i

ii
iii
TABLE OF CONTENTS A.5. DRAWEE MUST BE NAMED OR
DESIGNATED WITH REASONABLE CERTAINTY 16
CREDIT TRANSACTIONS B. KINDS OF NEGOTIABLE INSTRUMENTS ... 17
I. LETTERS OF CREDIT (L/C) ..................... 2 B.1 PROMISSORY NOTE ...................................... 17

A. DEFINITION AND NATURE OF LETTER OF B.2 BILL OF EXCHANGE ...................................... 17

CREDIT............................................................... 2 B.3. INSTANCES WHEN A BILL OF EXCHANGE
B. PARTIES TO A LETTER OF CREDIT .............. 3 MAY BE TREATED AS A PROMISSORY NOTE ... 18

C. BASIC PRINCIPLES OF LETTER OF CREDIT 4 III. Completion and Delivery ..................... 19

II. TRUST RECEIPTS LAW [PD 115 (1973)]... 6 A. INSERTION OF DATE .................................. 19
A.1 EFFECT OF ANTE-DATING AND POST-
A. DEFINITION/CONCEPT OF A TRUST DATING ................................................................ 19
RECEIPT TRANSACTION .................................. 6
B. COMPLETION OF BLANKS .......................... 19
A.1. LOAN/SECURITY FEATURE .......................... 6
A.2. OWNERSHIP OF THE GOODS, DOCUMENTS
C. INCOMPLETE AND UNDELIVERED
AND INSTRUMENTS UNDER A TRUST RECEIPT 6 INSTRUMENTS ................................................ 19

B. RIGHTS OF THE ENTRUSTER ...................... 7 D. COMPLETE BUT UNDELIVERED

INSTRUMENTS ............................................... 20
B.1. VALIDITY OF THE SECURITY INTEREST AS
AGAINST THE CREDITORS OF THE IV. Signature ............................................ 21
ENTRUSTEE/INNOCENT PURCHASERS FOR
VALUE .................................................................... 7 A. SIGNING IN TRADE NAME .......................... 21

C. OBLIGATION AND LIABILITY OF THE B. SIGNATURE OF AGENT............................... 21

ENTRUSTEE ...................................................... 7 B.1. LIABILITY OF AN AGENT .............................. 21
C.1. PAYMENT/DELIVERY OF PROCEEDS OF C. INDORSEMENT BY MINOR OR
SALE OR DISPOSITION OF GOODS, CORPORATION ............................................... 22
DOCUMENTS OR INSTRUMENTS ....................... 8
D. FORGERY .................................................... 22
C.2. RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE ............. 8 D.1 PERSONS PRECLUDED FROM SETTING UP
DEFENSE OF FORGERY ..................................... 22
C.3. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS ....................... 8 D.2 RULES ON FORGERY................................... 22
C.4. PENAL SANCTION IF OFFENDER IS A V. Consideration ....................................... 25
CORPORATION .................................................... 8
A. WHO IS A HOLDER FOR VALUE (HFV)? .... 25
D. REMEDIES AVAILABLE ................................ 8
B. BURDEN OF PROOF – PRESUMPTION OF
E. WAREHOUSEMAN’S LIEN ............................ 9 CONSIDERATION............................................ 25
C. EFFECT OF WANT OF CONSIDERATION .. 25
NEGOTIABLE INSTRUMENTS VI. Accommodation Party......................... 25
I. Definition .............................................. 12 A. LIABILITY OF AN ACCOMODATION PARTY
......................................................................... 26
A. DEFINITION AND PURPOSE ....................... 12
B. ACCOMMODATION PARTY AS SURETY ... 26
II. Forms and Interpretation ..................... 12
A. REQUISITES OF NEGOTIABILITY ................ 12
VII. Negotiation ........................................ 27
A.1. IN WRITING AND SIGNED BY THE MAKER A. DISTINGUISHED FROM ASSIGNMENT ......27
OR DRAWER........................................................ 12 B. MODES OF NEGOTIATION ..........................27
A.2. CONTAINING AN UNCONDITIONAL B.1. BY DELIVERY – IF PAYABLE TO BEARER ... 27
PROMISE TO PAY OR ORDER TO PAY A SUM
CERTAIN IN MONEY ............................................ 13 B.2. BY INDORSEMENT COMPLETED BY
DELIVERY – IF PAYABLE TO ORDER ................. 28
A.3. PAYABLE ON DEMAND, OR AT A FIXED OR
DETERMINABLE FUTURE TIME ......................... 14 C. KINDS OF INDORSEMENT ......................... 29
A.4. PAYABLE TO ORDER OR TO BEARER ........ 15
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 C.1. AS TO MANNER OF FUTURE METHOD OF
NEGOTIATION .................................................... 29
C.2. AS TO TITLE TRANSFERRED ..................... 29
C.3. AS TO KIND OF LIABILITY ASSUMED BY
INDORSER .......................................................... 30
C.4. AS TO PRESENCE/ABSENCE OF EXPRESS
LIMITATIONS ...................................................... 30
C.5. OTHER KINDS OF INDORSEMENT ............ 30
VIII. Rights of the Holder ...........................31
A. HOLDER IN DUE COURSE [HDC] ............... 32
A.1. WHO ARE HOLDERS IN DUE COURSE........32
A.2. THE SIGNIFICANCE OF DUE COURSE
HOLDING .............................................................32
A.3. RIGHTS OF A HOLDER IN DUE COURSE ....33
A.4. REQUISITES OF A HOLDER IN DUE COURSE
.............................................................................33
A.5. PRESUMPTION IN FAVOR OF DUE COURSE
HOLDING ............................................................ 35
A.6. HOLDER NOT IN DUE COURSE ................. 35
B. DEFENSES AGAINST THE HOLDER .......... 36
IX. Liabilities of Parties ............................ 36
A. MAKER ........................................................ 37
B. DRAWER ..................................................... 37
C. ACCEPTOR .................................................. 37
D. INDORSERS ................................................ 38
D.1. GENERAL OR UNQUALIFIED INDORSER .. 38
D.2. IRREGULAR INDORSER ............................. 38
D.3. ORDER OF LIABILITY AMONG INDORSERS
............................................................................ 38
E. WARRANTIES.............................................. 39
E.1. MAKER’S WARRANTIES .............................. 39
E.2. DRAWER’S WARRANTIES .......................... 39
E.3. ACCEPTOR’S WARRANTIES ....................... 39
E.4. GENERAL INDORSER’S WARRANTIES ..... 39
E.5. QUALIFIED INDORSER’S WARRANTIES ... 39
X. Presentment for Payment .................... 39
A. NECESSITY OF PRESENTMENT FOR
PAYMENT ........................................................40
B. PARTIES TO WHOM PRESENTMENT FOR
PAYMENT SHOULD BE MADE........................40
C. DISPENSATION WITH PRESENTMENT FOR
PAYMENT ........................................................40
D. DISHONOR BY NON-PAYMENT ................40
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XI. Notice of Dishonor .............................. 41
A. PARTIES TO BE NOTIFIED .......................... 41
A.1. TO WHOM IN GENERAL ............................... 41
A.2. IF GIVEN BY AGENT ..................................... 41
A.3. IF PARTY IS DEAD ........................................ 41
A.4. TO PARTNERS ............................................. 41
A.5. TO JOINT PARTIES ....................................... 41
A.6. TO BANKRUPT ............................................. 41
B. PARTIES WHO MAY GIVE NOTICE OF
DISHONOR ....................................................... 41
B.1. WHO SHOULD GIVE ...................................... 41
C. EFFECT OF NOTICE .................................... 42
D. FORM OF NOTICE ...................................... 42
E. WAIVER ....................................................... 42
F. DISPENSATION WITH NOTICE................... 42
G. EFFECT OF FAILURE TO GIVE NOTICE ..... 42
XII. Discharge of Negotiable Instrument ..42
A. DISCHARGE OF NEGOTIABLE INSTRUMENT
......................................................................... 43
A.1. BY PAYMENT IN DUE COURSE ................... 43
A.2. BY INTENTIONAL CANCELLATION ............ 43
A.3. BY OTHER ACTS THAT DISCHARGE A
SIMPLE CONTRACT ............................................ 43
A.4. BY REACQUISITION OF PRINCIPAL DEBTOR
IN HIS OWN RIGHT ............................................. 44
A.5. BY MATERIAL ALTERATION ....................... 44
B. DISCHARGE OF PARTIES SECONDARILY
LIABLE ............................................................. 44
C. RIGHT OF PARTY WHO DISCHARGED
INSTRUMENT.................................................. 44
D. RENUNCIATION BY HOLDER .................... 45
XIII. Material Alteration ...........................45
A. CONCEPT .................................................... 46
A.1. CHANGES IN THE FOLLOWING CONSTITUTE
MATERIAL ALTERATIONS ................................. 46
B. EFFECT OF MATERIAL ALTERATION ........ 46
XIV. Acceptance .......................................46
A. DEFINITION ................................................ 47
A.1. REQUISITES ................................................. 47
A.2. KINDS OF ACCEPTANCE ............................ 47
A.3. PROOF OF ACCEPTANCE ........................... 47
B. MANNER ..................................................... 47
 B.1. EXPRESS ACCEPTANCE...............................47
B.2. IMPLIED ACCEPTANCE ...............................47
C. TIME FOR ACCEPTANCE ............................ 47
D. RULES GOVERNING ACCEPTANCE .......... 47
XV. Presentment for Acceptance ..............48
A. TIME/PLACE/MANNER OF PRESENTMENT
......................................................................... 48
A.1. WHEN MADE ............................................... 48
A.2 WHAT CONSTITUTES SUFFICIENT
PRESENTMENT? ............................................... 48
A.3 HOW MADE .................................................. 49
B. EFFECT OF FAILURE TO MAKE
PRESENTMENT ............................................... 49
C. DISHONOR BY NON-ACCEPTANCE .......... 49
XVI. Promissory Notes ............................. 50
XVII. Checks ............................................ 50
A. DEFINITION .................................................50
B. KINDS ..........................................................50
C. PRESENTMENT FOR PAYMENT .................51
C.1. TIME .............................................................. 51
C.2 EFFECT OF DELAY ........................................ 51
INSURANCE
I. CONCEPT OF INSURANCE ....................54
A. CONTRACT OF INSURANCE ...................... 54
A.1. DEFINITION.................................................. 54
A.2. FORM........................................................... 54
A.3. INSURANCE AND GAMBLING
DISTINGUISHED ................................................. 55
B. DOING OR TRANSACTING INSURANCE
BUSINESS ........................................................ 55
C. GOVERNING LAW ....................................... 56
D. PARTIES TO AN INSURANCE CONTRACT 56
E. BANCASSURANCE ..................................... 56
F. PRE-NEED PLANS ...................................... 57
G. HEALTH CARE AGREEMENTS ................... 57
II. ELEMENTS OF AN INSURANCE
CONTRACT...............................................58
A. IN GENERAL ................................................ 58
B. INSURABLE INTEREST ............................... 58
C. CAUSE AND RISK OF LOSS OR DAMAGE . 58
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D. CONSIDERATION ....................................... 58
E. RISK-DISTRIBUTING SCHEME ................... 58
F. MEETING OF THE MINDS ........................... 58
III. CHARACTERISTICS OF AN INSURANCE
CONTRACT...............................................59
A. IN GENERAL ............................................... 59
B. CONSENSUAL ............................................ 59
C. VOLUNTARY ............................................... 59
D. ALEATORY .................................................. 60
E. EXECUTORY AND UNILATERAL BUT
SYNALLAGMATIC ........................................... 60
F. CONDITIONAL............................................. 60
G. CONTRACT OF ADHESION (FINE PRINT
RULE)............................................................... 60
H. PERSONAL CONTRACT ............................. 60
I. UBERRIMAE FIDES CONTRACT.................. 60
J. FOR SPECIFIC KINDS OF INSURANCE
CONTRACTS ................................................... 60
IV. CLASSES ............................................. 61
A. MARINE INSURANCE .................................. 61
A.1. DEFINITION ................................................... 61
A.2. DIVISIONS.................................................... 63
A.3. BOTTOMRY AND RESPONDENTIA
DISTINGUISHED ................................................. 63
A.4. RISKS ........................................................... 63
A.5. LOSS ............................................................ 64
A.6. ABANDONMENT ......................................... 65
A.7. AVERAGE ..................................................... 66
B. FIRE INSURANCE ....................................... 67
B.1. DEFINITION .................................................. 67
B.2. RISKS ........................................................... 67
B.3. ALTERATIONS IN USE OR CONDITION ..... 68
B.4. MEASURE OF INDEMNITY.......................... 68
C. CASUALTY INSURANCE............................. 69
C.1. DEFINITION .................................................. 69
C.2. INTENTIONAL AND ACCIDENTAL INJURY
DISTINGUISHED ................................................. 69
C.3. DIVISIONS .................................................... 69
C.4. NO ACTION CLAUSE ................................... 69
D. SURETYSHIP .............................................. 70
E. LIFE INSURANCE ........................................ 70
E.1. DEFINITION .................................................. 70
 E.2. TYPES ........................................................... 71
E.3. EXAMPLES OF LIFE INSURANCE POLICIES72
E.4. RISKS ............................................................ 73
F. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE .................................................... 73
V. INSURABLE INTEREST ........................ 75
A. IN GENERAL ................................................ 75
A.1. WHEN INSURABLE INTEREST SHOULD
EXIST ....................................................................75
A.2. CHANGE OF INTEREST ...............................75
B. IN LIFE/HEALTH INSURANCE ................... 76
B.1. IN LIFE INSURANCE .....................................76
B.2. INTEREST IN HEALTH INSURANCE ............78
B.3. TRANSFER OF POLICY ................................78
C. IN PROPERTY INSURANCE ........................ 78
C. 1. TIME OF EXISTENCE ....................................79
C.2. TRANSFER OF POLICY ................................79
C.3. MEASURE OF INDEMNITY...........................79
C.4. INTEREST IN PROPERTY AND LIFE
DISTINGUISHED ................................................. 80
D. DOUBLE AND OVER INSURANCE;
REINSURANCE ................................................80
D.1. DOUBLE INSURANCE ................................. 80
D.2. RULES FOR PAYMENT ................................ 81
D.3. DOUBLE AND OVER INSURANCE
DISTINGUISHED .................................................. 81
D.4. REINSURANCE ............................................ 81
D.5. DOUBLE INSURANCE AND REINSURANCE
DISTINGUISHED ................................................. 82
E. MULTIPLE OR SEVERAL INTERESTS ON
SAME PROPERTY ........................................... 82
E.1. OPEN LOSS PAYABLE MORTGAGE CLAUSE
............................................................................ 83
E.2. UNION MORTGAGE OR STANDARD
MORTGAGE CLAUSE ......................................... 83
VI. PERFECTION OF THE INSURANCE
CONTRACT............................................... 83
A. OFFER AND ACCEPTANCE/CONSENSUAL
......................................................................... 83
A.1. DELAY IN ACCEPTANCE ............................. 84
A.2. DELIVERY OF POLICY ................................. 84
B. PREMIUM PAYMENT .................................. 84
B.1. AUTHORITY OF AGENT TO RECEIVE
PREMIUM ........................................................... 85
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B.2. PAYMENT BY POST-DATED CHECK .......... 85
B.3. NON-PAYMENT OF PREMIUM ................... 85
B.4. EXCUSES FOR NON-PAYMENT ................. 85
C. COVER-NOTES ........................................... 85
D. NON-DEFAULT OPTIONS IN LIFE
INSURANCE .................................................... 86
D.1. CASH SURRENDER VALUE (CSV) ............... 86
D.2. ALTERNATIVE TO CSV ................................ 86
E. REINSTATEMENT OF A LAPSED LIFE
INSURANCE POLICY ....................................... 87
F. REFUND OF PREMIUMS ............................ 87
VII. RESCISSION OF INSURANCE
CONTRACTS ............................................88
A. CONCEALMENT .......................................... 88
A.1. PROOF OF FRAUD IN CONCEALMENT ...... 88
A.2. TEST OF MATERIALITY ............................... 88
A.3. EFFECTS ...................................................... 89
A.4. CONCEALMENT IN MARINE AND
ORDINARY PRIVATE INSURANCE
DISTINGUISHED ................................................. 89
A.5. CONCEALMENT IN NON-MEDICAL
INSURANCE ........................................................ 90
A.6. MATTERS WHICH MUST BE DISCLOSED
EVEN IN THE ABSENCE OF INQUIRY ................ 90
A.7. MATTERS WHICH NEED NOT BE
DISCLOSED ......................................................... 90
B. MISREPRESENTATION/OMISSIONS ......... 91
B.1. KINDS OF REPRESENTATIONS ................... 91
B.2. TEST OF MATERIALITY ................................ 91
B.3. EFFECTS ...................................................... 92
C. BREACH OF WARRANTIES ........................ 93
C.1. WARRANTIES, RIDERS, AND
ENDORSEMENTS ............................................... 93
C.2. KINDS OF WARRANTIES ............................ 93
C.3. EFFECT......................................................... 94
VIII. CLAIMS SETTLEMENT AND
SUBROGATION ........................................95
A. CONCEPT OF LOSS .................................... 95
A.1. CAUSES OF LOSS ........................................ 95
A.2. LIABILITY FOR LOSS ................................... 95
B. NOTICE AND PROOF OF LOSS .................. 95
B.1. NOTICE OF LOSS ......................................... 95
B.2. PROOF OF LOSS ......................................... 96
C. GUIDELINES ON CLAIMS SETTLEMENT ... 97
 C.1. UNFAIR CLAIMS SETTLEMENT; SANCTIONS
............................................................................ 98
C.2. PRESCRIPTION OF ACTION ....................... 98
C.3. SUBROGATION ........................................... 98
IX. INSURANCE COMMISSIONER .......... 100
A. JURISDICTION AND ADJUDICATORY
POWERS ........................................................ 100
B. REVOCATION OF CERTIFICATE OF
AUTHORITY ................................................... 100
C. LIQUIDATION OF INSURANCE COMPANY
........................................................................ 101
TRANSPORTATION LAWS
I. Common Carriers ................................ 103
A. CONCEPT .................................................. 103
B. DILIGENCE REQUIRED ............................. 105
B.1. STANDARD OF DILIGENCE ........................ 105
B.2. PRESUMPTION OF NEGLIGENCE ............. 105
C. LIABILITIES ................................................ 105
II. Vigilance over Goods .......................... 106
A. LIABILITY, IN GENERAL............................ 106
B. EXEMPTING CAUSES ............................... 106
B.1. NATURAL DISASTER OR CALAMITY ......... 107
B.2. ACT OF PUBLIC ENEMY............................. 107
B.3. ACT OR OMISSION OF SHIPPER OR OWNER
........................................................................... 107
B.4. CHARACTER OF THE GOODS ................... 107
B.5. ORDER OF COMPETENT AUTHORITY ...... 107
B.6. FORCE MAJEURE....................................... 108
C. CONTRIBUTORY NEGLIGENCE ............... 108
D. DURATION OF EXTRAORDINARY
RESPONSIBILITY FOR GOODS..................... 108
D.1. DELIVERY OF GOODS TO COMMON
CARRIERS .......................................................... 109
D.2. ACTUAL OR CONSTRUCTIVE DELIVERY .. 109
D.3. TEMPORARY UNLOADING OR STORAGE 109
E. STIPULATION FOR LIMITATION OF
LIABILITY ........................................................ 110
E.1. AS TO DILIGENCE REQUIRED .....................110
E.2. LIMITATION OF LIABILITY TO FIXED
AMOUNT.............................................................110
E.3. LIMITATION OF LIABILITY IN ABSENCE OF
DECLARATION OF GREATER VALUE.................111
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F. LIABILITY FOR BAGGAGE OF PASSENGERS
......................................................................... 111
F.1. CHECKED-IN BAGGAGE .............................. 111
F.2. BAGGAGE IN POSSESSION OF
PASSENGERS .....................................................112
III. Safety of Passengers .......................... 113
A. LIABILITY, IN GENERAL ............................. 113
B. VOID STIPULATIONS .................................. 113
C. DURATION OF LIABILITY ........................... 113
C.1. WAITING FOR CARRIER OR BOARDING OF
CARRIER ............................................................ 114
C.2. ARRIVAL AT DESTINATION ....................... 114
D. LIABILITY FOR ACTS OF OTHERS .............115
D.1. EMPLOYEES ................................................ 115
D.2. OTHER PASSENGERS AND STRANGERS 115
D.3. MANUFACTURERS OF EQUIPMENT ........ 116
E. CONTRIBUTORY NEGLIGENCE .................116
F. EXTENT OF LIABILITY FOR DAMAGES ......116
F.1. ACTUAL OR COMPENSATORY DAMAGES 116
F.2. MORAL DAMAGES ...................................... 117
F.3. EXEMPLARY DAMAGES .............................. 117
F.4. NOMINAL, TEMPERATE, AND LIQUIDATED
DAMAGES ........................................................... 117
F.5. ATTORNEY’S FEES ...................................... 117
IV. Bill of Lading ...................................... 118
A. THREE-FOLD CHARACTER: ......................118
B. DELIVERY OF GOODS ................................118
B.1. PERIOD OF DELIVERY ................................ 118
B.2. DELIVERY WITHOUT SURRENDER OF BILL
OF LADING......................................................... 119
B.3. REFUSAL OF CONSIGNEE TO TAKE
DELIVERY ........................................................... 119
C. PERIOD FOR FILING CLAIMS .....................119
D. PERIOD FOR FILING ACTIONS .................120
D.1. OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING .....................................120
D.2. INTERNATIONAL CARRIAGE OF GOODS BY
SEA .....................................................................120
D.3. FALSE DECLARATION OF CONTENTS ......121
V. Admiralty and Maritime Commerce .... 121
A. CHARTER PARTIES .................................... 121
A.1. BAREBOAT OR DEMISE CHARTER ............ 122
A.2. TIME CHARTER .......................................... 123
 A.3. VOYAGE OR TRIP CHARTER ..................... 123
B. LIABILITY OF SHIP OWNERS AND SHIPPING
AGENTS .......................................................... 123
B.1. LIABILIITY FOR ACTS OF CAPTAIN............ 124
B.2. EXCEPTIONS TO LIMITED LIABILITY ........ 124
C. ACCIDENTS AND DAMAGES IN MARITIME
COMMERCE ....................................................125
C.1. AVERAGES .................................................. 125
C.2. COLLISIONS ............................................... 127
C.3. ARRIVAL UNDER STRESS ......................... 128
C.4. SHIPWRECKS ............................................. 128
C.5. SALVAGE .................................................... 129
D. CARRIAGE OF GOODS BY SEA ACT
(COGSA) ..........................................................129
D.1. APPLICATION ............................................. 129
D.2. NOTICE OF LOSS OR DAMAGES .............. 130
D.3. PERIOD OF PRESCRIPTION ...................... 130
D.4. LIMITATION OF LIABILITY ......................... 130
E. VESSEL ...................................................... 130
F. SPECIAL CONTRACTS OF MARITIME
COMMERCE .................................................... 131
F.1. LOANS ON BOTTOMRY AND
RESPONDENTIA................................................. 131
G. PASSENGERS ON SEA VOYAGE ............... 131
VI. International Air Transport ................132
A. APPLICABILITY .......................................... 132
B. LIMITATION OF LIABILITY ......................... 132
B.1. LIABILITY TO PASSENGERS....................... 133
B.2. LIABILITY FOR CHECKED BAGGAGE ........ 133
B.3. LIABILITY FOR HAND-CARRIED BAGGAGE
........................................................................... 133
C. WILLFUL MISCONDUCT ............................ 133
D. JURISDICTION ........................................... 133
CORPORATION LAW
I. Corporation ......................................... 136
A. DEFINITION ................................................136
B. ATTRIBUTES OF THE CORPORATION .....136
II. Classes of Corporations ....................... 137
A. STOCK CORPORATION ............................. 137
B. NON-STOCK CORPORATION ................... 137
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C. OTHER CORPORATIONS .......................... 138
C.1. PUBLIC CORPORATION ............................. 138
C.2. PRIVATE CORPORATION .......................... 138
C.3. CLOSE CORPORATION .............................. 138
C.4. EDUCATIONAL CORPORATION ................ 139
C.5. RELIGIOUS CORPORATIONS ................... 140
C.6. ELEEMOSYNARY CORPORATION............ 140
C.7. DOMESTIC CORPORATION ...................... 140
C.8. FOREIGN CORPORATION ........................ 140
C.9. CORPORATION CREATED BY SPECIAL
LAWS OR CHARTER ......................................... 140
C.10. SUBSIDIARY CORPORATION ................. 140
C.11. PARENT CORPORATION ......................... 140
C.12 CORPORATION DE JURE ......................... 140
C.13. DE FACTO CORPORATION ...................... 140
C.14 CORPORATION BY ESTOPPEL ................. 141
III. Nationality of Corporations ............... 142
A. PLACE OF INCORPORATION TEST .......... 142
B. CONTROL TEST ......................................... 142
C. GRANDFATHER RULE .............................. 143
IV. Corporate Juridical Personality ......... 146
A. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY................................................ 146
A.1. CONCEPT ....................................................146
A.2. PROPERTY .................................................146
A.3. CONSTITUTIONAL RIGHTS........................146
B. DOCTRINE OF PIERCING THE CORPORATE
VEIL ................................................................. 146
B.1. GROUNDS FOR APPLICATION OF THE
DOCTRINE ......................................................... 147
B.2. TEST IN DETERMINING APPLICABILITY ... 147
C. PROCEDURAL CONSIDERATIONS...........148
V. Incorporation and Organization ......... 149
A. PROMOTER ............................................... 149
A.1. LIABILITY OF PROMOTER ..........................149
A.2. LIABILITY OF CORPORATION FOR
PROMOTER’S CONTRACTS ..............................149
B. NUMBER AND QUALIFICATIONS OF
INCORPORATORS ......................................... 153
C. CORPORATE NAME — LIMITATIONS ON
USE OF CORPORATE NAME ......................... 153
D. CORPORATE TERM................................... 153
 E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS .................153
VII. Board of Directors and Trustees ........ 171
F. ARTICLES OF INCORPORATION ...............153
F.1. NATURE AND FUNCTION OF ARTICLES ... 153
F.2. CONTENTS ................................................. 154
F.3. AMENDMENT ............................................. 158
F.4. NON-AMENDABLE ITEMS ......................... 159
G. REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION ............ 159
G.1. REGISTRATION OF THE ARTICLES OF
INCORPORATION ............................................. 159
G.2. ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC ................................ 160
G.3. GROUNDS FOR DISAPPROVING THE
ARTICLES OF INCORPORATION: ..................... 160
H. ADOPTION OF BY-LAWS ......................... 160
H.1. NATURE AND FUNCTIONS OF BY-LAWS . 160
H.2. REQUISITES OF VALID BY-LAWS .............. 161
H.3. BINDING EFFECTS ...................................... 161
H.4. AMENDMENT OR REVISION ...................... 161
VI. Corporate Powers.............................. 162
A. GENERAL POWERS, THEORY OF GENERAL
CAPACITY [SEC. 36] .......................................162
B. SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY [SECS. 37-44] ...............................162
B.1. EXTEND OR SHORTEN THE CORPORATE
TERM [SEC. 37] .................................................. 162
B.2. INCREASE OR DECREASE CAPITAL STOCK
OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS [SEC. 38] ................................ 162
B.3. DENY PREEMPTIVE RIGHT [SEC. 39]........ 163
B.4. SELL OR DISPOSE OF SUBSTANTIALLY ALL
ITS ASSETS [SEC. 40] ....................................... 164
B.5. ACQUIRE ITS OWN SHARES [SEC. 41]...... 164
B.6. INVEST IN ANOTHER CORPORATION OR
BUSINESS [SEC. 42] .......................................... 164
B.7. DECLARE DIVIDENDS [SEC. 43]................ 165
B.8. ENTER INTO MANAGEMENT CONTRACTS
[SEC. 44] ............................................................ 166
B.9. ULTRA VIRES ACTS ................................... 166
C. HOW (CORPORATE POWERS) EXERCISED
........................................................................ 167
C.1. BY THE SHAREHOLDERS ........................... 167
C.2. BY THE BOD ............................................... 168
C.3. BY THE OFFICERS ...................................... 168
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D. TRUST FUND DOCTRINE.......................... 170
A. DOCTRINE OF CENTRALIZED
MANAGEMENT ............................................... 171
A.1. BOARD IS SEAT OF CORPORATE POWERS
............................................................................. 171
A.2. PRINCIPLE ON DELEGATION OF BOARD
POWER............................................................... 172
B. BUSINESS JUDGMENT RULE ................... 172
C. TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR
TRUSTEES ...................................................... 173
C.1. TENURE ....................................................... 173
C.2. QUALIFICATIONS ....................................... 173
C.3. DISQUALIFICATIONS [SEC. 27] ................. 174
D. ELECTIONS ................................................ 174
D.1. CUMULATIVE VOTING ................................ 174
D.2. QUORUM.................................................... 174
E. REMOVAL................................................... 174
F. FILLING OF VACANCIES ............................ 175
F.1. VACANCY (1) BY REMOVAL; OR (2) BY
EXPIRATION OF TERM; OR (3) WHEN THE
REMAINING DIRECTORS DO NOT CONSTITUTE
A QUORUM ........................................................ 175
F.2. VACANCY BY REASON OF INCREASE IN THE
NUMBER OF THE DIRECTORS/TRUSTEES ..... 175
F.3. VACANCY BY OTHER CAUSES ................... 175
G. COMPENSATION [SEC. 30] ...................... 175
H. FIDUCIARY DUTIES AND LIABILITY RULES
........................................................................ 175
H.1. DUTIES ........................................................ 175
H.2. LIABILITIES ................................................. 176
I. RESPONSIBILITY FOR CRIMES .................. 178
J. INSIDE INFORMATION ............................... 178
K. CONTRACTS .............................................. 178
K.1. BY SELF-DEALING DIRECTORS WITH THE
CORPORATION.................................................. 178
K.2. BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS ............................ 179
K.3. MANAGEMENT CONTRACTS [SEC 44] ..... 179
L. EXECUTIVE COMMITTEE ........................... 179
L.1. CREATION ................................................... 179
L.2. LIMITATION ON ITS POWERS .................... 179
M. MEETINGS OF BOD ................................. 180
 M.1. REGULAR OR SPECIAL.............................. 180
M.2. WHO PRESIDES ........................................ 180
M.3. QUORUM ................................................... 180
M.4. RULE ON ABSTENTION ............................. 181
VIII. Stockholders and Members ............ 182
A. RIGHTS OF A STOCKHOLDER AND
MEMBERS ..................................................... 182
A.1. DOCTRINE OF EQUALITY OF SHARES ...... 182
B. PARTICIPATION IN MANAGEMENT .........183
B.1. PROXY ......................................................... 183
B.2. VOTING TRUST .......................................... 183
B.3. CASES WHEN STOCKHOLDERS’ ACTION IS
REQUIRED ......................................................... 184
C. PROPRIETARY RIGHTS ............................. 187
C.1. RIGHT TO DIVIDENDS ................................ 187
C.2. RIGHT OF APPRAISAL ............................... 187
C.3. RIGHT TO INSPECT .................................... 188
C.4. PRE-EMPTIVE RIGHT................................. 190
C.5. RIGHT TO VOTE .......................................... 191
C.6. RIGHT OF FIRST REFUSAL......................... 191
D. REMEDIAL RIGHTS....................................192
D.1. INDIVIDUAL SUIT ....................................... 192
D.2. REPRESENTATIVE SUIT ............................ 192
D.3. DERIVATIVE SUIT ...................................... 192
E. OBLIGATION OF A STOCKHOLDER ..........193
E.1. LIABILITY TO THE CORPORATION FOR
UNPAID SUBSCRIPTION (SEC. 67) ................... 193
E.2. LIABILITY TO THE CORPORATION FOR
INTEREST ON UNPAID SUBSCRIPTION IF SO
REQUIRED BY THE BY-LAWS (SEC. 66)........... 193
E.3. LIABILITY FOR WATERED STOCKS (SEC. 65)
........................................................................... 194
E.4. LIABILITY FOR DIVIDENDS UNLAWFULLY
PAID ................................................................... 194
E.5. LIABILITY FOR ASSUMING TO ACT AS A
CORPORATION KNOWING IT TO BE WITHOUT
AUTHORITY ....................................................... 195
F. MEETINGS ................................................. 195
F.1. REGULAR OR SPECIAL............................... 195
F.2. WHO CALLS THE MEETINGS ..................... 195
F.3. WHO PRESIDES AT THE MEETINGS ......... 195
F.4. QUORUM .................................................... 196
F.5. MINUTES OF THE MEETINGS .................... 196
XIV. Capital Structure..............................197
xi
A. SUBSCRIPTION AGREEMENTS ................ 197
A. 1. CHARACTERISTICS .................................... 197
A. 2. STATUS AS SHAREHOLDER .................... 197
A. 3. TYPES OF SUBSCRIPTION CONTRACTS .198
A. 4. INTEREST ON UNPAID SUBSCRIPTION ..198
B. CONSIDERATION FOR STOCKS ............... 198
B. 1. FORMS OF CONSIDERATION (SEC. 62) ...198
B. 2. LIMITATIONS ON CONSIDERATION ........198
C. SHARES OF STOCK ................................... 199
C. 1. NATURE OF STOCK ...................................199
C. 2. SUBSCRIPTION AGREEMENTS (SEE
ABOVE)...............................................................199
C. 3. CONSIDERATION FOR SHARES OF STOCK
(SEE ABOVE) ......................................................199
C. 4. WATERED STOCK .....................................199
C. 5. SITUS OF THE SHARES OF STOCK ........ 200
C. 6. CLASSES OF SHARES OF STOCK ........... 200
D. PAYMENT OF BALANCE OF SUBSCRIPTION
(SEC. 66 AND 67) .......................................... 205
D. 1. CALL BY BOD ............................................ 205
D. 2. NOTICE REQUIREMENT .......................... 205
D. 3. SALE OF DELINQUENT SHARES (SEC. 68)
........................................................................... 205
E. CERTIFICATE OF STOCK .......................... 206
E. 1. NATURE OF THE CERTIFICATE ................ 206
E. 2. UNCERTIFICATED SHARES ..................... 207
E. 3. NEGOTIABILITY ........................................ 207
E. 4. ISSUANCE .................................................209
E. 5. LOST OR DESTROYED CERTIFICATES ....209
F. STOCK AND TRANSFER BOOK ................ 209
F. 1. CONTENTS ................................................209
F. 2. WHO MAY MAKE VALID ENTRIES ...........209
G. DISPOSITION AND ENCUMBRANCE OF
SHARES ......................................................... 209
G. 1. ALLOWABLE RESTRICTIONS ON THE SALE
OF SHARES .......................................................209
G. 2. SALE OF PARTIALLY PAID SHARES ........210
G. 3. SALE OF A PORTION OF SHARES NOT
FULLY PAID........................................................210
G. 4. SALE OF ALL OF SHARES NOT FULLY PAID
............................................................................210
G. 5. SALE OF FULLY PAID SHARES ................210
G. .6. REQUISITES OF A VALID TRANSFER .....210
 G. 7. INVOLUNTARY DEALINGS WITH SHARES
........................................................................... 210
XV. Dissolution and Liquidation .............. 211
A. MODES OF DISSOLUTION ........................ 211
A.1. VOLUNTARY ................................................ 211
A.2. INVOLUNTARY........................................... 213
B. METHODS OF LIQUIDATION.................... 214
B.1. BY THE CORPORATION ITSELF ................. 214
B.2. CONVEYANCE TO A TRUSTEE WITHIN A 3-
YEAR PERIOD .................................................... 214
B.3. BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER ............................ 215
B.4. LIQUIDATION AFTER THREE YEARS ........ 215
XVI. Other Corporations ......................... 216
A. CLOSE CORPORATIONS ...........................216
A.1. CHARACTERISTICS OF A CLOSE
CORPORATION ................................................. 216
A.2. VALIDITY OF RESTRICTIONS ON TRANSFER
OF SHARES........................................................ 217
A.3. ISSUANCE OR TRANSFER OF STOCK IN
BREACH OF QUALIFYING CONDITIONS .......... 217
A.4. WHEN BOARD MEETING IS UNNECESSARY
OR IMPROPERLY HELD .................................... 218
A.5. PRE-EMPTIVE RIGHT ................................ 218
A.6. AMENDMENT OF ARTICLES OF
INCORPORATION ............................................. 218
A.7. DEADLOCKS ............................................... 219
B. NON-STOCK CORPORATIONS ................ 223
B.1. DEFINITION................................................ 225
B.2. PURPOSES ................................................ 225
B.3. TREATMENT OF PROFITS ........................ 225
B.4. DISTRIBUTION OF ASSETS UPON
DISSOLUTION .................................................. 225
C. RELIGIOUS CORPORATIONS ................... 225
C.1. CORPORATION SOLE (SEC. 110) ............... 225
C.2. NATIONALITY ............................................ 225
C.3. RELIGIOUS SOCIETIES ............................. 225
D. FOREIGN CORPORATIONS ..................... 226
D.1. BASES OF AUTHORITY OVER FOREIGN
CORPORATIONS .............................................. 226
D.2. NECESSITY OF A LICENSE TO DO BUSINESS
.......................................................................... 228
D.3. PERSONALITY TO SUE ............................. 228
D.4. SUABILITY OF FOREIGN CORPORATIONS
.......................................................................... 228
xii
D.5. INSTANCES WHEN UNLICENSED FOREIGN
CORPORATIONS MAY BE ALLOWED TO SUE 229
D.6. GROUNDS FOR REVOCATION OF LICENSE
........................................................................... 229
A. DEFINITION AND CONCEPT .................... 230
B. CONSTITUENT VS. CONSOLIDATED
CORPORATION ............................................. 230
C. PLAN OF MERGER OR CONSOLIDATION
[SEC. 76] ........................................................ 230
D. ARTICLES OF MERGER OR
CONSOLIDATION.......................................... 230
E. PROCEDURE ............................................. 230
E.1. APPROVAL OF PLAN OF MERGER OR
CONSOLIDATION BY BOD AND STOCKHOLDERS
OF CONSTITUENT CORPORATIONS ............... 230
E.2. EXECUTION OF ARTICLES OF MERGER OR
CONSOLIDATION .............................................. 231
E.3. SUBMISSION TO SEC OF ARTICLES .......... 231
E.4. ACTION BY SEC .......................................... 231
F. EFFECTIVITY............................................... 231
G. LIMITATIONS ............................................. 231
H. EFFECTS (SEC. 80) .................................... 231
BANKING LAWS
I. The New Central Bank Act................... 234
A. STATE POLICIES ....................................... 234
B. SALIENT FEATURES ................................. 234
C. CREATION OF THE BANGKO SENTRAL NG
PILIPINAS (BSP) ............................................ 234
C.1. NATURE OF THE BSP ................................ 234
C.2. CAPITALIZATION ...................................... 234
D. RESPONSIBILITY AND PRIMARY
OBJECTIVE .................................................... 234
D.1. PRIMARY OBJECTIVES .............................. 234
D.2. OTHER RESPONSIBILITIES ...................... 234
D.3. BSP AS TRANSFEREE OF PHILIPPINE
CENTRAL BANK POWERS ............................... 234
E. MONETARY BOARD ................................. 235
E.1. POWERS AND FUNCTIONS ....................... 235
E.2. COMPOSITION........................................... 235
E.3. REAPPOINTMENT ..................................... 235
E.4. QUALIFICATIONS ...................................... 235
E.5. DISQUALIFICATIONS ................................ 235
 E.6. PROHIBITION ON MEMBERS OF THE MB 235
E.7. GROUNDS FOR REMOVAL OF ANY MEMBER
OF THE MB ....................................................... 236
E.8. VACANCIES, HOW FILLED ........................ 236
E.9. CIVIL LIABILITY OF MEMBERS OF THE MB
.......................................................................... 236
F. HOW THE BSP HANDLES BANKS IN
DISTRESS ...................................................... 236
F.1. CONSERVATORSHIP ................................. 236
F.2. CLOSURE .................................................... 237
F.3. RECEIVERSHIP .......................................... 238
F.4. LIQUIDATION ............................................ 239
G. FOREIGN EXCHANGE OPERATIONS....... 243
G.1. LEGAL TENDER POWER ........................... 243
G.2. RETIREMENT OF OLD NOTES AND COINS
.......................................................................... 243
G.3. RATE OF EXCHANGE ................................ 243
II. Law on Secrecy of Bank Deposits .......244
A. POLICY ......................................................244
B. PURPOSE ..................................................244
C. PROHIBITED ACTS ...................................244
D. DEPOSITS COVERED ...............................244
E. EXCEPTIONS ............................................. 245
F. POWER OF THE OMBUDSMAN TO EXAMINE
ACCOUNTS .................................................... 246
G. GARNISHMENT OF DEPOSITS ................ 246
H. CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS ................................. 247
I. PENALTIES ................................................. 247
III. General Banking Law of 2000........... 247
A. CLASSIFICATION OF BANKS ................... 247
A.1. UNIVERSAL BANK (UB)............................. 247
A.2. COMMERCIAL BANK (KB) ........................ 248
A.3. THRIFT BANK ............................................ 248
A.4. RURAL BANKS .......................................... 248
A.5. COOPERATIVE BANKS ............................. 248
A.6. ISLAMIC BANKS ........................................ 248
A.7. OTHER BANKS AS CLASSIFIED BY THE BSP
.......................................................................... 248
A.8. QUASI-BANKS AND TRUST ENTITIES..... 248
B. CORE BANKING FUNCTIONS...................249
C. POWERS OF A COMMERCIAL BANK (SEC.
29) ..................................................................249
xiii
C.1. CORPORATE POWERS .............................. 249
C.2. GRANTING OF LOANS; SECURITY
REQUIREMENT ................................................. 249
C.3. STIPULATIONS ON INTEREST .................. 249
C.4. INCIDENTAL BANKING POWERS ............. 250
D. BANKING AND INCIDENTAL POWERS ... 250
E. DILIGENCE REQUIRED OF BANKS .......... 252
F. NATURE OF BANK FUNDS AND BANK
DEPOSITS ...................................................... 253
G. STIPULATION ON INTERESTS................. 253
H. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL MEASURES)
....................................................................... 254
H.1. RATIO OF NET WORTH TO TOTAL RISK
ASSETS ............................................................. 254
I. PURPOSE ................................................... 254
I.1. EFFECT OF NON-COMPLIANCE ................. 254
I.2. SINGLE BORROWER’S LIMIT ..................... 254
I.3. RESTRICTIONS ON BANK EXPOSURE TO
DOSRI (DIRECTORS, OFFICERS,
STOCKHOLDERS, AND THEIR RELATED
INTERESTS) ...................................................... 255
INTELLECTUAL PROPERTY
LAW
I. Intellectual Property Rights in General
...............................................................258
A. INTELLECTUAL PROPERTY RIGHTS ....... 258
A.1. DEFINITION ................................................ 258
A.2. INTELLECTUAL PROPERTY RIGHTS UNDER
THE INTELLECTUAL PROPERTY CODE ........... 258
B. DIFFERENCES BETWEEN COPYRIGHTS,
TRADEMARKS AND PATENT ....................... 258
B.1. PATENTABLE INVENTIONS....................... 258
B.2. TRADEMARK ............................................. 258
B.3. TRADE NAME ............................................ 258
B.4. COPYRIGHT ............................................... 258
B.5. OTHER FORMS OF INTELLECTUAL
PROPERTY ........................................................ 259
C. TECHNOLOGY TRANSFER
ARRANGEMENTS ......................................... 259
II. Patents .............................................. 260
A. WHAT ARE PATENTABLE? ...................... 260
A.1. INVENTIONS .............................................. 260
 A.2. UTILITY MODEL ......................................... 261
A.3. INDUSTRIAL DESIGNS .............................. 261
A.4. LAY-OUT DESIGNS (TOPOGRAPHIES OF
INTEGRATED CIRCUITS) ................................... 261
B. NON-PATENTABLE INVENTIONS ....... 262
C. OWNERSHIP OF A PATENT ..................... 262
C.1. RIGHT TO A PATENT ................................. 262
C.2. FIRST-TO-FILE RULE ................................ 262
C.3. INVENTIONS CREATED PURSUANT TO A
COMMISSION ................................................... 262
C.4. RIGHT OF PRIORITY ................................. 263
C.5. REMEDY OF PERSONS NOT HAVING THE
RIGHT TO A PATENT ........................................ 263
D. TERM OF PATENT .................................... 263
D.1. TERM OF INVENTION PATENT ................. 263
D.2. TERM OF UTILITY MODEL........................ 263
D.3. TERM OF INDUSTRIAL DESIGN ............... 263
E. CANCELLATION OF PATENT ................... 263
E.1. GROUNDS FOR CANCELLATION OF A
PATENT............................................................. 263
E.2. REQUIREMENTS OF THE PETITION ........ 263
E.3. NOTICE OF HEARING................................ 264
E.4. EFFECT OF CANCELLATION OF PATENT OR
CLAIM ............................................................... 264
F. REMEDY OF THE TRUE AND ACTUAL
INVENTOR ..................................................... 264
F.1. TIME TO FILE ACTION IN COURT .............. 264
G. RIGHTS CONFERRED BY A PATENT ....... 264
H. LIMITATIONS OF PATENT RIGHTS ......... 264
H.1. PRIOR USER .............................................. 265
H.2. USE BY THE GOVERNMENT .................... 265
I. PATENT INFRINGEMENT .......................... 266
I.1. CONTRIBUTORY INFRINGER ..................... 266
I.2. DOCTRINE OF PATENT EXHAUSTION ...... 266
I.3. TESTS IN PATENT INFRINGEMENT .......... 266
I.4. CRIMINAL ACTION FOR REPETITION OF
INFRINGEMENT ............................................... 267
I.5. INFRINGEMENT ACTION BY FOREIGN
NATIONAL ........................................................ 267
I.6. DEFENSE IN ACTION FOR INFRINGEMENT
.......................................................................... 267
J. LICENSING ................................................. 267
J.1. VOLUNTARY ............................................... 267
J.2. COMPULSORY ........................................... 269
xiv
III. Trademarks ........................................271
A. DEFINITION OF MARKS, COLLECTIVE
MARKS, TRADE NAMES ................................ 271
A.1. MARKS ........................................................ 271
A.2. FUNCTIONS OF A TRADEMARK ............... 271
A.3. KINDS OF MARKS; SPECTRUM OF
DISTINCTIVENESS ............................................. 271
B. ACQUISITION OF OWNERSHIP OF MARK
....................................................................... 272
B.1. DURATION OF CERTIFICATE .................... 272
C. ACQUISITION OF OWNERSHIP OF TRADE
NAME............................................................. 272
D. NON-REGISTRABLE MARKS ................... 272
D.1. DOCTRINE OF SECONDARY MEANING ... 273
D.2. DISCLAIMERS ........................................... 274
E. PRIOR USE OF MARK AS A REQUIREMENT
....................................................................... 274
E.1. USE OF MARK AS A REQUIREMENT ........ 274
E.2. NON-USE OF MARK WHEN EXCUSED..... 275
F. TESTS TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS .................... 275
G. WELL-KNOWN MARKS ............................ 276
G.1. DETERMINANTS (NEED NOT CONCUR) .. 276
G.2. PROTECTION EXTENDED TO WELL-KNOWN
MARKS .............................................................. 276
G.3. RIGHTS CONFERRED BY A WELL-KNOWN
MARK .................................................................277
H. RIGHTS CONFERRED BY REGISTRATION
........................................................................277
H.1. LIMITATIONS ON SUCH RIGHTS ...............277
H.2. ASSIGNMENT AND TRANSFER OF
APPLICATION AND REGISTRATION.................277
H.3. PROTECTION LIMITED TO GOODS
SPECIFIED IN REGISTRATION CERTIFICATE .. 278
H.4 USE BY THIRD PARTIES OF NAMES, ETC.
SIMILAR TO REGISTERED MARK .................... 278
I. INFRINGEMENT AND REMEDIES ............. 278
I.1. TRADEMARK INFRINGEMENT ................... 278
I.2. FALSE DESIGNATIONS OF ORIGIN; FALSE
DESCRIPTION OR REPRESENTATION ............ 279
I.3. INFRINGEMENT OF NAME AND MARKS OF
OWNERSHIP STAMP ON CONTAINERS .......... 279
I.4. DAMAGES ...................................................280
I.5. REQUIREMENT OF NOTICE .......................280
I.6. OTHER REMEDIES AVAILABLE: ................280
 I.7. LIMITATIONS TO ACTIONS FOR
INFRINGEMENT ................................................ 281
J. UNFAIR COMPETITION ............................. 281
K. TRADE NAMES OR BUSINESS NAMES ... 283
K.1. WHAT MAY NOT BE USED AS A TRADE
NAME ................................................................ 283
L. COLLECTIVE MARKS ................................ 283
L.1. GROUNDS FOR CANCELLATION .............. 284
M. PARALLEL IMPORTATION; EXCLUSIVE
DISTRIBUTORSHIP AS PROPRIETARY RIGHT
.......................................................................284
IV. Copyrights .........................................285
A. DEFINITION ...............................................285
B. BASIC PRINCIPLES ...................................285
B.1. WORKS ARE PROTECTED BY THE SOLE
FACT OF THEIR CREATION ............................. 285
B.2. PROTECTION EXTENDS ONLY TO THE
EXPRESSION OF AN IDEA, NOT THE IDEA ITSELF.
.......................................................................... 285
B.3. COPYRIGHT DISTINCT FROM THE
PROPERTY IN THE MATERIAL OBJECT SUBJECT
TO IT. 285
B.4. COPYRIGHT IS A STATUTORY RIGHT...... 285
C. COPYRIGHTABLE WORKS .......................285
C.1. ORIGINAL LITERARY AND ARTISTIC WORKS
.......................................................................... 286
C.2. DERIVATIVE WORKS ................................ 286
D. NON-COPYRIGHTABLE WORKS ............. 287
D.1. UNPROTECTED SUBJECT MATTER ......... 287
D.2. WORKS OF THE GOVERNMENT OF THE
PHILIPPINES ..................................................... 287
D.3. WORKS OF THE PUBLIC DOMAIN ........... 288
D.4. USEFUL ARTICLES ................................... 288
E. RIGHTS OF COPYRIGHT OWNER.............288
E.1. COPYRIGHT OR ECONOMIC RIGHTS ....... 288
E.2. WHEN COPYRIGHT VESTS ....................... 289
E.3. MORAL RIGHTS......................................... 289
E.4. RIGHTS TO PROCEEDS IN SUBSEQUENT
TRANSFERS (DROIT DE SUITE OR FOLLOW UP
RIGHTS) ............................................................ 290
E.5. NEIGHBORING RIGHTS ............................ 290
F. RULES ON OWNERSHIP OF COPYRIGHT 293
F.1. OWNERSHIP OF COPYRIGHT ................... 293
F.2. DURATION OF COPYRIGHT...................... 294
F.3. PRESUMPTION OF AUTHORSHIP ............ 295
xv
F.4. TRANSFER OR ASSIGNMENT OF
COPYRIGHT ...................................................... 295
F.5. COLLECTIVE MANAGEMENT
ORGANIZATIONS ............................................. 295
G. LIMITATIONS ON COPYRIGHT ................ 296
G.1. DOCTRINE OF FAIR USE ........................... 296
H. COPYRIGHT INFRINGEMENT .................. 296
SPECIAL LAWS
I. Anti – Money Laundering Act .............. 301
A. POLICY OF THE LAW ................................. 301
B. COVERED INSTITUTIONS ......................... 301
C. COVERED TRANSACTIONS ..................... 302
D. SUSPICIOUS TRANSACTIONS ................ 302
E. OBLIGATIONS OF COVERED INSTITUTIONS
....................................................................... 302
F. WHEN IS MONEY LAUNDERING
COMMITTED.................................................. 303
G. UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES .......................................................... 304
H. ANTI – MONEY LAUNDERING COUNCIL
(AMLC) ........................................................... 305
J. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS ...................................................... 307
II. Foreign Investments Act (R.A. 7042). 308
A. POLICY OF THE LAW ................................ 308
B. DEFINITION OF TERMS ............................ 308
D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE .................................................. 310
E. FOREIGN INVESTMENT IN DOMESTIC
MARKET ENTERPRISE ................................... 311
F. FOREIGN INVESTMENT NEGATIVE LIST ... 311
III. Financial Rehabilitation and Insolvency
Act of 2010 ..............................................312
A. KEY CONCEPTS AND DEFINITIONS ......... 312
B. NATURE OF REHABILITATION
PROCEEDINGS............................................... 312
C. COURT–SUPERVISED PROCEEDINGS .... 313
C.1. VOLUNTARY (SEC. 12) ................................ 313
C.2. INVOLUNTARY (SEC. 13, 14)....................... 313
C.3. PROVISIONS COMMON TO VOLUNTARY
AND INVOLUNTARY REHABILITATION
PROCEEDINGS .................................................. 313
 D. PRE- NEGOTIATED REHABILITATION ..... 321 C. 2. DISCLOSURE BY EQUITY HOLDERS ....... 342

E. OUT–OF–COURT REHABILITATION ........ 322 C. 3. DISCLOSURE BY INSIDER........................ 342

F. CONVERSION INTO LIQUIDATION VI. Civil Liability ..................................... 343

PROCEEDINGS .............................................. 323 A. CIVIL LIABILITIES ON ACCOUNT OF FALSE
G. LIQUIDATION ............................................ 323 REGISTRATION STATEMENT (SEC. 56) ...... 343
G.1. KEY CONCEPTS AND DEFINITONS ...........323 B. CIVIL LIABILITIES ARISING IN CONNECTION
WITH PROSPECTUS, COMMUNICATIONS AND
G.2. KINDS OF DEBTORS..................................323
REPORTS (SEC. 57) ...................................... 344
G.3. LIQUIDATION OF AN INDIVIDUAL DEBTOR
.......................................................................... 325 B. 1. LIABILITY OF SELLERS/OFFERORS ........ 344

G.4. LIQUIDATION OF A JURIDICAL DEBTOR 326 B.2. LIABILITY OF MAKERS OF FALSE

MISLEADING STATEMENTS ............................ 344
G.5. PROVISIONS COMMON TO LIQUIDATION
OF INDIVIDUAL AND JURIDICAL DEBTORS ... 326 C. CIVIL LIABILITY OF FRAUD IN CONNECTION
WITH SECURITIES TRANSACTIONS (SEC. 58)
....................................................................... 344

SECURITIES REGULATION D. CIVIL LIABILITY FOR MANIPULATION OF

SECURITY PRICES (SEC. 59) ........................ 345
CODE E. CIVIL LIABILITY WITH RESPECT TO
I. State Policy ..........................................331 COMMODITY FUTURES CONTRACTS AND
PRE-NEED PLANS (SEC. 60) ........................ 345
II. Securities Required to be Registered ..331
F. CIVIL LIABILITY ON ACCOUNT OF INSIDER
III.Procedure for Registration of Securities TRADING ....................................................... 345
............................................................... 335 F. 1. LIABILITY FOR NON-DISCLOSURE ......... 345
IV.Prohibitions on Fraud, Manipulation and F. 2. LIABILITY FOR COMMUNICATING NON-
Insider Trading ....................................... 337 PUBLIC INFORMATION ABOUT ISSUER ......... 345
A. MANIPULATION OF SECURITY PRICES .. 337 G. LIABILITIES OF CONTROLLING PERSONS,
AIDER AND ABETTOR AND OTHER
B. SHORT SALES ........................................... 337
SECONDARY LIABILITY ................................ 345
C. FRAUDULENT TRANSACTIONS .............. 338 G. 1. LIABILITY OF CONTROLLING PERSONS . 346
D. INSIDER TRADING ................................... 338 G. 2. LIABILITY OF DIRECTOR/OFFICER FOR
V.Protection of Investors DELAY IN THE FILING OF REQUIRED
DOCUMENTS .................................................... 346
............................................................... 339
G. 3. LIABILITY OF AIDER/ABETTOR............... 346
A. TENDER OFFER RULE .............................. 339
B. RULES ON PROXY SOLICITATION ...........340
C. DISCLOSURE RULE ...................................341
C. 1. DISCLOSURE BY THE ISSUER................... 341

xvi
UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW

MERCANTILE LAW
CREDIT
TRANSACTIONS

Page 1 of 353
UP LAW BOC CREDIT TRANSACTIONS
I. LETTERS OF CREDIT
(L/C)
A. DEFINITION AND NATURE OF
LETTER OF CREDIT
Definition
Letters of credit (L/C) are those issued by one
merchant to another, or for the purpose of
attending to a commercial transaction. [Art.
567, Code of Commerce]
A written instrument whereby the writer
requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee [Transfield
Philippines v. Luzon Hydro, G.R. No. 146717
( 2004)].
A L/C is a financial device developed by
merchants as a convenient and relatively safe
mode of dealing with sales of goods. The
buyer is required to contract a bank to issue a
L/C in favor of the seller so that, by virtue of
the L/C, the issuing bank can authorize the
seller to draw drafts and engage to pay them
upon their presentment simultaneously with
the tender of documents required by the L/C.
[Bank of America v. CA, G.R. No. 105395
(1993)]
Purpose
Its purpose is to substitute for, and support,
the agreement of the buyer-importer to pay
money under a contract or other
arrangement, but does not necessarily
constitute as a condition for the perfection of
such arrangement [Reliance Commodities,
Inc. v. Daewoo Industrial Co., Ltd., G.R. No. L-
100831 (1993)]
Essential Conditions of Letters of Credit:
(1) Issued in favor of a definite person and
not to order.
Page 2 of 353
MERCANTILE LAW
(2) Limited to a fixed and specified amount,
or to one or more undetermined
amounts, but within a maximum the
limits of which has to be stated exactly.
Those which do not have one of these
conditions shall be mere letters of
recommendation. [Art. 568, Code of
Commerce]
Nature
(1) Financial device – L/Cs are developed by
merchants as a convenient and relatively
safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part
with his goods before he is paid, and a
buyer, who wants to have control of the
goods before paying [Bank of America,
NT&SA v. Court of Appeals, G.R. No. L-
105395 (1993)]
A letter of credit is one of the modes of
payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign
Exchange Rules and Regulations," dated
13 April 1993, by which commercial banks
sell foreign exchange to service payments
for, e.g., commodity imports [Reliance
Commodities v. Daewoo, G.R. No. L-
100831 (1993)]
(2) Composite of three distinct contracts –
An L/C transaction involves three distinct
but intertwined relationships:
(a) The contract between the buyer and
the seller.
(b) The contract of the buyer with the
issuing bank, often called the
“Application and Agreement” or
“Reimbursement Agreement” and,
(c) The letter of credit proper in which
the bank promises to pay the seller
pursuant to the terms and conditions
stated therein. [Keng Hua Paper
Products Co. v. CA, G.R. No. 116863
(1998)]
UP LAW BOC CREDIT TRANSACTIONS MERCANTILE LAW

(3) As to the obligation assumed by

Duration of Letters of Credit correspondent bank
(1) Period stipulated by the parties; or (a) Unconfirmed L/C - One which
(2) If no period is fixed; continues to be the obligation of
(a) 6 months from date if used in the the issuing bank
Philippines (b) Confirmed L/C - One which is
(b) 12 months if abroad supported by the absolute
assurance to the beneficiary that
Types of letters of credit the confirming bank will
undertake the issuing bank's
(1) As to the type of the main contract obligation as its own according to
the terms and conditions of the
Commercial Standby credit [Feati Bank and Trust Co. v.
Letter of Credit Letter of Credit CA, G.R. No. 94209 (1991)]
Method of payment Used to guarantee or
in a contract of sale secure an obligation
in a non-sale
transaction B. PARTIES TO A LETTER OF CREDIT
Reduce the risk of Reduce the risk of
non-payment of non-performance of Rights and Obligations of the Parties
purchase price under a contractual There would be at least three parties to a
a contract of sale obligation letter of credit: [Lee v. CA, G.R. No. 117913
The credit is payable The credit is payable (2002)]
upon the upon certification of
presentation by the a party’s non- (1) Buyer/Exporter/Account Party – one who
seller-beneficiary performance of the procures the letter of credit and obliges
that he has taken agreement himself to reimburse the issuing bank
affirmative steps to upon receipt of documents of title.
comply with the sale
agreement. (2) Issuing/Opening Bank – the bank which is
Beneficiary must Beneficiary must usually the buyer’s bank and actually
certify by document certify that his issues the letter of credit. [Lee v. CA, G.R.
that he has obligor has not No. 117913 (2002)]
performed the performed the
contract contract It undertakes: (1) to pay the seller upon
receipt of the draft and proper documents
(2) As to revocability of title; and (2) to surrender the
(a) Revocable L/C - One which can documents to the buyer upon
be revoked by the issuing bank reimbursement.
without the consent of the buyer
and seller The obligation of the issuing bank to pay
(b) Irrevocable L/C - One which the the seller is direct, primary, absolute,
issuing bank cannot revoke definite and solidary with the buyer, in
without the consent of the buyer the absence of stipulation in the letter of
and seller [Feati Bank and Trust credit [Metropolitan Waterworks and
Co. v. CA, G.R. No. 94209 (1991)] Sewerage System v. Daway, G.R. No.
160732 (2004)]

Page 3 of 353
UP LAW BOC CREDIT TRANSACTIONS
An issuing bank that paid the beneficiary
of an expired letter of credit can recover
from the applicant-buyer, who obtained
goods from the beneficiary to prevent
unjust enrichment. [Rodzssen Supply Co.
v. Far East Bank & Trust Co., G.R. No.
109087 (2001)]
(3) Seller/Importer/Beneficiary – one who
ships the goods to the buyer in
compliance with a contract of sale and
delivers the documents of title and draft
to the issuing bank to recover payment.
Depending on the transaction, the number of
parties to the letter of credit may be
increased. Thus, the different types of
correspondent banks:
(1) Advising/Notifying Bank – the bank
which conveys to the seller the existence
of the credit.
The bank assumes no liability except to
notify and/or transmit to the seller the
existence of the letter of credit. It is not a
privy to the contract of sale between the
buyer and the seller. Its relationship is
only with that of the issuing bank.
The bank may suggest to the seller its
willingness to negotiate, but this fact
alone does not imply that the notifying
bank promises to accept the draft drawn
under the documentary credit [Feati
Bank and Trust Co. v. CA, G.R. No.
94209 (1991)]
The services of the notifying bank must
always be utilized if the letter of credit is
to be advised to the beneficiary through
cable. [Lee v. CA, G.R. 117913 (2002)]
(2) Confirming Bank – the bank which
confirms the letter of credit issued by the
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MERCANTILE LAW
opening bank. [Lee v. CA, G.R. 117913
(2002)]
The bank assumes a direct obligation to
the seller and its liability is a primary one
as if the bank itself had issued the letter
of credit [Feati Bank and Trust Co. v. CA,
G.R. No. 94209 (1991)]
(3) Negotiating Bank – the bank which
discounts the draft presented by the
seller.
The bank buys or discounts a draft under
the letter of credit. Its liability is
dependent upon the stage of the
negotiation. If before negotiation, it has
no liability with respect to the seller but
after negotiation, a contractual
relationship will then prevail between
the negotiating bank and the seller
[Feati Bank and Trust Co. v. CA, G.R. No.
94209 (1991)]
(4) Paying Bank – the bank which buys or
discounts the drafts contemplated by
the letter of credit, if such draft is to be
drawn on the opening bank or on
another designated bank not in the city
of the beneficiary. [Lee v. CA, G.R. No.
117913 (2002)]
C. BASIC PRINCIPLES OF LETTER OF
CREDIT
Doctrine of Independence
The principle of independence assures the
seller-beneficiary of prompt payment
regardless 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 assume no
liability or responsibility for the form,
sufficiency, accuracy, genuineness,
falsification or legal effect of any documents,
UP LAW BOC CREDIT TRANSACTIONS
or for the general and/or particular
conditions stipulated in the documents or
superimposed thereon, nor do they assume
any liability or responsibility for the
description, quantity, weight, quality,
condition, packing, delivery, value or
existence of the goods represented by any
documents, or for the good faith or acts
and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
whomsoever [PNB v. San Miguel Corporation,
G.R. No. 186063 (2014), citing Transfield
Philippines v. Luzon Hydro, G.R. No. 146717
(2004)]
The independent nature of the letter of credit
may be—
(a) Independent in toto - the credit is
independent from the justification aspect
and is a separate obligation from the
underlying agreement;
(b) Only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying
agreement.
In both cases the payment may be enjoined if
in the light of the purpose of the credit the
payment of the credit would constitute
fraudulent abuse of the credit. [Transfield
Philippines v. Luzon Hydro, G.R. No. 146717
(2004]
Justification Aspect – A demand for payment
under the credit prima facie means that the
beneficiary has performed his part of the
underlying transaction and and is prima facie
entitled to payment. The justification is only
prima facie, because the documents tendered
may be proper while there is a defect in the
underlying transaction.
Fraud Exception Principle
The principle that limits the application of the
independence principle only to instances
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MERCANTILE LAW
where it would serve the commercial function
of the credit and not when fraud attends the
transaction.
The untruthfulness of a certificate
accompanying a demand for payment under
a standby credit may qualify as fraud
sufficient to support an injunction against
payment. The remedy of injunction is
available when the following are present:
(1) Clear proof of fraud;
(2) The fraud constitutes fraudulent abuse of
the independent purpose of the letter of
credit and only fraud under the main
agreement and
(3) Irreparable injury might follow if
injunction is not granted or the recovery
of damages would be seriously damaged
Doctrine of Strict Compliance
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must
strictly conform to the terms of the letter of
credit.
Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform
its undertaking under the contract.
The tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated under
the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not
thereafter be able to recover from the buyer
or the issuing bank, as the case may be, the
money thus paid to the beneficiary. (Feati v.
Court of Appeals, 1991)
UP LAW BOC CREDIT TRANSACTIONS
II. TRUST RECEIPTS
LAW [PD 115 (1973)]
A. DEFINITION/CONCEPT OF A TRUST
RECEIPT TRANSACTION
A trust receipt is a written or printed
document whereby the entrustee binds
himself:
(1) to hold the designated goods, documents
or instruments in trust for the entruster,
and
(2) to sell or otherwise dispose of the goods,
documents or instruments with the
obligation to turn over to the entruster
the proceeds thereof to the extent of the
amount owing to the entruster or as
appears in the trust receipt 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.
[PD 115, Sec. 4]
A trust receipt transaction is any transaction
by and between an entruster and the
entrustee, whereby the entruster who owns or
holds absolute title or security interest over
certain specified goods, documents or
instruments, releases the same to the
possession of the entrustee upon the latter’s
execution and delivery to the entruster of a
signed document called a “trust receipt.”
[Colinares v. Court of Appeals, G.R. No.
90828 (2000)]
A trust receipt is a security transaction
intended to aid in financing importers and
retail dealers who do not have sufficient
funds or resources to finance the importation
or purchase of merchandise, and who may
not be able to acquire credit except through
utilization, as collateral, of the merchandise
imported or purchased. It is a security
Page 6 of 353
MERCANTILE LAW
agreement that secures an indebtedness and
there can be no such thing as security interest
that secures no obligation. [Spouses Dela
Cruz v. Planters Products Inc., G.R. No.
180677 (2013)]
A.1. LOAN/SECURITY FEATURE
In a letter of credit-trust receipt arrangement,
a bank extends a loan covered by the letter of
credit, and the trust receipt acts as the
security for the loan. In other words, the
transaction involves a loan feature
represented by the letter of credit, and a
security feature which is in the covering trust
receipt that secures an indebtedness. [Lee v.
CA, G.R. No. 117913 (2002)]
A.2. OWNERSHIP OF THE GOODS,
DOCUMENTS AND INSTRUMENTS UNDER
A TRUST RECEIPT
To secure that the banker (entrustee) shall be
repaid at the critical point — that is, when the
imported goods finally reach the hands of the
intended vendee — the banker takes the full
title to the goods at the very beginning, and
he continues to hold that title as his
indispensable security until the goods are
sold.
The importer (entruster) becomes absolute
owner of the imported merchandise as soon
as he has paid its price. The ownership of the
merchandise continues to be vested in the
owner thereof or in the person who has
advanced payment (entrustee), until he has
been paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the importer
or by his representative or successor in
interest. [Prudential Bank v. National Labor
Relations Commission, G.R. No. 112592
(1995), citing National Bank v. Viuda e Hijos
de Angel Jose, G.R. No. L-43117 (1936)]
UP LAW BOC CREDIT TRANSACTIONS
However, in the case of goods delivered
under trust receipt for the purpose of
manufacturing or processing before its
ultimate sale, the entruster shall retain its
title over the goods whether in its original or
processed form until the entrustee has
complied fully with his obligation under the
trust receipt. [PD 115, Sec. 4 (1)]
B. RIGHTS OF THE ENTRUSTER
The entruster shall have the following rights:
(1) In case of sale: Right to the proceeds from
the sale of the goods, documents or
instruments released under a trust
receipt to the entrustee to the extent of
the amount owing to the entruster or as
appears in the trust receipt
(2) In case of non-sale: Right to the return of
the goods, documents or instruments
(3) Right to the enforcement of all other
rights conferred on him in the trust
receipt (which are not contrary to the
provisions of PD 115)
(4) Right to cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time
upon default or failure of the entrustee to
comply with any of the terms and
conditions of the trust receipt or any other
agreement between the entruster and the
entrustee
(5) Right to sell the goods, documents or
instruments at public or private sale, not
less than five days after serving or
sending of notice to the entrustee of the
intention to sell
(6) Right to purchase at a public sale the
goods, documents, or instruments
(7) Right to recover deficiency from the
entrustee should the proceeds be
insufficient [PD 115, Sec. 7]
The entruster holding a security interest shall
not, merely by virtue of such interest or
Page 7 of 353
MERCANTILE LAW
having given the entrustee liberty of sale or
other disposition of the goods, documents or
instruments under the terms of the trust
receipt transaction be responsible as principal
or as vendor under any sale or contract to sell
made by the entrustee. [PD 115, Sec. 8]
B.1. VALIDITY OF THE SECURITY INTEREST
AS AGAINST THE CREDITORS OF THE
ENTRUSTEE/INNOCENT PURCHASERS
FOR VALUE
The entruster's security interest in goods,
documents, or instruments pursuant to the
terms of a trust receipt shall be valid as
against all creditors of the entrustee for the
duration of the trust receipt agreement. [PD
115, Sec. 12]
A purchaser of goods from an entrustee with
right to sell, or of documents or instruments
through their customary form of transfer, who
buys the goods, documents, or instruments
for value and in good faith from the entrustee,
acquires said goods, documents or
instruments free from the entruster's security
interest. [PD 115, Sec. 11]
C. OBLIGATION AND LIABILITY OF THE
ENTRUSTEE
The entrustee shall have the following
obligations:
(1) Hold the goods, documents or
instruments in trust for the entruster and
shall dispose of them strictly in
accordance with the terms and conditions
of the trust receipt;
(2) Receive the proceeds in trust for the
entruster and turn over the same to the
entruster to the extent of the amount
owing to the entruster or as appears on
the trust receipt;
UP LAW BOC CREDIT TRANSACTIONS
(3) Insure the goods for their total value
against loss from fire, theft, pilferage or
other casualties;
(4) Keep said goods or proceeds thereof
whether in money or whatever form,
separate and capable of identification as
property of the entruster;
(5) Return the goods, documents or
instruments in the event of non-sale or
upon demand of the entruster; and
(6) Observe terms and conditions of the trust
receipt not contrary to PD 115. [PD 115,
Sec. 9]
C.1. PAYMENT/DELIVERY OF PROCEEDS
OF SALE OR DISPOSITION OF GOODS,
DOCUMENTS OR INSTRUMENTS
The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to
the extent of the amount owing to the
entruster or as appears in the trust receipt
shall constitute the crime of estafa,
punishable under RPC 315, par. 1 (b). [PD 115,
Sec. 13]
C.2. RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE
The failure to return the goods, documents or
instruments if they were not sold or disposed
of in accordance with the terms of the trust
receipt shall constitute estafa, punishable
under RPC 315, par. 1 (b). [PD 115, Sec. 13]
Intent to defraud is presumed when (1) the
entrustee fails to turn over the proceeds of
the sale of goods covered by the trust receipt
to the entruster; or (2) when the entrustee
fails to return the goods under trust, if they
are not disposed of in accordance with the
terms of the trust receipts. [Land Bank of the
Philippines v. Perez, G.R. No. 166884 (2012)]
Page 8 of 353
MERCANTILE LAW
C.3. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
The risk of loss shall be borne by the
entrustee. Loss of goods, documents or
instruments which are the subject of a trust
receipt, pending their disposition, irrespective
of whether or not it was due to the fault or
negligence of the entrustee, shall not
extinguish his obligation to the entruster for
the value thereof. [PD 115, Sec. 10]
C.4. PENAL SANCTION IF OFFENDER IS A
CORPORATION
If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty shall be imposed
upon the directors, officers, employees or
other officials or persons therein responsible
for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
[PD 115, Sec. 13]
D. REMEDIES AVAILABLE
Upon default or failure of the entrustee to
comply with the terms and conditions
(a) The entruster may cancel the trust and
take possession of the goods, documents
or instruments subject of the trust or of
the proceeds realized therefrom.
(b) The entruster in possession of the goods
may give notice in writing to the
entrustee of the intention to sell, and
may, not less than five days after such
notice, sell the goods, documents or
instruments at a public or private sale.
The entruster may become a purchaser at
a public sale.
(c) The proceeds of the sale shall be applied
(a) to the payment of the expenses
thereof; (b) to the payment of the
expenses of re-taking, keeping and
storing the goods, documents or
UP LAW BOC CREDIT TRANSACTIONS
instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster.
(d) The entrustee shall receive any surplus
but shall be liable to the entruster for any
deficiency. [PD 115, Sec. 7]
In case of failure to turn over the proceeds of
the sale, or failure to return in case of non-sale
File a criminal case for estafa under RPC 315,
par. 1 (b). [PD 115, Sec. 13]
E. WAREHOUSEMAN’S LIEN
The warehouseman’s lien under the
Warehouse Receipts Law is the
warehouseman’s legal right or interest in the
depositor’s property. It is similar to the
depositary’s right of retention, which is a
means or device by which the depositary is
able to obtain payment of what may be due
because of the deposit [Gomez-Somera]
Claims included in the warehouseman’s lien
A warehouseman shall have a lien on the
goods deposited or the proceeds thereof in
his hands:
(1) All lawful charges for storage and
preservation of the goods
(2) All lawful claims for money advanced,
interest, insurance, transportation, labor,
weighing, coopering, and other charges
and expenses in relation to other goods
(3) All reasonable charges and expenses for
notice and advertisements of sale
(4) Sale of the goods where default had been
made in satisfying the warehouseman’s
lien [Act No. 2137, Sec. 27]
However, if a negotiable receipt is issued for
the goods, the warehouseman shall have no
lien thereon except for charges for storage of
goods subsequent to the date of the receipt
unless the receipt expressly enumerated
other charges for which a lien is claimed. In
such case, there shall be a lien for the
Page 9 of 353
MERCANTILE LAW
charges enumerated so far as they are within
Sec. 27 although the amount of the charges is
not stated in the receipt. [Act No. 2137, Sec.
30]
Against what property the lien may be
enforced
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
debtor for the claims in regard to which
the lien is asserted, and
(b) Against all goods belonging to others
which have been deposited at any time by
the person who is liable as debtor for the
claims in regard to which the lien is
asserted if such person had been so
entrusted with the possession of goods
that a pledge of the same by him at the
time of the deposit to one who took the
goods in good faith for value would have
been valid. [Act No. 2137, Sec. 28]
Satisfaction of lien by sale
A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
(1) An itemized statement of the
warehouseman's claim, showing the sum
due at the time of the notice and the date
or dates when it becomes due,
(2) A brief description of the goods against
which the lien exists,
(3) A demand that the amount of the claim
as stated in the notice of such further
claim as shall accrue, shall be paid on or
before a day mentioned, not less than ten
days from the delivery of the notice if it is
personally delivered, or from the time
when the notice shall reach its
destination, according to the due course
of post, if the notice is sent by mail,
(4) A statement that unless the claim is paid
within the time specified, the goods will
be advertised for sale and sold by auction
at a specified time and place. [Act No.
2137, Sec. 33]
UP LAW BOC CREDIT TRANSACTIONS
In accordance with the terms of a notice so
given, a sale of the goods by auction may be
had to satisfy any valid claim of the
warehouseman for which he has a lien on the
goods. [Act No. 2137, Sec. 33]
From the proceeds of such sale, the
warehouseman shall satisfy his lien including
the reasonable charges of notice,
advertisement and sale. The balance, if any,
shall be held by the warehouseman and
delivered on demand to the person to whom
he would have been bound to deliver or
justified in delivering goods. [Act No. 2137,
Sec. 33]
At any time before the goods are so sold
General rule: The warehouseman shall retain
the possession of the goods according to the
terms of the original contract of deposit
Exception: At any time before the goods are
so sold, any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to
satisfy his lien and to pay the reasonable
expenses and liabilities incurred. The
warehouseman shall deliver the goods to the
person making payment. [Act No. 2137, Sec.
33]
Effect of sale
The warehouseman shall not be liable for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the
Page 10 of 353
MERCANTILE LAW
receipt given for the goods when they were
deposited, even if such receipt be negotiable.
[Act No. 2137, Sec. 36]
Other methods of enforcing lien
Other remedies allowed by law for the
enforcement of a lien against personal
property are not precluded. The right to
recover so much of the warehouseman's
claim as shall not be paid by the proceeds of
the sale is not barred as well. [Act No. 2137,
Sec. 35]
How lien may be lost
(1) By surrendering possession of the goods
(2) By refusing to deliver the goods when a
demand is made with which he is bound
to comply [Act No. 2137, Sec. 29]
The lien may be lost where the
warehouseman surrenders possession of the
goods without requiring payment of the lien,
because a warehouseman’s lien is possessory
in nature. [Philippine National Bank v. Se,
G.R. 119231 (1996)]
Lien does not preclude other remedies
Whether or not a warehouseman has a lien
upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor
for the collection of all charges and advances
which the depositor has contracted to pay.
[Act No. 2137, Sec. 32]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS

Page 11 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. Definition
A. DEFINITION AND PURPOSE
• A negotiable instrument is a written
contract for the payment of money, by its
form and on its face, intended as
substitute for money and intended to
pass from hand to hand to give the holder
in due course (HDC) the right to hold the
same and collect the sum due.
• Instruments are negotiable when they
conform to all the requirements
prescribed by the Negotiable Instruments
Law (NIL; Act 2031, 03 February 1911).
• However, the fact that an instrument
does not meet the foregoing requisites
will not affect its validity, the only
consequence being that it will be
governed not by the NIL but by the
general law on contracts. (Campos)
Negotiable Instruments Not Legal tender
Although considered as medium for payment
of obligations, negotiable instruments are
not legal tender.
Negotiable instruments shall produce the
effect of payment only when they have been
encashed or when through the fault of the
creditor they have been impaired. [Art. 1249,
Civil Code]
BUT a CHECK which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash.
Page 12 of 353
MERCANTILE LAW
II. Forms and
Interpretation
A. REQUISITES OF NEGOTIABILITY
(Most Frequently Asked since 1992; Last
appeared in 2013)
An instrument to be negotiale must conform
to the following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) It must contain an unconditional promise
or order to pay a sum certain in money;
(c) It must be payable on demand, or at a
fixed or determinable future time;
(d) It must be payable to order or to bearer;
and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable
certainty. [Sec. 1, NIL]
A.1. IN WRITING AND SIGNED BY THE
MAKER OR DRAWER
In writing
What is considered "In writing" - includes
print; written or typed. Section 191 of the NIL
provides that the word “’written’ includes
printed, and ‘writing’ includes print.”
Rationale for requirement: Since an
instrument is a document, there must be
something in written form that can be
transferred from person to person. (Abad)
Signed
General Rule: No person is liable on the
instrument whose signature does not appear
thereon. [Sec. 18, NIL]
Note:
• One who signs in a trade or assumed
name will be liable to the same extent as
if he had signed in his own name. [Sec. 18,
NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

• Signature of any party may be made by • An instrument where the maker or the
duly authorized agent; no particular form person primarily liable has the option to
of appointment necessary. [Sec. 19, NIL] require something to be done in lieu of
• Signature is binding and may be in one’s payment of money is not negotiable. But
handwriting, printed, engraved, it is negotiable if the option to require
lithographed or photographed so long as something to be done in lieu of payment
it is intended or adopted as the signature of money is with the holder.(Campos)
of the signer or made with his authority.
(Campos) Fund
• Signature may appear on any part of the Particular Fund
for Reimbursement
instrument. However, if the signature is (conditional)
(unconditional)
so placed upon the instrument that it is
not clear in what capacity the person The drawee pays the The drawee pays
intended to sign, he is deemed an payee from his own directly from the
indorser. [Sec. 17 (f), NIL] funds. Afterwards, particular fund
the drawee pays indicated.
A.2. CONTAINING AN UNCONDITIONAL himself from the
PROMISE TO PAY OR ORDER TO PAY A indicated fund.
SUM CERTAIN IN MONEY
Indicated fund is not Particular fund
Sec. 3, NIL. When promise is unconditional. - An the direct source of indicated is the direct
unqualified order or promise to pay is payment. source of payment.
unconditional within the meaning of this Act (Sundiang and
though coupled with: Aquino)

(a) An indication of a particular fund out of

which reimbursement is to be made or a
particular account to be debited with
the amount; or
(b) A statement of the transaction which
gives rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
Unconditional
• The promise or order to pay, to be
unconditional, must be unqualified.
(Campos)
• Must not be dependent upon a
contingent event that is not certain to
happen. (Abad)
• The fact that the condition appearing on
the instrument has been fulfilled will not
convert it into a negotiable one. [Sec. 4,
NIL]
Page 13 of 353
When conditional: A negotiable instrument is
conditional when reference to the fund clearly
indicates an intention that such fund alone
should be the source of payment.
[Metropolitan Bank vs. CA, G.R. No. 88866
(1991)]
Order or promise to pay
• As to promissory note: Promise to pay
should be express on the face of the
instrument. (Campos)
o The word "promise" is not
absolutely necessary. Any
expression equivalent to a promise
is sufficient. (Campos)
o Mere acknowledgment of a debt is
insufficient. (Campos)
• As to bill of exchange: Order – command
made by the drawer addressed to the
drawee ordering the latter to pay the
payee or the holder a sum certain in
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
money; the instrument is, by its nature,
demanding a right.
o Words which are equivalent to an
order are sufficient.
o A mere request or authority to pay
does not constitute an order.
Although the mere use of polite
words like "please" does not of itself
deprive the instrument of its
characteristics as an order, its
language must clearly indicate a
demand upon the drawee to pay.
Sum payable must be certain
Sec. 2, NIL. What constitutes certainty as to
sum. - The sum payable is a sum certain within
the meaning of this Act, although it is to be
paid:
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision
that, upon default in payment of any
installment or of interest, the whole
shall become due; or
(d) With exchange, whether at a fixed rate
or at the current rate; or
(e) With costs of collection or an attorney's
fee, in case payment shall not be made
at maturity.
Note: A sum is certain if from the face of the
instrument it can be determined even if it
requires mathematical computation.
(Sundiang and Aquino)
Payable in money
• The instrument must be capable of being
transformed into money, since negotiable
instruments are intended to be
substitutes for money
• “Money” as used in the law is not
necessarily limited to “legal tender” as
defined by law but includes any particular
kind of current money. [Sec. 6(e), NIL and
PNB v. Zulueta, G.R. No. L-7271 (1957)]
• An agreement to pay in foreign currency
is valid. (RA 8183)
Page 14 of 353
MERCANTILE LAW
• An instrument payable in personal
property like merchandise, shares of
stock or gold is non-negotiable.
• An instrument which contains an order or
promise to do an act in addition to the
payment of money is not negotiable.
• However, a provision giving the holder an
election to require something in liue of
money does not affect negotiability. [Sec
5, NIL]
A.3. PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE TIME
Rationale: to inform the holder of the
instrument of the date when he may enforce
payment thereof.
On demand
Sec. 7, NIL. When payable on demand. - An
instrument is payable on demand:
(a) When it is so expressed to be payable on
demand, or at sight, or on presentation;
or
(b) In which no time for payment is
expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
Note: The holder may call for payment any
time; and the maker has an option to pay at
any time. The refusal of the holder to accept
payment will terminate the running of
interest, if any, but the obligation to pay the
note remains.
At a fixed time
• Only on the stipulated date, and not
before, may the holder demand its
payment.
• Should he fail to demand payment, the
instrument becomes overdue but remains
valid and negotiable. It is merely
converted to a demand instrument with
respect to the person who issued,
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
accepted, or indorsed it when overdue.
[Sec. 7, NIL]
At a determinable future time
Note: It is required that the maturity of the
instrument can be absolutely determined
with certainty. (Abad)
Payable At A Determinable Future Time If:
• At a fixed period after date or sight, e.g.,
“30 days after date.”
• On or before a fixed or determinable
future time specified therein, e.g.,
“payable on or before December 1, 2000”
• On or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain, e.g., “payable
within 60 days after the death of Jose”
Effect of Acceleration Provisions
• If option (absolute or conditional) to
accelerate maturity is on the maker, the
instrument is still negotiable. (Campos)
• If option to accelerate is on the holder and
can be exercised only after the happening
of a specified event/act over which he has
no control (conditional), the instrument is
still negotiable. (Campos)
Note: If option on the part of the holder is
absolute, the instrument is non-negotiable.
Insecurity Clauses
Provisions in the contract which allow the
holder to accelerate payment “if he deems
himself insecure.” The instrument is rendered
non-negotiable. (Sundiang and Aquino)
Provisions extending time of payment
General rule: Negotiability not affected. Effect
is similar with that of an acceleration clause
at the option of the maker. (Campos)
Exception: Where a note with a fixed maturity
provides that the maker has the option to
extend time of payment until the happening
Page 15 of 353
MERCANTILE LAW
of contingency, the instrument is NOT
negotiable. The time for payment may never
come at all.
Extension Clauses
An instrument is payable at a definite time if
by its terms, it is payable at a definite time
subject to extension at the option of the
holder, or to an extension to a further definite
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act. (Sundiang and Aquino)
Payment on Installments
If the instrument states that the amount shall
be paid in two equal installments, the second
being payable pm a fixed date, the
instrument can be considered negotiable
since the first installment would then be
payable on demand. (Vitug)
A.4. PAYABLE TO ORDER OR TO BEARER
• The negotiability or non-negotiability of
an instrument is determined from the
face of the instrument itself. [Caltex vs.
CA, G.R. No. 97753 (1992)]
• Therefore, the instrument must contain
words of negotiability. (2012 Bar
Question) For example:
o “Pay to the order of Juan Cruz”, or “I
promise to pay to the order of Juan
Cruz”
o “Pay to Juan Cruz or bearer”, or “I
promise to pay Juan Cruz or bearer”
• Instrument need not follow the language
of the law, but any term which clearly
indicates an intention to conform to the
legal requirements is sufficient.
Payable to order
Sec. 8, NIL. When payable to order. - The
instrument is payable to order where it is drawn
payable to the order of a specified person or to
him or his order. It may be drawn payable to
the order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time
being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Note: Without the words "to order" or "to the
order of" the instrument is payable only to
the person designated therein and is
therefore non-negotiable. [Consolidated
Plywood Industries vs. IFC Leasing, G.R. No.
72593 (1987)]
Payable to bearer
Payable to Bearer If:
(1) Expressed to be so payable - "I promise
to pay the bearer the sum"
(2) Payable to a person named therein or
bearer -"Pay to A or bearer"
(3) Payable to the order of a fictitious
person or non-existing person, and
such fact was known to the person
making it so payable - “Pay to John
Doe or order"
(4) Name of payee does not purport to be
the name of any person – "Pay to
cash"; "Pay to sundries."
(5) Only or last indorsement is an
indorsement in blank.
Fictitious Payee Rule
• It is not necessary that the person
referred to in the instrument is really
non-existent or fictitious to make the
instrument payable to bearer. The
person to whose order the instrument is
made payable may in fact be existing but
he is still fictitious or non-existent under
Sec. 9(c) of the NIL if the person making
it so payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R.
No. 170325 (2008)]
Page 16 of 353
MERCANTILE LAW
• A check drawn payable to the order of
"CASH" is a check payable to bearer, and
the bank may pay it to the person
presenting it for payment without the
drawer's indorsement. [Ang Tek Lian vs.
CA, G.R. No. L-2516 (1950)]
Where the Maker is the Payee
• Making himself liable to himself. Thus,
the instrument produces no legal effect.
• It will produce legal effect only once the
payee-maker indorses the instrument to
another person because such
indorsement will then give rise to rights
and obligations. (Abad)
A.5. DRAWEE MUST BE NAMED OR
DESIGNATED WITH REASONABLE
CERTAINTY
• Applies only to a bill of exchange.
• A bill may be addressed to two or more
drawees jointly whether they are
partners or not, but not to two or more
drawees in the alternative or in
succession. [Sec. 128, NIL]
• Examples:
o “To Juan Cruz and Jose Reyes” –
negotiable
o “To Juan Cruz or Jose Reyes” – not
negotiable; no certainty as to
drawee
Determination of negotiability
• In determining the negotiability of an
instrument, the instrument in its entirety
and what appears on its face must be
considered. [Caltex Phils. v. CA, G.R. No.
97753 (1992)]
• The acceptance of a bill of exchange is
not important in the determination of its
negotiability. The nature of acceptance is
important only on the determination of
the kind of liabilities of the parties
involved. [PBCOM vs. Aruego, G.R. Nos. L-
25836-37 (1993)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Omissions and negotiability, which is the ability to be

Additional Provisions transferred.
Provisions That Do
That Do Not Affect
Not Affect
Negotiability B. KINDS OF NEGOTIABLE
Negotiability
(1) Non-dating of the (1) Authorizes the sale INSTRUMENTS
instrument of collateral
B.1 PROMISSORY NOTE
(2) Non-specification securities on
of value given, or default; Sec. 184, NIL. Promissory note, defined. - A
that any value had (2) Authorizes negotiable promissory note within the meaning
been given confession of of this Act is an unconditional promise in
(3) Non-specification judgment on writing made by one person to another, signed
of place where it is default; by the maker, engaging to pay on demand, or
drawn or place (3) Waives the benefit at a fixed or determinable future time, a sum
where it is payable of law intended to certain in money to order or to bearer. Where a
(4) Bears a seal protect the debtor; note is drawn to the maker's own order, it is not
(5) Designation of or complete until indorsed by him.
particular kind of (4) Allows the creditor
currency in which the option to Kinds of promissory notes
payment is to be require something (1) Certificate of deposit – a form of
made. (Sec. 6) in lieu of money. promissory note, which is a written
(Sec. 5) acknowledgment of a bank of its
receipt of a certain sum with a
Note: Negotiability is promise to repay the same.
affected when (2) Bonds – a certificate or evidence of a
instrument contains a debt on which the issuing company or
promise or order to do governmental body promises to pay
any act in addition to the bondholders a specified amount
the payment of of interest for a specified length of
money. time, and to repay the loan on the
expiration date.
Note: (3) Debenture – a promissory note or
bond backed by the general credit of
• A confession of judgment is provision
a corporation and usually not secured
given by the maker authorizing the
by a mortgage or lien on any specific
plaintiff's attorney to sign judgment and
property. (Sundiang and Aquino)
issue execution for the value of the
instrument, costs, and attorney's fees.
B.2 BILL OF EXCHANGE
• A confession of judgment is not
Sec. 126, NIL. Bill of exchange, defined. - A bill
recognized in our country, as it is against
of exchange is an unconditional order in writing
public policy. It denies due process, and
addressed by one person to another, signed by
deprives the right of appeal. [PNB v.
the person giving it, requiring the person to
Manila Oil Refining, G.R. No. L-18103
whom it is addressed to pay on demand or at a
(1922)]
fixed or determinable future time a sum certain
• The electronic messages received by
in money to order or to bearer. (Sec. 126)
HSBC in HSBC v CIR, G.R. No. 166018
(2014) were not considered as negotiable
instruments as they lack the feature of Kinds of bills of exchange

Page 17 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

(1) Draft – used synonymously with bill of Unconditional Unconditional order

exchange although it normally refers promise
to a bill of exchange used in
Involves two parties Involves three parties
documentary exchange like letters of
credit transactions. Maker is primarily Drawer is only
(2) Inland and foreign bill – an Inland bill liable secondarily liable
is a bill which is, or on its face Only one Two presentments:
purports to be, both drawn and presentment: for for acceptance and for
payable within the Philippines. Any payment payment
other bill is a foreign bill.
(3) Time draft – draft that is payable at a
fixed date. Bill of Exchange Check
(4) Sight or demand draft – payable Not necessarily It is necessary that a
when the holder presents it for drawn on a deposit. check be drawn on a
payment. bank deposit.
(5) Trade acceptance – used in contracts The drawee need not Otherwise, there
of sale where the seller as drawer be a bank would be fraud.
orders the buyer (as drawee) to pay a
sum certain to the same seller (payee).
Death of a drawer of a Death of the drawer of
(6) Banker’s acceptance – a time draft
BOE, with the a check, with the
across the face which the drawee has
knowledge of the knowledge of the
written the word accepted. (Sundiang
bank, does not revoke bank, revokes the
and Aquino)
the authority of the authority of the
(7) Check - A bill of exchange drawn on a
drawee to pay. banker to pay.
bank payable on demand (Sec. 185). It
is the most common form of bill of
exchange. May be presented for Must be presented for
payment within payment within a
B.3. INSTANCES WHEN A BILL OF reasonable time after reasonable time after
EXCHANGE MAY BE TREATED AS A its last negotiation. its issue.
PROMISSORY NOTE
May be payable on Always payable on
(2011 and 2015 Bar Question)
demand or at a fixed demand
or determinable
(1) The drawer and the drawee are the
future time
same person;
(2) Drawee is a fictitious person;
(3) Drawee does NOT have the capacity
to contract (Sec. 130, NIL)
(4) Where the bill is drawn on a person
who is legally absent;
(5) Where the instrument is so
ambiguous that there is doubt
whether it is a bill or note, the holder
may treat it as either at his election
(Sec. 17[e], NIL)

Promissory Note Bill of Exchange

Page 18 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
III. Completion and
Delivery
Steps in the execution of negotiable
instruments
(1) Writing of the instrument completely in
accordance with the requisites of
negotiability under Sec. 1.
(2) Delivery of the instrument by the maker
or the drawer to the payee in order to
give legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
incomplete instrument... It would seem that if
an instrument contains all the requisites for
making it a negotiable one, it should be
considered as complete though it in fact may
have blanks as to non-essentials... (Campos)
A. INSERTION OF DATE
(2012 Bar Question)
Any holder may insert the true date of issue
or acceptance of an instrument where:
(1) The instrument is expressed to be
payable at a fixed period after date is
issued undated; or
(2) The acceptance of an instrument
payable at a fixed period after sight is
undated.
Effect: The instrument shall be payable
accordingly. The insertion of a wrong date
does not avoid the instrument in the hands of
a subsequent holder in due course; but as to
him, the date so inserted is to be regarded as
the true date.
A.1 EFFECT OF ANTE-DATING AND POST-
DATING
The instrument is not invalid for the reason
only that it is ante-dated or post-dated,
provided this is not done for an illegal or
fraudulent purpose.
Page 19 of 353
MERCANTILE LAW
The person to whom an instrument so dated
is delivered acquires the title thereto as of the
date of delivery. [Sec. 12, NIL]
B. COMPLETION OF BLANKS
Sec. 14, NIL. Blanks; when may be filled. - Where
the instrument is wanting in any material
particular, the person in possession thereof has
a prima facie authority to complete it by filling
up the blanks therein. And a signature on a
blank paper delivered by the person making
the signature in order that the paper may be
converted into a negotiable instrument
operates as a prima facie authority to fill it up
as such for any amount. In order, however, that
any such instrument when completed may be
enforced against any person who became a
party thereto prior to its completion, it must be
filled up strictly in accordance with the
authority given and within a reasonable time.
But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands, and
he may enforce it as if it had been filled up
strictly in accordance with the authority given
and within a reasonable time.
C. INCOMPLETE AND UNDELIVERED
INSTRUMENTS
Sec. 15, NIL. Incomplete instrument not
delivered. - Where an incomplete instrument
has not been delivered, it will not, if completed
and negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed
thereon before delivery.
In this case a real defense exists and not even
a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
(Campos)
Note: A drawee bank whose negligent
custody of the checks, after partial execution,
contributed to its escape, is estopped from
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

raising the real defense under Sec. 15 of the Delivery

NIL. (Campos)
Delivered Undelivered Undelivered
D. COMPLETE BUT UNDELIVERED Completeness
INSTRUMENTS (1) Wanting in
Sec. 16, NIL. Delivery; when effectual; when any material
presumed. - Every contract on a negotiable particular; Mechanically Mechanically
instrument is incomplete and revocable until (2) Blank incomplete incomplete
delivery of the instrument for the purpose of paper with
giving effect thereto. As between immediate signature
parties and as regards a remote party other Authority of Person in Possession
than a holder in due course, the delivery, in
(1) Prima facie
order to be effectual, must be made either by or May negotiate
authority to
under the authority of the party making, if delivered to
complete it by
drawing, accepting, or indorsing, as the case him by or
filling up the
may be; and, in such case, the delivery may be No authority under the
blanks;
shown to have been conditional, or for a special to complete authority of
(2) Signature
purpose only, and not for the purpose of and/or the party
operates as a
transferring the property in the instrument. But negotiate making,
prima facie
where the instrument is in the hands of a indorsing,
authority to
holder in due course, a valid delivery thereof by drawing, or
fill it up for
all parties prior to him so as to make them accepting
any amount
liable to him is conclusively presumed. And
where the instrument is no longer in the When Enforceable
possession of a party whose signature appears Delivery is
thereon, a valid and intentional delivery by him made by or
is presumed until the contrary is proved. Filled up
under
strictly in
authority of
accordance
• Non-delivery of a complete instrument is a the party
with authority Not
personal defense. (Campos) making,
given and enforceable
• Delivery of an instrument is a prerequisite indorsing,
within a
for liability. If the instrument is complete in drawing, or
reasonable
all its particulars, but is not delivered, there accepting, as
time
is no contract. However if the instrument is the case may
no longer in the possession of a party who be
has signed it, a delivery is presumed until Kind of Defense
the contrary is proved. (Campos)
Personal Real Personal
• If the holder of the instrument is a holder in
due course, the instrument is not merely Rights of Holder
prima facie deemed delivered, but this fact (1) If HDC, he Can enforce
is conclusively presumed. (Campos) can enforce the
• Until the same is delivered, the instrument the None in the instrument.
remains revocable. instrument as hands of any Here, the
completed as holder. instrument is
Section 14 Section 15 Section 16 against in the hands
parties prior of a HDC, a

Page 20 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

or subsequent valid delivery General rule: One whose signature does not
to the thereof by all appear on the instrument shall not be liable
completion; parties prior thereon. [Sec. 18, NIL]
(2) If not a to him so as to
HDC, he can make them Exceptions:
enforce the liable to him is (1) The principal who signs through an
instrument as conclusively agent
completed presumed. (2) The forger
only against Where the (3) One who indorses in a separate
parties instrument is instrument (allonge) OR where an
subsequent to no longer in acceptance is written on a separate
the the paper
completion possession of (4) One who signs his assumed or trade
but not a party whose name
against those signature (5) A person negotiating by delivery (as in
prior thereto. appears the case of a bearer instrument) is
thereon, a liable only to his immediate indorsee.
valid and
intentional A. SIGNING IN TRADE NAME
delivery to One who signs in a trade or assumed name
him is will be liable to the same extent as if he had
presumed signed in his own name [Sec. 18, NIL]
until the
contrary is B. SIGNATURE OF AGENT
proved.
Signature of any party may be made by duly
authorized agent, established as in ordinary
agency. No particular form of appointment is
necessary for this purpose; and the authority
of the agent may be established as in other
cases of agency. [Sec. 19, NIL]

B.1. LIABILITY OF AN AGENT

General rule: Where a person adds to his
signature words indicating that he signs on
behalf of a principal, then he is not liable if he
was duly authorized. [Sec. 20, NIL]

Exceptions:
(1) Mere addition of words describing him
as an agent WITHOUT disclosing his
principal [Sec. 20, NIL]
(2) Where a broker or agent negotiates an
instrument without indorsement, he
IV. Signature incurs all liabilities in Sec. 65 of the NIL,
unless he discloses name of principal

Page 21 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
and the fact that he is only acting as an
agent. [Sec. 69, NIL]
Requisites to negative personal liablity of
agent:
(1) He must be duly authorized;
(2) He must act within the scope of his
authority
(3) He must indicate in the instrument
that he is signing merely as agent;
and
(4) He must disclose his principal.
C. INDORSEMENT BY MINOR OR
CORPORATION
• The indorsement or assignment of the
instrument by a corporation or by an infant
(minor) passes the property therein,
notwithstanding that from want of capacity,
the corporation or infant may incur no
liability thereon. [Sec. 22, NIL]
• The provision does not change the rule in
civil law on minor's contracts, which
provides that a contract entered into by a
minor is voidable, and the minor cannot be
held liable thereon unless he ratifies it upon
reaching majority.
• However, under Section 22 of the NIL,
should the minor indorse a negotiable
instrument, although he cannot be held
liable on his contract of indorsement, title
to the instrument passes to his indorsee
and the latter can rightfully recover from
the maker, free from the defense of
minority. (Campos)
• REAL defense but available only to the
incapacitated party (i.e. the minor or the
corporation).
D. FORGERY
(3rd Most Frequently Asked Since 1992)
(2006, 2008, 2010, 2011 2015 Bar Question)
Counterfeit making or fraudulent alteration
of any writing, which may consist of:
(1) Signing of another’s name with intent
to defraud; or
Page 22 of 353
MERCANTILE LAW
(2) Alteration of an instrument in the name,
amount, name of payee, etc. with
intent to defraud.
General rule: When a signature is forged or
made without the authority of the person,
only the forged signature (not the instrument
itself and the other genuine signatures) is
wholly inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof
against any party thereto can be
acquired through or under such
signature
Exception: The party against whom it is
sought to be enforced is precluded from
setting up the forgery or want of authority as
a defense. [Sec. 23, NIL]
D.1 PERSONS PRECLUDED FROM SETTING
UP DEFENSE OF FORGERY
(1) Those who warrant or admit the
genuineness of the signature in
question. This includes indorsers,
persons negotiating by delivery and
acceptors.
(2) Those who, by their acts, silence, or
negligence, are estopped from setting
up the defense of forgery.
(3) Those who are negligent.
D.2 RULES ON FORGERY
D.2.A. Promissory note
Maker’s signature forged
(1) Maker is not liable because he never
became a party to the instrument.
(2) Indorsers subsequent to forgery are
liable because of their warranties.
(3) Party who made the forgery is liable.
Payee’s signature forged
(1) Payee is not liable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

(2) Maker is still liable. (REASON: (5) Party who made the forgery is liable
Indorsement is not necessary to title
and the maker engages to pay holder) Indorser’s signature forged
(3) Indorsers subsequent to forgery are (1) Drawer, payee, indorser whose
liable. signature/s was/were forged and all
(4) Party who made the forgery is liable. indorsers preceding the forgery are not
liable.
Indorser’s signature forged (2) Drawee is liable if it paid or accepted
(1) Maker, payee, indorser whose the instrument [Sec. 62, NIL; Price v.
signature/s was/were forged, and all Neal, 3 Burr. 1354 (1762)]
indorsers preceding the forgery are not (3) Indorsers subsequent to forgery are
liable. liable. (such as collecting bank)
(2) Indorsers subsequent to forgery are (4) Party who made the forgery is liable.
liable.
(3) Party who made the forgery is liable. SUMMARY OF RULES ON FORGERY AS TO
PROMISSORY NOTES
D.2.B. Bill of Exchange Order Instrument Bearer Instrument
Drawer’s signature forged
(1) Drawer is not liable because he was Maker’s Signature Forged
never a party to the instrument. Maker is not liable
(2) Drawee is liable if it paid or accepted because he never
Same
the instrument (no recourse to drawer) became a party to the
because he admitted the genuineness instrument.
of the drawer’s signature [Sec. 62, NIL; Indorsers may be
Price v. Neal, 3 Burr. 1354 (1762)] Indorsers subsequent
made liable to those
(3) Drawee cannot recover from the to forgery are liable
persons who obtain
collecting bank because there is no because of their
title through their
privity between the collecting bank and warranties.
indorsements.
the drawer. The collecting bank does
not give any warranty re: the drawer’s Payee’s Signature Forged
signature. [Associated Bank vs. CA, G.R. Maker and payee not Maker is liable.
No. 107382 (1996)] liable.
(4) Indorsers subsequent to forgery are Indorsers subsequent Indorsers may be
liable (such as collecting bank or last to forgery are liable made liable to those
endorser) because of their persons who obtain
(5) Party who made the forgery is liable warranties. title through their
indorsements.
Payee’s signature forged
(1) Payee is not liable Indorser’s Signature Forged
(2) Drawer is still secondarily liable Maker, payee and Maker is liable.
(3) Drawee is liable if it paid or accepted indorser whose Indorsement is not
the instrument [Sec. 62, NIL; Price v. signature was forged necessary to pass title
Neal, 3 Burr. 1354 (1762)], but it may are not liable. and the maker
pass liability back through the engages to pay any
collection chain bearer of the
(4) Indorsers subsequent to forgery are instrument.
liable (such as collecting bank)
Indorsers subsequent Only the indorser
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to forgery are liable whose signature was

because of their forged can raise the Indorsers subsequent Drawee is liable (no
warranties. defense of forgery to forgery (such as privity between
against a HDC. collecting bank) are drawer and payee
liable without because indorsement
prejudice to their right of payee is not
SUMMARY OF RULES ON FORGERY AS TO to proceed against necessary).
BILLS OF EXCHANGE the forger.
Order Instrument Bearer Instrument Payee is not liable.

Drawer’s Signature Forged Collecting bank is

Drawer is not liable liable because of
because he was never warranty. However, it
Same may recover from the
a party to the
instrument. person who forged
the indorsement on
Drawee-acceptor is
the check and
liable, without
deposited or
recourse to drawer, if
Drawee-acceptor is encashed the same.
it paid because he
liable if it paid. It Indorser’s Signature Forged
admitted the
cannot recover from
genuineness of the Drawer, payee and Drawer is liable even
the collecting bank
drawer’s signature. indroser whose if special indorsement
because it is bound to
know the drawer’s signatures were was forged because
Drawee also cannot forged are not liable. indorsement is not
signature since the
recover from the necessary to title.
latter is its depositor.
collecting bank Cut-off rule does not
because there is no apply.
The drawee may
privity of contract
recover from the Drawee is liable if it Drawee is liable.
between the
drawer when the paid.
collecting bank and
latter’s negligence is Indorsers subsequent Indorser whose
the drawer. The
the proximate cause to forgery (such as signature was forged
collecting bank does
of the loss or collecting bank) are is liable because
not give any warranty
contributed thereto. liable. indorsement is not
regarding the
signature of the necessary to title.
drawer.
Indorsers may be
Indorsers subsequent
made liable to those
to forgery (such as
persons who obtain
collecting bank or last
title through their
endorser) are liable.
indorsements.
Payee’s Signature Forged
Drawer, drawee and Drawer is liable (his
payee not liable. indorsement is not
necessary to pass
Cut-off rule applies. title).
Page 24 of 353
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V. Consideration
Sec. 25, NIL. Value, what constitutes. — Value
is any consideration sufficient to support a
simple contract. An antecedent or pre-
existing debt constitutes value; and is
deemed such whether the instrument is
payable on demand or at a future time.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Value" means valuable consideration;
x---x
“Value” and “consideration” are generally
convertible terms. However, they may have
different implications.
“Consideration” is the proper term when the
payee of a note sues the maker, or the payee
of a bill sues the drawer, or an indorsee sues
his immediate indorser.
“Value” is the proper term when a holder
sues any party to the instrument with whom
he himself has not dealt, the term “value” is
more appropriate.
An antecedent or pre-existing debt
constitutes value; and is deemed such
whether the instrument is payable on
demand or at a future time. [Sec. 25, NIL]
Value need not be full and a holder will be
one for value even if he gave less than the
face value of the instrument, provided the
intention of the transferor is to transfer the
full amount represented by the instrument.
A. WHO IS A HOLDER FOR VALUE
(HFV)?
1. A holder of an instrument for which value,
which need not be in full, has been given
at any given time but only with respect to
all parties who have become parties to
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
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MERCANTILE LAW
B. BURDEN OF PROOF –
PRESUMPTION OF CONSIDERATION
Sec. 24, NIL. Presumption of consideration. -
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Because of the presumption, it is immaterial
whether or not “for value received” appears in
the instrument.
C. EFFECT OF WANT OF
CONSIDERATION
Sec. 28, NIL. Effect of want of consideration. -
Absence or failure of consideration is a
matter of defense as against any person not a
holder in due course; and partial failure of
consideration is a defense pro tanto, whether
the failure is an ascertained and liquidated
amount or otherwise.
Absence or failure of consideration is a
matter of defense as against any person not a
holder in due course, hence, it is a personal
defense.
Partial failure of consideration is a defense
pro tanto, meaning a defense to the extent of
the failure. (Abad)
Effect of an illicit or unlawful consideration:
Illicit or illegal consideration does not affect
the negotiability of the instrument as validity
of consideration is not one of the requisites of
a negotiable instrument. It merely constitutes
a defect of title hence such illegality of
consideration is merely a personal defense
which cannot be raised against a holder in
due course. [Sec. 55 and 57, NIL] [2009 bar
question]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

VI. Accommodation reimbursement. [Cañeda v. CA, G.R. No.

81322 (1990)]
Party C. CORPORATION AS ACCOMMODATION
Sec. 29, NIL. Liability of accommodation PARTY
party. - An accommodation party is one who • As a general rule, a corporation cannot
has signed the instrument as maker, drawer, act as an accommodation party. The
acceptor, or indorser, without receiving value issue or endorsement of negotiable
therefor, and for the purpose of lending his instruments by a corporation without
name to some other person. Such a person is consideration and for the accommodation
liable on the instrument to a holder for value, of another is ultra vires.
notwithstanding such holder, at the time of
• By way of exception, an officer or agent of
taking the instrument, knew him to be only
a corporation shall have the power to
an accommodation party.
execute or indorse a negotiable paper in
the name of the corporation for the
Accommodation Party accommodation of a third person only if
(1) Must be a party to the instrument, specifically authorized to do so.
signing as maker, drawer, acceptor, or • Corollarily, corporate officers, such as the
indorser;
president and vice-president, have no
(2) Must not have received value therefor;
power to execute for mere
and
accommodation a negotiable instrument
(3) Signed for the purpose of lending his
of the corporation for their individual
name to some other person.
debts or transactions arising from or in
relation to matters in which the
A. LIABILITY OF AN ACCOMODATION corporation has no legitimate concern.
PARTY The signatories thereof shall be
• Whether the liability is primary or personally liable therefor. [Crisologo v. CA,
secondary will depend on whether he G.R. No. 80599 (1989)]
signs as a maker, acceptor, drawer or
indorser. Accommodation Party v. Regular Party
• The holder for value to whom the Accommodation Party Regular Party
instrument thus executed is subsequently
negotiated has a right of recourse against Purpose
the accommodation party in spite of the Signs instrument for
former’s knowledge that no consideration the purpose of Does not sign the
passed between the accommodation and lending his name or instrument for the
accommodated parties. [Sec. 28, NIL] credit to some other same purpose
person
B. ACCOMMODATION PARTY AS Value Received
SURETY
Signs the instrument Signs the instrument
• An accommodation party is generally without receiving for value
regarded as a surety for the party value therefor
accommodated.
Absence or Failure of Consideration as Defense
• When the accommodation party makes
payment to holder of the note, he has the Cannot avail of the Can avail of said
right to sue the accommodated party for defense of absence or defense against a
failure of person not a holder in
Page 26 of 353
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consideration against due course

a holder not in due
VII. Negotiation
course Sec. 30, NIL. What constitutes negotiation. -
An instrument is negotiated when it is
Right to Sue
transferred from one person to another in
After paying the May not sue any such manner as to constitute the transferee
holder, may sue the subsequent party for the holder thereof. If payable to bearer, it is
accommodated party reimbursement negotiated by delivery; if payable to order, it
for reimbursement is negotiated by the indorsement of the
holder and completed by delivery.

A. DISTINGUISHED FROM
ASSIGNMENT
Transfer is a broader term than negotiation. If
an instrument is transferred without
negotiation, the transfer is a mere
assignment which constitutes the transferee
as a mere assignee, not a holder, subject to
all defenses existing among prior parties.
Transfer thus includes both an ordinary
assignment and a negotiation. (Campos)

Negotiation Assignment
The transfer of the The transferee does
instrument from one not become a holder,
person to another so nor can he become a
as to constitute the holder in due course;
transferee the holder and he merely steps
thereof. [Sec.30, NIL] into the shoes of the
transferor. As such,
any defense available
against the transferor
is available against
the transferee.

B. MODES OF NEGOTIATION

B.1. BY DELIVERY – IF PAYABLE TO

BEARER

Delivery means transfer of possession of

instrument by the maker or drawer, with
intent to transfer title to the payee and
recognize him as holder thereof. [Sec. 191,
NIL]

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Issuance is the FIRST delivery of the thereto. The signature of the indorser,
instrument complete in form to a person who without additional words, is a sufficient
takes it as a holder. [Sec. 191, NIL] indorsement.

Requisites (1) Where placed – The indorsement must

(1) Mechanical act of writing the be written [Sec. 31, NIL]:
instrument completely and in (a) On the instrument itself [Sec. 31,
accordance with the requirements of NIL] , or
Section 1 of the NIL; and (b) On a separate piece of paper
(2) The delivery of the complete attached to the instrument
instrument by the maker or drawer, called “allonge” [Sec. 31, NIL]
with the intention of giving effect to it,
to the payee or holder. (2) Signature of the indorser, without
additional words, is a sufficient
Presumption of delivery indorsement [Sec. 31, NIL]
• Where the instrument is no longer in the
possession of a party whose signature (3) Must be of the ENTIRE instrument
appears thereon, a valid and intentional Sec. 32, NIL. Indorsement must be of entire
delivery by him is presumed until the instrument. - The indorsement must be an
contrary is proved [Sec. 16, NIL] indorsement of the entire instrument. An
• If it is in the hands of a holder in due indorsement which purports to transfer to the
course, the presumption of a valid indorsee a part only of the amount payable,
delivery is conclusive [Sec. 16, NIL] or which purports to transfer the instrument
to two or more indorsees severally, does not
Presumption as to date operate as a negotiation of the instrument.
• Date is not an essential element of But where the instrument has been paid in
negotiability; it is not included in the part, it may be indorsed as to the residue.
requirements for an instrument to be
negotiable under Sec. 1 of the NIL. • CANNOT indorse a part only of the
• An undated instrument is considered to amount payable; BUT if the instrument
be dated as of the time it was issued [Sec. has been paid in part, then the
17 (c), NIL] instrument may be indorsed as to the
residue [Sec. 32, NIL] (2012 Bar Question)
B.2. BY INDORSEMENT COMPLETED BY • CANNOT transfer the instrument to two
DELIVERY – IF PAYABLE TO ORDER or more indorsees severally [Sec. 32, NIL]
Sec. 191, NIL. Definition and meaning of • If not an indorsement of the entire
terms. - In this Act, unless the contract instrument, the transfer remains valid,
otherwise requires: but as a mere assignment which subjects
x---x the holder to all defenses on the
"Indorsement" means an indorsement instrument (Campos)
completed by delivery;
x---x (4) If name misspelled in indorsement,
indorsement will be prima facie
B.2.A. Indorsement; how done deemed not valid.
Sec. 31, NIL. Indorsement; how made. - The
indorsement must be written on the Sec. 43, NIL. Indorsement where name is
instrument itself or upon a paper attached misspelled, and so forth. - Where the name of
Page 28 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
proper signature.
• The indorsement should be made by the
holder in the manner he was designated,
otherwise the signature will prima facie
not be a valid indorsement of the
instrument [Sec 43, NIL]
(5) Indorsement where there are joint payees
• Where the instrument is payable or
indorsed to “A and B,” they are joint
payees and an indorsement by either A or
B only will not constitute a valid
negotiation, UNLESS the one indorsing is
authorized by the other. (Campos)
• But where the instrument is payable to “A
or B”, the payees are merely in the
alternative, and either one may validly
negotiate the same. (Campos)
C. KINDS OF INDORSEMENT
Sec. 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in
blank; and it may also be either restrictive or
qualified or conditional.
Four bases of classification of indorsements
under the NIL:
(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional
All of the four bases of classification coexist
with each other; thus, an indorsement may be
special and qualified at the same time. It may
also be special and unqualified, special and
restrictive, special, unrestrictive and
unqualified and so on. (Campos)
C.1. AS TO MANNER OF FUTURE METHOD
OF NEGOTIATION
Special
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MERCANTILE LAW
• Specifies the person to whom/to whose
order the instrument is to be payable;
and the indorsement of such indorsee is
necessary to further negotiation.
• A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable only
to those who take title through his
indorsement. [Sec. 40, NIL]
• An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. [Sec 40,
NIL]
• Originally bearer instrument always
remains a bearer instrument. (Sundiang
and Aquino)
Blank
• Specifies no indorsee, instrument so
indorsed is payable to bearer, and may be
negotiated by delivery
• The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of the indorsement.
[Sec 35, NIL]
• An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by a
subsequent special indorsement
C.2. AS TO TITLE TRANSFERRED
Sec. 37, NIL. Effect of restrictive indorsement;
rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the
indorser could bring;
(c) to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

But all subsequent indorsees acquire only the 1. Relieves the qualified indorser of his
title of the first indorsee under the restrictive liability to pay the instrument should the
indorsement. maker be unable to pay
2. The qualified indorser does not guarantee
(1) Restrictive – Such indorsement either: the solvency of the maker, but merely his
(a) Prohibits further negotiation of legal title to the instrument
instrument 3. A qualified indorsement does not impair
(b) Constitutes indorsee as agent of the negotiable character of the
indorser; or instrument
(c) Vests title in indorsee in trust for
another [Sec 36, NIL] (2) Non-qualified

A restrictive indorsement confers upon the C.4. AS TO PRESENCE/ABSENCE OF

indorsee the right:
(a) To receive payment of the instrument;
(b) To bring any action thereon that the
indorser could bring;
(c) To transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
(2) Non-restrictive
C.3. AS TO KIND OF LIABILITY ASSUMED
BY INDORSER
(1) Qualified
• Constitutes indorser as mere assignor of
title
• Made by adding the words “without
recourse”, “sans recourse,” “indorser not
holder,” “at the indorser’s own riske,” and
other terms of similar import. [Sec. 38,
NIL].
• But this does not mean that the
transferee only has the rights of an
assignee; transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
Effects:
EXPRESS LIMITATIONS
(1) Conditional
• Additional condition annexed to
indorser’s liability; such condition must
be expressed
• Where an indorsement is conditional, a
party required to pay the instrument may
disregard the condition, and make
payment to the indorsee or his transferee,
whether condition has been fulfilled or
not.
• But any person to whom an instrument so
indorsed is negotiated, will hold the same,
or the proceeds thereof, subject to the
rights of the person indorsing
conditionally. [Sec. 39, NIL]
(2) Unconditional
C.5. OTHER KINDS OF INDORSEMENT
(1) Absolute – One by which the indorser
binds himself to pay, upon no other
condition than the failure of prior
parties to do so, and of due notice to
him of such failure
(2) Joint – All must indorse when an
instrument is payable to the order of
two or more payees or indorsees who
are not partners. [Sec. 41, NIL]
Exceptions:

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• Where the payee or indorsee are partners;
and
• Where the payee or indorsee indorsing
has authority to indorse for the others.
(3) Irregular – A person who, not
otherwise a party to an instrument,
places thereon his signature in blank
before delivery. [Sec. 64, NIL]
Liability of Irregular Indorser:
• If the instrument is payable to the order
of a third person, he is liable to the payee
and to all subsequent parties.
• If the instrument is payable to the order
of the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
• If he signs for the accommodation of the
payee, he is liable to all parties
subsequent to the payee. [NIL, Sec. 64]
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MERCANTILE LAW
VIII. Rights of the
Holder
Rights of a holder
A holder is a payee or indorsee of a bill or
note who is in possession of it, or the bearer
thereof [Sec. 191, NIL]. He has the following
rights [Sec. 51, NIL]:
(1) To sue on the instrument in his own name
• Unindorsed instruments: Section. 49, NIL.
Transfer without indorsement; effect of.
Where the holder of an instrument
payable to his order transfers it for value
without indorsing it, the transfer vests in
the transferee such title as the transferor
had therein, and the transferee acquires
in addition, the right to have the
indorsement of the transferor. But for
the purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time
when the indorsement is actually made.
Note: This section applies only to an
instrument payable to the order of the
transferor. This cannot apply to bearer
instruments.
• Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
may at any time strike out any
indorsement which is not necessary to
his title. The indorser whose
indorsement is struck out, and all
indorsers subsequent to him, are
thereby relieved from liability on the
instrument.
• Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and
so forth. Where the instrument contains
or a person adds to his signature words
indicating that he signs for or on behalf
of a principal or in a representative
capacity, he is not liable on the
instrument if he was duly authorized;
but the mere addition of words
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
describing him as an agent, or as filling
a representative character, without
disclosing his principal, does not exempt
him from personal liability.
(2) Payment in due course to the holder
discharges instrument
A. HOLDER IN DUE COURSE [HDC]
(2nd Most Frequently Asked since 1992)
Sec. 52, NIL. What constitutes a holder in due
course. - A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before
it was overdue, and without notice that
it has been previously dishonored, if
such was the fact,
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him he had no notice of any infirmity in
the instrument or defect in the title of
the person negotiating it.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same defenses as
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any
fraud or illegality affecting the instrument,
has all the rights of such former holder in
respect of all parties prior to the latter.
Section 59, NIL. Who is deemed holder in due
course. - Every holder is deemed prima facie
to be a holder in due course; but when it is
shown that the title of any person who has
negotiated the instrument was defective, the
burden is on the holder to prove that he or
some person under whom he claims acquired
the title as holder in due course. But the last-
mentioned rule does not apply in favor of a
party who became bound on the instrument
Page 32 of 353
MERCANTILE LAW
prior to the acquisition of such defective title.
A.1. WHO ARE HOLDERS IN DUE COURSE
(1) Holder in due course [HDC] under Sec.
52, NIL
(2) HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument
through a HDC has all the rights of the
latter even though he himself satisfies
none of the requirements of due course
holding
HDC under Sec. 59, NIL [presumption]: Every
holder is deemed prima facie to be a holder in
due course.
Sec. 191 of the NIL defines holder as the
payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. The
word “holder” in the first clause of Sec. 52
and in the second subsection thereof may be
replaced by the definition in Sec. 191 so as to
read “a holder in due course is a payee or an
indorsee in possession, etc.” [De Ocampo vs.
Gatchalian, G.R. No. L-15126 (1961)]
A.2. THE SIGNIFICANCE OF DUE COURSE
HOLDING
• The question of whether a holder is a
holder in due course or not is significant
only when there is an existing defense
between prior parties. (Campos)
• A holder in due course can acquire a
better title than his predecessors because
he takes the instrument free from any
defect of title of prior parties. He is
furthermore free from defenses available
to prior parties among themselves.
(Campos)
• A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
transferee of a non-negotiable paper.
Real defenses, however, which attach to
the instrument itself would be available
even against a holder in due course.
(Campos)
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A.3. RIGHTS OF A HOLDER IN DUE
COURSE
(1) To sue on the instrument in his own
name [Sec. 51, NIL]
(2) To receive payment on the instrument
[Sec. 51, NIL]
(3) Holds instrument free of any defect of
title of prior parties [Sec. 57, NIL]
(4) Free from defenses available to prior
parties among themselves [Sec. 57,
NIL]
(5) May enforce payment of instrument for
full amount, against all parties liable
[Sec. 57, NIL]
In the hands of any holder other than a holder
in due course, a negotiable instrument is
subject to the same defenses as if it were
non-negotiable. But a holder who derives his
title through a holder in due course, and who
is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of
such former holder in respect of all parties
prior to the latter. [Sec. 58, NIL]
A.4. REQUISITES OF A HOLDER IN DUE
COURSE
Sec. 52, NIL. What constitutes a holder in due
course.- A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before
it was overdue, and without notice that
it has been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him, he had no notice of any infirmity in
the instrument or defect in the title of
the person negotiating it.
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MERCANTILE LAW
These four requisites must concur. If any one
of them is absent, the holder cannot be
considered a holder in due course. (Campos)
A.4.A. COMPLETE AND REGULAR UPON ITS
FACE
An instrument is incomplete when it is
wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
same will not be complete. (De Leon)
A.4.B. BECAME THE HOLDER BEFORE
OVERDUE AND WITHOUT NOTICE OF
PREVIOUS DISHONOR
“Overdue” – The Following Cannot Be Holders
in Due Course:
(a) A holder who became such after the date
of maturity of the instrument
[instrument is overdue; Sec. 53, NIL]
(b) In case of demand instruments: a holder
who negotiates it after an unreasonable
length of time after its issue [Sec. 53,
NIL]
The fact that the instrument is overdue is a
strong indication that it was dishonored and
the law puts the potential holder on inquiry
as to whether it was dishonored and the
reason therefor. (Campos)
An instrument may be dishonored either by
non-acceptance or by non-payment.
(1) Dishonor by non-acceptance – takes
place when the drawee refuses to
accept the order of the drawer as
stated in the bill. Can refer only to a bill
of exchange.
(2) Dishonor by non-payment – takes place
when the party primarily liable fails to
pay the instrument at the date of
maturity. (Campos)
Notes:
(1) An overdue instrument is still
negotiable, but it is subject to the
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
defenses (real and personal) existing at
the time of the transfer.
(2) As to what constitutes a reasonable
time, regard is to be had to the nature
of the instrument, the usage of trade or
business with respect to such
instrument, and the facts of the
particular case. [Sec. 193, NIL]
(3) An instrument is not invalid for the
reason only that it is ante-dated or
postdated provided it is not done for an
illegal or fraudulent purpose. The
person to whom an instrument so
dated is delivered acquires the title
thereto as of the date of delivery [Sec.
12, NIL]
(4) Instruments with fixed maturity but
subject to acceleration: ultimate date of
maturity is the date of maturity for the
purpose of determining whether a
purchaser is a HDC
(5) Undated instruments: Prima facie
presumption that it was negotiated
before it was overdue [Sec. 45, NIL]
A.4.C. That he took it in good faith AND for
value
“Good Faith”
Holder must have taken the instrument in
good faith and that at the time it was
negotiated to him he had no notice of any
infirmity in the instrument or defect in the
title of the person negotiating it. (Campos)
“Value”
(1) Any consideration sufficient to support
a simple contract [Sec. 25, NIL]
(2) An antecedent or pre-existing debt
constitutes value, whether the
instrument is payable on demand or at
a future time [Sec. 25, NIL]
“Holder For Value”
(1) Where value has at any time been given
for the instrument, the holder is
deemed a holder for value in respect to
all parties who become such prior to
that time [Sec. 26, NIL]; and
Page 34 of 353
MERCANTILE LAW
(2) Where the holder has a lien on the
instrument, he is deemed a HFV to the
extent of his lien [Sec .27, NIL]
The holder is a holder for value only to the
extent that the consideration agreed upon
has been paid, delivered, or performed.
(Sundiang and Aquino)
A negotiable instrument may be given as a
gift to the indorsee or transferee. In such
cases, whatever defenses can be set up
against the transferor can also be set up
against the transferee, but where the holder
gave valuable consideration for the note and
the other requisites of Sec. 52 are present, he
will be free from such defenses.
Value need not be full and a holder will be
one for value even if he gave less than the
face value of the instrument, provided that
intention of the transferor is to transfer the
full amount represented by the instrument.
(Campos)
Presumption: Every negotiable instrument is
deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
become a party thereto for value. [Sec. 24,
NIL]
Such presumption cannot be overcome by the
petitioner’s bare denial of receipt of the
consideration. [Bayani v. People, G.R. No.
154947 (2004)]
A.4.D. No Notice of Infirmity in the instrument
or defect in the title of the person negotiating
it
“Defective title”
Title is defective when [Sec. 55, NIL]
(1) instrument/signature obtained by
fraud, duress, force or fear or other
unlawful means OR for an illegal
consideration; or
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2) instrument is negotiated in breach of
faith, or fraudulent circumstances
Title is not defective when at the time it was
negotiated to him, he had no notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Note: Due course holding is not affected by
the holder’s acquisition of knowledge after he
has taken the instrument.
To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it
is negotiated must have had actual
knowledge of the infirmity or defect, or
knowledge of such facts that his action in
taking the instrument amounted to bad faith.
[Sec. 56, NIL]
A transferee who receives notice of any
infirmity or defect before he has paid the full
amount for the instrument will be deemed a
HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]
Gross negligence in itself would not
constitute notice since it is not the equivalent
of actual knowledge nor of bad faith.
“Suspicious circumstances”
General rule: A purchaser of an instrument is
not required to investigate every suspicious
circumstance; failure to investigate such
circumstances does not constitute him as
being in bad faith or having a notice of defect.
(Campos)
Rationale: The general principle that a
purchaser who has knowledge of certain facts
is put on inquiry does not operate to its full
extent in the law of negotiable instruments.
Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require
investigation of every suspicious
Page 35 of 353
MERCANTILE LAW
circumstance would hamper their function of
facilitating exchange; thus negligence in
tracking down a suspicious circumstance
which would put a prudent man on inquiry is
not of itself sufficient to prevent recovery.
(Campos)
Exceptions:
(a) Suspicious circumstances together with
other circumstances, may be admitted
as evidence of bad faith.
(b) Where the suspicious circumstances
are so cogent and obvious
A check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should put
the payee on inquiry and upon him devolves
the duty to ascertain the holders’ title to the
check or the nature of his possession. Failing
in this respect, the payee is declared guilty of
gross negligence amounting to legal absence
of good faith and as such the consensus of
authority is to the effect that the holder of the
check is not a holder in good faith. [State
Investment House vs. IAC, G.R. No. 72764
(1989)]
A.5. PRESUMPTION IN FAVOR OF DUE
COURSE HOLDING
Every holder is deemed prima facie to be a
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the
title of any person who has negotiated
the instrument was defective. Holder
must then prove that he or some
person under whom he claims acquired
the title as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became
bound on the instrument prior to the
acquisition of such defective title.
A.6. HOLDER NOT IN DUE COURSE
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

(1) One who became a holder of an an absence of one of reason, such as fraud,
instrument without any, some or all of the essential the defendant is
the requisites under Sec. 52 of the NIL elements of a contract excused from the
(2) With respect to demand instruments, if or where the admitted obligation to perform
it is negotiated an unreasonable length contract is void for all
of time after its issue, the holder is purposes for reasons
deemed not a holder in due course. of public policy
[Sec. 53, NIL]
Available against all Can be raised only
holders, including against holders not in
Rights of a holder not in due course
holders in due course due course
[Sec. 51, NIL]
(1) To sue on the instrument under in his Forgery, incapacity, Those mentioned in
own name fraud in the execution, Sec. 55 (fraud, duress,
(2) To enforce the instrument some types of duress, force and fear, other
and lack of delivery of unlawful means,
The only disadvantage of a holder who is not an incomplete illegal consideration,
a holder in due course is that the negotiable instrument negotiating in breach
instrument is subject to defenses as if it were of faith), want of
non-negotiable. [Chan Wan vs. Tan Kim, G.R. consideration,
No. L-15380 (1960)] incompleteness of the
instrument, lack of
Holder in Due Course Not Holder in Due delivery of a
Course completed instrument

Compliance with Requisites

All the requisites Not all of the
under Sec. 52, NIL are requisites under Sec.
complied with 52 are complied with
Defenses
His rights can only be His rights can be
defeated by real defeated by real and
defenses personal defenses
Rights
Has the right to Has the right to
enforce payment, sue enforce payment, sue
in his own name, and in his own name, and
negotiate the negotiate the
instrument instrument

B. DEFENSES AGAINST THE HOLDER

Real Defenses Personal Defenses

Those which attach to Those wherein a true
the instrument itself contract appears, but
and generally disclose where for some

Page 36 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
IX. Liabilities of Parties
Primary liability: The unconditional promise
attaches the moment the maker makes the
instrument while the acceptor’s assent to the
unconditional order attaches the moment he
accepts the instrument. No further act is
necessary in order for the liability to accrue.
Presentment for payment is all that is
necessary.
A. MAKER
Sec. 60, NIL. Liability of maker. – The maker
of a negotiable instrument by making it
engages that he will pay it according to its
tenor, and admits the existence of the payee
and his then capacity to indorse.
The term “maker” applies only to the
promissory note.
By signing the note, the maker also
represents to the world that the payee named
has the capacity to indorse at the time of the
making of such note and thus represents that
the named payee can transfer a good and
valid title to the note by indorsement. The
maker is therefore precluded from setting up
such defenses as minority or insanity of the
payee or ultra vires act of a payee-corporation.
(Campos)
B. DRAWER
Sec. 61, NIL. Liability of drawer. – The drawer
by drawing the instrument admits the
existence of the payee and his then capacity
to indorse; and engages that on due
presentment the instrument will be accepted
or paid, or both, according to its tenor, and
that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or
to any subsequent indorser who may be
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the
holder.
Page 37 of 353
MERCANTILE LAW
The drawer warrants the existence of the
payee and the latter’s capacity to indorse the
instrument at the time of its issuance.
(Campos)
C. ACCEPTOR
Sec. 62, NIL. Liability of acceptor. – The
acceptor by accepting the instrument
engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the
genuineness of his signature and his
capacity and authority to draw the
instrument, and
(b) The existence of the payee and his then
capacity to indorse.
A drawee has no liability on the bill until and
unless he accepts the same.
Unconditionally liable; the acceptor is duty-
bound to pay the holder at date of maturity,
WON holder demands payment from him,
and he is not relieved from liability even if the
instrument should become overdue due to
failure of holder to make such demand.
(Campos)
Requisites for a valid acceptance
(a) It must be in writing;
(b) It must be signed by the drawee; and
(c) It must not change the implied promise
of the acceptor to pay only in money.
[Sec. 132, NIL]
Note: A bill may be accepted even after it is
overdue or dishonored, since an instrument
does not lose its negotiability by the mere
fact that its maturity date has passed or that
the drawee has refused to accept or pay it.
(Campos)
The bank had the last clear chance to stop the
fraudulent encashment of the subject checks
had it exercised due diligence and followed
the proper and regular banking procedures in
clearing checks. The one who had the last
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
clear opportunity to avoid the impending
harm but failed to do so is chargeable with
the consequences thereof. [Bank of America v.
Philippine Racing Club, G.R. No. 150228
(2009), citing Westmont Bank v. Ong, G.R.
No. 132560 (2002)]
D. INDORSERS
The following indorsers assume the liability
to pay the instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
D.1. General or unqualified indorser
(2011 Bar Question)
Who is a qualified indorser? One who is
constituted as a mere assignor of the title to
the instrument by adding to his signature the
words "without recourse" or any words of
similar import.
A qualified indorser does not assume the
liability to pay the instrument since he is
merely an assignor of the title to the
instrument. However, he becomes liable once
he breaches a warranty.
Who is a general or unqualified indorser?
Every person who indorses without
qualification [Sec. 66, NIL]
A person placing his signature upon an
instrument other than as a maker, drawer, or
acceptor unless he indicates by appropriate
words his intention to be bound in some other
capacity [Sec. 63, NIL]
A person, who places his signature on an
instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The general indorser makes two contracts:
(1) An assignment or sale of the
instrument; and
(2) A special contract of indorsement
Page 38 of 353
MERCANTILE LAW
D.2. IRREGULAR INDORSER
When a person not otherwise a party to an
instrument, places thereon his signature in
blank before delivery, he is liable as an
indorser, in accordance with these rules:
(1) Instrument payable to order of 3rd
person: liable to payee and to all
subsequent parties
(2) Instrument payable to the order of
maker/drawer, or payable to bearer:
liable to all parties subsequent to
maker/drawer
(3) Signs for accommodation of payee:
liable to all parties subsequent to payee
[Sec. 64, NIL]
D.3. Order of Liability among Indorsers
Sec. 68, NIL. Order in which indorsers are
liable. – As respects one another, indorsers
are liable prima facie in the order in which they
indorse; but evidence is admissible to show
that as between or among themselves they
have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse
jointly and severally.
Among themselves, indorsers are liable prima
facie in the order they indorse.
Sec. 68 does not bind the holder, and he may
sue any of the indorsers, regardless of the
order of their indorsement. (Campos)
Promissory Note Bill of Exchange
No person primarily
liable to pay until and
unless the drawee
Maker is the person accepts the order of
primarily liable the drawer to pay;
when the drawee
accepts, he becomes
the acceptor
Indorsers are Drawer and indorsers
secondarily liable. are secondarily liable
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

E. WARRANTIES (1) That the instrument is genuine in and

The primary or secondary liability of the
parties should be distinguished from their
warranties.
(1) Primary or secondary liability of the
parties makes them liable to pay the
sum certain in money stated in the
instrument.
(2) Warranties are affirmations of the fact
on the part of the parties that impose no
direct obligation to pay in the absence of
breach thereof. (Aquino)
in all respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That the instrument is, at the time of
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)]

In case of breach of warranties, the person E.5. QUALIFIED INDORSER’S

who breached the same may either be liable WARRANTIES
or he may be barred from asserting a (1) That the instrument is genuine in and
particular defense. in all respects what it purports to be
(2) That he has a good title to it
E.1. MAKER’S WARRANTIES (3) That all prior parties had capacity to
(1) The maker admits the existence of the contract
payee AND (4) That he has no knowledge of any fact
(2) His then capacity to indorse [Sec. 60, which would impair the validity of the
NIL] instrument or render it valueless. [Sec.
68, NIL]
E.2. DRAWER’S WARRANTIES
(1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse

E.3. ACCEPTOR’S WARRANTIES

(1) As to the drawer, the acceptor admits:
(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec.
62, NIL]

The acceptor is precluded from setting up

certain defenses by reason of his warranties
like the defense that the drawer is a minor or
the signature of the drawer is forged.
(Aquino)

E.4. GENERAL INDORSER’S WARRANTIES

Page 39 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

X. Presentment for Exceptions: Where the person primarily liable

is/are:
Payment (1) Dead – presentment for payment
must be made to his personal
representative
Presentment for payment is the presentation (2) Partners – presentment for payment
of the instrument, whether a note or a bill, to may be made to any one of them,
the person primarily liable for the purpose of even though there has been a
demanding and obtaining payment thereof. dissolution of the firm
(Campos) (3) Several persons, not partners (joint
(1) The production of a Bill of Exchange debtors) – presentment for payment
to the drawer or acceptor for must be made to them all
payment; or
(2) The production of a Promissory Note
C. DISPENSATION WITH
to the party liable for payment.
PRESENTMENT FOR PAYMENT
When Excused:
A. NECESSITY OF PRESENTMENT FOR
(1) Where, after the exercise of
PAYMENT reasonable diligence, presentment
When necessary: In order to charge the cannot be made;
drawer and indorsers [Sec. 70, NIL] (2) Where the drawee is a fictitious
person;
When NOT necessary: (3) By waiver of presentment, express or
(1) To charge the person primarily liable implied. [Sec. 82, NIL]
on the instrument [Sec. 70, NIL]
(2) To charge the drawer where he has no
D. DISHONOR BY NON-PAYMENT
right to expect or require that the
The instrument is dishonored by non-
drawee or acceptor will pay the
payment when:
instrument. [Sec. 79, NIL]
(1) It is duly presented for payment and
(3) To charge an indorser where the
payment is refused or cannot be
instrument was made or accepted for
obtained; or
his accommodation and he has no
(2) Presentment is excused and the
reason to expect that the instrument
instrument is overdue and unpaid
will be paid if presented. [Sec. 80, NIL]
[Sec. 83, NIL]
(4) When the bill of exchange has
previously been dishonored by non-
In case of waiver of protest, whether in the
acceptance and has not been
case of a foreign bill of exchange or other NI –
subsequently accepted
deemed to be a waiver not only of a formal
protest but also of presentment and notice of
B. PARTIES TO WHOM PRESENTMENT dishonor [Sec. 111, NIL]
FOR PAYMENT SHOULD BE MADE
General rule: Presentment for payment must
be made to the person primarily liable on the
instrument or if he is absent or inaccessible,
to any person found at the place where the
presentment is made.

Page 40 of 353
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XI. Notice of Dishonor A.2. IF GIVEN BY AGENT

Notice of dishonor is bringing either verbally
or in writing, to the knowledge of the drawer
or the indorser of the instrument, the fact
that a specified negotiable instrument, upon
proper proceedings taken, has not been
accepted, or has not been paid, and that the
party notified is expected to pay it. [Martin v.
Brown, 75 Ala. 442]
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by:
(1) Non-acceptance by the drawee of a
bill; or
(2) Non-payment by the acceptor of a
bill; or
(3) Non-payment by the maker of a note
[Sec. 89, NIL]
Requisites:
(a) Given by holder or his agent, or by any
party who may be compelled by the
holder to pay [Sec. 90, NIL]
(b) Given to secondary party or his agent
[Sec. 97, NIL]
(c) Given within the periods provided by
law [Sec. 102, NIL]
(d) Given at the proper place [Secs. 103
and 104, NIL]
A. PARTIES TO BE NOTIFIED
(1) Non-acceptance [bill] – to persons
secondarily liable, namely, the drawer
and indorsers as the case may be
(2) Non-payment (both bill and note) – to
indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
are discharged. Notice may be given to the
party himself or to his agent.
A.1. TO WHOM IN GENERAL
Notice of dishonor may be given either to the
party himself or to his agent in that behalf.
[Sec. 97, NIL]
Page 41 of 353
Where the instrument has been dishonored in
the hands of an agent, he may either himself
give notice to the parties liable thereon, or he
may give notice to his principal. [Sec. 94, NIL]
A.3. IF PARTY IS DEAD
The notice must be given to a personal
representative, if there be one, and if with
reasonable diligence, he can be found.
If there be no personal representative, notice
may be sent to the last residence or last place
of business of the deceased. [Sec. 98, NIL]
A.4. TO PARTNERS
Where the parties to be notified are partners,
notice to any one partner is notice to the firm,
even though there has been a dissolution.
[Sec. 99, NIL]
A.5. TO JOINT PARTIES
Notice to joint parties who are not partners
must be given to each of them, unless one of
them has authority to receive such notice for
the others. [Sec. 10, NIL]
A.6. TO BANKRUPT
Where a party has been adjudged a bankrupt
or an insolvent, or has made an assignment
for the benefit of creditors, notice may be
given either to the party himself or to his
trustee or assignee. [Sec. 101]
B. PARTIES WHO MAY GIVE NOTICE OF
DISHONOR
The notice may be given by or on behalf of
the holder, or by or on behalf of any party to
the instrument who might be compelled to
pay it to the holder, and who, upon taking it
up, would have a right to reimbursement
from the party to whom the notice is given.
[Sec. 90, NIL]
B.1. WHO SHOULD GIVE
(1) Holder
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

(2) Agent or representative of holder. Where the waiver is embodied in the

(3) Any party who may be compelled to instrument itself, it is binding upon all
pay like indorsers. parties; but, where it is written above the
(4) Agent of any party who may be signature of an indorser, it binds him only.
compelled. [Sec. 90, NIL] [Sec. 110, NIL]

C. EFFECT OF NOTICE F. DISPENSATION WITH NOTICE

Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises.
It is as if the indorser becomes primarily liable
in the sense that the holder need not claim
payment from the person primarily liable
(Sundiang and Aquino)
D. FORM OF NOTICE
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument;
and
(2) Indicate that it has been dishonored
by non-acceptance or non-payment
It may in all cases be given by delivering it
personally or through the mails. [Sec. 96
NIL]
No misdescription of the amount, or of the
date, or of the name of the parties, or of the
time the paper falls due, or other defect will
vitiate the notice of dishonor, unless it
misleads the party to whom it is sent.
(Campos)
E. WAIVER
Notice of dishonor may be waived either
before the time of giving notice has arrived or
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109,
NIL]
Notice of dishonor is dispensed with:
(1) When party to be notified knows
about the dishonor, actually or
constructively [Secs. 114-117, NIL]
(2) If waived [Sec. 109, NIL]
(3) When after due diligence, it cannot be
given [Sec. 112, NIL]
G. EFFECT OF FAILURE TO GIVE NOTICE
Failure to give notice to parties secondarily
liable discharges such parties
An omission to give notice of dishonor by
non-acceptance does not prejudice the rights
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be
prejudiced by the failure or neglect of a
previous holder to give notice of dishonor by
non-acceptance.
A dishonor by non-payment necessarily
presupposes the instrument has matured,
and therefore, no holder subsequent thereto
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos)
XII. Discharge of
Negotiable Instrument
Discharge: The release of all parties, whether
primary or secondary, from the obligation on
the instrument. It renders the instrument
without force and effect and, consequently,
non-negotiable (De Leon)

Page 42 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
Sec. 119, NIL. Instrument; How discharged. - A
negotiable instrument is discharged:
(1) By payment in due course by or on behalf
of the principal debtor;
(2) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by
the holder;
(4) By any other act which will discharge a
simple contract for the payment of
money;
(5) When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.
A.1. BY PAYMENT IN DUE COURSE
(2000 Bar Question)
Requisites:
(1) Payment must be made at or after
maturity.
(2) Payment must be made to the holder.
(3) Payment must be made in good faith
and without notice that holder’s title is
defective.
• Payment should be in money in order to
effect its discharge. (Campos)
• If payment is made before maturity and the
note is negotiated to a HDC, the latter may
recover on the instrument.
• Payment to one of several payees or
indorsees in the alternative discharges the
instrument, but payment to one of several
joint payees or joint indorsers is not a
discharge. The party receiving payment
must have been authorized by others to
receive payment.
By whom made:
(1) Payment in due course by or on behalf
of the principal debtor.
Page 43 of 353
MERCANTILE LAW
(2) Payment in due course by party
accommodated where party is made/
accepted for accommodation whether
or not he appears to be a party to the
instrument.
• If payment is not made by the parties
enumerated, it would constitute a purchase
or negotiation and the instrument would
remain outstanding.
• Principal debtor: includes the maker and the
acceptor.
• If the primary party is an accommodation
party, like a guarantor or a surety, payment
by him does not discharge the instrument.
[Fox v. Kroeger, 119 Tex. 511 (1931)]
A.2. BY INTENTIONAL CANCELLATION
(2011 Bar Question)
• A cancellation made unintentionally, under
a mistake, or without the authority of the
holder, is inoperative. [Sec. 123, NIL]
• The burden of proving that a cancellation
was made unintentionally or by mistake or
through fraud, is on the person claiming its
effectiveness. Cancellation is presumed to
be intentional. (Campos)
• Cancellation need not be supported by
consideration and is effective even without
notice to the primary party.
A.3. BY OTHER ACTS THAT DISCHARGE A
SIMPLE CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple
contract for payment of money.
Sec. 1231, Civil Code. Obligations are
extinguished by:
(1) Payment or performance;
xxx
(3) By condonation or remission of the debt;
(4) By the confusion or merger of the rights of
a debtor;
(5) By compensation;
(6) By novation
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this
Code.
A.4. BY REACQUISITION OF PRINCIPAL
DEBTOR IN HIS OWN RIGHT
Principal debtor becomes holder of
instrument at or after maturity in his own
right and not as an agent or for and in behalf
of another.
• Reacquisition must be at or after maturity
for the instrument to be discharged,
otherwise the instrument may be further
negotiated. (Campos)
A.5. BY MATERIAL ALTERATION
Section 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(a) Date
(b) Sum payable, either for principal or
interest
(c) Time or place of payment
(d) Number or relations of the parties
(e) Medium or currency in which payment
is to be made
(f) Or which adds a place of payment
where no place of payment is specified
(g) Or any other change or addition which
alters the effect of the instrument in
any respect
Material alteration without assent of all
parties liable avoids instrument except as
against party to alteration and subsequent
indorsers [Sec. 124, NIL] (2011 Bar Question)
B. DISCHARGE OF PARTIES
SECONDARILY LIABLE
Sec. 120, NIL. When Persons Secondarily
Liable on, Discharged.- A person secondarily
liable on the instrument is discharged:
(1) By any act which discharges the
instrument;
(2) By the intentional cancellation of his
signature by the holder;
(3) By the discharge of a prior party;
Page 44 of 353
MERCANTILE LAW
(4) By a valid tender or payment made by a
prior party;
(5) By a release of the principal debtor
unless the holder's right of recourse
against the party secondarily liable is
expressly reserved;
(6) By any agreement binding upon the
holder to extend the time of payment or
to postpone the holder's right to enforce
the instrument unless made with the
assent of the party secondarily liable or
unless the right of recourse against such
party is expressly reserved.
OTHER GROUNDS
(1) Failure to make due presentment [Sec.
144, NIL]
(2) Failure to give notice of dishonor
(3) Certification of check at instance of
holder [Sec. 188, NIL]
(4) Reacquisition by prior party
• Where instrument negotiated back to
a prior party, such party may reissue
and further negotiate, but he is not
entitled to enforce payment against
any intervening party to whom he was
personally liable
• Where instrument is paid by party
secondarily liable, it is not discharged,
but:
• The party so paying it is remitted
to his former rights as regard to
all prior parties;
• and he may strike out his own
and all subsequent indorsements,
and again negotiate instrument,
except: where it is payable to
order of 3rd party and has been
paid by drawer or where it’s
made/accepted for
accommodation and has been
paid by party accommodated
(5) By taking a qualified acceptance
C. RIGHT OF PARTY WHO DISCHARGED
INSTRUMENT
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Sec. 121, NIL. Where the instrument is paid by subsequent to him

a party secondarily liable thereon, it is not
discharged; but the party so paying it is
remitted to his former rights as regards to all • Need not be supported by consideration.
prior parties, and he may strike out his own
and all subsequent indorsements, and again
negotiate the instrument, except:
(1) Where it is payable to the order of a third
person, and has been paid by the drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by the
party accommodated.

• The discharge of a secondary party is not

the same as the discharge of the
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.

D. RENUNCIATION BY HOLDER
Sec. 122, NIL. Renunciation by Holder. - The
holder may expressly renounce his rights
against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
against the principal debtor made at or after
the maturity of the instrument discharges the
instrument. But a renunciation does not
affect the rights of a holder in due course
without notice. A renunciation must be in
writing, unless the instrument is delivered up
to the person primarily liable thereon.

• Two forms of renunciation

(1) A written declaration to that effect; or
(2) By surrender of the instrument to the
primary party.

To Whom Made Effect

At or after maturity in Discharges the

favor of principal instrument
debtor

At or after maturity in Discharge only such

favor of any party party and the parties

Page 45 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

XIII. Material Alteration (2) Alteration by a stranger (spoliation)

(2011 Bar Question) The effect is the
A. CONCEPT same as where the alteration was
• Any change in the instrument which affects made by a party wherein a HDC can
or changes the liability of the parties in any recover on the original tenor of the
way. instrument. [Sec. 124, NIL]
• Any alteration which changes the date, sum
payable, time or place of payment, number
of relation of the parties, or medium of
currency of payment where none is
specified or which alters the effect of the
instrument in any respect [PNB v. CA, GR
No. L-26001 (1968)]
• An alteration is said to be material if it
alters the effect of the instrument. In other
words, a material alteration is one which
changes the items which are required to be
stated under Sec. 1 of the NIL (ibid.)

A.1. CHANGES IN THE FOLLOWING

CONSTITUTE MATERIAL ALTERATIONS
[Sec. 125, NIL]
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment
is to be made
(6) That which adds a place of payment
where no place of payment is
specified
(7) Any other change or addition which
alters the effect of the instrument in
any respect.

B. EFFECT OF MATERIAL ALTERATION

(1) Alteration by a party – Avoids the
instrument except as against the party
who made, authorized, or assented to
the alteration and subsequent
indorsers. However, if an altered
instrument is negotiated to a HDC, he
may enforce payment thereof
according to its original tenor
regardless of whether the alteration
was innocent or fraudulent.
Page 46 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

XIV. Acceptance Effects: When an acceptance is written on a

paper than the bill itself, it does not bind the
A. DEFINITION acceptor except in favor of a person to whom
Acceptance: An acceptance completed by it is shown and who, on the faith thereof,
delivery or notification. [Sec. 191, NIL] The receives the bill for value.
signification by the drawee of his assent to
the order of the drawer. [Sec. 132, NIL] B. MANNER
B.1. EXPRESS ACCEPTANCE
A.1. REQUISITES Must be in writing and signed by the drawee
[Sec. 132, NIL] and must not express that the drawee will
(1) In writing perform his promise by any other means than
(2) Signed by the drawee the payment of money. [Sec. 132, NIL]
(3) Does not express that the drawee will
perform his promise by and other If request for a written acceptance is refused,
means than the payment of money the holder may treat the bill as dishonored
[Sec. 13, NIL]
A.2. KINDS OF ACCEPTANCE
(1) General – assents without B.2. IMPLIED ACCEPTANCE
qualification to the order of the (1) If the drawee refuses to return the
drawer [Sec. 139, NIL] instrument within 24 hours after it was
(2) Qualified – which in express terms delivered for acceptance.
varies the effect of the bill as drawn (2) If the drawee destroys the same.
[Secs. 141 & 142, NIL]: (3) If the drawee makes an unconditional
(a) Conditional – makes payment promise in writing before the instrument
by the acceptor dependent on is drawn, with respect to every person
the fulfillment of a condition who, upon the faith thereof, receives
therein stated the bill for value.
(b) Partial – an acceptance to pay
part only of the amount for C. TIME FOR ACCEPTANCE
which the bill is drawn. [Sec. 136, NIL]
(c) Local – an acceptance to pay • The drawee is allowed twenty-four hours
only at a particular place. after presentment in which to decide
(d) Qualified as to time whether or not he will accept the bill.
(e) The acceptance of some one
• The acceptance, if given, dates as of the
or more of the drawees but
day of presentation.
not of all.
D. RULES GOVERNING ACCEPTANCE
A.3. PROOF OF ACCEPTANCE
Implication of payment without acceptance
(Sundiang and Aquino)
by a drawee [FEBTC vs. Gold Palace Jewellery
The written acceptance may be in the
Co,, Nachura, G.R. No. 168274 (2008)]
instrument itself or in a separate instrument.
However, under Sec. 133, “the holder of a bill
• The NIL explicitly provides that the
presenting the same for acceptance may
acceptor, by accepting the instrument,
require the acceptance be written on the bill,
and, if such request is refused, may treat the engages that he will pay it according to
the tenor of his acceptance.
bill as dishonored”

Page 47 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
• 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.
Right to unqualified acceptance
• The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the
bill as dishonored by non-acceptance.
• Where a qualified acceptance is taken,
the drawers and indorsers are
discharged from liability on the bill
unless they have expressly or impliedly
authorized the holder to take a qualified
acceptance, or subsequently assent
thereto.
• When the drawer or indorser receives
notice of a qualified acceptance, he must,
within a reasonable time, express his
dissent to the holder or he will be
deemed to have assented thereto.
• However, acceptance is presumed to be
unqualified or absolute. (Sundiang and
Aquino)
Page 48 of 353
MERCANTILE LAW
XV. Presentment for
Acceptance
Requisites:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business
day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at
the place where the presentment is
made.
General Rule: Presentment for acceptance is
not necessary in order to render any party to
the bill liable. [Sec. 143, NIL]
Presentment for acceptance is necessary only
in the instances where the law requires it. In
the instances where presentment for
acceptance is not necessary, the holder of the
bill of exchange can proceed directly to
presentment for payment. [HSBC v. CIR, G.R.
No. 166018 (2014)]
A. TIME/PLACE/MANNER OF
PRESENTMENT
A.1. WHEN MADE
A bill may be presented for acceptance on
any day on which negotiable instruments
may be presented for payment under the
provisions of Sections 72 and 85 of this Act.
When Saturday is not otherwise a holiday,
presentment for acceptance may be made
before twelve o'clock noon on that day. [Sec.
146, NIL]
A.2 What constitutes sufficient
presentment?
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Presentment for payment, to be sufficient,
must be made:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business
day;
(3) At the proper place as herein defined
[Sec. 73, NIL];
(4) To the person primarily liable on the
instrument or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
[Sec. 72, NIL]
Time of maturity: Every negotiable instrument
is payable at the time fixed therein without
grace. When they day of maturity falls upon
Sunday, or a holiday, the instrument is
payable on the next succeeding business day.
Instruments falling due or becoming payable
on Saturday are to be presented for payment
on the next succeeding business day, except
that instrument payable on demand may, at
the option of the holder be presented for
payment before twelve o’clock noon on
Saturday when that entire day is not a holiday.
[Sec. 85, NIL]
A.3 HOW MADE
[Sec. 145, NIL]
In general:
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
Where a bill is addressed to 2 or more
drawees who are not partners – presentment
must be made to them all XPT. One has
authority to accept/refuse for all
Where the drawee is dead – presentment may
be made to his personal representative
Page 49 of 353
MERCANTILE LAW
Where the drawee has been adjudged a
bankrupt or insolvent or has made an
assignment for the benefit of creditors –
presentment may be made to him or to his
trustee or assignee.
B. EFFECT OF FAILURE TO MAKE
PRESENTMENT
Failure to make presentment discharges the
drawer and all indorsers. [Sec. 144, NIL]
C. DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance: A bill is
dishonored by non-acceptance:
(1) When it is duly presented for
acceptance and such an acceptance as
is prescribed by this Act is refused or
cannot be obtained; or
(2) When presentment for acceptance is
excused and the bill is not accepted.
[Sec. 149, NIL]
Duty of holder: Where a bill is duly presented
for acceptance and is not accepted within the
prescribed time, the person presenting it
must treat the bill as dishonored by non-
acceptance or he loses the right of recourse
against the drawer and indorsers. [Sec. 150,
NIL]
Effect: When a bill is dishonored by non-
acceptance, an immediate right of recourse
against the drawer and indorsers accrues to
the holder and no presentment for payment is
necessary. [Sec. 151, NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

XVI. Promissory Notes XVII. Checks

A promissory note is: A. DEFINITION
(1) An unconditional promise in writing A check is a bill of exchange drawn on a bank
(2) Made by one person to another payable on demand. Except as herein
(3) Signed by the maker otherwise provided, the provisions of this Act
(4) Engaging to pay on demand, or at a applicable to a bill of exchange payable on
fixed or determinable future time demand apply to a check. [Sec. 185, NIL]
(5) A sum certain in money to order or to
bearer B. KINDS
(6) Where a note is drawn to the maker's (1) Cashier’s Check – One drawn by the
own order, it is not complete until cashier of a bank, in the name of the
indorsed by him. [Sec. 184, NIL] bank against the bank itself payable to
a third person. It is a primary obligation
There are originally 2 parties in a promissory of the issuing bank and accepted in
note: advance upon issuance. [Tan vs. CA,
(1) Maker – party who executes the G.R. No. 108555 (1994)]
written promise to pay.
(2) Payee – party in whose favor the (2) Manager’s Check – A check drawn by
promissory note is made payable. the manager of a bank in the name of
the bank itself payable to a third
person. It is similar to the cashier’s
check as to the effect and use.

In issuing a manager’s check, the bank

assumed the liabilities of the acceptor
under Sec. 62, NIL. [Equitable PCI Bank
v. Ong, G.R. No. 156207 (2006)]

(3) Memorandum Check – A check given by

a borrower to a lender for the amount
of a short loan, with the understanding
that it is not to be presented at the
bank, but will be redeemed by the
maker himself when the loan falls due
and which understanding is evidenced
by writing the word “memorandum”,
“memo” or “mem” on the check.

(4) Certified Check – An agreement

whereby the bank against whom a
check is drawn undertakes to pay it at
any future time when presented for
payment [Sec. 187, NIL]
(a) Certification is equivalent to
acceptance. [Sec. 187, NIL]

Page 50 of 353
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(b) Where the holder of a check
procures it to be accepted or
certified, the drawer and all
indorsers are discharged from
liability. [Sec. 188, NIL]
(c) A check of itself does not operate
as an assignment of any part of
the funds to the credit of the
drawer with the bank, and the
bank is not liable to the holder
unless and until it accepts or
certifies the check. [Sec. 189, NIL]
(5) Crossed Check – The NIL is silent with
respect to crossed checks, although the
Code of Commerce makes reference to
such instruments.
Article 541 of the Code of Commerce states:
“The maker or any legal holder of a check
shall be entitled to indicate therein that it be
paid to a certain banker or institution, which
he shall do by writing across the face the
name of said banker or institution, or only the
words ‛and company.”
Under usual practice, crossing a check is
done by placing two parallel lines diagonally
on the left top portion of the check. [State
Investment House vs. IAC, G.R. No. 72764
(1989)]
The Court has taken judicial cognizance of
the practice that a check with two parallel
lines on the upper left hand corner means
that it could only be deposited and not
converted into cash. The crossing of a check
with the phrase “Payees Account Only” is a
warning that the check should be deposited
in the account of the payee. It is the collecting
bank which is bound to scrutinize the check
and to know its depositors before it can make
the clearing indorsement, all prior
indorsements and/or lack of indorsement
guaranteed. [Salazar v. J.Y. Brothers
Marketing Corporation, G.R. No. 171998
(2010)]
Page 51 of 353
MERCANTILE LAW
TYPES: SPECIAL AND GENERAL
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
crossing may be general wherein between two
parallel diagonal lines are written the words
"and Co." or none at all as in the case at bar,
in which case the drawee should not encash
the same but merely accept the same for
deposit.
C. PRESENTMENT FOR PAYMENT
A check of itself does not operate as an
assignment of any part of the funds to the
credit of the drawer with the bank. The bank
is not liable to the holder, unless and until it
accepts or certifies the check. [Sec. 189, NIL]
C.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.
C.2 EFFECT OF DELAY
The drawer will be discharged from liability
thereon to the extent of the loss caused by
the delay. [Sec. 186, NIL]
Certification of checks: An agreement
whereby the bank against whom a check is
drawn, undertakes to pay it at any future time
when presented for payment
Effects:
(1) Equivalent to acceptance [Sec. 187,
NIL] and is the operative act that
makes banks liable
(2) Assignment of the funds of the drawer
in the hands of the drawee [Sec. 189,
NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

(3) If obtained by the holder, discharges
the persons secondarily liable thereon
[Sec. 188, NIL]
Refusal of drawee bank to certify: The holder
has no action against the bank but he has a
right of action against the drawer. The drawer
in turn has right of action against the bank
based on the original contact of deposit
between them.

Page 52 of 353
UP LAW BOC INSURANCE MERCANTILE LAW

MERCANTILE LAW
INSURANCE

Page 53 of 353
UP LAW BOC
I. CONCEPT OF
INSURANCE
On August 15, 2013, RA 10607 was signed into
law. It is a restatement of the Insurance Code (PD
612), with amendments.
While RA 10607 restated the whole law, most of
the amendments touch only the administrative
portion of the Code, and very little on the
substantive portion.
The section numbers hereinafter generally
pertain to RA 10607, unless otherwise indicated.
A. CONTRACT OF INSURANCE
Sec. 2(a).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 shall be deemed to be
an insurance contract only if made by a surety
who or which, as such, is doing an insurance
business.
Insurance is essentially a contract by which one
party (the insurer), for a consideration that is
usually paid in money, either in a lump sum or at
different times during the continuance of the
risk, promises to make a certain payment,
usually of money, upon the destruction or injury
of “something” in which the other party (the
insured) has an interest. [Carale, The Philippine
Insurance Law (2014)]
A contract of insurance involves public interest.
Thus, the business is regulated by the state
through the requirement of license or certificate
of authority [White Gold Marine Services v.
Pioneer Insurance, G.R. No. 154514 (2005)].
Page 54 of 353
INSURANCE MERCANTILE LAW
A.1. DEFINITION
Thus, a contract of insurance is:
(1) A contract of indemnity;
(2) Wherein one undertakes for a consideration;
(3) To indemnify another against loss, damage,
or liability;
(4) Arising from an unknown or contingent
event.
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its happening
is not known. A past event may be a designated
event only in cases where it has happened
already but the parties do not know about it,
e.g., prior loss of a ship at sea (applicable only to
marine insurance). [De Leon, The Insurance
Code of the Philippines Annotated (2014)]
A.2. FORM
An Insurance policy is different from the contract
of insurance. The policy is the formal written
instrument evidencing the contract of insurance
entered into between the insured and the
insurer. On the other hand, there is no particular
form required for a contract of insurance.
Sec. 232. No policy, certificate or contract of
insurance shall be issued or delivered within
the Philippines unless in the form previously
approved by the Commissioner, and no
application form shall be used with, and no
rider, clause, warranty or endorsement shall be
attached to, printed or stamped upon such
policy, certificate or contract unless the form of
such application, rider, clause, warranty or
endorsement has been approved by the
Commissioner.
May an insurance contract be oral?
The Insurance Code has no provision requiring a
particular form for the validity of an insurance
contract. There are provisions, however, dealing
with the form of the policy and of riders and
endorsements. In our jurisdiction, the Supreme
Court has not made a categorical ruling against
UP LAW BOC INSURANCE
the validity of an oral contract of insurance.
[Carale (2014)]
A.3. INSURANCE AND GAMBLING
DISTINGUISHED
A contract of insurance is a contract of
indemnity and is not a wagering or gambling
contract. It is based on contingency, but it is not
a contract of chance for profit.
In a wagering contract, the parties contemplate
gain through mere chance; in a contract of
insurance, the parties seek to distribute possible
loss by reason of mischance [Carale (2014)]
B. DOING OR TRANSACTING INSURANCE
BUSINESS
Sec. 2(b). The term “doing an insurance
business or transacting an insurance business”
includes:
(1) Making or proposing to make, as insurer,
any insurance contract;
(2) Making or proposing to make, as surety,
any contract of suretyship as a vocation and
not as merely incidental to any other
legitimate business or activity of the surety;
(3) Doing any kind of business, including a
reinsurance business, specifically
recognized as constituting the doing of an
insurance business within the meaning of
the Insurance Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the
foregoing in a manner designed to evade
the provisions of the Insurance Code.
In the application of the provisions of this Code,
the fact that no profit is derived from the
making of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business.
Page 55 of 353
MERCANTILE LAW
General rule: An insurance business consists in
undertaking, for a consideration, to indemnify
another against loss, damage or liability arising
from an unknown or contingent event.
Exception: Those not formally designated as
insurance businesses but are deemed “doing or
transacting an insurance business” as listed in
Sec. 2(b).
In Philippine Health Care Providers Inc. v. CIR
[G.R. No. 167330 (2009)], the court applied the
“principal object and purpose test,” based on
American case law, when it ruled that Philippine
Health Care is not engaged in the business of
insurance.
The test determines whether the assumption of
risk and indemnification of loss are the principal
object and purpose of the organization or
whether they are merely incidental to its
business. If these are the principal objectives,
the business is that of insurance. But if they are
merely incidental and service is the principal
purpose, then the business is not insurance.
The court said that although risk is a primary
element of an insurance contract, it is not
necessarily true that risk alone is sufficient to
establish it because almost anyone who
undertakes a contractual obligation always
bears a certain degree of financial risk. [Carale
(2014)]
Thus, the Court clarified that:
(1) Contracts that a law firm enters into with
clients whereby in consideration of
periodical payments, the law firm promises
to represent such clients in all suits for or
against them are not insurance contracts but
are contracts for personal services;
(2) But, a contract by which a corporation, in
consideration of a stipulated amount, agrees
at its own expense to defend a physician
against all suits for damages for malpractice
is one of insurance, and the corporation will
UP LAW BOC
be deemed as engaged in the business of
insurance since the purpose of the contract
is to indemnify against loss and damage.
A Protection and Indemnity agreement is a form
of insurance against third party liability where
an association of ship owners in general band
together for the specific purpose of providing
insurance cover on a mutual basis against
liabilities incidental to ship owning that the
members incur against third parties. In
Pandiman Philippines v. Marine Manning
Management, [G.R. No. 143313 (2005)] the Court
considered a P&I agreement as an insurance
contract.
C. GOVERNING LAW
General Rule: The Insurance Code primarily
governs insurance contracts.
Exception: If there is a special law which
specifically governs (e.g., insurance contract
under R.A. 1161 or the Social Security Act), in
which case, the Insurance Code governs
subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are regulated
by the Civil Code.
Other special laws:
1. National Health Insurance Act of 2013 (RA
10606, amending RA 7875)
2. The Revised Government Service Insurance
Act of 1997 (RA 8291)
3. The Social Security Act (RA 8282)
4. The Property Insurance Law ( RA 656, as
amended by PD 245)
5. The Philippine Deposit Insurance Act of 1963
(RA 3591)
D. PARTIES TO AN INSURANCE
CONTRACT
Sec. 6 Every person, partnership, association, or
corporation duly authorized to transact
Page 56 of 353
INSURANCE MERCANTILE LAW
insurance business as elsewhere provided in this
code, may be an insurer.
Sec. 7 Anyone except a public enemy may be
insured.
There is no definition of what a “public enemy”
is, but a definition that is generally accepted and
in keeping with the nature of an insurance
contract is one where a person possesses the
nationality of the state which another is at war
[Carale (2014)]
E. BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
Bancassurance means the presentation and sale
to bank customers by an insurance company of
its insurance products within the premises of the
head office of such bank duly licensed by the
Bangko Sentral ng Pilipinas or any of its
branches under such rules and regulations
which the Commissioner and the Bangko Sentral
ng Pilipinas may promulgate (Sec. 375)
Requirements
As prescribed by the Commissioner and the
Bangko Sentral ng Pilipinas.
Note: To engage in bancassurance arrangement,
a bank is not required to have equity ownership
of the insurance company.
Form
No insurance product, whether life or non-life,
shall be issued or delivered pursuant to a
bancassurance arrangement, unless in the form
previously approved by the Commissioner (Sec.
375).
License to sell
Personnel tasked to present and sell insurance
products within the bank premises shall be duly
licensed by the Commissioner and shall be
subject to the rules and regulations of this Act
(Sec. 376)
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For purposes of determining the liability of a

F. PRE-NEED PLANS
RA 9829 (Pre- Need Code), Sec. 4(B). Pre-need
plans are contracts, agreements, deeds or
plans for the benefit of the planholders which
provide for the performance of future services,
payment of monetary considerations or
delivery of other benefits at the time of actual
need or agreed maturity date, as specified
therein, in exchange for cash or installment
amounts with or without interest or insurance
coverage and includes life, pension,
education, interment and other plans,
instruments, contracts or deeds.
Pre-need plans are contracts which provide for
the rendering of services or payment of money to
plan holders or their beneficiaries when the
actual need for such payment or rendition of
services accrues. [Carale (2014)]
They are governed by the Pre-Need Code (RA
9829). They are not considered as insurance
contracts because:
1) Pre-need plans can have insurance coverage,
implying that they are separate contracts
2) Pre-need plans do not involve unknown or
contingent events but events certain to happen
at a certain time.
health care provider to its members,
jurisprudence holds that a health care
agreement is in the nature of non-life
insurance, which is primarily a contract of
indemnity. Once the member incurs hospital,
medical or any other expense arising from
sickness, injury or other stipulated contingent,
the health care provider must pay for the same
to the extent agreed upon under the contract.
[Fortune Medicare Inc. v. David Amorin, G.R. No.
195872 (2014)]
In Mitsubishi Motors Philippines Salaried
Employees Union v. Mitsubishi Motors Philippines
Corp. [G.R. 175773(2013)], the Court held that
there can be no recovery from an insurance
clause under a CBA if there was already recovery
under a Health Care agreement since the court
considered the agreement as a non-life
insurance contract.
NOTE: In the earlier case of Philippine Health
Care Providers Inc. v. CIR [G.R. No. 167330
(2009)], the Court held that Health Maintenance
Organizations, which enter into Healthcare
agreements are not in the business of insurance

However, all Pre-need plans are under the

primary and exclusive power supervision and
regulation of the Insurance Commission [Sec. 5,
RA 9829]. In addition, the Insurance
Commissioner shall have the primary and
exclusive power to adjudicate any and all claims
involving pre-need plans. If the amount of
benefits does not exceed P100,000, which
decision shall be final and executory [Sec. 55, RA
9829].

G. HEALTH CARE AGREEMENTS

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II. ELEMENTS OF AN
INSURANCE CONTRACT
A. IN GENERAL
(1) Insurable interest - the insured possesses an
interest of some kind which the event
insured against may cause loss or damage
(2) Cause – event or peril insured against;
(3) Risk of loss or damage being assured by the
Insurer
(4) Consideration – premium payments paid by
the insured
(5) Risk-Distributing Scheme – distribute and
transfer by the insurer of risk of loss,
damage or liability among persons having
similar risks;
(6) A Meeting of Minds of the parties upon all
the foregoing essentials.
B. INSURABLE INTEREST
The insured must have an insurable interest in
the subject matter of the insurance contract
otherwise, it is void [Sec. 25]
Insurable interest is the interest which the law
requires the owner of an insurance policy to have
in the person or thing insured.
Insurable interest is not required in industrial life
insurance. [Sec. 235-237]
C. CAUSE AND RISK OF LOSS OR
DAMAGE
Cause refers to an event or peril insured against.
Peril is the contingent or unknown event which
may cause a loss. Its existence creates a risk and
its occurrence results in loss.
The event or peril insured against must be such
that its happening will:
(1) Damnify or cause loss to a person having
insurable interest; or
(2) Create liability against him. [Sec. 3]
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INSURANCE MERCANTILE LAW
D. CONSIDERATION
An insurance premium is the agreed price for
assuming and carrying the risk. It is the
consideration paid to the insurer for undertaking
to indemnify the insured against a designated
peril. It is based on probability of loss and extent
of liability. [43 Am. Jur. 2d 326]
Premiums are different from assessments. An
assessment, in insurance law, is a sum
specifically levied by mutual insurance
companies or associations, upon a fixed and
definite plan, to pay losses and expenses. [Sec.
403] While premiums are levied and paid to
meet anticipated loss, assessments are collected
to meet actual loss. [Vance on Insurance (1951)]
E. RISK-DISTRIBUTING SCHEME
Insurance contracts serve to distribute the risk of
economic loss, damage or liability among as
many as possible of those who are subject to the
same kind of risk. The payment of premiums by
all will inure to a general fund, out of which
payment will be made for anyone who has
suffered an economic loss. Hence, each member
contributes to a small degree toward
compensation for losses suffered by any
member of the group.
The unknown event may be past or future. Even
if the proximate cause of the loss is a fortuitous
event, the insurer may still be liable if it is the
event or peril insured against [De Leon (2014)]
F. MEETING OF THE MINDS
The two parties to a contract of insurance whose
minds need to meet regarding the essential
elements are:
The insurer or the party who assumes or accepts
the risk of loss and undertakes for consideration
to indemnify the insured or to pay a certain lump
sum on the happening of the event or peril
insured against, and
The insured or the person in whose favor the
contract is operative and whose loss is the
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occasion for the payment of the insurance

proceeds by the insurer. [De Leon (2014)]
III. CHARACTERISTICS
The insured is not always the person whom the
OF AN INSURANCE
proceeds are paid. Such person is the CONTRACT
beneficiary. [Vance (1951)]
A. IN GENERAL
An insurance contract is:
(1) Consensual;
(2) Voluntary;
(3) Aleatory;
(4) Executory and unilateral, but synallagmatic;
(5) Conditional;
(6) Contract of adhesion;
(7) Personal contract;
(8) Uberrimae fides contract (a contract of the
highest degree of good faith).

For specific kinds of insurance contracts:

(1) Contract of Indemnity (for non-life insurance)
(2) Property (for life insurance)

B. CONSENSUAL
It is perfected by the meeting of the minds of the
parties. There must be concurrence of offer and
acceptance. Unless otherwise stipulated, the
policy is not essential to the existence of the
contract. It merely evidences the terms and
conditions thereof [Campos, Insurance (1983)]

C. VOLUNTARY
General rule: Contracts of Insurance are not
compulsory and the parties are free to
incorporate such terms and conditions they may
deem convenient provided they are not contrary
to law, morals, good customs, public order, or
public policy. [De Leon (2014)]

Exceptions: Insurance contracts particularly

liability insurance, may be required by law in
certain instances:
(1) For motor vehicles [Compulsory Motor
Vehicle Liability Insurance, Secs 386-
402, Insurance Code);
(2) For employees [Compulsory Coverage in
State Insurance Fund, Articles 168-184,
Labor Code];
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(3) As a condition to granting a license to
conduct business or calling affecting the
public safety or welfare [De Leon (2014)].
(4) Social Insurance for members of the
Government Service Insurance System
(GSIS) and for the employees of the
private Sector covered by the Social
Security System (SSS).
D. ALEATORY
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to occur
at an indeterminate time [Article 2010, Civil
Code].
E. EXECUTORY AND UNILATERAL BUT
SYNALLAGMATIC
Once the insured pays the premium, the contract
already takes effect. After the payment of
premiums, the insurance imposes a unilateral
obligation on the insurer who promise to
indemnify in case of loss.
It is also synallagmatic and reciprocal such that
even if the contingent event or designated peril
does not occur, the insurer has still provided
protection against the risk for the period covered
by the insurance contract.
F. CONDITIONAL
It is conditional because the insurer incurs
liability only upon the happening of the event
insured against. However, many other conditions
are usually required (such as payments of
premium or performance of other act) as
precedent to the right of the insured to claim
benefit under the insurance.
G. CONTRACT OF ADHESION (FINE PRINT
RULE)
Insurance contracts are already presented to the
insured in its printed form on a “take it or leave
it” basis. The insured merely has to agree to its
terms. Such contracts of adhesion are valid.
However, ambiguity in such contracts shall be
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MERCANTILE LAW
interpreted liberally in favor of the insured and
strictly against the insurer who prepared the
same.
H. PERSONAL CONTRACT
The contract of insurance is basically between
the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent of
the insurer (Secs 20, 58, and 83).
Property insurance is personal in the sense that
it is the damage to the personal interest not the
property that is being reimbursed.
I. UBERRIMAE FIDES CONTRACT
Each party is required to deal with each other in
utmost good faith and disclose conditions
affecting the risk, of which he is aware, or any
material fact which the applicant knows and
those which he ought to know. Violation of this
duty gives the aggrieved party the right to
rescind the contract. Where the aggrieved party
is the insured, the bad faith of the insurer will
preclude it from denying liability on the policy
based on breach of warranty [Campos (1983)].
J. FOR SPECIFIC KINDS OF INSURANCE
CONTRACTS
FOR NON-LIFE INSURANCE
Contract of Indemnity
The insured who has insurable interest over the
property is only entitled to recover the amount of
actual loss sustained. The burden is upon him to
establish the amount of such loss.
General rule: Only non-life insurance or property
insurance contracts are contracts of indemnity.
Life insurance contracts are not contracts of
indemnity because the value of a life is
immeasurable.
Exception: Where the basis of the insurable
interest of the policy owner on the life of the
insured is a commercial relationship (e.g.,
UP LAW BOC
creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then such
contract is an indemnity contract.
FOR LIFE INSURANCE
Property
Life insurance policies, unlike property
insurance, are generally assignable or
transferrable (Sec. 81) as they are in the nature of
property.
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IV. CLASSES
A. MARINE INSURANCE
A.1. DEFINITION
Marine insurance is a type of transportation
insurance which is concerned with the perils of
property in, or incidental to, transit as opposed
to property perils at a generally fixed location.
As presently worded, marine insurance covers
loss or damage to property, and even persons, in
connection with all risks or perils of navigation.
In addition, marine insurance includes “marine
protection and indemnity insurance against
liability incidental to ownership, operation,
maintenance or construction of vessels and
facilities therefore. [Carale (2014)]
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Sec. 101. Marine insurance includes: (2) Marine protection and indemnity insurance,
(1) Insurance against loss of or damage to: meaning insurance against, or against legal
(a) Vessels, craft, aircraft, vehicles, goods, liability of the insured for loss, damage, or
freights, cargoes, merchandise, effects, expense incident to ownership, operation,
disbursements, profits, moneys, chartering, maintenance, use, repair, or
securities, choses in action, instruments construction of any vessel, craft or
of debts, valuable papers, bottomry, instrumentality in use of ocean or inland
and respondentia interests and all other waterways, including liability of the insured
kinds of property and interests therein, for personal injury, illness or death or for
in respect to, appertaining to or in loss of or damage to the property of
connection with any and all risks or another person
perils of navigation, transit or
transportation, or while being
assembled, packed, crated, baled,
compressed or similarly prepared for
shipment or while awaiting shipment,
or during any delays, storage,
transhipment, or reshipment incident
thereto, including war risks, marine
builder’s risks, and all personal property
floater risks;
(b) Person or property in connection with or
appertaining to a marine, inland
marine, transit or transportation
insurance, including liability for loss of
or damage arising out of or in
connection with the construction,
repair, operation, maintenance or use of
the subject matter of such insurance
(but not including life insurance or
surety bonds nor insurance against loss
by reason of bodily injury to any person
arising out of ownership, maintenance,
or use of automobiles);
(c) Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise; and
(d) Bridges, tunnels and other
instrumentalities of transportation and
communication (excluding buildings,
their furniture and furnishings, fixed
contents and supplies held in storage);
piers, wharves, docks and slips, and
other aids to navigation and
transportation, including dry docks and
marine railways, dams and appurtenant
facilities for the control of waterways.
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A.2. DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against risk
connected with navigation, to which a ship,
cargo, freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a fixed
period of time. Its scope includes:
(a) Ships or hulls;
(b) Goods or cargoes;
(c) Earnings such as freight, passage
money, commissions, or profits; and
(d) Liability (protection and indemnity
insurance).
(2) Inland marine insurance covers the land or
over the land transportation perils of
property shipped by railroads, motor trucks,
airplanes, and other means of
transportation. It also covers risks of lake,
river or other inland waterway transportation
and other waterborne perils outside those
covered by ocean marine insurance.
A.3. BOTTOMRY AND RESPONDENTIA
DISTINGUISHED
A Bottomry loan is a loan that is obtained for the
value of the vessel on a voyage and the lender is
repaid only if the vessel subject of the loan
arrives safely at its destination. The insurable
interest of a ship owner on its bottomed boat is
the difference between the amount of the loan
and the value of the boat. Thus, if the amount of
the loan does not cover the total value of the
boat, the owner can still insure the boat.
A Respondentia loan is a loan that is obtained as
security for the value of the cargo to be
transported and the lender is repaid only if the
cargo arrives safely at its destination.
A.4. RISKS
A.4.A. PERILS OF THE SEA
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
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standard “perils of the sea” or “perils of
navigation” which includes casualties arising
from the violent action of the elements and does
not cover ordinary wear and tear or other
damage usually incident to the voyage. The
mere fact that an injury is due to violence of
some marine force does not necessarily bring
it within the protection of the policy if such
violence was not unusual or unexpected.
General Rule: The term perils of the sea extends
only to losses caused by sea damage, or by the
violence of the elements, and does not embrace
all losses happening at sea. They insure against
losses from extraordinary occurrences only. It
thus includes only such losses as are of
extraordinary nature or arise from some
overwhelming power which cannot be guarded
against by the ordinary exertion of human skill
or prudence, as distinguished from the ordinary
wear and tear of the voyage and from injuries
suffered by the vessel in consequence of her not
being unseaworthy [Roque v. IAC, G.R. No. L-
66935, (1985)]
The phrase also extends to barratry which refers
to the willful and intentional act on the part of
the master or the crew, in pursuance of some
unlawful or fraudulent purpose, without the
consent of the owner, and to the prejudice of his
interest (e.g., burning the ship, unlawfully selling
the cargo).
No honest error of judgment or mere negligence,
unless criminally gross, can be considered as
barratry [Roque v. IAC, (1985)]
Exception: The exception to a “perils of the sea”
condition for insurer liability is when there is an
“all-risk policy” [Malayan Insurance Corp v. CA,
G.R. No. 119599 (1997)]
A.4.B. PERILS OF THE SHIP
Perils of the ship are those which cause a loss
which in the ordinary course of events, results:
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(1) From the ordinary, natural and inevitable
action of the sea;
(2) From ordinary wear and tear of the ship; and
(3) From the negligent failure of the ship’s
owner to provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions. [De Leon (2014)]
is caused by a risk that is excluded [Filipino
Merchants Ins. Co. v. CA, G.R. No. 85141(1989)]
A.5. LOSS
Loss may be total or partial.
Total loss may be actual or constructive.

Perils of the Sea Perils of the Ship Sec. 132. An actual total loss is caused by:
(a) A total destruction of the thing insured;
- Covers those - Covers losses (b) The irretrievable loss of the thing by
casualties due to resulting from sinking, or by being broken up;
unusual violence ordinary wear and
(c) Any damage to the thing which renders
or extraordinary tear, or other
it valueless to the owner for the purpose for
action of wind damage incident
which he held it;
and wave, or to to the voyage
other (d) Any other event which effectively
extraordinary - Covers losses deprives the owner of the possession, at the
causes connected which result from port of destination of the thing insured.
with navigation the negligent
failure of the Sec. 133. A constructive total loss is one
- Covers losses that ship’s owner to which gives to a person insured a right to
are of an provide the vessel abandon, under Sec. 141.
extraordinary with proper
nature, or arise equipment to Sec. 134. An actual loss may be presumed
from some convey the cargo from the continued absence of a ship
overwhelming under ordinary without being heard of. The length of time
power, which conditions which is sufficient to raise this presumption
cannot be depends on the circumstances of the case.
guarded against
by the ordinary
exertion of
human skill and
prudence (Roque
v IAC)
Actual total loss exists when the subject matter
of the insurance is wholly destroyed or lost or
when it is so damaged as no longer to exist in its
A.4.C. RULE ON RISKS COVERED original character. [Vance (1951)]

General Rule: In the absence of stipulation, the
risks insured against are only perils of the sea [Go
Tiaco y Hermanos v. Union Ins. Society of Canton,
G.R. No. 13983(1919)]
Exception: However, in an all risk policy, all risks
are covered unless expressly excepted. The
burden rests on the insurer to prove that the loss
Constructive total loss or “technical total loss” is
one in which the loss, although not actually
total, is of such character that the insured is
entitled, if he thinks fit, to treat it as total by
abandonment. [45 CJS 1150]
As to when a constructive total loss exists, three
rules exist:

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(1) English rule: there is constructive total loss
when the subject matter of the insurance,
while still existent in specie, is so damaged
as not to be worth, when repaired, the cost
of the repairs;
(2) American rule: there is constructive total loss
when it is so damaged that the costs of
repairs would exceed one-half of the value of
the thing as acquired; also known as the
“fifty percent rule;”
(3) Philippine rule: the insured may not abandon
the thing insured unless the loss or damage
is more than ¾ of its value. [De Leon (2014)]
A person insured by a contract of marine
insurance may abandon the thing insured and
recover for a total loss thereof, when the cause
of the loss is a peril insured against:
(1) If more than ¾ thereof in value is actually
lost, or would have to be expended to
recover it from the peril;
(2) If it is injured to such an extent as to reduce
its value more than ¾;
(3) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an
expense to the insured of more than ¾ the
value of the thing abandoned or a risk which
a prudent man would not take under the
circumstances; or
(4) If the thing insured (cargo or freightage) and
the voyage cannot be performed, nor
another ship procured by the master, within
a reasonable time and with reasonable
diligence, to forward the cargo, without
incurring either an expense to the insured of
more than ¾ the value of the thing
abandoned or a risk which a prudent man
would not take under the circumstances.
Note: Freightage cannot in any case be
abandoned unless the ship is also abandoned.
A.6. ABANDONMENT
A.6.A. DEFINITION
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Sec. 140. Abandonment, in marine insurance, is
the act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest in
the thing insured.
A.6.B. CONDITIONS
Aside from the requirement under Sec 141
already mentioned:
(1) An abandonment must be neither partial nor
conditional [Sec 142];
(2) An abandonment must be made within a
reasonable time after receipt of reliable
information of the loss, but where the
information is of a doubtful character, the
insured is entitled to a reasonable time to
make inquiry [Sec 142];
(3) Abandonment is made by giving notice
thereof to the insurer, which may be done
orally, or in writing: Provided, That if the
notice be done orally, a written notice of
such abandonment shall be submitted
within seven days from such oral notice [Sec
145];
(4) Abandonment must be absolute and total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves incorrect,
or the thing insured was so far restored when
the abandonment was made that there was in
fact no total loss, the abandonment becomes
ineffectual.
A.6.C. CHARACTERISTICS
A valid abandonment has the following
characteristics:
(1) There must be an actual relinquishment by
the person insured of his interest in the thing
insured;
(2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
conditional [Sec. 142];
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(4) It must be made within a reasonable time
after receipt of reliable information of the
loss [Sec. 143];
(5) It must be factual [Sec. 144];
(6) It must be made by giving notice thereof to
the insurer which may be done orally or in
writing [Sec. 145]; and
(7) The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment [Sec. 146].
A.6.D. EFFECTS
(1) An abandonment is equivalent to a transfer
by the insured of his interest to the insurer,
with all the chances of recovery and
indemnity [Sec 148];
(2) If a marine insurer pays for a loss as if it were
an actual total loss, he is entitled to
whatever may remain of the thing insured, or
its proceeds or salvage, as if there had been
a formal abandonment [Sec 149];
(3) Upon an abandonment, acts done in good
faith by those who were agents of the
insured in respect to the thing insured,
subsequent to the loss, are at the risk of the
insurer, and for his benefit [Sec 150].
A.7. AVERAGE
An Average is defined as the extraordinary or
accidental expense incurred during the voyage
for the preservation of the vessel, cargo or both
and all the damages to the vessel and cargo
from the time it is loaded and the voyage
commenced until it ends and the cargo is
unloaded. [Art. 806, Code of Commerce]
There are two kinds of averages:
(1) Gross or general averages; and
(2) Simple or particular averages.
Gross averages include damages and expenses
which are deliberately caused by the master of
the vessel or upon his authority, in order to save
the vessel, her cargo, or both at the same time
from a real and known risk. [Art. 811, Code of
Commerce] This must be borne equally by all of
the interests concerned in the venture.
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To claim general average contributions, the
requisites are:
(1) There must be a common danger to the
vessel or cargo;
(2) Part of the vessel or cargo was sacrificed
deliberately;
(3) The sacrifice must be for the common safety
or for the benefit of all;
(4) It must be made by the master or upon his
authority;
(5) It must not be caused by any fault of the
party asking contribution;
(6) It must be successful (i.e., resulted in the
saving of the vessel and/or cargo)
(7) It must be necessary. [Vance (1951),
Magsaysay v Agan, G.R. No. L-6393 (1955),
Intl. Harvester v Hamburg-American Line,
G.R. No. L-11515 (1918)]
Particular averages include damages and
expenses caused to the vessel or her cargo,
which have not inured to the common benefit
and profit of all the persons interested in the
vessel and her cargo. [Art. 809, Code of
Commerce] A particular average loss is suffered
by and borne alone by the owner of the cargo or
of the vessel, as the case must be.[De Leon
(2014)]
A.8. WARRANTIES
Marine Insurance is unique in that it has certain
implied warranties
(1) Implied Warranty of Seaworthiness. - In every
marine insurance upon a ship or freight, or
freightage, or upon any thing which is the
subject of marine insurance, a warranty is
implied that the ship is seaworthy. [Sec. 115]
A vessel is seaworthy if:
(a) It is proper laden
(b) It is provided with a competent master
(c) It is provided with a sufficient number of
competent officers and seamen
(d) It is provided with the requisite
appurtenances and equipment [Sec.118]
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Where different portions of the voyage
contemplated by a policy differ in respect to
the things requisite to make the ship
seaworthy therefor, a warranty of
seaworthiness is complied with if, at the
commencement of each portion, the ship is
seaworthy with reference to that portion
[Sec. 119]
(2) Implied Warranty Against Improper deviation
– A Deviation is a departure from the course
of the voyage insured, or an unreasonable
delay in pursuing the voyage or the
commencement of an entirely different
voyage [Sec.125]
Deviation is proper:
(a) When caused by circumstances over
which neither the master nor the owner of
the ship has any control;
(b) When necessary to comply with a
warranty, or to avoid a peril, whether or not
the peril is insured against;
(c) When made in good faith, and upon
reasonable grounds of belief in its necessity
to avoid a peril; or
(e) When made in good faith, for the
purpose of saving human life or relieving
another vessel in distress [Sec. 126]
(3) Implied Warranty of Proper documentation -
Where the nationality or neutrality of a ship
or cargo is expressly warranted, it is implied
that the ship will carry the requisite
documents to show such nationality or
neutrality and that it will not carry any
documents which cast reasonable suspicion
thereon [Sec. 122]
B. FIRE INSURANCE
B.1. DEFINITION
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Sec. 169. Fire insurance includes insurance
against loss by fire, lightning, windstorm,
tornado or earthquake and other allied risks,
when such risks are covered by extension to fire
insurance policies or under separate policies.
A fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss of,
or damage to, a property caused by hostile fire.
Fire or other so-called “allied risks” enumerated
in Sec. 169 must be the proximate cause of the
damage or loss.
Fire is oxidation which is so rapid as to produce
either a flame or a glow. Spontaneous
combustion is usually rapid oxidation. Fire is
always caused by combustion, but combustion
does not always cause fire. [Western Woolen
Mills Co. v Northern Assurance Co., 139 Fed 637
(1905)]
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not prove
the existence of fire.
Fire cannot be considered a natural disaster or
calamity since it almost always arises from some
acts of man or by human means. It cannot be an
act of God unless caused by lightning or a
natural disaster or casualty not attributable to
human agency [Phil. Home Assurance Corp. v.
CA, G.R. No. 106999 (1996)]
B.2. RISKS
A Hostile fire is one that escapes from the place
where it was intended to burn and ought to be,
or one which remains completely within its
proper place but because of the unsuitable
materials used to light it, becomes inherently
dangerous and uncontrollable. This kind of fire
will make the insurer liable.[De Leon (2014)]
UP LAW BOC INSURANCE
A Friendly fire is one that burns in a place where
it is intended to burn and ought to be like fire
burning in a stove or a lamp. [De Leon (2014)]
Rule: The risk assumed by the insurer is the loss
and damage caused by hostile fire and not
friendly fire.
B.3. ALTERATIONS IN USE OR CONDITION
Sec. 170. An alteration in the use or condition of
a thing insured from that to which it is limited
by the policy made without the consent of the
insurer, by means within the control of the
insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance
Sec. 171. An alteration in the use or condition of
a thing insured from that to which it is limited
by the policy, which does not increase the risk,
does not affect a contract of fire insurance.
Sec. 172. A contract of fire insurance is no
affected by any act of the insured subsequent to
the execution of the policy, which does not
violate its provisions, even though it increases
the risk and is the cause of the loss.
Thus, in order that the insurer may rescind a
contract of fire insurance for any alteration made
in the use or condition of the thing insured, the
following requisites must be present:
(1) The use or condition of the thing is
specifically limited or stipulated in the
policy;
(2) Such use or condition as limited by the
policy is altered;
(3) The alteration is made without the consent
of the insurer;
(4) The alteration is made by means within the
control of the insured; and
(5) The alteration increased the risk. [De Leon
(2014)]
Every contract of insurance is made with
reference to the conditions surrounding the
subject matter of the risk [25 CJS 129]. Thus,
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MERCANTILE LAW
there is an implied promise or undertaking on
the part of the insured that he will not change
the premises or the character of the business
carried there so as to increase the risk of loss by
fire [44 AmJur 2d 138].
The rule on alteration was strictly applied in the
case of Malayan Insurance Co, Ltd v. Pap Co, Ltd
[G.R. No. 200784 (2013)]: The court held that
transferring machinery to another location,
despite a provision in the policy stating that the
machine cannot be transferred without the
consent of the insurer is considered an alteration
in the condition and location of the thing
insured. Hence, Malayan was not liable to Pap.
B.4. MEASURE OF INDEMNITY
(1) In an open policy, only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury will
be paid;
(2) In a valued policy, the parties are bound by
the valuation, in the absence of fraud or
mistake, similar to marine insurance. [Sec.
173]
If there is a valuation, the effect shall be similar
to a marine insurance policy wherein the
valuation is conclusive between the parties in
adjusting the loss [Sec. 158]
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained and
the burden of proof is upon him to establish the
amount of such loss by preponderance of
evidence.
Where the face value of the policy is less than
the agreed valuation, then even in case of total
loss, the insured can only recover up to the
policy’s face value, which is always the
maximum limit of the insurer’s liability [Tan
Chuco v. Yorkshire Fire & Life Ins. Co.G.R. No. L-
5069(1909)]
UP LAW BOC INSURANCE
In an open policy, the actual loss, as determined,
will represent the total indemnity due the
insured except only that the total indemnity
shall not exceed the total value of the policy
[Devt. Ins. Corp. v. IAC, G.R. No. 71360 (1986)]
C. CASUALTY INSURANCE
C.1. DEFINITION
Sec. 176. Casualty insurance is insurance
covering loss or liability arising from accident or
mishap, excluding certain types of loss which
by law or custom are considered as falling
exclusively within the scope of other types of
insurance such as fire or marine. It includes, but
is not limited to, employer’s liability insurance,
motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance,
personal accident and health insurance as
written by non-life insurance companies, and
other substantially similar kinds of insurance.
Casualty insurance includes all forms of
insurance against loss or liability arising from
accident or mishap excluding certain types of
loss or liability which are not within the scope of
other types of insurance such as fire, marine,
suretyship and life. It includes, but is not limited
to, employer’s liability insurance, workmen’s
compensation insurance, public liability
insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft
insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar kinds
of insurance (e.g., robbery and theft insurance).
It is governed by the general provisions
applicable to all types of insurance plus
stipulations in the insurance contract [Fortune
Insurance & Surety Co v. CA G.R. No. 115278
(1995)]
C.2. INTENTIONAL AND ACCIDENTAL INJURY
DISTINGUISHED
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MERCANTILE LAW
“Intentional” implies the exercise of the
reasoning faculties, consciousness and volition.
Where a provision of the policy excludes
intentional injury, it is the intention of the person
inflicting the injury that is controlling. If the
injuries suffered by the insured clearly resulted
from the intentional act of the third person, the
insurer is relieved from liability as stipulated.
“Accidental” means that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual and
unforeseen. The terms do not, without
qualification, exclude events resulting in
damage due to fault, recklessness or negligence
of third parties. The concept is not necessarily
synonymous with “no fault.” It may be utilized
simply to distinguish intentional or malicious
acts from negligent or careless acts of man.
C.3. DIVISIONS
Casualty insurance has two general divisions:
liability and indemnity insurance.
C.3.A. LIABILITY INSURANCE
Under policies of this type, the insurer assumes
the obligation to pay the third party in whose
favor the liability of the insured arises. The
liability of the insurer attaches as soon as the
liability of the insured to the third party is
established. It covers liability incurred from
quasi-delict or criminal negligence but cannot
cover deliberate criminal acts. [De Leon (2014)]
C.3.B. INDEMNITY INSURANCE
Under this kind of insurance, no action will lie
against the insurer unless brought by the
insured for loss actually sustained and paid by
him. Liability of the insurer attaches only after
the insured has paid his liability to the third
party. [De Leon (2014)]
C.4. NO ACTION CLAUSE
UP LAW BOC INSURANCE MERCANTILE LAW

A no action clause is a requirement in a policy of

liability insurance which provides that a suit
must first be instituted and a final judgment be
first obtained against the insured; that only
thereafter can the person injured recover on the
policy [Guingon v. Del Monte, G.R. No. L-
22042(1967)]
The contract of a surety is evidenced by a
document called “surety bond” which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an “indemnity agreement” in favor of
the insurer. [De Leon (2014)]

But, the no-action clause cannot prevail over the
Rules of Court provisions which are aimed at
avoiding multiplicity of suits. Parties (the insured
and the insurer) may be joined as defendants in
a case commenced by the third party claiming
under a liability insurance, as the right to relief
in respect to the same transactions is alleged to
exist [See Sec 5, Rule 2 and Sec 6, Rule 3, 1997
Rules of Civil Procedure]
D. SURETYSHIP
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
The liability of the surety or sureties under a
bond is joint and several, or solidary[Sec. 178].
This means that upon the default of the
principal obligor, the surety becomes primarily
liable. Unlike a guarantor, a surety is not entitled
to the benefit of exhaustion of the principal
obligor’s assets and assumes a regular party to
the undertaking.

It is limited or fixed to the amount of the bond.

Sec. 177. A contract of suretyship is an
agreement whereby a party called the surety
What is unique to a contract of suretyship is that
guarantees the performance by another party
when the obligee accepts the bond, the bond
called the principal or obligor of an obligation
becomes valid and enforceable whether or not
or undertaking in favor of a third party called
the premium has been paid by the obligor unlike
the obligee. It includes official recognizances,
in an insurance contract where payment of
stipulations, bonds or undertakings issued by
premium is necessary for the contract to be
any company by virtue of and under the
valid. If the obligee has not yet accepted, then
provisions of Act. No 536, as amended by 2206.
payment of premium is still necessary for the
contract of suretyship to be valid.

E. LIFE INSURANCE
E.1. DEFINITION
A suretyship is an agreement whereby a surety
guarantees the performance or undertakes to
answer, under specified terms and conditions,
for the debt, default or miscarriage of the
principal or obligor, such as failure to perform,
or breach of trust, negligence and the like, in
favor of a third party.

It shall be deemed as insurance contract if the

surety’s main business is that of suretyship, and
not where the contract is merely incidental to
any other legitimate business or activity of the
surety.

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UP LAW BOC
Sec. 181. Life insurance is insurance on human
lives and insurance appertaining thereto or
connected therewith.
Every contract or undertaking for the payment
of annuities including contracts for the
payment of lump sums under a retirement
program where a life insurance company
manages or acts as a trustee for such
retirement program shall be considered a life
insurance contract for purposes of the
Insurance Code.
Sec. 182. An insurance upon life may be made
payable on the death of the person, or on his
surviving a specified period, or otherwise
contingently on the continuance or cessation of
life.
Every contract or pledge for the payment of
endowments or annuities shall be considered a
life insurance contract for purposes of the
Insurance Code.
E.2. TYPES
E.2.A. INDIVIDUAL LIFE
Insurance on human lives and insurance
appertaining thereto or connected therewith. It
may be made payable on the death of the
person, or after his surviving a specified period
(as an annuity or endowment), or otherwise
contingently on the continuation or cessation of
life.
E.2.B. GROUP LIFE
It is a blanket policy covering a number of
individuals who are usually a cohesive group
(e.g., employees of a company) and subjected to
a common risk. No medical examination is
usually required of each person insured (in
contrast to individual life insurance).
Group insurance is a single insurance contract
that provides coverage for many individuals. The
employer-policy holder is the agent of the
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INSURANCE MERCANTILE LAW
insurer in collecting the premium. [Pineda v. CA,
G.R. No. 105562 (1993)]
Typically, the policy owner is an employer and
the policy covers the employees or members of
the group, with one master contract kept by the
employer. Where the employee is required to
pay a portion of the premium, the arrangement
is called a “contributory plan”, wherein his share
is deducted from his wages [Carale (2014)]
E.2.C. INDUSTRIAL LIFE
Sec. 235. The term Industrial life insurance as
used in this code shall mean that form of life
insurance under which the premiums are
payable either monthly or oftener, if the face
amount of insurance provided in any policy is
not more than 500 times that of the current
statutory minimum daily wage in the City of
Manila, and if the words industrial policy are
printed upon the policy as part of the
descriptive matter.
Industrial life insurance refers to an insurance
policy which provides insurance coverage to
industrial workers or people who are unable to
afford insurance for bigger amounts.
Unlike an ordinary life insurance policy, this kind
of insurance shall not lapse after non-payment
of premiums in 3 months after the expiration of
the grace period, if such non-payment is due to
the failure of the company to send its
representatives to the insured to collect
premium. (Sec. 235 & Carale [2014])
E.2.D. MICROINSURANCE
UP LAW BOC
Sec. 187. Microinsurance is a financial product
or service that meets the risk protection needs
of the poor, where:
The amount of contributions, premiums, fees or
charges, computed on a daily basis, does not
exceed 7.5% of the current daily minimum
wage rate for nonagricultural workers in Metro
Manila; and
The maximum sum of guaranteed benefits is
not more than 1,000 times of the said current
daily minimum wage rate.
Sec. 188. No insurance company or mutual
benefit association shall engage in the business
of Microinsurance unless it possesses all the
requirements as may be prescribed by the
Commissioner, who shall issue such rules and
regulations governing microinsurance.
E.3. EXAMPLES OF LIFE INSURANCE
POLICIES
(1) Ordinary or whole life policy, where the insurer
agrees to pay the face value of the policy
upon the death of the insured;
Distinct variations of Whole Life Policy:
(A) Ordinary Life Insurance – Premiums are
paid throughout the lifetime of the
person insured or until the person
reaches a predetermined specified age
at which point the coverage continues
without the payment of additional
premiums.
(B) Limited Payment Life Insurance –
Premiums are paid only during a
specified number of years or until a
specified event occurs.
(C) Single Premium Life Insurance – the
coverage is acquired by the payment of a
single premium.
(D) Joint Life Insurance – coverage is
payable upon the first death among two
or more insured (normally purchased by
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INSURANCE MERCANTILE LAW
business partners or spouse) and paid to
the survivor.
(E) Universal Life Insurance – emphasizes
the separation of the portion of the
premium that is used to cover the
insurance protection from the portion of
the premium allocated to an investment.
(F) Variable Life Insurance – some amount
of death benefit provided by a variable
life insurance policy is guaranteed by the
insurer, but the total death benefit and
the cash value of the insurance before
death depend on the investment
performance of that portion of the
premium which is allocated to a
separate fund.
(G) Pure endowment policy –where the
insurer pays the insured if the insured
survives a specified period. If the insured
dies within the period, the insurer is
released from liability and unless the
contract otherwise provides, need not
reimburse any part of the premiums
paid;
(H) Endowment policy – where the insured is
paid the face value of the policy if he
outlives the designated period. If he dies
within said period, the insurer pays the
proceeds to the beneficiary. This is a
combination of term policy and pure
endowment policy.
(2) Term Life Insurance,which provides for the
payment of a specified amount if death
occurs within the time period designated in
the policy, usually for periods of one to five
years.
(3) Modified Life Insurance, which is a policy that
combines terms and whole life insurance
into a single insurance policy. Premiums
paid by the insured are substantially less
during the first few years then later on
increases during the remaining term of the
policy.
(4) Group Life Insurance, which is a type of life
insurance in which a single contract covers
an entire group of people. [Carale (2014)]
UP LAW BOC
E.4. RISKS
E.4.A. DEATH OR SURVIVAL
Life insurance may be made payable on the
death of the person, or on his surviving a
specified period, or otherwise contingently on
the continuation or cessation of life [Campos
(1983)]
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
E.4.B. SUICIDE
Insurer is liable in any of the following cases:
(1) If committed after two years from the date of
the policy’s issue or its last reinstatement.
Unless the policy provides for a shorter
period. Any stipulation extending the 2-year
period is void;
(2) If committed in a state of insanity regardless
of the date of the commission unless suicide
is an excepted peril;[Sec. 183]
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer who seeks to avoid liability under a life
policy excepting it from coverage [Campos
(1983)]
E.4.C. DEATH AT THE HANDS OF THE LAW
Death at the hands of the law (e.g., legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance (1951)]
E.4.D. KILLING BY THE BENEFICIARY
General rule: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal accomplice or
accessory in willfully bringing about the death of
the insured. In such event, the other
beneficiaries so named shall receive their share
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INSURANCE MERCANTILE LAW
and divide among them the forfeited share of
the “guilty” beneficiary. In the absence of other
beneficiaries, proceeds shall be paid according
to the policy contract, and if silent, it shall be
paid to the estate of the insured[Sec. 12]
Exceptions:
(1) Accidental killing;
(2) Self-defense;
(3) Insanity of the beneficiary at the time he
killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is necessary
before his interest in the insurance policy is
forfeited in favor of the others indicated in Sec
12.
E.4.E. ACCIDENTAL DEATH
The terms “accident” and “accidental means”
have yet to acquire a technical meaning. In
general they have been taken to mean that they
happen by chance or fortuitously, without
intention and design and are unexpected,
unusual, and unforeseen. Where the death or
injury is not the natural or probable result of the
insured’s voluntary act, or if something
unforeseen occurs in the doing of the act which
produces the injury, the resulting death is within
the protection of the policies insuring against
death or injury from accident [Carale (2014)]
F. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
UP LAW BOC
Sec. 387. It shall be unlawful for any land
transportation operator or owner of a motor
vehicle to operate the same in the public
highways unless there is in force in relation
thereto a policy of insurance or guaranty in cash
or surety bond issued in accordance with the
provisions of this chapter to indemnity the
death, bodily injury and/or damage to property
of a third-party or passenger, as the case may
be, arising from the use thereof.
Compulsory motor vehicle liability insurance is a
policy of insurance or guaranty in cash or surety
bond to indemnify the death, bodily injury,
and/or damage to property of a third-party or
passenger arising from the use of a motor
vehicle.
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Sec. 390]. It is
the only type of compulsory insurance provided
for under the Insurance Code.
It is a species of compulsory insurance that
provides for protection coverage that will answer
for legal liability for losses and damages for
bodily injuries or property damage that may be
sustained by another arising from the use and
operation of motor vehicle by its owner. It
applies to all vehicles whether public or private
vehicles.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and the
provision making it merely an indemnity
insurance contract cannot have any effect
[Campos (1983)]
The insurer’s liability is direct and primary so the
insurer need not wait for final judgment in the
criminal case to be liable. The purpose is to give
immediate financial assistance to victims of
motor vehicle accidents and/or their
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INSURANCE MERCANTILE LAW
dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for the
accident sustained [Shafer v. Judge, RTC
Olongapo, G.R. No. 78848 (1988)]
The claimants/victims may be a passenger or a
third party. The insured may be the party at fault
as against claims of third parties (third party
liability) or the victim of the contingent event.
The following clauses are relevant to compulsory
motor vehicle liability insurance:
(1) Authorized driver clause is a stipulation in a
motor vehicle insurance policy which
provides that the driver, other than the
insured owner, must be duly licensed to
drive the motor vehicle, otherwise the
insurer is excused from liability;
(2) Theft clause is a stipulation including theft as
one of the risks insured against. If there is
such a provision and the vehicle was
unlawfully taken, the insurer is liable under
the theft clause and the authorized driver
clause does not apply. The insured can
recover even if the thief has no driver’s
license.
(3) No Fault Clause is a provision required in
every compulsory motor vehicle liability
insurance regarding claims for death or
injury to a passenger or third party on a
liability insurance policy covering the
vehicle.
Any claim for death or injury to any passenger or
third party shall be paid without the necessity of
proving fault or negligence of any kind, provided
the total indemnity in respect of any person shall
not exceed P15,000.
The claim shall be made against only one motor
vehicle. It shall lie against the insurer of the
vehicle in which the occupant is riding, and no
other. The claimant is not free to choose from
which insurer he will claim the no fault
indemnity. [Perla Compania de Seguros v.
Ancheta, G.R. No. L-49699 (1988)]
UP LAW BOC INSURANCE
V. INSURABLE
INTEREST
A. IN GENERAL
In general, an insurable interest is that interest
which a person is deemed to have in the subject
matter insured, where he has a relation or
connection with or concern in it, such that the
person will derive pecuniary benefit or
advantage from the preservation of the subject
matter insured and will suffer pecuniary loss or
damage from its destruction, termination, or
injury by the happening of the event insured
against. The existence of an insurable interest
gives a person the legal right to insure the
subject matter of the policy of insurance [Lalican
v. Insular Life Ins., G.R. No. 183526 (2009)]
An insurable interest is one of the most basic and
essential requirements in an insurance contract.
As such, it may NOT be waived by stipulation.
Absence of insurable interest renders the
insurance contract void. [See Sec. 25]
The insurable interest need not always be
pecuniary in nature (such as by insuring the life
of a person because the purpose is not to
indemnify but to act as an investment or savings
instrument) [Lucena v Crawford, 2Bos & PNR
269 (1806)]. But, the general rule is that it must
be capable in pecuniary estimation because the
purpose of insurance is to indemnify. It would be
difficult to measure if the benefit derived or the
loss incurred is not capable of pecuniary
estimation.
Rationale:
(1) As a deterrence to the insured. A policy issued
to a person without interest is a mere wager
policy or contract and is void for illegality. A
wager policy is obviously contrary to public
interest. [De Leon (2014)]
There is a moral hazard in removing
insurable interest as a requirement for the
validity of an insurance policy – It allows the
insured to have an interest in the destruction
Page 75 of 353
MERCANTILE LAW
of the subject matter rather than in its
preservation.
(2) As a measure of limit of recovery. The
insurable interest is the measure of the
upper limit of his provable loss under the
contract. Sound public policy requires that
insurance should not provide the insured
means of making a net profit from the
happening of the event insured against. [De
Leon (2014)]
A.1. WHEN INSURABLE INTEREST SHOULD
EXIST
Policy Insurable interest required
Inceptio Intervenin Occurrenc
n g period e of loss
Life or
✓
health
Property ✓ ✓
For Life Insurance: Insurable interest over
life/health must exist at the time of the
inception of the contract but may be lost after.
[Sec. 19]
For Property Insurance: Insurable interest must
exist at the time of the inception of the contract
and at the occurrence of the loss. But it need not
exist during the intervening period or from the
time between when the policy takes effect and
the loss occurs. The alienation of insured
property will not defeat a recovery if the insured
has subsequently reacquired the property and
possesses an insurable interest at the time of
loss [Sec. 19 and Womble v. Dubuque Fire
&Marine Ins. Co.310 Mass. 142, 144-145 (1941)]
A.2. CHANGE OF INTEREST
Change of interest means the absolute transfer
of the property insured.
General rule: A change of interest in the thing
insured does not transfer the policy, but
suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
UP LAW BOC INSURANCE MERCANTILE LAW

the insurance policy are vested in the same

person. Thus, the contract is not rendered void B. IN LIFE/HEALTH INSURANCE
but is merely suspended [Sec. 20]
Sec. 10. Every person has an insurable interest
Exceptions:
in the life and health:
(1) Life, health, and accident insurance;
(1) Of himself, of his spouse and of his
(2) A change of interest in the thing insured
children;
after the occurrence of an injury which
(2) Of any person on whom he depends
results in a loss does not affect the policy
wholly or in part for education or
[Sec. 21];
support, or in whom he has a pecuniary
(3) A change in the interest in one or more of
interest;
several things, separately insured by one
(3) Of any person under a legal obligation
policy, such as a conveyance of one or more
to him for the payment of money, or
things, does not affect the policy with
respecting property or services, of
respect to the others not so conveyed [Sec.
which death or illness might delay or
22];
prevent the performance; and
(4) A change of interest by will or succession on
(4) Of any person upon whose life any
the death of the insured. The death of the
estate or interest vested in him
insured does not avoid insurance policy. It
depends.
does not affect the policy except his interest
passes to his heir or legal representative
who may continue the insurance policy on
the property by continuing paying premiums
[Sec. 23]; Unless the interest of a person insured is
(5) A transfer of interest by one of several susceptible of exact pecuniary measurement,
partners, joint owners, or owners in the measure of indemnity under a policy of
common, who are jointly insured, to the insurance upon life or health is the sum fixed in
others. This does not avoid the insurance. It the policy. [Sec. 186]
will avoid the policy only as to the selling
partners or co-owners but not as to others. Life insurance policies may be divided into two
The rule applies even though it has been general classes:
agreed that the insurance cease upon (1) Insurance upon one’s life;
alienation of the thing [Sec. 24]; (2) Insurance upon life of another.
(6) Automatic transfers of interest in cases in
which the policy is so framed that it will
inure to the benefit of whosoever may B.1. IN LIFE INSURANCE
become the owner of the interest insured
B.1.a. Interest in one’s own life
during the circumstance of the risk [Sec. 57].
It is an exception to the general rule that
The Cestui que vie is the insured himself. The
upon maturity, the proceeds of a policy shall
insured can designate anyone to be the
be given exclusively to the proper interest if
beneficiary of the policy.
the person in whose name or for whose
benefit it is made.
Each person has unlimited interest in his own
(7) An express prohibition against alienation in
life, whether the insurance is for the benefit of
the policy [Article 1306, Civil Code], in which
himself or another. [40 CJS 909]
case alienation will not merely suspend the
contract but avoid it entirely.

Page 76 of 353
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The beneficiary designated need not have any
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and names
himself as the beneficiary, he must have
insurable interest therein. [De Leon (2014)]
Evidence that the insurance is regarded as a
wager policy:
1. That the original proposal to take out
insurance was that of the beneficiary;
2. That the premiums are paid by the
beneficiary;
3. That the beneficiary has no interest,
economic or emotional, in the continued
life of the insured. [De Leon (2010)]
B.1.B. INTEREST IN LIFE OF ANOTHER
The insurable interest in the life of another
must be a pecuniary one and it exists
whenever the relation between the assured
and the insured, whether by blood, marriage
or commercial intercourse. [De Leon (2010)].
However, the loss in life insurance can seldom
be measured pecuniarily. Still, a definitive
interest of some sort in the life of the cestui que
vie is required. Certainly, a person is not allowed
to take out insurance upon the life of a stranger.
There is no general rule fixing the degree of
relationship within which an insurable interest
exists, but more decisions are found supportive
of the rule that close relationship by blood or
marriage between the insured and the cestui que
vie is sufficient to constitute insurable interest.
[Carale (2014)]
The insurable interest must be based on moral
and legal grounds. Such interest exists
whenever the insured has a responsible
expectation of deriving benefit from the
continuation of the life of the other person or of
suffering detriment through its termination.
There is no insurable interest in the life of an
illegitimate spouse.
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INSURANCE MERCANTILE LAW
A creditor may take out insurance on the life of
his debtor but his insurable interest is only up to
the amount of the debt and only when the debt
is unsecured. [Carale(2014)]
When the owner of the policy insures the life
of another — the cestui que vie — and
designates a third party as beneficiary, both
the owner and beneficiary must have an
insurable interest in the life of the cestui que
vie.
Exception: An assignee of the insurance contract
is not required to have insurable interest in the
life of the insured (since insurable interest over
life should exist only during the inception of the
contract). To require such interest in him is to
diminish the investment value of the contract to
the owner.
Note: An assignment of the insurance contract is
different from a change in the designated
beneficiary.
B.1.C. BENEFICIARY
A beneficiary is the person named or designated
in a contract of life, health, or accident insurance
as the person who is to receive the proceeds or
benefits which become payable, according to the
terms of the contract, if the insured risk occurs.
General rule: A person may designate a
beneficiary, irrespective of the beneficiary’s lack
of insurable interest, provided he acts in good
faith and without intent to make the transaction
merely a cover for a forbidden wagering contract
[De Leon (2014)]
Exceptions: Any person who is forbidden from
receiving any donation under Article 739, Civil
Code cannot be named beneficiary of a life
insurance policy by the person who cannot make
any donation to him. [Article 2012, Civil Code]
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Sec. 739, Civil Code: The following donations are
void:
(1) Those made between persons who were
guilty of adultery or concubinage at the
time of the donation;
(2) Those made between persons found guilty
of the same criminal offense, in
consideration thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason of
his office.
General Rule: The insured shall have the right to
change the beneficiary he designated in the
policy [Sec. 11]
Exception: If the insured expressly waived his
right to change the beneficiary, this makes the
latter an irrevocable beneficiary. But despite the
waiver, he can still change the beneficiary,
provided he obtained the beneficiary’s consent.
[Sec. 11]
Under the Slayer Statute, when the beneficiary is
the principal, accomplice or accessory in willfully
bringing about the death of the insured, interest
of beneficiary in life insurance policy is forfeited
[Sec. 12]
B.2. INTEREST IN HEALTH INSURANCE
General rule: Interest in the life or health of a
person must exist at the inception of the
insurance contract but need not exist thereafter
or when the loss occurs. [Sec. 19]
Exceptions:
(1) In the case of a creditor’s insurance taken on
the life of the debtor, insurable interest
disappears once the debt has been paid. At
this point, the creditor/insured can no longer
recover on the policy;
(2) In the case of a company’s insurance taken
on the life of an employee, insurable interest
disappears once the employee leaves the
Page 78 of 353
INSURANCE MERCANTILE LAW
company, in which case, the company can no
longer recover on the policy.
B.3. TRANSFER OF POLICY
The life insurance policy can be transferred
whether the transferee has insurable interest or
not. Notice of the transfer to the insurer is not
required for the validity of the same. [Sec. 184
and 185]
There is no right of subrogation in life insurance,
because it is not a contract of indemnity.
C. IN PROPERTY INSURANCE
Sec. 13. Every interest in property, whether real
or personal, or any relation thereto, or liability
in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured, is an insurable interest.
Sec. 14. An insurable interest in property may
consist in:
(1) An existing interest;
(2) An inchoate interest founded on an
existing interest; or
(3) An expectancy, coupled with an existing
interest in that out of which the
expectancy arises.
A person has an insurable interest in property
when he sustains such relation with respect to it
that he has a reasonable expectation of benefit
to be derived from its continued existence, or of
loss or liability from its destruction [Carale,
(2014)]
The insurable interest may be in the property
itself (e.g., ownership), or any relation thereto
(e.g., interest of a trustee or a commission
agent), or liability in respect thereof (e.g.,
interest of a carrier or depository of goods).
(1) An existing interest - may be a legal title or
equitable title. Examples of those having
existing interest are owners as regards their
UP LAW BOC
properties, trustees in the case of the seller
of property not yet delivered, mortgagors
over the property mortgaged, and lessor,
lessee and sub-lessee over the property
leased.
(2) An inchoate interest must be founded on
existing interests. It exists but is incomplete
or unripe until the happening of an event.
Examples of inchoate interests are the
interest of stockholders with respect to
dividends in case of profits and shares in the
assets, and the interest of a partner in the
properties belonging to the partnership.
(3) An expectancy must be coupled with an
existing interest out of which the expectancy
arises. For example, a farmer who planted
crops has insurable interest over his harvest
which can be expected. [De Leon (2014)]
A mere contingent or expectant interest in
anything, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable. [Sec. 16 & German Insurance v.
Hyman, 34 Neb. 704, 52 N.W. 401 (1982)]
A son has no insurable interest over the property
of his father because such is just a mere
expectancy and has no legal basis before he
inherits such property.
Insurable interest in property may be based on a
perfected contract of sale, vesting an equitable
title even before delivery of the goods. [Filipino
Merchants Ins. Co. v. CA, (1989)]
When the seller retains ownership only to ensure
that the buyer will pay its debt, the risk of loss is
borne by the buyer. Insurable interest in property
does not imply a property interest in, or a lien
upon, or possession of the subject matter of the
insurance, and neither ownership nor a
beneficial interest is requisite to the existence of
such an interest. Anyone has an insurable
interest in property who derives a benefit from
its existence or would suffer loss from its
destruction [Gaisano Cagayan Ins. v. Ins. Co. of
North America, G.R. No. 14379(2006)]
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INSURANCE MERCANTILE LAW
C. 1. TIME OF EXISTENCE
General rule: Interest in property insured must
exist both at inception and at time of loss, but
not in the intervening period. [Sec. 19]
Exceptions:
(1) A change in interest over the thing insured
after the loss contemplated. The insured
may sell the remains without prejudice to his
right to recover [Sec. 21];
(2) A change of interest in one or more several
distinct things, separately insured by one
policy. This does not avoid the insurance as
to the others [Sec. 22];
(3) A change in interest by will or succession
upon the death of the insured [Sec. 23]
(4) A transfer of interest by one of several
partners, joint owners, or owners in common
who are jointly insured. The acquiring co-
owner has the same interest; his interest
merely increases upon acquiring other co-
owners interest (Sec. 24).
C.2. TRANSFER OF POLICY
The policy cannot be transferred without the
insurer’s consent, because the insurer has
approved the policy based on the personal
qualifications and insurable interest of the
insured.
When there is an express prohibition against
alienation in the policy, and there is alienation,
the contract of insurance is not merely
suspended but avoided.
C.3. MEASURE OF INDEMNITY
Being a contract of indemnity, the measure of
insurable interest in property is the extent to
which the insured might be damnified by the
loss of injury thereof. [Sec. 17] The insured
cannot recover a greater value than that of his
actual loss because it would be a wagering
policy contrary to public policy and void.
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A carrier or depository of any kind has an Must have insurable Need not have
insurable interest in a thing held by him as such, interest over the insurable interest
to the extent of his liability but not to exceed the thing insured over the life of the
value thereof. [Sec. 15] insured if the insured
himself secured the
C.4. INTEREST IN PROPERTY AND LIFE policy. But if the
DISTINGUISHED insurance was
Property Life obtained by the
beneficiary, the latter
Extent
must have insurable
Limited to actual Unlimited (save in life interest over the life
value of the interest insurance effected by of the insured
thereon a creditor on the life [Sundiang and
of the debtor – Aquino, Reviewer on
amount of debt only) Commercial Law
(2013)]

Existence

Must exist when the Must exist at the time D. DOUBLE AND OVER INSURANCE;
insurance takes the insurance takes REINSURANCE
effect and when the effect, BUT need not
loss occurs, BUT exist thereafter D.1. DOUBLE INSURANCE
need not exist in the Sec. 95. Double insurance exists where the
meantime same person is insured by several insurers
separately in respect to the same subject and
Expectation of benefit to be derived
interest.
Must have legal basis Need not have legal
basis Requisites:
Interest of beneficiary (1) The same person is insured;
(2) Two or more insurers insuring
separately;
(3) The same subject matter;
(4) The same interest insured; and
(5) The same risk or peril insured against
[Malayan Insurance v Philippine First
Insurance, G.R. No. 184300 (2012)]

Double insurance is not prohibited under the

law, unless the policy contains a stipulation to
the contrary. Usually, insurance policies contain
“other insurance clause” which requires
disclosure of other existing insurance policy. In
such case, non-disclosure will avoid the policy.
Such clause is intended to prevent over
insurance and thus avert the perpetration of
fraud.
Page 80 of 353
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Amount of insurance Amount of insurance

If there is double insurance and loss occurs, each may or may not exceeds the value of
of the insurers will be liable only up to the face exceed the value of the insured’s
value of their respective policies and the insured the insured’s insurable interest
has the option of choosing the order by which he insurable interest
will claim from the insurers.
There are always There may be one or
Over-insurance occurs when the value of the several insurers more insurers
insurance exceeds the value of the insurable
interest. Over-insurance is not per se void but D.4. REINSURANCE
recovery is allowed only to the extent of the loss
or damage incurred by the insured [Carale
Sec. 97. A contract of reinsurance is one by
(2014)]
which an insurer procures a third person to
insure him against loss or liability by reason of
If there is over-insurance and loss occurs, then
such original insurance.
the insurers will pay pro-rata (or in the order as
stated in contract or “excess clause”) in case of
Sec. 99. A reinsurance is presumed to be a
loss.
contract of indemnity against liability, and not
merely against damage.
Nonetheless, under Sec. 64(f), an insurer may
cancel an insurance policy, other than life, based
Sec. 100. The original insured has no interest in
on a “discovery of other insurance coverage that
a contract of reinsurance.
makes the total insurance in excess of the value
of the property insured” subject to the
requirement of prior notice.

Also, under Sec. 83, “in case of an over insurance
by several insurers other than life, the insured is
entitled to a ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at risk.”
D.2. RULES FOR PAYMENT
Sec. 96 enunciates the principle of contribution
which requires each insurer to contribute ratably
to the loss or damage considering that the
several insurances cover the same subject
matter and interest against the same peril. If the
loss is greater than the sum total of all the
policies issued, each insurer is liable for the
amount of his policy.
D.3. DOUBLE AND OVER INSURANCE
DISTINGUISHED
Double insurance Over insurance
Page 81 of 353
Reinsurance has been referred to as “an
insurance of an insurance.”
D.4.A. ORIGINAL INSURANCE CONTRACT AND
REINSURANCE CONTRACT DISTINGUISHED
The original insurance contract is separate and
distinct from the reinsurance contract. An
original insurance contract covers indemnity
against damages, while reinsurance covers
indemnity against liability.
D.4.B. REINSURANCE TREATY AND POLICY
DISTINGUISHED
A reinsurance treaty is an agreement between
two insurance companies whereby one agrees to
cede and the other to accept reinsurance
business pursuant to provisions specified in the
treaty. [De Leon (2014)]
UP LAW BOC INSURANCE MERCANTILE LAW

A reinsurance policy is a contract of indemnity Secured by the mortgage. [Geagonia v. CA, G.R.
one insurer makes with another to protect the No. 114427(1995)]
first insurer from a risk it has already assumed.
When a mortgagee insures his own interest in
Reinsurance treaties and reinsurance policies the mortgaged property without reference to the
are not synonymous. Treaties are contracts for right of the mortgagor, mortgagee is entitled to
insurance; policies are contracts of insurance. the proceeds of the policy in case of loss to the
[Philamlife v. Auditor General, G.R. No. extent of his credit. [De Leon (2014)]
19255(1968)]
If the proceeds are more than the total amount
D.5. DOUBLE INSURANCE AND of credit, then mortgagee has no right to the
REINSURANCE DISTINGUISHED excess. If the proceeds are equal to the credit,
Double insurance Reinsurance then insurer is subrogated to the mortgagee’s
rights and mortgagee can no longer recover the
Same interest Different interest mortgagor’s indebtedness.
Insurer remains as Insurer becomes the
If the proceeds are less than the credit, then the
the insurer insured in relation to
mortgagee may recover from the mortgagor the
the reinsurer
deficiency. Upon payment, the insurer is
subrogated to the rights of the mortgagee
Insured is a party in The original insured against the mortgagor to the extent of the
interest in the is not a party in the amount paid.
insurance contracts reinsurance contract
When a mortgagor takes out an insurance for his
own benefit, he can only recover from the insurer
Property is the The original insurer's but the mortgagee has a lien on the proceeds by
subject matter risk is the subject virtue of the mortgage. A mortgagor can make
matter the proceeds payable to or assigned to the
mortgagee. [De Leon (2014)]
Insured has to give Insured’s consent is
his consent not necessary Ways where mortgagee may be the beneficial
payee [Geagonia v CA G.R. No. 114427 (1995)]:
E. MULTIPLE OR SEVERAL INTERESTS ON 1. As assignee with the consent of the
SAME PROPERTY insurer;
2. A pledge without such consent;
The Insurance Code recognizes that both the 3. The original policy may contain a
mortgagor and mortgagee have each separate mortgage clause;
and distinct insurable interest in the mortgaged 4. A rider making the policy payable to the
property and that they may take out separate mortgagee "as his interest may appear"
policies with the same or different insurance may be attached
companies. Consequently, insurance taken by 5. A "standard mortgage clause,"
one on his own name only does not inure to the containing a collateral independent
benefit of the other. [Sec. 53] contract between the mortgagee and
insurer, may be attached
Thus, a mortgagor has an insurable interest 6. The policy, though by its terms payable
equal to the value of the mortgaged property and absolutely to the mortgagor, may have
a mortgagee, only to the extent of the debt been procured by a mortgagor under a

Page 82 of 353
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contract duty to insure for the
mortgagee's benefit, in which case the
mortgagee acquires an equitable lien
upon the proceeds
E.1. OPEN LOSS PAYABLE MORTGAGE
CLAUSE
An open loss payable clause states that the
proceeds of the insurance contract is payable to
the mortgagee as beneficiary.
The contract, however, is procured by the
mortgagor for his interest in the property. He is
the party to the contract, not the mortgagee.
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
affects the mortgagee, even if the property is in
the hands of said mortgagee.
E.2. UNION MORTGAGE OR STANDARD
MORTGAGE CLAUSE
This clause is similar to an open loss payable
clause, except that it is stipulated that the acts
of the mortgagor cannot invalidate the
insurance, provided that if the mortgagor fails to
pay the premiums due, the mortgagee shall, on
demand, pay said premiums. [De Leon (2014)]
When a mortgagee insured his own interest and
a loss occurs, he is entitled to recover on the
insurance. However, he may no longer claim
against the mortgagor, for his claim is
discharged up to the amount the insurer has
paid him. [Palileo v. Cosio G.R. No. L-7677
(1955)]
Page 83 of 353
INSURANCE MERCANTILE LAW
VI. PERFECTION OF THE
INSURANCE CONTRACT
A. OFFER AND
ACCEPTANCE/CONSENSUAL
An insurance contract is consensual. It is
therefore perfected by mere consent. Consent is
manifested by the meeting of the offer and the
acceptance upon the object or the cause which
are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application.The
insurance contract becomes effective upon
payment of first premium, provided there has
been an approval of the application.
A contract of insurance must be assented to by
both parties, either in person or through their
agents and so long as an application for
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to
make a contract. [Perez v. CA,G.R. No. 112329
(2000)]
The court applied the Cognition Theory in the
case of Enriquez v. Sun Life Assurance Co. [G.R.
No. L-15895 (1920)] when it ruled that an
acceptance made by letter shall not bind the
person making the offer except from the time it
came to his knowledge. The court held that:
(1) The submission of an application, even with
premium payment is a mere offer on the part
of the applicant, and does not bind the
insurer;
(2) An insurance contract is also not perfected
where the applicant dies before the approval
of his application or it does not appear that
the acceptance of the application ever came
to the knowledge of the applicant;
(3) An acceptance made by letter shall not bind
the person making the offer except from the
time it came to his knowledge.
UP LAW BOC
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated in
the application that contract shall not become
binding until the policy is delivered and the first
premium is paid [De Leon (2014)]
A.1. DELAY IN ACCEPTANCE
Delay in acting on the application does not
constitute acceptance even though the insured
has forwarded his first premium with his
application. [Perez v. CA, G.R. No. 112329(2000)]
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant dies,
the contract is not perfected. In this case, the
insurer can be liable for damages in accordance
with the “tort theory.” The insurance business is
imbued with public interest, thus it is the duty of
the insurer to act with reasonable promptness in
acting on applications submitted to it [Wallace v.
Hartford Fire Insurance Co, 31 Idaho 48r,(1918)]
A.2. DELIVERY OF POLICY
Delivery is the act of placing the insurance policy
(the physical document) into the possession of
the insured. The delivery can be a proof of the
acceptance of the insurer of the offer of the
insured. It is not, however, a pre-requisite of a
valid contract of insurance. Actual manual
delivery is not necessary for the validity of the
contract. Constructive delivery may be sufficient.
Actual delivery to the insured is not essential to
give the policy binding effect as long as the
insured has complied with every condition
required of him. [New York Life Ins. Co. v.
Babcock, 30 S. E. 273 (1898)]
In Bradley v. New York Life Ins., 275 F. 657
(1921),the agent of the insurance company is not
the agent of the insured. Thus delivery to the
agent cannot be considered delivery to the
insured.
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INSURANCE MERCANTILE LAW
B. PREMIUM PAYMENT
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the
consideration paid an insurer for undertaking to
indemnify the insured against the specified peril.
General rule: No insurance policy issued or
renewal is valid and binding until actual
payment of the premium (Sec 77). Any
agreement to the contrary is void.
Sec. 77. Notwithstanding any agreement to the
contrary, no policy or contract of insurance
issued by an insurance company is valid and
binding unless and until the premium thereof
has been paid, except in the case of a life or an
industrial life policy whenever the grace period
provision applies or whenever under the broker
and agency agreements with duly licensed
intermediaries, a 90 day credit extension is
given. No credit extension to a duly licensed
intermediary should exceed 90 days from the
date of issuance of the policy.
Sec. 79. An acknowledgment in a policy or
contract of insurance or the receipt of premium
is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding
nay stipulation therein that it shall not be
binding until the premium is actually paid.
Note: Under RA 10607, the exceptions provided
by law are as follows:
(1) Life and industrial life policy [Sec. 77]
(2) 90 day credit extensions covered by broker
or agency agreements with licensed
intermediaries [Sec. 77]
(3) Acknowledgment in the contract that
premium has been paid [Sec. 79)]
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Jurisprudence decided before RA 10607 provides
two further exceptions:
(1) Agreement to grant payment of premium in
installment basis and partial payment has
been made [Makati Tuscany v. CA, G.R. No.
95546, (1992)]
(2) When parties are barred by Estoppel [UCPB
v. Masagana Telemart, G.R. No. 137172(2001)]
B.1. AUTHORITY OF AGENT TO RECEIVE
PREMIUM
Where an insurer authorizes an insurance agent
or broker to deliver a policy to the insured, it is
deemed to have authorized said agent to receive
the premium in its behalf.
The insurer is bound by its agent’s
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua, G.R. No. 130421 (1999)]
B.2. PAYMENT BY POST-DATED CHECK
The payment of premium by a postdated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect.
But payment by a check bearing a date prior to
the loss, assuming availability of funds, would
be sufficient, even if it remains unencashed at
the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor
[Vitug, Commercial Laws and Jurisprudence
(2006)]
B.3. NON-PAYMENT OF PREMIUM
Non-payment of first premium, unless waived,
prevents the contract from becoming binding
notwithstanding the acceptance of the
application nor the issuance of the policy.
Page 85 of 353
INSURANCE MERCANTILE LAW
[Philippine Phoenix Surety and Insurance v
Woodworks, G.R. No. L-25317 (1979)]
Non-payment of subsequent premiums does not
affect the validity of the contracts unless, by
express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse.
In case of individual life insurance, the policy
holder is entitled a grace period of either 30
days or one month within which payment of any
premium after the first may be made. [Sec. 233]
In cases of industrial life insurance, the grace
period is four weeks, and where premiums are
paid monthly, either 30 days or one month. [Sec.
236]
B.4. EXCUSES FOR NON-PAYMENT
(1) Fortuitous events which render payment by
the insured wholly impossible will not
prevent forfeiture of the policy when the
premium remains unpaid. In other words, it
is not an excuse.
(2) Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It
would be unjust to allow the insurer to retain
the reserve value of the policy, which is the
excess of the premiums paid over the actual
risk carried during the years when the policy
had been in force in time of war [Constantino
v. Asia Life Ins. Co. G.R. No. L-1669 (1950)]
C. COVER-NOTES
Sec. 52. Cover notes may be issued to bind
insurance temporarily pending the issuance of
the policy. Within sixty (60) days after issue of a
cover note, a policy shall be issued in lieu
thereof, including within its terms the identical
insurance bound under the cover note and the
premium therefor.
Cover notes may be extended or renewed
beyond such sixty (60) days with the written
approval of the Commissioner if he determines
that such extension is not contrary to and is not
for the purpose of violating any provisions of this
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Code. The Commissioner may promulgate rules
and regulations governing such extensions for
the purpose of preventing such violations and
may by such rules and regulations dispense with
the requirement of written approval by him in
the case of extension in compliance with such
rules and regulations.
Cover notes are in effect interim policies that
bind the parties until a formal policy is issued,
but the rule is that the cover note will not
amount to a contract unless there is agreement
on the material terms. If the cover note was
issued following the expiration of a policy, the
presumption will be that the cover is on the
same terms as the old policy. [Carale (2014)]
D. NON-DEFAULT OPTIONS IN LIFE
INSURANCE
Sec. 227 (f) – The law requires that in case of life
or endowment insurance, the policy shall
contain a provision specifying the options to
which the policy holder is entitled in the event of
default in a premium payment after three full
annual premiums shall have been paid:
(1) Receive the cash surrender value
(2) Apply such value as the premium for an
extended insurance
(3) Apply such value as the premium for a
paid-up insurance
(4) Secure from such value an automatic
premium loan before the expiration of
the grace period.
D.1. CASH SURRENDER VALUE (CSV)
It is the amount that the insured is entitled to
receive if he surrenders the policy and releases
his claims upon it. The right to CSV accrues only
after three full annual premium payments. The
insured is given the right to claim the amount
less than the reserve, reduced by surrender
charge. [Sec. 233(f)]
The cash value or cash surrender value is an
amount which the insurance company holds in
trust for the insured to be delivered to him upon
Page 86 of 353
MERCANTILE LAW
demand. When the company’s credit for
advances is paid out of the cash value or cash
surrender value, that value and the company’s
liability is diminished. [Manufacturer’s Life Ins. v.
Meer G.R. No. L-2910(1951)]
Rationale: The premium is uniform throughout a
lifetime, but the risk is varied (i.e., higher risk
when older, lower when young). Thus, the cost of
protection is more expensive during the early
years of the policy.
D.2. ALTERNATIVE TO CSV
(1) Extended insurance/term insurance - where
the insured, after having paid three full
annual premiums, is given the right to have
the policy continued in force from date of
default for a time either stated or equal to
the amount of the CSV, taken as a single
premium. The face value of the policy
remains the same but only within the term.
It is also called “term insurance” where CSV
is taken as a single premium (no further
payments) to extend the policy for a fixed
period of time. If death occurs during this
period, the beneficiary can recover the face
value of the policy, but if the insured
survives, the beneficiary gets nothing.
Reinstatement is allowed if made within the
term purchased; no reinstatement after the
lapse of the term purchased.
(2) Paid-up insurance - where, after the
insurance is “paid-up,” the insured who has
paid three full annual premiums is given the
right, upon default, to have the policy
continued from the date of default for the
whole period of insurance without further
payment of premiums. It is also called
“reduced paid-up” because in effect the
policy, terms and conditions are the same
but the face value is reduced to the “paid-
up” value. The terms and conditions of the
original policy remain the same, however,
the amount will be less than the original
face value.
(3) Automatic premium loan (APL) - where, upon
default, the insurer lends/advances to the
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insured without any need of application on
his part, the amount necessary to pay
overdue premium, but not to exceed the CSV
of the policy. It only applies if requested in
writing by the insured either in the
application or at any time before expiration
of the grace period. In effect, the insurance
policy continues in force for a period covered
by the payment. After the period, if insured
still does not resume paying his premiums,
policy lapses, unless CSV still remains. If
there is still CSV, APL continues until CSV is
exhausted. This is beneficial for the insured
because it continues the contract and all its
features with full force and effect.
E. REINSTATEMENT OF A LAPSED LIFE
INSURANCE POLICY
Reinstatement of a lapsed life insurance policy is
not a non-default option. It does not create a
new contract, but merely revives the original
policy so insurer cannot require a higher
premium than the amount stipulated in the
contract. It does not apply to group/industrial
life insurance.
(2) When the contract is voidable due to the
fraud or misrepresentation of insurer or his
agent, the whole premium should be
refunded [Sec. 82]
(3) When by any default of the insured other
than actual fraud, the insurer never incurred
any liability under the policy, the whole
premium should be refunded [Sec. 82];
(4) When the contract is voidable because of the
existence of facts of which the insured was
ignorant without his fault, the whole
premium should be refunded [Sec. 82];
(5) Where the insurance is for a definite period
and the insured surrenders his policy, the
portion of the premium that corresponds to
the unexpired time at a pro rata rate, unless
a short period rate has been agreed upon
and appears on the face of the policy should
be return [Sec. 80(b)];
(6) When there is over-insurance by several
insurers, the return premiums should be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk [Sec. 83];
(7) When rescission is granted due to the
insurer’s breach of contract.

Requisites: [Sec. 233(j)]

(1) It must be exercised within three years from
date of default;
(2) The insured must present evidence of
insurability satisfactory to the insurer;
(3) He must pay all back premiums and all
indebtedness to the insurer (with interest)
(4) The CSV must not have been duly paid to the
insured nor the extension period expired;
(5) The application must be filed during the
insured’s lifetime. [Andres v. Crown Life Ins.
G.R. No. L-10874 (1958)]

F. REFUND OF PREMIUMS
Return of premiums can be made in the
following cases:
(1) If the thing insured was never exposed to the
risks insured against, the whole premium
should be refunded [Sec. 80(a)];
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VII. RESCISSION OF
INSURANCE
CONTRACTS
A. CONCEALMENT
Concealment is the failure to disclose facts
which the applicant at the time of application,
knows or ought to know and are material to the
insurance applied for [Carale (2014)].
Sec. 26. A neglect to communicate that which a
party knows and ought to communicate, is
called a concealment.
Sec. 27. A concealment whether intentional or
unintentional entitles the injured party to
rescind a contract of insurance.
Sec 28. Each party to a contract of insurance
must communicate to the other, in good faith,
all facts within his knowledge which are
material to the contract and as to which he
makes no warrant, and which the other has not
the means of ascertaining.
Sec 29. An intentional or fraudulent omission,
on the part of one insured, to communicate
information of matters proving or tending to
prove the falsity of a warranty, entitles the
insurer to rescind.
Requisites:
(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty of
the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
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INSURANCE MERCANTILE LAW
Failure of the insured to disclose conditions
affecting the risk, of which he is aware, makes
the contract voidable at the insurer’s option, the
ratio being that a contract of insurance is of
good faith.
But, Sec 27, uses the phrase “injured party”,
thus the insured may also rescind the contract.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. G.R. No. l-4611(1955)]
A.1. PROOF OF FRAUD IN CONCEALMENT
General rule: Fraud need not be proven in order
to prove concealment. Good faith is not a
defense. [Saturnino v Phil. American Life
Insurance, G.R. No. L-16163 (1963)]
Exception: When the concealment is made by
the insured in relation to the falsity of a warranty,
the non-disclosure must be intentional and
fraudulent in order that the contract may be
rescinded [Sec. 29]
A.2. TEST OF MATERIALITY
Sec. 31. Materiality relates rather to the
probable and reasonable influence of the facts
upon the party to whom the communication
should have been made, in assessing the risk
involved in making or omitting to make further
inquiries and in accepting the application for
insurance.
The test is the effect which the knowledge of the
fact in question would have on the contract. It is
sufficient if the knowledge of it would influence
the party in making the contract. [De Leon
(2014)]
In several cases, the cause of death may have no
relation to the fact or facts concealed. As clearly
provided in Sec. 31, the test of materiality is
whether the insurer would have agreed to issue
the policy had it known of the facts concealed or,
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perhaps, impose additional terms or require (2) Violation of the conditions of the policy
higher premium [Carale (2014)]. relating to military or naval service in time of
war [Sec. 233(b)]
A.3. EFFECTS
Effect of the incontestable clause: The insurer
General rule: Concealment vitiates the contract cannot prove that the policy is
and entitles the insurer to rescind, even if the (1) Void ab initio or
death or loss is due to a cause not related to the (2) Rescindable
concealed matter. [Sec. 27]
By reason of:
Exceptions: (1) Fraudulent concealment by the insured
or his agent
(1) Concealment after the contract has become
(2) Misrepresentation by the insured or his
effective, because concealment must take agent [Sec. 48, Insurance Code]
place at the time the contract is entered into
in order that the policy may be avoided. The incontestability clause is made for the
[Vance (1951)] Information obtained after the benefit of the insured, and not the insurer,
perfection of the contract is no longer considering that its effect and purpose is to cut
necessary to be disclosed by the insured, off, after a considerable period, any assertion
that the policy is invalid.
even if the policy has not been issued.
(2) Waiver or estoppel; Defenses, other than concealment,
(3) In Marine insurance, where concealment of misrepresentation and breach of warranty are
the following matters does not vitiate the still available to the insurer, subsequent to the 2
entire contract, but merely exonerates the year period. The insurer may still challenged the
insurer from a loss resulting from the risk policy by way of defense to an action brought
against the policy by the insured. [Carale (2014)]
concealed:
(a) The national character of the insured; Grounds:
(b) The liability of the thing insured to (1) Non-payment of premium to make the policy
capture and detention; effective or remain in force
(c) The liability to seizure from breach of (2) Lack of insurable interest
foreign laws of trade; (3) Coverage such that the loss/damage
(d) The want of necessary documents; and did not arise from the risks covered
(4) Violation of military or naval service
(e) The use of false and simulated papers
provisions of the policy (also an issue of
[Sec 112]. coverage)
(4) Incontestability clause: stipulates that the (5) Failure to commence action within
policy shall be incontestable after two years reglementary period
from its date of issue or of its last (6) Failure to comply with conditions (proof
reinstatement. The incontestability clause is of loss, etc.) subsequent to the loss; or
a mandatory provision in life and endowment (7) The particular viciousness of the fraud
employed by the insured to procure the
policies.[Sec. 233 (b) and Sec. 48]; contract, such as:
(a) where the policy was taken pursuant to a
Incontestability Clause scheme to murder the insured, or
A provision that the policy shall be incontestable (b) the insured substitutes himself with
after it shall have been in force during the another during the medical examination
lifetime of the insured for a period of 2 years
from its date of issue as shown in the policy, or A.4. CONCEALMENT IN MARINE AND
date of approval of last reinstatement [Sec. ORDINARY PRIVATE INSURANCE
233(b)]
DISTINGUISHED
Exceptions:
(1) Non-payment of premium
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Marine Ordinary Sec. 28. Each party to a contract of insurance

insurance insurance must communicate to the other, in good faith,
all facts within his knowledge which are
Required Exact and Substantia
material to the contract and as to which he
disclosure whole truth l truth
makes no warranty, and which the other has
Effect of Concealment Any kind not the means of ascertaining.
concealment of the matters of
specified in concealme
Sec. 112 will not nt will
entirely avoid make the Note: If the applicant is aware of the existence of
the contract insurer not some circumstance which he knows would
but will merely liable. influence the insurer in acting upon his
exonerate the application, good faith requires him to disclose
insurer from that circumstance, though unasked. [Vance
losses resulting (1951)]
from the risk
concealed. The fact of being a “mongoloid” is a material
fact that needs to be disclosed [Great Pacific Life
v. CA, G.R. No. L-31845(1979)].

A.5. CONCEALMENT IN NON-MEDICAL Mere possibility of previous hypertension is not

INSURANCE
The waiver of medical examination in a non-
medical insurance contract renders the
information required of the applicant concerning
the previous conditions of health and diseases
suffered more important. The cause of death is
not important because it is well settled that the
insured need not die of the disease he had failed
to disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his
estimates of the risks of the proposed policy or in
making inquiries.[Sunlife v. Sps. Bacani G.R. No.
105135 (1995)]
Where matters of opinion or judgment are called
for, answers made in good faith and without
intent to deceive will not avoid the policy even
though they are untrue. Reason: The insurer
cannot simply rely on those statements. He must
make further inquiry [Philamcare Health Systems
v. CA, G.R. No. 125678 (2002)]
A.6. MATTERS WHICH MUST BE DISCLOSED
EVEN IN THE ABSENCE OF INQUIRY
enough to establish concealment [Great Pacific
Life v. CA, G.R. No. 113899(1999)].
A.7. MATTERS WHICH NEED NOT BE
DISCLOSED
(1) Matters already known to the insurer [Sec
30(a)];
(2) Matters which each party are bound to know
[Sec 30(b) and Sec 32];
(3) Matters of which the insurer waives
communication [Sec 30(c) and Sec 33];
(4) Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material [Sec
30(d)];
(5) Matters which relate to a risk excepted in the
policy, and which are not otherwise material
[Sec 30(e)];
(6) Information of the nature or amount of the
interest of one insured unless if inquired
upon by the insurer, except if required by Sec
51[Sec 34]
(7) Matters of opinion [Sec 35]

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Sec. 32. Each party to a contract of insurance is
bound to know all the general causes which are
open to his inquiry, equally with that of the
other, and which may affect the political or
material perils contemplated; and all general
usages of trade.
B. MISREPRESENTATION/OMISSIONS
Sec 36. A representation may be oral or written.
Sec 37. A representation may be made at the
time of or before, the issuance of the policy.
Sec. 41. A representation may be altered or
withdrawn before the insurance is effected but
not afterwards.
Sec. 42. A representation must be presumed to
refer to the date on which the contract goes
into effect.
Sec. 44. A representation is to be deemed false
when the facts fail to correspond with its
assertions or stipulations.
Sec. 45. If a representation is false in a material
point, whether affirmative or promissory, the
injured party is entitled to rescind the contract
from the time when the representation
becomes false.
Representations are factual statements made by
the insured at the time of, or prior to, the
issuance of the policy, which give information to
the insurer and induce him to enter into the
insurance contract. It may be about a past, an
existing fact, or a future happening.
Because representations are not part of the
contract, it may be altered or withdrawn before
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INSURANCE MERCANTILE LAW
the contract actually takes place but not after
the insurer has agreed to assume the risk due to
that representation.
There is false representation if the matter is true
at the time it was made/represented but false at
the time the contract takes effect (Sec 44). There
is no false representation if the matter is true at
the time the contract takes effect although false
at the time it was made/represented.
B.1. KINDS OF REPRESENTATIONS
(1) Affirmative, which refers to any allegation as
to the existence or non-existence of a fact
when the contract begins [De Leon (2014)].
(2) Promissory, which is any promise to be
fulfilled after the contract has come into
existence; or any statement concerning what
is to happen during the existence of the
insurance [Sec 39]. A promissory
representation is substantially a condition or
warranty [De Leon (2014)].
(3) Oral or written [Sec 36].
Requisites:
(1) The insured stated a fact which is untrue;
(2) Such fact was stated with knowledge that it
is untrue and with intent to deceive or which
he states positively as true without knowing
it to be true and which has a tendency to
mislead;
(3) Such fact in either case is material to the
risk.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on the
ground of misrepresentation [Sec 45].
B.2. TEST OF MATERIALITY
Sec. 46. The materiality of a representation is
determined by the same rules as the materiality
of a concealment.
Materiality is a judicial question and not left to
the insurance company’s sole discretion.
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B.3. EFFECTS the medical examination [Eguaras v. Great

General rule:The injured party is entitled to EasternG.R. No. L-10436(1916)].
rescind from the time when the representation
becomes false [Sec 45]. The insurer is not entitled to rescission for
misrepresentation of age if the birth date on the
Exceptions: policy leads to the conclusion that the insured is
(1) Incontestability clause; beyond the age covered and yet the insurer
(2) Misrepresentation after contract takes effect; continued to accept payment and issued the
(3) Waiver, made by acceptance of insurer of policy. Insurer is deemed estopped [Edillon v.
premium payments despite knowledge of Manila Bankers Life G.R. No. L-34200 (1982)].
the ground for rescission [Sec 45];
(4) A representation of the expectation, belief, Despite not answering the questions and
opinion, or judgment of the insured, keeping blank certain questions in the
although false, and even if material to the application regarding ailments he has suffered,
risk [Philamcare Health Systems, Inc. v. CA, when the insured signed the pension plan
G.R. No. 125678. (2002)]; application, he adopted the written
(5) Representation by insured based on representations and declarations embodied in as
information obtained from third persons (not his own. Therefore, it is clear from these
his agent), provided the insured: representations that he concealed his chronic
(a) Has no personal knowledge of the facts; heart ailment and diabetes. [Florendo v. Philam
(b) Believes them to be true; and PlansG.R. No. 186983(2012)].
(c) Explains to the insurer that he does so
on the information of others. Concealment Misrepresentation
(6) A misrepresentation as to age does not
constitute a ground for rescission. If the age Who may commit
of the insured was considered in
May be committed by Committed only by
determining the premium and the benefits
either insured or insured.
under the policy and the age is misstated,
insurer
the amount payable for the policy shall be as
if the policy was purchased at the correct Act involved
age [Carale (2014)].
Passive form Active form
A representation cannot qualify an express Insured withholds Insured makes
provision or an express warranty of insurance information of erroneous
(Sec 40) because a representation is not part of material facts from statements of facts
the contract but only a collateral inducement to the insurer; he with the intent of
it. However, it may qualify as an implied maintains silence inducing the insurer
warranty. when he ought to to enter into the
speak insurance contract
It is sufficient that the representation is
substantially or materially true, and in case of
Materiality
promissory representation, it is sufficient that it
is substantially complied with [Carale (2014)]. Determined by the same rules

There is fraud and misrepresentation when Effect

another person takes the place of the insured in Same effects on the part of the insured;
insurer has right to rescind
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Injured party is entitled to rescind a contract
of insurance on ground of concealment or
false representation, whether intentional or
not.
C. BREACH OF WARRANTIES
A Warranty is a statement or promise by the
insured set forth in the policy itself or
incorporated in it by proper reference, the
untruth or nonfulfillment of which in any respect
and without reference to whether the insurer
was in fact prejudiced by such untruth or non-
fulfillment, renders the policy voidable by the
insurer [Vance (1951)].
Statements or promises agreed upon by both
parties to the insurance contract which are
contained in the contract or properly
incorporated constitute warranties [Carale
(2014)].
A warranty may also be made by the insurer.
Sec. 68. A warranty may relate to the past, the
present, the future, or to all of these.
Sec. 69. No particular form of words is
necessary to create a warranty.
C.1. WARRANTIES, RIDERS, AND
ENDORSEMENTS
Sec. 50 The policy shall be in printed form which
may contain blank spaces; and any word,
phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the
contract of insurance shall be written on the
blank spaces provided therein.
Any rider, clause, warranty or endorsement
purporting to be part of the contract of
insurance and which is pasted or attached to
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INSURANCE MERCANTILE LAW
said policy is not binding on the insured, unless
the descriptive title or name of the rider, clause,
warranty or endorsement is also mentioned and
written on the blank spaces provided in the
policy.
Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned
by the insured or owner, which countersignature
shall be taken as his agreement to the contents
of such rider, clause, warranty or endorsement.
Notwithstanding the foregoing, the policy may
be in electronic form subject to the pertinent
provisions of Republic Act No. 8792, otherwise
known as the ‘Electronic Commerce Act’ and to
such rules and regulations as may be prescribed
by the Commissioner.
A Rider is a printed or typed stipulation
contained in a slip of paper attached to the
policy and forming an integral part thereof. The
signature of the insured is required only if the
riders, warranties, or endorsements are made or
issued after the issuance of the original policy.
C.2. KINDS OF WARRANTIES
(1) Express warranty, which is an agreement
contained in the policy or clearly
incorporated therein as part thereof relating
to the person or thing insured or to the risk
as a fact [Sec. 71];
(2) Implied warranty,which is deemed included
in the contract although not expressly
mentioned (e.g., implied warranty of
seaworthiness of the vessel in marine
insurance and implied warranty not to alter
the circumstances of the thing insured). This
is only available for marine insurance;
(3) Affirmative warranty, which asserts the
existence of a fact or condition at the time it
is made;
(4) Promissory warranty or executory warranty,
which is one where the insured stipulates
that certain facts or conditions pertaining to
the risk shall exist or that certain things with
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reference thereto shall be done or omitted.
It is in the nature of a condition subsequent
[Secs 72 and 73].
C.3. EFFECT
C.3.A. MATERIAL WARRANTY
Sec. 74. The violation of a material warranty, or
other material provision of the policy, on the
part of either the insured or insurer, entitles the
other to rescind.
the contract [Pioneer v. Yap, G.R. No. L-
36232(1974)].
Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty
when, despite knowing fully that only 2 fire
hydrants existed (out of the 11 hydrants
required), it still issued the insurance policies
and received the premiums [Qua Chee Gan v.
Law Union, G.R. No. L-4611 (1955)].
Warranty Representation

Nature

Part of the contract Mere collateral

Breach of a material warranty may either be: inducement
(1) Without fraud, in which case, the insurer will
Form
be exonerated from the time it occurs. If
made during the inception, it will prevent Written on the policy, May be written in the
the policy from taking effect [Sec 76]. actually or by policy or may be oral
(2) With fraud, in which case, the policy is reference
avoided ab initio and the insured is not
entitled to the return of the premiums paid. Materiality
[De Leon (2014)] Presumed material Must be proved to be
material
Exceptions:
(1) Loss occurs before the time of performance Compliance
of the warranty [Sec 73];
Must be strictly Requires only
(2) The performance becomes unlawful[Sec 73];
complied with substantial truth and
(3) The performance becomes impossible[Sec
compliance
73];
(4) Waiver or estoppel. Applicability of incontestability clause

C.3.B. IMMATERIAL WARRANTY Does not apply Applies

General rule:Breach of an immaterial provision
does not avoid the policy [Sec 75].

Exception:Breach of an immaterial provision

avoids the policy when the parties stipulate that
violation of a particular provision, though
immaterial, shall avoid the policy. In effect, the
parties converted the immaterial provision into a
material one [Sundiang and Aquino (2013)].

A condition in the policy which requires insured

to disclose to the insurer of any insurance that, if
violated by the insured, would ipso facto avoid
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VIII. CLAIMS Loss the immediate Loss due to

cause of which is the connivance of the
SETTLEMENT AND peril insured against insured [Sec 89]
exceptwhere the
SUBROGATION proximate cause is an
excepted peril
A. CONCEPT OF LOSS
Loss through Loss where the
Loss in insurance law embraces injury or negligence of insured excepted peril is the
damage except where there proximate cause
was gross negligence
Requisites: Recovery upon a loss requires that: amounting to willful
(1) The insured must have insurable interest in acts
the subject matter;
(2) The interest is covered by the policy; Loss caused by
(3) There be a loss; and efforts to rescue the
(4) The loss must be one for which the insurer is thing from peril
liable; insured against if,
(5) Notice and proof of loss must be given if during the course of
policy is fire insurance or when the same is the rescue, the thing
stipulated in the policy. is exposed to a peril
not insured against,
A.1. CAUSES OF LOSS which permanently
(1) Remote cause is an event preceding another deprives the insured
in a causal chain, but separated from it by of its possession in
other events; whole or in part (Sec
(2) Proximate cause is “that cause, which, in 87)
natural and continuous sequence, unbroken
by any efficient intervening cause, produces
the injury, and without which the result
would not have occurred” [Vda. De Bataclan
v. Medina, G.R. No. L-10126 (1957)].
(3) Immediate cause isthe cause, not the B. NOTICE AND PROOF OF LOSS
proximate cause, which immediately
precedes the loss. B.1. NOTICE OF LOSS
This refers to the formal notice given the insurer
A.2. LIABILITY FOR LOSS by the insured or claimant under a policy of the
occurrence of the loss insured against.
Loss for which the Loss for which the
insurer is liable insurer is not liable B.1.A. PURPOSE
Its purpose is to apprise the insurance company
Loss the proximate Loss by insured’s so that it may make proper investigation and
cause of which is the willful act take such action as may be necessary to protect
peril insured against its interest.
[Sec 86]
In fire insurance, an insurer is exonerated, if
notice thereof be not given to him by an insured,
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or some person entitled to the benefit of the
insurance, without unnecessary delay [Sec 90].
In other types of insurance, failure to give notice
will not exonerate the insurer, unless there is a
stipulation in the policy requiring the insured to
do so.
However, it has been held that formal notice of
loss is not necessary if insurer has actual notice
of loss [Fidelity Phoenix Insurance v Friedman,
174 SW 215] but there is a ruling to the contrary
[Col. Sav. Bank v American Surety 87 P 118]
B.1.B. FORM
In case of loss as regards fire insurance, there
must be a written notice thereof. [Sec. 90] But
as to other non-life insurance policies, the law
does not provide for a necessity of written notice
[De Leon (2014)]
The notice of loss may be in the form of an
informal or provisional claim containing a
minimum of information as distinguished from a
formal claim which contains the full details of
the loss, computations of the amounts claimed,
and supporting evidence, together with a
demand or request for payment [De Leon (2014)].
B.1.C. TIME FOR GIVING NOTICE
Notice of loss must be given within reasonable
time. [Bachrach v Britain American Assurance,
G.R. No. L-5715 (1910)]
For compulsory motor vehicle insurance, the
notice must be given within six months from the
date of the accident. [Sec. 397]
For other non-life insurance, the Commissioner
may specify the period for the submission of the
notice of loss [Sec. 90]
B.2. PROOF OF LOSS
It is the formal evidence given to the insurance
company by the insured or claimant, under a
policy, of: the occurrence of the loss, the
particulars thereof, and the data necessary to
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INSURANCE MERCANTILE LAW
enable the company to determine its liability
and the amount. [De Leon (2014)]
B.2.A. PURPOSE
Its purpose is to give the insurer information by
which he may determine the extent of his
liability but also; to afford him a means of
detecting any fraud that may have been
practiced upon him, and to operate as a check
upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
orally or in writing.
The insured is not bound to give such proof as
would be necessary in a court of justice; but it is
sufficient for him to give the best evidence which
he has in his power at the time [Sec 91].
B.2.B. RULES FOR RECOVERY
Sec. 88. In case of loss upon an insurance
against fire, an insurer is exonerated, if notice
thereof be not given to him by an insured, or
some person entitled to the benefit of the
insurance, without unnecessary delay.
General rule: Timely compliance with the notice
and proof of loss is a condition precedent to the
right to recover if the policy is fire insurance, or
when the same is stipulated in the policy. [Sec.
90]
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may
be waived when such defects, which the
insured might remedy, are not specified,
without unnecessary delay, to him as
ground of objection by the insurer [Sec
92];
(b) Delay in presentation to an insurer of
notice or proof of loss is waived if caused
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by any act of his, or if he omits to take
objection promptly and specifically upon
that ground [Sec. 93];
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice of
loss.
C. GUIDELINES ON CLAIMS SETTLEMENT
Claims settlement is the indemnification of the
loss suffered by the insured. The claimant may
be the insured or reinsured, the insurer who is
entitled to subrogation, or a third party who has
a claim against the insured
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the interest
of the insured.

Claims Life insurance

Non-life insurance

Maturity Either: (1) Upon happening of event insured

(a) Upon death of the person insured;
(b) Upon his surviving a specific
period; or
(c) Otherwise contingently on the
continuance or cessation of life [Sec
180]
against; and
(2) Event must occur within the period
specified in policy, otherwise
insurer has no liability

Delivery General rule:The proceeds should be (1) Within 30 days after:

of proceeds delivered immediately upon maturity of
policy.
Exceptions:
1. If payable ininstallments or as an
annuity, when such installments or
annuities become due;
2. If maturity is upon death, within 60 (2) If ascertainment is not made within
days after presentation of claim
and filing of proof of death of
insured. [Sec. 248]
(a) Proof of loss is received by
insurer; and
(b) Ascertainment of loss or
damage is made either by
agreement between the
insured and insurer or by
arbitration
60 days after such receipt by
insurer of proof of loss, then loss or
damage shall be paid within 90
days after such receipt. [Sec. 249]

Effect of refusal 1. This entitles the beneficiary to collect interest on the proceeds of policy for the
or failure to pay duration of the delay at rate of twice the ceiling prescribed by the monetary
claim within time board (unless refusal to pay is based on ground that claim is fraudulent)
prescribed 2. In case damages are awarded, this includes attorney’s fees and other
expenses incurred due to delay (plus the interest) [Sec. 248 and 249]

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In case of litigation, it is the duty of the
Commissioner or the Court to determine
whether the claim has been unreasonably
denied or withheld.Failure to pay any such
claim within the time prescribed shall be
considered prima facie evidence of
unreasonable delay in payment. [Sec. 250]
C.1. UNFAIR CLAIMS SETTLEMENT;
SANCTIONS
Sec. 247. No insurance company doing
business in the Philippines shall refuse,
without just cause, to pay or settle claims
arising under coverages provided by its
policies, nor shall any such company engage
in unfair claim settlement practices.
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute
unfair claim settlement practices:
Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverage at issue;
Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
claims submitted in which liability has
become reasonably clear; or
Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason
substantially less than the amounts
ultimately recovered in suits brought by
them.
Evidence as to numbers and types of valid
and justifiable complaints to the
Commissioner against an insurance
company, and the Commissioner’s complaint
experience with other insurance companies
writing similar lines of insurance shall be
admissible in evidence in an administrative or
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INSURANCE MERCANTILE LAW
judicial proceeding for the purpose of
determining whether unfair claim settlement
practices have been committed.
If it is found, after notice and an opportunity
to be heard, that an insurance company has
violated this section, each instance of
noncompliance may be treated as a separate
violation and shall be considered sufficient
cause for the suspension or revocation of the
company’s certificate of authority
Sec. 247 lists the grounds which are sufficient
cause for the suspension or revocation of the
insurer’s certificate of authority [Sec. 247(c)].
C.2. PRESCRIPTION OF ACTION
In the absence of an express stipulation in the
policy, it being based on a written contract,
the action prescribes in ten years [Article 1144,
Civil Code].
However, the parties may validly agree on a
shorter period provided it is not less than one
year from the time the cause of action
accrues [Sec 63].
In compulsory motor vehicle insurance, the
action prescribes in one year from the denial
of the claim [Sec. 397]
C.3. SUBROGATION
The right of subrogation is provided in the
Civil Code, to wit:
Art. 2207. If the plaintiff’s property has been
insured, and he has received indemnity from
the insurance company for the injury or loss
arising out of the wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against
the wrongdoer or the person who has violated
the contact. If the amount paid by the insurance
company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss
or injury.
UP LAW BOC INSURANCE MERCANTILE LAW

Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
by the insurance policy, steps into the shoes
of the insured and avails himself of the
latter's rights that exist against the
wrongdoer at the time of loss.
The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
have paid to the insured.
Note: Subrogation applies only to property
insurance and non-life insurance.
(3) Where the insurer pays the insured for a
loss or risk not covered by the policy [Pan
Malayan Ins. Co. v. CA, G.R. No.
81026(1990)];
(4) In life insurance;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2014)].
The right of subrogation is not dependent
upon, nor does it grow out of, any privity of
contract or upon written assignment of claim.
It accrues simply upon payment of the
insurance claim by the insurer [Pan Malayan
Ins. Co v. CA, G.R. No. 81026 (1990)].

C.3.A. RIGHTS TRANSFERRED Since the insurer can be subrogated to only

The subrogee-insurer cannot acquire any
claim, Security, or remedy the subrogor did
not have (or a greater claim than the original
insured). In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor. A subrogee can recover only if the
insured likewise could have recovered.
[Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
Corp. G.R. No. 140349 (2005)]
such rights as the insured may have, should
the insured, after receiving payment from the
insurer, release the wrongdoer who caused
the loss, the insurer loses his rights against
the latter. But in such a case, the insurer will
be entitled to recover from the insured
whatever it has paid to the latter, unless the
release was made with the consent of the
insurer [Manila Mahogany v. CA G.R. No. L-
52576 (1987)].

The insured can no longer recover from the

offended party what was paid to him by the
insurer but he can recover any deficiency if
the damages suffered are more than what
was paid. The deficiency is not covered by the
right of subrogation.

The insurer must present the policy as

evidence to determine the extent of its
coverage. [Wallem Phil. Shipping v. Prudential
GuaranteeG.R. No. 152158 (2003)]

C.3.B. WHEN THERE IS NO RIGHT OF

SUBROGATION
(1) Where the insured by his own act releases
the wrongdoer or third party liable for the
loss or damage;
(2) Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insured’s claim for loss;

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IX. INSURANCE
COMMISSIONER
A. JURISDICTION AND ADJUDICATORY
POWERS
The Insurance Commissioner exercises
administrative supervision over insurance
companies, mutual benefit associations and
trusts for charitable uses. He has the duty to
see that all laws relating to insurance
companies and other insurance matters are
faithfully executed [Carale (2014)].
In addition to administrative powers, the
Commissioner has the power to adjudicate
disputes relating to an insurance company’s
liability to an insured under a policy. [Sec.
437] A complaint or claim filed with such
official is considered an “action” or “suit” the
filing of which would have the effect of tolling
the suspending the running of the
prescriptive period.
(1) Concurrent jurisdiction (with regular civil
courts) over cases where any single claim
does not exceed P5,000,000 involving
liability arising from:
(a) Insurance contract;
(b) Contract of suretyship;
(c) Reinsurance contract;
(d) Membership certificate issued by
members of mutual benefit
association [Sec 439];
(2) Primary and exclusive jurisdiction over
claims for benefits involving pre-need
plans where the amount of benefits does
not exceed P100,000 [Sec. 55, RA 9829].
For the purpose of proceeding under its
adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof
designated by him, is empowered to
administer oaths and affirmation, subpoena
witnesses, compel their attendance, take
evidence and require the production of any
books, papers, documents or contracts or
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INSURANCE MERCANTILE LAW
other records which are relevant or material
to the inquiry [Sec 439].
Note: However, the Insurance Commission
has no jurisdiction to decide the legality of a
contract of agency entered into between an
insurance company and its agent. The same
is not covered by the term “doing or
transacting insurance business” under Sec 2,
neither is it covered by Sec 439, which grants
the Commissioner adjudicatory powers
[Sundiang and Aquino (2013)].
B. REVOCATION OF CERTIFICATE OF
AUTHORITY
The Certificate of Authority issued to the
domestic or foreign company by the
Commission may be revoked or suspended by
the Insurance Commissioner for any of the
following grounds:
(1) The company is in an unsound condition;
(2) That it has failed to comply with the
provisions of law or regulations
obligatory upon it;
(3) That its condition or method of business
is such as to render its proceedings
hazardous to the public or its
policyholders;
(4) That its paid-up capital stock, in the case
of a domestic stock corporation, or its
available cash assets, in the case of a
domestic mutual company, or its Security
deposits, in the case of a foreign
company, is impaired or deficient;
(5) That the margin of solvency required of
such company is deficient.
[Sec. 254]
The Commissioner is authorized to suspend
or revoke all certificates of authority granted
to such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such
company by its agents in the Philippines
while such suspension, revocation, or
disability continues or until its authority to do
UP LAW BOC INSURANCE MERCANTILE LAW

business is restored by the Commissioner.

[Sec. 254]

Before restoring such authority, the

Commissioner shall require the company
concerned to submit to him a business plan
showing the company’s estimated receipts
and disbursements, as well as the basis
therefor, for the next succeeding three years.
[Sec. 254]

C. LIQUIDATION OF INSURANCE
COMPANY
If the company is determined by the
Commissioner to be insolvent or cannot
resume business, he shall, if public interest
requires, order its liquidation [Sec 256].

This should be distinguished from a situation

where a conservator is appointed when the
Commissioner finds that a company is in a
state of continuing inability or unwillingness
to maintain a condition of solvency or
liquidity adequate to protect the
policyholders and creditors. The
conservator will take charge of the
management of the insurance company
[Sec 255].

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UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

MERCANTILE LAW
TRANSPORTATION
LAWS

Page 102 of 353

UP LAW BOC TRANSPORTATION LAWS
I. Common Carriers
(Reference is to the Civil Code, unless
otherwise indicated)
A. CONCEPT
A contract of transportation is one whereby a
certain person or association of persons
obligate themselves to transport persons,
things, or news from one to another for a
fixed price.
Parties to the contract:
(1) Shipper - one who gives rise to the
contract of transportation by agreeing to
deliver the things or news to be
transported, or to present his own person
or those of other or others in the case of
transportation of passengers
(2) Carrier or conductor - one who binds
himself to transport person, things, or
news, as the case may be, or one
employed in or engaged in the business
of carrying good for others for hire.
(3) Consignee - the party to whom the carrier
is to deliver the things being transported;
to whom the carrier may lawfully make
delivery in accordance with its contract of
carriage. The shipper and the consignee
may be the same person.
Carriers are persons or corporations who
undertake to transport or convey goods,
property or persons, from one place to
another, gratuitously or for hire, and are
classified as:
(1) Private or special carriers, who transport
or undertake to transport in a particular
instance for hire or reward [Agbayani,
Commercial Laws of the Philippines
(1987)]; and
(2) Common or public carriers, defined in Art.
1732.
Common carriers are:
(1) Persons, corporations, firms or
associations;
(2) Engaged in the business of carrying or
transporting;
(3) Passengers or goods or both;
(4) By land, water, or air;
(5) For compensation;
(6) Offering their services to the public [Art.
1732].
Art. 1732 makes no distinction:
Page 103 of 353
MERCANTILE LAW
(1) Between one whose principal business
activity is the carrying of persons or goods
or both, and one who does such carrying
only as an ancillary activity [Fabre v. CA
(1996)];
(2) Between a person or enterprise offering
transportation service on a regular or
scheduled basis and one offering such
service on an occasional, episodic, or
unscheduled basis [Loadstar Shipping Co.,
Inc. v. CA (1999)];
(3) Between a carrier offering its services to
the general public and one who offers
services or solicits business only from a
narrow segment of the general population
[De Guzman v. CA (1988)].
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of
the conveyances used in the activity, but
whether the undertaking is a part of the
activity engaged in by the carrier that he has
held out to the general public as his business
or occupation. If the undertaking is a single
transaction, not a part of the general
business or occupation engaged in, as
advertised and held out to the general public,
the individual or the entity rendering such
service is a private, not a common, carrier.
The question must be determined by the
character of the business actually carried on
by the carrier, not by any secret intention or
mental reservation it may entertain or assert
when charged with the duties and obligations
that the law imposes [Teodoro v. Nicolas
(2012)].
A common carrier need not have fixed and
publicly known routes. Neither does it have to
maintain terminals or issue tickets [Asia
Lighterage and Shipping v. CA (2003)].
One engaged in the business of transporting
petroleum products from refineries via
pipeline is a common carrier. It is engaged in
the business of transporting or carrying
goods, i.e., petroleum products, for hire as a
public employment. It undertakes to carry for
all persons indifferently, that is, to all persons
who choose to employ its services, and
transports the goods by land and for
compensation. The fact that it has a limited
clientele does not exclude it from the
definition of a common carrier [First Phil.
Industrial v. CA (1998)].
UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

A customs broker is a common carrier. As or deterioration of

long as a person holds itself to the public for goods
the purpose of transporting goods as a
business, it is already considered a common Regulation
carrier regardless if it owns the vehicle used A public service, Not subject to
or has to hire one. [Schmitz Transport v.
therefore subject to regulation as a
Transport Venture, Inc. (2005)]
provisions common carrier
A travel agency is not a common carrier. It is governing common
not an entity engaged in the business of
carriers and public
transporting either passengers or goods and
is therefore neither a private nor a common utilities.
carrier. Its covenant with its customers is
It is not necessary that the carrier be issued a
simply to make travel arrangements on their
certificate of public convenience [Loadstar
behalf [Crisostomo v. CA (2003)].
Shipping Co., Inc. v. CA (1999)].
Common carrier Private carrier Kabit system:
Availability (1) It is an arrangement whereby a person
who has been granted a certificate of
Holds himself out in Agrees in some convenience allows another person who
common, that is, to special case with owns motor vehicles to operate under
all persons who some private such franchise for a fee [Lita Enterprises,
choose to employ individual to carry Inc. v. IAC (1984)].
him, as ready to for hire (2) It is invariably recognized as being
contrary to public policy and therefore
carry for hire
void and inexistent under Art. 1409. Thus,
Binding effect for the safety of passengers and the
public, the registered owner of the vehicle
Bound to carry all Not bound to carry is not allowed to prove that another
who offer and for any reason, such person has become the owner so that he
tender reasonable goods as it is may be thereby relieved of responsibility
compensation for accustomed to [Lim v. CA (2002)].
carrying them carry, unless it (3) One of the primary factors considered in
enters into a special the granting of a certificate of public
convenience for the business of public
agreement to do so
transportation is the financial capacity of
Diligence required the holder of the license, so that liabilities
arising from accidents may be duly
Extraordinary Ordinary diligence compensated. The kabit system renders
diligence illusory such purpose and, worse, may
Governing law still be availed of by the grantee to
escape civil liability caused by a negligent
Civil Code; Code of Law on obligations use of a vehicle owned by another and
Commerce and and contracts operated under his license. [Dizon v.
special laws, if not Octavio (1955)].
regulated by the (4) However, one who has availed of the
Civil Code (Art. kabit system is not precluded from filing
for damages against another who caused
1766); law of the
the injury, as the policy against the kabit
country to which the system will not be defeated by giving
goods are to be such person standing to sue. [Lim v CA
transported, if (2002)]
regarding liability Uber/Grab:
for loss, destruction,

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UP LAW BOC TRANSPORTATION LAWS
Transport Network Company or TNC is
defined as an organization whether a
corporation, partnership, or sole
proprietorship, that provides pre-arranged
transportation services for compensation
using an internet-based technology
application or a digital platform technology
to connect passengers with drivers using their
personal vehicles [DOTC D.O. No. 2015-011].
e.g. Uber and Grab.
The TNC may or may not have been granted a
Certificate of Public Convenience (CPC). If it
is a holder of a valid and current CPC, it is
known as a common carrier. Otherwise, it is
classified as a land transportation service
contractor.
The Partners (owners of the vehicles used in
transporting passengers) forming part of the
network of a TNC, may or may not be a
common carrier, depending on whether the
Partner(s) itself/themselves are holders of a
CPC. A mere Accreditation given by LTFRB is
not an equivalent to a CPC and will not make
said holder a common carrier. If the Partner
is a holder of a CPC, said Partner is a
common carrier. However, if the Partner is
not a holder of a CPC, said Partner is merely a
land transportation service contractor [BIR
RMC 70-2015].
Note: Please be guided by the requirements
under Art. 1732.
B. DILIGENCE REQUIRED
B.1. STANDARD OF DILIGENCE
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence,
according to all the circumstances of each
case:
(1) In the vigilance over the goods; and
(2) For the safety of the passengers
transported by them [Art. 1733].
Extraordinary diligence in the vigilance over
the goods is expressed in Arts 1734, 1735, and
1745, Nos. 5, 6, and 7, while the extraordinary
diligence for the safety of the passengers is
further set forth in Arts. 1755 and 1756.
As stated in Art. 1733, extraordinary diligence
is required because of the (1) nature of the
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MERCANTILE LAW
business of common carriers and (2) for
reasons of public policy.
Extraordinary diligence requires carrying
passengers safely as far as human care and
foresight can provide, using the utmost
diligence of very cautious persons, with a due
regard for all the circumstances [Art. 1755];
Note: A common carrier is not an insurer of
the safety of its passengers and is not bound
absolutely and at all events to carry them
safely and without injury [Yobido v. CA (1997)].
B.2. PRESUMPTION OF NEGLIGENCE
The mere proof of delivery of goods in good
order to a carrier, and of their arrival at the
place of destination in bad order, makes out
a prima facie case against the carrier, so that
if no explanation is given as to how the injury
occurred, the carrier must be held
responsible. It is incumbent upon the carrier
to prove that the loss was due to accident or
some other circumstance inconsistent with its
liability [Ynchausti Steamship v. Dexter and
Unson (1920)].
Note: While delay in the delivery of goods is a
breach of contract of carriage, it does not
raise the presumption of negligence because
the goods are not lost, deteriorated, or
destroyed [see Art. 1735].
In case of death of or injuries to passengers,
common carriers are presumed to have been
at fault or to have acted negligently, unless
they prove that they observed extraordinary
diligence as prescribed in Arts 1733 and 1755
[Art. 1756].
Note: Mere failure to reach one’s destination,
without injury or death, does not raise the
presumption of negligence because it does
not involve safety of the passengers.
C. LIABILITIES
The obligation of the common carrier consists
in the transportation of passengers or goods
or both [Art. 1732].
The liabilities of a common carrier arises from
a contract of carriage. Thus, the cause of
action, when there is failure on its part to
exert extraordinary diligence according to all
circumstances, is for breach of contract [Isaac
v. A.L. Ammen (1957)].
UP LAW BOC
In what follows, these liabilities in case of
breach, both with respect to vigilance over
the goods and safety of the passengers
transported, will be discussed.
TRANSPORTATION LAWS MERCANTILE LAW
II. Vigilance over Goods
A. LIABILITY, IN GENERAL
The law of the country to which the goods are
to be transported shall govern the liability of
the common carrier for their loss, destruction
or deterioration [Art. 1753].
Under Philippine law, the liability of the
common carrier with respect to vigilance over
goods, in general, are as follows:
(1) Common carriers are responsible for the
loss, destruction, or deterioration of the
goods [Art. 1734]. In fact, they are liable
even in those cases where the cause of
the loss or damage is unknown [Agbayani
(1987)].
(2) Moreover, if the goods are lost, destroyed,
or deteriorated, common carriers are
presumed to have been at fault or to have
acted negligently [Art. 1735].
Note: Two-pronged analysis in determining
liability:
(1) Whether or not the cause of the loss,
destruction, or deterioration is included
under Art. 1734;
(2) If not, whether or not the common carrier
exercised extraordinary diligence.
B. EXEMPTING CAUSES
General rule: Common carriers are
responsible for the loss, destruction, or
deterioration of the goods.
Exception: The same is due to any of the
following causes only:
(1) Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
(2) Act of the public enemy in war, whether
international or civil;
(3) Act of omission of the shipper or owner of
the goods;
(4) The character of the goods or defects in
the packing or in the containers;
(5) Order or act of competent public
authority [Art. 1734].
In all other cases of loss, destruction, or
deterioration, the common carrier is
presumed to have been at fault or to have
acted negligently, unless they prove that they
observed extraordinary diligence [Art. 1735].
Thus, in De Guzman v. CA (1988), it was held
that hijacking, not being included in Art. 1734,
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UP LAW BOC TRANSPORTATION LAWS
must be dealt with under the provisions of Art.
1735, and thus, the common carrier is
presumed to have been at fault or negligent.
B.1. NATURAL DISASTER OR CALAMITY
Requisites:
(1) The natural disaster must have been the
proximate and only cause of the loss;
(2) The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the occurrence of
the flood, storm or natural disaster [Art.
1739]; and
(3) The common carrier must not have
negligently incurred delay [Art. 1740];
In order that a common carrier may be
absolved from liability where the loss,
destruction or deterioration of the goods is
due to a natural disaster or calamity, it must
be shown that such natural disaster or
calamity was the proximate and only cause of
the loss; there must be an entire exclusion of
human agency from the cause of the injury of
the loss [Philippine American General
Insurance Co., Inc. v. MGG Marine Services, Inc.
(2002)].
Moreover, even in cases where a natural
disaster is the proximate and only cause of
the loss, a common carrier is still required to
exercise due diligence to prevent or minimize
loss before, during and after the occurrence
of the natural disaster, for it to be exempt
from liability under the law for the loss of the
goods [Art. 1739].
Fire may not be considered a natural disaster
or calamity. This must be so as it arises
almost invariably from some act of man or by
human means. It does not fall within the
category of an act of God unless caused by
lightning or by other natural disaster or
calamity. It may even be caused by the actual
fault or privity of the carrier [Eastern Shipping
Lines v. IAC (1987)].
Note: If the common carrier negligently incurs
in delay in transporting the goods, a natural
disaster shall not free such carrier from
responsibility [Art. 1740].
B.2. ACT OF PUBLIC ENEMY
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MERCANTILE LAW
Requisites:
(1) The act of the public enemy was
committed either in an international or
civil war [Art. 1734];
(2) The act of the public enemy must have
been the proximate and only cause; and
(3) The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the act of the
public enemy causing the loss,
destruction or deterioration of the goods
[Art. 1739].
Thieves, rioters, robbers, and insurrectionists,
though at war with social order, are not in a
legal sense classed as public enemies, but
are merely private depredators for whose acts
a carrier is answerable. Pirates on the high
seas, however, stand as an exception to this
rule. They are considered the enemies of all
civilized nations, and indeed of the human
race, and consequently their depredations on
a common carrier will excuse him from
liability [Aquino].
B.3. ACT OR OMISSION OF SHIPPER OR
OWNER
The act or omission of the shipper must have
been the proximate and only cause of the loss,
destruction, or deterioration of the goods.
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause being the
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Art. 1741].
B.4. CHARACTER OF THE GOODS
Requisites:
(1) The loss, destruction, or deterioration of
the goods is due to the character of the
goods or defects in the packing or in the
containers [Art. 1739]; and
(2) The common carrier must exercise due
diligence to forestall or lessen the loss
[Art. 1741].
If the fact of improper packing is known to the
carrier or its servants or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not
relieved of liability for loss or injury resulting
therefrom [Southern Lines v. CA (1962)].
B.5. ORDER OF COMPETENT AUTHORITY
UP LAW BOC TRANSPORTATION LAWS
Requisites:
(1) There must be an order or act of
competent public authority through
which the goods are seized or destroyed
[Art. 1734]; and
(2) The said public authority must have had
the power to issue the order [Art. 1743].
The intervention of the municipal officials
was not of a character that would render
impossible the fulfillment by the carrier of the
obligation. A carrier is not duty bound to obey
an illegal order (of a mayor) to dump into the
sea the scrap iron. There is absence of
sufficient proof that the issuance of the order
was attended with such force or intimidation
as to completely overpower the will of the
carrier’s employees [Ganzon v. CA (1988)).
B.6. FORCE MAJEURE
Force majeure – in general, has also been
invoked as an exempting cause based on Art.
1174, which states that no person shall be
responsible for a fortuitous event which could
not be foreseen, or which, though foreseen,
was inevitable.
A fortuitous event has the following
characteristics:
(1) The cause of the unforeseen and
unexpected occurrence, or the failure of
the debtor to comply with his obligations,
must be independent of human will;
(2) It must be impossible to foresee the event
which constitutes the caso fortuito, or if it
can be foreseen, it must be impossible to
avoid;
(3) The occurrence must be such as to render
it impossible for the debtor to fulfill his
obligation in a normal manner; and
(4) The obligor must be free from any
participation in the aggravation of the
injury resulting to the creditor.
There must be an entire exclusion of human
agency from the cause of injury or loss.
Moreover, a common carrier may not be
absolved from liability in case of force
majeure or fortuitous event alone. The
common carrier must still prove that it was
not negligent in causing the death or injury
resulting from an accident [Yobido v. CA
(1997)].
Loss of a ship and of its cargo, in a wreck due
to accident or force majeure must, as a
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general rule, fall upon their respective owners,
except in cases where the wrecking or
stranding of the vessel occurred through the
malice, carelessness, or lack of skill on the
part of the captain or because the vessel put
to sea is insufficiently repaired and prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the
merchandise was due to accident and force
majeure and not to fraud, fault, or negligence
on the part of the captain or owner of the ship
[Tan Chiong Sian v. Inchausti (1912)].
C. CONTRIBUTORY NEGLIGENCE
The liability of the common carrier shall be
equitably reduced when the loss, destruction,
or deterioration of the goods when:
(1) The negligence of the common carrier
was the proximate cause thereof; and
(2) The shipper or owner merely contributed
to such loss, destruction, or deterioration
[Art. 1741].
D. DURATION OF EXTRAORDINARY
RESPONSIBILITY FOR GOODS
The responsibility to exercise extraordinary
diligence begins from the time the goods are
unconditionally placed in the possession of
and received by the carrier for transportation
[Art. 1736].
The carrier’s responsibility terminates in any
of the following cases:
(1) When the goods are delivered actually or
constructively by the carrier to the
consignee or to the person who has a
right to receive them [Art. 1736];
(2) When the goods are temporarily
unloaded or stored in transit by reason of
the exercise of the shipper or owner of his
right of stoppage in transitu; or
(3) When the consignee has been advised of
the arrival of the goods at the place of
destination and has had reasonable
opportunity to remove them or dispose of
them from the warehouse of the carrier at
the place of destination [Art. 1738].
In dealing with the contract of common
carriage of passengers, for purpose of
accuracy, there are two (2) aspects of the
same, namely:
(1) contract ‘to carry (at some future time),’
which contract is consensual and is
UP LAW BOC TRANSPORTATION LAWS
necessarily perfected by mere consent;
and
(2) contract ‘of carriage’ or ‘of common
carriage,’ which should be considered as
a real contract for not until the carrier is
actually used can the carrier be said to
have already assumed the obligation of a
carrier [Paras, Civil Code Annotated, 11th
Ed].
Note: The distinction is important in
determining when the common carrier is
required to exercise extraordinary
responsibility. The birth of the contract is not
necessarily the birth of the duty to exercise
extraordinary responsibility.
D.1. DELIVERY OF GOODS TO COMMON
CARRIERS
Under Art. 1736, delivery means
unconditionally placing the goods in the
possession of the carrier and the carrier
receiving them for transportation.
Thus, if the common carrier received the
goods not for transportation but only for
safekeeping, then the duty of extraordinary
diligence has not yet started.
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common
carrier at will.
The liability of the carrier as common carrier
begins with the actual delivery of the goods
for transportation and not merely with the
formal execution of a receipt or bill of lading;
the issuance of a bill of lading is not
necessary to complete delivery and
acceptance. Even where it is provided by
statute that liability commences with the
issuance of the bill of lading actual delivery
and acceptance are sufficient to bind the
carrier [Cia. Maritima v. Ins. Co. of North
America (1964)].
D.2. ACTUAL OR CONSTRUCTIVE
DELIVERY
The extraordinary responsibility of the
common carrier ends when, subject to Art.
1738, the goods are delivered actually or
constructively by the carrier to:
(1) The consignee; or
(2) The person who has a right to receive
them (Art. 1736), such as agents, brokers,
and the like.
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Art. 1738 provides that the extraordinary
liability of the common carrier continues to
be operative even during the time the goods
are stored in a warehouse of the carrier at the
place of destination, until the consignee has:
(1) Been advised of the arrival of the goods;
and
(2) Had reasonable opportunity thereafter to
remove them or otherwise dispose of
them.
Delivery of the cargo to the customs
authorities is not delivery to the consignee or
“to the person who has a right to receive
them” as contemplated in Art. 1736 because
in such case the goods are still in the hands
of the government and the owner cannot
exercise dominion over them. However, the
parties may agree to limit the liability of the
carrier considering that the goods still have
to go through the inspection of the customs
authorities before they are actually turned
over to the consignee. This stipulation is not
contrary to morals or public policy. This is a
situation where it may be said that the carrier
loses control of the goods because of a
custom regulation and it is unfair that it be
made responsible for what may happen
during the interregnum [Lu Do v. Binamira
(1957)].
It is settled in maritime law jurisprudence
that cargoes while being unloaded generally
remain under the custody of the carrier [Asian
Terminals, Inc. v. Philam Insurance Co. (2013)]
D.3. TEMPORARY UNLOADING OR
STORAGE
The common carrier’s duty to observe
extraordinary diligence over the goods
remains in full force and effect even when
they are temporarily unloaded or stored in
transit, unless the shipper or owner has made
use of the right of stoppage in transitu [Art.
1737].
General rule: Extraordinary diligence over the
goods remains even when the goods are
temporarily unloaded or stored in transit.
Exception: The duty to observe such diligence
ceases when shipper or owner made use of
the right of stoppage in transitu.
Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
and resumes possession of them
UP LAW BOC TRANSPORTATION LAWS
constructively while they are in the course of
transit from him to the purchaser, and not yet
actually delivered to the latter [Agbayani
(1987)].
Basis: Under Art. 1530, when the buyer of the
goods becomes insolvent, the unpaid seller
who has parted with the possession of the
goods at any time while they are in transit,
may resume the possession of the goods as
he would have had if he had never parted
with the possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the
goods in the capacity of an ordinary bailee or
warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence,
only ordinary diligence is required [Agbayani
(1987)].
E. STIPULATION FOR LIMITATION OF
LIABILITY
There are two possible stipulations limiting
the liability of the common carrier:
(1) Stipulation limiting the common carrier’s
liability as to the diligence required;
(2) Stipulation limiting the common carrier’s
liability as to the amount of liability.
An agreement limiting the common carrier’s
liability for delay on account of strikes or riots
is also valid [Art. 1748].
E.1. AS TO DILIGENCE REQUIRED
A stipulation between the common carrier
and the shipper or owner limiting the liability
of the former for the loss, destruction, or
deterioration of the goods to a degree less
than extraordinary diligence shall be valid,
provided it be:
(1) In writing, signed by the shipper or
owner;
(2) Supported by a valuable consideration
other than the service rendered by the
common carrier; and
(3) Reasonable, just and not contrary to
public policy [Art. 1744].
Any of the following or similar stipulations
shall be considered unreasonable, unjust and
contrary to public policy:
(1) That the goods are transported at the risk
of the owner or shipper;
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MERCANTILE LAW
That the common carrier will not be liable for
any loss, destruction, or deterioration of the
goods;
(2) That the common carrier need not observe
any diligence in the custody of the goods;
(3) That the common carrier shall exercise a
degree of diligence less than that of a good
father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
(4) That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
(5) That the common carrier’s liability for acts
committed by thieves, or of robbers who do
not act with grave or irresistible threat,
violence or force, is dispensed with or
diminished;
(6) That the common carrier is not
responsible for the loss, destruction, or
deterioration of goods on account of the
defective condition of the car, vehicle, ship,
airplane or other equipment used in the
contract of carriage [Art. 1745].
The following stipulations are also void:
(1) Stipulation exempting the common
carrier from any and all liability for loss or
damage occasioned by its own
negligence;
(2) Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray (1921)].
E.2. LIMITATION OF LIABILITY TO FIXED
AMOUNT
A stipulation that the common carrier’s
liability is limited to the value of the goods
appearing in the bill of lading, unless the
shipper or owner declares a greater value, is
binding [Art. 1749].
A contract fixing the sum that may be
recovered by the owner or shipper for the loss,
destruction or deterioration of the goods is
valid if:
(1) It is reasonable and just under the
circumstances; and
UP LAW BOC TRANSPORTATION LAWS
(2) It has been fairly and freely agreed upon
[Art. 1750].
While a passenger may not have signed the
plane ticket, he is nevertheless bound by the
provision thereof; such provisions have been
held to be part of the contract of carriage and
valid and binding upon the passenger
regardless of the latter’s lack of knowledge or
assent to the regulation. It is what is known
as a contract of adhesion wherein one party
imposes a ready-made form of contract on
the other. The one who adheres to the
contract is in reality free to reject it entirely. A
contract limiting liability upon an agreed
valuation does not offend against the policy
of the law forbidding one from contracting
against his own negligence [Ong Yiu v. CA
(1979)].
[However], the fact that the conditions are
printed at the back of the ticket stub in letters
so small that they are hard to read would not
warrant the presumption that the [shipper]
was aware of those conditions such that he
had “fairly and freely agreed” to those
conditions [Shewaram v. PAL (1966)].
Factors Affecting Agreement
The effect of these stipulations is subject to
the following provisions:
(1) An agreement limiting the common
carrier’s liability may be annulled by the
shipper or owner if the common carrier
refused to carry the goods unless the
former agreed to such stipulation [Art.
1746].
(2) If the common carrier, without just cause,
delays the transportation of the goods or
changes the stipulated or usual route, the
contract limiting the common carrier’s
liability cannot be availed of in case of the
loss, destruction, or deterioration of the
goods [Art. 1747]. The limitation may be
availed of if the delay or change of route
was due to a just cause.
(3) The fact that the common carrier has no
competitor along the line or route, or a
part thereof, to which the contract refers
shall be taken into consideration on the
question of whether or not a stipulation
limiting the common carrier’s liability is
reasonable, just and in consonance with
public policy [Art. 1751].
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MERCANTILE LAW
(4) Even when there is an agreement limiting
the liability of the common carrier in the
vigilance over the goods, the common
carrier is disputably presumed to have
been negligent in case of their loss,
destruction or deterioration [Art. 1752].
E.3. LIMITATION OF LIABILITY IN ABSENCE
OF DECLARATION OF GREATER VALUE
A stipulation that the common carrier’s
liability is limited to the value of the goods
appearing in the bill of lading, unless the
shipper or owner declares a greater value, is
binding [Art. 1749].
F. LIABILITY FOR BAGGAGE OF
PASSENGERS
Baggage are things that a passenger will
bring with him consistent with a temporary
absence from where he lives. Passenger’s
baggage must have a direct relationship with
the passenger who is traveling.
For instance, a balikbayan box or suitcase is
passenger’s baggage. However, 10,000 cans
of corned beef is not considered as passenger
baggage. They are considered as goods. They
are not part of the contract of carriage [of
passenger]. A separate contract of carriage
[or bill of lading] must be entered into in
order to transport them. These goods will
then be transported whether or not a person
is physically traveling with them [Agbayani
(1987)].
There are two kinds of passenger’s baggage,
which are governed differently:
(1) Passenger baggage in the custody of the
passenger (or carry-on luggage); and
(2) Passenger baggage not in the custody of
the passenger (or checked-in luggage).
The liability is greater for baggage that is in
the custody of the carrier, or checked-in
baggage, as compared to those in the
possession of the passenger.
F.1. CHECKED-IN BAGGAGE
The provisions of Arts 1733-1753 shall apply to
passenger’s baggage which is not in his
personal custody or in that of his employee
[Art. 1754].
In other words, the rules governing the
responsibility of a common carrier in the
UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

transportation of goods just discussed apply. (3) Any stipulation whereby the responsibility
Thus, extraordinary diligence is required. of the common carrier as set forth in
Articles 1998-2001 is suppressed or
F.2. BAGGAGE IN POSSESSION OF
diminished shall be void [Art. 2003].
PASSENGERS
As to baggage other than checked-in
baggage, they are governed by Arts 1998, and
2000-2003, concerning the responsibility of
hotel-keepers [Art. 1754].
Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
that of their employees, while being
transported, are regarded as necessary
deposits. The common carriers are
responsible as depositaries, provided that:
(1) Notice was given to them, or to their
employees, of the effects brought by the
passengers; and
(2) The passengers take the precautions
which the common carrier advised
relative to the care and vigilance of their
baggage.
In case of loss or injury to the baggage of
passengers in their personal custody, or in
that of their employees, while being
transported, the carrier is liable if the loss or
injury is caused by:
(1) His servants;
(2) His employees;
(3) Strangers [Art. 2000]; or
(4) A thief or robber done without the use of
arms or irresistible force [Art. 2001].
The carrier is not liable if loss or injury is
caused by:
(1) Force majeure [Art. 2000);
(2) Theft or robbery with the use of arms or
irresistible force [Art. 2001);
(3) The acts of the passenger, his family,
servants, or visitors;
(4) The character of the baggage [Art. 2002).
The following provisions also figure in
determining the liability of the common
carrier:
(1) The fact that passengers are constrained
to rely on the vigilance of the common
carrier shall be considered in determining
the degree of care required of him [Art.
2000).
(2) The common carrier cannot free himself
from responsibility by posting notices to
the effect that he is not liable for the
articles brought by the passenger.

Page 112 of 353

UP LAW BOC TRANSPORTATION LAWS
III. Safety of
Passengers
A. LIABILITY, IN GENERAL
Under Philippine law, the liability of the
common carrier with respect to the safety of
passengers, in general, are as follows:
(1) A common carrier is bound to carry the
passengers safely as far as human care
and foresight can provide, using the
utmost diligence of very cautious persons,
with a due regard for all the
circumstances [Art. 1755].
(2) In case of death of or injuries to
passengers, common carriers are
presumed to have been at fault or to have
acted negligently, unless they prove that
they observed extraordinary diligence [Art.
1756].
Note: It is not enough that the accident was
caused by force majeure, the common carrier
must still prove that it was not negligent in
causing the injuries resulting from such
accident. [Bachelor Express v. CA (1990)]
Bachelor Express illustrates that force
majeure is not itself a defense; the exercise of
the diligence required by law is the defense.
B. VOID STIPULATIONS
General rule: The responsibility of a common
carrier for the safety of passengers cannot be
dispensed with or lessened by stipulation by
the posting of notices, by statements on
tickets, or otherwise [Art. 1757].
Exception: When a passenger is carried
gratuitously, a stipulation limiting the
common carrier’s liability for negligence is
valid.
Exception to the exception: Even when a
passenger is carried gratuitously, a
stipulation limiting the common carrier’s
liability for willful acts or gross negligence is
invalid.
The reduction of fare does not justify any
limitation of the common carrier’s liability
[Art. 1758].
C. DURATION OF LIABILITY
As in the contract of carriage for goods, the
perfection of the contract of carriage of
passengers does not necessarily coincide with
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the commencement of the duty of
extraordinary diligence. It may occur at the
same time or later.
Based on jurisprudence, the duty that the
carrier of passengers owes to its patrons
extends to persons boarding the cars as well
as those alighting therefrom [Del Prado v.
Manila Railroad (1929)].
This is also reflected in Art. 17, Warsaw
Convention, which applies to international air
carriage. It provides that the liability of a
common carrier for injury to the passenger
lasts from embarkation to disembarkation,
including the period when the passenger is
on board the aircraft.
In maritime commerce, Art. 698, Code of
Commerce relates to the period of the voyage:
(1) In case a voyage already begun should be
interrupted:
(a) The passengers shall be obliged to
pay the fare in proportion to the
distance covered; and
(b) If the interruption is due to a
fortuitous event, without right to
recover for losses and damages; if
caused by the captain exclusively,
with a right to indemnity.
(2) If the interruption should be caused by
the disability of the vessel, and a
passenger should agree to await the
repairs:
(a) He may not be required to pay any
increased price of passage; but
(b) His living expenses during the stay
shall be for his own account.
(3) In case of delay in the departure of the
vessel, the passengers have:
(a) The right to remain on board;
(b) If the delay is not due to a fortuitous
event or force majeure, with the right
to be furnished with food for the
account of the vessel;
(c) If the delay should exceed ten days:
(i) Passengers requesting the same
shall be entitled to the return of
the fare; and
(ii) If it is due exclusively to the fault
of the captain or ship agent, they
may also demand indemnity for
losses and damages.
A vessel exclusively devoted to the
transportation of passengers must take them
directly to the port or ports of destination, no
UP LAW BOC TRANSPORTATION LAWS
matter what the number of passengers may
be, making all the stops indicated in its
itinerary.
C.1. WAITING FOR CARRIER OR BOARDING
OF CARRIER
As to the commencement of the duty of the
common carrier, it was held that the duty that
the carrier of passengers owes to its patrons
extends to persons boarding the cars as well
as to those alighting therefrom [Del Prado vs.
Manila Electric Company (1929)].
Thus, it is the duty of common carriers of
passengers to stop their conveyances at a
reasonable length of time in order to afford
passengers an opportunity to board and
enter, and they are liable for injuries suffered
by boarding passengers resulting from the
sudden starting up or jerking of their
conveyances while they are doing so [Dangwa
Transportation v. CA (1991)].
In this connection, however, a person
boarding a moving car must be taken to
assume the risk of injury from boarding the
car under the conditions open to his view, but
he cannot fairly be held to assume the risk
that the motorman, having the situation in
view, will increase the peril by accelerating
the speed of the car before he is planted
safely on the platform [Del Prado v. Manila
Railroad (1929)].
With respect to carriage of passengers by
trains, the extraordinary responsibility of
common carriers commences the moment
the person who purchases the ticket from the
carrier presents himself at the proper place
and in a proper manner to be transported
with a bona fide intent to ride the coach
[Aquino, citing Vda. de Nueca, et al. vs. Manila
Railroad Company].
Similarly, with respect to carriage of
passengers by sea, the duty of the carrier
commences as soon as the person with bona
fide intention of taking passage places
himself in the care of the carrier or its
employees and is accepted as passenger.
[Aquino]
C.2. ARRIVAL AT DESTINATION
As to the termination of the duty of the
common carrier, it has been held that the
relation of carrier and passenger does not
cease at the moment the passenger alights
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from the carrier’s vehicle at a place selected
by the carrier at the point of destination, but
continues until the passenger has had a
reasonable time or a reasonable opportunity
to leave the carrier’s premises. What is a
reasonable time or a reasonable delay within
this rule is to be determined from all the
circumstances:
(1) A person who, after alighting from a train,
walks along the station platform is
considered still a passenger;
(2) A passenger, who has alighted at his
destination and is proceeding by the
usual way to leave the company’s
premises, but before actually doing so is
halted by the report that his brother, a
fellow passenger, has been shot, and he
in good faith and without intent of
engaging in the difficulty, returns to
relieve his brother, is deemed reasonably
and necessarily delayed and thus
continues to be a passenger entitled as
such to the protection of the railroad and
company and its agents [La Mallorca v.
CA (1966)].
The reasonableness of time should be made
to depend on the attending circumstances of
the case, such as the kind of common carrier,
the nature of its business, the customs of the
place, and so forth, and therefore precludes a
consideration of the time element per se
without taking into account such other
factors. The primary factor to be considered is
the existence of a reasonable cause as will
justify the presence of the victim on or near
the petitioner’s vessel.
In the case of a shipper, the passengers of
vessels are allotted a longer period of time to
disembark from the ship than other common
carriers such as a passenger bus, since such
vessels are capable of accommodating a
bigger volume of both passenger and
baggage as compared to the capacity of a
regular commuter bus. Consequently, a ship
passenger will need at least an hour as is the
usual practice, to disembark from the vessel
and claim his baggage whereas a bus
passenger can easily get off the bus and
retrieve his luggage in a very short period of
time [Aboitiz Shipping v. CA (1989)].
The relation of carrier and passenger
continues until the latter has been landed at
the port of destination and has left the
UP LAW BOC TRANSPORTATION LAWS
carrier’s premises. Hence, the carrier
necessarily would still have to exercise
extraordinary diligence in safeguarding the
comfort, convenience and safety of its
stranded passengers until they have reached
their final destination [PAL v. CA (1993)].
Note: Despite the Court’s pronouncement in
PAL v. CA, note that common carriers are
bound to observe extraordinary diligence in
the ‘safety’ of its passengers. The law does
not mention the words ‘comfort’ and
‘convenience.’
D. LIABILITY FOR ACTS OF OTHERS
D.1. EMPLOYEES
General rule: Common carriers are liable for
the death of or injuries to passengers through
the negligence or willful acts of the former’s
employees, although such employees may
have acted beyond the scope of their
authority or in violation of the orders of the
common carriers.
This liability does not cease even upon proof
that they exercised all the diligence of a good
father of a family in the selection and
supervision of their employees [Art. 1759].
Also, this liability cannot be eliminated or
limited by stipulation, by the posting of
notices, by statements on the tickets or
otherwise [Art. 1760].
Ratio: The servant is clothed with delegated
authority and charged with the duty to
execute the carrier’s undertaking to carry the
passenger safely [Agbayani (1987)]. Also, the
defense of diligence in the selection and
supervision of employees does not obtain
because the liability is not based on quasi-
delict, but on culpa contractual. However,
there must be a reasonable connection
between the act and the contract of carriage.
Note: The employee must be on duty at the
time of the act.
It is enough that the assault happens within
the course of the employee’s duty. It is no
defense for the carrier that the act was done
in excess of authority or in disobedience of
the carrier’s orders. The carrier’s liability here
is absolute in the sense that it practically
secures the passengers from assaults
committed by its own employees [Maranan v.
Perez (1967)].
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Exception: A common carrier is not
responsible for acts falling under force
majeure.
When a party is unable to fulfill his obligation
because of force majeure, the general rule is
that he cannot be held liable for damages for
non-performance [Japan Airlines vs. CA
(1998)].
Note: In order to be exempted from liability
due to a fortuitous event, a common carrier
must still prove that it was not negligent in
causing the death or injury resulting from an
accident. In other words, there must be a
complete exclusion of human agency from
the cause of injury or death. Hence, it was
held that, under the circumstances, the
explosion of the new tire may not be
considered a fortuitous event as there are
human factors involved in the situation
[Yobido vs. CA (1997)].
D.2. OTHER PASSENGERS AND
STRANGERS
General Rule: A common carrier is not liable
for injuries inflicted by strangers or co-
passengers.
Exception: A common carrier is responsible
for injuries suffered by a passenger on
account of the wilful acts or negligence of
other passengers or of strangers, if the
common carrier's employees through the
exercise of the diligence of a good father of a
family could have prevented or stopped the
act or omission. [Art. 1763]
Note: The law speaks of injuries suffered by
the passenger but not death. However, there
appears to be no reason why the common
carrier should not be held liable under such
circumstances. The word “injuries” should be
interpreted to include death [Agbayani (1987)].
Under Art. 1763, a tort committed by a
stranger which causes injury to a passenger
does not accord the latter a cause of action
against the carrier. The negligence for which
a common carrier is held responsible is the
negligent omission by the carrier’s employees
to prevent the tort from being committed
when the same could have been foreseen and
prevented by them. Further, when the
violation of the contract is due to the willful
acts of strangers, the degree of care essential
to be exercised by the common carrier for the
UP LAW BOC TRANSPORTATION LAWS
protection of its passenger is only that of a
good father of a family [Pilapil v. CA (1989)].
D.3. MANUFACTURERS OF EQUIPMENT
In case of mechanical defects, it was held
that while a carrier is not an insurer of the
safety of the passengers, it should
nevertheless be held to answer for the laws
its equipment if such flaws were at all
discoverable. In this connection, the
manufacturer of the defective appliance is
considered in law the agent of the carrier,
and the good repute of the manufacturer will
not relieve the carrier from liability. The
rationale of the carrier’s liability is the fact
that the passenger has no privity with the
manufacturer of the defective equipment;
hence, he has no remedy against him, while
the carrier usually has [Necesito vs. Paras
(1958)].
E. CONTRIBUTORY NEGLIGENCE
The passenger must observe the diligence of
a good father of a family to avoid injury to
himself [Art. 1762].
The contributory negligence of the passenger
does not bar recovery of damages for his
death or injuries, if the proximate cause
thereof is the negligence of the common
carrier, but the amount of damages shall be
equitably reduced [Art. 1762].
It is negligence per se for a passenger on a
railroad to voluntarily or inadvertently
protrude his arm, hand, elbow, or any other
part of his body through the window of a
moving car beyond the outer edge of the
window or outer surface of the car, so as to
come in contact with objects or obstacles
near the track; no recovery can be had for an
injury which but for such negligence would
not have been sustained [Isaac v. A. L.
Ammen Transportation (1975)]. In this case,
the negligence of the passenger was not
contributory, but was the proximate cause of
the injury. Hence, the common carrier was
exempted from liability.
F. EXTENT OF LIABILITY FOR
DAMAGES
Damages recoverable from common carriers,
both in cases of carriage of passengers and
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goods, shall be awarded in accordance with
Title XVIII concerning Damages.
Art. 2206, on liability, in case of death, for
loss of earning capacity, support, and moral
damages for mental anguish, shall also apply
to the death of a passenger caused by the
breach of contract by a common carrier [Art.
1764].
Thus, the damages recoverable are:
(1) Actual or compensatory damages;
(2) Moral damages;
(3) Exemplary damages;
(4) Nominal, temperate, and liquidated
damages;
(5) Attorney’s fees.
F.1. ACTUAL OR COMPENSATORY
DAMAGES
Actual or compensatory damages refer to
adequate compensation for such pecuniary
loss suffered as duly proved [Art. 2199].
Under Art. 2201, the liability for damages
include:
(1) In case the common carrier acted in good
faith:
(a) The natural and probable
consequence of the breach of the
obligation; and
(b) Those which the parties have
foreseen or could have reasonably
foreseen at the time the obligation
was constituted;
(2) In case of fraud, bad faith, malice or
wanton attitude, all damages which may
be reasonably attributed to the non-
performance of the obligation.
In case of death, actual damages also
include:
(1) Loss of earning capacity, unless the
deceased had no earning capacity at the
time of death; and
(2) Support for a period not exceeding five
years [Art. 2206].
Note: Art. 2206 applies only in case of death
of the passenger.
In the absence of a showing that common
carrier’s attention was called to the special
circumstances requiring prompt delivery of a
passenger’s luggage, the common carrier
cannot be held liable for the cancellation of
passenger’s contracts [for exhibition of films]
as it could not have foreseen such an
UP LAW BOC TRANSPORTATION LAWS
eventuality when it accepted the luggage for
transit [Pan-Am World Airways v. IAC (1988)].
F.2. MORAL DAMAGES
Moral damages, though incapable of
pecuniary computation, if they are the
proximate result of the common carrier’s
wrongful act or omission, may be recovered
[Art. 2217].
In cases of breach of contract of carriage,
moral damages may be recovered where:
(1) The common carrier acted fraudulently;
(2) The common carrier acted in bad faith
[Art. 2220];
(3) Death of a passenger resulted even in the
absence of bad faith or fraud [Art. 2206].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
with some motive of self-interest or will or for
ulterior purpose [Air France v. Carrascoso
(1966)].
When it comes to contracts of common
carriage, inattention and lack of care on the
part of the carrier resulting in the failure of
the passenger to be accommodated in the
class contracted for amounts to bad faith or
fraud which entitles the passenger to the
award of moral damages in accordance with
Art. 2220 [Ortigas v. Lufthansa (1975)].
Willful and deliberate overbooking on the
part of the airline carrier constitutes bad faith.
Under Section 3, Economic Regulations No. 7
of the Civil Aeronautics Board, overbooking,
which does not exceed ten percent, is not
considered as deliberate and therefore does
not amount to bad faith [United Airlines v. CA
(2001)].
F.3. EXEMPLARY DAMAGES
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted
in wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232].
Exemplary damages serves as an instrument
to serve the ends of law and public policy by
reshaping socially deleterious behaviors,
specifically, in the case, to compel the
common carrier to control their employees, to
tame their reckless instincts, and to force
them to take adequate care of human beings
and their property [Mecenas v. CA].
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F.4. NOMINAL, TEMPERATE, AND
LIQUIDATED DAMAGES
Nominal damages are adjudicated in order
that a right of the plaintiff, which has been
violated by the defendant, may be vindicated
or recognized, not for the purpose of
indemnifying the plaintiff for any loss
suffered by him [Art. 2221]. It may be awarded
in case of breach of contract of carriage and
in every case where any property right has
been invaded [Art. 2222].
A violation of the passenger’s right to be
treated with courtesy in accordance with the
degree of diligence required by law to be
exercised by every common carrier entitles
the passenger to nominal damages [Saludo v.
CA].
Temperate or moderate damages, which are
more than nominal but less than
compensatory damages, may be recovered
when some pecuniary loss has been suffered
but its amount cannot, from the nature of the
case, be proved with certainty [Art. 2224].
Liquidated damages are those damages
agreed upon by the parties to a contract, to
be paid in case of breach thereof [Art. 2226].
F.5. ATTORNEY’S FEES
Under Art. 2208, as applicable to a contract
of carriage, attorney’s fees and expenses of
litigation may be recovered in the following
cases:
(1) When exemplary damages are awarded;
(2) When the common carrier’s act or
omission has compelled the plaintiff to
litigate with third persons or to incur
expenses to protect his interest;
(3) Where the common carrier acted in gross
and evident bad faith in refusing to satisfy
the plaintiff’s valid, just and demandable
claim;
(4) In any other case where the court deems
it just and equitable that attorney’s fees
and expenses of litigation should be
recovered.
UP LAW BOC TRANSPORTATION LAWS
IV. Bill of Lading
(Reference is to the Code of Commerce,
unless otherwise indicated)
Definition
Bill of lading – a written acknowledgement,
signed by the master of a vessel or other
authorized agent of the carrier, that he has
received the described goods from the
shipper, to be transported on the expressed
terms to the described place of destination,
and to be delivered there to the designated
consignee or parties [70 Am. Jur. 2d 924].
It is not, however, indispensable for the
creation of a contract of carriage. [Cia.
Maritima v. Ins. Co. of North America (1964)].
In the absence of a bill of lading, disputes
shall be determined by the legal proofs which
the parties may present in support of their
respective claims, according to the general
provisions established in the Code of
Commerce for commercial contracts [Art. 354,
Code of Commerce].
The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino, Essentials of Transportation
& Public Utilities Law (2011)].
In the absence of fraud, concealment, or
improper conduct, it is presumed that the
stipulations of the bill are known to the
shipper, and he is generally bound by his
acceptance whether he reads the bill or not
[Magellan Mfg. Marketing Corp. v. CA (1991)].
A. THREE-FOLD CHARACTER:
(1) Receipt as to the quantity and description
of the goods shipped;
(2) Contract to transport and deliver the
goods to the consignee or other person
therein designated, on the terms
specified in such instrument; and
(3) Document of title, which makes it a
symbol of the goods.
The bill of lading constitutes the legal
evidence of the contract of transportation,
and all disputes between the parties
regarding the execution and performance of
the contract shall be decided by the contents
of the bill of lading issued by the carrier. The
law admits no exceptions other than the
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MERCANTILE LAW
falsity and material error in its drafting [Art.
353]
Bill of Lading is covered by the Parol Evidence
Rule in which the terms of the contract are
rendered conclusive upon the parties and
evidence aliunde is not admissible to vary or
contradict a complete and enforceable
agreement embodied in a document, subject
to well defined exceptions [Magellan Mfg.
Marketing Corp. v. CA (1991)].
B. DELIVERY OF GOODS
The goods should be delivered to the
consignee or any other person to whom the
bill of lading was validly transferred or
negotiated.
The carrier is duty bound to deliver the goods
in the same condition in which, according to
the bill of lading, they were found at the time
of there were received, without damage or
impairment [Art. 363].
B.1. PERIOD OF DELIVERY
Delivery should be made within the period
fixed for the delivery of the goods as
stipulated in the bill of lading [Art. 370].
In case of failure to deliver, the carrier shall
pay the indemnity agreed upon in the bill of
lading, neither the shipper nor consignee
being entitled to anything else.
Should there be no period previously fixed,
the carrier is bound to forward the goods in
the first shipment of the same or similar
merchandise which he may make to the point
of delivery. Should he not do so, he shall be
liable for damages cause by the delay [Art.
358].
If no indemnity is fixed and there is delay, the
carrier shall be liable for the damages which
may have been caused by the delay [Art. 370].
Period of delivery is Delivery must be
stipulated made within period
fixed
Period of delivery is Delivery must be
NOT stipulated made through the first
shipment of the same
or similar
merchandise. If not
made on the first
shipment, delay
UP LAW BOC TRANSPORTATION LAWS
arises.
Indemnity for delay Liability is limited to
is fixed in Bill of the stipulation
Lading
Indemnity for delay Liable for all
NOT fixed damages which may
have been caused by
the delay.
B.2. DELIVERY WITHOUT SURRENDER OF
BILL OF LADING
After the contract has been complied with,
the bill of lading which the carrier has issued
shall be returned to him, and by virtue of the
exchange of this title with the thing
transported, the respective obligations and
actions shall be considered cancelled, unless
in the same act the claim which the parties
may wish to reserve be reduced to writing,
exception being made of the provisions of Art.
366, on period for filing claims [Art. 353, 2nd
para.].
If, in case of loss or for any other reason
whatsoever, the consignee cannot return,
upon receiving the merchandise, the bill of
lading subscribed by the carrier, he shall give
said carrier a receipt for the goods delivered.
This receipt produces the same effects as the
return of the bill of lading [Art. 353, 3rd para.].
The surrender of the original bill of lading is
not a condition precedent for a common
carrier to be discharged of its contractual
obligation. If surrender of the original bill of
lading is not possible, acknowledgment of
the delivery by signing the delivery receipt
suffices [National Trucking and Forwarding
Corp v Lorenzo Shipping Corp (2005)]
B.3. REFUSAL OF CONSIGNEE TO TAKE
DELIVERY
The consignee may refuse to take delivery in
the following cases:
(1) If only part of the goods transported
should be delivered, when he proves that
he cannot make use thereof without the
others [Art. 363].
(2) When the goods are rendered useless for
purposes of sale or consumption in the
use for which they are properly destined,
in which case the consignee may demand
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MERCANTILE LAW
payment of the goods at current market
prices [Art. 365];
(3) In case part of the goods is in good
condition and separation is possible, the
consignee may refuse to receive only the
damaged goods [Art. 365].
(4) Where the delay is through the fault of
the carrier [Art. 371].
In case of dispute as to the condition of the
goods, the same shall be examined by
experts appointed by the parties, and the
third one, in case of disagreement, appointed
by the judicial authority.
If the persons interested should not agree
with the report, said judicial authority shall
order the deposits of the merchandise in a
safe warehouse, and the parties interested
shall make use of their rights in the proper
manner. [Art. 367].
C. PERIOD FOR FILING CLAIMS
Pursuant to Art. 366, Code of Commerce, a
claim, on account of damage found upon
opening the packages, must be made against
the carrier:
(1) Within 24 hours, if the indications of the
damage cannot be ascertained from the
exterior of the packages (i.e., latent
damage); or
(2) At the time of receipt, if the indications
damage can be so ascertained (i.e.,
patent damage).
But the Court in Aboitiz v Insurance Company
of North America [GR No. 168402, 6 Aug
2008] made a pro hac vice ruling, in that
even if the notice was given more than 24 hrs
after the receipt of the goods, the notice
requirement was held nevertheless to have
been complied with, due to the peculiar
circumstances:
“Provisions specifying a time to give notice of
damage to common carriers are ordinarily to
be given a reasonable and practical, rather
than a strict construction. We give due
consideration to the fact that the final
destination of the damaged cargo was a
school institution where authorities are
bound by rules and regulations governing
their actions. Understandably, when the
goods were delivered, the necessary
clearance had to be made before the package
was opened. Upon opening and discovery of
UP LAW BOC TRANSPORTATION LAWS
the damaged condition of the goods, a report
to this effect had to pass through the proper
channels before it could be finalized and
endorsed by the institution to the claims
department of the shipping company.”
No claim whatsoever shall be admitted
against the carrier with regard to the
condition in which the goods transported
were delivered:
(1) After the periods mentioned have
elapsed; or
(2) After the transportation charges have
been paid.
The periods mentioned commence upon
delivery of cargo to the consignee at the place
of destination.
Thus, Art. 366 is limited to cases of claims for
damage to goods actually turned over by the
carrier and received by the consignee. It does
not apply to misdelivery of goods.
Failure to file a claim bars recovery (Aquino
(2011)].
Ratio: The rule protects the carrier by
affording it an opportunity to make an
investigation of a claim while the matter is
still fresh and easily investigated so as to
safeguard itself from false and fraudulent
claims [UCPB General Ins. Co., Inc. v. Aboitiz
Shipping (2009)].
However, the periods prescribed may be
subject to modification by agreement of the
parties. [PHILAMGEN v. Sweet Lines, Inc.
(1992)].
The value of the goods stated in the bill of
lading is conclusive between the parties, and
the shipper is not allowed to prove a higher
value [Art. 372]. It is only when the carrier’s
fault is so gross as to amount to actual fraud
that the actual amount of the losses an
damages suffered may be proved by the
shipper against the carrier.
Horses, vehicles, vessels and equipment used
by the carrier serves as liens for the payment
of the value of the goods which the carrier
must pay in case of loss or misplacement [Art.
372].
D. PERIOD FOR FILING ACTIONS
D.1. OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING
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The general rules under the Civil Code on
extinctive prescription apply. Thus, action for
damages must be filed in court:
(1) Within 6 years, if a bill of lading was not
issued [Art. 1145, Civil Code].
(2) Within 10 years, if a bill of lading was
issued [Art. 1146, Civil Code].
D.2. INTERNATIONAL CARRIAGE OF
GOODS BY SEA
Suit must be brought within one year:
(1) After delivery of the goods; or
(2) From the date when the goods should
have been delivered.
Otherwise, the carrier and the ship shall be
discharged from all liability in respect of loss
or damage.
The absence of notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods
or the date when the goods should have been
delivered [Section 3(6), Carriage of Goods by
Sea Act].
The period for filing the claim is one year, in
accordance with the Carriage of Goods by Sea
Act. The Carriage of Goods by Sea Act, as
adopted and embodied in Commonwealth
Act No. 65, applies because it is a special law,
and, as such, prevails over the general
provisions of the Civil Code on prescription of
actions [Maritime Agencies & Services, Inc. v.
CA].
Code of Commerce COGSA (applicable
(primarily governs law for all contracts
domestic transport, for carriage of
but nothing stops goods by sea to
parties from Philippine ports in
stipulating that foreign trade)
COGSA applies in their
contract)
File claim for apparent loss: upon receipt
File claim within 24 File claim within 3
hours from delivery if days from delivery
damage or loss is not if damage or loss is
apparent not apparent
Filing of the claim is Not mandatory
mandatory; condition
precedent for filing of
action for damages
Prescriptive period to Prescriptive period
UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

file an action: 10 years

from breach (if bill of
to file an action: 1
year from discharge
V. Admiralty and
lading/written
receipt/contract is
of goods, or date
when they should
Maritime Commerce
Concept
issued), 6 years if only have been
The concept of admiralty, as distinguished
through oral contract delivered.
from overland transportation, depends on:
1 year period may (1) Size of the vessel; and
be extended by (2) Size of the body of water over which such
stipulation. vessel traverses.
Under B.P. 129, jurisdiction over admiralty
D.3. FALSE DECLARATION OF CONTENTS cases depends on the amount, and not on the
If the carrier has a well-founded suspicion of nature of the claim. Hence, jurisidction is with
falsity in the declaration of the contents of the MTC if the amount of the claim does not
the package, the carrier may examine it. If exceed Php 300,000 outside Metro Manila or
the declaration should be correct, Php 400,000 in Metro Manila. Otherwise,
examination and repacking expenses shall be jurisdiction is with the RTC.
defrayed by the carrier, and in the contrary, A. CHARTER PARTIES
by the shipper [Art. 357].
Charter party – a contract by virtue of which
the owner or agent of a vessel binds himself
to transport merchandise or persons for a
fixed price.
It is a contract by which the owner or agent of
the vessel leases for a certain price the whole
or portion of a vessel for the transportation of
the goods or persons from one port to
another.
It is a contract whereby the whole or part of
the ship is let by the owner to a merchant or
other person for a specified time or use for
the conveyance of goods, in consideration of
the payment of freight [Caltex v. Sulpicio Lines
(1999)].
Towage is not a charter party. It is a contract
for the hire of services by which a vessel is
engaged to tow another vessel from one port
to another for consideration.
In modern maritime law and usage, there are
three distinguishable types of charter parties:
(1) Bareboat or demise charter;
(2) Time charter; and
(3) Voyage or trip charter [Litonjua Shipping,
Inc. v. National Seamen Board (1989)].
Note: Both time and voyage charters are said
to be contracts of affreightment, where a
common or public carrier is not converted
into a private carrier.
Contract of affreightment – one in which the
owner of the vessel leases part or all of its
space to haul goods for others. It is a contract
Page 121 of 353
UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

for special service to be rendered by the (1) Owner or owners of the vessel, either in
owner of the vessel and under such contract whole or in part, who have legal control
the general owner retains the possession, and possession of the vessel;
command and navigation of the ship, the (2) Charterer may subcharter entire vessel to
charterer or freighter merely having use of 3rd person only if not prohibited in
the space in the vessel in return for his original charter (Art. 679);
payment of the charter hire. If the charter is a (3) Ship agent if authorized by the owner/s
contract of affreightment, which leaves the or given such power in the certificate of
general owner in possession of the ship as appointment (Art. 598); or
owner for the voyage, the rights, (4) Captain in the absence of the ship agent
responsibilities of ownership rest on the or consignee and only if he acts in
owner and the charterer is usually free from accordance with the instructions of the
liability to third persons in respect of the ship agent or owner and protects the latter’s
[Puromines Inc. v. CA (1993)]. interest (Art. 609).
(i) Bill of lading distinguished from a charter (iii) Requisites for a valid charter party
party (1) Consent of the contracting parties;
(2) Existing vessel which should be placed at
A charter party is a complete contract, while a
the disposition of the shipper;
bill of lading is a private receipt which the
(3) Freight; and
captain gives to accredit that such goods
(4) Compliance with the formal requisites
belong to such persons.
under Article 652 of the Code of
A charter party is a consensual contract Commerce which include the requirement
which can be dissolved by means of that the charter party must be in (a)
indemnity for losses and damages; while a writing, (b) drawn in duplicate, and (c)
bill of lading is a real contract which exists signed by the parties [Aquino (2016)].
only after delivery of the goods to be
A.1. BAREBOAT OR DEMISE CHARTER
transported is made.
In a bareboat or demise charter, the ship
Liabilities arising from breach is identical to
owner leases to the charterer the whole
overland transport.
vessel, transferring to the latter the entire
Contract of command, possession and consequent
Demise or Bareboat control over the vessel’s navigation, including
Affreightment
Charterer becomes Owner remains liable the master and the crew, who thereby
become the charterer’s “servants” [Aquino
liable to others as carrier and must
(2011)].
caused by its answer for any breach
negligence of duty To create a demise, the owner of a vessel
must completely and exclusively relinquish
Charterer regarded Charterer is not
possession, command and navigation thereof
as owner pro hac regarded as owner to the charterer, anything short of such a
vice for the voyage complete transfer is a contract of
Owner of vessel The vessel owner affreightment (time or voyage charter party)
relinquishes retains possession, or not a charter party at all.
possession, command, and Although a charter party may transform a
command, and navigation of the ship common carrier into a private one, the same,
navigation to however, is not true in a contract of
charterer affreightment on account of the distinctions
between a contract of affreightment and a
Common carrier is Common carrier is not
demise or bareboat charter [Puromines, Inc. v.
converted to private converted to private CA (1993)].
carrier carrier
Note: In a bareboat or demise charter, the
common carrier is converted to private carrier.
(ii) Persons who make a charter:

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UP LAW BOC TRANSPORTATION LAWS
The charterer, to whom the owner of the
vessel relinquishes, completely and
exclusively, the possession, command and
navigation of the vessel, by virtue of a demise
charter, is considered the owner pro hac vice.
He mans and equips the vessel and assumes
all responsibility for navigation, management
and operation. He thus acts as the owner of
the vessel in all important aspects during the
duration of the charter [Puromines, Inc. v. CA
(1993)].
A.2. TIME CHARTER
Time charter – a contract for the use of a
vessel for a specified period of time or for the
duration of one or more specified voyages.
In this case, the owner of a time-chartered
vessel retains possession and control through
the master and crew, who remain his
employees. What the time charterer acquires
is the right to utilize the carrying capacity and
facilities of the vessel and to designate her
destinations during the term of the charter
[Litonjua Shipping Co., Inc. v. National
Seamen Board (1989)].
A.3. VOYAGE OR TRIP CHARTER
In a voyage charter, the vessel is leased for a
single or particular voyage. The master and
crew remain the employ of the owner of the
vessel [Litonjua Shipping Co., Inc. v. National
Seamen Board (1989)].
B. LIABILITY OF SHIP OWNERS AND
SHIPPING AGENTS
The persons participating in maritime
commerce are the following:
(1) Ship owners or ship agents
(2) Captains and masters
(3) Other officers and crew
(4) Supercargoes
The ship owner has possession, control and
management of the vessel and the
consequent right to direct her navigation and
receive freight earned and paid, while his
possession continues; he is the person who is
primarily liable for damages sustained in the
operation of the vessel, based on the
provisions of the Code of Commerce.
A ship agent is the person entrusted with the
provisioning of a vessel, or who represents
her in the port in which she happens to be
[Art. 586].
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Based on the definition of the ship agent in
the Code of Commerce, it is evident that the
ship agent is jointly and severally liable with
the owner. The joint and several liability
applies both for breach of contract and extra-
contractual obligation such as tort. The ship
agent, even though he is not the owner, is
liable in every way to the creditor for losses
and damages, without prejudice to the right
of the owner, the vessel and its equipment
and freight [Aquino (2016)].
Captains are those who govern vessels that
navigate the high seas or ships of large
dimensions and importance, although they
may be engaged in coastwise trade.
Masters are those who command smaller
ships engaged exclusively in coastwise trade.
In maritime commerce, masters and captains
are the same.
A crew is a person on board who is involved in
highly technical tasks and in manning of the
vessel (e.g. master, mate).
A complement is a person, not a crew, who is
not directly involved in the manning of the
vessel (e.g. cook).
Supercargo is a person on board the vessel,
who functions as an agent of the owner of the
goods shipped as cargo on a vessel, who has
charge of the cargo on board, sells the same
to the best advantage in the foreign markets,
buys cargo to be brought back on the return
voyage of the ship, and comes home with it.
The powers and liabilities of the captain shall
cease, when there is a supercargo, with
regard to that part of the administration
legitimately conferred upon the latter, but
shall continue in force for all acts which are
inseparable from his authority and office [Art.
649].
The ship owner or ship agent is liable:
(1) For the acts of the captain, unless the
latter exceeds his authority [Art. 586].
(2) For contracts entered into by the captain
to repair, equip and provision the vessel,
provided that the amount claimed was
invested for the benefit of the vessel [Art.
586].
(3) For the indemnities in favor of third
persons which may arise from the
conduct of the captain in the care of the
goods transported, as well as for the
UP LAW BOC TRANSPORTATION LAWS
safety of passengers transported [Art.
587].
(4) For damages to third persons for tort or
quasi-delict committed by the captain,
except collision with another vessel [Art.
1759, Civil Code]
(5) For damages in case of collision due to
the fault, negligence, or want of skill of
the captain, sailing mate, or any other
member of the complement [Art. 826].
B.1. LIABILIITY FOR ACTS OF CAPTAIN
Three (3) distinct roles of a captain:
(1) General agent of the ship owner;
(2) Commander and technical director of the
vessel;
(3) Representative of the country under
whose flag he navigates [Inter-Orient
Marine Enterprises v. NLRC (1994)].
The captain shall be liable to the agent, and
the latter to third persons:
(1) For all the damages suffered by the
vessel and his cargo by reason of want of
skill or negligence on his part;
(2) For all the thefts committed by the crew,
reserving his right of action against the
guilty parties;
(3) For the losses, fines, and confiscations
imposed on account of violation of the
laws and regulations of customs, police,
health, and navigation;
(4) For the losses and damages caused by
mutinies on board the vessel, or by
reason of faults committed by the crew in
the service and defense of the same, if he
does not prove that he made full use of
his authority to prevent or avoid them;
(5) For those arising by reason of an undue
use of powers and non-fulfillment of the
obligations which are his;
(6) For those arising by reason of his going
out of his course or taking a course which
he should not have taken without
sufficient cause, in the opinion of the
officers of the vessel at a meeting with
the shippers or supercargoes who may be
on board;
(7) For those arising by reason of his
voluntarily entering a port other than that
of his destination;
(8) For those arising by reason of non-
observance of the provisions contained in
the regulations on situation of lights and
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maneuvers for the purpose of preventing
collisions [Art. 618].
B.2. EXCEPTIONS TO LIMITED LIABILITY
The Doctrine of Limited Liability (Hypothecary
Rule)
The real and hypothecary nature of maritime
law simply means that the liability of the
carrier in connection with losses related to
maritime contracts is confined to the vessel,
which is hypothecated for such obligations or
which stands as the guaranty for their
settlement.
It has its origin by reason of the conditions
and risks attending maritime trade in its
earliest years when such trade was replete
with innumerable and unknown hazards
since vessels had to go through largely
uncharted waters to ply their trade. It was
designed to offset such adverse conditions
and to encourage people and entities to
venture into maritime commerce despite the
risks and the prohibitive cost of shipbuilding.
Thus, the liability of the vessel owner and
agent arising from the operation of such
vessel were confined to the vessel itself, its
equipment, freight, and insurance, if any,
which limitation served to induce capitalists
into effectively wagering their resources
against the consideration of the large profits
attainable in the trade [Aboitiz Shipping Corp.
v. General Accident Fire and Life Assurance
Corp. (1993)].
Thus, under the doctrine of abandonment:
(1) The agent shall be civilly liable for the
indemnities in favor of third persons
which arise from the conduct of the
captain in the care of the goods which the
vessel carried, but he may exempt
himself therefrom by abandoning the
vessel with all her equipment and the
freight he may have earned during the
voyage [Art. 587];
(2) The owners of a vessel shall be civilly
liable in the proportion of their
contribution to the common fund, for the
results of the acts of the captain, referred
to in Art. 587. Each part owner may
exempt himself from this liability by the
abandonment before a notary of the part
of the vessel belonging to him [Art. 590].
(3) In case of collision, the liability of the ship
owner shall be understood as limited to
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the value of the vessel with all her
appurtenances and all the freight earned
during the voyage [Art. 837].
(4) If the vessel and her freight should be
totally lost, by reason of capture or wreck,
all rights of the crew to demand any
wages whatsoever shall be extinguished,
as well as the agent for the recovery of
the advances made [Art. 643].
If the ship owner or agent may in any way be
held civilly liable at all for injury to or death of
passengers arising from the negligence of the
captain in cases of collisions or shipwrecks,
his liability is merely co-extensive with his
interest in the vessel such that a total loss
thereof results in its extinction. This is based
on the exclusively “real and hypothecary
nature” of maritime law, which operates to
limit such liability to the value of the vessel,
or to the insurance thereon, if any. [Yangco v.
Laserna (1941)]
Exceptions:
(1) Claims under the Workmen’s
Compensation Act [Abueg v. San Diego];
(2) Expenses for repairing, provisioning and
equipping the vessel;
(3) There is an actual finding of negligence
on the part of the vessel owner or agent
[Aboitiz Shipping v. General Accident Fire
and Life Assurance Corp. (1993)];
(4) Vessel is insured, to the extent of the
insurance proceeds [Vasquez v. CA
(1985)];
(5) There was no total loss;
(6) Collision between two negligent vessels.
C. ACCIDENTS AND DAMAGES IN
MARITIME COMMERCE
C.1. AVERAGES
(1) All extraordinary or accidental expenses
incurred during the navigation for the
preservation of the vessel or cargo, or
both;
(2) All damages or deterioration the vessel
may suffer from the time she puts to sea
from the port of departure until she casts
anchor in the port of destination, and
those suffered by the merchandise from
the time it is loaded in the port of
shipment until it is unloaded in the port
of consignment [Art. 806].
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There are two kinds of averages:
(1) Particular or simple average; and
(2) Gross or general average.
Averages pertain to expenses and damages:
(1) Expense – to constitute an average, an
expense must be:
(a) Extraordinary or accidental
(b) Incurred during the voyage, and
(c) Incurred in order to preserve the
vessel, the cargo, or both.
(2) Damages or Deterioration – to constitute
and average, it must:
(a) Have been suffered from the time the
vessel put to sea from the port of
departure until it casts anchor in the
port of destination, and
(b) Have been suffered by the
merchandise from the time they are
loaded in the port of shipment until
they are unloaded in the port of
consignment.
(i). Simple average
Particular or simple averages shall include all
damages and expenses caused to the vessel
or cargo that did not inure to the common
benefit and profit of all persons interested in
the vessel and her cargo [Art. 809].
The owner of the goods which gave rise to the
expense or suffered the damage shall bear
this average [Art. 810].
(ii) General average
General or gross averages shall include all
the damages and expenses which are
deliberately caused in order to save the vessel,
her cargo, or both at the same time, from a
real and known risk [Art. 811].
The gross or general average shall be borne
by those who benefited from the sacrifice.
These include the ship owner and the owners
of the cargoes that were saved. Contribution
may also be imposed on the insurers of the
vessel or cargoes that were saved, as well as
lenders on bottomry or respondentia.
(1) Requisites
(a) There must be a common danger;
(b) That for the common safety, part of
the vessel or of the cargo or both is
sacrificed deliberately;
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(c) That from the expenses or damages
caused follows the successful saving
of the vessel and cargo; and
(d) That the expenses or damages
should have been incurred or inflicted
after taking proper legal steps and
authority [Magsaysay, Inc. v. Agan
[1955]].
Common danger means both the ship and the
cargo, after it has been loaded, are subject to
the same danger, whether during the voyage,
or in the port of loading or unloading, that
the danger arises from the accidents of the
sea, dispositions of the authority, or faults of
men, provided that the circumstances
producing the peril should be ascertained
and imminent or may rationally be said to be
certain and imminent. This last requirement
excludes measures undertaken against a
distant peril [Magsaysay, Inc. v. Agan [1955]].
Note: When a vessel is stranded
unintentionally, the damages incurred cannot
constitute general averages.
(2) Cases of general average
(a) The goods or cash invested in the
redemption of the vessel or cargo
captured by enemies, privateers, or
pirates, and the provisions, wages,
and expenses of the vessel detained
during the time the arrangement or
redemption is taking place;
(b) The goods jettisoned to lighten the
vessel, whether they belong to the
vessel, to the cargo, or to the crew,
and the damage suffered through
said act by the goods kept;
(c) The cables and masts which are cut
or rendered useless, the anchors and
the chains which are abandoned in
order to save the cargo, the vessel,
or both;
(d) The expenses of removing or
transferring a portion of the cargo in
order to lighten the vessel and place
her in condition to enter a port or
roadstead, and the damage
resulting therefrom to the goods
removed or transferred;
(e) The damage suffered by the goods
of the cargo through the opening
made in the vessel in order to drain
her and prevent her sinking;
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(f) The expenses caused through
floating a vessel intentionally
stranded for the purpose of saving
her;
(g) The damage caused to the vessel
which it is necessary to break open,
scuttle, or smash in order to save the
cargo;
(h) The expenses of curing and
maintaining the members of the
crew who may have been wounded
or crippled in defending or saving
the vessel;
(i) The wages of any member of the
crew detained as hostage by
enemies, privateers, or pirates, and
the necessary expenses which he
may incur in his imprisonment, until
he is returned to the vessel or to his
domicile, should he prefer it;
(j) The wages and victuals of the crew
of a vessel chartered by the month
during the time it should be
embargoed or detained by force
majeure or by order of the
Government, or in order to repair the
damage caused for the common
good;
(k) The loss suffered in the value of the
goods sold at arrivals under stress in
order to repair the vessel because of
gross average;
(l) The expenses of the liquidation of
the average [Art. 811];
(m) If in lightening a vessel on account
of a storm, in order to facilitate her
entry into a port or roadstead, part
of her cargo should be transferred to
lighters or barges and be lost, the
owner of said part shall be entitled
to indemnity, as if the loss has
originated from a gross average [Art.
817];
(n) If, as a necessary measure to
extinguish a fire in a port; roadstead;
creek, or bay, it should be decided to
sink any vessel, this loss shall be
considered gross average, to which
the vessels saved shall contribute.
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(3) Jettison
The captain shall direct the jettison, and shall
order the goods cast overboard in the
following order:
(a) Goods on deck - beginning with those
which embarrass the maneuver or
damage the vessel, preferring if possible,
the heaviest ones with the least utility
and value;
(b) Goods below the upper deck - always
beginning with those of the greatest
weight and smallest value, to the amount
and number absolutely indispensable
[Art. 815].
To include the goods jettisoned in the general
or gross average, the existence of the cargo
or goods must be proved:
(a) For cargo – by means of bill of lading;
(b) For good belonging to the vessel – by
means the inventory prepared prior to
departure [Art. 816].
(4) Jason clause
Jason clause is a provision in the contract of
carriage that requires the cargo owners to
contribute in general average though the
event which gave rise to the sacrifice or
expenditure may have been due to the fault
of one of the parties to the adventure [Rule D,
York Antwerp Rules].
Although the Code of Commerce provisions
on averages are still in force, the parties may,
by stipulation in the charter party or any
written agreement, agree that the York-
Antwerp Rules shall be applied. In addition,
the York-Antwerp Rules may also be used to
solve controversies where no provision in the
Code of Commerce is in point because said
rules embody the custom of maritime states
[Aquino (2016)].
(5) Procedure for recovery
(a) Assembly and deliberation with the
sailing mate and other officers;
(b) Resolution of the captain adopted;
(c) Hearing of the persons interested. In case
an interested person should not be heard,
he shall not contribute to the gross
average [Art. 813, Code of Commerce];
(d) Resolution to be entered in the log book,
stating the motives and reasons therefore
as well as the votes and reason for
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disagreement [Art. 814, Code of
Commerce];
(e) Minutes to be signed by all the persons
present or in urgent cases, the captain;
(f) Captain shall deliver one copy of the
minutes to the maritime judicial authority
of the first port he may make within 24
hours [Art. 814];
(g) Captain shall ratify the minutes under
oath [Art. 814].
C.2. COLLISIONS
Collision is an impact or sudden contact
between two moving vessels [Aquino (2011)].
Allision is the striking of a moving vessel
against one that is stationary.
The steamer’s greater facility of maneuvering
over a sail vessel means it has the greater
ability to avoid collisions; so as a general rule,
when meeting a sailing vessel, whether close
hauled or with the wind free, the sail vessel
has a right to keep her course, and it is the
duty of the steamer to adopt precautions as
will avoid the sail vessel […] Subject to the
general rules of evidence in collision cases as
to the burden of proof, in the case of a
collision between a steam vessel and a sail
vessel, the presumption is against the steam
vessel, and she must show that she took the
proper measures to avoid a collision. [A.
Urrutia & Co. v. Baco River Plantation Co.
[1913)].
When 2 power-driven vessels are meeting
head on, or nearly head on, so as to involve
risk of collision, each shall alter her course to
starboard (right side), so that each may pass
on the port (left) side of the other. [Smith Bell
and Co. v. CA (1991)].
Note: Although the liability with respect to
collision is not governed by quasi-delict,
liability in collision cases is still negligence
based. In other words, courts are still called
upon to determine the negligence of the
persons involved in order to impose liability.
The person who caused the injury is both
civilly and criminally liable [Aquino (2016)].
In some respect, however, the rules that
apply to quasi-delict cannot be applied to
collision cases. For example, the view is that
the doctrine of last clear chance and the rule
on contributory negligence cannot be applied
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in collision cases because of Art. 827 of the
Code of Commerce.
Thus if both vessels were negligently
operated, it does not matter if the other has
the last clear chance of avoiding the injury
because under Article 827, each must suffer
its own damage if both of them are negligent
[C.B. Williams v. Teodoro Yanco (1914)].
Similarly, proof that the plaintiff was
negligent will bar recovery from the
defendant in collision cases even if the
plaintiff’s negligence can be classified as
merely contributory [Gorgonio De Sarasola v.
Yu Biao Sontua (1925)].
Classes of Collision:
(1) Fortuitous - none was at fault;
(2) Culpable - one or more vessels were at
fault;
(3) Inscrutable Fault - it cannot be
determined which of the vessels was at
fault.
(i) Fortuitous
When it is due to a fortuitous event or force
majeure, each vessel and its cargo shall bear
its own damages [Art. 830].
When, by reason of force majeure, a vessel
properly anchored and moored collides with
another, the injury occasioned shall be looked
upon as particular average to the vessel run
into [Art. 832].
(ii) Culpable
When only one vessel is at fault, the owner of
the vessel at fault shall indemnify the losses
and damages suffered, after an expert
appraisal.
When both vessels are at fault, each shall
suffer its own damages, and both shall be
solidarily responsible for the losses and
damages occasioned to their cargoes [Art.
826].
Note: The ship owners cannot successfully
maintain an action against the other for the
loss or injury to his vessel.
When a third vessel at fault, the owner of the
third vessel shall indemnify the losses and
damages caused, the captain thereof being
civilly liable to said owner [Art. 831].
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(iii) Inscrutable Fault
In case of inscrutable fault, that is, if it cannot
be decided which of the two vessels was the
cause of the collision, each shall bear his own
damage and both shall be jointly responsible
for the losses and damages suffered by their
cargoes [Art. 828].
C.3. ARRIVAL UNDER STRESS
Arrival under stress is the arrival of a vessel at
the nearest and most convenient port instead
of the port of destination, if during the voyage
the vessel cannot continue the trip to the port
of destination.
It is lawful when the inability to continue
voyage is due to:
(1) Lack of provisions;
(2) Well-founded fear of seizure, privateers,
or pirates; or
(3) Any accident of the sea disabling it to
navigate [Art. 819].
It is unlawful when:
(1) The lack of provisions should arise from
the failure to take the necessary
provisions for the voyage, according to
usage and custom, or if they should have
been rendered useless or lost through
bad stowage or negligence in their care;
(2) The risk of enemies, privateers, or pirates
should not have been well known or
manifest, and based on positive and
justifiable facts;
(3) The injury to the vessel should have been
caused by reason of her not being
repaired, rigged, equipped, and arranged
in a convenient manner for the voyage, or
by reason of some erroneous order of the
captain; or
(4) Malice, negligence, want of foresight, or
lack of skill on the part of the captain is
the reason for the act causing the
damage [Art. 820].
The captain has the duty to continue the
voyage without delay after the cause of the
arrival under stress has ceased, otherwise, he
shall be liable for damages caused by the
delay [Art. 825].
Note: Expenses for arrival under stress are
particular averages [see Art. 821].
C.4. SHIPWRECKS
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Shipwreck denotes loss or wreck of a vessel at
sea as a consequence of running against
another vessel or thing at sea or on coast
where the vessel is rendered incapable of
navigation.
The losses and deterioration suffered by the
vessel and her cargo shall be individually for
the account of the owners [Art. 840].
If the wreck was due to malice, negligence or
lack of skill of the captain, or because the
vessel put to sea was insufficiently repaired
and equipped, the ship agent or the shippers
may demand indemnity from said captain.
[Art. 841].
C.5. SALVAGE
Salvage is defined as the service which one
person renders to the owner of a ship or
goods, by his own labor, preserving the goods
or the ship which the owner or those
entrusted with the care of them have either
abandoned in distress at sea, or are unable to
protect and secure. It is founded on equity
and is compensation for actual services
rendered.
Three elements are necessary to a valid
salvage claim:
(1) A marine peril;
(2) Service voluntarily rendered when not
required as an existing duty or from a
special contract; and
(3) Success, in whole or in part, or that the
service rendered contributed to such
success [Erlanger & Galinger v. Swedish
East Asiatic Co. Ltd (1916)].
The goods saved from the wreck shall be
specially bound for the payment of the
expenses of the respective salvage, and the
amount thereof must be paid by the owners
of the former before they are delivered to
them [Art. 842].
Where a personal action is brought by the
salvor against the owner of the ship, the
liability of the latter is limited to such part of
the salvage compensation due for the entire
service as is proportionate to the value of the
ship.
Derelict Required
The requirement of Section 1 of the Salvage
Law that the vessel sought to be salvaged is
shipwrecked beyond the control of the crew
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or abandoned, is present when the vessel is
considered a derelict [Aquino & Hernandez
(2016)].
A derelict is defined as a ship or her cargo
which is abandoned and deserted at sea by
those who were in charge of it, without any
hope of recovering it (sine spe recuperandi), or
without any intention of returning it (sine
animo revertendi)
If those in charge left with the intention of
returning, or of procuring assistance, the
property is derelict, but if they quitted the
property with the intention of finally leaving it,
it is derelict, and a change of their intention
and an attempt to return will not change its
nature [Erlanger & Galinger v. Swedish East
Asiatic Co. Ltd. (1916)].
Distinction between salvage and towage:
Towage –a vessel is engaged to tow another
vessel from one port to another for
consideration.
In contract for towage, the crew does not
have any interest or rights with the
remuneration pursuant to the contract; only
the owner of the towing vessel is entitled to
remuneration.
Salvage – a person preserves the goods or
the ship which the owner either abandoned in
distress at sea, or is unable to protect and
secure.
In salvage, the crew of the salvaging ship is
entitled to salvage, and can look to the
salvage vessel for its share [Barrios v. Go
Thong (1963)].
D. CARRIAGE OF GOODS BY SEA ACT
(COGSA)
D.1. APPLICATION
COGSA [Commonwealth Act No. 65] is a
special law that governs all contracts of
carriage of goods by sea between or to and
from the Philippine ports.
Its application is according to the following
scheme:
Common Carrier Private carrier
Coming to the Philippines from foreign trade*
(1) New Civil Code (1) COGSA
(Common (2) Code of
UP LAW BOC TRANSPORTATION LAWS
Carriers) Commerce
(2) COGSA (3) New Civil Code
(3) Code of (Provisions NOT
Commerce on common
carriers, i.e. torts,
contracts)
From Philippines to foreign country
Apply laws of such foreign country (1753, Civil
Code)
*Nothing stops parties from stipulating that
COGSA shall primarily apply; even domestic
carriers can stipulate such. With respect to
vessels destined for foreign ports, the COGSA
does not apply unless parties make it
applicable.
Under Art. 1766, in all matters not regulated
by the Civil Code, the rights and obligations of
common carriers shall be governed by the
Code of Commerce and special laws. Thus,
although a special law, COGSA only applies
when the Civil Code has no provision dealing
with the matter.
D.2. NOTICE OF LOSS OR DAMAGES
Notice of claim and the general nature of the
loss or damage must be given in writing to
the carrier or his agent at the port of
discharge before or at the time of the removal
of the goods [Section 3(6), COGSA].
If damage is not patent or cannot be
ascertained from the package, the shipper
should file the claim with the carrier within
three days from delivery.
Under Section 3(6), COGSA, a failure to file a
notice of claim within three (3) days will not
bar recovery if it is nonetheless filed within
one year. This one-year prescriptive period
also applies to the shipper, the consignee, the
insurer of the goods or any legal holder of the
bill of lading. Inasmuch as the neither the
Civil Code nor the Code of Commerce states a
specific prescriptive period on the matter, the
COGSA may be applied [Belgian Overseas
Chartering and Shipping v. Philippine First Ins.
Co. (2002)].
Note: In the Warsaw Convention, as well as
the Code of Commerce, the notice
requirement is a condition precedent for the
right of action against the shipowner to
accrue.
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D.3. PERIOD OF PRESCRIPTION
The carrier and the ship shall be discharged
from all liability in respect of loss or damage
unless suit is brought within one year after
delivery of the goods or the date when the
goods should have been delivered.
The absence of a notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods
or the date when the goods should have been
delivered [Section 3 (6)].
COGSA, as a special law, prevails over the
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA (1990)].
D.4. LIMITATION OF LIABILITY
Under Section 4(5], COGSA, the limit is set at
a maximum of $500 per package or
customary freight unit.
This is deemed incorporated in the bill of
lading even if not mention therein [Eastern
Shipping v. IAC (1987)].
The declaration made by the shipper stating
an amount bigger than $500 per package
will make the carrier liable for such bigger
amount, but only if the amount so declared is
the real value of goods [Aquino (2011)].
The Civil Code does not limit the liability of
the common carrier to a fixed amount per
package. In all matters not regulated by the
Civil Code, the right and the obligations of
common carriers shall be governed by the
Code of Commerce and special laws. Thus, the
COGSA, which is suppletory to the provisions
of the Civil Code, supplements the latter by
establishing a statutory provision limiting the
carrier’s liability in the absence of a shipper’s
declaration of a higher value in the bill of
lading. [Belgian Overseas v. Philippine First Ins.
Co. (2002)].
E. VESSEL
Vessels are those engaged in navigation,
whether coastwise or on the high seas
destined for the services of the industry or
maritime commerce.
The word ‘vessel’ used in the Code of
Commerce was not intended to include all
ships, craft, or floating structures of every
UP LAW BOC TRANSPORTATION LAWS
kind without limitation [Lopez v. Duruelo
(1928)].
Vessels are considered personal or movable
property [Art. 585]; but they partake to a
certain extent, of the nature and conditions of
real property, on account of their value and
importance in the world of commerce.
Vessel of domestic ownership and of more
than 15 tons gross is required to acquire a
certificate of Philippine register. The purpose
of the certificate is declare the nationality of a
vessel engaged in trade with foreign nations
and to enable her to assert that nationality
wherever found.
F. SPECIAL CONTRACTS OF MARITIME
COMMERCE
F.1. LOANS ON BOTTOMRY AND
RESPONDENTIA
Loan on bottomry is a contract in the nature
of a mortgage, by which the owner of the ship
borrows money for the use, equipment and
repair of the vessel and for a definite term,
and pledges the ship as a security for its
repayment, with maritime or extraordinary
interest on account of the maritime risks to be
borne by the lender, it being stipulated that if
the ship be lost in the course of the specific
voyage or during the limited time, by any of
the perils enumerated in the contract, the
lender shall also lose his money.
Loan on respondentia is one made on the
goods laden on board the ship, and which are
to be sold or exchanged in the course of the
voyage, the borrower’s personal responsibility
being deemed the principal security for the
performance of the contract, which is
therefore called respondentia. The lender
must be paid his principal and interest,
though the ship perishes, provided that the
goods are saved.
G. PASSENGERS ON SEA VOYAGE
The right to passage issued to a specified
person is non-transferrable without the
consent of the captain or of the consignee
[Art. 695].
Rights of passengers include:
(1) In case of suspension of voyage
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(a) If through the sole fault of the captain
or ship agent, the passengers shall be
entitled to have their passage
refunded and to recover for losses
and damages.
(b) If due to accidental cause or force
majeure, the passengers shall only be
entitled to the return of the passage
money [Art. 697].
(2) In case of interruption of voyage
(a) If due to fortuitous event or force
majeure, the passengers shall be
obliged to pay only the fare in
proportion to their distance covered,
without right to recover for losses or
damages.
(b) If due to the sole fault of the captain,
the passengers shall be obliged to
pay only the fare in proportion to their
distance covered, with a right to
indemnity.
(c) If due to the disability of the vessel
and the passenger should agree to
await the repairs, he may not be
required to pay any increased price of
passage, but his living expenses
during the delay shall be for his own
account [Art. 698].
(3) In case of delay in the departure, the
passengers have a right to remain on
board and to be furnished food, unless
the delay is due to accidental cause or to
force majeure. If the delay exceeds 10
days, the passengers are entitled to the
return of the fare upon request. If the
delay is due to the sole fault of the
captain or ship agent, they may demand
indemnity for losses and damages.
(4) To be taken directly to the port or ports of
destination, making all the stops
indicated in its itinerary [Art. 698].
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VI. International Air
Transport
THE WARSAW CONVENTION
A. APPLICABILITY
The Warsaw Convention applies to:
(1) All international carriage of persons,
baggage, or cargo performed by aircraft
for reward;
(2) Gratuitous carriage by aircraft performed
by an air transport undertaking [Art. 1(1),
Warsaw Convention].
International air carriage or international air
transport means transportation by air
between points of contact of two high
contracting parties, or those countries that
have acceded to the Warsaw Convention,
wherein the place of departure and the place
of destination are situated:
(1) Within the territories of two high
contracting parties, regardless of whether
or not there be a break in the
transportation or a transshipment; or
(2) Within the territory of a single high
contracting party, if there is an agreed
stopping place within a territory subject
to the sovereignty, mandate or authority
of another power, even though the power
is not a party to the Convention [Art. 1(2),
WC].
A carriage to be performed by several
successive air carriers is deemed, for the
purposes of the Convention, to be one
undivided carriage, if it has been regarded by
the parties as a single operation, whether it
had been agreed upon under the form of a
single contract or of a series of contracts [Art.
1(3), WC].
The carrier is liable for damages for:
(1) Death or injury of a passenger if the
accident causing it took place:
(a) On board the aircraft;
(b) In the course of the operations of
embarking or disembarking; or
(c) When there was delay [Art. 17 and 19,
WC];
(2) Destruction, loss, or damage to any
baggage or goods that are checked in, if
damage occurred:
(a) During the transportation by air; or
(b) When there was delay [Art. 18 and 19,
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WC];
(3) Delay in the transport by air of
passengers, baggage or goods [Art. 19,
WC].
The carriage by air contemplated comprises
the period in which the baggage or goods are
in charge of the carrier, whether in an airport
or on board an aircraft, or, in the case of a
landing outside an airport, in any place
whatsoever.
It does not cover any transportation by land,
by sea, or by river performed outside an
airport.
If transportation takes place in the
performance of a contract by air, for the
purpose of loading, delivery, or
transshipment, any damage is presumed,
subject to proof to the contrary, to have been
the result of an event which took place during
the transportation by air. [Art. 18, WC].
The Warsaw Convention does not provide for
an exclusive enumeration of instances when
the carrier is liable. It does not provide an
absolute limit of liability and it does not
preclude the application of the Civil Code and
other pertinent local laws. [Philippine Airlines
v. CA (1996)] Hence, a complaint for quasi-
delict can still be filed even if the filing is
beyond the prescriptive period provided for
under the Convention so long as it is within
the prescriptive period of four years under the
Civil Code. (Villanueva)
Notice of claim with the international carrier
is a mandatory or condition precedent under
the Warsaw Convention.
(1) Baggage—within 3 days from receipt;
(a) In case of delay, within 14 days from
the time the baggage was placed at
the disposal of the passenger
(2) Goods—within 7 days from delivery
In case of an action for damage to passenger
baggage, the case must be filed in court
within two years.
B. LIMITATION OF LIABILITY
With respect to the following limitations of
liability, Art. 23, Warsaw Convention provides
that any provision tending to relieve the
carrier of liability or to fix a lower limit than
that which is laid down shall be null and void,
but the nullity of any such provision does not
involve the nullity of the whole contract.
UP LAW BOC TRANSPORTATION LAWS
Also, under Art. 25, WC:
(1) The carrier shall not be entitled to avail
himself of the provisions which exclude or
limit his liability, if the damage is caused
by his willful misconduct or by such
default on his part as is considered to be
equivalent to willful misconduct;
(2) Similarly the carrier shall not be entitled
to avail himself of the said provisions, if
the damage is caused as aforesaid by any
agent of the carrier acting within the
scope of his employment.
Under Art. 29, WC, the right to damages
under the WC is extinguished after two years
from the date of arrival at the destination or
from the date on which the aircraft ought to
have arrived, or from the date on which the
carriage stopped. The method of calculating
the period of limitation shall be determined
by the law of the court seized of the case.
Sec. 22(2), WC does not operate as an
exclusive enumeration of the instances of an
airline’s liability, or as an absolute limit of the
extent of that liability. The Convention’s
provisions do not regulate or exclude the
following areas:
(1) Liability for other breaches of the contract
by the carrier;
(2) Misconduct of its officers and employees;
and
(3) For some particular or exceptional type of
damage (i.e. moral, nominal, temperate or
exemplary damages) [Alitalia v. IAC (1990)]
B.1. LIABILITY TO PASSENGERS
General rule: In the carriage of passengers,
the liability of the carrier for each passenger
is limited to 250,000 francs passenger.
Exception: By special contract, the carrier and
the passenger may agree to a higher limit
[Art. 22(1), Warsaw Convention].
B.2. LIABILITY FOR CHECKED BAGGAGE
General rule: In the carriage of baggage and
goods, the liability of the carrier is limited to
250 francs per kilogram.
Exception: The limit does not apply when the
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery
and has paid a supplementary sum if the case
so requires. In that case the carrier will be
liable to pay a sum not exceeding the
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declared sum, unless he proves that that sum
is greater than the actual value to the
consignor at delivery [Art. 22(2), Warsaw
Convention].
B.3. LIABILITY FOR HAND-CARRIED
BAGGAGE
As regards hand-carried baggage, the
liability of the carrier is limited to 5,000
francs per passenger [Art. 22(3), Warsaw
Convention].
The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and to
$1,000 for baggage. However, the Supreme
Court noted in Santos III v. Northwest Orient
Airlines (1992), that the Guatemala Protocol is
still ineffective [Sundiang and Aquino (2013)].
The Warsaw Convention should be deemed a
limit of liability only in those cases where the
cause of death or injury to person, or
destruction, loss or damage to property or
delay in its transport is not attributable to or
attended by any willful misconduct, bad faith,
recklessness, or otherwise improper conduct
on the part of any official or employee for
which the carrier is responsible; and there is
otherwise no special or extraordinary form of
resulting injury [Alitalia Airways v. CA (1990)].
C. WILLFUL MISCONDUCT
A common carrier may not avail of the
limitation in the following cases:
(1) Willful misconduct;
(2) Default amounting to willful misconduct
[Art. 25, Warsaw Convention];
(3) Accepting passengers without ticket [Art.
3(2), Warsaw Convention];
(4) Accepting goods without airway bill or
baggage without baggage check.
Receipt by the person entitled to the delivery
of baggage or cargo without complaint is
prima facie evidence that the same have been
delivered in good condition and in
accordance with the document of carriage
[Art. 26, Warsaw Convention].
D. JURISDICTION
An action for damages must be brought at
the option of the plaintiff:
(1) Before the court of the domicile of the
carrier;
(2) The court of its principal place of
business;
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(3) The court where it has a place of
business through which the contract
had been made; or
(4) The court of the place of destination
[Art. 28 (2) WC].
When a passenger buys a roundtrip ticket,
the place of destination is the place of first
departure. E.g. In a round-trip ticket from
San Francisco – Manila, the place of
destination is San Francisco [Santos v
Northwest Airlines (1992)].
It is settled that allegations of tortious
conduct committed against an airline
passenger during the course of the
international carriage do not bring the case
outside the ambit of the Warsaw Convention
[Lhuillier v. British Airways (2010)]
Note: The Montreal Convention adds a 5th
jurisdiction: residence of the plaintiff.

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MERCANTILE LAW
CORPORATION LAW

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I. Corporation
A. DEFINITION
Corporation – is an artificial being created by
operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or
incident to its existence [Sec. 2, unless
otherwise indicated, all sections cited herein
are from B.P. 68, or the Corporation Code].
B. ATTRIBUTES OF THE CORPORATION
B.1. AN ARTIFICIAL BEING
A corporation is a juridical entity that exists
apart from its stockholders. It has its own set
of rights and obligations as provided for by
law. Technically, it has no physical existence
although it occupies a principal place of
business.
Being only a juridical entity, the physical acts
of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a special act of the
Board of Directors (BOD). [Shipside, Inc. v. CA
(2001)]
A corporation, upon coming into existence, is
invested by law with a personality separate
and distinct from those persons composing it
as well as from any other legal entity to which
it may be related. [Yutivo Sons Hardware v.
CTA (1961)]
B.2. CREATED BY OPERATION OF LAW
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law
[in case of government corporations] or a
general law (i.e., Corporation Code in case of
private corporations).
A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then and only then will it acquire juridical
personality to sue and be sued, enter into
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contracts, hold or convey property or perform
any legal act in its own name.
B.3. HAS THE RIGHT OF SUCCESSION
Since one of the attributes of a corporation is
that it is an artificial being with a distinct
personality, the corporation’s existence is
unaffected by a change in the composition of
stockholders. Its existence is limited only by
the Articles of Incorporation (AOI), may be
subject to Quo Warranto proceedings (R.66
of the Rules of Court), and may be shortened
by dissolution (Title XIV of the Corp. Code)
B.4. HAS THE POWERS, ATTRIBUTES AND
PROPERTIES EXPRESSLY AUTHORIZED BY
LAW OR INCIDENT TO ITS EXISTENCE
A corporation has no power except those
expressly conferred on it by the Corporation
Code and by its articles of incorporation,
those which may be incidental to such
conferred powers, those that are implied from
its existence, and those reasonably necessary
to accomplish its purposes. In turn, a
corporation exercises said powers through its
BOD and/or its duly authorized officers and
agents. [Monfort Hermanos Agricultural Dev.
Corp. v. Monfort III (2004)]
Being a creature of the law, its powers are
limited by (i) the law (see Sec. 36 of the Corp.
Code for general powers and Secs. 37 to 44
for specific powers), (ii) by the express terms
of its AOI as well those essential or necessary
to carry out its purpose or purposes under
such Articles (see Sec. 36, last par.), and (iii)
by those necessary or incidental to its powers
so conferred (see Sec. 45)
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II. Classes of allotments of surplus

profits on the basis of
proper, be used for
the furtherance of
Corporations the shares held the purpose or
purposes
Composed of Composed of
A. STOCK CORPORATION stockholders members
Stock corporations – corporations which have It is for profit Has a purpose as per
capital stock divided into shares AND are Sec. 88 that is not for
authorized to distribute to the holders of such profit
shares dividends or allotments of the surplus
profits on the basis of shares held [Sec. 3]. It Other distinctions between stock and non-
is organized for profit. stock corporations
The governing body of a stock corporation is
usually the BOD (except in certain instances, STOCK NON-STOCK
e.g. close corporations). Stockholders and May act by mail or
Note: A corporation is deemed to have the directors must act in other similar means,
power to declare dividends. Thus, so long as meetings in person if provided in by-laws
the corporation has capital stock and there is or by proxy (BL).
no prohibition in its Articles of Incorporation
Cumulative voting Cumulative voting
or in its by-laws for it to declare dividends,
required by law only available if
such corporation is a stock corporation [Sec.
provided in AOI or
43].
BL.
15 director max May be more than 15
B. NON-STOCK CORPORATION except in merger or
All other corporations are non-stock consolidated banks
corporations [Sec. 3].
Term of director is 1 Term is 3 years, 1/3 of
Non-stock corporation – One where no part of year the directors must be
the income is distributable as dividends to its
elected annually
members, trustees, or officers, subject to the
Meetings must be in May be wherever
provisions of the Code on dissolution [Sec. 87].
city or municipality of within the Philippines
It is not organized for profit.
principal office,
Its governing body is usually the Board of
preferably in
Trustees (BOT). However, non-stock
principal office.
corporations may, through their articles of
One class must Right to vote of all
incorporation or their by-laws, designate their
always have shares may be
governing boards by any name other than as
complete voting denied.
board of trustees [Sec. 138].
rights
Free transfer of This is because
STOCK NON-STOCK
shares. Therefore, membership is
Have capital stock No part of income is
membership is not personal. Transfer
divided into shares distributable as
personal to the cannot be made
dividends to its
stockholder. without consent of
members or trustees
the corporation.
Are authorized to Any profit may obtain
May always vote by Proxy can be denied.
distribute to the as an incident to its
proxy
holders of such operations shall,
Upon transfer of Membership may be
shares dividends or when necessary or
share, seller no terminated according
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longer part of to causes provided in change the independent existence of a

corporation. Transfer by-laws. government entity as it deals with another
may only be subject government entity. [Polytechnic University of
to restrictions noted the Phils. v. CA (2001)]
down in AOI, BL, and Not all corporations which are not GOCC
stock certificate, not are ipso facto to be considered private
more onerous than corporations as there exists another distinct
right of first refusal. class of corporations or chartered institutions
1. Residual 1. Distributive which are otherwise known as “public
Assets to be rights must corporations.”
distributed to be spelled These corporations are treated by law as
stockholder. out in AOI or agencies or instrumentalities of the
approved by
2. Dissolution in government which are not subject to the tests
2/3
accordance of ownership or control and economic viability
members.
with the but to different criteria relating to their public
Generally,
Code.
not allowed purposes/interests or constitutional policies
to participate and objectives and their administrative
in properties. relationship to the government or any of its
2. Procedure is Departments or Offices. [Boy Scouts of the
different. Philippines v. COA (2011)]
Properties to
be C.2. PRIVATE CORPORATION
transferred to
other Private corporation – One formed for some
charitable private purpose, benefit, aim or end [Sec. 3,
corporations. Act 1456]; it may be either stock or non-stock,
Donations to government-owned or controlled or quasi-
non-stock public.
conditioned The test to determine whether GOCC or
on return
private corporation: if a corporation is created
upon
dissolution by its own charter for the exercise of a public
shall be function, then GOCC; if by incorporation
returned…. under the general corporation law, then
upon private corporation. [Baluyot v. Holganza
dissolution. (2000)]

C.3. CLOSE CORPORATION

C. OTHER CORPORATIONS
C.1. PUBLIC CORPORATION
Public corporation – one formed or organized
for the government of a portion of the state.
Its purpose is for the general good and
welfare [Sec. 3, Act 1456].
Beyond cavil, a GOCC has a personality of its
own, distinct and separate from that of the
government, and the intervention in a
transaction of the Office of the President
through the Executive Secretary does not
Close corporation - One whose articles of
incorporation provide that:
(1) All issued stock, exclusive of treasury
shares, shall be held by persons not
exceeding 20;
(2) All issued stock shall be subject to one or
more specified restrictions on transfer;
and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.

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Notwithstanding the foregoing, a corporation Philippine Stock

shall not be deemed a close corporation Exchange (PSE)
when at least 2/3 of its voting stock or voting In general, all Mining, Oil, Stock
rights is owned or controlled by another businesses may be Exchange, Banks
corporation which is not a close corporation. carried out by Insurance, Public Utility,
[Sec. 96] corporation Educational, Public
Any corporation may be incorporated as a Interest cannot be
close incorporation, except: organized as close corp.
(1) mining or oil companies; Powers exercised Stockholders may
(2) stock exchanges; by board, elected manage affairs directly,
by stockholders subject to the same
(3) banks;
rights and liabilities of
(4) insurance companies; directors.
(5) public utilities; Pre-emptive right No limit to pre-emptive
(6) educational institutions; and subject to Sec. 39 rights. Thus, includes
limitations sale of treasury shares
(7) corporations declared to be vested with and for acquisition of
public interest [Sec. 96]
properties.
Appraisal right Appraisal right can be
Ordinary Stock Close corp. must be for for any cause. And no
Corp. reasons listed in need for URE, so long as
Has an AOI with a AOI must provide: the code the corporation would
general template not thereby become
1. Not to be held insolvent.
by more than a Dissolution must Any stockholder may
certain number
of Stockholders, comply with all petition for dissolution
not to exceed 20 the requirements for stated grounds.
SEC may not SEC may intervene in
2. Transfer
restrictions regulate if management of corp. in
allowed purpose not case of deadlocks.
illegal
3. Shall not be
listed, and shall No classification May classify directors
not publicly of directors
offer BOD elects Sholders, as directors,
directors directly elect officers, if
Further, a corporation provided by AOI
which is not a close Must have No need for URE to
corp. cannot own more unrestricted acquire shares if ordered
than 75% of the retained earning by SEC in intra-
outstanding capital (URE) to buy own corporate deadlock
stock shares
No limit to Not more than 20, No arbitration in Arbitration allowed.
number of according to AOI case of intra-
corporators corporate
allowed by deadlock
authorized shares.
May list in May not list on PSE C.4. EDUCATIONAL CORPORATION
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Educational corporation – One organized for
educational purposes [Sec. 106].
C.5. RELIGIOUS CORPORATIONS
(a) Corporation sole
Corporation sole – is one formed for the
purpose of administering and managing, as
trustee, the affairs, property and
temporalities of any religious denomination,
sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder
of such religious denomination, sect or
church [Sec.110].
A corporation sole has no nationality but for
the purpose of applying nationalization laws,
nationality is determined not by the
nationality of its presiding elder but by the
nationality of its members constituting the
sect in the Philippines. Thus, the Roman
Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope.
[Roman Catholic Apostolic, etc v. Register of
Deeds of Davao City (1957)]
(b) Corporation aggregate
Corporation aggregate – is a religious
corporation incorporated by more than one
person.
C.6. ELEEMOSYNARY CORPORATION
Eleemosynary corporation– One organized for
a charitable purpose.
C.7. DOMESTIC CORPORATION
Domestic corporation– One formed,
organized, or existing under the laws of the
Philippines.
C.8. FOREIGN CORPORATION
Foreign corporation – One formed, organized
or existing under any laws other than those of
the Philippines and whose law allows Filipino
citizens and corporations to do business in its
own country and state [Sec. 123].
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C.9. CORPORATION CREATED BY SPECIAL
LAWS OR CHARTER
Corporation created by special laws or charter
- Corporations which are governed primarily
by the provisions of the special law or charter
creating them. Corporation Code has
suppletory application [Sec. 4].
C.10. SUBSIDIARY CORPORATION
Subsidiary corporation – One in which control,
in the form of ownership of majority of its
shares, is in another corporation [the parent
corporation].
C.11. PARENT CORPORATION
Parent corporation – Its control lies in its
power, directly or indirectly, to elect the
subsidiary’s directors thus controlling its
management policies.
Holding company – a parent company which
has no other business aside from the holding
of the shares of its subsidiaries, which it
controls.
Investment company – a parent company
which holds shares in other corporations not
for the purpose of controlling them but
merely to invest therein.
C.12 CORPORATION DE JURE
Corporation de jure – A corporation organized
in accordance with the requirements of the
law.
C.13. DE FACTO CORPORATION
De facto corporation – A corporation where
there exists a flaw in its incorporation.
(a) Rule on de facto corporations
The due incorporation of any corporation
claiming in good faith to be a corporation
under this Code, and its right to exercise
corporate powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry may
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be made by the Solicitor General in a quo As to the defense of lack of corporate

warranto proceeding [Sec. 20].
General Rule: The defect in the juridical
personality of a corporation cannot be
inquired into by private individuals, much less
used as a defense to avoid claims,
Exception: In quo warranto proceedings
brought on behalf of the State where the
main action is to question the validity or
existence of such juridical personality
[Villanueva].
personality
When such ostensible corporation is sued, it
is precluded from raising the defense of lack
of corporate personality [Sec. 21].
As to third party
One who assumes an obligation to an
ostensible corporation as such, cannot resist
performance thereof on the ground that there
was in fact no corporation. [Sec. 21]

(b) Requisites of de facto corporation: The doctrine of estoppel applies to a third

(1) There is an apparently valid statute under party only when he tries to escape liability on
which the corporation may be formed; a contract from which he has benefited on the
(2) There has been colorable compliance with ground of defective incorporation. It does not
the legal requirements in good faith; and apply to a third party who is not trying to
(3) There has been user of corporate powers, escape liability from the contract, but rather
i.e. the transaction of business as if it is the one claiming from the contract.
were a corporation [Campos]. [International Express Travel v. CA (2000)]
An association of persons cannot claim to be
a corporation if it has not been issued a (b) COMPARISION WITH R.3, Sec.15 of the
certificate of incorporation since that fact ROC
belies the claim of good faith compliance
with the requirements of the law. [Hall v. Corp. by Estoppel R.3, Sec.15
Piccio (1950)] Clothes a non-entity The unincorporated
with personality to entity may only be
C.14 CORPORATION BY ESTOPPEL sue a third person sued but has no
Corporation by estoppel – Where a group of who seeks to evade personality to sue
persons misrepresent themselves as a liability in favor of the
corporation, they are subsequently estopped former
from claiming lack of corporate life in order to Merely creates a Does not concede to
avoid liability; fiction whereby an the association of
- Also, a third party who had dealt with an association of persons the cover of
unincorporated association as a corporation persons is treated as a corporate entity
is precluded from denying its corporate a corporation only for even for such
existence on a suit brought by the alleged purposes of purposes of litigation
corporation on the contract. exacting/enforcing
liability
(a) Effects For purposes of both Procedural remedy
As to liability protecting, as well as for drawing out the
All persons who assume to act as a imposing liability persons who will
corporation knowing it to be without against, third parties truly answer for the
authority to do so shall be liable as general liability
partners for all debts, liabilities and damages
incurred or arising as a result thereof [Sec. 21]. (c) De facto corporation vs. Corporation by
Estoppel

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De facto
Where all the
Estoppel
If any of the
III. Nationality of
requisites of a de
facto corporation are
requisites are absent,
then the estoppel
Corporations
present, then the doctrine may be
defectively formed applied only if any of A. PLACE OF INCORPORATION TEST
corporation will have the parties is The corporation is a national of the country
the status of a de jure estopped from under whose laws it is organized or
corporation in all defending: incorporated [Sec. 123].
cases brought by or (1) the defendant
against it, except association is Domestic corporations – organized and
only as to the State in estopped from governed under and by Philippine laws
defending on the
a direct proceeding
ground of its lack Foreign corporations – organized under laws
of capacity to be other than those of the Philippines and can
sued, or
operate only in the territory of the state under
(2) the defendant whose laws it was formed. However, they may
third party had be licensed to do business here [Campos].
dealt with the
plaintiff as a
corporation and B. CONTROL TEST
is deemed to A corporation shall be considered a Filipino
have admitted its corporation if the Filipino ownership of its
existence. capital stock is at least 60%, and where the
60-40 Filipino-alien equity ownership is NOT
in doubt [SEC Opinion dated 6 November
1989; DOJ Opinion No. 18, s. 1989].
Therefore, its shareholdings in another
corporation shall be considered to be of
Filipino nationality when computing the
percentage of Filipino equity of that second
corporation [SEC Opinion dated 23 November
1993].
Control test is applied in the following:
• Exploitation of natural resources - “Only
Filipino citizens or corporations whose
capital stock is at least 60% owned by
Filipinos can qualify to exploit natural
resources.” [Sec. 2, Art. XII, Const.]
• Public Utilities - “… no franchise,
certificate or any other form of
authorization for the operation of a public
utility shall be granted except to citizens of
the Philippines or to corporations or
associations organized under the laws of
the Philippines at least 60% of whose
capital is owned by such citizens. “ [Sec. 11,
Art. XII, Const.]
The term "capital" in Sec. 11, Article XII of the
1987 Constitution refers only to shares of
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stock entitled to vote in the election of
directors, and thus in the present case only to
common shares, and not to the total
outstanding capital stock [common and non-
voting preferred shares].
Compliance with the required Filipino
ownership of a corporation shall be
determined on the basis of outstanding
capital stock whether fully paid or not, but
only such stocks which are generally entitled
to vote are considered.
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the
required Filipino equity. Full beneficial
ownership of the stocks, coupled with
appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been
assigned or transferred to aliens cannot be
considered held by Philippine citizens or
Philippine nationals. [Gamboa v. Teves (2011)]
The SC, however, reversed its ruling in 2012.
The term “capital” is not limited to voting
shares since the constitutional requirement of
at least 60 % Filipino ownership applies not
only to voting control of the corporation, but
also to the beneficial ownership of the
corporation. It is therefore imperative that
such requirement apply uniformly and across
the board to all classes of shares, regardless
of nomenclature and category, comprising
the capital of a corporation.
Preferred shares, denied the right to vote in
the election of directors, are anyway still
entitled to vote on the eight specific
corporate matters under Sec. 6. of the
Corporation Code.
Thus, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately
to each class of shares, whether common,
preferred non-voting, preferred voting or any
other class of shares. [Gamboa v. Teves,
(2012)]
SEC Memorandum Circular No. 8 dated 20 May
2013
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Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or
enterprises specifically reserved, wholly or
partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws,
amendments thereto and IRRs of said laws
except as may otherwise be provided therein.
Sec. 2. All covered corporations shall, at all
times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the
required percentage of Filipino ownership
shall be applied to both
(1) the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
(2) the total number of outstanding shares of
stock, whether or not entitled to vote in
the election of directors.
C. GRANDFATHER RULE
Method used when a domestic corporation
has both domestic and foreign stockholders
to determine whether or not said corporation
is qualified to engage in a partially
nationalized business [Campos].
It involves the computation of Filipino
ownership of a corporation in which another
corporation of partly Filipino and partly
foreign equity owns capital stock. The
percentage of shares held by the second
corporation in the first is multiplied by the
latter’s own Filipino equity, and the product
of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary
corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business. [SEC Opinion re: Silahis Intl Hotel
(1987)]
Compliance with the constitutional
limitation[s] on engaging in nationalized
activities must be determined by ascertaining
if 60% of the investing corporation’s
outstanding capital stock is owned by
“Filipino citizens”, or as interpreted, by
natural or individual Filipino citizens. If such
investing corporation is in turn owned to
some extent by another investing corporation,
UP LAW BOC CORPORATION LAW
the same process must be observed. One
must not stop until the citizenships of the
individual or natural stockholders of layer
after layer of investing corporations have
been established, the very essence of the
Grandfather Rule. [Redmont Consolidated
Mines, Corp v. McArthur Mining, Inc., et al.
(2010)]
The Grandfather Rule applies only when the
60-40 Filipino foreign equity ownership is in
doubt [i.e. in cases where the joint venture
corporation with Filipino and foreign
stockholders with less than 60% Filipino
stockholdings (or 59%) invests in another
joint venture corporation which is either 60-
40% Filipino alien or 59% less Filipino].
Stated differently, where the 60-40 Filipino
foreign equity ownership is not in doubt, the
Grandfather Rule will not apply. [Narra Nickel
Mining and Dev. Corp v. Redmont
Consolidated Mines Corp. (2014)]
The Control Test can be, as it has been,
applied jointly with the Grandfather Rule to
determine the observance of foreign
ownership restriction in nationalized
economic activities. The Control Test and the
Grandfather Rule are not, as it were,
incompatible ownership-determinant
methods that can only be applied alternative
to each other. Rather, these methods can, if
appropriate, be used cumulatively in the
determination of the ownership and control
of corporations engaged in fully or partly
nationalized activities.
The Grandfather Rule, standing alone, should
not be used to determine the Filipino
ownership and control in a corporation, as it
could result in an otherwise foreign
corporation rendered qualified to perform
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nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may
be applied. Put in another manner, if the
subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is
immediately considered foreign-owned, in
which case, the need to resort to the
Grandfather Rule disappears.
On the other hand, a corporation that
complies with the 60-40 Filipino to foreign
equity requirement can be considered a
Filipino corporation if there is no doubt as to
who has the “beneficial ownership” and
“control” of the corporation. In that instance,
there is no need for a dissection or further
inquiry on the ownership of the corporate
shareholders in both the investing and
investee corporation or the application of the
Grandfather Rule. As a corollary rule, even if
the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee
corporation, a resort to the Grandfather Rule
is necessary if doubt exists as to the locus of
the “beneficial ownership” and “control.” In
this case (where based on the incorporation
papers, the Filipino-Owned corporation
subscribed to 60% of the capital while the
foreign corporation subscribed to 40% but
the subscription of the former is only
nominally paid-up and such corporation
entered into a financial assistance agreement
with the foreign-owned corporation), a
further investigation as to the nationality of
the personalities with the beneficial
ownership and control of the corporate
shareholders in both the investing and
investee corporations is necessary. [Narra
Nickel Mining and Dev. Corp v. Redmont
Consolidated Mines Corp. (2015)]
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Fully/ Partially Nationalized Areas [10th Foreign Investment Negative List, E.O. 184 (2015)]
NATIONALITY REQUIREMENT INDUSTRY
100% Filipino ownership • Mass media, except recording
• Practice of profession
• Retail trade
• Cooperatives
• Private security agencies
• Small-scale mining
• Utilization of marine resources in archipelagic
waters, territorial sea, exclusize economic zone,
as well as rivers, lakes, bays, and lagoons
• Ownership, operation and management of
cockpits
• Manufacture, repair, stockpiling and/or
distribution of nuclear weapons
• Manufacture of firecrackers and other
pyrotechnic devices

80% Filipino ownership • Private radio communications network

75% Filipino ownership • Private recruitment
• Contracts for construction and repair of locally-
funded public works, except: (i) infra projects
under RA 7718 (BOT Law), and (ii) foreign-
funded projects
• Contracts for construction of defense-related
structures
70% voting stock Filipino ownership [but may be • Banks [except Rural Banks]
reduced to 60%]
70% Filipino ownership • Advertising
60% capital stock Filipino ownership • (See FINL)

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UP LAW BOC CORPORATION LAW
IV. Corporate Juridical
Personality
It commences from the date the SEC issues a
certificate of incorporation under its official
seal [Sec. 19].
A. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
A.1. CONCEPT
A corporation has a personality separate and
distinct from that of its stockholders and
members and is not affected by the personal
rights, obligations, and transactions of the
latter.
A corporation, upon coming into existence, is
invested by law with a personality separate
and distinct from the persons comprising it as
well as from any other legal entity to which it
may be related. By this attribute, a
stockholder may not, generally, be made to
answer for acts or liabilities of said
corporation, and vice versa. [Land Bank of the
Philippines v. CA (2001)]
A.2. PROPERTY
Stockholders have no claim on corporate
property as owners, but mere expectancy or
inchoate right to the same upon dissolution
of the corporation after all corporate creditors
have been paid. Such right is limited only to
their equity interest (doctrine of limited
liability). Although a stockholder’s interest in
the corporation may be attached by his
personal creditor, corporate property cannot
be used to satisfy his claim. [Wise and Co. v.
Man Sun Lung (1940)]
(a) Liability for Torts and Crimes
Being an entity with a separate juridical
personality, a corporation can be held liable
for torts committed by its officers for
corporate purpose. [PNB v. CA (1978)]
Since a corporation as a person is a mere
legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime
in which personal violence or malicious intent
is required. Criminal action is limited to the
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corporate agents guilty of an act amounting to
a crime and never against the corporation
itself. [West Coast Life Ins. Co. v. Hurd (1914);
Time Inc. v. Reyes (1971)]
(b) Recovery of Moral Damages
A corporation can recover moral damages
under Art 2219 (7) if it was the victim of
defamation. [Pilipinas Broadcasting Network v.
Ago Medical and Educational Center (2005);
NOTE: Pilipinas Broadcasting pointed out that
the doctrine in Mambulao Lumber v. PNB
(1968), to the effect that a corporation may
recover moral damages for besmirched
reputation, is obiter dictum]
A.3. CONSTITUTIONAL RIGHTS
Corporate entities are entitled to due process,
equal protection, and protection against
unreasonable searches and seizures.
However, a corporation is not entitled to the
privilege against self-incrimination. [Bataan
Shipyard and Eng’g Co. v. PCGG (1987)]
B. DOCTRINE OF PIERCING THE
CORPORATE VEIL
Piercing the veil of corporate entity is an
equitable remedy:
The veil of separate corporate personality
may be lifted when such personality is used
to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a
shield to confuse the legitimate issues; or
when the corporation is merely an adjunct, a
business conduit or an alter ego of another
corporation or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation
is used as a cloak or cover for fraud or
illegality, or to work injustice, or where
necessary to achieve equity or for the
protection of the creditors. In such cases, the
corporation will be considered as a mere
association of persons. The liability will
directly attach to the stockholders or to the
other corporation. [China Banking v. Dyne-
Sem (2006)]
UP LAW BOC
B.1. GROUNDS FOR APPLICATION OF THE
DOCTRINE
The corporate fiction may be pierced if used:
(1) to defraud the government of taxes due
it;
(2) to evade payment of civil liability;
(3) by a corporation which is merely a
conduit or alter ego of another
corporation;
(4) to evade compliance with contractual
obligations; or
(5) to evade financial obligation to its
employees.
Only in these and similar instances may the
veil be pierced and disregarded: to ward off a
judgment credit, to avoid inclusion of
corporate assets as part of the estate of the
decedent, to escape liability arising from a
debt, or to perpetuate fraud and/or confuse
legitimate issues either to promote or to
shield unfair objectives to cover up an
otherwise blatant violation of the prohibition
against forum shopping. [PNB v. Andrada
Electric and Engineering Co. (2002)]
B.2. TEST IN DETERMINING
APPLICABILITY
Specifically, it is used in the following specific
contexts:
(i) When the liability belongs to the
corporations but the plaintiff seeks to hold the
individual liable. Mere controlling interest is
not enough. There must be a clear showing
that the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud or defend crime [Koppel Phil v. Yatco
(1946)] Note the following badges of fraud: (1)
used as a shield to further an end subversive
of justice; (2) or for purposes that could not
have been intended by the law that created it;
(3) or to defeat public convenience; (4) justify
wrong; (5) protect fraud; (6) or defend crime;
(7) or to perpetuate fraud or confuse
legitimate issues; (8) or to circumvent the law
or perpetuate deception.;
CORPORATION LAW MERCANTILE LAW
(ii) Where the liability is personal to the
individual and he seeks to evade it by hiding
behind a corporate vehicle. Isabelo Calingasan
and defendant Fely Transportation may be
regarded as one and the same person. It is
evident that Isabelo Calingasan's main
purpose in forming the corporation was to
evade his subsidiary civil liability resulting
from the conviction of his driver, Alfredo
Carillo. This conclusion is borne out by the
fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his
wife, his son, Dr. Calingasan, and his two
daughters. We believe that this is one case
where the defendant corporation should not
be heard to say that it has a personality
separate and distinct from its members when
to allow it to do so would be to sanction the
use of the fiction of corporate entity as a
shield to further an end subversive of justice.
[Palacio v. Fely Transporation (1962)]
(iii) The instrumentality or alter ego rule. The
elements of this modality are: (1) Control, not
mere majority or complete stock control, but
complete domination, not only of finances
but of policy and business practice in respect
to the transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence
of its own; (2) Such control must have been
used by the defendant to commit fraud or
wrong, to perpetuate the violation of a
statutory or other positive legal duty, or
dishonest and unjust act in contravention of
plaintiffs legal rights; and (3) The aforesaid
control and breach of duty must proximately
cause the injury or unjust loss complained of.
Circumstances rendering subsidiary an
instrumentality:
(1) the parent corporation owns all or most
of the subsidiary’s capital stock;
(2) the parent and subsidiary corporations
have common directors or officers;
(3) the parent corporation finances the
subsidiary;
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UP LAW BOC CORPORATION LAW
(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
subsidiary;
(7) the subsidiary has substantially no
business except with the parent
corporation or no assets except those
conveyed to or by the parent corporation;
(8) in the papers of the parent corporation or
in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation or its
business or financial responsibility is
referred to as the parent corporation’s
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 independently in the
interest of the subsidiary but take their
orders from the parent corporation in the
latter’s interest; and
(11) the formal ledger requirements of the
subsidiary are not observed. [PNB v.
Ritratto Group (2001)]
(iv) Successor corporation rule. This applies in
instances where a corporation feigns
dissolution or cessation but really continues
in existence organized under another name.
This application of the rule figures
prominently in labor cases where the prior
entity seeks to evade its obligations to its
laborers. Some tell tale signs exhibited in
Claparols v. CIR (1975) include: (1) consecutive
date of cessation and commencement of
subsequent entity; (2) ownership and control
by former controlling stockholder; and (3)
turnover of assets. On the other hand, in
Livesey v Binswanger (2014), the court pointed
to the following: (1) same officers; (2) same
office; and (3) continuation of the business.
[Note: SME v. De Guzman (2013) allows for
the defense of good faith in case of assets
sales between a predecessor and successor
corporation:
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“In asset sales, the rule is that the seller in
good faith is authorized to dismiss the
affected employees, but is liable for the
payment of separation pay under the law.
The buyer in good faith, on the other hand, is
not obliged to absorb the employees affected
by the sale, nor is it liable for the payment of
their claims. The most that it may do, for
reasons of public policy and social justice, is
to give preference to the qualified separated
personnel of the selling firm.
In contrast with asset sales, in which the
assets of the selling corporation are
transferred to another entity, the transaction
in stock sales takes place at the shareholder
level. Because the corporation possesses a
personality separate and distinct from that of
its shareholders, a shift in the composition of
its shareholders will not affect its existence
and continuity.
Thus, notwithstanding the stock sale, the
corporation continues to be the employer of
its people and continues to be liable for the
payment of their just claims. Furthermore,
the corporation or its new majority
shareholders are not entitled to lawfully
dismiss corporate employees absent a just or
authorized cause”
This overturns the ruling in Manlimos v. NLRC
(1995) allowing for the defense of good faith
in stock sales.]
C. PROCEDURAL CONSIDERATIONS
The general rule is that both the individual
sought to be held liable and the corporation
must be impleaded at the first instance. This
is in consonance with the tenets of due
process and fair play. Hence, one cannot
“pierce the veil in order to acquire jurisdiction”
over a party [Pacific Rehaus v. CA (1988)]
The principle of piercing the veil of corporate
fiction, and the resulting treatment of two
related corporations as one and the same
juridical person with respect to a given
transaction, is basically applied only to
determine established liability; it is not
available to confer on the court a jurisdiction
it has not acquired, in the first place, over a
party not impleaded in a case. Elsewise put, a
corporation not impleaded in a suit cannot be
subject to the courts process of piercing the
UP LAW BOC
veil of its corporate fiction. In that situation,
the court has not acquired jurisdiction over
the corporation and, hence, any proceedings
taken against that corporation and its
property would infringe on its right to due
process. The implication of the above
comment is twofold: (1) the court must first
acquire jurisdiction over the corporation or
corporations involved before its or their
separate personalities are disregarded; and
(2) the doctrine of piercing the veil of
corporate entity can only be raised during a
full-blown trial over a cause of action duly
commenced involving parties duly brought
under the authority of the court by way of
service of summons or what passes as such
service. [Kukan v. Reyes (2010)]
Hence, a sheriff may not, on his own, attach
the properties of an individual stockholder
just because he failed to attach the purported
properties of the corporation itself. This runs
counter to the doctrine on “immutability of
judgment” as this would be an amendment of
a final and executory judgment. [Cruz v.
Dalisay (1987)]
The only exception recognized by
jurisprudence is when it is a labor case
involved. When an aggrieved laborer is
unable to attach the properties of the
corporation, the Labor Arbiter may thereafter
“amend” its decision by ordering that the
properties of the individual be levied
[Guillermo v. Uson (2016)]
CORPORATION LAW MERCANTILE LAW
V. Incorporation and
Organization
A. PROMOTER
Promoters – are persons who, acting alone or
with others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor
[Sec. 3.10, RA 8799, The Securities Regulation
Code].
A.1. LIABILITY OF PROMOTER
General rule: the promoter binds himself
personally and assumes the responsibility of
looking to the proposed corporation for
reimbursement.
Exceptions:
(1) Express or implied agreement to the
contrary
(2) Novation, not merely adoption or
ratification of the contract
A.2. LIABILITY OF CORPORATION FOR
PROMOTER’S CONTRACTS
General rule: A corporation is NOT bound by
the contract. A corporation, until organized,
has no life and no legal existence. It could not
have had an agent [the promoter] who could
legally bind it. [Cagayan Fishing Development
Co., Inc. v. Sandiko (1937)]
Exceptions: A corporation may be bound by
the contract if it makes the contract its own
by:
(1) Adoption or ratification of the ENTIRE
contract after incorporation.
Note:
• A corporation’s power to adopt a
contract [by its promoters] must be
understood to be limited to such
contracts as the corporation itself,
after its organization, would be
authorized to make. [Builders’ Duntile
Co. v. Dunn Mfg. Co. (1929)]
• Novation or the intent to novate the
original contract is required to adopt
Page 149 of 353
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or ratify the pre-incorporation contract. corporation when organized”. [Rizal

[Campos] Light v. PSC and Morong Electric
(1968)]
• The Court’s ruling in Cagayan Fishing v.
Teodoro Sandiko, that “a corporation (2) Acceptance of benefits under the contract
should have a full and complete with knowledge of the terms thereof.
organization and existence as an (3) Performance of its obligation under the
entity before it can enter into any kind contract
of a contract or transact any business”,
is not absolute. One of the exceptions
recognized by American courts is that
“a contract made by the promoters of a
corporation on its behalf may be
adopted, accepted or ratified by the

Page 150 of 353

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STEPS IN INCORPORATION
STEPS COMMENTS

a. Promotional Stage (See SEC. Promoter

2. Definitions) · brings together persons who become interested
in the enterprise
· aids in procuring subscriptions and sets in
motion the machinery which leads to the
formation of the corporation itself
· formulates the necessary initial business and
financial plans and, if necessary, buys the rights
and property which the business may need, with
the understanding that the corporation when
formed, shall take over the same.

b. Drafting articles of incorporation (see chart below)

(See SEC. 14)

c. Filing of articles; payment of fees.
· AOI & the treasurer’s affidavit duly signed &
acknowledged
· must be filed w/ the SEC & the corresponding fees paid
· failure to file the AOI will prevent due incorporation of
the proposed corporation & will not give rise to its juridical
personality. It will not even be a de facto corp.
· Under present SEC rules, the AOI once filed , will be
published in the SEC Weekly Bulletin at the expense of the
corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or Process:

rejection by SEC. a) SEC shall examine them in order to determine
whether they are in conformity w/ law.
b) If not, the SEC must give the incorporators a
reasonable time w/in w/c to correct or modify the
objectionable portions.

Grounds for rejection or disapproval of AOI:

a) AOI /amendment not substantially in accordance w/

the form prescribed

b) purpose/s are patently unconstitutional, illegal,

immoral, or contrary to government rules & regulations;

c) Treasurer’s Affidavit is false;

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d) required percentage of ownership has not been

complied with (Sec. 17)

e) corp.’s establishment, organization or operation will

not be consistent w/ the declared national economic policies
(to be determined by the SEC, after consultation w/ BOI,
NEDA or any appropriate government agency -- PD 902-A as
amended by PD 1758, Sec. 6 (k))

· Decisions of the SEC disapproving or rejecting AOI may

be appealed to the CA by petition for review in accordance
w/ the ROC.

e. Issuance of certificate of Certificate of Incorporation will be issued if:

incorporation.
a) SEC is satisfied that all legal requirements have been
complied with; and

b) there are no reasons for rejecting or disapproving the

AOI.

· It is only upon such issuance that the corporation

acquires juridical personality.
(See Sec. 19. Commencement of corporate existence)

· Should it be subsequently found that the incorporators

were guilty of fraud in procuring the certificate of
incorporation, the same may be revoked by the SEC, after
proper notice & hearing.

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B. NUMBER AND QUALIFICATIONS OF
INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a
subscriber to at least 1 share of the
capital stock of the corporation [Sec. 20]
C. CORPORATE NAME — LIMITATIONS
ON USE OF CORPORATE NAME
Corporate name
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws [Sec. 18]
Change of corporate name requires the
amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock [Sec. 16].
Amendment of a corporation’s Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same
corporation with a different name, and its
character is not changed. Consequently, the
“new” corporation is still liable for the debts
and obligations of the “old” corporation.
[Republic Planters Bank v. CA (1992)]
D. CORPORATE TERM
General rule: A corporation shall exist for a
period not exceeding 50 years from the date
of incorporation. [Sec. 11]
Exceptions:
(1) Sooner dissolved
(2) Period extended
• For periods not exceeding 50 years in
any single instance by an amendment
of the Articles of Incorporation
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• Extensions may not be made earlier
than 5 years prior to the original or
subsequent expiry date[s] [Sec. 11]
Except: If the SEC determines that
there are justifiable reasons for an
earlier extension.
Rationale: Corporations are creatures of the
law through the State legislature. The State
is therefore concerned that this privilege be
enjoyed by corporations only “under the
conditions and not beyond the period that it
sees fit to grant; and particularly, that it not
be abused in fraud and to the detriment of
other parties; and for this reason, it has been
ruled that the limitation to a definite period is
an exercise of control in the interest of the
public. [Benguet Consolidated Mining Co. v.
Pineda (1956)]
E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS
Stock corporations incorporated under the
Corporation Code shall not be required to
have a minimum authorized capital stock [Sec
12]
Except as provided for by special law and
subject to the provisions of Sec. 13
Amount of Capital Stock to be Subscribed and
Paid for the Purposes of Incorporation
(1) At the time of incorporation, at least 25%
of the authorized capital stock stated in
the Articles of Incorporation should be
subscribed;
(2) At least 25% of the total subscription
must be paid upon subscription;
(3) The balance to be payable on
• Dates fixed in the subscription contract
without need of call or
• Upon call by the BOD in the absence of
fixed dates
(4) The paid-up capital can in no case be
lower than P5,000.00 [Sec. 13]
F. ARTICLES OF INCORPORATION
F.1. NATURE AND FUNCTION OF ARTICLES
UP LAW BOC CORPORATION LAW
• Constitutes the charter of the corporation
and sets forth the rules and conditions
upon which the association or corporation
is founded
• Defines the contractual relationships
between the State and the corporation, the
stockholders and the State, and the
corporation and the stockholders
The Articles must be filed with the SEC for
the issuance of the Certificate of
Incorporation.
F.2. CONTENTS
(i) Corporate Name
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws [Sec. 18]
The policy underlying the prohibition against
the registration of a corporate name which is
“identical or deceptively or confusingly
similar” to that of any existing corporation or
which is “patently deceptive or patently
confusing” or “contrary to existing laws” is:
(1) The avoidance of fraud upon the public
which would have occasion to deal with
the entity concerned;
(2) The prevention of evasion of
legal obligations and duties, and
(3) The reduction of difficulties of
administration and supervision over
corporations. [Lyceum of the Philippines v.
CA (1993)]
To determine whether a given corporate
name is "identical" or "confusingly or
deceptively similar" with another entity's
corporate name, one must evaluate corporate
names in their entirety.
The corporate name shall contain the word
“Corporation” or “Incorporated”, or the
abbreviations “Corp.” or “Inc.” respectively.
[SEC Memo Circ. No.5, s.2008]
Business or trade name which is different
from the corporate name shall be indicated in
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the articles of incorporation. A company may
have more than one business or trade name.
[SEC Memo Circ. No. 12, s. 2008]
Change of corporate name requires the
amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock, or the vote of
or written assent of at least 2/3 of the
members if non-stock [Sec. 16].
Amendment of a corporation’s Articles of
Incorporation to change its corporate name
does not extinguish the personality of the
original corporation. It is the same
corporation with a different name, and its
character is not changed. Consequently, the
“new” corporation is still liable for the debts
and obligations of the “old” corporation.
[Republic Planters Bank v. CA (1992)]
(ii) Purpose Clause
• Must indicate the specific PRIMARY and
SECONDARY purposes if there are more
than one purpose, which should not
contradict or change the nature of the
corporation [Sec. 14(2)]
• Must not be patently unconstitutional,
illegal, immoral, and contrary to
government rules and regulations [Sec. 17
(2)].
• Must not be for the purpose of practicing a
profession. [People v. United Medical Service,
200 N.E. 157, cited in Campos]
• Under the present state of our law and
jurisprudence, a corporation cannot be
organized for or engage in the practice of
law in this country. This interdiction, just
like the rule against unethical advertising,
cannot be subverted by employing some
so-called paralegals supposedly rendering
the alleged support services. The remedy
for the apparent breach of this prohibition
is the concern and province of the Solicitor
General who can institute the
corresponding quo warranto action, after
due ascertainment of the factual
background and basis for the grant of the
corporate charter, in light of the putative
UP LAW BOC
misuse thereof. [Ulep v. The Legal Clinic
(1993)]
(iii) Principal Office
• Must be within the Philippines [Sec. 14 (3)]
• Articles of Incorporation must specify both
province or city or town where it is located
• SEC Circular No. 3-2006: A specific address
is now required; merely indicating Metro
Manila is no longer allowed.
Important for [1] determining venue in an
action by or against the corporation, and [2]
determining the province where a chattel
mortgage of shares should be registered.
[Chua Guan vs. Samahang Magsasaka (1935)]
The residence of a corporation is the place
where its principal office is located, as stated
in its Articles of Incorporation. To insist that
the proper venue is the actual principal office
and not that stated in its Articles of
Incorporation would indeed create confusion
and work untold inconvenience. Enterprising
litigants may, out of some ulterior motives,
easily circumvent the rules on venue by the
simple expedient of closing old offices and
opening new ones in another place that they
may find well to suit their needs. [Hyatt
Elevators v. Goldstar Elevators (2005)]
(iv) Corporate Term
• Maximum life of 50 years.
• Extendible for a period not exceeding 50
years at any one instance. No extension,
however, can be made earlier than 5 years
before the end of the term. [Sec. 11]
Extension requires an amendment of the
Articles of Incorporation subject to the
exercise of appraisal right by the dissenting
stockholder [Sec. 37].
(v) Names, citizenship and residences of
incorporators
(vi) Number, names, citizenship and
residences of directors/trustees.
CORPORATION LAW MERCANTILE LAW
Stock corporations: directors
Non-stock corporations: trustees
General rule: Not less than 5 but not more
than 15 directors/trustees
Exceptions: Non-stock corporations whose
articles or by-laws may provide for more than
15 trustees [Sec. 92]
Banks may have up to 21 directors for cases of
mergers and consolidation. [Sec. 17, General
Banking Act]
Educational non-stock corporations:
• trustees may not be less than 5 nor exceed
15
• number of trustees shall be in multiples of
5 [Sec. 108]
Nationalized or partially-nationalized
industries:
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares
If STOCK corporation:
• authorized capital stock in lawful money of
the Philippines
• the number of shares into which the ACS is
divided
• If with par value shares, the par value of
each share [Sec. 14[8], Sec. 15[7]].
• names, citizenship, residences of original
subscribers
• amount subscribed and paid on each
subscription
• fact that some or all shares are w/o par
value
If NON-STOCK:
• amount of capital
• names, nationalities and residences of
contributors
• amount contributed by each
(vii) Amount paid by each subscriber on their
subscription, which shall not be less than
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25% of subscribed capital and shall not be

less than P5,000
[Sec 15 (8,9)]

(viii) Name of treasurer elected by the

subscribers
[Sec 15(10)]

(ix) Other matters

(1) Classes of shares, as well as preferences
or restrictions on any such class [Sec. 6].
(2) Denial or restriction of pre-emptive right
[Sec.39].
(3) Prohibition against transfer of stock
which would reduce stock ownership to
less than the required minimum in the
case of a nationalized business or activity
[Sec. 15(11)].

No transfer clause
If the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign
stockholders’ ownership of the shares which
is adversely affected but the capacity of the
corporation to own land – that is, the
corporation becomes disqualified to own
land. No law disqualifies a person from
purchasing shares in a landholding
corporation even if the latter will exceed the
allowed foreign equity, what the law
disqualifies is the corporation from owning
land. [J.G. Summit Holdings, Inc. v. CA
(2005)]

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CONTENTS OF AOI COMMENTS

Corporate Name · Essential to its existence since it is through it that the

corporation can sue and be sued and perform all legal acts

· A corporate name shall be disallowed by the SEC if the

proposed name is either:

(1) identical or deceptively or confusingly similar to

that of any existing corporation or to any other name
already protected by law; or

(2) patently deceptive, confusing or contrary to

existing laws. (Sec. 18)

LYCEUM OF THE PHILS. VS. CA (219 SCRA 610)

The policy underlying the prohibition against the registration of a

corporate name which is “identical or deceptively or confusingly
similar” to that of any existing corporation or which is “patently
deceptive or patently confusing” or “contrary to existing laws is:

1. the avoidance of fraud upon the public which would

have occasion to deal with the entity concerned;
2. the prevention of evasion of legal obligations and
duties, and
3. the reduction of difficulties of administration and
supervision over corporations.

Purpose Clause · A corporation can only have one (1) primary

purpose. However, it can have several secondary purposes.

· A corporation has only such powers as are expressly granted

to it by law & by its articles of incorporation, those which may
be incidental to such conferred powers , those reasonably
necessary to accomplish its purposes & those which may be
incident to its existence.

· Corporation may not be formed for the purpose of practicing

a profession like law, medicine or accountancy

Principal Office · must be within the Philippines

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· specify city or province

· street/number not necessary
· important in determining venue in an action by or against the
corp., or on determining the province where a chattel
mortgage of shares should be registered

Term of Existence · cannot specify term which is longer than 50 years at a time
· may be renewed for another 50 years, but not earlier than 5
years prior to the original or subsequent expiry date UNLESS
there are justifiable reasons for an earlier extension.

Incorporators and Directors · names, nationalities & residences of the incorporators;

· names, nationalities & residences of the directors or trustees
who will act as such until the first regular directors or trustees
are elected;
· treasurer who has been chosen by the pre-incorporation
subscribers/members to receive on behalf of the corporation,
all subscriptions /contributions paid by them.

Capital Stock · amount of its authorized capital stock in lawful money of the
Philippines
· number of shares into which it is divided
· in case the shares are par value shares, the par value of each,
· names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on
his subscription, and if some or all of the shares are without
par value, such fact must be stated
· for a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and
the amount contributed by each
· 25% of 25% rule to be certified by Treasurer
· paid up capital should not be less than P5,000

Other matters · Classes of shares into w/c the shares of stock have been
divided; preferences of & restrictions on any such class;
and any denial or restriction of the pre-emptive right of
stockholders should also be expressly stated in said articles.

· If the corporation is engaged in a wholly or partially

nationalized business or activity, the AOI must contain a
prohibition against a transfer of stock which would reduce
the Filipino ownership of its stock to less than the required
minimum.
(2) And the vote or written assent of
F.3. AMENDMENT • 2/3 of the outstanding capital stock,
Amendment of the Articles of Incorporation without prejudice to the appraisal right
(1) By a majority vote of the BOD or trustees of dissenting stockholders in
Page 158 of 353
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accordance with the provisions of this
Code,
• 2/3 of the members if it be a non-stock
corporation. [Sec. 16]
(i) LIMITATIONS
(1) Requirements imposed by the Code or by
special laws
(2) Must be for a legitimate purpose
(3) Must be approved by the
directors/trustees and the
stockholders/members through the vote
requirement
(4) Appraisal Right
(5) Both the original and the amended
articles together must contain all the
provisions required by law to be set out in
the articles
(6) If the corporation is governed by a special
law, the amended articles must be
accompanied by a favorable
recommendation of the appropriate
government agency to the effect that
such amendment is in accordance with
law [Lopez]
(7) Will take effect only
• Upon their approval by the SEC by the
issuance of a certificate of amended
articles
• Or from the date of filing with the SEC if
not acted upon within 6 months from
the date of filing for a cause not
attributable to the corporation
(ii) PROCEDURE
(1) The original and amended articles
together shall contain all provisions
required by law to be set out in the
articles of incorporation
(2) The articles, as amended shall be
indicated by underscoring the change or
changes made
(3) A copy shall be submitted to the SEC
• Duly certified under oath by the
corporate secretary and a majority of
the directors or trustees
CORPORATION LAW MERCANTILE LAW
• Stating the fact that the amendment or
amendments have been duly approved
by the required vote of the stockholders
or members
The following items are amendable under
Sec. 16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or
trustees
(5) Increase or decrease in authorized capital
stock [subject to Sec. 38]
F.4. NON-AMENDABLE ITEMS
The following items state accomplished facts,
therefore, cannot be amended:
(1) The names, nationalities and residences
of the incorporators.
Otherwise, an amendment would go
against the definition of
“incorporators” in Sec. 5
(2) Treasurer-in-trust
(3) First set of directors or trustees
(4) Original stock subscriptions and paid-in
capital
(5) Place and date of execution
(6) Witnesses [De Leon]
Note: Articles of Incorporation must be
accompanied by Treasurer’s sworn statement
of compliance with Sec. 13 on amount of
capital to be subscribed and paid for the
purposes of incorporation; otherwise, SEC
shall not accept the Articles of Incorporation
[Sec. 14].
G. REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
G.1. REGISTRATION OF THE ARTICLES OF
INCORPORATION
Documents to be filed with SEC:
(1) Articles of Incorporation, and By-Laws (if
crafted prior to incorporation)
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(2) Treasurer’s Affidavit certifying that 25%
of the total authorized capital stock has
been subscribed and at least 25% of such
has been fully paid in cash or property
[Note: SEC Resolution No. 0331 dated
July 20, 2012 no longer requires a bank
certificate of deposit covering the paid-up
capital if payment for shares is made in
cash; where the capital stock is paid by a
combination of cash and property, only
the portion paid by way of property will
require the submission of supporting
documents.
(3) Letter authority authorizing the SEC to
examine the bank deposit and other
corporate books and records to determine
the existence of paid-up capital
(4) Undertaking to change the corporate
name in case there is another person or
entity with same or similar name that was
previously registered
(5) Certificate of authority from proper
government agency whenever
appropriate like BSP for banks and
Insurance Commission for insurance
corporations. [Sundiang and Aquino]
G.2. ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate
existence and juridical personality [Sec. 19]
Revocation of certificate of incorporation: If
incorporators are found guilty of fraud in
procuring the same after due notice and
hearing [Sec. 6(i), PD 902-A]
G.3. GROUNDS FOR DISAPPROVING THE
ARTICLES OF INCORPORATION:
• Does not substantially comply with form
prescribed
• Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
• Treasurer’s Affidavit concerning the
amount of capital subscribed and or paid is
false
• Required percentage of ownership of
Filipino citizens has not been complied with
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MERCANTILE LAW
when required by existing laws or the
Constitution. [Sec. 17]
REMEDY in case of rejection - petition for
review in accordance with the Rules of Court,
i.e. Rule 43 [Sec. 6, last par., PD 902-A]
SEC shall give the incorporators reasonable
time to correct or modify objectionable
portions of the articles or amendment [Sec.
17].
H. ADOPTION OF BY-LAWS
By-laws – has traditionally been defined as
regulations, ordinances, rules or laws
adopted by an association or corporation for
its internal governance, including rules for
routine matters such as calling meetings
[SMC v. Mandaue (2005)].
Adoption of By-Laws
May be done either:
(1) Prior to incorporation - approved and
signed by all the incorporators and
submitted to SEC together with Articles
of Incorporation; or
(2) After incorporation - within 1 month after
receipt of official notice of the issuance of
its certificate of incorporation by the SEC.
[Sec. 46]
Effect of failure to file the By-Laws within the
period:
Does not imply the "demise" of the
corporation. By-laws may be required by law
for an orderly governance and management
of corporations but they are not essential to
corporate birth. Nonetheless, failure to file
them within the period required by law by no
means tolls the automatic dissolution of a
corporation. [Loyola Grand Villas Homeowners
Association v. CA (1997)]
Note: Sec. 22 on the effect of failure to
formally organize within 2 years from
incorporation, the corporation’s corporate
powers cease and the corporation is deemed
dissolved. Organization includes: the filing
and approval of by-laws with the SEC and the
election of directors and officers [Campos].
H.1. NATURE AND FUNCTIONS OF BY-
LAWS
UP LAW BOC CORPORATION LAW MERCANTILE LAW

Nature: It is a product of agreement of the ii. HOW DELEGATION REVOKED:

stockholders or members [Campos]. Any power delegated to the BOD or trustees
Function: It establishes the rules for internal to amend or repeal any by-laws or adopt new
government of the corporation [Campos]. by-laws shall be considered as revoked
It also regulates the affairs and relationship whenever stockholders owning or
between and among stockholders, BOD and representing a majority of the outstanding
corporation [Lopez]. capital stock or a majority of the members in
non-stock corporations, shall so vote at a
H.2. REQUISITES OF VALID BY-LAWS regular or special meeting. [Sec. 48]
Approval requirement: Must be approved by
the affirmative vote of the stockholders
representing MAJORITY of the outstanding
capital stock or majority of members
If filed pre-incorporation: must be approved
and signed by all incorporators
Record-Keeping: Must be kept in the principal
office of the corporation, subject to inspection
of stockholders or members during office
hours [Sec. 74]
No provision of the by-laws can be adopted if
it is contrary to law. [Grace Christian High
School v. CA (1997)]

H.3. BINDING EFFECTS

When Binding: ONLY from date of issuance of
SEC of a certification that the by-laws are not
inconsistent with the Code [Sec. 48]
Pending such approval, they cannot bind
stockholders or corporation
Effect to third parties: Mere internal rules
among stockholders and cannot affect or
prejudice 3rd persons who deal with the
corporation unless they have knowledge of
the same [China Banking Corp v CA (1997)].

H.4. AMENDMENT OR REVISION

Effected by: majority vote of the members of
the board and majority vote of owners of the
Outstanding Capital Stock or members, in a
meeting duly called for the purpose

i. DELEGATION TO THE BOD OF POWER TO

AMEND OR REPEAL BY-LAWS:
By vote of stockholders representing 2/3 of
the Outstanding Capital Stock or 2/3 of the
members [Sec. 48]

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VI. Corporate Powers
A. GENERAL POWERS, THEORY OF
GENERAL CAPACITY [SEC. 36]
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt and amend by-laws;
(6) For stock corporations - issue or sell
stocks to subscribers and sell treasury
stocks; for non-stock corporation - admit
members to the corporation;
(7) Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and
personal property, pursuant to its lawful
business;
(8) Enter into merger or consolidation with
other corporations as provided in the
Code;
(9) Make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or
similar purposes: Provided, no
corporation, domestic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity;
(10) Establish pension, retirement, and other
plans for the benefit of its directors,
trustees, officers and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its
purposes
NOTE:
The Corporation has implied powers which
are deemed to exist because of the following
provisions:
(1) “Except such as are necessary or
incidental to the exercise of the powers so
conferred” [Sec. 45]
(2) “Such powers as are essential or
necessary to carry out its purpose or
purposes as stated in the Articles of
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MERCANTILE LAW
Incorporation” – catch-all phrase [Sec.
36(11)].
B. SPECIFIC POWERS, THEORY OF
SPECIFIC CAPACITY [SECS. 37-44]
(1) Power to Extend or Shorten Corporate
Term
(2) Power to Increase or Decrease Capital
Stock or Incur, Create, Increase Bonded
Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate
Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in
Another Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management
Contract
B.1. EXTEND OR SHORTEN THE
CORPORATE TERM [SEC. 37]
(1) Must be approved by majority vote of the
BOD/ BOT
(2) Ratified at a meeting by shareholders
representing 2/3 of the outstanding
capital stock/ 2/3 of members of non-
stock corporations
(3) Written notice of meeting (includes
proposed action, time and place of
meeting) shall be addressed to each
shareholders/member at his place of
residence and deposited to the addressee
in the post office, or served personally
(4) Appraisal right may be exercised by the
dissenting stockholder for BOTH
extension and shortening of corporate
term [See also Sec. 81]
B.2. INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE
BONDED INDEBTEDNESS [SEC. 38]
(1) Same requirements above from 1-3
(2) A certificate in duplicate must be signed
by a majority of the directors of the
corporation (countersigned by the
UP LAW BOC CORPORATION LAW
chairman and the secretary of the
shareholders meeting), setting forth:
(a) That requirements of this section
have been complied with
(b) The amount of the increase or
diminution of the capital stock
(c) In case of increase,
(i) the amount of capital stock or
number of shares of no-par stock
actually subscribed
(ii) names, nationalities and
residences of the persons
subscribing
(iii) the amount of no-par stock
subscribed by each
(iv) the amount paid by each on his
subscription, or the amount of
capital stock or number of shares
of no-par stock allotted to each
stockholder if such increase is for
the purpose of making effective
stock dividend
(d) any bonded indebtedness to be
incurred, created or increased
(e) the actual indebtedness of the
corporation on the day of the meeting
(f) the amount of stock represented at
the meeting
(g) the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of
any bonded indebtedness
(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file
in the office of the corporation and the
other shall be filed with the SEC,
attached in the original articles of
incorporation.
(a) From and after approval of the SEC of
its certificate of filing, the capital
stock shall stand increased or
decreased and the incurring, creating
or increasing of any bonded
indebtedness authorized
(b) SEC shall not accept for filing any
certificate of increase unless
accompanied by the sworn statement
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MERCANTILE LAW
of the treasurer of the corporation
showing:
(i) That at least 25% of such
increased capital stock have been
subscribed and
(ii) that at least 25% of the amount
subscribed has been paid or that
there has been transferred to the
corporation property the value of
which is equivalent to 25% of the
subscription
(c) SEC shall not approve any decrease
in the capital stock if its effect shall
prejudice the rights of corporate
creditors
(5) Bonds issued by a corporation shall be
registered with the SEC
B.3. DENY PREEMPTIVE RIGHT [SEC. 39]
General Rule: All shareholders of a stock
corporation have preemptive right to
subscribe to all issues or disposition of shares
of any class, in proportion to their respective
shareholdings
Exception: If such right is denied by the
Articles of Incorporation or an amendment
thereto
Pre-emptive right shall not extend to:
(1) shares to be issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the
public
(2) shares to be issued in good faith with
the approval of 2/3 of the
stockholders representing
outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment of
a previously contracted debt
[Note: For close corporations, the pre-
emptive rights extends to all stock to be
issued, including reissuance of treasury
shares, whether for money, property or
personal services, or in payment of corporate
debts, unless the AOI provides otherwise.
(Sec. 102)]
UP LAW BOC CORPORATION LAW
B.4. SELL OR DISPOSE OF
SUBSTANTIALLY ALL ITS ASSETS [SEC.
40]
(1) Same requirements from 1-3 as Sec. 37
above
(2) Any dissenting shareholders may exercise
his appraisal right
(3) Deemed to cover substantially all the
corporate property and assets. A sale or
other disposition shall be deemed to
cover substantially all the corporate
property and assets if thereby the
corporation would be rendered incapable
of continuing the business or
accomplishing the purpose for which it
was organized.
(4) After authorization by the
shareholders/members, the BOD/BOT
may abandon such sale, lease, exchange,
mortgage, pledge or other disposition,
subject to the rights of third parties under
any contract relating thereto, without
further action or approval by the
shareholders/ members
(5) Corporation is not restricted in its power
to sell or dispose of its assets without the
authorization of shareholders or
members:
(a) if the same is necessary in the usual
and regular course of business of the
corporation or
(b) if the proceeds of the sale will be
appropriated for the conduct of its
remaining business
In enumeration number (5) above, only the
approval of a quorum of the BOD/BOT is
required.
While the Corporation Code allows the
transfer of all or substantially all the
properties and assets of a corporation, the
transfer should not prejudice the creditors of
the assignor. The only way the transfer can
proceed without prejudice to the creditors is
to hold the assignee liable for the obligations
of the assignor. The acquisition by the
assignee of all or substantially all of the
assets of the assignor necessarily includes
the assumption of the assignor’s liabilities,
unless the creditors who did not consent to
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MERCANTILE LAW
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 its creditors and
without requiring the assignee to assume the
assignor’s obligations will defraud the
creditors. The assignment will place the
assignor’s assets beyond the reach of its
creditors. [Caltex (Phils.) Inc. v. PNOC
Shipping and Transport Corp. (2006)]
B.5. ACQUIRE ITS OWN SHARES [SEC. 41]
(1) For a legitimate corporate purpose/s,
including but not limited to the following:
(a) To eliminate fractional shares arising
out of stock dividends
(b) To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in
a delinquency sale, and to purchase
delinquent shares sold during said
sale; and
(c) To pay dissenting or withdrawing
stockholders
(2) Provided there are unrestricted retained
earnings in the corporate books to cover
the shares purchased or acquired
B.6. INVEST IN ANOTHER CORPORATION
OR BUSINESS [SEC. 42]
(1) Same requirements from 1-3 as Sec. 37
above
(2) Any dissenting shareholders shall have
appraisal right
(3) Where the investment is reasonably
necessary to accomplish the corporation’s
primary purpose, the approval of the
shareholders/ members is not necessary
NOTES:
If it is for the same purpose, or incidental, or
related to its PRIMARY purpose, the board
can invest the corporate fund WITHOUT the
consent of the stockholders. No appraisal
right.
If the investment is in another corporation of
different business or purpose BUT in
pursuance of the SECONDARY purpose, the
UP LAW BOC CORPORATION LAW MERCANTILE LAW

affirmative vote of majority of the board (a) When justified by definite corporate
consented by stockholders/ members is expansion projects or programs
required. approved by the BOD
If the investment is OUTSIDE the purpose/s (b) When the corporation is prohibited
for which the corporation was organized, under any loan agreement with any
Articles of Incorporation must be amended financial institution or creditor from
first, otherwise it will be an Ultra Vires act. declaring dividends without its
consent, and such consent has not
A private corporation, in order to accomplish yet been secured
its purpose as stated in its articles of
incorporation, and subject to the limitations (c) When it can be clearly shown that
such retention is necessary under
imposed by the Corporation Law, has the
special circumstances obtaining in
power to acquire, hold, mortgage, pledge or the corporation
dispose of shares, bonds, securities, and
Stock dividends cannot be issued to a person
other evidences of indebtedness of any
who is not a stockholder in payment of
domestic or foreign corporation. Such an act,
services rendered.
if done in pursuance of the corporate
A corporation may legally issue shares of
purpose, does not need the approval of the
stock in consideration of services rendered to
stockholders; but when the purchase of
it by a person not a stockholder, or in
shares of another corporation is done solely
payment of its indebtedness. A share of stock
for investment and not to accomplish the
issued to pay for services rendered is
purpose of its incorporation, the vote of
equivalent to a stock issued in exchange of
approval of the stockholders is necessary. [De
property, because services is equivalent to
La Rama v. Ma-ao Sugar Central Co. (1969)]
property. It is the shares of stock that are
originally issued by the corporation and
B.7. DECLARE DIVIDENDS [SEC. 43]
forming part of the capital that can be
(1) Out of unrestricted retained earnings
exchanged for cash or services rendered, or
(2) Payable in cash, in property, or in stock to property. A share of stock coming from stock
all shareholders on the basis of
dividends declared cannot be issued to one
outstanding stock held by them
who is not a stockholder of a corporation.
(3) Any cash dividend due on delinquent [Nielson and Co. v. Lepanto Consolidated
stock shall first be applied to the unpaid Mining (1968)]
balance on the subscription plus costs
and expenses
(4) Stock dividends shall be withheld from
the delinquent stockholder until his
unpaid subscription is fully paid
(5) Should be approved by 2/3 of
shareholders representing the
outstanding capital stock at a
regular/special meeting called for that
purpose
(6) Stock corporations- prohibited from
retaining surplus profits in excess of
100% of their paid-in capital stock,
except:

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Cash Dividends v. Stock Dividends

Cash Dividend Stock Dividend
Voting requirements for
issuance Board of Directors Board of Directors +
2/3 OCS

Effect on delinquent stock Shall be applied to the unpaid Shall be withheld from the
balance on the subscription delinquent stockholder until
plus costs and expenses. his unpaid subscription is
fully paid.

Can this be issued by Executive No. (Sec. 35)
Committee?
B.8. ENTER INTO MANAGEMENT
CONTRACTS [SEC. 44]
(1) Should be approved by the BOD and by
shareholders owning at least the majority
of the outstanding capital stock or at
least a majority of the members of both
the managing and the managed
corporation at a meeting duly called for
that purpose
(2) Should be approved by the 2/3 of
stockholders owning outstanding capital
stock/members of the managed
corporation when:
(a) A stockholder or stockholders
representing the same interest of
both the managing and managed
corporations own more than 1/3 of
the total outstanding capital stock
entitled to vote of the managing
corporation; or
(b) A majority of the members of the
BOD of the managing corporation
also constitute a majority of the BOD
of the managed corporation
(3) No management contract shall be
entered into for a period longer than 5
years for any one term
(4) 1-3 above applies to any contract
whereby a corporation undertakes to
manage or operate all or substantially all
of the business of another corporation,
whether such are called service contracts,
operating agreements or otherwise
No, since this requires SH
approval. (Sec. 35)
(5) Service contracts or operating
agreements which relate to exploration,
development, exploitation or utilization
of natural resources may be entered into
for such periods as may be provided in
the pertinent laws and regulations
NOTES: 2 general restrictions on the power of
the corporation to acquire and hold
properties:
(1) property must be reasonably and
necessarily required by the business
(2) that the power shall be subject to the
limitations prescribed by other special
laws and the Constitution (corporation
may not acquire more than 30% of voting
stocks of a bank; corporations are
restricted from acquiring public lands
except by lease of not more than 1000
hectares)
B.9. ULTRA VIRES ACTS
Definition
Ultra Vires acts are those acts which a
corporation is not empowered to do or
perform because they are not conferred by its
Articles of Incorporation or by the
Corporation Code, or not necessary or
incidental to the exercise of the powers so
conferred [Sec. 45].
Types of Ultra Vires Acts:

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(1) Acts done beyond the powers of the outside the powers and public order
corporation as provided in the law or its of the corporation
articles of incorporation; Can be ratified Cannot be ratified
(2) Acts or contracts entered into in behalf of Can bind the parties Cannot bind the
a corporation by persons who have no if wholly or partly parties
corporate authority (Note: This is executed
technically Ultra Vires acts of officers and
Voidable, and may Void and cannot be
not of the corporation);
be enforced by validated
(3) Acts or contracts, which are per se illegal performance,
as being contrary to law. [Villanueva]
ratification or
estoppel
i. Applicability of Ultra Vires Doctrine
It is a question, therefore, in each case of the iii. Remedies in Case of Ultra Vires Acts:
logical relation of the act to the corporate (1) State
purpose expressed in the charter. If that act is
(a) Dissolution of the corporation thru a
one which is lawful in itself, and not quo warranto proceeding
otherwise prohibited, is done for the purpose
(b) Injunction
of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a (c) Suspension or revocation of the
substantial, and not in a remote and fanciful certificate of registration by the SEC
sense, it may fairly be considered within the (2) Stockholders
charter powers. The test to be applied is (a) Injunction
whether the act in question is in direct and
immediate furtherance of the corporation’s (b) Derivative suit
business, fairly incident to the express powers (c) Ratification (except when a 3rd party
and reasonably necessary to their exercise. If is prejudiced or the act is illegal)
so, the corporation has the power to do it; (3) Creditors
otherwise, not. [Montelibano v. Bacolod- (a) Nullification of contract in fraud of
Murcia Milling Co., Inc. (1962)] creditors

ii. Consequences of Ultra Vires Acts

(1) Executed contract – courts will not set
aside or interfere with such contracts;
(2) Executory contracts – no enforcement
even at the suit of either party (void and
unenforceable);
(3) Partly executed and partly executory –
principle of “no unjust enrichment at
expense of another” shall apply;
(4) Executory contracts apparently authorized
but Ultra Vires – the principle of estoppel
shall apply.
Ultra Vires v. Illegal Acts
Ultra Vires Acts Illegal Acts
Not necessarily Unlawful; against law,
unlawful, but morals, public policy,
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C. HOW (CORPORATE POWERS)
EXERCISED
C.1. BY THE SHAREHOLDERS
i. Corporate Acts Requiring Approval of
Stockholders or Members (Voting and Non-
Voting Shares)
General Rule: Vote necessary to approve a
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
with voting rights [Sec. 6]
Exceptions [Sec. 6]
Voting and non-voting shares shall be
entitled to vote in the following cases:
(1) Amendment of Articles of Incorporation
(2) Adoption, Amendment and Repeal of By-
Laws [Sec. 48]
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(3) Sale, Lease, Mortgage or Other Exceptions:

Disposition of Substantially all corporate
assets [Sec. 40]
(4) Incurring, Creating or Increasing Bonded
Indebtedness [Sec. 38]
(5) Increase or Decrease of Capital Stock [Sec.
38]
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another
corporation or business or for any
purpose other than the primary purpose
for which it was organized [Sec. 42]
Requisites [Sec. 42] (Asked in 1995 Bar):
(a) Approval of majority of the BOD or
trustees
(b) Ratification by the stockholders
representing at least 2/3 of the
Outstanding Capital Stock or the
members at a meeting duly called for
the purpose
(c) Written notice addressed to each
stockholder or member at his place of
residence as shown on the books of
the corporation
(d) Appraisal right available to
dissenting stockholders or members
(8) Dissolution of the Corporation [Sec. 118-
121]
ii. Corporate Acts Requiring Approval of
Stockholders or Members (Voting Shares
Only)
(1) Declaration of Stock Dividends [Sec. 43]
(2) Management Contracts [Sec. 44]
(3) Fixing the Consideration of No-Par shares
[Sec. 62]
(4) Fixing the Compensation of Directors [Sec.
30]
C.2. BY THE BOD
Board as Repository of Corporate Powers
General Rule (Doctrine Of Centralized
Management): The corporate powers of the
corporation shall be exercised, all business
conducted, and all property of controlled and
held by the BOD or trustees. [Sec. 23]
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(1) Executive Committee duly authorized in
the by-laws [Sec. 35];
(2) A contracted manager which may be an
individual, a partnership, or another
corporation.
NOTE: In case the contracted manager is
another corporation, the special rule in
Sec. 44 applies.
(3) In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction. [Spouses Constantine Firme v.
Bukal Enterprises and Development
Corporation (2003)]
Requisites of a VALID Corporate Act by the
BOD [Sec. 25]:
(a) The Board must act as a BODY in a
meeting. Note: Current SEC regulations
allow BOD meetings by teleconferencing
or videoconferencing (SEC Memo Circular
No.15, series of 2001, in relation to Sec. 16
of R.A. 8792)
(b) There must be a VALIDLY constituted
meeting.
(c) Their act must be supported by a
MAJORITY OF THE QUORUM duly
assembled (Exception: Election of
officers requires a vote of majority of ALL
the members of the board)
(d) The act must be within the powers
conferred to the Board.
C.3. BY THE OFFICERS
Corporate Officer Corporate Employee
Position is provided Employed through the
for in the by-laws or action of the
under the managing officer of
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Corporation Code the corporation officials. [Matling Industrial and Commercial

RTC has jurisdiction NLRC has jurisdiction
in case of labor in case of labor
dispute disputes
i. Who are Corporate Officers [Sec. 25]
PRES SEC TREAS
Director YES NO NO
Filipino NO YES YES
Citizen
Residency NO YES YES
Prohibited Secretary President President
concurrent or
positions Treasure
r “Corporate officers’ in the context of PD No.
(1) President – must be a director;
(2) Treasurer – may or may not be a director;
as a matter of sound corporate practice,
must be a resident and citizen of the Phil
(SEC opinion)
(3) Secretary – need not be a director unless
required by the by-laws; must be a
resident and citizen of the Philippines;
and
(4) Other officers as may be provided in the
by-laws.
NOTE: Any 2 or more positions may be held
concurrently by the same person, EXCEPT
that no one shall act as president and
secretary or as president and treasurer at the
same time.
Additional qualifications of officers may be
provided for in the by-laws [Sec. 47(5)]
Conformably with Sec. 25 of the Corporation
Code, a position must be expressly
mentioned in the by-Laws in order to be
considered as a corporate office. Thus, the
creation of an office pursuant to or under a
by-Law enabling provision is not enough to
make a position a corporate office. Guerrea v.
Lezama (1958), the first ruling on the matter,
held that the only officers of a corporation
were those given that character either by
the Corporation Code or by the By-Laws; the
rest of the corporate officers could be
considered only as employees or subordinate
Page 169 of 353
Corp. v. Coros (2010)]
A different interpretation can easily leave the
way open for the BOD to circumvent the
constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in
the By-Laws of an enabling clause on the
creation of just any corporate officer position.
“An ‘office’ is created by the charter of the
corporation and the officer is elected (or
appointed) by the directors or stockholders”
[Real v. Sangu Philippines citing Easycall
Communications Phils., Inc. v. King, 2005,
(2011)]
902-A are those officers of the corporation
who are given that character by the
Corporation Code or by the corporation’s by-
laws. There are three specific officers whom a
corporation must have under Sec. 25 of the
Corporation Code. These are the president,
secretary and the treasurer. The number of
officers is not limited to these three. A
corporation may have such other officers as
may be provided for by its by-laws like, but
not limited to, the vice-president, cashier,
auditor or general manager. The number of
corporate officers is thus limited by law and
by the corporation’s by-laws” (citing Garcia v.
Eastern Telecommunications Philippines, Inc.,
2009).
ii. Disqualifications [Sec. 27]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years
(2) Convicted by final judgment of a violation
of the Corporation Code committed
within 5 years prior to the date of his
election or appointment. This includes
violations of rules and regulations issued
by the SEC to implement the provisions of
the Corporation Code.
iii. Authority of Corporate Officers
A person dealing with a corporate officer is
put on inquiry as to the scope of the latter’s
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authority but an innocent person cannot be
prejudiced if he had the right to presume
under the circumstances the authority of the
acting officers.
Associated Bank v. Pronstroller (2008,
Nachura):
Q: What is the Doctrine of Apparent
Authority?
A: If a corporation knowingly permits one of
its officers, or any other agent, to act within
the scope of an apparent authority, it holds
him out to the public as possessing the power
to do those acts; the corporation will, as
against anyone who has in good faith dealt
with it through such agent, be estopped from
denying the agent’s authority.
D. TRUST FUND DOCTRINE
Trust Fund Doctrine means that the capital
stock, properties and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors. Stated
simply, the trust fund doctrine states that all
funds received by the corporation in payment
of the shares of stock shall be held in trust for
the corporate creditors and other
stockholders of the corporation. Under such
doctrine no fund shall be used to buy back
the issued shares of stock except only in
instances specifically allowed by the
Corporation Code. [Boman Environmental
Development Corporation v. CA (1988)]
The subscribed capital 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 subscribed capital; subscription
commitments cannot be condoned or
Page 170 of 353
MERCANTILE LAW
remitted; nor can the corporation buy its own
shares using the subscribed capital as the
consideration therefor. [NTC v. CA (1999)]
Under Sec. 43 of Code, the corporation can
declare dividends only out of "unrestricted
retained earnings;" and that under Sec. 122,
no corporation shall distribute any of its
assets or property except upon lawful
dissolution and after payment of all its debts
and liabilities. These provisions in essence
provide for the "trust fund doctrine" where
the "subscription to the capital of a
corporation constitute a fund to which
creditors have a right to look for satisfaction of
their claims." [Philippine Trust Co. v. Rivera
(1923)]
"The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera' is the underlying principle in the
procedure for the distribution of capital
assets, embodied in Corporation Code, which
allows the distribution of corporate capital
only in three instances:
(1) amendment of the Articles of
Incorporation to reduce the authorized
capital stock,
(2) purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the
corporation.
Furthermore, the doctrine is articulated in
Sec. 41 on the power of a corporation to
acquire its own shares and in Sec. 122 on the
prohibition against the distribution of
corporate assets and property unless the
stringent requirements therefore are
complied with. [Ong Yong v. Tiu (2003)]
The creditors of a corporation have the right
to assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or
to declare dividends to its stockholders when
the corporation is insolvent. [Steinberg v.
Velasco (1929)]
The trust fund doctrine is not limited to
reaching the stockholder’s unpaid
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subscriptions. The scope of the doctrine when
the corporation is insolvent encompasses not
only the capital stock, but also other property
and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
All assets and property belonging to the
corporation held in trust for the benefit of
creditors that were distributed or in the
possession of the stockholders, regardless of
full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
Also, under the trust fund doctrine, a
corporation has no legal capacity to release
an original subscriber to its capital stock from
the obligation of paying for his shares, in
whole or in part, without a valuable
consideration, or fraudulently, to the
prejudice of creditors. The creditor is allowed
to maintain an action upon any unpaid
subscriptions and thereby steps into the
shoes of the corporation for the satisfaction
of its debt.
To make out a prima facie case in a suit
against stockholders of an insolvent
corporation to compel them to contribute to
the payment of its debts by making good
unpaid balances upon their subscriptions, it is
only necessary to establish that the
stockholders have not in good faith paid the
par value of the stocks of the corporation.
[Donnina Halley v. Printwell, Inc. (2011)]
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MERCANTILE LAW
VII. Board of Directors
and Trustees
A. DOCTRINE OF CENTRALIZED
MANAGEMENT
A.1. BOARD IS SEAT OF CORPORATE
POWERS
General Rule: Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall be
exercised, all business conducted and all
property of such corporations controlled and
held by the BOD or trustees to be elected
from among the holders of stocks, or where
there is no stock, from among the members
of the corporation, who shall hold office for 1
year until their successors are elected and
qualified. [Sec. 23]
Exceptions:
(1) In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
(2) In case of a contracted manager which
may be an individual, a partnership, or
another corporation
Note: In case the contracted manager is
another corporation, the special rule in
Sec. 44 applies.
(3) In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
The Corporation Code of the Philippines vests
in the BOD the exercise of the corporate
powers of the corporation, save in those
instances where the Code requires
stockholders’ approval for certain specific
acts. [Great Asian Sales Center Corp v. CA,
(2002)]
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
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transaction. [Spouses Constantine Firme v.
Bukal Enterprises and Development
Corporation (2003)]
Indisputably, one of the rights of a
stockholder is the right to participate in the
control or management of the corporation.
This is exercised through his vote in the
election of directors because it is the BOD
that controls or manages the corporation.
[Gamboa v. Teves, (2011)]
i. Requisites of a VALID Corporate Act by the
BOD
(a) The Board must act as a BODY in a
meeting.
(b) There must be a VALIDLY constituted
meeting.
(c) There act must be supported by a
MAJORITY OF THE QUORUM duly
assembled (Exception: Election of
officers requires a vote of majority of ALL
the members of the board)
(d) The act must be within the powers
conferred to the Board.
ii. Limitations on Powers of BOD/Trustees
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
laws;
(2) Certain acts of the corporation that
require joint action of the stockholders
and BOD:
(a) Removal of director [Sec. 28]
(b) Amendments of Articles of
Incorporation [Sec. 16]
(c) Fundamental changes [Sec. 6]
(d) Declaration of stock dividends [Sec.
43]
(e) Entering into management contracts
[Sec. 44]
(f) Fixing of consideration of non-par
shares [Sec. 62]
(g) Fixing of compensation of directors
[Sec. 30]
(3) Cannot exercise powers not possessed by
the corporation.
CORPORATION LAW MERCANTILE LAW
A.2. PRINCIPLE ON DELEGATION OF
BOARD POWER
Under Sec 23, the power and the
responsibility to decide whether the
corporation should enter into a contract that
will bind the corporation is lodged in the
board, subject to the articles of incorporation,
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 BOD may validly delegate
some of its functions and powers to officers,
committees or agents. The authority of such
individuals to bind the corporation is
generally derived from law, corporate by-laws
or authorization from the board, either
expressly or impliedly by habit, custom or
acquiescence in the general course of
business. [People’s Aircargo v. CA, (1998)]
B. BUSINESS JUDGMENT RULE
General Rule: Directors cannot be held liable
for mistakes or errors in the exercise of their
business judgment as long as they acted in
good faith, with due care and prudence.
Contracts entered into by the BOD are
binding upon the corporation and courts will
not interfere.
Exceptions:
(1) If the contracts are so unconscionable
and oppressive as to amount to a wanton
destruction of the rights of the minority
[Ingersoll v. Malabon Sugar (1927)];
(2) if they violate their duties under Sec. 31
(director willfully and knowingly assents
to patently unlawful acts of the
corporation, or are guilty of gross
negligence or bad faith); and
(3) if they violate Sec. 34 (disloyalty of a
director who acquires for himself a
business opportunity that should have
belonged to the corporation, unless his
act is ratified by a 2/3 vote of
stockholders).
Consequences of the Business Judgment Rule:
(1) The resolution, contracts and
transactions of the board cannot be
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overturned or set aside by the C. TENURE, QUALIFICATIONS AND

stockholders or members and not even by DISQUALIFICATIONS OF DIRECTORS
the courts under the principle that the
business of the corporation has been left OR TRUSTEES
to the hands of the board
C.1. TENURE
(2) Directors and duly authorized officers
cannot be held personally liable for acts Directors shall hold office for 1 year until their
or contracts done with the exercise of successors are elected and qualified [Sec. 23]
their business judgment. Term v. Tenure [Valle Verde Country Club v.
Africa, 2009]
Exceptions:
(1) When the Corporation Code expressly TERM TENURE
provides otherwise Time during which The period within
the officer may claim which the director
(2) When the Directors or officers acted with
fraud, gross negligence or in bad faith to hold the office as actually holds office,
(Sec. 31). of right, and fixes the including the
interval after which holdover period after
(3) When Directors or officers act against the
the several the end of his term
corporation in conflict of interest situation
(Villanueva). incumbents shall
succeed one
another.
Remedies in case of Mismanagement:
Not affected by the Includes holdover
(1) Removal of directors pursuant to Sec. 28
holdover.
(2) Derivative suit or complaint filed with the Fixed by statute and May be shorter or
RTC) (Sec. 5.2, R.A. 8799, Securities it does not change longer (in case of a
Regulation Code; A.M. No. 01-2-04 SC,
simply because the holdover) than the
Interim Rules of Procedure Governing
Intra-corporate Controversies) office may have term for reasons
become vacant, nor within or beyond the
(3) Receivership
because the power of the
(4) Injunction if the act has not yet been done incumbent holds incumbent
(5) Dissolution if abuse amounts to a ground over in office beyond
for quo warranto but Solicitor General the end of the term
Refuses to act due to the fact that a
NOTE: successor has not
Dean Villanueva opined that a derivative suit been elected and
may be an exception to such Rule: this occurs has failed to qualify.
when it is apparent that the Board is not in a 1 Year .
position to validly exercise its business
judgment for the protection of the
corporation, e.g., when the Board itself has C.2. QUALIFICATIONS
committed an act causing damage to the (1) If STOCK, director must own at least 1
corporation or when the Board is placed in a share of the capital stock, which stock
shall stand in his own name [Sec. 23]
conflict of interests scenario whereby it is
unlikely that it would use such business Exception: Trustee in a voting trust may
discretion to file such suit for the best interest be elected director/trustee.
of the corporation. (2) If NON-STOCK, trustee must be a
member.
Qualifications:

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(1) Majority of the directors/trustees must be
residents of the Philippines.
(2) Natural person
(3) Of Legal Age
(4) Other qualifications as may be prescribed
in the by-laws of the corporation.
With the omission of the phrase "in his own
right" the election of trustees and other
persons who in fact are not beneficial owners
of the shares registered in their names on the
books of the corporation becomes formally
legalized. Hence, this is a clear indication
that in order to be eligible as a director, what
is material is the legal title to, not beneficial
ownership of, the stock as appearing on the
books of the corporation. [Lee v. CA (1992)]
C.3. DISQUALIFICATIONS [SEC. 27]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
(2) A violation of the Corporation Code,
committed within 5 years prior to the
date of his election. This includes
violations of rules and regulations issued
by the SEC to implement the provisions of
the Corporation Code.
An amendment to the corporation’s by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a
corporation whose business is in competition
with that of the other corporation, has been
sustained as valid. This is based upon the
principle that where the director is so
employed in the service of a rival company,
he cannot serve both, but must betray one or
the other. Such an amendment "advances the
benefit of the corporation and is good."
[Gokongwei, Jr. v. SEC (1979)]
D. ELECTIONS
D.1. CUMULATIVE VOTING
i. Cumulative voting for one candidate
A stockholder is allowed to concentrate his
votes and give one candidate as many votes
CORPORATION LAW MERCANTILE LAW
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
ILLUSTRATION
If there are 5 directors to be elected and
Pedro, as shareholder, has 100 shares, Pedro
can give 500 (5 x 100 shares) votes to just
one candidate.
ii. Cumulative voting by distribution
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
ILLUSTRATION
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
candidate 5.
iii. Straight Voting
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected.
D.2. QUORUM
There must be present, in person or by
representative authorized to act by written
proxy, the owners of majority of the
Outstanding Capital Stock or majority of the
members entitled to vote in the meeting.
Election must be by ballot if requested.
A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the methods
of voting in the election of directors.
No delinquent stock shall be voted.
The candidates receiving the highest number
of votes shall be declared elected.
E. REMOVAL
General Rule: Any Director or Trustee of a
corporation may be removed from office, with
or without cause. [Sec. 28]
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Exception: Directors who have been elected
by minority stockholders exercising
cumulative voting can only be removed for
cause. Removal without cause may not be
used to deprive minority stockholders or
members of the right of representation to
which they may be entitled under Sec. 24.
Other requisites:
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding
capital stock, or if the corporation be a
non-stock corporation, by a vote of 2/3 of
the members entitled to vote
(2) At a regular or special meeting after
proper notice is given
F. FILLING OF VACANCIES
F.1. VACANCY (1) BY REMOVAL; OR (2) BY
EXPIRATION OF TERM; OR (3) WHEN THE
REMAINING DIRECTORS DO NOT
CONSTITUTE A QUORUM
Vacancy/ies must be filled by the
stockholders in a regular or special meeting
called for that purpose.
A director or trustee elected to fill a vacancy
shall be elected only for the unexpired term
of his predecessor in office.
F.2. VACANCY BY REASON OF INCREASE
IN THE NUMBER OF THE
DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the
stockholders:
(1) in a regular or special meeting called for
that purpose; or
(2) in the same meeting authorizing the
increase of directors or trustees if so
stated in the notice of the meeting.
F.3. VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum.
G. COMPENSATION [SEC. 30]
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MERCANTILE LAW
General Rule: Directors are only entitled to
reasonable per diems. They are not entitled
to compensation as directors.
Exceptions:
(1) When Articles of Incorporation, by-laws,
or an advance contract provides for
compensation.
(2) Compensation other than per diems may
also be granted to directors by the vote of
the stockholders representing at least a
majority of the Outstanding Capital Stock
at a regular or special stockholders’
meeting.
The total yearly compensation of directors
shall not exceed 10% of the net income
before income tax of the corporation during
the preceding year.
Compensation of Directors as Corporate
Officers
The position of being chairman and Vice-
Chairman, like that of treasurer and
secretary, are not considered directorship
positions but officership positions that would
entitle the occupants to compensation.
Likewise, the limitation placed under Sec. 30
of the Corporation Code that directors cannot
receive compensation exceeding 10% of the
net income of the corporation would not
apply to the compensation given to such
positions since it is being given in their
capacity as officers of the corporation and not
as board members. [Western Institute of
Technology v. Salas (1997)]
H. FIDUCIARY DUTIES AND LIABILITY
RULES
H.1. DUTIES
In this jurisdiction, the members of the BOD
have a three-fold duty: duty of obedience,
duty of diligence, and duty of loyalty.
(1) Duty of Obedience - shall direct the affairs
of the corporation only in accordance with the
purposes for which it was organized;
(2) Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad
UP LAW BOC CORPORATION LAW
faith or with gross negligence in directing the
affairs of the corporation; and
(3)Duty of Loyalty - shall not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees.
[Strategic Alliance Development Corp v.
Radstock Securities Ltd. (2009)]
Duty of Obedience
The Directors or Trustees and Officers to be
elected shall perform the duties enjoined on
them by law and by the by-laws of the
corporation [Sec. 25]
Duty of Diligence
Directors or trustees who (i) willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or (ii) who
are guilty of gross negligence or bad faith in
directing the affairs of the corporation or (iii)
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom suffered
by the corporation, its stockholders or
members and other persons. [Sec 31]
The conditions for the application of Sec. 31 of
the Corporation Code require factual
foundations to be first laid out in appropriate
judicial proceedings. Hence, concluding that
a person breached fiduciary duties as an
officer and member of the BOD of a
corporation without competent evidence
thereon would be unwarranted and
unreasonable. [Republic of the Philippines v.
Sandiganbayan (First Division) et al. (2011)]
Duty of Loyalty
Directors and trustees should not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees,
otherwise they shall be held liable jointly and
severally for all damages resulting therefrom
suffered by the corporation, its stockholders
or members and other persons. [Sec. 31]
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Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock [Sec. 34]
Doctrine of Corporate Opportunity
Unless his act is ratified, a director shall
refund to the corporation all the profits he
realizes on a business opportunity which:
(1) corporation is financially able to
undertake
(2) from its nature, is in line with
corporation’s business and is of practical
advantage to it; and
(3) one in which the corporation has an
interest or a reasonable expectancy.
The rule shall be applied notwithstanding the
fact that the director risked his own funds in
the venture. [Sec. 34]
By embracing the opportunity, the self-
interest of the officer or director will be
brought into conflict with that of his
corporation. Hence, the law does not permit
him to seize the opportunity even if he will
use his own funds in the venture. [Sundiang
and Aquino]
NOTE: Differences between Sec. 31 and Sec.
34:
(1) First, while both involve the same subject
matter (business opportunity) they
concern different personalities; Sec. 34 is
applicable only to directors and not to
officers, whereas Sec. 31 applies to
directors, trustees and officers.
(2) Second, Sec. 34 allows a ratification of a
transaction by a self-dealing director by
vote of stockholders representing at least
2/3 of the outstanding capital stock.
[Villanueva]
H.2. LIABILITIES
i. Solidary Liability for Damages
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(1) Willfully and knowingly voting for and are in-charge of day-to-day activities
assenting to patently unlawful acts of the [Campos]
corporation; [Sec. 31]
(2) Gross negligence or bad faith in directing Doctrine Of Limited Doctrine Of
the affairs of the corporation; [Sec. 31] Liability Immunity
(3) Acquiring any personal or pecuniary Shields the Protects a person
interest in conflict of duty; [Sec. 31] incorporators from acting for and in
(4) Consenting to the issuance of watered corporate liability behalf of the
stocks, or, having knowledge thereof, beyond their agreed corporation from
failing to file objections with secretary; contribution to the being himself
[Sec. 65] capital or personally liable for
(5) Agreeing or stipulating in a contract to shareholding in the his authorized
hold himself liable with the corporation; corporation. actions
or
(6) By virtue of a specific provision of law Liability of Director, Trustee or Officer (Asked
in 96 and 97)
Personal liability of a corporate director,
ii. Liability for Watered Stocks
trustee or officer along (although not
Watered Stocks – stocks issued for a
necessarily) with the corporation may so
consideration less than its par or issued value
validly attach, as a rule, only when:
or for a consideration in any form other than
(1) He assents (a) to a patently unlawful act
cash, valued in excess of its fair value. of the corporation, or (b) for bad faith or
Any director or officer of a corporation gross negligence in directing its affairs, or
consenting to the issuance of watered stocks (c) for conflict of interest, resulting in
or who, having knowledge thereof, does not damages to the corporation, its
forthwith express his objection in writing and stockholders or other persons;
file the same with the corporate secretary (2) He consents to the issuance of watered
shall be solidarily liable with the stockholder stocks or who, having knowledge thereof,
concerned to the corporation and its creditors does not forthwith file with the corporate
for the difference in value [Sec. 65] secretary his written objection thereto;
(3) He agrees to hold himself personally and
iii. Personal Liabilities solidarily liable with the corporation; or
GENERAL RULE (4) He is made, by a specific provision of law,
Members of the Board, who purport to act in to personally answer for his corporate
good faith for and in behalf of the corporation action [Tramat Mercantile, Inc. vs. CA,
within the lawful scope of their authority, are (1994), reiterated in Atrium Management
not liable for the consequences of their acts. Corp. v. CA, (2001)]
When the acts are of such nature and done
under those circumstances, they are iv. Special Facts Doctrine
attributed to the corporation alone and no Even though a director may not be under the
personal liability is incurred. obligation of a fiduciary nature to disclose to
The provisions on seizing corporate a shareholder his knowledge affecting the
opportunity and disloyalty [Secs. 31 and 34] value of the shares, that duty may exist in
shall also apply to corporate officers. [Price v. special cases. [Strong v. Repide (1909)]
Innodata Phils., Inc. (2008)]
NOTE: General Rule:
Members of the BOD who are also officers are Majority view: Directors only owe its duty to
held to a more stringent liability because they the corporation. They owe no fiduciary duty to
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stockholders but they may deal with each
other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts
known to the director or officer. [Taylor v.
Wright, 1945]
NOTE: Minority View (Realistic View)
recognizes the directors’ obligation to the
stockholders individually as well as
collectively, and refuses to permit him to
profit at the latter’s expense by the use of
information obtained as a result of official
position and duties.
Exception:
Special Facts Doctrine: Conceding the
absence of a fiduciary relationship in the
ordinary case, courts nevertheless hold that
where special circumstances or facts are
present which make it inequitable for the
director to withhold information from the
stockholder, the duty to disclose arises and
concealment is fraud. [Strong v. Repide, 1909]
I. RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere
legal fiction, it cannot be proceeded against
criminally because it cannot commit a crime
in which personal violence or malicious intent
is required.
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable. [West Coast Life Ins. Co. v.
Hurd (1914); Time Inc. v. Reyes (1971)]
The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons
responsible for the offense liable to suffer the
penalty of imprisonment. The reason is
obvious: corporations, partnerships,
associations and other juridical entities
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MERCANTILE LAW
cannot be put to jail. Hence, the criminal
liability falls on the human agent responsible
for the violation of the Trust Receipts Law.
[Ong v. CA (2003)] (see also Sec. 13, P.D. 115)
J. INSIDE INFORMATION
The fiduciary position of insiders, directors,
and officers prohibits them from using
confidential information relating to the
business of the corporation to benefit
themselves or any competitor corporation in
which they may have a mere substantial
interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation
Insider, defined
“Insider” means:
(a) the issuer;
(b) a director or officer (or person performing
similar functions) of, or a person
controlling the issuer;
(c) a person whose relationship or former
relationship to the issuer gives or gave
him access to material information about
the issuer or the security that is not
generally available to the public;
(d) a government employee, or director, or
officer of an exchange, clearing agency
and/or self-regulatory organization who
has access to material information about
an issuer or a security that is not
generally available to the public; or
(e) a person who learns such information by a
communication from any of the foregoing
insiders [Sec. 3.8, Securities Regulations
Code]
K. CONTRACTS
K.1. BY SELF-DEALING DIRECTORS WITH
THE CORPORATION
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General Rule: A contract of the corporation
with one or more of its directors or trustees is
VOIDABLE, at the option of such corporation.
[Sec. 32]
Exceptions:
Such contract is VALID if all of the following
conditions are present:
(a) That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract;
(c) That the contract is fair and reasonable
under the circumstances; and
(d) That in case of an officer, the contract has
been previously authorized by the BOD.
Ratification
In case of absence of the first two conditions
above, contract may be ratified if:
(a) Stockholders representing at least 2/3 of
the outstanding capital stock or at least
2/3 of the members in a meeting called
for the purpose voted to ratify the
contract.
(b) Full disclosure of the adverse interest of
the directors or trustees involved is made
at such meeting.
(c) Contract is fair and reasonable under the
circumstances
K.2. BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
Interlocking, characterized
If the interests of the interlocking director in
the corporations are both substantial (i.e.,
stockholdings exceed 20% of outstanding
capital stock). [Sec. 33]
General Rule: A contract between two or
more corporations having interlocking
directors shall not be invalidated on that
ground alone. [Sec. 33]
Exception: If contract is fraudulent or not fair
and reasonable under the circumstances
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MERCANTILE LAW
If the interest of the interlocking director in
one of the corporations is nominal
(stockholdings 20% or less) while substantial
in the other, the contract shall be VALID, if the
following conditions are met:
(a) The presence of such director or trustee in
the board meeting in which the contract
was approved was NOT necessary to
constitute a quorum for such meeting
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract
(c) That the contract is fair and reasonable
under the circumstances.
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members
in a meeting called for the purpose voted to
ratify the contract, provided that:
(a) Full disclosure of the adverse interest of
the directors/trustees involved is made
on such meeting;
(b) The contract is fair and reasonable under
the circumstances.
K.3. MANAGEMENT CONTRACTS [SEC 44]
See: Corporate Powers (2)(h) above
L. EXECUTIVE COMMITTEE
L.1. CREATION
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board.
Said committee may act, by majority vote of
all its members, on such specific matters
within the competence of the board, as may
be delegated to it in the by-laws or on a
majority vote of the board [Sec. 35]
L.2. LIMITATION ON ITS POWERS
CANNOT be delegated the following:
(1) Matters needing stockholder approval
[Sec. 35];
UP LAW BOC
(2) Filling up of board vacancies;
(3) Amendment, repeal or adoption of by-
laws [Sec. 35];
(4) Amendment or repeal of any resolution of
the Board which by its express terms is
not amendable or repealable [Sec. 35];
(5) Cash dividend distribution [Sec. 35]; and
(6) Acts which would render the BOD
powerless and free from all
responsibilities imposed on it by law
[Campos]
Under Sec. 35 of the Corporation Code, the
creation of an executive committee must be
provided for in the by-laws of the corporation.
Unfortunately, the by-laws of the corporation
in this case are silent as to the creation by its
BOD of an executive committee.
(1) Notwithstanding the silence of the by-
laws on the matter, the SC did not rule
that the BOD’s creation of the executive
committee is illegal or unlawful.
(2) One reason is the absence of a showing
as to the true nature and functions of said
executive committee considering that the
"executive committee," referred to in Sec.
35 of the Corporation Code which is as
powerful as the BOD and in effect acting
for the board itself, should be
distinguished from other committees
which are within the competency of the
board to create at anytime and whose
actions require ratification and
confirmation by the board.
(3) Another reason is that the BOD has the
power to create positions not provided for
in the by-laws since the board is the
corporation’s governing body. [Filipinas
Port Services Inc. v. Go (2007)]
M. MEETINGS OF BOD
M.1. REGULAR OR SPECIAL
Who May Attend?
The members of the Board themselves;
directors or trustees cannot be represented or
voted by proxies at board meetings. [Sec. 25]
In the Philippines, teleconferencing and
videoconferencing of members of BOD of
CORPORATION LAW MERCANTILE LAW
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Memorandum Circular No. 15, series of 2001,
on November 30, 2001, providing the
guidelines to be complied with in relation to
such conferences. [Expertravel and Tours, Inc.
v. CA, (May 26, 2005)]
i. When and Where
When? [Sec.53]
(1) Regular meetings of directors or trustees
shall be held monthly, unless the by-laws
provide otherwise.
(2) Special meetings of the BOD or trustees
may be held at any time upon the call of
the president or as provided in the by-
laws.
Where? [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws
provide otherwise.
ii. Notice
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least 1
day prior to the scheduled meeting, unless
otherwise provided by the by-laws.
A director or trustee may waive this
requirement, either expressly or impliedly.
[Sec. 50]
M.2. WHO PRESIDES
The president presides, unless the by-laws
provide otherwise. [Sec. 54]
M.3. QUORUM
General Rule: Majority of the number of
directors or trustees as fixed in the articles of
incorporation. [Sec. 25]
Exceptions:
(1) Unless the articles of incorporation or the
by-laws provide for a GREATER majority,
or
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(2) In case of election of officers where a vote REGULAR SPECIAL

of a majority of all the members of the
board is needed.
Whether or not "dead members" are entitled
to exercise their voting rights (through their
executor or administrator), depends on the
articles of incorporation or by-laws. [Tan v.
Sycip (2006)]
The quorum in a members’ meeting is to be
reckoned as the actual number of members of
the corporation. What happens in the event of
the death of one of them?
(1) In stock corporations, shareholders may
generally transfer their shares. Thus, on
the death of a shareholder, the executor
or administrator duly appointed by the
Court is vested with the legal title to the
stock and entitled to vote it. Until a
settlement and division of the estate is
effected, the stocks of the decedent are
held by the administrator or executor.
(2) On the other hand, membership in and
all rights arising from a non-stock
corporation are personal and non-
transferable, unless the articles of
incorporation or the bylaws of the
corporation provide otherwise. In other
words, the determination of whether or
not “dead members” are entitled to
exercise their voting rights (through their
executor or administrator), depends on
the Articles of Incorporation or by-laws.
Held monthly, at any time upon the
unless the by-laws call of the president or
provide otherwise as provided in the by-
laws
WHERE
anywhere in or outside of the Philippines,
unless the by-laws provide otherwise
NOTICE
Notice of regular or special meetings stating
the date, time and place of the meeting
must be sent to every director or trustee at
least 1 day prior to the scheduled meeting,
unless otherwise provided by the by-laws.
* A director or trustee may waive this
requirement, either expressly or impliedly
QUORUM
General Rule: Majority of the number of
directors or trustees as fixed in the articles
of incorporation. [Sec. 25]
Exceptions:
(3) Unless the articles of incorporation or
the by-laws provide for a GREATER
majority, or
(4) In case of election of officers where a
vote of a majority of all the members of
the board is needed.

M.4. RULE ON ABSTENTION

A vote of abstention is considered to be a vote
in itself. Abstentions will not be counted
towards the affirmative and such refusal to
vote does not by itself indicate acquiescence
in the action of those who vote.
A presumption of intent behind the
abstention is only prima facie. Thus, an
inquiry into the facts and circumstances
attending the voting is necessary. [Lopez v.
Ericta (1972)]

REGULAR SPECIAL
WHEN

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VIII. Stockholders and
Members
A. RIGHTS OF A STOCKHOLDER AND
MEMBERS
(1) Direct or indirect participation
management (Sec. 6)
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and
71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock
certificate for fully paid shares
(Sec. 64)
(d) Proportionate participation in the
distribution of assets in
liquidation (Sec. 122)
(e) Right to transfer of stocks in
corporate books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec.
74)
(6) Right to be furnished with the most
recent financial statements/reports (Sec.
75)
(7) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec.
69)
(8) Right to file individual suit, representative
suit and derivative suits
A.1. DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences.
[CIR v. CA, CTA, and A. Soriano Corporation
(1999)]
Doctrine of Equality of Shares provides that
where the Articles of Incorporation do not
CORPORATION LAW MERCANTILE LAW
provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same
rights and privileges and are also subject to
the same liabilities. [Sundiang and Aquino]
The default rule is that all stockholders have
equal right and obligations, expressed in the
in last paragraph of Sec. 6 of the Corporation
Code which provides, “each share shall be
equal in all respects to every other share.”
[Villanueva]
Note:
However, when preferences or restrictions are
made to apply to a class of shares, then such
preferences on restrictions shall exist and be
valid only when “provided in the articles of
incorporation and stated in the certificate of
stock.” [Villanueva]
Sec. 6 of the Corporation Code also contains
a “Board-enabling” clause that although the
default rule is that all shareholders have
equal rights and obligations, nevertheless,
when authorized by the articles of
incorporation, the BOD, may fix the terms and
conditions of preferred shares of stock or any
series thereof, or to classify its shares for the
purpose of insuring compliance with
constitutional or legal requirements; but such
terms and conditions shall be effective upon
filing of a certificate thereof with the SEC.
Thus, a preference or restriction on shares
may be valid and effective only if the same
has formally been registered with the SEC
and thereby becomes public records binding
on the public. [Villanueva]
Nature of the Rights of Members
The eleemosynary nature (i.e. charitable) of
every non-stock corporation defines the
characteristic of membership therein as being
essentially personal in character and
therefore essentially non-transferable in
nature.
Sec. 89 of the Corporation Code specifically
provides that in a non-stock corporation, the
right of members of any class or classes to
vote “may be limited, broadened or denied to
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the extent specified in the articles of
incorporation or the by-laws.”
The SEC has opined that the rule in Sec. 6
allowing non-voting shares to vote on
specified fundamental matters does not apply
to non-voting members of a non-stock
corporation; that insofar as members of a
non-stock corporation, the applicable
provision is Sec. 89, which specifically
provides that members may be denied
entirely their voting rights in the articles of
incorporation or by-laws of the corporation.
[SEC Opinion, 4 September 1995]
B. PARTICIPATION IN MANAGEMENT
B.1. PROXY
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members (Sec. 58).
The right to issue a proxy is vested with public
interest when it comes to stock corporations;
although it may be regulated under the by-
laws, it cannot be denied, since it is an aspect
of ownership interest of stockholders.
However, the right of members to vote by
proxy may be denied under the articles of
incorporation or by-laws of a non-stock
corporation (Sec. 89)
Requisites for a Valid and Enforceable Proxy:
(1) It must be in writing
(2) Signed by the stockholder or member of
record; and
(3) Filed with the corporation before the
scheduled meeting with the Corporate
Secretary [Sec. 58]
Note: Unless otherwise provided in the proxy,
it shall be valid only for the meeting for which
it is intended. No proxy shall be valid and
effective for a period longer than five (5) years
at any one time. [Sec. 58]
Procedural Matters Relating to Proxies:
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MERCANTILE LAW
(1) “Proxy solicitation” involves the securing
and submission of proxies, while “proxy
validation” concerns the validation of
such secured and submitted proxies;
(2) The SEC’s power to pass upon the validity
of proxies in relation to election
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
transferred to the RTC Special
Commercial Courts pursuant to the terms
of Sec. 5.2 of the Securities Regulation
Code;
(3) Nevertheless, although an intra-
corporate controversy may animate a
disgruntled shareholder to complain to
the SEC a corporation’s violations of SEC
rules and regulations, that motive alone
should not be sufficient to deprive the
SEC of its investigatory and regulatory
powers, especially so since such powers
are exercisable on a motu proprio basis.
The fact that the jurisdiction of the RTC
Special Commercial Courts is confined to the
voting on election of officers, and not all
matter which may be voted upon by
stockholders, elucidates that the power of the
SEC to regulate proxies remains extant and
could very well be exercised when
stockholders vote on matters other than the
election of directors. [GSIS v. CA (2009)]
B.2. VOTING TRUST
An arrangement created by one or more
stockholders for the purpose of conferring
upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a
period not exceeding 5 years at any time [Sec.
59].
Under a voting trust arrangement, a
stockholder of a stock corporation parts with
the naked or legal title, including the power
to vote, of the shares and only retains the
beneficial ownership of the stock. A voting
trustee is a share owner vested with colorable
and naked title of the shares covered for the
primary purpose of voting upon stocks that
he does not own.
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A voting trust agreement shall be ineffective otherwise provided in the articles of

and unenforceable unless: incorporation or declared delinquent under
(1) It is in writing and notarized; Sec. 67 of the Code. [Tan v. Sycip (2006)]

(2) Specify the terms and conditions thereof; In non-stock corporations, the voting rights
and attach to membership. Members vote as
persons, in accordance with the law and the
(3) A certified copy of such agreement shall by-laws of the corporation. Each member
be filed with the corporation and with the shall be entitled to one vote unless so limited,
SEC. broadened, or denied in the articles of
incorporation or by-laws. When the principle
PROXY TRUSTEE for determining the quorum for stock
corporations is applied by analogy to non-
Principal–agent Trustee-beneficiary stock corporations, only those who
Proxy cannot The only limit to are actual members with voting rights should
exceed delegated authority is that the act be counted.
authority. must be for the benefit
of trustee. (fiduciary i. By a Majority Vote
obligation) 1. Power to enter into management contracts
Must be in writing Must be in writing and (Sec. 44)
notarized General Rule
Copy must be filed Copy must be filed Requires approval by majority of the
with the with SEC and the BOD/BOT and approval by stockholders
corporation. corporation. owning at least the majority of the
No transfer. Transfer of legal title outstanding capital stock/majority of
to trustee. members of both the managing and the
Proxy exercises Trustee exercises managed corporation
voting rights only absolute voting rights Exceptions
for a specific continuously, subject (1) Where a stockholder/s representing the
meeting (unless only to fiduciary duty. same interest of both the managing and
otherwise provided) the managed corporations own or control
Proxy cannot be Trustee can be director more than one-third (1/3) of the total
director because he holds legal outstanding capital stock entitled to vote
of the managing corporation; or
title over the shares
Revocable at will in Irrevocable, as long as (2) Where a majority of the members of the
any manner, no misconduct or managing corporation’s BOD also
constitute a majority of the managed
EXCEPT if coupled fraud. corporation’s BOD
with an interest.
Max of 5 yrs at a Max of 5 yrs at a time Requires at least 2/3 votes of the outstanding
time (unless the voting trust capital stock/membership of the managed
is specifically required corporation.
as a condition in a loan BUT only majority vote is required for the
agreement) managing corporation.
SEC can pass on validity
2. Amendments to by-laws (Sec. 48)
Requires approval by majority of the
BOD/BOT and approval by stockholders
B.3. CASES WHEN STOCKHOLDERS’
owning at least the majority of the
ACTION IS REQUIRED
outstanding capital stock/majority of
Under Sec. 6 of the Corporation Code, each
share of stock is entitled to vote, unless members
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Includes all stockholders with or without
voting rights
3. Revocation of delegation to the BOD of the
power to amend or repeal or adopt by-laws
(Sec. 48)
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members
4. Calling a meeting to remove directors (Sec.
28)
Meeting for the removal of directors or
trustees, or any of them, must be called by
the secretary on order of the president or on
the written demand of the stockholders
representing or holding at least a majority of
the outstanding capital stock/majority of
members
5. Granting compensation other than per
diems to directors (Sec. 30)
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority
of the outstanding capital stock
6. Consideration for no-par shares (Sec. 62)
When the Articles of Incorporation or the
BOD does not provide for the value of no-par
shares, the value of such shares shall be
determined by the stockholders representing
at least a majority of the outstanding capital
stock
ii. By a Two-Thirds Vote
1. Amendment of Articles of Incorporation (Sec.
16)
Amendment of the Articles of Incorporation
may be made by a majority vote of the
BOD/BOT and the vote or written assent of
the stockholders representing at least two-
thirds 2/3 of the outstanding capital stock,
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without prejudice to the appraisal right of
dissenting stockholders.
Includes all stockholders with or without
voting rights
Amendment of Articles of Incorporation of
close corporations (Sec 103)
Amendment to the Articles of Incorporation
which seeks to delete or remove any provision
required to be contained in the Articles of
Incorporation of Close Corporations or to
reduce a quorum or voting requirement
stated in said Articles of Incorporation
requires the affirmative vote of at least 2/3 of
the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the Articles of Incorporation at a
meeting duly called.
2. Delegating the power to amend or repeal
by-laws or adopt new by-laws (Sec. 48)
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-
laws requires approval by at least 2/3 of the
outstanding capital stock/membership.
Revocation of the delegation requires only
majority vote of the outstanding capital
stock/membership.
3. Extending/shortening corporate term (Sec.
37)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
4. Increasing/decreasing capital stock (Sec.
38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without
voting rights
UP LAW BOC
5. Incurring, creating, increasing bonded
indebtedness (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without
voting rights
6. Issuance of shares not subject to pre-
emptive right (Sec. 39)
Shares issued in good faith in exchange for
property or previously incurred indebtedness
with the approval of the stockholders
representing 2/3 of the outstanding capital
stock are not subject to pre-emptive rights.
7. Sale/disposition of all or substantially all of
corporate assets(Sec. 40)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
Note: In non-stock corporations where there
are NO members with voting rights, the vote
of at least the majority of the BOT will be
sufficient authorization for any sale or
disposition of all or substantially all of
corporate assets. (Sec. 40)
8. Investment of funds in another business
(Sec. 42)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without
voting rights
9. Dividend declaration (Sec. 43)
No stock dividend shall be issued without the
approval of stockholders representing not
less than 2/3 of the outstanding capital stock.
10. Power to enter into management contracts
(Sec. 44)
CORPORATION LAW MERCANTILE LAW
Please see discussion under By a Majority
Vote
11. Removal of directors or trustees (Sec. 28)
Any director or trustee may be removed from
office by a vote of the stockholders holding or
representing at least 2/3 of the outstanding
capital stock/membership.
12. Ratifying contracts with respect to dealings
with directors/trustees (Sec. 32)
A contract of the corporation with one or
more of its directors is voidable, at the option
of such corporation, unless all the following
conditions are present:
(1) The director’s presence in the BOD
meeting in which the contract was
approved was not necessary to constitute
a quorum
(2) The vote of such director was not
necessary for the approval of the contract
(3) The contract is fair and reasonable under
the circumstances
(4) In case of an officer, the contract has
been previously authorized by the BOD.
Where any of the first two conditions is
absent, in the case of a contract with a
director, such contract may be ratified by the
vote of the stockholders representing at least
2/3 of the outstanding capital stock provided
that the contract is fair and reasonable under
the circumstances.
13. Ratifying acts of disloyalty of a director
(Sec. 34)
General Rule
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits, he must account to
the corporation for all such profits by
refunding it.
Exception
His act may be ratified by a vote of the
stockholders owning or representing at least
2/3 of the outstanding capital stock.
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UP LAW BOC CORPORATION LAW
14. Stockholders’ approval of the plan of
merger or consolidation (Sec. 77)
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
approval by at least 2/3 of the outstanding
capital stock/membership of each
corporation at separate corporate meetings
duly called.
Amendments to the plan of merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
of the outstanding capital stock/membership
of each corporation voting separately.
Includes all stockholders with or without
voting rights
15. Distribution of assets in non-stock
corporations (Sec. 95)
The BOT shall, by majority vote, adopt a
resolution recommending a plan of
distribution which shall be approved by at
least 2/3 of the members with voting rights.
16. Incorporation of a religious society (Sec.
116)
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church,
unless forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative vote
at a meeting called for the purpose of at least
2/3 of its membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and
estate.
17. Voluntary dissolution of a corporation (Sec.
118-119)
Requires a resolution adopted by a majority
vote of the BOD/BOT, and by a resolution
duly adopted by the affirmative vote of the
stockholders owning at least 2/3 of the
outstanding capital stock/membership at a
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meeting to be held upon call for such
purpose.
iii. By Cumulative Voting
Election of Directors or Trustees (Sec. 24) - A
stockholder may vote such number of shares
for as many persons as there are directors to
be elected or he may cumulate said shares
and give one candidate as many votes as the
number of directors to be elected multiplied
by the number of his shares shall equal, or he
may distribute them on the same principle
among as many candidates as he shall see fit:
Provided, That the total number of votes cast
by him shall not exceed the number of shares
owned by him as shown in the books of the
corporation multiplied by the whole number
of directors to be elected.
C. PROPRIETARY RIGHTS
C.1. RIGHT TO DIVIDENDS
General Rule
The right to dividends vests upon lawful
declaration by the BOD. From that time,
dividends become a debt owing to the
shareholders. No revocation can be made.
Exceptions
(1) Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
(2) Stock dividends, even if already declared,
may be revoked prior to actual issuance
since these are not distributions but
merely representations of changes in the
capital structure.
Note: Right to dividends vests upon
declaration so whoever owns the stock at
such time also owns the dividends.
Subsequent transfer of stock would not carry
with it right to dividends UNLESS agreed
upon by the parties.
C.2. RIGHT OF APPRAISAL
Right to withdraw from the corporation and
demand payment of the fair value of the
shares after dissenting from certain corporate
acts involving fundamental changes in
UP LAW BOC CORPORATION LAW
corporate structure (Sec. 81). The amount
paid to the stockholder is the fair value of his
shares as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation of
the corporate action (Sec. 82).
i. Instances of appraisal right
(1) Extension or reduction or corporate term
(Sec. 81)
(2) Amendment to Articles of Incorporation
which involves change in the rights of
stockholders, authorize preferences
superior to those stockholders, or restrict
the right of any stockholder (Sec. 81)
(3) Investment of corporate funds in another
business or purpose (Sec. 42)
(4) Sale or disposal of all or substantially all
assets of the corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
ii. Requirements for exercise of appraisal right
(Secs. 82, 86)
(1) Stockholder must have voted against the
corporate act.
(2) Stockholder must make a written
demand on the corporation within 30
days after the vote was taken for payment
of the fair value of his shares (failure to
make demand within such period shall be
deemed waiver of the appraisal right).
(3) Stockholder must submit his certificates
of stock to the corporation for notation
within 10 days after demand for payment.
Otherwise, right to appraisal may be
terminated at the option of corporation.
iii. Effect of demand (Sec. 83)
ALL rights accruing to such shares, including
voting and dividend rights, shall be
suspended
EXCEPT the right of such stockholder to
receive payment of the fair value thereof
Immediate RESTORATION of voting and
dividend rights if the dissenting stockholder is
not paid the value of his shares within 30
days after the award.
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iv. Extinguishment of appraisal right (Sec. 84,
generally)
(1) Withdrawal of demand by the
stockholder WITH CONSENT of the
corporation
(2) Abandonment of the proposed action
(3) Disapproval by SEC of the proposed
action where such approval is necessary
(4) Where SEC (now RTC) determines that
such stockholder is not entitled to
appraisal right
(5) Failure to submit the certificates of stock
representing his shares to the corporation
for notation as dissenting shares within
10 days after demand for payment, at the
option of the corporation [Sec. 86]
Effect of Extinguishment
(1) Right of dissenting stockholder to be paid
the fair value of his shares shall cease;
(2) His status as a stockholder shall
thereupon be restored; and
(3) All dividend distributions which would
have accrued on his shares shall be paid
to him. [Sec. 84]
Note: If shares represented by the certificates
bearing such notation are transferred, and
the certificates consequently cancelled, the
rights of the transferor as a dissenting
stockholder under this Title shall cease and
the transferee shall have all the rights of a
regular stockholder; and all dividend
distributions which would have accrued on
such shares shall be paid to the transferee.
[Sec. 86]
C.3. RIGHT TO INSPECT
i. Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholder’s right of inspection is based on
his ownership of the assets and property of
the corporation. Therefore, it is an incident of
ownership of the corporate property, whether
UP LAW BOC CORPORATION LAW
this ownership or interest is termed an
equitable ownership, a beneficial ownership,
or quasi-ownership. Such right is predicated
upon the necessity of self-protection.
[Gokongwei Jr. v. SEC (1979)]
ii. Records/Books to be Kept (Sec. 74)
(1) Books that record all business
transactions of the corporation which
shall include contract, memoranda,
journals, ledgers, etc;
(2) Minute book for meetings of the
stockholders/members;
(3) Minute book for meetings of the
board/trustees;
(4) Stock and transfer book
Stock transfer agent - One engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation (licensed by the SEC).
The corporate secretary is the one duly
authorized to make entries in the stock and
transfer book.
It is the corporate secretary's duty and
obligation to register valid transfers of stocks
and if said corporate officer refuses to comply,
the transferor-stockholder may rightfully
bring suit to compel performance. [Torres et
al v. CA (1997)]
iii. Financial Statements (Sec. 75)
Within 10 days from written request, the
corporation shall furnish its most recent
financial statement (balance sheet and profit
or loss statement as of last taxable year)
At a regular meeting, the Board shall present
a financial report of the operations of the
corporation for the preceding year, which
shall include financial statements duly signed
and certified by an independent CPA.
Exception
If the paid-up capital is less than P50,000 –
the financial statements may be certified
under oath by the treasurer or any
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responsible officer of the corporation (instead
of an independent CPA).
iv. Requirements for the exercise of the right
of inspection (Sec. 74)
(1) It must be exercised at reasonable hours
on business days and in the place where
the corporation keeps all its records (i.e.,
principal office).
(2) The stockholder has not improperly used
any information he secured through any
previous examination.
(3) Demand is made in good faith or for a
legitimate purpose. If the corporation or
its officers contest such purpose or
contend that there is evil motive behind
the inspection, the burden of proof is with
the corporation or such officer to show
the same.
TEST to determine whether the purpose is
legitimate – A legitimate purpose is one
which is germane to the interests of the
stockholder as such and not contrary to the
interests of the corporation. [Gokongwei v.
SEC (1979)]
Among the changes introduced in the new
Code with respect to the right of inspection
granted to a stockholder are the following:
(1) The records must be kept at the
principal office of the corporation;
(2) The inspection must be made on
business days;
(3) The stockholder may demand a copy
of the excerpts of the records or
minutes;
(4) The refusal to allow such inspection
shall subject the erring officer or
agent of the corporation to civil and
criminal liabilities.
However, while seemingly enlarging the right
of inspection, the new Code has prescribed
limitations to the same. It is now expressly
required as a condition for such examination
that the one requesting it must not have been
guilty of using improperly any information
through a prior examination, and that the
person asking for such examination must be
UP LAW BOC CORPORATION LAW
"acting in good faith and for a legitimate
purpose in making his demand." [Gonzales v.
PNB (1983)]
Directors of a corporation have the
unqualified right to inspect the books and
records of the corporation at all reasonable
times. The right of inspection is not to be
denied on the ground that the director or
shareholder is on unfriendly terms with the
officers of the corporation whose records are
sought to be inspected. A director or
stockholder can make copies, abstracts, and
memoranda of documents, books, and
papers as an incident to the right of
inspection, but cannot, without an order of a
court, be permitted to take books from the
office of the corporation. However, a director
or stockholder does not have any absolute
right to secure certified copies of the minutes
of the corporation until these minutes have
been written up and approved by the
directors. [Veraguth v. Isabela Sugar (1932)]
A stockholder of a sequestered company has
the right to inspect and/or examine the
records of the corporation pursuant to Sec. 74
of the Corporation Code. [Africa v. PCGG
(1992)]
v. Remedies when inspection is refused
(1) Mandamus
(2) Injunction
(3) Action for damages
(4) File an action under Sec. 144 to
impose a penal offense by fine and/or
imprisonment
Refusal to allow inspection is a criminal
offense. Such refusal, when done in violation
of Sec 74(4) of the Corporation Code, properly
falls within the purview of Sec. 144 of the
same code and thus may be penalized as an
offense. [Yujuico and Sumbilla v Quiambao
and Pilapil (2014)]
Because the obligations provided for in Sec.
74 fall on the corporation, violation of the
same is done by the corporation; thus
criminal action based on such violation can
only be maintained against corporate officers
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or other such persons acting on behalf of the
corporations.
C.4. PRE-EMPTIVE RIGHT
i. Definition and Distinguished from Right of
First Refusal
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same
can be disposed of in favor of others; this
right includes all issues and disposition of
shares of any class. It is a common law right
and may be exercised by stockholders even
without legal provision. On the other hand, a
right of first refusal arises only by virtue of
contract stipulations, by which the right is
strictly construed against the right of person
to dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS,
in proportion to their respective
shareholdings. The purpose is to enable the
shareholder to retain his proportionate
control in the corporation and to retain his
equity in the surplus.
Note: The broad phrase “all issues or
disposition of shares of any class” is
construed to include not only new shares
issued in pursuance of an increase in capital
stock or from the unissued shares which form
part of the ACS, but also covers “treasury
shares.” Treasury shares would come under
the term “disposition.” Likewise considering
that it is not included among the exceptions
enumerated therein, where pre-emptive right
shall not extend, the intention is to include it
in its application. (SEC Opinion, 14 January
1993).
A pre-emptive right is a right claimed against
the corporation on unissued shares of its
capital stock, and likewise on treasury shares
held by the corporation; while the right of first
refusal is a right exercisable against another
UP LAW BOC CORPORATION LAW
stockholder on his shares of stock.
[Villanueva]
Basis of Preemptive Right: to preserve the
existing proportional rights of the
stockholders [Campos]
ii. Limitations to exercise of pre-emptive right
(Sec. 39)
• Such pre-emptive right shall NOT extend
to shares to be issued in compliance with
laws requiring stock offerings or
minimum stock ownership by the public;
• It shall also NOT extend to shares to be
issued in good faith with the approval of
the stockholders representing 2/3 of the
outstanding capital stock, in exchange for
property needed for corporate purposes
or in payment of a previously contracted
debt
• It shall not take effect if denied in the
Articles of Incorporation or an
amendment thereto.
• If one shareholder does not want to
exercise his pre-emptive right, the other
shareholders are not entitled to purchase
the corresponding shares of the
shareholder who declined. But if nobody
purchased the same and later on the
board re-issued the shares, the pre-
emptive right applies. [Sundiang and
Aquino]
iii. Remedies in case of unwarranted denial
• Injunction
• Mandamus
• The suit should be individual and not
derivative because the wrong done is to
the stockholders individually
• SEC can cancel shares if the 3rd party is
not innocent
iv. Waiver/ Denial of Preemptive Right
• Allowed by the Code provided that it is
made in the Articles of Incorporation
o Waiver made through Articles of
Incorporation – would bind
present and subsequent
shareholders
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o 2/3 vote of the outstanding
capital stock is necessary before
waiver is binding
o Result of Non-placement of
waiver clause in Articles of
Incorporation: waiver shall not
bind future stockholders but only
those who agreed to it
• The shareholders must be given
reasonable time within which to exercise
their pre-emptive rights. Upon expiration
of such period, any shareholders who did
not exercise such will be deemed to have
waived it. This is necessary so as to not
hinder future financing plans of the
corporation. Some new investors may be
willing to invest only if all the new shares
will be issued to them [Campos].
C.5. RIGHT TO VOTE
• Non-voting shares are not entitled to vote
except as provided for in the last
paragraph of Sec. 6.
• Preferred or redeemable shares may be
deprived of the right to vote
• Fractional shares of stock cannot be
voted
• Treasury shares have no voting rights as
long as they remain in the treasury.
• No delinquent stock shall be voted (Sec.
71)
• A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
C.6. RIGHT OF FIRST REFUSAL
The right of first refusal provides that a
stockholder who may wish to sell or assign
his shares must first offer the shares to the
corporation or to the other existing
stockholders under terms and conditions
which are reasonable; and that only when the
corporation or the other stockholders do not
or fail to exercise their option, is the offering
stockholder at liberty to dispose of his shares
to third parties.
UP LAW BOC CORPORATION LAW
An agreement entered into between the two
majority stockholders of a corporation
whereby they mutually agreed not to sell,
transfer, or otherwise dispose of any part of
their shareholdings till after one year from
the date of the agreement. [Lambert v. Fox
(1914)]
The right of first refusal is primarily an
attribute of ownership, and consequently can
be effected only through a contractual
commitment by the owner of the shares;
consequently, the waiver of a right of first
refusal when duly constituted can be effected
only by the registered owner. [PCGG v. SEC,
unreported (1988)]
D. REMEDIAL RIGHTS
D.1. INDIVIDUAL SUIT
A suit brought by the shareholder in his own
name against the corporation when a wrong
is directly inflicted against him.
D.2. REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against
a group of stockholders.
D.3. DERIVATIVE SUIT
A suit is brought by a stockholder for
wrongful acts committed by
directors/trustees of the corporation, when
the stockholder finds that he has no redress
because the directors/trustees are the ones
vested by law to decide whether or not to sue.
Derivative Suit as defined in jurisprudence
It is a suit by a shareholder to enforce a
corporate cause of action. 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. [Chua v. CA
(2004)]
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
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corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
[Sundiang and Aquino]
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons.
Requisites of Derivative Actions
(1) That the person instituting the action be
a stockholder or member at the time the
acts or transactions subject of the action
occurred and the time the action was
filed;
(2) That the stockholder or member exerted
all reasonable efforts, and alleges the
same with particularity in the complaint,
to exhaust all remedies available under
the Articles of Incorporation, by-laws,
laws or rules governing the corporation or
partnership to obtain the relief he desires.
(3) That there is no appraisal right available
for the act(s) complained of;
(4) That the suit is not a nuisance or
harassment suit. (Rule 8, Interim Rules of
Procedure for Intra-Corporate
Controversies)
Note: Fifth requisite is that the action brought
by the stockholder or member must be "in the
name of [the] corporation or association.”
[implied from first paragraph of Rule 8,
Section 1; see also Florete v. Florete (2016)]
The action brought by the shareholder or
member must be in the name of the
corporation or association [Villamor v. Umale
(2014)]
How this works in terms of procedure?
Corporation as an unwilling co-plaintiff (Rule
3, Sec. 10, ROC); suing stockholder mere
nominal party/plaintiff.
Requisites of a Derivative Suit according to
Jurisprudence [SMC v. Kahn, 1989]
(1) the party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
(2) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
UP LAW BOC CORPORATION LAW
BOD for the appropriate relief but the
latter has failed or refused to heed his
plea; and
(3) the cause of action actually devolves on
the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit. [Lisam
Enterprises, Inc., represented by Lolita A.
Soriano and Lolita A. Soriano v. Banco de
Oro Unibank, Inc., et al., (2012)]
NOTE: The “wrong” contemplated in a
derivative suit is one in which the injury
alleged be indirect as far as the stockholders
are concerned and direct only insofar as the
corporation is concerned. [De Leon] The
reliefs sought pertain to the corporation.
[Symaco Trading Corp. v. Santos (2005)]
Corporation should be made a party to the
suit, either as plaintiff or defendant, for res
judicata to apply.
BUT the personal injury suffered by the
stockholder cannot disqualify him from filing
a derivative suit in behalf of the corporation.
It merely gives rise to an additional cause of
action for damages against the erring
corporate officers. [Gochan v. Young (2001)]
Recent rulings on the matter
• Status of heirs as co-owners of shares
before partition of estate does not make
them shareholders until there is
compliance with Sec. 63 on the manner
of transferring shares, thus the heirs are
not automatically registered
shareholders of the corporation. [Reyes v.
RTC of Makati (2008)]
• Stockholder may commence a derivative
suit “for mismanagement, waste or
dissipation of corporate assets because of
a special injury to him for which he is
otherwise without redress. In effect, the
suit is an action for specific performance
of an obligation owed by the corporation
to the stockholders to assist its right of
action when the corporation is put on
default by the wrongful refusal of the
directors or management to make
suitable measures for its protection.” [Yu
v. Yukayguan (2009)]
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The power to sue and be sued in any court by
a corporation even as a stockholder is lodged
in the BOD that exercises its corporate
powers and not in the president or officer
thereof. But where corporate directors are
guilty of a breach of trust, not of mere error of
judgment or abuse of discretion, and intra-
corporate remedy is futile or useless, a
shareholders may institute a derivative suit in
behalf of himself and other stockholders and
for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly
upon the corporation and indirectly upon the
stockholders. [Bitong v. CA (1998)]
Jurisdiction over derivative suits lies with the
RTC (Sec. 5.2, Securities Regulation Code)
E. OBLIGATION OF A STOCKHOLDER
E.1. LIABILITY TO THE CORPORATION FOR
UNPAID SUBSCRIPTION (SEC. 67)
A subscription contract is unconditional (i.e.,
obligation to pay is not be subject to any
contingency) and indivisible (as to the
amount and transferability — [Fua Cun v.
Summers, (1923)]. Hence, if the subscriber
paid 20% of his subscription, he is not
entitled to the issuance of certificates
corresponding to 20% of the shares.
Unpaid claim refers to any unpaid
subscription and not to any indebtedness
which a subscriber may owe the corporation
rising from any other transaction. [China
Banking Corp. v. CA (1997)]
E.2. LIABILITY TO THE CORPORATION FOR
INTEREST ON UNPAID SUBSCRIPTION IF
SO REQUIRED BY THE BY-LAWS (SEC. 66)
General Rule: Subscribers for stock are NOT
liable to pay interest on his unpaid
subscription
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in
the by-laws, such rate shall be deemed to be
the legal rate (Sec. 66)
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Notes: Transfer for consideration of treasury
shares is a sale (or disposition) by the
corporation (not subscription). A transfer of
previously issued shares by a stockholder to a
third person is a sale (or disposition).
Transfer of unissued shares is subscription.
Shareholders are not creditors of the
corporation with respect to their
shareholdings thereto and the principle of
compensation or set-off has no application.
Subscription contract is NOT required to be in
writing.
E.3. LIABILITY FOR WATERED STOCKS
(SEC. 65)
i. Definition
These are shares issued as fully paid when in
truth no consideration is paid, or the
consideration received is known to be less
than the par value or issued value of the
shares. (Sec. 65)
These include the following:
• Issued without consideration (bonus
share)
• Issued as fully paid when the corporation
has received less sum of money than its
par or issued value (discounted share)
• Issued for consideration other than actual
cash (i.e., property or services), the fair
valuation of which is less than its par or
issued value
• Issue stock dividend when there are no
sufficient retained earnings or surplus
profit to justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks. Subsequent
increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
determined at the time of issuance of the
stock.
ii. Liability of directors or officers
Any director or officer of a corporation
consenting to the issuance of watered stocks
or who, having knowledge thereof, does not
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MERCANTILE LAW
forthwith express his objection in writing and
file the same with the corporate secretary
shall be SOLIDARILY liable with the
stockholder concerned to the corporation and
its creditors for the difference in value (Sec.
65).
It is hornbook principle that personal liability
of corporate directors, trustees or officers
attaches only when: (a) they assent to a
patently unlawful act of the corporation, or
when they are guilty of bad faith or gross
negligence in directing its affairs, or when
there is a conflict of interest resulting in
damages to the corporation, its stockholders
or other persons; (b) they consent to the
issuance of watered down stocks or when,
having knowledge of such issuance, do not
forthwith file with the corporate secretary their
written objection; (c) they agree to hold
themselves personally and solidarily liable
with the corporation; or (d) they are made by
specific provision of law personally
answerable for their corporate action. [SPI
Technologies Inc. v Mapua (2014)]
E.4. LIABILITY FOR DIVIDENDS
UNLAWFULLY PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty,
any interest adverse to the corporation in
respect of any matter which has been
reposed in him in confidence, as to which
equity imposes a disability upon him to deal
in his own behalf, he shall be liable as a
trustee for the corporation and must account
for the profits which otherwise would have
accrued to the corporation (Sec. 31).
Violations of any of the provisions of the
Corporation Code not otherwise specifically
penalized therein shall be punished by a fine
of not less than one thousand (P1,000.00)
pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for
not less than thirty (30) days but not more
than 5 years, or both, in the discretion of the
court (Sec. 144).
UP LAW BOC
E.5. LIABILITY FOR ASSUMING TO ACT AS
A CORPORATION KNOWING IT TO BE
WITHOUT AUTHORITY
All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as a result thereof.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not
be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
was in fact no corporation (Sec. 21).
F. MEETINGS
General Rule: Stockholders’ or members’
approval is expressed in a meeting duly
called and held for the purpose.
Exception: In case of amendment of Articles
of Incorporation, approval may be expressed
by referendum or written assent of the
stockholders or members (Sec. 16)
Who May Attend and Vote?
• Stockholders, either in person or by proxy
• Pledgors or mortgagors (Sec. 55)
• Pledgee or mortgagee, IF expressly given
such right by the pledgor or mortgagor in
writing which is recorded on the
corporate books(Sec. 55)
• Executors, administrators, receivers, and
other legal representatives duly
appointed by the court, without need of
any written proxy(Sec. 55)
• ALL joint owners of stocks, or any one of
them with the consent of ALL the co-
owners, unless there is a written proxy,
signed by all the co-owners(Sec. 56)
• Any one of the joint owners of shares
owned in an "and/or" capacity or a proxy
thereof(Sec. 56)
F.1. REGULAR OR SPECIAL
i. When and Where
CORPORATION LAW MERCANTILE LAW
When? (Sec. 50)
Regular meetings of stockholders or
members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by
the BOD or trustees.
Special meetings of stockholders or members
shall be held at any time deemed necessary
or as provided in the by-laws.
Where?
• Stock: City or municipality where the
principal office of the corporation is
located, or, if practicable, in the principal
office of the corporation: Provided, Metro
Manila shall be considered a city or
municipality. (Sec. 51)
• Non-stock: Any place even outside the
place where the principal office is located,
within the Philippines (Sec. 93)
ii. Notice (Sec. 50)
• Regular Meeting—written notice sent to
all shareholders or members at least 2
weeks prior to the meeting, unless a
different period is required by the by-laws
• Special Meeting—written notice sent at
least 1 week prior to the meeting, unless
otherwise provided in the by-laws.
• Subject to waiver, expressly or impliedly
(i.e., attendance despite no notice)
Effect of Failure to Give Notice: Failure to give
notice would render a meeting VOIDABLE at
the instance of an absent stockholder, who
was not notified of the meeting (Board v. Tan,
1959).
F.2. WHO CALLS THE MEETINGS
Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. (Sec. 50)
F.3. WHO PRESIDES AT THE MEETINGS
The president, unless the by-laws provide
otherwise.(Sec. 54)
The petitioning stockholder or member (when
there is no person authorized to call a
meeting) shall preside thereat until at least a
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majority of the stockholders or members
present have chosen one of them as presiding
officer.(Sec. 50)
F.4. QUORUM
General Rule: Stockholders representing
majority of the Outstanding Capital Stock or
majority of the members
Exception: The Code or the by-laws provide
otherwise
Where quorum is present at the start of a
lawful meeting, stockholders present cannot
without justifiable cause break the quorum by
walking out from said meeting so as to defeat
the validity of any act proposed and approved
by the majority. However, stockholders can
break the quorum for justifiable causes.
(Johnston vs. Johnston, 1965 CA decision)
REGULAR SPECIAL
WHEN
held annually on a at any time upon the
date fixed in the by- call of the president or
laws, or if not so as provided in the by-
fixed, on any date in laws
April of every year
as determined by
the BOD or trustees
WHERE
STOCK - City or municipality where the
principal office of the corporation is located,
or, if practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality (sec. 51)
NON-STOCK - Any place even outside the
place where the principal office is located,
within the Philippines (sec. 93)
NOTICE
notice sent to all notice sent to all
shareholders or shareholders
members at least 2 members at least 1
weeks prior to the week prior to the
meeting, unless a meeting, unless
different period is otherwise provided in
required by the by- the by-laws
laws
CORPORATION LAW MERCANTILE LAW
REGULAR SPECIAL
QUORUM
General Rule: Stockholders representing
majority of the Outstanding Capital Stock or
majority of the members
Exception: The Code or the by-laws provide
otherwise
F.5. MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of
stockholders or members, or of the BOD or
trustees shall be kept and preserved at the
principal office of every corporation.
Contents:
• Time and place of holding the meeting;
• How the meeting was authorized;
• The notice given;
• Whether the meeting was regular or
special, if special its object;
• Those present and absent; and
• Every act done or ordered done at the
meeting.
Upon demand by any director/trustee or
shareholders/member, the following shall
also be noted in the minutes:
• The time when any director, trustee,
stockholder or member entered or left the
meeting;
• The yeas and nays on any motion or
proposition;
• The protest of any director/trustee or
stockholder/member on any action or
proposed action.
Notes:
The minutes of any meetings shall be open to
inspection by any director/trustee or
or stockholder/member at reasonable hours on
business days.
The director/trustee or stockholder/member
may demand, in writing, for a copy of
excerpts from said records or minutes, at his
expense.
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Any officer or agent of the corporation
refusing to allow the examination and
copying of the minutes shall be:
(1) liable to the director/trustee or
stockholder/ member; and
(2) guilty of an offense punishable under Sec.
144 (Sec. 74)
However, the officer of agent may use as a
defense that:
(1) the person demanding examination or
copy thereof made improper use of any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation thereby;
(2) the person demanding examination or
copy acts in bad faith or has no legitimate
purpose in making his demand.
CORPORATION LAW MERCANTILE LAW
XIV. Capital Structure
A. SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued
stock in an existing corporation or a
corporation still to be formed shall be
deemed a subscription contract (Sec. 60).
A. 1. CHARACTERISTICS
A subscription is a contract for the acquisition
of unissued stock of a corporation whether
existing or still to be formed, and is in effect
the contribution or promised contribution of a
person to the capital of a corporation
[Campos].
There can be a subscription only with
reference to unissued shares of the
Authorized Capital Stock (ACS), in the
following cases:
(1) The original issuance of the ACS at the
time of incorporation.
(2) The opening, during the life of the
corporation, of the portion of the original
ACS previously unissued; or
(3) The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC.
[Villanueva]
A. 2. STATUS AS SHAREHOLDER
One may become a shareholder in a
corporation in either of two ways:
(1) By entering into a SUBSCRIPTION
CONTRACT with an existing or still to
be formed corporation (he becomes a
stockholder upon acceptance of the
corporation of his offer to subscribe
whether the consideration is fully
paid or not).
• Once a subscription contract is
perfected, the stockholder becomes a
debtor to the corporation and may be
liable to pay any unpaid portion
thereof upon call by the BOD.
(2) By acquisition of already issued
shares through:
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(a) purchase of TREASURY SHARES Hence, the first question to ask is whether or
from the corporation not the BL actually provide for the payment of
(b) acquisition of shares from interest. If so, the next question is the rate of
existing shareholders by SALE OR such interest (aka the “stipulated interest”).
ANY OTHER CONTRACT Shareholders are NOT creditors of the
[Sundiang and Aquino] corporation with respect to their
NOTES shareholdings thereto and the principle of
Transfer of unissued shares = SUBSCRIPTION compensation or set-off has no application.
Transfer of already issued shares = NOT Subscription contract is NOT required to be in
SUBSCRIPTION; can either be: writing.
• SALE/DISPOSITION BY CORPORATION
of treasury shares B. CONSIDERATION FOR STOCKS
• SALE/DISPOSITION BY STOCKHOLDER
TO A THIRD PERSON B. 1. FORMS OF CONSIDERATION (SEC. 62)
• Actual cash
A. 3. TYPES OF SUBSCRIPTION • Property, tangible or intangible, actually
CONTRACTS received by the corporation and necessary
or convenient for its use and lawful
purposes at a fair valuation equal to the
i. Pre-incorporation subscription (Sec. 61)
par or issued value of the stock issued
It is a subscription for shares of stock of a
corporation still to be formed. - Property should NOT be
When pre-incorporation subscription is encumbered. Otherwise, it would
impair the consideration.
IRREVOCABLE:
(1) For a period of at least 6 months from the - Valuation is initially determined
date of subscription, UNLESS (a) all of by the incorporators or the BOD,
the other subscribers consent to the subject to approval by the SEC.
revocation, or (b) the incorporation fails ▪ Labor performed for or services actually
to materialize within 6 months or within a rendered to the corporation;
longer period as may be stipulated in the
contract of subscription; or ▪ Amounts transferred from unrestricted
retained earnings to stated capital
(2) After the submission of the Articles of (declaration of stock dividends); and
Incorporation to the SEC.
▪ Outstanding shares exchanged for stocks
in the event of reclassification or
ii. Post-incorporation subscription conversion;
It is entered into after incorporation. ▪ Previously incurred indebtedness of the
corporation;
A. 4. INTEREST ON UNPAID
SUBSCRIPTION
General Rule
B. 2. LIMITATIONS ON CONSIDERATION
Stockholder is NOT liable to pay interest on
Stocks shall NOT be issued:
his unpaid subscription.
Exception • for a consideration less than the par or
issued price thereof
If so required by the by-laws
RATE: that fixed in the by-laws, otherwise, • in exchange for promissory notes or
the legal rate (Sec. 66) future service
NOTES NOTES

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Promissory notes and future service may be
used as consideration provided that
certificates of stock will be issued ONLY
AFTER actual encashment of promissory note
or performance of such services.
[Stockholders of F. Guanzon and Sons, Inc. v
Register of Deeds of Manila (1962)]
C. 2. SUBSCRIPTION AGREEMENTS (SEE
ABOVE)

C. SHARES OF STOCK C. 3. CONSIDERATION FOR SHARES OF

STOCK (SEE ABOVE)
C. 1. NATURE OF STOCK
Shares of stock are units into which the C. 4. WATERED STOCK
capital stock is divided. A share of stock i. Definition
represents interest of the holder thereof to These are shares issued as fully paid when in
participate in the management of the truth no consideration is paid in any form, or
corporation, to share proportionally in the the consideration received is known to be less
profits of the business and, upon liquidation, than the par value or issued value of the
to obtain an aliquot part of corporate assets shares. (Sec. 65)
after all corporate debts have been paid. These include the following:
[Campos] ▪ Issued without consideration (bonus
A stockholder may own the share even if he is share)
not holding a certificate of stock. ▪ Issued as fully paid when the
corporation has received less sum of
Share of Stock Certificate of Stock money than its par or issued value
(discounted share)
Evidence of the
▪ Issued for consideration other than
holder’s ownership of
actual cash (i.e., property or services),
Unit of interest in the stock and of his the fair valuation of which is less than
a corporation right as a shareholder its par or issued value
and up to the extent
▪ Issue stock dividend when there are
specified therein. no sufficient retained earnings or
An incorporeal or surplus profit to justify it.
intangible Concrete and tangible
NOTE
property
Subsequent increase in the value of the
May be issued by
property used in paying the stock does not do
the corporation May be issued only if
away with the watered stocks. Subsequent
even if the the subscription is fully
increase in the value of the property used in
subscription is not paid
paying the stock does not cure the defect in
fully paid
issuance. The existence of watered stocks is
determined at the time of issuance of the stock.
A share of stock only typifies an aliquot part
of the corporation's property, or the right to
ii. Liability of Directors for Watered Stocks
share in its proceeds to that extent when
Any director or officer of a corporation
distributed according to law and equity, but
consenting to the issuance of watered stocks
its holder is not the owner of any part of the
or who, having knowledge thereof, does not
capital of the corporation. Nor is the
forthwith express his objection in writing and
shareholder entitled to the possession of any
file the same with the corporate secretary
definite portion of its property or assets. The
shall be solidarily liable with the stockholder
stockholder is not a co-owner or tenant in
common of the corporate property.
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concerned to the corporation and its creditors with the statutory regulations is necessary.
for the difference in value (Sec. 65). [Philippine Trust Corp. v. Rivera (1923)]

iii. Trust Fund Doctrine for Liability for C. 5. SITUS OF THE SHARES OF STOCK
Watered Stocks It is a general rule that for purposes of
Where the corporation issues watered stock execution, attachment and garnishment, it is
and thereby assumes an ostensible not the domicile of the owner of a certificate
capitalization in excess of its real assets, the but the domicile of the corporation which is
transaction necessarily involves the decisive. [Chua Guan v. Samahang
misleading of subsequent creditors, and Magsasaka, Inc. (1935)]
whether done with that purpose actually in
mind or not, is at least a constructive fraud C. 6. CLASSES OF SHARES OF STOCK
upon creditors. Hence, it is held that recovery Shares of stock of stock corporations may be
may be had by a creditor in such case, even divided into classes or series of shares or both.
though the corporation itself has no cause of Each class or series of shares may have rights,
action against the stockholders. Some of the privileges or restrictions, as stated in the
earlier decisions put the right of recovery in Articles of Incorporation.
such a case upon the so-called “trust fund Classification of shares:
doctrine.” In any view of the matter, however, (1) Common shares
the creditors’ right of action to compel the (2) Preferred shares
making good of the representation as to the
(a) Preference as to dividends
corporation’s capital is based on fraud, and
the trust fund doctrine is only another way of (i) Participating and non-
expressing the same underlying idea. [De participating
Leon] (ii) Cumulative and non-cumulative
Despite the view of foreign authors that the (3) Par value shares
fraud theory is the prevailing view, it would
(4) No-par value shares
seem that in the Philippine jurisdiction, the
trust fund doctrine on watered stock prevails. (5) Founder’s shares
It is established doctrine that subscription to (6) Redeemable shares
the capital of a corporation constitute a fund
(7) Treasury shares
to which creditors have a right to look for
satisfaction of their claims and that the (8) Convertible shares
assignee in insolvency can maintain an action (9) Non-voting shares
upon any unpaid stock subscription in order General Rule
to realize assets for the payment of its debts No share may be deprived of voting rights
(citing Velasco v. Poizat, 1918). A corporation (Sec. 6)
has no power to release an original
subscriber to its capital stock from the Exceptions
obligation of paying for his shares, without a
• Preferred non-voting or
valuable consideration for such release; and
as against creditors a reduction of the capital • Redeemable shares,
stock can take place only in the manner and • Provided by the Code (e.g., Treasury
under the conditions prescribed by the shares)
statute or the charter or the articles of There shall always be a class/series of shares
incorporation. Moreover, strict compliance which have COMPLETE VOTING RIGHTS (Sec.
6)
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Doctrine of Equality of Shares
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise
provided in the Articles of Incorporation and
stated in the certificate of stock (Sec. 6)
i. Common Shares
The most common type of shares, which
enjoy no preference but the owners thereof
are entitled to management (via exclusive
right to vote) of the corporation and to equal
pro-rata division of profits after preference. It
represents a residual ownership interest in
the corporation.
ii. Preferred shares
Stocks which are given preference by the
issuing corporation in dividends, or in the
distribution of assets of the corporation in
case of liquidation, or both, or such other
preferences as may be stated in the Articles
of Incorporation which do not violate the
Corporation Code.
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right
as it is an incident to stock ownership.
Limitations:
• Preferred shares can only be issued with
par value.
• Preferred shares must be stated in the
Articles of Incorporation and in the
certificate of stock.
• The BOD may fix the terms and
conditions only when so authorized by
the Articles of Incorporation and such
terms and conditions shall be effective
upon filing a certificate thereof with the
SEC.
Preference as to dividends:
(1) Participating and Non-participating
(a) Participating - those which, after
getting their fixed dividend
preference, share with common
stocks the rest of the dividends.
(b) Non-participating - those which, after
getting their fixed dividend
CORPORATION LAW MERCANTILE LAW
preference, have no more right to
share in the remaining dividends with
the common stocks.
(c) Unless otherwise provided, preferred
stocks are non-participating.
(2) Cumulative and Non-cumulative
(a) Cumulative - regardless of lack of
profits in any given year, and lack of
declaration of dividends, the arrears
for such year have to be paid to the
preferred stocks in a subsequent year
(once profits are made) before any
dividends can be paid to the common
stocks.
(b) Non-Cumulative – entitlement to
receipt of dividends essentially
depends on declaration of such;
types:
(i) Discretionary – right to dividends
in a particular year depends on
the discretion of the board, even if
the corporation has profits.
(ii) Mandatory – a positive duty is
imposed to declare preferred
dividends every year that profits
are earned.
(iii) Earned cumulative or dividend
credit – board with discretion not
to declare dividends even if there
were profits in a certain year;
however, once the board decides
that dividends will be declared,
the preferred stockholders have a
right to arrears in dividends for
the years when there were profits
but no dividend was declared.
(c) In the absence of any express
stipulation, preferred stocks are
deemed cumulative.
Note: Only preferred and redeemable shares
may be deprived of the right to vote. (Sec. 6,
Corporation Code)
Xpn: As otherwise provided in the
Corporation Code.
iii. Par value shares
These are shares with a stated value set out
in the Articles of Incorporation. This remains
the same regardless of the profitability of the
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corporation. This gives rise to financial
stability and is the reason why banks, trust
corporations, insurance companies and
building and loan associations must always
be organized with par value shares.
Par value is minimum issue price of such
share in the Articles of Incorporation which
must be stated in the certificate.
iv. No-par value shares
These are shares without a stated value.
“A no par share does not purport to represent
any stated proportionate interest in the
capital stock measured by value, but only an
aliquot part of the whole number of such
shares of the issuing corporation” (Agbayani)
Limitations:
• Cannot have an issue price of less
than P5.00 per share (Sec. 6)
• Once issued, they shall be deemed
fully paid and non-assessable and
the holders of such shares shall not
be liable to the corporation or to its
creditors in respect thereto (Sec. 6)
• Entire consideration received by the
corporation shall be treated as
capital and shall not be available for
distribution as dividends (Sec. 6)
• Articles of Incorporation must state
the fact that the corporation issues
no-par shares and the number of
shares
• Cannot be issued as preferred stocks
(Sec. 6)
• Cannot be issued by banks, insurance
companies, trust companies, building
and loan associations, and public
utilities (Sec. 6)
• Issued price may be fixed in the
Articles of Incorporation, or by the
BOD pursuant to authority conferred
upon it by the Articles of
Incorporation, or, in the absence
thereof, by majority vote of the
outstanding shares in a meeting
called for the purpose (Sec. 62).
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MERCANTILE LAW
v. Founder’s shares (Sec. 7)
These are shares, classified as such in the
Articles of Incorporation, which are given
certain rights and privileges not enjoyed by
the owners of other stocks.
Where exclusive right to vote and be voted for
in the election of directors is granted, such
right must be for a limited period not to
exceed 5 years subject to approval by SEC.
The 5 year period shall commence from date
of approval by SEC.
vi. Redeemable shares (Sec. 8)
These are shares which permit the issuing
corporation to redeem or purchase its shares.
Limitations:
• Redeemable shares may be issued
only when expressly provided for in
the Articles of Incorporation (Sec. 8).
• The terms and conditions affecting
said shares must be stated both in
the Articles of Incorporation and in
the certificate of stock (Sec. 8).
• Redeemable shares may be deprived
of voting rights in the Articles of
Incorporation.
• The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem. [SEC-OGC
Opinion No. 07-03]
• The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation (i.e., if the Articles of
Incorporation allows for reissuance of
such shares).
• Unrestricted retained earnings is NOT
necessary before shares can be
redeemed but there must be
sufficient assets to pay the creditors
and to answer for operations.
[Republic Planters Banks v. Agana
(1997)]
• Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
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obligations (SEC Opinion, 24 Aug
1987).
NOTE
Redeemable shares reacquired shall be
considered retired and no longer issuable,
unless otherwise provided in the Articles of
the redeeming corporation (SEC Rules
Governing Redeemable and Treasury Shares,
26 April 1982).
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders (Sec.68).
viii. Convertible shares
A type of preferred stock that the holder can
exchange for a predetermined number of
common shares at a specified time

vii. Treasury shares (Sec. 9) ix. Non-voting shares (Sec. 6)

These are shares which have been issued and General Rule
fully paid for, but subsequently re-acquired Non-Voting Shares are not entitled to vote.
by the issuing corporation by purchase, Exceptions
redemption, donation or through some other • Amendment of the Articles of
lawful means. Such shares may again be Incorporation
disposed of for a reasonable price fixed by the • Adoption and amendment of by-laws
BOD.
• Sale, lease, exchange, other
They are excluded from the definition of
disposition of all or substantially all
outstanding capital stock [Sec. 137] of the corporate property
Treasury shares shall have no voting right as
long as such shares remain in the Treasury. • Incurring, creating or increasing
bonded indebtedness
[Sec. 57]
Pre-emptive right of stockholders in close • Increase or decrease of capital stock
corporations shall extend to reissuance of • Merger and consolidation
treasury shares unless otherwise provided in
the Articles of Incorporation. [SEC. 102] • Investment of corporate funds in
another corporation or business
Treasury shares are issued shares, but being • Dissolution of the corporation
in the treasury, do not have the status of
outstanding shares. Consequently, although
a treasury share, not retired by reacquisition,
may be re-issued or resold, such share, as
long as it is held by the corporation as a
treasury share, participates neither in the
dividends, because dividends cannot be
declared by the corporation to itself nor in the
meetings of the corporation as voting stock,
for otherwise equal distribution of voting
powers among stockholders will be
effectively lost and the directors will be able
to perpetuate their control of the corporation,
though it still represents a paid for interest in
the property of the corporation. [CIR v.
Manning (1975) cited in San Miguel
Corporation v. Sandiganbayan (2000)]
NOTE

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UP LAW BOC CORPORATION LAW MERCANTILE LAW

COMMON PREFERRED PAR NO PAR* TREASURY REDEEMABLE FOUNDER’S

DEFINITION Stock which Stock which Shares that Shares issued Special
entitles the entitles the have been by the shares
owner of holder to issued and corporation whose
such stocks some fully paid that may be exclusive
to an equal preference but taken up by rights and
pro rata either in the subsequentl the privileges
division of dividends or y reacquired corporation are
profits distribution by the upon determined
of assets issuing expiration of a by the AOI.
upon corporation fixed period.
liquidation, by lawful - regardless of
or in both means. the existence
of unrestricted
retained
earnings
VALUE Depends if Stated par Fixed in Value not
it’s par or no value the AOI, fixed in
par and the AOI,
indicated and
in the therefore
stock not
certificate. indicated
May be in the
sold at a stock
value certificate
higher, . Price
but not may be
lower, set by
than that BOD, SH’s
fixed in or fixed in
the AOI. the AOI
eventually
.
VOTING Usually Can vote Depends Depends No voting Usually
RIGHTS
vested with only under if it’s if it’s rights for as denied voting
the certain common common long as such rights.
exclusive circumstanc or or stock
right to vote es preferred. preferred. remains in
the treasury
(Sec. 57)
PREFERENCE No First crack
UPON
LIQUIDATION advantage, at dividends
priority, or / profits /
preference distribution
over any of assets
other SH in
the same
class

Page 204 of 353

UP LAW BOC CORPORATION LAW
D. PAYMENT OF BALANCE OF
SUBSCRIPTION (SEC. 66 AND 67)
D. 1. CALL BY BOD
The BOD of any stock corporation may at any
time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary.
Payment shall be made on the date specified
in the contract of subscription or on the date
stated in the call. Failure to pay on such date
shall render the entire balance due and
payable and shall make the stockholder
liable for interest at the legal rate on such
balance, unless a different rate of interest is
provided for in the by-laws. If within 30 days
from said date no payment is made, all stocks
covered by said subscription shall become
delinquent and subject to sale under Sec. 68
unless the BOD orders otherwise.
There are 2 instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
(1) When, under the terms of the
subscription contract, subscription is
payable, not upon call, but
immediately, or on a specified day, or
when it is payable in installments at
specified times; and
(2) If the corporation becomes insolvent,
which makes the liability on the
unpaid subscription due and
demandable, regardless of any
stipulation to the contrary in the
subscription agreement [Villanueva]
D. 2. NOTICE REQUIREMENT
Where call is necessary, notice must be given
to the stockholder concerned. A call without
notice to the subscriber is practically no call
at all.
The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain
an action for the call. [Lingayen Gulf Electric
Power Co., Inc. v. Baltazar (1965)]
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MERCANTILE LAW
- The right to notice of call, however, may
be waived by the subscriber. [De Leon]
D. 3. SALE OF DELINQUENT SHARES (SEC.
68)
Delinquent Shares - These are shares for
which the corresponding subscription or
balance remains unpaid after a grace period
of 30 days from the date specified in the
contract of subscription or from the date
stated in the call made by the BOD. (Sec. 67)
i. Effect of Delinquency (Sec. 71)
No delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholders’ meeting
The holder thereof shall NOT be entitled to
any of the rights of a stockholder except the
right to dividends. But the dividends it will
receive will be subject to Sec. 43, that is, cash
dividends shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, and stock dividends shall be
withheld until the unpaid subscription is fully
paid.
Such shares shall be subject to delinquency
sale.
ii. Call by Resolution of the BOD (Sec. 68)
The BOD may, by resolution, order the sale of
delinquent stock and shall specifically state
the amount due on each subscription plus all
accrued interest, and the date, time and
place of the sale which shall not be less than
30 days nor more than 60 days from the date
the stocks became delinquent, which is 30
days after the date specified in the contract of
subscription or on the date stated in the call.
iii. Notice of Sale
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the
resolution shall be sent to every
delinquent stockholder either
personally or by registered mail.
(2) Notice of sale shall furthermore be
published once a week for 2
consecutive weeks in a newspaper of
UP LAW BOC CORPORATION LAW
general circulation in the province or
city where the principal office of the
corporation is located.
iv. Auction Sale and the Highest Bidder
Procedure for delinquency sale (Sec. 68)
• Call for payment made by the BOD.
• Notice of call served on each
stockholder.
• Notice of delinquency issued by the
BOD upon failure of the stockholder
to pay within 30 days from date
specified.
• Service of notice of delinquency on
the non-paying subscriber, PLUS
publication in a newspaper of general
circulation in the province or city
where the principal office of the
corporation is located, once a week
for 2 consecutive weeks.
NOTE
Requirements on notice and publication are
mandatory. Lacking such requirements, the
stockholder may question the sale as
provided under Sec. 69.
• Public auction - the highest bidder is
one who is willing to pay the balance
of the subscription for the least
number of shares. If there are no
bidders, the corporation must bid for
the whole number of shares
regardless of how much the
shareholders has paid. Such stocks
will pertain to the corporation as fully
paid treasury stocks.
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the
smallest number of shares or fraction of a
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MERCANTILE LAW
share. The stock so purchased shall be
transferred to such purchases in the books of
the corporation and a certificate of such stock
shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of
stock covering such shares.
Irregularities in the delinquency sale (Sec. 69)
• Action to recover delinquent stock
must be on the ground of irregularity
or defect in:
▪ the notice of sale or
▪ in the sale itself of delinquent
stock
• Unless, party seeking to recover first
pays or tenders to the party holding
the stock the sum for which the same
was sold, with interest from the date
of sale at the legal rate.
• The action must be commenced
within 6 months from the date of sale.
v. Interest Rate
Note that, taken together, Secs. 66 and 67
contemplate the imposition of two types of
interest: (i) the stipulated interest, or
moratory interest; and (ii) the interest by
default, or compensatory interest. The
interest rate provided for in Sec. 66 must be
stipulated in the BL and is imposed from the
date of subscription. On the other hand, the
“legal rate” being spoken of in Sec. 67 is
compensatory and is only imposed when the
balance becomes due and payable. Such
compensatory interest appears to be
imposable whether or not the same is
provided for in the BL, the only thing subject
to change is the rate thereof.
E. CERTIFICATE OF STOCK
E. 1. NATURE OF THE CERTIFICATE
A certificate of stock is an instrument
formally issued by the corporation with the
intention that the same constitute the best
evidence of the rights and status of a
UP LAW BOC CORPORATION LAW
shareholders (not a condition precedent to
the acquisition of such rights).
A certificate of stock is the paper
representative or tangible evidence of the
stock itself and of the various interests
therein. The certificate is not a stock in the
corporation but is merely evidence of the
holder’s interest and status in the corporation,
his ownership of the share represented
thereby. It is not in law the equivalent of such
ownership. It expresses the contract between
the corporation and the stockholder, but is
not essential to the existence of a share of
stock or the nature of the relation of
shareholder to the corporation. [Makati
Sports Club v. Cheng (2010)]
Shares of stock issued pursuant to requisites
in Section 63 are personal property and may
be transferred by delivery of the certificate or
certificates indorsed by the owner, attorney in
fact, or other person legally authorized to
make the transfer. [Sec. 63]
E. 2. UNCERTIFICATED SHARES
Uncertificated Shares/Securities
Security evidenced by electronic or similar
records (Sec. 3.14, Securities Regulation Code)
Notwithstanding Sec. 63 of the Corporation
Code (certificate of stock and transfer of
shares), a corporation whose securities are
registered pursuant to the SRC or listed on
securities exchange may:
▪ If so resolved by the BOD and agreed
by a shareholder, investor or securities
intermediary, issue shares to, or
record the transfer of some or all its
shares into the name of such
shareholders, investors or, securities
intermediary in the form of
uncertified securities
The use of uncertified securities in these
circumstances shall be without prejudice to
the rights of the securities intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
▪ If so provided in its articles of
incorporation and by-laws, issue all of
the shares of a particular class in the
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MERCANTILE LAW
form of uncertificated securities and
subject to a condition that investors
may not require the corporation to
issue a certificate in respect of any
shares recorded in their name.
Transfers of uncertificated securities, how
made
▪ Valid as between parties - validly
made and consummated by
appropriate book-entries in the
securities intermediaries, or in the
stock and transfer book held by the
corporation or the stock transfer
agent.
A transfer made pursuant to the foregoing
has the effect of delivery of a security in
bearer form or duly indorsed in blank
representing the amount of security or right
transferred, including the unrestricted
negotiability of that security by reason of such
delivery.
▪ Valid as to corporation – when the
transfer is recorded in the books of
the corporation so as to show the
names of the parties to the transfer
and the number of shares transferred
(Sec. 43, Securities Regulation Code).
E. 3. NEGOTIABILITY
Theory of Quasi-Negotiability
A stock certificate is regarded as quasi-
negotiable only in the sense that it may be
transferred by endorsement, coupled with
delivery.
This notwithstanding, it is well-known that
the instrument is non-negotiable, because the
holder thereof takes it without prejudice to
such rights or defenses as the registered owner
or creditor may have under the law, except
insofar as such rights or defenses are subject
to the limitations imposed by the principles
governing estoppel. Certificates of stock are
not negotiable instruments. Consequently, a
transferee under a forged assignment
acquires no title which can be asserted
against the true owner, unless the latter’s
negligence has been such as to create an
estoppel against him. If the owner of the
UP LAW BOC CORPORATION LAW
certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by on
innocent purchaser for value. [De los Santos v.
Republic (1955)]
i. Requirements for Valid Transfer of Stocks
For a valid transfer of stocks, the
requirements are as follows:
(1) There must be delivery of the stock
certificate;
(2) The certificate must be endorsed by
the owner or his attorney-in-fact or
other persons legally authorized to
make the transfer; and
(3) To be valid against third parties, the
transfer must be recorded in the
books of the corporation (i.e.,
showing the names of the parties to
the transaction, the date of the
transfer, the number of the certificate
or certificates and the number of
shares transferred) [Sec. 63] [Bitong v.
CA (1998)]
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
(Sec. 63).
The Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of
transfer is valid between the parties. In order
to bind third persons, however, the transfer
must be recorded in the books of the
corporation. Clearly then, the absence of a
deed of assignment is not a fatal flaw which
renders the transfer invalid.
- Requisites for a valid transfer per Sec.
63:
(1) Between the parties:
(a) Delivery
(b) Indorsement
(2) To be valid as to third persons:
(a) Recorded in the books of the
corporation [Republic v. Estate of
Hans Menzi (2005)]
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MERCANTILE LAW
The execution of a deed of sale does not
necessarily make the transfer effective. The
delivery of the stock certificate duly indorsed
by the owner is the operative act that
transfers the shares. The absence of delivery
is a fatal defect which is not cured by mere
execution of a deed of assignment. [Rural
Bank of Lipa City v. CA (2001)]
The stock and transfer book is the basis for
ascertaining the persons entitled to the rights
and subject to the liabilities of a
stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation
is under no specific legal duty to issue stock
certificates in the transferee’s name. [Ponce v.
Alsons Cement Corp. (2002)]
- Citing Hager v. Bryan (1911): A mandamus
should not issue to compel the secretary
of a corporation to make a transfer of
the stock on the books of the company,
unless it affirmatively appears that he
has failed or refused so to do, upon the
demand either of the person in whose
name the stock is registered, or of some
person holding a power of attorney for
that purpose from the registered owner
of the stock.
A transfer of shares is not valid unless
recorded in the books of the corporation. The
purpose of registration is two-fold: (a) to
enable the transferee to exercise all the rights
of a stockholder, including the right to vote
and to be voted for, and (b) to inform the
corporation of any change in share ownership
so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a
stockholder. [Batangas Laguna Tayabas Bus
Co. v. Bitangas (2001)]
- Until challenged in a proper proceeding,
a stockholder of record has a right to
participate in any meeting; his vote can
be properly counted to determine
whether a stockholders’ resolution was
approved, despite the claim of the
alleged transferee. On the other hand, a
person who has purchased stock, and
who desires to be recognized as a
stockholder for the purpose of voting,
must secure such a standing by having
the transfer recorded on the corporate
UP LAW BOC
books. Until the transfer is registered,
the transferee is not a stockholder but
an outsider.
E. 4. ISSUANCE
i. Full Payment
General Rule
No certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid (Sec. 64)
Exception
Where it was the practice of the corporation
since its inception to issue certificates of stock
to its individual SHs for unpaid shares of
stock and to give full voting power to shares
fully paid. [Baltazar v. Lingayen Gulf Electric
Power Company (1965)]
ii. Payment Pro-Rata
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed. [Nava Peers
Mktg. Corp. and Fua Cun v. Summers (1923)]
E. 5. LOST OR DESTROYED CERTIFICATES
Procedure for re-issuance in case of loss,
stolen or destroyed certificates:
(1) Registered owner to file an affidavit
of loss with the corporation.
(2) Publication of notice of loss in a
newspaper of general circulation
published in the place where the
corporation has its principal office,
once a week for 3 consecutive weeks
at the expense of the owner of the
certificate of stock
(3) Cancellation of the certificate in the
books of the corporation and issuance
of new certificates, after the
expiration of 1 year from the date of
the last publication and there is no
contest. The right to make such
contest shall be barred after the
expiration of the one-year period.
CORPORATION LAW MERCANTILE LAW
(4) Issuance of new certificates before 1
year period if the registered owner
files a bond and there is no pending
contest regarding the ownership of
said certificates.
NOTE
Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
the corporation which shall have issued
certificates of stock in lieu of those lost,
stolen or destroyed pursuant to the above
procedure.
F. STOCK AND TRANSFER BOOK
F. 1. CONTENTS
• a record of all stocks in the names of the
stockholders alphabetically arranged;
• the installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment;
• a statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and
• such other entries as the by-laws may
prescribe.
F. 2. WHO MAY MAKE VALID ENTRIES
(1) An SEC-licensed stock transfer agent; or
(2) The Corporate Secretary of the stock
corporation provided all rules and
regulations imposed on stock transfer
agents shall be applicable, except
payment of license fee.
G. DISPOSITION AND ENCUMBRANCE
OF SHARES
G. 1. ALLOWABLE RESTRICTIONS ON THE
SALE OF SHARES
General Rule
Shares of stock so issued are personal
property and may be transferred (Sec. 63).
(FREE TRANSFERABILITY OF SHARES)
Exception
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In CLOSE corporations, restrictions on the
right to transfer shares may be provided in
the Articles of Incorporation, by-laws and
certificates (Sec. 98).
G. 2. SALE OF PARTIALLY PAID SHARES
Under Sec. 63 of the Corporation Code, no
shares of stock against which the corporation
holds any unpaid claim shall be transferable
in the books of the corporation. Therefore, a
corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid, and may continue to hold
the original subscriber liable on the payment
of the subscription.
However, in China Banking Corp. v. CA (1997),
the court said that the above principle in
section 63 cannot be utilized by the
corporation to refuse to recognize ownership
over pledged shares purchased at public
auction. The term “unpaid claims” refers to
“any unpaid claims arising from unpaid
subscription, and not to any indebtedness
which a subscriber or stockholder may owe
the corporation arising from any other
transactions. Obligations arising from unpaid
monthly dues do not fall within the coverage
of Sec. 63.”
G. 3. SALE OF A PORTION OF SHARES NOT
FULLY PAID
The SEC has opined on several occasions that
a stockholder who has not paid the full
amount of his subscription cannot transfer
part of his subscription in view of the
indivisible nature of a subscription contract.
The reason behind the principle of
disallowing transfer of not fully paid
subscription to several transferee is that it
would be difficult to determine whether or
not the partial payments made should be
applied as full payment for the corresponding
number of shares which can only be covered
by such payment or as proportional payment
to each and all of the entire number of
subscribed shares, and it would be difficult to
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MERCANTILE LAW
determine the unpaid balance to be assumed
by each transferee. [Villanueva]
G. 4. SALE OF ALL OF SHARES NOT FULLY
PAID
On the other hand, the SEC has opined that
the entire subscription, although not yet fully
paid, may be transferred to a single
transferee, who as a result of the transfer
must assume the unpaid balance. It is
necessary, however, to secure the consent of
the corporation since the transfer of
subscription rights and obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent if the creditor.
[Villanueva]
G. 5. SALE OF FULLY PAID SHARES
Shares of stock so issued are personal
property and may be transferred by delivery
of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other
person legally authorized to make the
transfer. No transfer however shall be valid
except as between the parties until the
transfer is recorded in the books of the
corporation showing the names of the parties
to the transaction, the date of the transfer,
the number of the certificate or certificates
and the number of shares transferred (Sec.
63)
G. .6. REQUISITES OF A VALID TRANSFER
Same as requirements for valid transfer of
stocks
G. 7. INVOLUNTARY DEALINGS WITH
SHARES
The right of a stockholder to pledge,
mortgage or otherwise encumber his shares
is recognized under Sec. 55 of the
Corporation Code, which regulates the
manner of voting on pledged or mortgaged
shares.
If the restriction on the right to pledge or
mortgage shares of stock absolutely prohibits
the stockholders from pledging or
UP LAW BOC CORPORATION LAW
mortgaging their shares without the consent
of the BOD, it would be violative of the
statutory right of the stockholders to
encumber shares of stock as allowed in Sec.
55. However, when the restriction merely
allows the corporation or existing
stockholders to accept the offer within the
option period, and thereafter, if no one
accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any
3rd party, such provision is reasonable, valid
and binding.
By the strict application of Sec. 63 of the
Corporation Code to cover only the sale,
assignment or absolute disposition of shares
of stock, the SC has placed a bias against
voluntary sales, assignments or dispositions
of shares of stock vis-à-vis pledges,
mortgages, attachment or levy thereof. To be
valid and binding on third parties, the
voluntary sale, assignment or disposition of
shares requires the essential element of
registration in the stock and transfer book;
otherwise the sale, assignment or disposition
is considered void as to third parties, even
when they have actual notice. Whereas, when
it comes to pledge, mortgage, encumbrance,
attachment or levy of shares, registration
thereof in the stock and transfer book is not
essential either for validity or as a species of
notifying third parties. [Villanueva].
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MERCANTILE LAW
XV. Dissolution and
Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or
business purpose. However, for the purpose
only of winding up its affairs and liquidating
its assets, its corporate existence continues
for a period of 3 years from such dissolution
[Sec. 122].
Upon dissolution, the corporation ceases to
be a juridical person and consequently can no
longer continue transacting its business
[Campos].
Note: If no dissolution papers are filed with
the SEC by a corporation claiming dissolution
voluntarily, such corporation is still deemed
legally existing, notwithstanding the fact that
it has ceased to operate. [De Leon]
A. MODES OF DISSOLUTION
Based on jurisprudence, the methods of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be
dissolved except in the manner prescribed by
law. [De Leon]
A.1. VOLUNTARY
A.1.A. WHERE NO CREDITORS ARE
AFFECTED [SEC. 118]
• Notice of the meeting should be given to
the stockholders or members by personal
delivery or registered mail at least 30
days prior to the meeting.
• The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place where
the principal office of said corporation is
located. If no newspaper is published in
such place, then in a newspaper of
general circulation in the Philippines.
• The resolution to dissolve must be
approved by the majority of the
BOD/BOT and approved by the
stockholders representing at least 2/3 of
the Outstanding Capital Stock or 2/3 of
members.
UP LAW BOC CORPORATION LAW
o Non-voting shares are entitled to
vote in this matter [Sec. 6. Par
6(8)]
• A copy of the resolution shall be certified
by the majority of the BOD/BOT and
countersigned by the secretary.
• The signed and countersigned copy will
be filed with the SEC and the latter will
issue the certificate of dissolution.
Note:
Thus, except for the expiration of its term, no
dissolution can be effective without some act
of the State. [Daguhoy Enterprises v. Ponce
(1954)]
A.1.B. WHERE CREDITORS ARE AFFECTED
[SEC. 119]
• A petition shall be filed with the SEC
containing the following:
o signature by a majority of its BOD
or BOT or other officers having
management of its affairs;
o verified by its president, or
secretary or one of its director or
trustees;
o all claims and demands against
the corporation; and
o resolved upon by affirmative vote
of the stockholders representing
at least 2/3 of the Outstanding
Capital Stock or 2/3 of members;
• If the petition is sufficient in form and
substance, the SEC shall issue an order
fixing the date on or before which
objections to the petition may be filed.
Such date shall not be less than 30 days
nor more than 60 days after the entry of
the order.
• A copy of the order shall be published at
least once a week for 3 consecutive weeks
in a newspaper of general circulation, or
if there is no newspaper in the city or
municipality of the principal office,
posting for 3 consecutive weeks in 3
public places is sufficient.
• A hearing shall be conducted 5 days after
the lapse of the expiration of the time to
file objections.
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MERCANTILE LAW
• If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving
the corporation and directing the
disposition of assets. The judgment may
include appointment of a receiver.
o As long as 2/3 vote is obtained,
no member/ stockholder can
prevent such dissolution unless
the majority stockholders acted in
bad faith. The latter may be held
liable for damages [Campos].
o Even where there are creditors of
the corporation who may be
prejudiced by the dissolution, it is
still possible for the corporation
to terminate its existence prior to
the expiration of its term,
provided said creditors are given
the opportunity to present their
claims and objections so that
their interests may be protected
[Campos].
A.1.C. BY SHORTENING OF CORPORATE
TERM
A voluntary dissolution may be effected by
amending the Articles of Incorporation to
shorten the corporate term; and upon
approval of the expired shortened term, the
corporation shall be deemed dissolved
without any further proceedings.
A publication of notice of dissolution is
required and cannot be dispensed with by
alleging that it was not required in Sec. 120
and that no creditors will be prejudiced by its
dissolution. [SEC Opinion, August 30, 1988]
SEC Opinion No. 06-20, March 13, 2006:
• If the shortened term expires before the
SEC approval  the corporation will be
dissolved upon the SEC approval
• If the shortened term expires after the
SEC approval  the corporation will be
dissolved upon the expiration of the
shortened term
• If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
UP LAW BOC
after the 6-month period  the
corporation will be dissolved upon the
expiration of the shortened term.
• If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
before the 6-month period  the
corporation will be dissolved at the end of
the 6-month period. [Campos]
Notes: This is among the corporate acts
where appraisal right is available (see Sec. 81)
A.2. INVOLUNTARY
A.2.A. BY EXPIRATION OF CORPORATE
TERM
Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be
considered a de facto corporation.
A.2.B. FAILURE TO ORGANIZE AND
COMMENCE BUSINESS WITHIN 2 YEARS
FROM INCORPORATION
Failure to formally organize and commence
the transaction of its business or construction
of its works within 2 years - its corporate
powers shall cease and the corporation shall
be deemed dissolved [Sec. 22]
• Dissolution in this case is
automatic [Campos].
• Contrary view: Since there is a
defense available to the
corporation, that is, if its failure to
organize and commence its
business is due to causes beyond
the control of the corporation as
may be determined by the SEC,
therefore, the dissolution is not
automatic.
Transacting business implies a continuity of
acts or dealings in the accomplishment of the
purpose for which the corporation was
formed. [Mentholatum v. Mangaliman (1946)]
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will
CORPORATION LAW MERCANTILE LAW
administer the affairs of the corporation and
exercise its powers
• By-laws should be adopted within
one month of receipt of official notice
of the issuance of the certificate of
incorporation, otherwise the
certificate may be suspended or
revoked [PD 902-A, Sec. 6 (i)(5)]
Failure to operate for at least 5 consecutive
years after commencement of business -
ground for suspension or revocation of its
corporate franchise or certificate of
incorporation.
Note:
Dissolution in this case is not automatic.
[Campos]
The corporation may show that the failure to
commence its business or to continuously
operate is due to causes beyond its control
[Sec. 22]
A.2.C. LEGISLATIVE DISSOLUTION
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may
be effected through the amendment or repeal
of the Corporation Code. [implied from Sec.
145, De Leon]
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
(1) Under the Constitution, the amendment,
alteration, or repeal of the corporate
franchise of a public utility shall be made
only “when the common good so
requires”;
(2) Under Sec. 145 of the Code, it is provided
that: “No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers,
nor any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or of
any part thereof”;
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(3) While Congress may provide for the
dissolution of a corporation, it cannot
impair the obligation of existing contracts
between the corporation and third
persons, or take away the vested rights of
its creditors. [De Leon]
A.2.D. DISSOLUTION BY THE SEC ON
GROUNDS UNDER EXISTING LAWS
A corporation may be dissolved by the SEC,
upon a verified complaint and after proper
notice and hearing, on the following grounds
[Sec. 6, par. i, PD 902-A]:
(1) Fraud in procuring its certificate of
registration
(2) Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general
public
(3) Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts which
would amount to a grave violation of its
franchise
(4) Continuous inoperation for a period of at
least five years
(5) Failure to file by-laws within the required
period
(6) Failure to file required reports in
appropriate forms as determined by the
Commission within the prescribed period
(7) Other grounds
Other grounds:
(a) Violation by the corporation of any
provision of the Corporation Code [Sec.
144 BP 68]
(b) In case of a deadlock in a close
corporation, and the SEC deems it proper
to order the dissolution of the corporation
as the only practical solution to the
dispute (Sec. 104 BP 68)
B. METHODS OF LIQUIDATION
Liquidation is the process by which all the
assets of the corporation are converted into
liquid assets (cash) in order to facilitate the
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payment of obligations to creditors, and the
remaining balance if any is to be distributed
to the stockholders. It is a proceeding in rem.
B.1. BY THE CORPORATION ITSELF
Under Sec. 122 of the Corporation Code, a
corporation whose corporate existence is
terminated in any manner continues to be a
body corporate for 3 years after its dissolution
for purposes of prosecuting and defending
suits by and against it and to enable it to
settle and close its affairs, culminating in the
disposition and distribution of its remaining
assets. It may, during the 3-year term,
appoint a trustee or a receiver who may act
beyond that period.
The termination of the life of a corporate
entity does not by itself cause the extinction
or diminution of the rights and liabilities of
such entity. If the 3-year extended life has
expired without a trustee or receiver having
been expressly designated by the corporation,
within that period, the BOD (or trustees) itself,
may be permitted to so continue as "trustees"
by legal implication to complete the
corporate liquidation. [Pepsi-Cola Products
Philippines, Inc. v. CA (2004)]
A corporation under liquidation may not
amend its articles of incorporation to extend
its lifespan. When a corporation is liquidating
pursuant to the statutory period of 3 years to
liquidate, it is only allowed to continue for the
purpose of final closure of its business and no
other purposes. In fact, within that period, the
corporation is enjoined from “continuing the
business for which it was established.”
[Alhambra Cigar and Cigarette Mfg. v. SEC
(1968)]
B.2. CONVEYANCE TO A TRUSTEE WITHIN
A 3-YEAR PERIOD
In this method, the 3-year limitation does not
apply, provided that the designation of the
trustees is made within the period.
General rule
There is no time limit within which the trustee
must finish the liquidation, and he may sue
and be sued as such even beyond the 3-year
period.
Exception
UP LAW BOC CORPORATION LAW
The trusteeship is limited in its duration by
the deed of trust.
Trustees to whom the corporate assets have
been conveyed pursuant to liquidation may
sue and be sued as such in all matters
connected with the liquidation. [National
Abaca v. Pore (1961)]
The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period of
liquidation. No reason can be conceived why
a suit already commenced by the corporation
itself during its existence, not by a mere
trustee who, by fiction, merely continues the
legal personality of the dissolved corporation,
should not be accorded similar treatment —
to proceed to final judgment and execution
thereof. [Reburiano v. CA (1999)]
Unless the trusteeship is limited in its
duration by the deed of trust, there is no time
limit within which the trustee must finish
liquidation. [Board of Liquidators v Kalaw
(1967)]
B.3. BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
In SEC’s judgment dissolving the corporation
and directing disposition of its assets as
justice requires, it may appoint a receiver to
collect such assets and pay the debts of the
corporation [Sec. 119].
The mere appointment of a receiver, without
anything more, does not result in the
dissolution of the corporation nor bar it from
the exercise of its corporate rights. [Leyte
Asphalt and Mineral Oil Co. Ltd., v. Block
Johnston and Breenbrawn (1928)]
B.4. LIQUIDATION AFTER THREE YEARS
Q: What is the difference between
Liquidation and Rehabilitation?
A: Liquidation is the winding up of a
corporation so that assets are distributed to
those entitled to receive them. It is the
process of reducing assets to cash,
discharging liabilities and dividing surplus or
loss. On the other hand, rehabilitation
contemplates a continuance of corporate life
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and activities in an effort to restore and
reinstate the corporation to its former
position of successful operation and solvency.
Both cannot be undertaken at the same time.
[Phil. Veterans Bank v. Employees Union
(2001)]
If full liquidation can only be effected after
the 3-year period and there is no trustee, the
directors may be permitted to complete the
liquidation by continuing as trustees by legal
implication. [Reburiano v CA (1999)]
A corporation’s BOD is not rendered functus
officio by its dissolution. Since Sec. 122 allows
a corporation to continue its existence for a
limited purpose, necessarily there must be a
board that will continue acting for and on
behalf of the dissolved corporation for that
purpose. [Aguirre vs. FQB+, Inc. (2013)]
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if
such judgment is rendered beyond the 3-year
period allowed by Sec. 122 of the Corporation
Code. However, an already defunct
corporation is barred from initiating a suit
after the lapse of the said 3-year period. If a
petition is filed after the corporate existence,
the effect is that petitioner lacks the capacity
to sue as a corporation. To allow such
petition to prosper, on the ground that it is for
the sole purpose of liquidating the
corporation’s assets, would be to circumvent
the provisions of Sec. 122 of the Corporation
Code. [Alabang Development Corporation v.
Alabang Hills Village Association and Rafael
Tinio (2014)]
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XVI. Other Corporations
A. CLOSE CORPORATIONS
General concept:
Most characteristic feature is the identity of
stock ownership and active management, i.e.,
all or most of the stockholders are active in
the corporate business either as directors,
officers or other key men in management
[Campos]
Statutory definition: [Sec. 96]
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a
specified number of persons, not
exceeding 20;
(2) All the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
General Rule: Any corporation may
incorporate as a close corporation
Exceptions: mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with
public interest
Notes:
Under Sec. 96, the 3 provisions MUST appear
in the Articles of Incorporation, otherwise, a
corporation is not considered as a close
corporation. [San Juan Structural and Steel
Fabricators v CA (1998)]
However, do note that in the earlier case of
Dulay v CA (1993), the court did not look at
Sec. 96 in concluding that the corporation
involved was a close corporation.
Also note that, even after satisfying the 3
mandatory provisions, a corporation shall not
be deemed a close corporation when at least
2/3 of its voting stock or voting rights is
owned or controlled by another corporation
CORPORATION LAW MERCANTILE LAW
which is not a close corporation within the
meaning of this Code.
A narrow distribution of ownership does not,
by itself, make a close corporation.
When a corporation’s Articles of
Incorporation does not contain the provisions
enumerated under Sec. 96 of the Code, such
corporation is not a “close corporation”. It
does not become one either, just because
only a few individuals owned 99.866% of its
subscribed capital stock. [San Juan Structural
and Steel Fabricators v. CA (1998)]
General Rule:
Free transferability of shares - Shares of stock
so issued are personal property and may be
transferred
Exception:
In close corporations:
Restriction on transfer provided in Articles of
Incorporation
Limit: Restriction on the transfer must NOT
be more onerous than granting the existing
shareholders or corporation the option to
purchase the shares (Right of First Refusal).
Rationale: Considering the special
circumstances attending a close corporation
(e.g. formed by persons who know each other
well, thus they would want to choose the
persons who will be allowed in their group), it
is justifiable and even imperative for its
stockholders to protect themselves from
future conflicts by placing restrictions on the
right of each one of them to transfer his
shares to an outsider.
The stocks cannot be listed in the stock
exchange nor be publicly offered.
A.1. CHARACTERISTICS OF A CLOSE
CORPORATION
Direct management by stockholders (Sec. 97):
The stockholders themselves can directly
manage the corporation and perform the
functions of directors without need of
election:
(1) When they manage, stockholders are
liable as directors;
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(2) There is no need to call a meeting to elect
directors;
(3) The stockholders active in the
management of the close corporation are
personally liable for corporate torts
unless the corporation has obtained
reasonably adequate liability insurance
[Sec. 100(5)]
Identity and number of stockholders (Sec. 96):
(1) Stockholders of record not more than 20
(2) Stocks not publicly listed
(3) Restricted transfer of ownership
A.2. VALIDITY OF RESTRICTIONS ON
TRANSFER OF SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof
in good faith.
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. After expiration of said period and
upon failure of the existing stockholders or
the corporation to purchase said shares, the
transferring stockholder may sell his shares
to any third person.
A.3. ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING CONDITIONS
If stock of a close corporation is issued or
transferred to any person who is not entitled
under any provision of the articles of
incorporation to be a holder of record of its
stock, and if the certificate for such stock
conspicuously shows the qualifications of the
persons entitled to be holders of record
thereof, such person is conclusively presumed
to have notice of the fact of his ineligibility to
be a stockholder.
If the articles of incorporation of a close
corporation states the number of persons, not
exceeding 20, who are entitled to be holders
CORPORATION LAW MERCANTILE LAW
of record of its stock, and if the certificate for
such stock conspicuously states such number,
and if the issuance or transfer of stock to any
person would cause the stock to be held by
more than such number of persons, the
person to whom such stock is issued or
transferred is conclusively presumed to have
notice of this fact.
If a stock certificate of any close corporation
conspicuously shows a restriction on transfer
of stock of the corporation, the transferee of
the stock is conclusively presumed to have
notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition
violates the restriction.
Whenever any person to whom stock of a
close corporation has been issued or
transferred has, or is conclusively presumed
under this section to have, notice either (a)
that he is a person not eligible to be a holder
of stock of the corporation, or (b) that transfer
of stock to him would cause the stock of the
corporation to be held by more than the
number of persons permitted by its articles of
incorporation to hold stock of the corporation,
or (c) that the transfer of stock is in violation
of a restriction on transfer of stock, the
corporation may, at its option, refuse to
register the transfer of stock in the name of
the transferee.
The provisions of subsection (4) shall not be
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has been
consented to by all the stockholders of the
close corporation, or if the close corporation
has amended its articles of incorporation in
accordance with this Title.
The term "transfer", as used in this section, is
not limited to a transfer for value.
The provisions of this section shall not impair
any right which the transferee may have to
rescind the transfer or to recover under any
applicable warranty, express or implied [Sec.
99]
Summary:
• CONCLUSIVE PRESUMPTION OF
NOTICE: Restriction conspicuously
shown in stock certificate
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o that he is a person not eligible to Manuel R. Dulay Enterprises v. CA (1993): In a

be a holder of stock of the close corporation, a board resolution
corporation authorizing the sale or mortgage of the
o that transfer of stock to him would subject property is not necessary to bind the
cause the stock of the corporation corporation for the action of its president. At
to be held by more than the any rate, corporate action taken at a board
number of persons permitted by meeting without proper call or notice in a
its articles of incorporation to hold
stock of the corporation close corporation is deemed ratified by the
absent director unless the latter promptly
o that the transfer of stock is in files his written objection with the secretary of
violation of a restriction on
the corporation after having knowledge of the
transfer of stock
meeting.
• EFFECTS OF CONCLUSIVE When Improperly Held –
PRESUMPTION: When a director’s meeting is held without
o General Rule: Corporation may, at its proper call or notice, an action taken therein
option, refuse to register the transfer within the corporate powers is deemed
of stock in the name of the transferee ratified by a director who failed to attend.
o Exceptions: Corporation may not UNLESS he promptly files his written
refuse if objection with the secretary of the
• Transfer is consented to by all corporation after having knowledge thereof
the stockholders [Sec. 101]
• Articles of Incorporation has
been amended to remove the A.5. PRE-EMPTIVE RIGHT
restrictions The pre-emptive right of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury
A.4. WHEN BOARD MEETING IS
shares, whether for money, property or
UNNECESSARY OR IMPROPERLY HELD
personal services, or in payment of corporate
When Unnecessary –
debts, UNLESS the articles of incorporation
Any action by the directors of a close
provide otherwise [Sec. 102].
corporation without a meeting shall
nevertheless be deemed valid if:
A.6. AMENDMENT OF ARTICLES OF
(1) Before or after such action is taken,
written consent thereto is signed by all INCORPORATION
the directors; or Amendment to the Articles of Incorporation
which seeks to:
(2) All the stockholders have actual or
implied knowledge of the action and (1) delete or remove any provision
make no prompt objection thereto in required to be contained in the
writing; or Articles of Incorporation of Close
Corporations (under the Title on
(3) The directors are accustomed to take Close Corporations); or
informal action with the express or
implied acquiescence of all the (2) to reduce a quorum or voting
stockholders; or requirement stated in said Articles of
Incorporation
(4) All the directors have express or implied
knowledge of the action in question and Requires the affirmative vote of at least 2/3 of
none of them makes prompt objection the outstanding capital stock, whether with or
thereto in writing [Sec. 101] without voting rights, or of such greater
proportion of shares as may be specifically

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provided in the Articles of Incorporation at a
meeting duly called.
A.7. DEADLOCKS
Requisites:
(1) The directors or stockholders are so
divided respecting the management of
the corporation's business and affairs
(2) The votes required for any corporate
action cannot be obtained that the
business and affairs of the corporation
can no longer be conducted to the
advantage of the stockholders generally
Powers of the SEC in case of Deadlock in Close
Corporations
(1) Cancel or alter any provision in the
articles of incorporation or by-laws
(2) Cancel, alter or enjoin any resolution of
the corporation
(3) Direct or prohibit any act of the
corporation
(4) Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation
regardless of the availability of
unrestricted retained earnings.
(5) Appoint a provisional director
(6) Dissolve the corporation
(7) Granting such other relief as the
circumstances may warrant.

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CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Management / Board Authority
There can be classification of directors into one or
more classes, each of whom may be voted for and There is no such classification as in the case of
elected solely by a particular class of stock; and close corporations.

The articles of incorporation of a close corporation

may provide that the business of the corporation
shall be managed by the stockholders of the
corporation rather than by a BOD. So long as this Corporate Powers devolved upon BOD whose
provision continues in effect: powers are executed by officers. Cannot provide
that it be managed by stockholders
No meeting of stockholders need be called to elect
directors. BOD must be elected in a stockholders meeting

Unless the context clearly requires otherwise, the

stockholders of the corporation shall be deemed to Stockholders of a corporation are separate and
be directors for the purpose of applying the distinct from directors
provisions of this Code.

The stockholders of the corporation shall be subject

to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified
officers or employees shall be elected or appointed
by the stockholders, instead of by the BOD.
2. Meetings
Unless the by-laws provide otherwise, any action by
the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the directors; or
(2) All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
(3) The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in
writing.
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
Officers must be elected by the BOD
The directors or trustees shall not act individually
nor separately but as a body in a lawful meeting.
They will act only after discussion and deliberation
of matters before them. Contracts entered into
without a formal board resolution does not bind
the corporation except when ratified or when
majority of the board has knowledge of the
contract and the contract benefited the
corporation.
Absence of a prompt objection in writing does not
ratify acts done by directors without a valid
meeting. There must be express or implied
ratification.
Express ratification may consist of a Board
Resolution to that effect

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powers is deemed ratified by a director who failed
to attend, unless he promptly files his written
objection with the secretary of the corporation after
having knowledge thereof.
3. Voting / Quorum
The Articles of Incorporation may provide for a
classification of directors into one or more classes,
each of which may be voted for and elected solely
by a particular class of stock.
The Articles of Incorporation may provide for a
greater quorum or voting requirements in meetings
of stockholders or directors than those provided in
this Code.
4. Pre-emptive Right
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in payment
of corporate debts, unless the articles of
incorporation provide otherwise.
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Implied ratification may consist of acceptance of
benefits from said unauthorized act while having
knowledge of said act
Failure to give notice would render a meeting
voidable.
Attendance to a meeting despite want of notice
will be deemed implied waiver
All proceedings had and any business transacted
at any meeting of the stockholders or members, if
within the powers or authority of the corporation,
shall be valid even if the meeting be improperly
held or called, provided all the stockholders or
members of the corporation are present or duly
represented at the meeting. (Sec. 51)
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS
EACH SHARE SHALL BE EQUAL IN ALL
RESPECTS TO EVERY OTHER SHARE, except as
otherwise provided in the Articles of Incorporation
For BOD, the by-laws or Articles of Incorporation
can provide for a greater majority in quorum
For stockholders, the Articles of Incorporation can
provide for a different percentage in quorum
Limitations on the exercise of pre-emptive right:
Such pre-emptive right shall not extend to shares
to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public;
Not extend to shares to be issued in good faith
with the approval of the stockholders representing
2/3 of the outstanding capital stock, in exchange
for property needed for corporate purposes or in
payment of a previously contracted debt
Shall not take effect if denied in the Articles of
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Incorporation or an amendment thereto.

5. Transferability
Restrictions on the right to transfer shares must
appear in the Articles of Incorporation and in the
by-laws as well as in the certificate of stock
otherwise the same shall not be binding on any
purchaser thereof in good faith
6. Appraisal Right
Any stockholder of a close corporation may, for any
reason, compel the said corporation to purchase his
shares at their fair value, which shall not be less
than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock
Any stockholder of a close corporation may, by
written petition to the SEC, compel the dissolution
of such corporation whenever:
(a) Any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or
(b) Corporate assets are being misapplied or
wasted.
Restrictions on the right to transfer not allowed
Stockholders may require the corporation to buy-
back their shares at fair value when the
Corporation has Unrestricted Retained Earnings:
(a) In case of any amendment to the articles of
incorporation which has the effect of:
(i) changing or restricting the rights of
any stockholder or class of shares, or
(ii) authorizing preferences in any respect
superior to those of outstanding shares
of any class, or
(iii) extending or shortening the term of
corporate existence
(b) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
(c) In case of merger or consolidation
(d) Investment of corporate funds in another
corporation or business
(e) Diversion of funds of corporation from primary
purpose to secondary purpose (Sec. 41)
The corporation may buy-back shares of
stockholders subject to the following limitations
(Treasury shares):
There must be unrestricted retained earnings
Must be for a legitimate purpose

7. Election of Officers
By directors but AOI can direct that voting be done By directors where all directors need to be in
by SHs attendance

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B. NON-STOCK CORPORATIONS
Stock Non-stock
Definition
Corporations which have capital stock divided All other private corporations (Sec. 3)
into shares and
are authorized to distribute to the holders of One where no part of its income is distributable as
shares dividends or allotments of the surplus dividends to its members, trustees or officers. (Sec. 87)
profits on the basis of the shares (Sec. 3)
Purpose
Primarily to make profits for its shareholders May be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes like
trade, industry, agricultural and like chambers, or any
combination thereof. (Sec. 88)
Distribution of profits
Profit is distributed to shareholders Whatever incidental profit made is not distributed
among its members but is used for furtherance of its
purpose. AOI or by-laws may provide for the
distribution of its assets among its members upon its
dissolution. Before then, no profit may be made by
members. (Sec. 87)
Scope of Voting Rights
Each stockholder votes according to the Each member, regardless of class, is entitled to one (1)
proportion of his shares in the corporation. No vote UNLESS such right to vote has been limited,
shares may be deprived of voting rights except broadened, or denied in the AOI or by-laws. (Sec. 89)
those classified and issued as "preferred" or
"redeemable" shares, and as otherwise
provided by the Code. (Sec. 6)
Voting by proxy
Cannot be denied. (Sec. 58) May be denied by the AOI or the by-laws. (Sec. 89)
Who Exercises Corporate Power
Board of Directors or Trustees, consisting of 5- Board of Trustees, which may consist of more than 15
15 directors / trustees. (Sec. 23, 92) trustees unless otherwise provided by the AOI or by-
laws. (Sec. 23, 92)
Term of Directors of Trustees
Directors / trustees shall hold office for 1 year Board classified in such a way that the term of office of
and until their successors are elected and 1/3 of their number shall expire every year. Subsequent
qualified (Sec. 23). elections of trustees comprising 1/3 of the board shall
be held annually, and trustees so elected shall have a
term of 3 years. (Sec. 92)
Election of Officers
Officers are elected by the Board of Directors Officers may directly elected by the members UNLESS
(Sec. 25), except in close corporations where the AOI or by-laws provide otherwise. (Sec. 92)
the stockholders themselves may elect the
officers. (Sec. 97)

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Transferability of interest or membership

Transferable. Generally non-transferable since membership and all
rights arising therefrom are personal. However, the AOI
or by-laws can provide otherwise. (Sec. 90)

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B.1. DEFINITION
One where no part of its income is distributable
as dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution. [Sec.87]
B.2. PURPOSES
• Charitable
• Religious
• Educational
• Professional
• Cultural
• Fraternal
• Literary
• Scientific
• Social
• Civic services
• Similar purposes, such trade, industry or
agriculture and like chambers, or
combinations thereof [Sec. 88]
B.3. TREATMENT OF PROFITS
Any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which
the corporation was organized. [Sec. 87,2nd
sentence]
B.4. DISTRIBUTION OF ASSETS UPON
DISSOLUTION
Order of distribution of assets upon dissolution of
non-stock corporation
(1) All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be
made therefore
(2) Assets held subject to return on dissolution
shall be delivered back to the givers.
(3) Assets held for charitable, religious
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to
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one or more organizations engaged in
similar activities as dissolved corporation
(4) All other assets shall be distributed to
members, as provided in the Articles of
Incorporation or by-laws [Sec. 94]
Procedure for the Plan for Distribution
BOT, by majority vote in a resolution, shall adopt
a plan for distribution of the assets of the
corporation
Written notice for a meeting must be sent to all
members entitled to vote, stating the time and
place of such meeting and the purpose thereof
At such meeting, the plan must be approved by
2/3 votes of the members having the right to
vote, who are present or represented by proxy
[Sec. 95; Villanueva]
C. RELIGIOUS CORPORATIONS
C.1. CORPORATION SOLE (SEC. 110)
One formed for the purpose of administering
and managing, as trustee, the affairs, property
and temporalities of any religious denomination,
sect or church by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of
such religious denomination, sect or church.
[Sec. 110]
A special form of corporation, usually associated
with clergy and consists of one person only and
his successors, who are incorporated by law to
give some legal capacities and advantages.
A registered corporation sole can acquire land if
its members constitute at least 60% Filipinos
[SEC Opinion, 8 August 1994].
C.2. NATIONALITY
A corporation sole does not have any nationality
but for purposes of applying our nationalization
laws, nationality is determined by the nationality
of the members. [Roman Catholic Apostolic
Church v. Land Registration Commission (1957)]
C.3. RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious
society, group, diocese, synod, or district of any
religious denomination, sect, or church after
UP LAW BOC CORPORATION LAW
getting the approval of 2/3 of its members. [Sec.
116]
The Corporation Code provides no specific
mechanism for amending the articles of
incorporation of a corporation sole. But Sec. 109
allows the application to religious corporations
of the general provisions governing non-stock
corporations.
• For non-stock corporations, the power to
amend its Articles of Incorporation lies in
its members. The code requires two-
thirds of their votes for the approval of
such an amendment. So how will this
requirement apply to a corporation sole
that has technically but one member (the
head of the religious organization) who
holds in his hands its broad corporate
powers over the properties, rights, and
interests of his religious organization?
• Although a non-stock corporation has a
personality that is distinct from those of
its members who established it, its
Articles of Incorporation cannot be
amended solely through the action of its
BOT. The amendment needs the
concurrence of at least two-thirds of its
membership. If such approval mechanism
is made to operate in a corporation sole,
its one member in whom all the powers of
the corporation technically belongs, needs
to get the concurrence of two-thirds of its
membership. The one member is but a
trustee of its membership.
• There is no point to dissolving the
corporation sole of one member to
enable the corporation aggregate to
emerge from it. The one member, with
the concurrence of two-thirds of the
membership of the organization for
whom he acts as trustee, can self-will
the amendment. He can, with
membership concurrence, increase the
technical number of the members of the
corporation from “sole” or one to the
greater number authorized by its
amended articles. [Iglesia Evangelica
Metodista En Las Filipinas (Corporation
Sole) Inc., et al v. Bishop Nathanael
Lazaro, et al (2010)]
D. FOREIGN CORPORATIONS
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Foreign Corporation are those formed,
organized, or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business
in its own country or state [Sec. 123]
D.1. BASES OF AUTHORITY OVER FOREIGN
CORPORATIONS
Consent
As a rule, a foreign corporation can have no
legal existence or status beyond the bounds of
the State or sovereignty by which it is created or
incorporated and organized. It exists only in
contemplation of law and by force of the law and
where that law ceases to operate, the
corporation can have no existence. This principle,
however, does not prevent a corporation from
acting in another State or country with the
latter’s express or implied consent. This is the
“consent doctrine” which is provided in Sections
125 and 126. But every power which a
corporation exercises as such in another State
depends for its validity upon the laws of the
sovereignty in which it is exercised. A
corporation can exercise none of the functions
and privileges conferred by its charter in another
State or country except by the comity and
consent of such State or country. [De Leon]
Doctrine of “Doing Business” (relate to definition
under the Foreign Investments Act, R.A. No.
7042)
JURISPRUDENTIAL TESTS OF “DOING
BUSINESS IN THE PHILIPPINES”
(Asked in ‘98 and ‘02)
Twin Characterization Test
• Under the Continuity Test, doing
business implies a continuity of
commercial dealings and arrangements,
or performance of acts normally
incidental to the purpose and object of
the organization.
• Under the Substance Test, a foreign
corporation is doing business in the
UP LAW BOC CORPORATION LAW
country if it is continuing the body or
substance of the enterprise of business
for which it was organized [Mentholatum
v. Mangaliman (1941)]
CONTRACT TEST
A foreign corporation is doing business in the
Philippines if the contracts entered into by the
foreign corporation or by an agent acting under
the control and direction of the foreign
corporation are consummated in the Philippines.
[Pacific Vegetable Oil v. Singson (1955)]
STATUTORY DEFINITION OF “DOING
BUSINESS”: FOREIGN INVESTMENT ACT OF
1991 [SEC. 3(D), RA 7042]
(Asked in ‘98 and ‘02)
DOING BUSINESS
• Soliciting orders, service contracts, or
opening offices;
• Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
• Participating in the management,
supervision, or control of any domestic
business, firm, entity, or corporation in the
Philippines;
• Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the
performance of acts or works or the exercise
of some functions, normally incident to and
in progressive prosecution of the purpose
and object of its organization.
It relates to “business activities… not only casual,
but so systematic and regular as to manifest
continuity and permanence of activity to
constitute doing business here…” To constitute
doing business in the Philippines, the activity
should involve profit-making. [Cargill v. Intra-
Strata Assurance Corporation (2010)]
It is the performance by a foreign corporation of
the acts for which it was created, regardless of
volume of business, that determines whether a
foreign corporation needs a license or not.
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[European Resources and Technologies Inc. v.
Ingenieuburo Birkhanh + Nolte (2004)]
NOT DOING BUSINESS
A. Statutory: Sec. 3(d) FIA and Sec. 1 FIA IRR
• Mere investment as shareholder and
exercise of rights as investor;
• Having a nominee director or officer to
represent its interest in the corporation;
• Appointing a representative or distributor
which transacts business in its own name
and for its own account;
• The publication of a general advertisement
through any print or broadcast media
• Maintaining a stock of goods in the PH solely
for the purpose of having the same
processed by another entity in the PH
• Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export
• Collecting information in the Philippines
• 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
B. Jurisprudential
• Agent’s activities were confined to
maintaining a stock of goods in the PH and
consignment of equipmen. [Agilent v
Integrated Silicon (2004)]
• The imposition of minimum standards
concerning sales, marketing, finance and
operations is nothing more than an exercise
of sound business practice to increase sales
and maximize profits. For as long as these
requirements do not impinge on a
distributor’s independence, then there is
nothing wrong with placing reasonable
expectations. [Steelcase v Design Int’l (2010)]
• Multiple transactions are still considered a
single transaction where there are
constantly failed attempts in complying with
the contract by one of the contracting
parties. [Antam Consolidated v CA (1986)]
UP LAW BOC CORPORATION LAW
• A foreign firm which does business through
middlemen acting on their own names shall
not be deemed doing business in the
Philippines. [Le Chemise Lacoste v Fernandez
(1984)]
D.2. NECESSITY OF A LICENSE TO DO
BUSINESS
Requisites for Issuance of a License
The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a
verified application (See Sec. 125) accompanied
by the following:
(1) Name and address of its designated resident
agent who will receive summons and notices
for the corporation; a special power of
attorney should also be submitted for such
purpose
(2) An agreement that if it ceases to transact
business or if there is no more resident agent,
summons shall then be served through the
SEC
(3) Oath of Reciprocity stating that the foreign
corporation’s country allows Filipino citizens
and corporations to do business in said
country
Within 60 days from issuance of license, the
corporation should deposit at least P100,000
(cash, property, bond) for the benefit of creditors
subject to further deposit every six months [See
Sec. 126]
Rationale for the license requirement: Acquisition
of jurisdiction
The purpose of the law in requiring that foreign
corporations doing business in the country be
licensed to do so, is to subject the foreign
corporations doing business in the Philippines to
the jurisdiction of the courts, otherwise, a foreign
corporation illegally doing business here
because of its refusal or neglect to obtain the
required license and authority to do business
may successfully though unfairly plead such
neglect or illegal act so as to avoid service and
thereby impugn the jurisdiction of the local
courts.
The same danger does not exist among foreign
corporations that are indubitably not doing
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business in the Philippines. Indeed, if a foreign
corporation does not do business here, there
would be no reason for it to be subject to the
State’s regulation [Avon Insurance PLC v. CA
(1997)].
Resident Agent
A resident agent may be an individual, who must
be of good moral character and of sound
financial standing, residing in the Philippines, or
a domestic corporation lawfully transacting
business in the Philippines, designated in a
written power of attorney by a foreign
corporation authorized to do business in the
Philippines, on whom any summons and other
legal processes may be served in all actions or
other legal proceedings against the foreign
corporation [Sec. 127-128]
D.3. PERSONALITY TO SUE
A foreign corporation transacting business in the
Philippines is required to secure a license to
have the personality to sue before, or intervene
in, any court or administrative proceeding.
[Campos; Sec. 133]
D.4. SUABILITY OF FOREIGN CORPORATIONS
No foreign corporation transacting business in
the Philippines without a license, or its
successors or assigns, shall be permitted to
maintain or intervene in any action, suit or
proceeding in any court or administrative agency
of the Philippines; but such corporation may be
sued or proceeded against before Philippine
courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
[Sec 133]
Indeed if a foreign corporation, not engaged in
business in the Philippines, is not barred from
seeking redress from courts in the Philippines, a
fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts
for acts done against a person or persons in the
Philippines. [Facilities Management Corporation
v. De La Osa (1979)]
UP LAW BOC CORPORATION LAW
D.5. INSTANCES WHEN UNLICENSED
FOREIGN CORPORATIONS MAY BE ALLOWED
TO SUE
• When the corporation is considered “not
doing business” in the PH
• When the Philippine citizen or entity is
estopped from challenging the foreign
corporation’s personality to sue [Merrill
Lynch Futures v. Court of Appeals (1992)]
Summary of Rules on Capacity to Sue [Agilent
Technologies Singapore v. Integrated Silicon
Technologies (2004)]:
Status Consequence
Doing Business in the Can sue and be sued
PH, WITH a license
Doing Business in the GR: Cannot sue, but
PH, WITHOUT a may be sued in the PH
license Exception: Capacity to
sue may not be
questioned if the
other party is
estopped
NOT doing business in May sue;
the PH, on isolated may be sued
transactions
D.6. GROUNDS FOR REVOCATION OF
LICENSE
D.6.A. Under the Corporation Code
• Failure to file its annual report or pay any
fees as required by this Code;
• Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
• Failure, after change of its resident agent or
of his address, to submit to the Securities
and Exchange Commission a statement of
such change as required by this Title;
• Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
• A misrepresentation of any material matter
in any application, report, affidavit or other
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document submitted by such corporation
pursuant to this Title;
• Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivisions;
• Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
• Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines; or
• Any other ground as would render it unfit to
transact business in the Philippines (Sec.
134)
D.6.B. Under Special Laws
INSURANCE CODE
The Insurance Commissioner is authorized to
suspend or revoke all certificates of authority
granted to an insurance company, whether
domestic or foreign, when:
(1) it is in unsound condition; or
(2) it has failed to comply with the provisions of
law or regulations obligatory upon it; or
(3) its condition or method of business is such
as to render its proceedings hazardous to
the public or to its policyholders; or
(4) its paid-up capital stock, in the case of a
foreign company, is impaired or deficient, or
that the margin of solvency required of such
company is deficient [Sec. 247, Insurance
Code]
GENERAL BANKING ACT
The Monetary Board may revoke the license to
transact business in the Philippines of any
foreign bank, if it finds that:
(1) the foreign bank is insolvent; or
(2) in imminent danger thereof; or
(3) its continuance in business will involve
probable loss to those transacting business
with it. [Sec. 78, GBA]
UP LAW BOC CORPORATION LAW
XVII. Mergers and
Consolidations
A. DEFINITION AND CONCEPT
Merger – a corporation absorbs the other and
remains in existence while the others are
dissolved. [Sec.76]
One of the constituent corporations remains as
an existing juridical person, whereas the other
corporation shall cease to exist. Merger is the
disappearance of one of the corporations
[generally by amending the articles of
incorporation and shortening its term of
existence (Sec.40)] with the other corporation
acquiring all the assets, rights of action, and
assuming all the liabilities of the disappearing
corporation.
Consolidation – a new corporation is created,
and consolidating corporations are extinguished
[Sec.76]
If there is consolidation, there will be
disappearance of all constituent corporations
with the emergence of a new corporate entity
which shall obtain all the assets of the
disappearing corporations, and likewise shall
assume all their liabilities.
B. CONSTITUENT VS. CONSOLIDATED
CORPORATION
Constituent Corporations – the parties to a
merger or consolidation
Consolidated Corporation - The new single
corporation created through consolidation.
Surviving Corporation – one of the constituent
corporations which remain in existence after the
merger
C. PLAN OF MERGER OR
CONSOLIDATION [SEC. 76]
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which shall
set forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
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(3) Statement of changes, if any, in the present
articles of the surviving corporation to be
formed in the case of merger; and with
respect to the consolidated corporation in
case of consolidation
D. ARTICLES OF MERGER OR
CONSOLIDATION
Each of the constituent corporation shall
execute Articles of Merger or Consolidation
signed by the president/vice-president, and
certified by the secretary/assistant secretary
setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
(3) As to each corporation, number of shares or
members voting for and against such plan
respectively.
The Articles of Merger or Consolidation:
(1) take the place of the Articles of
Incorporation of the consolidated
corporation; or
(2) amend the Articles of Incorporation of the
surviving corporation.
E. PROCEDURE
E.1. APPROVAL OF PLAN OF MERGER OR
CONSOLIDATION BY BOD AND
STOCKHOLDERS OF CONSTITUENT
CORPORATIONS
Approval by majority vote of each of the board of
directors or trustees of the constituent
corporations of the plan of merger or
consolidation.
Approval by the stockholders or members of
each of such corporations. The affirmative vote
of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the
case of non-stock corporations shall be
necessary for the approval of such plan.
UP LAW BOC CORPORATION LAW
Holders of non-voting shares are entitled to vote
on the plan. (Sec. 6, par. 6(6))
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least 2 weeks prior to the date
of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary
of the plan of merger or consolidation.
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance
with the Code. Provided, that if after the
approval by the stockholders of such plan, the
board of directors decides to abandon the plan,
the appraisal right shall be extinguished.
Amendment to the plan of merger or
consolidation may be made by approval of the
majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative vote
of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of two-
thirds (2/3) of the members of each of the
constituent corporations. Such plan, together
with any amendment, shall be considered as the
agreement of merger or consolidation.
E.2. EXECUTION OF ARTICLES OF MERGER
OR CONSOLIDATION
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
E.3. SUBMISSION TO SEC OF ARTICLES
Submission of Four (4) copies of the Articles of
Merger or Articles of Consolidation to the SEC
for approval.
• Mergers and consolidations of
corporations governed by special laws
requires a recommendation from the
appropriate government agency (Sec. 79
(1))
E.4. ACTION BY SEC
Conduct hearing or issue certificate If necessary,
the SEC shall set a hearing, notifying all
corporations concerned at least 2 weeks before.
Issuance of certificate of merger or consolidation.
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F. EFFECTIVITY
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation
shall become effective [Sec. 79].
Merger or consolidation does not become
effective by mere agreement of the constituent
corporations. The approval of the SEC is
required. [PNB v. Andrada Electric and Engr. Co.,
Inc. (2002)]
Notwithstanding Sec. 79, parties may stipulate a
specific effective date of merger (or
consolidation) where no 3rd party will be
prejudiced [SEC Opinion No. 09-13, July 1, 2009]
G. LIMITATIONS
Consent of appropriate government agency:
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained [Sec. 79]
H. EFFECTS (SEC. 80)
AS TO THE CONSTITUENT CORPORATIONS:
Corporate existence
The constituent corporations shall become a
single corporation.
The separate existence of the constituents shall
cease, except that of the surviving or the
consolidated corporation.
The absorbed or constituent corporations are
ipso facto dissolved by operation of law [SEC
Opinion, July 16, 1981]
Assets and liabilities
There is no liquidation of the assets of the
dissolved corporations [Campos].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, powers, and franchises of each
constituent corporation and the properties shall
be deemed transferred to and vested in the
UP LAW BOC
surviving or consolidated corporation without
further act or deed
The surviving or the consolidated corporation
shall be subject to all the duties and liabilities of
the dissolving corporation(s).
AS TO CREDITORS
CORPORATION LAW MERCANTILE LAW
Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
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MERCANTILE LAW
BANKING LAWS

Page 233 of 353

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I. The New Central Bank
Act
[RA 7653]
A. STATE POLICIES
The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
concerning money, banking and credit. [Sec. 1]
In line with this, the Bangko Sentral ng Pilipinas
is:
(1) A central monetary authority;
(2) An independent and accountable body;
and
(3) A government-owned corporation that
enjoys fiscal and administrative autonomy.
[Secs. 1 & 2, NCBA]
B. SALIENT FEATURES
(1) Assurance of BSP independence by
providing for the majority of the members of
the Monetary Board to come from the
private sector. [Sec. 6]
(2) The BSP may now concentrate on monetary
policy, and will phase out its fiscal agency
functions and its responsibilities in respect
of finance companies without quasi-banking
functions, which in the past, had distracted it
from its primary function. The latter has
been assumed by the Securities and
Exchange Commission. [Secs. 3, 129, & 130,
NCBA]
(3) Provides safeguards to ensure that unlike
the old Central Bank which sustained huge
losses, the BSP would have a positive net
income position by the following provisions:
(a) Capitalization of P50B; [Sec.2, NCBA]
(b) Maintenance of positive net foreign
asset position; [Sec.71, NCBA]
(c) Charging interests on all loans and
advances to banks; [Sec. 85, NCBA]
(d) Authority to collect interests on loans
and advances to closed financial
institutions; [Sec. 85, NCBA] and
(e) BSP can't acquire shares, including by
collateral, nor participate in neither
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ownership nor management
enterprises, nor engage in development
of
banking or financing [Sec. 128, NCBA]
C. CREATION OF THE BANGKO SENTRAL
NG PILIPINAS (BSP)
There is hereby established an independent
central monetary authority, which shall be a
body corporate known as the Bangko Sentral ng
Pilipinas [Sec. 2, NCBA].
The BSP replaced the Central Bank of the
Philippines, and shares the same functions, but
is a new entity altogether.
C.1. NATURE OF THE BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
(3) A government-owned corporation but enjoys
fiscal and administrative autonomy. [Secs. 1
& 2, NCBA]
C.2. CAPITALIZATION
The BSP shall have a capitalization of P50B to
be fully subscribed by the Government. [Sec. 2,
NCBA]
D. RESPONSIBILITY AND PRIMARY
OBJECTIVE
D.1. PRIMARY OBJECTIVES
(1) To maintain price stability conducive to
balanced and sustainable economic growth.
(2) To promote and maintain monetary stability
and the convertibility of the peso.
D.2. OTHER RESPONSIBILITIES
(1) To provide policy directions in the areas of
money, banking, and credit
(2) To supervise operations of banks
(3) Regulates finance companies and non-bank
financial institutions performing quasi-
banking functions [Sec. 3, NCBA]
D.3. BSP AS TRANSFEREE OF PHILIPPINE
CENTRAL BANK POWERS
All powers, duties and functions vested by law in
the Central Bank of the Philippines not
inconsistent with the NCBA shall be deemed
transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
UP LAW BOC BANKING LAWS
special charters shall be deemed to refer to the
BSP. [Sec. 136, NCBA]
E. MONETARY BOARD
The body through which the powers and
functions of the Bangko Sentral are exercised
[Sec 6, NCBA]
E.1. POWERS AND FUNCTIONS
(1) Issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers
vested in it;
(2) Direct the management, operations, and
administration of the BSP, reorganize its
personnel and issue such rules and
regulations as it may deem necessary or
desirable for this purpose;
(3) Establish a human resource management
system which governs the selection, hiring,
appointment, transfer, promotion, or
dismissal of all personnel;
(4) Adopt an annual budget for and authorize
such expenditures by BSP as are in the
interest of the effective administration and
operations of Bangko Sentral in accordance
with applicable laws and regulations; and
(5) Indemnify its members and other officials of
the BSP, including personnel of the
departments performing supervision and
examination functions, against all costs and
expenses reasonably incurred by such
persons in connection with any civil or
criminal action, suit or proceeding, to which
any of them may be made a party by reason
of the performance of his functions or duties,
unless such members or other officials is
found to be liable for negligence or
misconduct. [Sec. 15, NCBA]
E.2. COMPOSITION
The MB shall be composed of 7 members
appointed by the President with a 6-year term.
[Sec. 6, NCBA]
Members
(1) The BSP Governor or his designated
alternate (a deputy governor);
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(2) A Cabinet member to be designated by
the President or his designated alternate
(an Undersecretary in his department);
and
(3) 5 members from the private sector [Sec.
6, NCBA]
E.3. REAPPOINTMENT
No member of the MB may be reappointed more
than once. [Sec. 6, NCBA]
E.4. QUALIFICATIONS
(1) Citizenship – Natural-born citizens of the
Philippines;
(2) Age
General Rule: At least 35 years old
Exception: Governor must be at least 40
years old;
(3) Of good moral character;
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and
(6) With recognized competence in social and
economic disciplines. [Sec. 8, NCBA]
E.5. DISQUALIFICATIONS
In addition to the disqualifications under the
Code of Conduct and Ethical Standards for
Public Officials and Employees [RA 6713], a
member of the Monetary Board is disqualified
by:
(1) Direct connection with any multilateral
banking or financial institution; or
(2) Substantial interest in any private bank in
the Philippines, within 1 year prior to his
appointment [Sec. 9, NCBA]
E.6. PROHIBITION ON MEMBERS OF THE MB
(a) Being a director, officer, employee,
consultant, lawyer, agent or stockholder
of any bank, quasi-bank, or any other
institution which is subject to supervision
or examination by the BSP (remedy:
resign and divest interests before
assuming office];
(b) Holding any other public office or public
employment during their tenure; and
(c) Being employed in any multilateral
banking or financial institution within 2
years after the expiration of his term.
UP LAW BOC BANKING LAWS
Exception: When he serves as an official
representative of the government to
such institution. [Sec. 9, NCBA]
E.7. GROUNDS FOR REMOVAL OF ANY
MEMBER OF THE MB
(1) If the member is subsequently disqualified
under Sec. 8;
(2) If he is physically or mentally incapacitated
that he cannot properly discharge his duties
and responsibilities and such incapacity has
lasted for more than 6 months;
(3) If he is guilty of acts or operations which are
of fraudulent or illegal character or which
are manifestly opposed to the aims and
interests of the BSP; and
(4) If he no longer possesses the qualifications
under Sec. 8. [Sec. 10, NCBA]
E.8. VACANCIES, HOW FILLED
Causes:
(1) Death;
(2) Resignation; or
(3) Removal.
Effect: A new member will be appointed to
complete the unexpired period of the term of the
member concerned. [Sec. 7, NCBA]
E.9. CIVIL LIABILITY OF MEMBERS OF THE MB
Members of the MB, officials, examiners, and
employees of the BSP are liable when they:
(1) Willfully violate the provisions of the NCBA;
(2) Are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
(3) Fail to exercise extraordinary diligence in the
performance of his duties;
(4) Disclose confidential information, or
information relating to MB discussions or
resolutions, or about the BSP’s confidential
operations
Exceptions:
(1) Disclosure is in connection with the
performance of official functions with the
BSP;
(2) MB or BSP Governor’s prior authorization; or
(5) Use confidential information for their
personal gain –or– to the detriment of the
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MERCANTILE LAW
Government, BSP, or 3rd Parties [Sec. 16,
NCBA]
F. HOW THE BSP HANDLES BANKS IN
DISTRESS
When Banks are in Distress
Illiquidity – occurs when the bank is not liquid. It
means that the bank cannot meet its current
liabilities.
Liquidity is the ability of an asset to be converted
into cash. An entity is liquid when it is able to
pay its liabilities when they fall due.
(1) Illiquidity is handled by conservatorship.
Insolvency – When the actual market value of
assets are insufficient to pay its liabilities, not
considering capital stock and surplus which are
not liabilities for such purpose. An entity is
insolvent when it is unable to meet current and
long-term obligations.
(1) In contrast, a bank is solvent when current
assets are more than current liabilities,
providing the ability to pay debts. It is able
to meet its long term obligations/liabilities.
(2) Insolvency is handled by receivership and/or
closure.
F.1. CONSERVATORSHIP
1. Grounds for Appointment of a Conservator
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the MB finds that a bank or quasi-
bank is:
(1) In a state of continuing inability; or
(2) Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors [Sec. 29,
NCBA]
2. Requisites in placing a bank under
conservatorship
(1) There must be a report submitted by
the appropriate supervising or examining
department of the BSP;
(2) There must be a finding that the
bank or quasi-bank falls under either of the
grounds for conservatorship.
UP LAW BOC BANKING LAWS
(3) The Board of Directors must be
informed in writing of the order of the
Monetary Board directing conservatorship.
3. Duration
Shall not exceed 1 year [Sec. 29, NCBA]
4. Expenses
The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank
concerned [Sec. 29, NCBA]
5. Grounds for termination of conservatorship by
MB
(1) When MB is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary; or
(2) When, on the basis of the report of the
conservator or of its own findings, the MB
determines that the continuance in business
of the institution would involve probable loss
to its depositors or creditors (effect: the bank
or quasi-bank would then be placed under
receivership) [Sec. 29, NCBA]
6. Effects of conservatorship
(1) Bank/Quasi-bank retains juridical
personality
(2) Not a precondition to the designation of a
receiver [Sec. 30, NCBA], and;
(3) Perfected transactions cannot be
repudiated [First Philippine International
Bank v. CA, G.R. No. 115849 (1996)]
7. Qualifications of a conservator
The conservator should be competent and
knowledgeable in bank operations and
management. [Sec. 29, NCBA]
The appointment of a conservator shall be
vested exclusively in the MB. [Sec. 30, NCBA]
Note that the conservator is a natural person to
be appointed by the Monetary Board. In
contrast, the receiver is always the PDIC.
8. Powers and duties of a conservator
(a) To take charge of the assets, liabilities,
and the management thereof;
(b) To reorganize the management;
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MERCANTILE LAW
(c) To collect all monies and debts due said
institution;
(d) To exercise all powers necessary to
restore its viability;
(e) To report and be responsible to the MB;
(f) To overrule or revoke the actions of the
previous management and board of
directors of the bank or quasi-bank. [Sec.
29, NCBA]
However, note that the management of the bank
is still with its board of directors and
management. However, the conservator may
revoke their actions. In contrast, in receivership,
the receiver takes over the management of the
bank.
9. The conservator cannot repudiate perfected
contracts
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the preservation
of the assets of the bank, the reorganization of
the management and the restoration of viability.
Such powers cannot extend to the post-facto
repudiation of perfected transactions, otherwise
they would infringe against the non-impairment
clause of the Constitution. [First Philippine
International Bank v. CA, G.R. No. 115849 (1996)]
10. Remuneration
General Rule: The conservator shall receive
remuneration in an amount not to exceed 2/3 of
the salary of the president of the institution in 1
year, payable in 12 equal monthly payments.
Exception: A conservator connected with the
BSP, in which case said conservator shall not be
entitled to receive any remuneration or
emolument. [Sec. 29, NCBA]
F.2. CLOSURE
2. Concept
The MB may summarily and without need for
prior hearing close a banking institution and
place it under receivership.
Receivership is equivalent to an injunction to
restrain the bank in any way. Thus, the
appointment of a receiver operates to suspend
the authority of the bank and of its directors and
UP LAW BOC BANKING LAWS
officers over its property and effects [Villanueva
v. CA, G.R. No. 114870 (1995)]
Receivership refers to the stage within which the
PDIC manages the affairs of the closed bank and
preserves its assets for the benefit of creditors
[RA 9302, Sec. 10(a,b)]
3. Grounds
Under the GBL
When a banking institution:
(1) Notifies the BSP or publicly announces a
bank holiday; or
(2) Suspends the payment of its deposit
liabilities continuously for more than 30
days in any manner[Sec. 53, GBL]
(3) Persistence in conducting business in an
unsafe or unsound manner [Sec. 56, GBL]
Under the NCBA
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they become
due in the ordinary course of business.
a. Except for inability to pay caused
by extraordinary demands
induced by financial panic in the
banking community; (bank run)
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
(3) Cannot continue in business without
involving probable losses to its depositors or
creditors; or
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets of the
institution.
a. Special rule: in this situation, the
MB may act summarily and
without hearing [Sec. 30, NCBA]
F.3. RECEIVERSHIP
1. requisites
(1) Report of the head of the supervising
department involving the bank
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MERCANTILE LAW
(2) Finding of the Monetary Board of the
existence of any of the grounds for
receivership.
(3) Decision of the MB to forbid the
institution from doing business, which
decision may be done summarily and
without need for prior hearing.
(4) Notice in writing to the BOD
informing the institution of the order of the
MB.
2. Grounds
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they become
due in the ordinary course of business.
Exception: This shall not include inability
to pay caused by extraordinary demands
induced by financial panic in the banking
community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
(3) Cannot continue in business without
involving probable losses to its depositors or
creditors; or
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets of the
institution.
Special rule: in this situation, the MB may act
summarily and without hearing [Sec. 30,
NCBA]
3. Who acts as Receiver
(A) If a banking institution: the PDIC
(B) If a quasi-bank: any person of
recognized competence in banking or
finance [Sec. 30, NCBA]
4. Who appoints Receivers
The appointment of a receiver shall be vested
exclusively in the MB. [Sec. 30, NCBA]
5. Conservatorship vis-à-vis Receivership
The designation of a conservator is not a
precondition to the designation of a receiver.
[Sec. 30, NCBA]
UP LAW BOC
6. Powers and duties of a receiver
(1) Immediately gather and take charge of all
the assets and liabilities of the institution
(2) Administer the assets for the benefit of the
creditors
(3) Exercise the general powers of a receiver
under the Revised Rules of Court
(4) Not to pay or commit any act that will
involve the transfer or disposition of any
asset of the institution.
Exceptions:
(1) Administrative expenditures;
(2) Receiver may deposit or place funds in non-
speculative investments.
(5) Subject to prior approval of the MB,
determine, as soon as possible, but not later
than 90 days from take-over, whether the
institution may be rehabilitated or otherwise
placed in such a condition so that it may be
permitted to resume business with safety to
its depositors and creditors and the general
public. [Sec. 30, NCBA]
Exceptions:
(1) Administrative expenditures;
(2) Receiver may deposit or place funds in
non-speculative investments.[Sec. 30, NCBA]
The assets of the institution under receivership
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of
garnishment, levy, attachment, or execution.
[Sec. 30, NCBA]
So, in contrast to a conservator, the receiver
takes over the operations of the bank and the
management of its assets.
However, the main duty of a receiver is to, within
90 days of takeover, to determine whether the
bank can be rehabilitated or not. If it can,
receivership will continue, or the bank will be
placed under conservatorship. If it cannot, the
bank will be liquidated.
7. Close now, hear later scheme
Sec. 29 of the Central Bank Act does not
contemplate prior notice and hearing before a
bank may be directed to stop operations and
Page 239 of 353
BANKING LAWS MERCANTILE LAW
placed under receivership. It is enough that such
action is made subject of a subsequent judicial
review. When the law provides for the filing of a
case within 10 days after the receiver takes
charge of the assets of the bank, it is
unmistakable that the assailed actions should
precede the filing of the case. The legislature
could not have intended to authorize “no prior
notice and hearing” in the bank’s closure and at
the same time allow a suit to annul it on the
basis of absence thereof [Central Bank vs. CA
and Triumph Savings Bank, GR No. 76118, March
30, 1993]
In other words, when there is a ground for
closure and receivership, such closure may be
effected without notice and hearing. The validity
of closure may be challenged afterwards.
F.4. LIQUIDATION
1. concept
After undergoing conservatorship, closure,
and/or receivership, if the bank cannot be
rehabilitated, it shall be liquidated
Liquidation refers to the recovery and conversion
of assets into cash for distribution to all creditors
in accordance with the rules on concurrence and
preference of credits.
2. kinds of liquidation
(1) Voluntary liquidation, and
(2) Involuntary liquidation
3. voluntary liquidation
The Stockholders and the Board of Directors can
decide to liquidate a bank in accordance with
the procedure under the Corporation Code.
However, as an additional requirement, written
notice of the liquidation should be sent to the
MB before the liquidation is undertaken.
Further, the MB shall have the right to intervene
and take such steps as may be necessary to
protect the interests of creditors. [Sec. 68, GBL]
4. Grounds for Liquidation
(1) The condition of the bank is one of
insolvency,
(2) Its continuance would involve probable
loss to its creditors
UP LAW BOC BANKING LAWS
(3) In both cases, the MB determines that
the bank cannot be rehabilitated.
5. how instituted
Should the determination be that the institution
cannot be rehabilitated or permitted to resume
business, the MB shall notify in writing the board
of directors of the institution of its findings and
direct the receiver to proceed with the
liquidation of the institution. [Sec. 30, NCBA]
6. Challenging the decision of the receiver
Only stockholders representing a majority of
the capital stock of the bank have the
personality to file a petition for certiorari to
be filed within 10 days from receipt by the
BOD of the order directing receivership,
conservatorship, or liquidation.
7. Effects of Liquidation
(1) Retention of juridical personality;
(2) Suspension of operations / Stoppage of
business;
(3) Assets are deemed in custodia legis, i.e.,
exempt from garnishment, levy or execution;
(4) Stay of execution of judgment to prevent
depletion of bank assets;
(5) Bank is not liable to pay interest on deposits
which accrued during the period of
suspension of operation;
(6) Restriction of bank’s capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts.
a. It cannot take new deposits or
grant new loans.
b. However, it can collect pre-
existing debts.
(7) Deposits do not become preferred
credits
8. procedure
(1) The 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
institution pursuant to the liquidation plan
adopted by the PDIC.
a. If a quasi-bank, the liquidation plan
is adopted by the MB;
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MERCANTILE LAW
(2) Upon acquiring jurisdiction, the court
shall, upon motion by the receiver after due
notice:
(a) Adjudicate disputed claims against
the institution;
(b) Assist the enforcement of individual
liabilities of the stockholders, directors, and
officers; and
(c) Decide on other issues as may be
material to implement the liquidation plan
(3) The receiver shall convert the assets
of the institutions to money, dispose of the
same to creditors and other parties, for the
purpose of paying the debts of such
institution in accordance with the rules on
concurrence and preference of credit under
the Civil Code. [Sec. 30, NCBA]
9. suits by receiver
The receiver may institute actions to collect
and recover assets or defend actions against
the institution, with the assistance of
counsel as he may retain. [Sec. 30, NCBA]
10. Dispositions
After payment of the cost of proceedings,
including reasonable expenses and fees of
the receiver to be allowed by the court, the
receiver shall pay the debts of such
institution, under order of the court, in
accordance with the rules on concurrence
and preference of credit in the Civil Code.
[Sec. 31, NCBA]
All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or
quasi-bank shall be used to pay the costs of
proceedings, salaries of such personnel
whose employment is rendered necessary in
the discharge of the liquidation together
with other additional expenses caused
thereby. The balance of revenues and
earnings, after the payment of all said
expenses, shall form part of the assets
available to creditors. [Sec. 32. NCBA]
UP LAW BOC BANKING LAWS MERCANTILE LAW

11. Comparison of Conservatorship, Closure and Receivership, and Liquidation

Conservatorship Closure/Receivership Liquidation

The assets of a bank,

A bank suffering from
An insolvent bank is placed which is not capable of
illiquidity is placed under
under the control of a receiver, being rehabilitated, are
Concept conservatorship to protect
who will decide whether to sold, and the proceeds
its creditors and to allow it
rehabilitate it or liquidate it. are used to pay off the
to become liquid again.
bank’s debts.

Under the GBL

When a banking institution:
(1) Notifies the BSP or publicly
announces a bank holiday; or

(2) Suspends the payment of

its deposit liabilities
continuously for more than 30
days in any manner

(3) Persistence in conducting

business in an unsafe or
unsound manner

Under the NCBA

A bank or quasi-bank is:
(1) In a state of continuing
inability to maintain
liquidity deemed adequate
Grounds
to protect the interest of
depositors or creditors, or
(2) Unwillingness to do so.
Whenever the MB finds that a
bank or quasi-bank:
(1) Is unable to pay its
liabilities as they become due
in the ordinary course of
business.
(2) Has insufficient realizable
assets, as determined by the
BSP, to meet its liabilities; or
(1) The condition of the
bank is one of insolvency,
(2) Its continuance would
involve probable loss to
its creditors
(3) In both cases, the MB
determines that the bank
cannot be rehabilitated.

(3) Cannot continue in

business without involving
probable losses to its
depositors or creditors; or

(4)Has willfully violated a

cease-and-desist order under
Sec. 37 that has become final,
involving acts or transactions
which amount to fraud or a
dissipation of the assets of the
institution.

Page 241 of 353

UP LAW BOC
Conservator, who is an
Who carries it Receiver, who in the case of
individual appointed by the
out banks is the PDIC
BSP.
(1) To take charge of the
assets, liabilities, and the
management thereof;
(2) To reorganize the
management;
(3) To collect all monies
and debts due said
institution;
(4) To exercise all powers
Power and necessary to restore its
duties thereof viability;
(5) To report and be
responsible to the MB;
(6) To overrule or revoke
the actions of the
management and board of
directors of the bank
Notably does not have the
power to take over bank
affairs.
When
After 1 year
terminated
BANKING LAWS MERCANTILE LAW
Liquidation Court and
Receiver
Court:
(1) Adjudicate disputed
claims against the
(1) Immediately gather and
institution;
take charge of all the assets
(2) Assist the
and liabilities of the institution
enforcement of individual
(2) Administer the assets for
liabilities of the
the benefit of the creditors
stockholders, directors,
(3) Exercise the general
and officers; and
powers of a receiver under the
(3) Decide on other
Revised Rules of Court
issues as may be
(4) Within 90 days, decide
material to implement
whether the bank can be
the liquidation plan
rehabilitated or should be
Receiver:
liquidated.
(1) convert the assets of
(5) Not to pay or commit any
the institutions to money,
act that will involve the
and
transfer or disposition of any
(2) dispose of the same
asset of the institution.
to for the purpose of
paying the debts of the
institution
Within 90 days, if liquidation
When debts have been
is decided upon
paid in accordance with
Until the bank is viable again,
the liquidation plan.
if rehabilitation decided upon
Page 242 of 353
UP LAW BOC INTELLECTUAL PROPERTY CODE
G. FOREIGN EXCHANGE OPERATIONS
G.1. LEGAL TENDER POWER
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the
Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both
public and private. [Sec. 52, NCBA]
Limitation: Coins shall be legal tender in
amounts not exceeding P50 for
denominations of 25 centavos and above,
and in amounts not exceeding P20 for
denominations of 10 centavos or less.
Exception to Limitation: MB may fix
otherwise. [Sec. 52, NCBA]
The maximum amount of coins to be
considered as legal tender is: [BSP Circular
537 (2006)]
(1) P1,000.00 for denominations of 1-Piso, 5-
Piso and 10-Piso coins; and
(2) P100.00 for denominations of 1-sentimo,
5-sentimo, 10-sentimo, and 25-sentimo
coins.
G.2. RETIREMENT OF OLD NOTES AND
COINS
The BSP may call in for replacement:
(1) Notes which are more than 5 years
old, and
(2) Coins which are more than 10 years
old.
Those called in for replacement remain legal
tender until one year from call
After that period, they will no longer be legal
tender, but may be exchanged for new
tender, for a period to be determined by the
BSP.
After the period for exchange, they cease to
be a liability of the BSP and will be
demonetized.
In times of exchange crises, the BSP may, in
its discretion, stop issuing legal tender, or
issue more legal tender, as the case may be,
in order to achieve exchange stability.
G.3. RATE OF EXCHANGE
The MB shall:
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MERCANTILE LAW
(1) Determine the exchange rate policy of the
country;
(2) Determine the rates at which the BSP
shall buy and sell spot exchange;
(3) Establish deviation limits from the
effective exchange rate or rates as it may
deem proper.
(4) Determine the rates for other types of
foreign exchange transactions by the
BSP, including purchases and sales of
foreign notes and coins. [Sec. 74, NCBA]
Limitation: The margins between the effective
exchange rates and the rates established by
the MB may not exceed the corresponding
margins for spot exchange transactions by
more than the additional costs or expenses
involved in each type of transactions. [Sec. 74,
NCBA]
Purchases and Sales of Foreign Exchange
The BSP may:
(1) Buy and sell foreign notes and coins, and
documents and instruments of types
customarily employed for the
international transfer of funds;
(2) Engage in future exchange operations;
and
(3) In order to maintain the convertibility of
the Peso, at the request of any banking
institution operating in the Philippines,
buy any quantity of foreign exchange
offered, and sell any quantity of foreign
exchange demanded, by such institution,
Provided, the foreign exchange offered
or demanded are freely convertible to
gold or USD. [Sec. 70, GBL]
Limitations: It may only transact with the
following entities and persons:
(a) Banking institutions operating in the
Philippines;
(b) The government, its political
subdivisions and instrumentalities;
(c) Foreign or international financial
institutions;
(d) Foreign governments and their
instrumentalities; and
(e) Other entities or persons authorized
by the MB to act as foreign exchange
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

dealers under the rules and

regulations prescribed by the MB.
II. Law on Secrecy of
[Sec. 70, GBL]
Bank Deposits
Acquisition of Inconvertible Currencies [RA No. 1405, as amended]
General Rule: The BSP shall avoid the
A. POLICY
acquisition and holding of currencies which
(1) To give encouragement to the people to
are not freely convertible.
deposit their money in banking
Exception: The acquisition of such currencies
institutions; and
in an amount exceeding the minimum
(2) To discourage private hoarding. [Sec. 1]
balance necessary to cover current demand
for said currencies only when and to the B. PURPOSE
extent that such acquisition is considered by
(1) To encourage the people to deposit
the MB to be in the national interest.
their money in banks
(2) To discourage private hoarding, so
In times of Crises
that the funds can be used by the bank to
The MB may exercise its emergency
grant loans to assist in economic
restrictions on Exchange Operations
development.
(1) These restrictions may be exercised by a
majority vote of the entire MB, i.e. 5
The absolute confidentiality rule in R.A. No.
votes.
1405 actually aims at protection from
(2) The vote must be approved by the
unwarranted inquiry or investigation if the
President.
purpose of such inquiry or investigation is
These restrictions the BSP may choose to
merely to determine the existence and nature,
impose are:
as well as the amount of the deposit in any
1. Temporary suspension or restriction
given bank account.[China Banking
of sales of exchange by the BSP.
Corporation v. Ortega, G.R. No. L-34964
2. Subjecting all transactions in gold
(1973)]
and foreign to license by the BSP, or
3. Requiring that any foreign exchange
C. PROHIBITED ACTS
thereafter obtained by any person
(1) Examination, inquiry, or looking into
residing in or any entity operating in
deposits by persons, government
the Philippines be delivered to the
officials, bureaus, or offices; [Sec. 2, RA
BSP or to an agent bank, at effective
1405]
exchange rates.(Sec. 74)
(2) Disclosure by banking institutions'
• These restrictions do not apply to
officials or employees to unauthorized
Foreign Currency Deposits under RA
persons regarding information about
6426.
covered accounts. [Sec. 3, RA 1405]

D. DEPOSITS COVERED

D.1 General Rule: All deposits of whatever

nature with banks or banking institutions in
the Philippines are considered as of an
absolutely confidential nature. [Sec. 2,]
This includes investments in bonds issued by
the Government of the Philippines, its
political subdivisions and its
Page 244 of 353
UP LAW BOC INTELLECTUAL PROPERTY CODE
instrumentalities. Note that investments in
bonds in foreign currency are still covered by
RA 1405, and have not been exempted by the
Foreign Currency Deposit Act.
Exceptions:
(1) Foreign Currency Deposits, which are
governed by the Foreign Currency
Deposit Act, infra.
(2) Funds placed in a bank not in the nature
of a deposit by private individuals.
However, these may also not be
disclosed, under Sec. 55.1 of the GBL of
2000. However, take note of the ruling in
Ejercito v. SB.
D. 2 Trust Accounts
The term "deposits" is to be understood
broadly and not limited to accounts giving
rise to creditor-debtor relations between the
bank and depositor. The deposit of money
which may be used by banks for authorized
loans to 3rd persons also falls under RA
1405. Therefore, trust accounts are also
covered. [Ejercito v. SB Special Division, G.R.
Nos. 157294-95 (2006)]
D. 3 Construction of Confidentiality
By force of statute, all bank deposits are
absolutely confidential, and that nature is
unaltered even by the legislated exceptions.
There is disfavor towards construing these
exceptions in such a manner that would
authorize unlimited discretion on the part of
the government or of any party seeking to
enforce those exceptions and inquire into
bank deposits. If there are doubts in
upholding the absolutely confidential nature
of bank deposits against affirming the
authority to inquire into such accounts, then
such doubts must be resolved in favor of
confidentiality. [Republic v. Eugenio, G.R. No.
174629 (2008)]
D.4 Zones of Privacy
Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. [People v. Estrada, G.R. No. 164368
(2009); Marquez v. Desierto, G.R. No. 135882
(2001); Ople v. Torres, G.R. No. 107737 (1999)]
It is conceded that while the fundamental law
has not bothered with the triviality of
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specifically addressing privacy rights relative
to banking accounts, there, nevertheless,
exists in our jurisdiction a legitimate
expectation of privacy governing such
accounts. The source of this right of
expectation is statutory, and it is found in
R.A. No. 1405, otherwise known as the Bank
Secrecy Act of 1955. [BSB Group, Inc., v. Go,
G.R. No. 168644 (2010)]
E. EXCEPTIONS
Deposits:
(1) Upon written permission of the depositor
(2) In cases of impeachment
(3) Upon order of competent court in cases of
bribery and dereliction of duty.
(4) In cases where the money deposited or
invested is the subject matter of litigation
If the case is for the recovery of money as a
result of failure to inform regarding improper
crediting, the money in the account is not the
subject matter of litigation. This is because
the amount sought to be recovered is
different from the amount that is already in
the account. By the terms of RA 1405, the
‘money deposited’ itself should be the subject
matter of the litigation [Union Bank v. Court of
Appeals, G.R. No. 134699 (1999)]
In contrast, where the case is for the
recovery of amounts converted by the
depositors, the amount sought to be
recovered is exactly the money that is
supposedly in the account. If the case
necessarily involves inquiring into the
whereabouts of the illegally-acquired
amount, this falls under the exceptions to
bank secrecy under RA 1405. [Mellon
Bank, N.A. v. Magsino, G.R. No. 71479
1990]
Other exceptions:
(1) The Commissioner of Internal
Revenue can inquire into the bank
accounts of the ff. taxpayers:
a. A decedent in order to
determine his gross estate, or
b. A taxpayer who has filed an
application to compromise
his tax liability on the ground
of financial incapacity. (NIRC,
Sec. 6(f))
UP LAW BOC INTELLECTUAL PROPERTY CODE
c. A taxpayer, information on
whose account is requested
by a foreign tax authority
(2) Unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt Practices
Act [RA 3019]. [PNB v. Gancayco, G.R.
No. L-18343 (1965); Banco Filipino v.
Purisima, G.R. No. L-56429 (1988);
Marquez v. Desierto, G.R. No. 135882
(2001)]
(3) Cases under the AMLA [RA 9160, the
Anti-Money Laundering Act of 2001]
when there is probable cause that the
deposits or investments involved are
in any way related to an unlawful
activity or a money laundering
offense. [Sec. 11, AMLA, see infra.]
(a) Under the Human Security
Act of 2007, cases involving:
(i) Kidnapping for Ransom [RPC]
(ii) Dangerous Drugs [2002
Comprehensive Dangerous Drugs
Act]
(iii) Hijacking and other violations of
RA 6235, and
(iv) Destructive arson and murder,
Are exceptions to the requirement of
a court order in order to examine the
accounts.
4. BSP inquiry or examination in the
course of its periodic or special
examination of the bank. [Sec. 11,
AMLA]
5. Disclosure of certain information
about bank deposits which have been
dormant for at least 10 years, to the
Treasurer of the Philippine in a sworn
statement, a copy of which is posted
in the bank premises. [Sec. 2,
Unclaimed Balances Law, Act No.
3926, as amended by PD 679]
6. The PDIC and/or the BSP can inquire
into or examine deposit accounts and
all information related thereto in case
there is a finding of unsafe and
unsound banking practice [Sec. 8,
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paragraph 8, R.A. 3591, as amended
by R.A. 9576].
Not an exception: Power of the Ombudsman
to “examine and have access to bank
accounts and records” under Sec. 15[8] of RA
6770 [Morales, The Philippine General Banking
Law (2004)]
F. POWER OF THE OMBUDSMAN TO
EXAMINE ACCOUNTS
While the Ombudsman is empowered to
“examine and have access to bank accounts
and records” under Sec. 15[8] of RA 6770,
this power was limited in Marquez v. Desierto
[G.R. No.135882 (2001)], where the SC ruled
that before an inspection could be allowed,
there must be a pending case before a court of
competent jurisdiction. This is, in turn, subject
to the ff. additional requirements:
(1) The account must be clearly identified,
(2) The inspection limited to the subject
matter of the pending case before the
court of competent jurisdiction,
(3) The bank personnel and the account
holder must be notified to be present
during the inspection, and
(4) Such inspection may cover only the
account identified in the pending case.
G. GARNISHMENT OF DEPOSITS
General rule: The prohibition against
examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude
its being garnished to insure satisfaction of a
judgment. [China Banking Corporation v.
Ortega, G.R. No. L-34964 (1973); Philippine
Commercial and Industrial Bank v. Court of
Appeals, G.R. No. 84526 (1991)]
“[T]he prohibition against examination of or
inquiry into a bank deposit under Republic
Act 1405 does not preclude its being
garnished to insure satisfaction of a
judgment. Indeed there is no real inquiry in
such a case, and if the existence of the
deposit is disclosed the disclosure is purely
incidental to the execution process. It is hard
to conceive that it was ever within the
intention of Congress to enable debtors to
UP LAW BOC INTELLECTUAL PROPERTY CODE
evade payment of their just debts, even if
ordered by the Court, through the expedient
of converting their assets into cash and
depositing the same in a bank.”[China
Banking Corporation v. Ortega, G.R. No. L-
34964 (1973)]
Exception: Foreign Currency Deposits
The foreign currency deposits shall be
exempt from attachment, garnishment, or
any other order or process of any court,
legislative body, government agency or any
administrative body whatsoever. [Sec. 8,
FCDA – Foreign Currency Deposit Act]
H. CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS
General rule: Foreign currency deposits are
confidential.
Exceptions:
(1) Upon written permission of the depositor
[Sec. 8, Foreign Currency Deposit Act ;
Intengan vs CA, G.R. No. 128996 (2002)]
a. This is the only exception given by
law. [GSIS v. CA, G.R. No. 189206
(2011)]
b. However, jurisprudence provides
another exception for
garnishment.
(2) On grounds of equity, where a Filipino
child was raped by a foreigner, the SC
allowed garnishment of foreign currency
deposits [Salvacion v. CA, G.R. No. 94723
(1997)]; and where the party inquiring into
the deposits is the owner of the funds and
is also a co-depositor of the check. [China
Banking v. CA, G.R. No. 140687 (2006).
Note that both decisions are pro hac vice.
I. PENALTIES
(1) Imprisonment of not more than 5 years;
or
(2) Fine of not more than P20,000; or
(3) Both, in the discretion of the court [Sec. 5,
RA 1405]
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III. General Banking
Law of 2000
[RA 8791]
Introduction (General Banking Law of 2000)
A. 1 Definition of Banks
"Banks" shall refer to entities engaged in
the lending of funds obtained in the form
of deposits. (Sec. 3.1)
How Banks are Structured
Generally, Banks are corporations.
However, cooperative banks may also be
formed under the Cooperatives Code.
NB. Note that under RA 10641, banks may
now be fully foreign owned, through any
of the ff. modes of entry:
1. Acquiring, purchasing, or owning up to
100% of the voting stock of an existing
bank,
2. Investing in up to 100% of the voting
stock of a new banking subsidiary
incorporated under the laws of the
Philippines, or
3. Establishing branches with full banking
authority.
(1) However, the foreign bank must be
established, reputable, and
financially sound.
(2) Further, it must be widely-owned and
publicly listed in the country of origin.
A. CLASSIFICATION OF BANKS
A.1. UNIVERSAL BANK (UB)
As the name implies, a universal bank has the
most banking power, as it has the same
powers as a commercial bank, plus the
powers:
(1) To operate an investment house,
whether as an integral unit or as a
subsidiary.
a. In turn, an investment house
underwrites securities either on firm
underwriting (good as sold) or best
UP LAW BOC INTELLECTUAL PROPERTY CODE
efforts (excess to be returned to the
firm)
(2) To invest in non-allied enterprises
A.2. COMMERCIAL BANK (KB)
• Has the powers defined in Secs. 29.
And 53, infra.
• This is the most common kind of
bank.
A.3. THRIFT BANK
• Thrift banks are banks that focus on basic
banking services for their clients, with an
emphasis on individuals and small
businesses. (Some Financial Textbook
since the Thrift Banks Act doesn’t have a
working definition of thrift banks)
• Thrift banks are primarily governed by RA
7906, the Thrift Banks Act.
• Thrift banks include:
(1) Savings and mortgage banks
(2) Savings and loan associations, and
(3) Private development banks.
A.4. RURAL BANKS
Are banks that are formed for the purpose of
providing adequate credit facilities to farmers
and merchants, or to cooperatives of such
farmers and merchants and in general, the
people of the rural communities.
They are primarily governed by RA 7353, the
Rural Banks Act.
A.5. COOPERATIVE BANKS
Are those which are organized as
cooperatives under RA 6938, the
Cooperatives Code.
A.6. ISLAMIC BANKS
There is exactly one Islamic Bank in the
Philippines, the Al-Amanah Islamic Bank,
which aims to provide banking under the
Shari’a principles governing banking.
A.7. OTHER BANKS AS CLASSIFIED BY THE
BSP
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This includes Land Bank, the Philippine
Veteran’s Bank, and Development Bank of
the Philippines.
A.8. QUASI-BANKS AND TRUST ENTITIES
Quasi-banks refer to entities engaged in
the borrowing of funds through the
issuance, endorsement or assignment
with recourse or acceptance of deposit
substitutes as defined in Section 95 of the
“New Central Bank Act” for purposes of
relending or purchasing of receivables
and other obligations.
Deposit Substitutes
A deposit is an alternative form of obtaining
funds from the public, other than deposits,
through the issuance, endorsement, or
acceptance of debt instruments for the
borrower's own account, for the purpose of
relending or purchasing of receivables and
other obligations.
(a) These instruments may include, but
need not be limited to, bankers
acceptances, promissory notes,
participations, certificates of
assignment and similar instruments
with recourse, and repurchase
agreements
(1) Instead, the funds are received from
investors in exchange for a financial
instrument like a bond or a loan, which
will be paid at a given time.
(2) However, the deposit substitute must be
on a with recourse basis.
Trust entities (Manual of Regulation of Banks)
Trust entity (TE) shall refer to a:
(1) bank or an NBFI, through its specifically
designated business unit to perform trust
functions; or
(2) trust corporation, authorized by the
Bangko Sentral to engage in trust and other
fiduciary business under The General Banking
Law of 2000) or to perform investment
management services under Section 53 of
R.A. No. 8791.
UP LAW BOC INTELLECTUAL PROPERTY CODE
B. CORE BANKING FUNCTIONS
As defined, (1) the taking of deposits and (2)
the lending of the funds coming from the
same.
Relationship between depositor and bank:
Creditor(bank) and Debtor (Depositor)
Nature of deposited funds
Thus, the deposit is a contract of loan
with the bank being lent money by the
depositor. Under the Civil Code
provisions on loan, this means that the
money deposited with the bank becomes
its property, which it is free to use, subject
to the condition that the depositor can
demand repayment, in the form of
withdrawals, at any time.
Quasi-deposits
(1) Funds placed with bank, but which is not
in the nature of a deposit
(2) Must be on with recourse basis
(3) As banks no longer have to apply for
authority to accept deposit substitutes,
this may now be considered a core
banking function.
C. POWERS OF A COMMERCIAL BANK
(SEC. 29)
A commercial bank shall have, in addition
to the general powers incident to
corporations, all such powers as may be
necessary to carry on the business of
commercial banking such as:
(1) accepting drafts and
(2) issuing letters of credit;
(3) discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidences of debt;
(4) accepting or creating demand deposits;
(5) receiving other types of deposits and
deposit substitutes;
(6) buying and selling foreign exchange and
gold or silver bullion;
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(7) acquiring marketable bonds and other
debt securities; and
(8) extending credit.
C.1. CORPORATE POWERS
Aside from the powers listed above,
banks, generally being in the form of a
corporation, also have all the powers a
corporation has.
(1) The exception is cooperative banks, which
are in the form of a cooperative, and have
all the powers of a cooperative under the
Cooperatives Code.
C.2. GRANTING OF LOANS; SECURITY
REQUIREMENT
The GBL no longer requires credit to be
secured.
(2) This is in contrast to the General Banking
Act it replaced, which requires all loans to
be secured.
C.3. STIPULATIONS ON INTEREST
As an accessory to its power to grant loans,
banks may stipulate interests.
(3) With the removal of the limit on
imposable interest under CB Circular
905, banks may impose interest past the
legal interest rate of 6% (CB Circular 799-
13)
(4) However, this does not give banks the
right to impose excessive interests. A
stipulated interest rate may nevertheless
be equitably reduced should the same be
found to be iniquitous, unconscionable,
and exorbitant under Art. 1556 of the CC.
If such is the case, there is no stipulated
rate, and the legal rate applies. [Dio v.
Japor, G.R. No. 154129 (2005)]
(5) A 3% monthly interest rate has been
ruled iniquitous. [Macalinao v. BPI, G.R.
No. 175490 (2009)]
(6) Also, while it is acceptable for banks to
stipulate that interest rates on a loan not
be fixed and instead be made dependent
on market conditions, there should
always be a reference rate upon which to
UP LAW BOC INTELLECTUAL PROPERTY CODE
peg the rates.[Consolidated Bank v. CA,
G.R. No. 114286 (2011)]
C.4. INCIDENTAL BANKING POWERS
In addition to the operations specifically
authorized in this Act, a bank may
perform the following services:
(a) Receive in custody funds, documents
and valuable objects;
(b) Act as financial agent and buy and
sell, by order of and for the account of
their customers, shares, evidences of
indebtedness and all types of
securities;
(c) Make collections and payments for
the account of others and perform
such other services for their
customers as are not incompatible
with banking business;
(d) Upon prior approval of the Monetary
Board, act as managing agent,
adviser, consultant or administrator
of investment
management/advisory/consultancy
accounts; and
(e) Rent out safety deposit boxes.
D. BANKING AND INCIDENTAL
POWERS
All such powers as may be necessary to carry
on the business of commercial banking [Sec.
29, GBL]
(a) Accepting drafts
(b) Issuing letters of credit
(c) Discounting and negotiating
promissory notes, drafts, bills of
exchange, and other evidence of debt
(d) Accepting or creating demand
deposits
(e) Receiving other types of deposits and
deposit substitutes
(f) Buying and selling foreign exchange
and gold or silver bullion
(g) Acquiring marketable bonds and
other debt securities
(h) Extending credit
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(1) Accepting drafts
(2) Issuing letters of credit
(3) Discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidence of debt
(4) Accepting or creating demand deposits
General rule: Only a UB KB can accept or
create demand deposits [Sec. 33, GBL]
Exception: Banks other than a UB or KB with
prior approval of, and subject to such
conditions and rules as may be prescribed by
the Monetary Board [Sec. 33, GBL]
Fixed, savings, and current deposits of money
in banks and similar institutions shall be
governed by the provisions concerning simple
loan. [Art. 1980, NCC]
Presumption of ownership of deposits
It is presumed that money deposited in a
bank account belongs to the person in whose
name the deposit account is opened.
A depositor is presumed to be the owner of
funds standing in his name in a bank deposit;
and where a bank is not chargeable with
notice that the money deposited in such
account is the property of some other person
than the depositor, the bank is justified in
paying out the money to the depositor or
upon his order, and cannot be liable to any
other person as the true owner. [Fulton Iron
Works Co. v. China Banking Corporation, G.R.
No. 32576 (1930)]
No duty to set-off
A bank is under no duty or obligation to make
an application or set-off against the deposit
accounts of a borrower. To apply the deposit
to the payment of a loan is a privilege, a right
of set-off which the bank has the option [but
not the obligation] to exercise. [BPI v. CA and
Eastern Plywood, G.R. No. 104612 (1994)]
Safety deposit boxes
The rent of safety deposit boxes is a special
kind of deposit and cannot be characterized
as an ordinary contract of lease because the
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

full and absolute possession and control of expenditure and such information as may be
the deposit box is not given to the renters. prescribed by law or by rules and regulations
The prevailing rule is that the relation of MB to enable the bank to properly evaluate
between the bank renting out and the renter the credit application which includes the
is that of bailor and bailee the bailment being corresponding financial statements
for hire and mutual benefit. [CA Agro- submitted for taxation purposes to the BIR.
industrial Dev. Corp. v. CA, G.R. No. 90027 [Sec. 40, GBL]
(1993)]
Credit enhancement
(5) Receiving other types of deposits and If the borrower is less than creditworthy, third
deposit substitutes persons may enhance his credit by providing
Types of Deposits: guarantees and other security devices in favor
1. Time Deposit - Interest rate stipulated of the bank. [Morales (2004)]
depending on the number of days. During
this period, the money deposited may not A bank cannot lend pesos to a non-resident
[BSP Circular No. 22; Sec. 22, Manual of
be withdrawn without incurring penalty.
Regulations on Foreign Exchange
High interest rates. Transactions]. [Morales (2004)]
2. Savings Deposit - Bank pays an interest
rate, but not as high as time deposits. Material misrepresentation
3. Demand Deposits/Current Accounts - No If there is material misrepresentation, bank —
interest is paid by the bank because the (1) May terminate any loan or other credit
depositor can take out his funds any time. accommodation granted on the basis of
It is called demand deposit because the said statements; and
depositor can withdraw the money he (2) Shall have the right to demand
deposited on the very same day when he immediate repayment or liquidation of
deposited it or at any time thereafter. the obligation [Sec. 40, GBL]
[Villanueva, Commercial Law Review
(2012)] Limit on loans, credit accommodations and
guarantees
4. Negotiable Order of Withdrawal Accounts
– Interest-bearing deposit accounts that General rule: Shall not
combine the payable on demand feature exceed 75% of the appraised
of checks and investment feature of value of the respective real
savings accounts [Sec. X223, Manual of estate security, plus 60% of
Regulations for Banks] the appraised value of the
insured improvements, and
(6) Buying and selling foreign exchange and such loans may be made to
Against the owner of the real estate
gold or silver bullion Real estate or to his assignees
(7) Acquiring marketable bonds and other Exception: Where the
debt securities Monetary Board otherwise
prescribes [Sec. 37, GBL]
(8) Extending credit

“Know your customer” rule

Before granting a loan or other credit
accommodation, a bank must ascertain that
the debtor is capable of fulfilling its
commitments to the bank. [Sec. 40, GBL]
The bank may demand from its credit
applicants a statement of their assets and
liabilities and of their income and
Page 251 of 353
UP LAW BOC INTELLECTUAL PROPERTY CODE
General rule: Shall not
exceed 75% of the appraised
On security value of the security, and
of chattels such loans and other credit
and accommodations may be
intangible made to the title-holder of
properties the chattels and intangible
(patents, properties or his assignees
trademarks, Exception: The Monetary
trade Board otherwise prescribes
names, and [Sec. 38, GBL]
copyrights)
Grant of loans
(1) Only in amounts and for the periods of
time essential for the effective
completion of the operations to be
financed; and
(2) Consistent with safe and sound banking
practices. [Sec. 39, GBL]
Purpose of loans
The purpose shall be stated in the application
and in the contract between the bank and the
borrower. [Sec. 39, GBL]
Effect of usage of loan proceeds for purposes
other than those agreed upon with the bank
The bank shall have the right to terminate the
loan or other credit accommodation and
demand immediate repayment of the
obligation. [Sec. 39, GBL]
Amortization on loans and other credit
accommodations
(1) Loans and other credit accommodations
with maturities of more than 5 years –
Requirement: Provisions must be made
for periodic amortization payments, but
such payments must be made at least
annually. Special rule: That when the
borrowed funds are to be used for
purposes which do not initially produce
revenues adequate for regular
amortization payments therefrom, the
bank may permit the initial amortization
payment to be deferred until such time as
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said revenues are sufficient for such
purpose. Exception to the special rule: In
no case shall the initial amortization date
be later than 5 years from the date on
which the loan or other credit
accommodation is granted.
(2) In case of loans and other credit
accommodations to microfinance sectors
– The schedule of loan amortization shall
take into consideration the projected cash
flow of the borrower and adopt this into
the terms and conditions formulated by
banks. [Sec. 44, GBL]
All are subject to such rules as the Monetary
Board may promulgate. [Sec. 29, GBL]
E. DILIGENCE REQUIRED OF BANKS
The banking industry is impressed with public
interest. As such, the highest degree of
diligence is expected, and high standards of
integrity and performance are even required.
Banks must treat depositors’ accounts with
meticulous care and always to have in mind
the fiduciary nature of its relationship with
them. [Metrobank v. Rosales, G.R. No. 183204
(2014); Comsavings Bank v. Sps. Capistrano,
G.R. No. 170942 (2013); Equitable Banking v.
Special Steel Products, G.R. No. 175350 (2012)]
Banks assume a degree of diligence higher
than that of a good father of a family. Its
fiduciary duty imposes upon it a higher level
of accountability than that expected of a
depositor.[Philippine Banking Corporation vs.
CA, G.R. No. 127469 (2004)]
Notwithstanding the degree of diligence
required, a bank is not expected to be
infallible [Prudential Bank vs. CA, G.R. No.
125536 (2000)].
Relevant Jurisprudence:
• When the bank fails to credit funds
deposited to the depositor’s account, it is
negligent, because the bank has the
obligation to treat the accounts of its
depositors with meticulous care, always
having in mind the fiduciary nature of
their relationship. [Simex v. CA, G.R. No.
88013 (1990)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
• Likewise, it is negligent for withdrawals
to be allowed from an account, if the
bank itself failed to follow its own rules
and procedures [BPI v. IAC, G.R. No. L-
66826 (1988)]
• The bank is not expected to be infallible
but it must hear the blame for not
discovering the mistake of its teller
despite the established procedure. (BPI v.
CA)
• The Rural Bank of Cabadbaran should
not have simply relied on the face of SPAs
since its undertaking to lend P200k as a
banking institution requires a greater
degree of diligence. [RBCI v. Melecio-Yap,
G.R. No. 178451 (2014)]
• When the teller lost the passbook, the
bank failed to meet the high standards of
integrity and performance. [Consolidated
Bank v. CA, G.R. No. 114286 (2011)]
• As is failure to compare the signatures on
the withdrawal slip and signature cards.
[PNB v. Pike, G.R. No. 157845 (2005)]
Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
Under the doctrine of last clear chance, a
bank may be held liable for loss despite the
negligence of a depositor. Examples of these
cases are the following:
(1) For disbursing funds to a dishonest
employee despite the employee’s
failure to strictly abide with the
bank’s internal procedure. [Philippine
Bank of Commerce v. CA, G.R. No.
97626 (1997)]
(2) Allowing the execution of a mortgage
on parcels of land as security for a
loan not owned by the prospective
borrower. [Canlas v. CA, G.R. No.
112160 (2000)]
(3) Crediting the deposit in favor of
another depositor, a check where the
signature of the drawer was forged.
[Westmont Bank v. Ong, G.R. No.
132560 (2002)]
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MERCANTILE LAW
F. NATURE OF BANK FUNDS AND
BANK DEPOSITS
The relationship between a depositor and a
bank is that of a creditor and debtor in
relation to the bank’s deposit functions
[Gullas vs. PNB, G.R. No. L-43191, (1935)] and
not that of depositor and depositary.
The contract between the bank and its
depositor is governed by the provisions of the
NCC on simple loan [Consolidated Bank and
Trust Corporation vs. CA, G.R. No. 138569
(2003)].
Bank deposits are in the nature of irregular
deposits [Serrano vs. Central Bank, G.R. No. L-
30511 (1980)]. Therefore, Art. 1287 of the Civil
Code, which prohibits compensation when
one of the debts arises from depositum, does
not apply.
Current and savings deposits are loans to a
bank because the bank can use the same and
they earn interest [BPI vs. CA, G.R. No. 104612
(1994)].
The relationship being contractual in nature,
mandamus is therefore not an available
remedy since mandamus does not lie to
enforce the performance of contractual
obligations [Maclaring Lucman vs. Alimatar
Malawi, G.R. No. 159794 (2006)]
Money deposited is commingled with other
money constituting a common fund.
G. STIPULATION ON INTERESTS
The Monetary Board may prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations.
Any change by the Board in the maximum
maturities shall apply only to loans and other
credit accommodations made after the date
of such action.
The Monetary Board shall regulate the
interest imposed on micro finance borrowers
by lending investors and similar lenders such
as, but not limited to, the unconscionable
rates of interest collected on salary loans and
similar credit accommodations [Sec. 43, GBL]
UP LAW BOC INTELLECTUAL PROPERTY CODE
H. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL
MEASURES)
H.1. RATIO OF NET WORTH TO TOTAL RISK
ASSETS
Concept: The minimum ratio which the net
worth of a bank must bear to its total risk
assets which may include contingent
accounts [i.e. net worth: total risk assets]
[Sec. 34, GBL]
General rule: A bank must conform to the
risk-based capital ratio prescribed by the MB
Exceptions: The MB may alter or suspend
compliance with such ratio whenever
necessary for a maximum period of 1 year.
(1) In case of a bank merger or consolidation;
OR
(2) When a bank is under rehabilitation
under a program approved by the BSP;
[Sec. 34]
I. PURPOSE
A bank must not be allowed to expand the
volume of its loans and investments in a
manner that is disproportionate to its net
worth. [Morales (2004)]
I.1. EFFECT OF NON-COMPLIANCE
(1) The MB may limit or prohibit the
distribution of net profits by such bank
and may require that part or all of the net
profits be used to increase the capital
accounts of the bank until the minimum
requirement has been met.
(2) The MB may restrict or prohibit the
acquisition of major assets and the
making of new investments by the bank,
with the exception of purchases of readily
marketable evidences of indebtedness of
the RP and the BSP and any other
evidences of indebtedness or obligations
the servicing and repayment of which are
fully guaranteed by the RP, until the
minimum required capital ratio has been
restored. [Sec. 34, GBL]
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I.2. SINGLE BORROWER’S LIMIT
General rule: The total loans, credit
accommodations and guarantees that may
be extended by a bank to any person,
partnership, association, or corporation or
other entity shall at no time exceed 20% of
the net worth of such bank. [Sec. 35.1, GBL]
Exceptions:
(a) The Monetary Board otherwise
prescribes for reasons of national
interest. [Sec. 35.1] Now, the single
borrower’s limit is 25% of the net
worth of the lending bank.
(b) Wholesale lending activities of
government banks to participating
institutions for re-lending to end-user
borrowers: separate limit of 35% net
worth. [BSP Circular No. 425 dated
March 25, 2004]
1. Increase of limit
The Monetary Board may increase the limit
prescribed by an additional 10% of the net
worth, when:
(1) The additional liabilities of any borrower
are adequately secured by trust receipts,
shipping documents, warehouse receipts
or other similar documents transferring
or securing title;
(2) Covering readily marketable, non-
perishable goods; and
(3) Which must be fully covered by insurance
[Sec. 35.2]
2. Purpose
To prevent the bank from making excessive
loans and other credit accommodations to a
single borrower or corporate group, including
guarantees for the account of such borrower
or group. The bank is prohibited from…
placing many eggs in the basket of one client.
[It] is a damage-control mechanism [and] a
device for risk amelioration. [Morales (2004)]
3. Basis for determining compliance
The basis for determining compliance with
the SBL is the total credit commitment of the
bank to the borrower. [Sec. 35.1, GBL]
UP LAW BOC INTELLECTUAL PROPERTY CODE
4. Inclusions in the ceiling
(1) The direct liability of the maker or
acceptor of paper discounted with or sold
to such bank and the liability of a general
indorser, drawer or guarantor who
obtains a loan or other credit
accommodation from or discounts paper
with or sells papers to such bank;
(2) In the case of an individual who owns or
controls a majority interest in a
corporation, partnership, association or
any other entity, the liabilities of said
entities to such bank;
(3) In the case of a corporation, all liabilities
to such bank of all subsidiaries in which
such corporation owns or controls a
majority interest; and
(4) In the case of a partnership, association
or other entity, the liabilities of the
members thereof to such bank. [Sec. 35.3,
GBL]
5. Guidelines on the wholesale lending of
government banks
(1) It shall apply only to loans granted by
participating financial institutions [PFIs]
on a wholesale basis for on-lending to
end-user borrowers;
(2) It shall apply only to loan programs
funded by multilateral, international, or
local development agencies,
organizations, or institutions, especially
designed for wholesale lending activities
of government banks;
(3) The end-user borrowers of the PFIs shall
be subject to the 25% SBL, not the
increased ceiling of 35%; and
(4) Government banks shall observe
appropriate criteria for accrediting PFIs
and for the grant/renewal of credit lines
to accredited PFIs. [BSP Circular No. 425
dated March 25, 2004]
6. Exclusions from the ceiling (non-risk loans)
Loans and other credit accommodations—
(1) Secured by obligations of the BSP or of
the Philippine Government;
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(2) Fully guaranteed by the government as to
the payment of principal and interest;
(3) Covered by assignment of deposits
maintained in the lending bank and held
in the Philippines;
(4) Under letters of credits to the extent
covered by margin deposits; and
(5) Specified by the Monetary Board as non-
risk items [Sec. 35.5, GBL]
7. Combination of liabilities
The MB may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association,
entity or such individual under certain
circumstances, including but not limited to
any of the following situations:
(1) The parent-corporation, partnership,
association, entity or individual
guarantees the repayment of the
liabilities;
(2) The liabilities were incurred for the
accommodation of the parent corporation
or another subsidiary or of the
partnership or association or entity or
such individual; or
(3) The subsidiaries though separate entities
operate merely as departments or
divisions of a single entity. [Sec. 35.4,
GBL]
Loans and other credit accommodations,
deposits maintained with, and usual
guarantees by a bank to any other bank or
non-bank entity, whether locally or abroad,
shall be subject to the prescribed limits. [Sec.
35.6, GBL]
I.3. RESTRICTIONS ON BANK EXPOSURE
TO DOSRI (DIRECTORS, OFFICERS,
STOCKHOLDERS, AND THEIR RELATED
INTERESTS)
General rule [Sec. 36, GBL]: No director or
officer of any bank—
(1) Shall, directly or indirectly, for himself or
as the representative or agent of others,
borrow from such bank, nor
(2) Shall he become a guarantor, endorser or
surety for loans from such bank to others,
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

or in any manner be an obligor or incur

any contractual liability to the bank

Exceptions [SEC. 36, GBL]:

(1) Valid insider lending;
(2) Loans, credit accommodations and
guarantees extended by a cooperative
bank to its cooperative shareholders.

1. Requirements for valid insider lending

(1) In the regular course of business;
(2) Upon terms not less favorable to the
bank than those offered to others;
(3) There is a written approval of the majority
of all the directors of the bank, excluding
the director concerned.
Exception: Not required where granted to
officers under a fringe benefit plan
approved by the BSP;
(4) The required approval shall be entered
upon the record of the bank and a copy of
such entry shall be transmitted forthwith
to the appropriate supervising and
examining department of the BSP;
(5) Limited to an amount equivalent to the
DOSRI borrower’s unencumbered
deposits and book value of his paid-in
capital contribution in the bank [Sec. 36]

2. Exceptions
[Sec. 36, GBL]:
(1) Non-risk items; and
(2) Loans in the form of fringe benefits.

3. Waiver of Bank Secrecy

A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in
all banks in the Philippines. [Sec. 26, NCBA]

4. Purpose
The general policy behind DOSRI rules is to
level the lending field between the “insiders”
and the “outsiders”. The objective is to
prevent the bank from becoming a captive
source of finance for DOSRI. [Morales (2004)]

Page 256 of 353

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MERCANTILE LAW
INTELLECTUAL
PROPERTY CODE

Page 257 of 353

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I. Intellectual Property
Rights in General
A. INTELLECTUAL PROPERTY RIGHTS
A.1. DEFINITION
Those property rights which result from the
physical manifestation of original thought.
[Ballantine’s Law Dictionary]
Note: There are no property rights protected
by law in mere ideas or mental conceptions.
When creations of mind are put in tangible
form, there is appropriate subject of property
that is protected by law. [63A Am Jur 3rd
Property, Section 5]
A.2. INTELLECTUAL PROPERTY RIGHTS
UNDER THE INTELLECTUAL PROPERTY
CODE
(1) Copyright;
(2) Related Rights of copyright;
(3) Trademarks and Service Marks;
(4) Geographic Indications;
(5) Industrial Designs;
(6) Patents;
(7) Layout-Designs (Topographies) of
Integrated Circuits; [Sec. 4, RA 8293]
(8) Protection of Undisclosed Information
(TRIPS Agreement).
B. DIFFERENCES BETWEEN
COPYRIGHTS, TRADEMARKS AND
PATENT
B.1. PATENTABLE INVENTIONS
Refer to any technical solution of a problem
in any field of human activity, which is new,
involves an inventive step and is industrially
applicable. It may be, or refer to, any product,
process, or an improvement of any of the
foregoing. [Sec. 21, RA 8293] It is vested from
the issuance of letters of patent.
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B.2. TRADEMARK
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark)
of an enterprise and shall include a stamped
or marked container of goods. [Kho v. CA, G.R.
No. 115758 (2002)] It is vested from
registration.
B.3. TRADE NAME
The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA
8293]
B.4. COPYRIGHT
Right granted by statute to the author or
originator of literary, scholarly, scientific, or
artistic productions, including computer
programs. A copyright gives him the legal
right to determine how the work is used and
to obtain economic benefits from the work.
For example, the owner of a copyright for a
book or a piece of software has the exclusive
rights to use, copy, distribute, and sell copies
of the work, including later editions or
versions of the work. If another person
improperly uses material covered by a
copyright, the copyright owner can obtain
legal relief. [Rule 2, Copyright Safeguards and
Regulations]
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work
(2) Dramatization, translation or adaptation,
abridgment, arrangement or other
transformation of the work.
(3) The first public distribution of the original
and each copy of the work by sale or
other forms of transfer of ownership.
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the
UP LAW BOC INTELLECTUAL PROPERTY CODE
ownership of the original or the copy
which is the subject of the rental.
(5) Public Display of the original or a copy of
the work.
(6) Public Performance of the Work;
(7) Other Communication to the public of the
work. [Sec. 177, IPC]
Copyright is confined to literary and artistic
works which are original intellectual
creations in the literary and artistic domain
protected from the moment of their creation.
[Kho v. CA, G.R. No. 115758 (2002)] It is vested
from the moment of creation.
B.5. OTHER FORMS OF INTELLECTUAL
PROPERTY
i. Geographic Indication
One which identifies a good as originating in
the territory of a TRIPS member, or a region
or locality in that territory where a given
quality, reputation or other characteristic of a
good is essentially attributable to its
geographical origin [Art. 22, TRIPS
Agreement]
ii. Industrial Design
Any composition of lines or colors or any
three-dimensional form, whether or not
associated with lines or colors: Provided, that
such composition or form gives a special
appearance to and can serve as pattern for an
industrial product or handicraft. (Sec. 112.1,
RA 8293)
iii. Layout Design (Topography) of an
Integrated Circuit
Layout Design (Topography) — The three-
dimensional disposition, however expressed,
of the elements, at least one of which is an
active element, and of some or all the
interconnections of an integrated circuit, or
such a three-dimensional disposition
prepared for an integrated circuit intended
for manufacture. (Sec. 112.3, RA 8293)
iv. Integrated Circuit —a product, in its final
form, or an intermediate form, in which the
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elements, at least one of which is an active
element and some or all of the
interconnections are integrally formed and/or
on a piece of material, and which is intended
to perform an electronic function. (Sec. 112.2,
RA 8293)
v. Undisclosed Information
Information which:
(1) Is a secret in a sense that it is not, as a
body or in the precise configuration and
assembly of components, generally
known among or readily accessible to
persons within the circles that normally
deal with the kind of information in
question;
(2) Has a commercial value because it is
secret; and
(3) Has been subject to reasonable steps
under the circumstances, by the person
lawfully in control of the information, to
keep it secret [Art. 39, TRIPS]
C. TECHNOLOGY TRANSFER
ARRANGEMENTS
Refers to contracts or agreements involving:
(1) the transfer of systematic knowledge for
the manufacture of a product;
(2) the application of a process, or rendering
of a service including management
contracts;
(3) The transfer, assignment or licensing of
all forms of intellectual property rights,
including licensing of computer software
except computer software developed for
mass market. [Sec. 4.2, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
II. Patents
IN GENERAL
Defintion
A patent is a grant issued by the government
through the Intellectual Property Office of the
Philippines (IP Philippines). It is an exclusive
right granted for a product, process or an
improvement of a product or process which is
new, inventive and useful. It thus gives the
inventor the right to exclude others from
making, using, or selling the product of his
invention during the life of the patent.
A patent has a term of protection of twenty
(20) years providing an inventor significant
commercial gain. In return, the patent owner
must share the full description of the
invention. This information is made available
to the public in the form of the Intellectual
Property Official Gazette and can be utilized
as basis for future research and will in turn
promote innovation and development.
[IPOPhil]
A. WHAT ARE PATENTABLE?
(1) Inventions
(2) Utility Model
(3) Industrial Designs
(4) Lay-Out Designs (Topographies of
Integrated Circuits)
A.1. INVENTIONS
A patentable invention is any technical
solution of a problem in any field of human
activity which is new, involves an inventive
step and is industrially applicable shall be
patentable. It may be, or may relate to, a
product, or process, or an improvement of
any of the foregoing. [Sec. 21, RA 8293]
Standards of Patentable Inventions
(1) Novelty — An invention shall not be
considered new if it forms part of a prior art.
[Sec. 23, RA 8293]
Prior art shall consist of:
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(1) Everything which has been made
available to the public anywhere in the
world, before the filing date or the priority
date of the application claiming the
invention; [Sec. 24.1, RA 8293]
(2) The whole contents of an application for
a patent, utility model, or industrial
design registration, published in
accordance with this Act, filed or effective
in the Philippines, with a filing or priority
date that is earlier than the filing or
priority date of the application: Provided,
That the application which has validly
claimed the filing date of an earlier
application under Section 31 of this Act,
shall be prior art with effect as of the
filing date of such earlier application:
Provided further, That the applicant or
the inventor identified in both
applications are not one and the same.
[Sec. 24.2, RA 8293]
(3)
Non-Prejudicial Disclosures –This is an
exception to the General Rule on Prior Art
under Sec. 24. It provides that the disclosure
of the information contained in the
application during the 12 months preceding
the filing date or the priority date of the
application shall not prejudice the applicant
on the ground of lack of novelty if such
disclosure was made by:
(1) The inventor
(2) A patent office and the information
contained (1) in another application filed
by the inventor and should not have been
disclosed by the office, or (2) in an
application filed without the knowledge
or consent of the inventor by a third party
which obtained the information directly
or indirectly from the inventor
(3) A third party which obtained the
information directly or indirectly from the
inventor [Sec. 25, RA 8293]
An invention must possess the essential
elements of novelty, originality and
precedence and for the patentee to be
entitled to protection, the invention must be
new to the world. [Maguan vs. CA, G.R. L-
45101 (1986)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(2) Inventive Step — An invention involves an
inventive step if, having regard to prior art, it
is not obvious to a person skilled in the art at
the time of the filing date or priority date of
the application claiming the invention. [Sec.
26.1, RA 8293, as amended by RA 9502]
Cheaper Medicines Act – In case of drugs and
medicines, there is no inventive step if the
invention results from the mere discovery of a
new form or new property of a known
substance which does not result in
enhancement of the known efficacy of that
substance, or the mere discovery of any new
property or new use of a known substance or
the mere use of a known process unless such
known process results in a new product that
employs at least one reactant. [Sec. 26.2, RA
8293 as amended by RA 9502]
(3) Industrial Applicability — An invention that
can be produced and used in any industry
shall be industrially applicable. [Sec. 27, RA
8293]
A.2. UTILITY MODEL
It is any technical solution of a problem in any
field of human activity which is new and
industrially applicable. Unlike an invention
patent, a utility model need not be inventive.
The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293]
A utility model registration shall expire,
without any possibility of renewal, at the end
of the seventh year after the date of the filing
of the application. [Sec. 109.3, RA 8293]
Statutory Classes of Utility Models
A Utility Model may be, or may relate to:
(1) A useful machine;
(2) An implement or tool;
(3) A product or composition;
(4) A method or process; or
(5) An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on
Utility Models and Industrial Designs as
amended]
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Grounds for Cancellation of Utility Models
(1) That the claimed invention does not
qualify for registration as a utility model
and does not meet the requirements of
registrability;
(2) That the description and the claims do
not comply with the prescribed
requirements;
(3) That any drawing which is necessary for
the understanding of the invention has
not been furnished;
(4) That the owner of the utility model
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]
A.3. INDUSTRIAL DESIGNS
An industrial design is any composition of
lines or colors or any three-dimensional form,
whether or not associated with lines or colors:
Provided that such composition or form gives
a special appearance to and can serve as
pattern for an industrial product or handicraft.
[Sec. 112.1, RA 8293 as amended by RA 9150]
A.4. LAY-OUT DESIGNS (TOPOGRAPHIES
OF INTEGRATED CIRCUITS)
Integrated Circuit means a product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the
interconnections are integrally formed in
and/or on a piece of material, and which is
intended to perform an electronic function.
[Sec. 112.2, RA 8293 as amended by RA 9150]
Layout-Design is synonymous with
'Topography' and means the three-
dimensional disposition, however expressed,
of the elements, at least one of which is an
active element, and of some or all of the
interconnections of an integrated circuit, or
such a three-dimensional disposition
prepared for an integrated circuit intended
for manufacture. [Sec. 112.3, RA 8293 as
amended by RA 9150]
UP LAW BOC INTELLECTUAL PROPERTY CODE
B. NON-PATENTABLE INVENTIONS
The following shall be excluded from patent
protection:
(1) Discoveries, scientific theories and
mathematical methods, and in the case
of drugs and medicines, the mere
discovery of a new form or new property
of a known substance which does not
result in the enhancement of the known
efficacy of that substance, or the mere
discovery of any new property or new use
for a known substance, or the mere use of
a known process unless such known
process results in a new product that
employs at least one new reactant. Salts,
esters, ethers, polymorphs, metabolites,
pure form, particle size, isomers, mixtures
of isomers, complexes, combinations, and
other derivatives of a known substance
shall be considered to be the same
substance, unless they differ significantly
in properties with regard to efficacy; [Sec.
22.1, RA 8293 as amended by RA 9502]
(2) Schemes, rules and methods of
performing mental acts, playing games
or doing business, and programs for
computers; [Sec. 22.2, RA 8293]
(3) Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the
human or animal body. This provision
shall not apply to products and
composition for use in any of these
methods; [Sec. 22.3, RA 8293]
(4) Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-
organisms and non-biological and
microbiological processes; [Sec. 22.4, RA
8293]
(5) Aesthetic creations; [Sec. 22.5, RA 8293]
(6) Anything which is contrary to public order
or morality. [Sec. 22.6, RA 8293]
Cheaper Medicines Act: In addition to
discoveries, scientific theories and
mathematical methods, the IP Code now
includes (as non-patentable), in case of drugs
and medicines:
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(1) The mere discovery of a new form or new
property of a known substance which
does not result in the enhancement of the
known efficacy of that substance
(2) the mere discovery of any new property or
new use of a known substance
(3) the mere use of a known process unless
such known process results in a new
product that employs at least one
reactant [Sec. 26.2, RA 8293 as amended
by RA 9502]
C. OWNERSHIP OF A PATENT
C.1. RIGHT TO A PATENT
General Rule: The right to patent belongs to
the inventor, his heirs, or assigns. When two
(2) or more persons have jointly made an
invention, the right to a patent shall belong
to them jointly. [Sec.28, RA 8293]
Exception: Inventions created pursuant to a
commission (Work for Hire Doctrine)
(1) The employer has the right to the patent
if the invention is the result of the
performance of the employee’s regularly
assigned duties [Sec. 30.2, RA 8293]
(2) In case of inventions created pursuant to
a commission, the person who
commissions the work shall own the
patent [Sec. 30.1, RA 8293]
C.2. FIRST-TO-FILE RULE
If two (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 two or more
applications are filed for the same invention,
to the applicant who has the earliest filing
date or, the earliest priority date. [Sec. 29, RA
8293]
C.3. INVENTIONS CREATED PURSUANT TO
A COMMISSION
Commission: Person who commissions the
work shall own the patent, unless otherwise
provided in the contract [Sec. 30.1, RA 8293)
UP LAW BOC INTELLECTUAL PROPERTY CODE
Employment Contract: Patent belongs to the
employee if the inventive activity is not a part
of his regular duties even if the employee
uses the time, facilities and materials of the
employer. [Sec. 30.2 (a), RA 8293]
Patent belongs to the employer if the
invention is the result of the performance of
his regularly-assigned duties, unless there is
an agreement, express or implied, to the
contrary. [Sec. 30.2 (b), RA 8293]
C.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 be considered filed
as of the date of filing the foreign application:
Provided, That: (a) the local application
expressly claims priority; (b) it is filed within
twelve (12) months from the date the earliest
foreign application was filed; and (c) a
certified copy of the foreign application
together with an English translation is filed
within six (6) months from the date of filing in
the Philippines. [Sec. 31, RA 8293]
C.5. REMEDY OF PERSONS NOT HAVING
THE RIGHT TO A PATENT
If a person other than the applicant, is
declared by final court order or decision as
having the right to the patent, such person
may, within three (3) months after the
decision has become final:
(1) Prosecute the application as his own
application in place of the applicant;
(2) File a new patent application in
respect of the same invention;
(3) Request that the application be
refused; or
(4) Seek cancellation of the patent, if one
has already been issued. [Sec. 67, RA 8293]
D. TERM OF PATENT
D.1. TERM OF INVENTION PATENT
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The term of a patent shall be twenty (20)
years from the filing date of the application.
[Sec. 54, RA 8293]
A patent shall take effect on the date of the
publication of the grant of the patent in the
IPO Gazette. [Sec. 50.3, RA 8293]
D.2. TERM OF UTILITY MODEL
A utility model registration shall expire,
without any possibility of renewal, at the end
of the seventh year after the date of the filing
of the application. [Sec. 109.3, RA 8293]
D.3. TERM OF INDUSTRIAL DESIGN
The registration of an industrial design shall
be for a period of five (5) years from the filing
date of the application. [Sec. 118.1, RA 8293]
E. CANCELLATION OF PATENT
E.1. GROUNDS FOR CANCELLATION OF A
PATENT
Any interested person may petition to cancel
the patent or any claim thereof, or parts of
the claim, on any of the following grounds:
(1) That what is claimed as the invention is
not new or patentable;
(2) That the patent does not disclose the
invention in a manner sufficiently clear
and complete for it to be carried out by
any person skilled in the art; or
(3) That the patent is contrary to public order
or morality. [Sec. 61.1, RA 8293]
Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
E.2. REQUIREMENTS OF THE PETITION
The petition for cancellation shall be in
writing, verified by the petitioner or by any
person in his behalf who knows the facts,
specify the grounds upon which it is based,
include a statement of the facts to be relied
UP LAW BOC INTELLECTUAL PROPERTY CODE
upon, and filed with the Office. Copies of
printed publications or of patents of other
countries, and other supporting documents
mentioned in the petition shall be attached
thereto, together with the translation thereof
in English, if not in English language. [Sec. 62,
RA 8293]
E.3. NOTICE OF HEARING
Upon filing of a petition for cancellation, the
Director of Legal Affairs shall forthwith serve
notice of the filing thereof upon the patentee
and all persons having grants or licenses, or
any other right, title or interest in and to the
patent and the invention covered thereby, as
appears of record in the Office, and of notice
of the date of hearing thereon on such
persons and the petitioner. Notice of the
filing of the petition shall be published in the
IPO Gazette. [Sec. 63, RA 8293]
E.4. EFFECT OF CANCELLATION OF
PATENT OR CLAIM
The rights conferred by the patent or any
specified claim or claims cancelled shall
terminate. Notice of the cancellation shall be
published in the IPO Gazette. Unless
restrained by the Director General, the
decision or order to cancel by Director of
Legal Affairs shall be immediately executory
even pending appeal. [Sec. 66, RA 8293]
F. REMEDY OF THE TRUE AND ACTUAL
INVENTOR
If a person, who was deprived of the patent
without his consent or through fraud is
declared by final court order or decision to be
the true and actual inventor, the court shall
order for his substitution as patentee, or at
the option of the true inventor, cancel the
patent, and award actual and other damages
in his favor if warranted by the circumstances.
[Sec. 68, RA 8293]
F.1. TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year
from the date of publication made in
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accordance with Sections 44 and 51,
respectively. (Sec. 70, RA 8293)
G. RIGHTS CONFERRED BY A PATENT
(1) Where the subject matter of a patent is a
product, to restrain, prohibit and prevent
any unauthorized person or entity from
making, using, offering for sale, selling or
importing that product. [Sec. 71.1(a), RA
8293]
(2) Where the subject matter of a patent is a
process, to restrain, prevent or prohibit
any unauthorized person or entity from
using the process, and from
manufacturing, dealing in, using, selling
or offering for sale, or importing any
product obtained directly or indirectly
from such process. [Sec. 71.1(b), RA 8293]
(3) Patent owners shall also have the right to
assign, or transfer by succession the
patent, and to conclude licensing
contracts for the same. [Sec. 71.2, RA
8293]
To be able to effectively and legally preclude
others from copying and profiting from the
invention, a patent is a primordial
requirement. No patent, no protection. The
ultimate goal of a patent system is to bring
new designs and technologies into the public
domain through disclosure Ideas, once
disclosed to the public without the protection
of a valid patent, are subject to appropriation
without significant restraint. [Pearl Dean, Inc.
v. Shoemart, Inc., G.R. No. 148222 (2003)]
H. LIMITATIONS OF PATENT RIGHTS
The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the acts referred to in Section
71 hereof in the following circumstances:
(1) Using a patented product which has been
put on the market in the Philippines by
the owner of the product, or with his
express consent, insofar as such use is
performed after that product has been so
put on the said market: Provided, That,
with regard to drugs and medicines, the
limitation on patent rights shall apply
UP LAW BOC INTELLECTUAL PROPERTY CODE
after a drug or medicine has been
introduced in the Philippines or anywhere
else in the world by the patent owner, or
by any party authorized to use the
invention: Provided, further, That the
right to import the drugs and medicines
contemplated in this section shall be
available to any government agency or
any private third party; [Sec. 72.1, RA 8293
as amended by RA 9502]
(2) Where the act is done privately and on a
non-commercial scale or for a non-
commercial purpose: Provided, That it
does not significantly prejudice the
economic interests of the owner of the
patent; [Sec. 72.2, RA 8293 as amended
by RA 9502]
(3) Where the act consists of making or using
exclusively for experimental use of the
invention for scientific purposes or
educational purposes and such other
activities directly related to such scientific
or educational experimental use; [Sec.
72.3, RA 8293 as amended by RA 9502]
(4) In the case of drugs and medicines, where
the act includes testing, using, making or
selling the invention including any data
related thereto, solely for purposes
reasonably related to the development
and submission of information and
issuance of approvals by government
regulatory agencies required under any
law of the Philippines or of another
country that regulates the manufacture,
construction, use or sale of any product:
Provided, That, in order to protect the
data submitted by the original patent
holder from unfair commercial use
provided in Article 39.3 of the Agreement
on Trade-Related Aspects of Intellectual
Property Rights (TRIPS Agreement), the
Intellectual Property Office, in
consultation with the appropriate
government agencies, shall issue the
appropriate rules and regulations
necessary therein not later than one
hundred twenty (120) days after the
enactment of this law; (Sec. 72.4, RA
8293 as amended by RA 9502)
(5) Where the act consists of the preparation
for individual cases, in a pharmacy or by a
medical professional, of a medicine in
accordance with a medical shall apply
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MERCANTILE LAW
after a drug or medicine has been
introduced in the Philippines or anywhere
else in the world by the patent owner, or
by any party authorized to use the
invention: Provided, further, That the
right to import the drugs and medicines
contemplated in this section shall be
available to any government agency or
any private third party; (Sec. 72.5, RA
8293 as amended by RA 9502)
There shall be no infringement of trademarks
or tradenames of imported or sold drugs and
medicines allowed as well as imported or
sold off-patent drugs and medicines:
Provided, That said drugs and medicines bear
the registered marks that have not been
tampered, unlawfully modified, or infringed.
(Sec.159.4 RA 8293 as amended by RA 9502)
H.1. PRIOR USER
Notwithstanding Section 72 hereof, any prior
user, who, in good faith was using the
invention or has undertaken serious
preparations to use the invention in his
enterprise or business, before the filing date
or priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in such
preparations within the territory where the
patent produces its effect. [Sec. 73.1, RA
8293]
The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which the use or
preparations for use have been made. [Sec.
73.2, RA 8293]
H.2. USE BY THE GOVERNMENT
A Government agency or third person
authorized by the Government may exploit
the invention even without agreement of the
patent owner where:
(1) The public interest, in particular, national
security, nutrition, health or the
development of other sectors, as
determined by the appropriate agency of
the government, so requires; [Sec. 74.1(a),
RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(2) A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent
or his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]
The use by the Government, or third person
authorized by the Government shall be
subject, mutatis mutandis, to the conditions
set forth in Sections 95 to 97 and 100 to 102
on compulsory licensing. [Sec. 74.2, RA 8293]
All cases arising from the implementation of
this provision shall be cognizable by courts
with appropriate jurisdiction provided by law.
No court except the Supreme Court of the
Philippines, shall issue any temporary
restraining order or preliminary injunction or
such other provisional remedies that will
prevent its immediate execution. [Sec. 74.3,
RA 8293 as amended by RA 9502]
I. PATENT INFRINGEMENT
It is the making, using, offering for sale,
selling, or importing a patented product or a
product obtained directly or indirectly from a
patented process, or the use of a patented
process without the authorization of the
patentee. [Sec 76.1, RA 8293 as amended by
RA 9502]
I.1. CONTRIBUTORY INFRINGER
One who actively induces the infringement of
a patent or provides the infringer with a
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted
for infringing and not suitable for substantial
non-infringing. He is jointly and severally
liable with the infringer. [Sec. 76.6, RA 8293]
I.2. DOCTRINE OF PATENT EXHAUSTION
It espouses that the patentee who has
already sold his invention and has received all
the royalty and consideration for the same
will be deemed to have released the invention
from his monopoly. The invention thus
becomes open to use of the purchaser
without further restriction. [Adams v. Burke,in
Notes on Selected Commercial Laws, Catindig
2003 ed.]
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MERCANTILE LAW
I.3. TESTS IN PATENT INFRINGEMENT
i. Literal infringement
In using literal infringement as a test, resort
must be had in the first instance to the words
of the claim. To determine whether the
particular item falls within the literal
meaning of the patent claims, the court must
juxtapose the claims of the patent and the
accused product within the overall context of
the claims and specifications, to determine
whether there is exact identity of all material
elements. [Godinez v. CA, G.R. No. L-97343
(1993)]
ii. Doctrine of equivalents
Under the doctrine of equivalents, an
infringement also occurs when a device
appropriates a prior invention by
incorporating its innovative concept and,
albeit with some modification and change,
performs substantially the same function in
substantially the same way to achieve
substantially the same result. [Godinez v. CA,
G.R. No. L-97343 (1993)]
In 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. [Del Rosario v. CA,
G.R. No. 115106 (1996)]
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. The principle or
mode of operation must be the same or
substantially the same. The doctrine of
equivalents thus requires satisfaction of the
function-means-and-result test, the patentee
having the burden to show that all three
components of such equivalency test are met.
[Smith Klein Beckman Corp. v. CA, G. R. No.
126627 (2003)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
I.4. CRIMINAL ACTION FOR REPETITION
OF INFRINGEMENT
If infringement is repeated by the infringer or
by anyone in connivance with him after
finality of the judgment of the court against
the infringer, the offenders shall, without
prejudice to the institution of a civil action for
damages, be criminally liable therefor and,
upon conviction, shall suffer imprisonment
for the period of not less than six (6) months
but not more than three (3) years and/or a
fine of not less than One hundred thousand
pesos (P100,000) but not more than Three
hundred thousand pesos (P300,000), at the
discretion of the court. The criminal action
herein provided shall prescribe in three (3)
years from date of the commission of the
crime. [Sec. 84, RA 8293]
I.5. INFRINGEMENT ACTION BY FOREIGN
NATIONAL
Any foreign national or juridical entity who
meets the requirements of Section 3 (RA
8293) and not engaged in business in the
Philippines, to which a patent has been
granted or assigned under RA 8293, may
bring an action for infringement of patent,
whether or not it is licensed to do business in
the Philippines under existing law. [Sec. 77,
RA 8293]
Any person who is a national or who is
domiciled or has a real and effective
industrial establishment in a country which is
a party to any convention, treaty or
agreement relating to intellectual property
rights or the repression of unfair competition,
to which the Philippines is also a party, or
extends reciprocal rights to nationals of the
Philippines by law, shall be entitled to
benefits to the extent necessary to give effect
to any provision of such convention, treaty or
reciprocal law, in addition to the rights to
which any owner of an intellectual property
right is otherwise entitled by this Act. [Sec. 3,
RA 8293]
I.6. Defense in Action For Infringement
In an action for infringement, the defendant,
in addition to other defenses available to him,
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MERCANTILE LAW
may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which
a petition of cancellation can be brought
under Section 61. [Sec 81, RA 8293]
i. Patent found invalid may be cancelled:
In an action for infringement, if the court
shall find the patent or any claim to be invalid,
it shall cancel the same, and the Director of
Legal Affairs upon receipt of the final
judgment of cancellation by the court, shall
record that fact in the register of the Office
and shall publish a notice to that effect in the
IPO Gazette. [Sec 82, RA 8293]
ii. Doctrine of File Wrapper Estoppel
Patentee is precluded from claiming as part
of patented product that which he had to
excise or modify in order to avoid patent
office rejection, and he may omit any
additions he was compelled to add by patent
office regulations. [Advance Transformer Co. v.
Levinson 837 F.2d 1081(1988)]
J. LICENSING
J.1. VOLUNTARY
Voluntary Licensing is the grant by the patent
owner to a third person of the right to exploit
the patented invention. [Sec. 85, RA 8293]
Mandatory Provisions
The following provisions shall be included in
voluntary license contracts:
(1) That the laws of the Philippines shall
govern the interpretation of the same and
in the event of litigation, the venue shall
be the proper court in the place where the
licensee has its principal office; [Sec. 88.1,
RA 8293]
(2) Continued access to improvements in
techniques and processes related to the
technology shall be made available
during the period of the technology
transfer arrangement; [Sec. 88.2, RA
8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(3) In the event the technology transfer
arrangement shall provide for arbitration,
the Procedure of Arbitration of the
Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations
Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation
and Arbitration of the International
Chamber of Commerce (ICC) shall apply
and the venue of arbitration shall be the
Philippines or any neutral country; [Sec.
88.3, RA 8293]
(4) The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the
licensor. [Sec. 88.4, RA 8293]
Prohibited clauses
The following provisions shall be deemed
prima facie to have an adverse effect on
competition and trade:
(1) Those which impose upon the licensee
the obligation to acquire from a specific
source capital goods, intermediate
products, raw materials, and other
technologies, or of permanently
employing personnel indicated by the
licensor; [Sec. 87.1, RA 8293]
(2) Those pursuant to which the licensor
reserves the right to fix the sale or resale
prices of the products manufactured on
the basis of the license; [Sec. 87.2, RA
8293]
(3) Those that contain restrictions regarding
the volume and structure of production;
[Sec. 87.3, RA 8293]
(4) Those that prohibit the use of competitive
technologies in a non-exclusive
technology transfer agreement; [Sec. 87.4,
RA 8293]
(5) Those that establish a full or partial
purchase option in favor of the licensor;
(Sec. 87.5, RA 8293)
(6) Those that obligate the licensee to
transfer for free to the licensor the
inventions or improvements that may be
obtained through the use of the licensed
technology; (Sec. 87.6, RA 8293)
Page 268 of 353
MERCANTILE LAW
(7) Those that require payment of royalties to
the owners of patents for patents which
are not used; (Sec. 87.7, RA 8293)
(8) Those that prohibit the licensee to export
the licensed product unless justified for
the protection of the legitimate interest of
the licensor such as exports to countries
where exclusive licenses to manufacture
and/or distribute the licensed product(s)
have already been granted; (Sec. 87.8, RA
8293)
(9) Those which restrict the use of the
technology supplied after the expiration
of the technology transfer arrangement,
except in cases of early termination of the
technology transfer arrangement due to
reason(s) attributable to the licensee;
(Sec. 87.9, RA 8293)
(10) Those which require payments for
patents and other industrial property
rights after their expiration, termination
arrangement; (Sec. 87.10, RA 8293)
(11) Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier; (Sec. 87.11, RA 8293)
(12) Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local conditions
or to initiate research and development
programs in connection with new
products, processes or equipment; (Sec.
87.12, RA 8293)
(13) Those which prevent the licensee from
adapting the imported technology to
local conditions, or introducing
innovation to it, as long as it does not
impair the quality standards prescribed
by the licensor; (Sec. 87.13, RA 8293)
(14) Those which exempt the licensor for
liability for non-fulfillment of his
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed product
or the licensed technology; (Sec. 87.14, RA
8293)
(15) Other clauses with equivalent effects.
(Sec. 87.15, RA 8293)
UP LAW BOC INTELLECTUAL PROPERTY CODE
Effect of Non-compliance with any provisions
of Secs. 87 and 88
The technology transfer arrangement shall
automatically be rendered unenforceable,
unless said technology transfer arrangement
is approved and registered with the
Documentation, Information and Technology
Transfer Bureau under the provisions of
Section 91 on exceptional cases. [Sec. 92, RA
8293]
Right of Licensor
Unless otherwise provided in the technology
transfer agreement, the licensor shall have
the right to:
(1) Grant further licenses to third person
(2) Exploit the subject matter of the
technology transfer agreement [Sec. 89,
RA 8293]
Right of the Licensee.
To exploit the subject matter of the
technology transfer agreement during the
whole term of the agreement. [Sec. 90, RA
8293]
Exceptional cases
(1) In exceptional or meritorious cases where
substantial benefits will accrue to the
economy, such as high technology
content, increase in foreign exchange
earnings, employment generation,
regional dispersal of industries and/or
substitution with or use of local raw
materials
(2) The case of BOI-registered companies
with pioneer status [Sec. 91, RA 8293]
J.2. COMPULSORY
Compulsory Licensing is the grant of the
Director of Legal Affairs of a license to exploit
a patented invention, even without the
agreement of the patent owner, in favor of
any person who has shown his capability to
exploit the invention. (Sec. 93, Ra 8293 as
amended by RA 9502)
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MERCANTILE LAW
i. Grounds
The Director General of the Intellectual
Property Office may grant a license to exploit
a patented invention, even without the
agreement of the patent owner, in favor of
any person who has shown his capability to
exploit the invention, under any of the
following circumstances:
(1) National emergency or other
circumstances of extreme urgency; [Sec.
93.1, RA 8293 as amended by RA 9502]
(2) Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government,
so requires; [Sec. 93.2, RA 8293 as
amended by RA 9502]
(3) Where a judicial or administrative body
has determined that the manner of
exploitation by the owner of the patent or
his licensee is anti-competitive; [Sec. 93.3,
RA 8293 as amended by RA 9502]
(4) In case of public non-commercial use of
the patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA 8293
as amended by RA 9502]
(5) If the patented invention is not being
worked in the Philippines on a
commercial scale, although capable of
being worked, without satisfactory
reason: Provided, That the importation of
the patented article shall constitute
working or using the patent; [Sec. 93.5,
RA 8293 as amended by RA 9502]
(6) Where the demand for patented drugs
and medicines is not being met to an
adequate extent and on reasonable terms,
as determined by the Secretary of the
Department of Health. [Sec. 93.6, RA
8293 as amended by RA 9502]
(7) If the invention protected by a patent,
hereafter referred to as the "second
patent," within the country cannot be
worked without infringing another patent,
hereafter referred to as the "first patent,"
granted on a prior application or
benefiting from an earlier priority, a
compulsory license may be granted to the
UP LAW BOC INTELLECTUAL PROPERTY CODE
owner of the second patent to the extent
necessary for the working of his invention,
subject to certain conditions. [Sec. 97, RA
8293]
(8) Manufacture and export of drugs and
medicines to any country having
insufficient or no manufacturing capacity
in the pharmaceutical sector to address
public health problems: Provided, That, a
compulsory license has been granted by
such country or such country has, by
notification or otherwise, allowed
importation into its jurisdiction of the
patented drugs and medicines from the
Philippines in compliance with the TRIPS
Agreement. [Sec. 93-A.2, RA 8293 as
amended by RA 9502]
ii. Period of filing a Petition for Compulsory
License
At any time after the grant of patent.
However, a compulsory license may not be
applied for on the ground stated in Sec. 93.5
before the expiration of a period of four (4)
years from the date of filing of the application
or three (3) years from the date of the patent
whichever period expires last. [Sec. 94, RA
8293 as amended by RA 9502]
iii. Requirement to Obtain a License on
Reasonable Commercial Terms
General Rule: The license will only be granted
after the petitioner has made efforts to obtain
authorization from the patent owner on
reasonable commercial terms and conditions
but such efforts have not been successful
within a reasonable period of time. [Sec. 95.1,
RA 8293 as amended by RA 9502]
Exceptions: The requirement of authorization
shall not apply in the following cases:
(1) Where the petition for compulsory license
seeks to remedy a practice determined
after judicial or administrative process to
be anti-competitive;
(2) In situations of national emergency or
other circumstances of extreme urgency;
(3) In cases of public non-commercial use.
(4) In cases where the demand for the
patented drugs and medicines in the
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Philippines is not being met to an
adequate extent and on reasonable terms,
as determined by the Secretary of the
Department of Health. [Sec. 95.2, RA
8293 as amended by RA 9502]
iv. Terms and Conditions of Compulsory
License
(1) The scope and duration of such license
shall be limited to the purpose for which
it was authorized; [Sec. 100.1, RA 8293]
(2) The license shall be non-exclusive; [Sec.
100.2, RA 8293]
(3) The license shall be non-assignable,
except with that part of the enterprise or
business with which the invention is being
exploited; ; [Sec. 100.3, RA 8293]
(4) Use of the subject matter of the license
shall be devoted predominantly for the
supply of the Philippine market: Provided,
that this limitation shall not apply where
the grant of the license is based on the
ground that the patentee's manner of
exploiting the patent is determined by
judicial or administrative process, to be
anti-competitive. ;[Sec. 100.4, RA 8293]
(5) The license may be terminated upon
proper showing that circumstances which
led to its grant have ceased to exist and
are unlikely to recur: Provided, That
adequate protection shall be afforded to
the legitimate interest of the licensee; ;
[Sec. 100.5, RA 8293]
(6) The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or
authorization, except that in cases where
the license was granted to remedy a
practice which was determined after
judicial or administrative process, to be
anti-competitive, the need to correct the
anti-competitive practice may be taken
into account in fixing the amount of
remuneration. [Sec. 100.6, RA 8293]
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common characteristic, including the quality

III. Trademarks of goods or services of different enterprises
which use the sign under the control of the
registered owner of the collective mark. (Sec.
A. DEFINITION OF MARKS, 121.2, RA 8293)
COLLECTIVE MARKS, TRADE NAMES

A.1. MARKS
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark)
of an enterprise and shall include a stamped
or marked container of goods (Sec. 121.1, RA
8293)
A trademark refers to a word, name, symbol,
emblem, sign or device or any combination
thereof adopted and used by a merchant to
identify, and distinguish from others, his
goods of commerce. It is basically an
intellectual creation that is susceptible to
ownership and, consistently therewith, gives
rise to its own elements of ownership. The
incorporeal right, however, is distinct from
the property in the material object subject to
it. Ownership in one does not necessarily vest
ownership in the other. Thus, the transfer or
assignment of the intellectual property will
not necessarily constitute a conveyance of the
thing it covers, nor would a conveyance of the
latter imply the transfer or assignment of the
intellectual right. [Distilleria Washington vs.
CA, G.R. No. 120961 (1996)]
Trademark Service Mark
Any visible sign which Any visible sign
is adopted and used capable of
to identify the source distinguishing the
of origin of goods, and services of an
which is capable of enterprise from the
distinguishing them service of other
from goods enterprises.
emanating from a
competitor.
Protection
Is not limited to similar marks but also
products that may case insidious damage.
Collective Marks
Any visible sign designated as such in the
application for registration and capable of
distinguishing the origin or any other
Page 271 of 353
Trade Name
The name or designation identifying or
distinguishing an enterprise (Sec. 121.3, RA
8293).
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
occupations. [Converse Rubber Corp. v.
Universal Rubber Products, Inc., G.R. No. L-
27906 (1987)]
A.2. FUNCTIONS OF A TRADEMARK
(1) To point out distinctly the origin or
ownership of the goods and to which it is
affixed;
(2) To secure him, who has been
instrumental in bringing into the market
a superior article of merchandise, the fruit
of his industry and skill;
(3) To assure the public that they are
producing the genuine article;
(4) To prevent fraud and imposition; and
(5) To protect the manufacturer against
substitution and sale of an inferior and
different article as its product [Mirpuri v.
CA, G.R. No. 114508 (1999)]
The objects of a trademark are to point out
distinctly the origin or ownership of the
articles to which it is affixed, to secure to him
who has been instrumental in bringing into
market a superior article or merchandise the
fruit of his industry and skill, and to prevent
fraud and imposition. [Etepha v. Director of
Patents, G.R. No. L-20635 (1966)]
A.3. KINDS OF MARKS; SPECTRUM OF
DISTINCTIVENESS
Fanciful or “Coined” Marks
These are invented or “coined” words that do
not have any meaning and are made solely
UP LAW BOC INTELLECTUAL PROPERTY CODE
for the purpose of the mark. They are
considered “strong” marks for purposes of
registration and protection for being
inherently distinctive. Ex. “KODAK”
Arbitrary Marks
Common words used as marks, but are
unrelated to the good or service they
represent. They neither describe nor suggest
the characteristic of the goods or service,
though they are considered highly distinctive
for purposes of registration. Ex. “APPLE”
Suggestive Marks
Marks that hint or suggest the nature or
quality of the good or service without directly
describing it. They are “subtly descriptive”
and are entitled to protection despite lack of
distinctiveness. Ex. “JAGUAR”
Descriptive Marks
Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services; (Sec.
123.j)
These are words that merely describe the
product or service or refer to their quality or
characteristic.
General rule: Descriptive marks are not
entitled to protection and are too weak to
function as a trademark.
Exception: Doctrine of Secondary meaning,
infra.
Ex. “ANG TIBAY,” “YELLOW PAGES”
Generic Marks
Words that directly tell what the product or
service is. These must remain in the public
domain and can never be registered as a
trademark. Ex. “SUGAR”
B. ACQUISITION OF OWNERSHIP OF
MARK
Page 272 of 353
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The rights to a mark shall be acquired
through registration made validly in
accordance with law. [Sec. 122, RA 8293]
B.1. DURATION OF CERTIFICATE
A certificate of registration shall remain in
force for 10 years and may be renewed for
periods of 10 years at its expiration upon
payment of the prescribed fee and upon filing
of a request. [Sec 145-146, RA 8293]
C. ACQUISITION OF OWNERSHIP OF
TRADE NAME
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even
prior to or without registration, against any
unlawful act committed by third parties. [Sec.
165.2 (a), RA 8293) The ownership of a trade
name is acquired through adoption and use.
A name or designation may not be used as a
trade name if by its nature or the use to which
such name or designation may be put, it is
contrary to public order or morals and if, in
particular, it is liable to deceive trade circles
or the public as to the nature of the enterprise
identified by that name. [Sec. 165.1, RA 8293]
Any change in the ownership of a trade name
shall be made with the transfer of the
enterprise or part thereof identified by that
name. [Sec. 165.4, RA 8293]
D. NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(1) Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection
with persons, living or dead, institutions,
beliefs, or national symbols, or bring
them into contempt or disrepute; [Sec
123.1(a), RA 8293]
(2) Consists of flags, coat of arms or other
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]
(3) Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or of a
deceased President of the Philippines,
UP LAW BOC INTELLECTUAL PROPERTY CODE
during the life of his widow, except by
written consent of the widow; [Sec 123.1(c),
RA 8293]
(4) Is identical with a registered mark of
another or a mark with an earlier filing or
priority date, in respect of:
(a) The same goods or services, or
(b) Closely related goods or services, or
(c) If it nearly resembles such a mark as
to be likely to deceive or cause
confusion; [Sec 123.1(d), RA 8293]
(5) Is identical with, or confusingly similar to,
or constitutes a translation of a well-
known mark, whether or not registered in
the Philippines, and used for identical or
similar goods or services; [Sec 123.1(e), RA
8293]
(6) Is identical with, or confusingly similar to,
or constitutes a translation of a well-
known mark which is registered in the
Philippines, and used for goods or
services which are not similar; [Sec 123.1(f),
RA 8293]
(7) Likely to mislead the public, particularly
as to the nature, quality, characteristics
or geographical origin of the goods or
services; [Sec 123.1(g), RA 8293]
(8) Consists exclusively of signs that are
generic for the goods or services that they
seek to identify; [Sec 123.1(h), RA 8293]
(9) Consists exclusively of signs or of
indications that have become customary
or usual to designate the goods or
services in everyday language or in a
bona fide and established trade practice;
[Sec 123.1(i), RA 8293]
(10) Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods or
rendering of the services, or other
characteristics of the goods or services;
[Sec 123.1(j), RA 8293]
(11) Consists of shapes that may be
necessitated by technical factors or by the
nature of the goods themselves or factors
that affect their intrinsic value; [Sec
123.1(k), RA 8293]
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(12) Consists of color alone, unless defined by
a given form; [Sec 123.1(l), RA 8293]
(13) Is contrary to public order or morality.
[Sec 123.1(m), RA 8293]
If Merely Descriptive
“"Tussin" was derived from the Latin "tussis"
meaning cough. "Tussin" is merely
descriptive; it is generic; it furnishes to the
buyer no indication of the origin of the goods;
it is open for appropriation by anyone. It is
barred from registration as trademark. While
"tussin" by itself cannot thus be used
exclusively to identify one's goods, it may
properly become the subject of a trademark
"by combination with another word or
phrase", e.g. “Atussin”, “Pertussin”.” [Etepha
vs. Director of Patents, G.R. No. L-20635
(1966)]
“The phrase “Ang tibay!” is never used
“adjectively” to define or describe an object.
One does not say, “Ang tibay sapatos” or
“sapatos ang tibay” to mean “durable
shoes”; rather we say “matibay na sapatos”
or “sapatos na matibay.”Thus, the name
“Ang Tibay” is a fanciful or coined phrase and
not a descriptive term, and therefore may be
legally appropriated as a trademark or trade-
name.” [Ang vs. Teodoro, G.R. No. L-48226
(1942)]
D.1. DOCTRINE OF SECONDARY MEANING
When the marks referred to in nos. 10, 11 and
12 has become distinctive, because of its long,
continuous and exclusive use for 5 years, as
used in connection with the applicant’s goods
or services in commerce and in the mind of
the public indicates a single source to
consumers, it may be registered. The Office
may accept as prima facie evidence that the
mark has become distinctive, as used in
connection with the applicant's goods or
services in commerce, proof of substantially
exclusive and continuous use thereof by the
applicant in commerce in the Philippines for
five (5) years before the date on which the
claim of distinctiveness is made. [Sec 123.2,
RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
The nature of the goods to which the mark is
applied will not constitute an obstacle to
registration. [Sec 123.3, RA 8293]
D.2. DISCLAIMERS
Office may allow or require the applicant to
disclaim an unregistrable component of an
otherwise registrable mark but such
disclaimer shall not prejudice or affect the
applicant’s or owner’s rights then existing or
thereafter arising in the disclaimed matter,
nor such shall disclaimer prejudice or affect
the applicant’s or owner’s right on another
application of later date if the disclaimed
matter became distinctive of the applicant’s
or owner’s goods, business or services. [Sec.
126, RA 8293]
Disclaimer
Words in a mark that are not being claimed
for exclusive use, including: 1. Generic terms;
2. Descriptive words; and 3. Those that do not
function as part of the trademark.
Note: Disclaimed words can later on be
registered as part of the trademark if it
acquires distinctiveness.
E. PRIOR USE OF MARK AS A
REQUIREMENT
E.1. USE OF MARK AS A REQUIREMENT
Declaration of Actual Use (DAU)
The applicant or the registrant shall file a
declaration of actual use of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years 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.
[Sec. 124.2, RA 8293]
Note: Failure to file declaration of actual use
automatically cancels mark registration by
operation of law.
When to File Declaration of Actual Use
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i. Under the IPC or RA 8293:
(a) within three (3) years from the application
date (3rd Year DAU); and
(b) within one (1) year from the 5th
anniversary of the registration of the mark
(5th Year DAU).
ii. Trademarks registered under RA 166:
(a) within one (1) year from the 5th
anniversary of registration of the mark (5th
Year DAU);
(b) within one (1) year from the 10th
anniversary of registration of the mark (10th
Year DAU); and
(c) within one (1) year from the 15th
anniversary of registration of the mark (15th
Year DAU).
Cf. Declaration of Non-Use, infra
For the requirement of “actual use in
commerce in the Philippines” before one may
register a trademark, trade name and service
mark under the law pertains to the territorial
jurisdiction of the Philippines and is not only
confined to a certain region, province, city or
barangay. [McDonald’s Corporation v. MacJoy
Fastfood, G.R. No. 166115 (2007)]
Trademark is a creation of use and, therefore,
actual use is a pre-requisite to exclusive
ownership; registration is only an
administrative confirmation of the existence
of the right of ownership of the mark, but
does not perfect such right; actual use
thereof is the perfecting ingredient. [Shangri-
La International Hotel v. Developers Group of
Companies, G.R. No. 159938 (2006)]
While a Declaration of Actual Use is a
notarized document, hence, a public
document, it is not conclusive as to the fact of
first use of a mark. The declaration must be
accompanied by proof of actual use as of the
date claimed. In a declaration of actual use,
the applicant must, therefore, present
evidence of such actual use. [E.Y. Industrial
Sales, Inc. v. Shen Dar, G.R. No. 184850
(2010)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
E.2. NON-USE OF MARK WHEN EXCUSED
(1) If caused by circumstances arising
independently of the will of the
trademark owner. Lack of funds shall not
excuse non-use of a mark; [Sec. 152.1, RA
8293]
(2) A use which does not alter its distinctive
character though the use is different from
the form in which it is registered. [Sec.
152.2, RA 8293]
(3) Use of a mark in connection with one or
more of the goods/services belonging to
the class in which the mark is registered.
[Sec. 152.3, RA 8293]
(4) The use of mark by a company related to
the applicant or registrant
(5) The use of mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]
The use of a mark by a company related with
the registrant or applicant shall inure to the
latter's benefit, and such use shall not affect
the validity of such mark or of its registration:
Provided, that such mark is not used in such
manner as to deceive the public. [Sec.152.4,
Ra 8293]
Declaration of Non-Use (DNU)
A registrant is allowed to keep the
registration active if such registrant is not
able to comply with the requirements of DAU
for non-use of the mark.
In the following cases, a Declaration of Non-
Use may be filed within three years from filing
of the application or within the extension
period if a request for extension
was timely made:
(1) where the applicant or registrant is
prohibited from using the mark in
commerce because of a requirement
imposed by another government
agency prior to putting the goods in
the market or rendering of the
services;
(2) where a restraining order or
injunction was issued by the Bureau
of Legal Affairs, the courts or quasi-
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judicial bodies prohibiting the use of
the mark; or
(3) where the mark is the subject of an
opposition or cancellation case.
The Declaration of Non-Use shall be under
oath and shall clearly state the facts
prohibiting the actual use
of the mark in commerce. The corresponding
fee must also be paid upon filing of the
declaration. [Rule 206 as amended by Office
Order No. 56 (2013)]
F. TESTS TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS
Dominancy test
Infringement is determined by the test of
“dominancy” rather than by differences or
variations in the details of one trademark and
of another. Similarity in size, form and color,
while relevant is not conclusive. If the
competing trademark contains the main or
essential or dominant features of another, and
confusion is likely to result, infringement
takes place. [Asia Brewery v. CA and San
Miguel, G.R. No. 103543 (1993)]
Holistic test
To determine whether a trademark has been
infringed, we must consider the mark as a
whole and not as dissected. If the buyer is
deceived, it is attributable to the marks as a
totality, not usually to any part of it. The court
therefore should be guided by its first
impression, for the buyer acts quickly and is
governed by a casual glance, the value of
which may be dissipated as soon as the court
assumed to analyze carefully the respective
features of the mark. [Del Monte Corporation,
et al. v. CA, G.R. No. L-78325 (1990)]
The dominancy test considers the dominant
features in the competing marks in
determining whether they are confusingly
similar. Under the dominancy test, courts
give greater weight to the similarity of the
appearance of the product arising from the
adoption of the dominant features of the
registered mark, disregarding minor
differences. Courts will consider more the
aural and visual impressions created by the
UP LAW BOC INTELLECTUAL PROPERTY CODE
marks in the public mind, giving little weight
to factors like prices, quality, sales outlets
and market segments. [McDonald’s
Corporation v. L.C. Big Mak Burger, Inc., et al.,
G.R. No. 143993 (2004)]
Doctrine of Related Goods/Services
(1) Goods are related when they belong to
the same class or have the same
descriptive properties or physical
attributes, or they serve the same
purpose or flow through the same
channel of trade.
(2) The use of identical marks on non-
competing but related goods may likely
cause confusion.
(3) Corollarily, the use of identical marks on
non-competing and unrelated goods is
not likely to cause confusion.
When Goods are Non-Competing
“Undoubtedly, the paints, chemical products,
toner and dyestuff of CKK that carry the
trademark CANON are unrelated to sandals,
the product of NSR. The 2 classes of products
in this case flow through different trade
channels. The products of CKK are sold
through special chemical stores or
distributors while the products of NSR are
sold in grocery stores, sari-sari stores and
department stores. Thus, the evident
disparity of these products renders
unfounded the apprehension of CKK that
confusion of business or origin might occur if
NSR is allowed to use the mark CANON.”
[Canon Kabushiki Kaisha vs. CA, G.R. No.
12090 (2000)]
G. WELL-KNOWN MARKS
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines.
In determining whether a mark is well-known,
account shall be taken of the knowledge of
the relevant sector of the public, rather than
the public at large, including knowledge in
the Philippines which has been obtained as a
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result of the promotion of the mark. (Sec
123.1(e), RA 8293)
G.1. DETERMINANTS (NEED NOT CONCUR)
(1) The duration, extent and geographical
area of any use of the mark;
(2) The market share in the Philippines and
other countries of the goods/services to
which the mark applies;
(3) The degree of the inherent or acquired
distinction of the mark;
(4) The quality-image or reputation acquired
by the mark;
(5) The extent to which the mark has been
registered in the world;
(6) The exclusivity of the registration
attained by the mark in the world;
(7) The extent of use of the mark in the
world;
(8) The exclusivity of use in the world;
(9) The commercial value attributed to the
mark in the world;
(10) The record of successful protection of the
rights in the mark;
(11) The outcome of litigations dealing with
the issue of whether the mar is well-
known; and
(12) The presence or absence of identical or
similar test marks validly registered or
used on other similar goods [Rule 102,
Rule on Trademarks]
G.2. PROTECTION EXTENDED TO WELL-
KNOWN MARKS
If not registered in the Philippines
A mark cannot be registered if it is 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 goods or services. [(Sec
123.1(e), RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
If registered in the Philippines
A mark cannot be registered if it is identical
with or confusingly similar to, or constitutes a
translation of a mark considered well-known
in accordance with the Sec. 123.1 (e), 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. [Sec 123.1(f), RA 8293]
Priority Right
An application for registration of a mark filed
in the Philippines by a person referred to in
Section 3, and who previously duly filed an
application for registration of the same mark
in one of those countries, shall be considered
as filed as of the day the application was first
filed in the foreign country. [Sec. 131.1, RA
8293]
No registration of a mark in the Philippines by
a person described in this section shall be
granted until such mark has been registered
in the country of origin of the applicant. [Sec.
131.2, RA 8293]
Significance of Priority Right
A Philippine application filed by another
applicant after the priority date but earlier
than the foreign applicant’s actual filing may
be refused registration if it is identical to the
mark with a priority date. [Agpalo, The Law
on Trademark, Infringement and Unfair
Competition (2000)]
G.3. RIGHTS CONFERRED BY A WELL-
KNOWN MARK
(1) Right to be protected whether or not it is
registered in the Philippines;
(2) If registered under Sec 123.1(e), extension
of protection to goods and services which
are not similar to those in respect of
which the mark is registered, provided
that:
(a) The use of the mark in relation to
unrelated or dissimilar goods or
services would indicate a
connection between those goods
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or services and the owner of the
mark; and
(b) The interests of the owner of the
registered mark are likely to be
damaged by such use. [Sec. 147.2,
RA 8293]
H. RIGHTS CONFERRED BY
REGISTRATION
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this
Act and of off-patent drugs and medicines,
the owner of a registered mark shall have the
exclusive right to prevent all third parties not
having the owner's consent from using in the
course of trade identical or similar signs or
containers for goods or services which are
identical or similar to those in respect of
which the trademark is registered where such
use would result in a likelihood of confusion.
In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed. [Sec. 147.1, RA
8293 as amended by RA 9502]
H.1. LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the
registration of a trademark could be
renewed every 10 years, a trademark
could conceivably remain registered
forever);
(2) Territorial (except well-known marks).
Registration of the mark shall not confer on
the registered owner the right to preclude
third parties from using bona fide their
names, addresses, pseudonyms, a
geographical name, or exact indications
concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or
services: Provided, That such use is confined
to the purposes of mere identification or
information and cannot mislead the public as
to the source of the goods or services. [Sec.
148, RA 8293]
H.2. ASSIGNMENT AND TRANSFER OF
APPLICATION AND REGISTRATION
UP LAW BOC INTELLECTUAL PROPERTY CODE
(1) An application for registration of a mark,
or its registration, may be assigned or
transferred with or without the transfer of
the business using the mark. [Sec. 149.1,
RA 8293]
(2) Such assignment or transfer shall,
however, be null and void if it is liable to
mislead the public, particularly as
regards the nature, source,
manufacturing process, characteristics, or
suitability for their purpose, of the goods
or services to which the mark is applied.
[Sec. 149.2, RA 8293]
(3) The assignment of the application for
registration of a mark, or of its
registration, shall be in writing and
require the signatures of the contracting
parties. Transfers by mergers or other
forms of succession may be made by any
document supporting such transfer. [Sec.
149.3, RA 8293]
(4) Assignments and transfers of
registrations of marks shall be recorded
at the Office on payment of the
prescribed fee; assignment and transfers
of applications for registration shall, on
payment of the same fee, be provisionally
recorded, and the mark, when registered,
shall be in the name of the assignee or
transferee. [Sec. 149.4, RA 8293]
(5) Assignments and transfers shall have no
effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA
8293]
Any license contract concerning the
registration of a mark, or an application
therefor, shall provide for effective control by
the licensor of the quality of the goods or
services of the licensee in connection with
which the mark is used. If the license contract
does not provide for such quality control, or if
such quality control is not effectively carried
out, the license contract shall not be valid.
[Sec. 150.1, RA 8293]
H.3. PROTECTION LIMITED TO GOODS
SPECIFIED IN REGISTRATION
CERTIFICATE
The certificate of registration can confer upon
the petitioner the exclusive right to use its
own symbol only to those goods specified in
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the certificate, subject to any conditions a
limitations stated therein. 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. [Faberge, Inc. v.
IAC and Co Beng Kay, G.R. No. 71189 (1992)]
H.4 USE BY THIRD PARTIES OF NAMES,
ETC. SIMILAR TO REGISTERED MARK
The IPC deems unlawful any subsequent use
of the trade name by a third party, whether as
a trade name or a mark or collective mark, or
any such use of a similar trade name or mark,
likely to mislead the public. [Sec. 165.2 (b), RA
8293]
I. INFRINGEMENT AND REMEDIES
I.1. TRADEMARK INFRINGEMENT
Any person who shall, without the consent of
the owner of the registered mark:
(1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of
a registered mark or the same container
or a dominant feature thereof in
connection with the sale, offering for sale,
distribution, advertising of any goods or
services including other preparatory steps
necessary to carry out the sale of any
goods or services on or in connection with
which such use is likely to cause
confusion, or to cause mistake, or to
deceive; [Sec. 155.1, RA 8293]
(2) Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such
reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used in
commerce upon or in connection with the
sale, offering for sale, distribution, or
advertising of goods or services on or in
connection with which such use is likely
to cause confusion, or to cause mistake,
or to deceive. [Sec. 155.2, RA 8293]
A crucial issue in any trademark infringement
case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of
the goods or identity of the business as a
UP LAW BOC INTELLECTUAL PROPERTY CODE
consequence of using a certain mark.
Likelihood of confusion is admittedly a
relative term, to be determined rigidly
according to the particular (and sometimes
peculiar) circumstances of each case. In
determining likelihood of confusion, the court
must consider: (a) the resemblance between
the trademarks; (b) the similarity of the goods
to which the trademarks are attached; (c) the
likely effect on the purchaser; and (d) the
registrant’s express or implied consent and
other fair and equitable considerations.
[Mighty Corporation v. E. & J. Gallo Winery,
G.R. No. 154342 (2004)]
To establish trademark infringement, the
following elements must be shown: (1) the
validity of the mark; (2) the plaintiff’s
ownership of the mark; and (3) the use of the
mark or its colorable imitation by the alleged
infringer results in “likelihood of confusion.”
Of these, it is the element of likelihood of
confusion that is the gravamen of trademark
infringement. Two types of confusion arise
from the use of similar or colorable imitation
marks, namely, confusion of goods (product
confusion) and confusion of business (source
or origin confusion). While there is confusion
of goods when the products are competing,
confusion of business exists when the
products are non-competing but related
enough to produce confusion or affiliation.
[McDonald’s Corporation v. L.C. Big Mak
Burger, Inc., et al., G.R. No. 143993 (2004)]
In order to bring a civil action for
infringement, it is not required that there is
an actual sale of the goods or services using
the infringing material. [Sec. 155.2, RA 8293]
Infringement takes place upon the mere use
or reproduction of the registered mark.
No article of imported merchandise which
shall copy or simulate the name of any
domestic product, or manufacturer, or dealer,
or which shall copy or simulate a mark
registered in accordance with the provisions
of this Act, or shall bear a mark or trade name
calculated to induce the public to believe that
the article is manufactured in the Philippines,
or that it is manufactured in any foreign
country or locality other than the country or
locality where it is in fact manufactured, shall
be admitted to entry at any customhouse of
the Philippines. [Sec. 166, RA 8293]
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A mere distributor and not the owner cannot
assert any protection from trademark
infringement as it had no right in the first
place to the registration of the disputed
trademarks. [Superior Commercial Enterprises
v. Kunnan Enterprises, G.R. No. 169974 (2010)]
I.2. FALSE DESIGNATIONS OF ORIGIN;
FALSE DESCRIPTION OR
REPRESENTATION
Any person who, on or in connection with any
goods or services, or any container for goods,
uses in commerce any word, term, name,
symbol, or device, or any combination thereof,
or any false designation of origin, false or
misleading description of fact, or false or
misleading representation of fact, which:
(1) Is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation,
connection, or association of such person
with another person, or as to the origin,
sponsorship, or approval of his or her
goods, services, or commercial activities
by another person; [Sec. 169.1(a), RA
8293]
(2) In commercial advertising or promotion,
misrepresents the nature, characteristics,
qualities, or geographic origin of his or
her or another person's goods, services,
or commercial activities, shall be liable to
a civil action for damages and injunction
[Sec. 169.1 (b), RA 8293]
Any goods marked or labeled in
contravention of the provisions of this Section
shall not be imported into the Philippines or
admitted entry at any customhouse of the
Philippines. The owner, importer, or
consignee of goods refused entry at any
customhouse under this section may have
any recourse under the customs revenue laws
or may have the remedy given by this Act in
cases involving goods refused entry or seized.
[Sec. 169.2, RA 8293]
I.3. INFRINGEMENT OF NAME AND MARKS
OF OWNERSHIP STAMP ON CONTAINERS
"Stamped or marked container" means, any
container of goods upon which a mark is
impressed or molded which will give a
distinctive effect, provided that the mark
UP LAW BOC INTELLECTUAL PROPERTY CODE
cannot be deleted or removed from the
container. The stamp or mark on the
container must be legible and visible for
registration. [Rule 1001, IRR]
General Rule: It is unlawful for any person,
without the consent of the manufacturer,
bottler or seller who has registered the mark
of ownership to fill such bottles, boxes, kegs,
barrels or other containers so marked and
stamped, for the purpose of sale, dispose of,
or wantonly destroy the same, whether filled
or not, to use the same for drinking vessels or
drain pipes, foundation pipes, for any other
purpose than that registered. [Sec. 2, RA 623
as amended by RA 5700]
The use of the same without apparent
permission from the trademark owners
thereof shall be prima facie presumption that
such possession or use is unlawful. [Sec. 3, RA
623 as amended by RA 5700]
Exceptions:
(1) Use of the bottles as containers for sisi,
bagoong, patis, and similar native
products [Sec. 6 RA 623 as amended by
RA 5700]
(2) Persons in whose favor the containers
were sold [Distelleria Washington v. LA
Tondena Distillers, G.R. No. 120961
(1997)]
I.4. DAMAGES
The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either the reasonable profit
which the complaining party would have
made, had the defendant not infringed his
rights, or the profit which the defendant
actually made out of the infringement, or in
the event such measure of damages cannot
be readily ascertained with reasonable
certainty, then the court may award as
damages a reasonable percentage based
upon the amount of gross sales of the
defendant or the value of the services in
connection with which the mark or trade
name was used in the infringement of the
rights of the complaining party. [Sec. 156.1,
RA 8293]
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The owner of the registered mark shall not be
entitled to recover profits or damages unless
the acts have been committed with
knowledge that such imitation is likely to
cause confusion, or to cause mistake, or to
deceive. Such knowledge is presumed if the
registrant gives notice that his mark is
registered by displaying with the mark the
words '"Registered Mark" or the letter R
within a circle or if the defendant had
otherwise actual notice of the registration.
[Sec. 158, RA 8293]
Should damages be recoverable, the measure
of the damages suffered shall be either:
(1) The reasonable profit which the
complaining party would have made, had
the defendant not infringed his rights; or
(2) The profit which the defendant actually
made out of the infringement; or
(3) A reasonable percentage based upon the
amount of gross sales of the defendant or
the value of the services in connection
with which the mark or trade name was
used in the infringement of the rights of
the complaining party if such measure of
damages cannot be readily ascertained
with reasonable certainty. [Sec. 156.1, RA
8293]
I.5. REQUIREMENT OF NOTICE
Notice of registration of trademark is
necessary for an owner of a trademark to
recover damages in an action for
infringement since knowledge that such
imitation is likely to cause confusion, or to
cause mistake, or to deceive is an element of
infringement. Requirement of notice may be
complied by displaying with the mark the
words '"Registered Mark" or the letter R
within a circle. [Sec. 158, RA 8293]
I.6. OTHER REMEDIES AVAILABLE:
(1) Injunction [Sec. 156.4];
(2) Impounding of sales invoices and other
documents [Sec. 156.2];
(3) Double damages in case of actual intent
to defraud or to mislead [Sec. 156.3];
UP LAW BOC INTELLECTUAL PROPERTY CODE
(4) Court order for the disposal or
destruction of the infringing goods [Sec.
157];
(5) Criminal Action;
(6) Administration sanctions
Any foreign national, who qualifies under the
principle on reciprocity and does not engage
in business in the Philippines, whether or not
it is licensed to do business in the Philippines,
may bring civil or administrative action for:
(1) Opposition
(2) Cancellation
(3) Infringement
(4) Unfair Competition
(5) False designation of origin or false
description (Sec. 160. RA 8293)
I.7. LIMITATIONS TO ACTIONS FOR
INFRINGEMENT
The remedies given to the owner of a right
infringed shall be limited as follows:
(1) Registered mark shall have no effect
against any person who, in good faith,
before the filing date or the priority date,
was using the mark for the purposes of
his business or enterprise: Provided, That
his right may only be transferred or
assigned together with his enterprise or
business or with that part of his
enterprise or business in which the mark
is used. [Sec. 159.1, RA 8293]
(2) Where an infringer who is engaged solely
in the business of printing the mark or
other infringing materials for others is an
innocent infringer, the owner of the right
infringed shall be entitled as against such
infringer only to an injunction against
future printing. [Sec. 159.2, RA 8293]
(3) Where the infringement complained of is
contained in or is part of paid
advertisement in a newspaper, magazine,
or other similar periodical or in an
electronic communication, the remedies
of the owner of the right infringed as
against the publisher or distributor of
such newspaper, magazine, or other
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similar periodical or electronic
communication shall be limited to an
injunction against the presentation of
such advertising matter in future issues of
such newspapers, magazines, or other
similar periodicals or in future
transmissions of such electronic
communications.
The limitations shall apply only to
innocent infringers: Provided, That such
injunctive relief shall not be available to
the owner of the right infringed with
respect to an issue of a newspaper,
magazine, or other similar periodical or
an electronic communication containing
infringing matter where restraining the
dissemination of such infringing matter in
any particular issue of such periodical or
in an electronic communication would
delay the delivery of such issue or
transmission of such electronic
communication is customarily conducted
in accordance with the sound business
practice, and not due to any method or
device adopted to evade this section or to
prevent or delay the issuance of an
injunction or restraining order with
respect to such infringing matter. [Sec.
159.3, RA 8293]
(4) There shall be no infringement of
trademarks or tradenames of imported or
sold drugs and medicines allowed under
Section 72.1 as well as imported or sold
off-patent drugs and medicines: Provided,
That said drugs and medicines bear the
registered marks that have not been
tampered, unlawfully modified, or
infringed upon as defined under Section
155. [Sec. 159.4 RA 8293 as amended by
RA 9502]
J. UNFAIR COMPETITION
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, whether or not a registered mark is
employed, has a property right in the
goodwill of the said goods, business or
services so identified, which will be protected
in the same manner as other property rights.
[Sec. 168.1, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Any person who shall employ deception or
any other means contrary to good faith by
which he shall pass off the goods
manufactured by him or in which he deals, or
his business, or services for those of the one
having established such goodwill, or who
shall commit any acts calculated to produce
said result, shall be guilty of unfair
competition, and shall be subject to an action
therefor. [Sec. 168.2, RA 8293]
The following shall be deemed guilty of unfair
competition:
(1) Any person, who is selling his goods and
gives them the general appearance of
goods of another manufacturer or dealer,
either as to the goods themselves or in
the wrapping of the packages in which
they are contained, or the devices or
words thereon, or in any other feature of
their appearance, which would be likely
to influence purchasers to believe that
the goods offered are those of a
manufacturer or dealer, other than the
actual manufacturer or dealer, or who
otherwise clothes the goods with such
appearance as shall deceive the public
and defraud another of his legitimate
trade, or any subsequent vendor of such
goods or any agent of any vendor
engaged in selling such goods with a like
purpose; [Sec. 168.3(a), RA 8293]
(2) Any person who by any artifice, or device,
or who employs any other means
calculated to induce the false belief that
such person is offering the services of
another who has identified such services
in the mind of the public; [Sec. 168.3(b),
RA 8293]
(3) Any person who shall make any false
statement in the course of trade or who
shall commit any other act contrary to
good faith of a nature calculated to
discredit the goods, business or services
of another. (Sec. 168.3(c), RA 8293)
The elements of an action for unfair
competition are: (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
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the packaging or presentation of the goods.
The intent to deceive and defraud may be
inferred from the similarity in appearance of
the goods as offered for sale to the public.
Actual fraudulent intent need not be shown.
[McDonald’s Corporation v. L.G. Big Mak
Burger, Inc., et al., G.R. No. 143993 (2004)]
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 purchasers desiring to buy the goods of
the latter would be induced to buy the goods
of the former. The most usual devices
employed in committing this crime are the
simulation of labels and the reproduction of
form, color and general appearance of the
package used by the pioneer manufacturer or
dealer. [Caterpillar, Inc v. Samson, G.R. No.
164605 (2006)]
Articles 168.1 and 168.2 provide the concept
and general rule on the definition of unfair
competition. The law does not thereby cover
every unfair act committed in the course of
business; it 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 that the petitioner cites. 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.” [Coca-Cola v. Gomez, G.R. No.
154491 (2008)]
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. It
formulated the “true test” of unfair
competition: whether the acts of defendant
UP LAW BOC INTELLECTUAL PROPERTY CODE
are such as are calculated to deceive the
ordinary buyer making his 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. The
advent of the IP Code has not significantly
changed these rulings as they are fully in
accord with what Section 168 of the Code in
its entirety provides. Deception, passing off
and fraud upon the public are still the key
elements that must be present for unfair
competition to exist.
Infringement of
Unfair Competition
Trademark
Unauthorized use of a Passing off of one’s
trademark goods as those of
another
Fraudulent intent is Fraudulent intent is
unnecessary essential
Prior registration of Registration is not
the trademark is a necessary
prerequisite to the
action
[In and Out Burger vs Sehwani, G.R. No. 179127
(2008)]
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement. The latter is more limited but it
recognizes a more exclusive right derived
from the trademark adoption and registration
by the person whose goods or business is first
associated with it. Hence, even if one fails to
establish his exclusive property right to a
trademark, he may still obtain relief on the
ground of his competitor’s unfairness or fraud.
Conduct constitutes unfair competition if the
effect is to pass off on the public the goods of
one man as the goods of another. [Mighty
Corporation v. E. & J. Gallo Winery, G.R. No.
154342 (2004)]
K. TRADE NAMES OR BUSINESS
NAMES
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It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA
8293]
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
occupations [Converse Rubber Corp. v.
Universal Rubber Products, Inc., G.R. No. L-
27906 (1987)]
K.1. WHAT MAY NOT BE USED AS A TRADE
NAME
(1) If by its nature or the use to which the
name or designation may be put, it is
contrary to public order or morals.
(2) If it is liable to deceive trade circles or the
public as to the nature of the enterprise
identified by the name
(3) If the trade name is similar to a mark or a
trade name owned by another person and
its use would likely mislead the public.
[Sec.165.1, RA 8293]
Acquisition of ownership: Trade names are
protected even prior to or without registration.
The ownership of a trade name is acquired
through adoption and use.
Right of owner: The IPC deems unlawful any
subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar
trade name or mark, likely to mislead the
public. [Sec. 165.2 (b), RA 8293]
Trade names, unlike trademarks, need not be
registered with the IPO before an
infringement suit may be filed by its owner
against the owner of an infringing trademark.
All that is required is that the trade name is
previously used in trade or commerce in the
Philippines. [Prosource International v.
Horphag Research Management, G.R. No.
180073 (2009)]
L. COLLECTIVE MARKS
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

which may otherwise not be diminished, nay,

rendered illusory by the expedient act of
A Collective mark is any visible sign
utilizing or interposing a person or firm to
designated as such in the application for
obtain goods from the supplier to defeat the
registration and capable of distinguishing the
very purpose for which the exclusive
origin or any other common characteristic,
distributorship was conceptualized, at the
including the quality of goods or services of
expense of the sole authorized distributor.
different enterprises which use the sign under
[Yu v. CA, G.R. 86683 (1993), citing (43 C.J.S.
the control of the registered owner of the
597)]
collective mark [Sec. 121.2, RA 8293]
Injunction is the appropriate remedy to
An application for registration of a collective
prevent a wrongful interference with contracts
mark shall designate the mark as a collective
by strangers to such contracts where the legal
mark and shall be accompanied by a copy of
remedy is insufficient and the resulting injury
the agreement, if any, governing the use of
is irreparable (Gilchrist vs. Cuddy, 29 Phil. 542
the collective mark. [Sec. 167.2, Ra 8293]
[1915]; 4-A Padilla, Civil Code Annotated, 1988
Ed., p. 90), supra
L.1. GROUNDS FOR CANCELLATION
In addition to the grounds under Section 149,
the Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves:

(1) That only the registered owner uses the

mark; or
(2) That he uses or permits its use in
contravention of the agreements referred
to in Subsection 166.2; or
(3) That he uses or permits its use in a
manner liable to deceive trade circles or
the public as to the origin or any other
common characteristics of the goods or
services concerned. [Sec. 167.3, RA 8293]
The registration of a collective mark, or an
application therefor shall not be the subject of
a license contract. [Sec. 167.4, RA 8293]

M. PARALLEL IMPORTATION;
EXCLUSIVE DISTRIBUTORSHIP AS
PROPRIETARY RIGHT
The unauthorized importation of goods
bearing authentic trademarks for distribution
or sale by entities other than the exclusive
distributors, otherwise known as the “gray
market.”
The right to perform an exclusive
distributorship agreement and to reap the
profits resulting from such performance are
proprietary rights which a party may protect

Page 284 of 353

UP LAW BOC INTELLECTUAL PROPERTY CODE
IV. Copyrights
A. DEFINITION
Is that system of legal protection an author
enjoys of the form of expression of ideas.
[Aquino, Intellectual Property Law]
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
(1) Reproduction of the work or
substantial portion of the work;
(2) Dramatization, translation, adapta-
tion, abridgment, arrangement or
other transformation of the work;
(3) The first public distribution of the
original and each copy of the work by
sale or other forms of transfer of
ownership;
(4) Rental of the original or a copy of an
audiovisual or cinematographic work,
a work embodied in a sound
recording, a computer program, a
compilation of data and other
materials or a musical work in
graphic form, irrespective of the
ownership of the original or the copy
which is the subject of the rental;
(5) Public display of the original or a copy
of the work;
(6) Public performance of the work; and
(7) Other communication to the public of
the work. [Sec 177, RA 8293]
B. BASIC PRINCIPLES
B.1. WORKS ARE PROTECTED BY THE
SOLE FACT OF THEIR CREATION
Principle of Automatic Protection: Copyright is
vested from the very moment of creation. [Sec.
172.2, RA 8293]
The enjoyment and exercise of copyright,
including moral rights, shall not be the
subject of any formality; such enjoyment and
such exercise shall be independent of the
existence of protection in the country of origin
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of the work. [Article 5(2), Berne Convention for
the Protection of Literary and Artistic Works]
The Denicola Test in intellectual property law
states that if design elements of an article
reflect a merger of aesthetic and functional
considerations, the artistic aspects of the
work cannot be conceptually separable from
the utilitarian aspects; thus, the article
cannot be copyrighted.
B.2. PROTECTION EXTENDS ONLY TO THE
EXPRESSION OF AN IDEA, NOT THE IDEA
ITSELF.
No protection shall extend, under this law, to
any idea, procedure, system method or
operation, concept, principle, discovery or
mere data as such, even if they are expressed,
explained, illustrated or embodied in a work.
[Sec 175, RA 8293]
B.3. COPYRIGHT DISTINCT FROM THE
PROPERTY IN THE MATERIAL OBJECT
SUBJECT TO IT.
The copyright is distinct from the property in
the material object subject to it.
Consequently, the transfer or assignment of
the copyright shall not itself constitute a
transfer of the material object. Nor shall a
transfer or assignment of the sole copy or of
one or several copies of the work imply
transfer or assignment of the copyright. [Sec
181, RA 8293]
B.4. COPYRIGHT IS A STATUTORY RIGHT.
Copyright, in the strict sense of the term is
purely a statutory right. Being a mere
statutory grant, the rights are limited to what
the statute confers. It may be obtained and
enjoyed only with respect to the subjects and
by the persons, and on terms and conditions
specified in the statute. Accordingly, it can
cover only the works falling within the
statutory enumeration or description. [Pearl
and Dean vs. Shoemart, G.R. No. 148222
(2003)]
C. COPYRIGHTABLE WORKS
UP LAW BOC INTELLECTUAL PROPERTY CODE
C.1. ORIGINAL LITERARY AND ARTISTIC
WORKS
Literary and artistic works, hereinafter
referred to as "works", are original
intellectual creations in the literary and
artistic domain protected from the moment of
their creation and shall include in particular:
(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;
(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) Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
(j) 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
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(o) Other literary, scholarly, scientific and
artistic works
When a work is considered original:
(1) The work is an independent creation of
the author; and
(2) It must not be copied from the work of
another.
A person to be entitled to a copyright must be
the original creator of the work. He must have
created it by his own skill, labor and
judgment without directly copying or
evasively imitating the work of another.
[Ching Kian Chuan vs. CA, G.R. No. 130360
(2001)]
By originality is meant that the material was
not copied, and evidences at least minimal
creativity; that it was independently created
by the author and that it possesses at least
some minimal degree of creativity. Copying is
shown by proof of access to copyrighted
material and substantial similarity between
the two works. The applicant must thus
demonstrate the existence and validity of
copyright because in the absence of copyright
protection, even the original creation may be
freely copied. [Ching v. Salinas, G.R. No.
161295 (2005)]
Originality is not determined by novelty,
aesthetic merit or ingenuity but that it is an
independent creation.
The requirement in US Law that the
expression should be fixed in a tangible
medium is not applicable here since our law
expressly provides that works are protected
irrespective of their mode or form of
expression. [Sec. 172.2, RA 8293]
C.2. DERIVATIVE WORKS
The Following Derivative Works Shall Also Be
Protected By Copyright:
(1) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works;
and
(2) Collections of literary, scholarly or artistic
works, and compilations of data and
UP LAW BOC INTELLECTUAL PROPERTY CODE
other materials which are original by
reason of the selection or coordination or
arrangement of their contents. [Sec. 173.1,
RA 8293]
Derivative works are protected as new works
provided they shall not:
(a) Affect the force of any subsisting
copyright upon the original works
employed or any part thereof; or
(b) Be construed to imply any right to such
use of the original works, or to secure or
extend copyright in such original works.
[Sec. 173.2, RA 8293]
The provisions of the intellectual property
code shall apply to works in which copyright
protection obtained prior to the effectivity of
the law is subsisting. Provided that the
application of the code shall not result in the
diminution of such protection. [Sec. 239.3
IPC]
A person entitled to copyright must be the
original creator of the work. He must have
created it by his own skill, labor, and
judgment without directly copying or
evasively imitating the work of another.
[Ching Kian Chuan vs CA, G.R. No. 130360
(2001) (Vermicelli Case)]
To be entitled to copyright, the thing being
copyrighted must be original, created by the
author through his own judgment without
directly copying or evasively imitating the
work of another. [Sambar vs Levi Strauss, G.R.
No. 132604 (2002]:
D. NON-COPYRIGHTABLE WORKS
D.1. UNPROTECTED SUBJECT MATTER
(1) 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;
(2) News of the day and other miscellaneous
facts having the character of mere items
of press information;
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(3) Any official text of a legislative,
administrative or legal nature, as well as
any official translation thereof;
(4) Pleadings;
(5) Original decisions of courts and tribunals
(This pertains to the “original decisions”
not the SCRA published volumes since
these are protected under derivative works
under Sec 173.1) [Sec. 175, RA 8293]
The format or mechanics of a TV show is not
copyrightable as copyright does not extend to
ideas, procedures, processes, systems,
methods of operation, concepts, principles or
discoveries regardless of the form in which
they are described, explained, illustrated or
embodied. [Joaquin Jr. et al vs. Drilon, et al,
G.R. No. 108946 (1999)]
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and report
a particular fact has not created the same; he
has merely discovered its existence. [Feist
Publication v Rural Telephone Services, 499
U.S. 340 (1991)]
D.2. WORKS OF THE GOVERNMENT OF
THE PHILIPPINES
Work of the Government of the Philippines: Is
a work created by an officer or employee of
the Philippine Government or any of its
subdivisions and instrumentalities, including
government-owned or controlled
corporations as a part of his regularly
prescribed official duties. [Sec. 171.11, RA
8293]
General Rule: Government cannot own
copyright
Exceptions:
(1) When copyright is assigned or bequested
in favor of the government [Sec 176.3];
(2) Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of
his work.
However, prior approval of the government
agency or the office wherein the work is
UP LAW BOC INTELLECTUAL PROPERTY CODE
created shall be necessary for the
exploitation of such work for profit. [Sec.
176.1]
Notwithstanding the foregoing provisions,
the Government is not precluded from
receiving and holding copyrights transferred
to it by assignment, bequest or otherwise; nor
shall publication or republication by the
Government in a public document of any
work in which copyright is subsisting be taken
to cause any abridgment or annulment of the
copyright or to authorize any use or
appropriation of such work without the
consent of the copyright owner. [Sec. 176.3,
RA 8293]
D.3. WORKS OF THE PUBLIC DOMAIN
These include works whose term of copyright
has expired.
D.4. USEFUL ARTICLES
Useful Article Doctrine: Works whose sole
purpose is utilitarian have no separate artistic
value. This can be distinguished from a work
of applied art, which has utilitarian functions
but there is an identifiable artistic work or
creation incorporated thereto.
E. RIGHTS OF COPYRIGHT OWNER
E.1. COPYRIGHT OR ECONOMIC RIGHTS
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work; [Sec. 177.1, RA 8293]
(2) Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work; [Sec. 177.2,
RA 8293]
(3) The first public distribution of the original
and each copy of the work by sale or
other forms of transfer of ownership; [Sec.
177.3, RA 8293]
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
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computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the
ownership of the original or the copy
which is the subject of the rental; [Sec.
177.4, RA 8293]
(5) Public display of the original or a copy of
the work; [Sec. 177.5, RA 8293]
(6) Public performance of the work; [Sec.
177.6, RA 8293]
(7) Other communication to the public of the
work [Sec. 177.7, RA 8293]
Economic rights also give the author the right
to assign or license the copyright and/or the
material object in whole or in part, and they
allow the owner to derive financial reward
from the use of his works by others. [Sec.
180.1, RA 8293 as amended by RA 10372]
Copyright in a work of architecture: shall
include the right to control the erection of any
building which reproduces the whole or a
substantial part of the work either in its
original form or in any form recognizably
derived from the original: Provided, That the
copyright in any such work shall not include
the right to control the reconstruction or
rehabilitation in the same style as the original
of a building to which that copyright relates.
[Sec. 186, RA 8293]
Communication to the Public of Copyrighted
Works: Includes point-to-point transmission
of a work, including video on demand, and
providing access to an electronic retrieval
system, such as computer databases, servers,
or similar electronic storage devices.
Broadcasting, rebroadcasting, retransmission
by cable, and broadcast and retransmission
by satellite are all acts of “communication to
the public” within the meaning of the IPC.
[Rule 11, Copyright Safeguards and
Regulations]
First Public Distribution of Work: An exclusive
right of first distribution of work includes all
acts involving distribution, specifically
including the first importation of an original
and each copy of the work into the jurisdiction
UP LAW BOC INTELLECTUAL PROPERTY CODE
of the Republic of the Philippines. [Rule 12,
Copyright Safeguards and Regulations]
Civil Code Provisions on Ownership of
Intellectual Creation:
By intellectual creation, the following persons
acquire ownership:
(1) The author with regard to his literary,
dramatic, historical, legal, philosophical,
scientific or other work;
(2) The composer; as to his musical
composition;
(3) The painter, sculptor, or other artist, with
respect to the product of his art;
(4) The scientist or technologist or any other
person with regard to his discovery or
invention. [Art. 721, NCC]
The author and the composer, mentioned in
Nos. 1 and 2 of the preceding article, shall
have the ownership of their creations even
before the publication of the same. Once their
works are published, their rights are
governed by the Copyright laws.
The painter, sculptor or other artist shall have
dominion over the product of his art even
before it is copyrighted. The scientist or
technologist has the ownership of his
discovery or invention even before it is
patented. . [Art. 722, NCC]
Letters and other private communications in
writing are owned by the person to whom
they are addressed and delivered, but they
cannot be published or disseminated without
the consent of the writer or his heirs. However,
the court may authorize their publication or
dissemination if the public good or the
interest of justice so requires. [Art. 723, NCC]
E.2. WHEN COPYRIGHT VESTS
Works are protected by the sole fact of their
creation, irrespective of their mode or form of
expression, as well as of their content, quality
and purpose. [Sec. 172.2, RA 8293]
The issuance of the certificates of registration
and deposit as provided by Sec. 2, Rule 7 of
the Copyright Safeguards and Regulations,
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are purely for recording the date of
registration and deposit of the work, and are
not conclusive as to copyright ownership (nor
does it determine the time when copyright
vests). [Manly Sportwear v. Dadodette
Enterprises, G.R. No. 165306 (2005)]
E.3. MORAL RIGHTS
The author of a work shall, independently of
the economic rights in Section 177 or the grant
of an assignment or license with respect to
such right, have the right:
(1) To require that the authorship of the
works be attributed to him, in particular,
the right that his name, as far as
practicable, be indicated in a prominent
way on the copies, and in connection with
the public use of his work; [Sec. 193.1, RA
8293]
(2) To make any alterations of his work prior
to, or to withhold it from publication; [Sec.
193.2, RA 8293]
(3) To object to any distortion, mutilation or
other modification of, or other derogatory
action in relation to, his work which
would be prejudicial to his honor or
reputation; [Sec. 193.3, RA 8293]
(4) To restrain the use of his name with
respect to any work not of his own
creation or in a distorted version of his
work. [Sec. 193.4, RA 8293]
In addition to the right to publish granted by
the author, his heirs, or assigns, the publisher
shall have a copyright consisting merely of
the right of reproduction of the typographical
arrangement of the published edition of the
work. [Sec.174, RA 8293]
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in
the preceding paragraphs shall have the
exclusive right of making a collection of his
works. [Sec. 176.2, Ra 8293]
Waiver of Moral Rights
General Rule: Moral rights can be waived in
writing, expressly stating such waiver [Sec.
195, RA 8293] or by contribution to a
collective work unless such is expressly
reserved [Sec. 196, RA 8293].
UP LAW BOC INTELLECTUAL PROPERTY CODE
Exceptions: Even if made in writing, waiver is
still not valid if:
(1) Use of the name of the author, title of his
work, or his reputation with respect to
any version or adaptation of his work,
which because of alterations
substantially tends to injure the literary or
artistic reputation of another author; [Sec.
195.1, RA 8293]
(2) It uses the name of the author in a work
that he did not create. [Sec. 195.1, RA
8293]
Moral rights are not assignable or subject to
license. [Sec. 198, RA 8293]
The right of an author under Section 193.1.
shall last during the lifetime of the author and
in perpetuity after his death while the rights
under Sections 193.2. 193.3. and 193.4. shall be
coterminous with the economic rights [Sec. 198,
RA 8293 as amended by RA 10372]
E.4. RIGHTS TO PROCEEDS IN
SUBSEQUENT TRANSFERS (DROIT DE
SUITE OR FOLLOW UP RIGHTS)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof by
the author, the author or his heirs shall have
an inalienable right to participate in the gross
proceeds of the sale or lease to the extent of
five percent (5%). This right shall exist during
the lifetime of the author and for fifty (50)
years after his death. [Sec. 200, RA 8293]
Works not covered
Prints, etchings, engravings, works of applied
art, or works of similar kind wherein the
author primarily derives gain from the
proceeds of reproductions. (Sec. 201, RA
8293)
First Sale Doctrine
After the first sale of the lawfully made copy
of the copyrighted work, anyone who is the
owner of that copy can sell or dispose of that
copy in any way without any liability for
copyright infringement. The first sale of an
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authorized copy of the work exhausts the
author’s right to control distribution of copies.
E.5. NEIGHBORING RIGHTS
Performer’s Rights
(1) As regards their performances, the right
of authorizing:
(a) The broadcasting and other
communication to the public of
their performance; and
(b) The fixation of their unfixed
performance. [Sec. 203.1, RA
8293]
Such right shall be maintained and
exercised fifty (50) years after his death,
by his heirs, and in default of heirs, the
government, where protection is claimed.
[Sec. 204.2, RA 8293]
(2) The right of authorizing the direct or
indirect reproduction of their
performances fixed in sound recordings,
or audiovisual works or fixations in any
manner or form; [Sec. 203.2, RA 8293, as
amended by 10372]
(3) Subject to the provisions of Section 206,
the right of authorizing the first public
distribution of the original and copies of
their performance fixed in the sound
recording or audiovisual works or
fixations through sale or rental or other
forms of transfer of ownership; [Sec.
203.3, RA 8293, as amended by RA 10372]
(4) The right of authorizing the commercial
rental to the public of the original and
copies of their performances fixed in
sound recordings or audiovisual works or
fixations, even after distribution of them
by, or pursuant to the authorization by
the performer; [Sec. 203.4, RA 8293, as
amended by RA 10372]
(5) The right of authorizing the making
available to the public of their
performances fixed in sound recordings
or audiovisual works or fixations, by wire
or wireless means, in such a way that
members of the public may access them
from a place and time individually chosen
by them. [Sec. 203.5, RA 8293, as
amended by RA 10372]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(6) Independently of a performer's economic
rights, the performer, shall, as regards his
live aural performances or performances
fixed in sound recordings or audiovisual
works or fixations, have the right to claim
to be identified as the performer of his
performances, except where the omission
is dictated by the manner of the use of
the performance, and to object to any
distortion, mutilation or other
modification of his performances that
would be prejudicial to his reputation.
[Sec. 204.1, RA 8293, as amended by RA
10372]
(7) Unless otherwise provided in the contract,
in every communication to the public or
broadcast of a performance subsequent
to the first communication or broadcast
thereof by the broadcasting organization,
the performer shall be entitled to an
additional remuneration equivalent to at
least five percent (5%) of the original
compensation he or she received for the
first communication or broadcast. [Sec.
206, RA 8293]
Rights of Producers of Sound Recordings
(1) The right to authorize the direct or
indirect reproduction of their sound
recordings, in any manner or form; the
placing of these reproductions in the
market and the right of rental or lending;
[Sec. 208.1, RA 8293]
(2) The right to authorize the first public
distribution of the original and copies of
their sound recordings through sale or
rental or other forms of transferring
ownership; [Sec. 208.2, RA 8293]
(3) The right to authorize the commercial
rental to the public of the original and
copies of their sound recordings, even
after distribution by them by or pursuant
to authorization by the producer. [Sec.
208.3, RA 8293]
(4) If a sound recording published for
commercial purposes, or a reproduction
of such sound recording, is used directly
for broadcasting or for other
communication to the public, or is
publicly performed with the intention of
making and enhancing profit, a single
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MERCANTILE LAW
equitable remuneration for the performer
or performers, and the producer of the
sound recording shall be paid by the user
to both the performers and the producer,
who, in the absence of any agreement
shall share equally. [Sec. 209, RA 8293]
Rights of Broadcasting Organizations
(1) The rebroadcasting of their broadcasts;
[Sec. 211.1, RA 8293]
(2) The recording in any manner, including
the making of films or the use of video
tape, of their broadcasts for the purpose
of communication to the public of
television broadcasts of the same; [Sec.
211.2, RA 8293]
(3) The use of such records for fresh
transmissions or for fresh recording. [Sec.
211.3, RA 8293]
Must-Carry Rule: Prevents cable television
companies from excluding broadcasting
organization especially in those places not
reached by signal. Also, the rule prevents
cable television companies from depriving
viewers in far-flung areas the enjoyment of
programs available to city viewers. [ABS-CBN
Broadcasting vs. Philippine Multi-Media
System, G.R. Nos. 175769-70 (2009)]
Limitations on Protection
Sections 203, 208 and 209 shall not apply
where the acts referred to in those Sections
are related to:
(1) The use by a natural person exclusively
for his own personal purposes;
(2) Using short excerpts for reporting current
events;
(3) Use solely for the purpose of teaching or
for scientific research; and
(4) Fair use of the broadcast subject to
certain conditions. (Sec. 212, RA 8293)
The issue in this case as WON the playing and
signing of musical compositions which have
been copyrighted under the provisions of the
copyright law inside the restaurant constitute
a performance for profit? The court ruled
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

that the word “perform” as used in the ACT Composers vs Benjamin Tan, Search Results
has been applied to one who plays a musical G.R. NO. L-36402 (1987)]
composition on a piano, thereby producing in
Term of Protection
the air sound waves which are heard as a
music… and if the instrument he plays on is a Works Term
piano plus a broadcasting apparatus, so that
the waves are thrown out, not only upon the For performances not Fifty (50) years from
air but upon others, then he also performing incorporated in the end of the year
a musical composition. In relation thereto it recordings in which the
has been held that the playing of music in performance took
dine and dance establishments which was place [Sec. 215.1(a),
paid for by the public in purchases of food RA 8293]
and drink constitute performance for public.
The music provided for is for the purpose of For sound or image and Fifty (50) years from
entertaining and amusing customers in order sound recordings and the end of the year
to make the establishment more attractive for performances in which the
and desirable. The expenses entailed thereby incorporated therein recording took
are added to the overhead of the restaurant place. [Sec. 215.1(b),
which are either eventually charged to the RA 8293]
price of the food and drink or the overall total
of additional income produced by the bigger
volume of business which the entertainment Broadcasts Twenty (20) years
was programmed to attract. Nevertheless, from the date the
the there is no infringement of copyright law broadcast took
as the composers in this case waived their place [Sec. 215.2, RA
right in favour of the public when they 8293]
allowed their intellectual creations to become
property of public domain. [Filipino Society of

Page 292 of 353

UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

F. RULES ON OWNERSHIP OF COPYRIGHT

F.1. OWNERSHIP OF COPYRIGHT

Work Ownership

Single Creator of an Original Work Belongs to the author of the work [Sec. 178.1, RA 8293]

Belongs of the co-authors; in the absence of agreement, their

rights shall be governed by the rules on co-ownership. However, if
Works of Joint Authorship the work consists of parts that can be used separately and
identified, the author of each part owns the copyright of the part
he has created. [Sec. 178.2, RA 8293; Asked in ‘95, ‘04]

Belongs to the employee if the creation is not a part of his regular

duties, even if he used the time, facilities and materials of the
Work created during the course of
employer. However, belongs to the employer if the work is in the
employment
performance of the employee’s regular duties unless there is an
agreement to the contrary. [Sec. 178.3, RA 8293; Asked in ‘08]

The person who commissioned the work holds ownership of the

Work commissioned by a person other work per se, but copyright remains with the creator unless there
than the employer was a stipulation to the contrary. [Sec. 178.4, RA 8293; Asked in
‘95, ‘04]

Belongs to the producer, author of the scenario, composer of the

music, film director, and author of the adapted work. However,
subject to stipulations, the producers shall exercise the copyright
Audio visual works
as may be required for the exhibition of the work, except for the
right to collect license fees for the performance of musical
compositions in the work. [Sec. 178.5, RA 8293]

Belongs to the writer, but the court may authorize their

publication or dissemination of the public good or interest of
Letters
justice requires, pursuant to Art. 723, New Civil Code. [Sec. 178.6,
RA 8293]

Publishers are deemed to represent the authors, unless the

contrary appears, the pseudonyms or adopted names leave no
Anonymous and pseudonymous works
doubt as to the author’s identity or if the author discloses his
identity. [Sec. 179, RA 8293]

A contributor is deemed to have waived his right unless he

Collective works
expressly reserves it. [Sec. 196, RA 8293]

Page 293 of 353

UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

F.2. DURATION OF COPYRIGHT

Works Term

Original Literary and Artistic Works including Lifetime of author and for fifty (50) years after his
Posthumous Works death [Sec 213.1, RA 8293]

Derivative Works including Posthumous Works Lifetime of author and for fifty (50) years after his
death [Sec 213.1, RA 8293]

Joint Authorship Lifetime of the last surviving author and for fifty (50)
years after his death [Sec 213.2, RA 8293]

Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful publication
[Sec. 213.3, RA 8293]

Applied Art Twenty-five (25) years from date of making [Sec.

213.4, RA 8293]

Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA
8293]

Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA
8293]

Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA
8293]

Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA
8293]

Page 294 of 353

UP LAW BOC INTELLECTUAL PROPERTY CODE
F.3. PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated
on a work in the usual manner as the author
shall, in the absence of proof to the contrary,
be presumed to be the author of the work.
This provision shall be applicable even if the
name is a pseudonym, where the pseudonym
leaves no doubt as to the identity of the
author. The person or body, corporate whose
name appears on an audio-visual work in the
usual manner shall, in the absence of proof to
the contrary, be presumed to be the maker of
said work. [Sec. 219, RA 8293]
The term of protection subsequent to the
death of the author shall run from the date of
his death or of publication, but such terms
shall always be deemed to begin on the first
day of January of the year following the event
which gave rise to them. [Sec. 214, RA 8293]
F.4. TRANSFER OR ASSIGNMENT OF
COPYRIGHT
The copyright may be assigned or licensed in
whole or in part. Within the scope of the
assignment or license, the assignee or
licensee is entitled to all the rights and
remedies which the assignor or licensor had
with respect to the copyright. [Sec. 180.1, RA
8293 as amended by RA 10372]
The copyright is not deemed assigned or
licensed inter vivos in whole or in part unless
there is a written indication of such intention.
[Sec. 180.2, RA 8293 as amended by RA
10372]
The submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication shall constitute only
a license to make a single publication unless
a greater right is expressly granted. If two (2)
or more persons jointly own a copyright or
any part thereof, neither of the owners shall
be entitled to grant licenses without the prior
written consent of the other owner or owners.
[Sec. 180.3, RA 8293]
The copyright is distinct from the property in
the material object subject to it.
Consequently, the transfer, assignment or
licensing of the copyright shall not itself
constitute a transfer of the material object.
Page 295 of 353
MERCANTILE LAW
Nor shall a transfer or assignment of the sole
copy or of one or several copies of the work
imply transfer, assignment or licensing of the
copyright. [Sec. 181, RA 8293 as amended by
RA 10372]
F.5. COLLECTIVE MANAGEMENT
ORGANIZATIONS
The owners of copyright and related rights or
their heirs may designate a society of artists,
writers, composers and other right-holders to
collectively manage their economic or moral
rights on their behalf. For the said societies to
enforce the rights of their members, they
shall first secure the necessary accreditation
from the Intellectual Property Office. [Sec.
183, RA 8293 as amended by RA 10372]
CMOs are entities that manage the bundle of
copyrights that their members own by
providing the legal platform to efficiently
enforce hteir intellectual property rights.
A group of artists, writers, composers and
other creators, or copyright/related rights
holders whose primary purpose is to
collectively manage copynght and/or related
rights. including any or all of the following
activities:
(i) negotiation with and grant of
licenses to users of protected
literary, scholarly, scientific and
artistic works, derivative works,
performances, sound recordings,
audiovisual works and
broadcasts;
(ii) collection of royalties and other
forms of remuneration for the use
of protected literary, scholarly,
scientific and artistic works,
derivative works, performances,
sound recordings, audiovisual
works and broadcasts:
(iii) collection of proceeds In
subsequent transfers of the
originals of paintings, sculptures
and manuscripts:
(iv) collection of additional
remuneration for subsequent
communication or broadcast of a
performance;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(v) collection of single equitable
remuneration for the broadcast,
other communication to the
public or public performance of a
sound recording; and
(vi) distribution of the
abovementioned collections to
the rights holders [Office Order
13-173 s.2013)
G. LIMITATIONS ON COPYRIGHT
G.1. DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and similar
purposes is not an infringement of copyright.
A privilege, in persons other than the owner
of the copyright, to use the copyrighted
material in a reasonable manner without his
consent, notwithstanding the monopoly
granted to the owner by the copyright. It is
meant to balance the monopolies enjoyed by
the copyright owner with the interests of the
public and of society.
Decompilation
Refers to the reproduction of the code and
translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program
with other programs. This may also constitute
fair use [Sec. 185.1, RA 8293].
The fact that a work is unpublished shall not
by itself bar a finding of fair use if such
finding is made upon consideration of all the
above factors. [Sec 185.2, RA 8293]
Factors to consider in determining Fair Use
(1) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
(2) The nature of the copyrighted work;
(3) The amount and substantiality of the
portion used in relation to the
copyrighted work as a whole; and
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(4) The effect of the use upon the potential
market for or value of the copyrighted
work [Sec. 185.1, RA 8293; (Harper & Row
v. Nation Enterprise, 471 US 539, (1985)]
The format of a show is not copyrightable.
[Joaquin vs Drilon, G.R. No. 108946 (1999)]
A compilation is not copyrightable per se, but
it is copyrightable only if its facts have been
selected, coordinated, or arranged in such a
way that the resulting work as a while
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
Industrious Collection Test. [Feist Publications
Inc vs. Rural Tel Service 499 US 340 (1991)]
An exception is carved out for lawyers and
officers of the court against plagiarism when
writing judicial documents that will be part of
court record. [In the Matter of the Charges of
Plagiarism etc Against Associate Justice
Mariano C. Del Castillo AM No 10-7-17-SC
(2011)]
H. COPYRIGHT INFRINGEMENT
Infringement of Copyright and Related Rights:
means any violation of the rights under the
Intellectual Property Code and/or the
applicable Intellectual Property Law,
including the act of any person who at the
time when copyright subsists in a work has in
his possession an article which he known, or
ought to know, to be an infringing copy of the
work f or the purpose of:
(1) Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
(2) Distributing the article for purpose of
trade, or for any other purpose to an
extent that will prejudice the rights of the
copyright owner in the work; or
(3) Trade exhibit of the article in public. [Sec.
1(l), Rule 1, Rules and Regulations on
Administrative Complaints for Violation
of Laws involving Intellectual Property
Rights]
Infringement consists in the doing by any
person, without the consent of the owner of
the copyright, of anything the sole right to do
UP LAW BOC INTELLECTUAL PROPERTY CODE
which is conferred by statute on the owner of
the copyright. For there to be substantial
reproduction of a book, it does not necessarily
require that the entire copyrighted work, or
even a large portion of it, be copied. If so
much is taken that the value of the original
work is substantially diminished, there is an
infringement of copyright and to an injurious
extent, the work appropriated. It is no
defense that the pirate did not know whether
or not he was infringing any copyright; he at
least knew that what he was copying was not
his, and he copied at his peril. In cases of
infringement, copying alone is not what is
prohibited. The copying must produce an
“injurious effect.” [Habana et al vs. Robles et
al., G.R. No. 131522 (1999)]
Copyright infringement and unfair
competition are not limited to the act of
selling counterfeit goods. They cover a whole
range of acts from copying, assembling,
packaging to marketing, including the mere
offering for sale of counterfeit goods.
[Microsoft Corp vs. Maxicorp Inc., G.R. No.
140946 (2004)]
A copy of a piracy is an infringement of the
original, and it is no defense that the pirate,
in such cases, did not know what works he
was indirectly copying, or did not know
whether or not he was infringing any
copyright; he at least knew that what he was
copying was not his, and he copied at his peril.
In 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. If so much is taken that the value of
the original is sensibly diminished, or the
labors of the original author are substantially
and to an injurious extent appropriated by
another, that is sufficient in point of law to
constitute a piracy. [Columbia Pictures v. CA,
G.R. No. 110318 (1996)]
The following shall NOT constitute
infringement of copyright:
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(1) Recitation or performance of a work once
it has been made accessible to the public
if (1) privately done AND free of charge
OR (2) strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]
(2) Making of quotations from a published
work: (i) compatible with fair use, (ii)
extent is justified by the purpose, (iii)
source and name of the author,
appearing on work, must be mentioned;
[Sec. 184.1(b), RA 8293]
(3) Reproduction or communication to the
public by mass media of articles on
current political, social, economic,
scientific or religious topic, lectures,
addresses and other works, delivered in
public: (i) for information purposes, (ii)
not expressly reserved, and (iii) source is
already indicated; [Sec. 184.1(c), RA 8293]
(4) Reproduction and communication to the
public of literary, scientific or artistic
works as part of reports of current events
by means of photography,
cinematography or broadcasting to the
extent necessary for the purpose; [Sec.
184.1(d), RA 8293]
(5) Inclusion of a work in a publication,
broadcast or other communication to the
public, sound recording or film if made by
way of illustration for teaching purposes
compatible with fair use and the source
and the name of the author appearing on
work, must be mentioned; [Sec. 184.1(e),
RA 8293]
(6) Recording made in schools, universities,
or educational institutions of a work
included in a broadcast for the use of
schools, universities or educational
institutions. Such recording must be
deleted within a reasonable period; such
recording may not be made from audio-
visual works which are part of the general
cinema, repertoire of feature films except
of brief excerpts of the work; [Sec. 184.1(f),
RA 8293]
(7) Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means
of its work or facilities, (iii) for use in its
own broadcast; [Sec. 184.1(g), RA 8293]
(8) Use made of a work by or under the
direction or control of the government for
UP LAW BOC INTELLECTUAL PROPERTY CODE
public interest compatible with fair use;
[Sec. 184.1(h), RA 8293]
(9) Public performance or the
communication to the public of a work in
a place where no admission fee is
charged by a club on institution for
charitable or educational purpose only
and the aim is not profit-making; [Sec.
184.1(i), RA 8293]
(10) Public display of the original or a copy of
the work not made by means of a film,
slide, television, image or otherwise on
screen or by means of any other device or
process either the work has been
published, sold, given away, or
transferred to another person by the
author or his successor in title; [Sec.
184.1(j), RA 8293]
(11) Use made of a work for the purpose of
any judicial proceedings or for the giving
of professional advice by a legal
practitioner. [Sec. 184.1(k), RA 8293]
(12) The reproduction or distribution of
published articles or materials in a
specialized format exclusively for the use
of the blind, visually- and reading-
impaired persons: Provided, That such
copies and distribution shall be made on
a nonprofit basis and shall indicate the
copyright owner and the date of the
original publication. [Sec. 184.1(l), RA
8293 as amended by RA 10372]
Reproduction of Published Work
General Rule: The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study,
shall be permitted, without the authorization
of the owner of copyright in the work. [Sec.
187.1, RA 8293]
Exceptions: Such permission shall not extend
to:
(1) A work of architecture in the form of
building or other construction;
(2) An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
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(3) A compilation of data and other
materials;
(4) A computer program except as provided
in Section 189; and
(5) Any work in cases where reproduction
would unreasonably conflict with a
normal exploitation of the work or would
otherwise unreasonably prejudice the
legitimate interests of the author. [187.2,
RA 8293]
Reprographic Reproduction by Libraries
Any library or archive whose activities are not
for profit may, without the authorization of
the author of copyright owner, make a single
copy of the work by reprographic
reproduction:
(1) Where the work by reason of its fragile
character or rarity cannot be lent to user
in its original form;
(2) Where the works are isolated articles
contained in composite works or brief
portions of other published works and the
reproduction is necessary to supply them,
when this is considered expedient, to
persons requesting their loan for
purposes of research or study instead of
lending the volumes or booklets which
contain them; and
(3) Where the making of such a copy is in
order to preserve and, if necessary in the
event that it is lost, destroyed or rendered
unusable, replace a copy, or to replace, in
the permanent collection of another
similar library or archive, a copy which
has been lost, destroyed or rendered
unusable and copies are not available
with the publisher. [Sec. 188.1, RA 8293]
It shall not be permissible to produce a
volume of a work published in several
volumes or to produce missing tomes or
pages of magazines or similar works, unless
the volume, tome or part is out of stock:
Provided, That every library which, by law, is
entitled to receive copies of a printed work,
shall be entitled, when special reasons so
require, to reproduce a copy of a published
work which is considered necessary for the
collection of the library but which is out of
stock. [Sec. 188.2, RA 8293)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Reproduction of Computer Program
The reproduction in one (1) back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of
that computer program: Provided, That the
copy or adaptation is necessary for:
(a) The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which the
computer program has been obtained;
and
(b) Archival purposes, and, for the
replacement of the lawfully owned copy
of the computer program in the event
that the lawfully obtained copy of the
computer program is lost, destroyed or
rendered unusable. [Sec. 189.1, RA 8293]
No copy or adaptation mentioned in this
Section shall be used for any purpose other
than the ones determined in this Section, and
any such copy or adaptation shall be
destroyed in the event that continued
possession of the copy of the computer
program ceases to be lawful. [Sec. 189.2, RA
8293]
Importation for Personal Purposes
The importation of a copy of a work by an
individual for his personal purposes shall be
permitted without the authorization of the
author of, or other owner of copyright in, the
work under the following circumstances:
(1) When copies of the work are not available
in the Philippines and:
(a) Not more than one (1) copy at one
time is imported for strictly
individual use only; or
(b) The importation is by authority of
and for the use of the Philippine
Government; or
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(c) The importation, consisting of not
more than three (3) such copies or
likenesses in any one invoice, is
not for sale but for the use only of
any religious, charitable, or
educational society or institution
duly incorporated or registered,
or is for the encouragement of the
fine arts, or for any state school,
college, university, or free public
library in the Philippines.
(2) When such copies form parts of libraries
and personal baggage belonging to
persons or families arriving from foreign
countries and are not intended for sale:
Provided, that such copies do not exceed
three (3). [Sec. 190.1, RA 8293 is repealed
by RA 10372]
Copies imported as allowed by this Section
may not lawfully be used in any way to violate
the rights of owner the copyright or annul or
limit the protection secured by this Act, and
such unlawful use shall be deemed an
infringement and shall be punishable as such
without prejudice to the proprietor's right of
action. [Sec. 190.2, RA 8293 is repealed by RA
10372]
Importation and Exportation of Infringing
Materials. – Subject to the approval of the
Secretary of Finance, the Commissioner of
Customs is hereby empowered to make rules
and regulations for preventing the
importation or exportation of infringing
articles prohibited under Part IV of this Act
and under relevant treaties and conventions
to which the Philippines may be a party and
for seizing and condemning and disposing of
the same in case they are discovered after
they have been imported or before they are
exported [Sec. 190, RA 8293 as amended by
RA 10372]
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MERCANTILE LAW
SPECIAL LAWS

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I. Anti – Money
Laundering Act
(R. A. 9160, as amended by R.A. 9194)
Note: Bar Syllabus covers RA 9160 as amended
by RA 9194, but RA 9160 has since been
further amended by RA 10365.
Money Laundering is a crime where the
proceeds of an unlawful activity are
transacted, thereby making them appear to
have originated from legitimate sources.
A. POLICY OF THE LAW
It is the policy of the State to:
- Protect and preserve the integrity and
confidentiality of bank accounts;
- Ensure that the Philippines shall not be
used as a money laundering site for the
proceeds of any criminal activity.
Consistent with its foreign policy, the State
shall extend cooperation in transnational
investigations and prosecutions of persons
involved in money laundering activities
whenever committed. (Sec. 2)
B. COVERED INSTITUTIONS
(1) Banks, non – banks, quasi – banks, trust
entities and all other institutions and
their subsidiaries and affiliates
supervised or regulated by the BSP;
(2) Insurance companies and all other
institutions supervised or regulated by
the Insurance Commission;
(3) (i) Securities dealers, brokers, salesmen,
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,
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(iii) Foreign exchange corporations,
money changers, money payment,
remittance and transfer companies and
other similar entities, and
(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 (SEC)
RA 10365 – amending RA 4160, approved
February 15, 2013 and took effect on March 7,
2013 – added the following persons:
(1) Pawnshops;
(2) Pre – need companies;
(3) Jewelry dealers in precious metals and
stones, who, as a business, trade in
precious metals and stones, for
transactions exceeding one million pesos
(P 1, 000, 000)
(4) Company service providers which, as a
business, provide any of the following
services to third parties:
(i) Acting as a formation agent of
juridical persons;
(ii) Acting as, or arranging for another
person to act as:
- A director or corporate secretary
of a company
- A partner of a partnership, or
- A similar position in relation to
other juridical persons;
(iii) Providing a registered office,
business address or accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and
(iv) Acting as, or arranging for
another person to act as, a nominee
shareholder for another person
UP LAW BOC
(5) Persons who provide any of the following
services:
(i) Managing of client money, securities or
other assets;
(ii) Management of bank, savings or securities
accounts;
(iii) Organization of contributions for the
creation, operation or management of
companies; and
(iv) Creation, operation or management of
juridical persons or arrangements and buying
or selling business entities.
The term ‘covered persons’ excludes lawyers
and accountants acting as independent legal
professionals, (1) in relation to information
concerning their clients or (2) where
disclosure of information would compromise
client confidences or the attorney-client
relationship. Provided, (1) that these lawyers
and accountants are authorized to practice in
the Philippines and (2) shall continue to be
subject to the provisions of their respective
codes of conduct and/or professional
responsibility or any of its amendments. (Sec.
1, RA 10365)
C. COVERED TRANSACTIONS
A covered transaction is a transaction in cash
or other equivalent monetary instrument
involving a total amount in excess of
Php 500,000.00 within one banking day.
(Sec. 3[b], as amended by Sec. 1 of RA 9194)
D. SUSPICIOUS TRANSACTIONS
Transactions with covered institutions,
regardless of the amount involved, where any
of the following circumstances exist:
(1) There is no underlying legal or trade
obligation, purpose or economic
justificaiton;
(2) The client is not properly identified;
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(3) The amount involved is not
commensurate with the business or
financial capacity of the client;
(4) Taking into account all known
circumstances, it may be perceived that
the client’s transaction is structued to
avoid being the subject of reporting
requirements under this 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 any way related to
an unlawful activity or offense under this
Act that is about to be, is being or has
been committed;
E. OBLIGATIONS OF COVERED
INSTITUTIONS
(1) Customer Identification
(2) Record Keeping
(3) Reporting of Covered and Suspicious
Transactions
Customer Identification
Covered institutions shall:
• Establish and record a true identity of its
clients, based on official documents
• Maintain a system of verifying the true
identity of their clients
• In case of corporate clients, require a
system to verify:
- Legal existence and organizational
structure; and
- Authority and identification of
persons purporting to act on their
behalf
Anonymous accounts, accounts under
fictitious names, and all other similar
accounts shall be absolutely prohibited. Peso
and foreign currency non-checking numbered
UP LAW BOC
accounts shall be allowed. The BSP may
conduct annual testing solely limited to the
determination of the existence and true
identity of the owners of such accounts.
(Sec. 9, RA 9160)
Record Keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the dates of
transactions.
With respect to closed accounts, the records
on customer identification, account files and
business correspondence, shall be preserved
and safely stored for at least five (5) years
from the dates when they were closed.
Reporting of Coveed and Suspicious
Transactions
General Rule: Covered institutions shall
report to the AMLC all covered transactions
within five (5) working days from occurrence.
Exception: If the Anti Money Laundering
Council (AMLC) prescribed a longer period
not exceeding ten (10) working days.
Note: Amended by RA10365 to 15 working
days
When reporting covered transactions to the
AMLC, covered institutions and their officers,
and employees are prohibited from
communicating to any person, entity, or the
media:
(1) The fact that a covered transaction report
was made;
(2) The contents thereof;
(3) Any other information in relation thereto;
and
(4) Neither may such reporting be published
or aired in any manner or form by the
mass media, electronic mail, or other
similar devices.
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In case of violation, criminal liability ensues.
However, no administrative, criminal or civil
proceedings shall lie against any person for
having made a covered transaction report in
the regular performance of his duties and in
good faith, whether or not such reporting
results in any criminal prosecution under this
Act or any other Philippine law.
(Sec. 9, RA 9160)
Lawyers and accountants acting as
independent legal professionals are not
subject to the reporting requirement if the
relevant information was obtained in
circumstances subject to professional secrecy
or legal professional privilege.
(Sec. 9, RA 10365)
F. WHEN IS MONEY LAUNDERING
COMMITTED
Money laundering is a crime whereby the
proceeds of an unlawful activity are
transacted, thereby making them appear to
have originated from legitimate sources.
It is committed by the following:
(1) 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.
(2) Any person knowing that any monetary
instrument or property involves the
proceeds of any unlawful activity,
performs or fails to perform any act as a
result of which he facilitates the offense
of money laundering referred to in the
paragraph above.
(3) Any person knowing that any monetary
instrument or property is required under
this Act to be disclosed and filed with the
Anti-Money Laundering Council (AMLC),
fails to do so. (Sec. 4)
Sec. 4 of RA 10365 amends this section as
follows:
UP LAW BOC
Money Laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves,
or relates to the proceeds of any unlawful
activity:
(a) Transacts said monetary instrument or
property;
(b) Converts, transfers, disposes of, moves,
acquires, possesses or uses said
monetary instrument or property;
(c) Conceals or disguises the true nature,
source, location, disposition, movement
or ownership of or rights with respect to
said monetary instrument or property;
(d) Attempts or conspires to commit money
laundering offenses referred to in
paragraphs (a), (b) or (c);
(e) Aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a), (b)
or (c) above; and
(f) Performs or fails to perform any act as a
result of which he facilitates the offense
of money laundering referred to in
paragraphs (a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered
or suspicious transaction is required under
this Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so.
G. UNLAWFUL ACTIVITIES OR
PREDICATE CRIMES
Unlawful activity refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended;
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otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
(9) Swindling under Article 315 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations under Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
(13) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
known as the Securities Regulation Code
of 2000;
(14) Felonies or offenses of a similar nature
that are punishable under the penal laws
of other countries. (Sec. 3 [i])
RA 10365 added the following:
(15) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372
(16) Financing of terrorism under Section 4
and offenses punishable under Sections 5,
6, 7 and 8 of Republic Act No. 10168,
otherwise known as the Terrorism
Financing Prevention and Suppression
Act of 2012:
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(17) Bribery under Articles 210, 211 and 211-A
of the Revised Penal Code, as amended,
and Corruption of Public Officers under
Article 212 of the Revised Penal Code, as
amended;
(18) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as
amended;
(19) Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised
Penal Code, as amended;
(20) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176 of
the Revised Penal Code, as amended;
(21) Violations of Sections 4 to 6 of Republic
Act No. 9208, otherwise known as the
Anti-Trafficking in Persons Act of 2003;
(22) Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree No.
705, otherwise known as the Revised
Forestry Code of the Philippines, as
amended;
(23) Violations of Sections 86 to 106 of
Chapter VI, of Republic Act No. 8550,
otherwise known as the Philippine
Fisheries Code of 1998;
(24) Violations of Sections 101 to 107, and 110
of Republic Act No. 7942, otherwise
known as the Philippine Mining Act of
1995;
(25) Violations of Section 27(c), (e), (f), (g) and
(i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources
Conservation and Protection Act;
(26) Violation of Section 7(b) of Republic Act
No. 9072, otherwise known as the
National Caves and Cave Resources
Management Protection Act;
(27) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping
Act of 2002, as amended;
(28) Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as
amended, otherwise known as the
decree Codifying the Laws on
Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
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Disposition of Firearms, Ammunition or
Explosives;
(29) Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing
Law;
(30) Violation of Section 6 of Republic Act No.
8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of
1995, as amended by Republic Act No.
10022;
(31) Violation of Republic Act No. 8293,
otherwise known as the Intellectual
Property Code of the Philippines;
(32) Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-
Photo and Video Voyeurism Act of 2009;
(33) Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(34) Violations of Sections 5, 7, 8, 9, 10(c), (d)
and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination
H. ANTI – MONEY LAUNDERING
COUNCIL (AMLC)
The Anti – Money Laundering Council shall
be composed of the Governor of the Bangko
Sentral ng Pilipinas (BSP) as chairman, and
the Commissioner of the Insurance
Commission and the Chairman of the
Securities and Exchange Commission (SEC)
as members. (Sec. 7)
FUNCTIONS
The AMLC shall act unanimously in the
discharge of its functions as defined
hereunder:
(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 institution 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
UP LAW BOC
assistance from a foreign State, or
believed by the Council, on the basis of
substantial evidence, to be, in whole or in
part, wherever located, representing,
involving, or related to, directly or
indirectly, in any manner or by any means,
the proceeds of an unlawful activity.
(3) To institute civil forfeiture proceedings
and all other remedial proceedings
through the Office of the Solicitor
General;
(4) To cause the filing of complaints with the
Department of Justice or the
Ombudsman for the prosecution of
money laundering offenses;
(5) To investigate suspicious transactions
and covered transactions deemed
suspicious after an investigation by AMLC,
money laundering activities, and other
violations of this Act;
(6) To apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be the
proceeds of any unlawful activity as
defined in Section 3(i) hereof;
(7) To implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
(8) To receive and take action in respect of,
any request from foreign states for
assistance in their own anti-money
laundering operations provided in this
Act;
(9) To develop educational programs on the
pernicious effects of money laundering,
the methods and techniques used in
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,
department, bureau, office, agency or
instrumentality of the government,
including government-owned and -
controlled corporations, in undertaking
any and all anti-money laundering
operations, which may include the use of
its personnel, facilities and resources for
the more resolute prevention, detection
and investigation of money laundering
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offenses and prosecution of offenders;
and
(11) To impose administrative sanctions for
the violation of laws, rules, regulations
and orders and resolutions issued
pursuant thereto. (Sec. 7)
Sec. 6 of RA 10365 added the following power
to the AMLC:
(12) To require the Land Registration
Authority and all its Registries of Deeds
to submit to the AMLC, reports on all real
estate transactions involving an amount
in excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days
from the date of registration of the
transaction, in a form to be prescribed by
the AMLC. The AMLC may also require
the Land Registration Authority and all
its Registries of Deeds to submit copies of
relevant documents of all real estate
transactions.
I. FREEZING OF MONETARY INSTRUMENT
OR PROPERTY
Requisites:
The Court of Appeals may issue a Freeze
Order under the following conditions:
(1) An application ex parte by the AMLC;
(2) Determination of the CA of probable
cause that any monetary instrument or
property is in any way related to an
unlawful activity as defined in Section 3(i)
Purpose
To give the government the necessary time to
prepare its case and to file the appropriate
charges without having to worry about the
possible dissipation of the assets that are in
any way related to the suspected illegal
activity.
Thus, a separate criminal charge, much less a
conviction, is not required for a freeze order.
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(Ligot v Republic, G.R. No. 176944, Mar 6,
2013)
Duration
The Freeze Order shall be effective
immediately, for a period not exceeding 20
days unless extended by the court.
Note: RA 10365 amends the period to up to
six months, depending on the circumstances
of the case.
A person whose account has been frozen may
file a motion to lift the freeze order. The court
must resolve this motion before the
expiration of the freeze order.
Lifting of Freeze Order (RA 10365)
General Rule: If there is no case filed against
a person whose account has been frozen with
the period determined by the court, the freeze
order is deemed ipso facto lifted.
Exception: The rule does not apply to pending
cases (law took effect Mar 7 2013)
Injunctions
No court shall issue a temporary restraining
order or writ of injunction against any freeze
order issues by the AMLC, except the
Supreme Court
J. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS
General Rule: The AMLC may inquire into or
examine any particular deposit or investment,
including related accounts, 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:
(1) There is probable cause that the deposits
or investments involved are related to
(2) An unlawful activity as defined in Sec 3(i)
or a money laundering offense
Related Accounts refers to accounts, funds
and sources of which originated from and/or
are materially linked to the monetary
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instrument(s) or property(ies) subject of the
freeze order(s).
The Court of Appeals must act on the
application within 24 hours from filing.
Exception: No court order shall be required in
the following cases:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code as amended;
(2) Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 15 and
16 of RA No. 9615 otherwise known as the
Comprehensive Dangerous Drugs Act of
2002;
(3) Hijacking and other violations under RA
No. 6235; destructive arson and murder
as defined under the Revised Penal Code
as amended, including those perpetrated
by terrorists against non-combatant
persons and similar targets;
(4) Felonies or offenses of a nature similar to
those mentioned in Section 3(i) (1), (2),
and (12) which are punishable under the
penal laws of other countries;
(5) Terrorism and conspiracy to commit
terrorism as defined and penalized under
RA No. 9372.
The authority of AMLC to inquire into or
examine the main account and the related
accounts shall comply with the Due Process
requirements (Art. III, Sec 2 and 3) of the 1987
Constitution.
Unlike the rules on applications for freeze
orders, no clearance for an ex parte
proceeding is granted to inquiry orders.
However, an inquiry into deposits does not
require a pre-existing criminal case.
(Republic v Eugenio, G.R. No. 174629, Feb. 14,
2008)
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II. Foreign Investments
Act (R.A. 7042)
A. POLICY OF THE LAW
(1) To 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 socio-economic
development to the extent that foreign
investment is allowed in such activity by
the Constitution and relevant laws;
(2) To encourage foreign investments in
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;
- Transfer relevant technologies in
agriculture, industry and support
services
(3) To welcome foreign investment 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. In 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
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technology to Filipinos, generating more
employment for the economy and enhancing
skills of Filipino workers. (Sec. 2)
B. DEFINITION OF TERMS
FOREIGN INVESTMENT
An equity investment made by a 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 which shall
assess and appraise the value of such assets
other than foreign exchange. (Sec. 3[c])
DOING BUSINESS IN THE PHILIPPINES
Includes:
(1) Soliciting orders, service contracts,
opening offices, whether called “liaison”
offices or branches;
(2) Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period or periods totalling one hundred
eighty (180) days or more;
(3) 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
progressive prosecution of, commercial
gain or of the purpose and object of the
business organization
Does Not Include:
(1) Mere investment and exercise of rights as
a shareholder by a foreign entity in
domestic corporations duly registered to
do business;
(2) Having a nominee director or officer to
represent its interests in the corporation;
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(3) Appointing a representative or distributor
domiciled in the Philippines which
transacts business in its own name and
for its own account (Sec. 3[d])
The IRR further does not include the
following from the definition of “doing
business”:
(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
(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.
EXPORT ENTERPRISE
An enterprise wherein a manufacturer,
processor or service (including tourism)
enterprise exports sixty percent (60%) or
more of its output, or wherein a trader
purchases products domestically and exports
sixty percent (60%) or more of such
purchases
(Sec. 3 [e])
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 (Sec. 3 [f])
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Note: The following sections are not part of the
Bar Syllabus but are included in this reviewer
for your reference.
C. REGISTRATION OF INVESTMENTS ON
NON- PHILIPPINE NATIONALS
Philippine National
(1) Citizen of the Philippines
(2) Domestic partnership or association
wholly owned by citizens of the
Philippines
(3) Corporation organized under the laws of
the Philippines of which at least 60% of
the capital stock outstanding and entitled
to vote is owned and held by citizens of
the Philippines
(4) Corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code
of which 100% of the capital stock
outstanding and entitled to vote is wholly
owned by Filipinos
(5) A trustee of funds for pension or other
employee retirement, where the trustee is
a Philippine national and at least 60% of
the fund will accrue to the benefit of
Philippine nationals
Where a corporation and its non-Filipino
stockholders own stocks in a Securities and
Exchange Commission (SEC) registered
enterprise, the corporation is a Filipino
national under the following conditions:
(1) At least sixty percent (60%) of the capital
stock outstanding and entitled to vote of
each of both corporations must be owned
and held by citizens of the Philippines
(2) At least sixty percent (60%) of the
members of the Board of Directors of
each of both corporations must be
citizens of the Philippines, (Sec. 3[a])
The control test shall be applied for this
purpose. (Sec. 1[b], IRR)
Non – Philippine Nationals
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General Rule: A non-Philippine national may
do business as defined in Section 3 (d) of this
Act or invest in a domestic enterprise up to
one hundred percent (100%) of its capital
- Upon registration with SEC, or
- With the Bureau of Trade Regulation and
Consumer Protection of the DTI for single
proprietorships
Exception: 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
this Act.
The SEC or BTRCP, as the case may be, shall
not impose any limitations on the extent of
foreign ownership in an enterprise additional
to those provided in this Act.
However, any enterprise seeking to avail of
incentives under the Omnibus Investment
Code of 1987 must apply for registration with
the Board of Investments (BOI).
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
SEC. During the transitory period as provided
in Section 15 hereof, 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.
Upon effectivity of this Act, SEC shall effect
registration of any enterprise applying under
this Act within fifteen (15) days upon
submission of completed requirements. (Sec.
5)
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D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE
Foreign investment in export enterprises
whose products and services do not fall
within Lists A and B of the Foreign
Investment Negative List provided under
Section 8 hereof 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, as the case may
be, 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 (40%) of its total
production; failure to comply with such SEC
or BTRCP order, without justifiable reason,
shall subject the enterprise to cancellation of
SEC or BTRCP registration, and/or the
penalties provided in Section 14 hereof. (Sec.
6)
Note: Export ratio refers to:
(1) If the enterprise is engaged in
manufacturing or processing: the
percentage share of the volume or peso
value of goods exported to the total
volume or value of goods sold in any
taxable year;
(2) If the enterprise is service – oriented: the
percentage share of the peso value of
services sold to foreigners to total
earnings or receipts from the sale of its
services from all sources in any taxable
year
- Value of services sold shall refer to the
peso value of all services rendered by
an export enterprise to foreigners
that are paid for in foreign currency
and/or pesos funded from inwardly
remitted foreign currency as properly
documented by the export enterprise;
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(3) If the enterprise is engaged in
merchandise trading: the percentage
share of the volume or peso value of
goods exported to the total volume or
value of goods purchased domestically in
any taxable year
E. FOREIGN INVESTMENT IN
DOMESTIC MARKET ENTERPRISE
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein
is prohibited or limited by the Constitution
existing law or the Foreign Investment
Negative List under Section 8 hereof. (Sec. 7)
A domestic market enterprise may change its
status to export enterprise if over a three (3)
year period it consistently exports in each
year thereof sixty per cent (60%) or more of
its output.
F. FOREIGN INVESTMENT NEGATIVE
LIST
The Foreign Investment Negative List shall
have three (2) component lists; A and B.
(1) List A shall enumerate the areas of
activities reserved to Philippine nationals
by mandate of the Constitution and
specific laws.
(2) List B shall contain the areas of activities
and enterprises regulated pursuant to
law;
- Which are defense-related activities,
requiring prior clearance and
authorization from Department of
National Defense (DND) to engage in
such activity, such as the
manufacture, repair, storage and/or
distribution of firearms, ammunition,
lethal weapons, military ordinance,
explosives, pyrotechnics and similar
materials; unless such manufacturing
or repair activity is specifically
authorized, with a substantial export
component, to a non-Philippine
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national by the Secretary of National
Defense; or
- Which have implications on public
health and morals, such as the
manufacture and distribution of
dangerous drugs; all forms of
gambling; nightclubs, bars,
beerhouses, dance halls; sauna and
steam bathhouses and massage
clinics.
General Rule: Small and medium-sized
domestic market enterprises, with paid-in
equity capital less than the equivalent two
hundred thousand US dollars (US$200,000)
are reserved to Philippine nationals,
Exception: A minimum paid-in capial of one
hundred thousand dollars (US $100 000) is
allowed to non – Philippine nationals if they
prove:
(1) They involve advanced technology as
determined by the Department of Science
and Technology; or
(2) They employ at least fifty (50) direct
employees
Amendments to List B may be made upon
recommendation of (1) the Secretary of
National Defense, or (2) the Secretary of
Health, or (3) the Secretary of Education,
Culture and Sports, endorsed by the NEDA,
approved by the President, and promulgated
by a Presidential Proclamation.
Foreign Investment Negative Lists shall
become effective 15 days after publication in
a newspaper of general circulation in the
Philippines: Provided, however, That each
Foreign Investment 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
Investment Negative List at the end of the
transitory period shall not be made more
often than once every two (2) years. (Sec. 8)
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(4) National and local government agencies

III. Financial or units (Sec. 5)
Rehabilitation and
Creditor refers to natural or juridical persons
Insolvency Act of 2010 which have claims against the debtor that
(R. A. 10142) arose on or before the commencement date.
(Sec. 4)

A. KEY CONCEPTS AND DEFINITIONS - General Unsecured Creditor refers to a

creditor whose claim or a portion thereof
Insolvency refers to the financial condition of is neither secured, preferred nor
a debtor tht is: subordinated under the FRIA
(1) Generally unable to pay liabilities as they - Secured Creditor refers to a claim secured
fall due on the ordinary course of by a lien, which is a statutory or
business (hence illiquid); or contractual claim or juridical charge on
(2) Has liabilities that are greater than its or real or personal property that legally
his assets (Sec. 4[p]) entitles a creditor to resort to said
property for payment of the debt or claim
secured.
Liabilities refers to money claims against the
debtor. (Sec. 4[s])
Rehabilitation refers to the restoration of the
debtor to a condition of successful operation
and solvency, if it is shown that:
Debtors under the FRIA
(1) Its continuance of operation is
Included:
economically feasible; and
(1) Sole proprietorship registered with DTI (2) Its creditors can recover, by way of the
(2) Partnership registered with SEC present value of payments projected in
the plan, more if the debtor continues as
(3) Corporation duly registered and existing a going concern than if it is immediately
under Philippine laws; or liquidated. (Sec. 4[gg])
(4) Individual debtor, who is a natural person
that is a resident citizen, that has become
insolvent (Sec. 4[k]) B. NATURE OF REHABILITATION
Note: Under the FRIA, the rules on debtors PROCEEDINGS
also include and apply to groups of debtors: (1) In Rem: Jurisdiction over all persons
affected is considered as acquired upon
(5) Corporations financially related to one publication of the notice of proceedings.
another as parent corporations,
subsidiaries or affiliates; (2) Summary and Non – Adversarial. (Sec. 3)
(6) Partnerships owned more than 50% by
the same person; and TYPES OF REHABILITATION PROCEEDINGS
(7) Single proprietorships owned by the
(1) Court – Supervised: A judicial proceeding;
same person
may be voluntary or involuntary.
Excluded:
(2) Pre – Negotiated: An insolvency
(1) Banks proceeding involving negotiation of terms
between the debtor and the creditor(s). It
(2) Insurance companies commences as an extrajudicial
(3) Pre-need companies
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proceeding but terminates as a judicial
proceeding;
(3) Out – of – Court: An insolvency
proceeding involving a consensual
contract between the debtor and the
creditor(s). Unlike pre – negotiation
rehabilitation, no petitions are filed with
the court. (SOMERA, Credit Transactions:
Notes and Cases, Volume II (2015))
C. COURT–SUPERVISED
PROCEEDINGS
C.1. VOLUNTARY (SEC. 12)
Refer to proceedings initiated by the debtor,
which may be:
(1) Sole Proprietorship: When approved by
the owner;
(2) Partnership: When approved by a majority
of the partners;
(3) Stock Corporation: When approved by a
majority vote of the BOD or trustees, and
authorized by the stockholders
representing 2/3 of the outstanding
capital stock in a meeting called for the
purpose;
(4) Non – Stock Corporation: When approved
by 2/3 of the members in a meeting
called for the purpose.
A group of debtors may file a petition for
rehabilitation when:
(1) One of more of its members foresee the
impossibility of meeting debts when they
respectively fall due; and
(2) The financial distress would likely
adversely affect the financial condition
and/or operations of the other members
of the group, and/or the participation of
the other members of the group is
essential under the terms and conditions
of the Rehabilitation Plan.
The debtor must file a verified petition for
rehabilitation with the court, to establish:
(1) The insolvency of the debtor; and
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(2) The viability of the rehabilitation.
C.2. INVOLUNTARY (SEC. 13, 14)
Refers to proceedings initiated by the
creditor(s).
Value Requirement for Creditors
The claim(s), or aggregate thereof, must
amount to at least Php 1 million or at least
25% of the subscribed capital stock or
partners’ contributions, whichever is higher.
Circumstances for Involuntary Rehabilitation
(1) There is no genuine issue of fact or law on
the claims of the creditors; and
(2) That the due and demandable payments
have not been made for at least 60 days;
or
(3) The debtor has failed generally to meet
its liabilities as they fall due (illiquidity);
or
(4) At least one creditor, other than the
petitoner(s), has initiated foreclosure
proceedings against the debtor that will
prevent the debtor from paying its debts
as they become due or will render it
insolvent.
C.3. PROVISIONS COMMON TO
VOLUNTARY AND INVOLUNTARY
REHABILITATION PROCEEDINGS
COMMENCEMENT ORDER
If the petition for rehabilitation is deficient in
form and substance, the court may give a
reasonable period to amend or supplement
the petition. If such deficiency is not complied
with, the court may dismiss the petition.
If the petition for rehabilitation is sufficient in
form and substance, it shall issue a
Commencement Order within five (5) working
days from the filing of the petition.
The rehabilitation proceedings shall
commence upon the issuance of the
Commencement Order.
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Contents of the Commencement Order
(1) Identifies the debtor, its principal
business and principal place of business;
(2) Summarize the grounds for initiating
proceedings;
(3) States the legal effects of the Order;
(4) Declares the debtor is
rehabilitation;
(5) Directs the publication of
Commencement Order;
(6) Directs service by personal delivery of a
copy of the petition to the creditor or to
the debtor (not the petitioner);
(7) Appoints a rehabilitation receiver;
(8) Summarizes the requirements and
deadlines for creditors to establish their
claims against the debtor;
(9) Directs the BIR to file and serve its
comment or opposition;
(10) Prohibits the debtor’s suppliers from
withholding the supply of goods and
services in the ordinary course of business
for as long as the debtor makes payments
for services/goods supplied after
issuance of the Order;
(11) Authorizes the payment of administrative
expenses;
(12) Sets the case for initial hearing;
(13) Makes available copies of the petition
and Rehabilitation Plan for examination
and copying by any interested party;
(14) Indicates the location(s) at which
documents may be reviewed and copied;
(15) States that any creditor or debtor, not the
petitioner, may submit the name or
nominate any other qualified person to
the position of rehabilitation receiver;
(16) Includes a Stay or Suspension Order.
(Sec. 16)
Effects of the Commencement Order
In addition to the effects of a Stay or
Suspension Order:
SPECIAL LAWS MERCANTILE LAW
(1) Vests the rehabilitation receiver with all
the powers and functions provided for
this Act, subject to the approval by the
court of the performance bond filed by
the rehabilitation receiver;
(2) Prohibits or otherwise serves as the legal
basis rendering null and void the results
of any attempt to collect or enforce a
claim against the debtor after the
under commencement date, unless otherwise
allowed under the FRIA;
the (3) Serves as the legal basis for rendering
null and void any setoff after the
commencement date of any debt owed to
the debtor by any of the debtor's
creditors;
(4) Serves as the legal basis for rendering
null and void the perfection of any lien
against the debtor's property, after the
commencement date; and
(5) Consolidates the resolution of all legal
proceedings by and against the debtor to
the court; however, the court may allow
the continuation of cases on other courts
where the debtor had initiated the suit.
(Sec. 17)
Effectivity and Duration of the
Commencement Order
Unless lifted by the court, the
Commencement Order shall be effective for
the duration of the rehabilitation proceedings
for as long as there is a substantial likelihood
that the debtor will be successfully
rehabilitated. (Sec. 21)
Minimum Requirements for Substantial
Likelihood
(1) The proposed Rehabilitation Plan
complies with the minimum contents
prescribed by the FRIA;
(2) There is sufficient monitoring by the
rehabilitation receiver of the debtor's
business for the protection of creditors;
(3) The debtor has met with its creditors to
the extent reasonably possible in
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attempts to reach consensus on the
proposed Rehabilitation Plan;
(4) The rehabilitation receiver submits a
report, based on preliminary evaluation,
stating that the underlying assumptions
and the goals stated in the petitioner's
Rehabilitation Plan are realistic, feasible
and reasonable or if not, there is, in any
case, a substantial likelihood for the
debtor to be successfully rehabilitated
because, among others:
- There are sufficient assets with/which
to rehabilitate the debtor;
- There is sufficient cash flow to
maintain the operations of the
debtor;
- The debtor's, partners, stockholders,
directors and officers have been
acting in good faith and which due
diligence;
- The petition is not a sham filing
intended only to delay the
enforcement of the rights of the
creditor's or of any group of creditors;
and
- The debtor would likely be able to
pursue a viable Rehabilitation Plan;
(5) The petition, the Rehabilitation Plan and
the attachments thereto do not contain
any materially false or misleading
statement;
(6) If the petitioner is the debtor, that the
debtor has met with its creditor/s
representing at least three-fourths (3/4)
of its total obligations to the extent
reasonably possible and made a good
faith effort to reach a consensus on the
proposed Rehabilitation Plan; or if the
petitioner/s is/are a creditor or group of
creditors, that/ the petitioner/s has/have
met with the debtor and made a good
faith effort to reach a consensus on the
proposed Rehabilitation Plan; and
(7) The debtor has not committed acts of
misrepresentation or in fraud of its
creditor/s or a group of creditors.
STAY AND SUSPENSION ORDER
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An order included in the Commencement
Order that has the following effects:
(1) Suspending all actions or proceedings, in
court or otherwise, for the enforcement of
claims against the debtor;
(2) Suspending all actions to enforce any
judgment, attachment or provisional
remedies against the debtor;
(3) Prohibiting the debtor from selling,
encumbering, transferring or disposing in
any manner any of its properties except in
the ordinary course of business; and
(4) Prohibiting the debtor from making any
payment of its liabilities outstanding as of
the commencement date except as may
be provided herein (Sec. 16)
Exceptions to the Stay or Suspension Order
(1) Cases already pending appeal in the
Supreme Court as of commencement
date Provided, That any final and
executory judgment arising from such
appeal shall be referred to the court for
appropriate action;
(2) Subject to the discretion of the court,
cases pending or filed at a specialized
court or quasi-judicial agency which,
upon determination by the court is
capable of resolving the claim more
quickly, fairly and efficiently than the
court: Provided, That any final and
executory judgment of such court or
agency shall be referred to the court and
shall be treated as a non-disputed claim;
(3) Enforcement of claims against sureties
and other persons solidarily liable with
the debtor, and third party or
accommodation mortgagors as well as
issuers of letters of credit, unless the
property subject of the third party or
accommodation mortgage is necessary
for the rehabilitation of the debtor as
determined by the court upon
recommendation by the rehabilitation
receiver;
(4) Any form of action of customers or clients
of a securities market participant to
recover or otherwise claim moneys and
securities entrusted to the latter in the
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ordinary course of the latter's business as
well as any action of such securities
market participant or the appropriate
regulatory agency or self-regulatory
organization to pay or settle such claims
or liabilities;
(5) Actions of a licensed broker or dealer to
sell pledged securities of a debtor
pursuant to a securities pledge or margin
agreement for the settlement of
securities transactions in accordance with
the provisions of the Securities
Regulation Code and its implementing
rules and regulations;
(6) Clearing and settlement of financial
transactions through the facilities of a
clearing agency or similar entities duly
authorized, registered and/or recognized
by the appropriate regulatory agency like
the BSP and the SEC as well as any form
of actions of such agencies or entities to
reimburse themselves for any
transactions settled for the debtor; and
(7) Criminal action against individual debtor
or owner, partner, director or officer of a
debtor. (Sec. 18)
REHABILATION RECEIVER
Any qualified person, natural or juridical, may
serve as a receiver. (Sec. 28)
If the receiver is a juridical entity, he must
designate a natural person as a
representative. Such representative must
possess all the qualifications and none of the
disqualifications.
Qualifications
(1) Citizen or resident for at least six (6)
months immediately prior to nomination;
(2) Of good moral character and with
acknowledged integrity, impartiality and
independence;
(3) Has the requisite knowledge of insolvency
and other relevant commercial laws,
rules and procedures, as well as the
relevant training and/or experience that
may be necessary to enable him to
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properly discharge the duties and
obligations of a receiver; and
(4) Has no conflict of interest. (Sec. 29)
Conflicts of Interest
Test: An individual is deemed to have a
conflict of interest if he is so situated as to be
materially influenced in the exercise of his
judgment for or against any party to the
proceedings. (Sec. 40)
An individual may have a conflict of interest
if:
(1) He is a creditor, owner, partner or
stockholder of the debtor;
(2) He is engaged in a line of business which
competes with that of the debtor;
(3) He is, or was, within five (5) years from
the filing of the petition, a director, officer,
owner, partner or employee of the debtor
or any of the creditors, or the auditor or
accountant of the debtor;
(4) He is, or was, within two (2) years from
the filing of the petition, an underwriter of
the outstanding securities of the debtor;
(5) He is related by consanguinity or affinity
within the fourth civil degree to any
individual creditor, owners of a sale
proprietorship-debtor, partners of a
partnership- debtor or to any stockholder,
director, officer, employee or underwriter
of a corporation-debtor; or
(6) He has any other direct or indirect
material interest in the debtor or any of
the creditors. (Sec. 40)
Principal Duties
(1) Preserving and maximizing the value of
the assets of the debtor during the
rehabilitation proceedings;
(2) Determining the viability of the
rehabilitation of the debtor;
(3) Preparing and recommending a
Rehabilitation Plan; and
(4) Implementing the approved
Rehabilitation Plan (Sec. 31)
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Management
Unless otherwise provided, the management
of the debtor remains with the existing
management, subject to laws and
agreements, If any, on election or
appointment of directors, managers, or
managing partner. (Sec. 47)
The debtor retains control of its business and
properties, subject only to monitoring by the
receiver. This is referred to as the principle of
debtor – in – possession or debtor – in – place.
(Umale v ASB Realty, G.R. No. 181126, Jun. 15,
2011)
Exception: The following are subject to the
approval of the Receiver or the court,
(1) Disbursements affecting title or interest
in the property;
(2) Payments affecting title or interest in
property;
(3) Sale, disposal, assignment, transfer or
encumbrance of property; or
(4) Any other act affecting title or interest in
property. (Sec. 47)
Immunity from Suit
The receiver, the management committee,
and all persons they engage are not subject
to any action, claim or demand for any act or
omission in good faith in the exercise of their
powers and functions (Sec. 41)
Report of the Receiver
Within 40 days from the initial hearing, the
receiver shall submit a report to the court on
whether:
(1) The debtor is insolvent, and if so, the
causes thereof; and any unlawful or
irregular act(s) committed by the
management of the debtor in
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contemplation of the insolvency or which
may have contributed to the insolvency;
(2) The assumptions, goals and procedures
of the Rehabilitation Plan are realistic,
feasible and reasonable;
(3) There is a substantial likelihood of
successful rehabilitation;
(4) The petition should be dismissed; and
(5) The debtor should be dissolved and/or
liquidated.
Removal
The receiver may be removed at any time by
the court, either by (1) motu propio or (2)
motion by any creditor(s) holding more than
50% of the total obligations of the creditor,
on the following grounds:
(1) Incompetence, gross negligence, failure
to perform or failure to exercise the
proper degree of care in the performance
of his duties and powers;
(2) Lack of particular or specialized
competency required by the specific case;
(3) Illegal acts or conduct in the performance
of his duties and powers;
(4) Lack or qualification or presence of any
disqualification;
(5) Conflict of interest that arises after his
appointment; and
(6) Manifest lack of independence that is
detrimental to the general body of the
stakeholders.
The Implementing Rules add the following
grounds for removal:
(7) Failure, without just cause, to perform
any of the powers and functions under
the Rules; or
(8) Any of the grounds for removing a trustee
under the general principles for trusts
MANAGEMENT COMMIITTEE
Upon motion of any interested party, the
court may appoint either (1) the rehabilitation
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receiver or (2) a management committee to
assume the management of the debtor. (Sec.
36)
Grounds
There must be clear and convincing evidence
of any of the following circumstances:
(1) Actual or imminent danger of dissipation,
loss, waste or destruction of the debtor’s
assets or other properties;
(2) Paralyzation of the business operations of
the debtor; or
(3) Gross mismanagement of the debtor, or
fraud or other wrongful conduct, or gross
or willful violation of the FRIA (Sec. 36)
Composition of the Committee
Three qualified members appointed as
follows:
(1) The first member shall be appointed by
the debtor;
(2) The second member shall be appointed
by the creditor(s) holding more than 50%
of the total obligations of the debtor; and
(3) The third member shall be appointed by
the first and second members within 10
from the appointment.
In case of failure to nominate, the court shall
appoint the member(s) concerned. In case the
decision to appoint a management
committee is due to the third ground
(mismanagement, etc.), the court shall
appoint the first member.
REHABILITATION PLAN
Refers to a plan by which the financial well-
being and viability of an insolvent debtor can
restored using various means including, but
not limited to:
(1) Debt Forgiveness: Condoning and/or
waiving the claims;
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(2) Debt Rescheduling: Extending the time to
pay the claim;
(3) Reorganization or Quasi-Reorganization:
Changing the equity, corporate or
operating structure of the debtor;
(4) Dacion en Pago: Assigning property and
assets as payment for certain claims;
(5) Debt to Equity Conversion: The issuance
of equity and/or ownership interests as
payment for certain claims;
(6) Sale of the Business;
(7) Setting up of new business entities.
(SOMERA)
Approval of the Rehabilitation Plan
The receiver shall notify the stakeholders that
the Plan is ready for examination. Within 20
days from notification, the receiver shall
convene the creditors to vote on the Plan.
The Plan must be approved by all classes of
creditors whose rights are adversely modified
or affected. Otherwise, it is deemed rejected.
The Plan is approved by a class of creditors if
members of the said class holding more than
50% of the total claims of the class vote in
favor of the Plan. (Sec. 64)
If the Plan is approved, the receiver shall
submit the same to the court for confirmation.
Objections to Rehabilitation Plan
The creditor may file an objection to the Plan
with 20 days from receipt of notice that it has
been submitted for confirmation.
Objections are limited to the following:
(1) The creditors’ support was induced by
fraud;
(2) The documents or data relied upon in the
Plan are materially false or misleading;
(3) The Plan is in fact not supported by the
voting creditors. (Sec. 66)
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If upon hearing, the court finds merit in the
objections, it should order the curing of the
defect.
If the court determines the debtor acted in
bad faith, or that it is not possible to cure the
defect, the court shall convert the
proceedings into one for liquidation.
Cram Down Effect
Notwithstanding the rejection of the creditors,
the court may nonetheless confirm the
Rehabilitation Plan in what is known as a
cram down.
The effect of the cram down is to bind the
debtor and all persons who may be affected,
whether or not they participated in the
proceedings or opposed the plan.
A cram down is only permitted under the
following circumstances:
(1) The Rehabilitation Plan complies with the
requirements specified in the FRIA;
(2) The receiver recommends confirmation of
the Rehabilitation Plan;
(3) The shareholders, owners or partners of
the debtor lost at least their controlling
interest as a result of the Rehabilitation
Plan; and
(4) The Rehabiliation Plan would likely
provide the objecting class or creditors
with compensation which has a net
present value greater than that which
they would have received if the debtor
were under liquidation. (Sec. 64)
Confirmation of the Rehabilitation Plan
The court has a maximum period of one year
from the date of filing to confirm a
Rehabilitation Plan.
If no Rehabilitation Plan is confirmed, the
proceedings may be converted into one for
liquidation. (Sec. 72)
Confirmation has the following effects:
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(1) The Plan and its provisions shall be
binding upon the debtor and all persons
who may be affected by it;
(2) The debtor shall comply with the
provisions of the Plan and shall take all
actions necessary to carry out the Plan;
(3) Payments shall be made to the creditors
in accordance with the provisions of the
Plan;
(4) Contracts and other arrangements
between the debtor and its creditors shall
be interpreted as continuing to apply to
the extent that they do not conflict with
the provisions of the Rehabilitation Plan;
(5) Any compromises on amounts or
rescheduling of timing of payments by
the debtor shall be binding on creditors
regardless of whether the Plan is
successfully implemented; and
(6) Claims arising after approval of the Plan
that are otherwise not treated by the Plan
are not subject to any Suspension Order.
(Sec. 69)
TREATMENT OF CLAIMS, ASSETS AND
CONTRACTS
Treatment of Claims
In general, the treatment of claims should
adhere to the following rules:
(1) Within 20 days from assumption into
office, the receiver shall establish a
preliminary registry of claims. The
registry shall be available for public
inspection; notice must be given to
stakeholders on when and where they
may inspect it.
(Sec. 44)
(2) Stakeholders may challenge the claim
within 30 days from the expiration of the
20-day period for establishing a registry.
After the 30-day period, the receiver shall
submit a registry of claims including
claims not subject to challenge. (Sec. 45)
(3) By virtue of the Stay or Suspension Order,
all actions to enforce claims are
suspended. (Sec. 16)
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(4) The Rehabilitation Plan shall treat
equally all claims within the same class,
unless a particular creditor voluntarily
agrees to less favorable treatment. (Sec.
62)
(5) The Rehabilitation Plan must ensure that
payments under the plan comply with the
concurrence and preference of credits.
(Sec. 62)
(6) The failure to file a notice of claim, where
such is not listed in the schedule of
liabilities, nonetheless entitles the
creditor to receive distributions. However,
the creditor cannot participate in the
rehabilitation proceedings. (Sec. 23)
The following rules also apply to the
treatment of secured claims:
(1) The security of lien of a secured creditor is
not diminished or impaired, but his right
to enforce may be suspended during the
Stay Order. (Sec. 16)
(2) Upon motion or recommendation of the
receiver, the court may allow the
enforcement of the security if the
property is not necessary for
rehabilitation. (Sec. 60)
(3) Upon motion or recommendation of the
receiver, the court may terminate or
modify the Stay or Suspension Order if a
secure creditor does not have adequate
protection over security, or the value of a
claim secured by a lien on property which
is not necessary for rehabilitation exceeds
the fair market value of the property. (Sec.
61)
(4) The Rehabilitation Plan shall maintain
the security interest of secured creditors
and preserve the liquidation value of the
security, unless such has been voluntarily
waived or modified. (Sec. 62)
Rules applicable to specific claims include:
(1) Employee’s claims upon issuance of the
Commencement Order are considered
administrative expenses. (Sec. 56)
(2) Taxes accruing from the issuance of the
Commencement Order until the approval
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of the Plan or dismissal of the petition,
whichever is earlier, are waived. (Sec. 19)
Treatment of Unencumbered Assets
General Rule: No funds or property of the
debtor shall be used or disposed of.
Exception:
(1) If in the ordinary course of business of the
debtor; or
(2) If necessary to finance the administrative
expenses of the proceedings. (Sec. 48)
The court may rescind or nullify any sale,
payment, transfer or conveyance of
unencumbered assets which are not in the
ordinary course of business. However, the
property may be disposed of upon order of
the court after notice and hearing if it is:
(1) In the interest of administering the debtor
and facilitating the preparation and
implementation of a Rehabilitation Plan;
(2) To provide a substitute lien, mortgage or
pledge of property;
(3) To meet administrative expenses;
(4) To pay victims of quasi – delicts upon a
valid claim and the debtor having
insurance to be reimbursed;
(5) To repurchase property of the debtor that
has been auctioned off in a sale under the
FRIA; or
(6) To reclaim property held pursuant to a
possessory lien. (Sec. 52)
Treatment of Encumbered Assets
The court may authorize the sale or disposal
of encumbered property held by the debtor
and assets of third parties held by the debtor
under the following conditions:
(1) Upon application of the receiver;
(2) The consent of the affected owners of the
property;
(3) The sale or disposal being necessary for
the continued operation of the debtor’s
business; and
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(4) The debtor has made arrangements to
provide a substitute lien or ownership
right with an equal level of security. (Sec.
50)
Treatment of Assets of Debtor Held by Third
Parties
General Rule: Third parties possessing or
controlling property held by the debtor
cannot dispose the same to persons other
than the debtor.
Exception: If the receiver gives prior approval.
The receiver may also undertake any other
disposition of the property that is beneficial
to rehabilitation, subject to the approval of
the court. (Sec. 51)
Treatment of Contracts
General Rule: All valid and subsisting
contracts of the debtor with creditors and
other third parties as of the commencement
date continue in force.
Provided: The debtor, with consent of the
receiver, effects confirmation by notice to the
other party within 90 days from
commencement of the proceedings.
Exceptions:
(1) Cancelled by final judgment prior to the
issuance of the Commencement Order;
(2) Cancelled after the issuance of the
Commencement Order by the court
before which rehabilitation proceedings
are pending;
(3) The lapse of the 90-day confirmation
period without notice of confirmation,
subject to a claim for actual damages.
(Sec. 57)
AVOIDANCE PROCEEDINGS
Transactions occurring prior to
commencement date entered into by the
debtor, or involving its funds or assets, may
be rescinded or nullified on the grounds of
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being executed to defraud creditors or
constituting undue preference of creditors.
(Sec. 58)
TERMINATION OF PROCEEDINGS
Upon motion by any stakeholder or the
rehabilitation receiver, the proceeding may
be terminated by order of the court declaring
either a successful implementation or failure
of rehabilitation.
Failure of Rehabilitation
(1) Dismissal of the petition;
(2) Failure to submit a Rehabilitation Plan;
(3) No substantial likelihood of rehabilitation
under the Plan;
(4) Failure to perform the obligations, or to
realize the objectives of the Plan;
(5) Fraud in securing approval of the Plan or
its amendment; and
(6) Other analogous circumstances. (Sec. 74)
Effects of Termination
(1) Discharge of the receiver, subject to his
submission of a final accounting;
(2) Lifting of the Stay Order and any other
court order holding in abeyance any
enforcement of a claim against the
debtor;
(3) If termination is due to failure of
rehabilitation or dismissal of the petition
other than technical grounds, the
proceedings shall be immediately
converted to one for liquidation. (Sec. 75)
D. PRE- NEGOTIATED
REHABILITATION
An insolvency proceeding involving a pre-
negotiated Rehabilitation Plan between the
debtor and the creditor(s). It commences as
an extrajudicial proceeding but terminates as
a judicial proceeding. (Somera)
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The court has a maximum period of 120 days

Requirements for Petition
An insolvent debtor, either by itself or jointly
with any of its creditors, may file a verified
petition for approval of the Pre – Negotiated
Rehabilitation Plan that complies with the
following:
(1) Approval of creditors holding at least 2/3
of the total liabilities of the debtor,
including
(2) Secured creditors holding more than 50%
of the total secured claims; and
(3) Unsecured creditors holding more than
50% of the total unsecured claims.
(Sec. 76)
Within five working days, and after
determination that the petition is sufficient in
form and substance, the court shall issue an
Order. (Sec. 77)
from the date of the filing of the petition to
approve the Rehabilitation Plan.
If the court fails to act within the same period,
the Plan shall be deemed approved.
Approval of a Plan has the same legal effect
as confirmation of a Plan in Court –
Supervised Rehabilitation. It also results in a
cram down, as it binds not only the debtor but
also all persons affected by it.
E. OUT–OF–COURT REHABILITATION
An extrajudicial insolvency proceeding of an
Out-of-Court or Informal Restructuring
Agreement (OCRA), or a restructuring of the
claims negotiated between the debtor and
the creditor(s). No petitions are filed with the
court, though the debtor and/or the creditor
may seek court assistance in implementation.
(Somera)

Objections to the Petition or Rehabilitation Pending negotiation and finalization of the

Plan OCRA, there may be a standstill period that
allows the debtor not to pay liabilities as they
Any creditor or other interested party may
fall due and prevents creditors from enforcing
submit a verified objection to the petition or
their claims. (ibid.)
the Rehabilitation Plan. The objections shall
be limited to the following:
(1) The allegations in the petition or the Requirements for OCRA
Rehabilitation Plan, or the attachments
(1) The debtor must agree to the out-of-
thereto, are materially false or
court or informal restructuring/workout
misleading;
agreement or Rehabilitation Plan;
(2) The majority of any class of creditors do
(2) It must be approved by creditors
not in fact support the Rehabilitation
representing at least 67% of the secured
Plan;
obligations;
(3) The Rehabilitation Plan fails to accurately
(3) It must be approved by creditors
account for a claim against the debtor
representing at least 75% of the
and the claim is not categorically
unsecured obligations;
declared as a contested claim; or
(4) It must be approved by creditors holding
(4) The support of the creditors, or any of
at least 85% of the total liabilities,
them, was induced by fraud. (Sec. 79)
secured or unsecured, of the debtor. (Sec.
Approval of the Plan 84)
Within 10 days from the date of the second
publication of the Order, the court shall Standstill Period/Agreement
approve the Rehabilitation Plan unless an
objection is submitted.
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The standstill period/agreement is effective
and enforceable not only against contracting
parties but also against other creditors,
provided that:
(1) Such agreement is approved by creditors
representing more than 50% of the total
liabilities of the debtor;
(2) Notice of the standstill agreement is
published in a newspaper of general
circulation in the Philippines once a week
for two consecutive weeks;
(3) The standstill period does not exceed 120
days from the date of effectivity.
The notice must invite creditors to participate
in the negotiation for the OCRA and inform
them that the agreement would bind all
creditors if the minimum vote requirements
were met. (Sec. 85)
Effects of the OCRA
(1) Results in a cram down, binding not only
the debtor but also all persons affected;
(2) Any proceedings arising or relating to the
OCRA shall not stay its implementation,
unless the relevant party secures a TRO
or injunctive relief from the Court of
Appeals.
Annulment of the OCRA/Standstill
Agreement
The debtor or creditor may file a petition to
annul based only on the following grounds:
(1) Non – compliance with the requirements
of the FRIA or the implementing rules; or
(2) Vitiation of consent due to fraud,
intimidation or violence if committed
against such number of creditors required
to approve the OCRA or the standstill
agreement (FR Rules, Rule 4, Sec .14)
F. CONVERSION INTO LIQUIDATION
PROCEEDINGS
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Under the FRIA, court-supervised or pre-
negotiated rehabilitation proceedings may be
converted in the following instances:
(1) Within 10 days from receipt of the
receiver’s report, a court finding that the
debtor is insolvent and there is no
substantial likelihood of substantial
rehabilitation; (Sec. 25[c])
(2) If no Rehabilitation Plan is confirmed
within 1 year from filing the petition to
confirm the Plan; (Sec. 72)
(3) If termination is due to failure or
rehabilitation or dismissal of the petition
for reasons other than technical grounds
(Sec. 75); or
(4) Motion filed by the insolvent debtor for
conversion into liquidation proceedings.
(Sec. 90)
G. LIQUIDATION
G.1. KEY CONCEPTS AND DEFINITONS
Liquidation is a judicial insolvency proceeding
by which the debtor’s assets are reduced and
converted to cash to discharge the claims
against the debtor. (Somera)
The concept of liquidation is thus
diametrically opposed to that of
rehabilitation, and both cannot be
undertaken at the same time. (Philippine
Veterans Bank Employees Union – NUBE v
Vega, G.R. No. 105364, June 28 2001)
Liquidation may be:
(1) Voluntary: Instituted by the debtor; or
(2) Involuntary: Instituted by a creditor or a
group of creditors.
G.2. KINDS OF DEBTORS
A debtor may be:
(1) Individual: A natural person who is a
resident and citizen of the Philippines; or
(2) Juridical: A partnership registered with
the SEC, or a corporation duly registered
and existing under Philippine laws (Sec.
4)
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Debtor Proceeding Requirements

Suspension of Possesses sufficient property to cover debts but foresees the impossibility
Payments of meeting them as they fall due (illiquid)
(1) Properties are not sufficient to cover liabilities; and
Individual Voluntary
(2) Owing debts exceeding Php 500,000
(1) Creditor(s) have claim(s) aggregating at least Php 500,000; and
Involuntary
(2) An act of insolvency alleged in the petition
Insolvent: Either unable to pay liabilities as they fall due or assets are
Voluntary
insufficient to pay for liabilitie

Juridical (1) At least three creditors; and

Involuntary (2) With aggregate claims at least either Php 1,000,000 or at least 25%
of subscribed capital stock or partner’s contributions, whichever is
higher

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G.3. LIQUIDATION OF AN INDIVIDUAL
DEBTOR
Voluntary Liquidation
An individual debtor whose:
(1) Properties are not sufficient to cover
liabilities; and
(2) Debts exceed Php 500,000;
May file a verified petition for liquidation with
the court of the province or city in which he
has resided for six months prior to the filing
of such petition.
Involuntary Liquidation
Any creditor or group of creditors whose
claims aggregate at least Php 500,000 may
file a verified petition for liquidation with the
court of the province or city where the debtor
resides.
The petition for liquidation must set forth or
allege at least one of these acts of insolvency:
(1) That such person is about to depart or
has departed from the Philippines, with
intent to defraud his creditors;
(2) That being absent from the Philippines,
with intent to defraud, he remains
absent;
(3) That he conceals himself to avoid the
service of legal process for the purpose of
hindering or delaying liquidation or of
defrauding creditors;
(4) That he conceals, or is removing, any of
his property to avoid its being attached or
taken on legal process;
(5) That he has suffered his property to
remain under attachment or legal
process for three days for the purpose of
hindering or delaying the liquidation or of
defrauding his creditors;
(6) That he has confessed or offered to allow
judgment in favor of any creditor or
claimant for the purpose of hindering or
delaying the liquidation or of defrauding
any creditor or claimant;
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(7) That he has willfully suffered judgment to
be taken against him by default for the
purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(8) That he has suffered or procured his
property to be taken on legal process
with intent to give a preference to one or
more of his creditors and thereby hinder
or delay the liquidation or defraud any
one of his creditors;
(9) That he has made any assignment, gift,
sale, conveyance or transfer of his estate,
property, rights or credits with intent to
hinder or delay the liquidation or defraud
his creditors;
(10) That he has, in contemplation of
insolvency, made any payment, gift, grant,
sale, conveyance or transfer of his estate,
property, rights or credits;
(11) That being a merchant or tradesman, he
has generally defaulted in the payment of
his current obligations for a period of 30
days;
(12) That for a period of 30 days, he has failed
after demand to pay any moneys
deposited with him or received by him a
fiduciary capacity; and
(13) That an execution having been issued
against him on final judgment for money,
he shall have been found to be without
sufficient property subject to execution to
satisfy the judgment. (Sec. 105)
Hence, save for (11) (12) and (13), it is generally
necessary to establish that the debtor intends
to delay liquidation or defraud creditors.
(Somera)
Show Cause and Injunction Order
Upon the filing of the creditors’ petition, the
court shall issue an order requiring the debtor
to show cause why he should not be adjudged
an insolvent.
Upon good cause, the court may issue an
injunction order forbidding the debtor from:
(1) Making payments of any of his debts,
and;
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(2) Transferring any property belonging to
him.
However, this injunction cannot affect or
impair the rights of a secured creditor to
enforce his lien. (Sec. 106)
Interim Measures
Where the individual debtor:
(1) Resides out of the Philippines;
(2) Has departed therefrom;
(3) Cannot after due diligence be found
therein; or
(4) Conceals himself to avoid service of the
Order to show cause, or any other
preliminary process or orders,
The petitioning creditors are entitled to a
court order directing the Sheriff to take into
his custody a sufficient amount of property to
satisfy the demands of the creditors and the
costs of the proceedings. They must present
the following:
(1) Affidavits;
(2) Bonds worth double the amount of the
aggregate claims. (Sec. 108)
The court may order the property to be sold in
the same manner as property sold under
execution, with the proceeds to be deposited
in court to abide by the results of the
liquidation proceedings. (Sec. 110)
G.4. LIQUIDATION OF A JURIDICAL
DEBTOR
Voluntary Liquidation
An insolvent debtor may apply for liquidation
by filing a petition for liquidation with the
court.
There is no value requirement as to the
claims of the creditor(s) against the debtor.
(Sec. 90)
Involuntary Liquidation
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A petition for liquidation of the debtor may be
filed by a group of at least three creditors
whose claims are, whichever is higher:
(1) At least Php 1,000,000; or
(2) At least 25% of the subscribed capital
stock or partner’s contributions
The petition shall show that:
(1) There is no genuine issue of fact or law on
the claims; and
(2) The due and demandable payments have
not been made for at least 180 days, or
that the debtor has failed generally to
meet its liabilities as they fall due; and
(3) There is no substantial likelihood that the
debtor may be rehabilitated.
G.5. PROVISIONS COMMON TO
LIQUIDATION OF INDIVIDUAL AND
JURIDICAL DEBTORS
LIQUIDATION ORDER
The Liquidation Order shall:
(1) Declare the debtor insolvent;
(2) Order the liquidation of the debtor and, in
the case of a juridical debtor, declare it as
dissolved;
(3) Order the sheriff to take possession and
control of all the property of the debtor,
except those that may be exempt from
execution;
(4) Order the publication of the petition or
motion in a newspaper of general
circulation once a week for two (2)
consecutive weeks;
(5) Direct payments of any claims and
conveyance of any property due the
debtor to the liquidator;
(6) Prohibit payments by the debtor and the
transfer of any property by the debtor;
(7) Direct all creditors to file their claims with
the liquidator within the period set by the
rules of procedure;
(8) Authorize the payment of administrative
expenses as they become due;
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(9) State that the debtor and creditors who
are not petitioner/s may submit the
names of other nominees to the position
of liquidator; and
(10) Set the case for hearing for the election
and appointment of the liquidator, which
date shall not be less than thirty (30)
days nor more than forty-five (45) days
from the date of the last publication. (Sec.
112)
Effects of the Liquidation Order:
(1) The juridical debtor shall be deemed
dissolved and its corporate or juridical
existence terminated;
(2) Legal title to and control of all the assets
of the debtor, except those that may be
exempt from execution, shall be deemed
vested in the liquidator or, pending his
election or appointment, with the court;
(3) All contracts of the debtor shall be
deemed terminated and/or breached,
unless the liquidator, within ninety (90)
days from the date of his assumption of
office, declares otherwise and the
contracting party agrees;
(4) No separate action for the collection of an
unsecured claim shall be allowed. Such
actions already pending will be
transferred to the Liquidator for him to
accept and settle or contest. If the
liquidator contests or disputes the claim,
the court shall allow, hear and resolve
such contest except when the case is
already on appeal. In such a case, the suit
may proceed to judgment, and any final
and executor judgment therein for a
claim against the debtor shall be filed
and allowed in court; and
(5) No foreclosure proceeding shall be
allowed for a period of one hundred
eighty (180) days.
The Liquidation Order results in the
dissolution of a juridical debtor; however, the
individual debtor is only discharged upon
termination of the proceedings. (Somera)
LIQUIDATOR
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Any qualified person, natural or juridical, may
serve as a receiver.
If the receiver is a juridical entity, he must
designate a natural person as a
representative. Such representative must
possess all the qualifications and none of the
disqualifications.
Qualifications
The liquidator shall have the same
qualifications as that of rehabilitator, thus;
(1) Citizen or resident for at least six (6)
months immediately prior to nomination;
(2) Of good moral character and with
acknowledged integrity, impartiality and
independence;
(3) Has the requisite knowledge of insolvency
and other relevant commercial laws,
rules and procedures, as well as the
relevant training and/or experience that
may be necessary to enable him to
properly discharge the duties and
obligations of a receiver; and
(4) Has no conflict of interest, which may be
waived by a party who may be prejudiced.
(Sec. 29)
Powers, Duties and Responsibilities
The principal duty of the liquidator is to
preserve and maximize the value and recover
the assets of the debtor, with the end of
liquidating them and discharging all the
claims against the debtor.
The powers, duties and responsibilities
include:
(1) To sue and recover all the assets, debts
and claims, belonging or due to the
debtor;
(2) To take possession of all the property of
the debtor except property exempt by law
from execution;
(3) To sell, with the approval of the court,
any property of the debtor which has
come into his possession or control;
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(4) To redeem all mortgages and pledges,
and so satisfy any judgement which may
be an encumbrance on any property sold
by him;
(5) To settle all accounts between the debtor
and his creditors, subject to the approval
of the court;
(6) To recover any property or its value,
fraudulently conveyed by the debtor;
(7) To recommend to the court the creation
of a creditors' committee which will assist
him in the discharge of the functions and
which shall have powers as the court
deems just, reasonable and necessary;
and
(8) Upon approval of the court, to engage
such professional as may be necessary
and reasonable to assist him in the
discharge of his duties.
TREATMENT OF CLAIMS AND CONTRACTS
Determination of Claims
The rules on the determination of claims are
as follows:
(1) Within 20 days from assuming office, the
liquidator shall prepare a preliminary
registry of claims.
(2) Secured creditors who have waived their
security or have fixed the value of the
property subject of the security shall be
considered unsecured.
(3) The registry shall be available for public
inspection and publication notice shall be
provided to stakeholders. (Sec. 123)
(4) The debtor and the creditor have the right
to set off their debts against each other;
only the balance if any shall be allowed in
the proceedings. (Sec. 124)
(5) Within 30 days from expiration of the
period for filing of applications for
recognition of claims, interested parties
may challenge claims to the court.
(6) Upon the expiration of the 30-day period,
the liquidator shall submit the registry of
claims containing the claims not subject
to challenge. Such claims shall become
final upon filing of the register.
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(7) Claims that have become final may be set
aside only on grounds of fraud, accident,
mistake or inexcusable neglect. (Sec. 125)
(8) The liquidator shall submit disputed
claims to court for final approval. (Sec.
126)
Rights of Secured Creditors
Upon issuance of the Liquidation Order, no
foreclosure proceeding shall be allowed for
180 days. (Sec. 113)
However, the Liquidation Order shall not
affect the right of a secured creditor to
enforce his lien.
During the proceedings, a secured creditor
may:
(1) Waive his right under the security or lien,
prove his claim in the liquidation
proceedings and share in the distribution
of the assets of the debtor; or
(2) Maintain his rights under the security or
lien.
If the secured creditor maintains his rights
under the security or lien:
(1) The value of the property may be fixed in
a manner agreed upon by the creditor
and the liquidator.
- If the value of the property is less
than the claim, the liquidator may
convey the property to the secured
creditor and the latter will be
admitted in the liquidation
proceedings as a creditor for the
balance.
- If its value exceeds the claim secured,
the liquidator may convey the
property to the creditor and waive the
debtor's right of redemption upon
receiving the excess from the creditor;
(2) The liquidator may sell the property and
satisfy the secured creditor's entire claim
from the proceeds of the sale; or
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(3) The secure creditor may enforce the lien
or foreclose on the property pursuant to
applicable laws. (Sec. 114)
Rights of Unsecured Creditors
General Rule: No separate action for the
collection of an unsecured claim shall be
allowed. Actions already pending will be
transferred to the liquidator.
Exception: When the action is already on
appeal, the suit may proceed to judgment,
and any final and executory judgment shall
be filed and allowed. (Sec. 113)
Treatment of Contracts
General Rule: All contracts are deemed
terminated and/or breached.
Exception: When the liquidator, within 90
days from assumption of office, declares
otherwise and the contracting party agrees.
(Sec. 113)
LIQUIDATION PLAN
Within three months from assuming office,
the liquidator shall submit a Liquidation Plan
enumerating the assets, claims and a
schedule of liquidation and payment. (Sec.
129)
Properties exempted by law shall be set apart
from liquidation for the use and benefit of the
insolvent. (Sec. 130)
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The Plan and its implementation shall
observe the concurrence and preference of
credits under the Civil Code. (Sec. 133)
Sale of Assets in Liquidation
The liquidator may sell the unencumbered
assets of the debtor and convert the same
into money.
General Rule: The sale shall be made at
public auction.
Exception: A private sale may be allowed with
the approval of the court if:
(1) The goods are of perishable nature;
(2) The goods are likely to quickly deteriorate
in value;
(3) The goods are disproportionately
expensive to keep or maintain; or
(4) The private sale is for the best interest of
the debtor and creditors.
TERMINATION OF PROCEEDINGS
Upon determining that the liquidation has
been completed, the court shall issue an
order ordering the SEC to remove the debtor
from the registry of legal entities. (Sec. 134)
Upon receipt of evidence that the debtor has
been removed from the registry, the court
shall issue an order terminating the
proceedings. (Sec. 135)
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MERCANTILE LAW
SECURITIES
REGULATION CODE

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I. State Policy
Section 2. Declaration of State Policy
The State shall
(1) Establish a socially conscious, free
market that regulates itself;
(2) Encourage the widest participation of
ownership in enterprises;
(3) Enhance the democratization of
wealth;
(4) Promote the development of the
capital market;
(5) Protect investors;
(6) Ensure full and fair disclosure about
securities;
(7) Minimize if not totally eliminate
insider trading and other fraudulent
or manipulative devices and practices
which create distortions in the free
market
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II. Securities Required
to be Registered
General Rule: Securities shall not be sold or
offered for sale or distribution to the public
within the Philippines, without a registration
statement duly filed with and approved by the
Commission (Sec. 8.1)
- The Securities Regulation Code (SRC)
regulates public offering within the
Philippines.
Exceptions:
(1) Exempt securities (Sec. 9)
(a) Any security issued or guaranteed by
the Government of the Philippines/
its political subdivision or agency/its
instrumentality/ or any person
controlled or supervised thereby;
• Rationale for the exception: The
public does not need protection
from the government itself. The
government will always be solvent
to pay its obligations because of
its ability to raise revenues
through taxation.
(b) Any security issued or guaranteed by
the government of any country with
which the Philippines maintains
diplomatic relations, or by any state,
province or political subdivision
thereof on the basis of reciprocity:
Provided, That the Commission may
require compliance with the form and
content for disclosures the
Commission may prescribe;
• Rationale: This is rooted in comity
among nations.
(c) Certificates issued by a receiver or by
a trustee in bankruptcy duly approved
by the proper adjudicatory body;
• Rationale: This is not a public
offering. Besides, protection is
already afforded by that “proper
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adjudicatory body” and additional
SEC protection is not necessary.
(d) Any security or its derivatives the sale
or transfer of which, by law, is under
the supervision and regulation of the
Office of the Insurance Commission,
Housing and Land Use Rule
Regulatory Board, or the Bureau of
Internal Revenue.
• Rationale: The issuers are
governmental agencies covered
by exception (a) above. SEC
protection would be a duplication.
(e) Any security issued by a bank except
its own shares of stock (Sec. 9.1)
• Rationale: Banks are under the
supervision of the Bangko Sentral.
SEC protection is a duplication.
(f) Any class of security with respect to
which the SEC finds that registration
is not necessary in the public interest
and for the protection of investors
(Sec. 9.2)
• NOTE: The exemption of
securities by the SEC must be
made through the issuance of a
rule or regulation (Sec. 9.2)
(2) Exempt transactions
(a) At any judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
- Rationale for exclusion: A court
will presumably not order the
sale if the public will be
prejudiced thereby.
(b) By or for the account of a pledge
holder, or mortgagee or any of a
pledge lien holder selling or offering
for sale or delivery in the ordinary
course of business and not for the
purpose of avoiding the provision of
this Code, to liquidate a bona fide
debt, a security pledged in good faith
as security for such debt.
- Rationale: This is not a voluntary
sale contemplated by the SRC.
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(c) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for
the owner’s account, such sale or
offer for sale, subscription or delivery
not being made in the course of
repeated and successive transaction
of a like character by such owner, or
on his account by such representative
and such owner or representative not
being the underwriter of such security.
- Rationale: Isolated and not
meant to be an ongoing public
offering.
(d) The distribution by a corporation
actively engaged in the business
authorized by its articles of
incorporation, of securities to its
stockholders or other security holders
as a stock dividend or other
distribution out of surplus.
- Rationale: The offerees are not
the public but shareholders
already familiar with their
company.
(e) The sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly in connection
with the sale of such capital stock.
- Rationale: Same as (d) above.
(f) The issuance of bonds or notes
secured by mortgage upon real estate
or tangible personal property, when
the entire mortgage together with all
the bonds or notes secured thereby
are sold to a single purchaser at a
single sale.
- Rationale: This is not a public sale.
(g) The issue and delivery of any security
in exchange for any other security of
the same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to
make such conversion: Provided, That
the security so surrendered has been
registered under this Code or was,
when sold, exempt from the provision
of this Code, and that the security
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issued and delivered in exchange, if
sold at the conversion price, would at
the time of such conversion fall within
the class of securities entitled to
registration under this Code. Upon
such conversion the par value of the
security surrendered in such
exchange shall be deemed the price
at which the securities issued and
delivered in such exchange are sold.
- Rationale: The SEC has already
registered the convertible security
and presumably also passed upon
the security to be issued upon
conversion.
(h) Broker’s transaction, executed upon
customer’s orders, on any registered
Exchange or other trading market.
- Rationale: If broker’s transactions
are registered each time, the
transactions on the exchange will
be unduly hampered. Besides, the
brokers are subject to a “code of
conduct” protective of the interest
of the investors.
(i) Subscriptions for shares of the
capitals stocks of a corporation prior
to the incorporation thereof or in
pursuance of an increase in its
authorized capital stocks under the
Corporation Code, when no expense
is incurred, or no commission,
compensation or remuneration is
paid or given in connection with the
sale or disposition of such securities,
and only when the purpose for
soliciting, giving or taking of such
subscription is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be
subscribed before it can be registered
and duly incorporated, or its
authorized capital increased.
- Rationale: This is not a public
offering. Besides, the SEC is
involved in the subscription process,
as a regulator.
(j) The exchange of securities by the
issuer with the existing security
holders exclusively, where no
commission or other remuneration is
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paid or given directly or indirectly for
soliciting such exchange.
- Rationale: This is not a public
offering.
(k) The sale of securities by an issuer to
fewer than twenty (20) persons in the
Philippines during any twelve-month
period.
- Rationale: This is not a public
offering but a private placement.
(l) The sale of securities to any number
of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan
maintained by the Government of
the Philippines or any political
subdivision thereof or managed
by a bank or other persons
authorized by the Bangko Sentral
to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the
Commission may by rule
determine as qualified buyers, on
the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in
financial and business matters, or
amount of assets under
management. (Sec. 10.1)
- Rationale: These are sophisticated
investors that could fend for
themselves.
(m) Any transaction with respect to which
the SEC finds that registration is not
necessary in the public interest and
protection of investors such as by the
reason of the small amount involved
or the limited character of the public
offering (Sec. 10.2)
NOTE: Application for exemption under
Section 10 must be accompanied by:
(1) A notice identifying the exemption
relied upon;
UP LAW BOC SECURITIES REGULATION CODE
(2) Payment of fee equivalent to 1/10 of
1% of the maximum value aggregate
price or issued value of the securities.
SEC v. PROSPERITY.COM, INC. (2012):
[This case involves the application of
the Howey test in order to determine if a
particular transaction is an investment
contract.] The sole issue is whether or not
Prosperity.com Inc.’s (PCI) scheme
constitutes an investment contract that
requires registration under the SRC.
The SRC treats investment contracts as
“securities” that have to be registered with
the SEC before they can be distributed and
sold. An investment contract is a contract,
transaction, or scheme where a person
invests his money in a common enterprise
and is led to expect profits primarily from the
efforts of others.
Apart from the definition which the IRR
provides, Philippine jurisprudence has so far
not done more to add to the same. Of course,
the United States Supreme Court, grappling
with the problem, has on several occasions
discussed the nature of investment
contracts. That court’s rulings, while not
binding in the Philippines, enjoy some degree
of persuasiveness insofar as they are logical
and consistent with the country’s best
interests.
The US SC held in Securities and Exchange
Commission v. W.J. Howey Co. (1946) that, for
an investment contract to exist, the following
elements, referred to as the HOWEY TEST
must concur:
(1) a contract, transaction, or scheme;
(2) an investment of money;
(3) investment is made in a common
enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of
others.
Thus, to sustain the SEC position in this case,
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PCI’s scheme or contract with its buyers must
have all these elements.
POWER HOMES UNLIMITED CORPORATION v.
SEC and MANERO (2008):
An investment contract is defined in the
Amended IRR of R.A. No. 8799 (SRC) as a
“contract, transaction or scheme (collectively
‘contract’) whereby a person invests his
money in a common enterprise and is led to
expect profits primarily from the efforts of
others.”
Although the proponents must establish all
four elements, the US Supreme Court
stressed that the Howey Test “embodies a
flexible rather than a static principle, one that
is capable of adaptation to meet the
countless and variable schemes devised by
those who seek the use of the money of
others on the promise of profits.”
After Howey came the 1973 US case of SEC v.
Glenn W. Turner Enterprises, Inc. et al. In this
case, the 9th Circuit of the US Court of
Appeals ruled that the element that profits
must come “solely” from the efforts of others
should not be given a strict interpretation. It
held that a literal reading of the
requirement “solely” would lead to
unrealistic results. It reasoned out that its
flexible reading is in accord with the statutory
policy of affording broad protection to the
public. Our RA 8799 (SRC) appears to follow
this flexible concept for it defines an
investment contract as a contract,
transaction or scheme whereby a
person invests his money in a common
enterprise and is led to expect profits no
t solely but primarily from the efforts of
others.
Thus, to be a security subject to regulation by
the SEC, an investment contract in our
jurisdiction must be proved to be: (1) an
investment of money, (2) in a common
enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.
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directors of the issuer corporation (Sec.

III. Procedure for 12.4)
Registration of
• Shall be accompanied by:
Securities (a) Written consent of the expert
named as having certified any
(1) Filing of a sworn registration statement part of the registration
with the SEC (Sec. 12.1) statement or any document
used in connection therewith;
• Shall include any prospectus required and
or permitted to be delivered under
Subsections 8.2, 8.3, and 8.4 (Sec. 12.1) (b) Where the registration
statement includes shares to
be sold by selling
shareholders - a written
Chapter III, Section 8. Requirement of
certification by such selling
Registration of Securities
shareholders as to the
x x x accuracy of any part of the
registration statement
8.2 The Commission may conditionally
contributed to by such selling
approve the registration statement under
shareholders (Sec. 12.4).
such terms as it may deem necessary.

(2) Payment to the SEC of a fee of not

8.3 The Commission may specify the terms
more than one-tenth (1/10) of one per
and conditions under which any written
communication, including any summary centum (1%) of the maximum
aggregate price at which such
prospectus, shall be deemed not to constitute
securities are proposed to be offered
an offer for sale under this Section.
(Sec. 12.5a)

8.4. A record of the registration of securities

shall be kept in Register of Securities in which
shall be recorded orders entered by the
Commission with respect to such securities.
Such register and all documents or
information with respect to the securities
registered therein shall be open to public
inspection at reasonable hours on business
days.
• Shall include the effect of the
securities issue on ownership, on the
mix of ownership, especially foreign
and local ownership (Sec. 12.3)
• Shall be signed by the issuer’s
executive officer, its principal
operating officer, its principal financial
officer, its comptroller, its principal
accounting officer, its corporate
secretary, or persons performing
similar functions accompanied by a
duly verified resolution of the board of
(3) Publication of the notice of the filing
of registration statement. (Sec. 12.5b)
• The publication must be in two
(2) newspapers of general
circulation in the Philippines,
once a week for two (2)
consecutive weeks, or in such
other manner as the Commission
by the rule shall prescribe (Sec.
12.5b)
(4) Declaration by the SEC whether the
registration statement is effective or
rejected.
• Declaration is made within 45
days from filing of the registration
statement or on such later date to
which the issuer has consented
unless applicant has been
allowed to amend the registration

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statement under Sec. 14 (Sec. and other related laws (Sec. 13.1)
12.6).
(d) If any issuer shall refuse to permit an
examination to be made by the
Commission (Sec. 13.3)
NOTE: Grounds for: (1) rejection/revocation of
registration statement and (2) refusal of
registration/revocation of securities
NOTE: A registration statement may be
thereunder:
withdrawn by the issuer only with the
(a) The issuer: consent of the Commission (Sec. 13.6).
(i) Has been judicially declared
insolvent;
(5) Statement under oath by the issuer in
(ii) Has violated any of the provision all prospectus that:
of this Code, the rules
(a) registration requirements
promulgated pursuant thereto, or
have been met and
any order of the Commission of
which the issuer has notice in (b) all information are true and
connection with the offering for correct as represented by the
which a registration statement issuer or the one making the
has been filed statement.
(iii) Has been or is engaged or is • Statement under oath must be
about to engage in fraudulent made upon effectivity of the
transactions; registration statement. (Sec. 12.7)
(iv) Has made any false or misleading
representation of material facts in
any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any
requirements that the
Commission may impose as a
condition for registration of the
security for which the registration
statement has been filed; or
(b) The registration statement is on its
face incomplete or inaccurate in any
material respect or includes any
untrue statements of a material fact
required to be stated therein or
necessary to make the statement
therein not misleading; or
(c) The issuer, any officer, director or
controlling person performing similar
functions, or any under writer has
been convicted, by a competent
judicial or administrative body, upon
plea of guilty, or otherwise, of an
offense involving moral turpitude and
/or fraud or is enjoined or restrained
by the Commission or other
competent or administrative body for
violations of securities, commodities,

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IV. Prohibitions on
Fraud, Manipulation
and Insider Trading
A. MANIPULATION OF SECURITY
PRICES
It shall be unlawful for any person acting for
himself or through a dealer or broker, directly
or indirectly:
(a) To create a false or misleading
appearance of active trading in any listed
security traded in an Exchange of any
other trading market ("Exchange"):
(i) By effecting any transaction in such
security which involves no change in
the beneficial ownership thereof;
(ii) By entering an order or orders for the
purchase or sale of such security with
the knowledge that a simultaneous
order or orders of substantially the
same size, time and price, for the sale
or purchase of any such security, has
or will be entered by or for the same
or different parties; or
(iii) By performing similar act where there
is no change in beneficial ownership.
(b) To affect, alone or with others, securities
or transactions in securities that:
(i) Raises their price to induce the
purchase of a security, whether of the
same or a different class of the same
issuer or of controlling, controlled, or
commonly controlled company by
others; or
(ii) Creates active trading to induce such
a purchase or sale through
manipulative devices such as marking
the close, painting the tape,
squeezing the float, hype and dump,
boiler room operations and such
other similar devices.
(c) To circulate or disseminate information
that the price of any security listed in an
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Exchange will or is likely to rise or fall
because of manipulative market
operations of any one or more persons
conducted for the purpose of raising or
depressing the price of the security for
the purpose of inducing the purchase or
sale of such security.
(d) To make false or misleading statement
with respect to any material fact, which
he knew or had reasonable ground to
believe was so false or misleading, for the
purpose of inducing the purchase or sale
of any security listed or traded in an
Exchange.
(e) To effect, either alone or others, any
series of transactions for the purchase
and/or sale of any security traded in an
Exchange for the purpose of pegging,
fixing or stabilizing the price of such
security; unless otherwise allowed by this
Code or by rules of the Commission (Sec.
24.1)
B. SHORT SALES
• The SEC is regulating transactions
wherein the seller does not yet own or
have the securities he is selling. He is
required to show that he has made
arrangements to effect delivery of such
securities on settlement date; otherwise,
the sale will not be allowed.
(a) No person shall use or employ, in
connection with the purchase or sale
of any security any manipulative or
deceptive device or contrivance.
(b) No short sale shall be effected nor
any stop-loss order be executed in
connection with the purchase or sale
of any security except if allowed by
the SEC (Sec. 24.2)
NOTE: The SEC may allow certain acts or
transactions under Sec. 24 (on
Manipulation of Security Prices and Short
Sales), for public interest and protection
of investors (Sec. 24.3)
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C. FRAUDULENT TRANSACTIONS
It shall be unlawful for any person, directly
or indirectly, in connection with the purchase
or sale of any securities to:
(a) Employ any device, scheme, or
artifice to defraud; (Sec. 26.1)
(b) Obtain money or property by means
of any untrue statement of a material
fact of any omission to state a
material fact necessary in order to
make the statements made, in the
light of the circumstances under
which they were made, not
misleading (Sec. 26.2)
(c) Engage in any act, transaction,
practice or course of business which
operates or would operate as a fraud
or deceit upon any person (Sec. 26.3)
D. INSIDER TRADING
• What is sought to be addressed here is
the asymmetry in information about a
“public company” (such as a company
listed on the Philippine Stock
Exchange) between insiders and
outsiders.
• Insiders could have material
information not yet known to the
public about the company, and they
might use this information to benefit
themselves at the expense of the
outsiders or the public. Therefore, they
must not trade in the shares of the
company pending the disclosure of
such information to the public.
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or a person
controlling the issuer; gives or gave him
access to material information about the
issuer or the security that is not generally
available to the public;
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(c) A government employee, director, or
officer of an exchange, clearing agency
and/or self-regulatory organization who has
access to material information about an
issuer or a security that is not generally
available to the public; or
(d) A person who learns such information by a
communication from any foregoing insiders
(Sec. 3.8)
‘Material non-public information’ means:
(a) It has not been generally disclosed to the
public and would likely affect the market
price of the security after being disseminated
to the public and the lapse of a reasonable
time for the market to absorb the
information; or
(b) Would be considered by a reasonable
person important under the circumstances in
determining his course of action whether to
buy, sell or hold a security (Sec. 27.2)
• It shall be unlawful for an insider:
(a) To sell or buy a security of the issuer,
while in possession of material
information with respect to the issuer
or the security that is not generally
available to the public, unless:
(1) The insider proves that the
information was not gained from
such relationship; or
(2) If the other party selling to or
buying from the insider (or his
agent) is identified, the insider
proves:
(i) That he disclosed the
information to the other
party, or
(ii) That he had reason to
believe that the other party
otherwise is also in
possession of the
information (Sec. 27.1)
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NOTE: Presumption that purchase or sale
is effected while in possession of material
non-public information arises:
(1) If the purchase or sale is
transacted after such information
came into existence but prior to
dissemination of such
information to the public; and
(2) The lapse of a reasonable time for
market to absorb such
information.
Presumption may be rebutted by
showing of purchaser’s or seller’s
awareness of the material non-public
information at the time of purchase
or sale (Sec. 27.1)
(b) To communicate material nonpublic
information about the issuer or the
security to any person who, by virtue of
the communication, becomes an insider
where the insider communicating the
information knows or has reason to
believe that such person will likely buy or
sell a security of the issuer while in
possession of such information (Sec. 27.3)
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V. Protection of
Investors
A. TENDER OFFER RULE
• This protects the minority shareholders.
• If a person or a group of persons (acting
in concert) intends and is in discussion
with certain shareholders of a public
company (normally, the controlling
shareholders) to acquire a substantial
stake in such company (now, the
threshold is 35% of the outstanding
class of shares in a public company), the
acquirer must make an offer to all the
shareholders of the company to tender
their shares at the price being offered to
the controlling shareholders.
• Before, the minority
shareholders are left out; so,
the acquirer only dealt with
the controlling shareholders
and disregarded the minority.
When a tender offer has commenced or is
about to commence, It shall be unlawful for:
(a) Any person (except the tender offeror)
who is in possession of material
nonpublic information relating to
such tender offer, to buy or sell the
securities of the issuer that are
sought or to be sought by such tender
offer if:
i. Such person knows or has
reason to believe that the
information is nonpublic and
has been acquired directly or
indirectly from the tender
offeror, those acting on its
behalf, the issuer of the
securities sought or to be
sought by such tender offer,
or any insider of such issuer
(b) Any tender offeror, those acting on its
behalf, the issuer of the securities
sought or to be sought by such tender
offer, and any insider of such issuer to
communicate material nonpublic
information relating to the tender
UP LAW BOC SECURITIES REGULATION CODE
offer to any other person where such
communication is likely to result in a
violation of (a) (Sec. 27.4).
CEMCO HOLDINGS, INC. v. NATIONAL LIFE
INSURANCE COMPANY OF THE PHILIPPINES,
INC. (2007):
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. Stated differently, a tender
offer is an offer by the acquiring person to
stockholders of a public company for them to
tender their shares therein on the terms
specified in the offer. Tender offer is in place
to protect minority shareholders against any
scheme that dilutes the share value of their
investments. It gives the minority
shareholders the chance to exit the company
under reasonable terms, giving them the
opportunity to sell their shares at the same
price as those of the majority shareholders.
The coverage of the mandatory tender offer
rule covers not only direct acquisition but also
indirect acquisition or “any type of
acquisition.”
[Case at bar: The indirect acquisition by
CEMCO Holdings of 36% of UCC shares
through the acquisition of the non-listed
UCHC shares is covered by the mandatory
tender offer rule.]
The legislative intent of Section 19 of the
Securities Regulation Code is to regulate
activities relating to acquisition of control of
the listed company and for the purpose of
protecting the minority stockholders of a
listed corporation. Whatever may be the
method by which control of a public company
is obtained, either through the direct
purchase of its stocks or through an
INDIRECT means, mandatory tender offer
applies.
What is decisive is the determination of the
power of control. The legislative intent
behind the tender offer rule makes clear that
the type of activity intended to be regulated is
the acquisition of control of the listed
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company through the purchase of
shares. Control may [be] effected through a
direct and indirect acquisition of stock, and
when this takes place, irrespective of the
means, a tender offer must
occur. The bottom line of the law is to give
the shareholder of the listed company the
opportunity to decide whether or not to sell in
connection with a transfer of control.
B. RULES ON PROXY SOLICITATION
Proxies shall be:
(a) Issued in accordance with SEC rules and
regulations; Proxy solicitations shall also
be made in accordance with the said
rules and regulations (Sec. 20.1)
(b) In writing (Sec. 20.2)
(c) Signed by the stockholder or his duly
authorized representatives (Sec. 20.2)
(d) Filed before the scheduled meeting with
the corporate secretary (Sec. 20.2)
(e) Valid only for the meeting for which it is
intended unless otherwise provided in the
proxy (Sec. 20.3)
NOTE: No proxy shall be valid and effective
for a period longer than five (5) years at one
time (Sec. 20.3)
A broker or dealer shall:
(a) Not give any proxy, consent or any
authorization, in respect of any security
carried for the account of the customer,
to a person other than the customer,
without written authorization of such
customer (Sec. 20.4)
(b) If he holds or acquires the proxy for at
least ten percent (10%) or such
percentage as the Commission may
prescribe of the outstanding share of
such issuer, submit a report identifying
the beneficial owner within ten days after
such acquisition, for its own account or
customer, to the issuer of security, to the
exchange where the security is traded
and to the Commission (Sec. 20.5)
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C. DISCLOSURE RULE
Issuers, equity holders, and insiders are
required to disclose certain information to the
SEC.
C. 1. DISCLOSURE BY THE ISSUER
(1) To the SEC
• Every issuer shall file with the
Commission:
(a) Annual Report within one
hundred thirty-five (135) days,
after the end of the issuer’s fiscal
year, or such other time as the
Commission may prescribe
(b) Such other periodical reports for
interim fiscal periods and current
reports on significant
developments of the issuer as the
Commission may prescribe as
necessary to keep current
information on the operation of
the business and financial
condition of the issuer (Sec. 17.1)
• NOTE: Under this Section, ‘issuer’
includes:
(a) An issuer which has sold a class
of its securities pursuant to a
registration under section 12
hereof.
• BUT the requirement shall be
suspended for any fiscal year
after the year such
registration became effective
if such issuer, as of the first
day of any such fiscal year,
has less than one hundred
(100) holder of such class of
securities or such other
number as the Commission
shall prescribe and it notifies
the Commission of such;
(b) An issuer with a class of securities
listed for trading on an Exchange;
and
(c) An issuer with assets of at least
Fifty million pesos
(50,000,000.00) or such other
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MERCANTILE LAW
amount as the Commission shall
prescribe, and having two
hundred (200) or more holders
each holding at least one
hundred (100) share of a class of
its equity securities.
• The obligation of such issuer
to file report shall be
terminated ninety (90) days
after notification to the
Commission by the issuer
that the number of its holders
holding at least one hundred
(100) shares is reduced to less
than one hundred (100) (Sec.
17.2)
PHILIPPINE VETERANS BANK v. CALLANGAN
(2011):
The ISSUE in this case is whether the Phil.
Veterans Bank qualifies as a “public
company” under Section 17.2 of the Securities
Regulation Code (SRC) in relation with Rule
3(1)(m) of the Amended Implementing Rules
and Regulations of the SRC, required to
comply with the reportorial requirements set
forth in Section 17.1 of the SRC.
Under Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the
SRC, a “public company” is defined as “any
corporation with a class of equity securities
listed on an Exchange or with assets in excess
of P50,000,000.00 and having 200 or more
holders, at least 200 of which are holding at
least 100 shares of a class of its equity
securities.”
It is clear that a “public company,” as
contemplated by the SRC, is not limited to a
company whose shares of stock are publicly
listed; even companies like the Bank, whose
shares are offered ONLY to a specific group of
people, are considered a public company,
PROVIDED they meet the requirements
enumerated [under Sections 17.1 and 17.2 of
the SRC and/or under the Amended IRR of
the SRC].
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(2) To the equity holders associate of such person, giving

the background, identity,
• An annual report shall be furnished residence, and citizenship of each
by every issuer which has a class of such associate; and
equity securities satisfying any of the
requirements in Subsection 17.2 to
each holder of such equity security (d) Information as to any contracts,
(Sec. 17.5) arrangements, or understanding
with any person with respect to
any securities of the issuer
C. 2. DISCLOSURE BY EQUITY HOLDERS including but not limited to
• Any person who acquires directly or transfer, joint ventures, loan or
indirectly the beneficial ownership of option arrangements, puts or call
more than five of per centum (5%) of guarantees or division of losses or
such class or in excess of such lesser profits, or proxies naming the
per centum as the Commission by persons with whom such
rule may prescribe, shall, within ten contracts, arrangements, or
(10) days after such acquisition or understanding have been entered
such reasonable time as fixed by the into, and giving the details
Commission, submit to: (1) the issuer thereof.
of the securities; (2) to the Exchange
where the security is traded; and (3)
to the Commission, the following NOTE: If it appears to the SEC that
information: securities were acquired by person in
the ordinary course of his business
and were not acquired for the
(a) The personal background, purpose of and do not have the effect
identity, residence, and of changing or influencing the control
citizenship of, and the nature of of the issuer nor in connection with
such beneficial ownership by, any transaction having such purpose
such person and all other persons or effect it may permit any person to
by whom or on whose behalf the file in lieu of the statement required
purchases are effected; in the by subsection 17.1 hereof, a notice
event the beneficial owner is a stating:
juridical person, the line of
business of the beneficial owner (1) The name of such person;
shall also be reported; (2) The shares of any equity
securities subject to
Subsection 17.1 which are
(b) If the purpose of the purchases or owned by him;
prospective purchases is to
acquire control of the business of (3) The date of their acquisition;
the issuer of the securities, any and
plans or proposals which such (4) Such other information as the
persons may have that will effect commission may specify (Sec.
a major change in its business or 18.3)
corporate structure;

C. 3. DISCLOSURE BY INSIDER
(c) The number of shares of such • An insider has the duty to disclose
security which are beneficially material information with respect to
owned, and the number of shares the issuer or the security that is not
concerning which there is a right generally available to the public (Sec.
to acquire, directly or indirectly, 27.1)
by; (i) such person, and (ii) each
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An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of,
or a person controlling the issuer;
gives or gave him access to
material information about the
issuer or the security that is not
generally available to the public;
(c) A government employee, director,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to
material information about an
issuer or a security that is not
generally available to the public;
or
(d) A person who learns such
information by a communication
from any foregoing insiders (Sec.
3.8)
‘Material non-public information’
means:
(a) It has not been generally
disclosed to the public and would
likely affect the market price of
the security after being
disseminated to the public and
the lapse of a reasonable time for
the market to absorb the
information; or
(b) Would be considered by a
reasonable person important
under the circumstances in
determining his course of action
whether to buy, sell or hold a
security (Sec. 27.2)
• A beneficial owner of 10% of a
public company becomes a
“principal shareholder” required
to disclose his interest to the SEC,
the company, and the Philippine
Stock Exchange (if the company
is listed there).
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MERCANTILE LAW
VI. Civil Liability
A. CIVIL LIABILITIES ON ACCOUNT OF
FALSE REGISTRATION STATEMENT
(SEC. 56)
Civil liabilities arise when the registration
statement or any part thereof contains on its
effectivity:
(1) An untrue statement of a material fact; or
(2) Omission to state a material fact required
to be stated therein or necessary to make
such statements not misleading
Who may be liable?
(a) Issuer and every person who signed the
registration statement;
(b) Director of/partner in the issuer at the
time of the filing of the registration
statement or any part, supplement or
amendment thereof;
(c) One who is named in the registration
statement as being or about to become
and whose written consent thereto is filed
with the registration statement;
(d) Auditor/auditing firm named as having
certified any financial statements used in
connection with the registration
statement or prospectus;
(e) One who, with his written consent filed
with the registration statement, has been
named as having prepared or certified any
part of the registration statement/any
report or valuation which is used in
connection with the registration
statement;
(f) Selling shareholder who contributed to
and certified as to the accuracy of a
portion of the registration statement;
(g) Underwriter with respect to such security
(Sec. 56.1)
Who may sue?
Any person who acquires the security AND
who suffers damage
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UNLESS it is proved that at the time of such
acquisition he knew of such untrue statement
or omission (Sec. 56.1)
NOTE: When the security is acquired AFTER
the issuer has made generally available to its
security holders an INCOME STATEMENT
covering a period of at least twelve (12)
months beginning from the effective date of
the registration statement, the right of
recovery under Section 56 shall be
conditioned on proof that such person
acquired the security RELYING UPON such
untrue statement in the registration
statement or relying upon the registration
statement AND NOT KNOWING of such
income statement (Sec. 56.2).
B. CIVIL LIABILITIES ARISING IN
CONNECTION WITH PROSPECTUS,
COMMUNICATIONS AND REPORTS
(SEC. 57)
(1) Consideration paid for such security with
interest thereon, LESS the amount of any
income received thereon, upon the tender of
such security; or
(2) For damages if he no longer owns the
security (Sec. 57.1).
B.2. LIABILITY OF MAKERS OF FALSE
MISLEADING STATEMENTS
Who may be liable?
Any person who shall make or cause to be
made any statement in any report, or
document filed pursuant to this Code or any
rule or regulation thereunder, which
statement as at the time and in the light of
the circumstances under which it was made
false or misleading with respect to any
material fact
DEFENSE: Good faith and lack of knowledge of
the false and misleading statement (Sec. 57.2).

Who may sue?

B. 1. LIABILITY OF SELLERS/OFFERORS
Who may be liable? Purchaser or seller of security who purchased
or sold at a price which was affected by such
(a) Offeror or seller of a security in violation statement, NOT KNOWING that such
of Chapter on Registration of Securities; statement was false or misleading, and
(b) Offeror or seller of a security, whether or RELYING UPON such statement
not exempted by the provisions of this SUE FOR: Damages caused by such reliance
Code, by means of a prospectus or other (Sec. 57.2)
written or oral communication which
includes an:
(1) untrue statement of a material fact OR C. CIVIL LIABILITY OF FRAUD IN
(2) omits to state a material fact necessary in CONNECTION WITH SECURITIES
order to make the statements, in the light of TRANSACTIONS (SEC. 58)
the circumstances under which they were
made, not misleading (the purchaser not
knowing of such untruth or omission) • Who may be liable?
• Any person who engages in any
act or transaction in violation of
DEFENSE: No knowledge of untruth or
Sections 19.2 (fraudulent,
omission, despite the exercise of reasonable
deceptive, or manipulative acts or
care (Sec. 57.1).
practices in connection with
tender offers), 20 (Proxy
Who may sue? Solicitations) or 26 (Fraudulent
Transactions), or any rule or
Purchaser of the security may sue to recover: regulation of the Commission
thereunder.
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Who may sue? F. 1. LIABILITY FOR NON-DISCLOSURE

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 a security
SUE FOR: Damages as a result of the act or
transaction.
D. CIVIL LIABILITY FOR
MANIPULATION OF SECURITY PRICES
(SEC. 59)
Who may be liable?
(1) Any insider who violates Subsection 27.1
(on Insider’s Duty to Disclose When
Trading); and
(2) Any person in the case of a tender offer
who violates Subsection 27.4 (a)(I), or
any rule or regulation thereunder, by
purchasing or selling a security while in
possession of material information not
generally available to the public (Sec.
61.1)

Who may be liable? Who may sue?

Any person who WILLFULLY participates in
any act or transaction in Section 24
(Manipulation of Security Prices).
Who may sue?
Any person who shall purchase or sell any
security at a price which was affected by such
act or transaction
SUE FOR: Damages as a result of the act or
transaction.
E. CIVIL LIABILITY WITH RESPECT TO
COMMODITY FUTURES CONTRACTS
AND PRE-NEED PLANS (SEC. 60)
Who may be liable?
Any person who engages in any act or
transactions in WILLFUL violation of any rule
or regulation promulgated by the
Commission under Section 11 (on Commodity
Future Contracts) or 16 (on Pre-Need Plans)
(Sec. 60.1)
Who may sue?
Any person sustaining damages as a result of
such act or transaction (Sec. 60.1)
F. CIVIL LIABILITY ON ACCOUNT OF
INSIDER TRADING
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Any investor who, contemporaneously with
the purchase or sale of securities that is the
subject of the violation, purchased or sold
securities of the same class
UNLESS such insider, or such person in the
case of a tender offer, proves that such
investor KNEW the information or would have
purchased or sold at the same price
REGARDLESS of disclosure of the
information to him (Sec. 61.1)
F. 2. LIABILITY FOR COMMUNICATING
NON-PUBLIC INFORMATION ABOUT
ISSUER
Who may be liable?
(1) An insider who violates Subsection 27.3;
(2) Any person in the case of a tender offer
who violates Subsection 27.4 (a), or any
rule or regulation thereunder
communicating material nonpublic
information shall be jointly and severally
liable under Subsection 61.1 with, and to
the same extent as, the insider, or person
in the case of a tender offer, to whom the
communication was directed and who is
liable under Subsection 61.1 by reason of
his purchase or sale of a security (Sec.
61.2).
G. LIABILITIES OF CONTROLLING
PERSONS, AIDER AND ABETTOR AND
OTHER SECONDARY LIABILITY
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

from the conduct of the person

G. 1. LIABILITY OF CONTROLLING
PERSONS
Who may be liable?
Every person who controls any person liable
under this Code or the rules or regulations of
the Commission thereunder, shall ALSO be
liable jointly and severally with and to the
same extent as such controlled persons to
any person to whom such controlled person is
liable (Sec. 51.1)
NOTE: ‘CONTROL’ may be:
(a) By or through stock ownership, agency, or
otherwise, or
(b) In connection with an agreement or
understanding with one or more other
persons (Sec. 51.1)
DEFENSE: Lack of knowledge of the existence
of facts by reason of which the liability of the
controlled person is alleged to exist (Sec. 51.1)
primarily liable (Sec. 51.5)
NOTE: An aider and abettor shall be
LIABLE ONLY:
▪ To the extent of his relative
contribution in causing such
damages in comparison to that of
the person primarily liable, or
▪ To the extent to which the aider
and abettor was unjustly enriched
thereby
• whichever is GREATER (Sec. 51.5)
NOTE: It shall be unlawful for any person,
DIRECTLY or INDIRECTLY, to do ANY act or
thing which it would be unlawful for such
person to do under the provisions of this Code
or any rule or regulation thereunder (Sec.
51.2)

G. 2. LIABILITY OF DIRECTOR/OFFICER
FOR DELAY IN THE FILING OF REQUIRED
DOCUMENTS
Who may be liable?
Any director or officer of, or any owner of any
securities issued by, any issuer required to file
any document, report or other information
under this Code or any rule or regulation of
the Commission thereunder, who, without
just cause, hinders, delays or obstructs the
making or filing of any such document, report,
or information (Sec. 51.3)

G. 3. LIABILITY OF AIDER/ABETTOR
Who may be liable?
Any person who aids, abets, counsels,
commands, induces or procures any violation
of this Code, or any rule, regulation or order
of the Commission thereunder (Sec. 51.4)
Every person who substantially assists the act
or omission of any person primarily liable
under Sections 57, 58, 59 and 60 of this Code,
with knowledge or in reckless disregard that
such act or omission is wrongful
Jointly and severally liable as an aider
and abettor for damages resulting
Page 346 of 353
UP LAW BOC
Civil Liability Arising …
• When the registration
statement or any part
thereof contains on its
effectivity:
o An untrue statement of a
material fact; or
o Omission to state a
material fact required to
be stated therein or
necessary to make such
statements not
misleading
CREDIT TRANSACTIONS MERCANTILE LAW
Who may be liable? Who may Sue?
(a) Issuer and every person Any person who acquires the
who signed the registration security and who suffers
statement; damage unless it is proved that
at the time of such acquisition
(b) Director of/partner in the
he knew of such untrue
issuer at the time of the
statement or omission (Sec.
filing of the registration
56.1)
statement or any part,
supplement or amendment
thereof;
NOTE: When the security is
(c) One who is named in the acquired after the issuer has
registration statement as made generally available to its
being or about to become security holders an income
(b); statement covering a period of
at least twelve (12) months
(d) Auditor/auditing firm
beginning from the effective
named as having certified
date of the registration
any financial statements
statement, the right of recovery
used in connection with the
under this subsection shall be
registration statement or
conditioned on proof that such
prospectus;
person acquired the security
(e) One who, with his written relying upon such untrue
consent filed with the statement in the registration
registration statement, has statement or relying upon the
been named as having registration statement and not
prepared or certified any knowing of such income
part of the registration statement (Sec. 56.2)
statement/any report or
valuation which is used in
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with
respect to such security (Sec.
56.1)
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Civil Liability Arising … Who may be liable? Who may Sue?

In Connection With Prospectus, (a)
Communications and
Reports (Sec. 57)
(b) Offeror or seller of a
A. Liability of Sellers/Offerors
Offeror or seller of a Purchaser of the security may
security in violation of sue to recover:
Chapter on Registration of
(1) consideration paid for such
Securities;
security with interest
thereon, less the amount of
security, whether or not any income received
exempted by the provisions thereon, upon the tender of
of this Code, by means of a such security; or
prospectus or other written
(2) for damages if he no longer
or oral communication
owns the security (Sec. 57.1).
which includes an untrue
statement of a material
fact or omits to state a
material fact necessary in
order to make the
statements, in the light of
the circumstances under
which they were made, not
misleading (the purchaser
not knowing of such
untruth or omission).

Defense: No knowledge of
untruth or omission,
despite the exercise of
reasonable care (Sec. 57.1).
In Connection With Prospectus, Any person who shall make or Purchaser or seller of security
Communications and cause to be made any who purchased or sold at a
Reports (Sec. 57) statement in any report, or price which was affected by
document filed pursuant to this such statement knowing that
B. Liability of Makers of False
Code or any rule or regulation such statement was false or
Misleading Statements
thereunder, which statement misleading, and relying upon
as at the time and in the light such statement may sue for
of the circumstances under damages caused by such
which it was made false or reliance (Sec. 57.2).
misleading with respect to any
material fact

Defense: Good faith and lack of

knowledge of the false and
misleading statement (Sec.
57.2).

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Civil Liability Arising … Who may be liable?
Fraud in Connection with Any person who engages in any
Securities Transactions act or transaction in violation of
(Sec. 58) Sections 19.2, 20 or 26, or any
rule or regulation of the
Commission thereunder
Manipulation of Security Prices Any person who willfully
(Sec. 59) participates in any act or
transaction in Section 24
(Manipulation of Security
Prices).
With Respect to Commodity Any person who engages in any Any person sustaining damages
Futures Contracts and Pre- act or transactions in willful as a result of such act or
need Plans (Sec. 60) violation of any rule or transaction (Sec. 60.1)
regulation promulgated by the
Commission under Section 11
(on Commodity Future
Contracts) or 16 (on Pre-Need
Plans) (Sec. 60.1)
On Account of Insider Trading (a) Any insider who violates Any
Subsection 27.1;
(b) and any person in the case
A. Liability for non-disclosure
of a tender offer who violates
Subsection 27.4 (a)(I), or any
rule or regulation thereunder,
by purchasing or selling a
security while in possession of
material information not
generally available to the
public (Sec. 61.1)
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MERCANTILE LAW
Who may Sue?
Any other person who
purchases or sells any security,
grants or refuses to grant any
proxy, consent or authorization,
or accepts or declines an
invitation for tender of a
security who sustained
damages as a result of the
transaction.
Any person who shall purchase
or sell any security at a price
which was affected by such act
or transaction
investor who,
contemporaneously with the
purchase or sale of securities
that is the subject of the
violation, purchased or sold
securities of the same class
unless such insider, or such
person in the case of a tender
offer, proves that such investor
knew the information or would
have purchased or sold at the
same price regardless of
disclosure of the information to
him (Sec. 61.1)
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Civil Liability Arising … Who may be liable? Who may Sue?

On Account of Insider Trading (a) An insider who violates
Subsection 27.3;
B. Liability for communicating
non-public information OR
about issuer
(b) any person in the case of a
tender offer who violates
Subsection 27.4 (a), or any rule
or regulation thereunder
communicating material
nonpublic information shall be
jointly and severally liable
under Subsection 61.1 with, and
to the same extent as, the
insider, or person in the case of
a tender offer, to whom the
communication was directed
and who is liable under
Subsection 61.1 by reason of his
purchase or sale of a security
(Sec. 61.2).

7. Liabilities of Controlling Every person who controls any

Persons, Aider and Abettor person liable under this Code
and Other Secondary or the rules or regulations of
Liability the Commission thereunder,
shall also be liable jointly and
severally with and to the same
A. Liability of Controlling extent as such controlled
Persons persons to any person to whom
such controlled person is liable
(Sec. 51.1)

NOTE: ‘Control’ may be by or

through stock ownership,
agency, or otherwise, or in
connection with an agreement
or understanding with one or
more other persons (Sec. 51.1)

Defense: Lack of knowledge of

the existence of facts by reason
of which the liability of the
controlled person is alleged to
exist (Sec. 51.1)

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Civil Liability Arising … Who may be liable? Who may Sue?

7. Liabilities of Controlling It shall be unlawful for any
Persons, Aider and Abettor director or officer of, or any
and Other Secondary owner of any securities issued
Liability by, any issuer required to file
any document, report or other
information under this Code or
B. Liability of Director/Officer any rule or regulation of the
for Delay in the Filing of Commission thereunder,
Required Documents without just cause, to hinder,
delay or obstruct the making or
filing of any such document,
report, or information (Sec.
51.2)

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Civil Liability Arising … Who may be liable? Who may Sue?

7. Liabilities of Controlling It shall be unlawful for any
Persons, Aider and Abettor person to aid, abet, counsel,
and Other Secondary command, induce or procure
Liability any violation of this Code, or
any rule, regulation or order of
the Commission thereunder
C. Liability of (Sec. 51.3)
Aider/Abettor
Every person who substantially
assists the act or omission of
any person primarily liable
under Sections 57, 58, 59 and
60 of this Code, with
knowledge or in reckless
disregard that such act or
omission is wrongful, shall be
jointly and severally liable as an
aider and abettor for damages
resulting from the conduct of
the person primarily liable (Sec.
51.4)
BUT an aider and abettor shall
be liable only to the extent of
his relative contribution in
causing such damages in
comparison to that of the
person primarily liable, or the
extent to which the aider and
abettor was unjustly enriched
thereby, whichever is greater
(Sec. 51.4)
NOTE: It shall be unlawful for
any person, directly, or
indirectly, to do any act or thing
which it would be unlawful for
such person to do under the
provisions of this Code or any
rule or regulation thereunder
(Sec. 51.2)

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