions in such a manner that would authorize
unlimited discretion on the part of the government or of any party
seeking to enforce those exceptions and inquire into bank deposits
(Republic vs. Eugenio, 545 SCRA 384).
Foreign currency deposits authorized under Presidential Decree
No. 1034 are considered absolutely confidential in nature and may
not be inquired into (China vs. CA,511 SCRA 110). The tone
exception to the non-disclosure of foreign currency deposits under
R.A. 6426 is disclosure upon the written permission of the depositor.
R.A. 1405 and R.A. 6426 both support the confidentiality of bank
deposits. There is no conflict between them. R.A. 1405 covers all
bank deposits in the Philippines and no distinction was made
between domestic and foreign deposits. Thus, R.A. 1405 is
considered a law of general application. R.A. 6426 was intended to
encourage deposits from foreign lenders and investors. lt is a
special law designed especially for foreign currency deposits in the
Philippines. .A general law does not nullify a specific or special law
(GSIS vs. 15"'Division, 651 SCRA 661).
Bar Question: An employee of a large manufacturing firm earns a
salary which is just a bit more than what he needs for a comfortable
living. He is fhus able to still maintain a PI0,000.00 savings account,
a P20,000.00 checking account, a P30,000.00 money market
placement and a P40,000.00 trust fund in a medium-size commercial
bank.
State which of the above accounts are covered by the Law on
Secrecy of Bank Deposifs. (1'997 Bar)
Answer: Only the savings, checking, and the trust fund are covered
by the Law on Secrecy of Banking depostfs as they are included in
the explicit provision stating all deposits of whatever nature with
banks or banking institutions in the Philippines. The money market
placement is not covered because it is not deposited in the bank.
The contention that trust accounts are not covered by the term
"deposits," as used in R.A. 1405, by the mere fact that they do not
entail a creditor-debtor relationship between the trustor and the bank,
 SECRECY OF BANK DEPOSITS LAW
does not lie. An examination of the law shows that the term
"deposits" used therein is to be understood broadly and not limited
only to accounts which give rise to a creditor-debtor relationship
between the depositor and the bank. lf the money deposited under
an account may be used by banks for authorized loans to third
persons, then such account, regardless of whether it creates a
creditor-debtor relationship between the depositor and the bank, falls
under the category of accounts which the law precisely seeks to
protect for the purpose of boosting the economic devblopment of the
country. The Trust Agreement between the depositor and the bank
provides that the trust account covers "deposit, placement or
investment of funds" by the bank for and in behalf of the depositor.
The money deposited, was, therefore, intended not merely to remain
with the bank but to be invested by it elsewhere. To hold that this
type of account is not protected by R.A. 1405 would encourage
private hoarding of funds that could otherwise be invested by banks
in other ventures, contrary to the policy behind the law (Ejercito vs.
Sandiganbayan, 509 SCRA 190).
Bar Question: What are the rules on secrecy of bank deposlfs'under
existing law? (19718a)
Answer: The rules on secrecy of bank depos/s are: deposits in
banks, including government banks, cannot be inquired into by any
person except in ttft-following cases.' (1) Where the depositor
consenfs in writing; (2) impeachment cases; (3) by court order in
bribery or deretiction of duty cases against public officials; (4) deposit
rs subiect of litigation; and (5) in anti-graft cases.
(Note: The first four exceptions in the above answer are found in
R.A. 1405 [See Mellon vs. Magsino, 190 SCRA 633; Onate vs.
Abrogar, 230 SCRA 1811. The fifth exception was added, by
analogy, in PNB vs. Gancayco (15 SCRA9l). P.D. 1792 added two
more exceptions: (1) a general or special examination of a bank
authorized by the Monetary Board after being satisfied that a bank
fraud or serious irregularity has been or is being committed, and it is
necessary to look into the deposits to establish such fraud or
irregularity; and (2) when an examination is made by an independent
auditor hired by the bank to conduct its regular audit. R.A. 6832
allows inquiry into bank deposits, trusts or investment funds, or
banking transactions when there is reasonable ground to believe that
they have been used in support or in furtherance of the December
1989 coup dletat.)
SECRECY OF BANK DEPOSITS LAW 721
Section 2 of Republic Act No. 1405 provides that bank deposits
are "absolutely confidential xxx and, therefore, may not be
examined, inquired or looked into" except in those cases enumerated
therein, Section 8 of Republic Act No. 3019 (Anti-Graft Law) directs
in mandatory terms that bank deposits "shall be taken into
consideration in the enforcement of this section, notwithstanding any
provision of law to the contrary." The only conclusion possible is that
Section 8 of the Anti-Graft Law is intended to amend Section 2 of
Republic Act No. 1405 by providing an additional exception to the
rule against the disclosure of bank deposits (PNB vs. Gancayco,
supra).
ln a prosecution for unexplained wealth, the Sandiganbayan may
order the production of bank deposit records, not only of the wife and
children of the accused, but also of those of his friends and cronies
(Mellon vs. Magsino, supra).
The application of the law on Secrecy of Foreign Currency
Deposits depends on the extent of its justice. Eventually, if it is ruled
that the questioned Section 113 of the Central Bank Circular No. 960
which exempts from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever, is applicable to a foreign transient,
injustice would result especially to a citizen aggrieved by a foreign
guest. This would negate Article 10 of the New Civil Code which
provides that "in case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and
justice to prevail. When the statute is silent or ambiguous, this is one
of those fundamental solutions that would respond to the vehement
urge of conscience (Salvacion vs. Central, 278 SCRA 27).
Shielding or protecting the dollar deposit of a transient alien
depositor against injustice to a national and victim of a crime? This
situation calls for fairness against legal tyranny. The provisions of
Section 113 of CB Circular No. 960 and PD No. 1246, insofar as it
amends Section B of RA No. 6426 are held to be inapplicable to this
case because of its peculiar circumstances (lbid.).
Considering that a foreigner has been arrested by virtue of a
Mission Order from the Bureau of lmmigration and is actually a
fugitive from justice of the Hongkong courts, it appears that there is a
strong possibility that, if allowed to withdraw his foreign currency
deposits before final disposition of the case, he might thereafter flee
to another sanctuary (Breckenridge vs. CA, 232 SCRA xvii).
 SECRECY OF BANK DEPOSITS LAW
Bar Question: The Law on Secrecy of Bank Deposlfs provides that
all deposits of whatever nature with banks or banking institutions are
absolutely confidential in nature and may not be examined, inquired
or looked into by any person, government official, bureau or office.
However, the law provides exceptions in certain rnsfances. Which of
the following may not be among the exceptions:
1. /n cases of impeachment
2. /n cases involving bribery
3. /n cases involving BIR inquiry
4. /n cases of anti-graft and corrupt prdctices
5. /n cases where the money involved is the subject of litigation
Explain your answer or choice briefly. (2004 Bar)
Answer: Above items (1) impeachment, (2) those involving bribery,
and (5) those where money involved is the subject of litigation, are
express exceptions to the law (Section 2, R.A. 1405).
Above item (3) cases involving BIR injury, is an exception but only to
the extent that tfie Commissioner of lnternal Revenue can inquire
into the bank deposits of a decedent for the purpose of determining
his gross estate, and of taxpayer who has filed an application for
compromise of his tax liability by reason of financial incapacity
(Section 6[F], National lniernal Revenue Code).
Above item @) cases of anti-graft and corrupt practices, is an
additional exception. Cases of unexplained wealth are similar to
bribery or dereliction*cif duty hence both are excepted from the rule
against disclosure of bank deposit (See PNB vs. Gancayco, 15
scRA 91).
The crime of bribery and the overt acts constitutive of plunder are
crimes committed by public officers, and in either case the noble idea
that "a public office is a public trust and any person who enters upon
its discharge does so with the full knowledge that his life, so far as
relevant to his duty, is open to public scrutiny" applies with equal
force. Plunder being thus analogous to bribery, the exception to R.A.
1405 applicable in cases of bribery must also apply to cases of
plunder (Ejercito vs. Sandiganbayan, 509 SCRA 190).
The plunder case now pending with the Sandiganbayan
necessarily involves an inquiry into the whereabouts of the amount
purportedly acquired illegally by former President Joseph Estrada.
The subject matter of the litigation cannot be limited to bank
accounts under the name of President Estrada alone, but must
include those accounts to which the money purportedly acquired
illegally or a portion thereof was alleged to have been transferred.
SECRECY OF BANK DEPOSITS LAW 723
These accounts fall under this description and must thus be part of
the subject matter of the litigation (tbid.)
Bar Question: Socdrro received $10,A00.00 from a foreign bank
although she uyas entitled only to $1,000.00. tn an apparent plan to
conceal the erroneously sent amount, she opened a dottar account
with her local bank, deposited the $10,000.00, and issued four (4)
checks in the amount of $2,000.00, and one (1) check for g1,000.00,
each payable to different individuals who deposited the same in their
respective dollar accounts with different local banks.
The sender bank then brought a civil suit before the Regionat rriat
Court (RTC) for the recovery of the erroneously sent amount. ln the
course of the trial, the sender presented testimonies of bank officiats
to show that the funds were in fact, deposited in a bank by Socorro
and paid out to several persons, who participated in the concealment
and dissipation the amount that Socorro had erroneously received.
Socorro moved to strike out said testimonies from the record
invoking the law on secrecy of bank deposifs.
lf you were the Judge, would you issue an order to strike them
out? Why? (1992 Bar)
Answer: tf t were the judge, t witt not issue an order to strike out the
testimonies of bank officials showing that the questioned erroneous
dollar check was deposited by Socorro in that bank, and paid out to
severalpersons who participated in the dissipation and concealment
of the fraud.
While the Law on Secrecy of Bank Deposlfs provides that a
personb deposit with a bank may not be the subject of inquiry by any
other person, including the government, the law however provides
exceptions to that general rule. one of these exceptions is that the
deposit is the subject of the titigation. The matter involved in the
problem squarely falls on this exception and the testimony sought to
be struck out is involved in this exception.
what indeed'constitutes the subject matter in litigation in relation
to Section 2 of R.A. No. 1405 has been pointedly and ampty
addressed, where it has been noted that the inquiry into bank
deposits allowable under R.A. No. 1405 must be premised on the
fact that the money deposited in the account is itself the subject of
the action (BSP vs. Go,612 SCRA 596).
Bar Question: X, a public official, is charged with violation of the
Anti-Graft for unexplained wealth. The prosecuting officiat learned
that X maintains a safety deptosit box at tJnion Bank. May the
724 SECRECY OF BANK DEPOSITS LAW
officials of the bank be subpoenaed and examined about the safety
deposit box? (1990,1989, 1972, 1969 Bar)
Answer: The officials of lJnion Bank may be subpoenaed and
examined about the safety deposit box of X, who is accused of
unexplained wealth.
A deposit in the safety deposit box in a bank is a bank deposit.
The non-disclosure of deposits law (Rep. AcL 1405) includes all
deposils of whatever nature with banks and banking institutions.
The rule against non-disclosure provides an exception - where the
depositor is accused in an Anti-Graft case. As the exception
operates against X, his safety deposit box may be the subiect of
inquiry by the court trying him. Hence, the officials of said bank may
be subpoenaed forthe purpose.
Petitioner is fishing for information so it can determine the
culpability of private respondent and the amount of damages it can
recover from the latter. lt does not seek recovery of the very money
contained in the deposit. The subject matter of the dispute may be
the amount of P999,000.00 that petitioner seeks from private
respondent as a result of the latter's alleged failure to inform the
former of the discrepancy; but it is not the P999,000.00 deposited in
the drawer's account. By the terms of R.A. No. 1405, the money
deposited itself should be the subject matter of the litigation. That
petitioner feels a heed for such information in order to establish its
case against private respondent does not, by itself, warrant the
examination of the bank deposits. The necessity of the inquiry, or
the lack thereof, is immaterial since the case does not come under
any of the exceptions allowed by the Bank Deposits Secrecy Act
(Union vs. CA, 321 SCRA 563).
There is yet no pending litigation before any court of competent
authority. What is existing is an investigation by the Office of the
Ombudsman. ln short, what the Office of the Ombudsman would
wish to do is to fish for additional evidence to formally charge a
person with the Sandiganbayan. Clearly, there was no pending case
in court which would warrant the opening of the bank account for
inspection (Marquez vs. Desierto, 359 SCRA 772).
The accounts in question are U.S. dollar deposits. Consequently,
the applicable law is not Republic Act No. 1405, but Republic Act No.
6426, known as the Foreign Currency Deposit Act of the Philippines,
section 8 of which provides that all foreign currency deposits
authorized under this Act, as amended by Presidential Decree No.
SECRECY OF BANK DEPOSITS LAW 725
1035, as well as foreign currency deposits authorized under
Presidential Decree No. 1034, are hereby declared as and
considered of an absolutely confidential nature and, except, upon the
written permission of the depositor, in no instance shall such foreign
currency deposits be examined, inquired or looked into by any
person or legislative or any other entity whether public or private
(lntengan vs. CA, 377 SCRA 63).
The absolute confidentiality of foreign currency deposit account
provided for under R.A. 6426 does not apply to the foreign currency
deposit accounts of herein complainant, since the protection under
the said law is intended only for depositors who are non residents
and are not engaged in trade and business in the
Philippines (Estrada vs. Desierto, 445 SCRA 655).
Bar Question: Hi Yielding Corporation filed a complaint against five
of its officers for violation of Section 31 of the Corporation Code.
The corporation claims that the said officers were guilty of advancing
their personal interests to the prejudice of the corporation, and that
they were grossly negligent in handling its affairs. Aside from
documents and contracts, the corporation also submifted in evidence
records of the officers' U.S. Dollar deposlfs in several banks
overseas - Boston Bank, Bank of Switzerland, and Bank of New
York.
For their paft, the officers filed ie criminal complaint against the
directors of Hi Yielding Corporation for violation of Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act of the
Philippines. The officers alleged that their bank deposits were
illegally drsc/osed for want of a court order, and that such deposifs
were not even the subject of the case against them.
a.) Will the complaint filed against the directors of Hi Yielding
Corporation prosper?
b.) Was there a violation of the Secrecy of Bank Deposits Law
(RA 1405)? (2005 Bar)
Answer: a.) No, the complaint will not prosper. Absolute
confidentiality of foreign currency deposit account provided for under
R.A. 6426 does not apply to the foreign currency deposit accounts of
herein complainant, since the protection under the said law. is
intended only for deposffors who are non residents and are not
engaged in trade and business in the Philippines (See Esfrada rs.
Desierto, supra).
b.) There is no violation of Republic Act No. 1405. Under the said
law, a bank deposit may be disclosed if the same rs the subject
726 SECRECY OF BANK DEPOSITS LAW
matter of litigation. Also, the said law does not find application to
FCDU accounts such as in the case at bar.
Bar Question: Michael withdrew without authority funds of the
partnership in the amounts of P500,000.a0 and US$50,000.00 for
services he claims he rendered for the benefit of the partnership. He
deposited the P500,000.00 in his personal peso current account with
Prosperity Bank and the US$50,000.00 in his personal foreign
currency savings account with Eastern Bank.
The partnership instituted an action in court against Michael,
Prosperity Bank and Eastern Bank to compe.l Michael to return the
subject funds to the partnership and pending litigation to order both
banks to disallow any withdrawal from his accounts.
At the initial hearing of the case the court ordered Prosperity Bank
to produce the records of Michael's peso current account, and
Eastern Bank to produce the records of his foreign currency savings
account.
Can the court compel Prosperity Bank and Eastern Bank to
disc/ose the bank deposifs of Michael? Dlscuss fully. (1998,1995
Ba0
Answer: With respect to the peso current account of Michael, the
court, can compel Prosperity Bank to produce the records thereof
since there is already a case filed in court against Michael, where
the money deposit}d is the subject mafter of litigation.
With respect to the foreign currency savrngs account, the court
cannot compel Eastern Bank to produce the records thereof because
Secfion 8 of the Foreign Currency Deposit Act provides that all
foreign currency deposits are declared as and considered of an
absolutely confidential nature and, except, upon the written
permission of the depositor, in no instance shall such foreign
currency deposds be examined, inquired or looked into by any
person or legislative or any other entity whether public or private.
Bar Question: Miguel, a special cusfoms agent is charged before
the Ombudsman with having acquired propefty out of proportion to
his salary, in violation of the Anti-Graft and Corrupt Practices Act.
The Ombudsman issued a subpoena duces tecum to the Banco de
Cinco commanding its representative to furnish the Ombudsman
records of transactions by or in the name of Miguel, his wife and
children. A second subpoena was lssued expanding the first by
including the production of records of friends of Miguel in said bank
and in all its branches and extension offices, specifically naming
them.
SECRECY OF BANK DEPOSITS LAW 727
Miguel moved to quash the subpoenas arguing that they violate
the Law on Secrecy of Bank Deposifs. ln addition, he coniends that
the subpoenas are in the nature of "fishing expedition" or "general
warrants," and are constitutionally impermissible with respect to
private individuals who are not under investigation.
ls Miguel's contention tenable? (199a Bar)
Answer: No. Miguel's contention is not tenable. The Anti-Graft and
Corrupt Practices Act allows inquiry into the bank accounts of a
public officialfound to have acquired propefty out of proportion to his
salary. This inquiry extends to his spouse, ascendants,
descendants, relatives or any other person, otherwise, public officials
can simply place property in the possession or name of persons
other than their spouse or children (See Banco vs. Purisima, 161
scRA 576).
Bar Question: The taw (R.A. No. 6832) creating a commission To
Conduct A Thorough Fact Finding lnvestigation of the Failed Coup
D'Etat of December 1989, Recommended Measures to Prevent The
Occurrence of Similar Attempts At a ViOlent Seizure of Power and
For Other Purposes, provides that the commission may ask the
Monetary Board fo disclose information on and/or grant authority to
examine any bank deposrts, trust or investment funds, or banking
transactions in the name of and/or utilized by a person, natural or
judicial, under investigation by the Commission, in aryy bank or
banking institution in the Philippines, when the Commission has
reasonable ground to believe that said deposifs, trust or investment
funds, or banking transactions have been used in support or in
furtherance of the objectives of the said coup d'etat.
Does not the above provision violate the Law of Secrecy of Bank
Depos/s (R.A. No. 1405)? (1991 Bar)
Answer: No, the above provision is not a violation of the Law on
Secrecy of Bank Depos/s. The law included as exceptions, initially
four instances. One was added by the Anti-Graft and Corrupt
Practices Law, and two more by a special law.
a suit filed against a
ln the Anti-Graft and Corrupt Practices Law,
government official was enough reason for requiring his deposit in
banks to be the subject of scrutiny.
The law in the problem (R.A. 6832) should be considered as.an
additional exception to the rule against non-disclosure of bank
deposifs.
728 SECRECY OF BANK DEPOSITS LAW
Bar Question: Manosa, a newspaper columnist, while making a
deposit in a bank, overheard a pretty bank teller informing a co-
employee that Gigi, a well-known public official, has just a few
hundred pesos in her bank account and that her next check will in all
probability bounce. Manosa'wrote his information in his newspaper
column. Thus, Gigifiled a complaint against Manosa with the Office
of the City Fiscal of Manila for unlawfully disclosing information about
her bank account. Will the sard sutt prosper? Explain your answer.
(1990 Bar)
Answer: Under the General Banking Law, an officer, employee or
agent of a bank is prohibited from disclosing to any unauthorized
person any information relative to the funds or properties in the
custody of the bank belonging to a private person, whether natural
or juridical.
The possible offender here is a bank official, employee or agent.
Manosa the person who revealed the information does not fall under
this classification, hence, he is not liable under said law because the
suit will not prosper. Ihis ls without prejudice to Gigi filing another
complaint against Manosa, such as for the offense of libel.
Bar Question: Pending is a preliminary investigation for estafa filed
by Dario against his employee Noli. The estafa complaint alleges
that Noli deposited Dario's checks to his personal bank account
instead of Dario's accbunt as was the instruction. ls it proper for the
investigating fiscalto subpoena the production of Noli's bank deposit
ledger and related bank record? (1974 Bar)
Answer: No, the investigating fiscal may not issue a subpoena for
Noli's bank deposit ledger and related bank records. While the
money deposited is the subject of the litigation, only the court can
lssue fhe subpoena.
The Probtem: Some busrnessmen with an available starting capital
totalling only Pl00,000.00 ask you to help organizea business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialassrsfance by way
of direct investments and/or loans. Your professiona/ assisfance is
solicited on the following various questions that may arise:
Bar Question: Your firm has a deposit of P200,000.00 with the ABC
Bank. Your legal advice is sought on the following matters.
May a couti compel the bank to disclose details of your firm's
deposit in a case pending before it? Give legal reasons. (1973 Bar)
SECREGY OF BANK DEPOSITS LAW 729
Answer: No, the court, as a general rule, cannot compel the bank to
disclose details of the firm's deposit. The disclosure may however
prosper if it can be shown that the deposit is the subject of a litigation
in that court.
Bar Question: The City Fiscalof Manila required the Manila Banking
Corporation to produce at a hearing the records of the bank deposrts
of Alfredo Sanfos. The Manila Banking Corporation refused, alleging
that disclosure of bank deposits is prohibited by Republic Act No.
1405. Threatened with prosecution, the Corporation filed an action
for declaratory judgment. May the court compel the Manila Banking
Corporation fo disclose the bank deposds of Alfredo Santos?
Reason. (1976 Bar)
Answer: I submit that the court cannot compel Manila Banking
Corporation fo drsc/ose the bank deposds of Alfredo Sanfos before
the Manila City Fiscal.
Under Rep. AcL 1405, deposit in banks cannot be inquired into,
except in the cases provided therein. A City fi'sca/ ls not among
those authorized to inquire into these deposifs. There is no court
case yet involving a bribery or'deretiction case against a pubtic
official; neither is there a court case mentioned in the problem where
the deposit is the subject of a litigation, which are the only possrb/e
instances where a couri can authorize inquiry into the bank deposits
of a person like Alfredo Sanfos.
Bar Question: GP ls a suspec/ed jueteng lord who is rumored to be
enjoying police and military protection. The envy of many drug lords
who had not escaped the dragnet of the law, GP was summoned to
a hearing of the Committee on Racketeering and Other Syndicated
Crimes of the House of Representatives, which was conducting a
congressional investigation "in aid of legislation" on the involvement
of police and military personnel, and possibly even of local
government officials, in the illegal activities of suspecfed gambling
and drug lords. Subpoenaed to attend the investigation were officers
of certain identified banks with a directive to them to bring the
records and documents of bank deposits of individuals mentioned in
the subpoenas, among them GP. GP and the banks opposed the
production of the bank's records of deposits on the ground that no
such inquiry is allowed under the Law on Secrecy of Bank Depos/s
(R.4. 1405 as amended). ls the opposition of GP and the banks
valid? (2000 Bar)
730 SECRECY OF BANK DEPOSITS LAW
Answer: Yes, the opposition of GP and the banks is valid. The
instant case does not fall under any of the exceptions to R.A. 1405.
The Committee is not a competent court, nor is there a bribery case,
nor is the money the subject matter of litigation.
Bar Qutestion: Do you believe that the Superintendent of Banks of
the Central Bank has authority to examine the accounts of all
depositors of a bank even without their consent? (1969 Bar)
Answer: Yes, the Superintendent of Banks (now called the Director,
Department of Commercial and Savings Banks) has authority to
examine the accounts of all depositors of a bank even without their
consent.
The Superintendent of Banks and his Department are charged
under the Central Bank Law (now The New Central Bank Act) with
the supervision and examination.of some banking institutions, and in
the exercise of such functions can compel the production of all
books, records, and documenfs necessary in his iudgment to
determine the true condition of banks.
Bar Question: A bought some goods from a department store and
paid with his personal check. When the department store deposited
the check of A, the bank dishonored it. On the assumption that the
department store Aid not know who A was, the store manager
inquired from the check's drawee bank the name of the drawer of the
dishonored check. The drawee bank refused to disclose the name of
such drawer in view of R.A. 1405 which governs the Secrecy of Bank
Deposifs.
ls the bank justified in not divulging the name of the drawer to the
store manager? Why? (1977 Bar)
Answer: No, the bank is not justified in refusing to divulge the name
of the drawer to the store manager.
The Non-Disclosure of Deposifs Law (R.A. 1405) prohibits inquiry
into the accounts of a depositor - meaning securing of information as
to the amount of deposits a bank depositor may have in a particular
bank.
Ihis ,s not what the store manager is asking. He is not after the
amount of A's deposds in the drawee bank, but after the true name
of A as appearing in the check issued to said store manager,
information within the capacity of the bank to reveal.
SECRECY OF BANK DEPOSITS LAW 731
lll. Garnishment of Deposits, lncluding Foreign Deposits
It is clear from the discussions of the Senate and House
Conference Committee of the Bill which eventually became R.A.
1405 that the prohibition against the examination of, or inquiry into, a
bank deposit under said law does not preclude it from being
garnished to insure satisfaction of a judgment. lndeed there is no
real inquiry in such a case, and if the existence of the deposit is
disclosed, the disclosure is purely incidental to the execution
process. lt is hard to conceive that it was ever the intention of
Congress to enable debtors to evade payment of their just debts,
even if ordered by the court, through the expedience of converting
their assets into cash and depositing the same in a bank (China vs.
Ortega, 49 SCRA 355).
A writ of garnishment on bank deposit of a defendant is not an
inquiry into his deposit as contemplated by R.A. 1405. lt merely
required the bank cashier to inform the court whether or not said
debtor had a deposit in said bank only for the purpose of the
garnishment issued by it, so that the bank would hold the same intact
and not allow any withdrawal until further orders (pClB vs. CA, 193
scRA 452).
The prohibition against an examination of bank deposits does not
preclude garnishment in satisfaction of a judgment (BSp vs. Go,612
scRA 596).
Foreign currency deposits shall be exempt from attachment,
garnishment, or any other order or process of any court, legislative
body, government agency or any administrative body whatsoever
R.A. 6426).
Bar Question: Don Mariano was able to secure a favorable
judgment against Nesfor Pe for recovery of a sum of money and the
said judgment had become final and executory. Don Mariano was
informed by someone that Nestor Pe might have a sizeable savrngs
deposit with Xena Commercial Bank, of which Dona Mariano is a
stockholder, with one (1) share registered in his name. tmmediately,
he rushed to the Bank and demanded from the Bank Manager that
he be shown the Bank records fo see if Nestor pe reatty has such
savings deposit. When the Bank Manager refused and invoked
Republic Act No. 1405, Don Mariano cited his right as a stockholder
to inspect corporate records.
a. ls the stand of the Bank Manager legally tenable? Explain.
732 SECRECY OF BANK DEPOSITS LAW
b. What remedy is available to Don Mariano? Explain- (1985,
1983 Bar)
Answer: (a) The stand of the bank manager is legally tenable. A
stockhotder's right to the inspection of corporate books.will have to
bow to the provisions of the Law on Non-Disclosure of Deposlfs,
which provides as a general rule that the deposit account of a
depositor in a bank cannot be inquired upon, by any person, even
i ncl ud i ng the govern ment.
White that general rule admits of several exceptions, the case of
Don Mariano does not fall under any one of the exceptions.
(b) The remedy of Don Mariano is 'fo secure a writ of
garnishment from the court to be served on the bank.
The remedy is not an inquiry into the bank deposit but merely an
order to the bank to inform the court whether or not the defendant
has a deposit therein. The disclosure of the deposit is purely
incidental to the execution process, and it is ceftainly inconceivable
for the law to be used as a shield of debtors to evade payment of iust
obligations.
Bar Question: A secured a iudgment by default against B for a sum
of money. To satisfy the iudgment. A sought the garnishment of the
bank deposit of B with China Bank. The Bank refused. May the writ
of garnishment be issued against the bank deposit of B? (2001,
1988,1981 Bar)
Answer: Yes, the writ of garnishment may be issued against the
bank deposit of B. The garnishment is merely an order to a bank to
inform the court of the existence or non-existence of deposit so that
execution thereon could follow. lt is inconceivable for the law to be
used as a shield by debtors who to evade payment of their iust debts
would go through the motions of converting all of fherr assefs lnto
cash, deposit it in banks and prevent creditors from reaching the
deposited assets.
Hence, fhe issue of the writ of garnishment is proper in this case.
Bar Question: CDC maintained a savings account with CBank- On
orders of the MM Regional Trial Court, the Sheriff garnished P50,000
of his account, to satisfy the iudgment in favor of his creditor, MO.
CDC complained that the garnishment violated the Law on the
Secrecy of Bank Deposifs because the existence of his savrngs
account uvas dlsc/osed to the public.
/s CDC3 complaint meritorious or not? Reason briefly. (2004
Ba0
SECRECY OF BANK DEPOSITS LAW 733
Answer: CDC3 complaint is not meritorious. The prohibition against
examination of or inquiry into a bank deposit under Repubtic Act
1405 does not preclude its being garnished to insure satisfaction of a
judgment, for indegd, there is no real inquiry in such a case, and if
existence of the deposit r's disclosed, the disclosure is purely
incidental to the execution process.
Bar Question: "1", a branch manager of a bank, in response to a
notice of garnishment, dlsc/oses to the Sheriff of pasig the
outstanding deposit balance of judgment debtor Rey seviila with the
bank as of the date of receipt of the aforementioned garnishment
notice.
Rey Sevilla files a criminal complaint with damages against the
bank for disclosing his deposit balance without his consent in
violation of Republic Act No. 1405, which absotutety prohibits the
disclosure of any information concerning bank deposits.
Would the complaint prosper? (1980 Bar)
Answer: No, the complaint will not prosper. The garnishment is not
an inquiry into the bank deposit of the defendant but merely an order
to the bank cashier to inform the court whether or not the defendant
had a deposit therein which the bank coutd order to be hetd intact
until further orders.
The disclosure of the deposit is purely incidentat to the execution
process, and certainly it was never the intention of Congress to
enable debtors to evade payment of their just debts by converting
fheft assefs into cash and depositing them in banks.
The criminal complaint against the bank manager witt therefore
not prosper.
734 CHAPTER XV
I
THE GENERAL BANKING LAW OF 2OOO
(Republic Act 8791)
l. The General Banking Law of 2000
The General Banking Law of 2000 took effect on June 13, 2000. lt
repealed Republic Act 337 or the General Banking Law, except the
last paragraph of Section 34 and Section 94 of this Act. lt also
repealed Paragraph 8, Section 8 of Republic Act 3591 (Philippine
Deposit lnsurance Corporation Act), as amended by Republic Act
7400.
ll. Definition, Glassification and Powers of Banks
Banks shall refer to entities engaged in the lending of funds
obtained in the form or deposits (Section 3.1).
Bar Question: ABC lnvestment Corp. is engaged in the purchase
of accounts receivables or specifically, installment papers of
purchasers of cars and trucks. As a source of its funding, ABC
lnvestment Corp. sells ifs bonds from time to time to the public- The
proceeds of the sate of its bonds are utilized by the ABC lnvestment
Corp. in its financing operations. On the basis of those facts, the
Legat counset of th.e central Bank rendered an opinion to the effect
that ABC tnvestmeht Corp. is a banking institution within the purview
of Sec. 2 of the Gen. Banking Act.
/s fhis correct? Give reasons for your answer. (1978 Bar).
Answer: No, the opinion of the Legat Counsel of the Centrat Bank is
not correct because ABC lnvestment Corporation is not a bank.
For an institution to be a bank, it must regularly engage in the
busrness of receiving funds from the public in the form of deposits of
any kind, and in the business of lending said funds.
The funds utitized by ABC lnvestment Corporation in the problem,
which it lends out, do not come from deposds received from the
public, but from the sale of its bonds.
Banks are classified into:
A. Universal Banks
A universal bank shall have the authority to exercise:
(i) The powers authorized for a commercial bank
(ii) The powers of an investment house
GENERAL BANKING ACT 73s
(iii) The power to invest in non-allied enterprises (Section 23)
(iv) Ownership of up to 100% of the equity in a thrift bank, a rural
bank, or a financial allied enterprise (section 25) or non-financial
allied enterprise (Section 26)
(v) Ownership of up to 100% of the voting stock of only one (1)
other universal or commercial bank, if a publicly-listed universal
banks (Section 25).
Universal banks may invest in equities of companies primarily
engaged in the management of mutual funds but not the mutual
funds themselves. There is a greater moral hazard in allowing banks
to invest in mutual funds since the public may believe that the bank
is guaranteeing their investments (Banking Laws of the philippines,
The General Banking Law, Annotated, BSp, page 163).
B. Gommercial Banks
A commercial bank shall have, in addition to the general powers
incident to corporations, all such powers as may be necessary to
carry on the business of commercial banking, such as accepting
drafts and issuing letters of credit; discounting and negotiating
promissory notes, drafts, bills of exchange, and other evidences of
debt; accepting or creating demand deposits; receiving other types of
deposits and deposit substitutes; buying and selling loreign
exchange and gold or silver bullion; acquiring marketable bonds and
other debt securities; and extending credit, subject to such rules as
the Monetary Board may promulgate (Section 29); own up to 100%
of the equity of a thrift or rural bank (Section 31), or in a non-
financial allied enterprises, or accept or create demand deposits
(Section 33).
C. Thrift Banks
Thrift banks are established for the purpose of meeting the needs
for capital, personal and investment credit or medium- and long-term
loans for Filipino entrepreneurs and promoting agriculture and
industry and at the same time place within easy reach of the people
the medium- and longterm facilities at reasonable cost (R.A. 7906,
Section 2). Thrift banks include savings and mortgage banks, private
development banks, and stock savings and loan associations
organized under existing laws, and any banking corporation that may
be established for the following purposes:
(i) Accumulating the savings of depositors and investing
them, together with capital loans secured by bonds, mortgages in
736 GENERAL BANKING ACT
real estate and insured improvements thereon, chattel mortgage,
bonds and other forms of security or in loans for personal or
household finance, whether secured or unsecured, or in financing for
homebuilding and home development; in readily marketable and
debt securities; in commercial papers and accounts receivables,
drafts, bills of exchange, acceptances or notes arising out of
commercial transactions; or in such other investments and loans
which the Monetary Board may determine as necessary in the
furtherance of national economic objectives
(i) Providing short-term working capital, medium- and long
term financing, to businesses engaged in agriculture, services,
industry and housing
(ii) Providing diversified financial and allied services for its
chosen market and constituencies especially for small and medium
enterprises and individuals (lbid., Section 3).
D. Rural Banks
Rural banks are organized to promote comprehensive rural
development with the end view of attaining equitable distribution of
opportunities, income and wealth; a sustained increase in the
amount of goods and services produced by the nation for the benefit
of the people; and in expanding productivity as a key in raising the
quality of life for all especially the underprivileged (R.A. 7353,
Section 2).
The estabtishment of the rural banking system is designed to
make needed capital available and readily accessible in the rural
areas on reasonable terms.
Rural banks may extend loans and advances primarily for the
purpose of meeting the normal credit needs of farmers, fishermen or
farm families as well as cooperatives, merchants, private,and public
employees, accept savings and time deposits, act as correspondent
of other financial institutions, perform other banking services, and,
with Monetary Board approval, accept current or checking accounts,
act as depository of municipal, city or provincial funds, and invest in
allied undertakings (Banking Laws of The Philippines, The General
Banking Law, Annotated, BSP, Page 447).
E. Cooperative Banks
Cooperative banks are organized for the primary purpose of
providing a wide range of financial services to cooperatives and their
GENERAL BANKING ACT 737
members (Banking Laws of The Philippines, The General Banking
Law, Annotated, BSP, Page 30).
Cooperative bank shall primarily provide financial, banking and
credit services to cooperative organizations and their members. ln
addition to powers granted by the Philippine Cooperative Code of
2008 and other existing laws, any cooperative bank may perform any
or all of the banking services offered by other types of banks subject
to the prior approval of the Bangko Sentral (lbid.).
Cooperative banks may exercise the powers granted under the
Philippine Cooperative Code of 2008, perform any or all of the
banking services offered by other types of banks, with Bankgo
Sentral approval, perform any or all of the services offered by rural
banks (Banking Laws of The Philippines, The General Banking Law,
Annotated, BSP, Page 448).
F.lslamic Bank
The Al-Amanah lslamic lnvestment Bank of the Philippines
(AAllBP) is created with the primary purpose of promoting and
accelerating the socio-economic development of the Autonomous
Region by performing banking, financing and investment operations
and to establish and participate in agricultural, commercial and
industrial ventures based on the lslamic concept of banking (R.A.
6848, Section 3 (1990), Banking Laws of the Philippines, The
General Banking Law, Annotated, BSP, Page 31)
All business dealings and activities of the AAIIBP are subject to
the basic principles and rulings of lslamic Shari'a within the purview
of the aforementioned declared policy (lbid.).
The business of lslamic banking is one whose aims and
operations do not involve interest (riba) which is prohibited by lslamic
Shari'a principles (lbid. ).
The AAIIBP may open savings accounts for safekeeping and
custody with no participation in profit and losses, accept investment
account placements, provide financing with or without collateral,
undertake investments in transactions allowed by the lslamic Shari'a,
and act as official depository of the government or any of its
branches (lbid., Pages 451-452).
738 GENERAL BANKING ACT
G. Other Banks
Government banks refer to universal or commercial banks owned
or controlled by the national government such as the Development
Bank of the Philippines, the Land Bank of the Philippines and the Al-
Amanah lslamic lnvestment Bank (lbid., Pages 31-32).
lll. Quasi-Banks and Trust Entities
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 under R.A. 7653 (New
Central Bank Act) for purposes of relending or purchasing of
receivables and other obligations (R.A. 8791, Section 4).
Quasi-banking functions refer to borrowing of funds, for the
borrower's own account, through the issuance, endorsement or
acceptance of debt instruments of any kind other than deposits, or
through the issuance of participations, certificates of assignment, or
similar instrument with recourse, trust certificates, or of repurchase
agreements, from 20 or more lenders at any one time, for purposes
of relending or purchasing of receivables and other similar
obligations. Commercial, industrial and other non-financial
companies, which borrow funds through any of these means for the
limited purpose oT financing their own needs or the needs of their
agents or dealers, shall not be considered as performing quasi-
banking functions (Banking Laws of the Philippines, The General
Banking Law, Annotated, BSP, Page74).
A trust entity shall administer the funds or property under its
custody with the diligence that a prudent man would exercise in the
conduct of an enterprise of a like character and with similar aims
(Section 80).
A trust entity can act as trustee on any mortgage or bond and
accept and execute any trust consistent with law; act as guardian,
receiver, trustee, or depositary of the estate of any minor or other
incompetent person, and as receiver and depositary of any moneys
paid into court by parties to any legal proceedings and of property of
any kind which may be brought under the jurisdiction of the court; act
as executor of any will; act as administrator of the estate of any
deceased person; accept and execute any trust for the holding,
management and administration of any estate; and establish and
manage common trust funds (R.A. 8791, Section 83).
GENERAL BANKING ACT 739
lV. Diligence Required of Banks
It is well-seitled that banks are engaged in a business impressed
with public interest, and it is their duty to protect in return their many
clients and depositors who transact business with them. They have
the obligation to treat their client's account meticulously and with the
highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than
that of a good father of a family.
Every client should be treated equally by a banking institution
regardless of the amount of his deposits and each client has the right
to expect that every centavo be entrusts to a bank would be handled
with the same degree of care as the accounts of other clients.
Nevertheless, even if we assume that both parties were guilty of
negligent acts that led to the loss, petitioner will still emerge as the
party foremost liable in this case. ln instancds where both parties
are at fault, this Court has consistently applied the doctrine of last
clear chance in order to assign liability.
It is the bank which had the clear chance to stop the fraudulent
encashment of the subject checks had it exercised due diligence and
followed the proper and regular banking procedures in clearing
checks. The one who had a last clear opportunity to avoid the
impending harm but failed to do so is chargeable with the
consequences thereof.
Banking business is so impressed with public interest where the
trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a
high degree of diligence, if not the utmost diligence (BA vs. phil.
Racing, 594 SCRA 301).
V. Nature of Bank Funds and Bank Deposits
Bank deposits are in the nature of irregular deposits (Serrano vs.
Central, 96 SCRA 96). They are not true deposits but are simple
loans (Allied vs. Lim, 549 SCRA 504).
Simple loan or mutuum is a contract whereby one of the parties
delivers to another, money or other consumable thing and the latter
acquires ownership thereof upon the condition that the same amount
of the same kind and quality shall be paid. Banks where monies are
740 GENERAL BANKING ACT
GENERAL BANKING ACT 741

deposited are considered the owners (People vs. Puig, 563 SCRA
577). Time Deposit
Pre-termination None With penalty With penalty
The relationship between banks and creditors'is that of a debtor
and creditor, respectively. The depositor lends the bank money and Holding Period None Yes Yes
the bank agrees to pay the depositor on demand (Central vs. Withdrawal Allowed Withdrawal Allowed
Citytrust, 578 SCRA 27). amounts to pre- provided the
termination minimum
A certificate of deposit is a written acknowledgment by a bank or amount to earn
banker of the receipt of a sum of money on deposit which the bank the higher
or banker promises to pay to the depositor, to the order of the interest rate is
depositor, or to some other person or his order, whereby the relation maintained,
of debtor and creditor between the bank and the depositor is created. otherwise, the
A certificate of deposit is also defined as a receipt issued by a bank regular savings
for an interest-bearing time deposit coming due at a specified future interest rate will
date (Phil. Banking vs. Commissioner,5TT SCRA366). applv.
(rbid.).
Demand deposits are deposits subject to withdrawal either by
check or through the automated tellering machines which are A certificate of deposit drawing interest as used in section 1g0 of
otherwise known as current or checking accounts. The bank may or the 1977 NIRC refers to a time deposit account. The
may not pay interest on these accounts. distinct
features of a certificate of deposit from a technical point of view are
as follows:
Savings deposits are interest-bearing deposits which are a. Minimum deposit requirement
withdrawable either upon presentation of a properly accomplished b. Stated maturity period
withdrawal slip {ogether with the corresponding passbook or through c. lnterest rate is higher than the ordinary savings account
the automated tellering machines.
_ d. Not payable on sight or demand, but upon maturity or in case
of,pre-termination, prior notice is required
Negotiable Order of Withdrawal Accounts are interest-bearing e. Early withdrawal penalty in the form of partial loss or total loss
savings deposit which are withdrawable by means of Negotiable of interest in case of pre-termination (lbid.).
Orders of Withdrawal.
The ssDA is for depositors who maintain savings deposits with
Time deposits are interest-bearing deposits with specific maturity substantial average daily balance and which earn higher interest
dates and evidenced by certificates issued by the bank (Phil.
rates. The holding period of an ssDA floats at the option of the
Banking vs. Commissioner, 577 SCRA 366 depositor at 30,60,90, 120 days or more and for maintaining a
longer holding period, the depositor earns higher interest rates.
Savings Time Deposit SSDA There is no pre-termination of accounts in an ssDA because'the
Account account is simply reverted to an ordinary savings status in case of
lnterest rate Regular Higher interest Higher interest early or partial withdrawal or if the required holding period is not met.
savings rate rate The ssDA has all of the distinct features of a certificate of deposit
lnterest (rbid.).

Period None Fixed Term Fixed Term Petitioner's SSDA has the following features:
Evidenced by Passbook Certificate of Passbook 1. Although the money placed in the SSDA can be withdrawn
anytime, the money is subject to a holding period in order to earn a
742 GENERAL BANKING ACT
higher interest rate. Otherwise, in case of premature withdrawal, the
depositor will not earn the preferred interest ranging from B% or
higher but only the normal interest rate on regular savings deposit.
2. ln order to qualify for an SSDA, the depositor must place a
substantial amount of money of not less than P50,000. This amount
is even larger than what is needed to open a time deposit which is
P20,000. Aside from the substantial amount of money required, this
amount must be maintained within a certain period just like a time
deposit.
3. On the issue of penalty, in an SSDA, if the depositor withdraws
the money and the balance falls below the "minimum balance" of
P50,000, the interest is reduced. This condition is identical to that
imposed on a time deposit that is withdrawn before maturity (lbid.).
Based on these features, it is clear that the SSDA is a certificate of
deposit drawing interest subject to Documentary Stamp Tax even if it
is evidenced by a passbook and non-negotiable in character.
A document to be deemed a certificate of deposit requires no
specific form as long as there is some written memorandum that the
bank accepted a deposit of a sum of money from a depositor. What
is important and controlling is the nature or meaning conveyed by the
passbook and not the particular label or nomenclature attached to it,
inasmuch as substance, not form, is paramount (lbid.).
Moreover, a certificate of deposit may be payable to the depositor,
to the order of the depositol or to some other person or his order.
From the use of the conjunction or, instead of and, the negotiable
character of a certificate of deposit is immaterial in determining the
imposition of DST (lbid.).
Third parties with unverified claims against the deposit of another
do not have a better right over the deposit. The bank's contractual
relations are with the depositors, not with the third party (Serfino vs.
Far East, 683 SCRA 380).
Vl. Grant of Loans and Security Requirements
A. Ratio of Net Worth to Total Risk Assets
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 (Section 33).
GENERAL BANKING ACT 743
B. Single Borrower's Limit
The total amount of loans, credit accommodations and
guarantees that may be extended by a bank to any person,
partnership, association, corporation or other entity shall it no time
exceed 20% of the net worth of such bank section 35.1). The limit
now is 25%.
The 20% total amount of roans, credit accommodations and
guarantees may be increased by an additional 1oo/o of the net worth,
provided the additional liabilities of any borrower are adequately
secured by trust receipts, shipping documents, warehouse receipti
or other similar documents transferring or securin{ tifle covering
readily marketable non-perishable goods which hust be fully
covered by insurance (Section 35.2).
C. Restrictions on Bank Exposures to DOSRI
section 83 of RA 337, as weil as other banking raws adopting the
same prohibition, was enacted to ensure that loans by banks and
similar financial institutions to their own directors, officers, and
stockholders are above board. Banks were not created for the
benefit of their directors and officers. They cannot use the assets of
the bank for their own benefit, except as may be permitted by law.
congress has thus deemed it essential to impose restrictions on
borrowings by bank directors and officers in order to protect the
public, especially the depositors. Hence, when the law prohibits
directors and officers
_of banking institutions from becoming in any
manner an obligor of the bank (unless with the approval of the
board), the terms of the prohibition shall be the standards to be
applied to directors'transactions (Go vs. BSp, 604 SCRA 322).
The second paragraph of section g3, RA 337 does not provide for
an exception to a violation of the first paragraph thereof, nor does it
constitute as an element of the offense charged. Section g3 of RA
337 actually imposes three restrictions: approval, reportorial, and
ceiling requirements.
The approval requirement refers to the written approvar of the
majority of the bank's board of directors required before bank
directors and officers can in any manner be an obligor for money
borrowed from or loaned by the bank. Failure to securL the approval
renders the bank director or officer concerned liable for prosecution
744 GENERAL BANKING ACT
and, upon conviction, subjects him to the penalty provided in the
third sentence of first paragraph of Section 83.
The reportorial requirement mandates that any such approval
should be entered upon the records of the corporation, and a copy of
the entry be transmitted to the appropriate supervising department'
The reportorial requirement is addressed to the bank itself, which,
upon its failure to do so, subjects it to quo warranto proceedings
under Section 87 of RA 337.
The ceiling requirement regulates the amount of credit
accommodations that banks may extend to their directors or officers
by limiting these to an amount equivalent to the respective
outstanding deposits and book value of the paid-in capital
contribution in the bank. Again, this is a requirement directed at the
bank. ln this light, a prosecution for violation of the first paragraph of
Section 83 does not require an allegation that the loan exceeded the
legal limit. Even if the loan involved is below the legal limit, a written
approval by the majority of the bank's directors is still required;
otherwise, the bank director or officer who becomes an obligor of the
bank is liable. Compliance with the ceiling requirement does not
dispense with the approval requirement.
to observe the three requirements under
Evidently, the failure
Section 83 paves-the way for the prosecution of three different
offenses, each with its own set of elements. A successful indictment
for failing to comply with the approval requirement will not
necessitate proof that the other two were likewise not observed.
CHAPTER XVI
INTELLECTUAL PROPERTY CODE
(Republic Act 8293)
l. The lntellectual Property Gode of the Philippines
The lntellectual Property Code of the Philippines declares that the
State recognizes that an effective intellectual and industrial property
system is vital to the development of domestic and creative activity,
facilitates transfer of technology, attracts foreign investments, and
ensures market access for our products. The State shall also protect
and secure the exclusive rights of scientists and other gifted citizens
to their intellectual property. The use of intellectual property bears a
social function. The State shall prqmote the diffusion of knowledge
and information to the promotion of national development and
progress and the common good. The State shall streamline
administrative procedures of registering intellectual property rights, to
liberalize the registration on transfer of technology and to enhance
the enforcement of intellectual property rights in the country (Section
2).
The Code took effect on January 1, 19BB and by its express
provision, repealed the Trademark Law, the Patent Law, Articles 188
and 189 of the Revised Penal Code, the Decree on lntellectual
Property ahd the Decree on Compulsory Reprinting of Foreign
Textbooks. The Code was enacted to strengthen the intellectual and
industrial property system in the Philippines as mandated by the
country's accession to the Agreement Establishing the World Trade
Organization (WTO) (Mirpuri vs.CA, 318 SCRA 516).
There is no encroachment upon the powers of the IPO granted
under R.A. No. 8293. Section 5 thereof enumerates the functions of
the lPO. Nowhere in said provision does it state nor can it be
inferred that the law intended the IPO to have the exclusive authority
to protect or promote intellectual property rights in the Philippines.
On the contrary, paragraph (g) of said Section even provides that the
IPO shall coordinate with other government agencies and the private
sector efforts to formulate and implement plans and policies to
strengthen the protection of intellectual property rights in the country.
Clearly, R.A. No. 8293 recognizes that efforts to fully protect
intellectual property rights cannot be undertaken by the IPO alone.
Other agencies dealing with intellectual property rights are, therefore,
not precluded from issuing policies, guidelines and regulations to
give protection to such rights (Pest vs. Fertilizer, 516 SCRA 360).
746 INTELLECTUAL PROPERTY CODE
A. lntellectual Property Rights
The term intellectual property rights consists of:
a. Copyright and related rights
b. Trademarks and service rnarks
c. Geographic ind ications
d. lndustrial designs
e. Patents
f. LayoutDesigns (Topographies) of I ntegrated Circuits
g. Protection of Undisclosed lnformation (Section 4).
B. Differences between Copyrights, Trademarks and Patent
Bar Question: Differentiate between copyright, patent and
trademark. (1960 Bar)
Answer: A copyright, patent and trademark may be differentiated
from each other from the following viewpoints:
1. Subject Matter of the Right (See Kho vs. CA, 379 SCRA 410):
Copyright-literary or aftistic works which are intellectual creations;
Patent - technical solution of a problem which is new, involves an
inventive step and is industrially applicable;
Trademark -any sign to distinguish the goods or services of an
enterprise.
2. Where Right {eQistgred:
Copyright - The National Library
Patent and Trademark - lntellectual Property Office
3. Duration of Right:
Patent - 20 years from filing or priority date
Trademark - 10 years
Copyright - Generally up to 50 years after the death of the author
Trademark, copyright and patents are different intellectual
property rights that cannot be interchanged with one another. A
trademark is any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall
include a stamped or marked container of goods. ln relation thereto,
a trade name means the name or designation identifying or
distinguishing an enterprise. Meanwhile, the scope of a copyright is
confined to literary and artistic works which are original intellectual
creations in the literary and artistic domain protected from the
moment of creation. Patentable inventions, on the other hand, refer
to any technical solution of a problem in any field of human activity
INTELLECTUAL PROPERTY CODE 747
which is new, involves and inventive step, and is industrially
applicable (Ching vs. Salinas, 462 SCRA 241).
Obviously, there appeared to be some confusion regarding what
ought or ought not to be the proper subjects of copyrights, patents
and trademarks. These three legal rights are completely distinct and
separate from one another, and the protection afforded by one
cannot be used interchangeably to cover items or works that
exclusively pertain to the others (Pearl vs. Shoemart, 409 SCRA
231).
C. Technology Transfer Arrangements
Technology transfer arrangements refer to contracts or
agreements involving the transfer of systematic knowledge for the
manufacture of a product, the application of a process, or rendering
of a service including management contracts; and the transfer,
assignment or licensing of all forms of intellectual property. rights,
including licensing of computer software except computer software
developed for mass market (Section 4.2).
ll. Law on Patents
Bar Question: Define patent. (1958 Bar)
Answer: A patent is an exclusive right acquired over an invention,
to sell, use and make the same whether for commerce or industry
(Note: Answer still valid under RA 9293)
The primary purpose of the patent system is not the reward of
the individual but the advancement of the arts and sciences. The
function of a patent is to add to the sum of useful knowledge and one
of the purposes of the patent system is to encourage dissemination
of information concerning discoveries and inventions. This is a
matter which is properly within the competence of the Patent Office.
Since the Patent Office is an expert body preeminently qualified to
determine questions of patentability, its findings must be accepted if
they are consistent with the evidence, with doubts as to patentability
resolved in favor of the Patent Office (Manzano vs. CA, 278 SCRA
688)
(Note: Patent Office is now lntellectual Property Office)
To be able to effectively and legally preclude others from copying
and profiting from the invention, a patent is a primordial requirement.
748 INTELLECTUAL PROPERTY CODE
No patent, no protection. The ultimate goal of a patent system is to
bring new designs and technologies into the public domain through
disclosure. ldeas, once disclosed to the public without the protection
of a valid patent, are subject to appropriation without significant
restraint (Pearl vs. Shoemart, supra).
The law attempts to strike an ideal balance between the tivo
interests: The patent system thus embodies a carefully crafted
bargain for encouraging the creation and disclosure of new useful
and non-obvious advances in technology and design, in return for
the exclusive right to practice the invention for a number of years.
The inventor may keep his invention secret and reap its fruits
indefinitely. ln consideration of its disclosure and the consequent
benefit to. the community, the patent is granted. An exclusive
enjoyment is guaranteed him, but upon the expiration of that period,
the knowledge of the invention inures to the people who are thus
enabled to practice it and profit by its use (lbid.).
The patent law has a three-fold purpose: first, patent law seeks to
foster and reward invention; second, it promotes disclosures of
inventions to stimulate further innovation and to permit the public to
practice the invention once the patent expires; third, the stringent
requirements for patent protection seek to ensure that ideas in the
public domain remain.there for the free use of the public (lbid.).
A. Patentablelnventions
Bar Question: What inventions are patentable? (1967, 1958 Bar)
Answer: Any technical solution of a problem in any field of human
activity which is new, involves an inventive step and is industrially
applicable shall be patentable. lt may be, or may relate to, a
product, or process, or an improvement of any of the foregoing
(Section 21).
Bar Question: Cezar works in a car manufacturing company owned
by Joab. Cezar_is quite innovative and loves to tinker with things.
With the materials and parts of the car, he was able to invent a Eas-
saving device that will enable cars to consume /ess gas. Francis, a
co-worker, saw how Cezar created the device and likewise, came up
with a similar gadget, also using scrap materials and spare pafts of
the company. Thereafter, Francis filed a registration of his device
with the Bureau of Patents. Eighteen months later, Cezar filed his
INTELLECTUAL PROPERTY CODE 749
application for the registration of his device with the Bureau of
Patents.
a.) ls the gas-saving device patentable?
b.) Assuming that it is patentable, who is entitled to the patent?
What, if any, is the remedy of the losing pafty?
c.) Supposing Joab got wind of the inventions of his employees
and also laid claim to the patents, assefting that Cezar and Francis
were using his materials and company time in making the devices,
will his claim prevail over those of his employees? (2005 Bar)
Answer: a.) To be patentable, a device must be new, involves an
inventive step and is industrially applicable (Section 21). The gas-
saving device falls squarely within these paramefers, as such, the
sarne is patentabld.
b.) By virtue of his earlier filing, Francis is entiiled to the patent
(Sections 67 and 68). However, Cezar is not without recourse as he
may file a petition in court for the cancellation of the patent of Francis
on the ground that he is the true and actual inventor. He may also
accompany it with a prayer that he be subsfifuted as patentee:
c.) Joab's claim will not prevail since the invention of the gas-
saving device is not part of the regular duties of his employees
(Section 30).
Bar Question: X invented a method of improving the tenderness of
meat by injecting an enzyme solution into the live animat shorily
before slaughter. ls the invention patentable? (1988 Bar)
Answer: Yes, the invention is patentable because it is a process
directed towards improving a commercial product.
In general, an invention possessrng the following requisites may
be the subject of an application for a patent: novelty, inventive step,
and industrial applicability. Ihese requisites are present in the case
at bar.
(Note: Answered under RA 8293).
For an invention to be patentable,.it must possess the following:
novelty, originality, and precedence. A patent issued for powder
puffs which lack novelty may be cancelled and an action for
infringement thereof will not prosper (Maguan vs. CA, 146 SCRA
107).
B. Non-Patentable lnventions
The following shall be excluded from patent protection:
750 INTELLECTUAL PROPERTY CODE
a. Discoveries, scientific theories and mathematical methods;
b. Schemes, rules and methods of performing mental acts, playing
games or doing business, and programs for computer;
c. Methods for treatment of the human or animal body by surgery
or therapy and diagnostic methods practiced on the human or
animal body;
d. Plant varieties or animal breeds of essentially biological process
for the production of plants or animals;
e. Aesthetic creations;
f. Anything which is contrary to public order or morality (Section
22)
Bar Question: Dr. Nobet discovered a new method of treating
Atzheimer's involving a special method of diagnosing the disease,
treating it with a new medicine that has been discovered after long
experimentation and field testing, and novel mental isometric
exerclses. He comes to you for advice on how he can have his
discoveries protected. Can he legally protect his new method of
diagnosis, the new medicine, and the new method of treatment? lf
no,why? lfyes, how? (2010&ar)
Answer: Dr. Nobel's new discoveries are considered as methods for
treatment of the human body and diagnostic methods practiced on
humans, thus, the same cannot be protected under our intellectual
property laws for thei are expressly excluded by law.
Bar Question: X invented a bogus coin detector which can be used
exclusively on self-operating gambling devices othenuise known as
one-armed bandits. Can X apply for a patent?' Reasons. (1989 Bar)
Answer: The invention cannot be patented.
tf the only endeavor the invention can be made use of is on self-
operating gambling devices otherwise known as one'armed bandits,
the invention is not patentable being a criminal offense, hence
against public policy.
(Note: Answer still valid under RA 8293)
Bar Question; Supposing Albert Einstein were alive today and he
filed with the lntellectual Property Otfice (IPO) an application for his
theory of relativity expressed in the formula E=mc2. The IPO
disapproved Einstein's application on the ground that his theory of
relativity is not patentable.
ls the IPO's action correct? (2006 Bal
INTELLECTUAL PROPERTY CODE 751
Answer: Einstein's theory of relativity may be c/assffied as a
"scientific theory". Scientific theories and mathematicat methods are
not considered patentable subjects under the lntellectual property
Code.
C. Ownership of a Patent
1. Right to a Patent
The right to a patent belongs:
a) to the inventor, his heirs, or assigns (Section 28)
b) when two (2) or more persons have jointly made an invention - to
them jointly (lbid.)
c) if two
(2) or'more persons have made the invention separately
and independently of each other - to the person who filed an
application for such invention (Section 29)
d) where two or more applications are filed for the same invention -
to the applicant who has the earliest filing date or the earliest priority
date (lbid.).
Only the patentee or his successors-in-interest, assignees or
grantees may file an action for infringement. A person or entity who
has not been granted letters patent over an invention and has not
acquired any right or title thereto either as assignee or as licensee,
has no cause of action for infringement because the right to
maintain an infringement suit depends on the existence of the patent
(Creser vs. CA, 286 SCRA 13).
Anyone who has no patent over an invention but claims to have a
right or interest thereto can not file an action for declaratory judgment
or injunctive suit which is not recognized in this jurisdiction but he
can file a petition for cancellation of the patent within 3 years from
the publication of the patent with the Director of Patents (lbid.).
lf a person never secured a patent for his invention, he acquired
no patent rights which could have protected his invention, if in fact it
really was. And because he had no patent, he could not legally
prevent anyone from manufacturing or commercially using the
contraption. There can be no infringement of a patent until a patent
has been issued, since whatever right one has to the invention
covered by the patent arises alone from the grant of patent. An
inventor has no common law right to a monopoly of his invention.
He has the right to make use and vend his invention, but if he
voluntarily discloses it, such as by offering it for sale, the world is
752 INTELLECTUAL PROPERTY CODE
free to copy and use it with impunity. A patent, however, gives the
inventor the right to exclude all others. As a patentee, he has the
exclusive right of making, selling or using the invention (Pearl vs.
Shoemart, 409 SCRA 231).
Bar Question: Che-Che invented a device that can conveft
rainwater to automobile fuel. She asked Macon, a lawyer, fo assrst
in getting her invention patented. Macon suggesfed that they form a
corporation with.other friends and have the corporation apply for the
patent, 80% of the shares of stock thereof fo be subscribed by Che-
Che and 5% by Macon. The corporation was formed and the patent
application was filed. However, Che-che dies three months later of a
he'art attack.
Franco, the estranged husband of Che-che, contested the
application of the corporation and filed his own patent application as
the sole surviving heir of Che-che. Decide fhe issue with reasons.
(1990 Bar)
Answer: The claim of Franco will prosper.
The one who created the invention (Che-Che in the problem) is
the only one who can file an application for a patent over the
invention, the eventual grant of the patent being merely a
confirmation of the ownership of the inventor of the invention.
Macon, the lawyer, and other friends, who own a total of 20% of
the capital stock ofthe corporation, had nothing at all to do with the
invention. Neither is there any showing that Macon and his friends
acquired by assignment or other modes of transfer 20% of the
invention, from Che-Che. Ihls is therefore a case of a patent (or at
least 20%) being applied for by persons who had nothing at all to do
with the creation of the invention. The application filed by the
corporation is null and void.
Since Che-Che died, her heirs inherit the invention and the right to
apply for a patent for it. lf Franco (estranged husband of Che-Che)
is the only heir of Che-Che, then he can file an application for patent
for the invention of Che-Che .
(Note: Under RA 8293, a natural or juridical person may apply for
invention provided the inventor is identified. lf the applicant is not the
inventor, the Bureau of Patents of IPO shall require him to submit his
authority [Section 32.2])
The Problem: Some busrnessman with an available starting capital
totalling only Pl00,000.00 ask you to help organize a business firm.
Subject to legal limitations, they have future plans to invite alien
investors who are agreeable to rendering financialasslsfance by way
INTELLECTUAL PROPERTY CODE 753
of direct investments and/or /oans. Your professional assr'sfance ls
solicited on the following various guesfions that may arise:
Bar Question: Assume that your firm is engaged in the businesses
of canning, processing and manufacture of food products. ln a
highly competitive field, protective measures are to be taken by the
management. Your legal advice r.s soughf on the following:
Your firm is interested in a new machine just invented by Mr.
Flores. lt was discovered that an application for a patent had been
filed by Mr. Goco, a close friend of Mr. Flores, for the same
invention. What steps rnust you take? Why? (1973 Bar)
Answer: I will .advise Mr. Flores to go to the lntellectual Propefty
Office and ask that the application of Mr. Goco be denied because
the latter is not the inventor (See Section 28). I will ask Mr. Flores to
file a new patent application in respect of the same invention
2. First-to-File Rule
lf 2 or more persons have made the invention, separately and
independently of each other, the right to the patent shall belong to
the person who filed an application for such invention, or where 2 or
more applications are filed for the same invention, to the applicant
who has the earliest filing date or, the earliest priority date (Section
2s).
3. lnventions Created Pursuant to a Gommission
The person who commissions ,the work shall own the patent,
unless otherwise provided for in the contract.
ln case the employee made the invention in the course of his
employment contract, the patent shall belong to (a) the employee, if
the inventive activity is not a part of his regular employment duties
even if the employee uses the time, facilities and materials of the
employer, and (b) to the employer, if the invention is the result of the
performance of his regularly-assigned duties, unless there is an
agreement to the contrary (Section 30).
4. Right of Priority
An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty,
convention, or law affords similar privileges to Filipino citizens, shall
754 INTELLECTUAL PROPERTY CODE
be considered as filed as of the date of filing the foreign application,
provided that (a) the local application expressly claims priority; (b) it
is filed within 12 months from the date the earliest foreign application
was filed; and (c) a certified copy of the foreign application is filed
within 6 months from the date of filing in the Philippines (Section 31).
D. Grounds for Gancellation of Patents
Any interested person may petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the following grounds:
a. That the patent is invalid (Section 8'1);
b. That what is claimed as the invention is not new or patentable;
c. That the patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out by any person
skilled in the art; or
d. That the patent is contrary to public order or morality (Section 61).
Bar Question: "1" has invented a certain device, which when
attached to the engine of a motor vehicle would cut the consumption
of gasoline by 50%. Without securing a patent therefor, he staried
manufacturing the gadget in large quantities and promoted lfs sa/es.
An ingenious "J" bought one gadget, dismantled and studied it,
and in due time was himself manufacturing an identical device.
Before offering it foi sate, "J" secured a patent for his device which
he called "Gasopid."
"1" learned of the patent and desired to secure his own patent but
fearing that he might be sued for infringement of patent seeks your
legal advice.
How can you help him? Explain briefly (1981 Bar)
Answer: "1" should first bring an action for the cancellation of the
patent illegally secured by "J", and in said proceedings prove that he
("1") invented the gadget.
"1", being the inventor of the gadget, is owner of an intellectual
creation and is entitled to legal protection of said property right from
the unauthorized use of the same by another person.
While the cancellation proceedings are pending, "1" may ask the
couti for a preliminary injunction to prevBnt "J" from manufacturing
the gadget for any purpose.
(Note: Answer still valid under RA 8293)
INTELLECTUAL PROPERTY CODE 755
E. Remedy of the True and Actual lnventor
lf a person, who was deprived of the patent without his consent or
through fraud is declared by final court order or decision to be the
true and actual inventor, the court shall order for his substitution as
patentee, or at the option of the true inventor, cancel the patent, and
award actual and other damages in his favor if warranted by the
circumstances (Section 68).
F. Rights Conferred by Patent
A patent shall confer on its owner the following exclusive rights:
a) Where the subject matter of a patent is a product, to
restrain, prohibit and prevent any unauthorized person or entity from
making, using, offering for sale, selling or importing that product;
b) Where the subject matter of a patent is a process, to
restrain, prevent or prohibit any unauthorized person or entity from
using the process, and from manufacturing, dealing in, using, selling
or offering for sale, or importing any product obtained direcily or
indirectly from such process;
c) To assign, or transfer by succession the patent, and to
conclude licensing contracts for the same (SectionTl).
G. Limitations of Patent Rights
The owner of a patent has no rigfit to prevent third parties from
performing the acts referred to in Section 71 (Rights Conferred by
Patent) in the following circumstances:
a. Using a patented product which has been put on the market
in the Philippines by the owner of the product, or with his consent,
insofar as such use is performed after the product has been so put in
the market
b. Where the act is done privately and on a non-commercial
scale or for a non-commercial purpose, provided that it does not
significantly prejudice the economic interests of the owner of the
patent
c. Where the act consists of making or using exclusively for the
purpose of experiments that relate to the subject matter of the
patented invention
d. Where the act consists of the preparation for individual
cases, in a pharmacy or by a medical professional, of a medicine in
accordance with a medical prescription or acts concerning the
medicines so prepared
756 INTELLECTUAL PROPERTY CODE
e. Where the invention is used in any ship, vessel, aircraft, or
land vehicle of any country entering the territory of the Philippines
temporarily or accidentally, provided that such invention is used
exclusively for the needs of the ship, vessel, aircraft, or vehicle and
not used for the manufacturing of anything to be sold within the
Philippines (Section 72).
1. Prior User
Any prior user who, in good faith, was using the invention or has
undertaken serious preparations to use the invention in his
enterprise or business, before the filing date or priority date of the
application on which a patent is granted, shall have the right to
iontinue the use thereof as envisaged in such preparations within
the territory were the patent produces its effect.
The right of the prior user may only be transferred or assigned
together with his enterprise or business, or with that part of his
enterprise or business in which the use or preparations for use have
been made (Section 73).
2. Use of lnvention by the Government
A government dgency or third person authorized by the
Government may exploit the invention even without agreement of the
patent owner where (a) the public interest, national security, nutrition,
health or the development of other sectors so requires; or (b) a
judicial or administrative body has determined that the manner of
exploitation, by the owner of the patent or his licensee, is anti-
competitive.
The use by the Government or third person authorized by the
Government shall be subject to the conditions set forth in Sections
95 to 97 (Requirement to Obtain a License on Reasonable
Commercial Terms; Compulsory Licensing of Patents lnvolving
Semi-Conductor Technology; and Compulsory License Based on
lnterdependence of Patents), and 100 lo 102 (Terms and Conditions
of Compulsory License; Amendment, Cancellation, Surrender of
Compulsory License; and Licensee's Exemption from Liability)
(Section 74).
H. Paient lnfringement
INTELLECTUAL PROPERTY CODE 757
1. Tests in Patent lnfringement
The tests to determine infringement are (1) literal infringement,
and (b) the doctnine of equivalents. ln using literal infringement as a
test, resort must be had, in the first instance, to the words of the
claim. lf accused matter clearly falls within the claim, infringement is
made out and that is the end of it. To determine whether the
particular item falls within the literal meaning of the patent claims, the
Court must juxtapose the claims of the patent and the accused
product within the overall context of the claims and specifications, to
determine whether there is exact identity of all material elements
(Godines vs. CA, 226 SCRA 338).
The reason for the doctrine of equivalents is that to permit the
imitation of a patented invention which does not copy any literal
detail would be to convert the protection of the patent grant into a
hollow and useless thing. Thus, according to this doctrine, an
infringement also occurs when a device apipropriates a prior
invention by incorporating its innovative concept and, albeit with
some modifications and change, performs substantially the same
function in substantially the same way to achieve substantially the
same result (lbid.).
a. Literallnfringement
The making, using, offering for sale, selling, or importing of a
patented product or a product obtained directly or indirecfly from a
patented process, or the use of a patented process without the
authorization of the patentee constitutes patent infringement (Section
76)
A patentee shall have the exclusive right to make, use and sell the
patented machine, article or product for the purpose of industry or
commerce, throughout the territory of the Philippines for the term of
the patent, and such making, using or selling by any person without
authorization of the patentee constitutes infringement of his patent
(Del Rosario vs. CA, 255 SCRA 152).
ln order to infringe a patent, a machine or device must perform the
same function, or accomplish the same result by identical or
substantially identical means and the principle or mode of operation
must be substantially the same (lbid.).
758 INTELLECTUAL PROPERTY CODE
lf infringement is repeated by the infringer or by anyone in
connivance with him after finality of the judgment of the court against
the infringer, the offenders shall, without prejudice to the institution of
a civil action for damages, be criminally liable (Section 84).
b. Doctrine of Equivalents
The doctrine of equivalents provides that an infringement also
takes place when a device appropriates a prior invention by
incorporating its innovative concept and, although with some
modification and change, performs substantially the same function in
substantially the same way to achieve substantially the same result
(Smith vs. CA, 409 SCRA 33).
The doctrine of equivalents requires satisfaction of the function-
mean-and-result test, the patentee having the burden to show that
all three components of such equivalency test are met (lbid.).
2. Defenses in Action for lnfringement
ln an action for infrihgement, the defendant may show the
invalidity of the patent, or any claim thereof, on any of the grounds
on Which a petition of cancellation can be brought (See Grounds for
Cancellation of a Pat6rtt, supra) (Section 81).
Bar Question: ln an action for infringement of patent, the alleged
infringer defended himself by stating (1) that the patent issued by the
Patent Office was not really an invention which was patentable; (2)
that he has no intent to infringe so that there was no actionable case
for infringement, and (3) that there was no exact duplication of the
patentee's existing patent but only a minor improvement.
With those defenses, would you exempt the alleged violator from
liability? Why? (1992 Bar)
Answer: lf the alleged infringer can prove with satisfactory evidence
that the patented invention was a duplication of one already
patented, or the patented invention was a duplication or was
substantially similar to one already patented, or that it forms part of
prior art or that the patented invention conslsfs of minor
improvements, then ft r.s possrb/e for the infringer to cancel the patent
as there would be no infringement by the alleged infringer.
INTELLECTUAL PROPERTY CODE 759
However, proof of the lack of intention to infringe a registered
patent is not a defense, because there is an infringement of a patent
whether or not the infringer had knowledge of said patent.
(Note: Answered under RA 8293).
Bar Question: Ferdie is a patent owner of a certain invention. He
discovered that his invention is being infringed by Johann.
a) What are the remedies available to Ferdie against Johann?
b) lf you were the lawyer of Johann in the infringement suit, what are
the defenses that your client can asseft? (1993, 1985, 1977 Bar)
Answer:
(a) The following remedies are available to Ferdie against Johann:
i) File civil case foi the following purposes.'
1. To recover from the infringer such damages as the court may
award considering the circumstances of the case provided it shall not
exceed three (3) times the amount of the actual damages sustained
plus aftorneyb fees and other expenses of litigation;
2. To secure an injunction for the protection of his rights;
3. To receive a reasonable royalty if the damages are inadequate or
cannot be readily asceftained with reasonable certainty;
4. To have the infringing goods, materials and implements
predominantly used in the infringemenf dr'sposed of outside the
channels of commerce or destroyed, without compensation;
5. To hold the contributory infringer jointly and severally liable with
the infringer (Section 76)
ii) File criminal case within 3 years from date of commission of the
crime.
(b) These are the defenses that Johann can asserf.
1) That the patent is invalid;
2) That what is claimed as fhe invention is not new or patentable;
3) That the patent does not disc/ose the invention in a manner
sufficiently clear and complete for it to be carried out by any person
skilled in the art; or
4) That the patent is contrary to public order or morality.
(Note: Answered under RA 8293)
Damages cannot be recovered for acts of infringement committed
before the infrinEer had known, or had reasonable grounds to know
of the patent. lt is presumed that the infringer had known of the
patent if on the patented product, or on the container or package in
which the article is supplied to the public, or on the advertising
material relating to the patented product or process, are placed the
words "Philippine Patent" with the number of the patent (Section 80).
760 INTELLECTUAL PROPERTY CODE
l. Licensing
A. Voluntary
To encourage the transfer and dissemination of technology,
prevent or control practices and conditions that may constitute an
abuse of intellectual property rights having an adverse effect on
competition and trade, all technology transfer arrangements shall
comply with the provisions on voluntary licensing (Section 85)
B. Compulsory
The Director of Legal Affairs of the lntellectual Property Office
may grant a license to exploit a patented invention, even without the
agreement of the patent owner, in favor of any person who has
shown his capability to exploit the invention, under any of the
following circumstances :
1) National emergency or other circumstances of extreme urgency;
2) Where the public interest, national security, nutrition, health or the
development of other vital sectors of the national economy so
requires;
3) Where the judicial or administrative body has determined that the
manner of exploitation by the owner of the patent or his licensee is '
anti-competitive;
4) ln case of public non-commercial use of the patent by the
patentee, without satisfactory reason;
5) lf the patented invention is not being worked in the Philippines on
a commercial scale, although capable of being worked, without
satisfactory reason, provided that the importation of the patented
article shall constitute working or using the patent (Section 93).
A compulsory license may be applied for at any time after the
grant of the patent if the grounds therefor are those stated in
paragraphs 2, 3, and 4 above. lf the ground is paragraph 5 above,
compulsory license may not be applied for before the expiration of 4
years from date of filing of the application or 3 years from the date of
patent, whichever period expires last (Section 94)
The Director of Patents (now Director of Legal Affairs) may give a
compulsory license for medicines to an applicant upon prior notice
and hearing (Prince vs. United, 166 SCRA 133).
There is no basis for the allegation tnai tne grant of a compulsory
license to private respondent results in the deprivation of petitioner's
INTELLECTUAL PROPERTY CODE 761
property without just compensation. lt must be pointed out that as
owner of letters patent, petitioner had already enjoyed exclusive
rights to manufacture, use and sell the product for at least two years
from its grant. Even if other entities are subsequently allowed to
manufacture, use and sell the patented invention by virtue of a
compulsory license, petitioner would still receive remuneration for the
use of such product in the form of royalties (Smith vs. CA, 368 SCRA
e).
J. Assignment and Transmission of Rights
Patents or applications for patents and inventions to which they
relate shall be. protected in the same way as the rights of other
property under the Civil Code (Section 103).
lnventions and any right, title or interest in and to patents and
inventions covered thereby may be assigned or transmitted by
inheritance or bequest or may be the subject of a license contract
(rbid.).
An assignment may be of the entire right, title or interest in and to
the patent and the invention covered thereby, or of an undivided
share of the entire patent and invention, in which even the parties
become joint owners thereof. An assignment may be limited to a
specific territory (Section 104). The assignment must be in writing,
acknowledged before a notary public, and certified under the hand
and official seal of the notary (Section 105).
iV. L"* on Trademarks, Service Marks and Trade Names
A. Definition
1. Mark - means any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall
include a stamped or marked container of goods (Section 121)
2. Collective Mark - means any visible sign designated as such in
the application for registration and capable of distinguishing the
origin or any other common characteristic, including the quality of
goods or services of different enterprises which use the sign under
the control of the registered owner of the collective mark (lbid.)
3. Trade name - means the name or designation identifying or
distinguishing an enterprise (lbid.).
762 INTELLECTUAL PROPERTY CODE
Bar Question: What are trademarks? (1958 Bar)
Bar Question: Distinguish "trademark" from "trade name" (1965 Bar)
Answer: Under RA 8293 (Section 121), a mark means any visible
sign capable of distinguishing the goods (trademark) or seruices
(service mark) of an enterprise and shall include a stamped or
marked container of goods, while a trade name means the name or
designation identifying or distinguishing an enterprise. Simply put, a
trade name refers to the business and lfs goodwill, while a trademark
refers to the goods.
Bar Question: What is the objective of the law in protecting
trademarks. (1982 Bar)
Answer: The objective of the law in protecting trademarks is to give
to their registered owners the full benefit accruing to them from the
goodwill earned by them from the use of said registered trademarks.
A trademark is an incorporeal property right, and like any other
property right, it is entitled to be protected from any illegal use by any
person without the authority of its owner..
(Note: Answer still valid under RA 8293)
The function of a trademark is to point out distinctly the origin or
ownership of the goods to which it is affixed; to secure to him, who
has been instrumental in bringing into the market a superior article of
merchandise, the fruit of his industry and skill; to assure the public
that they are procuring the genuine article; to prevent fraud and
imposition; and to protect the manufacturer against substitution and
sale of an inferior and different article as his product (Mirpuri vs. CA,
318 SCRA 516).
Modern authorities on trademark law view trademarks as
performing three distinct functions: (1) they indicate oqigin or
ownership of the articles to which they are attached; (2) they
guarantee that those articles come up to a certain standard of
quality; and (3) they advertise the articles they symbolize (lbid.).
The trademark is not merely a symbol of origin and goodwill; it is
often the most effective agent for the actual creation and protection
of goodwill. lt imprints upon the public mind an anonymous and
impersonal guaranty of satisfaction, creating a desire for further
satisfaction. ln other words, the mark actually sells the goods. The
mark has. become the "silent salesman", the conduit through which
direct contact between the trademark owner and the consumer is
assured. lt has invaded popular culture in ways never anticipated
INTELLECTUAL PROPERTY GODE 763
that it has become a more convincing selling point than even the
quality of the article to which it refers (lbid.).
lntellectual and industrial property rights cases are not simple
property cases. Trademarks deal with the psychological function of
symbols and the effect of these symbols on the public at large.
Trademarks play a significant role in communication, commerce and
trade, and serve valuable and interrelated business functions, both
nationally and internationally. For this reason, all agreements
concerning industrial property, like those on trademarks and trade
names, are intimately connected with economic development (lbid.).
Ordinarily, the ownership of a trademark or trade name is a
property right that the owner is entitled to protect. However, when a
trademark is used by a party for a product in which the other party
does not deal, the use of the same trademark on the latter's product
cannot be validly objected to (Canon vs. CA, 336 SCRA 10).
The term trademark is defined by RA 166, the Trademark Law, as
including any word, name, symbol, emblem, sign or device or any
combination thereof adopted and used by a manufacturer or
merchant to identify his goods and distinguish them from those
manufactured, sold or dealt in by others. This definition has been
simplified in R.A. No. 8293, which defines a trademark as any visible
sign capable of distinguishing goods. Trade name is defined by the
same law as including individual names and surnames, firm names,
trade names, devices or words used by manufacturers, industrialists,
merchants, agriculturists, and others to identify their business,
vocations, or occupations; the names or titles laMully adopted and
used by natural or juridical persons, unions, and any manufacturing,
industrial, commercial, agricultural or other organizations engaged in
trade or commerce (Societes vs. CA, 356 SCRA 207).
Trademark is basically an intellectual creation that is susceptible
to ownership but the incorporeal right is distinct from the property in
the material object subject to it (Distilleria vs. CA, 263 SCRA 303).
A mark is valid if it is "distinctive" and thus not barred from
registration under Section 4 of RA 166. However, once registered,
not only the mark's validity but also the registrant's ownership of the
mark is prima facie presumed (McDonald's vs. L.C., 437 SCRA 10;
Mcdonald's vs. Macjoy, 514 SCRA 95).
764 INTELLECTUAL PROPERTY CODE
B. Acquisition of Ownership of Mark or Trade Name
The rights in a mark shall be acquired through registration made
validly in accordance with R.A. 8293 (Section 122).
A certificate of registration of a mark or trade name shall be prima
facie evidence of the validity of the registration, the registrant's
ownership of the mark or trade name, and of the registrant's
exclusive right to use the same in connection with the goods,
business or services specified in the certificate, subject to any
conditions and limitations stated therein (Amigo vs. Cluett, 354
scRA 434).
A certificate of registration gives rise to a presumption of its
validity and the right to the exclusive use of the trademarks (Levi vs.
Vogue,462 SCRA 52).
Registration, without more, does not confer upon the registrant an
absolute right to the registered mark. The certificate of registration is
merely a prima facie proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior and continuous use
of the mark or trade name by another can overcome the presumptive
ownership of the registrant and may very well entitle the former to be
declared owner in an appropriate case. Ownership of a mark or trade
name may be ac{uired not necessarily by registration but by
adoption and use in trade or commerce. As between actual use of a
mark without registration, and registration of the mark without actual
use thereof, the former prevails over the latter. For a rule widely
accepted and firmly entrenched is that actual use in commerce or
business is a pre-requisite to the acquisition of the right of
ownership. While the present law on trademarks has dispensed with
the requirement of prior actual use at the time of registration, the law
in force at the time of registration must be applied, and thereunder it
was held that as a condition precedent to registration of trademark,
trade name or senrice mark, the same must have been in actual use
in the Philippines before the filing of the application for registration.
Trademark is a creation of use and therefore actual use is a pre-
requisite toexclusive ownership and its registration with the
Philippine Patent Office is a mere administrative confirmation of the
existence of such right (Shangri-La vs. Developers, 486 SCRA 405).
Registration does not cohfer upon the registrant an absolute right
to the registered mark. The certificate of registration merely
constitutes prima facie evidence that the registrant is the owner of
INTELLECTUAL PROPERTY CODE 765
the registered mark. Evidence of non-usage of the mark rebuts the
presumption of trademark ownership. Most importantly, registration
in the Philippines of trademarks does not rpso facfo convey an
absolute right or exclusive ownership thereof (Philip vs. Fortune, 493
scRA 333).
When one applies for the registration of a trademark or label which
is almost the same or very closely resembles one already used and
registered by another, the application should be rejected and
dismissed outright, even without any opposition on the part of the
owner and user of a previously registered label or trademark, this not
only to avoid confusion on the part of the public, but also to protect
an already used and registered trademark and an established
goodwill.(Mcdonald's vs. Macjoy, supra).
A personal name or surname may not be monopolized as a
trademark or trade name as against others of the same name or
surname. For in the absence of contract, fraud, or estoppel, any man
may use his name or surname in all legitimate ways. Thus,
"Wellington" is a surname, and its first user has no cause of action
against the junior user of "Wellington" as it is incapable of exclusive
appropriation. Likewise "LEE" is primarily a surname. The claimant
cannot, therefore, acquire exclusive ownership over and singular use
of said term (lbid.).
Bar Question: The trademark LOIUS is already registered in favor
of ABC for its product, edible oil. DEF applied for the registration of
the same trademark for its own product, soy sauce. Assuming that
the trademark applied for is in smaller type, colored differently, of
much smaller size, and set on a background which is dissimilar, as to
yield a distinct appearance, may the application of DEF be granted?
Or, should not such application be denied on the ground that its
grant would likely cause confusion or mistake on the part of the
buying public?
Decide. Give reasons. (1978 Bar)
Answetr: Yes, the apptication of DEF shoutd be granted. The
possibility of confusion is remote considering the differences in the
types used, in the color, size of the colored portion, and the
background of the two trademarks (See Acoje vs. Director,3B SCRA
488).
Sulmetine is a registrable trademark as it differs from Sulmet from
the following viewpoints: (1) different background colors; (2)'absence
766 INTELLECTUAL PROPERTY CODE
of pictorial representation in Sulmetine label; (3) one is a solution,
the other is in tablet form; (4) the foreign origin of one is clearly
marked; the second one is marked as "Made in the Philippines", and
(5) one is used for all domestic animals, the other for fowls only
(American vs. Director, 76 SCRA 568).
The trademarks in question are not apt to confuse prospective
customers. For though the words "bioferin" and "bufferin" have the
same suffix and similar-sounding prefixes, they appear in their
respective labels with strikingly different backgrounds 'and
surroundings, as to color, size and design. Furthermore, the product
covered by "bioferin" is expressly stated as dispensable only upon
doctor's prescription, while that of "bufferin" does not require the
same. The chances of being confused into purchasing one for the
other are therefore all the more rendered negligible (Bristol vs.
Directors, 17 SCRA 128).
Alacta as a label for skimmed milk is registrable because it is
different from Alaska used on evaporated milk the labels show
glaring and striking difference (Mead vs. N.V.J., 7-SCRA 768).
Attusin is registrable as against the objections of manufacturers of
Pertussin because the two labels are different in color, contents,
arrangement of words, sizes, shape and special appearance (Etepha
vs. Director, 16 SCRA495).
Bar Question: Laberge, lnc. manufactures and markets after-shave
lotion, shaving cream, deodorant, talcum powder and toilet soap,
using the trademark'PRUT', which is registered with the Philippine
Patent Officd. Laberge does not manufacture briefs and underwear
and these items are not specified in the certificate of registration.
JG, who manufactures briefs and undenuear, wants to know
whether, under our laws, he can use and register the trademark
"PRUTE" for his merchandise. What is your advice? (1994 Bar)
Answer: I willtell JG that he can use "PRUTE" for his merchandise.
The certificate of registration issued by the Philippine Patent Office to
Laberge, lnc. can confer upon the latter the exclusive right to use ifs
own symbol only to those goods specified in the certificate, subject to
any conditions and limitations stated therein. JG cannot be
prevented from adopting "PRUTE" for his merchandise which are of
a different description (See Faberge vs. lAC, supra)
INTELLECTUAL PROPERTY CODE 767
C. Non-Registrable Marks
A mark cannot be registered if it:
a) Consists of immoral, deceptive or scandalous matter, or matter
which may disparage or falsely suggest a connection with persons,
living or dead, institutions, beliefs, or national symbols, or bring them
into contempt or disrepute;
b) Consists of the flag or coat of arms or other insignia of the
Philippines or any of its political subdivisions, or of any foreign
nation, or any simulation thereof;
c) Consists of a name, portrait or signature identifying a particular
living individual except by his written consent, or the name,
signature, or portrait of a deceased President of the Philippines,
during the life of his widow, if any, except by written consent of the
widow;
d) ls identical with a registered mark belonging to a different
proprietor or a mark with an earlier filing or priority date, in respect of:
(i) The same goods or services, or
(ii) Closely related goods or services; or
(iii) lf it nearly resembles such a mark as to be likely to deceive
or cause confusion;
e) ls identical with, or confusingly similar to, or constitutes a
translation of a mark which is considered by the competent authority
of the Philippines to be well-known internationally and in the
Philippines, whether or not it is registered here, as being already the
mark of a person other than the applicant for registration, and used
for identical or similar goods or services: provided, that in
determining whether a mark is well-known, account shall be taken of
the knowledge of the relevant sector of the public, rather than of the
public at large, including knowledge in the Philippines which has
been obtained as a result of the promotion of the mark;
f) ls identical with, or confusingly similar to, or constitutes a
translation of a mark considered well-known in accordance with the
preceding paragraph, which is registered in the Philippines with
respect to goods or services which are not similar to those with
respect to which registration is applied for: provided, that use of the
mark in relation to those goods or services, would indicate a
connection between those goods and services, and the owner of the
registered trademark: provided further that the interests of the owner
of the registered mark are likely to be damaged by such use;
g) ls likely to mislead the public, particularly as to the nature,
quality, characteristics or geographical origin of the goods or
services;
768 INTELLECTUAL PROPERTY CODE
INTELLECTUAL PROPERTY CODE 769

license to do business rn the Philippines, ff ls not presently selling

h) Consists exclusively of signs that are generic for the goods or
footwear under the trademark "Juggler" in the Philippines, and it was
services that they seek to identify;
not licensed nor does it have any agreement with any local entity or
i) Consists exclusively of signs or of indications that have become
firm to sell any of its products in the Philippines.
customary or usual to designate the goods or services in everyday
language or in bona fide and established trade practice;
At the trial, it was esfab/ished that Rubberworld has spent a
j) Consists exclusively of signs or of indications that may serve in considerable amount and effort in popularizing said trademark in the
Philippines, had been using the same since 1969 and had built up
trade to designate the kind, quality, quantity, intended purpose,
enormous goodwill.
value, geographical origin, time or production of the goods or
Acting on the petition, the Patent Office dismissed the opposition
rendering of the services, or other characteristics of the goods or
and ordered the registration of the trademark "Juggler" in the name
services;
of Rubberworld.
k) Consists of shapes that may be necessitated by technical Dlscuss the validity of the aforesaid decision. (1985 Bar)
factors or by the nature of the goods themselves or factors that affect
their intrinsic value;
Answer: I submit that the dismlssa/ of the opposition of the Belgian
l) Consists of color alone, unless defined by a given form; or
corporation was valid.
m) ls contrary to public order or morality (Section 123)
IJnder RA 8293 (Section 123), a mark (tike "Juggter" of
Rubberworld in the problem) cannot be registered if it is identicalto a
Bar Question: For the past 12 years, "Q" has been using "Anchor"
mark considered by competent authority in the Philippines to be well
as a trademark for his locally manufactured butter, pursuant to a known internationally and in the Philippines, whether or not
contract with 'Y" of Denmark who owns said trademark. Can "Q"
registered here, used for identical goods. ln the problem, there was
now legally apply with the Patent Office for the registration of
no showing that "Juggler" of the Belgian Corporation is well known.
"Anchor" as the trademark of his locally manufactured bufter?
Likewise the Belgian Corporation does not use the mark on footwear.
Reason (1972 Bar)
RA 8293 also disallows registration on dissimilar goods where the
mark would indicate a connection between the goods and services
Answer: No, "Q" cannot appty for registration of the trademark (of Rubberworld), and the owner of the mark (Belgian Corporation),
"Anchor" on its locally made butter.
where the interest of the latter are likely to be damaged. This has
IJnder RA 8293 (Section 123), a mark cannot be registered if it is
not been shown to exist in the problem.
identical with a registered mark belonging to a different proprietor or
a mark with an earlier filing or priority date, in respect of (i) the same
goods or seruices, or (ii) closely related goods or services, or (iii) if it
Bar Question: S Development Corporation sued Shangrila
Corporation for using the "5" logo and the tradename "Shangrila".
nearly resembles such a mark as to be likely to deceive or cause
The former claims that it was the first to register the logo and the
confusion
tradename in the Philippines and that it has been using the same in
A mark cannot also be registered if it is identical or confusingly
its re stau ra nf business.
similar to or constitutes a translation of a mark considered by
Shangrila Corporation counters that it is an affiliate of an
competent authority of the Philippines to be well-known international organization which has been using such logo and
internationally, whether or not it is registered here, provided that the
tradename "Shangrila" for over 20 years.
use of the mark in relation to those goods or services would indicate
However, Shangrila Corporation registered the tradename and
a connection between the goods and seruices and the owner of the
logo in the Philippines only after the suit was filed.
mark.
a.) Which of the two corporations has a better right to use the
logo and the tradename?
Bar Question: Rubberworld, lnc. sought registration of the
trademark "Juggler" for his casual rubber shoes in lnter Partes Case
b.) How does the international affiliation of Shangrila Corporation
affect the outcome of the dispute? (2005 Bar)
No. 602 filed with the Patent Office. The registration was opposed
by a Belgian Corporation which alleges that it owns and has not
abandoned the trademark "Juggler" although it admits that it has no
770 INTELLECTUAL PROPERTY CODE
Answer: a.) Pursuantto Section 123(d) of the lntellectual Property
Code, S Corporation has a better right over the logo and tradename
since it was the first to register the same. The certificate of
registration upon which the infringement case is grounded remains
valid and subsisfrng as long as ff has not been cancelled (Sed
Shangrila vs. CA, 359 SCRA 273).
b.) Section 8 of the Paris Convention provides that "there is no
automatic protection afforded an entity whose tradename is alleged
to be infringed through the use of that name as a trademark by a
local entity" (See Kabushi vs. lAC, 203 SCRA 583). Tha
international affiliation of Shangrila Corporation shall have no effect
on the outcome of the dispute srnce ifs international affiliate is not
a uto m at i c al ly p rote cte d.
Defendant contends that plaintiff cannot appropriate the names
"Dona Alicia," and "Dona Aurora" on its vessels because they are the
names of wives of Ex-Presidents of the Philippines. Under Section 4
(c) of R.A. 166 as amended, what is prohibited from being
appropriated and being registered are tradenames consisting of, or
comprising, a name identifying a particular living individual or the
name of a deceased President of the Philippines. The names of
deceased wives are not included in the prohibition. Moreover,
Section a (fl of R.A. 166 (now Section 123.2 of R.A. 8293) does not
prohibit the registration, and hence appropriation of a tradename that
has become distinctive, and the substantial and exclusive use of a
tradename for five years is accepted as prima facie proof that the
tradename has become distinctive (Dela Rama vs. National, 35
scRA 567).
Common geometrical shapes such as diamonds are ordinarily not
regarded as indicia of origin of goods unless they have acquired a
secondary meaning (Victorias vs. Ong, 79 SCRA 207).
The word "MASTER" is neither a generic nor a descriptive term,
and as such, said term can not be invalidated as a trademark and,
therefore, may be legally protected. Generic terms are those which
constitute the common descriptive name of an article or substance,
or comprise the genus of which the particular product is a species, or
are commonly used as the name or description of a kind of goods, or
imply reference to every member of a genus and the exclusion of
individuating characters, or refer to the basic nature of the wares or
services provided rather than to the more idiosyncratic
characteristics of a particular product, and are not legally protectable.
On the other hand, a term is descriptive and therefore invalid as a
INTELLECTUAL PROPERTY CODE 771
trademark if it forthwith conveys the characteristics, functions,
qualities or ingredients of a product to one who has never seen it and
does not know what it is, or if it forthwith conveys an immediate idea
of the ingredients, qualities or characteristics of the goods, or if it
clearly denotes what goods or services are provided in such a way
that the consumer does not have to exercise powers of perception
or imagination (Societes vs. CA, 356 SCRA 207).
The likelihood of confusion of goods or business is a relative
concept to be determined only according to the particular, and
sometimes peculiar, circumstances of each case. ln cases of
confusion of business or origin, the question that usually arises is
whether the respective goods or services of the senior user and the
junior user are so related as to likely cause confusion of business or
origin, and thereby render the trademark or tradenames confusingly
similar. Goods are related when they belong to the same class or
have the same descriptive properties; when they possess the same
physical attributes or essential characteristics with reference to their
form, composition, texture or quality. They may also be related
because they serve the same purpose or are sold in grocery stores.
Undoubtedly, paints, chemicals, toner and dyestuff are unrelated to
sandals. Thus, the evident disparity of the products of the parties
renders unfounded the apprehension of petitioner that confusion of
business or origin might occur if private respondent is allowed to use
the mark (Canon vs. CA, 336 SCRA 266).
Bar Quiestion: ln 1968, the Food and Drug Administration approved
the labels submitted by Turbo Corporation for its new drug brand
name, "Axilon." Turbo is now applying with the Bureau of Patents,
Trademarks and Technology Transfer for the registration of said
brand name. lt was subsequently confirmed that "Accilone" is a
generic term for a c/ass of antifungal drugs and is used as such by
the medical profession and the pharmaceutical industry and that it is
used as a generic chemical name in various scientific and
professional publications. A competing drug manufacturer asks you
to contest the registration of the brand name "Axilon" by Turbo.
Whatwill be your advice? (1990 Bar)
Answer: t wilt advice the competing drug manufacturer to contest
the registration of the brand name "Axilon" with the Bureau of
Patents.
ln the first place, the brand name "Axilon" is confusingly similar to
the generic name "Accilone". Generic names, standing alone, are
prohibited from being registered as trademarks for the reason that no
772 INTELLECTUAL PROPERTY CODE
person can have the exclusive right to use a name which is an
ingredient in the manufacture of a c/ass of fungal drugs, currently
utilized by the pharmaceutical industry.
Furthermore, the medical profession recognizes and uses fhe
name Accilone to indicate an ingredient in anti-fungal medicines.
Lastly, lfs use as a generic chemical name is confirmed by
scientific and various professional publications.
A registration of the trademark "Axilon" can prevent the above
from using the name "Accilone" in the medicines they manufacture,
in the publications they print, because after its registration, there
exisfs fhe risk of prosecution for infringement for utilizing a colorable
imitation of a trademark already registered in a person's name.
(Note: Answer still valid under R:A. 8293)
D. Prior Use of Mark as a Requirement
The lntellectual Property Office will not require any proof of use in
commerce in the processing of trademark applications. However,
without need of any notice from the Office, all applicants or
registrants, shall file a declaration of actual use of the mark with
evidence to that effect within three years, without possibility of
extension, from the filing date of the application. Otherwise, the
application shall be refused or: the mark shall be removed from the
register by the Director motu propio (Section 124; Mattel vs.
Francisco, 560 SCRA 504).
Bar Question: May a home registration of a foreign trademark
entitle it to registration in the Philippines even without proof to use in
the Philippines? (1982 Ba)
Answer: The provision on home registration which is an exception
to proof of use in the Philippines in R.A. 166 has already been
repealed. Under R.A. 8293, use of the trademark is no longer a
requirement before applying for registration. A person or entity can
apply for registration even before using a mark.
Bar Question: ln 1979, Smash Manufacturing Company, a foreign
corporation registered in New York, but not doing busrness in the
Philippines, filed a complaint for unfair competition against Nilo
Malakas. The plaintiff alleged that since 1939, it had been exporting
tennis rackets under the trddemark "Smash" and tradename "Smash
Mfg. Co..", and that after the tradename became familiar to Filipino
consumers, defendant Malakas began manufacturing similar
products under the same trademark and tradename which he
INTELLECTUAL PROPERTY CODE 773
registered with the Philippine Patent Office. Actually, after 1948,
Smash tennis rackets produced by the foreign corporation were no
longer impofted to the Philippines.
The complaint failed to alleged that its trademark or tradename
has been registered with the Philippine Patent Office or that the
Sfafe of New York grants Philippine corporations the privilege to
bring an action for unfair competition in that State. Claiming that
these are conditions sine qua non before a foreign corporation may
file suit in the Philippines; defendant Malakas filed a motion to
dlsmiss the complaint.
(a) How would you decide the motion to dismiss? State your
answers.
(b) Regardless of how you decide the motion fo dismlss, how would
you decide the merits of the case? Does the foreign corporation
have other administrative remedies? (1982 Bar)
Answer: (a) t witt deny the motion fo drsmiss.
Under RA 8293, the allegation in the complaint that a trademark is
registered in the Philippine is no longer a condition precedent in the
exercise of the right over a trademark.
(b) The suit will not prosper on the ground of abandonment of the
trademark, the last use of the same in the Philippines being in 1948.
There are nci avaitable administrative remedies open to Smash
M an ufacturi ng Com pany.
Bar Question.' "San/os Company, lnc." is the exclusive distributor in
the Philippines of a medicated plaster manufactured in Japan under
the trademark, "Salonpas." To protect its interest and investment,
'Sanfos Company, lnc." filed an application to register the trademark
in its name. Should the application be given due course? Why?
(1967 Bar)
Answer; Yes, 'Sanfo s Company, lnc." may register the trademark
Sa/onpas. While it is true that "Santos Company, Inc." is a mere
exclusive distributor, its continuous use of the name Salonpas as
product coming from its store gave it the right to register the mark.
(See Fieldman's ys. Vda. de Songco, 23 SCRA 485).
(Note: Under RA 8293 (Section 124.2), a mark can be apptied for
registration even without use provided a declaration of actual use is
filed within three years from filing of the application)
E. Dominancy Test and Holistic Test
Bar Question: What is the "test of dominancy"? (1996 Bar)
774 INTELLECTUAL PROPERTY CODE
Answer: The test of dominancy focuses on the similarity of the
prevalent features of the competing trademarks which might cause
confusion or deception and thus constitute infringement (See
Societes vs. CA, 356 SCRA 207).
Applying sard fesf, similarity in size, form and color, while relevant,
is not conclusive. If the competing trademark confains the main or
essenfra/ or dominant features of another, and confusion and
deception is likely to result, infringement takes place. Duplication or
imitation is nof neces sary; nor is lf necessa ry that the infringing label
should suggesf an effort to imitate (See Asn vs. CA, 224 SCRA
4s7).
lnfringement is determined by the test of dominancy rather than
by differences or variations in the details of one trademark and of
another (lbid.).
The essential element of infringement is colorable imitation. This
term has been defined as such a close or ingenious imitation as to
be calculated to deceive ordinary purchasers, or such resemblance
of the infringing mark to the original as to deceive an ordinary
purchaser giving such attention as a purchaser usually gives, and to
cause him to purchase the one supposing it to be the other (Societes
vs. CA, supra).
ln determinirlg' whether colorable imitation exists, jurisprudence
has developed two kinds of tests - the dominancy test and the
holistic or totality test. As its title implies, the test of dominancy
focuses on the similarity of.the prevalent features of the competing
trademarks with might cause confusion or deception and thus
constitutes infringement. The holistic or totality test states that the
test is not simply to take their words and compare the spelling and
pronunciation of said words. ln determining whether two trademarks
are confusingly similar, the two marks in their entirety as they appear
in the respective labels must be considered in relation to the goods
to which they are attached; the discerning eye of the observer must
focus not only on the predominant words but also on the other
features appearing on both labels (lbid.).
The totality or holistic test is contrary to the elementary postulate
of the law on trademarks and unfair competition that confustng
similarity is to be determined on the basis of visual, aural,
connotative comparisons and overall impressions engendered by the
marks in controversy as they are encountered in the realities of the
marketplace. The totality or holistic test only relies on visual
INTELLECTUAL PROPERTY CODE 775
comparison between two trademarks whereas the dominancy test
relies not only on the visual but also on the aural and connotative
comparisons and overall impressions between the two trademarks
(lbid.). The holistic test requires the court to consider the entirety of
the marks as applied to the products, including the labels and
packaging, in determining confusing similarity (McDonald's vs. L.C.,
437 SCRA 10).
Petitioners' failure to present proof of actual confusion does not
negate their claim of trademark infringement. Section 22 requires the
less stringent standard of "likelihood of confusion" only. While proof
of actual confusion is the best evidence of infringement, its absence
is inconsequential (lbid.).
The question of infringement of trademarks is to be determined by
the test of dominancy. The dissimilarity in size, form and color of the
label and the place where applied are not conclusive. Duplication or
exact imitation is not necessary; nor is it necessary that the infringing
label should suggest an effort to imitate (Operators vs. Director, 15
scRA 147).
lf the similarities to two competing trademarks are lost in the
substantial differences in design and general appearances of their
respective hang tags, then there is no infringement.
There is infringement when the use of the mark would be likely to
cause confusion or mistake in the mind of the public. ln determining
whether the two marks are confusingly similar, the entirety of bo(h
marks, and not just a comparison of words, must be considered.
The ordinary purchaser must be thought of as having, and credited
with at least a modicum of intelligence to be able to see the obvious
differences between the two tiademarks in question (Fruit vs. CA,
133 SCRA 405).
The Dominancy test focuses on the similarity of the prevalent or
dominant features of the competing trademarks that might cause
confusion, mistake, or deception in the mind of the purchasing
public. lnfringement takes place when the competing trademark
contains the essential features of another. Duplication or imitation is
not necessary, neither is it required that the mark sought to be
registered suggests an effort to imitate. Given more consideration
are the aura and visual impression created by the marks on the
buyers of goods, giving little weight to factors like prices, quality,
sales outlets and market segments. The question is whether the use
776 INTELLECTUAL PROPERTY GODE
of the marks is likely to cause confusion or deceive purchasers
(Skechers vs. lnter, 646 SCRA 448; Pros6urce vs. Horphag, 605
scRA 523).
ln contrast, the Holistic or Totality Test necessitates a
consideration of the entirety of the marks as applied to the products,
including labels and packaging, in determining confusing similarity.
The discerning eye of the observer must focus not only on the
predominant words, but also on the other features appearing on both
labels so that the observer may draw conclusions on whether one is
confusingly similar to the other. (Philip vs. Fortune, 493 SCRA 333,
Skechers vs. lnter, supra).
The use of the stylized "S" by the respondent in its Strong rubber
shoes infringes on the mark already registered with the lPO. While it
is undisputed that petitioner's stylized "S" is within an oval design,
the dominant feature of the trademark is the stylized "S", as it is
precisely the stylized "S" which catches the eye of the purchaser.
Thus, even if respondent did not use an oval design, the mere fact
that it used the same stylized "S", the same being the dominant
feature of petitioner's trademark, already constitutes infringement
under the dominancy test (Skechers vs. lnter, supra)
It is a clear that the determinative factor in contests involving
registration of tradernark is not whether the challenged mark would
actually cause confusion or deception of the purchasers but whether
the use of such mark would likely cause confusion or mistake on the
part of thei buying public. ln short, to constitute an infringement of an
existing trademark and warrant a denial of an application for
registration, the law does not require that the competing trademarks
must be identical as to produce actual error or mistake; it would be
sufficient that the similarity between the two labels is such that there
is a possibility or likelihood of the purchaser of the older brand
mistaking the newer brand for it (Acoje vs. Director, 38 SCRA 480).
ln the solution of a trademark infringement problem, regard, too
should be given to the class of persons who buy the particular
product and the circumstances ordinarily attendant to its acquisition.
The medical preparations, clothes with the trademarks in question,
are unlike articles of everyday use such as candies, ice cream, milk,
soft drinks and the like which may be freely obtained by anyone,
anytime, gnywhere. Petitioner's and respondent's products are to be
dispensed upon medical prescription. An intending buyer must have
to go first to a licensed doctor of medicine; he receives instructions
INTELLECTUAL PROPERTY CODE 777
as to what to purchase; he examines the product sold to him; he
checks to find out whether it conforms to the medical prescription.
Similarly, the pharmacist or druggist verifies the medicine sold. The
margin of error in the acquisition of one for the other is quite remote.
It is possible that buyers might be able to obtain pertussin or atussin
without prescription. When this happens, then the buyer must be
one thoroughly familiar with what he intends to get, else he would not
have the temerity to ask for a medicine, specifically needed to cure a
given ailment. For a person who purchases with open eyes is hardly
the man to be deceived (Etepha vs. Director, 16 SCRA 495).
The risk of damage to an infringement action is not limited to a
possible confusion of goods, but also includes confusion of
reputation if the'public could reasonably assume that the goods of
the parties originated from the same source (Converse vs. Universal,
147 SCRA 154).
The trademark "lionpas" for medicated plaster cannot be
registered because it is confusingly similar to "salonpas", a
registered trademark also for medicated plaster. Both words have
the same suffix "pas" which denotes a plaster with curative powers
that adheres to the body. However, as "pas" is merely descriptive
and furnishes no indication of the origin of the article, it is open for
appropriation by anyone and may properly become the subject of a
trademark by the combination with another word or phase. Although
two letters of "salonpas" are missing in "lionpas," nevertheless, when
the two words are pronounced, the sound effects are confusingly
similar. Where goods are advertised over the radio, similarity of
sound is sufficient ground for holding that two marks are confusingly
similar when applied to merchandise of the same descriptive
properties (Marvex vs. Perta, 18 SCRA 1178).
The similarity between DURAFLEX and DYNAFLEX is apparent.
Not only are the initial letters and the last half of the appellations
identical, but the difference exists in that only two out of the 8 literal
elements of the designations coupled with the fact that both marks
cover insulated flexible wires under class 20; that both products are
contained in boxes of the same material, color, shape and size; that
the dominant elements of the front designs are a red circle and a
diagonal zigzag commonly related to a spark of electricity, no
difficulty is experienced in reaching the conclusion that there is a
deceptive similarity that would lead the purchaser to confuse one
product for another (American vs. Director, 31 SCRA 544).
778 INTELLECTUAL PROPERTY CODE
l INTELLECTUAL PROPERTY CODE
"Pilsen" is a primarily geographically descriptive work, hence non-
registrable and not appropriable by any beer manufacturer. The fact
that the words pale pilsen are part of Asia's trademark does not
constitute an infringement of San Miguel Corporation's trademark:
SAN MIGUEL PALE PILSEN, for "pale pilsen" are generic words
descriptive of the color ("pale") of a type of beer ("pilsen"), which is a
light bohemian beer with a strong hops flavor that originated in the
City of Pilsen in Czechoslovakia and became famous in the Middle
Ages (Asia vs. CA, 224 SCRA437).
A generic term like Ginebra is incapable of appropriation by gin
manufacturers (Tanduay vs. Ginebra, 596 SCRA 114).
The universal test question is whether the public is likely to be
deceived. Nothing less than conduct tending to pass off one man's
goods or business as that of another will constitute unfair
competition. Actual or probable deception and confusion on the part
of the customers by reason of defendant's practices must always
appear (lbid.).
Use by Asia of the steinie bottle similar but not identical to the San
Miguel Pale Pilsen bottle is not unlaMul. As pointed out by Asia's
counsel, San Miguel did not invent but merely borrowed the steinie
bottle from abroad and it claims neither patent nor trademark
protection for that bottle shape and design. The Cerveza Especial
and the Efes Pale Pilsen use the "steinie" bottle (lbid.).
San Miguel being the first to use the steinie bottle does not give it
a vested right to use it to the exclusion of everyone else. Asia's
contention that bottle size, shape and color may not be the exclusive
property of any one beer manufacturer is well taken. Being of
functional or common use, and not the exclusive invention of any
one, it is available to all who might need to use it within the industry.
Nobody can acquire any exclusive right to market articles supplying
simple human needs in containers or wrappers of the general form,
size and character commonly and immediately used in marketing
such articles (lbid.).
ln resolving cases of infringement and unfair competition, courts
should take into consideration several factors which would affect its
conclusion, to wit: the age, training, and education of the usual
purchaser, the nature and cost of the article, whether the article is
bought for immediate consumption and also the conditions under
which it is usually purchased (lbid.).
The totality or holistic test should not be applied. lf the ordinary
purchaser is undiscerningly rash in buying such common and
inexpensive household products as instant coffee, and would
therefore be less inclined to closely examine specific details of
similarities and dissimilarities between the two competing products,
then it would be less likely for the ordinary purchaser to notice that
respondent's trademark carries the colors orange and mocha while
that of petitioner's uses red and brown. The application of the totality
or holistic test is improper since the ordinary purchaser would not be
inclined to notice the specific features, similarities or dissimilarities,
considering that the product is an inexpensive and common
household item (Societes vs. CA, 356 SCRA 207).
The term 'MASTER" has acquired a certain connotation to mean
the coffee products MASTER ROAST and MASTER BLEND
produced by petitioner. As such, the use by respondent of the term
"MASTER' in the trademark for its coffee product FLAVOR MASTER
is likely to cause confusion or mistake or even to deceive the
ordinary purchasers. Rather, the term "MASTER' is a
suggestive
term brought about by the advertising scheme of petitioner.
Suggestive terms are those which require imagination, thought and
perception to reach a conclusion as to the nature of the goods. Such
terms, which subtly connote something about the product, are
eligible for protection in the absence of secondary meaning. While
suggestive marks are capable of shedding some light upon certain
characteristics of the goods or services in dispute, they nevertheless
involve an element of incongruity, figurativeness, or imaginative
effort on the part of the observer (lbid.).
Section 22 covers two types of confusion arising from the use of
similar or colorable imitation marks, namely, confusion of goods
(product confusion) and confusion of business (source or origin
confusion). The first is the confusion of goods "in which event the
ordinarily prudent purchaser would be induced to purchase one
product in the belief that he was purchasing the other". The other is
the confusion of business: "Here though the goods of the parties are
different, the defendant's product is such as might reasonably be
assumed to originate with the plaintiff, and the public would then be
deceived either into that belief or,into the belief that there is some
connection between the plaintiff and defendant which, in fact, does
not exist" (McDonald's vs. L.C., 437 SCRA 10).
Under Act No. 666, the first trademark law, infringement was
limited to confusion of goods only, when the infringing mark is used
780 INTELLECTUAL PROPERTY CODE
on "goods of a similar kind". Thus, no relief was afforded to the party
whose registered mark or its colorable imitation is used on different
although related goods. To remedy this situation, Congress enacted
RA 166 on 20 June 1947. ln defining trademark infringement,
Section 22 of RA 166 deleted the requirement in question and
expanded its scope to include such use of the mark or its colorable
imitation that is likely to result in confusion on "the source or origin of
such goods or services, or identity of such business". Thus, while
there is confusion of goods when the products are competing,
confusion of business exists when the products are non-competing
but related enough to produce confusion of affiliation (lbid.).
For the crime of trademark infringement, the infringer must use
another's trademark or a confusingly similar trademark with intent to
deceive the public and defraud its competitor as to what it is selling
(rbid.)
There is no question, therefore, that the infringer exerted the effort
to make the counterfeit products look genuine to deceive the unwary
public into regarding the products as genuine. The buying public
would be easy to fall for the counterfeit products due to their having
been given the appearance of the genuine products, particularly with
the difficulty of detecting whether the products were fake or real if the
buyers had no experience and the tools for detection, like black light.
He thereby infringed the registered trademark by the colorable
imitation of it through applying the dominant features of the
trademark on the fake products (Batistis vs. People, 608 SCRA 335).
Bar Question: Assume that your firm is engaged in the business of
canning, processing and manufacture of food products. ln a highly
competitive field, protective measures are to be taken by the
management. Your legal advice is sought on the following:
The management plans to use a trademark with the words
"SWEET CANDY." However, there is an existing and registered
trademark using the words "TWEET CANDY." What is your advice?
Why (1973 Bar)
Answer: I would advise the firm to abandon the plan to use the
trademark "Sweet Candy" on its producfs because another company
uses fhe registered trademark "Tweet Candy" on its products. There
is a danger here of a suit for infringement, the words "Sweet" and
"Tweet" being almost similar in sound and therefore liable to confuse
the general public.
(Note: Answer still valid under RA 8293)
INTELLECTUAL PROPERTY CODE 781
F. Well-Known Marks
The owner of a registration shall not be entifled to sue for acts
committed prior to the date on which his mark was registered in this
country: Provided, That the owner of a well-known mark (a mark
identical with, or confusingly similar to, or constitutes a transiation of
a mark considered by competent philippine authority to be well-
known internationally and in the philippines, as being aiready a mark
of person other than the applicant for registration and used for
identical or similar goods or services) that is not registered in the
Philippines, may, against an identical or confusingly similar mark,
oppose its registration, or petition the cancellation of its registration
or sue for unfair competition, without prejudice to availing hlmself of
other remedies provided for under the law (Section 131).
The fdct that respondent's marks are neither registered nor used
in the Philippines is of no moment. The scope of protection initially
afforded by Article 6bis of the Paris convention has been expanded
in the 1999 Joint Recommendation concerning provisions on the
Protection of well-Known Marks, wherein the world lntellectual
Property organization (wlPo) General Assenrbly and the paris
Union agreed to a nonbinding recommendation that a well-known
mark should be protected in a country even if the mark is neither
registered nor used in that country. part l, Article 2(3) thereof
provides: (3) [Factors Which Shail Not Be Required] (a) A Member
state shall not require, as a condition for determining whether a mark
is a well-known mark: (i) that the mark has been used in, or that the
mark has been registered or that an application for registration of the
mark has been filed in or in respect of, the Member state; (ii) that the
mark is well known in, or that the mark has been registered or that
an application for registration of the mark has been filed in or in
respect of, any jurisdiction other than the Member State; or (iii) that
the mark is well known by the public at large in the Member-state
(Sehwani vs. ln-N-Out, 536 SCRA 225).
Bar Question: "G" Corporation, organized under phitippine Laws, is
the owner of the trademark "Jumbo" under Registry No. 50025,
issued on February 15, 1979 by the phitippine patent Office, for
assorfed kitchen ware. On June 10, lg\0, the Jumbo Cookware
corporation, organized and existing under lJ.s. laws, fited a petition
with the Philippine Patent office for the cancellation of the trademark
"Jumbo" registered in the name of "G" Corporation alteging
ownership and prior use in the philippines srnce 194g of said
 782 INTELLECTUAL PROPERTY CODE
trademark on the same kind of goods, which use it had not
abandoned.
"G" Corporation moved fo drsmrss the petition atteging that the
Jumbo Cookware Corporation, being a foreign entity which is not
licensed to do and is not doing business rn the philippines has no
personality under Philippine laws to maintain such petition.
(a) ls "G's" contention meritorious? (b) Who is entitted to the use
of the trademark "Jumbo"? Explain each of your answers. (1gg1 Bar)
Answer: (a) G's contention is not meritorious. RA B2g3 (Section
160) allows a foreign juridical person to bring an action for
cancellation, whether or not licensed to do business in the
Philippines.
(b) "G" Corporation is better entiiled ta the use of said trademark.
Under R.A. 8293, the rights in a mark can only be acquired
through registration made validty in accordance with law except
when it is identical to a registered mark or a mark with an earlier
filing or priority date or an internationatty well-known mark
considered as such by a competent authority in the phitippines. ln
the problem, Jumbo Cookware Corporation did not register the mark
nor was there a showing that the mark is well-known.
Trademark dilution is the lessening of the capacity of a famous
mark to identify and distinguish goods or services, regardless of the
presence or absence of: (1) competition between the owner of the
famous mark and other parties; or (2) likelihood of confusion,
mistake or deception. Subject to the principles of equity, the owner
of a famous mark is entitled to an injunction "against another
person's commercial use in commerce of a mark or trade name, if
such use begins after the mark has become famous and causes
dilution of the distinctive quality of the mark." This is intended to
protect famous marks from subsequent uses that blur distinctiveness
of the mark or tarnish or disparage it (Levi vs. Clinton, 470 SCRA
236).
Bar Question: Sony is a registered trademark for TV, stereo, radio,
cameras, betamax and other electronic products. A local company,
Best Manufacturing, lnc., produced electric fans which it sold under
the trademark SONY without the consent of SONy. SONy sued
Best Manufacturing, lnc. for infringement. Decide the case. (1gg1
Bar)
Answer:' Under RA 8293 (Section 123), the mark of Best
Manufacturing should not have beeh registered for being identicat
INTELLECTUAL PROPERTY CODE 783
i
with a mark well-known internationally and in the Philippines, even
on dissimilar goods. The act of Best Manufacturing of using SONy
{
I
J
is likely the cause confusion, mistake or deceive the public, hence it
p
L is liable for infringement.
4
I
I
G. Rights Conferred by Registration
i
The owner of a registered mark shall have the exclusive right to
prevent all third parties not having the owner's consent from using in
the course of trade identical or similar signs or containers for goods
or services which are identical or similar to those in respect of which
l:
the trademark is registered where such use would result in a
$
likelihood of confusion. ln case of the use of an identical sign for
identical goodd or services, a likelihood of confusion snJtt ne
presumed (Section 147).
#,l
H. Use By Third Parties of Names Similar to Registered Mark
Registration of the mark shall not confer on the registered owner
the right to preclude third parties from using bona fide their names,
addresses, pseudonyms, a geographical name, or exact indications
concerning the kind, quality, quantity, destination, value, place of
origin, or time of production or of supply, of their goods or
services: Provided, That such use is confined to the purposes of
mere identification or information and cannot mislead the public as to
the source of the goods or services (Section 148).
According to Section't3B of R. A. No.8293, the Certificate of
Registration is prima facle evidence of the validity of the registration,
the registrant's ownership of the mark and of the exclusive right to
use the same in connection with the goods or services and those
that are related thereto specified in the certificate (Levi vs. Clinton,
470 SCRA 236).
Registration with the supplemental register gives no presumption
of ownership of the trademark. The registration of a mark upon the
supplemental register is not, as in the case of the principal register,
prima facie evidence of (1) the validity of registration; (2) registrant's
ownership of the mark; and (3) registrant's exclusive right to use the
mark. lt is not subject to opposition, although it may be cancelled
after its issuance. Neither may it be the subject of interference
proceedings. Registration in the supplemental register is not
constructive notice of registrant's claim of ownership. A
supplemental register is provided for the registration because of
784 INTELLECTUAL PROPERTY CODE
some defects (conversely, defects which make a mark unregistrable
on the principal register, yet do not bar them from the supplemental
register) (Amigo vs. Cluett, 354 SCRA 434).
One who has adopted and used a trademark on his goods does
not prevent the adoption and use of the same trademark by others
for products which are of a different description (Pearl vs. Shoemart,
409 SCRA 231).
One who has imitated the trademark of another cannot bring an
action for infringement, particularly against the true owner of the
mark, because he would be coming to court with unclean hands.
Priority is of no avail to the bad faith plaintiff. Good faith is required
in order to ensure that a second user may not merely take advantage
of the goodwill established by the true owner (Shangri-La vs.
Developers, 4BO SCRA 405).
Defendant had every right and prerogative to revoke the authority
granted to plaintiff on the use of the trademark for "OTTO" for jeans
only when plaintiff failed to pay a single centavo of royalty and had
likewise violated the grant of authority by illegally manufacturing and
distributing aside from jeans, other products like jackets, skirts,
shirts, blouses and shorts which are not covered by the grant of
authority granted to him_ (Samson vs. CA, 549 SCRA 412).
l. lnfringement and Remedies
1. Trademark lnfringement
Bar Question: What constitutes an infringement (1958 Bar)
Answer: Any person who shall, without the consent of the owner
of the registered mark:
1. Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant
feature thereof in connection with the sale, offering for sale,
distribution, advertising of any goods or services including other
preparatory sfeps necessary to carry out the sale of any goods or
services on or in connection with which such use is likely to cause
confusion, or to cause mistal<e, or to deceive; or
2. Reproduce, counterteft, copy or colorably imitate a registered
mark or a dominant feature thereof and apply such reproduction,
counterfeit, copy or colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be
INTELLECTUAL PROPERTY CODE 785
used in commerce upon or in connection with the sale, offering for
sale, distribution, or advertising of goods or seryices on or in
connection with which such use is likely to cause confusion, or to
cause mistake, or to deteive, shatt be tiable in a civit action for
infringement by the registrant: Provided, That the infringement takes
place at the moment any of the acts stated in this and the preceding
secfions are commifted regardless of whether there is actual sale of
goods or services using the infringing material. (Section 155).
The elements of infringement under R.A. No. 8293 are as follows:
(1) The trademark being infringed is registered in the lntellectual
Property Office; however, in infringement of trade name, the same
need not be registered;
(2) The trademark or trade name is reproduced, counterfeited,
copied, or colorably imitated by the infringer;
(3) The infringing mark or trade name is used in connection with
the sale, offering for sale, or advertising of any goods, business or
services; or the infringing mark or trade name is applied to labels,
signs, prints, packages, wrappers, receptacles or advertisements
intended to be used upon or in connection with such goods, business
or services;
(4) The use of application of the infringing mark or trade name is
likely to cause confusion or mistake or to deceive purchasers or
others as to the goods or services themselves or as to the source or
origin of such goods or services or ttie identity of such business; and
(5) lt is without the consent of the trademark or trade name
owner of the assignee thereof (Prosource vs. Horphag, 605 SCRA
523).
ln the foregoing enumeration, it is the element of "likelihood of
confusion" that is the gravamen of trademark infringement. But
"likelihood of confusion" is a relative concept. The particular and
peculiar circumstances of each case are determinative of its
existencq (lbid.).
To establish trademark infringement, the following elements must
be shown: (1) the validity of plaintiff's mark; (2) the plaintiff's
ownership of the mark; and (3) the use of the mark or its colorable
imitation by the alleged infringer results in "likelihood of confusion"
(Philip vs. Fortune, 493 SCRA 333).
ln trademark cases, particularly in ascertaining whether one
trademark is confusingly similar to another, no set rules can be
deduced because each case must be decided on its merits. ln such
786 INTELLECTUAL PROPERry CODE
cases, precedent must be studied in the light of the facts of the
particular case. That is the reason why in trademark cases,
jurisprudential precedents should be applied only to a case if they
are specifically in point (McDonald's vs. Macjoy, 514 SCRA 95).
Bar Question: After disposing of his /asf opponent in only two
rounds in Las Vegas, the renowned Filipino boxer Sonny Bachao
arrived at the Ninoy Aquino lnternational Airport met by thousands of
hero-worshipping fans and hundreds of media photographers. The
following day, a colored photograph of Sonny wearing a black polo
shirt embroidered with the 2-inch Lacoste crocodile logo appeared
on the front page of every Philippine newspaper.
Lacoste lnternational, the French firm that manufactures Lacoste
apparel and owns the Lacoste trademark, decided to cash in on the
universal popularity of the boxing icon. lt reprinted the photographs,
with the permission of the newspaper publishers, and went on a
world-wide blitz of print commercials in which Sonny is shown
wearing a Lacoste shirt alongside the phrase "Sonny Bachao just
loves Lacoste."
When Sonny sees the Lacoste advertisements, he hires you as
lawyer and asks you to sue Lacosfe lnternational before a Philippine
court for trademark infringement in the Philippines because Lacosfe
lnternational used his image without hls permission. Will the action
prosper? (2009 Bar)
Answer: A case for trademark infringement will not prosper.
lnfringement is defined as fhe use by others without the registrant's
consent of a reproduction or colorable imitation of his trademark,
trade name or service mark with the purpose of causing to mislead
or misleading the public that such goods or services are those of the
registrant. The definition of infringement implies that only registered
trademarks, trade names and service marks are protected against
infringement or unauthorized use by another or others (See Asra vs.
CA, supra). Since the photographs of Sonny Bachao wearing
Lacoste shirts are not registered trademarks, there is clearly no basis
to file a case for infringement.
The petitioner does not dispute that the design and/or mark of the
Crown brand playing cards is owned by respondents. ln fact, there
is no allegation that the design and/or mark of such Crown brand
playing cards is a reproduction, counterfeit, copy, or colorable
imitation of anqther registered mark legally owned by another;
hence, no crime of trademark infringement appears to have been
committed or perpetrated to warrant the inference that the Crown
INTELLECTUAL PROPERTY CODE 787
brand playing cards are "subject of the offense" as contemplated by
Sec. 4 of Rule 126 of the Rules of Court. All the more telling is the
contention of petitioner that it is the plastic containericase and its
marking that bear the reproduction, counterfeit, copy, or colorable
imitation of its registered mark. ln other words, it is the design of th'e
plastic container/case that is allegeci to have been utiiized by
respondents to deceive the public into believing that their Crown
brand playing cards are the same as those manufactured by
petitioner (Summerville vs. CA, 525 SCRA 602).
There can be trademark infringement without unfair competition
such as when the infringer discloses on the labels containing the
mark that he manufactures the goods, thus preventing the public
from being deceived that the goods originate from the trademark
owner (Superior vs. Kunnan, 618 SCRA 531).
A foreign corporation not doing business in the Philippines needs
no license to sue in Philippine courts for infringement of trademark or
unfair competition. And even if the case is for violation of Section
21-A of the Law on Trademarks, no license would be needed
because the action is not to enforce any legal or contractual right but
to protect its reputation, goodwill or corporate name and because we
are signatories to the Paris Convention (La Chemise vs. Fernandez,
129 SCRA 373).
Bar Question: ls a fraud essential in the infringement of trademark?
/s rt essenfral in unfair competition? (1958 Bar)
Answer: Fraud ls nof essen tiat in the infringement of trademark, as
the mere use of a similar trademark likely to mislead the public is
sufficient. ln unfair competition, there must be a fraudutent intent to
pass off one's goods as fhose of another.
Maong pants and jeans are not inexpensive, and as the casual
buyer is predisposed to be more cautious and discriminating in and
would prefer to mull over his purchase, confusion and deception is
less likely. Ordinary purchaser was defined as one accustomed to
buy, and therefore to some extent familiar with, the goods in
question. The test of fraudulent simulation is to be found in the
likelihood of the deception of some persons in some measure
acquainted with an established design and desirous of purchasing
the commodity with which that design has been associated. The test
is not found in the deception, or the possibility of deception, of the
person who knows nothing about the design which has been
 1
788 INTELLECTUAL PROPERTY CODE
counterfeited, and who must be indifferent between that and the
other. The simulation, in order to be objectionable, mu$t be such as
appears likely to mislead the ordinary intelligent buyer who has a
need to supply and is familiar with the article that he seeks to
purchase (Emerald vs. CA, 251 SCRA 600).
Bar Question: "A" registered a trademark for the shirts he
manufactures. The mark consisfs of a red cock, one by two inches
in size. "D" sells impofted shrrts, bearing another trademark,
consisting of a hen laying eggs. /fs color is blue. "A" desires to bring
an action against "D" to prevent "D" from using his mark (blue hen
laying eggs). Does an action lie in his favor? lf so, what? lf not, why
not? (1971, 1957 Bar)
Answer: The action will not lie. There is no infringement of
trademark because of the dissimilarity in the marks. Both marks
have predominantly different colors - one red, the other blue. Ihis is
enough to make the public distinguish even from a distance that the
products are different.
There is also no unfair competition, as there is no attempf fo pass
off one merchant's goods as fhose of another.
(Note: Answer valid under RA 8293)
The use of the trademark "ESSO" by a manufacturer of cigarettes
does not infringe the iegistered mark used on petroleum products
because the products not being related, being dissimilar, and being
non-competing, cannot deceive the public as to what they are buying
(ESSO vs. CA, 116 SCRA 336).
Where the products are dissimilar (as where a previously
registered trademark "Brut" is used for shave lotion and other facial
products, as against "Brut", a trademark on briefs), there is no
infringement (Faberge vs. lAC, 215 SCRA 316).
The use of "Hickok" on shoes does not infringe the registered
trademark of another used on wallets, key holders, belt, and men's
briefs, the goods being dissimilar (Hickok vs. CA, 116 SCRA 387).
The use as a trademark by petitioner of the word "Camia" on a
wide range of products: lard, butter, cooking oil, abrasive detergents
polishing materials, and soap of all kinds does not give to it
exclusively the use of the mark. Another person may use the same
trademark on unrelated goods, like ham, which although a food
product cannot confuse the ordinary consumer as to its origin,
INTELLECTUAL PROPERTY CODE 789
especially because petitioner's products are derived principally from
vegetable oil, while the product of the respondent is processed from
pig's legs (Phil. Refining vs. Ng, 115 SCRA 472).
ln resolving whether goods are related, several factors come into
play: (a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong; (c) the product's
quality, quantity, or size, including the nature of the package,
wrapper or container; (d) the nature and cost of the articles; (e) the
descriptive properties, physical attributes or essential characteristics
with reference to their form, composition, texture or quality; (f) the
purpose of the goods; (g) whether the article is bought for immediate
consumption, that is, dayto-day household items; (h) the fields of
manufacture; (i) the conditions under which-the article is usually
purchased; and (j) the channels of trade through which the goods
flow, how they are distributed, marketed, displayed and sold (Mighty
vs.E&J,434SCRA473).
Non-competing goods may be those which, though they are in
actual competition, are so related to each other that it can
reasonably be assumed that they originate from one manufacturer, in
which case, confusion of business can arise out of the use of similar
marks (lbid.).
The business names "Universal Mills Corporation" and "Universal
Textile Mills, lnc.", though not identical, are so similar as to cause
confusion to the general public, dyeing and selling of fabrics of all
kinds being the business of the latter for more than a decade ahead
of petitioner (Universal vs. Universal, 78 SCRA 62).
Where a trade name (lsetan) used and registered in Japan and
Hongkong was never utilized in the Philippines by these registrants,
they are not owners of this trade name. The use therefore and
registration of said tradename in the Philippines by another (lsetan)
is not violative of the Trademarks Law (Kabushi vs. lAC, 203 SCRA
583).
While it is true that the Philippines is a signatory to the Paris
Convention for the Protection of lndustrial Property, the protection
extendible to holders of these marks registered in other countries
exist only if the conditions prescribed by said convention, one of
which is that the name or mark must be internationally known, are
present (lbid.).
 INTELLECTUAL PROPERTY CODE
790
A trade name need not be registered with the IPO before an
1 Our municipal law on trademarks regarding the requirement of
infringement suit may be filed by its owner against the owner of an
infringing trademark. All that is required is that the trade name is
previously used in trade or commerce in the Philippines (Coffee vs.
San Francisco, 614 SCRA 113).
Section 165.2 of RA 8293 categorically states that trade names
shall be protected, even prior to or without registration with the lPO,
against any unlawful act including any subsequent use of the trade
name by a third party, whether as a trade name or a trademark likely
to mislead the public (lbid.).
lf the competing trademark contains the main, essential, and
dominant features of another, and confusion or deception is likely to
result, infringement occurs. Exact duplication or imitation is not
required (lbid.).
A corporation has an exclusive right to the use of its name. The
right proceeds from the theory that it is a fraud on the corporation
which has acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use the same
name, or the same name with a slight variation in such a way as to
induce persons to deal with it in the belief that they are dealing with
the corporation which has given a reputation to the name (lbid.).
Where a predominant word in the trade name of a manufacturing
concern is appropriated and used by another manufacturing firm as a
trademark of goods manufactured by it, the two entities being
engaged in the manufacture of the same goods - rubber shoes -- the
use of said predominant word may be enjoined, and its use as a part
of the trademark prevented. The Philippines is a"party to the Paris
Convention, under which a tradename of corporate name shall be
protected in all countries of the union whether or not said name
forms a part of the trademark (Converse vs. Universal, 147 SCRA
154).
A foreign corporation not doing business in the Philippines may
have the right to sue before Philippine Courts but existing adjective
axioms require that qualifying circumstances necessary for the
dssertion of such right should first be affirmatively pleaded. lt is not
sufficient for a foreign corporation suing to simply allege its alien
origin. lt must additionally allege its personality to sue (lbid.).
INTELLECTUAL PROPERTY CODE
791
actual use in the Philippines must subordinate an international
agreement inasmuch as the apparent.clash is being decided by a
municipal tribunal. The fact that international law has been made
part of the law of the land does not imply the primacy of international
law over national law in the municipal sphere. Under the doctrine of
incorporation as applied in most countries, rules of international law
are given a standing equal, not superior, to national legislative
enactments (lbid.).
ln actions for infringement of patents and unfair competition, the
court cannot proceed on the bare allegation and assume as true the
contention of respondent that "Chloramphenicol" and
"Chloramphenicol'palmitate" are entirely different substances. The
case should have been tried on the merits and the parties required to
present evidence (Parke vs. Doctor's, 104 SCRA 700).
2. Damages
The owner of a registered mark may recover damages from any
person who infringes his rights, and the measure of the damages
suffered shall be either the reasonable profit which the complaining
party would have made, had the defendant not infringed his rights, or
the profit which the defendant actually made out of the infringement,
or in the event such measure of damages cannot be readily
ascertained with reasonable certainty, then the court may award as
damages a reasonable percentage based upon the amount of gross
sales of the defendant or the value of the services in connection with
which the mark or trade name was used in the infringement of the
rights of the complaining party. The court may impound sales
invoices and other documents evidencing sales. Where actual intent
to mislead the public or to defraud the complainant is shown, the
damages may be doubled. The complainant may also be granted
injunction (Section 1 56).
a. CivilAction
Jurisdiction over cases for infringement of registered marks, unfair
competition, false designation of origin and false description or
representation is lodged with the Court of First lnstance (now
Regional Trial Court) (Samson vs. Daway, 434 SCRA 612).
Bar Question: What are the remedies against unfair comptetition?
(1967 Bar)
792 INTELLECTUAL PROPERTY CODE
1 793
Answer: Under RA 8293 (Secflons 156, 157, 161), the remedies
available to the offended party against the offender are as follows:
a) Damages, which may either be (1) reasonable profit which plaintiff
would have realized, or (2) actual profits collected by the defendant,
or (3) a certain percentage over the gross sa/es of defendanf is case
the measure of damages cannot be readily asceftained;
b) Damages may be doubled rn cases where actual intent to mislead
the public or to ascertained.
c) lmpounding of sa/es invoices and other documents evidencing
sa/es,'
d) lnjunction - to prevent defendant from the further use of the
trademark;
e) Destruction of goods found to be infringing, and all paraphernalia.
Bar Question: Does the owner of a trademark have a right of
propefty to prevent others from manufacturing, producing, or selling
the same article to which it is attached? (1982 Bar)
Answer: No, the trademark owner does not have the right to
prevent others from manufacturing, producing or selling the same
article to which the trademark is aftached.
The right of the trademark owner is to prevent the use by others of
his registered mark on similar goods manufactured, produced or sold
by others.
(Note: Answer still valid under RA 8293)
b. GriminalAction
Under RA 8293, imprisonment from 2 years to 5 years and fine
ranging from P50,000.00 to P200,000 shall be imposed upon a
person found guilty of committing infringement, unfair competition
and false designation of origin (Section 170).
Duly registered trademarks are protected by law as intellectual
properties and cannot be appropriated by others without violating the
due process clause. An infringement of intellectual rights is no less
vicious and condemnable as theft of material property, whether
personal or real (Amigo vs. Cluett, 354 SCRA 434).
c. Simultaneity of Actions
Bar Question: K-9 Corporation, a foreign corporation alleging itself
to be the registered owner of trademark "K-9" and logo "K" filed an
lnter-partes case with the lntellectual Property Office against Kanin
INTELLECTUAL PROPERTY CODE
Corporation for the cancellation of the latter's mark "K-9" and logo
"K". During the pendency o,f the case before the lntellectual Property
Office, Kanin Corporatign brought suit against K-9 Corporation
before the Regional Trial Court for infringement and damages.
Could the action before the Regional Trial Court prosper? Why?
(2003 Bar)
Answer: Yes, the action before the Regional Trial Couri can
prosper.
An application for an administrative cancellation of a registered
trade mark cannot per se have the effect of restraining or preventing
the courts from the exercise of their lawfully conferred jurisdiction. A
contrary rule would unduly expand the doctrine of primary jurisdiction
which, simply expressed, would merely behoove regular courts, in
controversies involving specialized dr'spufes, to defer to the findings
or resolutions of administrative tribunals on certain technical matters.
But the court may, in 'its sound discretion, suspend the action
pending outcome of the cancellation proceedings (See Conrad vs.
cA,246 SCRA 691).
d. Requirement of Notice
ln any suit for infringement, the owner of the registered mark shall
not be entitled to recover profits or damages unless the acts have
been committed with knowledge that such imitation is likely to cause
confusion, or to cause mistake, or to deceive. Such knowledge is
presumed if the registrant gives notice that his mark is registered by
displaying with the mark the words "Registered Mark" or the letter R
within a circle or if the defendant had otherwise actual notice of the
registration (Section 1 58).
J. Unfair Gompetition
Bar Question: What is unfair competition? Discuss briefly. (1968,
1966 Bar)
Answer: Any person who shall employ deception or any other
means contrary to good faith by which he sha// pass off the goods
manufactured by him or in which he deals, or his busrness, or
seryices for those of the one having established such goodwill, or
who shall commit any acts calculated to produce said result, shatl be
guilty of unfair competition (Section 168).
794 INTELLECTUAL PROPERTY CODE
A person who has identified in the mind of the public the goods he
manufactures or deals in, his business or services from those of
others, has a property right in the goodwill of the said goods,
business or services so identified, which will be protected as other
property rights. The following shall be deemed guilty of unfair
competition: (a) Any person, who is setling his goods and gives
them the general appearance of goods of another manufacturer or
dealer, either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words
thereon, or in any other feature of their appearance, which would be
likely to influence purchasers to believe that the goods offered are
those of a manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the goods with
such appearance as shall deceive the public and defraud another of
his legitimate trade, or any subsequent vendor of such goods or any
agent of any vendor engaged in selling such goods with a like
purpose; (b) Any person who by any artifice, or device, or who
employs any other means calculated to induce the false belief that
such person is offering the services of another who has identified
such services in the mind of the public; or (c) Any person who shall
make any false statement in the course of trade or who shall commit
any other act contrary to good faith of a nature calculated to discredit
the goods, business or services of another (Section 168).
The law does not thefeby cover every unfair act committed in the
course of business as unfair competition. lt covers only acts
characterized by "deception or any other means contrary to good
faith" in the passing off of goods and services as those of another
who has established goodwill in relation with these goods or
services, or any other act calculated to produce the same result.
What unfair competition is, is further particularized under Section
168.3 when it provides specifics of what unfair competition is "without
in any way limiting the scope of protection against unfair
competition." Part of these particulars is provided under Section
168.3(c) which provides the general "catch-all" phrase. Under this
phrase, a person shall be guilty of unfair competition "who shall
commit any other act contrary to good faith of a nature calculated to
discredit the goods, business or services of another." From
jurisprudence, unfair competition has been defined as the passing off
(or palming off) or attempting to pass off upon the public the goods
or business of one person as the goods or business of another with
the end and probable effect of deceiving the public. lt formulated the
"true test" of unfair competition: whether the acts of defendant are
such as are calculated to deceive the ordinary buyer making his
" INTELLECTUAL PROPERTY CODE 79s
purchases under the ordinary conditions which prevail in the
particular trade to which the controversy relates. one of the
essential requisites in an action to restrain unfair competition is proof
of fraud; the intent to deceive must be shown before the right to
recover can exist. Deception, passing off and fraud upon the public
are still the key elements that must be present for unfair competition
to exist (Coca-Cota vs. Gomez, 521 SCRA 1g).
Given the lP code's specific focus, a first test that should be made
when a question arises on whether a matter is covered by the code
is to ask if it refers to an intellectual property as defined in tne cooe.
lf it does not, then coverage by'the code miy be negated. A second
test, if a disputed matter does not expressly refer t,o an intellectual
property right as defined above, is whether it falls under the general
"unfair competition" concept and definition. The question
ihen is
whether there is "deception" or any other simirar act in "passing off,
of goods or services to be those of another who enjoys established
goodyvill. separately from these tests is the application of the
principles of statutory construction giving particular attention to the
terms of section 168 in particular. Undei the principle of .noscitur a
sociis," when a particular word or phrase is ambiguous in itself or is
equally susceptible of various meanings, its correct construction may
be made clear and specific by considering the company of words in
which it is found or with whibh it is associated. As basis for this
interpretative analysis, we note that section 168.1 speaks of a
person who has earned goodwill with respect to his goods and
services and who is entifled to protection under the coie, with or
without a registered mark. section 168.2, as previously discussed,
refers to the general definition of unfair competition. section 168.3,
on the other hand, refers to the specific instances of unfair
competition, with section 168.1 referring to the sale of goods given
the appearance of the goods of anoiher; Section 1fig.2, td tfre
inducement of belief that his or her goods or services are that of
another who has earned goodwill; while the disputed Section 168.3
being a "catch all" crause whose coverage the parties now dispute
(rbid.).
An action for unfair competition is based on the proposition that
no dealer in merchandise should be allowed to dress his goods in
simulation of the goods of another dealer, so that puichasers
desiring t9 buy the goods of the latter would be induced to buy the
goods of the former. The most usuar devices emptoyel in
committing this crime are the simulation of labels'and the
reproduction of form, coror and generar appearance of the package
796 INTELLECTUAL PROPERTY CODE
used by the pioneer manufacturer or dealer (Caterpillar vs. Samson,
505 SCRA 704).
Bar Question: Prince Manufacturing Company, lnc. filed a
comptaint for unfair competition under Secflon 21-A of Republic Act
166 against Prince lndustries, lnc. The complaint substantially
alleges that plaintiff is a foreign corporation organized under the laws
of California, U.S.A., with offices in San Francisco; that defendant
Prince lndustries, tnc. is a corporation organizpd under the laws of
the Phitippines with principaloffice at Sucaf Road, Paranaque, Metro
Manita; that plaintiff, founded in 1920 by lver Prince, is the largest
manufacturer of balt bearings with the trademark "Prince" and
tradename "Prince Manufacturing Company, lnc'" which have been
exported to the Philippines since 1960; that due to the superior
quatity and widespread use of its products by the public, the names
are well known to Filipino consumers under the tradename "Prince
Manufacturing lndustries, Inc." and trademark "Prince"; that long
after the commencement of the use of plaintiff's trademark and
tradename in the Philippines, defendant began manufacturing and
selling ball bearings under the trademark "Prince" and tradename
"Prince lndustries, Company"; that defendant has registered with the
Philippine Patent Office the trademark "Prince", which registration is
contrary to Section 4 of RA 166, as amended, and violative of
ptaintiff's right to the trademark "Prince"; that the defendant not only
uses fhe trademark "Pfince" but likewise has copied the design used
by plaintiff in distinguishing its trademark; and that the'use thereof by
defendant on its product would cause confusion in the minds of the
consumers and tikely deceive them as to the source or origin of the
goods, thereby enabling the defendant to pass off their products as
those of plaintiff.
tnvoking the provisions of Secflon 21-A of Republic Act 166, as
amended, plaintiff prayed for damages. lt also sought the issuance
of a writ of iniunction to prohibit defendants from using the
tradename "Prince tndustries, lnc." and the trademark "Prince".
(a) lf you were the counsel for the defendant Prince lndustries, Inc',
what grounds woutd you invoke to have the complaint dismissed?
(b) If you were the counsel for the plaintiff, what administrative
remedy woutd you advise your client to pursue in the event the coutt
action fails? (1984 Bar)
Answer: (a) tf t were counset for defendant Prince lndustries lnc', I
witt invoke thq following grounds to have the complainf dismissed;
1. That a competent authority in the Philippines has not
considered the mark as internationally well-known;
INTELLECTUAL PROPERTY CODE 797
2. That defendant has registered the questioned trademark, hence
is entitled fo use the same for its products.
(b) While I submit that the court action of plaintiff will not fail, in the
remote possibility that it will fail, on the supposition stated in the
question, the administrative remedy open to plaintiff will be to file
proceedings before the lntellectual Property Office for the
cancellation of the trademark registered by the defendant if the mark
is considered by a competent authority as internationally well-known
under Section 123'(e) or (f) of RA 8293.
Bar Question: 1) What is the distinction between infringement and
unfair.competition? (1 996, 1 960 Bar)
Answer: An action= for unfair competition is differentiated from an
action for infringement of trademark as follows:
1. Cause of action: in infringement, the cause of action is the
unauthorized use of a registered trademark; in unfair competition, it
is fhe passrng off of one's goods as fhose of another merchant.
2. Fraudulent intent is not necessary in infringement, but it is
necessary in unfair competition.
3. Registration of trademark: in infringement, registration of the
trademark is a prerequisite; such registration is not required in unfair
competition.
4. Class of goods involved in infringement; the goods involved must
be of similar c/ass,' in unfair competition, the goods need not be of
the Same c/ass (See Del Monte vs. CA, 1 81 SCRA 41 0).
Although the laws on trademark infringement and unfair
competition have a common conception at their root, that is, a
person shall not be permitted to misrepresent his goods or his
business as the goods or business of another, the law on .unfair
competition is broader and more inclusive than the law on trademark
infringement. The latter is more limited but it recognizes a more
exclusive right derived from the trademark adoption and registration
by the person whose goods or business is first associated with it.
The law on trademarks is thus a specialized subject distinct from the
law on unfair competition, although the two subjects are entwined
with each other and are dealt with together in the Trademark Law
(now, both are covered by the lP Code). Hence, even if one fails to
establish his exclusive property right to a trademark, he may still
obtain relief on the ground of his competitor's unfairness or fraud.
Conduct constitutes unfair competition if the effect is to pass off on
the public the goods of one man as the goods of another. lt is not
798 INTELLECTUAL PROPERTY CODE
necessary that any particular means should be used to this end
(Mighty vs. E & J, 434 SCRA 473).
Bar Question: ln what way is an infringement of a trademark similar
to that which pertains to unfair competition? (2003 Bar)
Answert lnfringement of a trademark is a form of unfair competition
(See Clarke vs. Manila, 36 Phil. 100), both of which causes
confusion as to deceive an ordinary person into thinking that the
product or service of one is that of another.
The essential elements of an action for unfair competition are (1)
confusing similarity in the general appearance of the goods, and (2)
intent to deceive the public and defraud a competitor. The confusing
similarity may or may not result from similarity in the marks, but may
result from other external factors in the packaging or presentation of
the goods. The intent to deceive and defraud may be inferred from
the similarity of the appearance of the goods as offered for sale to
the public. Actual fraudulent intent need not be shown (ln-N-Out vs.
Sehwani, 575 SCRA 535).
The element of intent to deceive may be inferred from the
similarity of the goods or their appearance (NBl vs. Hwang, 460
scRA 428).
Generally, unfair competition consists in employing deception or
any other means contrary to good faith by which any person shall
pass off the goods manufactured by him or in which he deals, or his
business, or services for those of the one having established
goodwill, or committing any acts calculated to produce such result.
The elements of unfair competition under Article 189(1) of the
Revised Penal Code are: (a) That the offender gives his goods the
general appearance of the goods of another manufacturer or dealer;
(b) That the general appearance is shown in the (1) goods
themselves, or in the (2) wrapping of their packages, or in the (3)
device or words therein, or in (4) any other feature of their
appearance; (c) That the offender offers to sell or sells those goods
or gives other persons a chance or opportunity to do the same with a
like purpose; and (d) That there is actual intent to deceive the public
or defraud a competitor (Levi vs. Lim, 573 SCRA 25).
Bar Question: Who are the persons to be held liable for the act of
unfair competition? (1965 Bar)
INTELLECTUAL PROPERTY CODE 799
Answer: Under RA 8293 (Section 168.3), persons committing any
of the following acts are guilty of unfair competition:
a. Making one's goods appear as the goods of another;
b. Use of artifice or device to induce the fatse belief that one's goods
are those of another;
c. False statements in the course of trade;
d. Any act contrary to good faith calculated to discredit another's
goods.
Bar Question: Ashley Manufacturing Company, a manufacturer in
France of a certain brand of cigarette paper, appoints "X" Company
the exclusive agent to se// rfs paper in the Philippines. Among its
customers are well-known cigarette manufacturers in the philippines.
"Y" Company imports from a dealer in France the same cigarette
paper which Ashley Manufacturing Company produces, and selts it
fo ifs seyeral outlets. The dealer in France has no restriction
whatsoever from the manufacturer regarding the sate of such paper
for export, nor did "Y" Company have any dealings with
Company. Nonefheless, "Y" Company is fully aware of the exclusive
right of "X" Company to handle the distributorship of the said
cigarefte paper in the Philippines.
ls "Y" Company liable for unfair competition under the Trademark
Law, as amended, and could it be enjoined from seiling said
cigarette paper? (1980 Bar)
Answer: Y Company is liable for unfair competition.
Under the Law on Trademarks, a person who had identified in the
minds of the public the goods he deals in his business or serylces
from those of others has a property right in the goodwill of the said
goods, buslness or services so identified which wilt be protected in
the same manner as other property rights protected by the Law on
Trademarks. The person who passes off the goods as deatt by him
for those of one having established a goodwill over them is guitty of
unfair competition.
"Y" Company in the problem is dealing with the cigarette paper
with full knowledge of the exclusive agency of "X" Company over
said article, and therefore commits unfair competition. "y" Company
can be enjoined from selling said cigarette.paper.
(Note: Answer valid under RA 8293)
Republic Act No. 623, "An Act to Regutate the Use of Duly
Stamped or Marked Bottles, Boxes, Casks, Kegs, Barrels and Other
Similar Containers," as amended by RA No. 5700, was meant to
protect the intellectual property rights of the registrants of the
800 INTELLECTUAL PROPERTY CODE
containers and prevent unfair trade practices and fraud on the public.
However, the exemption granted in Section 6 thereof was deemed
extremely necessary to provide assistance and incentive to the
backyard, cottage and small-scale manufacturers of indigenous
native products such as patis, sisi and toyo who do not have the
capital to buy brand new bottles as containers nor afford to pass the
added cost to the majority of Filipinos who use the products as their
daily condiments or viands (Twin vs. CA, 280 SCRA 884).
Petitioner cannot seek refuge in Section 5 of RA No. 623 to
support its claim of continuing ownership over the subject bottles.
Since the purchaser at his discretion could either retain or return the
bottles, the transaction must be regarded as a sale of the bottles
when the purchaser actually exercised that discretion and decided
not to return them to the vendor (lbid.).
Judicial notice is taken of the standard practice today that the cost
of the cbntainer is included in the selling price of the product such
that the buyer of liquor or any such product from any store is not
required to return the bottle nor is the liquor placed in a plastic
container that possession of the bottle is retained by the store (lbid.).
Bar Question: X, a dealer of low grade oil, to save on expenses
uses fhe containers of different companies. Before marketing to the
public his low grade oil, X totally obliterates and erases the brands or
marks stenciled on the containers
Y brings an action against X for unfair competition upon its
discovery that its containers have been used by X for his low grade
oil.
ls there unfair competition? State briefly your reasons. (1988 Bar)
Answer: The act of X of utitizing containers of other companies to
package his own products (low grade oil) is a violation of Rep. Act
623 as amended.
This law declares as unlawful the use by a manufacturer on his
goods of the empty bottles, boxes, casks, kegs and similar
containers for bottling or packaging his products, and which
containers reveal the names of their products and their
manufacturers.
The bottles, boxes, casks, kegs and similar containers used by Y
should however be registered with the patent office.
The law however does not apply to the packaging and boftling of
bagoong, srsi and pafis.
INTELLECTUAL PROPERTY CODE 801
lf the container is not registered with the patents office, X, the
offender, instead of being guilty of infringement, could be brought to
coutt for unfair competition.
(Note: Answer valid under RA 8293)
A practical approach to the problem of similarity or dissimilarity is
to go into the whole of the two trademarks pictured in their manner of
display. lnspection should be undertaken from the viewpoint of
prospective buyers. The trademark complained of should be
compared and contrasted with the purchaser's memory (not in
juxtaposition) of the trademark to be infringed (87 C.J.S. 2BB-291).
Some such factors as sound, appearance, form, style, shape, size or
format, color, ideas connoted by the mark, the meaning, spelling,
and pronunciatlon of words used and the setting in which the words
appear may be considered (87 C.J.S. 291-292).
There is no unfair competition where a person did not pass off
the subject goods as that of another (Solid vs. Sheriff, 370 SCRA
491).
The law brands business practices which are unfair, unjust or
deceitful not only as contrary to public policy but also as inimical to
private interests (Proline vs. CA, 281 SCRA 162).
The act may constitute unfair competition even if the element of
selling has not been proved. To hold that the act of selling is an
indispensable element of the crime of unfair competition is illogical
because if the law punishes the seller of the imitation goods, then
with more reason should the law penalize the manufacturer (lbid.).
The manufacture of the |spalding" balls was obviously done to
deceive would-be buyers as the projected sale would have pushed
through were it not for the timely seizure of the goods made by the
NBl. That there was intent to sell or distribute the product to the
public cannot also be disputed given the number of goods
manufactured and the nature of the machinery and other equipment
installed in the factory (lbid.).
Bar Question: N Corporation manufactures rubber shoes under the
trademark "Jordann" which hit the Philippine market in 1985, and,
registered its trademark with the Bureau of Patents, Trademarks and
Technology Transfer (BPTTT) in 1990. PK Company also
manufactures rubber shoes with the trademark "Javorski" which it
registered with the BPTTT in 1978.
802 INTELLECTUAL PROPERTY CODE
ln 1992, PK Company adopted and copied the design of N
Corporation's "Jordann" rubber shoes, both as to shape and color,
but retained the trademark "Javorski" on its products.
May PK Company be held liable to N Corporation? Explain.
(1996 Bar)
Answer: Yes, PK company may be held liable for unfair
competition. The test of unfair competition is whether certain goods
have been clothed with an appearance likely to deceive the ordinary
purchaser exercising ordinary care, even if not all the details were
identical, but with the general appearances alone of the two
products, any ordinary, or even perhaps even a not too perceptive
and discriminating customer would be deceived.
It is immaterial that PK Company had prior registration of the
trademark. lt may still be"held liable for unfair competition for
manufacturing products that appear similar to those of N Corporation
(See Converse vs. Jacinto,9T SCRA 158).
Bar Question: A manufacturer of men's shrrf uses a label which
uses on the collar of lts shrrfs the figure of a gentleman. After
sometime, another manufacturer of men's shirts adopts a label which
uses fhe word "gentleman," but not the figure of a gentleman. /s
there any violation of the law on trademarks? Reasons for your
answer. lf so, what is the measure of the damages to which the first
manufacturer wouUbe entitled? Explain your answer. (1968 Bar)
Answer: No, the law on trademarks is not violated in the problem
above.
One manufacturer uses for his trademark the figure of gentleman
without even the word gentleman mentioned; and other manufacturer
uses a label with the word "Gentleman" on it, but without at all the
picture of a gentlemen.
The test for violation under the trademarks law is whether the
trademark, because of its similarity with an existing one is likely to
confuse the ordinary purchaser exercising ordinary care.
There are no points of similarity between the two labels which
woutd confuse an ordinary person to treat the product of one as the
product of another.
Hence, 'there is no violation whether infringement or unfair
competition in the problem above.
There being no violation, there would be no damages assessab/e.
(Note: Answer valid under RA 8293)
INTELLECTUAL PROPERTY CODE 803
Bar Question: "Hang Ten" on l-shrrfs, with the accompanying pair
of footprints marked on the T-shirts, is a registered Philippines
Trademark. Later comes a Chinese bicycle manufacturer who uses
the mark "Hank Double-Ten, accompanied by a pair of clenched
fists, on racing bicycles produced and sold by it. Does the registered
trademark owner have any remedy against the Chinese bicycle
manufacture? (1979, 1976, 1974, 1970 Bar)
Answer: No, the registered trademark owner has no cause of action
hence no remedy'against the Chinese bicycle manufacturer.
There is no colorable imitation of the registered trademark
because of a difference in name (Hang Ten and Hank Double-Ten),
and in the dominant background (footprints and clenched fists), such
that the possibility of the second being mistaken by the general
public for the f/rsf ls remote hence, there is no infringement.
There is no unfair competition a/so because the goods being of
different nature, the general public is not apt to think that the T-shirt
of one originated from the bicycle manufacturer.
(Note: Answer stillvalid under RA 8293)
Bar Question: P has for a long time been manufacturing shoes
which he has been selling under the registered trademark "Top
Notch". D opens a factory for the manufacture of hats which he
begins to sell under the mark "Top Notch". He also files an
application with the Patent Office to register the mark "Top Notch" for
hats. How would you decide the case if you were the judge. (1950
Ba0
Answer: lf I were the judge I will issue an order to restrain D from
continuing with the sale of the hats with the trademark "Top Notch."
P has long been using the same mark on hats, which like shoes, are
wearing apparels, hence is likely to mislead the public believing that
D's hats are also manufactured by P. There is therefore unfair
competition, and the offender can be enjoined from the further use of
the mark.
(Note: Answer stillvalid under RA 8293)
Bar Question: For the tast ten years, Rubberwortd Company has
been using the name Formidas for its rubber shoes and slippers but
has never registered it in the Patent Office. /fs busrness has
flourished and it is now exporting its products to other countries.
The Philippine Knitting Mills Company, a new enterprise, is now
selling socks manufactured by it with the label Formidas without
having registered the same either as a trademark or as tradename.
804 INTELLECTUAL PROPERTY CODE
Rubberworld Company wants to stop Philippine Knitting Mills from
using the tradename Formidas, but it entertarns some misgiving
abo:ut its right to do so because, firstly, it has not registered the
tradename, and secondly, its products and those of Philippine
Knitting Mills are different and, therefore, not competing items.
Are the doubts of Rubberworld Company well-founded? Why?
(1983 Bar)
Answer: Yes, the doubts of Rubberworld Company are well-
founded. While it is true that an action for unfair competition is
available as a remedy if the infringed trademark is not registered,
however, considering that the trademark was used by Philippine
Knitting Mills on socks, an afticle of commerce, very dissimilar from
the slippers or rubber shoes on which the same trademark is being
used by Rubberwortd, the action, even for unfair competition, will not
prosper.
(Note: Answer stillvalid under RA 8293)
While an application for the administrative cancellation of a
registered trademark on any of the grounds enumerated in Section
17 of RA 166 falls under the exclusive cognizance of the Bureau of
Patents, Trademarks and Technology Transfer, an action for
infringement or unfair competition, as well as the remedy of
injunction and relief for damages, is explicitly and unquestionably
within the comp6tence and jurisdiction of ordinary courts (Conrad vs.
cA,246 SCRA 691).
(Note: Under RA 8293 [Section 10.2], the Bureau of Legal Affairs of
the lntellectual Property Office shall exercise original jurisdiction in
administrative complaints for violations of laws involving intellectual
property rights where the total damages claimed are not less than
P20,000.00)
K.. Trade Names or Business Names
A name or designation may not be used as a trade name if by its
nature or the use to which such name or designation may be put, it is
contrary to public order or morals and if it is liable to deceive trade
circles or the public as to the nature of the enterprise identified by
that name. Such names shall be protected against any unlawful act
committed by third parties. Any subsequent use of the trade name by
a third party, whether as a trade name or a mark or collective mark,
or any such use of a similar trade name or mark, likely to mislead the
public, shall be deemed unlaMul. Any change in the ownership of a
INTELLECTUAL PROPERTY CODE 805
trade name shall be made with the transfer of the enterprise or part
thereof identified by that name (Section 165).
L. Collective Marks
A collective mark means any visible sign designated as such in
the application for registration and capable of distinguishing the
origin or any other common characteristic, including the quality of
goods or services of different enterprises which use the sign under
the control of the registered owner of the collective mark (Section
121).
The provisions pertaining to trademarks shall apply to collective
marks except that additional provisions on cancellation are provided,
and license contract shall not be required (Section 167)
lV. Law on Gopyright
A. Basic Principles
Bar Question: What is "copyright"? (1965 Bar)
Answer: A copyright is an intangible incorporeal right to ceftain
literary, scholarly, scientific and artistic productions granted by
statute to the author or creator of the work, and giving him, his heirs
and asslgns copyright or economic rights, which shallconsisf of the
exclusive right to carry out, authorize or prevent the following acts:
a. Reproduction of the work or substantial portion of the work;
b. Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work;
c. The first public distribution of the original and each copy of the
work by sale or other forms or transfer of ownership or transfer of
ownership;
d. Rental of the original or a copy of an audio visual or
cinematographic work, a work embodied in a sound recording, a
computer program, a compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental;
e. Public display of the original or a copy of the work;
f. Public performance of the work; and
g. Other communication to the public of the work. (Section 177,
RA B2e3).
 1
806 INTELLECTUAL PROPERTY CODE
1. Protection by Greation
Works are protected by the sole fact of their creation, irrespective
of their mode or form of expression, as well as of their content,
quality and purpose (Section 172.2).
2. Unprotected Subject Matter
. No protection shall extend to any idea, procedure, system, method
or operation, concept, principle, discovery or mere data as such,
even if they are expressed, explained, illustrated or embodied in a
work; news of the day and other miscellaneous facts having the
character of mere items of press information; or any official text of a
legislative, administrative or legal nature, as well as any official
translation thereof (Section 175).
3. Copyright and Material Object
The copyright is distinct from the property in the material object
subject to it. Consequently, the transfer or assignment of the
copyright shall not itself constitute a transfer of the material object.
Nor shall a transfer or assignment of the sole copy or of one or
several copies of the work imply transfer or assignment of the
copyright ( Section.l Bl ).
B. Copyrightable Works
',. OriginalWorks
Literary and artistic works are original intellectual creations in the
literary and artistic domain protected from the moment of their
creation and shall include in particular:
(a) Books, pamphlets, articles and other writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses, dissertations prepared for oral
delivery, whether or not reduced in writing or other material form;
(d) Letters;
(e) Dramatic or dramatico-musical compositions; choreographic
works or entertainment in dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture, engraving,
lithography or other works of art; models or designs for works of art;
INTELLECTUAL PROPERTY CODE 807
(h) Original ornamental designs or models for articles of
manufacture, whether or not registrable as an industrial design, and
other works of applied art;
(i) lllustrations, maps, plans, sketches, charts and three-dimensional
works relative to geography, topography, architecture or science;
fi) Drawings or plastic works of a scientific or technical character;
(k) Photographic works including works produced by a process
analogous to photography; lantern slides;
(l) Audiovisual works and cinematographic works and works
produced by a process analogous to cinematography or any process
for making audio-visual recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic works (Section
172.1).
A person to be entitled to a copyright must be the original creator
of the work. He must have created it by his own skill, labor and
judgment without directly copying or evasively imitating the work of
another (Sambar vs. Levi, 378 SCRA 364).
The format or mechanics of a television show is not included in the
list of protected works. For this reason, the protection afforded by
law cannot be extended to cover them (Joaquin vs. Drilon, 302
scRA 225).
2. Derivative Works
The following derivative works shall be protected by copyright as
new works: Provided That such new work shall not affect the force of
any subsisting copyright upon the original works employed or any
part thereof, or be construed to imply any right to such use of the
original works, or to secure or extend copyright in such original
works:
(a) Dramatizations, translations, adaptations, abridgments,
arrangements, and other alterations of literary or artistic works; and
(b) Collections of literary, scholarly or artistic works, and compilations
of data and other materials which are original by reason of the
selection or coordination or arrangement of their contents
.(Section 173).
The focus of copyright is the usefulness of the artistic design, and
not its marketability. The central inquiry is whether the article is a
work of art. Works for applied art include all original pictorials,
808 INTELLECTUAL PROPERTY CODE
I
graphics, and sculptural works that are intended to be or have been
embodied in useful article regardless of factors such as mass
production, commercial exploitation, and the potential availability of
design patent protection. lndeed, while works of applied art, original
intellectual, literary and artistic works are copyrightable, useful
articles and works of industrial design are not. A useful article may
be copyrightable only if and only to the extent that such design
incorporates pictorial, graphic, or sculptural features that can be
identified separately from, and are capable of existing independently
of the utilitarian aspects of the article (Ching vs. Salinas, 462 SCRA
241).
C. Non-Copyrightable Works (Unprotected Subject Matter)
Bar Question: What inteltectual productions may not be
copyrighted? (1 97 2 Bar)
Answer: RA 8293 provides the following works not protected:
1. Any idea, procedure, system, method or operation, concept,
principle, discovery or mere data
2. News of the day and other facts having the character of mere
items of press information
3. Any official text of a legislative, administrative or legal nature, as
well as any officialtranslation thereof (Section 175)
4. No copyright shallconsisf in any work of the Government of the
Philippines (Section 1 76)
D. Rights of Copyright Owner
. Copyright or economic rights shall consist of the exclusive right to
carry out, authorize or prevent the following acts:
a. Reproduction of the work or substantial portion of the work;
b. Dramatization, translation, adaptation, abridgment, arrangement
or other transformation of the work;
c. The first public distribution of the original and each copy of the
work by sale or other forms of transfer of ownership;
d. Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound recording, a
computer program, b compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental; (n)
e. Public display of the original or a copy of the work;
f. Public performance of the work; and
g. Other communication to the public of the work (Section 177).
INTELLECTUAL PROPERTY CODE 809
Copyright is purely a statutory right. Being a mere statutory grant,
the rights are limited to what the statute confers. lt may be obtained
and enjoyed only with respect to the subjects and by the persons,
and on terms and conditions specified in the statute. Accordingly, it
can cover only the works falling within the statutory enumeration or
description (Pearl vs. Shoemart, 409 SCRA 231).
Petitioner secured its copyright under the classification class "O"
work. This being so, its copyright protection extended only to the
technical drawings and not to the light box itself because the latter
was not at all in the category of "prints, pictorial illustrations,
advertising copies, labels, tags and box wraps." What the law does
not include, it excludes, and for good reason: the light box was not a
literary or arti6tic piece which could be copyrighted under the
copyright law (lbid.).
E. Rules on Ownership of Gopyright
. Copyright ownership shall be governed by the following rules:
1. ln the case of original literary and artistic works, copyright shall
belong to the author of the work;
2. ln the case of works of joint authorship, the co-authors shall be
the original owners of the copyright and in the absence of
agreement, their rights shall be governed by the rules on co-
ownership. lf, however, a work of joint authorship consists of parts
that can be used separately and the author of each part can be
identified, the author of each part shall be the original owner of the
copyright in the part that he has created;
3. ln the case of work created by an author during and in the course
of his employment, the copyright shall belong to:
(a) The employee, if the creation of the object of copyright is not a
part of his regular duties even if the employee uses the time, facilities
and materials of the employer.
(b) The employer, if the work is the result of the performance of his
regularly-assigned duties, unless there is an agreement, express or
implied, to the contrary.
4. ln the case of a work commissioned by a person other than an
employer of the author and who pays for it and the work is made in
pursuance of the commission, the person who so commissioned the
work shall have ownership of work, but the copyright thereto shall
remain with the creator, unless there is a written stipulation to the
contrary;
5. ln the case of audiovisual work, the copyright shall belong to the
producer, the author of the scenario, the composer of the music, the
810 INTELLECTUAL PROPERTY CODE
film director, and the author of the work so adapted. However,
subject to contrary or other stipulations among the creators, the
producers shall exercise the copyright to an extent required for the
exhibition of the work in any manner, except for the right to collect
performing license fees for the performance of musical compositions,
with or without words, which are incorporated into the work; and
6. ln respect of letters, the copyright shall belong to the writer subject
to the provisions of Article 723 of the Civil Code (that letters are
owned by the person to whom addressed and delivered but cannot
be published without the consent of the writer) (Section 178).
For anonymous and pseudonymous works, the publishers shall be
deemed to represent the authors of articles and other writings
published without the names of the authors or under pseudonyms,
unless the contrary appears, or the pseudonyms or adopted name
leaves no doubts as to the author's identity, or if the author of the
anonymous works discloses his identity (Section 179).
At most, the certificates of registration and deposit issued by the
National Library and the Supreme Court Library serve merely as a
notice of recording and registration of the work but do not confer any
right or title upon the registered copyright owner or automatically put
his work under the protective mantle of the copyright law. lt is not a
conclusive proof of copyright ownership. As it is, non-registration
and deposit of the worKwithin the prescribed period only makes the
copyright owner liable to pay a fine (Manly vs. Dadodette, 470 SCRA
384).
Bar Question: The widow of a former President commissioned
Matatino to write a biography of her late husband for a fee. lJpon
completion of the work, the widow paid Matalino the agreed price.
The biography was copyrighted. The widow, however, changed her
mind upon reading the book and decided not to have it published.
a. Can the President's widow sell the property without the
consent of Matalino?
b. Can the President's widow transfer the copyright without the
consent of Matalino? Explain (1986 Bar)
Answer: (a) Yes, the President's widow can sell the copyrighted
biography of her husband without need of securing the consent of
Matalino, the writer of said biography.
By Matalino.entering into a contract with the President's widow to
write the President's biography, and having received the fee for
INTELLECTUAL PROPERTY CODE 811
writing the said book, Matalino had parted with all rights to said
book, in effect making the widow the assignee of all of these rights.
The assignee's rEthfs include the right to sell the work.
(b) The President's widow cannot transfer the copyright without
the consent of Matalino. RA 8293 (Section 178.4) provides that in
the case of a work commissioned by a person other than an
employer of the author and who pays for it and the work is made in
pursuance of the commtssion, the person who so commissioned the
work shall have ownership of the work, but the copyright thereto shall
remain with the author, unless there is written stipulation to the
contrary.
Bar Question: Eloise, an accomplished writer, was hired by Petong
to write a bi-monthly newspaper column for Diario de Manila, a
newly-established newspaper of which Petong was the editor-in-
chief. Eloise was to be paid P1,000 for each column that was
published. ln the course of two months, Eloise submitted three
columns which, after some slight editing, were printed in the
newspaper. However, Diario de Manila proved unprofitable and
closed only after two months. Due to the minimal amounts involved,
Eloise chose not to pursue any claim for payment from the
newspaper, which was owned by New Media Enterprises. Three
years later, E/olse was planning to publish an anthology of her
works, and wanted to include the three columns that appeared in the
Diario de Manila in her anthology. She asks for your legal advice:
a) Does Eloise have to secure authorization from New Media
Enterprises to be abte to publish her Diario de Manila columns in her
own anthology? Explain fully.
b) Assume that the New Media Enterprises plans to publish E/oise's
columns in its own anthology entitled, "The Best of Diario de Manila"-
Eloise wants to prevent the publication of her columns in that
anthology srnce she was never paid by the newspaper. Name one
irrefutabte tegat argument Eloise could cite to enioin New Media
Enterprises from including her columns rn lts anthology. (2008 Bar)
Answer: a) No, there is no necessity to seek authorization from
New Media Enterprises in order for Eloise to publish her columns in
her own anthology. The articles fall within the provisions of Section
172 of the lntellectual Prsperty Code on Copyrights. These original
intettectuat creations in the literary and artistic domain are protected
from the moment of their creation. Section 178 of the same law
declares that copyright ownership shall belong to the author, which in
fhis case is E/oise.
812 INTELLECTUAL PROPERTY CODE
b) Under the lntellectual Property Code, the copyright or economic
rights to the columns she authored peftain only to the author, Eloise.
She may prevent the reproduction of the work, including public
distribution of the same.
Bar Question: tn 1999, Mocha Warm, an American musician, had
hit rap single called Warm Warm Honey which he himself composed
and peiormed. The single was produced by a California record
company, Galactic Records. Many noticed that sor??e passages from
Warm Warm Honey sounded eerily similar to pafts of Under Hassle,
a 1978 hit song by the British rock bank Majesty. A copyright
infringement suit was filed in the United Sfafes against Mocha Warm
by Majesty. lt was later settled out of court, with Majesty receiving
attribution as co-author of Warm Warm Honey as well as a share in
the royalties.
By 2002, Mocha Warm was nearing bankruptcy and he so/d his
economic rights over Warm Warm Honey to Galactic Records for
$10,000.
ln 2008, Planet Films, a Filipino movie producing company,
commissioned DJ Chef Jean, a Filipino musician, to produce an
original re-mix of Warm Warm Hoeny for use of its latest f/ms, Astig/.
DJ Chef Jean remixed Warm Warm Honey with a salsa beat, and
interspersed as well a recital of a poetic stanza by John Blake, a
17th century Scottish poet. DJ Chef Jean died shortly after
submitting the rernixed Warm Warm Honey to Planet Films.
Prior to the release of Astig!, Mocha Warm learns of the remixed
Warm Warm Honey and demands that he be publicly identified as
the author of the remixed song in all the CD covers and publicity
releases of Planet Films.
a) Who are the pariies or entities entitled to be credited as author of
the remixed Warm Warm Honey2 Reason out your answers.
b) Who are the particular parties or entities who exercise copyright
over the remixed Warm Warm Honey? Explain. (2008 Bar)
Answer: a) As a result of their own creative and intellectual efforts
in remixing Warm Warm Honey, Mocha Warm, Majesty, DJ Chef
Jean and John Blake may be credited as authors of the song.
b) Galactic Records and Planet Films may exercise the copyright
over the remixed version of Warm Warm Honey. Galactic Records
by virtue of its procurement of the economic rights of Mocha Warm
and Planet Films by virtue of the fact that it was the one who
commissioned the remixed work.
INTELLECTUAL PROPERTY CODE 8r3
Bar Question: a) What intellectual property rights are protected by
copyright?
b)Solid lnvestment House (SOLID) commissioned Mon Blanco and
his son Sfeve, both noted arftsts, to paint a mural for the Main Lobby
of the new building of SOLID for a contract price of Php 2 Miltion.
1) Who owns the nntral?
2) Who owns the copyright of the mural? Exptain? (2004, 1g9S
Ba0
Answer: (a) RA 8293 (Section 177) provides that copyright or
economic rights shall consisf of the exclusive right to carry out,
authorize or prevent the following acts:
a. Reproduction of the work or substantial portion of the work;
b. Drameitization, translation, adaptation, abridgment,
arrangement or other transformation of the work; .
c. The first public distribution of the original and each copy of the
work by sale or other forms or transfer of ownership;
d. Rental of the original or a copy of an audio visual or
cinematographic work, a work embodied in a sound recording, a
computer program, a compilation of data and other materials or a
musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental;
e. Public display of the original or a copy of the work;
f. Public performance of the work; and
g. Other communication to the public of the work.
(b)(1) SOL/D owns the mural. SOL/D was the one who
commissioned the arfisfs to do the work and paid for the work in the
sum of P2 mittion. The taw provides that in the case of a work
commissioned by a person other than an employer of the author and
who pays for it and the work is made in pursuance of the
commission,the person who commissioned the work shalt have
ownership of the work.
(2) Unless there is a stipulation to the contrary in the contract,
the copyright shall belong to the creators, Mon Blanco and his son
Sfeve.
F. Limitations on Copyright
. The following acts shall not constitute infringement of copyright:
(a) the recitation or performance of a work, once it has been laMully
made accessible to the public, if done privately and free of charge or
if made strictly for a charitable or religious institution or society;
(b) The making of quotations from a published work if they are
compatible with fair use and only to the extent justified for the

814 INTELLECTUAL PROPERTY CODE
purpose, including quotations from newspaper articles and
periodicals in the form of press summaries: Provided, That the
source and the name of the author, if appearing on the work, are
mentioned;
(c) The reproduction or communication to the public by mass media
of articles on current political, social, economic, scientific or religious
topic, lectures, addresses and other works of the same nature, which
are delivered in public if such use is for information purposes and
has not been expressly reserved: Provided, That the source is
clearly indicated;
(d) The reproduction and communication to the public of literary,
scientific or artistic works as part of reports of current events by
means of photography, cinematography or broadcasting to the extent
necessary for the purpose;
(e) The inclusion of a work in a publication, broadcast, or other
communication to the public, sound recording or film, if such
inclusion is made by way of illustration for teaching purposes and is
compatible with fair use: Provided, That the source and of the name
of the author, if appearing in the work, are mentioned;
(f) The recording made in schools, universities, or educational
institutions of a work included in a broadcast for the us'e of such
schools, universities or educational institutions: Provided, That such
recording must be deleted within a reasonable period after they were
first broadcast: Provided, further, That such recording may not be
made from audiovisual'works which are part of the general cinema
repertoire of feature films except for brief excerpts of the work;
(S) The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use in its own
broadcast;
(h) The use made of a work by or under the direction or control of the
Government, by the National Library or by educational, scientific or
professional institutions where such use is in the public interest and
is compatible with fair use;
(i) The public performance or the communication to the public of a
work, in a place where no admission fee is charged, by a club or
institution for charitable or educational purpose only, whose aim is
not profit making;
(j) Public display of the original or a copy of the work not made by
means of a film, slide, television image or otherwise on screen or by
means of any other device or process: Provided, That either the work
has been published, or, that original or the copy displayed has been
sold, given away or otherwise transferred to another person by the
author or his successor in title; and
1
{ INTELLECTUAL PROPERTY CODE 815
(k) Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by a legal
practitioner.
The foregoing provisions shall be interpreted in such a way as to
allow the work to be used in a manner which does not conflict with
the normal exploitation of the work and does not unreasonably
prejudice the right holder's legitimate interest (Section 184).
Bar Question: May a person have photocopies of some pages of
the book of Professor Rosario made without violating the copyright
law? (1998 Bar)
Answer: Yes, he may. The private reproduction of a published
work in a single copy, where the reproduction is made by a natural
person exclusively for research and private study, shall be permifted,
without the authorization of the owner of copyright in the work.
Bar Question: ln a written legal opinion for a client on the difference
between an apprenticeship and learnership, Liza quoted without
permission a labor law expert's comment appearing in his book
entitled "Annotations on the Labor Code."
Can the labor law expert hold Liza liable for infringement of
of his book without his permission?
copyright for quoting a portion
(2006 Bar)
Answer: Liza cannot be held liable for copyright infringement.
Section 184.1(k) of the lntellectualProperty Code provides, as one of
the limitations fo the copyright, the making of quotations from
published work for purpose of any judicial proceedings or for giving
professorial advice by legal practitioner. Provided however that the
source and name of the author are identified.
1. Doctrine of Fair Use
The fair use of a copyrighted work for criticism, comment, news
reporting, teaching including multiple copies for classroom use,
scholarship, research, and similar purposes is not an infringement of
copyright. Decompilation, which is the reproduction of the code and
translation of the forms of the computer program to achieve the inter-
operability of an independently created computer program with other
programs may also constitute fair use. ln determining whether the
use made of a work in any particular case is fair use, the factors to
be considered shall include:
(a) The purpose and character of the use;
 1
816 INTELLECTUAL PROPERTY CODE
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in relation to
the copyrighted work as a whole; and
(d) The effect of the use upon the potential market for or value of
the copyrighted work.
The fact that a work is unpublished shall not by itself bar a finding
of fair use if such finding is made upon consideration of all the above
factors (Section 185).
Bar Question: (1) Felix copyrighted the oil painting showing the
oath taking of President C. Aquino and Vice-President S. Laurel after
the EDSA revolution. Val engaged an artist to paint the same scene
for use as picture posfcards. Val then started sending the picture
posfcards to his friends abroad. ls there a violation of Felix's
copyright? Reasons. (1989 Bar)
Answer: No, there is no violation of the copyright of Felix. The
copyright secured by Felix on his oil painting of the oath taking of
President Aquino and Vice-President Laurel, after the EDSA
revolution, is a nullity because it was over a matter which formed part
of the repofts by media of current events.
No doubt, Felix used as basis for his oil painting pictures taken by
media of the oath taking. The pictures themselves, being a paft of a
report by media, or even an oil painting made from these pictures,
cannot be the subjecfof a copyright application.
The copyright granted to Felix, being null and void, Val cannot be
prosecuted for infringement of the said null and void copyright.
2. Copyright lnfringement
Any person infringing a copyright shall be liable:
(a) To an injunction restraining such infringement. The court may
also order the defendant to desist from an infringement, among
others, to prevent the entry into the channels of commerce of
imported goods that involve an infringement.
(b) Pay to the copyright proprietor or his assigns or heirs such actual
damages as he may have incurred due to the infringement as well as
the profits the infringer may have made due to such infringement,
and in proving profits the plaintiff shall be required to prove sales
only and the defendant shall be required to prove every element of
cost which he claims, or, in lieu of actual damages and profits, such
damages which to the court shall appear to be just and shall not be
regarded as penalty.
INTELLECTUAL PROPERTY CODE 817
(c) Deliver under oath, for impounding, sales invoices and other
documents evidencing sales, all articles and their packaging alleged
to infringe a copyright and implements for making them.
(d) Deliver under oath for destruction without any compensation all
infringing copies or devices, as well as all plates, molds, or other
means for making such infringing copies as the court may order.
(e) Such other terms and conditions, including the payment of
damages, which the court may deem proper, wise and equitable and
the destruction of infringing copies of the work even in the event of
acquittal in a criminal case.
ln an infringement action, the court shall also have the power to
order the seizure and impounding of any article which may serve as
evidence in the court proceedings (Section 216).
The complaint for copyright infringement was filed at the time that
Presidential Decree No. 49 was in force. The same principles are
reiterated under R.A. 8293 (Habana vs. Robtes, 310 SCRA 51 1).
Section 5 of PD 49 enumerates the rights vested exclusively on
the copyright owner. The gravamen of copyright infringement is not
merely the. unauthorized "manufacturing" of intellectual works but
rather the unauthorized performance of any of the acts covered by
Section 5. Hence, any person who performs any of the acts undei
Section 5 without obtaining the copyright owner's prior consent
renders himself civilly and criminally liable for copyright infringement
(NBl vs. Hwang, 460 SCRA 428).
It must be emphasized that the law on copyright is not absolute.
The lP Code provides for limitations on copyright (ABS-CBN vs.
Philippine, 576 SCRA 262).
The award of damages and cancellation of petitioner's copyright
are appropriate. Award of damages is clearly provided in Section 23,
while cancellation of petitioner's copyright finds basis on the fact that
the design was a mere copy of private respondents' trademark
(rbid.).
Bar Question: Diana and Pioto are i"rou" personalities in
a special
showbusiness who kept their love affair secref. They use
instant messaging service which ailows them to see one another,s
typing on their own screen as each letter key rs pressbd. When Greg,
the controller of the service facility, found out their identities, he kept
a copy of all the rnessages Diana and pioto sent each other and

818 INTELLECTUAL PROPERTY CODE
published them. Is Greg liable for copyright infringement? Reason
briefly. (2007 Bar)
Answer: Yes, Greg may be held liable for copyright infringement.
The exchanges of instant rnessages fall within the ambit of the term
"letters" under the Copyright Law. Such original creations are
protected by law from the moment of their creation. Gregb
unauthorized publication of the same constitutes copyright
infringement. (Section 1 72)
Bar Question: (a) Mrss So/ls wrote a script for Regal Films for the
movie "One Day - lsang Araw." Ms. Badiday, while watching the
movie in Ermita Theater, discovered that the story of the movie is
exactly similar to an unpublished copyrighted autobiography which
she wrote. Ms. Badiday sued Mrss So/is for infringement of
copyright. lt was however conclusively proven that Miss So/rs was
not aware that the autobiography of Ms. Badiday was protected by a
copyright. /s Miss Solis liable? State briefly your reasons. (199e,
1997, 1988, 1977 Bar)
Answer:.Mrss So/rs is liable to Ms. Badiday for infringement of
copyright.
A copyright work is infringed by the mere fact of the repetition of it
or of a substantial portion of it, without authority from the author or
writer of the copyriglited work. Her good faith or lack of knowtedge
that the work she infringed was copyrighted will not in any manner be
a defense on her part for the infringemenf she has committed.
Bar Question: Jose Molina, Jr. inherited the musical works of his
talented father, Jose Molina, Sr. who, before his death, had
composed a number of well-known songs. When he was alive, the
senior Molina never took the precaution of procuring copyright
registration for his composition, but his son, Molina Junior, who
appears to be more practical-minded, succeeded in having his
father's intellectual creations registered under the Copyright law.
One of such composffions was a song entitled "Habang Buhay",
which had been popularly sung and had in fact received international
acclaim long before the senior Molina's demise.
Vilma Aunor, a popular singer, was requested to sing "Habang
Buhay" in a free cultural presentation at the Luneta Park.
Jose Molina, Jr. sued Vilma Aunor for infringement of copyright.
How would you decide the case? (1987 Bar)
T
INTELLECTUAL PROPERTY CODE 819
Answer: The suit filed by Jose Molina, Jr. against Vitma Aunor witt
not prosper.
RA 8293 (Section 184) provides that the recitation or performance
of a work, once it has been lawfully made accessibte to the public, if
done privately and free of charge or if made stricfly for a charitable or
religious institution or society shall not constitute infringement
Bar Question: .X copyrighted a scientific research paper consisting
of 50 pageg dealing with the Tasadays. Y wrote a 1)}-page review
of X's paper criticizing X's findings and dlsmissing X's story as a
hoax. Y's reviews reproduced 90% of X's paper. Can X sue y for
infringement of his copyright? Reasons (1989 Bar)
Answer: X cannot sue Y for infringement. A critique on a
copyrighted work, necessarily has to reproduce portions of the work
being criticized before the critique can be understood by the readers.
The reproduction of portions of the work was done without any
intention on Y's part to claim the copyrighted work as his own.
Bar Question: The Victcjria Hotet chain reproduces videotapes,
a distributes the copies thereof to its hotels and makes them avaitbble
to hotel guesfs for viewing in the hotel guest rooms. tt charges a
separate nominal fee for the use of the videotape player.
a) Can the Victoria Hotel be enjoined for infringing copyrights and
held liable for damages?
b) Would it make any difference if Victoria Hotet does not charge any
fee for the use of videotape? (1994 Bar)
Answer: a) Yes, because the reproduction of the videotapes is an
infringement violative of the copyright or economic rights of its owner
(Section 177, RA 8293). The right to reproduceis a bastc right of the
owner, and any reproduction other than by the owner or without
authority from the owner, is an infringerpent.
(b) No. Although Section 184.1 of RA 8293 sfafes that the
performance of a work if done privately and free of charge does not
constitute infringement of copyright, still the use of the videotapes
was part of the operations of the hotel business fo enfice customers,
hence, was not done so for free and stilt constituted infringement
(See Filipino vs. Tan, 1 48 SCRA 461 ; P.D. I 9SB).
A basic requirement for the validity of search warrants in cases
involving film piracy is the presentation of the master tapes of the
copyright films from which the pirated films are supposed to have
been copied. The basic fact to be proven to establish probable
820 INTELLECTUAL PROPERTY CODE
cause is the "unauthorized transfer" of a motion picture that has been
recorded (Columbia vs. CA,237 SCRA 367).
Even assuming that only the sale, lease, or distribution of pirated
video tapes is involved, the fact remains that there is need to
establish probable cause that the tapes being sold, leased or
distributed are pirated tapes, hence, the issue reverts back to the
question of whether there was unauthorized transfer, directly or
indirectly, of a sound recording or motion picture or ,other audio
visual work that has been recorded (lbid.).
ln determining the question of infringement, the amount of matter
copied from the copyrighted work is an important consideration. To
constitute infringement, it is not necessary that the whole or even a
large portion of the work shall have been copied. lf so much is taken
that the value of the original is sensibly diminished, or the labors of
the original author are substantially and to an injurious extent
appropriated by another, that is sufficient in point of law to constitute
piracy (Habana vs. Robles, 310 SCRA 51 1).
Even if two authors were of the same background in terms of
teaching experience and orientation, it is not an excuse for them to
be identical even in examples contained in their books (lbid.).
ln cases of infrii$ement, copying alone is not what is prohibited,
the copying must produce an "injurious effect." Here the injury
consists in respondent's lifting from petitioner's book mat6rials that
were the result of the latter's research work and compilation and
misrepresented them as her own. She circulated the book for
commercial use and did not acknowledge petitioners as her source.
Quotations from a published work if they are compatible with fair use
and only to the extent justified by the purpose, including quotations
from newspaper articles and periodicals in the form of press
summaries are allowed provided that the source and the name of the
author, if appearing on the work, are mentioned (lbid.).
The use of intellectual property or creations should basically
promote the creator or author's personal and economic gain. Hence,
the copyright protection extended to the creator should ensure his
attainment of some form of personal satisfaction and economic
reward from the work he produced (lbid.).
Copyright infringement and unfair competition are not limited to
the act of selling counterfeit goods. They cover a whole range of
INTELLECTUAL PROPERTY CODE 821
acts, from copying, assembling, packaging to marketing, including
the mere offering for sale of the counterfeit goods (Microsoft vs.
Maxicorp, 438 SCRA 224).
Bar Question: ,After disposing of his last opponent in only two
rounds in Las Vegas, the renowned Filipino boxer Sonny Bachao
arrived at the Ninoy Aquino lnternational Airport met by thousands of
hero-worshipping fans and hundreds of media photographers. The
following day, a colored photograph of Sonny wearing a black polo
shirt embroidered with the 2-inch Lacoste crocodile logo appeared
on the front page of every Philippine newspaper.
Lacoste lnternational, the French firm that manufactures Lacoste
apparel and owns the Lacoste trademark, decided to cash in on the
universal pop'ularity of the boxing icon. tt reprinted the photographs,
with the permission of the newspaper publishers, and went on a
world-wide blitz of print commercials in which Sonny is shown
wearing a Lacoste shirt alongside the phrase "Sonny Bachao just
loves Lacoste."
When Sonny sees fhe Lacoste adveriisements, he hires you as
lawyer and asks you to sue Lacosfe lnternational before a Philippine
court for copyright infringement because of the unauthorized use of
the published photographs. Willthe action prosper? (2009 Bar)
Answer: A case for copyright infringement will not prosper. An
infringement is a copy of substantial poriions of a copyrighted work.
The copyright law expressly sfafes that news of the day and other
facts having the character of mere items of press information cannot
be the subject of a copyright application. The pictures being a part of
a repoft by media are not a copyrightable material which may be
subject to an action for infringement.
Bar Question: "a", a well-known artist, desrgns for "R" a
personalized Christmas card with an artistic motif depicting a
Philippine rural Christmas scene with a woman and a child, a nipa
hut adorned with star-shaped lanterns and a man astride a carabao
besrde a tree. Underneath the design appears the name of "Q". "R"
ordered from "Q" 500 of such Christmas cards and distributed them
to his friends.
A year later, "X" copies and prints the same design for his album
of Christmas cards intended for sale to the general public. Se:veral
cusfomers ordered Christmas cards from "X" with the same design
as that printed for "R".
"Q" files a_ suit against "X" claiming damages under the Copyright
Law despite his failure to copyright the work mentioned above. He
 T
822 INTELLECTUAL PROPERTY CODE
fufther claims that the printing or publication of the design he
prepared for "R" was special and limited.
Decide the case. (1980 Bar)
Answer: Q can claim damages against X.
Under RA 8293 (Secfions 172 and 191), registration and deposit
is no longer a requirement before a copyright owner can file a suit
under the Copyright Law. lt is merely for the purpose of completing
the records in the National Library and the Supreme Court. The
copyright is protected from the moment of creation.
Bar Question: Jose Sanfos has written many poems, some of
which have been published in Panorama Magazine but never
registered with the Copyright Office. Among his published works
was the poem entitled "ln a Rose Garden." About a year from its
publication, Jose was surprised to hear over the radio a song whose
lyrics were copied from his poem. lt appears that music sheefs of
the song have been published and sold under the name of the
composer, without any acknowledgment in favor of Jose.
Jose wants to know what his rights are and whether he can
secure an injunction against the composer and/or the publisher,
perhaps with damages. How will you advise him? Explain. (1983
Bar)
Answer: Jose Sanfoq as author of the plagiarized poem, may enioin
the publisher of the music sheefs- from further publishing said music
sheefs containing his poem, because under the law the requirement
of registration and deposit is not a condition for enioying the
remedies available to him as copyright owner srnce hls poems are
now protected from the moment of creation
GHAPTER XVII 823
ANTI.MONEY LAUNDERING ACT
(Republic Act 9160)
l. Policy of the Law
It is the policy of the State to protect and preserve the integrity
and confidentiality of bank accounts and to ensure that the
Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity. Hence, the State shall extend
cooperation in transnational investigations and prosecutions of
persons involved in money laundering activities wherevef committed.
ll. Govered lnstitution
Covered institution refers to:
(1) banks, non-banks, quasi-banks, trust entities and other
institutions and their subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng Pilipinas
(2) insurance companies and all other institutions supervised or
regulated by the lnsurance Commission
(3) (i) securities dealers, brokers, investment houses and other
similar entities managing securities or rendering services as
investment agent, advisor, or consultant
(ii) mutual funds, close-end investment companies, common trust
funds, pre-need companies and other similar entities
(iii) foreign exchange corporations, money changers, money
payment, remittance, and transfer companies and other similar
entities
(iv) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects,
cash substitutes and other similar monetary instruments or property
supervised or regulated by the Securities and Exchange Commission
lll. Obligations of Covered lnstitutions
(a) Customer ldentification. - Covered institutions shall establish and
record the true identity of its clients based on official documents;
maintain a system of verifying the true identity of their clients and
require a system of verifying their legal existence and organizational
structure, as well as the authority and identification of all persons
purporting to act on their behalf.
 824 ANTI.MONEY LAUNDERING ACT ANTI.MONEY LAUN DERING ACT 825

Anonymous accounts, accounts under fictitious names, and all the concerned officer and employee of the covered institution and
other similar accounts shall be absolutely prohibited. Peso and media shall be held criminally liable.
foreign currency non-checking numbered accounts shall be allowed.
lV. Covered Transaction
(b) Record Keeping. - All records of all transactions of covered
institutions shall be maintained and safely stored for five (5) years "Covered transaction" is a transaction in cash or other equivalent
from the dates of transactions. With respect to closed accounts, the monetary instrument involving a total in excess of P500,000.00
records on customer identification, account files and business within 1 banking day.
correspondence, shall be preserved and safely stored for at least five
(5)years from the dates when they were closed. V. SuspiciousTransactions

(c) Reporting of Covered and Suspicious Transactions. -- Covered
institutions shall report to the AMLC all covered transactions and
suspicious transactions within five (5) working days from occurrences
thereof, unless the Supervising Authority prescribes a longer period
not exceeding ten (10) working days.
Should a transaction be determined to be both a covered
transaction and a suspicious transaction, the covered institution shall
be required to report the same as a suspicious transaction.
When reporting covered or suspicious transactions to the AMLC,
covered institutions and their officers and employees shall not be
deemed to have violated Republic Act No. 1405, as amended,
Republic Act No. 6426, as amended, Republic Act No. 8791 and other
similar laws, but are prohibited from communicating, directly or
indirectly, in any manner or by an means, to any person, the fact that
a covered or suspicious transaction report was made, the contents
thereof, or any other information in relation thereto. ln case of
violation thereof, the concerned officer and employee of the covered
institution shall be criminally liable. However, no administrative,
criminal or civil proceedings shall lie against any person for having
made a covered or suspicious transaction report in the regular
performance of his duties in good faith, whether or not such reporting
results in any criminal prosecution under this Act of any other law.
When reporting covered or suspicious transactions to the AMLC,
covered instituting and their officers and employees are prohibited
from communicating directly or indirectly, in any manner or by any
means, to any person or entity, the media, the fact that a covered or
suspicious transaction report was made, the contents thereof, or any
other information in relation thereto. Neither may such reporting be
published or aired in any manner or form by the mass media,
electronic mail, or other similar devices. ln case of violation thereof,
"Suspicious transactions" ate transactions with covered
institutions, regardless of the amounts involved, where any of the
following circumstances exist:
(1) there is no underlying legal or trade obligation, purpose or
econom ic j ustification
(2) the client is not properly identified
(3) the amount involved is not commensurate with the business or
financial capacity of the client
(4) it may be perceived that the client's 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 client;s past
transactions with the covered institution
(6) the transaction is in a way related to an unlawful activity or
offense under this Act that is about to be, is being, or has been
committed
(7) any transaction that is similar or analogous to any of the
foregoing
Vl. When is Money Laundering Committed
Money laundering is a crime whereby the proceeds of an unlaMul
activity are transacted, thereby making them appear to have
originated from legitimate sources, committed by:
(i) 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
(ii) any person, knowing that any monetary instrument or property
involves the proceeds of any unlaMul activity, performs or fails to
perform any act as a result of which he facilitates the offense of
money laundering
 ANTI.MONEY LAUNDERING ACT
I ANTI.MONEY LAUNDERING ACT
826
(iii) any person, knowing that the monetary instrument of property is
required under this Act to be disclosed and fited with the AMLC, fails
to do so
Vll. UnlawfulActivity
"Unlawful activity" refers to any act or omission or series or
combination thereof involving or having direct relation to:
(1) Kidnapping for ransom
(2) Violation of the Comprehensive DangBrous Drugs Act of 2002
(3) Violation of the Anti-Graft and Corrupt Practices Act
(4) Plunder
(5) Robbery and extortion
(6) Jueteng and Masiao
(7) Piracy on the high seas
(B) Qualified theft
(9) Swindling
(10) Smuggling
(11) Violation of the Electronic Commerce Act
(12) Hijacking, destructive arson and murder, including those
perpetrated by terrorists against non-combatant persons and similar
targets
(13) Fraudulent practices and other violations of the Securities
Regulation Code
(14) Felonies of a similar nature punishable under the penal laws of
other countries
Vlll. Anti-MoneyLaunderingCouncil
The Anti-Money Laundering Council (AMLC) is created,
composed of the Governor of the Bangko Sentral ng Pilipinas as
Chairman, the Commissioner of the lnsurance Commission and the
Chairman of the Securities and Exchange Commission as Members.
The AMLC shall act unanimously in the discharge of its functions
(1) to require and receive covered or suspicious transaction reports
from covered institutions
(2) to issue orders addressed to the appropriate supervising authority
or the covered institutions to determine the true identity of the owner
of any monetary instrument or property subject of a covered
transaction or suspicious transaction report or request for assistance
from a foreign State, or believed by the Council to be representing,
involving or related to the proceeds of an unlaMul activity
(3) to institute civilforfeiture and all other remedial proceedings
m7
(4) to cause the filing of complaints for the prosecutlon of nroney
laundering
(5) to investigate suspicious transactions and covered traneactlonr
deemed suspicious
(6) to apply before the Court of Appeals for the freezing of any
monetary instrument or property alleged to be the proceeds of any
unlawful activity
(7) to implement such measures as may be necessary and justified
to counteract money laundering
(B) to receive and take action in respect of any request from foreign
states for assistance in their own anti-money laundering operations
(9) to develop educational programs on the pernicious etfects of
money laundering, the methods and techniques used in the money
laundering, the viable means of preventing money laundering and
the effective ways of prosecuting and punishing offenders
(10) to enlist the assistance of any branch or instrumentality of the
government in undertaking any and all anti-money laundering
operations
(11) to impose administrative sanctions for the violation of laws and
rules issued pursuant thereto
lX. Freezing of Monetary lnstrument or Property
The Court of Appeals may issue a freeze order which shall be
effective immediately for a period of 20 days unless extended by the
court.
The amendment by RA 9194 of RA 9160 erased any doubt on the
jurisdiction of the CA over the extension of freeze orders. As the law
now stands, it is solely the CA which has the authority to issue a
freeze order as well as to extend its effectivity. lt also has the
eiclusive jurisdiction to extend existing freeze orders previously
issued by the AMLC yr's-d-vis accounts and deposits related to
money-laundering activities (Republic vs. Cabrini, 489 SCRA 644).
X. Authority to Inquire Into Bank Deposits
Notwithstanding the provisions of Republic Act No. 1405, the
AMLC may inquire into or examine any particular deposit or
investment with any banking institution or non-bank financial
institution upon order of any competent court in cases of violation of
this Act, when it has been established that there is probable cause
that the deposits or investments are related to an unlavyful activity or
a money laundering offense, except that no court order shall be
828 ANTI.MONEY LAUNDERING ACT
required in cases involving unlawful activities. The BSP may inquire
into or examine any deposit of investment with any banking
institution or non-bank financial institution when the examination is
made in the course of a periodic or special examination.
When reporting covered or suspicious transactions to the AMLC,
covered institutions and their officers and employees shall not be
deemed to have violated Republic Act No. 1405 (Secrecy of Bank
Deposits Law) but are prohibited from communicating the fact that a
covered or suspicious transaction report was made, the contents
thereof, or any other information in relation thereto. ln case of
violation, the concerned officer and employee of the covered
institution shall be criminally liable. No. administrative, criminal or
civil proceedings shall lie against any person for having made a
covered or suspicious transaction report in the regular performance
of his duties, whether or not such reporting results in any criminal
prosecution.
Bar Question: Rudy is 7bbless but is reputed to be a iueteng
operator. He has never been charged or convicted of any crime. He
maintains several bank accounts and has purchased 5 houses and
lots for his children from Luansing Realty, Inc. since he does not
have any visible job, the company reported his purchases to the Anti'
Money Laundering Council (AMLC). Thereafter, AMLC charged him
with violation of 'the Anti-Money Laundering Law. Upon request of
the AMLC, the bank disclosed.to it Rudy's bank deposits amounting
to Pl00 Million. Subsequently, he was charged in couri for violation
of the anti-Money Laundering Law.
1) Can Rudy move to dismrss the case on the ground that he has
no criminal record?
2) To raise fund for his defense, Rudy sold the houses and lots to
a friend. Can Luansing Realty, lnc. be compelled to transfer to the
buyer ownership of the houses and lots?
3) tn disclosing Rudy's bank accounts fo AMLC, did the bank
violate any law?
4) Supposing the titles of the houses and /ots are in possession of
the Luansing Realty, lnc., is it under obligation to deliver the titles to
Rudy? (2006 Bar)
Answer: 1) No. Rudy may not move to dlsmiss, the fact that he has
no criminal record is of no moment. Under the Anti-Money
Laundering Law, Rudy would be guilty of a "money laundering crime"
committed when the proceeds of an unlawful activity, like iueteng
operations, are made to appear as having originated from legitimate
ANTI.MONEY LAUNDERING ACT 829
sources. The money laundering crime is separate and distinct from
the unlawful activity of being a jueteng operator, and requires no
previous conviction for unlavvful activity.
2) Luansing Realty is not a covered institution. Being a real estate
company, it is not one of those mentioned under Section 3 of the
Anti-Money Laundering Act. Hence, Luansing Realty, lnc. has no
justification under the said law to refuse to transfer to the buyer
ownership of the houses and /ofs.
3) No, the bank did not violate any law. The bank is a "covered
institution" under the Anti-Money Laundering Law, as such if is
obliged to report to the AMLC covered and suspicious transactions,
without thereby violating any law. Ihis is one of the exceptions of
the Secrecy of Bank Deposit Act.
When repofting covered or suspicious transactions to the AMLC,
covered institutions and their officers and employees sha// not be
deemed to have violated Republic Act No. 1405 (Secrecy of Bank
Deposlfs Law) but are prohibited from communicating the fact that a
covered or suspicious transaction report was made, the contents
thereof, or any other information in relation thereto. ln case of
violation,' the concerned officer and emptoyee of the covered
institution shall be criminally liable. No. administrative, criminal or
civil proceedings shall lie against any person for having made a
covered or suspicious transaction report in the regular performance
of his duties, whether or not sueh reporting resu/fs in any criminal
prosecution.
4) Yes, it has an obligation to detiver tittes to Rudy. Not being a
covered institution, Luansing Realty may not avoid its obligation by
invoking the Anti-Money Laundering Act.
 1
CHAPTER XVIII
830
FOREIGN INVESTMENTS ACT OF 1991
(Republic Act7O42l
l. Policy of the Law
The State shall attract, promote and welcome productive
investments from foreign individuals, partnerships, corporations, and
governments, including their political subdivisions, in activities which
significantly contribute to national industrialization and
socioeconomic development to the extent that foreign investment is
allowed in such activity by the Constitution and relevant laws.
Foreign investments shall be encouraged in the enterprises that
significantly expand livelihood and employment opportunities for
Filipinos; enhance economic value of farm products; promote the
welfare of.Filipino consumers; expand the scope, quality and volume
of exports and their access to foreign markets; and/or transfer
relevant technologies in agriculture, industry and support services.
Foreign investments shall be welcome as a supplement to Filipino
capital and technology in those enterprises serving mainly the
domestic market.
As a general rule, there are no restrictions on extent of foreign
ownership of export enterprises. ln domestic market enterprises,
foreigners can invest as much as one hundred percent [100%]equity
except in areas included in the negative list. Foreign-owned firms
catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation
in their businesses by taking in Filipino partners, electing Filipinos to
the board of directors, implementing transfer of technology to
Filipinos, generating more employment for the economy and
enhancing skills of Filipino workers.
The Foreign lnvestments Act (FlA) is the basic law governing
foreign investments in the Philippines, irrespective of the nature of
business and area of investment. The FIA spells out the procedures
by which non-Philippine nationals can invest in the Philippines (Heirs
vs. Teves, 682 SCRA 397).
ll. Definition of Terms
a. Foreign lnvestment - an equity investment made by non-
Philippine national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly registered with
the Central Bank (now Bangko Sentral ng Pilipinas) which shall
FOREIGN INVESTMENTS ACT OF 1991 831
assess and appraise the value of such assets other than foreign
exchange.
b. Doing Business includes soliciting orders, service
contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a
period or periods totaling one hundred eighty [180] days or more;
participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and
any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally
incident to, and in irrogressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided,
however, That the phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.
c.
Export Enterprise - an enterprise which produces goods for
sale, or
renders services to the domestic market entirely or if
exporting a portion of its output fails to consistently export at least
sixty percent (60%) thereof.
d. Domestic Market Enterprise - an enterprise which produces
goods for sale, or renders services to the domestic market entirely or
if exporting a portion of its output fails to consistently export at least
sixty percent (60%) thereof.
lll. Registration of Investments of Non-Philippine Nationals
Without need of prior approval, a non-Philippine national, not
otherwise disqualified by law may, upon registration with the
Securities and Exchange Commission [SEC], or with the Bureau of
Trade Regulation and Consumer Protection [BTRCP] of the
Department of Trade and lndustry in the case of single
proprietorships, do business or invest in a domestic enterprise up to
one hundred percent (100%) of its capital, unless participation of
non-Philippine nationals in the enterprise is prohibited or limited to a
smaller percentage by existing law and/or under the provisions of
 1
832 FOREIGN INVESTMENTS ACT OF 1991
this Act. The SEC or BTRCP shall not impose any limitations on the
extent of foreign ownership in an enterprise additional to those
provided in this Act: Provided That any enterprise seeking to avail of
incentives under the Omnibus lnvestment Code of 1987 must apply
for registration with the Board of lnvestments [BOl], which shall
process such application for registration in accordance with the
criteria for evaluation prescribed in said Code: Provided That a non-
Philippine national intending to engage in the same line of business
as an existing joint venture, in which he or his majority shareholder is
a substantial partner, must disclose the fact and the names and
addresses of the partners in the existing joint venture in his
application for registration with the SEC. During the transitory
pbriod, SEC shall disallow registration of the applying non-Philippine
national if the existing joint venture enterprise, particularly the Filipino
partners therein, can reasonably prove they are capable to make the
investment needed for the domestic market activities to be
undertaken by the competing applicant. The SEC shall effect
registration of any enterprise applying under this Act within fifteen
[15] days upon submission of completed requirements.
IV. Foreign lnvestments in Export Enterprises.
Foreign investment in export enterprises whose products and
services do not fall within Lists A and B of the Foreign lnvestment
Negative List is allowed up to one hundred percent [100%]
ownership.
Export enterprises which are non-Philippine nationals shall
register with BOI and submit the reports that may be required to
ensure continuing compliance of the export enterprise with its export
requirement. BOI shall advise SEC or BTRCP of any export
enterprise that fails to meet the export ratio requirement. The SEC or
BTRCP shall thereupon order the non-complying export enterprise to
reduce its sales to the domestic market to not more than forty
percent 140%l of its total production. Failure to comply with such
SEC or BTRCP order shall subject the enterprise to cancellation of
SEC or BTRCP registration, and/or penalties.
V. Foreign lnvestments in Domestic Market Enterprises
Non-Philippine nationals may own up to one hundred percent
[100%] of domestic market enterprises unless foreign ownership
therein is piohibited or limited by the Constitution and existing law or
the Foreign lnvestment Negative List.
FOREIGN INVEETi]IENTE ACT il I$I rut
Vl. Foreign lnvestment Negative Llet (Llet of lnvmtm.nt Arlll
Reserved to Philippine Nationals)
The Foreign lnvestment Negative List shall have two l2l
component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws'
b. List B shall contain the areas of activities and enterprises
regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and
authorization from the Department of National Defense [DND] to
engage in such:activity, such as the manufacture, repair, storage
anOlol distribution of firearms, ammunition, lethal weapons, military
ordnance,. explosives, pyrotechnics and similar materials; unless
such manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the
Secretary of National Defense
2. which have implications on public health and morals, such as the
manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beer houses, dance halls, sauna and
steam bathhouses and massage clinics
small and medium-sized domestic market enterprises with paid-in
equity capital less than the, equivalent of Two hundred thousand US
dolais [U5$200,000.00] are reserved to Philippine nationals:
Provided, That if: t1l they involve advanced technology as
determined by the Department of Science and Technology; or [2]
they employ at least fifty [50] direct employees, thel- a minimum
paiO-in capiiat of One hundred thousand US dollars [US$100,000.00]
shall be allowed to non-Philippine nationals.
Amendments to List B may be made upon recommendation of the
Secretary of National Defense, or the Secretary of Health, or the
Secretary of Education, Culture and Sports (now Secretary of
Education), indorsed by NEDA, or approved by the President, and
promulgated by a Presidential Proclamation.
The Transitory Foreign lnvestment Negative List shall be replaced
at the end of the transitory period by the first Regular Negative List to
be formulated and recommended by NEDA. The first Regular
Negative Lists shall be published not later than sixty [60] days before
 1
834 FOREIGN INVESTMENTS ACT OF 1991
the end of the transitory period, and shall become immediately
effective at the end of the transitory period. Subsequent Foreign
lnvestment Negative Lists shall become effective fifteen [15] days
after publication in a newspaper of general circulation in the
Philippines: Provided That each Foreign lnvestment Negative List
shall be prospective in operation and shall in no way affect foreign
investment existing on the date of its publication.
Amendments to List B after promulgation and publication of the
first Regular Foreign lnvestment Negative List at the end of the
transitory period shall not be made more often than once every two
[2] years.
lf a corporation, engaged in a partially nationalized industry,
issues a mixture of common and preferred non-voting shares, at
least 60% of the common shares and at least 60% of the preferred
non-voting shares must be owned by Filipinos. ln short, the 60-40
ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares (Heirs vs. Teves,
682 SCRA 397).
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino eQuity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential (lbid.).
2011 Bar Examination for Commercial Law 835
(Answers Taken from Supreme Court Website)
MULTTPLY CHOTCE QUESTIONS (MCa)
1. P rode a Sentinel Liner bus going to Baguio from Manila. At a
stop-over in Tarlac, the bus driver, the conductor, and the
passengers disembarked for lunch. P decided, however, to remain
in the bus, the door of which was not locked. At this point, V, a
vendor, sneaked into the bus and offered P some refreshments.
When P rudely declined, V attacked him, resulting in P suffering from
bruises and contusions. Does he have cause to sue Sentinel Liner?
A.Yes. since the carrier's crew did nothino to protect a passenqer
who remained in the bus durinq the stop-over.
B. No, since the carrier's crew could not have foreseen the attack.
C. Yes, since the bus is liable for anything that goes wrong in the
course of a trip.
D. No, since the attack on P took place when the bus was at a stop-
over.
2. A cargo ship of X Shipping, Co. ran aground off the coast of Cebu
during a storm and lost all its cargo amounting to Php50 Million. The
ship itself suffered damages estimated at Php80 Million. The cargo
owners filed a suit against X Shipping but it invoked the doctrine of
limited liability since its vessel suffered an Php80 Million damage,
more than the collective value of all lost cargo. ls X Shipping correct?
A. Yes, since under that doctrine, the value of the lost cargo and the
damage to the ship can be set-off.
B. No, since each cargo owner has a separate and individual claim
for damages.
C. Yes, since the extent of the ship's damage was greater than that
of the value of the lost cargo.
D. No. since X Shippinq neither incurred a total loss nor abandoned
its ship.
3. A writes a promissory note in favor of his creditor, B. lt says:
"subject to my option, I promise to pay B Phpl Million or his order or
give Phpl Million worth of cement or to authorize him to sell my
house worth Phpl Million. Signed, A." ls the note negotiable?
A. No. because the exercise of the option to pav lies with A, the
maker and debtor.
B. No, because it authorizes the sale of collateral securities in case
the note is not paid at maturity.
C. Yes, because the note is really payable to B or his order, the other
provisions being merely optional.
 T
836 2011 Bar Examination for Commercial Law
D. Yes, because an election to require something to be done in lieu
of payment of money does not affect negotiability
4. ABC Corp. increased its capital stocks from Php10 Million to
Php15 Million and, in the process, issued 1,000 new shares divided
into Common Shares "8" and Common Shares .C." T, a stockholder
owning 500 shares, insists on buying the newly issued shares
through a right of pre-emption. The company claims, however, that
its By-laws deny T any right of pre-emption. ls the corporation
correct?
A. No. since the Bv-Laws cannot denv a shareholder his riqht of pre-
emption.
B. Yes, but the denial of his pre-emptive right extends only to 500
shares.
C. Yes, since the denial of the right under the By-laws is binding on
T.
D. No, since pre-emptive rights are governed by the articles of
incorporation.
5. M makes a promissory note that states: "1, M, promise to pay
Php5,000.00 to B or bearer. Signed, M." M negotiated the note by
delivery to B, B to N, and N to O. B had known that M was bankrupt
when M issued the note. Who would be liable to O?
A. M and N since they may be assumed to know of M's bankruptcy
B. N. beinq O's immediate neqotiator of a bearer note
C. B, M, and N, being indorsers by delivery of a bearer note
D. B, having known of M's bankruptcy
6. S delivered 10 boxes of cellphones to Trek Bus Liner, for transport
from Manila to llocos Sur on the following day, for which S paid the
freightage. Meanwhile, the boxes were stored in the bus liner's
bodega. That night, however, a robber broke into the bodega and
stole S's boxes. S sues Trek Bus Liner for contractual breach but the
latter argues that S has no cause of action based on such breach
since the loss occurred while the goods awaited transport. Who is
correct?
A. The bus liner since the goods were not lost while being
transported.
B. S since the qoods were unconditionallv placed with T for
transportation.
C. S since the freightage for the goods had been paid.
D. The bus liner since the loss was due to a fortuitous event.
2011 Bar Examination for Commercial Law 837
7. X Corp. operates a call center that received orders for pizzas on
behalf of Y Corp. which operates a chain of pizza restaurants. The
two companies have the same set of corporate officers. After 2
years, X Corp. dismissed its call agents for no apparent reason. The
agents filed a collective suit for illegal dismissal against both X Corp.
and Y Corp. based on the doctrine of piercing the veil of corporate
fiction. The latter set up the defense that the agents are in the
employ of X Corp. which is a separate juridical entity. ls this defense
appropriate?
A. No, since the doctrine would apply, the two companies having the
same set of corporate officers.
B. No, the real employer is Y Corp:, lhe pizza company, with X Corp.
serving as an arm for receiving its outside orders lor pizzas.
C. Yes, it is noi shown that one company completelv dominates the
finances. policies. and business practices of the other.
D. Yes, since the two companies perform two distinct businesses.
B. A negotiable instrument can be indorsed by way of a restrictive
indorsbment, which prohibits further negotiation and constitutes the
indorsee as agent of the indorser. As agent, the indorsee has the
right, among others, to
A. demand payment of the instrument only.
B. notify.the drawer of the payment of the instrument.
C. receive pavment of the instrument.
D. instruct that payment be made to the drawee.
9. Under the Negotiable lnstruments Law, a signature by procuration
operates as a notice that the agent has but a limited authority to sign.
Thus, a person who takes a bill that is drawn, accepted, or indorsed
by procuration is duty-bound to inquire into the extent of the agent's
authority by:
A. examining the agent's special power of attorney.
B. examininq the bill to determine the extent of such authoritv.
C. asking the agent about the extent of such authority.
D. asking the principal about the extent of such authority.
10. Under the Negotiable lnstruments Law, if the holder has a lien on
the instrument which arises either from a contract or by implication of
law, he would be a holder for value to the extent of
A. his successor's interest.
B. his predecessor's interest.
C. the lien in his favor.
D. the amount indicated on the instrument's face.
 2011 Bar Examination for Commercial Law
11. The liability 'of a common carrier for the goods it transports
begins from the time of
A. conditional receipt.
B. constructive receipt.
C. actual receipt.
D. either actual or constructive receipt.
12. Deleted from 2013 Bar Exam
13. X executed a promissory note with a face value of Php50,000.00,
payable to the order of Y. Y indorsed the note to Z, to whom Y owed
Php30,000.00. lf X has no defense at all against Y, for how much
may Z collect from X?
A. Php20,000.00, as he is a holder for value to the extent of the
difference between Y's debt and the value of the note.
B. Php30,000.00, as he is a holder for value to the extent of his lien.
C. Php50.000.00, but with the obliqation to hold Php20.000.00 for
Y's benefit.
D. None, as Z's remedy is to run after his debtor, Y.
14. Under the Anti-Money Laundering Law, a covered institution is
required to maintain a system of verifying the true identity of their
clients as well as persons purporting to act on behalf of
A. those doing business with such clients.
B. unknown principals.
C. the covered institution.
D. such clients.
15. lt is settled that neither par value nor book value is an accurate
indicator of the fair value of a share of stock of a corporation. As to
unpaid subscriptions to its shares of stock, as they are regarded as
corporate assets, they should be included in the
A. capitalvalue.
B. book value.
C. par value.
D. market value.
16. P sold to M 10 grams of shabu worth Php5,000.00. As he had no
money at the time of the sale, M wrote a promissory note promising
to pay P or his order Php5,000. P then indorsed the note to X (who
did not know about the shabu), and X to Y. Unable to collect from P,
Y then sued X on the note. X set up the defense of illegality of
consideration. ls he correct?
2011 Bar Examination for Commercial Law lt39
A. No, since X, being a subsequent indorser, warranta thnt lho noler
is valid and subsisting.
B. No, since X. a qeneral indorser. warrants that the note ls v-qlld.ru1fl
subsistinq.
C. Yes, since a void contract does not give rise to any right.
D. Yes, since the note was born of an illegal consideration which is a
real defense.
17. ln a contract of carriage, the common carrier is liable for the
injury or death of a passenger resulting from its employee's fault
although the latter acted beyond the scope of his authority. This is
based on the
A. rule that thq carrier has an implied dutv to transport the passenqer
safely.
B. rule that the carrier has an express duty to transport the
passenger safely
C. Doctrine of Respondeat Superior.
D. rule in culpa aquiliana.
18. 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. An example of such a defense is -
A. fraud in inducement.
B. duress amounting to forgery.
C. fraud in esse contractus.
D. alteration.
19. ln elections for the Board of Trustees of non-stock corporations,
members may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate. This
is true -
A. unless set aside by the members in plenary session.
B. in every case even if the Board of Trustees resolves otherwise.
C. unless otherwise provided in the Articles of lncorporation or in the
By-laws.
D. in every case even if the majority of the members decide
otherwise during the elections.
20. The rule is that the valuation of the shares of a stockholder who
exercises his appraisal rights is determined as of the day prior to the
date on which the vote was taken. This is true -
A. reqardless of anv depreciation or appreciation in the share's fair
value.
B. regardless of any appreciation in the share's fair value.
 2011 Bar Examination for Commercial Law
C. regardless of any depreciation in the share's fair value.
D. only if there is no appreciation or depreciation in the share's fair
value.
21. T Shipping, Co. insured all of its vessels with R lnsurance, Co.
The insurance policies stated that the insurer shall answer for all
damages due to perils of the sea. One of the insured's ship, the MV
Dona Priscilla, ran aground in the Panama Canal when its engine
pipes leaked and the oil seeped into the cargo compartment. The
leakage was caused by the extensive mileage that the ship had
accumulated. May the insurer be made to answer for the damage to
the cargo and the ship?
A. Yes, because the insurance policy covered any or all damage
arising from perils of the sea.
B. Yes, since there appears to have been no fault on the part of the
shipowner and shipcaptain.
C. No, since the proximate cause of the damage was the breach of
warranty of seaworthiness of the ship.
D. No, since the proximate cause of the damaqe was due to ordinarv
usaqe of the ship, and thus not due to a peril of the sea.
22. X has been a long-time household helper of Z. X's husband, Y,
has also been Z's long-time driver. May Z insure the lives of both X
and Y with Z as beneficiary?
A. Yes, since X and Y render services to Z.
B. No, since X and Y have no pecuniary interest on the life of Z
arising from their employment with him.
C. No, since Z has no pecuniarv interest in the lives of X and Y
erci
D. Yes, since X and Y are Z's employees.
23. X, Co., a partnership, is composed of A (capitalist partner), B
(capitalist partner) and C (industrial partner). lf you were partner A,
who between B and C would you have an insurable interest on, such
that you may then insure him?
A. No one, as there is merely a partnership contract among A, B and
c.
B. Both B and C, as they are your partners.
C. Only C, as he is an industrial partner.
D. Only B, as he is a capitalist partrier.
24. X is the holder of an instrument payable to him (X) or his order,
with Y as maker. X then indorsed it as follows: "subject to no
recourse, pay to Z. Signed, X." When Z went to collect from Y, it
2011 Bar Examination for Commctrclal I aw tat
turned out that Y's signature was forged. Z now ettoa X for txtllsttlltttt
Will it prosper?
A. Yes, because X, as a conditional indorser, warrants that tho noto
is genuine.
B. Yes. because X. as a qualified indorser, warrants that the note is
qenuine.
C. No, because X made a qualified indorsement.
D. No, because a qualified indorsement does not include the
warranty of genuineness.
25. A bill of exchange has T for its drawee, U as drawer, and F as
holder. When F went to T for presentment, F learned that T is only
15 years old. F wants to recover from U but the latter insists that a
notice of dishonor must first be made, the instrument being a bill of
exchange. ls he correct?
A. Yes, since a notice of dishonor is essential to charging the drawer.
B. No, since T can waive the requirement of notice of dishonor.
C. No. since F can treat U as maker due to the minoritv of T. the
drawee.
D. Yes, since in a bill of exchange, notice of dishonor is at all times
required.
26. An insured, who gains knowledge of a material fact already alter
the effectivity of the insurance policy, is not obliged to divulge it. The
reason for this is that the test of concealment of material fact is
determined
A. at the time of the issuance of the policy.
B. at any time before the payment of premium.
C. at the time of the payment of the premium.
D. at any time before the policv becomes effective.
27.f ,the captain of MV Don Alan, while asleep in his cabin, dreamt
of an lntensity 8 earthquake along the path of his ship. On waking
up, he immediately ordered the ship to return to port' True enough,
the earthquake and tsunami struck three days later and his ship was
saved. Was the deviation proper?
A. Yes, because the deviation was made in good faith and on a
reasonable ground for believing that it was necessary to avoid a
peril.
B. No. because no reasonable Oround for avoiding a peril existed at
the time of the deviation.
C. No, because T relied merely on his supposed gift of prophecy.
D. Yes, because the deviation took place based on a reasonable
belief of the captain.
842 2011 Bar Examination for Commercial Law
28. X, drawee of a bill of exchange, wrote the words: "Accepted, with
promise to make payment within two days. Signed, X." The drawer
questioned the acceptance as invalid. ls the acceptance valid?
A. Yes, because the acceptance is in realitv a clear assent to the
order of the drawer to pay.
B. Yes, because the form of the acceptance is really immaterial.
C. No, because the acceptance must be a clear assent to the order
of the drawer to pay.
D. No, because the document must not express that the drawee will
perform his promise within two days.
29. X came up with a new way of presenting a telephone directory in
a mobile phone, which he dubbed as the "iTel" and which uses
lesser time for locating names and telephone numbers. May X have
his "iTel" copyrighted in his name?
A. No. because it is a mere svstem or method.
B. Yes, because it is an original creation.
C. Yes, because it entailed the application of X's intellect.
D. No, because it did not entail any application of X's intellect.
30. D, debtor of C, wrote a promissory note payable to the order of
C. C's brother, M, misrepresenting himself as C's agent, obtained the
note from D, then negotiated it to N after forging C's signature. N
indorsed it to E, who indorsed it to F, a holder in due course. May F
recover from E?
A. No, since the forgery of C's signature results in the discharge of E.
B. Yes. since onlv the forqed siqnature is inoperative and E is bound
as indorser.
C. No, since the signature of C, the payee, was forged.
D. Yes, since the signature of C is immaterial, he being the payee.
31. A material alteration of an instrument without the assent of all
parties liable thereon results in its avoidance, EXCEPT against a
A. prior indorsee.
B. subsequent acceptor.
C. subsequent indorser.
D. prior acceptor.
32. Deleted from 2013 Bar Exam
33. B borrowed Phpl million from L and offered to him his BMW car
worth Phpl Million as collateral. B then executed a promissory note
that reads: "1, B, promise to pay L or bearer the amount of Phpl
2011 Bar Examination for Commercial Law r{t
Million and to keep my BMW car (loan collaternl) freo frrtltt tttty olltat
encumbrance. Signed, B." ls this note negotlable?
A. Yes, since it is payable to bearer.
B. Yes, since it contains an unconditional promlee to pay a Bum
certain in money.
C. No, since the promise to just pay a sum of money is unclear.
D. No, since it contains a oromise to do an act in addition to the
pavment of monev.
34. A bank can be placed under receivership when, if allowed to
continue in business, its depositors or creditors would incur
A. probable losses
B. inevitable losses
C. possible lo5ses
D. a slight chance of losses
35. EFG Foundation, lnc., a non-profit organization, scheduled an
election for its six-member Board of Trustees. X' Y and Z, who are
minority members of the foundation, wish to exercise cumulative
voting in order to protect their interest, although the Foundation's
Articles and By-laws are silent on the matter. As to each of the three,
what is the maximum number of votes that he/she can cast?
A.6
B.9
c.12
D.3
36. lf the drawer and the drawee are the same person, the holder
may present the instrument for payment without need of a previous
presentment for acceptance. ln such a case, the holder treats it as a
A. non-ne$otiable instrument.
B. promissorv note.
C. letter of credit.
D. check.
37. D draws a bill of exchange that states: "One month from date,
pay to B or his order Php100,000.00. Signed, D." The drawee named
in the bill is E. B negotiated the billto M, M to N, N to O, and O to P.
Due to non-acceptance and after proceedings for dishonor were
made, P asked O to pay, which O did. From whom may O recover?
A. B, being the payee
B. N, as indorser to O
C. E, being the drawee
D. D. beinq the drawer
844 2011 Bar Examination for Commercial Law
38. T, an associate attorney in XYZ Law Office, wrote a newspaper
publisher a letter disputing a columnist's claim about an incident in
the attorney's family. T
used the law firm's letterhead and its
computer in preparing the letter. T also requested the firm's
messenger to deliver the letter to the publisher. Who owns the
copyright to the letter?
A. T. since he is the oriqinal creator of the contents of the letter.
B. Both T and the publisher, one wrote the letter to the other who has
possession of it.
C. The law office since T was an employee and he wrote it on the
firm's letterhead.
D. The publisher to whom the letter was sent.
39. E received goods from T for display and sale in E's store. E was
to turn over to T the proceeds of any sale and return the ones
unsold. To document their agreement, E executed a trust receipt in
T's favor covering the goods. When E failed to turn over the
proceeds from his sale of the goods or return the ones unsold
despite demand, he was charged in court for estafa. E moved to
dismiss on the ground that his liability is only civil. ls he correct?
A. No, since he committed fraud when he promised to pay for the
goods and did not.
B. No. since his breach of the trust receipt aqreement subjects him to
both civil and criminal.liabilitv for estafa.
C. Yes, since E cannot be charged with estafa over goods covered a
trust receipt.
D. Yes, since it was merely a consignment sale and the buyer could
not pay.
40. Deleted from 2013 Bar Exam
41. Any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the instrument
results in the discharge of the party secondarily liable unless made
with the latter's consent. This agreement refers to one which the
holder made with the
A. principaldebtor.
B. principalcreditor.
C. secondary creditor.
D. secondary debtor.
42. Upon execution of a trust receipt over goods, the party who is
obliged to release such goods and who retains security interest on
those goods, is called the
2011 Bar Examination for Commercial Law 84s
A. holder.
B. shipper.
C. entrustee.
D. entrustor.
43. Deleted from 2013 Bar Exam
44.On June 1,2011, X mailed to Y lnsurance, Co. his application for
life insurance, with payment for 5 years of premium enclosed in it.
On July 21,2011, the insurance company accepted the application
and mailed, on the same day, its acceptance plus the cover note. lt
reached X's residence on August11,201'1. But, as it happened, on
August 4,2011, X figured in a car accident. He died a day later. May
X's heirs recover on the insurance policy?
A. Yes, since under the Cognition Theory, the insurance contract
was perfected upon acceptance by the insurer of X's application.
B. No, since there is no privity of contract between the insurer and
X's heirs.
C. No. since X had no knowledge of the insurer's acceptance of his
application before he died.
D. Yes, since under the Manifestation Theory, the insurance contract
was perfected upon acceptance of the insurer of X's application.
45. A bill of exchange has D as drawer, E as drawee and F as
payee. The bill was then indorsed to G, G to H, and H to l. l, the
current holder presented the bill to E for acceptance. E accepted but,
as it later turned.out, D is a fictitious person. ls E freed from liability?
A. No. since by acceptinq. E admits the existence of the drawer.
B. No, since by accepting, E warrants that he is solvent.
C. Yes, if E was not aware of that fact at the time of acceptance.
D. Yes, since a bill of exchange with a fictitious drawer is void and
inexistent.
46. Due to his debt to C, D wrote a promissory note which is payable
to the order of C. C's brother, M, misrepresenting himself as agent of
C, obtained the note from D. M then negotiated the note to N after
forging the signature of C. May N enforce the note against D?
A. Yes, since D is the principal debtor.
B. No, since the siqnature of C was forqed.
C. No, since it is C who can enforce it, the note being payable to the
order of C.
D. Yes, since D, as maker, is primarily liable on the note.
846 2011 Bar Examination for Commercial Law
47. T Corp, has a corporate term of 20 years under its Articles of
lncorporation or from June 1 , 1980 to June 1 , 2000. On June 1 , 1991
it amended its Articles of lncorporation to extend its life by 15 years
from June 1, 1980 to June 1, 2015. The SEC approved this
amendment. On June 1, 2011, however, T Corp decided to shorten
its term by 1 year or until June 1,2014. Both the 1991 and 2011
amendments were approved by majority vote of its Board of
Directors and ratified in a special meeting by its stockholders
representing at least 213 of its outstanding capital stock. The SEC,
however, disapproved the 2011 amendment on the ground that it
cannot be made earlier than 5 years prior to the expiration date of
the corporate term, which is June 1 ,2014.|s this SEC disapproval
correct?
A. No, since the S-vear rule on amendment of corporate term applies
onlv to extension. not to shorteninq, of term.
B. Yes, any amendment affecting corporate term cannot be made
earlier than 5 years prior to the corporation's expiration date.
C. No, since a corporation can in fact have a corporate life of 50
years.
D. Yes, the amendment to shorten corporate term cannot be made
earlier than 5 years prior to the corporation's expiration date.
48. B, while drunk, accepted a passenger in his taxicab. B then
drove the taxi recklessly, and inevitably, it crashed into an electric
post, resulting in serious physical injuries to the passengers. The
latter then filed a suit for tort against B's operator, A, but A raised the
defense of having exercised extraordinary diligence in the safety of
the passenger. ls his defense tenable?
A. Yes, as a common carrier can rebut the presumption of
negligence by raising such a defense.
B. No, as in tort actions. the proper defense is due diliqence in the
selection and supervision gf the emplovee bv the emplover.
C. No, as B, the common carrier's employee, was obviously
negligent due to his intoxication.
D. Yes, as a common carrier can invoke extraordinary diligence in
the safety of passengers in tort cases.
49.X is a director in T Corp. who was elected to a 1-year term on
Feb. 1,2010. On April 11,2010, X resigned and was replaced by R,
who assumed as director on May 17,2010. On Nov. 21,2010, R
died. S was then elected in his place. Until which time should S
serve as director?
A. April 11,2011.
B. Feb.1,2011.
2011 Bar Examination for Commercial Law 847
C. May 17,2011.
D. Nov.21,2011.
50. M, the maker, issued a promissory note to P, the payee which
states: "1, M, promise to pay P or order the amount of Phpl Million.
Signed, M." P negotiated the note by indorsement to N, then N td O
also by indorsement, and O to Q, again by indorsement. But before
O indorsed the note to Q, O's wife wrote the figure "2" on the note
after "Php'l" without O's knowledge, making it appear that the note is
for Php12 Million. For how much is O liable to Q?
A. Phpl Million since it is the original tenor of the note.
B. Phpl Million since he warrants that the note is genuine and in all
respects what it purports to be.
C. Php12 Million since he warrants his solvency and that he has a
good title to the note.
D. Php12 Million since he warrants that the note is qenuine and in all
respects what it purports to be.
51. X Corp., whose business purpose is to manufacture and sell
vehicles, invested its funds in Y Corp., an investment firm, through a
resolution of its Board of Directors. The investment grew
tremendously on account of Y- Corp.'s excellent business judgment.
But a minority stockholder in X Corp. assails the investment as ultra
vires. ls he right and, if so, what is the status of the investment?
A. Yes, it is an ultra vires act of the corporation itself but voidable
only, subject to stockholders' ratification.
B. Yes, it is an ultra vires act of its Board of Directors and thus void.
C. Yes. it is an ultra vires act of its Board of Directors but voidable
onlv, subiect to stockholders' ratification.
D. Yes, it is an ultra vires act of the corporation itself and,
consequently, void.
52. Notice of dishonor is not required to be made in all cases. One
instance where such notice is not necessary is when the indorser is
the one to whom the instrument is suppose to be presented for
payment. The ratioriale here is that the indorser
A. alreadv knows of the dishonor and it makes no sense to notify him
of it.
B. is bound to make the acceptance in all cases.
C. has no reason to expect the dishonor of the instrument.
D. must be made to account for all his actions.
53. "Eagleson Refillers, Co.," a firm that sells water to the public,
opposes the trade name application of "Eagleson Laundry, Co.," on
 1
848 2011 Bar Examination for Commercial Law
the ground that such trade name tends to deceive trade circles or
confuse the public with respect to the water firm's registered trade
name. Willthe opposition prosper?
A. Yes, since such use is likely to deceive or confuse the public.
B. Yes, since both companies use water in conducting their
business.
C. No, since the comoanies are not enqaqed in the same line of
business.
D. No, since the root word "Eagle" is a generic name not subject to
registration.
54. For a constructive total loss to exist in marine insurance, it is
required that the person insured relinquish his interest in the thing
insured. This relinquishment must be
A. actual.
B. constructive first and if it fails, then actual.
C. either actual or constructive.
D. constructive.
55. The Corporation Code sanctions a contract between two or more
corporations which have interlocking directors, provided there is no
fraud that attends it and it is fair and reasonable
under the
circumstances. The interest of an interlocking director in one
corporation may be either substantial or nominal. lt is nominal if his
interest:
A. does not exceed 25% of the outstanding capital stock.
B. exceeds 25% of the outstanding capital stock.
C. exceeds 20% of the outstanding capital stock.
D- joeqnolexeqed 20% of the outstandinq capital stock.
56. X, an amateur astronomer, stumbled upon what appeared to be
a massive volcanic eruption in Jupiter while peering at the planet
through his telescope. The following week, X, without notes,
presented a lecture on his findings before the Absociation of
Astronomers of the Philippines. To his dismay, he later read an
article in a science jourhal written by Y, a professional astronomer,
repeating exactly what X discovered without any attribution to him.
Has Y infringed on X's copyright, if any?
A. No, since X did not reduce his lecture in writing or other material
form.
B. Yes, since the lecture is considered X's original work.
C. No. since no protection extends to any discovery. even if
expressed. explained, illustrated, or embodied in a work.
D. Yes, since Y's article failed to make any attribution to X.
2011 Bar Examination for Commercial Law 849
57. ln case of disagreement between the corporation and a
withdrawing stockholder who exercises his appraisal right regarding
the fair value of his shares, a three-member group shall by majority
vote resolve the issue with finality. May the wife of the withdrawing
stockholder be named to the three-member group?
A. No, the wife of the withdrawinq shareholder is not a disinterested
person.
B. Yes, since she could best protect her husband's shareholdings.
C. Yes, since the rules do not discriminate against wives.
D. No, since the stockholder himself should sit in the three-member
group.
58. Apart from economic rights, the author of a copyright also has
moral rights which he may transfer by way of assignment. The term
of these moral rights shall last
A. durinq the author's lifetime and for 50 vears after his death.
B. forever.
C. 50 years from the time the author created his work.
D. during the author's lifetime.
59. Which of the following indorsers expressly warrants in
negotiating an instrument that 1) it is genuine and true; 2) he has a
good title to it; 3) all prior parties have capacity to negotiate; and 4) it
is valid and subsisting at the time of his indorsement?
A. The irregular indorser.
B. The regular indorser.
C. The qeneral indorser.
D. The qualified indorser.
60. Where the insurer was made to pay the insured for a loss
covered by the insurance contract, such insurer can run after the
third person who caused the loss through subrogation. What is the
basis for conferring the right of subrogation to the insurer?
A. Their express stipulation in the contract of insurance.
B. The equitable assiqnment that results from the insurer's pavment
of the insured.
C. The insured's formal assignment of his right to indemnification to
the insurer.
D. The insured's endorsement of its claim to the insurer.
61. X invented a device which, through the use of noise, can
recharge a cellphone battery. He applied for and was granted a
patent on his device, effective within the Philippines. As it turns out, a
year before the grant of X's patent, Y, also an inventor, invented a
850 2011 Bar Examination for Commercial Law
similar device which he used in his cellphone business in Manila. But
X files an injunctive suit against Y to stop him from using the device
on the ground of patent infringement. Will the suit prosper?
A. No, since the correct remedy for X is a civil action for damages.
B. No. since Y is a prior user in qood faith.
C. Yes, since X is the first to register his device for patent
registration.
D. Yes, since Y unwittingly used X's patented invention.
62. P, a sales girl in a flower shop at the Ayala Station of the Metro
Rail Transit (MRT) bought two tokens or tickets, one for her ride to
work and another for her ride home. She got to her flower shop
where she usually worked from B a.m. to 5 p.m. At about 3 p.m.,
while P was attending to her duties at the flower shop, two crews of
the MRT got into a fight near the flower shop, causing injuries to P in
the process. Can P sue the MRT for contractual breach as she was
within the MRT premises where she would shortly take her ride
home?
A. No, since the incident took place, not in an MRT train coach, but
at the MRT station.
B. No, since P had no intention to board an MRT train coach when
the incident occured.
C. Yes, since she already had a ticket for her ride home and was in
the MRTs premises at the time of the incident.
D. Yes, since she'bought a round trip ticket and MRT had a duty
while she was at its station to keep her safe for her return trip.
63. Forgery of bills of exchange may be subdivided into, a) forgery of
an indorsement on the bill and,b) forgery of the drawer's signature,
which may either be with acceptance by the drawee, or
A. with acceptance but the bill is paid by the drawee.
B. without acceptance but the bill is paid by the drawer.
C. without acceptance but the bill is paid by the drawee.
D. with acceptance but the bill is paid by the drawer.
64. lf an insurance policy prohibits additional insurance on the
property insured without the insurer's consent, such provision being
valid and reasonable, a violation by the insured
A. reduces the value of the policy.
B. avoids the policv.
C. offsets the value of the policy with the additional insurances's
value.
D. forfeits premiums already paid.
2011 Bar Examination for Commercial Law 851
65. X found a check on the street, drawn by Y against ABC Bank,
with Z as payee. X forged Z's signature as an indorser, then indorsed
it personally and delivered it to DEF Bank. The latter, in turn,
indorsed it to ABC Bank which charged it to the Y's account. Y later
sued ABC Bank but it set up the forgery as its defense. Will it
prosper?
A. No, since the payee's signature has been forged.
B. No, since Y's remedy is to run after the forger, X.
C. Yes, since forgery is only a personal defense.
D. Yes, since ABC Bank is bound to know the siqnature of Y. its
client.
66. The rule is that no stock dividend shall be issued without the
'stockholders
approval of representing at least 2/3 of the outstanding
capital stock at a regular or special meeting called for the purpose.
As to other forms of dividends:
A. a mere majority of the entire Board of Directors applies.
B. a mere maiority of the quorum of the Board of Directors applies.
C. a mere majority of the votes of stockholders representing the
outstanding capital stock applies.
D. the same rule of 2/3 votes applies.
67. Deleted from 2013 Bar Exam
68. May a publicly listed universal bank own 100% of the voting
stocks in another universal bank and in a commercial bank?
A. Yes, if with the permission of the Bangko Sentral ng Pilipinas.
B. No, since it has no power to invest in equities.
C. Yes, as there is no prohibition on it.
D. No, since under the law. the 100% ownership on votino stocks
must be in either bank onlv.
69. Perils of the ship, under marine insurance law, refer to loss which
in the ordinary course of events results from
A. natural and inevitable actions of the sea.
B. natural and ordinary actions of the sea.
C. unnatural and inevitable actions of the sea.
D. unnatural and ordinary actions of the sea.
70. Under the lntellectual Property Code, lectures, sermons,
addresses or dissertations prepared for oral delivery, whether or not
reduced in writing or other material forms, are regarded as
A. non-originalworks.
B. oriqinalworks.
852 2011 Bar Examination for Commercial Law 2011Bar Examination for Commercial Law 853

C. derivative works. 75. X executed a promissory note in favor of Y by way of

D. not subject to protection. accommodation. lt says: "Pay to Y or order the amount of
Php50,000.00. Signed, X." Y then indorsed the note to Z, and Z to T.
71. Can a drawee who accepts a materially altered check recover When T sought collection from Y, the latter countered as indorser
from the holder and the drawer? that there should have been a presentment first to the maker who
A. No, he cannot recover from either of them. dishonors it. ls Y correct?
B. Yes from both of them. A. No. since Y is the real debtor and thus, there is no need for
C. Yes but only from the drawer. presentment for pavment and dishonor bv the maker.
D. Yes but only from the holder. B. Yes, since as an indorser who is secondarily liable, there must
first be presentment for payment and dishonor by the maker.
72. The rule is that the intentional cancellation of a person C. No, since the absolute rule is that there is no need for
secondarily liable results in the discharge of the latter. With respect presentment for payment and dishonor to hold an indorser liable.
to an indorser, the holder's right to cancel his signature is: D. Yes, since the secondary liability of Y and Z would only arise after
A. without limitation. presentmenf for payment and dishonor by the maker.
B. not limited to the case where the indorsement is necessary to his
title. 76. The Board of Directors of XYZ Corp. unanimously passed a
C. limited to the case where the indorsement is not necessarv to his Resolution approving the taking of steps that in reality amounted to
title. willful tax evasion. On discovering this, the government filed tax
D. limited to the case where the indorsement is necessary to his title. evasion charges against all the company's members of the board of
directors. The directors invoked the defense that they have no
73. X, in the hospital for kidney dysfunction, was about to be personal liability, being mere directors of a fictional being. Are they
discharged when he met his friend Y. X told Y the reason for his correct?
hospitalization. A month later, X applied for an insurance covering A. No, since as a rule only natural persons like the members of the
serious illnesses from ABC lnsurance, Co., where Y was working as board of directors can commit corporate crimes.
Corporate Secretary. Since X had already told Y about his B. Yes, since it is the corporation that did not pay the tax and it has a
hospitalization, he no longer answered a question regarding it in the personality distinct from its directors.
application form. Would this constitute concealment? C. Yes, since the directors officially and collectively performed acts
A. Yes, since the previous hospitalization would influence the insurer that are imputable only to the corporation.
in decidinq whether to qrant X's application. D. No. since the law makes directors of the corporation solidarilv
B. No, since Y may be regarded as ABC's agent and he already liable for qross neqliqence and bad faith in the discharqe of their
knew of X's previous hospitalization. duties.
C. Yes, it would constitute concealment that amounts to
misrepresentation on X's part. 77.T is the registered trademark owner of "CROCOS" which he uses
D. No, since the previous illness is not a material fact to the on his ready-to-wear clothes. Banking on the popularity of T's trade
insurance coverage. mark, B came up with his own "CROCOS" mark, which he then used
for his "CROCOS' burgers. T now sues B for trademark infringement
74. Several American doctors wanted to set up a group clinic in the but B argues that his product is a burger, hence, there is no
Philippines so they could render modern medical services. lf the infringement. ls B correct?
clinic is to be incorporated under our laws, what is the required A. No. since the owner of a well-known mark reqistered in the
foreign equity participation in such a corporation? Philippines has riqhts that extends even to dissimilar kinds of qoods.
A.4OYo B. Yes, since the right of the owner of a well-known mark registered
B.jYo in the Philippines does not extend to goods which are not of the
C.6OYo same kind.
D.70%
 T
8s4 2011 Bar Examination for Commercial Law
C. Yes, as B was in bad faith in coming up with his own 'CROCOS'
mark.
D. No, since unlike T, he did not register his own "CROCOS" mark
for his product.
78. A, the proprietor of a fleet of ten taxicabs, decides to adopt, as
his business name, "A Transport Co., lnc." May this be allowed?
A. No. it would be deceptive since he is a proprietor. not a
corporation.
B. No, since "A" is a generic name, not suitable for registration.
C. Yes, since his line of business is public transportation.
D. Yes, since such name would give his business a corporate
identity.
79. Deleted from 2013 Bar Exam
80. The Articles of lncorporation must be accompanied by a 85. A promissory note states, on its face: "1, X, promise to pay Y the
Treasurer's Affidavit certifying under oath, among others, that the
total subscription paid is:
A. not less than P25,000.00.
B. not more than P5,000.00.
C. not less than P5.000.00.
D. not more than P25,000.00.
81. ln a special-meeting called for the purpose, 213 of lhe
stockholders representing the outstanding capital stock in X. Co.
authorized the company's Board of Directors to amend its By-laws.
By majority vote, the Board then approved the amendment. ls this
amendment valid?
A. No since the stockholders cannot deleqate their riqht to amend
the Bv-laws to the Board.
B. Yes since the majority votes in the Board was sufficient to amend
the By-laws.
C. No, because the voting in the Board should have been by majority
of a quorum.
D. Yes since the votes of 213 of the stockholders and majority of the
Board were secured.
82. A group of Malaysians wanted to invest in the Philippines'
insurance business. After negotiations, they agreed to organize
'FIMA lnsurance Corp." with a group of Filipino businessmen. FIMA
would have a PhP50 Million paid up capital, PhP40 Million of which
would come from the Filipino group. All corporate officers would be
Filipinos and 8 out of its 10-member Board of Directors would be
2011 Bar Examination for Commercial Law 8s5
Filipinos. Can FIMA operate an insurance business in the
Philippines?
A. No. since an insurance companv must have at least PhP75 Million
paid-up capital.
BJes, slrrcethere is substantial compliance with our nationalization
laws respecting paid-up capital and Filipino dominated Board of
Directors.
C. Yes, since FIMA's paid up capital more than meets the country's
nationalization laws.
D. No, since an insurance company should be 100% owned by
Filipinos.
83. Deleted from 2013 Bar Exam
84. Deleted from 2013 Bar Exam
amount of Php 5,000.00 five days after completion of the on-going
construction of my house. Signed, X." ls the note negotiable?
A. Yes, since it is payable at a fixed period after the occurrence of a
specified event.
B. No. since it is pavable at a fixed period after the occurrence of an
event which may not happen.
C. Yes, since it is payable at a fixed period or determinable future
time.
D. No, since it should be payable at a fixed period before the
occurrence of a specified event.
86. P sold to M a pair of gecko (tuko) for Php50,000.00. M then
issued a promissory note to P promising to pay the money within 90
days. Unknown to P and M, a law was passed a month before the
sale that prohibits and declares void any agreement to sell gecko in
the country. lf X acquired the note in good faith and for value, may
he enforce payment on it?
A. No, since the law declared void the contract on which the
promissory note was founded.
B. No, since it was not X who bought the gecko.
C. Yes, since he is a holder in due course of a note which is distinct
from the sale of gecko.
D. Yes, since he is a holder in due course and P and M were not
aware of the law that prohibited the sale of gecko.
87. P authorized A to sign a bill of exchange in his (P's) name. The
bill reads: "Pay to B or order the sum of Phpl million. Signed, A (for
856 2011 Bar Examination for Commercial Law
and in behalf of P)." The bill was drawn on P. B indorsed the bill to
C, C to D, and D to E. May E treat the bill as a promissory note?
A. No, because the instrument is payable to order And has been
indorsed several times.
B. Yes, because the drawer and drawee are one and the same
person.
C. No, because the instrument is a bill of exchange.
D. Yes, because A was only an agent of P.
88. Z wrote out an instrument that states: "Pay to X the amount of
Phpl Million for collection only. Signed, 2." X indorsed it to his
creditor, Y, to whom he owed Phpl million. Y now wants to collect
and satisfy X's debt through the Phpl million on the check. May he
validly do so?
A. Yes, since the indorsement to Y is for Phpl Million.
B. No, since Z is not a party to the loan between X and Y.
C. No. since X is merelv an aqent of Z, his onlv riqht beinq to collect.
D. Yes, since X owed Y Phpl Million.
89. X Shipping, Co., insured its vessel MV Don Teodoro for Php100
Million with ABC lnsurance, Co. through T, an agent of X Shipping.
During a voyage, the vessel accidentally caught fire and suffered
damages estimated at Php80 Million. T personally informed ABC
lnsurance that X Shipping was abandoning the ship.
Later, ABC insurance denied X Shipping's claim for loss on the
ground that a notice of abandonment through its agent was
improper. ls ABC lnsurance right?
A. Yes, since X Shipping should have ratified its agent's action.
B. No, since T. as aqent of X Shippinq who procured the insurance,
can also qive notice of abandonment for his principal.
C. Yes, since only the agent of X Shipping relayed the fact of
abandonment.
D. No, since in the first place, the damage was more than Yt of the
ship's value.
90. A law was passed disqualifying former members of Congress
from sitting in the Board of Directors of government-owned or
controlled corporations. Because of this, the Board of Directors of
ABC Corp., a government-owned and controlled corporation,
disqualified C; a former Congressman, from continuing to sit as one
of its members. C objected, however, insisting that under the
Corporation Code members of the board of directors of corporations
may only be removed by vote of stockholders holding 2/3 of its
2011 Bar Examination for Commercial Law 8t7
outstanding capital stock in a regular or special meiotlng cnllorl ior
that purpose. ls C correct?
A. Yes, since the new law cannot be applied to mombors of tho
board of directors already elected prior to its passage.
B. No, since the disqualification takes effect bv oporatlon of law.Jt.ll
sufficient that he was declared no lonqer a member of tho board.
C. Yes, since the"provisions of the Corporation Code applies as well
to government-owned and controlled corporations.
D. No, since the board has the power to oust him even without the
new law.
91. Deleted from 2013 Bar Exam
92. ln a signdture by procuration, the principal is bound only in case
the agent acted within the actual limits of his authority. The signature
of the agent in such a case operates as notice that he has
A. a qualified authority to sign.
B. a limited authoritv to siqn.
C. a special authority to sign.
D. full authority to sign.
93. ln return for the 20 years of faithful service of X as a househelper
to Y, the latter promised to pay Php100,000.00 to X's heirs if he (X)
dies in an accident by fire. X agreed. ls this an insurance contract?
A. Yes, since all the elements of an insurance contract are present.
B. Yes, since X'services may be regarded as the consideration.
C. No. since Y actually mqde a conditional donation in X's favor.
D. No, since it is in fact an innominate contract between X and Y,
94. A bill of exchange states on its face: "One (1) month after sight,
pay Io the order of Mr. R the amount of Php50,000.00, chargeable to
the account of Mr. S. Signed, Mr. T." Mr. S, the drawee, accepted
the bill upon presentment by writing on it the words "l shall pay
Php30,000.00 three (3) months after sight." May he accept under
such terms, which varies the command in the bill of exchange?
A. Yes. since a drawee accepts accordinq to the tenor of his
acceptance.
B. No, since, once he accepts, a drawee is liable according to the
tenor of the bill.
C. Yes, provided the drawer and payee agree to the acceptance.
D. No, since he is bound as drawee to accept the bill according to its
tenor.
858 2011 Bar Examination for Commercial Law 2011 Bar Examination for Commercial Law 859

95. May the indorsee of a promissory note indorsed to him "for B. No, since the bill is non-negotiable, the drawer and drawee being
deposit" file a suit against the indorser? the same person.
A. Yes, as lonq as the indorser received value for the restrictive C. Yes, since the bill is payable to order, presentment is required for
indorsement. acceptance.
B. Yes, as long as the indorser received value for the conditional D. Yes, in order to hold all persons liable on the bill.
indorsement.
C. Yes, whether or not the indorser received value for the conditional 100. The corporate term of a stock corporation is that which is stated
indordement. in its Articles of lncorporation. lt may be extended or shortened by an
D. Yes, whether or not the indorser received value for the restrictive amendment of the Articles when approved by majority of its Board of
indorsement. Directors and:
A. approved and ratified by at least 213 of all stockholders.
96. X issued a check in favor of his creditor, Y. lt reads: " Pay to Y B. approved by at least 213 of the stockholders representing the
the amount of Seven Thousand Hundred Pesos (Php700,000.00). outstanding capital stock.
Signed, X". What amount should be construed as true in such a C. ratified by at least 213 of all stockholders.
case? D. ratified bv at least 2/3 of the stockholders representinq the
A. Php700,000.00. outstandinq capital stock.
B. Php700.00.
C. Php7,000.00.
D. Php700,100.00.

97. Shipowner X, in applying for a marine insurance policy from

ABC, Co., stated that his vessel usually sails middle of August and
with normally 100 tons of cargo. lt turned out later that the vessel
departed on the first week of September and with only 10 tons of
cargo. Will this avoid the policy that was issued?
A. Yes, because there was breach of implied warranty.
B. No, because there was no intent to breach an implied warranty.
C. Yes, because it relates to a material representation.
D. No, because there was onlv representation of intention.

98. The Articles of lncorporation of ABC Transport Co., a public

utility, provides for ten (10) members in its Board of Directors. What
is the prescribed minimum number of Filipino citizens in its Board?
A. 10
8.6
c.7
D.5

99. P authorized A to sign a negotiable instrument in his (P's) name.

It reads: "Pay to B or order the sum of Phpl million. Signed, A (for
and in behalf of P)." The instrument shows that it was drawn on P. B
then indorsed to C, C to D, and D to E. E then treated it as a bill of
exchange. ls presentment for acceptance necessary in this case?
A. No, since the drawer and drawee are the same person.
860 2012Bar Examination for Commercial Law
(Answers from Author)
MULTTPLY CHOTCE QUESTTONS (MCO)
1. Letters of Credit are financial deviOes in commercial transactions
which will ensure that the seller of the goods is sure to be paid when
he parts with the goods and the buyer of the goods gets control of
the goods upon payment.
Which statement is most accurate?
f,a) The use of the Letter of Credit serves to reduce the risk of
honpayment of the purchase price in a sale transaction.
b) The Letters of Credit can only be used exclusively in a sales
transaction.
c) The Letters of Credit are issued for the benefit of the seller only.
d) (a), (b) and (c) are all correct.
2. Letter of Credit which is used in non-sale transaction, where it
serves to reduce the risk of non-performance is called --
a) irrevocable letter of credit;
O rb) standby letter of credit;
C) confirmed letter of credit;
d) None of the above
3. At the instance of CCC Corporation, AAA Bank issued an
irrevocable Letter of Credit in favor of BBB Corporation. The terms of
the irrevocable Letter of Credit state that the beneficiary must
present certain documents including a copy of the Bill of Lading of
the importation for the bank to release the funds. BBB Corporation
could not find the original copy of the Bill of Lading so it instead
presented to the bank a xerox copy of the Bill of Lading. Would you
advise the bank to allow the drawdown on the Letter of Credit?
0.,'a) No, because the rule of strict compliance in commercial
transactions involving letters of credit, requiring documents set as
conditions for the release of the fund, has to be strictly corn plied
with or else funds will not be released.
b) Yes, because an irrevocable letter of credit means that the issuing
bank undertakes to release the fund anytime when claimed by the
beneficiary, regardless of the kind of document presented.
c) Yes, because the issuing bank can always justify to CCC
Corporation that xerox copies are considered as faithful reproduction
of the original copies.
-because
d) Yes, the issuing bank really has no discretion to
determine whether the documents presented by the beneficiary are
sufficient br not.
2012 Bar Examination for Commercial Law 861
4. AAA Carmakers opened an irrevocable Letter of Credit with BBB
Banking Corporation with CCC Cars Corporation as beneficiary. The,
irrevocable Letter of Credit was opened to pay for the importation of
ten (10) units of Mercedes Benz S class. Upon arrival of the cars,
AAA Carmakers found out that the cars were all not in running
condition and some parts were missing. As a consequence, AAA
Carmakers instructed BBB Banking Corporation not to allow
drawdown on the Letter of Credit. ls this legally possible?
I a) No, because under the "lndependence Principle", conditions for
the drawdown on the Letters of Credit are based only on documents,
like shipping documents, and not with the condition of the goods
subject of the importation.
b) Yes, because the acceptance by the importer of the goods subject
of importation is material for the drawdown of the Letter of Credit.
c) Yes, because under the "lndependence Principle", the seller or the
beneficiary is always assured of prompt payment if there is no
breach in the contract between the seller and the buyer.
d) No, because what was opened was an irrevocable letter of credit
and not a confirmed letter of credit.
5. Deleted from 2013 Bar Exam
6. Deleted from 2013 Bar Exam
7. Deleted from 2013 Bar Exam
B. BBB Banking Corporation issued a Letter of Credit in the amount
of P5Million, for the purchase of five (5) tons of corn by X. Upon
arrival of the goods, the goods were delivered to the warehouse of X.
Thereafter he was asked to sign a Trust Receipt covering the goods.
When the goods were sold, X did not deliver the proceeds to BBB
Banking Corporation, arguing that he will need the fund for the
subsequent importation. ls there sufficient basis to sue for criminal
action?
I a) Yes, because X's failure to turn over the proceeds to the bank is
b violation of the Trust Receipt Law.
b) No, because the trust receipt was signed only after the delivery of
the goods. When the trust receipt was signed, the ownership of the
goods was already with X.
c) Yes, because violation of Trust Receipt Law is mala prohibita,
intention is irrelevant.
d) No, because X has a valid reason not to deliver the proceeds to
BBB Banking Corporation.
862 2012Bar Examination for Commercial Law
9. X secured a loan from BBB Bank to pay for the importation of
some dried fruits. Upon arrival of the goods consisting of dried fruits
imported by X but before delivery to him, a trust receipt was
executed by X to cover the transfer of the dried fruits to his
possession. The dried fruits were so saleable but instead of turning
over the proceeds of the sale, X used the funds to pay for the
medical expenses of his mother who was sick of cancer of the bone.
Which statement is most accurate?
a) X cannot be held criminally liable because although he did not pay
the bank he used the proceeds for a good reason.
b) Fraud or deceit is a necessary element to hold X criminally liable
for non-payment under the Trust Receipts Law.
O c) X can be held criminally liable under the Trust Receipts Law
regardless of the purpose or intention for the use of the proceeds.
d) X cannot be held criminally liable because the underlying
obligation is one of simple loan.
10. X is the President of A/AA Products Corporation. X signs all the
Trust Receipts documents for certain importations of the company. ln
the event of failure to deliver the proceeds of the sale of the goods to
the.bank, which statement is most accurate?
a) The criminal liability will not attach to X as President because of
separate juridical personality.
b) For violation of Trust Receipts Law, the law specifically provides
for the imposittbn of penalty upon directors / officers of the
corporation.
c) The officer will not be held criminally accountable because he is
just signing the trust receipt for and in behalf of the corporation.
1C) The officer of the corporation will be held liable provided it is
clear that the officer concerned participated in the decision not to
pay.
11. Who is the Entrustee in a Trust Receipt arrangement?
a) the owner of the goods;
b) the one who holds the goods and receives the proceeds from the
sale of the goods;
o c)the person to whom goods are delivered for sale and who bears
the risk of the loss;
d) the party who acquires security interest in the goods.
12. Which phrase best completes the statement -- ln accordance
with the Trust Receipt Law, purchasers of the goods from the
Entrustee will:
a) get the goods only as a collateral;
b) not get good title to the goods;
2Q12Bar Examination for Commercial Law 863
c) only get security interest over the goods;
f d) get good title to the goods.
13. X acted as an accommodation party in signing as a maker of a
promissory note. Which phrase best completes the sentence -- This
means that X is liable on the instrument to any holder for value:
a) for as long as the holder does not know that X is only an
accommodation party.
O b) even though the holder knew all along that X is only an
accomrnodation party.
c) for as long as X did not receive any consideration for acting as
accommodation party.
d) provided X received consideration for acting as accommodation
party. :
14. X issued a promissory note which states, "l promise to pay Y or
order Phpl 00,000.00 or one (1) unit Volvo Sedan." Which statement
is most accurate?
a) The promissory note is negotiable because the forms of payment
are clearly stated.
o U) tne promissory note is non-negotiable because the option as to
which form of payment is with the maker.
c) The promissory note is an invalid instrument because there is
more than one form of payment.
d) The,promissory note can be negotiated by way of delivery.
15. X issued a promissory note which states "l promise to pay Y or
bearer the amount of HK$50,000 on or before December 30, 2013."
ls the promissory note negotiable?
a) No, the promissory note becomes invalid because the amount is
in foreign currency.
O b) Yes, the promissory note is negotiable even though the amount
is stated in foreign currency.
c) No, the promissory note is not negotiable because the amount is
in foreign currency.
d) Yes, the promissory note is negotiable because the Hong Kong
dollar is a known foreign currency in the Philippines.
16. X delivered a check issued by him and payable to the order of
CASH to Y in payment for certain obligations incurred by X in favor
of Y. Y then delivered the check to Z in payment for certain
obligations. Which statement is most accurate?
a a) Z can encash the check even though Y did not indorse the
check.
864 2012 Bar Examination for Commercial Law
b) Z cannot encash the check for lacking in proper endorsement.
c) Y is the only one liable because he was the one who delivered the
check to Z.
d) The negotiation is not valid because the check is an instrument
payable to order.
17. A stale check is a check --
O a) that cannot anymore be paid although the underlying obligation
still exists.
b) that cannot anymore be paid and the underlying obligation under
the check is also extinguished.
c) that can still be negotiated or indorsed so that whoever is the
holder can
d) which has not been presented for payment within a period of thirty
(30) days.
18. ln payment for his debt in favor of X, Y gave X a Manager's
Check in the amount of Phpl 00,000 dated May 30, 2012. Which
phrase best completes the statement -A Manager's Check:
a) is a check issued by a manager of a bank for his own account.
b) is a check issued by a manager of a bank in the name of the bank
against the bank itself for the account of the bank.
j c) is like any ordinary check that needs to be presented for
payment also.
d) is better than-a cashier's check in terms of use and effect.
19. Which phrase best completes the statement -- A check which is
payable to bearer is a bearer instrument and:
1a) negotiation can be made by delivery only;
b}negotiation must be by written indorsement;
c) negotiation must be by specific indorsement;
d) negotiation must be by indorsement and delivery.
20. As payment for a debt, X issued a promissory note in favor of Y
but the promissory note on its face was marked non-negotiable.
Then Y instead of indorsing the promissory note, assigned the same
in favor of Z lo whom he owed some debt also. Which statement is
most accurate?
a) Z cannot claim payment from X on the basis of the promissory
note because it is marked non-negotiable.
b) Z can claim payment from X even though it is marked non-
negotiable.
c) Z can claim payment from Y because under the Negotiable
lnstrument Law, negotiation and assignment is one and the same.
2012 Bar Examination for Commercial Law 865
a.d) Z can claim payment from Y only because he was the endorser
of the promissory note.
21. Negotiable instruments are used as substitutes for money, which
means-
a) that they can be considered legal tender.
O b) that when negotiated, they can be used to pay indebtedness.
C) that at all times the delivery of the instrument is equivalent to
delivery of the cash.
d) that at all times negotiation of the instruments requires proper
indorsement.
22. The signature of X was forged as drawer of a check. The check
was deposited in the account of Y and when deposited was accepted
by 444 Bank, the drawee bank. Subsequently, AAA Bank found out
that the signature of X was actually forged. Which statement is most
accurate?
a) The drawee bank can recover from Y, because the check was
deposited in his account.
b) The drawee bank can recover from X, because he is thO drawer
even though his signature was forged.
ac) The drawee bank is estopped from denying the genuineness of
the signature of the X, the drawer of the check.
d) The drawee bank can recover from Y because as endorser he
warrants the genuineness of the signature.
23. A issued a check in the amount of Php20,000 payable to B. B
endorsed the check but only to the extent of Phpl 0,000. Which
statement is most accurate?
a) The partial indorsement is not a valid indorsement, although will
result in the assignment of that part.
O.b) The partial indorsement will invalidate the whole instrument.
i) ffre endorsee will be considered as a holder in due course.
d) The partial indorsement is valid indorsement up to the extent of
the Php10,000.
24. A promissory note which does not have the words "or order" or
"or bearer" will render the promissory note non-negotiable, and
therefore ---
a) it will render the maker not liable;
Ob) the note can still be assigned and the maker made liable;
c) the holder can become holder in due course;
d) the promissory note can just be delivered and the maker will still
be liable.
866 2O12Bar Examination for Commercial Law
25. A check is--
o-a) a bill of exchange;
b) the same as a promissory note;
c) is drawn by a maker;
d) a non-negotiable instrument.
26. A check was issued to Tiger Woods. But what was written as
payee is the word "Tiger Woods". To validly endorse the check---
a) Tiger Woods must sign his real name.
b) Tiger Woods must sign both his real name and assumed name.
|c) Tiger Woods can sign his assumed name.
d) the check has become non-negotiable.
27. Y, as President of and in behalf of AAA Corporation, as a way to
accommodate X, one of its stockholders, endorsed the check issued
by X. Which statement is most acurate?
a) lt is an ultra vires act.
b) lt is a valid indorsement.
c) The corporation will be held liable to any holder in due course.
OJ) lt is.an invalid indorsement.
28. ln a negotiable instrument, when the sum is expressed both in
numbers and in words and there is discrepancy between the words
and the numbers -
f a) the sum expressed in words will prevail over the one expressed
.
tn
numbers.
b) the sum expressed in numbers will prevail over the one expressed
in words.
c) the instrument becomes void because of the discrepancy.
d) this will render the instrument invalid.
29. A promissory note which is undated is presumed to be--
f a) dated as of the date of issue;
b) dated as of the date of the first indorsement;
c) promissory note is invalid because there is no date;
d) dated on due date.
30. An insurance contract is an aleatory contract, which means that-
a) the insurer will pay the insured equivalent to the amount of the
premium paid.
Ob) the obligation of the insurer is to pay depending upon the
happening of an uncertain future event.
2012Bar Examination for Commercial Law 867
c) the insured pays a fixed premium for the duration of the policy
period and the amount of the premiums paid to the insurer is not
necessarily the same amount as what the insured will get upon the
happening of an uncertain future event.
d) . the obligation of the insurer is to pay depending upon the
happening of an event that is certain to happen.
31. An lnsurance Contract is a contract of adhesion, which means
that in resolving ambiguities in the provision of the insurance
contract, --
a) the general rule is that, the insurance contract is to be interpreted
strictly in accordance with what is written in the contract.
or b) are to be construed liberally in favor of the insured and strictly
against the insurei who drafted the insurance policy.
c) are to be construed strictly against the insured and liberally in
favor of the insurer.
d) if there is an ambiguity in the insurance contract, this will
invalidate the contract.
32. X is the common law wife of Y. Y loves X so much that he took
out a life insurance on his own life and made her the sole
beneficiary. Y did this to ensure that X will be financially comfortable
when he is gone. Upon the death of Y, --..,.
a) X as sole beneficiary under the life insurance policy on the life of Y
will be entitled to the proceeds of the life insurance.
b) despite the designation of X as the sole beneficiary, the proceeds
of the life insurance will go to the estate of Y.
!,;) the proceeds of the life insurance will go to the compulsory
heirs of Y.
d) the proceeds of the life insurance will be divided equally amongst
X and the compulsory heirs of Y.
33. X, in January 30, 2009, or two (2) years before reaching the age
of 65, insured his life for Php2OMillion. For reason unknown to his
family, he took his own life two (2) days after his 65th birthday. The
oolicy contains no excepted risk. Which statement is most accurate?
O-,a) The insurer will be liable.
b) The insurer will not be liable.
c) The state of sanity of the insured is relevant in cases of suicide in
order to hold the insurer liable.
d) The state of sanity of the insured is irrelevant in cases of suicide in
order to hold the insurer liable.
868 2012 Bar Examination for Commercial Law
34. X, a minor, contracted an insurance on his own life. Which
statement is most accurate?
a) The life insurance policy is void ab initio.
b) The life insurance is valid provided it is with the consent of the
beneficiary.
-O.c) The life insurance policy is valid provided the beneficiary is his
estate or his parents, or spouse or child.
d) The life insurance is valid provided the disposition of the proceeds
will be subject to the approval of the legal guardian of the minor.
35. The "incontestability clause" in a Life lnsurance Policy means ---
a) that life insurance proceeds cannot be claimed two (2) years after
the death of the insured.
f , b) that two (2) years after date of issuance or reinstatement of the
life insurance policy, the insurer cannot anymore prove that the
policy is void ab initio or rescindable by reason of fraudulent
concealment or misrepresentation of the insured.
c) that the insured can still claim from the insurance policy after two
(2)years even though premium is not paid.
d) that the insured can only claim proceeds in a life insurance. policy
two (2) years after death.
36. For both the Life lnsurance and Property lnsurance, the insurable
interest is required to be--
a) existing at the time of perfection of the contract and at the time-of
loss.
f b) existing at the time of perfection and at the time of loss for
pioperty insurance but only at the time of perfection for life
insurance.
c) existing at the time of perfection for property insurance but for life
insurance both at the time of perfection and at the time of loss.
d) existing at the time of perfection only.
37. A house and lot is covered by a real estate mortgage (REM) in
favor of ZZZBank. The bank required that the house be insured. The
owner of the policy failed to endorse nor assign the policy to the
bank. However, the Deed of Real Estate Mortgage has. an express
provision which says that the insurance policy is also endorsed with
the signing of the REM. Will this be sufficient?
Oa) No, insurance policy must be expressly endorsed to the bank
so that the bank will have a right in the proceeds of such insurance in
the event of loss.
b) The express provision contained in the Deed of Real Estate
Mortgage to the effect that the policy is also endorsed is sufficient.
2012Bar Examination for Commercial Law tlou
c) Endorsement of lnsurance Policy in any form is not legally
allowed.
d) Endorsement of the lnsurance Policy must be in a formal
document to be valid.
38. X is a passenger of a jeepney for hire being driven by Y. The
jeepney collided with another passenger jeepney being driven by Z
who was driving recklessly. As a result of the collision, X suffered
injuries. Both passenger jeepneys are covered by Comprehensive
Motor Vehicular lnsurance Coverage. lf X wants to claim under the
"no fault indemnity clause", his claim will lie--
a) against the insurer of the jeepney being driven by Z who was the
one at fault.
o b) the claim shall lie against the insurer of the passenger jeepney
diiven by Y because X was his passenger.
c) X has a choice against whom he wants to make his claim.
d) None of the above.
39. X insured the building she owns with two (2) insurance
companies for the same amount. ln case of damage, --
a) X can not claim from any of the two (2) insurers because with the
double insurance, the insurance coverage becomes automatically
void.
b) the two (2) insurers will be solidarily liable to the extent of the loss.
3 c) the two (2) insurers will be proportionately liable.
d)'X can choose who he wants to claim against.
40. When X insured his building, X indicated in the application that it
is a residential building, but actually the building was being used as a
warehouse for some hazardous materials. What is the effect on the
insurance policy, if any?
a) The insurance policy can be cancelled because of the change in
the use.
b) The insurance policy will automatically be changed.
O, c) The insurance policy need not be changed.
d; fne insurance policy is fixed regardless of the change in the use.
41. X owned a house and lot. X insured the house. The house got
burned. Then he sold the partially burnt house and the lot to Y.
Which statement is most accurate?
a) X is not anymore entitled to the proceeds of the insurance policy
because he already sold the partially burnt house and lot.
 870 2012 Bar Examination for Commercial Law
a.b) x is still entifled to the proceeds of the insurance poricy
bbcause what is material is thai at the time of the loss, X is the
owner of the house and lot.
c) No one is entifled to the proceeds because ownership over the
house and lot was already transferred.
d) Y will be the one entifled to the proceeds because he now owns
the partially burnt house and lot.
!-\, while driving his Toyota ,Artis, tried to cross the rairway tract of
Philippine approached Brumentritt Avenida Ext., appried its ntin as a
warning to all the vehicles that might be crossing the railway tract,
but there was reaily nobody manning the crossing. x was ristening
to
his lpod touch, hence, he did not hear the sound of the horn of the
train and so his car was hit by the train. As a result of the accident, X
suffered some injuries and his car was totally destroyed as a result
of
the impact. ls PNR tiabte?
a) PNR is not liable because X should have known that he was
crossing a place designated as crossing for train, and therefore
should have been more careful.
I b) PNR is liable because Railroad companies owe to the public a
oury or exercrsrng a reasonable degree of care to avoid injury to
person and property at railroad crossings which means
a flagman or
a watchman should have been posted to warn the public at aii times.
c) PNR is not liable because it blew its horn when it was about to
cross the railway aldng Blumentritt Avenida Ext.
d) PNR is not liable because X was negrigent, for ristening to his rpod
touch while driving.
43. The AAA Bus Company picks up passengers along EDSA. X,
the
conductor, while on board the bus, drew his gun and-randomly shot
the passengers inside. As a result, y, a passenger, was shot and
died instantly. ls 444 Bus Company tiabte?
a) The bus company is not riabre for as rong as the bus company
can
show that when they hired X, they did ftre rignt serection pro""rr.
b) The bus company cannot be held liable because whaiX did is not
part of his responsibility.
The bus company is liable because common carriers are liable
-l.r)the negligence
foi or wilrful act of its emproyees even ttrough tney
acted beyond the scope of their responsibility.
d) The bus company is not riabre because ihere is no way that the
bus company can anticipate the act of X.
44. X is a tiader of schoor suppries in carapan, orientar Mindoro. To
bring the school suppries to carapan, it has to be transported by a
2012Bar Examination for Commercial Law tlTl
vessel. Because there were so many passengers, the two (2) boxes
of school supplies were loaded but the shipping company was not
able to issue the Bill of Lading. So, on board, the Ship Gaptain
issued instead a "shipping receipt" to X indicating the two (2) boxes
of school supplies being part of the cargo of the vessel. which
phrase therefore, is the most accurate?
a) the owner of the vessel is not liable because no bill of lading was
issued to X hence, no contract of carriage was perfected.
o, b) it is possible to have a contract of carriage of cargo even
witnout a bill of lading, and the "shipping receipt" would be sufficient.
c) the only acceptable document of title is a Bill of Lading.
d) None of the above.
45. X took Philippine Airlines Flight PR 102 lo Los Angeles, USA'
She had two (2) luggage checked-in and was issued two (2)
baggage checks. When X reached Los Angeles, one of two checked
in baggage could not be found.
Which statement is most accurate?
O, a) PAL is liable for the loss of the checked- in luggage under the
provisions of the Warsaw Convention on Air Transport.
b) PAL is liable for the loss only if the baggage check expressly
states that the airline shall be liable in case of loss'
I
i
l c) PAL cannot be held liable because that is the risk that a
i passenger takes when she checks- in her baggage.
d) PAL can only be held liable if it can be proven that PAL was
l
negligent.
46. X owns a passenger jeepney covered by Certificate of Public
Convenience. He allowed Y to use its Certificate of Convenience for
l
)
l
a consideration. Y therefore was operating the passenger jeepney
l under the same Certificate of Public Convenience (Kabit System)
under the name of X. The passenger jeepney met an accident. Who
will be liable?
a) Y, the one actually operating the jeepney, will be liable to the
injured party.
o- b) x wiil be the one liable to the injured party despite the fact that it
is Y who is actually operating the jeepney, because while the Kabit
System is tolerated, the public should not be inconvenienced by the
arrangement.
c) X will not be held liable if he can prove that he is not the owner
anymore.
d) Public Policy dictates that the real owner, even not the registered
one, will be held liable.
 872 2012Bar Examination for Commercial Law
47. X owns a fleet of taxicabs, He operates it through what is known
as boundary system. Y drives one of such taxicabs and pays X a
fixed amount of Phpl,000 daily under the boundary sysiem. jrhis
mgans that anything above phpl,00O would be the earnings of y. y,
driving recktessly, hit an old lady crossing the street. which
statement is most accurate?
a) X as the owner is exempt from liability because he was not the
one driving.
b) X as the owner is exempt from liability because precisery the
arrangement
is one under the "boundary system".
l.uc) X will not be exempt from liability because he remains to be the
rbgistered owner and the boundary system will not allow the
circumvention of the law to avoid liability.
d) Y is the only one liable because he drove recklessly.
48. The Articles of lncorporation of AAA corporation was approved
by the securities and Exchange commission (sEC). After the receipt
of the Certificate of Approval from the SEC, AAA Corporation
decided to immediately start the operation of its business despite the
fact that it has no approved By-Laws. what is the legal status of the
AAA Corporation?
a) A de jure corporation;
f ,,b) A de facto corporation;
c) A corporation by estoppel;
d) An unregistered corporation.
49. X, the Presidenl of ZZZ Corporation, was authorized by the
Board of Directors of zzZ corporation to obtain a loan from yw
Bank and to sign documents in behalf of the corporation. X
personally negotiated for the loan and got tile loan at very low
interest rates. Upon maturity of the loin, zzz corporation was
unable to pay. Which statement is most accurate?
a) Because X was personally acting in behalf of the corporation, he
can be held personally liable.
O.b) X, as President, cannot be personally held liable for the
obligation of the corporation even though he signed all the loan
documents, because the loan was authorized by the Board.
c) YW Bank can choose as to who it wants to hold liable for the
loan.
d) lf zzz corporation cannot pay, x can be hetd subsidiarity tiable.
50. X owns 99o/o of the capital stock of SSS Corporation. X also
owns 99% of rrr corporation. sss corporation obtained a loan
2O12Bar Examination for Commercial Law fl7.1
from VW Bank. On due date, SSS Corporation defaulted. TTT
Corporation is financially healthy. Which statement is most accurate?
a) X being a controlling owner of SSS Corporation can automatically
be held personally liable for the loan of SSS Corporation.
b) TTT Corporation, owned 99% by X, can automatically be held
liable.
O c) SSS Corporation and TTT Corporation, although both are
owned by X, are two (2) distinct corporations with beparate juridical
personalities hence, the TTT Corporation cannot automatically be
held liable for the loan of SSS Corporation.
d) The principle of piercing the veil of corporate fiction can be applied
in this case.
51. A corporation generally can issue both par yalue stock and no
par value stock. These are all fixed in the Articles of lncorporation of
the corporation. Which of the following corporations may not be
allowed to issue no par value shares?
a) lnsurance companies;
b) Banks;
c) Trust companies;
l.d) Rtt of the above.
52. Deleted from 2013 Bar Exam
53. The number of the Board of Trustees of a non-stock, non-profit
educational institution should be --
a) five (5) only
b) any nurnber for as long as it is not less than five (5) and no more
than eleven (11)
c) any number in multiples of five (5), for as long as it is'not less than
five (5) and no more than fifteen (15).
d) not less than five (5) nor more than ten (1 0) in multiples of five
(5)
INONE OF THE ABOVE
54. X subscribed 10,000 shares in the capital stocks of AAA
Corporation. He paid 50oh of the 10,000 shares. X asked the
Corporate Secretary to issue him the corresponding stock certificate
representing the 50% of what he already paid. The Corporate
Secretary of the corporation refused. Was the Corporate Secretary
correct?
a) The Corporate Secretary is correct because the Corporation
O.
Code provides that no certificate of stock shall be issued to a
subscriber until the shares as subscribed have been fully paid.
 874 2Ci'2 Bar Examination
for Commercial
Law
b) The Coror 2Ol2BarExamination for Commercial Law 875

itffi I:'i'J"T:Jig,,:il?""J,;#n":""""f, :;:"?,fj?:l a) This kind of classification may not be allowed or else it will violate
the Doctrine of Equality of shares.

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d) The Corporai
t, b) Classifications of shares may be allowed for as long as it is
clearly stated as such in the Articles of lncorporation of the
Corporation.
ro tssue a stocl, c) Classifications of shares is mainly for business purpose to attract
actually subscrib investors.
d) Classifications of shares may be allowed with the approval of the
55' XXX Corporatin^ ah/ \^^, stockholders and the Board of Directors.
^

58. ABC Corporation declared stock dividends to lts stockholders.

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The stock dividends were approved by the Board of Directors of ABC
Corporation. ln .the subsequent year however, the Board again
,*,$ii};'"rr,:fl{ft ftll approved the redemption of all stock dividends and to pay the
effective date of shareholdings in cash. Which statement is most accurate?
ll_Tf the mer.o. a) The redemption of the stock dividends can be validly approved by
2012,he da,e the Board without any conditions.
i:li1i,{!},::?r*:;;:jrj'hi,*:!k{11', b) The redemption of stock dividends may only be allowed if there
are sufficient earnings and should not be violative of the trust fund

***ffi$a*iruuiflfffiljl
doctrine.
l, c) The redemption of the shares may be taken from the existing
property and other assets of the corporation.
d) None of the above.
16 AAA Corpora
59. X sold all his shares in AAA Hotel Corporation to Y. X owns 99%
"Ii,ff
mffi"*f*'LJ oYll,l3,"
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of AA/A Hotel Corporation. As the new owner, Y wanted a
reorganization of the hotel which is to include primarily the

iii'';#,-f +iffi
b) The Articles of
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separation of all existing employees and the hiring of new
employees. Which statement is most accurate?
a) With the change in ownership, in effect there is a new juridical
entity and therefore all employees are considered separated.
provide such power O b) Despite the change in shareholder, there is actually no change
and be
in the juridical entity and therefore elisting employees can not
j
automatically be considered separated.
c) Y, as the new shareholder, has the right to retain only those
"*,,"* :: ":;ffi :. ; employees who in his judgment are qualified.
d) For as long as the existing employees are given their separation
pay, they can be terminated.
js-dividedintocommon
g 60. South China Airlines is a foreign airline company. South China
jn ,ff Airlines tickets are sold in the Philippines though Philippine Airlines
ru # ffi fj:'l" FHjf as their general agent. South China Airlines is not registered to do
business as such with the Philippine Securities and Exchange
Commission. Which statement is most accurate?
876 2012 Bar Examination for Commercial Law
a) Although unlicensed to do business in the Philippines, South
China Airlines can sue before the Philippine Courts and can also be
sued.
b) South China Airlines can sue but cannot be sued.
c) South China Airlines cannot sue and cannot be sued also.
O.d) South China Airlines can be sued in Philippine Courts but
cannot sue.
61. So that ABC Corporation could venture into more projects, it
needed to raise funds by issuing new shares to increase its
capitalization. X, Y, Z, J and G are the five existing shareholders of
the company. They hold 20% each. How will the additional shares be
divided among the existing shareholders?
a a) The existing shareholders can subscribe to the new shares
eQuivalent to their existing shareholdings because the Corporation
Code provides that each of the existing stockholders will have
preemptive rights to the extent of their existing shareholdings.
b) The existing shareholders' preemptive rights is equivalent to the
percentage that they want.
c) Each of the existing shareholder can exercise their right of first
refusal against each other.
d) Preemptive rights and right of first refusal are one and the same.
62. lf ABC Corporation will increase its authorized capital stock, the
Corporation Code requires ---
a) the approval of the majority of the Board of Directors only.
b) the approval of the majority of the stockholders and the Board of
Directors.
c) the approval of 213 of the shareholders of the outstanding capital
stock as well as the approval of the Securities and Exchange
Commission.
aO) tne approval of the majority of the Board of Directors and
approval of the shareholde.rs holding 2/3 share of the outstanding
capital stock.
63. X is a minority stockholder of CCC Corporation. Y is a member of
the Board of Directors of CCC Corporation and at the same time he
is the President. X believes that Y is mismanaging CCC Corporation
hence, as a stockholder and in behalf of the other stockholders, he
wanted to sue Y. Which statement is most accurate?
a) X can institute a derivative suit in behalf of himself as
stockholder.
f O) n derivative suit must be instituted in behalf of the corporation.
c) Derivative buit is an exclusive remedy that X can institute.
d) Derivative suit is not the remedy in this situation.
2O12Bar Exainination for Commercial Law 877
64. The term GGG Corporation in accordance with its Articles of
lncorporation ended last January 30, '2012. The term was not
extended. What will happen to the corporation?
la) The corporation is dissolved ipso facto.
b) There is a need to pass a board resolution to formally dissolve the
corporation.
c) The Board of Directors must pass a resolution for the corporation
to formally go into liquidation.
d) The stockholders must pass a resolution to dissolve the
corporation.
65. The term of one (1) year of the Board of Directors of pvAA
Corporation expired last February 15,2012. No new election of the
Board of Directors was called, hence, the existing members of Board
continue as Directors in hold over capacity. Which statement is most
accurate?
Oa) This is allowed provided there is a valid and justifiable reason
for not calling for an election of the new members of the Board.
b) This is not allowed because the term of the directors must only be
for one (1) year.
c) The positions of the members of the Board of Directors will be
automatically declared vacant.
d) Acting as members of the Board of Directors in a hold over
capacity must be ratified by the stockholders.
66. AAA Corporation is a foreign corporation that wants to operate a
representative office here in the Philippines. As required by the
Corporation Code, there is a need to appoint a Resident Agent as a
condition precedent to the issuance of a license to transact business
in the Philippines. After two (2).years, AAA Corporation removed its
Resident Agent and did not appoint anyone anymore. Which
statement is the most accurate?
O,a) This can be a ground for revocation or suspension of its license
to do business.
b) There is no more effect in the license because anyway at the time
of registration, a resident agent was appointed.
c) This can be a ground for suspension only.
d) This will result in automatic revocation of its license to do business
in the Philippines.
a
67. The By-laws of ABC Corporation is silent as to when a
stockholder can be qualified to attend the meeting of the
stockholders. The Corporate Secretary sent out the notice of the
stockholders meeting two (2) days before the meeting and at that
 2012Bar Examination for Commercial Law
time X was not yet a stockholder. On the day of the meeting,
however, X became a shareholder which was duly recorded in the
stock and transfer book. Which statement is most accurate?
a) X is a stockholder of ABC Corporation as of the time of meeting of
the stockholders for the purpose of electing the members of the
board.
a" b) X is not qualified to elect members of the board because at the
time the notice of the meeting was sent, she was not yet
stockholder.
c) Qualifications as to who are considered as stockholders on record
for purposes of being able to elect members of the board are to be
determined by the By-laws alone.
d) None of the above.
68. X, who is the Executive Vice President of ABC Corporation, a
listed company, can be held liable or guilty of insider trading if, he --
a) bought shares of ABC Corporation when it was planning to
acquire another company to improve its asset base, the news of
which increased the price of the shares in the Stock Exchange.
b) bought shares of XYC Corporation, a sister company of ABC
Corporation when he learned that XYC Corporation was about to
also list its share in the Philippine Stock Exchange.
c) bought shares of ZZZ Corporation when he learned that ABC
Corporation would acquire ZZZ Corporation.
a,d) All of the above.:
69. The purpose of the "Tender Offer" Rule is to---
a) ensure an even playing field for all shareholders of a company in
terms of opportunity to sell their shareholdings.
o b) ensure that minority shareholders in a publicly listed company
are protected in the sense that they will equally have the same
opportunity as the majority shareholders in terms of selling their
shares.
c) ensure that the shareholders who would also want to sell their
shareholdings will have the opportunity for a better price.
d) All of the above.
70. Section 38 of The Securities Regulation Code defines an
independent director as a person who must not have a relation with
the corporation which would interfere with his exercise of
independent judgment in carrying out the responsibilities of
director. To ensure independence therefore, he must be
i, a) nominated and elected by the entire shareholders;
b) nominated and elected by the minority shareholders;
2012Bar Examination for Commercial Law lt79
c) nominated and elected by the majority shareholders;
d) appointed by the Board.
71. "Securities" issued to the public are required by law to be
registered with--.
a) the Bangko Sentral ng Pilipinas;
b) the Philippine Stock Exchange;
a O:c) the_Securities and Exchange Commission;
d) the Securities and Exchange Commission and the Philippine
Stock Exchange.
72. fhe government agency granted with the power of supervision
and examination over banks and non-bank financial institutions
perforning quasi-banking functions, to ensure that the conduct of its
business is on a sound financial basis that will provide continued
solvency and liquidity is -
a) The Philippine Deposit lnsurance Corporation;
f,, b) The Bangko Sentral ng Pilipinas;
c) The Anti-Money Laundering Council;
d) The Securities and Exchange Commission.
73. X maintains a savings deposit in the amount of Php'1 Million with
ABC Bank Corporation. X also has obtained a loan from ABC Bank
Corporation in the amount of Phpl Million. ln case of default,
O"a) ABC Bank can set-off the loan from the savings account being
daintained by X with ABC Bank.
b) Set-off is not possible because legal compensation is not allowed
in banking transaction.
c) Deposit accounts are usually earmarked for specific purpose
' hence offsetting is not legally possible.
d) Off -setting is not possible because the obligation of X is a "simple
loan".
74.XYZ Corporation is engaged in lending funds to small vendors in
various public markets. To fund the lending, XYZ Corporation raised
funds through borrowings from friends and investors. Which
statement is most accurate?
a\XYZ Corporation is a bank.
b) XYZ Corporation is a quasi-bank.
c)XYZ Corporation is an lnvestment Company.
a l,d) XYZ is none of the above.
75. XXX Bank Corporation and ZZZ Corporation were merged into
XX ZZ Bank Corporation. So as not to create any unnecessary
880 2012 Bar Examination for Commercial Law
conflict, all the former directors of both banks wanted to be appointed
/elected as members of the Board of Directors of the merged bank.
Each bank used to have eleven (11) members of the board. The
maximum number of directors of the merged bank is --
a) 15;
b) 22;
O ,c) 21;
d) 11.
76. All senior officers of ABC Bank are entitled to obtain a housing
loan. X is an Executive Vice President for Operations of ABC Bank.
She obtained a housing loan with the ABC Bank. Which statement is
most accurate?
a) The housing loan of X requires a guarantor from somebody who is
not connected with the bank.
b) The housing loan of X requires the approval of the Board of
Directors of the bank.
f ,c) The housing loan of X, being a benefit for employees, does not
require (a) but will require (b).
d) The housing loan of X, being a benefit for employees, will not
require (a) and (b).
77. ABC Holdings Company, a Hong Kong company, owns 10% of
XYZ Bank. Because of the peace and order situation in the
Philippines, ABC Holding Company wanted to sell its shareholdings
in XYZ Bank. Unfortunately, nobody is interested to buy a 1 0%
shareholdings in a bank. The board of directors of XYZ Bank thought
that it would be a good idea to buy back the shares owned by ABC
Holding Company. Which statement is most acurate?
a) Buying back the shares by XYZ Bank is absolutely not allowed.
l.b) Buying back the shares may be allowed provided it is with the
approval of the Monetary Board and disposed of within six (6)
months.
c) Buying back the shares may be allowed provided such shares 'will
be disposed of within ten (1 0) years.
d) Buying back the shares may be done anytime provided the Board
of Directors will approve the same.
78. X is being charged for violation of Anti-Graft and Corrupt
Practices because he is suspected of having accumulated
unexplained wealth. X maintains deposit accounts with ABC Bank.
The Ombudsman filed criminal cases against X before the
Sandiganbayan. Can the Court issue subpoenas against ABC Bank
to produce all documents pertaining to all the deposit accounts of X?
2012Bar Examination for Commercial Law 881
f ra) Yes, because there is already a pending case and provided the
Subpoena must be specific as to which account.
b) Yes, it is enough that the specific bank is identified.
c) No, because the issuance of the subpoena has no real legal basis.
d) Even without a subpoena, information about the deposit accounts
of X can be submitted to the Sandiganbayan because it will be used
in a pending case.
79. X, a private individual, maintains a dollar deposit with ABC Bank.
X is suspected to be the leader of a Kidnap for Ransom Gang and he
is suspected of depositing all ransom money in said deposit account
which are all in US Dollars. The police want to open said account to
know if there are really deposits in big amounts. Which statement is
most accurate?
a) The same rules under Secrecy of Bank Deposit Act will apply.
b) An approval from the Monetary Board is necessary to open the
account.
a,c) Because the deposit is in US Dollars, it is covered by the
Foreign Currency Deposit Act which allows disclosure only upon the
written permission of the depositor.
d) Approval from the Court is necessary to order disclosure of the
account.
80. Deleted from 2013 Bar Exam
81 The Bank Secrecy Law (RA 1405) prohibits disclosing any
information about deposit records of an individual without court order
except ---
a) in an examination to determine gross estate of a decedent.
b) in an investigation for violation of Anti-Graft and Corrupt Practices.
c) in an investigation by the Ombudsman.
l..d) in an impeachment proceeding.
82. X works as a research computer engineer with the lnstitute of
Computer Technology, a government agency. When not busy with
his work, but during office hours, he developed a software program
for law firms that will allow efficient monitoring of the cases, which
software program is not at all related to his work. Assuming the
program is patentable, who has the right over the patent?
o a)X;
b) lnstitute of Computer Technology;
c) Neither X nor the lnstitute of Computer Technology can claim
patent right over the invention;
d) X and the employer of X willjointly have the rights over the patent.
882 2012 Bar Examination for Commercial Law 2O12Bar Examination for Commercial Law 883

83. The "test of dominancy" in the Law on Trademarks, is a way to 87. Deleted from 2013 Bar Exam
determine whether there exists an infringement of a trademark by --
a) deteimining if the use of the mark has been dominant in the 88. Deleted from 2013 Bar Exam
market.
O.:b) focusing on the similarity of the prevalent features of the 89. Deleted from 2013 Bar Exam
Competing marks which might create confusion.
c) looking at the mark whether they are similar in size, form or color. 90. Deleted from 2013 Bar Exam
d) looking at the mark whether there is one specific feature that is
dominant. 91. Deleted from 2013 Bar Exam
84. X's painting of Madonna and Child was used by her mother to 92. Deleted from 2013 Bar Exam
print some personalized gift wrapper. As part of her mother's efforts
to raise funds for Bantay Bata, the mother of X sold the wrapper to 93. Deleted from 2013 Bar Exam
friends. Y, an entrepreneur, liked the painting in the wrapper and
made many copies and sold the same through National Bookstore. 94. Deleted lrom 2013 Bar Exam
Which statement is most accurate?
a) Y can use the painting for his use because this is not a 95. Deleted from 2013 Bar Exam
copyrightable material.
l.b) X can sue Y for infringement because artistic works are 96. Deleted from 2013 Bar Exam
protected from moment of creation.
c) Works of art need to be copyrighted also to get protection under 97. Which of the following is an exception to the secrecy of bank
the law. deposits which are in Philippine Pesos, but NOT an exception to the
d) Y can use the drawing even though not copyrighted because it is secrecy of forergn currency deposits?
already a public property having been published already. a) Upon Bangko Sentral ng Pilipinas (SSP) inquiry into or
examination of deposits or investments with any bank, when the
85. Compulsory Licensing of lnventions which are duly patented may inquiry or examination is made in the course of the SSP's periodic
be dispensed with or will be allowed exploitation even without special examination of said bank to ensure compliance with the Anti-
agreement of the patent owner under certain circumstances, like Money Laundering Act (AMLA);
national emergency, for reason of public interest, like national b) Upon Philippine Deposit lnsurance Corporation (PDIC) and SSP
security, etc. The person who can grant such authority is -- inquiry into and examination of deposit accounts in case there is a
a) the Director General of the lntellectual Property Office; finding of unsafe or unsound banking practice;
O r b) the Director of Legal Affairs of the lntellectual Property Office; I,c) Upon inquiry in cases of impeachment;
C) the owner of the Patent right; O) Upon inquiry by the Commissioner of lnternal Revenue in the
d) any agent of the owner of the Patent right. event a taxpayer files an application to compromise his tax liabilities
on the ground of financial incapacity.
86. The Fair Use Doctrine allows others to utilize copyrighted works
under certain conditions. The factors to consider whether use is fair 98. The Anti-Money Laundering Law is a law that seeks to prevent
or not would be the purpose and character of the use, nature of the money laundering activities by providing for more transparency in the
copyrighted work, amount and substantiality of the portions used, Philippine Financial System, hence the following institutions are
and what else? covered by the law, except:
l, a) effect of the use upon the creator of the work. a) bank and any financial instltutions;
b) effect of the use upon the potential market of the work. b) pawnshops;
c) effect of the use upon the public in general. O,c) casino operators;
d) effect of the use upon the class in which the creator belongs. d) All of the above.
884 2012 Bar Examination for Commercial Law
99. For purposes of determining violation of the provlslons of Anti-
Money Laundering Law, a transaction is considered as a "suspicious
Transaction" with "Covered lnstitutions" regardless of the amount
involved, where which the following circumstances exisVs?
a) the amount involved is not commensurate with the client's
business or financial capacity;
b) there is no underlying legal or trade obligation, purpose or
economic j ustification ;
c) client is not properly identified;
O J) All of the above.
100. The main feature of the Foreign lnvestment Act of 1991 is to
introduce the concept of "Negative Lists". Under the said law, what is
a "Negative List"?
a.a) lt is a list of business activities or enterprises in the Philippines
that foreigners are disqualified to engage in.
b) lt is a list of business activities or enterprises in the Philippines
that foreigners are qualified to engage in.
c) lt is a list of business activities or enterprises that are open to
foreign investments provided it is with the approval of the Board of
lnvestment.
d) lt is a list of business activities or enterprises that are open to
foreign investments provided it is with the approval of the Securities
and Exchange Commission.
ESSAY.TYPE QUESTIONS
Bar Question: ABC Company filed a Petition for Rehabilitation with
the Court. An Order was issued by the Couri, (1) staying
enforcement of all claims, whether money or othenwise against ABC
Company, its guarantors and surefles not sotidarity liabte with the
company; and (2) prohibiting ABC Company from making payments
of its liabilities, outstanding as of the date of the filing of the Petition.
XYC Cornpany is a holder of an irrevocable Standby Letter of Credit
which was previously procured by ABC Company in favor of XyC
Company to secure performance of ceftain obligations. ln the tight of
the Order issued by the Court.
a) Can XYC Company still be able to draw on their irrevocable
Standby Letter of Credit when due? Explain your answer.
b) Explain the nature of Letters of Credit as a financiat devise.
Answer: (a) XYC Company can still draw on their irrevocable
standby letter of credit. Secflon 18 of R.A. No. 10142 or the
Financial Rehabilitation and lnsolvency Act (FRIA) of 2010 expressly
2012Bar Examination for Commercial Law
provides that the stay or suspension order issued in a rehabilitation
proceedings shall not apply to the enforcement of claims lssuers of
letters of credit.
(b) A lefter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods
to satisfy the interests of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to have control of the
goods before paying. To break the impasse, the buyer may be
required to contract a bank fo issue a letter of credit in favor of the
se//er so that, by viftue of the letter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required
by the letter of credit. The buyer and the seller agree on what
documents are fo be presented for payment. Once the credit is
established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of
title. To get paid, the seller executes a draft and presents it together
with the required documents to the issurng bank. The issuing bank
redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents
upon paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling
him to the goods. Under this arrangement, the se//er gefs paid only if
he delivers the documents of title over the goods, while the buyer
acquires the said documents and control over the goods only after
reimbursing the bank (See BA vs. CA, 228 SCRA 357).
Bar Question: CCC Car, lnc. obtained a loan from BBB Bank,
which fund was used to import ten (10) units of Mercedes Benz S
class vehicles. Upon arrival of the vehicles and before release of
said vehicles to CCC Car, Inc., X and Y, the President and
Treasurer, respectively, of CCC Car, Inc. signed the Trust Receipt to
cover the value of the ten (10) units of Mercedes Benz S c/ass
vehicles after which, the vehicles were all delivered to the Car
display room of CCC Car, lnc. Sale of the vehicles were slow, and it
took a month /o dlspose of the ten (10) units. CCC Car, lnc. wanted
to be in busrness and to save on various documentations required by
the bank, decided that instead of turning over the proceeds of the
sa/es, CCC Car, lnc. used the proceeds to buy another ten (10) units
of BMW 3 series.
a) ls the action of CCC Car, lnc. legally justified? Explain your
answer.
886 2012 Bar Examination for Commercial Law
b) Will the corporate officers of CCC Car, lnc. be held liable under
the circumstances? Explain your answer.
Answer: (a) No, the action of CCC Car, lnc. is not legally justified.
Under the Trust Recelpfs Law, the failure of the entrustee (CCC Car,
lnc.) to surrender the goods held under trust, or to account for the
proceeds of the sales thereof, to the entruster (BBB Bank), is estafa,
which can make the entrustee criminally liable under both the Trust
Recerpfs Law and the Revised Penal Code, and liable to the
payment of damages under Article 33 of the Civil Code (Prudential
vs. lAC, 216 SCRA 257).
(b) Though a person signed the Trust Receipts merely as a
corporate officer, he cannot avoid responsibility for violation of
Presidential Decree No. 115 for two unpretentious reasons.' first, that
the last sentence of Section 13 of the Trust Receipts Law explicitly
mposes the penalty provided therein upon directors, officers,
employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the
criminal offense, of a corporation, partnershrp, association or other
juridical entities found to have violated the obligation imposed under
the law. The rationale for making such officers and employees
responsible for the offense is that they are vested with the authority
and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable;
thus, they have a resitonsible share in the violations of the law. And
second, a corporation or other juridical entity cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment (Gonzales vs. HSBC, 537 SCRA 255).
Bar Question: X borrowed money from Y in the amount of Php 1 insurance proceeds?
Million and as payment, issued a check. Y then indorsed the check
fo hrs sisfer Z for no consideration. When Z deposited the check to
her account, the check was dishonored for insufficiency of funds.
a) ls Z a holder in due course? Explain your answer.
b) Who is liable on the check. The drawer or the indorser? Explain
your answer.
Answer: (a) No, Z is not a holder in due course because the check
was indorsed "for no consideration" to her and she knew such fact
when the check was indorsed to her, being the sister of X.
b) Y, the indorser, is liable because the indorsement was without
qualification.. Under Secflon 66 of the Negotiable lnstruments Law,
an indoirser who indorses without qualification is liabte to atl
subsequent holders in due course.
2012 Bar Examination for Commercial Law 887
Bar Question: lndicate and explain whether the promissory note is
negotiable or non-negotiable.
a) I promise to pay A or bearer Php 100,000 from rny inheritance
which I will get after the death of my father.
b) I promise to pay A or bearer Php 100,000 plus the interest rate of
ninety (90)-day treasury bills.
c) I promise to pay A or bearer Phpl 00,000 if A passes the 2012 bar
exams.
d) I promise to pay A or bearer the sum of Phpl 00,000 on or before
December 30, 2012.
e) I promise to pay A or bearer the sum of Php 100,000.
Answer: (a) lhe promissory note is not negotiable because it is
conditioned on receipt of an inheritance after the death of the father.
(b) The promissory note is negotiable because ft safis/?es all the
requisites of negotiability. The sum is still certain even if with interest.
(c)The promissory note is not negotiable because it is conditional.
(d) The prgmissory note is negotiable because ft satisfies all the
requirements of Section 1 of the Negotiable lnstruments Law. The
date is determinable.
(e)The promissory note is negotiable because ff satisfles all the
requirements of Section 1 of the Negotiable lnstruments Law.
Bar Question: X borrowed from CCC Bank. She mortgaged her
house and lot in favor of the bank. X insured her house. The bank
also got the house insured.
a) ls this doubte insurance? Exptain your answer.
b) ls this legally valid? Explain your answer.
c) ln case of damage, can X and CCC Bank separately claim for the
Answer: (a) No, it is not double insurance. Double insurance exlsfs
only when two (2) persons obtain insurance on the same subject
matter and interest. ln this case, the interest of X is different from
the interest of CCC Bank.
(b) Yes, the insurances obtained separately by X and CCC Bank are
valid. The insurable interest of X as mortgagor is different from the
insurable interest of CCC Bank as mortgagee.
(c) Yes, both X and CCC Bank can separately claim the insurance
proceeds from their respective insurances.
Bar Question: X is a Filipino immigrant residing in Sacramento,
California. Y is a Filipino residing in Quezon City, Philippines. Z is a
resident alien residing in MakatiCity. GGG Corporation is a domestic
888 2012 Bar Examination for Commercial Law
corporation - 40% owned by foreigners and 60'/o owned by Filipinos,
with T as authorized representative. CCC Corporation is a foreign
corporation registered with the Philippine Securlies and Exchange
Commission. KKK Corporation is a domestic corporation (100%)
Filipino owned. S is a Filipino, 16 years of age, arid the daughter of
Y.
a) Who can be incorporators? Who can be subscribers?
b)What are the differences between an incorporator and a
subscriber, if there are any?
c) Who are qualified to become members of the board of directors of
the corporation?
d) Who are qualified to act as Treasurer of the company?
e) Who can be appointed Corporate Secretary? Q%)
Answer: (a) Only Y and Z can be incorporators because only
naturalpersons who are of legal age and a majority are residents of
the Philippines may be incorporators. X, Y, Z, CCC, GGG and KKK
Corporations may be subscribers-
b) lncorporators are those stockholders or members mentioned in
the Articles of lncorporation as originally forming and composing the
corporation and who are the signatories to the said articles. On the
other hand, subscrbers are those persons who may otherwise be
known as stockholders who have subscribed to the capital stock of
the corporation.
c) A person who ownS at least one share, in his name on the books
of the corporation, of the capital stock of the corporation may be
elected as a member of the board of directors. The corporation may
prescribed in its py-laws other qualifications for a person to be
considered eligible to be elected as a member of the board of
directors.
d) A person of legal age, a resident of the Philippines, and who has
satisfied the qualifications prescribed in the by-laws of the
corporation, if any, may act as treasurer of the corporation. He may
or may not be a director.
e) A person of legal age, a resident and a citizen of the Philippines,
and who has satisfied the qualifications prescribed in the byJaws of
the corporation, if any, can be appointed corporate secretary.
Bar Question: A, B, C, 0, E are att duly etected members of the
Board of Directors of XYZ Corporation. F, the general manager,
entered into a supply contract with an American firm. The contract
was duly approved by the Board of Directors. However, with the
knowledge and consent of F, no deliveries were made to the
American firm. As a result of the non-delivery of the promised
2012Bar Examination for Commercial Law 889
supplies, the American firm incurred damages. The American firm
would like to file a suit for damages. Can the American firm sue:
a) The members of the Board of Directors individually, because they
approved the transaction?
b) The corporation?
c) F, the general manager, personally, because the non-delivery
was with his knowledge and consent?
d) Explain the rules on liabilities of a corporation for the act of its
corporate officers and the liabilities of the corporate officers and
Board of Directors of a corporation acting in behalf of the
corporation.
Answer: (a) Ng, the individual members of the Board of Directors
cannot be sued because corporate obligations are not chargeable
against them. A corporation has a personality distinct and separate
from those persons composing it, like ,fs directors, officers,
employees and stockholders.
b) Yes, it can sue the corporation itself because fhe liability is a
corporate liability.
c) lf the American firm could prove that F acted in bad faith, then the
American firm can sue F personally (See Tramat. vs. CA, 238 SCRA
14)
d) Acts of a corporation made by the board of directors or agents
authorized by the board are binding on the corporation. The directors
and agents are not individually liable. lf they exceed their authority,
their actions cannot bind the corporation unless ratified or stopped
from disclaiming them (See San Juan vs. CA, 296 SCRA 631). lf it
can be proved that the acts of the corporation are patently unlawful
and done with malice and bad faith, or if the contracts makes the
directors and agents personally liable, then the corporate officers
performing as such may be held personally liable.
Bar Question: AAA Corporation is a bank. The operations of AAA
Corporation as a bank was not doing well. So, fo aveft any bank run,
AAA Corporation, with the approval of the Monetary Board, sold all
ifs assefs and liabilities to BBB Banking Corporation which includes
all deposit accounts. ln effect then, BBB Corporation will seruice all
depos/fs of alldepositors of AAA Corporation
a) Will the sale of a// assets and liabilities of AAA Corporation to BBB
Banking Corporation automatically disso/ve or terminate the
corporate existence of AAA Corporation? Explain your answer.
b) What are the legal requirements in order that a corporation may
be dissolved?
890 2O12Bar Examination for Commercial Law INDEX 891

Answer: (a) No, the sale of all the corporate assefs and liabilities of CHAPTER l- lntroductory Chapter ,|

AAA Corporation, which is a bank, to BBB Banking Corporation will Acts of Commerce 1

not automatically dissolved or terminate the corporate existence of Civil Code of the Philippines 3
the said bank. The General Banking Law prescribes certain Code of Commerce
Commerce
2
1
requirements for cessation of banking busrness.
Commercial Law
b) The dissolution may either be voluntary or involuntary. The Special Commercial Laws
1

3
requirements for voluntary dissolution of a stock corporation are as
follows: CHAPTER ll - Letters of Gredit 4
1. Where no creditors are affected (Section 118, NCC) - By Code of Commerce 8
majority vote of the board of directors and by a resolution duly Essential Conditions 8
adopted by the affirmative vote of the stockholders of at least two- Fraud Exception Principle 17
thirds (V3) of the outstanding capital stock at a meeting to be held Governing Laws 7
on the call of the directors after notice by publication. A copy of the lndependence Doctrine 15
Liability of Parties 8
resolution must be ceftified by the board of directors, thereafter given
Nature i Definition 4
fo SEC, who shall then issue the certificate of dissolution. Parties 9
2. Where creditors are affected (Section 119, NCC ) - A petition Rights and Obligations I
for dissolution of a corporation shall be filed with the SEC, signed by Strict Compliance Doctrine 17
a majority of its board of directors, verified by its president or one of Uniform Customs and Practices 9
its directors and shall set forth all claims and demands against it, and
that its dissolution was resolved by the affirmative vote of the CHAPTER III_ Trust Receipts Law 18
stockholders representing at least two-thirds (23) of the outstanding Defined 18
Penalty for Breach 28
capital stock, at a meeting of its stockholders called for the purpose.
Rights and Obligations of Parties 23
3. Shortening corporate term (Section 120, NCC) - By amending
the articles of incorporation, whereby a copy of the amended articles
of incorporation shall 6e submitted to the SEC. Upon approval of the
CHAPTER lV - Negotiable Instruments Law 30
Acceptance 133
amended articles of incorporation or the expiration of the shortened Acceptor 101
term, the corporatiop shall be deemed dissolved without any further Accommodation 81
proceedings, subject to the provisions of liquidation Alteration 62,73
lnvoluntary dissolution arises from violation of the provisions of Bill of Exchange 32,34,45, 129, 134, 140
the Corporation Code, including failure to organize and commence Blank lndorsement 1'15

busrness within 2 years from date of incorporation. Certainty of Sum 46t

Certificate of Time Deposit 35.
Check 32,139
Cashier's 144
Certification 142
Certified 144
Crossed 146
Manager's 144
Ordinary 143
Use 142
Classes 32
Complete and Delivered 56
Complete but Undelivered 56, 59, 68
Consideration 56, 60, 78
Dates 52
Defenses 125
892 INDEX INDEX 893

Cont'd . . . Negotiable Instruments Law Cont'd . . . Negotiable lnstruments Law

Determinable Future Time 48 Warehouse Receipts 35
Discharge 138
Dishonor 134, 140 CHAPTER V - lnsurance Code 151
Drawee 101 Beneficiary 164
Drawer 102 Casualty lnsurance 254
Execution/Negotiation r00 Claims 230
Express/Constructive Acceptance 134 Classes 160
Foreign Bill 137 Co-insurance 226
Forgery 58, 60, 70,,88
88 Compulsory Motor Vehicle Liability 256,265
General lndorser 104 Concealment 192,245
General/Qualifi ed Acceptance 134 Contract of lnsurance 152
History 30 Cover Notes 208
118 Double lnsurance 224
Holder in Due Course 55, 58, 1 19 Fire lnsurance 252
Holder Not in Due Course 123 Group lnsurance 274
ln Money 47 lnchamaree Clause 245
lncomplete and Undelivered 58, 60, 69 lncontestability Clause 197,202
lncomplete but Delivered 56, 59, 64 lnsurable lnterest 171
lndorsement 101,113 lnsurance Contract 157
lndorsers 110 lnsured 163
lnterpretation 53 lnsurer 163
lrregular lndorser '108, 1 16
Life lnsurance 230,270
Maker 101 Loss 228,249
Minors/Disqualified Persons 101 Marine lnsurance 240
Nature 30 Non-Fault Clause 257
Negotiating by Delivery .. '109, 113 Parties 162
Negotiation 111 Policy of lnsurance 207
Non-negotiable Documents and lnstruments 35 Premium 221
Payable on Demand 47 Property lnsurance 232
Payable to Bearer 48 Proximate Cause 228
Payable to Order 48 Reinsurance 224,226
Personal/Equitable Defenses 126 Reinsurance Treaty 227
Postal Money Order 36 Representation 198
Presentment for Acceptance 129 Seaworthiness 248
Presentment for Payment 128,132 Suicide 272
Promissory Note 32,34,39, 128, 134 Suretyship 266
Protest 137 Warranty 199.204,247
Qualified lndorser 108,116
Real/Absolute Defenses 125 CHAPTER Vl - Trans portation Law 277
Regular lndorser 116
1
Air Transportation 280
Requisites of Negotiability 37,45, 55 Boundary System 291
Sales lnvoice 37 Carriage of Goods 282,295
295
Secondary Liability 110 Carriage of Passengers 306
Signature Per Procuration 100 Classes 277
Stop Payment Order 141 Common Carriers 283
Trade Name/Assumed Name '100 Damages Recoverable 337
Treasury Warrants 36 Diligence Required 295 , 306
Unconditional Promise or Order 46 Domestic Air Transportation 282
894 INDEX INDEX 895

Cont'd . . . Transportation Law Gont'd. . . Corporation Code

Land Transportation 278 Civil Corporation 450
Private Carrier 286 Classes 444
Sea Transportation 278 Close Corporation 663
Common Shares 494
CHAPTER Vll - Bill of Lading 346 Compensation of Directors 473
Delivery of Goods 358 Condominium Corporation 457
Period to File Actions 362 Control Tesl 441
Period to File Claims 360 Conversion of Stocks 524
Three-fold Character 346 Corporate Books 539
Corporate Liabilities 572
CHAPTER Vlll - Maritime Commerce 363 Corporate Powers 547,565
Average 381 Corporation by Estoppel 454
BareboaU Demise Charter 374 Corporation by Prescription 457
Charter Party 374 Corporation Sole 450
Collisions 388 Corporators 459
Gross/General Average 382 De Facto Corporation 451
Limited Liability/Hypothecary Rule 366 De Jure Corporation 450
Particular/Simple Average 381 Derivative Suit 610
Ship Agent 363,373,377 DiSsolution 622
Ship Owner 363,373,377 Distinct Personality 420
Voyage Charter 376 Dividends 592
Zones of Time in Collision 389 Domestic Corporation 450
Ecclesiastical Corporation 450
CHAPTER lX - Carriage of Goods by Sea Act 395 Eleemosynary Corporation 450
Application 395 Eminent Domain 565
Limitation of Liability 403 Equality of Shares 494
Notice of Loss 395 Escrow Stock 498
Period of Prescription 398 Executive Committee 474,564
Financial Statements 547
CHAPTER X - Warsaw Gonvention 406 Foreign Corporation 450,644
Applicability 406 Forum Shopping 577
Limitation of Liability 410 Founder's Shares 493
Wilful Misconduct 416 Franchises 565
Government Owned/Controlled Corporation 445
CHAPTER Xl - Gorporation Gode 417 Grandfather Forum 442
Aggregate Corporation 450 I ncorporation/Organ ization 521
Appraisal Right 604 lncorporators 458
Articles of lncorporation 521, 531 lndividual Suit 610
Attributes 419 lnspeclion of Books 543
Board of Directors 461,527,551,590
590 lnstrumentality Rule 429
Book of Accounts 541 lnvestments 565
Book of Minutes 540 lssue of Stocks 498
By-Laws 527,531 Lay Corporation 450
Capital 479 Liability of Directors 466
CapitalStock 479,480,489 License to Engage in Business 694
Cash Dividend 603 Liquidation 627
Certificate of lncorporation 526 Lost and Stolen Certificates 507
Certificate of Stock 504, 609 Management Rights 584
896 INDEX INDEX 897

Cont'd. . . Corporation Code Cont'd. . . Corporation Code

Members 460 Voting Rights 584
Merger/Consolidation 534 Voting Shares 493
Name 440,532 Watered Stock 498
Nationality 441 Winding-up 627,634
Non-stock Corporation 450, 523, 665
Non-voting Shares 493,496 CHAPTER Xll - Securities Regulation Code 668
No-Par Value Shares/Corporations 497 Civil Liability 689
Number of Directors 466 Disclosure Rule 689
Officers 474, 570,667 Exempt Securities 673
Over-issued Stock 498 Exempt Transactions 674
Paid-up Capital 488 Fraudulent Transactions 679, 691
Par Value Shares/Corporations 497 lnsider Trading 679,692
Perpetual Succession 439 Manipulation of Security Prices 676, 691
Piercing the Veil of Corporate Fiction 427 Protection of lnvestors 685
Place of lncorporation Test 441 Proxy Solicitation 688
Pledge/Mortgage of Shares 515 Registration of Securities 668
Preemptive Right 501 Short Sales 679
Preferred Shares 493 State Policy 668
President 476 Tenddr Offer Rule 686
Private Corporation 448
Promoter 460 CHAPTER Xlll - New Central Bank Act 693
Promotion Stock 498 Bangko Sentral ng Pilipinas 693
Proprietary Rights 592 Closure 701
Public Corporation 444 Conservatorship 697
Qualification of Directors 462 Legal Tender Power 712
Quasi Corporation 457 Liquidation 709
Quasi Public Corpoiation 457 Monetary Board 696
Reacquisition of Stocks 520 Rate of Exchange 713
Receivership 638 Receivership 705
Redeemable Shares 495 State Policy 693
Rehabilitation 627
Representative Suit 610 CHAPTER XIV - Law on Secrecy of Bank Deposits 715
Rights of Stockholders 583 Deposits Covered 715
Secretary 478 Exceptions 715
Share of Stock 480,493 Garnishment 731
Stock and Transfer Book 541 Prohibited Acts 715
Stock Corporation 448,521 Purpose 715
Stock Dividend 600, 603
Stockholders 460.563,622 CHAPTER XV - General Banking'Lavy 734
Subscribed Capital 482 Bank Deposits 739
Transfer of Shares 509 Commercial Bank 735
Treasurer 478 Cooperative Bank 736
Treasury Stocks 496 Diligence Required 739
Trust Fund Doctrine 483 DOSRI 743
Trustees 642,667 lslamic Bank 737
Ultra Vires Act 568 Quasi Banks 738
Unpaid Subscription 517 Ratio of Net Worth to Total Risk Assets 742
Visitorial Power 526
898 INDEX INDEX 899

Cont'd...Genera I Banking Law Cont'd . . . Anti-Money Laundering Act

Rural Bank 736 UnlaMulActivity 826
Single Borrower's Limit 743 When Committed 825
Thrift Bank 735
Trust Entities 738 CHAPTER XVlll * Foreign lnvestments Act 830
Universal Bank 734 Doing Business 831
Domestic Market Enterprise 831
CHAPTER XVI - lntellectual Property Code 745 Export Enterprise 831
Assignment of Rights 761 Foreign lnvestmenl 830, 832
Business Name 804 Negative List 833
Collective Marks 805 i'
Policy 830
:l
Compulsory Licensing 760 ',; Registration of lnvestments 83'1
Copyright 746, 805 F

Copyright Owner 808

Damages 791
Defenses 758
Derivative Works 807
Doctrine of Equivalents 758
Dominancy Test 773
Fair Use Doctrine 8'15
First to File Rule 753
Holistic Test 773
lnfringement 784,816
Limitations 813
Literal lnfringement 757
Non-Copyrightable Works 808
Non-Patentable lnventions 749
Non-Registrable Marks 767
Original Works 806
Patent 746
Patent lnfringement 756
Patentable lnventions 748
Prior User 756,772
Service Marks 761
Technology Transfer Arrangement 746
Trademarks 746,761
Tradenames 761.804
Unfair Competition 793
Voluntary Licensing 760
Well-Known Marks 781

CHAPTER XVll - Anti-Money Laundering Act 823

Anti-Money Laundering Council 826
Covered lnstitutions 823
Covered Transactions 825
Freezing of Monetary lnstrument 827
lnquiry into Bank Deposits 827
Policy 823
Suspicious Transactions 825