2012 UP LAW

BAR REVIEWER
MERCANTILE
LAW
Letters of Credit
Warehouse Receipts Law
Trust Receipts Law
Negotiable Instruments Law
Insurance Code Dean Danilo L. Concepcion
Dean, UP College of Law
Transportation Law Prof. Concepcion L. Jardeleza
Corporation Law Associate Dean, UP College of Law

Prof. Ma. Gisella D. Reyes

Securities Regulation Code Secretary, UP College of Law
Banking and Finance Prof. Florin T. Hilbay
Faculty Adviser, UP Law Bar Operations
Intellectual Property Law Commission 2012
Ramon Carlo F. Marcaida
Commissioner
Eleanor Balaquiao
Mark Xavier Oyales
Academics Committee Heads

Anna Katarina Rodriguez

Mickey Chatto
Mercantile Law Subject Heads

Graciello Timothy Reyes

Layout

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

2012 UP LAW
BAR REVIEWER
MERCANTILE
LAW
BAR OPERATIONS COMMISSION 2012

EXECUTIVE COMMITTEE
Ramon Carlo Marcaida |Commissioner
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor
MERCANTILE LAW TEAM 2012
COMMITTEE HEADS Subject Heads | Anna Katarina Rodriguez
Eleanor Balaquiao • Mark Xavier Oyales | Acads • Mickey Chatto
Monique Morales • Katleya Kate Belderol • Kathleen Mae
Tuason (D) • Rachel Miranda (D) |Special Lectures LAYOUT TEAM 2012
Patricia Madarang • Marinella Felizmenio |Secretariat Layout Artists | Alyanna Apacible • Noel
Victoria Caranay |Publicity and Promotions Luciano • RM Meneses • Jenin Velasquez •
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Mara Villega
Angelo Bernard Ngo • Annalee Toda|HR s • Naomi Quimpo • Leslie Octaviano • Yas
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise Refran • Cris Bernardino
Graciello Timothy Reyes |Layout Layout Head| Graciello Timothy Reyes
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events
OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE
2012 UP Law Bar Reviewer
\

LAW
Copyright and all other relevant rights over this
material are owned jointly by the University of the
Philippines College of Law and the Student Editorial
Team.

The ownership of the work belongs to the University of

the Philippines College of Law. No part of this book
shall be reproduced or distributed without the consent
of the University of the Philippines College of Law.

All Rights reserved.

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

IV. ..................................... Signature

Letters of Credit ................................................. 24
4 A. Signing in Trade Name ............. 24
A. Definition/Concept ................. 11 B. Signature of Agent .................. 24
B. Governing laws ...................... 11 C. Indorsement by Minor or
C. Nature of letter of credit .......... 11 Corporation ................................ 25
D. Parties to a letter of credit ....... 12 D. Forgery ............................... 25
E. Basic Principles of letter of credit 12
V. ............................... Consideration
................................................. 27
Warehouse Receipts Law
VI.Accommodation party
A. Nature and Functions of a ................................................. 27
Warehouse Receipt ....................... 14
B. Duties of a Warehouseman ........ 15 VII.Negotiation .............................. 27
C. Warehouseman‘s Lien .............. 16 A. Negotiation Distinguished from
Assignment................................. 27
Trust Receipts Law B. Modes of Negotiation ............... 27
1. By Delivery - If payable to bearer
A. Definition/Concept of a Trust (Sec. 30) ................................. 27
Receipt Transaction ...................... 17 2. By Indorsement completed by
B. Rights of the Entruster ............. 18 Delivery - If payable to order (Sec. 30)
C. Obligations and Liability of the 28
Entrustee .................................. 18 3. Other Kinds of Indorsement .... 29
D. Remedies available ................. 18
VIII.Rights of the Holder ................... 29
Negotiable Instruments Law ......... 20 A. Holder in Due Course (HDC) ....... 29
B. Defenses against the Holder ...... 31
I. FORMS AND INTERPRETATION ......... 20
A. Requisites of Negotiability ........ 20 IX.Liabilities of Parties
1. In writing and signed by the ................................................. 31
maker or drawer ....................... 20 A. Parties Primarily Liable (Sec. 60 and
2. Containing an unconditional 62) 31
promise to pay or order to pay ...... 20 B. Parties Secondarily Liable ......... 31
3. Sum payable must be certain .. 21 C. Warranties ........................... 32
4. Payable in money ................ 21
5. Payable on demand, or at a fixed X.Presentment for Payment
or determinable future time ......... 21 ................................................. 33
6. Payable to order or to bearer .. 22 A. Necessity of presentment for
7. If bill of exchange, drawee must payment .................................... 33
be named or designated with B. Parties to whom presentment for
reasonable certainty .................. 22 payment should be made ................ 33
B. Kinds of Negotiable Instrument ... 23 C. Dispensation with presentment for
payment .................................... 33
II.Completion and delivery D. Dishonor by non-payment.......... 33
................................................. 23
A. Insertion of Date (Sec. 13) ........ 23 XI.Notice of Dishonor
B. Completion of Blanks .............. 23 ................................................. 33
C. Incomplete and Undelivered A. Parties to be notified .............. 33
Instruments (Sec. 15) .................... 24 B. Parties who may give notice of
D. Complete and Undelivered dishonor .................................... 34
Instruments (Sec. 16) .................... 24 C. Effect of notice ..................... 34
D. Form of notice (Sec. 96) ........... 34
III.Rules of interpretation E. Waiver ................................ 34
................................................. 24 F. Dispensation with notice........... 34
 MERCANTILE LAW REVIEWER

G. Effect of failure to give notice ... 34 V.Insurable Interest

................................................. 45
XII. Discharge of Negotiable Instrument 34 A. In Life/Health ....................... 46 5
A. Discharge of negotiable instrument B. In Property ........................... 47
34 C. Double Insurance and Over
B. Discharge of parties secondarily Insurance ................................... 48
liable ....................................... 35 D. Multiple or Several Interests on Same
C. Right of party who discharged Property [Secs. 8, 9] ..................... 49
instrument ................................. 35
D. Renunciation by holder (Sec. 122) 35 VI.Perfection of the Contract of Insurance
................................................. 49
XIII.Material alteration
................................................. 35 VII. Rescission of Insurance Contracts .... 52
A. Concept .............................. 35
B. Effect of material alteration ...... 35 VIII. Claims Settlement and Subrogation . 55

XIV. ................................ Acceptance

................................................. 36 Transportation Law ............59
A. Definition ............................ 36
B. Manner ............................... 36 I.Common Carriers
C. Time for acceptance (Sec. 136) .. 36 ................................................. 60
D. Rules governing acceptance....... 36 A. Diligence Required of Common
Carriers ..................................... 60
XV. Presentment of Acceptance ......... 36 B. Liabilities of Common Carriers .... 61
A. Time/place/manner of present-
ment ........................................ 37 II.Vigilance over goods
B. Effect of failure to make ................................................. 61
presentment (Sec. 144).................. 37 A. Exempting Causes ................... 61
C. Dishonor by non-acceptance ...... 37 1. Requirement of Absence of
Negligence .............................. 62
XVI.Promissory Notes 2. Absence of Delay ................. 62
................................................. 37 3. Due diligence to prevent or
lessen the loss .......................... 62
XVII. ..................................... Checks B. Contributory negligence ........... 62
................................................. 37 C. Duration of liability ................. 62
A. Definition ............................ 37 1. Delivery of goods to common
B. Kinds .................................. 37 carrier ................................... 63
C. Presentment for payment............ 38 2. Actual or constructive delivery 63
1. Time ............................... 38 3. Temporary unloading or storage
2. Effect of delay ................... 38 63
D. Stipulation for limitation of liability
63
Insurance Code ................... 39 1. Void stipulations ................. 63
2. Limitation of liability to fixed
I.Concept of Insurance amount .................................. 64
................................................. 40 3. Limitation of liability in absence
of declaration of greater value ...... 64
II.Elements of an Insurance Contract E. Liability for baggage of passengers
................................................. 40 (asked in 97 and 98) ...................... 64
1. Checked-in baggage ............. 64
III.Characteristics/Nature of Insurance 2. Baggage in possession of
Contracts ..................................... 41 passengers .............................. 65

IV......................................... Classes III. Safety of Passengers ................... 65

................................................. 42 A. Void stipulations .................... 65
 MERCANTILE LAW REVIEWER

B. Duration of liability ................ 65 2. Exclusion of income tax as

1. Waiting for carrier or boarding of expense ................................. 75
6 carrier ................................... 65 D. Unlawful arrangements ............ 75
2. Arrival at destination ........... 66 1. Boundary system ................. 75
C. Liability for acts of others......... 66 2. Kabit system (Asked in 90 and 05)
1. Employees ........................ 66 76
2. Other passengers and strangers 66 E. Approval of sale, encumbrance or
D. Extent of liability for damages ... 67 lease of property ......................... 76

IV.Bill of Lading VII.The Warsaw Convention

................................................. 67 ................................................. 77
A. Three-fold character ............... 67 A. Applicability ......................... 77
B. Delivery of goods ................... 67 B. Liability of Carrier for Damages .. 77
1. Period for delivery............... 67 C. Limitation of Liability .............. 77
2. Delivery without surrender of bill 1. Liability to passengers .......... 77
of lading ................................ 67 2. Liability for checked baggage .. 77
3. Refusal of consignee to take 3. Liability for hand-carried baggage
delivery ................................. 68 77
C. Period for filing claims............. 68 D. Willful misconduct .................. 77
D. Period for filing actions ............ 68

V.Maritime Commerce
................................................. 68
Corporation Law .........................79
A. Charter Parties ...................... 68
I.Corporation, defined
1. Bareboat/Demise Charter ...... 68
................................................. 80
2. Time Charter ..................... 69
3. Voyage/Trip Charter ............ 69
II.Classification of corporations
B. Liability of Shipowners and Shipping
................................................. 80
Agents ...................................... 69
A. Stock Corporation (Asked in 01 and
1. Liability for acts of captain .... 69
04) 80
2. Exceptions to limited liability . 69
B. Non-stock Corporation (Asked in 04)
C. Accidents and Damages in Maritime
80
Commerce ................................. 70
C. Other Classification................. 81
1. General Average ................. 70
2. Collisions (Asked in 95 and 98 Bar
III.Nationality of corporations
Exams) .................................. 71
................................................. 81
D. Carriage of Goods by Sea Act
A. Control Test ......................... 81
(Commonwealth Act No. 65) ............ 72
B. The Grandfather Rule .............. 82
1. Application ....................... 72
2. Notice of Loss or Damage....... 72
IV. Corporate juridical personality ...... 82
3. Period of Prescription (Asked in
A. Doctrine of Separate Juridical
92, 95, 00 and 04 Bar Exams) ........ 72
Entity (Asked in 95, 96, 99 and 00) .... 82
4. Limitation of liability ........... 72
1. Liability for torts and crimes ... 82
2. Recovery of damages ............ 82
VI.Public Service Act
B. Doctrine of piercing the corporate
................................................. 73
veil (Asked in 91, 01 and 04) ............ 82
A. Definition of public utility (Asked in
1. Grounds for application of
92, 93, 95, 98 and 00) ................... 73
doctrine ................................. 82
B. Necessity for certificate of public
2. Test in determining applicability
convenience ............................... 73
83
1. Requisites for issuance of CPC . 74
2. Prior operator rule .............. 74
V. Capital structure ........................ 83
C. Fixing of rate ........................ 75
A. Number and Qualifications of
1. Rate of return .................... 75
Incorporators .............................. 83
 MERCANTILE LAW REVIEWER

1. Definition ......................... 83 1. By the Shareholders ............. 94

2. Requirements (Sec. 10) ......... 83 2. By the Board ...................... 94
B. Minimum Capital Stock and 3. By the Officers ................... 95 7
Subscription Requirements .............. 84
C. Corporate Term ..................... 84 VIII. Stockholders and members ......... 95
D. Classification of Shares ............ 84 A. Fundamental Rights of a
Stockholder ................................ 95
VI. Incorporation and organization B. Participation in Management...... 95
................................................. 86 1. Proxy ............................... 95
A. Promoter ............................. 86 2. Voting Trust ....................... 95
1. Liability of Promoter ............ 86 3. Cases When Stockholder‘s Action
2. Liability of Corporation for is Required .............................. 96
Promoter‘s Contract .................. 86 C. Proprietary Rights .................. 98
B. Subscription Contract .............. 86 1. Right to Dividends ............... 98
C. Pre-incorporation Subscription 2. Right of Appraisal ................ 99
Agreements ................................ 87 3. Right to Inspect .................. 99
D. Consideration for Stocks ........... 87 4. Preemptive Right ...............100
E. Articles of Incorporation........... 87 5. Right to Vote ....................100
1. Contents (Sec. 14) ............... 87 D. Remedial Rights ....................100
2. Non-amendable items ........... 88 1. Individual Suit ...................100
F. Corporate Name – limitations on use 2. Representative Suit .............100
of corporate name ....................... 89 3. Derivative Suit ...................101
G. Registration and Issuance of E. Obligations of a Stockholder .....101
Certificate of Incorporation ............. 89 F. Meetings .............................102
H. Election of Directors or Trustees . 89 1. Regular or Special...............102
I. Adoption of By-Laws ............... 90 2. Who Calls the Meetings ........102
3. Quorum (Sec. 50) ...............102
VII. Corporate powers ..................... 90 4. Minutes of Meetings ............103
A. General powers, theory of general
capacity (Sec. 36) ........................ 90 IX.Board of directors and trustees
B. Specific powers, theory of specific ............................................... 103
capacity .................................... 91 A. Repository of Corporate Powers .103
1. Power to extend or shorten B. Tenure, Qualifications and
corporate term......................... 91 Disqualifications of Directors ..........104
2. Power to increase or decrease C. Elections (Sec. 24) .................104
capital stock or incur, create, D. Removal (Sec. 28) .................105
increase bonded indebtedness....... 91 E. Filling of Vacancies (Sec.29) .....105
3. Power to deny pre-emptive rights F. Compensation (Sec. 30) ...........105
91 G. Disloyalty ............................105
4. Power to sell or dispose of H. Business Judgment Rule ..........106
corporate assets ....................... 91 I. Solidary Liability for Damages ...106
5. Power to acquire own shares .. 91 J. Liability for Watered Stocks ......106
6. Power to invest corporate funds K. Personal Liabilities ................106
in another corporation or business .. 91 L. Responsibility for Crimes .........107
7. Power to declare dividends .... 91 M. Special Facts Doctrine ............107
8. Power to enter into management N. Inside Information .................107
contract ................................. 91 O. Contracts ............................107
9. Ultra vires acts (Sec. 45) ....... 93 1. By self-dealing directors with the
10. Doctrine of individuality of corporation ............................107
subscription ............................ 93 2. Between corporations with
11. Doctrine of equality of shares interlocking directors ................107
93 P. Executive Committee .............108
12. Trust fund doctrine ........... 94 1. Creation ..........................108
C. How Exercised....................... 94 2. Limitations on its Powers ......108
 MERCANTILE LAW REVIEWER

Q. Meetings ............................ 108 3. By Management Committee or

1. Regular or Special .............. 108 Rehabilitation Receiver ..............115
8 2. Who Presides (Sec. 54) ......... 108 4. Liquidation after Three Years .115
3. Quorum (Sec. 25) ............... 108
4. Rule on Abstention ............. 108 XII.Other corporations
............................................... 115
X. Capital affairs .......................... 109 A. Close Corporations (Corporation
A. Certificate of Stock ............... 109 Code, Title XII) ...........................115
1. Nature of the Certificate ...... 109 1. Characteristics of a Close
2. Uncertificated Shares .......... 109 Corporation ............................116
3. Negotiability ..................... 109 2. Validity of Restrictions on
4. Issuance .......................... 109 Transfer of Shares ....................116
5. Stock and Transfer Book (Sec. 74, 3. Issuance or Transfer of Stock in
par. 4) .................................. 110 Breach of Qualifying Conditions ....116
6. Lost or Destroyed Certificates 4. When Board Meeting is
(Sec. 73) ............................... 110 Unnecessary or Improperly Held ....116
7. Situs of the Shares of Stock ... 110 5. Preemptive Right ...............117
B. Watered Stocks .................... 110 6. Amendment of Articles of
1. Definition ........................ 110 Incorporation ..........................117
2. Liability of Directors for Watered 7. Deadlocks ........................117
Stocks .................................. 110 B. Non-Stock Corporations
3. Trust Fund Doctrine for Liability (Corporation Code, Title XI)............119
for Watered Stocks ................... 110 1. Definition ........................119
C. Payment of Balance of Subscription 2. Purposes (sec. 88) ..............119
(Sec. 66 & 67) ............................ 111 3. Treatment of Profits............119
1. Call by Board of Directors ..... 111 4. Distribution of Assets Upon
2. Notice Requirement ............ 111 Dissolution .............................119
D. Sale of Delinquent Shares (Sec. 68) C. Religious Corporations ............119
111 1. Corporation Sole (Sec. 110) ...119
1. Effect of Delinquency (Sec. 71) D. Foreign Corporations ..............120
111 1. Bases of Authority Over Foreign
2. Call by Resolution of the Board of Corporations ...........................120
Directors (Sec. 68).................... 111 2. Necessity of a License to Do
3. Notice of Sale ................... 111 Business ................................120
4. Auction Sale ..................... 111 3. Personality to Sue...............121
E. Alienation of Shares ............... 112 4. Suability of Foreign Corporations
1. Allowable Restrictions on the 121
Sale of Shares ......................... 112 5. Instances When Unlicensed
2. Sale of Partially Paid Shares .. 112 Foreign Corporations May Be Allowed
3. Sale of a Portion of Shares not to Sue ...................................121
Fully Paid .............................. 112 6. Grounds for Revocation of
4. Sale of All of Shares Not Fully License .................................121
Paid 112
5. Sale of Fully Paid Shares ....... 112 XIII. Merger and consolidation .......... 122
6. Requisites of a Valid Transfer. 112 A. Definition and Concept (Corporation
7. Involuntary Dealings ............ 113 Code, Title IX)............................122
B. Constituent v. Consolidated
XI. Dissolution and liquidation ......... 113 Corporation ...............................122
A. Modes of Dissolution .............. 113 C. Plan of Merger or Consolidation
1. Voluntary ........................ 113 (Sec. 76) ..................................122
2. Involuntary....................... 114 D. Articles of Merger or Consolidation
B. Methods of Liquidation ........... 114 (Sec. 78) ..................................122
1. By the Corporation Itself ...... 114 E. Procedure ...........................122
2. Conveyance to a Trustee within a F. Effectivity ...........................123
3-Year Period.......................... 115 G. Limitations ..........................123
 MERCANTILE LAW REVIEWER

H. Effects ............................... 123 2. Liability of Director/Officer for

Delay in the Filing of Required
Securities Regulation Code......... 124 Documents .............................133 9
3. Liability of Aider/Abettor .....133
I.State policy
............................................... 125 Banking and Finance .................. 138
II.Powers and functions of the SEC
............................................... 125 I.The New Central Bank Act (RA 7653)
A. Under the SRC ...................... 125 ............................................... 139
B. Under PD 902-A .................... 125 A. State policies .......................139
C. Under the Corporation Code ..... 126 B. Salient features of the NCBA .....139
III.Securities required to be registered C. Creation of the Bangko Sentral ng
............................................... 126 Pilipinas (BSP) ............................139
IV.Procedure for registration of securities D. Responsibility and primary
............................................... 127 objective ..................................139
V.Prohibitions on fraud, manipulation E. Monetary Board ....................139
and insider trading ....................... 128 1. Powers and Functions (Sec. 15,
A. Manipulation of security prices .. 128 NCBA) ...................................139
B. Short sales .......................... 129 2. Composition (Sec. 6, NCBA) ...140
C. Fraudulent transactions .......... 129 3. Members (Sec. 6, NCBA) .......140
D. Insider trading ..................... 129 4. Qualifications (Sec. 8, NCBA) .140
VI.Protection of investors 5. Disqualifications (Sec. 9, NCBA)
............................................... 130 140
A. Tender offer rule .................. 130 6. Prohibitions on members of the
B. Rules on proxy solicitation ....... 130 MB (Sec. 9, NCBA) ....................140
C. Disclosure rule ..................... 130 7. Grounds for Removal of any
VII. Civil liability .......................... 131 member of the MB (Sec. 10, NCBA) 140
A. Civil Liabilities on Account of False 8. Vacancies, how filled (Sec. 7,
Registration Statement (Sec. 56) ..... 131 NCBA) ...................................140
B. Civil Liabilities Arising in 9. Salaries (Sec. 13, NCBA) .......140
Connection With Prospectus, 10. Meetings (Sec. 11, NCBA) ...140
Communications and Reports (Sec. 57) 11. Civil Liability of Members of
132 the MB (Sec. 16, NCBA) ..............141
1. Liability of Sellers/Offerors ... 132 F. How the BSP handles banks in
2. Liability of Makers of False distress ....................................141
Misleading Statements ............... 132 1. Conservatorship .................141
C. Civil Liability of Fraud in 2. Receivership .....................141
Connection with Securities Transactions 3. Liquidation / Closure ...........142
(Sec. 58) .................................. 132 G. How the BSP handles exchange
D. Civil Liability for Manipulation of crisis .......................................142
Security Prices (Sec. 59)................ 132
E. Civil Liability with Respect to II.Law on Secrecy of Bank Deposits (RA
Commodity Futures Contracts and Pre- 1405) ........................................ 143
need Plans (Sec. 60) .................... 132 A. Purpose (Sec. 1) ....................143
F. Civil Liability on Account of Insider B. Prohibited acts (Sec. 3) ...........143
Trading .................................... 132 C. Deposits covered (Sec. 2) .........143
1. Liability for non-disclosure .... 132 D. Exceptions (Sec. 2) ................143
2. Liability for communicating non- E. Garnishment of deposits ..........145
public information about issuer .... 133 F. Penalties for violation (Sec. 5)...146
G. Liabilities of Controlling Persons,
Aider and Abettor and Other Secondary III.General Banking Law of 2000 (RA
Liability ................................... 133 8791) ........................................ 146
1. Liability of Controlling Persons A. Policy ................................146
133
 MERCANTILE LAW REVIEWER

B. Definition and classification of B. Acquisition of Ownership of Marks

banks ...................................... 146 170
10 C. Distinction between banks and C. Acquisition of Ownership of Trade
quasi-banks and trust entities ......... 147 Name ......................................170
D. Bank powers and liabilities ....... 147 D. Non-registrable Marks .............171
E. Diligence required of banks ...... 149 E. Tests to Determine Confusing
F. Nature of bank funds and bank Similarity between Marks ...............171
deposits ................................... 150 F. Well-known Marks..................172
G. Stipulation on interests ........... 150 Determinants (need not concur)....172
H. Grant of loans and security Protection extended to Well-Known
requirements (Prudential measures) . 150 Marks ...................................172
I. Penalties for violation ............ 153 G. Rights Conferred by Registration 173
H. Use by Third Parties of names, etc.
IV. Philippine Deposit Insurance similar to Registered Marks ............173
Corporation Act (RA 3591, as amended) I. Cancellation of Trademark .......174
............................................... 153 J. Infringement and Remedies ......174
A. Basic Policy ......................... 153 K. Unfair Competition ................176
B. Concept of Insured Deposits ..... 153 L. Trade Names and Business Names
C. Liability of Depositors ............. 154 177
M. Collective Marks....................178
Chapter V. Foreign Currency Deposit Act N. Criminal Penalties .................178
(RA 6426) .................................. 156
A. Confidentiality ..................... 156 IV. Copyright
B. Privileges ........................... 157
A. Basic Principles.....................178
B. Copyrightable Works ..............179
C. Non-copyrightable Works .........179
Intellectual Property ................... 158 D. Rights of Copyright Owner ........180
E. Rules on Ownership of Copyright 183
I. Intellectual Property in general F. Deposit on Copyrightable Materials
184
A. Intellectual Property Rights ...... 159 G. Limitations on Copyright ..........185
B. Differences between copyrights,
trademarks and patent ................. 159 V. Registration Flowcharts
C. Technology Transfer Arrangement
160 A. Patent Application .................190
A. Patentable Inventions ............. 161 B. Utility Model and Industrial Design 191
B. Non-patentable Inventions ....... 162 C. Copyright Registration and Deposit 192
C. Ownership of a Patent ............ 162
D. Cancellation of a Patent .......... 163
E. Remedy of the True and Actual
Inventor ................................... 163
F. Rights conferred by a Patent .... 164
G. Limitations on the Rights of
Patentees ................................. 164
H. Patent Infringement ............... 165
I. Licensing ............................ 166
J. Assignment and Transmission of
Rights...................................... 169

II. Patents

A. Definitions of Marks, Collective

Marks, Trade Names ................. 170
 MERCANTILE LAW REVIEWER

C. Nature of letter of credit

Letters of Credit
MERCANTILE LAW 1. Financial device – L/Cs are developed by 11
Letters of Credit A. Definition/Concept merchants as a convenient and relatively safe
Warehouse Receipts mode of dealing with sales of goods to satisfy the
B. Governing laws
Law seemingly irreconcilable interests of a seller, who
C. Nature of letter of credit refuses to part with his goods before he is paid,
Trust Receipts Law D. Parties to a letter of credit
Negotiable and a buyer, who wants to have control of the
Instruments Law
E. Basic Principles of letter of credit goods before paying. (Bank of America, NT&SA v.
Insurance Code Court of Appeals, 1993)
Transportation Law
Corporation Law A letter of credit is one of the modes of payment,
Securities Regulation set out in Sec. 8, Central Bank Circular No. 1389,
Code "Consolidated Foreign Exchange Rules and
Banking and Finance Regulations," dated 13 April 1993, by which
Intellectual Property commercial banks sell foreign exchange to
service payments for, e.g., commodity imports
(Reliance Commodities v. Daewoo, 1993).
A. Definition/Concept
2. Composite of three distinct contracts – An L/C
A letter of credit is a written instrument whereby transaction involves three distinct but
the writer requests or authorizes the addressee to intertwined relationships:
pay money or deliver goods to a third person and (a) First Contract between the party applying for
assumes responsibility for payment of debt therefor the L/C (buyer/ importer/ account party) and
to the addressee (Transfield Philippines v. Luzon the party for whose benefit the L/C is issued
Hydro, 2004). (seller/ exporter/ beneficiary).
(b) Second Contract between the buyer and the
A letter of credit is an engagement by a bank or issuing bank. This contract is sometimes
other person made at the request of a customer that called the "Application and Agreement" or the
the issuer shall honor drafts or other demands of "Reimbursement Agreement".
payment upon compliance with the conditions (c) Third Contract between the issuing bank and
specified in the credit (Prudential Bank v. the seller, in order to support the contract,
Intermediate Appellate Court, 1992). under (a) above (Reliance Commodities v.
Daewoo, 1993).
Its purpose is to substitute for, and support, the
agreement of the buyer-importer to pay money Types of letters of credit
under a contract or other arrangement, but does not
necessarily constitute as a condition for the 1. As to the type of the main contract
perfection of such arrangement (Reliance
Commodities, Inc. v. Daewoo Industrial Co., Ltd.) a. Commercial L/C
The main transaction involves a contract of sale. The
B. Governing laws credit is payable upon the presentation by the seller
of documents that show he has taken affirmative
steps to comply with the sales agreement. The
The Uniform Customs and Practice (UCP) for beneficiary of a commercial credit must
Documentary Credits governs transactions involving demonstrate by documents that he has performed
letters of credit. his contract (Transfield Philippines v. Luzon Hydro,
2004).
The provisions of the Code of Commerce on letters
of credit (Art. 567-572) have been repealed. b. Standby L/C
Used in non-sale settings. The credit is payable upon
Letters of Credits have long been and are still certification of a party's nonperformance of the
governed by the provisions of the Uniform Customs agreement. The beneficiary of the standby credit
and Practice for Documentary Credits of the must certify that his obligor has not performed the
International Chamber of Commerce. (Metropolitan contract. (Transfield Philippines v. Luzon Hydro,
Waterworks and Sewerage System v. Daway, 2004) 2004).
We have further observed that there being no 2. As to revocability
specific provisions which govern the legal
complexities arising from transactions involving a. Revocable L/C
letters of credit not only between or among banks One which can be revoked by the issuing bank
themselves but also between banks and the seller or without the consent of the buyer and seller
the buyer, as the case may be, the applicability of
the U.C.P. is undeniable. (Bank of America, NT&SA b. Irrevocable L/C
v. Court of Appeals, 1993)
 MERCANTILE LAW REVIEWER

One which the issuing bank cannot revoke without accept the draft drawn under the documentary
the consent of the buyer and seller (Feati Bank and credit (Feati Bank and Trust Co. v. CA, 1991).
12 Trust Co. v. CA, 1991)
5. Confirming Bank – the bank which lends
3. As to the obligation assumed by correspondent credence to the letter of credit issued by a
bank lesser known issuing bank.

a. Unconfirmed L/C The bank assumes a direct obligation to the

One which continues to be the obligation of the seller and its liability is a primary one as if the
issuing bank bank itself had issued the letter of credit (Feati
Bank and Trust Co. v. CA, 1991).
b. Confirmed L/C
One which is supported by the absolute assurance to 6. Negotiating Bank – the bank which discounts the
the beneficiary that the confirming bank will draft presented by the seller.
undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit The bank buys or discounts a draft under the
(Feati Bank and Trust Co. v. CA, 1991) letter of credit. Its liability is dependent upon
the stage of the negotiation. If before
D. Parties to a letter of credit negotiation, it has no liability with respect to
the seller but after negotiation, a contractual
relationship will then prevail between the
Bank of America, NT & SA v. Court of Appeals, 1993: negotiating bank and the seller (Feati Bank and
There would be at least three parties to a letter of
Trust Co. v. CA, 1991).
credit:
7. Paying Bank – the bank which undertakes to
1. Buyer/Exporter/Account Party – one who encash the drafts drawn by the seller.
procures the letter of credit and obliges himself
to reimburse the issuing bank upon receipt of
documents of title. E. Basic Principles of letter of
credit
2. Issuing Bank – the bank which undertakes: (1) to
pay the seller upon receipt of the draft and a. Doctrine of independence
proper documents of title; and (2) to surrender
the documents to the buyer upon The principle of independence assures the seller or
reimbursement. the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
The obligation of the issuing bank to pay the issuing bank from determining whether the main
seller is direct, primary, absolute, definite and contract is actually accomplished or not.
solidary with the buyer, in the absence of
stipulation in the letter of credit (Metropolitan Under this principle, banks assume no liability or
Waterworks and Sewerage System v. Daway, responsibility for the form, sufficiency, accuracy,
2004) genuineness, falsification or legal effect of any
documents, or for the general and/or particular
3. Seller/Importer/Beneficiary– one who ships the conditions stipulated in the documents or
goods to the buyer in compliance with a superimposed thereon, nor do they assume any
contract of sale and delivers the documents of liability or responsibility for the description,
title and draft to the issuing bank to recover quantity, weight, quality, condition, packing,
payment. delivery, value or existence of the goods
represented by any documents, or for the good faith
Depending on the transaction, the number of parties or acts and/or omissions, solvency, performance or
to the letter of credit may be increased. Thus, the standing of the consignor, the carriers, or the
different types of correspondent banks: insurers of the goods, or any other person
whomsoever (Transfield Philippines v. Luzon Hydro,
4. Advising/Notifying Bank – the bank which 2004; Bank of America, NT&SA v. Court of Appeals,
conveys to the seller the existence of the credit. 1993).
The bank assumes no liability except to notify Feati v. Court of Appeals, 1991:
and/or transmit to the seller the existence of The concept of guarantee vis-a-vis the concept of an
the letter of credit. A notifying bank is not a irrevocable credit are inconsistent with each other.
privy to the contract of sale between the buyer
and the seller, its relationship is only with that In the first place, the guarantee theory destroys the
of the issuing bank and not with the beneficiary independence of the bank's responsibility from the
to whom he assumes no liability. contract upon which it was opened. In the second
place, the nature of both contracts is mutually in
The bank may suggest to the seller its conflict with each other. In contracts of guarantee,
willingness to negotiate, but this fact alone does the guarantor's obligation is merely collateral and it
not imply that the notifying bank promises to arises only upon the default of the person primarily
 MERCANTILE LAW REVIEWER

liable. On the other hand, in an irrevocable credit

the bank undertakes a primary obligation.

b. Fraud exception principle 13

The principle that limits the application of the
independence principle only to instances where it
would serve the commercial function of the credit
and not when fraud attends the transaction.

In the case of Transfield Philippines v. Luzon Hydro,

2004, the petitioner alleged misrepresentation as
constituting fraud. The Court, however, made no
ruling as to whether the same indeed constitutes
fraud.

Transfield Philippines v. Luzon Hydro, 2004:

It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the
credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication,
material representations of fact that to his
knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy
available to it.

Citing Dolan's treatise on letters of credit, petitioner

argues that the independence principle is not
without limits and it is important to fashion those
limits in light of the principle's purpose, which is to
serve the commercial function of the credit. If it
does not serve those functions, application of the
principle is not warranted, and the common law
principles of contract should apply.

c. Doctrine of strict compliance

The settled rule in commercial transactions involving

letters of credit which requires that the documents
tendered by the seller must strictly conform to the
terms of the letter of credit.

Otherwise, the issuing bank or the concerned

correspondent bank is not obliged to perform its
undertaking under the contract.

Feati v. Court of Appeals, 1991:

The tender of documents by the beneficiary (seller)
must include all documents required by the letter. A
correspondent bank which departs from what has
been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it
may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary.
 MERCANTILE LAW REVIEWER

b. Kinds

14
Warehouse a. Negotiable Receipts

Receipts Law A receipt in which it is stated that the goods

received will be delivered to the bearer or to the
order of any person named in such receipt (Sec.5).
MERCANTILE LAW
Letters of Credit A. Nature and Functions of a Negotiation may be made either by:
Warehouse Receipts Warehouse Receipt
Law B. Duties of a Warehouseman i. delivery
Trust Receipts Law C. Warehouseman‘s Lien
Negotiable
(a) Where, by terms of the receipt, the
Instruments Law
warehouseman undertakes to deliver the goods
Insurance Code
to the bearer, or
Transportation Law
(b) Where, by the terms of the receipt, the
Corporation Law
warehouseman undertakes to deliver the goods
Securities Regulation
to the order of a specified person, and such
Code
person or a subsequent indorsee of the receipt
Banking and Finance
has indorsed it in blank or to bearer (Sec. 37)
Intellectual Property
ii. indorsement
A. Nature and Functions of a
Warehouse Receipt A negotiable receipt may be negotiated by the
indorsement of the person to whose order the goods
are, by the terms of the receipt, deliverable. Such
a. To whom delivered
indorsement may be in blank, to bearer or to a
specified person. If indorsed to a specified person,
The warehouseman may deliver the goods to the
it may be again negotiated by the indorsement of
following:
such person in blank, to bearer or to another
specified person. Subsequent negotiation may be
(a) The person lawfully entitled to the possession
made in like manner (Sec. 38)
of the goods, or his agent;
b. Non-Negotiable Receipts
(b) A person who is either himself entitled to
delivery by the terms of a non-negotiable
A receipt in which it is stated that the goods
receipt issued for the goods, or who has
received will be delivered to the depositor or to any
written authority from the person so entitled
other specified person (Sec. 4).
either indorsed upon the receipt or written
upon another paper; or
The indorsement of such receipt gives the transferee
no additional right (Sec. 39)
(c) A person in possession of a negotiable receipt
by the terms of which the goods are
deliverable to him or order, or to bearer, or NOTE—
which has been indorsed to him or in blank by No provision shall be inserted in a negotiable receipt
the person to whom delivery was promised by that it is non-negotiable. Such provision, if
the terms of the receipt or by his mediate or inserted shall be void.
immediate indorser (Sec. 9)
BUT, a non-negotiable receipt shall have plainly
placed upon its face by the warehouseman issuing it
Where a warehouseman delivers the goods to one
"non-negotiable," or "not negotiable." In case of the
who is not in fact lawfully entitled to the possession
warehouseman's failure so to do, a holder of the
of them, the warehouseman shall be liable as for
receipt who purchased it for value supposing it to be
conversion to all having a right of property or
negotiable, may, at his option, treat such receipt as
possession in the goods if he delivered the goods
imposing upon the warehouseman the same
otherwise than as authorized by subdivisions (b) and
liabilities he would have incurred had the receipt
(c) of the preceding section, and though he
been negotiable (Sec. 7).
delivered the goods as authorized by said
subdivisions, he shall be so liable, if prior to such
delivery he had either: c. Distinction between a Negotiable
Instrument and a Negotiable Warehouse
(a) Been requested, by or on behalf of the person Receipt
lawfully entitled to a right of property or possession
in the goods, not to make such deliver; or Negotiable Instrument Negotiable Warehouse
Receipt
(b) Had information that the delivery about to be May be issued by anyone May be issued only by a
made was to one not lawfully entitled to the with capacity to contract warehouseman
possession of the goods. Must contain all the Must contain all the
requisites under Sec. 1 essential terms under
 MERCANTILE LAW REVIEWER

of the NIL Sec. 2 of the WRL compel him to indorse the receipt unless a contrary
Subject is sum certain in Subject is goods intention appears. The negotiation shall take effect
money as of the time when the indorsement is actually
Holder has the right to Holder has the right to made (Sec. 44). 15
demand payment demand the delivery of
the goods B. Duties of a Warehouseman
The issuer has no lien on The issuer retains a lien
the amount represented on the goods
1. Duty to deliver to the persons entitled to
by the instrument
delivery as enumerated in Sec. 9

A warehouseman, in the absence of some lawful

d. Rights of a holder of a negotiable
excuse provided by this Act, is bound to deliver
warehouse receipt as against a transferee of
the goods upon a demand made either by the
a non-negotiable warehouse receipt
holder of a receipt for the goods or by the
depositor; if such demand is accompanied with:
Rights of Holder of a Rights of a Transferee (a) An offer to satisfy the warehouseman's lien;
Negotiable Warehouse of Non-Negotiable (b) An offer to surrender the receipt, if
Receipt Warehouse Receipt negotiable, with such indorsements as would
Acquires: Acquires: be necessary for the negotiation of the
receipt; and
(a) Such title to the (a) as against the (c) A readiness and willingness to sign, when the
goods as the person transferor, the title of goods are delivered, an acknowledgment
negotiating the receipt the goods subject to the that they have been delivered, if such
to him had or had ability terms of any agreement signature is requested by the warehouseman
to convey to a purchaser with the transferor. (Sec. 8)
in good faith for value,
and also such title to the (b) the right to notify
NOTE—
goods as the depositor or the warehouseman of
Where a warehouseman delivers the goods to one
person to whose order the transfer to him of
who is not in fact lawfully entitled to the possession
the goods were to be such receipt and thereby
of them, the warehouseman shall be liable as for
delivered by the terms to acquire the direct
conversion to all having a right of property or
of the receipt had or had obligation of the
possession in the goods if he delivered the goods
ability to convey to a warehouseman to hold
otherwise than as authorized by subdivisions (b) and
purchaser in good faith possession of the goods
(c) of the preceding section, and though he
for value; and for him according to the
delivered the goods as authorized by said
terms of the receipt
subdivisions, he shall be so liable, if prior to such
(b) The direct (Sec. 42)
delivery he had either:
obligation of the
(a) Been requested, by or on behalf of the person
warehouseman to hold NOTE—
lawfully entitled to a right of property or possession
possession of the goods Prior to the notification
in the goods, not to make such deliver; or
for him according to the of the warehouseman by
(b) Had information that the delivery about to be
terms of the receipt as the transferor or
made was to one not lawfully entitled to the
fully as if the transferee of a non-
possession of the goods (Sec. 10)
warehouseman and negotiable receipt, the
contracted directly with title of the transferee to
him (Sec. 41). the goods and the right 2. Duty to ensure the existence of goods and the
to acquire the obligation accurate description thereof in the warehouse
of the warehouseman receipt – Otherwise, he shall be liable for damages
may be defeated by the to the holder of the receipt (Sec. 20)
levy of an attachment or
execution upon the 3. Duty to exercise care over goods – A
goods by a creditor of warehouseman must exercise the degree of care as a
the transferor or by a reasonably careful owner would exercise. Otherwise,
notification to the he shall be liable for any loss or injury arising from
warehouseman by the failure to exercise such care.
transferor or a
subsequent purchaser 4. Duty to keep goods of different depositors, or of
from the transferor of a same depositor when his goods are covered by
subsequent sale of the separate receipts, separate.
goods by the transferor.
(Sec. 42) Exception: Fungible goods can be commingled
with the same kind, if warehouseman is
authorized by agreement or by custom.
NOTE—
If the warehouse receipt is negotiable through
5. Duty to cancel/mark a negotiable receipt when
indorsement, the transferee thereof which acquired
goods/part of goods are delivered – Otherwise, he
the same through mere delivery acquires the right to
shall be liable to anyone who purchases for value in
 MERCANTILE LAW REVIEWER

good faith such receipt, for failure to deliver the From the proceeds of such sale, the warehouseman
goods/all the goods to him, whether such purchaser shall satisfy his lien including the reasonable charges
16 acquired title to the receipt before or after the of notice, advertisement and sale. The balance, if
delivery of the goods by the warehouseman (Secs. 11 any, of such proceeds shall be held by the
and 12) warehouseman and delivered on demand to the
person to whom he would have been bound to
C. Warehouseman‘s Lien deliver or justified in delivering goods.

At any time before the goods are so sold, any person

A warehouseman shall have a lien on goods claiming a right of property or possession therein
deposited or on the proceeds thereof in his hands:
may pay the warehouseman the amount necessary to
(a) for all lawful charges for storage and
satisfy his lien and to pay the reasonable expenses
preservation of the goods;
and liabilities incurred in serving notices and
(b) for all lawful claims for money advanced, advertising and preparing for the sale up to the time
interest, insurance, transportation, labor, of such payment. The warehouseman shall deliver
weighing, coopering and other charges and the goods to the person making payment if he is a
expenses in relation to such goods; person entitled, under the provision of this Act, to
(c) for all reasonable charges and expenses for the possession of the goods on payment of charges
notice, and advertisements of sale; and thereon. Otherwise, the warehouseman shall retain
(d) for sale of the goods where default had been the possession of the goods according to the terms of
made in satisfying the warehouseman's lien (Sec. the original contract of deposit (Sec. 33)
27)
NOTE—
NOTE—
Effect of the Sale
General Rule The warehouseman is relieved from any liability for
A warehouseman shall have lien only for charges for failure to deliver the goods to the depositor or
storage of goods subsequent to the date of the owner of the goods or to a holder of the receipt
receipt. given for the goods when they were deposited, even
if such receipt be negotiable (Sec. 36)
Exception
When the receipt expressly enumerated other
b. By other means
charges provided under Sec. 27 even though the
amounts thereof are not stated in the receipt. (Sec.
The remedy for enforcing a lien herein provided does
30)
not:
(a) preclude any other remedies allowed by law for
However, whether a warehouseman has or has not a
the enforcement of a lien against personal
lien upon the goods, he is entitled to all remedies
property; nor
allowed by law to a creditor against a debtor for the (b) bar the right to recover so much of the
collection from the depositor of all charges and warehouseman's claim as shall not be paid by
advances which the depositor has expressly or the proceeds of the sale of the property (Sec.
impliedly contracted with the warehouseman to pay 35)
(Sec. 32).
3. How the Lien may be Lost
1. Against what property the lien may be
enforced: The Warehousman‘s Lien is possessory. The lien may
(a) Against all goods, whenever deposited, be lost:
belonging to the person who is liable as debtor
(a) by surrendering possession thereof; or
for the claims in regard to which the lien is
(b) by refusing to deliver the goods when a demand
asserted, and is made with which he is bound to comply under
(b) Against all goods belonging to others which have the provisions of this Act.
been deposited at any time by the person who is
liable as debtor for the claims in regard to Thus, a warehouseman having a lien valid against the
which the lien is asserted if such person had person demanding the goods may refuse to deliver
been so entrusted with the possession of goods the goods to him until the lien is satisfied (Sec. 31)
that a pledge of the same by him at the time of
the deposit to one who took the goods in good
faith for value would have been valid (Sec. 28)

2. Satisfaction of the Lien

a. By Sale

In accordance with the terms of a notice so given, a

sale of the goods by auction may be had to satisfy
any valid claim of the warehouseman for which he
has a lien on the goods.
 MERCANTILE LAW REVIEWER

purchase of goods or merchandise through the use of

Trust Receipts Law those goods or merchandise as collateral for the
advancements made by a bank. The title of the bank
MERCANTILE LAW to the security is the one sought to be protected and 17
Letters of Credit A. Definition/Concept of a Trust not the loan which is a separate and distinct
Warehouse Receipts Receipt Transaction agreement (People v. Nitafan, 1992)
Law B. Rights of the Entruster
Trust Receipts Law C. Obligations and Liability of the b. Ownership of the goods, documents and
Negotiable instruments under a trust receipt
Instruments Law
Entrustee
Insurance Code D. Remedies available
Entrustee is the factual owner of the goods,
Transportation Law documents and instruments (Prudentlal Bank v.
Corporation Law NLRC)
Securities Regulation
Code Entruster is the real owner of the goods,
Banking and Finance documents and instruments.
Intellectual Property
―A trust receipt transaction, within the meaning of
A. Definition/Concept of a Trust this Decree, is any transaction…whereby the
entruster, who owns or holds absolute title or
Receipt Transaction security interests over certain specified goods,
documents or instruments...‖ (Sec. 4, TRL)
A Trust Receipt Transaction is any transaction by
and between an entruster and another person as NOTE—
entrustee, whereby the entruster, who owns or holds "Security Interest" means a property interest in
absolute title or security interests over certain goods, documents or instruments to secure
specified goods, documents or instruments, releases performance of some obligations of the entrustee or
the same to the possession of the entrustee upon the of some third persons to the entruster and includes
latter's execution and delivery to the entruster of a title, whether or not expressed to be absolute,
signed document called a trust receipt (Sec. 4) whenever such title is in substance taken or retained
for security only.
A Trust Receipt is a written or printed document
signed by the entruster wherein the entrustee binds
Prudential Bank v. NLRC, 1995
himself: (1) to hold the designated goods, documents
―Accordingly, in order to secure that the banker
or instruments in trust for the entruster; and (2) to
shall be repaid at the critical point — that is, when
sell or otherwise dispose of the goods, documents or
the imported goods finally reach the hands of the
instruments with the obligation to turn over to the
intended vendee — the banker takes the full title to
entruster the proceeds thereof to the extent of the
the goods at the very beginning; he takes it as
amount owing to the entruster or as appears in the
soon as the goods are bought and settled for by his
trust receipt or the goods, documents or instruments
payments or acceptances in the foreign country,
themselves if they are unsold or not otherwise
and he continues to hold that title as his
disposed of, in accordance with the terms and
indispensable security until the goods are sold‖
conditions specified in the trust receipt, or for other
purposes substantially equivalent to those specified
―[I]n a certain manner, (trust receipt contracts)
under Sec. 4.(Sec. 4)
partake of the nature of a conditional sale as
provided by the Chattel Mortgage Law, that is, the
a. Loan/security feature
importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. The
A letter of credit-trust receipt arrangement is
ownership of the merchandise continues to be
endowed with its own distinctive features and
vested in the owner thereof or in the person who
characteristics. Under that set-up, a bank extends a
has advanced payment, until he has been paid in
loan covered by the letter of credit, with the trust
full, or if the merchandise has already been sold,
receipt as a security for the loan. In other words,
the proceeds of the sale should be turned over to
the transaction involves a loan feature
him by the importer or by his representative or
represented by the letter of credit, and a security
successor in interest.‖
feature which is in the covering trust receipt x x x
A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security NOTE—
interest" in the goods (Vintola v. IBAA, 1987) In the earlier cases of Vintola v. IBAA (1987) and
Abad v. Court of Appeals (1990), the Supreme Court
A trust receipt arrangement does not involve a held that the entrustee becomes the absolute owner
simple loan transaction between a creditor and of the goods, documents and instruments, the
debtor-importer. Apart from a loan feature, the entruster being a mere security holder.
trust receipt arrangement has a security feature that
is covered by the trust receipt itself. That second
feature is what provides the much needed financial
assistance to our traders in the importation or
 MERCANTILE LAW REVIEWER

B. Rights of the Entruster (e) To return the goods, documents or Instruments in

the event of non-sale or upon demand of the
18 entruster; and
The entruster shall have the following rights: (f) To observe all other terms and conditions of the
(1a) Right to the proceeds from the sale of the trust receipt not contrary to the provisions of
goods, documents or instruments released under the TRL. (Sec. 9)
a trust receipt to the entrustee to the extent of
the amount owing to the entruster or as appears 2. Liabilities of the Entrustee
in the trust receipt; OR
(1b) Right to the return of the goods, documents or (a) Liability for Loss - The risk of loss shall be
instruments in case of non-sale; AND
borne by the entrustee. Loss of goods,
(2) Right to the enforcement of all other rights
documents or instruments which are the subject
conferred on him in the trust receipt provided
of a trust receipt, pending their disposition,
such are not contrary to the provisions of the irrespective of whether or not it was due to the
TRL. fault or negligence of the entrustee, shall not
(3) Right to cancel the trust and take possession extinguish his obligation to the entruster for the
of the goods, documents or instruments subject value thereof (Sec. 10)
of the trust or of the proceeds realized (b) Liability for failure to turn over proceeds of
therefrom at any time upon default or failure of sale or to return – the failure shall constitute
the entrustee to comply with any of the terms the crime of estafa, punishable under Art. 315
and conditions of the trust receipt or any other (b) of the Revised Penal Code (Sec. 13)
agreement between the entruster and the
entrustee.
d. Penal sanction if offender is a corporation
(4) Right to sell the goods, documents or
If the violation or offense is committed by a
instruments at public or private sale at least
corporation, partnership, association or other
five days notice to the defaulting entrustee of juridical entities, the penalty provided for in this
the intention to sell. Decree shall be imposed upon the directors, officers,
(5) Right to purchase the goods, documents or employees or other officials or persons therein
instruments at a public sale. responsible for the offense, without prejudice to the
(6) Right to recover the deficiency from the civil liabilities arising from the criminal offense (Sec.
entrustee should the proceeds of the sale not be 13)
sufficient (Sec. 7)

a. Validity of the security interest as against D. Remedies available

the creditors of the entrustee/innocent
purchasers for value 1. In case of default or failure of the entrustee
to comply with the trust receipt agreement –
C. Obligations and Liability of the Entruster may cancel the trust receipt
agreement, take possession of the goods,
Entrustee documents, instruments, and sell the same at
any private or public sale at least five days from
a. Payment/Delivery of proceeds of sale or notice of intention to sell to the entrustee.
disposition of goods, documents or
instruments The proceeds of any such sale, whether public
b. Return of goods, documents or instruments or private, shall be applied (a) to the payment
in case of sale of the expenses thereof; (b) to the payment of
c. Liability for loss of goods, documents or the expenses of re-taking, keeping and storing
instruments the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to
1. Obligations of the Entrustee the entruster (Sec. 7)

(a) To hold the goods, documents or instruments in 2. In case of loss of the goods, documents,
trust for the entruster and shall dispose of them instruments – Entrustee may claim damages
strictly in accordance with the terms and from the entrustee (Sec.10)
conditions of the trust receipt;
(b) To receive the proceeds in trust for the 3. In case of failure to turn over proceeds of the
entruster and turn over the same to the sale of the goods, documents or instruments
entruster to the extent of the amount owing to or to return the same in case of non-sale -
the entruster or as appears on the trust receipt; Entruster may file a criminal complaint for
(c) To insure the goods for their total value against estafa (Art. 315 (b) of the Revised Penal Code)
loss from fire, theft, pilferage or other against the entrustee,
casualties;
(d) To keep said goods or proceeds thereof whether
in money or whatever form, separate and
capable of identification as property of the
entruster;
 MERCANTILE LAW REVIEWER

19

2012 UP LAW
BAR REVIEWER
MERCANTILE
Negotiable Instruments Law LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads | Anna
EXECUTIVE COMMITTEE Katarina Rodriguez • Mickey
Ramon Carlo Marcaida |Commissioner Chatto
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary LAYOUT TEAM 2012
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Layout Artists | Alyanna
Apacible • Noel Luciano • RM
COMMITTEE HEADS Meneses • Jenin Velasquez •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Mara Villegas • Naomi
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Quimpo • Leslie Octaviano •
Miranda (D) |Special Lectures Yas Refran • Cris Bernardino
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 Negotiable I. FORMS AND INTERPRETATION
Instruments Law A. Requisites of Negotiability
MERCANTILE LAW
Letters of Credit I. Forms and Interpretation Sec. 1. Form of negotiable instruments.
Warehouse Receipts II. Completion and Delivery An instrument to be negotiable must conform to the
Law III. Rules of Interpretation following requirements:
Trust Receipts Law IV. Signature (a) It must be in writing and signed by the maker or
Negotiable drawer;
Instruments Law
V. Consideration
(b) Must contain an unconditional promise or order
Insurance Code VI. Accommodation Party
to pay a sum certain in money;
Transportation Law VII. Negotiation (c) Must be payable on demand, or at a fixed or
Corporation Law VIII. Rights of a Holder determinable future time;
Securities Regulation IX. Liabilities of Parties (d) Must be payable to order or to bearer; and
Code X. Presentment for Payment (e) Where the instrument is addressed to a drawee,
Banking and Finance XI. Notice of Dishonor he must be named or otherwise indicated
Intellectual Property XII. Discharge of Negotiable therein with reasonable certainty.
Instrument
XIII. Material Alteration 1. In writing and signed by the maker
XIV. Acceptance or drawer
XV. Presentment for Acceptance
XVI. Promissory Notes a. No person is liable on the instrument whose
XVII.Checks signature does not appear thereon.
b. One who signs in a trade or assumed name will
Definition be liable to the same extent as if he had signed
 Written contract for the payment of money, by in his own name (Sec. 18).
its form and on its face, intended as substitute c. Signature of any party may be made by duly
for money and intended to pass from hand to authorized agent; no particular form of
hand to give the holder in due course (HDC) the appointment necessary (Sec. 19)
right to hold the same and collect the sum due. d. "In writing" - includes print; written or typed
 Instruments are negotiable when they conform e. Signature is binding so long as it is intended or
to all the requirements prescribed by the NIL adopted as the signature of the signer or made
(Act 2031, 03 February 1911). with his authority.
 Although considered as medium for payment of f. It may appear on any part of the instrument.
obligations, negotiable instruments are not legal However, if the signature is so placed upon the
tender (Sec. 60, New Central Bank Act, R.A. instrument that it is not clear in what capacity
7653). the person intended to sign, he is deemed an
indorser. (Sec. 17[f])
BPI vs. Royeca, (2008, Nachura):
Q: Can the delivery of a negotiable instrument 2. Containing an unconditional
discharge an obligation? promise to pay or order to pay
A: Settled is the rule that payment must be made
Sec. 3. When promise is unconditional.
in legal tender. A check is not legal tender and,
An unqualified order or promise to pay is
therefore, cannot constitute a valid tender of
unconditional within the meaning of this Act,
payment. Since a negotiable instrument is only a
though coupled with:
substitute for money and not money, the delivery of
(a) An indication of a particular fund out of which
such an instrument does not, by itself, operate as
reimbursement is to be made, or a particular
payment. Mere delivery of checks does not
account to be debited with the amount; or
discharge the obligation under a judgment. The
(b) A statement of the transaction which gives rise
obligation is not extinguished and remains
to the instrument.
suspended until the payment by commercial
document is actually realized.
But an order or promise to pay out of a particular
fund is not unconditional.
 Negotiable instruments shall produce the effect
of payment only when they have been encashed
or when through the fault of the creditor they a. ―UNCONDITIONAL‖
have been impaired. (Art. 1249, Civil Code)  The promise or order to pay, to be
 BUT a CHECK which has been cleared and unconditional, must be unqualified.
credited to the account of the creditor shall be  Fact that the condition appearing on the
equivalent to a delivery to the creditor of cash. instrument has been fulfilled will not convert it
into a negotiable one (see Sec. 4)

A negotiable instrument is conditional when

reference to the fund clearly indicates an intention
 MERCANTILE LAW REVIEWER

that such fund alone should be the source of (a) Where it is expressed to be payable on demand,
payment. (Metropolitan Bank vs. CA, 1991) or at sight, or on presentation; or
(b) In which no time for payment is expressed.
b. ―ORDER OR PROMISE TO PAY‖ 21
 As to promissory note Where an instrument is issued, accepted, or
- Promise to pay should be express on the face indorsed when overdue, it is, as regards the person
of the instrument so issuing, accepting, or indorsing it, payable on
- Word "promise" is not absolutely necessary. demand.
Any expression equivalent to a promise is
sufficient. Demand instruments: Holder may call for payment
- Mere acknowledgment of a debt is insufficient any time; maker has an option to pay at any time,
 As to bill of exchange: and the refusal of the holder to accept payment will
- Order - command or imperative direction; the terminate the running of interest, if any, but the
instrument is, by its nature, demanding a obligation to pay the note remains.
right.
- Words which are equivalent to an order are b. ―AT A FIXED TIME‖
sufficient.  Only on the stipulated date, and not before,
- A mere request or authority to pay does not may the holder demand its payment.
constitute an order. Although the mere use of  Should he fail to demand payment, the
polite words like "please" does not of itself instrument becomes overdue but remains valid
deprive the instrument of its characteristics and negotiable. It is merely converted to a
as an order, its language must clearly indicate demand instrument.
a demand upon the drawee to pay.
c. ―AT A DETERMINABLE FUTURE TIME‖
3. Sum payable must be certain Sec. 4. Determinable future time; what
constitutes.
A sum is certain if from the face of the instrument it An instrument is payable at a determinable future
can be mathematically computed. time, within the meaning of this Act, which is
expressed to be payable:
Sec. 2. Certainty as to sum; What constitutes. (a) At a fixed period after date or sight; or
The sum payable is a sum certain within the (b) On or before a fixed or determinable future
meaning of this Act, although it is to be paid: time specified therein; or
(a) with interest; or (c) On or at a fixed period after the occurrence of
(b) by stated installments; or a specified event which is certain to happen,
(c) by stated installments, with a provision that, though the time of happening be uncertain.
upon default in payment of any installment or
of interest, the whole shall become due; or An instrument payable upon a contingency is not
(d) with exchange, whether at a fixed rate or at negotiable, and the happening of the event does not
the current rate; or cure the defect.
(e) with costs of collection or an attorney's fee, in
case payment shall not be made at maturity.  Examples:
- I promise to pay Juan Cruz or order the sum of
4. Payable in money P100 30 days after date
- I promise to pay Juan Cruz or order the sum of
P100 on or before Dec. 1, 2000
a. Capable of being transformed into money.
- I promise to pay Juan Cruz or order the sum of
b. NON-NEGOTIABLE:
P100 60 days after the death of Jose
 An instrument which contains an order or
 Effect of acceleration provisions:
promise to do an act in addition to the payment
- If option (absolute or conditional) to
of money (with the exception of certain acts
accelerate maturity is on the maker, still
enumerated in Sec. 5)
NEGOTIABLE.
 Payable in personal property like merchandise,
- If option to accelerate is on the holder and
shares of stock or gold.
can be exercised only after the happening of a
 Maker or the person primarily liable has the
specified event/act over which he has no
option to require something to be done in lieu of
control (conditional), still NEGOTIABLE.
payment of money. (CAMPOS)
c. NEGOTIABLE: if the option to require something
Provisions extending time of payment
to be done in lieu of payment of money is with
 General rule
the holder.
Negotiability not affected. Effect is similar with that
of an acceleration clause at the option of the
5. Payable on demand, or at a fixed maker.
or determinable future time
 Exception
a. ―ON DEMAND‖ Where a note with a fixed maturity provides that the
Sec. 7. When payable on demand. maker has the option to extend time of payment
An instrument is payable on demand: until the happening of contingency, the instrument
 MERCANTILE LAW REVIEWER

is NOT negotiable. The time for payment may never d. ―PAYABLE TO ORDER‖
come at all.
22 Sec. 8. When payable to order.
6. Payable to order or to bearer The instrument is payable to order where it is
(Asked in 98) drawn payable to the order of a specified person or
to him or his order. It may be drawn payable to the
a. Must contain Words of Negotiability order of:
 ―Pay to the order of Juan Cruz‖, or ―I promise (a) A payee who is not maker, drawer, or drawee;
to pay to the order of Juan Cruz‖ or
 ―Pay to Juan Cruz or order‖, or ―I promise to (b) The drawer or maker; or
pay Juan Cruz or order‖ (c) The drawee; or
(d) Two or more payees jointly; or
b. Negotiability determined from the face of the (e) One or some of several payees; or
instrument (f) The holder of an office for the time being.

The negotiability or non-negotiability of an Where the instrument is payable to order, the payee
instrument is determined from the face of the must be named or otherwise indicated therein with
instrument itself. Where words "or bearer" printed reasonable certainty.
on a check are cancelled by the drawer, instrument
becomes not negotiable. (Caltex vs. CA, 1992) Without the words "to order" or "to the order of,"
the instrument is payable only to the person
c. ―PAYABLE TO BEARER‖ designated therein and is therefore non-negotiable.
Sec. 9. When payable to bearer. (Consolidated Plywood Industries vs. IFC Leasing,
The instrument is payable to bearer: 1987)
(a) When it is expressed to be so payable; or  For order instruments - negotiation requires
(b) When it is payable to a person named therein or delivery and indorsement of the transferor.
bearer; or
(c) When it is payable to the order of a fictitious or 7. If bill of exchange, drawee must
non-existing person, and such fact was known to be named or designated with
the person making it so payable; or
(d) When the name of the payee does not purport reasonable certainty
to be the name of any person; or
(e) When the only or last indorsement is an a. Applies only to bill of exchange
indorsement in blank. b. A bill may be addressed to 2 or more drawees
jointly whether they are partners or not, but not
to 2 or more drawees in the alternative or in
 Examples:
succession (Sec. 128, NIL).
- Expressed to be so payable
c. Examples:
"I promise to pay the bearer the sum…."
 ―To Juan Cruz and Jose Reyes‖ – negotiable
- Payable to a person named therein or bearer
 ―To Juan Cruz or Jose Reyes‖ – not negotiable;
"Pay to A or bearer."
no certainty as to drawee
- Payable to the order of a fictitious person or
non-existing person, and such fact was known
Determination of Negotiability
to the person making it so payable
In determining the negotiability of an instrument,
“Pay to John Doe or order."
the instrument in its entirety and by what appears
- Name of payee does not purport to be the
on its face must be considered. It must comply with
name of any person –
the requirements of Sec. 1 of the Negotiable
"Pay to cash;"
Instruments Law. (Caltex Phils. v. CA, 1992)
"Pay to sundries."
- Only or last indorsement is an indorsement in
The acceptance of a bill of exchange is not
blank.
important in the determination of its negotiability.
The nature of acceptance is important only on the
 Fictitious payee rule
determination of the kind of liabilities of the parties
involved. (PBCOM vs. Aruego, 1993)
It is not necessary that the person referred to in the
instrument is really non-existent or fictitious to
Omissions and Provisions not Affecting
make the instrument payable to bearer. The person
Negotiability
to whose order the instrument is made payable may
Omissions and Additional Provisions
in fact be existing but he is still fictitious or non-
Provisions That Do Not Affect
existent under Sec. 9(c) of the NIL if the person
That Do Not Affect Negotiability
making it so payable does not intend to pay the
Negotiability
specified persons.
1. Non-dating of the 1. Authorizes the sale of
A check drawn payable to the order of cash is a instrument collateral securities on
check payable to bearer, and the bank may pay it to 2. Non-specification of default;
the person presenting it for payment without the value given, or that 2. Authorizes confession of
drawer's indorsement. (Ang Tek Lian vs. CA, 1950) any value had been judgment on default;
given 3. Waives the benefit of
 MERCANTILE LAW REVIEWER

3. Non-specification of law intended to protect

place where it is the debtor; or Bill of Exchange vs. Check
drawn or place 4. Allows the creditor the Bill of exchange Check
where it is payable option to require Not necessarily It is necessary that a 23
4. Bears a seal something in lieu of drawn on a deposit. check be drawn on a
5. Designation of money. The drawee need not be bank deposit. Otherwise,
particular kind of (Sec. 5) a bank there would be fraud.
currency in which
payment is to be NOTE: Negotiability is Death of a drawer of a Death of the drawer of a
made. (Sec. 6) affected when instrument BOE, with the check, with the
contains a promise or order knowledge of the bank, knowledge of the bank,
to do any act in addition does not revoke the revokes the authority of
to the payment of money. authority of the drawee the banker to pay.
to pay.
B. Kinds of Negotiable Instrument May be presented for Must be presented for
payment within payment within a
1. Promissory Note (Sec. 184) reasonable time after its reasonable time after its
a. An unconditional promise in writing last negotiation. issue.
b. Made by one person to another May be payable on Always payable on
c. Signed by the maker demand or at a fixed or demand
d. Engaging to pay on demand, or at a fixed or determinable future
determinable future time time
e. A sum certain in money to order or to
bearer
f. Where a note is drawn to the maker's own II. Completion and delivery
order, it is not complete until indorsed by
him.
A. Insertion of Date (Sec. 13)
2. Bill of Exchange (Sec. 126) Any holder may insert the true date of issue or
a. An unconditional order in writing acceptance of an instrument where:
b. Addressed by one person to another
c. Signed by the person giving it (1) the instrument is expressed to be payable at a
d. Requiring the person to whom it is fixed period after date is issued undated; or
addressed to pay on demand or at a fixed or (2) the acceptance of an instrument payable at a
determinable future time fixed period after sight is undated.
e. A sum certain in money to order or to
bearer The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
Check - A bill of exchange drawn on a bank payable due course; but as to him, the date so inserted is to
on demand. (Sec. 185). It is the most common form be regarded as the true date.
of bill of exchange.
The instrument is not invalid for the reason only that
Instances when a bill of exchange may be treated it is ante-dated or post-dated, provided this is not
as a promissory note done for an illegal or fraudulent purpose. The person
 The drawer and the drawee are the same to whom an instrument so dated is delivered
person; or acquires the title thereto as of the date of delivery
 Drawee is a fictitious person; or (Sec. 12).
 Drawee does NOT have the capacity to contract
(Sec. 130) B. Completion of Blanks
 Where the bill is drawn on a person who is
legally absent;
 Where the instrument is wanting in any material
 Where the instrument is so ambiguous that
particular, the person in possession thereof has
there is doubt whether it is a bill or note, the
a prima facie authority to complete it by filling
holder may treat it as either at his election.
up the blanks therein.
(Sec. 17[e]) (Sec. 17[e])
 A signature on a blank paper delivered by the
Promissory Note vs. Bill of Exchange
person making the signature in order that the
Promissory note Bill of exchange
paper may be converted into a negotiable
Unconditional promise Unconditional order instrument operates as a prima facie authority
Involves 2 parties Involves 3 parties to fill it up as such for any amount.
Maker is primarily liable Drawer is only
secondarily liable For such instrument to be enforceable against
Only one presentment: Two presentments: for any person who became a party thereto prior to
for payment acceptance and for its completion, it must be filled up strictly in
payment
 MERCANTILE LAW REVIEWER

accordance with the authority given and within 5. Where the instrument is ambiguous as to
a reasonable time. whether it is a note or a bill, the holder may
24 treat it as either at his election
When subsequently negotiated to an HDC, 6. When the capacity of signatory is not clear, he
there is a presumption that such instrument is is to be deemed an indorser.
filled up strictly in accordance with the 7. “I promise to pay” when signed by two or more
authority given and within reasonable time. persons is deemed to be jointly and severally
signed
C. Incomplete and Undelivered
Where two promissory notes, both employing the
Instruments (Sec. 15) terms “I promise to pay”, were each signed by two
or more persons, a solidary (joint and several)
Where an incomplete instrument has not been liability on each note is created on the part of the
delivered, it will not be a valid contract in the hands signors. (Evangelista vs. Mercator Finance, 2003)
of any holder, as against any person whose signature
was placed thereon before delivery if completed
and negotiated without authority.
IV. Signature
 Who may be estopped from raising the real
defense under Sec 15? A drawee bank whose GENERAL RULE
negligent custody of the checks, after partial One whose signature does not appear on the
execution, contributed to its escape. instrument shall not be liable thereon.

D. Complete and Undelivered EXCEPTIONS

a. The principal who signs through an agent is
Instruments (Sec. 16) liable;
b. The forger is liable;
Every contract on a negotiable instrument is c. One who indorses in a separate instrument
incomplete and revocable until delivery of the (allonge) OR where an acceptance is written on
instrument for the purpose of giving effect thereto. a separate paper is liable;
d. One who signs his assumed or trade name is
Between immediate parties and as regards a remote liable; and
party other than a holder in due course, the e. A person negotiating by delivery (as in the case
delivery, in order to be effectual, must be made of a bearer instrument) is liable to his
either by or under the authority of the party making, immediate indorsee.
drawing, accepting, or indorsing.
A. Signing in Trade Name
When the instrument is in the hands of HDC, a
valid delivery thereof by all parties prior to him so
One who signs in a trade or assumed name will be
as to make them liable to him is conclusively
liable to the same extent as if he had signed in his
presumed.
own name
Incomplete and Delivered Instruments (Sec. 14)
a. Holder has prima facie authority to fill up the B. Signature of Agent
instrument.
b. The instrument must be filled up strictly in  Signature of any party may be made by duly
accordance with the authority given and within authorized agent, established as in ordinary
reasonable time agency.
c. HDC may enforce the instrument as if filled up  Signature per procuration operates as notice
according to b. above. that the agent has limited authority to sign, and
the principal is bound only in case the agent in
III. Rules of interpretation so signing acted within the actual limits of his
authority.
1. Sum expressed in words takes precedence over Liability
sum in numbers; BUT where words are  General rule
ambiguous or uncertain, reference to the figures Where a person adds to his signature words
may be made. indicating that he signs on behalf of a principal, then
2. Where interest is stipulated, without he‘s not liable if he was duly authorized.
specification of the starting date, the interest
runs from the date of the instrument, and if  Exceptions
undated, from the issue thereof. a. Mere addition of words describing him as an
3. An undated instrument is considered dated as of agent without disclosing his principal
time issued. b. Where a broker or agent negotiates an
4. Written provisions prevail over printed instrument without indorsement, he incurs
provision. all liabilities in Sec. 65, unless he discloses
name of principal and fact that he‘s only
acting as agent. (Sec. 69)
 MERCANTILE LAW REVIEWER

 General rule
C. Indorsement by Minor or When a signature is forged or made without the
authority of the person, the signature (not the
Corporation instrument itself and the other genuine signatures) is 25
wholly inoperative
The indorsement or assignment of the instrument by - Effects:
a corporation or by an infant passes the property o No right to retain the instrument
therein, notwithstanding that from want of capacity, o No right to give a discharge therefor
the corporation or infant may incur no liability o No right to enforce payment thereof
thereon (Sec. 22). against any party thereto can be acquired
through or under such signature
REAL defense but available only to the incapacitated
party (ex. minor or corporation).  Exception
Unless the party against whom it is sought to be
D. Forgery enforced is precluded from setting up the forgery or
want of authority as a defense (Sec. 23).
Counterfeit making or fraudulent alteration of any
Persons precluded from setting up defense of
writing, which may consist of:
forgery
a. Signing of another‘s name with intent to
1. Those who warrant or admit the genuineness of
defraud; or
the signature in question. This includes
b. Alteration of an instrument in the name,
indorsers, persons negotiating by delivery and
amount, name of payee, etc. with intent to
acceptors.
defraud.
2. Those who, by their acts, silence, or negligence,
are estopped from setting up the defense of
forgery.

Rules on Forgery

1. Promissory Note
ORDER INSTRUMENT BEARER INSTRUMENT
Maker‘s signature 1. Maker is not liable because he never 1. Maker is not liable.
forged became a party to the instrument. 2. Indorsers may be made liable to
2. Indorsers subsequent to forgery are liable those persons who obtain title
because of their warranties. through their indorsements.
3. Party who made the forgery is liable. 3. Party who made the forgery is
liable.
Payee‘s signature 1. Maker and payee not liable. 1. Maker is liable. (Why? Indorsement
forged 2. Indorsers subsequent to forgery are liable. is not necessary to title and the
3. Party who made the forgery is liable. maker engages to pay holder)
2. Party who made the forgery is liable
Indorser‘s signature 1. Maker, payee, indorser whose signature/s 1. Maker is liable. (Indorsement is not
forged was/were forged, and all indorsers necessary to title and the maker
preceding the forgery are not liable. engages to pay the holder)
2. Indorsers subsequent to forgery are liable. 2. Indorser whose signature was forged
(Because of their warranties) is not liable to one who is not a HDC
3. Party who made the forgery is liable. provided the instrument is
mechanically complete before the
forgery.
3. Party who made the forgery is
liable.
 MERCANTILE LAW REVIEWER

2. Bill of Exchange
ORDER INSTRUMENT BEARER INSTRUMENT
26 Drawer‘s signature 1. Drawer is not liable because he was never 1. Drawer is not liable.
forged a party to the instrument. 2. Drawee is liable if it paid. Drawee
2. Drawee is liable if it paid (no recourse to cannot recover from the collecting
drawer) because he admitted the bank.
genuineness of the drawer‘s signature. 3. Party who made the forgery is
Drawee cannot recover from the collecting liable.
bank because there is no privity between
the collecting bank and the drawer. The
latter does not give any warranty re: the
drawer‘s signature. (Associated Bank vs.
CA)
3. Indorsers subsequent to forgery liable
(such as collecting bank or last endorser)
4. Party who made the forgery is liable
Payee‘s signature 1. Drawer and payee not liable 1. Drawer and drawee are liable.
forged 2. Drawee is liable if it paid, but it may pass 2. Payee is not liable.
liability back through the collection chain 3. Collecting bank is liable because of
3. Indorsers subsequent to forgery are liable warranty.
(such as collecting bank) 4. Party who made the forgery is
4. Party who made the forgery is liable liable.
Indorser‘s signature 1. Drawer, payee, indorser whose signature/s 1. Drawer is liable. (indorsement not
forged was/were forged and all indorsers necessary to title)
preceding the forgery are not liable. 2. Drawee is liable.
2. Drawee is liable if it paid. 3. Indorser whose signature was forged
3. Indorsers subsequent to forgery are liable. is liable because indorsement is not
(such as collecting bank) necessary to title.
4. Party who made the forgery is liable. 4. Party who made the forgery is
liable.

Acceptance and payment under mistake

 A bank is bound to know the signatures of its Effects of Negligence of Depositor
depositors. If bank pays a forged check it must  If such negligence was the proximate cause of
be considered as making the payment out of its the loss, the drawee-bank is NOT liable
own funds and cannot charge the account of the - It is the duty of the depositor/drawer to
depositor whose signature was forged. (PNB vs. carefully examine bank‘s statements,
Quimpo, 1988) cancelled checks, his check stubs, and other
 Consequently, if a bank pays a forged check, it pertinent records within a reasonable time
must be considered as paying out of its funds and to report any errors without
and cannot charge the amount so paid to the unreasonable delay.
account of the depositor. A bank is liable, - If a drawer/depositor‘s negligence and delay
irrespective of its good faith, in paying a forged should cause a bank to honor a forged check,
check. (Samsung vs. Far East Bank, 2004) drawer cannot later complain should bank
refuse to recredit his account.
Extensions of Price vs. Neal doctrine
 Doctrine: As between equally innocent persons,  When drawee may recover from drawer
the drawee who pays money on a check or draft - Where the instrument is originally a bearer
the signature on which was forged CANNOT instrument, because the indorsement can be
recover the money from the one who received disregarded as being unnecessary to the
it. The drawee is bound to know the signature holder‘s title
of its depositor. - Indorsement forged by an employee or agent
 The bar to recovery is extended to overdrafts of the drawer
and stop payment orders. - If due to the drawer‘s negligence/delay, the
 Overdraft occurs when a check is issued for an forgery is not discovered until it is too late
amount more than what the drawer has in for the bank to recover from the holder or
deposit with the drawee bank. the forger
- Rule: The drawee who pays the holder of the
bill cannot recover from the holder what he  When drawee may not recover from holder
paid under mistake - Where the instrument is originally a bearer
 Stop Payment Order is one issued by the instrument, because the indorsement can be
drawer of a check countermanding his first disregarded as being unnecessary to the
order to the drawee bank to pay the check. holder‘s title
- Rule: The drawee bank is bound to follow the - If drawee fails to act promptly , if he delays
order, provided it is received prior to its in informing the holder whom he paid
certification or payment of the check.
 MERCANTILE LAW REVIEWER

 Between Drawee Bank and Collecting Bank

- Collecting bank only liable for forged
VI.Accommodation party
indorsements and not forgeries of the drawer
or maker‘s signature (PNB v CA, 1968). Sec. 29. Liability of accommodation party. 27
- The collecting bank or last indorser generally An accommodation party is one who has signed the
suffers the loss because it has the duty to instrument as maker, drawer, acceptor, or indorser,
ascertain the genuineness of all prior without receiving value therefor, and for the
indorsements considering that the act of purpose of lending his name to some other person.
presenting the check for payment to the Such a person is liable on the instrument to a holder
drawee is an assertion that the party making for value, notwithstanding such holder, at the time
the presentment had done its duty to of taking the instrument, knew him to be only an
ascertain the genuineness of the accommodation party.
indorsements (BPI v CA, 1992).
- In presenting the checks for clearing, the Liability
collecting agent made an express guarantee The person to whom the instrument thus executed is
on the validity of ―all the prior subsequently negotiated has a right of recourse
endorsements.‖ against the accommodation party in spite of the
- The drawee bank is not similarly situated as former‘s knowledge that no consideration passed
the collecting bank because the former between the accommodation and accommodated
makes no warranty as to the genuineness of parties (Sec. 29).
any indorsement. The drawee bank‘s duty is
but to verify the genuineness of the drawer‘s Stelco Marketing Corp. vs. C.A. (1992): Liable on the
signature and not of the indorsement instrument to a holder for value notwithstanding
because only the drawer is its client. such holder at the time of the taking of the
- However, where the negligence of the instrument knew him to be only an accommodation
drawee bank is the proximate cause of the party. Hence, as regards an AP, the 4th condition,
collecting bank‘s payment of a check with a i.e., lack of notice of infirmity in the instrument or
forged indorsement, the drawee bank may be defect in the title of the persons negotiating it, has
held liable to the collecting bank. no application.
- When both are guilty of negligence, the
degree of negligence of each will be weighed
Accommodation Party as Surety
in considering the amount of loss which each
 Accommodation Party is generally regarded as a
should bear (BPI v CA, 1992)
surety for the party accommodated;

V. Consideration When AP makes payment to holder of the note, he

has the right to sue the accommodated party for
Value reimbursement. [Agro Conglomerates, Inc. v. CA]
Any consideration sufficient to support a simple
contract. VII.Negotiation
An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is A. Negotiation Distinguished from
payable on demand or at a future time. Assignment
Who is a Holder for Value (HFV)?
NEGOTIATION ASSIGNMENT
a. A holder of an instrument for which value has
been given at any given time but only with The transfer of the The transferee does not
respect to all parties who have become parties instrument from one become a holder and he
to the instrument prior to the time at which person to another so as merely steps into the
value has been given. to constitute the shoes of the transferor.
b. A holder who as a lien on the instrument but only transferee as holder Any defense available
to the extent of his lien. thereof (Sec.30). against the transferor is
available against the
Presumption of Consideration transferee.
Sec. 24. Every negotiable instrument is deemed
prima facie to have been issued for a valuable B. Modes of Negotiation
consideration; and every person whose signature
appears thereon to have become a party thereto for 1. By Delivery - If payable to bearer
value.
(Sec. 30)
Delivery means transfer of possession of instrument
Effect of Want of Consideration
by the maker or drawer, with intent to transfer title
Absence or failure of consideration is a matter of
to the payee and recognize him as holder thereof.
defense as against any person not a holder in due
course, hence, a personal defense.
 MERCANTILE LAW REVIEWER

Issuance is the first delivery of the instrument 2. Blank

complete in form to a person who takes it as a - Specifies no indorsee, instrument so
28 holder (Sec. 191). indorsed is payable to bearer, and may
be negotiated by delivery
 Requisites - The holder may convert a blank
a. Mechanical act of writing the instrument indorsement into a special
completely and in accordance with the indorsement by writing over the
requirements of Section 1; and signature of the indorser in blank any
b. The delivery of the complete instrument by contract consistent with the character
the maker or drawer to the payee or holder of the indorsement. (Sec 35)
with the intention of giving effect to it. - An order instrument may be converted
into a bearer instrument by means of a
Presumption of delivery blank indorsement, and may be later
a. Where the instrument is no longer in the reconverted into an order instrument by
possession of a party whose signature appears a subsequent special indorsement
thereon, a valid and intentional delivery by him - But a bearer instrument remains as such
is presumed until the contrary is proved (Sec. whether it has been indorsed specially
16) or in blank. It is the liability of the
b. if it is in the hands of a HDC, the presumption is indorser which is affected.
conclusive (Sec. 16)
 As to title transferred
Presumption as to date 1. Restrictive
a. Date is not an essential element of negotiability - Such indorsement either:
b. An undated instrument is considered to be dated o Prohibits further negotiation of
as of the time it was issued instrument
o Constitutes indorsee as agent of
2. By Indorsement completed by indorser
o Vests title in indorsee in trust for
Delivery - If payable to order (Sec. another (Sec 36)
30) - Rights of Restrictive Indorsee:
o Receive payment
Indorsement o Bring any action thereon that the
 Where placed – The indorsement must be indorser could bring.
written (Sec. 31): o Transfer his rights as such indorsee,
a. On the instrument itself, or but all subsequent indorsees acquire
b. On a separate piece of paper attached to only the title of first indorsee under
the instrument called ―allonge‖ restrictive indorsement. (Sec 37)
2. Non-restrictive
 Signature of the indorser, without additional
words, is a sufficient indorsement (Sec. 31)  As to kind of liability assumed by indorser
 Must be of the ENTIRE instrument 1. Qualified
- CANNOT indorse a part only of the amount - Constitutes indorser as mere assignor of
payable; BUT if the instrument has been paid title
in part, then the instrument may be indorsed - Made by adding the words ―without
as to the residue (Sec. 32) recourse‖ (Sec. 38).
- CANNOT transfer the instrument to two or - But this does not mean that the
more indorsees severally (Sec. 32) transferee only has the rights of an
- If not an indorsement of the entire assignee. Transfer remains a negotiation
instrument, the transfer remains valid, but as and transferee can still be a holder
a mere assignment which subjects the holder capable of acquiring a title free from
to all defenses on the instrument (CAMPOS) defenses of prior parties.
- Effects:
Kinds of Indorsement o Relieves the qualified indorser of his
 As to manner of future method of negotiation liability to pay the instrument should
1. Special the maker be unable to pay
- Specifies the person to whom/to whose o The qualified indorser does not
order the instrument is to be payable; guarantee the solvency of the maker,
indorsement of such indorsee is but merely his legal title to the
necessary to further negotiation. instrument
- A special indorser is liable to all o The instrument may still be further
subsequent holders, unless the negotiated; no effect on its
instrument is an originally bearer negotiability
instrument, in which case he is liable
only to those who take title through his 2. Non-qualified
indorsement (Sec 40).
- An instrument, payable to bearer, and  As to presence/absence of express limitations
indorsed specially, may nevertheless be 1. Conditional
further negotiated by delivery. (Sec 40)
 MERCANTILE LAW REVIEWER

- Placed by indorser upon primary

obligor‘s privileges of paying the holder  Cancellation of Indorsement
- Additional condition annexed to Sec. 48. Striking out indorsement.
indorser‘s liability; such condition must The holder may at any time strike out any 29
be expressed indorsement which is not necessary to his title. The
- Where an indorsement is conditional, a indorser whose indorsement is struck out, and all
party required to pay the instrument indorsers subsequent to him, are thereby relieved
may disregard the condition, and make from liability on the instrument.
payment to the indorsee or his
transferee, whether condition has been  Indorsement by Agent
fulfilled or not. Sec. 20. Liability of person signing as agent, and so
- But any person to whom an instrument forth.
so indorsed is negotiated, will hold the Where the instrument contains or a person adds to
same, or the proceeds thereof, subject his signature words indicating that he signs for or on
to the rights of the person indorsing behalf of a principal or in a representative capacity,
conditionally. (Sec. 39) he is not liable on the instrument if he was duly
2. Unconditional
authorized; but the mere addition of words
describing him as an agent, or as filling a
3. Other Kinds of Indorsement representative character, without disclosing his
principal, does not exempt him from personal
1. Absolute liability.
One by which the indorser binds himself to pay, upon
no other condition than the failure of prior parties 2. payment to him in due course discharges
to do so, and of due notice to him of such failure instrument.

2. Joint
Where instrument payable to the order of two or
A. Holder in Due Course (HDC)
more payees or indorsees not partners, all must
indorse, unless the one indorsing has authority to Who are HDCs?
endorse for the others (Sec. 41)  HDC under Sec. 52
 HDC under Sec. 58: A holder who derives title
3. Irregular to the instrument through a HDC has all the
Where a person, not otherwise a party to the rights of the latter even though he himself
instrument, places thereon his signature in blank satisfies none of the requirements of due course
before delivery, he is liable as indorser holding
 HDC under Sec. 59 (presumption): Every holder
is deemed prima facie to be a holder in due
VIII.Rights of the Holder course.

Holder is a payee or indorsee of a bill or note who is Requisites of a holder in due course
in possession of it, or the bearer thereof (Sec. 191). Sec. 52. What constitutes a holder in due course.
A holder in due course is a holder who has taken the
A holder may be: (1) Holder in Due Course; or (2) a instrument under the following conditions:
Holder NOT in Due Course. (a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
Rights of a holder (Sec. 51) overdue, and without notice that it has been
1. sue thereon in his own name previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
 Unindorsed Instruments (d) That at the time it was negotiated to him, he
Sec. 49. Transfer without indorsement; effect of. had no notice of any infirmity in the instrument
Where the holder of an instrument payable to his or defect in the title of the person negotiating
order transfers it for value without indorsing it, the it.
transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires a. That the instrument is complete and regular
in addition, the right to have the indorsement of upon its face
the transferor. But for the purpose of determining  It is incomplete when it is wanting in any
whether the transferee is a holder in due course, material particular or particular proper to be
the negotiation takes effect as of the time when the inserted in a NI without which the same will not
indorsement is actually made. be complete.

NOTE—  Material Particulars

This section applies only to an instrument payable to A change in the ff. is considered a material
the order of the transferor. This cannot apply to alteration (Sec. 125):
bearer instruments. - Date
 MERCANTILE LAW REVIEWER

- Sum payable, either for principal or interest  Such presumption cannot be overcome by the
- Time or place of payment petitioner‘s bare denial of receipt of the
30 - Number or relations of the parties consideration. (Bayani vs. People, 2004)
- Medium or currency in which payment is to
be made - ― GOOD FAITH‖
- Or which adds a place of payment where no o Holder must have taken the instrument in
place of payment is specified good faith and that at the time it was
- Or any other change or addition which negotiated to him he had no notice of any
alters the effect of the instrument in any infirmity in the instrument or defect in
respect the title of the person negotiating it.
o NOT a Holder in GOOD FAITH: Holder
b. That he became the holder of it before it was acted in bad faith or holder had NOTICE
overdue and without notice that it had been OF DEFECT.
previously dishonored, if such was the fact - ―ACTUAL KNOWLEDGE‖
 ―OVERDUE‖ Sec 56. What constitutes notice of defect
The ff. cannot be HDCs: To constitute notice of an infirmity in the
- A holder who became such after the date of instrument or defect in the title of the person
maturity of the instrument (instrument is negotiating the same, the person to whom it is
overdue); negotiated must have had actual knowledge of the
- In case of demand instruments, a holder who infirmity or defect, or knowledge of such facts that
negotiates it after an unreasonable length of his action in taking the instrument amounted to bad
time after its issue (Sec. 53) faith.
- Instruments with fixed maturity but subject
to acceleration: ultimate date of maturity is d. That at the time it was negotiated to him he
the date of maturity for the purpose of had no notice of any infirmity in the
determining whether a purchaser is a HDC instrument or defect in the title of the person
- Undated instruments: Prima facie negotiating it.
presumption that it was negotiated before it  ―SUSPICIOUS CIRCUMSTANCES‖
was overdue (Sec. 45). - BAD FAITH - does not require actual
knowledge of the exact fraud that was
NOTE— practiced; knowledge that there was
An overdue instrument is still negotiable, but it is something wrong about the assignor‘s
subject to the defense existing at the time of the acquisition of title is sufficient.
transfer.
State Investment House vs. IAC (1989):
As to what constitutes a reasonable time, regard is A check with 2 parallel lines in the upper left hand
to be had to the nature of the instrument, the usage corner means that it could only be deposited and
of trade or business with respect to such instrument, may not be converted to cash. Consequently, such
and the facts of the particular case. (Sec. 193) circumstance should put the payee on inquiry and
upon him devolves the duty to ascertain the holders‘
 An instrument is not invalid for the reason only title to the check or the nature of his possession.
that it is ANTE-DATED OR POSTDATED provided Failing in this respect, the payee is declared guilty
not done for an illegal or fraudulent purpose. of gross negligence amounting to legal absence of
The person to whom an instrument so dated is good faith and as such the consensus of authority
delivered acquires the title thereto as of the is to the effect that the holder of the check is not
date of delivery (Sec. 12). a holder in good faith.

c. That he took it in good faith AND for value  ―DEFECTIVE TITLE‖

 ―VALUE‖ Title is NOT defective when at the time it was
- Any consideration sufficient to support a negotiated to him, he had NO notice of:
simple contract. An antecedent or pre- - any infirmity in instrument
existing debt constitutes value, whether the - any defect in title of person negotiating
instrument is payable on demand or at a
future time (Sec. 25) Title is DEFECTIVE when (Sec. 55):
 ―HOLDER FOR VALUE‖ - instrument / signature obtained by fraud,
- Where value has at any time been given for duress, force or fear or other unlawful means
the instrument, the holder is deemed a HFV OR for an illegal consideration; or
in respect to all parties who become such - instrument is negotiated in breach of faith,
prior to that time (Sec. 26); and or fraudulent circumstances
- Where the holder has a lien on the - NOTICE of infirmity or defect – actual
instrument, he is deemed a HFV to the knowledge of the infirmity or defect OR
extent of his lien (Sec .27). knowledge of such facts that his action in
taking the instrument amounted to bad faith
Presumption: Every NI is deemed prima facie issued (Sec.56)
for valuable consideration; and every person whose - RIGHT of a transferee who receives NOTICE
signature appears thereon is deemed to have of any infirmity or defect BEFORE he has
become a party thereto for value (Sec. 24). PAID THE FULL amount for the instrument.
 MERCANTILE LAW REVIEWER

He will be deemed a HDC only to the extent

of the amount therefore paid by him (Sec.54)
IX. Liabilities of Parties
Rights of a Holder in Due Course Primary liability 31
a. To sue on the instrument in his own name (Sec. The unconditional promise attaches the moment the
51) maker makes the instrument while the acceptor‘s
b. To receive payment on the instrument– assent to the unconditional order attaches the
discharges the instrument (Sec. 51) moment he accepts the instrument. No further act is
c. Holds instrument free of any defect of title of necessary in order for the liability to accrue.
prior parties (Sec. 57) Presentment for payment is all that is necessary.
d. Free from defenses available to prior parties
among themselves (Sec. 57) A. Parties Primarily Liable
e. May enforce payment of instrument for full (Sec. 60 and 62)
amount, against all parties liable (Sec. 57)
 These are persons who by the terms of the
B. Defenses against the Holder instrument are absolutely required to pay the
same.
Presumption in Favor of Due Course Holding
Every holder is deemed prima facie to be a holder in 1. Maker (Sec. 60)
due course (Sec. 59). Promises to pay according to the tenor of the
a. BURDEN SHIFTS when it is shown that the title promissory note
of any person who has negotiated the
instrument was defective. Holder MUST then 2. Acceptor (Sec. 62)
PROVE that he or some person under whom he Upon acceptance of the bill of exchange, engages to
claims acquired the title as a holder in due pay the bill according to the tenor of the
course. acceptance.
b. But the last mentioned rule does not apply in  Unconditionally liable; he is duty-bound to pay
favor of a party who became bound on the the holder at date of maturity, WON holder
instrument prior to the acquisition of such demands payment from him, and he is not
defective title. (Sec. 59) relieved from liability even if the instrument
c. However, this presumption arises only in favor should become overdue due to failure of holder
of a person who is a holder as defined in Sec. to make such demand.
191, meaning a “payee or indorsee of a bill or
note, who is in possession of it, or the bearer NOTE—
thereof.” Until he accepts the bill of exchange, the drawee
assumes no liability to pay the instrument.
Holder Not In Due Course
a. One who became a holder of an instrument Secondary liability
without any, some or all of the requisites under A party secondarily liable is not bound to pay unless
Sec. 52. the following have been fulfilled:
b. With respect to demand instruments, if it is  Due presentment or demand to the primary
negotiated an unreasonable length of time after party
its issue, the holder is deemed not a holder in  Dishonor by such party
due course. (Sec. 53)  Notice of dishonor to secondary party, and, in
c. Rights of a holder not in due course (Sec. 51, cases of foreign bills of exchange, protest of the
Rights of a holder): bill
1. To sue on the instrument under in his own
name
2. To enforce the instrument B. Parties Secondarily Liable

Prior parties can avail against him any defense 1. Drawer (Sec. 61)
among these prior parties and prevent the a. Engages that the instrument will be
said holder from collecting in whole or in part accepted or paid, or both, according to its
the amount stated in the instrument tenor on due presentment;
b. Engages that he will pay the amount of the
Chan Wan vs. Tan Kim, (1960): instrument to the holder or to any
The only disadvantage of a holder who is not a subsequent indorser who may be compelled
holder in due course is that the negotiable to pay the same if the instrument be
instrument is subject to defenses as if it were non- dishonored upon due presentment and
negotiable. proceedings on dishonor be taken,

 Limiting Liability: Drawer may insert in the

instrument an express stipulation
negativing/limiting his own liability to the
holder.
 MERCANTILE LAW REVIEWER

2. Indorsers However, he becomes liable once he breaches a

The following indorsers assume the liability to pay warranty.
32 the instrument: (1) General or Unqualified Indorser; Who is a qualified indorser?
and (2) Irregular Indorser. One who is constituted as a mere assignor of the
title to the instrument by adding to his signature the
a. General or Unqualified Indorser (Sec. 66) words "without recourse" or any words of similar
Engages that he will pay the amount of the import.
instrument to the holder or to any subsequent
indorser who may be compelled to pay the same if b. Irregular Indorser
the instrument be dishonored upon due When a person not otherwise a party to an
presentment and proceedings on dishonor be instrument, places thereon his signature in blank
taken. before delivery, he is liable as an indorser, in
accordance w/ these rules:
Who is a General or Unqualified Indorser? i) Instrument payable to order of 3rd person:
Every person who indorses WITHOUT qualification liable to payee and to all subsequent parties
(Sec. 66.) ii) Instrument payable to the order of
maker/drawer, or payable to bearer: liable to
A person placing his signature upon an instrument all parties subsequent to maker/drawer
other than as a maker, drawer, or acceptor unless iii) Signs for accommodation of payee: liable to
he indicates by appropriate words his intention to be all parties subsequent to payee (Sec. 64)
bound in some other capacity (Sec. 63).
Order of Liability among Indorsers (Sec. 68)
A person, who places his signature on an instrument a. Among themselves: liable prima facie in the
negotiable by delivery, incurs all the liabilities of an order they indorse, but proof of another
indorser (Sec. 67). agreement admissible
b. As to the Holder: Holder may sue any of the
NOTE— indorsers, regardless of order of indorsement
A Qualified Indorser does not assume the liability to c. Joint payees/indorsees deemed to indorse
pay the instrument since he is merely an assignor of solidarily
the title to the instrument.

C. Warranties

Maker Acceptor Drawer General/ Qualified Person

Unqualified Indorser Negotiating by
Indorser Delivery
1. existence of 1. the existence 1. existence of 1.genuineness of 1.genuineness of 1.genuineness of
the payee; of the payee; the payee; the instrument the instrument the instrument
2. his then 2. his then 2. his then in all respects in all respects in all respects
capacity to capacity to capacity to that it that it purports that it
indorse indorse; indorse purports to be; to be; purports to
3. existence of 2. his good title 2. his good title to be;
the drawer; to the the instrument; 2. his good title
4. the instrument; 3. all prior to the
genuineness of 3. all prior parties‘ instrument;
the drawer‘s parties‘ capacity to 3. prior parties‘
signature; capacity to contract; capacity to
5. the drawer‘s contract; 4. no knowledge contract;
capacity and 4. the of any fact 4. no knowledge
authority to instrument is which would of any fact
draw the valid and impair the which would
instrument; subsisting at validity of the impair the
the time of his instrument or validity of the
indorsement. render it instrument or
valueless. render it
valueless.

NOTE— NOTE—Warranty
No. 3 does not extends only to
apply to person immediate
negotiating public transferee
or corporation
securities other
than bills and
notes.
 MERCANTILE LAW REVIEWER

X. Presentment for Payment  Demand bill of exchange – within a reasonable

time after the last negotiation. (Sec. 71) 33
Definition NOTE— Although presentment was made within a
a. The production of a Bill of Exchange to the to reasonable time from last negotiation, it may have
the drawer or acceptor for PAYMENT; or been made within an unreasonable time from
b. The production of a PN to the party liable for issuance. Thus holder may still not be a holder in
payment due course under Sec. 71.

A. Necessity of presentment for

payment XI. Notice of Dishonor
B. Parties to whom presentment Notice given by holder or his agent to party or
for payment should be made parties secondarily liable that the instrument was
dishonored by:
When necessary (1) non-acceptance by the drawee of a bill;or
In order to charge the drawer and indorsers (Sec. 70) (2) non-payment by the acceptor of a bill; or
(3) non-payment by the maker of a note.
When NOT necessary
 To charge the person primarily liable on the Requisites
instrument (Sec. 70) a. Given by holder or his agent, or by any party
 To charge the drawer where he has no right to who may be compelled by the holder to pay
expect or require that the drawee or acceptor (Sec. 90)
will pay the instrument. (Sec. 79) b. Given to secondary party or his agent (Sec. 97)
 To charge an indorser where the instrument was c. Given within the periods provided by law (Sec.
made or accepted for his accommodation and he 102)
has no reason to expect that the instrument will d. Given at the proper place (Secs. 103 and 104)
be paid if presented. (Sec. 80)
 When the bill of exchange has previously been A. Parties to be notified
dishonored by non-acceptance and has not been
subsequently accepted. Under Sec. 151, an 1) Non-acceptance (bill) – to persons secondarily
immediate right of recourse against the liable, namely, the drawer and indorsers as the
persons secondarily liable accrues to the holder. case may be.
2) Non-payment (both bill and note) – indorsers.
C. Dispensation with presentment
for payment NOTE—
Notice must be given to persons secondarily liable.
D. Dishonor by non-payment Otherwise, such parties are discharged. Notice may
be given to the party himself or to his agent.
When Excused
 Where, after the exercise of reasonable When not Necessary
diligence, presentment cannot be made; Notice of dishonor is not required to be given to the
 Where the drawee is a fictitious person; drawer in any of the ff. cases:
 By waiver of presentment, express or implied.  Drawer and drawee are the same;
(Sec. 82)  Drawee is a fictitious person or not having the
capacity to contract;
In case of waiver of protest, whether in the case of  Drawer is the person to whom the instrument is
a foreign bill of exchange or other NI – deemed to be presented for payment;
a waiver not only of a formal protest but also of  The drawer has no right to expect or require
presentment and notice of dishonor (Sec. 111) that the drawee or acceptor swill honor the
instrument;
Date and time of presentment  Where the drawer has countermanded payment.
 bearing fixed maturity / not payable on (Sec. 114)
demand – on the day it falls due if day of
maturity falls on Sunday or a holiday, the Notice of dishonor is not required to be given to an
instruments falling due or becoming payable on indorser in the ff. cases:
Saturday are to be presented for payment on  Drawee is a fictitious person or does not have
the next succeeding business day (Sec. 85) the capacity to contract, and indorser was
 Payable on demand – within a reasonable time aware of that fact at the time he indorsed the
after its issue, iv at the option of the holder, instrument;
may be presented for payment before twelve  Indorser is the person to whom the instrument is
o'clock noon on Saturday when that entire day is presented for payment;
not a holiday (Sec. 85)  Instrument was made or accepted for his
accommodation. (Sec. 115)
 MERCANTILE LAW REVIEWER

XII. Discharge of Negotiable

B. Parties who may give notice of
34 dishonor
Instrument
Discharge
Sec. 90. By whom given. The release of all parties, whether primary or
The notice may be given by or on behalf of the secondary, from the obligation on the instrument;
holder, or by or on behalf of any party to the renders the instrument non-negotiable
instrument who might be compelled to pay it to the
holder, and who, upon taking it up, would have a
right to reimbursement from the party to whom the
A. Discharge of negotiable
notice is given. instrument

C. Effect of notice Sec. 119. Instrument; how discharged.

Notice of Dishonor is required to charge parties A negotiable instrument is discharged:
secondarily liable. (a) By payment in due course by or on behalf of the
principal debtor;
(b) By payment in due course by the party
D. Form of notice (Sec. 96) accommodated, where the instrument is made
The notice may be: or accepted for his accommodation;
(1) in writing; or (c) By the intentional cancellation thereof by the
(2) merely oral holder;
(d) By any other act which will discharge a simple
The notice may be given in any terms which: contract for the payment of money;
(1) sufficiently identify the instrument; and (e) When the principal debtor becomes the holder
(2) indicate that it has been dishonored by non- of the instrument at or after maturity in his
acceptance or non-payment. own right.

It may in all cases be given by delivering it 1) By payment in due course (Asked in 00)
personally or through the mails Sec. 88. What constitutes payment in due course.
Payment is made in due course when it is made at or
E. Waiver after the maturity of the payment to the holder
thereof in good faith and without notice that his
Sec. 109. Waiver of notice. title is defective.
Notice of dishonor may be waived either before the
time of giving notice has arrived or after the  If payment is made before maturity and the
omission to give due notice, and the waiver may be note is negotiated to a HDC, the latter may
expressed or implied. recover on the instrument.
 Payment to one of several payees or indorsees
in the alternative discharges the instrument, but
Sec. 110. Whom affected by waiver.
payment to one of several joint payees or joint
Where the waiver is embodied in the instrument
indorsers is not a discharge. The party receiving
itself, it is binding upon all parties; but, where it is
payment must have been authorized by others
written above the signature of an indorser, it binds
to receive payment.
him only.
 By whom made:
a. payment in due course by or on behalf of
F. Dispensation with notice principal debtor
b. payment in due course by party
a. When party to be notified knows about the accommodated where party is made/
dishonor, actually or constructively (Secs. 114- accepted for accommodation
117)
b. If waived (Sec. 109) 2) By intentional cancellation
c. When after due diligence, it cannot be given Sec. 123. Cancellation; unintentional; burden of
(Sec. 112). proof.
A cancellation made unintentionally or under a
G. Effect of failure to give notice mistake or without the authority of the holder, is
inoperative.
Failure to give notice to parties secondarily liable But where an instrument or any signature thereon
discharges such parties. appears to have been cancelled, the burden of proof
lies on the party who alleges that the cancellation
An omission to give notice of dishonor by non- was made unintentionally or under a mistake or
acceptance does not prejudice the rights of a holder without authority.
in due course subsequent to the omission. (Sec. 117)
 MERCANTILE LAW REVIEWER

3) By other acts that discharge a simple contract C. Right of party who discharged
for payment of money
Any other act which discharges a simple contract for instrument
payment of money (Art. 1231 of the Civil Code), ex. 35
issuance of a renewal note—novation The party secondarily liable who pays the
instrument:
4) By reacquisition of principal debtor in his own (1) is remitted to his former rights as regard all
right prior parties;
Principal debtor becomes holder of instrument at or (2) may strike out his own and all subsequent
after maturity in his own right indorsements; and
(3) may again negotiate the instrument, except:
5) By material alteration (a) Where it is payable to the order of a third
Material alteration w/o assent of all parties liable person and has been paid by the drawer;
avoids instrument except as against party to and
alteration and subsequent indorsers (Sec. 124) (b) Where it was made or accepted for
accommodation and has been paid by the
B. Discharge of parties secondarily party accommodated.
liable D. Renunciation by holder (Sec.
Grounds under Sec. 120 122)
Sec. 120. When persons secondarily liable on the
instrument are discharged. The holder may expressly renounce his rights against
A person secondarily liable on the instrument is any party to the instrument before, at, or after its
discharged: maturity. An absolute and unconditional
(a) By any act which discharges the instrument; renunciation of his rights against the principal
(b) By the intentional cancellation of his signature debtor made at or after the maturity of the
by the holder; instrument discharges the instrument.
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior Renunciation must be in writing unless the
party; instrument is delivered up to the person primarily
(e) By a release of the principal debtor unless the liable thereon
holder's right of recourse against the party
secondarily liable is expressly reserved; Renunciation does not affect the rights of an HDC
(f) By any agreement binding upon the holder to without notice.
extend the time of payment or to postpone the
holder's right to enforce the instrument unless
made with the assent of the party secondarily XIII. Material alteration
liable or unless the right of recourse against
such party is expressly reserved.
A. Concept
Other grounds
a. Failure to make due presentment (Secs. 70, 144) Any change in the instrument which affects or
b. Failure to give notice of dishonor changes the liability of the parties in any way.
c. Certification of check at instance of holder
d. Reacquisition by prior party B. Effect of material alteration
e. Where instrument negotiated back to a prior
party, such party may reissue and further
1) Alteration by a party – Avoids the instrument
negotiate, but not entitled to enforce payment
except as against the party who made, authorized,
vs. any intervening party to whom he was
or assented to the alteration and subsequent
personally liable
indorsers.
f. Where instrument is paid by party secondarily
liable, it‘s not discharged, but
However, if an altered instrument is negotiated to a
 the party so paying it is remitted to his
HDC, he may enforce payment thereof according to
former rights as regard to all prior parties
its original tenor regardless of whether the
 and he may strike out his own and all alteration was innocent or fraudulent.
subsequent indorsements, and again
negotiate instrument, except: where it‘s
2) Alteration by a stranger (spoliation)  the effect
payable to order of 3rd party and has been
is the same as where the alteration was made by a
paid by drawer or where it‘s made/accepted
party wherein a HDC can recover on the original
for accommodation and has been paid by
tenor of the instrument (Sec. 124).
party accommodated
g. by taking a qualified acceptance
 Changes in the following constitute material
alterations (Sec. 125):
1. Date
2. Sum payable, either for principal or interest
 MERCANTILE LAW REVIEWER

3. Time or place of payment D. Rules governing acceptance

4. Number or relations of the parties
36 5. Medium or currency in which payment is to
be made FEBTC vs. Gold Palace Jewellery Co, (Nachura,
6. That which adds a place of payment where 2008):
no place of payment is specified Q: What is the implication of payment without
7. Any other change or addition which alters acceptance by a drawee?
the effect of the instrument in any respect.
A: Act No. 2031, or the Negotiable Instruments Law
(NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it
XIV. Acceptance according to the tenor of his acceptance. This
provision applies with equal force in case the drawee
A. Definition pays a bill without having previously accepted it. His
actual payment of the amount in the check implies
not only his assent to the order of the drawer and
The signification by the drawee of his assent to the a recognition of his corresponding obligation to
order of the drawer. pay the aforementioned sum, but also, his clear
compliance with that obligation. Actual payment by
Kinds of Acceptance the drawee is greater than his acceptance, which is
a. General -- assents without qualification to the merely a promise in writing to pay. The payment of
order of the drawer a check includes its acceptance.
b. Qualified - which in express terms varies the
effect of the bill as drawn
 Conditional - makes payment by the acceptor
dependent on the fulfillment of a condition XV. Presentment of Acceptance
therein stated
 Partial - an acceptance to pay part only of Requisites
the amount for which the bill is drawn. (a) By the holder, or by some person authorized to
 Local - an acceptance to pay only at a receive payment on his behalf;
particular place. (b) At a reasonable hour on a business day;
 Qualified as to time - the acceptance of (c) At a proper place as herein defined;
some one or more of the drawees but not of (d) To the person primarily liable on the
all. (Sec. 141) instrument, or if he is absent or inaccessible, to
any person found at the place where the
B. Manner presentment is made.

Express Acceptance When necessary

Must be in writing and signed by the drawee and Sec. 143. When presentment for acceptance must
must not express that the drawee will perform his be made.
promise by any other means than the payment of Presentment for acceptance must be made:
money. (Sec. 132) If request for a written (a) Where the bill is payable after sight, or in any
acceptance is refused, the holder may treat the bill other case, where presentment for acceptance
as dishonored (Sec. 133) is necessary in order to fix the maturity of the
instrument; or
Implied Acceptance (b) Where the bill expressly stipulates that it shall
 If the drawee refuses to return the instrument be presented for acceptance; or
within 24 hours after it was delivered for (c) Where the bill is drawn payable elsewhere than
acceptance. at the residence or place of business of the
 If the drawee destroys the same. drawee.
 If the drawee makes an unconditional promise
in writing before the instrument is drawn, In no other case is presentment for acceptance
with respect to every person who, upon the necessary in order to render any party to the bill
faith thereof, receives the bill for value. liable.

C. Time for acceptance (Sec. 136) When Excused

Sec. 148. Where presentment is excused.
The drawee is allowed twenty-four hours after Presentment for acceptance is excused and a bill
presentment in which to decide whether or not he may be treated as dishonored by non-acceptance in
will accept the bill; either of the following cases:
(a) Where the drawee is dead, or has absconded, or
The acceptance, if given, dates as of the day of is a fictitious person or a person not having
capacity to contract by bill.
presentation.
(b) Where, after the exercise of reasonable
diligence, presentment cannot be made.
 MERCANTILE LAW REVIEWER

(c) Where, although presentment has been nonacceptance or he loses the right of recourse
irregular, acceptance has been refused on some against the drawer and indorsers.
other ground.
Sec. 151. Rights of holder where bill not accepted.
37
A. Time/place/manner of present- When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
ment indorsers accrues to the holder and no presentment
for payment is necessary.
When made
Sec. 146. On what days presentment may be
made.
A bill may be presented for acceptance on any day
XVI. Promissory Notes
on which negotiable instruments may be presented
for payment under the provisions of Sections Promissory Note (Sec. 184)
seventy-two and eighty-five of this Act. When a. An unconditional promise in writing
Saturday is not otherwise a holiday, presentment b. Made by one person to another
for acceptance may be made before twelve o'clock c. Signed by the maker
noon on that day. d. Engaging to pay on demand, or at a fixed or
determinable future time
How made e. A sum certain in money to order or to bearer
Sec. 145. Presentment; how made. f. Where a note is drawn to the maker's own
Presentment for acceptance must be made by or on order, it is not complete until indorsed by
behalf of the holder at a reasonable hour, on a him.
business day and before the bill is overdue, to the
drawee or some person authorized to accept or
refuse acceptance on his behalf; and XVII. Checks
(a) Where a bill is addressed to two or more
drawees who are not partners, presentment
must be made to them all unless one has A. Definition
authority to accept or refuse acceptance for all,
in which case presentment may be made to him Sec. 185. A check is a bill of exchange drawn on a
only; bank payable on demand. Except as herein
(b) Where the drawee is dead, presentment may be otherwise provided, the provisions of this Act
made to his personal representative; applicable to a bill of exchange payable on demand
(c) Where the drawee has been adjudged a apply to a check.
bankrupt or an insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to his
B. Kinds
trustee or assignee.
1) Cashier‘s Check
One drawn by the cashier of a bank, in the name of
B. Effect of failure to make the bank against the bank itself payable to a third
presentment (Sec. 144) person. It is a primary obligation of the issuing bank
and accepted in advance upon issuance (Tan vs. CA
Failure to make presentment discharges the 1994).
drawer and all indorsers (Sec. 144).
 What is reasonable time involves a consideration 2) Manager‘s Check
of the nature of the instrument, usage of trade A check drawn by the manager of a bank in the name
or business with respect to the instrument, and of the bank itself payable to a third person. It is
the facts of each case. similar to the cashier‘s check as to the effect and
use.
C. Dishonor by non-acceptance 3) Memorandum Check
A check given by a borrower to a lender for the
Sec. 149. When dishonored by non-acceptance. amount of a short loan, with the understanding that
A bill is dishonored by non-acceptance: it is not to be presented at the bank, but will be
(a) When it is duly presented for acceptance and redeemed by the maker himself when the loan falls
such an acceptance as is prescribed by this Act due and which understanding is evidenced by writing
is refused or cannot be obtained; or the word ―memorandum‖, ―memo‖ or ―mem‖ on the
(b) When presentment for acceptance is excused check.
and the bill is not accepted.
4) Certified Check
Sec. 150. Duty of holder where bill not accepted. An agreement whereby the bank against whom a
Where a bill is duly presented for acceptance and is check is drawn undertakes to pay it at any future
not accepted within the prescribed time, the person time when presented for payment. (Sec. 187)
presenting it must treat the bill as dishonored by
 MERCANTILE LAW REVIEWER

5) Crossed Check  Assignment of the funds of the drawer in the

 The NIL is silent with respect to crossed checks, hands of the drawee (Sec. 189)
38 although the Code of Commerce makes  If obtained by the holder, discharges the
reference to such instruments. persons secondarily liable thereon (Sec. 188)
 Article 541 of the Code of Commerce states:
―The maker or any legal holder of a check shall Refusal of drawee bank to certify
be entitled to indicate therein that it be paid to The holder has no action against the bank but he has
a certain banker or institution, which he shall do a right of action against the drawer. The drawer in
by writing across the face the name of said turn has right of action against the bank based on
banker or institution, or only the words ‛and the original contact of deposit between them.
company.‖
 Under usual practice, crossing a check is done
by placing two parallel lines diagonally on the
left top portion of the check (State Investment
House vs. IAC, 1989).
 The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case the
drawee should pay only with the intervention of
that bank or company, or crossing may be
general wherein between two parallel diagonal
lines are written the words "and Co." or none at
all as in the case at bar, in which case the
drawee should not encash the same but merely
accept the same for deposit (supra).

Effects
Bataan Cigar vs. CA (1994):
a. That the check may not be encashed; it may
only be deposited with the bank;
b. That the check may be negotiated only once to
a person who has an account with the bank; and
c. That it serves as a warning to a holder that the
check has been issued for a definite purpose.

C. Presentment for payment

A check of itself does not operate as an assignment

of any part of the funds to the credit of the drawer
with the bank. The bank is not liable to the holder,
unless and until it accepts or certifies the check.
(Sec. 189)

1. Time
When to present?
A check must be presented for payment within
reasonable time after its issue.

2. Effect of delay
Effect of delay in presentment
The drawer will be discharged from liability thereon
to the extent of the loss caused by the delay. (Sec.
186)

Certification of Checks
An agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future
time when presented for payment.

Effects
 Equivalent to acceptance (Sec. 187) and is the
operative act that makes banks liable
 MERCANTILE LAW REVIEWER

39

2012 UP LAW
BAR REVIEWER
MERCANTILE
Insurance Code LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads | Anna
EXECUTIVE COMMITTEE Katarina Rodriguez• Mickey
Ramon Carlo Marcaida |Commissioner Chatto
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary LAYOUT TEAM 2012
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Layout Artists | Alyanna
Apacible • Noel Luciano • RM
COMMITTEE HEADS Meneses • Jenin Velasquez •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Mara Villegas • Naomi
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Quimpo • Leslie Octaviano •
Miranda (D) |Special Lectures Yas Refran • Cris Bernardino
Patricia Madarang • Marinella Felizmenio |Secretariat Layout Head| Graciello
Victoria Caranay |Publicity and Promotions Timothy Reyes
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

40
Insurance Code Doing or transacting an insurance business

MERCANTILE LAW GENERAL RULE

Letters of Credit I. Concept of Insurance An insurance business consists in undertaking, for a
Warehouse Receipts II. Elements of Insurance Contract consideration, to indemnify another against loss,
Law III. Characteristics/Nature of Insurance damage or liability arising from an unknown or
Trust Receipts Law Contracts contingent event.
Negotiable
Instruments Law
IV. Classes
SUPPLEMENTARY RULE
Insurance Code V. Insurable Interest
 Although the business is not formally designated
Transportation Law VI. Perfection of the Contract of as one of insurance and no profit is derived or
Corporation Law Insurance no separate or direct consideration is received,
Securities Regulation VII. Rescission of Insurance Contracts  It is deemed to be doing an insurance business,
Code VIII.Claims Settlement and Subrogation  If it undertakes any of the following
Banking and Finance circumstances:
Intellectual Property 1. Making or proposing to make, as insurer,
any insurance contract
I. Concept of Insurance 2. Making or proposing to make, as surety, any
contract of suretyship as a vocation not as a
mere incident to any other legitimate
Contract of insurance business of a surety
3. Doing any insurance business, including a
Insurance reinsurance business
An agreement whereby one undertakes for a 4. Doing or proposing to do any business in
consideration to indemnify another against loss, substance equivalent to any of the above
damage or liability arising from an unknown or [Sec. 2, par. 2].
contingent event [Sec. 2, par.1]
Sec. 2, Par. 2 The fact that no profit is derived
Definition:
from the making of insurance contracts, agreements
 A contract of indemnity
or transactions or that no separate or direct
 Wherein one undertakes for a consideration
consideration is received therefor shall not be
 To indemnify another against loss, damage, or
deemed conclusive to show that the making thereof
liability
does not constitute the doing or transacting of an
 Arising from an unknown or contingent event.
insurance business.
- Contingent: an event that is not certain to
take place
- Unknown: an event which is certain to
happen, but, the time of its happening is not II. Elements of an Insurance
known
- Past event may be a designated event only in Contract
cases where it has happened already but the
parties do not know about it, e.g. prior loss of (PARIS)
a ship at sea 1) Payment of Premium
 The consideration of the insurance contract
Regulation by the state through a license or  The premium is a ratable consideration
certification of authority is necessary since a  Paid by the insured to a general insurance fund
contract of insurance involves public interest.  For the insurer‘s assumption of risk
[White Gold Marine Services vs. Pioneer (2005)]
2) Assumption of Risk: Designated Peril as Cause
Sec. 4b of the Pre-Need Code “Pre-need plans” are  The insurer promises to pay or indemnify such
contracts, agreements, deeds or plans for the loss
benefit of the planholders which provide for the  In a fixed or ascertainable amount
performance of future service/s, payment of  in order to recover from the insurance contract,
monetary considerations or delivery of other the cause of the damage or loss must be caused
benefits at the time of actual need or agreed by the perils expressly indicated in the contract
maturity date, as specified therein, in exchange for
cash or installment amounts with or without 3) Risk of Loss or Damage
interest or insurance coverage and includes life,  The happening of designated events,
pension, education, interment and other plans,  Either unknown or contingent,
instruments, contracts or deeds as may in the future  Past or future,
be determined by the Commission.  Will subject such interest to some kind of loss,
 Whether in the form of injury, damage, or
 Pre-need plans: not considered as insurance liability
contracts because even pre-need plans can be
insured, thereby implying that the two are not 4) Insurable Interest
the same.  The interest of the insured in a thing or a life
 Not governed by the Insurance Code
 MERCANTILE LAW REVIEWER

 Such interest is susceptible of pecuniary

estimation (for non-life insurance only, does not  The obligation of the insurer to pay depends on
apply to life insurance because life does not the happening of an event which is uncertain, or
have monetary value) though certain, is to occur at an indeterminate 41
 Thing insured in non-life insurance must be time [Art. 2010, Civil Code].
capable of pecuniary estimation because non-  However, it cannot be considered as gambling,
life insurance is essentially for indemnification. wagering, or a contract of chance because the
 Cannot be waived [Sec. 25] risk is created by the contract itself.
 The insurance contract is in a sense
5) Risk-Distributing Scheme commutative since the premium paid by the
 This assumption of risk is part of a general insured is deemed the equivalent of the
scheme to distribute the loss protection given by the insurer [SUNDIANG AND
 Among a large number of persons AQUINO, Reviewer on Commercial Law].
 Exposed to similar risks.  When the designated peril does not happen, the
 Losses are borne not by the insurer but insured nevertheless gets the protection against
proportionally by all those who paid premiums. such risk for the period covered by the
insurance contract.

III. Characteristics/Nature of 6) Contract of Indemnity (only for non-life

insurance)
Insurance Contracts  The insured who has insurable interest over the
property is only entitled to recover the amount
1) Consensual of actual loss sustained
 It is perfected by the meeting of the minds of  The burden is upon him to establish the amount
the parties. of such loss.
 There must be concurrence of offer and  Generally applies only to property insurance
acceptance. except when the creditor insures the life of his
 Unless otherwise stipulated, the policy is not debtor for the amount of the debt.
essential to the existence of the contract. It  Life insurance is not a contract of indemnity; it
merely evidences the terms and conditions is a mere form of investment.
thereof. (CAMPOS)  Insurance contracts are not wagering contracts
[Sec. 4].
2) Voluntary
 General Rule 7) A Risk Distributing Device
It is not compulsory. Also, the parties are free  By paying a pre-determined amount into a
to stipulate terms provided they are not general fund out of which payment will be made
contrary to law, morals, good customs, public for an economic loss of a defined type,
order, or public policy.  Each member contributes to a small degree
 Exception toward compensation for losses suffered by any
For motor vehicles [Sec. 373-389]; employees member of the group.
[Art. 168-184, Labor Code]; or as a condition to
granting a license [DE LEON]. 8) Uberrimae Fides Contract (Principle of Utmost
Good Faith)
3) Contract of Adhesion (Fine Print Rule)  Each party is required to disclose conditions
 The contract is presented to the insured already affecting the risk of which he is aware, or any
in its printed form by which he either ―takes it material fact which the applicant knows and
or leaves it.‖ those which he ought to know.
 Contracts of adhesion are valid.  Violation of this duty gives the aggrieved party
 Ambiguity in the insurance contract shall be the right to rescind the contract. Where the
interpreted liberally in favor of the insured and aggrieved party is the insured, the bad faith of
strictly against the insurer. the insurer will preclude it from denying liability
on the policy based on breach of warranty.
4) Executory [CAMPOS]
 Once the insured pays the premium, the
contract already takes effect. 9) Personal Contract
 Synallagmatic and reciprocal such that even if  Each party takes into consideration the
the contingent event does not occur, the insurer character, conduct and/or credit of the other
has still provided protection against the risk. and in making of the contract, each is enjoined
by law to deal with the other in utmost good
5) Aleatory faith. [CAMPOS]
 So, the insured cannot assign, before the
Art. 2010, Civil Code By an aleatory contract one
happening of the loss, his rights under a
of the parties or both reciprocally bind themselves
property policy to others without the consent of
to give or to do something in consideration of what
the insurer [Sec. 20, 58, 83].
the other shall give or do upon the happening of an
event which is uncertain, or which is to occur at an
indeterminate time.
 MERCANTILE LAW REVIEWER

IV. Classes Sec. 139 A person insured by a contract of marine

insurance may abandon the thing insured, or any
42 1. Marine [Secs. 99–166]
particular portion thereof separately valued by the
policy, or otherwise separately insured, and
 Insurance against the peril of property in, or recover for a total loss thereof, when the cause of
incidental to, transit the loss is a peril insured against:
 Covers not only property exposed to risks of (a) If more than three-fourths thereof in value is
navigation but also those which are exposed to actually lost, or would have to be expended to
risks not connected with navigation [CAMPOS]. recover it from the peril;
 Bottomry loan: a loan is obtained for the value (b) If it is injured to such an extent as to reduce its
of the vessel on a voyage and the lender is value more than three-fourths;
repaid only if the vessel subject of the loan (c) If the thing insured is a ship, and the
arrives safely at its destination. contemplated voyage cannot be lawfully
 Respondentia loan: a loan is obtained as performed without incurring either an expense
security for the value of the cargo to be to the insured of more than three-fourths the
transported and the lender is repaid only if the value of the thing abandoned or a risk which a
cargo arrives safely at its destination. prudent man would not take under the
 Also known as transportation insurance circumstances; or
(d) If the thing insured, being cargo or freightage,
Has two major divisions: and the voyage cannot be performed, nor
another ship procured by the master, within a
a. Ocean Marine Insurance reasonable time and with reasonable diligence,
 Insurance against risk connected with to forward the cargo, without incurring the like
navigation, to which a ship, cargo, expense or risk mentioned in the preceding sub-
freightage, profits or other insurable paragraph. But freightage cannot in any case be
interest in movable property, may be abandoned unless the ship is also abandoned.
exposed during a certain voyage or a
fixed period of time
 Insurer becomes the owner of the thing
abandoned.
b. Inland Marine Insurance
 Abandonment must be total and absolute and
 Covers the land or over the land
made within a reasonable time so as to give the
transportation perils of property shipped
insurer the chance to promptly save, if possible,
by railroads, motor trucks, airplanes, and
some part of the property abandoned by the
other means of transportation
insured.
 Also covers risks of lake, river or other
 If abandonment is not accepted, then the
inland waterway transportation and other
insured can claim the proceeds or bring the
waterborne perils outside those covered
matter before the court.
by ocean marine insurance
Characteristics of a valid abandonment:
Risks that may be insured against:
 Explicit notice of abandonment
 ―Perils of the sea‖- includes casualties arising
 Neither partial nor conditional
from the violent action of the elements and
 Irrevocable
does not cover ordinary wear and tear or other
 Given reasonable time to abandon
damage usually incident to the voyage.
 Insurance policy may cover acts of barratry.
2. Fire [Secs. 167–173]
 Barratry- the willful and intentional act on the
 Insurance against loss by fire, lightning,
part of the master of the crew, in pursuance of
windstorm, tornado or earthquake and other
some unlawful or fraudulent purpose, without
allied risks, when such risks are covered by
the consent of the owner, and to the prejudice
extension to fire insurance policies or under
of his interest (ex: burning the ship, unlawfully
separate policies [Sec. 167].
selling the cargo) [CAMPOS].
 Fire must be the proximate cause of the damage
or loss [CAMPOS].
Liability of Marine Insurer:
 Fire must be visible heat or light. Combustion
 Loss- total or partial
which produces heat but not visible glow is not
Total loss- actual or constructive
fire [CAMPOS].
 Fire must be hostile. [CAMPOS].
 Actual total loss- irretrievable loss of the thing
or any damage which renders the thing valueless
Risks in fire insurance
to the owner for the purpose for which he held
it
Hostile vs. friendly fire
 Constructive total loss- gives the insured the HOSTILE FIRE FRIENDLY FIRE
right to abandon the thing insured by One that escapes from One that burns in a place
relinquishing to the insurer his interest in such the place where it was where it is intended to
thing, entitling the former to recover for a total intended to burn and burn and ought to be
loss thereof. In turn, the insurer acquires all the ought to be
rights over the thing insured. [CAMPOS] Ex: fire burning in a
OR stove or lamp
 MERCANTILE LAW REVIEWER

HOSTILE FIRE FRIENDLY FIRE Liability vs. Indemnity

One which remains Liability insurance

completely within its  Insurer assumes the obligation to pay the third 43
proper place but party in whose favor the liability of the insured
because of the arises.
unsuitable materials  Liability of the insurer attaches as soon as the
used to light it, it liability of the insured to the third party is
becomes inherently established.
dangerous and  Insurer is liable regardless of whether or not the
uncontrollable insured has paid the third party [CAMPOS].
Insurer is liable Insurer is not liable
Indemnity insurance
Measure of indemnity  NO action will lie against the insurer unless
a. Open policy - only the expense necessary to brought by the insured for loss ACTUALLY
replace the thing lost or injured in the condition sustained and paid by him.
it was at the time of the injury  Liability of the insurer attaches only AFTER the
b. Valued policy - the parties are bound by the insured has paid his liability to the third party
valuation, in the absence of fraud or mistake, [CAMPOS].
just like in marine insurance
No Action Clause
However, where the face value of the policy is less A requirement in a policy of liability insurance which
than the agreed valuation, then even in case of total provides that suit and final judgment be first
loss, the insured can only recover up to the policy‘s obtained against the insured; that only thereafter
face value, which is always the maximum limit of can the person injured recover on the policy.
the insurer‘s liability. [Guingon vs. Del Monte 1967]

3. Casualty [Sec. 174] But, the no-action clause CANNOT prevail over the
Rules of Court provisions which are aimed at
 Insurance covering loss or liability arising from avoiding multiplicity of suits. Parties (the insured
accident or mishap, and the insurer) may be joined as defendants in a
 Not falling exclusively within the scope of other case commenced by the third party claiming under a
types of insurance. liability insurance, as the right to relief in respect to
 Includes, but not limited to, employer‘s liability the same transactions is alleged to exist [see Sec. 5,
insurance, workmen‘s compensation insurance, Rule 2, ROC; Sec. 6, Rule 3, ROC].
public liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and 4. Suretyship [Secs. 175–178]
theft insurance, personal accident and health  An agreement whereby a surety guarantees the
insurance as written by non-life insurance performance by the obligor of an obligation or
companies, and other substantially similar kinds undertaking in favor of the obligee.
of insurance (ex: robbery and theft insurance)  It shall be deemed as insurance if the surety‘s
 Governed by the general provisions applicable to main business is that of surety ship, and not
all types of insurance + stipulations in the where the contract is merely incidental to any
insurance contract other legitimate business or activity of the
surety. [Secs. 175 par. 2 and 3].
Risks in casualty or accident insurance  A contract of surety becomes an insurance
contract only when authorized to function as an
Intentional vs. accidental insurance business.
Intentional – Implies the exercise of the reasoning  Thus, corporations organized for the purpose of
faculties, consciousness and volition. guaranteeing performance of contractual
 Where a provision of the policy excludes obligations or the payment of debts of others
intentional injury, it is the intention of the are deemed insurance corporations [Sec. 185]
person inflicting the injury that is controlling. and are thus subject to all the requirements of
 If the injuries suffered by the insured clearly the Insurance Code [CAMPOS].
resulted from the intentional act of the third  What is unique to a contract of suretyship is
person, the insurer is relieved from liability as that when the obligee accepts the bond, the
stipulated [Biagtan v. the Insular Life Assurance bond becomes valid and enforceable whether or
Co. Ltd. (1972)]. not the premium has been paid by the obligor
[Sec. 177], unlike in an insurance contract
Accidental – That which happens by chance or where payment of premium is necessary for the
fortuitously, without intention or design, which is contract to be valid [Sec. 77].
unexpected, unusual and unforeseen.  If the obligee has not yet accepted, then
payment of premium is still necessary for the
contract of suretyship to be valid [Sec. 177].
 MERCANTILE LAW REVIEWER

Bond Necessary to Secure Performance of - Limited payment plan: insured agrees to

Obligation pay premiums only for a specified number
44 If the obligor does not perform the obligation, the of years. If he survives such period, he
bond is forefeited in favor of the obligee and there stops paying any further premium, and
will be no more need to go to court. (obligee can go when he dies, the insurer pays the
directly and secure performance of the obligation). proceeds.
[NPC v. CA (1986)] - Term plan: insurer‘s liability arises only
upon the death of the insured within the
5. Life agreed term or period. If the insured
survives, the contract terminates and the
Individual Life [Secs. 179-183, 227] insurer is not liable.
 Insurance on human lives and insurance - Pure endowment policy: insurer pays the
appertaining thereto or connected therewith insured if the insured survives a specified
[Sec. 179] period. If the insured dies within the
 May be made payable on the death of the period, the insurer is released from
person, or on his surviving a specified period, or liability and unless the contract otherwise
otherwise contingently on the continuation or provides, need not reimburse any part of
cessation of life the premiums paid.
- Endowment policy: If the insured
Group Life [Secs. 50, 228] outlives the designated period, he is paid
 A blanket policy covering a number of the face value of the policy. If the he dies
individuals who are usually a cohesive group (ex: within said period, the insurer pays the
employees of a company) proceeds to the beneficiary. (combination
 No medical examination is required of each of term policy and pure endowment
person insured (in contrast to individual life policy)
insurance) but a specified number of persons is  Death of the insured must be proven by the
usually required before the policy is issued beneficiary before the insurer can be made
 Based on the theory that by the law of averages, to pay.
only a determinable percentage of the members
of the group would die within the contemplated b. Suicide (Asked in 95)
period Insurer is liable in the following cases:
 The policy need not be in printed form and may  If committed after two years from the date
be typewritten, but the law prescribes the of the policy‘s issue or its last
contents of such policy. reinstatement;
 If committed in a state of insanity
Industrial Life [Secs. 229-231] regardless of the date of the commission
 It is tailored to suit the needs of the urban unless suicide is an excepted peril. [Sec.
industrial class of blue-collar workers [J.F. 180-A]
DOBBYNS].  If committed after a shorter period
 Purpose: to cover the expenses for the last provided in the policy.
sickness of the insured and those for his burial  Since suicide is contrary to the laws of
 Face amount is relatively small. nature and the ordinary rules of conduct, it
 Shall not lapse for non-payment if due to the is never presumed. The burden of proving
failure of the company to send its lies with the insurer who seeks to avoid
representative/agent to the insured to collect liability under a life policy excepting it from
such premium. coverage [CAMPOS].
 A form of life insurance under which
a. The premiums are payable either monthly Note: Any stipulation extending the 2-year
or oftener; period is null and void.
b. The face amount of insurance provided in
any policy is not more than 500 times that c. At the hands of the law (e.g. by legal
of the current statutory minimum daily execution)
wage in the City of Manila; and  It is one of the risks assumed by the insurer
c. The words "industrial policy" are printed under a life insurance policy in the absence
upon the policy [Sec. 229]. of a valid policy exception [VANCE].

Risks in life insurance d. Killing by the beneficiary

a. Death or Survival GENERAL RULE

 It may be made payable on the death of the  The interest of a beneficiary in a life
person, or on his surviving a specified insurance policy
period, or otherwise contingently on the  Shall be forfeited when the beneficiary is
continuation or cessation of life. [CAMPOS] the principal accomplice or accessory in
 Various Life Insurance Plans willfully bringing about the death of the
- Ordinary or whole life policy: insurer insured,
agrees to pay the face value of the policy  In which event, the nearest relative of the
upon the death of the insured insured shall receive the proceeds of said
insurance if not otherwise disqualified.
 MERCANTILE LAW REVIEWER

[Sec. 12] If there is no surviving relative of

the insured, the proceeds should be
V. Insurable Interest
delivered to the estate of the insured
subject to the payment of his debts Insurable Interest, Defined 45
[CAMPOS].  Interest which the law requires the policy owner
to have in the person or thing insured, the
Note: Conviction of the beneficiary is absence of which renders the contract void.
necessary before his interest in the
insurance policy is forfeited in favor of the Definition
nearest relative of the insured. This is  A person is said to have an insurable interest in
consistent with the cardinal principle of law the subject matter insured where he has a
that forfeitures are not favored, and that relation or connection with, or concern in it that
any construction which would result in the he will derive pecuniary benefit or advantage
forfeiture of the policy benefits will be from its preservation and will suffer pecuniary
avoided if it is possible to construe the loss or damage from its destruction,
policy in a manner which would allow termination, or injury by the happening of the
recovery (see page 8). Moreover, a event insured against [44 C.J.S. 870 as cited in
contrary interpretation would result in the Lalican v. Insular Life (2009)]
forfeiture of the beneficiary‘s interest on  Insurable interest: one of the essential elements
mere imputations of his participation in the of an insurance contract so necessary for its
killing of the insured. validity, may not be waived

EXCEPTIONS Sec. 25 Every stipulation for the payment of loss

 Accidental killing whether the person insured has or has not any
 Self defense interest in the property insured, or that the policy
 Insanity of the beneficiary at the time he shall be received as proof of such interest, and
killed the insured every policy executed by way of gaming or
 Negligence (the Code only refers to a wagering, is void.
―willful‖ act)
Rationale for requiring insurable interest
6. Compulsory Motor Vehicle Liability Insurance  To avoid constituting insurance as a wagering
 A species of compulsory insurance that provides contract, because the insured has an interest in
for protection coverage that will answer for the preservation or protection of the subject of
legal liability for losses and damages for bodily the insured.
injuries or property damage that may be  To avoid a moral hazard, wherein the insured
sustained by another arising from the use and will have nothing to lose but everything to gain
operation of motor vehicle by its owner. with the happening of the event insured against.
 The Land Transportation Office shall NOT allow  Limits the amount that can be recovered in
the registration or renewal of registration of any indemnity insurance.
motor vehicle unless such insurance is obtained
[Sec. 376, as amended by PD 1455]. Transfer of interest
 To the extent that motor vehicle insurance is
compulsory, it must be a LIABILITY policy [Sec. General Rule
373(f)], and the provision making it merely an Sec. 58 The mere transfer of a thing insured does
indemnity insurance contract CANNOT have any not transfer the policy, but suspends it until the
effect [CAMPOS]. same person becomes the owner of both the policy
 Insurer‘s liability is DIRECT and PRIMARY so the and the thing insured.
insurer need not wait for final judgment in the
criminal case to be liable. [Shafer v. Judge,
Sec. 53 The insurance proceeds shall be applied
RTC, (1988)].
exclusively to the proper interest of the person in
 Purpose: To give immediate financial assistance
whose name or for whose benefit it is made unless
to victims of motor vehicle accidents and/or
otherwise specified in the policy.
their dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for the Exceptions
accident sustained [Shafer v. Judge, RTC, 1. Life, health and accident insurance [Sec. 20]
(1988)]. 2. A change in interest in a thing insured, after the
 Claimants/victims may be a ―passenger‖ or a occurrence of an injury, which results in a loss
―3rd party‖. The insured may be the party at [Sec. 21]
fault as against claims of third parties (third 3. A change in interest in one or more of several
party liability) or the victim of the contingent distinct things, separately insured by one policy
event. [Sec. 22]
 It applies to all vehicles whether public or 4. A change in interest, by will or succession, on
private vehicles. the death of the insured [Sec. 23]
5. Transfer of interest by one of several partners,
Note: It is the only compulsory insurance coverage joint owners, or owners in common, who are
under the Insurance Code. jointly insured, to the others [Sec. 24]
 MERCANTILE LAW REVIEWER

6. When a policy is so framed that it will inure to  Cestui que vie is the insured himself
the benefit of whomsoever, during the  Insured can designate anyone to be the
46 continuance of the risk, may become the owner beneficiary of the policy.
of the interest insured [Sec. 57]  Each has unlimited interest in his own life,
7. When there is an express prohibition against whether the insurance is for the benefit of
alienation in the policy, in which case, the himself or another.
insurance contract is avoided [Art. 1306, Civil  The beneficiary designated need NOT have any
Code] interest in the life of the insured (when person
takes out policy on his own life)
No-Fault Clause  But if a person obtains a policy on the life of
Sec. 378 Any claim for death or injury to any another and names himself as the beneficiary,
passenger or third party pursuant to the provisions he must have insurable interest therein (when a
of this chapter shall be paid without the necessity person takes out policy on the life of another)
of proving fault or negligence of any kind: Provided,
That for the purpose of this section: Interest in life of another
(i) The total indemnity in respect of any person
shall not exceed five thousand pesos; General Rule
(ii) The following proofs of loss, when submitted  The insured must have pecuniary interest in the
under oath, shall be sufficient evidence to life of another.
substantiate the claim:  Must be based on moral and legal grounds
a) Police report of accident; and  No insurable interest in the life of an
b) Death certificate and evidence sufficient to illegitimate spouse
establish the proper payee; or  Such interest exists whenever the insured has a
c) Medical report and evidence of medical or responsible expectation of deriving benefit from
hospital disbursement in respect of which the continuation of the life of the other person
refund is claimed; or of suffering detriment through its
(iii) Claim may be made against one motor vehicle termination.
only. In the case of an occupant of a vehicle,
claim shall lie against the insurer of the vehicle Exception
in which the occupant is riding, mounting, or In Sec. 10 par. (a) (spouse and children), mere
dismounting from. In any other case, claim shall relationship is sufficient.
lie against the insurer of the directly offending  Sec. 10(a) does not qualify so children may be
vehicle. In all cases, the right of the party legitimate or illegitimate, minors or of legal
paying the claim to recover against the owner of age, married or not, dependent or not
the vehicle responsible for the accident shall be
maintained. Note:
 CREDITOR may take out insurance on the life of
 No-fault clause: for immediate compensation, his debtor. BUT his insurable interest is only up
only for a minimal amount so injured party can to the amount of the debt.
still recover the remaining balance of the  When the OWNER of the policy insures the life
damage after final judgment of another (the ―cestui que vie‖) and designates
 Person who paid under the no-fault clause can a third party as BENEFICIARY, BOTH the owner
collect from the person at fault in case he was and beneficiary must have an insurable interest
not responsible for the accident. in the life of the cestui que vie.
 ASSIGNEE is not required to have insurable
interest in the life of the insured, for to require
A. In Life/Health such interest in him is to diminish the
investment value of the contract to the owner.
Who has insurable interest over whose life? Note, however, that assignment is different
Sec. 10 Every person has an insurable interest in the from a change in the designated beneficiary.
life and health:  When the beneficiary is the PRINCIPAL,
ACCOMPLICE, or ACCESSORY in willfully bringing
(a) Of himself, of his spouse and of his children; about the death of the insured = Interest of
beneficiary in life insurance policy is FORFEITED
(b) Of any person on whom he depends wholly or in [Sec. 12].
part for education or support, or in whom he has a
pecuniary interest;
Interest in health
(c) Of any person under a legal obligation to him The health care agreement was in the nature of non-
for the payment of money, or respecting property or life insurance, which is primarily a contract of
services, of which death or illness might delay or indemnity. Once the member incurs hospital,
prevent the performance; and medical or any other expense arising from sickness,
injury or other stipulated contingent, the health
(d) Of any person upon whose life any estate or care provider must pay for the same to the extent
interest vested in him depends. agreed upon under the contract. [Philamcare Health
Systems v. CA (2002)]
Interest in one‘s own life
Time of existence of insurable interest
 MERCANTILE LAW REVIEWER

thing, nor upon any valid contract for it, is not

General Rule insurable.
Interest in the life or health of a person must exist
when the insurance takes effect (at inception), but Nature of insurable interest 47
need not exist thereafter or when the loss occurs. 1. EXISTING interest
[Sec. 19]  May arise from legal title
Ex: interest of a mortgagor, lessor, assignee
Exceptions  May also arise from equitable title
1. Creditor‘s insurance taken on the life of the Ex: purchaser of property before delivery,
debtor - Insurable interest disappears once the builder of a building under construction
debt has been paid. At this point, the
creditor/insured can no longer recover on the 2. INCHOATE interest founded on an existing
policy. interest
2. Company‘s insurance taken on the life of an  Must be founded on an existing contract but
employee - insurable interest disappears once not yet clearly defined or identified
the employee leaves the company, in which Ex: stockholder‘s inchoate interest in the
case, the company can no longer recover on the properties of the corporation, such interest
policy. being based on his owned shares

Transfer of policy: Interest can be transferred even 3. EXPECTANCY, coupled with an existing interest
without the notice to the insurer of such transfer or in that out of which the expectancy arises
bequest, unless there is a stipulation to the contrary Ex: farmer‘s interest over his future crops grown
[Sec. 182]. on land owned by him at the time of the
issuance of the policy
Note: there is no right of subrogation in life
insurance, because it is not a contract of indemnity. Insurable interest of specific persons
1. Stockholder/partner in a firm – has inchoate
B. In Property right to dividends in case the firm earns profits
and to share in the assets after payment of
corporate debts upon a firm's liquidation.
Sec. 13. Every interest in property, whether real or
2. General Creditor – does not have insurable
personal, or any relation thereto, or liability in interest in a debtor's property.
respect thereof, of such nature that a contemplated 3. Judgment Creditor - has insurable interest in
peril might directly damnify the insured, is an debtor‘s property because he is given a right to
insurable interest. levy (general lien).
4. Mortgage Creditor - has insurable interest (lien)
Forms of insurable interest which is recognized by the Insurance Code [Sec.
1. INTEREST in the property itself 8].
Ex: Ownership of or a lien on property.
Measure of insurable interest in property
2. RELATION to such property Sec. 15 A carrier or depository of any kind has an
Ex: Interest of a commission agent on goods he insurable interest in a thing held by him as such, to
is selling. the extent of his liability but not to exceed the
value thereof.
3. LIABILITY in respect thereof
Ex: Interest of carrier on cargo which he has to
carry safely to its destination, such interest Sec. 17 The measure of an insurable interest in
being limited to the extent of his liability. property is the extent to which the insured might be
damnified by loss or injury thereof.
 No contract or policy of insurance on property
shall be enforceable except for the benefit of Indemnity principle: insured may not recover a
some person having an insurable interest in the greater value than his actual loss
property insured. [Sec. 18]
Time of existence
Sec. 14 An insurable interest in property may Sec. 19 An interest in property insured must exist
consist in: when the insurance takes effect, and when the loss
(a) An existing interest; occurs, but need not exist in the meantime; and
(b) An inchoate interest founded on an existing interest in the life or health of a person insured
interest; or must exist when the insurance takes effect, but
(c) An expectancy, coupled with an existing need not exist thereafter or when the loss occurs.
interest in that out of which the expectancy
arises. GENERAL RULE
Interest must exist BOTH at inception and at time of
Sec. 16 A mere contingent or expectant interest in loss, but not in the meantime.
anything, not founded on an actual right to the
EXCEPTIONS (automatic transfer of interest)
 MERCANTILE LAW REVIEWER

1. A change in interest over the thing insured C. Double Insurance and Over
AFTER the loss contemplated. The insured may
sell the remains without prejudice to his right to Insurance
48
recover (Sec. 21).
2. A change of interest in one or more several Double insurance (Asked in 93, 99, 05)
distinct things, separately insured by one policy.  It exists where the same person is insured by
This does not avoid the insurance as to the several insurers separately in respect to the
others (Sec. 22). same subject and interest [Sec. 93]
3. A change in interest by will or succession upon  Requisites—
the death of the insured (Sec. 23). 1) same person insured
4. A transfer of interest by one of several partners, 2) two or more insurers separately insuring
joint owners, or owners in common who are 3) same subject matter
jointly insured. The acquiring co-owner has the 4) same interest insured
same interest; his interest merely increases 5) same risk or peril insured against
upon acquiring other co-owners interest (Sec.  The insured CANNOT recover above the value of
24). property, for otherwise, the insurance would
constitute wagering.
Distinctions between Insurable Interest in Property  It is not prohibited by law but it may be
and Insurable Interest in Life prohibited by an ―other insurance clause.‖
Insurable
Insurable Interest in Note: Double insurance is not applicable to life
Interest in
Life insurance because the latter is incapable of
Property
Unlimited (save in pecuniary estimation.
Limited to
life insurance
actual value of Overinsurance (Asked in 08)
Extent effected by a
the interest  This happens when the amount of the insurance
creditor on the life
thereon policy or policies exceed the value of the
of the debtor)
Must exist when insurable interest.
the insurance  Overinsurance is allowed, only that the
Time Insurance Code regulates it.
takes effect
when Must exist at the
and when the
Insurable time the insurance Sec. 94 Where the insured is overinsured by double
loss occurs,
Interest takes effect insurance:
BUT need not
Must Exist (a) The insured, unless the policy otherwise
exist in the
meantime provides, may claim payment from the insurers
Expectati in such order as he may select, up to the
on of amount for which the insurers are severally
Must have legal Need NOT have legal liable under their respective contracts;
Benefit to
basis basis (b) Where the policy under which the insured
Be
Derived claims is a valued policy, the insured must give
Need not have credit as against the valuation for any sum
insurable interest received by him under any other policy without
over the life of the regard to the actual value of the subject matter
insured if the insured insured;
Must have himself secured the (c) Where the policy under which the insured
Beneficiar insurable policy. But if the claims is an unvalued policy he must give
y‘s interest over insurance was credit, as against the full insurable value, for
Interest the thing obtained by the any sum received by him under any policy;
insured beneficiary, the (d) Where the insured receives any sum in excess of
latter must have the valuation in the case of valued policies, or
insurable interest of the insurable vale in the case of unvalued
over the life of the policies, he must hold such sum in trust for the
insured. (SUNDIANG) insurers, according to their right of
contribution among themselves;
Note: When there is an express prohibition against (e) Each insurer is bound, as between himself and
alienation in the policy, in case of alienation, the the other insurers, to contribute ratably to the
contract of insurance is not merely suspended but loss in proportion to the amount for which he is
avoided. liable under the contract.

Transfer of policy  In case of loss, the insurer is bound to pay only

Interest cannot be transferred without the insurer‘s up to the extent of the real value of the
consent, because the insurer has approved the policy property lost. BUT the insured may recover the
based on the personal qualifications and insurable amount of the premium corresponding to the
interest of the insured. excess in value of the property.
 The insured may claim payment from the
insurers in such order as he may select, up to
 MERCANTILE LAW REVIEWER

the amount for which the insurers are severally

liable under their respective contracts. Open mortgage or loss payable mortgage clause
A mortgage that can be paid-off prior to maturity
Double Insurance vs. Over-insurance without penalty; mortgagee is the beneficiary for 49
Double insurance Over-insurance insurance taken by mortgagor (insurance taken by
There may be no over- The amount of the mortgagor but payable or assigned to the
insurance as when the insurance is beyond the mortgagee).
sum total of the amount value of the insured‘s
of the policies issued insurable interest.  The insurance is on the interest of the
does not exceed the mortgagor; so, he does not cease to be a party
insurable interest of the to the contract.
insured.
There are always several There may be only one  His acts, prior to the loss, which would
insurers. insurer involved. otherwise avoid the insurance, affects the
mortgagee, even if the property is in the hands
Reinsurance of the latter. [Secs. 8 and 9]
Sec. 97 A reinsurance is presumed to be a contract
of indemnity against liability, and not merely  In case of loss, the mortgagee is entitled to
against damage. recover up to the extent of his credit, and
should the amount he recovers be equal to the
amount of his credit, then the debt is
Sec. 98 The original insured has no interest in a extinguished.
contract of reinsurance.
Union mortgage or standard mortgage clause
 The original insurance contract is separate and  Mortgagee may perform the acts of mortgagor.
distinct from the reinsurance contract.  Subsequent acts of the mortgagor or owner do
Insurance contract is independent from NOT prejudice the mortgagee's interest.
reinsurance contract. - When a mortgagee insured his own interest
 Reinsurance is a contract of indemnity and a loss occurs, he is entitled to recover
 No relationship between reinsurer and the on the insurance. However, he may no
insured under the insurance contract longer claim against the mortgagor, for his
claim is discharged up to the amount the
Insurance vs. Reinsurance insurer has paid him [Palileo vs. Cosio
 Insurance- indemnity against damages (1955)].
 Reinsurance- indemnity against liability - If insurance taken by mortgagor for his own
benefit: he can only recover from the
Reinsurance treaty vs. Reinsurance policy insurer but the mortgagee has a lien on the
 A reinsurance treaty is an agreement between proceeds by virtue of the mortgage
two insurance companies whereby one agrees to
cede and the other to accept reinsurance Insurance taken by mortgagee
business pursuant to provisions specified in the When mortgagee insures his own interest in the
treaty [DE LEON]. mortgaged property without reference to the right
 A reinsurance policy is a contract of indemnity of the mortgagor
one insurer makes with another to protect the  Mortgagee is entitled to the proceeds of the
first insurer from a risk it has already assumed. policy in case of loss to the extent of his credit
 Reinsurance treaties and reinsurance policies  If the proceeds are more than the total amount
are not synonymous. Treaties are contracts for of credit  mortgagor has no right to the
insurance; policies are contracts of insurance balance
[Philamlife vs. Auditor General (1958)].
If proceeds are equal to the credit  insurer is
Double Insurance vs. Reinsurance (Asked in 94) subrogated to the mortgagee‘s rights + mortgagee
Double Insurance Reinsurance can no longer recover the mortgagor‘s indebtedness
Same interest Different interest
Insurer becomes the If proceeds are less than the credit  mortgagee
Insurer remains as the
insured in relation to the may recover from the mortgagor the deficiency
insurer.
reinsurer.  Upon payment, the insurer is subrogated to the
Insured is a party in The original insured is rights of the mortgagee against the mortgagor
interest in the insurance not a party in the to the extent of the amount paid.
contracts. reinsurance contract.
Property is the subject
matter
The original insurer's risk
is the subject matter.
VI.Perfection of the Contract of
Insured has to give his Insured‘s consent is not Insurance
consent. necessary.
a. Offer and Acceptance/Consensuality
D. Multiple or Several Interests on The insurance contract is consensual and is therefore
Same Property [Secs. 8, 9] perfected the moment there is a meeting of the
 MERCANTILE LAW REVIEWER

minds with respect to the object and the cause or (2) Delivery of Policy
consideration.  Delivery- the act of putting the insurance policy
50 (the actual document) into the possession of the
Insurance contracts follow the ―cognition theory.‖ insured

Enriquez vs. Sun Life Assurance Co. of Canada  Delivery of policy is important because it is: a)
(1920) an evidence of the execution of the insurance
The insurance contract cannot be perfected without contract; and b) a communication of the
the notice of acceptance coming to the knowledge insurer‘s acceptance of insured‘s offer.
of the applicant. Under the CC, consent is shown by However, delivery of policy is not essential for
the concurrence of offer and acceptance. the validity of the contract.

An acceptance made by letter shall not bind the Modes of delivery

person making the offer except from the time it 1. Actual – delivery to the insured
came to his knowledge, known as the ―cognition 2. Constructive – delivery by mail; delivery to the
theory‖. insured‘s agent or some person for the benefit
of the insured.
Great Pacific Life Assurance Corp. vs. CA (1999)
Delivery to the insured in person is not necessary.
Note that in insurance contracts, the insured is the
Delivery may be made by mail or to a constituted
one making the offer by submitting an application to
agent. [Lucero Vda. De Sindayen v. Insular Life
the insurer and the latter accepts the offer by
(1935)]
approving the application.

Thus, mere submission of the application without b. Premium Payment

the corresponding approval of the policy does not
result in the perfection of the contract of insurance. Premium, Defined
The agreed price for assuming and carrying the risk,
that is, the consideration paid an insurer for
(1) Delay in acceptance undertaking to indemnify the insured against the
If there is delay in the acceptance by the insurer, specified peril.
after the insured has submitted an application and
has paid the premium, there are three theories that
Sec. 77 An insurer is entitled to payment of the
can be applied:
1. Insurer is liable for tort, under the tort theory. premium as soon as the thing insured is exposed to
―Tort theory‖  no pre-existing contractual the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of
relation
insurance issued by an insurance company is valid
and binding unless and until the premium thereof
2. Here, there is delay in acceptance of the
has been paid, except in the case of a life or an
obligation  insurance business is imbued with
industrial life policy whenever the grace period
public interest.
provision applies.
3. The measure of damage is the face value of the
policy. In life insurance, the proceeds will inure Validity of Contract upon Payment
to the insured‘s estate and not to the
beneficiary. General Rule
NO insurance policy issued or renewal is valid and
4. Insurer is liable under the policy because its binding until actual payment of the premium. Any
delay in formally accepting/denying the agreement to the contrary is void [Sec. 77].
application and payment of premium is taken as
an implied acceptance. Exceptions
1. In case of life and industrial life whenever the
It should be noted that an application is a mere offer grace period provision applies [Sec. 77].
which requires the overt act of the insurer for it to 2. Where there is an acknowledgment in the
ripen into a contract. Delay in acting on the contract or policy of insurance that the
application does not constitute acceptance even premium has already been paid [Sec. 78]
though the insured has forwarded his first premium 3. Where there is an agreement to grant the
with his application. [Perez v. Court of Appeals insured credit extension for the payment of the
(2000)] premium despite full awareness of Sec. 77
[UCPB v. Masagana Telemart (2001)]
Note: 4. Where there is an agreement allowing the
Offer – when the insured submits an application to insured to pay premium in installment and
the insurer partial payment has been made at the time of
Acceptance – when the insurer approves the the loss [Makati Tuscany vs. CA (1992)]
application 5. Where the parties are barred by estoppel [UCPB
Effectivity – upon payment of first premium, v. Masagana (2001)]
provided there has been an approval of the
application. Makati Tuscany v CA (1992)
 MERCANTILE LAW REVIEWER

The policies are valid even if the premiums due are Effect of payment by postdated check
paid in installments because the records clearly  The payment of premium by a postdated check
show that the two parties intended the policies to be at a stated maturity subsequent to the loss is
binding and effective notwithstanding the staggered insufficient to put the insurance into effect. 51
payment of the premiums.  But payment by a check bearing a date prior to
the loss, assuming availability of funds, would
The acceptance of the installment payments over be sufficient even if it remains unencashed at
the period of 3 years speaks loudly of the intention the time of the loss.
of insurer to honor the policies it issued to Makati  The subsequent effects of encashment would
Tuscany. retroact to the date of the instrument and its
acceptance by the creditor [VITUG, Pandect on
Sec. 77 merely prohibits the parties from stipulating Commercial Law].
that the policy is valid even if premiums were not
paid, but it does not expressly prohibit an agreement Premiums in Suretyship Contracts
granting credit extensions. Payment of premiums is also necessary to make
suretyship contracts binding, but the acceptance by
Sec. 78 also allows the insurer to waive the the obligee of the bond makes the suretyship
condition of full payment by acknowledging in the contract binding notwithstanding non-payment of
policy that there has been receipt of premium premium by the insured.
despite the fact that premium is actually unpaid.
Philippine Pryce Assurance Corp. vs. CA (1994)
If the Code allows a waiver when no actual payment Generally, premium is also necessary in order for
has been made, then a waiver should also be allowed the contract of suretyship or bond to be binding.
in this case where the insurer has already
acknowledged receipt of partial payment. However, where the obligee has accepted the bond,
it is binding even if the premium has not been paid,
UCPB Gen. Ins. v Masagana Telemart (2001) subject to the right of the insurer to recover the
Sec. 77 of the Insurance Code cannot be strictly premium from its principal.
applied.
c. Non-Default Options in Life Insurance
Exceptions to Sec. 77 are:
a.) In case of a life or industrial life policy Options of Insured under a lapsed life insurance
whenever the grace period applies. policy [Secs. 227(f), (h), (j))]
b.) Sec. 78: An acknowledgment in a policy or
contract of insurance of the receipt of premium Cash Surrender Value (CSV)
is conclusive evidence of its payment, so far as  Amount that the insured is entitled to receive if he
to make the policy binding, notwithstanding any surrenders the policy and releases his claims upon it
stipulation therein that it shall not be binding  A portion of the reserve on a life insurance policy,
until premium is actually paid. resulting from the accumulation of premium
c.) If the parties have agreed to the payment in overcharges in the early years of the policy
installments of the premium and partial  Right to CSV accrues only after 3 premium payments
payment has been made at the time of the loss.  Insured is given the right to claim the amount less
d.) The insurer may grant credit extension for the than the reserve, reduced by surrender charge.
payment of the premium.
e.) It would be unjust and inequitable if recovery Rationale: Premium is uniform throughout your lifetime,
on the policy would not be permitted against but the risk is varied (higher risk when you‘re older, low
UCPB, which consistently granted the 60-90 day when you‘re young) thus the cost of protection is more
credit term for the payment of the premiums expensive during the early years of the policy
despite its full awareness of Sec. 77.
Alternatives to Obtaining the Cash Surrender Value
Estoppel bars it from taking refuge under the action,
since Masagana relied on good faith on such a 1. Extended Insurance/term insurance
practice.  To have the policy continued in force from date of
default for a time either stated or equal to the
Authority of agent to receive premium amount of the CSV, taken as a single premium
 Where an insurer authorizes an insurance agent  Term insurance: pay a single premium (no further
or broker to deliver a policy to the insured, it is payments) to extend the policy for a fixed period of
deemed to have authorized said agent to time
receive the premium in its behalf.  Failure to extend at the end of the fixed period 
 The insurer is also bound by its agent‘s purchase new policy
acknowledgment of receipt of payment of  Face value remains the same but only within the
premium [American Home Assurance Co. vs. term
Chua [1999)].  Reinstatement allowed if made within the term
purchased, no reinstatement after the lapse of the
term purchased
 MERCANTILE LAW REVIEWER

2. Paid-up Insurance 4. Contract is voidable because of the existence of

 Such amount of insurance as the CSV applied as a facts of which the insured was ignorant without
52 single premium his fault [Sec. 81]
 Effect: policy continues in force from date of 5. Where the insurance is for a definite period and
default for the whole period and under the same the insured surrenders his policy [Sec. 79(b)]
conditions of the original contract without further  Entitled to a portion of the premium that
payment of premiums corresponds to the unexpired time at a pro rata
 Same policy, same terms and conditions, different rate, unless a short period rate has been agreed
price upon and appears on the face of the policy
 Insured is given the right, upon default, the option 6. Ratable return of the premium when there is
to make the policy continued for the whole period over-insurance by several insurers [Sec. 82]
of insurance without further payment of premiums.  Proportioned to the amount by which the
 In case of maturity, the beneficiary will recover only aggregate sum insured in all the policies
the ―paid-up value‖. exceeds the insurable value of the thing at risk
 No reinstatement allowed 7. When rescission is granted due to the insurer‘s
breach of contract
3. Automatic Premium Loan (APL)
 Upon default, insurer lends/advances to the insured Note: Under Nos. 1, 2, 3 and 4, the insured is
without any need of application on his part, amount entitled to a return of the entire premium paid.
necessary to pay overdue premium, but not to
exceed the CSV of the policy
 Must be requested in writing by the insured either in
the application or at any time before expiration of
VII. Rescission of Insurance
the period Contracts
 Effect: insurance policy continues in force for a
period covered by the payment. After the period, if 1. Concealment (Asked in 96, 97, 01)
insured still does not resume paying his premiums,
policy lapses, unless CSV still remains Concealment, Defined
 If there is still CSV, APL continues until CSV is A neglect to communicate that which a party knows
exhausted. and ought to communicate [Sec. 26]
 Beneficial for the insured because it continues the
contract and all its features with full force and Requisites
effect 1. A party knows a fact which he neglects to
communicate or disclose to the other.
d. Reinstatement of a Lapsed Policy of Life 2. Such party concealing is duty bound to disclose
Insurance [Sec. 227] such fact to the other.
3. Such party concealing makes no warranty of the
 Not a non-default option fact concealed.
 Effect: does not create a new contract, merely 4. The other party has not the means of
revives the original policy so insurer cannot ascertaining the fact concealed.
require a higher premium than the amount 5. The fact concealed is material.
stipulated in the contract
 It does not apply to group/industrial life Note: Concealment requires fraudulent intent.
insurance.
Effects of Concealment
Requisites:  It vitiates the contract and entitles the insurer
 Must be exercised within 3 years from date of to rescind, even if the death or loss is due to a
default cause not related to the concealed matter [Sec.
 Insured must present evidence of insurability 27].
satisfactory to the insurer  The contract is VOIDABLE at the insurer‘s
 Pay all back premiums and all indebtedness to option.
the insurer
 CSV must not have been duly paid to insured nor Note: Good faith is NOT a defense in concealment.
the extension period expired Sec. 27 clearly provides that ―the concealment
whether intentional or unintentional entitles the
e. Refund of Premiums injured party to rescind the contract of insurance.‖
Return of Premiums Test of Materiality
1. If the thing insured was never exposed to the
risks insured against [Sec. 79(a)] General Rule
2. When the contract is voidable due to the fraud Determined not by the event, but solely by the
or misrepresentation of insurer or his agent probable and reasonable influence of the facts upon
[Sec. 81] the party to whom the communication is due, in
3. When by any default of the insured other than forming his estimate of the disadvantages of the
actual fraud, the insurer never incurred any proposed contract, or in making his inquiries [Sec.
liability under the policy [Sec. 81] 31]
 MERCANTILE LAW REVIEWER

It need not increase the risk or contribute to any loss well settled that the insured need not die of the
or damage suffered. It is sufficient if the knowledge disease he had failed to disclose to the insurer.
of it would influence the party in making the It is sufficient that his nondisclosure misled the
contract. insurer in forming his estimates of the risks of the 53
proposed policy or in making inquiries.
Exceptions
1. Incontestability clause under Sec. 227(b) (will be Matters which NEED to be disclosed
incontestable after policy has been in force 1. Matters within a party‘s knowledge
during lifetime of insured for two years) 2. Which are material to the contract and
2. marine insurance [Sec. 110] 3. As to which the party with the duty to
communicate makes no warranty, and
Concealment: Marine Insurance vs. Ordinary 4. Which the other party does not have the means
Insurance of ascertaining [Sec. 28].
Concealment in Marine Concealment in
Insurance Ordinary Private Note: If the applicant is aware of the existence of
Insurance some circumstance which he knows would influence
Stricter: state the ―exact Need not be the exact the insurer in acting upon his application, good faith
and whole truth‖ statements requires him to disclose that circumstance, though
concealment of certain Any kind of concealment unasked [VANCE]
matters as provided in will not make the insurer
Sec. 110 will not entirely liable. Great Pacific Life v. CA (1979) The fact of being a
avoid the contract but “mongoloid” is a material fact that needs to be
will merely exonerate disclosed.
the insurer from losses
resulting from the risk Matters which DO NOT need to be disclosed [Secs.
concealed 30, 33-35]
- national character of a. Matters already known to the insurer [Sec.
the insured 30(a)]
- liability of the thing b. Matters each party are bound to know such as
insured to capture public events, general information etc. [Sec.
and detention 30(b)]
- liability to seizure c. Matters of which the insurer waives
from breach of foreign communication – he is in estoppel. [Sec. 30(c)]
laws of trade d. Matters that concern only risks excepted,
- want of necessary either expressly or by warranty, from the
documents liability assumed under the policy which are
- use of false and NOT OTHERWISE MATERIAL. [Sec. 30(e)]
simulated papers e. Information of the nature or amount of the
interest of one insured except if inquired upon
Non-Medical Insurance by the insurer. [Sec. 34]
The waiver of medical examination in a non-medical f. If the interest of the insured to the property
insurance contract renders even more material the being insured is absolute then there is no
information required of the applicant concerning the necessity to disclose the extent of his interest,
previous conditions of health and diseases suffered. if not then he is required to disclose under
[Sunlife v. Sps. Bacani (1995)]. Section 51 [Sec. 34]
g. The right to information of material fact may
Philamcare Health Systems vs. CA (2002) be waived either expressly, by the terms of
Where matters of opinion or judgment are called insurance or impliedly by neglecting to make
for, answers made in good faith and without intent inquiry as to the facts already communicated.
to deceive will not avoid the policy even though they [Sec. 33]
are untrue. h. Matters of opinion. [Sec. 35]
 Reason: The insurer cannot rely on those
statements. He must make further inquiry. Mere possibility of previous hypertension is not
enough to establish concealment [Great Pacific Life
Note: Concealment must take place at the time the v. CA (1999)].
contract is entered into in order that the policy may
be avoided. Information obtained after the Sec.32 Each party to a contract of insurance is
perfection of the contract is no longer necessary to bound to know all the general causes which are open
be disclosed by the insured, even if the policy has to his inquiry, equally with that of the other, and
not been issued. which may affect the political or material perils
contemplated; and all general usages of trade.

Sunlife Assurance vs. CA (1995)

The fact that the matter concealed had no bearing
on the cause of death is NOT important because it is
 MERCANTILE LAW REVIEWER

2. Misrepresentation/Omissions the representation, because in such cases the

intent to deceive is presumed [DE LEON].
54 Representation, Defined
 Factual statements made by the insured at the Note: If a statement of fact, fraudulent intent is
time of, or prior to, the issuance of the policy presumed. Hence, materiality of the misrepresented
[Sec. 37] to give information to the insurer and fact will avoid the contract.
induce him to enter into the insurance contract.
 may be oral or written [Sec. 36]  A representation cannot qualify an express
provision or an express warranty of insurance
Kinds of Representations [Sec. 40]. It is not part of the contract but only
1) Affirmative a collateral inducement to it. But it may qualify
Any allegation as to the existence or non-existence as an IMPLIED WARRANTY.
of a fact when the contract begins  A representation may be altered of withdrawn
before the insurance is effected but not
2) Promissory afterwards [Sec. 41]
Any promise to be fulfilled after the contract has  There is fraud and misrepresentation when
come into existence or any statement concerning another person took the place of the insured in
what is to happen during the existence of the the medical examination [Eguaras v. Great
insurance. A promissory representation is Eastern (1916)].
substantially a condition or warranty.  The insurer is not entitled to rescission for
misrepresentation of age if the birth date on the
Requisites of a False Representation policy leads to the conclusion that the insured is
(Misrepresentation) beyond the age covered and yet insurer
1. The insured stated a fact which is untrue. continued to accept payment and had issued the
2. Such fact was stated with knowledge that it is policy. Insurer deemed estopped [Edillon v.
untrue and with intent to deceive or which he Manila Bankers Life (1982)].
states positively as true without knowing it to
be true and which has a tendency to mislead. Concealment vs. Misrepresentation
3. Such fact in either case is material to the risk. CONCEALMENT MISREPRESENTATION
Passive form Active form
 There is false representation if the matter is Insured withholds Insured makes
true at the time it was made/represented but information of material erroneous statements
false at the time the contract takes effect. facts from the insurer; of facts with the intent
[Sec. 44] he maintains silence of inducing the insurer
when he ought to speak to enter into the
 Remedy of injured party is rescission. But the insurance contract
remedy is not available should the insurer Determined by the same rules as to materiality
accept the premium notwithstanding knowledge Same effects on the part of the insured; insurer
of the ground/s for rescission. [Sec. 45] has right to rescind
Injured party is entitled to rescind a contract of
 A representation must be presumed to refer to insurance on ground of concealment or false
the date on which the contract goes into effect representation, whether intentional or not
[Sec.42] Rules on concealment and representation apply
likewise to the insurer as insurance contract is
 NO false representation if the matter is true at one of utmost good faith
the time the contract takes effect although
false at the time it was made/represented. 3) Breach of Warranties
Effect of Misrepresentation Warranty, Defined
The injured party is entitled to rescind from the  A statement or promise by the insured
time when the representation becomes false. [Sec.  Set forth in the policy or by reference
45] incorporated therein,
 The untruth or non-fulfillment of which in any
Representation of Opinion respect, and without reference to whether
insurer was in fact prejudiced by such untruth or
General Rule non-fulfillment,
A representation of the expectation, belief, opinion,  Renders the policy voidable by the insurer
or judgment of the insured, although false, will NOT [VANCE].
avoid the policy, even if such was material to the  Must always be express
risk (DE LEON).
Purpose
Exception To eliminate potentially increasing hazards which
Such representation will avoid the policy if there is a may either be due to the acts of the insured or to
CONCURRENCE OF MATERIALITY AND FRAUDULENCE the change of the condition of the property.
OR INTENT TO DECEIVE.
 However, if the representation is one of fact,
the insurer need only prove the materiality of
 MERCANTILE LAW REVIEWER

Kinds of warranties violated by the insured, would ipso facto avoid the
1. Express – contained in the policy or clearly contract [Pioneer v. Yap (1974)].
incorporated therein as part thereof; warranty
as a fact [Sec. 71]. Insurer is barred by waiver (or estoppel) to claim 55
2. Implied – deemed included in the contract violation of the so-called hydrants warranty when,
although not expressly mentioned; applicable in despite knowing fully that only 2 fire hydrants
marine insurance only (ex: implied warranty of existed (out of the 11 hydrants required), it still
seaworthiness of the vessel.) issued the insurance policies and received the
3. Affirmative Warranty is one which asserts the premiums [Qua Chee Gan v. Law Union (1955)].
existence of a fact or condition at the time it is
made [Sec. 68]. Warranty vs. Representation
4. Promissory Warranty or Executory Warranty is Warranty Representation
one where the insured stipulates that certain Part of the contract Mere collateral
facts or conditions pertaining to the risk shall inducement
exist or that certain things with reference Written on the policy, May be written in the
thereto shall be done or omitted. It is in the actually or by reference policy or may be oral.
nature of a condition subsequent [Secs.72 & 73]. Presumed material Must be proved to be
material
Effect of breach of warranty Must be strictly complied Requires only substantial
with truth and compliance
General Rule
It gives the insurer the right to rescind [Secs.74&76].  Incontestible clause does not include
warranties, only concealment/misre-
Exceptions [Sec. 73] presentation.
 loss occurs before the time of performance of
the warranty
 the performance becomes unlawful
 performance becomes impossible VIII. Claims Settlement and
Subrogation
Rule on immaterial provisions

General Rule Liability for Loss (Asked in 96, 05, 07)

 Not all breach of the provisions in the policy Loss for which insurer is Loss for which insurer is
may give the right to rescind the policy. liable NOT liable
 Breach of an immaterial provision does not
avoid the policy [Sec. 75]. Loss the proximate Loss by insured‘s willful
cause of which is the act
Exception peril insured against
When the parties stipulate that violation of a [Sec. 84]
particular provision (though normally immaterial) Loss the immediate Loss due to connivance
shall avoid the policy. cause of which is the of the insured [Sec. 87]
 In effect, the parties converted the immaterial peril insured against
provision into a material one [SUNDIANG]. except where the
proximate cause is an
A breach of warranty without fraud merely excepted peril;
exonerates an insurer from the time it occurs [Sec. Loss through negligence Loss where the excepted
76] of insured except where peril is the proximate
there was gross cause.
Fraud is not essential to entitle the insurer to negligence amounting to
rescind a contract for breach of warranty. Falsity, willful acts; and
not fraud, is the basis of liability in warranty. Loss caused by efforts to
rescue the thing from
Warranties in Fire Insurance [Sec. 168] peril insured against;
Entitles the insurer to rescission if: If during the course of
 Use or condition of a thing insured is limited by the rescue, the thing is
the policy exposed to a peril not
 Insured alters the use of condition without the insured against, which
consent of the insurer permanently deprives
 Alteration is by means within the control of the the insured of its
insured possession, in whole or
 Alteration increased the risk (increase of hazard in part [Sec. 85]
or chance of loss).
 Alteration is actual and substantial Requisites for recovery from insurance
1) The insured must have insurable interest in the
A condition in the policy which requires insured to subject matter;
disclose to the insurer of any insurance that, if 2) That interest is covered by the policy;
3) There must be a loss; and
 MERCANTILE LAW REVIEWER

4) The loss must be proximately caused by the insured to policy requiring the insured to
peril insured against OR the immediate cause of recover. do so.
56 the loss is a peril insured against except where
the proximate cause is an excepted peril. Proof of Loss
Proximate Cause Remote Cause The formal evidence given the insurance company by
An event that sets all An event preceding the insured or claimant under a policy of the
other events in motion another in a causal occurrence of the loss, the particulars thereof and
without any intervening chain, but separated the data necessary to enable the company to
or independent case, from it by other events determine its liability and the amount
without which the injury  Is not tantamount to proof or evidence under
or loss would not have the law on evidence.
occurred. [Vda. De  Form: Like a notice of loss, in the absence of
Bataclan v. Medina any stipulation in the policy, proof may be given
(1957)] orally or in writing.
 Proof of loss is intended to:
- Give the insurer information by which he may
a. Notice and Proof of Loss determine the extent of his liability.
- Afford him a means of detecting any fraud
Notice of Loss that may have been practiced upon him.
 The formal notice given the insurer by the - Operate as a check upon extravagant claims.
insured or claimant under a policy of the
occurrence of the loss insured against. b. Guidelines on Claims Settlement
 Purpose: To apprise the insurance company so Sec. 241. No insurance company doing business in
that it may make proper investigation and take the Philippines shall refuse, without just cause, to
such action as may be necessary to protect its pay or settle claims arising under coverages
interest. provided by its policies, nor shall any such company
 Necessary as the insurer cannot be liable to pay engage in unfair claim settlement practices.
a claim unless he receives notice of that claim.
 In fire insurance: Insurer is exonerated if notice (1) Unfair Claims Settlement; Sanctions
of loss is not given to the insurer by the insured
or by the person entitled to the benefit without Sec. 241 (1) provides for instances of unfair claims
unnecessary delay [Sec. 88] settlement done by an insurance company:
 However, it has been held that formal notice of 1. Knowingly misrepresenting to claimants
loss is not necessary if insurer has actual notice pertinent facts or policy provisions relating to
of loss already. coverages at issue;
2. Failing to acknowledge with reasonable
Form of Notice promptness pertinent communications with
 In the absence of any stipulation in the policy, respect to claims arising under its policies;
notice may be given orally or in writing. 3. Failing to adopt and implement reasonable
 The notice of loss may be in the form of an standards for the prompt investigation of claims
informal or provisional claim containing a arising under its policies;
minimum of information as distinguished from a 4. Not attempting in good faith to effectuate
formal claim which contains the full details of prompt, fair and equitable settlement of claims
the loss, computations of the amounts claimed, submitted in which liability has become
and supporting evidence, together with a reasonably clear;
demand or request for payment [DE LEON]. 5. Compelling policyholders to institute suits to
recover amounts due under its policies by
In fire insurance In other types of insurance offering without justifiable reason substantially
Required Not required less than the amounts ultimately recovered in
Failure to give Failure to give notice will not suits brought by them.
notice will defeat exonerate the insurer, unless
the right of the there is a stipulation in the
 MERCANTILE LAW REVIEWER

CLAIMS LIFE INSURANCE NON-LIFE INSURANCE

 Upon death of the person  Upon happening of event insured
insured; against 57
 Upon his surviving a specific  Event must occur within the period
Maturity period specified in policy, otherwise insurer
 Otherwise contingently on the has no liability
continuance or cessation of life
[Sec. 180]
General Rule:  Within 30 days after
Immediately upon maturity of  Proof of loss is received by insurer;
policy. and
 Ascertainment of loss or damage is
Exception: made either by agreement between
If payable in INSTALLMENTS or as an the insured and insurer or by
Delivery of Proceeds ANNUITY, when such installments or arbitration
annuities become due
 If ascertainment not made within 60
IF MATURITY IS UPON DEATH: days after such receipt by insurer of
Within 60 days after presentation of proof of loss, loss or damage shall be
claim and filing of proof of death of paid within 90 days after such
insured. receipt.
Effect of Refusal or Failure to  Entitles beneficiary to collect  Entitles beneficiary to collect interest
pay claim within time interest on the proceeds of on the proceeds of policy for the
prescribed: policy for the duration of the duration of the delay at rate of twice
 In case of litigation, it is the delay at rate of twice ceiling ceiling prescribed by the monetary
duty of the Commissioner or prescribed by the monetary board (unless refusal to pay is based
the Court to determine WON board (unless refusal to pay is on ground that claim is fraudulent)
claim has been unreasonably based on ground that claim is  In case damages awarded, this
denied or withheld. fraudulent) includes attorney‘s fees and other
 Failure to pay any such claim  In case damages awarded, this expenses incurred due to delay (plus
within the time prescribed includes attorney‘s fees and the interest)
shall be considered prima other expenses incurred due to
facie evidence of delay (plus the interest)
unreasonable delay in
payment.

(2) Prescription of Action accrues, so prior to such denial, action cannot be

Sec. 63 A condition, stipulation, or agreement in brought)
any policy of insurance, limiting the time for
commencing an action thereunder to a period of less Art. 1144, Civil Code The following action must be
than one year from the time when the cause of brought within ten years from the time the right of
action accrues, is void. action accrues:
(1) Upon a written contract;
Sec. 384 Any person having any claim upon the (2) Upon an obligation created by law
policy issued pursuant to this Chapter shall, without (3) Upon a judgment. (n)
any unnecessary delay, present to the insurance
company concerned a written notice of claim setting Rules:
form the nature, extent and duration of the injuries 1. In the absence of an express stipulation in the
sustained as certified by a duly licensed physician. policy, it being based on a written contract, the
Notice of claim must be filed within six months from action prescribes in 10 years.
the date of the accident, otherwise, the claim shall 2. However, the parties may validly agree on a
be deemed waived. Action or suit for recovery of shorter period provided it is not less than one
damage due to loss or injury must be brought, in year from the time the cause of action accrues.
proper cases, with the Commissioner or the Courts  Note: In motor vehicle insurance, action
within one year from the denial of the claim, prescribes in one year.
otherwise, the claimant’s right of action shall 3. The cause of action accrues from the rejection
prescribe. of the claim of the insured and not from the
time of loss.
Period for presenting a written notice of claim   The period for filing claim is not merely a
within 6 months from date of accident procedural requirement.
 It is essential for the prompt settlement of
Period for action or suit for recovery of damage  claims as it demands for suits to be brought
within one year from the denial of the claim (denial while the evidence as to the origin and cause of
of the claim is the time when cause of action the loss or destruction has not yet disappeared.
 MERCANTILE LAW REVIEWER

 It is a condition precedent to the insurer‘s that it places the party subrogated in the shoes of
liability or a resolutory cause in case the action the creditor, and he may use all means which the
58 is not filed by the insured within the stipulated creditor could employ to enforce payment [Lorenzo
period. Shipping Corporation v. Chubb and Sons, Inc.
 The Insurance Commissioner has the power to (2004)].
adjudicate disputes relating to an insurance
company‘s liability to an insured under a policy. Rights Transferred
 A complaint or claim filed with such official is  The rights to which the subrogee succeeds are
considered an ―action‖ or ―suit‖ the filing of the same as, but not greater than, those of the
which would have the effect of tolling the person for whom he is substituted.
suspending the running of the prescriptive  He cannot acquire any claim, security, or
period. remedy the subrogor did not have. In other
 A stipulation stating that the prescriptive period words, a subrogee cannot succeed to a right not
for filing an action is 1 year from the happening possessed by the subrogor. A subrogree in effect
of loss is void (it should be from the time of steps into the shoes of insured and can recovery
rejection). As the stipulation is void and is upon only if the insured likewise could have
a written contract, the time limit is 10 years recovered
from the time the cause of action accrues.
Rules:
Period for Payment of Claims  NO need of a formal assignment or an express
LIFE POLICIES [Sec. NON-LIFE POLICIES stipulation in the policy. It is a legal effect of
242] POLICIES [Sec. 243] payment.
Maturing upon the The proceeds shall be  The insurer can only recover from the third
expiration of the term – paid within 30 days after person what the insured could have recovered.
The proceeds are the receipt by the Thus, there can be no recovery if the insurer
immediately payable to insurer of proof of loss, voluntarily paid even if the loss is not covered
the insured, unless they and ascertainment of the by the policy.
are made payable in loss or damage by  The insured can no longer recover from the
installments or as agreement of the parties offended party what was paid to him by the
annuity, in which case, or by arbitration but not insurer but he can recover any deficiency, that
the installments or later than 90 days from is, if the damages suffered are more than what
annuities shall be paid as such receipt of proof of was paid. The deficiency is not covered by the
they become due loss whether or not right of subrogation.
ascertainment is had or  The insurer must present the policy as evidence
made to determine the extent of its coverage [Wallen
Maturing at the death of Phil. Shipping v. Prudential Guarantee (2003)].
the insured, occurring
prior to the expiration Instances where there is no right of subrogation
of the term stipulated –  Where the insured by his own act releases the
Proceeds are payable to wrongdoer or third party liable for the loss or
the beneficiaries within damage;
60 days after  Where the insurer pays the insured the value of the
presentation and filing of loss without notifying the carrier who has in good
proof of death faith settled the insured‘s claim for loss;
 Where the insurer pays the insured for a loss or risk
(3) Subrogation not covered by the policy [Pan Malayan Insurance
Company v. CA (1997)].
 Normal incident of indemnity insurance as a  In life insurance
legal effect of payment  For recovery of loss in excess of insurance coverage
 Insurer steps into the shoes of insured. [DE LEON].

Note: There is only subrogation in non-life By the act of Manila Mahogany issuing a release
insurance. claim to SMC, the right of Zenith against SMC is
nullified since the insurer can be subrogated to only
Definition and Scope such rights as the insured may have, should the
Subrogation is the substitution of one person in the insured, after receiving payment from the insurer,
place of another with reference to a lawful claim or release the wrongdoer who causes the loss, the
right, so that he who is substituted succeeds to the insurer loses his rights against him. But in such a
rights of the other in relation to a debt or claim, case the insurer will be entitled to recover from the
including its remedies or securities. The principle insured whatever it has paid, unless it was made
covers the situation under which an insurer that has with the consent of the insurer. [Manila Mahogany v.
paid a loss under an insurance policy is entitled to CA (1987)]
all the rights and remedies belonging to the insured
against a third party with respect to any loss covered
by the policy. It contemplates full substitution such
 COMMERCIAL LAW REVIEWER

59

2012 UP LAW
BAR REVIEWER
MERCANTILE
Transportation Law LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads | Anna
EXECUTIVE COMMITTEE Katarina Rodriguez• Mickey
Ramon Carlo Marcaida |Commissioner Chatto
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary LAYOUT TEAM 2012
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Layout Artists | Alyanna
Apacible • Noel Luciano • RM
COMMITTEE HEADS Meneses • Jenin Velasquez •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Mara Villegas • Naomi
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Quimpo • Leslie Octaviano •
Miranda (D) |Special Lectures Yas Refran • Cris Bernardino
Patricia Madarang • Marinella Felizmenio |Secretariat Layout Head| Graciello
Victoria Caranay |Publicity and Promotions Timothy Reyes
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

narrow segment of the general population [Fabre

60
Transportation Law vs. CA (1996)]

MERCANTILE LAW Private Carriers

Letters of Credit I. Common carriers Those who transport or undertake to transport in a
Warehouse Receipts II. Vigilance over goods particular instance for hire or reward. [Agbayani,
Law III. Safety of passengers Commercial Laws of the Philippines]
Trust Receipts Law IV. Bill of lading
Negotiable Common Private Carrier
Instruments Law
V. Maritime commerce
Carrier
Insurance Code VI. Public Service Act
Availability Holds himself Agrees in some
Transportation Law VII. The Warsaw Convention
out in common, special case
Corporation Law that is, to all with some
Securities Regulation persons who private
Code choose to individual to
Banking and Finance employ him, as carry for hire
Intellectual Property ready to carry
for hire
I. Common Carriers Binding Effect Bound to carry Not bound to
all who offer carry for any
and tender reason, such
Art. 1732 Civil Code. Common carriers are persons, reasonable goods as it is
corporations, firms or associations engaged in the compensation accustomed to
business of carrying or transporting passengers or for carrying carry, unless it
goods or both, by land, water, or air, for them enters into a
compensation, offering their services to the public. special
agreement to
What are the elements of a common carrier? do so
1. It is engaged in the business of carrying or Diligence Extraordinary Ordinary
transporting goods for others as a public Required diligence diligence
employment, or passengers, or both Governing Law Principally, Civil Obligations and
2. It is for compensation or for hire Code provisions contracts
3. It is operated generally as a business and not as on common
a casual occupation carriers
4. It holds out to the public as ready to engage in Regulation A public service Not subject to
the transportation of goods of the kind to which and is therefore regulation as a
his business is confined [cf. First Phil. Industrial subject to common
v. CA] regulation carrier
[Agbayani,
First Phil. Industrial v. CA (1998). There is no Commercial
doubt that petitioner (engaged in the business of Laws of the
transporting petroleum products from the Batangas Philippines]
refineries, via pipeline) is a common carrier. It is
engaged in the business of transporting or carrying
goods, i.e. petroleum products, for hire as a public
A. Diligence Required of Common
employment. It undertakes to carry for all persons Carriers
indifferently, that is, to all persons who choose to
employ its services, and transports the goods by land Art. 1733 Civil Code. Common carriers, from the
and for compensation. The fact that petitioner has nature of their business and for reasons of public
a limited clientele does not exclude it from the policy, are bound to observe extraordinary diligence
definition of a common carrier. in the vigilance over the goods and for the safety of
the passengers transported by them, according to all
Fabre v. CA (1996). The provision (Art. 1732) makes the circumstances of each case.
no distinction between one whose principal business
activity is the carrying of persons or goods or both, Such extraordinary diligence in the vigilance over
and one who does such carrying only as an ancillary the goods is further expressed in Articles 1734,
activity (in local idiom, as ―a sideline‖). 1735, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the
Art. 1732 avoids the following distinctions: passengers is further set forth in Articles 1755 and
1. Between a person or enterprise offering 1756.
transportation service on a regular basis and one
offering such service on occasional or Nature: bound to observe extraordinary diligence
unscheduled basis
2. Between one offering its services to the general Basis of liability: nature of their business and public
public and one soliciting business only from a policy [Art 1733]
 MERCANTILE LAW REVIEWER

Cangco v. MRR. The liability of the carrier is result to damage of all aboard. [PAL v. CA
contractual in nature. It arises from the contract of (1981)]
carriage. The liability is direct and immediate, and  Presence of stevedores on board the barge was
differs from presumptive responsibility for the called for by the contract of carriage. Petitioner 61
negligence of [Manila Railroad‘s] servants. is liable if it knew and consented to the
stevedores‘ presence. [Sulpicio v. CA (1995)]
The contract of Manila Railroad Company to
transport Cangco carried with it the duty to carry
him safely and provide safe means of entering and II. Vigilance over goods
leaving its trains. That duty, being contractual, was
direct and immediate, and its non-performance
could not be excused by proof that the fault was A. Exempting Causes
morally imputable to Manila Railroad‘s servants.
There was no contributory negligence on the part of 1) Natural disaster
Cangco.
Requisites:
B. Liabilities of Common Carriers 1. The natural disaster must have been the
proximate and only cause [Art 1739]
2. The common carrier must exercise due diligence
Goods
to prevent or minimize the loss before, during
and after the occurrence of the flood, storm or
GENERAL RULE: Common carriers are responsible for
natural disaster [Art 1739]
the loss, destruction, or deterioration of the goods.
3. The common carrier must not have been guilty
This responsibility arises from contract, as the
of delay [Art 1740]
relation between a carrier and its patrons is of a
4. The shipment was at shipper‘s risk [Art 361,
contractual nature. A failure on the carrier to use
Code of Commerce]
extraordinary care in carrying goods or passengers
safely is a breach of contract and constitutes culpa
contractual. The carrier is also liable even in those Martini v. Macondray (1919): The master is
cases where the cause of the loss or damage is responsible for the safe & proper stowage of the
unknown. [Agbayani, Commercial Laws of the cargo, & there is no doubt that by the general
Philippines] maritime law he is bound to secure the cargo safely
under deck. If the master carries goods on deck w/o
EXCEPTION: if due to any of the following causes the consent of the shipper, he does it at his own
only risk. If they are damaged or lost in consequence of
(1) Flood, storm, earthquake, lightning, or other their being thus exposed, he cannot protect himself
natural disaster or calamity; from responsibility by showing that they were
(2) Act of the public enemy in war, whether damaged or lost by the dangers of the seas. When
international or civil; the shipper consents to his goods being carried on
(3) Act of omission of the shipper or owner of the deck, he takes the risks of any damage or loss
goods; sustained as a consequence of their being so carried.
(4) The character of the goods or defects in the
packing or in the containers; Eastern Shipping Lines v. IAC (1987): Fire may not
(5) Order or act of competent public authority. be considered a natural disaster/calamity. This must
be so as it arises almost invariably from some act of
NOTE: The presumption of negligence does not apply man or by human means. It does not fall within the
in these cases. category of an act of God unless caused by lightning
or boy other natural disaster/calamity. It may even
Passengers be caused by the actual fault or privity of the
Art. 1755 Civil Code. A common carrier is bound to carrier.
carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of 2) Act of public enemy
very cautious persons, with a due regard for all the
circumstances. Requisites:
1. The act of the public enemy must have been the
Art. 1756 Civil Code. In case of death of or injuries proximate and only cause [Art. 1739]
to passengers, common carriers are presumed to 2. The common carrier must exercise due diligence
have been at fault or to have acted negligently, to prevent or minimize the loss before, during
unless they prove that they observed extraordinary and after the act of the public enemy causing
diligence as prescribed in Arts 1733 and 1755. the loss, destruction or deterioration of the
goods. [Art. 1739]
Common carriers are also responsible for the
3) Act or omission of shipper
safety of the following persons (even though they
are not passengers):
Requisites:
 Extraordinary diligence is for the safety of
1. The act or omission of the shipper must have
passengers and crew because any lapse will
been the proximate and only cause [Art 1741]
 MERCANTILE LAW REVIEWER

2. If the shipper owner merely contributed to the

loss, destruction or deterioration of the goods,
the proximate cause being the negligence of the
1. Requirement of Absence of
62 Negligence
common carrier, then the common carrier shall
be liable for the damages, which shall, however,
be equitably reduced. [Art 1741] Articles 1739 and 1741 provide that the exempting
causes listed above must have been the proximate
4) Character of goods and only cause of the loss. Since the exempting
cause must be the only cause of the loss, it follows
Requisites: that for the exempting causes to apply, the
1. The character of the goods or defects in packing provisions also require the absence of negligence.
or containers [Art 1739]
2. The common carrier must exercise due diligence 2. Absence of Delay
to forestall or lessen the loss [Art 1739] Art. 1740. If the common carrier negligently incurs
in delay in transporting the goods, a natural disaster
DAMAGE WHEN TO CLAIM shall not free such carrier from responsibility.
Ascertainable from Claim for damages must
package be made upon receipt
Only upon opening the Claim for damages may
3. Due diligence to prevent or lessen
package be made within 24 hours the loss
upon receipt
Art. 1739 Civil Code. In order that the common
After such periods OR after transportation charges carrier may be exempted from responsibility, the
have been paid, no more claims for damages will be natural disaster must have been the proximate and
entertained. [Art 366, Code of Commerce] only cause of the loss. However, the common carrier
must exercise due diligence to prevent or minimize
Southern Lines v. CA (1962). If the fact of improper loss before, during and after the occurrence of
packing is known to the carrier or its servants or flood, storm or other natural disaster in order that
apparent upon ordinary observation, but [the the common carrier may be exempted from liability
carrier] accepts the goods notwithstanding such for the loss, destruction, or deterioration of the
condition, it is not relieved of liability for loss or goods. The same duty is incumbent upon the
injury resulting therefrom. common carrier in case of an act of the public
enemy referred to in Article 1734, No. 2.
5) Order of competent authority
Art. 1742 Civil Code. Even if the loss, destruction
Requisites: or deterioration of the goods should be caused by
1. There must be an order or act of competent the character of the goods or the faulty nature of
authority [Art. 1743] the packing or of the containers the common carrier
2. The said public authority must have had the must exercise due diligence to forestall or lessen
power to issue the order. If the officer acts the loss.
without legal process, then the common carrier
will be held liable [Art. 1743]
B. Contributory negligence
Ganzon v. CA (1988)
The intervention of the municipal officials was not of Art. 1741 Civil Code. If the shipper or owner
a character that would render impossible the merely contributed to the loss destruction or
fulfillment by the carrier of the obligation. The deterioration of the goods the proximate cause
petitioner was not duty bound to obey the illegal thereof being the negligence of the common carrier
order [of the mayor] to dump into the sea the scrap the latter shall be liable in damages which however
iron. There is absence of sufficient proof that the shall be equitably reduced.
issuance of the order was attended with such force
or intimidation as to completely overpower the will C. Duration of liability
of petitioner‘s employees. The mere difficulty in the
fulfillment of the obligation is not force majeure.
Duration of liability/Extraordinary diligence
Melencio-Herrera, dissent: Through the ―order or
When does carrier‘s responsibility begin?
act‖ of ―competent public authority,‖ the
Under Art. 1738, the extraordinary responsibility of
performance of the contractual obligation was
the common carrier begins from the time the goods
rendered impossible. Apparently, the seizure and
are delivered to the carrier. The delivery must place
destruction of the goods was done under legal
the goods to be transported unconditionally in the
process or authority so that petitioner should be
possession of the common carrier and the latter
freed from responsibility.
must receive them.

When does carrier‘s responsibility terminate?

Under Art. 1738, the extraordinary responsibility of
the carrier is terminated at the time the goods are
 MERCANTILE LAW REVIEWER

delivered to the consignee or the person who has a the goods still have to go through the inspection of
right to receive them (actual or constructive the customs authorities before they are actually
delivery). [Agbayani, Commercial Laws of the turned over to the consignee. This is a situation
Philippines] where we may say that the carrier losses control of 63
the goods because of a custom regulation and it is
1. Delivery of goods to common unfair that it be made responsible for what may
happen during the interregnum.
carrier
The liability and responsibility of the carrier 3. Temporary unloading or storage
commence on their actual delivery to, or receipt by
the carrier or an authorized agent, of the goods. Art. 1737 Civil Code. The common carrier's duty to
[Cia. Maritima v. Insurance Co., 12 SCRA 213] observe extraordinary diligence over the goods
remains in full force and effect even when they are
2. Actual or constructive delivery temporarily unloaded or stored in transit unless the
shipper or owner has made use of the right of
Art. 1736 Civil Code. The extraordinary stoppage in transitu.
responsibility of the common carrier lasts from the
time the goods are unconditionally placed in the GENERAL RULE: extraordinary diligence over goods
possession of and received by the carrier for even when the goods are temporarily unloaded or
transportation until the same are delivered actually stored in transit
or constructively by the carrier to the consignee or
to the person who has a right to receive them EXCEPTION: shipper or owner made use of the right
without prejudice to the provisions of Article 1738. of stoppage in transitu [Art. 1737]

When is the contract of transportation perfected? What is stoppage in transitu?

A contract of transportation is consensual in nature; This is the act by which the unpaid vendor of goods
therefore it is perfected upon the meeting of the stops their progress and resumes possession of them
minds of the parties. [Art. 1305 Civil Code] constructively while they are in the court of transit
from him to the purchaser, and not yet actually
What if the goods are only for safekeeping? delivered to the latter. The duty of the common
If the common carrier received the goods not for carrier to exercise extraordinary diligence ends in
transportation but only for safekeeping, where the the middle of the journey or transit.
goods have already been purchased by the shipper
and ready for transportation, then the duty of When the buyer of the goods becomes insolvent, the
extraordinary diligence has not yet started. [in unpaid seller who has parted with the possession of
relation to Art. 1319 Civil Code] the goods at any time while they are in transit, may
resume the possession of the goods as he would have
Who are these persons or entities who have ―a had if he had never parted with the possession. [Art.
right to receive‖ the goods? 1530 Civil Code]
These persons include agents, brokers, and the like.
When the right of stoppage in transitu is exercised,
What does ―unconditionally placed‖ in Art. 1736 the common carrier holds the goods in the capacity
mean? of an ordinary bailee or warehouseman upon the
It means that the shipper cannot get the goods back theory that the exercise of the right of stoppage in
from the common carrier at will. transitu terminates the contract of carriage. Hence,
only ordinary diligence is required. [Agbayani,
Commercial Laws of the Philippines]
Compania Maritima v. Insurance Company of
North America (1964). The liability of the carrier as
common carrier begins with the actual delivery of D. Stipulation for limitation of
the goods for transportation and not merely with the liability
formal execution of a receipt or bill of lading; the
issuance of a bill of lading is not necessary to
complete delivery and acceptance. Even where it is 1. Void stipulations
provided by statute that liability commences with
the issuance of the bill of lading actual delivery and Art. 1744 Civil Code. A stipulation between the
acceptance are sufficient to bind the carrier. common carrier and the shipper or owner limiting
the liability of the former for the loss, destruction,
Lu Do v. Binamira (1957): Delivery of the cargo to or deterioration of the goods to a degree less than
the customs authorities is not delivery to the extraordinary diligence shall be valid, provided it
consignee or ―to the person who has a right to be:
receive them‖ contemplated in Article 1736 because (1) In writing, signed by the shipper or owner;
in such case the goods are still in the hands of the (2) Supported by a valuable consideration other
Government and the owner cannot exercise than the service rendered by the common
dominion over them however the parties may agree carrier; and
to limit the liability of the carrier considering that
 MERCANTILE LAW REVIEWER

(3) Reasonable, just and not contrary to public circumstances and has been fairly and freely agreed
policy. upon.
64
Art. 1745 Civil Code. Any of the following or similar Shewaram v. PAL (1966). There are two requisites
stipulations shall be considered unreasonable, that must be fulfilled in order that the liability of
unjust and contrary to public policy: PAL be limited according to the stipulations behind
(1) That the goods are transported at the risk of the ticket stub:
the owner or shipper; 1. that the contract is just and reasonable under
(2) That the common carrier will not be liable for the circumstances
any loss, destruction, or deterioration of the 2. that the contract was fairly and freely agreed
goods; upon (per Art. 1750)
(3) That the common carrier need not observe any
diligence in the custody of the goods; The fact that the conditions are printed at the back
(4) That the common carrier shall exercise a degree of the ticket stub in letters so small that they are
of diligence less than that of a good father of a hard to read would not warrant the presumption that
family, or of a man of ordinary prudence in the plaintiff was aware of those conditions such that he
vigilance over the movables transported; had ―fairly and freely agreed‖ to those conditions.
(5) That the common carrier shall not be
responsible for the acts or omission of his or its Ong Yiu v. CA (1979). While the passenger had not
employees; signed the plane ticket, he is nevertheless bound by
(6) That the common carrier's liability for acts the provision thereof; such provisions have been held
committed by thieves, or of robbers who do not to be part of the contract of carriage and valid and
act with grave or irresistible threat, violence or binding upon the passenger regardless of the latter‘s
force, is dispensed with or diminished; lack of knowledge or assent to the regulation. It is
(7) That the common carrier is not responsible for what is known as a contract of adhesion wherein one
the loss, destruction, or deterioration of goods party imposes a ready made form of contract on the
on account of the defective condition of the car, other. The one who adheres to the contract is in
vehicle, ship, airplane or other equipment used reality free to reject it entirely. A contract limiting
in the contract of carriage. liability upon an agreed valuation does not offend
against the policy of the law forbidding one from
Art. 1751 Civil Code. The fact that the common contracting against his own negligence.
carrier has no competitor along the line or route, or
a part thereof, to which the contract refers shall be 3. Limitation of liability in absence
taken into consideration on the question of whether
or not a stipulation limiting the common carrier's
of declaration of greater value
liability is reasonable, just and in consonance with
public policy. Art. 1749 Civil Code. A stipulation that the common
carrier's liability is limited to the value of the goods
Kinds of Stipulations Limiting Liability appearing in the bill of lading unless the shipper or
[Heacock v. Macondray, 42 Phil 205] owner declares a greater value is binding.
Exempting the common carrier from VOID
any and all liability for loss or damage E. Liability for baggage of
occasioned by its own negligence
passengers (asked in 97 and 98)
Providing for an unqualified limitation VOID
of such liability to an agreed
stipulation What are the kinds of passenger baggage and the
Limiting the liability of the common VALID laws applicable to them?
carrier to an agreed valuation unless 1. Passenger baggage in the custody of the
the shipper declares a higher value and passenger (e.g. carry-on luggage). These are
pays a higher rate of freight considered as necessary deposits. Articles 1998,
2000-2003 apply.
2. Passenger baggage not in the custody of the
2. Limitation of liability to fixed passenger (e.g. checked-in luggage). Arts. 1733-
amount 1753 on extraordinary diligence apply. The
liability is greater for baggage that is in the
Art. 1749 Civil Code. A stipulation that the common custody of the carrier in contrast if such is in
carrier's liability is limited to the value of the goods the possession of the passenger.
appearing in the bill of lading unless the shipper or
owner declares a greater value is binding. 1. Checked-in baggage

Art. 1750 Civil Code. A contract fixing the sum that Art. 1754 Civil Code. The provisions of Articles
may be recovered by the owner or shipper for the 1733 to 1753 shall apply to the passenger's baggage
loss, destruction or deterioration of the goods is which is not in his personal custody or in that of his
valid if it is reasonable and just under the employee. As to other baggage, the rules in Articles
 MERCANTILE LAW REVIEWER

1998 and 2000 to 2003 concerning the responsibility transported whether or not you are physically
of hotel-keepers shall be applicable. traveling with them.

65
2. Baggage in possession of III. Safety of Passengers
passengers (Asked in 97 and 01)
Under Art. 1998, the baggage of passengers in their
personal custody or in that of their employees while A. Void stipulations
being transported shall be regarded as necessary
deposits. The common carrier shall be responsible Art. 1757 Civil Code. The responsibility of a
for such baggage as depositaries (i.e. like hotel- common carrier for the safety of passengers as
keepers), provided that 1) notice was given to them required in Articles 1733 and 1755 cannot be
or to their employees, and that 2) the passengers dispensed with or lessened by stipulation by the
take the precautions which said carriers advised posting of notices, by statements on tickets, or
relative to the care and vigilance of their baggage. otherwise.
[Agbayani, Commercial Laws of the Philippines]
Art. 1758 Civil Code. When a passenger is carried
When hotel-keeper liable gratuitously, a stipulation limiting the common
In the following cases, the hotel-keeper is liable carrier's liability for negligence is valid, but not for
regardless of the amount of care exercised: willful acts or gross negligence.
1. loss or injury is caused by his servants or
employees as well as by strangers (Art 2000) The reduction of fare does not justify any limitation
provided that: a) notice has been given by the of the common carrier's liability.
guest, and b) proper precautions taken by the
guest (Art 1998) Carriage of Validity of Stipulations
2. loss is caused by the act of a thief or robber Limiting Liability
done without the use of arms or irresistible Goods VALID, subject to
force (Art 2001) conditions [Art. 1749]
Passengers GR: VOID
When hotel-keeper not liable E: gratuitous carriage
1. loss or injury is caused by force majeure (Art [Arts. 1757, 1758]
2000), theft or robbery by a stranger (not by
hotel-keeper‘s servant or employee) with the B. Duration of liability
use of arms or irresistible force (Art 2001), etc
unless he is guilty of fault or negligence in
failing to provide against the loss or injury from 1. Waiting for carrier or boarding of
his cause carrier
2. loss is due to the acts of the guests, his family,
servants, or visitors (Art 2002) Does the duty of extraordinary diligence occur
3. loss arises from the character of the things right at the perfection of the contract of
brought into the hotel (Art 2002) transportation?
The perfection of the contract of carriage does not
Art. 2003 Civil Code. The hotel-keeper cannot free necessarily coincide with the commencement of the
himself from responsibility by posting notices to the duty of extraordinary diligence. It may occur at the
effect that he is not liable for the articles brought same time or later.
by the guest. Any stipulation between the hotel-
keeper and the guest whereby the responsibility of It is the duty of common carriers of passengers to
the former as set forth in articles 1998 to 2001 is stop their conveyances a reasonable length of time
suppressed or diminished shall be void. in order to afford passengers an opportunity to board
and enter, and they are liable for injuries suffered
What is a passenger baggage? by boarding passengers resulting from the sudden
They are the things that a passenger will bring with starting up or jerking of their conveyances while
him consistent with a temporary absence from they are doing so. [Dangwa Transportation v. CA
where he lives. Passenger baggage must have a (1991)]
direct relationship with the passenger who is
traveling. Del Prado v. Manila Railroad (1929). A person
boarding a moving car must be taken to assume the
E.g. A balikbayan box or suitcase is passenger risk of injury from boarding the car under the
baggage. However, 10,000 cans of corned beef is not conditions open to his view, but he cannot fairly be
considered as passenger baggage. They are held to assume the risk that the motorman, having
considered as goods. If you carry goods with you, you the situation in view, will increase the peril by
cannot bring them with you as part of your accelerating the speed of the car before he is
[passenger] contract of carriage. You will need to planted safely on the platform.
get a separate contract of carriage (―bill of lading‖)
in order to transport them. These goods will then be
 MERCANTILE LAW REVIEWER

2. Arrival at destination
Note: The employee must be on duty at the time of
66 When does relationship of common carrier and the act.
passenger terminate?
It does not cease at the moment that the passenger 2. Other passengers and strangers
alights from the common carrier‘s vehicle at a place
selected by the carrier at the point of destination, Responsibility for Acts of Strangers and Co-
but continues until the passenger has had reasonable passengers
time or a reasonable opportunity to leave the Art. 1763 Civil Code. A common carrier is
carrier‘s premises. What is a reasonable time or a responsible for injuries suffered by a passenger on
reasonable delay within this rule is to be determined account of the willful acts or negligence of other
from all the circumstances. [La Mallorca v. CA passengers or of strangers, if the common carrier's
(1966)] employees through the exercise of the diligence of a
good father of a family could have prevented or
Aboitiz v. CA. It is of common knowledge that by stopped the act or omission.
the very nature of petitioner's business as a shipper,
the passengers of vessels are allotted a longer period Pilapil v. CA (1989). In consideration of the right
of time to disembark from the ship than other granted to it by the public to engage in the business
common carriers such as a passenger bus. Such of transporting passengers and goods, a common
vessels are capable of accommodating a bigger carrier does not give its consent to become an
volume of both passenger and baggage as compared
insurer of any and all risks to passenger and goods. It
to the capacity of a regular commuter bus.
merely undertakes to perform certain duties to the
Consequently, a ship passenger will need at least an
public as the law imposes, and holds itself liable for
hour as is the usual practice, to disembark from the
any breach thereof.
vessel and claim his baggage whereas a bus
passenger can easily get off the bus and retrieve his
Under Art. 1763, a tort committed by a stranger
luggage in a very short period of time. which causes injury to a passenger does not accord
the latter a cause of action against the carrier. The
Does the duty of extraordinary diligence get negligence for which a common carrier is held
interrupted? responsible is the negligent omission by the carrier's
No. In PAL v. CA, it was held that PAL had to employees to prevent the tort from being committed
continue to exercise extraordinary diligence even in when the same could have been foreseen and
the case of stranded passengers until they have prevented by them. Further, when the violation of
reached their final destination. the contract is due to the willful acts of strangers, as
in the instant case, the degree of care essential to
C. Liability for acts of others be exercised by the common carrier for the
protection of its passenger is only that of a good
father of a family.
1. Employees
What is the common carrier‘s responsibility
Responsibility for Acts of Employees
towards employees?
Art. 1759 Civil Code. Common carriers are liable The common carrier is responsible even beyond the
for the death of or injuries to passengers through scope of authority and in violation of orders
the negligence or willful acts of the former's compared to quasi-delicts under Art. 2180, which
employees, although such employees may have exempts the employer if it was done outside of
acted beyond the scope of their authority or in employment. However, there must be a reasonable
violation of the orders of the common carriers. This connection between the act and the contract of
liability of the common carriers does not cease upon carriage.
proof that they exercised all the diligence of a good
father of a family in the selection and supervision of
Act Done Liability of Obligor
their employees.
In good faith Only natural and probable
consequences of the
Art. 1760 Civil Code. The common carrier's breach, which have could
responsibility prescribed in the preceding article have reasonably been
cannot be eliminated or limited by stipulation, by foreseen
the posting of notices, by statements on the tickets In bad faith, fraud, All damages which may be
or otherwise. malice or wanton reasonably attributed to
attitude breach
Maranan v. Perez (1967). It is enough that the
assault happens within the course of the employee's Culpa Contractual Culpa Aquiliana
duty. It is no defense for the carrier that the act was (quasi-delict)
done in excess of authority or in disobedience of the Art. 1759 Art. 2180
carrier's orders. The carrier's liability here is Carrier is directly and Carrier and employee
absolute in the sense that it practically secures the primarily liable are solidarily liable as
passengers from assaults committed by its own joint tort-feasors
employees.
 MERCANTILE LAW REVIEWER

No defense of due Defense of due selection and use of the equipment and appliances in
diligence in the diligence in the use by the carrier. Having no privity whatever with
selection and selection and the manufacturer or vendor of the defective
supervision of supervision of equipment, the passenger has no remedy against 67
employees employees is available him.

What is the common carrier‘s responsibility

towards strangers?
Art. 1763 imposes only the duty of ordinary
IV. Bill of Lading
diligence. In Bachelor Express v. CA (1990), the
Court held that the common carrier has a duty of Definition; subject matter
extraordinary diligence for the act of a co- It is a written acknowledgment of the receipt of
passenger. However, in Pilapil v. CA (1989), the goods and an agreement to transport and to deliver
standard of diligence is only ordinary diligence, them at a specified place to a person named therein
referring to the acts of strangers. or on his order. It comprehends all methods of
transportation.
D. Extent of liability for damages
It is not indispensable for the creation of a contract
of carriage. [Compania Maritima v. Insurance
Art. 1761 Civil Code. The passenger must observe Company of North America, 12 SCRA 213]
the diligence of a good father of a family to avoid
injury to himself. A. Three-fold character
Art. 1762 Civil Code. The contributory negligence a. receipt as to the quantity and description of the
of the passenger does not bar recovery of damages goods shipped;
for his death or injuries, if the proximate cause b. contract to transport the goods to the
thereof is the negligence of the common carrier, consignee or other person therein designated,
but the amount of damages shall be equitably on the terms specified in such instrument;
reduced. c. document of title

Art. 1764 Civil Code. Damages in cases comprised in B. Delivery of goods

this Section shall be awarded in accordance with
Title XVIII of this Book, concerning Damages. Article
2206 shall also apply to the death of a passenger 1. Period for delivery
caused by the breach of contract by a common
carrier. Rule
Period fixed for the delivery of the goods. If no
Isaac v. A. L. Ammen Transportation (1975). It is period is fixed, within a reasonable time.
the prevailing rule that it is negligence per se for a
passenger on a railroad voluntarily or inadvertently Effect of Non-compliance
to protrude his arm, hand, elbow, or any other part The carrier shall pay the indemnity agreed upon in
of his body through the window of a moving car the bill of lading. If no indemnity is fixed, the carrier
beyond the outer edge of the window or outer shall be liable for the damages which may have been
surface of the car, so as to come in contact with caused by the delay. [Art. 370, Code of Commerce]
objects or obstacles near the track, and that no
recovery can be had for an injury which but for such If no period is fixed, the carrier shall be under the
negligence would not have been sustained. obligation to forward the goods in the first shipment
of the same or similar merchandise which he may
make to the point of delivery. [Art. 358, Code of
Spouses Landingin v. PANTRANCO (1970). When a
Commerce]
passenger dies or is injured, the presumption is that
the common carrier is at fault or that it acted
negligently (Article 1756). This presumption is only 2. Delivery without surrender of bill
rebutted by proof on the carrier's part that it of lading
observed the "extraordinary diligence" required in
Article 1733 and the "utmost diligence of very If in case of loss or for any other reason whatsoever,
cautious persons" required in Article 1755 (Article the consignee cannot return upon receiving the
1756). merchandise the bill of lading subscribed by the
carrier, he shall give said carrier a receipt for the
Necesito v. Paras. While the carrier is not an goods delivered, this receipt producing the same
insurer of the safety of the passengers, it should effects as the return of the bill of lading. [Art. 353.
nevertheless be held answerable for the flaws of its (2) (3), Code of Commerce]
equipment, if such flaws were discoverable. The
rationale for the common carrier‘s liability for
manufacturing defects is the fact that the passenger
has neither choice nor control over the carrier in the
 MERCANTILE LAW REVIEWER

3. Refusal of consignee to take Maritime Agencies & Services, Inc. v. CA. The
delivery period for filing the claim is one year, in accordance
68 with the Carriage of Goods by Sea Act.
When consignee may refuse to receive goods
1. Partial Delivery. The consignee may refuse to This was adopted and embodied by our legislature in
receive them, when he proves that he cannot Com. Act No. 65 which, as a special law, prevails
make use thereof without the others. [Art. 363, over the general provisions of the Civil Code on
Code of Commerce] prescription of actions. Section 3(6) of that Act
2. When the goods are rendered useless for provides as follows: In any event, the carrier and the
purposes of sale or consumption in the use for ship shall be discharged from all liability in respect
which they are properly destined. [Effect: of loss or damage unless suit is brought within one
consignee may demand payment of the goods at year after delivery of the goods or the date when
current market prices] the goods should have been delivered; Provided,
3. In case part of the goods is in good condition, that if a notice of loss for damage; either apparent
the consignee may refuse to receive only the or concealed, is not given as provided for in this
damaged goods if separation is possible. [Art. section, that fact shall not effect or prejudice the
365, Code of Commerce] right of the shipper to bring suit within one year
after the delivery of the goods or the date when the
In case of dispute as to the condition of the goods, goods should have been delivered.
the same shall be examined by experts appointed by
the parties, and the third one, in case of V. Maritime Commerce
disagreement, appointed by the judicial authority.

If the persons interested should not agree with the A. Charter Parties
report, said judicial authority shall order the
deposits of the merchandise in a safe warehouse, A charter party is a contract by virtue of which the
and the parties interested shall make use of their owner or agent of a vessel binds himself to transport
rights in the proper manner. (Art. 367, Code of merchandise or persons for a fixed price.
Commerce)
It is a contract by which the owner or agent of the
C. Period for filing claims vessel leases for a certain price the whole or portion
of a vessel for the transportation of the goods or
persons from one port to another.
Damage When to Claim
Ascertainable from Claim for damages must
Towage is not a charter party. It is a contract for the
package be made upon receipt of
hire of services by which a vessel is engaged to tow
delivery
another vessel from one port to another for
Only upon opening the Claim for damages may consideration.
package be made within 24 hours
upon receipt of delivery.
Caltex v. Sulpicio Lines (1999). A contract whereby
the whole or part of the ship is let by the owner to a
After such periods OR transportation charges have
merchant or other person for a specified time or use
been paid, no more claims for damages will be
for the conveyance of goods, in consideration of the
entertained. (Art. 366, Code of Commerce)
payment of freight.
 Shorter period may be stipulated by the parties
because it merely affects the shipper‘s remedy 1. Bareboat/Demise Charter
and does not affect the liability of the carrier.
[PHILAMGEN v. Sweetlines, Inc.] Under the demise or bareboat charter of the vessel,
the charterer will generally be regarded as the
D. Period for filing actions owner for the voyage or service stipulated. The
charterer mans the vessel with his own people and
becomes the owner pro hac vice (just for that one
In any event, the carrier and the ship shall be particular purpose only), subject to liability to
discharged from all liability in respect of loss or others for damages caused by negligence. To create
damage unless suit is brought within one year after a demise, the owner of a vessel must completely and
delivery of the goods or the date when the goods exclusively relinquish possession, command and
should have been delivered. navigation thereof to the charterer, anything short
of such a complete transfer is a contract of
The absence of a notice shall not affect or prejudice affreightment (time or voyage charter party) or not
the right of the shipper to bring suit within one year a charter party at all. [Puromines v. CA]
after the delivery of the goods or the date when the
goods should have been delivered. [Sec. 3 (6),
Puromines, Inc. v. Court of Appeals. Although a
Carriage of Goods by Sea Act]
charter party may transform a common carrier into a
private one, the same however is not true in a
contract of affreightment on account of the
 MERCANTILE LAW REVIEWER

distinctions between a contract of affreigment and a 3. Damages to vessel and to cargo due to lack of
demise or bareboat charter. skill and negligence.

NOTE: In a bareboat or demise charter, the common 4. Losses, fines, and confiscations imposed an 69
carrier is converted to private carrier. account of violation of customs, police, health,
and navigation laws and regulations.
Owner Pro Hac Vice – demise charter to whom the
owner of the vessel has completely and exclusively 5. Those caused by the misuse of the powers.
relinquished possession, command and navigation of
the vessel. In this kind of charter, the charterer 6. For those arising by reason of his voluntarily
mans and equips the vessel and assumes all entering a port other than that of his
responsibility for navigation, management and destination, outside of the cases or without the
operation. He thus acts as the owner of the vessel in formalities referred to in Article 612.
all important aspects during the duration of the
charter. 7. For those arising by reason of non-observance of
the provisions contained in the regulations on
2. Time Charter situation of lights and maneuvers for the
purpose of preventing collisions. [Art. 618]
Contract of affreightment* wherein the vessel is let
Exemption: abandonment of the vessel [Art. 587,
for a fixed day or for a determined number of days
Code of Commerce]
or months.
The owner or agent shall not be liable for the
3. Voyage/Trip Charter obligations contracted by the captain if the latter
exceeds his powers and privileges. However, if the
Contract of affreightment* wherein the vessel is let amounts claimed were made use of for the benefit
for a particular or single voyage. of the vessel, the owner or agent shall be liable.
(Art. 588, Code of Commerce)
Note: A contract of affreightment is one in which
the owner of the vessel leases part or all of its space
to haul goods for others. It is a contract for special
2. Exceptions to limited liability
service to be rendered by the owner of the vessel
Limited Liability
and under such contract the general owner retains
The real and hypothecary nature of the liability of
the possession, command and navigation of the ship,
the shipowner or agent had its origin in the
the charterer or freighter merely having use of the
prevailing conditions of the maritime trade and sea
space in the vessel in return for his payment of the
voyages during the medieval ages, attended by
charter hire. [Puromines vs. CA]
innumerable hazards and perils.
In a contract of affreightment, the common carrier
To offset against these adverse conditions and
is NOT converted into a private carrier.
encourage shipbuilding and maritime commerce, it
was deemed necessary to confine the liability of the
B. Liability of Shipowners and owner or agent arising from the operation of a ship
Shipping Agents to the vessel, equipment, and freight, or insurance,
if any, so that if the shipowner or agent abandoned
Shipowner has possession, control and management the ship, equipment, and freight, his liability was
of the vessel and the consequent right to direct her extinguished.
navigation and receive freight earned and paid,
while his possession continues. The agent shall be civilly liable for the indemnities
in favor of third persons which arise from the
Shipagent is the person entrusted with the conduct of the captain in the care of the goods
provisioning of a vessel, or who represents her in the which the vessel carried; but he may exempt himself
port in which she happens to be. therefrom by abandoning the vessel with all her
equipments and the freight he may have earned
during the voyage. (Art. 587, Code of Commerce)
1. Liability for acts of captain
The owners of a vessel shall be civilly liable in the
1. The owner of a vessel and the agent shall be proportion of their contribution to the common
civilly liable for the acts of the captain and for fund, for the results of the acts of the captain,
the obligations contracted by the latter to referred to in Article 587.
repair, equip, and provision the vessel. [Art.
586, Code of Commerce] Each part owner may exempt himself from this
liability by the abandonment before a notary of the
2. The agent shall also be civilly liable for the part of the vessel belonging to him. [Art. 590, Code
indemnities in favor of third persons which arise of Commerce]
from the conduct of the captain in the care of
the goods which the vessel carried.
 MERCANTILE LAW REVIEWER

In case of collision, the liability of the shipowner Kinds:

shall be understood as limited to the value of the 1. Particular or Simple Average
70 vessel with all her appurtenances and all the freight 2. Gross or General Average
earned during the voyage. [Art. 837, Code of
Commerce] Simple Average
Particular or Simple Averages shall be all damages or
Liability for wages of the captain and the crew and expenses caused to the vessel or cargo that did not
for advances made by the ship agent if the vessel is inure to the common benefit, and borne by
lost by shipwreck or capture. [Art. 643, Code of respective owners. [Art. 809]
Commerce]
The owner of the goods which gave rise to the
Yangco v. Laserna et al (1941). If the shipowner or expense or suffered the damage shall bear this
agent may in any way be held civilly liable at all for average. [Art. 810]
injury to or death of passengers arising from the
negligence of the captain in cases of collisions or 1. General Average
shipwrecks, his liability is merely co-extensive with General or gross averages shall be all the damages
his interest in the vessel such that a total loss and expenses which are deliberately caused in order
thereof results in its extinction. In arriving at this to save the vessel, her cargo, or both at the same
conclusion, the fact is not ignored that the ill-fated time, from a real and known risk, and particularly
S. S. Negros, as a vessel engaged in interisland the following:
trade, is a common carrier, and that the relationship 1. The goods or cash invested in the redemption of
between the petitioner and the passengers who died the vessel or cargo captured by enemies,
in the mishap rests on a contract of carriage. But privateers, or pirates, and the provisions,
assuming that petitioner is liable for a breach of wages, and expenses of the vessel detained
contract of carriage, the exclusively "real and during the time the arrangement or redemption
hypothecary nature" of maritime law operates to is taking place.
limit such liability to the value of the vessel, or to 2. The goods jettisoned to lighten the vessel,
the insurance thereon, if any. In the instant case it whether they belong to the vessel, to the cargo,
does not appear that the vessel was insured. or to the crew, and the damage suffered
through said act by the goods kept.
Art. 587 of the Code of Commerce appears to deal 3. The cables and masts which are cut or rendered
only with the limited liability of shipowners or useless, the anchors and the chains which are
agents for damages arising from the misconduct of abandoned in order to save the cargo, the
the captain in the care of the goods which the vessel vessel, or both.
carries, but this is a mere deficiency of language and 4. The expenses of removing or transferring a
in no way indicates the true extent of such liability. portion of the cargo in order to lighten the
vessel and place her in condition to enter a port
Exceptions to the Doctrine of Limited Liability or roadstead, and the damage resulting
a. Claims under the Workmen‘s Compensation therefrom to the goods removed or transferred.
[Abueg v. San Diego] 5. The damage suffered by the goods of the cargo
b. Expenses for repairing, provisioning and through the opening made in the vessel in order
equipping the vessel to drain her and prevent her sinking.
c. Injury or damage due to the fault of the 6. The expenses caused through floating a vessel
shipowner intentionally stranded for the purpose of saving
d. Vessel is insured her.
e. Vessel is not abandoned or there was no total 7. The damage caused to the vessel which it is
loss. necessary to break open, scuttle, or smash in
order to save the cargo.
C. Accidents and Damages in 8. The expenses of curing and maintaining the
members of the crew who may have been
Maritime Commerce wounded or crippled in defending or saving the
vessel.
Averages 9. The wages of any member of the crew detained
The following shall be considered averages: as hostage by enemies, privateers, or pirates,
1. All extraordinary or accidental expenses and the necessary expenses which he may incur
incurred during the navigation for the in his imprisonment, until he is returned to the
preservation of the vessel or cargo, or both. vessel or to his domicile, should he prefer it.
2. All damages or deterioration the vessel may 10. The wages and victuals of the crew of a vessel
suffer from the time she puts to sea from the chartered by the month during the time it
port of departure until she casts anchor in the should be embargoed or detained by force
port of destination, and those suffered by the majeure or by order of the Government, or in
merchandise from the time it is loaded in the order to repair the damage caused for the
port of shipment until it is unloaded in the port common good.
of consignment. [Art. 806, Code of Commerce] 11. The loss suffered in the value of the goods sold
at arrivals under stress in order to repair the
vessel because of gross average.
 MERCANTILE LAW REVIEWER

12. The expenses of the liquidation of the average.

(Art. 811, Code of Commerce) Classes and Effects
13. If in lightening a vessel on account of a storm, in
order to facilitate her entry into a port or a. Fortuitous Collision: Each vessel and her cargo 71
roadstead, part of her cargo should be shall be liable for their own damage [Art. 830,
transferred to lighters or barges and be lost, the Code of Commerce]
owner of said part shall be entitled to b. Vessel forced to collide with another one by a
indemnity, as if the loss has originated from a third vessel: Owner of third vessel shall
gross average (Art. 817, Code of Commerce) indemnify for the losses and damages caused
14. If, as a necessary measure to extinguish a fire in [Art. 831, Code of Commerce]
a port; roadstead; creek, or bay, it should be c. By reason of fortuitous event, vessel properly
decided to sink any vessel, this loss shall be anchored and moored collides with another:
considered gross average, to which the vessels The injury occasioned shall be looked upon as
saved shall contribute. particular average to the vessel run into.
[Article 832, Code of Commerce]
Essential Requisites d. Culpable: The owner of the vessel at fault shall
In order to recover the costs and expenses, the indemnify the losses and damages suffered,
following are necessary: after an expert appraisal. [Art. 826, Code of
1. Previous resolution of the captain adopted after Commerce]
deliberation with the sailing mate and other e. Both vessels may be blamed for the collision:
officers Each one shall be liable for his own damages,
2. Hearing of the persons interested. In case an and both shall be jointly responsible for the
interested person should not be heard, he shall losses and damages suffered by their cargoes.
not contribute to the gross average. [Art. 813, [Art. 827, Code of Commerce]
Code of Commerce] f. Inscrutable Fault (it can not be decided which
3. Resolution to be entered in the log book, stating of the two vessels was the cause of the
the motives and reasons therefore as well as the collision): Each one shall be liable for his own
votes and reason for disagreement. [Art. 814, damages, and both shall be jointly responsible
Code of Commerce] for the losses and damages suffered by their
4. Minutes to be signed by all the persons present cargoes. [Art. 828, Code of Commerce] Asked in
or in urgent cases, the captain. 97 Bar Exams
5. Captain shall deliver one copy of the minutes to
the maritime judicial authority of the first port Arrival under stress – the arrival of a vessel at the
he may make within 24 hours and ratify it under nearest and most convenient port instead of the port
oath. [Art. 814, Code of Commerce] of destination, if during the voyage the vessel cannot
continue the trip to the port of destination.
Magsaysay Inc v. Agan (1955). Requisites for
General Average: It is lawful when the inability to continue voyage is
1. There must be a common danger. This means, due to lack of provisions, well-founded fear of
that both the ship and the cargo, after it has seizure, privateers, pirates, or accidents of the sea
been loaded, are subject to the same danger, disabling it to navigate. [Art. 819]
whether during the voyage, or in the port of
loading or unloading, that the danger arises It is unlawful when:
from the accidents of the sea, dispositions of 1. Lack of provisions due to negligence to carry
the authority, or faults of men, provided that according to usage and customs;
the circumstances producing the peril should be 2. Risk of enemy not well known or manifest
ascertained and imminent or may rationally be 3. Defect of vessel due to improper repair; and
said to be certain and imminent. This last 4. Malice, negligence, lack of foresight or skill of
requirement excludes measures undertaken captain. [Art. 820]
against a distant peril.
2. That for the common safety, part of the vessel Shipwreck - it denotes loss/wreck of a vessel at sea
or of the cargo or both is sacrificed deliberately. as a consequence of running against another vessel
3. That from the expenses or damages caused or thing at sea or on coast where the vessel is
follows the successful saving of the vessel and rendered incapable of navigation.
cargo.
4. That the expenses or damages should have been If the wreck was due to malice, negligence or lack of
incurred or inflicted after taking proper legal skill of the captain, the owner of the vessel may
steps and authority. demand indemnity from said captain. [Art. 841]

2. Collisions (Asked in 95 and 98 Bar

Exams)
Collision – the impact of two vessels both of which
are moving.
Allision – the striking of a moving vessel against one
that is stationary.
 MERCANTILE LAW REVIEWER

D. Carriage of Goods by Sea Act COGSA—which provides for a one-year period of

limitation on claims for loss of, or damage to,
(Commonwealth Act No. 65) cargoes sustained during transit--may be applied
72
suppletorily to the case at bar."
1. Application
3. Period of Prescription (Asked in
COGSA is a special law that governs all contracts of 92, 95, 00 and 04 Bar Exams)
carriage of goods by sea between or to and from the
Philippine ports.
In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
Application of laws
damage unless suit is brought within one year after
delivery of the goods or the date when the goods
a. If the common carrier is coming to the
should have been delivered.
Philippines:
First: Civil Code
The absence of a notice shall not affect or prejudice
Second: COGSA (in foreign trade)
the right of the shipper to bring suit within one year
Third: Code of Commerce
after the delivery of the goods or the date when the
goods should have been delivered. [Sec. 3 (6)]
b. If the private carrier is coming to the
Philippines:
First: COGSA Filipino Merchants Insurance, Inc. v. Alejandro
Second: Code of Commerce (1986). Clearly, the coverage of the Act includes the
Third: Civil Code (excluding rules on common insurer of the goods. Otherwise, what the Act
carriers) intends to prohibit after the lapse of the one-year
prescriptive period can be done indirectly by the
c. If the private or common carrier is from the shipper or owner of the goods by simply filing a
Philippines to a foreign country: claim against the insurer even after the lapse of one
 Apply the law of the foreign country [per year.
Art. 1753, CC] UNLESS the parties make
COGSA applicable Maritime Agencies & Services, Inc. v. CA. The
period for filing the claim is one year, in accordance
Hierarchy of laws with the Carriage of Goods by Sea Act.
1. Art. 1766, CC (COGSA as only in matters not This was adopted and embodied by our legislature in
regulated by this Code) this notwithstanding the Com. Act No. 65 which, as a special law, prevails
fact that COGSA is a special law. over the general provisions of the Civil Code on
Goods in a foreign country shipped to the prescription of actions. Section 3(6) of that Act
Philippines are governed by the Civil Code provides as follows: In any event, the carrier and the
2. Art. 1753, CC ship shall be discharged from all liability in respect
of loss or damage unless suit is brought within one
2. Notice of Loss or Damage year after delivery of the goods or the date when
the goods should have been delivered; Provided,
Notice and the general nature of the loss or damage that if a notice of loss for damage; either apparent
must be given in writing to the carrier or his agent at or concealed, is not given as provided for in this
the port of discharge before or at the time of the section, that fact shall not effect or prejudice the
removal of the goods. [Sec. 3 (6)] right of the shipper to bring suit within one year
after the delivery of the goods or the date when the
If damage is not patent or cannot be ascertained goods should have been delivered.
from the package, the shipper should file the claim
with the carrier within three days from delivery. 4. Limitation of liability
Belgian Overseas v. Philippine First Insurance Under Sec. 4(5), the limit is set at a maximum of
(2002). First, the provision of COGSA provides that $500 per package or customary freight unit.
the notice of claim need not be given if the state of
the goods, at the time of their receipt, has been the Eastern Shipping vs. IAC (150 SCRA 463). Under
subject of a joint inspection or survey. Prior to the Sec. 4(5), the liability limit is set at $500 per
unloading the cargo, an Inspection Report as to the package or customary freight unit unless the nature
condition of the goods was prepared and signed by and value of such goods is declared by the shipper.
representatives of both parties. Second, as stated in This is deemed incorporated in the bill of lading
the same provision, a failure to file a notice of claim even if not mentioned in it.
within three days will not bar recovery if it is
nonetheless filed within one year. This one-year Belgian Overseas v. Philippine First Insurance
prescriptive period also applies to the shipper, the (2002). The Civil Code does not limit the liability of
consignee, the insurer of the goods or any legal the common carrier to a fixed amount per package.
holder of the bill of lading. "Inasmuch as the neither In all matters not regulated by the Civil Code, the
the Civil Code nor the Code of Commerce states a right and the obligations of common carriers shall be
specific prescriptive period on the matter, the governed by the Code of Commerce and special
 MERCANTILE LAW REVIEWER

laws. Thus, the COGSA, which is suppletory to the impressed with public interest and concern. When,
provisions of the Civil Code, supplements the latter therefore, one devotes his property to a use in which
by establishing a statutory provision limiting the the public has an interest, he, in effect grants to the
carrier's liability in the absence of a shipper's public an interest in that use, and must submit to 73
declaration of a higher value in the bill of lading. In the control by the public for the common good, to
the case before us, there was no stipulation in the the extent of the interest he has thus created.
Bill of Lading limiting the carrier's liability. Neither
did the shipper declare a higher valuation of the Albano v. Reyes (1989). A public utility is a
goods to be shipped. Petitioners' liability should be business or service engaged in regularly supplying
computed based on US$500 per package and not on the public with some commodity or service of public
the per metric ton price declared in the Letter of consequence, such as electricity, gas, water,
Credit. transportation, telephone or telegraph services.
Apart from statutes which define public utilities that
are within the purview of such statutes, it would be
VI.Public Service Act difficult to construct a definition of a public utility
which would fit every conceivable case. As its name
indicates, however, the term public utility implies a
A. Definition of public utility public use and service to the public.
(Asked in 92, 93, 95, 98 and
00) Tatad v Garcia. While a franchise is needed to
operate these facilities to serve the public, they do
not by themselves constitute a public utility. What
It is a business or service engaged in regularly constitutes a public utility is not their ownership but
supplying the public with some commodity or service their use to serve the public.
of public consequence such as electricity, gas,
water, transportation, telephone or telegraph In law, there is a clear distinction between the
service. "operation" and the ―ownership‖ of the facilities and
equipment used to serve the public… The devotion
Two tests for determining public utility: of property to serve the public may be done by the
1. Is it engaged in regularly supplying the public owner or by the person in control thereof who may
with some commodity or service? [per definition not necessarily be the owner thereof.
in Albano v. Reyes]
2. If #1 is uncertain, is it a public service as
What does ―regularly supplying the public…‖
defined in the Public Service Law under CA 146
mean?
Sec. 13(b)? If it falls under any one of the
The utility must hold itself out to the public as a
examples given under CA 146 Sec 13(b), then it
public utility by demand and as a matter of right,
is a public utility.
and not by permission. To determine regularity, look
at it from the perspective of the public, and not the
CA 146, Section 13(b). The term ―public service‖ operator.
includes every person that now or hereafter may
own, operate, manage, or control in the Philippines, It is a service or a readiness to serve an indefinite
for hire or compensation, with general or limited portion of the population subject only to the
clientele, whether permanent, occasional or limitations of the service as given by the grant such
accidental, and done for general business purposes, that [the utility] incurs a liability as a violation of its
any common carrier, railroad, street railway, duty if it refuses, such that the availment of the
traction railway, sub-way motor vehicle, either for service has become, through time, a matter of right
freight or passenger, or both with or without fixed and not of mere privilege. [also in US v. Tan Piaco]
route and whether may be its classification, freight
or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and B. Necessity for certificate of
water craft, engaged in the transportation of public convenience
passengers or freight or both, shipyard, marine
railways, marine repair shop, [warehouse] wharf or What is a CPC?
dock, ice plant, ice-refrigeration plant, canal, A CPC is any authorization to operate a public
irrigation system, gas, electric light, heat and power service issued by the pertinent government agency
water supply and power, petroleum, sewerage (DOTC, NTC, LTFRB, etc) for the operation of public
system, wire or wireless communications system, services for which no franchise, either municipal or
wire or wireless broadcasting stations and other legislative, is required by law (e.g. motor vehicles.)
similar public services…
It constitutes neither a franchise nor a contract; it
Kilusang Mayo Uno v. Garcia (1994). Public does not confer property rights, it is a mere license
utilities are privately owned and operated businesses or privilege [Pantranco v. PSC]. Such privilege is
whose services are essential to the general public. forfeited when the grantee fails to comply with his
They are enterprises which specially cater to the commitments to serve the public and public
needs of the public and conduce to their comfort necessity.
and convenience. As such, public utility services are
 MERCANTILE LAW REVIEWER

However, these certificates represent property operator that already maintains an adequate service
rights to the extent that if the rights which any and is able to meet the demands of the public. The
74 public utility is exercising pursuant to the lawful policy is not to issue a certificate to a second
orders of the PSC (now DOTC) have been invaded by operator to cover the same field and in competition
another public utility, in appropriate cases, actions with a first operator who is rendering sufficient,
may be maintained by the complainant public utility. adequate and satisfactory service. If inadequate or
[Cui vs. Cui (1934)] deficient, the prior operator must first be given an
opportunity to improve its service.
Also, it is a ―property‖ and has a considerable value
and can be the subject of sale or attachment. Rationale: the preservation of public convenience
[Cogeo-Cubao Operators and Drivers Assn. v. CA, and the prevention of ruinous competition in order
Raymundo v. Luneta Motor Co.] that the interests of the public would be conserved
and preserved. [Batangas Transportation Co. v.
The revocation of this certificate deprives the Orlanes]
grantee of no vested right. New and additional
burdens, alteration of the certificate, or even Batangas Transportation Co. v. Cayetano
revocation or annulment thereof is reserved to the Orlanes (1928). So long as the 1st licensee keeps
State. [Luque v. Villegas, 30 SCRA 408] and performs the terms and conditions of its license
and complies with the reasonable rules and
Public Utilities exempted from getting a CPC regulations of the Commission and meets the
Under the Public Service Law, Sec. 14, the following demands of the public, it should have more or less of
are exempted from getting a CPC: a vested and preferential right over a person who
(a) Warehouses; seeks to acquire another and a later license over
(b) Animal-drawn vehicles and bancas moved by oar same route. Otherwise, the first licensee would not
or sail, and tugboats and lighters; have protection on his investment and would be
(c) Airships within the Philippines except as regards subject to ruinous competition and thus defeat the
the fixing of their maximum rates on freight and very purpose and intent for the PSC was created.
passengers;
(d) Radio companies except with respect to the COROLLARY RULES:
fixing of rates;
(e) Public services owned or operated by any
PRIOR APPLICANT RULE: The rule presupposes a
instrumentality of the National Government or
situation where two interested persons apply for a
by any government-owned or controlled
certificate to operate a public utility in the same
corporation, except with respect to the fixing of
community over which no person has as yet granted
rates. [As amended by Com. Act 454, RA No. any certificate. If it turns out, after the hearing,
2031 and RA No. 2677] that the circumstances between the two applicants
are more or less equal, then the applicant who
1. Requisites for issuance of CPC applied ahead of the other, will be granted the
certificate. This rule is subordinated under the Prior
1) Citizenship Operator Rule.

Applicant may either be: PROTECTION OF INVESTMENT RULE: It means that

a. a citizen of the Philippines, or one of the purposes of the Public Service Act is to
b. corporation, co-partnership or association protect and conserve investments which have
i. organized under the laws of the Philippines already been made for that purpose by public
ii. at least 60% of the stock of paid-up capital service operators.
of which must belong to citizens of the
Philippines. [Sec 16a, CA 146, as amended] b. Exceptions

2) Promotion of public interests Exception to Prior Operator Rule

The applicant must prove that the operation of the 1. When the subsequent CPC or CPCN covers a new
public service proposed and the authorization to do route, even if it overlaps with the route of the
business will promote the public interest in a proper prior operator;
and suitable manner. [Sec 16a CA 146 as amended] 2. Where the corporate existence of the prior
operator has expired;
3) Financial capability 3. When regularity is at issue – regular operators
The applicant must be financially capable of are preferred over irregular operators.
undertaking the proposed service and meeting the 4. When the CPC or CPCN already granted
responsibilities incident to its operation. comprises a larger territory than that applied
for;
2. Prior operator rule 5. Where public interest would be better served by
the new operator;
a. Meaning 6. When the application of the rule would be
The prior operator rule is the rule which prohibits conducive to monopoly.
the issuance of a license to a subsequent operator
for the same route in order to protect the prior
 MERCANTILE LAW REVIEWER

c. Ruinous competition 2. Exclusion of income tax as

Ruinous competition exists when there is actual ruin
expense
of the business of the operator; that the existing 75
In computing the return, income tax is EXCLUDED
operator will not gain enough profits if another
as an expense.
person is allowed to enter the business; that which
will result in the deprivation of sufficient gain in
respect of reasonable return of investment, Republic v. Meralco, 2003. Income tax payments
therefore the oppositor, alleging this, must show are NOT deductible expenses for purposes of rate
that he will be deprived of a reasonable return on determination. Rate regulation calls for a careful
his investment. consideration of the totality of facts and
circumstances material to each application for an
Mere possibility of reduction in the earnings of the upward rate revision. Rate regulators should strain
business or the deterioration in the income of his to strike a balance between the clashing interests of
business is not sufficient to prove ruinous the public utility and the consuming public and the
competition. It must be shown that the business balance must assure a reasonable rate of return to
would not have sufficient gains to pay a fair rate of public utilities without being unreasonable to the
interest on his capital investments [Manila Electric consuming public. What is reasonable or
Co. vs. Pasay Transportation Co; Ice & Cold Storage unreasonable depends on a calculus of changing
Industries v. Valero] circumstances that ebb and flow with time.
Yesterday cannot govern today, no more than today
can determine tomorrow.
C. Fixing of rate

Rates imposed by Public Utilities are regulated by

D. Unlawful arrangements
the State. A public utility submits to the regulation
of government authorities and surrenders certain 1. Boundary system
business prerogatives, including the amount of rates
that may be charged by it. It is the imperative duty The boundary system is a scheme by an
of the State to interpose its protective power owner/operator engaged in transporting passengers
whenever too much profit becomes the priority of as a common carrier to primarily govern the
public utilities. compensation of the driver, that is, the latter‘s daily
earnings are remitted to the owner/operator less the
Three major factors to be considered by the excess of the boundary which represents the driver‘s
regulating agency to determine just and reasonable compensation. Under this system, the
rates to be charged by a public utility: owner/operator exercises control and supervision
a) rate of return; over the driver. It is different from lease of chattels
b) rate base and because in the latter, the lessor loses complete
c) the return itself or the computed revenue to be control over the chattel and the lessee is still
earned by the public utility. [Republic v. Meralco ultimately responsible for the consequences of its
(2003)] use.

Hence: In the boundary system, the management of the

Rate of return x Rate base = return on the public business is still in the hands of the owner/operator,
utility for the use of its property who, being the holder of the certificate of public
convenience, must see to it that the driver follows
1. Rate of return the route prescribed by the franchising and
regulatory authority, and the rules promulgated with
regard to the business operations. [Villamaria v.
Rates must assure reasonable rate of return. The
Court of Appeals(2006)]
rate of return of a public utility is not prescribed by
statute but by administrative and judicial
Note that the boundary system is not in itself
pronouncements. SC has consistently adopted a 12%
unlawful but only unlawful when used as a defense
rate of return for public utilities [Republic v.
to evade true liability. The owner-operator shall
Meralco, 2002]. However it has also qualified that
remain liable to the public —Indeed to exempt from
what is reasonable or unreasonable depends on a
liability the owner of a public vehicle who operates
calculus of changing circumstances that ebb and
it under the "boundary system" on the ground that he
flow with time. [Republic v. Meralco (2003)]
is a mere lessor would be not only to abet flagrant
violations of the Public Service Law, but also to
Rate base
place the riding public at the mercy of reckless and
It is an evaluation of the property devoted by the
irresponsible drivers — reckless because the measure
utility to the public service or the value of invested
of their earnings depends largely upon the number of
capital or property which the utility is entitled to a
trips they make and, hence, the speed at which they
return.
drive; and irresponsible because most if not all of
them are in no position to pay the damages they
might cause. [Sps. Hernandez v. CA (2004)]
 MERCANTILE LAW REVIEWER

2. Kabit system (Asked in 90 and 05) privileges, or rights or any part thereof; or
merge or consolidate its property, franchises
76 A system whereby a person who has been granted a privileges or rights, or any part thereof, with
certificate of public convenience allows other those of any other public service. The
persons who own motor vehicles to operate under approval herein required shall be given, after
such license, for a fee or percentage of such notice to the public and hearing the persons
earnings. interested at a public hearing, if it be shown
that there are just and reasonable grounds for
Although not penalized outright as a criminal making the mortgaged or encumbrance, for
offense, the "kabit system" is invariably recognized liabilities of more than one year maturity, or
as being contrary to public policy and, therefore, the sale, alienation, lease, merger, or
void and inexistent under Art 1409 of the Civil Code. consolidation to be approved, and that the same
"Kabit System" has been identified as one of the root are not detrimental to the public interest, and
causes of graft and corruption in the government in case of a sale, the date on which the same is
transportation offices. It is a "pernicious system" that to be consummated shall be fixed in the order
cannot be too severely condemned. It constitutes an of approval: Provided, however, that nothing
imposition upon the good faith of the government. It herein contained shall be construed to
is an abuse of a certificate of public convenience, prevent the transaction from being
which is a special privilege granted by the negotiated or completed before its approval
government. [Teja Marketing v. IAC] or to prevent the sale, alienation, or lease by
any public service of any of its property in
Example: the ordinary course of its business.
A, a grantee of a CPC from the LTFRB, is given the
authority to operate 10 units of taxis. B, a non-  In order to validly transfer its
grantee, wishes to operate as a common carrier and franchise/certificate such that it would bind the
―kabits‖ with the CPC of A who will obtain approval public, a public utility owner/operator must
from the LTFRB to operate another taxi. The taxi secure PSC approval.
will be registered in the name of A, who will be paid  However, the proviso contained in the
by B. aforequoted law, to the effect that nothing
therein shall be construed "to prevent the
Assume that A executed a deed of sale in favor of B transaction from being negotiated or complete
in case B decides not to go on with the arrangement, before its approval", means that the sale, even
in order to safeguard the rights of B. However, in without the required approval is still valid and
case of injury to a passenger of the taxi actually binding between the parties themselves.
operated by B (and previously sold to B as well) it is [Montoya vs. Ignacio]
still A who will be liable. The illegal contract of sale
between A & B cannot be used as a defense. Fores v. Medina (1959). A transfer contemplated by
the law, if made without the requisite approval of
A does not have a cause of action against B either. the Public Service Commission, is not effective and
They are in pari delicto. binding in so far as the responsibility of the grantee
under the franchise in relation to the public is
Teja Marketing v. IAC (1987). Parties operated concerned. The provisions of the statute are clear
under an arrangement, commonly known as the and prohibit the sale, alienation, lease, or
"kabit system" whereby a person who has been encumbrance of the property, franchise, certificate,
granted a certificate of public convenience allows privileges or rights, or any part thereof of the owner
another person who owns motor vehicles to operate or operator of the public service Commission. The
under such franchise for a fee. A certificate of law was designed primarily for the protection of the
public convenience is a special privilege conferred public interest; and until the approval of the public
by the government. Although not outrightly Service Commission is obtained the vehicle is, in
penalized as a criminal offense, the kabit system is contemplation of law, still under the service of the
invariably recognized as being contrary to public owner or operator standing in the records of the
policy and, therefore, void and in existent under Commission which the public has a right to rely
Article 1409 of the Civil Code. upon.

E. Approval of sale, encumbrance Note: The approval of the sale of CPCs, CPCNs or
other properties does not affect the validity
or lease of property (perfection) of the sale between the parties as long
as all the elements of a contract are met. The
CA 146, Public Service Act, section 20. Subject to approval only affects the relation of the parties to
established limitations and exceptions and saving the DOTC or to 3rd parties. If there is no approval,
provisions to the contrary, it shall be unlawful for then the sale does not bind the DOTC or 3rd parties.
any public service or for the owner, lessee or The controlling factor therefore is the registration.
operator thereof, without the approval and
authorization of the Commission previously had ---
(g) To sell, alienate, mortgage, encumber or lease
its property, franchises, certificates,
 MERCANTILE LAW REVIEWER

VII. The Warsaw Convention C. Limitation of Liability

A. Applicability 1. Liability to passengers 77

General Rule: $100,000 per passenger
The Convention is applicable to:
1. International transport by air
Exception: Agreement to a higher limit [Article
2. Transport of persons, baggage, or goods [WC,
22(1)]
Art. 1]

International air transportation 2. Liability for checked baggage

Transportation by air between points of contact of
two high contracting parties, or those countries that General Rule: $20 per kilogram
have acceded to the Convention
Exception: In case of special declaration of value
Two Categories Of "International Transportation By and payment of a supplementary sum by consignor,
Air" Under The Convention: carrier is liable to not more than the declared sum
1. That where the place of departure and the unless it proves the sum is greater than actual value.
place of destination are situated within the [Article 22(2)]
territories of two High Contracting Parties
regardless of whether or not there be a break in 3. Liability for hand-carried baggage
the transportation or a transshipment; and
2. That where the place of departure and the $1000/passenger [Article 22(3)]
place of destination are within the territory of a
single High Contracting Party if there is an  An agreement relieving the carrier from liability
agreed stopping place within a territory subject or fixing a lower limit is null and void. [Art. 23]
to the sovereignty, mandate or authority of
another power, even though the power is not a  Carrier is not entitled to the foregoing limit if
party to the Convention. [WC, Article 1, No. 2] the damage is caused by willful misconduct or
default on its part. [Art. 25]
A carriage to be performed by several successive air
carriers is deemed, for the purposes of this  The right to damages under the WC is
Convention, to be one undivided carriage, if it has extinguished after 2 years from the date of
been regarded by the parties as a single operation, arrival at the destination or from the date on
whether it had been agreed upon under the form of which the aircraft ought to have arrived, or
a single contract or of a series of contracts. [WC, from the date on which the carriage stopped.
Article 1, No. 3] [Art. 29(1)]

The Convention does not apply to carriage Alitalia v. CA. The WC does not operate as an
performed under the terms of any international exclusive enumeration of the instances of an
postal Convention. [WC, Article 2, No. 2] absolute limit of the extent of liability. It does not
B. Liability of Carrier for Damages preclude the application of the Civil Code and other
pertinent local laws. It does not regulate or exclude
1. Death or injury of a passenger if the accident liability for other breaches of contract by the
causing it took place on board the aircraft or in carrier, or misconduct of its employees, or for some
the course of the operations of embarking or particular or exceptional type of damage.
disembarking [Art. 17];
Philippine Airlines vs. Savillo, et al (2008).
2. Destruction, loss, or damage to any baggage or Applicability of periods of prescription in WC 29 and
goods, if it took place during the transportation NCC 1146
by air [Art. 18]
D. Willful misconduct
Transportation by Air – the period during which
the baggage or goods are in the charge of the
carrier whether in an airport or on board an When can a common carrier not avail itself of this
aircraft, or in case of a landing outside an limitation?
airport, in any place whatsoever. It includes 1. Willful misconduct [Art. 25]
any transportation by land or water outside an
airport if such takes place in the performance of 2. Default amounting to willful misconduct [Art.
a contract for transportation by air, for the 25]
purpose of loading, delivery, or transshipment.
3. Accepting passengers without ticket [Art. 3, No.
3. Delay in the transportation of passengers, 2]
baggage, or goods [Art. 19]
4. Accepting goods without airway bill or baggage
without baggage check
 MERCANTILE LAW REVIEWER

 Carrier guilty of willful misconduct cannot

avail of the provisions limiting liability but
78 may still invoke other provisions of the WC.
[see Art. 25]

Lhuillier v. British Airways (2010). Tortious

conduct as ground for petitioner‘s complaint is
within the purview of the Warsaw Condition; venue

Savellano v. Northwest Airlines (2003). Non-use of

original contracted route; notice of loss
 MERCANTILE LAW REVIEWER

79

2012 UP LAW
BAR REVIEWER
MERCANTILE
Corporation Law LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads | Anna
EXECUTIVE COMMITTEE Katarina Rodriguez• Mickey
Ramon Carlo Marcaida |Commissioner Chatto
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary LAYOUT TEAM 2012
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Layout Artists | Alyanna
Apacible • Noel Luciano • RM
COMMITTEE HEADS Meneses • Jenin Velasquez •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Mara Villegas • Naomi
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Quimpo • Leslie Octaviano •
Miranda (D) |Special Lectures Yas Refran • Cris Bernardino
Patricia Madarang • Marinella Felizmenio |Secretariat Layout Head| Graciello
Victoria Caranay |Publicity and Promotions Timothy Reyes
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

corporations) or a general law (i.e., Corporation

80
Corporation Law Code in case of private corporations).

MERCANTILE LAW A corporation comes into existence upon the

Letters of Credit I. Corporation, defined issuance of the certificate of incorporation. Then
Warehouse Receipts II. Classification of corporations and only then will it acquire juridical personality to
Law III. Nationality of corporations sue and be sued, enter into contracts, hold or
Trust Receipts Law IV. Corporate juridical personality convey property or perform any legal act in its own
Negotiable name (Ladia, Corporation Code of the Philippines
Instruments Law
V. Capital structure
2001 ed.)
Insurance Code VI. Incorporation and organization
Transportation Law VII. Corporate powers 3) Has the right of succession
Corporation Law VIII.Stockholders and members Its continued existence during its stated term cannot
Securities Regulation IX. Board of directors and trustees be affected by any change in the members or
Code X. Capital affairs stockholders or by any transfer of shares by a
Banking and Finance XI. Dissolution and liquidation stockholder to a 3rd person.
Intellectual Property XII. Other corporations
XIII.Merger and consolidation 4) Has the powers, attributes and properties
expressly authorized by law or incident to its
existence
I. Corporation, defined A corporation has no power except those expressly
conferred on it by the Corporation Code and those
A corporation is an artificial being created by that are implied or incidental to its existence.
operation of law, having the right of succession and (Premium Marble Resources v. CA 1996)
the powers, attributes, and properties expressly
authorized by law or incident to its existence. (Sec.
2, Corporation Code) II. Classification of corporations
Attributes of a Corporation
A. Stock Corporation (Asked in 01
1) An Artificial Being and 04)
A corporation exists by fiction of law. Hence, it can
act only through its directors, officers and
Corporations which have capital stock divided into
employees.
shares and are authorized to distribute to the
holders of such shares dividends or allotments of the
 Moral Damages – cannot be awarded in favor of
surplus profits on the basis of shares held (Sec 3)
corporations because they do not have feelings
and mental state. They may not even claim
It is organized for profit.
moral damages for besmirched reputation
(NAPOCOR v. Philipp Brothers Oceanic, 2001).
The governing body of a stock corporation is usually
However, a corporation can recover moral
the Board of Directors (except in certain instances,
damages under Art 2219 (7) if it was the victim
e.g. close corporations).
of defamation (Pilipinas Broadcasting Network
v. Ago Medical and Educational Center 2005).
B. Non-stock Corporation (Asked
 Criminal Liability – Since a corporation as a in 04)
person is a mere legal fiction, it cannot be
proceeded against criminally because it cannot
All other corporations are non-stock corporations
commit a crime in which personal violence or
(Sec. 3)
malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act
One where no part of the income is distributable as
amounting to a crime and never against the
dividends to its members, trustees, or officers,
corporation itself (West Coast Life Ins. Co. v.
subject to the provisions of the Code on dissolution.
Hurd [1914], Time Inc. v. Reyes [1971])
Not organized for profit.
NOTE – Doctrine of Separate Personality: A
corporation, upon coming into existence, is invested
Its governing body is usually the Board of Trustees.
by law with a personality separate and distinct from
those persons composing it as well as from any other
legal entity to which it may be related. (Yutivo Sons CIR vs. Club Filipino de Cebu (1962):
Hardware v. CTA 1961) There are two elements for a stock corporation to
exist:
2) Created by operation of law 1) Capital stock divided into shares, and
Mere consent of the parties to form a corporation is 2) An authority to distribute to the holders of such
not sufficient. The State must give its consent either shares, dividends or allotments of the surplus profits
through a special law (in case of government on the basis of shares held. (Test of WON a stock
corporation)
 MERCANTILE LAW REVIEWER

Even if there is a statement of capital stock, the

corporation is still NOT a stock corporation if k. Parent corporation – its control lies in its
dividends are NOT supposed to be declared, that is, power, directly or indirectly, to elect the
there is no distribution of retained earnings. subsidiary‘s directors thus controlling its 81
management policies.
Note: Under Sec. 43 of the Corporation Code, a
corporation is deemed to have the power to declare
dividends. Thus, so long as the corporation has III. Nationality of corporations
capital stock and there is no prohibition in its
Articles of Incorporation or in its by-laws for it to
declare dividends, such corporation is a stock A. Control Test
corporation.
A corporation shall be considered a Filipino
C. Other Classification corporation if the Filipino ownership of its capital
stock is at least 60%, and where the 60-40 Filipino-
alien equity ownership is NOT in doubt (SEC Opinion
a. Public corporation (Asked in 04) – One formed
dated 6 November 1989; DOJ Opinion No. 18, s.
or organized for the government of a portion of
1989).
the state. Its purpose is for the general good
and welfare.
Therefore, its shareholdings in another corporation
shall be considered to be of Filipino nationality when
b. Private corporation (Asked in 04) – One formed
computing the percentage of Filipino equity of that
for some private purpose, benefit, aim or end; it
second corporation (SEC Opinion dated 23 November
may be either stock or non-stock, government-
1993).
owned or controlled or quasi-public.
Control test is applied in the following:
c. Close corporation (see Sec. 96) one that is
 Exploitation of natural resources - ―Only
limited to selected persons or members of a
Filipino citizens or corporations whose capital
family
stock are at least 60% owned by Filipinos can
qualify to exploit natural resources.‖ (Sec. 2,
d. Educational corporation – One organized for
Art. XII, Consti.)
educational purposes (Sec. 106).
 Public Utilities - ―xxx no franchise, certificate
or any other form of authorization for the
e. Religious corporations
operation of a public utility shall be granted
Corporation sole is one formed for the purpose
except to citizens of the Philippines or to
of administering and managing, as trustee, the
corporations or associations organized under the
affairs, property and temporalities of any
laws of the Philippines at least 60% of whose
religious denomination, sect, or church, by the
capital is owned by such citizens. ― (Sec. 11,
chief archbishop, bishop, priest, rabbi, or other
Art. XII, Consti.)
presiding elder of such religious denomination,
sect or church (Sec. 110)
NOTE:
In the recently decided case of Gamboa vs. Teves
Corporation aggregate is a religious corporation
(G.R. No. 176579, June 28, 2011), the SC ruled as
incorporated by more than one person.
follows:
f. Eleemosynary corporation – One organized for a
The term "capital" in Section 11, Article XII of the
charitable purpose
1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus
g. Domestic corporation – One formed, organized,
in the present case only to common shares, and not
or existing under the laws of the Philippines.
to the total outstanding capital stock (common and
non-voting preferred shares).
h. Foreign corporation – One formed, organized or
existing under any laws other than those of the
The 60 percent of the "capital" assumes, or should
Philippines and whose law allows Filipino
result in, "controlling interest" in the corporation.
citizens and corporations to do business in its
Compliance with the required Filipino ownership of a
own country and state (Sec. 123).
corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not,
i. Corporation created by special laws or charter
but only such stocks which are generally entitled to
- Corporations which are governed primarily by
vote are considered.
the provisions of the special law or charter
creating them. Corporation Code has suppletory
For stocks to be deemed owned and held by
application. (Sec. 4)
Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino
j. Subsidiary corporation – one in which control,
equity. Full beneficial ownership of the stocks,
usually in the form of ownership of majority of
coupled with appropriate voting rights is essential.
its shares, is in another corporation (the parent
Thus, stocks, the voting rights of which have been
corporation).
 MERCANTILE LAW REVIEWER

assigned or transferred to aliens cannot be 1. Liability for torts and crimes

considered held by Philippine citizens or Philippine
82 nationals. As a separate juridical personality, a corporation can
be held liable for torts committed by its officers for
Individuals or juridical entities not meeting the corporate purpose (PNB v. CA, 1978).
aforementioned qualifications are considered as non-
Philippine nationals.
2. Recovery of damages
B. The Grandfather Rule GENERAL RULE
A Corporation has the power to sue in its corporate
It is a method of determining the nationality of a name. (Sec. 36)
corporation which in turn is owned in part by
another corporation by breaking down the equity EXCEPTION
structure of the shareholder corporation. Moral Damages cannot be awarded in favor of
corporations because they do not have feelings and
It involves the computation of Filipino ownership of mental state. They may not even claim moral
a corporation in which another corporation of partly damages for besmirched reputation (NAPOCOR v.
Filipino and partly foreign equity owns capital stock. Philipp Brothers Oceanic, 2001).
The percentage of shares held by the second
corporation in the first is multiplied by the latter‘s HOWEVER, a corporation can recover moral damages
own Filipino equity, and the product of these under Art 2219 (7) if it was the victim of defamation
percentages is determined to be the ultimate (Pilipinas Broadcasting Network v. Ago Medical and
Filipino ownership of the subsidiary corporation (SEC Educational Center, 2005).
Opinion re; Silahis Intl Hotel May 4, 1987)
Constitutional Rights
Corporate entities are entitled to due process, equal
IV. Corporate juridical protection, and protection against unreasonable
searches and seizures. However, a corporation is
personality not entitled to the privilege against self-
incrimination (Bataan Shipyard & Eng‘g Co. v.
A private corporation formed or organized under this PCGG, 1987)
code commences to have corporate existence and
juridical personality and is deemed incorporated B. Doctrine of piercing the
from the date the SEC issues a certificate of corporate veil (Asked in 91, 01
incorporation under its official seal (Sec. 19)
and 04)
A. Doctrine of Separate Juridical
Piercing the veil of corporate entity is merely an
Entity (Asked in 95, 96, 99 and equitable remedy, and may be granted only in cases
00) when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend
Concept crime (Yutivo Sons v CTA 1961) or where the
A corporation has a personality separate and corporation is a mere alter ego or business conduit
distinct from that of its stockholders and members of a person. (Koppel Phil v Yatco)
and is not affected by the personal rights,
obligations, and transactions of the latter. 1. Grounds for application of
doctrine
Merely a legal fiction for purposes of convenience
and to subserve the ends of justice  If done to defraud the government of taxes due
it.
Property  If done to evade payment of civil liability.
SHs have no claim on corporate property as owners,  If done by a corporation which is merely a
but mere expectancy or inchoate right to the same conduit or alter ego of another corporation.
upon dissolution of the corporation after all  If done to evade compliance with contractual
corporate creditors have been paid. Such right is obligations.
limited only to their equity interest (doctrine of  If done to evade financial obligation to its
limited liability). Although a stockholder‘s interest employees.
in the corporation may be attached by his personal
creditor, corporate property cannot be used to Seaoil vs Autocorp Group ( 2008, Nachura):
satisfy his claim (Wise & Co. v. Man Sun Lung, Q: Is a corporation liable for the individual acts of its
1940). stockholders or members? Is there an exception to
the general rule?

A: It is settled that a corporation has a personality

separate and distinct from its individual stockholders
or members, and is not affected by the personal
 MERCANTILE LAW REVIEWER

rights, obligations and transactions of the latter. The

corporation may not be held liable for the
V. Capital structure
obligations of the persons composing it, and neither
can its stockholders be held liable for its obligation. A. Number and Qualifications of 83
Of course, this Court has recognized instances Incorporators
when the corporation‘s separate personality may be
disregarded. However, we have also held that the
same may only be done in cases where the corporate 1. Definition
vehicle is being used to defeat public convenience,
justify wrong, protect fraud, or defend crime. Incorporators - are those stockholders or members
Moreover, the wrongdoing must be clearly and mentioned in the articles of incorporation as
convincingly established. It cannot be presumed. originally forming and composing the corporation
and who are signatories thereof.
2. Test in determining applicability
2. Requirements (Sec. 10)
GENERAL RULE
The mere fact that a corporation owns all or  Natural persons
substantially all of the stocks of another corporation  All Of legal age
is NOT sufficient to justify their being treated as one  Must own or subscribe to at least one share of
entity. stock of the corporation (Genuine interest)
 5-15 incorporators who must sign the articles of
EXCEPTION incorporation
The subsidiary is a mere instrumentality of the  Majority of the incorporators must be residents
parent corporation. of the Philippines

Circumstances rendering subsidiary an GENERAL RULE

instrumentality (PNB v. Ritratto Group, 2001): All incorporators/ corporators may be foreigners.
 The parent corporation owns all or most of the
subsidiary‘s capital stock. EXCEPTIONS
 The parent and subsidiary corporations have Fully or partly nationalized corporations
common directors or officers.
 The parent corporation finances the subsidiary.  Where NO foreign stockholder is allowed.
 The parent corporation subscribes to all the - Mass media except recording (Art. XVI, Sec.
capital stock of the subsidiary or otherwise 11 of the Constitution; Presidential
causes its incorporation. Memorandum dated 04 May 1994)
 The subsidiary has grossly inadequate capital. - Retail trade enterprises with paid-up capital
 The parent corporation pays the salaries and of less than US$2.5 Million (Sec. 5 of RA
other expenses or losses of the subsidiary. 8762)
 The subsidiary has substantially no business - Private security agencies (Sec. 4 of RA 5487)
except with the parent corporation or no assets - Small-scale mining (Sec. 3 of RA 7076)
except those conveyed to or by the parent - Utilization of natural resources (Art. XII, Sec.
corporation. 2 of the Constitution)
 In the papers of the parent corporation or in the - Ownership, operation and management of
statements of its officers, the subsidiary is cockpits (Sec. 5 of PD 449)
described as a department or division of the - Manufacture, repair, stockpiling and/or
parent corporation or its business or financial distribution of nuclear weapons (Art. II, Sec.
responsibility is referred to as the parent 8 of the Constitution)
corporation‘s own. - Manufacture, repair, stockpiling and/or
 The parent corporation uses the property of the distribution of biological, chemical and
subsidiary as its own. radiological weapons and anti-personnel
 The directors or executives of the subsidiary do mines (Various treaties to which the
not act independently in the interest of the Philippines is a signatory and conventions
subsidiary but take their orders from the parent supported by the Philippines)
corporation in the latter‘s interest. - Manufacture of firecrackers and other
 The formal ledger requirements of the pyrotechnic services (Sec. 5 of RA 7183)
subsidiary are not observed.  Only up to 20% foreign equity.
- Private radio communications network (RA
3846)
 Only up to 25% foreign equity.
- Private recruitment, whether for local or
overseas, employment (Art. 27 of PD 442)
- Construction and repair of locally funded
works (Sec. 1 of CA 541, LOI 630)
- Construction of defense-related structures
(Sec. 1 of CA 541)
 Only up to 40% foreign equity.
 MERCANTILE LAW REVIEWER

- Exploration, development and utilization of

natural resources (Art. XII, Sec. 2 of the Unissued Capital Stock - It is that portion of the
84 Constitution). capital stock that is not issued or subscribed. It does
- Realty companies and other corporations that not vote and draws no dividends.
own private lands (Art. XII, Sec. 7 of the
Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 Legal Capital - It is the amount equal to the
of RA 9182). aggregate par value and/or issued value of the
- Operation and management of public utilities outstanding capital stock (DE LEON).
(Art. XII, Sec. 11 of the Constitution; Sec. 16
of CA 146)
- Culture, production, milling, processing,
trading except retail of rice and corn and by-
products (Sec. 5 of PD 194; Sec. 15 of RA Requirement (Sec 13, Corporation Code)
8762). At least twenty-five (25%) percent of the authorized
- Adjustment companies (Sec. 323 of PD 612 as capital stock of the corporation must be subscribed;
amended by PD 1814). and
- Enterprises included in the Foreign
Investment Negative List (Sec. 3(g) in At least twenty-five (25%) of the total subscription
relation to Sec. 8 and Sec. 15 of R.A. 7042) has been fully paid to him in actual cash and/or in
 Only up to 60% foreign equity. property the fair valuation of which is equal to at
- Financing companies regulated by SEC (Sec. 6 least twenty-five (25%) percent of the said
of RA 5980 as amended by RA 8556) subscription, such paid-up capital being not less than
- Investment houses (Sec. 5 of PD 129 as five thousand (P5,000.00) pesos.
amended by RA 8366)
C. Corporate Term
NOTE—
Original subscribers - Persons whose names are
mentioned in the Articles, but not as incorporators; Maximum life of 50 years. Extendible for a period
they do not sign the Articles not exceeding 50 years at any one instance. No
extension, however, can be made earlier than 5
years before the end of the term, unless there are
B. Minimum Capital Stock and justifiable reasons for an earlier extension as may
Subscription Requirements be determined by the SEC (Sec. 11)

Definitions Extension requires an amendment of the AOI. Any

dissenting stockholder may exercise his appraisal
Capital Stock is an amount fixed in the AOI (where right (Sec. 37).
shares are with par value) and is unaffected by
profits and losses. It limits the maximum amount or D. Classification of Shares
number of shares that may be issued without formal
amendment of the articles of incorporation (See Sec. Shares of stock of stock corporations may be divided
38). into classes or series of shares or both. Each class or
series of shares may have rights, privileges or
Authorized Capital Stock - is synonymous with restrictions, as stated in the AOI.
capital stock where the shares of the corporation
have par value. If the shares of stock have no par Classification of shares:
value, the corporation has no ACS, but it has capital  Common shares
stock the amount of which is not specified in the AOI  Preferred shares
as it cannot be determined until all the shares have  Par value shares
been issued. In this case, the two terms are not  No-par value shares
synonymous (DE LEON).  Founder‘s shares
 Redeemable shares
Subscribed Capital Stock - It is the amount of the  Treasury shares
capital stock subscribed whether fully paid or not. It  Convertible shares
connotes an original subscription contract for the  Non-voting shares
acquisition by a subscriber of unissued shares in a
corporation (Secs. 60 and 61) GENERAL RULE
No share may be deprived of voting rights (Sec. 6)
Outstanding Capital Stock - it is the total shares of
stock issued under the binding subscription EXCEPTIONS
agreements to subscribers or stockholders, whether  Preferred or
or not fully or partially paid, except treasury shares  Redeemable shares,
(Sec. 137). It is broader than ―subscribed‖ capital  Provided by the Code
stock.
There shall always be a class/series of shares which
Paid-up Capital - Portion of the authorized capital have a COMPLETE VOTING RIGHTS (Sec. 6)
stock which has been subscribed and paid (See Sec.
13).
 MERCANTILE LAW REVIEWER

Doctrine of Equality of Shares  AOI must state the fact that the corporation
Each share shall be EQUAL in ALL respects to every issues no-par shares and the number of shares.
other share, except as otherwise provided in the AOI  Banks, insurance companies, trust companies,
and stated in the certificate of stock (Sec. 6) building and loan associations, and public 85
utilities cannot issue no-par value shares (Sec.
a. Common Shares 6).
 The issued price may be fixed in the AOI, or by
The most common type of shares which enjoy no the BOD pursuant to authority conferred upon it
preference but the owners thereof are entitled to by the AOI, or, in the absence thereof, by
management of the corporation and to equal pro- majority vote of the outstanding shares in a
rata division of profits after preference. It meeting called for the purpose (Sec. 62).
represents a residual ownership interest in the
corporation. e. Founder‘s Shares (Sec. 7)

b. Preferred Shares These are shares, classified as such in the AOI, which
are given certain rights and privileges not enjoyed by
Stocks which are given preference by the issuing the owners of other stocks.
corporation in dividends and the distribution of
assets of the corporation in case of liquidation or Where exclusive right to vote and be voted for in the
such other preferences as may be stated in the AOI election of directors is granted, such right must be
which do not violate the Corporation Code. for a limited period not to exceed 5 years subject to
approval by SEC. 5 year period shall commence from
Limitations: date of approval by SEC.
 Preferred shares can only be issued with par
value. f. Redeemable Shares (Sec. 8)
 Preferred shares must be stated in the Articles
of Incorporation and in the certificate of stock. These are shares which permit the issuing
 The BOD may fix the terms and conditions only corporation to redeem or purchase its shares.
when so authorized by the AOI and such terms
and conditions shall be effective upon filing a Limitations:
certificate thereof with the SEC.  Redeemable shares may be issued only when
expressly provided for in the AOI (Sec. 8).
c. Par value shares  The terms and conditions affecting said shares
must be stated both in the AOI and in the
These are shares with a stated value set out in the certificate (Sec. 8).
AOI. This remains the same regardless of the  Redeemable shares may be deprived of voting
profitability of the corporation. This gives rise to rights in the AOI, unless otherwise provided in
financial stability and is the reason why banks, trust the Code.
corporations, insurance companies and building and  The corporation is required to maintain sinking
loan associations must always be organized with par fund to answer for redemption price if the
value shares. corporation is required to redeem.
 The redeemable shares are deemed retired upon
Par value is minimum issue price of such share in the redemption unless otherwise provided in the
AOI which must be stated in the certificate AOI.
 Unrestricted retained earnings is NOT necessary
d. No-par value shares before shares can be redeemed but there must
be sufficient assets to pay the creditors and to
These are shares without a stated value. answer for operations (Republic Planters Banks
v. Agana, 1997). Redemption cannot be made if
―A no par share does not purport to represent any such redemption will result in insolvency or
stated proportionate interest in the capital stock inability of the corporation to meet its
measured by value, but only an aliquot part of the obligations (SEC Opinion, 24 Aug 1987).
whole number of such shares of the issuing
corporation‖ (AGBAYANI) NOTE— Redeemable shares reacquired shall be
considered retired and no longer issuable, unless
Limitations: otherwise provided in the Articles of the redeeming
 No-par value shares cannot have an issue price corporation (SEC Rules Governing Redeemable and
of less than P5.00 per share (Sec. 6). Treasury Shares, 26 April 1982).
 They shall be deemed fully paid and non-
assessable and the holders of such shares shall g. Treasury Shares (Sec. 9)
not be liable to the corporation or to its
creditors in respect thereto (Sec. 6). These are shares which have been issued and fully
 Entire consideration received by the corporation paid for, but subsequently re-acquired by the issuing
for its no-par value shares shall be treated as corporation by purchase, redemption, donation or
capital and shall not be available for distribution through some other lawful means. Such shares may
as dividends (Sec. 6). again be disposed of for a reasonable price fixed by
the BOD.
 MERCANTILE LAW REVIEWER

Treasury shares are therefore issued shares, but EXCEPTIONS

86 being in the treasury, do not have the status of 1. Express or implied agreement to the contrary
outstanding shares. Consequently, although a 2. Novation, not merely adoption or ratification of
treasury share, not retired by reacquisition, may be the contract
re-issued or resold, but such share, as long as it is
held by the corporation as a treasury share, 2. Liability of Corporation for
participates neither in the dividends, because
dividends cannot be declared by the corporation to
Promoter‘s Contract
itself nor in the meetings of the corporation as
GENERAL RULE
voting stock, for otherwise equal distribution of
A corporation is NOT bound by the contract. A
voting powers among stockholders will be effectively
corporation, until organized, has no life and no legal
lost and the directors will be able to perpetuate
existence. It could not have had an agent (the
their control of the corporation, though it still
promoter) who could legally bind it. (Cagayan
represents a paid for interest in the property of the
Fishing Development Co., Inc. v. Sandiko)
corporation. (CIR v. Manning, 1975).
EXCEPTIONS
NOTE—
A corporation may be bound by the contract if it
Delinquent stocks, which are stocks that have not
makes the contract its own by:
been fully paid, may become treasury stocks upon
1. Adoption or ratification of the ENTIRE contract
bid of the corporation in absence of other bidders
after incorporation.
(Sec.68).
Note:
 Power of the corporation to adopt a
h. Convertible shares
contract must be understood to be limited
to such contracts as the corporation itself,
A type of preferred stock that the holder can
after its organization, would be authorized
exchange for a predetermined number of common
to make. (Builders‘ Duntile Co. v. Dunn Mfg.
shares at a specified time
Co.)
 Novation or the intent to novate the
i. Non-voting shares (Sec. 6)
original contract is required to adopt or
ratify the pre-incorporation contract.
GENERAL RULE
(Campos, 1990)
Non-Voting Shares are not entitled to vote.
2. Acceptance of benefits under the contract with
EXCEPTIONS
knowledge of the terms thereof.
 Amendment of the AOI
 Adoption and amendment of by-laws
3. Performance of its obligation under the contract
 Sale, lease, exchange, other disposition of all or
substantially all of the corporate property
 Incurring, creating or increasing bonded B. Subscription Contract
indebtedness
 Increase or decrease of capital stock Section 60. Subscription contract.
 Merger and consolidation Any contract for the acquisition of unissued stock in
 Investment of corporate funds in another an existing corporation or a corporation still to be
corporation or business formed shall be deemed a subscription contract
 Dissolution of the corporation within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase or
some other contract.
VI. Incorporation and
a. Characteristics
organization
There can be a ―subscription‖ only with reference to
A. Promoter ―unissued shares‖ of the Authorized Capital Stock
(ACS), in the following cases:
1. The original issuance of the ACS at the time
Promoters are persons who, acting alone or with
of incorporation.
others, take initiative in founding and organizing the
2. The opening, during the life of the
business or enterprise of the issuer and receives
corporation, of the portion of the original
consideration therefor (RA 8799, The Securities
ACS previously unissued; or
Regulation Code).
3. The increase in ACS achieved through a
formal amendment of the Articles and
1. Liability of Promoter registration thereof with the SEC.
(VILLANUEVA)
GENERAL RULE
The promoter binds himself PERSONALLY & assumes
the responsibility of looking to the proposed
corporation for reimbursement.
 MERCANTILE LAW REVIEWER

b. Status as Shareholder months or within a longer period as may be

stipulated in the contract of subscription; or
A person becomes a shareholder the moment he: 2. After the submission of the AOI to the SEC.
 Enters into a SUBSCRIPTION CONTRACT with an 87
existing corporation (he is a stockholder upon D. Consideration for Stocks
acceptance of the corporation of his offer to
subscribe whether the consideration is fully paid
or not). a.Forms of Consideration (Sec. 62)
 Purchases TREASURY SHARES from the [CP-LADS]
corporation  Actual cash
 Acquires shares from existing shareholders by
 Property, tangible or intangible, actually
SALE OR ANY OTHER CONTRACT (SUNDIANG AND
received by the corporation and necessary or
AQUINO)
convenient for its use and lawful purposes at a
c. Types of subscription contracts fair valuation equal to the par or issued value of
the stock issued
i. Pre-incorporation subscription (Sec. NOTES—
61) - Property should NOT be encumbered.
It is a subscription for shares of stock of a Otherwise, it would impair the consideration.
corporation still to be formed. - Valuation is initially determined by the
incorporators or the board of directors,
ii. Post-incorporation subscription subject to approval by the SEC.
 Labor performed for or services actually
It is entered into after incorporation.
rendered to the corporation;
 Previously incurred indebtedness of the
d. Interest on unpaid subscription corporation;
 Amounts transferred from unrestricted retained
GENERAL RULE earnings to stated capital (declaration of stock
Stockholder is NOT liable to pay interest on his dividends); and
unpaid subscription.  Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
EXCEPTION
If so required by the by-laws b. Limitations on Consideration:

Stocks shall NOT be issued

RATE: that fixed in the by-laws, otherwise, the legal
 for a consideration less than the par or issued
rate (Sec. 66)
price thereof
NOTES—  in exchange for promissory notes or future
Transfer of unissued shares = subscription. service

Transfer for consideration of treasury shares = NOTES—

sale by the corporation (not subscription). Promissory notes and future service may be used as
consideration provided that certificates of stock will
Transfer of previously issued shares be issued ONLY AFTER actual encashment of
by a stockholder to a third person = sale. promissory note or performance of such services.

Same consideration applies for the issuance of bonds

Shareholders are NOT creditors of the corporation
by the corporation.
with respect to their shareholdings thereto and the
principle of compensation or set-off has no
application. E. Articles of Incorporation
Subscription contract is NOT required to be in  constitutes the charter of the corporation
writing.  defines the contractual relationships between
the State and the corporation, the stockholders
C. Pre-incorporation Subscription and the State, and the corporation and the
stockholders
Agreements
The Articles must be filed with the SEC for the
It is a subscription for shares of stock of a issuance of the Certificate of Incorporation.
corporation still to be formed.

When subscription is IRREVOCABLE:

1. Contents (Sec. 14)
1. For a period of at least 6 months from the date
i. Corporate name (Sec. 18)
of subscription, UNLESS (1) all of the other
subscribers consent to the revocation, or (2) the
1. Must not be identical or deceptively or
incorporation fails to materialize within six (6)
confusingly similar to that of any existing
 MERCANTILE LAW REVIEWER

corporation or to any other name already GENERAL RULE

protected by law Not less than 5 but not more than 15
88 2. Not patently deceptive, confusing or contrary to directors/trustees
existing laws
EXCEPTION
Required by law to include the word ―Corporation‖ Non-stock corporations whose articles or by-laws
or ―Inc.‖ (Campos, 1990) may provide for more than 15 trustees (Sec. 92)

Change of corporate name requires the amendment Educational non-stock corporations:

of the AOI: majority vote of the board and the vote  trustees may NOT be less than 5 NOR exceed 15
or written assent of stockholders holding 2/3 of the  number of trustees shall be in multiples of 5
outstanding capital stock (Sec. 16). (Sec. 108)

Republic Planters Bank v. CA (1992): Nationalized industries:

Amendment of a corporation‘s AOI changing its Aliens may be directors but only in such number as
corporate name does not extinguish the may be proportional to their allowable ownership of
personality of the original corporation. It is the shares
same corporation with a different name, and its
character is not changed. Consequently, the ―new‖ vii. If STOCK corporation:
corporation is still liable for the debts and  authorized capital stock in lawful money of the
obligations of the ―old‖ corporation. Philippines
 the number of shares into which the ACS is
ii. Purpose clause divided
 Must indicate the PRIMARY and SECONDARY  If with par value shares, the par value of each
purposes if there is more than one purpose, share (Sec. 14(8), Sec. 15(7)).
which should not contradict or change the  names, citizenship and residences of original
nature of the corporation (Sec. 14(2)) subscribers
 Must not be patently unconstitutional, illegal,  amount subscribed and paid on each
immoral, and contrary to government rules and subscription
regulations (Sec. 17 (2)).  fact that some or all shares are without par
 Must not be for the purpose of practicing a value
profession (People v. United Medical Service,
200 N.E. 157, cited in Campos) viii. If NON-STOCK:
 amount of capital
iii. Principal office  names, nationalities & residences of
 Must be within the Philippines (Sec. 14 (3)) contributors
 AOI must specify both province or city or town  amount contributed by each
where it is located
ix. Amount paid by each subscriber on
Important for (1) determining venue in an action by their subscription, which shall not be
or against the corporation, and (2) determining the less than 25% of subscribed capital
province where a chattel mortgage of shares should and shall not be less than P5,000
be registered (Chua Gan vs. Samahang Magsasaka, (Sec. 15 (8 & 9))
1935).
x. Name of treasurer elected by the
iv. Corporate Term subscribers (Sec. 15 (10)
 Maximum life of 50 years.
 Extendible for a period not exceeding 50 years xi. Other matters
at any one instance. No extension, however, can  Classes of shares, as well as preferences or
be made earlier than 5 years before the end of restrictions on any such class (Sec. 6).
the term. (Sec. 11)  Denial or restriction of pre-emptive right
(Sec.39).
Extension requires an amendment of the subject  Prohibition against transfer of stock which
to the exercise of appraisal right by the dissenting would reduce stock ownership to less than the
stockholder (Sec. 37). required minimum in the case of a nationalized
business or activity (Sec. 15(11)).
v. Names, citizenship and residences of
incorporators 2. Non-amendable items
vi. Number, names, citizenship and The following items state accomplished facts,
residences of directors/trustees. therefore, cannot be amended:
(Asked in 05 and 08)  The names, nationalities and residences of the
incorporators
Stock corporations: DIRECTORS (Otherwise, an amendment would go against the
Non-stock corporations: TRUSTEES definition of ―incorporators‖ in Sec. 5)
 First set of directors or trustees
 Original stock subscriptions and paid-in capital
 MERCANTILE LAW REVIEWER

 Treasurer-in-trust b. Issuance of Certificate of Incorporation by

 Place and date of execution SEC
 Witnesses (De Leon, 2010)
EFFECT: Commencement of corporate existence and 89
NOTES: juridical personality (Sec. 19)
AOI must be accompanied by Treasurer‘s sworn
statement of compliance with Sec. 13 on amount of REVOCATION of certificate of incorporation:
capital to be subscribed and paid for the purposes of If incorporators are found guilty of fraud in procuring
incorporation; otherwise, SEC shall not accept the the same after due notice and hearing (Sec. 6(i), PD
AOI. (Sec. 14) 902-A)

F. Corporate Name – limitations c. Grounds for disapproving AOI: (Sec. 17)

[F2P2]
on use of corporate name  AOI does not SUBSTANTIALLY comply with the
form prescribed
Corporate name (Sec. 18)  Purpose is patently unconstitutional, illegal,
1. Must not be identical or deceptively or immoral, contrary to government rules and
confusingly similar to that of any existing regulations
corporation or to any other name already  Treasurer‘s Affidavit concerning the amount of
protected by law capital subscribed and or paid is false
2. Not patently deceptive, confusing or contrary to  Required percentage of ownership of Filipino
existing laws citizens has not been complied with.

Required by law to include the word ―Corporation‖ REMEDY in case of rejection of AOI - petition for
or ―Inc.‖ (Campos, 1990) review in accordance with the Rules of Court (Sec.
6, last par., PD 902-A)
Change of corporate name requires the amendment
of the AOI: majority vote of the board and the vote SEC shall give the incorporators reasonable time to
or written assent of stockholders holding 2/3 of the correct or modify objectionable portions of the
outstanding capital stock (Sec. 16). articles or amendment (Sec. 17).

Republic Planters Bank v. CA (1992): H. Election of Directors or

Amendment of a corporation‘s AOI changing its
corporate name does not extinguish the
Trustees
personality of the original corporation. It is the
same corporation with a different name, and its a. Requirements
character is not changed. Consequently, the ―new‖
corporation is still liable for the debts and  To hold the ELECTION meeting:
obligations of the ―old‖ corporation. - owners of MAJORITY of the OCS or majority
of the members entitled to vote in the
meeting must be present, in person or by
G. Registration and Issuance of proxy,
Certificate of Incorporation
 Manner of elections
a. Registration of the Articles of GEN. RULE: Viva voce
Incorporation EXCEPTION: Election by ballot if requested

Documents to be filed with SEC (Asked in 02): [BAT-  STOCKHOLDER‘S RIGHT TO VOTE and USE ANY
LaNG] METHOD for voting cannot be deprived in the
1. Articles of Incorporation articles of incorporation or in the by-laws
2. Treasurer‘s Affidavit certifying that 25% of the
total authorized capital stock has been  In STOCK CORP:
subscribed and at least 25% of such has been Stockholders entitled to vote number of shares
fully paid in cash or property. of stock standing in OWN NAME in the books of
3. Bank certificate covering the paid-up capital. the corporation-
4. Letter authority authorizing the SEC to examine
the bank deposit and other corporate books and GENERAL RULE (when by-laws silent): at time of
records to determine the existence of paid-up election
capital. EXCEPTION: at the time fixed in the by-laws
5. Undertaking to change the corporate name in
case there is another person or entity with same  In NON-STOCK CORP:
or similar name that was previously registered. GENERAL RULE: One member = as many votes as
6. Certificate of authority from proper government there are vacancies but only one vote per
agency whenever appropriate like BSP for banks candidate
and Insurance Commission for insurance EXCEPTION: otherwise provided by AOI/By-laws
corporations. (SUNDIANG AND AQUINO)
 No delinquent stock shall be voted.
 MERCANTILE LAW REVIEWER

corporation is deemed dissolved. Organization

 REQUIREMENT TO BE ELECTED: includes: the filing & approval of by-laws with the
90 Candidates receiving the highest number of SEC and the election of directors and officers
votes shall be declared elected (PLURALITY) (Campos, 1990).

b. Methods of Voting (Sec. 24) c. REQUISITES OF VALID BY-LAWS (Sec. 46)

 Must be approved by the affirmative vote of the
i. Straight Voting stockholders representing MAJORITY of the
outstanding capital stock or majority of
ii. Cumulative voting for one candidate members (If filed pre-incorporation: must be
A stockholder is allowed to cumulate his votes and approved and signed by all incorporators)
give one candidate as many votes as the number of  Must be kept in the principal office of the
directors to be elected multiplied by the number of corporation, subject to inspection of
his shares shall equal. stockholders or members during office hours
(Sec. 74)
Illustration: If there are 5 directors to be elected
and Pedro, as shareholder, has 100 shares, Pedro can d. BINDING EFFECT (Sec. 46)
give 500 (5 x 100 shares) votes to just one ONLY from date of issuance of SEC of certification
candidate. that by-laws are not inconsistent with the Code

iii. Cumulative voting by distribution Pending approval, they CANNOT bind stockholders or
A stockholder may cumulate his shares by corporation
multiplying the number of his shares by the number
of directors to be elected and distribute the same e. Amendments or Repeal (Sec. 48)
among as many candidates as he shall see fit. Effected by: MAJORITY vote of the members of the
BOARD and MAJORITY VOTE OF THE OWNERS of the
Illustration: In the illustration above, Pedro may OCS or members, in a meeting duly called for the
choose to give 100 votes to candidate 1, 100 votes to purpose
candidate 2, 100 votes to candidate 3, 150 votes to
candidate 4, and 50 votes to candidate 5. DELEGATION TO THE BOD OF POWER TO AMEND OR
REPEAL BY-LAWS:
I. Adoption of By-Laws by vote of stockholders representing 2/3 of the OCS
or 2/3 of the members
BY-LAWS
HOW DELEGATION REVOKED:
 Product of agreement of the
by MAJORITY VOTE only of stockholders representing
stockholders/members and establish the rules
2/3 of the OCS or 2/3 of the members
for internal government of the corporation
(Campos, 1990)
 Mere internal rules among stockholders and
cannot affect or prejudice 3rd persons who deal VII. Corporate powers
with the corporation unless they have
knowledge of the same (China Banking Corp v
CA, 1997)
A. General powers, theory of
general capacity (Sec. 36)
a. ADOPTION OF BY-LAWS (Sec. 46)
 After incorporation - within 1 month after 1. Sue and be sued in its corporate name;
receipt of official notice of the issuance of its 2. Succession;
certificate of incorporation by the SEC. 3. Adopt and use a corporate seal;
 Prior to incorporation - approved and signed by 4. Amend its Articles of Incorporation;
all the incorporators & submitted to SEC 5. Adopt by-laws;
together with AOI 6. For stock corporations - issue or sell stocks to
subscribers and sell treasury stocks; for non-
b. EFFECT OF FAILURE TO FILE THE BY-LAWS stock corporation - admit members to the
WITHIN THE PERIOD: corporation;
 does not imply the "demise" of the corporation. 7. Purchase, receive, take or grant, hold, convey,
By-laws may be required by law for an orderly sell, lease, pledge, mortgage and otherwise deal
governance and management of corporations with such real and personal property, pursuant
but they are not essential to corporate birth. to its lawful business;
Therefore, failure to file them within the period 8. Enter into merger or consolidation with other
required by law by no means tolls the automatic corporations as provided in the Code;
dissolution of a corporation (Loyola Grand Villas 9. Make reasonable donations, including those for
Homeowners Assn v. CA (1997) the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
NOTE— Provided, no corporation, domestic or foreign,
Section 22 on the effect of failure to formally shall give donations in aid of any political party
organize within 2 years from incorporation, the or candidate or for purposes of partisan political
corporation‘s corporate powers cease and the activity;
 MERCANTILE LAW REVIEWER

10. Establish pension, retirement, and other plans  Increase or decrease Capital stock (Sec. 38)
for the benefit of its directors, trustees, officers
and employees; and  Incur, create or increase Bonded indebtedness
11. Exercise such other powers as may be essential (Sec. 38) 91
or necessary to carry out its purposes a) Same requirements above from a-c
b) A certificate in duplicate must be signed by
NOTE— a majority of the directors of the
The Corporation has implied powers which are corporation (countersigned by the chairman
deemed to exist because of the following provisions: and the secretary of the SH meeting),
 ―Except such as are necessary or incidental to setting forth:
the exercise of the powers so conferred‖ (Sec. a. That requirements of this section have
45) been complied with
 ―Such powers as are essential or necessary to b. The amount of the increase or
carry out its purpose or purposes as stated in diminution of the capital stock
the AOI‖ – catch-all phrase (Sec. 36(11)). c. In case of increase,
i. the amount of capital stock or
B. Specific powers, theory of number of shares of no-par stock
actually subscribed
specific capacity ii. names, nationalities and
residences of the persons
(BADD PIT MC) subscribing
iii. the amount of no-par stock
1. Power to extend or shorten subscribed by each
corporate term iv. the amount paid by each on his
subscription, or the amount of
capital stock or number of shares
2. Power to increase or decrease of no-par stock allotted to each
capital stock or incur, create, stockholder if such increase is for
increase bonded indebtedness the purpose of making effective
stock dividend
d. any bonded indebtedness to be
3. Power to deny pre-emptive rights incurred, created or increased
e. the actual indebtedness of the
4. Power to sell or dispose of corporation on the day of the meeting
f. the amount of stock represented at the
corporate assets
meeting
g. the vote authorizing the increase or
5. Power to acquire own shares diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness
6. Power to invest corporate funds in c) prior approval of SEC is required
another corporation or business d) duplicate certificates shall be kept on file
in the office of the corporation and the
7. Power to declare dividends other shall be filed with the SEC, attached
in the original articles of incorporation.
a. From and after approval of the SEC of
8. Power to enter into management its certificate of filing, the capital
contract stock shall stand increased or
decreased and the incurring, creating
(Sec. 37-44) or increasing of any bonded
 Extend or shorten the corporate Term (Sec. 37) indebtedness authorized
a) Must be approved by majority vote of the b. SEC shall not accept for filing any
Board of Directors/ Board of Trustees certificate of increase unless
(BOD/BOT) accompanied by the sworn statement
b) Ratified at a meeting by 2/3 of SH of the treasurer of the corporation
representing the outstanding capital stock/ showing:
2/3 of members of non-stock corporations i. That at least 25% of such
c) Written notice of meeting (includes increased capital stock have
proposed action, time and place of been subscribed and
meeting) shall be addressed to each ii. that at least 25% of the amount
SH/member at his place of residence and subscribed has been paid or that
deposited to the addressee in the post there has been transferred to
office, or served personally the corporation property the
d) In case of extension of corporate term, value is equivalent to 25% of the
appraisal right may be exercised by the subscription
dissenting stockholder c. SEC shall not approve any decrease in
the capital stock if its effect shall
 MERCANTILE LAW REVIEWER

prejudice the rights of corporate primary purpose, the approval of the SH/
creditors members is not necessary
92 e) Bonds issued by a corporation shall be
registered with the SEC  Declare dividends (Sec. 43)
a) Out of unrestricted retained earnings
 Deny Preemptive right (Sec. 39) b) Payable in cash, in property, or in stock to
- All SH of a Stock Corporation have all SH on the basis of outstanding stock held
preemptive right to subscribe to all issues by them
or disposition of shares of any class, in c) Any cash dividend due on delinquent stock
proportion to their respective shareholdings shall first be applied to the unpaid balance
- Pre-emptive right shall not extend to: on the subscription plus costs and expenses
a) shares to be issued in compliance with d) Stock dividends shall be withheld from the
laws requiring stock offerings or delinquent stockholder until his unpaid
minimum stock ownership by the public subscription is fully paid
b) shares to be issued in good faith with e) Should be approved by 2/3 of SH
the approval of 2/3 of the stockholders representing the outstanding capital stock
representing outstanding capital stock, at a regular/ special meeting called for that
in exchange for property needed for purpose
corporate purposes or in payment of a f) Stock corporations- prohibited from
previously contracted debt retaining surplus profits in excess of 100% of
their paid-in capital stock, except:
 Sell or Dispose of substantially all its assets a. When justified by definite corporate
(Sec. 40) expansion projects or programs
a) Same requirements from a-c as Sec. 37 approved by the BOD
above b. When the corporation is prohibited
b) Any dissenting SH may exercise his appraisal under any load agreement with any
right financial institution or creditor from
c) Deemed to cover substantially all the declaring dividends without its consent,
corporate property and assets and such consent has not yet been
d) After authorization by the SH/ members, secured
the BOD/ BOT may abandon such sale, c. When it can be clearly shown that such
lease, exchange, mortgage, pledge or other retention is necessary under special
disposition, subject to the rights of third circumstances obtaining in the
parties under any contract relating thereto, corporation
without further action or approval by the
SH/ members  Enter into Management contracts (Sec. 44)
e) Corporation is not restricted in its power to a) Should be approved by the BOD and by SH
dispose assets if the same is necessary in owning at least the majority of the
the usual and regular course of business of outstanding capital stock or at least a
the corporation or if the proceeds of the majority of the members of both the
sale will be appropriated for the conduct of managing and the managed corporation at a
its remaining business meeting duly called for that purpose
b) Should be approved by the 2/3 of
 Acquire its own shares (Sec. 41) stockholders owning outstanding capital
a) For a legitimate corporate purpose/s, stock/ members of the managed
including but not limited to the following: corporation when:
a. To eliminate fractional shares arising a. A stockholder or stockholders
out of stock dividends representing the same interest of both
b. To collect or compromise an the managing and managed
indebtedness to the corporation, corporations own more than 1/3 of the
arising out of unpaid subscription, in a total outstanding capital stock entitled
delinquency sale, and to purchase to vote of the managing corporation;
delinquent shares sold during said sale; or
and b. A majority of the members of the BOD
c. To pay dissenting or withdrawing of the managing corporation also
stockholders constitute a majority of the BOD of the
b) Provided there are unrestricted retained managed corporation
earnings in the corporate books to cover the c) No management contract shall be entered
shares purchased or acquired into for a period longer than 5 years for any
one term
 Invest in another corporation or business (Sec. d) a-c above applies to any contract whereby
42) a corporation undertakes to manage or
a) Same requirements from a-c as Sec. 37 operate all or substantially all of the
above business of another corporation, whether
b) Any dissenting SH shall have appraisal right such are called service contracts, operating
c) Where the investment is reasonably agreements or otherwise
necessary to accomplish the corporation‘s e) Service contracts or operating agreements
which relate to exploration, development,
 MERCANTILE LAW REVIEWER

exploitation or utilization of natural  Partly executed and partly executory –

resources may be entered into for such principle of ―no unjust enrichment at expense of
periods as may be provided in the pertinent another‖ shall apply;
laws and regulations  Executory contracts apparently authorized but 93
ultra vires – the principle of estoppel shall
NOTES— apply.
2 general restrictions on the power of the
corporation to acquire and hold properties: ULTRA VIRES ACTS ILLEGAL ACTS
 property must be reasonably and necessarily Not necessarily unlawful, Unlawful; against law,
required by the business but outside the powers of morals, public policy,
 that the power shall be subject to the the corporation and public order
limitations prescribed by other special laws and Can be ratified Cannot be ratified
the constitution (corporation may not acquire Can bind the parties if Cannot bind the parties
more than 30% of voting stocks of a bank; wholly or partly executed
corporations are restricted from acquiring public
lands except by lease of not more than 1000
Seaoil vs Autocorp Group (2008, Nachura):
hectares)
An ultra vires act is distinguished from illegal act,
the former being voidable which may be enforced by
9. Ultra vires acts (Sec. 45) performance, ratification, or estoppel, while the
latter is void and cannot be validated.
Definition
Ultra Vires acts are those acts which a corporation is Remedies in Case of Ultra Vires Acts
not empowered to do or perform because they are  State
not conferred by its AOI or by the Corporation Code, - Forfeiture by judgment of Court
or not necessary or incidental to the exercise of the - Suspension or revocation of the certificate of
powers so conferred. registration by the SEC
 Stockholders
Types of Ultra Vires Acts - Injunction
 Acts done beyond the powers of the - Derivative suit
corporation as provided in the law or its articles  Creditors
of incorporation; o Nullification of contract in fraud of
 Acts or contracts entered into in behalf of a creditors
corporation by persons who have no corporate
authority (Note: This is technically ultra vires
acts of officers and not of the corporation); 10. Doctrine of individuality of
 Acts or contracts, which are per se illegal as subscription
being contrary to law. (VILLANUEVA)
Section 64 of the Corporation Code implicitly sets
i. Applicability of ultra vires forth the doctrine that subscription is one entire and
doctrine indivisible contract. Thus, if the stockholder has not
paid the full amount of his subscription, he cannot
It is a question, therefore, in each case of the logical
transfer part of it in view of the indivisible nature of
relation of the act to the corporate purpose
subscription contract. It is only upon full payment of
expressed in the charter. If that act is one which is
the whole subscription that a stockholder can
lawful in itself, and not otherwise prohibited, is
transfer a portion of his subscription. However, the
done for the purpose of serving corporate ends, and
entire subscription although not yet fully paid, may
is reasonably tributary to the promotion of those 75
be transferred to a single transferee. It is necessary,
ends, in a substantial, and not in a remote and
however, to secure the consent of the corporation
fanciful sense, it may fairly be considered within the
since the transfer of subscription right contemplates
charter powers. The test to be applied is whether
a novation of contract which, under Article 1293 of
the act in question is in direct and immediate
the Civil Code of the Philippines, cannot be made
furtherance of the corporation‘s business, fairly
without the consent of the creditor. Likewise, it has
incident to the express powers and reasonably
to be emphasized that under Section 63 of the
necessary to their exercise. If so, the corporation
Corporation Code, no transfer shall be valid, except
has the power to do it; otherwise, not. (Montelibano
as between the parties, until the transfer is
v. Bacolod-Murcia Milling Co., Inc., G.R. No.
recorded in the books of the corporation. (SEC
15092, May 18, 1962)
Opinion, August 7, 1991)

ii. Consequences of ultra vires

11. Doctrine of equality of shares
acts
Each share shall be EQUAL in ALL respects to every
 Executed contract – courts will not set aside or
other share, except as otherwise provided in the AOI
interfere with such contracts;
and stated in the certificate of stock (Sec. 6)
 Executory contracts – no enforcement even at
the suit of either party (void and
unenforceable);
 MERCANTILE LAW REVIEWER

12. Trust fund doctrine of majority of the board consented by

stockholders/ members is required.
94 Boman Environmental Development Corporation v.
If the investment is OUTSIDE the purpose/s for
CA (1988):
which the corporation was organized, AOI must
Trust Fund Doctrine means that the capital stock,
be amended first.
properties and other assets of a corporation are
regarded as equity in trust for the payment of
 Adoption, Amendment and Repeal of By-Laws
corporate creditors. Stated simply, the trust fund
(Sec. 48)
doctrine states that all funds received by the
 Merger and Consolidation
corporation in payment of the shares of stock shall
 Dissolution of the Corporation
be held in trust for the corporate creditors and other
stockholders of the corporation. Under such
b. Corporate Acts Requiring Approval of
doctrine no fund shall be used to buy back the issued
Stockholders or Members (Voting
shares of stock except only in instances specifically
Shares Only)
allowed by the Corporation Code.
 Declaration of Stock Dividends (Sec. 43)
C. How Exercised
 Management Contracts (Sec. 44)
- Any contract whereby a corporation
1. By the Shareholders undertakes to manage or operate ALL OR
SUBSTANTIALLY ALL of the business of
a. Corporate Acts Requiring Approval of
another corporation for a period NOT longer
Stockholders or Members (Voting and
than 5 years
Non-Voting Shares)
- Requisites:
o Approval by the BOD
GENERAL RULE
o Approval by SH owning at least the
Vote necessary to approve a particular corporate act
majority of the OCS or the members of
as provided in this Code shall be deemed to refer
BOTH the managing and the managed
only to stocks with voting rights (Sec. 6)
corporation (at meeting duly called)
o 2/3 vote required of the managed
EXCEPTIONS (Sec. 6)
corporation when:
Voting and non-voting shares shall be entitled to
 Where a SH/s representing the same
vote in the following cases:
interest of both the managing and the
 Amendment of Articles of Incorporation
 Extend or Shorten Corporate Term managed corporations own or control
 Increase or Decrease of Capital Stock more than 1/3 of the total OCS
 Incurring, Creating or Increasing Bonded entitled to vote of the managing
Indebtedness corporation; or
 Sale, Lease, Mortgage or Other Disposition of  Where a majority of the members of
Substantially all corporate assets the BOD of the managing corporation
 Investment of funds in another corporation or also constitute a majority of the
business or for any purpose other than the members of the BOD of the managed
primary purpose for which it was organized corporation

Requisites (Sec. 42)(Asked in 95):  Fixing the Consideration of No-Par shares (Sec.
- Approval of majority of the board of 62)
directors or trustees
- Ratification by the stockholders representing  Fixing the Compensation of Directors (Sec. 30)
at least 2/3 of the OCS or the members at a
meeting duly called for the purpose 2. By the Board
- Written notice addressed to each 76
stockholder or member at his place of Board as Repository of Corporate Powers
residence as shown on the books of the  GENERAL RULE
corporation The corporate powers of the corporation shall be
- Appraisal right available to dissenting exercised, all business conducted and all property of
stockholders or members such corporation controlled and held by the board of
directors or trustees. (Sec. 23)
NOTES—
If it is the same purpose or incidental or related  EXCEPTIONS
to its PRIMARY purpose, the board can invest the - Executive Committee duly authorized in the
corporate fund WITHOUT the consent of the by-laws (Sec. 35);
stockholders. No appraisal right. - A contracted manager which may be an
individual, a partnership, or another
If the investment is in another corporation of corporation.
different business or purpose BUT in pursuance
of the SECONDARY purpose, the affirmative vote NOTE
 MERCANTILE LAW REVIEWER

In case the contracted manager is another  Convicted by final judgment of a violation of the
corporation, the special rule in Sec. 44 Corporation Code committed within 5 years
applies. prior to the date of his election or appointment
95
- In case of close corporations, the c. Authority of Corporate Officers
stockholders may manage the business of the A person dealing with a corporate officer is put on
corporation instead by a board of directors, inquiry as to the scope of the latter‘s authority but
if the articles of incorporation so provide an innocent person cannot be prejudiced if he had
(Sec. 97) the right to presume under the circumstances the
authority of the acting officers.
Spouses Constantine Firme v. Bukal Enterprises and
Development Corporation (2003): Associated Bank v. Pronstroller (2008, Nachura):
The power to purchase real property is vested in the Q: What is the Doctrine of Apparent Authority?
board of directors or trustees. While a corporation A: If a corporation knowingly permits one of its
may appoint agents to negotiate for the purchase of officers, or any other agent, to act within the scope
real property needed by the corporation, the final of an apparent authority, it holds him out to the
say will have to be with the board, whose approval public as possessing the power to do those acts; the
will finalize the transaction. corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped
Requisites of a VALID Corporate Act by the Board from denying the agent‘s authority.
of Directors (Sec. 25):
 The Board must act as a BODY in a meeting.
 There must be a VALIDLY constituted meeting.
VIII. Stockholders and members
 Their act must be supported by a MAJORITY OF
THE QUORUM duly assembled (Exception: A. Fundamental Rights of a
Election of officers requires a vote of majority Stockholder
of all the members of the board)
 The act must be within the powers conferred on
the Board.  Direct or indirect participation in management
(Sec. 6)
 Voting rights (Sec. 6)
3. By the Officers  Right to remove directors (Sec. 28)
 Proprietary rights
CORPORATE OFFICER CORPORATE EMPLOYEE - Right to dividends (Secs. 43 and 71)
Position is provided for Employed by the action of - Appraisal right (Sec. 81)
in the by-laws or under the managing officer of - Right to issuance of stock certificate for fully
the Corporation Code the corporation paid shares (Sec. 64)
RTC has jurisdiction in NLRC has jurisdiction in - Proportionate participation in the distribution
case of labor dispute case of labor disputes of assets in liquidation (Sec. 122)
- Right to transfer of stocks in corporate books
a. Who are Corporate Officers (POST) (Sec. (Sec. 63) 77
25) - Pre-emptive right (Sec. 39)
 President – must be a director;  Right to inspect books and records (Sec. 74)
 Treasurer – may or may not be a director; as a  Right to be furnished with the most recent
matter of sound corporate practice, must be a financial statements/reports (Sec. 75)
resident and citizen of the Phil (SEC opinion)  Right to recover stocks unlawfully sold for
 Secretary – need not be a director unless delinquent payment of subscription (Sec. 69)
required by the by-laws; must be a resident and  Right to file individual suit, representative suit
citizen of the Philippines; and and derivative suits
 Other officers as may be provided in the by-
laws. B. Participation in Management
NOTE—
Any two (2) or more positions may be held
7 71. Proxy
concurrently by the same person, EXCEPT that no
one shall act as president and secretary or as Stockholders and members may vote in person or by
president and treasurer at the same time. proxy in all meetings of stockholders or members
(Sec. 58).
Additional qualifications of officers may be provided
for in the by-laws (Sec. 47(5)). 2. Voting Trust
b. Disqualifications (Sec. 27) An arrangement created by one or more stockholders
 Convicted by final judgment of an offense for the purpose of conferring upon a trustee or
punishable by imprisonment for a period trustees the right to vote and other rights pertaining
exceeding 6 years to the shares for a period not exceeding five (5)
years at any time (Sec. 59).
 MERCANTILE LAW REVIEWER

(b) Amendments to by-laws (Sec. 48)

PROXY TRUSTEE
96 Principal –agent Trustee-beneficiary Requires approval by majority of the BOD/BOT and
Proxy can‘t exceed The only limit to approval by stockholders owning at least the
delegated authority. authority is that the act majority of the outstanding capital stock/majority of
must be for the benefit members.
of trustee. (fiduciary
obligation) Since amendments to by-law is among those
Must be in writing Must be in writing and enumerated under Sec. 6, the basis of the majority
notarized vote includes all stockholders/members with or
Copy must be filed Copy must be filed with without voting rights.
with the corporation. SEC and the corporation.
No transfer. Transfer of legal title to (c) Revocation of delegation to the
trustee. BOD of the power to amend or
Proxy exercises voting Trustee exercises repeal or adopt by-laws (Sec. 48)
rights only for a absolute voting rights
specific meeting continuously, subject Requires approval by majority of the BOD/BOT and
(unless otherwise only to fiduciary duty. approval by stockholders owning at least the
provided) majority of the outstanding capital stock/majority of
Proxy cannot be Trustee can be director members.
director
(d) Calling a meeting to remove
Revocable at will in Irrevocable, as long as no
any manner, EXCEPT misconduct or fraud. directors (Sec. 28)
if coupled with an Meeting for the removal of directors or trustees, or
interest. any of them, must be called by the secretary on
order of the president or on the written demand of
Max of 5 yrs at a time Max of 5 yrs at a time
the stockholders representing or holding at least a
(unless coterminous with
majority of the outstanding capital stock/majority of
loan)
members.
SEC can pass on validity
(e) Granting compensation other than
3. Cases When Stockholder‘s Action per diems to directors (Sec. 30)
is Required
Compensation other than per diems may be granted
a. By a Majority Vote to directors by the vote of the stockholders
representing at least a majority of the outstanding
(a) Power to enter into management capital stock.
contracts (Sec. 44)
(f) Consideration no-par shares (Sec.
GENERAL RULE 62)
Requires approval by majority of the BOD/BOT and
approval by stockholders owning at least the When the AOI or the BOD does not provide for the
majority of the outstanding capital stock/majority of value of no-par shares, the value of such shares shall
members of both the managing and the managed be determined by the stockholders representing at
corporation least a majority of the outstanding capital stock.

EXCEPTIONS b. By a Two-Thirds Vote

 Where a stockholder/s representing the same
interest of both the managing and the managed (a) Amendment of AOI (Sec. 16)
corporations own or control more than one-
third (1/3) of the total outstanding capital Amendment of the AOI may be made by a majority
stock entitled to vote of the managing vote of the BOD/BOT and the vote or written assent
corporation; or of the stockholders representing at least two-thirds
 Where a majority of the members of the 2/3 of the outstanding capital stock, without
managing corporation‘s BOD also constitute a prejudice to the appraisal right of dissenting
majority of the the managed corporation‘s BOD stockholders.

Requires at least 2/3 votes of the outstanding Since amendment of the AOI is among those
capital stock/membership of the managed enumerated under Sec. 6, the basis of the two-thirds
corporation. vote includes all stockholders/members with or 78
without voting rights.
BUT only majority vote is required for the managing
corporation. Amendment of AOI of close corporations (Sec 103):
Amendment to the AOI which seeks to delete or
remove any provision required to be contained in the
AOI of Close Corporations or to reduce a quorum or
voting requirement stated in said AOI requires the
 MERCANTILE LAW REVIEWER

affirmative vote of at least 2/3 of the outstanding Requires approval by a majority vote of the
capital stock, whether with or without voting BOD/BOT and approval by at least two-thirds (2/3)
rights, or of such greater proportion of shares as of the outstanding capital stock/membership.
may be specifically provided in the AOI at a meeting 97
duly called. Since sale/disposition of all or substantially all of
corporate assets is among those enumerated under
(b) Delegating the power to amend Sec. 6, the basis of the two-thirds vote includes all
or repeal by-laws or adopt new stockholders/members with or without voting rights.
by-laws (Sec. 48)
NOTE—
Delegation to the BOD/BOT of the power to amend In non-stock corporations where there are NO
or repeal by-laws or adopt new by-laws requires members with voting rights, the vote of at least the
approval by at least two-thirds (2/3) of the majority of the BOT will be sufficient authorization
outstanding capital stock/membership. for any sale or disposition of all or substantially all
of corporate assets. (Sec. 40)
Revocation of the delegation requires only majority
vote of the outstanding capital stock/membership. (h) Investment of funds in another
business (Sec. 42)
(c) Extending/shortening corporate
term (Sec. 37) Requires approval by a majority vote of the
Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3)
BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership.
of the outstanding capital stock/membership.
Since the investment of funds in another business is
Since extending/shortening corporate term is among among those enumerated under Sec. 6, the basis of
those enumerated under Sec. 6, the basis of the the two-thirds vote includes all
two-thirds vote includes all stockholders/members stockholders/members with or without voting rights.
with or without voting rights.
(i) Dividend declaration (Sec. 43)
(d) Increasing/decreasing capital
stock (Sec. 38) No stock dividend shall be issued without the
approval of stockholders representing not less than
Requires approval by a majority vote of the BOD and two-thirds (2/3) of the outstanding capital stock.
approval by at least two-thirds (2/3) of the
outstanding capital stock. (j) Power to enter into management
contracts (Sec. 44)
Since increasing/decreasing capital stock is among
those enumerated under Sec. 6, the basis of the GENERAL RULE
two-thirds vote includes all stockholders/members Requires approval by majority of the BOD/BOT and
with or without voting rights. approval by stockholders owning at least the
majority of the outstanding capital stock/majority of
(e) Incurring, creating, increasing members of both the managing and the managed
bonded indebtedness (Sec. 38) corporation

Requires approval by a majority vote of the BOD and EXCEPTIONS

approval by at least two-thirds (2/3) of the  Where a stockholder/s representing the same
outstanding capital stock. interest of both the managing and the managed
corporations own or control more than one-
Since incurring, creating and increasing indebtedness third (1/3) of the total outstanding capital
is among those enumerated under Sec. 6, the basis stock entitled to vote of the managing
of the two-thirds vote includes all stockholders/ corporation; or
members with or without voting rights.  Where a majority of the members of the
managing corporation‘s BOD also constitute a
(f) Issuance of shares not subject to majority of the the managed corporation‘s BOD
pre-emptive right (Sec. 39)
Requires at least 2/3 votes of the outstanding
Shares issued in good faith in exchange for property capital stock/membership of the managed
or previously incurred indebtedness with the corporation.
approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock are not (k) Removal of directors or trustees
subject to pre-emptive rights. (Sec. 28)

(g) Sale/disposition of all or Any director or trustee may be removed from office
substantially all of corporate by a vote of the stockholders holding or representing
assets (Sec. 40) at least two-thirds (2/3) of the outstanding capital
stock/membership.
 MERCANTILE LAW REVIEWER

(l) Ratifying contracts with respect approved by at least two-thirds (2/3) of the
to dealings with directors/ members with voting rights.
98 trustees (Sec. 32)
(p) Incorporation of a religious society
A contract of the corporation with one or more of its (Sec. 116)
directors is voidable, at the option of such
corporation, unless all the following conditions are Any religious society or religious order, or any
present: diocese, synod, or district organization of any
 The director‘s presence in the BOD meeting in religious denomination, sect or church, unless
which the contract was approved was not forbidden by the constitution, rules, regulations, or
necessary to constitute a quorum discipline of the religious denomination, sect or
 The vote of such director was not necessary for church of which it is a part, or by competent
the approval of the contract authority, may, upon written consent and/or by an
 The contract is fair and reasonable under the affirmative vote at a meeting called for the purpose
circumstances of at least two-thirds (2/3) of its membership,
 In case of an officer, the contract has been incorporate for the administration of its
previously authorized by the BOD. temporalities or for the management of its affairs,
properties and estate.
Where any of the first two conditions is absent, but
necessary that the contract be fair and reasonable, (q) Voluntary dissolution of a
in the case of a contract with a director, such corporation (Sec. 118-119)
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of Requires a resolution adopted by a majority vote of
the outstanding capital stock. the BOD/BOT, and by a resolution duly adopted by
the affirmative vote of the stockholders owning at
(m) Ratifying acts of disloyalty of a least two-thirds (2/3) of the outstanding capital
director (Sec. 34) stock/membership of a meeting to be held upon call
for such purpose.
GENERAL RULE
Where a director, by virtue of his office, acquires for c. By Cumulative Voting
himself a business opportunity which should belong
to the corporation, thereby obtaining profits, he Election of Directors or Trustees (Section 24) - A
must account to the corporation for all such profits stockholder may vote such number of shares for as
by refunding it. many persons as there are directors to be elected or
he may cumulate said shares and give one candidate
EXCEPTION as many votes as the number of directors to be
His act may be ratified by a vote of the stockholders elected multiplied by the number of his shares shall
owning or representing at least two-thirds (2/3) of equal, or he may distribute them on the same
the outstanding capital stock. principle among as many candidates as he shall see
fit:
(n) Stockholders‘ approval of the
plan of merger or consolidation Provided, That the total number of votes cast by him
(Sec. 77) shall not exceed the number of shares owned by him
as shown in the books of the corporation multiplied
Requires approval by majority of each of the by the whole number of directors to be elected.
BOD/BOT of the constituent corporations of the plan
of merger or consolidation and approval by at least C. Proprietary Rights
two-thirds (2/3) of the outstanding capital
stock/membership of each corporation at separate
corporate meetings duly called. 1. Right to Dividends
Amendments to the plan of merger or consolidation GENERAL RULE
also requires approval by majority vote of each of Right to Dividends vests upon lawful declaration by
the BOD and two-thirds (2/3) vote of the outstanding the BOD. From that time, dividends become a debt
capital stock/membership of each corporation voting owing to the SH. No revocation can be made.
separately.
EXCEPTIONS
Since merger or consolidation is among those  Dividends are revocable if NOT yet announced or
enumerated under Sec. 6, the basis of the two-thirds communicated to the stockholders.
vote includes all stockholders/members with or  Stock dividends, even if already declared, may
without voting rights. be revoked prior to actual issuance since these
are not distributions but merely represent
(o) Distribution of assets in non-stock changes in the capital structure.
corporations (Sec. 96)
NOTE—
The BOT shall, by majority vote, adopt a resolution Right to dividends vests upon declaration so whoever
recommending a plan of distribution which shall be owns the stock at such time also owns the dividends.
Subsequent transfer of stock would not carry with it
 MERCANTILE LAW REVIEWER

right to dividends UNLESS agreed upon by the

parties. A stockholder‘s right of inspection is based on his
ownership of the assets and property of the
2. Right of Appraisal corporation. Therefore, it is an incident of 99
ownership of the corporate property, whether this
Right to withdraw from the corporation and demand ownership or interest is termed an equitable
payment of the fair value of the shares after ownership, a beneficial ownership, or quasi-
dissenting from certain corporate acts involving ownership. Such right is predicated upon the
fundamental changes in corporate structure (Sec. necessity of self-protection. (Gokongwei Jr. v. SEC,
81). 1979)

i. Instances of appraisal right ii. Records/Books to be Kept (Sec. 74)

 Extension or reduction or corporate term (Sec.  Books that record all business transactions of
11) the corporation which shall include contract,
 Change in the rights of stockholders, authorize memoranda, journals, ledgers, etc;
preferences superior to those stockholders, or  Minute book for meetings of the
restrict the right of any stockholder (Sec. 81) stockholders/members;
 Investment of corporate funds in another  Minute book for meetings of the board/trustees;
business or purpose (Sec. 42)  Stock and transfer book.
 Sale or disposal of all or substantially all assets
of the corporation (Sec. 81) Stock transfer agent - One engaged principally in
 Merger or consolidation (Sec. 81) the business of registering transfers of stocks in
behalf of a stock corporation (licensed by the SEC).
ii. Requirements for exercise of appraisal The corporate secretary is the one duly authorized
right (Secs. 82, 86) to make entries in the stock and transfer book.

 Stockholder must have voted against the Torres et al v. CA (1997):

corporate act. It is the corporate secretary's duty and obligation to 80
 Stockholder must make a written demand on the register valid transfers of stocks and if said
corporation within 30 days after the vote was corporate officer refuses to comply, the transferor-
taken for payment of the fair value of his shares stockholder may rightfully bring suit to compel
on the said date. performance.
 Stockholder must submit the certificates to the
corporation for notation within ten (10) days iii. Financial Statements (Sec. 75)
after demand for payment. Otherwise, right to
appraisal may be terminated at the option of Within 10 days from written request, the corporation
corporation. shall furnish its most recent financial statement
(balance sheet and profit or loss statement as of last
iii. Effect of demand (Sec. 83) taxable year)

ALL rights accruing to such shares, including voting At a regular meeting, the Board shall present a
and dividend rights, shall be suspended financial report of the operations of the corporation
for the preceding year, which shall include financial
EXCEPT the right of such stockholder to receive statements duly signed and certified by an
payment of the fair value thereof independent CPA.

Immediate RESTORATION of voting and dividend iv. Requirements for the exercise of the
rights if the dissenting stockholder is not paid the right of inspection (Sec. 74)
value of his shares within 30 days after the award.
 It must be exercised at reasonable hours on
iv. Extinguishment of appraisal right (Sec. business days and in the place where the
84) corporation keeps all its records (i.e., principal
office).
 Withdrawal of demand by the stockholder WITH  The stockholder has not improperly used any
CONSENT of the corporation information he secured through any previous
 Abandonment of the proposed action examination.
 Disapproval by SEC of the proposed action  Demand is made in good faith or for a legitimate
purpose. If the corporation or its officers
3. Right to Inspect contest such purpose or contend that there is
evil motive behind the inspection, the burden of
i. Basis of Right proof is with the corporation or such officer to
show the same.
As the beneficial owners of the business, the
stockholders have the right to know the financial
condition and management of corporate affairs.
 MERCANTILE LAW REVIEWER

Gokongwei v. SEC (1979):  It shall NOT extend to shares to be issued in

TEST to determine whether the purpose is legitimate good faith with the approval of the stockholders
100 – A legitimate purpose is one which is germane to representing two-thirds (2/3) of the outstanding
the interests of the stockholder as such and not capital stock, in exchange for property needed
contrary to the interests of the corporation for corporate purposes or in payment of a
previously contracted debt
v. Remedies when inspection is refused  It shall not take effect if denied in the AOI or an
amendment thereto.
 Mandamus
 Injunction iii. Remedies in case of unwarranted
 Action for damages denial:
 File an action under Sec. 144 to impose a penal
offense by fine and/or imprisonment  Injunction
 Mandamus
The suit should be individual and not derivative
4. Preemptive Right because the wrong done is to the stockholders
individually
i. Definition and Distinguished from  SEC can cancel shares if the third party is not
Right of First Refusal innocent
Pre-emptive right is an option privilege of an existing iv. Waiver/ Denial of Preemptive Right
stockholder to subscribe to a proportionate part of  Allowed by the Code provided that it is made in
shares subsequently issued by the corporation before the articles of incorporation
the same can be disposed of in favor of others; this - Waiver made through AOI – would bind
right includes all issues and disposition of shares of present and subsequent SH
any class. It is a common law right and may be - 2/3 vote of the outstanding capital stock is
exercised by stockholders even without legal necessary before waiver is binding
provision. On the other hand, a right of first refusal - Result of Non-placement of waiver clause in
arises only by virtue of contract stipulations, by AOI: waiver shall not bind future stockholders
which the right is strictly construed against the right but only those who agreed to it
of person to dispose or deal with their property.  The SH must be given reasonable time within
which to exercise their pre-emptive rights. Upon
Stockholders of a corporation shall enjoy pre- expiration of such period, any SH who did not
emptive right to subscribe to ALL ISSUES OR exercise such will be deemed to have waived it.
DISPOSITIONS of shares of any class, in proportion to  May be Necessary so as to not hinder future
their respective shareholdings. financing plans of the corporation
 Because some new investors may be willing only
NOTE— to invest ONLY if all the new shares will be
The broad phrase ―all issues or disposition of shares issued to them (CAMPOS)
of any class is construed to include not only new
shares issued in pursuance of an increase in capital
stock or from the unissued shares which form part of 5. Right to Vote
the ACS, but also covers ―treasury shares.‖ Treasury
shares would come under the term ―disposition.‖  Non-voting shares are not entitled to vote
Likewise considering that it is not included among except as provided for in the last paragraph of
the exceptions enumerated therein, where pre- Sec. 6.
emptive right shall not extend, the intention is to  Preferred or redeemable shares may be
include it in its application. (SEC Opinion, 14 deprived of the right to vote
January 1993).  Fractional shares of stock cannot be voted.
 Treasury shares have no voting rights as long as
A pre-emptive right is a right claimed against the they remain in the treasury.
corporation on unissued shares of its capital stock,  No delinquent stock shall be voted (Sec. 71)
and likewise on treasury shares held by the  A transferee of stock cannot vote if his transfer
corporation; while the right of first refusal is a right is not registered in the stock and transfer book
exercisable against another stockholder on his shares of the corporation.
of stock. (VILLANUEVA)
D. Remedial Rights
Basis of Preemptive Right: to preserve the existing
proportional rights of the stockholders (CAMPOS)
1. Individual Suit
ii. Limitations to exercise of pre-
emptive right (Sec. 39): A suit brought by the shareholder in his own name
against the corporation when a wrong is directly
 Such pre-emptive right shall not extend to inflicted against him.
shares to be issued in compliance with laws
requiring stock offerings or minimum stock 2. Representative Suit
ownership by the public;
 MERCANTILE LAW REVIEWER

A suit brought by the stockholder in behalf of the president or officer thereof. But where
himself and all other stockholders similarly situated corporate directors are guilty of a breach of trust,
when a wrong is committed against a group of not of mere error of judgment or abuse of
stockholders. discretion, and intra-corporate remedy is futile or 101
useless, a SH may institute a derivative suit in behalf
3. Derivative Suit of himself and other stockholders and for the benefit
of the corporation, to bring about a redress of the
A suit by a shareholder to enforce a corporate cause wrong inflicted directly upon the corporation and
of action. The corporation is a necessary party to the indirectly upon the stockholders.
suit, and the relief which is granted is a judgment
against a third person in favour of the corporation Jurisdiction over derivative suits lies with the RTC
(Chua v. CA, 2004) (Sec. 5.2, Securities Regulation Code)

Suits of stockholders based on wrongful or fraudulent E. Obligations of a Stockholder

acts of directors or other persons.
a. Liability to the corporation for unpaid
Requisites of Derivative Actions subscription (Sec. 67)
1) That the person instituting the action
stockholder or member at the time the acts or A subscription contract is unconditional (i.e.,
transactions subject of the action occurred and obligation to pay must not be subject to any
the time the action was filed; contingencies) and indivisible (as to the amount and
2) That the stockholder exerted all reasonable transferability—Fua Cun v. Summers, 1923). Hence,
efforts, and alleges the same with particularity if the subscriber paid 20% of his subscription, he is
in the complaint, to exhaust all remedies not entitled to the issuance of certificates
available under the AOI, by-laws, laws or rules corresponding to 20% of the shares.
governing the corporation or partnership to
obtain the relief he desires. Unpaid claim refers to any unpaid subscription and
3) That there is no appraisal right available for the not to any indebtedness which a subscriber may owe
act(s) complained of; and the corporation rising from any other transaction
4) That the suit is not a nuisance or harassment (China Banking Corp. v. CA, 1997)
suit. (Rule 8, Interim Rules of Procedure for
Intra-Corporate Controversies) b. Liability to the corporation for interest on
unpaid subscription if so required by the
Requisites based on jurisprudence by-laws (Sec. 66)
1) The cause of action actually devolves on the
corporation, the wrong or harm having been, or GENERAL RULE
being caused to it and not the shareholder filing Subscribers for stock are NOT liable to pay interest
the suit. (Evangelista vs. Santos, 1950; SMC v. on his unpaid subscription
Kahn, 1989).
2) The reliefs sought pertain to the corporation. EXCEPTION
(Symaco Trading Corp. v. Santos, 2005). If so required in the by-laws at the rate fixed in the
by-laws. If no rate is fixed in the by-laws, such rate
Recent rulings on the matter shall be deemed to be the legal rate (Sec. 66)
 Status of heirs as co-owners of shares before
partition of estate does not make them NOTES—
shareholders until there is compliance with Sec. Transfer for consideration of treasury shares is a sale
63 on the manner of transferring shares, thus by the corporation (not subscription). A transfer of
the heirs are not automatically registered previously issued shares by a stockholder to a third
shareholders of the corporation. (Reyes v. RTC person is a sale. Transfer of unissued shares is
of Makati, 2008) subscription.
 Stockholder may commence a derivative suit
―for mismanagement, waste or dissipation of Shareholders are not creditors of the corporation
corporate assets because of a special injury to with respect to their shareholdings thereto and the
him for which he is otherwise without redress. principle of compensation or set-off has no
In effect, the suit is an action for specific application.
performance of an obligation owed by the
corporation to the stockholders to assist its right Subscription contract is NOT required to be in
of action when the corporation is put on default writing.
by the wrongful refusal of the directors or
management to make suitable measures for its c. Liability for watered stocks (Sec. 65)
protection.‖ (Yu v. Yukayguan, June 18, 2009)
i. Definition
Bitong v. CA (1998):
The power to sue and be sued in any court by a These are shares issued as fully paid when in truth
corporation even as a stockholder is lodged in the no consideration is paid, or the consideration
BOD that exercises its corporate powers and not in
 MERCANTILE LAW REVIEWER

received is known to be less than the par value or 1. Regular or Special

issued value of the shares. (Sec. 65)
102 a. When and Where
These include the following:
 Issued without consideration (bonus share) When? (Sec. 50)
 Issued as fully paid when the corporation has Regular meetings of stockholders or members shall
received less sum of money than its par or be held annually on a date fixed in the by-laws, or if
issued value (discounted share) not so fixed, on any date in April of every year as
 Issued for consideration other than actual cash determined by the board of directors or trustees.
(i.e., property or services), the fair valuation of
which is less than its par or issued value Where?
 Issue stock dividend when there are no  Stock: City or municipality where the principal
sufficient retained earnings or surplus to justify office of the corporation is located, or, if
it. practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
NOTE— considered a city or municipality. (Sec. 51)
Subsequent increase in the value of the property  Non-stock: Any place even outside the place
used in paying the stock does not do away with the where the principal office is located, within the
watered stocks. Subsequent increase in the value of Philippines (Sec. 93)
the property used in paying the stock does not cure
the defect in issuance. The existence of watered Notice (Sec. 50)
stocks is determined at the time of issuance of the  Regular Meeting—written notice sent to all SH
stock. or members at least 2 weeks prior to the
meeting, unless a different period is required by
ii. Liability of directors or officers the by-laws
Any director or officer of a corporation consenting to  Special Meeting—written notice sent at least 1
the issuance of stocks or who, having knowledge week prior to the meeting, unless otherwise
thereof, does not forthwith express his objection in provided in the by-laws.
writing and file the same with the corporate  Subject to waiver, expressly or impliedly (i.e.,
secretary shall be SOLIDARILY liable with the attendance despite no notice)
stockholder concerned to the corporation and its
creditors for the difference in value (Sec. 65). Effect of Failure to Give Notice: Failure to give
notice would render a meeting VOIDABLE at the
d. Liability for dividends unlawfully paid instance of an absent stockholder, who was not
(Sec. 31 and 43) notified of the meeting (Board v. Tan, 1959).
e. Liability for assuming to act as a
corporation knowing it to be without
2. Who Calls the Meetings
authority (Sec. 21)
The president, unless the by-laws provide otherwise.
(Sec. 54)
F. Meetings
Any petitioning stockholder or member upon order of
GENERAL RULE the SEC when there is no person authorized to call a
Stockholders‘ or members‘ approval is expressed in a meeting. Such petitioning stockholder or member
meeting duly called and held for the purpose. shall preside thereat until at least a majority of the
stockholders or members present have chosen one of
EXCEPTION them as presiding officer. (Sec. 50)
In case of amendment of AOI, approval may be
expressed by referendum or written assent of the 3. Quorum (Sec. 50)
stockholders or members (Sec. 16)
GENERAL RULE
Who May Attend and Vote? Stockholders representing majority of the OCS or
 Stockholders, either in person or by proxy majority of the members
 Pledgors or mortgagors (Sec. 55)
 Pledgee or mortgagee, IF expressly given such EXCEPTION
right by the pledgor or mortgagor in writing The Code or the by-laws provide otherwise
which is recorded on the corporate books.
 Executors, administrators, receivers, and other Where quorum is present at the start of a lawful
legal representatives duly appointed by the meeting, stockholders present cannot without
court, without need of any written proxy. justifiable cause break the quorum by walking out
 ALL joint owners of stocks, or any one of them from said meeting so as to defeat the validity of any
with the consent of ALL the co-owners, unless act proposed and approved by the majority.
there is a written proxy, signed by all the co- (However, stockholders can break the quorum for
owners justifiable causes.) (Johnston vs. Johnston, 1965 CA
 Any one of the joint owners of shares owned in decision)
an "and/or" capacity or a proxy thereof
 MERCANTILE LAW REVIEWER

4. Minutes of Meetings IX. Board of directors and

A record of all the minutes of all meetings of trustees
stockholders or members, or of the board of
103
directors or trustees shall be kept and preserved at A. Repository of Corporate Powers
the principal office of every corporation.

Contents: GENERAL RULE

 time and place of holding the meeting; The corporate powers of the corporation shall be
 how the meeting was authorized; exercised, all business conducted and all property of
 the notice given; such corporation controlled and held by the board of
 whether the meeting was regular or special, if directors or trustees. (Sec. 23)
special its object;
 those present and absent; and EXCEPTIONS
 every act done or ordered done at the meeting.  In case of an Executive Committee duly
authorized in the by-laws; (Sec. 35)
Upon demand by any director/trustee or
SH/member, the following shall also be noted in  In case of a contracted manager which may be
the minutes: an individual, a partnership, or another
 the time when any director, trustee, corporation.
stockholder or member entered or left the Note: In case the contracted manager is another
meeting; corporation, the special rule in Sec. 44 applies.
 the yeas and nays on any motion or proposition;
 the protest of any director/trustee or  In case of close corporations, the stockholders
stockholder/member on any action or proposed may manage the business of the corporation
action. instead by a board of directors, if the articles of
incorporation so provide. (Sec. 97)
NOTES—
The minutes of any meetings shall be open to Spouses Constantine Firme v. Bukal Enterprises and
inspection by any director/trustee or Development Corporation (2003):
stockholder/member at reasonable hours on business The power to purchase real property is vested in the
days. board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of
The director/trustee or stockholder/member may real property needed by the corporation, the final
demand, in writing, for a copy of excerpts from said say will have to be with the board, whose approval
records or minutes, at his expense. will finalize the transaction.

Any officer or agent of the corporation refusing to a. Requisites of a VALID Corporate Act by
allow the examination and copying of the minutes the Board of Directors
shall be:
(1) liable to the director/trustee or stockholder/ 1) The Board must act as a BODY in a meeting.
member; and 2) There must be a VALIDLY constituted meeting.
(2) guilty of an offense punishable under Sec. 144 3) There act must be supported by a MAJORITY OF
(Sec. 74) THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority
HOWEVER, the officer of agent may use as a defense of all the members of the board)
that: 4) The act must be within the powers conferred on
(1) the person demanding examination or copy the Board.
thereof made improper use of any information
secured through any prior examination of the b. Limitations on Powers of Board of
records or minutes of such corporation or of any Directors/Trustees
other corporation thereby;
(2) the person demanding examination or copy acts  Limitations imposed by the Constitution,
in bad faith or has no legitimate purpose in statutes, articles of incorporation or by-laws;
making his demand.  Certain acts of the corporation that require
joint action of the stockholders and board of
directors:
- Removal of director (Sec. 28)
- Amendments of AOI (Sec. 16)
- Fundamental changes (Sec. 6)
- Declaration of stock dividends (Sec. 43)
- Entering into management contracts (Sec.
44)
- Fixing of consideration of non-par shares
(Sec. 62)
- Fixing of compensation of directors (Sec. 30)
 MERCANTILE LAW REVIEWER

 Cannot exercise powers not possessed by the c. Disqualifications

corporation.  Not have been convicted by final judgment of an
104 offense punishable by imprisonment for a period
B. Tenure, Qualifications and exceeding 6 years; or
 A violation of the Corporation Code, committed
Disqualifications of Directors within five years from the date of his election.
(Sec. 27)
a. Tenure
C. Elections (Sec. 24)
Directors shall hold office for one (1) year until their
successors are elected and qualified (Sec. 23).
a. Quorum
Term: One (1) year
Tenure: The period within which the director There must be present, in person or by
actually holds office, including the holdover period representative authorized to act by written proxy,
after the end of his term. the owners of majority of the OCS or majority of the
members entitled to vote in the meeting.
Valle Verde Country Club v. Africa, 2009:
Election must be by ballot if requested.
In several cases, we have defined "term" as the time
during which the officer may claim to hold the office
A stockholder cannot be deprived in the articles of
as of right, and fixes the interval after which the
incorporation or in the by-laws of his statutory right
several incumbents shall succeed one another. The
to use any of the methods of voting in the election
term of office is not affected by the holdover. The
of directors.
term is fixed by statute and it does not change
simply because the office may have become vacant,
No delinquent stock shall be voted.
nor because the incumbent holds over in office
beyond the end of the term due to the fact that a
The candidates receiving the highest number of
successor has not been elected and has failed to
votes shall be declared elected.
qualify.
b. Methods of Voting
Term is distinguished from tenure in that an officer‘s
"tenure" represents the term during which the
i. Straight Voting
incumbent actually holds office. The tenure may be
Every stockholder may vote such number of shares
shorter (or, in case of holdover, longer) than the
for as many persons as there are directors to be
term for reasons within or beyond the power of the
elected.
incumbent.
ii. Cumulative voting for one candidate
Based on the above discussion, when Section 239 of
A stockholder is allowed to concentrate his votes and
the Corporation Code declares that "the board of
give one candidate as many votes as the number of
directors…shall hold office for one (1) year until
directors to be elected multiplied by the number of
their successors are elected and qualified," we
his shares shall equal.
construe the provision to mean that the term of the
members of the board of directors shall be only for
ILLUSTRATION—
one year; their term expires one year after election
If there are 5 directors to be elected and Pedro, as
to the office. The holdover period – that time from
shareholder, has 100 shares, Pedro can give 500 (5 x
the lapse of one year from a member‘s election to
100 shares) votes to just one candidate.
the Board and until his successor‘s election and
qualification – is not part of the director‘s original
iii. Cumulative voting by distribution
term of office, nor is it a new term; the holdover
A stockholder may cumulate his shares by
period, however, constitutes part of his tenure
multiplying the number of his shares by the number
of directors to be elected and distribute the same
b. Qualifications among as many candidates as he shall see fit.
 If STOCK, director must own at least 1 share of ILLUSTRATION—
the capital stock, which stock shall stand in his In the illustration in (b), Pedro may choose to give
own name (Sec. 23). 100 votes to candidate 1, 100 votes to candidate 2,
If NON-STOCK, trustee must be a member. 100 votes to candidate 3, 150 votes to candidate 4,
 Majority of the directors/trustees must be and 50 votes to candidate 5.
residents of the Philippines.
 Natural person
 Of Legal Age
 Other qualifications as may be prescribed in the
by-laws of the corporation.
 MERCANTILE LAW REVIEWER

D. Removal (Sec. 28) The total yearly compensation of directors shall not
exceed 10% of the net income before income tax of
the corporation during the preceding year.
GENERAL RULE 105
Removal may be with or without cause.
Western Institute of Technology v. Salas (1997):
But The position of being chairman and Vice-Chairman,
Removal without cause may not be used to deprive like that of treasurer and secretary, are not
minority stockholders or members of the right of considered directorship positions but officership
representation to which they may be entitled under positions that would entitle the occupants to
Section 24 compensation. Likewise, the limitation placed under
Sec. 30 of the Corporation Code that directors
Other requisites: cannot receive compensation exceeding 10% of the
net income of the corporation would not apply to
 Vote of the stockholders representing at least
the compensation given to such positions since it is
2/3 of the OCS or the members entitled to vote
being given in their capacity as officers of the
 At a regular or special meeting after proper
corporation and not as board members.
notice is given

E. Filling of Vacancies (Sec.29) G. Disloyalty

a. Vacancy (1) by removal; or (2) by Duty of Loyalty

expiration of term; or (3) when the Directors and trustees should not acquire any
remaining directors do not constitute a personal or pecuniary interest in conflict with their
quorum duty as such directors or trustees, otherwise they
shall be held liable jointly and severally for all
Vacancy/ies must be filled by the stockholders in a damages resulting therefrom suffered by the
regular or special meeting called for that purpose. corporation, its stockholders or members and other
persons. (Sec. 31)
A director or trustee elected to fill a vacancy in shall
be elected only for the unexpired term of his Where a director, by virtue of his office, acquires
predecessor in office. for himself a business opportunity which should
belong to the corporation, thereby obtaining profits
b. Vacancy by reason of increase in the to the prejudice of such corporation, he must
number of the directors/trustees account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote
Vacancy/ies must be filled by the stockholders: of the stockholders owning or representing at least
 in a regular or special meeting called for that two-thirds (2/3) of the outstanding capital stock
purpose; or (Sec. 34)
 in the same meeting authorizing the increase of
directors or trustees if so stated in the notice Doctrine of Corporate Opportunity
of the meeting. Unless his act is ratified, a director shall refund to
the corporation all the profits he realizes on a
c. Vacancy by other cause business opportunity which:
Vacancy/ies may be filled by the vote of at least a  corporation is financially able to undertake
majority of the remaining directors or trustees, if  from its nature, is in line with corporation‘s
still constituting a quorum. business and is of practical advantage to it; and
 one in which the corporation has an interest or a
A director or trustee elected to fill a vacancy in shall reasonable expectancy.
be elected only for the unexpired term of his
predecessor in office. The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture.
(Sec. 34)
F. Compensation (Sec. 30)
By embracing the opportunity, the self-interest of
GENERAL RULE the officer or director will be brought into conflict
Directors are only entitled to per diems, which are with that of his corporation. Hence, the law does
reasonable. not permit him to seize the opportunity even if he
will use his own funds in the venture. (SUNDIANG
EXCEPTION AND AQUINO)
When AOI, by-laws, or an advance contract provides
for compensation. NOTE:
Compensation other than per diems may also be Differences between Section 31 and Section 34:
granted to directors by the vote of the stockholders
representing at least a majority of the OCS at a First, while both involve the same subject matter
regular or special stockholders‘ meeting. (business opportunity) they concern different
personalities; Sec. 34 is applicable only to directors
 MERCANTILE LAW REVIEWER

and not to officers, whereas Sec. 31 applies to J. Liability for Watered Stocks
directors, trustees and officers.
106 Watered Stocks – stocks issued for a consideration
Second. Sec. 34 allows a ratification of a transaction
by a self-dealing director by vote of stockholders less than its par or issued value or for a
representing at least 2/3 of the outstanding capital consideration in any form other than cash, valued in
stock excess of its fair value.
(VILLANUEVA)
Any director or officer of a corporation consenting to
the issuance of watered stocks or who, having
H. Business Judgment Rule knowledge thereof, does not forthwith express his
objection in writing and file the same with the
GENERAL RULE corporate secretary shall be solidarily liable with
Directors cannot be held liable for mistakes or errors the stockholder concerned to the corporation and its
in the exercise of their business judgment if they creditors for the difference in value (Sec. 65).
acted in good faith, with due care & prudence.
Contracts intra vires entered into by the board of K. Personal Liabilities
directors are binding upon the corporation & courts
will not interfere.
GENERAL RULE
EXCEPTION Members of the Board, who purport to act in good
If the contracts are so unconscionable & oppressive faith for and in behalf of the corporation within the
as to amount to a wanton destruction of the rights of lawful scope of their authority, are not liable for the
the minority or if they violate their duties under consequences of their acts. When the acts are of
Sections 31 & 34. such nature and done under those circumstances,
they are attributed to the corporation alone and no
personal liability is incurred. (Price v. Innodata
Note:
Phils., Inc., 2008)
Dean Villanueva opined that a derivative suit may be
an exception to such Rule: this occurs when it is
apparent that the Board is not in a position to validly The provisions on seizing corporate opportunity and
exercise its business judgment for the protection of disloyalty (Secs. 31 and 34) shall also apply to
the corporation, e.g., when the Board itself has corporate officers
committed an act causing damage to the corporation
or when the Board is placed in a conflict of interests NOTE—
scenario whereby it is unlikely that it would use such Members of the BOD who are also officers are held
business discretion to file such suit for the best to a more stringent liability because they are in-
interest of the corporation. charge of day-to-day activities (CAMPOS)

CONSEQUENCES OF THE BUSINESS JUDGMENT

RULE: DOCTRINE OF LIMITED DOCTRINE OF
 Resolutions and transactions entered into by the LIABILITY IMMUNITY
Board within the powers of the corporation Shields the corporators Protects a person acting
cannot be reversed by the court not even on the from corporate liability for and in behalf of the
behest of the stockholders. beyond their agreed corporation from being
 Directors and officers acting within such contribution to the himself personally liable
business judgment cannot be held personally capital or shareholding in for his authorized
liable for such acts. (Philippine Corporate Law, the corporation. actions
Cesar Villanueva, 2009 ed. P.328)
Tramat Mercantile, Inc. vs. CA, (1994), reiterated in
I. Solidary Liability for Damages Atrium Management Corp. v. CA, (2001):
Liability of Director, Trustee or Officer (Asked in
 Willful and knowingly voting for and assenting to 96 and 97)
patently unlawful acts of the corporation; (Sec. Personal liability of a corporate director, trustee or
31) officer along (although not necessarily) with the
 Gross negligence or bad faith in directing the corporation may so validly attach, as a rule, only
affairs of the corporation; (Sec. 31) when:
 Aquiring any personal or pecuniary interest in  He assents (a) to a patently unlawful act of the
conflict of duty; (Sec. 31) corporation, or (b) for bad faith or gross
 Consenting to the issuance of watered stocks, negligence in directing its affairs, or (c) for
or, having knowledge thereof, failing to file conflict of interest, resulting in damages to the
objections with secretary; (Sec. 65) corporation, its stockholders or other persons;
 Agreeing or stipulating in a contract to hold  He consents to the issuance of watered stocks or
himself liable with the corporation; or who, having knowledge thereof, does not
 By virtue of a specific provision of law forthwith file with the corporate secretary his
written objection thereto;
 He agrees to hold himself personally and
solidarily liable with the corporation; or
 MERCANTILE LAW REVIEWER

 He is made, by a specific provision of law, to information relating to the business of the

personally answer for his corporate action corporation to benefit themselves or any competitor
corporation in which they may have a mere
substantial interest. 107
L. Responsibility for Crimes
Since loss and prejudice to the corporation is not a
Since a corporation as a person is a mere legal requirement for liability, the corporation has a cause
fiction, it cannot be proceeded against criminally of action as long as there is unfair use of inside
because it cannot commit a crime in which personal information
violence or malicious intent is required.
It is inside information if it is not generally available
Criminal action is limited to the corporate agents to others and is acquired because of the close
guilty of an act amounting to a crime and never relationship of the director or officer of the
against the corporation itself (West Coast Life Ins. corporation
Co. v. Hurd [1914], Time Inc. v. Reyes [1971]).
O. Contracts
Since the BOD is the repository of corporate powers
and acts as the agent of the corporation, the
directors may be held criminally liable. 1. By self-dealing directors with the
corporation
The Trust Receipts Law recognizes the impossibility
of imposing the penalty of imprisonment on a GENERAL RULE
corporation. Hence, if the entrustee is a A contract of the corporation with one or more of its
corporation, the law makes the officers or directors or trustees is VOIDABLE, at the option of
employees or other persons responsible for the such corporation. (Sec. 32)
offense liable to suffer the penalty of imprisonment.
The reason is obvious: corporations, partnerships, EXCEPTION
associations and other juridical entities cannot be Such contract is VALID if all of the following
put to jail. Hence, the criminal liability falls on the conditions are present:
human agent responsible for the violation of the  That the presence of such director or trustee in
Trust Receipts Law. (Ong v. CA, 2003) the board meeting in which the contract was
approved was not necessary to constitute a
M. Special Facts Doctrine quorum for such meeting;
 That the vote of such director or trustee was
Even though a director may not be under the not necessary for the approval of the contract;
obligation of a fiduciary nature to disclose to a  That the contract is fair and reasonable under
shareholder his knowledge affecting the value of the circumstances; and
the shares, that duty may exist in special cases.  That in case of an officer, the contract has been
(Strong v. Repide, 1909) previously authorized by the board of directors.

GENERAL RULE
(Majority view) Directors owe no fiduciary duty to Ratification
stockholders but they may deal with each other at In case of absence of the first two conditions above,
fair and reasonable terms, as if they were unrelated. contract may be ratified if:
No duty to disclose facts known to the director or  Stockholders representing at least 2/3 of the
officer. outstanding capital stock or at least 2/3 of the
members in a meeting called for the purpose
EXCEPTION voted to ratify the contract.
Special Facts Doctrine: Conceding the absence of a  Full disclosure of the adverse interest of the
fiduciary relationship in the ordinary case, courts directors or trustees involved is made at such
nevertheless hold that where special circumstances meeting.
or facts are present which make it inequitable for  Contract is fair and reasonable under the
the director to withhold information from the circumstances
stockholder, the duty to disclose arises and
concealment is fraud. (Strong v. Repide, 1909) 2. Between corporations with
interlocking directors
N. Inside Information
i. If the interests of the interlocking
1
The fiduciary position of insiders , directors, and director in the corporations are both
officers prohibits them from using confidential
not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing
1
“Insider” means: (a) the issuer; (b) a director or officer (or agency and/or self-regulatory organization who has access
person performing similar functions) of, or a person to material information about an issuer or a security that is
controlling the issuer; (c) a person whose relationship or not generally available to the public; or (e) a person who
former relationship to the issuer gives or gave him access to learns such information by a communication from any of the
material information about the issuer or the security that is foregoing insiders (§3.8, Sec Regulations Code)
 MERCANTILE LAW REVIEWER

substantial (stockholdings exceed 20%  Acts which would render the BOD powerless and
of outstanding capital stock). free from all responsibilities imposed on it by
108 law (CAMPOS)
GENERAL RULE
A contract between two or more corporations having Q. Meetings
interlocking directors shall not be invalidated on
that ground alone. (Sec. 32)
1. Regular or Special
EXCEPTION
If contract is fraudulent or not fair and reasonable Who May Attend?
The members of the Board themselves; directors in
ii. If the interest of the interlocking Board meetings cannot be represented or voted by
director in one of the corporations is proxies.
nominal (stockholdings 20% or less)
while substantial in the other, the a. When and Where
contract shall be VALID, if the
following conditions are met: When? (Sec.53)
 Regular meetings of directors or trustees shall
1) The presence of such director or trustee in the be held monthly, unless the by-laws provide
board meeting in which the contract was otherwise.
approved was NOT necessary to constitute a  Special meetings of the board of directors or
quorum for such meeting trustees may be held at any time upon the call
2) That the vote of such director or trustee was of the president or as provided in the by-laws.
not necessary for the approval of the contract
3) That the contract is fair and reasonable under Where? (Sec. 53)
the circumstances. Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines,
Where (1) and (2) are absent, the contract can be unless the by-laws provide otherwise.
ratified by the vote of the stockholders representing
at least 2/3 of the outstanding capital stock or at b. Notice (Sec. 53)
least 2/3 of the members in a meeting called for the
purpose voted to ratify the contract, provided that: Notice of regular or special meetings stating the
 full disclosure of the adverse interest of the date, time and place of the meeting must be sent to
directors/trustees involved is made on such every director or trustee at least one (1) day prior
meeting; to the scheduled meeting, unless otherwise
 the contract is fair and reasonable under the provided by the by-laws.
circumstances.
Notice of meeting is subject to waiver.
P. Executive Committee
2. Who Presides (Sec. 54)
1. Creation
The president presides, unless the by-laws provide
otherwise.
A body created by the by-laws and composed of
some members of the board which, subject to the
statutory limitations, has all the authority of the 3. Quorum (Sec. 25)
board to the extent provided in the board resolution
or by-laws (See Sec. 35). GENERAL RULE
Majority of the number of directors or trustees as
2. Limitations on its Powers fixed in the articles of incorporation.

EXCEPTION
Must be provided for in the by-laws and composed of
Unless the articles of incorporation or the by-laws
at least 3 members of the board appointed by the
provide for a greater majority, or in case of election
board.
of officers where a vote of a majority of all the
members of the board is needed.
Must act by a majority vote of all of its members.

CANNOT act on the following: 4. Rule on Abstention

 Matters needing stockholder approval (Sec. 35);
 Filling up of board vacancies; An abstention is counted as an affirmative vote
 Amendment, repeal or adoption of by-laws (Sec. insofar as it may be construed as an acquiescence in
35); the action of those who vote affirmatively. This
 Amendment or repeal of any resolution of the manner of counting is obviously based on what is
Board which by its express terms is not deemed to be a presumption as to the intent of the
amendable or repealable (Sec. 35); one abstaining, namely, to acquiesce in the action of
 Cash dividend distribution (Sec. 35); and those who vote affirmatively, but which
presumption, being merely prima facie, would not
 MERCANTILE LAW REVIEWER

hold in the face of clear evidence to the contrary. It including the unrestricted negotiability of that
is pertinent to inquire into the facts and security by reason of such delivery.
circumstances which attended the voting by the
members to determine whether or not such a  Valid as to corporation – when the transfer is 109
construction would govern. (Lopez v. Ericta, G.R. recorded in the books of the corporation so as to
No. L-32991, June 29, 1972) show the names of the parties to the transfer
and the number of shares transferred (Sec. 43,
Securities Regulation Code).
X. Capital affairs 3. Negotiability
A. Certificate of Stock Theory of Quasi-Negotiability
Certificates indorsed in blank – where the
stockholder indorses his certificate in blank in such a
1. Nature of the Certificate manner as to clothe whoever may be in possession of
it with apparent authority to deal with the shares as
A certificate of stock is an instrument formally
the latter‘s own, he will be estopped from claiming
issued by the corporation with the intention that the
the shares as against a bonafide purchaser.
same constitute the best evidence of the rights and
(Santamaria v. Hongkong & Shanghai Bank, 1951)
status of a SH (not a condition precedent to the
acquisition of such rights).
i. Requirements for Valid Transfer of
Stocks (Sec. 63)
2. Uncertificated Shares For a valid transfer of stocks, the requirements are
as follows:
Uncertificated Shares/Securities  There must be delivery of the stock certificate;
Security evidenced by electronic or similar records  The certificate must be endorsed by the owner
(Sec. 3.14, Securities Regulation Code) or his attorney-in-fact or other persons legally
authorized to make the transfer; and
Notwithstanding Sec. 63 of the Corporation Code  To be valid against third parties, the transfer
(certificate of stock and transfer of shares), a must be recorded in the books of the
corporation whose securities are registered pursuant corporation. (Bitong v. Court of Appeals, G.R.
to the SRC or listed on securities exchange may: No. 123553, July 13, 1998)
 If so resolved by the Board of Directors and
agreed by a shareholder, investor or securities No shares of stock against which the corporation
intermediary, issue shares to, or record the holds an unpaid claim shall be transferable in the
transfer of some or all its shares into the name books of the corporation.
of such shareholders, investors or, securities
intermediary in the form of uncertified
securities,
4. Issuance
i. Full Payment
The use of uncertified securities in these
circumstances shall be without prejudice to the
GENERAL RULE
rights of the securities intermediary
No certificate of stock shall be issued to a subscriber
subsequently to require the corporation to issue
until the full amount of his subscription together
a certificate in respect of any shares recorded in
with interest and expenses (in case of delinquent
its name; and
shares), if any is due, has been paid (Sec. 64)
 If so provided in its articles of incorporation
EXCEPTION
and by-laws, issue all of the shares of a
In Baltazar v Lingayen Gulf Electric Power Company,
particular class in the form of uncertificated
1965), where it was the practice of the corporation
securities and subject to a condition that
since its inception to issue certificates of stock to its
investors may not require the corporation to
individual SHs for unpaid shares of stock and to give
issue a certificate in respect of any shares
full voting power to shares fully paid.
recorded in their name.
ii. Payment Pro-rata
Transfers of uncertificated securities, how made
 Valid as between parties - validly made and
consummated by appropriate book-entries in the Nava Peers Mktg. Corp. and Fua Cun v. Summers
securities intermediaries, or in the stock and (1923):
transfer book held by the corporation or the The entire subscription must be paid first before the
stock transfer agent. certificates of stock can be issued. Partial payments
are to be applied pro rata to each share of stock
A transfer made pursuant to the foregoing has subscribed.
the effect of delivery of a security in bearer
form or duly indorsed in blank representing the
amount of security or right transferred,
 MERCANTILE LAW REVIEWER

5. Stock and Transfer Book (Sec. 74, B. Watered Stocks

par. 4)
110 1. Definition
i. Contents
These are shares issued as fully paid when in truth
 a record of all stocks in the names of the con consideration is paid, or the consideration
stockholders alphabetically arranged; received is known to be less than the par value or
 the installments paid and unpaid on all stock for issued value of the shares. (Sec. 65)
which subscription has been made, and the date
of payment of any installment; These include the following:
 a statement of every alienation, sale or transfer  Issued without consideration (bonus share)
of stock made, the date thereof, and by and to  Issued as fully paid when the corporation has
whom made; and received less sum of money than its par or
 such other entries as the by-laws may prescribe. issued value (discounted share)
 Issued for consideration other than actual cash
ii. Who May Make Valid Entries (i.e., property or services), the fair valuation of
which is less than its par or issued value
 a licensed stock transfer agent; or  Issue stock dividend when there are no
 the Secretary of the stock corporation provided sufficient retained earnings or surplus to justify
all rules and regulations imposed on stock it.
transfer agents shall be applicable, except
payment of license fee. NOTE—
Subsequent increase in the value of the property
6. Lost or Destroyed Certificates used in paying the stock does not do away with the
(Sec. 73) watered stocks. Subsequent increase in the value of
the property used in paying the stock does not cure
Procedure for re-issuance in case of loss, stolen or the defect in issuance. The existence of watered
destroyed certificates: stocks is determined at the time of issuance of the
 Registered owner to file an affidavit of loss with stock
the corporation.
 Publication of notice of loss in a newspaper of 2. Liability of Directors for Watered
general circulation published in the place where Stocks
the corporation has its principal office, once a
week for 3 consecutive weeks at the expense of Any director or officer of a corporation consenting to
the owner of the certificate of stock the issuance of stocks or who, having knowledge
 Cancellation of the certificate in the books of thereof, does not forthwith express his objection in
the corporation and issuance of new writing and file the same with the corporate
certificates, after the expiration of 1 year from secretary shall be solidarily liable with the
the date of the last publication and there is no stockholder concerned to the corporation and its
contest. The right to make such contest shall be creditors for the difference in value (Sec. 65).
barred after the expiration of the one-year
period.
 Issuance of new certificates before 1 year 3. Trust Fund Doctrine for Liability
period if the registered owner files a bond and for Watered Stocks
there is no pending contest regarding the
ownership of said certificates. Where the corporation issues watered stock and
thereby assumes an ostensible capitalization in
NOTE— excess of its real assets, the transaction necessarily
Except in cases of fraud, bad faith, or negligence on involves the misleading of subsequent creditors, and
the part of the corporation and its officers, no whether done with that purpose actually in mind or
action may be brought against the corporation which not, is at least a constructive fraud upon creditors.
shall have issued certificates of stock in lieu of those Hence, it is held that recovery may be had by a
lost, stolen or destroyed pursuant to the above creditor in such case, even though the corporation
procedure. itself has no cause of action against the
stockholders. Some of the earlier decisions put the
7. Situs of the Shares of Stock right of recovery in such a case upon the so-called
―trust fund doctrine.‖ In any view of the matter,
It is a general rule that for purposes of execution, however, the creditors‘ right of action to compel the
attachment and garnishment, it is not the domicile making good of the representation as to the
of the owner of a certificate but the domicile of the corporation‘s capital is based on fraud, and the trust
corporation which is decisive. (Chua Guan v. find doctrine is only another way of expressing the
Samahang Magsasaka, Inc., G.R. No. 42091, same underlying idea. (De Leon, 2010)
November 2, 1935)
Despite the view of foreign authors that the fraud
theory is the prevailing view, it would seem that in
the Philippine jurisdiction, the trust fund doctrine on
 MERCANTILE LAW REVIEWER

watered stock prevails. In Philippine Trust Corp. v. The notice is regarded as a condition precedent to
Rivera, the Supreme Court held – the right of recovery. It must, therefore, be alleged
and proved to maintain an action for the call
It is established doctrine that subscription to the (Baltazar v. Lingayen Gulf Electric Power Co., Inc.). 111
capital of a corporation constitute a fund to The right to notice of call, however, may be waived
which creditors have a right to look for by the subscriber. (De Leon, 2010)
satisfaction of their claims and that the assignee
in insolvency can maintain an action upon any D. Sale of Delinquent Shares (Sec.
unpaid stock subscription in order to realize
assets for the payment of its debts. A 68)
corporation has no power to release an original
subscriber to its capital stock from the Delinquent Shares - These are shares for which the
obligation of paying for his shares, without a corresponding subscription or balance remains
valuable consideration for such release; and as unpaid after a grace period of 30 days from the date
against creditors a reduction of the capital stock specified in the contract of subscription or from the
can take place only in the manner an under the date stated in the call made by the BOD. (Sec 67)
conditions prescribed by the statute or the
charter or the articles of incorporation. 1. Effect of Delinquency (Sec. 71)
Moreover, strict compliance with the statutory
regulations is necessary. (Villanueva, 2001) No delinquent stock shall be voted for or be entitled
to vote or to representation at any stockholders‘
C. Payment of Balance of meeting
Subscription (Sec. 66 & 67)
The holder thereof shall NOT be entitled to any of
the rights of a stockholder except the right to
1. Call by Board of Directors dividends.

The board of directors of any stock corporation may Such shares shall be subject to delinquency sale.
at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock 2. Call by Resolution of the Board of
and may collect the same or such percentage
thereof, in either case with accrued interest, if any,
Directors (Sec. 68)
as it may deem necessary.
The board of directors may, by resolution, order the
sale of delinquent stock and shall specifically state
Payment shall be made on the date specified in the
the amount due on each subscription plus all accrued
contract of subscription or on the date stated in the
interest, and the date, time and place of the sale
call. Failure to pay on such date shall render the
which shall not be less than 30 days nor more than
entire balance due and payable and shall make the
60 days from the date the stocks became delinquent.
stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is
provided for in the by-laws. If within 30 days from 3. Notice of Sale
said date no payment is made, all stocks covered by
said subscription shall become delinquent and If the BOD resolves to proceed with the sale:
subject to sale under Sec. 68 unless the BOD orders 1. Notice of sale and a copy of the resolution shall
otherwise. be sent to every delinquent stockholder either
personally or by registered mail.
There are two (2) instances when call is not 2. Notice of sale shall furthermore be published
necessary to make the subscriber liable for payment once a week for two (2) consecutive weeks in a
of the unpaid subscription: newspaper of general circulation in the province
 When, under the terms of the subscription or city where the principal office of the
contract, subscription is payable, not upon call, corporation is located.
but immediately, or on a specified day, or when
it is payable in installments at specified times; 4. Auction Sale
and
 If the corporation becomes insolvent, which Procedure for delinquency sale (Sec. 68)
makes the liability on the unpaid subscription  Call for payment made by the BOD.
due and demandable regardless of any  Notice of call served on each stockholder.
stipulation to the contrary in the subscription  Notice of delinquency issued by the BOD upon
agreement. (Villanueva, 2001) failure of the stockholder to pay within 30 days
from date specified.
2. Notice Requirement  Service of notice of delinquency on the non-
paying subscriber, PLUS publication in a
Where call is necessary, notice must be given to the newspaper of general circulation in the province
stockholder concerned. A call without notice to the or city where the principal office of the
subscriber is practically no call at all. corporation is located, once a week for two (2)
consecutive weeks.
 MERCANTILE LAW REVIEWER

refuse to acknowledge and register a sale or

Note: assignment of shares which are not fully paid, and
112 Requirements on notice and publication are may continue to hold the original subscriber liable
mandatory. Lacking such requirements, the on the payment of the subscription.
stockholder may question the sale as provided
under Sec. 69. However, in China Banking Corp. v. CA, the court
said that the above principle in section 63 cannot be
 Public auction - the highest bidder is one who is utilized by the corporation to refuse to recognize
willing to pay the balance of the subscription for ownership over pledged shares purchased at public
the least number of shares. If there are no auction. The term ―unpaid claims‖ refers to ―any
bidders, the corporation must bid for the whole unpaid claims arising from unpaid subscription, and
number of shares regardless of how much the SH not to any indebtedness which a subscriber or
has paid. Such stocks will pertain to the stockholder may owe the corporation arising from
corporation as fully paid treasury stocks. any other transactions. Obligations arising from
unpaid monthly dues do not fall within the coverage
The delinquent stockholder may stop the auction by of Section 63.‖ (Villanueva, 2001)
paying to the corporation or before the date
specified for the sale the balance due on his 3. Sale of a Portion of Shares not
subscription, plus accrued interest, costs of
advertisement and expenses of the sale.
Fully Paid
The SEC has opined on several occasions that a
Otherwise, the public auction shall proceed and be
stockholder who has not paid the full amount of his
sold to the bidder that will pay the full amount of
subscription cannot transfer part of his subscription
the balance of subscription with accrued interest,
in view of the indivisible nature of a subscription
costs and expenses of the sale, for the smallest
contract. The reason behind the principle of
number of shares or fraction of a share. The stock so
disallowing transfer of not fully paid subscription to
purchased shall be transferred to such purchases in
several transferee is that it would be difficult to
the books of the corporation and a certificate of
determine whether or not the partial payments
such stuck shall be issued in his favor. The remaining
made should be applied as full payment for the
shares, if any,shall be credited in favor of the
corresponding number of shares which can only be
delinquent stockholder who shall likewise be
covered by such payment or as proportional payment
entitled to the issuance of a certificate of stock
to each and all of the entire number of subscribed
covering such shares.
shares, and it would be difficult to determine the
unpaid balance to be assumed by each transferee.
Irregularities in the delinquency sale (Sec. 69)
(Villanueva, 2001)
 Action to recover delinquent stock must be on
the ground of irregularity or defect in the notice
of sale. 4. Sale of All of Shares Not Fully Paid
 Party seeking to recover must first pay or tender
to the party holding the stock the sum for which On the other hand, the SEC has opined that the
the same was sold, with interest from the date entire subscription, although not yet fully paid, may
of sale at the legal rate. be transferred to a single transferee, who as a result
 The action shall be commenced within six of the transfer must assume the unpaid balance. It is
months from the date of sale. necessary, however, to secure the consent of the
corporation since the transfer of subscription rights
E. Alienation of Shares and obligations contemplates a novation of contract
which under Article 1293 of the Civil code cannot be
made without the consent if the creditor.
1. Allowable Restrictions on the Sale (Villanueva, 2001)
of Shares
5. Sale of Fully Paid Shares
GENERAL RULE
Shares of stock so issued are personal property and Shares of stock so issued are personal property and
may be transferred (Sec. 63). (FREE may be transferred by delivery of the certificate or
TRANSFERABILITY OF SHARES) certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the
EXCEPTION transfer. No transfer however shall be valid except
In CLOSE corporations, restrictions on the right to as between the parties until the transfer is recorded
transfer shares may be provided in the AOI, by-laws in the books of the corporation showing the names of
and certificates (Sec. 98). the parties to the transaction, the date of the
transfer, the number of the certificate or
2. Sale of Partially Paid Shares certificates and the number of shares transferred
(Sec. 63, Code)
Under Section 63 of the Corporation Code, no shares
of stock against which the corporation holds any 6. Requisites of a Valid Transfer
unpaid claim shall be transferable in the books of
the corporation. Therefore, a corporation may Same as requirements for valid transfer of stocks
 MERCANTILE LAW REVIEWER

7. Involuntary Dealings The resolution to dissolve must be approved by the

majority of the directors/trustees and approved by
The right of a stockholder to pledge, mortgage or the stockholders representing at least 2/3s of the 113
otherwise encumber his shares is recognized under OCS or 2/3 of members.
Section 55 of the Corporation Code, which regulates
the manner of voting on pledged or mortgaged A copy of the resolution shall be certified by the
shares. majority of the directors or trustees and
countersigned by the secretary.
If the restriction on the right to pledge or mortgage
shares of stock absolutely prohibits the stockholders The signed and countersigned copy will be filed with
from pledging or mortgaging their shares without the the SEC and the latter will issue the certificate of
consent of the board of directors, it would be dissolution.
violative of the statutory right of the stockholders to
encumber shares of stock as allowed in Section 55. NOTE—
However, when the restriction merely allows the Thus, except for the expiration of its term, no
corporation or existing stockholders to accept the dissolution can be effective without some act of the
offer within the option period, and thereafter, if no state (Daguhoy Enterprises v. Ponce, 1954)
one accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any third ii. Where Creditors are Affected (Sec.
party, such provision is reasonable, valid and 119)
binding.
A petition shall be signed by a majority of its board
By the strict application of Section 63 of the of directors or trustees or other officers having
Corporation Code to cover only the sale, assignment management of its affairs.
or absolute disposition of shares of stock, the
Supreme Court has placed a bias against voluntary The petition must be verified by its president, or
sales, assignments or dispositions of shares of stock secretary or one of its director or trustees.
vis-à-vis pledges, mortgages, attachment or levy
thereof. To be valid and binding on third parties, the Approval of the stockholders representing at least
voluntary sale, assignment or disposition of shares 2/3 of the OCS or 2/3 of members in a meeting
requires the essential element of registration in the called for that purpose.
stock and transfer book; otherwise the sale,
assignment or disposition is considered void as to Filing of a petition with the SEC signed by majority
third parties, even when they have actual notice. of directors or trustees or other officers having the
Whereas, when it comes to pledge, mortgage, management of its affairs verified by the President
encumbrance, attachment or levy of shares, or Secretary or Director. Claims and demands must
registration thereof in the stock and transfer book is be stated in the petition.
not essential either for validity or as a species of
notifying third parties. (Villanueva, 2001) If the petition is sufficient in form and substance,
the SEC shall issue an order fixing a hearing date for
objections.

XI. Dissolution and liquidation A copy of the order shall be published at least once a
week for 3 consecutive weeks in a newspaper of
Dissolution of a corporation is the extinguishment of general circulation, or if there is no newspaper in
its franchise and the termination of its corporate the city or municipality of the principal office,
existence or business purpose. posting for 3 consecutive weeks in 3 public places is
sufficient.
A. Modes of Dissolution
Objections must be filed no less than 30 days nor
more than 60 days after the entry of the Order.
1. Voluntary
After the expiration of the time to file objections, a
i. Where No Creditors are Affected (Sec. hearing shall be conducted upon prior 5 day notice
118) to hear the objections.

Notice of the meeting should be given to the Judgment shall be rendered dissolving the
stockholders or members by personal delivery or corporation and directing the disposition of assets.
registered mail at least 30 days prior to the meeting. The judgment may include appointment of a
receiver.
The notice of meeting should also be published for 3
consecutive weeks in a newspaper published in the iii. By Shortening of Corporate Term
place, where the principal office of said corporation (Sec. 120)
is located. If no newspaper is published in such
place, then in a newspaper of general circulation in A voluntary dissolution may be effected by amending
the Philippines. the AOI. Upon approval of the amended AOI or the
 MERCANTILE LAW REVIEWER

expiration of the shortened term, as the case may 3. While Congress may provide for the dissolution
be, the corporation shall be deemed dissolved of a corporation, it cannot impair the obligation
114 without any further proceedings of existing contracts between the corporation
and third persons, or take away the vested
2. Involuntary rights of its creditors. (De Leon, 2010)

i. By Expiration of Corporate Term iv. Dissolution by the SEC on Grounds

Under Existing Laws (Sec. 121)
Once the period expires, the corporation is
automatically dissolved without any other A corporation may be dissolved by the SEC, upon a
proceeding and it cannot thereafter be considered a verified complaint and after proper notice and
de facto corporation. hearing, on the following grounds (Sec. 6, par i, PD
902-A):
ii. Failure to Organize and Commence  Fraud in procuring its certificate of registration
Business within Two Years from  Serious misrepresentation as to what the
Incorporation (Sec. 22) corporation can or is doing to the great
prejudice of or damage to the general public
Failure to formally organize and commence the  Refusal to comply or defiance of any lawful
transaction of its business or construction of its order of the Commission restraining commission
works within two years - its corporate powers shall of acts which would amount to a grave violation
cease and the corporation shall be deemed dissolved of its franchise
 Continuous inoperation for a period of at least
Transacting business implies a continuity of acts or five years
dealings in the accomplishment of the purpose for  Failure to file by-laws within the required
which the corporation was formed (Mentholatum v. period
Mangaliman, 1946)  Failure to file required reports in appropriate
forms as determined by the Commission within
Formal organization includes not only the adoption the prescribed period
of the by-laws but also the establishment of the  Other grounds
body which will administer the affairs of the
corporation and exercise its powers Other grounds:
 Violation by the corporation of any provision of
Failure to operate for at least 5 consecutive years the Corporation Code (Sec. 144 BP 68)
after commencement of business - ground for  In case of a deadlock in a close corporation, and
suspension or revocation of its corporate franchise or the SEC deems it proper to order the dissolution
certificate of incorporation. of the corporation as the only practical solution
to the dispute (Sec. 104 BP 68)
NOTE—
The corporation may show that the failure to B. Methods of Liquidation
commence its business or to continuously operate is
due to causes beyond its control (Sec. 22). Liquidation is the process by which all the assets of
the corporation are converted into liquid assets
iii. Legislative Dissolution (cash) in order to facilitate the payment of
obligations to creditors, and the remaining balance if
The inherent power of Congress to make laws carries any is to be distributed to the stockholders. It is a
with it the power to amend or repeal them. proceeding in rem.
Involuntary corporate dissolution may be effected
through the amendment or repeal of the Corporation
Code.
1. By the Corporation Itself

The limitations on the power to dissolve corporations Under Section 122 of the Corporation Code, a
by legislative enactment are as follows: corporation whose corporate existence is terminated
1. Under the Constitution, the amendment, in any manner continues to be a body corporate for
alteration, or repeal of the corporate franchise three (3) years after its dissolution for purposes of
of a public utility shall be made only ―when the prosecuting and defending suits by and against it and
to enable it to settle and close its affairs,
common good so requires‖;
culminating in the disposition and distribution of its
2. Under Section 145 of the Code, it is provided
remaining assets. It may, during the three-year
that: ―No right or remedy in favor of or against
any corporation, its stockholders, members, term, appoint a trustee or a receiver who may act
directors, trustees, or officers, nor any liability beyond that period.
incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall The termination of the life of a corporate entity
be removed or impaired either by the does not by itself cause the extinction or diminution
subsequent dissolution of said corporation or by of the rights and liabilities of such entity. If the
any subsequent amendment or repeal of this three-year extended life has expired without a
Code or of any part thereof‖; trustee or receiver having been expressly designated
by the corporation, within that period, the board of
directors (or trustees) itself, may be permitted to so
 MERCANTILE LAW REVIEWER

continue as "trustees" by legal implication to operation and solvency. Both cannot be undertaken
complete the corporate liquidation. (Pepsi-Cola at the same time.
Products Philippines, Inc. v. Court of Appeals, G.R.
No. 145855, November 24, 2004) 115
XII. Other corporations
2. Conveyance to a Trustee within a
3-Year Period A. Close Corporations
(Corporation Code, Title XII)
From and after any such conveyance by the
corporation of its property in trust for the benefit of
Section 96: Close corporations are those whose AOI
its SH/members/creditors and others in interest, all
provide the following:
interest which the corporation had in the property
a) all of the corporation’s issued stock of all classes,
terminates, the legal interest vests in the trustees,
exclusive of treasury shares, shall be held of
and the beneficial interest in the stockholders,
record by not more that a specified number of
members, creditors or other persons in interest.
persons, not exceeding 20
b) all of the issued stock of all classes shall be
"the trustee (of a dissolved corporation) may
subject to one or more specified restrictions on
commence a suit which can proceed to final
transfer permitted by the Code
judgment even beyond the three-year period (of
c) the corporation shall not list in any stock
liquidation) . . . , no reason can be conceived why a
exchange or make any public offering of any of
suit already commenced by the corporation itself
its stock of any class
during its existence, not by a mere trustee who, by
d) at least 2/3 of its voting stock must not be owned
fiction, merely continues the legal personality of the
or controlled by another corporation which is
dissolved corporation, should not be accorded
not a close
similar treatment — to proceed to final judgment
e) must not be a mining or oil company, stock
and execution thereof." (Reburiano v. Court of
exchange, bank, insurance company, public
Appeals, G.R. No. 102965, January 21, 1999)
utility, educational institution or corporation
vested with public interest
3. By Management Committee or
Rehabilitation Receiver The AOI must state that the number of stockholders
shall not exceed 20.
However, the mere appointment of a receiver,
without anything more does not result in the The AOI must contain restriction on the transfer of
dissolution of the corporation nor bar it from the issued stocks (which must appear in the AOI, by-laws
existence of its corporate rights (Leyte Asphalt & and certificate of stock)
Mineral Oil Co. Ltd., v. Block Johnston &
Breenbrawn, 1928) GENERAL RULE
Free transferability of shares - Shares of stock so
Upon five (5) day's notice, given after the date on issued are personal property and may be transferred
which the right to file objections as fixed in the
order has expired, the Commission shall proceed to EXCEPTION
hear the petition and try any issue made by the In close corporations: Considering the special
objections filed; and if no such objection is circumstances attending a close corporation (e.g.
sufficient, and the material allegations of the formed by persons who know each other well, thus
petition are true, it shall render judgment dissolving they would want to choose the persons who will be
the corporation and directing such disposition of its allowed in their group), it is justifiable and even
assets as justice requires, and may appoint a imperative for its stockholders to protect themselves
receiver to collect such assets and pay the debts of from future conflicts by placing restrictions on the
the corporation (Sec. 119, Code) right of each one of them to transfer his shares to an
outsider.
4. Liquidation after Three Years
 Restriction on the transfer must NOT be more
Phil. Veterans Bank v. Employees Union (2001): onerous than granting the existing SH or
Q: What is the difference between Liquidation and corporation the option to purchase the shares.
Rehabilitation?
The stocks cannot be listed in the stock exchange
A: Liquidation is the winding up of a corporation so nor be publicly offered.
that assets are distributed to those entitled to
receive them. It is the process of reducing assets to The corporation must NOT be mining company, stock
cash, discharging liabilities and dividing surplus or exchange, oil company, bank, insurance company,
loss. On the other hand, rehabilitation public utility, educational institution or other
contemplates a continuance of corporate life and corporation declared to be vested with public
activities in an effort to restore and reinstate the interest.
corporation to its former position of successful
 MERCANTILE LAW REVIEWER

At least 2/3 of its voting stock or voting rights must If the articles of incorporation of a close corporation
NOT be owned or controlled by another corporation states the number of persons, not exceeding twenty
116 which is not a close corporation. (20), who are entitled to be holders of record of its
stock, and if the certificate for such stock
1. Characteristics of a Close conspicuously states such number, and if the
issuance or transfer of stock to any person would
Corporation cause the stock to be held by more than such
number of persons, the person to whom such stock
The stockholders themselves can directly manage
is issued or transferred is conclusively presumed
the corporation and perform the functions of
to have notice of this fact.
directors without need of election (Sec. 97):
 When they manage, stockholders are liable as
If a stock certificate of any close corporation
directors;
conspicuously shows a restriction on transfer of stock
 There is no need to call a meeting to elect
of the corporation, the transferee of the stock is
directors;
conclusively presumed to have notice of the fact
 The stockholders are liable for tort.
that he has acquired stock in violation of the
restriction, if such acquisition violates the
2. Validity of Restrictions on Transfer restriction.
of Shares
Whenever any person to whom stock of a close
Validity of Restrictions (AO) (Sec. 98) corporation has been issued or transferred has, or is
 Restrictions must appear in the articles of conclusively presumed under this section to have,
incorporation and in the by-laws as well as in notice either (a) that he is a person not eligible to
the certificate of stock; otherwise, the same be a holder of stock of the corporation, or (b) that
shall not be binding on any purchaser thereof in transfer of stock to him would cause the stock of the
good faith. corporation to be held by more than the number of
 Restrictions shall not be more onerous than persons permitted by its articles of incorporation to
granting the existing stockholders or the hold stock of the corporation, or (c) that the
corporation the option to purchase the shares transfer of stock is in violation of a restriction on
of the transferring stockholder with such transfer of stock, the corporation may, at its
reasonable terms, conditions or period stated option, refuse to register the transfer of stock in
therein. After expiration of said period and upon the name of the transferee.
failure of the existing stockholders or the
corporation to purchase said shares, the The provisions of subsection (4) shall not applicable
transferring stockholder may sell his shares to if the transfer of stock, though contrary to
any third person. subsections (1), (2) of (3), has been consented to by
all the stockholders of the close corporation, or if
Presumptions (Sec. 99): the close corporation has amended its articles of
 If the stock certificate CONSPICUOUSLY shows incorporation in accordance with this Title.
the restriction, the purchaser or transferee is
CONCLUSIVELY presumed to have notice of the The term "transfer", as used in this section, is not
restriction, provided this appears in the AOI. limited to a transfer for value.
 Where a conclusive presumption of notice
arises, the corporation may, at its option, refuse The provisions of this section shall not impair any
to register the transfer, unless right which the transferee may have to rescind the
- all the stockholders have consented to the transfer or to recover under any applicable
transfer, or warranty, express or implied (Sec. 99)
- the AOI has been properly amended to
remove the restriction. 4. When Board Meeting is
 If it appears in the certificate, but NOT Unnecessary or Improperly Held
CONSPICUOUSLY, then although he may be
presumed to have notice of the restriction, he
i. When Unnecessary –
can prove the contrary.
Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed
3. Issuance or Transfer of Stock in valid if:
Breach of Qualifying Conditions  Before or after such action is taken, written
consent thereto is signed by all the directors; or
If stock of a close corporation is issued or  All the stockholders have actual or implied
transferred to any person who is not entitled under knowledge of the action and make no prompt
any provision of the articles of incorporation to be a objection thereto in writing; or
holder of record of its stock, and if the certificate  The directors are accustomed to take informal
for such stock conspicuously shows the qualifications action with the express or implied acquiescence
of the persons entitled to be holders of record of all the stockholders; or
thereof, such person is conclusively presumed to  All the directors have express or implied
have notice of the fact of his ineligibility to be a knowledge of the action in question and none of
stockholder. them makes prompt objection thereto in writing
(Sec. 101)
 MERCANTILE LAW REVIEWER

voting rights, or of such greater proportion of shares

ii. When Improperly Held as may be specifically provided in the AOI at a
meeting duly called.
When a director‘s meeting is held without proper 117
call or notice, an action taken therein within the 7. Deadlocks
corporate powers is deemed ratified by a director
who failed to attend. Requisites
1) The directors or stockholders are so divided
UNLESS he promptly files his written objection with respecting the management of the corporation's
the secretary of the corporation after having business and affairs
knowledge thereof (Sec. 101) 2) The votes required for any corporate action
cannot be obtained that the business and affairs
5. Preemptive Right of the corporation can no longer be conducted
to the advantage of the stockholders generally
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for Powers of the SEC in case of Deadlock in Close
money, property or personal services, or in Corporations
payment of corporate debts, UNLESS the articles of  Cancel or alter any provision in the articles of
incorporation provide otherwise (Sec. 102). incorporation or by-laws
 Cancel, alter or enjoin any resolution of the
6. Amendment of Articles of corporation
 Direct or prohibit any act of the corporation
Incorporation  Require the purchase at their fair value of
shares of any stockholder either by any
Amendment to the AOI which seeks to:
stockholder or by the corporation regardless of
 delete or remove any provision required to be
the availability of unrestricted retained
contained in the AOI of Close Corporations
earnings.
(under the Title on Close Corporations); or
 Appoint a provisional director
 to reduce a quorum or voting requirement
 Dissolve the corporation
stated in said AOI
 Granting such other relief as the circumstances
requires the affirmative vote of at least 2/3 of the
may warrant.
outstanding capital stock, whether with or without

CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Management / Board Authority
There can be classification of directors into one or
more classes, each of whom may be voted for and There are no classification of board of directors
elected solely by a particular class of stock; and
The articles of incorporation of a close corporation
may provide that the business of the corporation shall
be managed by the stockholders of the corporation
rather than by a board of directors. So long as this Corporate Powers devolved upon board of directors
provision continues in effect: whose powers are executed by officers. Cannot provide
that it be managed by stockholders
No meeting of stockholders need be called to elect
directors. Board of directors must be elected in a stockholders
meeting
Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of Stockholders of a corporation are separate and distinct
this Code. from directors

The stockholders of the corporation shall be subject to

all liabilities of directors.
The articles of incorporation may likewise provide that
all officers or employees or that specified officers or Officers must be elected by the Board of Directors
employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
2. Meetings
Unless the by-laws provide otherwise, any action by The directors or trustees shall not act individually nor
the directors of a close corporation without a meeting separately but as a body in a lawful meeting. They will
shall nevertheless be deemed valid if: act only after discussion and deliberation of matters
before them. Contracts entered into without a formal
 MERCANTILE LAW REVIEWER

CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Before or after such action is taken, written board resolution does not bind the corporation except
118 consent thereto is signed by all the directors; or when ratified or when majority of the board has
knowledge of the contract and the contract benefited
2. All the stockholders have actual or implied the corporation.
knowledge of the action and make no prompt
objection thereto in writing; or Absence of a prompt objection in writing does not ratify
acts done by directors without a valid meeting. There
3. The directors are accustomed to take informal must be express or implied ratification.
action with the express or implied acquiescence
of all the stockholders; or Express ratification may consist of a Board Resolution to
that effect
4. All the directors have express or implied
knowledge of the action in question and none of Implied ratification may consist of acceptance of
them makes prompt objection thereto in writing. benefits from said unauthorized act while having
knowledge of said act
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate Failure to give notice would render a meeting voidable.
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection Attendance to a meeting despite want of notice will be
with the secretary of the corporation after having deemed implied waiver
knowledge thereof.
All proceedings had and any business transacted at any
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid
even if the meeting be improperly held or called,
provided all the stockholders or members of the
corporation are present or duly represented at the
meeting. (§51)
3. Voting / Quorum
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code
The AOI may provide for a classification of directors
into one or more classes, each of which may be voted There shall always be a class/series of shares which have
for and elected solely by a particular class of stock. a COMPLETE VOTING RIGHTS

EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY

OTHER SHARE, except as otherwise provided in the AOI
For Board of directors, the by-laws or AOI can provide for
The AOI may provide for a greater quorum or voting a greater majority in quorum
requirements in meetings of stockholders or directors
than those provided in this Code. For stockholders, the AOI can provide for a different
percentage in quorum
4. Pre-emptive Right
Limitations on the exercise of pre-emptive right:
a. Such pre-emptive right shall not extend to shares to
be issued in compliance with laws requiring stock
The pre-emptive right of stockholders in close offerings or minimum stock ownership by the public;
corporations shall extend to all stock to be issued, b. Not extend to shares to be issued in good faith with
including reissuance of treasury shares, whether for the approval of the stockholders representing two-
money, property or personal services, or in payment thirds (2/3) of the outstanding capital stock, in
of corporate debts, unless the articles of incorporation exchange for property needed for corporate
provide otherwise. purposes or in payment of a previously contracted
debt
c. Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
5. Transferability
Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in the
certificate of stock otherwise the same shall not be Restrictions on the right to transfer not allowed
binding on any purchaser thereof in good faith
6. Withdrawal Right
 MERCANTILE LAW REVIEWER

CLOSE CORPORATIONS REGULAR CORPORATIONS

Any stockholder of a close corporation may, for any Stockholders may require the corporation to buy-back
reason, compel the said corporation to purchase his their shares at fair value when the Corporation has 119
shares at their fair value, which shall not be less than unrestricted Retained Earnings:
their par or issued value, when the corporation has a. In case any amendment to the articles of
sufficient assets in its books to cover its debts and incorporation which has the effect of:
liabilities exclusive of capital stock i. changing or restricting the rights of any
stockholder or class of shares, or
Any stockholder of a close corporation may, by written ii. authorizing preferences in any respect
petition to the SEC, compel the dissolution of such superior to those of outstanding shares of
corporation whenever: any class, or
a. Any of acts of the directors, officers or those iii. extending or shortening the term of
in control of the corporation is illegal, or corporate existence
fraudulent, or dishonest, or oppressive or b. In case of sale, lease, exchange, transfer, mortgage,
unfairly prejudicial to the corporation or any pledge or other disposition of all or substantially all
stockholder, or of the corporate property and assets as provided in
b. Corporate assets are being misapplied or the Code; and
wasted. c. In case of merger or consolidation
d. Extension or shortening of the term of the
corporation (§37)
e. Diversion of funds of corporation from primary
purpose to secondary purpose (§41)

The corporation may buy-back shares of stockholders

subject to the following limitations (Treasury shares):
a. There must be unrestricted retained earnings
b. Must be for a legitimate purpose

B. Non-Stock Corporations 4. Distribution of Assets Upon

(Corporation Code, Title XI) Dissolution
Order of Distribution of Assets Upon Dissolution of
1. Definition Non-Stock Corporation
 All its creditors shall be paid.
One where no part of its income is distributable as  Assets held subject to return on dissolution shall
dividends to its members, trustees, or officers, be delivered back to the givers.
subject to the provisions of this Code on dissolution.  Assets held for charitable, religious purposes,
(Sec.87) etc., without a condition for their return on
dissolution, shall be conveyed to one or more
2. Purposes (sec. 88) organizations engaged in similar activities as
dissolved corporation
 Charitable  All other assets shall be distributed to members,
 Religious as provided in the AOI or by-laws (Sec. 94)
 Educational
 Professional C. Religious Corporations
 Cultural
 Fraternal
 Literary 1. Corporation Sole (Sec. 110)
 Scientific
 Social A special form of corporation, usually associated
 Civic services with clergy and consists of one person only and his
 Similar purposes, such as chambers or successors, who are incorporated by law to give
combinations trade, industry or agriculture some legal capacities and advantages.

3. Treatment of Profits A registered corporation sole can acquire land if its

members constitute at least 60% Filipinos (SEC
Any profit which a non-stock corporation may obtain Opinion, 8 August 1994).
as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of i. Nationality
the purpose or purposes for which the corporation
was organized, subject to the provisions of this Title. A corporation sole does not have any nationality but
(Sec. 87,2nd sentence) for purposes of applying our nationalizations laws,
nationality is determined by the nationality of the
members (Roman Catholic Apostolic Church v.
Land Registration Commission, 1957).
 MERCANTILE LAW REVIEWER

―Doing Business‖ Under the Foreign investment

ii. Religious Societies Act of 1991 (RA 7042, Sec. 3(d)) (Asked in 98 and
120 02)
Non-stock corporation formed by a religious society, Doing Business
group, diocese, synod, or district of any religious  Soliciting orders, service contracts, or opening
denomination, sect, or church after getting the offices;
approval of 2/3 of its members.  Appointing representatives, distributors
domiciled in the Philippines or who stay for a
D. Foreign Corporations period or periods totaling 180 days or more;
 Participating in the management, supervision,
or control of any domestic business, firm,
Foreign Corporation are those formed, organized,
entity, or corporation in the Philippines;
or existing under any laws other than those of the
 Any act or acts that imply a continuity of
Philippines and whose laws allow Filipino citizens commercial dealings or arrangements, and
and corporations to do business in its own country or contemplate to some extent the performance of
state (Sec. 123). acts or works or the exercise of some functions,
normally incident to and in progressive
1. Bases of Authority Over Foreign prosecution of the purpose and object of its
Corporations organization.

i. Consent Not Doing Business

 Mere investment as shareholder and exercise of
As a rule, a foreign corporation can have no legal rights as investor;
existence or status beyond the bounds of the State  Having a nominee director or officer to
or sovereignty by which it is created or incorporated represent its interest in the corporation;
and organized. It exists only in contemplation of law  Appointing a representative or distributor which
and by force of the law and where that law ceases to transacts business in its own name and for its
operate, the corporation can have no existence. This own account.
principle, however, does not prevent a corporation
from acting in another State or country with the Jurisprudential Rules on ―Not Doing Business in
latter‘s express or implied consent. This is the the Philippines‖
―consent doctrine‖ which is provided in Sections 125  Products manufactured off-shore and returned
and 126. But every power which a corporation back to foreign corporation (Agilent Tech.
exercises as such in another State depends for its Singapore Ltd. v. Integrated Silicon Tech.
validity upon the laws of the sovereignty in which it Phils. Corp., 2004)
is exercised. A corporation can exercise none of the  Single isolated transaction (Marshall-Wells Co.
functions and privileges conferred by its charter in v. Henry Eiser & Co, 1924). Multiple
another State or country except by the comity and transactions are still considered a single
consent of such State or country. (De Leon, 2010) transaction where there are constantly failed
attempts in complying with the contract by one
ii. Doctrine of ―Doing Business‖ (relate of the contracting parties (Antam Consolidated
to definition under the Foreign Investments v. CA, 1986).
Act, RA 7042)  Trademark protection; foreign corporations not
doing business are merely protecting their
Tests of ―Doing Business in the Philippines‖ property rights (General Garments v. Director
(Asked in 98 and 02) of Patents, 1971).
 Twin Characterization Test  A foreign firm which does business through
- Under the Continuity Test, doing business middlemen acting on their own names shall not
implies a continuity of commercial dealings be deemed doing business in the Philippines. (Le
and arrangements, or performance of acts Chemise Lacoste v. Fernandez, 1984).
normally incidental to the purpose and
object of the organization. 2. Necessity of a License to Do
- Under the Substance Test, a foreign Business
corporation is doing business in the country if
it is continuing the body or substance of the i. Requisites for Issuance of a License
enterprise of business for which it was
organized (Mentholatum v. Mangaliman,  The foreign corporation should file a copy of its
1941) articles of incorporation and by-laws, and a
verified application (See Sec. 125) accompanied
 Contract test by the following:
A foreign corporation is doing business in the - Name and address of its designated resident
Philippines if the contracts entered into by the agent who will receive summons and notices
foreign corporation or by an agent acting under the for the corporation; a special power of
control and direction of the foreign corporation are
attorney should also be submitted for such
consummated in the Philippines (Pacific Vegetable
purpose
Oil v. Singson, 1955).
 MERCANTILE LAW REVIEWER

- An agreement that if it ceases to transact 4. Suability of Foreign Corporations

business or if there is no more resident
agent, summons shall then be served through A Foreign Corporation whether or not doing
the SEC business in the Philippines may be sued for acts
121
- Oath of Reciprocity stating that the foreign done against persons in the Philippines.
corporation‘s country allows Filipino citizens
and corporations to do business in said
Facilities Management Corporation v. De La Osa,
country
1979:
 Within 60 days from issuance of license, the
Indeed if a foreign corporation, not engaged in
corporation should deposit at least P100,000
business in the Philippines, is not barred from
(cash, property, bond) for the benefit of
seeking redress from courts in the Philippines, a
creditors subject to further deposit every six
fortiori, that same corporation cannot claim
months (See Sec. 126).
exemption from being sued in Philippine courts for
acts done against a person or persons in the
ii. Resident Agent
Philippines
Resident Agent is an individual, who must be of
good moral character and of sound financial 5. Instances When Unlicensed
standing, residing in the Philippines, or a domestic Foreign Corporations May Be
corporation lawfully transacting business in the Allowed to Sue
Philippines, designated in a written power of
attorney by a foreign corporation authorized to do  Isolated transactions, i.e. not ‗doing business‘
business in the Philippines, on whom any summons in the Philippines, (Sec. 133, Corporation Code);
and other legal processes may be served in all  Action to protect good name, goodwill, and
actions or other legal proceedings against the reputation of a foreign corporation;
foreign corporation (Sec. 127-128).  The subject contracts provide that Philippine
courts will be the venue to controversies;
3. Personality to Sue  A license subsequently granted enables the
foreign corporation to sue on contracts
A foreign corporation transacting business in the executed before the grant of the license;
Philippines is required to secure a license to have  Recovery of misdelivered property;
the personality to sue before, or intervene in, any  Where the unlicensed foreign corporation has a
court or administrative proceeding. (Campos, domestic corporation.
rephrased; Sec. 133, Corporation Code)  When the Philippine citizen or entity is estopped
from challenging the foreign corporation‘s
Agilent Technologies Singapore v. Integrated Silicon personality to sue (Merrill Lynch Futures v.
Technologies, 2004: Court of Appeals, G.R. No. 97816, 24 July
The principles regarding the right of a foreign 1992, 211 SCRA 824)
corporation to bring suit in Philippine courts may
thus be condensed in four statements: 6. Grounds for Revocation of License
 if a foreign corporation does business in the
Philippines without a license, it cannot sue i. Under the Corporation Code
before the Philippine courts (Sec. 133,
Corporation Code);  Failure to file its annual report or pay any fees
 if a foreign corporation is not doing business in as required by this Code;
the Philippines, it needs no license to sue before  Failure to appoint and maintain a resident
Philippine courts on an isolated transaction or agent in the Philippines as required by this
on a cause of action entirely independent of any Title;
business transaction (Eastboard Navigation, Ltd.  Failure, after change of its resident agent or of
v. Juan Ysmael & Company, Inc., 102 Phil. 1, his address, to submit to the Securities and
1957); Exchange Commission a statement of such
 if a foreign corporation does business in the change as required by this Title;
Philippines without a license, a Philippine  Failure to submit to the Securities and Exchange
citizen or entity which has contracted with said Commission an authenticated copy of any
corporation may be estopped from challenging amendment to its articles of incorporation or by
the foreign corporation‘s corporate personality laws or of any articles of merger or
in a suit brought before Philippine courts consolidation within the time prescribed by this
(Merrill Lynch Futures v. Court of Appeals, G.R. Title;
No. 97816, 24 July 1992, 211 SCRA 824); and  A misrepresentation of any material matter in
 if a foreign corporation does business in the any application, report, affidavit or other
Philippines with the required license, it can sue document submitted by such corporation
before Philippine courts on any transaction. pursuant to this Title;
 Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
 MERCANTILE LAW REVIEWER

 Transacting business in the Philippines outside B. Constituent v. Consolidated

of the purpose or purposes for which such
corporation is authorized under its license; Corporation
122
 Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign Constituent Corporations – the parties to a merger
corporation or entity not duly licensed to do or consolidation
business in the Philippines; or
 Any other ground as would render it unfit to Consolidated Corporation - The new single
transact business in the Philippines (Sec. 134) corporation created through consolidation.

ii. Under Special Laws Surviving Corporation – one of the constituent

corporations which remain in existence after the
Insurance Code merger
The Insurance Commissioner is authorized to suspend
or revoke all certificates of authority granted to an C. Plan of Merger or Consolidation
insurance company, whether domestic or foreign,
when:
(Sec. 76)
 it is in unsound condition; or
 it has failed to comply with the provisions of Each of the constituent corporations must draw up a
law or regulations obligatory upon it; or Plan of Merger or Consolidation which shall set forth:
 its condition or method of business is such as to  Names of the corporation involved;
render its proceedings hazardous to the public  Terms and mode of carrying it;
or to its policyholders; or  Statement of changes, if any, in the present
 its paid-up capital stock, in the case of a foreign articles of the surviving corporation to be
company, is impaired or deficient, or that the formed in the case of merger; and with respect
margin of solvency required of such company is to the consolidated corporation in case of
deficient (Sec. 247, Insurance Code) consolidation

General Banking Act D. Articles of Merger or

The Monetary Board may revoke the license to Consolidation (Sec. 78)
transact business in the Philippines of any foreign
bank, if it finds that:
 the foreign bank is insolvent; or Each of the constituent corporation shall execute
 in imminent danger thereof; or Articles of Merger or Consolidation signed by the
 its continuance in business will involve probable president/vice-president, and certified by the
loss to those transacting business with it. secretary/assistant secretary setting forth:
 Plan of merger or consolidation;
 For stock corporation, the number of shares
outstanding; for non-stock, the number of
XIII. Merger and consolidation members;
 As to each corporation, number of shares or
A. Definition and Concept members voting for and against such plan
respectively.
(Corporation Code, Title IX)
The Articles of Merger or Consolidation:
Merger – a corporation absorbs the other and  take the place of the Articles of Incorporation
remains in existence while the others are dissolved. of the consolidated corporation; or
 One of the constituent corporations remains as  amend the Articles of Incorporation of the
an existing juridical person, whereas the other surviving corporation.
corporation shall cease to exist. Merger is the
disappearance of one of the corporations with E. Procedure
the other corporation acquiring all the assets,
rights of action, and assuming all the liabilities
of the disappearing corporation.  The board of each corporation shall draw up a
plan of merger or consolidation.
Consolidation – a new corporation is created, and  The plan of merger or consolidation shall be
consolidating corporations are extinguished approved by majority vote of each of the board
 If there is consolidation, there will be of the concerned corporations at separate
disappearance of both the constituent meetings, and a vote of 2/3 of the members or
corporations with the emergence of a new of stockholders representing 2/3 of the
corporate entity which shall obtain all the assets outstanding capital stock.
of the disappearing corporations, and likewise Any amendment to the plan must be approved
shall assume all their liabilities. by the majority vote of the board members or
trustees of the constituent corporations and
affirmative vote of 2/3 of the outstanding
capital stock or members.
 MERCANTILE LAW REVIEWER

 Articles of Merger or Articles of Consolidation G. Limitations

shall be executed by each of the constituent
corporations.
 Submission of Four (4) copies of the Articles of In the case of merger or consolidation of banks or 123
Merger or Articles of Consolidation to the SEC banking institutions, building and loan associations,
for approval. trust companies, insurance companies, public
 If necessary, the SEC shall set a hearing, utilities, educational institutions and other special
notifying all corporations concerned at least two corporations governed by special laws, the favorable
(2) weeks before. recommendation of the appropriate government
 Issuance of certificate of merger or agency shall first be obtained (Sec. 79, Code)
consolidation.
H. Effects
Procedure under Sec. 77:
1. Approval by majority vote of each of the  The constituent corporations shall become a
board of directors or trustees of the single corporation.
constituent corporations of the plan of  The separate existence of the constituents shall
merger or consolidation. cease, except that of the surviving or the
2. Approval by the stockholders or members of consolidated corporation.
each of such corporations. The affirmative  The surviving or the consolidated corporation
vote of stockholders representing at least shall possess all the rights, privileges,
two-thirds (2/3) of the outstanding capital immunities and powers and shall be subject to
stock of each corporation in the case of all the duties and liabilities of a corporation.
stock corporations or at least two-thirds  The surviving or the consolidated corporation
(2/3) of the members in the case of non- shall possess all rights, privileges, immunities
stock corporations shall be necessary for and franchises of each constituent corporation
the approval of such plan and the properties shall be deemed transferred
3. Notice of such meetings shall be given to all to and vested in the surviving or consolidated
stockholders or members of the respective corporation without further act or deed.
corporations, at least two (2) weeks prior to  All liabilities of the constituents shall pertain to
the date of the meeting, either personally the surviving or the consolidated corporation.
or by registered mail. Said notice shall state  Any claim, action or proceeding pending by or
the purpose of the meeting and shall against any of the constituent corporations may
include a copy or a summary of the plan of be prosecuted by or against the surviving or
merger or consolidation. consolidated corporation; and
4. Any dissenting stockholder in stock  The rights of the creditors or lien upon the
corporations may exercise his appraisal property of any of each constituent corporation
right in accordance with the Code. shall not be impaired by such merger or
Provided, that if after the approval by the consolidation.
stockholders of such plan, the board of
directors decides to abandon the plan, the
appraisal right shall be extinguished.
5. Amendment to the plan of merger or
consolidation may be made by approved of
the majority vote of the respective boards
of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds
(2/3) of the members of each of the
constituent corporations. Such plan,
together with any amendment, shall be
considered as the agreement of merger or
consolidation.

F. Effectivity

Upon issuance of the certificate of merger or

consolidation, such merger or consolidation shall
become effective (Sec. 79).

PNB v. Andrada Electric & Engr. Co., Inc. (2002):

Merger or consolidation does not become effective
by mere agreement of the constituent corporations.
The approval of the SEC is required.
 MERCANTILE LAW REVIEWER

124

2012 UP LAW
BAR REVIEWER
MERCANTILE
Securities Regulation Code
LAW MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads Anna Katarina
EXECUTIVE COMMITTEE Rodriguez • Mickey Chatto
Ramon Carlo Marcaida |Commissioner
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners LAYOUT TEAM 2012
Barbie Kaye Perez |Secretary Layout Artists | Alyanna
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Apacible • Noel Luciano • RM
Meneses • Jenin Velasquez •
COMMITTEE HEADS Mara Villegas • Naomi
Eleanor Balaquiao • Mark Xavier Oyales | Acads Quimpo • Leslie Octaviano •
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Yas Refran • Cris Bernardino
Miranda (D) |Special Lectures Layout Head| Graciello
Patricia Madarang • Marinella Felizmenio |Secretariat Timothy Reyes
Victoria Caranay |Publicity and Promotions
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

(c) Approve, reject, suspend, revoke or require

Securities Regulation amendments to registration statements, and
registration and licensing applications;
125
Code (d) Regulate, investigate or supervise the activities
of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the
MERCANTILE LAW
activities of exchanges, clearing agencies and
Letters of Credit I. State policy other SROs;
Warehouse Receipts II. Powers and functions of the SEC (f) Impose sanctions for the violation of laws and
Law III. Securities required to be rules, regulations and orders, and issued
Trust Receipts Law registered pursuant thereto;
Negotiable
Instruments Law
IV. Procedure for registration of (g) Prepare, approve, amend or repeal rules,
securities regulations and orders, and issue opinions and
Insurance Code
V. Prohibitions on fraud, provide guidance on and supervise compliance
Transportation Law
manipulation, and insider trading with such rules, regulation and orders;
Corporation Law
(h) Enlist the aid and support of and/or deputize
Securities VI. Protection of investors
any and all enforcement agencies of the
Regulation Code VII. Civil liability Government, civil or military as well as any
Banking and Finance
private institution, corporation, firm,
Intellectual Property
association or person in the implementation of
its powers and function under its Code;
I. State policy (i) Issue cease and desist orders to prevent fraud or
injury to the investing public;
Purpose (j) Punish for the contempt of the Commission,
The establishment of a socially conscious, free both direct and indirect, in accordance with the
market that: pertinent provisions of and penalties prescribed
(1) regulates itself; by the Rules of Court;
(2) encourage the widest participation of ownership (k) Compel the officers of any registered
in enterprises; corporation or association to call meetings of
(3) enhance the democratization of wealth; stockholders or members thereof under its
(4) promote the development of the capital supervision;
market; (l) Issue subpoena duces tecum and summon
(5) protect investors; witnesses to appear in any proceedings of the
(6) ensure full and fair disclosure about securities; Commission and in appropriate cases, order the
(7) minimize if not totally eliminate insider trading examination, search and seizure of all
and other fraudulent or manipulative devices documents, papers, files and records, tax
and practices which create distortions in the returns and books of accounts of any entity or
free market (Sec. 2). person under investigation as may be necessary
for the proper disposition of the cases before it,
subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and
II. Powers and functions of the hearing the franchise or certificate of
SEC registration of corporations, partnership or
associations, upon any of the grounds provided
by law; and
a. Regulatory (n) Exercise such other powers as may be provided
b. Adjudicative by law as well as those which may be implied
from, or which are necessary or incidental to
The SEC shall have the powers and functions the carrying out of, the express powers granted
provided by the SRC, P.D. 902-A, the Corporation the Commission to achieve the objectives and
Code, the Investment Houses Law, the Financing purposes of these laws (Sec. 5.1)
Company Act and other existing laws.
B. Under PD 902-A
A. Under the SRC
 The SEC‘s jurisdiction over all cases enumerated
(a) Exercise jurisdiction and supervision over all under Section 5 of Presidential Decree No. 902-A
corporations, partnership or associations who is hereby transferred to the Courts of general
are the grantees of primary franchises and/or a jurisdiction or the appropriate Regional Trial
license or a permit issued by the Government; Court (Sec. 5.2)
(b) Formulate policies and recommendations on  Sections 2, 4 and 8 of Presidential Decree 902-A
issues concerning the securities market, advise as amended, are hereby repealed. (Sec. 76)
Congress and other government agencies on all  Insofar as not inconsistent with the SRC, the SEC
aspect of the securities market and propose retains its powers under Sec. 6 of P.D. 902-A:
legislation and amendments thereto;
 MERCANTILE LAW REVIEWER

[List does not include those which are also (b) Any security issued or guaranteed by the
enumerated under the SRC, i.e. Subsections (b), government of any country with which the
126 (c), (e), (f), (i) and (j)] Philippines maintains diplomatic relations,
or by any state, province or political
(a) To issue preliminary or permanent subdivision thereof on the basis of
injunctions, whether prohibitory or reciprocity: Provided, That the Commission
mandatory, in all cases in which it has may require compliance with the form and
jurisdiction, and in which cases the pertinent content for disclosures the Commission may
provisions of the Rules of Court shall apply; prescribe;
(d) To pass upon the validity of the issuance and (c) Certificates issued by a receiver or by a
use of proxies and voting trust agreements trustee in bankruptcy duly approved by the
for absent stockholders or members; proper adjudicatory body;
(g) To authorize the establishment and operation (d) Any security or its derivatives the sale or
of stock exchanges, commodity exchanges transfer of which, by law, is under the
and such other similar organization and to supervision and regulation of the Office of
supervise and regulate the same; including the Insurance Commission, Housing and
the authority to determine their number, Land Use Rule Regulatory Board, or the
size and location, in the light of national or Bureau of Internal Revenue.
regional requirements for such activities with (e) Any security issued by a bank except its
the view to promote, conserve or rationalize own shares of stock (Sec. 9.1)
investment; (see Sec. 5(e), SRC)
(h) To pass upon, refuse or deny, after NOTE: The foregoing exempt securities are
consultation with the Board of Investments, exempt only as a general rule (Sec. 9.1)
Department of Industry, National Economic
and Development Authority or any other (f) Any class of security with respect to which
appropriate government agency, the the SEC finds that registration is not
application for registration of any necessary in the public interest and for the
corporation, partnership or association or any protection of investors (Sec. 9.2)
form of organization falling within its
jurisdiction, if their establishment, NOTE: The exemption of securities by the
organization or operation will not be SEC must be made through the issuance of a
consistent with the declared national rule or regulation (Sec. 9.2)
economic policies;
b. Exempt transactions
C. Under the Corporation Code (a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
Among others, (b) By or for the account of a pledge holder, or
 To implement the provisions of this Code, and to mortgagee or any of a pledge lien holder
promulgate rules and regulations reasonably selling of offering for sale or delivery in the
necessary to enable it to perform its duties ordinary course of business and not for the
hereunder, particularly in the prevention of fraud purpose of avoiding the provision of this
and abuses on the part of the controlling Code, to liquidate a bonafide debt, a
stockholders, members, directors, trustees or security pledged in good faith as security
officers (Sec. 143, Corporation Code) for such debt.
 To collect and receive fees as authorized by law (c) An isolated transaction in which any
or by rules and regulations promulgated by the
security is sold, offered for sale,
Commission (Sec. 139, Corporation Code)
subscription or delivery by the owner
therefore, or by his representative for the
owner‘s account, such sale or offer for sale
III. Securities required to be or offer for sale, subscription or delivery
not being made in the course of repeated
registered and successive transaction of a like
character by such owner, or on his account
GENERAL RULE: Securities shall not be sold or by such representative and such owner or
offered for sale or distribution within the representative not being the underwriter of
Philippines, without a registration statement duly such security.
filed with and approved by the Commission (Sec. (d) The distribution by a corporation actively
8.1) engaged in the business authorized by its
articles of incorporation, of securities to its
EXCEPTIONS: stockholders or other security holders as a
stock dividend or other distribution out of
a. Exempt securities (Sec. 9) surplus.
(a) Any security issued or guaranteed by the (e) The sale of capital stock of a corporation to
Government of the Philippines/ its political its own stockholders exclusively, where no
subdivision or agency/its instrumentality/ commission or other remuneration is paid or
or any person controlled or supervised given directly or indirectly in connection
thereby; with the sale of such capital stock.
 MERCANTILE LAW REVIEWER

(f) The issuance of bonds or notes secured by buyers, on the basis of such factors as
mortgage upon real estate or tangible financial sophistication, net worth,
personal property, when the entire knowledge, and experience in financial
mortgage together with all the bonds or and business matters, or amount of 127
notes secured thereby are sold to a single assets under management. (Sec. 10.1)
purchaser at a single sale.
(g) The issue and delivery of any security in (m) Any transaction with respect to which the
exchange for any other security of the same SEC finds that registration is not necessary
issuer pursuant to a right of conversion in the public interest and protection of
entitling the holder of the security investors such as by the reason of the small
surrendered in exchange to make such amount involved or the limited character of
conversion: Provided, That the security so the public offering (Sec. 10.2)
surrendered has been registered under this
Code or was, when sold, exempt from the NOTE: Application for exemption under this
provision of this Code, and that the security Section must be accompanied by: (1) notice
issued and delivered in exchange, if sold at of the exemption relied upon; (2) payment
the conversion price, would at the time of of fee equivalent to 1/10 of 1% of the
such conversion fall within the class of maximum value aggregate price or issued
securities entitled to registration under this value of the securities.
Code. Upon such conversion the par value
of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered in
IV. Procedure for registration of
such exchange are sold. securities
(h) Broker‘s transaction, executed upon
customer‘s orders, on any registered 1. Filing of a sworn registration statement with
Exchange or other trading market. the SEC (Sec. 12.1)
(i) Subscriptions for shares of the capitals  Shall include any prospectus required or
stocks of a corporation prior to the permitted to be delivered under Subsections
incorporation thereof or in pursuance of an 8.2, 8.3, and 8.4 (Sec. 12.1)
increase in its authorized capital stocks
under the Corporation Code, when no
Chapter III, Section 8. Requirement of Registration
expense is incurred, or no commission,
of Securities
compensation or remuneration is paid or
x x x
given in connection with the sale or
8.2 The Commission may conditionally approve the
disposition of such securities, and only
registration statement under such terms as it may
when the purpose for soliciting, giving or
deem necessary.
taking of such subscription is to comply with
the requirements of such law as to the
8.3 The Commission may specify the terms and
percentage of the capital stock of a
conditions under which any written communication,
corporation which should be subscribed
including any summary prospectus, shall be deemed
before it can be registered and duly
not to constitute an offer for sale under this
incorporated, or its authorized, capital
Section.
increase.
(j) The exchange of securities by the issuer
8.4. A record of the registration of securities shall
with the existing security holders
be kept in Register Securities in which shall be
exclusively, where no commission or other
recorded orders entered by the Commission with
remuneration is paid or given directly or
respect such securities. Such register and all
indirectly for soliciting such exchange.
documents or information with the respect to the
(k) The sale of securities by an issuer to fewer
securities registered therein shall be open to public
than twenty (20) persons in the Philippines
inspection at reasonable hours on business days.
during any twelve-month period.
(l) The sale of securities to any number of the
following qualified buyers:  Shall include the effect of the securities issue
on ownership, on the mix of ownership,
(i) Bank; especially foreign and local ownership (Sec.
(ii) Registered investment house; 12.3)
(iii)Insurance company;  Shall be signed by the issuer‘s executive
(iv) Pension fund or retirement plan officer, its principal operating officer, its
maintained by the Government of the principal financial officer, its comptroller, its
Philippines or any political subdivision principal accounting officer, its corporate
thereof or manage by a bank or other secretary, or persons performing similar
persons authorized by the Bangko functions accompanied by a duly verified
Sentral to engage in trust functions; resolution of the board of directors of the
(v) Investment company or; issuer corporation (Sec. 12.4)
(vi) Such other person as the Commission  Shall be accompanied by: (a) written consent
may rule by determine as qualified of the expert named as having certified any
 MERCANTILE LAW REVIEWER

part of the registration statement or any convicted, by a competent judicial or

document used in connection therewith; and administrative body, upon plea of guilty, or
128 (b) Where the registration statement shares otherwise, of an offense involving moral
to be sold by selling shareholders, a written turpitude and /or fraud or is enjoined or
certification by such selling shareholders as restrained by the Commission or other
to the accuracy of any part of the competent or administrative body for
registration statement contributed to by such violations of securities, commodities, and
selling shareholders (Sec. 12.4). other related laws (Sec. 13.1)

2. Payment to the SEC a fee of not more than (d) If any issuer shall refuse to permit an
one-tenth (1/10) of one per centum (1%) of examination to be made by the Commission
the maximum aggregate price at which such (Sec. 13.3)
securities are proposed to be offered (Sec.
12.5a) NOTE: A registration statement may be
withdrawn by the issuer only with the consent of
3. Publication of the notice of the filing of the Commission (Sec. 13.6).
registration statement. The publication must
be in two (2) newspapers of general 5. Statement under oath by the issuer in all
circulation in the Philippines, once a week for prospectus that registration requirements
two (2) consecutive weeks, or in such other have been met and that all information are
manner as the Commission by the rule shall true and correct as represented by the issuer
prescribe (Sec. 12.5b) or the one making the statement. Statement
under oath must be made upon effectivity of
4. Declaration by the SEC whether the the registration statement. (Sec. 12.7)
registration statement is effective or rejected,
Declaration is made within 45 days from filing
of the registration statement or on such later
date to which the issuer has consented unless
V. Prohibitions on fraud,
applicant has been allowed to amend the manipulation and insider trading
registration statement under Sec. 14 (Sec.
12.6).
A. Manipulation of security prices
NOTE: Grounds for: (1) rejection/revocation of
registration statement and (2) refusal of It shall be unlawful for any person acting for himself
registration/revocation of securities thereunder: or through a dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of
(a) The issuer: active trading in any listed security traded in an
(i) Has been judicially declared insolvent; Exchange of any other trading market (hereafter
(ii) Has violated any of the provision of this referred to purposes of this Chapter as
Code, the rules promulgate pursuant "Exchange"):
thereto, or any order of the (i) By effecting any transaction in such security
Commission of which the issuer has which involves no change in the beneficial
notice in connection with the offering ownership thereof;
for which a registration statement has (ii) By entering an order or orders for the
been filed purchase or sale of such security with the
(iii) Has been or is engaged or is about to knowledge that a simultaneous order or
engage in fraudulent transactions; orders of substantially the same size, time
(iv) Has made any false or misleading and price, for the sale or purchase of any
representation of material facts in any such security, has or will be entered by or
prospectus concerning the issuer or its for the same or different parties; or
securities; (iii) By performing similar act where there is no
(v) Has failed to comply with any change in beneficial ownership.
requirements that the Commission may
impose as a condition for registration (b) To affect, alone or with others, securities or
of the security for which the transactions in securities that:
registration statement has been filed; (i) Raises their price to induce the purchase of
or a security, whether of the same or a
different class of the same issuer or of
(b) The registration statement is on its face controlling, controlled, or commonly
incomplete or inaccurate in any material controlled company by others; or
respect or includes any untrue statements (ii) Creates active trading to induce such a
of a material fact required to be stated purchase or sale through manipulative
therein or necessary to make the statement devices such as marking the close, painting
therein not misleading; or the tape, squeezing the float, hype and
dump, boiler room operations and such
(c) The issuer, any officer, director or other similar devices.
controlling person performing similar
functions, or any under writer has been
 MERCANTILE LAW REVIEWER

(c) To circulate or disseminate information that the (b) a director or officer (or any person performing
price of any security listed in an Exchange will similar functions) of, or a person controlling the
or is likely to rise or fall because of issuer; gives or gave him access to material
manipulative market operations of any one or information about the issuer or the security that 129
more persons conducted for the purpose of is not generally available to the public;
raising or depressing the price of the security (c) a government employee, director, or officer of
for the purpose of inducing the purpose of sale an exchange, clearing agency and/or self-
of such security. regulatory organization who has access to
material information about an issuer or a
(d) To make false or misleading statement with security that is not generally available to the
respect to any material fact, which he knew or public; or
had reasonable ground to believe was so false or (d) a person who learns such information by a
misleading, for the purpose of inducing the communication from any foregoing insiders (Sec.
purchase or sale of any security listed or traded 3.8)
in an Exchange.
‗Material non-public information‘ means:
(e) To effect, either alone or others, any series of (a) it has not been generally disclosed to the public
transactions for the purchase and/or sale of any and would likely affect the market price of the
security traded in an Exchange for the purpose security after being disseminated to the public
of pegging, fixing or stabilizing the price of such and the lapse of a reasonable time for the
security; unless otherwise allowed by this Code market to absorb the information; or
or by rules of the Commission (Sec. 24.1) (b) would be considered by a reasonable person
important under the circumstances in
B. Short sales determining his course of action whether to buy,
sell or hold a security (Sec. 27.2)
(a) No person shall use or employ, in connection
 It shall be unlawful for an insider:
with the purchase or sale of any security any
(a) to sell or buy a security of the issuer, while
manipulative or deceptive device or
contrivance. in possession of material information with
respect to the issuer or the security that is
(b) No short sale shall be effected nor any stop-loss not generally available to the public,
order be executed in connection with the unless:
purchase or sale of any security except if (i) The insider proves that the
allowed by the SEC (Sec. 24.2) information was not gained from such
relationship; or
NOTE: The SEC may allow certain acts or (ii) If the other party selling to or buying
from the insider (or his agent) is
transactions under Sec. 24 (on Manipulation of
identified, the insider proves:
Security Prices and Short Sales), for public interest
(1) that he disclosed the information
and protection of investors (Sec. 24.3)
to the other party, or
(2) that he had reason to believe
C. Fraudulent transactions that the other party otherwise is
also in possession of the
It shall be unlawful for any person, directly or information (Sec. 27.1)
indirectly, in connection with the purchase or sale of
any securities to: NOTE: Presumption that purchase or sale is
effected while in possession of material
(a) Employ any device, scheme, or artifice to non-public information arises:
defraud; (Sec. 26.1) (1) if the purchase or sale is transacted
after such information came into
(b) Obtain money or property by means of any existence but prior to dissemination of
untrue statement of a material fact of any such information to the public; and
omission to state a material fact necessary in (2) the lapse of a reasonable time for
order to make the statements made, in the light market to absorb such information.
of the circumstances under which they were
made, not misleading (Sec. 26.2) Presumption may be rebutted by showing of
purchaser‘s or seller‘s awareness of the
(c) Engage in any act, transaction, practice or material non-public information at the time
course of business which operates or would of purchase or sale (Sec. 27.1)
operate as a fraud or deceit upon any person
(Sec. 26.3) (b) to communicate material nonpublic
information about the issuer or the security
D. Insider trading to any person who, by virtue of the
communication, becomes an insider where
the insider communicating the information
An Insider means: knows or has reason to believe that such
(a) the issuer;
 MERCANTILE LAW REVIEWER

person will likely buy or sell a security of account or customer, to the issuer of
the issuer whole in possession of such security, to the exchange where the
130 information (Sec. 27.3) security is traded and to the Commission
(Sec. 20.5)

VI.Protection of investors C. Disclosure rule

 Disclosure by the Issuer

A. Tender offer rule
- To the SEC
When a tender offer has commenced or is about to
commence, It shall be unlawful for: Every issuer shall file with the Commission:
(a) Annual Report within one hundred thirty-
(a) Any person (except the tender offeror) who is in five (135) days, after the end of the
possession of material nonpublic information issuer‘s fiscal year, or such other time as
relating to such tender offer, to buy or sell the the Commission may prescribe
securities of the issuer that are sought or to be (b) Such other periodical reports for interim
sought by such tender offer if: fiscal periods and current reports on
(i) such person knows or has reason to believe significant developments of the issuer as
that the information is nonpublic and has the Commission may prescribe as
been acquired directly or indirectly from the necessary to keep current information on
tender offeror, those acting on its behalf, the operation of the business and
the issuer of the securities sought or to be financial condition of the issuer (Sec.
sought by such tender offer, or any insider of 17.1)
such issuer
NOTE: Under this Section, ‗issuer‘ includes:
(b) Any tender offeror, those acting on its behalf, (a) An issuer which has sold a class of its
the issuer of the securities sought or to be securities pursuant to a registration
sought by such tender offer, and any insider of under section 12 hereof.
such issuer to communicate material nonpublic
information relating to the tender offer to any BUT the requirement shall be suspended
other person where such communication is likely for any fiscal year if such issuer, as of
to result in a violation of (a) (Sec. 27.4). the first day of any such fiscal year, has
less than one hundred (100) holder of
B. Rules on proxy solicitation such class securities or such other
number as the Commission shall
 Proxies shall be: prescribe and it notifies the Commission
(a) issued in accordance with SEC rules and of such;
regulations; Proxy solicitations shall also be
made in accordance with the said rules and (b) An issuer with a class of securities listed
regulations (Sec. 20.1) for trading on an Exchange; and
(b) in writing (Sec. 20.2)
(c) signed by the stockholder or his duly (c) An issuer with assets of at least Fifty
authorized representatives (Sec. 20.2) million pesos (50,000,000.00) or such
(d) filed before the scheduled meeting with the other amount as the Commission shall
corporate secretary (Sec. 20.2) prescribe, and having two hundred (200)
(e) valid only for the meeting for which it is or more holder each holding at least one
intended unless otherwise provided in the hundred (100) share of a class of its
proxy (Sec. 20.3) equity securities.

NOTE: No proxy shall be valid and effective for a The obligation of such issuer to file
period longer than five (5) years at one time (Sec. report shall be terminate ninety (90)
20.3) days after notification to the Commission
by the issuer that the number of its
 A broker or dealer shall: holders holding at least one hundred
(a) not give any proxy, consent or any (100) share reduced to less than one
authorization, in respect of any security hundred (100) (Sec. 17.2)
carried for the account of the customer, to
a person other than the customer, without - To the equity holders
written authorization of such customer An annual report shall be furnished by every
(Sec. 20.4) issuer which has a class of equity securities
(b) if he holds or acquires the proxy for at least satisfying any of the requirements in
ten percent (10%) or such percentage as the Subsection 17.2 to each holder of such equity
commission may prescribe of the security (Sec. 17.5)
outstanding share of such issuer, submit a
report identifying the beneficial owner of  Disclosure by Equity Holders
ten days after such acquisition, for its own
 MERCANTILE LAW REVIEWER

Any person who acquires directly or indirectly (4) such other information as the
the beneficial ownership of more than five of commission may specify (Sec. 18.3)
per centum (5%) of such class or in excess of
such lesser per centum as the Commission by 131
rule may prescribe, shall, within ten (10) days
after such acquisition or such reasonable time as  Disclosure by Insider
fixed by the Commission, submit to: (1) the An insider has the duty to disclose material
issuer of the securities; (2) to the Exchange information with respect to the issuer or the
where the security is traded; and (3) to the security that is not generally available to the
Commission, the following information: public (Sec. 27.1) (See definitions of ‗insider‘
and ‗material non-public information‘ at pp.
(a) The personal background, identity, 132-133)
residence, and citizenship of, and the
nature of such beneficial ownership by,
such person and all other person by whom
or on whose behalf the purchases are
VII. Civil liability
effected; in the event the beneficial owner
is a juridical person, the of business of the A. Civil Liabilities on Account of
beneficial owner shall also be reported; False Registration Statement
(b) If the purpose of the purchases or (Sec. 56)
prospective purchases is to acquire control
of the business of the issuer of the  Civil liabilities arise when the registration
securities, any plans or proposals which statement or any part thereof contains on its
such persons may have that will effect a effectivity:
major change in its business or corporate - An untrue statement of a material fact; or
structure; - Omission to state a material fact required to
be stated therein or necessary to make such
(c) The number of shares of such security which statements not misleading
are beneficially owned, and the number of
shares concerning which there is a right to  Who may be liable? (NUPSAID)
acquire, directly or indirectly, by; (i) such (a) Issuer and every person who signed the
person, and (ii) each associate of such registration statement;
person, giving the background, identity, (b) Director of/partner in the issuer at the time of
residence, and citizenship of each such the filing of the registration statement or any
associate; and part, supplement or amendment thereof;
(c) One who is named in the registration statement
(d) Information as to any contracts, as being or about to become (b);
arrangements, or understanding with any (d) Auditor/auditing firm named as having certified
person with respect to any securities of the any financial statements used in connection
issuer including but not limited to transfer, with the registration statement or prospectus;
joint ventures, loan or option (e) One who, with his written consent filed with the
arrangements, puts or call guarantees or registration statement, has been named as
division of losses or profits, or proxies having prepared or certified any part of the
naming the persons with whom such registration statement/any report or valuation
contracts, arrangements, or understanding which is used in connection with the registration
have been entered into, and giving the statement;
details thereof. (f) Selling shareholder who contributed to and
certified as to the accuracy of a portion of the
NOTE: If it appears to the SEC that registration statement;
securities were acquired by person in the (g) Underwriter with respect to such security (Sec.
ordinary course of his business and were not 56.1)
acquired for the purpose of and do not have
the effect of changing or influencing the  Who may sue?
control of the issuer nor in connection with Any person who acquires the security and who
any transaction having such purpose or suffers damage unless it is proved that at the time of
effect it may permit any person to file in such acquisition he knew of such untrue statement
lieu of the statement required by or omission (Sec. 56.1)
subsection 17.1 hereof, a notice stating:
(1) the name of such person; NOTE: When the security is acquired after the issuer
has made generally available to its security holders
(2) the shares of any equity securities an income statement covering a period of at least
subject to Subsection 17.1 which are twelve (12) months beginning from the effective
owned by him; date of the registration statement, the right of
recovery under this subsection shall be conditioned
(3) the date of their acquisition; and on proof that such person acquired the security
relying upon such untrue statement in the
 MERCANTILE LAW REVIEWER

registration statement or relying upon the C. Civil Liability of Fraud in

registration statement and not knowing of such
income statement (Sec. 56.2) Connection with Securities
132
Transactions (Sec. 58)
B. Civil Liabilities Arising in
Connection With Prospectus,  Who may be liable?
Any person who engages in any act or transaction in
Communications and Reports violation of Sections 19.2, 20 or 26, or any rule or
(Sec. 57) regulation of the Commission thereunder

 Who may sue?

1. Liability of Sellers/Offerors Any other person who purchases or sells any
security, grants or refuses to grant any proxy,
 Who may be liable? consent or authorization, or accepts or declines an
(a) Offeror or seller of a security in violation of invitation for tender of a security who sustained
Chapter on Registration of Securities; damages as a result of the transaction.
(b) Offeror or seller of a security, whether or
not exempted by the provisions of this
Code, by means of a prospectus or other D. Civil Liability for Manipulation
written or oral communication which of Security Prices (Sec. 59)
includes an untrue statement of a material
fact or omits to state a material fact  Who may be liable?
necessary in order to make the statements, Any person who willfully participates in any act or
in the light of the circumstances under transaction in Section 24 (Manipulation of Security
which they were made, not misleading (the Prices).
purchaser not knowing of such untruth or
omission).  Who may sue?
Any person who shall purchase or sell any security at
Defense: No knowledge of untruth or a price which was affected by such act or
omission, despite the exercise of reasonable transaction
care (Sec. 57.1).

 Who may sue?

E. Civil Liability with Respect to
Purchaser of the security may sue to recover: Commodity Futures Contracts
(1) consideration paid for such security with and Pre-need Plans (Sec. 60)
interest thereon, less the amount of any income
received thereon, upon the tender of such
 Who may be liable?
security; or
Any person who engages in any act or transactions in
(2) for damages if he no longer owns the security
willful violation of any rule or regulation
(Sec. 57.1).
promulgated by the Commission under Section 11 (on
Commodity Future Contracts) or 16 (on Pre-Need
2. Liability of Makers of False Plans) (Sec. 60.1)
Misleading Statements
 Who may sue?
 Who may be liable? Any person sustaining damages as a result of such
Any person who shall make or cause to be made any act or transaction (Sec. 60.1)
statement in any report, or document filed pursuant
to this Code or any rule or regulation thereunder, F. Civil Liability on Account of
which statement as at the time and in the light of
the circumstances under which it was made false or
Insider Trading
misleading with respect to any material fact, shall
be liable to 1. Liability for non-disclosure
Defense: Good faith and lack of knowledge of the  Who may be liable?
false and misleading statement (Sec. 57.2). - Any insider who violates Subsection 27.1;
- and any person in the case of a tender offer
 Who may sue? who violates Subsection 27.4 (a)(I), or any
Purchaser or seller of security who purchased or sold rule or regulation thereunder, by purchasing
at a price which was affected by such statement or selling a security while in possession of
knowing that such statement was false or material information not generally available
misleading, and relying upon such statement may to the public (Sec. 61.1)
sue for damages caused by such reliance (Sec. 57.2).
 Who may sue?
Any investor who, contemporaneously with the
purchase or sale of securities that is the subject of
the violation, purchased or sold securities of the
same class unless such insider, or such person in the
 MERCANTILE LAW REVIEWER

case of a tender offer, proves that such investor of this Code, or any rule, regulation or order of the
knew the information or would have purchased or Commission thereunder (Sec. 51.3)
sold at the same price regardless of disclosure of the
information to him (Sec. 61.1) Every person who substantially assists the act or 133
omission of any person primarily liable under
2. Liability for communicating non- Sections 57, 58, 59 and 60 of this Code, with
knowledge or in reckless disregard that such act or
public information about issuer omission is wrongful, shall be jointly and severally
liable as an aider and abettor for damages resulting
 Who may be liable?
from the conduct of the person primarily liable (Sec.
- An insider who violates Subsection 27.3;
51.4)
- or any person in the case of a tender offer
who violates Subsection 27.4 (a), or any rule
BUT an aider and abettor shall be liable only to the
or regulation thereunder communicating
extent of his relative contribution in causing such
material nonpublic information shall be
damages in comparison to that of the person
jointly and severally liable under Subsection
primarily liable, or the extent to which the aider and
61.1 with, and to the same extent as, the
abettor was unjustly enriched thereby, whichever is
insider, or person in the case of a tender
greater (Sec. 51.4)
offer, to whom the communication was
directed and who is liable under Subsection
NOTE: It shall be unlawful for any person, directly,
61.1 by reason of his purchase or sale of a
or indirectly, to do any act or thing which it would
security (Sec. 61.2).
be unlawful for such person to do under the
provisions of this Code or any rule or regulation
G. Liabilities of Controlling thereunder (Sec. 51.2)
Persons, Aider and Abettor and
Other Secondary Liability

1. Liability of Controlling Persons

 Who may be liable?
Every person who controls any person liable under
this Code or the rules or regulations of the
Commission thereunder, shall also be liable jointly
and severally with and to the same extent as such
controlled persons to any person to whom such
controlled person is liable (Sec. 51.1)

NOTE: ‗Control‘ may be by or through stock

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

Defense: Lack of knowledge of the existence of facts

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

2. Liability of Director/Officer for

Delay in the Filing of Required
Documents
It shall be unlawful for any director or officer of, or
any owner of any securities issued by, any issuer
required to file any document, report or other
information under this Code or any rule or regulation
of the Commission thereunder, without just cause,
to hinder, delay or obstruct the making or filing of
any such document, report, or information (Sec.
51.2)

3. Liability of Aider/Abettor
It shall be unlawful for any person to aid, abet,
counsel, command, induce or procure any violation
 MERCANTILE LAW REVIEWER

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

134  when the registration statement (a) Issuer and every person who Any person who acquires the
or any part thereof contains on signed the registration security and who suffers damage
its effectivity: statement; unless it is proved that at the time
o An untrue statement of a (b) Director of/partner in the of such acquisition he knew of such
material fact; or issuer at the time of the filing untrue statement or omission (Sec.
o Omission to state a material of the registration statement 56.1)
fact required to be stated or any part, supplement or
therein or necessary to make amendment thereof; NOTE: When the security is
such statements not (c) One who is named in the acquired after the issuer has made
misleading registration statement as generally available to its security
being or about to become (b); holders an income statement
(d) Auditor/auditing firm named covering a period of at least twelve
as having certified any (12) months beginning from the
financial statements used in effective date of the registration
connection with the statement, the right of recovery
registration statement or under this subsection shall be
prospectus; conditioned on proof that such
(e) One who, with his written person acquired the security relying
consent filed with the upon such untrue statement in the
registration statement, has registration statement or relying
been named as having upon the registration statement
prepared or certified any part and not knowing of such income
of the registration statement (Sec. 56.2)
statement/any report or
valuation which is used in
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified as
to the accuracy of a portion of
the registration statement;
(g) Underwriter with respect to
such security (Sec. 56.1)

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

Defense: No knowledge of
untruth or omission, despite
the exercise of reasonable care
(Sec. 57.1).
 MERCANTILE LAW REVIEWER

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

in Connection With Prospectus, Any person who shall make or cause Purchaser or seller of security who
Communications and Reports to be made any statement in any purchased or sold at a price which
(Sec. 57) report, or document filed pursuant was affected by such statement 135
B. Liability of Makers of False to this Code or any rule or knowing that such statement was
Misleading Statements regulation thereunder, which false or misleading, and relying
statement as at the time and in the upon such statement may sue for
light of the circumstances under damages caused by such reliance
which it was made false or (Sec. 57.2).
misleading with respect to any
material fact, shall be liable to

Defense: Good faith and lack of

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

Fraud in Connection with Any person who engages in any act Any other person who purchases or
Securities Transactions (Sec. or transaction in violation of sells any security, grants or refuses
58) Sections 19.2, 20 or 26, or any rule to grant any proxy, consent or
or regulation of the Commission authorization, or accepts or
thereunder declines an invitation for tender of
a security who sustained damages
as a result of the transaction.

Manipulation of Security Prices Any person who willfully Any person who shall purchase or
(Sec. 59) participates in any act or sell any security at a price which
transaction in Section 24 was affected by such act or
(Manipulation of Security Prices). transaction

with Respect to Commodity Any person who engages in any act Any person sustaining damages as a
Futures Contracts and Pre- or transactions in willful violation result of such act or transaction
need Plans (Sec. 60) of any rule or regulation (Sec. 60.1)
promulgated by the Commission
under Section 11 (on Commodity
Future Contracts) or 16 (on Pre-
Need Plans) (Sec. 60.1)

on Account of Insider Trading (a) Any insider who violates Any investor who,
Subsection 27.1; contemporaneously with the
A. Liability for non-disclosure (b) and any person in the case of a purchase or sale of securities that is
tender offer who violates the subject of the violation,
Subsection 27.4 (a)(I), or any rule purchased or sold securities of the
or regulation thereunder, by same class unless such insider, or
purchasing or selling a security such person in the case of a tender
while in possession of material offer, proves that such investor
information not generally available knew the information or would
to the public (Sec. 61.1) have purchased or sold at the same
price regardless of disclosure of the
information to him (Sec. 61.1)
 MERCANTILE LAW REVIEWER

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

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

7. Liabilities of Controlling Every person who controls any

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

NOTE: ‗Control‘ may be by or

through stock ownership, agency,
or otherwise, or in connection with
an agreement or understanding
with one or more other persons
(Sec. 51.1)
Defense: Lack of knowledge of the
existence of facts by reason of
which the liability of the controlled
person is alleged to exist (Sec.
51.1)

7. Liabilities of Controlling It shall be unlawful for any director

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

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

7. Liabilities of Controlling It shall be unlawful for any person
Persons, Aider and Abettor to aid, abet, counsel, command,
and Other Secondary Liability induce or procure any violation of 137
this Code, or any rule, regulation
C. Liability of Aider/Abettor or order of the Commission
thereunder (Sec. 51.3)

Every person who substantially

assists the act or omission of any
person primarily liable under
Sections 57, 58, 59 and 60 of this
Code, with knowledge or in
reckless disregard that such act or
omission is wrongful, shall be
jointly and severally liable as an
aider and abettor for damages
resulting from the conduct of the
person primarily liable (Sec. 51.4)

BUT an aider and abettor shall be

liable only to the extent of his
relative contribution in causing
such damages in comparison to that
of the person primarily liable, or
the extent to which the aider and
abettor was unjustly enriched
thereby, whichever is greater (Sec.
51.4)

NOTE: It shall be unlawful for any

person, directly, or indirectly, to
do any act or thing which it would
be unlawful for such person to do
under the provisions of this Code or
any rule or regulation thereunder
(Sec. 51.2)
 MERCANTILE LAW REVIEWER

138

2012 UP LAW
BAR REVIEWER
MERCANTILE
Banking and Finance LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Head | Karina Pulido
EXECUTIVE COMMITTEE
Ramon Carlo Marcaida |Commissioner LAYOUT TEAM 2012
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners Layout Artists | Alyanna
Barbie Kaye Perez |Secretary Apacible • Noel Luciano • RM
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Meneses • Jenin Velasquez •
Mara Villegas • Naomi
COMMITTEE HEADS Quimpo • Leslie Octaviano •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Yas Refran • Cris Bernardino
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Layout Head| Graciello
Miranda (D) |Special Lectures Timothy Reyes
Patricia Madarang • Marinella Felizmenio |Secretariat
Victoria Caranay |Publicity and Promotions
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 MERCANTILE LAW REVIEWER

C. Creation of the Bangko Sentral

Banking and Finance ng Pilipinas (BSP)
MERCANTILE LAW 139
Letters of Credit I. The New Central Bank Act (RA Nature of the BSP
Warehouse Receipts 7653) A. A central monetary authority;
Law II. Law on Secrecy of Bank Deposits B. An independent and accountable body; and
Trust Receipts Law (RA 1405) C. A government-owned corporation but enjoys
Negotiable fiscal and administrative autonomy. (Secs. 1 &
Instruments Law
III. General Banking Law of 2000 (RA
2, NCBA)
Insurance Code 8791)
Transportation Law IV. Philippine Deposit Insurance The BSP shall have a capitalization of P50B to be
Corporation Law Corporation Act (RA 3591, as fully subscribed by the Government. P10B of which
Securities Regulation amended) shall be paid upon effectivity of the NCBA and the
Code V. Foreign Currency Deposit Act (RA balance payable within two (2) years from the
Banking and Finance 6426) effectivity of the NCBA (Sec. 2)
Intellectual Property
D. Responsibility and primary
objective
I. The New Central Bank Act (RA
7653) 1. Primary Objectives

A. To maintain price stability conducive to a

A. State policies balanced and sustainable growth of the
economy.
The State shall maintain a central monetary B. To promote and maintain monetary stability and
authority that shall function and operate as an the convertibility of the peso.
independent and accountable body corporate in the
discharge of its mandated responsibilities concerning 2. Other Responsibilities
money, banking and credit. (Sec. 1)
A. To provide policy directions in the areas of
B. Salient features of the NCBA money, banking, and credit
B. To supervise operations of banks (Sec. 3, NCBA)
1. Assurance of BSP independence by providing for  All powers, duties and functions vested by
the majority of the members of the Monetary law in the Central Bank of the Philippines not
Board to come from the private sector. (Sec. 6, inconsistent with the NCBA shall be deemed
NCBA) transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
2. The BSP may now concentrate on monetary special charters shall be deemed to refer to
policy, and will shed itself of fiscal the BSP. (Sec. 136, NCBA)
responsibilities which in the past, had distracted
it from its primary function. (Secs. 3, 129, &
130, NCBA) E. Monetary Board

3. Provides safeguards to ensure that unlike the old The body through which the powers and functions of
Central Bank which sustained huge losses, the the Bangko Sentral are exercised (Sec 6, NCBA)
BSP would have a positive net income position by
the following provisions: 1. Powers and Functions (Sec. 15,
a. Capitalization of P50B of which P10B will be
NCBA)
paid upon effectivity of the Act; (Sec.2,
NCBA)
1. Issue rules and regulations it considers necessary
b. Maintenance of positive net foreign asset
for the effective discharge of the responsibilities
position; (Sec.71, NCBA)
and exercise of the powers vested in it;
c. Charging interests on all loans and advances
to banks; (Sec. 85, NCBA)
2. Direct the management, operations, and
d. Authority to collect interests on loans and
administration of Bangko Sentral, organize its
advances to closed financial institutions; and
personnel and issue such rules and regulations as
e. BSP can‘t acquire any shares in banking
it may deem necessary or desirable for this
enterprise, in development banking and
purpose;
financing (Sec. 128, NCBA)
3. Establish a human resource management system
which governs the selection, hiring,
appointment, transfer, promotion, or dismissal
of all personnel;
 MERCANTILE LAW REVIEWER

4. Adopt an annual budget for and authorize such 2. To hold any other public office or public
expenditures by Bangko Sentral as are in the employment during their tenure; and
140 interest of the effective administration and 3. To be employed in any multilateral banking or
operations of Bangko Sentral in accordance with financial institution within 2 years after the
applicable laws and regulations; and expiration of his term.
Exception: when he serves as an official
5. Indemnify its members and other officials of representative of the government to such
Bangko Sentral, including personnel of the institution.
departments performing supervision and
examination functions, against all costs and 7. Grounds for Removal of any
expenses reasonably incurred by such persons in
connection with any civil or criminal action, suit
member of the MB (Sec. 10, NCBA)
or proceeding, to which any of them may be
1. If the member is subsequently disqualified under
made a party by reason of the performance of
Sec. 8;
his functions or duties, unless such members or
2. If he is physically or mentally incapacitated that
other officials is found to be liable for
he cannot properly discharge his duties and
negligence or misconduct
responsibilities and such incapacity has lasted
for more than 6 months;
2. Composition (Sec. 6, NCBA) 3. If he is guilty of acts or operations which are of
fraudulent or illegal character or which are
The MB shall be composed of 7 members with 6-year manifestly opposed to the aims and interests of
terms. the BSP; and
4. If he no longer possesses the qualifications
3. Members (Sec. 6, NCBA) under Sec. 8.

1. The BSP Governor or his designated alternate (a 8. Vacancies, how filled (Sec. 7,
deputy governor); NCBA)
2. A Cabinet member to be designated by the
President or his designated alternate (an
Cause: death, resignation, or removal of any
Undersecretary in his department); and
member
3. 5 members from the private sector (Sec. 6)
Effect: a new member will be appointed to complete
 No member of the MB may be reappointed more
the unexpired period of the term of the member
than once.
concerned.

4. Qualifications (Sec. 8, NCBA) 9. Salaries (Sec. 13, NCBA)

1. Natural-born citizens of the Philippines;
Fixed by the Phil. President at a sum commensurate
2. At least 35 years old (the Governor must be at
to the importance and responsibility attached (Sec.
least 40 years old);
13, NCBA)
3. Of good moral character;
4. Of unquestionable integrity;
5. Of known probity and patriotism; and 10. Meetings (Sec. 11, NCBA)
6. With recognized competence in social and
economic disciplines. 1. held at least once a week;
2. called by the Governor or by 2 MB members;
3. the complete records of the proceedings and
5. Disqualifications (Sec. 9, NCBA) deliberations of the MB including the tapes and
transcripts of stenographic notes are to be
In addition to the disqualifications under the Code of
maintained and preserved;
Conduct and Ethical Standards for Public Officials
4. four (4) members constitute a quorum; and
and Employees (RA 6713), a member of the Monetary
5. all decisions by the MB shall require the
Board is disqualified:
concurrence of four (4) of its members unless
1. Direct connection with any multilateral banking
otherwise provided by the NCBA;
or financial institution; or
 deputy governors may attend (Sec. 12,
2. Substantial interest in any private bank in the
NCBA).
Philippines, within 1 year prior to his
 any member with personal or pecuniary
appointment
interest in any matter in the agenda shall
disclose his interest and shall retire from
6. Prohibitions on members of the the meeting when the matter is taken up
MB (Sec. 9, NCBA) (Sec. 14, NCBA).

1. To be a director, officer, employee, consultant,

lawyer, agent or stockholder of any bank, quasi-
bank, or any other institution which is subject
to supervision or examination by the BSP;
 MERCANTILE LAW REVIEWER

11. Civil Liability of Members of the  The appointment of a conservator shall be

vested exclusively in the MB. (Sec. 30)
MB (Sec. 16, NCBA)
Powers and Duties of a Conservator: 141
Members of the MB, officials, examiners, and
a. To take charge of the assets, liabilities, and the
employees of the BSP are liable when:
management thereof
1. they willfully violate the provisions of the NCBA;
b. To reorganize the management
2. they are guilty of negligence, abuses or acts of
c. To collect all monies and debts due said
malfeasance or misfeasance; or
institution, and
3. fail to exercise extraordinary diligence in the
d. To exercise all powers necessary to restore its
performance of his duties.
viability
e. To report and be responsible to the MB
F. How the BSP handles banks in f. To overrule or revoke the actions of the
distress previous management and board of directors of
the bank or quasi-bank. (Sec. 29)
Liquidity – Ability of an asset to be converted into
cash First Philippine International Bank v. CA, 1996:
While the Central Bank law gives vast and far
Solvency – When liabilities amount to less than total reaching powers to the conservator of a bank, such
assets, providing the ability to pay debts powers must be related to the preservation of the
assets of the bank, the reorganization of the
Insolvency – When the actual market value of assets management and the restoration of viability. Such
are insufficient to pay its liabilities, not considering powers cannot extend to the post-facto repudiation
capital stock and surplus which are not liabilities for of perfected transactions, otherwise they would
such purpose infringe against the non-impairment clause of the
Constitution.
1. Conservatorship Remunerations:
 General Rule
Applicability: The conservator shall receive remuneration in
 when a bank or a quasi-bank is in a state of an amount not to exceed 2/3 of the salary of
continuing inability or unwillingness to maintain the president of the institution in 1 year,
a condition of liquidity deemed adequate to payable in 12 equal monthly payments
protect the interest of depositors and creditors
(Sec. 29)  Exception
 determination is to be made by the MB on the A conservator connected with the BSP, in which
basis of a report submitted by the appropriate case said conservator shall not be entitled to
supervising or examining department (Sec. 29) receive any remuneration or emolument. (Sec.
29, NCBA)
Period and Termination:
 Period: shall not exceed 1 year (Sec. 29)
 The expenses attendant to the conservatorship 2. Receivership
shall be borne by the bank or quasi-bank
concerned (Sec. 29) Grounds:
 Grounds for termination of conservatorship by Whenever the MB finds that a bank or quasi-bank:
MB: a. Is unable to pay its liabilities as they become
a. When it is satisfied that the institution can due in the ordinary course of business: Provided,
continue to operate on its own and the That this shall not include inability to pay
conservatorship is no longer necessary caused by extraordinary demands induced by
b. When, on the basis of the report of the financial panic in the banking community;
conservator or of its own findings, the MB b. Has insufficient realizable assets, as determined
determines that the continuance in business by the BSP, to meet its liabilities; or
of the institution would involve probable c. Cannot continue in business without involving
loss to its depositors or creditors (the bank probable losses to its depositors or creditors; or
or quasi-bank would then be placed under d. Has willfully violated a cease-and-desist order
receivership) (Sec. 29) under Sec. 37 that has become final, involving
acts or transactions which amount to fraud or a
Effects of Conservatorship dissipation of the assets of the institution
1. Bank/Quasi-bank retains juridical personality
2. Not a precondition to the designation of a Receiver:
receiver, and; a. if a banking institution: the PDIC
3. Perfected transactions cannot be repudiated b. if a quasi-bank: any person of recognized
competence in banking or finance
Qualifications of a Conservator:
The conservator should be competent and The appointment of a receiver shall be vested
knowledgeable in bank operations and management. exclusively in the MB. And the designation of a
(Sec. 29)
 MERCANTILE LAW REVIEWER

conservator is not a precondition to the designation b. assist the enforcement of individual

of a receiver. liabilities of the stockholders, directors,
142 and officers, and
Powers and Duties of a Receiver: c. decide on other issues as may be material
a. Immediately gather and take charge of all the to implement the liquidation plan
assets and liabilities of the institution 3. The receiver shall convert the assets of the
b. Administer the assets for the benefit of the institutions to money, dispose of the same to
creditors creditors and other parties, for the purpose of
c. Exercise the general powers of a receiver under paying the debts of such institution in
the Revised Rules of Court accordance with the rules on concurrence and
d. Not to pay or commit any act that will involve preference of credit under the Civil Code
the transfer or disposition of any asset of the
institution, except: The assets of the institution under receivership and
1. administrative expenditures liquidation shall be deemed in custodia legis and
2. receiver may deposit or place funds in non- shall be exempt from any order of garnishment,
speculative investments levy, attachment, or execution.
e. Subject to prior approval of the MB, determine,
as soon as possible, but not later than 90 days Dispositions:
from take-over, whether the institution may be In case of a liquidation of a bank or quasi-bank, after
rehabilitated or otherwise placed in such a payment of the cost of proceedings, including
condition so that it may be permitted to resume reasonable expenses and fees of the receiver to be
business with safety to its depositors and allowed by the court, the receiver shall pay the
creditors and the general public debts of such institution, under order of the court,
in accordance with the rules on concurrence and
The assets of the institution under receivership and preference of credit in the Civil Code. (Sec. 31,
liquidation shall be deemed in custodia legis and NCBA)
shall be exempt from any order of garnishment,
levy, attachment, or execution. All revenues and earnings realized by the receiver in
winding up the affairs and administering the assets
Close Now, Hear Later Scheme of any bank or quasi-bank shall be used to pay the
Sec. 29 of the Central Bank Act does NOT costs of proceedings, salaries of such personnel
contemplate prior notice and hearing before a bank whose employment is rendered necessary in the
may be directed to stop operations and placed under discharge of the liquidation together with other
receivership. It is enough that such action is made additional expenses caused thereby. The balance of
subject of a subsequent judicial review. When the revenues and earnings, after the payment of all said
law provides for the filing of a case within 10 days expenses, shall form part of the assets available to
after the receiver takes charge of the assets of the creditors. (Sec. 32, NCBA)
bank, it is unmistakable that the assailed actions
should precede the filing of the case. The legislature Effects of Appointment of Receiver/Liquidation
could not have intended to authorize ―no prior 1. Retention of juridical personality
notice and hearing‖ in the bank‘s closure and at the 2. Suspension of operations/ Stoppage of business
same time allow a suit to annul it on the basis of 3. Assets are deemed in custodial legis, i.e.,
absence thereof (Central Bank vs. Cam GR No. exempt from garnishment, levy or execution
76118, March 30, 1993) 4. Stay of execution of judgment to prevent
depletion of bank assets
3. Liquidation / Closure 5. Bank is not liable to pay interest on deposits
which accrued during the period of suspension
Should the determination be that the institution of operation
cannot be rehabilitated or permitted to resume 6. Restriction of bank‘s capacity to do new
business, the MB shall notify in writing the board of business (new loans, deposits) but with
directors of the institution of its findings and direct obligation to collect pre-existing debts
the receiver to proceed with the liquidation of the
institution. G. How the BSP handles exchange
crisis
Procedure:
1. The receiver shall file ex parte with the proper
RTC, and without requirement of prior notice or 1. Legal Tender Power (Sec. 52)
any other action, a petition for assistance in the
liquidation of the institution pursuant to the All notes and coins issued by the BSP shall be fully
liquidation plan adopted by the PDIC (if quasi- guaranteed by the Government of the Republic of
bank, liquidation plan adopted by the MB) the Philippines and shall be legal tender in the
2. Upon acquiring jurisdiction, the court shall, Philippines for all debts, both public and private.
upon motion by the receiver after due notice,
a. adjudicate disputed claims against the Limitation: Coins shall be legal tender in amounts
institution, not exceeding P50 for denominations of 25 centavos
and above, and in amounts not exceeding P20 for
 MERCANTILE LAW REVIEWER

denominations of 10 centavos or less unless C. Deposits covered (Sec. 2)

otherwise fixed by the MB,

The maximum amount of coins to be considered as All deposits of whatever nature with banks or 143
legal tender is: [BSP Cicular 537 (2006) ] banking institutions in the Philippines are hereby
1. P1,000.00 for denominations of 1-Piso, 5-Piso considered as of an absolutely confidential nature
and 10-Piso coins; and and may not be examined.
2. P100.00 for denominations of 1-sentimo, 5-
sentimo, 10-sentimo, and 25-sentimo coins. Includes investments in bonds issued by the
Philippine Government, its political subdivisions and
its instrumentalities.
2. Rate of Exchange (Sec. 74)
 Under the RA 1405, bank deposits are
The MB shall:
1. Determine the exchange rate policy of the statutorily protected or recognized zones of
country; privacy. (People v. Estrada, G.R. No. 164368,
2. Determine the rates at which the Bangko Sentral April 2, 2009; Marquez v. Desierto, G.R. No.
shall buy and sell spot exchange; 135882, June 27, 2001, 359 SCRA 772; Ople v.
3. Establish deviation limits from the effective Torres, G.R. No. 107737. October 1, 1999, 316
exchange rate or rates as it may deem proper. SCRA 43)
4. Determine the rates for other types of foreign
exchange transactions by the BSP, including Ejercito v. Sandiganbayan (Special Division), 2006:
purchases and sales of foreign notes and coins. The term deposits as used in RA 1405 is to be
understood broadly and not limited only to accounts
Limitation: The margins between the effective which give rise to a creditor-debtor relationship
exchange rates and the rates established by the MB between the depositor and the bank.
may not exceed the corresponding margins for spot
exchange transactions by more than the additional If the money deposited under an account may be
costs or expenses involved in each type of used by banks for authorized loans to third persons,
transactions. then such account, regardless of whether it creates
a creditor-debtor relationship between the
depositor and the bank, falls under the category of
accounts which the law precisely seeks to protect
II. Law on Secrecy of Bank for the purpose of boosting the economic
Deposits (RA 1405) development of the country.

Considering the use of the phrase ―of whatever

A. Purpose (Sec. 1) nature‖ RA 1405 applies not only to money which is
deposited but also to those which are invested.
1. To give encouragement to the people to deposit Thus, the protection afforded by RA 1405 extends to
their money in banking institutions and to trust accounts.
discourage private hoarding; and
D. Exceptions (Sec. 2)
2. So that the people‘s money may be properly
utilized by banks in authorized loans to assist in
A. Upon written permission of the depositor;
the economic development of the country.
B. In cases of impeachment;
C. Upon order of a competent court in cases of:
China Banking Corporation v. Ortega, 1973: a. Bribery;
The absolute confidentiality rule in R.A. No. 1405 b. dereliction of duty of public officials; or
actually aims at protection from unwarranted D. Where the money deposited or invested is the
inquiry or investigation if the purpose of such subject matter of the litigation.
inquiry or investigation is merely to determine the
existence and nature, as well as the amount of the
Union Bank v. Court of Appeals, 1999:
deposit in any given bank account.
By the phrase "subject matter of the action" is meant
"the physical facts, the things real or personal, the
B. Prohibited acts (Sec. 3) money, lands, chattels, and the like, in relation to
which the suit is prosecuted, and not the delict or
1. No person, government official, bureau or office wrong committed by the defendant. (Mathay v.
may examine, inquire into or look into such Consolidated Bank and Trust Company, 1974).
deposits; and
2. No official or employee of any banking We note with approval the difference between the
institution may disclose to any unauthorized "subject of the action" from the "cause of action."
person any information concerning said We also find petitioner's definition of the phrase
deposits. "subject matter of the action" is consistent with the
term "subject matter of the litigation," as the latter
is used in the Bank Deposits Secrecy Act.
 MERCANTILE LAW REVIEWER

Where the plaintiff is fishing for information so it iv. destructive arson and murder, including
can determine the culpability of private respondent those perpetrated by terrorists against
144 and the amount of damages it can recover from the non-combatants and similar targets.
latter. It does not seek recovery of the very money 4. BSP inquiry or examination in the course of its
contained in the deposit. The subject matter of the periodic or special examination of the bank
dispute may be the amount of P999,000.00 that (Sec. 11, AMLA).
petitioner seeks from private respondent as a result 5. Disclosure of certain information about bank
of the latter's alleged failure to inform the former of deposits which have been dormant for at least
the discrepancy; but it is not the P999,000.00 10 years, to the Treasurer of the Philippine in a
deposited in the drawer's account. By the terms of sworn statement, a copy of which is posted in
R.A. No. 1405, the "money deposited" itself should the bank premises. (Sec. 2, Unclaimed Balances
be the subject matter of the litigation. Law [Act No. 3926, as amended])
6. The PDIC and/or the BSP can inquire into or
Banco Filipino v. Purisima, 1988: examine deposit accounts and all information
The exception applies to cases of concealment of related thereto in case there is a finding of
illegally acquired property in anti-graft cases. The unsafe and unsound banking practice (Sec. 8,
paragraph 8, R.A. 3591, as amended by R.A.
inquiry into illegally acquired property – or property
9576).
NOT "legitimately acquired" – extends to cases where
such property is concealed by being held by or
[NOT considered as EXCEPTIONS]:
recorded in the name of other persons.
a. In 1981, PD 1792 added the following grounds
Mellon Bank, N.A. v. Magsino, 1990: when the bank can be compelled to reveal the
The exception even extends to cases of concealment amount of a depositor:
of illegally acquired property not involving anti-graft i. ―made in the course of a special or general
cases as long as money deposited was the subject examination of a bank and is specifically
matter of litigation. authorized by the Monetary Board after
being satisfied that there is reasonable
Other exceptions: ground to believe that a bank fraud or
1. upon order of a competent court in cases of serious irregularity has been or is being
unexplained wealth under Sec. 8 of RA 3019 or committed and that it is necessary to look
the Anti-Graft and Corrupt Practices Act (PNB v. into the deposit to establish such fraud or
Gancayco, 1965; Banco Filipino v. Purisima, irregularity,‖ or
1988; Marquez v. Desierto, 2001) ii. ―made by an independent auditor hired by
2. when inquiry is conducted under the authority the bank to conduct its regular audit
of the Commissioner of Internal Revenue into provided that the examination is for audit
the bank accounts of the following: purposes only and the results thereof shall
a. a decedent in order to determine his gross be for the exclusive use of the bank.‖
estate However, Sec. 135 of RA 7653 or the New
b. any taxpayer who has filed an application Central Bank Act expressly repealed PD
for compromise of his tax liability, which 1792 thereby reverting RA 1405 to its
application shall include a written waiver of version prior to the promulgation of the
his privilege under RA 1405 or under other Decree.
general or special laws
 information obtained from banks and a) Thus, Villanueva says that these two
financial institutions may be furnished to instances are excluded from the
a foreign tax authority pursuant to an enumeration of exceptions to the
existing convention or agreement. (Sec. secrecy of bank deposits (VILLANUEVA,
6(F), NIRC, as amended by RA 10021) Commercial Law Review, opinion).
3. upon order of a competent court in cases under
the Anti-Money Laundering Act of 2001 (RA b) Morales, however, notes that with the
9160, hereinafter ―AMLA‖), when there is enactment of the AMLA, exception (i)
probable cause that the deposits or investments has been substantially resurrected.
involved are in any way related to an unlawful While there is no similar development
activity or a money laundering offense, except of exception (ii), the exclusion of the
that no court order required if: BSP examiners and independent
a. funds or property involved consists of auditors from the coverage of the
investments; or Secrecy of Bank Deposits Law finds
b. said investments are related to: basis in Opinion No. 243 (s. 1975) of
i. kidnapping for ransom then Secretary of Justice Pedro Tuason.
ii. unlawful activities under (MORALES, The Philippine General
Comprehensive Drugs Act of 2002 (RA Banking Law, opinion)
9165);
iii. hijacking and other violations under RA b. It used to be believed that the RA 1405 did not
6235; and apply to the Ombudsman, on account of his
authority under Sec. 15(8) of RA 6770 or the
Ombudsman Act of 1989 to ―examine and have
 MERCANTILE LAW REVIEWER

access to bank accounts and records.‖ However, BSB Group, Inc., v. Go, 2010:
the SC in Marquez v. Desierto (G.R. No.135882, It is conceded that while the fundamental law has
June 27, 2001) and Ombudsman v. Ibay (G.R. not bothered with the triviality of specifically
No. 137538, September 3, 2001) restricted the addressing privacy rights relative to banking 145
Ombudsman‘s power as follows: accounts, there, nevertheless, exists in our
―[B]efore an in camera inspection may be jurisdiction a legitimate expectation of privacy
allowed, there must be a pending case before governing such accounts. The source of this right of
a court of competent jurisdiction. Further, the expectation is statutory, and it is found in R.A. No.
account must be clearly identified, the 1405, otherwise known as the Bank Secrecy Act of
inspection limited to the subject matter of the 1955.
pending case before the court of competent
jurisdiction. The bank personnel and the Subsequent statutory enactments have expanded the
account holder must be notified to be present list of exceptions to this policy yet the secrecy of
during the inspection, and such inspection may bank deposits still lies as the general rule, falling as
cover only the account identified in the pending it does within the legally recognized zones of
case.‖ (MORALES, The Philippine General privacy. There is, in fact, much disfavor to
Banking Law) construing these primary and supplemental
exceptions in a manner that would authorize
―Further, it is interesting to note that the unbridled discretion, whether governmental or
Secretary of Justice in his Opinion No. 13 (s. otherwise, in utilizing these exceptions as authority
1987) concluded that the Presidential for unwarranted inquiry into bank accounts. It is
Commission on Good Government can compel then perceivable that the present legal order is
banks to disclose or produce bank records obliged to conserve the absolutely confidential
without violating the bank secrecy laws.‖ nature of bank deposits.
(MORALES, The Philippine General Banking Law)

―Moreover, under Sec. 1(d) of RA 6382 (1990),

E. Garnishment of deposits
which created the Davide Commission that
conducted a fact finding investigation of the  General Rule
failed coup d‘ etat of December 1989, the The prohibition against examination of or inquiry
commission had the power to ‗ask the Monetary into a bank deposit under Republic Act 1405 does
board to disclose information on and/or grant not preclude its being garnished to insure
authority to examine bank deposits, trust finds, satisfaction of a judgment (China Banking
or banking transactions in the name of and/or Corporation v. Ortega, 1973; Philippine Commercial
utilized by a person, natural or juridical, under and Industrial Bank v. Court of Appeals, 1991)
investigation by the Commission, in any bank or
banking institution in the Philippines, when the China Banking Corporation v. Ortega (1973):
Commission has reasonable ground to believe ―…the prohibition against examination of or inquiry
that said deposits, trust or investment funds, or into a bank deposit under Republic Act 1405 does not
banking transactions have been used in support preclude its being garnished to insure satisfaction of
of furtherance of the objectives of the coup d‘ a judgment. Indeed there is no real inquiry in such a
etat.‘‖ (MORALES, The Philippine General case, and if the existence of the deposit is disclosed
Banking Law) the disclosure is purely incidental to the execution
process. It is hard to conceive that it was ever within
Notwithstanding the exceptions enumerated by law, the intention of Congress to enable debtors to evade
the prevailing policy on the matter is to preserve the payment of their just debts, even if ordered by the
absolute confidentiality enjoyed by bank deposits. Court, through the expedient of converting their
assets into cash and depositing the same in a bank.‖
Republic v. Eugenio, 2008:
Indeed, by force of statute, all bank deposits are  Exception - Foreign Currency Deposits.
absolutely confidential, and that nature is unaltered The foreign currency deposits shall be exempt from
even by the legislated exceptions referred to above. attachment, garnishment, or any other order or
There is disfavor towards construing these process of any court, legislative body, government
exceptions in such a manner that would authorize agency or any administrative body whatsoever. (Sec.
unlimited discretion on the part of the government 8, Foreign Currency Deposit Act)
or of any party seeking to enforce those exceptions
and inquire into bank deposits. If there are doubts in  Exceptions to exception
upholding the absolutely confidential nature of bank
deposits against affirming the authority to inquire 1. upon written permission of the depositor (Sec.
into such accounts, then such doubts must be 8, Foreign Currency Deposit Act ; Intengan vs CA
resolved in favor of the former. Such a stance would ; 2002)
persist unless Congress passes a law reversing the 2. upon order of a competent court in cases of
general state policy of preserving the absolutely violation of the Anti-Money Laundering Act of
confidential nature of Philippine bank accounts. 2001 [as in the case of peso deposits, supra]
 MERCANTILE LAW REVIEWER

3. during Bangko Sentral‘s periodic or special b. stock savings and loan associations; and
examinations [as in the case of peso deposits, c. private development banks
146 supra], and
4. disclosure of the Treasurer of the Philippines NOTE—
when the unclaimed balances law applies (Act The term ‗thrift banks‘ also refers to any banking
3936, as amended by PD 679) corporation organized for the following purposes:
5. BSP/PDIC inquiry if there is a finding of unsafe (1) Accumulating the savings of depositors and
and unsound banking practice (as in the case of investing them, together with capital loans
peso deposits, supra) secured by bonds, mortgages in real estate and
6. In Salvacion vs. CB (1997), where a Filipino child insured improvements thereon, chattel
was raped by a foreigner, the SC allowed mortgage, bonds and other forms of security or
garnishment of foreign currency deposits in loans for personal or household finance,
stating: ―If we rule that the questioned Section whether secured or unsecured, or in financing
113 of CB Circular No. 960 which exempts from for homebuilding and home development; in
attachment, garnishment, or any other order or readily marketable and debt securities; in
process of any court, legislative body, commercial papers and accounts receivables,
government agency or any administrative body drafts, bills of exchange, acceptances or notes
whatsoever, is applicable to a foreign transient, arising out of commercial transactions; and in
injustice would result especially to a citizen such other investments and loans which the
aggrieved by a foreign guest.‖ Monetary Board may determine as necessary in
the furtherance of national economic objectives;
F. Penalties for violation (Sec. 5) (2) Providing short-term working capital, medium-
and long-term financing, to businesses engaged
Imprisonment of not more than 5 years or a fine of in agriculture, services, industry and housing;
and
not more than P20,000 or both, in the discretion of
(3) Providing diversified financial and allied services
the court.
for its chosen market and constituencies
especially for small and medium enterprises and
III. General Banking Law of 2000 individuals. (Sec.3(a), R.A. 7906)
(RA 8791)
4) Cooperative Banks.
These are banks organized primarily to make
A. Policy financial and credit services available to cooperative
banks.
To promote and maintain a stable and efficient
banking and financial system that is globally NOTE—
competitive, dynamic and responsive to the demands A cooperative bank is one organized by the majority
of a developing economy. (Sec. 2) shares of which is owned and controlled by
cooperatives primarily to provide financial and
B. Definition and classification of credit services to cooperatives. The term
"cooperative bank" shall include cooperative rural
banks banks. (Sec. 100, R.A. 6938)

Banks shall refer to entities engaged in the lending 5) Islamic Banks

of funds obtained in the form of deposits. (Sec. 3.1, These are banks the business dealings and activities
GBL) of which are subject to the basic principles and
rulings of Islamic Shari‘a. The Al Amanah Islamic
Classification of Banks (Sec. 3.2) Investment Bank of the Philippines, which was
created by RA 6848, is the only Islamic bank in the
1) Universal Banks. (UB) country at this time.
These used to be called expanded commercial banks
and their operations are primarily governed by the NOTE—
GBL. They can exercise the powers of an investment Islamic Bank refers to the Al-Amanah Islamic
house and invest in non-allied enterprises. They Investment Bank of the Philippines, created under
have the highest capitalization requirement. R.A. 6848. (See Sec. 44(1) and Sec. 2, R.A. 6848)
2) Commercial Banks. (KB)
6) Rural Banks
These are ordinary or regular commercial banks, as
Mandated to make needed credit available and
distinguished from a universal bank. They have a
readily accessible in the rural areas on reasonable
lower capitalization requirement than a UB and
terms and which are primarily governed by the Rural
cannot exercise the powers of an investment house
Banks Act of 1992 (RA 7353)
and invest in non-allied enterprises.
7) Other classifications of banks
3) Thrift Banks.
As determined by the Monetary Board, i.e.,
These are
Philippine Veterans Bank (RA 3518), Landbank of the
a. savings and mortgage banks;
 MERCANTILE LAW REVIEWER

Philippines (RA 3844), Development Bank of the c. Power to c. Power to

Philippines (RA 85) Invest in invest in
Allied Allied
C. Distinction between banks and enterprises (financial or 147
(financial or non-financial)
quasi-banks and trust entities non- (Sec. 24, GBL)
financial) d. Power to
As opposed to Quasi-banks (Sec. 30, invest in Non-
Quasi-banks (QB) refer to entities engaged in the GBL) allied
borrowing of funds through the issuance, enterprises –
endorsement or assignment with recourse or (Sec. 24, GBL)
acceptance of deposit substitutes for purposes of e. Powers of an
relending or purchasing of receivables and other investment
obligations. (last paragraph of Sec. 4) house (Sec.
23, GBL)
The term ―deposit substitutes‖ is defined as an
alternative form of obtaining funds from the public,
other than deposits, through the issuance, 1) Corporate powers
endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of General powers incident to corporations (Sec. 36,
relending or purchasing of receivables and other Corporation Code)
obligations. It includes bankers acceptances, 1. To sue and be sued in its corporate name;
promissory notes, participations, certificates of 2. Succession by its corporate name for the period
assignment and similar instruments with recourse, stated in the AOI and the certificate of
and repurchase agreements. (Sec. 95, New Central incorporation
Bank Act, hereinafter “NCBA”) 3. To adopt and use a corporate seal
4. To amend its AOI
As opposed to Trust Entities 5. To adopt by-laws, not contrary to law, morals,
A Trust Entity is a stock corporation or a person duly or public policy, and to amend or repeal them
authorized by the Monetary Board to engage in trust 6. To issue or sell stocks to subscribers and to sell
business. (Sec. 79, GBL) treasury stocks.
7. To purchase, receive, take or grant, hold,
A Trust Business is any activity resulting from convey, sell, lease, pledge, mortgage and
trusteeship involving the appointment of a trustee otherwise deal with such real and personal
by a trustor for the administration, holding, property, including securities and bonds of other
management of funds and/or properties of the corporations, as the transaction of the lawful
trustor by the trustee for the use, benefit or business of the corporation may reasonably and
advantage of the trustor or of beneficiaries. necessarily require, subject to the limitations
prescribed by law and the Constitution
D. Bank powers and liabilities 8. To enter into merger or consolidation
9. To make reasonable donations, including those
Classification of Banks: for the public welfare or for hospital,
 Universal Banks. (UB) charitable, cultural, scientific, civic, or similar
These used to be called expanded commercial purposes: provided that no corporation,
banks and their operations are primarily domestic or foreign, shall give donations in aid
governed by the GBL. They can exercise the of any political party or candidate or for
powers of an investment house and invest in purposes of partisan political activity
non-allied enterprises. They have the highest 10. To establish pension, retirement, and other
capitalization requirement. plans for the benefit of its directors, trustees,
officers and employees
 Commercial Banks. (KB) 11. To exercise such other powers as may be
These are ordinary or regular commercial banks, essential or necessary to carry out its purposes
as distinguished from a universal bank. They as stated in the AOI.
have a lower capitalization requirement than a
UB and cannot exercise the powers of an 2) Banking and incidental powers
investment house and invest in non-allied All such powers as may be necessary to carry on the
enterprises. business of commercial banking (Sec. 29)

KB UB a. Accepting drafts
Powers a. Corporate a. Corporate
b. Issuing letters of credit
Powers (Sec. Powers (Sec.
29, GBL) 29, GBL)
c. Discounting and negotiating promissory notes,
b. Banking and b. Banking and
drafts, bills of exchange, and other evidence of
Incidental Incidental
debt
Powers (Sec. Powers (Sec.
29, GBL) 23, GBL)
d. Accepting or creating demand deposits
 MERCANTILE LAW REVIEWER

g. Acquiring marketable bonds and other debt

Deposit Function: securities
148 GENERAL RULE
Only a Universal Bank (UB) Commercial Bank h. Extending credit
(KB) can accept or create demand deposits Loan Function
―Know your customer‖ rule:
EXCEPTION Before granting a loan or other credit
Banks other than a UB or KB with prior approval accommodation, a bank must ascertain that the
of, and subject to such conditions and rules as debtor is capable of fulfilling its commitments
may be prescribed by the Monetary Board (Sec. to the bank. (Sec. 40)
33, GBL)
The bank may demand from its credit applicants
Presumption of ownership of deposits: a statement of their assets and liabilities and of
It is presumed that money deposited in a bank their income and expenditure and such
account belongs to the person in whose name information as may be prescribed by law or by
the deposit account is opened. rules and regulations of MB to enable the bank
to properly evaluate the credit application
Fultron Iron Works Co. v. China Banking which includes the corresponding financial
Corporation, 1930 statements submitted for taxation purposes to
A depositor is presumed to be the owner of funds the BIR. (Sec. 40)
standing in his name in a bank deposit; and where a
bank is not chargeable with notice that the money Credit enhancement
deposited in such account is the property of some If the borrower is less than creditworthy, third
other person than the depositor, the bank is justified persons may enhance his credit by providing
in paying out the money to the depositor or upon his guarantees and other security devices in favor
order, and cannot be liable to any other person as of the bank. (MORALES, The Philippine General
the true owner. Banking Law, opinion)

BPI v. CA, 1994 If there is material misrepresentation, the bank

may:
A bank is under no duty or obligation to make an
a. Terminate any loan or other credit
application or set-off against the deposit accounts of
accommodation granted on the basis of said
a borrower. To apply the deposit to the payment of
statements; and
a loan is a privilege, a right of set-off which the bank
b. Shall have the right to demand immediate
has the option to exercise, but not the obligation.
repayment or liquidation of the obligation (Sec.
40)
CA Agro-industrial Dev. Corp. v. CA, 1983
The rent of safety deposit boxes is a special kind of Limit on Loans, Credit Accommodations and
deposit and cannot be characterized as an ordinary Guarantees:
contract of lease because the full and absolute Real Estate GENERAL RULE
possession and control of the deposit box is not given Shall not exceed 75% of the
to the renters. The prevailing rule is that the appraised value of the respective
relation between the bank renting out and the real estate security, plus 60% of
renter is that of bailor and bailee the bailment being the appraised value of the insured
for hire and mutual benefit. improvements, and such loans may
be made to the owner of the real
e. Receiving other types of deposits and deposit estate or to his assignees
substitutes
Types of Deposits: EXCEPTION
1. Time Deposit - Interest rate stipulated The Monetary Board otherwise
depending on the number of days. During prescribes (Sec. 37)
this period, the money deposited may not Security of GENERAL RULE
be withdrawn. High interest rates. chattels and Shall not exceed 75% of the
2. Savings Deposit - Bank pays an interest rate, intangible appraised value of the security,
but not as high as time deposits. properties and such loans and other credit
3. Demand Deposits/Current Accounts - No (patents, accommodations may be made to
interest is paid by the bank because the trademarks, the title-holder of the chattels and
depositor can take out his funds any time. It trade names, intangible properties or his
is called demand deposit because the and assignees
depositor can withdraw the money he copyrights)
deposited on the very same day when he EXCEPTION
deposited it. (VILLANUEVA, Commercial Law The Monetary Board otherwise
Review, opinion) prescribes (Sec. 38)

f. Buying and selling foreign exchange and gold or

silver bullion
 MERCANTILE LAW REVIEWER

Grant of Loans (Sec. 39) v. Spouses Tan [2003]; Samsung Construction v.

a. Only in amounts and for the periods of time FEBTC [2004]; Citibank, N.A. v. Spouses
essential for the effective completion of the Cabamongan [2006]; Philippine Savings Bank v.
operations to be financed; and Chowking Food Corporation [2008]; Bank of 149
b. Consistent with safe and sound banking America NT &SA v. Philippine Racing Club
practices. [2009].

Purpose of Loans Simex International v. CA, 1990:

Purpose must be stated in the application and in the As a business affected with public interest and
contract between the bank and the borrower. (Sec. because of the nature of its functions, the bank is
39) under obligation to treat the accounts of its
depositors with meticulous care, always having in
Effect of usage of loan proceeds for purposes mind the fiduciary nature of their relationship.
under than those agreed upon with the bank
The bank shall have the right to terminate the loan In every case, the depositor expects the bank to
or other credit accommodation and demand treat his account with the utmost fidelity, whether
immediate repayment of the obligation. (Sec. 39) such account consists only of a few hundred pesos or
of millions. The bank must record every single
Amortization on Loans and Other Credit transaction accurately, down to the last centavo,
Accommodations (Sec. 44) and as promptly as possible. This has to be done if
a. In case of loans and other credit the account is to reflect at any given time the
accommodations with maturities of more than 5 amount of money the depositor can dispose as he
years, provisions must be made for periodic sees fit, confident that the bank will deliver it as
amortization payments, but such payments must and to whomever he directs. A blunder on the part
be made at least annually: of the bank, such as the failure to duly credit him his
Provided, however, That when the deposits as soon as they are made, can cause the
borrowed funds are to be used for purposes depositor not a little embarrassment if not financial
which do not initially produce revenues loss and perhaps even civil and criminal litigation.
adequate for regular amortization payments
therefrom, the bank may permit the initial PCI Bank v. CA, 2001:
amortization payment to be deferred until such
Banks are expected to exercise the highest degree
time as said revenues are sufficient for such
of diligence in the selection and supervision of their
purpose, but in no case shall the initial
employees.
amortization date be later than 5 years from the
date on which the loan or other credit
accommodation is granted. Philippine Savings Bank v. Chowking Food
b. In case of loans and other credit Corporation, 2008:
accommodations to microfinance sectors, the It cannot be over emphasized that the banking
schedule of loan amortization shall take into business is impressed with public interest. Of
consideration the projected cash flow of the paramount importance is the trust and confidence of
borrower and adopt this into the terms and the public in general in the banking industry.
conditions formulated by banks. Consequently, the diligence required of banks is
more than that of a Roman pater familias or a good
All are subject to such rules as the Monetary Board father of a family. The highest degree of diligence
may promulgate. (Sec. 29, GBL) is expected.

E. Diligence required of banks Bank of America NT&SA v. Philippine Racing Club,

2009:
The banking business is so impressed with public
Banks should observe the highest degree of interest where the trust and confidence of the public
diligence. in general is of paramount importance such that the
appropriate standard of diligence must be a high
Notwithstanding the degree of diligence required, a degree of diligence, if not the utmost diligence.
bank is not expected to be infallible (Prudential
Bank vs. CA, 2000)
Under the doctrine of last clear chance, a bank may
Fiduciary Nature of Banks be held liable for loss despite the negligence of a
 Failure on the part of the bank to satisfy the depositor. Examples of these cases are the
degree of diligence required of banks may following:
warrant the award of damages.  For disbursing funds to a dishonest employee
 Under Sec. 2, the degree of diligence is ―high despite the employee‘s failure to strictly abide
standards of integrity and performance‖. In with the bank‘s internal procedure. (PBC v. CA,
numerous cases, the Supreme Court has held 1997)
that the highest degree of diligence and care is  Allowing the execution of a mortgage on parcels
expected from banks (Simex International v. CA of land as security for a loan not owned by the
[1990]; Philippine Bank of Commerce v. CA prospective borrower. (Canlas v. Court of
[1997]; Westmont Bank v. Ong [2002]; Solidbank Appeals, 2000)
 MERCANTILE LAW REVIEWER

 Crediting the deposit in favor of another then perceivable that the present legal order is
depositor, a check where the signature of the obliged to conserve the absolutely confidential
150 drawer was forged. (Westmont Bank v. Ong, nature of bank deposits.
2002)
 Encashing pre-signed checks of the depositor G. Stipulation on interests
which were stolen by its employee. (Bank of
America NT & SA v. Philippine Racing Club,
2009) The Monetary Board may prescribe the maturities, as
well as related terms and conditions for various
A bank is liable to a depositor when it honored and types of bank loans and other credit
paid on a forged check against the depositor‘s accommodations.
account even if the bank followed its internal
procedure in preventing a faulty discharge. (Samsung Any change by the Board in the maximum maturities
Construction v. FEBTC, 2004) shall apply only to loans and other credit
 In Gempesaw v. Court of Appeals (1993), a bank accommodations made after the date of such action.
was held liable for damages for failing to follow
its internal procedures in paying on a forged The Monetary Board shall regulate the interest
check despite the gross negligence on the part imposed on micro finance borrowers by lending
of the depositor. investors and similar lenders such as, but not limited
to, the unconscionable rates of interest collected on
salary loans and similar credit accommodations (Sec.
F. Nature of bank funds and bank 43, GBL)
deposits
H. Grant of loans and security
Confidentiality of Bank Deposits. The prevailing requirements (Prudential
policy on the matter is to preserve the absolute
confidentiality enjoyed by bank deposits. measures)

Republic v. Eugenio, 2008: 1. Ratio of Net Worth to Total Risk Assets

Indeed, by force of statute, all bank deposits are
absolutely confidential, and that nature is unaltered Risk-based capital ratio:
even by the legislated exceptions referred to above. The minimum ratio which the net worth of a bank
There is disfavor towards construing these must bear to its total risk assets which may include
exceptions in such a manner that would authorize contingent accounts [i.e. net worth: total risk
unlimited discretion on the part of the government assets] (Sec. 34, GBL)
or of any party seeking to enforce those exceptions
and inquire into bank deposits. If there are doubts in  General Rule
upholding the absolutely confidential nature of bank A bank must conform to the risk-based capital
deposits against affirming the authority to inquire ratio prescribed by the MB
into such accounts, then such doubts must be  Exceptions
resolved in favor of the former. Such a stance would The MB may alter or suspend compliance with
persist unless Congress passes a law reversing the such ratio whenever necessary for a maximum
general state policy of preserving the absolutely period of 1 year.
confidential nature of Philippine bank accounts. a. In case of a bank merger or consolidation;
OR
BSB Group, Inc., v. Go, 2010: b. When a bank is under rehabilitation under a
It is conceded that while the fundamental law has program approved by the BSP; (Sec. 34,
not bothered with the triviality of specifically GBL)
addressing privacy rights relative to banking
accounts, there, nevertheless, exists in our Purpose:
jurisdiction a legitimate expectation of privacy A bank must not be allowed to expand the volume of
governing such accounts. The source of this right of its loans and investments in a manner that is
expectation is statutory, and it is found in R.A. No. disproportionate to its net worth. (MORALES, The
1405, otherwise known as the Bank Secrecy Act of Philippine General Banking Law, Opinion)
1955.
Effect of non-compliance (Sec. 34, GBL):
Subsequent statutory enactments have expanded the 1. The MB may limit or prohibit the distribution of
list of exceptions to this policy yet the secrecy of net profits by such bank and may require that
bank deposits still lies as the general rule, falling as part or all of the net profits be used to increase
it does within the legally recognized zones of the capital accounts of the bank until the
privacy. There is, in fact, much disfavor to minimum requirement has been met.
construing these primary and supplemental 2. The MB may restrict or prohibit the acquisition
exceptions in a manner that would authorize of major assets and the making of new
unbridled discretion, whether governmental or investments by the bank, with the exception of
otherwise, in utilizing these exceptions as authority purchases of readily marketable evidences of
for unwarranted inquiry into bank accounts. It is indebtedness of the RP and the BSP and any
other evidences of indebtedness or obligations
 MERCANTILE LAW REVIEWER

the servicing and repayment of which are fully d. in the case of a partnership, association or other
guaranteed by the RP, until the minimum entity, the liabilities of the members thereof to
required capital ratio has been restored. such bank. (Sec. 35.3, GBL)
151
2. Single Borrowers‘ Limit Guidelines on the wholesale lending of
government banks:
General Rule a. it shall apply only to loans granted by
The total loans, credit accommodations and participating financial institutions (PFIs) on a
guarantees that may be extended by a bank to any wholesale basis for on-lending to end-user
person, partnership, association, or corporation or borrowers;
other entity shall at no time exceed 20% of the net b. it shall apply only to loan programs funded by
worth of such bank. (Sec. 35.1,GBL) multilateral, international, or local development
agencies, organizations, or institutions,
Exceptions especially designed for wholesale lending
1. The Monetary Board otherwise prescribes for activities of government banks;
reasons of national interest. (Sec. 35.1, GBL) c. the end-user borrowers of the PFIs shall be
2. Wholesale lending activities of government subject to the 25% SBL, not the increased ceiling
banks to participating institutions for relending of 35%; and
to end-user borrowers: separate limit of 35% net d. government banks shall observe appropriate
worth. (BSP Circular No. 425 dated March 25, criteria for accrediting PFIs and for the
2004) grant/renewal of credit lines to accredited PFIs.
(BSP Circular No. 425 dated Mach 25, 2004)
Increase of limit:
The Monetary Board may increase the limit Exclusions from the ceiling:
prescribed by an additional 10% of the net worth, Loans and other credit accommodations
when: a. secured by obligations of the BSP or of the
a. The additional liabilities of any borrower are Philippine Government;
adequately secured by trust receipts, shipping b. fully guaranteed by the government as to the
documents, warehouse receipts or other similar payment of principal and interest;
documents transferring or securing title; c. covered by assignment of deposits maintained in
b. Covering readily marketable, non-perishable the lending bank and held in the Philippines;
goods; and d. under letters of credits to the extent covered by
c. Which must be fully covered by insurance (Sec. margin deposits; and
35.2, GBL) e. specified by the Monetary Board as non-risk
items (Sec. 35.5, GBL)
Purpose:
To prevent the bank from making excessive loans Combination of liabilities:
and other credit accommodations to a single The MB may prescribe the combination of the
borrower or corporate group, including guarantees liabilities of subsidiary corporations or members of
for the account of such borrower or group. The bank the partnership, association, entity or such
is prohibited from… placing many eggs in the basket individual under certain circumstances, including but
of one client. [It] is a damage-control mechanism not limited to any of the following situations:
[and] a device for risk amelioration. (MORALES, The a. the parent corporation, partnership,
Philippine General Banking Law, Opinion) association, entity or individual guarantees the
repayment of the liabilities;
Basis for determining compliance: b. the liabilities were incurred for the
The basis for determining compliance with the SBL is accommodation of the parent corporation or
the total credit commitment of the bank to the another subsidiary or of the partnership or
borrower. (Sec. 35.1, GBL) association or entity or such individual; or
c. the subsidiaries though separate entities
Inclusions in the ceiling: operate merely as departments or divisions of a
a. the direct liability of the maker or acceptor of single entity. (Sec. 35.4, GBL)
paper discounted with or sold to such bank and
the liability of a general indorser, drawer or  Loans and other credit accommodations,
guarantor who obtains a loan or other credit deposits maintained with, and usual guarantees
accommodation from or discounts paper with or by a bank to any other bank or non-bank entity,
sells papers to such bank; whether locally or abroad, shall be subject to
b. in the case of an individual who owns or controls the limits as herein prescribed. (Sec. 35.6, GBL)
a majority interest in a corporation,
partnership, association or any other entity, the 3. Restrictions on Bank Exposure to Directors,
liabilities of said entities to such bank; Officers, Stockholders and their Related
c. in the case of a corporation, all liabilities to Interests (DOSRI)
such bank of all subsidiaries in which such
corporation owns or controls a majority interest; General Rule
and No director or officer of any bank
 MERCANTILE LAW REVIEWER

a. shall, directly or indirectly, for himself or as the eventuality, the bank is required to set aside
representative or agent of others, borrow from reserved for bad debts and other doubtful accounts
152 such bank, nor or contingencies. (MORALES, The Philippine General
b. shall he become a guarantor, endorser or surety Banking Law, Opinion)
for loans from such bank to others, or in any
manner be an obligor or incur any contractual 5. Reserves
liability to the bank
Purposes:
Exceptions a. To control the volume of money created by the
1. valid insider lending (Sec. 36, GBL) credit operations of the banking system, the BSP
2. loans, credit accommodations and guarantees requires all banks to maintain reserves against
extended by a cooperative bank to its their deposit and deposit-substitute liabilities.
cooperative shareholders (Sec. 36, GBL) b. As a ready source of funds that will respond to
unusually large number of withdrawals or
Requirements for valid insider lending (Sec. 36, preterminations of deposits or deposit-
GBL): substitutes, taking in the shape of a bank run.
a. in the regular course of business ; (MORALES, The Philippine General Banking Law,
b. upon terms not less favorable to the bank than Opinion)
those offered to others;
c. there is a written approval of the majority of all Two types of reserves:
the directors of the bank, excluding the director a. Statutory legal reserve
concerned; 10% for deposits and deposit substitutes (BSP
(Except: granted to officers under a fringe Circular No. 491 dated July 12, 2005)
benefit plan approved by the BSP;
d. the required approval shall be entered upon the For deposit-substitutes evidenced by repurchase
record of the bank and a copy of such entry agreements covering government securities: 2%
shall be transmitted forthwith to the (BSP Circular No. 444 dated August 18, 2004)
appropriate supervising and examining
department of the BSP; For foreign currency deposit units: 100% (BSP
e. limited to an amount equivalent to the DOSRI Circular No. 1389 dated April 13, 1993, as
borrower‘s unencumbered deposits and book amended); 30% of this cover must be in the form
value of his paid-in capital contribution in the of liquid assets (BSP Circular-Letter dated June
bank 6, 1997, as cited in MORALES)

Exceptions b. Liquidity reserve

1. non-risk items; and 11% (BSP Circular No. 491). This consists of
2. loans in the form of fringe benefits. deposits placed in the Reserve Deposit Account
with the BSP for at least 3 months (BSP Circular
 A DOSRI borrower is required to waive the No. 539 dated August 9, 2006)
secrecy of his ―deposits of whatever nature in
all banks in the Philippines.‖ (Sec. 26, NCBA) The BSP shall not pay interest on the reserves
maintained with it unless the Monetary Board
Purpose: decides otherwise as warranted by circumstances.
The general policy behind DOSRI rules is to level the (Sec. 94, NCBA)
lending field between the ―insiders‖ and the
―outsiders‖. The objective is to prevent the bank 6. PDIC Insurance
from becoming a captive source of finance for Banks are required to insure their deposit liabilities
DOSRI. (MORALES, The Philippine General Banking with the PDIC.
Law, Opinion)
Partial Insurance:
4. Loan-Loss Provisioning (Sec. 49, GBL) Each depositor is a beneficiary of the insurance for a
maximum amount of P500,000, or its foreign
The following are subject to regulation by the currency equivalent in the case of an FCDU deposit.
Monetary Board: (RA 9576, 2009)
a. the amount of reserves for bad debts or
doubtful accounts or other contingencies; and NOTE—
b. the writing off of loans, other credit PDIC only insures deposit (not deposit substitutes)
accommodations, advances and other assets. liabilities of a bank or banking institution which is
engaged in the business of receiving deposits, or
Purpose: which thereafter may engage in the business of
For effective banking supervision. There is a problem receiving deposits (Sec.5, RA 3591, as amended)
of mismatch when a loan becomes non-performing.
The bank is paying interest on the money it Purpose:
borrowed from the depositors or other placers of Full insurance might encourage risky banking
funds, but is not recouping that interest from the activities. A limited insurance of bank deposits
loan it made. Eventually, the bank may have to serves to limit moral hazard.
write off loan losses against profits. To cushion this
 MERCANTILE LAW REVIEWER

I. Penalties for violation

(a) Fine not exceeding Thirty thousand pesos
(P30,000) a day for each violation, taking into
Violation of any of the provisions of the GBL shall be consideration the attendant circumstances, such 153
subject to Sections 34, 35, 36 and 37 of the New as the nature and gravity of the violation or
Central Bank Act, unless otherwise provided under irregularity and the size of the bank or quasi-
therein. bank; or
1. Fine, Imprisonment (b) Suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;
Criminal Sanctions
a. Refusal by an institution subject to
(c) Suspension of lending or foreign exchange
examination and supervision by the Monetary
operations or authority to accept new deposits or
Board to file the required report or permit make new investments;
any lawful examination into its affairs (Sec.
34, NCBA) (d) Suspension of interbank clearing privileges;
and/or
Fine: Not less than Fifty thousand pesos
(P50,000) nor more than One hundred thousand (e) Revocation of quasi-banking license.
pesos (P100,000); or
2. Suspension or Removal of Director
Imprisonment: Not less than one (1) year nor
more than five (5) years; or
If the offender is a director or officer of a bank,
quasi-bank or trust entity, the Monetary Board may
Both fine and imprisonment, in the discretion
also suspend or remove such director or officer (Sec.
of the Court. 66, GBL).

Resignation or termination from office shall not

2. Willful making of a false or misleading exempt such director or officer from
statement on a material fact to the Monetary administrative or criminal sanctions. (Sec. 37, NCBA)
Board or to the examiners of the Bangko
Sentral (Sec. 35, NCBA) 3. Dissolution of Bank
Fine: Not less than One hundred thousand  If the violation is committed by a corporation,
pesos (P100,000) nor more than One hundred
such corporation may be dissolved by quo
thousand pesos (P200,000); or
warranto proceedings instituted by the Solicitor
General (Sec. 66, GBL)
Imprisonment: Not more than five (5) years; or

Both fine and imprisonment, in the discretion  Whenever a bank or quasi-bank persists in
of the Court. carrying on its business in an unlawful or unsafe
manner, the Monetary Board may commence
3. Willful violation of the NCBA and other proceedings in liquidation. (Sec. 36, NCBA in
pertinent banking laws (including the GBL) relation to Sec. 30, NCBA)
being enforced or implemented by the
Bangko Sentral or any order, instruction, rule IV. Philippine Deposit Insurance
or regulation issued by the Monetary Board
(Sec. 36, NCBA) Corporation Act (RA 3591, as
amended)
Fine: Not less than Fifty thousand pesos
(P50,000) nor more than One hundred thousand A.. BASIC POLICY
pesos (P200,000); or B.. CONCEPT OF INSURED DEPOSITS
C.. LIABILITY OF DEPOSITORS
Imprisonment: Not less than two (2) years nor
more than ten (10) years; or A. Basic Policy
Both fine and imprisonment, in the discretion Promote and safeguard the interests of the
of the Court. depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits
Administrative Sanctions (Sec. 1, as amended)
1. Willful violation of its charter or by-laws; willful
delay in the submission of reports or
publications thereof as required by law, rules
B. Concept of Insured Deposits
and regulations; Criminal Acts in Nos. 1 to 3
above; and/or conducting business in an unsafe Insured deposit means the amount due to any bona
or unsound manner as may be determined by fide depositor for legitimate deposits in an insured
the Monetary Board bank net of any obligation of the depositor to the
 MERCANTILE LAW REVIEWER

insured bank as of the date of closure, but not to by the Corporation, in consultation with the
exceed 500,000 (Sec. 4(g), as amended) BSP, after due notice and hearing, and
154 publication of a cease and desist order issued by
C. Liability of Depositors the Corporation against such deposit accounts or
transactions; and
1. Deposit Liabilities Required to be Insured with (4) Deposits that are determined to be the
PDIC proceeds of an unlawful activity as defined
under republic act 9160, as amended.
The deposit liabilities of any bank or banking
institution, which is engaged in the business of
NOTE—
receiving deposits on the effective date of this
‗Unlawful Activity‘ refers to any act or omission
Act, or which thereafter may engage in the
or series or combination thereof involving or
business of receiving deposits, shall be insured
having direct relation to following:
with the Corporation (Sec. 5)
1) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
NOTE— Revised Penal Code, as amended;
‗Bank' and 'Banking Institution' shall include 2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
banks, commercial banks, savings bank, and 16 of Republic Act No. 9165, otherwise
mortgage banks, rural banks, development known as the Comprehensive Dangerous
banks, cooperative banks, stock savings and loan
Act of 2002;
associations and branches and agencies in the
3) Section 3 paragraphs B, C, E, G, H and I of
Philippines of foreign banks and all other
republic Act No. 3019, as amended,
corporations authorized to perform banking otherwise known as the Anti-Graft and
functions in the Philippines (Sec. 4(b), as Corrupt Practices Act;
amended) 4) Plunder under Republic Act No. 7080, as
amended;
‗Deposit‘ means the unpaid balance of money or 5) Robbery and extortion under Articles 294,
its equivalent received by a bank in the usual 295, 296, 299, 300, 301 and 302 of the
course of business and for which it has given or Revised Penal Code, as amended;
is obliged to give credit to a commercial, 6) Jueteng and Masiao punished as illegal
checking, savings, time or thrift account, or gambling under Presidential Decree No.
issued in accordance with Bangko Sentral rules
1602;
and regulations and other applicable laws,
7) Piracy on the high seas under the Revised
together with such other obligations of a bank,
Penal Code, as amended and Presidential
which, consistent with banking usage and under the Revised Penal Code, as amended
practices, the Board of Directors shall determine and Presidential Decree No. 532;
and prescribe by regulations to be deposit 8) Qualified theft under Article 310 of the
liabilities of the bank (Sec. 4(f), as amended). Revised penal Code, as amended;
9) Swindling under Article 315 of the Revised
What is not considered a deposit? Penal Code, as amended;
Any obligation of a bank which is payable at the 10) Smuggling under Republic Act Nos. 455 and
office of the bank located outside of the 1937;
Philippines (Sec. 4(f), as amended). 11) Violations under Republic Act No. 8792,
otherwise known as the Electronic
2. Commencement of Liability Commerce Act of 2000;
12) Hijacking and other violations under
Liability commences upon the approval of Republic Act No. 6235; destructive arson
application. and murder, as defined under the Revised
Penal Code, as amended, including those
3. Deposit Account not Entitled to Payment perpetrated by terrorists against non-
combatant persons and similar targets;
The Corporation shall not pay deposit insurance 13) Fraudulent practices and other violations
for the following accounts or transactions, under Republic Act No. 8799, otherwise
whether denominated, documented, recorded known as the Securities Regulation Code of
or booked as deposit by the bank: 2000;
14) (14) Felonies or offenses of a similar
(1) Investment products such as bonds and nature that are punishable under the penal
securities, trust accounts, and other similar laws of other countries (Sec. 3(i) of R.A.
instruments; 9160, as amended).
(2) Unfunded, fictitious or fraudulent deposit
accounts or transactions; 4. Extent of Liability
(3) Deposits accounts or transactions  Liability of the Corporation is to the extent of
constituting, and/or emanating from, unsafe
the insured deposit (Sec.14)
and unsound banking practice/s, as determined
 MERCANTILE LAW REVIEWER

Whenever an insured bank shall have been b. Joint Accounts

closed by the Monetary Board pursuant to
Section 30 of R.A. 7653, payment of the insured A joint account regardless of whether the
deposits on such closed bank shall be made by conjunction 'and,' 'or,' 'and/or' is used, shall be 155
the Corporation as soon as possible either (1) by insured separately from any individually-owned
cash or (2) by making available to each deposit account (Sec. 4(g), as amended).
depositor a transferred deposit in another
insured bank in an amount equal to insured
deposit of such depositor (Sec. 14). i. If the account is held by two or more
natural persons or two or more juridical
NOTE— persons
Insured deposit shall not exceed 500,000 (Sec.
4(g), as amended)  General Rule
The maximum insured deposit shall be
5. Determination of Insured Deposit divided into as many equal shares as
there are individuals or juridical
The determination of insured deposits shall persons (Sec. 4(g), as amended).
commence upon the Corporation‘s actual
takeover of the closed bank (Sec. 16(a), as  Exception
amended). Unless a different sharing is stipulated
in the document of deposit (Sec. 4(g),
The amount of the insured deposit shall be as amended).
determined according to such regulations as the
Board of Directors may prescribe, In determining i. If the account is held by a juridical person
such amount due to any depositor, there shall or entity jointly with one or more natural
be added together all deposits in the bank persons
maintained in the same right and capacity for
his benefits either in his own name or in the The maximum insured deposits shall be
name of others (Sec. 4(g), as amended). presumed to belong entirely to such juridical
person or entity (Sec. 4(g), as amended).
NOTE—
The Corporation may require proof of claims to NOTE—
be filed before paying the insured deposits, and The aggregate of the interest of each co-
that in any case where the Corporation is not owner over several joint accounts, whether
satisfied as to the viability of a claim for an owned by the same or different combinations
insured deposit, it may require final of individuals, juridical persons or entities,
determination of a court of competent shall likewise be subject to the maximum
jurisdiction before paying such claim (Sec. 14) insured deposit of P500,000.00 (Sec. 4(g), as
amended).

 Notice and Publication Requirement: c. Mode of Payment

(1) The Corporation shall give notice to the Payment of the insured deposits on such closed
depositors of the closed bank of the insured bank shall be made by the Corporation as soon
deposits due them by whatever means as possible either:
deemed appropriate by the Board of (1) by cash;
Directors. (2) by making available to each depositor a
(2) The Corporation shall publish the notice transferred deposit in another insured
once a week for at least three (3) bank in an amount equal to insured
consecutive weeks in a newspaper of deposit of such depositor (Sec. 14)
general circulation or, when appropriate, in
a newspaper circulated in the community or NOTE—
communities where the closed bank or its ‗Transfer Deposit‘ means a deposit in an insured
branches are located (Sec. 16(a), as bank made available to a depositor by the
amended). Corporation as payment of insured deposit of such
depositor in a closed bank and assumed by another
6. Calculation of Liability insured bank (Sec. 4(h), as amended)

a. Per depositor, per capacity rule d. Effect of Payment of Insured Deposit

In determining the amount due to any depositor,  Discharge from Liability to the Depositor
there shall be added together all deposits in the The Corporation shall be discharged from
bank maintained in the same right and capacity liability upon payment under Sec. 14, ie:
for his benefits either in his own name or in the
name of others (Sec. 4(g), as amended) (1) Payment of an insured deposit to any
person by the Corporation;
 MERCANTILE LAW REVIEWER

(2) Payment of a transferred deposit to any (1) If he fails to claim the insured deposits
156 person by the new bank or by an insured within two (2) years from actual takeover of
bank in which a transferred deposit has the closed bank by the receiver; or
been made available (Sec.16(b), as
amended) (2) If he does not enforce his claim filed with
the corporation within two (2) years after
 Subrogation to All the Rights of the Depositor the two-year period to file a claim.

The Corporation, upon payment of any depositor BUT, all rights of the depositor against the
as provided for in Section 14 shall be closed bank and its shareholders or the
subrogated to all rights of the depositor receivership estate to which the Corporation
against the closed bank to the extent of such may have become subrogated, shall thereupon
payment. Such subrogation shall include the revert to the depositor.
right on the part of the Corporation to receive
the same dividends and payments from the Thereafter, the Corporation shall be discharged
proceeds of the assets of such closed bank and from any liability on the insured deposit (Sec.
recoveries on account of stockholders liability as 16(e), as amended)
would have been payable to the depositor on a
claim for the insured deposits.
Chapter V. Foreign Currency
BUT, the depositor shall retain his claim for any Deposit Act (RA 6426)
uninsured portion of his deposit (Sec. 15). A. CONFIDENTIALITY
B. PRIVILEGES
e. Payments of Insured Deposits as Preferred
Credit under Art. 2244 of the Civil Code
 The FCDA allowed any person to deposit, and
banks to accept deposit, any foreign currency
All payments by the Corporation of insured
acceptable as part of the Philippines‘
deposits in closed banks partake of the nature
international reserve.
of public funds, and as such, must be
considered a preferred credit similar to taxes
due to the National Government in the order of A. Confidentiality
preference under Article 2244 of the New Civil
Code (Sec. 15) All foreign currency deposits are declared as and
considered of an absolutely confidential nature and,
f. Failure to Settle Claim of Insured Depositor except upon the written permission of the depositor,
in no instance shall be examined, inquired or looked
 General Rule into by any person, government official, bureau or
Failure to settle the claim within six (6) office, whether judicial or administrative, or
months from the date of filing of claim for legislative or any other entity whether public or
insured deposit shall, upon conviction, private. (Sec. 8)
subject the directors, officers or employees
of the Corporation responsible for the delay The foreign currency deposits shall be exempt from
to imprisonment from six (6) months to one attachment, garnishment, or any other order or
(1) year. process of any court, legislative body, government
agency or any administrative body whatsoever. (Sec.
8)
 Exceptions
 Such failure was not due to grave Exceptions
abuse of discretion, gross 1. upon written permission of the depositor (Sec.
negligence, bad faith, or malice of 8, Foreign Currency Deposit Act ; Intengan vs CA
the directors, officers or ; 2002)
employees; or 2. upon order of a competent court in cases of
violation of the Anti-Money Laundering Act of
 The validity of the claim requires 2001 [as in the case of peso deposits, supra]
the resolution of issues of facts 3. during Bangko Sentral‘s periodic or special
and or law by another office, body examinations [as in the case of peso deposits,
or agency including the case supra], and
mentioned in the first proviso or by 4. disclosure of the Treasurer of the Philippines
Corporation together with such when the unclaimed balances law applies (Act
other office, body or agency. 3936, as amended by PD 679)
5. BSP/PDIC inquiry if there is a finding of unsafe
g. Failure of Depositor to Claim Insured Deposits and unsound banking practice (as in the case of
peso deposits, supra)
All rights of the depositor against the 6. In Salvacion vs. CB (1997), where a Filipino child
Corporation with respect to the insured deposit was raped by a foreigner, the SC allowed
shall be barred: garnishment of foreign currency deposits stating
 MERCANTILE LAW REVIEWER

: If we rule that the questioned Section 113 of

CB Circular No. 960 which exempts from
attachment, garnishment, or any other order or
process of any court, legislative body, 157
government agency or any administrative body
whatsoever, is applicable to a foreign transient,
injustice would result especially to a citizen
aggrieved by a foreign guest.

B. Privileges

1. Tax exemption – the FCD, including interests

and all other income or earnings of such
deposits, are exempt from any and all taxes
whatsoever if these deposits are made by non-
residents and irrespective of whether or not the
non-residents are engaged in trade or business
in the Philippines (Sec. 6 as amended). FCDs of
residents are subject to 7.5% withholding tax.

2. Exemption from attachment, garnishment or any

other order or process of any court, legislative
or administrative body, or government agency
whatsoever (Sec. 8)

EXC: The CA, upon application ex parte by the AMLC

and after determination that a probable cause exists
that any monetary instrument or property is in any
way related to an ―unlawful activity‖, the AMLC,
may freeze the account (Sec. 10, RA9160).
 MERCANTILE LAW REVIEWER

158

2012 UP LAW
BAR REVIEWER
MERCANTILE
Intellectual Property Law LAW
MERCANTILE LAW TEAM
BAR OPERATIONS COMMISSION 2012
2012
Subject Heads | Anna
EXECUTIVE COMMITTEE Katarina Rodriguez• Mickey
Ramon Carlo Marcaida |Commissioner Chatto
Raymond Velasco • Mara Kriska Chen |Deputy Commissioners
Barbie Kaye Perez |Secretary LAYOUT TEAM 2012
Carmen Cecilia Veneracion |Treasurer
Hazel Angeline Abenoja|Auditor Layout Artists | Alyanna
Apacible • Noel Luciano • RM
COMMITTEE HEADS Meneses • Jenin Velasquez •
Eleanor Balaquiao • Mark Xavier Oyales | Acads Mara Villegas • Naomi
Monique Morales • Katleya Kate Belderol • Kathleen Mae Tuason (D) • Rachel Quimpo • Leslie Octaviano •
Miranda (D) |Special Lectures Yas Refran • Cris Bernardino
Patricia Madarang • Marinella Felizmenio |Secretariat Layout Head| Graciello
Victoria Caranay |Publicity and Promotions Timothy Reyes
Loraine Saguinsin • Ma. Luz Baldueza |Marketing
Benjamin Joseph Geronimo • Jose Lacas |Logistics
Angelo Bernard Ngo • Annalee Toda|HR
Anne Janelle Yu • Alyssa Carmelli Castillo |Merchandise
Graciello Timothy Reyes |Layout
Charmaine Sto. Domingo • Katrina Maniquis |Mock Bar
Krizel Malabanan • Karren de Chavez |Bar Candidates’ Welfare
Karina Kirstie Paola Ayco • Ma. Ara Garcia |Events

OPERATIONS HEADS
Charles Icasiano • Katrina Rivera |Hotel Operations
Marijo Alcala • Marian Salanguit |Day-Operations
Jauhari Azis |Night-Operations
Vivienne Villanueva • Charlaine Latorre |Food
Kris Francisco Rimban • Elvin Salindo |Transpo
Paula Plaza |Linkages

UP LAW BAR OPERATIONS COMMISSION

 COMMERCIAL LAW REVIEWER

B. Differences between
Intellectual Property copyrights, trademarks and
MERCANTILE LAW patent 159
Letters of Credit I. Intellectual Property in general
Warehouse Receipts II. Patents Patentable Inventions: refer to any technical
Law III. Trademarks solution of a problem in any field of human activity,
Trust Receipts Law IV. Copyright which is new, involves an inventive step and is
Negotiable industrially applicable. It may be, or refer to, any
Instruments Law
V. Registration Flowcharts
product, process, or an improvement of any of the
Insurance Code foregoing. [Sec. 21, RA 8293] It is vested from the
Transportation Law issuance of letters of patent.
Corporation Law
Securities Regulation Trademark: any visible sign capable of distinguishing
Code the goods (trademark) or services (service mark) of
Banking and Finance an enterprise and shall include a stamped or marked
Intellectual Property container of goods. [Kho v. CA, et al. (2002)] It is
vested from registration.

Trade Name: the name or designation identifying or

I. Intellectual Property in General distinguishing an enterprise [Sec. 121.3, RA 8293]
A. Intellectual property Rights
Copyright: right granted by statute to the author or
B. Differences between copyrights, originator of literary, scholarly, scientific, or artistic
trademarks and patent productions, including computer programs. A
C. Technology transfer arrangements copyright gives him the legal right to determine how
D. International Conventions and Reciprocity the work is used and to obtain economic benefits
from the work. For example, the owner of a
A. Intellectual Property Rights copyright for a book or a piece of software has the
exclusive rights to use, copy, distribute, and sell
copies of the work, including later editions or
Intellectual Property versions of the work. If another person improperly
uses material covered by a copyright, the copyright
State Policies owner can obtain legal relief. [Rule 2, Copyright
1. To protect and secure the exclusive rights Safeguards and Regulations]
of scientists, inventors, artists and other
gifted citizens to their intellectual property Copyright is confined to literary and artistic works
and creations, particularly when beneficial which are original intellectual creations in the
to the people, for such periods as provided literary and artistic domain protected from the
in this Act. moment of their creation. [Kho v. CA, et al. (2002)]
2. To promote the diffusion of knowledge and It is vested from the moment of creation.
information for the promotion of national
development and progress and the common Other forms of Intellectual Property
good.
3. To streamline administrative procedures of
Geographic Indication
registering patents, trademarks and
copyright, to liberalize the registration on
One which identifies a good as originating in the
the transfer of technology, and to enhance
territory of a TRIPS member, or a region or locality
the enforcement of intellectual property
in that territory where a given quality, reputation or
rights in the Philippines. [Sec. 2, RA 8293]
other characteristic of a good is essentially
attributable to its geographical origin [Art. 22, TRIPS
Intellectual Property Rights under the Agreement]
Intellectual Property Code
1. Copyright; Industrial Design
2. Related Rights of copyright;
3. Trademarks and Service Marks; Any composition of lines or colors or any three-
4. Geographic Indications; dimensional form, whether or not associated with
5. Industrial Designs; lines or colors: Provided, that such composition or
6. Patents; form gives a special appearance to and can serve as
7. Layout-Designs (Topographies) of Integrated pattern for an industrial product or handicraft. [Sec.
Circuits; [Sec. 4, RA 8293] 112.1, RA 8293]
8. Protection of Undisclosed Information
[TRIPS Agreement].
 MERCANTILE LAW REVIEWER

Layout Design (Topography) of an Integrated which any owner of an intellectual property

Circuit right is otherwise entitled by this Act. [Sec. 3,
160 RA 8293]
Layout Design (Topography): The three-dimensional
disposition, however expressed, of the elements, at Reverse Reciprocity of Foreign Laws
least one of which is an active element, and of some Any condition, restriction, limitation, diminution,
or all the interconnections of an integrated circuit, requirement, penalty or any similar burden imposed
or such a three-dimensional disposition prepared for by the law of a foreign country on a Philippine
an integrated circuit intended for manufacture. national seeking protection of intellectual property
[Sec. 112.3, RA 8293] rights in that country, shall reciprocally be
enforceable upon nationals of said country, within
Integrated Circuit: a product, in its final form, or an Philippine jurisdiction. [Sec. 231, RA 8293]
intermediate form, in which the elements, at least
one of which is an active element and some or all of Philip Morris v. Fortune Tobacco (2006). True, the
the interconnections are integrally formed and/or on Philippines’ adherence to the Paris
a piece of material, and which is intended to Convention effectively obligates the country to
perform an electronic function. [Sec. 112.2, RA honor and enforce its provisions as regards the
8293] protection of industrial property of foreign
nationals in this country. However, any protection
Undisclosed Information accorded has to be made subject to the limitations
of Philippine laws. Hence, despite Article 2 of the
Information which: Paris Convention which substantially provides that
1. Is a secret in a sense that it is not, as a (1) nationals of member-countries shall have in this
body or in the precise configuration and country rights specially provided by the Convention
assembly of components, generally known as are consistent with Philippine laws, and enjoy the
among or readily accessible to persons privileges that Philippine laws now grant or may
within the circles that normally deal with hereafter grant to its nationals, and (2) while no
the kind of information in question; domicile requirement in the country where
2. Has a commercial value because it is secret; protection is claimed shall be required of persons
and entitled to the benefits of the Union for the
3. Has been subject to reasonable steps under enjoyment of any industrial property rights, foreign
the circumstances, by the person lawfully in nationals must still observe and comply with the
control of the information, to keep it secret conditions imposed by Philippine law on its
[Art. 39, TRIPS] nationals.

Principles under the TRIPS Agreement:

C. Technology Transfer
Arrangement 1. National Treatment: It is a principle which
states that each member of the WTO must
Refers to contracts or agreements involving: treat the nationals of every other member
1. the transfer of systematic knowledge for as favorably as its own with respect to
the manufacture of a product intellectual property, i.e. no discrimination
2. the application of a process, or rendering of may be made against foreign nationals of
a service including management contracts; members.[Art. 3, TRIPS]
3. the transfer, assignment or licensing of all
forms of intellectual property rights, 2. Most-favored Nation Treatment: It requires
including licensing of computer software that each member give other members‘
except computer software developed for nationals the same treatment as its own,
mass market. [Sec. 4.2, RA 8293] but that each member should not prefer
any other member‘s nationals or those of
any non0member country, over the
D. International Conventions and nationals of any member.[Art.4,TRIPS]
Reciprocity
3. Exhaustion of First Sale Doctrine: The term
Reciprocity Rule generally refers to doctrine that extinguish
Any person who is a national or who is domiciled or certain exclusive rights of the holder of
has a real and effective industrial establishment in a intellectual property with respect to a
country which: particular physical item embodying the
1. is a party to any convention, treaty or intellectual property after the item has first
agreement relating to intellectual property been sold under the holder‘s authority. The
rights or the repression of unfair competition, TRIPS Agreement explicitly disclaims in
to which the Philippines is also a party, or Article 6 an intent to impose any particular
2. extends reciprocal rights to nationals of the requirements regarding the issue of the
Philippines by law, shall be entitled to exhaustion of intellectual property rights,
benefits to the extent necessary to give effect thus, members of the WTO are free to
to any provision of such convention, treaty or implement exhaustion of intellectual
reciprocal law, in addition to the rights to
 COMMERCIAL LAW REVIEWER

property rights as they please. [Art.6 in the application during the 12 months
subject to Arts. 3 and 4, TRIPS] preceding the filing date or the priority
date of the application shall not
prejudice the applicant on the ground of 161
lack of novelty if such disclosure was
II. Patents made by:
A. Patentable Inventions 1. The inventor
2. A patent office and the
B. Non-patentable Inventions
information contained (1) in
C. Ownership of a Patent another application filed by the
D. Cancellation of a Patent inventor and should not have been
E. Remedy of the True and Actual Inventor disclosed by the office, or (2) in an
F. Rights conferred by a Patent application filed without the
G. Limitations on Rights of Patentees knowledge or consent of the
H. Patent Infringement inventor by a third party which
I. Licensing obtained the information directly
J. Assignment and Transmission of Rights or indirectly from the inventor
3. A third party which obtained the
information directly or indirectly
A. Patentable Inventions from the inventor [Sec. 25, RA
8293]
A patentable invention is any technical solution of
a problem in any field of human activity which is b. Inventive Step - An invention involves an
new, involves an inventive step and is industrially inventive step if, having regard to prior
applicable shall be Patentable. It may be, or may art, it is not obvious to a person skilled
relate to, a product, or process, or an in the art at the time of the filing date
improvement of any of the foregoing. [Sec. 21, RA or priority date of the application
8293] claiming the invention. [Sec. 26.1, RA
8293, as amended by RA 9502]
1. Invention Patent
Cheaper Medicines Act: In case of drugs
and medicines, there is no inventive
Standards:
step if the invention results from the
a. Novelty - An invention shall not be
mere discovery of a new form or new
considered new if it forms part of a prior
property of a known substance which
art. [Sec. 23, RA 8293]
does not result in enhancement of the
known efficacy of that substance, or the
Prior art shall consist of:
mere discovery of any new property or
i. Everything which has been made
new use of a known substance or the
available to the public anywhere in
mere use of a known process unless such
the world, before the filing date or
known process results in a new product
the priority date of the application
that employs at least one reactant. [Sec.
claiming the invention; [Sec. 24.1,
26.2, RA 8293 as amended by RA 9502]
RA 8293]
ii. The whole contents of an application
c. Industrial Applicability - An invention
for a patent, utility model, or
that can be produced and used in any
industrial design registration,
industry shall be industrially applicable.
published in accordance with this
[Sec. 27, RA 8293]
Act, filed or effective in the
Philippines, with a filing or priority
date that is earlier than the filing or 2. Utility Model
priority date of the application:
Provided, That the application which It is any technical solution of a problem in any field
has validly claimed the filing date of of human activity which is new and industrially
an earlier application under Section applicable. Unlike an invention patent, a utility
31 of this Act, shall be prior art with model need not be inventive. The law merely
effect as of the filing date of such requires that it be novel and industrially applicable.
earlier application: Provided further, [Sec. 109.1, RA 8293]
That the applicant or the inventor
identified in both applications are A utility model registration shall expire, without any
not one and the same. [Sec. 24.2, RA possibility of renewal, at the end of the seventh year
8293] after the date of the filing of the application. [Sec.
109.3, RA 8293]
Non-Prejudicial Disclosures: This is an
exception to the General Rule on Prior Statutory Classes of Utility Models
Art under Sec. 24. It provides that the
disclosure of the information contained A Utility Model may be, or may relate to:
 MERCANTILE LAW REVIEWER

a. A useful machine; substance, or the mere use of a known

b. An implement or tool; process unless such known process results in
162 c. A product or composition; a new product that employs at least one
d. A method or process; or new reactant.
e. An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on Utility Salts, esters, ethers, polymorphs,
Models and Industrial Designs as amended] metabolites, pure form, particle size,
isomers, mixtures of isomers, complexes,
Grounds for Cancellation of Utility Models combinations, and other derivatives of a
known substance shall be considered to be
a. That the claimed invention does not qualify the same substance, unless they differ
for registration as a utility model and does significantly in properties with regard to
not meet the requirements of registrability; efficacy; [Sec. 22.1, RA 8293 as amended by
b. That the description and the claims do not RA 9502]
comply with the prescribed requirements;
c. That any drawing which is necessary for the 2. Schemes, rules and methods of performing
understanding of the invention has not been mental acts, playing games or doing
furnished; business, and programs for computers; [Sec.
d. That the owner of the utility model 22.2, RA 8293]
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293] 3. Methods for treatment of the human or
animal body by surgery or therapy and
3. Industrial Design diagnostic methods practiced on the human
or animal body. This provision shall not
An industrial design is any composition of lines or apply to products and composition for use
colors or any three-dimensional form, whether or in any of these methods; [Sec. 22.3, RA
not associated with lines or colors: Provided that 8293]
such composition or form gives a special appearance
to and can serve as pattern for an industrial product 4. Plant varieties or animal breeds or
or handicraft. [Sec. 112.1, RA 8293 as amended by essentially biological process for the
RA 9150] production of plants or animals. This
provision shall not apply to micro-organisms
and non-biological and microbiological
4. Lay-out Designs (Topographies) of processes; [Sec. 22.4, RA 8293]
Integrated Circuits
5. Aesthetic creations; [Sec. 22.5, RA 8293]
Integrated Circuit means a product, in its final
form, or an intermediate form, in which the 6. Anything which is contrary to public order
elements, at least one of which is an active element or morality. [Sec. 22.6, RA 8293]
and some or all of the interconnections are
integrally formed in and/or on a piece of material, Cheaper Medicines Act: In addition to discoveries,
and which is intended to perform an electronic scientific theories and mathematical methods, the IP
function. [Sec. 112.2, RA 8293 as amended by RA Code now includes, in case of drugs and medicines:
9150] 1. The mere discovery of a new form or new
property of a known substance which does
Layout-Design is synonymous with 'Topography' and not result in the enhancement of the known
means the three-dimensional disposition, however efficacy of that substance
expressed, of the elements, at least one of which is 2. the mere discovery of any new property or
an active element, and of some or all of the new use of a known substance
interconnections of an integrated circuit, or such a 3. the mere use of a known process unless
three-dimensional disposition prepared for an such known process results in a new product
integrated circuit intended for manufacture. [Sec. that employs at least one reactant [Sec.
112.3, RA 8293 as amended by RA 9150] 26.2, RA 8293 as amended by RA 9502]

B. Non-patentable Inventions C. Ownership of a Patent

The following shall be excluded from patent
protection: 1. Right to a Patent
1. Discoveries, scientific theories and General Rule: The right to patent belongs to the
mathematical methods, and in the case of inventor, his heirs, or assigns. When two (2) or more
drugs and medicines, the mere discovery of persons have jointly made an invention, the right to
a new form or new property of a known a patent shall belong to them jointly. [Sec.28, RA
substance which does not result in the 8293]
enhancement of the known efficacy of that
substance, or the mere discovery of any Exception: Inventions created pursuant to a
new property or new use for a known commission (Work for Hire Doctrine)
 COMMERCIAL LAW REVIEWER

i. The employer has the right to the patent if a. That what is claimed as the invention is not
the invention is the result of the new or patentable;
performance of the employee‘s regularly b. That the patent does not disclose the
assigned duties [Sec. 30.2, RA 8293] invention in a manner sufficiently clear and 163
ii. In case of inventions created pursuant to a complete for it to be carried out by any
commission, the person who commissions person skilled in the art; or
the work shall own the patent [Sec. 30.1, c. That the patent is contrary to public order
RA 8293] or morality. [Sec. 61.1, RA 8293]

2. First-to-file Rule Where the grounds for cancellation relate to some of

the claims or parts of the claim, cancellation may be
If two (2) or more persons have made the invention effected to such extent only. [Sec. 61.2, RA 8293]
separately and independently of each other, the
right to the patent shall belong to the person who 2. Requirement of the Petition
filed an application for such invention, or where two
or more applications are filed for the same The petition for cancellation shall be in writing,
invention, to the applicant who has the earliest verified by the petitioner or by any person in his
filing date or, the earliest priority date. [Sec. 29, RA behalf who knows the facts, specify the grounds
8293] upon which it is based, include a statement of the
facts to be relied upon, and filed with the Office.
3. Inventions created pursuant to a Copies of printed publications or of patents of other
Commission countries, and other supporting documents
mentioned in the petition shall be attached thereto,
together with the translation thereof in English, if
Commission: Person who commissions the work shall
not in English language. [Sec. 62, RA 8293]
own the patent, unless otherwise provided in the
contract [Sec. 30.1, RA 8293]
3. Notice of Hearing
Employment Contract: Patent belongs to the
employee if the inventive activity is not a part of his Upon filing of a petition for cancellation, the
regular duties even if the employee uses the time, Director of Legal Affairs shall forthwith serve notice
facilities and materials of the employer. [Sec. of the filing thereof upon the patentee and all
30.2(a), RA 8293] persons having grants or licenses, or any other right,
title or interest in and to the patent and the
Patent belongs to the employer if the invention is invention covered thereby, as appears of record in
the result of the performance of his regularly- the Office, and of notice of the date of hearing
assigned duties, unless there is an agreement, thereon on such persons and the petitioner. Notice
express or implied, to the contrary. [Sec. 30.2(b), RA of the filing of the petition shall be published in the
8293] IPO Gazette. [Sec. 63, RA 8293]

4. Right of priority 4. Effect of Cancellation of Patent or

Claim.
An application for patent filed by any person who
has previously applied for the same invention in The rights conferred by the patent or any specified
another country which by treaty, convention, or law claim or claims cancelled shall terminate. Notice of
affords similar privileges to Filipino citizens, shall be the cancellation shall be published in the IPO
considered as filed as of the date of filing the Gazette. Unless restrained by the Director General,
foreign application: Provided, That: (a) the local the decision or order to cancel by Director of Legal
application expressly claims priority; (b) it is filed Affairs shall be immediately executory even pending
within twelve (12) months from the date the earliest appeal. [Sec. 66, RA 8293]
foreign application was filed; and (c) a certified
copy of the foreign application together with an E. Remedy of the True and Actual
English translation is filed within six (6) months from
the date of filing in the Philippines. [Sec. 31, RA Inventor
8293]
If a person, who was deprived of the patent without
his consent or through fraud is declared by final
D. Cancellation of a Patent court order or decision to be the true and actual
inventor, the court shall order for his substitution as
1. Grounds for Cancellation of Patent patentee, or at the option of the true inventor,
cancel the patent, and award actual and other
Any interested person may, upon payment of the damages in his favor if warranted by the
required fee, petition to cancel the patent or any circumstances. [Sec. 68, RA 8293]
claim thereof, or parts of the claim, on any of the
following grounds: Time to file action in court: The actions indicated in
Sections 67 and 68 shall be filed within one (1) year
from the date of publication made in accordance
 MERCANTILE LAW REVIEWER

with Sections 44 and 51, respectively. [Sec. 70, RA after that product has been so put on the
8293] said market: Provided, That, with regard to
164 drugs and medicines, the limitation on
Remedy of persons not having the right to a patent rights shall apply after a drug or
patent: If a person other than the applicant, is medicine has been introduced in the
declared by final court order or decision as having Philippines or anywhere else in the world by
the right to the patent, such person may, within the patent owner, or by any party
three (3) months after the decision has become authorized to use the invention: Provided,
final: further, That the right to import the drugs
1. Prosecute the application as his own and medicines contemplated in this section
application in place of the applicant; shall be available to any government agency
2. File a new patent application in respect of or any private third party; [Sec. 72.1, RA
the same invention; 8293 as amended by RA 9502]
3. Request that the application be refused; or
4. Seek cancellation of the patent, if one has b. Where the act is done privately and on a
already been issued. [Sec. 67, RA 8293] non-commercial scale or for a non-
commercial purpose: Provided, That it does
not significantly prejudice the economic
F. Rights conferred by a Patent interests of the owner of the patent; [Sec.
72.2, RA 8293 as amended by RA 9502]
A patent shall confer on its owner the following
exclusive rights: c. Where the act consists of making or using
1. Where the subject matter of a patent is a exclusively for experimental use of the
product, to restrain, prohibit and prevent any invention for scientific purposes or
unauthorized person or entity from making, educational purposes and such other
using, offering for sale, selling or importing activities directly related to such scientific
that product. [Sec. 71.1(a), RA 8293] or educational experimental use; [Sec.
72.3, RA 8293 as amended by RA 9502]
2. Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any d. In the case of drugs and medicines, where
unauthorized person or entity from using the the act includes testing, using, making or
process, and from manufacturing, dealing in, selling the invention including any data
using, selling or offering for sale, or importing related thereto, solely for purposes
any product obtained directly or indirectly reasonably related to the development and
from such process. [Sec. 71.1(b), RA 8293] submission of information and issuance of
approvals by government regulatory
3. Patent owners shall also have the right to agencies required under any law of the
assign, or transfer by succession the patent, Philippines or of another country that
and to conclude licensing contracts for the regulates the manufacture, construction,
same. ( Sec. 71.2, RA 8293] use or sale of any product: Provided, That,
in order to protect the data submitted by
To be able to effectively and legally preclude the original patent holder from unfair
others from copying and profiting from the commercial use provided in Article 39.3 of
invention, a patent is a primordial requirement. the Agreement on Trade-Related Aspects of
No patent, no protection. The ultimate goal of a Intellectual Property Rights (TRIPS
patent system is to bring new designs and Agreement), the Intellectual Property
technologies into the public domain through Office, in consultation with the appropriate
disclosure. Ideas, once disclosed to the public government agencies, shall issue the
without the protection of a valid patent, are appropriate rules and regulations necessary
subject to appropriation without significant therein not later than one hundred twenty
restraint. [Pearl Dean, Inc. v. Shoemart, (120) days after the enactment of this law;
Inc.(2003)] [Sec. 72.4, RA 8293 as amended by RA 9502]

G. Limitations on the Rights of e. Where the act consists of the preparation

for individual cases, in a pharmacy or by a
Patentees medical professional, of a medicine in
accordance with a medical shall apply after
1. Limitation on Patent Rights a drug or medicine has been introduced in
the Philippines or anywhere else in the
The owner of a patent has no right to prevent world by the patent owner, or by any party
third parties from performing, without his authorized to use the invention: Provided,
authorization, the acts referred to in Section 71 further, That the right to import the drugs
hereof in the following circumstances: and medicines contemplated in this section
shall be available to any government agency
a. Using a patented product which has been or any private third party; [Sec. 72.5, RA
put on the market in the Philippines by the 8293 as amended by RA 9502]
owner of the product, or with his express
consent, insofar as such use is performed
 COMMERCIAL LAW REVIEWER

There shall be no infringement of trademarks or of the patentee. [Sec 76.1, RA 8293 as amended by
tradenames of imported or sold drugs and medicines RA 9502]
allowed as well as imported or sold off-patent drugs
and medicines: Provided, That said drugs and Contributory Infringer: One who actively induces the 165
medicines bear the registered marks that have not infringement of a patent or provides the infringer
been tampered, unlawfully modified, or infringed. with a component of a patented product or of a
[Sec.159.4 RA 8293 as amended by RA 9502] product produced because of a patented process
knowing it to be especially adopted for infringing
2. Prior User and not suitable for substantial non-infringing. He is
jointly and severally liable with the infringer. [Sec.
Notwithstanding Section 72 hereof, any prior user, 76.6, RA 8293]
who, in good faith was using the invention or has
undertaken serious preparations to use the invention Doctrine of Patent Exhaustion: It espouses that the
in his enterprise or business, before the filing date patentee who has already sold his invention and has
or priority date of the application on which a patent received all the royalty and consideration for the
is granted, shall have the right to continue the use same will be deemed to have released the invention
thereof as envisaged in such preparations within the from his monopoly. The invention thus becomes
territory where the patent produces its effect. [Sec. open to use of the purchaser without further
73.1, RA 8293] restriction. [Adams v. Burke, in Notes on Selected
Commercial Laws, Catindig 2003 ed.]
The right of the prior user may only be transferred
or assigned together with his enterprise or business, 1. Tests in patent infringement
or with that part of his enterprise or business in
which the use or preparations for use have been a. Literal infringement
made. [Sec. 73.2, RA 8293]
In using literal infringement as a test, resort must be
3. Use by the government had in the first instance to the words of the claim.
To determine whether the particular item falls
A Government agency or third person authorized by within the literal meaning of the patent claims, the
the Government may exploit the invention even court must juxtapose the claims of the patent and
without agreement of the patent owner where: the accused product within the overall context of
the claims and specifications, to determine whether
a. the public interest, in particular, national there is exact identity of all material elements.
security, nutrition, health or the [Godinez v. CA (1993)]
development of other sectors, as
determined by the appropriate agency of b. Doctrine of equivalents
the government, so requires; [Sec. 74.1(a),
RA 8293] Under the doctrine of equivalents, an infringement
b. A judicial or administrative body has also occurs when a device appropriates a prior
determined that the manner of invention by incorporating its innovative concept
exploitation, by the owner of the patent or and, albeit with some modification and change,
his licensee, is anti-competitive. [Sec. performs substantially the same function in
74.1(b), RA 8293] substantially the same way to achieve substantially
the same result. [Godinez v. CA (1993)]
The use by the Government, or third person
authorized by the Government shall be subject, In order to infringe a patent, a machine or device
mutatis mutandis, to the conditions set forth in must perform the same function, or accomplish the
Sections 95 to 97 and 100 to 102 on compulsory same result by identical or substantially identical
licensing. [Sec. 74.2, RA 8293] means and the principle or mode of operation must
be substantially the same. [Del Rosario v. CA (1996)]
All cases arising from the implementation of this
provision shall be cognizable by courts with The doctrine of equivalents provides that an
appropriate jurisdiction provided by law. No court infringement also takes place when a device
except the Supreme Court of the Philippines, shall appropriates a prior invention by incorporating its
issue any temporary restraining order or preliminary innovative concept and, although with some
injunction or such other provisional remedies that modification and change, performs substantially the
will prevent its immediate execution. [Sec. 74.3, RA same function in substantially the same way to
8293 as amended by RA 9502] achieve substantially the same result. The principle
or mode of operation must be the same or
H. Patent Infringement substantially the same. The doctrine of equivalents
thus requires satisfaction of the function-means-and-
result test, the patentee having the burden to show
It is the making, using, offering for sale, selling, or that all three components of such equivalency test
importing a patented product or a product obtained are met. [Smith Klein Beckman Corp. v. CA (2003)]
directly or indirectly from a patented process, or the
use of a patented process without the authorization
 MERCANTILE LAW REVIEWER

2. Remedies against Infringement If infringement is repeated by the infringer or by

anyone in connivance with him after finality of the
166 a. Civil Action for damages judgment of the court against the infringer, the
offenders shall, without prejudice to the institution
If the damages are inadequate or cannot be readily of a civil action for damages, be criminally liable
ascertained with reasonable certainty, the court therefore and, upon conviction, shall suffer
may award by way of damages a sum equivalent to imprisonment for the period of not less than six (6)
reasonable royalty. [Sec. 76.3, RA 8293] months but not more than three (3) years and/or a
fine of not less than One hundred thousand pesos
The court may, according to the circumstances of (P100,000) but not more than Three hundred
the case, award damages in a sum above the amount thousand pesos (P300,000), at the discretion of the
found as actual damages sustained: Provided, that court.
the award does not exceed three (3) times the
amount of such actual damages. [Sec. 76.4, RA 8293] Prescription: The criminal action herein provided
shall prescribe in three (3) years from date of the
Civil action for infringement shall not apply to commission of the crime. [Sec 84, RA 8293]
instances covered by the Limitations of Patent Rights
(Sec. 72); Use of Invention by Government (Sec. 74); 3. Defenses in action for
Compulsory Licensing (Sec. 93.6); and Procedures on infringement
Issuance of a Special Compulsory License under the
TRIPS Agreement (Sec. 93-A). [Sec.76.1, RA 8293 as In an action for infringement, the defendant, in
amended by RA 9052] addition to other defenses available to him, may
show the invalidity of the patent, or any claim
Notice Requirement: Damages cannot be recovered thereof, on any of the grounds on which a petition of
for acts of infringement committed before the cancellation can be brought under Section 61. [Sec
infringer had known, or had reasonable grounds to 81, RA 8293]
know of the patent. It is presumed that the infringer
had known of the patent. [Sec. 80, RA 8293] Patent found invalid may be cancelled: In an action
for infringement, if the court shall find the patent or
Infringement Action by a Foreign National: Any any claim to be invalid, it shall cancel the same, and
foreign national or juridical entity who meets the the Director of Legal Affairs upon receipt of the final
requirements of Section 3 and not engaged in judgment of cancellation by the court, shall record
business in the Philippines, to which a patent has that fact in the register of the Office and shall
been granted or assigned under this Act, may bring publish a notice to that effect in the IPO Gazette.
an action for infringement of patent, whether or not [Sec 82, RA 8293]
it is licensed to do business in the Philippines under
existing law. [Sec.77, RA 8293] Doctrine of File Wrapper Estoppel: Patentee is
precluded from claiming as part of patented product
Prescription: No damages can be recovered for acts that which he had to excise or modify in order to
of infringement committed more than four (4) years avoid patent office rejection, and he may omit any
before the institution of the action for infringement. additions he was compelled to add by patent office
[Sec. 79, RA 8293] regulations. [Advance Transformer Co. v. Levinson
837 F.2d 1081(1988)]
b. Injunction
I. Licensing
Any patentee, or anyone possessing any right, title
or interest in and to the patented invention, whose
rights have been infringed, may bring a civil action 1. Voluntary Licensing
before a court of competent jurisdiction, to recover
from the infringer such damages sustained thereby, Voluntary Licensing is the grant by the patent owner
plus attorney‘s fees and other expenses of litigation, to a third person of the right to exploit the patented
and to secure an injunction for the protection of his invention. [Sec. 85, RA 8293]
rights. [Sec. 76.2, RA 8293]
Mandatory Provisions
c. Destruction or disposal of infringing
goods The following provisions shall be included in
voluntary license contracts:
The court may, in its discretion, order that the
infringing goods, materials and implements a. That the laws of the Philippines shall govern
predominantly used in the infringement be disposed the interpretation of the same and in the
of outside the channels of commerce or destroyed, event of litigation, the venue shall be the
without compensation. [Sec. 76.5, RA 8293] proper court in the place where the
licensee has its principal office; [Sec. 88.1,
d. Criminal Action for repeated RA 8293]
infringement
b. Continued access to improvements in
techniques and processes related to the
 COMMERCIAL LAW REVIEWER

technology shall be made available during i. Those which restrict the use of the
the period of the technology transfer technology supplied after the expiration of
arrangement; [Sec. 88.2, RA 8293] the technology transfer arrangement,
except in cases of early termination of the 167
c. In the event the technology transfer technology transfer arrangement due to
arrangement shall provide for arbitration, reason(s) attributable to the licensee; [Sec.
the Procedure of Arbitration of the 87.9, RA 8293]
Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations j. Those which require payments for patents
Commission on International Trade Law and other industrial property rights after
(UNCITRAL) or the Rules of Conciliation and their expiration, termination arrangement;
Arbitration of the International Chamber of [Sec. 87.10, RA 8293]
Commerce (ICC) shall apply and the venue
of arbitration shall be the Philippines or any k. Those which require that the technology
neutral country; [Sec. 88.3, RA 8293] recipient shall not contest the validity of
any of the patents of the technology
d. The Philippine taxes on all payments supplier; [Sec. 87.11, RA 8293]
relating to the technology transfer
arrangement shall be borne by the licensor. l. Those which restrict the research and
[Sec. 88.4, RA 8293] development activities of the licensee
designed to absorb and adapt the
Prohibited clauses transferred technology to local conditions
or to initiate research and development
The following provisions shall be deemed prima facie programs in connection with new products,
to have an adverse effect on competition and trade: processes or equipment; [Sec. 87.12, RA
8293]
a. Those which impose upon the licensee the
obligation to acquire from a specific source m. Those which prevent the licensee from
capital goods, intermediate products, raw adapting the imported technology to local
materials, and other technologies, or of conditions, or introducing innovation to it,
permanently employing personnel indicated as long as it does not impair the quality
by the licensor; [Sec. 87.1, RA 8293] standards prescribed by the licensor; [Sec.
87.13, RA 8293]
b. Those pursuant to which the licensor
reserves the right to fix the sale or resale n. Those which exempt the licensor for
prices of the products manufactured on the liability for non-fulfillment of his
basis of the license; [Sec. 87.2, RA 8293] responsibilities under the technology
transfer arrangement and/or liability arising
c. Those that contain restrictions regarding from third party suits brought about by the
the volume and structure of production; use of the licensed product or the licensed
[Sec. 87.3, RA 8293] technology; [Sec. 87.14, RA 8293]

d. Those that prohibit the use of competitive o. Other clauses with equivalent effects. [Sec.
technologies in a non-exclusive technology 87.15, RA 8293]
transfer agreement; [Sec. 87.4, RA 8293]
Effect of Non-compliance with any provisions
e. Those that establish a full or partial of Secs. 87 and 88
purchase option in favor of the licensor;
[Sec. 87.5, RA 8293] The technology transfer arrangement shall
automatically be rendered unenforceable, unless
f. Those that obligate the licensee to transfer said technology transfer arrangement is approved
for free to the licensor the inventions or and registered with the Documentation, Information
improvements that may be obtained and Technology Transfer Bureau under the provisions
through the use of the licensed technology; of Section 91 on exceptional cases. [Sec. 92, RA
[Sec. 87.6, RA 8293] 8293]

g. Those that require payment of royalties to Right of Licensor: Unless otherwise provided in the
the owners of patents for patents which are technology transfer agreement, the licensor shall
not used; [Sec. 87.7, RA 8293] have the right to:
a. Grant further licenses to third person
h. Those that prohibit the licensee to export b. Exploit the subject matter of the
the licensed product unless justified for the technology transfer agreement [Sec. 89, RA
protection of the legitimate interest of the 8293]
licensor such as exports to countries where
exclusive licenses to manufacture and/or
distribute the licensed product(s) have
already been granted; [Sec. 87.8, RA 8293]
 MERCANTILE LAW REVIEWER

Right of the Licensee: To exploit the subject matter extent and on reasonable terms, as
of the technology transfer agreement during the determined by the Secretary of the
168 whole term of the agreement. [Sec. 90, RA 8293] Department of Health. [Sec. 93.6, RA 8293
as amended by RA 9502]
Exceptional cases
g. If the invention protected by a patent,
a. In exceptional or meritorious cases where hereafter referred to as the "second
substantial benefits will accrue to the patent," within the country cannot be
economy, such as high technology content, worked without infringing another patent,
increase in foreign exchange earnings, hereafter referred to as the "first patent,"
employment generation, regional dispersal granted on a prior application or benefiting
of industries and/or substitution with or use from an earlier priority, a compulsory
of local raw materials license may be granted to the owner of the
b. The case of BOI-registered companies with second patent to the extent necessary for
pioneer status [Sec. 91, RA 8293] the working of his invention, subject to
certain conditions. [Sec. 97, RA 8293]
2. Compulsory Licensing
h. Manufacture and export of drugs and
Compulsory Licensing is the grant of the Director of medicines to any country having insufficient
Legal Affairs of a license to exploit a patented or no manufacturing capacity in the
invention, even without the agreement of the patent pharmaceutical sector to address public
owner, in favor of any person who has shown his health problems: Provided, That, a
capability to exploit the invention. [Sec. 93, Ra 8293 compulsory license has been granted by
as amended by RA 9502] such country or such country has, by
notification or otherwise, allowed
Grounds importation into its jurisdiction of the
patented drugs and medicines from the
Philippines in compliance with the TRIPS
The Director General of the Intellectual Property
Agreement. [Sec. 93-A.2, RA 8293 as
Office may grant a license to exploit a patented
amended by RA 9502]
invention, even without the agreement of the patent
owner, in favor of any person who has shown his
Period of filing a Petition for Compulsory License: At
capability to exploit the invention, under any of the
any time after the grant of patent. However, a
following circumstances:
compulsory license may not be applied for on the
ground stated in Sec. 93.5 before the expiration of a
a. National emergency or other circumstances
period of four (4) years from the date of filing of the
of extreme urgency; [Sec. 93.1, RA 8293 as
application or three (3) years from the date of the
amended by RA 9502]
patent whichever period expires last. [Sec. 94, RA
8293 as amended by RA 9502]
b. Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the Requirement to Obtain a License on
national economy as determined by the Reasonable Commercial Terms
appropriate agency of the Government, so
requires; [Sec. 93.2, RA 8293 as amended General Rule: The license will only be granted after
by RA 9502] the petitioner has made efforts to obtain
authorization from the patent owner on reasonable
c. Where a judicial or administrative body has commercial terms and conditions but such efforts
determined that the manner of exploitation have not been successful within a reasonable period
by the owner of the patent or his licensee is of time. [Sec. 95.1, RA 8293 as amended by RA 9502]
anti-competitive; ; [Sec. 93.3, RA 8293 as
amended by RA 9502] Exceptions: The requirement of authorization shall
not apply in the following cases:
d. In case of public non-commercial use of the a. Where the petition for compulsory license
patent by the patentee, without seeks to remedy a practice determined
satisfactory reason; [Sec. 93.4, RA 8293 as after judicial or administrative process to
amended by RA 9502] be anti-competitive;
b. In situations of national emergency or other
e. If the patented invention is not being circumstances of extreme urgency;
worked in the Philippines on a commercial c. In cases of public non-commercial use.
scale, although capable of being worked, d. In cases where the demand for the patented
without satisfactory reason: Provided, That drugs and medicines in the Philippines is not
the importation of the patented article being met to an adequate extent and on
shall constitute working or using the patent; reasonable terms, as determined by the
[Sec. 93.5, RA 8293 as amended by RA 9502] Secretary of the Department of Health.
[Sec. 95.2, RA 8293 as amended by RA 9502]
f. Where the demand for patented drugs and
medicines is not being met to an adequate
 COMMERCIAL LAW REVIEWER

Terms and Conditions of Compulsory License Requirements for Recording of Assignment

a. The scope and duration of such license shall a. It must be in writing and accompanied by an
be limited to the purpose for which it was English translation, if it is in a language 169
authorized;[Sec. 100.1, RA 8293] other than English of Filipino
b. It must be notarized
b. The license shall be non-exclusive; [Sec. c. It must be accompanied by an appointment
100.2, RA 8293] of a resident agent, if the assignee is not
residing in the Philippines
c. The license shall be non-assignable, except d. It must identify the letters patent involved
with that part of the enterprise or business by number and date and give the name of
with which the invention is being exploited; the owner of the patent and the title of the
;[Sec. 100.3, RA 8293] invention. In the case of an application for
a patent, it should state the application
d. Use of the subject matter of the license number and the filing date of the
shall be devoted predominantly for the application and give the name of the
supply of the Philippine market: Provided, applicant and the title of the invention. If
that this limitation shall not apply where the assignment was executed concurrently
the grant of the license is based on the with or subsequent to the execution of the
ground that the patentee's manner of application but before the application is
exploiting the patent is determined by filed or before its application number is
judicial or administrative process, to be ascertained, it should adequately identify
anti-competitive. ;[Sec. 100.4, RA 8293] the application by its date of execution, the
name of the applicant, and the title of the
e. The license may be terminated upon proper invention.
showing that circumstances which led to its e. It must be accompanied by the required
grant have ceased to exist and are unlikely fees. [Sec. 105; Rules and Regulations on
to recur: Provided, That adequate Inventions, Rule 1200]
protection shall be afforded to the
legitimate interest of the licensee; ;[Sec. Effect of non-recording of assignment with
100.5, RA 8293] the IPO
f. The patentee shall be paid adequate The non-recording will not affect the binding
remuneration taking into account the agreement between the assignor and assignee.
economic value of the grant or However, such registration would be necessary to
authorization, except that in cases where bind third parties. An assignment would be void as
the license was granted to remedy a against any subsequent purchaser or mortgagee for
practice which was determined after valuable consideration and without notice unless
judicial or administrative process, to be recorded in the IPO within 3 months from the date of
anti-competitive, the need to correct the the assignment or prior to the subsequent purchase
anti-competitive practice may be taken into or mortgage. [Sec. 106, RA 8293]
account in fixing the amount of
remuneration. (;[Sec. 100.6, RA 8293]
III. Trademarks
J. Assignment and Transmission of A. Definitions of Marks, Collective Marks, Trade
Names
Rights B. Acquisition of Ownership of Marks
C. Acquisition of Ownership of Trade Name
Assignment of Rights: The assignment may be of the D. Non-registrable Marks
entire patent or a portion thereof, or be limited to a E. Tests to Determine Confusing Similarity
specified territory. [Sec. 104, RA 8293] between Marks
F. Well-known Marks
Transmission of Rights: Patents or applications for
G. Rights conferred by Registration
patents and invention to which they relate, shall be
H. Use by Third Parties of names etc. similar to
protected in the same way as the rights of other
property under the Civil Code. [Sec. 103.1, RA 8293] Registered Marks
I. Cancellation of Trademark
Inventions and any right, title or interest in and to J. Infringement and Remedies
patents and inventions covered thereby, may be K. Unfair Competition
assigned or transmitted by inheritance or bequest or L. Trade Names or Business Names
may be the subject of a license contract. [Sec. M. Collective Marks
103.2, RA 8293] N. Criminal Penalties
 MERCANTILE LAW REVIEWER

A. Definitions of Marks, Collective

For the requirement of ―actual use in commerce in
Marks, Trade Names the Philippines‖ before one may register a
170
trademark, trade name and service mark under the
Marks: Any visible sign capable of distinguishing the law pertains to the territorial jurisdiction of the
goods (trademark) or services (service mark) of an Philippines and is not only confined to a certain
enterprise and shall include a stamped or marked region, province, city or barangay. [McDonald’s
container of goods [Sec. 121.1, RA 8293] Corporation v. MacJoy Fastfood(2007)]

Trademark Service Mark Trademark is a creation of use and, therefore,

Any visible sign which is Any visible sign capable actual use is a pre-requisite to exclusive ownership;
adopted and used to of distinguishing the registration is only an administrative confirmation of
identify the source of services of an enterprise the existence of the right of ownership of the mark,
origin of goods, and from the service of other but does not perfect such right; actual use thereof is
which is capable of enterprises. the perfecting ingredient. [Shangri-La International
distinguishing them from Hotel v. DCC (2006)]
goods emanating from a
competitor. Non-use of mark when excused

Collective Marks: Any visible sign designated as such 1. If caused by circumstances arising
in the application for registration and capable of independently of the will of the trademark
distinguishing the origin or any other common owner. Lack of funds shall not excuse non-
characteristic, including the quality of goods or use of a mark; [Sec. 152.1, RA 8293]
services of different enterprises which use the sign 2. A use which does not alter its distinctive
under the control of the registered owner of the character thought he use is different from
collective mark. [Sec. 121.2, RA 8293] the form in which it is registered. [Sec.
152.2, RA 8293]
Trade Name: The name or designation identifying or 3. Use of a mark in connection with one or
distinguishing an enterprise [Sec. 121.3, RA 8293]. more of the goods/services belonging to the
class in which the mark is registered. [Sec.
Any individual name or surname, firm name, device 152.3, RA 8293]
or word used by manufacturers, industrialists, 4. The use of mark by a company related to
merchants, and others to identify their businesses, the applicant or registrant
vocations or occupations. [Converse Rubber Corp. v. 5. The use of mark by a person controlled by
Universal Rubber Products, Inc. (1980)] the registrant. [Sec. 152.4, RA 8293]

Functions of a Trademark The use of a mark by a company related with the

registrant or applicant shall inure to the latter's
1. To point out distinctly the origin or benefit, and such use shall not affect the validity of
ownership of the goods and to which it is such mark or of its registration: Provided, that such
affixed; mark is not used in such manner as to deceive the
2. To secure him, who has been instrumental public. [Sec.152.4, Ra 8293]
in bringing into the market a superior
article of merchandise, the fruit of his A certificate of registration shall remain in force for
industry and skill; 10 years [Sec. 145, RA 8293] and may be renewed for
3. To assure the public that they are producing periods of 10 years at its expiration upon payment of
the genuine article; the prescribed fee and upon filing of a request. [Sec
4. To prevent fraud and imposition; and 146, RA 8293]
5. To protect the manufacturer against
substitution and sale of an inferior and C. Acquisition of Ownership of
different article as its product [Mirpuri v.
CA (1998)]
Trade Name

B. Acquisition of Ownership of Notwithstanding any laws or regulations providing for

any obligation to register trade names, such names
Marks shall be protected, even prior to or without
registration, against any unlawful act committed by
The rights to a mark shall be acquired through third parties. [Sec. 165.2 (a), RA 8293] The
registration made validly in accordance with law. ownership of a trade name is acquired through
[Sec. 122, RA 8293] adoption and use.

Use of mark as a requirement: The applicant or the A name or designation may not be used as a trade
registrant shall file a declaration of actual use of the name if by its nature or the use to which such name
mark with evidence to that effect, as prescribed by or designation may be put, it is contrary to public
the Regulations within three (3) years from the filing order or morals and if, in particular, it is liable to
date of the application. Otherwise, the application deceive trade circles or the public as to the nature
shall be refused or the mark shall be removed from of the enterprise identified by that name. [Sec.
the Register by the Director. [Sec. 124.2, RA 8293] 165.1, RA 8293]
 COMMERCIAL LAW REVIEWER

Any change in the ownership of a trade name shall 10. Consists exclusively of signs or of
be made with the transfer of the enterprise or part indications that may serve in trade to
thereof identified by that name. [Sec. 165.4, RA designate the kind, quality, quantity, 171
8293] intended purpose, value, geographical
origin, time or production of the goods or
D. Non-registrable Marks rendering of the services, or other
characteristics of the goods or services;
[Sec 123.1(j), RA 8293]
A mark cannot be registered if it:
11. Consists of shapes that may be necessitated
1. Consists of immoral, deceptive or
by technical factors or by the nature of the
scandalous matter, or matter which may
goods themselves or factors that affect
disparage or falsely suggest a connection their intrinsic value; [Sec 123.1(k), RA 8293]
with persons, living or dead, institutions,
beliefs, or national symbols, or bring them 12. Consists of color alone, unless defined by a
into contempt or disrepute; [Sec 123.1(a), given form; [Sec 123.1(l), RA 8293]
RA 8293]
13. Is contrary to public order or morality. [Sec
2. Consists of flags, coat of arms or other 123.1(m), RA 8293]
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293] Doctrine of Secondary Meaning: When the marks
referred to in nos. 10, 11 and 12 has become
3. Consists of a name, portrait or signature
distinctive, because of its long, continuous and
identifying a particular living individual
exclusive use for 5 years, as used in connection with
except by his written consent, or of a the applicant‘s goods or services in commerce and in
deceased President of the Philippines, the mind of the public indicates a single source to
during the life of his widow, except by consumers, it may be registered. The Office may
written consent of the widow; [Sec accept as prima facie evidence that the mark has
123.1(c), RA 8293] become distinctive, as used in connection with the
applicant's goods or services in commerce, proof of
4. Is identical with a registered mark of substantially exclusive and continuous use thereof by
another or a mark with an earlier filing or the applicant in commerce in the Philippines for five
priority date, in respect of: (5) years before the date on which the claim of
a. The same goods or services, or
distinctiveness is made. [Sec 123.2, RA 8293]
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to
The nature of the goods to which the mark is applied
be likely to deceive or cause will not constitute an obstacle to registration. [Sec
confusion; [Sec 123.1(d), RA 8293] 123.3, RA 8293]
5. Is identical with, or confusingly similar to,
or constitutes a translation of a well-known E. Tests to Determine Confusing
mark, whether or not registered in the Similarity between Marks
Philippines, and used for identical or similar
goods or services; [Sec 123.1(e), RA 8293]
1. Colorable Imitation
6. Is identical with, or confusingly similar to,
Colorable imitation denotes such a close or ingenious
or constitutes a translation of a well-known
imitation as to be calculated to deceive ordinary
mark which is registered in the Philippines,
persons, or such a resemblance to the original as to
and used for goods or services which are not
deceive an ordinary purchaser giving such attention
similar; [Sec 123.1(f), RA 8293]
as a purchaser usually gives, as to cause him to
purchase the one supposing it to be the other. In
7. Likely to mislead the public, particularly as
ascertaining whether one mark is confusingly similar
to the nature, quality, characteristics or
to or is a colorable imitation of another, no set rules
geographical origin of the goods or services;
can be deduced. Each case must be decided on its
[Sec 123.1(g), RA 8293]
own merits. The complexities attendant to an
accurate assessment of likelihood of confusion
8. Consists exclusively of signs that are generic
requires that the entire panoply of elements
for the goods or services that they seek to
constituting the relevant factual landscape be
identify; [Sec 123.1(h), RA 8293]
comprehensively examined. [Societe des Produits
Nestlé, S.A. v. CA (2001)]
9. Consists exclusively of signs or of
indications that have become customary or
usual to designate the goods or services in 2. Dominancy test
everyday language or in a bona fide and
established trade practice; [Sec 123.1(i), RA Infringement is determined by the test of
8293] ―dominancy‖ rather than by differences or variations
 MERCANTILE LAW REVIEWER

in the details of one trademark and of another.

Similarity in size, form and color, while relevant is
172 not conclusive. If the competing trademark contains Determinants (need not concur)
the main or essential or dominant features of
another, and confusion is likely to result, a. The duration, extent and geographical area
infringement takes place. [Asia Brewery v. CA and of any use of the mark;
San Miguel (1993)] b. The market share in the Philippines and
other countries of the goods/services to
3. Holistic test which the mark applies;
c. The degree of the inherent or acquired
To determine whether a trademark has been distinction of the mark;
infringed, we must consider the mark as a whole and d. The quality-image or reputation acquired by
not as dissected. If the buyer is deceived, it is the mark;
attributable to the marks as a totality, not usually to e. The extent to which the mark has been
any part of it. The court therefore should be guided registered in the world;
by its first impression, for the buyer acts quickly and f. The exclusivity of the registration attained
is governed by a casual glance, the value of which by the mark in the world;
may be dissipated as soon as the court assumed to g. The extent of use of the mark in the world;
analyze carefully the respective features of the h. The exclusivity of use in the world;
mark. [Del Monte Corporation, et al. v. CA (1990)] i. The commercial value attributed to the
mark in the world;
The dominancy test considers the dominant features j. The record of successful protection of the
in the competing marks in determining whether they rights in the mark;
are confusingly similar. Under the dominancy test, k. The outcome of litigations dealing with the
courts give greater weight to the similarity of the issue of whether the mar is well-known; and
appearance of the product arising from the adoption l. The presence or absence of identical or
of the dominant features of the registered mark, similar testmarks validly registered or used
disregarding minor differences. Courts will consider on other similar goods [Rule 102, Rule on
more the aural and visual impressions created by the Trademarks]
marks in the public mind, giving little weight to
factors like prices, quality, sales outlets and market Protection extended to Well-Known Marks
segments. [McDonald’s Corporation v. L.C. Big Mak
Burger, Inc., et al. (2004)]
a. If not registered in the Philippines
A mark cannot be registered if it is identical with or
As to the goods or services in connection with
confusingly similar to, or constitutes a translation of
which the marks are used (Doctrine of Related
a mark which is considered by the competent
Goods/Services):
authority of the Philippines to be well-known
internationally and in the Philippines, whether or
1. Goods are related when they belong to the
not it is registered here, as being already the mark
same class or have the same descriptive
of a person other than the applicant for registration
properties or physical attributes, or they
and used for identical goods or services. ([Sec
serve the same purpose or flow through the
123.1(e), RA 8293]
same channel of trade.
2. The use of identical marks on non-
b. If registered in the Philippines
competing but related goods may likely
A mark cannot be registered if it is identical with or
cause confusion.
confusingly similar to, or constitutes a translation of
3. Corollarily, the use of identical marks on
a mark considered well-known in accordance with
non-competing and unrelated goods is not
the Sec. 123.1 (e), which is registered in the
likely to cause confusion. [UP 2011 Bar
Philippines with respect to goods or services which
Reviewer]
are not similar to those with respect to which
registration is applied for. [Sec 123.1(f), RA 8293]
F. Well-known Marks
Priority Right: An application for registration of a
A mark which a competent authority of the mark filed in the Philippines by a person referred to
Philippines has designated to be well-known in Section 3, and who previously duly filed an
internationally and in the Philippines. application for registration of the same mark in one
of those countries, shall be considered as filed as of
In determining whether a mark is well-known, the day the application was first filed in the foreign
account shall be taken of the knowledge of the country. [Sec. 131.1, RA 8293]
relevant sector of the public, rather than the public
at large, including knowledge in the Philippines No registration of a mark in the Philippines by a
which has been obtained as a result of the promotion person described in this section shall be granted
of the mark. [Sec 123.1(e), RA 8293] until such mark has been registered in the country of
origin of the applicant. [Sec. 131.2, RA 8293]

Significance of Priority Right: A Philippine

application filed by another applicant after the
 COMMERCIAL LAW REVIEWER

priority date but earlier than the foreign applicant‘s 1. An application for registration of a mark, or
actual filing may be refused registration if it is its registration, may be assigned or
identical to the mark with a priority date. [The Law transferred with or without the transfer of
on Trademark, Infringement and Unfair the business using the mark. [Sec. 149.1, RA 173
Competition, Agpalo (2000)] 8293]
2. Such assignment or transfer shall, however,
Rights Conferred by a Well-Known Mark be null and void if it is liable to mislead the
public, particularly as regards the nature,
1. Right to be protected whether or not it is source, manufacturing process,
registered in the Philippines; characteristics, or suitability for their
2. If registered under Sec 123.1(e), extension purpose, of the goods or services to which
of protection to goods and services which the mark is applied. [Sec. 149.2, RA 8293]
are not similar to those in respect of which 3. The assignment of the application for
the mark is registered, provided that: registration of a mark, or of its registration,
a. The use of the mark in relation to shall be in writing and require the
unrelated or dissimilar goods or services signatures of the contracting parties.
would indicate a connection between Transfers by mergers or other forms of
those goods or services and the owner of succession may be made by any document
the mark; and supporting such transfer. [Sec. 149.3, RA
b. The interests of the owner of the 8293]
registered mark are likely to be 4. Assignments and transfers of registrations of
damaged by such use. [Sec. 147.2, RA marks shall be recorded at the Office on
8293] payment of the prescribed fee; assignment
and transfers of applications for registration
G. Rights Conferred by shall, on payment of the same fee, be
provisionally recorded, and the mark, when
Registration registered, shall be in the name of the
assignee or transferee. [Sec. 149.4, RA
Except in cases of importation of drugs and 8293]
medicines allowed under Section 72.1 of this Act and 5. Assignments and transfers shall have no
of off-patent drugs and medicines, the owner of a effect against third parties until they are
registered mark shall have the exclusive right to recorded at the Office. [Sec. 149.5, RA
prevent all third parties not having the owner's 8293]
consent from using in the course of trade identical
or similar signs or containers for goods or services Any license contract concerning the registration of a
which are identical or similar to those in respect of mark, or an application therefor, shall provide for
which the trademark is registered where such use effective control by the licensor of the quality of the
would result in a likelihood of confusion. In case of goods or services of the licensee in connection with
the use of an identical sign for identical goods or which the mark is used. If the license contract does
services, a likelihood of confusion shall be not provide for such quality control, or if such
presumed. [Sec. 147.1, RA 8293 as amended by RA quality control is not effectively carried out, the
9502] license contract shall not be valid. [Sec. 150.1, RA
8293]
Limitations on such rights
Protection limited to goods specified in
1. Duration (except that, inasmuch as the registration certificate
registration of a trademark could be
renewed every 10 years, a trademark could The certificate of registration can confer upon the
conceivably remain registered forever); petitioner the exclusive right to use its own symbol
2. Territorial (except well-known marks). only to those goods specified in the certificate,
subject to any conditions a limitations stated
Registration of the mark shall not confer on the therein. One who has adopted and used a trademark
registered owner the right to preclude third parties on his goods does not prevent the adoption and use
from using bona fide their names, addresses, of the same trademark by others for products which
pseudonyms, a geographical name, or exact are of a different description. [Faberge, Inc. v. IAC
indications concerning the kind, quality, quantity, and Co Beng Kay (1992)]
destination, value, place of origin, or time of
production or of supply, of their goods or services: H. Use by Third Parties of names,
Provided, That such use is confined to the purposes
of mere identification or information and cannot etc. similar to Registered Marks
mislead the public as to the source of the goods or
services. [Sec. 148, RA 8293] The IPC deems unlawful any subsequent use of the
trade name by a third party, whether as a trade
Assignment and Transfer of Application and name or a mark or collective mark, or any such use
Registration of a similar trade name or mark, likely to mislead
the public. [Sec. 165.2(b), RA 8293]
 MERCANTILE LAW REVIEWER

I. Cancellation of Trademark wrappers, receptacles or advertisements

intended to be used in commerce upon or in
174 connection with the sale, offering for sale,
Upon petition, with due process and hearing, based distribution, or advertising of goods or
on the following grounds: services on or in connection with which
such use is likely to cause confusion, or to
1. Within 5 years from registration: Belief that cause mistake, or to deceive. [Sec. 155.2,
the registered mark has damaged or will RA 8293]
damage the petitioner
2. At any time
Mighty Corporation v. E. & J. Gallo Winery
a. Becomes the generic name for the
(2004). A crucial issue in any trademark
goods or services for which it has
infringement case is the likelihood of confusion,
registered; or
mistake or deceit as to the identity, source or
b. Has been abandoned; or
origin of the goods or identity of the business as a
c. The registration was obtained
consequence of using a certain mark. Likelihood of
fraudulently or contrary to the
confusion is admittedly a relative term, to be
provisions of the IPC; or
determined rigidly according to the particular (and
d. Is being used by, or with the permission sometimes peculiar) circumstances of each case.
of the registrant so as to misrepresent In determining likelihood of confusion, the court
the source of the goods or services in must consider: (a) the resemblance between the
connection with which the mark is used
trademarks; (b) the similarity of the goods to
e. If the registered owner of the mark, which the trademarks are attached; (c) the likely
without legitimate reason, fails to use effect on the purchaser; and (d) the registrant‘s
the mark within the Philippines, or to express or implied consent and other fair and
cause it to be used in the Philippines by equitable considerations.
virtue of a license, for an uninterrupted
period of at least 3 years. [Sec. 151, RA
McDonald’s Corporation v. L.C. Big Mak Burger,
8293]
Inc., et al., (2004). To establish trademark
infringement, the following elements must be
The use of the mark in a form different from the
shown: (1) the validity of the mark; (2) the
form in which it is registered, which does not alter
plaintiff‘s ownership of the mark; and (3) the use of
its distinctive character, shall not be ground for
the mark or its colorable imitation by the alleged
cancellation or removal of the mark and shall not
infringer results in ―likelihood of confusion.‖ Of
diminish the protection granted to the mark. [Sec.
these, it is the element of likelihood of confusion
152.2, RA 8293]
that is the gravamen of trademark infringement.
Two types of confusion arise from the use of similar
The use of a mark in connection with one or more of
or colorable imitation marks, namely, confusion of
the goods or services belonging to the class in
goods (product confusion) and confusion of business
respect of which the mark is registered shall prevent
(―source or origin confusion‖). While there is
its cancellation or removal in respect of all other
confusion of goods when the products are
goods or services of the same class. [Sec. 152.3, RA
competing, confusion of business exists when the
8293]
products are non-competing but related enough to
produce confusion or affiliation.
J. Infringement and Remedies
In order to bring a civil action for infringement, it is
1. Trademark infringement not required that there is an actual sale of the goods
or services using the infringing material. [Sec. 155.2,
Any person who shall, without the consent of the RA 8293] Infringement takes place upon the mere
owner of the registered mark: use or reproduction of the registered mark.

1. Use in commerce any reproduction, No article of imported merchandise which shall copy
counterfeit, copy, or colorable imitation of or simulate the name of any domestic product, or
a registered mark or the same container or manufacturer, or dealer, or which shall copy or
a dominant feature thereof in connection simulate a mark registered in accordance with the
with the sale, offering for sale, distribution, provisions of this Act, or shall bear a mark or trade
advertising of any goods or services name calculated to induce the public to believe that
including other preparatory steps necessary the article is manufactured in the Philippines, or
to carry out the sale of any goods or that it is manufactured in any foreign country or
services on or in connection with which locality other than the country or locality where it is
such use is likely to cause confusion, or to in fact manufactured, shall be admitted to entry at
cause mistake, or to deceive; [Sec. 155.1, any customhouse of the Philippines. [Sec. 166, RA
RA 8293] 8293]
2. Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant A mere distributor and not the owner cannot assert
feature thereof and apply such any protection from trademark infringement as it
reproduction, counterfeit, copy or colorable had no right in the first place to the registration of
imitation to labels, signs, prints, packages,
 COMMERCIAL LAW REVIEWER

the disputed trademarks. [Superior Commercial 2. Actions, Damages and Injunction

Enterprises v. Kunnan Enterprises (2010)] for Infringement
False Designations of Origin; False 175
The owner of a registered mark may recover
Description or Representation damages from any person who infringes his rights,
and the measure of the damages suffered shall be
Any person who, on or in connection with any goods
either the reasonable profit which the complaining
or services, or any container for goods, uses in
party would have made, had the defendant not
commerce any word, term, name, symbol, or device,
infringed his rights, or the profit which the
or any combination thereof, or any false designation
defendant actually made out of the infringement, or
of origin, false or misleading description of fact, or
in the event such measure of damages cannot be
false or misleading representation of fact, which:
readily ascertained with reasonable certainty, then
the court may award as damages a reasonable
a. Is likely to cause confusion, or to cause
percentage based upon the amount of gross sales of
mistake, or to deceive as to the affiliation,
the defendant or the value of the services in
connection, or association of such person
connection with which the mark or trade name was
with another person, or as to the origin,
used in the infringement of the rights of the
sponsorship, or approval of his or her goods,
complaining party. [Sec. 156.1, RA 8293]
services, or commercial activities by
another person;[Sec. 169.1(a), RA 8293]
The owner of the registered mark shall not be
entitled to recover profits or damages unless the
b. In commercial advertising or promotion,
acts have been committed with knowledge that such
misrepresents the nature, characteristics,
imitation is likely to cause confusion, or to cause
qualities, or geographic origin of his or her
mistake, or to deceive. Such knowledge is presumed
or another person's goods, services, or
if the registrant gives notice that his mark is
commercial activities, shall be liable to a
registered by displaying with the mark the words
civil action for damages and injunction
'"Registered Mark" or the letter R within a circle or if
[Sec. 169.1(b), RA 8293]
the defendant had otherwise actual notice of the
registration. [Sec. 158, RA 8293]
Any goods marked or labeled in contravention of the
provisions of this Section shall not be imported into
Should damages be recoverable, the measure of the
the Philippines or admitted entry at any
damages suffered shall be either:
customhouse of the Philippines. The owner,
a. the reasonable profit which the complaining
importer, or consignee of goods refused entry at any
party would have made, had the defendant
customhouse under this section may have any
not infringed his rights; or
recourse under the customs revenue laws or may
b. the profit which the defendant actually
have the remedy given by this Act in cases involving
made out of the infringement; or
goods refused entry or seized. [Sec. 169.2, RA 8293]
c. a reasonable percentage based upon the
amount of gross sales of the defendant or
Infringement of Name and Marks of the value of the services in connection with
Ownership Stamp on Containers which the mark or trade name was used in
the infringement of the rights of the
General Rule: It is unlawful for any person, without complaining party if such measure of
the consent of the manufacturer, bottler or seller damages cannot be readily ascertained with
who has registered the mark of ownership to fill such reasonable certainty. [Sec. 156.1, RA 8293]
bottles, boxes, kegs, barrels or other containers so
marked and stamped, for the purpose of sale,
dispose of, or wantonly destroy the same, whether
3. Other remedies available:
filled or not, to use the same for drinking vessels or
drain pipes, foundation pipes, for any other purpose 1. Injunction (Sec. 156.4);
than that registered. [Sec. 2, RA 623 as amended by 2. Impounding of sales invoices and other
RA 5700] documents (Sec. 156.2);
3. Double damages in case of actual intent to
The use of the same without apparent permission defraud or to mislead (Sec. 156.3);
from the trademark owners thereof, shall be prima 4. Court order for the disposal or destruction
facie presumption that such possession or use is of the infringing goods (Sec. 157);
unlawful. [Sec. 3, RA 623 as amended by RA 5700] 5. Criminal Action;
6. Administration sanctions
Exceptions:
1. Use of the bottles as containers for sisi, Any foreign national who qualifies under the
bagoong, patis, and similar native products principle on reciprocity and does not engage in
[Sec. 6 RA 623 as amended by RA 5700] business in the Philippines, whether or not it is
2. Persons in whose favor the containers were licensed to do business in the Philippines, may bring
sold [Distelleria Washington v. LA Tondena civil or administrative action for:
Distillers (1997)] 1. Opposition
2. Cancellation
3. Infringement
 MERCANTILE LAW REVIEWER

4. Unfair Competition communication is customarily conducted in

5. False designation of origin or false accordance with the sound business
176 description [Sec. 160. RA 8293] practice, and not due to any method or
device adopted to evade this section or to
Notice of registration of trademark is necessary for prevent or delay the issuance of an
an owner of a trademark to recover damages in an injunction or restraining order with respect
action for infringement since knowledge that such to such infringing matter. [Sec. 159.3, RA
imitation is likely to cause confusion, or to cause 8293]
mistake, or to deceive is an element of
infringement. Requirement of notice may be d. There shall be no infringement of
complied by displaying with the mark the words trademarks or tradenames of imported or
'"Registered Mark" or the letter R within a circle. sold drugs and medicines allowed under
[Sec. 158, RA 8293] Section 72.1 as well as imported or sold off-
patent drugs and medicines: Provided, That
4. Limitations to actions for said drugs and medicines bear the
infringement registered marks that have not been
tampered, unlawfully modified, or infringed
upon as defined under Section 155. [Sec.
The remedies given to the owner of a right infringed
159.4 RA 8293 as amended by RA 9502]
shall be limited as follows:

a. registered mark shall have no effect K. Unfair Competition

against any person who, in good faith,
before the filing date or the priority date, A person who has identified in the mind of the public
was using the mark for the purposes of his the goods he manufactures or deals in, his business
business or enterprise: Provided, That his or services from those of others, whether or not a
right may only be transferred or assigned registered mark is employed, has a property right in
together with his enterprise or business or the goodwill of the said goods, business or services
with that part of his enterprise or business so identified, which will be protected in the same
in which the mark is used. [Sec. 159.1, RA manner as other property rights. [Sec. 168.1, RA
8293] 8293]

b. Where an infringer who is engaged solely in Any person who shall employ deception or any other
the business of printing the mark or other means contrary to good faith by which he shall pass
infringing materials for others is an off the goods manufactured by him or in which he
innocent infringer, the owner of the right deals, or his business, or services for those of the
infringed shall be entitled as against such one having established such goodwill, or who shall
infringer only to an injunction against commit any acts calculated to produce said result,
future printing. [Sec. 159.2, RA 8293] shall be guilty of unfair competition, and shall be
subject to an action therefor. [Sec. 168.2, RA 8293]
c. Where the infringement complained of is
contained in or is part of paid The following shall be deemed guilty of unfair
advertisement in a newspaper, magazine, competition:
or other similar periodical or in an
electronic communication, the remedies of a. Any person, who is selling his goods and
the owner of the right infringed as against gives them the general appearance of goods
the publisher or distributor of such of another manufacturer or dealer, either
newspaper, magazine, or other similar as to the goods themselves or in the
periodical or electronic communication wrapping of the packages in which they are
shall be limited to an injunction against the contained, or the devices or words thereon,
presentation of such advertising matter in or in any other feature of their appearance,
future issues of such newspapers, which would be likely to influence
magazines, or other similar periodicals or in purchasers to believe that the goods
future transmissions of such electronic offered are those of a manufacturer or
communications. dealer, other than the actual manufacturer
or dealer, or who otherwise clothes the
The limitations shall apply only to innocent goods with such appearance as shall deceive
infringers: Provided, That such injunctive the public and defraud another of his
relief shall not be available to the owner of legitimate trade, or any subsequent vendor
the right infringed with respect to an issue of such goods or any agent of any vendor
of a newspaper, magazine, or other similar engaged in selling such goods with a like
periodical or an electronic communication purpose;[Sec. 168.3(a), RA 8293]
containing infringing matter where
restraining the dissemination of such b. Any person who by any artifice, or device,
infringing matter in any particular issue of or who employs any other means calculated
such periodical or in an electronic to induce the false belief that such person
communication would delay the delivery of is offering the services of another who has
such issue or transmission of such electronic
 COMMERCIAL LAW REVIEWER

identified such services in the mind of the which the controversy relates. One of the essential
public; [Sec. 168.3(b), RA 8293] requisites in an action to restrain unfair competition
is proof of fraud; the intent to deceive must be
c. Any person who shall make any false shown before the right to recover can exist. The 177
statement in the course of trade or who advent of the IP Code has not significantly changed
shall commit any other act contrary to good these rulings as they are fully in accord with what
faith of a nature calculated to discredit the Section 168 of the Code in its entirety provides.
goods, business or services of another. [Sec. Deception, passing off and fraud upon the public are
168.3(c), RA 8293] still the key elements that must be present for
unfair competition to exist. [Coca-Cola v. Gomez
McDonald’s Corporation v. L.G. Big Mak Burger, (2008)]
Inc., et al. (2004). The elements of an action for
unfair competition are: [1] confusing similarity in Infringement of Unfair Competition
the general appearance of the goods, and [2] intent Trademark
to deceive the public and defraud a competitor. The Unauthorized use of a passing off of one‘s
confusing similarity may or may not result from trademark goods as those of
similarity in the marks, but may result from other another
external factors in the packaging or presentation of Fraudulent intent is Fraudulent intent is
the goods. The intent to deceive and defraud may be unnecessary essential
inferred from the similarity in appearance of the prior registration of the registration is not
goods as offered for sale to the public. Actual trademark is a necessary
fraudulent intent need not be shown. prerequisite to the
action
An action for unfair competition is based on the [Del Monte Corporation, et al. v. CA (1990)]
proposition that no dealer in merchandise should be
allowed to dress his goods in simulation of the goods The law on unfair competition is broader and more
of another dealer, so that purchasers desiring to buy inclusive than the law on trademark infringement.
the goods of the latter would be induced to buy the The latter is more limited but it recognizes a more
goods of the former. The most usual devices exclusive right derived from the trademark adoption
employed in committing this crime are the and registration by the person whose goods or
simulation of labels and the reproduction of form, business is first associated with it. Hence, even if
color and general appearance of the package used one fails to establish his exclusive property right to a
by the pioneer manufacturer or dealer. [Caterpillar, trademark, he may still obtain relief on the ground
Inc v. Samson (2006)] of his competitor‘s unfairness or fraud. Conduct
constitutes unfair competition if the effect is to pass
Articles 168.1 and 168.2 provide the concept and off on the public the goods of one man as the goods
general rule on the definition of unfair competition. of another. [Mighty Corporation v. E. & J. Gallo
The law does not thereby cover every unfair act Winery (2004)]
committed in the course of business; it covers only
acts characterized by ―deception or any other means L. Trade Names and Business
contrary to good faith‖ in the passing off of goods
and services as those of another who has established Names
goodwill in relation with these goods or services, or
any other act calculated to produce the same result. It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA 8293]
What unfair competition is, is further particularized
under Section 168.3 when it provides specifics of Any individual name or surname, firm name, device
what unfair competition is ―without in any way or word used by manufacturers, industrialists,
limiting the scope of protection against unfair merchants, and others to identify their businesses,
competition.‖ Part of these particulars is provided vocations or occupations [Converse Rubber Corp. v.
under Section 168.3(c) which provides the general Universal Rubber Products, Inc. (1980)]
―catch-all‖ phrase that the petitioner cites. Under
this phrase, a person shall be guilty of unfair What may NOT be used as trade name
competition ―who shall commit any other act
contrary to good faith of a nature calculated to 1. If by its nature or the use to which the
discredit the goods, business or services of another.‖ name or designation may be put, it is
contrary to public order or morals.
From jurisprudence, unfair competition has been 2. If it is liable to deceive trade circles or the
defined as the passing off (or palming off) or public as to the nature of the enterprise
attempting to pass off upon the public the goods or identified by the name
business of one person as the goods or business of 3. If the trade name is similar to a mark or a
another with the end and probable effect of trade name owned by another person and
deceiving the public. It formulated the ―true test‖ its use would likely mislead the public.
of unfair competition: whether the acts of defendant [Sec.165.1, RA 8293]
are such as are calculated to deceive the ordinary
buyer making his purchases under the ordinary
conditions which prevail in the particular trade to
 MERCANTILE LAW REVIEWER

Acquisition of ownership: Trade names are protected imposed on any person who is found guilty. [Sec.
even prior to or without registration. The ownership 170, RA 8293]
178 of a trade name is acquired through adoption and
use.
IV. Copyright
Right of owner: The IPC deems unlawful any A. Basic Principles
subsequent use of the trade name by a third party, B. Copyrightable Works
whether as a trade name or a mark or collective C. Non-copyrightable Works
mark, or any such use of a similar trade name or D. Rights of Copyright Owner
mark, likely to mislead the public. [Sec. 165.2(b), RA
E. Rules on Ownership of Copyright
8293]
F. Deposit of Copyrightable Materials
Trade names, unlike trademarks, need not be G. Limitations on Copyright
registered with the IPO before an infringement suit
may be filed by its owner against the owner of an A. Basic Principles
infringing trademark. All that is required is that the
trade name is previously used in trade or commerce
in the Philippines. [Prosource International v. 1. Works are protected by the sole fact
Horphag Research Management (2009)] of their creation

Principle of Automatic Protection: Copyright is

M. Collective Marks vested from the very moment of creation. [Sec.
172.2, RA 8293]
Any visible sign designated as such in the application
for registration and capable of distinguishing the The enjoyment and exercise of copyright, including
origin or any other common characteristic, including moral rights, shall not be the subject of any
the quality of goods or services of different formality; such enjoyment and such exercise shall be
enterprises which use the sign under the control of independent of the existence of protection in the
the registered owner of the collective mark [Sec. country of origin of the work. [Article 5(2), Berne
121.2, RA 8293] Convention for the Protection of Literary and Artistic
Works]
An application for registration of a collective mark
shall designate the mark as a collective mark and The Denicola Test in intellectual property law states
shall be accompanied by a copy of the agreement, if that if design elements of an article reflect a merger
any, governing the use of the collective mark. [Sec. of aesthetic and functional considerations, the
167.2, Ra 8293] artistic aspects of the work cannot be conceptually
separable from the utilitarian aspects; thus, the
Grounds for Cancellation article cannot be copyrighted. [UP 2011 Bar
Reviewer]
In addition to the grounds under Section 149, the
Court shall cancel the registration of a collective 2. Protection extends only to the
mark if the person requesting the cancellation expression of an idea, not the idea
proves: itself.
1. that only the registered owner uses the
No protection shall extend, under this law, to any
mark; or
idea, procedure, system method or operation,
2. that he uses or permits its use in
concept, principle, discovery or mere data as such,
contravention of the agreements referred
even if they are expressed, explained, illustrated or
to in Subsection 166.2; or
embodied in a work. [Sec 175, RA 8293]
3. that he uses or permits its use in a manner
liable to deceive trade circles or the public
as to the origin or any other common
3. The copyright is distinct from the
characteristics of the goods or services property in the material object
concerned. [Sec. 167.3, RA 8293] subject to it. [Sec 181, RA 8293]

The registration of a collective mark, or an 4. Copyright is a statutory right.

application therefor shall not be the subject of a
license contract. [Sec. 167.4, RA 8293] Copyright, in the strict sense of the term is purely a
statutory right. Being a mere statutory grant, the
N. Criminal Penalties rights are limited to what the statute confers. It may
be obtained and enjoyed only with respect to the
subjects and by the persons, and on terms and
Independent of the civil and administrative sanctions
conditions specified in the statute. Accordingly, it
imposed by law, a criminal penalty of imprisonment
can cover only the works falling within the statutory
from two (2) years to five (5) years and a fine
enumeration or description. [Pearl and Dean vs.
ranging from Fifty thousand pesos (P50,000) to Two
Shoemart (2003)]
hundred thousand pesos (P200,000), shall be
 COMMERCIAL LAW REVIEWER

B. Copyrightable Works copyrighted material and substantial similarity

between the two works. The applicant must thus
demonstrate the existence and validity of copyright
1. Original Literary and Artistic Works because in the absence of copyright protection, even 179
the original creation may be freely copied. [Ching v.
Sec. 172.1, RA 8293. Literary and artistic works, Salinas (2005)]
hereinafter referred to as "works", are original
intellectual creations in the literary and artistic Originality is not determined by novelty, aesthetic
domain protected from the moment of their creation merit or ingenuity but that it is an independent
and shall include in particular: creation. [2011 UP Bar Reviewer]

a. Books, pamphlets, articles and other The requirement in US Law that the expression
writings; should be fixed in a tangible medium is not
b. Periodicals and newspapers; applicable here since our law expressly provides that
c. Lectures, sermons, addresses, dissertations works are protected irrespective of their mode or
prepared for oral delivery, whether or not form of expression. [Sec. 172.2, RA 8293]
reduced in writing or other material form;
d. Letters; 2. Derivative Works
e. Dramatic or dramatico-musical
compositions; choreographic works or The following derivative works shall also be
entertainment in dumb shows; protected by copyright:
f. Musical compositions, with or without a. Dramatizations, translations, adaptations,
words; abridgments, arrangements, and other
g. Works of drawing, painting, architecture, alterations of literary or artistic works; and
sculpture, engraving, lithography or other b. Collections of literary, scholarly or artistic
works of art; models or designs for works of works, and compilations of data and other
art; materials which are original by reason of
h. Original ornamental designs or models for the selection or coordination or
articles of manufacture, whether or not arrangement of their contents. [Sec. 173.1,
registrable as an industrial design, and RA 8293]
other works of applied art;
i. Illustrations, maps, plans, sketches, charts Derivative works are protected as new works
and three-dimensional works relative to provided they shall not:
geography, topography, architecture or a. affect the force of any subsisting copyright
science; upon the original works employed or any
j. Drawings or plastic works of a scientific or part thereof; or
technical character; b. be construed to imply any right to such use
k. Photographic works including works of the original works, or to secure or extend
produced by a process analogous to copyright in such original works. [Sec.
photography; lantern slides; 173.2, RA 8293]
l. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process C. Non-copyrightable Works
for making audio-visual recordings;
m. Pictorial illustrations and advertisements; 1. Unprotected Subject matter
n. Computer programs; and
o. Other literary, scholarly, scientific and a. Any idea, procedure, system method or
artistic works. operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or
When a work is considered original: embodied in a work.
1. the work is an independent creation of the
author; and b. News of the day and other miscellaneous
2. it must not be copied from the work of facts having the character of mere items of
another. press information;

A person to be entitled to a copyright must be the c. Any official text of a legislative,

original creator of the work. He must have created it administrative or legal nature, as well as
by his own skill, labor and judgment without directly any official translation thereof;
copying or evasively imitating the work of another.
[Ching Kian Chuan vs. CA (2001)] d. Pleadings;
By originality is meant that the material was not
e. Original decisions of courts and tribunals
copied, and evidences at least minimal creativity;
(This pertains to the “original decisions”
that it was independently created by the author and
not the SCRA published volumes since these
that it possesses at least some minimal degree of
creativity. Copying is shown by proof of access to
 MERCANTILE LAW REVIEWER

are protected under derivative works under not actionable but is merely a case of sloppy writing.
Sec 173.1) [Sec. 175, RA 8293] Clearly, there is no legal obligation, by a judge or by
180 any person, to make an attribution when copying
The format or mechanics of a TV show is not Works of the Government. However, misquoting or
copyrightable as copyright does not extend to ideas, twisting, with or without attribution, any judicial
procedures, processes, systems, methods of decision, statute, regulation or other Works of the
operation, concepts, principles or discoveries Government in judicial writing, if done to mislead
regardless of the form in which they are described, the parties or the public, is actionable. [J. Carpio
explained, illustrated or embodied. [Joaquin Jr. et Dissenting Opinion, In The Matter Of the Charges of
al vs. Drilon, et al (1999)] Plagiarism, Etc., Against Assoc. Justice Mariano Del
Castillo, A.M. 10-7-17-SC (2011)]
No one may claim originality as to facts as these do
not owe their origin to an act of authorship. The first 3. Works of the Public domain
person to find and report a particular fact has not These include works whose term of copyright has
created the same; he has merely discovered its expired. [2011 UP Bar Reviewer]
existence. [Feist Publication v Rural Telephone
Services (1991)] 4. Useful articles
2. Works of the Government of the Useful Article Doctrine: Works whose sole purpose
Philippines is utilitarian have no separate artistic value. This can
be distinguished from a work of applied art, which
Work of the Government of the Philippines: is a has utilitarian functions but there is an identifiable
work created by an officer or employee of the artistic work or creation incorporated thereto. [2011
Philippine Government or any of its subdivisions and UP Bar Reviewer]
instrumentalities, including government-owned or
controlled corporations as a part of his regularly D. Rights of Copyright Owner
prescribed official duties. [Sec. 171.11, RA 8293]
1. Copyright or Economic Rights
General Rule: Government cannot own copyright
Copyright or economic rights shall consist of the
Exceptions: exclusive right to carry out, authorize or prevent the
1. When copyright is assigned or bequested following acts:
in favor of the government (Sec 176.3);
2. Author of speeches, lectures, sermons, a. Reproduction of the work or substantial
addresses and dissertations shall have portion of the work; [Sec. 177.1, RA 8293]
exclusive right of making a collection of
his work. b. Dramatization, translation, adaptation,
abridgment, arrangement or other
However, prior approval of the government agency transformation of the work; [Sec. 177.2, RA
or the office wherein the work is created shall be 8293]
necessary for the exploitation of such work for
profit. (Sec. 176.1) c. The first public distribution of the original
and each copy of the work by sale or other
Notwithstanding the foregoing provisions, the forms of transfer of ownership; [Sec. 177.3,
Government is not precluded from receiving and RA 8293]
holding copyrights transferred to it by assignment,
bequest or otherwise; nor shall publication or d. Rental of the original or a copy of an
republication by the Government in a public audiovisual or cinematographic work, a
document of any work in which copyright is work embodied in a sound recording, a
subsisting be taken to cause any abridgment or computer program, a compilation of data
annulment of the copyright or to authorize any use and other materials or a musical work in
or appropriation of such work without the consent of graphic form, irrespective of the ownership
the copyright owner. [Sec. 176.3, RA 8293] of the original or the copy which is the
subject of the rental; [Sec. 177.4, RA 8293]
In writing judicial decisions, a judge should make the
proper attribution in copying passages from e. Public display of the original or a copy of
any judicial decision, statute, regulation, or other the work; [Sec. 177.5, RA 8293]
Works of the Government. However, the failure to
make such attribution does not violate the Law on f. Public performance of the work; [Sec.
Copyright. The law expressly provides that Works of 177.6, RA 8293]
the Government are not subject to copyright. This
means that there is neither a legal right by anyone g. Other communication to the public of the
to demand attribution, nor any legal obligation from work [Sec. 177.7, RA 8293]
anyone to make an attribution, when Works of the
Government are copied. The failure to make the Economic rights also give the author the right to
proper attribution of a Work of the Government is assign the copyright and/or the material object in
 COMMERCIAL LAW REVIEWER

whole or in part, and they allow the owner to derive cannot be published or disseminated without the
financial reward from the use of his works by others. consent of the writer or his heirs. However, the
[Sec. 180.1, RA 8293] court may authorize their publication or
dissemination if the public good or the interest of 181
Copyright in a work of architecture shall include the justice so requires.
right to control the erection of any building which
reproduces the whole or a substantial part of the
work either in its original form or in any form 2. Moral Rights (Sec. 193)
recognizably derived from the original: Provided,
That the copyright in any such work shall not include The author of a work shall, independently of the
the right to control the reconstruction or economic rights in Section 177 or the grant of an
rehabilitation in the same style as the original of a assignment or license with respect to such right,
building to which that copyright relates. [Sec. 186, have the right:
RA 8293]
a. To require that the authorship of the works
Communication to the Public of Copyrighted Works: be attributed to him, in particular, the right
includes point-to-point transmission of a work, that his name, as far as practicable, be
including video on demand, and providing access to indicated in a prominent way on the copies,
an electronic retrieval system, such as computer and in connection with the public use of his
databases, servers, or similar electronic storage work; [Sec. 193.1, RA 8293]
devices. Broadcasting, rebroadcasting,
retransmission by cable, and broadcast and
b. To make any alterations of his work prior
retransmission by satellite are all acts of
to, or to withhold it from publication; [Sec.
―communication to the public‖ within the meaning
193.2, RA 8293]
of the IPC. [Rule 11, Copyright Safeguards and
Regulations]
c. To object to any distortion, mutilation or
First Public Distribution of Work: An exclusive right other modification of, or other derogatory
of first distribution of work includes all acts action in relation to, his work which would
involving distribution, specifically including the first be prejudicial to his honor or reputation;
importation of an original and each copy of the work [Sec. 193.3, RA 8293]
into the jurisdiction of the Republic of the
Philippines. [Rule 12, Copyright Safeguards and d. To restrain the use of his name with respect
Regulations] to any work not of his own creation or in a
distorted version of his work. [Sec. 193.4,
RA 8293]
Civil Code Provisions on Ownership of
In addition to the right to publish granted by the
Intellectual Creation:
author, his heirs, or assigns, the publisher shall have
a copyright consisting merely of the right of
Article 721. By intellectual creation, the following reproduction of the typographical arrangement of
persons acquire ownership: the published edition of the work. [Sec.174, RA
(1) The author with regard to his literary, 8293]
dramatic, historical, legal, philosophical,
scientific or other work; The author of speeches, lectures, sermons,
(2) The composer; as to his musical composition; addresses, and dissertations mentioned in the
(3) The painter, sculptor, or other artist, with preceding paragraphs shall have the exclusive right
respect to the product of his art; of making a collection of his works. [Sec. 176.2, Ra
(4) The scientist or technologist or any other 8293]
person with regard to his discovery or invention.
Waiver of Moral Rights
Article 722. The author and the composer,
mentioned in Nos. 1 and 2 of the preceding article,
General Rule: Moral rights can be waived in writing,
shall have the ownership of their creations even
expressly stating such waiver [Sec. 195, RA 8293] or
before the publication of the same. Once their works
by contribution to a collective work unless such is
are published, their rights are governed by the
expressly reserved [Sec. 196, RA 8293].
Copyright laws.
Exceptions:
The painter, sculptor or other artist shall have
Even if made in writing, waiver is still not valid if:
dominion over the product of his art even before it is
a. use of the name of the author, title of his
copyrighted.
work, or his reputation with respect to any
The scientist or technologist has the ownership of his
version or adaptation of his work, which
discovery or invention even before it is patented.
because of alterations substantially tends to
injure the literary or artistic reputation of
Article 723. Letters and other private
another author; [Sec. 195.1, RA 8293]
communications in writing are owned by the person
to whom they are addressed and delivered, but they
 MERCANTILE LAW REVIEWER

b. it uses the name of the author in a work 4. The right of authorizing the commercial
that he did not create. [Sec. 195.1, RA rental to the public of the original and
182 8293] copies of their performances fixed in sound
recordings, even after distribution of them
Moral rights are not assignable or subject to license. by, or pursuant to the authorization by the
[Sec. 198, RA 8293] performer; [Sec. 203.4, RA 8293]

3. Rights to Proceeds in Subsequent 5. The right of authorizing the making

Transfers (Droit de Suite or Follow available to the public of their
performances fixed in sound recordings, by
Up Rights) wire or wireless means, in such a way that
members of the public may access them
In every sale or lease of an original work of painting from a place and time individually chosen
or sculpture or of the original manuscript of a writer by them. [Sec. 203.5, RA 8293]
or composer, subsequent to the first disposition
thereof by the author, the author or his heirs shall 6. Independently of a performer's economic
have an inalienable right to participate in the gross rights, the performer, shall, as regards his
proceeds of the sale or lease to the extent of five live aural performances or performances
percent (5%). This right shall exist during the fixed in sound recordings, have the right to
lifetime of the author and for fifty (50) years after claim to be identified as the performer of
his death. [Sec. 200, RA 8293] his performances, except where the
omission is dictated by the manner of the
Works not Covered: Prints, etchings, engravings, use of the performance, and to object to
works of applied art, or works of similar kind any distortion, mutilation or other
wherein the author primarily derives gain from the modification of his performances that would
proceeds of reproductions. [Sec. 201, RA 8293] be prejudicial to his reputation. [Sec.
204.1, RA 8293]
First Sale Doctrine: After the first sale of the
lawfully made copy of the copyrighted work, anyone
7. Unless otherwise provided in the contract,
who is the owner of that copy can sell or dispose of
in every communication to the public or
that copy in any way without any liability for
broadcast of a performance subsequent to
copyright infringement. The first sale of an
the first communication or broadcast
authorized copy of the work exhausts the author‘s
thereof by the broadcasting organization,
right to control distribution of copies. [US
the performer shall be entitled to an
Jurisprudence; UP Law 2011 Reviewer]
additional remuneration equivalent to at
least five percent (5%) of the original
4. Neighboring Rights compensation he or she received for the
first communication or broadcast. [Sec.
Performer‘s Rights 206, RA 8293]

1. As regards their performances, the right of Rights of Producers of Sound Recording

authorizing:
a. The broadcasting and other 1. The right to authorize the direct or indirect
communication to the public of their reproduction of their sound recordings, in
performance; and any manner or form; the placing of these
b. The fixation of their unfixed reproductions in the market and the right of
performance. [Sec. 203.1, RA 8293] rental or lending; [Sec. 208.1, RA 8293]

Such right shall be maintained and exercised 2. The right to authorize the first public
fifty (50) years after his death, by his heirs, and distribution of the original and copies of
in default of heirs, the government, where their sound recordings through sale or
protection is claimed. [Sec. 204.2, RA 8293] rental or other forms of transferring
ownership; [Sec. 208.2, RA 8293]
2. The right of authorizing the direct or
indirect reproduction of their performances 3. The right to authorize the commercial
fixed in sound recordings, in any manner or rental to the public of the original and
form; [Sec. 203.2, RA 8293] copies of their sound recordings, even after
distribution by them by or pursuant to
3. Subject to the provisions of Section 206, authorization by the producer. [Sec. 208.3,
the right of authorizing the first public RA 8293]
distribution of the original and copies of
their performance fixed in the sound 4. If a sound recording published for
recording through sale or rental or other commercial purposes, or a reproduction of
forms of transfer of ownership; [Sec. 203.3, such sound recording, is used directly for
RA 8293] broadcasting or for other communication to
the public, or is publicly performed with
the intention of making and enhancing
 COMMERCIAL LAW REVIEWER

profit, a single equitable remuneration for E. Rules on Ownership of

the performer or performers, and the
producer of the sound recording shall be Copyright
paid by the user to both the performers and 183
the producer, who, in the absence of any 1. Ownership of Copyright
agreement shall share equally. [Sec. 209,
RA 8293]
Work Ownership
Rights of Broadcasting Organizations Single Creator of an Belongs to the author of the
Original Work work [Sec. 178.1, RA 8293]
1. The rebroadcasting of their broadcasts; Belongs of the co-authors; in
[Sec. 211.1, RA 8293] the absence of agreement,
their rights shall be governed
2. The recording in any manner, including the by the rules on co-ownership.
making of films or the use of video tape, of However, if the work consists
their broadcasts for the purpose of Works of Joint of parts that can be used
communication to the public of television Authorship separately and identified,
broadcasts of the same; [Sec. 211.2, RA the author of each part owns
8293] the copyright of the part he
has created. [Sec. 178.2, RA
3. The use of such records for fresh 8293;BAR Question (1995,
transmissions or for fresh recording. [Sec. 2004)]
211.3, RA 8293] Belongs to the employee if
the creation is not a part of
Must-Carry Rule: prevents cable television his regular duties, even if he
companies from excluding broadcasting organization used the time, facilities and
especially in those places not reached by signal. materials of the employer.
Also, the rule prevents cable television companies Work created during However, belongs to the
from depriving viewers in far-flung areas the the course of employer if the work is in the
enjoyment of programs available to city viewers. employment performance of the
[ABS-CBN Broadcasting vs. Philippine Multi-Media employee‘s regular duties
System (2009)] unless there is an agreement
to the contrary. [Sec. 178.3,
Limitations on Protection RA 8293; BAR Question
(2008)]
Sections 203, 208 and 209 shall not apply where the The person who
acts referred to in those Sections are related to: commissioned the work holds
1. The use by a natural person exclusively for ownership of the work per
his own personal purposes; Work commissioned se, but copyright remains
2. Using short excerpts for reporting current by a person other with the creator unless there
events; than the employer was a stipulation to the
3. Use solely for the purpose of teaching or for contrary. [Sec. 178.4, RA
scientific research; and 8293; BAR Question (1995,
4. Fair use of the broadcast subject to certain 2004)]
conditions. [Sec. 212, RA 8293] Belongs to the producer,
author of the scenario,
Term of Protection composer of the music, film
director, and author of the
adapted work. However,
Works Term
subject to stipulations, the
For performances not fifty (50) years from the
producers shall exercise the
incorporated in end of the year in which Audio visual works
copyright as may be required
recordings the performance took
for the exhibition of the
place [Sec. 215.1(a), RA
work, except for the right to
8293]
collect license fees for the
For sound or image and fifty (50) years from the
performance of musical
sound recordings and for end of the year in which
compositions in the work.
performances the recording took
[Sec. 178.5, RA 8293]
incorporated therein place. [Sec. 215.1(b), RA
Belongs to the writer, but
8293]
the court may authorize their
publication or dissemination
Broadcasts twenty (20) years from
Letters of the public good or interest
the date the broadcast
of justice requires, pursuant
took place[Sec. 215.2,
to Art. 723, New Civil Code.
RA 8293]
[Sec. 178.6, RA 8293
Anonymous and Publishers are deemed to
pseudonymous works represent the authors, unless
 MERCANTILE LAW REVIEWER

the contrary appears, the to begin on the first day of January of the year
pseudonyms or adopted following the event which gave rise to them. [Sec.
184 names leave no doubt as to 214, RA 8293]
the author‘s identity or if the
author discloses his identity. 4. Transfer or Assignment of Copyright
[Sec. 179, RA 8293]
A contributor is deemed to The copyright may be assigned in whole or in part.
have waived his right unless Within the scope of the assignment, the assignee is
Collective works
he expressly reserves it. entitled to all the rights and remedies which the
[Sec. 196, RA 8293] assignor had with respect to the copyright. [180.1,
RA 8293]

2. Duration of Copyright The copyright is not deemed assigned inter vivos in

whole or in part unless there is a written indication
Works Term of such intention. [180.2, RA 8293]
Original Literary and Lifetime of author and
The submission of a literary, photographic or artistic
Artistic Works including for fifty (50) years after
work to a newspaper, magazine or periodical for
Posthumous Works his death [Sec 213.1,
publication shall constitute only a license to make a
RA 8293]
single publication unless a greater right is expressly
Derivative Works including Lifetime of author and
granted. If two (2) or more persons jointly own a
Posthumous Works for fifty (50) years after
copyright or any part thereof, neither of the owners
his death [Sec 213.1,
shall be entitled to grant licenses without the prior
RA 8293]
written consent of the other owner or owners.
Joint Authorship Lifetime of the last
[180.3, RA 8293]
surviving author and for
fifty (50) years after his
The transfer or assignment of copyright shall not
death [Sec 213.2, RA
itself constitute a transfer of the materials object. A
8293]
transfer or assignment of the copyright of the sole
Anonymous or Fifty (50) years from
copy or one of the several copies of the work shall
Pseudonymous Works date of first lawful
not imply transfer or assignment of copyright
publication [Sec. 213.3,
[Sec.181, RA 8293]
RA 8293]
Applied Art Twenty-five (25) years
The copyright owners or their heirs may designate a
from date of making
society of artists, writers or composers to enforce
[Sec. 213.4, RA 8293]
their economic rights and moral rights on their
Published Photographic Fifty (50) years from behalf. [Sec. 183, RA 8293]
Works publication [Sec. 213.5,
RA 8293]
Unpublished Photographic Fifty (50) years from F. Deposit on Copyrightable
Works the making [Sec. 213.5, Materials
RA 8293]
Published Audio-visual Fifty (50) years from Rule 5, Copyright Safeguards and Regulations
Works publication [Sec. 213.6,
RA 8293] SECTION 4. Works That Shall Be Registered and
Unpublished Audio-visual Fifty (50) years from Deposited. — Two (2) copies or reproductions of the
Works the making [Sec. 213.6, following classes of works, and transfers and
RA 8293] assignments related thereto, shall be registered and
deposited with TNL Copyright Division and another
two (2) copies with the SCL:
3. Presumption of Authorship a. Books, pamphlets, articles and other
writings;
The natural person whose name is indicated on a b. Periodicals and newspapers;
work in the usual manner as the author shall, in the c. Lectures, sermons, addresses, dissertations
absence of proof to the contrary, be presumed to be prepared for oral delivery whether or not
the author of the work. This provision shall be reduced in writing or other material form;
applicable even if the name is a pseudonym, where d. Letters;
the pseudonym leaves no doubt as to the identity of e. Musical compositions with or without words
the author. The person or body, corporate whose
name appears on an audio-visual work in the usual SECTION 5. Replicas and Pictures. — For practical
manner shall, in the absence of proof to the purposes, only replicas and pictures of the following
contrary, be presumed to be the maker of said work. classes of works, shall be registered and deposited
[Sec. 219, RA 8293] with The National Library Copyright Division:

The term of protection subsequent to the death of a. Works of drawing, painting, architecture,
the author shall run from the date of his death or of sculpture, engraving, lithography or other
publication, but such terms shall always be deemed works of art, models or designs for works of
 COMMERCIAL LAW REVIEWER

art; Library shall become the property of the

b. Original ornamental designs or models for Government [Sec. 227, RA 8293]
articles of manufacture, whether or not
registerable as an industrial design, and Notice of Copyright 185
other works of applied art;
c. Illustrations, maps, plans, sketches, charts Each copy of a work published or offered for sale
and three-dimensional works relative to may contain a notice bearing the name of the
geography, topography, architecture or copyright owner, and the year of its first
science; publication, and, in copies produced after the
d. Drawings or plastic works of a scientific or creator's death, the year of such death. [Sec. 192,
technical character. RA 8293]

SECTION 6. Works that May be Registered and

Deposited. The following works may be registered
G. Limitations on Copyright
and deposited:
a. Dramatic or dramatic-musical compositions, 1. Doctrine of Fair Use
choreographic works or entertainment in
shows; The fair use of copyrighted work for criticism, news
b. Photographic works including works reporting, teaching (including multiple copies for
produced by a process analogous to classroom use), research and similar purposes is not
photography, lantern slides; an infringement of copyright.
c. Audiovisual works and cinematographic
works and works produced by a process A privilege, in persons other than the owner of the
analogous to cinematography or any process copyright, to use the copyrighted material in a
for making audio-visual recordings; reasonable manner without his consent,
d. Pictorial illustrations and advertisements; notwithstanding the monopoly granted to the owner
e. Computer programs; by the copyright. It is meant to balance the
f. Other literary, scholarly, scientific and monopolies enjoyed by the copyright owner with the
artistic works; interests of the public and of society.
g. Sound recordings;
e. Broadcast recording [Sec. 6, Rule 5, Decompilation: Refers to the reproduction of the
Copyright Safeguards and Regulations code and translation of the forms of the computer
program to achieve the inter-operability of an
Registration and Deposit with the National independently created computer program with other
Library and the Supreme Court Library programs. This may also constitute fair use [Sec.
185.1, RA 8293].
After the first public dissemination of performance
by authority of the copyright owner of a work there The fact that a work is unpublished shall not by
shall, for the purpose of completing the records of itself bar a finding of fair use if such finding is made
the National Library and the Supreme Court Library, upon consideration of all the above factors. [Sec
within three (3) weeks, be registered and deposited 185.2, RA 8293]
with it, by personal delivery or by registered mail
two (2) complete copies or reproductions of the Factors to consider in determining Fair Use
work in such form as the directors of said libraries
may prescribe. A certificate of deposit shall be 1. The purpose and character of the use,
issued for which the prescribed fee shall be including whether such use is of a
collected and the copyright owner shall be exempt commercial nature or is for non-profit
from making additional deposit of the works with the educational purposes;
National Library and the Supreme Court Library 2. The nature of the copyrighted work;
under other laws. 3. The amount and substantiality of the
portion used in relation to the copyrighted
If, within three (3) weeks after receipt by the work as a whole; and
copyright owner of a written demand from the 4. The effect of the use upon the potential
directors for such deposit, the required copies or market for or value of the copyrighted work
reproductions are not delivered and the fee is not [Sec. 185.1, RA 8293; [Harper & Row v.
paid, the copyright owner shall be liable to pay a Nation Enterprise, 471 US 539, 105 S.Ct.
fine equivalent to the required fee per month of 2218, 85 L.Ed.2d 588]
delay and to pay to the National Library and the
Supreme Court Library the amount of the retail price 2. Copyright infringement
of the best edition of the work. Only the above
mentioned classes of work shall be accepted for
Infringement of Copyright and Related Rights means
deposit by the National Library and the Supreme
any violation of the rights under the Intellectual
Court Library. [Sec. 191, RA 8293}
Property Code and/or the applicable Intellectual
Property Law, including the act of any person who at
All copies deposited and instruments in writing filed
the time when copyright subsists in a work has in his
with the National Library and the Supreme Court
possession an article which he known, or ought to
 MERCANTILE LAW REVIEWER

know, to be an infringing copy of the work f or the

purpose of: b. Making of quotations from a published
186 work: (i) compatible with fair use, (ii)
a. Selling, letting for hire, or by way of trade extent is justified by the purpose, (iii)
offering or exposing for sale, or hire, the source and name of the author, appearing
article on work, must be mentioned; [Sec.
b. Distributing the article for purpose of trade, 184.1(b), RA 8293]
or for any other purpose to an extent that
will prejudice the rights of the copyright c. Reproduction or communication to the
owner in the work; or public by mass media of articles on current
c. Trade exhibit of the article in public. [Sec. political, social, economic, scientific or
1(l), Rule 1, Rules and Regulations on religious topic, lectures, addresses and
Administrative Complaints for Violation of other works, delivered in public: (i) for
Laws involving Intellectual Property Rights] information purposes, (ii) not expressly
reserved, and (iii) source is already
Habana et al vs. Robles et al. (1999). Infringement indicated; [Sec. 184.1(c), RA 8293]
consists in the doing by any person, without the
consent of the owner of the copyright, of anything d. Reproduction and communication to the
the sole right to do which is conferred by statute on public of literary, scientific or artistic works
the owner of the copyright. For there to be as part of reports of current events by
substantial reproduction of a book, it does not means of photography, cinematography or
necessarily require that the entire copyrighted work, broadcasting to the extent necessary for
or even a large portion of it, be copied. If so much is the purpose; [Sec. 184.1(d), RA 8293]
taken that the value of the original work is
substantially diminished, there is an infringement of e. Inclusion of a work in a publication,
copyright and to an injurious extent, the work broadcast or other communication to the
appropriated. It is no defense that the pirate did not public, sound recording or film if made by
know whether or not he was infringing any way of illustration for teaching purposes
copyright; he at least knew that what he was compatible with fair use and the source and
copying was not his, and he copied at his peril. In the name of the author appearing on work,
cases of infringement, copying alone is not what is must be mentioned; [Sec. 184.1(e), RA
prohibited. The copying must produce am ―injurious 8293]
effect.‖
f. Recording made in schools, universities, or
Copyright infringement and unfair competition are educational institutions of a work included
not limited to the act of selling counterfeit goods. in a broadcast for the use of schools,
They cover a whole range of acts from copying, universities or educational institutions.
assembling, packaging to marketing, including the Such recording must be deleted within a
mere offering for sale of counterfeit goods. reasonable period; such recording may not
[Microsoft Corp vs. Maxicorp Inc.(2004)] be made from audio-visual works which are
part of the general cinema, repertoire of
Columbia Pictures v. CA (1996). A copy of a piracy feature films except of brief excerpts of the
is an infringement of the original, and it is no work; [Sec. 184.1(f), RA 8293]
defense that the pirate, in such cases, did not know
what works he was indirectly copying, or did not g. Making of ephemeral recordings; (i) by a
know whether or not he was infringing any broadcasting organization, (ii) by means of
copyright; he at least knew that what he was its work or facilities, (iii) for use in its own
copying was not his, and he copied at his peril. In broadcast; [Sec. 184.1(g), RA 8293]
determining the question of infringement, the
amount of matter copied from the copyrighted work h. Use made of a work by or under the
is an important consideration. To constitute direction or control of the government for
infringement, it is not necessary that the whole or public interest compatible with fair use;
even a large portion of the work shall have been [Sec. 184.1(h), RA 8293]
copied. If so much is taken that the value of the
original is sensibly diminished, or the labors of the i. Public performance or the communication
original author are substantially and to an injurious to the public of a work in a place where no
extent appropriated by another, that is sufficient in admission fee is charged by a club on
point of law to constitute a institution for charitable or educational
piracy. purpose only and the aim is not profit-
making; [Sec. 184.1(i), RA 8293]
The following shall NOT constitute
infringement of copyright: j. Public display of the original or a copy of
a. Recitation or performance of a work once it the work not made by means of a film,
has been made accessible to the public if slide, television, image or otherwise on
(1) privately done AND free of charge OR (2) screen or by means of any other device or
strictly for a charitable or religious process either the work has been published,
institution; [Sec. 184.1(a), RA 8293] sold, given away, or transferred to another
 COMMERCIAL LAW REVIEWER

person by the author or his successor in entitled to receive copies of a printed work, shall be
title; [Sec. 184.1(j), RA 8293] entitled, when special reasons so require, to
reproduce a copy of a published work which is
k. Use made of a work for the purpose of any considered necessary for the collection of the library 187
judicial proceedings or for the giving of but which is out of stock. [Sec.188.2, RA 8293]
professional advice by a legal practitioner.
[Sec. 184.1(k), RA 8293] Reproduction of Computer Program

The reproduction in one (1) back-up copy or

Reproduction of Published Work adaptation of a computer program shall be
permitted, without the authorization of the author
General Rule: The private reproduction of a of, or other owner of copyright in, a computer
published work in a single copy, where the program, by the lawful owner of that computer
reproduction is made by a natural person exclusively program: Provided, That the copy or adaptation is
for research and private study, shall be permitted, necessary for:
without the authorization of the owner of copyright a. The use of the computer program in
in the work. [Sec. 187.1, RA 8293] conjunction with a computer for the
purpose, and to the extent, for which the
Exceptions: Such permission shall not extend to: computer program has been obtained; and
a. A work of architecture in the form of b. Archival purposes, and, for the replacement
building or other construction; of the lawfully owned copy of the computer
b. An entire book, or a substantial part program in the event that the lawfully
thereof, or of a musical work in graphic obtained copy of the computer program is
form by reprographic means; lost, destroyed or rendered unusable.
c. A compilation of data and other materials; [189.1, RA 8293]
d. A computer program except as provided in
Section 189; and No copy or adaptation mentioned in this Section
e. Any work in cases where reproduction shall be used for any purpose other than the ones
would unreasonably conflict with a normal determined in this Section, and any such copy or
exploitation of the work or would otherwise adaptation shall be destroyed in the event that
unreasonably prejudice the legitimate continued possession of the copy of the computer
interests of the author. [187.2, RA 8293] program ceases to be lawful. [189.2, RA 8293]

Reprographic Reproduction by Libraries Importation for Personal Purposes

Any library or archive whose activities are not for The importation of a copy of a work by an individual
profit may, without the authorization of the author for his personal purposes shall be permitted without
of copyright owner, make a single copy of the work the authorization of the author of, or other owner of
by reprographic reproduction: copyright in, the work under the following
a. Where the work by reason of its fragile circumstances:
character or rarity cannot be lent to user in a. When copies of the work are not available
its original form; in the Philippines and:
b. Where the works are isolated articles i. Not more than one (1) copy at one
contained in composite works or brief time is imported for strictly
portions of other published works and the individual use only; or
reproduction is necessary to supply them, ii. The importation is by authority of
when this is considered expedient, to and for the use of the Philippine
persons requesting their loan for purposes Government; or
of research or study instead of lending the iii. The importation, consisting of not
volumes or booklets which contain them; more than three (3) such copies or
and likenesses in any one invoice, is
c. Where the making of such a copy is in order not for sale but for the use only of
to preserve and, if necessary in the event any religious, charitable, or
that it is lost, destroyed or rendered educational society or institution
unusable, replace a copy, or to replace, in duly incorporated or registered, or
the permanent collection of another similar is for the encouragement of the
library or archive, a copy which has been fine arts, or for any state school,
lost, destroyed or rendered unusable and college, university, or free public
copies are not available with the publisher. library in the Philippines.
[Sec. 188.1, RA 8293] b. When such copies form parts of libraries
and personal baggage belonging to persons
It shall not be permissible to produce a volume of a or families arriving from foreign countries
work published in several volumes or to produce and are not intended for sale: Provided,
missing tomes or pages of magazines or similar That such copies do not exceed three (3).
works, unless the volume, tome or part is out of [Sec. 190.1, RA 8293]
stock: Provided, That every library which, by law, is
 MERCANTILE LAW REVIEWER

Copies imported as allowed by this Section may not

lawfully be used in any way to violate the rights of Rule on Search and Seizure in Civil
188 owner the copyright or annul or limit the protection
Actions for Infringement of Intellectual
secured by this Act, and such unlawful use shall be
deemed an infringement and shall be punishable as Property Rights
such without prejudice to the proprietor's right of (A.M. No. 02-1-06-SC)
action. [Sec. 190.2, RA 8293]
Application for Search and Seizure [Sec. 3]

a. Remedies

Examination of Applicant and Witnesses [Sec. 5]

Nature Remedy
Injunction,; Actual, Moral and
Exemplary Damages; Impounding Issuance of Writ [Sec. 7]
of documents evidencing sales,
articles and packaging that
infringe copyright and
Civil Search conducted in the presence of defendant,
implements for making them;
Destruction without his representative or witnesses [Sec. 13]
compensation of infringing copies
and devices and the means of
making infringing copies. [Sec. Verified Return filed by Sheriff to the court w/in
216, RA 8293] 3 days from enforcement [Sec. 17]
Imprisonment and fine-
depending on the value of the
infringing materials produced and
Criminal Judge shall ascertain WON writ was served or
the damage the copyright owner
has suffered by reason of the return made w/in 5 days
infringement. [Sec. 217, RA 8293]
Administrative action; Cease and
Desist Orders; Forfeiture of the Trial/Hearing
Administrative paraphernalia used in committing
the offense; Administrative fines
[Sec. 10, RA 8293]
Judgment [Sec. 22]
General Rule: Mere possession of infringing goods is
not punishable
Contents of Application
Exception: Unless one can prove that the possessor a. Ground upon which application is based
knows or ought to know that the goods in his b. Specific description and location of
possession are infringing copies of the work and are documents
held for the purpose of: c. Articles to be searched, inspected copied or
1. Selling, letting for hire or by way of trade, seized
offering or exposing the article for sale or d. Names of applicant, representative, witness
hire; and counsel
2. Distributing the article for trade or for any e. Other information necessary for identification
other purpose to an extent that will of articles [Sec. 4]
prejudice the rights of the copyright owner;
3. Trade exhibit of the article [Sec. 217.3, RA Grounds for Issuance of Writ
8293] a. Applicant is the right holder or his duly
No damages may be recovered under this Act after authorized representative
four (4) years from the time the cause of action b. There is probable cause to believe that the
arose. [Sec. 226, RA 8293] applicant‘s right is being infringed
c. Damage likely to be caused is irreparable
d. Demonstrable risk of evidence that the
alleged defendant may destroy, hide or
remove the document
e. Documents and articles to be seized
constitute evidence of the alleged
defendant‘s infringing activity or that they
infringe or are used or intended to be used as
means of infringing the applicant‘s
intellectual property right [Sec. 6]

Contents of Writ
a. An order to the alleged defendant to permit
 COMMERCIAL LAW REVIEWER

persons named in the writ to enter into the Third and Subsequent Offenses: Imprisonment of six
premises for purpose of searching, inspecting, (6) years and one (1) day to nine (9) years plus a fine
copying or removing from the premises the ranging from five hundred thousand pesos (P500,000)
documents and articles subject to the control to One million five hundred thousand pesos 189
of the court (P1,500,000). ). [Sec. 217.1 (c), RA 8293]
b. An order to the alleged defendant to disclose
to the sheriff the location of the documents In all cases, subsidiary imprisonment in cases of
and articles subject of the writ insolvency. [Sec. 217.1(d), RA 8293]
c. Period when writ shall be enforced (w/in 10
days from issuance) In determining the number of years of imprisonment
d. Names of applicants or his agent and the and the amount of fine, the court shall consider the
Commissioner who will supervise the value of the infringing materials that the defendant
enforcement of writ has produced or manufactured and the damage that
e. Other terms and conditions that will ensure the copyright owner has suffered by reason of the
proper execution of the writ [Sec. 8] infringement. [Sec. 217.2, RA 8293]

Discharge of Writ
a. Writ was improperly or irregularly issued or
excessively enforced
b. Bond was insufficient
c. Safeguards in the writ was violated by the
applicant or the sheriff
f. Documents and articles seized are not
infringing copies or means for making the
materials alleged to infringe the applicant‘s
intellectual property right [Sec. 18]

Failure to file the complaint – the writ, upon motion,

shall be set aside [Sec. 20]

Alleged defendant may claim for damages

a. Writ was discharged
b. Finding or no infringement or threat of
infringement of an intellectual property right
[Sec. 21]

Judgment
a. Finding of Infringement – Court shall order the
destruction of goods or donation to
charitable, educational institution with
prohibition against bringing the same into
channels of commerce
b. Finding of no infringement – Seized materials
shall be immediately returned to defendant
[Sec. 22]

b. Criminal penalties

Any person infringing any right secured by provisions

of Part IV of this Act or aiding or abetting such
infringement shall be guilty of a crime punishable
by:

First Offense: Imprisonment of one (1) year to three

(3) years plus a fine ranging from Fifty thousand
pesos (P50,000) to One hundred fifty thousand pesos
(P150,000). [Sec. 217.1(a), RA 8293]

Second Offense: Imprisonment of three (3) years and

one (1) day to six (6) years plus a fine ranging from
One hundred fifty thousand pesos (P150,000) to Five
hundred thousand pesos (P500,000) for the second
offense. [Sec. 217.1(b), RA 8293]
 MERCANTILE LAW REVIEWER

190 V. Registration Flowcharts

A. Patent Application
B. Utility Model and Industrial Design
C. Copyright Registration and Deposit
D. Trademark

A. Patent Application [Source: http://ipophil.gov.ph; Secs. 32-39, RA 8293]

Application Requirements to get a filing date [Sec.

40, RA 8293]
1. Request for Philippine Patent
2. Description of Invention
Formality Examination 3. Drawings necessary
4. Claim(s)
5. Abstract
6. Identification of Inventor (NRA shall
Classification and Search appoint an agent in the Philippines)

Publication of Unexamined Application in the IPO

Gazette after 18 months from filing or priority date

Request for Substantive Exam (w/in 6 months from

date of publication)

Substantive Examination

Applicant is notified of reasons for refusal

Opinion and/or Amendment

Decision to Grant Final Refusal by Examiner

Patent

Publication of Patent in Appeal to Director of Patents

the IPO Gazette

Final Refusal by Director

Issuance of Patent
Certification
Appeal to Director General

Final Refusal

Court of Appeals

Refusal

Appeal to Supreme Court

Refusal
 COMMERCIAL LAW REVIEWER

B. Utility Model and Industrial Design [Source: http://ipophil.gov.ph]

191

Application is Received

Application is not Formal

Applicant‘s Request
Application is subjected to Applicant is Notified of the
Formality Examination Result of Examination

Application is Received
Application is Formal
With Response No Response

Application is recommended
for Publication Application Deemed
Withdrawn

Director‘s Request Opposition Filed

Petition for Revival
Application is published

BOP Director
No Opposition Filed

BOP Director Application is confirmed for

Registration
Application Revived

Decision

Application is Application is
Refused Affirmed for
Registration

Appeal on the Decision of

the Director

Director General

Decision

Application is Application is
Refused Affirmed for
Registration Third Party‘s Request
Request
Issuance of Certificate Registrability Report
 MERCANTILE LAW REVIEWER

C. Copyright Registration and Deposit [Source: IPOPHL Office Order No. 93 Series of 2011]
192

Submission of Registration and Deposit Form (RDF) with

IP Satellite Office (IPSO)

IPSO Field Specialist shall review entries and documents

Statement of Account (SOA) is issued to Applicant

Payment of Filing Fee to Landbank

IPSO Field Specialist received RDF and RDF Number and

date of filing upon showing of validated deposit slip

IPSO Field Specialist issues Acknowledgment Receipt

(AR) pending release of Official Receipt (OR)

IPSO Field Specialist encodes bibliographic entry in data

base and scan documents including AR, SOA and deposit
slip

IPSO Field Specialist transmit scanned documents to IP

Field Operations Unit (IPFOU) to verity completeness of
documents

IPFOU transmit documents to IP Office Philippines

(IPOPHL) Cashier for preparation of Official Receipt (OR)

Notification by IPOPHL Cashier of the release of OR

Copyright Support Services (CSS) shall print the

Certificate of Registration and Deposit

Certificate released to applicant after 5 working days

from filing
 COMMERCIAL LAW REVIEWER

D. Trademark [Source: http://ipophil.gov.ph] 193

1. Request for Registration
2. Applicant‘s Name and address
3. Nationality or Domicile and
Filing of Application
Place of Business
4. Reproduction of Marks
Requirements [Sec. 5. Translation or marks
6. Names of goods or services for
124, RA 8293]
w/c registration is sought
7. Signature of Applicant
8. Juridical Entity: law under w/c
According of Filing or organized
Priority 9. NRA: appointment of agent
10. Claims of Priority Right
11. Claims of color as distinctive
Search and Examination feature of mark
12. 3D mark, statement to that
effect

Actions and
Responses

Allowance for Publication

Certificate of Registration [Sec.
138, RA 8293]
Prima Facie evidence of:
1. Validity of registration
2. Registrant‘s ownership of the
Publication
mark
3. Registrant‘s exclusive right to
use the same in connection with
the goods or services and those
that are related thereto

NO YES
Is there an
opposition? Opposition
Issuance of Certificate of
Registration

Decision
Publication

YES Favorable to
Applicant

NO

Motion for Reconsideration or

Appeal to the Director General