Commercial Law Memory Aid

M E M O R Y A I D
CBO OVER-ALL CHAIRPERSON: Evangeline Co

ASSISTANT CHAIRPERSON: Rose Lyn Rabanera
ACADEMICS COMMITTEE - HEADS:
Reigel Prado, Omar Gabrieles
SECRETARIAT – HEAD: Romino Arzadon
FINANCE COMMITTEE – HEAD: Kyan Sioco
LOGISTICS COMMITTEE - HEAD: Janis Ruckenbrod
COMMERCIAL LAW COMMITTEE
HEAD: Darlene Fae Arizobal
NEGOTIABLE INSTRUMENTS LAW: Kathlyn Giaewa Leuterio

MEMBER: Marian Allam
INSURANCE: Marty Cachapero

MEMBER: Anthony Cruz
TRANSPORTATION LAW: Dianne Elizabeth Feeney
CORPORATION LAW: Darlene Fae Arizobal
BANKING AND INTELLECTUAL PROPERTY LAWS: Charina Sabangan

MEMBERS: Aristotle Almario, Rowena Gonzales
SPECIAL LAWS: Marissa Corazon Nefalar
SUBJECT ADVISER:
Atty. Manuel T. Gatcho

I n s t i t u t e o f L a w
C E N T R A L B A R O P E R A T I O N S 2 0 0 6
U n i t e d P u r s u i t o f E x c e l l e n c e
CBO OVER-ALL CHAIR: Evangeline Co; ASSISTANT CHAIR: Rose Lyn Rabanera; SECRETARIAT - HEAD: Romino Arzadon; ACADEMICS -
HEADS: Reigel Prado, Omar Gabrieles; FINANCE – HEAD: Kyan Sioco; LOGISTICS - HEAD: Janis Ruckenbrod
M E M O R Y A I D I N C O M M E R C I A L L A W
NEGOTIABLE INSTRUMENTS LAW 2. Only what appears on the face of the

(Act No. 2031, effective June 2, 1911) instrument
3. Provisions of the NIL, Sec.1
NEGOTIABLE INSTRUMENT - a written
contract for the payment of money which NEGOTIABLE NON-
complies with the requirements of Sec. 1 of the INSTRUMENTS NEGOTIABLE
NIL, which by its form and on its face, is INSTRUMENTS
intended as a substitute for money and passes 1. Must contain all 1. Does not contain
from hand to hand as money, so as to give the requisites of sec.1 all requisites of
holder in due course (HDC) the right to hold the sec.1
instrument free from defenses available to prior 2. Transferable by 2. Transferable by
parties. negotiation and assignment only
assignment.
Functions of Negotiable Instrument: 3. HDC can have 3. A transferee
1. Substitute for money rights better than acquires no better
2. Medium of exchange his transferor right than his
3. Tool used in commercial transaction. transferor
4. Prior parties 4. Prior parties do
Requisites: (Sec.1 NIL) warrant payment not warrant payment
a. Must be in writing and signed by the (secondary but merely the
maker or drawer; liability). legality of his title.
b. Must contain an unconditional promise 5. NIL only applies
or order to pay a sum certain in money; 5. Governed by NIL by analogy
c. Must be payable on demand, or at a 6. Transferee is
fixed or determinable future time; 6. Transferee is a assignee only.
d. Must be payable to order or bearer; holder in due 7. All defenses
e. Where the instrument is addressed to a course. available against last
drawee, he must be named or otherwise 7. Defenses generally transferee.
indicated therein with reasonable not available.
certainty.
Classes of Negotiable Instruments:
Two Distinctive Features of NI: 1. PROMISSORY NOTE (PN) - unconditional
1. NEGOTIABILITY - it is that attribute or promise in writing by one person to another
property whereby a bill or note or check signed by the maker engaging to pay on
may pass from hand to hand similar to demand or at a fixed or determinable future
money, so as to give the holder in due time, a sum certain in money to order or to
course the right to hold the instrument and bearer. (Sec. 184)
to collect the sum payable for himself free
from defenses. 2. BILL OF EXCHANGE (BE) -an
unconditional order in writing addressed by
2. ACCUMULATION OF SECONDARY one person to another, signed by the person
CONTRACTS - secondary contracts are giving it, requiring the person to whom it is
picked up and carried along with Negotiable addressed to pay on demand or at a fixed or
Instruments as they are negotiated from one determinable future time a sum certain in
person to another; or in the course of money to order or to bearer. (Sec. 126)
negotiation of negotiable instruments, a
series of juridical ties between the parties 3. CHECK- a bill of exchange drawn on a bank
thereto arise either by law or by privity. The payable on demand. (Sec. 185)
indorsers become secondarily liable to the
holder. Kinds:
 Manager’s / Cashier’s Check –
Test of Negotiability: presence of drawn by a bank on itself and therefore,
requirements in Section 1 of NIL. it is a primary obligation of the bank.
- It is accepted in advance by the act of
Factors that determine Negotiability: its issuance and is not subject to
1. The whole instrument itself
C O M M E R C I A L L A W
ADVISER: Atty. Manuel T. Gatcho
COMMERCIAL LAW – HEAD: Darlene Fae Arizobal
MEMBERS: Marian Allam, Aristotle Almario, Marty Cachapero, Anthony Cruz, Dianne Elizabeth Feeney, Rowena Gonzales,
Kathlyn Giaewa Leuterio, Marissa Corazon Nefalar, Charina Sabangan
Page 2 of 199
countermand by the payor after that he must inquire if he has

indorsement. received the check pursuant to
- The bank’s manager signs manager’s that purpose.
check while cashier’s check is signed by
the bank cashier.  Stale check – one which has not been
presented for payment within a
 Memorandum Check reasonable time after its issue
– it is like an ordinary check except that
the word “memorandum,” “mem” or NEGOTIABLE NEGOTIABLE
“memo” is written upon the face of the INSTRUMENT DOCUMENT OF
check, signifying that the drawer TITLE
engages to pay the bona fide holder 1. The subject is 1. The subject is
absolutely, and not upon a condition to Money goods
pay upon presentment at maturity and if 2. Is itself the 2. The document is
due notice of the presentment and non- property with a mere evidence
payment should be given. value of title – the
things of value
 Certified Check – one being the goods
drawn by a depositor upon funds to his mentioned in the
credit in a bank which a proper officer of document
the bank certifies will be paid when duly 3. Has all the 3. Does not have
presented for payment requisites of Sec these requisites
1 of NIL
 Traveler’s check – one 4. A holder of NI 4. Intermediate
upon which the holder’s signature must may run after parties are not
appear twice, one to be affixed by him at the secondary secondarily liable
the time it is issued and the second o parties for if the document
counter-signature, to be affixed by him payment if is dishonored
in the presence of the payee before it is dishonored by
paid, otherwise it is incomplete the party
primarily liable
5. A holder, if HDC, 5. A holder can
 Crossed check – when may acquire never acquire
2 parallel lines are drawn across its face rights over the rights to the
or across a corner thereof. If the name of instrument document better
a bank appears between the parallel better than his than his
lines, the check is said to be specially predecessors predecessors
crossed, and payment should be made
only if presented by the named bank. If PROMISSORY BILL OF
no name appears between the parallel NOTE EXCHANGE
lines, the check is said to be generally 1.Unconditional 1.Unconditional
crossed, and payment should be made promise order
only upon presentment by some bank. 2. Involves 2 parties 2.Involves 3 parties
3. Maker is primarily 3.Drawer is only
Effects of crossing a check: liable secondarily liable
a. That the check may not be 4.Only one 4.Two presentments:
encashed but only be deposited presentment: for for acceptance and
in the bank; payment for payment
b. That the check may be Instances when BILL may be treated as a

negotiated only once to one who NOTE:
has an account with a bank; and 1. Drawer and drawee are the same person.
2. Drawee is a fictitious person.
c. That the act of crossing the 3. Drawee has no capacity to contract.
check serves as a warning to the 4. When instrument is so ambiguous, the
holder that the check has been holder may treat it either as a BILL or a
issued for a definite purpose so NOTE.
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1. Issue
BILLOF CHECK 2. Delivery
EXCHANGE 3. Negotiation
1.Not necessarily 1.It is necessary 4. Presentment for acceptance, in certain kinds
drawn on a that a check is of bills of exchange
deposit. The drawn on a bank 5. Acceptance
drawee need not deposit. The 6. Dishonor by non-acceptance
be a bank. drawee is always a 7. Presentment for payment
bank. 8. Dishonor by non-payment
2.Death of a drawer 2.Death of the 9. Notice of dishonor
of a BOE, with the drawer of a check, 10. Discharge
knowledge of the with the
bank, does not knowledge of the I. ISSUE
revoke the authority bank, revokes the
of the drawee to authority of the A. CONCEPTS
pay. banker to pay. Issue - the first delivery of the instrument,
3. May be presented 3. Must be complete in form, to a person who takes it as a
for payment within presented for holder (sec. 191)
a reasonable time payment within a
after its last reasonable time Delivery - transfer of possession, actual or
negotiation because after its issue. constructive, from one person to another
it may be further (sec.191)
negotiated.
4.May be payable 4. Always payable Holder – refers to the:
on demand or at a on demand a. The payee or indorsee of a bill or note
fixed or who is in possession of it, or
determinable b. The bearer thereof (sec.191)
future time
Bearer - the person in possession of a bill or
OTHER FORMS OF NEGOTIABLE note which is payable to bearer (sec. 191)
INSTRUMENTS
1. Certificate of deposit issued by banks, Person - includes a body of persons, whether
payable to the depositor or his order, or to incorporated or not (sec. 191)
bearer
2. Trade acceptance B. FORM AND INTERPRETATION
3. Bonds, which are in the nature of
promissory notes Requisites of negotiable instruments
4. Drafts, which are bills of exchange drawn by a. It must be in writing and signed by the
one bank upon another maker or drawer;
b. Must contain an unconditional promise
 All of these must comply with Sec. 1, NIL
or order to pay a sum certain in money;
Note: Letters of credit are not negotiable.
c. Must be payable on demand, or at a
fixed or determinable future time;
d. Must be payable to order or to bearer;
LEGAL TENDER
and
 That kind of money that the law compels a e. Where the instrument is addressed to a
creditor to accept in payment of his debt drawee, he must be named or otherwise
when tendered by the debtor in the right indicated therein with reasonable
amount. certainty. (sec. 1)
Note: A negotiable instrument although 1. Must be in writing, signed by the
intended to be a substitute for money, is maker or drawer;
generally not a legal tender. - Otherwise it cannot be a substitute for money.
(See notes under New Central Bank Act)
2. Must contain an unconditional
INCIDENTS IN “LIFE” OF NEGOTIABLE promise or order to pay a sum certain in
INSTRUMENT money;
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3. Indication in the 3. Indication in

Certainty of sum payable. instrument does not the
The sum payable is a sum certain although it is affect the instrument
to be paid: unconditional nature makes the
a. With interest; or of the promise or promise or
b. By stated installments; or order. order
c. By stated installments, with a provision conditional.
that, upon default in payment of any
installment or of interest, the whole
shall become due; or 3. Payable on demand or at a fixed
d. With exchange, whether at a fixed rate determinable future time;
or at the current rate; or
e. With costs of collection or an attorney's Certainty of time of payment
fee, in case payment shall not be made at An instrument is payable at a determinable
maturity. (sec. 2) future time which is expressed to be payable:
a. At a fixed period after date or sight; or
Acceleration clause - renders whole debt due b. On or before a fixed or determinable
and demandable upon failure of obligor to future time specified therein; or
comply with certain conditions. c. On or at a fixed period after the
occurrence of a specified event which is
When promise is unconditional certain to happen, though the time of
An unqualified order or promise to pay is happening be uncertain.
unconditional though coupled with:
a. An indication of a particular fund out of  An instrument payable upon a contingency
which reimbursement is to be made or a is not negotiable, and the happening of the
particular account to be debited with the event does not cure the defect. (sec. 4)
amount; or
b. A statement of the transaction which  A promise to pay “when able,” “as soon as I
gives rise to the instrument. can”, etc., without specification of an
absolute date is not negotiable. However,
 An order or promise to pay out of a there is a difference of opinion as to whether
particular fund is not unconditional. (sec. 3) it is a conditional promise or an absolute
promise to pay at un unreasonable time:
FUND FOR PARTICULAR
REIMBURSEMENT FUND FOR a. Under the first view,
PAYMENT negotiability is destroyed both by the
1. Drawee pays the 1. There is only condition and by want of a fixed time
payee from his own one act- the for payment;
funds; afterwards, drawee pays b. Under the second view, by
the drawee pays directly from the general principle that a promise
himself from the the particular to pay within a reasonable time is
particular fund fund not so certain as to render an
indicated. indicated. instrument negotiable.
Payment is Aftersight Draft - payable only after the
subject to the expiration of the stipulated period from
condition acceptance (legal sight).
that the fund
is sufficient. When payable on demand:
2. Particular fund 2. Particular a. When it is so expressed to be payable on
indicated is NOT the fund demand, or at sight, or on presentation;
direct source of indicated is or
payment but only the direct b. In which no time for payment is
the source of source of expressed.
reimbursement. payment. Note: 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. (sec. 7)
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4. Payable to order or to bearer forth the basis of liability and authorizing

the entry of judgment thereon.
When payable to order
The instrument is drawn payable:  Kinds of confession of judgment
a. To the order of a specified person or a. cognivit actiomen – literally means “he
b. To him or his order. has confessed action”. It is a written
confession of action by the defendant
 The payee must be named or otherwise acknowledging is indebtedness to the
indicated therein with reasonable certainty. plaintiff after the action has been filed. It
(Sec. 8) is given after the action is brought to
 It may be drawn payable to the order of: save expenses.
a. A payee who is not maker, drawer, or b. relicta verificationem – literally means
drawee; or “his pleadings being abandoned.” It is
b. The drawer or maker; or confession of judgment by withdrawal of
c. The drawee; or the defense.
d. Two or more payees jointly; or
e. One or some of several payees; or Note: However, warrants of attorney to confess
f. The holder of an office for the time judgment, are not authorized nor contemplated
being. by our law. They are void as against public
policy because they enlarge the field for fraud,
When payable to bearer. because under these instruments, the
a. When it is expressed to be so payable; or promissory bargains away his right to a day in
b. When it is payable to a person named court. The NIL does not sanction nor validated
therein or bearer; or any provision otherwise illegal.
c. When it is payable to the order of a
fictitious or non-existing person, and Omissions; seal; particular money.
such fact was known to the person The validity and negotiable character of an
making it so payable; or instrument are not affected by the fact that:
d. When the name of the payee does not a. it is not dated; or
purport to be the name of any person; or b. does not specify the value given, or that
e. When the only or last indorsement is an any value had been given therefore; or
indorsement in blank. (Sec. 9) c. does not specify the place where it is
drawn or the place where it is payable;
Additional provisions not affecting or
negotiability. d. bears a seal; or
GENERAL RULE: the instrument is non- e. designates a particular kind of current
negotiable if it contains a promise or order to do money in which payment is to be made.
any act in addition to the payment of money. (sec. 6)
EXCEPTIONS:  if it is not dated, the instrument will be

considered to be dated as of the time it was
a. authorizes the sale of collateral issued (sec. 17[c])
securities in case the instrument be not
paid at maturity; or  consideration for the instrument is
b. authorizes a confession of judgment if presumed (art. 154 NCC & sec. 25 NIL)
the instrument be not paid at maturity;  sec. 73 specifies where presentment for
or payment should be made when the place of
c. waives the benefit of any law intended payment is not specified
for the advantage or protection of the
obligor; or Rules of construction:
d. gives the holder an election to require a. Where the sum payable is expressed in
something to be done in lieu of payment words and also in figures and there is a
of money. discrepancy between the two, the sum
denoted by the words is the sum
 Confession of judgment – a written payable; but if the words are ambiguous
statement signed by the defendant, setting
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or uncertain, reference may be had to  where the holder has a lien on the
the figures to fix the amount; instrument arising either from contract or
b. Where the instrument provides for the by implication of law, he is deemed a holder
payment of interest, without specifying for value to the extent of his lien. (sec. 27)
the date from which interest is to run,
the interest runs from the date of the Effect of want of consideration: a matter
instrument, and if the instrument is of defense as against any person not a holder in
undated, from the issue thereof; due course; and partial failure of consideration
c. Where the instrument is not dated, it is a defense pro tanto, whether the failure is an
will be considered to be dated as of the ascertained and liquidated amount or
time it was issued; otherwise. (sec. 28)
d. Where there is a conflict between the
written and printed provisions of the Absence of consideration – total lack of any
instrument, the written provisions valid consideration for the contract, only a
prevail; personal defense.
e. Where the instrument is so ambiguous
that there is doubt whether it is a bill or Failure of consideration – failure or refusal or
note, the holder may treat it as either at one party to do, perform or comply with the
his election; consideration agreed upon, only a personal
f. Where a signature is so placed upon the defense.
instrument that it is not clear in what
capacity the person making the same II. NEGOTIATION
intended to sign, he is to be deemed an
indorser; TRANSFER AND NEGOTIATION
g. Where an instrument containing the
word "I promise to pay" is signed by two Types of transfers:
or more persons, they are deemed to be
jointly and severally liable thereon. (sec. 1. Assignment - transfer of title to the
17) instrument, with the assignee generally
taking only such title as his assignor has,
C. CONSIDERATION subject to all defenses available against his
assignor;
Consideration – inducement to a contract 2. By operation of law – such as by
succession, by insolvency
Presumption of consideration. - every 3. Negotiation - transfer of a negotiable
negotiable instrument is deemed prima facie to instrument from one person to another
have been issued for a valuable consideration; made in such a manner as to constitute the
and every person whose signature appears transferee the holder thereof (sec. 30)
thereon to have become a party thereto for
value. (sec. 24)
NEGOTIATION ASSIGNMENT
Value - any consideration sufficient to support 1. Refers only to 1. Refers generally
a simple contract. An antecedent or pre-existing negotiable to an ordinary
debt constitutes value; and is deemed such instruments; contract;
whether the instrument is payable on demand 2. The transferee is a 2. The transferee is
or at a future time. (sec. 25) holder; an assignee;
3. A holder in due 3. An assignee is
Holder for value – one who has given a course is subject subject to both
valuable consideration for the instrument only to real real and personal
issued or negotiated to him. defenses; defenses;
4. Generally, an
4. A holder in due assignee merely
What constitutes holder for value: course may steps into the
 where value has at any time been given for acquire a better shoes of the
the instrument, the holder is deemed a right than that of a assignor;
holder for value in respect to all parties who prior party 5. An assignor does
become such prior to that time. (sec. 26) 5. A general indorser not warrant the
Page 7 of 199
warrants the solvency of prior contract consistent with character of

solvency of prior parties unless indorsement (sec. 35)
parties; expressly
stipulated or the c. Restrictive - when the indorsement
insolvency is either:
known to him; i. Prohibits further negotiation of
6. An indorser is not 6. An assignor is the instrument; or
liable unless there liable even ii. Constitutes the indorsee the
be presentment without notice of agent of the indorser; or
and notice of dishonor; iii. Vests the title in the indorsee in
dishonor; trust for or to the use of some
7. Negotiation is 7. Governed by Arts. other persons. But mere absence
governed y the 1624 to 1635 (on of words implying power to
NIL. assignment of negotiate does not make an
credits) of the indorsement restrictive.(sec. 36)
Civil Code.  A restrictive indorsement confers
upon the indorsee the right:
Methods of negotiation a. To receive payment of the
instrument;
Instruments Indoresment and
payable to order delivery b. To bring any action thereon
Instruments Delivery that the indorser could bring;
payable to bearer
c. To transfer his rights as such
Indorsement - legal transaction effected by indorsee, where the form of
the writing of one's own name at the: the indorsement authorizes
a. back of the instrument or him to do so.
b. upon a paper (allonge) attached thereto But all subsequent indorsees acquire
with or without additional words only the title of the first indorsee
specifying the person to whom or to under the restrictive indorsement.
whose order the instrument is to be (sec. 37)
payable whereby one not only transfers
legal title to the paper transferred but  Such indorsement destroys the
likewise enters into an implied guaranty negotiability of the instrument and
that the instrument will be duly paid bars further negotiation to a holder
(sec. 31) in due course.
General Rule: indorsement must be of the d. Qualified - constitutes the indorser a

entire instrument. mere assignor of the title to the
Exception: where instrument has been paid in instrument. (sec. 38)
part, it may be indorsed as to the residue. (sec.  made by adding to the indorser's
32) signature words like "sans recourse,”
“without recourse", "indorser not
Kinds of indorsement: holder", "at the indorser's own risk",
a. Special - specifies the person to whom or etc.
to whose order, the instrument is to be
payable (sec. 34)  The purpose of this kind of
indorsement is to transfer title
b. Blank - specifies no indorsee: without guaranteeing payment by
 Instrument is payable to bearer the primary party.
and may be negotiated by delivery
(sec. 34)  It does not mean, however, that
the qualified indorser incurs no
 May be converted to special liability at all. The effect is merely to
indorsement by writing over the limit his liability. He is secondarily
signature of indorser in blank any liable for breach of is warranties as
Page 8 of 199
an indorser under Sec. 65. Thus, he

is liable if the instrument is h. Successive (Secs. 50, 68)
dishonored by NON-ACCEPTANCE
or NON-PAYMENT due to: i. Irregular - a person who, not otherwise a
a. forgery; party to an instrument, places thereon
b. lack of good title to his signature in blank before delivery
the instrument indorsed; (sec. 64)
c. lack of capacity to
contract on the part of prior j. Facultative
parties; or
d. the fact that the Rules on Indorsements:
instrument was valueless or
not valid at the time of the  Effect of transfer without
indorsement which fact was indorsement:
known to him.
a. transfer vests in the transferee such
e. Conditional - right of the indorsee is title as the transferor had therein
made to depend on the happening of a (assignment), and
contingent event b. the right to have the indorsement of
 Party required to pay may the transferor
disregard the conditions. (sec. 39)
 For the purpose of determining
 This kind of indorsement has no whether the transferee is a holder in
effect on the further negotiation of due course, the negotiation takes
the instrument. The party required effect as of the time when the
to pay, if he chooses, may make indorsement is actually made (sec.
payment, disregarding the condition 49)
without incurring any liability
because he is expressly authorized to  Applicable only to order instruments
do so under Sec. 39. But the person
who received payment will hold the  Indorsement of a bearer instrument:
proceeds subject to the right of the where an instrument, payable to bearer, is
conditional indorser. indorsed specially, it may nevertheless be
further negotiated by delivery; but the
person indorsing specially is liable as
f. Absolute - one by which indorser binds indorser to only such holders as make title
himself to pay: through his indorsement. (sec. 40)
i. upon no other condition than
failure of prior parties to do so;  The rule only applies to originally bearer
and instruments. If it is originally a BEARER
ii. upon due notice to him of such instrument, it will always be a BEARER
failure. instrument.
g. Joint - indorsement of instrument  As opposed to an original order

payable to 2 or more persons (sec. 41); instrument becoming payable to bearer,
all must indorse in order for the if the same is indorsed specifically, it can
transaction to operate as a negotiation. NO LONGER be negotiated further by
 Exceptions to the rule mere delivery, it has to be indorsed.
requiring joint indorsement:
a. Where the payees or  Striking out indorsements: the holder
indorsees are partners; and may at any time strike out any indorsement,
which is not necessary to his title. The
b. Where the payee or indorser whose indorsement is struck out
indorsee indorsing has and all indorsers subsequent to him, are
authority to indorse for the thereby relieved from liability on the
others. instrument. (sec. 48)
Page 9 of 199
has been previously dishonored, if such

 If the instrument is payable to bearer was the fact;
on its face, then whether or not there are c. That he took it in good faith and for
indorsements on the back of the value;
instrument would be immaterial to the d. That at the time it was negotiated to
title of the bearer, who is presumptively him, he had no notice of any infirmity in
the owner and holder by his mere the instrument or defect in the title of
possession of such instrument. None of the person negotiating it. (Sec. 52)
the indorsement would be necessary to
it’s title since mere delivery would have When title defective - The title of a person
been sufficient to transfer title from one who negotiates an instrument is defective when
holder to another. he obtained the instrument or any signature
thereto, by:
 Where the instrument is payable to a. fraud,
order on its face, the situation is b. duress, or force and fear,
different. First, the indorsement of a c. other unlawful means,
special indorsee is necessary for the d. illegal consideration,
further negotiation of the instrument. e. negotiation in breach of faith,
Second, the last indorsement controls f. circumstances amounting to fraud.(sec.
the method of further negotiation. 55)
 When prior party (reacquirer) may What constitutes notice of defect. - The
negotiate: where an instrument is person to whom it is negotiated must have:
negotiated back to a prior party, such party a. actual knowledge of the infirmity
may reissue and further negotiate the same. or defect, or
But he is not entitled to enforce payment b. knowledge of such facts that his
thereof against any intervening party to action in taking the instrument
whom he was personally liable. (sec. 50) amounted to bad faith. (sec. 56)
Notice before full amount is paid - where
 In the following cases, a prior party the transferee receives notice of any infirmity in
cannot further negotiate the instrument: the instrument or defect in the title of the
person negotiating the same before he has paid
1. Where it is payable to the order of the full amount agreed to be paid, he will be
a third person, and has been paid deemed a holder in due course only to the
by the drawer; extent of the amount paid by him (sec. 54)
2. Where it was made or accepted for
accommodation and has been paid When person not deemed a holder in due
by the party accommodated; course - where an instrument payable on
3. In other cases, where the demand is negotiated on an unreasonable
instrument is discharged when length of time after its issue, the holder is not
acquired by a prior party. deemed a holder in due course (sec. 53)
HOLDERS:  Reasonable time,

Classes of holders: what constitutes. - regard is to be had to
1. simple holder (sec. 51) the
2. holder for value (sec. 26) a. nature of the instrument,
3. holder in due course (sec.52, 57) b. the usage of trade or
business with respect to such
Holder in Due Course instruments, and the
 holder who has taken the instrument under c. facts of the particular
the following conditions: case. (sec. 193)
a. That it is complete and regular upon its  Effect: in the hands of any holder other
face; than a holder in due course, a negotiable
b. That he became the holder of it before it instrument is subject to the same
was overdue, and without notice that it defenses as if it were non-negotiable
(sec. 58)
Page 10 of 199
3. He is entitled to the
General Rule: every holder is deemed prima instrument but holds it subject to the
facie to be a holder in due course same defenses as if it were non-
negotiable; and
Exception: when it is shown that the title of 4. He has all the rights of
any person who has negotiated the instrument the holder in due course from whom
was defective, the burden is on the holder to he derived his title in respect of all
prove that he or some person under whom he parties prior to such holder,
claims acquired the title as holder in due course provided he is not himself a party to
(shifting of burden of proof). any fraud or illegality affecting the
instrument.
Limitation: the last-mentioned rule does not
apply in favor of a party who became bound on LIABILITY OF PARTIES
the instrument prior to the acquisition of such
defective title. (sec. 59) Persons primarily liable on instrument:
the person who, by the terms of the instrument,
 Rights of a holder in due course: is absolutely required to pay the same. All other
parties are "secondarily" liable(sec.192)
a. he may sue on the instrument in his own
name; Classification of parties according to
b. he may receive payment and if payment liability
is in due course, the instrument is
discharged (sec. 51) Persons liable: Maker
c. holds the instrument free from any In a Promissory Indorser
defect of title of prior parties, Note 3. Persons
d. holds the instrument free from defenses negotiating by
available to prior parties among delivery
themselves, and In a Bill of Drawer
e. may enforce payment of the instrument Exchange: Acceptor
for the full amount thereof against all Indorsers
parties liable thereon (sec. 57) 4. Persons
negotiating by
 Payment in due course is payment delivery
made:
at or after the maturity of the
instrument
to the holder thereof 1. PARTIES PRIMARILY LIABLE
in good faith and without notice that his a. MAKER (sec. 60)
title is defective.  engages to pay according to the
tenor of the instrument; and
 Shelter Rule:  admits the existence of the payee
a. derives his title through a holder in due and his then capacity to indorse at
course, and the time of the making of the note.
b. who is not himself a party to any fraud  A person placing his name on the
or illegality affecting the instrument, has face of a note is prima facie a maker
all the rights of such former holder in and liable as such; and he is
respect of all parties prior to the latter presumed to have acted with care
(sec. 58) and to have signed the instrument
with full knowledge of its contents.
RIGHTS OF HOLDER NOT IN DUE
COURSE: b. ACCEPTOR OR DRAWEE (sec. 62)
 engages to pay according to the
1. He may sue on the tenor of his acceptance;
instrument in his own name;  admits:
2. He may receive payment 1. the existence of the drawer,
and if the payment is in due course,
the instrument is discharged;
Page 11 of 199
2. the genuineness of his  warrants ---

signature and 1. genuineness of the
3. his capacity and authority to instrument;
draw the instrument; and 2. his good title to it;
4. the existence of the payee 3. capacity to contract of prior
and his then capacity to parties; and
indorse. 4. instrument is valid and
subsisting.
Note: the drawee is not liable until he
accepts the instrument  engages that the instrument will be
accepted or paid by the party
 Where a check is certified by a primarily liable; and
bank, it is equivalent to an  engages that if the instrument is
acceptance. (Sec. 187) Since dishonored and proper proceedings
certification is equivalent to are taken, he will pay to the party
acceptance, a bank which has entitled to be paid.
certified a check whether at the
request of the holder or of a drawer, c. IRREGULAR INDORSER – a person,
has the same liabilities and makes not otherwise a party to an instrument,
the same warranties as an acceptor. places his signature thereon in blank
It cannot, after certification, before delivery. (sec. 64)
question the genuineness of the Rules:
drawer’s signature. If it discovers  If instrument payable to the order of
that such signature is forged a 3rd person, he is liable to the payee
subsequent to certification but prior and subsequent parties.
to payment, it cannot refuse to pay
 If instrument payable to order of
on the check. If its discovery comes
maker or drawer, he is liable to all
after it has paid the check, it cannot
parties subsequent to the maker or
recover back what it paid on the
drawer.
ground of mistaken payment unless
the holder is guilty of fraud or  If he signs for accommodation of the
negligence. payee, he is liable to all parties
subsequent to the payee.
 If a drawee-bank accepts or pays
PRIMARY PARTY SECONDARY
a check despite a stop payment order
PARTY
from the drawer, through oversight
1. Unconditionally 1. Conditionally
or otherwise, it cannot refuse to pay
Bound; bound;
the holder or recover what has been
2.Absolutely 2. Undertakes to pay
paid; neither may it debit the
required to pay upon only after certain
drawer’s account unless the
the maturity of the conditions have been
acceptance nor payment was made
instrument. fulfilled:
prior to the receipt of the order.
a. due
presentment for
2. PARTIES SECONDARILY LIABLE
payment or
a. DRAWER (sec. 61)
acceptance to
 admits the existence of the payee
primary party;
and his capacity to indorse;
b. dishonor by
 engages that the instrument will be such party; and
accepted or paid by the party c. the taking of
primarily liable; and proceedings
 engages that if the instrument is required by law
dishonored and proper proceedings after dishonor.
are brought, he will pay to the party
entitled to be paid.
INDORSER DRAWER
1. A party to either a 1. A party only to a
b. GENERAL INDORSER (sec. 66)
note or a bill; bill;
Page 12 of 199
2. Does not make 2. The drawer makes 3. Action can be 3. Action may be
any admission such admission; brought only brought anytime.
regarding the 3. Makes no on maturity
existence of the warranties, but he of
payee and his engages to pay after instrument.
capacity to indorse; certain conditions
and are complied with.
3. Has warranties. Negotiating by
Mere delivery or by General
Qualified Indorser
GENERAL IRREGULAR Indorsement
INDORSER INDORSER 1. No secondary 1. With secondary
1. Makes either a 1. Always makes a liability; liability;
blank or special blank indorsement;
indorsement; 2. Indorses before its 2. Warrants that he 2. Warrants that
2. Indorses the delivery; has no knowledge the instrument
instrument after its 3. Liable to the payee of any fact, which is, at the time
delivery to the and subsequent would impair the of his
payee; and parties unless he validity of the indorsement,
3. Liable only to signs for the instrument or valid and
parties subsequent accommodation of render it valueless. subsisting.
to him the payee in which 4. OTHER PARTIES:
case he is liable only
to all parties General Rule:
subsequent to the One whose signature does not appear on the
payee. instrument shall not be liable thereon (sec. 18)
3. PARTIES WITH LIMITED LIABILITY (sec. Exceptions:

65; Metropol Financing v. Sambok, 120 1. The principal who signs through an agent is
SCRA 864) liable;
2. The forger is liable;
a. QUALIFIED INDORSER - 3. One who indorses in a separate instrument
warrants that: (allonge) is liable;
 instrument is genuine and in all 4. One who signs his assumed or trade name is
respects what it purports to be; liable; and
 he has good title to it; 5. A person negotiating by delivery (as in the
 all prior parties had capacity to case of a bearer instrument) is liable to his
contract; immediate indorsee.
 he has no knowledge of any fact
which would impair the validity of Requisites for an Agent to escape
the instrument or render it valueless. liability: (sec. 20)
1. must be duly authorized;
b. PERSONS NEGOTIATING 2. add words to his signature indicating
BY DELIVERY that he signs as an agent, that is, for or on
behalf of a principal, or in a representative
 warranties same as those of qualified
capacity; and
indorsers; and
3. disclose his principal.
 warranties extend to immediate
 A signature by “procuration” operates as
transferee only.
notice that the agent has but a limited
authority to sign, and the principal is bound
Liability Warranty
only in case the agent in so signing acted
1. To pay a sum 1. No obligation to
within the actual limits of his authority.
certain. pay.
(sec. 21)
2. Requires 2. Notice of
Notice of Dishonor is not a
Dishonor. requirement.
Page 13 of 199
 Indorsement or assignment of the NI by a DEFENSES

corporation or by an infant passes the Kinds:
property therein, notwithstanding that from 1. REAL/ABSOLUTE DEFENSES - those that
want of capacity, the corporation or infant attach to the instrument itself and are
may incur no liability thereon. (sec. 22) available against all holders, whether in due
course or not.
Accomodation Party - one who has signed Examples:
the instrument as maker, drawer, acceptor, or 1. Alteration;
indorser, without receiving value therefor, and 2. Non-delivery of incomplete
for the purpose of lending his name to some instrument;
other person 3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse
 Liability: such a person is liable on the contractus;
instrument to a holder for value, 5. Minority;
notwithstanding such holder, at the time 6. Marriage in the case of a wife;
of taking the instrument, knew him to be 7. Insanity where the insane person
only an accommodation party (sec. 29) has a guardian appointed by the court;
8. Ultra vires acts of a corporation,
 Effects: where the corporation is absolutely
1. accommodation party is prohibited by its charter or statute from
generally regarded as a surety for issuing any commercial paper under any
the party accommodated; circumstances;
2. When accommodation party 9. Want of authority of agent;
makes payment to holder of the 10. Execution of instrument between
note, he has the right to sue the public enemies;
accommodated party for 11. Illegality of contract where it is
reimbursement. the contract or instrument itself which is
expressly made illegal by statute; and
 Rights of accommodation parties as 12. Forgery.
against each other: the other may
demand contribution from his co- 2. PERSONAL/EQUITABLE DEFENSES –
accommodation party without first those which are available only against a
directing his action against the principal person not a holder in due course or a
debtor provided: subsequent holder who stands in privity
with him.
1. he made the payment by Examples:
virtue of judicial demand; or 1. Absence or failure of
2. the principal debtor is consideration, partial or total;
insolvent. 2. Want of delivery of complete
Note: A corporation cannot act as an instrument;
accommodation party. The issuance or 3. Insertion of wrong date in an
indorsement of negotiable instrument by a instrument, where it is payable at a fixed
corporation without consideration and for the period after date and it is issued undated
accommodation of another is ultra vires. or where it is payable at a fixed period
(Crisologo v. CA, 117 SCRA 594). after sight and the acceptance is
undated;
Order of liability of indorsers: 4. Filling up of blank contrary to
1. among themselves – indorsers are liable authority given or not within reasonable
prima facie in the order in which they time, where the instrument is delivered;
indorse; but evidence is admissible to show 5. Fraud in inducement;
that, as between or among themselves, they 6. Acquisition of instrument by
have agreed otherwise (sec. 68) force, duress, or fear;
7. Acquisition of the instrument by
2. to the holder – indorsers are liable in any unlawful means;
order 8. Acquisition of the instrument for
an illegal consideration;
9. Negotiation in breach of faith;
Page 14 of 199
10. Negotiation under circumstances read, signed a note

that amount to fraud; but failed to read it.
11. Mistake;
12. Intoxication (according to better Effects of Defenses:
authority); 1. Complete and undelivered
13. Ultra vires acts of corporations instrument (sec. 16)
where the corporation has the power to  as between immediate parties and as
issue negotiable paper but the issuance regards a remote party other than a
was not authorized for the particular holder in due course, the delivery must
purpose for which it was issued; be authorized in order to be effectual
14. Want of authority of agent where
he has  where the instrument is in the hands of
15. apparent authority; a holder in due course, a valid delivery
16. Insanity where there is no notice thereof by all parties prior to him so as
of insanity on the part of the one to make them liable to him is
contracting with the insane person; and conclusively presumed
17. Illegality of contract where the
form or consideration is illegal.  where the instrument is no longer in the
possession of a party whose signature
FRAUD IN FRAUD IN appears thereon, a valid and intentional
FACTUM INDUCEMENT delivery by him is presumed until the
1. It exists in those 1. It is that which contrary is proved
cases in which a related to the
person, without quality, quantity, 2. Incomplete but delivered instrument
negligence, has value or character of (sec. 14)
signed an the consideration of  where the instrument is wanting in any
instrument which the instrument. In material particular, the person in
was in fact a this case, the signer possession thereof has a prima facie
negotiable is led by deception to authority to complete it by filling up the
instrument, but was execute what he blanks therein
deceived as to the knows is a
character of the negotiable
 it must be filled up strictly in accordance
instrument and instrument. It
with the authority given and within a
without knowledge implies that the
reasonable time
of its, as where a not signer knew what he
was signed by one was signing but that
under the belief that he was induced by  if any such instrument, after completion,
he was signing as a fraud to sign. is negotiated to a holder in due course, it
witness to a deed. is valid and effectual for all purposes in
his hands, and he may enforce it as if it
2. This kind of fraud 2. Such type of fraud
had been filled up strictly in accordance
is a real defense is only a personal
with the authority given and within a
because there is no defense because it
reasonable time.
contract. It implies does not prevent a
that the person did contract.
3. Incomplete and undelivered
not know what he
instrument (sec. 15)
was signing. But
where the signer by  it will not, if completed and negotiated
the exercise of without authority, be a valid contract in
reasonable diligence the hands of any holder, as against any
could have person whose signature was placed
discovered the thereon before delivery.
nature of the
instrument, the  Subsequent indorsers are liable however
fraud cannot be
considered a real 4. Forgery (sec.2)
defense, as where a
person, who can
Page 15 of 199
 counterfeit making or fraudulent cannot charge the account of the drawer

alteration of any writing, which may BUT he can recover from the one to
consist of: whom he paid since he makes no
1. signing of another’s name with warranty as to genuineness of any
intent to defraud; or indorsement.
2. alteration of an instrument in the BUT IF BEARER instrument, the

name, amount, name of payee, etc. drawee may debit the drawer’s account
with intent to defraud. since the indorsement may be
disregarded.
 Effect: signature is wholly
inoperative, and no right to retain the HOWEVER: if the DRAWEE’S
instrument, or to give a discharge negligence is the proximate cause of the
therefore, or to enforce payment thereof payment under a forged instrument, the
against any party thereto, can be drawee is liable to the collecting bank.
acquired through or under such
signature BUT: Where both the drawee and the
collecting banks are guilty of negligence,
 Exception: unless the party against the degree of negligence of each shall be
whom it is sought to enforce such right weighed in considering the amount of
is precluded from setting up the forgery loss which each should bear.
or want of authority.
 Where a check has several indorsements
 Persons precluded from setting up on it and one of the indorser’s
defense of forgery: signatures is forged, it was held that
it is only the negotiation based on the
1. Those who warrant or admit the forged or unauthorized signature, which
genuineness of the signature in is inoperative. Thus, where the drawee
question. This includes indorsers, bank paid it to the encasher, the drawee
persons negotiating by delivery and bank can recover since the indorser [Sec.
acceptors. 65-66] is supposed to warrant to the
2. Those who, by their acts, silence, drawee that the signature of the payee
or negligence, are estopped from and previous indorsers are genuine. One
setting up the defense of forgery. who purchases a check is bound to
satisfy himself that the paper is genuine
and that by indorsing it or presenting it
RULES IN CASES OF FORGED for payment, he impliedly assets that he
SIGNATURE: has performed his duty.
 Where the drawer’s signature is  Prior parties are not liable to forgery of
forged and the drawee pays it without signature.
having detected the forgery, he cannot
charge the amount thereof to the
drawer’s account. MOREOVER: The NOTE: CUT-OFF RULE – only if forged
drawee who has paid a forged bill. signature is necessary to vest title to
whether previously accepted or not, is subsequent parties will prior parties be
prevented from recovering from the excused from liability.
recipient the amount he paid because he
is bound to know the drawer’s signature. 5. Alteration (sec. 124)
EXCEPT, if the person to whom it was  Effect: the instrument is avoided
paid was guilty of fraud, negligence, or
who has not given value therefore.  Exceptions:
1. against a party who has himself
RECOURSE: Recover from the forger. made, authorized, or assented to the
alteration
 Where the payee’s indorsement is 2. subsequent indorsers
forged and the drawee bank pays it, he
Page 16 of 199
3. holder in due course not a party to

the alteration - he may enforce III. PRESENTMENT FOR ACCEPTANCE
payment according to its original
tenor Presentment for acceptance – the production or
exhibition of a bill of exchange to the drawee for
 Changes constituting his acceptance or payment
material alteration:
a. date; General Rule: presentment for acceptance is
b. sum payable, either for not necessary to render any party to the bill
principal or interest; liable.
c. time or place of payment; Exception: presentment for acceptance must
d. number or relations of be made:
the parties; a. Where the bill is payable after sight, or
e. medium or currency in where presentment for acceptance is
which payment is to be made; necessary in order to fix the maturity of
f. that which adds a place of the instrument; or
payment where no place of
payment is specified; and b. Where the bill expressly stipulates that it
g. any other change or shall be presented for acceptance; or
addition which alters the effect of
the instrument in any respect. c. Where the bill is drawn payable
(sec. 125) elsewhere, then at the residence or place
of business of the drawee. (sec. 143)
 Spoliation – alteration made by a
stranger. Note: in all the above cases, the holder must
either present the bill for acceptance or
 The general rule denies the drawee negotiate it within a reasonable time; otherwise,
bank’s right to charge against the the drawer and all indorsers are discharged.
drawer’s account the amount of an (sec. 144)
altered check. However, the latter’s
negligence, before or after the How made:
alteration, may estop him from 1. made by or on behalf of the holder
setting such alteration as against an 2. at a reasonable hour
innocent drawee bank who has paid 3. on a business day
the check. 4. before the bill is overdue and within
reasonable time
 In cases of altered checks and checks 5. to the drawee or some person authorized
with forged indorsements, the to accept or refuse acceptance on his
drawee bank must notify and return behalf
them to the collecting bank before
4:00 p.m. of the next day of clearing, Days presentment may be made. If date of
but the drawee bank may still return presentment is:
them even after such time provided a. Sunday or a holiday – must be made on
he does so within 24 hours from its the next succeeding business day
discovery of the alteration or forged b. Saturday – before 12:00 noon on
instruments so that recovery of the Saturday provided that it is not a holiday
amount may be had. BUT, in no (sec. 146)
event beyond the period fixed or
provided by law for filing of a legal When delay for presentment excused:
action by the returning bank against a. bill is drawn payable elsewhere than at
the bank sending the same. the place of business or the residence of
the drawee
NOTE: Alteration is only a partial real
defense because a holder in due course b. holder has no time, with the exercise of
can still enforce it according to its reasonable diligence, to present the bill
original tenor. for acceptance before presenting it for
payment on the day that it falls due
Page 17 of 199
acceptance is given, it dates as of the day of

Effect: does not discharge the drawers and presentation (sec. 136)
indorsers (sec. 147)
Constructive acceptance: where a drawee
Where presentment is excused: refuses within 24 hours after delivery or within
a. Where the drawee is dead, or has such other period as the holder may allow, to
absconded, or is a fictitious person or a return the bill accepted or non-accepted to the
person not having capacity to contract holder, he will be deemed to have accepted the
by bill. same (sec. 137)
b. Where presentment can not be made Note: same effect if the drawee destroys the
after the exercise of reasonable diligence instrument
Kinds:
c. Where, although presentment has been 1. General - assents without qualification to
irregular, acceptance has been refused the order of the drawer.
on some other ground.
2. Qualified - which in express terms varies the
Note: bill may be treated as dishonored by effect of the bill as drawn.
non-acceptance (sec. 148) a. Conditional - makes payment by the
acceptor dependent on the fulfillment of
Duty of holder where bill not accepted. - a condition therein stated.
where a bill is duly presented for acceptance b. Partial - an acceptance to pay part only
and is not accepted within the prescribed time of the amount for which the bill is
(24 hours – sec. 136), the person presenting it drawn.
must treat the bill as dishonored by non- i. Local - an acceptance to pay only
acceptance or he loses the right of recourse at a particular place.
against the drawer and indorsers (sec. 150) ii. Qualified as to time
iii. The acceptance of some one or
IV. ACCEPTANCE more of the drawees but not of
all. (sec. 141)
Acceptance:
 the signification by the drawee of his assent 3. Constructive (sec. 137)
to the order of the drawer. It is the act by
which the drawee manifests his consent to Rights of parties as to qualified
comply with the request contained in the bill acceptance.
of exchange directed to him.  Holder: he may refuse to take a qualified
acceptance and if he does not obtain an
How made : unqualified acceptance, he may treat the bill
1) must be in writing as dishonored by non-acceptance.
2) signed by the drawee
3) must not express that the drawee will  Drawer or indorser: when he receives
perform his promise by any other means notice of a qualified acceptance, he must,
than the payment of money. (sec. 132) within a reasonable time, express his dissent
 the holder of the bill presenting the same for to the holder or he will be deemed to have
acceptance may require that the acceptance assented thereto (implied assent).
be written on the bill, and if such request is
refused, may treat the bill as dishonored. Effect of taking a qualified acceptance:
(sec. 133) the drawer and indorsers are discharged from
 where an acceptance is written on a paper liability on the bill unless they have expressly or
other than the bill itself, it does not bind the impliedly authorized the holder to take a
acceptor except in favor of a person to qualified acceptance, or subsequently assent
whom it is shown and who, on the faith thereto. (sec.142)
thereof, receives the bill for value (sec. 134)
Other rules of acceptance:
Period for drawee to accept - allowed 24  a bill may be accepted before it has been
hours after presentment in which to decide signed by the drawer, or while otherwise
whether or not he will accept the bill; if incomplete, or when it is overdue, or after it
Page 18 of 199
has been dishonored by a previous refusal to When instrument is dishonored by non-

accept, or by non payment acceptance:
a. When it is duly presented for
 when a bill payable after sight is acceptance and such an acceptance is
dishonored by non-acceptance and the refused or can not be obtained; or
drawee subsequently accepts it, the holder, b. When presentment for
in the absence of any different agreement, is acceptance is excused and the bill is not
entitled to have the bill accepted as of the accepted (sec. 149)
date of the first presentment. (sec. 138)  where a bill is duly presented for acceptance
and is not accepted within the prescribed
 an unconditional promise in writing to time (24 hours – sec. 136), the person
accept a bill before it is drawn is deemed an presenting it must treat the bill as
actual acceptance in favor of every person dishonored by non-acceptance (sec. 150)
who, upon the faith thereof, receives the bill  subsection (a) refers to secs. 132, 133 and
for value.(sec. 135) 142
 subsection (b) refers to sec. 148
 where a check is certified by the bank on
which it is drawn, the certification is Rights of holder where bill not accepted.
equivalent to an acceptance. (sec. 187) - when a bill is dishonored by non-acceptance,
Effect: the drawer and all indorsers are an immediate right of recourse against the
discharged from liability thereon (sec. 188) drawer and indorsers accrues to the holder and
no presentment for payment is necessary (sec.
Acceptance for Honor - an undertaking by a 151)
stranger to a bill after protest for the benefit of
any party liable thereon or for the honor of the VI. PRESENTMENT FOR PAYMENT
person for whose account the bill is drawn
which acceptance inures also to the benefit of all Presentment for payment – the presentation of
parties subsequent to the person for whose an instrument to the person primarily liable for
honor it is accepted, and conditioned to pay the the purpose of demanding and receiving
bill when it becomes due if the original drawee payment.
does not pay it. (Secs. 161-170)
General Rules:
 presentment for payment to charge
 Requisites: persons primarily liable is not necessary
1. the bill must have been protested  presentment for payment to charge
for dishonor by non-acceptance or persons secondarily liable is necessary
for better security;
2. the acceptor for honor must be a Exceptions:
stranger and not a party already a. drawer - where he has no right to
liable on the instrument; expect or require that the drawee or
3. bill must not be overdue; acceptor will pay the instrument (sec. 79)
4. acceptance for honor must be b. indorser - where the instrument was
with the consent of the holder of the made or accepted for his accommodation
instrument. and he has no reason to expect that the
instrument will be paid if presented (sec.
 Formalities: 80)
1. must be in writing;
2. must indicate that it is an c. when dispensed:
acceptance for honor; i. where, after the exercise of
3. signed by the acceptor for honor; reasonable diligence,
4. must contain an express or presentment as required cannot
implied promise to pay money; be made;
5. the accepted bill for honor must ii. where the drawee is a fictitious
be delivered to the holder. person;
iii. by waiver of presentment,
V. DISHONOR BY NON-ACCEPTANCE express or implied. (sec. 82)
Page 19 of 199
d. when the instrument has been  a check must be presented for payment
dishonored by non-acceptance (sec. 151) within a reasonable time after its issue or
the drawer will be discharged from liability
Sufficiency of presentment. thereon to the extent of the loss caused by
It must be: the delay (Sec. 186)
1. made by the holder or any
person authorized to receive Time of maturity:
payment on his behalf;  every negotiable instrument is payable
2. at a reasonable hour on a at the time fixed therein without grace
business day;
3. at a proper place;  when the day of maturity falls upon a
4. to the person primarily liable or Sunday or a holiday, the instruments are to
if he is absent or inaccessible, to any be presented for payment on the next
person found at the place where the succeeding business day
presentment is made. (sec. 72)
 when the day of maturity falls upon a
How made: Saturday:
1. personal demand for payment at the
 Instrument is payable at a fixed or
proper place; and
determinable future time (time
instrument) - presented for payment
2. readiness to exhibit the instrument if
is on the next succeeding business
required, and to receive payment and to
day
surrender the instrument if the debtor is
willing to pay.
 instruments is payable on demand -
at the option of the holder, be
 Purpose of exhibition:
presented for payment:
To enable the debtor to:
a. before 12:00 noon on
1. determine the genuineness of the
Saturday when that entire
instrument and the right of the holder to
day is not a holiday or
receive payment; and
b. the next succeeding
2. to enable him to reclaim
business day (sec. 85)
possession upon payment.
How computed:
 When exhibition excused:
 excluding the day from which the time is
1. when debtor does not demand to
to begin to run, and by including the
see the instrument but refuses payment
date of payment
on some other grounds, and
2. when the instrument is lost or  applies to instruments which are
destroyed. payable at a fixed period after date, after
sight, or after that happening of a
When made: specified event (sec. 86)
Where made (proper place):
 where the instrument is payable at a
a. Where a place of payment is
fixed or determinable future time,
specified in the instrument and it is
presentment must be made on the day it
there presented;
falls due
b. Where no place of payment is
specified but the address of the person
 where it is payable on demand: to make payment is given in the
a. promissory note: presentment instrument and it is there presented;
must be made within a reasonable c. Where no place of payment is
time after its issue specified and no address is given and the
b. bill of exchange: presentment for instrument is presented at the usual
payment will be sufficient if made place of business or residence of the
within a reasonable time after the person to make payment;
last negotiation thereof (sec.71) d. In any other case if presented to
the person to make payment wherever
he can be found, or if presented at his
Page 20 of 199
last known place of business or 1. Given by holder or his agent, or

residence. (sec. 73) by any party who may be compelled by
the holder to pay (sec. 90);
When delay in presentment excused – 2. Given to secondary party or his
delay is caused by circumstances beyond the agent (sec. 97);
control of the holder and not imputable to his 3. Given within the periods
default, misconduct, or negligence. When the provided by law (sec. 102); and
cause of delay ceases to operate, presentment 4. Given at the proper place (Secs.
must be made with reasonable diligence. (sec. 103 and 104)
81)
When notice of dishonor dispensed with:
VII. WHEN INSTRUMENT 1. when party to be notified knows
CONSIDERED TO BE DISHONORED: about the dishonor, actually or
constructively (Secs. 114-117);
1. If it is not accepted when presented 2. if waived (sec. 109); and
for acceptance; or 3. when after due diligence, it
2. If it is not paid when presented for cannot be given (sec. 112).
payment at maturity; or
3. If presentment is excused or waived How given:
and the instrument is past due and 1. by bringing verbally or
unpaid. 2. by writing to the knowledge of
the person liable the fact that a specified
VIII. DISHONOR BY NON-PAYMENT instrument, upon proper proceedings
taken, has not been accepted or has not
When instrument dishonored by non-payment: been paid, and that the party notified is
a. it is duly presented for payment expected to pay it.
and payment is refused or cannot be
obtained; or To whom given:
b. presentment is excused and the 1. Non-acceptance (bill) – to
instrument is overdue and unpaid. (sec. persons secondarily liable, namely, the
83.) drawer and indorsers as the case may
be.
Effect of dishonor: an immediate right of 2. Non-payment (both bill and
recourse to all parties secondarily liable thereon note) – indorsers.
accrues to the holder (sec. 84)
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
IX. NOTICE OF DISHONOR AND are discharged. Notice may be given to the
PROTEST party himself or to his agent.
A. Notice of Dishonor By whom given:

1. the holder
Notice of Dishonor - notice given by the holder 2. another on behalf of the holder
or his agent to a party or parties secondarily 3. any party to the instrument who
liable that the instrument was dishonored by may be compelled to pay it to the holder,
non-acceptance by the drawee of a bill, or by and who would have a right of
non-payment by the acceptor of a bill or by non- reimbursement from the party to whom
payment by a maker of a note. (Sec. 89) notice is given. (sec. 90)
 If such notice is given by a notary  Notice of dishonor given by or on behalf of a

public, it is called PROTEST. holder inures to the benefit of:
a. all parties prior to the holder,
Effect of failure to give notice: parties who have a right of recourse against
secondarily liable are discharged the party to whom the notice is
given; and
Requisites: b. all holders subsequent to the
holder giving notice. (sec. 92)
Page 21 of 199
4. the drawer has no right to expect

 Notice of dishonor given by or on behalf of a or require that the drawee or
party entitled to give notice inures to the acceptor will honor the instrument;
benefit of: 5. where the drawer has
a. the holder; and countermanded payment. (sec. 114)
b. all parties subsequent to the
party to whom notice is given. (sec.  Notice of dishonor is not required to be
93) given to an indorser in the ff. cases:
1. drawee is a fictitious person or
 Where an instrument is dishonored in the does not have the capacity to
hands of an agent, he can do either of the ff.: contract, and indorser was aware of
a. directly give notice to persons that fact at the time he indorsed the
secondarily liable thereon; or instrument;
b. give notice to his principal. In 2. indorser is the person to whom
such case, he must give notice within the instrument is presented for
the time allowed by law as if he were payment;
a holder. (sec. 94) 3. instrument was made or
accepted for his accommodation.
 A party giving notice is deemed to have (sec. 115)
given due notice where:
a. the notice of dishonor is duly  If an instrument is not accepted by the
addressed, and drawee, there is no sense presenting it again
b. deposited in the post-office, even for payment, and notice of dishonor must at
when there is miscarriage of mail. once be given. If there was acceptance,
(sec. 105) presentment for payment is still required
and if payment is refused, there is a need for
 Where a party receives notice of dishonor, notice of dishonor. (sec. 116)
he has, after the receipt of such notice, the
same time for giving notice to antecedent  An omission to give notice of dishonor by
parties that the holder has after the non-acceptance does not prejudice the
dishonor. (sec. 107) rights of a holder in due course subsequent
to the omission. (sec. 117)
 Notice may be waived either before the time
of giving notice, or after the omission to give B. Protest
due notice. Waiver may be expressed or
implied. (sec. 109) Protest - the formal instrument executed
usually by a notary public certifying that the
 As to who are affected by an express waiver legal steps necessary to fix the liability of the
depends on where the waiver is written: drawee and the indorsers have been taken.
a. if it appears in the body or on the
face of the instrument, it binds all Effect of waiver: where protest is waived,
parties; but presentment and notice of dishonor are also
b. if it is written above the deemed waived. But where the notice of
signature of an indorser, it binds dishonor is waived, presentment is not waived.
him only. (sec. 110)
Applicability: protest is necessary only in case
 Notice of dishonor is not required to be of foreign bills of exchange which have been
given to the drawer in any of the ff. cases: dishonored by non-acceptance or non-payment,
1. drawer and drawee are the same; as the case may be. If it is not so protested, the
2. drawee is a fictitious person or drawer and indorsers are discharged. (Sec. 118)
not having the capacity to contract;
3. drawer is the person to whom FOREIGN BILL OF EXCHANGE:
the instrument is presented for 1. Drawn in the Philippines but payable
payment; outside the Philippines.
2. Payable in the Philippines but drawn
outside the Philippines.
Page 22 of 199
4. By a valid tender of payment

PROTEST MAY BE MADE BY: made by a prior party;
1. a notary public; or 5. By the release of the principal
2. any respectable resident of the place where debtor, unless the holder’s right of
the bill is dishonored, in the presence of 2 or recourse against the party secondarily
more credible witnesses. (Sec. 154) liable is expressly reserved;
 Protest for better security is one made by 6. By any agreement binding upon
the holder of a bill after it has been accepted the holder to extend the time of payment
but before it matures, against the drawer or to postpone the holder’s right to
and indorsers, where the acceptor has been enforce the instrument. (Sec. 120)
adjudged a bankrupt or an insolvent, or has
made an assignment for the benefit of the  In the following cases, the agreement to
creditors. (Sec. 158) extend the time of payment does not
discharge a party secondarily liable:
X. DISCHARGE a. where the extension of time is
consented to by such party;
Discharge of instrument - a release of all b. where the holder expressly
parties, whether primary or secondary, from the reserves his right of recourse against
obligations arising thereunder. It renders the such party.
instrument without force and effect and,
consequently, it can no longer be negotiated.  Payment at or after maturity by a party
secondarily liable does not discharge the
How discharged: instrument. It only cancels his own liability
1. By payment in due course by or and that of the parties subsequent to him.
on behalf of the principal debtor; (Sec. 121)
2. Payment by accommodated
party; Effects of Renunciation:
3. Intentional cancellation by the 1. A renunciation in favor of a
holder; secondary party may be made by the
4. By any act which will discharge a holder before, at or after maturity of the
simple contract for the payment of instrument. Effect: only such secondary
money; party is discharged and all parties
5. When the principal debtor subsequent to him but the instrument
becomes the holder of the instrument at itself remains in force.
or after maturity in his own right (sec. 2. A renunciation in favor of the
119) principal debtor may be effected at or
after maturity. Effect: the instrument is
By any act which would discharge a simple discharged and all parties thereto
contract: provided the renunciation is made
1. Payment or performance; unconditionally and absolutely. (sec.
2. Loss of the thing due; 122)
3. Condonation or remission;
4. Confusion or Merger; Note: In either case, renunciation does not
5. Compensation; affect the rights of a holder in due course
6. Novation; without notice.
7. Annulment or Rescission;
8. Fulfillment of a resolutory condition;  Cancellation of an instrument includes
9. Prescription. tearing, erasure, obliteration, or burning. It
is not limited to writing of the word
When persons secondarily liable on the ‘cancelled”, or “paid”, or drawing of criss-
instrument are discharged: cross lines across the instrument. (Sec. 123)
1. By any act which discharges the
instrument; Payment for Honor - payment made by a
2. By the intentional cancellation of person, whether a party to the bill or not, after it
his signature by the holder; has been protested for non-payment, for the
3. By the discharge of a prior party; benefit of any party liable thereon or for the
Page 23 of 199
benefit of the person for whose account it was Insurance - an agreement whereby one
drawn. (Secs. 171-177) undertakes for a consideration to indemnify
another against loss, damage or liability arising
Requisites: from an unknown or contingent event. (Sec. 2,
1. the bill has been dishonored by par. 2, ICP)
non-payment;
2. it has been protested for non- TYPES OF INSURANCE CONTRACTS:
payment; 1. LIFE INSURANCE
3. payment supra protest (another a. individual life (Secs. 179–183,
term for payment for honor because 227)
prior protest for non-payment is b. group life (Secs. 50, last par.,
required) is made by any person, even 228)
by a party thereto; c. industrial life (Secs. 229–231)
4. the payment is attested by a 2. NON-LIFE INSURANCE
notarial act of honor which must be a. Marine (Secs. 99–166)
appended to the protest or form an b. Fire (Secs. 167–173)
extension of it; c. Casualty (Sec. 174)
5. the notarial act must be based on 3. CONTRACTS OF SURETYSHIP OR
the declaration made by the payor for BONDING (Secs. 175–178)
honor or his agent of his intention to pay
the bill for honor and for whose honor C. Nature and Characteristics
he pays.
1. Risk distributing device - By
Note: If the above formalities are not complied paying a pre-determined amount into a
with, payment will operate as a mere voluntary general fund out of which payment will
payment and the payor will acquire no right to be made for an economic loss of a
full reimbursement against the party for whose defined type, each member contributes
honor he pays. to a small degree toward compensation
for losses suffered by any member of the
 In payment for honor, the payee cannot group.
refuse payment. If he refuses, he cannot 2. Contract of adhesion or Fine
recover from the parties who would have Print Rule - most of the terms of the
been discharged had he accepted the same. contract do not result from mutual
In acceptance for honor, the holder’s negotiations between the parties as they
consent is necessary. are prescribed by the insurer in printed
form to which the insured adhere if he
 The payor for honor is given the right to chooses but which he cannot change.
receive both the bill and the protest Hence, in case of doubt, the contract
obviously to enable him to enforce his rights shall be interpreted strictly against the
against the parties who are liable to him. insurer and liberally in favor of the
insured.( Rizal Surety and Insurance Co.
v. C.A.,336 SCRA 12 [2000].
INSURANCE CODE 3. Aleatory - there is an obligation on
(P.D. No. 1460, effective June 11, 1978) the part of the insurer to pay the
proceeds of the insurance upon the
happening of the event which is
I. INTRODUCTION
uncertain, or which is to occur at an
indeterminate time.
A. Laws governing Insurance:
4. Contract of Indemnity - there is
a. Insurance Code of 1978;
an exchange of value for value (quid pro
b. Civil Code, Art. 2011 and other
qou), applies only to property insurance
articles;
except the creditor insuring the life of
c. Family Code (E.O 209);
his debtor.
d. Other Special laws.
5. Uberrimae fides contract /
principle of utmost good faith - It
B. General concept of insurance
requires the parties to the contract of
insurance to disclose conditions
Page 24 of 199
affecting the risk of which he is aware, or indemnity whereby the insurer promises to
material fact, which the applicant make good only the loss of the insured.
knows, and those which he ought to
know. Requisites for recovery:
6. Personal Contract - insurer 1. The insured must have insurable
considers the personal qualifications of interest in the subject matter;
the insured in approving the contract. 2. That interest is covered by the
7. Consensual – it is perfected by the policy;
meeting of the minds of the parties. 3. There must be a loss; and
8. Bilateral - both parties are bound 4. The loss must be proximately caused
to do something. by the peril insured against.
9. Onerous - there is a valuable
consideration called the premium. D. Elements of Insurance
10. Conditional - subject to conditions 1. Existence of an insurable interest
such as the happening of the event (Secs. 12-14,ICP);
insured against, payment of premium, 2. Risk of loss (Sec. 51, par. 9, ICP);
etc. 3. Assumption of Risk (Sec. 2, ICP);
11. Property in legal contemplation 4. Scheme to distribute losses; and
5. Payment of premiums (Sec.77, ICP).
CONSTRUCTION OF INSURANCE (Philamcare Health Systems, Inc. v. CA,
CONTRACTS: No. 125678, March 18,2002).
As a general rule, it is to be construed liberally  A contract possessing only the first 3

in favor of the insured and strictly against the elements above is a risk-shifting device. If
insurer. Such rule applies only in cases of doubt all the elements, it is a risk-distributing
and not when the intention of the policy is clear device.
or the language is sufficiently clear to convey
the meaning of the parties. II. CONTRACT OF INSURANCE
PRINCIPLE OF SUBROGATION A. Requisites of a contract of

 A process of legal substitution insurance:
where the insurer steps into the shoes of the a. A subject matter in which the insured
insured and he avails of the latter’s rights has an insurable interest;
against the wrongdoer at the time of loss. b. Event or peril insured against which
 Applicable only to property may be any contingent or unknown
insurance. event, past or future, and a duration for
 The insurer can only recover the risk thereof;
from the third person what the insured c. A promise to pay or indemnify in a fixed
could have recovered. or ascertainable amount;
 There can be no subrogation in d. A consideration for the promise, known
cases: as the premium
1. Where the insured by his own act e. A meeting of minds of the parties upon
releases the wrongdoer or third party all the foregoing essentials
liable for the loss or damage; f. The parties must be competent to enter
2. Where the insurer pays the insured the into the contract
value of the loss without notifying the g. The contract must be for a purpose not
carrier who has in good faith settled the contrary to law or public policy.
insured’s claim for loss;
3. Where the insurer pays the insured for a B. Perfection
loss or risk not covered by the policy.  consensual contract
(Pan Malayan Insurance Company v. and therefore perfected the moment
CA, 184 SCRA 54) there is meeting of the minds with
respect to the object and the cause or
PRINCIPLE OF INDEMNITY consideration. (Cognition Theory)
 Mere submission of
 Except life and accident insurance, a
the application without the
contract of insurance is a contract of
corresponding approval of the policy
Page 25 of 199
does not result in the perfection of the  The consent of the husband
contract of insurance (Great Pacific Life is not necessary for the validity of an
Assurance Corp. v. CA, 89 SCRA 543) insurance policy taken out by a married
woman on her life or that of her children.
(Sec. 3)
C. Parties to a contract of insurance
a. Insurer – the person who  The married woman or the
undertakes to indemnify another minor herein allowed to take out an
b. Insured – the person with capacity insurance policy may exercise all the rights
to contract and having an insurable and privileges of an owner under a policy.
interest in the life or property of the (Sec. 3)
insured Foreign Insurance Corporations
c. Beneficiary – person designated to  May be authorized by the
receive the proceeds of the policy when Commission to engage in insurance
the risk attaches business in the country.
 Every person, partnership,
association, or corporation duly Requirements:
authorized to transact insurance a. appointment of a resident
business as elsewhere provided in this as a general agent
code, may be an insurer. (Sec. 6) b. paid-up unimpaired assets
 Anyone except a public enemy may or capital and reserves not less than
be insured. (Sec. 7) that required of domestic
 Public enemy means a nation with corporation.
whom the Philippines is at war and it c. Deposit for the benefit and
includes every citizen or subject of such security of policyholders, securities
nation. satisfactory to the Commission
d. Investments should not
Rules on minors exceed 20% of the net worth of the
 For life, health or accident insurance foreign corporation or 20% of the
– A minor may enter into a valid contract of capital of the registered enterprise.
insurance provided:
a. He is 18 years D. Subject matter of insurance
of age or over;  Any contingent or unknown event, whether
b. the insurance past or future, which may damnify a person
is taken on his own life, and having an insurable interest, or create a
c. the beneficiary liability against him, may be insured
appointed is the minor's estate or the against, subject to the provisions of this
minor's father, mother, husband, chapter. (Sec. 3)
wife, child, brother or sister. (Sec. 3)  An insurance for or against the drawing
of any lottery, or for or against any chance
 Other insurance – taken by or ticket in a lottery drawing a prize is not
the minor is voidable authorized. (Sec. 4)
 All rights, title and interest E. Insurance not a wagering contract

in the policy of insurance taken out by an  An insurance for or
original owner on the life or health of a against the drawing of any lottery, or
minor shall automatically vest in the minor  for or against any chance
upon the death of the original owner, unless or ticket in a lottery drawing a prize is not
otherwise provided for in the policy. (Sec. 3) authorized. (Sec. 4)
Note: the law has lowered the age of majority to GAMBLING INSURANCE
18 years hence a minor is no longer qualified CONTRACT CONTRACT
to take insurance by himself. 1. The parties 1. The parties seek
contemplate gain to distribute
Rules on married women through mere possible loss by
chance. reason of
Page 26 of 199
mischance. perfection of the contract and need not exist

thereafter. (Sec. 19)
2. The gambler 2. The insured seeks C. Insurable interest in property
courts fortune. to avoid misfortune. insurance
 Every interest in property whether real
3. Tends to 3. Tends to equalize or personal, or any relation thereto, or
increase the fortune. liability in respect thereof, of such
inequality of nature that the contemplated peril might
fortune directly damnify the insured (Sec. 13),
4. Essence: 4. What the insured which may consist in:
whatever one gains is not at the 1. an existing interest;
person wins from a expense of another 2. any inchoate interest founded on
wager is lost by the insured. an existing interest; or
other party. 3. an expectancy coupled with an
existing interest in that out of
III. INSURABLE INTEREST which the expectancy arises.
(Sec. 14)
A. Concept of insurable interest in  The measure of insurable interest in
general property is the extent to which the
 A person has an insurable interest in insured might be damnified by loss or
the subject matter if he is so connected, injury thereof. (Sec. 17)
so situated, so circumstanced, so related,
that by the preservation of the property INSURABLE INSURABLE
he shall derive pecuniary benefit, and by INTE INTEREST IN
its destruction he shall suffer pecuniary REST PROPERTY
loss, damage or prejudice. IN
LIFE
B. Insurable interest in life insurance 1. Must exist only at 1. Must exist at
 Every person has an the time the policy time the policy
insurable interest in the life and health: takes effect and takes effect and
a. Of himself, of his spouse and of his need not exist at when the loss
children; the time of loss occurs
b. Of any person on whom he depends 2. Insurable interest 2. Insurable
wholly or in part for education or unlimited except interest limited
support, or in whom he has a in life insurance to actual value
pecuniary interest; effected by of interest in
c. Of any person under a legal creditor on life of property
obligation to him for the payment of debtor insured
money, or respecting property or 3. The expectation of 3. An expectation
services, of which death or illness benefit to be of a benefit to
might delay or prevent the derived from the be derived
performance; and continued from the
d. Of any person upon whose life any existence of life continued
estate or interest vested in him need not have any existence of the
depends. (Sec. 10) legal basis property
whatever. A insured must
General Rule: No limit in the amount the reasonable have a legal
insured can insure his life. probability is basis.
Exception: In a creditor-debtor relationship sufficient without
 where the creditor insures more.
the life of his debtor,
 the limit of insurable interest a. Insurable interest in case of
is equal to the amount of the debt. mortgaged property
 Both the mortgagor and the
Note: Insurable interest in the life of mortgagee have insurable interest in
another need exist only at the time of
Page 27 of 199
the property which is separate and IV. DEVICES FOR ASCERTAINING

distinct from each other. AND CONTROLLING RISK AND
 Mortgagor’s insurable interest - LOSS
to the extent of its value, even
though the mortgage debt equals 1. CONCEALMENT - neglect to
such value. communicate that which a party knows and
 Mortgagee's interest - up to the ought to communicate
extent of the debt only. 2. REPRESENTATION - factual
statements made by the insured at the time
STANDARD OPEN OR LOSS of, or prior to, the issuance of the policy to
OR UNION PAYABLE give information to the insurer and induce
MORTGAGE MORTGAGE him to enter into the insurance contract.
CLAUSE CLAUSE 3. WARRANTIES - statements or
the subsequent the mortgagor does promise by the insured set forth in the
acts of the not cease to be a policy itself or incorporated in it by proper
mortgagor cannot party to the contract. reference, the untruth or non-fulfillment of
affect the rights of Thus, the acts of which in any respect and without reference
the assignee the mortgagor to whether the insurer was in fact
affect the prejudiced by such untruth or non-
mortgagee (Secs. fulfillment. The same may be expressed,
8 and 9) implied, affirmative or promissory.
4. CONDITIONS - the insurer may also
b. Effect of change in interest in the protect himself against fraudulent claims of
thing insured loss and this he attempts to do by inserting
in the policy various conditions, which take
General Rule: suspends the insurance the form of conditions precedent. For
until the interests in the thing and the instance, there are conditions requiring
interest in the insurance are vested in immediate notice of loss or injury and
the same person. (Sec. 20) detailed proofs of loss within a limited
Exceptions: period.
1. In life, health and accident insurance 5. EXCEPTIONS - provisions that may
(Sec. 20); specify excepted perils. It makes more
2. Change in interest in the thing definite the coverage indicated by the
insured after occurrence of an injury general description of the risk by excluding
which results in a loss (Sec. 21); certain specified risk that otherwise would
3. Change in interest in one or more of be included under the general language
several distinct things separately describing the risks assumed
insured by one policy (Sec. 22);
4. Change of interest, by will or A. Concealment
succession, on the death of the
insured (Sec. 23); a. Concept
5. Transfer of interest by one of several  A neglect to communicate that
partners, joint owners, or owners in which a party knows and ought to
common, who are jointly insured, to communicate, is called a concealment.
others (Sec. 24); (Sec. 26)
6. When a policy is so framed that it
will inure to the benefit of b. Duty to communicate
whomsoever, during the continuance  Each party to a contract of
of the risk, may become the owner of insurance must communicate to the
the interest insured (Sec. 57); other, in good faith, all facts within his
7. When there is an express prohibition knowledge which are material to the
against alienation in the policy, in contract and as to which he makes no
case of alienation, the contract of warranty, and which the other has not
insurance is not merely suspended the means of ascertaining. (Sec. 28)
but avoided (Art. 1306, NCC).
c. Test of Materiality
Page 28 of 199
 Materiality is to be determined  The waiver of medical

not by the event, but solely by the examination in a non-medical
probable and reasonable influence of the insurance contract renders even
facts upon the party to whom the more material the information
communication is due, in forming his required of the applicant concerning
estimate of the disadvantages of the the previous conditions of health and
proposed contract, or in making his diseases suffered (Sunlife v. Sps.
inquiries. (Sec. 31) Bacani, 246 SCRA 268).
d. Requisites: f. Matters which need not be

a. The matters concealed communicated
must be material;  Neither party to a contract of
b. There must be an insurance is bound to communicate
obligation for the insured to reveal the information of the matters following,
same; except in answer to the inquiries of the
c. The matters concealed are other:
those to which he makes no warranty; a. Those which the other
d. And the insurer has no knows;
means of ascertaining those matters. b. Those which, in the exercise
of ordinary care, the other ought
e. Effects of concealment to know, and of which the former
has no reason to suppose him
General Rule: Rescission of the contract by ignorant;
the insurer, whether the concealment is c. Those of which the other
intentional or unintentional. Good faith waives communication;
therefore is not a defense. (Sec. 27) d. Those which prove or tend to
prove the existence of a risk
Exceptions: excluded by a warranty, and
a. Incontestability clause which are not otherwise
 In life insurance, after the material; and
policy has been in force for at least e. Those which relate to a risk
2 years, the insurer cannot rescind excepted from the policy and
the policy due to fraudulent which are not otherwise
concealment or misrepresentation material. (Sec. 30)
by the insured.  Each party to a contract of
insurance is bound to know all the
b. Certain Concealments in Marine general causes which are open to his
Insurance inquiry, equally with that of the other,
 The following matters, and which may affect the political or
though concealed will not vitiate material perils contemplated; and all
the contract except when they general usages of trade. (Sec. 32)
caused the loss:
a. National  Information of the nature or
character of the insured; amount of the interest of one insured
b. Liability of need not be communicated unless in
insured thing to capture or answer to an inquiry, except as
detention; prescribed by section 51. (Sec. 34)
c. Liability to
seizure from breach of foreign  Neither party to a contract of
laws; insurance is bound to communicate,
d. Want of even upon inquiry, information of his
necessary documents; own judgment upon the matters in
e. Use of false or question. (Sec. 35)
simulated papers.
g. Waiver of information
 By:
Page 29 of 199
 the terms of the that he does so on the information of

insurance or others; or he may submit the
 by neglect to make information, in its whole extent, to the
inquiry as to such facts, where insurer; and in neither case is he
they are distinctly implied in responsible for its truth, unless it
other facts of which information proceeds from an agent of the insured,
is communicated. (Sec. 33) whose duty it is to give the information.
(Sec. 43)
B. Representation
7. When presumed false, effect of
1. Concept falsity
 oral or written statement of a fact  A representation is to be deemed
or condition affecting the risk, made by false when the facts fail to correspond
insured to insurer, tending to induce with its assertions or stipulations. (Sec.
insurer to assume risk. (Sec. 36) 44)
2. Kinds of representation  If a representation is false in a

a. AFFIRMATIVE – affirmation of material point, whether affirmative or
a fact when the contract begins; and promissory,
(Sec. 37)  the injured party is
b. PROMISSORY – promise to be entitled to rescind the contract from
performed after policy was issued. (Sec. the time when the representation
39) becomes false.
 exception: The
 A representation may be made at acceptance of premium payments
the time of, or before, issuance of the despite knowledge of the ground for
policy. (Sec. 37) rescission. (Sec. 45).
 A representation as to the future
is to be deemed a promise, unless it C. Remedies available in case of
appears that it was merely a statement concealment or false representation
of belief or expectation. (Sec. 39)
GROUNDS FOR RESCISSION OF INSURANCE
3. Test of materiality CONTRACT:
 The materiality of a a. Concealment;
representation is determined by the b. Misrepresentation;
same rules as the materiality of c. Breach of warranty
concealment. (Sec. 46)
WAIVER OF RIGHT TO RESCIND: The right to
4. Effect of alteration or withdrawal rescind is waived by the acceptance of premium
payments despite the knowledge of the ground
 A representation may be altered
for rescission. (Sec. 45)
or withdrawn before the insurance is
effected, but not afterwards. (Sec. 41)
LIMITATIONS ON THE RIGHT OF THE
INSURER TO RESCIND:
5. Time to which representation refers  In non-life policy – such right must
be exercised prior to the commencement of
 A representation must be
an action on the contract;
presumed to refer to the date on which
the contract goes into effect. (Sec. 42)
 In life insurance – such right must
6. Effect when representation is be availed of during the first 2 years from
obtained from third persons the date of issue of policy or its last
reinstatement. (Sec. 48)
 When a person insured has no
personal knowledge of a fact, he may
1. When recission by the insurer may
nevertheless repeat information which
be exercised
he has upon the subject, and which he
believes to be true, with the explanation
Page 30 of 199
 Whenever a right to rescind a coverage once the period of

contract of insurance is given to the contestability passes.
insurer by any provision of this chapter,
such right must be exercised previous to c. Defenses not barred by
the commencement of an action on the incontestability
contract. (Sec. 48) i. That the person taking the
2. When life insurance policy becomes insurance lacked insurable
incontestable interest as required by law;
 After (1) a policy of life insurance ii. That the cause of the death of
(2) made payable on the death of the the insured is an excepted
insured (3) shall have been in force risk;
during the lifetime of the insured for a iii. That the premiums have not
period of 2 years from the date of its been paid (Secs. 77, 227[b],
issue or of its last reinstatement the 228[b], 230[b]);
insurer cannot prove that the policy is iv. That the conditions of the
void ab initio or is rescindible by reason policy relating to military or
of the fraudulent concealment or naval service have been
misrepresentation of the insured or his violated (Secs. 227[b],
agent. (Sec. 48) 228[b]);
v. That the fraud is of a
a. Requisites for incontestability particularly vicious type;
i. The insurance is a life vi. That the beneficiary failed to
insurance policy payable on furnish proof of death or to
the death of the insured. comply with any condition
ii. It has been enforced during imposed by the policy after
the lifetime of the insured for the loss has happened; or
at least two years from its vii. That the action was not
date of issue or of its last brought within the time
reinstatement. specified.
b. Theory and object of D. Warranties

incontestability
1. Concept
As to the insurer – the theory is  Statement or promise by the
that an insurer should have a insured set forth in the policy or by
reasonable opportunity to reference incorporated therein, the
investigate the statements which untruth or non-fulfillment of which in
the applicant makes in procuring any respect, and without reference to
his policy and that after a whether insurer was in fact prejudiced
definite period, the insurer by such untruth or non-fulfillment,
should not be permitted to renders the policy voidable by the
question the validity of the insurer.
policy, either by affirmative
action or by defense to a suit PURPOSE: In order to eliminate potentially
bought on the life policy by the increasing hazards which may either be due
beneficiary (Powell vs Mut. Life to the acts of the insured or to the change to
Ins. Co., 144 N.E. 825) the condition of the property.
As to the insured – the clause

has as its object to give the WARRANTY REPRESENTATION
greatest possible assurance to a 1. part of the 1. mere collateral
policyholder that his contract inducement
beneficiaries would receive 2. written on 2. may be written in the
payment without question as to the policy, policy or may be oral.
the validity of the policy (Newton actually or
vs New York Life Ins. , 35 F. 2d by reference
498) or the existence of the
Page 31 of 199
3. conclusively 3. must be proved to be subject matter, the same interest therein

presumed material. and the same risk.
material.
4. must be 4. requires only V. POLICY OF INSURANCE
strictly substantial truth and
complied compliance. A. Definition and form
with. Policy of insurance - the written
instrument in which a contract of insurance
2. Kinds of warranties is set forth. (Sec. 49)
a. EXPRESS
b. IMPLIED - it is deemed included  shall be in printed form which
in the contract although not expressly may contain blank spaces; and any
mentioned. Example: In marine word, phrase, clause, mark, sign,
insurance, seaworthiness of the vessel. symbol, signature, number, or word
c. AFFIRMATIVE- asserts the necessary to complete the contract of
existence of the fact or condition at the insurance shall be written on the blank
time it is made. spaces provided therein.
d. PROMISSORY- the insured  Unless applied for by the insured
stipulates that certain facts or conditions or owner, any rider, clause, warranty or
shall exist or thing shall be done or endorsement issued after the original
omitted. (Sec. 67) policy shall be countersigned by the
3. Time to which warranty refers insured or owner, which
 A warranty may relate to the countersignature shall be taken as his
past, the present, the future, or to any or agreement to the contents of such rider,
all of these. (Sec. 68) clause, warranty or endorsement.
4. Effects of breach  Group insurance and group

 Violation of material warranty annuity policies, however, may be
Rule: Violation of material warranty or typewritten and need not be in printed
of a material provision of a policy will form. (Sec. 50)
entitle the other party to rescind the
contract. (Sec. 74) B. Contents of the policy
a. Parties
 Violation of immaterial provision b. Amount of insurance, except in open
General Rule: it will not avoid the or running policies;
policy. c. Rate of premium;
Exception: when the policy expressly d. Property or life insured;
provides or declares that a violation e. Interest of the insured in the
thereof will avoid it. (Sec. 75) property if he is not the absolute
owner;
 A breach of warranty without f. Risk insured against; and
fraud merely exonerates an insurer from g. Duration of the insurance.
the time that it occurs, or where it is
broken in its inception, prevents the C. Papers attached to the policy and
policy from attaching to the risk. (Sec. their binding effect
76)
RIDER – printed stipulation usually
“OTHER INSURANCE” CLAUSE attached to the policy because they
 A condition in the policy constitute additional stipulations between
requiring the insured to inform the insurer the parties.
of any other insurance coverage of the
property insured is lawful and specifically General Rule: not binding
allowed under Sec. 75 of the ICP Exception: Valid when:
 the descriptive title or name of the rider,
 To constitute a violation, the clause, warranty or endorsement is also
other insurance must be upon the same
Page 32 of 199
mentioned and written on the blank e. Physical changes in property

spaces provided in the policy. (Sec. 50) making the property uninsurable;
and
D. Kinds of policy f. Determination by the Insurance
a. Open - one in which the value of the Commissioner that the continuation
thing insured is not agreed upon, but of the policy would violate the
is left to be ascertained in case of Insurance Code. (Sec. 64)
loss. (Sec. 60)
REQUIREMENTS FOR CANCELLATION
b. Valued - one which expresses on its OF POLICY:
face an agreement that the thing a. prior notice of cancellation to the
insured shall be valued at a specific insured;
sum. (Sec. 61) b. notice must be based on the
c. Running - one which contemplates occurrence after the effectivity date
successive insurances, and which of the policy;
provides that the object of the policy c. notice must be in writing, mailed
may be from time to time defined, or delivered to the named insured at
especially as to the subjects of the address shown in the policy;
insurance, by additional statements d. notice must state which of the
or indorsements. (Sec. 62) grounds set forth in Sec. 64 is relied
upon and that upon written request
E. Cover notes of the insured, the insurer will
 a concise and temporary written furnish the facts on which the
contract issued to the insurer through its cancellation is based. (Sec. 65)
duly authorized agent embodying the
principal terms of an expected policy of Rule on renewal of policy:
insurance. General Rule: entitled to renewal
Exceptions:
 It is intended to give temporary a. life insurance; or
insurance protection coverage to the b. the insurer does not intend to renew,
applicant pending the acceptance or provided:
rejection of his application for a period  the insurer at least 45
of not exceeding 60 days unless a longer days in advance of the end of the
period is approved by Insurance policy period
Commissioner (Sec. 52).  mails or delivers to the
named insured at the address
BINDING RECEIPT - merely an shown in the policy
acknowledgment on behalf of the  notice of its intention not
company that their branch office had to renew the policy or to condition
received from the applicant the its renewal upon reduction of
insurance premium and had accepted limits or elimination of coverage
the application subject to processing by
the head office. G. Time to commence action on the policy;
effect of stipulation
F. Cancellation of policy  A condition, stipulation, or
agreement in any policy of
GROUNDS (EXCEPT LIFE INSURANCE): insurance, limiting the time for
a. Non-payment of premium; commencing an action thereunder to
b. Conviction of a crime out of acts a period of less than 1 year from the
increasing the hazard insured time when the cause of action
against; accrues, is void. (Sec. 63)
c. Discovery of fraud or material
misrepresentation; VI. PREMIUM
d. Discovery of willful or reckless
acts of omissions increasing the A. Concept
hazard insured against;
Page 33 of 199
 A consideration paid to an insurer inexistent from the beginning. (Art.

for undertaking to indemnify the 1306 NCC)
insured against a specified peril.
C. When insured entitled to the
 The basis of the right of the return of premiums
insurer to collect premiums is the
assumption of risk. 1. If thing insured was never exposed
to the risks insured against (Sec. 79);
B. Effect of non-payment of
premium; exceptions 2. Contract is voidable due to the fraud
or misrepresentation of insurer or his
General Rule: No policy issued by an agents; (Sec. 81)
insurance company is valid and
binding until actual payment of 3. Contract is voidable because of the
premium. Any agreement to the existence of facts of which the insured
contrary is void. (Sec. 77) was ignorant without his fault; (Sec. 81)
Exceptions to the requirement for pre-
payment of premiums: 4. When by any default of the insured
1. in case of life or industrial life other than actual fraud, the insurer
insurance, when the grace periods never incurred liability (Sec. 81);
applies; (Sec. 77)  In 1-4 above, the whole premium
2. when the insurer makes a written is returned.
acknowledgment of the receipt 5. When the insurance is for a definite
premium; (Sec. 78) period and the insured surrenders his
3. when there is a stipulation which policy before the termination thereof;
provides for the payment of the  Only pro rata return of the
premium on installment, the same unexpired time. Exceptions:
not being contrary to law, morals, a. policy not made for a definite
good custom, public order or public period of time
policy b. short period rate is agreed
4. In suretyship, where the obligee upon
has accepted the bond (Sec. 177) c. life insurance policy
5. cover note
6. When there is over-insurance (Sec.
Effect of non-payment: notwithstanding 82);
any agreement to the contrary, no policy or  Only pro rata return to the
contract of insurance issued by an insurance amount by which the aggregate
company is valid and binding unless and sum insured exceeds the
until the premium thereof has been paid. insurable value of the thing at
(Sec. 77) risk. (Sec. 82)
 Section 77 merely precludes the 7. When rescission is granted due to

parties from stipulating that the policy is the insurer’s breach of contract. (Sec.
valid even if the premiums are not paid. 82)
(Makati Tuscanny Condominium Corp.  Only pro rata return of the
v. CA, 215 SCRA 462) unexpired time.
 The contracting parties may  If a peril insured against has existed,

establish such stipulations, clauses, and the insurer has been liable for any
terms, and conditions as they may deem period, however short, the insured is not
convenient, provided they are not entitled to return of premiums, so far as
contrary to law, morals, good customs, that particular risk is concerned. (Sec.
public order or public policy. If the 80)
stipulation is contrary to law, morals or
public policy, the contract is void and
Page 34 of 199
VII. PERSONS ENTITLED TO applicable to the joint or common

RECOVER ON THE POLICY AND interest. (Sec. 55)
CONDITIONS FOR RECOVERY
D. Notice and proof of loss
A. Beneficiary  When a preliminary proof of loss is
General Rule: Designation is revocable. required by a policy, the insured is not
Exception: Express provision in the policy bound to give such proof as would be
that it is irrevocable necessary in a court of justice; but it is
sufficient for him to give the best
 The interest of a beneficiary in a life evidence which he has in his power at
insurance policy shall be forfeited when the time. (Sec. 89)
the beneficiary is the principal,
accomplice, or accessory in willfully  All defects in a notice of loss, or in
bringing about the death of the insured; preliminary proof thereof, which the
in which event, the nearest relative of insured might remedy, and which the
the insured shall receive the proceeds of insurer omits to specify to him, without
said insurance if not otherwise unnecessary delay, as grounds of
disqualified. (Sec. 12) objection, are waived. (Sec. 90)
 The insurance proceeds shall be  Delay in the presentation to an

applied exclusively to the proper interest insurer of notice or proof of loss is
of the person in whose name or for waived if caused by any act of him, or if
whose benefit it is made unless he omits to take objection promptly and
otherwise specified in the policy. (Sec. specifically upon that ground. (Sec. 91)
53)
 If the policy requires, by way of
 When the description of the insured preliminary proof of loss, the certificate
in a policy is so general that it may or testimony of a person other than the
comprehend any person or any class of insured, it is sufficient for the insured to
persons, only he who can show that it use reasonable diligence to procure it,
was intended to include him can claim and in case of the refusal of such person
the benefit of the policy. (Sec. 56) to give it, then to furnish reasonable
evidence to the insurer that such refusal
 A policy may be so framed that it will was not induced by any just grounds of
inure to the benefit of whomsoever, disbelief in the facts necessary to be
during the continuance of the risk, may certified or testified. (Sec. 92)
become the owner of the interest
insured. (Sec. 57) LOSS - injury or damage sustained by
insured from perils insured against.
B. Rule where insurance is made by
an agent or trustee PROXIMATE CAUSE - an event which
 When an insurance contract is sets all other events in motion without any
executed with an agent or trustee as the intervening or independent case, without
insured, the fact that his principal or which the injury or loss would not have
beneficiary is the real party in interest occurred.
may be indicated by describing the
insured as agent or trustee, or by other LOSS FOR WHICH INSURER IS LIABLE:
general words in the policy. (Sec. 54) 1. loss the proximate cause of
which is the peril insured against
C. Rule where insurance if made by (Sec. 84);
the partner or part owner 2. loss the immediate cause of
 To render an insurance effected by which is the peril insured against
one partner or part-owner, applicable to except where proximate cause is an
the interest of his co-partners or other excepted peril;
part-owners, it is necessary that the 3. loss through negligence of
terms of the policy should be such as are insured except where there was
Page 35 of 199
gross negligence amounting to B. Stipulation against double

willful acts; and insurance
4. loss caused by efforts to rescue  The purpose of the prohibition
the thing from peril insured against; against double insurance is to prevent
5. if during the course of rescue, the over-insurance and thus avert the
thing is exposed to a peril not perpetration of fraud. The public, as well
insured against, which permanently as the insurer, is interested in
deprives the insured of its preventing the situation in which a loss
possession, in whole or in part (Sec. would be profitable to the insured.
85). (Pioneer insurance & Surety Corp. vs
Yap)
LOSS FOR WHICH INSURER IS NOT
LIABLE: C. Rules for payment where there is
1. loss by insured’s willful act; over-insurance by double insurance
2. loss due to connivance of the a. The insured, unless the policy
insured (Sec. 87); and otherwise provides, may claim payment
3. loss where the excepted peril is from the insurers in such order as he
the proximate cause. may select, up to the amount for which
the insurers are severally liable under
EFFECT OF FAILURE TO GIVE NOTICE their respective contracts;
OF LOSS:
1. In fire insurance - it will defeat b. Where the policy under which the
the right of the insured to recover; insured claims is a valued policy, the
2. In other types of insurance – it insured must give credit as against the
will not exonerate the insurer unless valuation for any sum received by him
there is a stipulation in the policy to under any other policy without regard to
that effect. the actual value of the subject matter
insured;
VIII. DOUBLE INSURANCE
c. Where the policy under which the
A. Definition insured claims is an unvalued policy he
 exists where the same person is must give credit, as against the full
insured by several insurers separately in insurable value, for any sum received by
respect to the same subject and interest. him under any policy;
(Sec. 93)
REQUISITES: d. Where the insured receives any sum
1. The person insured is the same; in excess of the valuation in the case of
2. Two or more insurers insuring valued policies, or of the insurable value
separately; in the case of unvalued policies, he must
3. The subject matter is the same; hold such sum in trust for the insurers,
4. The interest insured is also the according to their right of contribution
same; among themselves;
5. The risk or peril insured against
is likewise the same. e. Each insurer is bound, as between
himself and the other insurers, to
OVER- DOUBLE contribute ratably to the loss in
INSURANCE INSURANCE proportion to the amount for which he is
1. One insurer is 1. Two or more liable under his contract. (sec. 94)
sufficient insurers
2. Insurance taken 2. Total amount of IX. REINSURANCE
must be more than policies taken need
the amount of not exceed the A. Definition
insurable interest amount of the  one by which an insurer procures a
insurable interest third person to insure him against loss
or liability by reason of such original
insurance. (Sec. 95)
Page 36 of 199
 In every reinsurance, the original 1. vessels, goods, freight, cargo,

contract of insurance and the contract of merchandise, profits, money,
reinsurance are covered by separate valuable papers, bottomry and
policies. respondentia, and interest in respect
to all risks or perils of navigation;
B. Nature 2. persons or property in connection
 A reinsurance is presumed to be a with marine insurance;
contract of indemnity against liability, 3. precious stones, jewels, jewelry and
and not merely against damage. (Sec. precious metals whether in the
97) course of transportation or
 The original insured has no interest otherwise; and
in a contract of reinsurance. (Sec. 98) 4. bridges, tunnels, piers, docks and
other aids to navigation and
DOUBLE REINSURANCE transportation. (Sec. 99)
INSURANCE
1. involves the 1. involves different  Cargo can be the subject of marine
same interest interest insurance, and once it is entered into,
2. insurer 2. insurer becomes the implied warranty of seaworthiness
remains in the insured in immediately attaches to whoever is
such capacity relation to insuring the cargo, whether he be the
reinsurer shipowner or not. (Roque v. IAC, 139
3. insured is the 3. original insured SCRA 596)
party in has no interest in
interest in the the reinsurance C. Risk or losses covered in marine
2 contracts contract. insurance
4. subject of 4. subject of
insurance is insurance is the a. perils of the sea vs. perils of the ship
property original insurer’s
risk PERILS OF THE SEA
5. insured has to 5. insured’s consent  includes only those casualties
give his not necessary due to the unusual violence or
consent extraordinary action of wind and wave
or to other extraordinary causes
C. Duty of reinsured to disclose facts connected with navigation.
 Where an insurer obtains
reinsurance, except under automatic PERILS OF THE SHIP
reinsurance treaties, he must  a loss which in the ordinary
communicate all the representations of course of events, results from the:
the original insured, and also all the 1. natural and inevitable
knowledge and information he action of the sea
possesses, whether previously or 2. ordinary wear and tear of
subsequently acquired, which are the ship or
material to the risk. (Sec. 96) 3. negligent failure of the
ship’s owner to provide the
X. MARINE INSURANCE vessel with proper equipment to
convey the cargo under ordinary
A. Definition conditions.
 insurance against risks connected BARRATRY
with navigation, to which a ship, cargo,  any willful misconduct on the
freightage, profits or other insurable part of the master or crew in pursuance
interest in movable property, may be of some unlawful or fraudulent purpose
exposed during a certain voyage or a without consent of owners, and to the
fixed period of time. (Sec. 99) prejudice of the owner’s interest.
B. Scope of marine insurance b. “all risks” marine insurance policy
Page 37 of 199
 insurance against all causes of 2. charterer’s insurable

conceivable loss or damage, except: (1) interest
as otherwise excluded in the policy or  to the extent that he is liable to
(2) due to fraud or intentional be damnified by its loss. (Sec. 106)
misconduct on the part of the insured.
3. cargo owner’s insurable
INCHAMAREE CLAUSE – covers loss or interest
damage to the hull or machinery through:  over the cargo and the expected
1. negligence of the captain, engineers, profits (Sec. 105)
etc.
2. explosions, breakage of shafts; and E. Concealment
3. latent defect of machinery or hull. 1. Meaning of concealment in marine
insurance
D. Insurable interest in marine  failure to disclose any material
insurance fact or circumstance which in fact or
1. ship owner’s insurable law is within, or which ought to be
interest within the knowledge of one party
a. rule where vessel is chartered and of which the other has no actual
 The owner of a ship has in all or presumptive knowledge.
cases an insurable interest in it,
even when it has been chartered 2. Duty to communicate
by one who covenants to pay him  each party is bound to
its value in case of loss except communicate, in addition to what is
that in this case the insurer shall required by section 28, all the
be liable for only that part of the information which he possesses,
loss which the insured cannot material to the risk, except such as is
recover from the charterer. (Sec. mentioned in section 30, and to state
100) the exact and whole truth in relation
to all matters that he represents, or
b. rule where vessel is hypothecated upon inquiry discloses or assumes to
by bottomry disclose. (Sec. 107)
 difference between the value
of vessel and the amount of loan. 3. Opinions or expectations of third
(Sec. 101) persons
Creditor’s insurable interest:  information of the belief or
amount of the loan. expectation of a third person, in
reference to a material fact, is
c. insurable interest in freightage material. (Sec. 108)
Freightage - in the sense of a policy 4. when concealment does not vitiate

of marine insurance signifies all the the entire contract
benefits derived by the owner, either  A concealment in a marine
from the chartering of the ship or its insurance, in respect to any of the
employment for the carriage of his following matters, does not vitiate
own goods or those of others. (Sec. the entire contract, but merely
102) exonerates the insurer from a loss
resulting from the risk concealed:
 The owner of a ship has an a. The national character of
insurable interest in expected the insured;
freightage which according to the b. The liability of the thing
ordinary and probable course of insured to capture and
things he would have earned but for detention;
the intervention of a peril insured c. The liability to seizure
against or other peril incident to the from breach of foreign laws of
voyage. (Sec. 103) trade;
Page 38 of 199
d. The want of necessary condition of the structure of the ship itself,

documents; but requires that it be:
e. The use of false and a. properly laden, and
simulated papers. (Sec. 110) b. provided with a
competent master,
F. Representations c. sufficient number of
1. Effect of false representation by competent officers and seamen, and
the insured the
 If a representation is d. requisite
intentionally false in any material appurtenances and equipment, such
respect, or in respect of any fact on as ballasts, cables and anchors,
which the character and nature of cordage and sails, food, water, fuel
the risk depends, the insurer may and lights, and
rescind the entire contract. (Sec. 111) e. other necessary or
proper stores and implements for
2. Effect of false representation as the voyage. (Sec. 116)
to expectation
 The eventual falsity of a  A ship which is seaworthy
representation as to expectation for the purpose of an insurance upon the
does not, in the absence of fraud, ship may, nevertheless, by reason of being
avoid a contract of marine insurance. unfitted to receive the cargo, be
(Sec. 112) unseaworthy for the purpose of the
insurance upon the cargo. (Sec. 119)
G. Implied Warranties in Marine
Insurance  It becomes the obligation
a. that the ship is seaworthy at the of a cargo owner to look for a reliable
inception of the insurance (Sec. 113); common carrier which keeps its vessels in
b. that the ship will not deviate from seaworthy conditions. The shipper may have
agreed voyage unless deviation is proper no control over the vessel but he has control
(Sec. 123, 124, 125); in the choice of the common carrier that will
c. that the ship will not engage in an transport his goods (Roque v. IAC, 139
illegal venture; SCRA 596).
d. warranty of neutrality: that the ship
will carry the requisite documents of  when complied with;
nationality or neutrality of the ship or exceptions
cargo where such nationality or  An implied
neutrality is expressly warranted; (Sec. warranty of seaworthiness is complied
120) with if the ship be seaworthy at the time
e. presence of insurable interest. of the of commencement of the risk.
Seaworthiness Exceptions:
 In every marine insurance upon a. When the insurance is
a ship or freight, or freightage, or upon any made for a specified length of time,
thing which is the subject of marine the implied warranty is not complied
insurance, a warranty is implied that the with unless the ship be seaworthy at
ship is seaworthy. (Sec. 113) the commencement of every voyage
it undertakes during that time;
 what constitutes seaworthiness b. When the insurance is
 A ship is seaworthy when it is upon the cargo which, by the terms
reasonably fit to perform the service and of the policy, description of the
to encounter the ordinary perils of the voyage, or established custom of the
voyage contemplated by the parties to trade, is to be transhipped at an
the policy. (Sec. 114) intermediate port, the implied
warranty is not complied with unless
 A warranty of each vessel upon which the cargo is
seaworthiness extends not only to the shipped, or transhipped, be
Page 39 of 199
seaworthy at the commencement of Note: Every deviation not specified above is

each particular voyage. (Sec. 115) improper. (Sec. 125)
 effect of improper deviation
 Rule  An insurer is not liable for
where ship becomes unseaworthy in the any loss happening to the thing
course of the voyage insured subsequent to an improper
 When the ship becomes unseaworthy deviation. (Sec. 126)
during the voyage to which an insurance
relates, an unreasonable delay in H. Loss
repairing the defect exonerates the 1. Kinds of losses
insurer on ship or shipowner's interest a. TOTAL LOSS:
from liability from any loss arising i. actual loss - cause by:
therefrom. (Sec. 118) a. A total destruction of the
thing insured;
Warranty that necessary documents are b. The irretrievable loss of the
carried thing by sinking, or by being
 Where the nationality or broken up;
neutrality of a ship or cargo is expressly c. Any damage to the thing
warranted, it is implied that the ship will which renders it valueless to the
carry the requisite documents to show such owner for the purpose for which
nationality or neutrality and that it will not he held it; or
carry any documents which cast reasonable d. Any other event which
suspicion thereon. (Sec. 120) effectively deprives the owner of
the possession, at the port of
Warranty against improper deviation destination, of the thing insured.
 Deviation is a departure (Sec. 130)
from the course of the voyage insured or
an unreasonable delay in pursuing the ii. constructive total loss - one
voyage or the commencement of an which gives to a person insured a
entirely different voyage. (Sec. 123) right to abandon (sec. 131 & sec. 139)
 Proper voyage: (in order)
i. that stated in the insurance b. PARTIAL LOSS – that which is
contract not total (Sec. 128)
ii. that fixed by mercantile  An actual loss may be presumed
usage from the continued absence of a ship
iii. that which is most natural, without being heard of. The length of
direct and advantageous time which is sufficient to raise this
presumption depends on the
 when deviation proper: circumstances of the case. (Sec. 132)
i. When caused by
circumstances over which neither the CO-INSURANCE - A marine insurer is liable
master nor the owner of the ship has any upon a partial loss, only for such proportion of
control; the amount insured by him as the loss bears to
ii. When necessary to comply the value of the whole interest of the insured in
with a warranty, or to avoid a peril, the property insured. (Sec. 157)
whether or not the peril is insured
against; When the property is insured for less than its
iii. When made in good faith, value, the insured is considered a co-insurer of
and upon reasonable grounds of belief in the difference between the amount of insurance
its necessity to avoid a peril; or and the value of the property.
iv. When made in good faith, for
the purpose of saving human life or Requisites:
relieving another vessel in distress. (Sec. 1. The loss is partial;
124) 2. The amount of insurance is
less than the value of the
property insured (Sec 157).
Page 40 of 199
freightage cannot in any case be

Note: In fire insurance, in addition to abandoned unless the ship is also
the above 2 requisites, there has to be an abandoned. (Sec. 139)
express stipulation to that effect.
Note: In case of constructive total loss,
2. Right to payment upon an actual total loss insured may
 Upon an actual total loss, a 1. abandon goods or vessel to
person insured is entitled to payment the insurer and claim for whole
without notice of abandonment. (Sec. insured value (Sec. 139), or
135) 2. he may, without abandoning
vessel, claim for partial actual
3. Scope of insurance against actual total loss loss. (Sec. 155)
 An insurance confined in terms
to an actual loss does not cover a 5. Concept of abandonment and its requisites
constructive total loss, but covers any  the act of the insured by which,
loss, which necessarily results in after a constructive total loss, he
depriving the insured of the possession, declares the relinquishment to the
at the port of destination, of the entire insurer of his interest in the thing
thing insured. (Sec. 137) insured. (Sec. 138)
4. When constructive total loss exists Effects:

 A person insured by a contract of  equivalent to a transfer by
marine insurance may abandon the the insured of his interest to the insurer,
thing insured, or any particular portion with all the chances of recovery and
thereof separately valued by the policy, indemnity. (Sec. 146)
or otherwise separately insured, and  acts done in good faith by
recover for a total loss thereof, when the those who were agents of the insured in
cause of the loss is a peril insured respect to the thing insured, subsequent
against: to the loss, are at the risk of the insurer
a. If more than 3/4 thereof in and for his benefit. (Sec. 148)
value is actually lost, or would have  acceptance of an
to be expended to recover it from the abandonment, whether express or
peril; implied, is conclusive upon the parties,
and admits the loss and the sufficiency
b. If it is injured to such an of the abandonment. (Sec. 151)
extent as to reduce its value more  once made and accepted is
than 3/4; irrevocable, unless the ground upon
which it was made proves to be
c. If the thing insured is a ship, unfounded. (Sec. 152)
and the contemplated voyage cannot
be lawfully performed without Requisites:
incurring either an expense to the 1. There must be an actual
insured of more than 3/4 the value relinquishment by the person insured of
of the thing abandoned or a risk his interest in the thing insured (Sec.
which a prudent man would not take 138);
under the circumstances; or 2. There must be a constructive
total loss (Sec. 139);
d. If the thing insured, being 3. The abandonment be neither
cargo or freightage, and the voyage partial nor conditional (Sec. 140);
cannot be performed, nor another 4. It must be made within a
ship procured by the master, within reasonable time after receipt of reliable
a reasonable time and with information of the loss (Sec. 141);
reasonable diligence, to forward the 5. It must be factual (Sec. 142);
cargo, without incurring the like 6. It must be made by giving
expense or risk mentioned in the notice thereof to the insurer which may
preceding sub-paragraph. But be
Page 41 of 199
done orally or in writing (Sec. 143); and insured which may have come to the
7. The notice of abandonment hands of the insured. (Sec. 154)
must be explicit and must specify the
particular cause of the abandonment 6. Average
(Sec. 144). 1. Kinds of average (particular
and general)
 where the information
regarding the loss is of a doubtful GENERAL AVERAGE LOSS - includes
character, the insured is entitled to a damages and expenses which are
reasonable time to make inquiry. (Sec. deliberately caused by the master of the
141) vessel or upon his authority, in order to save
 where the information upon the vessel, her cargo, or both at the same
which an abandonment has been made time from real or known risk. It must be
proves incorrect, or the thing insured borne equally by all of the interests
was so far restored when the concerned in the venture.
abandonment was made that there was
then in fact no total loss, the PARTICULAR AVERAGE LOSS - includes
abandonment becomes ineffectual (Sec. all damages and expenses caused to the
142) vessel or to her cargo which have not inured
 if the notice be done orally, a to the common benefit and profit of all
written notice of such abandonment persons interested in the vessel and her
shall be submitted within seven days cargo. It is borne alone by the owner of the
from such oral notice.(Sec. 143) cargo or the vessel, as the case may be.
 an abandonment can be
sustained only upon the cause specified 2. Requisites of general average
in the notice thereof (sec. 145) 1. There must be a common
danger to the vessel or cargo;
 where notice of
2. Part of the vessel or cargo
abandonment is properly given, the
was sacrificed deliberately;
rights of the insured are not prejudiced
3. The sacrifice must be for the
by the fact that the insurer refuses to
common safety or for the benefit of
accept the abandonment. (Sec. 149)
all;
4. It must be made by the
Other Rules:
master or upon his authority;
 If a marine insurer pays for a loss 5. It must be not be caused by
as if it were an actual total loss, he is any fault of the party asking the
entitled to whatever may remain of the contribution;
thing insured, or its proceeds or salvage, 6. It must be successful, i.e.
as if there had been a formal resulted in the saving of the vessel or
abandonment. (Sec. 147) cargo; and
 The acceptance of an 7. It must be necessary.
abandonment may be either express or
implied from the conduct of the insurer. 3. Insurer’s liability for general
The mere silence of the insurer for an average
unreasonable length of time after notice  the liability of the insurer shall
shall be construed as an acceptance. be limited to the proportion of
(Sec. 150) contribution attaching to his policy
 On an accepted abandonment of value where this is less than the
a ship, freightage earned previous to the contributing value of the thing
loss belongs to the insured of said insured. (Sec. 164)
freightage; but freightage subsequently
earned belongs to the insurer of the  when a person insured by a
ship. (Sec. 153) contract of marine insurance has a
 If an insurer refuses to accept a demand against others for
valid abandonment, he is liable as upon contribution, he may claim the
actual total loss, deducting from the whole loss from the insurer,
amount any proceeds of the thing
Page 42 of 199
subrogating him to his own right to  the measure of indemnity in an

contribution. (Sec. 165) insurance against fire is the expense it
would be to the insured at the time of
No liability: the commencement of the fire to replace
a. after the separation of the the thing lost or injured in the condition
interests liable to the contribution in which at the time of the injury (Sec.
b. when the insured, having 171)
the right and opportunity to enforce
the contribution from others, has Valued Policy:
neglected or waived the exercise of  the effect shall be the same as in a
that right. (Sec. 165) policy of marine insurance (Sec. 171)
Note: Insured is not a co-insurer in the
XI. FIRE INSURANCE absence of stipulation
A. Definition and scope of fire FALL-OF-BUILDING CLAUSE – provides

insurance that if the building or any part thereof falls,
 a contract by which the insurer for a except as a result of fire, all insurance by the
consideration agrees to indemnify the policy shall immediately cease.
insured against loss of, or damage to,
property by fire, but may include loss by OPTION TO REBUILD CLAUSE – option of
lightning, windstorm, tornado or insurer to reinstate or replace the property
earthquake and other allied risks, when damaged or destroyed or any part thereof,
such risks are covered by extension to instead of paying the amount of the loss or
fire insurance policies or under separate the damage. The insurer, after electing to
policies. (Sec. 167) rebuild, cannot be compelled to perform
this undertaking by specific performance
B. Risks or losses covered because this is an obligation to do, not to
1. direct losses give. Remedy: ‘the same be executed at his
2. indirect or consequential losses cost’. (Art. 1167 Civil Code)
a. physical damage
b. loss of earnings XII. CASUALTY INSURANCE
c. extra expense
A. Concept
C. Effect of alteration in the thing  insurance covering loss or liability
insured arising from accident or mishap,
 entitles an insurer to rescind a excluding certain types of loss which by
contract of fire insurance; (Sec. 168) law or custom are considered as falling
provided: exclusively within the scope of other
1. The use or condition of the thing types of insurance such as fire or
is specifically limited or marine.
stipulated in the policy;
2. Such use or condition as limited  includes, but is not limited to:
by the policy is altered;  employer's liability insurance,
3. The alteration is made without  motor vehicle liability insurance,
the consent of the insurer;
 plate glass insurance,
4. The alteration is made by means
within the control of the insured;  burglary and theft insurance,
5. The alteration increases the risk;  personal accident and health
(Sec. 168) and insurance as written by non-life
6. There must be a violation of a insurance companies, and
policy provision. (Sec. 170)  other substantially similar kinds
of insurance.
D. Measure of indemnity
Open policy: B. Liability insurable

a. liability for quasi-delict or non-
fulfillment of contract
Page 43 of 199
b. liability for criminal negligence The liability of the insurer to the 3rd
party is based on contract; that of the
insured is based on tort. (Malayan
LIABILITY OF INSURER IF INSURED Insurance Co. Inc. vs CA 165 SCRA 136)
WAS COMMITTING A FELONY - liabilities  While in a solidary obligation the
arising out of acts of negligence, which are creditor may enforce the entire
also criminal, are also insurable on the obligation against one of the solidary
ground that such acts are accidental. But debtors, in an insurance contract, the
liability consequences of deliberate criminal insurer undertakes to indemnify the
acts are not insurable. insured against loss, damage or liability
arising from unknown or contingent
C. Meaning of “accident” and event. To make the insurer solidarily
“accidental” in casualty insurance liable with the latter’s entire obligation
beyond the sum limited in the insurance
ACCIDENTAL - The terms “accident” and contract would result in “evident breach
“accidental” have been taken to mean that of the concept of solidary obligations.”
which happens by chance or fortuitously, (Vda. De Maglana vs Consolacion, 212
without intention or design, which is SCRA 268)
unexpected, unusual and unforeseen.
XIII. SURETYSHIP
INTENTIONAL - as used in an accident
policy excepting intentional injuries A. Definition
inflicted by the insured or any other person,  An agreement whereby a surety
implies the exercise of the reasoning guarantees the performance by the
faculties, consciousness and volition. Where principal or obligor of an obligation or
a provision of the policy excludes undertaking in favor of an obligee. (Sec.
intentional injury, it is the intention of the 175) It is essentially a credit
person inflicting the injury that is accommodation.
controlling. If the injuries suffered by the
insured clearly resulted from the intentional Kinds:
act of the third person, the insurer is relieve a. Fidelity Bond – contract of
from liability as stipulated (Biagtan v. the insurance against loss from misconduct
Insular Life Assurance Co. Ltd., 44 SCRA
58, 1972) b. Fidelity Guaranty Insurance – a
contract whereby one, for a
D. Basis and extent of insurer’s consideration, agrees to indemnify the
liability assured against loss arising from want of
 Casualty insurance may provide for integrity, fidelity or honesty of
3rd party liability (in the nature of employees or other persons holding
stipulation pour autrui for personal positions of trust
injury and even damage to property), in B. Nature of liability of surety
which case, the third party may directly 1. Solidary;
sue the insurer upon the occurrence of 2. Limited to the amount of the bond;
the loss. (First Integrated Bonding and 3. It is determined strictly by the terms
Ins. Co., Inc. vs Hernando, 199 SCRA of the contract of suretyship in
769) relation to the principal contract
 If the policy provides for between the obligor and the obligee.
“reimbursement after actual payment by (Sec. 176)
the insured,” or for the indemnity
against loss, a third person has no cause SURETYSHIP PROPERTY
of action against the insurer. (Bonifacio INSURAN
Brothers vs Mora 20 SCRA 261) CE
 The direct liability of the insurer 1.accessory contract 1. principal contract
under indemnity contract against 3rd 2. parties: surety, 2. parties: insurer
party does not mean that the insurer can obligor and and insured
be held solidarily liable with the insured obligee
and / or the other parties found at fault.
Page 44 of 199
3. credit 3. contract of weekly, or where premiums are payable

accommodation indemnity monthly or oftener; and
4. surety can 4. no such right;
recover from only right of 6. VARIABLE CONTRACT – any policy
principal subrogation or contract on either a group or
5. bond can be 5. may be cancelled individual basis issued by an insurance
cancelled only unilaterally company providing for benefits or other
with consent of either by insured contractual payments or values
obligee, or insurer on thereunder to vary so as to reflect
Commissioner or grounds investment results of any segregated
court provided by law portfolio of investment.
6. requires 6. no need of
acceptance of acceptance by C. Liability of insurer in case of
obligee to be any third party suicide
valid
7. risk-shifting 7. risk-distributing 1. If committed after 2 years from the
device, premium device, premium date of the policy’s issue or its last
paid being in the paid as a ratable reinstatement;
nature of a contribution to a 2. If committed after a shorter period
service fee common fund provided in the policy; and
3. If committed in a state of insanity
XIV. LIFE INSURANCE regardless of the date of the commission
unless suicide is an excepted peril. (Sec.
A. Definition 180-A)
 insurance on human lives and
insurance appertaining thereto or Note: Any stipulation extending the 2-year
connected therewith which includes period is null and void.
every contract or pledge for the payment
of endowments or annuities. (Sec. 179)  Premiums paid out of conjugal funds,
the proceeds are considered conjugal. If
B. Kinds of life insurance the beneficiary is other than the
1. ORDINARY LIFE, GENERAL LIFE insured’s estate, the source of premiums
OR OLD LINE POLICY - insured pays a would not be relevant (Del Val v. Del
fixed premium every year until he dies. Val, 29 Phil 534).
Surrender value after 3 years.  If the insured or beneficiary is a minor,
and the amount involved does not
2. LIMITED PAYMENT POLICY – exceed P20,000, the father, in the
insured pays premium for a limited absence of a judicial guardian, or in his
period. If he dies within the period, his absence or incapacity, the mother may
beneficiary is paid; if he outlives the exercise the minor’s rights under the
period, he does not get anything. policy, without the need of a court
authority or a board. (Sec. 180)
3. ENDOWMENT POLICY – pays
premium for specified period. If he D. Right to assign life insurance
outlives the period, the face value of the policy
policy is paid to him; if not, his  A policy of insurance upon life or
beneficiaries receive the benefit. health may pass by transfer, will or
succession to any person, whether he
4. TERM INSURANCE – insurer pays has an insurable interest or not, and
once only, and he is insured for a such person may recover upon it
specified period. If he dies within the whatever the insured might have
period, his beneficiaries benefits. If he recovered. (Sec. 181)
outlives the period, no person benefits  Notice to an insurer of a transfer or
from the insurance. bequest thereof is not necessary to
preserve the validity of a policy of
5. INDUSTRIAL LIFE - life insurance
entitling the insured to pay premiums
Page 45 of 199
insurance upon life or health, unless money and the debtor incurs in delay, the
thereby expressly required. (Sec. 182) indemnity for damages, there being no
stipulation to the contrary, shall be the payment
E. Measure of indemnity of interest agreed upon, and in the absence of
 Unless the interest of a person stipulation, the legal interest which is 6% per
insured is susceptible of exact pecuniary annum.". (Tio Kho Chio vs CA, 202 SCRA 119).
measurement, the measure of indemnity
under a policy of insurance upon life or Prescriptive period: 10 years
health is the sum fixed in the policy. Exception: the parties may validly agree on a
(Sec. 183) shorter period provided it is not less than 1 year
from the time the cause of action accrues.
XV. CLAIMS SETTLEMENT  The cause of action accrues from the
final rejection of the claim of the insured
a. Life insurance and not from the time of loss.
 The proceeds of the policy shall
be paid immediately upon maturity of Prescriptive period commences from the
the policy, unless such proceeds are initial denial of the claim, not from the
made payable in installments or as an resolution of the motion for
annuity, in which case the installments, reconsideration filed by the insured.
or annuities shall be paid as they (Sun Insurance Office Ltd. vs. CA, 195
become due. SCRA 193)
 That in the case of a policy
maturing by the death of the insured, Note:Under Sec. 384 of the insurance Code,
the proceeds thereof shall be paid within notice of claim setting for the nature, extent and
60 days after presentation of the claim duration of the injuries sustained must be filed
and filing of the proof of the death of the otherwise the claim is waived. This is different
insured. (Sec. 242) from the prescription period of 1 year from the
denial of the claim within which to file an action
b. Property Insurance against the insurer. (Vda. De Gabriel vs. CA,
 Proceeds under the policy shall be paid 264 SCRA 17)
within 30 days after proof loss is
received by the insurer and XVI. COMPULSORY MOTOR VEHICLE
ascertainment of the loss or damage is LIABILITY INSURANCE (CMVLI)
made either by agreement between the
insured and the insurer or by  a protection coverage that will
arbitration. (Sec. 243) answer for legal liability for losses
and damages for bodily injuries or
Effect of delay: the beneficiary is entitled to property damage that may be
payment of: sustained by another arising from
a. interest for the duration of the delay the use and operation of motor
at the rate of twice the legal interest vehicle by its owner.
(24% interest)
b. attorney’s fees and other litigation A. Reason for the requirement
expenses  primarily intended to provide
c. appropriate damages under the Civil compensation for the death or bodily
Code like moral and exemplary injuries suffered by innocent third
damages. (Sec. 244; Zenith parties or passengers as a result of a
Insurance Corp. vs. CA, 185 SCRA negligent operation and use of motor
389) vehicles. The victims and / or their
dependents are assured of immediate
Note: Sections 243 and 244 of the Insurance financial assistance, regardless of the
Code apply only when the court finds an financial capacity of motor vehicle
unreasonable delay or refusal in the payment of owners. (Shafer vs Judge, RTC 167
the claims. The applicable law is Article 2209 of SCRA 386)
the Civil Code which provides that if the
obligation consists in the payment of a sum of B. Scope of coverage required
Page 46 of 199
a. Private motorists – comprehensive or dismounting from. The said vehicle

against 3rd party liability for death or might not be the one that caused the
bodily injuries accident is of no moment since the law
b. Operators of land transportation – itself provides that the party paying may
comprehensive against both passenger recover against the owner of the vehicle
and 3rd party liabilities for death or responsible for the accident. (Perla
bodily injuries Compania de Seguros, Inc. v. Ancheta,
169 SCRA 144).
C. Persons subject to the
requirement  See also Casualty Insurance, basis
1. motor vehicle owner (MVO) – one and extent of insurer’s liability
who is the actual legal owner of a motor
vehicle in whose name such vehicle is Period to file notice: written notice of claim
registered with the Land Transportation must be presented within 6 months from
Office the date of the accident otherwise the claim
is deemed waived. (Sec. 384)
2. land transportation operator (LTO)
– one who is the owner of a motor Prescriptive period: within 1 year from
vehicle or vehicles being used for denial of the claim (Sec. 384)
conveying passengers for compensation  It shall commence from the
including school buses denial of the claim, not from the
resolution of the motion for
D. No-fault indemnity claim reconsideration, otherwise it can be
used by the insured as a scheme or
“NO-FAULT” CLAUSE – any claim for death device to waste time until the
or injury shall be paid up to P5,000.00 evidence which may be used against
without necessity of proving fault or him is destroyed (Sun Insurance
negligence, provided the following proofs of Office, Ltd. v. CA, 195 SCRA).
loss under oath are submitted:
1. police report of accident; Jurisdiction: where the amount involved
2. death certificate and evidence does not exceed P100,000.00, the Office of
sufficient to establish proper the Insurance Commission and the RTC
payee; have concurrent jurisdiction. Where the
3. medical report and evidence of amount exceeds P100,000.00, RTC has
medical or hospital jurisdiction
disbursement. (Sec. 378)
FUNCTIONS OF THE COMMISSIONER:
E. Rules of recovery 1. Adjudicatory functions -
1. In the case of an occupant of a except when amount involved in
vehicle, claim shall lie against the maritime insurance is within the
insurer of the vehicle in which the exclusive jurisdiction of the RTC
occupant is riding, mounting or 2. Administrative functions –
dismounting includes suspension or revocation of
2. if not an occupant, case or claim license, power to examine books and
shall lie against the insurer of the records, etc.
directly offending vehicle
3. In all cases, the right of the party Note: The Insurance Commissioner has no
paying the claim to recover against the jurisdiction to decide the legality of a
owner of the vehicle responsible for the contract of agency entered into between an
accident shall be maintained. insurance company and its agent. The same
is not covered by the term “doing or
 The claimant is not free to choose transacting insurance business” under Sec
from which insurer he will claim the “no 2, ICP, neither is it covered by Sec. 416 of
fault indemnity.” As the law, makes it the same Code which grants the
mandatory that the claim shall lie Commissioner adjudicatory powers
against the insurer of the vehicle in (Philippine American Life Insurance Co. v.
which the occupant is riding, mounting Ansaldo, 234 SCRA 509).
Page 47 of 199
even if the parties expressly

AUTHORIZED DRIVER CLAUSE – The provide for it.
clause means that it indemnifies the insured B. Foreign Ports to Philippine Ports
owner against loss or damage to the car but a. New Civil Code - primary
limits the use of the insured vehicle to the law
insured himself or any person who drives on b. Code of Commerce
his order or with his permission (Villacorta c. Carriage of Goods by Sea
v. Insurance Commissioner) Act
 The requirement that the person  the law of the Philippines
driving the insured vehicle is permitted still applies even if the collision
in accordance with the licensing laws or actually takes place in foreign
other laws or regulations to drive the waters.
motor vehicle. It is applicable only if the C. Philippine Ports to Foreign Ports
person driving is other than the insured.  laws of the country to
which the goods are to be
 Where the car is unlawfully and transported. (Eastern Shipping v.
wrongfully taken without the owner’s IAC, 150 SCRA 463)
consent or knowledge, such taking
constitutes theft, and thus, it is the “theft 3. Air transportation
clause” and not the “authorized driver A. Domestic - Civil Code
clause” that should apply (Palermo v. B. International - Warsaw
Pyramids Ins., 161 SCRA 677). Convention
 applies to all
COOPERATION CLAUSE – clause in an international transportation of
automobile insurance policy which provides person, baggage or goods
in essence that the insured shall give all performed by aircraft for hire.
such information and assistance as the
insurer may require, usually requiring When not applicable: (WCN)
attendance at trials or hearings. 1. If there is willful misconduct on
the part of the carrier’s employees.
 The Convention does not
TRANSPORTATION LAWS regulate, much less exempt, carrier from
liability for damages for violating the
I. PRELIMINARY CONSIDERATIONS rights of its passengers under the
contract of carriage (PAL v. CA, 257
Governing Laws: SCRA 33).
2. when it contradicts public policy;
1. Land Transportation 3. if the requirements under the
A. Overland Transportation Convention are not complied with.
a. Common carriers
i. Civil Code - primary law International transportation means any
ii. Code of Commerce - transportation in which the place of departure
suppletory law and the place of destination are situated either
b. Private carriers 1. within the territories of two High
B. Object merchandise Contracting Parties regardless of
a. Code of Commerce - whether or not there be a break in
primary law the transportation or transshipment,
b. Civil Code - suppletory or
law 2. within the territory of a single High
Contracting Party, if there is an
2. Transportation by Sea agreed stopping place within a
A. Coastwise territory subject to the sovereignty,
a. Civil Code - primary law mandate or authority of another
b. Code of Commerce - power, even though that power is not
suppletory law a party to the Convention.
 COGSA - inapplicable
Page 48 of 199
 Whether the transportation is Constitution)

"international" is determined by the
contract of the parties, which in the case  No franchise, certificate, or any other form
of passengers is the ticket. When the of authorization for the operation of a public
contract of carriage provides for the utility shall be granted except to:
transportation of the passenger between 1. Citizens of the Philippines
certain designated terminals "within the 2. Corporations or associations
territories of two High Contracting organized under the laws of the
Parties," the provisions of the Philippines at least sixty (60%) per
Convention automatically apply and centum of whose capital is owned by
exclusively govern the rights and such citizens (Art. XII Sec. 11 1987
liabilities of the airline and its Constitution)
passenger. (Santos III vs. Northwest
Orient Airlines 210 SCRA 256)  The State may, in the interest of national
welfare or defense, establish and operate
 Transportation to be performed by vital industries and upon payment of just
several successive air carriers shall be compensation, transfer to public ownership
deemed to be one undivided utilities and other private enterprises to be
transportation if it has been regarded by operated by the government. (Art. XII, Sec.
the parties as a single operation, 18).
whether it has been agreed upon under
the form of a single contract or of a  The State shall regulate or prohibit
series of contracts, and it shall not lose monopolies when the public interest so
its international character merely requires; no combination in restraint of
because one contract or a series of trade or unfair competition shall be allowed.
contracts is to be performed entirely (Art. XII, Sec. 19).
within a territory subject to the  The right to operate a public utility may
sovereignty, suzerainty, mandate, or exist independently and separately from the
authority of the same High Contracting ownership of the facilities thereof. One can
Party. (Art. 1 WC) own said facilities without operating them
as a public utility, or conversely, one may
 Warsaw Convention prevails over the operate a public utility without owning the
Civil Code, Rules of Court and all laws in facilities used to serve the public. The
the Philippines since an international devotion of property to serve the public may
law prevails over general law. be done by the owner or by the person in
control thereof who may not necessarily be
 Concept of Public Utility & Public the owner thereof. (Tatad vs. Garcia G.R.
Service (Sec. 13, Public Service Act) No. 114222)
Public Service Regulatory Agencies
 includes every person that operates,
manages or controls in the Philippines for Government agencies that replaced the Public
hire or compensation, with general or Service Commission:
limited clientele, whether permanent, 1. Land Transportation Franchising
occasional or accidental, and done for Regulatory Board (LTFRB) – land
general business purposes, any common transportation (The Land
carrier or public utility, ice plants, power Transportation Office registers motor
and water supplies communication and vehicles)
similar public services. (Sec. 13b, CA 146)
2. Maritime Industry Authority (MARINA)
Public Utility – water transportation
 refers to a business or service engaged in
supplying the public with some commodity 3. National Telecommunications
or service of public consequence. Commission – communication utilities
and services, radio communications
Constitutional limitations on operation systems, wire or wireless telephone and
of public utilities (Art. XII, 1987
Page 49 of 199
telegraph systems,, radio and television Requirements for granting Certificate of Public
broadcasting systems and other similar Convenience: (CPPS)
public utilities 1. The applicant must be a citizen
of the Philippines or a corporation or
4. Energy Regulatory Board – electric or entity 60% of the capital of which is
power companies owned by such citizens;
5. National Water Resources Council – 2. The applicant must prove public

water resources necessity.
6. Civil Aeronautics Board 0 air 3. The applicant must prove that

transportation (The Air Transportation the operation of the public service
Office undertakes the maintenance and proposed and the authorization to do
operation of airports and other similar business will promote the public interest
facilities. The ATO also registers on a proper and suitable manner;
aircrafts.)
4.The applicant must have
Concept of franchise and certificate of public sufficient financial capability to
convenience undertake the proposed services and
meeting the responsibilities incident to
Certificate of Certificate of its operation;
Public Public Grounds for the Revocation of the Certificate:
Convenience Convenience and (VDCA)
Necessity when the holder:
1. any authorization 1. issued by the 1. Violates or contumaciously
to operate a public appropriate refuses to comply with any order, rule or
service issued by government agency regulation of the commission
the appropriate to a public service to 2. Is a mere dummy
government agency which any political 3. Ceases operations by placing his
subdivision has buses in storage
granted a franchise 4. Abandons the service
2. an authorization 2. an authorization
for the operation of for the operation of Grounds for Suspension: when the operator
public services for public services for willfully or contumaciously refuses to comply
which no franchise, which a franchise is with any order, rule or regulation.
either municipal or required by law  General Rule: Prior notice and
legislative is hearing.
required by law  Exception: When it is necessary to
3. it is a “property” 3. neither a franchise avoid serious and irreparable damage or
and have a nor a contract, inconvenience to the public or private
considerable value confers no property interest, in which case, a suspension not
and can be the right, and is a license more than 30 days may be ordered, prior to
subject of sale by or a privilege. the hearing. (Soriano v. Medina, 164 SCRA
the holder (Cogeo- Revocation of this 36)
Cubao Operators certificate deprives
and Drivers Assn. v. him of no vested II. GENERAL CONCEPTS
CA, 207 SCRA 343) right. New and
additional burdens, Contract of Transportation - a contract
alteration of the whereby a person, natural or juridical, obligates
certificate, or even to transport persons, goods or both, from one
revocation or place to another by land, air or water for a price
annulment thereof or compensation.
are reserved to the
State. (Luque v. Kinds of Contracts of Transportation:
Villegas, 30 SCRA 1. Carriage of passengers or Carriage of
408) goods
2. Common carrier or Private carrier
Page 50 of 199
b. contract of carriage - which is a

Parties to the Contract of Transportation: real contract for not until the carrier
A. Carriage of Passengers is actually used can the carrier be
1. Common carrier - persons, said to have already assumed the
corporations, firms or associations obligation of the carrier
engaged in the contract of  aircrafts:
transportation as defined above and  Perfected contract - if it was
offering their services to the public. established:
(Art. 1732, NCC)  that the passenger had
2. Passenger - one who travels in a checked in at the
public conveyance by virtue of departure counter,
contract, express or implied, with  passed through customs
the carrier as to the payment of fare and immigration,
or that which is accepted as an
 boarded the shuttle
equivalent thereof.
buses and
Note: someone is still considered as  proceeded to the ramp of
passenger even if he is being carried the aircraft, and
gratuitously or under a reduced fare.  his baggage had already
However, a stipulation limiting the been loaded in the
common carrier’s liability for negligence aircraft to be flown with
is valid. him to his destination.
B. Carriage of Goods  in buses, jeepneys and street

1. Shipper - one who delivers the goods cars:
to the carrier for transportation and  Once a public utility bus or
who pays the consideration or on jeepney stops, it is in effect
whose behalf payment is made making a continuous offer to
2. Common carrier bus riders.
3. Consignee - to whom the goods are  A passenger is deemed to be
to be delivered which could be: accepting the offer if he is
 the shipper himself or already attempting to board
 may be a 3rd person who the conveyances and the
is not actually a party to the contract of carriage is
contract perfected from that point.
 trains:
Note: there are instances when the  Perfected when:
third-party consignee is bound by the  the passenger purchases
agreement between the shipper and the a ticket and
carrier, when it was established that he  presents himself at the
accepted the same and is trying to proper place and in the
enforce the agreement. (Everett proper manner to be
Steamship Corp. v. CA, 297 SCRA 496) transported and
 must also have the bona
Perfection of the Contract of fide intention to use the
Transportation: facilities of the carrier.
1. Carriage of Passengers
a. contract to carry - an agreement 2. Carriage of Goods
to carry the passenger at some future a. contract to carry - whereby the
date which is consensual carrier agrees to accept and
 in aircrafts, contract to carry is transport goods at some future date
perfected even if no tickets have b. contract of carriage - when the goods
been issued so long as there was are unconditionally placed in the
already meeting of minds with possession and control of the carrier,
respect to the subject matter and and upon their receipt by the carrier
the consideration for transportation
Page 51 of 199
(Asia Lighterage and Shipping Inc. v. CA,

Tests for determining whether the GR No. 147246, August 19, 2003)
carrier is a common carrier of goods:
(EUMH) g. A person or entity need not be engaged in
1. he must be engaged in the business of the business of public transportation for the
carrying goods for others provisions of the Civil Code on common
 as public employment, and carriers to apply to them (Fabre Jr. v. CA,
 must hold himself out as ready to engage 259 SCRA 426)
in the transportation of goods generally
as a business and not as a casual Private Carrier - not engaged in business of
occupation carrying as a public employment, undertakes to
2. he must undertake to carry goods of the deliver goods or passengers for compensation
kind to which his business is confined (requires only ordinary diligence). (Home
Insurance Co. vs. American Steamship Agency,
3. he must undertake to carry by the method 23 SCRA 24)
by which his business is conducted and over
his established roads and Distinctions between a common carrier
and a private carrier:
4. the transportation must be for hire (First
Phil. International Corporation v. CA, 300
SCRA 66) Common Private Carrier
Characteristics of common carrier under Carrier
Art. 1732 and under the Public Service 1. holds himself 1. contracts with
Act: out for all people particular
a. Art. 1732 makes no distinction between one indiscriminately individuals or
whose principal business activity is the groups only
carrying of persons or goods or both, and 2. extraordinary 2. ordinary
one who does such carrying only as an diligence is diligence is
ancillary activity (in local idiom, as a required required
sideline) (De Guzman v. CA, 168 SCRA 612) 3. subject to State 3. not subject to
regulation State regulation
b. Art. 1732 also carefully avoids making any 4. parties may not 4. parties may
distinction between a person or enterprise agree on limiting limit the carrier’s
offering transportation service on a regular the carrier’s liability provided
or scheduled basis and one offering such liability except it is not contrary
service on an occasional, episodic or when provided by to law, morals or
unscheduled basis law good customs
5. exempting 5. general
c. Art. 1732 does not distinguish between a circumstance; exempting
carrier offering its services to the general prove circumstance;
public and one who offers services or solicits extraordinary caso fortuito, Art.
business only from a narrow segment of the diligence and Art. 1174 NCC
general population 1733, NCC
6. there is 6. no presumption
d. A person or entity is a common carrier and presumption of of fault or
has the obligations of the common carrier fault or negligence negligence
under the Civil Code even if he did not
secure a Certificate of Public Convenience
Functions of Arrastre Operator:
e. The Civil Code makes no distinction as to 1. to receive, handle, care for, and deliver
the means of transporting, as long as it is by all merchandise imported and exported,
land, water or air (First Philippine upon or passing over government-
Industrial Corp. v. CA, 300 SCRA 661) owned wharves and piers in the port
2. to record or check all merchandise
f. The Civil Code does not provide that the which may be delivered to said port at
transportation should be by motor vehicle shipside
Page 52 of 199
3. to furnish light, and water services and although the same was already sold or
other incidental services in order to conveyed to another person at the time of
undertake its arrastre service the accident.
Note: The arrastre operator’s services are Kabit System

clearly not maritime. They are in fact no  A system whereby a person who has been
different from those of a depositary or granted a certificate of public convenience
warehouseman. allows other persons who own motor
vehicles to operate under such license, for a
Nature of Business fee or percentage of such earnings.
 common carriers are impressed with public  It is void and inexistent
interest and concern hence, common
carriers are subject to regulation by the Effects of the System:
State. 1. The transfer, sale, lease or assignment of
the privilege granted is valid between
the contracting parties but not upon the
public or third persons. (Gelisan v.
Alday, 152 SCRA 388)
Common 2. The registered owner is generally liable
Carrier for all the consequences flowing from
Towage A vessel is Persons, the operations of the carrier.
hired to bring corporations,  The public has the right to
another vessel firms or assume that the registered owner is
to another associations the actual or lawful owner thereof.
place. It engaged in the  It would be very difficult and
refers to a business of often impossible, as a practical
service carrying or matter, for the public to enforce
rendered to a transporting their rights of action that they may
vessel by passengers or have for injuries inflicted by the
towing for the goods or both, vehicle if they should be required to
mere purpose by land, water, prove who the actual owner is
of expediting or air, for (Benedicto v. IAC, 187 SCRA 547).
her voyage compensation,  The thrust of the law in enjoining
without offering their the kabit system is not so much as to
reference to services to the penalize the parties but to identify
any public. the person upon whom
circumstances responsibility may be fixed in case of
of danger an accident with the end view of
protecting the riding public. The
Arrastre A contract for policy therefore loses its force if the
the unloading public at large is not deceived, much
of goods from less involved. (Lim vs. CA G.R. No.
a vessel 125817)
3. The registered owner cannot recover
Stevedorin Involves the from the actual owner and the latter
g loading and cannot obtain transfer of the vehicle to
unloading of himself, both being in pari delicto (Teja
coastwise Marketing v. IAC)
vessels calling 4. For the better protection of the public,
at the port both the registered owner and the actual
owner are jointly and severally liable
with the driver (Zamboanga
Registered Owner Rule Transportation Co. v. CA).
 the person who is the registered owner of a
vehicle is liable for any damage caused by III. OBLIGATIONS OF THE COMMON
the negligent operation of the vehicle CARRIER IN A CONTRACT OF
Page 53 of 199
CARRIAGE OF GOODS to receive them. (Art. 1736)

 It remains in full force and effect
A. Vigilance over the Goods: even when they are temporarily
unloaded or stored in transit
 Duty to exercise extraordinary diligence unless the shipper or owner has
 From the nature of their business and made use of the right of stoppage
for reasons of public policy, they are in transitu (Art. 1737).
bound to observe extraordinary  It continues to be operative even
diligence in the vigilance over the goods during the time the goods are
and for the safety of the passengers stored in a warehouse of the
transported by them, according to all the carrier at the place of
circumstances of each case. (Art. 1733) destination until the consignee
 a common carrier is required to has been advised of the arrival of
faithfully comply with his obligation the goods and has had
to deliver the goods to the point of reasonable opportunity
destination thereafter to remove them or
otherwise dispose of them (Art.
 Presumption of negligence 1738).
 In case of loss, destruction and
deterioration of the goods, common  Defenses of common carriers
carriers are presumed to be at fault or 1. Flood, storm, earthquake,
have acted negligently, unless they prove lighting, or other natural disaster or
that they exercise extraordinary calamity.
diligence. 2. Act of the public enemy in war,
whether international or civil
Proof required: 3. Act or omission of the shipper or
 mere proof of delivery of goods in the owner of goods
good order to a carrier and the 4. The character of the goods or
subsequent arrival of the same goods defects in the packing or in the
at the place of destination in bad containers.
order makes for a prima facie case 5. Order or act of competent
against the carrier. (Coastwise authority (Art. 1734)
Lighterage Corp. v. CA, 245 SCRA
796) 1. Natural Disaster
 the court need not make an express Requisites: (PDN)
finding of fault or negligence of a. must be the proximate and only
common carriers, the law imposes cause of the loss
liability upon common carriers, as b. carrier must exercise due
long as it is shown that: diligence to prevent or minimize the
1. there exist a contract between loss before, during or after the
the shipper and the common occurrence of the disaster (Art. 1739)
carrier c. carrier had not negligently
2. that the loss or deterioration incurred in delay in transporting the
took place during the existence goods (Art. 1740)
of the contract
Acts of the Public Enemy
 Duration of liability: Requisites:
Commencement: when the goods are a. the act must be the proximate
unconditionally placed in the and only cause of the loss
possession of, and received by the b. carrier must exercise due
carrier for transportation diligence to prevent or minimize the
loss before, during or after the act
Termination: when the same are delivered, causing the loss, deterioration or
actually or constructively, by destruction of the goods (Art. 1739)
the carrier to the consignee or
to the person who has the right 2. Contributory Negligence of the
Shipper
Page 54 of 199
 If the shipper or owner merely reasonable, just and in consonance with

contributed to the loss, destruction public policy (Art. 1751)
or deterioration of the goods, the
proximate cause thereof being the Valid stipulations:
negligence of the carrier, the carrier  A stipulation that the common carrier's
shall still be liable for damages, but liability is limited to the value of the
such shall be equitably reduced. (Art. goods appearing in the bill of lading,
1741) unless the shipper or owner declares a
greater value, is binding. (Art. 1749)
3. Character of the Goods or Defects  A contract fixing the sum to be
in the Packing or in the Container recovered by the owner or shipper for
 Even if the damage should be the loss, destruction or deterioration of
caused by the inherent the goods, if it is reasonable and just
defect/character of the goods, the under the circumstances and has been
common carrier must exercise due fairly and freely agreed upon. (Art. 1750)
diligence to forestall or lessen the  An agreement limiting the common
loss. (Art. 1742) carrier’s liability for delay on account of
 The carrier who knowing the fact strikes or riots (Art. 1748)
of improper packing of the goods
upon ordinary observation, still Invalid stipulations: (RNNLNTD)
accepts the goods notwithstanding a. the goods are transported at the risk
such condition is not relieved of of the owner or shipper;
liability or loss or injury resulting b. the carrier will not be liable for any
there from. (Southern Lines, Inc. v. loss, destruction or deterioration of the
CA, 4 SCRA 258) goods;
c. the carrier need not observe any
4. Order or Act of Public Authority diligence in the custody of the goods;
 Said public authority must have d. the carrier shall exercise a degree of
the power to issue the order (Art. diligence less than that of a good father
1743). Consequently, where the of a family over the movable
officer acts without legal process, the transported;
common carrier will be held liable. e. the carrier shall not be responsible
for the acts or omissions of his or its
Stipulation limiting liability of carrier employees;
Requisites: (WVR) f. the carrier’s liability for acts
1. The common carrier and the shipper committed by thieves or robbers who do
may agree on the carriers observance of not act with grave or irresistible threat,
diligence to a degree less than violence or force is dispensed with or
extraordinary, provided it be: diminished;
a. in writing, signed by the g. the carrier is not responsible for the
shipper or owner; loss, destruction or deterioration of the
b. supported by a valuable goods on account of the defective
consideration other than the condition of the car, vehicle, ship or
service rendered by the carriers; other equipment used in the contract of
and carriage. (Art. 1745)
c. reasonable, just and not
contrary to public policy. (Art. Effect of delay:
1744)  If the common carrier, without just
cause, delays the transportation of the
2. The fact that the common carrier has no goods or changes the stipulated or usual
competitor along the line or route, or a route, the contract limiting the common
part thereof, to which the contract refers carrier's liability cannot be availed of in
shall be taken into consideration on the case of the loss, destruction, or
question of whether or not a stipulation deterioration of the goods. (Art. 1747)
limiting the common carrier's liability is
Rule on presumption despite stipulation:
Page 55 of 199
 Even when there is an agreement case of the loss, destruction, or

limiting the liability of the common deterioration of the goods. (Art. 1747)
carrier in the vigilance over the goods,  Excusable delays in carriage suspend,
the common carrier is disputably but do not generally terminate, the
presumed to have been negligent in case contract of carriage, and when the cause
of their loss, destruction or is removed, the master must proceed
deterioration.( Art. 1752) with the voyage and make delivery.
 During detention or delay the vessel
B. Other Obligations: continues to be liable as a common
carrier, not as a warehouseman, and
Duty to accept goods - without any remains duty bound to exercise
discrimination extraordinary diligence
 payment of the indemnity:
Grounds for valid refusal to accept goods:  stipulated in the bill of lading, or
(DUO-CIELSF)  If no indemnity is stipulated, then
1. when the goods sought to be the carrier shall be liable for the
transported are dangerous objects or damages incurred due to the delay.
substances including dynamites and
 the consignee may:
other explosives
1. leave the goods
2. goods are unfit for transportation
transported in the hands of the
3. acceptance would result in
former (abandonment) advising him
overloading
thereof in writing before their arrival
4. the goods are considered
at the point of destination.
contrabands or illegal goods
Effect: The carrier shall pay the full
5. goods are injurious to health
value of the goods as if they had been
6. goods will be exposed to untoward
lost or mislaid.
danger like flood, capture by enemies
2. If no abandonment was
and the like
made
7. goods like livestock will be exposed
to diseases  indemnification shall not
8. strike exceed the current price of the
9. failure to tender goods in time goods at the time it should have
been delivered.
Duty to deliver goods
Where and to whom delivered:
Time of delivery a. To the consignee in the place agreed
 OFT-REPEATED RULE: In the
upon by the parties.
absence of a special contract, a carrier is b. To the consignee or any other
NOT an insurer against delay in person to whom the bill of lading
transportation of goods was validly transferred or
negotiated.
 when a common carrier undertakes to
convey goods, the law implies a contract
(See: Liability of Air Carriers regarding
that they shall be delivered at
liabilities in the transport of goods by air)
destination within a reasonable time.
 in determining if the delivery is made IV. OBLIGATIONS OF THE COMMON
within a reasonable time: CARRIER IN A CONTRACT OF
i. the expected date of arrival CARRIAGE OF PASSENGERS
reflected in the bill of lading may
be considered A. Safety of Passengers
ii. depend upon the nature of goods
 Duty to observe utmost diligence
Consequences of delay:
 A common carrier is bound to carry the
 A natural disaster shall not free such
passengers safely as far as human care
carrier from responsibility. (Art. 1740)
and foresight can provide, using the
 The contract limiting the common utmost diligence of very cautious
carrier's liability cannot be availed of in
Page 56 of 199
persons, with a due regard for all the of or injuries to passengers through the
circumstances. (Art. 1755) negligence or willful acts of the former’s
employees, although such employees
 Duration of liability may have acted beyond the scope of
Commencement: from the moment the  This responsibility cannot be
person who purchases the ticket eliminated or limited by stipulation,
from the carrier presents himself at by the posting of notices, by
the proper place and in a proper statements on the tickets or
manner to be transported with a otherwise. (Art. 1760)
bona fide intent to ride the coach  The liability of the carrier for the
Termination: until the passenger has, after personal violence of its employees or
reaching his destination, safely agents upon its passengers extends only
alighted from the carrier’s to those acts that the carrier could
conveyance or had a reasonable foresee or avoid through the exercise of
opportunity to leave the carrier’s the degree of diligence required.
premises
Note: Diligence in the selection and
 Once created, the relationship will not supervision of employees under Articles
ordinarily terminate until the passenger 2180 NCC, cannot be interposed by the
has, after reaching his destination, safely common carrier to prevent damages
alighted from the carrier’s conveyance or because the liability of the carriers arises
had a reasonable opportunity to leave from the breach of the contract of
the carrier’s premises, including the carriage. The defense under said articles
time upon which the passenger looks for is applicable to negligence in quasi-
his baggage and claim them. delicts (Del Prado v. Manila Electric Co.,
 All persons who remain on the premises 52 Phil 900).
within a reasonable time after leaving
the conveyance are to be deemed  Liability for acts of strangers or other
passengers, and what is a reasonable passengers
time or a reasonable delay within this  A common carrier is responsible for
rule is to be determined from all the injuries suffered by a passenger on
circumstances, and includes a account of the willful acts or negligence
reasonable time to see after his baggage of other passengers or of strangers, if the
and prepare for his departure (La common carrier’s employees, through
Mallorca v. CA, July 27 1966; Abiotiz the exercise of the diligence of a good
Shipping Corporation v. CA, November father of a family could have prevented
6, 1989). or stopped the act or omission. (Art.
1763)
 Presumption of negligence - the same  The carrier is liable when its personnel
presumption as in the carriage of goods allowed a passenger to drive the vehicle
applies. causing it to collide with another vehicle
 The courts need not make an express resulting to the injuries suffered by the
finding of fault or negligence of other passengers. (MRR v. Ballesteros,
common carriers, the law imposes 16 SCRA 641)
upon common carriers strict
liability, as long as it is shown that  Effect of stipulation on liability
there exists a relationship between General Rule: liability cannot be
the passenger and the common dispensed with or lessened by stipulation,
carrier and that injury or death took by posting of notices, by statements on
place during the existence of the tickets or otherwise. (Art. 1757)
contract. Exception: When a passenger is carried
 The doctrine of res ipsa loquitur gratuitously, a stipulation limiting the
applies. common carrier’s liability for negligence is
valid,
 Liability for acts of employees Exception to the exception: Not for
 Common carriers are liable for the death willful acts on gross negligence. (Art. 1758)
Page 57 of 199
Notes: Note: The Hague Protocol amended the

 The diligence required in the carriage of Warsaw Convention by removing the provision
the goods may be reduced by only one that if the airline took all necessary steps to
degree, from extraordinary to ordinary avoid the damage, it could exculpate itself
diligence or diligence of a good father of completely (Art. 20(1)). (Alitalia v. IAC, 192
a family. (Art. 1744, Art. 1745, no. 4) SCRA 9)
 In the transport of passengers, the
diligence required may be reduced by Special Rules on Liabilities of Airline
two degrees from extraordinary to Carriers:
ordinary diligence or even to simple 1. In case of flight diversion due to bad
negligence but not to gross negligence. weather or other circumstances beyond the
(Art. 1758) pilot’s control, the relation between the
carrier and the passenger continues until
B. Passenger’s Baggages the latter has been landed at the port of
1. in the custody of the passengers or their destination and has left the carrier’s
employees premises. The carrier should necessarily
a. The common carrier shall be responsible exercise extraordinary diligence in
for the baggage as depositaries, provided safeguarding the comfort, convenience and
that: safety of its stranded passengers until they
 notice was given to them or its have reached their final destination
employees and (Philippine Airlines v. CA, 226 SCRA 423).
2. Even where overbooking of passengers is
 the passenger took the necessary
precautions which the carrier has allowed as a commercial practice, the airline
advised them relative to the care and company would still be guilty of bad faith
vigilance of their baggage. and still be liable for damages if it did not
properly inform passenger that it could
b. In case of loss due to the fault of the breach the contract of carriage even if they
passenger, the carrier will not be liable. were confirmed passengers. (Zalamea v.
CA, 228 SCRA 23)
 The act of thief will not be
3. An open-dated ticket constitutes a complete
force majeure unless the same is
contract between the carrier and passenger.
committed by armed men and
Hence, the airline company is liable if it
through irresistible force (Arts. 1998,
refused to confirm a passenger’s flight
2000-2003).
reservation (Singson v. CA, 282 SCRA 149).
4. An airline company which issued a
2. not in such custody, but in that of the
confirmed ticket to a passenger covering
carrier
successive trips on different airlines can be
 The carrier is required to observe held liable for damages occasioned by
extraordinary diligence. In case of loss “bumping off” by one of the successive
or damage the carrier is presumed airlines (Lufthansa German Airlines v. CA,
negligent. (Arts. 1733-1753) 238 SCRA 290).
5. An airline ticket providing that carriage by
successive air carriers is to be regarded as a
C. Liability of Air Carriers – Warsaw “single operation” is to make the issuing
Convention carrier liable for the tortuous conduct of the
other carrier. A printed provision in the
Liability for damages: ticket limiting liability only to its own
1. Death or injury of a passenger if the conduct is not enough to rebut that liability
accident causing it took place on board (KLM Royal Dutch Airlines v. CA, 65 SCRA
the aircraft or in the course of its 237)
operations; (Art. 17)
2. Destruction, loss or damage to any V. OBLIGATIONS OF THE SHIPPER,
luggage or goods, if it took place during CONSIGNEE AND PASSENGER
the carriage; (Art. 18) and
3. Delay in the transportation of A. Effects of negligence of shipper or
passengers, luggage or goods. (Art. 19) passenger
Page 58 of 199
 If the shipper or owner merely the goods transported in an amount

contributed to the loss, destruction or necessary to cover the cost of
deterioration of the goods, the transportation and the expenses
proximate cause thereof being the incurred.
negligence of the common carrier, the
latter shall be liable in damages, which C. Liability for demurrage
however, shall be equitably reduced
(Art. 1741) Demurrage - the compensation provided
 The passenger must observe the for in the contract of affreightment for the
diligence of a good father of a family to detention of the vessel beyond the time
avoid injury to himself (Art. 1761) agreed on for loading and unloading. It is a
 The contributory negligence of the claim for damages for failure to accept
passenger does not bar recovery of delivery.
damages for his death or injuries, if the  Liability for demurrage exists only when
proximate cause thereof is the expressly stipulated in the contract.
negligence of the common carrier, but
the amount of damages shall be VI. EXTRAORDINARY DILIGENCE
equitably reduced. (Art. 1762.)
 If the negligence of the shipper or the  Common carriers, from the nature of their
passenger may be the proximate and business and for reasons of public policy,
only cause of the loss, the carrier should are bound to observe extraordinary
not be held liable. diligence in the vigilance over goods and for
 However, even if the carrier is the safety of the passengers transported by
responsible for the loss or injury, the them according to all the circumstances of
passenger is also required to lessen the each case (Art. 1733, in relation to Art. 1755)
damage or injury under what is known
as the Doctrine of Avoidable (See notes on stipulations on liability)
Consequences.
Extraordinary Diligence in Carriage by Sea
B. Payment of freight 1. Seaworthiness (Implied warranty)
Who will pay:  extends not only to the condition of
 Shipper the structure of the ship itself, but
 before or at the time he delivers the requires that it be: (PCSAO)
goods to the carrier for shipment. a. properly laden, and
 Consignee b. provided with a competent
 if agreed upon by the parties at the master,
c. sufficient number of
point of destination is bound by such
stipulation the moment he accepts competent officers and
the goods. seamen, and the
d. requisite appurtenances and
 Passengers
equipment and
 they are contractually bound to pay e. other necessary or proper
the fare within such time as stores and implements for
prescribed by regulations or by the the voyage (sec. 116,
carrier. Insurance Code).
 ship itself must not only be
Time to pay:
seaworthy to undertake the voyage
 Tickets are purchased in advance but it must also be cargo worthy (sec.
from ticket outlets. 119, ICP).
 Consignees to whom the  carrier is bound before and at the
shipment was made may not defer the beginning of the voyage to exercise
payment of the expenses and due diligence to:
transportation charges of the goods they a. make the ship seaworthy,
receive after the lapse of 24 hours b. property man, equip and
following their delivery. supply the ship (sec. 3,
 In case of delay in payment, the COGSA).
carrier may demand the judicial sale of
Page 59 of 199
 shippers are not required to inquire 2. Overloading

into the seaworthiness, genuineness  duty to exercise due diligence
of licensees and compliance with all likewise includes the duty to take
maritime laws. passengers or cargoes that are within
 vessel must be adequately equipped the carrying capacity of the vessel
and manned. (Negros Navigation v. CA).
Qualifications of captains, masters or patrons 3. Negligence of Captain and Crew

of vessels:  if captain and crew were negligent,
a. Filipino limited liability rule may apply. If
b. Have legal capacity to contract the captain and crew’s negligence is
c. With qualifications necessary to due to their inherent incompetence,
command and direct the vessel as ship-owner is deemed incompetent;
established by marine or navigation limited liability rule does not apply.
laws, ordinances or regulations
d. Must not be disqualified under the 4. Deviation and Transshipment
same laws a. Deviation
e. If ship owner desires to be captain  if route is stipulated upon by
without having the necessary the shipper and carrier, carrier
qualifications, shall limit him to the can’t change unless due to force
financial administration of the vessel, majeure.
and shall in trust the navigation to a  Carrier shall be liable for all
person possessing the qualifications losses suffered from any other
required (Art. 609, Code of cause, beside the sum stipulated
Commerce). for such case.
 If due to said force majeure
 The payment made by the insurer for the he took another route and
insured value of the lost cargo operates incurred expenses by reason
as waiver of its (insurer) right to enforce thereof, he shall be reimbursed
the term of the implied warranty against for such increase upon formal
the insured under the marine insurance proof thereof (Art. 359, Code of
policy. However, the same cannot be Commerce).
validly interpreted as an automatic b. Transshipment
admission of the vessel’s seaworthiness  the act of taking cargo out of
by the insurer as to foreclose recourse one ship and loading it in
against the carrier for any liability under another.
its contractual obligation as a common  When done without legal
carrier. The fact of payment grants the excuse, however competent and
insurer subrogatory right which enables safe the vessel into which the
it to exercise legal remedies that would transfer is made, is a violation of
otherwise be available to the insured as the contract and an infringement
owner of the lost cargo against the of the right of the shipper and
petitioner common carrier. (Delsan subjects the carrier to liability if
Transport Lines vs. CA GR No. 128797) the freight is lost even by a cause
otherwise excepted (Magellan
 It becomes the obligation of a cargo Manufacturing Corp. v. CA).
owner to look for a reliable common
carrier which keeps its vessels in Extraordinary Diligence in Carriage by Land
seaworthy conditions. The shipper may 1. Condition of vehicle - duty to exercise
have no control over the vessel but he extraordinary diligence requires the
has control in the choice of the common carriers to purchase and use vehicle
carrier that will transport his goods parts that aren’t defective.
(Roque v. IAC, 139 SCRA 596)
2. Traffic rules - unless there is a proof to
the contrary, it is presumed that a
person driving a motor vehicle has been
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negligent if at the time of the mishap, he  becomes effective upon its delivery to and
was violating traffic rules (Art. 2185, acceptance by the shipper.
New Civil Code). In case of breach of  4 copies, all signed by the captain and the
contract of carriage, proof of violation of shipper. Shipper shall keep one and shall
traffic rules confirms that the carrier send one to the consignee; captain shall take
failed to exercise extraordinary 2, 1 for himself and the other for the ship
diligence. agent.
 legitimate holder of a bill who fails to
3. Duty to inspect - in overland present the captain of the vessel before the
transportation, common carrier is not unloading obliging the latter thereby to
bound nor empowered to make an unload it and place it in deposit, shall be
examination of the contents of packages responsible for the expenses of warehousing
or bags particularly those hand carried. and other expenses arising therefrom (Art.
Airline companies are e\required to 711, Code of Commerce).
inspect each and every cargo brought
into the aircraft (RA 6235). Limitations as to Carriers’ Liability:
Extraordinary Diligence in Carriage by Air 1. No liability - the carrier will not be liable at
1. Airworthiness - an aircraft, its engines, all for the negligent acts of its crew and
propellers and other components and employees. This is null and void for being
accessories are of proper design and contrary to public policy;
construction, and are safe for air
navigation purposes, such design and 2. Limited liability - regardless of the value of
construction being consistent with the cargo, the maximum liability of the
accepted engineering practice and in carrier will be, for example, P500. This is
accordance with aerodynamic laws and void for being contrary to public policy;
aircraft science (RA 779).
2. Competent and well trained crew 3. Qualified liability - A stipulation in the bill
3. To take the required and prescribed of lading limiting the liability of the carrier
route to an agreed valuation unless the shipper
4. Adverse weather conditions or extreme declares a higher value and pays a higher
climatic changes are some of the perils rate of freight is valid (Org. v. CA and PAL,
involved in air travel consequence of 91 SCRA 223).
which the passenger must assume or
expect. Note: However, the carrier cannot limit its
5. RA 6235 (An Act Prohibiting Certain liability for injury to, or loss of, goods shipped
Acts Inimical to Civil Aviation and for where such injury or loss was caused by its own
Other Purposes) - acts punishable: negligence (Shewaram v. PAL, 17 SCRA 606).
a. to compel a change in the course
or destination of an aircraft of Kinds:
Philippine registry; or 1. Negotiable
b. to seize or usurp control of the 2. Non-Negotiable
aircraft while in flight. 3. Clean Bill of Lading - does not contain any
notation indicating any defect in the goods
VII. BILL OF LADING AND OTHER 4. Foul Bill of Lading - one that contains a
FORMALITIES notation indicating defect in the goods
5. On Board Bill of Lading - issued when the
Bill of Lading - written acknowledgment of goods have been actually placed aboard the
receipt of goods and agreement to transport ship with very reasonable expectation that
them to a specific place to a person named or to the shipment is as good as on its way
his order. 6. Received bill of lading - one in which it is
 It is not indispensable for the stated that the goods have been received for
creation of a contract of carriage (Compania shipment with or without specifying the
Maritima v. Insurance Company of North vessel by which the goods are to be shipped.
America, 12 SCRA 213) 7. Spent Bill of Lading - goods were already
 ambiguity is construed against the carrier, delivered but the bill of lading was not
the contract being one of adhesion. returned
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8. Through Bill of Lading - issued by the CONTRACT OF CARRIAGE

carrier who is obliged to use the facilities of
other carriers as well as his own facilities for A. Causes of Action:
the purpose of transporting the goods from 1. Culpa Contractual
the city of the buyer, which bill of lading is  Passengers and shippers who suffered
honored by the 2nd and other interested damages because of the breach of the
carriers who do not issued their own lading contractual obligation of the carrier may sue
(Agbayani, Comments and Jurisprudence the latter for damages.
on the Commercial Laws of the Philippines).  Here, the vinculum exists independently of
9. Custody Bill of lading - goods are already the breach of the voluntary duty assumed by
received by the carrier but the vessel the parties when entering into the
indicated therein has not yet arrived in the contractual relation.
port (Agbayani). 2. Culpa Aquiliana
10. Port Bill of Lading - vessel indicated in the  The damage was caused by reason of
bill of lading that will transport the goods is negligence or fault whereby the parties have
already at the port. no pre-existing contractual relation between
them.
Nature of Bill of Lading (the 3-Fold nature  it is the wrongful or negligent act or
of a bill of lading applies only to carriage of omission itself, which creates the vinculum
goods): juris.
1. a receipt;
2. a contract - contains the following: 3. Culpa Delictual
a. name, surname and residence of
shipper; Note: The same act that breaches the contract
b. name, surname and residence of may also be tort. A negligent act that breaches
carrier; the contract may give rise to a liability based on
c. name, surname and residence of contract and quasi-delict.
person to whom or to whose order
the goods are to be sent or whether Liability:
they are to be delivered to the bearer 1. Negligence of driver alone:
of the said bill;  The driver may be held liable for culpa
d. description of the goods; delictual or culpa aquiliana. He is not liable
e. cost of transportation; based on contract because there is no
f. date on which shipment is made; privity of contract between him and the
g. place of delivery of the carrier; passenger or shipper.
h. place and time at which delivery
to the consignee shall be made; 2. Negligence of 3rd persons concurs with the
i. indemnity to be paid by the breach:
carrier in case of delay, if there  The 3rd person and/or his employer may be
should be any agreement on this held liable for quasi delict. The driver alone
matter may be held criminally or civilly liable based
3. a document of title on delict. The employer is subsidiarily
liable.
Functions:
1. best evidence of the existence of the contract 3. In case of injury to a passenger due to
of carriage of cargo; negligence of driver of both colliding
2. commercial document whereby, if vehicles:
negotiable, ownership may be transferred by
 The drivers and owners of the two vehicles
negotiation; and
are jointly and severally liable for damages.
3. receipt of cargo (Magellan Manufacturing v.
If the owner and driver of the other vehicle
CA, 201 SCRA 2021).
are not impleaded, the carrier may implead
them by filing a 3rd party complaint.
(See: notes on Air Carriers below for the limits
of liability of air carriers with respect to
B. Prescriptive Period and Conditions
transport of goods)
Precedent:
1. Inter-island - if goods arrived in damaged
VIII. ACTIONS IN CASE OF BREACH OF
Page 62 of 199
condition (Art. 366): SCRA 432)

a. If damage is apparent, the  Damages arising from delay or late
shipper must file a claim delivery are not the damage or loss
immediately (it may be oral or contemplated under the COGSA. The
written); goods are not actually lost or damaged.
b. If damage is not apparent, he The applicable period is 10 years.
should file a claim within 24 hours (Mitsui vs. CA 287 SCRA 366)
from delivery.  If there is no delivery in case of
undelivered or lost cargo the one-year
 The filing of claim under either (1) or (2) period starts to run from the day the
is a condition precedent for recovery. vessel left port
 If the claim is filed, but the carrier  Where there was delivery to the wrong
refuses to pay: enforce carrier’s liability person, the prescriptive period is 10
in court by filing a case: years because there is a violation of
i. within 6 year, if no bill of contract, and the carriage of goods by
lading has been issued; or sea act does not apply to misdelivery.
ii. within 10 years, if a bill of (Ang v. American SS Agencies (19 SCRA
lading has been issued. 631)
2. Overseas –where goods arrived in a 3. Air Carriers - Warsaw Convention

damaged condition from a foreign port to a
Philippine port of entry: (COGSA applied) Action for Damages:
a. upon discharge of goods, if the damage 1. Condition precedent
is apparent, claim should be filled  A written complaint must me made
immediately; within:
b. if damage is not apparent, claim should - 3 days from receipt of baggage
be filled within 3 days from delivery. - 7 days from receipt of goods
- in case of delay, 14 days from
 Filing of claim is not a condition receipt of baggage / goods
precedent, but an action must be filed  otherwise the action is barred except
against the carrier within a period of 1 in case of fraud on the part of the
year from discharge. carrier. (Art. 26)
 The prescriptive period of 1 year starts
after the delivery of the goods or the 2. Jurisdiction - governed by domestic law
date the goods should have been
delivered (sec. 3 COGSA) It starts from 3. Venue – at the option of the plaintiff:
the delivery to the arrastre operator, not a. court of domicile of the carrier;
the consignee b. court of its principal place of
 A stipulation reducing the 1 year period business;
is null and void, but a written agreement c. court where it has a place of business
to suspend it is valid through which the contract has been
 In cases of collision the period starts made;
from the date the goods should have d. court of the place of destination.
been delivered, had the cargoes been (Art. 28)
saved (Maritime Company of the The places enumerated by Article 28 of
Philippines vs. CA, 164 SCRA 593) the Warsaw Convention where an action
 An extra-judicial demand does not for damages may be bought are not
suspend the period matters of venue which can be waived,
 An insurer who is exercising its right of but are jurisdictional in nature. (Santos
subrogation is also bound by the 1 year III vs. Northwest Orient Airlines 210
period (Fil. Merchants vs. Alejandro 145 SCRA 256)
SCRA 42). It does not apply to a claim
against the insurer for the insurance 4. Prescriptive period – 2 years from:
proceeds. The claim against the insurer a. date of arrival at the destination
is based on contract that expires in 10 b. date of expected arrival
years (Mayer Steel Pipe Corp. vs. CA 274 c. date on which the transportation
Page 63 of 199
stopped. (Art. 29)  the

natural and
5. Rule in case of various successive probable
carriers, consequences of
a. In case of transportation of the breach of
passengers – the action is filed only the obligation,
against the carrier in which the  and
accident or delay occurred unless which the
there is an agreement whereby the parties have
first carrier assumed liability for the foreseen or
whole journey. could have
b. In case of transportation of baggage reasonably
or goods foreseen at the
i. the consignor can file an action time the
against the first carrier and the obligation was
carrier in which the damage constituted.
occurred
ii. the consignee can file an action
against the last carrier and the Kinds of Damages:
carrier in which the damage 1. Actual (damnum
occurred. These carriers are emergente) or compensatory (lucro
jointly and severally liable. (Art. cessante)
30) a. In case of Goods:
 Plaintiff is entitled to their value at
the time of destruction.
Limit of Liability: (Art. 22 as amended by
Guatemala Protocol, 1971; Alitalia v. IAC) b. In case of Passengers:
1. passengers - $10,000 to  Personal Injury:
$100,000  The claimant is entitled to all
except: agreement to a higher limit medical expenses and other
2. checked-in baggage - $20 / kg reasonable expenses the he
except: consigner declared its value incurred to treat the injuries. It
and paid a supplementary sum, may include plastic surgery.
carrier liable to not more than the
 Also entitled to the amount of
declared sum unless it proves the
loss of earning capacity from the
sum is greater than its actual value.
time of the accident up to the
3. hand-carry baggage - $400 to
time he has fully recovered.
$1000 / passenger
 Death:
 an agreement relieving the  The claimant is entitled to all
carrier from liability or fixing a lower medical expenses and other
limit is null and void. (Art. 23) reasonable expenses the he
incurred to treat the injuries.
 Carrier not entitled to the
foregoing limit if the damage is caused  Also entitled to the amount spent
by willful misconduct or default on its during the wake and funeral of
part. (Art. 25) the deceased, but expenses
incurred after the burial is not
RECOVERABLE DAMAGES compensable.
 The relatives of the deceased are
Extent of Liability: entitled to the amount of loss of
earning capacity as determined
Carrier in good Carrier in bad according to Art. 2206 of the
faith faith NCC.
liable only to pay liable for all
for the damages damages whether 2. Moral
that are the same can be  Generally, no moral damages may be
foreseen or not. awarded where the breach of contract is
Page 64 of 199
malicious. However if contractual matter of right, their determination

negligence is considered gross depending upon the amount of
negligence, moral damages may be compensatory damages that may be
awarded. awarded to the claimant,
 Conditions in order that moral damages c. the act must be accompanied by
may be awarded: (ICPC) bad faith or done in wanton,
a. there must be an injury, whether fraudulent, oppressive or malevolent
physical, mental or psychological, manner.
clearly sustained by the claimant,
b. there must be a culpable act or Note: The rule on the award of interest on
omission factually established, damages is that, when an obligation, not
c. the wrongful act or omission of the constituting a loan or forebearance of money, is
defendant is the proximate cause of breached, an interest on the amount of damages
the injury sustained by the claimant, awarded may be imposed at the discretion of
and the court at the rate of 6% per annum.
d. the award of damages is predicated
on any of the cases stated in Art. IX. MARITIME LAW
2219 of the NCC in relation to Art.
2220. A. Concept of Maritime Law
3. Nominal Maritime Law - system of laws which

 The assessment of nominal damages is particularly relates to the affairs and business of
left to the discretion of the court the sea, to ships, their crews and navigation and
according to the circumstances of the to marine conveyance of persons and property
case. The award of such damages is
justified in the absence of proof of the Merchant vessel
specific amounts of actual damages  vessel engaged in maritime commerce,
suffered. whether foreign or otherwise.
 constitutes property which may be acquired
4. Temperate or and transferred by any of the means
moderate recognized by law. They shall continue to be
 Temperate or moderate damages are considered as personal property. (Arts. 573,
awarded when the court finds that some 585)
pecuniary loss has been suffered but its
amount can not, from the nature of the Characteristics of Maritime Law:
case, be provided with certainty. 1. Real
 similar to transactions over real
5. Liquidated property with respect to effectively
 Liquidated damages are those agreed against third persons which is done
upon by the parties to a contract, to be through registration. The evidence of
paid in case of breach thereof. Generally real nature is shown by (1) the limitation
the court cannot change the amount of the liability of the agents to the actual
agreed upon except when the indemnity value of the vessel and the freight money
or penalty is iniquitous or and (2) the right to retain the cargo and
unconscionable. embargo and detention of the vessel
(Luzon Stevedoring Corp v. CA, 156
6. Exemplary or SCRA 169);
corrective 2. Hypothecary
 Requisites in order that exemplary  the liability of the owner of the value of
damages may be awarded: (ECB) the vessel is limited to the vessel itself
a. they may be imposed by way of (Doctrine of Limited Liability).
example in addition to 3. Preference of Credits
compensatory damages, and only  Mortgage of a vessel properly registered
after the claimant’s right to them has becomes of preferred mortgage lien
been established, which shall have priority over all claims
b. they cannot be recovered as a against the vessel in an extrajudicial
Page 65 of 199
foreclosure for:  If the amount of the demand or claim is less

a. credit in favor of the public than the jurisdictional amount of the RTC,
treasury; the jurisdiction over the admiralty and
b. judicial costs of the proceedings; maritime cases are with the Metropolitan
c. pilotage and tonnage charges Trial Court, Municipal Trial Court or
and other sea and port charges; Municipal Circuit Trial Court as the case
d. salaries of depositaries and may be. (Section 19(3) BP 129)
keepers of the vessel
e. captain and crew’s wages; C. Vessels
f. general average;
g. salvage, including contract Ownership of Vessels:
salvage; 1. Acquisition
h. maritime liens arising prior in a. Prescription - acquisition of the vessel
time to the recording of the must appear in a written instrument,
preferred mortgage; which shall not produce any effect with
i. damages arising out of tort; and respect to third persons if not inscribed in
j. preferred mortgage registered the registry of the vessels and shall be
prior in time. acquired by possession in good faith,
continued for 3 years, with a just title duly
B. Limited liability rule (Art. 587, 590, 643, recorded. In the absence of any of these,
837, CC) continuous possession for 10 years shall
be necessary in order to acquire
Doctrine of Limited Liability – “No vessel, ownership.
no liability”
General Rule: The liability of ship owners is b. Sale - includes the rigging, masts, stores
limited to the amount of interest in said vessel and engine of a streamer appurtenant
such that where vessel is entirely lost, the thereto, which at the time belongs to the
obligation is extinguished. (Luzon Stevedoring vendor
v. Escano, 156 SCRA 169)  if sale is made while it is on voyage,
the freightage which it earns from the
The interest extends to: time it receives its last cargo shall
a. the vessel itself, pertain entirely to the purchaser, and
b. equipments, the payment of the crew and other
c. freightage and persons who make up its complement
d. insurance proceeds. (Chua v. IAC, shall be for his account
166 SCRA 183)  if the sale is made after the vessel has
arrived at the port of its destination,
Exceptions: (WINES) the freightage shall pertain to the
1. claims under Workmen’s Compensation; vendor, and the payment of the crew
2. injury or damage due to ship owner’s fault; and other individuals who make up its
3. the vessel is insured. complement shall be fore his account,
4. expenses for repair on vessel before loss; unless the contrary is stipulated in
5. the vessel is not abandoned; either case.
Note: Abandonment of the vessel, its 2. Registration - must be made through the
appurtenances and the freightage is an Maritime Industry Authority (MARINA)
indispensable requirement before the
shipowner or ship agent can enjoy the benefits Ship’s Manifest -is a declaration of the entire
of the limited liability principle. The only cargo. The object of a manifest is to furnish
instance where such abandonment is dispensed customs officers with a list to check against, to
with is when the vessel was entirely lost. inform the revenue officers what goods are
Admiralty Jurisdiction - in all actions in being brought into a port of the country on a
admiralty and maritime jurisdiction where the vessel. Hence, the requirement that a vessel
demand or claim exceeds P300, 000.00 or in must carry a manifest is not complied with even
Metro Manila, where such demand or claim if a bill of lading can be presented.
exceeds P400, 000.00 the RTC has jurisdiction.  A bill of lading is just a declaration of a
specific cargo rather than the entire cargo. It
Page 66 of 199
is issued as a matter of convenience by Ship Agents:

virtue of a contract. 1. Capacity to trade;
D. Persons who take part in Maritime 2. Discharge duties of the captain,
Commerce in case of the latter’s absence;
3. Contract in the name of the
Participants in Maritime Commerce: owners with respect to repairs, details of
a. ship-owners and ship agents equipment, armament, and all that
b. captains and masters of the vessel relate to the requirements of navigation;
c. officers and crew of the vessel 4. Order a new voyage, make a new
d. supercargoes charter or insure the vessel after
obtaining authorization from the ship-
Complement of the vessel owners.
 all persons on board, from the captain to the
cabin boy, necessary for the management, Duty of Ship Agent to Discharge the
maneuvers, and service, thus, include the Captain and the Members of the Crew:
crew, the sailing mates, engineers, stokers  If the seamen contract is not for
and other employees on board not having a definite period or voyage, he may
specific designations. discharge them at his discretion (Art.
 does not include the passengers or the 603).
persons whom the vessel is transporting.  If for a definite period, he may
not discharge them until after the
1. Shipowners and ship fulfillment of their contracts, except on
agents (Art. 586-588, CC) the following grounds:
a. insubordination in serious
Ship-owner - person who has possession, matters;
control in management of the vessel and the b. robbery;
consequent right to direct her navigation and c. theft;
receive freight earned and paid, while his d. habitual drunkenness;
possession continues. e. damage caused to the vessel or to
its cargo through malice or manifest
Ship agent - person entrusted with or proven negligence (Art. 605).
provisioning and representing the vessel in the
port in which it may be found; also includes the 2. Captains and masters of
ship-owner. vessels
Civil Liabilities of the Shipowner and the Nature of Position:

Ship Agents: 1. general agent of the ship-owner;
1. All contracts of the captain, 2. technical director of the vessel;
whether authorized or not, to repair, 3. representative of the government
equip and provision the vessel; (Art. of the country under whose flag he
586) navigates.
2. Loss and damage to the goods
loaded on the vessel without prejudice to Qualifications:
their right to free themselves from 1. Filipino citizen;
liability by abandoning the vessel to the 2. legal capacity to contract;
creditors. (Art. 587) 3. must have passed the required
physical and mental examinations
 Both are liable jointly and severally in required for licensing him as such (Art.
case of breach of contract and extra- 609).
contractual obligation such as tort.
 Neither of them will be liable for an Inherent Powers of the Captain: (ACICSR)
obligation contracted by the captain in 1. appoint crew in the absence of
excess of the latter’s powers and ship agent;
privileges pertaining to him. 2. command and direct crew;
3. impose correctional punishment
Powers, Functions and Liabilities of the on those who, while on board vessel, fail
Page 67 of 199
to comply with his orders or are wanting Effect: ship agent or ship owner solidarily
in discipline; liable to the passengers and owners of the
4. make contracts for the charter of cargo
vessel in the absence of ship agent. No Liability for the Following:
5. supply, equip, and provision the 1. damages caused to the vessel or
vessel; and to the cargo by force majeure;
6. order repair of vessel to enable it 2. obligations contracted for the
to continue its voyage (Art. 610). repair, equipment, and provisioning of
the vessel unless he has expressly bound
Sources of Funds to Comply with the himself personally or has signed a bill of
Inherent Powers of the Captain: (in exchange or promissory note in his
successive order) name. (Art. 620)
1. from the consignee of the vessel;
2. from the consignee of the cargo; 3. Pilot
3. by drawing on the ship agent;
4. by a loan on bottomry; Pilot
5. by sale of part of the cargo. (Art.  a person duly qualified and licensed to
611) conduct a vessel into or out of ports, or in
certain waters. In a broad sense, the term
Duties of the Captain: includes:
1. bring on board the proper 1. those whose duty it is to guide vessels
certificate and documents and a copy of into or out of ports, or in particular
the Code of Commerce; waters, and
2. keep a Log Book, Accounting 2. those entrusted with the navigation of
Book and Freight Book; vessels on the high seas.
3. examine the ship before the  however, the term ‘pilot’ is more generally
voyage; understood as a person taken on board at a
4. say on board during the loading particular place for the purpose of
and unloading of the cargo; conducting a ship through a river, road or
5. be on deck while leaving or channel, or from a port.
entering the port;
6. protest arrivals under stress and Compulsory Pilotage
in case of shipwreck;  states possessing harbors have enacted laws
7. follow instructions of and render or promulgated rules requiring vessels
an accounting to the ship agent; approaching their ports to take on board
8. eave the vessel last in case of pilots licensed under the local law.
wreck;  pilot supersedes the master for the time
9. hold in custody properties left by being in the navigation of the ship,
deceased passengers and crew members; considered as a master pro hac vice but a
10. comply with the requirements of master is still in command of the vessel that
customs, health, etc. at the port of did not deal with navigation
arrival. (Art. 612)
Duties and Liabilities:
Liabilities of the Ship Agent / Ship Owner 1. Responsible for the direction of a vessel
for Acts Done By the Captain towards from the time he assumes control
Passengers and Cargoes: thereof until he leaves it anchored or
1. damages to vessel and to cargo berthed safely.
due to lack of skill and negligence; 2. Shall properly and safely secure or
2. thefts and robberies of the crew; anchor vessels under their control when
3. losses and fines for violation of requested to do so by the master of such
laws; vessels.
4. damages due to mutinies; 3. Personally liable for damages caused by
5. damages due to misuse of power; his own negligence or default to the
6. for deviations; owners of the vessel and to third parties
7. for arrivals under stress; for damages sustained in a collision.
8. damages due to non-observance
of marine regulations. (Art. 618)
Page 68 of 199
Cases where the master is allowed to 6. desertion. (Art. 637)

displace a compulsory pilot:
1. obvious incompetence Causes of Revocation of Voyage:
2. intoxicated pilot 1. war;
3. in all cases of great necessity 2. blockade;
4. in cases of danger where the pilot 3. prohibition to receive cargo at
does not foresee destination;
4. Officers and crew of the 4. embargo;
vessel 5. inability of the vessel to navigate.
(Art. 640)
Officers and crew of the vessel:
1. Sailing Mate / First Mate No Liability under the following
2. Second Mate circumstances:
3. Engineers 1. if, before beginning voyage,
4. Members of the Crew captain attempts to change it, or a naval
war with the power to which the vessel
1. Sailing Mate / First Mate was destined occurs;
 second chief of the vessel who takes 2. if a disease breaks out and be
the place of the captain in case of officially declared an epidemic in the
absence, sickness, or death and shall port of destination;
assume all of his duties, powers and 3. if the vessel should change owner
responsibilities. (Art. 627) or captain. (Art. 647)
2. Second Mate
 takes command of the vessel in case Supercargoes
of the inability or disqualification of  persons who discharge administrative
the captain and the sailing mate, duties assigned to him by ship agent or
assuming in such case their powers shippers, keeping an account and record of
and responsibilities. transaction as required in the accounting
book of the captain. (Art. 649)
3. Engineers
 officers of the vessel but have no E. Charter Parties
authority except in matters referring
to the motor apparatus. When two or Charter Party
more are hired, one of them shall be  Contract by which an entire ship, or some
the chief engineer. principal part thereof is let by the owner to
4. Members of the Crew another person for a specified time or use
 hired by the ship agent, where he is for the conveyance of goods, in
present and in his absence, the consideration of the payment of freight.
captain hires them, preferring (Caltex Phil., Inc. vs. Sulpicio Lines, Inc.,
Filipinos, and in their absence, he etc., 315 SCRA 709)
may take in foreigners, but not
exceeding 1/5 of the crew. (Art. 634) LEASE CHARTER
PARTY
Classes of Seaman’s Contracts: 1. If for a definite 1. Charterer may
1. by the voyage; period, lessee rescind charter
2. by the month; and cannot give up party by paying
3. by share of profits or freightage. lease by paying half of the
a portion of the freightage agreed
Just Causes for Discharge: amount agreed upon
1. perpetration of a crime; upon
2. repeated insubordination, want 2. If the leased 2. The new owner is
of discipline; property is sold not compelled to
3. repeated incapacity and to one who respect the
negligence; knows of the charter party so
4. habitual drunkenness; existence of the long as he can
5. physical incapacity; lease, the new load the vessel
Page 69 of 199
owner must with his own CONTRACT OF

respect the cargo BAREBOAT OR AFFREIGHTME
lease DEMISE NT (TIME OR
CHARTER VOYAGE
Classes of Charter Party: CHARTER)
1. Bareboat or Demise 1. Charterer 1. Owner remains
 charterer provides crew, food becomes liable liable as carrier
and fuel. The charterer is liable as if to others and must answer
he were the owner, except when such caused by its for any breach of
arises from the unworthiness of the negligence duty
vessel. 2. Charterer 2. Charterer is not
regarded as regarded as
Owner pro hac vice - means that a owner pro hac owner.
charterer, in spite of the fact that vice for the
somebody else is the owner of the vessel, voyage
is treated as the owner of the chartered 3. Owner of vessel 3. The vessel owner
vessel, just for that one particular relinquishes retains
purpose only. possession, possession,
 This situation exists in “demise” or command and command and
“bareboat” charter, wherein the ship- navigation to navigation of the
owner turns over possession of the charterer ship
vessel to the charterer who then
undertakes to provide a crew and Who may contract:
victuals and supplies and fuel for the 1. Bottomry - by the ship owner or
vessel for the duration of the charter. ship agent. Outside of the residence of
 Because the charterer is treated as the owners, the captain.
owner pro hac vice, the charterer 2. Respondentia - only the owner of
assumes the customary rights and the cargo.
liabilities of the ship-owner to third
persons and is held liable for the Requisites of a valid charter: (CEC)
expense of the voyage and the wages 1. consent of the contracting parties
of the seamen. 2. an existing vessel which should be
placed at the disposition of the shipper
2. Contract of Affreightment 3. the freight
 owner leases the boat or part of it 4. compliance with the requirements of
for the carriage of goods. (Planters Art. 652 of the Code of Commerce:
Products Inc. v. CA, 226 SCRA 476)
It may either be time charter or  A charter party must be drawn in
voyage charter. duplicate and signed by the contracting
parties and when either does not know how
a. Time charter or is not able too do so, by two witnesses at
 vessel is chartered for a his request.
period of time or duration of  The charter party shall contain, besides
voyage; owner retains possession the conditions freely stipulated, the
and control of the vessel; following circumstances:
charterer acquires the right to a. the kind, name, tonnage of the vessel
use the carrying capacity, b. her flag and port of registry
facilities of the vessel and could c. the name, surname and domicile of
designate destinations. the captain
d. the name, surname and domicile of
b. Voyage or trip charter the ship agent, if the latter should
 contract for hire of vessel make the charter party
for one or series of voyages e. the name, surname, and domicile of
usually for purposes of the charterer and if he states that he
transporting goods for charterer. is acting by commission, that of the
person for whose account he makes
Page 70 of 199
the contract Party:

f. the port of loading and unloading
g. the capacity, number of tons or  Of the ship owner or ship agent:
weight, or measurement which they 1. Bound to observe the capacity of the
respectively bind themselves to load vessel
and transport or whether the charter 2. Any loss incurred by a shipper whose
party is total cargo is refused on account of the
h. the freight to be paid, stating receipt by the shipowner of a greater
whether it is to be a fixed amount for amount of cargo belonging to other
the voyage or so much per month, or persons shall be for the account of the
for the space to be occupied, or for shipowner in the form of indemnity.
the weight or measurement of the 3. May effect a substitution in respect of
goods making up the cargo, or in any the vessel, which had been initially
other manner whatsoever agreed chartered with that of another.
upon 4. After 3/5 of the vessel is loaded, the
i. the amount of primage to be paid the vessel cannot be substituted with
captain another, unless he procures the consent
j. the days agreed upon for loading of the shipper or charterer.
and unloading 5. May be held generally liable for
k. the lay days and extra lay days to be damages incurred by the charterer due
allowed and the demurrage for each to voluntary delay.
of them to be paid. 6. May unload cargo clandestinely placed
on board, or transport them
Freight 7. To leave the port if the charterer does
 The parties may fix the manner or form not bring the cargo within the lay days
in which the charter price or money shall be and extra lay days allowed;
satisfied. It shall accrue to the conditions 8. To place in a vessel in a condition to
stipulated in the contract. In the absence of navigate;
stipulations, the rules are as follows: 9. To bring cargo to nearest neutral port in
a. the freight shall begin to run from the case of war or blockade.(Arts. 669-678)
day of loading on the vessel
b. in charters with a fixed period, the  Of the charterer:
freight shall begin upon that very day, 1. May subcharter the vessel to a 3rd
and person only if he is authorized by the
c. if the freight is charged according to shipowner
weight, the payment thereof shall be 2. To load goods that were contracted
made according to the gross weight, upon, otherwise he will be held liable to
including the weight of the containers. indemnify the parties injured thereby.
3. If illicit cargo is loaded with the
Lay days - period when vessel will be delayed knowledge of the shipowner or captain,
in the port for loading and unloading. charterer is jointly liable for damages.
4. To pay the agreed charter price;
Primage - bonus to be paid to the captain after 5. To pay freightage on unboarded cargo;
the successful voyage. 6. To pay for the full freightage, the
expenses of the arrival made at his
Deadfreight - where the charterer failed to request and the losses and damages
occupy the leased portion of the vessel, he may caused to the other shippers if any of the
thereby be made liable by the ship-owner shipper unloads his goods before
arriving at the port, unless in cases of
Demurrage - sum due, by express contract, for force majeure.
the detention of the vessel, in loading and 7. To wait if the vessel needs repair;
unloading, beyond the time allowed in the 8. To pay expenses for deviation. (Arts.
contract of affreightment, and to any other 679-687)
improper detention or delay beyond the time
set for loading. Rescission of a Charter Party:
A. At charterer’s request: (Art 688)
Rights and Obligations of a Charter
Page 71 of 199
1. by abandoning the charter and 2. Obligation of the debtor

paying half of the freightage; conditioned only upon safe arrival of the
2. error in tonnage or flag; security at the point of destination.
3. failure to place the vessel at the
charterer’s disposal; Exceptions to the Hypothecary Nature of
4. return of the vessel due to pirates, Bottomry and Respondentia:
enemies or bad weather; 1. loss due to inherent defect;
5. arrival at a port for repairs. 2. loss due to the barratry on the
part of the captain;
B. At ship owner’s request: (Art. 689) 3. loss due to the fault of malice of
1. if the extra lay days terminate the borrower;
without the cargo being placed 4. that the vessel was engaged in
alongside the vessel; contraband; and
2. sale by the owner of the vessel before 5. that the cargo loaded on the
loading by the charterer; vessel be different in form that agreed
upon..
C. Fortuitous causes: (Art. 690)
1. war; BOTTOMRY/ ORDINARY
2. blockade; RESPONDENTIA LOAN
3. prohibition to receive cargo; 1. Liability of the 1. Not subject to
4. embargo; and borrower is any
5. inability of the vessel to navigate. contingent on contingency
the safe arrival of
Usual forms of Consummating Contracts: the vessel or
1. C.I.F - cost, insurance and freight; cargo at
2. F.O.B. - free on board; destination
3. F.A.S. - free alongside ship; and 2. The last lender is 2. The first lender
4. C. and F. - cost and freight. a preferred is a preferred
creditor creditor
Transshipment of Goods
 the act of taking cargo from one ship and Note: Under existing laws, the parties to a loan,
loading it in another, whether ordinary or maritime, may agree on
 if done without legal excuse, however any rate of interest. (CB Circular 905).
competent and safe the vessel into which the
transfer is made is a violation of contract Who may contract:
and infringement of right of shipper and 1. Bottomry - by the ship owner or ship
subjects carrier to liability if freight s lost agent. Outside of the residence of the
event by cause otherwise excepted owners, the captain.
(Magellan Manufacturing vs. CA, 201 SCRA 2. Respondentia - only the owner of the
102). cargo.
F. Loans on Bottomry and Respondentia Formalities:

May be executed by means of:
Loan on Bottomry - loan made by ship- 1. public instrument
owner or ship agent guaranteed by vessel itself 2. policy signed by the contracting
and repayable upon arrival of vessel at parties and the broker taking part
destination. (Art. 719) therein
3. private instrument (Art. 720)
Loan on Respondentia - loan, taken on
security of the cargo laden on a vessel, and Contents:
repayable upon safe arrival of cargo at 1. kind, name and registry of the
destination. (Art. 719) vessel;
2. name, surname and domicile of
Common Elements: the captain;
1. Exposure of security to marine 3. names, surnames and domiciles
peril; of the borrower and the lender;
Page 72 of 199
4. amount of the loan and the the vessel and the cargo therein at the
premium stipulated; time of the occurrence of the average
5. time for repayment; shall contribute to satisfy this average.
6. goods pledged to secure (Art. 812)
repayment;
7. voyage during which the risk is Requisites: (CDSA)
run (Art.721) 1. There must be a common
danger;
G. Accidents in Maritime Commerce 2. That for the common safety, part
of the vessel or of the cargo or both is
Accidents in Maritime Commerce: deliberately sacrificed;
1. Averages 3. That from the expenses or
2. Collision damage caused follows the successful
3. Arrival Under Stress saving of the vessel and the cargo, and;
4. Shipwreck 4. That the expenses or damages
should have been incurred or inflicted
Protest - the written statement by the master after taking proper legal steps and
of a vessel or any authorized officer, authority
attested by proper officer or a notary, to the
effect that damages has been suffered by Who is entitled to indemnity:
the ship. Protest is required in the following  The owner of the goods, which were
instances: sacrificed, is entitled to receive general
1. when the vessel makes an arrival under average contribution.
stress  However, the following goods are
2. where the vessel is shipwrecked not covered:
3. where the vessel has gone through the 1. Goods carried on deck unless the
hurricane or the captain has suffered rule, special law or customs of the
damages or averages place allow the same,
4. maritime collisions 2. Goods that are not recorded in
the books or records of the vessel,
1. Averages and
 an extra-ordinary or accidental expense 3. Fuel for the vessel if there is
incurred during the voyage in order to more than sufficient fuel for the
preserve the cargo, vessel or both; and all voyage.
damages or deterioration suffered by the
vessel from departure to the port of Procedure for recovery: (Art. 813-814)
destination, and to the cargo from the port 1. There must be a resolution of the
of loading to the port consignment. (Art. captain, adopted after a deliberation with
806) the other officers of the vessel and after
hearing all persons interested in the
Classes of Averages: cargoes. If the latter disagree, the
A. Particular or Simple Average decision of the captain should prevail but
 Damage or expenses caused to the vessel they shall register their objections.
or cargo that did not inure to common 2. The resolution must be entered
benefit, and borne by respective owners. in the logbook, stating the reasons and
(Art. 809) motives for the dissent, and the
 The owner of the goods which gave rise irresistible and urgent causes if he acted
to the expense or suffered the damage in his own accord. It must be signed, in
shall bear this average. (Art. 810) the first case, by all persons present in
the hearing. In the second case, by the
B. Gross or General Average captain and all the officers of the vessel.
 Damage or expenses deliberately 3. The minutes must also contain a
caused in order to save the vessel, its detail of all the goods jettisoned and
cargo or both from real and known risk. those injuries caused to those on board.
(Art. 811) 4. The captain shall deliver it to the
 All the persons having an interest in maritime judicial authority of the first
port he may make, within 24 hours after
Page 73 of 199
his arrival, and to ratify it immediately of Commerce:

under oath. 1. The collision may be due to the fault,
negligence or lack of skill of the captain,
Order of goods to be cast overboard in case of sailing mate, or any other member of the
jettison: complement of the vessel. The owner of
1. those which are on the deck, preferring the vessel at fault is liable for losses or
the heaviest one with the least utility damage. (Art. 826)
and value; 2. The collision may be due to the fault of
2. those which are below the upper deck, both vessels. Each vessel shall suffer its
beginning with the one with greatest own losses, but as regards the owner of
weight and smallest value. (Art. 815) cargoes both vessels shall be jointly and
severally liable. (Art. 827)
York-Antwerp Rules on determining liability 3. If it cannot be determined which vessel
for contribution on averages: is at fault. Each vessel shall also suffer
 Under the rule, deck cargo is permitted its own losses and both shall be
in coastwise shipping but prohibited in solidarily liable for losses o damages on
overseas shipping. the cargoes. (Art. 828)
1. If deck cargo is located with the consent 4. The vessels may collide with each other
of the shipper on overseas trade, it must through fortuitous event or force
always contribute to general average, majeure. In this case each shall bear its
but should the same be jettisoned, it own damage. (Art. 830)
would not be entitled to reimbursement 5. Two vessels may collide with each other
because there is violation of the Y-A without their fault by reason of a third
Rules. vessel. The third vessel will be liable for
2. If deck cargo is loaded with the consent losses and damages. (Art. 831)
of the shipper on coastwise shipping, it 6. A vessel which is properly anchored and
must always contribute to general moored may collide with those nearby,
average and if jettisoned would be reasons of storm or other cause of force
entitled to reimbursement. majeure. The vessel run into shall suffer
its own damage and expense. (Art. 832)
2. Collision
 impact of 2 vessels both of which are Cases covered by collision and allision:
moving. 1. One vessel at fault - such vessel is liable
for damage caused to innocent vessel as
Allision well as damages suffered by the owners
 impact between a moving vessel and a of cargo of both vessels.
stationary one. 2. Both vessels at fault - each vessel must
bear its own loss, but the shippers of
Zones of Time in the Collision of vessels: both vessels may go against the ship
1. First zone - all time up to the moment owners who will be solidarily liable.
when risk of collision begins; 3. Vessel at fault not known - same as rule
2. Second zone - time between moment as (2).
when risk of collision begins and 4. Third vessel at fault - same rule as (1).
moment it becomes a practical certainty; 5. Fortuitous event - no liability. Each
3. Third zone - time when collision is bears its own loss.
certain and time of impact.
Prerequisite to recovery:
Error in Extremis - sudden movement made by  Protest should be made within 24 hours
a faultless vessel during the 3rd zone of collision before the competent authority at the point
with another vessel which is at fault during the of collision or at the first port of arrival, if in
2nd zone. Even if such sudden movement is the Philippines and to the Philippine consul,
wrong, no responsibility will fall on said if the collision took place abroad. (Art. 835)
faultless vessel. (Urrutia and Co. v. Baco River  Injuries to persons and damage to cargo of
Plantation Co., 26 PHIL 632). owners not on board on collision time need
not be protested. (Art. 836)
Rules on Collision of Vessels under Code
Doctrine of “Inscrutable Fault”
Page 74 of 199
 In case of collision where it cannot be examining the circumstances. The

determined which between the two vessels captain shall have the deciding vote
was at fault, both vessels bear their 5. the agreement shall be drafted and the
respective damage, but both should be proper minutes shall be signed and
solidarily liable for damage to the cargo of entered in the log book
both vessels. 6. objections and protests shall likewise
entered in the minutes
Note: The Doctrine of Limited Liability applies
in case of collisions, but it shall be limited only 4. Shipwreck
to the value of the vessel with all its  loss of the vessel at sea as a consequence of
appurtenances and freightage earned during the its grounding, or running against an object
voyage. When the latter is not sufficient to cover in sea or on the coast.
all the liabilities, the indemnity due by reason of
the death or injury of persons shall have Rules pertaining to Shipwrecks:
preference. (Arts. 837 and 838) 1. Losses and deteriorations suffered by a
vessel and her cargo shall be
3. Arrival Under Stress individually for the account of the
 arrival of a vessel at a port of destination on owners. (Art. 840)
account of lack of provision, well founded 2. If the wreck was due to malice,
fear of seizure, pirates, or accidents of sea negligence or lack of skill of the captain,
disabling navigation. (Art. 819) the owner of the vessel may demand
indemnity from said captain.(Art. 841)
When not lawful: 3. Goods saved shall be specially bound for
1. lack of provisions due to negligence to the payment of the expenses of the
carry according to usage and customs; respective salvage and must be paid
2. risk of enemy not well known or before they are delivered, with
manifest preference over any other obligation if
3. defect of vessel due to improper repair; the merchandise should be sold. (Art.
and 842)
4. malice, negligence, lack of foresight or 4. If several vessels sail under convoy, and
skill of captain. (Art. 820) any of them should be wrecked, the
cargo saved shall be distributed among
Who bears expenses: the rest in proportion to the amount
 The ship-owner or ship agent shall be with each one is able to take. (Art. 843)
liable but they shall not be liable for the 5. Any goods taken on board saved from
damages caused by the shippers by reason the wreck shall continue his course and
of a lawful arrival. (Art. 821) upon arrival shall deposit the same. (Art.
 The captain shall be liable for damages 844)
caused by his delay, if after the cause of the 6. If there is no person interested in the
arrival under stress has ceased, he continues cargo who can pay the expenses and
the voyage. (Art. 825) freightage corresponding to the salvage,
it may be sold to cover the same. (Art.
Steps to be Taken in the Determination of the 845)
Propriety of Arrival Under Stress:
1. the captain should be determine during H. Salvage
the voyage if there is well founded fear  services one person render to the owner of a
of seizure, privateers and other valid ship or goods, by his own labor, preserving
grounds the goods or the ship which the owner or
2. the captain shall then assemble the those entrusted with the care of them have
officers either abandoned in distress at sea, or are
3. the captain shall summon the persons unable to protect or secure.
interested in the cargo who may be
present and who may attempt but
without right to vote Kinds of Salvage Services:
4. the offices shall determine and agree if 1. voluntary - wherein the compensation is
there is well founded reason after dependent upon success
Page 75 of 199
2. rendered under a contract for a per diem or government (Secs. 11-12).

per horam voyage, payable at all events 3. If a vessel is the
3. under a contract for a compensation payable salvor, the reward shall be distributed as
only in case of success follows:
a. 50% to the
Contract of Towage - contract whereby one ship-owner;
vessel, usually motorized, pulls another, b. 25% to the
whether loaded or not with merchandise, from captain; and
one place to another, for compensation. It is a c. 25% to the
contract for services rather than a contract of officers and crew in proportion to
carriage. their salaries (Sec. 13)
SALVAGE TOWAGE Rights Obligations of Salvors and Owners

1. governed by 1. governed by Civil Salvors:
special law (Act Code on contract 1. Entitled to compensation for services
No. 2616) of lease rendered.
2. requires success, 2. success not 2. Acquires a lien upon the property
otherwise no required salvaged until he is compensated.
payment 3. To all intents and purposes, he is a joint
3. must be done 3. only the consent owner and if the property is lost he must
with the consent of the tugboat bear his share.
of the owner is needed 4. Acquires the right of possession of
captain/crewme derelict for purposes of a salvage claim.
n 5. Entitled to half of the deposit of the
4. vessel must be 4. vessel need not derelict sold, if after the lapse of 3 years
involved in an be involved in an no claim was made.
accident accident
5. fees distributed 5. fees belong to the Owners:
among crewmen tugboat owner 1. He does not renounce his right to the
derelict.
Requisites for Salvage Award: 2. Has a right to the delivery of the vessel
1. Valid object of salvage or things saved after the salvage is
2. Object must have been exposed accomplished, provided he pays or gives
to marine peril a bond.
3. Salvage services rendered 3. Should make a claim within 3 months
voluntarily after the publication of a salvage report,
4. Salvage services are successful otherwise the thing saved shall be sold.
4. Entitled to the salvage reward for the
Derelict – a ship or her cargo, which is use of his vessel in rendering salvage
abandoned and deserted at sea by those who services.
were in charge of it, without any hope of
recovering it, or without any intention of
returning to it. THE CORPORATION CODE OF THE
PHILIPPINES
Rules on Salvage Award: Batas Pambansa Bilang 68 (May 1, 1980)
1. The reward is
fixed by the RTC judge in the absence of TITLE I
agreement or where the latter is excessive GENERAL PROVISIONS
(Sec. 9).
2. If sold (no claim Definitions and Classifications
being made within 3 months from
publication), the proceeds, after deducting Sec. 2. Corporation defined.
expenses and the salvage claim, shall go to  A corporation is an artificial being created
the owner; if the latter does not claim it by operation of law, having the right of
within 3 years, 50% of the said proceeds succession and the powers, attributes and
shall go to the salvors, who shall divide it
equitably, and the other half to the
Page 76 of 199
properties expressly authorized by law or house counsel (Sec 11, Rule 14, Rules
incident to its existence. of Court)
5. Changes in individual membership -
Attributes of a Corporation: (CARP) Remains unchanged and unaffected
1. It is an artificial being. in its identity by changes in its
2. It is created by operation of law. individual membership
3. It enjoys the right of succession. 6. Entitlement to constitutional
4. It has the powers, attribute and guarantees:
properties expressly authorized by law • Due Process
or incident to its existence. • Equal protection of the law
• Protection against
THEORIES on the Formation of a unreasonable searches and
Corporation: seizures
1. Concession Theory – a corporation is an
NOTE: A corporation is not entitled
artificial creature without any existence to invoke the right against self-
until it has received the imprimatur of the incrimination (Bataan Shipyard vs
state acting according to law, through the PCGG)
SEC. 7. Liability for torts – a corporation is
liable whenever a tortuous act is
2. Theory of corporate enterprise or committed by an officer or agent
economic unit – the corporation is not under the express direction or
merely an artificial being, but more of an authority of the stockholders or
aggregation of persons doing business, or an members acting as a body or
underlying business unit. generally, from the directors as the
governing body (PNB vs CA)
3. Genossenschall Theory – treats the 8. A corporation is not entitled to
corporation as the reality of the group as a moral damages because it has no
social and legal entity independent of state feelings, no emotions, no senses
recognition and “concession” (ABS-CBN vs CA)
9. Liability for crimes – since a
Doctrine of Separate Personality corporation is a mere legal fiction, it
 A corporation has a juridical personality cannot be held liable for a crime
separate and distinct from that of its committed by its officers, since it
stockholders or members. does not have the essential element
of malice; in such case the
 Consequences: responsible officers would be
1. Liability for acts or contracts- criminally liable (People vs Tan
obligations incurred by a Boon Kong, 54 Phil 607)
corporation, acting through its
authorized agents are sole its sole Doctrine of Piercing the Veil of
liabilities (Creese vs CA, 93 SCRA Corporate Entity
483)  Requires the court to see through the
2. Right to bring actions – may bring protective shroud which exempts its
civil and criminal actions in is own stockholders from liabilities that they
name in the same manner as natural ordinarily would be subject to, or
persons (Art 46, NCC) distinguishes a corporation from a
3. Right to acquire and possess seemingly separate one, were it not for the
property – property conveyed to or existing corporate fiction (Lim vs CA, 323
acquired by the corporation is in law SCRA 102)
the property of the corporation itself
as a distinct legal entity and not that Extent: The application of the doctrine to a
of the stockholders or members (Art particular case does not deny the
44(3), NCC) corporation of legal personality for any and
4. Acquisition of court of jurisdiction – all purposes, but only for the particular
service of summons may be mad on transaction or instance for which the
the president, general manager,
corporate secretary, treasure or in-
Page 77 of 199
doctrine was applied (Koppel v. Yatco 77 2. Numbers of incorporators

Phil. 496) 2. Requires at least 5 2. Requires at least 2
Rules: incorporators; partners;
1. has only a res judicata effect
2. to prevent wrong or fraud and not 3. Commencement of juridical
available for other purposes personality
3. judicial prerogative only Acquires juridical Acquires juridical
4. must be with necessary and factual personality from the personality form the
basis date of issuance of moment of execution
3 Classes of Piercing: the certificate of of the contract of
1. Fraud Cases – when a corporation is incorporation by the partnership
used as a cloak to cover fraud, or to do Securities and
wrong. Exchange
2. Alter Ego Cases – when the corporate Commission
entity is merely a farce since the corporation 4. Powers
is an alter ego, business conduit or Corporation can Partnership may
instrumentality of a person or another exercise only the exercise any power
corporation powers expressly authorized by the
3. Equity cases – when piercing the granted by law or partners (provided it
corporate fiction is necessary to achieve implied from those is not contrary to
justice or equity. granted or incident law, morals, good
to its existence customs, public
Instrumentality / Alter Ego Rule order, public policy)
 where one corporation is so organized and
controlled and its affairs are conducted so 5. Management
that it is, in fact, a mere instrumentality or The power to do the When management
adjunct of the other, the fiction of the business and is not agreed upon,
corporate entity of the “instrumentality” manage its affairs every partner is an
may be disregarded. is vested in the agent of the
board of directors partnership
Requisites: and trustees
1. There must be control, not mere 6. Effect of mismanagement
majority or complete stock control, but The suit against a A partner as such
complete domination, not only of member of the board can sue a co-partner
finances, but of policy, and business of directors or who mismanages
practice in respect to the transaction trustees who
attacked so that the corporate entity as mismanages must be
to this transaction had, at that time, no in the name of the
separate mind, will or existence of its corporation
own (control); 7. Right of succession
2. Such control must have been used by the Has right of Has nor right of
defendant to commit fraud or wrong, to succession succession
perpetrate the violation of a statutory or
other positive duty, or dishonest and 8. Extent of liability to third persons
unjust act in contravention of plaintiff’s
Stockholders are Partners are liable
legal rights (breach of duty); and
liable only to the personally and
3. Such control and breach of duty must
extent of the shares subsidiarily
proximately cause the injury to the
subscribed by them (sometimes
plaintiff. (proximate cause)
solidarily) for
partnership debts to
CORPORATION PARTNERSHIP third persons
1. Creation
Created by Created by 9. Transferability of interests
operation of law; agreement of the
parties;
Page 78 of 199
Stockholder has Partner cannot 2. Vested in the 2. Vested in the

generally the right to transfer his interest individuals who corporation after
transfer his shares in the partnership so compose the its incorporation
without prior as to make the corporation and not upon the
consent of the other transferee a partner individuals who
stockholders because without the compose it
a corporation is not unanimous consent 3. It cannot be sold 3. It may be sold or
based on this of all existing or transferred transferred;
principle partners because the because it is subject to sale on
partnership is based inseparable from execution, subject
on the principle of the corporation to levy
delectus itself.
personarum
Basic Advantages of Corporate
10. Term of existence Organizations:
May not be formed May be established 1. Separate juridical personality
for a term in excess for any period of 2. Limited liability of investors
of 50 years time stipulated by 3. Free transferability of units of
extendible to no the partners ownership
more than 50 years 4. Centralized management
in any one instance
Circumstance rendering the Subsidiary in
11. Firm name a Parent-Subsidiary Relationship an
May adopt any name Limited partnership instrumentality:
provided it is not the is required by law to a. The parent corporation owns all or most
same as or similar to add the word “Ltd” of the capital stock of the subsidiary.
any registered firm to its name b. The parent and subsidiary corporations
name have common directors or officers.
12. Dissolution c. The parent corporation finances the
Can only be May be dissolved at subsidiary.
dissolved with the any time by or all of d. The parent corporation subscribes to all
consent of the State the partners the capital stock of the subsidiary or
13. Governing Law otherwise causes its incorporation.
Governed by the Governed by the e. The subsidiary has grossly inadequate
Corporation Code Civil Code capital.
f. The subsidiary has substantially no
Franchises of Corporations: business except with the parent
1. Primary or corporate franchise corporation or no assets except those
 The right or privilege granted by the conveyed to or by the parent
State to individuals to exist and act as a corporation.
corporation after its incorporation. g. In the papers of the parent corporation
2. Secondary or special franchise or in the statements of its officers, the
subsidiary is described as a department
 The special right or privilege conferred
or division of the parent corporation, or
upon an existing corporation to the
its business or financial responsibility is
business for which it was created.
referred to as the parent corporation's
Example, use of the streets of a
own.
municipality to lay pipes or tracks, or
h. The parent corporation uses the
operation of a messenger and express
property of the subsidiary as its own.
delivery service.
i. The directors or executives of the
subsidiary do not act independently in
PRIMARY SECONDARY
the interest of the subsidiary but take
1. Refers to the 1. Refers to the their orders from the parent
franchise of being exercise of rights. corporation.
or existing as a Example: right of j. The formal legal requirements of the
corporation eminent domain subsidiary are not observed.
Page 79 of 199
The mere fact that a corporation owns resist a suit by a state brought to
all of the stocks of another challenge its existence; a de facto
corporation, taken alone is not corporation cannot sustain its
sufficient to justify their being treated right to exist
as one entity. If used to perform c. Corporation by estoppel – group of
legitimate functions, a subsidiary's separate persons that assumes to act as a
existence may be respected, and the liability corporation knowing it to be without
of the parent corporation as well as the authority to do so, and enters into a
subsidiary will be confined to those arising transaction with a third person on the
in their respective business. (PNB vs strength of such appearance. It cannot
Ritratto Group Inc. GR No. 142616) be permitted to deny its existence in an
action under said transaction. (Sec. 21)
SEC. 3. CLASSES OF CORPORATIONS. It is neither de jure nor de facto.
1. AS TO ORGANIZERS: d. Corporation by prescription – one which
a. Public – by State only; and has exercised corporate powers for an
b. Private – by private persons alone or indefinite period without interference on
with the State. the part of the sovereign power, e.g.
2. AS TO FUNCTIONS: Roman Catholic Church.
a. Public – government of a portion of the 5. AS TO EXISTENCE OF SHARES OF
territory; and STOCK:
b. Private – usually for profit-making a. Stock corporation – a corporation:
c. Quasi-public – those private corps. 1. whose capital stock is divided
which have accepted from the state the into shares and
grant of a franchise or contact involving the 2. which is authorized to
performance of public duties. distribute to shareholders
3. AS TO GOVERNING LAW: dividends or allotments of
a. Public – Special Laws; and the surplus profits on the
b. Private – Law on Private Corporations basis of the shares held. (Sec.
4. AS TO LEGAL STATUS: 3)
a. De jure corporation – organized in b. Non-stock Corporation – does not issue
accordance with the requirements of stocks nor distribute dividends to their
law. members.
b. De facto corporation – organized with a 6. AS TO RELATIONSHIP OF
colorable compliance with the MANAGEMENT AND CONTROL:
requirements of a valid law. Its existence a. Holding corporation - it is one which
cannot be inquired collaterally. Such controls another as a subsidiary by the
inquiry may be made by the Solicitor power to elect management.
General in a quo warranto proceeding. b. Subsidiary corporation
(Sec. 20) 1. Majority-owned subsidiary – where
 Requisites: one corporation owns 51% to 94% of
1. The existence of a valid law the capital stock of another
under which it may be corporation.
incorporated; 2. Wholly-owned subsidiary – where
2. A bona fide attempt in good one corporation holds 95% to 100%
faith to incorporate under of the capital stock of another
such law; corporation.
3. Actual use or exercise in c. Affiliates - company that is subject to
good faith of corporate common control of a mother holding
powers; and company and operated as part of the
4. Issuance of certificate of system.
incorporation by the SEC as d. Parent and Subsidiary Corporation -
a minimum requirement of separate entities with power to contract
continued good faith with each other.
NOTE: The only difference between a  The board of directors of the parent
de facto corporation and a de company determines its
jure corporation is that a de representatives to attend and vote in
jure corporation can successfully
Page 80 of 199
the stockholder’s meeting of its portion thereof.

subsidiary.
 The stockholders of the parent QUASI- QUASI-PUBLIC
company demand representation in CORPORATION CORPORATION
the board meetings of its subsidiary. 1. Not a full corp.; 1. A full corp.;
7. AS TO PLACE OF INCORPORATION:
a. Domestic corporation - a corporation 2. An 2. An
formed, organized, or existing under instrumentality of instrumentality of
Philippine laws. the state. private individuals.
b. Foreign corporation – a corporation
formed, organized, or existing under any SEC. 4. CORPORATIONS CREATED BY
laws other than those of the Philippines. SPECIAL LAWS OR CHARTERS.
(see sec. 123)  Governed primarily by the provisions of the
special law or charter creating them or
Government-owned or controlled applicable to them, supplemented by the
corporations (GOCC): provisions of this Code insofar as they are
 They are not immune from suits; applicable.
 Employees of GOCCs are governed by Civil
Service if created by special law and by Charter – refers to the law under which it is
Labor Code if created under corporation created which may be either the general law (i.e.
law; B.P. Blg. 68.) or a special law.
 While public services operated by  It includes the articles of
government entities and GOCCs, are again incorporation and by-laws of the
placed under the jurisdiction of the Public corporation and all laws including the
Service Commission, they are not required Constitution applicable thereto.
to secure certificates of public convenience
before commencing operations; SEC. 5. CORPORATORS AND
INCORPORATORS, STOCKHOLDERS
Quasi-Corporations: AND MEMBERS.
 Public bodies which are not corporations in
the full sense but only resemble them in that Components of a Corporation:
they have some of the attributes of 1. Promoter;
corporation, and 2. Incorporators;
 which are created or authorized by the 3. Corporators
legislature as public agencies to aid the State a. stockholders
in, or take charge of, some public or state b. members;
work other than community government, 4. Governing body (absolute control and
for the general welfare. direction)
a. board of directors (stock); or
 They are created for narrow or limited
b. board of trustees (non-stock).
purpose;
5. Managing and administrative body (limited
 They do not have the power and liabilities of
to the general corporate business)
self-governing corporations.
a. executive committee; and
 Example: MMDA, LLDA b. contracted managers.
6. Corporate officers
QUASI- PUBLIC
CORPORATION CORPORATION Promoter - a person who brings about the
1. Possesses only 1. A full corporation; incorporation and organization of a
some corporate corporation.
powers, therefore,  He brings together the persons
not a full corp. who become interested in the enterprise,
2. Organized for the aids in procuring subscriptions and sets in
2. Organized to aid government of a motion the machinery which leads to the
the state in some portion of the state. formation of the corporation itself.
public or state work
other than the
government of a
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Corporators – those who compose a The owners thereof are entitled to a


corporation, whether as stockholders or as pro rata share in the profits of the
members. corporation and in its assets upon
 Corporators in a stock dissolution and, likewise, in the
corporation are called stockholders or management of its affairs without
shareholders. preference or advantage whatsoever
 Corporators in a non-stock 2. PREFERRED SHARES
corporation are called members.  Those issued with par value, and
preferences either with respect to:
Incorporators - those stockholders or a. Assets after dissolution,
members mentioned in the articles of b. Distribution of dividends, or
incorporation as originally forming and both, and
composing the corporation and who are c. Other preferences.
signatories thereof.  Limitations:
a. If deprived of voting rights, it shall
INCORPORATORS CORPORATORS still be entitled to vote on matters
1. Signatory to the 1. Stockholder enumerated in Sec 6, paragraph 6
Articles of (stock b. Preference must not be violative of
Incorporation corporation) or the Code
member (non- c. May be issued only with a stated par
stock value
corporation) d. The board of directors may fix the
2. Fait accompli; 2. They may cease terms and conditions only when so
accomplished fact to be such if they authorized by the articles of
(the Articles of subsequently lose incorporation and such terms and
Incorporation their conditions shall be effective upon
cannot be amended qualifications filing a certificate thereof with the
to replace them) SEC
4. Number is limited 3. No restriction as  Kinds:
to 5-15 to number a. Cumulative preferred share
4. Must have 4. May be such b. Non-cumulative preferred share
contractual capacity through a c. Participating preferred share
guardian d. Non-participating preferred share
e. Cumulative-participating preferred
SEC. 6. CLASSIFICATION OF SHARES. share
Limitations: 3. REDEEMABLE SHARES
 No share may be deprived of voting  Those which permit the issuing
rights except those classified and issued corporation to redeem or purchase its
as “preferred” or “redeemable” shares. own shares
 There shall always be a class or series of  Limitations:
shares that have complete voting rights. a. Issued only when expressly provided
 Any or all of the shares or series of for in the articles of incorporation;
shares may have a par value or have no b. The terms and conditions affecting
par value as may be provided for in the said shares must be stated both in
articles of incorporation, except that the articles of incorporation and in
banks, trust companies, insurance the certificates of stock representing
companies, public utilities, and building such shares;
and loan associations shall not be c. May be deprived of voting rights in
permitted to issue no-par value shares of the articles of incorporation, unless
stock. otherwise provided in the Code
 May be redeemed, regardless of the
1. COMMON SHARES existence of unrestricted retained
 The basic class of stock ordinarily earnings (Sec. 8), provided that the
and usually issued without corporation has, after such redemption,
extraordinary rights and privileges, sufficient assets in its books to cover
and
Page 82 of 199
debts and liabilities inclusive of capital the following fundamental matters:

stock (AASIIMID)
4. TREASURY SHARES a. Amendment of Articles of
 Shares that have been earlier issued as Incorporation;
fully paid, and have thereafter been b. Adoption and amendment of by-
acquired by the corporation by laws;
purchase, donation, and redemption or c. Sale or disposition of all or
through some lawful means. (Sec. 9) substantially all of corporate
 If purchased from stockholders: It is in property;
effect a return to the stockholders of the d. Incurring, creating or increasing
value of their investment in the bonded indebtedness;
company and a reversion of the shares e. Increase or decrease of capital
to the corporation. stock;
 The corporation must have surplus f. Merger or consolidation of
profits with which to buy the shares corporation;
so that the transaction will not cause g. Investments of corporate funds
an impairment of the capital. in another corporation or another
 If acquired by donation from the business purpose; and
stockholders: Amounts to a surrender of h. Corporate dissolution. (Sec. 6)
their stock without getting back their 8. ESCROW STOCK
investments that are instead, voluntarily  Deposited with a third person to be
given to the corporation. delivered to a stockholder or his assign
 Need not be sold at par or issued value after complying with certain conditions,
but may be sold at the best price usually payment of full subscription
obtainable, provided it is reasonable. price.
 When treasury shares are sold below its 9. OVER-ISSUED STOCK
par or issued value, there can be no  Stock issued in excess of the authorized
watering of stock because such watering capital stock.
contemplates an original issuance of  It is also known as spurious stock.
shares.  Its issuance is considered null and void.
 Not entitled to dividends and may not be 10. WATERED STOCK
voted  A stock issued not in exchange for its
5. FOUNDERS' SHARE equivalent either in cash, property,
 Shares issued to organizers and share, stock dividends, or services.
promoters of a corporation in  “Water” in the stock represents the
consideration of some supposed right or difference between the fair market value
property. at the time of the issuance of the stock
 May be given special preference and the par or issued value of said stock
in voting rights and dividend payments.  It includes stocks:
 But if an exclusive right to vote a. Issued without consideration
and be voted for as director is granted, b. Issues as fully paid when in the
this privilege is subject to approval by corporation has received a lesser
the SEC, and cannot exceed 5 years from sum of money than its par value
the date of approval. c. Issued for a consideration other than
6. VOTING SHARES actual cash, the fair valuation of
 Shares with a right to vote. which is less than its par or issued
7. NON-VOTING SHARES value
 Shares without right to vote. d. Issues s stock dividend when there
 The law only authorizes the denial of are no sufficient retained earnings to
voting rights in the case of redeemable justify it
shares and preferred shares, 11. PAR VALUE SHARES
provided that there shall always be a  Shares with a value fixed in the
class or series of shares which have certificates of stock and the articles of
complete voting rights. incorporation.
 When such voting rights are denied, it 12. NO PAR VALUE SHARES
shall nevertheless be entitled to vote on
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 Shares having no par value but have  In the absence thereof, by the
issued value stated in the certificate or stockholders representing at least a
articles of incorporation. majority of the outstanding capital stock
 Limitations: at a meeting duly called for the purpose.
a. No par value shares cannot have (Sec. 62)
an issued price of less than P5.00; 13. STREET CERTIFICATE
b. The entire consideration for its  A stock certificate endorsed by the
issuance constitutes capital so that registered holder in blank and transferee
no part of it should be distributed as can command its transfer to his name
dividends; from the issuing corporation.
c. They cannot be issued as 14. CONVERTIBLE SHARE
preferred stocks;  A share a share that is changeable by the
d. They cannot be issued by banks, stockholder from one class to another at
trust companies, insurance a certain price and within a certain
companies, public utilities and period.
building and loan association; 15. FRACTIONAL SHARE
e. The articles of incorporation  A share with a value of less than one full
must state the fact that it issued no share.
par value shares as well as the
number of said shares; DOCTRINE OF EQUALITY OF SHARES
f. Once issued, they are deemed  Where the articles of incorporation do not
fully paid and non-assessable. (Sec. provide for any distinction of the shares of
6) stock, all shares issued by the corporation
 Advantages of no-par shares: are presumed to be equal and enjoy the
1. Does not pretend to place a definite same rights and privileges and are also
money value on the share, and subject to the same liabilities. (Sec. 6)
therefore, is less likely to mislead
naïve investors who may take e par CORPORATE INDEBTEDNESS AND
value printed on the certificate as a BONDS:
representation of the present actual
value of the share. I. Promissory Note – complete in itself and
2. Allow flexibility of price. which is ordinarily used for short-term
3. On the part of the shareholder, the loans;
disappearance of personal liability II. Bond – for long-term obligations and which
for unpaid stock subscription as they is usually issued as a series under a single
are deemed fully paid and non- instrument known as trust indenture.
assessable.  The bonds are the
4. Afford a possible remedy for, or at instruments representing the contract of
least a means of relief from, the evil the corporation to pay the holder or
of over-capitalization and stock owner a definite sum of money at a
watering. definite time, together with periodic
 Disadvantages: payments of interest.
1. They legalize instead of restrict large
issues of stock property; a. Mortgage Bond – secured by a
2. They conceal what money or mortgage constituted on
property a share represents; corporate physical property.
3. They permit the issuance of a  The property is conveyed to a
maximum of watered stock at a trustee for the benefit of the
minimum risk. bondholder in case the
interest or principal is
The issued price of no-par value shares may be defaulted;
fixed:
 In the articles of incorporation b. Equipment Bond – secured by a
 By the board of directors pursuant to mortgage or pledge of corporate
authority conferred upon it by the movable equipments.
articles of incorporation or the by-laws
Page 84 of 199
c. Collateral Trust Bond – not b. The solicitation of pre-incorporation

secure by a lien on physical subscriptions, subject to the
property of the corporation but by requirement of the Securities Act,
a lien on securities deposited with such as the registration and/or
a trustee as collateral. licensing of securities.
 Such securities may consist of
shares or bonds issued by the 2. Incorporation – the act or process of
subsidiaries of the corporation forming or creating a corporation.
and it may also consist of  It refers to the performance of
bonds of a small operating conditions, act, deeds and writings
company which the by the incorporator and the official
corporation controls; acts and certification of record,
which give the corporations its
d. Guaranteed Bond – secured by a existence.
guaranty of a corporation other
then the one issuing it; 3. Organization and commencement of
business operations.
e. Debentures – not secured by any
specific mortgage, lien or pledge SEC. 10. NUMBER AND
on specific corporate property but QUALIFICATIONS OF
by the general credit of the INCORPORATORS.
corporation and restrictive
agreements; Incorporators
 They are those mentioned in the Articles of
f. Income Bond – one the principal Incorporation as originally forming and
of which may or may not be composing the corporation, having signed
secured by a mortgage, but the the Articles and acknowledged the same
interest is payable only out of net before a notary public.
profits;  Qualifications:
g. Coupon Bond – those to which 1. Natural person;
are attached a sheet of dated, 2. Not less than 5 but not more
numbered and similarly printed than 15;
coupons which the bondholders 3. Of legal age;
may cut off when due or 4. Majority must be residents of the
thereafter. Philippines; and
 Such coupons may be served 5. Each must own or subscribe to at
and deposited in a bank, least one share.
negotiated before the maturity  Effect of lack of qualifications: Failure
of the interest they represent, to comply with them substantially will
and transferred just like any prevent the formation of a de jure corp. But
commercial paper. the lack of requisite qualifications cannot be
collaterally raised, and the corporation has a
TITLE II de facto existence.
INCORPORATION AND ORGANIZATION  General Rule: Only natural persons can
OF PRIVATE CORPORATIONS be incorporators.
Exception: When otherwise allowed by law,
STEPS IN THE CREATION OF e.g., Rural Banks Act of 1992, where
CORPORATIONS: incorporated cooperatives are allowed to be
1. Promotion –the act of getting it upon incorporators of rural banks. Note:
organizing it, and procuring of subscriptions However, it is undeniable that
to its capital stock. It includes: corporations can be Corporators.
a. The taking of preliminary options
and the making of promotion and SEC. 11. CORPORATE TERM.
financing arrangement by the  Limitations:
organizers or promoters with the aid a. The term shall not exceed 50 years in
of competent legal advisers; any one instance
Page 85 of 199
b. The extension cannot be made  The amount paid by the stockholders on

earlier than 5 years prior to the subscriptions from unissued shares of
expiration date unless there are the corporation.
justifiable reasons as determined by the
SEC Minimum Capital Stock (MCS):
c. The amendment shall be effected
before the expiration of the corporate GENERAL RULE: No minimum required for
term, for after dissolution by expiration capital stock under the Corporation Code (Sec.
of the corporate term there is no more 12). However, the MCS, in effect, is P5,000
corporate life to extend because the minimum paid-up capital required
EXCEPTION: Doctrine of Relation - under the Code is P5,000 (Sec. 13).
extension was not achieved due to EXCEPTIONS:
insurmountable intervening event, A. As provided by special law:
which the corporation cannot avoid even 1. Domestic Insurance
with the exercise of prudence. Corporations - P500T capital stock; 50%
subscribed and the balance payable in 12
SEC. 12. MINIMUM CAPITAL STOCK months.
REQUIRED OF STOCK CORPORATIONS. 2. Private Development Banks
- P4M for class A
DEFINITION OF TERMS: - P2M for class B
1. CAPITAL STOCK OR LEGAL STOCK OR - P1M for class C
STATED CAPITAL 3. Investment Companies – paid up
 Amount fixed in the corporate charter to at least P500T
be subscribed and paid in cash, kind or 4. Savings and Loan Corporation –
property at the organization of the to be fixed by the Monetary Board, but
corporation or afterwards and upon not less than P100T
which the corporation is to conduct its 5. Financing Companies 1
operation. Paid up: - P2M for Metro Manila
2. CAPITAL - P1M for Cities
 The value of the actual property or estate - P500T for others
of the corporation whether in money or B. Provided that at least 25% of the
property. Its net worth (or stockholder’s authorized capital stock has been subscribed
equity) is its assets less liabilities. and at least 25% of the total subscription
3. AUTHORIZED CAPITAL STOCK must be paid up
 The capital stock divided into shares
with par values. Sec. 13. AMOUNT OF CAPITAL STOCK
 Par value stocks are required in the case TO BE SUBSCRIBED AND PAID FOR
of corporations issuing preferred shares, THE PURPOSES OF INCORPORATION.
as well as in the case of banks, trust
companies, insurance companies, MINIMUM SUBSCRIBED CAPITAL STOCK
building and loan associations, and  25% of authorized capital stock
public utilities. It is the total amount in
the charter, which may be raised by the MINIMUM PAID-UP CAPITAL
corporation for its operations.  25% of total subscription must be paid upon
4. SUBSCRIBED CAPITAL STOCK subscription but must not be less than
 The total amount of the capital stock P5,000.
subscribed whether fully paid or not.
5. OUTSTANDING CAPITAL STOCK NOTE: Non-resident aliens should pay their
 The portion of the capital stock issued to subscriptions in full unless a resident assumes
subscribers except treasury stocks. the balance. The subscription payments of the
6. STATED CAPITAL non-resident aliens shall not be included in the
 The capital stock divided into no par computation of the 25% minimum paid-up
value shares. capital requirement.
7. PAID-UP CAPITAL
Ways of increasing the capital stock:
1. By increasing the number of
shares and retaining the par value;
Page 86 of 199
2. By increasing the par value of SEC. 14. CONTENTS OF THE ARTICLES

existing shares without increasing the OF INCORPORATION.
number of shares;
3. By increasing the number of ARTICLES OF INCORPORATION
shares and increasing the par value.  The document prepared by the persons
4. By reinvesting retained establishing a corporation and filed with the
earnings to the capital and issuing stock SEC containing the matters required by the
dividends Code.
 Significance:
Tools available to a stockholder to 1. Its issuance signals the birth of the
replenish capital: corporation’s juridical personality;
1. Additional subscription to shares of 2. It is an essential requirement for the
stock of the corporation by stockholders existence of a de facto corporation.
or by investors;
2. Advances by the stockholders to the  Contents:
corporation; 1. Name of corporation;
3. Payment of unpaid subscription by the 2. Purpose/s, indicating the
stockholders. primary and secondary purposes;
3. Place of principal office;
Trust Fund Doctrine (TFD) 4. Term of existence;
 The subscribed capital stock of the 5. Names, citizenship and
corporation is a trust fund for the payment residences of incorporators;
of debts of the corporation which the 6. Number, names, citizenship and
creditors have the right to look up to satisfy residences of directors or trustees;
their credits, and which the corporation may 7. Names, nationalities, and
not dissipate. residences of the persons who shall act
 The creditors may sue the stockholders as directors or trustees until the first
directly for the latter’s unpaid subscription. regular ones are elected and qualified;
8. If a stock corporation, the
Application of the TFD: amount of its authorized capital stock,
1. Where the corporation has distributed its number of shares and in case the shares
capital among the stockholders without are par value shares, the par value of
providing for the payment of creditors; each share;
2. Where it had released the subscribers to the 9. Names, residences, number of
capital stock from their subscriptions; shares, and the amounts subscribed and
3. Where it has transferred the corporate paid by each of the original subscribers
property in fraud of its creditors; and which shall not be less than 25% of
4. Where the corporation is insolvent. authorized capital stock;
10. If non-stock, the amount of
capital, the names, residences, and
Coverage of the TFD: amount paid by each contributor, which
1. If the corporation is solvent, the TFD shall not be less than 25% of total
extends to the capital stock represented by subscription;
the corporation’s legal capital. 11. Name of treasurer elected by
2. If the corporation is insolvent, the TFD subscribers; and
extends to the capital stock of the 12. If the corporation engages in a
corporation as well as all of its property and nationalized industry, a statement that
assets. no transfer of stock will be allowed if it
will reduce the stock ownership of
Exceptions to the TFD: Filipinos to a percentage below the
Redemption of redeemable shares (Sec. 8) required legal minimum.
1. In close corporation, when there should be a
deadlock and the SEC orders the payment of  The articles of incorporation of any stock
the appraised value of the stockholder’s corporation must be accompanied by a
share. (Sec. 104) Treasurer’s Affidavit showing that:
Page 87 of 199
 At least 25% percent of the Note:

authorized capital stock of the  appraisal right of dissenting
corporation has been subscribed, stockholders is available
and  meeting of stockholders is not necessary
 At least 25% of the total subscription
has been fully paid to him in actual Effectivity of amendment:
cash and/or in property the fair  upon their approval by the SEC; or
valuation of which is equal to at least  from the date of filing with the said
25% percent of the said subscription, Commission if not acted upon within six (6)
such paid-up capital being not less months from the date of filing for a cause
than P5,000.00. not attributable to the corporation.
SEC. 16. AMENDMENT OF ARTICLES OF Sec. 17. Grounds when articles of

INCORPORATION incorporation or amendment may be
rejected or disapproved.
Limitations: 1. the articles or its amendment is not
1. The amendment of any provision or substantially in accordance with the
matters stated in the articles pf form prescribed
incorporation is not allowed when it will 2. The purposes of the corporation are
be contrary to the provisions or patently unconstitutional, illegal,
requirement prescribed by the Code or immoral, or contrary to government
by special law or changes any provision rules and regulations
in the articles of incorporation stating an 3. The Treasurer’s Affidavit concerning the
accomplished fact amount of capital stock subscribed
2. It must be legitimate purposes and/or paid is false
3. It must be approved by the required vote 4. The required percentage of ownership of
of the board of directors or trustees and the capital stock to be owned by Filipino
the stockholders or members citizens ahs not been complied with
4. The original articles and amended
articles must contain all provisions Note: The SEC shall give the incorporators a
required by law to be set out in the reasonable time within which to correct or
articles on incorporation modify the objectionable portions of the articles
5. Such articles, as amended, must be or amendment.
indicated by underscoring the changes
made, and a copy thereof duly certified Grounds for suspension or revocation of
under oath by the corporate secretary Certificate of Incorporation (Pres.
and a majority of the directors or Decree No. 902-A)
trustees stating that the amendments 1. Fraud in procuring its certificate of
have been duly approved by the required incorporation
vote of the stockholders or members 2. Serious misrepresentation as to what the
must be submitted to the SEC corporation can do or is doing to the
6. If the corporation is governed by special great prejudice of, or damage to, the
law, the amendments must be general public
accompanied by a favorable 3. Refusal to comply with or defiance of a
recommendation of the appropriate lawful order of the SEC restraining the
government agency commission of acts which would amount
to a grave violation of its franchise
Vote requirement: 4. Continuous inoperation for a period of
 majority vote of the board of directors or at least 5 years
trustees and 5. Failure to file the by-laws within the
 the vote or written assent of the required period
stockholders representing at least 2/3 of the 6. Failure to file required reports
outstanding capital stock or the vote or
written assent of at least 2/3 of the Non-amendable facts in the articles on
members if it be a non-stock corporation. incorporation
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 Those matters referring to facts existing

as of the date of the incorporation such Note: The doctrine of secondary meaning
as: originated in the field of trademark law. Its
1. Names of incorporators; application has, however, been extended to
2. Names of original subscribers to corporate names since the right to use a
the capital stock of the corporate name to the exclusion of others is
corporation and their subscribed based upon the same principle which underlies
and paid up capital; the right to use a particular trademark or trade
3. Treasurer elected by the original name. (Lyceum of the Phil vs. CA, G.R. No.
subscribers; 101897)
4. Members who contributed to the
initial capital of non-stock Sec. 19. Commencement of corporate
corporation; existence.
5. Date and place of execution of  From the date the SEC issues a certificate of
the articles of incorporation; incorporation under its official seal
6. Witnesses to the signing and
acknowledgment of the article Sec. 20. De facto corporations.
 A corporation has a de facto existence where
A certificate of authority is required for the there is a bona fide attempt to incorporate,
following: colorable compliance with the statute and
1. banks, building and loan associations, user of corporate powers
finance companies – Monetary Board  Its existence cannot be inquired
2. insurance companies – Insurance collaterally. Such inquiry may be made by
Commission the Solicitor General in a quo warranto
3. educational institutions – Secretary of proceeding
Education  The only entity that can attack the de facto
4. Public utilities – Land Transportation existence of a corporation is the State and
Commission, Civil Aeronautics Board, only by a direct proceeding called quo
National Telecommunications warranto specifically sought for the purpose
Commission, etc. of ousting the corporators from their right
to exist as a corporation.
Sec. 18. Corporate name.
Requisites of De Facto Corporation:
Prohibitions: 1. The existence of a valid law under which
1. Proposed name is identical or it may be incorporated;
deceptively or confusingly similar to that 2. A bona fide attempt in good faith to
of any existing corporation or to any incorporate under such law;
other name already protected by law or 3. Actual use or exercise in good faith of
2. Patently deceptive, confusing or corporate powers; and
contrary to existing laws. 4. Issuance of a certificate of incorporation
by the SEC as a minimum requirement
Note: When a change in the corporate name is of continued good faith.
approved, the Commission shall issue an
amended certificate of incorporation under the Difference between a de facto corporation and
amended name. a de jure corporation
Doctrine of Secondary Meaning A de jure corporation can successfully resist a

 a word or phrase originally incapable of suit by a state brought to challenge its existence;
exclusive appropriation with reference to an while a de facto corporation cannot sustain its
article on the market, because right to exist.
geographically or otherwise descriptive,
might nevertheless have been used so long Sec. 21. Corporation by estoppel
and so exclusively by one producer with Definition
reference to his article that, in that trade  group of persons that assumes to act as a
and to that branch of the purchasing public, corporation knowing it to be without
the word or phrase has come to mean that authority to do so, and
the article was his product.
Page 89 of 199
 enters into a transaction with a third person cease and the corporation shall be
on the strength of such appearance. deemed dissolved (automatic).
 It cannot be permitted to deny its existence
in an action under said transaction. It is Non-User for 5 Years
neither de jure nor de facto.  When a corporation has commenced the
transaction of its business but
Estoppel to deny corporate existence against subsequently becomes continuously
a. persons who assume to act as a inoperative for a period of at least 5
corporation knowing it to be without years, the same shall be a ground for the
authority to do so suspension or revocation of its corporate
Effect: liable as general partners for all franchise or certificate of incorporation
debts, liabilities and damages incurred (not automatic).
or arising as a result thereof
b. persons who assume an Note: This principle does not apply if the
obligation to an ostensible corporation causes are beyond the control of the
as such corporation as may be determined by the
SEC.
Note: A third party who, knowing an
association to be unincorporated, nonetheless “Formal Organization” and “Commencement
treated it as a corporation and received of the Transaction of Business”
benefits from it, may be barred from denying  Conditions subsequent, which may be
its corporate existence in a suit brought satisfied by substantial compliance in order
against the alleged corporation. In such case, that a corporation may legally continue as
all those who benefited from the transaction such.
made by the ostensible corporation, despite  Formal Organization:
knowledge of its legal defects, may be held liable 1. Adoption of By-Laws and filing of the
for contracts they impliedly assented to or took same with the SEC;
advantage of. (Lim Tong Lim vs. CA, 317 SCRA 2. Election of board of directors/trustees,
728) and officers;
3. Establishment of principal office;
4. Providing for subscription and payment
DE FACTO CORPORATION of capital stock.
CORPORATION BY ESTOPPEL
1. Has a real 1. No real existence TITLE III
existence in law; in law but it is a BOARD OF
mere fiction existing DIRECTORS/TRUSTEES/OFFICERS
only for a particular
case; Sec. 23. The board of directors or
trustees.
2. May exist even if 2. Cannot exist
there are no dealings unless there are A. Qualifications
between the parties dealings between the 1. For a stock corporation, ownership of at
on a corporate basis. parties on a least (1) share of capital stock of the
corporate basis. corporation in his own name and IF he
ceases to own at least one share in his own
name, he automatically ceases to be a
Sec. 22. Effects on non-use of corporate director.
charter and continuous inoperation of a
corporation. For Non-stock Corporation, only members
of the corporation can be elected to seat in
Non-User for 2 Years the Board of Trustees.
 When a corporation does not formally Exception: Trustee in a voting trust may
organize and commence the transaction be elected director/trustee
of its business or the construction of its
works within 2 years from the date of its Note: In order to be eligible as a director,
incorporation, its corporate powers what is material is legal title thereto
(stocks), not beneficial ownership of the
Page 90 of 199
stocks appearing in the books of the

corporation CORPORATE CORPORATE
OFFICER EMPLOYEE
2. A majority of the directors/trustees must be Position is provided Employed by the
residents of the Philippines. for in the by-laws or action of the
under the managing officer of
3. He must not have been convicted by final Corporation Code the corporation
judgment of an offense punishable by RTC has jurisdiction NLRC has
imprisonment for a period exceeding 6 in case of labor jurisdiction in case
years or a violation of the Corporation Code, dispute of labor disputes
committed within 5 years from the date of
his election. (Sec. 27) D. Board of Directors/Trustees as
Repository of Corporate Powers
4. Only natural persons can be elected General Rule: The corporate powers of the
directors/trustees. corporation shall be exercised, all business
conducted and all property of such corporation
5. Other qualifications as may be prescribed in controlled and held by the board of directors or
the by-laws of the corporation. trustees.
B. Additional qualifications for directors Exceptions:

of particular corporations 1. In case of an Executive Committee duly
a. For banks and banking institutions authorized in the by-laws;
and financing corporations, at least 2/3 2. In case of a contracted manager which
of the members of the BODs shall be may be an individual, a partnership, or
citizens of the Philippines; another corporation.
b. For rural banks and registered Note: In case the contracted manager is
investment companies, every member of another corporation, the special rule in
the BODs shall be citizen of the Sec. 44 applies.
Philippines; 3. In case of close corporations, the
stockholders may manage the business
c. For domestic air carriers, the of the corporation instead by the board
directing head and 2/3 or more of the of directors, if the articles of
BODs and other managing officers shall incorporation so provide.
be Filipino citizens.; Note: The power to purchase real property is
d. The management of mass media vested in the board of directors or trustees.
shall be limited to Filipino citizens or to While a corporation may appoint agents to
corporations and/or associations wholly negotiate for the purchase of real property
owned and managed by Filipino citizens; needed by the corporation, the final say will
e. The governing body of every entity have to be with the board, whose approval will
engaged in commercial finalize the transaction. A corporation can only
telecommunications shall be in all cases exercise its powers and transact its business
be controlled by Filipino citizens; through its officers and agents when authorized
f. The control and administration of by a board resolution or by its by-laws (Spouses
education institutions shall be vested to Constantine Firme vs. Bukal Enterprises and
Filipino citizens. Development Corporation, G.R. No. 146608,
Oct 23, 2003)
C. Corporate Officers
1. President – must be a director; E. Limitation on powers of board of
2. treasurer – may or may not be a Directors/Trustees
director; as a matter of sound corporate 1. Limitations imposed by the Constitution,
practice, must be a resident statues, articles of incorporation or by-laws
3. Secretary – need not be a director unless 2. Cannot perform constituent or those
required by the by-laws; must be a involving fundamental changes in the
resident and citizen of the Philippines, corporation requiring the approval of the
and stockholders or members
4. Such other officers as may be provided 3. Cannot exercise powers not possessed by the
in the by-laws corporation.
Page 91 of 199
Exceptions:
F. Nature of Powers of Board of 1. When the directors
Directors / Trustees are themselves the only
 Under the Theory of Original Power, the shareholders;
powers of the board of directors or trustees 2. Ratification by vote or
are ORIGINAL and UNDELEGATED. acquiescence, upon full disclosure of
 The stockholders or members do not the circumstances, is generally held
confer, nor can they revoke, those effective to validate irregular or
powers. voidable acts of the directors;
 They are DERIVATIVE only in the 3. A transaction carried
sense of being received from the State in out in the name of the corporation
the act of incorporation. and with the approval of all of its
shareholders.
G. Business Judgment Rule
Definition H. RIGHTS OF STOCKHOLDERS:
1. Managerial Rights
 A resolution or transaction pursued within
a. Voting rights; and
the corporate powers and business
b. Right to remove directors
operations of the corporation, and passed in
good faith by the board of directors, is valid
2. Proprietary Rights
and binding, and generally the courts have
a. Right to dividends;
no authority to review the same and
b. Right to issuance of stock certificate for
substitute their own judgment, even when
fully paid shares;
the exercise of such power may cause losses
c. Proportionate participation in the
to the corporation or decrease the profits of a
distribution of assets in liquidation;
department
d. Right to transfer of stocks in corporate
Consequences
books;
 Resolutions and transactions entered into e. Preemptive right;
by the board within the powers of the f. Right to inspect books and records;
corporation cannot be reversed by the g. Right to be furnished of the most recent
courts not even on the behest of the financial statement/financial report;
stockholders h. Right to recover stocks unlawfully sold
 Directors and duly authorized officers for delinquent payment of subscription.
acting within such business judgment
cannot be held personally liable for acts or 3. Remedial Rights
contracts a. Individual suit – a suit instituted by a
Exceptions: shareholder for his own behalf against
a. when the Code expressly provides the corporation;
otherwise b. Representative suit – a suit filed by a
b. when the directors or officers acted shareholder in his behalf and in behalf
with fraud, gross negligence or in likewise of other stockholders similarly
bad faith situated and with a common cause
c. when the director or officers act against the corporation; and
against the corporation in conflict- c. Derivative suit – a suit filed in behalf of
of-interest situation the corporation by its shareholders (not
creditors whose remedies are merely
Remedies in case of Mismanagement subsidiary such as accion subrogatoria
1. receivership; and accion pauliana) upon a cause of
2. injunction, if the act has not yet been done; action belonging to the corporation, but
3. dissolution if the abuse amounts to a ground not duly pursued by it, against any
for quo warranto but the Solicitor General person or against the directors, officers
refuses to act; and and/or controlling shareholders of the
4. derivative suit or complaint filed with SEC corporation.
Requisite for filing a DERIVATIVE SUIT Requisites:
General Rule: The Board must act as a body to a. the party bringing suit should be a
bind the corporation shareholder as of the time of the act
Page 92 of 199
or transaction complained of, the 3. Cumulative Voting by Distribution – a

number of his shares not being stockholder may cumulate his shares by
material; multiplying the number of his shares by
b. he has tried to exhaust intra- the number of directors to be elected
corporate remedies, i.e., has made a and distribute the same among as many
demand on the board of directors for candidates as he shall see fit his shares
the appropriate relief but the latter
has failed or refused to heed his plea; Time to determine voting right:
and a. shares standing in one’s name at the
c. the cause of action actually devolves time fixed in the by-laws
on the corporation, the wrongdoing b. where by-laws silent, at the time of
or harm having been, or being election
caused to the corporation and not to
the particular stockholder bringing Sec. 25. Corporate officers, quorum.
the suit. 1. president - must be a director
2. treasurer - may or may not be a director
4. Appraisal Rights 3. secretary - must be a resident and
 (see sec. 81) citizen of the Philippines
4. other officers as may be provided for in
5. Inspection Rights the by-laws
 (see sec. 74)
Notes:
 Any 2 or more positions may be held
Sec. 24. Election of directors or trustees. concurrently by the same person, except
Limitations / conditions that no one shall act as president and
1. At any meeting of stockholder or secretary or as president and treasurer at
members called for the election of the same time.
directors or trustees, there must be  Corporate officers are subject to the
present, either in person or by business judgment discretion of the board to
representative authorized to act by terminate
written proxy, the owners of a majority
of the outstanding capital stock, or Quorum – such number of the membership of
2. If there be no capital stock, a majority of a collective body as is competent to transact its
the members entitled to vote. business or do any other corporate act.
3. The election must be by ballot if
requested by any voting stockholder or General Rule: a majority of the number of
member. directors or trustees as fixed in the articles of
4. No delinquent stock shall be voted. incorporation
5. Candidates receiving the highest Exceptions:
number of votes shall be declared  unless the articles of incorporation or
elected provided there is quorum. the by-laws provide for a greater
6. In case of failure to hold an election for majority
any reason, the meeting may be  election of officers which shall require
adjourned from day to day or from time the vote of a majority of all the members
to time but not sine die or indefinitely. of the board.
Methods of voting Note: Every decision of at least a majority of the

1. Straight Voting – every stockholder may directors or trustees present at a meeting at
vote such number of shares for as many which there is a quorum shall be valid as a
persons as there are directors to be corporate act. Directors or trustees cannot
elected attend or vote by proxy at board meetings.
2. Cumulative Voting for one candidate – a
stockholder is allowed to concentrate his Sec. 26. Report of election of directors,
votes and give one candidate, as many trustees and officers.
votes as the number of directors to be  Report of election of directors, trustees and
elected multiplied by the number of his officers shall be made to the SEC within 30
shares shall equal
Page 93 of 199
days after the election, their names, 1. if still constituting a quorum, any
nationalities and residences vacancy occurring in the board other
 IF any one dies, resigns or in any manner than by removal by the stockholders or
ceases to hold office, his heirs in case of his members or by expiration of term
death, the secretary, or any other officer of
the corporation, or the director, trustee or Note: A director or trustee so elected to fill a
officer himself, shall immediately report vacancy shall be elected only for the unexpired
such fact to the SEC term of his predecessor in office.
Sec. 27. Disqualification of directors, Sec. 30. Compensation of directors.

trustees or officers.
1. Convicted by final judgment of an offense General Rule: They shall be entitled to
punishable by imprisonment of 6 years; or reasonable per diems only
2. Violation of the Corporation Code Exceptions:
committed within 5 years prior to the date 1. When their compensation is fixed by the by-
of his election or appointment laws
2. When granted by the vote of stockholders
Note: If the disqualification is based on a representing at least a majority of the
violation of the Code, the duration of the outstanding capital stock at a regular or special
imprisonment is immaterial. (see sec. 23) meeting
3. When they are also officers of the corporation
Sec. 28. Removal of directors or
trustees. Where the compensation of a director is for
Requisites: services rendered other than as such, and the
1. Vote of at least 2/3 of the stockholders board fixes the compensation, all the conditions
representing at least 2/3 of the outstanding required under Sec. 32 must be present.
capital stock or 2/3 of the members entitled to
vote Sec. 31. Liability of directors, trustees or
2. at a regular or special meeting after proper officers.
notice is given Three-Fold Duties of Directors:
3. Removal may be with or without cause 1. Duty of Obedience
4. A minority director elected through • to direct the affairs of the corporation in
cumulative voting cannot be removed without accordance with the purposes for which
just case it was organized
• Legal Basis: The directors or trustees
Extent: Removal may be with or without cause. and officers to be elected shall perform
Limitation: Removal without cause may not be the duties enjoined on them by law and
used to deprive minority stockholders or the by-laws
members of the right of representation. 2. Duty of Diligence
• Legal Basis: Directors or trustees who
Sec. 29. Vacancies in the office of willfully and knowingly vote for or
director or trustee. assent to patently unlawful acts of the
The following vacancies shall be filled by corporation who are guilty of gross
stockholders / members in a regular or special negligence or bad faith in directing the
meeting: affairs of the corporation shall be liable
1. removal by the stockholders or members jointly and severally for all damages
or by expiration of term resulting therefrom suffered by the
2. other than by removal by the corporation, its stockholders or
stockholders or members or by members and other persons (Sec. 31)
expiration of term, if the remaining 3. Duty of Loyalty
directors or trustees do not constitute a
• Legal Basis: Directors or trustees who
quorum
acquire any pecuniary or personal
3. by reason of an increase in the number
interest in conflict with their duty as
of directors or trustees
such directors or trustees shall be liable
jointly and severally for all damages
The following vacancies shall be filled by the
resulting therefrom (Sec 31)
members of the board:
Page 94 of 199
5. Agreeing or stipulating in a contract to hold

himself liable with the corporation; or
6. By virtue of a specific provision of law
Note: Special Fact Doctrine
When a director or He shall be liable as  Director takes advantage of information
trustee attempts to trustee and must by virtue of his office to the
acquire or acquires account for all the disadvantage of the corporation.
in violation of his profits which
duty, any interest otherwise would DOCTRINE OF DOCTRINE OF
adverse to the have accrued to the LIMITED IMMUNITY
corporation in corporation (Sec 31, LIABILITY
respect of any matter par 2) Shields the Protects a person
which has been corporators from acting for and in
reposed in him in corporate liability behalf of the
confidence as to beyond their agreed corporation from
which equity contribution to the being himself
imposes upon him to capital or personally liable for
deal in his own shareholding in the his authorized
behalf corporation actions
Where a director, by He must account to
virtue of his office, the latter for all such Sec. 32. Dealings of directors, trustees
acquires for himself profits by refunding or officers with the corporation.
a business the same (Sec 34) Special rules on contracts entered into by
opportunity which directors/trustees or officers:
should belong to the 1. Doctrine of Corporate Opportunity
corporation, thereby  Unless his act is ratified, a director shall
obtaining profits refund to the corporation all the profits
which belong to the he realizes on a business opportunity
corporation which:
1. The corporation is financially
PERSONAL liability of Directors able to undertake;
1. Willfully and knowingly voting for and 2. From its nature, is in line with
assenting to patently unlawful acts of the corporation business and is of
corporation; practical advantage to it; and
2. Gross negligence or bad faith in directing 3. The corporation has an interest
the affairs of the corporation; or a reasonable expectancy
 jointly and severally liable for all  The rule shall be applied
damages suffered by the corporation, its notwithstanding the fact that the
stockholders or members and other director risked his own funds in the
persons; (sec. 31) venture
3. Acquiring any personal or pecuniary 2. Contracts of self-dealing directors
interest in conflict of duty;  Contracts which are entered into
 liable as a trustee for the corporation by the corporation with one or more of
and must account for the profits which its own directors/trustees, or officers
otherwise would have accrued to the  They are voidable unless:
corporation (sec. 31) 1. The presence of such
4. Consenting to the issuance of watered director/trustee in the board
stocks, or, having knowledge thereof, failing meeting approving the contract
to file objections with the secretary; was not necessary to constitute a
 solidarily, liable with the stockholder quorum for such meeting;
concerned to the corporation and its 2. The vote of such
creditors for the difference between the director/trustee in the board
fair value received at the time of meeting approving the contract
issuance of the stock and the par or was not necessary for the
issued value of the same; (sec. 65) approval of the contract;
Page 95 of 199
3. The contract is fair and 3. The corporation has an interest or a

reasonable under the reasonable expectancy
circumstances;  The rule shall be applied notwithstanding
4. In the case of an officer, the fact that the director risked his own
there was previous authorization funds in the venture.
by the board of directors
 Although not all Sec. 35. Executive committee
said conditions are present, the Definition
corporation may elect not to attack or  A body created by the by-laws and
question the validity of the contract, composed of some members of the board
without prejudice, however, to the which, subject to the statutory limitations,
liability of the director/trustee for has all the authority of the board to the
damages under Sec. 31 extent provided in the board resolution or
 Where any of the by-laws
two conditions is absent, said contract  Must be provided for in the by-laws and
must be ratified by the vote of the composed of not less than 3 members of the
stockholders representing at least 2/3 of board appointed by the board
the outstanding capital stock or 2/3 of  May act by a majority vote of all of its
the members in a meeting called for the members
purpose, provided that full disclosure of
the adverse interest of the Limitations on the powers of the Executive
director/trustee involved is made at Committee:
such meeting It cannot act on the following:
Matters needing stockholder approval;
Sec. 33. Contracts between corporations Filling up board vacancies;
with interlocking directors. 3. Amendment, repeal, adoption of
 Contracts entered into between by-laws;
corporations with interlocking directors 4. Amendment or repeal of any
(interest of said directors is “substantial”, resolution of the Board which by its
i.e. exceeding 20% of the outstanding capital express terms is not amendable or
stock) repealable; and
 They are valid, provided that: Cash dividend declaration
1. The contract is not fraudulent; and
2. The contract is fair and TITLE IV
reasonable under the circumstances POWERS OF CORPORATIONS
IF the interlocking All the conditions Sec. 36. Corporate powers and capacity.
director’s interest in prescribed in Sec. 32 1. Express Powers - granted by law,
one corporation or on self-dealing Corporation Code, and its Articles of
corporations is directors must be Incorporation or Charter
“nominal” (not present with respect 2. Inherent / Incidental Powers – not
exceeding 20% of to the corporation in expressly stated but are deemed to be within
the outstanding which he has the capacity of corporate entities
capital stock) nominal interest 3. Implied / Necessary Powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
Sec. 34. Disloyalty of a director. pursuit of its purposes as provided for in the
Doctrine of Corporate Opportunity Charter
 Unless his act is ratified, a director shall Classification:
refund to the corporation all the profits he a. Acts in the usual course of business
realizes on a business opportunity which: b. Acts to protect debts owing to the
1. the corporation is financially able to corporation
undertake; c. Acts which involve embarking in a
2. from its nature, is in line with different business usually to collect
corporations business and is of debts out of profits
practical advantage to it; and d. Acts to protect or aid employees
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e. Acts to increase business 6. Invest corporate funds in another

Note: The corporate powers of the corporation corporation or business for other purpose
shall be exercised, all business conducted and other than primary purpose;
all property of such corporation controlled and 7. Power to declare dividends out of
held by the board of directors or trustees. unrestricted retained earnings;
8. Enter into management contract with
A. Theory of General Capacity another corporation (not with an individual
 A corporation is said to hold such powers as or a partnership-within general powers)
are not prohibited or withheld from it by whereby one corporation undertakes to
general law (everything is allowed except manage all or substantially all of the
when prohibited). business of the other corporation for a
period not longer than 5 years for any one
General Powers and Capacity: term.
1. To sue and be sued;
2. Of succession; Sec. 37. Power to extend or shorten
3. To adopt and use a corporate seal; corporate term
4. To amend its Articles of Incorporation; Vote requirement
5. To adopt its by-laws; 1. majority vote of the board and
6. For stock corporations: issue and sell stocks 2. ratified at a meeting by the stockholders
to subscribers and treasury stocks; for non- representing at least 2/3 of the
stock corporations: admit members; outstanding capital stock or by at least
7. To purchase, receive, take or grant, hold, 2/3 of the members in case of non-stock
convey, sell, lease, pledge, mortgage and corporations.
deal with real and personal property,
securities and bonds Notice requirement
8. To enter into merger or consolidation; Written notice of the proposed action and of
9. To make reasonable donations for public the time and place of the meeting shall be
welfare, hospital, charitable, cultural, addressed to each stockholder or member at his
scientific, civic or similar purposes, place of residence as shown on the books of the
provided that no donation is given to any (i) corporation and deposited to the addressee in
political party, (ii) candidate and (iii) the post office with postage prepaid, or served
partisan political activity. personally
10. To establish pension, retirement, and other
plans for the benefit of its directors, Note: in case of extension of corporate term,
trustees, officers and employees. any dissenting stockholder may exercise his
11. To exercise other powers essential or appraisal right
necessary to carry out its purposes.
Sec. 38. Power to increase or decrease
B. Theory of Special Capacity capital stock; incur, create or increase
 A corporation cannot exercise powers except bonded indebtedness
those expressly or impliedly given Ways of increasing/decreasing the capital
(everything is prohibited except when stock
allowed). 1. By increasing/decreasing the number of
shares and retaining the par value;
Special Powers: (Secs. 37-44) 2. By increasing/decreasing the par value of
1. Power to extend or shorten corporate term; existing shares without increasing/decreasing
2. Increase or decrease corporate stock; the number of shares;
3. Incur, create, or increase bonded 3. By increasing/decreasing the number of
indebtedness; shares and increasing/decreasing the par value
4. Sell, dispose, lease, encumber all or
substantially all of corporate assets; Requirements:
5. Purchase or acquire own shares provided: 1. prior approval of the SEC is required
i. there is an unrestricted retained 2. compliance with Sec. 12 and 13 is
earnings, and required
ii. it is for a legitimate purpose. 3. no decrease of the capital stock shall be
approved by the SEC if its effect shall
prejudice the rights of corporate creditor
Page 97 of 199
4. majority vote of the board of directors c. the right is denied by the

and articles of incorporation
5. ratified at a stockholder’s meeting duly d. shares that are being
called for the purpose, 2/3 of the reoffered by the corporation after they
outstanding capital stock were initially offered together with all
the shares (Benito vs SEC 123 SCRA
Note: non-stock corporations may incur or 722)
create bonded indebtedness, or increase the
same, with the approval by a majority vote of Note: In close corporations, the pre-emptive
the board of trustees and of at least 2/3 of the right is subject to no exceptions unless denied
members in a meeting duly called for the in the articles.
purpose.
Sec. 40. Sale or other disposition of
Notice requirement: assets
Written notice of the proposed action and of the  Sale or disposition of all or substantially all
time and place of the stockholder’s meeting of corporate property and assets – if the
must be addressed to each stockholder at his corporation would be rendered incapable of
place of residence as shown on the books of the continuing the business or accomplishing
corporation and deposited to the addressee in the purpose for which it was incorporated.
the post office with postage prepaid, or served
personally Vote requirement
Stockholders representing at least 2/3 of the
Tools available to the stockholders to replenish outstanding capital stock, or in case of non-
capital stock corporation, by the vote of at least to 2/3
1. Additional subscription to shares of stock of of the members, in a stockholder’s or member’s
the corporation by stockholders or investors; meeting duly called for the purpose
2. Advances by the stockholders ot the  However, no ratificatory vote is needed
corporation; in the following instances:
3. Payment of unpaid subscription by the a. If it is necessary in the usual and
stockholders; and regular course of business
4. Loans from third persons b. If the proceeds of such property and
assets be appropriated for the
Sec. 39. Power to deny pre-emptive right conduct of the remaining shares
Pre-emptive Right – right to subscribe to all Notice requirement

issues or disposition of shares of any class in Written notice of the proposed action and of the
proportion to his present stockholdings time and place of the meeting shall be
 the purpose being to enable the addressed to each stockholder or member at his
shareholder to retain his proportionate place of residence as shown on the books of the
control in the corporation and to retain his corporation and deposited to the addressee in
equity in the surplus. the post office with postage prepaid, or served
personally
General Rule: Applies to all issues or
disposition of shares of any class Note: dissenting stockholder may exercise his
Exceptions: appraisal right
a. shares issued in compliance
with laws requiring stock offerings or Sec. 41. Power to acquire own shares
minimum stock ownership by the public
b. shares issued in good faith General Rule: A stock corporation shall have
with the approval of the stockholders the power to purchase or acquire its own shares
representing 2/3 of the outstanding for a legitimate corporate purpose
capital stock, in exchange for: Limitation: existence of unrestricted retained
i. property needed for corporate earnings in its books
purposes, or
ii. in payment of a previously Instances:
contracted debt 1. To eliminate fractional shares arising
out of stock dividends;
Page 98 of 199
2. To collect or compromise an stockholders or members shall not be

indebtedness to the corporation, arising necessary
out of unpaid subscription, in a iii. the other purposes for which the funds
delinquency sale, and to purchase may be invested must be among those
delinquent shares sold during said sale; enumerated as secondary purposes and
and must further comply with the
3. To pay dissenting or withdrawing requirements of Sec 42
stockholders entitled to payment for
their shares under the provisions of this Sec. 43. Power to declare dividends
Code Definitions
4. To acquire treasury shares 1. RETAINED EARNINGS = ASSETS,
5. Redeemable shares regardless of LIABILITIES AND LEGAL CAPITAL
existence of retained earnings 2. UNRESTRICTED – if the retained
6. To effect a decrease of capital stock earnings have not been reserved or set
7. in close corporations, when there is a aside by the board of directors for some
deadlock in the management of the corporate purpose
business 3. DIVIDENDS - corporate profits set
aside, declared, and ordered to be paid
Notes: by the directors for distribution among
i. Redeemable shares may be shareholders at a fixed time.
redeemed, regardless of the existence of
unrestricted retained earnings (Sec. 8), Kinds of dividends
provided that the corporation has, after 1. Cash
such redemption, sufficient assets in its  cash dividends due on delinquent stock
books to cover debts and liabilities shall first be applied to the unpaid
inclusive of capital stock balance on the subscription plus costs
ii. In numbers 1-3, there must be and expenses
unrestricted retained earnings 2. Property
3. Stock
Sec. 42. Power to invest corporate funds  stock dividends shall be withheld from
in another corporation or business or the delinquent stockholder until his
for any other purpose unpaid subscription is fully paid
Vote requirements:  no stock dividend shall be issued
1. majority of the board of directors or without the approval of stockholders
trustees and representing not less than 2/3 of the
2. ratified by the stockholders representing outstanding capital stock at a regular or
at least 2/3 of the outstanding capital special meeting duly called for the
stock, or by at least 2/3 of the members purpose
in the case of non-stock corporations, at  cannot be issued to non-stockholders
a stockholder’s or member’s meeting (Nielson vs Lepanto Consolidated Mines
duly called for the purpose 26 SCRA 540)
Notice requirement Cash Dividend Stock Dividend
Written notice of the proposed investment and
Involves a Does not involve any
the time and place of the meeting shall be
disbursement of the disbursement
addressed to each stockholder or member at his
SH of accumulated
place of residence as shown on the books of the
earnings
corporation and deposited to the addressee in
Cash dividend May be reached by
the post office with postage prepaid, or served
declared and paid corporate creditors
personally
becomes the absolute being still part o
property of the SH corporate property
Notes:
and cannot be
i. any dissenting stockholder can exercise
reached by the
his appraisal right
creditors of the
ii. where the investment by the corporation
corporation in the
is reasonably necessary to accomplish its
absence of fraud
primary purpose, the approval of the
Page 99 of 199
Declared only by the Declared by the board for special reserve for probable
board of directors at with the concurrence of contingencies
its discretion the SH representing at
least 2/3 of the Sources of dividends:
outstanding capital General Rule: Dividends can only be declared
Does not increase the Increases corporate and paid out of actual and bona fide
corporate capital capital unrestricted retained earnings.
Declaration creates a No debt is created
debt from the Special Rules:
corporation in favor 1. Where a corporation sold its real property,
of its SH which is not being used for business, at a
Taxable as income to Not subject to income gain, the income derived therefrom may be
the SH tax availed of for dividend distribution.
Cash dividends due Stock dividends cannot 2. Increase in the value of a fixed asset as a
on delinquent shares be applied as payment result of its revaluation is not retained
can be applied to the dividends for unpaid earning. However, increase in the value of
payment of the subscription fixed assets as a result of revaluation
unpaid balance (“Revaluation surplus”) may be declared as
cash or stock dividends provided that the
Note: The right to dividends is based on duly company:
recorded stockholdings; accordingly, the a. has sufficient income from
corporation is prohibited from entitling thereto operations from which the
anyone else depreciation on the appraisal
increase was charged
Other kinds of dividends: b. has no deficit at the time the
1. Optional dividend – gives an option to depreciation on the appraisal
receive cash or stock dividend increase was charged to operations;
2. Composite dividend – dividend partly in and
cash partly in stocks c. such depreciation on appraisal
3. Scrip dividend – issued to a stockholder increase previously charged to
entitling him to the payment of money or operations has not been impaired by
the like at some future time, similar to a losses.
promissory note 3. Dividends can be declared out of the
4. Bond dividend – dividends distributed in amount received in excess of the par value
bonds of the corporation to the stockholders of shares (“paid-in surplus”) when:
5. Liquidating dividends – distributions of the a. That they be declared only as
assets of the corporation upon dissolution stock dividends and not cash;
or winding up o the same b. No creditors are prejudiced; and
c. There is no impairment of
General Rule: Stock corporations are capital.
prohibited from retaining surplus profits in Note: unlike par value shares, when no par
excess of 100% of their paid-up stock capital value shares are sold at a premium, the
Except: entire consideration paid is considered
1. When justified by definite corporate capital, hence the same cannot be declared
expansion projects approved by the as dividends.
board of directors 4. Reduction surplus can be a source of
2. When the corporation is prohibited dividends. Rule on paid-in surplus is
under any loan agreement with any applicable.
financial institution or creditor, whether 5. No dividends can be declared out of capital
local or foreign, from declaring except only in two instances: 1) liquidating
dividends without its/his consent, and dividends; and 2) dividends from
such consent has not yet been secured; investments in wasting asset corporation.
or  It permits corporations solely or
3. When it can be clearly shown that such principally engaged in the exploitation
retention is necessary under special of “wasting assets” to distribute the net
circumstances obtaining in the proceeds derived from exploitation of
corporation, such as when there is need their holdings such as mines, oil wells,
Page 100 of 199
patents and leaseholds, without corporation owning at least 2/3 of the total
allowance or deduction for depletion. outstanding capital stock entitled to vote, or by
 Wasting Assets Corporation is one sole at least 2/3 of the members in the case of a non-
purpose of which is to invest its capital stock corporation
in a specific property and afterward to
consume that property or extract its Term: maximum of 5 years
value at a profit, such as mining.
6. Profits realized from sale of treasury shares Sec. 45. Ultra vires acts of corporations.
are part of capital and cannot be declared as
cash or stock dividend as purchase and sale TYPES OF ULTRA VIRES CASES:
of such shares are regarded as contractions 1. Acts done beyond the powers of the
and expansions of paid-in capital. corporation as provided in the law or its
7. Money cannot be borrowed for the payment articles of incorporation;
of dividends because an indebtedness is not 2. Acts or contracts entered into in behalf of a
a retained earning of the corporation. corporation by persons who have no
8. Corporate earnings which have not yet been corporate authority (Note: This is
received even though they consist in money technically ultra vires acts of officers and
which is due, cannot be included in the not of the corporation); and
profits out of which dividends may be paid. 3. Acts or contracts, which are per se illegal as
being contrary to law.
Sec. 44. Power to enter into
management contract Note: An ultra vires act may be that of:
a. The corporation;
Management contract - any contract b. The Board of Directors; and
whereby a corporation undertakes to manage or c. The corporate officers.
operate all or substantially all of the business of
another corporation, whether such contracts are Ultra Vires Acts and Illegal Acts:
called service contracts, operating agreements  Ultra vires (“beyond powers”) refers only to
or otherwise an act outside or beyond corporate powers,
including those that may ostensibly be
Vote requirement: within such powers but are, by general or
1. approved by the board of directors and special laws, either prohibited or declared
2. by stockholders owning at least the illegal. It is in this context that the Code has
majority of the outstanding capital used the term.
stock, or by at least a majority of the
members in the case of a non-stock  TEST whether or not a corporation may
corporation, of both the managing and perform an act:
the managed corporation, at a meeting consider the logical and necessary
duly called for the purpose relation between the act questioned and
the corporate purpose expressed by law
Exceptions: or in the charter. If the act is lawful in
1. where stockholders representing the same itself and not prohibited, and is done for
interest of both the managing and the the purpose of serving corporate ends,
managed corporations own or control more and reasonably contributes to the
than one-third 1/3 of the total outstanding promotion of those ends in a substantial
capital stock entitled to vote of the and not in a remote and fanciful sense
managing corporation (interlocking (Montelibano Doctrine).
stockholders); or
2. where a majority of the members of the  An illegal corporate act is an act which is
board of directors of the managing contrary to law, morals, good customs,
corporation also constitute a majority of the public order, or public policy (Art. 1306
members of the board of directors of the NCC)
managed corporation (interlocking
directors) Effects of Ultra Vires Act on:
1. executed contract – courts will not set aside
Note:the management contract must be or interfere with such contracts;
approved by the stockholders of the managed
Page 101 of 199
2. executory contracts – no enforcement even 1. It is a condition 1. It is a condition

at the suit of either party (void and precedent in the subsequent; its
unenforceable); acquisition of absence merely
3. part executed and part executory – corporate existence; furnishes a ground
principle of “no unjust enrichment at for the revocation of
expense of another” shall apply; and the franchise
4. executory contracts apparently authorized 2. It is essentially a 2. It is for the internal
but ultra vires – the principle of estoppel contract between the government of the
shall apply. corporation and the corporation but has
stockholders/ the force of a contract
Requisites for valid ratification of ultra members; between the between the
vires act: stockholders/ member corporation and the
a. act or contract must be inter se, and between stockholders/
consummated, not merely executory; the corporation and members, and
b. the creditors are not prejudiced, or all the State; between the
of them have given their consent stockholders and
c. the rights of the public or the State members;
are not involved; and 3. It is executed before 3. It may be executed
d. all the stockholders must give their incorporation after incorporation.
consent (Pirovano vs Dela Rama Sec. 46 allows the
Steamship 96 Phil. 335) filing of the by-laws
simultaneously with
Doctrine of Ratification the Articles of
 When corporate officers exceed their Incorporation
authority, their actions cannot bind the 4. It is amended by a 4. It may be amended
corporation, unless it has ratified such acts majority of the by a majority vote of
or is estopped from disclaiming them. Such directors/ trustees and the BOD and majority
ratification can come only from the act or stockholders vote of outstanding
omission of the Board of Directors. (San representing 2/3 of capital stock or a
Juan Structural vs CA 296 SCRA 631) the outstanding majority of the
capital stock, or 2/3 of member in non-stock
Doctrine of Apparent Authority the members in case of corporation
 If a corporation knowingly permits one of its non-stock
officers, or any other agent, to act within the corporations
scope of an apparent authority, it holds him 5. Power to 5. Power to amend or
out to the public possessing the power so to amend/repeal articles repeal by-laws or
do those acts; and thus, the corporation will, cannot be delegated by adopt new by-laws
as against anyone who has in good faith the stockholders/ may be delegated by
dealt with it through such agent, be members to the board the 2/3 of the
estopped from denying the agent’s of directors/ trustees. outstanding capital
authority. stock or 2/3 of the
members in the case
TITLE V of non-stock
BY LAWS corporation.
Sec. 46. Adoption of by-laws. Time and procedure of adoption:

 filed after incorporation
By-laws – rules of action adopted by the  1 month after receipt of official notice of
corporation for its internal regulations and for the issuance of its certificate of
the government of its officers and of its incorporation by the SEC
stockholders or members.  affirmative vote of the stockholders
representing at least a majority of the
ARTICLES OF BY-LAWS outstanding capital stock, or of at least a
INCORPORATION majority of the members in case of non-
stock corporations, shall be necessary
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 filed prior to incorporation 3. The required quorum in meetings of

 approved and signed by all the stockholders or members and the
incorporators and submitted to the SEC, manner of voting therein;
together with the articles of  the by-laws cannot provide that a
incorporation. lesser number shall constitute a
quorum in those cases in which the
Where kept: principal office of the corporation, law requires for the validity of
subject to the inspection of the stockholders or certain corporate acts
members during office hours 4. The form for proxies of stockholders and
members and the manner of voting
Effectivity: only upon the issuance by the SEC them;
of a certification that the by-laws are not 5. The qualifications, duties and
inconsistent with this Code compensation of directors or trustees,
officers and employees;
A certificate of the appropriate government  cannot dispense with the minimum
agency to the effect that such by-laws or legal requirements provided for in
amendments are in accordance with law is Sec. 23
required for the following: 6. The time for holding the annual election
 bank or any banking institution, of directors of trustees and the mode or
 building and loan association, manner of giving notice thereof;
 trust company, 7. The manner of election or appointment
 insurance company, and the term of office of all officers other
than directors or trustees;
 public utility,
 cannot provide for manner of
 educational institution or
election and term of office of
 other special corporations governed by directors or trustees which are
special laws already regulated by law (Secs. 23 &
24)
Note: Third persons are not bound by the by- 8. The penalties for violation of the by-
laws of a corporation except when they have laws;
knowledge of its provisions either actually or 9. In the case of stock corporations, the
constructively. manner of issuing stock certificates; and
10. Such other matters as may be necessary
Section 46 reveals the legislative intent to attach for the proper or convenient transaction
a directory, and not mandatory, meaning for the of its corporate business and affairs.
word "must" in the first sentence thereof. Note (21a)
should be taken of the second paragraph of the
law which allows the filing of the by-laws even Limitations: contents are subject to the
prior to incorporation. Therefore, the failure to provisions of the Constitution, the Corporation
file the by-laws within that period does not Code, other special laws
imply “demise” of the corporation, but merely
constitute a ground by which the SEC may seek Sec. 48. Amendments to by-laws.
forfeiture of the franchise of the corporation as Vote requirement:
provided in PD 902-A. (Loyola Grand Villas vs
 majority of the board of directors or trustees
CA, 276 SCRA 681)
and
Sec. 47. Contents of by-laws.  the owners of at least a majority of the
A private corporation may provide in its by-laws outstanding capital stock, or at least a
for: majority of the members of a non-stock
1. The time, place and manner of calling corporation, at a regular or special meeting
and conducting regular or special duly called for the purpose
meetings of the directors or trustees;
Delegation to the board: owners of 2/3 of the
 with respect to stockholders or
outstanding capital stock or 2/3 of the members
members, see Sec. 51 and Sec. 93.
in a non-stock corporation
2. The time and manner of calling and
conducting regular or special meetings
of the stockholders or members;
Page 103 of 199
Limitation: the power to adopt the 1 originalst

1. Held at the proper place
by-laws cannot be delegated to the board; only 2. Held at the stated date at the appointed
the power to adopt new by-laws that will time or at a reasonable time thereafter
supplant the old by-laws 3. Called by the proper person
4. Previous notice
Revocation: stockholders representing a 5. Quorum
majority of the outstanding capital stock or a
majority of the members in non-stock Remedy if there is no person authorized to call
corporations a stockholder’s (S/H) meeting: SEC upon
petition of a S/H, may order the petitioning S/H
Effectivity: upon the issuance by the SEC of a to call a meeting by giving the required notice to
certification that the same are not inconsistent the other S/H.
with this Code.
Sec. 51. Place and time of meetings of
TITLE VI stockholders or members.
MEETINGS Place: city or municipality where the principal
office of the corporation is located, and if
Sec. 49. Kinds of meetings. practicable in the principal office of the
Meetings of stockholders or members: corporation provided, that Metro Manila shall,
 regular for purposes of this section, be considered a city
 special (sec. 50) or municipality.
Meetings of directors Improperly Held or Called Meetings:

 regular General Rule: all proceedings had and any
 special (secs. 50-53) business transacted shall be invalid
Sec. 50. Regular and special meetings of Exception: valid if:

stockholders or members. a. business transacted is within the
powers or authority of the
Regular meetings of stockholders or members: corporation
b. all the stockholders or members of
 annually on a date fixed in the by-
the corporation are present or duly
laws, or
represented at the meeting
 if not so fixed, on any date in April of
every year as determined by the Sec. 52. Quorum in meetings.
board of directors or trustees General Rule: consist of the stockholders
representing a majority of the outstanding
Notice Requirement: written notice capital stock or a majority of the members in
shall be sent to all stockholders or the case of non-stock corporations.
members of record at least 2 weeks prior
to the meeting, unless a different period Exception: unless otherwise provided for in this
is required by the by-laws. Code or in the by-laws
Special meetings of stockholders and members: Sec. 53. Regular and special meetings of
 any time deemed necessary or as directors or trustees.
provided in the by-laws
Regular meetings of the board of directors or
Notice requirement: at least 1 week trustees:
written notice shall be sent to all  held monthly, unless the by-laws
stockholders or members, unless provide otherwise.
otherwise provided in the by-laws.
 held anywhere in or outside of the
Philippines, unless the by-laws provide
Note: Notice of any meeting may be waived,
otherwise.
expressly or impliedly, by any stockholder or
member.  notice stating the date, time and
place of the meeting must be sent at
Requisites for a valid meeting: least 1 day prior to the scheduled
Page 104 of 199
meeting, unless otherwise provided by  no voting right as long as such shares

the by-laws. remain in the Treasury.
Special meetings of the board of directors or Sec. 58. Proxies.

trustees:
 may be held at any time upon the Proxy - a written instrument, signed by the
call of the president or as provided in stockholder or member (as principal) and filed
the by-laws. before the scheduled meeting with the
 held anywhere in or outside of the corporate secretary, and given to another
Philippines, unless the by-laws provide person (as agent) authorizing such person to
otherwise. exercise the voting rights of the former
 notice stating the date, time and
place of the meeting must be sent at  Period of validity: unless otherwise
least 1 day prior to the scheduled provided in the proxy, it should be valid
meeting, unless otherwise provided by only for the meeting for which it is intended.
the by-laws. No proxy shall be valid and effective for a
Note: a director or trustee may waive the notice longer period than five years at any one
requirement, either expressly or impliedly. time.
 The right to vote by proxy may be exercised
Sec. 54. Who shall preside at meetings. in any of the following instances:
 President shall preside at all meetings 1. election of the board of directors
unless the by-laws provide otherwise. or trustees;
 see Sec. 50, last par. 2. voting in case of joint ownership
of stock;
Sec. 55. Right to vote of pledgors, 3. voting by trustee under voting
mortgagors, and administrators. trust agreement;
4. pledge or mortgage of shares;
General Rule: the pledgor or mortgagor shall 5. as provided for in its by-laws.
have the right to attend and vote at meetings of
stockholders Note: Stockholders or members may attend and
Exception: the pledgee or mortgagee is vote in their meetings by proxy; directors
expressly given by the pledgor or mortgagor cannot do so. Directors must always act in
such right in writing which is recorded on the person (Sec. 25).
appropriate corporate books.
Sec. 59. Voting trusts.
 Executors, administrators, receivers, and  An agreement whereby one or more
other legal representatives duly appointed stockholders transfer their shares of stocks
by the court may attend and vote in behalf to a trustee, who thereby acquires for a
of the stockholders or members without period of time the voting rights (and/or any
need of any written proxy. other rights) over such shares;
 and in return, trust certificates are given to
Sec. 56. Voting in case of joint the stockholder/s, which are transferable
ownership of stock. like stock certificates, subject, however, to
the trust agreement.
General Rule: the consent of all the co-owners  Limitations on voting trust agreement:
shall be necessary 1. No voting trust agreement shall
Exceptions: be entered into:
 there is a written proxy, signed by all the a. for a period not exceeding
co-owners, authorizing one or some of 5 years at any time except if the
them or any other person to vote voting trust is required as a
 the shares are owned in an “and/or” condition in a loan agreement, it
capacity by the holders thereof may be for a period exceeding 5
 any one of the joint owners can vote years but shall automatically
said shares or appoint a proxy expire upon full payment of the
loan
Sec. 57. Voting right for treasury shares.
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b. for the purpose of even when the stock

circumventing the law against latter is present
monopolies and illegal
combinations in restraint of 8. An agreement 8. A proxy is usually
trade or used for purposes of must not exceed 5 of shorter
fraud years at any one duration although
2. in writing and notarized, and time except when under Sec. 58 it
shall specify the terms and conditions the same is made cannot exceed 5
thereof a condition of a years at any one
3. A certified copy of such loan. time
agreement shall be filed with the
corporation and with the SEC. 9. The voting right 9. The right to vote
Otherwise, it is ineffective and is divorced from is inherent in or
unenforceable the ownership of inseparable from
4. shall be subject to examination stocks the right to
by any stockholder of the corporation in ownership of
the same manner as any other corporate stock
book or record
5. Unless expressly renewed, all TITLE VII
rights granted in the agreement shall STOCKS AND STOCKHOLDERS
automatically expire at the end of the
agreed period Sec. 60. Subscription contract.
6. The voting trustee or trustees  any contract for the acquisition of unissued
may vote by proxy unless the agreement stock in an existing corporation or in one
provides otherwise still to be formed, irrespective of how the
parties refer to the agreement
VOTING TRUSTS PROXY
1. The trustee votes 1. The proxy holder Issue - the initial disposition (for consideration
as owner rather votes as agent not less than par or stated value) of unissued
than as mere shares, such as by subscriptions, stock
agent dividends, and sale of, or payment of obligation
2. The trust may 2. The proxy must with, shares from the unsubscribed capital
vote in person or vote in person stock.
by proxy unless
the agreement How person may become shareholder:
provides 1. by subscription contract;
otherwise 2. by purchase from the corporation of
3. Trustee acquires 3. Proxy has no treasury shares;
legal title to the legal title to the 3. by the transfer from a shareholder of
shares of the shares of the outstanding shares, by which transfer he is
transferring principal substituted in the place of the transferor.
stockholder
4. The agreement 4. Proxy need not be The rescission of the Pre-Subscription
must be notarized notarized Agreement will effectively result in the
5. The agreement is 5. Revocable unauthorized distribution of the capital assets
irrevocable anytime except and property of the corporation, thereby
one with interest violating the Trust Fund Doctrine and the
6. Trustee is not 6. Proxy can only act Corporation Code, since rescission of a
limited to act at at a specified subscription agreement is not one of the
any particular stockholder’s instances when distribution of capital assets
meeting meeting (if not and property of the corporation is allowed. (Ong
continuing) Yong vs Tiu, G.R. No. 144476)
7. A trustee can 7. A proxy can only
vote and exercise vote in the Sec. 61. Pre-incorporation subscription.
all the rights of absence of the
the stockholder owners of the PRE-INCORPORATION SUBSCRIPTION
AGREEMENTS (PISA)
Page 106 of 199
 Subscription of shares of stock of a majority of the outstanding capital

corporation still to be formed stock at a meeting duly called for the
 irrevocable for a period of at least 6 months purpose.
from date of subscription, unless:
1. all of the other subscribers Sec. 63. Certificate of stock and transfer
consent to the revocation; of shares.
2. the incorporation of said
corporation fails to materialize with Certificate of Stock - the document
said period or within a longer period evidencing the ownership of shares of stocks by
as may be stipulated in the contract a stockholder and the full payment of its issue
of subscription; provided that no or subscription price.
pre-incorporation subscription may
be revoked after the submission of  It is not essential to the ownership and/or
the articles of incorporation to the existence of the share of stock.
SEC.  Where the certificate of stock reflects a
greater volume of shares than the actual
Sec. 62. Consideration for stocks. number of shares issued or to be issued, the
 Consideration may be any or a combination following rules may be considered:
of any two or more of the following: 1. To the extent that there is an
1. Actual cash paid to the corporation; overissue, the excess issuance (over
2. Property, tangible or intangible, actually the authorized capital stock or the
received by the corporation and stated capital) shall be void as being
necessary or convenient for its use and ultra vires.
lawful purposes at a fair valuation equal Remedy of purchaser: to recover
to the par or issued value of the stock damages for misrepresentation.
issued;
3. Labor performed for or services actually 2. If there is no overissue, but no
rendered to the corporation; payment has been made to cover the
4. Previously incurred indebtedness of the par or stated value of the excess
corporation; shares, the latter would constitute
5. Amounts transferred from unrestricted “watered” stocks.
retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks 3. If there is no overissue and
in the event of reclassification or watering of stocks, the corporation
conversion. may be bound to honor the
certificate (if duly signed and
Limitations: released by its authorized officers) in
 Stocks shall not be issued for a the hands of a holder in good faith,
consideration less than the par or issued reserving a right of recourse that an
price thereof except treasury shares (sec. 9) aggrieved party may pursue against
 Shares shall not be issued in exchange for the culpable or unjustly enriched
promissory notes or future service party.
 Where the consideration is other than actual
cash, or consists of intangible property such Requisites for issuance of certificates of
as patents of copyrights, the valuation stock:
thereof shall initially be determined by the 1. Must be signed by the president
incorporators or the board of directors, or vice-president; countersigned by the
subject to approval by the SEC secretary or clerk, and sealed with the
 The issued price of no-par value shares may seal of the corporation;
be fixed in the (a) articles of incorporation 2. Generally, delivery of a
or by the (b) board of directors pursuant to certificate is essential. Except when the
authority conferred upon it by: shareholder has control over the books
a. the articles of incorporation or of the company.
b. the by-laws, or 3. The par value or the full
c. in the absence thereof, by the subscription must first be fully paid.
stockholders representing at least a
Page 107 of 199
4. In case of transfer of shares, the its principal place

original certificate must be surrendered of business.
to the corporation. c. For purposes of
execution, it is the
Capital stock Shares of stock domicile of the
- the amount paid - the interest or right corporation.
in or secured to which the
be paid in by the stockholder has in TRANSFER OF SHARES
stockholders the management of  A stockholder has an absolute right to
upon which the the corporation, dispose of his shares except if there is a
corporation is to and its surplus reasonably restriction in the articles of
conduct its profits, and upon a incorporation and in the certificates of
operation. It is dissolution, in all stock.
the property of of its assets  Kinds:
the corporation remaining after a. Absolute transfers/transfer of
itself (monetary payment of ownership
value). corporate debts.  No transfer 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
SHARES OF CERTIFICATE number of shares transferred.
STOCK OF STOCK  No shares of stock against which the
1. Unit of interest in 1. Evidence of the corporation holds any unpaid claim
a corporation holder’s ownership shall be transferable in the books of
of the stock and of the corporation.
his right as a  any unpaid claims arising from
shareholder unpaid subscription, and not to
2. It is an 2. It is concrete and any indebtedness which a
incorporeal or tangible subscriber or stockholder may
intangible property owe the corporation arising from
3. It may be issued 3. It may be issued any other transaction
by the corporation only if the  Modes:
even if the subscription is fully  By indorsement and delivery
subscription is not paid. when there is a certificate of
fully paid. stock (presupposes that the
4. Situs is the state 4. The situs may be subscription is already fully
where the the place where it is paid); and
corporation has its located or at the  By deed of assignment when
domicile domicile of the there is no certificate of stock,
a. For taxation owner, except when but the transfer shall be valid
purposes, situs is corporation is only between the parties and
inconsistent with dominated void as to others until its
an express elsewhere. recording in the stock and
provision of the transfer book.
statute or it is
unjust. b. Limited transfers/transfer of
b. To register the juridical possession only, e.g., pledge
chattel mortgages and mortgage.
over the shares of
stock, the status is PLEDGE OR MORTGAGE OF SHARES:
the duty/promise  The pledge or mortgage itself
in which the need not be recorded in the stock
corporation has and transfer book, but a chattel
Page 108 of 199
mortgage must comply with the 1. Majority view: No certificate of stock shall
Chattel Mortgage Law, and a pledge be issued to a subscriber until the full
would require the certificate to be amount of his subscription has been paid.
placed in the possession of the Basis: Doctrine of Individuality of
creditor/pledgee. The agreement Subscription that espouses that the
must appear in a public instrument subscription is one, entire, indivisible, and
to take effect against third persons. whole contract which cannot be divided into
• portions.
• When mandamus will lie to compel
corporation to register transfer: 2. Justice Vitug’s View: “The doctrine in the
1. That due application therefore has been Baltazar v. Lingayen Gulf case (14 SCRA
made by the registered owner or by one who 522) is still authoritative, not only because
holds a power of attorney from the Sec. 64, in essence, is a reiteration of the old
registered owner authorizing the transfer in law, but more importantly, the ruling is not
the books of the corporation; really opposed to Sec. 64 which speaks of
2. That said application has been denied; ‘subscription’ obviously referring to the
3. That there are no unpaid claims against the shares rather than to the instrument of
stock by the corporation; subscription.”
4. That an ordinary action against the
corporation for damages would be “The Baltazar doctrine itself recognizes that
inadequate; a certificate of stock may not be issued on
5. That an action in the nature of a suit in unpaid subscription even to the extent of
equity to secure a decree ordering the the paid-up, but that payments (subsequent
transfer would also be inadequate. to the subscription) may specifically be so
applied by the stockholder to certain shares
Underwriting Agreement- an agreement thereof as to make them fully paid for
between a corporation and a third person, which, and to the extent of full payment,
termed the “underwriter”, by which the latter certificates may be issued as long as such
agrees, for a certain compensation, to take a application of payment is permitted by a
stipulated amount of stocks or bonds, specified board resolution indiscriminately applicable
in the underwriting agreement, if such to all shareholders.”
securities are not taken by those to whom they
are first offered. Issuance of forged certificates:
 As a rule, a corporation will be held
UNDERWRITING STOCK responsible:
AGREEMENT SUBSCRIPTION a. where the forgery is committed
AGREEMENT by an officer having charge of the
1. The signers 1. The obligation of transfer and stock books and having
obligate the signer to the authority to issue certificates, and
themselves to purchasers and to b. the certificate is apparently
take the shares of the public is genuine.
stock which absolute.
cannot be sold.  On the other hand, the company is not
2. Underwriters are 2. There is no responsible where a necessary signature is
given commission. forged by an officer or employee who is not
commission. charged with the duty of issuing certificates.
3. The signer can 3. He becomes a
refuse to become stockholder of the Sec. 65. Liability of directors for
a stockholder/ company and is watered stocks.
member of the liable to pay the  solidarily liable with the stockholder
company. amount due on concerned to the corporation and its
the stock. creditors for the difference between the fair
value received at the time of issuance of the
Sec. 64. Issuance of stock certificates. stock and the par or issued value of the
same (water)
Page 109 of 199
 for consenting to the issuance of the stocks of call, and subject to sale, unless the
or who, having knowledge thereof, does not board declares otherwise.
forthwith express his objection in writing
and file the same with the corporate Sec. 68. Delinquency sale.
secretary
Procedure for the Sale of Delinquent Stocks:
Watered Stock – stock issued for no value at 1. Call by resolution demanding payment of
all or for a value less than its equivalent either the balance. However, if the contract of
in cash, property, stock dividends or sevices. subscription prescribes the date of payment,
no call is necessary. In addition, when the
Sec. 66. Interest on unpaid corporation becomes insolvent, with
subscriptions. proceedings instituted by creditors to wind
 from the date of subscription, if so required up and distribute its assets, no call or
by the by-laws assessment is necessary before the
 at the rate fixed in the by-laws and if no rate institution of suits to collect unpaid balance
is fixed, the legal rate (12%) on the subscriptions.
2. Notice of the board resolution given to the
Sec. 67. Payment of balance of stockholders by the corporate secretary,
subscription. either personally or by registered mail.
Publication of notice of call is not required.
Collection of Unpaid Subscription 3. Failure of the stockholder to pay within a
1. Voluntary payment grace period of 30 days from the date
a. upon the date specified in the specified in the contract of subscription or
subscription contract in the call, the stocks shall be declared
b. upon call by the Board of Directors delinquent and shall be subject to sale.
4. Notice of delinquency served on the
2. Involuntary payment subscribers either personally or registered
a. extrajudicial mail and publication in a newspaper of
i. delinquency sale general circulation in the province or the
ii. application of dividends city where principal office is located for once
b. judicial action a week for 2 consecutive weeks. Notice shall
state the amount due on each subscription
Call – a declaration officially made by a plus accrued interest, and the date, time and
corporation usually expressed in the form of a place of the sale which shall not be less than
resolution of the board of directors requiring 30 days nor more than 60 days from the
the payment of all or a certain prescribed date the stocks become delinquent.
portion of a subscriber’s stock subscription 5. Sale of the delinquent shares at public
auction.
When Stocks become delinquent:
1. If the subscription contract fixes HIGHEST BIDDER
the date for payment, failure to pay on The person participating in the delinquency sale
such date shall render the entire balance who offers to pay the full amount of the
due and payable with interest. Thirty balance of the subscription together with
(30) days therefrom, if still unpaid, the the accrued interest, costs of advertisement
shares become delinquent, as of the due and expenses of sale, for the smallest
date, and subject to sale, unless the number of shares. In other words, the
board declares otherwise. amount of the bid does not vary but only
2. If no date is fixed in the the number of shares to be bought changes
subscription contract, the board of and determines the highest bidder.
directors can make the call for payment,
and specify the due date. The notice of Notes:
call is mandatory. The failure to pay on  The remaining shares, if any, shall be
such date shall render the entire balance credited in favor of the delinquent
due and payable with interest. Thirty stockholder who shall be entitled to the
days (30) therefrom, if still unpaid, the issuance of a certificate of stock covering
shares become delinquent, as of the date such shares.
Page 110 of 199
 Should there be no HIGHEST BIDDER the b. stock dividends shall be

corporation may, subject to the provisions withheld until the unpaid
of the Code, bid for the same, and the total subscription is fully paid.
amount due shall be credited as paid in full
in the books of the corporation. The stocks Upon the director owning delinquent
shall then be considered as treasury shares. shares:
1. He can continue serving in that
Sec. 69. When sale may be questioned. capacity unless and until said shares
are totally bidded away, he continues
Grounds for recovery of stock unlawfully sold: to be the owner thereof and in the
 irregularity or defect in the notice of sale interim he is not disqualified.
 irregularity or defect in the sale itself of the 2. A delinquent stockholder seeking
delinquent stock to be elected as director may not be a
candidate for, nor be duly elected to,
Conditions: the board.
 the party seeking to maintain such action
first pays or tenders to the party holding the Sec. 72. Rights of unpaid shares.
stock the sum for which the same was sold,  all the rights of a stockholder as long as the
with interest from the date of sale at the stocks are not delinquent
legal rate
 a complaint must be filed within 6 months Sec. 73. Lost or destroyed certificates.
from the date of sale.
PROCEDURE FOR ISSUANCE OF NEW
Sec. 70. Court action to recover unpaid CERTIFICATE OF STOCK IN LIEU OF LOST,
subscription. STOLEN OR DESTROYED ONES:
 A call may be required before a corporation 1. Filing with the corporation an affidavit in
can maintain a suit for the enforcement of triplicate by the registered owner setting
unpaid subscription (sec. 67) forth the circumstances as to how the
certificate was lost, stolen or destroyed, the
 The judicial remedy is limited to the amount
number of shares, serial number of the
due on any unpaid subscription, with
certificate and the name of the corporation
accrued interest, costs and expenses
that issued the same.
2. Publication of notice of loss by the
Sec. 71. Effects of delinquency.
corporation in a newspaper of general
1. Accelerates the entire amount of the unpaid
circulation in the place of the principal
subscription;
office, once a week for 3 consecutive weeks.
2. Subject the shares to interest, expenses and
3. After the lapse of 1 year from the date of the
costs;
last publication, if no contest has been
3. Disenfranchise the shares from any right
presented, the corporation shall cancel in its
that inheres to a shareholder, except the
books the certificate of stock, which has
right to dividends (but which shall be
been lost, stolen or destroyed, and issue in
applied to any amount due on said shares
lieu thereof a new certificate of stock.
or, in the case of stock dividends, to be
withheld by the corporation until full
However, if the registered owner files a bond or
payment of the delinquent shares. (Sec. 43)
other securities as may be necessary to the
board, the new certificate of stock may be issued
Upon the rights of stockholders:
even before the expiration of 1 year period.
1. The delinquent stock is not entitled to
vote or to be represented at any  The prescribed procedure does not apply to
stockholders’ meeting; a case where the certificates are in the
2. The holder of delinquent stock is not company’s possession when mislaid which
entitled to any of the rights of a thereby obligates the corporation, not the
stockholder except the right to receive stockholder, to suffer the consequences.
dividends subject to the rule in Sec. 43: (SEC Opinion)
a. cash dividends shall first be  Except in case of fraud, bad faith, or
applied to the unpaid balance negligence on the part of the corporation
plus costs and expenses; and its officers, no action may be brought
Page 111 of 199
against any corporation which shall have 3. Stock and transfer book, in case
issued certificate of stock in lieu of those of stock corporations.
lost, stolen or destroyed pursuant to the  Corporate records required by the SEC to be
procedure above-described. (R. A. 201a) kept and/or registered:
1. Books of Account;
TITLE VIII 2. List of Stockholders or Members; and
CORPORATE BOOKS AND RECORDS 3. Financial Records.
 A stockholder has the power to inspect the
Sec. 74. Books to be kept; stock transfer corporate books of a controlled subsidiary of
agent. the mother corporation of which he is the
stockholder provided. (Gokongwei vs SEC,
Inspection Rights 89 SCRA 36)
Limitations:
a. The right must be exercised Sec. 75. Right to financial statements.
during reasonable hours on business The financial statement shall include:
days; 1. a balance sheet as of the end of the last
b. The person demanding the right taxable year
has not improperly used nay 2. a profit or loss statement for said taxable
information obtained through any year, showing in reasonable detail its assets
previous examination of the books and and liabilities and the result of its
records of the corporation; and operations.
c. The demand is made in good
faith or for a legitimate purpose.  The board of directors or trustees shall
present to such stockholders or members a
Remedies: financial report of the operations of the
a. Action for mandamus corporation for the preceding year at the
b. Civil (damages) or criminal liability regular meeting of stockholders or members
under par. 3 and sec. 144 – imposed on which shall include financial statements,
the guilty officer or agent of the
corporation. Form: duly signed and certified by an
Extent: if the refusal is made pursuant independent CPA
to a resolution or order of the board, Exception: if the paid-up capital of the
liability shall be imposed upon those corporation is less than P50,000.00, it may
who voted for such refusal. be certified under oath by the treasurer or
any responsible officer of the corporation
Note: it shall be a defense to any action
under this section that the person TITLE IX
demanding to examine the corporation’s MERGER AND CONSOLIDATION
records and minutes has improperly
used any information secured through Procedure for effecting a merger or
any prior examination of the records or consolidation: ( Secs. 76 to 80.)
minutes of such corporation or of any 1. The BOD or trustees of each
other corporation, or was not acting in corporation, party to the merger or
good faith or for a legitimate purpose in consolidation, shall approve a plan of
making his demand. merger or consolidation.
2. Approval by the stockholders or
 The right extends, in consonance with members of the constituent corporations
equity, good faith, and fair dealing, to a by a vote of at least 2/3 of the voting
foreign subsidiary wholly-owned by the power of the corporations.
corporation. 3. Articles of merger or articles of
 Books required to be kept: consolidation shall be executed, to be
1. Book of Minutes signed by the president or vice-president
a. minutes of stockholder or members and certified by the secretary or
meetings; and assistant secretary of each corporation.
b. minutes of board meetings. 4. Submittal to the SEC and issuance of a
2. Book of all business transactions; certificate of merger or consolidation, at
Page 112 of 199
which time the merger or consolidation articles of incorporation for corporations

shall be effective. organized under this Code; and
4. Such other provisions with respect to the
Sec. 76. Plan of merger or consolidation. proposed merger or consolidation as are
deemed necessary or desirable.
Modes of corporate combination: Vote requirement: approval by majority vote of
1. by the sale of all or part of the assets of each of the board of directors or trustees of the
one corporation to another; constituent corporations (sec. 77)
2. by the transfer of the assets of one
corporation to another by lease; Sec. 77. Stockholder’s or member’s
3. by consolidation or merger; approval.
4. by the use of the holding company.
Vote requirement: affirmative vote of
Merger stockholders representing at least 2/3 of the
 A union whereby one or more existing outstanding capital stock of each corporation in
corporations are absorbed by another the case of stock corporations or at least 2/3 of
corporation which survives and continues the members in the case of non-stock
the combined business. corporations
Consolidation Notice requirement: given to all stockholders or

 The union of two or more existing members of the respective corporations, at least
corporations to form a new corporation 2 weeks prior to the date of the meeting, either
called the consolidated corporation. personally or by registered mail.
SALE OF ASSETS MERGER/ Contents: purpose of the meeting and

CONSOLIDATION shall include a copy or a summary of the
1. Merger or 1. A sale of assets is plan of merger or consolidation.
consolidation is not always involved;
always involved; Amendment to Plan of Merger or
Consolidation:
2. Ordinarily, the 2. Involves an Vote requirement:
purchasing corp. assumption of the  approved by majority vote of the respective
does not assume the debts and liabilities boards of directors or trustees of all the
liabilities of the of the absorbed constituent corporations and
selling corp; corp.;  ratified by the affirmative vote of
stockholders representing at least 2/3 of the
3. Does not 3. Involves the outstanding capital stock or of 2/3 of the
constitute a dissolution of the members of each of the constituent
dissolution or absorbed companies. corporations
liquidation of the
seller. Note: any dissenting stockholder in stock
corporations may exercise his appraisal right
Contents of Plan of Merger or except that if the board of directors decides to
Consolidation: abandon the plan, the appraisal right shall be
1. The names of the corporations extinguished.
proposing to merge or consolidate,
hereinafter referred to as the constituent Sec. 78. Articles of merger or
corporations; consolidation.
2. The terms of the merger or  executed by each of the constituent
consolidation and the mode of carrying corporations, to be signed by the president
the same into effect; or vice-president and certified by the
3. A statement of the changes, if any, in the secretary or assistant secretary of each
articles of incorporation of the surviving corporation
corporation in case of merger; and, with  Contents:
respect to the consolidated corporation 1. The plan of the merger or the plan of
in case of consolidation, all the consolidation;
statements required to be set forth in the
Page 113 of 199
2. As to stock corporations, the number of liabilities of a corporation organized under

shares outstanding, or in the case of this Code;
non-stock corporations, the number of
members; and 4. The surviving or the consolidated
3. As to each corporation, the number of corporation shall thereupon and thereafter
shares or members voting for and possess all the rights, privileges, immunities
against such plan, respectively. and franchises of each of the constituent
corporations; and all property, real or
Sec. 79. Effectivity of merger or personal, and all receivables due on
consolidation. whatever account, including subscriptions
 upon the issuance of a certificate of merger to shares and other choses in action, and all
or of consolidation by the SEC and every other interest of, or belonging to,
Conditions precedent: or due to each constituent corporation, shall
 submission of articles of merger or be deemed transferred to and vested in such
of consolidation, signed and certified surviving or consolidated corporation
to the SEC without further act or deed; and
 favorable recommendation of the
appropriate government agency in 5. The surviving or consolidated corporation
case of merger or consolidation of shall be responsible and liable for all the
banks or banking institutions, liabilities and obligations of each of the
building and loan associations, trust constituent corporations in the same
companies, insurance companies, manner as if such surviving or consolidated
public utilities, educational corporation had itself incurred such
institutions and other special liabilities or obligations; and any pending
corporations governed by special claim, action or proceeding brought by or
laws against any of such constituent corporations
may be prosecuted by or against the
Note: If, upon investigation, the SEC has reason surviving or consolidated corporation. The
to believe that the proposed merger or rights of creditors or liens upon the property
consolidation is contrary to or inconsistent with of any of such constituent corporations shall
the provisions of this Code or existing laws, it not be impaired by such merger or
shall set a hearing to give the corporations consolidation.
concerned the opportunity to be heard. Written
notice of the date, time and place of hearing General Rule: When one corporation buys all
shall be given to each constituent corporation at the shares of another corporation, this will not
least 2 weeks before said hearing. operate to dissolve the other corporation and as
the two corporations still maintaining their
Sec. 80. Effects of merger or separate corporate entities, one will not answer
consolidation. for the debts of the other.
1. The constituent corporations shall become a Exceptions to Non-assumption of Liabilities:
single corporation which, in case of 1. If there is an express assumption
merger, shall be the surviving corporation of liabilities;
designated in the plan of merger; and, in 2. If there is a consolidation or
case of consolidation, shall be the merger;
consolidated corporation designated in the 3. If the purchase was in fraud of
plan of consolidation; creditors; and
4. If the purchaser is merely a
2. The separate existence of the constituent continuation of the seller.
corporations shall cease, except that of the
surviving or the consolidated corporation; TITLE X
APPRAISAL RIGHT
3. The surviving or the consolidated
corporation shall possess all the rights, Sec. 81. Instances of appraisal right.
privileges, immunities and powers
and shall be subject to all the duties and APPRAISAL RIGHTS
 The right to withdraw from the corporation
and demand payment of the fair value of his
Page 114 of 199
shares after dissenting from certain and appraised by 3 disinterested persons,

corporate acts involving fundamental one of whom shall be named by the
changes in corporate structure, namely: stockholder, another by the corporation,
1. An amendment to the articles and the third by the two thus chosen. The
that has the effect of findings of the majority of the appraisers
a. changing or restricting shall be final, and their award shall be paid
the rights of shareholders or of by the corporation within 30 days after such
authorizing preferences over award is made
those of outstanding shares, or
b. extending the term of Limitation: no payment shall be made to any
corporate existence; dissenting stockholder unless the corporation
2. Sale, encumbrance or other has unrestricted retained earnings in its books
dispositions of all or substantially all of to cover such payment
the corporate property or assets.
3. Merger or consolidations; and Sec. 83. Effect of demand and
4. Investment of corporate funds in termination of right.
another corporation or in a purpose Effect of demand of right:
other than the primary purpose; (Sec.  all rights accruing to such shares, including
42) voting and dividend rights, shall be
5. A stockholder of a close suspended
corporation may, for any reason, compel
said corporation to purchase his shares Period: from the time of demand for payment
at their fair value (Sec. 105) of the fair value of a stockholder’s shares until
 It is essential that the dissenting either the abandonment of the corporate action
shareholder must have been present, either involved or the purchase of the said shares by
in person or by proxy, in the stockholders’ the corporation
meeting and had his dissenting vote
recorded. Limitation: if the dissenting stockholder is not
paid the value of his shares within 30 days after
Sec. 82. How right is exercised. the award, his voting and dividend rights shall
 by making a written demand for payment of immediately be restored.
the fair value of his shares on the
corporation within 30 days after the date on Sec. 84. When right to payment ceases.
which the vote was taken  demand for payment is withdrawn with the
 failure to make the demand within consent of the corporation
such period shall be deemed a  proposed corporate action is abandoned or
waiver of the appraisal right rescinded by the corporation
 upon surrender of the certificate(s) of stock  proposed corporate action disapproved by
(which must be within 10 days from the date the SEC where such approval is necessary
of demand) representing his shares the  if the SEC determines that such stockholder
corporation shall pay to such stockholder is not entitled to the appraisal right
the fair value thereof
 upon payment by the corporation of the Effect: his status as a stockholder shall
agreed or awarded price, the stockholder thereupon be restored, and all dividend
shall transfer his shares to the corporation distributions which would have accrued on his
shares shall be paid to him
Determination of fair value of the shares:
 the fair value as of the day prior to the date Sec. 85. Who bears costs of appraisal.
on which the vote was taken, excluding any General Rule: the corporation
appreciation or depreciation in anticipation Exception: the stockholder if the fair value
of such corporate action. ascertained by the appraisers is approximately
 if within a period of 60 days from the date the same as the price which the corporation
the corporate action was approved by the may have offered to pay the stockholder
stockholders, the withdrawing stockholder
and the corporation cannot agree on the fair Who bears costs and expenses in an action to
value of the shares, it shall be determined recover fair value:
Page 115 of 199
General Rule: the corporation election of available unless

Exception: the stockholder if refusal of the directors otherwise
stockholder to receive payment was unjustified provided in the
articles or by-laws
Sec. 86. Notation on certificates; rights 4. Directors cannot • 4. Trustees may
of transferee. exceed 15 in exceed 15 in
 within 10 days after demanding payment for number number
his shares, a dissenting stockholder shall 5. The term of a • 5. The term of a
submit the certificates of stock for notation director is 1 year trustee is 3 years;
that they are dissenting shares 1/3 of the Board
shall be elected
Transfer of dissenting shares: annually
 rights of the transferor as a dissenting 6. Stockholders may • 6. Members may
stockholder to be paid the fair value of the vote by proxy be deprived of the
shares shall cease right to vote by
 the transferee shall have all the rights of a proxy in the
regular stockholder; articles or by-laws
 all dividend distributions which would have 7. Officers are • 7. Officers may
accrued on such shares shall be paid to him elected by the be directly elected
Board of by the members
TITLE XI Directors unless otherwise
NON-STOCK CORPORATIONS provided in the
articles or by-laws
Sec. 87. Definition. 8. Stockholders and • 8. Members may
Non-stock corporation - one where no part directors must act
of its income is distributable as dividends to its be allowed by the
in a meeting, by-laws to vote by
members, trustees, or officers except where a mail or other
mere written similar means
Limitation: any profit which a non-stock assent is
corporation may obtain as an incident to its sufficient or a
operations shall, whenever necessary or proper, formal meeting
be used for the furtherance of the purpose or unnecessary
purposes for which the corporation was
organized Rules on Conversion: (SEC Opinion)
1. Stock to non-stock corporation:
Governing Law: governed by the same rules
 Conversion may be made by mere
established for stock corporations, whenever
amendment of the articles of
pertinent, subject, however, to a number of
incorporation.
special features.
2. Non-stock to stock corporation:
STOCK NON-STOCK
 The corporation must first be dissolved;
1. Has capital stock • 1. Does not have
mere amendment of the articles of
divided into shares and may incorporation would not suffice because
shares and with not distribute the conversion would change the
authority to profits to its corporate nature from non-profit to
distribute members monetary gain.
dividends to its
stockholders  The conversion without dissolving it first
2. Stockholders may • 2. would be tantamount to distribution of
Members
transfer their its assets or income to its members
cannot transfer inasmuch as after its conversion, the
shares their membership asset of the non-stock corporation would
unless allowed by now be treated as payment to the
the articles or by- subscriptions of the members who will
laws now become stockholders of the
3. Cumulative voting • 3. Cumulative corporation.
is available in the voting not
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Sec. 88. Purposes. Exception: as soon as organized, the term of

Non-stock corporations may be formed or office of 1/3 of the number of the board shall
organized for expire every year
a. charitable,  elections of trustees comprising 1/3 of the
b. religious, board of trustees shall be held annually
c. educational,
d. professional, Notes:
e. cultural,  only a member of the corporation shall be
f. fraternal, elected as a trustee
g. literary,  officers of a non-stock corporation may be
h. scientific, directly elected by the members unless
i. social, otherwise provided in the articles of
j. civic service, or incorporation or the by-laws
k. similar purposes, like trade, industry,
agricultural and like chambers, or any Sec. 93. Place of meetings.
combination thereof General Rule: city or municipality where the
principal office of the corporation is located
Chapter I - MEMBERS (sec. 51)
Exception: any place within the Philippines
Sec. 89. Right to vote. (regular or special meetings), which the by-laws
General Rule: each member, regardless of class, may provide
shall be entitled to one vote
Extent: it may be limited, broadened or denied Notice requirement: proper notice is sent to all
to the extent specified in the articles of members indicating the date, time and place of
incorporation or the by-laws the meeting
 a member may vote by proxy unless Chapter III - DISTRIBUTION OF ASSETS

otherwise provided in the articles of IN
incorporation or the by-laws NON-STOCK CORPORATIONS
 voting by mail or other similar means may
be authorized by the by-laws with the Sec. 94. Rules of distribution.
approval of the SEC
Distribution of Assets of Non-Stock Corporation
Sec. 90. Non-transferability of upon Dissolution:
membership. 1. All its creditors shall be paid;
General Rule: membership and all rights 2. Assets held subject to return
arising from it are personal and non- upon dissolution shall be delivered back
transferable to their respective transferors;
Exception: the articles of incorporation or the 3. Assets held for charitable,
by-laws otherwise provide religious, etc., without a condition for
their return on dissolution, shall be
Sec. 91. Termination of membership. conveyed to one or more organizations
 in the manner and for the causes provided engaged in similar activities as the
in the articles of incorporation or the by- dissolved corporation;
laws 4. Other assets shall be distributed
to members, as provided for in the
Effect: extinguish all rights in the corporation articles or by-laws; and
or in its property, unless otherwise provided in 5. In any other case, assets may be
the articles of incorporation or the by-laws. distributed as specified in a plan of
Chapter II - TRUSTEES AND OFFICERS distribution.
Sec. 92. Election and term of trustees. Sec. 95. Plan of distribution of assets.
 trustees elected shall have a term of three 3 Procedure:
years a. The board of trustees shall, by majority vote,
adopt a resolution recommending a plan of
distribution and directing the submission
Page 117 of 199
thereof to a vote at a regular or special h. other corporations declared to be vested

meeting of members having voting rights. with public interest.
b. Written notice setting forth the proposed
plan of distribution or a summary thereof Governing Law: the provisions of this Title
and the date, time and place of such meeting shall primarily govern close corporations
shall be given to each member entitled to provided, that the provisions of other Titles of
vote, within the time and in the manner this Code shall apply suppletorily except insofar
provided in the Code for the giving of notice as this Title otherwise provides.
of meetings to members.
c. Such plan of distribution shall be adopted Characteristics of Close Corporations:
upon approval of at least 2/3 of the 1. Stockholders may act as
members having voting rights present or directors without need of election and
represented by proxy at such meeting. therefore are liable as directors;
2. Stockholders who are involved in
TITLE XII the management of the corporation are
CLOSE CORPORATIONS liable in the same manner as directors
are.
Sec. 96. Definition and applicability of 3. Quorum may be greater than
Title. mere majority;
4. Transfers of stocks to others,
Close corporation - a special kind of stock which would increase the number of
corporation: stockholders to more than the maximum
1. whose articles of incorporation should are invalid;
provide that: 5. Corporate actuations may be
a. the number of stockholders shall not binding even without a formal board
exceed 20; meeting, if the stockholder had
b. issued stocks are subject to transfer knowledge or ratified the informal
restrictions, with a right of preemption action of the others;
in favor of the stockholders or the 6. Preemptive right extends to all
corporation; and stock issues;
c. the corporation shall not be listed in the 7. Deadlocks in board are settled by
stock exchange or its stocks should not the SEC, on the written petition by any
be publicly offered; AND stockholder; and
8. Stockholder may withdraw and
2. whose 2/3 of the voting stocks or voting avail of his right of appraisal.
rights is owned or controlled by another
corporation which is not a close corporation. ORDINARY CLOSE
STOCK CORPORATION
 The mere ownership by a single CORPORATION
stockholder or by another corporation of all 1. Its articles of 1. Its articles must
or nearly all of the capital stock of a incorporation need contain the special
corporation is not itself sufficient ground for only contain the matters prescribed
disregarding the separate corporate general matters by Sec. 97, aside
personalities. So, too, a narrow enumerated in Sec. from the general
distribution of ownership does not, by 14 of the Code. matters in Sec. 14.
itself, make a close corporation (San Failure to do so
Juan Structural vs CA 296 SCRA 631 1998) precludes a de jure
close corporation
The following cannot be a close corporation: status.
a. mining companies; 2. Its status as an 2. 2/3 of its voting
b. oil companies; ordinary stock stock or voting
c. stock exchanges; corporation is not rights must not be
d. banks; affected by the owned or controlled
e. insurance companies; ownership of its by another
f. public utilities; voting stock or corporation which
g. education institutions; voting rights. is not a close
corporation.
Page 118 of 199
3. Its articles cannot 3. Its articles may 1. For a classification of shares or rights
classify its classify its directors. and the qualifications for owning or
directors. holding the same and restrictions on
4. Business of the 4. Business of the their transfers;
corporation is corporation may be 2. For a classification of directors into one
managed by the managed by the or more classes, each of whom may be
board of directors. stockholders if the voted for and elected solely by a
articles so provide, particular class of stock; and
but they are liable 3. For a greater quorum or vote
as directors. requirements in meetings of
5. The corporate 5. Its articles may stockholders or directors than those
officers and provide that any or provided in this Code.
employees are all of the corporate
elected by a officers or  it may provide that the business of the
majority vote of all employees may be corporation shall be managed by the
the members of elected or stockholders provided that:
the board of appointed by the 1. No meeting of stockholders need be
directors. stockholders. called to elect directors;
6. The pre-emptive 6. The pre-emptive 2. The stockholders of the corporation
right is subject to right is subject to no shall be deemed to be directors for the
the exceptions exceptions unless purpose of applying the provisions of
found in Sec. 39. denied in the this Code unless the context clearly
articles requires otherwise; and
7. The appraisal 7. The appraisal right 3. The stockholders of the corporation
right may be may be exercised shall be subject to all liabilities of
exercised by a and compelled directors.
stockholder only in against the
the cases provided corporation by a  it may also provide that all officers or
in Secs. 81 and 42 stockholder for any employees or that specified officers or
of the Code. reason. employees shall be elected or appointed by
8. Except as regards 8. In case of an the stockholders, instead of by the board of
redeemable shares, arbitration of an directors.
the purchase by intra-corporate
the corporation of deadlock by the Sec. 98. Validity of restrictions on
its own stock must SEC, the transfer of shares.
always be made corporation may be
from the ordered to purchase Conditions of restrictions:
unrestricted its own shares from 1. Restrictions on the right to transfer shares
retained earnings. the stockholders must appear in the:
regardless of the a. articles of incorporation,
availability of b. by-laws, and in the
unrestricted c. certificate of stock; otherwise, the same
retained earnings. shall not be binding on any purchaser
8. Arbitration of 8. Arbitration of thereof in good faith.
intra-corporate intra-corporate
deadlock by the deadlock by the 2. The restrictions shall not be more onerous
SEC is not a SEC is an available than granting the existing stockholders or
remedy in case the remedy in case the the corporation the option to purchase the
directors or directors or shares of the transferring stockholder with
stockholders are so stockholders are so such reasonable terms, conditions or period
divided respecting divided respecting stated therein.
the management the management of
of the corporation. the corporation. Note: If the existing stockholders fails to
exercise the option to purchase upon the
Sec. 97. Articles of incorporation. expiration of said period, the transferring
 it may provide: stockholder may sell his shares to any third
person.
Page 119 of 199
conduct of the business and affairs

Sec. 99. Effects of issuance or transfer of of the corporation as to restrict or
stock in breach of qualifying conditions. interfere with the discretion or
 Whenever any person to whom stock of a powers of the board of directors
close corporation has been issued or such agreement shall impose on the
transferred who is not entitled under any stockholders who are parties thereto the
provision of the articles of incorporation to liabilities for managerial acts imposed
be a holder of record of stock, he is by this Code on directors.
conclusively presumed to have notice 5. To the extent that the stockholders are
either that: actively engaged in the management or
a. he is a person not eligible to be a operation of the business and affairs of a
holder of stock of the corporation close corporation, the stockholders shall
b. transfer of stock to him would cause be held to strict fiduciary duties to
the stock to be held more than the each other and among themselves. Said
number of persons permitted by its stockholders shall be personally liable
articles of incorporation to hold for corporate torts unless the
stock of the corporation; or corporation has obtained reasonably
c. with the transfer of stock he adequate liability insurance.
corporation’s restrictions on transfer
is violated Sec. 101. When board meeting is
unnecessary or improperly held.
 The corporation may, at its option Rule: any action by the directors without a
refuse to register the transfer of the meeting shall be deemed valid if:
stock in the name of the transferee. 1. Before or after such action is taken,
But these restrictions may be waived written consent thereto is signed by all
by consent of all the stockholders or the directors; or
by amendment of the articles of 2. All the stockholders have actual or
incorporation. implied knowledge of the action and
Sec. 100. Agreements by stockholders. make no prompt objection thereto in
writing; or
1. Agreements by and among stockholders 3. The directors are accustomed to take
executed before the formation of a informal action with the express or
close corporation, shall survive the implied acquiescence of all the
incorporation of such corporation and stockholders; or
shall continue to be valid and binding 4. All the directors have express or implied
between and among them, if such be knowledge of the action in question and
their intent, to the extent that such none of them makes prompt objection
agreements are not inconsistent with the thereto in writing.
articles of incorporation.
2. An agreement between two or more Exception: the by-laws provide otherwise
stockholders, if in writing and signed
by the parties thereto, may provide Sec. 102. Pre-emptive right in close
that in exercising any voting rights, corporations.
the shares held by them shall be voted as
therein provided, or as they may agree, Extent: all stock to be issued, including
or as determined in accordance with a reissuance of treasury shares, whether for
procedure agreed upon by them. money, property or personal services, or in
3. No provision in any written agreement payment of corporate debts, unless the articles
signed by the stockholders, relating to of incorporation provide otherwise.
any phase of the corporate affairs, shall
be invalidated as between the parties on Sec. 103. Amendment of articles of
the ground that its effect is to make incorporation.
them partners among themselves.
4. A written agreement among some or all Vote requirement: affirmative vote of at least
of the stockholders in a close 2/3 of the outstanding capital stock, whether
corporation shall not be invalidated on with or without voting rights, or of such greater
the ground that it so relates to the proportion of shares as may be specifically
Page 120 of 199
provided in the articles of incorporation, at a  any stockholder may, for any reason,
meeting duly called for the purpose compel the said corporation to purchase his
shares at their fair value, which shall not be
Sec. 104. Deadlocks. less than their par or issued value
 the SEC, upon written petition by any
stockholder, shall have the power to Limitation: the corporation has to have
arbitrate the dispute sufficient assets in its books to cover its debts
 the Commission shall have authority to and liabilities exclusive of capital stock
make such order as it deems appropriate,
including an order: Right to have the corporation dissolved:
1. canceling or altering any  by written petition to the SEC:
provision contained in the articles of 1. whenever any of acts of the directors,
incorporation, by-laws, or any officers or those in control of the
stockholder’s agreement; corporation is illegal, or fraudulent,
2. canceling, altering or enjoining or dishonest, or oppressive or unfairly
any resolution or act of the prejudicial to the corporation or any
corporation or its board of directors, stockholder, or
stockholders, or officers; 2. whenever corporate assets are being
3. directing or prohibiting any act misapplied or wasted.
of the corporation or its board of
directors, stockholders, officers, or TITLE XIII
other persons party to the action; SPECIAL CORPORATIONS
4. requiring the purchase at their
fair value of shares of any Chapter I - Educational Corporations
stockholder, either by the
corporation regardless of the Sec. 106. Incorporation.
availability of unrestricted retained
earnings in its books, or by the other Educational Corporation – a stock or non-
stockholders; stock corporation organized to provide facilities
5. appointing a provisional for teaching or instruction.
director;
6. dissolving the corporation; or Governing Law: Educational corporations shall
7. granting such other relief as the be governed by special laws and by the general
circumstances may warrant. provisions of this Code.
Provisional director: Sec. 107. Pre-requisites to

 an impartial person who is neither a incorporation.
stockholder nor a creditor of the corporation  The articles and by-laws must be
or of any subsidiary or affiliate of the accompanied by a favorable
corporation, and whose further recommendation of the Department of
qualifications, if any, may be determined by Education, Culture and Sports.
the Commission.
 not a receiver of the corporation and does Sec. 108. Board of trustees.
not have the title and powers of a custodian
or receiver. For non-stock educational institutions:
 shall have all the rights and powers of a duly  trustees shall not be less than 5 nor more
elected director of the corporation, than 15
including the right to notice of and to vote at  the number of trustees shall be in multiples
meetings of directors, until such time as he of 5
shall be removed by order of the  the terms of the office of the trustees shall
Commission or by all the stockholders. be staggered with 1 year interval, unless
otherwise provided by the articles or the by-
Sec. 105. Withdrawal of stockholder or laws
dissolution of corporation.  shall hold office for 5 years
 trustees elected to fill vacancies, occurring
Right to withdraw: before the expiration of a particular term,
Page 121 of 199
shall hold office only for the unexpired 3. That as such chief archbishop, bishop,
period priest, minister, rabbi or presiding elder,
 majority of the trustees shall constitute a he is charged with the administration of
quorum for the transaction of business the temporalities and the management
 powers and authority of trustees shall be of the affairs, estate and properties of his
defined in the by-laws religious denomination, sect or church
within his territorial jurisdiction,
For stock educational institutions: describing such territorial jurisdiction;
 the number and term of directors shall be 4. The manner in which any vacancy
governed by the provisions on stock occurring in the office of chief
corporations. archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be
Chapter II - RELIGIOUS filled, according to the rules, regulations
CORPORATIONS or discipline of the religious
denomination, sect or church to which
Sec. 109. Classes of religious he belongs; and
corporations. 5. The place where the principal office of
a. corporation sole - a special form of the corporation sole is to be established
corporation, usually associated with the and located, which place must be within
clergy, consisting of one person only and his the Philippines.
successors, who is incorporated by law to 6. Any other provision not contrary to law
give some legal capacities and advantages; for the regulation of the affairs of the
and corporation.
b. religious societies - a non-stock
corporation governed by a board but with Sec. 112. Submission of the articles of
religious purposes. It is incorporated by an incorporation.
aggregate of persons, e.g. religious order,  must be verified, before filing, by affidavit or
diocese, synod, sect, etc. affirmation of the chief archbishop, etc., as
the case may be, and
Sec. 110. Corporation sole.  accompanied by a copy of the commission,
A corporation sole may be formed by the: certificate of election or letter of
a. chief archbishop, appointment of such chief archbishop,
b. bishop, bishop, priest, minister, rabbi or presiding
c. priest, elder, duly certified to be correct by any
d. minister, notary public
e. rabbi or
f. other presiding elder of such Effect: such chief archbishop, etc. shall become
religious denomination, sect or church a corporation sole and all temporalities, estate
and properties of the religious denomination,
Sec. 111. Articles of incorporation. sect or church theretofore administered or
 Filed by the chief archbishop, bishop, priest, managed by him as such chief archbishop, etc.,
minister, rabbi or presiding elder of any shall be held in trust by him as a corporation
religious denomination, sect or church sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or
Contents: church including hospitals, schools, colleges,
1. That he is the chief archbishop, bishop, orphan asylums, parsonages and cemeteries
priest, minister, rabbi or presiding elder thereof.
of his religious denomination, sect or
church and that he desires to become a Sec. 113. Acquisition and alienation of
corporation sole; property.
2. That the rules, regulations and Rule: authority from the RTC is required before
discipline of his religious denomination, the corporation sole may mortgage or sell real
sect or church are not inconsistent with property
his becoming a corporation sole and do
not forbid it; Exception: where the religious denomination,
sect or church, religious society or order
concerned represented by the corporation sole
Page 122 of 199
has rules which regulate the acquisition, management of its affairs, properties and
mortgage and selling of real estate and personal estate.
property
Contents of article of incorporation:
Sec. 114. Filling of vacancies. 1. That the religious society or religious
 the successors in office of any chief order, or diocese, synod, or district
archbishop, etc. as the case may be shall organization is a religious organization
become the corporation sole on the filing of a religious denomination, sect or
with the SEC of a copy of their commission, church;
certificate of election, or letters of 2. That at least 2/3 of its membership have
appointment, duly certified by any notary given their written consent or have voted
public to incorporate, at a duly convened
 in case of any vacancy in the office of chief meeting of the body;
archbishop, etc. as the case may be, the 3. That the incorporation of the religious
person or persons authorized by the rules of society or religious order, or diocese,
the religious denomination to administer synod, or district organization desiring
the affairs of the corporation sole during the to incorporate is not forbidden by
vacancy shall exercise all the powers and competent authority or by the
authority of the corporation sole during constitution, rules, regulations or
such vacancy discipline of the religious denomination,
sect, or church of which it forms a part;
Sec. 115. Dissolution. 4. That the religious society or religious
 A corporation sole may be dissolved and its order, or diocese, synod, or district
affairs settled voluntarily by submitting to organization desires to incorporate for
the SEC a verified declaration of dissolution. the administration of its affairs,
 The declaration of dissolution shall set properties and estate;
forth: 5. The place where the principal office of
1. The name of the corporation; the corporation is to be established and
2. The reason for dissolution and winding located, which place must be within the
up; Philippines; and
3. The authorization for the dissolution of 6. The names, nationalities, and residences
the corporation by the particular of the trustees elected by the religious
religious denomination, sect or church; society or religious order, or the diocese,
4. The names and addresses of the persons synod, or district organization to serve
who are to supervise the winding up of for the first year or such other period as
the affairs of the corporation. may be prescribed by the laws of the
religious society or religious order, or of
 Upon approval of such
the diocese, synod, or district
declaration of dissolution by the SEC, the
organization, the board of trustees to be
corporation shall cease to carry on its
not less than five (5) nor more than
operations except for the purpose of
fifteen (15). (160a)
winding up its affairs.
TITLE XIV
Sec. 116. Religious societies.
DISSOLUTION
 Any religious society or religious order, or
any diocese, synod, or district organization Sec. 117. Methods of dissolution.
of any religious denomination, sect or
church, unless forbidden by the MODES OF DISSOLUTION
constitution, rules, regulations, or discipline 1. Voluntary
of the religious denomination, sect or a. Application for dissolution with
church of which it is a part, or by competent the SEC
authority, may, upon written consent i. Where no creditors are affected
and/or by an affirmative vote at a meeting ii. Where creditors are affected
called for the purpose of at least 2/3 of its b. Shortening of the corporate term
membership, incorporate for the by amending the articles of
administration of its temporalities or for the incorporation.
Page 123 of 199
2. Involuntary by personal delivery at least 30 days

a. Expiration of the corporate term; prior to said meeting
b. Failure to organize and 2. Board Resolution
commence business within 2 years from  majority vote of the board of directors
the date of issuance of the certificate of or trustees
incorporation (Note: However, the SEC 3. Stockholders or members approval
has opined that the dissolution in this  affirmative vote of the stockholders
case is not automatic. The corporation owning at least 2/3 of the outstanding
continues to exist as such, capital stock or of at least 2/3 of the
notwithstanding its non-operational members of a meeting to be held upon
status until the SEC orders its call of the directors or trustees
dissolution after notice and hearing.) 4. Certification
c. Legislative dissolution;  a copy of the resolution shall be
d. Quo warranto suit against a de certified by a majority of the board of
facto corporation; directors or trustees and countersigned
e. Minority stockholders’ suit for by the secretary of the corporation
dissolution on justifiable grounds; or 5. Issuance of certificate of Dissolution
f. SEC dissolution, upon complaint  the SEC shall thereupon issue the
and after notice and hearing, on the certificate
following grounds:
i. The corporation was illegally Sec. 119. Voluntary dissolution where
organized; creditors are affected.
ii. Continuous inactivity Petition for dissolution:
(subsequent to incorporation,
 Formalities:
organization and
commencement of business) for  signed by a majority of its board of
at least 5 years; directors or trustees or other officers
iii. Serious dissension in the having the management of its affairs
corporation; or  verified by its president or secretary or
iv. Commission by the one of its directors or trustees
corporation of illegal or ultra  affirmative vote of the stockholders
vires acts or violations of the representing at least 2/3 of the
Code. outstanding capital stock or by at least
2/3 of the members at a meeting of its
STEPS IN DISSOLUTION: stockholders or members called for the
1. The termination of the corporate purpose
existence as far as the right to go on  Contents:
doing ordinary business is concerned;  set forth all claims and demands against
2. winding up of its affairs, payment of its it
debts and the distribution of its assets  Where filed:
among the shareholders.  filed with the SEC
Sec. 118. Voluntary dissolution where no Procedure by the SEC:

creditors are affected. a. by order reciting the purpose of the petition,
Procedure: fix a date on or before which objections
1. Publication thereto may be filed by any person, which
 3 consecutive weeks publication of the date shall not be less than 30 days nor more
notice of time, place and object of the than 60 days after the entry of the order
meeting in a newspaper published in the b. a copy of the order shall be published at
place where the principal office of said least once a week for 3 consecutive weeks in
corporation is located; and if no a newspaper of general circulation
newspaper is published in such place, published in the municipality or city where
then in a newspaper of general the principal office of the corporation is
circulation in the Philippines, after situated, or if there be no such newspaper,
sending such notice to each stockholder then in a newspaper of general circulation in
or member either by registered mail or the Philippines, and a similar copy shall be
Page 124 of 199
posted for 3 consecutive weeks in 3 public (Republic vs Security Credit &

places in such municipality or city Acceptance Corp., 19 SCRA 58)
c. upon 5 day’s notice, given after the date on d. continuous inactivity of the corporation
which the right to file objections as fixed in for at least 5 years;
the order has expired, the Commission shall e. refusal to adopt or approve by-laws.
proceed to hear the petition and try any (P.D. 902-A).
issue made by the objections filed; and if no
such objection is sufficient, and the material Sec. 122. Corporate liquidation.
allegations of the petition are true, it shall
render judgment dissolving the corporation Corporate Liquidation
and directing such disposition of its assets  After the dissolution of the corporation, it
as justice requires, and may appoint a continues to exist as a body corporate, but
receiver to collect such assets and pay the only for the purpose of prosecuting and
debts of the corporation. defending suits by or against it and enabling
it to settle and close its affairs, to dispose of
Sec. 120. Dissolution by shortening and convey its property and to distribute its
corporate term. assets, but not for the purpose of continuing
 Effected by amending the articles of the business for which it was established.
incorporation
 It refers to the dissolution of a corporation Liquidation
prior to the expiration of its term as fixed in  The process by which all the assets of the
the articles of incorporation. corporation are converted into liquid assets
 This may be done by following the formal (cash) in order to facilitate the payment of
requirements of Sec. 16 (not mere written obligations to creditors, and the remaining
assent) and the procedural requirements of balance, if any, is to be distributed to the
Sec. 37 of the Code (stockholders’ approval). stockholders or members.
Methods:
Sec. 121. Involuntary dissolution. 1. By the corporation itself through its board
 upon filing of a verified complaint before of directors/trustees (sec. 122, par. 1);
the SEC and after proper notice and hearing 2. By a trustee to whom the corporate assets
on the grounds provided by existing laws, have been conveyed (sec.122, par. 2); and
rules and regulations 3. By a management committee or
rehabilitation receiver appointed by the SEC
Effects of dissolution: (sec.119, last par.).
 The corporation ceases as a body corporate
to continue the business for which it was NOTE: The 3-year period of liquidation does
established (sec. 122) not apply to Methods 2 and 3 as long as the
 The corporation continues as a body trustee or the receiver is appointed within the
corporate for years for purposes of winding- said period.
up or liquidation (sec. 122)
 The termination of the life of a juridical
 Upon the expiration of the winding-up
entity does not by itself cause the extinction
period of years, the corporation ceases to
or diminution of the rights and liabilities of
exist for all purposes
such entity nor those of its owners and
creditors alike (see Sec. 145). Where, in the
SEC may dissolve a corporation, upon filing of a
case of a corporation, the 3-year extended
verified complaint, and after notice and hearing,
life has expired without a trustee or receiver
on the following grounds:
having been expressly designated within the
a. fraud or misrepresentation as to the
said period, those who have been charged to
paid-up capital of the corporation (25%-
wind up its affairs or, in their absence, the
25% requirements);
board of directors/trustees should be
b. misrepresentation;
permitted to continue as “trustees” by legal
c. ultra vires – mala pohibita, but too
implication to complete the corporate
numerous infractions, which is
liquidation.
persistent despite SEC warnings
TITLE XV
Page 125 of 199
FOREIGN CORPORATIONS “GRANDFATHER RULE”

 The method by which the percentage of
Sec. 123. Definition and rights of foreign Filipino equity in a corporation engaged in
corporations. nationalized and/or partly nationalized
 A corporation formed, organized or existing areas of activities, provided for under the
under any law other than those of the Constitution and other nationalization laws,
Philippines, and whose laws allow Filipino is computed, in cases where there are
citizens and corporations to do business in corporate shareholders.
its own country or state.  The present liberal application of the rule
 The definition espouses the incorporation embodies the control test:
test and the reciprocity rule and is  Shares belonging to corporations or
significant for licensing purposes. partnerships at least 60% of the capital
 It is not permitted to “transact or do of which is owned by Filipino citizens
business in the Philippines” until it has shall be considered as of Philippine
secured a license for that purpose from the nationality.
SEC and a certificate of authority from the  But if the percentage of Filipino
appropriate government agency. ownership in the corporation or
partnership is less than 60% only the
TESTS TO DETERMINE NATIONALITY number of shares corresponding to
OF CORPORATIONS: such percentage shall be counted as of
1. INCORPORATION TEST – determined Philippine nationality.
by the state of incorporation, regardless of
the nationality of the stockholders. DOMICILE
2. DOMICILE TEST – determined by the  The domicile of a corporation is the place
state where it is domiciled. fixed by the law creating or recognizing it; in
3. CONTROL TEST – determined by the the absence thereof, it shall be understood
nationality of the controlling stockholders to be the place where its legal representation
or members. This test is applied in times of is established or where it exercise its
war. Also known as the WAR-TIME TEST. principal functions (Art. 51, NCC).
“PHILIPPINE NATIONAL” UNDER THE

FOREIGN INVESTMENT ACT OF 1991 (R.A.
No. 7042): Sec. 124. Application to existing foreign
1. A corporation organized under the laws of corporations.
the Philippines of which at least 60% of the  A license issued to the corporation before
outstanding capital stock entitled to vote is the effectivity of the Code shall continue to
owned by Filipino citizens; have such authority under the terms and
2. A foreign corporation licensed as doing condition of its license, subject to the
business in the Philippines of which 100% of provisions of this Code and other special
the outstanding capital stock entitled to vote laws
is wholly owned by Filipinos; and  Any corporation that is affected by the new
 However, it provides that where a requirements of this Code, said corporation
corporation and its non-Filipino shall, unless otherwise herein provided, be
stockholders own stocks in a SEC-registered given a period of not more than 2 years from
enterprise, at least 60% of the capital stock the effectivity of this Code within which to
outstanding and entitled to vote of both comply with the same (sec. 148)
corporations and at least 60% of the
members of the board of directors of both Sec. 125. Application for a license.
corporations must be Filipino citizens
(double 60% rule). Contents of Application:
The application shall be under oath and,
NOTE: The law applies the control test both unless already stated in its articles of
with respect to the ownership of shares entitled incorporation, shall specifically set forth the
to vote and the membership in the board of following:
directors. 1. The date and term of incorporation;
Page 126 of 199
2. The address, including the street  statement under oath of the president or
number, of the principal office of the any other person authorized by the
corporation in the country or state of corporation, showing to the satisfaction of
incorporation; the SEC and other governmental agency in
3. The name and address of its resident the proper cases that the applicant is solvent
agent authorized to accept summons and in sound financial condition, and
and process in all legal proceedings and, setting forth the assets and liabilities of the
pending the establishment of a local corporation as of the date not exceeding 1
office, all notices affecting the year immediately prior to the filing of the
corporation; application.
4. The place in the Philippines where the  foreign banking, financial and insurance
corporation intends to operate; corporations shall, in addition to the above
5. The specific purpose or purposes which requirements, comply with the provisions of
the corporation intends to pursue in the existing laws applicable to them
transaction of its business in the  in the case of all other foreign corporations,
Philippines: Provided, That said purpose no application for license to transact
or purposes are those specifically stated business in the Philippines shall be accepted
in the certificate of authority issued by by the SEC without previous authority from
the appropriate government agency; the appropriate government agency,
6. The names and addresses of the present whenever required by law
directors and officers of the corporation;
7. A statement of its authorized capital Sec. 126. Issuance of a license.
stock and the aggregate number of  SEC will issue a license to the foreign
shares which the corporation has corporation to do business in the
authority to issue, itemized by classes, Philippines provided the following
par value of shares, shares without par conditions are met:
value, and series, if any; a. appointment of a resident
8. A statement of its outstanding capital agent:
stock and the aggregate number of i. either a Filipino or a
shares which the corporation has issued, domestic corporation
itemized by classes, par value of shares, ii. power of attorney to
shares without par value, and series, if SEC to receive process
any; b. must prove that the foreign
9. A statement of the amount actually paid corporations country grants
in; and reciprocal rights to Filipinos and
10. Such additional information as may be Philippine corporations
necessary or appropriate in order to c. establish an office in the
enable the SEC to determine whether Philippines
such corporation is entitled to a license d. bring in its assets
to transact business in the Philippines, e. in the event o insolvency –
and to determine and assess the fees undertaking that Filipino creditors
payable. will be preferred
f. notice of six months should
Documents required: desire to terminate
 copy of its articles of incorporation and by- g. franchise and patents must
laws, certified in accordance with law, and remain in the Philippines, if possible
their translation to an official language of h. must file a bond of P100,000
the Philippines, if necessary which may be in the following form:
 duly executed certificate under oath by the i. surety bond
authorized official or officials of the ii. government securities
jurisdiction of its incorporation, attesting to iii. securities of political
the fact that the laws of the country or state subdivisions
of the applicant allow Filipino citizens and iv. shares of stock of
corporations to do business therein, and registered enterprises with
that the applicant is an existing corporation SEC
in good standing
Page 127 of 199
v. shares of stock of any

corporation being sold at the Sec. 130. Amendments to articles of
stock exchange incorporation or by-laws of foreign
corporations.
 That within 6  within 60 days after the amendment
months after each fiscal year, SEC shall becomes effective, file with the SEC, and in
require the deposit of additional securities the proper cases with the appropriate
equivalent to 2% of the amount in excess of government agency, a duly authenticated
P5M of the gross income. copy of the articles of incorporation or by-
laws, as amended
Sec. 127. Who may be a resident agent.  indicate clearly in capital letters or by
Either: underscoring the change or changes made,
a. an individual residing in the duly certified by the authorized official or
Philippines officials of the country or state of
 must be of good moral character and incorporation
of sound financial standing  the filing thereof shall not of itself enlarge or
b. a domestic corporation alter the purpose or purposes for which such
corporation is authorized to transact
Sec. 128. Resident agent; service of business in the Philippines
process.
Requirement: written power of attorney Sec. 131. Amended license.
designating some person who must be a When required: in the event it changes its
resident of the Philippines, on whom any corporate name, or desires to pursue in the
summons and other legal processes may be Philippines other or additional purposes
served in all actions or other legal proceedings
against such corporation How: by submitting an application to the SEC,
 In case of a change of address of the favorably endorsed by the appropriate
resident agent, it shall be his or its duty government agency in the proper cases
to immediately notify in writing the SEC
of the new address Sec. 132. Merger or consolidation
involving a foreign corporation licensed
Service of summons: in the Philippines.
 service to resident agent Requirements:
 within 10 days thereafter, transmit by mail a 1. With a domestic corporation:
copy of such summons or other legal a. it is permitted under Philippine laws
process to the corporation at its home or and by the law of its incorporation,
principal office and
 all expenses incurred by the b. the requirements on merger or
Commission for such service shall be consolidation as provided in this
paid in advance by the party at whose Code are followed
instance the service is made 2. With another foreign corporation:
a. permitted by the law of its
Sec. 129. Law applicable. incorporation
General Rule: Philippine laws b. within 60 days after such merger or
consolidation becomes effective, file
Exception: Laws of the state of creation on with the SEC, and in proper cases
matters relative to: with the appropriate government
 creation, agency, a copy of the articles of
merger or consolidation duly
 formation,
authenticated by the proper official
 organization or or officials of the country or state
 dissolution of corporations or under the laws of which merger or
 those which fix the relations, liabilities, consolidation was effected
responsibilities, or duties of c. if the absorbed corporation is the
stockholders, members, or officers of foreign corporation doing business
corporations to each other or to the in the Philippines, the latter shall at
corporation
Page 128 of 199
the same time file a petition for or the exercise of some of the functions
withdrawal of it license normally incident to, and in progressive
prosecution of, commercial gain or of
Sec. 133. Doing business without a the purpose of the business
license. organization.
TEST OF “DOING OR TRANSACTING 2. Implementing Rules of R.A. No. 7042

BUSINESS IN THE PHILIPPINES”:  Acts not constituting “doing
 The Corporation Code does not define the business”:
phrase “doing or transacting business.” a. Mere investment as a shareholder in a
domestic corporation and/or the
A. Jurisprudential Tests exercise of rights as such investor;
1. Twin characterization test b. Appointing a representative or
a. Whether the foreign corporation is distributor domiciled in the Philippines
maintaining or continuing in the which transacts business in its own
Philippines the body or substance of the name and for its own account;
business for which it was organized or c. Publication of a general advertisement
whether it has substantially retired from through any print or broadcast media;
it and turned it over another d. Maintaining a stock of goods in the
(Substance Test); and Philippines solely for the purpose of
b. Whether there is continuity of having the same processed by another
commercial dealings and arrangements, entity in the Philippines;
contemplating to some extent the e. Consignment by the foreign corporation
performance of acts or works or the of equipment with a local company to be
exercise of some functions normally used in the processing of products for
incident to and in progressive export;
prosecution of, the purpose and object of f. Collecting information in the
its organization (Continuity Test). Philippines; and
g. Performing services auxiliary to an
2. Contract Test existing isolated contract of sale which
 Whether the contracts entered into by the are not on a continuing basis.
foreign corporation, or by an agent acting
under the control and direction of the EFFECTS OF LACK OF LICENSE
foreign corporation, are consummated in A. On suits
the Philippines. 1. Foreign corporation doing business in the
Philippines:
B. Statutory Tests a. may not sue or intervene in any action in
1. Foreign Investment Act of 1991 (R.A. No. any court or administrative agency of
7042) the Philippines; but
 Acts constituting “doing business”: b. may be sued on any valid cause of action
a. Soliciting orders, service contracts, recognized in the Philippines (under the
opening offices, whether called “liaison” doctrine of quasi-estoppel by
offices or branches; acceptance of benefits).
b. Appointing representatives or
distributors domiciled in the Philippines 2. Foreign corporation not doing business in
or who in any calendar year stay in the the Philippines:
country for a period or periods totaling a. Generally, it may not sue and be sued in
180 days or more; any court or administrative agency of
c. Participating in the management, the Philippines;
supervision or control of any domestic b. However, it may sue and be sued for
business, firm or entity or corporation in isolated transactions, as well as for those
the Philippines; and which are casual or incidental thereto.
d. Any other act or acts that imply a
continuity of commercial dealings or DOCTRINE OF ISOLATED
arrangements, and contemplate to that TRANSACTIONS
extent the performance of acts or works,  Foreign corporations, even unlicensed ones,
can sue or be sued on a transaction or series
Page 129 of 199
of transactions set apart from their common 3. Failure to inform the SEC of the
business in the sense that there is no change of residence of the resident
intention to engage in a progressive pursuit agent;
of the purpose and object of business 4. Failure to submit copy of
transaction. amended articles or by-laws or articles
 However, it is not the lack of the of merger or consolidation;
prescribed license to do business 5. A misrepresentation in material
in the Philippines but the doing of matters in reports;
business without license which 6. Failure to pay taxes, imposts and
bars a foreign corporation from assessments;
access to Philippine courts. An 7. Engage in business unauthorized
unlicensed foreign corporation is not by SEC;
ipso facto barred from bringing an 8. Acting as dummy of a foreign
action. The legal prohibition is confined corporation; and
to cases relating to its business activity 9. Not licensed to do business in
in the country. the Philippines.
INSTANCES WHEN A FOREIGN Sec. 135. Issuance of certificate of

CORPORATION MAY SUE IN THE revocation.
PHILIPPINES WHETHER OR NOT LICENSED  upon the revocation of any such license to
TO DO BUSINESS THEREAT: transact business in the Philippines
1. To seek redress for an isolated
business transaction; Sec. 136. Withdrawal of foreign
2. To protect its corporate corporations.
reputation, name, and goodwill;  by filing a petition for withdrawal of license
3. To enforce a right not arising out
of a business transaction, e.g. tort that  no certificate of withdrawal shall be issued
occurred in the Philippines; by the SEC unless all the following
4. When the parties have requirements are met:
contractually stipulated that Philippines 1. All claims which have accrued in
is the venue of actions; and the Philippines have been paid,
5. When the party sued is barred by compromised or settled;
the principle of estoppel and/or 2. All taxes, imposts, assessments,
principle of unjust enrichment from and penalties, if any, lawfully due to
questioning the capacity of the foreign the Philippine Government or any of
corporation. its agencies or political subdivisions
have been paid; and
B. On contracts 3. The petition for withdrawal of
 The contracts contemplated are those that license has been published once a
satisfy the “contract test” or those that make week for 3 consecutive weeks in a
a foreign corporation as one “doing business newspaper of general circulation in
in the Philippines.” the Philippines.
General Rule: The contracts are unenforceable. TITLE XVI

They are enforceable only upon securing a MISCELLANEOUS PROVISIONS
license.
Sec. 137. Outstanding capital stock
Exception: However, the contracts are null and defined.
void if they are contrary to law, morals, good  the total shares of stock issued under
customs, public order and public policy. binding subscription agreements to
subscribers or stockholders, whether or not
Sec. 134. Revocation of license. fully or partially paid, except treasury shares
Grounds:
1. Failure to file annual reports Sec. 138. Designation of governing
required by the Code; boards.
2. Failure to appoint and maintain
a resident agent;
Page 130 of 199
 non-stock or special corporations may, 4. Majority Owned by Filipinos

through their articles of incorporation or a. Investment House (PD NO. 129)
their by-laws, designate their governing 
boards by any name other than as board of Sec. 141. Annual report or corporations.
trustees.  submitted to the SEC together with a
financial statement of its assets and
Sec. 139. Incorporation and other fees. - liabilities, certified by any independent
The SEC is hereby authorized to collect and certified public accountant in appropriate
receive fees as authorized by law or by rules and cases
regulations promulgated by the Commission.
(n)  report shall be submitted within such period
as may be prescribed by the SEC
Sec. 140. Stock ownership in certain
corporations. Sec. 142. Confidential nature of
examination results.
NATIONALIZED CORPORATIONS: Coverage: all interrogatories propounded by
1. 100% Filipino Owned the SEC and the answers thereto, as well as the
a. Mass Media which includes radio, results of any examination
television and printed media (Sec. 11(1), Exception: insofar as the law may require the
Art. XVI, 1987 Constitution) same to be made public or where such
b. Rural Banks - 100% of its capital stock interrogatories, answers or results are necessary
(RA No. 720, as amended) to be presented as evidence before any court
c. Rice and Corn Industry (RA No. 3018, as
amended) Visitorial power / right of visitation –
d. Security, watchman, and detective power of the State through the proper
Agency (RA No. 5487) governmental agency to examine the business
2. 70% Filipino Owned affairs, administration and condition of
a. Advertising Industry; (Sec. 11(2), Art. corporations
XVI, 1987 Constitution)
b. Banks and other than rural banks and Sec. 143. Rule-making power of the SEC.
new banks established by consolidation  power and authority to implement the
of branches or agencies of foreign banks provisions of this Code
in the Philippines; (RA No. 337)
c. Private Development Banks; (RA No.  promulgate rules and regulations
4093) reasonably necessary to enable it to perform
d. Savings and Loan Associations (RA No. its duties hereunder, particularly in the
3779 and RA No. 4378, as amended) prevention of fraud and abuses on the part
3. 60% Filipino Owned of the controlling stockholders, members,
a. Financing Companies – 60% directors, trustees or officers
of the capital stock. (RA No. 5980)
b. Fishing and Business Activity Sec. 144. Violations of the Code.
relating to Fishery Industry – 60% of the By an individual:
capital stock. (PD 43 and PD 704)
 fine of not less than P1,000.00 but not more
c. Exploration, Development,
than P10,000.00 or by imprisonment for
and Utilization of Natural Resources.
not less than 30 days but not more than 5
(Sec. 2 Art. XII, 1987 Constitution)
years, or both, in the discretion of the court
d. Ownership of Lands (Sec. 2
Art. XII, 1987 Constitution)
By the corporation:
e. Operation of Public Utility
(Sec. 11 Art. XII, 1987 Constitution)  after notice and hearing, be dissolved in
f. Educational Institutions appropriate proceedings before the SEC
other than those established by religious  such dissolution shall not preclude the
groups. (Sec.4[2], Art. XIV, 1987 institution of appropriate action against
Constitution) the director, trustee or officer of the
g. Any business reserved by corporation responsible for said
Congress. (Sec. 10 Art. XII, 1987 violation
Constitution)
Page 131 of 199
Sec. 145. Amendment or repeal. 8. Enlist aid and support of and/or

 No right or remedy in favor of or against any deputize any and all enforcement
corporation, its stockholders, members, agencies of Government, as well as any
directors, trustees, or officers, nor any private institution, corporation, firm,
liability incurred by any such corporation, association or person in the
stockholders, members, directors, trustees, implementation of its powers and
or officers, shall be removed or impaired functions;
either by the subsequent dissolution of said 9. Issue cease and desist orders to prevent
corporation or by any subsequent fraud or injury to investing public;
amendment or repeal of this Code or of any 10. Punish for both direct and indirect
part thereof. contempt;
11. Compel corporate officers to call
SECURITIES REGULATION CODE meetings of stockholders or members
(R.A. 8799) – July 19, 2000 thereof under its supervision;
12. Issue subpoena duces tecum and
• The Code is also known as the “Blue Sky summon witnesses, and order the
examination, search and seizure of all
Law”, because it was enacted to protect the
documents, papers, file and records, tax
public from unscrupulous promoters who
returns, and books of accounts of any
stake business or venture claims which have
entity or person under investigation;
really no basis and sell shares or interests
13. Suspend, or revoke, after proper notice
therein to investors, who are then left
and hearing, franchise or certificate of
holding certificates representing nothing
registration of corporations,
more than a square of the blue sky.
partnerships or associations; and
• The Code is self-executory and failure of
14. Exercise such other powers as may be
SEC to issue rules and regulations shall not
provided by law, implied from, or which
in any manner affect its self-executory
are necessary or incidental to the
nature. (Subsec. 72.1)
carrying out of express powers.
Powers and Functions of the SEC: (Sec.
Securities
5)
 Shares, participation or interest in a
1. Shall have jurisdiction and supervision
corporation or in a commercial
over all corporations, partnerships or
enterprise or profit-making venture and
associations who are grantees of primary
evidenced by a certificate, contract,
franchises;
instrument, whether written or
2. Formulate policies and
electronic in character. (Sec. 3)
recommendations on securities market,
Kinds:
advise Congress and other government
a. Debt Instruments: bonds, debentures,
agencies on all aspects of securities
notes, and other evidences of
market, and propose legislation and
indebtedness, asset-backed securities;
amendments thereto;
b. Equity Instruments: shares of stock,
3. Approve, reject, suspend, revoke, or
certificate of deposit for a future
require amendments to the registration
subscription, proprietary or
statements, and registration licensing
nonpropriety membership certificates in
applications;
corporations;
4. Regulate, investigate or supervise
c. Investment Instruments: investment
activities of persons to ensure
contracts, fractional undivided interests
compliance;
in oil, gas or other mineral rights;
5. Supervise, monitor, suspend or take
d. Derivatives: like options and warrants;
over activities of exchanges, clearing
e. Trust Instruments: certificates of
agencies and other SROs;
assignments, certificates of
6. Impose sanctions for violation of laws
participation, trust certificates, voting
and rules, regulations, and orders;
trust certificates or similar certificates;
7. Prepare, approve, amend or repeal rules
f. Catch-All: other instruments as may in
and regulation and orders, and issue
the future determined by the
opinions and provide guidance on and
Commission. (Subsec. 3.1)
supervise compliance therewith;
Page 132 of 199
Registration of Securities g. Issuance of security in exchange of

General Rule: Securities shall NOT be sold or any security from same issuer
offered for sale or distribution within the pursuant to the right of conversion;
Philippines (a) without registration statement h. Broker’s transactions;
duly filed and approved by SEC; and (b) Prior to i. Pre-incorporation subscription
such sale, information on the securities in such pursuant to the increase of the
form and with such substance as SEC may authorized capital stock;
prescribe, shall be made available to each j. Exchange of securities by issuer with
prospective purchaser. (Sec.8) securities holders exclusively;
k. Sale to less than 20 persons during
Exception: The following securities may be sold any 12 month period;
without need of registration; l. Sale of securities to banks,
A. Exempt Securities (Sec. 9): registered investment house,
a. Those issued or guaranteed by insurance companies, pension fund
the Government or by any political or retirement plan maintained by
subdivision, agency, or by any the government or other persons
person controlled or supervised by, authorized by the BSP to engage in
and acting as an instrumentality of trust functions.
the Government;
b. Those issued or guaranteed by  Any person applying for an
the government of any country with exemption under Sec. 10, shall file
which the Philippines has with SEC notice identifying the
diplomatic relations, or by any state, exemption relied upon on such form
province, or political subdivision and at such time as SEC by rule may
thereof on the basis of reciprocity, prescribe and with such notice shall
although the SEC may require pay to SEC a fee (Subsec. 10.3).
compliance with the form and
content of disclosures; Procedure for Registration of Securities:
c. Certificates issued by receiver or 1. The Issuer(originator, maker, obligor, or
by trustee in a bankruptcy duly creator of the security) shall file with the
approved by proper adjudicatory SEC a sworn registration statement;
body; 2. The registration statement shall include
d. Any security or its derivatives the a prospectus (document made by and on
sale or transfer of which, by law, is behalf of an issuer, underwriter or
under supervision and regulation of dealer to sell or offer securities for sale
OIC, HLURB, or BIR; to the public through a registration
e. Any security issued by bank, statement filed with SEC);
except its own shares. 3. The submission of the following
information: the effect of the securities
B. Exempt Transactions (Sec. 10): issue on ownership, on the mix of
a. Judicial sale by executor, ownership, especially foreign and local
administrator, guardian/receiver in ownership;
insolvency or bankruptcy; 4. The registration statement shall be
b. Sale of pledged or foreclosed signed by Issuer’s executive officer,
property to liquidate debts; principal operation officer, principal
c. Sale on isolated transaction by officer, comptroller, principal
owner; accounting officer, secretary or persons
d. Distribution of stock dividends; performing similar functions
e. Sale of capital stock exclusively to accompanied by a duly verified petition
stockholders where no commission of the Board of Director’s of the Issuer;
is paid; 5. Filing of the written consent of the
f. The issuance of bonds or notes expert named;
secured by mortgage upon real 6. Written certification of the selling
estate or tangible personal property, shareholders, if the registration
where the entire mortgage are sold statement includes shares to be sold by
to a single purchaser at a single sale; selling shareholders;
Page 133 of 199
7. Payment of fees to the SEC by the payment of future monetary

Issuer; consideration at the time of actual need,
8. Publication in 2 newspapers of general for which planholders pay in cash or
circulation in the Philippines, once a installment at stated prices, with or
week for 2 consecutive weeks, reciting without interest or insurance coverages
that a registration statement has been and includes life, pension, interment,
filed; and other plans which SEC shall
9. The SEC may compel the production of approve. (Subsec. 3.9)
all the books of such Issuer, and may
administer oaths to, and examine the
officers of such Issuer or any other Commodity Future Contract
person connected therewith as to its  a contract providing for the making or
business and affairs; taking delivery at a prescribed time in
10. Within 45 days after the date of filing of the future of a specific quantity and
the registration statement, or by such quality of a commodity or the cash value
later date to which the issuer has thereof, which is customarily offset prior
consented, SEC shall declare the to the delivery date, and includes
registration statement effective or standardized contracts having the
rejected, unless the applicant is allowed indicia of commodities futures,
to amend the registration statement. commodity options and commodity
leverage, or margin contracts.
Grounds for Rejection and Revocation:
(Sec. 13.1) Tender Offer
1. The issuer:  A publicly announced intention by a
a. has been judicially declared person acting alone or in concert with
insolvent; other persons to acquire equity
b. has violated the provisions of the securities of a “public company”
Code or orders issued by the SEC;  It is mandatory to make a tender offer
c. has been engaged in fraudulent for equity shares of a public company in
transactions; an amount equal to the number of
d. has made false or misleading shares that the person intends to acquire
representation in any material facts; in the following circumstances:
e. has failed to comply with any a. The person intends to acquire 15%
requirement the SEC may impose as or more of the equity shares of a
a condition of registration; public company pursuant to an
2. The registration statement is on its face agreement made between or among
inaccurate or incomplete, or includes the person and one or more sellers;
ant untrue statement or omits to state a b. The person intends to acquire 30%
material fact required to be stated or more of the equity shares of a
therein; public company within a period of
3. The issuer, any officer, director or 12 months; or
controlling person performing similar c. The person intends to acquire
functions, has been convicted by a shares that would result in
competent judicial or administrative ownership of more than 50% of the
body (it includes a foreign court of equity shares of a public company.
competent jurisdiction), of an offense (Sec. 19)
involving moral turpitude and/or fraud  Securities deposited may be withdrawn
or is restrained by the SEC or other at any time throughout the period that
bodies for violation of securities, the tender offer remains open and if the
commodities and other related laws; securities deposited have not been
4. Non-production of all books and papers, previously accepted for payment, and at
administration of oath or examination of any time after 60 days from the date of
its officers as required by the SEC. the original tender offer or request or
invitation.
Pre-Need Plans  Unlawful and Prohibited Acts Relating
 Contracts which provide for the to Tender Offers: To make an untrue
performance of future services or the statement of a material fact or omit to
Page 134 of 199
state any material fact in order to make 7. For an insider to communicate material
the statements made, not misleading, or non-public information about the issuer
to engage in any fraudulent, deceptive, or security (Sec. 27.3)
or manipulative act or practices. 8. Unlawful Tender Offer (Sec. 27.4)
9. Use of Extensive Credit. (Sec. 48.1)
How Tender Offer is made:
1. By filing with the SEC a declaration to Definition of terms:
make a tender offer; 1. SHORT SALE— A contract for sale of
2. By furnishing the issuer or the originator shares of stock which the seller does not
of the security a statement containing own, or certificates which are not within
such information required under Sec. 17 his control, so as to be available for
of the SRC: delivery at the time when delivery must
a. Annual Report (includes balance be made.
sheet, profit and loss statement); 2. STOP-LOSS ORDER—The direction by a
and customer to his broker that if the
b. Periodical reports for interim fiscal commodity touches the price named, the
periods; and broker shall close the trade at the best
3. By publishing all request or invitations available price.
for tender, or materials, making a tender 3. PUT—An option that, in consideration
offer or requesting on inviting letters of of a premium paid, give the purchase the
such a security. right to make the seller take for him a
given number of shares of a named stock
Public Company: between a given time at a stipulated
1. Any corporation with a class of equity price which is usually below the
securities listed on an Exchange; or prevailing market price of the stock at
2. Any corporation with assets in excess of the time the “put” is purchased.
P50M and having 200 or more holders, 4. CALL— An option that, in consideration
at least 200 of which are holding at least of a premium paid, entitles the buyer the
100 shares of a class of its securities. right to compel the seller to deliver to
him a certain number of shares within a
Unlawful Acts: given time at a stipulated price which is
1. UNLAWFUL SALE OF SECURITIES-- usually higher than the prevailing
For any beneficial owner, director, or market price of the stock at the time the
officer to sell any security if the seller or “call” is bought. “Call” is the reverse of
his principal does not own or does not “put”.
deliver it within 20 days from sale. (Sec. 5. STRADDLE—The double privilege of a
23.3) “put” and a “call”, and secures to the
2. Manipulation of security prices. (Sec. holder the right to demand of the seller
24.1) at a certain price within a certain time a
3. MANIPULATIVE AND DECEPTIVE certain number of shares of specified
DEVICES-- Employment of stock, or to require him to take, at the
manipulative or deceptive device or price within the same time, the same
contrivance in connection with purchase shares of stock.
and sale of authorities. Execution of 6. WASH SALE—the operation of
“short sale”, “stop-loss order” not in simultaneously buying and selling the
accordance with SEC rules. (Sec 24.2) same stock. It is any transaction in any
4. OPTION TRADING-- For any member security which involves no change in the
of Exchange directly or indirectly beneficial ownership thereof. It is the
endorse or guarantee the performance of reverse of “matched orders” wherein
any “put”, “call”, “straddle”, “option” or there is a change in the ownership of the
“privilege” in relation to any security securities.
registered. (Sec. 25) 7. SHORT SWING TRANSACTION—One
5. FRAUDULENT TRANSACTION-- where a person buys securities and sells
Fraudulent transactions in the sale of the same within a period of six months.
securities. (Sec. 26)
6. Insider trading (Sec. 27) Unlawful Sale of Securities (Sec. 23.3)
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• It shall be unlawful for any such  A person who, with respect to a

beneficial owner, director, or officer, particular security, may be any of the
directly or indirectly, to sell any equity following:
security of such issuer if person selling a. The issuer;
security or his principal: b. The director or officer of, or a
a. does not own the security sold; person controlling, controlled by, or
or under common control with the
b. if owning the security, does not Issuer;
deliver it against such sale within c. A person whose relationship or
20 days thereafter, or does not former relationship to Issuer gives
within 5 days after such sale or gave him access to a fact of
deposit it in the mails or other special significance about Issuer or
usual channels of transportation. the security that is not generally
• No person shall be deemed to have available;
violated the Code if he proves the d. A government employee, or director,
exercise of good faith. or officer of an exchange, clearing
• Prohibition does NOT apply to a dealer agency and/ or self- regulatory
in the ordinary course of his business organization who has access to
and incident to the establishment or material information about an
maintenance by him of a primary or Issuer or a security that is not
secondary market, otherwise than in an generally available to the public;
Exchange, for such security. e. A person who learns such a fact
from any of the foregoing insiders
Insider’s Trading (Sec. 27) with knowledge that the person
 The selling or buying of a security by an from whom he learns the fact is an
insider while in possession of material insider.
non-public information with respect to
the issuer or the security. It is Material Non-Public Information (Sec.
considered unlawful unless: 27.2)
1. The insider proves that the 1. Information about the Issuer or the
information was not gained from security which has not been generally
such relationship; or disclosed to the public and would likely
2. If the other party selling to or affect the market price of the security
buying form the insider (or his after being disseminated to the public
agent) is identified, the insider and the lapse of a reasonable time for
proves: the market to absorb information; or
a. that he disclosed the 2. Information about the Issuer or the
information to the other party; security which would be considered by a
or reasonable person important under the
b. that he had reason to circumstances in determining his course
believe that the other party of action to buy, sell or hold security.
otherwise is also in possession of
the information.
Self- Regulatory Organization (SROs)
Presumption: A purchase or sale made by  Organizations whose operation are
an insider, his spouse, or relatives, shall be related to or connected with securities
presumed to have been effected while in market such as but not limited to
possession of material nonpublic associations of:
information if transacted after such a.brokers and dealers;
information came into existence but prior b.transfer agents;
to public dissemination of such c. custodians;
information. (Sec 27.1) d.fiscal and paying agents;
e. computer services;
Insider (Sec. 3.8) f. news disseminating services;
g.proxy solicitors;
h. statistical agencies;
i. securities- rating agencies; and
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j. securities information processors. “Over-the-Counter” Market

 A market created other than a registered
Margin stock exchange for both the purchase
 Sum of money, or its equivalent, placed and sale of any security.
in the hands of a stockbroker by
principal or persons on whose account INTELLECTUAL PROPERTY CODE
the purchase is to be made, as a security (R.A. No. 8293, effective 06 June 1997 as
to the former against losses to which he amended by R.A. 9150)
may be exposed by a subsequent
depression in the market value of the INTELLECTUAL PROPERTY - those
stock. property rights which result from
the physical manifestation of
Purpose: Margin limitations are provided original thought. (Ballantine's
in the Code to prevent excessive use of Law Dictionary) It is the catchall
credit for the purchase or carrying of label for the property that is
securities. recognized in works of the mind.
Margin Trading GENERAL OVERVIEW
 A kind of trading that allows a broker to
advance for the customer part of the Purpose:
purchase price of a security and to keep To strengthen the intellectual and industrial
it as a collateral for such advance. property system in the Philippines as mandated
• The credit extended must be for an by the country’s accession to the Agreement
amount not greater than whichever is establishing the World Trade Organization.
higher of:
1. 65% of current market price of the State policy declaration:
security; The policy of the State is:
2. 100% of the lowest market price of a. to recognize that an effective intellectual
security during the preceding 36 and industrial property system is vital to
calendar months, but not greater the development of domestic and
than 75% of the current market creative activity, facilitates transfer of
price. (Sec. 48) technology, attracts foreign investments,
and ensures market access for the
Margin Call country’s products.
 When a broker makes a demand on the
investor to deposit money or securities b. to protect and secure the exclusive rights
with the broker when a purchase is of scientists, inventors, artists and other
made or when the investor’s equity in a gifted citizens to their intellectual
margin account declines below a property and creations, particularly
minimum standard set by the exchange when beneficial to the people, for such
or the broker. periods as provided in this Act.
Compliance with SRC Provisions c. to recognize that the use of intellectual

 Any condition, stipulation or provision property bears a social function. To this
binding any person to waive compliance end, the State shall promote the
with any provision of the SRC or of any diffusion of knowledge and information
rule or regulation thereunder, or of any for the promotion of national
rule of an Exchange required thereby, as development and progress and the
well as the waiver itself, shall be void. common good.
(Sec. 71.1)
d. to streamline administrative procedures
“Over-the-Counter” Transactions of registering patents, trademarks and
 Transactions which are not made at the copyright, to liberalize the registration
stock exchange, but directly between the on the transfer of technology, and to
broker and the customer. enhance the enforcement of intellectual
property rights in the Philippines.
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Rule on international conventions and Coverage of Intellectual property rights

on principle of reciprocity: under the I.P. Code:
Any person who is: The intellectual property rights under the
 a national or Intellectual Property Code are as follows:
 domiciled or 1. Copyright and related rights;
 has a real and effective industrial 2. Trademarks and service marks;
establishment in a country: 3. Geographic indications;
 which is a party to any One which identifies a good as
convention, treaty or agreement originating in the territory of a TRIPS
relating to intellectual property member, or a region or locality in that
rights or the repression of unfair territory, where given quality, reputation
competition, to which the or other characteristic of the good is
Philippines is also a party, or essentially attributable to its
geographical origin. (Art. 22 TRIPS
 extends reciprocal rights to
Agreement)
nationals of the Philippines by law;
4. Industrial designs
shall be entitled to benefits to the extent
Any composition of lines or colors or any
necessary to give effect to any provision of
three-dimensional form, whether or not
such convention, treaty or reciprocal law, in
associated with lines or colors:
addition to the rights to which any owner of
Provided, That such composition or
an intellectual property right is otherwise
form gives a special appearance to and
entitled by this Act.
can serve as pattern for an industrial
product or handicraft;
Laws repealed:
Republic Act No. 8293 repealed all Acts and
5. Patents;
parts of Acts inconsistent therewith, more
particularly:
6. Layout designs [topographies] of
1. Republic Act No. 165, as amended [An Act
integrated circuits;
Creating a Patent Office, Prescribing its
Powers and Duties, Regulating the Issuance  Integrated circuit – a product in its
of Patents, and Appropriating Funds final form or an intermediate form,
Therefor]; in which the elements at least one of
2. Republic Act No. 166, as amended[An Act to which is an active element, and some
Provide for the Registration and Protection or all of the interconnections are
of Trademarks, Trade-Names, and Service- integrally formed in and/or on a
Marks, Defining Unfair Competition and piece of material and which is
False Marking and Providing Remedies intended to perform an electric
Against the Same, and for Other Purposes]. function (Sec. 112.2; Art. 5 TRIPS
3. Presidential Decree No. 49 [Decree on the Agreement)
Protection of Intellectual Property];  Layout design / topography – 3
4. Presidential Decree No. 285, as amended dimensional disposition, however
[Decree on the Protection of Intellectual expressed, of the elements, at least
Property]; one of which is an active element,
5. Articles 188 and 189 of the Revised Penal and of some or all of the
Code of the Philippines. interconnections of an integrated
circuit, or such a 3 dimensional
Parts of the law: disposition prepared for an
The Intellectual Property Code of the integrated circuit intended for
Philippines is divided into 5 parts, to wit: manufacture. (Sec. 112.3; Art. 5
PART I - The Intellectual Property Office TRIPS Agreement)
7. Protection of undisclosed information.
PART II - The Law on Patents  Information which
PART III - The Law on Trademarks, a. is secret in the sense that it is
Service Marks and Trade Names not, as a body or in the precise
PART IV - The Law on Copyright configuration and assembly of its
PART V - Final Provisions components, generally known
among or readily accessible to
Page 138 of 199
persons within the circles that 7. Coordinate with other government

normally deal with the kind of agencies and the private sector efforts to
information in question; formulate and implement plans and
b. has commercial value because it policies to strengthen the protection of
is secret; and intellectual property rights in the
c. has been subject to reasonable country.
steps under the circumstances,
by the person lawfully in control Disqualifications of IPO Officers and
of the information, to keep it Employees
secret. All IPO officers and employees are disqualified
from:
Government Agencies:  submitting any application with IPO;
The agency of the government in charge of the  acting as attorney or patent agent of an
implementation of the Intellectual Property application with IPO; and
Code is the Intellectual Property Office which  acquiring, except by hereditary
replaced the Bureau of Patents, Trademarks and succession, any intellectual property, or
Technology Transfer. It is divided into six [6] any right, title or interest therein during
Bureaus, namely: their employment and for one (1) year
1. Bureau of Patents; thereafter.
2. Bureau of Trademarks;
3. Bureau of Legal Affairs; Technology Transfer Arrangements
4. Documentation, Information and  contracts or agreements
Technology Transfer Bureau; involving the transfer of systematic
5. Management Information System and knowledge for the manufacture of a product,
EDP Bureau; and the application of a process, or rendering of
6. Administrative, Financial and Personnel a service including management contracts;
Services Bureau. and the transfer, assignment or licensing of
all forms of intellectual property rights,
Intellectual Property Office: including licensing of computer software
Functions: except computer software developed for
The Intellectual Property Office is mandated mass market
under the law to:
1. Examine applications for the grant of Jurisdiction over disputes under the
letters patent for inventions and register IPC:
utility models and industrial designs; A. Original Jurisdiction
2. Examine applications for the 1. Director General
registration of marks, geographic  Has original jurisdiction to resolve
indication and integrated circuits; disputes relating to the terms of a
3. Register technology transfer license involving the author’s right to
arrangements and settle disputes public performance or other
involving technology transfer payments communication of his work. (Sec.
covered by the provisions of Part II, 7.1[c])
Chapter IX on Voluntary Licensing and
develop and implement strategies to 2. Bureau of Legal Affairs
promote and facilitate technology
 Has jurisdiction over the following:
transfer;
a. Opposition to applications for
4. Promote the use of patent information
registration of marks;
as a tool for technology development;
b. Cancellation of trademarks;
5. Publish regularly in its own publication
c. Cancellation of patents, utility
the patents, marks, utility models and
models, and industrial designs;
industrial designs, issued and approved,
d. Petitions for compulsory
and the technology transfer
licensing;
arrangements registered;
e. Administrative complaints for
6. Administratively adjudicate contested
violation of laws involving
proceedings affecting intellectual
intellectual property rights where
property rights; and
the total damages claimed are
Page 139 of 199
not less than P200,000. The  Upon becoming a member of the

Director of Legal Affairs has the WTO, the Philippines, has adhered to the
power to punish contempt. (Sec. Trade-Related Aspects of Intellectual
10) Property Rights (TRIPS), that provides that
the protection afforded to the member-state
3. Documentation, Information and (with respect to intellectual property) must
Technology Transfer Bureau be extended to the nationals of the other
 Has jurisdiction to settle disputes member-states.
involving technology transfer
payments. (Sec. 11.8) Most-favored Nation Principle
 Any favor, allowance, consideration,
B. Appellate Jurisdiction privilege or immunity a member-state
1. Director General grants the nationals of another country, it
 Over all decision rendered by the immediately and unconditionally accords
(1) Director of Legal Affairs, the nationals of other member-states.
(2) Director of Patents, (TRIPS)
(3) Director of Trademarks, and
(4) Director of the Documentation, LAW ON PATENTS
Information and Technology
Transfer. (Sec. 7.1[b]) Patent
The exclusive right acquired over an invention,
2. Court of Appeals to sell, use and make the same whether for
 Over decisions of the Director commerce or industry.
General in the exercise of his Term: 20 years from the filing date of the
appellate jurisdiction over the application. (sec. 54)
decisions of the
(1) Director of Legal Affairs, PATENT COPYRIGHT
(2) Director of Patents, When a person, by It may be vested
(3) Director of Trademarks. (Sec. independent in a work closely
7.1[b]) research arrives at similar or even
the same product identical to an
3. Secretary of Trade or that already earlier, already
and Industry patented, he is patented work,
 Over decisions of the Director restrained by the provided that the
General in the exercise of his arm of the law former is truly
appellate jurisdiction over the from exploiting original, i.e., it
decisions of the Director of the such an invention owes its existence
Documentation, Information and by reason of the to its creator.
Technology Transfer; (Sec. 7.1[b]) patent granted the
and earlier discoverer.
 Over decisions of the Director
General in the exercise of his original Patentability
jurisdiction relating to terms of  A patentable invention is any technical
license involving the author’s right. solution of a problem in any field of human
(Sec. 7.1[c]) activity which is:
 new,
Principle of Reverse Reciprocity (Sec. 231)
 involves an inventive step and
 It is the imposition upon nationals of
 is industrially applicable.
a foreign country within the Philippine
jurisdiction, any condition, restriction,  It may be, or may relate to, a product, or
limitation, diminution, requirement, process, or an improvement of any of the
penalty or any similar burden imposed by foregoing.
the law of such foreign country on a
Philippine national seeking intellectual Requisites of Patentability:
A. Novelty (Sec. 23)
property rights in that country.
National Treatment Principle  that which does not form part of a prior
art
Page 140 of 199
 Prior art consist of: a. The employee, if the inventive

a. Those already available to the public activity is not a part of his regular
anywhere in the world before the filing duties even if the employee uses the
date or the priority date of the time, facilities and materials of the
application. employer.
b. that which forms part of an b. The employer, if it is the result of
application whether for patent, utility the performance of his regular
model or industrial design, effective in assigned duties,
the Philippines, provided that: EXCEPTION: if there is an
i. the inventors or applicants are agreement, express or implied, to the
not the same contrary. (sec. 30.2)
ii. the contents of the application
are published in accordance with the Patent Application
requirements of patent application First to File Rule (Sec. 29)
rules  If 2 or more persons have made the
iii. the filing date of the prior art is invention, the right to the patent belongs to
earlier the person who filed an application for such
invention or to the applicant who has the
B. Inventiveness (Sec. 26) earliest filing/priority date.
 if, having regard to prior act, it is not Non-Prejudicial Disclosure
obvious to a person skilled in the art at  Any disclosure of the invention
the time of the filing date or priority  does not prejudice the application if
date of the application claiming the the disclosure is made by:
invention 1. inventor himself (or by anyone who has
the right to patent (Sec. 23))
C. Industrial applicability (Sec. 27)  if made within 12 months
 An invention that can be produced and before the filing date
used in any industry  For instance, an inventor
gave a lecture about his product; he
Non-Patentable Inventions (Sec. 22) has 12 months to file patent for it. If
a. Discoveries, scientific theories and he doesn’t file and the 12 months
mathematical method had passed, the lecture will be part
b. Schemes, rules and methods of performing of prior art.
mental acts, playing games or doing
business, and programs for computers 2. patent office
c. Methods for treatment of the human or  through publication by
animal body means of another application filed by
d. Plant varieties or animal breeds of the inventor and should not have
essentially biological process for the been disclosed. This is publication by
production of plants or animals mistake.
e. Aesthetic creations  Also, if a third party without
f. Anything which is contrary to public order the knowledge or consent of the
or morality inventor filed the application, it will
not be prejudicial for the inventor to
Right to Patent: file the application.
Belongs to the inventor, his heirs, or
assigns. Right of Priority (Sec. 31)
 Joint investors: the right to patent is  An application for patent is
owned jointly (Sec. 28) entitled to a right of priority if:
 The person who commissions the  it is filed by a person
work shall own the patent, unless otherwise who has previously applied for the same
provided in the contract. (sec. 30.1) invention in another country,
 Invention made by an employee in convention or law which affords a
the course of employment: the patent shall similar privilege to Filipino citizens, and
belong to:
 the following
requirements are complied with:
Page 141 of 199
a. the local application expressly f. Written request by the applicant,

claims priority; within six (6) months form the date of
b. it is filed within 12 months from publication pf his patent application, for
the date the earliest foreign substantive examination by the IPO of his
application was filed; and application (Sec. 48);
c. a certified copy of the foreign g. Grant of the patent (Sec. 50), or
application, together with an English refusal of the examiner to grant the patent
translation thereof, is filed within 6 (Sec. 51); in the latter case, the refusal may
months from the date of filing in the be appealed to the Director of the Bureau of
Philippines. Patents;
 An application for patent entitled to h. Publication of the grant of the patent
right of priority shall be considered filed as in the IPO Gazette. (Sec. 52)
of the date of filing of the foreign
application. Unity of invention – an application for a
patent shall relate to 1 invention
Contents of Application (Sec. 32) only or to a group of inventions
The patent application shall be in Filipino or forming a single general inventive
English and shall contain the following: step. (sec. 38)
a. a request for the grant of a
patent; Cancellation of Patents
b. a description if the invention; Grounds (Sec. 61)
c. drawings necessary for the  Any interested person may
understanding of the invention; petition to cancel on any of the following
d. one or more claims – a claim is grounds:
one which defines the matter for which a. that the invention is not new or
protection is sought. patentable;
e. an abstract b. that the patent does not disclose
 a concise summary, the invention in a manner sufficiently
preferably in not more than 150 clear and complete for it to be carried
words, of the disclosure of the out by any person skilled in the art; or
invention as contained in the c. that the patent is contrary to
description, claims and drawings, public order or morality.
 drafted in a way as to allow a
clear understanding of the technical Effect of cancellation (Sec. 66)
problem, the gist of the solution of  The rights shall be
the problem through the invention, terminated,
and the principal use or use of the  with notice of cancellation
invention. published in IPO Gazette unless restraint by
Director General
Procedure for Grant of Patent (Sec. 41, et  the decision or order to
seq.) cancel by Director of Legal Affairs is
a. According a filing date to the immediately executory even pending appeal.
application (Sec. 41);
b. Examination of compliance by ay Remedies of Person with patent
applicant with the formal requirements Application by Persons Not Having Right to
specified in Section 32, i.e., contents of Patent (Sec. 67)
application (Sec. 42);  If a person referred to in Sec.
c. Classification of application and 29 (Relating to the First to File Rule) other
search for prior art (Sec. 43); than the applicant
d. Publication of patent application in  is declared by final court
the IPO Gazette (Sec. 44); order or decision as having the right to the
e. Inspection of the application patent,
documents by any interested party and  such person may, within 3
written observations by any third party months after the decision has become final:
concerning the patentability of the invention a. Prosecute application as his own in
(Secs. 44.2 and 47); place of applicant;
Page 142 of 199
b. File new patent application in

respect of the same invention; Assignment:
c. Request that application in respect  may be of entire patent and
of the same invention; invention covered thereby, or
d. Seek cancellation of patent, if  of an undivided share of entire
already been issued. patent and invention, in which event parties
become joint-owners.
Remedies of True and Actual Inventor (Sec. 68)  may be limited to specified territory.
 When true and actual (Sec. 104)
inventor  Form:
 is deprived of patent without  in writing and
his consent or through fraud, and  notarized. (Sec. 105)
 so declared by final court  GEN. RULE: shall be void as against
order, any subsequent purchaser or mortgagee
 court shall order for his without notice,
substitution as patentee, or EXCEPTION: unless recorded in IPO within
 at the option of true three (3) months from date of said
inventor, cancel the patent, and award instrument, or prior to subsequent purchase
actual and other damages in his favor as or mortgage. (Sec. 106.2)
warranted.
Rights of Joint Owners
Time to file: the actions indicated in Secs. 67  Each of them shall be entitled to
and 68 shall be filed within 1 year from date of personally make, use, sell, or import for his
publication. own profit.
 GEN. RULE neither of joint owners
RIGHTS OF PATENTEES AND shall be entitled to grant licenses or to
INFRINGEMENT assign his right, title or interest or part
Rights Conferred by Patent (Sec. 71) thereof
a. where patent covers product EXCEPTIONS:
 to restrain, prohibit and prevent any  If made with the consent of other
authorized person or entity from: owner or owners
 making,  The proceeds are divided
 using, proportionally between them (Sec. 107)
 offering for sale,
 selling or Limitations of Patents Rights (Sec. 72)
 importing that product  Patent owner has no right to
prevent 3rd parties from performing, in the
b. where patent is process following circumstances:
 to restrain, prevent or prohibit any a. using patent product which has been put
authorized person or entity from: on Philippine market by owner of
 using process, and product, or with his express consent,
 manufacturing, insofar as such use is performed after
that product has been so put on the said
 dealing in, using,
market;
 selling or offering for sale, or
 importing any product b. where act is done privately and on a
obtained directly or indirectly form non-commercial scale for a non-
such process; commercial purpose provided that it
c. to assign, or transfer by succession the does not significantly prejudice owner’s
patent, and to conclude licensing contracts economic interests;
for the same.
c. where act consists of making or using
Note: Patents or applications for patents and exclusively for purpose of experiments
invention to which they relate, shall be that relate to subject matter of patent
protected in the same way as the rights of other invention;
property under the Civil Code. ( Sec. 103.1)
Page 143 of 199
d. where act consists of preparation for

individual cases, in a pharmacy or by a Note: the IPC makes the contributory infringer
medical professional, of a medicine in jointly and severally liable with the infringer. A
accordance with a medical prescription contributory infringer is one who induces the
or acts concerning medicine so infringement of a patent or provides the
prepared; infringer with a component of a patented
product produced because of a patented
e. where invention is used in any ship, invention and not suitable for substantial non-
vessel, aircraft or land vehicle of any infringing use.
other country entering Philippine
territory temporarily or accidentally. Doctrine of Patent Exhaustion
 the patentee, having in the act of sale
Prior Use ( Sec. 72) received all the royalty or consideration
 Any prior user who, in good faith was: which he claims for the use of his invention
 using the invention or in that particular machine or instrument, it
 has undertaken serious preparations is open to the use of the purchaser without
to use the invention in his enterprise or further restriction on account of the
businesses, monopoly of the patentee.
 before the filing date or priority
date of the application on which a patent is Tests of Patent Infringement
granted, a. Literal infringement test - resort must
 shall have the right to continue be had, in the first instance, to the
use thereof as envisaged. ”words “ of the claim. If the accused
matter clearly falls within the claim,
Note: the right of prior user may only be infringement is made out.
b. Doctrine of equivalents test – a
transferred or assigned together with enterprise
or business, or with the part of his enterprise or device appropriates a prior invention by
business which use or preparations for use have incorporating its innovative concept
been made. and, although with some modification,
performs substantially the same
Use of Invention by Government (Sec. 74) function in substantially the same way to
achieve substantially the same result.
 A government agency or third
- it requires the satisfaction of the
person authorized by the Government may
function-means-and-result test.
exploit the invention even without the
(Smith Kline Beckman Corp. v CA 409
agreement of the patent owner:
SCRA 33)
a. the public interest, in particular,
c. Economic interest test– when the
national security, nutrition, health or
process-discoverer’s economic interests
the development of other sectors, as
are compromised, i.e., when others can
determined by the appropriate
import the products that result from the
agency of the Government, so
process, an act is said to be prohibited.
requires; or
b. a judicial or administrative body
Doctrine of File Wrapper Estoppel
has determined that the manner of
exploitation, by the owner of the  The patentee is precluded from
patent or his licensee, is anti- claiming as part of patented product that
competitive. which he had to excise or modify in order to
avoid patent office rejection, and he may
Patent Infringement omit any additions he was compelled to add
by patent office regulations.
 the making, using, offering for sale,
selling, or importing:  it balances the doctrine of equivalents.
 apatented product or
Remedies in case of Infringement
 a product obtained directly or 1. Action for damages (Sec. 79)
indirectly from a patented process, OR  Prescription: must be filed within 4
 the use of a patented years from the knowledge of the act of
process without the authorization of the infringement
patentee.
Page 144 of 199
 Requirement of notice: UTILITY MODEL - An invention qualifies for

Damages cannot be recovered for acts of registration as a utility model if it is new and
infringement committed before the industrially applicable.
infringer had known; or had reasonable
grounds to know of the patent. It is -the provisions governing patents shall apply,
presumed that the infringer had known of mutatis mutandis, to the registration of utility
the patent if on the patented product, or on models.( Sec 108)
the container or package in which the article
is supplied to the public, or on the Term - seven years after the date of the filing of
advertising material relating to the patented the application, without any possibility of
product or process, are placed the words renewal
"Philippine Patent" with the number of the
patent. (sec. 80) Patent Utility Industrial
2. Injunction (Sec. 76) Model Design
3. Disposal or destruction by court’s order of (sec. 108) (sec. 112)
infringing goods, materials and implements Refer to Models of Any
without compensation. (Sec. 76) either the implement compositio
4. Criminal action for repetition of grant of or tools of n of lines or
infringement (Sec. 84) rights, or any colors or
 If the subject matter of a patent is a the industrial any three-
process for obtaining a product, the burden instrument product dimensiona
of proof is on the defendant or alleged (sometimes even if not l form,
infringer. Any identical product shall be called possessed whether or
presumed to have been obtained though the letters of of the not
use of the patented process if the product is patent) quality of associated
new or there is substantial likelihood that containing invention with lines
the identical product was made by the the grant, but which or colors
process and the owner of the patent has giving an is of provided
been unable despite reasonable efforts to inventor “practical that such
determine the process actually used. (sec. monopoly utility.” compositio
78) on the n or form
inventor’s gives a
Defenses in Action for Infringement invention special
(Sec. 81) for a appearance
The defendant may validly show: limited to and can
a. invalidity of the patent or any claim period. serve as
thereof; pattern for
b. on any grounds on which a petition for an
cancellation can be brought. industrial
product or
LICENSING handicraft.
1. Compulsory licensing (Secs. 93-102)
 The grant by the Director of Legal  New  New  New
Affairs of a license to exploit a patented  Industri  Industri  Not
invention even without the agreement of ally ally industri
the patent owner in favor of any person applica applica ally
who has shown his capability to exploit ble ble applica
the invention under certain ble
circumstances.  Involve  Does  Does
s an not not
2. Voluntary Licensing (Secs. 85-92) inventiv involve involve
 the grant by the patent owner to a third e step an any
person of the right to exploit a patented inventiv inventiv
invention e step e step
Page 145 of 199
20 years 7 years 5 years mark) of an enterprise and shall include a

from filing from filing from filing stamped or marked container.
date of date of date of
application; application; application; Collective Mark (Sec. 121.2)
without without renewable  Any visible sign designated as such in the
renewal renewal twice (sec. application for registration and capable of
118) distinguishing the origin or any other
common characteristic, including the
quality of goods or services of different
Conversion of Patent Applications or enterprises which use the sign under the
Applications for Utility Model control of the registered owner of the
Registration collective mark.
At any time before the grant or refusal of a Trade name (Sec. 121.3)
patent, an applicant for a patent may convert  The name or designation identifying or
his application into an application for distinguishing an enterprise.
registration of a utility model, which shall be
accorded the filing date of the initial Service Mark
application. An application may be converted  Any visible sign which distinguishes the
only once. (Sec 110) services of an enterprise from the service of
other enterprises.
Likewise, an applicant for a utility model
registration may convert his application into a Trademark
patent application  Anything which is adopted and used to
identify the source of origin of goods, and
Prohibition against Filing of Parallel which is capable of distinguishing them
Applications. from goods emanating from a competitor.
 It includes individual names and surnames,
- An applicant may not file two applications for firm names, devices or words used by
the same subject, one for utility model manufacturers, industrials, merchants,
registration and the other for the grant of a agriculturists, and others to identify their
patent whether simultaneously or consecutively. business, vocations, or occupations; the
(Sec 111) names or titles lawfully adopted and used by
natural or juridical persons, unions, and any
Cancellation manufacturing, industrial, commercial,
Grounds : agricultural or other organizations engaged
1. That the claimed invention does not qualify in trade or commerce. (Canon Kabushiki
for registration as a utility model and does not Kaisha v. CA)
meet the requirements of registrability
Term: The certificate of registration of a
2. That the description and the claims do not trademark shall be 10 years from the filing date
comply with the prescribed requirements; of the application provided the registrant shall
file a declaration of actual use within a year
3. That any drawing which is necessary for the from the 5th anniversary of registration date
understanding of the invention has not been (Sec. 145). Renewable for another 10 years
furnished; (Sec. 146).
4. That the owner of the utility model TRADEMARKS TRADE NAME

registration is not the inventor or his successor The goods or The person (whether
in title. services offered by natural or juridical)
a proprietor or an who does the
I. LAW ON TRADEMARKS enterprise are business and
designated by produces the goods
Mark (Sec. 121.1) trademarks or or services is
service marks. designated by a trade
 Any visible sign capable of distinguishing
name.
the goods (trademark) or services (service
Page 146 of 199
Philippine President, without the

consent of the widow during her life;
Has an existence Attached to the d. identical with the registered
separate from the natural or juridical mark of another or a mark with an
proprietor or the person who does earlier filing or priority date in respect
juridical person business and of:
doing business and produces the goods i. the same goods or
producing the or services. services, or
goods or distinct ii. closely related goods or
from the existence services, or
of the services iii. if it nearly resembles such
offered by such a mark, it is likely to deceive or
person or cause confusion.
enterprise. e. identical with, or confusingly
similar to , or constituting a translation
There is a need to There is no need to of a well-known mark, whether or not
be registered to register in order to registered in the Philippines, and used
secure protection secure protection for identical or similar goods or services;
for them. for them. f. identical with, or confusingly
similar to, or constituting a translation
of a well-known mark which is
Purpose of Trademark registered in the Philippines, and used
a. to indicate origin or ownership of articles to for goods or services which are not
which they are attached; similar;
b. to guarantee that those articles come up to g. likely to mislead the public,
certain standard of quality; and particularly as to the nature, quality,
c. to advertise articles they symbolize. characteristics or geographical origin of
the goods or services;
Acquisition of Ownership of Mark (Sec. h. consists exclusively of signs that
122) and Trade name (Sec. 165) are generic for the goods or services that
a. the ownership of a mark is acquired solely they seek to identify.
through registration. i. consists exclusively of signs or of
b. the ownership of trade name is acquired indications that have customary or usual
through adoption and use. Registration is to designate the goods or services in
not required. everyday language or in bona fide and
established trade practice;
Element of Prior Use no longer j. consists exclusively of signs or of
enumerated indications that may serve in trade to
The Code no longer provides for the doctrine of designate the kind, quality, intended
prior use as the basis for priority right or purpose, value, geographical origin, time
registration right of a trademark or service or production of the goods or rendering
mark. It is the registration of the mark that of the services, other characteristics of
seems to be the operative act. the goods or services;
k. consists of shapes that may be
Registrability (Sec. 123) necessitated by the technical factors or
 The mark must not be one of those by the nature of the goods themselves or
that are considered as non-registrable such factors that affect their intrinsic value;
as the following: l. consists of colors alone, unless
a. immoral, deceptive or defined by a given form;
scandalous marks; m. contrary to public order or
b. flags, coat of arms of other morality
insignia of the Philippines or any foreign
country; Generic term – constitutes the common
c. name, portrait or signature of descriptive name of an article or substance
any living individual without his consent - refers to the basic nature of the wares or
or, in the case of that of a deceased services provided
Page 147 of 199
Descriptive term – conveys the characteristics,  No registration of mark in the Philippines

functions, qualities or ingredients of a product by a person described in this section shall be
to one who has never seen it and does not know granted until such mark has been registered
what it is in the country of origin of the applicant.
(Societe Des Produits Nestle, S.A. v. CA, 256
SCRA 207) Certificates of Registration (Sec. 138)
 prima facie evidence of:
Doctrine of Secondary Use  the validity of the registration,
 The registration of a common name  the registrant’s ownership of the mark,
or geographical location may be permitted and
under the doctrine of “secondary meaning’  of the registrant’s exclusive right to use
which is applied where it is proven that: the same in connection with the goods
a. this common term has been in or services and those that are related
use for many years; and thereto specified in the certificate.
b. the public has associated the
products of applicant with this
 Duration:
common term.
 shall remain in force for
Suggestive terms ten (10) years.
- those which require imagination,  PROVIDED that the
thought and perception to reach a registrant SHALL, WITHIN ONE (1)
conclusion as to the nature of the goods; year from the 5th anniversary of date of
- they involve an element of incongruity, registration of the mark,
figurativeness or imaginative effort on  file a declaration of actual
the part of the observer use and evidence to that effect, or
- such terms which subtly connote  shall show valid reasons
something about the product are eligible based on the existence of obstacles to
for protection in the absence of such use.
secondary meaning (Societe Des  Otherwise, the mark shall
Produits Nestle, S.A. v. CA, 256 SCRA be removed from the register by IPO.
207) (Sec. 145)
Filing Date ( Sec. 127)  Rights Conferred:

 the date on which IPO received the 1. Exclusive right to prevent all third
following indications and elements: parties not having the owner’s consent
a. an express or implicit indication that the from using in the course of trade
registration of a mark is sought; identical or similar signs or containers
b. identity of the applicant; for goods or services which are identical
c. indications sufficient to contract the or similar to those in respect of which
applicant or his representative, if any; the trademark is registered where such
d. reproduction of the mark whose use would result in likelihood of
registration is sought; and confusion shall be presumed.
e. list of the goods or services for which the
registration is sought. 2. Exclusive right of owner of a well-known
mark which is registered in the
Priority Right of Foreign Applicant (Sec. Philippines, shall extend to goods and
131) services which are not similar to those
 An application for registration of mark filed in respect of which the mark is
by a foreign person, and registered. (Sec. 147)
 who previously duly filed an application for
registration of the same mark in one of Registration of a Mark
those countries, A. Formal requirements (Sec. 124)
 shall be considered as filed as of the day the a. the application must be in
application was first filed in the foreign Filipino or English;
country. b. the appointment of the agent or
the representative of the applicant if
it is not domiciled in the Philippines;
Page 148 of 199
c. the additional requirements to be  An application for

satisfied if the applicant claims the registration of a mark, or its registration,
priority of an earlier application; may be assigned or transferred with or
d. the classification of the goods or without the transfer or the business using
services; the mark.
e. the signature of the applicant  HOWEVER, such
( which is not required to be under assignment or transfer shall be null and void
oath). if it is liable to mislead the public,
particularly as regards the nature, source,
B. Procedure for Registration manufacturing process, characteristics, or
a. Examination to determine suitability for their purpose, of the goods or
whether the application satisfies the services to which the mark is applied.
requirements for the grant of a filing  Form:
date under Section 127;
 in writing
b. Examination to determine
and
whether the application meets the
requirements of Section 124 and the  requires
mark is registrable under Sec. 123; the signatures of the contracting
c. Denial of the application or parties.
amendment thereof or publication of  Transfers
the application; by mergers or other forms of
d. Opposition to the application; successions may be made by any
notice; hearing; decision by document supporting such transfer.
examiner; appeal to the Director of (Sec. 149.3)
the Bureau of Trademarks; appeal to
the IPO Director General; appeal to License Contracts (Sec. 150)
the Court of Appeals; Any license contract concerning the registration
e. Issuance of certificate of of a mark, or an application therefore, shall
registration provide for effective control by the licensor of
f. Publication in the IPO Gazette of the quality of the goods or services of the
the fact of registration. licensee in connection with which the mark is
used. OTHERWISE the license contract shall
Use of Indications by Third Parties for not be valid.
Purposes other than those for which
Mark Used (Sec. 148) Well-known Mark (Sec. 123.1 [e] and [f])
 Registration of the mark shall not  One which a competent authority of the
confer on the registered owner the right to Philippines has designated to be well-known
preclude 3rd parties from using bona fide internationally and in the Philippines.
 their names,  In determining whether a mark is well-
 addresses, known, account shall be taken of the
 pseudonyms, knowledge of the relevant sector of the
public, rather than the public at large,
 a geographical name, or
including knowledge in the Philippines
 exact indications concerning the which has been obtained as a result of the
kind, quality, quantity, destination, promotion of the mark.
value, place of origin, or time of
production or of supply, of their goods Cancellation (Sec. 151)
or services,
 A petition to cancel a registration of
 provided: a mark may be filed
 that such use is confined  with the Bureau of Legal Affairs
to the purposes of mere identification or
 by any person who believed that he
information and
is or will be damaged by the registration of a
 cannot mislead the public mark as follows:
as to the source of the goods or services. a. within 5 years from the date of
the registration of the mark;
Assignment and Transfer of Application b. at any time, if the registered
and Registration (Sec. 149) mark;
Page 149 of 199
i. becomes generic name for the steps necessary to carry out the sale of
goods or services, or a portion the said goods or services.
thereof, fro which it is registered; b. the reproduction, counterfeit, copying or
ii. has been abandoned; colorable imitation of the mark or a
iii. its registration was obtained dominant feature thereof and the
fraudulently or contrary to the application of such reproduction, etc., to
provisions of the Code; labels, signs, prints packages, wrappers,
iv. if the registered mark is being receptacles or advertisements intended
used by, or with the permission of, to be used in commerce in connection
the registrant so as to misrepresent with the sale, etc. of goods, in
the source of the goods or service on connection with which such use is likely
or in connection with which the to cause confusion, mistake or
mark is used. deception.
c. at any time
 if the registered owner of the There is infringement of trademark when the
mark use of the mark involved would be likely to
 without legitimate reason fails to cause confusion or mistake in the mind of the
use the mark within the Philippines, public or to deceive purchasers as to the origin
 or to cause it to be used in the or source of commodity. (Philippine Nut
Philippines by virtue of a license Industry, Inc. v. Standard Brands, Inc. 65 SCRA
during an uninterrupted period of 3 575)
years or longer.
Colorable imitation – denotes such a close or
Non-Use of Mark When Excused (Sec. ingenious imitation as to be calculated to
152) deceive ordinary persons, or such a
 if caused by circumstances arising resemblance to the original as to deceive an
independently of the will of the trademark ordinary purchaser giving such attention as a
owner. purchaser usually gives, as to cause him to
purchase the one supposing it to be the other.
 Lack of funds shall not excuse non-
use of a mark.
In determining if colorable imitation exists, the
dominancy test or the holistic test may be used.
Goodwill through Use
(Societe Des Produits Nestle, S.A. v. CA, 256
 When a person has identified in the SCRA 207)
mind of the public the goods he
manufactures or deals in his business or Tests of Trademark Infringement
services from those of others, such a person Dominancy Test Holistic Test
has a property right in the goodwill of the
focuses not simply considers the mark
said goods or services which will be
on similarities in as a whole and not
protected in the same manner as other
size, form or color as dissected;
property rights.
BUT on the main or focuses on the mark
essential features of as a totality not
Infringement (Sec. 155)
each mark taken usually to any part
 if a registered mark is used in together. of it.
commerce by a person
 without the consent of the registered
owner thereof. Such infringement may  The test of dominancy requires that if the
involve: competing trademark contains the main or
essential features of another and confusion
a. use in commerce of any reproduction, and deception is likely to result
counterfeit, copy or colorable imitation infringement takes place. (Asia Brewery,
of the mark or the same container or a Inc. v. CA, 224 SCRA 437)
dominant feature thereof in connection
with the sale, offering for sale, Principle of Related Goods or Services
distribution or advertising of any goods - There is infringement when there is use of
or services, including other preparatory similar marks on goods that are so related that
the public may be, or is actually deceived, and
Page 150 of 199
misled that they come from the same maker or innocent infringing newspapers and
manufacturer. (Esso Standard Eastern, Inc. v magazines.
CA 116 SCRA 336)
Unfair Competition (Sec. 168)
Goods are related when they belong to  the use by a person of deception or
the same class or have the same  any other means contrary to good faith by
descriptive properties, when they which he passes off the goods manufactured
possess the same physical attributes or by him or in which he deals, or his business
essential characteristics with reference or services, for those of another person who
to their form, composition, texture or has established goodwill in the goods of
quality such person manufactures or deals in, or his
- they may also be related because they business or services,
serve the same purpose or are sold in  or who shall commit any acts calculated to
grocery store or they flow through the produce said result.
same channels of trade. (Esso Standard
Eastern, Inc. v CA 116 SCRA 336) Some acts of unfair competition are as follows:
a. giving one’s goods the general
Exception appearance of goods of another
- well- known mark manufacturer;
- a junior user of a well-known mark b. inducing the false belief that one is
is precluded from using the same on goods or offering the services of another who has
services entirely unrelated to those specified in identified such services in the minds of
the certificate of registration of the well-known the public;
mark ( 246 Corp. v. Daway 416 SCRA 315) c. making any false statement calculated to
discredit the goods, business or services
Idem Sonans Test (similarity of sounds or of another.
pronunciations) alone cannot be applied
(Amigo Mfg. vs. Cluett Peabody) Note: Registration of a mark is not
necessary for purposes of filing a case of
Remedies (Secs 156, 157 & 170) unfair competition or false designation
a. Sue for damages; of origin (secs. 168.2 and 169 IPC)
b. Have the infringement goods
impounded; Infringement of Unfair Competition
c. ask for double damages; Tra
d. ask for injunction; dem
e. Have the infringing goods ark
disposed of outside the channels of 1. As to nature of
commerce; offense
f. Have the infringing goods it is the passing off
destroyed; it is the of one’s goods as
g. File criminal action; unauthorized use of those of another
h. Administrative sanctions. a trademark
2. As to existence
Limitations to Actions for Infringement of fraudulent
(Sec. 159) intent
a. No action for infringement could be taken fraudulent intent is
against a person who, in good faith and fraudulent intent is essential
before the filing date or priority date, was unnecessary
using the mark for the purposes of his
3. As to need for
business or enterprise.
registration on
b. Only an injunction against future printing
mark
may be imposed upon an innocent
infringing printer.
prior registration of
c. Similarly, only an injunction against the
the trademark is a registration is not
presentation of infringing advertising
prerequisite to the necessary.
matter in future issues may be imposed on
action
Page 151 of 199
II. LAW ON COPYRIGHT l. Audiovisual works and cinematographic

works and works produced by a process
Copyright analogous to cinematography or any
 The system of legal protection an author process for making audiovisual
enjoys in the form of expression of ideas. recordings;
(World Intellectual Property Organization - m. Pictorial illustrations and
WIPO) advertisements;
n. Computer programs; and
Basic principles (Secs 172.2 & 175) o. Other literary, scholarly, scientific and
 works are protected by the sole fact of their artistic works.
creation, irrespective of their mode or form
of expression, as well as their content, 2. Derivative works ( Sec. 173)
quality or purpose. a. Dramatizations, translations,
 protection extends only to the expression of adaptations, abridgments,
the idea, not to the idea itself or to any arrangements, and other alterations of
procedure, system, method or operation, literary or artistic works; and
concept or principle, discovery, or mere b. Collections of literary, scholarly or
data. artistic works, and compilations of data
and other materials which are original
Principle of Automatic Protection by reason of the selection or
 the enjoyment and exercise of copyright, coordination or arrangement of their
including moral rights, shall not be the contents
subject of any formality. (Berne Convention)
Works not protected by copyright
Works Protected by Copyright 1. Unprotected subject matter (Sec. 175)
1. Original works (Sec. 172) a. Idea, procedure, system, method or
a. Books, pamphlets, articles and other operation, concept, principle, discovery
writings; or mere data as such, even if they are
b. Periodicals and newspapers; expressed, explained, illustrated or
c. Lectures, sermons, addresses, embodied in a work;
b. News of the day and other miscellaneous
dissertations prepared for oral delivery,
whether or not reduced in writing or facts having the character of mere items
other material form; of press information;
d. Letters; c. Any official text of a legislative,
e. Dramatic or dramatico-musical administrative or legal nature, as well as
compositions; choreographic works or any official translation thereof.
entertainment in dumb shows;
f. Musical compositions, with or without 2. Works of Government(Sec. 176)
words; a. work of the Government of the
g. Works of drawing, painting, Philippines;
architecture, sculpture, engraving,  However, prior approval of the
lithography or other works of art; government agency or office wherein
models or designs for works of art; the work is created shall be
h. Original ornamental designs or models necessary for exploitation of such
for articles of manufacture, whether or work for profit. Such agency or
not registrable as an industrial design, office may, among other things,
and other works of applied art; impose as a condition the payment
i. Illustrations, maps, plans, sketches, of royalties.
charts and three dimensional works  No prior approval or conditions shall
relative to geography, topography, be required for the use of any
architecture or science; purpose of statutes, rules and
j. Drawings or plastic works of a scientific regulations, and speeches, lectures,
or technical character; sermons, addresses, and
k. Photographic works including works dissertations, pronounced, read or
produced by a process analogous to rendered in courts of justice, before
photography; lantern slides; administrative agencies, in
Page 152 of 199
deliberative assemblies and in make a single publication unless a greater

meetings of public character. right is expressly granted. (Sec. 180.3)
b. Pleadings;
c. Decisions of courts and tribunals. They Who owns the copyright in a piece of work?
may therefore be freely used or quoted. 1. Single creator – copyright belongs to
the author of the work, his heirs or assigns.
Rights of an Author 2. Joint creation – copyright belongs to the
1. Economic rights (Sec. 177) co-authors jointly as co-owners. But if the
a. right to reproduce; work consists of identifiable parts, the
b. right to create derivative works; author of each part owns the part that he
c. right to first public distribution or first has created.
sale; 3. Employee’s creation – copyright belongs
d. right to rent out; to the employee if the creation is not part of
e. right to public display; his regular duties even if he uses the time,
f. right to public performance; facilities and materials of the employer;
g. right to other communication of the otherwise it belongs to the employer
work to the public. 4. Commissioned work – the work belongs
to the person commissioning but the
2. Moral Rights (Sec. 193) copyright remains with the creator unless
a. right to attribution or paternity right; there is a written stipulation to the contrary.
b. right to alteration or non-publication; 5. Cinematographic works – the producer
c. right to preservation of integrity; has copyright for purposes of exhibition; for
d. right not to be identified with work of all other purposes, the producer, the author
others or with distorted work. of the scenario, the composer, the film
 These rights are distinct from economic director, the author of the work are the
rights and remain with the author even creators.
after he has transferred or assigned to 6. Anonymous and pseudonymous works
others “other rights of copyright. – the publishers shall be deemed the
(WIPO, 215) representative of the author unless:
 Term of moral right: lifetime of the a. the contrary appears
author and 50 years after his death. b. the pseudonyms or adopted name
Moral right not assignable or subject to leaves no doubt as to the author’s
license. (Sec. 198) identity, or
c. if the author discloses his identity.
Waiver of moral right: (Sec. 179)
a. by a written instrument (Sec. 195) 7. Collective works – the contributor is
b. by contribution to a collective work deemed to have waived his right unless he
unless expressly reserved. (Sec. 196) expressly reserves it. (Sec. 196)
 Collective work – a work created
3. Droit de suite (Sec. 200)  by two or more persons
 The right to participate in the  at the initiative and under the
gross proceeds of the sale or lease of the direction of another
original work.  with the understanding that
it will be disclosed by the latter
Publisher’s Rights under his own name and that the
 The right to publish granted by the contributions of natural persons will
author, his heirs, or assigns not be identified. (Sec. 171.2)
 The publisher shall have a copyright 8. In case of transfers, the transferee shall
consisting merely of the right of own one or more or all of the economic
reproduction of the typographical rights transferred provided:
arrangement of the published edition of the a. the assignment, if inter vivos, be in
work. (Sec. 174) writing (Sec. 180.2)
 The submission of a literary, b. the assignment be files with the
photographic or artistic work to a National Library upon payment of
newspaper, magazine or periodical for the prescribed fee. (Sec. 182)
publication shall constitute only a license to
Page 153 of 199
Transfer or Assignment of Copyright accessible to the public, if done privately

(Sec. 180) and free of charge or if made strictly;
a. Copyright may be assigned in b. making of quotations from a published
whole or in part, which would entitle work if they are compatible with fair use,
assignee to all rights and remedies provided that the source and the name
which assignor had with respect to the of the author, if appearing on the work,
copyright. are mentioned.
b. Copyright is not deemed c. reproduction or communication to the
assigned inter vivos in whole or in part public by mass media of articles on
unless there is a written indication of current political, social, economic,
such intention. scientific or religious topic, lectures,
c. Unless greater right is expressly addresses and other works of the same
granted, submission of a literary, nature, which are delivered in public if
photographic, or artistic work to a such use is for information purposes and
newspaper, magazine or periodical for has not been expressly reserved,
publication shall constitute only a provided that the source is given;
license to make a single publication. d. reproduction and communication to the
d. Since copyright is distinct from public of literary, scientific or artistic
the property in the material object works as part of reports of current
subject to it: events by means of photography,
 the transfer or assignment of the cinematography or broadcasting to the
copyright shall not itself constitute a extent necessary for the purpose;
transfer of the material object; e. inclusion of a work in a publication,
 nor shall a transfer or broadcast, or other communication to
assignment of the sole copy or of one the public, sound recording or film, if
or several copies of the work imply such inclusion is made by way of
transfer or assignment of the illustration for teaching purposes and is
copyright. compatible with fair use, provided that
e. Copyright owners or their heirs the source and the name of the author
may designate a society of artists, are mentioned.
writers or composers to enforce their f. recording made in schools, universities,
economic rights and moral rights on or educational institutions, provided
their behalf. that such recording must be deleted
within a reasonable period after they
 In every sale or lease of an original work were first broadcast;
of painting or sculpture or of the original g. making of ephemeral recordings by a
manuscript of a writer or composer, broadcasting organization by means of
subsequent to the first disposition thereof its own facilities and for use in its own
by the author, the author or his heirs shall broadcast;
have an inalienable right to participate in h. use made by or under the direction or
the gross proceeds of the sale or lease to the control of the Government, by the
extent of 5%. (Droit de suite) National Library or by educational,
scientific or professional institutions
 Term: This right shall exist where such use is in the public interest
during the lifetime of the author and for 50 and is compatible with fair use;
years after his death. (sec. 200) i. public performance or communication
Exception: shall not apply to prints, to the public of a work, in a place where
etchings, engravings, works of applied art, no admission fee is charged in respect of
or works of similar kind wherein the author such public performance or
primarily derives gain from the proceeds of communication, by a club or institution
reproductions. (sec. 201) for charitable or educational purpose
only, whose aim is not profit-making;
Limitations of Copyright (Sec. 184) j. public display of the original or a copy of
The following shall not constitute infringement the work not made by means of film,
of copyright: slide, television image or otherwise on
a. recitation or performance of a work, screen or by means of any other device
once it has been lawfully made or process, provided that either the work
Page 154 of 199
has been published, or, that the original Reproduction of Published Work (Sec.
or the copy displayed has been sold, 187)
given away or otherwise transferred to  Private reproduction of a published
another person by the author or his work
successor in title;  in a single copy,
k. use made for the purpose of any judicial  made by a natural person
proceedings or for giving or professional  exclusively for research and private
advice be legal practitioner. study,
 shall be permitted without the
Fair Use of Copyright Work (Sec. 185)
authorization of owner of copyright.
 The fair use of a copyrighted work
for criticism, comment, news reporting, Such permission granted shall not extend to
teaching, including multiple copies for the reproduction of:
classroom use, scholarship, research, and a. work of architecture in the form of
similar purposes is not an infringement of building or other construction;
copyright. b. an entire book, or a substantial part
thereof, or of a musical work in graphic
Factors determining Fair Use form by reprographic means;
a. purpose and character of use; including c. compilation of data and other materials;
whether such use is of a commercial d. computer program except as provided in
nature or is for non-profit educational Section 189; and
purposes; e. any work in cases where reproduction
b. nature of copyrighted work; would unreasonably conflict with a
c. amount and substantiality of the portion normal exploitation of the work or
used in relation toot the copyrighted would otherwise unreasonably prejudice
work as a whole; and the legitimate interests of the author.
d. effect of use upon the potential market
for or value of the copyrighted work. Reprographic Reproduction by Libraries (Sec.
188)
Note: the fact that a work is unpublished
 Any library or archive
shall not by itself bar a finding of fair use if
such finding is made upon consideration of  whose activities are not for
all the above factors. profit may,
 without the authorization of
Decompilation the author or copyright owner,
 the reproduction of the code of translation  make a single copy of the
of the forms of the computer program to work by reprographic reproduction:
achieve the inter-operability of an a. where the work by reason of its fragile
independently created computer program character or rarity cannot be lent to
with other programs may also constitute fair user in its or rendered unusable, replace
use. a copy, or to replace, in the permanent
collection of original form;
Work of Architecture (Sec. 186) b. where the works are isolated articles
 Copyright in a work of architecture contained in composite works or brief
shall include the right to control the erection portions or other published works and
of any building which reproduces the whole the reproduction necessary to supply
or a substantial part of the work either in its them, when this is considered expedient,
original form or in any form recognizably to persons requesting their loan for
derived form the original. purposes of research or study instead of
lending the volume or booklets which
 Provided that the copyright in any
contain them; and
such work shall not include the right to
c. where the making of such copy is in
control the reconstruction or rehabilitation
order to preserve and, if necessary in
in the same style as the original of a building
the event that it is lost, destroyed
to which that copyright relates.
another similar library or archive, a copy
which has been lost, destroyed or
Page 155 of 199
rendered unusable and copies are not  The reproduction of a computer

available with the publisher. program is allowed on the following
conditions:
Term of copyright (Sec. 213): 1. Only one copy is made;
a. In general - lifetime of the creator and for 2. Lawful owner made the copy;
50 years after his death 3. Purpose for which the
b. In case of joint ownership - lifetime of last reproduction is made is legal, like:
surviving co-creator and for 50 years after a. use to which the program is
his death made and for which it was purchased
c. In case of anonymous or pseudonymous demand the reproduction of a copy;
works - 50 years after the date of their first or
publication b. the reproduction of a copy is
Except where, before the expiration of necessary to guarantee against loss
said period, the author’s identity is or destruction.
revealed or is no longer in doubt, (a) and
(b) shall apply Importation for Personal Purposes (Sec.
d. In case of works of applied art - 25 years 190)
from the date of making.  The importation of a copy of a work
e. In case of photographic works - 50 years by an individual for his personal purposes
from the publication of the work, or from shall be permitted without the authorization
making the same term is given to of the author of, or other owner of copyright
audiovisual works produced by photography in, the work under the following
or analogous processes. circumstances:
f. In case of newspaper article - lifetime of the a. Copies of the work are not
author and fifty years thereafter. However, available in the Philippines and:
relative to newspapers and periodicals, Sec. i. One copy at one time is
175 denies copyright protection to "news of imported, for strict individual use; or
the day and other miscellaneous facts ii. By Authority of and for the use of
having the character of mere items of press the Philippine Government; or
information." A pure news report will no iii. Religious, Charitable or
longer find protection under the new law, Educational Society or institution
BUT a column or published comment will. imported not more than 3 copies per
When newspapers and periodicals include title (or kind) provided they are not
works enjoying independent copyrights, the for sale. (it is enough if the
works so included continue enjoying the importation be for the sake of such
rights for a duration proper to them. society or institution)
Calculation: The term of protection shall be b. Copies form parts of libraries

counted from the first day of January of the year and personal baggage belonging to
following the death or of last publication. (Sec. persons or families arriving from foreign
214) countries and are not intended for sale:
Provided, That such copies do not
Personal Use exceed 3.
 Making a single reproduction, adaptation,
arrangement or other transformation of Related rights or neighboring rights
another's work exclusively for one's own  these are those rights, akin to but different
individual use in such cases as personal from copyright, granted by law to
research, learning or amusement. (a) performers,
Private Use (b) producers of sound recordings and
 Making a reproduction, adaptation or other (c) broadcasting organizations
transformation of it, in a single person, as in
the case of "personal use" but also for a Limitations:
common purpose by a specific circle of 1. The use by a natural person exclusively
persons only. for his own personal purposes;
2. Using short excerpts for reporting
Reproduction of Computer Programs (Sec. current events;
189.1)
Page 156 of 199
3. Use solely for the purpose of teaching or c. the first public distribution of the
for scientific research; and original and copies of their sound
4. Fair use. (Sec, 212) recordings through sale or rental or
other forms of transferring ownership;
Term of rights: and
 For performances not incorporated in d. the commercial rental to the public of
recordings, 50 years from the end of the the original and copies of their sound
year in which the performance took recordings, even after distribution by
place; them by or pursuant to authorization by
 For sound or image and sound the producer. (Sec. 208)
recordings and for performances
incorporated therein, 50 years from the Broadcasting organizations shall enjoy
end of the year in which the recording the exclusive right to carry out, authorize or
took place. prevent any of the following acts:
 In case of broadcasts, the term shall be a. The rebroadcasting of their broadcasts;
20 years from the date the broadcast b. The recording in any manner, including
took place. (Sec. 215) the making of films or the use of video
 The extended term shall be applied tape, of their broadcasts for the purpose
only to old works with subsisting of communication to the public of
protection under the prior law. (Sec. television broadcasts of the same; and
55, P. D. No. 49a) c. The use of such records for fresh
transmissions or for fresh recording.
Performers have the right to authorize:
a. The broadcasting and other Notes:
communication to the public of their  "Performers" are actors, singers,
performance; and musicians, dancers, and other persons
b. The fixation of their unfixed who act, sing, declaim, play in, interpret,
performance. or otherwise perform literary and
c. the direct or indirect reproduction of artistic work;
their performances fixed in sound  "Sound recording" means the
recordings, in any manner or form; fixation of the sounds of a performance
d. first public distribution of the original or of other sounds, or representation of
and copies of their performance fixed in sound, other than in the form of a
the sound recording through sale or fixation incorporated in a
rental or other forms of transfer of cinematographic or other audiovisual
ownership; work;
e. the commercial rental to the public of  "audiovisual work or fixation" is a
the original and copies of their work that consists of a series of related
performances fixed in sound recordings, images which impart the impression of
even after distribution of them by, or motion, with or without accompanying
pursuant to the authorization by the sounds, susceptible of being made
performer; and visible and, where accompanied by
f. the making available to the public of sounds, susceptible of being made
their performances fixed in sound audible;
recordings, by wire or wireless means, in  "Fixation" means the embodiment of
such a way that members of the public sounds, or of the representations
may access them from a place and time thereof, from which they can be
individually chosen by them. (Sec. 203) perceived, reproduced or communicated
Producers of sound recordings have the through a device;
right to authorize:  "Producer of a sound recording"
a. the direct or indirect reproduction of means the person, or the legal entity,
their sound recordings, in any manner who or which takes the initiative and has
or form; the responsibility for the first fixation of
b. the placing of these reproductions in the the sounds of a performance or other
market and the right of rental or sounds, or the representation of sounds;
lending;  "Publication of a fixed performance
or a sound recording" means the
Page 157 of 199
offering of copies of the fixed 4. Payment of moral and exemplary

performance or the sound recording to damages in the discretion of the court.
the public, with the consent of the right (Sec. 126)
holder: Provided, That copies are
offered to the public in reasonable  The infringer also exposes himself to
quality; criminal liability wherein the law prescribes
 "Broadcasting" means the penalties of imprisonment and fines,
transmission by wireless means for the including subsidiary imprisonment in case
public reception of sounds or of images of insolvency. (Sec. 218)
or of representations thereof; such
transmission by satellite is also Persons who may sue:
"broadcasting" where the means for a. Legal owner; or
decrypting are provided to the public by b. Beneficial owner; since they are "parties
the broadcasting organization or with its in interest."
consent;
 "Broadcasting organization" shall Who may be liable for infringement:
include a natural person or a juridical a. infringer
entity duly authorized to engage in b. those who aid, abet, participate,
broadcasting; and contribute, authorize or benefit from the
 "Communication to the public of a infringing acts. (Sec. 217)
performance or a sound recording"
means the transmission to the public, by Prescriptive Period:
any medium, otherwise than by  No damages may be recovered after 4
broadcasting, of sounds of a years from the time the cause of action
performance or the representations of arose. (Sec. 226)
sounds fixed in a sound recording. For  There is no such prescriptive period in
purposes of Section 209, petitions for injunctive relief as well as
"communication to the public" includes for the impounding and destruction of
making the sounds or representations of infringing material. The crime of
sounds fixed in a sound recording infringement is subject to the general
audible to the public. rules of prescription of crimes.
Infringement
 when there is piracy or substantial BANKING LAWS
reproduction.
 If so much is taken that the value of
the original work is substantially diminished A. GENERAL BANKING LAW (RA No.
or the labors of the original author are 8791), Laws on Secrecy of Deposits and
substantially and to an injurious effect Related Laws
extent appropriated by another. (Habana vs
Robles, GR # 131522 1999) Declaration of Policy: to promote and
maintain a stable and efficient banking and
Remedies for infringement: financial system that is globally competitive,
1. Injunction to prevent infringement dynamic and responsive to the demands of a
2. Damages assessed on the basis of the developing economy.
proof alleged by the plaintiff of sales Scope of Application: The GBL primarily
made by the defendant of the infringing governs universal banks and commercial banks.
work minus whatever costs the It suppletorily governs thrift banks, rural banks
defendant may be able to prove and and other banking institutions.
appreciated by the court.
3. Delivery under oath of all implements Banks - entities engaged in the lending of
employed in the production of the funds obtained in the form of deposits. (Sec.3)
infringing items, as well as the
infringing products themselves, for Classification:
impounding or destruction as the court 1. Universal banks
may order.
Page 158 of 199
2. Commercial certificate of Monetary Board

banks; authority issued by before it can register
3. Thrift banks, a government with SEC.
composed of: agency.
i. Savings and mortgage banks; 4. May 4. May not
ii. Stock savings and loan associations; purchase/acquire purchase/acquire its
iii. Private development banks, its own shares for a shares or accept
4. Rural banks legitimate them as security for a
5. Cooperative banks corporate purpose; loan. Except: when
6. Islamic banks provided that, it authorized by the
7. Other has unrestricted Monetary Board. In
classifications of banks as determined by the retained earnings such case, the bank
Monetary Board of the Bangko Sentral ng in its books to must sell or dispose
Pilipinas. (Sec. 3) cover the shares to of said shares within
be 6 months from the
Distinctions: purchased/acquire time of their
a. capitalization d. acquisition. (Sec. 10)
b. purpose 5. Must be 5. Also composed of
c. powers and functions composed of 5 to 15 5 to 15 directors w/ 2
d. directors directors, each of independent
e. incorporators whom shall own at directors (Sec. 15). In
f. foreign equity least one (1) share case of merger or
g. necessity of public offering of the capital stock consolidation, the
of the corporation. number of directors
Quasi-banks – entities engaged in the shall not exceed 21.
borrowing of funds through the issuance, (Sec. 17)
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes Independent
of relending or purchasing of receivables and Director – a person
other obligations. (Sec. 4) other than an officer
 Entities authorized to perform universal or employee of the
or commercial banking functions may bank, its subsidiaries
also engage in quasi-banking functions. or affiliates or related
(Sec. 6) interests.
6. May declare 6. May not declare
Deposit substitutes – an alternative form of dividends out of its dividends, if any of
obtaining funds from the public, other than unrestricted the conditions set
deposits, through the issuance, endorsement, or retained earnings. forth under Sec. 57
acceptance of debt instruments for the are present.
borrower’s own account, for the purpose of
relending or purchasing of receivables and Foreign Stockholdings.
other obligations. (Sec. 95, RA 7653) Foreign individuals and non-bank corporations
may own or control up to 40% of the voting
Distinctions: stock of a domestic bank. This rule shall apply
to Filipinos and domestic non-bank
ORDINARY BANKING corporations. (Sec. 11)
CORPORATION CORPORATION
1. May be a stock or 1. Must generally be Grandfather Rule:
non-stock a stock corporation The percentage of foreign-owned voting stocks
corporation in a bank shall be determined by the citizenship
2. May issue par 2. May issue par of the individual stockholders in that bank. The
value or no par value stocks only. citizenship of the corporation which is a
value stocks. (Sec. 9) stockholder in a bank shall follow the
3. May be 3. Must secure a citizenship of the controlling stockholders of the
registered with the certificate of corporation, irrespective of the place of
SEC without any authority from the incorporation.
Page 159 of 199
Note: Non-Filipino citizens may become Exceptions:

members of the board of directors of a bank to 1. as otherwise provided under Sec. 5 of
the extent of the foreign participation in the the Rural Bank Act
equity of said bank. (Sec. 15) - Nothing in the Act shall be construed
as prohibiting any appointive or elective
Fit and Proper Rule. To maintain the quality public official from serving as director,
of bank management and afford better officer, consultant or in any capacity in
protection to depositors and the public in the bank.
general the Monetary Board shall prescribe, 2. where such service is incident to
pass upon and review the qualifications and financial assistance provided by the
disqualifications of individuals elected or government-owned or -controlled
appointed bank directors or officers and corporation to the bank
disqualify those found unfit. 3. as otherwise provided under existing
laws.
After due notice to the board of directors of the
bank, the Monetary Board may disqualify, Powers of a Commercial Bank:
suspend or remove any bank director or officer 1. the general powers incident to corporations
who commits or omits an act which render him 2. all such powers as may be necessary to carry
unfit for the position. on the business of commercial banking
a. accepting drafts and issuing
In determining whether an individual is fit and letter of credits;
proper to hold the position of a director or b. discounting and negotiating
officer of a bank, regard shall be given to his: promissory notes, drafts, bills of
a. integrity, exchange and other evidence of debt;
b. experience, c. accepting or creating demand
c. education, deposits; receiving other types of
d. training, and deposits and deposit substitutes;
e. competence. (Sec. 16) d. buying and selling foreign
exchange and other debt securities;
Compensation and Other Benefits of e. and extending credit. (Sec. 29)
Directors and Officers.
To protect the fiunds of depositors and creditors Powers of a Universal Bank:
the Monetary Board may regulate the payment 1. the powers
by the bark to its directors and officers of authorized for a commercial bank;
compensation, allowance, fees, bonuses, stock 2. the powers of an
options, profit sharing and fringe benefits only investment house; and
in exceptional cases and when the 3. the power to
circumstances warrant, such as but not limited invest in non-allied enterprises. (Sec. 23)
to the following:
a. When a bank is under comptrollership
or conservatorship; or Equity Investments:
b. When a bank is found by the Monetary Universal Comm’l
Board to be conducting business in an Bank Bank
unsafe or unsound manner; or (Sec. 24-28) (Sec. 30-
c. When a bank is found by the Monetary 32)
Board to be in an unsatisfactory Power to invest May invest in May
financial condition. (Sec. 18) allied and non- invest
allied only in the
Prohibition on Public Officials. - No enterprises equities of
appointive or elective public official whether (Sec. 24) allied
full-time or part-time shall at the same time enterprise
serve as officer of any private bank, save in s (Sec. 30)
cases where such service is incident to financial Total investment 50% 35%
assistance provided by the government or a in allied of net worth of net
government owned or controlled corporation to enterprises worth
the bank or unless otherwise provided under Total investment
existing laws. (Sec. 19) in non-allied 50% N/A
Page 160 of 199
enterprises of net worth EXCEPT: purchases of evidence of

Equity indebtedness guaranteed by the
investment in any 25% 25% Government (Sec. 34).
one enterprise of net worth of net 3. In case of a bank merger or consolidation,
worth or when a bank is under rehabilitation
Equity under a program approved by BSP, the MB
investment in 100% 100% may temporarily relieve the surviving bank,
financial allied of equity of equity consolidated bank, or constituent bank or
enterprise - thrift In other corporations under rehabilitation from full
bank, rural bank financial compliance with the required capital ratio.
or any financial allied
allied enterprise enterprise Bank Branches. - Universal or commercial
(Sec. 25) s,investm banks may open branches or other offices
A publicly- ent shall within or outside the Philippines upon prior
listed bank may remain a approval of the Bangko Sentral.
own up to 100% minority
of the voting holding. A bank may, subject to prior approval of the
stock of only one (Sec. 31) Monetary Board, use any or all of its branches
other UB / CB. as outlets for the presentation and/or sale of the
(Sec. 25) financial products of its allied undertaking or of
Equity its investment house units.
investment in 100% 100%
non-financial of equity of equity A bank and its branches and offices shall be
allied enterprises treated as one unit. (Sec. 20)
Equity
investment in Banking Days and Hours. – all banks
non-allied including their branches and offices shall
enterprise transact business on all working days for at
Equity 40% 40% least 6 hours a day.
investment in of equity of equity Exception: Unless otherwise authorized
Quasi-Banks by the Bangko Sentral in the interest of the
banking public.
Net Worth -- the total of the unimpaired paid-
in capital including paid-in surplus, retained In addition, banks or any of their branches or
earnings and undivided profit, net valuation offices may open for business on Saturdays,
reserves and other adjustments as may be Sundays or holidays for at least 3 hours a day:
required by the Bangko Sentral. (Sec. 24)
Provided, That banks which opt to open on days
Risk-Based Capital – The Monetary Board other than working days shall report to the
shall prescribe the minimum ratio which the net Bangko Sentral the additional days during
worth of a bank must bear to its total risk assets which they or their branches or offices shall
which may include contingent accounts. transact business. (Sec. 21)
Provided: the Monetary Board may require or
suspend compliance with such ratio whenever Strikes and Lockouts. - The banking
necessary for a maximum period of one year; industry is declared as indispensable to the
that such ratio shall be applied uniformly to national interest
banks of the same category (Sec. 34). - any strike or lockout involving banks, if
unsettled after 7 calendar days shall be reported
Effects of Non-compliance: by the Bangko Sentral to the Secretary of Labor
1. Distribution of net profits may be limited or who may assume jurisdiction over the dispute
prohibited and MB may require that part or or decide it or certify the same to the National
all of the net profits be used to increase the Labor Relations Commission for compulsory
capital accounts of the bank until the arbitration.
minimum requirement has been met; or -The President of the Philippines may at any
2. Acquisition of major assets and making of time intervene and assume jurisdiction over
new investments may be restricted. such labor dispute in order to settle or
terminate the same. (Sec. 22)
Page 161 of 199
or commercial bank passbook .

FUNCTIONS OF BANKS can accept or create 2. Banks are
demand deposits. prohibited from
A. DEPOSIT FUNCTION 2. Other banks can issuing / accepting
only accept demand withdrawal slips or
Simple Loan - fixed, savings and current deposits except upon other similar
deposits of money in banks an similar prior approval of the instruments to
institutions shall be governed by the provisions Monetary Board. effect withdrawals
concerning simple loan (Art.1980, Civil Code) 3. Temporary without the
overdrawing against passbooks except
1. The bank can use as its own the money current accounts for bank authorized
deposited. (Tang Tiong Tick vs. American shall not be allowed by the BSP to adopt
Aphothecaries , 65 Phil. 414) unless caused by the no passbook
2. The duty of a bank is to its creditor- normal bank charges withdrawal system.
depositor and not to third persons. If a third and other fees 3. A bank is
person has a valid right over the money incidental to negligent if it allows
deposited, he must prove the same before a handling such the withdrawal
competent jurisdiction. (Fulton Ironworks accounts. without requiring
v. Chinabank, November 6, 1930) 4. Drawings against the presentation of
3. The bank has the right to compensation. It uncollected deposits a passbook. (BPI v.
can set off the deposits with the (uncleared checks) CA)
indebtedness of the depositor that are due are generally
and demandable. (Gullas v. PNB, 62 Phil. prohibited.
519)
NOW ACCOUNTS TIME DEPOSITS
Depositors: (Negotiable
Order of
a. Minors : Withdrawal)
a. at least seven years of age ; Interest bearing An account with
b. able to read and write ; deposit accounts fixed term
c. not disqualified by any that combine the
incapacity payable on demand
d. it should only be savings or time feature of checks
deposits and investment
feature of savings
 Parents may deposit for their account.
minor children or wards (Sec.1 PD
No.734)
 If the guardian shall give notice Note: Demand , savings , NOW accounts , time
in writing to any thrift bank not to deposits and deposit substitutes shall not be
make payments of deposits, subject to interest ceilings.
dividends, or interest to the minor of
whom he is the guardian, then such Note: A bank other than a universal or
payment shall be made to the commercial bank must seek approval of
guardian. (Sec. 22, Thrift Banks Act Monetary Board before accepting or creating
of 1995) demand deposits. (Sec. 33)
b. Married Women ; are allowed to open Deposit Insurance

bank accounts without assistance of All deposits of any bank are insured with the
their husbands (RA No. 7192) Philippine Deposit Insurance Corporation or
PDIC (Sec. 4 RA 3591 as amended)
Kinds of Deposits: By virtue of PD 1974, trust funds were deleted

from the scope of insured deposits
DEMAND SAVINGS
DEPOSITS ACCOUNT What specific risks to a bank does PDIC Cover?
1. Only a universal 1. Evidenced by a
Page 162 of 199
- Only the risk of bank closures. Thus losses due  Deposits that have become dormant for
to a bank theft is not covered by PDIC. a period of ten years may be escheated
in favor of the government.
a. Amounts . Insured deposits under the  Publication of a list of unclaimed
law means the net amount to any balances is also required to safeguard
depositor for deposits in an insured the right of depositors , their heirs and
bank (after deducting any offsets) less successors in interests to due process.
any part thereof which is in excess of P
250,000. If the depositor has two or B. LOAN FUNCTION OF BANKS
more accounts with the same bank , the
maximum coverage pertains to the sum Single Borrower’s Limit
of all such accounts .  the total amount of loans extended by a
b. When Payment is made. The bank to any person, partnership,
proceeds of the insurance shall be paid association, corporation or other entity
by the PDIC to the depositor whenever shall at no time exceed 20% of the
the insured bank is closed on the net worth of such bank.
account of insolvency. An insured bank  The total amount of loans may be
shall be deemed to have been closed on increased by additional 10% of the net
account of insolvency when ordered worth of such bank provided the
closed by the Monetary Board of the additional liabilities of any borrower are
BSP. adequately secured by trust receipts,
c. The liability of the PDIC for insured shipping documents, warehouse receipts
deposits rests upon the existence of or other similar documents transferring
deposits with insured bank , not on the or securing title covering readily
negotiability of the certificates marketable, non-perishable goods which
evidencing these deposits. In fact, the must be fully covered by insurance;
claimant cannot recover even if he can
present a negotiable certificate of The prescribed ceiling shall include:
deposit if there is actually no deposit. a. The direct liability of the maker or
(See also Notes on PDIC) acceptor of paper discounted with or
sold to such bank and the liability of a
Deposits that are exempt from general endorser, drawer or guarantor
garnishment: who obtains a loan or other credit
1. Foreign Currency Deposits (Sec. 8 , FCDA) accommodation from or discount paper
Exception: The SC ruled in Salvacion v. with or sells paper to such banks;
Central Bank of the Philippines (August 20, b. In the case of an individual who owns or
1997) that the FCD of an American tourist controls a majority interest in a
who was found guilty of repeatedly raping a corporation, partnership, association or
twelve (12) year old child is subject to any other entity, the liabilities of the said
garnishment. entities to the bank;
2. Those exempt under the Rules of Civil c. In a case of a corporation, all liabilities
Procedure like the provision for the family to such bank of all subsidiaries in which
for four months . (Sec. 13 of Rule 39 of the such corporation owns or controls a
1997 Rules of Civil Procedure) majority interest; and
d. In the case of a partnership, association,
Unclaimed Balances: or other entity, the liabilities of the
 include credits or deposits of money, member thereof to such bank.
bullion, security or other evidence of
indebtedness of any kind, and interest Exclusions from the Limits:
thereon with banks , buildings and loan a. loans secured by obligations of the
associations and trust corporations , as Bangko Sentral or the Philippine
hereinafter defined , in favor of any Government;
person known to be dead or who has not b. loans fully guaranteed by the
made further deposits or withdrawals government;
during the preceding ten years or more. c. loans covered by assignment of deposits
maintained in the lending bank and held
in the Philippines;
Page 163 of 199
d. loans, credit accommodations and any bank director or officer who

acceptances under letters of credit to the violates the provisions of this Section
extent covered by margin deposits; and may be declared vacant and the
e. other loans or credit accommodations director or officer shall be subject to
which the MB may specify as non-risk the penal provisions of the New
items. Central Bank Act;
 DOSRI account shall be limited to an
DOSRI accounts amount equivalent to their
 Restrictions on bank exposure to respective unencumbered deposits
Directors, Officers, Stockholder and and book value of their paid-in
their Related Interests (DOSRI) capital contribution in the bank.
No director or officer of any bank shall, Provided:

directly or indirectly, for himself or as  That loans, credit
the representative or agent of others, accommodations and guarantees
borrow from such bank nor shall he secured by assets considered as non-
become a guarantor, endorser or surety risk by the Monetary Board shall be
for loans from such bank to others, or in excluded from such limit
any manner be an obligor or incur any  That loans, credit
contractual liability to the bank except accommodations and advances to
with the written approval of the majority officers in the form of fringe benefits
of all the directors of the bank, excluding granted shall not apply to loans,
the director concerned (Sec. 36) credit accommodations and
guarantees extended by a
Requisites: cooperative bank to its cooperative
1. The borrower is a director, shareholders.
officer or any stockholder of a bank
(and related interests) Note: Stockholdings of individuals
2. He contracts a loan or any form related to each other within the 4th
of financial accommodation. degree of consanguinity or affinity,
3. The loan or accommodation is legitimate or common-law, shall be
from: considered family groups or related
a. his bank , or interests and must be fully disclosed in
b. a bank that is a subsidiary of all transactions by such corporations or
a bank holding company of related groups of persons with the bank.
which both his bank and lending (Sec. 12)
bank are subsidiaries
c. a bank in which a controlling Secured Loans:
proportion of the shares is 1. Those secured by real estate shall not
owned by the same interest that exceed 75% of the appraised value of the
owns a controlling proportion of real estate security, plus 60% of the
the shares of his bank; appraised value of the insured
4. The loan or financial improvements. (Sec. 37)
accommodation is in excess of 5% of 2. Those secured by chattels and
capital and surplus of the lending intangible properties (such as
bank or in the maximum amount patents, trademarks, trade names and
permitted by law, whichever is copyrights) shall not exceed 75% of the
lower. appraised value of the security. (Sec. 38)
Principles Involved:
 Dealings of a bank with any of its Grant and Purpose of Loans and Other
directors, officers or stockholders Credit Accomodations.
and their related interests shall be A bank shall grant loans and other credit
upon terms not less favorable to the accommodations only in amounts and for the
bank than those offered to others; periods of time essential for the effective
 After due notice to the board of completion of the operations to be financed.
directors of the bank, the office of Such grant of loans and other credit
Page 164 of 199
accommodations shall be consistent with safe Note: In case the mortgagor is a natural
and sound banking practices. (Sec. 39) person, the redemption period is 1 year from
The Monetary Board is hereby authorized to registration of sale with Register of Deeds
issue such regulations as it may deem necessary (Sec. 1(3) SC Cir. AM No. 99-10-05)
with respect to unsecured loans or other credit
accommodations that may be granted by banks. 3. Purchaser at the auction sale whether in a
(Sec. 41) judicial or extrajudicial foreclosure shall
have the right to enter upon and take
Requirement for Grant of Loans: possession of such property immediately
Before granting a loan, a bank must ascertain after the date of the confirmation of the
that the debtor is capable of fulfilling his auction sale. To enjoin or restrain the
commitments to the bank. conduct of foreclosure proceedings, the
1. A bank may demand from its applicants petitioner must file a bond conditioned that
a statement of their assets and liabilities he will pay all the damages which the bank
and of their income and expenditures may suffer by the injunction. (Sec. 47)
and other information. (See also Notes on Real and Chattel
2. Should such statements prove to be false Mortgage)
or incorrect, the bank may terminate
any loan granted on the basis of said Ceiling on Investments in Certain Assets.
statements and shall have the right to Any bank may acquire real estate as shall be
demand immediate repayment or necessary for its own use in the conduct of its
liquidation of obligation. (Sec. 40) business, provided:
a. That the total investment in such real
Rules on Redemption: estate and improvements thereof
1. In the event of foreclosure of real estate including bank equipment, shall not
mortgage, whether judicially or extra- exceed 50% of combined capital
judicially, the mortgagor shall have the right accounts;
to redeem the property within 1 year after b. That the equity investment of a bank in
the sale by paying: another corporation engaged primarily
a. by paying in real estate shall be considered as part
the amount due under the mortgage of the bank’s total investment in real
deed, estate, unless otherwise provided by the
b. interest Monetary Board. (Sec. 51)
rate specified in the mortgage, and
c. all the Acquisition of Real Estate by Way of
costs and expenses incurred by the bank Satisfaction of Claims.
or institution from the sale and custody Notwithstanding the limitations of the
of the property less the income derived preceding Section, a bank may acquire, hold or
by the less the derived income convey real property under the following
circumstances:
Note: Under Act No. 3135 governing extra- a. Such as shall be mortgaged to it in good
judicial foreclosure, the mortgagor has 1 faith by way of security for debts;
year to redeem the property from the time b. Such as shall be conveyed to it in
that the date of registration of the with the satisfaction of debts previously
Register of Deeds. However for judicial contracted in the course of its dealings;
foreclosure, there is no right of redemption or
under Rule 68. c. Such as it shall purchase at sales under
judgments, decrees, mortgages, or trust
2. Juridical persons, whose real property is deeds held by it and such as it shall
being sold pursuant to an extrajudicial purchase to secure debts due it.
foreclosure, shall have the right to redeem
the property before: Any real property acquired or held under the
a. registration of the certificate of sale with circumstances enumerated in the above
the Register of Deeds or paragraph shall be disposed of by the bank
b. within 3 months after foreclosure, within a period of 5 years or as may be
whichever is earlier. prescribed by the Monetary Board: Provided,
however, That the bank may, after said period,
Page 165 of 199
continue to hold the property for its own use. approval of a loan or other credit
(Sec. 52) accommodation from said bank;
d. Overvalue or aid in overvaluing any
C. OTHER BANKING SERVICES: security for the purpose of influencing in
1. Receive in custody funds, documents any way the actions of the bank or any
and valuable objects; bank; or
2. Act as financial agent and buy and sell, e. Outsource inherent banking functions.
by order of and for the account of their 3. Prohibited acts by borrower - No
customer, shares, evidences of borrower of a bank shall -
indebtedness and types of securities; a. Fraudulently overvalue property offered
3. Make collection and payments for the as security for a loan from the bank;
account of others and perform such b. Make misrepresentations for the
other services for their customer as are purpose of obtaining, renewing, or
not incompatible with banking business; increasing a loan or extending the
4. Upon prior approval of the Monetary period thereof;
Board, act as managing agent, adviser, c. Attempt to defraud the said bank in the
consultant or administrator of event of a court action to recover a loan
investment management/ or other credit accommodation; or
advisory/consultancy accounts; and d. Offer any director, officer, employee or
5. Rent out safety deposit boxes. agent of a bank any gift, fee,
commission, or any other form of
Note: The bank shall act as depositary or as an compensation in order to influence such
agent shall keep the funds, securities and other persons into approving a loan or other
effects which it receives duly separated from its credit accommodation application.
own assets and liabilities. (Sec. 53) 4. Prohibited acts by BSP offiers - No
examiner, officer or employee of the Bangko
Suspension of Payment on its Deposit Sentral or any department, bureau, office,
Liabilities branch or agency of the Government that is
In case a bank or quasi-bank notifies the assigned to supervise, examine, assist or
Bangko Sentral or publicly announces a bank render technical assistance to any bank shall
holiday, or in any manner suspends the make false reports or suppress material
payment of its deposit liabilities continuously facts.
for more than 30 days, the Monetary Board may 5. No bank shall employ casual or non regular
summarily and without need for prior hearing personnel or too lengthy probationary
close such banking institution and place it personnel in the conduct of its business
under receivership of the Philippine Deposit involving bank deposits. (Sec. 55)
Insurance Corporation. (Sec. 53) 6. Conducting Business in an Unsafe or
Unsound Manner - In determining
Prohibitions: whether a particular act or omission, which
1. Prohition to act as insurer - A bank is not otherwise prohibited by any law, rule
shall not directly engage in insurance or regulation affecting banks, quasi-banks
business as the insurer. (Sec. 54) or trust entities, may be deemed as
2. Prohibited transactions by bank conducting business in an unsafe or
officials - No director, officer, employee, or unsound manner for purposes of this
agent of any bank shall - Section, the Monetary Board shall consider
a. Make false entries in any bank report or any of the following circumstances:
statement or participate in any  The act or omission has resulted or
fraudulent transaction; may result in material loss or
b. Without order of a court of component damage, or abnormal risk or danger
jurisdiction, disclose to any to the safety, stability, liquidity or
unauthorized person any information solvency of the institution;
relative to the funds or properties in the  The act or omission has resulted or
custody of the bank belonging to private may result in material loss or
individuals, corporations, or any other damage or abnormal risk to the
entity; institution's depositors, creditors,
c. Accept gifts or any other form of investors, stockholders or to the
remuneration in connection with the
Page 166 of 199
Bangko Sentral or to the public in imminent danger thereof or that its

general; continuance in business will involve
 The act or omission has caused any probable loss to those transacting
undue injury, or has given any business with it. (Sec. 78)
unwarranted benefits, advantage or
preference to the bank or any party Trust Operations
in the discharge by the director or  Only a stock corporation or a person
officer of his duties and duly authorized by the Monetary Board
responsibilities through manifest shall act as a trustee or administer any
partiality, evident bad faith or gross trust or hold property in trust or on
inexcusable negligence; or deposit for the use, benefit, or behalf of
 The act or omission involves others. (Sec. 79)
entering into any contract or
transaction manifestly and grossly
disadvantageous to the bank, quasi-
bank or trust entity, whether or not B. THE NEW CENTRAL BANK ACT
the director or officer profited or will (R.A. No. 7653, effective August 24, 1993)
profit thereby
Declaration of Policy
Whenever a bank, quasi-bank or trust entity - The State shall maintain a central monetary
persists in conducting its business in an authority that shall function and operate as an
unsafe or unsound manner, the Monetary independent and accountable body corporate in
Board may, without prejudice to the the discharege of its mandated responsibilities
administrative sanctions provided in concerning money, banking and credit.
Section 37 of the New Central Bank Act,
take action under Section 30 of the same Act Bangko Sentral
and/or immediately exclude the erring bank - a government-owned corporation established
from clearing, the provisions of law to the as an independent central monetary authority
contrary notwithstanding. (Sec. 56)
7. Prohibition on dividend declaration – Responsibility and Primary Objective
No bank or quasi-bank shall declare 1. Provide policy directions in the areas of
dividends, if at the time of declaration: money, banking, and credit
a. Its clearing account with the Bangko 2. Supervise the operations of banks and
Sentral is overdrawn; exercise such regulatory powers over the
b. It is deficient in the required liquidity operations of finance companies and non-bank
floor for government deposits for 5 or financial institutions performing quasi-banking
more consecutive days; functions.
c. It does not comply with the liquidity
standards/ratios prescribed by the Powers and Functions
Bangko Sentral for purposes of 1. Issuer of Currency (Sec. 50)
determining funds available for dividend 2. Custodian of Reserves (Sec. 94)
declaration; 3. Clearing Channel or House - especially
d. It has committed a major violation as where the PCHC does not operate
may be determined by the Bangko 4. Banker of the Government - the BSP
Sentral. (Sec. 57) shall be the official depository of the
Government and shall represent it in all
Foreign Banks monetary fund dealings. (Secs. 110 and
 The entry of foreign banks in the 111)
Philippines through the establishment of 5. Financial Advisor of the Government
branches shall be governed by the (Sec. 123)
provisions of the Foreign Bank  Under Article VII, Sec. 20 of the
Liberalization Act. (Sec. 72) 1987 Constitution, the President may
 The Monetary Board may revoke the contract or guarantee foreign loans
license to transact business in the but with the prior concurrence of the
Philippines of any foreign bank if it finds Monetary Board.
that the foreign bank is insolvent or in 6. Source of Credit (Sec. 81)
Page 167 of 199
7. Supervisor of the Banking System (Sec. public employment during their tenure
25) (Sec. 9);
Shall include the power to: 3. cannot be connected directly with any
a. Examine – extends to enterprises multilateral banking or financial
wholly or majority-owned or institution or has a substantial interest
controlled by the bank. (Sec. 7, RA in any private bank in the Philippines,
8791); this power may not be within one (1) year prior to his
restrained by a writ of injunction appointment (Sec. 9);
unless there is convincing proof that 4. cannot be employed in any such
the action of the BSP is plainly institution within two (2) years after the
arbitrary. (Sec. 25) expiration of his term except when he
b. Place a bank under receivership or serves as an official representative of the
liquidation (Sec. 30) Philippine Government to such
c. Initiate criminal prosecution of institution (Sec. 9);
erring officers of banks. 5. the Governor of the Bangko Sentral and
the full-time members of the Board shall
Monetary Board limit their professional activities to
The powers and functions of BSP are exercised those pertaining directly to their
by the Monetary Board, composed of 7 positions with the Bangko Sentral.
members appointed by the President of the Accordingly, they may not accept any
Philippines for a term of 6 years: other employment, whether public or
1. The governor as Chairman private, remunerated or ad honorem,
2. A member of the Cabinet designated by with the exception of positions in
the President eleemosynary, civic, cultural or religious
3. 5 members who shall come from the organizations or whenever, by
private sector, all of whom shall serve designation of the President, the
full-time; Governor or the full-time member is
No member of the Monetary Board may be tasked to represent the interest of the
reappointed more than once. (Sec. 6) Government or other government
agencies in matters connected with or
Qualifications of Members of the affecting the economy or the financial
Monetary Board: system of the country (Sec. 20);
1. must be natural-born citizens of the 6. in case any member of the Monetary
Philippines, Board with personal or pecuniary
2. at least 35 years of age, with the interest in any matter in the agenda of
exception of the Governor who should at the Monetary Board shall disclose his
least be 40 years of age, interest to the Board and shall retire
3. of good moral character, of from the meeting when the matter is
unquestionable integrity, of known taken up (Sec. 14).
probity and patriotism, and
4. with recognized competence in social Supervision and Examination of Banks
and economic disciplines. (Sec. 8)  The BSP shall have supervision over,
and conduct periodic or special
Disqualifications and Inhibition on examinations of, banking institutions
Governor and Board Members: and quasi-banks, including their
1. disqualified from being a director, subsidiaries and affiliates engaged in
officer, employee, consultant, lawyer, allied activities.
agent or stockholder of any bank, quasi-
bank or any other institution which is Subsidiary – a corporation more than
subject to supervision or examination by 50% of the voting stock of which is owned
the Bangko Sentral, in which case such by a bank or quasi-bank
member shall resign from, and divest
himself of any and all interests in such Affiliate – a corporation the voting stock of
institution before assumption of office which, to the extent of 50% or less, is owned
(Sec. 9); by a bank or quasi-bank or which is related
2. those coming from the private sector or linked to such institution or intermediary
shall not hold any other public office or
Page 168 of 199
through common stockholders or other 3. revealing in any manner, except under

factors determined by the Monetary Board orders of the court, the Congress or any
government office or agency authorized
No Restraining Order Against BSP by law, information relating to the
No restraining order or injunction shall be condition or business of any institution;
issued by the court enjoining the Bangko 4. borrowing from any institution subject
Sentral from examining any institution to supervision or examination by the
subject to supervision or examination by the Bangko Sentral shall be prohibited
Bangko Sentral, unless there is convincing unless said borrowings are adequately
proof that the action of the Bangko Sentral secured, fully disclosed to the Monetary
is plainly arbitrary and made in bad faith Board. (Sec. 27)
and the petitioner or plaintiff files with the
clerk or judge of the court in which the Conservatorship
action is pending a bond executed in favor Whenever the Monetary Board finds that a bank
of the Bangko Sentral, in an amount to be or a quasi-bank is in a state of continuing
fixed by the court. (Sec. 25) inability or unwillingness to maintain a
condition of liquidity deemed adequate to
Refusal to Make Reports or Permit protect the interest of depositors and creditors,
Examination. - Any officer, owner, agent, the Monetary Board may appoint a conservator
manager, director or officer-in-charge of to:
any institution subject to the supervision or
examination by the Bangko Sentral who, a. Take charge of the assets, liabilities, and
being required in writing by the Monetary the management thereof;
Board or by the head of the supervising and b. Reorganize the management;
examining department willfully refuses to c. Collect all monies and debts due said
file the required report or permit any lawful bank; and
examination into the affairs of such d. Exercise all powers necessary to restore
institution shall be punished under the Act. its viability, with the power to overrule
(Sec. 34) or rebuke the actions of the previous
management and board of directors of
False Statement. - The willful making of a the bank or quasi-bank.
false or misleading statement on a material
fact to the Monetary Board or to the Such power to revoke cannot extend to post
examiners of the Bangko Sentral shall be facto repudiation of perfected transactions,
punished. (Sec. 35) otherwise they would infringe against the non-
impairment clause of the Constitution. Sec. 28-
A gives the conservator power to revoke
Prohibitions on Bank Officers, Directors, contracts that are deemed defective – i.e., void,
Lawyers, Agents voidable, unenforceable or rescissible. (First
Personnel of the Bangko Sentral are hereby Phil. Int’l Bank v. CA, 252 SCRA 259)
prohibited from:
1. being an officer, director, lawyer or Duration – Period not exceeding one year
agent, employee, consultant or
stockholder, directly or indirectly, of any When conservatorship terminated:
institution subject to supervision or 1. When the Monetary Board is satisfied
examination by the Bangko Sentral; that the institution can continue to
Exception: non-stock savings and loan operate on its own and the
associations and provident funds conservatorship is no longer necessary;
organized exclusively for employees of 2. But if the continuance in business of the
the Bangko Sentral, and except as bank would involve probable loss to its
otherwise provided in this Act; depositors or creditors, proceedings for
2. directly or indirectly requesting or receivership and liquidation shall be
receiving any gift, present or pecuniary pursued (Sec. 29).
or material benefit for himself or
another, from any institution subject to Receivership:
supervision or examination by the Whenever the Monetary Board finds that
Bangko Sentral; a bank or quasi-bank:
Page 169 of 199
1. is unable to pay its liabilities as they b. Not exceeding P20.00 - 10 centavos or

become due in the ordinary course of less.
business. But shall not include inability  The BSP may call in for replacement
to pay cause by extraordinary demands notes for any series or denomination
induced by financial panic in the which are more than 5 years old and
banking community; coins which are more than 10 years old.
2. has insufficient realizable assets to meet  Notes and coins called in for
its liabilities; replacement shall remain legal tender
3. cannot continue business without for a period of one year from the date of
involving probable losses to its call. After that period, they shall cease
depositors or creditors; or to be legal tender during the following
4. has willfully violated a cease and desist year or for such longer period as MB
order involving acts or transactions may determine. After the expiration of
which amount to fraud or a dissipation this latter period, the notes and coins
of the assets of the institution. (Sec. 30) which have not been exchanged shall
cease to be a liability of BSP and shall be
Note: The designation of a conservator is not a demonetized (Sec. 57).
precondition to the designation of a receiver.
Demand Deposits – all those liabilities of the
Liquidation - If the receiver determines that Bangko Sentral and of other banks which are
the bank cannot be rehabilitated: denominated in Philippine currency and are
1. He shall file ex parte, with the proper subject to payment in legal tender upon
RTC, a petition for assistance in the demand by the presentation of checks. (Sec. 58)
liquidation of the institution pursuant to Checks representing demand deposits do not
a liquidation plan adopted by the PDIC have legal tender power and their acceptance in
for general application to all closed the payment of debts, both public and private, is
banks. In case of quasi-banks, the at the option of the creditor.
liquidation plan shall be adopted by the However, a check which has been cleared and
Monetary Board. credited to the account of the creditor shall be
2. He shall convert the assets of the equivalent to a delivery to the creditor of cash in
institution to money for the purpose of an amount equal to the amount credited to his
paying the debts of the institution. (Sec. account (Sec. 60).
30)
3 Important Tools to Achieve Price
Effect of appointment of receiver / Stability:
liquidation on creditor’s claims: The 1. Loans to Banks (Sec. 83)
assets under receivership or liquidation shall be - If BSP wants to increase money supply,
deemed in custodia legis in the hands of the it opens rediscount window
receiver and shall be exempt from garnishment, - If BSP wants to decrease money supply,
levy, attachment or execution (Sec. 30). it closes rediscount window or charges
very high interest rates for rediscounted
Close Now and Hear Later Scheme notes
Sec. 29 of the Central Bank Act does not 2. Open Market Operations (Sec. 90)
contemplate prior notice and hearing before a - If BSP wants to increase money supply,
bank is placed under receivership. It is enough it buys government securities
that such action is made the subject of a - If BSP wants to decrease money supply,
subsequent judicial review. The purpose of the it sells government securities
scheme is to protect the depositors, creditors, 3. Reserve Requirements
stockholders and general public (Central Bank - The required reserves of each bank shall
v. CA, 220 SCRA 536). be proportional to the volume of its
deposit liabilities
Legal Tender – all notes and coins issued by
the Bangko Sentral and fully guaranteed by the Since the required reserves are imposed
Government. (Sec. 52) primarily to control the volume of money, the
Note: Coins shall be legal tender in amounts: Bangko Sentral shall not pay interests thereon.
a. Not exceeding P50.00 - 25 centavos or (Sec. 94)
above
Page 170 of 199
Deposits maintained with the Bangko Sentral as structure, as well as the authority and
part of the reserve requirements shall be identification of all persons purporting
exempt from attachment, garnishment, or any to act on their behalf.
other order or process of any court or agency.
(Sec. 103) Note: The provisions of existing laws to
the contrary notwithstanding,
Prohibitions on the BSP: anonymous accounts, accounts under
1. The BSP shall not acquire shares of any kind fictitious names, and all other similar
or accept them as collateral, and shall not accounts shall be absolutely prohibited.
participate in the ownership or management Peso and foreign currency non-checking
of any enterprise, either directly or numbered accounts shall be allowed.
indirectly; and The BSP may conduct annual testing
2. It shall not engage in development banking solely limited to the determination of the
and financing. (Sec. 128) existence and true identity of the owners
of such accounts.
C. OTHER RELATED LAWS
2. Record Keeping. - All records of all
ANTI-MONEY LAUNDERING ACT (RA transactions of covered institutions shall
9160 as amended by RA 9194) be maintained and safely stored for 5
years from the dates of transactions.
Money Laundering – a crime whereby the With respect to closed accounts, the
proceeds of an unlawful activity as herein records on customer identification,
defined are transacted, thereby making them account files and business
appear to have originated from legitimate correspondence, shall be preserved and
sources. (Sec. 4, RA 9160 as amended by RA safely stored for at least 5 years from the
9194) dates when they were closed.
It is committed by the following: 3. Reporting of Covered and Suspicious

a. Any person knowing that any Transactions. -- Covered institutions
monetary instrument or property shall report to the AMLC all covered
represents, involves, or relates to, the transactions and suspicious transactions
proceeds of any unlawful activity, within 5 working days from occurrences
transacts or attempts to transacts said thereof, unless the Supervising
monetary instrument or property. Authority prescribes a longer period not
b. Any person knowing that any exceeding 10 working days. (Sec. 9)
monetary instrument or property
involves the proceeds of any unlawful Prohibitions:
activity, performs or fails to perform any When reporting covered or suspicious
act as a result of which he facilitates the transactions to the AMLC, covered
offense of money laundering referred to instituting and their officers and
in paragraph (a) above. employees
c. Any person knowing that any  shall not be deemed to have
monetary instrument or property is violated bank secrecy laws
required under this Act to be disclosed  are prohibited from
and filed with the Anti-Money communicating directly or
Laundering Council (AMLC), fails to do indirectly, in any manner or by
so. any means, to any person or
entity, the media, the fact that a
Prevention of Money Laundering: covered or suspicious transaction
1. Customer Identification. - Covered report was made, the contents
institutions shall establish and record thereof, or any other information
the true identity of its clients based on in relation thereto. Effect of
official documents. They shall maintain violation: criminally liable.
a system of verifying the true identity of  administrative, criminal or civil
their clients and, in case of corporate proceedings shall not lie against
clients, require a system of verifying any person for having made a
their legal existence and organizational covered or suspicious transaction
Page 171 of 199
report in the regular 2. drafts, checks and notes;

performance of his duties in 3. securities or negotiable
good faith, whether or not such instruments, bonds, commercial papers,
reporting results in any criminal deposit certificates, trust certificates,
prosecution under this Act of any custodial receipts or deposit substitute
other law. instruments, trading orders, transaction
 may not have such reporting be tickets and confirmations of sale or
published or aired in any manner investments and money market
or form by the mass media, instruments; and
electronic mail, or other similar 4. other similar instruments where
devices. Effect of violation: the title thereto passes to another by
concerned officer and employee endorsement, assignment or delivery.
of the covered institution and (Sec. 3[c])
media shall be held criminally
liable. (Sec. 9) Suspicious transactions - transactions with
covered institutions, regardless of the amounts
Covered institution - refers to: involved, where any of the following
1. banks, non-banks, quasi-banks, trust circumstances exist:
entities, and all other institutions and their 1. there is no underlying legal or trade
subsidiaries and affiliates supervised or obligation, purpose or economic
regulated by the Bangko Sentral ng Pilipinas justification;
(BSP); 2. the client is not properly identified;
2. insurance companies and all other 3. the amount involved is not
institutions supervised or regulated by the commensurate with the business or
Insurance Commission; and financial capacity of the client;
3. 4. taking into account all known
a. securities dealers, brokers, salesmen, circumstances, it may be perceived that
investment houses and other similar the client's transaction is structured in
entities managing securities or order to avoid being the subject of
rendering services as investment agent, reporting requirements under the Act;
advisor, or consultant; 5. any circumstances relating to the
b. mutual funds, close-end investment transaction which is observed to deviate
companies, common trust funds, pre- from the profile of the client and/or the
need companies and other similar client's past transactions with the
entities; covered institution;
c. foreign exchange corporations, money 6. the transactions is in a way related to an
changers, money payment, remittance, unlawful activity or offense under this
and transfer companies and other Act that is about to be, is being or has
similar entities; and been committed; or
d. other entities administering or 7. any transactions that is similar or
otherwise dealing in currency, analogous to any of the foregoing.
commodities or financial derivatives
based thereon, valuable objects, cash Unlawful activity - refers to any act or
substitutes and other similar monetary omission or series or combination thereof
instruments or property supervised or involving or having direct relation to following:
regulated by the Securities and 1. Kidnapping for ransom
Exchange Commission. (Sec. 3[a]) 2. Drug trafficking
3. Graft and corrupt practices
Covered transaction - a transaction in cash 4. Plunder
or other equivalent monetary instrument 5. Robbery and extortion
involving a total amount in excess P500,000 6. Jueteng and Masiao
within 1 banking day. 7. Piracy on the high seas
8. Qualified theft
Monetary instrument - refers to: 9. Swindling
1. coins or currency of legal tender 10. Smuggling
of the Philippines, or of any other 11. Violations of the Electronic Commerce
country; Act of 2000
Page 172 of 199
12. Hijacking, destructive arson and destructive arson and murder, including acts of
murder, including acts of terrorism terrorism against non-combatant persons and
against non-combatant persons and similar targets (Sec. 3[i]12). (Sec. 11)
similar targets
13. Fraudulent practices under the Anti-Money Laundering Council (AMLC)
Securities Regulation Code of 2000; Composition:
14. Felonies or offenses of a similar nature 1. BSP Governor – AMLC Chairman
that are punishable under the penal laws 2. Insurance Commission Chairman
of other countries. (Sec. 3[i]) 3. SEC Chairman
 There can be separate convictions for

money-laundering offense and unlawful TRUTH IN LENDING ACT (RA 3765)
activity constituting it
 However unlawful activity shall be given Purposes:
precedence over money laundering  To protect users of credit from a lack of
charge without prejudice to freezing and awareness of the true cost of such credit by
other remedies provided by the Act requiring a full disclosure of such cost. The
law assumes that the uninformed use of
Jurisdicion: credit is detrimental to the national
 All cases on money- laundering shall economy.
be within the jurisdiction of the RTC  To protect a debtor from the effects of
 Those committed by public officers misrepresentation or concealment
and private persons in conspiracy  Avoid circumvention of usury laws.
with such public officers shall be  Permitting him to fully appreciate and
within the jurisdiction of the evaluate the real costs of his borrowing
Sandiganbayan
Definitions:
Freezing of Monetary Instrument or
Property Finance charges – amounts to be paid by the
 the Court of Appeals , upon application debtor incident to the extension of credit such
ex parte by the AMLC and after as interests, discounts, collection fees, credit
determination that probable cause exists investigation fees and attorney’s fees.
that any monetary instrument or
property is in any way related to an Non-finance charges – amounts advanced by a
unlawful activity , may issue a freeze creditor for items normally associated with the
order which shall be effective ownership of property or the availment of the
immediately. services purchased which are not incident to the
 The freeze order shall be for a period of extension of credit
20 days unless extended by the court.
(Sec. 9, as amended by RA 9194) Creditor – any person engaged in the business
of extending credit (including any person who
Authority to Inquire into Bank Deposits as a regular business practice make loans or sell
General Rule: the AMLC may inquire into or or rents property or services on a time, credit,
examine any particular deposit or investment or installment basis, either as principal or as
with any banking institution or non-bank agent) who requires as an incident to the
financial institution: extension of credit, the payment of a finance
a. upon order of any competent court charge.
in cases of violation of the Act
b. existence of probable cause that the Disclosure Requirement
deposits or investments are related to an  Any creditor shall furnish to each person to
unlawful activities as defined in Section whom credit is extended, prior to the
3(i) or a money laundering offense consummation of the transaction, a clear
under Section 4 statement in writing setting forth, to the
Exception: no court order shall be required in extent applicable and in accordance with
cases involving kidnapping for ransom (Sec. rules and regulations prescribed by the
3[i]1); drug trafficking (Sec. 3[i]2); hijacking, Board , the following information ;
Page 173 of 199
1. the cash price or delivered price of the Penal clause: failure to comply with the law
property or service to be acquired ; makes creditor liable for double finance charges
2. the amounts , if any , to be credited as plus attorney’s fees
down payment and /or trade-in ; Prescriptive period: 1 year.
3. the difference between the amounts set
forth under clauses (1) and (2)
4. the charges , individually itemized , SECRECY OF BANK DEPOSITS LAW
which are paid or to be paid by such (R.A. No. 1405)
person in connection with the
transaction but which are not incident to Purpose: to give encouragement to the people
the extension of credit ; to deposit their money in banking institutions
5. the total amount to be financed ; and to discourage private hoarding so that the
6. the finance charge expressed in terms of same may be properly utilized by banks in
pesos and centavos authorized loans to assist in the economic
7. the percentage that the finance bears to development of the country (Sec. 1)
the total amount to be financed
expressed as a simple annual rate on the Acts prohibited:
outstanding unpaid balance of the 1. the examination and inquiry or looking
obligation. (Sec. 4) into all deposits of whatever nature with
banks or banking institutions in the
Transactions covered: Philippines (including investments in
1. any loan, mortgage, deed of trust, bonds issued by the Government of the
advance, or discount; Philippines, its political subdivisions
2. any conditional sales contract; any and its instrumentalities) by any person,
contract to sell, or sale or contract of government official, bureau or office
sale of property or services, either for (Sec. 2)
present or future delivery, under which 2. the disclosure by any official or
part or all of the price is payable employee of any bank to any
subsequent to the making of such sale or unauthorized person of any information
contract; concerning the said deposits (Sec. 3)
3. any rental purchase contract;
4. any contract or arrangement for the General Rule:
hire, bailment, or leasing of property; All deposits of whatever nature with
5. any option or demand, lien, pledge or banks or banking institutions in the Philippines
other claim against, or for delivery of, are considered as of an absolutely confidential
property or money; nature and may not be examined, inquired or
6. any purchase, or other acquisition of, or looked into by any person, government official,
any credit upon the security of, any bureau or office (Sec. 2)
obligation or claim arising out of any of
the foregoing; and Exceptions:
7. any transaction or series of transactions 1. upon written permission of the
having similar purpose or effect. depositor;
2. in cases of impeachment;
Transactions outside the scope of the 3. upon order of a competent court in cases
Act: of bribery or dereliction of duty of public
1. those that do not involve the payment of officials;
any finance charge by the debtor 4. In cases where the money deposited or
2. those in which the debtor is the one invested is the subject matter of the
specifying a definite and fixed set o litigation; (Sec. 2)
credit terms such as bank deposits, 5. upon order of the court in cases of
insurance contracts, sale of bonds, etc. unexplained wealth under Section 8 of
(Sec. 3, CB Circular No. 158) the Anti-Graft and Corrupt Practices Act
(PNB vs Gancayco 15 SCRA 91)
Effect of non-compliance: authorize the debtor 6. upon order of the Commissioner of
to recover any interest payment made. Internal Revenue in respect of the bank
deposits of a decedent for the purpose of
Page 174 of 199
determining such decedent’s gross estate accordance with the rules of

(Sec. 6[F][1], NIRC) examination of the BSP (Sec. 11, RA
7. upon order of the Commissioner of 9160; see also Sec. 4, RA 8791)
Internal Revenue in respect of the bank
deposits of a taxpayer who has filed an Foreign Currency Deposit Act (RA No.
application for compromise of his tax 6426)
liability under Section 204(A)(2) of the
NIRC by reason of financial incapacity All foreign currency deposits authorized
to pay his tax liability (Sec. 6[F][2], under the Act are declared as and considered of
NIRC) an absolutely confidential nature and in no
8. upon order of the court in cases filed by instance shall foreign currency deposits be
the Ombudsman and upon the latter’s examined, inquired or looked into by any
authority to examine and have access to person, government official, bureau or office.
bank accounts and records (Marquez, et
al. vs Desierto, et al., GR No. 135882 in Except:
relation to Sec. 15[8], RA 6770) 1.when there is written consent of depositor
9. disclosure of the Treasurer of the under Sec 8 of the Foreign Currency Deposits
Philippines for dormant deposits for at Act ;
least 10 years under the Unclaimed
Balances Act (Sec. 2, RA 3936) 2. upon order of the court (or even without
10. without need of a court order if the Anti- court order in proper cases) when there is
Money Laundering Council determines probable cause of money laundering as
that a particular deposit or investment provided for under Sec.11 of the Anti-Money
with any banking institution is related to Laundering Act.
any one of the following unlawful
activities: Extent of examination:
a. kidnapping for ransom under  the permitted inquiry into illegally
Article 267 of the Revised Penal acquired properties in anti-graft cases
Code, as amended extends to instances where such
b. violations of sections 4, 5, 6, property is concealed by being held by or
8, 9, 10, 12, 13, 14, 15, and 16 of recorded in the name of other persons.
the Comprehensive Dangerous (Banco Filipino vs Purisima 161 SCRA
Act of 2002 (RA 9165) 576)
c. hijacking and other  even in cases not involving prosecution
violations under Republic Act under the Anti-Graft and Corrupt
No. 6235; destructive arson and Practices Act, an inquiry into the
murder, as defined under the whereabouts of the amount converted
Revised Penal Code, as amended, necessarily extends to whatever is
including those perpetrated by concealed (by being held or recorded in
terrorists against non-combatant the name of persons other than the one
persons and similar targets responsible for the illegal acquisition)
11. upon order o the court, if the AMLC inasmuch as the case is aimed at
determines that a particular deposit or recovering the amount converted
investment with any banking institution (Mellon Bank vs Magsino 190 SCRA
is related to any one of the unlawful 633)
activities under Section 3 (i), except  garnishment of bank deposit of
those refereed to in Section(i)[1], [2] and judgment debtor does not violate RA
[12] of RA 9160 or a money laundering 1405. The lower court merely required
offense under Section 4 (sec. 11, RA the cashier of the bank to inform the
9160) court whether or not the defendant had
12. inquiry into or examination of any a deposit in said bank only for purposes
deposit or investment with any banking of garnishment issued by it (China
institution when the examination is Banking Corporation v. Ortega, 49 SCRA
made by the Bangko Sentral ng Pilipinas 355).
to insure compliance with the Anti-  before an in camera inspection may be
Money Laundering Law in the course of allowed, there must be a pending case
a periodic or special examination in
Page 175 of 199
before a court of competent jurisdiction. 3. To establish a human resource

Further, the account must be clearly management system which shall govern
identified, the inspection limited to the the selection, hiring, appointment,
subject matter of the pending case transfer, promotion or dismissal of all
before the court of competent personnel
jurisdiction. The bank personnel and 4. To appoint, establish the rank, fix the
the account holder must be notified to remuneration, approve local and foreign
be present during the inspection, and training of, and remove any officer or
such inspection may cover only the employee of the PDIC, for cause, subject
account identified in the pending case. to pertinent civil service laws
(Marquez vs Desierto GR No. 135882) 5. To adopt an annual budget for, and
authorize such expenditures by the PDIC
6. To approve the methodology for
PHILIPPINE DEPOSIT INSURANCE determining the level and amount of
CORPORATION provisioning for insurance and financial
(RA 3591, as amended by RA 9302, assistance losses, which shall establish
August 12, 2004) reasonable levels of deposit insurance
reserves.
Purpose:
 shall insure the deposits of all banks which Main functions of the PDIC:
are entitled to the benefits of insurance 1. Risk Management:
under this Act  deals with the insurance assessment and
 shall promote and safeguard the interests of premium collection from member
the depositing public by providing banks.
permanent and continuing insurance  monitors the health of member banks,
coverage on all insured deposits examines and identifies “risk” areas in
banks, or their weaknesses.
Board of Directors:  institutes corrective measures to prevent
a. Secretary of Finance – ex-officio closures thru bank rehabilitation and
Chairman of the Board without provides financial assistance to
compensation distressed banks and assists in the
b. Governor of the BSP – ex-officio reopening of closed banks, provided all
member without compensation PDIC requirements are met.
c. President of the PDIC – appointed by 2. Claims, Receivership and Liquidation.
the President of the Philippines from  claims refers to the settlement of claims
either the government or private sector for insured deposits
to serve on a full-time basis for a term of  receivership deals with the takeover and
6 yrs.; also serve as Vice-Chair of the control of all assets, liabilities and affairs
Board of closed banks
d. 2 members from the private sector –  liquidation covers the conversion of
appointed for a term of 6 years without loans, disposal of fixed assets into cash
reappointment by the President of the deposits, and the implementation of
Phils.; of these first appointed, the first final settlement with creditors.
appointee shall serve for 2 years
Insurance coverage:
 The presence of 3 members shall  The deposit liabilities of any bank or
constitute a QUORUM. banking institution, which is engaged in
 All decisions of the BODs shall require the business of receiving deposits, or
the concurrence of at least 3 members. which thereafter may engage in the
business of receiving deposits, shall be
The BOD shall have the authority: insured with the PDIC. (Sec. 5)
1. To prepare and issue rules and
regulations Deposit - the unpaid balance of money or
2. To direct the management, operations its equivalent received by a bank in the
and administration of the PDIC usual course of business and for which it has
given or is obliged to give credit to a
Page 176 of 199
commercial, checking, savings, time or thrift When liable: Whenever an insured bank shall
account or which is evidenced by passbook, have been closed by the Monetary Board. (Sec.
check and/or certificate of deposit. 14)
 any obligation of a bank which is Form of payment: payment shall be made as
payable at the office of the bank located soon as possible either by
outside of the Philippines shall not be a 1. cash or
deposit for any of the purposes of this 2. making available to each depositor a
Act or included as part of the total transferred deposit in another
deposits or of insured deposit insured bank in an amount equal to
 subject to the approval of the Board of insured deposit of such depositor
Directors, any insured bank which is
incorporated under the laws of the Transfer Deposit - a deposit in an insured
Philippines which maintains a branch bank made available to a depositor by the
outside the Philippines may elect to PDIC as payment of insured deposit of such
include for insurance its deposit depositor in a closed bank and assumed by
obligations payable only at such branch another insured bank.
(Sec. 4)
 The PDIC may withhold payment of
Extent of liability: not to exceed P250,000 as of such portion of the insured deposit of
the date of the bank’s closure(Sec. 4) any depositor in a closed bank as may be
Rules: required to provide for the payment of
 In determining such amount due any liability of such depositor as a
to any depositor, there shall be added stockholder of the closed bank, or of any
together all deposits in the bank liability of such depositor to the closed
maintained in the same right and bank or its receiver, which is not offset
capacity for his benefit either in his own against a claim due from such bank,
name or in the name of others. pending the determination and payment
 A joint account regardless of of such liability by such depositor or any
whether the conjunction “and,” “or,” other liable therefor. (Sec. 16)
“and/or” is used, shall be insured  Except as otherwise prescribed by the
separately from any individually-owned Board of Directors, neither the PDIC nor
deposit account, provided that such other insured bank shall be
1. If the account is held jointly by required to recognize as the owner of
two or more natural persons, or by any portion of a deposit appearing on
two or more juridical persons or the records of the closed bank under a
entities, the maximum insured name other than that of the claimant,
deposit shall be divided into as many any person whose name or interest as
equal shares as there are individuals, such owner is not disclosed on the
juridical persons or entities, unless a records of such closed bank as part
different sharing is stipulated in the owner of said deposit, if such
document of deposit, and recognition would increase the
2. If the account is held by a aggregate amount of the insured
juridical person or entity jointly with deposits in such closed bank. (Sec. 16)
one or more natural persons, the
maximum insured deposit shall be Effect of payment:
presumed to belong entirely to such 1. The PDIC, upon payment of any
juridical person or entity depositor shall be subrogated to all
 The aggregate of the interests of rights of the depositor against the closed
each co-owner over several joint bank to the extent of such payment.
accounts, whether owned by the same or
different combinations of individuals, Extent: Such subrogation shall include
juridical persons or entities, shall the right on the part of the PDIC to
likewise be subject to the maximum receive the same dividends and
insured deposit of P250,000.00. payments from the proceeds of the
assets of such closed bank and
 Liability is per bank basis.
recoveries on account of stockholders’
liability as would have been payable to
Page 177 of 199
the depositor on a claim for the insured Unless otherwise waived by the PDIC, all of the
deposits depositor’s rights with respect to the insured
deposit shall be barred if the said depositor in
Limitation: The depositor shall retain the closed bank fails to claim his insured
his claim for any uninsured portion of deposits with the PDIC:
his deposit. a. within 2 years from actual takeover, or
b. does not enforce his claim within 2 years
Nature of payments: All payments by after the 2-year period to file a claim.
the PDIC of insured deposits in closed
banks partake of the nature of public Effects:
funds, and as such, must be considered a  all rights of the depositor against the
preferred credit similar to taxes due to PDIC with respect to the insured
the National Government in the order of deposit shall be barred
preference under Article 2244 of the  all rights of the depositor against the
New Civil Code. (Sec. 15) closed bank and its shareholders or
the receivership estate to which the
2. Payment of an insured deposit to any PDIC may have become subrogated,
person by the PDIC shall discharge the shall thereupon revert to the
PDIC, and payment of a transferred depositor
deposit to any person by the new bank  the PDIC shall be discharged from
or by an insured bank in which a any liability on the insured deposit
transferred deposit has been made
available shall discharge the PDIC and Sanctions Against Unsafe and Unsound
such new bank or other insured bank, to Banking Practices
the same extent that payment to such 1. Whenever upon examination by the
person by the closed bank would have PDIC, it shall be disclosed that an
discharged it from liability for the insured bank or its directors or agents
insured deposit. (Sec. 16) have committed, are committing or
about to commit unsafe or unsound
Period to settle claims by PDIC: 6 months from practices, or have violated, are violating
the date of filing of claim for insured deposit. or about to violate any law or regulation,
Liability for failure to settle: will subject the the BOARD OF DIRECTORS SHALL
directors, officers or employees of the PDIC SUBMIT THE REPORT OF THE EXAM
responsible for the delay to imprisonment upon TO THE MONETARY BOARD to secure
conviction from 6 months to 1 year, where such corrective action.
failure was due to: 2. If no such action is taken within 45 days
a. grave abuse of discretion, from the submission of the report, the
b. gross negligence, BOARD OF DIRECTORS shall, motu
c. bad faith, or proprio, INSTITUTE CORRECTIVE
d. malice, ACTION it deems necessary.
3. Board of Directors may thereafter issue
 the PDIC, in its discretion, may require a CEASE AND DESIST ORDER, and
proof of claims to be filed before paying require bank or its directors or agents to
the insured deposits, and that in any correct the practices or violations within
case where the PDIC is not satisfied as to 45 days.
the viability of a claim for an insured 4. If the practice or violation is likely to
deposit, it may require final cause insolvency or seriously weaken the
determination of a court of competent bank’s condition or prejudice the
jurisdiction before paying such claim interests of depositors and the PDIC, the
 the period shall not apply if the validity period to take corrective action shall not
of the claim requires the resolution of be more than 15 days.
issues of facts and or law by another
office, body or agency or by the PDIC Powers as a Corporate Body
together with such other office, body or 1. To adopt and use a corporate seal
agency. (Sec. 14) 2. To have succession until dissolved by an
Act of Congress
Prescription:
Page 178 of 199
3. To make contracts  occurs whenever a deposit account

4. To sue and be sued in any court of law in with an outstanding balance of more
the Phils. NO attachment or execution than the statutory maximum amount
shall be issued against the PDIC or its of insured deposit maintained under
property before final judgment in any the name of natural or juridical
suit, action, or proceeding in any court persons is broken down and
5. To appoint by its BOD such officers and transferred into two or more
employees accounts in the name/s of natural or
6. To prescribe, by its BOD, by-laws not juridical persons or entities who
inconsistent with law have no beneficial ownership on
7. To exercise by its BOD, or duly transferred deposits in their names:
authorized officers or agents, all powers a. within 30 days immediately
granted by this Act preceding or during a bank-
8. To conduct examination of banks with declared bank holiday, or
prior approval of the Monetary Board. b. immediately preceding a closure
Provided, that no exam can be order issued by the Monetary
conducted within 12 months from the Board of the Bangko Sentral ng
last exam date Pilipinas for the purpose of
9. To act as receiver availing of the maximum deposit
10. To prescribe by its BOD such rules and insurance coverage. (Sec. 21)
regulations 6. refusal to allow PDIC to take over a
11. To establish its own provident fund closed bank under its receivership
12. To compromise, condone or release any 7. refusal to turn over or destroying or
claim or settled liability to the PDIC, tampering bank records
regardless of the amount involved 8. fraudulent disposal, transfer or
concealment of any asset, property or
Permanent Insurance Fund liability of the closed bank
 shall be three billion pesos 9. violation or causing any person to
(P3,000,000,000.00) violate, the exemption from
garnishment, levy, attachment or
Deposit Insurance Fund execution
 shall be the capital account of the PDIC 10. any willful failure or refusal to comply
and shall consist of the ff.: (i) the with any provision of this Act.
Permanent Insurance Fund; (ii)
assessment collections; (iii) reserves for
insurance and financial assistance SPECIAL LAWS
losses; and (iv) retained earnings
Prohibitions:
The penalty of prision mayor or a fine of not Bulk Sales Law
less than P50,000 but not more than (Act No. 3952 as amended)
P2,000,000, or both, shall be imposed upon
any director, officer, employee or agent of a Purpose: To prevent secret or fraudulent sales
bank: or conveyances of goods in bulk and, thereby,
1. for any willful refusal to submit reports protect the creditors of the seller.
as required by law, rules and
regulations; Bulk sale:
2. any unjustified refusal to permit  Any sale, transfer, mortgage, or assignment
examination and audit of the deposit of: (SBE)
records or the affairs of the institution; 1. a stock of goods, wares, merchandise,
3. any willful making of a false statement provisions, or materials otherwise than
or entry in any bank report or document in the ordinary course of trade and the
4. submission of false material information regular prosecution of business; (S)
in connection with any financial 2. all, or substantially all, of the business
assistance extended to the bank or trade theretofore conducted; (B) and
5. splitting of deposits or creation of
fictitious loans or deposit accounts.
Page 179 of 199
3. all, or substantially all, of the fixtures Regulation and Consumer

and equipment used in and about the Protection. (Sec. 9) (R)
business (Sec. 2). (E)
Effects of violation:
Exceptions: (COJAP) 1. On the transaction:
1. written waiver from all the  VALID as between the parties.
creditors; (Sec. 2) (C)  VOID as to affected creditors.
2. sale or transfer is made in the
ordinary course of business; (O) 2. On the purchaser:
3. sale by virtue of a judicial 1. holds the property in trust for
order; (Sec. 8) (J) seller (whether in good faith or bad
4. those sold by assignee or those faith);
beyond the right of creditors; (A) and 2. acquires no right in the property
5. sale of properties exempt from purchased as against the creditors of
attachment or execution. (Rule 39, the seller; and
Sec.13, Rules of Court) (P) 3. liable to seller’s creditors for
properties forming part of bulk and
Duties of seller, mortgagor or assignor in already disposed by him.
bulk: (SPIN-R)
1. to deliver to the vendee, mortgagee, or Note: The law imposes no direct
his agent or representative a sworn obligation on the buyer, mortgagee,
written statement of the names and transferee or assignee in bulk sale.
addresses of all the creditors to whom Strictly speaking, therefore, since
the vendor or mortgagor may be criminal provisions are to be construed
indebted, together with the amount of strictly in favor of the accused, a buyer
indebtedness due or owing, or to in bulk sale cannot be deemed to be
become due or owing by said vendor or subject to criminal liability under the
mortgagor to each of said creditors. (Sec. law, although it may be argued that the
3) (S) buyer would be a principal by
2. to apply the purchase or mortgage indispensable cooperation, if he was
money to the pro rata payment of the aware of the intent of the seller or
bona fide claims of the creditors of the conspired with the seller. (Villanueva
vendor or mortgagor. (Sec. 4) (P) 2002 Ed. Pg 1027)
3. at least 10 days before the sale, transfer
or execution of a mortgage upon any 3. On the seller, mortgagor, transferor
stock of goods, wares, merchandise, or assignor:
provisions or materials, in bulk, to make
a full detailed inventory thereof and to Criminal liability for: (FKT)
preserve the same showing the quantity a. failure to prepare and deliver the sworn
and, to the extent possible, the cost statement listing his creditors and the
price to the vendor, transferor, application pro-rata of the proceeds
mortgagor or assignor of each article to thereof to the listed creditors (Sec. 4) (F)
be included in the sale, transfer or b. knowingly or willfully make, or deliver
mortgage. (Sec. 5) (I) or cause to be made or delivered, a
4. notify every creditor whose name and statement which shall not include the
address is set forth in the verified names of all such creditors, with the
statement of the vendor, transferor, correct amount due and to become due to
mortgagor, or assignor, at least 10 days each of them, or shall contain any false or
before transferring possession, of the untrue statement (Sec. 6) (K)
price, terms conditions of the sale, c. transfer of title without consideration or
transfer, mortgage, or assignment. (Sec. for a nominal consideration only (Sec. 7)
5) (N) (T)
5. to register the sworn statement
containing the names and addresses Distinction on fraudulent transfer
of all creditors o the vendor or against creditors:
mortgagor with the Bureau of Trade
Bulk Sales New Civil Code
Page 180 of 199
Law b. language indicating if the

Null and void Rescissible (Article 1381- warehouseman is an owner, solely or
1389) jointly with others, of the goods
deposited; (O)
c. statement of advances made by the
warehouseman for which he claims a
WAREHOUSE RECEIPTS LAW lien; (A)
ACT NO. 2137 d. date of issue; (D)
e. location of the warehouse; (L)
Coverage f. language to indicate if the receipt
 Seeks to encourage transactions on were negotiable or non-negotiable, that
negotiable warehouse receipts, which may is, whether the goods received will be
only be issued by a warehouseman who is delivered to the bearer, to a specified
engaged in the business of receiving person, or to a specified person or his
commodities on deposits for storage. order; (L)
g. signature of the warehouse or his
In correlation with: agent; (A)
a. Articles 706 to 718 of Code of Commerce h. rate of storage charges; (R) and
(Bill of Ladings); i. description of the goods or the
b. Articles 1507 to 1520 of Civil Code packages containing them. (D)
(Documents on Title)
 The Civil Code provisions have Prohibited terms:
repealed the Code of Commerce a. such additional terms that are
provisions on the Bill of Lading. contrary to the provisions of the
 Despite the fact that we have Warehouse Receipts Law;
Warehouse Receipts Law, the Civil b. terms that reduces the degree of
Code still have provisions on diligence imposed by law. (Sec. 3)
quedans.
Function of Warehouse Receipt
 The sugar centrals which issue
quedans are not warehousemen,  The negotiation of a warehouse
since their service is offered only to receipt carries with it the transfer of title
sugar planters and not to the public. over the commodity covered by the receipt,
so also with a negotiable bill of lading.
Purposes of the Law: (PR)
a. to prescribe the rights and duties of a Exception: Where a negotiable warehouse
warehouseman ; (P) receipt is indorsed and delivered to a
b. to regulate the relationship between a creditor as collateral for a loan.
warehouse man and i.) the depositor of
goods, or ii) the holder of a warehouse Note: in case of loss of the commodity
receipt for the goods, or iii) the person covered by the receipt through a fortuitous
lawfully entitled to the possession of the event, it will be the debtor who will bear the
good, or iv) other persons. (R) loss as the true intent to the parties is not
the negotiation of the warehouse receipt
Warehouseman (Sec. 58 [a]) with its consequent transfer of title but
merely as security.
 A person lawfully engaged in the business of
storing goods for profit.
Kinds (Secs. 4 & 5)
1. Negotiable – one which states that the
Warehouseman Receipt (Sec. 2)
goods received by the warehouse will be
 A written acknowledgement by a delivered:
warehouseman that he has received and a. to the bearer or
holds certain goods therein described in b. to the order of any person named in
store for the person to whom it is issued. such receipt.
Form: No particular form. However, it must
contain the following terms: (ROAD-LLARD) 2. Non-Negotiable – one which states that the
a. receipt number; (R)
goods received by the warehouseman will be
Page 181 of 199
delivered to the depositor or to any other

specified person.
Page 182 of 199
Distinctions between Negotiable i e

Instrument and Negotiable Warehouse p h
Receipt: t o
u
s
Negotiable Negotiable
e
As to: Instrument Warehouse
Receipt
R
Subject Money Money e
Object of Instrument Goods c
value itself deposited e
None for i
Liability of
Secondary failure to p
intermediate
liability deliver the t
parties
goods May be Negotiation Transfer or
Valid but acquired assignment
enforceable through
Effect of only in
Null and  Title to the  title of the
deliberate accordance
void goods of the goods, as
alteration with its
person against the
original
negotiating transferor
tenor
the receipt (merely steps
Can be
An originally and title of into the
converted to
bearer the person to shoes)
Conversion an order
instrument whose order  right to notify
from bearer warehouse
will always the goods the
to order receipt if Rights of
be such were to be warehousem
specifically the person
delivered. an of the
endorsed to whom it
is  Direct transfer and
Obtains only
negotiated obligation of acquire the
the title
(holder)/ the direct
May obtain a which the
Significance transferee warehousem obligation of
better title party
of a HIDC an to hold the
negotiating
possession of warehousem
had over the
the goods for an to hold the
goods
him as if the goods for
warehousem him. (Sec.
an directly 42)
Distinctions between Negotiable
contracted
Warehouse Receipt and Non-Negotiable
with him
Warehouse Receipt:
(Sec. 41
Negotiation
Negotiable Non-
defeats the lien
W N
of the seller of
a e
the goods.
r g
Attachment
e o
or levy by Cannot unless
h t Can be subject
execution in proper
o i to such
of goods circumstances
u a
represented
s b
e l
Note: Negotiation of the document has the
e
effect of manual delivery so as to constitute the
R
transferee the owner of the goods. Negotiation
e W
carries with it both the title to and possession of
c a
e r
Page 183 of 199
the property. (Philippine Trust Co. vs. National unless a contrary intention appears,
Bank, 42 Phil. 413) warrants(Sec. 44): (GRIT)
a. that the receipt is genuine;
Kinds of Negotiation: (G)
1. Negotiation by delivery: b. that he has legal right to
a. Where, by terms of the negotiate or transfer it; (R)
receipt, the warehouseman undertakes c. that he has knowledge of no fact
to deliver the goods to the bearer; or which would impair the validity or
b. Where, by the terms of the worth of the receipt; and (I)
receipt, the warehouseman undertakes d. that he has a right to transfer
to deliver the goods to the order of a title to the goods and that the goods
specified person, and such person or a are merchantable. (T)
subsequent indorsee of the receipt has
indorsed it in blank or to bearer. (Sec. Notes: Sec. 44 is similar to Sec. 65 of NIL
37) on warranties of a qualified indorser.
Note: A bearer document of title is not Indorser not a guarantor - The

always a bearer document in the sense that indorsement of a receipt shall not make the
a special indorsement has the effect of indorser liable for any failure on the part of
converting the bearer instrument into an the warehouseman or previous indorsers of
order instrument the receipt to fulfill their respective
obligations (Sec. 45).
2. Indorsement coupled with
delivery Negotiation defeats vendor's lien - Where a
a. A negotiable receipt may be negotiable receipt has been issued for goods,
negotiated by the indorsement of the no seller's lien or right of stoppage in
person to whose order the goods are, by transitu shall defeat the rights of any
the terms of the receipt, deliverable. purchaser for value in good faith to whom
b. Such indorsement may be in such receipt has been negotiated, whether
blank, to bearer or to a specified person. such negotiation be prior or subsequent to
If indorsed to a specified person, it may the notification to the warehouseman who
be again negotiated by the indorsement issued such receipt of the seller's claim to a
of such person in blank, to bearer or to lien or right of stoppage in transitu. Nor
another specified person. Subsequent shall the warehouseman be obliged to
negotiation may be made in like manner. deliver or justified in delivering the goods to
(Sec. 38) an unpaid seller unless the receipt is first
surrendered for cancellation (Sec. 49).
Effect of delivery without indorsement:
(ANT) Warehouseman’s obligation to deliver
 The transferee acquires title the goods (Sec. 8)
against the transferor; (A)  upon demand made either:
 There is no direct obligation of the a. by the holder of a receipt for the goods;
warehouseman; (N) and b. by the depositor, provided that such
 The transferee can compel the demand is accompanied by:
transferor to complete the i. an offer to satisfy the
negotiation by indorsing the warehouseman’s lien;
instrument. (Sec. 43) (T) ii. an offer to surrender the receipt if it
is negotiable; and
Note: The negotiation takes effect on iii. a readiness and willingness to sign
the date of indorsement only. an acknowledgment, when such
goods are delivered, that they have
Effects of Negotiation: been delivered if such is requested
Warranties on sale of receipt: A person who, by the warehouseman.
for value, negotiates or transfers a receipt by
indorsement or delivery, including one who Commingling of Goods ( Secs. 22 and 23)
assigns for value a claim secured by a receipt,  General Rule: Warehouseman
must keep the goods of a depositor from the
Page 184 of 199
goods of other depositors, or from the goods 1. where the goods have already been lawfully
of the same depositor for which a separate sold to third persons to satisfy the
receipt has been issued. warehouseman’s lien or disposed of
because of their perishable nature; (S)
Purpose: in order to permit the inspection 2. when the holder of the receipt does not
and redelivery of the goods deposited at all satisfy the conditions prescribed in Section
times. 8 of the Act; (H)
3. In case of adverse claimants; (A)
Exception: Commingling of goods is 4. prior to delivery (P): (RI)
allowed if: a. if he has been requested by
a. the goods are fungible; and a person lawfully entitled to a right of
b. the commingling is authorized by property or possession in the goods not
agreement or by custom. to make delivery to any person; (R)
b. if he had information that
What the Warehouseman can do in case the delivery to be made was to one not
of several claims: (Sec. 17 and 18) lawfully entitled to the passion of the
a. He can refuse to deliver the goods to goods. (I)
anyone of them until he has had 5. In the valid exercise of the
reasonable time to ascertain the validity warehouseman’s lien;(E) and
of the various claims; 6. when the warehouseman has a legal title
b. He can require all claimants to in himself on the goods such title or right
interplead, either as a defense to an being derived directly or indirectly from the
action brought against him for non- transfer made by the depositor at the time
delivery of the goods, or as an original or subsequent to the deposit for storage or
suit, whichever is appropriate. from the warehouseman’s lien. (W)
When justified in delivering the goods - Other liabilities of a warehouseman:

the person lawfully entitled to the possession of (FANCID-COMS)
the goods (Sec. 9): (EP) 1. for issuing
1. the person who is himself entitled to receipts containing false statements (Sec.
delivery of goods by the terms of a non- 51); (F)
negotiable receipt or who has been 2. for altered
authorized to take delivery of the goods by receipts (Sec. 13); (A)
the person entitled to such delivery; (E) 3. for the non-
2. the person in possession of a negotiable existence or misdescription of goods
instrument receipt by the person to whom (Sec. 20); (N)
delivery was promised by the terms of the 4. for commingled
receipt by immediate endorsee. (P) goods (Sec. 24); (C)
5. for issuing
When liable for misdelivery (sec.10): receipt for goods not received (Sec. 50);
1. if he delivers the goods to one who is not (I)
in fact lawfully entitled to the possession of 6. for issuing
the goods; duplicate receipts not so marked (sec.
2. If he delivers to a person holding a non- 52); (D)
negotiable receipt or a negotiable receipt, if 7. for failure to take
prior to the delivery he had either: up and cancel a negotiable receipt or to
a. been requested not to make such place upon it a statement of what goods
delivery by the person lawfully have been delivered, when the goods are
entitled to a right of property or partly delivered (Sec. 12); (S)
possession in the goods; or 8. for commingled
b. had information that delivery goods (Sec. 24); (C)
about to be made was to one not 9. for delivery of
lawfully entitled to the goods without obtaining negotiable
possession of the goods. receipt (sec. 54). (O)
10. for failure to
When may delivery be legally refused: mark a receipt intended to be non-
(SHAPE-W) negotiable (Sec.7); (M)
Page 185 of 199
11. for issuing 2. If a non-negotiable receipt is issued,

receipts for the warehouseman’s goods goods can be attached provided it is done
which do not state that fact (Sec. 53); (S) prior to the notification of the
warehouseman of the transfer, (Sec. 42)
Warehouseman’s Lien
Extent: Reason: Absent such notice, both the
1. lawful charges for storage and warehouseman and the sheriff have a right
preservation of the goods; to assume that the goods are still owned by
2. lawful claims for money advanced; and ( the person whose name appears in the
3. reasonable charges and expenses receipt.
for notice and advertisement of the sale,
and the sale of goods. (Sec. 27) Creditor's remedies to reach negotiable
receipts.
Remedies available to warehouseman to  entitled to such aid from courts of
enforce his lien: (SOR) appropriate jurisdiction, by injunction and
1. To refuse to deliver the goods otherwise, in attaching such receipt or in
until his lien is satisfied; (Sec. 31) (R) satisfying the claim by means thereof as is
2. To sell the goods and apply the allowed at law or in equity in these islands
proceeds to the value of the lien; (Sec.33 in regard to property which can not readily
and 34) (S) be attached or levied upon by ordinary legal
3. By the other means allowed by process. (Sec. 26)
law to a creditor against his debtor, for
the collection from the depositor of all Duty to insure the goods:
charges and advances which the a. where the law provides;
depositor contracted with the b. where it was an inducement for the
warehouseman to pay, (Sec. 32); or such depositor to enter into the contract;
other remedies allowed by law for the c. established practice;
enforcement of a lien against personal d. where the warehouse receipt contains a
property. (Sec. 35) (O) representation to that effect.
Against what property lien may be

enforced: GENERAL BONDED WAREHOUSE LAW
1. All deposited goods of the person liable ACT 3893, AS AMENDED
for the lien; and
2. All goods belonging to others Purpose of the law (Sec. 3)
deposited by the person liable for the lien. 1. to regulate the business of receiving
(Sec. 28) commodities for storage in order;
2. to protect persons who may want to avail
How lien may be lost: (SR) themselves of warehouse facilities; and
1. By surrendering possession thereof; 3. to encourage the establishment of more
(S) or warehouses.
2. By refusing to deliver the goods when a
 to achieve this purpose, any person
demand is made with which he is bound to who wants to engage in the business
comply. (Sec. 29) (R) of receiving commodities fro storage
is required by the Act to first secure
Rules on attachment / execution of goods a license therefore from the
deposited: Department of Trade and Industry.
1. If a negotiable receipt is issued, the
goods cannot be attached or levied in Any warehouseman receiving commodities for
execution unless: storage, milling, or commingling must:
1. obtain prior license from the Bureau of
a. The receipt is first surrendered; Commerce;
or 2. file a bond in an amount equivalent to 33
b. Its negotiation is enjoined; or 1/3% of the capacity of the warehouse
c. The receipt is impounded by the against which bond depositors may sue
court. (Sec. 25) directly (pour autrui);
Page 186 of 199
3. open to the public; no discrimination of the maximum quantity of the

allowed; commodity to be received by the
4. liable for double market value should he warehouseman.
accept if goods are damaged or destroyed. 3. It shall be so conditioned to
 a warehouse accepting tobacco for respond for the market value of the
flueing is covered by law. commodity actually delivered at any time
 Itinerant miller of palay who keeps by the warehouseman in case the latter is
palay in process of milling under a unable to return the commodity or to pay
camalig falls within the law. its value.
 A mill which must store palay
temporarily must still get the license Duties of a Bonded Warehouseman:
from the Bureau. 1. to receive for storage any commodity the
kind customarily stored by him in the
Warehouseman (Sec. 2) - A person engaged warehouse, so far as his license and the
in the business of receiving commodity for capacity of his warehouse will permit,
storage. without making any discrimination
 Included in the business of receiving between person desiring to avail
commodity for storage (Sec. 2) themselves of warehouse facilities (sec. 8);
2. to keep a complete record of all
 It includes entering into any contract
commodities received by him, of the
or transaction wherein;
receipts issued therefore, of the
a. the warehouseman is obligated to return
withdrawals, of the liquidation, and of all
the very same commodity delivered to
receipts returned to and cancelled by him
him or to pay its value;
(Sec. 9).
b. commodity delivered to
him or to pay its value;
Rights of Injured Person against
c.the commodity delivered is to be
Warehouseman (Sec. 7):
milled for the owner thereof;
 He may sue on the bond put up by the
d. the commodity delivered is
warehouseman to recover the damages he
commingled with the commodity
may have sustained on account of such
belonging to other persons, and
breach.
the warehouseman is obligated to
return commodity of the same  In case the bond is not sufficient to
kind or to pay its value. cover the full market value of the
commodity stored, he may sue on any
Commodities stored in a bonded property or assets of the warehouseman not
warehouse (Sec. 2) exempt by law from attachment and
 Generally, these commodities could be execution.
any raw, processed, manufactured or
finished product or by-product, goods, Offenses penalized under the Act:
article, or merchandise, either domestic or a. engaging in the business of receiving
foreign production or origin, which may be commodities for storage without the
traded or dealt in openly and legally. proper license (Sec. 11);
b. receiving a quantity of commodity
 Prohibited substances, the possession of
greater than that specified in the license
which is proscribed by law, may not be
of the warehouseman (Sec. 12);
validly received for storage in a bonded
c. conniving or entering into a
warehouse.
combination with an unlicensed
warehouseman for the purpose of
Bond required to be put up by the
avoiding compliance with the
warehouseman (Sec. 4)
requirement of obtaining a license
1. the bond may either be:
before engaging in the business of
a. a cash bond;
receiving commodities for storage (Sec.
b. a bond secured by real estate; or
13).
c. a bond issued by a duly authorized
bonding company.
2. the amount of the bond must not
be less than 33 1/3% of the market value Letters of Credit
Page 187 of 199
Assignment of credit - the process of

Defined: An engagement by a bank or other transferring the right of the assignor to the
person made at the request of a customer that assignee, who would then be allowed to proceed
the issuer will honor a draft or other demands against the debtor.
for payments or other complaints with the
conditions specified in the credit. An assignor is liable for the legality of the credit
and for his capacity as transferor, but not for
In a letter of credit, there are 3 distinct and the solvency of the debtor unless there is an
independent contracts: agreement to the contrary.
1. contract of sale between buyer and
seller, An assignee cannot acquire a greater right than
2. contract of the buyer with issuing bank, that pertaining to the assignor.
and
3. letter of credit proper in which the bank Rules relating to Letters of Credit:
promises to pay the seller pursuant to 1. In the absence of any particular
the terms and conditions stated therein. provision in the Code of Commerce,
commercial transactions shall be
Essential Conditions: governed by usages and customs
1. sued in favor of a definite person; generally observed;
2. amount fixed or specified; 2. An advising or notifying bank does not
3. duration of 6 months, if used in the Phil. incur any obligation by such notification
or 1 year, if used abroad, unless the and is only bound to check the apparent
parties provide for a different period. authenticity of the letter of credit. (Bank
of America vs. CA, G.R. No. 105395)
Perfection: Letters of credit are deemed 3. an advising or notifying bank is not
perfected from the time the correspondent bank privy to the contract of sale between the
makes payment to persons in whose favor the buyer and the seller, its relationship is
letter of credit has been opened. only with that of the issuing bank and
not with the beneficiary to whom he
Parties to a Letter of Credit transaction: assumes no liability. (Feati Bank vs. CA,
1. Buyer - procures the letter of credit and G.R. No. 94209)
obliges himself to reimburse the issuing 4. a negotiating bank has a right of
bank upon receipt of the documents of recourse against the issuer bank and,
title; until reimbursement is obtained, the
2. Issuing bank - undertakes to pay the drawer of the draft continues to assume
seller upon receipt of the draft and a contingent liability thereon;
proper documents of titles and to 5. between the seller and negotiating bank
surrender the documents to the buyer there is the usual relationship existing
upon reimbursement; and between a drawer and the purchaser of
3. Seller - ships the goods to the buyer drafts; the involved bank deals only with
and delivers the documents of title and documents and not on the goods
draft to the issuing bank to recover describes in the documents.
payment.
Independence Principle
Other parties:  means that a bank, in determining
1. Advising / notifying bank - notify compliance with the terms of a letter of
and/or transmit to the beneficiary the credit;
existence of the letter of credit.  is required to examine only the shipping
2. Negotiating bank - buys or discounts documents presented by the seller; and
a draft under the letter of credit.  is precluded from determining whether the
3. Confirming bank - assumes a direct main contract is actually accomplished or
obligation to the seller and its liability is not.
a primary one as if the correspondent
bank itself had issued the letter of credit. Rule of Strict Compliance
4. Paying bank - undertakes to encash  means that the documents tendered by the
the drafts drawn by the exporter. seller or beneficiary must strictly conform to
Page 188 of 199
the terms of the letter of credit, i.e., they 8. Non-cumulative - a revolving letter of
must include all documents required by the credit by which any amount not used by
letter of credit. the beneficiary during the specified period
may not be drawn against in a later
It is a settled rule in commercial transactions period.
involving letters of credit that the documents
tendered must strictly conform to the terms of Draft - an order written by an exporter/seller
the letter of credit. The tender of documents by instructing an importer/buyer or its agent to
the beneficiary (seller) must include all pay a specified amount of money at a specified
documents required by the letter. A time.
correspondent bank which departs from what
has been stipulated under the letter of credit, as Types of Drafts
when it accepts a faulty tender, acts on its own 1. Sight draft - payable on presentation to
risks and it may not thereafter be able to the drawee and the drawee must pay at
recover from the buyer or the issuing bank, as once or dishonor the draft.
the case may be, the money thus paid to the 2. Time draft - allows a delay in payment.
beneficiary thus the rule of strict Once accepted, the time draft becomes a
compliance. (Feati Bank & Trust Company vs. promise to pay by the accepting party.
CA, G.R. No. 94209) 3. Clean draft - an order to pay
unaccompanied by any other documents.
Standby letter of credit 4. Documentary draft - various shipping
 a bank-issued option on a loan whereby the documents are attached to the draft.
beneficiary has the right to trigger the loan
option if the account party fails to meet its Documents needed as condition of the
commitment, in which case the issuing bank letter of credit for honoring a draft:
disburses a specified sum to the beneficiary 1. Bill of lading
and books an equivalent loan to its 2. Commercial invoice
customer. 3. Consular invoice
4. Certificate of analysis
Common types of letters of credit: 5. Packing list
1. Irrevocable - obligates the issuing bank 6. Export declaration
to honor drafts drawn in compliance with
the credit and can be neither cancelled nor
modified without the consent of all Trust Receipts Law (P.D. 115)
parties, including in particular the
beneficiary/ exporter. Defined: A commercial document whereby
2. Revocable - can be cancelled or the bank releases the goods in the possession of
amended at any time before payment the entrustee but retains ownership thereof
which is intended to serve as a means of while the entrustee shall sell the goods and
arranging payment but not as a guarantee apply the proceeds for the full payment of his
of payment. liability with the bank.
3. Confirmed - a letter of credit issued by
one bank which may be confirmed by  It is a written / printed document signed by
another, by which both banks are the entrustee;
obligated to honor drafts drawn in  in favor of the entruster;
compliance with the credit.  whereby the latter releases the goods,
4. Unconfirmed - the obligation to confirm
documents or instruments to the possession
the letter of credit belongs only to the of the former upon the entrustee’s promise:
issuing bank. a. to hold said goods in trust for the
5. Revolving - a letter of credit, which is
entruster;
valid for several transactions over a given b. to sell the goods;
period of time. c. turn over the proceeds thereof to the
6. Non-revolving - a letter of credit that is
extent of what is owing to the
valid for one transaction only. entruster; or
7. Cumulative - a revolving letter of credit
d. to return the goods if unsold or for
where an undrawn amount is carried over other purposes. (Sec. 4)
to future periods.
Page 189 of 199
The Trust Receipt Law does not seek to enforce Obligations of entrustee: (RAIDS-ROH)
the payment of loans. Thus, there can be no 1. Receive the proceeds in trust for the
violation of the right against imprisonment for entruster; (R)
non-payment of a debt. It is not an offense 2. Turn over the proceeds to the entruster
against property but an offense against public to the extent of the amount owing to
order. (People vs. Nitafan, 207 SCRA 726) the entruster or as appears on the trust
receipt; (A)
Parties: 3. Insure the goods for their total value
1. Entrustee – refer to the person having against loss from fire, theft, pilferage or
or taking possession o goods, documents other casualties; (I)
or instruments under a trust receipt 4. Dispose the goods, etc. strictly in
transaction, and any successor in interest accordance with the terms and
of such person for the purpose or conditions of the trust receipt; (D)
purposes specified in the trust receipt 5. Keep said goods or proceeds thereof
agreement. separate and capable of identification
as property of the entruster; (S)
2. Entrustor – person holding title over 6. Return the goods, etc. in the event of
the goods, documents, or instruments non-sale or upon demand of the
subject of a trust receipt transaction, and entruster; (R)
any successor in interest of such person. 7. Observe all other terms and conditions
of the trust receipt not contrary to law.
Note: on issuing trust receipts, the bank, if (O) and
not paid what is due it, will be preferred over 8. Hold the goods, etc. in trust for the
other creditors of the entrustee. He is not entruster; (H)
liable to the buyer of the goods as vendor.
 The risk of loss shall be borne by the
Rights of the entruster: (PROCE) entrustee. Loss of goods, etc. pending
1. Entitled to the proceeds from the sale disposition, whether due to the fault or
of goods, documents or instruments; (P) negligence of the entrustee, shall not
2. Entitled to the return of goods , etc. in extinguish his obligation to the entruster for
case of non-sale; (R) the value thereof.
3. Enforce all other rights conferred on  It is assumed that the title and possession is
him under the trust receipts; (O) turned over to the entrustee. The law does
4. May cancel the trust and take not cover sales on credit with the title or
possession of goods, etc. on case of breach other interest being retained by the seller as
of trust agreement; (C) and security thereof.
5. Give at least 5 days notice to the  A purchaser for value and in good faith
entrustee of the intention to sell the acquires said goods, etc. free from the
goods, etc.; he my purchase at a public entruster’s security interest.
sale. (E)
Civil Law Trust Receipts
 The entruster is not the owner of the goods Concepts Law Concept
but merely a holder of a security title. Although the
 The entruster’s security interest shall be trustee is not the
valid as against all creditors of the entrustee owner of the
for the duration of the trust receipt Where there is a
goods under a
agreement. Security interest of the contract of sale, the
trust receipt
entruster’s advances will have to be settled buyer is to acquire
(ownership is
first before the entrustee can consolidate his only whatever title
retained by the
ownership over the goods. the seller had at the
entrustor),
time the sale was
 He is not liable as principal or vendor under anyone who
perfected. (Art. 1505)
any sale or contract to sell made by the acquires the
entrustee. goods from the
 No agency relationship is established in entrustee acquires
Trust Receipts Law. good title over the
Page 190 of 199
goods. entrustee. seller to the buyer.

Although the
entrustee is not Does not involve the Chattel Mortgage
creation of a lien. Involves the creation
Owner will bear the the owner of the
of a lien upon the
risk of loss of the goods covered by
property.
object. a trust receipt, he
Consignment
bears the risk of The seller does not The consignor
loss. retain title to the retains title to the
property but property to secure
Effects of breach of obligation: (DEEM) transfers such title the indebtedness
 Acts involving the violation of trust receipts to the entruster. due form the
agreement, such as failure to turn over the
consignee.
goods or the proceeds realized from the sale
thereof, shall render the offender liable for
estafa under Article 315, par. 1-b of the
Revised Penal Code. (E) CHATTEL MORTGAGE LAW
 If the violation or offense is committed by a
(Act No. 1508)
corporation, the penalty shall be imposed
upon the directors, officers, employees or CHATTEL MORTGAGE
other officials or persons therein  An accessory contract by virtue of which
responsible for the offense, without personal property is recorded in the Chattel
prejudice to the civil liabilities arising from Mortgage Register as security for the
the criminal offense. (Pilipinas Bank vs. performance of an obligation. (Art. 2140,
Ong, G.R. No. 133176) (D) NCC)
 In the event of default by the entrustee the  It is no longer considered as a conditional
entruster need not demand the return of the sale.
unsold goods to be able to enforce his
rights under the trust receipt. (E) SUBJECT MATTER:
 Fraud and deceit need not be proven for the  personal or movable property: (MISS-
offense is punished as malum prohibitum MORBI)
regardless of intent or malice. (M) 1. Machinery treated as personal
 Surrender of the goods to the bank, if property subsequently installed on
unsold merely extinguishes the entrustee’s leased land; (Davao Sawmill v. Castillo,
criminal liability but is not relieved of its 61 Phil. 709) (M)
obligation to pay for the money borrowed. 2. Interest in business; (I)
3. House of strong materials- personal
Note: Mere failure to deliver the proceeds of property for purposes of executing a
the sale or the goods, if not sold, constitutes chattel mortgage as the parties to the
violation of PD No. 115. However, what is being contract so agrees and no innocent third
punished by the law is the dishonesty and abuse party will be prejudiced. (S)
of confidence in the handling of money or goods 4. Shares of stock; (need not be registered
to the prejudice of another regardless of in the stocks and transfer book.) (S)
whether the latter is the owner. The mala 5. House of mixed materials; (M)
prohibita nature of the offense 6. Vessels recorded in the office of the
notwithstanding, intent to misuse or Philippine Coast Guard to be effective as
misappropriate the goods or their proceeds has to third persons; not necessary to be
to be established by the records. (Pilipinas Bank recorded in the Office of the Registry of
vs. Ong, G.R. No. 133176) Deeds; (O)
7. Motor Vehicles mortgage registered in
Trust Receipt Pledge LTO (for vehicles used for public
The property is in The person doing the services); (R)
the possession of the financing has 8. House built on rented land; (B)
person financed. possession of the GR: still immovable property
property. Exception: by estoppel treated as
There is no sale of Conditional Sale movable (the chattel mortgage is valid as
the property from There is a sale of the between the parties but not against third
the entruster to the property from the persons.)
Page 191 of 199
9. House intended to be demolished. (I) 3. The persons constituting the mortgage

have the free disposal of the property
EXTENT OF CHATTEL MORTGAGE or in the absence thereof, that they are
1. After-acquired properties: legally authorized for the purpose; (D)
4. The object be personal or movable
GR: covers only the property described property. (O)
therein and not like or substituted property
acquired by the mortgagor and placed in the Formal requisites: (SAMR or MARS)
same depository as the property originally 1. Signed by the person executing the
mortgaged (Sec. 7 par. 4). same in the presence of 2 witnesses; (S)
2. Accompanied by an affidavit of good
Exception: This provision does not apply faith and a certificate of oath; (A)
to stores open to public for retail business 3. Mortgaged property must be described
where the goods are constantly sold and in such a manner as to enable anybody
substituted with new stock (Torres v. reading the document, after reasonable
Limjap, 56 Phil 141). inquiry and investigation, to be able to
identify the same; (M) and
Note: A stipulation in the chattel mortgage 4. Registration (R)
which includes goods that are acquired in
renewal of or in substitution of goods on Affidavit of Good Faith
hand when the mortgage was executed is  Included in the contract of chattel
valid and binding. (Northern Motors, Inc. v. mortgage wherein the parties “severally
Coquia, 66 SCRA 415). swear that the mortgage is made:
 for the purpose of securing the
2. After-incurred obligations obligation specified in conditions
thereof, and
 While a pledge, real estate  for no other purpose and that the same
mortgage, or antichresis may is just and valid obligation and
exceptionally secure after-incurred  one not entered into for the purpose of
obligations so long as these future debts fraud.” (Sec. 5)
are accurately described, a chattel  The affidavit gives the mortgagee a
mortgage can only cover obligations preferred status; it enjoys preference of
existing at the time the mortgage is third person.
constituted.  Effect of its absence: the
 Promise expressed in a chattel contract is valid between the parties but will
mortgage to cover debts yet to be not bind third person without notice.
contracted may be binding but security
itself arise only after amending the old Where registered:
contract conformably with the form  Resident: place of residence
prescribed by the Chattel Mortgage Law.  Non-resident: where the property is
(Acme Shoe Rubber and Plastic Corp. v. situated
CA, 260 SCRA 714)  Where the mortgagor resides in a
 A deed of chattel mortgage is place different from where the
void where it provides that the security property is situated: in the place where
stated therein is for the payment of any the mortgagor resides and where the
and all obligations hereinbefore property is situated
contracted and which may hereafter be Exception: Where the amount of the
contracted by the mortgagor in favor of mortgage is more than P500,000
the mortgagee. registration of the mortgage in the province
where the property is situated is sufficient
Essential requisites: (CADO) (Sec. 4).
1. Constituted to secure the fulfillment of
a principal obligation; (C) Note: where motor vehicles are involved,
2. The mortgagor be the absolute owner the contract must be recorded also in the
of the thing mortgaged; (A) Land Transportation Office where the
Page 192 of 199
vehicle is registered (Sec. 5(e), Revised EQUITY OF REDEMPTION

Motor Vehicles Law);  The following may redeem after the
 where the vehicle is a public utility condition of the chattel mortgage is broken
and the mortgage is executed to but before the sale thereof:
guaranty a loan not payable within 1 1. mortgagor;
year, the approval of the Land 2. a person holding a subsequent
Transportation Franchising and mortgage;
Regulatory Board is required. 3. a subsequent attaching creditor.
 Effect of failure to register:  An attaching creditor who redeems shall be

the contract is valid between the parties but subrogated to the rights of the mortgagee
will not bind third person without notice. and entitled to foreclose the mortgage (Sec.
13).
Remedies of Mortgagee in case of default
by mortgagor:  No right of redemption in chattel mortgage
1. Foreclose the mortgage 30 days after the after foreclosure sale (Cabral vs. Evangelista
condition is broken (Sec. 14); 28 SCRA 1000).
General Rule: public auction Right acquired by 2nd mortgagee and

Exception: there is an agreement for subsequent purchaser:
private sale; hence, the mortgagor is in
estoppel to question it 1. Before payment of debt
Exception to the exception: when there  After the mortgage is executed,
is fraud or duress the mortgagor has only an equity of
redemption and only this right passes to
2. Bring ordinary action to recover money; the 2nd mortgagee in case of a 2nd
mortgage.
 Remedies are alternative.  As between the 1st and the 2nd
mortgagee, the latter can only recover
Distribution of proceeds of foreclosure the property from the former by paying
sale: him the mortgage debt.
1. payment of the costs of keeping and
sale; 2. after payment of debt
2. payment of the obligation secured by  The judgment or attaching creditor
such mortgage; who purchased the property at the
3. payment of the obligation secured by execution sale could not acquire
subsequent mortgages; and anything except such right of
4. balance, if any shall be paid to the redemption.
mortgagor (Sec. 14).  He is not entitled to the actual
possession and delivery of the property
RULE ON RECOVERY OF DEFICIENCY: without first paying the mortgage debt.
General Rule: There is recovery of deficiency
in all mortgages (chattel and real).
Reason: Mortgages as accessory contracts RECTO LAW
serve only as securities and not for the (Article 1484 and 1485, NCC)
satisfaction of the principal obligation. The
action may be brought within 10 years from the
time the cause of action accrues.
In sale of personal property the price of which is
payable in installments, the vendor may
Exceptions:
exercise any of the following remedies: (ECF)
1. chattel mortgage on the thing sold (Art. 1485,
1. Exact fulfillment of the obligation,
1486 NCC)
should the vendee fail to pay; (E)
2. pledge (Art. 2115, NCC)
2. Cancel the sale, should the vendee’s
failure to pay cover 2 or more
installments; (C) and
Page 193 of 199
3. Foreclose the chattel mortgage on the

thing sold, should the vendee’s failure to Distinctions between chattel mortgage
pay cover 2 or more installments. He and pledge:
can not recover any unpaid balance of
the price. Any agreement to the contrary Chattel Pledge
As to:
shall be void. (F) Mortgage
Delivery of Not Necessary
 The foregoing also applies to contracts the necessary
purporting to be leases of personal property personal
with option to buy, when the lessor has property
deprived the lessee of the possession or Necessary Not
enjoyment of the thing. Registration for the necessary
of the validity of
 The remedies are alternative, not property the
cumulative. mortgage.
 Foreclosure of chattel mortgage on the Sec. 14 of Act Art. 2112 of
things sold shall bar recovery of any Procedure No. 1508 the Civil
deficiency, including recovery from a Code
guarantor. Right of the Has a right No right tot
debtor to to the excess eh excess
 If the seller-mortgagee opts to exercise the excess
remedy #1, he shall be deemed to have Creditor may Creditor
waived his right as a mortgagee but may still Deficiency recover cannot
levy on the mortgaged property. recover
Must be in Need not be
Offenses involving chattel mortgage Consent of writing and in writing
under the Art. 319 of the RPC: the annotated on and may be
mortgagee/ the back of oral.
1. Knowingly removing any personal pledgee the mortgage
property mortgaged under the Chattel instrument.
Mortgage Law to any province or city other Mortgagor Not required
than the one in which it was located at the must execute
Affidavit
time of the execution of the mortgage an affidavit
without the written consent of the of good faith.
mortgagee; and
2. Selling or pledging personal property Distinctions between a chattel mortgage

already mortgages, or any part thereof, and a pacto de retro sale:
under the terms of the Chattel Mortgage
Law without the consent of the mortgagee As to: Chattel Pacto de
written on the back of the mortgage and Mortgage Retro Sale
duly recorded in the Chattel Mortgage Nature of
Register. the Accessory Principal
contract
 The property removed or repledged, Transferred
as the case may be, should be the same Title to the Not subject to the
or identical property that was mortgaged thing transferred right of
or pledged before such removal or redemption
pledging. Affidavit of
Required Not required
good faith
 The mortgagor is not relieved
of criminal liability even if the mortgage
indebtedness is thereafter paid in full, or Distinctions between chattel mortgage
the mortgagor-seller informed the and real estate mortgage:
purchaser that the thing sold had been
mortgaged, though the sale is valid. As to: Chattel Real Estate
Page 194 of 199
Mortgage Mortgage judgment becomes final or even after

Personal or foreclosure sale but prior to confirmation of
Real or sale (Limpin v. IAC, 166 SCRA 87).
Object movable
immovable Exceptions:
property
Affidavit of a. mortgagee is a bank – 1 year
Required Not required from registration of the sale (Sec. 47,
good faith
Consent of General Banking Law)
No consent b. the purchaser consents
the
Consent needed and
mortgagee
must be any such Procedure: (AIM-CA)
in order to
written prohibition a. An action for the purpose should be
alienate the
is void filed. (A)
property
Right exists b. The court will order the mortgagor to
in pay the amount due with interest and
Right of No such extrajudicial other charges within a period of not less
redemption right and judicial than 90 days nor more than 120 days
foreclosure from the entry of judgment. (I)
by banks c. If the mortgagor fails to pay at such
Future Cannot Can time, the court, upon motion, shall order
obligations guarantee guarantee the property to be sold to the highest
bidder at public auction. (M)
d. Confirmation of sale by the court
upon motion. (C)
e. Application of proceeds of sale (A):
REAL ESTATE MORTGAGE
(Act No. 3135) (CAJB)
1. costs of the sale; (C)
2. the amount due to the mortgagee;
REMEDIES OF A REAL ESTATE
(A)
MORTGAGEE:
3. claims of junior encumbrances or
1. Ordinary action for sum of money;
persons holding subsequent
2. Foreclosure
mortgages in the order of their
a. judicial – file a petition in court under
priority; (J) and
Rule 68 if there is no stipulation
4. the balance, if any, shall be paid to
authorizing extrajudicial foreclosure.
the mortgagor or his duly authorized
b. extrajudicial (ACT 3135) – file a
agent, or to the person entitled to it.
petition with sheriff’s office provided
(B)
there is a stipulation authorizing
extrajudicial foreclosure.
2. Extrajudicial foreclosure (ACT 3135)
GR: There is right of redemption within 1
KINDS OF REDEMPTION
year from registration of the sale with
1. Equity redemption – the right of the
Registry of Deeds. (Sec. 6, Act No. 3135)
mortgagor to redeem the mortgaged
Exception: where the mortgagee is a bank
property after his default in the
and the mortgagor is a juridical person,
performance of the conditions of the
redemption period is:
mortgage but before the sale of the
a. 3 months after foreclosure; or
mortgaged property or confirmation of the
b. before registration of the sale;
sale.
whichever is earlier. (Sec. 47,
2. Right of redemption – the right of the
General Banking Law)
mortgagor to redeem the mortgaged
property within a certain period after it was
sold for the satisfaction of the mortgage  Shall be made at public auction
debt. within the province where the property is
situated
RIGHT OF REDEMPTION  Sale is made after:
1. Judicial foreclosure  posting the notice of the sale for not less
GR: No right of redemption. Only equity than 20 days in at least 3 public places
of redemption within 90 days after
Page 195 of 199
at the municipality or city where the SUSPENSION OF PAYMENTS

property is situated:  The state desired by a debtor
 Sheriff’s Office who, possessing sufficient property to cover
 Assessor’s Office, and the all his debts, foresees the impossibility of
 Register of Deeds, and meeting them when they respectively fall
 The publication thereof once a week for due.
3 consecutive weeks in a newspaper of  The object of a suspension of
general circulation in said municipality payment is to defer the payment of debts
or city if the property is worth more than until such time as the debtor has converted
400 pesos. his assets into cash to pay his obligations.
 Personal notice to the  The Regional Trial Court has
mortgagor. jurisdiction over the petition for suspension
GR: not required of payments. Note: Sec. 5.2 R.A. No. 8799
Exception: contrary stipulation in the transferred petitions by corporations,
mortgage contract. partnerships, or associations to be declared
in the state of suspension of payments to the
REDEMPTION PRICE: RTC.
GR: Bid / purchase price, 1% interest per
month from date of registration to redemption, The following may file a petition for
costs and expenses of sale. (Rule 39 Sec. 28) suspension of payments:
Exception: In banks, the amount of loan,
interest, costs and expenses of sale less income 1. Individual Debtor
derived by the bank (Sec. 47, General Banking  He may petition the court of the
Law). province or city in which he has resided
for six (6) months preceding the filing of
Who may redeem: his petition that he be declared in the
1. Mortgagor or one in privity of title state of suspension of payments (Sec.
with mortgagor; (M) 2).
2. Successor-in-interest: 2. Corporate Debtor
a. the one to whom the debtor has  The corporation may possess
transferred his right of redemption; sufficient property to cover all his debts
or but foresees the impossibility of meeting
b. one to whom the debtor has them when they respectively fall due or
conveyed his interest in the property in cases where the corporation has no
for the purpose of redemption; or assets to cover its liabilities but is under
c. one who succeed to the interest of management of a Rehabilitation
the debtor by operation of law; or Receiver or Management Committee.
d. one or more joint debtors who were (Sec. 5 [d], PD 902-A)
joint owners of the property sold; or
e. the wife as regards her husband’s Procedure: (PIPA-OC)
homestead by reason of the fact that 1. Filing of petition by the debtor (Sec.
some portion of her husband’s title 2). (P)
passes to her.  Annexed is the schedule
of creditors, a statement of debtors
assets and liabilities, and the
INSOLVENCY LAW (ACT NO. 1956) debtor’s proposal for the suspension
of payments
PURPOSES: 2. Issuance by the court of an order
1. To provide a mechanism for the calling for a meeting of the creditors
equitable distribution of assets of an (Sec.3). (I)
insolvent debtor among his creditors. 3. Publication of the order and service
2. To relieve the debtor of his liabilities thereof on the creditors (Sec. 4). (P)
enabling him to start anew free from 4. Meeting of creditors for the approval
such debts. or disapproval of the debtor’s
proposition (Sec. 8). (A)
Page 196 of 199
 The presence of 2. If the decision is in the negative, or

creditors representing at least 3/5 of if no decision is had, the proceedings
the liabilities of the debtor is the shall be deemed terminated and the
quorum required for the debtor’s parties shall be at liberty to enforce their
proposal to be properly approved rights. (N)
(Sec. 8).
 Double Majority Distinctions between the insolvency law
Rule: To obtain a majority vote, at and PD 902:
least 2/3 of the creditors
representing at least 3/5 of the total INSOLVENCY PD 902-A
liabilities of the debtor must vote on LAW
the same proposition. (Sec. 8 [e]) Applies to either Only to corporate
5. Objection, if any and if justified, to the individual or debtors
decision of the meeting of the creditors corporate debtor
(Sec. 11). (O) Suspensive effect Suspensive effect
Grounds for objection: does not cover covers secured and
a. defects in the call for the meeting, secured creditors unsecured creditors
in holding thereof, or in In absence of any No time limit as long
deliberations ha thereat, which agreement among as corporate debtor
prejudiced creditor’s rights creditors, automatic under management
b. fraudulent connivance between stay expire after 3 committee/
one or more creditors and debtor mos. rehabilitation
to vote in favor of the proposed receiver
agreement Agreement subject No need to obtain
c. fraudulent connivance of claims to to qualifying approval of creditors
obtain a majority (Sec. 12) majority votes
6. Court order to complement the
agreement (Sec. 11). (C) INSOLVENCY PROCEEDINGS
 Suspension of payments is a proceeding A. VOLUNTARY INSOLVENCY

in rem; thus, for the court to acquire proper  The state desired by a debtor owing
jurisdiction, the application must be debts exceeding the amount of P1, 000. He
published as often as the court may require. may be discharged from his liabilities by
filing a petition with the RTC of the province
Effects of Filing of Petition by Individual or city in which he has resided for 6 months
Debtor for Suspension of Payments: next preceding the filing of the petition.
(EODL or DOLE) (Sec. 14)
1. All pending executions against
debtor’s property are suspended, except Procedure: (PIPAC-LDOA)
executions against properties specially 1. Filing of petition by the
mortgaged (Sec. 8); (E) debtor. (Sec. 14) (P)
2. No ordinary creditor may file an action 2. Issuance by the court of an
in court against the debtor (Sec. 9); (O) order declaring, among other things,
3. Debtor may not dispose of his property, that the petitioner is insolvent (Sec.
except in the ordinary course of the 18). (I)
business in which he is engaged; (D) 3. Publication of order and
4. Debtor cannot make any payments service thereof on the creditors (Sec.
outside of the necessary or legitimate 19). (P)
expenses of his business (Sec. 3). (L) 4. Meeting of Creditors for
assignment of assignee in insolvency
Effects of an affirmative or negative (Sec. 30). (A)
decision of the creditors: (Sec.11) (AN) 5. Conveyance of debtor’s
1. If the decision is in the affirmative, property to assignee in insolvency (Sec.
and there is no objection or the court 32). (C)
has denied the objection, the parties are 6. Liquidation of assets and
bound thereby. (A) payment of debts (Sec. 33). (L)
Page 197 of 199
7. Discharge of the debtor B. INVOLUNTARY INSOLVENCY

(Sec. 66). (D)
8. Objections to the  The state to which
discharge, if any (Sec. 66). (O) the debtor may be placed by:
9. Appeal to the Supreme  3 or more creditors
Court in certain cases (Sec. 82). (A)  who are residents of the Philippines
 whose credits accrued in the
Effects of Order Declaring Debtor Philippines
Insolvent: (SPAT)
 in the amount not less than 1,000
1. all debtor’s assets placed in sheriff’s
pesos
custody until a receiver or assignee has
 The creditors may file, with the
been appointed; (S)
RTC of the province or city in which the
2. payment to debtor of any debt due him,
debtor resides or has his principal place of
or delivery of any property due to him,
business, a petition which must allege the
and the transfer or conveyance of any
commission by the debtor of one or more
property by him, are forbidden; time
acts of insolvency. (Sec. 20)
and place fixed for a meeting of creditors
to select the assignee in insolvency; (P)
Procedure: (FOSAT-FPECL-DOS)
3. all civil proceedings against the
1. Filing of petition by the creditors of the
insolvent are stayed, except those
debtor (Sec. 20). (F)
pertaining to foreclosure of secured
2. Order of the court requiring the debtor
liens; (A) and
to show cause why he should not be
4. time and place fixed for a meeting of
declared insolvent (Sec. 21). (O)
creditors to select the assignee in
3. Service of the order on the debtor
insolvency. (T)
(Sec. 22). (S)
4. Filing of answer or motion to dismiss
Voluntary Insolvency of Partnership
by the debtor (Sec. 23). (A)
(Sec. 51)
5. Trial of the case (Sec. 23). (T)
 on the petition of partners 6. If the court favors the debtor, then the
 same requisites and conditions for proceedings shall be dismissed (Sec.
natural persons will also apply 23); if the court favors the creditors or
 partnerships duly registered with the the debtor defaults, then the court shall
SEC are now governed by PD 902-A when it issue an order-adjudging debtor
comes to rehabilitation / suspension of insolvent (Sec. 24). (F)
payments 7. Publication of order and service
thereof on the creditors (Sec.25). (P)
Voluntary Insolvency of Corporation 8. Meeting of creditors for election of the
(Sec. 52) assignee in insolvency (Sec. 30). (E)
 How: 9. Conveyance of debtor’s property to
 upon petition by any officer of the assignee in insolvency (Sec. 32). (C)
corporation, duly authorized by the board of 10. Liquidation of assets and
directors, or payment of debts (Sec. 33). (L)
 upon the written assent of majority of 11. Discharge of the debtor
the board. (Sec. 66). (D)
Exception: if the articles or by-laws of the 12. Objections to the
corporation provides otherwise, such discharge, if any (Sec. 66). (O)
method shall be followed 13. Appeal to the Supreme
 Same rules for natural persons shall apply Court in certain cases (Sec. 82). (S)
Exception: corporations engaged
principally in the banking business or to any Acts of Insolvency: (CRAFT-
other corporation governed by special laws ACAPIDI)
providing for rules of liquidation in case of 1. Concealment of debtor to avoid legal
insolvency processes. (C)
 no discharge shall be granted to any 2. Concealment or removal of his
corporation property to avoid legal processes. (R)
Page 198 of 199
3. Absence from the Philippines to Suspension of Insolvency

defraud creditors. (A) Payments
4. Failure to pay money on deposit or them when they
received in a fiduciary capacity for a respectively fall due
period of thirty (30) days. (F)
5. Transferring his property in The purpose is to
contemplation of insolvency. (T) discharge the
The purpose is to
6. Allowing his property to be taken debtor from the
suspend the payment of
under legal process in preference of a payment of
debts.
particular creditor to defraud other certain debts.
creditors. (A)
7. Confession of judgment in favor of any Some of the
creditor to defraud other creditors. (C) The amount of the creditors may
8. Making conveyance, assignment, or indebtedness is not receive less than
transfer of his property to defraud other affected. their credits
creditors. (A)
9. Default of merchant or tradesman to pay In case of
his current obligations for a period of involuntary
The number of creditors
thirty (30) days after demand. (P) insolvency, 3 or
is immaterial.
10. Intention to depart from the more creditors
Philippines to defraud creditors. (I) are required.
11. Allowing default judgment in favor of a
creditor to defraud other creditors. (D)
12. Insufficiency of property to satisfy an Distinctions between voluntary
execution issued against him. (Sec. 20) insolvency and involuntary insolvency:
(I)
As to: Voluntary Involuntary
Distinctions between suspension of Insolvency Insolvency
payments and insolvency: Number of One is 3 or more are
creditors sufficient required
Suspension of Insolvency By 3 or more
Payments Who must By the
qualified
The debtor has file debtor
creditors
sufficient property to No need for Debtors must
cover all his debts but The debtor does the have
foresees the no sufficient Reason for
commission committed any
impossibility of meeting property to pay filing
of acts of acts of
them when they his debts insolvency insolvency
respectively fall due Must not be
Amount of Exceeds
less than
The purpose is to indebtedness P1,000.00
P1,000.00
discharge the Bond Not required Required
The purpose is to
debtor from the None The creditors
suspend the payment of
payment of must be
debts.
certain debts. Philippine
residents
whose credits
Distinctions between suspension of accrued in the
payments and insolvency: Philippines
and none of
Suspension of Insolvency them become
Payments as to a creditor by
The debtor has The debtor does creditors assignment
sufficient property to no sufficient within 30 days
cover all his debts but property to pay prior to the
foresees the his debts filing of the
impossibility of meeting
Page 199 of 199
petition. cleavage but decided within 0 days

May be because of confession o judgment or
Granted only declaration of default of debtor may be
The order of granted ex
after a hearing set aside by action of assignee (Sec. 32)
adjudication parte
 Properties acquired
Petition after date of cleavage, after discharge of
must be filed debtor in good faith shall not be liable
with the for debts incurred prior to date of
RTC where cleavage
Length of
Where to file petitioner-  Fraudulent
residence is
petition debtor references made within 30 days prior to
immaterial
resided 6 the date of cleavage may be set aside in
months an action brought by assignee. (Sec. 70)
prior to
filing Composition
 An agreement whereby the creditors of
Effects of Adjudication of Insolvency: an insolvent agree to accept a certain
1. Forbid the payment to the debtor of percentage of their claims in full settlement
any debt due to him and the delivery to of such claims. It is the method of dividing
him of any property belonging to him; the estate of the insolvent debtor among his
(P) creditors.
2. Forbid the transfer of any property to
him; (T) Discharge
3. Stay of all pending civil proceedings  The release of the debtor from his
against the insolvent. (Secs. 18 and liabilities, which may be proved in the
24). (S) insolvency proceedings such that they are
 Unpaid claims of wages are no longer a charge upon him.
subordinate to legal and contractual  Only natural persons may ask for a
claims. discharge (Sec. 52)
 The Insolvency Law still governs the
procedure when a corporate debtor Requirements:
seeks to pursue voluntary insolvency a. debtor must have complied with
proceedings. statutory requirements regarding
surrender of his assets for the benefit
Date of Cleavage of credits and regarding the
 Date when the petition is filed, from rendition of an account of his assets
which we count backward or forward, in and liabilities.
determining the effects provided for under b. He must have applied for discharge
the Insolvency Law c. Debtor must not have committed
any of the acts of insolvency (Sec.
When important: 65) preventing discharge of a debtor.
 A creditor by
assignment of credit made within 30 When may a debtor apply for discharge:
days from date of cleavage shall be  Anytime after the expiration of 3 months
disqualified as petitioning creditor (Sec. from the adjudication of insolvency BUT not
20) later than 1 year from such adjudication.
 Attachment levied  Failure to apply within the said period,
upon within a period of 30 days before debtor loses his right to be discharged.
the date of cleavage may be set aside by (Sec. 64)
the assignee (Sec. 32)  But the debtor is still entitled to a
 Judgments on cases SECOND DISCHARGE. The second
filed and decided within 0 days prior to discharge takes place:
the date of cleavage may be set aside by  after 6 years from the first discharge
the assignee (Sec. 32) or,
 Judgments on cases  within 6 years from the first
filed before 30 days from the date of discharge, if the second insolvency
Page 200 of 199
proceeding is INVOLUNTARY.
(Sec. 65) Period: the transfer should take place
within the 30 day period from the date of
Legal Effects of Discharge: (R-COS-C) cleavage.
1. The insolvent debtor is released from:
a. all his debts and liabilities set forth Presumed fraudulent transfer: (NUN)
in the schedule, and a. not in the ordinary course of
b. all debts, liabilities or claims which business; (N)
were or might have been proved b. under confession of judgment; (U)
against the estate in insolvency (Sec. c. not for valuable consideration. (N)
69)
2. Takes effect not from the date it was —oOo—
granted but retroacts to the date of the
commencement of the proceedings in
insolvency. (C)
3. It operates as a discharge of the
insolvent and future acquisitions, but
permits mortgagees and other lien
creditors to have their satisfaction out of
the mortgage or subject of the lien. (O)
4. It is a special defense which may be
pleaded and be a complete bar to all suits
brought on any such debts, claims,
liabilities or demands. (S)
5. Where a debtor is judicially declared
insolvent, the remedy of the guarantor or
surety would be to file a contingent
claim in the insolvency proceeding, if his
rights as such guarantor or surety is not to
be barred by the subsequent discharge of
the insolvent debtor from all his liabilities.
(C)
The following are not discharged:

(SOFT-NO)
1. claims of secured creditor. (S)
2. debts created by defalcation by public
officer or while acting in fiduciary capacity.
(O)
3. debt created by fraud or embezzlement.
(F)
4. taxes or assessment due to the National or
local government. (T)
5. debts not listed in debtor’s schedule unless
creditor had notice or actual knowledge of
the insolvency proceedings. (N)
6. debts owing to creditors who were listed in
the schedule, but were not duly notified of
the proceedings (Secs. 67-69). (O)
Fraudulent Preferences (Sec. 70)

 If a debtor transferred property
to any person to give him preference, such
transfer may be set aside by proper court
action by the assignee and the property will
be returned to the insolvent’s estate for
equitable distribution among his creditors.
Page 201 of 199

Commercial Law Memory Aid

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Commercial Law Memory Aid

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M E M O R Y A I D

CBO OVER-ALL CHAIRPERSON: Evangeline Co

NEGOTIABLE INSTRUMENTS LAW: Kathlyn Giaewa Leuterio

INSURANCE: Marty Cachapero

TRANSPORTATION LAW: Dianne Elizabeth Feeney

CORPORATION LAW: Darlene Fae Arizobal

BANKING AND INTELLECTUAL PROPERTY LAWS: Charina Sabangan

SPECIAL LAWS: Marissa Corazon Nefalar

Atty. Manuel T. Gatcho

NEGOTIABLE INSTRUMENTS LAW 2. Only what appears on the face of the

countermand by the payor after that he must inquire if he has

b. That the check may be Instances when BILL may be treated as a

3. Indication in the 3. Indication in

4. Payable to order or to bearer forth the basis of liability and authorizing

EXCEPTIONS:  if it is not dated, the instrument will be

warrants the solvency of prior contract consistent with character of

General Rule: indorsement must be of the d. Qualified - constitutes the indorser a

an indorser under Sec. 65. Thus, he

g. Joint - indorsement of instrument  As opposed to an original order

has been previously dishonored, if such

HOLDERS:  Reasonable time,

2. the genuineness of his  warrants ---

3. PARTIES WITH LIMITED LIABILITY (sec. Exceptions:

 Indorsement or assignment of the NI by a DEFENSES

10. Negotiation under circumstances read, signed a note

 counterfeit making or fraudulent cannot charge the account of the drawer

2. alteration of an instrument in the BUT IF BEARER instrument, the

3. holder in due course not a party to

acceptance is given, it dates as of the day of

has been dishonored by a previous refusal to When instrument is dishonored by non-

last known place of business or 1. Given by holder or his agent, or

A. Notice of Dishonor By whom given:

 If such notice is given by a notary  Notice of dishonor given by or on behalf of a

4. the drawer has no right to expect

4. By a valid tender of payment

As a general rule, it is to be construed liberally  A contract possessing only the first 3

PRINCIPLE OF SUBROGATION A. Requisites of a contract of

 All rights, title and interest E. Insurance not a wagering contract

mischance. perfection of the contract and need not exist

the property which is separate and IV. DEVICES FOR ASCERTAINING

 Materiality is to be determined  The waiver of medical

d. Requisites: f. Matters which need not be

 the terms of the that he does so on the information of

2. Kinds of representation  If a representation is false in a

 Whenever a right to rescind a coverage once the period of

b. Theory and object of D. Warranties

As to the insured – the clause

3. conclusively 3. must be proved to be subject matter, the same interest therein

4. Effects of breach  Group insurance and group

mentioned and written on the blank e. Physical changes in property

 A consideration paid to an insurer inexistent from the beginning. (Art.

 Section 77 merely precludes the 7. When rescission is granted due to

 The contracting parties may  If a peril insured against has existed,

VII. PERSONS ENTITLED TO applicable to the joint or common

 The insurance proceeds shall be  Delay in the presentation to an

gross negligence amounting to B. Stipulation against double

 In every reinsurance, the original 1. vessels, goods, freight, cargo,

B. Scope of marine insurance b. “all risks” marine insurance policy

 insurance against all causes of 2. charterer’s insurable

Freightage - in the sense of a policy 4. when concealment does not vitiate

d. The want of necessary condition of the structure of the ship itself,

seaworthy at the commencement of Note: Every deviation not specified above is

freightage cannot in any case be