UST GOLDEN NOTES 2010

Q: What is acorporation?
A: An artificial being created by operation of law having the right of succession, and the powers,
attributes and properties expressly authorized by law and incident to its existence. (Sec. 2)
Q: What are the distinctions between partnership and corporation?
Stockholder has the right to transfer his shares without
consent of the other stockholders unless the right of first
is embodied in the articles of incar
GR: May exercise any power au
the partners.
XPN: Acts which are contrary to: law,
morals, good customs, public order, public
May exercise only such powers as may be granted by law
and its articles of incorporation, implied therefrom or
incidental thereto.
When management is not agreed upon,
every partner is an agent of the partnership
Power to do business and manage its affairs is vested in the
BOD/BOT
Stockholders are liable only to the extent of the shares
subscribed by them whether paid or not.
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CORPORATION CODE
Q: What are the advantages and
disadvantages of a business corporation?
A:
1. Advantages
a. Limited liability;
b. Shareholders are not general
agents of the business;
c. Easy transferability of shares;
d. Continuity of existence;
e. Its credit is strengthened by such
continuity of existence;
f. Standardized methods for the
creation, organization,
management and dissolution
under Corporation Code;
g. Centralized management in the
BOD/BOT;
h. Feasibility of great undertakings;
i. The corporation has legal
capacity to act as a legal unit.
2. Disadvantages
a. Relatively complicated in
formation and management;
b. Entails high cost of formation and
operation;
c. Limited liability of shareholder
serves as a limitation to
corporate creditor because
shareholders are not personally
liable;
d. There is ordinarily lack of
personal element in view of the
transferability of shares;
e. There is greater degree of
governmental control and
supervision that in any
other forms of business
organizations;
f. In large corporations, holding
rights have become largely
theoretical because of the use of
proxies and widespread
ownership;
g. Stockholders have little voice in
the conduct of the business;
h. In large group, management and
control has been separated from
ownership;
i. Double taxation on corporate
system.
2
Q: Give the similarities between a
partnership and a corporation.
A:
1. Has juridical personality separate arid
distinct from that of the individuals
composing it;
2. Can act only through agents;
3. GR: Organization composed of an
aggregate of individuals;
XPN: corporation sole;
4. GR: Distributes its profits to those who
contribute capital;
XPN: The case of an industrial partner
who also shares ill partnership profits;
5. Can only be organized where there is
a law authorizing its organization;
6. Both are taxable as corporation,
subject to income taxation.
Q: ~ay, a corporation enter into a contract
of partllership?
A:
GR: Corporations have no power to enter
into partnership.
Reason: Public policy. In a partnership, the
corporation would be bound by the acts of
the persons who are not its duly appointed
and authorized agents and officers, which
would be entirely inconsistent with the
policy of the law that the corporation shall
manage its own .affairs separately and
exclusively.
XPN: The SEC allowed corporations to
enter into partnerships with other
corporations and individuals provided:
1. The authority to enter into partnership
relation is expressly conferred by the
Charter or the AOI and the nature of
the business venture to be
undertaken by the partnership is in
line with the business authorized by
the charter or the AOI. (SEC
Opinions, Feb. 29, 1980, Dec. 1,
1993, and Feb. 23, 1994.); .
2. The partnership' must be a limited
partnership and the corporation must
be a limited partner;
3. If it is a foreign corporation, it must
obtain a license to transact business
inthe country.
UST GOLDEN NOTES 2010
Q: Does a defective Incorporation result
into a partnership?
A: The answer depends on whether or not
there is a clear intent to participate in the
management of the business affairs on the
part of the investor. Parties who intends to
participate or has actually participated in the
business affairs of the proposed corporation
would be considered as partners under a de
facto partnership. On the other hand, parties
who took no part notwithstanding their
subscriptions do not become partners with'
other subscribers. (Pioneer Insurance v. CA,
G.R. No. 84197, July 28, 1989)
Q: May a corporation enter into a joint
venture?
A: Yes. It may enter into a joint venture with
another where the nature of that venture is in
line with the business authorized by its charter.
(Aurbach v. Sanitary Wares Manufacturing
Corporation, G.R. No. 75875, Oec. 15, 1989)
Q: What are the distinctions between joint
account and partnership?
A:
JOINT ACCOUNT
PARTNERSHIp .,
Has no firm name and
is conducted Inthe
. Has afirm name.
name of the ostensible
partner.
Has nojuridical
Has juridical
personality and can
sue or be sued only in
personality and may
sue or be sued
the name of the
under its firm name
ostensible partner.
Has no common fund.
Has a common fund.
The ostensible partner
All general partners
manages its business
have the right of
operations.
management.
Liquidation thereof can
Liquidation may, by
only be done by the
agreement, be
entrusted to a
ostensible partner.
partner or partners.
Q: What are the attributes of a corporation?
A:
1. It is an artificial being;
2. It is created by operation of law;
3. It enjoys the right of succession; and
4. It has the powers, attributes and
properties expressly authorized by
law or incident to its existence.
Q: What are the theories on the fonnation
of a corporation?
.A:
1. Concession theory or fiat theory -
Means that a corporation was
conceived as an artificial person
owing existence through creation by a
foreign power. It has without any
existence until it has received the
imprimatur of the state acting
according to law, through the SEC.
(Tayag V. Benguet Consolidated, Inc.,
G.R. No. L-23276, Nov. 29, 1968)
Note: Philippine jurisprudence adopted
this theory as the underlying basis for
the existence and powers of corporate
entities.
2. Theory of corporate enterprise or
economic unit - The corporation is
not merely an artificial being, but
more of an aggregation of persons
doing business, or an underlying
business unit. (However, this doctrine
is being used in support of other
doctrines.)
Note: Recognizes the existence of a
business enterprise as the bases of
several contracts and transactions apart
from the issue of whether there was
dulyconstituted ajuridical person.
3.. Genossenschaft theory - Treats a
corporation as. "the reality of the
group as a social and legal entity,
independent of State recognition and
concession". (Tayag V. Benguet
Consolidated, Inc., G.R. No. L-23276,
Nov 29, 1968) .
Q: What are the two kinds of franchise?
A:
1. Corporate or general franchise -
grant given to exist as a corporation;
2. Special or secondary franchise -
certain rights and privileges conferred
upon existing as a corporation (e.g.
right to use the streets of a
municipality to lay pipes of tracks,
erect poles, or string wires).
UNIVERSITY OF SANTO TOMAS ~~)
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CoRP0 RATIO
CODE
at is the doctrine of separate (legal)
personality?
A: It is a well-settled doctrine that a
corporation has a personality distinct and
separate from its individual stockholders or
members. (Cruz vs. Oalisay, A.M. No. R-181-
P, July 31, 1987)
Q: What are the significances of the
doctrine of separate personality?
A:
1. Liabilfty for acts or contracts - the
acts of the stockholders do not bind
the corporation unless they are
properly authorized. The obligations
incurred by a corporation, acting
through its authorized agents are its
sale liabilities. The obligations of the
corporation are not the obligations of
its shareholders and members and
vice-versa. (Cease v. CA,G.R. No. L-
33172, Oct. 18, 1979)
2. Right to bring actions - may bring
civil and criminal actions in its own
name in the same manner as natural
persons. (Art. 46, Civil Code)
3. Right to acquire and possess
property - property conveyed to or
acquired by the corporation is in law
the property of the corporation itself
as a distinct legal entity and not that
of the stockholders or members. (Art.
44[3], Civil Code)
Note: The interest of the shareholder in
the properties of the corporation is
inchoate only. The interest of the
shareholder on a particular property
becomes actual, direct and existing only
uponthe liquidation of the assets of the
corporation and the same property is
assignedtothe shareholder concerned.
4. Acquisftion of court of jurisdiction -
service of summons may be made on
the president, general manager,
corporate secretary, treasurer or in-
house counsel. (Sec. 11, Rule 14,
Rules of Court).
5. Changes in individual membership _
corporation remains unchanged and
unaffected in its identity by changes
inits individual membership.
4
Q: Nine individuals formed a private
corporation. Incorporator Mr. Armando was
elected director and president-general
manager. Part of his emolument is a Ford
Expedition, which the corporation owns.
After a few years, .Mr. Armando lost his
corporate positions but he refused to
return the motor vehicle claiming that as a
stockholder with a substantial equity share,
he owns that portion of the corporate
assets now in his possession. Is the
contention of Mr. Armando valid? Explain.
A: No. The contention of Mr. Armando is not
valid. The Ford Expedition is owned by the
corporation. The corporation has a legal
personality separate and distinct from that of
its stockholder. What the corporation owns is
its own property and not the property of any
stockholder even how substantial the equity
shares that stockholder owns. (2000 Bar
Question)
Q: What are the constitutional guarahtees
to which a corporation is entitled?
A:
1. Due process - It cannot be deprived
of life and property without due
process of law.
Note: Failure to implead a corporation
as defendants and merely annexing a
list of such corporations to the
complaints is a violation of their right to
due process for it would in effect be
disregarding their separate personality
without a hearing. (PCGG v.
Sandiganbayan, G.R. No. 140615, Feb.
19, 2001)
2. Equal protection of the law
3. Protection against unreasonable
searches and seizures.
Note: A corporation is not entitled to invoke the
right against self-incrimination. (Balaan Shipyard
v. PCGG, G.R. No. L-75885, May 27, 1987)
Q: Is a corporation entitled to moral
damages?
A:
GR: A corporation is not entitled to moral
damages because it has no feelings, no
emotions, no senses. (ABS-CBN
Broadcasting Corporation v. CA, G.R. No.
128690 Jan 21, 1999 and Phillip Brothers
Oceanic, Inc, G. R. No. 126204, Nov. 20,
2001)
UST GOLDEN NOTES 2010
XPN:
1. The corporation may recover moral
damages under item7 of Article 2219
of the New Civil Code because said
provision expressly authorizes the
recovery of moral damages in cases
of libel, slander, or any other form of
defamation. Article 2219(7) does not
qualify whether the injured party is a
natural or juridical person. Therefore,
a corporation, as a juridical person,
can validly complain for libel or any
other form of defamation and claim
for moral damages. (Filipinas
Broadcasting Network, Inc. v. AMEC-
BCCM, G.R. No. 141994, Jan 17,
2005)
2. When the corporation has a
reputation that is debased, resulting
in its humiliation in the business
realm. (Manila Electric Company v.
TEA.M. Electronics Corporation, et.
al., G.R. No. 131723, Dec. 13, 2007)
Q: Is a corporation liable for torts?
A: Yes whenever a tortuous act is committed
by an officer or agent under the express
direction or authority of the stockholders or
members acting as a body, or, generally, from
the directors as the governing body. (PNB v.
CA, GR. No. L-27155, May 18, 1978)
Q: Is a corporation liable for crimes?
A:
GR: No. Since a corporation is a mere
legal fiction, it cannot be held liable for a
crime committed by its officers, since it
does not have the essential element of
malice; in such case the responsible
officers would be criminally liable. (People
v. Tan Boon Kong, G.R. No. L-32066. Mar.
15, 1930)
Note: An officer of a corporation can be held
criminally liable for acts or omissions done in
behalf of the corporation only where the law
directly makes the personwhofails toperform
the act in the prescribed manner expressly
liable criminally. (Sia v. People of the
Philippines, L-30896, Apr. 28, 1983)
XPN: If the penalty of the crime is only fine
or forfeiture of license or franchise. (Ching
v Secretary of Justice, G. R. No. 164317,
Feb. 6, 2006)
Q: What is the doctrine of piercing the veil
of corporate fiction?
A: It is the doctrine that allows the State to
disregard the notion of separate personality of
a corporation for justifiable reason/so
Q: What are the effects of piercing the veil?
A: Courts will look at the corporation as an
aggregation of persons undertaking the
business as a group.
Note: Whenthe veil of corporatefictionis pierced
in proper cases, the corporate character is not
necessarily abrogated. It continues for legitimate
objectives. The decision applies only for that
particular case. (Reynoso IV v. CA, G.R. Nos.
116124-25, Nov 22, 2000)
Q: What are the tests in piercing the
corporate veil?
A:
1. Fraud test (When corporate fiction
used to justify a wrong, protect fraud
of defend crime)
2. Control test
3. Alter-ego or instrumentality test (or
conduit cases)
4. Public convenience or objective test
5. Equity cases/test
Q: What are the requisites of the control
test?
A:
1. Control, not mere majority or
complete stock control, but complete
domination, not only of finances but
of policy and business practice in
respect to the transaction attacked
such that the corporate entity as to
this transaction had at that time no
separate mind, will or existence of its
own;
2. Such control must have been used by
the defendant to commit fraud or
wrong, to perpetuate the violation of a
statutory or other positive legal duty,
or dishonest or unjust act in
contravention of plaintiffs legal right;
and
3. The control and breach of duty must
proximately cause the injury or unjust
loss . complained of. (Velarde v.
Lopez, tnc., G.R. No. 153886, Jan.
14, 2004; Heirs of Ramon Durano, Sr.
v. Uy, G.R. No. 136456, Oct. 24,
2000)
UNIVERSITY OF SANTO TOMAS ~ " r '
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CORPORATION CODE
a. Stock corporation - a corporation which has capital stock divided into shares and is authorized
to distribute to holders thereof of such shares dividends or allotments of the surplus profits on
the basis of the shares held. (Sec. 3) .
b. Non-stock corporation - a corporatioh which does not issue stocks nor distribute dividends to
their members. (Sec. 87) .
Q: What circumstances the mere existence
of which does not. necessarily entitle
piercing the veil?
A:
1. Controlling ownership of the
corporation's share
2. 2 corporations have common
;
directors
13.
SUbstantial identity of the
incorporators or 2 corporations
and
identity of its business
Q: ~Iaintiffs filed acollection action against
X Corporation. Upon execution of the
court's decision, X Corporation was found
to be without assets. Thereafter, plaintiffs
filed an action against its present and past
stockholder Y Corporation which owned
substantially all of the stocks of X
corporation. The two corporations have the
same board of directors and Y Corporation
financed the operations of X corporation.
May Y Corporation be held liable for the
debts of X Corporation? Why?
A: Yes, Y Corporation may be held liable for
the debts of X Corporation. The doctrine of
piercing the veil of corporation fiction applies to
this case. The two corporations have the same
board of directors and Y Corporation owned
substantially all of the stocks of X Corporation,
which facts justify the conclusion that the latter
is merely an extension of the personality of the
former, and that the former controls the
Q: What arethe classifications of corporations?
A:
a. Aggregate - consisting at least 5 members.
b. Corporation sale - consisting of 1 person or member only.
policies of the latter. Added to this is the fact
that Y Corporation controls the finances of X
Corporation which is merely an adjunct,
business conduit or alter ego of Y Corporation.
(Commissioner of Internal Revenue v. Norton
& Harrison Company, G.R. No. L-17618, Aug.
31, 1964)(2001Bar Question)
Q: What is alter ego or instrumentality
rule?
A: Where the corporation is so organized and
controlled and its affairs are so conducted as
to make it merely an instrumentality, agency,
conduit or adjunct of another person. Fraud is
not an element in these cases. What is being
considered is that the stockholders or those
who compose the corporation did not treat the
corporatioh as such and considered and
operated the same not as a separate entity but
only as part of the property or business of an
individual or group of individuals or another
corporation.
Q: Canthe doctrine of piercing the veil of
corporate fiction be applied on the basis of
equity?
A: Yes, the doctrine can be applied when it is
necessary to achieve equity or for the
protection of the creditors. It may be called as
"dumping ground" where no fraud or alter ego
circumstances can be culled to warrant the
piercing. (Martinez v. Court of Appeals, G.R.
No. 131673,Sept. 10, 2004)
a. Public - organized for the government of a portion of a State for general good and welfare. (e.g.
cities and municipalities)
b. Private - formed for sorne private purpose, benefit or end; it cannot be created by alegislative
act.
i. Government-owned or controlled corporation - created by the government or of which the
government is the majority stockholder (e.g. GSIS, NAPOCOR, PNR).
ii. Quasi-public corporation - private corporations which have accepted from the State the
grant of franchise or contract involving the performance of public duties but which are
organized for profits (e.g. electric, water, transportation companies).
6
UST GOLDEN NOTES 2010
a.
b.
by created by through
ote: Governedprimarily bythe chartercreatingthemandthe provisions of the Code
applies onlysuppletorily. .
Corporation created under ageneral law - created under the Corporation Code, or the old Corp.
law.
Corporation by prescription - not formally organized as such but has been duly recognized by
immemorial as a Roman Catholic jiElIiillJ lJ llIjBlilJ Blllll1
with requirements law.
De facto - There exist aflaw inits incorporation but there is colorable compliance with the
requirements of law.
Note: The only difference betweenadejure andadefactor corporationis that the former can
successfully resist asuit broughtbythe Statechallenging its existence, while the latter cannotsustain
its righttoexist as against the State.
c.
Corporation by estoppel- A group of persons assumes to act as a corporation knowing it to be
without authority to do so, and enters into a transaction with a third person onthe strength of
such appearance. They are liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof. It cannot be permitted to deny its existence in an action
under said transaction. (Sec.21)
Note: Ithas noreal existence inlaw. Itexists onlybetweenthe personswho misrepresented their
status andthe parties whorelied ontheir misrepresentation. Itsexistence may be attacked byany
third party exceptwhere the attackingpartyis estoppedtotreat the entity other thanthe corporation.
A third partywho, knowing anassociationtobe unincorporated, nonetheless treated it ascorporation
and received benefits fromit, may bebarredfromdenying its corporate existence inasuitbrought
against the alleged corporation(Lim Tong Lim v. Phil. Fishing Gear Industries, Inc. G.R. No. 136448,
Nov. 3, 1999)
d.
a. Domestic - formed, I or existing under
b. Foreign corporation - formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporation to do business inits own
or State.
a.
b.
c.
d.
':j
a.
b.
c.
d.
a.
b.
Parent corporation - has the power irectly or indirectly
elect a majority of the directors of such other corporation.
Holding corporation - owns shares ina corporation only for investment purposes; it does not
actively participate in its management.
Subsidiary - 50% or more of its shares are owned by another corporation.
Affiliate - less than 50% of its shares are owned another n
-~~
tzcci esmsucn, corporation - entirely of spiritual persons bishops, deacons and
the like and are established for the turtherance of religion and for perpetuating the rights of a
church.
Lay corporation - All corporations other than ecclesiastical.
Eleemosynary or charitable corporation - Created notfor private gain or profit but for charitable
purposes for the administration of charitable trust
Civil corporation - Not for the purpose of charity but for benefit, pecuniary or otherwise, of its
members.
corporation - one which i any person who may wish to or
member thereto
Close corporation - those whose shares of stock are held by limited number of persons like the
family or other group (Sec. 96; The Corporation Code ofthe Philippines, De Leon &
De Jr., 2006
UNIVERSITY OF SANTO TOMAS
PacuCtaa de f Der echo CiviC
7
UST GOLDEN NOTES 2010
a. ~~~ ~
Note: Governed primarily bythe chartercreatingthemandthe provisions of the Code
applies onlysuppletorily.
b. Corporation created urider a general law - created under the Corporation Code, or the old Corp.
law.
c. Corporation by prescription - not formally organized as such but has been duly recognized by
immemorial u Roman Catholic
~.
Dejure - inaccordance of alaw.
De facto - There exist aflaw inits incorporation but there is colorable compliance with the
requirements of law.
Note: The only difference betweenadejure andadefactor corporationis that theformer can
successfully resist asuitbroughtbythe Statechallenging its existence, while the lattercannotsustain
its righttoexist as against the State.
a.
b.
c. . Corporation by estoppe/- A group of persons assumes to act as a corporation knowing itto be
without authority to do so, and enters into atransaction with a third person onthe strength of
such appearance. They are liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof. It cannot be permitted to deny its existence in an action
under said transaction. (Sec.21)
Note: It has noreal existence inlaw. Itexists onlybetweenthe persons who misrepresentedtheir
status andthe parties whorelied ontheir misrepresentation. Itsexistence may be attacked byany
third party exceptwhere the attackingpartyis estoppedtotreat the entity other thanthe corporation.
A third partywho, knowing anassociationtobe unincorporated, nonetheless treated it ascorporation
and received benefits fromit, may bebarredfromdenying its corporate existence inasuit brought
againstthe alleged corporation(Lim Tong Lim v. Phil. Fishing Gear Industries, Inc. G.R. No. 136448,
Nov. 3, 1999)
d.
a. Parent corporation - has power irectly or another corporation, to
elect a majority of the directors of such other corporation.
b. Holding corporation - owns shares ina corporation only for investment purposes; it does not
actively participate in its management.
c. Subsidiary - 50% or more of its shares are owned by another corporation.
d. Affiliate - less than 50% of its shares are owned another i
--~---~
a. persons shops, ns and
the like and are established for the furtherance of religion and for perpetuating the rights of a
church.
b. Lay corporation - All corporations other than ecclesiastical.
c. Eleemosynary or charitable corporation - Created notfor private gain or profit but for charitable
purposes for the administration of charitable trust
d. Civil corporation - Not for the purpose of charity but for benefit, pecuniary or otherwise, of its
members.
a. Open corporation - one is open to any person or
member thereto
b. Close corporation - those whose shares of stock are held by limited number of persons like the
family or other closely-knit group (Sec. 96; The Corporation Code of the Philippines, De Leon &
De L Jr., 2006
UN I V E R SIT Y aF SAN T 0 To M AS ~'-'t",
Pacu(tad de Cf Jer ecl i o Civif ' 9-
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..CORPORATION CODE
Q: What are the requisites of a de facto
corporation?
A:
1. Organized under avalid law.
2. Attempt in good faith to form a
corporation according to the
requirements of the la'IV.
Note: The Supreme Court requires that
Articles of Incorporation have already
been filed with the SEC and' the
corresponding certificate of
incorporationis obtained.
3. Use of corporate powers.
Note: The corporation must have
performedtheacts which are peculiar to
a corporation like entering into a
subscription. agreement, adopting by-
laws, and electing directors.
Q: How is the status of a de facto
corporation attacked?
A: The existence of a de facto corporation
shall not be inquired into collaterally in any
private suit to which such corporation may be
a party. Such inquiry may be made by the
Solicitor General in a quo warranto
proceeding. (Sec. 20)
Note: However, as long as it exists, a de facto
corporation enjoys all attributes of a corporation
until the State questions its existence.
In comparison with a corporation by estoppel
where the stockholders are liable as general
partners, stockholders in a de facto corporation
are liable as a de jure corporation. Hence, up to
the extentof their share holdings.
Q: Distinguish de facto corporation from
corporation by estoppel.
A:
, .
DE FACTO
CORPORATION BY
I
CORPORATION . ESTOPPEL
There is existence in
There is no existence
law
in law
The dealings among
The dealings among
the parties on a
the parties on a
corporate basis is not
corporate basis is
required
required
When requisites are
Itwill be considered a
lacking, it can be
corporation in any
corporation by
estoppel
shape or form
8i
I
Q: What is the concept of "going public"
and "going private"?
A: A corporation is deemed to be "going
public" when it decides to list its shares in the
stock exchange. These include corporations
that will make initial public offering of its
shares. A corporation is said to be "going
private" when it would strict the shareholders
to a certain group. In a sense, these include
close and closely held corporation (Aquino,
Philippine Corporate Law Compendium,2006).
Q: What are the tests in detemlining the
nationality of corporations?
A:
1. Incorporation test - Determined by the
state of incorporation, regardless of
the nationality of the stockholders.
2. Domiciliary test - Detemlined bythe
principal place of business of the
corporation.
3. Control test - Determined by the
nationality of the controlling
stockholders or members. This test is
applied intimes of war.
4. Grandfather rule - Nationality is
attributed to the percentage of equity
in the corporation used in nationalized
or partly nationalized area.
Q: Who are considered "Philippine
National" under Foreign Investment Act of
1991(RA. No. 7042)?
A:
1. Corporations organized under
Philippine laws of which 60% of the
capital stock outstanding and entitled
to vote is owned and held by Filipino
citizens;
2. Corporations organized abroad and
registered as doing business in the
Philippines under the Corporation
Code of which 100% of the capital
stock entitled to vote belong to
Filipinos.
Note: However, it provides that where a
corporationand its non-Filipino stockholders own
stocks in a SEC-registered enterprise, at least
60% of the capital stock outstanding and entitled
to vote of both corporations and at least 60% of
the members of the board of directors of both
corporations must be Filipino citizens (DOUBLE
60%RULE). .
UST GOLDEN NOTES 2010
Q: What is the nationality of a corporation
organized and incorporated under the laws
of a foreign country, but owned 100% by
Filipinos?
A: Under the control test of corporate
nationality, this foreign corporation is of Filipino
nationality. Where there are grounds for
piercing the veil of corporate entity, that is,
disregarding the fiction, the corporation will
follow the nationality of the controlling
members or stockholders, since the
corporation will then be considered as one and
the same. (1998 Bar Question)
Q. What are the components of a
corporation?
A:
1. Corporators - Those who compose a
corporation, whether as stockholders
or members
2. Incorporators - They are those
mentioned in the Articles of
Incorporation as originally forming
and composing the corporation and
who are signatories thereof.
3. Directors and trustees - The Board of
Directors is the governing body in a
stock corporation while the Board of
Trustees is the governing body in a
non-stock corporation.
4. Corporate officers - they are the
officers who are identified as such in
the Corporation Code, the Articles of
Incorporation, or the By-laws of the
corporation.
5. Stockholders - Owners of shares of
stock in a stock corporation.
6. Members Corporators of a
corporation which has no capital
stock. They are not owners of shares
of stocks, and their membership
depends on terms provided in the
articles of incorporation or by-laws
(Sec. 91).
7. Promoter - A person who, acting
alone or with others, takes initiative in
founding and organizing the business
or enterprise of the issuer and
receives consideration therefor. (Sec.
3. 10, R.A. No. 8799, The Securities
Regulation Code)
8. Subscriber - persons who have
agreed to take and pay for original,
unissued shares of' a corporation
formed or to be formed.
9. Underwriter a person who'
guarantees on a firm commitment
and/or declared best effort basis the
distribution and sale of securities of
any kind by another.
Q: What is the doctrine of limited liability?
A: Shields the corporators from corporate
liability beyond their agreed contribution to the
capital or shareholding inthe corporation.
Q: What are the qualifications of
incorporators?
A:
1. Natural person;
2. GR: Not less than 5 but not more
than 15;
XPN: Corporation sole
3. Of legal age;
4. Majority must be residents of the
Philippines;
5. Each must own or subscribe to at
least one share. (Sec.10)
Q: Who can be incorporators?
A:
GR: Only natural persons can be
incorporators.
XPN: When otherwise allowed by law,
Rural Banks Act of 1992, where
incorporated cooperatives are allowed to
be incorporators of rural banks.
Note: An incorporator can be corporator. Non-
residents may be incorporators because the law
only requires the majority to be residents of the
Philippines.
An incorporator remains to be an incorporator
evenif hewill later oncease to be acorporatoror
shareholder.
UNIVERSITY OF SANTO TOMAS ~~)
PacuCtal de De r echo Ci vi C ''V'
9
CORPORATION CODE
Q: What are the distinctions between
corporators and incorporators?
A :
INCORPORATORS CORPORATORS
Necessarily a corporator
Not hecessarily an
incorporator
Signatory of the Articles
Not signatory of
the Articles of
of Incorporation
Incorporation
Does not cease to be an Cease to be a
incorporator upon sale corporator by sale
of his shares
of his shares
GR: 5 to 15 natural
persons
XPN: incase of
No limit
cooperative,
incorporator of rural
bank; corporation sole
Originally forms part of
Not necessarily
the corporation
GR: Filipino citizenship
is not a requirement.
XPN: When engaged in
a business which is
partly or wholly
nationalized where
majority must be
residents
Q: Are promoters agents of a corporation?
A: No. Promoters are not agents of the
corporation before it comes into existence.
Upon incorporation, the practice is for the BOD
to pass a resolution ratifying the contracts
entered into by the incorporators with the
promoter. Then, they become agents of the
corporation.
Q: What are the kinds of underwriting
agreement?
A:
1. English - the underwriter sells what
. the corporation cannot sell;
2. Firm Commitment - the underwriter
purchases outright the securities and
then resells the same; and
3. Best Efforts - the underwriter merely
sells for commission.
10
Academics Committee
Chai r per son: Abraham D. Genuino II
Vi ce-Cbai r f or .Academi cs: Jeannie /\. Laur cntino
Vi ce-Cbai r j or Admi n &Fi nan: Ai,sa Cclinc I-l.Luna
Vi ce-Cbai r f or uJjoll1 < 1:'" D,.r i g 1 l : Loise Rae G. Naval
Mercantile Law Committee
51 1 bj ,d H ead: Holy T Ampagucy
Aul . Sl I bj ed H ead' Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldi.
Aircen M. Cacho
Socrates Benjie L Marbil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
Maybclline M. Santiago.
CORPORATION CODE: SHARES OF STOCK
Q: What are the limitations on no par value
shares?
A:
1. Shares which are no par value,
cannot have an issued price of less
than P5.00;
2. The entire consideration for its
issuance constitutes capital so that
no part of it should be distributed as
dividends;
3. They cannot be issued as preferred
stocks;
4. They cannot be issued by banks,
trust companies, insurance
companies, public utilities and
building and loan association;
5. The articles of incorporation must
state the fact that it issued no par
value shares as well as the number
of said shares;
6. Once issued, they are deemed fully
paid and non-assessable. (Sec. 6) .
Q: What are common shares?
A: These are ordinarily and usually issued
stocks without extraordinary rights and
privileges, and entitle the shareholder to a pro
r ata division of profits. It represents the
residual ownership interest in the corporation.
The holders of this kind of share have
complete voting rights and they cannot be
deprived of the said rights except as provided
bylaw.
Q: What are preferred shares?
A: These entitle the shareholder to some
priority on distribution of dividends and assets
over those holders of common shares.
Q: Are holders of preferred shares
creditors?
A: No. Holders thereof cannot compel the
corporation to give them .dividends. The
preference only applies once dividends are
declared.
Q: What are the kinds of preferred shares?
A:
1. Preferred shares as to assets -
Shares which gives the holder
preference in the distribution of the
assets of the corporation in case of
liquidation; and
a. Participating preferred shares -
Entitled to participate with the
common shares in excess
distribution.
12
b. Non-participating preferred
shares Not entitled to
participate with the common
shares in excess distribution.
2. Preferred shares as to dividends-
Shares which are entitled to receive
dividends on said share to the extent
agreed upon before any dividends at
all are paid to the holders of common
stock.
a. Cumulative preferred shares - If
a dividend is omitted in any year,
it must be made up in a later
year before any dividend may be
paid on the common shares in
the later year.
b. Non-cumulative preferred shares
- There is no need to make up
for undeclared dividends
Q: What is preferred cumulative
participating share of stock?
A: This is a kind of share which gives the
holder preference in the payment of dividends
ahead of common stockholders and to be paid
the dividends due for prior years and to
participate further with common stockholders
individend declaration.
Q: What are redeemable shares?
A: These are shares of stocks issued by a
corporation which said corporation can
purchase or take up from their holders as
expressly provided for in the articles of
incorporation and certificates of stock
representing said shares. (Sec. 8)
Q: Can a corporation purchase its own
shares?
A:
GR: Corporation cannot purchase its own
shares except out of unrestricted retained
earnings.
XPN: Redeemable shares may be
redeemed, regardless of the existence of
unrestricted retained earnings (Sec. 8),
provided that the corporation has, after
such redemption, sufficient assets in its
books to cover debts and liabilities
inclusive of capital stock.
Note: When redeemable shares are
reacquired, the same. shall be considered
retired and no longer issuable unless
otherwise provided for in the Articles of
Incorporation. Corporations issuing
redeemable shares with mandatory
UST GOLDEN NOTES 2010
redemption features are required to set up
and maintainasinking fund.
Q: What are the limitations on treasury
shares?
Q: What are unrestricted retained earnings
(URE)?
A: These are surplus profits not subject to
encumbrance.
Q: What are the limitations on redeemable
shares?
A:
1. Issuance of redeemable shares must
be expressly provided in the articles
of incorporation;
2. The terms and conditions affecting
said shares must be stated both in
the articles of incorporation and in
the certificates of stock;
3. Redeemable shares may be deprived
of voting rights in the articles of
incorporation, unless otherwise
provided inthe Code (Sec. 6, par. 6).
4. Redemption cannot be made if it will
cause insolvency of the corporation.
Q: What are treasury shares?
A: Shares that have been earlier issued as
fully paid and have thereafter been acquired
by the corporation by purchase, donation, and
redemption or through some lawful means.
(Sec. 9)
Note: Treasury shares are not retired shares.
They do not revert to the unissued shares of the
corporation but are regarded as property
acquired by the corporation which may be
reissued or resold at a price to be fixed by the
Board of Directors (SC Rules Governing
Redeemable and Treasury Shares, CCP No. 1-
1982).
Q: What are the other means in which a
corporation may acquire its own shares?
A:
1.. To collect or compromise unpaid
indebtedness to the corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares;
4. Redemption; and
5. Close corporation.
A:
1. They may be re-issued or sold again
as long as they are held by the
corporation as treasury shares.
2. Cannot participate individends.
3. It cannot be represented during
stockholder's meetings.
4. The amount of URE equivalent to the
cost of treasury shares being held
shall be restricted from being
declared and issued as dlvidends.
,
Note: When treasury shares are sold below its
par or issued value, there can be no watering of
stock because such watering contemplates an
original issuance of shares.
Q: What are founders' shares?
A: Shares classified as such in the articles of
incorporation which may be given special
preference in voting rights and dividend
payments. But if an exclusive right to vote and
be voted for as director is granted, this
privilege is subject to approval by the SEC,
and cannot exceed 5 years from the date of
approval. (Sec. 7)
Q: What are voting shares?
A: Shares with a right to vote. If the stock is
originally issued as voting stock, it may not
thereafter be deprived of the right to vote
without the consent of the holder.
Q: What are non-voting shares?
A: Shares without right to vote.
The law only authorizes the denial of voting
rights in the case of redeemable shares and
preferred shares, provided that there shall
always be a class or series of. shares which
have complete voting rights.
Q: What are the instances when holders of
non-voting shares are allowed to vote?
A: These redeemable and preferred shares,
when such voting rights are denied, shall
nevertheless be entitled to vote on the
following fundamental matters:
1. Amendment of articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale,lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
UNIVERSITY OF SANTO TOMAS ~.~.~
Pacu(taa de CDerecfio Ci'f}if '.. 13
CORPORATION CODE: SHARES OF STOCK
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation
or other corporations;
7. Investment .of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation. (Sec. 6
par. 6)
Q: What are convertible shares?
A: A share that is changeable by the
stockholder from one class to another at a
certain price and within a certain period.
GR: Stockholder may demand conversion
at his pleasure.
XPN: Otherwise restricted by the articles
of incorporation.
Q: What is a watered stock?
A: A stock issued not in exchange for its
equivalent either in cash, property, share,
stock dividends, or services. Includes stocks:
1. Issued without consideration (bonus
share);
2. Issued for a consideration other than
cash, the fair valuation of which is
less than its par or issued value
(discount share);
3. Issued as stock dividend when there
are no sufficient retained earnings to
justify it;
4. Issued as fully paid when the
corporation has received a lesser
sum of money than its par or issued
value.
Note: "Water" in the .stock represents the
difference between the fair market value at the
time of the issuance of the stock and the par or
issued value f said stock. Both par and no par
stocks canthus bewatered stocks.
Watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such
stocks bythe corporation.
Q: What is a fractional share?
A: A share with a value of less than one full
share.
14
Q: What are shares in escrow?
A: Subject to an agreement by virtue of which
the share is deposited by the grantor or his
agent with a third person to be kept by the
depositary until the performance of certain
condition or the happening of a certain event
contained inthe agreement.
Q: What is an over-issued stock?
A: It is a stock issued in excess of the
authorized capital stock; it is null and void.
Q: What is a street certificate?
A: It is a stock certificate endorsed by the
registered holder in blank and the transferee
can command its transfer to his name from
issuing corporation.
Q: What is promotional share?
A: This is a share issued by promoters or
those in some way interested in the company,
for incorporating the company, or for services
rendered in launching or promoting the welfare
of the company.
Q: Are classes of shares infinite?
A: Yes. There can be other classifications as
long as they are indicated in the AOI, stock
certificate and not contrary to law.
Q: Who may classify shares?
A:
1. Incorporators - the classes and
number of shares which a corporation
shall issue are first determined by the
incorporators as stated in the articles
of incorporation filed with the SEC.
2. Board of directors and stockholders -
after the corporation comes into
existence; they may be altered by the
board of directors and the
stockholders by amending the articles
of incorporation pursuant to Sec. 16.
Q: What is the doctrine of equality of
shares?
A: Where the articles of incorporation do not
provide for any distinction of the shares of
stock, all shares issued by the corporation are
presumed to be equal and enjoy the same
rights and privileges and are also subject. to
the same liabilities. (Sec. 6)
UST GOLDEN NOTES 2010
Q: What is incorporation?
A: It is the performance of conditions, acts,
deeds, and writings by incorporators, and the
official acts, certification or records, which give
the corporation its existence.
Q: What is the term of corporate existence?
A:
GR: A corporation shall exist for a period
not exceeding fifty (50) years from the date
of incorporation
XPN: Unless sooner dissolved or unless
said period is extended.
Note: Extensionmay be made for periods not
exceeding (50) years in any single instance
by an amendment of the articles of
incorporation.
Q: What are the limitations on extension of
corporate term?
A:
1. Should not be made earlier than 5
years prior to the original or
subsequent expiry dates unless there
are justifiable reasons for earlier
extension to be determined by SEC.
2. Should be made before the expiry
date.
3. Extension shall not exceed 50years.
4. Extension . must comply with
procedural requirements for
amendment of AO!.
Q: What is the doctrine of relation or
relating back doctrine?
A: Generally, the filing and recording of a
certificate of extension after the term cannot
relate back to the date of the passage of the
resolution of the stockholders to extend the life
of the corporation. However, the doctrine of
relation applies if the failure to file the
application for extension within the term of the
corporation is due to the neglect of the officer
with whom the certificate is required to be filed
or to a wrongful refusal on his part to receive it.
(Aquino, Philippine Corporate Law
Compendium, 2006)
Q: What is acorporate charter?
A: It is an instrument or authority from the
sovereign power bestowing the right or
privilege to be and act as a corporation.
Q: What is the three-fold nature of the
corporate charter?
A:
1. It is a contract between the State and
the corporation;
2. It is a contract between the
corporation and its stockholder;
3. It is a contract between the
stockholder inter se.
Q: What are the capital stock
requirements?
A:
GR: There is no minimum authorized
capital stock as long as the paid-up capital
is not less than P5,OOO.OO
XPN:
-1-.- As provided by special law
2. As provided bythe Corporation Code
- at least 25% of the authorized
capital stock has been subscribed
and at least .25% of the total
subscription must be paid.
Q: Is it required that each subscriber pay
25%of each subscribed share?
A: No. It is only required that at least 25% of
the subscribed capital must be paid.
UNIVERSITY OF SANTO TOMAS
PacuCtad de (] ) er ecl i o Ci'Vi{
15
CORPORATION CODE: INCORPORATION
Nationalized and Partly Natioalized Businesses
a. Mass media except recording;
b. Practice of all professions
i. Law
ii. Medicine and allied professions
iii. Accountancy, etc.
c. Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec. 5, R.A. 8762);
d. Cooperatives (Ch. III, Art. 26, R.A. 6938);
e.. Private security agencies (Sec. 4, R.A. 5487);
f. Small-scale mining (Sec. 3, R.A. 7076);
g. Utilization of marine resources (Art. XII, Sec. 2, Constitution);
h. Cockpits (Sec. 5, P.O. 449);
i. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8,
Constitution);
j. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological
weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines);
k. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183).
a.. Financing companies regulated by the SEC (Sec. 6, R.A. 5980 as amended byRA. 8556);
b. Investment houses regulated ~ the SEC (Sec. 5, P'D. 129as amended by R.A. 8366).
a. Exploration, development and utilization of natural resources (Art. XII, Sec. 2, Constitution);
b. Ownership of private lands (Art. XII, Sec. 7, Constitution; Ch. 5, Sec. 22, CA 141; Sec. 4, R.A.
9182);
c. Operation and management of public utilities (Art. XII, Sec. 11, Const.; Sec. 16of CA 146);
d. Ownership/establishment and administration of educational institutions (Art. XlV, Sec. 4,
Constitution);
e. Culture, production, milling, processing, trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof (Sec. 5,
P.O. 194;Sec. 15, R.A. 8762);
f. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183)
g. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise
(Art. XII, Sec. 11, Constitution; Sec. 2a, R.A. 7718);
h. Ownership of condominium units where the common areas in the condominium project are co-
owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726).
i. Adjustment Companies (Sec. 323, PD. 613)
j. Manufacture, repair, storage and! or distribution of productsl ingredients requiring PNP
clearance (R.A. 7042 as amended by R.A. 8179)
k. Operation of deep sea commercial fishing vessel (Sec. 27 R.A. 8550)
~a.,
Advertisiji (Art. XVI, Constitution).
a. Private recruitment, whether for local or overseas employment (Art. 27, P.O. 442);
b. Contracts for the construction and repair of locally-funded public works (Sec. 1, CA 541,
LOI 630) except:
i.. infrastructure/development projects covered in R.A. 7718; and
ii. projects which are foreign funded or assisted and required to undergo international
competitive bidding (Sec. 2[aJ, R.A. 7718,'
c. Contracts for the construction of~e-related structures (Sec.l CA 541).
a.
Private radio communications network (R.A. 3846).
16
UST GOLDEN NOTES 2010
ARTICLES OF INCORPORATION
Q: Define articles of incorporation.
A: Articles of Incorporation (AOI) is one that
defines the charter of the corporation and the
contractual relationships between the State
and the corporation, the stockholders and the
State, and between the corporation and its
stockholders.
Q: What are the contents of ADI?
A: NaP- PlaTINum-ASONO
1. Name of corporation;
2. Eurpose/s, indicating the primary and
secondary purposes;
3. Place of principal office;
Note: To determine proper venue in
filing of an action
4. Ierm of existence;
5. Names, nationalities and residences
of incorporators; .
6. Number of directors or trustees,
which shall not be less than 5 nor
more than 15, except for corporation
sole;
7. Names, nationalities, and residences
of the persons who shall ~ct as
directors or trustees until the first
regular ones are elected and
qualified;
8. If a ,tock corporation, the amount of
its authorized capital stock, number of
shares and incase the shares are par
value shares, the par value of each
share;
9. Names, nationalities, number of
shares, and the amounts subscribed
and paid by each of the Qriginal
subscribers which shall not be less
than 25% of authorized capital stock;
10. If Non-stock, the amount of capital,
the names, residences, and amount
paid by each contributor, which shall
not be less than 25% of' total
subscription; name of treasurer
elected by subscribers; and
11. Qther matters as are not inconsistent
with law and which the incorporators
may deem necessary and
convenient. (Sec. 14)
Q: What are the limitations in adopting
corporate name?
A:
1. The proposed name is identical or
deceptively or confusingly similar to
that of any existing corporation;
2. Any other name protected by law; or
3. Patently deceptive, confusing or
contrary to existing laws. (Sec. 18)
4. The corporate name shall contain the
word "Corporation" or its abbreviation
"Corp." or "Incorporated", or "Inc."
5. The partnership name shall contain
the word "Company" or ..Co.".
6. For limited partnership, the word
"Limited" or ..Ltd." Shall be included.
7. If the name or surname of a person is
used as part of a corporate or
partnership name, the consent of said
person or his heirs must be submitted
except if that person is a stockholder,
member, partner or a declared
national hero.
8. The name of a dissolved firm shall
not be allowed to be used by other
firms within 3 years after the approval
of the dissolution of the corporation
by SEC, unless allowed by the last
stockholders representing at least
majority of the outstanding capital
stock of the dissolved firm. (SC
Memorandum Circular 14)
Q: If a corporation changes its corporate
name, is it considered a new corporation?
A: No, it is the same corporation with a
different name, and its character is in no
respect changed. (Republic Planter's Bank v.
. CA, G.R. No. 93073, Dec 21, 1992)
Q: What are the basic requirements for a
stock corporation?
A:
1. Name verification slip;
2. AOI and by-laws;
3. Treasurer's affidavit;
4. Registration data sheet;
5. Proof of payment of subscription like
Bank Certificate of Deposit if the paid-
up capital is incash;
6. Favorable endorsement from proper
government agency incase of special
corporations.
UNIVERSITY OF SANTO TOMAS
PacuCtaa 4t; (} ) er ecl i o Ci oi !
17
CORPORATION CODE: INCORPORATION
Q: What is the content of a treasurer's
affidavit?
Q: What is the doctrine of corporate entity?
A: That at least 25% of the authorized capital
stock of the corporation has been subscribed,
and at least 25% of the total subscription has
been fully paid in actual cash and/or property;
such paid-lip capital being not less than
P5,OOO.
Q: What are the limitations in the
amendment of AOI?
A:
1. The amendment must be for
legitimate purposes and must not be
contrary to other provisions of the
Corporation Code and Special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders
I
I representing 2/3 of the outstanding
capital stock or 2/3 of members;
4. The original and amended articles
together shall contain all provisions
required by law to be set out in the
articles of incorporation. Such
articles, as amended, shall be
indicated by underscoring the
change/s made;
5. Certification under oath by corporate
secretary and a majority of the
BOD/BOT stating the fact that said
amendmentls have been duly
approved by the required vote of the
stockholders or members, shall be
submitted to the SEC;
6. Must be approved by SEC. (Sec. 16);
7. Must be accompanied by a favorable
recommendation of the appropriate
government agency incases of:
a. Banks;
b. Banking and quasi-banking
institutions;
c. Building and loan associations;
d. Trust companies and other
financial intermediaries;
e. Insurance companies;
f. Public utilities;
g. Educational institutions; and
h. Other corporations governed by
special laws (Sec. 17[2])
18
A:
GR: A corporation comes into existence
upon the issuance of the certificate of
incorporation. Then and only then will it
acquire ajuridical personality.
XPN: Sec. 112 clearly states that from
and after the filing with the SEC of the
articles of incorporation, the chief
archbishop shall become corporation sole.
Q: When does amendment of AOI take
effect?
A: Upon approval by the SEC. THat is upon
issuance of amended certificate of
incorporation.
Q: Is it necessary that the approval of SEC
be express?
A: No, implied approval of SEC is also 'I.
allowed. Thus amendment may also take
effect from the date of filing with SEC if not
acted upon within 6 months from the date of
filing for a cause not attributable to the
corporation.
Q: What are the provrsrons of AOI that
cannot be amended?
A: Those matters referring to accomplished
facts, except to correct mistakes.
E.g .
1.
2.
Names of incorporators;
Names of original subscribers to the
capital stock of the corporation and
their SUbscribedand paid up capital;
Names of the original directors;
Treasurer elected by the original
subscribers;
Members who contributed to the
initial capital of the non-stock
corporation; and
Witnesses 'to and acknowledgement
with AOI.
3.
4.
5.
6.
Q: What are the grounds for the rejection or
dlsapproval of AOI or amendment thereto
by the SEC?
A :
1. If such is not substantially in
accordance with the form prescribed;
2. The purpose/s of the corporation are
patently unconstitutional, illegal,
immoral, or contrary to government
rules and regulations;
UST GOLDEN NOTES 2010
3. The treasurer's affidavit concerning
the amount of capital stock
subscribed and/or paid is false
4.. The required percentage of
ownership of the capital stock to be
owned by Filipino citizens has not
been complied with. (Sec. 17)
Note: The above grounds are not exclusive. The
grounds according toP.O. No. 902-A are:
1. Fraud in procuring its certificate of
incorporation;
2. Serious misrepresentation as to what
the corporation can do or its doing to
the great prejudice of, or damage to,
the general public;
3. Refusal to comply with, or defiance or a
lawful order of the SEC restraining the
commission of acts which' would
amount to a grave violation of its
franchise;
4. Continuous inoperation for a period of
at least five (5) years after commencing
the transactionof its business (Sec. 22);
5. Failure to file the by-laws within the
required period;
6. Failure tofile required reports.
Q: Is there an automatic rejection of the
AOI or any amendment thereto?
A: No, the SEC shall give the incorporators a
reasonable time within which to correct or
modify the objectionable portions of the AOI or
amendment. (Sec. 17[1J)
Q: What is the effect of non-use of
corporate charter and continuous
inoperation of a corporation?
A:
1. Failure to organize and commence
business within 2 years from
incorporation - its corporate powers
ceases- and the corporation shall be
deemed dissolve.
2. Continuous inoperation for at least 5
years - ground for the suspension or
revocation of corporate franchise or
certificate of incorporation. (Sec. 22)
Note: The above shall not be applicable if it is
due to causes beyond the control of the
corporationas determined bySEC.
Q: Is the dissolution or revocation due to
failure to operate or inoperation automatic?
A: No, SEC is of the opinion that there should
be proper proceedings for the revocation of
AOI incompliance with due process.
":'~.~'~""
Academics Committee
Chai r per son: Abraham D. Genuine II
' Vi a-Chai r f or Al " l u1 emi t: i ; J eannit: A. Laurentino
Vi ,,-Chai r f or Admi n ee- Fi nan: Aissa Celine H. Luna
Vi ce-Chai r Jar L l JoJl / &De.r zg l l : Loise Rae G. Naval
Mercantile Law Committee
Subj cd H ead: HolyT. Ampaguel'
A.o/ . Sub; cd H catl : Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldi.
Aireen M. Cacho
Socrates Benjie L Mathil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
lvlaybelline M. Santiago
UNIVERSITY OF SANTO TOMAS
Pacu(taa de (j)ereclio Ci'f}iC
19
CORPORA TION CODE: DIRECTORS, TRUSTEES AND OFFICERS
Q: Who shall exercise corporate powers?
A:
GR: The Board of Directors or the Board
of Trustees. (Sec. 23)
XPN:
-1-.- In case of an Executive Committee
duly authorized inthe by-laws;
2. In case of a contracted manager
which may be an individual, a
partnership, or another corporation.
Note: In case the contracted
manager is another corporation, the
special rule in Sec. 44 applies.
3. In case of close corporations, the
stockholders may manage the
business of the corporation instead
by a board of directors, if the articles
of incorporation so provide.
Q: What are the qualifications of a
director/trustee?
A:
1. Director -
a. Must own at least 1 share of the
capital stock;
b. Must be a natural person;
c. Ownership of stock shall stand in
his name on the books of the
corporation.
Note: What is material is the legal
title, not beneficial ownershipof the
stock as appearing onthe books of
the corporation.
d. A person who does not own a
stock at the time of his election
or appointment does not
disqualify him as director if he
becomes a shareholder before
assuming the duties of his office.
(SEC Opinions, Nov. 9, 1987 &
Apr. 5, 1990)
2. Trustee - must be a member of the
non-stock corporation.
20
Q: What are the common requirements of a
director and trustee?
A:
1. Majority of the directors/trustees must
be residents of the Philippines (Sec.
23);
2. He must not have been convicted by
final judgment of an offense
punishable by imprisonment for
period exceeding 6 years or a
violation of the Corporation Code,
committed within 5 years prior to the
date of his election (Sec. 27);
3. He must be of legal age;
4. Other qualifications as may be
prescribed in special laws or
regulations or in the by-laws of the
corporation.
Q: What are the disqualifications?
A:
1. Conviction by final judgment of an
offense punishable by imprisonment
exceeding 6 years;
2. Violation of the Corporation Code
committed Within 5 years prior to his
election or appointment.
Q: What is the term of office of BOD/BOT?
A:
GR: The regular director shall hold office
for 1year.
XPN: If no election is held, the directors
and officers shall hold over until their
successors are elected and qualified. This
is applicable to a going concern where
there is no break in the exercise of the
duties of the officers and directors. (SEC
Opinion, Dec. 15, 1989).
Q: What are the different methods of
voting?
A:
1. Straight voting - every stockholder
may vote such number of shares for
as many persons as there are
directors to be elected.
2. Cumulative voting for one candidate -
a stockholder is allowed to
concentrate his votes and give one
candidate, as many votes as 'the
number of directors to be elected
multiplied by the number of his
shares shall equal.
UST GOLDEN NOTES 2010
3. Cumulative voting by distribution - a
stockholder may cumulate his shares
by multiplying the number of his
shares by the number of directors to
be elected and distribute the same
among as many candidates as he
shall see fit.
Note: Cumulative voting in case of non-
stock corporations only if it is provided inthe
AOI. The members of non-stock
corporations may cast as many votes as
there are trustees to be elected butmay cast
not morethanone votefor one candidate.
Q: Is permanent representation allowed in
the BOD?
A: No, the board of directors of corporations
must be elected from among the stockholders
or members directors every year. Estoppel
does not set in to legitimize what is wrongful.
(Grace Christian High School v. CA, G.R. No.
108905, Oct. 23, 1997)
Q: What are the limitations on the election
of directorsl trustees?
A:
1. At a meeting of stockholders or
members called for the election of
directors or trustees, there must be
present either in person or by
representative authorized to act by
written proxy, the owners of the
majority of the outstanding capital
stock or majority of the members
entitled to vote.
2. The election must be by ballot if
requested;
3. A stockholder cannot be deprived in
the articles of incorporation or in the
by-laws of his statutory right to use
any of the methods of voting in the
election of directors;
4. No delinquent stock shall be voted;
5. The candidates receiving the highest
number of votes shall be declared
elected. (Sec. 24)
Q: Who is an independent director?
A: Shall mean a person other than an officer
or employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which would
interfere with the exercise of independent
judgment in carrying out the responsibilities of
a director. (Sec 38, SRC) .
Q: Is a provision in the by-laws of the
corporation declaring a person engaged in
a competing business ineligible for
nomination for elections to the board of
directors valid?
A: Yes, provided that before such nominee is
disqualified, he should be given due process to
show that he is not covered by the
disqualification. (Gokongwei v. SEC, G.R. No.
L-45911, Apr. 11, 1979)
Note: The disqualification of a competition
from being elected to .the board is a
reasonable exercise of corporate authority.
Q: Who has jurisdiction over election
contests in stock and non-stock
corporation?
A: As amended by R.A. 8799 (The Securities
Regulation Code), the jurisdiction of the SEC
under Sec. 5 P.O. No. 902-A (SEC
Reorganization Act) is now transferred to
Courts of general J urisdiction (Regional Trial
Court). Thus, RTC now has jurisdiction over
election contest.
Q: In case where there are 2 lists of BOD
submitted to SEC, which one is
controlling?
A: It is the list of directors in the latest general
information sheet as filed with the SEC which
is controlling. (Premium Marble Resources,
Inc. v. CA, G.R. No. 96551, Nov. 4, 1996)
Q: What is the next step after the election
of directors?
,A: The directors must formally organize by the
election of corporate officers. (Sec. 25)
Q: Who are corporate officers?
A:
1. President - Must be a director at the
time the assumes office, not at the
time of appointment;
2. Treasurer - Mayor may not be a
director; as a matter of sound
corporate practice, must be a resident
3. Secretary - Need not be a director
unless required by the by-laws; must
be a resident and citizen of the
Philippines; (Sec. 25); and
4. Such other officers as may be
provided inthe by-laws.
Note: An officer is also considered a
corporate officer if he has beenappointedby
the board of directors. (Easycal/
UNIVERSITY OF SANTO TOMAS ~i~ 21
' Facu{ taa ae Der sch Ci'Pi{' -
CORPORATION CODE: DIRECTORS, TRUSTEES AND OFFICERS
Communications Phils., Inc. v. Edward King,
G.R. No. 145901, Dec. 15, 2005)
Any two or more positions may be held
concurrently by the same person, except
that no one shall act as president and
secretary or as president and treasurer at
thesame time. (Sec. 25)
Q: What are the distinctions between a
corporate officer and a corporate
employee?
A:
'CORPORATE CORPORATE
;/ . . OFFICER " .' v EMPLOYEE
Position is provided
for inthe by-laws or
under the
Corporation Code.
Employed by the
action of the
managing officer of
the corporation.
RTC acting as a
special commercial
court has jurisdiction
over intra-corporate
controversies.
LA has jurisdiction in
case of labor
disputes.
Q: What is the required number of
BOD/BOT to constitute quorum?
A:
GR: Majority of the number of directors or
trustees.
XPN: If AOI or the by-laws provide for a
greater number.
Note:
GR: Every decision of at least a majority of
the directors or trustees present at a meeting
at which there is quorum shall be valid as a
corporate act.
XPN:
-1-.- The election of officers which shall
require the vote of a majority of a/l the
members of the board. (Sec. 25[2])
2. No board approval is necessary where
there is custom, usage and practice in
the corporation not requiring prior board
approval or where subsequent approval
is sufficient. (Board of Liquidators v.
Kalaw, G.R. No. L-18805, Aug. 14,
1967)
Q: Who may remove directors or trustees?
A: The power to remove belongs to the
stockholders exclusively. (Sec. 28)
22
Q: What are the requisites for removal of'
directors or trustees?
A:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for
the purpose;
2. Previous notice to the stockholders or
members of the intention to remove a
director;
3. A vote of the stockholders
representing 2/3 of outstanding
capital stock or 2/3 of members
4. Generally, removal may be with or
without cause; however, ifthe director
was elected by the minority, there
must be cause for removal because
the minority may not be deprived of
the right to representation to which
they may be entitled under Sec. 24 of
the Code; (Sec. 28) ,
Q: In 1999, Corporation A passed a board
resolution removing X from his position as
manager of said corporation. The by-laws
of A corporation provide that the officers
are the president, vice-president, treasurer
and secretary. Upon complaint filed with
the SEC, it held that a manager could be
removed by mere resolution of the board of
directors. On motion for reconsideration, X
alleged that he could only be removed by
the affirmative vote of the stockholders
representing 2/ 3 of the outstanding capital
stock. Is X's contention legally tenable.
Why?
A: No. Stockholders' approval is necessary
only for the removal of the members of the
Board. For the removal of a corporate officer
or employee, the vote of the Board of Directors
is SUfficient for the purpose. (2001 Bar
Question)
Q: What are the ways of filling up the
vacancies in the board?
A:
1. Vacancies filled up by stockholders or
members, if it is due to
a. removal;
b. expiration of term;
c. grounds other than removal or
expiration of term, e.g. death,
resignation, abandonment, or
disqualification where the
remaining directors do not
constitute a quorum for the
purpose of filling the vacancy;
d. if the vacancy may be filled by
the remaining directors or
trustees but the board refers the
UST GOLDEN NOTES 2010
matter to stockholders or
members; or (e) increase in the
number of directors;
2. Vacancies filled up by the remaining
directors constituting a quorum or by
the members of the board if still
constituting a quorum, at least a
majority of them are empowered to fill
any vacancy occurring in the board
other than by removal by the
stockholders or members, expiration
of term or increase in the number of
board seats. (Sec. 29)
Note: A director elected to fill vacancy shall
serve the unexpired term. (Sec. 29)
Q: How are directors compensated?
A:
GR: Directors, in their capacity as such,
are not entitled to receive any
compensation except for reasonable per
diems.
XPN:
1. When their compensation is fixed in
the by-laws; .
2. When granted by the vote of
stockholders representing at least a
majority of the outstanding capital
stock at a regular or special meeting;
3. When they are also officers of the
corporation.
XPN to XPN: In no case shall the total
yearly compensation of directors, as such
directors exceed 10% of the net income
before income tax of the corporation during
the preceding year. (Sec. 30)
Q: What is business judgment rule?
A: Under this rule, the will of the majority
controls in corporate affairs, and contracts
intra vires entered into by the board of
directors are binding on the corporation and
courts will not interfere unless such contracts
are so unconscionable and oppressive as to
amount to a wanton destruction of rights of the
minority. (Ingersoll v. Malabon Sugar Co., G.R.
No. L-16977, Apr. 21, 1922)
Q: What are the consequences of business
judgment rule?
A:
1. Resolutions and transactions entered
into by the Board within the powers of
the corporation cannot be reversed
by the courts not even on the behest
of the stockholders.
2. Directors and officers acting within
such business judgment cannot be
held personally liable for such acts.
Q: What are the instances when
directors/trustees/officers are personally
liable?
A:
GR: Directors, trustees or officers are not
solidarily liable with the corporation.
XPN: AGIWAL
-1-.- Willfully and knowingly voting for and
8ssenting to patently unlawful acts of
the corporation; (Sec. 31)
2. Qross negligence or bad faith in
directing the affairs of the corporation;
(Sec. 31)
3. Acquiring any personal or pecuniary
[nterest in conflict of duty; (Sec. 31)
4. Consenting to the issuance of
Watered stocks, or, having
knowledge thereof, failing to file
objections with the secretary;(Sec.
65)
5. 8greeing or stipulating in a contract
to hold himself liable with the
corporation; or
6. By virtue of a specific provision of
.baw.
Note: When the officers of the corporation
exceeded their authority, their actions are not
binding upon the corporation unless ratified by
the corporation or is estopped from disclaiming
them (Reyes v. RCPI Credit Employees Union,
G.R.No. 146535, Aug 18, 200~.
Q: What is doctrine of corporate
opportunity?
A: Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation:
GR: A director shall refund to the
corporation all the profits he realizes on a
business opportunity (Sec. 34) which:
1. The corporation is financially able to
undertake;
UNIVERSITY OF SANTO TOMAS ~~~.
P' acu{ tati ti e (j ) er ecno Ci vi l ' .'
23
CORPORATION CODE: DIRECTORS, TRUSTEES AND OFFICERS
2. From its nature, is in line with
corporations business and is of
practical advantage to it; and
3. The corporation has an interest or a
reasonable expectancy.
Note: The rule shall be applied
notwithstanding the fact that the director
riskedhisownfundsintheventure.
XPN: If such act is ratified by a vote of the
stockholders representing at least 213 of
the outstanding capital stock, the director is
excusedfromremitting the profitrealized.
Q: Malyn, Schiera and J az are the directors
of Patio Investments, a close corporation
formed to run the Patio Cafe, an al fresco
coffee shop in Makati City. In 2000, Patio
Cafe began experiencing financial
reverses, consequently, sdme of the
checks it issued to its beverage
distributors and employees bounced.
In October 2003, Schiera informed Malyn
that she found a location for a second cafe
in Taguig City. Malyn objected because of
the dire financial condition of the
corporation.
!
Sometime in April 2004, Malyn learned
about Fort Patio Cafe located in Taguig City
and that its development was undertaken
by a new corporation known as Fort Patio,
Inc., where both Schiera and J az are
directors. Malyn also found that Schiera
and J az, on behalf of Patio Investments,
had obtained aIoan of P500, 000.00, from
PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by
the assets of Patio Investments and
personally guaranteed by Schiera and J az.
Malyn then filed a corporate derivative
action before the Regional Trial Court of
Makati City against Schiera and J az,
alleging that the two directors had
breached their fiduciary duties by
misappropriating money and assets of
Patio Investments in the operation of Fort
Patio Cafe.
Did Schiera and J az violate the principle of
corporate opportunity? Explain.
A: Shciera and J az violated the principle of
corporate opportunity; because they used
Patio Investments to obtain a loan, mortgaged
its assets and usedthe proceeds of the loanto
acquire a coffee shop through a corporation
theyformed. (Sec. 34) (2005 Bar Question)
24
Q: Give the rules on contracts entered into
by directors/trustees of or officers.
A:
1. Contracts which are entered into by
the corporation with one or more of its
own directors/trustees, or officers
(Sec. 32) - Voidable at the option of
the corporation, unless:
a. The presence of such
director/trustee in the board
meeting approving the contract
was not necessary to constitute a
quorum;
b. The vote of such director/trustee
in the board meeting approving
the contract was not necessary
for the approval of the contract;
c. The contract is fair and
reasonable under the
circumstances;
d. In the case of an officer, there
was previous authorization by
the board of directors.
Note: Even if stockholders
representing 2/3 of the outstanding
capital stock authorizes the contract,
the 3
rd
element (contract is fair and
reasonable) cannot be dispensed
with if the transaction is to be valid
and enforceable.
2: Contracts entereii : into between
corporations with interlocking
directors (Sec. 33) - Valid, provided
that:
a. The contract is not fraudulent;
and
b. The contract is fair and
reasonable under the
circumstances.
Q: What is the effect if the interlocking
director's interest in nominal in one
corporation and substantial in another?
A: If the interlocking director's interest in one
corporation or corporations is "nominal" (not
exceeding 20% of the outstanding capital
stock) and inthe other substantial, then all the
first 3conditions prescribed inSec. 32must be
present with respect to the corporation in
which he has nominal interest.
Where any of the first two conditions is absent,
said contractmust be ratified bythe vote of the
stockholders representing at least 213of the
outstanding capital stock or 2/3 of the
members in a meeting called for the purpose,
provided:
UST GOLDEN NOTES 2010
1. That full disclosure of the adverse
interest of the director/ trustee
involved is made at such meeting;
2. The contract is fair and reasonable
under the circumstances.
Q: Suppose that the by-laws of X
Corporation, a mining firm, provides that
"The directors shall be relieved from all
liability for any contract entered into by the
corporation with any firm in which the
directors may be interested." Thus, director
A acquired claims which overlapped with
X's claims and were necessary for. the
development and operation of X's mining
properties. Is the by-law provision valid?
Why?
A: No. It is in violation of Sec. 32 of the
Corporation Code,
Q: What happens if director "A" is able to
consummate his mining claims over and
above that of the corporation's claims?
A: "A" should account to the corporation for
the profits which he realized from the
transaction. He grabbed the business
opportunity from the corporation. (Sec. 34)
(2001 Bar Question)
Q: What is an executive committee
(execom)?
A: 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 board to the extent
provided inthe board resolution or by-laws.
The creation of executive committee must be
provided for in the by laws and composed of
not less than 3 members of the board
appointed by the board. The committee may
act by a majority vote of all of its members.
Note: An executive committee can only be
createdbyvirtue of a provisioninthe by-laws and
that inthe absence of such by-law provision, the
boardof directors cannot simply create or appoint
an executive committee to perform some of its
. functions. (SEC Opinion, Sept. 27, 1993)
A person not a director can be a member.of the
executive committee but only in a
recommendatory or advisory capacity.
Q: Are the decisions of the executive
committee subject to appeal to the board?
A: No, however, if the resolution of the
Executive Committee is invalid, i.e. not one of
the powers conferred to it, it may be ratified by
the board (SEC Opinion, July 29, 1995).
Q: What are the limitations on the powers
of the executive committee?
A: It cannot act onthe following:
1. Matters needing stockholder
approval;
2. Filling upof board vacancies;
3. Amendment, repeal or adoption of by-
laws;
4. Amendment or repeal of any
resolution of the Board which by its
express terms is not amendable or
repealable; and
5. Cash dividend declaration. (Sec. 35)
Academics Committee
Cl Jai r per Jol I : Abraham D. Genuino II
Vi ,,Cooi r (or A" ,tk1 1 l i L J: J eannie A. Laurentino
Vi aC.ooi r l or .Admi n e;- Fi l i on" ,: Aissa Celine H. Luna
Vi aCl Jai r / or L oyo: i " DeJi g l l : Loise RaeG. Naval
Mer cantile Law Comr nittee
Sub/ cd H ead: IIoly T. J \mpaguey
.Asst. S u& j ed H ead: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Aireen M. Cacho
Socrates Benjie L Marqil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
Maybelline M. Santiago
UNIVERSITY OF SANTO TOMAS ~~)
Pacu{ tati ti e < Der ecl i o Ci oi l 'V'
25
CORPORATION CODE: PO\IV'ERSOF jORPORATIONS
Q: What are the kinds of powers of
corporation?
A:
11
i
Express powers - Granted by law,
Corporation Code, and its Articles of
Incorporation or Charter, and
administrative regulations
2: Inherent/incidental powers - Not
expressly stated but are deemed to
be within the capacity of corporate
entities.
3. Implied/necessary powers - Exists as
a necessary consequence of the
exercise of the express powers of the
corporation or the pursuit of its
purposes as provided for in the
Charter
Q: What are the general powers of a
corporation?
A: SuSuCo-ABSP-MEDPO
1. To SUe and be sued;
2. Of SUccession;
3. To adopt and use of Corporate seal;
4. To amend its Articles of
Incorporation; -
5. To adopt its ~y-Iaws;
6. For .tock corporations: issue and sell
stocks to subscribers and treasury
stocks; for non-stock corporations:
admit members
7. To Eurchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and deal with real and
personal property, securities and
bonds;
8. To gnter into merger or consolidation;
9. To Make reasonable Donations for
pubiiC welfare, hospitai, charitable,
cultural, scientific, civic or similar
purposes, provided that no donation
is given to any
a. political party,
b. candidate and
c. partisan political activity.
10. To establish Eension, retirement, and
other plans for the benefit of its
directors, trustees, officers and
employees - basis of which is the
labor code
11. To exercise Qther powers essential
or necessary to carry out its
purposes.
26
Q: When does the power to sue and be
sued commence?
A: Upon issuance by SEC of Certificate of
Incorporation.
Q: What are the limitations of the
corporation in dealing with property?
A:
1. In dealing with any kind of property, it
must be in the furtherance of the
purpose for which the corporation was
organized.
2. Constitutional limitations - cannot
acquire public lands except by lease.
With regard to private land, 60% of the
corporation must be owned by the
Filipinos, same with the acquisition of
a condo unit.
Note: No law disqualifies a person from
purchasing shares in a landholding
corporation even if the 'latter will exceed
the allowed foreign equity, what the law
disqualifies is the corporation from
owning land.
3. Special law - subject to the provisions
of the Bulk Sales Law
Q: What are the requisites for a valid
donation?
A:
1. Donation must be reasonable;
2. Must be for valid purposes including
public welfare, hospital, charitable,
cultural, scientific, civic or similar
purposes;
3. Must not be an aid in any
a. political party,
b. candidate and
c. partisan political activity;
4. Donation must bear a reasonable
relation to the corporation's interest
and not be so remote and fanciful.
Q: Can a corporation act as surety or
guarantor?
A:
GR: No.
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the
particular transaction is reasonably
necessary or proper in the conduct of its
business.
UST GOLDEN NOTES 2010
What are the specific powers of a
-paration?
Power to extend or shorten corporate
term (Sec. 37);
2. Increase or decrease corporate stock
(Sec. 38);
3. Incur, create, or increase bonded
indebtedness (Sec. 38);
4. Deny pre-emptive right (Sec. 39);
5. Sell, dispose, lease, encumber all or
substantially all of corporate assets
(Sec. 40);
6. Purchase or acquire shares (Sec.
41);
7. Invest corporate funds in another
corporation or business for other
purpose other than primary purpose
(Sec. 42);
8. Declare dividends out of unrestricted
retained earnings (Sec. 43);
9. Enter into management contract with
another corporation (not with an
individual or a partnership - within
general powers) whereby one
corporation undertakes to manage all
or substantially all of the business of
the other corporation for a period not
longer than five (5) years for anyone
term (Sec. 44);
10. Amend Articles of Incorporation (Sec.
16).
Note: May be used as means to voluntarily
dissolve a corporation
Q: What are the procedural requirements in
extending/shortening corporate term?
A:
1. Majority vote of the BOD or BOT;
2. Ratification by 213 of the SH
representing outstanding capital stock
or by at least 2/3 of the members in
case of non-stock corporation;
3. Written notice of the proposed action
and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of
the corporation and deposited to the
addressee in the post office with
postage prepaid, or served
personally;
4. Copy of the amended AOI shall be
submitted to the SEC for its approval;
5. In case of special corporation, a
favorable recommendation of
appropriate government agency.
(Sec. 37)
Note: The extension must be done during the
lifetime of the corporationnot earlier than5years
prior to the expiry date unless exempted. The
extensionmust notexceed 50 years.
After the term had expired without extension, the
corporation is dissolved. The remedy of the
stockholders is reincorporation. .
Any dissenting stockholder may exercise his
appraisal right in case of shortening or extending
corporateterm(Sec. 37).
Q: What are the procedural requirements in
increasing or decreasing capital stock?
A:
1. Majority vote of the BOD;
2. Ratification by stockholders
representing 2/3 of the
outstanding capital stock;
3. Written notice of the proposed
increase or diminution of the capital
stock and of the time and place of the
stockholder's meeting at which the
proposed increase or diminution of
the capital stock must be addressed
to each stockholder at his place of
residence as shown on the books of
the corporation and deposited to the
adqressee in the post office with
postage prepaid, or served
personally;
4. A certificate in duplicate must be
signed by a majority vote of the
directors of the corporation and
countersigned by the chairman and
the secretary of the stockholder's
meeting, setting forth:
a. That the foregoing requirements
have been complied with;
b. The amount of increase or
diminution of the capital stock;
c. If an increase of the capital
stock, the amount of capital stock
or number of shares of no par
stock actually subscribed, the
names, nationalities and
residences of the persons
subscribing, the amount of
capital stock or number of no par
stock subscribed by each, and
the amount paid by each on his
subscription in cash or property,
UN I V E RSIT Y 0 F SAN ToT ci MAS ~ " ' -' t" . 27
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CORPORATION CODE: POWERS OF :ORPORATIONS
or the amount of capital stock or
number of shares of no par stock
allotted to each stockholder if
such increase is for the purpose
of making effective stock
dividend authorized;
d. The amount of stock represented
at the meeting; and
e. The vote authorizing the increase
or diminution of the capital stock
Note: The increase or decrease in the capital
stock or the incurring, creating or increasing
bonded indebtedness shall require prior approval
of the SEC.
Q: What is the additional requirement With
respect to the increase of capital stock?
A: The application to be filed with the SEC
shall be accompanied by the sworn statement
of the treasurer of the corporation, showing
that at least 25% of the amount subscribed
has been paid either incash or property or that
there has been transferred to the corporation
property the valuation of which is equal to 25%
of the subscription.
Q: What shall be the basis of the required
25% subscription?
A: It shall be based on the additional amount
by which the capital stock increased and not
on the total capital stock as increased.
Note: There will be no treasurer's affidavit in
case of decrease in capital stock. Corporation
need i not exhaust its original capital before
increasingcapital stock.
I
Q: What is the additional requirement With
respect to the decrease of capital stock?
A: The same must not prejudice the right of
the creditors.
Q: What are the ways of Increasing or
decreasing the capital stock?'
A: By increasing or decreasing the: .
1. number of shares and retaining the
par value;
2. par value of existing shares without
increasing or decreasing the number
of shares;
3. number of shares and increasing or
decreasing the par value.
Q: The stockholders of People Power, Inc.
(PPI) approved two resolutions in a special
stockholders'meeting:
28 Iteam:B
a) Resolution increasing the
authorized capital stock of PPI;
and
b) Resolution authorizing the Board
of Directors to issue, for cash
payment, the new shares from the
proposed capital stock increase in
favor of outside investors who are
non-stockholders.
The foregoing resolutions Were approved
by stockholders representing 99% of the
total outstanding capital stock. The sole
dissenter was J immy Morato who owned
1% of the stock.
Are the resolutions binding on the
corporation and its stockholders including
J immy Morato, the dissenting stockholder?
A: No. The resolutions are not binding on the
corporation and its stockholders including
J immy Morato. While these resolutions were
approved by the stockholders, the directors'
approval, which is required by law in such
case, does not exist. (1998 Bar Question)
Q: What remedies, if any, are available to
Morato?
'A: J immy Morato can petition the Securities
and Exchange Commission to declare the two
(2) resolutions, as well as any and all actions
taken by the Board of Directors thereunder,
null and void. (1998 Bar Question)
Note: The requirements for the power to incur,
create or increase bonded indebtedness is also
the same with the power to increase or decrease
capital stock.
Q: What is bonded indebtedness?
A: It is a long term indebtedness secured by
real or personal property (corporate assets).
Note: Not all borrowings of the corporation need
stockholders' approval. Only bonded
indebtednessrequiressuch approval.
UST GOLDEN NOTES 2010
, Flower todeny'pre-emptive right
Q: What is pre-emptive right?
A: It is the preferential right of shareholders to
subscribe to all issues or disposition of shares
of any class in proportion to their present
shareholdings. (Sec. 39)
Q: What is the purpose of pre-emptive
right?
A: To enable the shareholder to retain his
proportionate control in the corporation and to
retain his equity inthe surplus.
Q: Is there pre-emptive right on the re-
issuance of treasury shares?
A: Yes. When a corporation reacquires its own
shares which .thereby become treasury shares,
all shareholders are entitled to pre-emptive
right when the corporation reissues or sells
these treasury shares. The re-issuance of
treasury shares is not among the exception
provided by Sec. 39 when pre-emptive right
does not exist.
Q: May pre-emptive right be waived by the
stockholder?
A: Yes when the stockholder fails to exercise
his pre-emptive right after being notified and
given anopportunity to avail of such right.
Q: Is the pre-emptive right of a stockholder
transferable?
A: Yes, unless there is an express restriction
inthe AOI.
Q: Suppose that X Corporation has already
issued the 1000 originally authorized
shares of the corporation so that its Board
of Directors and stockholders wish to'
increase X's authorized capital stock. After
complying with the requirements of the law
on increase of capital stock, X issued an
additional 1000 shares of the same value.
Assume that stockholder A presently holds
200 out of the 1000 original shares. Would
A have a pre-emptive right to 200 of the
new issue of 1000 shares? Why?
A: Yes, A would have a pre-emptive right to
200 of the new issue of 1000 shares. A is a
stockholder of record holding 200 shares in X
Corporation. According to the Corporation
Code, each stockholder has' the pre-emptive
right to all issues of shares made by the
corporation in proportion to the number of
shares he holds on record inthe corporation.
Q: When should stockholder A exercise the
pre-emptive right?
A: Pre-emptive right must be exercised in
accordance with the Articles' of Incorporation
or the By-Laws. When the Articles of
Incorporation and the By-Laws are silent, the
Board may fix a reasonable time within which
the stockholders may exercise the right.
Q: Assuming a stockholder disagrees with
the issuance of new shares and the pricing
for the shares, may the stockholder invoke
his appraisal rights and demand payment
for his shareholdings?
A: No, the stockholder may not exercise
appraisal right because the matter that he
dissented from is not one of those where right
of appraisal is available under the Corporation
Code. (1999 Bar Question)
Q: When can the corporation deny pre-
emptive right?
A: The corporation can deny pre-emptive right
if the articles of incorporation or amendment
thereto denies such right.
Q: Distinguish pre-emptive right from right
of first refusal.
A:
Arises only by virtue
of contractual
stipulations but is
also granted under
the provisions on
close corporation
May be exercised even
when there is no
express provision of
law
Pertains to
unsubscribed portion of
the authorized capital
stock. A right that may
be claimed against the
corporation. It includes
treasury shares.
Exercisable against
another stockholder
of the corporation of
his shares of stock
UNIVERSITY OF SANTO TOMAS
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CORPORATION CODE: POWERS OF CORPORATIONS
Q: What are the instances when pre-
emptive right is not available?
A:
1.
Shares to be issued to comply with
laws. requiring stock offering or
minimum stock ownership by the
public;
Shares issued in good faith with the
approval of the stockholders
representing 2/ 3 of the outstanding
capital stock in exchange for property
needed for corporate purposes;
Shares issued in payment of
previously contracted debts;
In case the right is denied in the
Articles of Incorporatioh;
Waiver of the right by the stockholder.
2.
3.
I
I
4.
I
5.
Sel l , l ease, t i xchange, .l port gage, pl edge or
' . ot her di spqsi t i on (SLEMPO) of al/ or
: .subst ant i al l y al l -of COl i orat e asset s
Q: What are the procedural requirements?
A:
1. Majority vote of the BOD or BOT;
2. Ratification by stockholders
representing at least 2/ 3 of the
outstanding capital stock or by at
least 2/ 3 of the members in case of
non-stock corporation;
3. Written notice of the proposed action
and of the time and place of the
meeting addressed to each
stockholder or member at his place of
residence as shown Onthe books of
the corporation and deposited to the
addressee in the post office with
postage prepaid, or served
personally. (Sec. 40)
Note: The sale of the assets shall be subject
to the provisions of existing laws on illegal
combinations and monopolies.
After such authorization or approval by the
stockholders the board may, nevertheless, in
its discretion, abandon such SLEMPO. (Sec.
40)
Any dissenting stockholder shall have the
option to exercise his appraisal right.
Q: What is meant by substantially all of
corporate assets?
A: If the corporation would be:
1. rendered incapable of continuing the
business, or
30
2. accomplishing the purpose for which
it was incorporated.
Q: When may the corporation forgo the
ratification by SH I members?
A:
1. If sale is necessary in the usual and
regular course of business;
2. If the proceeds of the sale or other
disposition of such property and
assets are to be appropriated for the
conduct of the remaining business;
3. If the transaction does not cover all or
substantially all of the assets.
Q: What is the effect of transfer of all or
substantially all of assets of one
corporation to another corporation?
A:
GR: The transferee corporation of all or
substantially all of the assets of the
transferor corporation shall not be liable for
the debts of the transferor corporation.
XPN:
1. Express or implied assumption of
liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of
creditors;
4. If the purchaser becomes a
continuation of the seller;
5. If there is violation of the Bulk Sales
Law.
Power to acqui re own shares.
Q: Can a corporation acquire its own
shares?
A:
GR: In the absence of statutory authority,
the corporation cannot acquire its own
shares
XPN: SEC Opinion, Oct. 12, 1992,
imposed the following conditions on its
exercise:
1. The capital of the corporation must
not be impaired;
2. Legitimate and proper corporate
objective is advanced;
3. Condition of the corporate affairs
warrants it;
4. Transaction is designed and carried
out ingood faith
5. Interest of creditors not impaired, that
is, not violative of the trust fund
doctrine.
UST GOLDEN NOTES 2010
te: Sec. 41 of the Code requires that:
1. the acquisition should be for a
legitimate corporate purpose; and
2. there should be unrestricted retained
earnings [URE].
Q: What are the instances where
corporation may acquire its own shares?
A:
1. To eliminate fractional shares out of
stock dividends;
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, ina
delinquency sale and to purchase
delinquent shares sold during said
sale;
3. To pay dissenting or withdrawing
stockholders (in the exercise of the
stockholder's appraisal right);
4. To acquire treasury shares;
5. Redeemable shares regardless of
existence of retained earnings;
6. To effect a decrease of capital stock;
7. In close corporations, when there is a
deadlock in the management of the
business
Q: What are the requirements?
A:
1. Approval by the majority vote of the
BOD or BOT;
2. Ratification by stockholders
representing at least 213 of the
outstanding capital stock or by at
least 2/ 3 of the members in case of
non-stock corporation
3. Ratification must be made at a
meeting duly called for the purposes,
and
4. Prior written notice of the proposed
investment and the time and place of
the meeting shall be made addressed
to each stockholder or member by
mail or by personal service.
Note: Investment of a corporation in a business
which is in line with its primary purpose requires
onlythe approval of the board.
Any dissenting stockholder shall have appraisal
right.
Q: What are the requirements?
A:
1. Existence of unrestricted retained
earnings;
2. Resolution of the board;
3. In case of stock dividend, resolution
of the board with the concurrence of
votes representing 2/ 3 of outstanding
capital.
Q: What are unrestricted retained
earnings?
A: These are retained earnings which have not
been reserved or set aside by the board of
directors for some corporate purpose.
Q: Who are entitled to receive dividends?
A: The stockholders of record date in so far as
the corporation is concerned; if there is no
record date, the stockholders at the time of
declaration of dividends (not at the time of
payment).
Note: In case of transfer, dividends declared
before the transfer of shares belong to the
transferor and those declared after the transfer
belongstothe transferee.
Q: Who are entitled to receive dividends in
case of mortgaged or pledged shares?
A:
GR: The mortgagor or the pledgor has the
right to receive the dividends.
XPN: When the mortage or pledge is
recorded in the books of the corporation,
in such a case then the mortgagee or
pledgee is entitled to receive the
dividends.
Q: What are the forms of dividends?
A:
1. Cash
Note: Cash dividends due on delinquent
stock shall first be applied to the unpaid
balance onthe subscription plus cost and
expenses.
2. Stock
Note: Stock dividends are withheld from
the delinquent stockholder until his unpaid
subscriptionisfully paid.
UNIVERSITY OF SANTO TOMAS
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CORPORATION CODE: POWERS OF CORPORATIONS
3. Property
Note: Stockholders are entitled to
dividends PRO-RATA based on the total
number of shares and not on the amount
paidonshares.
Q: When may corporation declare
dividends?
A:
GR: Even if there are existing profits, BOD
has discretion to determine whether
dividends are to be declared.
XPN: Stock corporations are prohibited
from retaining surplus profits in excess of
100% of their paid-in capital stock.
XPN toXPN:
1. Definite corporate expansion projects
approved by the board of directors;
2. Corporation is prohibited under any
loan agreement with any financial
institution or creditor from declaring
dividends without itslhis consent and
such consent has not yet been
secured;
3. The retention is necessary under
special circumstances obtaining in
the corporation, such as when there
is a need for special reserve for
probable contingencies.
Q: What if there is a wrongful or illegal
declaration of dividends?
Q: What are the sources of retained
earnings? Is it available for dividends?
A:
i
SOURCES OF
AVAILABILITY FOR'
I
RETAINED
DIVIDENDS'. . .:
I
.-EARNINGS
I
Paid-in surplus - It is It cannot be
the difference between declared as cash
the par value and the dividend but can be
issued value or selling declared only as
price of the shares stock dividends
Revaluation surplus -
Increase inthe value Cannot be declared
of afixed asset as a as dividends
result of its because there is no
appreciation. They are actual gain (gain in
by nature subject to paper only).
fluctuations.
Reduction surplus -
It cannot be
the surplus arises from
declared as cash
the reduction of the par
dividend but can be
value ofthe issued
declared only as
shares of stocks.
stock dividends
Gain from Sale of Real Available as
Property dividends
Cannot be declared
as stock or cash
Treasury Shares dividends but it may
be declared as
property dividend
Operational Income Available as
Income dividends
Q: Distinguish cash and stock dividends.
A: The Board of Directors is liable. The
stockholders should return the dividends to the A:
corporation (solutio indebiti).
Q: What are the sources of dividends?
A:
GR: Dividends can only be declared out of
actual and bona fide unrestricted retained
earnings.
XPN: Dividends can be declared out of
capital inthe following instances:
1. Dividends from investments wasting
assets corporation;
2. Liquidating dividends
I
32
CASH DIVIDENDS STOCK; DIVIDENDS
-I
Part of general fund Part of capital
Results incash
No cash outlay
outlay
Once issued, can be
Not subject to levy levied by corporate
by corporate creditors because
creditors they're part of
corporate capital
Declared only by
Declared by the board
the board of
directors at its
with the concurrence of
the stockholders
discretion
representing at least
(majority of the
2/3 of the outstanding
quorum only, not
capital stock at a
majority of all the
board)
regular/special meeting
Does not increase
Corporate capital is
the corporate
capital
increased
Its declaration
No debt is created by
creates a debt from
the corporation to
its declaration
UST GOLDEN NOTES 2010
each of its
stockholders
If received by
individual: subject
Not subject totax either
to tax;
If received by
received by individual
corporation: not
or a corporation
subiect to tax
Cannot be revoked
Can be revoked despite
after announcement
announcement but
before issuance
Applied to the
Can be withheld until
unpaid balance of
payment of unpaid
delinquent shares
balance of delinquent
shares
Note: For the purposes of this distinction,
property dividends are considered as cash
dividends.
Q: May stock dividends be issued to a
person who is not a stockholder in
payment of services rendered?
A: No. Only stockholders are entitled to
payment of stock dividends. (Nielson & Co.,
Inc. v. Lepanto Consolidated Mining Co., GR.
No. 21763, Dec. 17, 1966).
Q: What is the trust fund doctrine?
A: The subscribed capital stock of the
corporation is a trust fund for the payment of
debts of the corporation which the creditors
have the right to look up to satisfy their credits,
and which the corporation may not dissipate.
The creditors may sue the stockholders
directly for the latter's unpaid subscription.
Q: What are the exceptions to the trust
fund doctrine?
A: The Code allows distribution of corporate
capital only inthese instances:
1. Amendment of the AOI to reduce
authorized capital stock;
2. Purchase of redeemable shares by
the corporation regardless of
existence of unrestricted retained
earnings;
3. Dissolution and eventual liquidation of
the corporation.
Q: What is a management contract?
A: It is any contract whereby a corporation
J dertakes to manage or operate all or
ibstantially all of the business of another
rporation, whether such contracts are called
service contracts, operating agreements or
otherwise. (Sec. 44)
Note: Sec. 44 refers only to a management
contract with another corporation. Hence, it does
not apply to management contracts entered into
byacorporationwith natural persons.
. Q: What are the requirements?
A:
1. Contract must be approved by the
majority of the BOD or BOT of both
managing and managed corporation;
2. Ratified by the stockholders owning
at least the majority of the
outstanding capital stock, or
members in case of a non-stock
corporation, of both the managing
and the managed corporation, at a
meeting duly called for the purpose
3. Contract must be approved by the
stockholders of the managed
corporation owning at least 2/3 of the
outstanding capital stock entitled to
vote, 213 members when:
a. Stockholders representing the
same interest in both of the
managing and the managed
corporation own or control more
than 1/3 of the total outstanding
capital stock entitled to vote of
the managing corporation;
b. Majority of the members of the
BOD of the managing
corporation also constitute a
majority of the BOD of the
managed corporation.
Q: What is the allowed period for every
management contract entered into by the
corporation?
A:
GR: Management contract shall be entered
into for a period not longer than 5 years for
anyone term.
XPN: In cases of service contracts or
operating agreements which relate to the
exploitation, development, exploration or
utilization of natural resources, it may be
entered for such periods as may be
provided by the pertinent laws or
regulations.
UNIVERSITY OF SANTO TOMAS
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CORPORATION CODE: POWERS OF CORPORATIONS
Q: What are ultra vires acts?
Q: What are the effects of an ultra vires
act?
A: Those powers that are not conferred to the
corporation by law, by its AOI and those that
are not implied or necessary or incidental to
the exercise of the powers so conferred. (Sec
45)
Q: What are the types of ultra vires acts?
A:
1. Acts done beyond the powers of the
corporation as provided for in the law
or its articles of incorporation;
2. Acts or coritracts entered into in
behalf of the corporation by persons
who have no corporate authority; and
Note: This is technically ultra vires acts
of officers and notof the corporation.
3. Acts or contracts which are per se
illegal as being contrary to law.
Q: When does the act of the officers bind
the corporation?
A:
,
4.
If it is provided inthe by-laws;
If authorized by the board;
Under the doctrine of apparent
authority;
When the act was ratified.
Q: What is the doctrine of apparent
authority?
A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the
scope of an apparent authority, it holds himout
to the public possessing the power to do those
acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agent's authority.
Q: When is the corporation estopped to
deny ratification of contracts or acts
entered by its officers or agents?
A: Generally, when the corporation has
knowledge that its officers or agents exceed
their power, it must promptly disaffirm the
contract or act, and allow the other party or
third person to act in the belief that it was
authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it
fails to disaffirm, ratification will be implied.
(Premiere Development Bank vs. CA, G.R. No.
159352, Apr. 14, 2004)
34~
A:
1. Executed contract - courts will not set
aside or interfere with such contracts;
2. Executory contracts no
enforcement even at the suit of either
party (void and unenforceable);
3. Partly executed and partly executory
- principle of "no unjust enrichment at
expense of another" shall apply; and
4. Executory contracts apparently
authorized but ultra vires - the
principle of estoppel shall apply.
Q: What are the distinctions between ultra
vires acts and illegal acts?
A:
i . ULTRASIIRES ACT . '.
ILLEI;;AL ACTS -
Not necessarily
Unlawful; against
unlawful, but outside
law, morals, public
the powers of the
policy, and public
corporation
order
Can be ratified
Cannot be ratified
Can bind the parties if
Cannot bind the
wholly or partly
parties
executed
Q: What are the remedies in case of ultra
vires act?
A:
1. State
a. Obtain a judgment of forfeiture;
or
b. The SEC may suspend or revoke
the certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors - Nullification of contract in
fraud of creditors.
I=il! 4WO-J
Q: What are by-laws?
A: Rules and regulations or private laws
enacted by the corporation to regulate, govem
and control its own actions, affairs and
concerns and of its stockholders or members
and directors and officers in relation thereto
. and among themselves intheir relation to it.
UST GOLDEN NOTES 2010
Q: What are the requisites for the validity of
by-laws?
A:
1. Must be consistent with the
Corporation Code, other pertinent
laws and regulations;
2. Must not be contrary to morals and
public policy;
3. Must not impair obligations and
contracts or property rights of
stockholders;
4. Must be consistent with the charter or
articles of incorporation;
5. Must be reasonable;
6. Must be of general application and
not directed against a particular
individual.
Q: In case of conflict between the by-laws
and the articles of incorporation which
prevails?
A: The AOI prevails because the by-laws is
intended merely to supplement the former.
Q: What is the binding effect of by-laws?
A:
1. As to members and corporation -
They have the force of contract
between the members themselves.
2. As to third persons - They are not
bound to know the by-laws which are
merely provisions for the
government of a corporation and
notice to them will not be presumed.
Note: By-laws have no extra-corporate
force and are not in the nature of
legislative enactments so far as third
persons are concerned.
Q: Give the procedures in adopting by-
laws. .
A: The by-laws may be adopted before or after
incorporation. Inall cases, the By-laws shall be
effective only upon the issuance by the SEC of
a certification that the by-laws are not
inconsistent with the AOI.
1. Pre - incorporation - It shall be
approved and signed by all the
incorporators and submitted to the
SEC, together witl: AOI.
2. Post - incorporation
a. Vote of the majority of the
stockholders representing the
outstanding capital stock or
members;
b. By-laws shall be signed by the
stockholders or members voting
for them;
c. It shall be kept in the principal
office of the corporation and
subject to the inspection of the
stockholders ore members
during office hours
d. Copy thereof, duly certified by
the BOD or BOT countersigned
by the secretary of the
corporation, shall be filed with
the SEC and shall be attached
with the original AOI. (Sec. 46)
Q: What is the effect of non-filing of the
articles of incorporation within the required
period?
A: Failure to submit the by-laws within 30days
from incorporation does not automatically
dissolve the corporation. It is merely a ground
for suspension or revocation of its charter after
proper notice and hearing. The corporation is,
at the very least, a de facto corporation whose
existence may not be collaterally attacked.
(Sawadjaan v. CA, G.R. No. 142284, June 8,
2005)
Q: What are the contents of by-laws?
A:
1. Time, place and manner of calling
and conducting regular or special
meetings of directors or trustees;
2. Time and manner of calling and
conducting regular or special
meetings of the stockholder or
members;
3. The required quorum in meeting of
stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders
and members and the manner of
voting them;
5. The qualification, duties and
compensation of directors or trustees,
officers and employees;
6. Time for holding the annual election
of directors or trustees and the mode
or manner of giving notice thereof;
7. Manner of election or appointment
and the term of office of all officers
other than directors or trustees;
8. Penalties for violation of the by-laws
9. In case of stock corporations, the
manner of issuing certificates;
10. Such other matters as may be
necessary for the proper or
convenient transaction of its
corporate business and affairs. (Sec.
47)
UNIVERSITY OF SANTO TOMAS ~ 35
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CORPORATION CODE: POWERS OF CORPORATIONS
Q: What are the distinctions between AOI
and by-laws?
A:
.
AOI BY LAWS
Condition Conditioh subsequent;
precedent inthe its absence merely
acquisltion of furnishes a ground for
corporate the revocation of the
existence franchise
Essentially a
contract between For the internal
the corporation and government of the
the stockholders! corporation but has the
members; between force of a contract
the stockholders! between the corporation
member inter se, and the stockholders!
and between the members, and between
corporation and the the stockholders and
State; members;
May be executed after
incorporation. Sec. 46
Executed before allows the filing of the
incorporation by-laws simultaneously
with the Articles of
Incorporation
Amended by a
majority of the
May be amended by a
directors! trustees
and stockholders
majority vote of the BOD
representing 2/3 of
and majority vote of
the outstanding
outstanding capital
capital stock, or 2/3
stock or a majority of the
member in non-stock
of the members in
corporation
case of non-stock
corporations
Power to Power to amend or
amend!repeal repeal by-laws or adopt
articles cannot be new by-laws may be
delegated by the delegated by the 2!3 of
stockholders! the outstanding capital
members to the stock or 2/3 of the
board of directors! members inthe case of
trustees non-stock corporation,
36
Q: What are the ways of amending,
repealing or adopting new by-laws?
A:
1. Amendment may be made by
stockholders together with the Board
- by majority vote of directors and
owners of at least a majority of the
outstanding capital stock/members;
or
2. By the board only after due
delegation by the stockholders
owning 2!3 of the outstanding capital
stock/members. Provided, that such
power delegated to the board shall be
considered as revoked whenever
stockholders owning at least majority
of the outstanding capital stock or
members, shall vote at a regular or
special meeting. (Sec. 48)
Academics Committee
Cbai r per son: Abraham D. Genuino II
Vi ,.-Chai r f or .Academi cs: J eannie A. Laurcntino
Vi cc-Chai r j or .Admi &Fi nance: Aissa Coline l-l. Luna
Vi ce-Chai r f or L ayou! &DCJigll: Loise RaeG. Naval
Mercantile Law Committee
Subj ed l l ead: I-IolyT. Arnpaguey
A.rJ I. Subj cd H ead' Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldi"
Airccn M. Cacho
Socrates Benjie I. Marbil
Ron Chcrrie S. Mendoza
Edison J ames I'. l'ag:1lil:1u:1n
Maybellinc M. Santiago
UST GOLDEN NOTES 2010
Q: What is the required quorum?
Q: When will stockholders/members
meeting be held?
1. Annually on
date fixed in the
1. Within the
by-laws; or
2. If there is no
period
date inthe by-
provided in
laws - any date
the by-laws
inApril as
2. Inthe
absence of
determined by
provision in
the board.
the by-laws -
Venue: Inthe city or
2 weeks prior
municipality where the
to the
principal office is
meeting.
located
1. Anytime
1. Within the
deemed
period
necessary; or
provided in
2. As provided in
the by-laws
the by-laws
2. If no provision
inthe by-laws
Venue: Principal office
- 1week prior
to the meeti
Q: When will BOD/BOT meetings be held?
ate
Within the
inthe by-laws;
period provided
or
2. If there is no
inthe by-laws
date inthe by-
2. Inthe absence
laws - shall
of provision in
be held
the by-laws - 1
monthly
day prior tothe
scheduled
meeting
Any time upon
the
the call of the
period provided
president; or
inthe by-laws
2. As provided in
2. If no provision
the by-laws
inthe by-Iaws-
1 day prior to
Venue: Anywhere
the scheduled
meeti
A:
A:
1. Quorum in meetings of stockholders
GR: Shall consist of the stockholders
representing majority of the
outstanding capital stock or amajority
of the actual and living members with
voting rights, inthe case of non-stock
corporation. (Tan v. Sycip, GR. No.
1 53468, Aug. 17, 2006)
XPN:
a. A different quorum may be
provided for inthe by-laws
b. The corporation code provides
for certain resolutions that must
be approved by at least 213 of
the outstanding capital stock, in
which case, majority of the
outstanding capital stock is
insufficient to constitute a
quorum, presence of the
stockholders representing 213 of
the outstanding capital stock is
necessary for such purpose.
2. Quorum in meetings of Board-
GR: Quorum is majority of the total
numbers of the board as fixed in the
AOI.
XPN: A different quorum may be
provided for inthe by-laws.
Note: The quorum is the same even if there is
vacancy inthe board.
A meeting with a quorum remains to be such
throughout the proceedings even if at any time
during the proceedings, the required number of
participants to constitute a quorum is lessened
(walk-outduringthe meeting).
Q: What are the requirements for a valid
meeting whether stockholders/members or
the board?
1. It must be held inthe proper place;
2. It must be held at the stated date and
at the appointed time or at a
reasonable time thereafter;
3. It must be called by the proper
person:
a. The person or persons
designated in the by-laws have
authority to call stockholders' or
members'meeting;
b. In the absence of such provision
inthe by-laws it may be called by
a director or trustee or by an
UNIVEHSITY OF SANTO TO~A.S ~,~ 37
Cf'acu[taa de (])erecfio Ctvtf 'V
CORPORATION CODE: MEETINGS
officer entrusted with the
management of the corporation;
c. A stockholder or member may
make the call on order of the
SEC whenever for any cause
there is no person authorized to
call a meeting;
d. The special meeting for the
removal of directors or trustees
may be called by the secretary or
by stockholder or member.
4. There must be a previous notice;
5. There must be a quorum.
Q: Whoshall preside at all meetings?
A: The president shall preside at all meetings
of the directors or trustees as well as of
stockholders or members unless the by-laws
provide otherwise (Sec. 54).
Note: 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
presentor dulyrepresented atthe meeting.
Q: What are the rules on meetlnq or voting
which are applicable to certain kinds of
shares?
A:
1. Delinquent shares Shall not be
entitled to vote;
Treasury shares have no voting rights
while they remain in the treasury
(Sec. 57);
Fractional shares shall not be entitled
to vote;
Escrow shares shall not be entitled to
vote before the fulfillment of the
condition imposed thereon;
Unpaid shares, if not delinquent, are
entitled to all the rights of a
stockholder including the right to vote;
Sequestered shares
GR: to determine whether PCGG
may vote sequestered Shares - Two-
Tiered Test
a. Whether there is a prima facie
evidence showing that the said
shares are ill-gotten and thus
belong to the State; and
b. Whether there is an immediate
danger of dissipation thus
necessitating their continued
sequestration and voting by the
PCGG while the main issue is
pending with the Sandiganbayan
(Republic vs. Sandiganbayan,
G.R. No. 107789, Apr. 30, 2003).
Iteam:IMI 'W .
2.
5.
6.
38
XPN: The two-tiered test does not
apply in cases involving funds of
public character (public character
exception). In such cases, the
govemment is granted the authority
to vote said shares, namely:
a. Where the government shares
are taken over by private
persons or entities who or which
registered them in their own
names; and
b. Where the capitalization of
shares that were acquired with
public funds somehow landed in
private hands (ibid).
7. Pledgor, mortgagor, or administrator
shares (Sec. 55); pledgor or mortagor
has the right to attend and vote at
meetings unless pledge or morgagee
is expressly given such right in
writing, as recorded on the books.
Executor, administrators, receivers,
and other legal representatives may
attend and vote in behalf of the
stockholder or members without need
of any written proxy. In Gochan v.
Young, (G.R. No. 131889, Mar. 12,
2001), it was held that heirs are not
prohibited from representing the
deceased with regard to shares of
stock registered in the name of the
latter, especially when no
administrator has been appointed.
8.
Shares jointly owned (Sec. 56) -
consent of all ~he co-owners is
necessary, unless there is a written
proxy signed by all the co-owners. If
shares are owned in an "and/or"
capacity by the holders thereof, any
one of the joint owners can vote or
appoint a proxy thereof.
Q: Is teleconferencing or video-
conferencing valid?
A: Yes. (R.A. 8792, as implemented by SEC
Memo. Circular No. 15, Nov 30, 2001)
provided:
1. Directors must express their intent on
teleconferencing;
2. Proper identification of those
attending;
3. The corporate secretary must
safeguard the integrity of the meeting
by recording it. There is no violation
of the Anti-Wire Tapping Act (R.A.
4200) because all the parties to the
UST GOLDEN NOTES 2010
board meeting are aware that all the
communications are recorded.
Note: The basic types of teleconferencing are:
1. Video conferencing;
2. Computer conferencing;
3. Audio conferencing.
Q: What is a proxy?
A: A written authorization given by one person
to another so that the second person can act
for the first such as that given by the
shareholder to someone else to represent him
and vote his shares at a shareholders'
meeting.
Q: What are the requirements for a valid
proxy?
A:
1. Proxies shall be in writing and shall
be signed by the stockholders or
members;
2. The proxy shall be filed before the
scheduled meeting with the corporate
secretary;
Note: For public companies, the SEC
requires that proxy forms be submitted
atleast 5days before the meeting.
3. Unless otherwise provided
(continuing in nature) in the proxy, it
shall be valid only for the meeting for
which it is intended; AND
4. No proxy shall be valid and effective
for a period longer than 5 years at
anyone time. (Sec. 58 BP. 68 as
amended by Sec. 20, SRC)
Note: Stockholders or members may attend and
vote in their meetings by proxy (Sec. 58);
directors cannot do so. Directors must always acl
inperson. (Sec. 25).
Q: Is the power to appoint a proxy a
personal right?
A: Yes. The right to vote is inseparable from
the right of ownership of stock. Therefore, to
be valid, a proxy must have been given by the
person who is the legal owner of the stock and
is entitled to vote. (SEC Opinion, Sept. 9,
1991) .
Note: Innon-stock corporations the right to vole
by proxy, or even the right to vote itself may be
denied tomembers inthe articles of incorporation
or the by-laws as long as the denial is not
discriminatory.
Q: What is the duration of proxy?
A:
1. Specific proxy - Refers to one where
the authority granted the proxy holder
is merely for a particular meeting on a
specific date.
2. Continuing proxy - Is not limited to a
specific meeting and it continues for a
certain period but not more that 5
years at anyone time.
Note: By-laws may providefor ashorter
durationof acontinuing proxy.
Q: What is the extent of authority of a
proxy?
A:
1. General proxy A general
discretionary power to attend and
vote at annual meeting.
2. Limited proxy - Restrict the authority
to vote to specified matters only and
may direct the manner in which the
vote shall be cast
Q: When may the right to vote by proxy be
exercised?
A:
1. Election of the BOD/BOT;
2. Voting in case of joint ownership of
stock;
3. Voting by trustee under VTA;
4. Pledge or mortgage of shares;
5. As provided for inthe by-laws.
Q: How and when is a proxy revoked?
A: A proxy may be revoked in writing, orally or
by conduct.
GR: One who has given a proxy the right to
vote may revoke the same at anytime.
XPN: Said proxy is coupled with interest
even it may appear by its terms to be
irrevocable. .
VOTING TRUST AGREEMENT
Q: What is avoting trust agreement (VTA)?
A: It is an agreement whereby one or more
stockholders transfer their shares of stocks to
a trustee, who thereby acquires for a period of
time the voting rights (and/or any other rights)
over such shares; and in return, trust
certificates are given to the stockholder/s,
which are transferable like stock certificates,
subject, to the trust agreement.
UNIVERSITY OF SANTO TOMAS
Pacu{ tad de (] ) er ecf i o Civi]
39
CORPORATION CODE: MEETINGS
Q: What are the specific limitations on
VTA?
A:
1. VTA can be entered into for a period
not exceeding 5 years at anyone
time except when it is a condition ina
loan agreement but shall
automatically expire upon full
payment of the loan;
2. It must be in writing and notarized,
and shall specify the terms and
conditions thereof; (Sec. 59)
Q: What are the procedural requirements
for VTAto bevalid?
A:
1. Execution and notarization of the VTA
stating the terms and conditions
thereof;
2. A certified copy of such agreement
shall be filed with the corporation and
with the SEC, otherwise, it is
ineffective and unenforceable;
3. The certificate/s of stock covered by
the VTA shall be cancelled;
4. A new certificate shall be issued in
the name of the trustee/s stating that
they are issued pursuant to the VTA;
5. The transfer shall be noted in the
books of the corporation, that it is
made pursuant to said VTA;
6. The trustee/s shall execute and
deliver to the transferors voting trust
certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock;
7. No VTA shall be entered into for the
purpose of circumventing the law
against monopolies and illegal
combinations in restraint of trade or
used for purposes of fraud. (Sec. 59)
,
Note: I Unless expressly renewed, all rights
grantea in a voting trust agreement shall
automatically expire at the end of the agreed
period, and the voting trust certificates as well as
the certificates of stock inthe name of the trustee
or trustees shall thereby be deemed cancelled
and newcertificates of stock shall be reissued in
the nameof the transferors. (Sec. 59)
40
Q: What arethe .distinctions between a
voting trust agreement and proxy?
A:
I
.VOTING TRUST;' . PROXY
The agreement is
Revocable anytime
except one with
irrevocable
interest
Trustee acquires legal
Proxy has no legal
title to the shares of
title to the shares of
the transferri ng
the principal
stockholder
Not only right to vote
is given, other rights
Only right to vote is
as well except the
given
right to receive
dividends
The trust may vote in
person or by proxy The proxy must vote
unless the agreement in person
provides otherwise
The agreement must Proxy need not be
be notarized notarized
Proxy can only act at
Trustee is not limited a specified
to act at any particular stockholder's
meeting meeting (if hot
continuing)
The share certificate
No cancellation of the
shall be cancelled and
certificate shall be
transferred to the
made
trustee
A trustee can vote
and exercise all the A proxy can only vote
rights of the inthe absence of the
stockholder even owners of the stock
when the latter is
present
The right to vote is
The voting right is inherent inor
divorced from the inseparable from the
ownership of stocks right to ownership of
stock
An agreement must
A proxy is usually of
not exceed 5 years at
shorter duration
anyone time except
although under Sec.
when the same is
58 it cannot exceed 5
made a condition of a
years at anyone time
loan.
Governed by the law Governed by the law
on trust on agency
UST GOLDEN NOTES 2010
~,.:"', STQCKS:AND\STOCKl'lOLD~RS '.
Q: What is asubscription contract?
Q: Howdoes one become ashareholder in
acorporation?
A: A person becomes a shareholder the
moment he:
1. Enters into a subscription contract
with an existing corporation (he is a
stockholder upon acceptance of the
corporation of his offer to subscribe
whether the consideration is fully paid
or not),
2. Purchase treasury shares from the
corporation, or
3. Acquires shares from existing
shareholders by sale or any other
contract.
Q: What are the distinctions between
subscription and purchase?
A:
SUBSCRIPTION" ~,: ,. PURCHASE'~
May be made before or
May be made only
after incorporation
after incorporation
Buyer does not
become a
Subscriber becomes a
stockholder until
stockholder even if he
the fulfillment of
has not fully paid the
the terms of the
sale and
subscription
registration thereof
inthe books of the
corporation
Cannot be released from
The corporation
his subscription unless
may rescind or
cancel the contract
all stockholders agree
for non-fulfillment
thereto and no creditor
of the contract by
is thereby prejudiced
the buyer
Corporate creditors may
Creditors may not
proceed against the
proceed against
subscriber for his unpaid
the buyer for the
subscription incase the unpaid price as
assets of the corporation
there is no privity
are not sufficient to pay of contract
their claims
between them
May be inany form, Inpurchase
written or oral, express amounting to more
or implied, and than 500 pesos,
therefore, not covered the Statute of
by the Statute of Frauds Frauds shall apply
Subscription price are
Purchase price
considered assets of the
does not become
corporation, hence, assets of the
creditors may go after corporation unless
them fully paid
A: It is a contract for the acquisition of
unissued stock in an existing corporation or a
corporation still to be formed. It is considered
as such notwithstanding the fact that the
parties refer to it as purchase or some other
contract. (Sec. 60)
Q: What are the kinds of subscription
contracts?
A:
1. GR: Pre-incorporation subscription -
entered into before the incorporation
and irrevocable for a period of six (6)
months from the date of subscription
unless all other subscribers consent
or if the corporation failed to
materialize. It cannot also be revoked
after filing the Articles of Incorporation
with the SEC (Sec. 61)
XPN: When creditors will be
prejudiced thereby.
2. Post-incorporation subscription
entered into after incorporation.
Q: What are valid considerations in a
subscription agreement?
A:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible (i.e.
patents or copyrights), the requisites
are as follows:
a. The property is actually received
by the corporation;
b. The property is necessary or
convenient for its use and lawful
purposes;
c. It must be subject to a fair
valuation equal to the par or
issued value of the stock issued;
d. The valuation thereof shall
initially be determined by the
incorporators; and
e. The valuation is subject to the
approval by the SEC.
3. Labor or services actually rendered to
the corporation;
4. Prior corporate obligations or
indebtedness;
Note: The indebtedness involved is one
that is acknowledged bythe board.
5. Amounts transferred from
unrestricted retained earnings to
UNIVERSITY OF SANTO TOMAS ~+.
PacuCtad de (/ ) er ecf to Ci oi i .y'
41
CORPORATION CODE: STOCKS AND STOCKHOLDERS
stated capital (in case of declaration
of stock dividends);
6. Outstanding shares in exchange for
stocks in the event of reclassification
or conversion.
Note: Promissory notes or future services are not
validconsiderations.
Q: What are shares of stock?
A: It is an interest or right which an owner has
in the management of the corporation and its
surplus profits, and, on dissolution, inall of its
assets remaining after the payment of Its debt.
Q: What are the distinctions between
capital stock from shares of stock?
A:
. . SHARES OF .
.~APITA'2 STOCK -.. _. 'STOCK
It is an interest or
right which an
owner has inthe
management of the
corporation, and its
surplus profits,
and, on dissolution,
in all of its assets
remaining after
payment of its
debt. The
stockholder may
own the shares
even if he is not
holding a certificate
of stock.
I idi
The amount pal In
dr secured to be
'pald in by the
stockholders upon
which the.
corporation is to
conduct its
operation. It is the
property of the
corporation itself
(monetary value).
Q: What is a certificate of stock?
A: It is a paper representation or tan~ible
evidence of the stock itself and of various
interests therein (Tan v. SEC, G.R. No. 95696,
Mar. 3, 1992)
Q: What are the distinctions between
shares of stock from certificates of stock?
A:
:. ;-~'''5HAREO~:',~I,:pERTIFICATE OF '.
.,.,-, . STOCK, ". ,STOCK'
Evidence of the
holder's ownership of
the stock and of his
right as a shareholder
and of his extent
specified therein.
Unit of interest in
a corporation
It is an
incorporeal or
intanqible
It is concrete and
tangible
42 Iteam:ldll.'41
property
It may be issued
It may be issued only by the
corporation even if the subscription is
if the subscription fully paid.
is not fully paid.
Q: What are the requlsltes for the issuance
of the Certificate of Stock?
A:
1. The certificate must be signed by the
president or vice-president,
countersigned by the secretary or
assistant secretary;
2. The certificate must be sealed with
the seal of the corporation;
3. The certificate must be delivered;
4. The par value as to par value shares,
or full subscription as to no par value
shares must be fully paid, the basis of
which is the doctrine of indivisibility of
subscri ption;
5. The original certificate must be
surrendered where the person
requesting the issuance of a
certificate is a transferee from the
stockholder (Bitong v. CA, etc al.,
G.R. No. 123553, July 13, 1998).
Q: What is the Doctrine of Individuality of
Subscription?
A: A subscription is one entire and indivisible
whole contract. It cannot be divided into
portions. (Sec. 64)
Q: What is the rule on right to issuance?
A: A corporation may now, in the absence of
provisions in their by-laws to the contrary,
apply payments made by subscribers-
stockholders, either as:
1. Full payment for the corresponding
number of shares of stock, the par
value of each of which is covered by
such payment; or
2. Payment pro-rata to each and all the
entire number of shares subscribed
for. (Baltazar V. Lingayen Gulf Electric
Power Co., Inc, G.R. No. L-16236-38,
June 30, 1965)
UST GOLDEN NOTES 2010
Who are required to pay their
s bscription infull?
1. Non-resident foreign subscribers
upon incorporation must pay in full
their subscriptions unless their unpaid
subscriptions are guaranteed by a
surety bond or by anassumption by a
resident stockholder through an
affidavit of liability.
2. In case of no-par value shares, they
are deemed fully paid and non-
assessable.
Q: Is a stockholder entitled to the shares of
stock subscribed although not fully paid?
A: Yes. As long as the shares are not
considered delinquent, they are entitled to all
rights granted to it whether or not the
subscribed capital stocks arefully paid.
Q: Is astock certificate negotiable?
A: No. Itis regarded as quasi-negotiable inthe
sense that it may be transferred by
endorsement, coupled with delivery.
Q: Why is a stock certificate not
negotiable?
A: Because the holder thereof takes it without
prejudice to such rights or defenses as the
registered owners or transferor's creditor may
have under the law, except insofar as such
rights or defenses are subject tothe limitations
imposed by the principles governing estoppel.
(De los Santos v. Republic, G.R. No. L-4818,
Feb. 28, 1955)
Q: Maya stockholder bring suit to compel
the corporate secretary to register valid
transfer of stocks?
A: Yes, it is the corporate secretary's duty and
obligationto register transfers of stocks.
Q: To be valid and binding on the
corporation and third parties, is the
attachment or mortgage of shares of stock
required to be registered in the
corporation's stock and transfer book?
A: An attachment or mortgage of shares of
stock need not be registered in the
corporations stock and transfer book inasmuch
as a chattel mortgage over shares of stock
does a "transfer of shares" and that only
absolute transfers of shares of stock are
required to be recorded in the corporation's
stock and transfer book inorder to have "force
and effect as against third persons".
(Chemphil Export and Import Corporation v.
CA, G.R. Nos. 112438-39, Dec. 12, 1995)
Q: How are shares of stock transferred?
A:
1. If represented by a certificate, the
following must be strictly complied
with:
a. Delivery of the certificate;
b. Indorsement by the owner and
his agent;
c. To be valid to third parties, the
transfer must be recorded in the
books of the corporation (Rural
Bank of Lipa v. CA, G.R. No.
124535, Sept 28,2001).
2. If not represented by a certificate
(such as when the certificate has not
yet been issued or where for some
reason is not inthe possessionof the
stockholder).
a. By means of deed of
assignment: and
b. Such is duly recorded in the
books of the corporation.
Q: A is the registered owner of Stock
Certificate No. 000011. He entrusted the
possession of said certificate to his best
friend B who borrowed the said endorsed
certificate to support B's application for
passport (or for a purpose other than
transfer). But Bsold the certificate to X, a
bona fide purchaser who relied on the
endorsed certificates and believed him to
be the owner thereof.
Can A claim the shares of stocks from X?
Explain.
A: No. Since the shares were already
transferred to "B", "A" cannot claimthe shares
of stock from "X". The certificate of stock
covering said shares have beenduly endorsed
by "A" and entrusted by himto "B". By his said
acts, "A" is now estopped from claiming said
shares from "X", a bona fide purchaser who
relied on the endorsement by "A" of the
certificate of stock. (2001 Bar Question)
UNIVERSITY OF SANTO TOMAS
PacuCtad de (j ) er ecl i o Ci vi t
CORPORATION CODE: STOCKS AND STOCKHOLDERS
Q: What if the transfer is not recorded, is it
valid?
A: Yes, but, only insofar as the parties to the
transfer are concerned.
Note: . Hence, the corporation has the right to
refuse to recognize any transfer of shares which
has not been duly registered in the stock and
transfer book. (Sec. 63)
Q: What are the remedies where
corporation refuses to transfer certificate
of stocks?
A:
1. Petition for mandamus;
2. Suit for specific performance of an
express or implied contract;
3. May sue for damages where specific
performance cannot be granted;
Note: There must be aspecial power of attorney
executed by the registered owner of the share
authorizing transferor to demand transfer in the
stock and transfer book (Ponce vs. Arsons
Cement, G.R. No. 139802, Dec. 10, 2002).
The lawdoes not prescribe a period withinwhich
the registration of the transfer of shares should
be effected. Hence, the actionto enforce the right
does not accrue until there has been a demand
and arefusal concerning the transfer.
Q: When may the corporation validly refuse
to register the transfer of shares?
A: No shares of stock against which the
corporation holds any unpaid clairn shall be
transferable in the books of the corporation.
The "unpaid claim" refers to the unpaid
subscription on the shares transferred and not
to any other indebtedness that the transferor
may have to the corporation. (Sec. 63)
Q: When are stock certificates issued?
A: Certificates of stock shall be issued to a
subscriber only until the full payment of his
subscription, together with interest and
expenses, if any is due. (Sec. 64)
Q: When should the balance of the
subscription be paid?
A: It should be paid:
1. On the date specified in the
subscription contract, without need of
demand or call, or;
2. If no date of payment has been
specified, on the date specified on the
call made by the BOD; or
44
3. When insolvency supervenes upon a
corporation and the court assumes
jurisdiction to wind it up, all unpaid
subscriptions become payable on
demand, and are at once
recoverable, without necessity of any
prior call.
Q: Will the unpaid balance accrue interest?
A: Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions
from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws.
If no rate of interest is fixed in the by-laws,
such rate shall be deemed to be the legal rate.
(Sec. 66)
The above interest is different from the interest
contemplated by Sec. 67. The said unpaid
balance will only accrue interest, by way of
penalty, on the date specified in the contract of
subscription or on the date stated in the call
made by the board.
Note: Interest contemplated in Sec. 66 is
moratory interest, while Sec. 67 speaks of
compensatoryinterest.
Q: What is the effect of failure to pay the
subscription on the date it is due?
A: It shall render the entire balance due and
payable and shall make the shareholder liable
for interest at the legal rate on such balance,
unless a different rate of interest is provided in
the by-laws.
Q: When will the share become delinquent?
A: If within 30 days from the date of payment
specified inthe contract of subscription or from
the date stated in the call made by the board,
no payment is made, all stocks covered by
said subscription shall thereupon become
delinquent and shall be subject to sale unless
the BOD orders otherwise.
Note: "Call" means the resolution or formal
declaration of the board that the unpaid
subscriptions aredue and payable.
Q: What are the remedies of corporations
to enforce payment of stocks?
A:
1. Extra-judicial sale at public auction
(Sec. 67)
2. judicial action (Sec. 70)
UST GOLDEN NOTES 2010
Vhat is the procedure for the sale of
=-"J nquent stocks?
1. Resolution - the board shall issue
resolution ordering the sale of
delinquent stock;
2. Notice - notice of said sale, with a
copy of the resolution, shall be sent to
every delinquent stockholder either
personally or by registered mail;
3. Publication the notice shall
furthermore be published once a
week for two consecutive weeks in a
newspaper of general 'circulation in
the province or city where the
principal office of the corporation is
located;
4. Sale - the delinquent stock shall be
sold at the public auction to be held
not less than 30 days nor morethan
60 days from the date stocks become
delinquent;
5. Transfer - the stock so purchased
shall be transferred to such purchaser
in the books of the corporation and a
certificate for such stock shall be
issued in his favor; and
6. Credit remainder - the remaining
shares, if any: shall be credited in
favor of the delinquent stockholder
who shall likewise be entitled to the
issuance of a certificate of stock
covering the same (Aquino, Philippine
Corporate Law Compendium, 2006).
Q: Who is the winning bidder in a
delinquency sale?
A:
1. The person participating in the
delinquency sale who offers to pay
the full amount of the balance of the
subscription together with the
accrued interest, costs of
advertisement and expenses of sale,
for the smallest number of shares;
2. If there is no bidder as mentioned
above, the corporation may bid for
the same, and he total amount due
shall be credited as paid in full in the
books of the corporation. Such
shares shall be considered' as
treasury shares.
Note: The board is not bound to accept the
highest bid unless the contrary appears. This is
forthe reasonthat inpublicsale, the bidder is the
one making the offer to purchase which the
corporation'is free toacceptor rejeet.
Q: When may delinquency sale be
discontinued or cancelled?
A: If the delinquent SH pays the unpaid
balance plus interest, costs and expenses on
or before the date specified for the sale or
when the BOD orders otherwise.
Q: Can a stockholder assail the
delinquency sale?
A: The stockholder may file an action to nullify
the sale on the ground of irregularity or defect
inthe notice of sale or inthe sale itself. But the
stockholder must first pay the amount for
which the shares are sold with interest from
the date of sale at the legal rate. The action
shall be commenced within 6 months from the
date of sale. (Sec. 69)
Q: What are the effects of stock
delinquency?
A:
1. Upon the stockholder
a. Accelerates the entire amount of
the unpaid subscription;
b. Subjects the shares to interest
expenses and costs;
c. Disenfranchises the shares from
any right that inheres to the to a
stockholder, except the right to
dividends (but which shall be
applied to any amount due on
said shares, or, in the case of
stock dividends, to be withheld
by the corporation until full
payment of the delinquent shares
(Sec. 43).
2. Upon the director owning delinquent
shares
a. If the delinquent stockholder is a
director, the director shall
continue to be a director but he
cannot run for re-election
(Sundiang and Aquino, Reviewer
in Commercial Law, 2006);
b. A delinquent stockholder seeking
to be elected as director may not
be a candidate for, not be duly
elected to, the board.
UNIVERSITY OF SANTO TOMAS
PacuCtaa de (] ) er ecl i o Ci vi C
~ 45
CORPORATION CODE: STOCKS AND STOCKHOLDERS
Q: What is the procedure for issuance of
new certificate of stock in lieu of lost,
stolen or destroyed ones?
A:
1. Affidavit - the registered owner shall
execute and file an affidavit regarding
the share and the circumstances
regarding its loss;
2. Verification - the corporation shall
verify the affidavit and other
information and evidence with the
books of the corporation;
3. Publication - the corporation shall
publish a notice in a newspaper of
general circulation published in the
place where the corporation has its
principal office, once a week for 3
consecutive weeks at the expense of
registered owner of the certificate of
stock which has been lost, stolen, or
destroyed;
4. One year waiting period - there shall
be a waiting period of 1 year from the
date of its publication during which a
contest can be interposed;
5. Contest - if the contest has been
presented to.said corporation or if an
action is pending in court regarding
the ownership of said certificate of
stock which has been lost, stolen, or
destroyed, the issuance of new
certificate of stock shall be
suspended until the final decision of
the court regarding the ownership of
, said certificate of stock which has
been lost, stolen, or destroyed; and
6. Replacement - if there is no contest
within the 1 year period, the
corporation shall then replace the
certificate. The replacement of stock
certificate can be made before the
expiration of 1year period if a bond is
posted
Note: The prescribed procedure does not apply
to a case where the certificates are in the
company's possession when mislaid which
thereby obligates the corporation, not the
stockholder, tosuffer the consequences.
46 I team: iGW
Q: May the corporation be sued for the
issuance of new certificates of stock?
A: No action shall prosper against the
corporation for the issuance of new certificates
unless there is bad faith, fraud or negligence
present.
Q: A stockholder claimed that his stock
certificate was lost. After going through
with the procedure for the issuance of lost
certificate, and no contest was presented
within 1 year from the last publication, the
corporation issued a new certificate of
stock in lieu of the supposed lost
certificate. The stockholder immediately
sold his shares and endorsed the
replacement certificate to a buyer. It turned
out that the original certificate was not lost,
but sold and endorsed to another person.
(1) May the corporation be made liable by
the aggrieved party? (2) Who will have a
better right over the shares, the endorsee
of the original certificate or the endorsee of
the replacement certificate?
A :
1. No, the corporation cannot be made
liable. Except in cases of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no action
may be brought against any
corporation which have issued
certificates of stock in lieu of those
lost, stolen, or destroyed pursuant to
the procedure prescribed by law.
2. The endorsee of the replacement
certificate has a better right to the
shares. After expiration of 1 year
from the date of the last publication,
and no contest has been presented to
said corporation regarding said
certificate, the right to make such
contest has been barred and said
corporation already cancelled in its
books the certificate Which have been
lost, stolen, or destroyed and issued
in lieuthereof new certificate.
Q: What if there are oppositions on the
issuance of new certificates, what may the
corporation do?
A: The corporation may file an interpleader
proceeding to compel the parties to litigate
among themselves.
UST GOI:DEN NOTES 2010
: When may a corporation issue a
-eplacement certificate of subscription
. hout waiting for the expiration of one
ear?
. The registered owner shall file a bond or
cmer security effective for a period of one (1)
lear in which case a new certificate may be
- ued even before the expiration of the one
1) year period. Provided, That if a contest has
J ean presented to said corporation or if an
2 'on is pending. in court regarding the
ownership of said certificate of stock which has
en lost, stolen or destroyed, the issuance of
.ne new certificate of stock in lieu thereof shall
oe suspended until the final decision by the
court regarding the ownership of said
certificate of stock which has been lost, stolen
or destroyed. (Sec. 73)
Q: What are the rights of stockholders?
A:
1. Management Right
a. To attend and vote in person or
by proxy at a stockholders'
meetings (Secs. 50, 58);
b. To elect and remove directors
(Sees. 24, 18);
c. To approve certain corporate
acts (Sec. 58);
d. To compel the calling of the
meetings (Sec. 50);
e. To have the corporation
voluntarily dissolved (Sec. 118,
119);
f. To enter into a voting trust
agreement (Sec. 59);
g. To adopt/amend/repeal the by-
laws or adopt hew by-laws
(Sees. 46, 48);
2. Proprietary rights
a. To transfer stock inthe corporate
book (Sec. 63);
b. To receive dividends when
declared (Sec. 43);
c. To the issuance of certificate of
stock or other evidence of stock
ownership (Sec. 63);
d. To participate in the distribution
of corporate assets upon
dissolution (Sec. 118, 119);
e. To pre-emption in the issue of
shares (Sec. 39);
3. Remedial rights
a. To inspect corporate books (Sec.
74);
b. To recover stock unlawfully sold
for delinquency (Sec. 69);
c. To demand payment in the
exercise of appraisal right (Secs.
41, 81);
d. To be furnished recent financial
statements or reports of the
corporation's operation (Sec. 75);
e. To bring suits (derivative suit,
individual suit, and
representative suit).
Q: What is a pooling agreement?
A: This is an agreement, also known as voting
agreement, entered into by and between 2 or
more stockholders to make their shares vote in
the same manner. This usually relates to
election of directors where parties often
provide for arbitration in case of disagreement.
This does not involve atransfer of stocks but is
merely a private agreement. (Sec. 100)
Q: When are pooling agreements valid?
A: As long as they do not limit the discretion of
the BOD in the management of corporate
affairs or work any fraud against stockholders
not party to the contract.
Q: Give the summary of vote requirements
for stockholders
A:
1. 2/3 of outstanding capital stock
(OCS) along with majority of the
board:
a. Amendment of AOI;
b. Extending and Shortening
Corporate Term
c. Increasing / Decreasing capital
stock / bonded indebtedness;
d. Sale or disposition of all,
substantially all of corporate
assets;
e. Investment of corporate funds in
another corporation or for' a
purpose other than main
purpose;
f. Issuance of stock dividends;
g. Corporate mergers or
consolidation;
h. Voluntary dissolution of the
corporation whether or not
creditors are prejudiced.
2. 2/3 of outstanding capital stocks
a. Removal of directors;
b. Ratification of contract with
director or officer where first two
requisites of Sec. 32 are lacking;
c.' Where stockholders of managed
corporation own more than 1/3 of
outstanding capital stock entitled
UNIVERSITY OF SANTO TOMAS .i) 47
PacuCtaa ae CDer ecl i o Civif' .
CORPORATION CODE: STOCKS AND STOCKHOLDERS
to vote of the managing
corporation are also the majority
of the board of managed
corporation, such 21 3 vote is
required to approve management
contract;
d. Delegation to the board to
amend, repeal by-laws or adopt
new by-laws.
3. Majority of outstanding capital stocks
with majority of the board
a. Approval of management
contract;
b. Amendment to by-laws, repeal of
by-laws, adoption of new by-
laws.
4. Majority of outstanding capital stock
a. For quorum in electing members
of the board by cumulative
voting;
b. Grant of compensation to
members of the board;
c. Adoption of original by-laws;
d. Revocation of delegated
authority to the board of directors
to amend or repeal or adopt new
by-laws.
5. The right to vote of non-voting
stockholders may be limited or
broadened to the extent specified in
the AOI or by-laws, however, they
may still vote in instances specified in
the Corporation Code.
Q: Is a provision stating that the consent of
the board must be obtained before transfer
of shares valid?
A: No. A provision that requires any
stockholder who wishes to sell, assign or
dispose of his shares in the corporation to first
obtain the consent of the board of directors or
other stockholders of the corporation is void as
it unduly restrains the exercise of the
stockholder of his right to transfer.
Q: What is the right of first refusal?
A: A right that grants to the corporation or
another stockholder the right to buy the shares
of stock of another stockholder at a fixed price
and only valid if made on reasonable terms
and consideration.
Except in the case of a close corporation
where the right of first refusal is required to be
a feature to be found in the articles of
ihcorporation, the right of first refusal can only
arise by means of a contractual stipulation, or
48
when it is provided for in the articles of
incorporation.
Note: When the by-laws provide a right of first
refusal, it is null and void. There is no authority
to create property restrictions in by-laws
provisions. (Hodges v. Lezama, 62 O.G. 6823)
Q: May a provision in the articles of
incorporation validly grant a right of first
refusal in favor of other stockholders?
A: Yes, the SEC, as a matter of policy, allows
restrictions on transfer of shares in the articles
of incorporation if the same is necessary and
convenient to the attainment of the objective
for which the company was incorporated,
unless palpably unreasonable under the
. circumstances. (SEC Opinion, Feb. 20, 1995)
Q: What actions can the stockholders or
members bring?
A:
1. Derivative suit - one brought by one
or more stockholders or members in
the name and on behalf of the
corporation to redress wrongs
committed against it or to protect or
vindicate corporate rights, whenever
the officials of the corporation refuse
to sue or are the ones to be sued or
hold control of the corporation. The
requisites are as follows:
a. There should be ah existing
cause of action in favor of the
corporation;
b. The stockholder or member must
first make a demand upon the
corporation or the management
to sue unless such a demand
would be futile;
c. Stockholder or member must be
such at the time of the
objectionable acts or
transactions unless the
transactions are continuously
injurious; and
d. The action must be brought in
the name of the corporation
which must be alleged
Note: The stockholder is only nominal
party in a derivative suit. The real party
ininterestis the corporation.
2. Individual suit - and action brought by
a stockholder against the corporation
for direct violation of his contractual
rights.
UST GOLDEN NOTES 2010
3. Representative suit - one brought by
a person in his own behalf and on
behalf of all similarly situated.
Q: AA, a minority stockholder, filed a suit
against BB, CC, DD, and EE, the holders of
majority shares of MOP Corporation, for
alleged misappropriation of corporate
funds. The complaint averred, inter alia,
that MOP Corporation is the corporation in
"hose behalf and for whose benefit the
derivative suit is brought. In their capacity
as members of the Board of Directors, the
majority stockholders adopted a resolution
authorizing MOP Corporation to withdraw
the suit. Pursuant to said resolution, the
corporate counsel filed aMotion to Dismiss
in the name of the MOP Corporation.
Should the motion be granted or denied?
Reason briefly.
A: It .should not be denied. The requisites for
a valid derivative suit exist in this case. First,
AA was exempt from exhausting his remedies
\' ithin the corporation and did not have a
demandonthe Board of Directorsfor the latter
o sue. Here, such a demand would be futile,
since the directors who comprise the majority
(namely BB, CC, DO and EE are the ones
guilty of the wrong complained of. Second, AA
appears to be a stockholder at the time of the
alleged misappropriation of corporate funds.
Third, the suit is brought on behalf and for the
benefitof MOP Corporation. Inthis connection,
it was held in
Commart(Phils.) Inc. v. Securities and
Exchange Commission, G.R. No. 85318, J une
3, 1991, that to grant to the corporation
concerned the right of withdrawing or
dismissing the suit, at the instance of the
majority stockholders and directors who
hemselves are the persons alleged to have
committed the breach of trust against the
interests of the corporation would be to
emasculate the right of the minority
stockholders to seek redress for the
corporation. Filing such action as a derivative
suit even by a lone stockholder is one of the
protections extended by law to minority
stockholders against abuses of the majority.
Q: What are the liabilities of stockholders?
A: Liability:
1. to the corporation for the unpaid
subscription;
2. to the corporation for interest on
unpaid subscription;
3. tothe creditors of the corporation;
4. for watered stock; and
5. for dividends unlawfullypaid;
"':'~"~':.~.""'.
Academics Committee
Chai r per son: Abraham D. Genllino II
" V' i cc-Cbai r f or .,L l aul emi Ci : J eannie J\. Laurentino
VI i -eChai r / or Admill &FiJ/(J/"': Aissa Celine H. Luna
Vi a-Chai r Jor L r yotl l &D'J igll: Loise Rae G. Naval
Mercantile Law Committee
Stl bi ,d I ' -l e" d: Holy T. Ampague),
AJ J I. Suhj cd H ead' Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Aireen M. Cacho
Socrates Benjie 1. Marbil
Ron Cherne S. Mendoza
Edison J ames F. l'agalilauan
Maybelline M. Santiago
~"'-:~"~"'~' ~
UNIVERSITY OF SANTO TOMAS
PacuCtad de Der ech Civif
49
CORPORATION CODE: CORPORATE BOOKS AND RECORDS
Q: What books are required to be kept by a
corporation?
A :
1. Book for the minutes of SH and BOD
meetings;
2. Record of transactions;
3. Stock and transfer book; and
4. Other books required to be kept.
Q: What are the contents of a stock and
transfer book?
A:
1. All stocks in the name of the
stockholders alphabetically arranged;
2. Amount paid and unpaid on all stocks
and the date of payment of any
installment;
3. Alienation, sale or transfer of stocks;
4. Other entries as the by-laws may
prescribe.
Q: Who may make proper entries in stock
and transfer books?
A: The obligation and duty falls on the
corporate secretary. If the corporate secretary
refuses to comply, the stockholder may
rightfully bring suit to compel performance.
The stockholder cannot take the law on to his
hands; otherwise such entry shall be void.
(Torres, Jr. v. CA, G.R. No. 120138, Sept. 5,
1997)
Q: What is the probative value of the stock
and transfer book?
A: The stock and transfer book is the best
evidence of the transactions that must be
entered or stated therein. However, the entries
are considered prima facie evidence only and
may be subject to proof to the contrary (Bilong
v. CA,I G.R. No. 123553, July 13, 1999).
i
Q: Who are the persons given the right to
inspect corporate books?
A:
1, Any director, trustee, stockholder or
member;
2. Voting trust certificate holder;
3. Stockholder of sequestered company;
or;~\
4. Beneficial owners of ~.I:H;lres.
50
Q: What is the basis. of SH's right of
inspection?
A: Their ownership of the assets and property
of the corporation whether this ownership or.
interest be termed equitable, beneficial or
quasi-ownership. It is predicated upon the
necessity of self-protection.
Q: What are the limitations on the right to
inspection?
A:
1. The right must be exercised during
reasonable hours on business days;
2. The person demanding the right has
not improperly used any information
obtained through any previous
examination of the books and records
of the corporation; and
3. The demand is made in good faith or
for legitimate purpose (Sec. 74);
4. The inspection should only be for a
purpose germane to his interest as a
SH;
5. It should follow the formalities that
may be required inthe by-laws;
6. The right does not extend to trade
secrets;
7. It is subject to limitations under
special laws,e.g. Secrecy of Bank
Deposits.
Note: The right extends, in compliance with
equity, good faith, and fair dealing, to a foreign
subsidiarywholly-owned bythe corporation.
...--:.~ ..--..
Academics Committee
Cbai r per son. Abraham D. Ccnuino 11
Vi a-Cbai r f or Academia: Jeannie A. Laurcntino
Vi ce-Chai r f or .Admi n e:.--Fi nance: Aissa Celine H. Luna
Vi te-Chai r f or Utyout &De.r{~II:Loise Rae G. Naval
Mercantile LawCommittee
Subj ed H ead: Holy T. Ampaguey
A.r .r t. Subj ed H ead: Manilyn 'Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Airccn M. Cacho
Socrates Beujie I. Marbil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
Maybellino M. Santiago
.""~;.~~'.
UST GOLDEN NOTES 2010
Q: What are the distinctions between
merger and consolidation?
: What is combination?
. It is used to designate an alliance or
::onfederation or sale or other transaction
-=tween two or more transaction, by virtue of
, ich will not necessarily result in the loss of
separate existence of the corporations
'quino, Philippine Corporate Law
moetui i um, 2006)
: What are the common forms of
orporate combinations?
A:
1. Sale of assets;
2. Lease of assets;
3. Sale of stock;
4. Merger; or
5. Consolidation.
Q: What are the limitations on corporate
combinations?
A:
1. Should not create monopolies;
2. Should not eliminate free and healthy
competition; and
3. Should not create illegal
combinations such as banks
combined with insurance companies.
Q: What is merger?
A: One where a corporation absorbs the other
and remains in existence while others are
dissolved. (Sec. 76)
Q: What is consolidation?
A: One where a new corporation is created
and consolidating corporations are
extinguished. (Sec. 76)
A:
fo MERGER 0 '".CONSOLIDATIOW'''',I
All of the constituent
corporations
involved are
dissolved except
one
No new corporation
is created
The surviving
corporation acquires
all the assets,
liabilities, and
capital stock of all
constituent
cor orations
All assets, liabilities,
and capital stock of all
consolidated
corporations are
transferred to the new
corporation
Q: What is the procedure for merger or
consolidation?
A:
1. Board of each corporation shall draw
up a plan of merger or consolidation,
setting forth:
a. Names of corporations involved
(constftuent corporations);
b. Terms and mode of carrying it
out;
c. Statement of changes, if any, in
the present articles of surviving
corporation; or the articles of the
new corporation to be formed in
case of consolidation.
2. Plan for merger or consolidation shall
be approved by majority vote of each
board of the concemed corporations
at separate meetings.
3. The same shall be submitted for
approval by the stockholders or
members of each such corporation at
separate corporate meetings duly
called for the purpose. Notice should
be given to all stockholders or
members at least two (2) weeks prior
to date of meeting, either personally
or by registered mail.
4. Affirmative vote of 2/3 of the
outstanding capital stock in case of
stock corporations, or 2/3 of the
members of a non-stock corporation
shall be required.
5. Dissenting stockholders may exercise
the right of appraisal. But if Board
abandons the plan to merge or
UNIVERSITY OF SANTO TOMAS ~~. 51
Pac~ { tad de De r ech o Ci vi t . .
CORPORATION CODE: MERGER AND CONSOLIDATION
consolidate, such
extinguished.
right
6. The plan may still be amended before
the same is filled with the SEC;
however, any amendment to the plan
must be approved by the same votes
of the board members of trustees and
stockholders or members required for
the original plan.
7. After such approval, Articles of
Merger or Articles of Consolidation
shall be executed by each of the
constituent corporations, signed by
president or VP and certified by
secretary or assistant secretary,
setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number
of shares outstanding; in non-
stock, the number of members;
c. As to each corporation, number
of shares or members voting for
and against such plan,
respectively
8. Four copies of the Articles of Merger
or Consolidation shall be submitted to
the SEC for approval. Special
corporations like banks, insurance
companies, building and loan
associations, etc., need the prior
approval of the respective
government agency concerned.
9. If SEC is satisfied that the merger or
consolidation is legal, it shall issue
the Certificate of Merger or the
Certificate of Incorporation, as the
case may be.
10. If the SEC is not satisfied, it shall set
a hearing, giving due notice to all the
corporations concerned. (Sees. 76-
79)
Q: When shall the merger or consolidation
become effective?
A: Upon issuance by the SEC of the certificate
of rnerger and consolidation. In the case of
merger or consolidation of banks or banking
institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other
special corporations governed by special laws,
the favorable recommendation of the
appropriate government agency shall first be
obtained.
52
is Q: Will the absorbing corporation or the
newly created corporation bound to
assume the liabilities of the dissolved
corporation or the consolidated
corporation?
A:
GR: Generally, when one corporation buys
all the shares/assets of another corporation
this will not operate to dissolve the other
corporation and as the two corporations still
maintaining their separate corporate
entities, one will not answer for the debts of
the other.
XPN: (to the non-assumption of liabilities)
1. If the purchase was in fraud of the
creditors;
2. If there is an express assumption of
liabilities;
3. If there is a consolidation or merger;
4. If the purchaser is merely a
continuation of the seller.
Q: What is the difference between merger
and consolidation and sale of assets?
A:
I MERGER AND
,SALE OF ASSETS
I
I
CONSOLIDATION
I
Sale of assets is
Does not necessary
always involved
involve merger and
consolidation.
Title tothe assets are
Transfer of title is by
transferred by
operation of law
virtue of contract
Purchasing
There is automatic
corporation is not
assumption of
generally liable for
the debts and
liabilities
liabilities of the
selling corporation
The constituent The selling
corporation are corporation is not
automatically dissolved by the
dissolved mere transfer of all
(but no liquidation) its property
The selling
There is continuance corporation ordinarily
of the enterprise and contemplates a
of the stockholders liquidation of the
enterprise
UST GOLDEN NOTES 2010
' 1 0 corporations agreed to merge. They
executed an agreement specifying the
iving corporation and the absorbed
ration. Under the agreement of
-3rger dated November 5, 1998, the
iving corporation acquired all the
._ is, properties and liabilities of the
orbed corporation.
at would happen to the absorbed
rporation? Must the absorbed
rporation undertake dissolution and the
ding up procedures? Explain your
o. There is no need for the absorbed
rporation to undertake dissolution and
.-riding up procedure. As a result of the
er, the absorbed corporation is
~ omatically dissolved and its assets and
~ili ies are acquired and assumed by the
. ingcorporation.
: Pending the approval of the merger by
e Securities and Exchange Commission,
ay the surviving corporation already
itute suits to collect all receivables due
the absorbed corporation from its
stomers? Explain your answer.
. o. The merger does not becomeeffective
'1 and unless approved by the Securities
2.."Id Exchange Commission. Before the
aoproval by the SEC of the merger, the
survivinq corporation has no legal personality
.: . respect to receivables due to the
absorbedcorporation.
: A case was filed against a customer to
lIect on the' promissory note issued by
im after the date of the merger agreement.
The customer raised the defense that while
e receivables as of the date of the merger
agreement were transferred to the
surviving corporation, those receivables
vhlch were created after the merger
agreement remained to be owned by the
absorbed corporation. These receivables
'lQuld be distributed to the stockholders
confonnably with the dissolution and
liquidation procedures under the New
Corporation Code? Discuss the merits of
this argument.
A: Whetherthe receivablewas incurredbythe
absorbed corporation before or after the
merger agreement, or before or after the
approval thereof by the SEC, the said
receivable would still belong to the surviving
corporation under Sec. 80 of the Corporation
Code which does not make any distinctionas
o the assets and liabilities of the absorbed
corporation that the surviving corporation
would inherit. (1999Bar Question)
Q: In case of merger, can an absorbing
corporation (Bank B) validly commence a
suit against the debtor of the absorbed
corporation (Bank A)?
A: Yes, Bank B cansue the debtor of BankA
becauseit has already acquiredthe rights and
interests of the latter. Novation (by virtue
change of creditor) cannot be a proper
defense because the surviving corporation
acquiresall the rights, properties, and liabilities
of the dissolvedcorporation. (Chester 8abst v.
CA, ei. et., G.R. No. 99398 & 104625, Jan. 26,
2001)
Q: What if there are properties under the
absorbed corporation's name and the
surviving corporation wants to sell the
same, is there a need to obtain a new title
or sign a deed of sale between the two
corporations?
A: No. The surviving corporationacquiresthe
propertywithout needof further act. Hence, it
maysell said propertyevenwithoutobtaininga
newtitle or signingadeedof sale.
Q: What happens to the employees of the
absorbed corporation? Is the surviving
corporation duty-bound to absorb the
former's employees?
A: Yes, because employment agreements or
contracts are considered liabilities but without
prejudicetoterminationduetoredundancy.
Q: What is aspin-off?
A: It has the opposite effect of merger or
consolidation, whereby a department, division
or portions of the corporate business
enterprise is sold-off or assigned into a new
corporationthatwill arise bythe processwhich
may constitute it into a subsidiary of the
original corporation. The validity of spin-offs
depends uponvalid business cause and good
faith. (San Miguel Corp. Employees Union-
PTGWO v, Confesor, G.R. No. 111262, Sept.
19, 1996)
UNIVERSITY OF SANTO TOMAS
Pacu(tad' d' e (] ) er ecl i o Ci vi C
53
CORPORATION CODE: ApPRAISAL RIGHT
APPRAISAL RIGHT
Q: What is appraisal right?
A: The right to withdraw from the corporation
and demand payment of the fair value of his
shares after dissenting from certain corporate
acts involving fundamental changes in
corporate structure. (Sec. 81)
Q: In what instances may the right of
appraisal be exercised?
A:
1. In case any amendment to the
articles of incorporation which has the
effect of:
a. Changing or restricting the rights
of any stockholder or authorizing
preferences over those of
outstanding shares; or
b. Changing the term of the
corporate existence.
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided inthe Code (Sec. 81);
3. In case of merger or consolidation
(Secs. 77,81);
4. In case of investment of corporate
funds in another corporation or
business or for any other purpose;
(Sec. 42);
5. In cases of close corporations, a
stockholder may, for any reason,
compel the corporation to purchase
his shares when the corporation has
sufficient assets in its books to cover
its debts and liabilities exclusive of
capital stock (Sec. 105);
Q: What are the conditions tor the exercise
of appraisal right?
A:
1. Any of the instances set forth by the
law must be present;
2. Dissenting stockholder must have
voted against the proposed action;
3. Demand for payment must be made
within 30 days from the date the vote
is taken thereon;
4, Price must be based on fair market
! value as of day prior to date on which
vote was taken;
5. Submission by withdrawing
stockholder of his shares to the
corporation for notation of being
dissenting stockholder within 10 days
from the written demand;
54
6. Payment must be made only when
the corporation has unrestricted
retained earnings in its books;
however, in case of a close
corporation which only requires that it
has assets and the payment of the
fair value of the shares to the
dissenting SH will not result to its
insolvency.
7. Stockholder must transfer his shares
to the corporation upon payment by
the corporation.
Q: When will the dissenting stockholder
lose his right of appraisal?
A:
1. If the dissenting stockholder fails to
make a written demand on the
corporation within 30 days after the
date on which the vote was taken for
payment on the fair value of his
shares. Such failure shall be deemed
to be awaiver of his appraisal right.
2. When the dissenting stockholder fails
to submit his certificates of stock
representing his shares for notation
thereon that such shares are
dissenting shares, within 10 days
after demand for payment for his
shares.
3. When the shares of the dissenting
stockholder are transferred to another
person and the certificates covering
said shares are consequently
cancelled.
Q: What are the rules in case of
disagreement on the fair value of shares?
A: If within a period of sixty (60) days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value
of the shares, it shall be determined and
appraised by three (3) disinterested persons
one of Whom shall be named by the
stockholder, another by the corporation, and
the third by the two thus chosen. The findings
of the majority of the appraisers shall be final.
The award shall be paid by the corporation
within thirty (30) days after such award is
made.
UST GOLDEN NOTES 2010
: What are the effects of the demand and
erminatlon of right?
1. From the time of demand for payment
of the fair value of a stockholder's
shares until either the abandonment
of the corporate action involved or the
purchase of the said shares by the
corporation, all rights accruing to
such shares, including voting and
dividend rights, shall be suspended;
2. The dissenting stockholder shall be
entitled to receive payment of the fair
market value of his shares as agreed
upon between him and the
corporation or as determined by the
appraisers chosen bythem.
If he is not paid within 30 days after
the award, his voting and dividend
rights shall immediately be restored.
(Sec. 83)
Q: When are the rights of a stockholder
restored even after the exercise of
appraisal right?
A:
GR: A dissenting stockholder who
demands payment of his shares is no
longer allowed to withdraw from his
decision.
XPN: When the following instances are
present:
1. If such demand for payment is
withdrawn with the consent of the
corporation;
2. If the proposed corporate action is
abandoned or rescinded by the
corporation;
3. If the proposed corporate action
disapproved by the SEC where such
approval is necessary;
4. If the SEC determines that such
stockholder is not entitled to the
appraisal right. (Sec. 84)
Note: In such instances, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
onhis shares shall be paid tohim.
Q: How is valuation date determined?
A: The fair value of the shares of the
dissenting stockholder is determined as of the
day prior to the date on which the vote was
taken notwithstandinq any appreciation or
depreciation in value of the shares in
anticipation of such corporate action.
Q: Who bears the cost of appraisal?
A:
GR: Costs of appraisal shall be borne by
the corporation
XPN: The costs shall be borne by the
stockholder, when the fair value
ascertained by the appraisers is
approximately the same as the price which
the corporation may have offered to pay
the stockholder. (Sec. 85)
Note: Inthe case of anactiontorecoversuch fair
value, all costs and expenses shall be assessed
against the corporation, unless the refusal of the
stockholder toreceive paymentwas unjustified.
Q: What is the effect of the transfer of
shares of the dissenting stockholder?
A: .
1. The rights of the transferor as a
dissenting stockholder shall cease;
2. The transferee shall become a
regular stockholder with the right to
receive all dividend distributions
which would have accrued to such
shares; and
3. The right of the transferor as a
dissenting stockholder to be paid the
fair value of the shares shall cease.
Q: A dissenting stockholder transfers his
shares of stock and his certificate of stock
bearing the notation that such shares are
dissenting shares, are consequently
cancelled. Will the transferee acquire the
right of the transferor to demand from the
corporation the payment of the fair value of
the shares?
A: No, because upon transfer of the shares of
the dissenting stockholder, his right as a
dissenting stockholder shall cease and the
transferee shall have all the rights of a regular
stockholder and all dividend distributions which
would have accrued on such shares shall be
paid to the transferee. The transfer of shares
is abandonment by the dissenting stockholder
of his appraisal right.
UNIVERSITY OF SANTO TOMAS
Pacu{ tati ti e I ] ) er ecl i o Civ i]
CORPORATION CODE: NON-STOCK CORPORATIONS
. NON-STOCK
.' CORPORATION
Q: What is the concept of a non-stock
corporation?
A: It is one where no part of its income is
distributable as dividends to its members.
Even if there is a statement of capital stock, for
as long as there is no distribution of retained
earnings to its members, the corporation is
non-stock.
Any profit which it may obtain as an incident to
its operations shall whenever necessary or
proper, be used in furtherance of the purpose
or purposes for which it was organized.
Note: They are govenied by the same rules
established for stock corporations, subject
however, to special provisions governing non-
stockcorporations.
Q: What are the requisites of a non-stock
corporation?
A:
1. It does not have capital stock divided
into shares;
2. No part of its income during its
existence is distributable as dividends
to its members, trustees, or officers;
Q: For what purposes may a non-stock
corporation be organized?
A: Non-stock corporation may be formed or
organized for charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes, like trade, industry, agriculture and
like chambers, or any combination thereof.
Q: What are the rules regarding
conversion?
A:
1. A non-stock corporation cannot be
converted into a stock corporation
through mere amendment of its
Article of Incorporation. This would
violate Sec.S7 which prohibits
distribution of income as dividends to
members. Giving the members
shares is tantamount to distribution of
its assets or income. (SEC Opinion,
Mar. 20, 1995)
2. A non-stock corporation can be
converted into a stock corporation
56
only if the members dissolve
and then organize a
corporation. However, there
resulting new corporation.
Opinion, May 13, 1992)
it first
stock
is a
(SEC
3. A stock corporation may be converted
into a non-stock corporation by mere
amendment provided all the
requirements are complied with. Its
rights and liabilities will remain.
Q: What are the' distinctions between a
stock corporation and a non-stock
corporation?
A:
may
held at any place
outside the place of
business but must
be within the
Phili
Place of meeting:
within the city or
municipality where the
place of business is
located
Term of BOD: 1year
Assets are distributed
according to interest
UST GOLDEN NOTES 2010
Termination:
governed by the
AOI
Q: What are the rights of members?
A:
1. Right to vote - A member is entitled
to one (1) vote. However, such right
may be broadened, limited or denied
in the Articles of Incorporation or by-
laws. (Sec.89) thus, the by-laws of a
non-stock corporation may provide for
the desired voting rights of members,
including the number of votes. (SEC
Opinion, Oct. 10, 1989)
2. Right to transfer membership - As a
general rule, a member cannot
transfer his membership (since
membership is personal to the
member) in a non stock corporation.
However, by way of exception, the
Articles on Incorporation or by-laws
may provide for their transferability.
(Sec. 90)
Q: What is the order of distribution of
assets on dissolution of non-stock
corporati ons?
A:
1. All its creditors shall be paid;
2. Assets held subject to return on
dissolution, shall be delivered back to
their givers;
3. Assets held for charitable, religious
purposes, etc., without condition for
their return on dissolution, shall be
conveyed to one or more
organizations engaged in similar
activities as dissolved corporation;
4. All other assets shall be distributed to
members, as provided for in the
Articles or by-laws; and
5. In case of there is no provision in the
AOI or by-laws, distribution may be
made in accordance to a plan of
distribution adopted by the board of
trustees by majority vote and by at
least 2/3 of the members. (Sec. 94)
Q: Can a non-stock corporation offset
unused contributions of members against
the balance of receivables from the same
members?
A: No. The unused contributions of members
cannot be offset against the balance of
receivables because this would amount to
distribution of the capital of the corporation.
Members of Non-stock Corporation are not
entitled to distribution of capital. They are only
entitled to distribution of capital upon
dissolution when it is provided for in the
articles of incorporation or by-laws. (SEC
Opinion, Nov. 27, 1985)
Academics Committee
Cbai r per .r on: Abraham D. Genuino IT
' Vi a-Chai r f or Academi a: J eannie A. Laurentino
Vi a-Chai r / or Admi n e;.-Fi nance: Aissa Celine H. Luna
Vi a-Chai r Jor L ayout &Desi g : Loise Rae G. Nan!
Mercantile LawCommittee
Subj ect H ead: Holy T. Ampaguey
AJJI . Subj ed H ead: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Aireen M. Cacho
Socrates Benjie 1. Marbi!
Ron Cherne S. Mendoza
Edison J ames F. Pagalilauan
Maybelline M. Santiago
UNIVERSITY OF SANTO TOMAS
PacuCtati ti e (] ) er ecl i o Civif
57
CORPORATION CODE: CLOSE CORPORA TrONS
CLOSE CORPORATION
Q: What is a close corporation?
A:
1. Whose articles of incorporation
provide that:
a. All the corporation's issued stock
of all classes, exclusive of
treasury shares, shall be held of
record by not more than a
specified number or persons not
exceeding twenty (20);
b. All the issued stock of all classes
shall be subject to one or more
specified restrictions on transfer;
c. The corporation shall not list in
any stock exchange or make any
public offering of any of its stock
of any class.
2. Whose stocks, at least 213 of the
voting stocks or voting rights of which
are owned or controlled by another
corporation which is a close
corporation.
Note: The Corporation is not a close corporation
even if the shares belong to less than twenty if
not all the requisites are present. (San Juan
Structural and Steel Fabricators, Inc. v. CA, G.R.
No. 129459, Sept. 29, 1998)
Q: What are the characteristics of a close
corporati on?
A:
1. Stockholders may act as directors
I without need of election and therefore
I are liable as directors;
2., Stockholders who are ihvolved in the
management of the corporation are
liable in the same manner as
directors are;
3. Quorum may be greater than mere
majority;
4. Transfer of stocks to others, which
would increase the number of
stockholders to more than the
maximum are invalid;
5. Corporate actuations may be binding
even without a formal board meeting,
if the stockholder had knowledge or
ratified the informal action of the
others;
6. Pre-emptive right extends to all stock
issues;
7. Deadlock in board are settled by the
SEC, on the written petition by any
stockholder; and
8. Stockholder may withdraw and avail
of his right of appraisal.
58
Q: What is the difference between ordinary
stock corporation and close corporation?
A:
ORDINARY STOCK
CLOSE CORPORATION.
CORPORATION
I
ItsAOI must containthe
ItsAOI needonly
special matters
prescribed by Sec. 97,
containthe general
aside fromthe general
mattersenumerated
matters inSec. 14.
inSec. 14of the
Failure todoso
Code
precludes adejure close
corporationstatus
Itsstatus as an
2/3 of its voting stock or
ordinarystock
voting rights must notbe
corporationis not
affected bythe
owned or controlled by
ownershipof its
another corporation
which is not aclose
.votingstock or voting
corporation
rights
ItsAOI cannot ItsAOI may classify
classifydirectors directors
The corporate ItsAOI may provide that
officers and any or all of the corporate
employees are officers or employees
electedbyamajority may be elected or
vote of all the appointed bythe
members of the BOD stockholders
Business of the
Businessof the corporationmay be
corporationis managed bythe
managedbythe stockholders if theAOI
BOD so provide, butthey are
liable as directors
The pre-emptive
The pre-emptive right is
rightissubject tothe
subject tonoexceptions
exceptionsfound in
unless denied inthe AOI
Sec. 39
The appraisal right
The appraisal right may
be exercised and
maybe exercised by
compelled against the
astockholder onlyin
corporationby a
the cases provided
stockholder for any
inSecs. 81 and42
reason
Arbitrationor intra"
Arbitrationof intra-
corporate deadlock
corporate deadlock by
bythe SEC is nota
the SEC is anavailable
remedyincase the
remedy incase the
directors or
stockholders areso
directors or stockholders
divided respecting
are so divided respecting
the management of the
the managementof
corporation
thecorporation
Incase of voluntary
Any stockholder who
dissolution, approval
thinks there is
of the majorityvote
mismanagement or fraud
of the BODand
inthe corporation may
stockholders
representing213 of
file a petitionwith the
SEC todissolve the
theoutstanding
corporation
capital is reauired.
UST GOLDEN NOTES 2010
: What cannot be a close corporation?
A: MOSBI PEP
1. Mining companies;
2. Qil companies;
3. .tock exchanges;
4. !!anks;
5. insurance companies;
6. Eublic utility;
7. Educational institutions; and
8. Other corporation declared to be
vested with Eublic interest. (Sec. 96)
ate: A "close corporation" is different from a
"closed corporation" and a "closely held
c poration".
: What are the conditions for validity of
restrictions on transfer of shares?
A:
1. Such restrictions must appear in the
AOI and in the by-laws as well as in
the certificate of stock, otherwise they
shall not be binding on any purchaser
thereof in good faith;
2. They shall not be more onerous than
granting the existing stockholders or
the corporations the option to
purchase the shares of the
transferring stockholders with such
reasonable terms, conditions, or
period stated therein.
ate: Any transfer made should not result in
exceeding the number of stockholders as allowed
")y he Code.
Q: What is the nature of restrictions on
transfer?
A; It is inthe nature of a right of first refusal in
:2 or of stockholders which can be waived by
j)e stockholder, if the latter fails to exercise
the option to purchase within the period stated
0 he articles and by-laws.
Q: Can good faith be a defense in the
issuance or transfer in breach of qualifying
conditions?
A: No, according to Sec. 99, there is a
conclusive presumption of knowledge of the
restrictions.
Q: What are the effects where stockholders
are managers? '"
A:
1. No longer necessary to elect
directors;
2. Stockholders concerned shall be
deemed the directors;
3. The stockholders shall have the same
liabilities as directors;
4. To the extent that the stockholders
are actively engaged in the
management or operation of the
business and affairs of a close
corporation, the stockholders shall be
held to strict fiduciary duties to each
and among themselves; and
5. The stockholders .shall be personally
liable for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.
Q: What is the effect of unnecessary or
improperly held board meeting?
A: Any action by the directors of a close
corporation without a meeting shall be valid if:
1. Before or after such action is taken,
written consent is signed by all the
directors;
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection;
3. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders;
4. All the directors have express or
implied knowledge of the action in
question and make no prompt
objection thereto.
Q: What is deadlock in a close
corporation?
A: It is when the directors or stockholders are
so divided respecting the management of the
business and affairs of the corporation that the
votes required for any corporate action cannot
be obtained and as a result, business and
affairs can no longer be conducted to the
advantage of the stockholders generally.
Q: What is the remedy in case of deadlocks
in a close corporation?
A: The SEC may be asked to intervene and
the SEC may perform such actions that may
be necessary under the circumstances
including the appointment of a provisional
director who, as an impartial person will have
all the powers of a duly elected director.
UNIVERSITY OF SANTO TOMAS ~:l;J 59
Pacu[ tad de < Der ecf i o Ci vi l . "
CORPORATION CODE: SPECIAL CORPORATIONS
.,,', , SPECIAL CORPORATIONS Q: What is the nationality of a corporation
sole?
Q: What is an educational corporation?
A: It is a stock or non-stock corporation
organized to provide facilities for teaching or
instruction. (Secs. 106 - 108)
Note: A favorable recommendation of the DECS
or CHED is essential for the approval of its AOI
and by-laws.
It is primarily governed by special laws and
suppletorily governed by the provisions of the
Code.
Q: What is a religious corporation?
A: A corporation composed entirely of spiritual
persons and which is organized for the
furtherance of a religion or for perpetuating the
rights of the church or for the administration of
church or religious work or property. It is
different from an ordinary non-stock
corporation organized for religious purposes.
(Secs. 109- 116)
Q: Are religious groups required to be
registered with the SEC?
A: No, the Corporation Code does not require
any religious groups to be registered as a
corporation but if it wants to acquire legal
personality, its members should incorporate
under the Code.
Q: What are the kinds of Religious
Corporation?
A:
1. Corporation sole - a special form of
corporation, usually associated with
the clergy, consisting of one person
only and his successors, who is
incorporated by law to give some
legal capacities and advantages
(Sec. 110);
2. Religious societies or corporate
aggregate - a non-stock corporation
governed by a board but with
religious purposes. It is incorporated
by an aggregate of persons, religious
order, diocese, synod, sect, etc. (Sec.
116)
Q: How is a corporation sole organized?
A: By the mere filing of a verified articles of
incorporation with the SEC without the need of
an issuance of a certificate of incorporation.
(Sec. 111)
60
A: A corporation sole does not have any
nationality but for purposes of applying
nationalization laws, nationality is determined
not by the nationality of its presiding elder but
by the nationality of its members, constituting
the sect in the Philippines. Thus, the Roman
Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope.
(Roman Catholic Apostolic Church v. Land
Registration Commission, G.R. No. L-8451,
Dec. 20, 1957)
Q: May a corporation sole acquire
property?
A: Yes a corporation sole may acquire
property even without court intervention by
purchase, donation and other lawful means.
Q: How may a corporation sole alienate
property?
A:
1. By obtaining an order from the RTC
of the province where the property is
situated after notice of the application
for leave to sell or mortgage has been
given by publication or otherwise
2. In cases where the rules, regulations
and discipline of the religious
denomination, sect or church,
religious society or order concerned
represented by such corporation sole
regulate the method of acquiring,
holding, selling and mortgaging real
estate and personal property, such
rules, regulations and discipline shall
control, and the intervention of the
courts shall not be necessary. (Sec.
113)
Q: How is the vacancy filled in a
corporation?
A: By accession to the office by the
successors of any chief archbishop, bishop,
priest, minister, rabbi or presiding elder, (Sec.
114)
Note: They shall be permitted to transact
business onthe filing with the SEC acopy of their
commission, certificate of election, or letters of
appointment, duly certified by any notary public.
UST GOLDEN NOTES 2010
: Howis acorporation sole dissolved?
. By filing a verified declaration of dissolution
:::::e:ing:
1.
2.
3.
4.
The name of tile corporation;
Reason for dissolution;
Authorization for the dissolution by
the particular religious denomination,
sect or church;
Names and addresses of the persons
who will supervise the dissolution and
winding up.
Academics Committee
Cbai r per so: Abraham D. Genuino II
Vi a-Cbai r f or .Academi cs: Jeannie A. Laur entino
Vi a-Cbai r f or Admi n &Fi uana: AissaCelineH. Luna
Vi ceOJ" i r j i Jr L ayo,,! &DeJi g n: LoiseRaeG. Naval
Mercantile Law Committee
Sub j ed H ead' Holy T Ampaguey
Ass!. Subj ed H ead: ManilynRose S. Sotelo
Members:
Edwin Marc T Baldia
AireenM. Cacho
Socrates Benjie I. Marbil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
Maybelline M. Santiago
UNIVERSITY OF SANTO TOMAS
Pacu{ tati ti e (j ) er ecl i o Ci vi ]
61
CORPORATION CODE: DISSOLUTION
DISSOLUTION
Q: What is meant by dissolution?
A: It is the extinguishment of the franchise of a
corporation and the termination of its corporate
existence.
Q: What are the voluntary modes of
dissolution of a corporation?
A:
1. Where no creditors are affected
Procedure:
a. Majority vote of the board of
directors or trustees; and
b. Resolution duly adopted by the
affirmative. vote of the
stockholders owning at least 2/3
of the outstanding capital stock
or at least 2/3 of the members at
a meeting duly called for that
purpose.
c. A copy of the resolution
authorizing the dissolution shall
be certified by a majority of the
board of directors or trustees and
countersigned by the secretary of
the corporation.
d. Such copy shall be filed with
SEC. (Sec. 118)
2. Where creditors are affected
Procedure:
a. Filing a petition for dissolution
with the SEC
b. Such petition must be signed by
majority of the board of directors
or trustees
c. Must also be verified by the
president or secretary or one of
its directors
d. The dissolution was resolved
upon by the affirmative vote of
the stockholders representing at
least 2/3 of the outstanding
capital stock or at least 2/3 of the
members at a meeting duly
called for that purpose.
e. If there is no sufficient objection,
and the material allegations of
the petition are true, a judgment
shall be rendered dissolving the
corporation and directing such
disposition of its assets as justice
requires, and may appoint a
receiver to collect such assets
and pay the debts of the
corporation. (Sec. 119)
3. By shortening the corporate term - A
voluntary dissolution may be effected
by amending the AOI to shorten its
62
corporate term pursuant to the
provisions of the Code. A copy of the
amended AOI shall be submitted to
the SEC.. Upon approval of the
amended AOI of the expiration of the
shortened term, the corporation shall
be deemed dissolved without any
further proceedings, subject to the
provisions of the Code on liquidation.
As an additional requirement, the
SEC requires to submit the final
audited financial statement not older
than 60 days before the application
for shortening the corporate term.
4. In case of a corporation sole, by
submitting to the SEC for approval, a
verified declaration of dissolution
(Sec. 115). This merely needs the
affidavit .of the presiding elder. No
need for a board resolution.
5. By merger or consolidation, whereby
the constituent corporations
automatically cease upon issuance
by the SEC of the certificate of
merger or consolidation, except the
surviving or consolidated corporation
which shall continue to exist. (Secs.
79 and 80)
6. Expiration of the corporate term (Sec.
11).
Q: What are the involuntary modes of
dissolution of a corporation?
A:
1. Failure to organize and commence
transaction of its business within 2
years from date of incorporation.
(Sec. 22)
2. Continuous inoperation for a period of
at least 5 years.
3. Failure to file by-laws within the
required period but, according to a
SEC Opinion, SEC will give it the
opportunity to explain such failure an
not automatically dissolve the
corporation.
4. By order of the SEC upon a verified
petition and after proper notice and
hearing on the ground of serious
misrepresentation as to what the
corporation can do or is doinq to the
great prejudice of or damage to the
general public.
UST GOLDEN NOTES 2010
5. Revocation or forfeiture of the
franchise or certificate of
incorporation due to its misuse or
non-use pursuant to q.uo warranto
proceedings filed by the Solicitor
General.
6. Failuretofile requiredreports.
Q: XYZCorporation entered into a contract
of lease with ABC, Inc., over a piece of real
estate for aterm of 20years, renewable for
another 20 years, provided that XYZ's
corporate term is extended in accordance
with law. Four years after the term of XYZ
Corporation expired, but still within the
period allowed by the lease contract for the
extension of the lease period, XYZ Corp.
notified ABC, Inc., that it is exercising the
option to extend the lease. ABC, Inc.,
objected to the proposed extension,
arguing that since the corporate life of XYZ
Corp. had expired, it could no longer opt to
renew the lease. XYZ Corp. countered that
withstanding the lapse of its corporate term
it still has the right to renew the lease
because no quo warranto proceedings for
involuntary dissolution of XYZ Corp. has
been instituted by the Office of the Solicitor
General. Is the contention of XYZ Corp.
meritorious? Explain briefly.
A: XYZ Corporation's contention is not
meritorious based on the ruling of the
Supreme Court in PNB v. CFt of Rizat, May
27, 1992. XYZ Corp. was dissolved ipsofacto
upon the expiration of its original term. It
ceasedto be a body corporatefor the purpose
of continuing the business for which it was
organized, exceptonly for purposesconnected
with itswinding upor liquidation. Extendingthe
lease is not an act to wing upor litigate XYZ's
affairs. It is contrary to the idea of winding up
the affairs of the corporation. (2004 Bar
Question)
Q: What is liquidation?
A: It is the process by which all the assets of
the corporationare convertedintoliquidassets
(cash) in order to facilitate the payment of
obligations to creditors, and the remaining
balance if any is to be distributed to the
stockholders.
Note: At this stage, thecorporationcontinuesas
a body corporate for 3 years only for the
purposes of liquidating and winding up its
corporateaffairs.
Q: What are the modes of liquidation?
A:
1. By a management committee or
rehabilitation receiver appointed by
SEC; (Sec. 119, last par.)
2. By the corporation itself or its board
of directors or trustees; (Sec. 122,
par. 1)
3.. By a trustee to whom the assets of
the corporation had been conveyed.
(Sec. 122, par. 2); (Board of
Liquidators v. Kataw, G.R. No. L-
18805, Aug. 14, 1967)
Note: The 3-year periodof liquidationdoes not
applyto methods1 and3 as longasthe trustee
orthereceiverisappointedwithinthesaidperiod.
Q: When is the question as to the right of
priority of claimant against assets of the
corporation being dissolved and liquidated
becomes important?
A: The question becomes important whenthe
assets of the corporation is not sufficient to
paya!1the claims
Q: Does a corporation in the process of
liquidation have legal authority to engage
in any new business?
A: No, a corporation in the process of
liquidation has no legal authority to engage in
any new business, even if the same is in
accordance with the primary purpose stated in
its articleof incorporation.
Q: The Securities and Exchange
Commission approved the amendment of
the articles of incorporation of GHQ
Corporation shortening its corporate life to
only 25 years in accordance with Sec. 120
of the Corporation Code. As shortened, the
corporation continued its business
operations until May 30, 1997, the last day
of its corporate existence. Prior to said
date, there were a number of pending civil
actions, of varying nature but mostly
money claims filed by creditors, none of
which was expected to be completed or
resolved within five years from May 30,
1997. If the creditors had sought your
professional help at that time about
whether or not their cases could be
pursued beyond May 30, 1997, what would
have beenyour advice?
A: The cases can be pursued even beyond
May 30, 1997, the last day of the corporate
existence of GHQ Corporation. The
corporation is not actually dissolved upon the
UNIVERSITY OF SANTO TOMAS
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~. 63
CORPORATION CODE: DISSOLUTION
expiration of its corporate term. There is still
the period for liquidation or winding up. (2000
Bar Question)
Q: X Corporation shortened its corporate
life by amending its articles of
incorporation. It has no debts but owns a
prime property located in Quezon City. How
would the said property be liquidated
among the five stockholders of said
corporation? Discuss two methods of
liquidation.
A: The prime property of X Corporation can be
liquidated among the five stockholders after
the property has been conveyed by the
corporation to the five stockholders, by dividing
or partitioning it among themselves in any two
of the following ways:
1, By physical division or partition based
on the proportion of the values of
their stockholdings; or .
2. By selling the property to a third
person and dividing the proceeds
among the five stockholders in
proportion totheir stockholdings; or
3. After the determination of the value of
the property, by assigning or
transferring the property to one
stockholder with the obligation on the
part of said stockholder to pay the
other four stockholders the amountls
in proportion to the value of the
stockholding of each. (2001 Bar
Question)
Q: What are the consequences if the
liquidation is not tenninated within the 3-
year period?
A:
1. Pending suits for or against the
corporation which were initiated prior
to the expiration of the 3-year period
shall continue. (Gelano v. CA, G.R.
No. L-39050, Feb. 24, 1981)
2.. New actions may still be filed against
the trustee of the corporation even
after the expiration of the 3-year
period but before the affairs of said
corporation have been finally
liquidated or settled by the trustee.
(Republicv. Marsman, G.R. No. L-
18956 Apr. 27, 1972)
3. A corporation which has a pending
action which cannot be finished within
the 3-year period is authorized to
convey all its property, including
pending choses of action, of a trustee
to enable it to prosecute and defend
suits by or against the corporation
beyond the 3-year period. Where no
64 Iteam:iB
trustee is appointed, its counsel who
prosecuted and represented the
interest of the corporation may be
considered as trustee of said
corporation, at least with respect to
the matter in litigation (Gelano v. CA,
G.R. No. L-39050, Feb. 24, 1981).
The directors may also be permitted
to continue as trustees to complete
the liquidation. (Clemente v. CA,
G.R. No. 82407, Mar. 27, 1995)
4. The creditors of the corporation who
were not paid may follow the property
of the corporation that may have
passed to its stockholders unless
barred by prescription or laches or
disposition of said property infavor of
a purchaser ingood faith.
Q: May the corporation, through its
president condone penalties and charges
after it had been placed under
receivership?
A: No. The appointment of receiver operates
to suspend the authority of a corporation and
of its directors and officers over its property
and effects, such authority being reposed in
the receiver. (Yam v. CA, G.R. No. 104726
Feb 11, 1999)
Q: What is the difference between
liquidation and rehabilitation?
A:
.: LIQUIDATION '. REHABILITATION'
Connotes awinding up
or setting with
creditors and debtors
Connotes opening or
reorganization
Contemplates
continuance of
corporate life inan
effort to restore the
corporation to its
former successful
operation
Winding up process so
that assets may be
distributed to those
entitled
UST GOLDEN NOTES 2010
< 'FOREIGN-CORPORATION ',,,,,
Q: Whocanbearesident agent?
Q: Whatis aforeign corporation?
A: It is a corporation formed, organized or
existing under any law other than those of the
Philippines, and whose laws allow Filipino
citizens and corporation to do business in its
own country or state. (Sec. 123)
Note: The definition espouses the incorporation
lest and the reciprocity rule and is significant for
licensing purposes.
Q: What are the requisites for obtaining
license to dobusiness?
A:
1. The foreign corporation should file a
verified application containing and
together with Ihe following:
a: Designated resident agent (who
will receive summons and
notices for the corporation;
b. a special power of attorney
should also be submitted for
such purpose;
2. An agreement that if it ceases to
transact business or if there is no
more resident agent, summons shall
then be served through SEC;
3. Oath of Reciprocity. Certificate under
Oath. of the authorized official of the
foreign corporation's country that
allows Filipino citizens and
corporations to do business in said
country.
4. Within 60 days from issuance of
license, the corporation should
deposit at least Pi 00, 000.00 (cash,
property or bond) for the benefit of
creditors subject to further deposit
every six months.
Q: Why do foreign corporations need
license to transact business in the
Philippines?
A: Foreign corporations need license to:
1. Place them under the jurisdiction of
thecourt;
2. Place them in the same footing as
domestic corporation;
3. Protect the public in dealing with the
said corporation.
-:
A:
1. An individual, who must be of good
moral character and of sound
financial standing, residing in the
Philippines; or
2. A domestic corporation lawfully
transacting business in the
Philippines, designated in a written
power of attorney by a foreign
corporation authorized to do business
inthe Philippines.
Q: Canaresident agent sign the certificate
of non-forum shopping?
A: No, while a resident agent may be aware of
the actions filed against the principal, he may
not be aware of the actions initiated by the
principal, therefore he cannot sign the
certificate of non-forum shopping that is a
requirement for filing of an initiatory pleading in
court (Expert Travel & Tours Inc. v. CA, G.R.
No. 152392, May 26,2005).
Q: What are the jurisdictional tests of
"doing or transacting business" in the
Philippines for foreign corporations?
A:
1. Twin Characterization Test
a. Cqntinuity Test - doing business
implies a continuity of
commercial dealings and
arrangements, and contemplates
to some extent the performance
of acts or works or the exercise
of some functions normally
incident to and in progressive
prosecution of, the purpose and
object of its organization.
b. Subsequent Test - a foreign
corporation is doing business in
the country if it is continuing the
body or substance of the
enterprise of business for which
it was organized. (Philippine
Corporate Law, Villanueva, 2001
ed.)
2. Contract Test
Whether the contracts entered into by
the foreign corporation, or by an
agent acting under the control and
direction of the foreign corporation,
are consummated inthe Philippines.
To be "doing or transacting business
in the Philippines" for the purposes of
Sec. 133 of the Corporation Code, the
foreign corporation must actually
U N I V E R SIT V 0 F 5 ANT 0 TOM A S ~~ ! 65
Pacu{ tad de Der echo Ci vi f .,.
CORPORATION CODE: FOREIGN CORPORATIONS
transact business in the Philippines,
that is, perform specific business
transactions within the Philippines
territory on a continuing basis, in its
own name or for its own account.
Note: Actual transaction of business
Within the Philippine territory is an
essential requisite for the Philippines to
acquire jurisdiction over a foreign
corporationand thus require the foreign
corporation to secure a Philippine
business license (B. Van Zuiden Bros.,
Ltd. v. GTVL Manufacturing Industries,
Inc., G.R. No. 147905, May 28, 2007).
Q: What are the considered as " doing or
transacting business" in the Philippines for
foreign corporations?
A:
1. Foreign Investment Act of 1991 (R.A.
7042)
a. Soliciting orders, service
contracts, and opening offices;
b. Appointinq representatives,
distributors domiciled in the
Philippines or who stay for a
period or periods totaling 180
days or more;
c. Participating in the management,
supervision or control of any
domestic business, firm, entity,
or corporation inthe Philippines;
d. Any act or acts that imply a
continuity of commercial dealings
or arrangements, and
contemplate to some extent the
performance of acts or works or
the exercise of some functions
normally incident to and in
progressive prosecution of, the
purpose and object of its
organization.
2. Implementing Rules of RA 7042
a. Mere investment as shareholder
and exercise of rights as
investor;
b. Having a nominee director or
officer to represent its interest in
the corporation;
c. Appointing a representative or
distributor which transacts
business in its own name and for
its own account.
d. Publication of a general
advertisement thrbugh any print
or broadcast media;
e. Maintaining a stock of goods in
the Philippines solely for the
purpose of having the same
66
processed by another entity in
the Philippines;
f. Consignment by the foreign
corporation of equipment with a
local company to be used in the
processing of products for
export;
g.. Collecting information in the
Philippines; and
h. Performing services auxiliary to
an existing isolated contract of
sale which are not on a
continuing basis.
Q: What are the effects of lack of license?
1. On suits
a. Foreign corporation doing
business inthe Philippines:
i. May not sue or intervene in
any action in any court or
administrative agency of the
Philippines; but
ii. May be sued on any valid
cause of action recognized
in the Philippines (under the
doctrine of quasi-estoppel by
acceptance of benefits)
(Sec. 133).
b. Foreign corporations not doing
business inthe Philippines:
i. Generally, it may not be sue
and be sued in any court in
any or administrative agency
of the Philippines;
ii. However, it may sue and be
sued for isolated
transactions, as well as for
those which are casual or
incidental thereto.
2. On contracts
GR: The contracts are valid between
the parties but are unenforceable.
They are enforceable only upon
securing license.
XPN: The contracts are null and void
if they are contrary to law, morals,
good customs, public order and
public policy.
UST GOLDEN NOTES 2010
Q: Does an "isolated transaction" by a
foreign corporation qualify as "doing
business" in the Philippines?
A: It depends. If a single or isolated
transaction is incidental and casual
transaction, it cannot qualify as doing
business" since it lacks the element of
continuity. However, where a single or isolated
transaction is not merely incidental or casual
but indicates the foreign corporation's intention
to do business in the Philippines, said single
act or transaction constitutes "doing business"
inthe Philippines.
Q: What are the jurisprudential rules
related to the consequences of not
obtaining license by aforeign corporation?
A:
1. Doctrine of isolated transactions -
foreign corporations, even unlicensed
ones can sue or be sued on a
transaction or series of transactions
set apart from their common business
in the sense that there is no intention
to engage in a progressive pursuit of
the purpose and object of business
transaction (Eriks Pte. Ltd. v. CA,
G.R.No. 118843, Feb. 6, 199n
2. In pari delicto rule - in the case of
Top-Weld manufacturing VS. ECED
S.A. (G.R. No: L-44944, Aug. 9,
1985), the court denied the relief
prayed for by petitioner when it ruled
that the very purpose of the law was
circumvented and evaded when the
petitioner entered' into the said
agreements despite the prohibition
contained. in the questioned law. The
parties were considered as being in
pari delicto because they equally
violated R.A. No. 5455.
3. Doctrine of Estoppel - the party is
estopped from 'questioning the
capacity of a foreign corporation to
institute an action in our courts where
it had obtained benefits from its
dealings with such foreign
corporations and thereafter omitted a
breach or sought to renege its
obligations (Merrill Lynch v. CA, GR.
No. 978160, July 24, 1992)
Q: Give instances when unlicensed foreign
corporations can sue.
A:
1. Isolated transactions;
2. The action aims to protect its good
name, goodwill, and reputation;
3. The subject contracts provide that
Philippine courts will be the only
venue to future disputes or
controversies;
4. A license subsequently granted
enables the foreign corporation to sue
on contracts executed before the
grant of the license;
5. Recovery of erroneously delivered
property;
6. Where the unlicensed foreign
corporation has a domestic
corporation.
Q: Maya foreign corporation not engaged
in business in the' Philippines and a
national of a country which is a party to
any convention, treaty, or agreement
relating to intellectual property rights or the
repression of unfair competition, to which
the Philippines is also a party or extend
reciprocal rights sue in trademark or
service mark enforcement action?
A: Yes, the foreign corporation mentioned
above may sue in trademark or service mark
enforcement action. This is in accordance with
Section 160, in relation to Section 3 of R.A.
No. 8393, The Intellectual Property Code.
(Sehwani Inc. v. In-n-Out Burger, GR. No.
171053, Oct. 15, 2007)
Q: What are the grounds for revocation of
license of aforeign corporation?
A:
1. Failure to file annual reports required
by the Code;
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by the Code;
3. Failure to inform the SEC of the
change of address of the resident
agent;
4. Failure to submit copy of amended
articles or by-laws or articles of
merger or consolidation;
5. A misrepresentation in material
matters in reports;
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de Der e cho Ci vi f
67
CORPORATION CODE: FOREIGN CORPORATIONS
6. Failure to pay taxes, imposts, and
assessments;
7. Engage in business unauthorized by
SEC; and
8. Acting as dummy of a foreign
corporation; (Sec. 134).
Q: What is the procedure for the revocation
of the license by SEC?
A:
1. The SEC shall issue a corresponding
certificate of revocation, furnishing a
copy thereof to the appropriate
government agency in the proper
case;
2. The SEC shall also mail to the
corporation at its registered office in
the Philippines a notice of such
revocation accompanied by a copy of
the certificate of revocation.
Q: What is the procedure for the withdrawal
of license?
A: By filing a petition for withdrawal of license
A:
1. All claims which have accrued in the
Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessment, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions
have been paid; and
3. The petition for withdrawal of license
has been established once a week for
'three consecutive weeks in a
newspaper of general circulation in
the Philippines.
68
Academics Committee
Chai r per .r ol 1 :Abraham D. Genuino II
Vi aCbai r f or .Academi cs: J eannie A. Laurentino
Vi a-Oi ai r Jor Admi n &Fi nance: Aissa Cclinel-I. Luna
Vi ceChai r !or L r yotl l &De.r i g l 1 :Loise Rae C. Naval
Mercantile LawCommittee
Suo/ ed H ead' Holy 1". Arnpaguey
A.r .r t. Subj ect H ead: Manilyn Rose S. Sotel~ .
Members:
Edwin Marc T. Baldin
Aireeu M. Cacho
Socrates Benjie I. Marbil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilauan
Maybelline M. Santiago
UST GOLDEN NOTES 2010
-, Rl! lES OF PROCEDURE ON " '
,CO,RPORATE REHABILITATION (200B) ,
- ... ,~. (A.M. No. 00 a 10 SC) ' j , ~
: What is rehabilitation?
. The restoration of the debtor to a position of
cessful operation and solvency, if it is
shown that its continuance of operation is
economically feasible and its creditors can
recover by way of the present value of
oayrnents projected in the plan, more if the
rporation continues as a going concern than
i is immediately liquidated. (Sec. 1, Rule 2)
: What is the nature of corporate
ehabilitation?
: It is a summary proceeding. Also, it is a
oroceedinq in rem, but non-adversarial. (Sec.
1, Rule 3)
ote: It is a non-adversarial proceeding because
;he status or fact sought to be established is the
- ability of the corporate debtor to pay its debts
.','hentheyfall due.
Q: Are the rules limited to corporations?
A: No. The rules apply to petitions for
rehabilitation filed not only by corporations but
also by partnerships and associations. (Sec. 1,
Rule 1)
ote: The same applies to de facto corporations
andcorporations byestoppel.
Q: Are government corporations and public
corporations included inthe rules?
A:
GR: No. They are governed primarily by
their charter and special laws.
XPN:
1. If the special law granting their
franchise is silent, the rules on
corporate rehabilitation will apply
suppletorily
2. If the special law granting their
franchise expressly mentions that the
interim rules will govern them in
rehabilitation cases.
Q: Who are considered debtors in a petition
for rehabilitation?
A: It shall mean any corporation, partnership
or association or a group of companies,
whether supervised or regulated by the
Securities and Exchange Commission or other
government agencies, on whose behalf a
petition for rehabilitation has been filed. (Sec.
1, Rule 2)
Q: Where is the petition for rehabilitation
filed?
A:
1. The RTC having jurisdiction over the
territory where the debtor's principal
office is located as specified in its
Articles of Incorporation or
partnership.
2. Where the principal office of the
corporation, partnership or
association is registered in the SEC
as Metro Manila, the action must be
filed in the regional trial court of the
city or municipality where the head
office is located.
3. A joint petition by a group of
companies shall be filed in the RTC
which has jurisdiction over the
principal . office of the parent
company, as specified in its Articles
of Incorporation. (Sec. 2, Rule 3)
Q: What are the kinds of rehabilitation
based on the party filing the petition?
A:
1. Debtor-initiated rehabilitation - filed
by any debtor who foresees the
impossibility of meeting its debts
when they respectively fall due (Sec.
1, Rule 4) .
2. Creditor-initiated rehabilitation - filed
by any creditorls holding at least
twenty percent (20%) of the debtor's
total liabilities may file a petition for
rehabilitation of a debtor that cannot
meet its debts as they respectively
fali due (Sec. 1, Rule 5)
3. Pre-negotiated rehabilitation - A
debtor that foresees the impossibility
of meeting its debts as they fall due
may, by itself or jointly with any of its
creditors, file a verified petition for the
approval of a pre-negotiated
rehabilitation plan (Sec. 1, Rule 6)
Q: What is a stay order?
A: It is an order issued by the court after the
filing of a petition for rehabilitation to defer or
suspend ali actions or claims against the
corporation seeking rehabilitation.
UNIVERSITY OF SANTO TOMAS
PacuCtaa de ([ ) er ecl i o Civi]
, , ! 69
CORPORATION CODE: CORPORATE REHABILITATION
Q: What is the purpose of a stay order?
A: To enable the management committee or
the rehabilitation receiver to effectively
exercise powers free from any judicial or
extrajudicial interference that might unduly
hinder or prevent the rescue of the debtor
company. (Ramos v. NLRC, G.R. No. 126773,
Apr. 14, 1999)
Q: ~at is the duration of the stay order?
A: Th~ stay order shall be effective from the
date of its issuance until the approval of the
rehabilitation plan or the dismissal of the
petition. (Sec. 9, Rule 3)
Q: What are included in the term "claims"
suspended by a stay order?
A: It shall include all claims or demands of
whatever hature or character against a debtor
or its property, whether for money or
otherwise. (Sec. 1, Rule 2)
Note: The issuance of a stay order does not
affect the right to commence actions or
proceedings insofar as it is necessary to preserve
aclaimagainstthe debtor. (Sec. 7, Rule 3)
Q: What are excluded from the stay order?
A:
1. Claims against letters of credit and
similar security arrangements issued
by a third party to secure the payment
of the debtor's obligations; and
2. Foreclosure by a creditor of property
not belonging to a debtor under
corporate rehabilitation. (Sec. 7, Rule
3 and Sec.2, Rule 6)
Note: Where the owner of such
property sought to be foreclosed is also
aguarantor, said owner shall be entitled
tothe benefit of excussion. (ibid.)
Q: What is the effect of suspension of
claims on the secured creditors' preference
over the corporate debtor'sproperties?
A: All the creditors should stand on equal
footing. Not anyone of them should be given
any preference by paying one or some of them
ahead of the others. As between creditors, the
key phrase is "equality is equity." (Sobrejuanite
v. ASB Development Corporation, GR. No.
165675, Sept. 30, 2005)
70
Q: Would it not amount to impairment of
contract as it effectively takes away the
creditor's preference of credits?
A: No. It merely suspends the action for claims
against the debtor and the secured creditors
may still enforce their preference when the
assets of the debtor are liquidated. (China
Banking Corporation v. ASB Holdings, Inc.,
G.R. No. 172192, Dec. 23,2008)
Q: What are the prohibited acts in
rehabilitation?
A:
1. The debtor is prohibited from selling,
encumbering, transferring or
disposing in any manner any of its
properties except in the ordinary
course of business
2. The debtor is prohibited from making
any payment of its liabilities except:
a. goods and services in the
ordinary course of business
b. administrative expenses incurred
after the issuance of the stay
order
c. new loans or other forms of
credit accommodations obtained
for the rehabilitation of the debtor
with prior court approval
d. when ordered by the court
3. The debtor's suppliers of goods or
services are prohibited from
withholding supply of goods and
services in the ordinary course of
business for as long as the debtor
makes payments for the services and
goods supplied after the issuance of
the stay order. (Sec. 7, Rule 3 &
Sec. 2, Rule 6)
Q: Who is a rehabilitation receiver?
A: A person appointed by the RTC in behalf of
all parties for the purpose of preserving and
conserving the property and preventing its
possible destruction or dissipation, if it were
left in the possession of any of the parties. He
acts ina fiduciary capacity and with impartiality
towards all interested.
UST GOLDEN NOTES 2010
-: Does the receiver take all the control
.:..rayfrom the corporation?
o. The rehabilitation receiver shall only
::. ersee and monitor the operations of the
ceotor during the pendency of the
::-oceedings. (Sec. 12, Rule 3)
: Hera Miravalles is the receiver of Phijam
rporation engaged in plant breeding
, ich is under rehabilitation. They entered
0 a business with Tugue Hotel Corp, to
mish 1,000 hydrocultural plants with the
atter. Consequently, those plants were
eaten by rats inside the hotel. Tugue Hotel
orp filed an action for damages against
hijam Corp.' Phijam Corp, who on the
her hand Instituted a third party claim
against Hera..ls Hera liable?
o. The general rule is the receiver shall
be subject to any action, claim or demand
connection with any act done or omitted by
in good faith in the exercise of his
'unctkms and powers conferred in the rules.
e exception is if there is bad faith or fraud
nhis part. There is no showing of bad faith on
e part of the receiver. Rather, it was the rats
on .he hotel who caused the damage. (Jorge
. Miravite, Commercial Law Review, 2002)
Q: What are the grounds for the dismissal
of areceiver?
A: He may be dismissed by the court upon
motion:
1.
2.
if he fails, without just cause, to
perform any of his powers and
functions
on any of the grounds for receiving a
trustee under the general principles of
trust: (Sec. 17, Rule 3) .
a. removal appears essential in the
interest of petitioners
b. insane or otherwise incapable of
discharging his trust
c. evidently unsuitable
Q: What are the effects of the rehabilitation
plan?
A:
1. The plan and its provisions shall be
binding upon the debtor and all
persons who may be affected by it,
including the creditors, whether or not
such persons have participated inthe
proceedings or opposed the plan or
whether or not their claims have been
scheduled;
2. GR: The debtor shall comply with the
provisions of the plan and shall take
all actions necessary to carry out the
plan.
XPN: Any compromises on amounts
or rescheduling of timing of payments
by the debtor shall be binding on the
creditors regardless of whether or not
the plan is successfully implemented.
3. Payments shall be made to creditors
in accordance with the provisions of
the plan;
4. Contracts and other arrangements
between the debtor and its creditors
shall be interpreted as continuing to
apply to the extent that they do not
conflict with the provisions of the
plan. (Sec. 20, Rule 3)
Q: What are the powers and functions of a
management committee or rehabilitation
receiver?
A:
1. To take custody of and control over
all the eXisting assets and property
(not management over the affairs) of
such entities under management;
2. To evaluate the existing assets and
liabilities, earnings and operations of
such corporations, partnerships or
other associations;
3. To determine the best way to salvage
and protect the interest of the
investors and creditors;
4. To study, review and evaluate the
feasibility of continuing operations
and structure and rehabilitate such
entities if determined to be feasible by
the RTC;
5. To report and be responsible to the
RTC until dissolved; and
6. May overrule or revoke the actions of
the previous management and Board
of Directors of the entity under
management, in spite of any
provisron of law, Articles of
Incorporation, or By-Laws to the
contrary. (P.O. 1799)
U N I V E R SIT Y aF 5 ANT a TOM A S ~~
' FacuCtad de Der e cho Ci vi C ' ..,. 71
CORPORATION CODE: CORPORATE REHABILITATION
Q: What is the condition precedent for the
appointment of a rehabilitation receiver or
management committee for the
corporation?
A: There must be an actual, threatened or
imminent danger of loss of corporate property
or of any other injury to stockholders.
Q: Is conflict among stockholders a ground
for the appointment of a receiver?
A:
GR: Mere disagreement among
stockholders as to the affairs of the
corporation would not in itself suffice as a
ground for the appointment of a
management committee.
XPN: Where the dissension among
stockholders is such that the corporation
cannot successfully carry on its corporate
functions, the appointment of a
management committee becomes
imperative (Molina v. Women's Credit Inc.,
G.R. No. 151921, Apr. 8, 2006).
72
Academics Committee
Chai r per son: Abraham D. Genl1ino II
T/ia! -Cbair /or Acade! JJic.r : Jeannie A. Laur entino
Vt~ .Chai r f or Admi n &Fi nance: Aissn Celine H. Luna
Vi ce-Chai r f or L ayoul &DeJi g l l : Loise RaeG. Naval
Mer cantile Law Committee
Subj ed H ead: Holy T. i\mpoguey
ArJ f. Sl I bj ed H ead: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Airccn M. Cacho
Socrates Benjie 1. Marbil
Ron Cherrie S. Mendoza
Edison] ames F. Pagalilauan
Maybelline M. Santiago
" -.~,~.~., ..
UST GOLDEN NOTES 2010
SECURt:rIES REGULAT ON COD .
. (R.A. No. 8799) , ',.
Q: What is the nature of the Securities
Regulation Code (SRC)?
A: The SRC is enacted to protect the public
'rom unscrupulous promoters, who stake
business or venture claims which have really
no basis, and sell shares or interests therein to
investors.
Q: What is the state policy with regard to
the SRC?
A:
1. Establish a socially-conscious market
that regulates itself;
2. Encourage widest participation of
ownership in enterprises and
enhance democratization of wealth;
3. Promote development of capital
market;
4. Protect investors and ensure full and
fair disclosure about securities;
5. Minimize, if not totally eliminate,
insider trading and other fraudulent or
manipulative devices; and practices
which distorts the free market.
Q: What are the provisions in the SRC
intended to protect the investors?
A:
1. No securities shall be sold or offered
to be sold in the Philippines unless
registered with the SEC.
2. Provisions providing for criminal and
civil liabilities in filing false or
fraudulent registration statements.
3. Provisions for the protection of
minority stockholders through clear
rules inproxy solicitations.
4. Rule on tender offer.
5. Increase of penalty in case of
violation of the SRC.
6. Only persons accredited by the SEC
may deal insecurities.
Q: What is atender offer?
A: Publicly declared intention to buy securities
of public companies given to all stockholders
by:
1. Filing with the SEC a declaration to
that effect, and paying the filing fee.
2. Furnishing the issuer a statement
containing the information required of
the issuers as SEC may prescribe,
including subsequent or additional
materials.
3. Publishing all requests or invitations
for tender, or materials making a
tender offer or requesting or inviting
letters of such security.
Note: It is also defined as an offer by the
acquiring person to stockholders of a public
company for them to tender their shares on the
termsspecified inthe offer.
Q: What then is the purpose of tender
offer?
A: Tender offer is in place to protect the
interest of minority stockholders of a target
company against any scheme that dilutes the
share value of the investments. It affords such
minority shareholders the opportunity to
withdraw or exit from the company under
reasonable terms, a chance to sell their shares
at the same price as those of the majority
stockholders. .
Q: In what instances is a tender offer
required to be made?
A:
1. The person intends to acquire 15% or
more of the equity share of a public
company pursuant to an agreement
made between or among the person
and one or more sellers. .
2. The person intends to acquire 30% or
more of the equity shares of a public
company within a period of 12
months. '
3. The person intends to acquire equity
shares of a public company that
would result in ownership of more
than 50% of the said shares. (2002
Bar Question)
Note: Tender offer applies to both direct and
indirectacquisition.
Q: What may be considered as a public
. company?
A:
1. Those listed; or
2. Those with assets of at least 50M
pesos and having 200 shareholders
owning at least 100shares each.
UNIVERSITY OF SANTO TOMAS
PacuCtad de ([ ) er ecno Ci oi t
.~ 73
CORPORATION CODE: SECURITIES REGULATION CODE
Q: What are the unlawful and prohibited
acts relating to tender offers?
4. Derivatives - options and warrants;
A: It shall be unlawful for any person to:
1. Make any :untrue statement of a
material fact or omit to state any
material fact necessary in order to
make statements made not
misleading, and
2. Engage in any fraudulent, deceptive,
or manipulative acts or practices in
connection with any tender offer or
request or invitation for tenders, or
any solicitation of security holders in
opposition to or in favour of any such
offer, request, or invitation.
Q: What are the reportorial requirements
under the SRC in regard to transactions of
directors, officers and principal
stockholders?
A:
1. Every person who is:
a. Directly or indirectly the
beneficial owner of more than
10% of any class of any equity
security of a covered issuer, and
b. A director or an officer of the
issuer of such security,
2. Shall file with the SEC a statement of
the amount of all equity securities of
such Issuer of which he is a beneficial
owner.
Q: What are securities?
A: Securities are shares, participation or
interests in a corporation or in a commercial
enterprise or profit-making venture and
evidenced by a certificate, contract,
instrument, whether written or electronic in
character. It includes:
1. Equity instruments - Shares of stock,
certificates of interest or participation
in a profit sharing agreement,
certificates of deposit for a future
subscription, proprietary or non-
proprietary membership certificates in
corporations;
2. Investments instruments -Investment
contracts, fractional undivided
interests inoil, gas, or other
mineral rights;
3. Debt instruments
debentures, notes,
indebtedness,
securities;
bonds,
evidence of
asset-backed
74
5. Trust instruments - Certificates of
assignments, certificates of
participation, trust certificates, voting
trust certificates or similar
instruments;
6. Future - Other instruments as may in
the future be determined by the SEC.
(1996 Bar Question)
Q: What are the kinds of securities with
regard to the need for registration to the
SEC?
A:
1. Exempt (from registration) - Can be
issued and sold without registration.
(Sec. 9)
2. Non-exempt (from registration) -
Cannot be issued and sold without
registration.
3. Sold in exempt transactions. (Sec. 10)
Q: What is registration with regard to
securities?
A: It is the disclosing to the SEC of all
material and relevant information about the
issuer of the security. Its purpose is to inform
the public for them to be able to make good
business judgment. It is the filing of registration
statement.
Q: What is the rule with regard to
registration of securities?
A:
GR: No security can be sold or offered for
sale or distribution within the Philippines
unless accompanied by a registration
statement filed with and approved by the
SEC.
XPN:
1. Exempt securities;
2. Securities sold
transactions.
in
exempt
Q: What are the effects of non-registration?
A: The issuer would be penalized. Issuers of
securities not registered shall be subject
criminal, civil and administrative charges.
UST GOLDEN NOTES 2010
Q: What are the exempt securities?
A:
1. Any security issued or guaranteed by
the Government of the Philippines, or
by any political subdivision or agency
thereof, or by any person controlled
or supervised by, and acting as
instrumentality of said government.
2. Any security issued or guaranteed by
the government of any country with
which the Philippines maintains
diplomatic relations, or by any state,
province or political subdivision
thereof on the basis of reciprocity:
Provided, that the SEC may require
compliance with the form and content
of disclosures the SEC may
prescribe.
3. Certificates issued by a receiver or by
a trustee in bankruptcy duly approved
by the proper adjudicatory body.
4. Any security or its derivatives the sale
or transfer of which, by law, is under
the supervision and regulation of the
Office of Insurance Commission,
Housing and Land Use Regulatory
Board, or the Bureau of Internal
Revenue.
5. Any security issued by a bank except
its own shares of stock.
6. Other securities as determined by the
SEC
Note: Being anissuerof anexemptsecurity does
not exempt such issuer from the requirement of
submissionof reports - full andfair disclosure.
Q: What are exempt transactions?
A:
1. Any judicial sale, or sale by an
executor, administrator, guardian,
receiver or trustee in insolvency or
bankruptcy;
2. Those sold by a pledge, mortgagee,
or any other similar lien holder, to
liquidate a bona fide debt (a security
pledged in good faith as security for
such debt;
3. Those sold or offered for sale in an
isolated transaction, the owner not
being an underwriter;
4. Distribution by the corporation of
securities to its stockholders as
dividends:
5. Sale of capital stock of a corporation
to its own stockholders exclusively;
6. Bonds or notes secured by a
mortgage are sold to a single
purchaser at a single sale; i
7. Delivery of security in exchange for
any other security pursuant to the
right of conversion;
8. Broker's transactions executed upon
the customer's orders;
9. Share subscriptions prior to
incorporation or in pursuance of an
increase in its authorized capital
stock;
10. Exchange of securities by the issuer
with its existing security holders
exclusively;
11. Sale by issuer to fewer than 20
. persons in the Philippines during any
12 month period;
12. Sale to banks, investment houses,
insurance companies and any entities
ruled qualified by the SEC.
Q: What is the procedure for registration of
securities?
A:
1. Application - All securities required to
be registered shall be registered
through the filing by issuer with SEC,
of a sworn registration statement;
2. Prospectus The registration
statement shall include any
prospectus required or permitted to
be delivered;
3. Other information - The infonmation
required for the registration of any
kind and all securities shall include,
among others, the effect of the
securities' issue on ownership, onthe
mix of ownership, especially foreign
and local ownership;
4. Signatories to registration statement
- The registration statement shall be
signed by the issuer's executive
officer, its principal operating officer,
its comptroller, its principal
UNIVERSITY OF SANTO TOMAS .~
Pacu{ tad de Der e cho Ci vi C .... , : 75
CORPORATION CODE: SECURITIES REGULATION CODE
accounting officer, its corporate
secretary or persons performing
similar functions, accompanied by a
duly verified resolution of the BoD of
the issuer;
5. Written consent of expert - The
written consent of the expert named
as having certified any part of the
registration statement or any
document used in connection
therewith shall also be filed;
6. Certification by selling stockholders -
Where the registration statement
includes shares to be sold by the
selling shareholders, a written
certification by such selling
shareholders as to the accuracy of
any part of the registration statement
contributed by. such selling
shareholders shall also be filed;
7. Fees - The issuer shall pay to the
SEC; the SEC shall prescribe by rule,
diminishing the fees in inverse
proportion, the value of the aggregate
price of the offering;
8. Notice and publication - Notice of the
filing of the registration statement
shall be imniediately published by the
issuer in two newspapers of geperal
circulation in the Philippines; once a
week for two consecutive weeks,
reciting that a registration statement
has been filed, and that the aforesaid
registration statement, as well as the
papers attached thereto are open to
inspection at the SEC during
business hours, and copies thereof,
shall be furnished to interested
parties at a reasonable charge;
9. SEC Power for production of books -
The SEC may compel the production
. of all the books and papers of such
issuer, and may administer oaths to,
and examine the officers of such
issuer, or any other person connected
therewith as to its business and
affairs;
10. Ruling - Within 45 days after the date
of the filing of the registration
statement, or by such later date to
which the issuer has consented, the
SEC shall declare the registration
statement effective or rejected,
unless the applicant is allowed to
amend the registration statement.
76 I team: I .Mi.;
Q: What should the issuer do after the
effectivity of the registration statement?
A: Upon the effectivity of the registration
statement, the issuer shall state under oath
that all registration requirements have been
met, and all information are true and correct to
the best of his ability.
Q: What are the grounds for rejection and
revocation of registration?
A:
1. The issuer:
a. Has been judicially declared
insolvent;
b. Has violated any of the
provisions of the Code, the rules
promulgated pursuant thereto, or
any order of the SEC of which
the issuer has notice in
connection with the offering for
which a registration statement
has been filed;
c. Has been or is engaged or is
about to engage in fraUdulent
transactions;
Has made any false or
misleading representations of
material facts in any prospectus
concerning the issuer or its
securities; or
d. Has failed to comply with any
requirement that the SEC may
impose as a condition for
registration of the security for
which registration statement has
been filed.
2. The registration statement is on its
face incomplete or inaccurate or
includes any untrue statement of a
material fad or omits to state a
material fact required to be stated
therein.
3. The issuer or any underwriter has
been convicted by a competent
judicial or administrative body of an
offense involving moral turpitude
and/or fraud or is enjoined by the
SEC or other competent judicial or
administrative body for violations of
securities, commodities and other
related laws
4. Any issuer who refuses to permit the
examination to be made by the
Commissioner.
UST GOLDEN NOTES 2010
Q: What are the grounds for suspension or
cancellation of certificate of registration:
A:
1. Fraud in procuring registration;
2. Serious misrepresentation as to
objectives of corporation;
3. Refusal to comply with lawful order of
SEC;
4. Continuous inoperation for at least 5
years;
5. Failure to file by-laws within required
period;
6. Failure to file reports;
7. Other similar grounds. (Sec. 6[LJ)
Q: What are the grounds for suspension of
registration?
A:
1. If any time, the information contained
in the registration statement filed is or
has become misleading, incorrect,
inadequate or incomplete in any
material respect; or
2. The sale or offering for sale of the
security registration there under may
work or tend to work a fraud;
3. Pending investigation of the security
registered to ascertain whether the
registration of such security should be
revoked on any ground specified the
SRC; and
4. Refusal to furnish information
required by the Commission. (Sec.
15)
Q: Who are the securities market
professionals as classified by the SRC?
A: They are the broker, dealer, associated
person of a broker or dealer, and a salesman.
Q: Who is a broker?
A: A person engaged in the business of
buying and selling securities for the account of
others.
Q: Who is a dealer?
A: Any person who buys and sells securities
for his/her own account in the ordinary course
of business.
Q: Who is an associated person of a broker
or dealer?
A: He is an employee of a broker or dealer
who directly exercises control of supervisory
authority but does not include a salesman, or
an agent, or a person, whose functions are
solely clerical or ministerial.
Q: Who is a salesman?
A: He is a natural person, employed as such,
or as an agent, by a dealer, issuer or broker to
buy and sell securities; but for the purpose of
registration, shall not include any employee of
an issuer whose compensation is not
determined directly or indirectly on sales of
securities of the issuer.
Q: What is the obligation of the broker to
his client?
A: The primary obligation of the broker is to
ensure his account's compliance with the law.
Since a brokerage relationship is essentially a
contract for the employments of an agent, the
law on contracts govern the broker-principal
relationship (Abacus Securities Corp. v. Ampil,
G.R. No. 160922, Feb. 27, 2006).
Q: Are security market professipnals
required to be registered?
A: Yes. Under Sec. 19 of the Revised
Securities Act, no broker shall sell any
securities unless he is registered with the SEC
(Nicolas vs. CA, et et., G.R. No. 12285, Mar.
27, 1998).
Q: Can a stockbroker who has not obtained
a license from the SEC, recover
management fees allegedly earned from
handling the securities transactions of a
client?
A: No. An unlicensed person may not recover
compensation for services as a broker where a
statute or ordinance is applicable and such is
of a regulatory nature.
UNIVERSITY OF SANTO TOMAS
Pacu{ tad de (] ) er ecl i o Ci T l i C
77
CORPORATION CODE: SECURITIES REGULATION CODE
Q: What is margin trading?
A: A kind of trading that allows a broker to
advance for the customer/investor part of the
purchase price of the security and to keep it as
collateral for such advance.
Q: What is the margin allowance standard?
A: The credit extended must be for an amount
not greater than, whichever is higher of:
1. 65% of the current market price of the
security; or
2. 100% of the lowest market price
during the preceding 36 months, but
not more than 75% of the current
market price.
Q: What are the purposes of the margin
requirements?
A: They are primarily intended to achieve a
macroeconomic purpose - the protection of
the overall economy from excessive
speculation in' securities. Their recognized
secondary purpose is to protect small
investors.
Q: Who has the burden of compliance with
margin requirements?
A: The brokers and dealers.
Note: In securities trading, the brokers are
essentially the counterparties to the stock
transactions at the Exchange. Since the
principalsof the broker are generally undisclosed,
the broker is personally liable for the contracts
thus made. Brokers have a righttobe reimbursed
for sums advanced by themwith the express or
implied authorization of the principal. (Abacus
Securities Corporation v. Ampil, G.R. No.
160016, Feb. 27, 2006)
Q: What are the unlawful acts under the
SRC?
A: i
1i
r
Submission of false registration
statements - criminal, civil, and
administrative liabilities may be
imposed against those who signed
said statement.
Prescriptive period: 2 years from
discovery but not later than 5 years
. from the time all the securities are
sold to the public.
2. Sale to public through:
a. Insider trading - the selling or
buying of a security by an insider
while in possession of material
non-public information.
78
b. Short selling - It is the selling of
shares which the seller does not
actually own or possess and
therefore cannot, himself supply
the delivery.
c. Shortswing transaction - It is one
where a person buys securities
and sells the same within a
period of 6 months.
3. Manipulation of security prices
a. Transactions intended to create
active trading:
i. Wash Sale - To effect any
transaction in any security
that involves no change in
the beneficial ownership
thereof.
ii. Matched Sale - There is a
change of ownership in the
securities by entering an
order for the purchase/sale
of security With the
knowledge that a
simultaneous order of
substantially the same size,
time, ana price, for the sale
or purchase of any such
security, has or will be
entered by or for the same
or different parties.
iii. Similar transactions where
there is no change of
beneficial ownership.
b. Engaging in transactions which
induce price to increase or
decrease:
i. Marking the tape - Buy
security at or near the
closing hour of trading.
ii. Painting the tape
Projecting a rosy picture of
the corporation through
publication
iii. Squeezing the float
Controlling the supply of the
shares so as to increase
demand of the shares
iv. Hype and dump - Build up
the company to induce
others to join, only to be
dumped later.
v. Boiler room operations -
Employ high pressure tactics
to force purchase and sale
of security.
UST GOLDEN NOTES 2010
Q: Suppose A is the owner of several
inactive securities. To create an
appearance of active trading for such
securities, A connives with B by which A
will offer for sale some of his securities and
B will buy them at a certain fixed price, with
the understanding that although there
would be an apparent sale, A will retain the
beneficial ownership thereof.
1. Is the arrangement lawful?
2. If the sale materializes, what is it
called?
A:
1. No. The arrangement is not lawful. It
is an artificial manipulation of the
price of securities. This is prohibited
by the Securities Regulation Code.
2. If the sale materializes, it is called a
wash sale or simulated sale. (2001
Bar Question)
Q: Who is an insider?
A: A person in possession of corporate
information not generally available to the
public, as a director, an accountant, or other
officer or employee of a corporation.
Q: What is the presumption with regard to
insider trading?
A: A purchase or sale made by an insider or
his relative within the second degree shall be
presumed to be effected while inpossession of
material non-public information if transacted
after such information came into existence but
prior to the public dissemination of such
information, and lapse of reasonable time for
[he market to absorb such information.
Q: Who may be an insider?
A:
1. The issuer;
2. A director or officers of or a person
controlling the issuer;
3. A person whose relationship or
former relationship to the issuer gives
him access to material information
about the issuer or the security that is
not generally available to the public;
4. A govemment employee, or director ,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to
material information about an issuer
or a security that is not generally
available to the public; or
5. Constructive Insider - A person who
learns such information by a
communication from any of the
foregoing insiders. (Sec. 3.8) (1995
Bar Question) i
Q: What are the other prohibited acts in an
insider trading?
A: It shall be unlawful:
1. For an insider to communicate
material non-public information about
the issuer or the security to any
person who thereby becomes an
insider, where original insider
communicating knows or has reason
to believe that such person will likely
buy or sell on the basis of such
information
2. For any person, other than the tender
offeror, who is in possession of
material non-public information
relating to such tender offer to
[ransact securities covered by the
tender offer
3. For the tender offeror, or those acting
in his behalf, the issuer of securities
covered by the tender offer, and any
insider, to communicate material non-
public information relating to the
tender offer which would likely result
inviolation of prohibition of the insider
from trading.
Q: When is information "material non-
public"?
A: If:
1. Information about the issuer or the
security which has not been generally
disclosed to the public and would
likely affect the market price of the
security after being disseminated to
the public and the lapse of a
reasonable time for the market to
absorb the information; or
2. Would be considered by a reasonable
person important under the
circumstances in determining his
course of action whether to buy, sell
or hold a security (Sec. 27.2). (1995
Bar Question)
UNIVERSITY OF SANTO TOMAS
PacuCtad de CDer ecno Ci vi C
, , ! ' 79
CORPORATION CODE: SECURITIES REGULATION CODE
Q: Ms. OB was employed in MAS
Investment Bank. WIC, a medical drug
company, retained the bank to assess
whether it is desirable to make a tender
offer for DOP company, a drug
manufacturer. OB overheard in the course
of her work the plans of WIC. By herself
and thru associates, she purchased DOP
stocks available at the stock exchange
priced at P20per share. WhenWIC's tender
offer was announced, DOP stocks jumped
to P30per share. Thus OB earned asizable
profit. Is OB liable for breach and misuse of
confidential or insider information gained
from her employment? Is she also liable for
damages to sellers or buyers with whom
she traded? If so, what is the measure of
such damages? Explain briefly.
A: OB is an insidersince she is an employee
of the Bank, the financial adviserof DOP, and
this relationshipgives her access to material
infom\ation about the issuer (DOP) and the
latter'ssecurities(shares), whichinformationis
not generally available to the public.
Accordingly, OB is guilty of insider trading
under Section27of the Securities Regulation
Code, which requires disclosurewhentrading
insecurities.
OB is also liable for damages to sellers or
buyers with whom she traded. Under
Subsection63.1 of the Securities Regulation
Code, the damages awarded could be an
amountnotexceedingtriple the amountof the
transaction plus actual damages. Exemplary
damagesmayalsobeawardedincaseof bad
faith, fraud, malevolenceor wantonnessinthe
violationof the Securities RegulationCode or
its implementing rules. The court is also
authorized to award attorney's fees not
exceeding 30% of the award. (2004 Bar
Question)
Q: What are the possible defenses against
insider trading?
A:
1. Thatthe informationwas acquirednot
onaccountof his relationshipwiththe
issuer; or
2. That the other party knewor can be
presumed to know the material
information.
80
Q: Equity Online Corporation (EOl), a New
York corporation, has a securities
brokerage service on the Internet after
obtaining all requisite U.S. licenses and
permits to do so. EOl's website
(www.eonline.com). which is hosted by a
server in Florida, enables internet users to
trade on-line in securities listed in the
various stock exchanges in the U.S. EOl
buys and sells U.S. listed securities for the
accounts of its clients all over the world,
who convey their buy and sell instructions
to EOl through the internet. EOl has no
offices, employees or representatives
outside the U.S. The website has icons for
many countries, including an icon "For
Filipino Traders" containing the day's
prices of U.S. listed securities expressed in
U.S. dollars and their Philippine peso
equivalent.
Grace Gonzales, a resident of Makati, is a
regular customer of the website and has
been purchasing and selling securities
through EOl with the use of her American
Express credit card. Grace has never
traveled outside the Philippines.
After aseries of erroneous stock picks, she
had incurred a net indebtedness of
US$30,OOOwith EOl, at which time she
cancelled her American Express credit
card.
After a number of demand letters sent. to
Grace, all of them unanswered, EOl,
through aMakati lawfirm, filed a complaint
for collection against Grace with the
Regional Trial Court of Makati. Grace,
through her lawyer, filed a motion to
dismiss on the ground that aot, (a) was
doing business inthe Philippines without a
license and was therefore barred from
bringing suit and (b) violated the Securities
Regulation Code by selling or offering to
sell securities within the Philippines
without registering the securities with the
Philippine SEC and thus came to court
"with unclean hands."
EOl opposed the motion to dismiss,
contending that it had never established a
physical presence in the Philippines and
that all of the activities related to the
trading in U.S. securities all transpired
outside the Philippines.
If you are the judge, decide the motion to
dismiss by ruling on the respective
contentions of the parties on the basis of
the facts presented above.
A: The grounds of the motionto dismiss are
both untenable. EOL is not doing business in
UST GOLDEN NOTES 2010
the Philippines, and it did not violate the
Securites Act, because it was not selling
securities inthe country.
The contention of EOL is correct, because it
never did any business in the Philippines. All
its transactions inquestion were consummated
outside the Philippines. (2002 Bar Question)
Academics Committee
Chai Jpenon: Abraham D. Genuino II
Vi ce-Cbai r f or ~l(adelJlit:f: Jeannie A. Laurentino
Vi a-Cbai r f or " Admi n &F,' l um-e: Aissa Celine H. Luna
Vi e-Chai r f or wyoJ/ 1 &OeJi g l / : Loise RaeG. Naval
Mer cantile Law Committee
Subj ed H ead: Holy T. Arnpaguey
AJ J /. Si l o/ cd H ead: Manilyn Rose S. Sotelo
Member s:
Edwin Marc T. Baldia
Aireen M. Cacho
Socrates Benjie I. Marbil
Ron Cherrie S. Mendoza
Edison J ames F. Pagalilaunn
Maybelline M. Santiago
UNI VERSI TY OF SANTO TOMAS
Pacu{tad de <Der echo CiviC
81
CORPORATION CODE: SEC REORGANIZATION ACT
. SEC REORGANIZATION ACT
(P.O. No. 902A)
Q: What are the two tests to determine the
existence of an intra-corporate
Q: What are the new features of the SEC
under P.O. 902-A? A:
controversy?
A:
1. SEC has no more quasi-judicial
functions.
a. J urisdiction over intra-corporate
controversies was transferred
from the SEC to the RTC acting
as a special commercial court
(Calleja v. Panday, G.R. No.
168696, Feb. 28, 2006).
b. The SEC shall retain jurisdiction
over pending suspension of
payments/rehabilitation cases
filed as of J une 30, 2000 until
finally disposed.
c. Administrative supervision is
retained in the SEC (Fabia v.CA,
G.R. No. 132684, Sept. 11,
2002)
2. Philippine Stock Exchange is now
open to the public.
3. SRC seeks to protect both the public
and minority interest.
Q: What are intra-corporate disputes?
A: Any controversy or dispute between the
corporation and the stockholder or the
stockholders among themselves or relates to
the regulation of corporate affairs such as:
1.. Suspension of payment;
2. Termination of officers - If the office
was created by the by-laws or by the
board pursuant to the authority under
the by-laws;
3. Derivative suit;
4. Matters regarding lnspection of
corporate books;
5. Issue relating to election or
appointment of officers and directors
(Prescriptive period of filling a suit is
15days from election);
6. Petition for corporate rehabilitation.
82
1. Relationship test - the existence of
intracorporate relations between or
among the parties is sufficient to
invest jurisdiction to the RTC
regardless of the subject matter of the
dispute .
2. Controversy test - mere existence of
an intracorporate relationship is not
sufficient to determine existence of an
intracorporate controversy. The
incidents and nature of the
relationship must as well be taken
into consideration.
Q: Which has the authority to list shares?
A: The Philippine Stock Exchange (PSE).
Q: Can the decision of the PSE be set aside
by the SEC?
.A: Yes, on the basis of its supervisory powers,
but only if the PSE acted in bad faith.
Q: Where should a criminal charge for
violation of the SRC be filed?
A: Since a criminal charge for violation of the
SRC is a specialized dispute, it must first be
referred to an administrative ;;J gencyof special
competence, the SEC and where the
complaint is criminal in nature, the SEC shall
endorse the complaint to the Department of
J ustice for preliminary investigation and
prosecution (Baviera v. Paglinawan, G.R. No.
16838~Feb. 8,200~
However, fraudulent acts or schemes which
the SEC shall exclusively investigate or
prosecute are those in violation of any law or
rules and regulations administered and
enforced by the SEC alone. If the criminal
case is not within the specialized jurisdiction of
the SEC, it does not preclude the
simultaneous and concomitant filing of a
criminal action before the regular courts.
(Fabia v. CA, G.R. No. 132684, Sept. 11,
2002)
UST GOLDEN NOTES 2010
1~1::W iiM:l! lI~&ij;! ll~113~ii'-1! 4WmJ l! l
Q: What are the principal features of a
negotiable instrument?
A:
1 . Negotiability - it may pass from hand
to hand similar to money, so as to'
give the holder indue course the right
to hold the instrument and collect the
sum payable.
2. Accumulation of secondary contracts
- where the instrument is negotiated
from person to perosn, more parties
and secondary contracts are added,
hence, the more advantageous it will
be to the holder as he can proceed
not only against the person who
transferred the instrument to him but
also against all transferors.
Q: What are the elements of a negotiable
instrument?
A:
1. In writing and signed by the maker or
drawer;
2. Contains an unconditional promise or
order to pay a sum certain in money;
3. Payable all demand, or at afixed or
determinable future time;
4. Payable to order or to bearer (so
called badges of negotiability); and
5. If addressed to a drawee, he must be
named or otherwise indicated with
reasonable certainty. (Sec. 1 )
Note: A negotiable instrument neednotfollowthe
exact language of NIL, as long as the terms are
sufficient which clearly indicate an intention to
conformtothe requirements of the law. (Sec. 10)
o. 5 applies only to bills of exchange. A
promissory note has nodrawee.
Q: State and explain whether the following
are negotiable instruments under the
Negotiable Instruments Law:
1. Postal money order;
2. A certificate of time deposit which
states "This is to certify that bearer
has deposited in this bank the sum
of FOUR THOUSAND PESOS
(P4,000.00) only, repayable to the
depositor 200 days after date."
3. Letters of credit;
4. Warehouse receipts;
5. Treasury warrants payable from a
specific fund.
A:
1. A Postal Money Order is not a
negotiable instrument because of the
conditions appearing at the back
thereof, thereby making the order
conditional, contrary to Section 1 of
the Negotiable Instruments Law.
(Phil. Educ. Co. lnc., v. Soriano, 148-
A Phil 521 U971)
2. A certificate of time deposit is a
negotiable instrument, because it is
an acknowledgment in writing by the
bank of the amount of deposit with a
promise to repay the same to the
depositor or bearer thereof at a
specific time. (Caltex v. CA, GR. No.
97753, Aug. 10, 1992)
3. A letter of credit is not a negotiable
instrument, because it is not payable
to order or bearer (Art. 568, Code of
Commerce) and is generally
conditional;
4. Warehouse receipts are not
negotiable instruments, because their
subject matter is things or goods, and
not a sumcertain inmoney.
5. Treasury warrants payable from a
specific fund are not negotiable
instruments as they are payable out
of a particular fund which mayor may
not exist, thereby making the order
conditional, in contravention of
Section 1 of the Negotiable
Instruments Law. (2005 Bar
Question)
Q: Is a withdrawal slip a negotiable
instrument?
A: Withdrawal slips are non-negotiable
instruments. The essence of negotiability
which characterizes a negotiable paper as a
credit instrument lies in its freedom to circulate
freely as a substitute for money. The
withdrawal slips in question lacked this
character. (Firestone Tire &Rubber Co. v. CA,
GR. No. 113236, Mar. 5, 2001)
Note: Inthis case, a client maintained a special
saving account with his drawee bank and was
allowed to withdraw funds through special
withdrawal slips and used the withdrawal slips in
payment of certain purchases, as if they were
checks. The creditor deposited these withdrawal
slips toits bankwhich inturnwould sendthemfor
collectionto the drawee bank. The fact that other
withdrawal slips were honored and paid by the
drawee bank was no license for the collecting
bank to presume that subsequent withdrawal
slips would be honored and paid immediately. It
could not have expected that the withdrawal slips
aretobetreated as checks byother entities.
UNIVERSITY OF SANTO TOMAS ~~)
PacuCtaa ae (j ) er ecf to Cioi] '9>
83
NEGOTIABLE INSTRUMENTS LAW
Q: Which of the following stipulations or
features of apromissory note (PN) affect or
do not affect its negotiability, assuming
that the PN is otherwise negotiable?
Indicate your answer by writing the
paragraph number of the stipulation or
feature of the PN as shown below and your
corresponding answer, either "Affected" or
"Not affected." Explain.
1. The date of the PN is "February 30,
2002."
2. The PN bears interest payable on
the last day of each calendar
quarter at a rate equal to five
percent (5%) above the then
prevailing 91-day Treasury Bill rate
as published at the beginning of
such calendar quarter.
3. The PN gives the maker the option
to make payment either in money
or in quantity of palay or
equivalent value.
4. The PN gives the holder the option
either to require payment in money
or to require the maker to serve as
the bodyguard or escort of the
holder for 30days.
A: I
11. Paragraph 1 - Negotiability is not
affected. The date is not one of the
reqUirementsfor negotiability.
2. Paragraph 2 - Negotiability is not
affected. The interest is to be
computed at a particular time and is
determinable. It does not make the
sum uncertain or the promise
conditional.
3. Paragraph 3 Negotiability is
affected. Giving the makerthe option
rendersthe promiseconditional
4. Paragraph 4 - Negotiability is not
affected. Giving the option to the
holder does not make the promise
conditional. (2002Bar Question)
Q: EJ bought a used cell phone from PB.
PB preferred cash but EJ is a friend so PB
accepted EJ 's promissory note for P10,OOO.
PB thought of converting the note into
cash by endorsing it to his brother J V. The
promissory note is a piece of paper with
the following hand-printed notation: "EJ
will pay PB P10,000 1 week from today in
consideration of the cell phone bought from
PB." Below this notation EJ 's signature
with "8/1/00" next to it, indicating the date
of the promissory note. When PB
presented EJ 's note to J V, the latter said it
was not a negotiable instrument under the
law and so could not be a valid substitute
for cash. PB took the opposite view,
84
insisting on the note's negotiability. You
are asked to referee. Which of the opposing
views is correct?
A: J V is right. The promissory note is not
negotiable. It is not issued to order or bearer.
There is no word of negotiability containing
therein. It is not issued in accordance with
Section1of the NegotiableInstrumentsLaw.
Q: Tony Laguesma is an indorsee of a
promissory note that simply states: "Pay to
J ovin Usin P400." The note has no date, no
place' of payment and no consideration
mentioned. It was signed by Marian KayVin
and written under her letterhead specifying
the address, which happens to be her
residence. Edison accepted the promissory
. note as payment for services rendered to
J ames, who in turn received the note from
J ovin Usin as payment for a prepaid cell
phone card worth 450 pesos. The payee
acknowledged having received the note on
August 1, 2000. A Bar reviewee had told
Edison, who happens to be your friend,
that he is not a holder in due course under
Article 52 of the Negotiable Instruments
Law (Act 2031) and therefore does not
enjoy the rights and protection under the
statute. Edison asks for our advice
specifically in connection with the note
being undated and not mentioning a place
of payment and any consideration. What
would your advice be?
A: The factthat the instrumentis undatedand
does not mentionthe place of payment does
not militate against its being negotiable. The
date and place of payment are not material
particulars required to make an instrument
negotiable. The fact that no mention is made
of any consideration is not material.
Consideration is presumed. (2000 Bar
Question)
UST GOLDEN NOTES 2010
Q: Distinguish a negotiable document from
a negotiable instrument. (2005 Bar
Question)
A:
,
' "
,
'NEGOTIABLE
NEGOTIABLE
INSTRUMENT
DOCUMENTS OF
TITLE
Subject is money Subiect is qcods
Document is a.mere
evidence of title -
Is itself the property tile things of value
with value being the goods
mentioned inthe
document
Has all the Does not have these
requisites of Sec. 1 requisites
Holder may run
after the secondary Intermediate parties
parties for payment are not secondarily
if dishonored by the liable if document is
party primarily dishonored
liable
Holder (if a holder
Holder can never
indue course) may
acquire rights over
acquire rights to the
the instrument
document better
better than his
than his
predecessors
predecessors
Q: What is the purpose of the Negotiable
Instruments Law?
A: To facilitate transactions in commercial
paper and to promote free flow of credit. The
law tries to make negotiable instruments have
the same attributes and characteristics as
money (negotiability).
Q: What are the functions of a negotiable
instrument? .
A:
1. As a valid substitute for money;
2. As a medium of exchange for most
commercial transactions; and
3, As amedium of credit transactions.
4. Increase purchasing media in
circulation
Q: What are the factors to determine the
negotiability of the instrument?
A:
1. Words that appear on the face of
negotiable instrument;
2. Requirements enumerated in Section
1 of NIL;
3. Intention of the parties by considering
the whole of the instruments.
Q: Is a negotiable instrument legal tender?
A:
GR: Negotiable instruments are not legal
tender. Only coins and notes issued by
the Bangko Sentral ng Pilipinas are
considered legal tender, (Sec, 52, RA
7653)
XPN: A check which has been cleared
and credited to the account of the creditor
shall be equivalent to delivery to the
creditor of cash in an amount equal to the
amount credited to his account. (Sec. 60,
New Central Bank Act)
Q: What are the two kinds of negotiable
instruments under the law?
A:
1, Promissory notes (PN) An
unconditional promise inwriting made
by one person to another, signed by
the maker, engaging to pay on
demand, or at a fixed or determinable
future time, a sum certain inmoney to
order or to bearer. (Sec. 184)
2, Bi/I of exchange (BOE) - An
unconditional order in writing
addressed by one person to another
signed by the person giving it,
requiring the person to whom it is
addressed to pay on demand or at a
fixed or determinable future time a
sum certain in money to order or to
bearer, (Sec. 126)
Note: Checks are special form of
BOE,
Q: Who are the parties to a negotiable
instrument?
A:
1, Maker - the person who makes a
promissory note and promises to pay
the amount stated therein,
2. Payee - the obligee, that is, the
person who, by the terms of the note
or bill, is to receive payment.
3. Drawer - the person who draws the
bill of exchange and orders the
drawee to pay a, sum certain in
money
4, Drawee - the person to whom the
order to pay is addressed in a bill of
exchange
UNIVERSITY OF SANTO TOMAS ~~. 85
Pacu(tad de < Der ecl i o Ci vi l . ~
NEGOTIABLE INSTRUMENTS LAW
Q: Who is a holder?
A: A holder is a person in possession of a
bearer instrument or an indorsee of an order
instrument who is in possession thereof. A
holder is the obligee, a person who can
enforce payment of the instrument.
I
Q: Who is a referee in case of need?
A: He is a person who may be designated in
the instrument as the person who may be
resorted to by the parties in case of dispute
Q: Distinguish promissory note from a bill
of exchange.
A:
PROMISSORY NOTE BILL OF EXCHANGE
Promise
Order
2 original parties
3 parties
Maker is primarily
Drawer is
liable
secondari)yHable
Only 1
2 presentments (for
presentment (for acceptance and for
payment) is
payment) are
needed
generally needed
Q: Who are the original parties to a PN?
A:
1 . Maker - Makes the promise and
signs the instrument; and
2.. Payee - To whom the instrument is
payable.
Q: Who are the parties in a BOE?
A:
1. Drawer - Gives the order to pay
money to athird party;
2. Drawee - To whom the bill is
addressed and ordered to pay;
becomes "acceptor" When he
indicates a willingness to accept
responsibility for the payment of the
bill; and
Note: It is only when a drawee
becomes an acceptor that he is
primarily liable.
3. Payee - In whose favor the bill is
drawn.
Q: What are the different stipulations that
will not affect the certainty of the sum
contained in the instrument?
A: The sum payable is a sum certain although
it is to be paid:
1. With interest; or
2. By stated installments; or
3. With acceleration clause; or
4. With exchange; or
5. With costs of collection or an
attorney's fee, incase payment shall
not be made at maturity. (Sec. 2)
Q: What provisions do not affect the
negotiability of an instrument?
A:
1. Authorizes the sale of collateral
securities in case the instrument be
not paid at maturity
2. . Authorizes a confession of judgment
if the instrument be not paid at
maturity; or
3. Waives the benefit of any law
intended for the advantage or
protection of the obligor
4. Gives the holder an election to
require something to be done in lieu
of payment of money
5. It is not dated
6. It does not specify the value given, or
that any value had been given
therefor
7. It does not specify the place where it
is drawn or the place where it is
payable
8. It bears a seal
9. It designates a particular kind of
currency in which payment is to be
made (Sees. 5 and 6)
Q: What is the test of negotiability?
A: Whether or not an additional promise (other
than those required in Sec. 1 of the NIL) would
give rise to a cause of action for breach of
contract if the additional act were not done. If it
does, the instrument is rendered non-
negotiable. (Villanueva, Commercial Law
Review)
UST GOLDEN NOTES 2010
Q: A manager's check, made payable to
cash was tendered by the seller to the
buyer as payment for the return of the
reservation fee. The buyer refused to
accept the check. Hence, the seller
consigned the check to the court. Decide.
A: In general, a manager's check is not legal
tender. The creditor has the option of refusing
or accepting it. However, payment in check by
the debtor may be acceptable as valid, if no
prompt .objection to said payment is made.
(Pabugais v, Sahijiwani, G.R. No. 156846,
Feb. 23, 2004)
Q: When is a promise not considered
unconditional?
A: An order or promise to payout of a
particularfund is not unconditional. (Sec. 3)
Note: But an unqualified order or promise to pay
is unconditional though coupled with:
.1. An indication of a particular fund out of
which reimbursement is to be made, or
a particular account to be debited with
the amount; or
2. A statement of the transaction which
gives rise tothe instrument. (Ibid.)
Q: What constitutes determinable future
time?
A: If payable:
1. At afixed period after date or sight; or
2. On or before a fixed or determinable
future time specified therein; or
3. On or at a fixed period after the
occurrence of a specified event. (Sec.
4)
Note: An instrument payable upon a
contingency is not negotiable and the
happening of the event does not cure the
defect. (Ibid.)
Q: What is the effect of ante-dating and
post-dating?
A: I does not affect the negotiability provided
: is not done for an illegal purpose. It may be
ego iated before or after the date given as
g as it is not negotiated after its maturity.
e person to whom the instrument is
i ered acquires title thereto as of the date of
i ery.
Q: What are the distinctions between a
negotiable instrument and a non-negotiable
instrument?
A:
. NEGOTII\BLE
<
NON NEGOTIABLE-.
Contains all
Does not have any,
requisites under
some or all
Sec. 1
requisites
Transferred by
Transferred by
negotiation
assiqnrnent
Holder indue
Transferee acquires
course (HIDC) can
rights no better than
have rights better
his transferor
than his transferor
Prior party does not
Prior parties
warrant payment but
warrant payment
merely the legality of
his title
Q: When is an instrument payable on
demand?
A:
1. When it is so expressed to be
payable on demand, at sight or on
presentation;
2. When no period of payment is stated;
or
3. When issued, accepted, or indorsed
after maturity. (Sec. 7)
Q: When is an instrument payable to order?
A: The instrument is payable to order where it
is drawn payable to the order ofa specified
person, or to himor his order. (Sec. 8)
Q: When is an instrument payable to
bearer?
A:
1. It is expressed to be so payable to
bearer;
2. Payable to a person named therein or
bearer;
3. Payable to the order of a fictitious or
non-existing person, and such fact
was known to the person making it so
payable;
4. The name of the payee does not
purport to be the name of any person;
or
5. The only or last indorsement is an
indorsement inblank. (Sec. 9)
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de CDer echo Ci vi t
~~' 87
NEGOTIABLE INSTRUMENTS LAW
Q: In a check drawn payable to "cash", is
an indorsement necessary?
A: No. Where a check is made payable to the
order of "cash", the word "cash" does not
purport to be the name of any person and
hence the instrument is payable to bearer. The
drawee bank need not obtain any indorsement
of the check but may pay it to the person
presenting it without any indorsement. (Ang
Tek Lian v. CA, G.R. No. L-2516, Sept. 25,
1950)
Q: Is the date essential to make an
instrument negotiable?
A: The date is not essential (Sec. 6 [a)). If
dated, such date is deemed a prima facie
proof ,that it is the true date of the making,
drawing, acceptance or indorsement of the
instruinent. (Sec. 11)
i
Q: When is date important?
A: Date is important inthe following instances,
not to determine negotiability, but to determine
maturity:
1. Where the instrument is payable
within a specified period after date, or
after sight.
2. When the instrument is payable on
demand, date is necessary to
determine 'whether the instrument
was presented within a reasonable
time from issue, or from the last
negotiation.
3. When the instrument is an interest-
bearing one, to determine when the
interest starts to run.
Q: When may date be inserted?
A:
1. Where an instrument expressed to be
payable at a fixed period after date is
issued undated, or
2. Where the acceptance of an
instrument payable at a fixed period
after sight is undated
Note: Any holder may insert thereinthe true date
of issue or acceptance, and the instrument shall
be payable accordingly. (Sec.13)
Q: What is the effect of insertion of wrong
date?
A: It does not avoid the instrument in the
hands of a subsequent holder in due course.
In the hands of a holder in due course,. the
date inserted, even if wrong, is to be regarded
as the true date (Sec. 13). With respect to the
88
person who inserted the wrong date, however,
the instrument is avoided. (Bank of HOU9ton v.
Day, 145Mo. Appl. 410, 122 SW 756)
Q: What are the incidents in the life of a
negotiable instrument?
A:
1. Issue;
2. Negotiation;
3. Presentment for acceptance, in
certain kinds of bills of exchange;
4. Acceptance;
5. Dishonor by non-acceptance;
6. Presentment for payment;
7. Dishonor by non-payment;
8. Notice of dishonor;
9. Protest in certain cases; and
10. Discharge
Q: What are the various situations
involving negotiable instruments?
A:
1. Incomplete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and
alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and
alteration
2. Complete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and
alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and
alteration
INCOMPLETE BUT DELIVERED
Q: When is an instrument incomplete?
A: When it is wanting in any material
particular, (Sec. 14)
Q: Who has the authority to fill up the
blanks in an incomplete but delivered
instrument?
A: The holder has a prima facie authority to
complete it. And a signature on a blank paper
delivered by the person making the signature
inorder that the paper may be converted into a
negotiable instrument operates as a prima
UST GOLDEN NOTES 2010
facie authority to fill it up as such for any
amount. (Sec. 14)
Q: What is meant by material particular?
A: Any particular proper to be inserted in a
negotiableinstrumentto make itcomplete.
Q: When maya prior party be bound by an
incomplete but delivered instrument?
A: If it isfilled upstrictly inaccordancewiththe
authority given and within a reasonable time.
But if any such instrument, after completion, is
negotiatedto a holder in due course, it is valid
andeffectual for all purposes inhis hands, and
he may enforce it as if it had been filled up
strictly in accordance with the authority given
andwithina reasonabletime. (Sec. 14)
Q: J un was about to leave for a business
trip. As his usual practice, he signed
several blank checks. He instructed Ruth,
his secretary, to fill them as payment for
his obligations. Ruth filled one check with
her name as payee, placed P30,000.00
thereon, endorsed and delivered it to Marie.
Marie accepted the check in good faith as
payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did
and apologized to J un. Immediately J un
directed the drawee bank to dishonor the
check. When M.arie encashed the check, it
was dishonored. Is J un liable to Marie?
A: Yes. This covers the delivery of an
incompleteinstrument, under Section14of the
Negotiable Instruments Law, which provides
that there was primafacie authority onthe part
of Ruthtofill-up any of the material particulars
thereof. Having done so, and when it is first
completedbefore it is negotiatedto a holder in
due course like Marie, it is valid for all
purposes, and Marie may enforce it within a
reasonable time, as if it had been filled up
strictly in accordance with the authority given.
(2006 Bar Question)
Q: What is the rule when an instrument is
incomplete and undelivered?
A: Notvalid againstthe partywhosesignature
was placedbefore delivery, whetherthe holder
is a holder indue course or not. However,with
respectto a holder in due course, non-delivery
must be proved because as to him, there is a
prima facie presumptionof delivery.
Reason: Delivery is essential to validity. (Sec.
15)
Q: What about the party whose signature
was placed after delivery?
A: Valid against the party whose signature
was placed after delivery like an indorser
because the indorser warrants the instrument
to be genuine and in all respect what it
purportsto be.
Q: PN makes a promissory note for
P5,000.00, but leaves the name of the payee
in blank because he wanted to verify its
correct spelling first. He mindlessly left the
note on top of his desk at the end of the
workday. When he returned the following
morning, the note was missing. It turned up
later when X presented it to PN for
payment. Before X, T, who turned out to
have filched the note from PN's office, had
endorsed the note after inserting his own
name in the blank space as the payee. PN
dishonored the note, contending that he
did not authorize its completion and
delivery. But X said he had no participation
in, or knowledge about, the pilferage and
alteration of the note and therefore he
enjoys the rights of a holder in due course
under the Negotiable Instruments Law.
Who is correct and why?
A: PN is right. The instrument is incomplete
and undelivered. It did not create any contract
that would bind PN to an obligationto paythe
amountthereof. (2000Bar Question)
Q: J un was about to leave for a business
trip. As his usual practice, he signed
several blank checks. He instructed Ruth;
his secretary, to fill them as payment for
his obligations. Ruth filled one check with
her name as payee, placed P30,OOO.OO
thereon, endorsed and delivered it to Marie.
She accepted the check in good faith as
payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did
and apologized to J un. Immediately he
directed the drawee bank to dishonor the
check. When Marie encashed the check, it
was dishonored.
Supposing the check was stolen while in
Ruth's possession and a thief filled the
blank check, endorsed and delivered it to
Marie in payment for the goods he
purchased from her, is J un liable to Marie if
the check is dishonored?
A: No. Eventhough Marie is a holder in due
course, this is an incomplete and undelivered
UNIVERSITY OF SANTO TOMAS ~+~
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NEGOTIABLE INSTRUMENTS LAW
instrument, covered by Section 15 of the
Negotiable Instruments Law. Where an
incomplete instrument has not been delivered,
it will not, if completed and negotiated without
authority, be a valid contract in the hands of
any holder, as against any person, including
J un, whose signature was placed thereon
before delivery. Such defense is a real
defense even against a holder in due course,
available to a party like J un whose signature
appeared prior to delivery.
COMPLETE BUT UNDELIVERED
Q: What is the effect if an instrument is
undelivered?
A: It is incomplete and revocable until delivery
of the instrument. (Sec. 16)
Q: What is delivery?
A: It is the transfer of possession, actual or
constructive, from one person to another (Sec.
191), with the intent to transfer title to payee
and recognize him as holder thereof.
Q: When is an instrument issued?
A: The first delivery of the instrument,
complete in form, to a person who takes it as
holder. (Sec. 191)
Q: Can a creditor bank who was the payee
in a check fraudulently obtained by a third
person who subsequently encashed it sue
the drawer-debtor, third person, and
drawee bank for the amount of the check?
A: No, the payee of a negotiable instrument
acquires no interest with respect thereto until
its delivery to him. Without the initial delivery of
the instrument from the drawer to the payee,
there can be no liability on the instrument.
(Development Bani, of Rizal v. Sima Wei, GR.
No. 85419, Mar. 9, 1993)
Q: What is the effect if the instrument is in
the possession of aholder in due course?
. I
A: V~lid delivery is conclusively presumed.
(Sec.! 16)
I
Q: What if the instrument is in the
possession of a party other than a holder in
due course?
A: Prima facie presumption of delivery but
subject to rebuttal. It must be made either by
or under the authority of the party making,
drawinq, accepting, or indorsing.
Q: What is the rule if the instrument is
delivered conditionally or for a special
purpose?
A: If the instrument lands in the hands of a
holder in due course (one who does not know
of the conditional delivery or of its special
purpose), the instrument will be as if there is
no condition. To a holder not in due course,
prior parties are not bound by the instrument.
Note: The lawcontemplates that the condition is
orally or verbally conveyed to the holder upon
delivery, because of the rule that the negotiability
is determined only upon the face of the
instrument.
Q: Who are immediate parties?
A: Those having or being held to know the
conditions or limitations placed upon the
delivery of an instrument. It means privity, and
not proximity.
Q: Who are remote parties?
A: Those who do not know the conditions or
limitations placed upon the delivery of an
instrument, even if he is the next party
physically.
Q: May the checks issued by the
Department of J ustice as salary of the
judgment debtor, an Assistant City Fiscal,
be garnished in favor of the judgment
creditor prior to delivery to said judgment
debtor?
A: No. As Assistant City Fiscal, the source of
the salary is public funds. He receives his
compensation in the form of checks from the
Department of J ustice through the City Fiscal,
who had the custody over the checks.
Inasmuch as said checks had not yet been
delivered to judgment debtor, they did not
belong to him and still had the character of
public funds. (De La Victoria v. Burgos, G.R.
No. 111190, June 27,1995)
UST GOLDEN NOTES 2010
, ',COMPLETE AND DELIVERED .,>,
RULES OF CONSTRUCTION r'
Q: What are the rules when an instrument
is complete and delivered?
A:
1. Without forgery and alteration, all
parties are bound.
2. With forged indorsement and/or
alteration
a. Order instruments
i. Order promissory note
Prior parties not bound.
Forged signature is
wholly inoperative (Sec.
23); unless estoppel
sets in with regard prior
parties (cut-off rule).
Subsequent parties
bound.
ii. Order bill of exchange
Drawer's account
cannot be charged by
the Drawee;
Drawer has no cause of
action against collecting
bank, since the duty of
the latter is only to
payee;
Drawee can recover
from collecting bank;
Drawer not liable to the
collecting bank.
Collecting bank bears
loss (can recover from
person it paid)
Payee can recover
from: Drawer and
Collecting bank, but not
from Drawee unless
with acceptance of the
bill;
b. Bearer instruments
i. Bearer promissory note
Prior parties liable;
Forged signatory not
liable to party not holder
in due course.
ii. Bearer bill of exchange
Drawee bank liable.
Q: What are the rules of construction in
case of ambiguous or omissions of
negotiable instruments?
A:
1. Words prevail over figures;
2. Interest runs from the date of the
instrument, if date from which interest
is to run is unspecified; if undated,
from the issue;
3. If undated, deemed dated on the date
of issue;
4. Written provisions prevail over
printed;
5. If there is doubt whether it is a bill or
note, the holder may treat it as either
at his election;
6. When not clear in what capacity it
was signed, deemed signed as an
indorser;
7. If "I promise to pay" but signed by two
or more persons, jointly and severally
liable.
RULES ON SIGNATORIES ' ...
Q: Who are the persons liable on an
instrument?
A:
GR: Only persons .whose signatures
appear on an instrument are liable thereon.
(Sec. 18)
XPN:
1. Person signs in trade or assumed
name (Sec. 18 [2J) - Party who
signed must have intended to be
bound by his signature.
2. Principal is liable if a duly authorized
agent signs .in his own behalf
disclosing the name of the principal
and adding words to show he is
merely signing in a representative
capacity. (Sec. 19) - Authority may
be given orally or in writing (SPA,
only an evidence of authority of an
agent to third parties)
3. Incase of forgery (Sec. 23)
4. Acceptor makes his acceptance of a
bill on a separate paper (Sec. 134)
5. Person makes a written promise to
accept the bill before it is drawn (Sec.
135)
UNIVERSITY OF SANTO TOMAS
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NEGOTIABLE INSTRUMENTS LAW
Q: What are the requisites to exempt an
agent from liability?
Q: When is there want of authority?
A:
1. He is duly authorized;
2. He adds words to his signature
indicating that he signs as
agent/representative;
3. He discloses the name of his
principal. (Sec. 20)
Q: What is the effect of a signature by
procuration?
A: It operates as notice that the agent has but
a limited authority to sign and the principal is
bound only in case the agent in so signing
acted within the actual limits of his authority.
(Sec. 21)
Q: What are the effects of an infant or
corporation's indorsement?
A:
1.
Not void. The incapacity of the infant
is not a defense which can be availed
of by prior parties. However, it does
not destroy the right of such an infant
indorser to disaffirm under the rules
of infancy;
Passes property thereih;
Voidable. Therefore, parties prior to
the minor or corporation cannot-
escape liability by setting up as
defense the incapacity of the
indorsers.
A minor, however, may be held
bound by his signature in an
instrument where he is guilty of actual
fraud committed by specifically
stating that he is of age. (PNB v. CA,
G.R. No. L-34404, June 25, 1980)
2.
3.
4.
FORGERY .
Q: What is forgery?
A: Forgery is the counterfeit making or
fraudulent alteration of any writing.
Q: When is there forgery?
A: Signature is affixed by one who does not
claim to act as an agent and who has no
authority to bind the person whose signature
he has forged.
92
A: Signature is affixed by one who purports to
be an agent but has no authority to bind the
alleged principal.
Q: What is the effect when there is
forgery?
A:
GR: The signature is wholly inoperative,
and no right to retain the instrument, or to
give a discharge thereof. or to enforce
payment thereof against any party to it, is
acquired through or under such Signature.
(Cut-off rule). But it does not avoid the
instrument.
XPN:
1. If the party against whom it is sought
to enforce such right is precluded
from setting up forgery or want of
authority. (Sec. 23)
2. Where the forged Signature is not
necessary to the holder's title, in
which case, the forgery maybe
disregarded (Sec. 48)
Q: Can a payee of a check sue the
collecting bank for the amount of the
checks when it made payment of the same
under a forged endorsement in favor of the
forger?
A: Yes, since the Signature of the payee was
forged to make it appear that he had made an
indorsement in favor of the forger, such
Signature should be deemed as inoperative
and ineffectual. The collecting bank grossly
erred in making payment by virtue of said
forged signature. The collecting bank is liable
to the payee and must bear the loss because it
is its legal duty to ascertain that the payee's
endorsement was genuine before cashing the
check. (Westmont Bank v. Ong, G.R. No.
132560, Jan. 3~2002)
Q: Who are preCluded from setting up the
defense of forgery?
A:
1. Those who admit/warrant the
genuineness of the signature:
indorsers, persons negotiating by
delivery and acceptor; (Sec 56)
2. Those who by their acts, silence, or
negligence, are estopped from
claiming forgery;
3. A holder of a bearer instrument who
subsequently negotiates such
instrument with a prior forged
indorsement (forged indorsement is
UST GOLDEN NOTES 2010
not necessary to his title it being a
bearer instrument).
Q: What are the rights of the parties in
cases of forged instruments?
A:
1. Where note payable to order:
a. Party whose signature was
forged is not liable to a holder,
even a HIDC
b. Indorsement is wholly
inoperative.
2. Where note payable to bearer:
a. The party whose indorsement is
forged is liable to a HIDC, but not
to one who is not a HIDC
Reason: it can be negotiated by
mere delivery
b. The only defense available is
want of delivery but this defense
can be raised only against a
holder not in due course.
3. Where bill payable to order: The party
whose indorsement is forged is not
liable to any holder even a HIDC.
The forged indorsement is wholly
inoperative.
Q: A client indorsed a check with a forged
indorsement. The collecting bank indorsed
the check with the drawee bank. What are
the liabilities of the parties?
A: The collecting bank is bound by its
warranties as an indorser and cannot set up
the defense of forgery as against the drawee
bank.
The drawee bank is under strict liability to pay
the check to the order of the payee. Payment
under a forged indorsement is not to the
drawer's order. Since the drawee bank did not
pay a holder or other person entitled to receive
payment, it has no right to reimbursement from
the drawer. (Associated Bank v. CA, G.R. No.
107382, Jan. 31,1996)
Q: What is the remedy of the drawee bank?
A: Tile drawee bank may not debit the account
of the drawer but may generally pass liability
back through the collection chain to the party
who took from the forger and, of course, to the
forger himself, if available. If the forgery is that
of the payee's or holder's indorsement, the
collecting bank is held liable, without prejudice
to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the
collecting bank had no right to be paid by the
drawee bank. The former must necessarily
return the money paid by the latter because it
was paid wrongfully. (Associated Bank v. CA,
G.R. No. 107382, Jan. 31, 1996)
Q: What is the extent of the liability of the
drawee bank and the drawer for the amount
paid on checks with forged indorsements
of the payees, if the same was due to the
negligence of both the drawee bank and
the drawer?
A: The loss occasioned or caused by such
negligence should be divided equally between
the drawer/depositor and the drawee.
Q: Can a drawer-depositor who entrusted
his check books, credit cards, passbooks,
bank statements and cancelled checks to
his secretary and who had introduced the
secretary to the bank for purposes of
reconciliation of his accounts hold the
drawee bank liable for the amounts
withdrawn by the secretary by forging his
Signature on the checks?
A: No, 11eis precluded from setting up the
forgery due to his own negligence in entrusting
to. his secretary his credit cards and check
book including the' verification of his
statements of account. (llusorio v. CA, GR.
No. 139130, Nov. 27, 2002)
Q: Can a drawer, from whom checks were
stolen but failed to report the same to the
authorities or the drawee bank, recover the
value of the checks paid by the drawee
bank on the forged checks which' was
stolen from the drawer?
A: No, the drawer is the one which stahds to
be blamed for its negligence/predicament.
(Security Bank and Trust Company v. Triumph
Lumber and Construction Corp., G.R. No.
126696, Jan. 21, 1999)
Q: How is forgery proven and who has the
burden of proof?
A: The drawer's signatures on the questioned
checks amount to prima facie evidence that he
issued those checks. By denying that he
issued the said checks, it is he who puts into
question the genuineness and authenticity of
the Signatures appearing thereon, and it is he
who has the burden of proving that those
signatures were forgeries. Forgery, as any
other mechanism of fraud must be proven
clearly and convincingly, and the burden of
proof lies onthe party alleging forgery. (Chiang
Via Min v. CA, G.R. No. 137932, Mar. 28,
2001)
UNIVERSITY OF SANTO TOMAS ~"-'j'~
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93
NEGOTIABLE INSTRUMENTS LA\\/
I
Q: CX:maintained a checking account with.
UBANK, Makati Branch. One of his checks
in a stub of fifty was missing. Later, he
discovered that Ms. DY forged his
signature and succeeded to encash
P15,000 from another branch of the bank.
DY was able to encash the check when ET,
a friend, guaranteed due execution, saying
that she was a holder in due course. Can
CX recover the money from the bank?
Reason briefly.
A: Yes, CX can recover from the bank. Under
Section 23 of the Negotiable Instruments Law,
forgery is a real defense. The forged check is
wholly inoperative in relation to CX. CX cannot
be held liable thereon by anyone, not even by
a holder in due course. Under a forged
signature of the drawer, there is no valid
instrument that would give rise to a contract
which can be the basis or source of liability on
the part of the drawer. The drawee bank has
no right or authority to touch the drawer's
funds deposited with the drawee bank. (2004
Bar Question)
Q: Discuss the legal consequences when a
bank honors a forged check.
A:
1. When drawer's signature is forged -
Drawee-bank by accepting the check
cannot set up the defense of forgery,
because by accepting the instrument,
the drawee bank admits the
genuineness of signature of drawer
(BPI Family Bank v. Buenaventura,
GR No. 148196, Sept. 30, 2005;
Sec. 23, NIL).
Unless a forgery is attributable to the
fault or negligence of the drawer
himself, the remedy of the drawee-
bank is against the party responsible
for the .forgery. Otherwise, drawee-
bank bears the loss. A drawee-bank
paying on a forged check must be
considered as paying out of its funds
and cannot charge the amount to the
drawer (Samsung Construction Co.
Phils, v. Far East Bank, GR No.
129015, Aug. 13, 2004). If the
drawee-bank has charged drawer's
account, the latter can recover such
amount from the drawee-bank
(Associated Bank v. CA, GR No.
107382, Jan. 31, 1996; BPI v Case
Montessori Internationale, G.R. No.
149454, May 28, 2004).
However, the drawer may be
precluded or estopped from setting
94 I team: bSli.nl1
up the defense of forgery as against
the drawee-bank, when it is shown
that the drawer himself had been
guilty of gross negligence as to have
facilitated the forgery (Metropolitan
Waterworks v. CA, GR No. L-62943,
July 14, 1986).
2. Drawee bank versus collecting bank
- When the signature of the drawer is
forged, as between the drawee-bank
and collecting bank, the drawee-bank
sustains the loss, since the collecting
bank does not guarantee the
signature of the drawer. The payment
of the check by the drawee bank
constitutes the proximate negligence
since it has the duty to know the
signature of its client-drawer.
(Philippine National Bank v. CA, GR
No. L-26001, Oct. 29, 1968). I
I
3. Forged payee's Signature -i When
drawee-bank pays the forged! check,
it must be considered as paying out
of its funds and cannot charge the
amount so paid to the account of the
depositor. In such case, the bank
becomes liable since its primary duty
is to verify the authenticity of the
payee's signature (Traders Royal
Bank v. Radio Philippines Network,
GR No. 138510, Oct. 10, 2002;
Westmont Bank v, Ong, GR No.
132560, Jan. 30, 2002).
4. Forged endorsement - Drawer's
account cannot be charged, and if
charged, he can recover from the
drawee-bank (Associated Bank v.
CA, GR No. 107382, Jan. 31,1996).
Drawer has no cause of action
against collecting bank, since the
duty of collecting bank is only to the
payee (Manila Lighter Transportation,
Inc. v, CA, GR No. L-50373 Feb. 15,
1990). Drawee-bank can recover
from the collecting bank (Great
Eastern Life Ins. Co. v. Hongkong &
Shanghai Bank, GR No. 18657,
Aug. 23, 1922) because even if the
indorsement on the check deposited
by the bank's client is forged,
collecting bank is bound by its
warranties as an indorser and cannot
set up defense of forgery as against
drawee bank (Associated Bank v. CA,
GR No. 107382, Jan. 31, 1996).
UST GOLDEN NOTES 2010
Q: What are the kinds of fraud relating to a
negotiable instrument?
A:
1. Fraud in the execution or fraud in
factum A person, without
negligence, has signed an instrument
which was in fact a negotiable one,
but was deceived as to the character
of the instrument and without
knowledge of it (real defense).
2. Fraud in the inducement cr simple
fraud - Relates to the quantity,
quality, value or character of the
consideration of the instrument.
Deceit is not in the character of the
instrument but in its amount or terms
(personal defense).
Q: The drawer's signature was forged.
There is, however, a provision in the
monthly bank statement that if the drawer's
signature was forged, the drawer should
report it within 10 days from receipt of the
statement to the drawee. The drawer,
however failed to do so. What will be its
effect insofar as the drawer's right is
concerned?
A: Where the forgery of the drawer's signature
has been clearly established, the drawee bank
must re-credit the account of the drawer. The
failure of the drawer to report the forgery within
ten days from receipt of the monthly bank
statement from the drawee bank does not
preclude tile drawer from questioning the
mistake of the drawee bank despite the
provision in the monthly statement that if no
error is reported in ten days, the account will
be deemed correct. (BPI v. CASA Montessi,
GR. No. 149454, May 28,2004)
Q: If forgery was committed by an
employee of the party whose signature was
forged (drawer), does it amount to estoppel
so that the drawer is precluded in
recovering from the drawee bank?
A: The bare fact that the forgery was
committed by an employee of the party whose
Signature was forged can not necessarily imply
that such party's negligence was the cause of
the forgery in the absence of some
circumstances raising estoppel against the
drawer. Since the drawer is not precluded by
negligence from setting up the forgery, the
general rule should apply. Consequently, if a
bank pays a forged check, it must be
considered as paying out of its own funds and
can not charge tile amount so paid to the
account of the depositor. A bank is liable,
irrespective of its good faith, in paying aforged
check. (Samsung Construction Co. v. Far East
Bank and Trust Company, GR. No. 129015,
Aug. 13, 2004)
Q: What is consideration?
A: It is an inducement to a contract that is the
cause, price or impelling influence, which
induces a party to enter into a contract.
Note: It is not tile motive, for the latter is the
personal or private reasons of a party in
entering into a contract.
Q: What is the presumption recognized by
law as to the existence of consideration?
A: Every negotiable instrument is deemed
prima facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value. (Sec. 24)
Q: What constitutes value?
A: It is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value and is deemed such
whether the instrument is payable on demand
or at afuture time. (Sec. 25)
Note: Love and affection do not constitute value
withinthe meaning of the law.
Q: Who is a holder for value?
A: One who has given a valuable
consideration for the instrument issued or
negotiated to him (Sec. 26). The holder is
deemed as such not only as regards the party
to whom the value has been given to by him
but also in respect to all those who became
parties prior to the time when value was given.
Where the holder has a lien on the instrument
arising either from contract or by implication of
law, he is deemed a holder for value to the
extent of his lien. (Sec. 27)
Q: What is the effect of want of
consideration?
A: It becomes a matter of defense as against
any person not a holder in due course; and
partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise (Sec. 28)
UNIVERSITY OF SANTO TOMAS ~~~"J
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NEGOTIABLE INSTRUMENTS LAW
Q: A travel agency sued the drawer for the
amount of 6 post-dated checks which were
all dishonored. On the other hand, the
drawer claims that the checks were issued
for purposes of accommodation. Who, as
between the parties, has the burden of
proving that the checks were issued for a
consideration?
A: Since a negotiable instrumeht is presumed
to have been issued for a valuable
consideration, the mere presentation of a
dishonored check in evidence entitles the
holder to recover from the drawer even if the
payee did not establish the accountability of
the drawer. The drawer of a check, not the
payee, has. the burden of proof to show that
the check was issued without sufficient
consideration. (Travel-On v. CA, G.R. No. L-
56169, June 26, 1992)
Q: Can a logging concessionaire which
issued promissory notes in favor of a bank
to secure advances in connection to its log
exportations raise the defense of want of
consideration in a case filed by the bank
for the payment of the PN?
A: No, the promissory note appears to be
negotiable as they meet the requirements of
Sec.1 of the NIL. Such being the case, the
notes are prima facie deemed to have been
issuedfor consideration. Itbears noting that no
sufficient evidence was adduced by the
logging concessionaire to show otherwise.
(Quirino Gonzales Logging Concessionaire v.
CA, G.R. No. 126568, Apr. 30, 2003)
Q: How is absence or failure of
consideration distinguished from
inadequacy of consideration?
A: Inadequacy of consideration does not
invalidate the instrument, unless there has
been fraud, mistake or 'undue influence (Art.
1355, NCC). However, knowledge of
inadequacy of consideration would render the
holdernot aholder indue course. (Sec. 53)
Note: Failureof considerationmeans the failure
or refusal of one of the partiesto do, performor
complywiththeconsiderationagreedupon.
.: .'.~. -, ACCOMMODATION .. '
Q: Who is an accommodation party?
A: One who has signed the instrument as
maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of
lending his name to some other person. (Sec.
29)
96
Q: What are the requisites to be an
accommodation party?
A:
1. Accommodation party must sign as
maker, drawer, acceptor or indorser;
2. No value is received by the
accommodation party for the
accommodated party; and
3. The purpose is tolend the name.
Note: It does not mean, however. thai one
cannot be an accomodation party merely
becausehe has receivedsome considerationfor
the use of his name. The phrase "without
receiving value therefor" only means that no
value has beenreceived for the instrumentand
notfor lendinghisname.
Q: What are the rights of an
accommodation party?
A:
1. Right to revoke accommodation _
before the instrument has been
negotiated for value.
2. Right to reimbursement from
accommodated party .the
accommodated party is the real
debtor. Hence, the cause of action is
not on the instrument but on an
implied contract of reimbursement.
3. Right to contribution from other
solidary accommodation maker.
(Sadaya v. Sevilla, G.R. No. L-17845,
Apr. 27, 1967)
UST GOLDEN NOTES 2010
Q: What are the distinctions between an
accommodation party and a regular party?
A:
'~C~OMMODATlON ' .REGULAR PARfv'
.: 'PARTY . r
Signs an instrument
without receiving Signs the instrument
value therefore (Sec. for value (Sec. 24)
29)
Purpose of signing:
lend his name to
Not for that purpose
another person
(Sec. 29)
May always show, Cannot disclaim
by parol evidence, personal liability by
that he is only such parol evidence
Cannot avail of the
defense of
absence/failure of
May avail
consideration
against a holder not
indue course
May sue
reimbursement after
paying the May not sue
holder/subsequent
party
Q: Can a party who signed on the note as
an accommodation party raise the defense
of absence or want of consideration?
A: An accommodation party who lends his
name to enable the accommodated party to
obtain credit or raise money is liable on the
instrument to a holder for value even if he
receives no part of the consideration. He
assumes the obligation to the other party and
binds himself to pay the note on its due date.
By signing the note, the accomodation party
thus became liable for the debt even if he had
no direct personal interest in the obligation or
did not receive any benefit therefrom. (Henry
dela Rama v. Admiral United Savings Bank,
G.R. No. 154740, Apr. 16,2008)
Q: An accommodation party signed in the
instrument with their building and lot held
as mortgage subject to certain conditions
to be fulfilled by the creditor bank. The
creditor bank failed to fulfil the conditions.
The accommodation party now seeks to
obtain release from its liability. Can a
creditor bank, being a mere assignee of the
note refuse the release of an
accommodation party in a REM?
A: It depends. To be entitled to recover from
an accommodated party, the holder of a
negotiable instrument must be a holder in due
course except for the notice of want of
consideration. If he does not qualify as a
HIDC then he holds the instrument subject to
the defenses as if it were non-negotiable.
(Prudencio v. CA, G.R. No. L-34539, July 14,
1986)
Q: Can a corporation be an accommodation
party, if so, does the liability of an
accommodation party attach to a
corporation?
A: No, the issue or indorsement of negotiable
paper by a corporation without consideration
and for the accommodation of another is ultra
vires. Hence, one who has taken the
instrument with knowledge of the
accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party. (Crisologo-Jose v. CA,
G.R. No. 80599, Sept. 15, 1989)
Q: Maya holder for value recover from an
accommodation party notwithstanding his
knowledge of such fact?
A: An accommodation party is liable on the
instrument to a holder for value
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. The accommodation
party is liable to a holder for value as if the
contract was not for accommodation. It is not a
valid defense that the accommodation party
did not receive any valuable consideration
when he executed the instrument. Nor is it
correct to say that the holder for value is not a
holder in due course merely because at the
time he acquired the instrument, he knew that
the indorser was only an accommodation
party. (Ang Tiong v. Ting, G.R. No. L-26767,
Feb. 22, 1968)
Q: On J une 1, 1990, A obtained a loan of
P100,000 from B, payable not later than 20
Dec. 1990. B required A -to issue him a
check for that amount to be dated Dec. 20,
1990. Since he does not have any checking
account, A, with the knowledge of B,
requested his friend, C, President of Saad
Banking Corp (Saad) to accommodate him.
C agreed, he signed a check for the
aforesaid amount dated Dec. 20, 1990,
drawn against Saad's account with the
ABC Commercial Banking Co. The By-laws
of Saad requires that checks issued by it
must be Signed by the President and the
Treasurer or the Vice-President. Since the
Treasurer was absent, C requested the
Vice-President to co-sign the check, which
the latter reluctantly did. The check was
delivered to B. The check was dishonored
UNIVERSITY OF SANTO TOMAS f~"~
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NEGOTIABLE INSTRUMENTS LAW
upon presentment on due date for
insufficiency of funds.
1. Is Saad liable on the check as an
accommodation party?
2. If it is not, who then, under the
I
above facts, is/are the
accommodation party?
A:
1. Saad is not liable on the check as an
accommodation party. The act of the
corporation in accommodating a
friend of the president is ultra vires
(Ctlsotoqo-Jose vs. CA, GR. No.
80599, Sept. 15, 1989). While it may
be legally possible for the
corporation, whose business is to
provide financial accommodations in
the ordinary course of business, such
as one given by a financing company
to be an accommodation party, this
situation, however, is not the case in
the bar problem.
2. Considering that both the president
and vice-president were signatories
to the accommodation, they
themselves can be subject to the
liabilities of accommodation parties to
the instrument in their personal
capacity. (Cris%go-Jose v. CA, G.R.
No. 80599, Sept. 15, 1989) (1991 Bar
Question)
:, ,; " . " NEGOTIATION ' . ,
Q: When is an instrument negotiated?
A: An instrument is negotiated when it is
transferred from one person to another in such
a manner as to constitute the transferee the
holder thereof. (Sec. 30)
Note: A holder is the payee or indorser of a bill or
note, who is in possession of it, or the bearer
thereof. (Sec. 191)
Q: What are the methods of transferring a
negotiable instrument?
A:
1. Issue - first delivery of the instrument
complete in form to a person who
takes it as a holder.
2. Negotiation - an instrument is
negotiated when it is transferred from
one person to another in such a
manner as to constitute the
transferee the holder thereof.
98 Iteam:._
3. Assignment - absent any express
prohibition against assignment or
transfer written on the face of a non-
negotiable instrument, the same may
be assigned or transferred.
Q: What distinguishes negotiation from
assignment?
A:
NEGOTIATION
ASSIGNMENT
I
Non-negotiable
Only a negotiable
instrument may be
assigned absent of
instrument may be
any prohibition
negotiated
against assignment
written on its face.
The transferee can
The transferee, if he
have no better rights
is a HIDC may
than his transferor;
acquire better rights
he merely steps into
than his transferor.
the shoes of the
assignor
The holder can hold
the drawer liable
The transferee has
and the indorsers
no right of recourse
liable if the party
for payment against
primarily liable does
immediate parties.
not pay.
Q: A promissory note had already been
legally extinguished because it satisfied
the elements of compensation or legal set-
off under Art. 1285 as between the maker
and the assignor of the note who are
mutually creditors and debtors of each
other. The holder assigned the note. Can
the maker raise the defense of
compensation or legal set-off against the
assignee?
A: Yes. The assignee takes the instrument
subject to both personal and real defenses,
because he merely steps into the shoes of the
assignor. His remedy is aqainst the assignor
arid not the maker of the note. (Sesbreno v.
CA, G.R. No. 89252, May 24, 1993)
Q: What are the methods of negotiation?
A:
1. If payable to bearer, it is negotiated by
delivery;
2. If payable to order, it is negotiated by
the indorsement of the holder
completed by delivery. (Sec. 30)
UST GOLDEN NOTES 2010
Q: What is the effect, if any, if a bearer
instrument is negotiated by indorsement
and delivery?
A: A bearer instrument, even when indorsed
specially, may nevertheless be further
negotiated by delivery, but the person
indorsing specially shall be liable as endorser
to only such holders as make title through his
endorsement (once a bearer instrument,
always a bearer instrument). (Sec. 40)
Note: This rule does not apply to an instrument
originally payable to order but is converted into
bearer instrument because the only or last
indorsement is anindorsement inblank.
Q: Richard Clinton makes a promissory
note payable to bearer and delivers the
same to Aurora Page. Aurora Page,
however, endorses it to X in this manner:
"Payable to X. Signed: Aurora Page."
Later, X, without endorsing the promissory
note, transfers and delivers the same to
Napoleon. The note is subsequently
dishonored by Richard Clinton. May
Napoleon proceed against Richard Clinton
for the note?
A: Yes. Richard Clinton is liable to Napoleon
under the promissory note. The note made by
Richard Clinton is a bearer instrument. Despite
special indorsement made by Aurora Page
thereon, the note remained a bearer
Instrument and can be negotiated by mere
delivery. When X delivered and transferred
the note to Napoleon, the latter became a
holder thereof. As such holder, Napoleon can
proceed against Richard Clinton. (1998 Bar
Question)
Q: Where indorsement should be placed?
A:
1. On the instrument itself; or
2. On a separate piece of paper
attached to the instrument called
"allonge". (Sec. 31)
Q: Can there be partial indorsement?
A:
GR: No. Indorsement must be of tile entire
instrument. (Sec. 32)
XPN: When there is partial payment.
Q: What is the effect when an order
instrument was delivered without
indorsement?
A: The transfer operates as an ordinary
assignment (Sec. 49). Without the
indorsement, the transferee would not be the
holder of the instrument. When indorsement is
subsequently obtained, the transfer operates
as a negotiation only as of the time the
negotiation is actually made.
Note: The transferee has the right to require
the transferor to indorse the instrument.
Q: What is the effect when a negotiable
instrument is merely assigned?
A: The transferee does not become a holder
and he merely steps into the shoes of the
transferor. Any defense available against the
transferor is available against the transferee.
(Salas v. CA, G.R. No. 76788 Jan. 22, 1990)
Q: What is an indorsement?
A: Indorsement is the writing of the name of
the indorser on the instrument with the intent
to transfer title to the same.
Q: What are the different kinds of
Indorsement?
A:
1 . Special (Sec. 34) - Specifies the
person to whom or to whose order
the instrument is to be payable. Also
known as specific indorsement or
indorsement infull.
2. Blank (Sec. 34) - Specifies no
indorsee.
a. Instrument is payable to bearer
and may be negotiated by
. delivery;
b. May be converted to special
indorsement by writing over the
signature of the indorser in blank
any contract consistent with the
character of indorsement (Sec.
35).
3. Absolute - The indorser binds himself
to pay:
a. upon no other condition than
failure of prior parties to do so
b. upon due notice to him of such
failure
4. Conditional - Right of the indorsee is
made to depend on the happening of
a contingent event. Party required to
UNIVERSITY OF SANTO TOMAS ~""""'.
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NEGOTIABLE INSTRUMENTS LAW
pay may disregard the conditions
(Sec. 39)
the indorsement which fact was
known to him.
5. Restrictive - When the instrument:
a. Prohibits further negotiation of
the instrument (it destroys the
negotiability of the instrument);
b. Constitutes the indorsee the
agent of the indorser; (Sec. 36)
c. Vests the title in the indorsee in
trust for or to the use of some
persons. But mere absence of
words implying power to
negotiate does not make an
instrument restrictive.
6. Qualified (Sec. 34) - constitutes the
indorser a mere assignor of the title to
the instrument. It is made by adding
to the indorser's signature words like,
without recourse (serves as an
ordinary equitable assignment) (Sec.
38)
I
7. Joint - indorsement made payable to
2 or more persons who are not
partners. (Sec. 41)
Note: All of them must indorse unless
the one indorsing has authority to
indorsefor the others
6.
Irregular (Sec. 64) - A person who,
not otherwise a party to an
instrument, places thereon his
signature in blank before delivery.
7. Facultative Indorser waives
presentment and notice of dishonor,
enlarging his liability and his
indorsement.
8. Successive - indorsement to two
persons insuccession.
Note: Any of them can indorse to effect
negotiationof the instrument.
Q; What is the effect of a qualified
indorsement:
A; A qualified indorsee has limited liability. He
is liable only if the instrument is dishonored by
non-acceptance or non-payment due to:
1. Forgery;
2. Lack of good title on the part of the
indorser;
3. Lack of capacity to indorse on the
part of the prior parties; or
4. The fact that at the time of the
indorsement, the instrument was
valueless or not valid at the time of
100
Note: A qualified indorser guarantess only the
genuineness of the instrument but does not
guarantee its payment.
Q: What are the rights of an indorsee in a
restrictive indorsement?
A:
1. To receive payment of the instrument;
2. To bring any action thereon that the
indorser could bring; and
3. To transfer his rights as such
indorsee, where the form of the
indorsement authorizes him to do so.
(Sec. 37)
Q: What do subsequent indorsees acquire
.under the restrictive indorsement?
A: All subsequent indorsees acquire only the
title of the 1
51
indorsee. (Sec. 37)
Q; When there is a joint indorsement, who
must indorse?
A;
GR: All must indorse in order for the
transaction to operate as a neqotiatlon.
(Sec. 41)
XPN:
1. Payees or indorsees are partners;
and
Payee or indorsee indorsing has
authority to indorse for the others.
2.
Q: What are the instances where the
indorsements served only as equitable
assignment?
A:
1. Indorsement of part of the amount of
the instrument. (Sec. 32)
2. In cases of qualified indorsement.
(Sec. 38)
3. Conditional Indorsement. (Sec. 39)
4. Transfer of an instrument payable to
order by mere delivery. (Sec. 49)
UST GOLDEN NOTES 2010
Q: When can an indorsement be stricken
out?
A: The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out, and
all indorsers subsequent to him, are relieved
from liability on the instrument. (Sec. 48)
Q: When can a prior party negotiate an
instrument?
A: Where an instrument is negotiated back to
him. But, he is not entitled to enforce payment
thereof against any intervening party to whom
he was personally liable. (Sec. 50)
Q: What are the limitations to
renegotiation?
A: In the following cases, a prior party cannot
further negotiate the instrument:
1. Where it is payable to the order of a
third person, and it has been paid
by the drawer (Sec. 121[aJ);
2. Where it was made or accepted for
accommodation and has been paid
by the party accomodated (Sec.
121[b));
3. In other cases, where the instrument
is discharqed when acquired by a
prior party. (Sec. 119)
Q: Who is a holder?
A: The payee or indorsee of a bill or note who
is in possession of it or the bearer thereof.
(Sec. 191)
Q: What are the classes of holders?
A:
1. Holders in general (Simple Holders)
(Sec. 51);
2. Holders for value (Sec. 26);
3. Holders in due course (Secs. 52, 57).
Q: What are the rights of a holder in
general?
A:
1. Right to sue
2. Right to receive payment (Sec. 51)
Note: If the payment is in due course,
the instrument is discharged.
Q: What constitutes payment in due
course?
A: When made:
1. At or after the maturity of the
instrument
2. To the holder thereof, in good faith
and without notice that his title is
defective (Sec. 88)
Q: Who is a holder in due course (HIOC)?
A: He who takes a negotiable instrument:
1. That is complete and regular upon its
face;
Note: Absence of the required
documentary stamp will not make the
instrument incomplete. (It is not a
requisite of negotiability under Sec. 1
and it is not a material particular under
Sec. 125)
2. Became the holder before it was
overdue, and without notice that it
has been previously dishonored, if
such was the fact;
Note: if the instruments is payable on
demand, the date of maturity is
determined by the date of presentment,
which must be made within a
reasonable time after its issue, if it is a
note, or after the last negotiation
thereof, if it is a bill of exchange. (Secs.
71 and 143{aJ)
Where transferee receives notice of any
infirmity in the instrument of defect in
the title of the person negotiating the
same before he had paid the full
amount agreed to be paid, he will be
deemed a holder in due course only to
the extent of the amount therefor paid
byhim. (Sec. 54)
3. Took it in good faith and for value;
4. At the time it was negotiated to him,
he had no notice of any infirmity in
the instrument or defect in the title of
the person negotiating it. (Sec. 52)
Note: Knowledge of the agent is
constructive knowledge tothe principal.
UNIVERSITY OF SANTO TOMAS
Pacu(taa de CDer ecf i o Ci vi t
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Q: Who is deemed to be a HIDC?
I
NEGOTIABLE INSTRUMENTS LAW
A:
GR: Every holder is deemed prima facie to
be a holder in due course;
XPN: When it is shown that the title of any
person who has negotiated the instrument
was defective. (Sec. 59)
Q: Larry issued a negotiabie promissory
note to Evelyn and authorized the latter to
fill up the amount in blank with his loan
account in the sum of P1,OOO. However,
Evelyn inserted P5,OOOin violation of the
instruction. She negotiated the note to
J ulie who had knowledge of the infirmity.
J ulie in turn negotiated said note to Devi
for value and who had no knowledge of the
infirmity.
1. Can Devi enforce the note against
Larry and if she can, for how
much? Explain.
2. Supposing Devi indorses the note
to Baby for value but who has
knowledge of the infirmity, can the
latter enforce the note against
Larry?
A:
1. Yes. Devi is a holder in due course
and the breach of trust committed by
Evelyn cannot be set up by Larry
against Devi because it is a personal
defense. As a holder in due course,
Devi is not subject to such personal
defense.
2. Yes. Baby is not a holder in due
course because she has knowledge
of the breach of trust committed by
Evelyn against Larry which is just a
personal defense. But having taken
the instrument from Devi, a holder in
due course, Baby has all the rights of
a holder in due course. Baby did not
participate in the breach of trust
committed by Evelyn who filled the
blank but filled up the instrument with
P5,000 instead of Pi ,000 as
instructed by Larry. (Sec. 58) (1993
Bar Question)
102
Q: Can a payee be a HIDC?
A: There can be no doubt that a proper
interpretation of NIL as a whole leads to the
conclusion that a payee may be a holder in
due course under the circumstances in which
he meets the requirments of Sec. 52. (De
Ocampo v. Gatchalian, GR. No. L-15126,
Nov. 30, 1961)
Note: There is a contrary view on the matter,
whereinitis contended that under subsection4 of
Sec. 52, the holder in due course must have
acquired the instrument through negotiation and
an instrument is issued and not negotiated to a
payee.
Q: Can adrawee be a HIDC?
A: A drawee does not by paying a bill become
a holder in due course since a holder refers to
one who has taken the instrument as it
passess along in the course of negotiation;
whereas a drawee, upon aceptance and
payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
payment.
Q: What are the rights of a HIDC?
A:
1. Hold the instrument free from
defenses available to parties among
themselves;
2. Hold the instrument free from any
defect of title of prior parties;
3. Receive payment;
4. Enforce payment of the instrument for
the full amount thereof against all
parties liable; and
5. Sue.
Q: Who is a holder not in due course
(NHIC)?
A:
1. One who became a holder of an
instrument without any of the
requisites under Sec. 52;
2. One to whom an instrument payable
on demand is negotiated after an
unreasonable length of time from
issue. (Sec. 53)
UST GOLDEN NOTES 20'lO
Q: What are the rights of a NHIC?
A: The rights similar to an assignee. The other
rights are:
1. He may receive payment and if the
payment is in due course, the
instrument is discharged
2. He is entitled to the instrument but
holds it subject to the same defenses
as if it were non-negotiable
3. He may sue on the instrument in his
own name. (Sec. 5)
Q: What are the rights of a holder through
a HIDC?
A: He has all the rights of 3HIDC from whom
he derives his title in respect of all parties prior
to such holder, provided he is not himself a
party to any fraud or illeqality- affecting the
instrument. (Sec. 58)
Note: A payee or indorsee whose title is
defective cannot better it by sellingthe instrument
to a HIDC and buying it again. Similarly, a HIDC
who negotiates the instrument to a holder other
that one in due course and thenreacquires it will
holdthe instrument as aholder indue course.
Q: How does the "shelter principle"
embodied in the Negotiable Instruments
Law operate to give the rights of a HIDC to
a holder who does not have the status of a
HIDC? Briefly explain.
A: Under the shelter principle, a person who
does not qualify as a holder in due course can,
nonetheless, acquire the rights and privileges
of a holder in due course if he derives his title
to the instrument through a holder in due
course. However, a person who previously
held the instrument cannot improve his
position by later reacquiring it from a holder in
due course if tile former holder was a party to
fraud or illegal activity affecting the instrument
or had notice of a claim or defense against the
instrument. (2008 Bar Question)
Q: When is the title of a person (transferor)
defective?
A:
1. In its acquisition - When he obtained
the instrument,. or any signature thereto,
by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration.
2. In the negotiation - When he negotiates
it in breach of faith, or under such
circumstances as amount to a fraud.
(Sec. 55)
Q: What constitutes notice of defect (on the
transferee) ?
A: The person to whom it is negotiated must
have had actual knowledge of such facts or
knowledge of other facts that his action in
taking the instrument amounted to bad faith.
(Sec. 56)
Q: What is the effect of notice before the
full amount is paid?
A: Transferee will be deemed a holder in due
course only to the extent of the amount
therefore paid by him. (Sec. 54)
Q: The drawer delivered a check to EJ , an
agent, 'for safekeeping only and for the
purpose of evidencing his sincere intention
to buy a car owned by RC, who is EJ 's
principal. EJ did not return the check and
delivered it as payment for his hospital
expenses to MB Clinic. Does the
presumption that every holder is presumed
to be HIDC apply to MB Clinic?
A: No, the rule that a possessor of the
instrument is prima facie a HIDC does not
apply to MB Clinic because there was a defect
in the title of the holder, because the
instrument was not payable to EJ or to bearer,
the drawer had no account with the payee, EJ
did not show or tell the payee why he had the
check in his possession and why he was using
it for the payment of his own account. As
holder's title was defective or suspicious, it
cannot be stated that the payee acquired the
check without knowledge of said defect in
. holder's title, the presumption that it is a HIDC
does not exist. (De Ocampo & Co. v.
Gatchalian, G.R. No. L-15126, Nov. 30, 1961)
Q: NSW received three post-dated and
crossed checks issued on the condition
that the drawer on due date would make
sufficient deposits to cover the checks.
NSW did not wait for the maturity and
indorsed the check to an investment
house, which deposited the same. The
checks bounced. Is the investment house a
holder in due course?
A: No, that the checks had been issued
subject to the condition that the drawer on due
date would make the back up deposit for said
check which condition was not made,
constitutes a good defense against the holder
who is not a HIDC, particularly when the check
was crossed. The crossing of a check serves a
warning to the holder that the check had been
issued for a definite purpose so- that he must
inquire if received the check pursuant to that
UNIVERSITY OF SANTO TOMAS t~7-".103
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NEGOTIABLE INSTRUMENTS LA \XI
I
purpose, otherwise, he is not a holder in due
course. (State Investment House v. lAC, GR.
No. 72764, July 13, 1989)
Q: What is the effect of possession of a
negotiable instrument after presentment
and dishonor? .
A: It does not make the possessor a holder
for value within the meaning of the law. It gives
rise to no liability on .the part of the maker or
drawer or indorsers. (STELCO Marketing
Corp. vs. CA, G.R. No. 96160, June 17, 1992)
Q: Is a corporation to which four crossed
checks were indorsed by the payee
corporation a holder in due course and
hence entitled to recover the amount of the
checks when the same had been
dishonored for the reason of "payment
stopped"?
A: The checks were crossed checks and
specifically indorsed for deposit to payee's
account only. From the beginning, the
corporation was aware of the fact that the
checks were all for deposit only to payee's
account. Clearly then, it could not be
considered a HlDC. However, it does not
follow as a legal proposition that simply
because it was not a HIDC for having taken
the instruments in question, wi notice that the
same was for deposit only, that it was
altogether precluded from recovering on the
instrument. The disadvantage in not being a
HIDC is that the negotiable instrument is
subject to defenses as if it were non-
negotiable. (Atrium Management Corp. v. CA,
G.R. No. 109491, Feb. 28, 2001)
. ,':, . LIABILITIES OF: THE PARTIES
Q: Who are primarily liable?
A:
1. Maker - ina promissory note
2. Acceptor - ina bill of exchange
Q: Who are secondarily liable?
A:
1. Drawer
2. Indorser
104
Q: To whom presentment made?
A:
1. Promissory note - maker
2. Bill of exchange - drawee/acceptor
Q: What are the liablities of those primarily
liable? .
A:
1. Maker of a PN
a. Engages to pay according to the
tenor of the instrument; and
b. Admits the existence of the payee
and his then capacity to indorse.
(Sec. 60)
Consequently, maker is precluded
from setting-up these defenses:
a. That payee is a fictitious person;
b. That payee was insane, a minor,
or a corporation acting ultra vires.
Note: Liability of the maker is primary and
unconditional.
2. Acceptor
a. Engages to pay according to the
tenor of his acceptance;
b. Admits the existence of the
drawer, the genuineness of his
signature and his capacity and
authority to draw the instrument;
and
c. Admits the existence of the payee
and his then capacity to indorse.
(Sec. 62)
Consequently, acceptor is precluded
from setting-up these defenses:
a. That the drawer is non-existent or
fictitious;
b. That the drawer's signature is a
forgery; and
c. That there is no consideration
between him and the drawer
Note: Drawee does not become liable until
he accepts the instrument in which case he
becomesanacceptor.
UST GOLDENNOTES2010
Q: What are words which depict the nature
of the liability of the makers/drawers?
A: An instrument which begins with "I", or
"Either of us" promise to pay, when signed by
two or more persons, makes them solidarily
liable. Also, the phrase "joint and several"
binds the makers jointly and individually tothe
payee so that all may be sued together for its
enforcement, or the creditor may selectone or
more as the object of the suit. (Astra
Electronics Corp. v. Phil. Export and Foreign
Loan Guarantee Corporation, G.R. No. 96073,
Dec. 21, 2003)
Q: On the right bottom margin of a PN
appeared the signature of the corporation's
president and treasurer above their printed
names with the phrase "and in his personal
capacity." The corporation failed to pay its
obligation. Are the officers liable?
A: Yes, persons who write their names onthe
face of promissory notes are makers andliable
as such. The officers are co-makers and as
such, they cannot escape liability arising
therefrom. (Republic Planters Bank v. CA,
G.R.No. 93073, Dec. 21, 199~
Q: X draws a check against his current
account with Bonifacio Bank in favor of B.
Although X does not have sufficient funds,
the bank honors the check when it is
presented for payment. Apparently, X has
conspired with the bank's bookkeeper so
that his ledger card would show that he still
has sufficient funds.
The bank files an action for recovery of the
amount paid to B because the check
presented has no sufficient funds. Decide
the case.
A: The bank cannot recover the amount paid
toBfor the check. When the bank honoredthe
check, it becameanacceptor. As acceptor, the
bank became primarily and directly liable to
the payee/holder B.
The recourse of the bank should be against X
and its bookkeeper who conspired to makeX's
ledger showthat he has sufficientfunds.
Alternative Answer:
The bank can recover from B. This is solutio
indebiti because there is payment bythe bank
to Bwhen such payment is notdue. The check
issued by X to B as payee had no sufficient
funds. (1998 Bar Question)
UNIVERSITY OF SANTO TOMAS
Pacu(taa de i J) er ecf i o Civ i]
~i~ 105
NEGOTIABLE INSTRUMENTS LA \ " X I
Q: What are the liabilities of those secondarily liable?
A:
ABSOLUTE LIABILITY
LIMITED LIABILITY
1.
Qualified Indorser warrants that:
a. Instrument is genuine;
1.
Drawer of a BOE warrants: b. he has good title to it;
a.
the existence of payee and his then c.
capacity to contract of all prior
capacity to indorse;
parties; and
b.
that the instrument will be accepted or d.
no knowledge of any fact which
paid by the party primarily liable; and would impair the validity of the
c.
that if dishonored, he pay the party
instrument. (Sec.65)
entitled to be paid. (Sec. 61)
Note: He is liableto all parties who derive their
titlethrough his indorsement.
2. General indorser
a.
Warrants that:
i.
Instrument is genuine;
ii.
He had good title to it; 2.
Person negotiating by delivery - Same
iii.
All prior parties had capacity to warranties as a qualified indorser. But
contract; unlike a qualified indorser, a person
iv. Instrument, at the time of negotiating by mere delivery is liable only
indorsement, was valid and to his immediate transferee. (par. 2, Sec.
subsisting; 65)
b.
On due presentment, it shall be
accepted or paid, or both according to
Note: Personnegotiating by mere delivery and a
its tenor;
qualified indorser's secondary liability is limited,
c. if the instrument is dishonored and the
namely, totheirwarranties
necessary proceedings on dishonor be
duly taken, he will pay the holder. (Sec.
66)-
3. Irregular indorser
.
a.
Inanorder instrument, liable to the
payee and all subsequent parties
b.
If bearer instrument or payable to order
of maker or drawer, liable to all parties
subsequent to the maker or drawer
c.
If he signs for accomodation of the
payee, liable to all parties subsequent
to payee. (Sec. 64j
Q: Distinguish a drawer from a maker.
A:
,.;
:DRAWER'
"-
.MAKER
I Issues a BOE
Issues a PN
Only secondarily
Primarily liable
!
liable
Can limit his liability
by putting "without
Cannot limit liability
recourse"
Q: What are the conditions in order for
persons secondarily liable in a BOE
(drawer and indorsers) to become liable?
A:
1. The bill is presented for acceptance
(Sec. 143);
2. The bill is dishonored by non-
acceptance or non-payment (Sec.
70); and
3. The necessary proceedings for
dishonor are duly taken (Sec. 152).
10 6
UST GOLDEN NOTES 2010
Q: To whom is the drawer secondarily
liable?
A:
1. Tile holder;
2. Any of tile indorsers intervening
between holder and drawer who is
compelled to pay by tile holder. tile
drawer will be liable to that indorser
so compelled to pay.
Q: Who is deemed an indorser?
A: A person placing his signature upon an
instrument otherwise than as maker or
acceptor, is deemed to be an indorser, unless
he clearly indicates by appropriate words Ilis
intention to be bound in some other capacity.
(Sec. 63)
Note: A person who places his indorsement on
an instrument negotiable by delivery incurs all
liabilities of anindorser. (Sec. 67)
Q: Distinguish an irregular indorser from a
general indorser.
A: An irregular indorser, not otherwise a party
to tile instrument, places his signature thereon
inblank before delivery to add credit thereto. A
general indorser is a regular party to tile
instrument like a maker, drawer or acceptor
and he signs upon delivery of tile instrument.
Wilile an irregular indorser signs for
accommodation, a regular indorser signs for
valuable consideration. (Sec. 64[2]) (2005 Bar
Question)
Q: Who is a qualified indorser?
A: A qualified indorser is a person who
indorses without recourse. (Sec. 65)
Q: Does an indorser warrant the solvency
of prior parties?
A: A general indorser warrants tile solvency of
prior parties, while a qualified indorser does
not.
Q: A issued a promissory note payable to
B or bearer. A delivered the note to B. B
indorsed tile note to C. C placed the note in
his drawer, which was stolen by the janitor
X. X indorsed the note to 0 by forging C's
signature. 0 indorsed the note to E who in
turn delivered the note to F, a holder in due
course, without indorsement. Discuss the
individual liabilities to F of A, Band C.
A: A is liable to F. As the maker of the
promissory note, A is directly or primarily liable
to F, who is a holder in due course. Despite
the presence of the special indorsements on
the note, these do not detract from the fact that
a bearer instrument is always negotiable by
mere delivery, until it is indorsed restrictively
"for deposit only."
B, as a general endorser, is liable to F
secondarily, and warrants that the instrument
is genuine and in all respects what it purports
to be; that he has good title to it; that all prior
parties had capacity to contract; that he has no
knowledge of any fact which would impair the
validity of the instrument or render it valueless;
that at the time of his indorsement, the
instrument is valid and subsisting; and that on
due presentment, it shall be accepted or paid,
or both, according to its tenor, and that if,it be
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent
indorser who may be compelled to pay.
C is not liable to F since the latter cannot trace
his title to the former. The Signature of C inthe
supposed indorsement by himto Dwas forged
by X. C can raise the defense of forgery since
it was his signature that was forged. (2001 Bar
Question)
Q: Can a collecting bank debit the account
of the depositor when the checks indorsed
to it (bank) were forged?
A: Yes, because the depositor of a check as
indorser warrants that it is genuine and in all
respect what it purports to be. Thus, when tile
checks deposited had forged indorsements
and the collecting bank, as a consequence of
such forgery, was made to pay the drawee
bank, the collecting bank can debit the account
of the depositor for his breach of warranty (Jai-
Alai Corporation Of The Philippines v. BPI,
G.R. No. L-29432, Aug. 6, 1975).
Q: Phebean, the drawer issued a check to
J ames. J ames, subsequently indorsed it to
Trude. When Trude is about to encash the
check, the drawee Union Bank refused to
encash it due to insufficiency of funds.
Trude sued J ames for payment of money,
J ames alleged that the suit should be
dismissed because Phebean is an
indispensable party. Does J ames'
argument hold water?
A: No. There is no privity between the drawer
and the holder. The drawer is merely
secondarily liable. As indorser, the buyer
warranted that upon due presentment, the
checks were to be accepted or paid, or both,
according to their tenor, and that in case they
UN I V E R 5 I TV 0 F 5ANT 0 TOM A 5 ~~. 107
PaCll{taa de CDer ecf i o Ci v i] . "
NEGOTIABLE INSTRUMENTS LAW
were dishonored. she would pay the
corresponding amount. After an instrument is
dishonored by non-payment, indorsers cease
to be merely secondarily liable; they become
principal debtors whose liability becomes
identical to that of the original obligor. (Tuazon
v. Heirs of Bartolome Ramos. GR. No.
156262, July 14,2005).
Q: Treasury warrants were indorsed by A
and B. These were presented for
encashmsnt by PNB. Subsequently, these
werel dishonored by the Insular Treasurer.
Because of the dishonor, PNB applied A's
deposit in the PNB for payment of the
warrant. Is the application of the deposit of
A properly enforced?
A: No. The general indorser of a negotiable
instrument engages that if it be dishonored
and the necessary proceedings of dishonor be
duly taken. he will pay the amount thereof to
the holder. Inthis connection. it has been held
that notice of dishonor is necessary in order to
charge an indorser and that the right of action
against him does not accrue until the notice is
given (Gullas v. PNB, GR. No. L-43191. Nov.
13. 1935)
Q: What is the order of liability among the
indorsers?
A:
1 . Among themselves - Liable prima
facie in the order in which they
indorse (Sec. 68)
2. To the holder - Inany order
Note: Every indorser is liable to all indorsers
subsequent to him. but not those indorsers prior
tohim.
Q: Cannel a indorsed a check to Linas.
Paolo stole the check from Linas, forged
the latter's signature and indorsed it to
J ohan. Denver Bank encashed the check
upon presentment thereof by J ohan. Who
is the party liable?
A: The bank is the party liable. It is the primary
duty of the bank to know that the check was
duly indorsed by the original payee and. where
it pays the amount of the checks to a third
person who has forged the signature of the
payee. the loss falls on such bank who cashed
the checks. A bank engaged in business is
invested with public interest and itis its duty to
pretect its clients and all persons who transact
businesswith it. (Traders Royal Bank v. Radio
Philippine Network, G.R. No. 138510. Oct. 10.
2002)
108
Q: What is the liability of an agent or broker
who neqotlatas . an instrument without
indorsement?
A: He incurs all the liabilities prescribed to a
general indorser unless he discloses the name
of his principal and the fact that he is acting
only as anagent. (Sec. 69)
Note: Parol evidence is not admissible to relieve
an agent or broker whose endorsement brings
himwithinthe above liability.
PRESENTMENT F OR PAYMENT .
Q: What is presentment for payment (PP)?
A: The presentation of an instrument to the
person primarily liable for the purpose of
demanding and receiving payment.
Q: How should presentment be made?
A:
GR: Instrument must be exhibited to the
person from whom payment is demanded;
when' paid. it must be delivered to person
paying it. (Sec. 74) .
XPN: When exhibition is excused:
1. Debtor does not demand to see the
instrument and refuses payment on
some other grounds; or
2. Instrument is lost or destroyed.
Q: What is the liability of a bank paying a
certificate of deposit payable to bearer
without requiring its surrender?
A: The princlple that payment. in order to
discharge a debt. must be made to someone
authorized to receive it. is applicable to the
payment of certificates of deposit. Thus. a
bank will be protected in making payment to
the holder of a certificate indorsed by the
payee. unless it has notice of the invalidity of
the indorsement or the holder's want of title.
Tile bank remains liable to the holder if it paid
the certificate of deposit payable to bearer
without requiring its surrender (Far East Bani,
& Trust Company v. Querimit. G.R. No.
148582. Jan. 16,2002).
Q: AS issued a promissory note for
P1,000.00 payable to CD or his order. CD
indorsed the note in blank and delivered
the same to EF. GH stole the note from EF
and presented it to AB for payment. When
asked by AS, GH said CD gave him the
note in payment for two cavans of rice. AS
therefore paid GH P1,OOO.OOon the same
date. EF discovered that the note of AB
UST GOLDEN NOTES 2010
was not in his possession and he went to
AB. It was then that EF found out that AB
had already made payment on the note.
Can EF still claim payment from AB? Why?
A: No. EF cannot claim payment from AB. EF
is not a holder of the promissory note. To
make presentment for payment, it is necessary
to exhibit the instrument, which EF cannot do
because he is not in possession thereof. (2002
Bar Question)
Q: When is PP necessary?
A: PP is only necessary to charge persons
secondarily liable (Sec. 70). But PP is not
necessary inthe following instances:
1. As to drawer, where he has no right
to expect or require that the drawee
or acceptor will pay the instrument .
(Sec. 79)
2. As to indor.ser where the instrument
was made or accepted for his
accommodation and he has no
reason to expect that the instrument
will be paid if presented (Sec. 80)
3. When dispensed with under Sec. 82,
such as:
a. where, after the exercise of
reasonable diligence,
presentment cannot be made;
b. where the drawee is a fictitious
person;
c. by waiver of presentment,
express or implied;
d. when the instrument has been
dishonored by non-acceptance
Q: What is the rule if the instrument is, by
its terms, payable at a special place (at a
bank or at an office or at a residence but
not in an unspecified place like Manila
City)?
A: If he is able and willing to pay it there at
maturity, such ability and willingness are
equivalent to a tender of payment upon his
part. (Sec. 70)
Q: PN is the holder of a negotiable
promissory note. The note was originally
issued by.RP to XL as payee. XL indorsed
the note to PN for goods bought by XL. The
note mentions the place of payment on the
specified maturity date as the office of the
corporate secretary of PX Bank during
banking hours. On maturity date, RP was at
the aforesaid office ready to pay the note
but PN did not show up. What PN later did
was to sue XL for the face value of the
note, plus interest and costs. Will the suit
prosper? Explain.
A: Yes. The suit will prosper as far as the face
value of the note is concerned, but not with
respect to the interest due subsequent to the
maturity of the note and the costs of collection.
RP was ready and willing to pay the note at
the specified place of payment onthe specified
maturity date, but PN did not show up. PN lost
his right to recover the interest due
subsequent to the maturity of the note and the
costs of collection. (2000 Bar Question)
Q: What are the requisites for a sufficient
PP?
A:
1. Made by the holder, or his agent;
2. At a reasonable hour on a business
day;
3. At a proper place;
4. To the person primarily liable, or if he
is absent or inaccessible, to any
person found at the place where the
presentment is made (Sec. 72)
Note: Where the person/s primarily liable is/are:
1. Dead - payment must be made to his
personal representative (Sec. 76)
2. Liable as partners and no place of
payment specified - payment may be
made to any of themthough there has
beenadissolutionof thefirm(Sec. 77)
3. Several persons, not partners, and no
place of payment is specified- payment
mustbe madeto all of them(Sec. 78)
Q: Is the bank liable to the payee for
depositing and encashing the crossed
checks to an unauthorized person?
A: The effects of crossing a check relate to the
mode of its presentment for payment. Under
Sec. 72 of the NIL, presentment for payment,
to be sufficient, must be made by the holder or
by some person authorized to receive on his
behalf. Who the holder or authorized person
depends on the instruction stated on the face
of the check. The checks here had been
crossed and issued "for payee's account only"
This only signifies that the drawers had
intended the same for deposit only by the
person indicated (Associated Bank v. CA, GR.
No. 89802, May 7, 1992).
UNIVERSITY OF SANTO TOMAS
Pacu[ tati ti e < Der ecf i o Cioi]
~i l09
NEGOTIABLE INSTRUMENTS LA \X/
Q: When must presentment for payment be
made?
I~"~';~'I'II=!~I 111'11;11 ;i.] ;~:.1;~::h" j ~ ~. 11111 ~ ~III
GR: On the day it falls due.
(Sec. 85)
I XPN: If the due date falls on
I
a Saturday, presentment
Payable at a
must be made on the next
fixed or
Monday.
determinable
future time
Note: If presentment for
payment is made before
maturity; it will not result to
a discharge of the
instrument (Sec. 50).
Promissory
Within a reasonable time
note payable
after its issue.
on demand
Within a reasonable time
after the last negotiation
thereof (Sec. 71).
Bill of
Note: " L ast negotiation"
exchange
means the last transfer for
payable on
value. Subsequent transfers
demand
between banks for
purposes of collection are
not negotiations within Sec.
71.
Note: Reasonable time is meant not more than 6
months from the date of issue. Beyond said
period, it is unreasonable time and the check
becomesstale.
Q: What is the order of preference with
regard to the place of presentment?
A:
1. Specified place inthe instrument;
2. Address of the person to make the
payment if given inthe instrument;
3. Usual place of business or residence
of the person to make the payment;
4. Wherever he can be found; or
5. At his Last known place of business
or residence (Sec. 73).
Q: When is the delay in making
presentment excused?
A:
1. When caused by circumstances
beyond the control of the holder; and
2. Not imputable to his default,
misconduct, or negligence (Sec. 81).
Note: Only the delay in presentment is
excused and not the presentment itself.
110 i Iteam:G$ lI.OO
i
Hence, as soon as the cause of delay ceases
to operate, presentment must be made with
reasonable diligence (Sec. 81).
Q: How must presentment be made where
the instrument is payable at a bank?
A: Must be made during banking hours,
unless the person to make payment has no
funds there to meet it at any time during the
day, in which case presentment at any hour
before the bank is closed on that day is
sufficient. (Sec. 75)
Q: What is the effect When presentment is
not made?
A: Drawer and the indorsers are discharged
from their secondary liability unless such
presentment is excused.
i . .. . NOTICE OF DISHONOR I
Q: When is a PN considered dishonored?
A:
1. If not accepted;
2. Not paid when presented; or
3. Where presentment is excused,
instrument is overdue and unpaid.
(Sec. 83)
Q: What is the liability of person
secondarily liable when instrument
dishonored?
A: After the necessary proceedings for
dishonor had been duly taken, an immediate
right of recourse to all parties secondarily
liable thereon accrues to the holder. (Sec. 84)
Q: What is notice of dishonor?
A: Given by the holder to the parties
secondarily liable, drawer and each indorser,
that the instrument was dishonored by non-
payment or . non-acceptance by the
drawee/maker.
Note: Persons primarily liable need not be given
notice of dishonor because they are the ones
whodishonored the instrument.
UST GOLDEN NOTES 2010
Q: What are the purposes for requiring
notice of dishonor?
A:
1. To inform parties secondarily liable
that the maker or acceptor has failed
to meet his engagement.
2. To advise them that they are required
to make payment.
Q: What is the effect of failure to give
notice of dishonor?
A:
GR: Any person towhom such notice is not
given is discharged, but he will still be liable
for breach of warranties pertaining to the
instrument.
XPN:
1. Waiver (Sec. 109)
2. Notice is dispensed with (Sec. 112)
3. Not necessary to drawer (Sec. 114)
4. Not necessary to indorser (Sec. 115)
Q: To whom must notice be given?
A:
1. The drawer; or
2. His agent (Sec. 97);
3. Where party is dead - to a personal
representative or sent to the last
residence or last place of business of
the deceased (Sec. 98);
4. When the parties to be notified are
partners - notice to anyone partner
though there has been a dissolution
(Sec. 99);
5. Notice tojoint parties who are not
partners must be given to each of
them (Sec. 100);
6. Where a party has been adjudged a
bankrupt - to the party himself or to
his trustee or assignee (Sec. 101).
Q: What is the form and contents of a
notice of dishonor?
A:
1. Oral; or
2. Inwriting
3. It may be given by personal delivery,
or by mail (Sec. 96);
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been
presented for payment or for
acceptance and that it has been
dishonored (If protest is
necessary, notice must also
contain a statement that it has
been protested).
c. Statement that the party giving
the notice intends to look for the
party addressed for payment.
Note: A written notice need not be signed, and
an insufficient notice may be supplemented or
validated by verbal communication. A
misdescription of the instrument does not vitiate
the notice unless the party towhomthe notice is
givenis infact misledthereby. (Sec. 95)
Q: Who gives the notice?
A:
1. Holder;
2. Another in behalf of the holder;
3. Any party to the instrument who may
be compelled to pay and who, upon
taking it up, would have a right to
reimbursement from the party to
whom notice is given. (Sec. 90)
Q: Who benefits from the notice given by or
on behalf the holder?
A:
1. All holders subsequent to the holder
who has given notice; and
2. All parties prior to the holder but
subsequent to the party to whom
notice has been given and against
whom they may have a right of
recourse (Sec. 92).
Q: Who benefits from the notice given by
the party entitled to give notice?
A:
1. The holder; and
2. All parties subsequent to the party to
whom notice is given (Sec. 93).
Q: The instrument was dishonored in the
hands of the agent. To whom and when
may he give notice?
A:
1. To the parties secondarily liable -
Within the time fixed by Secs. 102-
104, and 107, otherwise, they are
discharged;
2. To his principal - The principal must
give notice to parties secondarily
liable as if he were the holder. (Sec.
94)
UNIVERSITY OF SANTO TOMAS
Pacu{tad de (])erecfio Civif
~.~ 111
NEGOTIABLE INSTRUMENTS LAW
Q: When should the notice be given?
A:
1. GR:' .As soon as instrument was
dishonored (Sec. 102) - Party is
allowed one entire day for the
purpose of giving notice.
XPN: Delay is excused (Sec. 113)
Note: An instrument cannot be
dishonored by non-payment until after
the maturity
2. Parties reside inthe same place
a. Place of business - Before close
of business hours on the. day
following
b. Residence - Before the usual
hours of rest onthe day following
c. By mail - Deposited in the post
office in time to reach him in the
usual course on the day following
(Sec. 103)
3. Parties reside in different places
a. By mail - Deposited in the post
office in time to go by mail
(actual departure in the course of
mail from the post office in which
the notice was deposited) the
day following the day of
dishonor.
b. If no mail - At a convenient hour
(of the sender) on that day, by
the next mail thereafter
c. Other than by post office (e.g.
personal messenger) - Within
the time that notice would have
been received in due course of
mail, if it has been deposited in
the post office within the time
specified in(a) (Sec. 104)
4,. Time of notice to antecedent parties -
'
I Same time for giving notice that the
holder has after the dishonor (Sec.
107)
Note: Actual receipt of the party within the time
specified by law is sufficient though not sent in
the placesspecified above. (Sec. 108)
112
Q: What is the effect of lack of notice of
dishonor on the instrument which is
payable in installments?
A:
1. No acceleration clause - Failure to
give notice of dishonor on a previous
installment does not discharge
drawers and indorsers as to
succeeding installments.
2. With acceleration clause - It depends
upon whether the clause is automatic
or optional.
a. Automatic - failure to give notice
of dishonor as to a previous
installment will discharge the
persons secondarily liable as to
the succeeding installments;
b. Optional - if not exercised, the
rule would be the same as if
there is no acceleration clause. If
exercised, the rule would be the
same as if the installment
contains an automatic
acceleration clause. (Town
Savings Bank v. CA, G.R. No.
106011, June 17,1993)
Q: When is notice of dishonor not
necessary?
A:
1. Waiver of notice (Sec. 109);
2. Waiver of protest (Sec. 111);
3. When after due diligence, notice
cannot be given (Sec. 112);
4. Drawer in cases under Sec. 114;
5. Indorser in cases under Sec. 115;
and
6. Where due notice of dishonor by non-
acceptance has been given (notice of
dishonor by non-payment not
necessary) (Sec. 116).
Q: When may waiver of notice be given?
A:
1: Before the time of giving notice has
arrived; or
2. After the omission to give due notice.
(Sec. 109)
Q: What are the ways to give a waiver of
notice?
A: Itcan either be:
1. Express; or
2. Implied (e.g. Payment by an indorser
after he learns of the default of the
maker admission of liability after
dishonor). (Sec. 109)
UST GOLDEN NOTES 2010
Q: Who are affected by the waiver of
notice?
A:
1. All parties (if embodied on the face of
the instrument); or
2. Particular indorser (if written above
the signature of such indorser) (Sec.
110).
Q: With regard to the drawer, when can a
notice of dishonor be dispensed with?
A:
1. When drawer and drawee is the
same person;
2. Drawee is fictitious or does not have
the capacity to contract;
3. Drawer is person to whom the
instrument is presented for payment
(he is the one who dishonored the
instrument);
4. Drawer has no right to expect or
require that the drawee or acceptor
will honor the instrument.
5. Drawer has countermanded the
payment (e.g. stop payment order)
(Sec. 114)
Q: HA issued to AV, as security for pieces
of jewelry to be sold on commission basis,
2 post-dated checks. Thereafter, the AV
negotiated the check to TQ. HA failed to
sell the jewelry, so she returned them to AV
before the maturity of the checks. As the
checks can no longer be returned, HA
withdrew all her funds from the drawee
bank. After dishonour, HA contends that
the holder failed to give her a notice of
dishonor. Is notice of dishonor necessary
in this case?
A: After withdrawing her funds, HA could not
have expected her checks to be honored. In .
other words, she was responsible for the
dishonor of her checks, hence, there was no
need to serve her notice of dishonor. (State
Investment House, Inc. v. CA, GR. No.
101163, Jan. 11, 1993)
Q: With regard to the indorser, when is it
not necessary to give a notice of dishonor?
A:
1. Drawee is fictitious or has no
capacity to contract, and indorser was
aware of these facts at the time he
indorsed the instrument;
2. Indorser is person to whom the
instrument is presented for payment;
or
3. Instrument was made or accepted for
his accommodation (Sec. 115)
Q: What is the effect of omission of a
previous holder to give notice of dishonor
by non-acceptance?
A: It does not prejudice the rights of a holder
in due course subsequent to the omission to
present the instrument to the drawee for
acceptance and notify the drawer and
indorsers if acceptance is refused. (Sec. 117)
. DISCHARGE' ,," , <:\~,
Q: What is discharge?
A: It is the release of all parties, whether
primary or secondary, from the obligations
arising thereunder. It renders tile instrument
without force and effect, and consequently, it
can no longer be negotiated.
Q: What are the methods for discharge of
instrument?
A:
1. Payment by principal debtor:
a. By or on behalf of principal
debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice
that the holder's title is defective
2. Payment byaccommodated party
3. Intentional cancellation of instrument
by the holder (by expressly stating it
in the instrument or when the
instrument is torn up, burned or
destroyed)
4. Any act which discharges a simple
contract for the payment of money
under Art. 1231 of the NCC
specifically remission, novation, and
merger.
Note: Loss of the negotiable
instrument will not extinguish liability;
compensation is not available so long
as an obligation is evidenced by a
negotiable instrument. (Commercial
Law Review, Villanueva, 200ged)
I
5. Reacquisition by principal debtor in
his own right. Reacquisition must be:
a. By the principal debtor
b. In his own right
c. At or after date of maturity
(instrument is discharged; if
made before, it may be
renegotiated) (Sec. 119).
UNIVERSITY OF SANTO TOMAS
Pacu[taa de (])erecfio Civil
~.~ 113
NEGOTIABLE INSTRUMENTS LA \'II
Q: What are the methods of discharge of
secondary parties?
Q: What are the effects of renunciation?
A:
1. Any act which discharges the
instrument;
2. Intentional cancellation of his
signature by the holder;
3. Discharge of prior party which may be
made when signature is stricken out
4. Valid tender of payment by a prior
party;
5. Release of the principal debtor,
unless holder expressly reserves his
right of recourse against the said
subsequent parties
6. Extension of time of payment, unless:
a. Extension is consented to by
such party
b. Holder expressly reserves his
right of recourse against such
party (Sec. 120).
Q: What are the effects of payment by
persons secondarily liable?
A:
1. Instrument is not discharged;
2. It only cancels his own liability and
that of the parties subsequent to him;
31 GR: Instrument may be renegotiated;
XPN:
a. Where it is payable to the order
of a third person, and has been
paid by the drawer; and
b. Where it is paid by the
accommodated party
Note: (a) and (b) has the same
effect as payment by the party
primarily liable.
4. Person paying is remitted to his
former rights (as regards prior
parties) and he may strike out his
own and all subsequent
indorsements. (Sec. 121)
Q: What is renunciation?
A: The act of surrendering a claim or right
with or without recompense (a personal
defense).
Q: How is renunciation by holder made?
A:
1. Must be written;
2. If oral, the instrument must be
surrendered to the person primarily
liable. (Sec. 122)
114
A:
1. Made in favor of principal debtor
made at or after the maturity (made
absolutely and unconditionally) of the
instrument discharges the
instrument (Sec. 122);
2. Made in favor of a secondary party
may be made by the holder before, at
or after maturity - discharges only the
secondary parties and all subsequent
to him (Sec. 122);
3. Renunciation does not affect the
rights of a holder in due course
without notice. (Sec. 120)
Q: What is the rule regarding cancellation?
A: It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an
instrument or any signature appears to have
been cancelled, burden of proof lies on the
party who alleges that the cancellation was
made unintentionally, or under a mistake or
without authority. (Sec. 123).
Q: What is a material alteration?
A: Any change inthe instrument which affects
or changes the liability of the parties in any
way.
Q: What constitutes a material alteration?
A: Any alteration which changes the:
1. Date;
2. Sum payable, either principal or
interest;
3. Time or place of payment;
4. Number or relations of the parties;
5. Medium or currency in which
payment is to be made; or
5. Adds a place of payment when no
place of payment is specified, or any
other change or addition which alters
the effect of the instrument in any
respect. (Sec. 125)
Note: The change in the date of indorsement is
not material where the date is not necessary tofix
the maturityof the instrument.
UST GOLDEN NOTES 2010
Q: What is the effect of material alteration
which is not apparent?
A:
1. Avoids the instrument except against:
a. A party who has made the
alteration;
b. A party who authorized or
assented to the alteration; or
c. The indorsers who indorsed
subsequent to the alteration
(because of their warranties)
2. If negotiated to a HIDC, he may
enforce the payment thereof
according to its original tenor against
the party prior to the alteration. He
may also enforce payment thereof
against the party responsible for the
alteration for the altered amount.
3. If negotiated to a NHIDC, he cannot
enforce payment against the party
prior to the alteration. He may
however enforce payment according
to the altered tenor from the person
who caused the alteration and from
the indorsers. (Sec. 124)
Q: A check for P50,OOO.OO was drawn
against drawee bank and made payable to
XYZ Marketing or order. The check was
deposited with payee's account at ABC
Bank which then sent the check for
clearing to drawee bank.
Drawee bank refused to honor the check on
ground that the serial number thereof had
been altered.
XYZ Marketing sued drawee bank.
1. Is it proper for the drawee bank to
dishonor the check for the reason.
that it had been altered? Explain.
2. In instant suit, drawee bank
contended that XYZ Marketing as
payee could not sue the drawee
bank as there was no privity
between them. Drawee theorized
that there was no basis to make it
liable for the check. Is this
contention correct? Explain.
A:
1. No. An alteration is said to be
material if it alters the effect of the
instrument. It means an unauthorized
change in an instrument that purports
to modify in any respect the obligation
of a party or an unauthorized addition
of words or numbers or other change
to an incomplete instrument relating
to the obligation of a party. The
alteration of the serial number of a
check did not change the relations
between the parties nor the effect of
the instrument. Hence, the alteration
on the serial number of a check is not
a material alteration. (International
Corporate Bank VS. CA, GR No.
141968, Feb. 12, 2001)
2. Yes. As a general rule, the drawee is
not liable under the check because
there is no privity of contract between
XYZ Marketing, as payee, and ABC
Bank as the drawee bank. However,
if the action taken by the bank is an
abuse of right which caused damage
not only to the issuer of the check but
also to the payee, the payee has a
cause of action under quasi-delict.
(1999 Bar Question)
. BILL OF EXCHANGE . , .
Q: What is abill of exchange (BOE)?
A: It is an unconditional order in writing
addressed by one person to another, Signed
by the person giving it, requiring the person to
whom it is adressed to pay on demand or at a
fixed or determinable future time a sum certain
inmoney to order or bearer. (Sec. 126)
Note: A bill of itself does not operate as an
assignment of the funds in the hands of the
drawee available for the paymentthereof, andthe
drawee is not liable onthe bill unless and until he
accepts thesame. (Sec. 127)
Q: What are tile types of BOE:
A:
1 . Draft - It is drawn by a bank, issued
at the solicitation of a stranger who
purchases and pays for it. It is an
order for payment of money.
2. Trade acceptance - It is drawn bythe
seller on the buyer of goods sold and
accepted by such purchaser by
signing it as a drawee.
3. Banker's acceptance - The acceptor
is a bank engaged in the business of
granting banker's acceptance credit.
It is lending its credit to the buyer.
4. Treasury warrants - It bears on its
face an order for payment out of a
particular fund and is not
unconditional. It is not a negotiable
instrument.
5. Money order - Drawn by one post
office upon another post office for an
UNIVERSITY OF SANTO TOMAS ''''''''-'.115
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NEGOTIABLE INSTRUMENTS LAW
amount of money deposited at the
first office by the person purchasing
the money order, and payable at the
second office to the payee. The
restrictions and limitations imposed
on money orders makes it not
negotiable. .
6. Certificate of deposit - A written
acknowledgment by a bank of deposit
payable to the depositor, bearer or
order.
7. Bonds - A promise, under seal, to
pay money.
8. Bank notes - PN of issuing bank
payable to bearer on demand and
intended to circulate as money.
9. Due bills - An instrument where one
person acknowledges his
indebtedness to another. (Villanueva,
Commercial Law Reviewer, 2009 ed.)
Q: When maya bill be treated as a PN at
the option of the holder?
A:
1. If the drawer and the drawee are the
same
2. If the drawee is afictitious person
3. If the drawee is incapacitated to
contract (Sec. 130)
Q: What is the fictitious-payee rule?
A: When the payee is fictitious or not intended
to be the true recipient of the proceeds of the
BOE, the BOE is considered as a bearer
instrument and as such it does not require
indorsement to be validly negotiated. It is
negotiable by mere delivery. On the other
hand, if a BOE is payable to a specified payee,
it is an order instrument which requires
indorsement from the payee or holder before it
may be validly negotiated but it may
nevertheless be considered as a bearer
instrument if it is payable to the order of a
fictitious or non- existing person, and such fact
is known to. the person making it so payable.
. Thus, checks issued to "Prinsipe Abante" or
"Si Malakas at si Maganda," who are well
known characters in Philippine mythology, are
bearer' instruments because the named
payees are fictitious and non-existent. (PNB v.
Rodriguez, GR. No. 170325, Sept. 26, 2008)
116
Q: May a BOE addressed to two or more
drawees?
A: A bill may be addressed to two or more
drawees jointly, whether they are partners or
not, but not to two or more drawees in the
alternative or in succession. (Sec. 128)
A CCEPTA NCE
Q: What is acceptance of a bill?
A: A Signification by the drawee of his assent
tothe order of the drawer (Sec. 132)
Q: What is the effect of acceptance?
A: Upon acceptance, the bill, in effect
becomes a note. The drawee who thereby
becomes an acceptor assumes the liability of
the maker (which is primary liability) and the
drawer, that of the first indorser.
Q: What are the requisites for acceptance?
A:
1. In writing, except . constructive
acceptance and to a foreign bill
payable in another state (unless the
other state requires for written
acceptance);
2. Signed by the drawee (without it, he
is not liable);
3. Must express a promise to pay
money (not goods); and
4. Delivered to the holder (before
delivery or notification, acceptor may
revoke or cancel his acceptance).
Q: What is the time allowed for the drawee
to make the acceptance?
A: The drawer has 24 hours after
presentment to decide whether or not he will
accept the bill. The acceptance, if given, dates
as of the day of presentation. (Sec. 136)
Note: Drawee bank is not entitled to 24 hours to
decide whether or not to pay a check since a
checkis presentedfor payment, not acceptance.
Q: What are the kinds of acceptance?
A:
1. General Assents without
qualification to the order of the drawer
(Sec. 139).
. Note: A holder may refuse to accept a
qualified acceptance and if he does not
obtain an unqualified acceptance, he
UST GOLDEN NOTES 2010
may treat the bill as dishonored by non-
acceptance.
a. Qualified - An acceptancewhich in
express terms varies the effect of
the bill as drawn(Sec. 139).
b. Conditional - makes payment by
the acceptor dependent on the
fulfillment of a condition therein
stated.
c. Partial - anacceptance to pay part
only of the amount for which the
bill is drawn.
d. Local - an acceptance to pay only
at aparticular place.
e. Qualified astotime
f. The acceptance of some one or
more of the drawees but not of all.
(Sec. 141)
2. Constructive/implied
a. Drawee to whom the bill is
delivered for acceptance
destroys it; or
b. Drawee refuses, within 24 hours
after such delivery, or within such
time as is given him, to return the
bill accepted or non-accepted
3. Extrinsic - the acceptance is written.
on a paper other than the bill itself. To
be binding upon the acceptor:
a. Acceptance must be shown to
the person to whom the
instrument is negotiated; and
b. Such person must take the bill
for value on the faith of such
acceptance (Sec. 134).
4. Virtual- conditions:
a. Unconditional promise in writing
to accept a bill
b. Promise made before it is drawn
c. Any person who, upon faith
thereof, received the bill for.
value. (Sec. 135)
Q: What is the effect of accepting an
instrument with a qualified acceptance?
A:
GR: When the holder takes a qualified
acceptance the drawer and indorsers are
discharged from liability on the bill.
XPN:
1. When they have expressly or
impliedly authorized the holder to
take a qualified acceptance, or
2. Subsequently assent thereto
3. Implied assent (when they did not
express their dissent to the holder
within a reasonable time when they
received a notice of qualified
acceptance). (Sec. 142)
Q: When mayan incomplete bill be
accepted?
A: Acceptance may be made before the bill
has been signed by the drawer or while
otherwise incomplete, or after it is overdue, or
even after it has been dishonored by non-
acceptance or non-payment. (Sec. 138)
Q: In satisfaction of a judgment debt, the
debtor tendered payment partly in cash and
the rest in cashier's check. The cashier's
check was certified by the drawee bank.
What is the effect of the certification by the
drawee bank?
A: Certification implies that the check is drawn
upon sufficient funds in the hand of the
drawee, that they have been set apart for its
satisfaction and that they shall be so applied
whenever the check is presented for payment.
Where a check is certified by the bank on
which it is drawn, the certification is equivalent
to acceptance (New Pacific Timber v. Seneris,
GR No. L-41764, Oec. 19, 1980)
Q: What is presentment for acceptance
(PA)?
A: Production or exhibition of a bill of
exchange to the drawee for his acceptance or
payment (also includes presentment for
payment).
Q: What are the rules as to PA?
A:
GR: PA is not necessary to render any
party to the bill liable. (par.2, Sec. 143)
XPN:
1. Payable after sight, or when it is
necessary in order to fix the maturity
of the instrument;
2. Expressly stipulated that it shall be
presented for acceptance; or
3. Where the bill is drawn payable
elsewhere than at the residence or
place of business of the drawee (Sec.
143).
Note: The holder must either present it for
acceptance or negotiate it within a reasonable
time, otherwise, the drawer and all indorsers are
discharged. (Sec. 144)
UN I VE R SIT Y 0 F 5ANT 0 TOM AS
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NEGOTIABLE INSTRUMENTS LA \\1
Q: How must PA be made?
A:
1. By or on behalf of the holder;
2. At a reasonable hour on a business
day;
3. Before the bill is overdue; and
4. To the drawee or some person
authorized to accept or refuse to
accept on his behalf. When:
a. Addressed to 2 or more drawees
not partners - To all (except
when one was given authority)
b. Drawee is dead - To his
personal representative
Note: Where drawee is dead, PA
is not required.
c. Drawee is bankrupt or insolvent
or has made an assignment for
the benefit of creditors - To him
or to his trustee or assignee.
(Sec. 145)
Q: When may delay in making PA be
excused?
A:
1. Bill drawn payable elsewhere than at
the place of business or the
residence of the drawee; and
2. Holder has no time, with the exercise
of reasonable diligence, to present
the bill for acceptance before
presenting it for payment on the day
. that it falls due. (Sec. 147)
Q: When is presentment excused?
A:
1. Drawee is dead, or has absconded,
or is a fictitious person not having
capacity to contract by bill;
2. After exercise of reasonable
diligence, presentment cannot be
made; or
3. Although presentment has been
irregular, acceptance has been
refused on some other ground. (Sec.
148)
Q: When is a bill dishonored by non-
acceptance?
A:
1. When it is duly presented for
acceptance and such an acceptance
is refused or cannot be obtained; or
2. When presentment for acceptance is
excused, and the bill is not accepted.
(Sec. 149)
118
Q: What is the duty of the holder where bill
is not accepted?
A: The person presenting it must treat the bill
as dishonored by non-acceptance or he loses
the right of recourse against the drawer and
indorsers. (Sec. 150)
Q: What are the rules when a bill is
dishonored by non-acceptance?
A:
1. Right of recourse against all
secondary party accrues to the
holder;
2. No presentment for payment is
necessary since dishonor of the
instrument by non-payment is to be
expected;
3. If the instr.ument is accepted after it
has been dishonored by non-
acceptance presentment for payment
is necessary upon maturity; and
4. In case of non-payment, holder must
give the corresponding notice of
dishonor; otherwise, secondary
parties are discharged.
PROTEST
Q: What is protest?
A: Formal instrument executed by a notary
public or other competent persons certifying
that the facts necessary to the dishonor of the
instrument (non-acceptance/non-payment)
have taken place.
Q: When is protest required?
A:
1. Mandatory for foreign bill of exchange
which has been dishonored by non-
acceptance or non-payment for
evidentiary purposes (if not, drawer
and indorsers are discharged)
2. For inland bills of exchange, checks,
promissory notes only if required
(Sec. 118), except
a. Where bill has been accepted for
honor, it must be protested for
payment to the acceptor for
honor;
b. Where bill contains a referee in
case of need, it must be
protested for non-payment
before it is presented for
payment to referee in case of
need. (Sec. 167)
UST GOLDEN NOTES 2010
Q: What are the requisites for a protest?
A:
1. Must be made by:
a. Notary public; or
b. Any respectable resident of the
place where the bill is
dishonored, in the presence of 2
or more credible witnesses.
(Sec. 154)
2. Must be annexed to the bill or must
contain a copy thereof;
3. Must be under the hand and seal of
the notary making it; and
4. Must specify:
a. Time and place of presentment;
b. The fact that presentment was
made and the manner thereof;
c. The cause or reason for
protesting the bill; and
d. Demand made and the answer
given (if any) or the fact that the
drawee or acceptor could not be
found. (Sec. 153)
Q: When should the protest be made?
A: On the day of the dishonor, unless
excused. But the certificate may be
subsequently made. (Sec. 155)
Q: Where should the protest be made?
A:
GR: At the place where it is dishonored.
XPN: Where a bill drawn payable at the
place of business or residence of some
person other than the drawee has been
dishonored by non-acceptance, it must be
protested for non-payment at the place
where it is expressed to be payable, and no
further presentment for payment to, or
demand on, the drawee is necessary. (Sec.
156)
Q: Can protest be dispensed with?
A: Yes, by any circumstances which would
dispense with notice of dishonor. (See Sees.
109-118)
Q: When is the delay in noting or
protesting excused?
A:
1. When caused by circumstances
beyond the control of the holder; and
2. Not imputable to his default,
misconduct, or negligence.
Note: When the cause of delay ceases to
operate, the bill must be noted or protested with
reasonable diligence (Sec. 159).
Q: What are the distinctions between
protest and notice of dishonor?
A:
~PROTEST --:;;-~tICE'OF' ~.'.'
DISHONOR
Required inany
negotiable
instrument, other
than aforeiqn bill
Required only in
case of dishonor of
aforeign bill
Made within the
times prescribed in
Sees. 102-104, 107
Always written Oral or written
Includes
presentment, notice
of dishonor, and all
steps
accompanying
dishonor
Only to such notice
By notary public
By a party or his
aqent
Made at the place
of dishonor
Place of dishonor
not essential
Made on the day of
dishonor
Q: What is a protest for better security?
A:
1. One made by the holder of a bill;
2. After it has been accepted;
3. But before it matures;
4. Made against the drawer and
indorsers;
5. The acceptor has:
a. been adjudged a bankrupt or an
insolvent; or
b. made an assignment for the
benefit of the creditors (Sec. 158)
Note: The purpose of it is to notify the drawer or
indorsers that the acceptor is bankrupt or
insolvent, therefore he cannot pay, and that they
should make the arrangement to pay. It is purely
optional and its omission will not affect the
holder's remedy against the drawer and
indorsers.
UNIVERSITY OF SANTO TOMAS~i . ~ 119
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NEGOTIABLE INSTRUMENTS LAW
Q: Can guarantors .and sureties, be held
jointly and severally liable, in the absence
of protest on the bill?
A: There are well-defined distinctions between
the contract of an indorser and that of a
guarantor/surety of a commercial paper. The
contract of indorsement is primarily that of
transfer, while the contract of guaranty is that
of personal security. The liability of a
guarantor/surety is broader than that of an
indorser. Unless the bill is promptly presented
for payment at maturity and due notice of
dishonor given to the. indorser within a
reasonable time, he will be discharged from
liability thereon. On the other hand, except
where required by the provisions of the
contract of suretyship, a demand or notice of
default is not required to fix the surety's
liability. He cannot complain that the creditor
has not notified him inthe absence of a special
agreement to that effect in the contract of
suretyship. Therefore, no protest on the export
bill is necessary to charge guarantors/sureties
jointly and severally liable since they held
themselves liable upon demand in case the
instrument is dishonored. (Allied Banking
Corp. v. CA, G.R. No. 125851, July 11,2006)
Q: When may protest be made on a copy or
written particulars thereof?
A: When a bill is lost or destroyed or is
wrongfully detained from the person entitled to
hold it. (Sec. 160)
.:'.: AqC.E~TANCEFOR HONOR
. (Acceptance Supra Protest)
Q: What is an acceptance supra protest?
A:
1.- An undertaking by a stranger to a bill
I after protest
i a. For the benefit of any party liable
thereon; or
b. For the honor of the person for
whose account the bill is drawn;
2. Which acceptance inures also to the
benefit of all parties subsequent to
the persons for whose honor it is
accepted; and
3. Conditioned to pay the bill when it
becomes due if the original drawee
does not pay it.
Note: Acceptance for honor may be for part only
of the sumfor which the bill is drawn; and where
there has been an acceptance for honor for one
party, there may be a further acceptance by a
120
different person for the honor of another party.
(Sec. 161)
Q: What is the purpose of acceptance for
honor?
A: To preserve the credit of the parties to the
instrument or some party to it for whose honor
acceptance was made.
Q: What are the requisites?
A:
1. Bill is protested for dishonor by non-
acceptance or for better security;
2. Acceptor for honor must be a
stranger to the bill;
3. Bill is not overdue at the time of
acceptance for honor; and
4. Holder must consent to fhe
acceptance for honor. (Sec. 161)
Q: What are its formal requisites?
A:
1. Must be inwriting;
2. Must indicate that it is an acceptance
for honor;
3. Signed by the acceptor for honor;
4. Must contain an express or implied
promise to pay money; and
5. The accepted bill for honor must be
delivered to the holder.
Q: For whose honor is an acceptance for
honor made?
A: Where an acceptance for honor does not
expressly state for whose honor it is made, it is
deemed to be an acceptance for the honor of
the drawer. (Sec. 163)
Q: What is the effect of acceptance for
honor?
A: Holder's rights are suspended (because
the holder can go against the preceding
parties after the acceptor for honor does not
pay)
Q: What is the right of the acceptor for
honor upon payment of the bill?
A: The acceptor for payment is subrogated to
the rights which the parties to the bill
subsequent to the party for whose honor he
has accepted may have as regards the latter
and all prior parties. (Sec. 175)
UST GOLDEN NOTES 2010
Q: What conditions need to be fulfilled
before an acceptor for honor becomes
liable to pay the bill?
A:
1. The bill is duly presented for
payment;
2. It was not paid for by the drawer;
3. It was protested for non-payment;
and or is given to him supra protest;
4. Notice of dishonor (for non-payment)
(Sec. 165)
Q: Within which time should presentment
for payment to the acceptor be made?
A:
1. If it is to be presented in the place
where the protest for non-payment
was made, it must be presented not
later than the day following its
maturity;
2. If it is to be presented in some other
place than the place where it was
protested, it must be forwarded within
the time specified in Sec. 104
(mailing). (Sec. 168)
Q: What must the holder do after the
acceptor for honor does not pay the bill?
A: The holder must protest the bill for non-
payment by the acceptor for honor in order to
hold the drawer and indorsers whose liabilities
have not yet become fixed because of the
acceptance for honor. (Sec. 170)
Note: At this time, there would have been three
protestonthe bill, namely: protestfor dishonor for
non-acceptance, protest for non-payment by the
drawee and protest for non-payment by the
acceptorfor honor.
Q: What are the distinctions between an
acceptance for honor and ordinary
acceptance?
A:
" -':ACCEPTANCe-FOR' ~~ORDINARY
HONOR-' ACCEPTANCE
There must be
Protest not
previous protest required
Acceptor: stranger Acceptor: drawee
Holder's consent
Consent not
required requlred
Acceptor: secondarily Acceptor:
liable primarily liable
Bill not discharged
upon payment by
Bill is discharged
acceptance for honor
" PAYMENT FOR HONOR .:~ . '
,. " ' (Payment Supra Protest) .r:
Q: What is payment supra protest?
A: Payment made by a person, whether a
party to the bill or not, after it has been
protested for non-payment, for the benefit of
any party liable thereon or for the benefit of the
person for whose account it was drawn (Sec.
171).
Q: What are the requisites?
A:
1. Bill has been dishonored by non-
payment;
2. It has been protested for non-
payment;
3. Payment supra protest is made by
any person, even by a party thereto;
4. The payment is attested by a notarial
act of.honor which must be appended
to the protest or form an extension of
it (Sec. 172); and
5. The notarial act must be based onthe
declaration made by the payee for
honor or his agent of his intention to
pay the bill for honor and for whose
honor he pays. (Sec. 173)
UNIVERSITY OF SANTO TOMAS ~~':"~
Pacu{ taa de Der echo Ci vi f ' . 121
NEGOTIABLE INSTRUMENTS LAW
A:
Q: What are the distinctions between payment for honor and acceptance for honor?
PAYMENT FOR HONOR
ACCEPTANCE FOR HONOR
Protest: non-payment
Non-acceptance or for better security
Bill is overdue
Not overdue
Consent of holder is not required; he cannot refuse
Consent is required. Because the rights of the
holder are suspended.
Acceptor: secondarily liable
Acceptor: primarily liable
Notarial act of dishonor is necessary
Not necessary
Only 1 payor for honor
May be several acceptors
Effects: (Secs. 164"165)
Effects: (Secs. 175 and 177)
1.
The acceptor for honor is liable to the
1. All parties subsequent to the party for
holder and to all parties to the bill
whose honor it is paid are discharged but
subsequent to the party for whose
the payor for honor is subrogated for, and
honor he has accepted.
succeeds to, both the rights and duties of
2.
The acceptor for honor, by such
the holder as regards the party for whose
acceptance, engages that he will, on
honor he pays and all parties liable to the
due presentment, pay the bill
latter.
according to the terms of his
2. The payor for honor, on paying to the
acceptance provided it shall not have
holder the amount of the bill and the
been paid by the drawee and provided
notarial expenses incidental to its dishonor,
also that it shall have been duly
is entitled to receive both the bill itself and
presented for payment and protested
the protest.
for non-payment and notice of
dishonor given to him.
Q: What is the preference of parties
offering to pay for honor?
A: Where two or more persons offer to pay a
bill for the honor of different parties, the person
whose payment will discharge most parties to
the bill is to be given the preference. (Sec.
174)
. . . . BILLS IN SET ..
Q: Define bills in set.
A: One composed of several parts, each part
being numbered and containing a reference to
the other parts, the whole of the parts
constituting but one bill.
!
Q: What is its purpose?
A: Usually availed of in cases where a bill had
to be sent to a distant place through some
conveyance. If each part is sent by different
means of conveyances, the chance that at
least one part of the set would reach its
destination would be greater.
Q: What are the rights of holders to whom
parts are negotiated separately?
A:
1. If both are HIDC, holder whose title
first accrues is considered the true
owner of bill.
2. But the person who accepts or pays
in due course shall not be prejudiced.
(Sec. 179)
Q: What are the obligations of a holder who
indorses 2 or more parts of the bills in set?
A:
1. Be liable on every such part;
2. Every indorser subsequent to him is
liable on the part he has himself
indorsed, as if such parts were
separate bills. (Sec. 180)
Q: What happens when the acceptor pays
the bill without requiring the part bearing
his acceptance to. be delivered to him?
A: He is liable to the holder thereon if that part
at maturity is outstanding in the hands of a
holder indue course. (Sec. 182)
Note: The drawee is required to accept only one
part of a bill drawn in a set and the acceptance
may be written on any part. But should the
drawee accept more than one part and they are
negotiatedtoholders indue course, he is liable to
every holder of the different parts as if such parts
were separate bills. If all the parts are in the
hands of the same holder, the drawee is liable
onlyfor one part. (Sec. 181)
UST GOLDEN NOTES 2010
Q: What is the effect of discharging one
part of aset?
A: Where anyone part of a bill drawn in set is
discharged by payment or otherwise, the
whole bill is discharged, except as otherwise
provided by tile NIL. (Sec. 18:1)
I " " . CHECKS' .- . .
Q: What is a check?
A: It is a bill of exchange drawn on a bank and
payable on demand (Sec. 185). It must be
presented for payment within a reasonable
time after its issue or the drawer shall be
discharged from liability thereon to the extent
of the loss caused by the delay. (Sec. 186)
It does not operate as an assignment to any
part of the funds to the credit of the drawer
with the bank, and the bank is not liable to the
holder, unless and until it accepts or certifies
the check. (Sec. 189)
Q: What are the different kinds of checks?
A:
1 . Cashier's or manager's checl< -
Drawn by the bank's cashier or
manager, as the case may be, upon
the bank itself and deemed accepted
by the act of issuance.
2. Traveler's ctieck - Upon which the
holder's signature must appear twice,
one to be affixed by him at the time it
is issued and the second counter-
signature, to be affixed by him in the
presence of the payee before it is
paid, otherwise, it is incomplete.
3. Certified check - Bears upon its face
an agreement by the drawee bank
that the check will be paid on
presentation ..
4. Memorandum check - "Memo" is
written across its face, signifying that
drawer will pay holder absolutely
without need of presentment.
Q: What is a crossed check? What are the
effects of crossing a check? Explain.
A: A crossed check is a check with two (2)
parallel lines, written diagonally on the upper
right corner thereof. It is a warning to the
drawee bank that payment must be made to
the right party; otherwise the bank has no
authority to use the drawer's funds deposited
with the bank. To be assured that it will avoid
any mistake in paying to the wrong party,
banks adopted the policy that crossed checks
must be deposited in the payee's aocount.
When withdrawal is made, the banks can be
sure that they are paying to the right party. The
crossing becomes a warning also to whoever
deals with the said instrument to inquire as to
the purpose of its issuance. Otherwise, if
something wrong happens to the payment
thereof, that person cannot claim to be a
holder in due course. Hence, he is subject to
the personal defense on the part of the drawer
that there is breach of trust committed by the
payee in not complying with the drawer's
instruction. (2005 Bar Question)
Q: What is a stale check?
A: A check which has not been presented for
payment within a reasonable time after its
issue. It is valueless and thus, should not be
paid. A check becomes stale 6 months from
date of issue.
Q: What is the effect of a stale check?
A: The drawer and all indorsers are
discharged from liability thereon. (Sec. 188)
Q: What is amemorandum check?
A: A memorandum check is an evidence of
debt against the drawer and although may not
be intended to be presented, has the same
effect as an ordinary check and if passed onto
a third person, will be valid in his hands like
any other check. (People v. Nita fa n, G.R. No.
75954, Oct. 22, 1992)
Q: A check was dishonored due to material
alteration. Debtor made partial payment in
cash, Creditor filed an action against
drawee bank for the amount. Is the creditor
entitled?
A: No. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under
Sections 185 and 189 of the NIL, sue the
bank. The payee should instead sue the
drawer who might inturn sue the bank. This is
so because no privity of contract exists
between the drawee-bank and the payee.
(Villanueva v. Nite, G.R. No. 148211, July 25,
2006)
Q: When will the delivery of a check
produce the effect of payment even ;if the
same had not been encashed?
A: If the debtor was prejudiced by tile
creditor's unreasonable delay in presentment.
Acceptance of a check implies an undertaking
of due diligence in presenting it for payment. If
UN I V ER5I T Y 0 F SAN ToT 0 MAS ~':'~. 123
'Facu(taa de (])erecfio Ci vi C '9
NEGOTIABLE INSTRUMENTS LAW
no such presentment was made, the drawer
cannot be held liable irrespective of loss or
injury sustained by the payee. Payment will be
deemed effected and the obligation for which
the check was given as conditional payment
will be discharged. (Pia Barretto Realty Corp.
v. CA, G.R. No. 132362, June 28, 2001)
124
Academics Committee
Ch" i l / m: wl / : Abraham D. Gcnuino II
Vi a-Cbai r f or .Acadcmi cs: Jeannie /\. Laurentino
r /" it:e-CbtJir Jf Jr .Admi l l C'" " Fi l l t l l l a!: Aissa Coline 1--1. J .una
t/ia.'-Ch~irjf)r J.J!} ' o/d &f)eJ~'~f1:Loise Rae G. Na val
Mercantile Law Committee
.l " l I bl cd I l ead: 11(1), T. Aillragul')'
A X X i . Jl l bj ed H ead: Manil),n Rose S. Soteio
Members:
I.'elwin Marc T. Baldia
Airccn M. Cacho
Socrates llcnjic I. Marbil
Ron Chl'rril' S. Ml'ndoza
Ed1son .lames I,', Pagalibuan
Mavbclline ~J . Santiago
UST GOLDEN NOTES 2010
SPECIAL COMMERCIAL LAWS
Q: What is the law governing letter of credit
(LC)?
A: Articles 567 to 572 of the Code of
Commerce on Letters of Credit are obsolete.
However, in the absence of any provision in
.the Code of Commerce, commercial
transaction shall be governed by the usages
and customs generally observed. (Sec. 2,
Code of Commerce)
Q: What is LC?
A: It is any arrangement, however named or
described, whereby a bank (issuing bank),
acting at the request and on the instructions of
a customer (applicant) or on its own behalf,
binds itself to:
1. Pay to the order of, or accept and pay
drafts drawn by a third party
(Beneficiary), or
2. Authorize another bank to payor to
accept and pay such drafts, or
3. Authorizes another bank to negotiate,
against stipulated document(s),
Provided, the terms and conditions of the
credit are complied with. (Art. 2, Uniform
Customs &Practice for Documentary Credits.)
Note: They are ineffect absolute undertakings to
pay the money advanced or for the amount for
which the credit is' given on the faith of the
instrument.
Q: What is the purpose of LC?
A: To ensure certainty of payment. The seller
is assured of payment because the bank
intervenes and makes the commitment to pay.
This addresses problems arising from seller's
refusal to part with his goods before being paid
and the buyer's refusal to part with his money
before acquiring the goods, thus, facilitating
commercial transactions.
Q: What are the essential conditions of LC?
A:
1. Issued in favour of a definite person
and not to order.
Note: The Uniform Commercial Practice for
Documentary, Credits allows leiters of credit
tobe payable to order
2. Limited to a fixed or specified
amount, or to one or more amounts,
but with a maximum stated limit
(Article 568, Ibid).
Note: If any of these essential conditions is
not present,' the instrument is merely
consideredas a letter of recommendation.
Q: What is the duration of LC?
A:
1. Upon the period fixed by the parties;
or
2. If none is fixed:
a. 6 months from its date if used in
the Philippines;
b. 12 months if used abroad (Art
572, ibid).
Q: What are the kinds of LC?
A:
COMMERCIAL STANDBY LETTERS
LETTERS OF OF CREDIT
CREDIT .
Involve non-sale
transactions.
Involve contracts of
sale.
Payable upon
certification bythe
beneficiary of the
applicant's NON-
performance of the
agreement.
(Transfield v. Luzon
Hydro Corp., GR
No. 146717, Nov. 22,
2004)
Payable upon
presentation by the
seller-beneficiary of
documents that show
he has performed his
contract.
Q: Is irrevocable letter of credit and
confirmed letter of credit synonymous?
A: An irrevocable letter of credit is not
synonymous with a confirmed letter of credit.
In an irrevocable letter of credit, the issuing
bank may not, without the consent of the
beneficiary and the applicant, revoke its
undertaking under the letter, whereas, in a
confirmed letter of credit, the correspondent
bank gives an absolute assurance to the
beneficiary that it will undertake the issuing
bank's obligation as its own according to the
terms and condition of the credit. (Prudential
Bank and Trust Company v. lAC, GR No.
74886, Dec. 8, 1992)
U N I V E R 5 I T Y 0 F SAN ToT 0 MAS ~... ~ 125
Pacu{ tad de (j ) er ecl i o Ci vi l ,V'
SPECIAL COI\1MERCIAL LA \XIs: LEITERS OF CREDIT
Q: Can a court order the release to the
applicant the proceeds of an irrevocable
letter of credit without the consent of the
beneficiary?
A: No, such order violates the irrevocable
nature of the letter of credit. The terms of an
irrevocable letter of credit cannot be changed
without the consent of the parties, particularly
the beneficiary thereof. (Phil. Virginia Tobacco
Administration v. De Los Angeles, GR. No. L-
27829, Aug. 19, 1988)
Q: Who are the parties to a Letter of Credit
transaction?
A:
1. Applicant/Buyer/Importer - procures
the letter of credit, purchases the
goods and obliges himself to
reimburse the issuing bank upon
receipt of the documents title.
2.. Issuing Bank - One which, whether a
paying bank or not, Issues the letter
of credit and undertakes to pay the
seller upon receipt of the draft and
proper documents of title from the
seller and to surrender them to the
buyer upon reimbursement.
3. Beneficiary/Seller/Exporter In
whose favor the instrument is
executed; One who delivers the
documents of title and draft to the
issuing bank to recover payment.
The number of parties may be increased.
Modern letters of credit are usually involve
bank-to-bank transactions. The following
additional parties may be:
1. Advising/notifying bank The
correspondent bank (agent) of the
issuing bank through which it advises
the beneficiary of the LC.
I
I
Confirming bank - bank which, upon
the request of the beneficiary,
confirms the LC issued.
3.
Paying bank - bank on which the
drafts are to be drawn, which may be
the issuing bank or another bank not
inthe city of the beneficiary.
4.
Negotiating bank - bank in the city of
the beneficiary which buys or
discounts the drafts contemplated by
the LC, if such draft is to be drawn on
the opening bank not inthe city of the
beneficiary.
126 ! team: bSI I .ij
Q: What are the stages of LC?
A:
1. Contract of sale between the buyer
and seller;
2. Application for LC by the buyer with
the bank;
3. Issuance of LC by the bank;
4. Shipping of goods by the seller;
5. Executuion of draft and tender of
documents by the seller;
6. Redemption of draft (payment) and
obtaining of documents by the issuing
bank; and
7. Reimbursement to the bank and
obtaining of documents by the buyer.
Q: Explain the three (3) distinct but
intertwined contract relationships that are
indispensable in .a letter of credit
transaction.
A:
1. Between the applicant/buyer/importer
and the beneficiary/seller/exp0l1er _
The applicantlbuyel/importer is the
one who procures the letter of credit
while the beneficiary/seller/exporter is
the one who in compliance with the
contract of sale ships the goods to the
buyer and delivers the documents of
title and draft to the issuing bank to
recover payment for the goods. Their
relationship is governed by the
contract of sale.
2. Between the issuing bank ami the
beneficiary/sellellexporter The
issuing bank is the one that issues the
letter of credit and undertakes to pay
the seller upon receipt of the draft and
proper documents of title and to
surrender the documents to the buyer
upon reimbursernent. Their
relationship is governed by the terms
of the documents of title.
3.
Between the issuing benk and the
applicant/buyer/importer The
applicant/buyerlimporter obliges
himself to reimburse the issuing bank
upon receipt of the documents of title.
Their relationship is governed by the
terms of the application and
agreement for the issuance of the
leiter of credit by the bank. (2002 Bar
Question)
UST GOLDEN NOTES 2010
Q: What are the types of correspondent
banks?
A:
Serves as an agent
of the issuing bank;
Warrants the
apparent
(Appearance to
unaided senses)
authenticity of the
Letter of Credit.
(Bank of America NT
& SA v. CA, G.R.
No. 105395, Dec.
10, 1993)
Does not incur any
obligation more than
just notifying the
seller/beneficiary of
the opening of the LC
after it has
determined its
apparent authority.
(Bank of America NT
& SA v. CA, G.R. No.
105395, Dec. 10,
1993)
Not liable for
damages unless the
document on its face
'On""< "'I" fake.
Lends credence
the LC issued by a
lesser-known bank.
Buys the seller's
draft and later on
sells the draft to the
issuing bank.
Depends on the
stage of negotiation,
thus:
1. Before negotiation
- No liability with
respect to the seller.
Merely suggests its
willingness to
negotiate.
2. After negotiation -
A contractual
relationship will then
arise, making the
bank liable.
May either be
issuing bank or any
other bank inthe
place of the
Direct obligaticin.
Q: In letters of credit in banking
transactions, distinguish the liability of a
confirming bank from a notifying bank.
A: In case anything wrong happens to the
letter of credit, a confirming bank incurs liability
for the amount of the letter of credit, while a
notifying bank does not incur any liability.
(1994 Bar Question)
Q: Is an issuing bank a guarantor?
A: No, the concept of guarantee vis-a-vis the
concept of irrevocable LC is inconsistent with
each other. LCs are primary obligations and
not security contracts and while they are
security arrangements, they are not converted
thereby into contracts of guaranty. (MWSS v.
Hon. Dewey, G.R. No. 160732, June 21,
2004)
Q: What is the independence principle?
A: The relationship of the buyer and the bank
is separate and distinct from the relationship of
the buyer and seller in the main contract; the
bank is not required to investigate if the
contract underlying the LC has been fulfilled or
not because in transactions involving LC,
banks deal only with documents and not goods
(Bank of the Philippine Islands v. De Reny
Fabric tndustr tes, tnc., L-2481, Oct. 16, 1970).
ln effect, the buyer has no course of action
against the issuing bank.
Q: What is the exception to the
independence principle?
A: The "Fraud exception rule." It provides that
the untruthfulness of a certificate
accompanying a demand for payment under a
standby letter of credit may qualify as fraud
sufficient to support an injunction against
payment. (Transfield v. Luzon Hydro, G.R. No.
146717, Nov. 22, 2004)
Q: What is the effect of the buyer's failure
to procure an LC to the main contract?
A: The LC is independent from the contract of
sale. Failure of the buyer to open the Letter of
Credit does not prevent the birth of the Sales
Contract. (Reliance Commodities, Inb. v.
Daewoo Industrial Co. Ltd., GR. No. 10'0831,
Dec. 17, 1993) The opening of the LC is only a
mode of payment. The LC is not an essential
requisite to the contract of sale.
Q: In a contract of loan secured by a
standby LC, can the partial payments made
on the loan be added in computing the
issuing bank's liability under its own
standby letter of credit?
A: No, although these payments could result in
the reduction of the actual amount, which,
could ultimately be collected from the issuing
bank, the latter's separate undertaking under
its letters of credit remain. This is because the
letter of credit is an absolute and primary
undertaking which is separate and distinct
UNIVERSITY OF SANTO TOMAS
PacuCtaa de (j ) er ecf i o Cioi]
SPECIAL COM:MERCIAL LAWS: LETTERS OF CREDIT
fromthe contract underlying it. (Insular Bank of
Asia &America v. lAC, Nov. 17, 1988)
Q: What is the doctrine of strict
compliance?
A: The documents tendered by the
seller/beneficiary must strictly conform to the
terms of the letter of credit. The tender of
documents must include all documents
required by the letter. Thus, a correspondent
bank which departs from what has been
stipulated under the LC acts on its own risk
and may notthereafter be able to recover from
the buyeror the issuing bank, as the case may
be, the money thus paid to the beneficiary.
(Feati Bank and Trust Company v. CA, G.R.
No. 940209, Apr. 30, 1991)
Q: When is the bank entitled to
reimbursement?
A: Once the issuing bank shall have paid the
beneficiary after the latter's compliance with
the terms of the LC. Presentment for
acceptance to the customer/applicant is not a
condition sine qua non for reimbursement.
(Prudential Bank v. lAC, G.R. No. 74886, Dec.
8, 1992)
Q: What is the consequence of payment
upon anexpired LC?
A: An issuing bank which paid the beneficiary
of an expired letter of credit can recover the
paymentfromthe applicant which obtained the
goods from the beneficiary to prevent unjust
enrichment. (Rodzssen Supply Co. v. Far East
Bank and Trust Co, G.R. No. 109087, May 9,
2001)
Q: Should the marginal deposit made by
the customer, in possession of the bank be
first deducted from the principal
indebtedness before computing the
interest?
A: Yes, since it is supposed to be returned
upon compliance with his obligation. Indeed, it
would be onerous to compute interest and
other charges on the face value of the letter of
credit which the issuing bank issued, without
first crediting or setting off the marginal deposit
which the importer paid to it. Requiring the
importer to pay the interest on the entire letter
of credit without deducting first his marginal
deposit would be a clear case of unjust
enrichment by the bank. (Abad v. CA, G.R.
42735, Jan. 22, 1990)
128
Q: Ricardo mortgaged his fishpond to AC
Bank to secure a P1 Million loan. In a
separate transaction, he opened a letter of
credit with the same bank for $500,000.00
in favor of HS Bank, a foreign bank, to
purchase outboard motors. Likewise,
Ricardo executed a Surety Agreement in
favor of AC Bank. The outboard motors
arrived and were delivered to Ricardo, but
he was not able to pay the purchase price
thereof. Can AC Bank take possession of
the outboard motors? Why?
A: If what Ricardo executed is a trust receipt,
AC Bank cantake possession of the outboard
motors so that it can exercise its lien and sell
them (Section 7, Trust Receipts Law). If what
Ricardo executed is a surety agreement, AC
'Bank cannot take possession of the outboard
motors, because it has nolienonthem.
Alternative Answer:
No. The opening of a Letter of Credit did not
vest ownership of the outboard motors in the
bank in the absence of a trust receipt
agreement. A letter of credit is arnerefinancial
device developed by merchants as a
convenient andrelatively safe mode of dealing
with the sales of goods to satisfy the
seemingly irreconcilable 'interests of a seller,
who refusesto partwith his goods before he is
paid, and a buyer, who wants to have control
of the goods before paying. (Trenstietd
Philippines, Inc. v. Luzon Hydro Corporation,
G.R. No. 14671~ Nov. 22, 200~
A: Can AC Bank also foreclose the
mortgage over the fishpond? Explain.
A: AC Bank can also foreclose the mortgage
over the fishpond if Ricardo fails to pay the
loan. (2005 Bar Question)
UST GOLDEN NOTES 2010
Q: What is atrust receipt transaction?
A: It is any transaction between the entruster
and entrustee:
1. Whereby the entruster who owns or
holds absolute title or security
interests over certain specified goods,
documents or instrument, releases
the same to the possession of
entrustee upon the latter's execution
of a TR agreement.
2. Wherein the entrustee binds himself
to hold the designated goods in trust
for the entruster and, in case of
default, to sell such goods,
documents or instrument with the
obligation to turn over to the entruster
the proceeds to the extent of the
amount owing to it or to turn over the
goods, documents or instrument itself
if not sold. (Sec. 4, P.O. 115)
Q: What is atrust receipt (TR)?
A: It is the written or printed document signed
by the entrustee in favor of the entruster
containing terms and conditions substantially
complying with the provisions of PO 115.
Q: What are the two views regarding TR?
A:
1. As a commercial document (Sec. 4,
P.O. 115)
2. As a commercial transaction - It is a
separate and independent security
transaction intended to aid in
financing importers and retail dealers
who do not have sufficient funds.
(Nacu v. CA, G.R. No. 108638, Mar.
11, 1994) .
Q: Who arethe parties?
A:
1. En truster - Lender, financer or
creditor. Person holding title over the
goods documents or instruments
(GOI) subject of a trust receipt
transaction; releases possession of
the goods. upon execution of trust
receipt. (Sec. 3[c))
2. Entrustee - Borrower, buyer, importer
or debtor. Person to whom the goods
are delivered for sale or processing in
trust, with the obligation to return the
proceeds of sale of the goods or the
goods themselves to the
entruster.(Sec. 3[b))
Q: What are the rights and obligations of
the parties?
To
proceeds of the
sale;
Tothe returnof
the goods,
documents or
instruments (GOI)
incase they could
not besold; and
Maycancel the
trustandtake
possessionof and
sell GOI ata
publicor private
sale. (Sec. 7, P.O.
11
Togive a5-day
noticetothe
entrusteeof his
intentiontosell at
apublicauction.
(Sec.7,P.D.115)
Toreceive the surplus from
the publicsale. (Sec. 7,
PO 115)
GOI intrustfor the
entruster andtodispose of
themstrictly inaccordance
with the terms of TR;
Toreceive the proceedsof
thesale for the entruster
and to turn over the same
tothe entruster tothe
extentof amountowingto
the entruster;
To insure GOI againstloss
fromfire, theft, pilferage or
other casualties.
To keepGOI or the
proceeds thereof, whether
inmoney orwhatever form,
separate andcapable of
identificationas propertyof
the entruster;
To returnGOI tothe
entruster incase theycould
notbe sold or upondemand
of the entruster; and
ToQbserveall other
UNIVERSITY OF SANTO TOMAS
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SPECIAL COMIvfERCIAL LAWS: TRUST RECEIPTS
Q: What are the alternative obligations of
an entrustee?
A:
1. Entregarla - Obligation to return to
the entruster the proceeds of the sale
of the goods.
2. Oevolvera - Obligation to return the
goods themselves to the entruster, in
case the goods are not sold.
Q: What is the nature of a TR?
A: A trust receipt is a security agreement,
pursuant to which a bank acquires a security
interest inthe goods. (Vintola v. IBAA, G.R.No.
L-73271, May 29, 1987)
Q: Who is the owner of the articles subject
of the TR?
A: The entrustee. A trust receipt has two
features, the loan and security features. The
loan is brought about by the fact that the
entruster financed the importation or purchase
of the goods under TR. Until and unless this
loan is paid, the"obligation to pay subsists. If
the entrustee is made to appear as the owner,
it was but an artificial expedierit, more of legal
fiction than fact, for if it were r~ally so, it could
dispose of the goods in any manner that it
wants, which it cannot do. To consider the
entn.lstee as the true owner from the inception
of the transaction would be to disregard the
loan! feature thereof. (Rosario Textile Mills
Corp. v. Home Bankers Savings and Trust
Company, G.R. No. 137232. June 29, 2005)
Q: Who shall bear the loss of goods which
are the subject of TR?
A: The entrustee. Loss of goods, documents
or instruments which are the subject of a TR,
pending their disposition, irrespective of
whether or not it Was due to the fault or
negligence of the entrustee, shall not
extinguish his obligation to the entruster for the
value thereof (Sec. 10, PD. 115).
Q: As between the entruster and the
creditors of the entrustee, who has a better
right over the goods?
A: The entruster. His security interest in
goods, documents, or instruments pursuant to
the written terms of a trust receipt shall be
valid as against all creditors of the entrustee
for the duration of the trust receipt agreement.
(Sec. 12, P.Od 115)
130
Q: Who can defeat the rights of the
entruster over the goods?
A: A purchaser in good faith. He acquires
goods, documents or instruments free from the
entruster's security interest. (Sec. 11, P. D.
115)
Q: Is the entruster liable as principal or as
vendor under any sale or contract to sell
made by the entrustee?
A: No, the entruster holding a security interest
shall not, merely by virtue of such interest or
having given the entrustee liberty of sale or-
other disposition of the goods, documents or
instruments under the terms of the trust receipt
transaction be responsible as principal or as
vendor under any sale or contract to sell made
by the entrustee. (Sec. 8, P.D. 115)
Q: What acts or omissions are penalized
undet the TR Law?
A: The TR Law declares the failure to turn
over goods or proceeds realized from sale
thereof, as a criminal offense under Art.
315(I)(b) of RPC (estafa). The law is violated
whenever the entrustee or person to whom
trust receipts were issued fails to: (a) return
the goods covered by the trust receipts; or (b)
return the proceeds of the sale of said goods.
(Metropolitan Bank v. Tonda, G.R. No.
134436, Aug. 16,2000).
Q: Does P.O. 115 violate the prohibition in
the Constitution against imprisonment for
non-payment of a debt?
A: No. What is being punished is the
dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of
another regardless of whether the lalter is the
owner or not. It does not seek to enforce
payment of the loan. Thus, there can be no
violation of a right against imprisonment for
non-payment of a debt. (People v. Nitafan,
G.R. No. 81559, Apr 6, 1992)
Q: Is lack of intent to defraud a bar to the
prosecution of these acts or omissions?
A: No. The mere failure to account or return
gives rise to the crime which is malum
prohibitum. There is no requirement to prove
intent to defraud (Ching v. Secretary of
Justice, G.R. No. 164317, Feb. 6, 2006;
Colinares v. CA, G.R. No. 90828, Sept. 5,
2000; Ong v. CA, G.R. No. 119858, Apr. 29,
2003). (2006 Bar Question)
UST GOLDEN NOTES 2010
Q: What is the effect of insufficiency of
proof of delivery of goods?
A: Estafacannot lie. (Ramos v. CA, GR. No.
L -3992-25, Aug. 21, 1987)'
Q: What will happen to the criminal action if
the entrustee complied with his obligation
under the TR agreement?
A:
1. If compliance occurred before the
criminal charge,there is no criminal
liability.
2. If compliance occurred after the
charge even before conviction, the
criminal action will not be
extinguished.
Q: In the event of default by the entrustee
on his obligation under the trust receipt
agreement, is it absolutely necessary for
the entruster to cancel the trust and take
possession of the goods to be able to
enforce his right thereunder?
A: The law uses the word "may" ingranting to
the entruster the right to cancel the trust and
take possession of the goods. Consequently,
the entrustee has the discretion to avail of
such right or seek any alternative action, such
as athird party claimor a separate civil action
which it deems best to protect its right, at any
time upon default or failure of the entrustee to
comply with any of the terms and conditions of
the trust agreement (South City Homes, Inc. v.
BA Finance Corporation, GR. No, 1 35462,
Dec. 7, 2001 ) .
Q: Can the repossession of the goods by
the entruster be considered as payment?
A: No, payment would legally result only after
the entruster has foreclosed on the securities,
sold the same and applied the proceeds,
thereof to the entrustee's obligation. Since the
trust receipt is a mere security arrangement,
the repossession by the entruster cannot be
considered payment of the loan/advances
given to the entrustee under the letter of
credit/trust receipt. (PNB v. Pineda, GR. No.
46658, May 13, 1991)
Q. Mr. A filed an application for an
. Irrevocable Domestic LC with the SOS
Bank in favor of LS Parts for the purchase
of assorted scrap irons. The application
was approved. Thereafter, Mr. A executed a
trust receipt
Mr. A failed to comply with their
undertaking under the trust receipt. The
bank filed both criminal and civil cases
against Mr. A. The court proceeded with the
civil case independently from the criminal
case. The court rendered judgment in favor
of the bank. Is the court correct in
proceeding independently although a
criminal case is also instituted?
A: Yes, the complaint against Mr. A was based
on the failure of the latter to comply with his
obligation as spelled out intheTR. This breach
of obligation is separate and distinct from any
criminal liability for "misuse and/or
misappropriation of goods or proceeds
realized from the sale of goods, documents or
instruments released under trust receipts",
punishable under Section 13 of the Trust
Receipts.Law. Being based onanobligationex
contractu and not ex delicto, the civil action
may proceed independently of the criminal
proceedings instituted against petitioners
regardless of the result of the latter.
(Sarmiento v. CA, GR. No. 1 22502, Dec. 27,
2002)
Q. What is the effect of novation of 'il trust
agreement?
A. Where the entruster and entrustee entered
into an agreement which provides for
conditions incompatible with the trust receipt
agreement, the obligation under the trust
receipt is extinguished, Hence, the breach in
the subsequent agreement does not give rise
to a criminal liability under P.O. 115 but only
civil liability. (Philippine Bank v. Ong, GR. No.
1 331 76, Aug. 8, 2002)
Q: What are the defenses to negate
criminal liability of the entrustee?
A:
1. Compliance with the terms of the trust
receipt either by payment, return of
the proceeds or returnof the goods.
2. The transaction does not fall under
PO 115. (Colinares v. CA, GR. No.
90828, Sept. 5, 2000, Consolidated v.
CA, GR. No. 114286, Apr. 1 9,2001 )
Note:' In these cases, the execution
of a TR was made after the goods
covered by it had been purchased,
making the buyer the owner thereof.
The transaction does not involve a
trust receipt but a simple loan even
though the parties denominate the
transaction as one of atrust receipt.
3. Non-receipt of the goods or where
proof of delivery of goods covered by
a trust receipt to the accused is
UNIVERSITY OF SANTO TOMAS
Pacu[ taa de CDer ecf to Civif
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SPECIAL COMMERCIAL LAWS: TRUST RECEIPTS
insufficient. (Ramos v. CA, GR. No.
L-3992-25, Aug. 21, 1987)
4 Cancellation of the trust receipt
agreement and taking into
possession of the goods by the
entruster.
Note: Mere repossession of the
goods will extinguish criminal liability.
5. Compromise by parties before filing
of information in court. (Ong v. CA,
G.R. No. 119858, Apr. 29, 2003)
6. Novation before the filing of the
criminal complaint.
7. Loss of goods without fault of the
entrustee.
8. Consignment.
Q: Can deposits in a savings account
opened by the buyer subsequent to the TR
transaction be applied to outstanding
obligations under the TR account?
A: No, the receipt of the bank of a sum of
money without reference to the trust receipt
obligation does not obligate the bank to apply
the money received against the trust receipt
obligation. Neither does compensation arise
because compensation is not proper when one
of the debts consists in civil liability arising
from criminal. (Metropolitan Bank and Trust
Co. v. Tonda, G.R. No. 134436, Aug. 16,
2000)
Q: What is the order in the application of
proceeds or the TR transactions?
A:
1.
2.
3.
Expenses of the sale;
Expenses derived from
goods;
Principal obligation.
storing the
Q: Is the entrustee liable for the deficiency?
A: Yes, but any excess shall likewise belong to
him. (Sec. 7, =o. 115)
Q: Are LC and TR negotiable instruments?
A: Letters of credit and trust receipts are not
negotiable instrument, but drafts issued in
connection with letters of credit are negotiable
instruments. Hence, while the presumption of
consideration under the negotiable instrument
law may not necessarily be applicable to trust
receipls and leiters of credit, the presumption
that the drafts drawn in connection with the
letters of credit have sufficient consideration
applies. (Lee v. CA, G.R. No. 117913, Feb. 1,
2002)
132
Academics Committee
Chai f pet : r(JII: Abr aham D. CClluill(l 11
l /ic' e-Chl l ir j f )T .4tl Jr f emit:r : Jeannie A. Laurcntino
[/i,"-Cboirjill" Admill ~'" Fi nan,: lIi"a Celinc If. Luna
I/itr-C/lairjill" Layollf e::-/)cJ i~lI: Loise RaeC. Naval
Mercantile Law Committee
Jubj ed l l cad: Holy T. i\llll'aguc)'
A.r.rf. Jl l b/ cd Head: Manilyn Rose S. Sotelo
Members:
Edwin Marc T Baldi"
Airccn M, Cacho
Socrates Bcnjie I. Marbil
Ron Cherric S. Mendoza
L~dison -'ames I'. Pagalila~J an
Maybcllinc M, Santiago
~~ ...~~ ..
.",.
UST GOLDEN NOTES 2010
Q: What is the purpose of Bulk Sales Law
(BSL)?
A: To prevent fraudulent transfer of goods by a
merchant to the prejudice of his creditors.
Q: When is a sale considered as a sale in
bulk?
A: Any sale, transfer, mortgage or assignment:
1. of stock of goods, wares,
merchandise, provisions and
materials other than in the ordinary
course of trade and the regular
prosecution of business of the
vendor, mortgagor, transferor or
assignor;
2. of all, or substantially all, of the
business or trade;
3. of all, or substantially all, of the
fixtures and equipment used in and
about the business (Sec. 2, BSL)
Q: What is meant by "substantially ali"?
A: When the business could not continue with
its operation after the sale.
Q: Stanrus .Inc., a department store with
outlets in Makati, Mandaluyong, and
Quezon City, is contemplating to refurbish
and renovate its Makati store in order to
introduce the most modern and state of the
art equipment in merchandise display. To
carry out its plan, it intends to sell all of the
existing fixtures and equipment (display
cases, wall decorations, furniture,
counters, etc.) to Crossroads Department
Store. Thereafter, it will buy and install new
fixtures and equipment and continue
operations. Crossroads wants to know
from you as counsel whether the intended
sale ls.vbulk.sate".
A: Yes. The sale involves all fixtures and
equipment, not in the ordinary course of trade
and the regular prosecution of business of
Stanrus, Inc. (Sec. 2, Act 3952, as amended)
Q: What are the duties of a seller if the
transaction is within the coverage of the
law?
A:
1. To execute, and deliver to the buyer,
a verified written statement of:
a. the names and addresses of all
creditors to whom he may be
indebted;'
b. amount of indebtedness due or
owing, or to become due or
owing;
c. the addresses of creditors;
d. due dates of the obligations
(Sec. 3, BSL).
2. To make a full detailed inventory, at
.Ieast ten days before the transfer of
any stock of goods, wares,
merchandise, provisions or materials,
in bulk (Sec. 5, BSL);
3. To notify every creditor whose name
and address is set forth inthe verified
statement at least ten days before
transferring possession thereof,
personally or by registered mail, of
the price, terms conditions of the
sale, transfer, mortgage, or
assignment (Sec. 5, BSL);
4. To apply the purchase or mortgage
money, pro rata, to the payment of
the bona fide claim or claims of the
creditors of the vendor or mortgagor,
as shown by such sworn statement
(Sec. 4, BSL);
5. To register the statement with the
OTI. (Sec. 9, BSL) (1995, 1997 Bar
Question)
Q: When may the requirements not be
complied with under the law?
A: If such vendor, mortgagor, transferor or
assignor, produces and delivers a written
waiver of the provisions of the BSL from Ilis
creditors. (Sec. 2, BSL)
Q: What are the exempt transactions?
A:
1. The sale or transfer is in the
regular/ordinary course of trade or
busiriess;
2. Sale of not all or substantially all of
the business of the vendor;
3. A sale in bulk but with written waiver
of the provisions of the BSL from all
the sellers creditors;
4. A sale by an executor, administrator,
receiver, assignee or court
representative;
5. Sale by virtue of ajudicial order;
6. Sale of property exempt from
execution;
7. Sale by a manufacturer;
8. Sale of afoundry shop; or
9. Sale of services. (1993 Bar
Question)
UNIVERSITY OF SANTO TOMAS
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.' 133
SPECIAL COMMERCIAL LAWS: BULK SALES LAW
Q: Who are covered under the tenn
creditors?
A: It covers all of the seller's creditors at the
time of the sale or mortgage. They need not be
judgment creditors and that their claim need
not be due. Creditors whose claims came into
existence subsequent to the sale are not
entitledtothe benefits of the statute.
Q: Pursuant to a writ of execution issued
by the Regional Trial Court in "Express
Bank v. Don Rubio," the sheriff levied and
sold at public auction 8 photocopying
machines of Don Rubio. Is the sheriffs sale
covered by the Bulk Sales LaW?
A: No. The sale by sheriff at public sale is not
a sale by a merchant. Section 8 of the Bulk
Sales Law itself provides that it has no
application to executors, administrators,
receivers, assignees in insolvency, or public
officers, acting under process. The Bulk Sales
Law only applies to the sale or encumbrance
of a merchant of goods, merchandise or
commodity done "in bulk" as defined by the
lawitself. (2006 Bar Question)
Q: wJ en is the seller criminally liable?
i
A: The seller will be criminaly liable and the
transactionis void if there is:
1, Failure to prepare and deliver a
swornlisting of creditors;
2. Failure to apply proceeds pro-rata to
listed creditors;
3. Failure to include names of all
creditors and the correct amount due
inthe statement; or
4. Salefor noor nominal consideration.
Q. In case the buyer violated the BSL, What
remedies are available to the seller?
A: The seller may recover the amount paid if
the sale was made in fraud of creditors and
sue for damages.
Q: A is amerchant engaged in the sale of a
variety of goods and merchandise.
Because of the economic crisis, he
incurred indebtedness to X, Y and Z.
Thereafter, A sold to B all the stock of
goods and merchandise. What steps
should A undertake to effect avalid sale in
bulk of his goods to B?
A: A must prepare an affidavit stating the
names of all his creditors, in this case, X, Y
and Z, their addresses, the amount of their
credits and their maturity. A should give the
affidavit to B who, in turn, should furnish a
134
copy to each creditor and notify the creditors
that there is a proposed bulk sale in order to
enablethe latterto protecttheir interests.
Q: What is the right of creditors X, Y and Z
if A failed to comply with the
procedure/steps required by law under the
previous question letter (a) hereof?
A: The recourse of X, Y and Z is to question
the validity of the sale from A to B so as to
recover the goods and merchandise to satisfy
their credits. (2001 Bar Question)
Q: Suppose A submitted a false statement
on the schedule of his creditors. What is
the effect of such false statement as to
vendee B.
A: If the vendee does not have knowledge of
the falsity of the schedule, the sale is valid.
However, if the vendee has knowledge of such
falsity, the sale is void because he is in bad
faith.
Q: What are the remedies available to the
creditors in case of violation of the BSL?
A:
1. The creditor's proper remedy is one
against the goods to subject them to
payment of a debt, such as
execution, attachment, garnishment
or byaproceeding in equity.
2. An ordinary action to obtain money
judgment against the purchaser by
the creditors in violation of BSL if
purchaser has disposed of the
property held intrust.
UST GOLDEN NOTES 2010
Q: What is the applicability of the
Warehouse Receipts Law (WRL)?
A. The WRL applies to all warehouses,
whether public or private, bonded or not. Inall
other cases where receipts are not issued by
the warehouseman, the Civil Code (Art. 1507-
1520) applies.
Q: Who is a warehouseman?
A: A person, natural or juridical, lawfully
engaged inthe business of storing of goods for
profit. (Sec. 58, WRL)
Q: What is a warehouse?
A: The building or place where goods are
deposited and stored for profit.
Q: What is a warehouse receipt?
A: A written acknowledgment by the
warehouseman that he has received and holds
certain goods therein described in his
warehouse for the person to whom the
document is issued. The warehouse receipt
has two-fold functions, that is, it is a contract
and a receipt (Telengtan Bros. &Sons v. CA,
GR No. L-110581, Sept 21, 1994).
Q: Distinguish Warehouse Receipts Law
from Documents Of Title under Civil Code.
A:
. 'WAREHOUSE DOCUMENTSOF
. RECEIPTSLAW TITLE UNDERCIVIL
. CODE
Warehouse receipts
issued by a
warehouseman
Other receipts of
documents issued in
bailment contracts
other than
warehouse receipts
Q: Who may issue warehouse receipt?
A:
1. A warehouseman, whether public or
private, bonded or not. (Sec. 1)
2. A person authorized by a
warehouseman.
Q: What is the form of a warehouse receipt
and what are its essential terms?
A: It need not be in particular form but must
embody within its written or printed terms:
1. The location of the warehouse;
2. The date of the issue;
3. The consecutive number of the
receipt;
4. A statement whether the goods
received will be delivered to bearer,
to a specified person or to a specified
person or his order;
5. Fees;
6. A description of the goods;
7. The signature of the warehouseman;
8. If the receipt is issued for goods of
which the warehouseman is the
owner, either solely or jointly or in
common with others, the fact of such
ownership; and
9. A statement of the amount of
advances made and of liabilities
incurred for which the warehouseman
claims a lien. (Sec. 2)
Q: What is the effect when the goods
deposited are incorrectly described? .
A: It does not make the receipt ineffective
when the identity of the goods is fully
established by evidence. Thus, the
indorsement and delivery shall constitute
sufficient transfer of the title of the goods.
(American Foreign Banking Corp. v, Herridge,
GR No. L-21005, Dec. 20, 1924).
Q: What are the effects of omission of any
of the essential terms?
A:
1. A warehouseman shall be liable to
any person injured thereby for all
damages caused bythe omission;
2. Validity of receipt not affected;
3. Negotiability of receipts not affected;
4. Contract is converted to ordinary
deposit. (Gonzales V. Go Fiong &
Luzon Surety Co., GR No. 91776,
Aug. 30, 1958)
UNIVERSITY OF SANTO TOMAS
Pacu(tad de De r e cl to Ci vi !
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SPECIAL COMIvIERCIALLAWS: WAREHOUSE RECEIPTS LA\\!
I
Q: What terms may and may not be
insert~d?
A: A warehouseman may insert in a receipt
issued. by him any other terms and conditions
provided that such terms and conditions shall
not be:
1.
2.
Contrary to the Warehouse Receipts
Law. (Sec. 3)
Terms reducing the required diligence
of the warehouseman. (Ibid.)
Contrary to law,. morals, good
customs, public order or public policy.
Those exempting the warehouseman
from liability for misdelivery or for not
giving statutory notice in case of sale
of goods.
Those exempting the warehouseman
from liability for negligence.
3.
4.
5.
Q: What are the kinds of warehouse
receipt?
A:
1. Negotiable warehouse receipt
2. Non-negotiable warehouse receipt
Q: What is a negotiable warehouse receipt?
A: It is a receipt in which it states that the
goods received will be delivered to the bearer
or to the order of any person named in such
receipt (Sec. 5). It is negotiated by either
delivery or indorsement plus delivery.
Note: No provision shall be inserted in a
negotiable receipt that it is non-negotiable. Such
provision, if inserted, shall be void. A negotiable
warehouse receipt cannot be converted into non-
negotiable. (Sec. 5)
Q: Who may negotiate?
A:
1. The owner thereof; or
2. Any person to whom the possession
or custody of the receipt has been
entrusted by the owner, if, by the
terms of the receipt, the goods are
deliverable to the order of the person
to whom the possession or custody of
receipt has been entrusted or in such
form that it may be negotiated by
delivery (Sec. 40).
136
Q: What happens if the indorsement is
necessary but the negotiable receipt was
only delivered?
A:
1. The transferee acquires title against
the transferor;
2. There is no direct obligation of the
warehouseman; and
3. The transferee can compel the
transferor to complete the negotiation
by indorsing the instrument.
Negotiation takes effect as of the time
when the indorsement is actually
made.
Q: X deposited 1000 sacks of wheat flour
with Luzon Warehouse Company, for which
he was issued a negotiable receipt. Y was
able to get hold of the receipt, forged the
signature of X, presented the receipt to
Luzon Warehouse and was able to
withdraw the wheat flour. What are the
rights of X?
A: If under the terms of the negotiable
warehouse receipt, the goods are deliverable
to the depositor or to his order, X may proceed
against Luzon Warehouse and/or Y. Without
the valid indorsement of X to the holder or in
blank, the warehouseman is liable to X for
conversion in the misdelivery. If, however, by
the terms of the negotiable warehouse receipt,
the goods are deliverable to bearer (either
because it is so expressed in the warehouse
receipt or because of a blank indorsement by a
person to whose order the goods are
deliverable) X may only proceed against Y.
The warehouseman is not liable for conversion
where the goods are delivered to a person in
possession of a bearer negotiable instrument.
Q: What is the rule when more than one
negotiable receipt is issued for the same
goods?
A: A warehouseman shall be liable for all
damages caused by his failure to do so to any
one who purchased the subsequent receipt for
value supposing it to be an original, even
though the purchase be after the delivery of
the goods by the warehouseman to the holder
of the original receipt (Sec. 6).
Note: The word "duplicate" shall be plainlyplaced
upon the face of every such receipt, except the
first one issued(Sec. 6).
UST GOLDEN NOTES 2010
Q: What are the warranties on a warehouse
receipt?
A: A person who, for value, negotiates or
transfers a receipt by indorsement or delivery,
including one who assigns for value a claim
secured by a receipt, unless a contrary
intention appears warrants:
1. Receipt is genuine;
2. Legal right to negotiate or transfer it;
3. No knowledge of defects that may
impair tile validity or worth of the
receipt;
4. That he has a right to transfer title to
tile goods and that the goods are
merchantable or fit for a particular
purpose whenever such warranties
would have been to transfer without a
receipt of goods represented thereby.
(Sec. 44)
Note: The indorsee does not guarantee that the
warehouseman will comply with his duties. (Sec.
4~ .
A creditor receiving the warehouse receipt given
as acollateral makes nowarranty. (Sec. 46)
Q: What is a non-negotiable warehouse
receipt?
A: It is a receipt in which it states that the
goods received delivered to tile depositor or to
any other specified person (Sec. 4).
Q: What is required in a non-negotiable
receipt?
A: It shall have plainly placed upon its face by
the warehouseman issuing it "non-negotiable,"
or "not negotiable." (Sec. 7)
Note: Failure to mark "non-negotiable" shall
make it negotiable (if the holder purchased it for
valuesupposing ittobe negotiable).
Q: How is it transferred?
A: A non-negotiable warehouse receipt may
be transferred by its delivery to the transferee
accompanied by a deed of assignment,
donation or other form of transfer.
Q: What is the effect of indorsement?
A: Even if the receipt is indorsed, the
transferee acquires no additional right (Sec.
39)
UNIVERSITY OF SANTO TOMAS
Pacu{ taa ae (j ) er ecf zo Civif
SPECIAL COMMERCIAL LAWS: WAREHOUSE RECEIPTS LAW
Q: Distinguish negotiable warehouse receipt from non-negotiable warehouse receipt.
A:
1_~I::(eJ :enI.:c':~=lW! ';:~=! .;['l l-"j=l~L=ttj~I"
May be a~uired through n~otiatiori
May be acquired through transfer or assignment
Rights of the holder of the receipt:
1. If indorsed:
a. Acquires title to the goods as the
person negotiating. (Sec. 41)
b. Acquires the direct obligation of the
warehouseman to hold possession of
the goods for himas if the
warehouseman directly contracted
with him. (Ibid.)
2. If not indorsed: He may compel
indorsement; otherwise, he would
acquire title as that of an assignee
(Section 43).
Rights of transferee:
1. Acquires title to the goods subject to the
terms of any agreement with the transferor.
(Sec. 42)
2. Acquires the right to notify the
warehouseman of the transfer and thereby
acquires the direct obligation of the
warehouseman to hold possession of the
goods for him. (Sec. 42)
Note: Prior to notice, the title of the transferee may be
defeated by the levy of an attachment or execution
upon the goods by a creditor of the transferor or by a
notificationto the warehouseman by the transferor or a
subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor. (Sec.
42)
Defeats the lien of the seller of the goods
covered thereQt.{Sec. 49J
Acquires the title as that of his transferor.
Good covered cannot be garnished, attached or
levied on execution by execution, unless:
1. Receipt is surrendered.
2. Its negotiation is enjoined by the court.
3. The goods are impounded by the court.
(Sec. 25)
Note: This shall not apply if the person
depositing is not the owner of the goods or one
whohas norighttoconvey title tothe goods
bindinguponthe owner.
Pending notification to the warehouseman, goods
can be.
Reason: Absent such notice, both the
warehouseman and the sheriff have a right to
assume that the goods are still owned by the person
whose name appears inthe receipt.
Protects the purchaser ingood faith and for
value.
The assignee only steps into the shoes of the
assignor.
Q: A Warehouse Company received for
safekeeping 1000 bags of rice from a
merchant. To evidence the transaction, the
Warehouse Company issued a receipt
expressly providing that the goods be
delivered to the order of said merchant. A
month after, a creditor obtained judgment
against the said merchant for a sum of
money. The sheriff proceeded to levy on
the rice and directed the Warehouse Com-
pany to deliver to him the deposited rice.
What advice will you give the Warehouse
Company? Explain your answer.
A: The merchant delivered the 1000 bags of
rice to the Warehouse Company and a
negotiable receipt was issued therewith. The
rice cannot thereafter, while in the possession
of the Warehouse Company, be attached by
garnishment or otherwise, or be levied upon
under an execution unless the receipt be first
138 /team:bIIN
surrendered to the warehouseman, or its
negotiation enjoined. The Warehouse
Company cannot be compelled to deliver the
actual possession of the rice until the receipt is
surrendered to it or impounded by the court.
Q: Assuming that a week prior to the levy.
the receipt was sold to a rice mill on the
basis of which it filed a claim with the
sheriff. Would the rice mill have better
rights to the rice than the creditor? Explain
your answer.
A: Yes. The rice mill, as a holder for value of
the receipt, has a better right to the rice than
the creditor. It is the rice mill that can
surrender the receipt which is in its possession
and can comply with the other requirements
which will oblige the warehouseman to deliver
the rice, namely, to sign a receipt for the
UST GOLDEN NOTES 2010
delivery of the rice, and to pay the
warehouseman's liens and fees and other
charqss (1999 Bar Question)
Q: J ojo deposited several cartons of goods
with SN Warehouse Corporation. The
corresponding warehouse receipt was
issued to the order of J ojo. He endorsed
the warehouse receipt to EJ who paid the
value of the goods deposited. Before EJ
could withdraw the goods, Melchor
informed SN Warehouse Corporation that
the goods belonged to him and were taken
by J ojo without his consent. Melchor wants
to get the goods, but EJ also wants to
withdraw the same. Who has a better right
to the goods? Why?
A: EJ has better right to the goods. The goods
are covered by a negotiable warehouse receipt
which was indorsed to EJ for value. The
negotiation to EJ was not impaired by the fact
that J ojo took the goods without the consent of
Melohor, as EJ had no notice of such fact.
Moreover, EJ is in possession of the
warehouse receipt and only he can surrender
it to the warehouseman. (Sec. 8, WRL)
Q: If SN Warehouse Corporation is
uncertain as to who is entitled to the
property, what is the proper recourse of the
corporation? Explain
A: Since there is a conflicting claim of
ownership or title, SN Warehouse Corporation
should file a complaint in interpleader requiring
EJ and Melchor to interplead. The matter
involves a judicial question as to whose claim
is valid. (2005 Bar Question)
Q: What is the rule where a warehouse
receipt is transferred to secure payment of
a loan by way of pledge or mortgage?
A: The pledgee or mortgagee does not
automatically become the owner of the goods
but merely retains the right to keep and with
the consent of the owner to sell them so as to
satisfy the obligation from the proceeds for the
simple reason that the transaction is not a sale
but only a mortgage or pledge. Likewise, if the
property is lost without the fault or negligence
of the mortgagee or pledgee, then said goods
are to be regarded as lost on account of the
real owner, mortgagor or pledgor (PNB v.
Sayo, Jr., GR. No. 129198, July 9, 1998).
Q: Does the non-payment by the original
depositors of the purchase price render the
further negotiation of the receipt invalid?
A: No, the negotiation of the warehouse
receipt by the buyer of goods purchased from
and deposited to the warehouseman is valid
even if the warehouseman who issued the
negotiable warehouse receipt was not paid by
the buyer. The validity of the negotiation
cannot be impaired by the fact that the
owner/warehouseman was deprived of the
possessicin of the same by fraud, mistake or
conversion. (PNB v. Noah's Ark Sugar
Refinery, GR. No. 107243, Sept. 1, 1993)
Q: What are the obligations of a
warehouseman?
A:
1. To take care of the goods entrusted
to his safekeeping; and
2. To deliver them to the holder of
the receipt or the. depositor
provided there is demand by the
depositor accompanied by either:
a. An offer to satisfy the
warehouseman's lien;
b. An offer to surrender the receipt,
if negotiable with such
indorsements as would be
necessary for the negotiation of
the receipts; or
c. A readiness and willingness to
sign, when the goods are
delivered, an acknowledgement
that they have been delivered,
if such signature is requested
by the warehouseman (Sec. 8)
Q: Should the demand be made in order to
have the delivery by the warehouseman?
A:
GR: Yes, the demand should be made in
order before the duty to deliver the goods
will arise.
XPN: When the warehouseman has
rendered it beyond his power to deliver the
goods.
UNIVERSITY OF SANTO TOMAS
PacuCtaa de Der ech o Ci vi l
SPECIAL COM1vfERCIALLAWS: WAREHOUSE RECEIPTS LAW
Q: To whom should the goods be
delivered?
A:
1. To the person lawfully entitled to the
possession of the goods, or his
agent;
2. To the person entitled to delivery
under a non-negotiable instrument or
with written authority; or
3. To the lawful order of a negotiable
receipt. (person in possession of a
negotiable receipt) (Sec. 9)
Q: When is refusal to deliver by the
warehouseman justified?
A:
1. If the warehouseman's lien is not
satisfied by the claimants (Sec. 31);
2. Where the goods have already been
sold to satisfy the warehouseman's
lien or because of their perishable or
hazardous nature (Sec. 34);
3. If the warehouse receipt is negotiated
back to him.
4. When the holder does not satisfy the
conditions prescribed inSection 8.
5. The failure was not due to any fault
on the part of the warehouseman:
a. Upon request by or on behalf of
the person lawfully entitled; (Sec.
10);
b. If he had information that the
delivery about to be made was to
one not lawfully entitled; (Ibid.)
c. If several persons claim the
goods; (Sec. 17)
d. If the warehouseman needs
reasonable time to ascertain the
validity of the claim if someone
other than the depositor claims
title to the goods; (Sec. 18)
e. If the goods are lost, despite
ordinary care by the
warehouseman.
140
Q: What if the receipts are lost or
destroyed?
A: A court of competent jurisdiction may order
the delivery of the goods only:
1. Upon satisfactory proof of the loss or
destruction of the receipt; and
2. Upon the giving of a bond with
sufficient sureties to be approved by
the court. (Sec. 14)
Note: The delivery of the goods under anorder of
the court shall not relieve the warehouseman
fromliability to a person to whom the negotiable
receipt has been or shall be negotiated for value
without notice of the proceedings or of the
deliveryof the goods. (Sec. 14)
Q: What is the rule on mixture of goods?
A:
GR: Warehouseman shall keep the
different goods under different receipts.
XPN: If authorized by agreement or by
custom, a warehouseman may mingle
fungible goods with other goods of the
same kind and grade although of different
ownership. (Sec. 23)
Q: When does the duty to insure the goods
arise?
A:
1. Where the law provides;
2. Where it was an inducement for the
depositor to enter into the contract;
3. Established practice; or
4. Where the warehouse receipt
contains a representation to that
effect.
Q: What is conversion?
A: An unathorized assumption and exercise of
the right of ownership over goods belonging to
another through the alteration of their condition
or the exclusion of the owner's right (Bouvier's
Law Dictionary)
Q: What are the instances where a
warehouseman is liable for conversion?
A:
1. Where the delivery is made to person
other than those authorized;
2. Even if delivered to persons entitled,
he may still be liable for conversion if
prior to delivery:
a. He had been requested not to
make such delivery; or
UST GOLDEN NOTES 2010
b. He had received notice of the
adverse claim or title of a third
person.
Q: Give the effects of alteration of the
receipt on the liability of the
warehouseman.
A:
1. Alteration immaterial whether
fraudulent or not, whether authorized'
or not, the warehouseman is liable
on the altered receipt according to its
original tenor
2. Authorized material alteration - the
warehouseman is liable according
to the terms of the receipt as altered
3. Material alteration innocently made -
the warehouseman is liable on the
altered receipt according to its
original receipt
4. Material alteration fraudulently
made - warehouseman is liable
according to the. original tenor of
the receipt to a purchaser of the
receipt for value without notice, and
even to the a1\erer and subsequent
purchasers with notice except that
as regards to the last two,
the warehousem an's liability is limited
only to delivery as he is excused from
any liability
Q: What is covered by the warehouseman's
lien over the goods deposited or on the
proceeds thereof?
A:
1. Charges for storage and preservation
of the goods (insurance and others
may be included as long as it is
stipulated);
2. Money advanced, interest, insurance,
transportation, labor, weighing,
coopering and other charges and
expenses in relation to such goods;
3. Charges and expenses for notice,
and advertisements of sale, and for
sale of the goods where default had
been made in satisfying the
warehouseman's lien. (Sec. 27)
Q: What are the remedies available to a
warehouseman to enforce his
warehouseman's lien?
A:
1.
.:.,'
2.
By refusing to deliver the goods until
the lien is satisfied;
By causing the extrajudicial sale of
the property and applying the
proceeds of the value of the lien;
Note: Where the sale was i made
without the publication required and
before the time provided by law, such
sale is void and the purchases of the
goods acquires notitle tothem.
3. By filing a civil action for collection of
the unpaid charges or by way of
counterclaim in an action to recover
the property from him or such other
remedies allowed by law for the
enforcement of a lien against
personal property or to a creditor
against his debtor, for the collection
from the depositor of all the charges
which the depositor has bound
himself to pay.
Q: Against whose goods may the lien be
enforced?
A:
1. Goods belonging to the person who is
liable as debtor; and
2. Goods belonging to others which
have been deposited at any time by
the debtor with authority to make a
valid pledge. (Sec. 28)
Q: How may the warehouseman lose his
lien?
A:
1. By surrendering possession thereof,
or
2. By refusing to deliver the goods when
a demand is made with which he is
bound to comply. (Sec. 29)
Note: Where a negotiable receipt is issued, with
the exception of the charges for the storage
or preservation of goods for which a
negotiable receipt has been issued, the lien
exists only for other' charges expressly
, ',. enumerated in the receipt so far as they are
written although the amount of the said charge
isn'tstated.
Loss of lien does not mean that the
warehousemandoes nothave anyother remedy.
UNIVERSITY OF SANTO TOMAS
Pacu[ tar f de Der ec I i o Civif
SPECIAL COMMERCIAL LAWS: WAREHOUSE RECEIPTS LAW
Q: What are the instances where a
warehouseman is criminally liable for his
acts?
A:
1. Issuance of receipts for goods not
received. (Sec. 50)
Issuance of receipt containing false
statement. (Sec. 51)
Issuance of duplicate negotiable
warehouse receipt not marked as
such. (Sec. 52)
Issuance of a negotiable warehouse
receipt of which he is an owner
wi thout_stati ng such fact of
ownership. (Sec. 53)
Delivery of goods wi thout obtaining
negotiable warehouse receipt. (Sec.
54)
Negotiation of receipt for mortgaged
goods. (Sec. 55)
2.
3.
4.
I
51
I
6)
Q: What are the other acts for which
warehouseman is liable?
A:
1. Failure to stamp "duplicate" on copies
of negotiable receipt (Sec.6)
2. Failure to place "non-negotiable" or
"not-negotiable" on a non-negotiable
receipt (Sec. 7)
3. Misdelivery of goods(Sec. 10)
4. Failure to effect cancellation of a
negotiable receipt upon delivery of
the goods (Sec. 11)
5. Issuing receipt for non-existing goods
or misdescribed goods (Sec. 20)
6. Failure to take care of the goods
(Sec. 21)
7. Failure to give notice in case of sale
of goods to satisfy lien (Sec. 33) or
because the goods are perishable or
hazardous (Sec. 34)
142
Academics Corrunrttce .
Uwi r penol l : Abraham D. Celluill() II
Vi ce-Chai r ] or .Academi ,: Jeannie A, Laurentino
f/i~1:-(/J(jirJ;Jr Admi ne: Fi nance: Aissa Celinc ll. Luna
Vi ,r -Cbai r j i l l ' L a) ,o,,' C:,.. De.r 1 ~ 1 I : Loise RaeC. Naval
Mer cantile Law Cornrn itrce
.\ ' ubi ed l I ead' Hoty '1'. Amj)aguey
A" -J/ ... )lIb/ed I l ead: Maniivn Rose S. S()tei"
Members:
I ':dwin Marc T Ilaldia
Airccn M. Cacho
Socrates I\cnjic I. Marbil
Ron Chcrric S. Menciu%a
L':dison.lamcs te. l'ag<llitauol1
Maybcllin M. Santiago
UST GOLDEN NOTES 2010
Q: When is the law applicable?
A: The GBWA applies to a warehouseman
engaged in the business of receiving
commodity for storage, including contracts or
transactions:
1. Wherein the warehouseman is
obligated to return the very same
commodity delivered to him or to pay
its value;
2. Wherein the commodity delivered is
to be milled for and on account of its
owner; or
3. Wherein the commodity delivered is
commingled with commodity
delivered by or belonging to other
persons and the warehouseman is
obligated to return commodity of the
same kind or to pay its value (Sec.2)
Note: The kinds of commodity to be deposited
must be those which may be traded or dealt in
openly and legally. Thus, illegal and prohibited
goods may not bevalidly received (Sec.2)
Q: What are the obligations of a
. warehouseman under this law?
A: A warehouseman cannot receive goods for
storage, milling or commingling without
performing the following:
1. He must secure a license from the
Department of Trade and Industry;
2. He must file cash, real estate or
surety bond in an amount not less
than 33% of the market value of the
maximum quantity or commodity to
be received.
3. He must not discriminate and must
open his warehouse to the public;
4. In case of damage to the goods
because the warehouseman accepts
goods in excess of the capacity of his
warehouse, the latter is liable in the
amount equivalent to double tile
market value of the goods.
5. The goods must be insured against
fire.
Academics Committee
ClwirperflJlJ: Abraham D. (;cnuino II
f 'i((l-Chair.Jfu AtaJl : l l l l t: C J <..:annit: A. Laurcn tino
Vi t" C-CI .l ai r j o1 ' .,q dmi Jl ~ ' ,; " , 1-'IJltlna: :\iss:l Celinc r I. Luna
r ' i w-Chai r ./ or Li..'Y01l11i:.....J)e,flgn: LDisc Rae C;. Naval
Mer cantile Law Committee
j ' " b/ ,d H ead: Holy T il1l1pagucy
Aut . .l"lIbl'(/ [ ' -/ c" d: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Airccn M. Cacho
Socrates Benjie 1. ilbrbil
R n Chcrric S. Mendoza
Edison J amLs I", Pagalilauan
Maybellinc IVI.Santiago
UNIVERSITY OF SANTO TOMAS
'Facu It a d: de (])erecfio Civif
SPECIAL COMMERCIAL LA \\IS: TRUTH IN LENDING ACT
Q: What is the purpose of Truth in Lending
Act (TILA)?
A: To protect persons from a lack of
awareness of the true cost of credit and to
prevent the uninformed use of credit.
Q: When does TILA apply?
A: It applies to creditors who extend loans,
sales on installments and other credit
transactions.
Note: It applies only tocases involving extension
of credit and not to transactions made on cash
basis!
I
Q: What are the items required to be
disdosed?
A:
1. In credit sales:
a. Cash price or delivered price;
b. Credit for down-payment or
trade-in;
c. Total amount to be financed;
d. Charges not incident tothe sale;
e. Finance charges - amounts to
be paid by the debtor incident to
the extension of credit such as
interests, discounts, collection
fees, credit investigation fees
and attorney's fees;
f. Percentage of the finance
charges 0 the amount to be
financed;
g. Effective interest rate;
h. Repayment program; and
i. Default or delinquency charges
or late payments. (Sec. 4, TlLA)
2. In consumer loans:
a. Amount of credit;
b. Charges;
c. Amount to be financed;
d. Amount of finance charge;
e. Effective interest rates;
f. Percentage of finance charge
and amount to be financed;
g. Default or delinquency charges;
and
h. Description of security.
Note: This disclosure requirement is not
applicable to bank deposits and insurance
contracts.
144
Q: When and how should disclosure be
made?
A: Prior to the consummation of the
transaction and ina clear statement inwriting.
Q: What are the credit transactions covered
byTILA?
A:
1. Loans, mortgages, deeds of trust,
advances and discounts;
2. Conditional sales contracts, any
contract to sell, or sale or contract of
sale of property or services, either for
present or future delivery, under
which part or all of the price is
payable subsequent to the making of
such sale or contract;
3. Any rental-purchase contract;
4. Any contract for the hire, bailment or
leasing of property;
5. Any option, demand, lien, pledge or
other claim against, or for delivery of,
property or money;
6. Any purchase, or other acquisition of,
or any credit upon the security of, any
obligation or claim arising out of any'
of the foregoing; and
7. Any transaction or series of
transactions having a similar purpose
or effect. (Sec. 3)
Q: What transactions are not covered by
TILA?
A:
1. Those which do not involve the
payment of any finance charges by
the debtor; and
2. Where the debtor is the one
specifying a definite and fixed set of
credit terms such as bank deposits,
insurance contracts, sale of bonds,
etc.
UST GOLDEN NOTES 2010
Q: What is the effect of non-compliance
with TllA?
Q: May the lender collect handling charges
where the promissory notes executed do
not contain any. stipulation pertaining to
the payment of such handling charges?
A: .No, banks and non-bank financial
intermediaries authorized to engage in quasi-
banking functions are required to strictly
adhere to the provisions of the TllA. Where
the promissory note signed by the borrowers
do not containany stipulationonthe payment
of handling charges, the bank cannot collect
the same even though a CB Circular 504
authorized banks to collect handling charges
on loans over P500,OOO. (Consolidated Bank
v. CA, G.R. No. 91494, July 14, 1995)
Q. What is the effect of the violation on the
contract?
Chargesnotitemized
cannotbe collected. If
alreadypaid, canbe
recovered
as providedin
subsec. (a),
nothingshall affectthe
validityor
enforceabilityof any
contractor
transactions.
Liablein amount
of P100or inan
amountequal to
twice thefinance
chargedrequiredby
suchcreditor,
whicheveristhe
greater, exceptthat
such liabilityshall
notexceedP2,000
onanycredit
transaction.
be by not
lessthanP1,000or
morethanP5,OOOor
imprisonmentfor not
less than6months,
nor morethanone
or both.
Q: Dana Gianina purchased on a 36 month
installment basis the latest model of the
Nissan Sentra Sedan car from the J obel
Cars Inc. In addition to the advertised
selling price, the latter imposed finance
charges consistinq of interests, fees and
service charges. It did not, however, submit
to Dana a written statement setting forth
therein the information required by the
Truth in lending Act (R.A. 3765).
Nevertheless, the conditional deed of sale
which the parties executed mentioned that
the total amount indicated therein included
such finance charges.
Has there been substantial compliance of
the aforesaid Act?
A: There was no substantial compliance with
theTruth inlending Act. The lawprovidesthat
the creditor must make afull disclosure of the
creditlost. The statementthat thetotal amount
due includes the principal and the financial
charqes, without specifying the amounts due
on each portion thereof would be insufficient
and unacceptable.
A: A violation of the Truth in lending Act will
not adverselyaffect the validity of the contract
itself.
Q. In the event of a violation of the Act,
what remedies may be availed of by Dana?
A: It would allow Dana to refuse payment of
financial charges or, if already paid, to recover
the same. Dana may also initiate criminal
charges against the creditor. (1991 Bar
Question)
Q: Embassy Appliances sells home theater
components that are desiqned and
customized as entertainment centers for
consumers within the medium-to-high price
bracket. Most, If not all, of these packages
are sold on installment basis, usually by
means of credit cards allowing amaximum
of 36 equal monthly payments. Preferred
credit cards of this type are those Issued
by banks, which regularly hold mall-wide
sales blitzes participated in by appliance
retailers like Embassy Appliances. You are
a buyer of a home theater center at
Embassy Appliances. The salesclerk who
is attending to you Simply swipes your
credit card on the electronic approval
machine (which momentarily prints out
your charge Slip since you have unlimited
credit), tears the slip from the machine,
hands the same over to you for your
signature, and without more, proceeds .to
arrange the delivery and installation of your
new home theater system. You know you
will receive astatement on your credit card
purchases from the bank containing an
option to pay only a minimum amount,
which is usually 1/36 of the total price you
were charged for your purchase. Did
Embassy Appliances comply with the
UN I V E R 5 I T Y OF 5ANT 0 TOM A 5 ~~'. 145
Pacu{ taa ae De r e c h o Ci vi t . .
SPECIAL COMMERCIAL LAWS: TRUTH IN LENDING ACT
provisions of the Truth In Lending Act (RA.
3765)?
A: There is no need for Embassy Appliances
to comply with the Truth In Lending Act. The
transaction is not a sale on Installment basis.
Embassy Appliances Is a seller on cash basis.
It is the credit card company which allows the
buyer to enjoy the privilege of paying the price
on installment basis. (2000 Bar Question)
Q: When must an action for violation of the
Truth in Lending Act be brought?
A: Within 1 year from the date of the
occurrence of the violation.
146
Academics Committee
C//(Jirj>CIJIIII: Abraham D. ( icnuinr. II
!/ i L r -Chl i r j () r ./.'(C}(IL'mi~:r:.l cannic /\. J .aurcu rino
1 / " i a' L hai r J' u- /Idmill e.'.'"I'i"IIUlh!:: Ai ssa Ccliru- II. Luna
I/i,,'-Chairjill' l ayou; e.'" Oe.r (~ I l : 1.oisc Rae (;. Na val
Mercantile Law Committee
J/ l bj cd 1/,,,,/, [[oIl' T. 1\l11l'aguey
/r... t. .\ J(bj ed H ear l - Mnnilyn Rose S. Sotclo
Members:
I,dwin Mnrc T. Ihldia
Airccn IVI. Cacho
Socrates Belliie r. Mm-hil
ROil Chcrric S. IVlclldoza
Edisoll.ialllcs F. P;lgaljlauall
Mnybcllin M. Santiago
".---.,l'("~ ~-
UST GOLDEN NOTES 2010
Q: What is real estate mortgage (REM)?
A: It is a contract whereby the debtor secures
to the creditor the fulfillment of a principal
obligation, specially subjecting to such security
immovable property or real rights over
immovable property which obligation shall be
satisfied with the proceeds of the sale of said
property or rights in case the said obligation is
not complied with atthe time stipulated.
Q: What is the nature of REM?
A: It is a real right following the property, such
that in subsequent transfers by the mortgagor,
the transferee must respect the mortgage. A
registered mortgage lien is considered
inseperable from the property inasmuch as it is
a right in rem.
Q: What laws govern REM?
A:
1. Act 3135 - Extrajudicial foreclosure;
when a special power of attomey is
attached/inserted to REM contract;
2. Rule 68, Rules of Court - When the
contract is silent as to the manner of
foreclosure, judicial;
3. Sec. 47, R.A. 8791 (General Banking
Law of 2000) - Mortgagee/bidder is a
bank.
Q: What are the alternative remedies of the
mortgagee?
A:
1. Mortgagor is living
a. Foreclosure
a. judicial (Rule 68, ROC)
b. Extrajudicial (Act 3135)
b. Ordinary action for collection of
money - effect is waiver of REM
2. Mortgagor is dead
a. Waive the mortgage and claim
the entire debt from the estate of
the mortgagor as an ordinary
claim;
b. J udicial foreclosure; and
c. Rely on the mortgage. (Sec. 7,
Rule 86. ROC)
d. Extrajudicial foreclosure (Act
3135) before it is barred by
prescription without right to file a
aclaim for any deficiency. (Vda.
De Jacob v. CA, G.R. No. 88602,
Apr. 6, 1990)
Q: What are the methods of forced sales
arising from failure to pay mortgage debt?
A:
1. Extrajudicial foreclosure sale under
Act No. 3135.
2. J udicial foreclosure sale under Rule
68 of the Rules of Court.
3. Ordinary execution sale under Rule
39.
Q: What are the stages in extra-judicial
foreclosure?
A:
1. Execution of contract of loan and
REM agreement with the
corresponding SPA.
2. Default of the mortgagor-debtor either
by:
a. non-payment; or
b. violation of the terms of the loan
or REM agreement.
3. Filing of petition for sale witll clerk of
court who acts as ex-officio sheriff
(A.M No. 99-10-05-00). Afterwards,
the clerk of court will raffle it among
the sheriffs, who shall conduct the
foreclosure sale once given the
authority to do so.
Note: Petition is filed where the
property is located. In case the
mortgaged properties are located in
different provinces, the venue of the
extrajudicial foreclosure proceedings is
the place where each of the mortgaged
property is located.
A mortgage action prescribes in 10
years from the time the right of action
accrues, that is, from the time the
mortgagor defaults in the payment of
his obligationto the mortgagee and not
from the date of the execution of the
mortgage contract. (Cando v. Spouses
Olazo, G.R. No. 160741, Mar. 22, 2007)
4. Compliance with certain jurisdictional
requirements:
a. Publication - in a newspaper of
general circulation once a week
for 3 consecutive weeks; and
U N I V E R 5 I T Y 0 F SAN ToT 0 MAS ~-u,; ..147
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SPECIAL COMMERCIAL LAWS: REAL ESTATE MORTGAGE
b. Posting - of the notice of sale for
not less than 20 days in at least
3 public/conspicuous places in
the province or municipality
where property is located.
Note: A certificate of posting is not
indispensable for the validity of an
extra judicial foreclosure sale of
real property. What the law
requires is the posting of the notice
of sale and not the certificate of
posting. (Development Bank of the
Phils. v. CA G. R. No. 125838 June
10, 2003)
5. Foreclosure - the remedy available to
the mortgagee by which he subjects
the mortgaged property to the
satisfaction of the obligation to secure
which the mortgage was given. (59
G.J.S.482)
6. Registration of sale with the RD -
This pertains to the annotation of the
sale to the TCT onfile with the RD.
7. Redemption The mortgagor
reacquires or buys back the property,
which may have passed under the
mortgage.
8. Consolidation of title - By filing
affidavit with RD. The Affidavit of
Consolidation of Title must indicate
the relevant dates to show
mortgagor's failure to redeem within
the allowable time. This enables the
mortgagee to acquire full ownership
. over the property. HiS inchoate right
ripens tofull ownership.
9. Cancellation of the title of the
mortgagor and Issuance of anew title
in favor of mortgagee - The basis of
which is the order of court confirming
the sale. .
Petition for a writ of possession -
There is no need to file an ejectment
suit. Here, the mortgagee employs
force to oust the mortgagor from the
property. This writ may be even
issued during redemption period
provided the mortgagee issued a
bond, but the grant of which is
discretionary on the part of the court.
But if the petition for the writ is filed
after the expiration of the redemption
period, the issuance of which is
ministerial on the part of the court.
This writ can be issued without the
issuance of a bond; infact it can even
148
be issued ex parte. The writ cannot
be suspended even by the filing of
the mortgagor of an action to annul
the foreclosure sale.
Q: Is there a need for personal notice?
A: No, (GSIS v. CA, G.R. No. 40824, Feb. 23,
1989) unless so stipulated.
Q: What is meant by "once a week for three
consecutive weeks"?
A: A period of 7 days, inclusive of the first day
of publication. The publication must be made 7
days apart (PNB v. CA, G.R. No. 108870, July
14, 1995) .
.Q: What happens when the foreclosure sale
is postponed?
A: The notice of sale must be republished
once a week for three consecutive weeks
otherwise, foreclosure is invalid. (Tambunting
v. CA, G.R. No. L-48278, Nov. 8, 1988)
Q: Is the rule on republication absolute?
A:
GR: Yes.
XPN:
1. The sale was not finished and is
continued the following day until
completed; or
2. When there is waiver.
Q: What is the effect of clerical errors in the
notice?
A: Clerical errors inthe name of the mortgagor
and the technical description in the notice of
sale are not sufficient to annul a foreclosure.
(Langkaan Realty Development v. UCPB, G.R.
No. 139437, Dec. 8, 2000)
Q: Can the notices required by law be
waived?
A: No, the parties have absolutely no right to
waive the posting and publication
requirements under Act 3135. xxx Notices are
given to secure bidders and prevent sacrifice
of property. (PNB v. Nepomuceno
Productions, G.R. No. 139479, Dec. 27, 2002)
UST GOLDEN NOTES 2010
Q: How is the foreclosure sale conducted?
A: Highest bidder wins, if mortgagee wins,
there is no need to pay cash tothe mortgagor,
and thus, the bid price would simply beapplied
tothe amount of the obligation. If the
highest bidder is not the mortgagee, then the
purchaser needs to pay cash and remit his
payment tothe mortgagee.
Q: What are the statutory requirements for
the foreclosure sale?
A: It shall be made in public auction, between
9:00 AM and 4:00 PM, under direction of any
of the following persons:
1. Sheriff;
2. Municipal judge; or
3. Auxiliary municipal judge of the
municipality in which the sale has to
be made; or
4. Notary public of said municipality.
(Sec. 4, Act 3135)
Note: Atthesale, creditor, trustee, or anyperson
authorizedto act for the creditor may participate
in the bidding. Also, any other person may bid
unless the contrary is expressly provided inthe
mortgageor trust deed under which the sale is
made. (Sec. 5, Act 3135)
Q: Would failure to implead subordinate
lien holders to the mortgage as defendants
in foreclosure proceedings would render
the proceedings not valid?
A: No. Appropriate relief could be granted by
the court to the mortgagee in the proceeding,
without affecting the rights of the subordinate
lienholder. The effect of the failure onthe part
of the mortgagee to make the subordinate lien
holder a defendant is that the decree of
foreclosure in a suit to which the holders of a
second lienare not parties leaves the equity of
redemption in favor of such lien holders'
unforeclosed and unaffected. (Loyuko, et al. v.
CA, G.R. No. 102696, July 12, 2001)
Q: When must the buyer exercise the right
of redemption?
A: One year from the date of registration of
certificate of sale.
Note: The exercise of the right of redemptionis
an implied admission of the regularity of the
foreclosuresale and estops the mortgagorfrom
later impugning its validity on that ground.
Redemptionis inconsistentwith the claimof the
invalidityof thesale.
Q: When does the one year period for
redemption not apply?
,
A: It does not apply to real estate mortgages
constituted by juridical persons in favor of a
bank, quasi-bank or trust entity. Rigl,t to
redeem can only be exercised until b:ut not
after the registration of the certificate of 9aleor
3 months from foreclosure, whichever is
earlier, underthe following conditions:
1. Mortgagor must be a juridical person
that is either a partnership or a
corporation;
2. Mortgagee is a bank, quasi-bank or
trust entity; and
3. Foreclosure is done extrajudicially.
Q: Primetime Corporation (the Borrower)
obtained a P10 million, five-year term loan
from Universal Bank (the Bank) in 1996. As
security for the loan and as required by the
Bank, the Borrower gave the following
collateral security in favor of the Bank: (1) a
real estate mortgage over the land and
building owned by the Borrower and
located in Quezon City; (2) the joint and
several promissory note of Mr. Primo
Tlrnbol, the President of the Borrower; and
(3) a real estate mortgage over the
residential house and lot owned by Mr.
Timbol, also located in Quezon City.
Because of business reverses, neither the
Borrower nor Mr. Timbol was able to pay
the loan. In J une 2001, the Bank
extrajudicially foreclosed the two real
estate mortgages, with the Bank as the
only bidder in the foreclosure sale. On
September 16,2001, the certificates of sale
of the two properties in favor of the Bank
were registered with the Register of Deeds
of Quezon City. Ten months later, both the
Borrower and Mr. Timbol were able to raise
sufficient funds to redeem their respective
properties from the Bank, but the Bank
refused to permit redemption on the
ground that the period for redemption had
already expired, so that the Bank now has
absolute ownership of both properties. The
Borrower and Mr. Timbol came to you
today, September 15, 2002, to find out if the
position ofthe Bank is correct. What would
be your answer? State your reasons.
A: With respect to the real estate mortgage
over the land and building owned by the
Borrower, Primetime Corporation, a juridical
body, the period of redemption is only three (3)
months, which period already expired. As to
the real estate mortgage over the residential
house and lot owned by Mr. Timbol, the period
of redemption is one (1) year from the gate of
registration of the certificate of sale, Iwhich
U N I V E R 5 I T Y 0 F 5ANT 0 TOM A 5 ~. 149
' Fac u.I t a d. ti e (] ) er echo Ci -oi l ' " ,
SPECIAL COMMERCIAL LAWS: REAL ESTATE MORTGAGE
period has not yet expired in this case. (2002
Bar Question)
Q: What is the difference between the right
of redemption and repurchase?
A: The right to redeem a foreclosed property
becomes functus officio on the date of expiry
and Its exercrse after the period is not really
one of redemption but a repurchase.
Distinction must be made because redemption
IS by force of law; the purchaser at public
auction is bound to accept redemption.
Repurchase however of foreclosed property,
after redemption period, imposes no such
obligation. After expiry, the purchaser mayor
may not resell the property but no law will
compel him to do so and he is not bound by
the said bid price; it is entirely within his
discretion to set a higher price, for after all, the
property already belongs to him as owner.
(Prudencio v. CA, G.R. No. L-34539, July 14
1986) ,
Q: What is the rule as to the redemption
price in case the mortgagee is a banking
institution?
A: . Where the mortgagee is a banking
Institution, the redemption price is the amount
fixed by the court in the order of execution or
the amount due under the mortgaged deed.
(Tolentino v. CA, G.R. No. 171354 Mar 7
2007) , .,
I
Q: What is the redemption price in case of
accornodatlon mortgagors?
A: Accommodation mortgagors are not liable
for the payment of the loan of the debtor. The
liability of the accommodation mortgagors
extends only up to the loan value of their
mortgaged property and not to the entire loan
itself. Hence, it is only just that they be
allowed to redeem their mortgaged property by
paying only the winning bid price thereof (plus
interest thereon) at the public auction sale.
(Belo v. PNB, G.R. No. 134330, Mar. 1, 2001)
Q: What is the effect of filing an action to
annul the foreclosure sale during the one-
year redemption period?
A: It will not toll the running of the one-year
redemption period. (MBTC v. Spouses Tan, et
ai, G.R. No. 159934, June 26, 2008)
Note: A judicial action instituted for the sole
purpose of determining the amount of the
redemptionprice, if filed before the expiration of
the original period to redeem, has the effect of a
valid exercise of the right to redeem and will
suspend the running of the period of redemption
150 Iteam:'B
even if unaccompanied by asimultaneous tender
of theredemptionprice.
However,.before this rule canbe mad~toapply, it
IS essential that the judicial action was instituted
by the mortgagor in good faith and not merely
designed to delay the redemptive period
indefinitely. (Heirs of Norberto Quisumbing v.
PNB, GR No. 178242, Jan. 20, 2009)
Q: Who is the owner of the mortgaged
property?
A: During the redemption period, the
mortgagor is still the owner. Hence, he may
stili execute attributes of ownership during said
period such as executing a second mortgage
on the same subject property.
Q: The mortgagee introduced
improvements in the property sought to be
redeemed. Will the cost of improvements
be imputed to the redemption price?
A: No, to rule otherwise would defeat the
purpose of the law.
Q: What is the remedy if the mortgagor
failed to redeem but nonetheless refuses to
surrender the certificate of title?
A: The court may order the Register of Deeds
to register the final deed of sale because
otherwise the buyer will never be able to
consolidate his title. (San Juan v. CA, G.R. No.
110055, Aug. 20, 2001)
Q: Is a mortgagee, who foreclosed and
purchased the mortgaged real property of a
delinquent debtor, entitled to a writ of
possession over the property despite the
fact that the premises are in the
possession of a lessee and whose lease
has not terminated.
A: The mortgagee is entitled to the issuance of
a writ of possession even if the property is in
the possession of a lessee whose lease has
not expired unless the lease had been
previously registered in the Registry of
Property or unless despite non-registration, the
mortgagee had prior knowledge of the
existence and duration of the lease (actual
knowledge being equivalent to registration).
(Ibasco v. Caguioa, G.R. No. L-62619, Aug.
19, 1986)
Note: The buyer at the extra-judicial foreclosure
of real property is not entitled to possessionif it is
inthe possessionof anagricultural tenant, who is
entitled to security of tenure. (PNB v. CA, GR
No. 105760, July 7, 1997)
UST GOLDEN NOTES 2010
Q: What are the remedies availing in favor
of third parties adversely affected by the
order for the issuance of the writ of
possession in favor of the winning bidder?
A:
1. Terceria to determine whether the
sheriffs has rightly or wrongfully taken
hold of the property not belonging to
the judgment debtor or obligor; and
2. An independent separate action to
vindicate their claim of ownership
and/or possession over the
foreclosed property. (China Banking
Corporation v. Ordinaria, G.R. No.
121943, Mar. 24, 2003)
Note: A third party in possession of the
property who is claiming a right adverse to
that of the debtor/mortgagor may not be
dispossessed on the strength of a mere ex
parte possessory writ, since to do so would
be tantamount to his summary ejectment.
(Penson v. Spouses Maranan, G.R. No.
1 48630, June 20, 2006)
The available remedies are cumulative.
Q: What is the effect of filing a collection
case?
A: It is tantamount to abandonment of the
remedy to foreclose the REM. The principle
applies even though the mortgage was
constituted on the property of a third party
mortgagor and the collection suit was filed
before foreign courts.
Q: What are the stages in judicial
foreclosure?
A:
1. File a complaint against the
mortgagor - Don't forget to include
subsequent lien holders, otherwise
equity in redemption will not be
divested (Limp in v. lAC, G.R. No. L:
7098, Sept. 29, 1988). The prior
execution of SPA is not required
here.
2. Hearing
3. J udgment
4. Entry of J udgment - This is the
reckoning point whereby the period of
equity of redemption is computed.
5. 90- 120 days from entry of judgment
for mortgagor to pay his debt, as
determined by court.
6. Upon failure to pay, mortgagee must
file a Motion for Execution foreclosing
the mortgage.
7. Execution sale
8. Mortgagee to file Motion for
Confirmation of Sale - the purpose of
which is to declare the sale valid in
accordance with law.
9. Issuance of Order confirming the sale
- order is appealable because it is
not an interlocutory order. Thus,
mortgagee must wait until the finality
of the order.
10. Registration of the order confirming
the sale.
11. Cancellation of the Title of the
mortgagor and issuance of new title
to the mortgagee - the basis of which
is the order of court confirming the
sale.
12. Motion for writ of possession from the
same court that ordered the
foreclosure.
Note: As compared with extra judicial
foreclosure which needs a petition, only a
motion is required in judicial foreclosure
because the court already has jurisdictlon
over the subject mortgage. This remedy
could be availed of by the mortgagee, it the
mortgagor is still in the possession 0\ the
property despite the issuance of a new
l
title
inhisfavor.
Q: When can you exercise the right of
redemption if) judicial foreclosure?
A:
GR: There is no right of redemption in
judicial foreclosure, only equity of
redemption.
XPN: If mortgagee or bidder is a bank or
credit institution, mortgagor has one (1)
more year from registration of order
confirming the sale and the certificate of
sale to redeem the property.
UNIVERSITY OF SANTO TOMAS
' Fa cu.I t.a d' ae Der e c Iio CiviC
~i~ 151
SPECIAL COMMERCIAL LA \,(! S: REAL ESTATE MORTGAGE
Q: What is equity of redemption?
A: The right of the mortgagor not to be
divested of the ownership of the mortgaged
property and to stop the foreclosure sale by
paying the mortgage debt within 90 - 120 days
from entry of judgment and even beyond, until
finality of order confirming the sale.
GR: only in J F of
REM
GR: there is no right of
redemption in judicial
foreclosure, only equity
in redemption. (Huerta
Alba Resort v. CA, G. R.
No. 128567, Sept. 1,
2000)
XPN: EJ F
involving a bank
as mortgagee and
a juridical person
as mortgagor.
XPN: If mortgagee or
bidder is a bank or
credit institution,
mortgagor has one (1)
more year from
registration of order
confirming the sale and
the certificate of sale to
redeem the property.
May be acquired
by a second
mortgagee in case
of sale of property.
mortgagor,
successors-i n-i nterest
or any judgement
creditor of the
mo
EJ foreclosure
Act3135-1 year from
date of registration of
certificate of sale
In JF - 90-120
days from entry of
judgment or until
finality of order
confirming sale.
In banks - 3 months
from date of actual sale
entry of
judgment but
before foreclosure
sale; After
foreclosure sale
but before
confirmation of
sale.
Only after foreclosure
sale
152i
Academics Cornmirrce
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I, i a-(} l oi rjf Jr, Al(jckmi~:f: .Il'all nie /\. I .aun-ruino
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1/; a-Chai r./f Jr I ~!y(JJ(' e: ' .....f)l'J,;'~Il: Ltlisl' Rae (;. Nil val
Mercantile Law Committee
Jlfhled J l ead- Iioly 'I'. t\1llJ 1agllc),
AUf. Slflyed H ead: Manilvn Rnse S. Sotelo
Members:
I ,:dIVi" Mntc '!". Ihldia
Airccn M. Cacho
Stocrates lknjie I. 1\larbii
Ron Cherric S. [VlcllJO%:1
Edisun .lames 1" . Pag:1.lilautln
Maybelline M. Santiago
UST GOLDEN NOTES 2010
Q: What is chattel mortgage?
A: By a chattel mortgage (CM), a personal
property is recorded in the Chattel Mortgage
Register as a security for the performance of
an obligation. (Sec. 2140, NCC)
Q: What laws govern the chattel mortgage?
A:
1. Act No. 1508 also known as Chattel
Mortgage Law of 1906 (As amended
by Sec. 198, Revised Administrative
Code, and by RA No. 2711,
approved J une 18, 1960);
2. RA 386 also known as the Civil
Code of the Philippines;
3. Revised Administrative Code of 1987;
4. Art. 319 of Act No. 3815 also known
as the Revised Penal Code; and
5. P.D. 1521 also known as Ship
Mortgage Decree of 1978
governing mortgage of vessels of
domestic ownership.
Q: What are the characteristics of a CM?
A:
1. Accessory contract
2. Formal obligation
3. Unilateral
Q: What are the requisites for a valid
chattel mortgage?
A:
1. Constituted to secure fulfillment of the
principal obligation;
2. Mortgagor is the absolute owner of
the property;
3. Mortgagor has free disposal of the
property, in the absence thereof, that
he be legally authorized for such
purpose;
4. Affidavit of good faith;
5. Registration with the Chattel
Mortgage Registry;
6. That it involves a personal property
(Sec. 2085, NCC); and
7. If necessary, additional registration in
the proper government agency.
Q: What is an affidavit of good faith?
A: A certificate included in the chattel
mortgage contract executed by both mortgagor
and mortgagee stating:
1. that the obligation is valid, just and
subsisting; and
2. not one entered into for purposes of
fraud.
Q: What is the effect of absence of affidavit
of good faith?
A: It does not affect the validity of the chattel
mortgage but the same will be unenforceable
against third persons.
Q: What is the status of an unrecorded
CM?
A: It is valid and binding between the parties
because the registration is necessary only for
the purpose of binding third person. (Filipinas
Marble Corp. v. lAC, GR No. L- 68010, May
30, 1986) However, knowledge is equivalent to
registration.
Q: What is the period within which to make
registration?
A: There is no specific time within which a
chattel mortgage should be recorded but the
law is substantially complied with if registration
is made:
1. before the mortgagor has complied
with his principal obligation; and
2. no right of innocent third parties is
prejudiced.
Q: What is the dual registration rule?
A:
GR: The property must be registered twice;
first, in the place where mortgagor resides
and second, in the place where property is
situated. (Sec. 4, Act 1508)
XPN: First, if the mortgagor resides in the
same place where the property is located;
second, if the amount of the loan is above
P 500,000.00, registration which should be
made in the city or municipality where the
property is situated (Sec. 116, PD.. 1159)
Q: May machinery be the subject of a CM?
A: Yes, provided none of the following are
present:
1. the machinery is installed by the
owner;
2. intended by the owner of the
tenement for an industry or work
being carried on in a building or piece
of land; and
3. which tend directly to meet the needs
of the said industry or work. (Art. 415
rbi, NCC).
Note: Thus, a machinery installed by the lessee
on the leased premises may be the subject of a
eM. (Davao Sawmill v. Castillo, GR No. L-
40411, Aug. 7, 1935)
UNIVERSITY OF SANTO TOMAS
Facu i t a d' ti e Der ec ho Ci'f)if
~i~ 153
SPECIAL COMMERCIAL LAWS: CHATrEL MORTGAGE
Q: Can immovable properties be the
subject of a CM?
A: Immovable properties cannot be the proper
subject of a CM. But a CM over immovable
properties is valid as between the parites on
the basis of estoppel but not against 3
rd
persons. (Evangelista v. Alto Surety & Ins. Co.,
G.R. No. L-11139, Apr. 23, 1958)
I
Q: Can the CM cover after-acquired
properties?
A: A I chattel mortgage shall be deemed to
cover' only the property described therein and
not like or substituted property thereafter
acquired by the mortgagor and placed in the
same depository as the property originally
mortgage. (Sec. 7, Act 1508)
Q: When may after-acquired property be
included?
A: Where the after-acquired property is in
renewal of, or in substitution for, goods on
.hand when the mortgage was executed, or is
purchased with the proceeds of the sale of
such goods. (Torres v. Limjap, G.R. No.
34385, Sept. 21, 1931)
Q: Can the CM cover after-incurred
obligations?
A: No, the affidavit of good faith in a CM
makes it obvious that the debt referred to in
the law is current, not an obligation that is yet
merely contemplated. (Acme Shoe v. CA, G.R.
No. 103576, Aug. 22, 1996)
Q: What then is the status of aCM covering
after-incurred obligations?
A: A promise expressed in a CM to include
debts that are yet to be contracted can be a
binding. commitment that can be compelled
upon. The security itself, however, does not
come into existence or arise until after a CM
agreement covering newly contracted debt is
executed either by concluding a fresh CM or
by amending the old contract conformably with
the form prescribed by the CM law. The
remedy of foreclosure can only cover the debts
extant at the time of constitution and during the
life of the CM sought to be foreclosed.
154
Q: Can' the mortgagor dispose of the
mortgaged property?
A: The owner (mortgagOr) of the mortgaged
property may validly transfer ownership thereof
to a third person and such sale is valid and
binding even against the mortgagee.
Nevertheless, the vendee must not act in bad
faith for the sale to be valid. Inspite of this, the
sale is without prejudice to the owner's
criminal liability under Art. 319 of the Revised
Penal Code whether or not intent to defraud is
attendant. (Servicewide Specialist v. lAC, G.R.
No. 74553, June 8, 1989)
Q: What is the right of a subsequent
attaching creditor?
A: A registered chattel mortgage lien attaches
to the property wherever it may be. A
subsequent attaching creditor acquired the
properties in question subject to the creditor's
mortgage lien as it existed thereon at the time
of the attachment. What may be attached in
this case is only the equity or right of
redemption of the mortgagor. (Allied Banking
Corporation v. Salas, G.R. No. L-49091, Dec.
13, 1988)
Q: A third party mortgaged his property to
secure the payment of the loan of another.
Is he liable for the deficiency?
A: He does not become solidarily liable with
the borrower merely because of the execution
of the mortgage. A Special Power of Attorney
authorizing another to mortgage one's property
as security of the latter's obligation does not in
itself make the person executing the same as
co-mortgagor thereof. It is only upon default of
the principal debtor that third party mortgagor
becomes liable and he is liable only to the
extent of the property mortgaged. He is not
liable to pay any deficiency. (Cerna v. CA,
G.R. No. 48359, Mar. 30, 1993)
UST GOLDEN NOTES 2010
Q: Distinguish chattel mortgage from
pledge.
A:
Binding if registered
Existing obligations at
the time the mortgage is
constituted.
May secure
after-incurred
obligations so
long as the
future debts are
accurately
described.
XPN:
1.Recto Law;
2. Inaccommodation
mortgages, the
accommodation
mortgagor is liable
only to the extent of
the value of the
mortgaged property;
3. EJ F due to death of
mortgagor. (Vda. De
Jacob v. CA, G.R.
No. 88602, Apr. 6,
1
Goes to the mortgagor
May be oral
Voluntary
Pledge- no
recovery of
deficiency.
Legal Pledge -
still entitled to
recovery of
deficiency.
XPN: Stipulation
to the
Q: When and how is foreclosure of CM
conducted?
A: After 30 days from the time the condition is
broken:
1.
2.
3.
At a public auction by a public officer;
At a public place in the municipality
where the mortgagor resides, or
where the property is situated;
Provided at least 10 days notice of
the time, place, and purpose of such
sale has been posted at two or more
public places insuch municipality.
Q: To what articles does foreclosure of
chattel mortgage extend to?
A: Foreclosure is limited to the items sold only
and not to other items not subject of the sale
although also given as additional security. The
foreclosure of the latter items is null and void
(Ridad vs. Filipinas Investment and Finance
Corporation, G.R. No. L-39806, Jan.
27, 1983).
Q: Does the filing of criminal action for
violation of BP 22 by the mortgagee-
creditor against the mortgagor bar the
latter from availing himself of other civil
remedy of the foreclosure of REM?
A: Following the rule on the alternative
remedies of a mortgagee-creditor, the filing of
criminal case for violation of B.P. 22 by the
mortgagee-creditor against the mortgagor will
bar or preclude the former from availing
himself of the other civil remedies of the
foreclosure of the real estate mortgage
because pursuant to Sec. 1(b) of rule 111 of
the 2000 Rules on Criminal Proceedure, he is
deemed to have availed himself of the remedy
of collection of suit (Chieng v. Spouses
Santos, G.R. No. 169647, Aug. 31, 2007).
Q: What is the order of application of the
proceeds of the sale?
A: The proceeds of the sale are to be applied
for payment inthe following order:
1. Costs and expenses of keeping and
sale;
2. Payment of the obligation secured by
the mortgage;
3. Claims of persons holding
subsequent mortgages in their order;
and
4. The balance, if any, shall be paid to
the mortgagor or person holding
under him (Sec. 14, Act No. 1508)
UNIVERSITY OF SANTO TOMAS
Pacu(tad de Ver ecl i o Ci vi l
SPECIAL COl\1.MERCIAL LAWS: CHATTEL MORTGAGE
Q: When does the mortgagor incur criminal
liability?
A:
1. Knowingly removing any personal
property mortgaged under the Chattel
Mortgage Lawto any province or city
other than the one in which it was
located at the time of the execution of
the mortgage without the written
consent of the mortgagee;
2. Selling or pledging personal property
already mortgaged or any partthereof
under the terms of the Chattel
Mortgage Law without the consent of
the mortgagee written on the back of
the mortgage and duly recorded in
the chattel mortgage register. (Art.
319, Revised Penal Code)
Note: The mortgagoris not relieved of criminal
liability even if the mortgage indebteness is
thereafterpaid infull (US v. Kilayko, GR No. L-
10891, Aug. 18, 1916), or the mortgagor-seller
subsequently informed the purchaser that the
thing sold had been mortgaged. (People v.
Alvares, GRNo. L-70446, Jan. 31, 1989)
Q: B obtained a loan and as security
mortgaged a parcel of land. While the
mortgage was subsisting, B leased for 50
years the mortgaged property to LOC. The
mortgagee was duly advised of the lease.
Thereafter, LOC constructed on the
mortgaged property an office
condominium. B defaulted on his loan and
mortgagee foreclosed the mortgage. At the
foreclosure sale, the mortgagee Was
awarded the property. The corresponding
Certificate of Sale was executed and after
the lapse of one year, title Was
consolidated in the name of mortgagee.
Mortgagee then applied for the issuance of
a writ of possession not only over the land
but also the condominium building. The
mortgagee contended that the mortgage
included all accessions, improvements and
accessories found on the mortgaged prop-
erty. LOC countered that it had built on the
mortgaged property with the prior
knowledge of mortgagee which had re-
ceived formal notice of the lease. Who has
abetter right on the building?
A: The mortgagee has a better rightthan LOC.
The mortgage extends to the improvements
introduced on the land, with the declarations,
amplifications, and limitations established by
law, whether the estate remains in the
possessionof the mortgagor or passes intothe
hands of a third person (Article 2127 Civil
Code). The notice given by LOC to the
156
mortgagee was not enough to remove the
building from coverage of the mortgage con-
sidering that the building was built after the
mortgage was constituted and the notice was
only as regards the lease and not as to the
construction of the building. Since the
mortgagee was informed of the lease and did
not object to it, the mortgagee became bound
by the terms of the lease when it acquired the
property as the highest bidder. Hence, the
mortgagee steps into the shoes of the
mortgagor and acquires the rights of the lessor
under Article 1678 of the Civil Code. This
provision gives the lessor the right to
appropriate the condominium building but after
paying the lessee half of the value of the
building at that time. Should the lessor refuse
to reimburse said amount, the lessee may
remove the improvement eventhough the land
will suffer damage thereby.
Q: Is the mortgagee entitled to the lease
rentals due from LOC under the lease
agreement?
A: LOC lease rentals belong to the mortgagor.
However, the mortgage extends to rentals not
yet receivedwhen the obligation becomes due
and the mortgagee may run after the said
rentals for the payment of the mortgage debt.
(1999Bar Question)
Academics Committee
.Chai r tcr so: Abraham D. Genuino II
l / j a-CI Jai r j or .Academi c: J eannie /\. Laurcntiun
I/l~ __ ('-CJ/(/ir 1(11"/ l dmi l l e..'no Finance: Aissa Cclinc II. Luna
l / 1 ' r .C.h~ i r f i Jr ifl),Of(1 iC' {)C.ri.s'.": Loise Rae (;. Naval
Mercantile Law Corn mittce
Jabjed I -l ead- Holy T. i\mpaguey
/1.1'.1'1 . )f(bjed I l ead: Manil)'n Rose S. Solcio
Members:
Edwin MnrcT. ! laldio
Airccn M. Cacho
Socrates llelljie I. Marbil
ROil Cherric S. ~'lelldoza
L~dis()Il.lal11eS I'. I'ogalilauall
Maybellinc ~.. 1. Santiago
UST GOLDEN NOTES 2010
Q: When does the Recto Law apply?
A:
1. Sale of personal property, the price of
which is payable in two or more
installments;
2. Contracts purporting to be leases of
personal property with option to buy
(Art. 1485, NCC)
Q: What are the requisites for the sale to be
covered under the Recto Law?
A:
1. Sale of personal property;
2. Payable in instalments; and
3. CM constituted over the same
property.
Note: It does not contemplate a sale on straight
terminwhich the balance, after paymentof initial
sum, should be paid in its totality at the time
specified inthe promissory note. (Levy Hermanos
Inc. v. Lazaro Bias Gervaci, G.R. No. 46306, Oct.
27, 1939)
Q: Under the Recto Law, what are the
remedies of the unpaid seller?
A:
1. Exact fulfillment of the obligation,
should the vendee fail to pay (action
for specific performance):
2. Cancel the sale, should the vendee's
failure to pay cover two or more
installments (rescission); or
3. Foreclose the chattel mortgage on
the thing sold, should the vendee's
failure to pay cover 2 or more
installments.
Q: Can the unpaid seller avail of all
remedies?
A: No, the remedies are alternative and not
cumulative.
Note: However, recovery of property through a
replevin case preparatory to foreclosure will not
bar the other remedies if there was no actual
foreclosure. If seller-mortgagee opts to file an
action for specific performance, he shall be
deemed to have waived his right as a mortgagee
but may still levy on the mortgaged property (on
execution).
The mortgagee's letter informingthe mortgagorof
his intent to foreclose is not yet a foreclosure of
the chattel. A mere offer by the mortgagor to
surrender the chattel, not accepted by the
mortgagee, does not preclude the mortgagee
from bringing suit to recover the balance of the
purchase price. (Industrial Finance Corp v.
Castor Tobias, G.R. No. L-41555, July 27 1977)
Q: Debtor, instead of paying, returned the
mortgaged property in satisfaction of its
indebtedness. Did the return of the
mortgaged property by the mortgagor to
the mortgagee constitute dation in payment
or dacion en pago?
A: No, under the principle of dacion en pago,
mere delivery of mortgaged motor vehicle by
mortgagor does not mean transfer of
ownership to the mortgagee. Without the
consent to transfer ownership, what is
transferred is merely possession of the
property. Mortgagee is thus not estopped from
demanding payment of unpaid obligation of
mortgagor by former's acceptance of delivery
of mortgaged property. (Fi/invest Credit Corp.
v. Phil. Acetylene, GR No. 50449, Jan. 30,
1982)
Q: Is a mortgagee/vendor of personal
property sold on installments, after taking
possession of the property, legally
obligated to foreclose the chattel mortgage
and sell it at public auction?
A: Yes, the taking of the mortgaged property
without proceeding to the sale of the same at
public auction, but instead appropriating the
same in payment of the mortgagor's
indebtedness, is not lawful. The mortgagee
must proceed to foreclose the mortgage.
(Esguerra V. CA, GR No. 40062, May 3,
1989)
UNIVERSITY OF SANTO TOMAS
Pacu[ taa de CJ) er ecl i o Civif
'i~157
SPECIAL COMMERCIAL LAWS: RECTO LAW
Q: Arb the expenses incurred by the
mortqaqae in an action for replevin
recoverable from the mortgagor?
I
A: Yes, the necessary expenses incurred in
the prosecution by the mortgagee of the action
of replevin so that he can regain possession of
the chattel should be borne by the mortgagor.
Recoverable expenses include expenses
properly incurred in effecting seizure of the
chattel and reasonable attorney's fees in
prosecuting the action for replevin. These
repossession expenses are not part of the
unpaid claim which cannot be recovered by
the foreclosure of the chattel mortgage on the
property sold on installments under Article
1484 of the Civil Code. (Agustin v. CA, G.R.
No. 107846, Apr. 18, 1997)
15 8
Academics Committee
Owilpenoll: Abraham D. (;enuino I J
[/i a.C} ,ai rjf Jr .-Li me/ami d: .Jeannie j\, l.aurcntino
]/i<"<'-Cwlijor /Idmill e: ,.. hi w" v: /\issa eeline II. Lunn
Vi a' C; /Jai r./i Jl " 1~!}'()l(t e:~l)e.riJ!.lf: Loise Rae C-i, Naval
Mercantile Law Committee
Sl I hl ed I l ead: I 1,,1)' T. /\ml'''gucy
/lJ .rI . .\ " l I hl ' d tl ead: ! 'vlanil)'n Ruse S. SOlelo
Members:
I":dwin Marc T. llaldia
t\ irecn M. Cacho
Soc rntcs lleniie I. Mnrbil
Ron Chcrric S. I\:lcndoza
Edison {ames I;. Pagalilal.lan
Mnybcllinc M. Santiago
UST GOLDEN NOTES 2010
Q: What is the purpose of the law?
A: To protect buyers of real estate on
installment payments against onerous and
oppressive conditions. (Sec. 2, R.A. 6552)
Q: What transactions are covered by the
law?
A: All transactions or contracts involving the
sale or financing of real estate on installment
payments, including residential condominium
apartments but excluding industrial lots,
commercial buildings and' sales to tenants
under CARL, where the buyer has paid at least
two years of installments. (Sec. 3)
Q: After having paid at least 2 years of
installments, what rights are accorded to
the buyer by law in case he defaults in the
payment of succeeding installments?
A.
1. To pay, without additional interest,
the unpaid installments due within the
total grace period earned by himfixed
at the rate of 1month grace period for
every 1 year of instalment payments
made.
2. To be entitled to the refund, if the
contract is cancelled.
3. To sell his rights or assign the same,
via a notarized deed, to another
person or to reinstate the contract by
updating the account during the grace
period and before actual cancellation
on he contract, (Sec. 5)
4. To pay in advance any instalment or
the full unpaid balance of the
purchase' price any time without
interest and to have such full
payment of the purchase price
annotated in the certificate of title
covering the property. (Sec. 6)
Q: What are the rights accorded to the
buyer who has paid less than 2 years of
installment?
A:
1. To pay without additional interest the
unpaid instalments due within a grace
period of 60 days from the date the
instalment became due.
2. To sell his right or to assign the same
or to reinstate the contract by
updating the account during the grace
period and before actual cancellation
of the contract. (Sec. 8)
Q: What is the extent of the refund?
A: The cash surrender value of the payments
on the property equivalent to fifty percent of
the total payments made, and, after five years
of installments, an additional five percent every
year but not to exceed ninety percent of the
total payments made.
Q: What shall be included in the
computation of the total numblr of
installments made?
A: Down payments, deposits or options on the
contract shall be included.
Q: How is the grace period determined?
A: One month grace period for every one year
of instalment payments made. Provided, That
this right shall be exercised by the buyer only
once in every five years of the life of the
contract and its extensions, if any. (Sec. 3)
Q: What happens if the buyer fails to pay
the installments due at the expiration of the
grace period?
A: The seller may cancel the contract after 30
days from receipt by the buyer of the notice of
cancellation or the demand for rescission of
the contract- by a notarial act
Q: When must the cancellation take place?
A: The actual cancellation of the contract shall
take place after 30 days from receipt by the
buyer of the notice of cancellation or the
demand for rescission of the contract by a
notarial act and upon full payment of the cash
surrender value to the buyer. (Sec. 3)
UNI.VERSITY OF SANTO TOMAS
Fa cu.I t a d: d Der echo Ci ui ]
SPECIAL COI:vIMERCIAL LAWS: BANI<J NG LAWS
'(C33~'3@ a1M~M;tl.lf4@ [']~~:U
Q: Wh~t are the governing laws?
t
A:
General banking laws
a. General Banking Law (R.A.
8791)
b. New Central Bank Act (R.A
7653)
2. Special banking laws
a. New Rural Banks Act (R.A.
7353)
b. Private Development Bank Act
(R.A. 4093)
c. Savings and Loan Association
Act (R.A. 3779)
d. Thrift Banks Act (R.A. 7906)
3. Other laws affecting banks
a. Secrecy of Bank Deposits Law
(R.A. 1405)
b. Unclaimed Balances Law (Act
3936)
c. Philippine Deposit Insurance
Corporation Act (R.A. 3591)
Q: What are the three kinds of entities that
introduce funds into the economy?
A:
1. Banks;
2. Quasi-Banks; and
3. Finance Companies and other
financial intermediaries
Q: What are banks?
A: Entities engaged in the lending of funds
obtained through deposits
Q: What are the elements determinative of
a bank?
A:
1. Must be authorized by law;
2. Accepts fund, inthe form of a deposit,
from the public; and
3. Lends money to the public.
Q: What is a quasi-bank?
A: These are entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes
of re-Iending or purchasing of receivables and
other 'obligations.
I
160
Q: What are financial intermediaries?
A: Persons or entities whose principal
functions include the lending, investing, or
placement of funds on pieces of evidence of
indebtedness or equity deposited with them,
acquired by them or otherwise coursed
through them, either for their own account or
for the account of others.
Q: What are deposit substitutes?
A: It is an alternative forrn of obtaining funds
from the public, other than deposits, through
the issuance, endorsement, or acceptance of
debt instruments, for the borrower's own
account, for the purpose of reiending or
purchasing of receivables and other
obligations. These instruments may include,
but need not be limited to, banker's
acceptances, promissory notes, participations,
certificates of assignment and similar
instruments with recourse, and repurchase
agreements.
Q: What are the classifications of banks?
A:
1. Universal banks;
2. Commercial banks;
3. Thrift banks composed of:
a. savings and mortgage banks;
b. stock savings and loan
associations;
c. private development banks;
4. Rural banks;
5. Cooperative banks;
6: Islamic banks (Charter of AI AmanaiJ
Islamic Investment) ; or
7. Other classifications of banks as
determined by the Monetary Board of
the Bangko Sentral ng
Pilipinas. (2002 Bar Question)
UST GOLDEN NOTES 2010
Q: Differentiate universal banks, commercial banks and thrift banks.
1. Has the aut ty to exercise
the powers of a commercial bank.
2. To act as an investment house
- a corporation that sells and
guarantees sale of securities and
shares of stocks. i.e. Petron will
tap an investment house in order
to sell its stocks.
engage
undertakings and, in addition
to the general powers incident
to a corporation, may exercise
all such powers as may be
necessary to carry on the
business of commercial
banking.
Note: Allied undertakings are
those activities or entities
which enhance or complement
Q: What are other powers which may be
necessary in carrying on the business of
commercial banking?
A:
1. Accepting drafts and issuing letters of
credit;
2. Discounting and negotiating
promissory notes, drafts, bills of
exchange and other instrument
evidencing debt;
3. Accepting or creating demand
deposits, receivinq other types of
deposit and deposit substitutes;
4. Buying and selling FOREX and gold
or silver bullion;
5. Acquiring marketable bonds and
other debt securities;
6. Extending credit; and
7. Determination of bonds and other
debt securities eligible for investment
including maturities and aggregate
amount of such investment, subject to
1.To issue imported LC;
2.To accept or open
checking account except
with prior approval by the
Monetary Board (MB
requires at least a net
asset worth of 28M)
such rules as the Monetary Board
may promulgate. (Sec. 24)
Q: What are the functions of a bank?
A:
1. Loan function;
2. Deposit Function; and
3. Others.
Q: What are the classifications of loan?
A:
1. Unclassified Loans - Those that do
not have greater-than-normal risk and
the borrower has apparent ability to
satisfy it infull and no loss in ultimate
collection is anticipated
2. Classified Loans - Those that have
extraordinary risks of loss in
collection due to some defects such
as bad debts or those under litigation.
UNIVERSITY OF SANTO TOMAS f'''''''~
Facul t a d' de De r e ch o Ci vd' 161
SPECIAL COMMERCIAL LAWS: BANKING LAWS
Q: What are the limitations imposed upon
banks with respect to its loan function?
A:
1. GR: Single borrower's limit - The
total amount of loans, credit
accommodatioilS and guarantees that
the bank could grant should at no
time exceed 25% of the bank's net
worth. (Sec 35.1, General Banking
Law (GBL))
XPN:
a. As the Monetary Board may
otherwise prescribe for reasons
of national interest
b. Deposits of rural banks with
government-owned or
controlled financial institutions
like LBP, DBP, and PNB.
2. The total amount of loans, credit
accommodations and guarantees
prescribed in (a) may be increased by
an additional 10% of the net worth of
such bank provided that additional
liabilities are adequately secured by
trust receipt, shipping documents,
warehouse receipts and other similar
documents which must be fully
covered by an insurance. (Sec. 35.2,
GBL)
3. Loans and other credit
accommodations secured by REM
shall not exceed 75% of the
appraised value of the real estate
security plus 60% of the appraised
value of the insured improvements
(Sec. 37, GBL)
CM/intangible property such as
patents, trademarks, etc. shall not
exceed 75%of the appraised value of
the security (Sec. 38, GBL)
4. Loans being contractual, the period of
payment may be subject to stipulation
by the parties. In the case of
amortization, the amortization
schedule has no fixed period as it
depends on the project to be financed
such that if it was capable of raising
revenues, it should be at least once a
year with a grace period of 3 years if
the project to be financed is not that
profitable which could be deferred up
to 5 years if the project was not
capable of raising revenues. (Sec. 44,
GBL)
5. Loans granted to DOSRI:
162
a. Qirector
b. Qfficer
c. .tockholder, which should at
least 1% (if below 1% - not
anymore covered)
d. Belated interests, such as DOS's
spouses, their relatives within the
first degree whether by
consanguinity or affinity,
partnership whereby DOS is a
partner or a corporation where
DOS owns at least 20%.
Q:What are excluded from such loan
limitations?
A: Non-risk loans, such as:
1. Loans secured by obligations of the
Bangko Sentral ng Pilipinas or the
Philippine Government;
2. Loans fully guaranteed by the
Government;
3. Loans covered by assignment of
deposits maintained in the lending
bank and held inthe Philippines;
4. Loans, credit accomrnodations and
acceptances under letters of credit to
the extent covered by margin
deposits; and
5. Other loans or credit
accommodations which the MB may
specify as non-risk items.
Q: What is joint and solidary signiture
(J SS) practice?
A: A common banking practice requiring as an
additional security for a loan granted to a
corporation the joint and solidary signature of a
major stockholder or corporate officer of the
borrowing corporation (Security Bank v.
Cuenca, G.R. No. 138544, Oct. 3, 2000)
Q: In case of DOSRI accounts, what are the
requirementsthat must be complied with?
A:
1. Procedural requirement - Loan must
be approved by the majority of all the
directors not including the director
concerned. CB approval is not
necessary; however, there is a need
to inform them prior to the transaction.
Loan must be entered in the books of
the corporation. (Sec. 36)
2. Substantive requirement - Loan must
not exceed the paid in contribution
and unencumbered deposits. (Not to
exceed 15% of the portfolio or 100%
of the net worth, whichever is lower.)
(Sec. 36 [4])
UST GOLDEN NOTES 2010
Q: What is the effect of non-compliance
with the foregoing requirements?
A: Violation of DOSRI is a crime and carries
with ii penal sanction.
Q: What are the transactions covered by
the DOSRI regulation?
A: Tile transaction covered are loan and credit
accommodation. Not being a loan, the ceiling
will not apply to lease and sale. However, it
should still comply with the procedural
requirement.
Q: What is the arms-length rule?
A: It provides that any dealings of a bank with
any of its DOSRI shall be upon terms not less
favorable to the bank than those offered to
others. [Sec. 36 (2)]
Q: Can the bank terminate the loan and
demand immediate payment if the borrower
used the funds for purposes other than that
agreed upon?
A: If the bank finds that the borrower has not
employed the funds borrowed for the purpose
agreed upon between the bank and the
borrower, the bank may terminate the loan and
demand immediate payment. (Banco de Oro v.
Bayuga, GR No. L-4956B, Oct. 17, 1979)
Q: What is the deposit function of banks?
A: The function of the bank to receive a thing, .
primarily money, from depositors with the
obligation of safely keeping it and returning the
same.
Q: What are the kinds of deposits between
a bank and its depositors?
A:
1. As debtor-creditor:
a. Demand deposits - all those
liabilities of banks which are
denominated in the Philippine
currency and are subject to
payment in legal tender upon
demand by representation of
checks.
b. Savings deposits - the most
common type. of deposit and is
usually evidenced by a
passbook.
Note: The requirement of
presentation of passbooks is
usually included in the terms and
conditions printed in the
passbooks. A bank is negligent if it
. allows the withdrawal without
requiring the presentation of
passbook (BPI v. CA, GR No.
112392, Feb. 29,2000).
c. Negotiable order of withdrawal
account (NOWA) - Interest-
bearing deposit accounts that
combine he payable on demand
feature of checks and investment
feature of saving accounts.
d. Time deposit - an account with
fixed term; payment of which
cannot be legally required within
such a specified number of days.
2. As trustee-trustor: Trust account - a
savings account, established under a
trust agreement containing funds
administered by the bank for the
benefit of the trustor or another
person or persons.
3. As agent-principal.
a. Deposit of checks for collection
b. Deposit for specific purpose
c. Deposit for safekeeping
Q: What are the types of deposit accounts?
A:
1. Individual; or
2. J oint:
a. "And" account - the signature of
both co-depositors are required
for withdrawals.
b. "And/or" account - either one of
the co-depositors may deposit
and withdraw from the account
without the knowledge consent
and signature of the other.
Q: Is an anonymous account prohibited? .
A:
GR: Anonymous accounts or those under
fictitious names are prohibited (R.A. 9160
as amended by by R.A. 9194; asp Circular
No. 251, July 21, 2000).
XPN: In case where numbered accounts is
allowed such as in foreign currency
deposits. However, banks/non-bank
financial institutions should ensure that the
client is identified in an official or other
identifying documents (Sec. B, R.A. 6426
as amended, FCDA).
UNIVERSITY OF SANTO TOMAS
PacuCtaa de < Der ecf i o Ci'(liC
SPECIAL COMMERCIAL LA ws: BANKING LAWS
Q: What is the nature of a bank deposit?
A: All kinds of bank deposits are loan. The
bank can make use as its own the money
deposited. Said amount is not being held in
trust for the depositor nor is it being kept for
safekeeping. (Tang Tiong Tick v. American
Apothecaries, G.R. No. 43682, Mar. 31, 1938)
Q: In the enforcement of obligations
concerning deposit, will the remedy of
mandamus lie?
A: No, because all kinds of deposit are loans.
Thus, the relationship being contractual in
nature, mandamus cannot be availed of
because mandamus will not lie to enforce the
performance of contractual obligations.
(Lucman v. Alimatar Malawi, G.R. No. 159794,
Dec. 19, 2006)
I
Q: Does the fiduciary nature of the bank-
depositor relationship convert the contract
between banks and depositors to a trust
agreement?
A: No, thus, failure by the bank to pay the
depositor is failure to pay simple loan, and not
a breach of trust. (Consolidated Bank and
Trust Corp. v. CA, G.R. No. 138569, Sept. 11,
2003)
Q: After procuring a checking account, the
depositor issued several checks. He was
surprised to learn later that they had been
dishonored for insufficient funds.
Investigation disclosed that deposits made
by the depositor were not credited to its
account. Is the bank liable for damages?
A: Yes, the depositor expects the bank to treat
his account with utmost fidelity, whether such
account consist only of a few hundred pesos
or of millions. The bank must record every
single transaction accurately, down to the last
centavo, and as promptly as possible. This has
to be done if the account is to reflect at any
given time the amount of money the depositor
can dispose of as he sees fit, confident that
the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank,
such as the dishonor of the check without
good reason, can cause the depositor not a
little embarrassment if not also financial loss
and perhaps even civil and criminal litigation.
(Simex Inti. v. CA, G.R. No. 88013, Mar. 19,
1990)
164
Q: What is the effect when the teller gave
the passbook to a wrong person?
A: Banks must exercise high degree of
diligence in insuring that they return the
passbook only to the depositor or his
authorized representative. The tellers should
know that the rules on savings account provide
that any person in possession of the passbook
is presumptively the owner. If the teller gives
the passbook to the wrong person, they would
be clothinq that person presumptive ownership
of the passbook, facilitating unauthorized
withdrawals by that person. For failing to return
the passbook to authorized representative of
the depositor, the bank presumptively failed to
observe such high degree of diligence in
safeguarding the passbook and insuring its
return to the party authorized to receive the
same. However, the bank's liability is mitigated
by the depositor's contributory negligence in
allowing a withdrawal slip signed by authorized
signatories to fall into the hands of an
impostor.
Q: If the bank was forbidden by Central
Bank to do business, does it still have the
obligation to pay interest on deposit?
A: No, because a bank lends money, engages
in international transactions, acquires
foreclosed mortgaged properties or their
proceeds and generally engages in other
banking and financing activities in order that it
can derive income therefrom. Therefore,
unless a bank can engage in those activities
from which it can derive income, it is
inconceivable how it can carry on as a
depository obligated to pay interest on money
deposited with it. (Fidelity & Savings and
Mortgage Bank v. Cenzon, G.R. No. L-46208,
Apr. 5, 1990)
Q: What are the other services that a bank
may offer?
A:
1. Receive in custody funds, documents
and valuable objects;
2. Acts as financial agent and buy and
sell, byorder of and for the account of
their customers, shares, evidence of
indebtedness, and all types of
securities;
3. Make collections and payments for
the account of others (i.e. Globe
payments) and perform such other
services for their customers as are
not incompatible with banking
business;
4. Upon approval by MB, act as
managing agent, adviser, consultant
UST GOLDEN NOTES 2010
or administrator of investment
management, advisory and
consultancy accounts; and
5. Rentout safety deposit boxes
Q: Is a safety deposit box aform of deposit
or lease?
A: Underthe old banking law, a safety deposit
box is a special deposit. However, the new
General Banking Law, while retaining the
renting of safe deposit box as one of the
services that the bank may render, deleted
referenceto depository function. Itis submitted
that because of these changes, the contract
for the use of a safe deposit box should be .
governed by the law on lease. (Divina,
Handbook on Philippine Commercial Law)
Q: What is net worth?
A: The total of the unimpaired paid-insurplus,
retained earnings and undivided profit, net of
valuation reserves and other adjustments as
may be required bythe BSP (Sec. 24.2) .
Q: What are the limitations on acquisition
of real properties?
A: The bank may acquire, hold and convey
real property only under the following
circumstances:
1. As it may be necessary for the
conduct of its business;
2. As shall be mortgaged to it in good
faith by way of security of debts, e.g
foreclosure;
3. As shall be conveyed to it in
satisfaction of "debts" previously
contracted in the course of its
dealings, e.g. dacionenpago;
4. As it shall purchase at sales under
judgments, decrees, mortgages or
trust deeds, e.g. execution sales - to
be able to levy on attachment real
property after decisionbecamefinal.
Note: Any property acquired byvirtue
of which should be disposed of within
5 years fromacquisition.
Q: What are debts?
A: A loan, or that which results to civil
transactions by the bank in the course of its
dealings and does not refer to civil liability
arisingfromcrime. (Registry of Deeds v. China
Bank, G.R. No. L- 11964, Apr. 28, 1962)
Q: Can a foreign-owned commerCial bank
acquire ownership over a residential lot by
virtue of the deed of transfer executed in its
favor to satisfy acivil liability arising from a
criminal offense?
A: Where the deed of transfer over a real
estate is executed in favor of the foreign-
owned bank to satisfy a civil liability arising
fromanoffense, the cannot acquire ownership
over such real estate since the "debts" referred
to in the law are only those resulting from
previous loans and similar transactions made
or entered into by commercial bank in the
ordinary course of its business.
Q: Is the stipulation that a bank will not be
liable for damages in case of error or delay
in transmitting through a telegraphic
transfer valid?
A: No, it is against public policy. (Philippine
Commercial International bank v. CA, G.R. No.
97785, Mar. 29, 1996)
Q: Does the bank need to exercise extra-
ordinary diligence in all commercial
transactions?
A: No, the degree of diligence required of
banks, is morethanthat of agoodfather of the
family where the fiduciary nature of their
relationshipwith their depositors is concerned,
that is, depositary of deposits. But the same
higher degree of diligence is. not expected to
be exerted by banks in commercial
transactions that do not involve their fiduciary
relationshipwith their depositors, such as sale
and issuance of foreign exchange demand
draft. (Reyes v. CA, G.R. No. 118492,Aug. 15,
2001)
Q: When may the Monetary Board
summarily close a banking institution?
A: In case a bank or quasi-bank notifies the
Bangko Sentral or publicly announces a bank
holiday, or in any manner suspends the.
payment of its deposit liabilities continuously
for more than 30 days, the Monetary Board
may summarily and without need for prior
hearing close such banking institution and
hearing close such banking institution and
place it under receivership of the Philippine
DepositCorporation(Sec. 53, GBL).
UNIVERSITY OF SANTO TOMAS
PacuCtaa de Der echo Ci vi C
~. 165
SPECIAL COMMERCIAL LAWS: BANKING LAWS
Q: Who may file a criminal case for
violations of banking laws?
i
A: It does not appear from the law that only
the CJ ntral Bank or its respondent officials can
cause! the prosecution of alleged violations of
banking laws. Said violations constitute a
public offense, the prosecution of which is a
matter of public interest and hence, anyone -
even private individuals - can denounce such
violations before the prosecuting authorities.
(Perez v. Monetary Board, GR No. L-23307,
June 30, 1967)
Q: What are the limitations on a person's
extent of ownership in a bank?
A:
1 . On Filipino individual/corp. -
GR: Can own up to 40% (individual
limit) of the voting stock of the bank.
XPN: In case of a corporation whose
shares of stocks is listed in the Stock
Exchange or has been in operation
for at least 10 years - 60% but for
only 1bank. (R.A. 7221)
2. On foreign individual/corp. - Foreign
individuals and non-bank
corporations may own or control up
40% (aggregate limit) of the voting
stock of a domestic bank. The
percentage of foreign-owned voting
stocks ina bank shall be determined:
a. If individuals By their
citizenship
b. If corporations By the
citizenship of the controlling
stockholders of the corporation,
irrespective of the place of
incorporation. (Sec. 11)
166
Q: What are the powers, functions and
objectives of Bangko Sentral ng Pilipinas
(BSP)?
A:
1. Economic side
a. Policy direction in the areas of
money, banking and credit;
b. Promotes and maintains price
stability/monetary and
stability/convertibility of the peso.
2. Supervisory side
a. Exercises supervision over
banks and quasi banks;
b. Issues rules and regulations
involving the conducts of banks;
and
c. Examination of banks and quasi
banks to determine:
i. compliance with the laws
and regulations;
ii. solvency and liquidity; and
iii. enforcing prompt corrective
actions.
Q: What is the Monetary Board?
A: The body through which the powers and
functions of the Bangko Sentral are exercised.
(Sec 6, NCBA)
Q: What are considered legal tender?
A:
1. t-peso, 5-peso and 10-peso coins: in
amounts not exceeding P1,OOO.OO;
2. 25 centavo coin or less: in amount
not exceeding Pi 00.00 (Circular No.
537, 2006)
Q: What is the function of the BSP on a
distressed bank?
A: Appointment of a conservator or receiver or
closure of the bank.
Q: Who is a conservator?
A: One appointed if the bank is in the staie of
illiquidity or the bank fails or refuses to
maintaina state of liquidity adequate to protect
its depositors and creditors. The bank still has
more assets than its liabilities but its assets
are not liquid or not in cash thus it cannot pay
its obligation when it falls due. The bank, not
the Central Bank, pays for fees.
UST GOLDEN NOTES 2010
Q: What are the 'powers of a conservator?
A:
1, To take charge of the assets,
liabilities, and the management
thereof;
2. Recognize the management;
3, collect all monies and debts due said
bank;
4. Exercise all powers necessary to
restore its viability with the power to
overrule or revoke the actions of the
previous management and board of
directors of the bank or quasi-bank
(First Philippine International Bank vs.
CA, GR. No. 115849, Jan 24,
1996J-
Note: Such powers cannot extend to
post facto repudiation of perfected
transactions. Thus, the law merely
gives the conservator power to
revoke contracts that are deemed tei
be defective- void, voidable,
unenforceable or rescissible. Hence,
the conservator merely takes the
. place of the bank's board. .
5, To bring court actions to assail or
repudiate contracts entered into by
the bank.
Q: When is conservatorship terminated?
A:
1. When Monetary Board is satisfied
that the institution can continue to
operate on its own and the
conservatorship is no longer
necessary.
2. When the Monetary Board, on the
basis of the report of the conservator
or of its own findings, determine that
the continuance in business of the
institution would involve probable
losses to its depositors or creditors, in
which case the provisions of Section
30 shall apply.
Q: Who is a receiver?
A: One appointed if bank is already insolvent
which means that its liabilities are greater than
its assets.
Q: Is the receiver authorized to transact
business in connection with the bank's
assets and property?
A: No, the receiver only has authority to
administer the same for the benefit of its
creditors, (Abacus Real Estate Development
Center, Inc, v. Manila Banking Corp, GR. No.
162270, ApT- 6, 2005)
Q: An intra-corporate case was filed before
RTC, on the other hand, another complaint
was filed before BSP to compel a bank to
disclose its stockholdings invoking the
supervisory power of the latter- Is there a
forum shopping?
A: None. The two proceedings are of different
nature praying for different relief. The
complaint filed with the BSP was an invocation
of its supervisory powers over banking
operations which does not amount to ajudicial
proceeding. (Suan v. Monetary Board, A. C.
No. 6377, Mar. 12,2007)
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de (j ) er ecl i o Ci ui ]
~i~ 167
SPECIAL COMMERCIAL LAWS: BANKING LAWS
Q: Distinguish between the grounds for conservatorship, receivership and liquidation and their
effects.
A:
r.r.rn~~;m
to pay liabilities as
e.g: bank run, rumors, etc.
2. Assets are less than its liabilities; 2. Bank cannot be rehabilita-ted
3. Cannot continue business without
causing damage;
4. Violation of a cease and desist;
5. "Bank holiday" for more than 30 days
(Section 30)
2. Unwilling-ness to
maintain condition of
liquidity;
1.J uridical
personality is
retained.
1. J uridical personality s retained with conservator-ship
2. Suspension of operation /stoppage of
business;
3. Assets deemed incustodia legis
(Domingo v. NLRC, G.R. 156761, Oct 17,
2006
2. Perfected
transacttions cannot
be repudiated;
Q: What is the close now-hear later
doctrine?
Q: What is the rule of promissory estoppel?
A: The law does not contemplate prior notice
and hearing before the bank may be directed
to stop operations and placed under
receivership. The purpose is to prevent
unwarranted dissipation of the bank's assets
and as a valid exercise of police power to
protect the depositors, creditors, stockholders
and the general public. (Central Bank of the
Philippines v. CA, G.R. No. 76118 Mar. 30,
1993)
Q: Where will the' claims against the
insolvent bank be filed?
!
A: Where liquidation is undertaken with judicial
intervention, all claims against the insolvent
bank should be filed in the liquidation
proceeding. It is not necessary that a claim be
initially disputed in a court or agency before it
is filed with the liquidation court. (Ong v. CA,
G.R. No. 112830, Feb. 1, 1996)
Note: The judicial liquidation is intended to
prevent multiplicity of actions against the
insolventbank.
Where it is the bank that files a claim against
another person or legal entity, the claim should
befiled intheregular courts.
168
A: The doctrine was applied in one case
where the SC held that the CB may not
thereafter renege on its representation and
liquidate the bank after majority stockholders
of the bank complied with the conditions and
parted with value to the profit of CB, which
thus acquired additional security for its own
advances, to the detriment of the bank's
stockholders, depositors and other creditors.
(Ramos v. Central Bank of the Philippines,
G.R. No. L-29352, Oct. 4, 1971)
Q: Can the closure and liquidation of a
bank, which is considered an exercise of
police power, be the subject of judicial
inquiry?
A: While the closure and liquidation of a bank
may be considered an exercise of police
power, the validity of such exercise of police
. power is subject to judicial inquiry and could
be set aside if it is either capricious,
discriminatory, whimsical, arbitrary, unjust or a
denial or due process and equal protection
clauses of the Constitution. (Central Bank v.
CA, G.R. No. L-50031-32, July 27, 1981)
UST GOLDEN NOTES 2010
Q: Should the issue of whether or not the
Monetary Board's resolution is arbitrary be
only raised in aseparate action?
A: No. While resolutions of tile Monetary
Board forbidding a bank to do business on
account of a condition of insolvency and
appointing a receiver to take charge of the
bank's assets or determining whether the bank
may be rehabilitated or should be liquidated
are by law "final and executory." However,
they can be set aside by the court on one
specific ground - if the action is plainly arbitrary
and made in bad faith. Such contention can be
asserted as an affirmative defense of a
counterclaim in the proceeding for assistance
in liquidation. (SaiLid v. Central Bank, G.R. No.
L-17630, Aug. 19, 1986)
Q: Can a final and executory judgment
against an insolvent bank be stayed?
A: Yes, after the Monetary Bank has declared
that a bank is insolvent and has ordered it to
cease operations, the assets of the insolvent
bank are held in trust for the equal benefit of
all creditors. One cannot obtain an advantage
or preference over another by attachment,
execution or otherwise .. The final judgment
against .the bank should be stayed as to
execute the judgment would unduly deplete
the assets of the banks to the obvious
prejudice of other depositors and creditors.
(Lipana v. Development Bank of Rizal, GR.
No. L-73884, Sept. 24, 1987)
Q: Upon maturity of the time deposit, the
bank failed to remit. By reason of punitive
action taken by Central Bank, the bank has
been prevented from performing banking
operations. Is the bank still obligated to
pay the time deposits despite the fact that
its operations were suspended by the
Central Bank?
A: The suspension of operations of a bank
cannot excuse non-compliance with the
obligation to remit the time deposits of
depositors which matured before the bank's
closure. (Overseas Bank of Manila v. CA, GR.
No. 45886, Apr. 19, 1989)
Q: Can the liquidator of a distressed bank
prosecute and defend suits against the
bank and foreclose mortgages for and in
behalf of the bank while the issue on
receivership and liquidation is still
pending?
A: Yes. The Central Bank is vested with the
authority to take charge and administer the
monetary and banking systems of the country
and this authority includes the power to
examine and determine the financial
conditions of banks for the purpose of closure
on the ground of insolvency. Even if the bank
is questioning the validity of its closure, during
the pendency of the case the liquidator can
continue prosecution suits for collection and
foreclosure of mortgages, as they are acts
done in the usual course of administration of
the bank. (Banco Filipino v. Central Bank, G.R.
No. 70054, Dec: 11, 1991)
Q: What is the purpose?
A:
1. To encourage deposit in banking
institutions; and
2. To discourage private hoarding so
that banks may lend such funds and
assist in the economic development
of the country.
Q: What are the prohibited acts under the
law?
A:
1. Examination/inquiry/looking into all
deposits of whatever nature with
banks or banking institutions in the
Philippines (including investment in
bonds issued by the government) by
any person, government official or
office (Sec. 2)
2. Disclosure by any official or employee
of any banking institution to any
authorized person of any information
concerning said deposit (Sec. 3).
Q: What are the kinds of deposits covered?
A:
1. All deposits of whatever nature with
banks or banking institutions found in
the Philippines; or
2. Investments in bonds issued by the
Philippine government, its branches,
and institutions. (Sec. 2, R.A. 1405)
Q: Are trust funds covered by the tenn
"deposit?"
A: Yes, the money deposited under the trust
agreement is intended not merely to remain
with the bank but to be invested. by it
elsewhere. To hold that this type of account is
not protected by R.A. 1405 would encourage
private hoarding of funds that could otherwise
be invested by banks in other ventures,
UN I V E R5 I T V 0 F 5ANT 0 TOM A 5 f-':'--. 169
PacuCtaa de i I Jer ecf i o Ci vi C V-
SPECIAL CUMMERCIALLAws: BANKING LAWS
contrary to the policy behind the law. (Ejercito
v. Sandiganbayan, G.R. No. 157294-95, Nov.
30,2006)
Note: Despite such pronouncement that trust
funds are considered deposits, trust funds remain
not covered byPDIC.
Q: What are the instances where accounts
can be inquired into?
A:
1. Upon written consent of the depositor
(Sec. 2)
2. Incases of impeachment (Sec. 2)
3. Upon order of competent court in
cases of bribery or dereliction of duty
of public officials (Sec. 2)
4. In cases where the money deposited
or invested is the subject matter of
tile litigation (Sec. 2)
Upon order of the Commissioner of
Internal Revenue in respect of the
bank deposits of a decedent for the
purpose of determining such
decedent's gross estate (Sec. 6[F][1],
NlRC)
6. Upon the order of the Commissioner
of Internal Revenue in respect of
bank deposits of a taxpayer who has
filed an application for compromise of
his tax liability by reason of financial
incapacity to pay his tax liability (Sec.
6[f}[1],NIRC)
7. In case of dormant accounts/deposits
for at Ieast 10 years under the
Unclaimed Balances Act (Sec. 2, Act
No. 3936). .
8. When the examination is made by the
BSP to insure compliance with the
AML Law in the course.of a periodic
or special examination
9. With court order:
a. In cases of unexplained wealth
under Sec. 8 of the Anti-Graft
and Corrupt Practices Act (PNB
v. Gancayco, L-18343, Sept. 30,
1965)
b. In cases filed by the
Ombudsman and upon the
latter's authority to examine and
have access to bank accounts
and records (Marquez v.
17 0
Desierto, GR 138569, Sept. 11,
2(03)
10. Without court order: If the AMLC
determines that a particular deposit or
investment with any banking
institution is related to the following:
HK-MAD
a. Hijacking,
b. lSidnapping,
c. Murder,
d. Destructive 8rson, and
e. Violation of the Dangerous Qrugs
Act. (2004, 2006 Bar Question)
Q: What are the requisites before the
Ombudsman may examine deposits?
A:
1. There is a pending case before court
of competent jurisdiction;
2. The account must be clearly
identified; and
3. There is notice upon the account
holder and bank personnel of their
presence during inspection.
Note: The inspection must cover only the
account identified in the pending case.
(Marquez v. Desierto, G.R.No. 138569,
Sept. 11, 2003) .
Q: Does garnishment of a bank deposit
violate the law?
A: No, the prohibition against examination
does not preclude its being garnished for
satisfaction of judgment. The disclosure is
purely incidental to the execution process and
it was not the intention of the legislature to
place bank deposits beyond the reach of
judgment creditor. (PCIB v. CA, G.R. No.
84526, Jan. 28, 1991)
Q: Can a bank be compelled to disclose the
records of the accounts of a depositor
under the investigation for unexplained
wealth?
A: Since cases of unexplained wealth are
similar to cases of bribery, dereliction of duty,
no reason is seen why it cannot be excepted
from the rule making bank deposits
confidential. In this connection, inquiry into
illegally acquired property in anti-graft cases
extends to cases where such property is
concealed by being held or recorded in the
name of other persons. This is also because
the Anti-Graft and Corrupt Practices Act, bank
deposits shall be taken into consideration in
determining whether or not a public officer has
UST GOLDEN NOTES 2010
acquired property manifestly out of proportion
with his lawful income. (PNB v. Gancayco,
G.R. No. L-18343, Sept. 3Q, 1965)
Q: In an action filed by the bank to recover
the money transmitted by mistake, can the
bank be allowed to present the accounts
which it believed were responsible for the
acquisition of the money?
A: Yes, RA 1405 allows the disclosure of
bank deposits in cases where the money
deposited is the subject matter of litigation. In
an action filed by the bank to recover the
money transmitted by mistake, necessarily, an
inquiry into the whereabouts of the amount
extends to whatever is concealed by being
held or recorded in the name of the persons
other than the one responsible for the illegal
acquisition. (Mellon Bank, N.A. v. Magsino,
G.R. No. 71479, Oct. 18, 1990)
Q: The Law on Secrecy of Bank Deposits
provides that all deposits of whatever
nature with banks or banking institutions
are. absolutely confidential in nature and
may not be examined, inquired or looked
into by any person, governmental official,
bureau or office. However, the law provides
exceptions in certain instances. Which of
the following may not be among the
exceptions?
1. in cases of impeachment
2. in cases involving bribery
3. in cases involving BIR inquiry
4. in cases of anti-graft and corrupt
practices
5. in cases where the money involved
is the subject of litigation
A: Under Section 6(F) of the National Internal
Revenue Code, the Commissioner of Internal
Revenue can inquire into the deposits of a
decedent for the purpose of determining the
gross estate of such decedent. Apartfromthis
case, a BIR inquiry into bank deposits cannot
be made.
Thus, exception 3 may not always be
applicable. Turning to exception 4, an inquiry
into bank deposits is possible only in
prosecutions for unexplained wealth underthe
Anti-graft and Corrupt Practices Act. However,
all other cases of anti-graft and corrupt
practices will not warrant an inquiry into bank
deposits. Thus, exception4 may notalways be
applicable. Likeany other exception, itmust be
interpretedstrictly.
Exceptions 1, 2, and 5 on the other hand, are
provided expressly in the Law on Secrecy of
Bank Deposits. They are available to
depositors atall times. (2004 Bar Question)
.. ~ .il<.~ . ..-- .
Academics Comm irree
C: hl i r per .l Ol I : Abraham D. Gcruun o 11
f/iff:-Chllir./iu- /-Jau/elJlio: J eannie ;\. Laurcnrino
k' ; a: -Chai r !or .Admi n i...... j-iillll)h'C: .-\iSS;l Coline [.1. Luna
! Fia;,C}lllirjor L.L!YfJtll~""" Dc.r i g n: Loi::;e R"1C C;. Naval
Mercantile Law Committee
Sub/ cd H ead: Hnly T. i\ mpagutl'
/lJ J /. Sub l ed / -I e,,(/ : Manily Rose S. Sotelo
Members:
Edwin ! I,lare T. Baldia
Airccn M, Cach
Socrates Benjie I. Tl.larbil
Run Chcrrie S. l'V(cnd/)z;l
Edison .1ames F. P,lgalibuan
Maybcllinc M. SantiaglJ
UNIVERSITY OF SANTO TOMAS f~7c,.
Pacu{ taa de Ver echo Ci vi l . . 171
;SPECIAL COI\1MERCIAL LAWS: ANTI-MONEY LAUNDERING ACT
Q: What is the meaning of money
laundering?
A: A crime whereby the proceeds of unlawful
activity are transacted, making them appear to
have come from lawful transaction. (Sec. 4,
AMLA)
Q: How is money laundering committed?
A: It is committed by the following persons:
1. Any person knowing that the
monetary instrument or property
represents, involves, or relates to, the
proceeds of any unlawful activity,
transacts or attempts to transact said
monetary instrument or property;
2. Any person knowing that any
monetary instrument or property
involves the proceeds of any unlawful
activity performs or fails to perform
any act as a result of which he
facilitates the offense referred to in
No.1 above;
3. Any person knowing that any
monetary instrument or property is
required under this Act to be
disclosed and filed with the Anti-
Money Laundering Council (AMLC),
fails to do so.
Q: When may the Anti-Money Laundering
Council (AMLC) inquire into bank deposits
without need of court order?
A: Only in cases of Kidnapping, Hijacking,
Drugs, Arson, Murder. (Sec. 11)
Q: What are the covered entities?
A:
1. Banks;
2. Non-banks;
3. Quasi-banks;
4. Trust entities;
5." All other institutions; their subsidiaries
and affiliates supervised or regulated
I by BSP (Sec. 1[1]);
6'1 Insurance companies and all other
institutions supervised and regulated
by the Insurance Commission;
7. Foreign exchange, corporations,
money changers, money payments,
remittance and transfer companies
and other similar entities; and
172
8. Other entities administering or
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes, and other similar
monetary instruments or property
supervised or regulated by Sec. 9.
Q: What are the kinds of transactions
contemplated by the law?
A:
1 . Covered transactions - Amount more
than P500,OOO.OO in one banking
day; and
Note: These transactions are required
to be reported to the Anti-Money
Laundering Council
2. Suspicious transactions - Regardless
of amount, if any of the following is
present:
a. No underlying economic, trade
or legal justification;
b. Client not properly identified;
numbered accounts are allowed
provided client is identified;
c. Transaction is not
commensurate with financial
capability of the client;
d. Transaction is so structured that
it cannot be reported to the
AMLC; .
e. Transaction which deviates from
usual profile of the client;
f. Relates to unlawful activity as
defined by law; and
g. Analogous transactions.
Note: No administrative, criminal' or civil
proceedings shall lie against any person for
having made a covered transaction report in the
regular performance of his duties and in good
faith, whether or not such reporting results in any
criminal prosecutionunder the AMLA or any other
Philippinelaw(Safe Harbor Provision).
Q: Who has jurisdiction for violations of
AMLA?
A:
1. RTC - all cases on money laundering
(Sec. 5)
2. Sandiganbayan - Those committed
by public officers and private persons
inconspiracy with them.
UST GOLDENNOTES 2010
Q: Which court has the jurisdiction to issue
afreeze order?
A: The amendment by R.A. 9194 of R.A. 9160
erased any doubt on the jurisdiction of the
Court of Appeals (CA) over the extension of
freeze orders. As the law now stands, it is
solely the CA which has the authority to issue
a freeze order as well as to extend its
effectivity. It also has the exclusive jurisdiction
to extend existing freeze orders previously
issued by the AMLC vis-a-vis accounts and
deposits related to money-laundering
activities. (Republic of the Philippines v,
Cabrini Green &Ramos, GR No. 154522,
May 5,2006)
Q: Rudy is jobless but is reputed to be a
jueteng operator. He has never been
charged or convicted of any crime. He
maintains several bank accounts and has
purchased 5 houses and lots for his
children from the Luansing Realty, Inc.
Since he does not have any visible job, the
company reported his purchases to the
Anti-Money Laundering Council (AMLC).
Thereafter, AMLC charged him with
violation of the Anti-Money Laundering
Law. Upon request of the AMLC, the bank
disclosed to it Rudy's bank deposits
amounting to P100 Million. Subsequently,
he was charged in court for violation of the
Anti-Money Laundering Law. Can Rudy
move to dismiss the case on the ground
that he has no criminal record?
A: No. Under the Anti-Money Laundering Law,
Rudy would be guilty of a "money laundering
crime" committed when the proceeds of an
"unlawful activity," like jueteng operations, are
made to appear as having originated from
legitimate sources. The money laundering
crime is separate from the unlawful activity of
being a jueteng operator, and requires no
previous conviction for the unlawful activity.
(Sec. 3, AMLA)
Q: To raise funds for his defense, Rudy
sold the houses and lots to a friend. Can
Luansing Realty, Inc. be compelled to
transfer to the buyer ownership of the
houses and lots?
A: Luansing Realty, Inc. is a real estate
company, hence, it is not a covered institution
under Section 3 of the Anti-Money Laundering
Act. Only banking institutions, insurance
companies, securities dealers and brokers,
pre-need companies and other entities
administering or otherwise dealing in currency,
commodities or financial derivatives are
covered institutions. Hence, Luansing Realty,
Inc. may not use the Anti-Money Laundering
Act to refuse to transfer to the buyer ownership
of the houses and lots.
Q: In disclosing Rudy's bank accounts to
the AMLC, did the bank violate any law?
A: No, the bank did not violate any law. The
bank being specified as a "covered institution"
under the Anti-Money Laundering Law, is
obliged to report to the AMLC covered and
SUSpICIOUS transactions, without thereby
violating any law. This is one of the exceptions
to the Secrecy of Bank Deposit Act.
-,
4 ~~'~
Academ ics Comnlittee
Chairper.)()JI: Abraham D. Genuine II
l / i aJ-Chai r j i n" /I~udellli(f: {carmjc ;\. l... aurcnnno
~ Fi t' t: -Cl l Ui r j ; ) r Atl mi n 0"""Fillufld:: .Y issa Coline I r.., Luna
Vi l e-Chai r / or J "')'"111 Ii- LJ e.II~~II:Loise Rue c;. ! '<,\\-al
Mercantile Law Committee
Si / b) ' ' " ' J-I ead: Holy T. i\mpaguey
A.HI. Sub/ed I-{,,,": Manilyn Rose S. Sotelo
Members:
Edwin Marc T Baldia
Airccn 111.Cacho .
Socrates 13e111iel. lI tubil
Eon Chen-ic S. Mendoza
Edison J ames F. Pagalilauan
Maybelline M. Sanli:lgll
UNIVERSITY OF SANTO TOMAS
Pacu{taa de (])erecfio Ci'rlif
~.173
SPECIAL COI\1MERCIALLAWS: PHIL. DEPOSIT INSURANCE CORP.
Q: What is the function of POIC?
A: It insures all bank deposits.
Q: What is the coverage of the insurance?
A: The deposit liabilities of any bank or
banking institution, which is engaged in the
business of receiving deposits, shall be
insured with PDIC. The coverage is
compulsory.
Q: What is the extent of the POIC's liability
to a bank depositor?
A: The amount due to any depositor for
deposits in an insured bank net of any
obligation of the depositor to the insured bank
as of the date of closure, but not to exceed
P500,OO.OOper depositor. In determining such
amount due to any depositor, there shall be
added together all deposits in the bank
maintained in the same right and capacity for
his benefit either in his own name and the
name of the others.
Q: How is the amount due determined in
case of joint account?
A: A joint account regardless of whether the
conjunction "and," "or," "and/or" is used, shall
be insured separately from any individually-
owned deposit account: Provided, that:
i
1.1 If the account is held jointly by two or
more natural persons, or by two or
more juridical persons or entities, the
maximum insured deposit shall be
divided into as many equal shares as
there are individuals, juridical persons
or entities, unless a different sharing
is stipulated in the document of
deposit; and
2. If the account is held by a juridical
person or entity with one or more
natural persons, the maximum
insured shall be presumed to belong
entirely to such juridical person or
entity.
Note: The aggregate of the interests of each co-
owner. over several joint accounts, whether
owned by the same or different combinations of
individuals, juridical persons or entities, shall
likewise be subject to the maximum insured
deposit of P500,000.00.
The provisions of any law to the contrary
notwithstanding, no owner/holder of any
174
negotiable certificate of deposit shall be
recognized as a depositor entitled to the rights
provided inthis Act unless his name is registered
as owner/holder thereof in the books of the
issuing bank [Sec. 4 (g)].
Illustration:
1. A has P400,000 deposit - can recover
P400,000
2. A has P200,000deposit in3 branches _
only P500,000 .
3. A has P200,OOOdeposit in 3 branches
of XYZ and another P200,000 deposit
in 3 branches of ABC - P500,000 on
eachbank
4. A and/or B P600,000 deposit - half
(P300,OOO) each
Note: Individually-owned accounts are insured
separately fromjoint accounts. If depositor made
more than 1joint account, the maximum amount
hecanrecover is only upto250,000.
Q: What are the types of deposits covered?
A: Demand, savings and time deposits. If the
depositor has all three types of accounts with
the same bank, he can only recover up to
P500,OOO.OO. He is considered as one
depositor.
Q: Are deposits in foreign currency
covered?
A: Deposit obligations in foreign currency of
any insured bank are likewise insured.
Note: Foreign currency deposits are covered
under the provisions of RA 3591, as amended,
and insurance payment shall be ill the same
currency in which the insured deposits are
denominated(Sec. 9, RA 6426; Circular No. 1389,
1993).
Q: What are the deposits Which are
excluded from POIC coverage?
A:
1. Trust funds deposited with an insured
bank; and
2. Bearer time deposit certificate with no
registered payee.
Q: What are trust funds?
A: Funds held by an insured bank in a
fiduciary capacity and include, without being
limited to, funds as trustee, executor,
administrator, guardian or agent.
UST GOLDEN NOTES 2010
Q: When is POIC discharged from its
obligation to a depositor?
A:
1. Upon payment of an insured deposit
by itself; or
2. Upon payment of a transferred
deposit to any person by the new
bank or by an insured bank inwhich a
transferred deposit has been made
available.
Note: A transferred deposit is a deposit in an
insured bank made available to a depositor by
the POIC as payment of the insured deposit of
such depositor inaclosed bank and assumedby
anotherinsured bank.
Q: What are the effects of payment to the
depositor of his insured deposit?
A:
1. pOle is discharged from any further
liability to the depositor; and
2. pOle is subrogated to all the rights of
the depositor against the closed bank
to the extent of such payment.
Q: Within what period must claims against
POIC be filed?
A: Within 24 months. After such time,
depositors have recourse against distressed
bank subject to concurrence and preference of
credit.
Note: Inorder that a claimfor deposit insurance
with the POIC may prosper, the lawrequires that
a corresponding deposit be placed inthe insured
bank. A deposit may be constituted only if money
or the equivalent of money is received by a bank.
(PolC v. CA G.R. No. 118917, Dec. 22,1997)
Q: What is the rule with regard to the
recognition of owner?
A: pOle or any insured bank is not required to
recognize as the owner of any portion of a
deposit under a name other than that of the
claimant, where such person whose name or
interest as such owner is not disclosed on the
records of such closed bank as part owner of
said deposit, if such recognition would
increase the aggregate amount of the insured
deposits in such closed bank (Sec. 16[c)).
Acad cmics Comm ittee
Chai r per son: "braham D. Genuine 11
f/jrc-Chairj;)F Acm/cllIl(f." J <..:cu1nie .-\, Laurenrino
ki~e-Cbair.F)f r 1 dmi l l \ : : : : .' " " Fi " U/ w: : .-\i! )Sil Cclinc (-I. Luna
r ' ~ i " c-L I Jai rl or L .i !You/ G- nC.f~~II: Loise Rae (i. Naval
Mercantile Law Committee
.r " " I ' d I -l ead: Holy T ! ll1lpagllc)'
A,J/. Jul ) ed / -l ead Manily I~DSC S. Sotcl"
Members:
Edwin Marc T. Raldi.l
Airccn M. Cacho
Socrates Bcnjic I. J \ farbil
Ron Cherrie S. Mendoza
Edison J :t111l:SF. Pagalibudll
Maybcllinc M. Santiago
UN I V E R 5 I T Y aF 5 ANT a TOM A 5 f-"'.
Pacu(taa de Wer ecl i o Ci vi C -9-1
75
SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW
Q: What is the coverage of the insolvency
law?
A: Its coverage is not limited to insolvency but
also suspension of payment.
Q: What is insolvency?
A: The state of a person whose liabilities are
more than his assets. The term is frequently
used in the more restricted sense to express
inability of a person to pay his debts as they
become due in the ordinary course of his
business.
Q: What are the tests to detennine
insolvency?
I
A: !
1.. Equity test - A state of inability of a
person to pay his debts at maturity.
2.' Balance sheet test - The assets, if all
made immediately available, would
not be sufficient to discharge the
balance.
Q: What are the remedies of an insolvent
. debtor?
A:
1. Petition the court to suspend
payments of his debts; or
2. To be discharged from his debts and
liabilities by voluntary or involuntary
insolvency proceedings. (Sec. 1)
Q: What is the effect of insolvency
proceedings filed by individual debtors?
A:
1. Suits' pending in court-
a. secured obligations suspended
until assignee appointed
b. unsecured obligations terminated
except to fix amount of obligation
c. foreclosure suits pending
continue
2. Suits not yet filed - cannot be filed
anymore but claims may be
presented to assignee
Note: The result is different if the petitioner is a
corporationbecause under the Revised Rules on
Corporate Recovery, all claims whether secured
or unsecured arestayed.
176 Iteam:.W
Q: If A is declared an insolvent by the
court, what would be the effect, if any, of
such declaration on his creditors? Explain.
A:
1. The sheriff shall take possession of
all assets of the debtor until the
appointment of a receiver or
assignee;
2. Payment to the debtor of any debts
due to him and the delivery to the
debtor of any property belonging to
him, and the transfer of any property
by himare forbidden;
3. All civil proceedings pending against
the insolvent shall be stayed; and
4. Mortgages and pledges are not
affected by the order declaring a
person insolvent. (Sec. 59,
Insolvency Law)
Q: Assuming that A has guarantors for his
debts, are the guarantors released from
their obligations once A is discharged from
his debts?
A: The guarantors are not discharged,
because the discharge is limited to A only
(Sec. 68). Precisely under the principle of
excussion, the liability of the guarantors arises
only after the exhaustion of the assets of the
principal obligor. The effect of discharge
merely confirms exhaustion of the assets of
the obligor available to his creditors.
Q. What remedies are available to the
guarantors in case they are made to pay
the creditors? Explain.
A: Their remedy is to prove in the insolvency
proceeding that they paid the debt and that
they substituted for the creditors, if the
creditors have not proven their claims (Sec.
56).
Under Article 2081 of the Civil Code, the
guarantor may set up against the creditor all
the defenses that pertain to the principal
debtor. The discharge obtained by the debtor
on the principal obligation can now be used as
a defense by the guarantors against the
creditors. The guarantors are also entitled to
indemnity under Article 2066 of the Civil Code.
(2005 Bar Question)
UST GOLDEN NOTES 2010
Q: A and B were employees of ATLAS
which hypothecated its certain assets to
DBP. After ATLAS .defaulted in its
obligations, DBP foreclosed and acquired
the mortgaged assets by virtue of the
foreclosure sale. Respondents filed their
claim their wages against both ATLAS and
DBP. The Labor Arbiter (LA) ruled in favour
of A and B. Is the LA correct in considering
worker's preference under Article 110 of
the Labor Code over that of DBP's
mortgage lien?
A: Declaration of bankruptcy or a judicial
liquidationmust be present before the worker's
preference may be enforced. A distinction
should be made between a preference of
credit and a lien. A preference applies only to
claims which do not attach to specific
properties. A lien creates a charge on a
particular property. The right of first preference
as regards unpaid wages recognizedbyArticle
110does not constitute a lienonthe property
of the insolvent debtor infavor of workers. It is
but a preference of credit in their favor, a
preference in application. It is a method
adopted to determine and specify the order in
which credits should be paid in the final
distribution of the proceeds of the insolvent's
assets. It is a right to a first preference in the
discharge of the funds of the judgment debtor.
A recorded mortgage is a special preferred
credit while the preference given to workers
under Article 110 of the Labor Code is an
ordinary preferred credit. (DBP v. NLRC, G.R.
No. 86227, Jan. 19, 1994)
Q: On J uly 2, 1980, three creditors filed a
petition for the involuntary insolvency of
the spouses Gatmaytan. Prior thereto, HTA
filed a case for collection of sum of money
covering the proceeds of some personal
properties belonging to the spouses. The
RTC issued a writ of preliminary
attachment and on March 4, 1980, a levy on
attachment was done on the real properties
registered in the names of the spouses.
However, on May 30, 1984, the said
properties levied on attachment were made
part of the assets belonging to the
insolvents available for distribution. HTA
opposed contending that the insolvent
court is without jurisdiction. Is the levy on
attachment in favor of the HTA dissolved
by the filing of insolvency proceedings four
months after said attachment?
A: Under the Insolvency Law, attachments
dissolved are those levied within one month
next preceeding the commencement of the
insolvency proceedings and judgments
vacated and set aside are judgments entered
in any action filed within thirty days
immediately prior tothe commencement of the
insolvency proceedings. Thus, a levy on
attachment made more than 4 months before
the filing of the insolvency proceedings is not
dissolved and consequently any execution
sale made during the pendency of the
insolvency proceeding is valid. (Radiola-
Toshiba Phi/sov. lAC, G.R. No. 75222, July 18,
1991)
Q: Is the power to petition for the
adjudication of bankruptcy granted to
juridical persons?
A: The lawgrants to ajuridical person, as well
to natural persons, the powerto petitionfor the
adjudication of bankruptcy of any natural or
juridical person provided that with respect to
juridical persons, it is a resident corporation
and adjoins at least two other residents in
presenting the petition to the Bankruptcy
Court. When a foreign bank alleged in its
petitionthat it is licensed to do business inthe
Philippines and actually doinq business inthe
country, it is ineffectstating that it is aresident
foreign corporation in the Philippines. (State
Investment House v. Citibank, N.A., G.R. Nos.
79926-27, Oct. 17, 1991)
.0: What is suspension of payments?
A: It is the postponement, by court order, of
the payment of debts of one who, while
possessing sufficient property to cover his
debts, foresees the impossibility of meeting
themwhenthey respectivelyfall due.
Q: When is the remedy of suspension of
payments available?
A: The debtor who, .possessing sufficient
property to cover all his debts, foresees the
impossibility of meeting them when they
respectively fall due, may petition that he be
declared in the state of suspension of
payments bythe court of the provinceor city in
which he has resided for six months next
precedingthe filing of his petition(Sec. 2[1]).
Q: When does suspe;nsion take effect?
A: Uponthe filing of the petition.
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de Ver ecf i o Ci vi l
SPECIAL COl\ttMERCLALLAWS: INSOLVENCY LAW
Q: What are the steps in suspension of
paym'ents?
I
i
A:
1. Filing of the petition by the debtor
(Sec. 2);
2. Issuance by the court of an order
calling a meeting of creditors (Sec. 3);
3. Publication of the order and service of
summons (Sec. 4);
4. Meetings of creditors for. the
consideration of the debtor's
proposition (Sec. B):
Note: To hold a valid meeting, the
creditors representing at least 3/5 of the
liabilities of the debtor must be present.
5. Approval by the creditors of the
debtor's proposition (Sec. B, [20]);
6. The Double Majority Rule applies. To
obtain a majority vote, it is necessary
that:
a. At least 213 of the creditors must
vote on the same proposition,
and
b. Said 2/3 represent at least 3/5 of
the total liabilities of the debtor.
7. Objections, if any, to the decision
must be made within 10 days
following the meeting. (Sec. 11);
8. Issuance of order by the court
directing that the agreement. be
carried out in case the decision is
declared valid, or when no objection
to said decision has been presented.
Q: What are the documents that should
accompany the petition?
A:
1. A verified schedule containing a full
and true statement of the debts and
liabilities of the petitioner together
with a list of creditors; (Sees. 15, 2)
2. A verified inventory containing a list of
creditors, an accurate description of
all the property of the petitioner
including property exempt from
execution and a statement as to.the
value of each item of property, its
location, and encumbrances thereon,
if any; (Secs. 16, 2)
3. A statement of his assets and
liabilities; (Sec. 2) and
41 The 'proposed agreements he
i requests of his creditors. (Ibid.)
178
Q: What are the effects of filing of the
petition?
A:
1. No disposition in any manner of his
property may be made by the
petitioner except insofar as concerns
the ordinary operations of commerce
or of industry in which he is engaged;
(Sec. 3 [2])
2. No payments may be made by the
petitioner except in the ordinary
course of his business or industry
(Ibid.); and;
3. Upon the request to the court, all
pending executions against the
debtor shall be suspended except
execution against property especially
mortgaged. (Sec. 6)
Q: Who are the creditors affected by the
filing of the petition?
A: Only creditors included in the schedules
filed by the debtor shall be cited to appear and
to take part in the meeting. (Sec. 5) Hence,
those who did not appear because they were
not informed of the proceedings are unaffected
by the same.
Q: Who are the creditors not affected by
order of suspension of payments?
A:
1. Those having claims for personal .
labor, maintenance, expenses of the
last illness and funeral of wife or child
of debtor, incurred during the 60 days
immediately preceding the filing of the
petition; and
2. Those having legal or contractual
mortgages. (Sec. 9)
Q: When is a petition for suspension of
payments deemed rejected?
A:
1. When the number of creditors
representing at least 3/5 of the
liabilities not attend; (Sees. B, 10) or
2. When the two majorities required are
not in favor of the proposed
agreement (Sec. 10).
UST GOLDEN NOTES 2010
Q: What is the effect of disapproval of
petition?
A: If the decision of the meeting be negative
as regards the proposed agreement or if no
decision is had in default of such number or of
such majorities, the proceeding shall be
terminated without recourse. In such case, the
parties concerned shall be at liberty to enforce
the rights which correspond to them. (Sec. 11)
Q: What are the modes or forms of
suspension of payment?
A:
1. Petition for ordinary suspension of
payments under Act 1956
2. Verified petition for rehabilitation
under the Interim Rules of Procedure
for Corporate Rehabilitation which
includes suspension of payments.
Q: Distinguish Petition for ordinary suspension of payments from Petition for corporate
rehabilitation.
1. Corporation, partnership or association, or i
2. The creditors holding at least 20% of the debtor's total
liabilities.
The court, still, has to issue a stay order not later than 5 days from
the filing of the petition.
All claims against the debtor are stayed upon the jssuance of stay'
order. All actions or claims against the
corporation pending before the
court, tribunal, board, or body
shall be suspended.
The creditors may proceed to enforce their claim against the
surety even if during the pendency of the rehabilitation
proceedings involving the corporate debtor. (Phil. Blooming Mills,
Inc. and Alfredo Ching v. CA, G.R. No. 142381, Oct. 5, 2003)
UN I V E R5I T vt: F SAN ToT 0 MAS
Pacu[ taa de Der e cho Ci vi f
~i~ 179
SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW
Q: What are kinds of insolvency?
A:
1. Voluntary insolvency
2. Involuntary insolvency
Note: When suspension of payments has been
judicially declared, a declaration of insolvency is
not legally possible unless proceedings for
suspensionhave beenterminated. The condition
of suspensionof payments is inlawincompatible
with that of simultaneous bankruptcy. Insolvency
is, of course, an essential element of insolvency
proceedings.
Q: Distingujsh suspension of payments
from insolvency proceedings.
debtor has
enough assets to
meet his liabilities,
but cannot meet
them as they fall
due.
of all debts, whether
due or not, and to
secure a complete
discharge from such
debts.
The debtor has more
liabilities than assets.
Always initiated by
the debtor
May be i by
creditors or other
persons incase of
involuntary insolvency
proceedings or by the
debtor himself incase
of voluntary insolvency
roceedin s.
payment
of debts inorder to
provide the debtor a
period to convert
some of his
erties to cash.
The amount of debts
is not affected, only
the time for paying
them is postponed.
I
The tors usually
receive less than what
they are entitled to, or
some creditors may
not even receive
a
ncase of invol
insolvency, 3 or
creditors are
180
Q:What is avoluntary insolvency?
A: This is availed of a debtor who, having
debts exceeding Pi ,000.00, cannot discharge
all of them with all of his existing assets and
who, as a consequence, voluntarily goes to
court to have himself declared as an insolvent
so that his assets may be equitably distributed
among his creditors. (Sec 14)
Q: What is the procedure for voluntary
insolvency?
A:
1. Filing of the petition by the debtor
praying for the declaration of
insolvency (Sec.Z),
2. Issuance of an order of adjudication
declaring the petitioner insolvent"
(Sec. 18); .
3. Publication and service of the order
(Sec. 19);
4. Meeting of the creditors to elect the
assignee in insolvency (Sec. 30);
5. Conveyance of the debtor's property
by the clerk of court to the assignee
(Sec. 32);
6. Liquidation of the debtor's assets and
payment of his debts (Sec. 33);
7. Composition, if agreed upon (Sec.
63);
8. Discharge of the debtor on his
application (Sec. 64), except a
corporation;
9, Objection, if any, to the discharge
(Sec. 66);
10. Appeal to the SC incertiorari.
Q: A, a well-known architect, is suffering
from financial reverses. He has. four
creditors with a total claim of P26 Million.
Despite his intention to pay these
obligations, his current assets are
insufficient to cover all of them. His
creditors are about to sue him.
Consequently, he was constrained to file a
petition for insolvency
Since A was merely forced by
circumstances to petition the court to
declare him insolvent, can the judge
properly treat the petition as one for
involuntary insolvency? Explain.
A: The petition cannot be treated as one of
involuntary insolvency, because it was filed by
A himself, the debtor, and not by his creditors
(Sec. 20). To treat it as one of involuntary
insolvency would unduly benefit A as a debtor,
because he would not be subject to the
UST GOLDEN NOTES 2010
limitation of time within which he is subject in
the case of voluntary insolvency for purposes
of discharge (Sec 65).
Q: What are the requisites of petition for
voluntary insolvency?
A: The petition which must be verified (Sec.
17) is to be filed:
I. By an insolvent debtor
2. Owing debts exceeding in amount the
sumof P1,OOO.OO,
3. In the RTC of the province or city in
which he has resided for 6 months
next preceding the filing of such
petition, and
4. Setting forth in his petition the
following:
a. His place of residence;
b. The period of residence therein
immediately prior to filing said
petition;
c. His inability to pay all his debts in
full;
d. His willingness to surrender all
his property, estate, and effects
not exempt from execution for
the benefit of his creditors; and
e. An application to be adjudged an
insolvent. (Sec. 14)
Q: What are the documents to accompany
the petition?
A:
1. A verified schedule must contain:
a. A full and true statement of all
debts and liabilities of the
insolvent debtor; and
b. An outline of the facts giving rise
or which might give rise to a
cause of action against such
insolvent debtor; (Sec. 15)
2. A verltieo inventory, which must
contain:
a. An accurate description of all the
personal and real property of the
insolvent exempt or not from
execution including a statement
as to its value, location and
encumbrances thereon; and
b. An outline of the facts giving rise
or which might give rise to a right
of action in favour of the
insolvent debtor. (Sec. 16)
Q: Who may petition for voluntary
insolvency?
A: The petition may be filed by any officer duly
authorized by the vote of the board of directors
or trustees at a meeting especially called for
that purpose, or by assent in writing of the
majority of the directors or trustees, as the
case may be. (Sec. 52)
Q: What is the effect of filing petition?
A: Once the petition is filed, it ipso facto takes
away and deprives the debtor petitioner of the
right to do or commit any act of preference as
to creditors, pending the final adjudication.
(Philippine Trust Co. v. National Bank, 42 Phil
413)
Q: What are the effects of court order
declaring debtor insolvent?
A:
1. All the assets of the debtor not
exempt from execution are taken
possession of by the sheriff until the
appointment of a receiver or
assignee;
2. The payment to the debtor of any
debts due to him and the delivery to
the debtor or to any person for himof
any property belonging to him, and
the transfer of any property by him
are forbidden;
3. All civil proceedings pending against
the insolvent debtor shall be stayed;
and
4. Mortgages or pledges, attachments,
or executions on property of the
debtor duly recorded and not
dissolved are not affected by the
order. (Sec. 59) I
UNIVERSITY OF SANTO TOMAS
' Facu(taa de CDer ecno Ci vi l
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SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW
Q: What is an involuntary insolvency?
A: This is availed of by the petition of 3 or
more creditors, none of whom became a
creditor by assignment within 30 days prior to
filing of petition and whose aggregate credit is
not less than Pi ,000.00, because of
commission of one or more acts of insolvency.
(Sec. 20)
Q: What are the acts of insolvency?
A:
1. Such person is about to depart or has
departed from the Philippines, with
intent to defraud his creditors;
2. Being absent from the Philippines,
with intent to defraud his creditors, he
remains absent;
3. He conceals himself to avoid the
service of legal process for purpose
of hindering or delaying or defrauding
his creditors;
4. He conceals, or is removing, any of
his property to avoid its being
attached or taken on legal process;
5. He has suffered his property to
remain under attachment or legal
process for 3 days for the purpose of
hindering or delaying or defrauding
his creditors;
6. He has confessed or offered to allow
judgment in favor of any creditor or
claimant for the purpose of hindering
or delaying or defrauding any creditor
or claimant;
7. He has willfully suffered judgment to
be taken against him by default for
i the purpose of hindering or delaying
, or defrauding his creditors;
8.1 He has suffered or procured his
property to be taken on legal process
with intent to give a preference to one
or more of his creditors and thereby
hinder, delay, or defraud anyone of
his creditors;
9. He has made any assignment, gift,
sale, conveyance, or transfer of his
estate, property, rights, or credits with
intent to delay, defraud, or hinder his
creditors;
10. He has, in contemplation of
insolvency, made any payment, gift,
grant, sale, conveyance, or transfer of
his estate, property, rights, or credits;
11. Being a merchant or tradesman he
has generally defaulted in the
payment of his current obligations for
a period of 30 days;
182
12. For a period of 30 days he has failed
after demand, to pay any moneys
deposited with him or received by him
inafiduciary capacity; and
13. An execution having been issued
against him on final judgment for
money, he shall have been found to
be without sufficient property subject
to execution to satisfy the judgment.
(Sec. 20)
Q: What is the procedure in involuntary
insolvency?
A:
1. Filing of the petition by three or more
creditors (Sec. 20);
2. Issuance of order requiring the debtor
to show cause why he should not be
adjudged insolvent (Sec. 21);
3. Service of order to show cause (Sec.
22);
4. Filing of answer or motion to dismiss
(Sec. 23);
5. Hearing of the case (Sec. 24);
6. Issuance of order or decision
adjudging debtor insolvent (Ibid.)
7. Publication and service of order (Sec.
25);
8. Meetings of creditors for election of
an assignee in insolvency (Sec. 30);
9. Conveyance of debtor's property by
clerk of court to the assignee (Sec.
32);
10. Liquidation of the debtor's assets and
payment of debts (Sec. 33);
Note: Assets of the insolvent which
are not exempt from execution will
then be distributed among his
creditors in accordance with the rules
of concurrence and preference of
credits inthe Civil Code.
11. Composition, if agreed upon (Sec.
63);
12. Discharge of the debtor on his
application, except a corporation
(Sec. 52);
13. Objection, if any, to the discharge
(Sec. 66); and
14. Appeal to the Supreme Court in
certain cases (Sec. 62)
UST GOLDEN NOTES 2010
Q: What are the requisites for filing a
petition for Involuntary Insolvency?
A: The petition is filed by:
1. Three or more creditors;
2. None of whom has become such a
creditor by assignment, within 30
days prior to the filing of said petition;
3. Whose credits accrued in the
Philippines;
4. The total amount of which credits is
not less than P1,OOO.OO; and
5. In tile RTC of the province or city in
which the debtor resides 01- has his
principal place 0 business.
6. The petition must:
a. be verified by at least 3 of the
petitioning creditors;
b. set forth one or more acts of
insolvency mentioned in the law;
and
c. be accompanied by a bond,
approved by the court with at
least 2 sureties, in' such penal
sum as the court shall direct.
Q: Can a surety institute involuntary
proceedings?
A: No, a surety for the debtor is not a creditor.
Hence, he cannot institute involuntary
proceedings. All he can do is to prove his
claim.
Q: Distinguish voluntary insolvency from
involuntary insolvency.
A:
,.':
'VOLUNTARY
',INV,OLUNTARY
,
-INSOLVENCY
INSOLVENCY ~
Filed by the debtor.
Filed by 3 or more
creditors.
Only 1 creditor is 3 or more creditors are
required.
required.
No requirement for Requirements
for
creditors.
creditors:
1. Residents of the
Philippines;
2. Their credits or
demands must have
accrued in the
Philippines; and
3. Must not have been
a creditor
by
assignment within 30
days prior to the filing
of the petition.
Venue: where he has
Where the debtor has
resided 6 months . residence
or has his
J 2!ior to the filing of
principal place of
petition.
business.
No need for the Debtor must
' have
commission of any of
committed any of the
the acts of acts of insolvency.
insolven9f,
Amount of debts Amount of debts must
must exceed not be less than
Pi ,000.00.
Pi ,00000.
Debtor deemed Debtor is considered
insolvent through an
insolvent upon the
order of adjudication
issuance by the court
after filing of the of an order after due
petition; adjudication hearing declaring him
may be granted ex insolvent; adjudication
parte.
granted only after
heariQf!,
Bond is not required.
Bond is required.
Q: Who is an assignee in insolvency?
A: A person elected ~y the creditors or
appointed by the court to whom an insolvent
debtor makes an assiqnment of all his property
for the benefit of his creditors.
Note: The assignee must be a person elected
by the majority of the creditors who have
proven their claims, such majority being in
number and amount.
Q: Who are the creditors not entitled to
vote in the election of assignee?
A:
1. Those who did not file their claims at
least 2 days prior to the time
appointed for such election; (Sec. 29)
2. Those whose claims are barred by
the statute of limitations; (Ibid.)
3. Secured creditors unless they
surrender their security or lien to the
sheriff or receiver or unless they shall
first have the value of such security
fixed as provided in Sec. 59; and
4. Holders of claims for unliquidated
damages arising out of pure tort.
Q: Is the assignee required to give a bond?
A: After his election, the assignee is required
to give a bond for the faithful performance of
his duties. (Sees. 3D, 31)
Note: Courts have the power to appointreceivers
to hold the property of individuals or corporations
although noinsolvency proceedings are involved.
A receiver appointed by a court before the
institution of the insolvency proceedings may be
appointed the permanent assignee in such
proceedings.
UNIVERSITY OF SANTO TOMAS
Pacu(taa de Der ecI i o Ci vi l
SPECIAL COMMERCIAL LA WS: INSOLVENCY LAW
Q: What is the date of cleavage?
A: The date when the petition is filed, from
which is counted backward or forward, in
determining the effects provided for under the
Insolvency Law.
Illustrations:
1. A creditor by assignment of credit
made within 30 days from date of
cleavage shall be disqualified as
petitioning creditor (Sec. 20);
2. Attachment levied upon within a
period of 30 days before the date of .
cleavage may be set aside by the
assignee (Sec. 32);
3. J udgment on cases filed and decided
within 30 days prior to the date of
cleavage may be set aside by the
assignee (Sec. 32);
4. J udgments on cases filed before 30
days from the date of cleavage but
decided within 30 days because of
confession of judgment or declaration
of default by debtor may be set aside
by action of assignee;
5. Properties acquired after date of
I
cleavage, after discharge of debtor in
good faith shall not be liable for debts
incurred prior to the date of cleavage;
6. Fraudulent preferences made within
30 days prior to the date of cleavage
may be set aside in action brought by
assignee.
Q: What is a dividend in insolvency?
A: A parcel of the fund arising from the assets
of the estate, rightfully allotted to a creditor
entitled to share in the fund whether in the
same proportion with other creditors or in a
different proportion. It is paid by the assignee
only upon order of the court (Sees. 43, 44).
Q: When may a partnership be declared
insolvent?
A: A partnership may be declared insolvent by
a petition of the partners and may be done
during the continuation of the partnership
business or after its dissolution and before the
final settlement thereof.
A partnership may be declared insolvent
notwithstanding the solvency. of the partners
constituting the same. (Campos Rueda &Co.
v. Pacific Commercial Co., G.R. No. L-18703
Aug. 28, 1922)
184
Q: Who may petition for declaration of
insolvency of a partnership?
A:
1. Voluntary insolvency - By all the
partners or any of them;
2. Involuntary insolvency - By one or
more of the partners or three or more
creditors of the partnership.
Q: What are the properties included in the.
insolvency proceedings?
A:
1. All the property of the partnership;
and ~
2. All the. separate of each of the
partners except:
a. Separate properties of limited
partners (Art. 1843, NCC)
b. Properties which are exempt by
law (Sec. 51)
Q: What are the effects of filing of petition?
A:
1. The proceedings are deemed to
commence against the partners atthe
same time;
2. Upon order of the court, all the
properties of the partnership and also
all the separate property of each
partner, if they are liable, shall be
taken; (Sec. 51)
3. All creditors of the partnership and
the separate creditors of each partner .
shall be allowed to. prove their
respective claims; (Ibid.)
4. The assignee shall be chosen by the
creditors of the partnership; and
(Ibid.)
5. Pending insolvency proceedings by
or against any partnership, person or
corporation no statute of limitations
shall run upon a claim of or against
the estate of the debtor. (Sec. 73)
UST GOLDEN NOTES 2010
Q: What is the effect of insolvency of
partnership or any partner?
A:
1. A partnership may be declared
insolvent notwithstanding the
solvency of the partners constituting
tile same.
2. A partnership is not necessarily
insolvent because one of its members
is insolvent. The solvent members
are bound to wind up the partnership
affairs.
3. Under the law, a partnership is
automatically dissolved by the
insolvency of any partner or of the
partnership
Q: What is the effect when corporation
declared insolvent?
A: Its property and assets shall be distributed
to the creditors but no discharge shall be
granted to any corporation. (Sec. 52)
Q: Is insolvency law applicable to
corporations?
A: The Insolvency Law expressly provides that
it is not applicable to corporations:
1. Engaged principally in the banking
business; or
2. Any other corporation as to which
there is a special provision of law for
its liquidation in case of insolvency.
(Ibid)
A:
Q: In the filing of claims in an insolvency proceeding, what debts may and may not be proved?
1. All debts due and payable from the debtor at
the time of adjudication of insolvency; (Sec.
53)
2. All debts existing at the time of the
adjudication of insolvency but not payable
until afuture time, a discount being made if
no interest is payable by the terms of the
contract;
3. Any debt of the insolvent arisin'gfrom his
liability as indorser, surety, bailor guarantor,
where such liability became absolute after the
adjudication of insolvency but before the final
dividend shall have been declare; (Sec, 54)
4, Other contingent debts and contingent
liabilities contracted by the insolvent if the
contingency shall happen before the order of
final dividend; (Sec. 55); and
5. Any debt of the insolvent arising from his
liability to any person liable as bail, surety, or
guarantor or otherwise, for the insolvent, ho
shall have paid the debt infull, or in part.
(Sec. 56)
~- - - - - - - - - - - - - - - - - - - - - - - - - - ~- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
The debts which may be proved against the estate
of the debtor ininsolvency proceedinqs are the
following:
The following debts are not provable or aI/owed in
insolvency proceedings:
1. Claims barred by the statute of limitations;
(Sec. 29, 73)
2, .Claims of secured creditors with a mortgage
or pledge intheir favour unless they
surrender the security; (Sec, 59)
3. Claims of creditors who hold anattachment
or execution onthe property of the debtor
duly recorded and not dissolved; (Sec. 32)
4. Claims on account of which afraudulent
preference was made or given; (Sec. 61)
5. Support, as it does not arise from any
business transaction but from the relation of
marriage; and
6. A claimfor unliquidated damages arising out
of a pure tort, which neither constitutes a
breach of an express contract nor results in
any unjust enrichment of the tortfeasor that
may form the basis of an implied contract.
UNlilERSITY OF SANTO TOMAS
Pacu(tad de De r ech o Ci v i]
~v~ 185
SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW
Q: What is a contingent claim? Q: Distinguish composition from accord.
A: A claim in which liability depends on some
future event that mayor may not happen and
which makes it uncertain whether there will be
any liability.
Note: After the close of the insolvency
proceedings and the happening of the
contingency, the creditor may pursue any
availableremedyfor the collectionof his claim.
Q: How are claims arising or acquired after
insolvency treated?
A:
1. Claim arose after commencement of
proceedings - An obligation coming
in force after the initiation of the
proceedings is not generally a proper
claim to be proved.
2. Claim owned by insolvent purchased
after insolvency - One indebted to an
insolvent will not be permitted to
interpose as an offset, a claim owned
by the insolvent which he has
purchased after the insolvency.
Q: .What are the alternative rights of a
secured creditor?
A:
1. To maintain his rights under his
security or' lien and ignore the
insolvency proceedings, in which
case, it is the duty of the assignee to
surrender to him the property
encumbered;
2. To waive his right under the security
or lien and thereby share in the
distribution of the assets of the
debtor; or
3. To have the value of the encumbered
property appraised and then share in
the distribution of the assets of the
debtor with respect to the balance of
his credit. .
Q: What is composition?
A: It is an agreement, made upon a sufficient
consideration, between an insolvent or
embarrassed debtor and his creditors,
whereby the latter for the sake of immediate or
sooner payment, agree to accept a dividend
less than the whole amount of their claims, to
be distributed pro rata, in discharge and
satisfaction of the whole debt.
18 6
A: Accord properly denotes an agreement
between a debtor and a single creditor for a
discharge of the obligation by a part payment
or ondifferent terms.
Composition, on the other hand, designates an
arrangement between a debtor and the whole
body of his creditors (or at least a considerable
portion of them) for the liquidation of their
claims bythe dividend offered.
Q: What are the requirements for a valid
offer of composition?
A:
1. The offer of the terms of composition
must be made after the filing of the
schedule of the debtor's property and
the submission of the list of his
creditors;
2. The offer must be accepted in writing
by a majority of the creditors
representing a majority of the claims
which have been allowed;
3. It must be made after the depositing
in such place designated by the court,
the consideration to be paid and the
costs of the proceedings; and
4. The terms of the composition must be
approved or confirmed by the court.
(Sec. 63)
Q: When may the court confirm a
composition?
A: When:
1. It is for the best interest of the
creditors;
2. The debtor has not been quilty of any
of the acts, or of a failure to perform
any of the duties which would create
a bar to his discharge; and
3. The offer and its acceptance are in
good faith and have not been made
or procured in a manner forbidden by
the Act.
UST GOLDEN NOTES 2010
Q: What are the effects of confirmation of
composition?
A:
1. The consideration shall be distributed
as the judge shall direct;
2. The insolvency proceedings shall be
dismissed;
3. The title to the insolvent's estate shall
revert in him;
4. The insolvent shall be released from
his debts
Q: When may confirmation be set aside?
A: The court may, upon application of a party
in interest within 6 months after the
composition has been confirmed, set the same
aside and reinstate the case if it shall be made
to appear upon a trial:
1. That fraud was practiced in the
procuring of such composition; and
2. The knowledge thereof has come to
the petitioner since the confirmation
of such composition. (Sec. 63)
Q: What is discharge?
A: Discharge, under the Insolvency Law, is the
formal and judicial release of an insolvent
debtor from his debts with the exception of
those expressly reserved by law.
Note: Only natural persons may ask for
discharge; corporations cannot ask for discharge.
(Sec. 52) When granted, takes effect not from its
date, but from the commencement of the
proceedings in insolvency.
Q: When insolvent debtor may apply for
discharge?
A: A debtor' may apply to the RTC for a
discharge at anytime after the expiration of 3
months from the adjudication of insolvency,
but not later than 1 year from such
adjudication of insolvency, unless the property
of the insolvent has not been converted into
money" (Sec. 64) without his fault, thereby
delaying the distribution of dividends among
the creditors in which case the court may
extend the period
Any creditor may oppose the discharge by
filing his objections thereto, specifying the
grounds of his opposition. After the debtor has
filed and served his verified answer, the court
shall try the issue or issues raised. (Sec. 66)
Q: What are the requisites for discharge?
A:
1. Compliance with statutory
requirements regarding surrender of
his assets for the benefit of the
creditors and regarding the rendition
of an account of his assets and
liabilities;
Note: A discharge in insolvency is a
matter of legislative grace or favour to
the debtor, to be obtained only by a
strict compliance with the conditions
prescribed by the statute.
2. Application for discharge should be
filed after the expiration of 3 months
from the adjudication of insolvency,
but not later than 1 year; (Sec. 64);
and
3. Insolvent debtor must not have
committed any of the acts of
insolvency preventing discharge.
Q: What are the acts of debtor or grounds
which will prevent discharge?
A: No discharge shall be granted, or if gr\3nted,
shall be valid, to the following cases:
1. False swearing;
2. Concealment of any part of his estate
or effects;
3. Fraud or willful neglect in the care of
his property or in the delivery thereof
to the assignee;
4. Procuring his properties to be
attached or seized on execution
within 1 month before the
commencement of insolvency
proceedings;
5. Destruction, mutilation, alteration or
falsification of his books, documents,
and papers;
6. Giving fraudulent preference to a
creditor;
7. Non-disclosure of the assignee of a
proven false or fictitious debt within 1
month after acquiring knowledge;
8. Being a merchant, failure to keep
proper books or accounts;
9. Influencing the action of any creditor,
at any state of the proceedings, by
pecuniary consideration;
10. Effecting any transfer, conveyance or
mortgage in contemplation of
insolvency;
11. Conviction of any misdemeanor
under the Insolvency Law:
12. In case of voluntary insolvency, he
has received the benefit of insolvency
UNIVERSITY OF SANTO TOMAS ~~~", 187
'Facu{taa de <Derecfio Ci vi l 'W'
SPECIAL COMMERCIAL LAWS: INSOLVENCY LAW
within 6 years next preceding his
application for discharge; and
13. If irisolvency proceeding in which he
could have applied are pending by or
against him in the RTC of any other
province or city. (Sec. 65)
Q: What are the effects of discharge?
A:
1. It releases the debtor from all claims,
debts, liabilities and demand set forth
in the schedule or which were or
might have been proved against his
estate in insolvency. (Sec. 69).
Hence, non-provable debts are not
affected whether or not they were
properly scheduled;
2. It operates as a discharge of the
insolvent and future acquisitions, but
pemits mortgagees and other lien
creditors to have their satisfaction out
of the mortgage or subject of the lien;
3. It is a special defense which may be
pledged and be a complete bar to all
suits brought on any such debts,
claims, liabilities or dernands. (Ibid.)
4. It does not operate to release any
person liable for the same debt, for or
with the debtor, either as partner, joint
contractor, indorser," surety or
otherwise; (Sec. 68)
5. The certificate of discharge is prima
facie evidence of the fact of release,
and the regularity of such discharge.
Note: Where a debtor is judicially declared
insolvent, the remedy of the guarantor or
surety would be to file a contingent claimin
the insolvency proceeding, if his rights as
such guarantor or sureties are not to be
barred by the subsequent discharge of the
insolventdebtor fromall his liabilities.
Q: What are the debts and obligations not
affected by discharge of insolvent?
A:
1. Taxes or assessments due the
Government, whether national or
local;
Any debt created by the fraud or
embezzlement of the debtor;
Any debt created by ihe defalcation of
the debtor as a public officer or while
acting inafiduciary capacity;
Debt of any person liable for the
same debt, for or with the insolvent
debtor, either as partner, joint
contractor, inorser, surety or
otherwise; (Sec; 68)
Debts of a corporation (Sec. 52);
Claimfor support;
2.
3.
i
4.
5.
6.
18 8
7. Discharged debt but revived by a
subsequent new promise to pay;
8. Debts which have not been duly
scheduled in time for proof and
allowance, unless the creditors had
notice or actual knowledge of the
insolvency proceedings, are not
discharged as tosuch creditors;
9. Claims for unliquidated damages
arising out of a pure tort;
10. Claims of secured creditors; (Sec. 59)
11. Claims not in existence or not mature
at the time of the discharge;
12. Claims that are contingent at the time
of discharge.
Q: When discharge may be revoked?
A: A discharge may be revoked by the court
which granted it on petition of any creditor:
1. Whose debt was proved or provable
against the estate in insolvency on
the ground that the discharge was
fraudulently obtained;
2. Who has discovered facts constituting
the fraud subsequent to tile dlscharqe
and fraudulent transfer; and provided,
3. The petition is filed within 1 year after
the date of the discharge. (Sec. 69)
Q: What is transfer?
A: It includes the'sale and every other and
different modes of disposing of or parting with
property, or the possession of property,
absolutely or conditionally, as a payment,
pledge, mortgage, gift, or security.
Note: A deposit of money is not atransfer.
Q: When is there preferential transfer?
A: There must be a parting with the insolvent's
property for the benefit of the creditor and a
consequent diminution of the insolvent's estate
with the result that such creditor receives a
greater proportion of his claim than other
creditors of the same class.
Note: Except incases mentioned in the
Insolvency Law, a debtor is not prohibited from
payingone creditor inpreference toanother.
UST GOLDEN NOTES 2010
Q: How
committed?
fraudulent preference is
A: A fraudulent preference is committed when
the debtor procures any part of his propertyto
be attached, sequestered, or seized on
execution or makes any payment, pledge,
mortgage, assignment, transfer, sale or
conveyance of any part of his property,
whether directly or indirectly, absolutely or
conditionally, to anyone under the following
circumstances:
1. The debtor is insolvent or in
contemplationof insolvency;
2. The transaction in question is made
within 30 days before the filing of a
petitionby or againstthe debtor;
3. It is made with a view to giving
preference to any creditor or person
having aclaimagainst him; and
4. The person receiving a benefit
thereby has reasonable cause to
believe that the transfer is made with
a view to prevent his property from
coming to his assignee in insolvency
or to prevent the same from being
distributed ratably among his
creditors or to defeat the object of or
any way hinder the operation of or
evade the provisions of the
Insolvency Law. (Sec. 70)
Q: What are the effects of fraudulent
transfer?
A: As against the creditors of the insolvent,
any conveyance or assignment fraudulently
made is void.
In all actions to set aside or nullify fraudulent
transfer or transactions as void, the assignee
appears for and represents the general
creditors. The creditors of the Insolventare not
authorizedto institute anindependentactionto
annul suchfraudulent preferences.
Q: When are the provisions of the Act not
applicable?
A: The provisions of the Act shall not apply to
corporations principally in the banking
business or any other corporation as to which
there is a special provision of law for its
liquidationincase of insolvency.
A petition for liquidation of an insolvent
. partnership or corporation is a special
proceeding notanordinary action.
Q: As of J une 1, 2002,Edzo Systems Corporation
(Edzo) was indebted to the following creditors:
a. Ace Equipment Supplies - for
various personal computers and
accessories sold to Edzo on credit
amounting to P300,000.
b. Handyman Garage - for mechanical
repairs (parts and service)
performed on Edzo's company car
amounting to P10,000.
c. J oselyn Reyes - former employee
of Edzo who sued Edzofor unlawful
termination of employment and was
able to obtain a final judgment
against Edzofor P100,000.
d. Bureau of Internal Revenue - for
unpaid value-added taxes
amounting to P30,000.
e. Integrity Bank - which granted
Edzo a loan in 2001 in the amount
of P500,000.
The loan was not secured by any asset of
Edzo, but it was guaranteed
unconditionally and solidarily by Edzo's
President and controlling stockholder,
Eduardo Z. Ong, as accommodation surety.
The loan owed to Integrity Bank fell due on
J une 15, 2002. Despite pleas for extension
of payment by Edzo, bank demanded
immediate payment. Because Integrity
Bank threatened to proceed against the
surety, Eduardo, Edzo decided to pay up all
of its obligations to Integrity Bank. OnJ une
20, 2002, Edzo paid to Integrity Bank the
full principal amount of P500,000.00, plus
accrued interests amounting to P55.000.00.
As a result, Edzo had hardly any cash left
for operations and decided to close its
business. After paying the unpaid salaries
of its employees, Edzo filed a petition for
insolvency on J uly 1, 2002. In the
insolvency proceedings in court, the
assignee in insolvency sought to invalidate
the payment made by Edzo to Integrity
Bank for being a fraudulent transfer
because it was made within 30days before
the filing of the insolvency petition. In
defense, Integrity Bank asserted that the
payment to it was for a legitimate debt that
was not covered by the prohibition
because it was "a valuable pecuniary
consideration made in good faith," thus
falling within the exception specified in the
Insolvency Law.
As judge in the pending insolvency case,
how would you decide the respective
contentions of the assignee in insolvency
and of Integrity Bank? Explain.
UNIVERSITY OF SANTO TOMAS ~"-1,'~ 189
' Facu(tad de De r ecl i o Ci vi i
SPECIAL COIvIJ :v[ERCIAL LAWS: INSOLVENCY LAW
A: The contention of the assignee in
insolvency is correct. The payment made by
Edzo to Integrity Bank was a fraudulent
preference or payment, being made within
thirty (30) days before the filing of the
insolvency petition.
Q: Based onthe same facts as stated inthe
preceding question, how would you, as
judge in the insolvency proceedings, rank
the respective credits or claims of the five
(5) creditors mentioned above in terms of
preference or priority against each other?
A: The claim of Handyman Garage for
P10,000.00 has a specific lien on the car
repaired. The remaining four (4) claims have
preference or priority against each other in the
following order:
1. Letter (d) - claim of the BIR for unpaid
value-added taxes;
2. Letter (c) - claim of J oselyn Reyes for
unlawful termination;
3. Letter (a) - claim of Ace Equipment
Supplies as an unpaid seller; and
4. Letter (e) - claim of Integrity Bank.
(2002Bar Question)
190
Academics Committee
C.!wi r pmr l / l : Abraham D. Cl'lluill() II
l / i a-Chui r ./ r Jr /[aH/e/J/;t:r: -' cnnni ;\. Laurcntino
Vial-C/wirjfw/ldlllill e: : ... /'iII(J'hr: ;\issa Cclinc [-I . Luna
1/1~:e-(.ll{/irJiJf' Lq}'fJ/(1 C'""' f)l'J(~": Loise Rae (;. Naval
Mercantile Law Comm ittcc
Jl l bj ed l l ead: 11,,1)'T {\mpaguey
Aul . .l'1If,jcd I l ead: Manilvn I(ose S. Sotel"
Members:
I':dwin Marc T. lIaldia
Airccn M. Cacho
S()crates llenjil' I. Marbil
Ron Chcrric S. f"Iendel%<1
[':dison .Iallles I,'. I'agalilauan
Mnybcllinc M. Santiago
. ---. 'IO('~ ~ ..
UST GOLDEN NOTES 2010
Q: What are the applicable laws?
A:
1. .Sections 48-50, Act 1956
2. Articles 2241-2245, New Civil Code
Q: What is concurrence of credit?
A: It implies possession by two or more
creditors of equal rights or privileges over the
same property or all of the property of a
debtor.
Q: What is preference of credit?
A: It is the right held by a creditor to be
preferred in the payment of his claim above
other out of the debtor's assets. By preference
of credit, one person is given a superior right
or claim over another.
Q: What is the order of distribution?
A:
1. Exclude properties exempt from
execution;
2. Exclude equitable claims under
Section 48;
3. Preferred claims with respect to the
specific movable property and
specific immovable property under
Article 2241 and Article 2242,
respectively, of the Civil Code;
Note: The preferred claims enumerated
in Article 2241 and Article 2242 of the
Civil Code are considered as mortgages
or ledges of real or personal propertyor
liens within the purview of the
Insolvency Law. (Article 2243, Nee)
With reference to specific movable and
immovable property of the debtor, the
taxes due the State shall first be
satisfied. If there are two or more
credits with respect to the same
movable or immovable property, they
shall besatisfied prorata, after payment
of taxes due the State.
4. Preferred claims as to unencumbered
property of the debtor which shall be
paid in the order named in Article
2244 of the Civil Code; and
5. Common or ordinary credits, which
shall be paid pro rata regardless of
dates under Article 2245 of the Civil
Code.
Q: What are the exempt properties?
A:
1. Present Property:
a. Family home
b. Right to receive support as well
as money or property obtained
by such support shall not be
levied upon an attachment or
execution.
c. Sec. 13, Rule 39, Rules of
Court.
d. Sec. 118, the Public Land Act.
2. Future Property
Note: A debtor whoobtains adischarge
fromhis debts onaccount of insolvency,
is not liable for the unsatisfied claims of
his creditors with said property.
3. Property in custodia legis and of
public dominion.
Q: What are the equitable claims under the
Insolvency Law?
A: Under Sec. 48, any property found among
the property of the insolvent, the ownership or
which has not been conveyed to him by legal
and irrevocable title, shall not be considered
as property of the insolvent and shall be
placed at the disposal of its lawful owners on
order of the court on petition of the assignee or
any creditor whose right to the estate of the
insolvent has been established.
Equitable claims shall include the following:
1. Paraphernal property belonging to
wife of the insolvent;
2. Property held by the insolvent in
deposit, administration, lease or
usufruct;
3. Merchandise held by the debtor on
commission;
4. Negotiable instruments for collection
or remittance;
5. Money held by the debtor for
remittance;
6. Amounts due the insolvent for sales
or merchandise on commission;
7. Merchandise bought by the insolvent
on credit where no delivery is made
or where the right of ownership or
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de CJ) er echo Ci vi l
~i~ 191
SPECIAL COMMERCIAL LAWS: CONCURRENCE AND PREFERENCE OF CREDIT
possession has been retained by the
seller; and
8. Goods or chattels wrongfully taken by
the insolvent onthe amount of the
value thereof. (Sec. 48)
Q: A special examination of Rural Bank of
Boklod Inc. (RBBI) was conducted by the
BSP wherein various loan irregularities
were uncovered. The Monetary Board
ordered the liquidation of the bank. The
Monetary Board transferred to POIC the
receivershiplliquidation of RBBI. PDIC then
filed a Motion for Approval of Project of
Distribution of the Assets of RBBI. During
the hearing, BIR manifested that PDIC
should secure a tax clearance certificate
pursuant to Section 52(C) of Republic Act
No. 8424 before it could proceed with the
dissolution. The RTC directed the PDIC to
comply. Is there a need to secure a tax
clearance before the project of distribution
may be approved?
A: The Government, in this case, cannot
generally claim preference of credit, and
receive payment ahead of the other creditors
of RBBI. Duties, taxes and fees due to the
Government may enjoy priority only when they
are with reference to a specific movable
property under Art. 2241(1) of the Civil Code
or im'movable property under Art. 2242(1) of
the same Code. With reference to the other
real bnd personal property of the debtor,
sometimes referred to as "free property", the
taxes' and assessments due to the National
Government, other than those in Art.2241(1)
and Art. 2242(2) of the Civil Code will come
only in the ninth place in the order of
preference. (In Re: Petition for Assistance in
the Uquidation of the Rural Bank of Bokod
(Benguet), PolC v. BIR, G.R. No. 158261,
Dec. 18, 2006)
192
Academics Comm ittcc
ChairjJ('I:rrJ!1: Abruham 1). (;clluin() [[
Vi a-Cbai r f : ,,'l((H/nJlil:r:.I cnnnic ". 1 .aun-ntim .
['"ia-C/!(Jir./f)r/1dmil1 e.',:"" FilItJ!I((:: Aissn (:l'lil1~ II. Luna
Vi a-Chai r } ,," L(!),(JII! e..':", f)l'.r~~II:] ,oisl' Rat: (;. Naval
Mercantile Law 'Couuu incc
Jllhj,d / / ' u,/ 1101)" T ,\I1lJ lagllc\"
," ' L -.r / . Ju/ Jj r : d ' -f ear / - Manilyn Rose S. ~()tc.:l\l
Members:
1,e1win Mntc T. Il,""ia .
Ait-ccn f\l Cach! )
~()cr"tcs Ilcnjic I. ~larbil
ROil Chcrric S. l\:fcndoz;1
l~dis()n,llll11l's F. Pilgalili1u;lll
iV/;tY UC/J illC M. ~""li"glJ
UST GOLDEN NOTES 2010
-' .' . . i : INSURANCEtLAW ."
Q: What laws govern insurance?
A:
1. Insurance Code of 1978 (P.D. 1460)
2. New Civil Code
3. Special Laws
Q: What is a contract of insurance?
A: It is an agreement whereby one undertakes
for a consideration to 'indemnify another
against the loss, damage or liability arising
from an unknown or contingent event. (Sec.
2[1], Insurance Code)
Q: What are the elements of a contract of
insurance?
A: SPEAR
1. Existence of insurable interest - The
insured possesses an interest of
some kind susceptible of pecuniary
estimation, known as "insurable
interest. "
In general (except in life insurance
policies), a person is deemed to have
an insurable interest in the subject
matter insured where he has a
relation or connection with or concern
in it that he will derive pecuniary
benefit or advantage from' its
preservation and will suffer pecuniary
loss from its destruction or injury by
the happening of the event insured
against.
2. Risk of loss - The insured is subject
to a risk of loss through the
destruction or impairment of that
interest by the happening of
designated peril.
3. (jssumption of Risk - The insurer
assumes that risk of loss for a
consideration.
4. Scheme to distribute losses - Such
assumption of risk is part of a general
scheme to distribute actual losses
among a large group or substantial
number of persons bearing a similar
. risk.
5. Eayment of premium As
consideration for the insurer's
promise, the insured makes a ratable
contribution called "premium," to a
general insurance fund.
Note: Because of the fourth element,
an insurance contract therefore is a
risk-distributing device.
Q: What is moral hazard?
A: An undesirable side effect in the transfer of
risk. It is a phenomenon on which the
existence of insurance could have the
perverse effect of the probability of loss.
Q: What are the nature and characteristics
of an insurance contract?
A:
1. Consensual - It is perfected by the
meeting of the minds of the parties.
So, if an application for insurance has
not been either accepted or rejected,
there is no contract as yet.
Note: Insurance contracts through
correspondence follow the "cognition
theory" wherein an acceptance made
by letter shall not bind the person
making the offer except from the time
it came to his knowledge (Enriquez v.
Sun Life Assurance Co. of Canada,
GR No. L-15774, Nov. 29, 1920).
2. Voluntary . The parties may
incorporate such terms and
conditions as they may deem
convenient which will be binding
provided they do not contravene any
provision of law and are not opposed
to public policy.
GR: The taking out of an insurance
contract is not compulsory.
XPN: Liability insurance may be
required by law in certain instances
such as for motor vehicles,or
employees under Labor Code, or as a
condition to granting a license to
conduct a business or calling
affecting the public 'safety or welfare.
3. Aleatory - It depends upon some
contingent event.
Note: An aleatory contract is a
contract where one or both of the
parties reciprocally bind themselves
to give or do upon the happening of
an event which is uncertain, or which
is to occur at an indeterminate time
(Art. 2010, NCC).
4. Unilateral - It imposes legal duties
only on insurer who promises to
UNIVERSITY OF SANTO TOMAS
Pacu{ tad de Der ecI i o Ci vi f
~i~ 193
INSURANCE LAW
indemnify in case of loss. It is
executed as to the insured after the
payment of the premium, and
executory on the part of the insurer in
the sense that it is not executed until
payment for a loss.
5. Conditional - It is subject to
conditions the principal one of which
is the happening of the event insured
against.
6. Contract of indemnity-
GR: The insurer promises to make
good only the loss of the insured.
XPN: A life insurance is not a
contract of indemnity. It is not
applicable to life insurance policies
because life is not capable of
pecuniary estimation. The only
situation where the principle of
indemnity is applicable to life
insurance is if the amount in the
policy is fixed. An example would be
in a case where a creditor insures
the life of his debtor to the extent
of the latter's debt to the former.
7. Personal - Each party having in view
the character,credit and conduct of
the other.
8. Property - Since insurance is a
contract, it is property in legal
contemplation.
9. Risk distributing device - Insurance
serves to distribute the risk of
economic loss among as many as
possible of those who are subject to
the same kind of loss.
10. Onerous - there is a valuable
consideration called the premium
Q: What are the five cardinal principles in
insurance?
1. Insurable interest - Relation between
the insured and the event insured
against such that occurrence of the
event will cause substantial loss or
harm of some kind to the insured.
2.
i
I
Principle of utmost good faith
(uberrimae fides) - Each party takes
into consideration the character,
conduct and/or credit of the other and
in making the contract, each is
enjoined by law to deal with the other
in utmost good faith. A violation of
194'
this duty gives the aggrieved party
the right to rescind the contract.
3. Contract of indemnity - The insured
who has insurable interest over a
property is only entitled to recover the
amount of actual loss sustained and
the burden is upon him to establish
the amount of such loss.
4. Contract of Adhesion (Fine Print
Rule) - the policy is presented to the
insured already in its printed form, so
that he either takes it or leaves it.
Most of the terms of the contract do
not result from mutual negotiations
between the parties as they are
prescribed by the insurer in that
printed form to which the insured may
adhere if he chooses but which he
cannot change (Rizal Surety and
Insurance, Co. v, CA, GR. No.
112360, July 18, 2000). In effect, the
ambiguous terms are to be construed
strictly against the insurer and
liberally in favor of the insured.
However, if the terms are clear, there
is no roomfor interpretation.
5. Principle of subrogation - if the
plaintiff's property has been insured,
and he has received indemnity from
the insurance company for the injury
or loss arising out of wrong or breach
of contract complained of, the
insurance company shall be
subrogated to the rights of the
insured against the wrongdoer or the
person who has violated the contract.
(Aft 2207, NCC).
Q: Should there be a contract before the
insurer be subrogated?
A: The principle of subrogation inures to.the
insurer without any formal assignment or any
express stipulation to that effect in the policy.
Said right is not dependent upon nor does it
grow out of any private contract. Payment to
the insured makes the insurer a subrogee in
equity. (Malayan Insurance Co., Inc. v. CA,
G.R. No. L-36413, Sept. 26, 1988)
Note: Incapacity of the insured will not affect
the capacity of the subrogee because capacity
is personal to the holder (Lorenzo Shipping v.
Chub and Sons, tnc., G.R. No. 147724, June
8, 2004).
UST GOLDEN NOTES 2010
Q: What are the rules on indemnity?
A:
1. Applies only to property insurance
except when the creditor insures the
Iifeof his debtor
2. Insurance contracts are not wagering
contracts or gambling contracts.
Note: Wagering contracts are those
where the parties contemplate gain
through mere chance.
Q: What are the purposes of subrogation?
A:
c. To make the person who caused the
loss legally responsible for it;
d. To prevent the insured from receiving
double recovery from the wrongdoer
and the insurer; and
e. To prevent the tortfeasors from being
free from liability and is thus founded
on consideration of public policy.
Q: What are the rules on subrogation?
A:
1. Applicable only to property insurance
- the value of human life is regarded
as unlimited and therefore, no
recovery from a third party can be
deemed adequate to compensate the
insured's beneficiary.
2. The right of insurer against a third
party is limited to the amount
recoverable from latter by the
insured.
Q: What if the amount paid by the
insurance company does not fully cover
the injury or loss?
A: The aggrieved party shall be entitled to
recover the deficiency from the person causinq '
the loss or injury. (Art 2207, NCC)
Q: What are the instances where the right
of subrogation does not apply?
A:
1. Where the insured by his own act
releases the wrongdoer or third party
liable for loss or damage from liability;
2. The insurer loses his rights against
the wrongdoer since the insurer can
only be subrogated to only such
rights as the insured may have;
3. Where the insurer pays the insured
the value of the loss without notifying
the carrier who has in good faith
settled the insured claimfor loss;
4. Where the insurer pays the insured
for a loss or risk not covered by the
policy;
5. Life insurance;
6. For recovery of loss in excess of
insurance coverage.
Q: What are the 3 classes of insurance?
A:
2. Life insurance - dependent upon
human life.
a. Individual life
b. Group life
c. Industrial life
3. Non-Life Insurance
a. Marine
b. Fire
c. Casualty
4. Contracts of suretyship or bonding.
(Hector S. de Leon, The Insurance
Code Annotated, 2006.)
Q: What may be insured against?
A:
1. Any contingent or unknown event,
whether past or future, which may
damnify a person having an insurable
interest or creates a liability against
him. (Sec. 3 [1])
2. A past event may be insured provided
the loss is unknown to both parties
and they expressly stipulated that
prior loss is insured by the policy.
3. Contingent liability, that is to say, the
insured is protected against his loss
with regards to claims for damages.
Thus, we have reinsurance,
workmen's compensation insurance,
and motor vehicle liability (Hector S.
de Leon, The Insurance Code
Annotated, 2006.)
Q: What event is covered by an insurance
contract?
A:
GR: Only a future event can be covered by
an insurance contract.
XPN: In marine insurance, even a past
event can be covered, provided that the
loss of the vessel in the past could not
have been known by ordinary means of
communication (Sec. 109).
UNIVERSITY OF SANTO TOMAS
Pacu{taa de (j)erecfio Civif
INSURANCE LA WI
Q: What are void insurance contract
stipulations?
Q: Distinguish contract of insurance from
gambl inglwageri ng contract.
A: A:
1. Stipulations for the payment of loss
whether the person insured do not
have any interest in the subject
matter of the insurance.
2. Stipulation that the policy shall be
received as proof of insurable
interest.
3. Policy executed by way of gaming or
wagering.
4. Stipulations within the proscription of
Article 739 of the New Civil Code.
5. Stipulations against public policy,
public morals and public order.
Q: What is awager policy?
A:
GR: It is a pretended insurance where the
insured has no interest in the thing insured
and can sustain no loss by the happening
of the misfortunes insured against.
XPN: A policy of insurance upon life or
health may pass by transfer, will or
succession to any person, whether he has
an insurable interest or not, and such
person may recover upon it whatever the
insured might have recovered (Sec. 181).
Q: What are the requisites of wagering
policy?
A:
1;.
I
2.
3.
The original proposal to take out
insurance was that of the beneficiary.
Premiums are paid by the beneficiary.
Beneficiary has no interest (economic
or emotional), in the continued life of
the insured.
Q: Mayan insurance be taken up on a
lottery ticket?
A: No. The Insurance Code provides that "No
insurance for or against the drawing of any
lottery, or for or against any chance or ticket in
a lottery drawing a prize may be allowed" It is
not allowed because it may result in profit
which is not true in insurance which only seeks
to indemnify the insured against losses. (Sec.
4)
196
GAMBLING/WAGERING CONTRACT OF
. CONTRACT. '
INSURANCE
Distributes the
Gains through mere possible loss by
chance reason of
mischance.
Gambler courts fortune
Insured seeks to
avoid misfortune
Increases the inequality
Equalizes fortune.
of fortune.
Whatever one wins from
The gain of the
one insured is not
awager is lost by the
at the expense of
other wagering party.
another insured.
The only
As soon as the party
intelligent reason
for purchasing
makes awager, he
insurance is that
creates a risk of loss to
the purchaser
himself where such risk
faces an already
did not exist previously.
existing risk of
economic loss.
Q: What are the requisites for recovery
upon insurance contract?
A:
1. The insured must have insurable
interest inthe subject matter;
2. The interest is covered by the policy;
3. There must be a loss; and
4. The peril insured against must be the
proximate cause of the lossldamage
Q: What may be the subject matter of an
insurance contract?
A:
1. In general: Anything with. pecuniary
value.
2. Property insurance: Property covered
by the policy.
3. Life, health and accident: Person
insured.
4. Casualty: Risks involved in its use or
the insured's risk of loss orliability.
UST GOLDEN NOTES 2010
" " .':" PARTIES TO,THE CONTRACT ,
Q: Who are the parties to an insurance
contract?
A:
1. The insurer - the party who assumes
or accepts the risk of loss and
undertakes for a consideration to
indemnify the insured or to pay hima
certain sum on the happening of a
specified contingency or event.
2. Insured - the party inwhose favor the
contract is operative and who is
indemnified against, or is to receive a
certain sum upon the happening of a
specified contingency or event
3, Beneficiary (cestui que trust) -
person designated to receive the
proceed of the policy when the risk
attaches
Q: Who may be an insurer?
A: Every person, partnership, association, or
corporation duly authorized to transact
insurance business. (Sec, 6)
Q: What are the requisites for one to bean
insured?
A:
Q: May a member of the Moro Islamic
Liberation Front (MILF) or its breakaway
group, the Abu Sayyaf, be insured with a
company licensed to do business under
the Insurance Code of the Philippines (P.O.
1460)? Explain.
A: Yes, What is prohibited to be insured is a
public enemy. A public enemy is a citizenor
national of acountry with which the Philippines
is atwar, Such member of the MILF or the Abu
Sayyaf is not a citizen or national of another
country, but of the Philippines. (2000 Bar
Question)
Q: What is the effect of war?
A: Itabrogates the contract of insurance; even
if war terminates. It does not revive the
contract.
Q: Are mobs, robbers or thieves
considered public enemies?
A: No, a mob, however numerous they may
be, or robbers or thieves whoever they may
be, are never considered public enemies for
purposes of the provision.
Q: What determines the nationality of the
corporation during wartime?
1, He must have the capacity to A:
contract; GR: The place of incorporation or where it
2. He must have insurable interest and tsregistered (incorporation test),
3. He must not be a publicenemy.
Q: Who is a public enemy?
A: A nationwith whomthe Philippines is atwar
and it includes every citizenor subject of such
nation,
Q: What is the reason behind the
prohibition that a public enemy may not be
insured?
A: The purpose of war is to cripple the power
and exhaust the resources of the enemy, and
it is inconsistent that one country should
destroy its enemy's property and repay in
insurance the value of what has been so
destroyed, or that it should in such manner
increase the resources of the enemy, or render
it aid, However,' elementary rules of justice
require that the premium paid by the insured
public enemy fromfirst payment upto the time
of its becoming public enemy, should be
returned.
XPN: During wartime where the Philippines
is involved, what is decisive is not its
registration but is the nationality of the
majority of its stockholders (control test).
Q: Who may be a beneficiary?
A:
1. Insured himself;
2. Third person who paid a
consideration; or
3, Third person through mere bounty of
insured, (Hector S, de Leon, The
Insurance Code Annotated, 2006.)
Note: Inthe Z' d and 3
r d
cases, the beneficiary
is not a party to the contract. The New Civil
Code allows the contracting parties to include
a stipulation in favor of a third person not a
partytothe contract.
UNIVERSITY OF SANTO TOMAS
tf ' acu{ taa d i J) er ecl i o ctou
~i~ 197
INSURANCE LA \\I: PARTIES TO TI-IE CONTRACT
Q: Who are the persons who cannot be
named as beneficiary?
A: Any person who is forbidden from receiving
any donation under Article 739 of the New Civil
Code cannot be named beneficiary of life
insurance policy by the person who cannot
make any donation to him, as follows:
1. Those who are guilty of adultery or
concubinage with the insured at the
time of designation;
2. Those who were found guilty with the
insured of the same criminal offense,
committed in consideration of the
designation;
3. A public officer or his wife,
descendants and ascendants
designated by reason of his office.
Note: The prohibition will apply only to life
insurance policy.
Q: Is a beneficlary required to have an
insurable interest?
A:
1. On a life insurance - A person who
insures his own life can designate
any person as his beneficiary,
whether or not the beneficiary has an
insurable interest in the life of the
insured subject to limitations under
Article 739 and 2012 of the NCC.
A person who insures the life of
another (as allowed under Section
10) and name himself as the
beneficiary must have an insurable
interest insuch life.
2. On a non-life or property insurance -
Beneficiary must have an insurable
interest on the property of the insured
at the time the policy was taken, and
at the time the loss took place,
although it may not exist in the
meantime. (Sec. 19)
Q: May the insured change his beneficiary?
A :
GR: The insured shall have the right to
change the beneficiary he designated in
the policy.
1. The beneficiary acquires no vested
right but only expectancy of receiving
the proceeds under the insurance.
2. The right may be exercised in the
manner provided inthe policy.
198
3. The right ceases upon the insured's
death. It may not be exercised by his
representatives.
XPN:
1. If the right to change the beneficiary
is expressly waived in the policy then
the insured has no power to make
such change without the consent of
the beneficiary;
2. When the designation of beneficiary
is irrevocable;
Note: If the insured refuses to pay
the premiums, the designated
irrevocable beneficiary may continue
the policy by paying the premiums
that are due.
XPN to XPN: Under Articles 43(4), 50 and
64 of the Family Code, the innocent spouse
may revoke the designation of the other
spouse who acted in bad faith as
beneficiary in any insurance policy, even if
such designation be stipulated as
irrevocable.
Q: What are the effects of an irrevocable
designation?
A: The insured cannot, without the express
written consent of the irrevocable beneficiary:
1. Assign the policy;
2. Take the cash surrender value of the
policy;
3. .Allow his creditors to attach or
execute on the policy;
4. Add a new beneficiary or
5. Change the irrevocable designation
to revocable.
When. the designation of beneficiary is
revocable but the insured died without
exercising his right to revoke, the right must be
exercised specifically in the manner provided
in the policy or contract. But the insured's
power to extinguish the beneficiary's interest
ceases at his death, and cannot be exercised
by his personal representatives or assignees.
The beneficiary's right then becomes
completely fixed.
Note: The beneficiary acquires a vested right
in the policy. Such beneficiary, to whom a
policy of insurance upon life or health has
passed by transfer, will or succession, may
recover upon it whatever the insured might
have recovered.
UST GOLDEN NOTES 2010
Q: What if the beneficiary dies before the-
insured?
5. Death caused by the beneficiary-
A:
1. If irrevocable - Such beneficiary has
a vested interest in the policy. The
legal representatives of such
beneficiary are entitled to the
proceeds of the insurance as assets
of his or her estate, unless the
proceeds were made payable to the
beneficiary only "if living"
2. If revocable - Such beneficiary does
not have vested interest ii}the policy
at the time of his death, his estate or
legal representatives derive no
interest from or through him, but the
proceeds passes to the estate of the
insured.
In case of an insurance policy taken
out by an original owner on the life or
health of a minor, all rights, title and
interest in the policy shall
automatically vest in the minor upon
the death of the original owner,
unless otherwise provided for in the
policy.
Q: What are the rules on the liability of
insurer on death of insured?
A:
1. Death at the hands of the law - The
insurer is liable. This is one of the
risks assumed by the insurer in the
absence of a valid policy exception.
2. Death by suicide - The insurer is not
liable if suicide is intentional, with
whatever motive because death is
still caused by the voluntary act of the
insured, he knowing and intending
that his death shall be the result of his
act. (Sec. fBO-A)
3. Death by accident - Death which are
purely accidental, even though due to
the insured's own carelessness or
negligence is not excluded from the
coverage by the words "self-
destruction," death by his own hand,"
and the like which are generally
considered synonymous with suicide.
4. Death by suicide while insane - The
insurer is still liable since the
unwitting act of self-destruction is as
much the consequence of that
disease.
GR: The beneficiary cannot receive
benefits.
XPN:
a.- The beneficiary acted in self-
defense;
b. The insured's death was not
intentionally caused.
Note: Sec. 12 says in "willfully"
bringing about the death.
6. Death caused by violation of law -
The insurer is still liable. To avoid
liability, the insurer must 'further
establish that the commission of the
felony or the violation of law was the
cause or had a causal connection
with the accident resulting in the
death of the insured.
Q: When is the "interest" of a beneficiary in
a life insurance forfeited?
A: When the beneficiary is the principal,
accomplice, or accessory in willfully bringing
about the death of the insured. (Sec. 12)
Note: The word "interest" means the right of
the beneficiary to receive the proceeds of the
life insurance policy. It does not mean
insurable interest since the beneficiary need
not have an insurable interest in the life of the
insured
Q: In such case, who shall receive the
proceeds of insurance?
A: The nearest relative, not otherwise
disqualified, of the insured shall receive the
proceeds of the insurance in accordance with
the rules on intestate succession provided in
the Civil Code.
The nearest relatives of the insured in the
order of enumeration are the following:
1. The legitimate children;
2. The father or mother, if living;
3. The grandfather and grandmother; or
ascendants nearest in degree, if
living;
4. The Illegitimate children;
5. The surviving spouse; and
6. The collateral relatives, to wit:
a. Brothers and sisters of the full
blood;
b. Brothers and sisters of the half-
blood;
c. Nephews and nieces..
UNIVERSITY OF SANTOToMAS ("""; 199
' Facu(tati ti e Ver ecf i o Ci vi f . "
INSURANCE LAW: PARTIES TO TI-IE CONTRACT
7. Indefaultof the above, the State shall
be entitled to receive the insurance
proceeds.
Q: On J anuary 1, 2000, A secured a life
insurance from X Insurance Corp. for P1
Million with B, his adopted daughter, as the
beneficiary. A died on March 4, 2005 and in
the pollee investigation, it was ascertained
that B participated as an accessory in the
killing of A. Can X Insurance Corp. avoid
liability by setting up as a defense the
participation of B inthe killing of A?
A: No. Although S, as the killer - beneficiaryis
not qualified to claimthe insurance proceeds
because of the prohibition in both civil law
(donation) and insurance law, the insurer may
not escape liability and is liable to pay the
estate of the insured when the designated
beneficiary does not qualify to claim the
insuranceproceeds. (2008 Bar Question)
200
Academics Committee
C/ Jai r j Jc1 : l " on: Abmham D. Cicnuin c. II
I " i a' -Chr l i r j o1 " /1I uJt'lJIi,-J: jcunnic A. J ,aurcnlill(J
I, 'j,'('-Chu;rjiJ1" /ldmil1 e.. ... , F"il1,J!Jt-e: ;\iSS:1 (:clillc II. Luna
1/ ' i t." !' -C/ J(} i r Jr w L .l D' ou/ C'" f)(,J,,~h: 1A lise Rill' ( ;. NaY ;l1
Mercantile Law Committee
Jl l hi ed H ead: 1.1(1)'T. /lmpaglle)'
/J .I.lI. Jl l h/ ed { ,,o,/ , Manilyn R<lse S. S<ltcl"
Members:
I':dwin Marc 'J ' J hldia
Airccn rd. Cacho
Socrates Iklljie I. ~'iarhil
R,," Chcrric S. Ml'1ldwa
I ':dison ,j:lll1l'S I', 1\lgalibu:11l
Mnybcllin M. Salltiag"
UST GOLDEN NOTES 2010
, " . .INSURABLE INTEREST' . , :" ~
Q: What is an insurable interest?
A:
GR: A person is deemed to have an
insurable interest in the subject matter
insured where he has a relation or
connection with or concern in it that he will
derive pecuniary benefit or advantage from
its preservation and will suffer pecuniary
loss from its destruction or injury by the
happening of the event insured against.
XPN: The term has a somewhat broader
meaning in connection with life insurance.
To have an insurable interest inthe life of a
person, the expectation of benefit from the
continued life of that person need not
necessarily be of pecuniary nature.
Q: Differentiate insurable interest in life
insurance and insurable interest in
property insurance.
A: Insurable interest inlife exists when there is
reasonable ground founded on the relation of
the parties, either pecuniary or contractual or
by blood or affinity, to expect some benefit or
advantage from the continuance of the life of
the insured.
On the other hand, every interest in property,
whether real or personal, or any relation
thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly
damnify the insured. (Sec. 13)
Q: What are the reasons for the
requirement of an insurable interest?
A:
1. As deterrence to the insured - The
requirement of an insurable interest
to support a contract of insurance is'
based upon considerations of public
policy which render wager policies
invalid. A wager policy is obviously
contrary to public interest.
2. As a measure of limit of recovery - If
and to the extent that any particular
insurance contract is a contract to
pay indemnity, the insurable interest
of the insured will be the measure of
the upper limit of his provable loss
under the contract.
Q: What are the two general classes of life
policies?
A:
1. Insurance upon one's life - are those
taken out by the insured upon his
own life (Section 10[a)) for the benefit
of himself, or of his estate, in case it
matures only at his death, for the
benefit of third person who may be
designated as beneficiary.
The question of insurable interest is
immaterial where the policy is
procured by the person whose life is
insured. A person who insures his
own life can designate any person as
his beneficiary, whether or not the
beneficiary has an insurable interest
inthe life of the insured subject to the
limits under Article 739 and 2012 of
the NCC.
Note: An application for insurance on
one's own life does not usually
present an insurable interest
question.
2. Insurance upon life of another .: are
those taken out by the insured upon
the life of another. (Sec. 10raj, [b), [cJ
and [d))
Where a person names himself
beneficiary in a policy he takes on the
life of another, he must have
insurable interest in the life of the
latter.
Q: For whose life and health does a person
have an insurable interest?
A: Of himself, of his spouse and of his
children (Sec. 10[a])
Q: Is the insured beneficiary required to
prove insurable interest?
A: No, because he is presumed to have an
insurable interest on the life of his spouse or
his children.
The husband and wife as well as parent and
child do have some pecuniary interest in each
other's life since they are legally obliged to
support each other.
c. Of any person on whom he depends
wholly or in part for education or
support, or in whom he has a
pecuniary interest; (Section 10, [b))
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de De r ech o Ci vi i
,'-0". 201
INSURANCE LA \\I: INSURABLE INTEREST
Mere blood relationship or mere
relationship by affinity does not
constitute an insurable interest; there
must be a risk of monetary loss from
the insured's death.
d. Of any person under a legal
obligation to him for the payment of
money, or respecting property or
services, of which death or illness
might delay or prevent performance;
(Sec. 10, (c])
e. Of any person upon whose life any
estate or interest vested in him
depends. (Sec. 1~(d])
Q: Who are the persons under Sec. 10, (c)
who have an insurable interest on the life
and health of a person?
A: A creditor may name himself as beneficiary
in a policy he takes on the life of his debtor.
The d~ath of the debtor may either prevent
payment if his estate is not sufficient to pay his
debts or delay such payment if an
administrator has to be appointed to settle his
estate. Except Section 10, (a) of the Insurance
Code, an insurance contract partakes the
nature of a contract of indemnity.
Q: What is the extent of the creditor's
reco,very upon the death of the debtor?
A:
GR: Limited to the amount of his interest
(the amount owing to him).
XPN: If the debtor is the insured and the
creditor is named beneficiary, the creditor
will be entitled to the whole proceeds of the
policy upon the debtor's death, though his
credit may be much less.
Note: The debtor was the one who applied
for the insurance, to insure his own life.
XPN to XPN:
1. If debtor applied for insurance and
designated creditor in compliance
with creditor's requirement that debtor
will take insurance to insure creditor's
interest.
2. A person may take a policy on the life
of his business partner because the
latter's death may result in an
interruption of business operations
which can be in turn cause financial
loss.
3. A business firm can take out a policy
on the life of its officers or employees
whose services proved valuable to
the business. The proceeds are not
taxable income but constitute
indemnity to the employer for the loss
which the business suffers because
of the death of a valued officer or
employee.
Q: Is the consent of the person insured
essential to the validity of the policy?
A: No. So long as it could be proved that the
insured has an insurable interest at the
inception of the policy, the insurance is valid
even without such consent.
Q: When must insurable interest exists?
A:
1. Life or health insurance
GR: Insurable interest in life or health
must exist when the insurance takes
effect, bur need not exist thereafter or
when the loss occurs. (Sec. 19)
XPN:
a. When the insurance is taken by
the creditor on the life of the
debtor, the creditor is required to
have an insurable interest not
only at the time of the contract
but also at the time of the
debtor's death because in this
case, it is considered as a
contract of indemnity.
b. When the insurance is taken by
the employer on the life of the
employee.
2. Property Insurance - When the
insurance takes effect and when the
loss occurs, but neednot exist in the
meantime. (Sec. 19)
UST GOLDEN NOTES 2010
Q: Inacivil suit, the court ordered Benjie to
pay Nat P500, 000.00. To execute the
judgment, the sheriff levied upon Benjie's
registered property (a parcel of land and
the building thereon), and sold the same at
public auction to Nat, the highest bidder.
The latter, on March 18, 1992, registered
with the Register of Deeds the certificate of
sale issued to him by the sheriff.
Meanwhile, on J anuary 27, 1993, Benjie
insured with Garapal Insurance for
P1,000,000.00 the same building that was
sold at public auction to Nat. Benjie failed
to redeem the property by March 18, 1993.
On March 19, 1993, afire razed the building
to the ground. Garapal Insurance refused
to make good its obligation to Benjie under
the insurance contract.
1. Is Garapal Insurance legally
justified in refusing payment to
Benjie?
iii. Is Nat entitled to collect on the
insurance policy?
A:
1. Yes. At the time of the loss, Benjie
was no longer the owner of the
property insured as he failed to
redeem the property. The law
requires in property insurance that a
person can recover the proceeds of
the policy if he has insurable interest
at the time of the issuance of the
policy and also at the time when the
loss occurs. At the time of fire, Benjie
no longer had insurable interestinthe
property insured.
2. No. While at the time of the loss Nat
had insurable interest inthe building,
as he was the owner thereof, Nat did
not have any interest in the property
at the inception of the policy. There
was no automatic transfer clause in
the policy that would give him such
interest in the policy. ('1994 Bar
Question)
Q: J Q, owner of a condominium unit,
insured the same against fire with the XYZ
Insurance Co., and made the loss payable
to his brother, MLQ. In case of loss by fire
of the said condominium unit, who may
recover on the fire insurance policy? State
the reason(s) for your answer.
A: J Q canrecover onthe fire insurance policy
for the loss of said condominium unit. He has
the insurable interest as owner-insured. As
beneficiary in the fire insurance policy, MLQ
cannot recover on the fire insurance policy.
For the beneficiary to recover on the fire or
propertyinsurance policy, it is requiredthat he
must have insurable interest in the property
insured. In this case, MLQ does not have
insurable interest in the condominium unit.
(2001 Bar Question)
Q: What may consist an insurable interest
in property?
A:
1. An existing interest - The existing
interest in the property may be legal
or equitabletitle.
Examples of insurable interest arisinq
fromlegal title:
a. Trustee, as in the case of the
seller of property not yet
delivered;
b. Mortgagor of the property
mortgaged;
c. Lessor of the propertyleased
Examples of insurable interest arising
fromequitable title:
a. Purchaser of property before
delivery or before he has
performed the conditions of the
sale
b. Mortgagee of property
mortgaged;
c. Mortgagor, after foreclosure but
before the expiration of the
period withinwhich redemptionis
allowed
2. An inchoate interest founded on an
existing interest
Example: A stockholder has an
inchoate interest in the property of the
corporation of which he is a
stockholder, which is founded on an
existing interest arising from his
ownership of shares in the
corporation
3. An expectancy coupled with an
existing interest in that out of which
the expectancy arises.
Note: Expectancy to be insurable
must be coupled with an existing
interest or founded on anactual right
to the thing or uponany valid contract
for it. (Sec. 16)
UNIVERSITY OF SANTO TOMAS
PacuCtaa de ([ ) er echo Ci vi C
~i'203
INSURANCE LAW: INSURABLE INTEREST
Q: A piece of machinery was shipped to Mr.
Pablo on the basis of C&F Manila. Pablo
insured said machinery with the Talaga
Merchants Ins. Co. (Tamic) for loss or
damage during the voyage. The vessel
sank en route to Manila. Pablo then filed a
claim with Tamic which was denied for the
reason that prior to the delivery, Pablo had
no insurable interest. Decide the case.
A: Pablo had an existing insurable interest on
the piece of machinery he bought. The
purchase of goods under a perfected contract
of sale already vests equitable interest on the
property in favor of the buyer eve~while it is
pending delivery. (1991 Bar Question)
Q: What is the measure of insurable
interest in property?
A: The extent to which the insured might be
damnified by loss or injury thereof. (Sec. 17).
Insurable interest in property does not
necessarily imply a property interest in, or lien
upon, or possession of, the subject matter of
the insurance, and neither title nor a beneficial
interest is requisite to the existence thereof. It
is sufficient that the insured is so situated with
reference to the property that would be liable
to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a
benefit from its existence or would suffer loss
fromits destruction. (Gaisano Cagayan, Inc. v.
Insurance Company of North America, G.R.
No. 147839, June 8, 2006)
Q: BD has a bank deposit of one million
pesos. Since the limit of the insuranc~
coverage of the Philippine Deposit
Insurance Corp (PDIC) is only P500,000.00,
he would like some protection for the
excess by taking out an insurance aqainst
all risks or contingencies of loss ansmg
from, any unsound or unsafe banking
practices including unforeseen adverse
effects of the continuing crisis involving
the banking and financial sector in the
Asian region. Does BD have an insurable
interest within the meaning of the
Insurance Code of the Philippines (P.O.
1460)?
A: Yes. Incase of loss of said deposit, SD will
suffer pecuniary loss of P500,OOO.OO, that is,
his bank deposit of one million pesos minus
P500,OOO.OOwhich is the maximum amount
recoverable from the PDIC. (2000 Bar
Question)
204
Q: What are the distinctions between
insurable interest in life and property
insurance?
If the secured
the policy, the
beneficiary need not
have insurable interest
over the life of the .
insured; if secured by
the beneficiary, the
latter must have
insurable interest ill
the life of the insured.
The beneficiary must
have all insurable
interest ill the thinq
insured.
Q: What is the extent of insurable interest
of a common carrier or depository in a
thing held by him?
A: To the extent of his liability but not to
exceed the value thereof (Sec. 15). This is so
because the loss of the thing by the carrier or
depository may cause liability aqainst him to
the extentof its value.
Q: Is the insurable interest of mortgagor
and mortgagee in case of a mortgaged
property the same?
A: Each has an insurable interest ill the
property mortgaged and this interest is
separate and distinct from the other.
Therefore, insurance taken by aile ill his name
only and ill his favor alone does not inure to
the benefit of the other. The same IS not open
to objection that there is double insurance.
(Sec. 8)
UST GOLDEN NOTES 2010
Q: . A, a businessman in the grocery
business, obtained from X Insurance an
insurance policy for five million pesos to
fully cover his stocks-in-trade from the risk
of fire.
Three months thereafter, a fire of
accidental origin broke out and completely
destroyed the grocery including his stocks-
in-trade. This prompted the A to file with X
insurance a claim for five million pesos
representing the full value of his goods. X
Insurance denied .the claim because it
discovered that at the time of the loss, the
stocks-in-trade were mortgaged to B
(creditor) who likewise obtained from Y,
Second Insurance Company fire insurance
coverage for the stocks at their full value of
five million pesos. May the businessman
and the creditor obtain separate insurance
coverage over the same stocks-in-trade?
Explain.
A: Yes. A, the businessman, as owner, and B
the creditor, as mortgagee, have separate
insurable interests inthe same stocks-in-trade.
Each may insure such interest to protect his
own separate interest. (1999 Bar Question)
Q: X Insurance refused to pay claiming that
double insurance is contrary to law. Is this
contention tenable?
A: No. There is no law providing that double
insurance is illegal per se. Moreover, in the
problemat hand, there is no double insurance
because the insured with the First Insuranceis
different from the insured with the Second
Insurance Company. The same is true with
respect to the interests insured in the two
policies, e.g., there is noidentity of personand
interests insured. (Geagonia v. CA, G.R. No.
114427, Feb. 6, 1995)
Q: What is the extent of insurable interest
of mortgagor and mortgagee?
A:
1. Mortgagor - Tothe extentof its value
as owner of the property. The loss or
destruction of the property insured
will not extinguish the mortgage debt.
The exceptionis inmarine insurance.
2. Mortgagee - To the extent of the
debt. Such interest continues until the
mortgage debt is extinguished.
The property relied on as mortgaged
is only a security. In insuring the
property, he is not insuring the
property itself but his interest or lien
thereon.
Note: In case of an insurance taken by the
mortgagee alone and for his benefit, the
mortgagee, after recovery from the insurer, is
not allowed to retain his claim against the
mortgagor but it passes by subrogation to tile
insurer to the extent of the insurance money
paid. .
Q: Maya lessor be a beneficiary of a fire
insurance policy taken by a lessee over his
merchandise?
A: No, the provision for such automatic
assignment is void for being contrary to law
and public policy. If at all, the lessor is deemed
to have an insurable interest only over the
leased premises, and not over the
merchandise owned only by the lessee. (Cha
v. CA, G.R. No. 124520, Aug. 18, 1997)
Q: What are the distinctions between a
standard or union mortgage clause and
open or loss payable mortgage clause?
A:
. STANDARD OR . -'I . 'OPEN OR LOS,S": 'I
. UNION MORTGAGE . " PAYABLE .7
MORTGAGE ....
,CLAUSE ' p. . CLAUSE .\
Acts of the mortgagor
affectthe mortgagee.
Subsequentacts of
the mortgagor cannot
affectthe rights of the
assignee.
Reason: Mortgagor
does notcease tobe
a partytothe
contract.
Q: What are the effects of insurance taken
by the mortgagor providing that the loss is
payable to the mortgagee?
A:
1. The contract is deemed to be upon
the interest of the mortgagor; hence
he does not cease to be a partytothe
contract;
2. Any act of the mortgagor prior to the
loss, which would otherwise avoid
the insurance affects the mortgagee
evenif the property is inthe hands of
the mortgagee;
3. Any act, which under the contract of
insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the sameeffect;
4. In case of loss, the mortgagee is
entitled to the proceeds to the extent
of the debt;
5, Upon recovery by the mortgagee to
the extent of the debt, the d1ebtis
extinguished.
UNIVERSITY OF SANTO TOMAS
' Fa cu.I t a d' de Der ech a CiviC
~i~ 205
INSURANCE LA WI: INSURABLE INTEREST
Q: Is the rule on subrogation by the insurer
applicable to the right of the mortgagee?
A: No, because the premium payment has
been paid by the mortgagor and not by the
mortgagee.
Q: What are the rights of mortgagee under
mortgagor's policy?
A:
1. Before loss - entitled to receive so
much of any sum that may become
due under the policy as does not
exceed his interest as mortgagee.
Such right becomes absolute upon
the occurrence of the loss.
2. After loss and credit is not due -
entitled to receive the money to apply
to the extinguishment of the debt as
fast as it becomes due. On the other
hand, if the loss happensafier the
credit has matured; the mortgagee
may apply the proceeds to the extent
of his credit.
I
Q: What is the rule on transfer of policy
from mortgagor to mortgagee?
A: It is the rule which assents and imposes
further obligations on the assignee
(mortgagee), making a new contract with him,
the acts of the mortgagor cannot affect the
rights of said assignee. Unless assignee
makes a new contract with insurer, he has no
greater right under the insurance. (Sec. 9)
Q: What is the rule in case of mortgage
redemption insurance (MRI)?
A: A life insurance taken pursuant to a group
mortgage redemption scheme by the lender of
money on the life of a mortgagor, who
mortgages the house constructed to the extent
of the mortgage indebtedness, such that if the
mortgagor dies, the proceeds of his life
insurance will be used to pay for his
indebtedness and the deceased's heirs will
thereby be relieved from paying the unpaid
balance of the loan. (Great Pacific Life
Assurance Corp. v. CA, GR. No. 113899, Oct.
13, 1999)
206
Q: May a general or unsecured creditor
insure the property of his debtor?
A:
GR: No, a general or unsecured creditor
cannot insure specific property of his
debtor who is alive, even though
destruction of such property would render
worthless any judgment he might obtain.
XPN:
1. When the debtor has died (all
personal liability ceases with the
death of the debtor);
2. When the unsecured creditor obtains
a judgment in his favor (becomes a
judgment creditor;
3. An unsecured creditor may insure the
life of his debtor to the extent of the
amount of the debt.
Q: What may be trahsferred or assigned?
A:
1. The thing insured; (See Sec. 20)
2. The policy itself; (See Sec. 58)
3. The claim itself. (See Sec. 83)
UST GOLDEN NOTES 20.10
-
Q: What is the effect of change of interest
unaccompanied by a corresponding
change in interest in the insurance? .
A:
GR: A change in interest in any part of the
thing insured, unaccompanied by a
corresponding change of interest in the
insurance, suspends the insurance to an
equivalent extent, until the interest in the
thing and the interest in the insurance are
vested inthe same person. (Sec. 20)
Reason: Insurance contract is personal
XPN:
1. In cases of life, accident, and health
insurance (Sec. 20).
Reeson. They are not regarded as
contracts of indemnity and therefore,
insurable interest need exist only at
the time the insurance is effected.
2. Change of interest in the thing
insured after the occurrence of an
injury which results in the loss. (Sec.
21)
Reason: After the loss has happened,
the liability of the insurer becomes
fixed. Therefore, the insured has the
right to assign his claim against the
insurer as any other money claim.
3. Change of interest in one or more of
several distinct things, separately
insured by one policy. (Sec. 22)
Reason: The contract is divisible.
4. Change of interest, by will or
succession, 011 the death of the
insured. (Sec. 23)
Reason: Art. 1311, NCC (Relativity of
Contracts ).
Whoever takes the property of the
decedent will automatically become
the owner of the policy.
5. Transfer of interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to
others. (Sec. 24)
Reason: No new party was
introduced into the co-ownership. It is
the alienation to a stranger that will
suspend the policy.
6. When a policy is so framed that it will
. inure to the benefit of whomsoever,
during the continuance of the risk,
may become the owner of the interest
insured. (Sec. 57) .
Reason: Art. 1306, NCC (Autonomy
of Contracts).
7. When there is a prohibition against
the alienation or change of interest
without the consent of the insurer, in
which case, the policy is not merely
suspended but avoided.
Reason: Art. 1306, NCC (Autonomy
of Contracts).
Q: What is the rule regarding the transfer of
policy?
A:
1. Life insurance -
GR: The policy may be transferred
without the consent of the insurer.
(Sec. 181)
Reason: The policy does not
represent a personal agreement
between the insured and the insurer.
XPN: When notice to insurer of a
transfer is expressly required in the
policy. (Sec. 182)
2. Property insurance - The policy may
not be transferred without the consent
of the insurer.
Reason: The insurer approved the
policy based on the personal
qualification and the insurable interest
of the insured.
3. Casualty Insurance - The policy may
not be transferred without the consent
of the insurer.
Reason: The moral hazards are as
great as those of property insurance.
UNIVERSITY OF SANTO TOMAS
PacuCtaa de (j ) er ecl i o Ci vi C
~.~207
INSURANCE LAW: INSURABLE INTEREST
Q: What is the effect of transfer the
insurance policy without consent of the
insurer?
A: The insurance policy will be suspended
until the interest inthe thing and the interest in
the insurance are vested inthe same person.
Q: What is the rule regarding the transfer of
claim?
A: Claim of insured after loss is transferable,
and any stipulation to the contrary is void.
(Sec. 83)
Q: The policy of insurance upon his life,
with a face value of P100,OO.OO was
assigned by J ose, a married man with 2
legitimate children, to his nephew Y as
security for a loan of P50,OOO.OO. He did not
give jthe insurer any written notice of such
assignment despite the explicit provision
to that effect in the policy. J ose died. Upon
the claim on the policy by the assignee, the
insurer refused to pay on the ground that it
was 'not notified of the assignment. Upon
the other hand, the heirs of J ose contended
that Y is not entitled to any amount under
the policy because the assignment without
due notice to the insurer was void. Resolve
the issues.
A: A life insurance is assignable. A provision,
however, in the policy stating that written
notice of such an assignment should be given
to the insurer is valid (Sec. 181-182). The
failure of the notice of assignment would thus
preclude the assignee from claiming rights
under the policy. The failure of notice did not,
however, avoid the policy; hence, upon the
death of J ose, the proceeds would, in the
absence of a designated beneficiary, go to the
estate of the insured. The estate, in turn,
would be liable for the loan of P50,OOO.OO
owing infavor of Y. (1991 Bar Question)
Q: What are the rights of insured after the
loss?
A:
1. To assign his right of claim against
the insurer (absolute and cannot be
delimited by agreement);
2. Insured has a right to transfer the
thing insured after the occurrence of
the loss.
Reasons:
a. Agreernent hinders
transrnission of property;
208
free
b. Transfer does not involve a
personal contract, but merely a
money clairn or right of action;
c. Transfer involves no moral
hazard.
Q: What are the 4 primary concerns of the
insurer?
A:
1. Correct estimation of risk which
enables insurer to determine if he will
approve the policy application and if
so at what premium rate;
2. Determination of the risk;
3. Control of risk to guard against
increase of risk;
4. Determine if loss occurs and if so the
amount thereof.
Q: What are the devices used for
ascertaining and controlling risks and
loss?
A:
1. Concealrnent
2. Representation
3. Warranties
4. Condition
5. Exception
Academ ics Committee
Cf,airjJc!JolI: Abraham 1), C;l'lluin(J II
I/i~'(!-CI/()ir l or /i("(lticmif:r: jcannil' A. J .aurcutino
1/1~C-C.h(/i".JfJ1-/Id;"ill ~....,I ;illl1ll1l',: AisS;1Cl'linc II. J .uuu
l/ia-CI,air'/rlr 1.L!)'ou/ : J)c.r~~I1: 1,f list: Rae (;. Naval
Mercantile Law Corn mittcc
.\ /I! ,;;.,i Ilcad- Iioly '1'. I\mpagllc)'
/1.,..-1.. 1'1I!,;"d I Iwd' Mallil)'1l (lose S. SOlelo
Members:
I ':dIVin Marc T. Ilaldia
Airccn ~I. Cacho
Socrates llelljic I. Murbil
Ron Chcrric S. f\'lcnd()l'.a
1-:di:-;()ll J i1111CS I", P;tgalilaUilll
~h)'hellil\e ~1. Salltiago
UST GOLDEN NOTES 2010
" " - . CONCEALNI T ~".. ,ti !' , c '
Q: What is concealment?
A: Concealment is a neglect to communicate
that which a party knows and ought to
communicate. (Sec. 26)
Q: What are the requisites in concealment?
A:
1. A party knows a fact which he
neglects to communicate or disclose
to the other party;
2. Such party concealing is duty bound
to disclose such fact to the other;
3. Such party concealing makes no
warranty as tothe fact concealed;
4. The other party has no means of
ascertaining the fact concealed; and
5. The fact must be material.
Q: What is the test of materiality?
A: It is determined not by the event, but solely
by the probable and reasonable influence of
the facts upon the party to whom the
communication is due, in forming his estimate
of the advantages of the proposed contract, or
inmaking his inquiries. (Sec. 31)
Q: What is the presumption when the
insured failed to convey the nature of the
facts to the insurer?
A:
GR: The failure of the insured to
communicate is intentional rather than
inadvertent.
XPN: In the absence of evidence of the
uninsurability of a person afflicted with
chronic cough, concealment thereof is no
ground for annulment of the policy.
Note: As long as the facts concealed are
material. Sec. 27 states concealment, whether
intentional or not.
Q: How does it differ from materiality in
marine insurance?
A: Rules on concealment are stricter since the
insurer would have to depend almost entirely
on the matters communicated by the insured.
Thus, in addition to material facts, each party
must disclose all the information he possesses
which are material to the information of the
belief or expectation of a third person, in
reference to a material fact. But a concealment
in a marine insurance in any of the following
matters enumerated under Section 110,
Insurance Code does not vitiate the entire
contract, but merely exonerates the insurer
from a loss resulting from the risk concealed.
Q: What is the test in ascertaining the
existence of concealment?
A: If the applicant is aware of the existence of
some circumstances which he knows would
influence the insurer in acting upon his
application, good faith requires him to disclose
that circumstance, though unasked.
Q: What are the matters that need not be
disclosed?
A:
GR: The parties are not bound to
communicate information of the following
matters:
1. Those which the other knows;
2. Those which, in the exercise of
ordinary care, the other ought to
know and of which, the former has no
reason to suppose himignorant;
3.. Those of which the other waives
communication;
4. Those which prove or tend to prove
the existence of a risk excluded by a
warranty, and which are not
otherwise material;
5. Those whicn relate to a risk excepted
from the policy and which are not
otherwise material; ,
6. The nature or amount of the interest
of one insured (except if he is not the
owner of the property insured, Sec.
34)
XPN: In answer to inquiries of the other.
(Sec. 30)
Note: Neither party is bound to
communicate, even upon inquiry,
information of his own judgment.
The parties are bound to know all the
general causes which are open to his
inquiry, equally with the other, and all
general usages of trade.
Q: What are the matters that must be
disclosed even in the absence of inquiry?
A:
1. Those material to the contract;
2. Those which the other has no means
of ascertaining;
3. Those as to which the party with the
duty to communicate makes no
warranty.
UNIVERSITY OF SANTO TOMAS ~"""'~J 209
PacuCtaa de / I r er e ch o Ci vi C
INSURANCE LA \'\I: CONCEALMENT
Note: Matters relating to the health of the
insured are material and relevant to the
approval of the issuance of the life insurance
policy as these definitely affect the insurer's
action to the application. It is well-settled that
the insured need not die of the disease he had
failed to disclose to the insurer, as it is
sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of.
the proposed insurance policy or in making
inquiries (Sunlife Assurance Company of
Canada v. CA, G.R. No. 105135, June 22,
1995).
Q: May the right to information of material
facts be waived?
A: Yes.
1.
2.
By the terms of the contract;
By the failure to make an inquiry as to
such facts, where they are distinctly
implied in other facts from which
information is communicated (Sec.
33)
Q: What are the effects of concealment?
A:
1. If there is concealment under Section
27, the remedy of the insurer is
rescission since concealment vitiates
the contract of insurance.
2. The party claiming the existence of
concealment must prove that there
was knowledge of the fact concealed
on the part of the party charged with
concealment.
3. Good faith is not a defense in
concealment. Concealment, whether
intentional or unintentional entitles the
injured party to rescind the contract of
insurance. (Sec. 27)
4. The matter concealed need not be
the cause of loss.
5. To be guilty of concealment, a party
must have knowledge of the fact
concealed at the time of the effectivity
of the policy.
Q: When should concealment take place in
order that the policy may be avoided?
!
A: At the time the contract is entered into and
not afterwards. The duty of disclosure ends
with the completion of the contract. Waiver of
medical examination in a non-medical
insurance contract renders even more material
the information required of the applicant
concerning previous condition of health and
diseases suffered, for such' information
necessarily constitutes an important factor
which the insurer takes into consideration in
210
deciding .whether to issue the policy or not.
Failure to communicate information acquired
after the effectivity of the policy will not be a
ground to rescind the contract.
Reason: Information is no longer material as it
will no longer influence the other party to enter
into such contract.
Q: A applied for a non-medical life
insurance. The insured did not inform the
insurer that one week prior to his
application for insurance, he was examined
and confined at St. Luke's Hospital where
he was diagnosed for lung cancer. The
insured soon thereafter died in a plane
crash. Is the insurer liable considering that
the fact concealed had no bearing with the
cause of death of the insured? Why?
A: No. The concealed fact is material to the
approval and issuance of the insurance policy.
It is well settled that the insured need not die
of the disease he failed to disclose to the
insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimate of
the risks of the proposed insurance policy or in
making inquiries. (2001 Bar Question)
Academics Corumirtcc
C/ !" i r pc/ : wI I : I\braham I), (;CIIUill(1 [I
/'Ii"('-( } wi r j or ,/I~ad['m~I.:r:J cnnnic 1\. I .aurent-inc I
l / i ,,' ,C/ !i Ji r !or / I dl l l i l l e.
N
Fi nau,r : i \ ; " " Lclinc II. Luna
l ~ ,~ .~ ' : Ch{ ./ [ i j () r 1 .1 !) ' o/ tl i ,: , /)t'.r~I~II:1 .uisc Rae < .;. Naval
Mercantile Law Cornmitter,
.III/it'd f-I,od: 11(1), 'J '. i\1111'''glll'),
/1.1'.1'1. .\'II/'Ied lIe,1d- Mall;l),n Rosl' S. Sotelo
Members:
I':dw;n Marc '!' ! laldia
Airccn IV).Cacho
Socrates Ilcnjil' I. Mnrbil
Ron Chcrric S. MClldoi'::1
Edi~()l1-'al1ll'S F. Pag,llil"u<1n
Maybeliinc M. Sanliago
UST GOLDEN NOTES 2010
. 'REPRESENTATION '
Q: What is representation?
A: An oral or written statement of a fact or
condition affecting the risk made by the
insured to the insurance company, tending to
induce the insurer to assume the risk.
Q: What are the kinds of representation?
A:
1. Oral or written; (Sec. 36)
2. Affirmative; (Sec. 39) or
3. Promissory. (Sec. 42)
Q: What is an affirmative representation?
A: Any allegation as to the existence or non-
existence of a fact when the contract begins.
(e.g the statement of the insured that the
house to be insured is used only for residential
purposes is an affirmative representation).
Q: What is a promissory representation?
A: Any promise to be fulfilled after the
contract has come into existence or any
statement concerning what is to happen during
the existence of the insurance.
Q: When should representation be made?
A: At the time of, or before, issuance of the
policy. (Sec. 37)
Q: What are the requisites of a false
representation (misrepresentation)?
A:
1. The insured stated a fact which is
untrue;
2. Such fact was stated with knowledge
that it is untrue and with intent to
deceive or which he states positively'
as true without knowing it to be true
and which has a tendency to mislead;
3. Such fact in either case is material to
the risk.
Q: What is misrepresentation?
A: It is an affirmative defense. To avoid
liability, the insurer has the duty to establish
such a defense by satisfactory and convincing
evidence. (Ng Gan Zee v. Asian Crusader Life
Assn. Corp., G.R. No. L- 30685, May 30,
1983)
Note: In the absence of evidence that the
insured has sufficient medical knowledge to
enable him to do distinguish between "peptic
ulcer" and "tumor", the statement of deceased
that said tumor was "associated with ulcer. of
the stomach" should be considered an
expression in good faith. Fraudulent intent of
insured must be established to entitle insurer
to rescind the insurance cqntract.
Misrepresentation, as a defense of insurer, is
an affirmative defense which must be proved.
(Ng Gan Zee v. Asian Crusader Life: Assn.
Corp., G.R. No. L- 30685, May 30, 1 983
1
Q: What is the test of materiality?
A: It is to be determined not by the event, but
solely by the probable and reasonable
influence of the facts upon the party to whom
the representation is made, in forming his
estimates of the disadvantages of the
proposed contract or in making his inquiries
(similar with concealment). (Sec. 46)
Q: What are
misrepresentation?
the
effects of
A:
1. It renders the insurance contract
voidable at the option of the insurer,
although the policy is not thereby
rendered void ab initio. The injured
party entitled to rescind from the time
when the representation becomes
false;
2. When the insurer accepted the
payment of premium with the
knowledge of the ground for
rescission, there is waiver of such
right;
3. There is no waiver of the right of
rescission if the insurer had no
knowledge of the ground therefore at
the time of acceptance of premium
payment.
Q: What is the effect of collusion between
the insurer's agent and the insured?
A: It vitiates the policy even though the agent
is acting within the apparent scope of his
authority. The agent ceases to represent his
pnncioal. He, thus, represents himself; so the
insurer is not estopped from avoiding the
policy.
I
UNIVERSITY OF SANTO TOMAS f ';J -'. ')11
Pacu{ taa de (] ) er ecl i o Ci -ui ] '9' ~
INSURANCE LAW: REPRESENTATION
Q: What are the characteristics of
representation?
A:
1. Not a part of the contract but merely a
collateral inducement to it;
2. Oral or written;
3. Made at the time of, or before issuing
the policy and not after;
4. Altered or withdrawn before the
insurance is effected but not
afterwards;
5. Must be presumed to refer to the date
the contract goes into effect. (Sec.
42)
Q: What are the similarities of concealment
and representation?
A:
1. Refer to the same subject matter and
both take place before the contract is
entered.
2. Concealment or representation prior
to loss or death gives rise to the
same remedy; that is rescission or
cancellation.
3. The test of materiality is the same.
(Secs. 31, 46)
4. The rules of concealment and
representation are the same with life
and non-life insurance.
5. Whether intentional or not, the injured
party is entitled to rescind a contract
of insurance on ground of
concealment or false representation.
6. Since the contract of insurance is
said to be one of utmost good faith on
the part of both parties to the
agreement, the rules on concealment
and representation apply likewise to
the insurer.
Q: How does concealment differ from
misrepresentation?
A: In concealment, the insured withholds the
information of material facts from the insurer,
whereas in misrepresentation, the insured
makes erroneous statements of facts with the
intent of inducing the insurer to enter into the
insurance contract.
212
Q: How is concealment and
misrepresentation applied in case of loss
or death?
A:
GR: If the concealment or
misrepresentation is discovered before loss
or death, the insurer can cancel the policy.
If the discovery is after loss or death, the
insurer can refuse to pay.
XPN: The incontestability clause under
paragraph 2 of Section 48.
XPN to XPN:
1. Non-payment of premiums (Sees. 77,
22 rbi, 228 rbi, 203 [bJ) ;
2. Violation of condition (Secs 227 [o],
228 [b});
3. No insurable interest;
4. Cause of death was excepted or not
covered;
5. Fraud of avicious type;
6. Proof of death was not given (Sec.
242).
7. That the conditions of the policy
relating to military or naval service
(Secs. 227rbi, 228 [bJ)
8. That the action was not bought within
the time specified (Sec. 62)
Acudern ics Co rumitrcc
Chai r j > o: r OIl: Abraham D. (;cl1uin(J II
l/i(('-(,h(ji,.}"../J~'(/(Ir:!lJi(f: .J eannie /\. J ,,;lurcntin()
f / t~ r -ChtJi r ./ ; Jr /ldl1lin e.':""1' i nau,: Ais sa Coline II. ] .una
1/-i(e-Clh'i,,)f)lI.~)'OItI r i .,: " f)(,.f~~!I: I,(lise [till' (;, Naval
Mercantile Law Co mm irtc e
T / l bj ed { { " " r !.' I loll' 'J ' ;\I1lI,agllc),
/1.r.r1.,fll!!;('d l l cad: r'vl:tnil)'ll Rose S. S()l"l'l{)
Members:
"c1win Marc T. Il:lldia
Airccn i\'I. Cacho
Socrates Iknjie I. Marbil
Ron Chen'ie S. Men~I()%a
Edisonjnmes I,'. Pngalil~lL1:1n
Maybcllin M, S~lnl-iag(J
UST GOLDEN NOTES 2010
Q: What is anincontestability clause?
A: The Code providesthat:
fter a policy of life insurance made payable
onthe death of the insured shall have beenin
'orce during the lifetime of the insured for a
periodof-two years fromthe dateof its issueor
its last reinstatement, the insurer cannot prove
. atthe policy is void ab initio or is rescindable
'J y reason of the fraudulent concealment or
flisrepresentation of the insured or his agent
SecA8).
:.'henever a right to rescind a contract of
~ rance is given to the insurer by any
'lOv;sion of this chapter, suet: right must be
=.E{cised previous to the commencement of
=..- a 'on onthe contract"
--- ar agr aph - Incontestability Clause. It
==- es tolife insuranceonly.
-::I: aragraph - Refers to the insurer's rightto
-- ,d that may only be validly exercised
:-=. LIS tothe commencementof anactionon
-'O contract. It applies to non-life insurance
~ -.-
What are the
ntestability clause?
requisites
The policy must be a life insurance
policy
2. The policy must be payable on the
deathof the insured; and
3. The policy must be inforce duringthe
lifetime of the insured for at least 2
years from the date of its issue or of
its lastreinstatement
a. te: The period of 2 years may beshortened
--: : cannot beextendedby stipulation.
: Renato was issued a life insurance
licy on J anuary 2, 1990. He concealed
re fact that three years prior to the
ssuanca of his life insurance policy, he
ad been seeing a doctor about his heart
ilment On March 1, 1992, Renato died of
"art failure. May the heirs file a claim on
Ie proceeds of the life insurance policy of
enato?
es, the life insurance policy in question
",5 issuedonJ anuary 2, 1990. Morethantwo
, years had elapsed when Renato, the
J red, died on March 1, 1992. The
of
incontestability clause applies. (1998 Bar
Question)
Q: What is the meaning of "during the
lifetime" under the incontestability clause?
A: The phrase "during the lifetime"means that
the policy is no longer considered after the
insured has died. The key phrase in the 2"d
paragraph is for a period of 2 years. (Tan v.
CA, GR No. 48049, June 29, 1989)
Q: What is the purpose of incontestability
clause?
A: To assure that after the specified period,
the policy owner may rely uponthe insurance
companytocarry out the terms of the contract,
regardless of irregularities in connection with
the applicationwhich maylater bediscovered.
Q: What is the essence of incontestability
clause?
A: It precludes the insurer from- raising the
defenses of false representations or
concealmentof material facts insofaras health
and previous diseases are concerned if the
insurancehas beeninforce for at least2years
duringthe insured's lifetime.
Q: Manpower Co., obtained a group life
insurance policy for its employees from
Phoenix Insurance Co. The master policy
issued by Phoenix on J une 1, 1986
contained a provrsron that eligible
employees for insurance coverage were all
full time employees of Manpower regularly
working at least 30 hours per week. The
policy had also an incontestability clause.
Beforehand, Phoenix sent enrollment cards
to Manpower for distribution to its eligible
employees. X filled out the card which
contained a printed clause: "I request the
insurance for which I may become eligible
under said Group Policy." The cards wera
sent to Phoenix and X was among the
employees of Manpower who was issued a
certificate of coverage by Phoenix. On J uly
3, 1988, X was killed on the occasion of a
robbery in their house. While processing
the claim of X's beneficiary, Phoenix found
out that X was not an eligible employee as
defined in the group policy since he has
not been employed 30 hours a week by
Manpower. Phoenix refused to pay. May X's
beneficiary invoke the incontestability
against Phoenix? Reasons?
A: Yes. While it is true that the master policy
contained an exclusionary clause-excluding
from coverage employees working less than
UNIVERSITY OF SANTO TOMAS ~~.LU) )13
Pacu{ taa de De r e c h o Ci vi i 9'~
INSURANCE LAW: INCONTESTABILITY CLAUSE
30 hours- X filled up an enrollment card where
his personal circumstances and working
schedule were obviously contained. The
failure by Phoenix to exclude X, who instead
was issued a certificate coverage, is deemed
as a' waiver by Phoenix of said exclusionary
clause. Hence, the. beneficiary of X can
recover under the policy. (1989 Bar Question)
I
Q: What are the grounds for rescission of
contract of insurance?
A:
1. Concealment
2. False representation
3. Breach of material warranty
4. Breach of a condition subsequent
5. Alteration of the thing insured
Q: When may the: right to rescind be
exercised?
A:
1. 'Non-life policy - The insurer must
exercise the right to rescind the
contract before the insured has filed
an action to collect the amount of
insurance.
Note: A defense to an action to
recover insurance that the policy was
obtained through false
representation, fraud and deceit is not
in the nature of an action to rescind
and therefore not barred by the
provision. There is no limit for
interposing this defense.
2. Life-policy - The defenses mentioned
are available only during the first 2
years of a life insurance policy,
provided that after a policy of
insurance made payable on the death
of the insured shall have been in
force during the lifetime of the insured
for a period of 2 years from the date
of its issue or its last reinstatement,
the insurer cannot prove that the
policy is void ab initio or is
rescindable by the reason of
fraudulent concealment or
misrepresentation of the insured or
his agent. (Incontestability Clause)
214
Q: What are the limitations on the right of
the insurer to rescind?
A :
1. He must not have. accepted
premiums despite knowledge of
rescission;
2. He cannot rescind if he has already
commenced any action on the
contract.
Note: In life insurance, defenses which may
be raised as grounds for rescission are
available only during the first 2 years of the life
insurance policy.
Q: When right to rescind is lost?
A: If the beneficiary has commenced an action
on the policy.
Q: What are the defenses of the insurer that
are barred by the Insurance Code?
A:
1. Policy is void ab initio;
2. Policy is rescindable by reason of the
fraudulent concealment, no matter
how patent or well founded;
3. Policy is rescindable by reason of
misrepresentation of the insured or
his agent.
Q: What defenses are not barred by
incontestability clause?
A:
1. Lack of insurable interest;
2. Cause of death is an excepted risk;
3. Non-payment of premium (subject to
certain exceptions);
4. Violations of conditions relating to
military or naval service;
5. Fraud is particularly vicious;
6. Failure to furnish proof of death;
7. Failure to comply with any condition
imposed by the policy after the loss
happened;
8. Prescription.
UST GOLDEN NOTES 2010
.' . . . WARRANTIES . " ~'.
Q: What are warranties?
A: Statements or promises by the insured set
forth in the policy itself or incorporated in it by
proper reference. the untruth or non-fulfillment
of which in any respect, and without reference
to whether the insurer was in fact prejudiced
by such untruth or non-fulfillment render the
policy voidable by the insurer.
Q: What is the purpose of warranties?
A: To eliminate potentially increasing moral or
physical hazards which may either be due to
the acts of the insured or to the change of the
condition of the property.
Q: What is the basis of warranties?
A: The insurer took into consideration the
condition of the property at the time of
effectivity ofthe policy.
Q: What are the kinds of warranties?
A:
1. Express - an agreement contained in
the policy or clearly incorporated
therein as part thereof whereby the
insured stipulates that certain facts
relating to the risk are or shall be true,
or certain acts relating to the same
subject have been or shall be done.
2. Implied - It is deemed included in the
contract although not expressly
mentioned.
Peculiar only to marine insurance,
and therefore is deemed included in
the 'contract, although not expressly
mentioned:
a. That the ship will not deviate
from the agreed voyage unless
deviation is proper;
b. That the ship will not engage in
illegal venture;
c. Warranty of neutrality, that the
ship will carry the requisite
documents of nationality or
neutrality where such nationality
or neutrality is warranted;
d. Presence of insurable interest;
e. That the ship is seaworthy at the
time of the commencement of
the insurance contract.
Q:' What are the distinctions between
warranty and representation?
A:
WARRANTY REPRESENTATION' I
Considered parts Collateral inducement to
of the contract. the contract.
Always written on
,
May be written ina
the face of the
totally disconnected
policy, actually or
paper or may be oral.
by reference.
Must be strictly Only substantial proof is
complied with. required.
Itsfalsity or non-
fulfillment Its falsity render'sthe
operates as a policy void onthe ground
breach of of fraud.
contract.
Presumed
Insurer must show its
materiality inorder to
material.
defeat an action on the
policy.
Q: What are the effects of breach of
warranty?
A:
1. Material
GR: Violation of material warranty or
Ofmaterial provision of a policy will
entitle the other party to rescind the
contract.
XPN:
a,
Loss occurs before the time of
performance of the warranty;
The performance becomes
unlawful at the place of the
contract; and
Performance becomes
impossible.
b.
c.
2. Immaterial
GR: Itwill not avoid the policy.
XPN: When the policy expressly
provides or declares that a violation
thereof will avoid it.
For instance, an "Other Insurance
Clause" which is a condition in the
policy requiring the insured to inform
the insurer of any other insurance
coverage of the property. A violation
of the clause by tile insured will not
constitute a breach unless there is an
additional provision stating that the
violation thereof will avoid the policy.
(Sec. 75)
UNIVERSITY OF SANTO TOMAS
'Fa cu It.a d de Der ec Iio Civ i]
~i 215
INSURANCE LAW: WARRANTIES AND CONDITIOONS
Q: What is the effect of a breach of
warranty without fraud?
A: The policy is avoided only from the time of
breach (Sec. 76) and the insured is entitled:
1. To the return of the premium paid at a
pro rata from the time of breach if it
occurs after the inception of the
contract; or
2. To al/ premiums if it is broken during
the inception of the contract.
. _< .', CONDITIONS .' " .. '
Q: What is a condition in insurance policy?
A: It is an event signifying in its broadest
sense, either an occurrence or a non-
occurrence that alters the previously existing,
legal relations of the parties to the contract.
I
Q: What are the kinds of conditions?
A:
1. Condition precedent - It calls for the
happening .of some event or the
performance of some act after the
terms of the contract have been
agreed upon, before the contract
shall be binding on the parties.
Eg. the policy shall not take effect
until delivery and payment of the first
premium during the good health of
the applicant.
2. Condition subsequent - It is that
which pertains not to the attachment
of the risk and the inception of the
policy, but to the contract of
insurance after the risk has attached
and during the existence thereof.
Eg. the condition requiring notice and
proof of loss in case of loss upon an
insurance against fire.
216
Q: What distinguishes a condition from
warranty as to effects?
A:
CONDITION
WARRANTY
I
Limitation to the
Does not have
attachment of the risk.
that effect.
Condition precedent is
one if not performed, will
Does not
render the contract as
suspend or
not constituted although
defeat the
it is sufficient inform,
operation of the
executed by the parties,
contract.
and validly delivered.
The occurrence of breach temporarily
renders the entire contract voidable.
Q: What are " exceptions" ?
A: Those which are inserted in a contract of
insurance for the purpose of withdrawing from
the coverage of the policy, as delimited by the
general language describing the risk assumed,
some specific risks which the insurer declares
himself unwilling to undertake.
Acadernics Committee
C/hl ir r enol l : Abr aham D. C~llllinC) f l
f /i t r-Cbai rjf " " .Acadcmi a: Jeannie ; \, j .aurcntino
[ /il ' r :-Chair Fw/l dmil l e.'~ Fi Il i Jl /(' : /\ls:-;;\ Cclinc II. Lunn
l/ia'-Ch~Il'rji)!- I ~ J' { JI I I (.' ' ' ' ' ' n('.r~~Il:1..( Jise 1\;1t' (;. Nav al
Mercanri le Law Conllnittec
.\ ' ,,/ ' ; ' d l/cd,/iioly T ;11l1I':tgUl'\'
/I.r.rl . .\',,/'/,<1 I1l'Od- Mal1ilfll RoSl' S. S"Il'I"
Members:
lvdwin Marc 'I'. Ibldi"
Airccn M. each"
Socrates Ilc'lljil' I. ~I"rbil
ROll Chcrric S. i\klldlJl'.:i
I ':disnn .la11ll's I" , P;lg<1.libuall
M"ybellil1l' ~1. Sailliago
UST GOLDEN NOTES 2010
'. " '~ , ,'POLICY, < ~ " "
Q: What are kinds of policies?
Q: What is a policy of insurance?
A: It is the written instrument in which the
contract of insurance is set forth (Sec. 49) It is
the written document embodying the terms
and stipulations of the contract of insurance
between the insured and insurer. It is not
necessary for the perfection of the contract.
Q: What is the form of an insurance
contract?
A: May be verbal or in writing, or partly in
writing and partly verbal. However, the law
provides that no policy of insurance shall be
issued or delivered unless in the form
previously approved by the Insurance
Commission.
Q: May the approval of the Insurance
Commissioner be dispensed with?
A: Yes, upon the certification of the president,
vice-president, or general manager of the
insurance company concerned that the risk
involved, the values of such risks and/or the
premiums therefore has not yet been
determined or established, or such extension
or renewal is not contrary to and is not for the
purpose of violating any provisions of the
Insurance Code, or of any rulings, instructions,
or circulars of the Insurance Commissioner.
Q: Is the insurance policy the same with
the contract itself?
A: No, the policy is the formal written
instrument evidencing the contract of
insurance entered into between the insured
and the insurer. It is the law between them.
Q: What is the characteristic of the policy?
A: It is a contract of adhesion wherein one
party having superior bargaining power
imposes its choice of terms on the other party.
The insured sees the contract in its final form
and has no voice inthe selection or agreement
of the words employed therein.
A:
5. Open - One in which the value of the
thing insured is not agreed upon, but
is left to be ascertained in case of
loss. (Sec. 60)
6. Valued policy - One which expresses
on its face an agreement that the
thing insured shall be valued at a
specified sum (Sec. 61).
What is defined in this section is the
value of the thing insured, not the
face value of the policy. The liability
of the insurer under a life policy is
measured by the face value of the
policy. However, the insurer may still
come up with the investigation to the
actual loss suffered. Thus, valued
policies are sometimes construed as
the maximum amount of liability
(whichever is lower).
7. Running' policy One which
contemplates successive insurances,
and which provides that the object of
the policy may be from time to time
defined, especially as to the subjects
of insurance, by additional statements
or endorsements. (Sec. 62)
It is intended to provide indemnity for
property which cannot well be
covered by a valued policy because
of its frequent change in location and
quantity, or for property of such a
nature as not to admit of a gross
valuation. Contemplates that the risk
is shifting, fluctuating or varying, and
which covers a class of property
rather than any particular thing.
Q: What is the prescriptive period in
comrnenclnq an action?
A: Within one year from time cause of action
accrues.
Q: When is the insurance contract
perfected?
A: When the assent or consent is manifested
by the meeting of the offer and the acceptance
upon the thing and the cause which are to
constitute the contract. Mere offer or proposal
is not contemplated. (De Lim v. Sun Life
Assurance Co., G.R. No. L-15774, Nov. 29,
1920)
UNIVERSITY OF SANTO TOMAS
Pacu(taa de i ] ) er ecl i o Ci oi]
~i' 217
INSURANCE LAW: POLICY
Q: What are the contents of policy?
Q: What are the kinds of insurable risks?
A:
1. Parties - It is of no importance that
the name of the insured was
incorrectly spelled, provided the
identity of the party can be clearly
established. The .insured may be
described in other ways than by
name. (e.g. "for the owner", to whom
it may concern") (Sec. 57).
2. Amount of insurance
a. It is the basis for calculating the
premium.
b. Need not be specified in open or
running policies.
c. Not necessarily the value of the
property insured nor the extent of
liability of the insurer in the event
of loss.
3. Rate of premium - It is the
consideration of the contract. Its basis
is on the nature and character of the
risk assumed (rate increases as the
risk of loss increases). Thus, the
basis in:
a. Life insurance - Average life
span predicted from statistical
figures (mortality tables)
b. Fire insurance Structure,
occupancy or use, location and
loss-prevention or protection
facilities
4. Property or the life insured - It is the
subject matter of the insurance.
5. Interest of the insured in the property
if he is not the absolute owner -
Important in fire insurance to
determine the actual damage
suffered by the insured in case of loss
of the property covered by the policy
if he is not the absolute owner.
But if he is the absolute owner,
information of the nature or amount of
his interest need not be
communicated unless in answer to an
inquiry. (Sec. 34)
6. Risk insured against - Generally
i speaking, all foreseeable losses or
risks may be insured against except
those the insurance of which would
be repugnant to public policy or
positively prohibited, or those which
are occasioned by the insured's own
fraud/misconduct.
(Sec. 51)
218
A:
1 . Personal risks (death or' disability
involving the person, life and health
risks).
2. Property risks (loss or damage to
property)
3. Liability risks (those involving liability
for the injury/damage caused to third
persons.
p: What is the duration of the insurance?
A: It is the period during which the insurance is
to continue (life of the policy). Insurer would
not be liable unless it occurred during such
duration of the insurance. For:
1. Annual policies: 12 months
2. Short period policies: less than 12
months
Q: Who are the signatories to the insurance
policy?
A:
GR: It is only the insurer or his duly
authorized agent who signs the policy. It
need not be signed by the insured
XPN: Where express warranties are
contained in a separate instrument forming
part of the policy; the law requires that it
must be signed bythe insured.
Note: The signature of the insured is needed
only when there is a rider or endorsement for
countersigning purposes.
Q: What is a rider?
A: An attachment in an insurance policy that
modifies the condition of the policy expanding
or restricting its benefits or excluding certain
conditions from the coverage.
.
Q: When is a counter-signature of the
insured on a rider, endorsement, clause, or
warranty not necessary?
A: If the rider, endorsement, clause or
warranty was issued simultaneously with the
policy. However, the descriptive title or name
of the rider must be written on the blank
spaces provided inthe policy.
Where the rider, endorsement, clause, or
warranty was issued after the issuance of the
policy, the following rules apply:
UST GOLDEN NOTES 2010
1. If the insured applied for the rider,
endorsement, clause, or warranty, his
counter-signature is not necessary.
2. If the same is not applied for by the
insured, riders and the like shall be
countersigned by the insured or
owner.
Note: When the requirements for a rider are
complied with, it is considered as part of the
policy.
Q: Are riders necessary inapolicy?
A: Yes, because it often becomes necessary
to add a new term to a policy, or to modify or
waive an existing form.
Q: In case of conflict between a rider (or
warranties, clauses, or endorsements) and
the printed stipulations of a policy, which
shall prevail?
A: The rider prevails it being more deliberate
expression of tile agreement of the contracting
parties.
Q: What is anendorsement?
A: It is any provision added to an insurance
contract altering its scope or application (may
be in the nature of a permit). Thus, if it is
already attached to the policy at the time of its
issue, it is not an endorsement, strictly
speaking.
Q: Whatis aclause?
A: It is an agreement between the insurer and
the insured on certain matter relating to the
liability of the insurer incase of loss.
Q: Whatarewarranties?
A: They are attached or inserted to a policy to
eliminate specific potential increases of hazard
during the policy term owing to actions of the
insured or condition of the property.
Q: What are the requirements in order that
a rider, clause, warranty, or endorsement
may be binding onthe insured?
A:
1. The descriptive name or title of the
rider, clause, warranty, or
endorsement must be mentioned and
written on the blank spaces provided
inthe policy; (Sec. 50[2])
2. If the policy was not applied for by the
insured, the latter must agree to the
contents of the rider, clause,
warranty, or endorsement by
'countersigning the policy; (Sec. 50
[3]) and
3. The rider, clause, warranty, or
endorsement must be approved by
the Insurance Commissioner.
Q: What are. the distinctions between a
binding receipt and abinding slip?
A:
,,' CONDITIONAL or ',' ,COYER NOTE or
, BINDING RECEIPT ~,BINDING 5'(IP,' .
Acknowledgement on
behalf of the company
that their branch office
had received from
applicant the insurance
premiumand had
accepted the application
subject to processing by
the head office,
A concise and
temporary written
contract issued by
the insurer through
its duly authorized
agent embodying
the principal terms
of an expected
policy insurance, It
is intended to give
the insured
temporary
protection (good
only for 60days)
pending the
investigation of the
risk by the insurer
or until the
issuance of a
regular policy.
It is that which insurance
agents issue (since they
do not have the authority
to bind immediately the
insurers they represent)
that makes the coverage
effective on (1) the date
of the application, or on
(2) the date of medical
examination, if the
insurer determines later
that the applicant was
insurable onthat date. It
is a conditional
acceptance by the
insurer.
Apply this term to life
Insurance
Apply this term
specifically, "cover
notes" treated
under Sec, 52 to
non-life insurance
(such as in marine
insurance)
pending
investigation of the
vessel.
UNIVERSITY OF SANTO TOMAS
Pacuf taa de ([ ) er ecl i o Ci o i]
~. 219
Q: What are the rules on cover notes?
INSURANCE LAW: POLICY
A:
1. Insurance companies doing business
in the Philippines may issue cover
notes to bind insurance temporarily,
pending issuance of the policy. (Sec.
52 [1])
2. A cover note shall be deemed to be a
contract of insurance Within the
meaning of (Sec. 1[1]).
3. No cover note shall be issued or
renewed unless inthe form previously
approved by the Insurance
Commission.
4. The cover note is valid for 60 days
from the date of issuance, whether
the premium therefor has been paid,
but such cover note may be cancelled
by either party upon at least 7days
notice to the other party.
5. If a cover note is cancelled, a policy
of insurance shall, within 60 days
after the issuance of such cover note,
be issued in lieu thereof. Such policy
shall include within its terms the
identical insurance and under the
cover note and the premium.
6. The period may be extended or
renewed beyond 60 days with the
wrilten approval of the Commissioner
if he determines that such extension
is not contrary to and is not for the
purpose of violating any provision of
the Code. (Sec. 52[2])
7. Insurance companies may impose on
cover notes a deposit premium
equivalent to at least 25% of the
estimated premium of the intended
insurance coverage but in no case
less than P500.
Q: Is the cover note null and void for lack
of valuable consideration?
A: No. It is binding. A "cover note" issued in
advance of the issuance of a marine policy is
binding as an insurance contract although no
separate premium paid therefor. The non-
payment of premium on the Cover Note is no
cause for the insured. to lose what is due it, for
non-payment by it was not chargeable against
its fault. To add, such Cover Note must not be
treated separately but instead as integrated as
part of the insurance policy (Pacific Timber
Export Corporation v. C.A., G.R. No. L-38613,
Feb. 25, 1982).
Q: Is the binding slip issued only by the
agent binding between the insured and the
insurer in a life insurance policy?
A: No. When an agreement is made between
the applicant and agent only, no liability shall
attach until the principal approves the risk and
a receipt is given by the agent. The
acceptance is merely conditional, and is
subordinated to the act of the company in
approving or rejecting the application. Thus, in
life insurance, a "binding slip" or "binding
receipt" does not insure by itself, and use
merely as an acknowledgment on behalf of the
company, that the latter's branch office has
received from the applicant the insurance
premium and had accepted the application
subject for processing by the insurance
company (Great Pacific Life Assurance
Company v. CA, G.R. No. L-31845, Apr. 30,
1979).
Q: What are the 2 types of conditional or
binding receipt?
A:
1. One that affords inlmediate protection
- Insured is covered so long as he
files his application and pays the
premium.
2. One that does not afford immediate
protection - There is no coverage if
anything happens to the insured prior
to favorable action on his application
at the home office.
Q: When does the policy become binding?
A:
1. When all the conditions precedent
stated in the offer have been
satisfied; and
2. When delivered
Q: What are the requisites for a valid
delivery?
A:
1. Intention of the insurer to give legal
effect as a completed instrument;
2. Word or act by insurer putting the
instrument beyond his legal, though
not necessarily physical control;
3. Insured must acquiesce in this
intention.
Note: Possession of the policy by the insured
raises the presumption of delivery, while the
possession by the insurer is prima facie
evidence of no delivery.
UST GOLDEN NOTES 2010
Q: What are the 2 types of delivery?
A:
1. Actual- delivery to the person of the
insured.
2. Constructive
a. By mail - If policy was mailed
already and premium was paid
and nothing is left to be done by
the insured, the policy is
. considered constructively
delivered if insured died before
receiving the policy.
b. By agent - If delivered to the
agent of the insurer, whose duty
is ministerial, or delivered to the
agent of the insured, the policy is
considered constructively
delivered.
Q: What is the importance of delivery?
A:
1. It becomes the evidence of the
making of a contract and of its
terms;
2. It is considered as communication
of the insurer's acceptance of the
insured's offer;
3. It becomes the determination of
policy period;
4. It marks the end of. insurer's
opportunity to decline coverage.
Q: What are the 2 views when there is a
failure of the insured to read the policy?
A:
1. Majority rule The insured's
acceptance and retention of the
policy unread is not such laches as
will defeat his right to reformation.
This is so because insurance
contracts are contracts of adhesion.
2. Minority rule-
GR: The insured has the duty to read
his policy and is bound by his
contract as written whether he reads
it or not. He may not thereafter be
heard to say that he did not read the
policy or knows not its terms.
XPN:
a. When the insured could not
have discovered the erroneous
statement by such reading (e.g.
the copy attached was illegible);
b. He is induced by the fraud of
the agent not to read the policy;
c. He is illiterate; and
d. When the contracts are long,
complicated and difficult to
understand.
Q: When does the insurer have the duty to
explain the policy?
A: When the policy is ambiguous and unclear.
This, however, is subject to some important
caveats:
1. Reasonable expectations doctrine -
Insurer must explain to the insured
what is contained inthe policy for the
latter may have something in mind
different from what is contained inthe
policy.
2. Insurer must explain the options
available to the insured.
3. Agents owe their customers a duty to
exercise the skill and care that a
reasonable agent would exercise in
the circumstances.
4. Insurer must take affirmative steps to
make sure that the insured is
informed of his remedial rights.
Q: May a third person sue the insurer
directly?
A:
GR: The insurance proceeds shall be
applied exclusively to the proper interest of
the person in whose name or for whose
benefit it is made. A third person may not
sue the insurer directly.
XPN: If the insurance contract was
intended to benefit third persons, the latter
may directly claimfor the insurer. Thus:
1. If the insurance contract contain
some stipulation in favor of a third
person (stipulation pour autrui), the
latter although not a party to the
contract may enforce the stipulation
in his favor before it is revoked by the
contracting parties.
2. A third person has no right in law or
equity to the proceeds of insurance
unless there is a contract or trust,
express or implied, between the
insured and third person.
3. Where the contract of insurance
provides for indemnity against liability
to third persons, then third persons,
to whom the insured is liable, can sue
the insurer.
UNIVERSITY OF SANTO TOMAS
. Pacu{ taa de Der ec I i o Ci vi C
~i~ 221
INSURANCE LAW: POLICY
Q: What is the test to detennine whether a
third person may directly sue the insurer of
the wrongdoer?
A: Where the contract provides for indemnity
against liability to third person, then the latter
to whom the insured is liable, can sue the
insurer. On the other hand, where the
insurance is for indemnity against actual loss
or payment, then third persons cannot proceed
against the insurer, the contract being solely to
reimburse the insured for liability actually
discharged by him through payment to third
persons, said third person's recourse being,
thus limited to the insured alone.
Q: What is the effect of an insurance
procured by an agent?
A: The insurance inures to the benefit of the
principal.
Q: What are the requisites?
A:
1. Agent must be authorized;
2. Must act within the scope of his
authority;
3. Must disclose his principal;
4. Indicate by appropriate words that he
is acting ina representative capacity.
Q: Maya policy be unilaterally cancelled?
A: The insurer may, upon notice to the
insured, stating grounds for cancellation, and
stating further that it can prove the ground
should the insured require it, unilaterally
cancel the policy.
Q: What are grounds for cancellation of
non-life insurance policy?
A: After prior notice by the insurer to the
insured and upon the occurrence of one or
more of the ff:
1. Non-payment of premium;
2. Conviction of a crime arising out of
acts increasing the hazard insured
against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts or
omissions increasing the hazards
insured against;
5. Physical changes in the property
insured which result in the property
becoming uninsurable;
6. A determination by the commissioner
that the continuation of the policy
would violate or would place the
222
insurer in violation of the Insurance
Code. (Sec. 64).
Q: When is notice of cancellation
sufficient?
A:
1. Made prior to the cancellation;
2. Based on the occurrence, after the
.effectivity date of the policy;
3. In writing, mailed or delivered to the
named insured at the address shown
inthe policy;
4. Must state the grounds relied upon.
(Malayan Insurance Co. Inc. v. Cruz
Arnalda, G.R. No., G.R. No. L-67835
Oct. 12, 1987)
Academics Com mittcc
Chai r/,l ' J: wl l ... Abraham I). tielll1illO 11
! /' icc-Chair j f " , //f i Jdl ' l l l i ,: f : Jl' ann,ic A. Lnurcnrin
l/il~'-ChtJir/;Jr /Idmi l l e:....,Fi ' l l t l J1a' : i\issa Cclinc II. J .unn
l / i ((!-Ch~ i " j ; 1 r i.L!:)'{~!l1 e:~~. /)i~.\t~lI:J .nisc Rae ( ;. Naval
Mercantile Law Committee
.r l l hj cd I / (!() r / .- Iloly 'J '. J \mpagLicy
./Iul. Jl l h/ cd ' -l eaJ Manilyn RoseS. Sotelo
Members:'
i':dwin Mate 'I' Baldia
Airccn M. Cacho
Socrates llenjic I. 1\J arbil
R()i1 Chcr r ic S. i\'(clld()z;\
1':disoll .Ial11es I" , Pag:11ibu;1I1
Maybcllin 1\,1.~anliag"
.... i
UST GOLDEN NOTES 2010
'," GROUP INSUR, NeE '7,,' .:
Q: What is flrouP insurance?
A: Tile coverage of a number of individuals by
means of a single or blanket policy, thereby
effecting economies which frequently enable
the insurer to sell its services atlower premium
rates than are ordinarily obtainable for the
same type of insurance protection on life
policies soldto individuals.
Q: What is the form and nature of group
insurance?
A: It is essentially a single insurance contract
that provides coverage for many individuals. In
its original and most common form, group
insurance provides life or health insurance
coverage for the employees of one employer.
(Pineda v. CA, G.R. No. 105562, Sept. 27,
1993) Eventhough the employer is the named
policy-holder in the "master" policy, it is not
indemnity insurance for the benefit of the
employer but insurance upon the life of the
employee for his personal benefit and the
protectionof those depending uponhimand is
in addition to and distinct from workmen's
compensation insurance. It affects 4 parties:
the insurer, the insured, the employer, and the
beneficiary.
Q: X company procured a group accident
insurance policy for its construction
employees variously assigned to its
provincial infrastructure projects. Y
Insurance Company underwrote the
coverage, the premiums of which were paid
for entirely by X Company without any
employee contributions. While the policy
was in effect, five of the covered
employees perished at sea on their way to
their provincial assignments. Their wives
sued Y Insurance Company for payment of
death benefits under the policy. While the
suit was pending, the wives signed a power
of attorney designating X Company
executive, PJ , as their authorized
representative to enter into a settlement
with the insurance company. When a
settlement was reached, PJ instructed the
insurance company to issue the settlement
check to the order of X Company, which
will undertake the payment to the individual
claimants of their respective shares. PJ
misappropriated the settlement amount
and the wives pursued their case against Y
Insurance Co. Will the suit prosper?
Explain.
A: Yes. The suitwill prosper. Y Ins Cois liable.
X Co, through its executive, PJ , acted as agent
of Y Ins Co. The latter is thus bound by the
misconduct of its agent. It is the usual practice
in the group insurance business that the
employer-policy holder is the agent of the
:'.insurer.(2000Bar Question)
Q: What is a mutual insurance company or
:\':association?
,t
fA: A mutual life insurance corporation is a
cooperative that promotes the welfare of its
own members, with the money collected from
among themselves and solely for their own
protectionand notfor profit. Members are both
the insurer and insured. A mutual life
insurance company has no capital stock and
relies solely uponits contributions or premiums
- to meet unexpected losses, contingencies and
expenses. (Republic v. Sunlite, G.R. No.
158085, Oct. 14, 2005). (2006 Bar Question)
Academics Committee
CJJuirpl!l:wlI.' r\ braham D. Genuine 11
Vi a: -Chdi r ./ or .~ Jt{ l dt!l Jl i t: ' ; : J eannie A, Laurcurino
Vi a: -Chtl i r ' / oJ" .--I dmi n cc.... },'illtlfla.:: I\iss~ Cclinc r I. LUlU
r ~ i t" l : -(' Jl tl i r ./ ; Jr 14..lyoJlI ~'" ne.\~~Jl: Loise Rae (;. Naval
Mercantile Law Committee
.\'lIbl'eI H cad: Hnly T /\ll1pagul')'
/'I.e.fI. .5' 1 1 1 ' 1 ' (/ Head' Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldiu
Airucn M, Cacho
S{)crate' Belljie I. i\farbil
]{()Il Chcrric S. t\(clldcJ Z:l
Edison J anH':s I,'. Pagali! auan
MaybcllincM. Salltiago
UNIVERSITY OF SANTO TOMAS ~....)
Pacu(tad de (j ) er ecf to Ci vi C. 223
INSURANCE LAW: PREMIUM
PREMIUM
Q: What is premium?
A: It is an agreed price for assuming and
carrying the risk - that is, the consideration
paid an insurer for undertaking to indemnify
the insured against a specified peril.
Q: What is the difference between premium
and assessment?
A: Premium is levied and paid to meet
anticipated losses, while. assessment are
collected to meet actual losses. Also, while
premium is not a debt, assessment properly
levied, unless otherwise expressly agreed, is a
debt.
Q: When does payment of premium
become a debt or obligation?
A:
1. In fire, casualty and marine
insurance, the premium payable
becomes a debt as soon as the risk
attaches.
2. In life insurance, the premium
becomes a debt only when, in the
case of the first premium, the contract
has become binding, and in the case
of subsequent premiums, when the
insurer has continued the insurance
after maturity of the premium, in
consideration of the insured's express
or implied promise to pay.
Q: Does non-payment of balance of
premiums cancel the policy?
A: No', a contrary rule would place exclusively
in the 'hands of the insured the right to decide
whether the contract should stand or not.
(Philippine Phoenix Surety &Insurance, Co.,
tnc., v. Woodworks, Inc., G.R. No. L-22684,
Aug. 31, 1967)
Q: What are the effects of non-payment of
premiums?
A: Non-payment of the first premium unless
waived, prevents the contract from becoming
binding notwithstanding the acceptance of the
application or the issuance of the policy.
Non-payment of the subsequent premiums
does not affect the validity of the contracts
unless, by express stipulation, it is provided
that the policy shall inthat event be suspended
or shall lapse.
Q: J s the fire insurance )Jo)jcy a bh7djng 0178
ererr ITr/le prem/um srafed In r/le po/icy IS
not paid?
A: No, insurance is a contract whereby one
undertakes for a consideration to indemnify
another against loss, damage or liability arising
from an unknown contingent event.
The consideration is the premium. The
premium must be paid at the time and in the
way and manner specified in the policy, and if
not, the policy will lapse and be forfeited by its
own terms.
The non-payment of consideration constitutes
inability of the agreement (Philippine Surety
and Insurance Company v. Woodwork, Inc.,
G.R. No. L-25317, Aug. 6, 1979)
Q: C Insurance Co. delivered to the
respondent P Manufacturing Co, an open
Fire Policy. When the policy was delivered,
P Manufacturing failed to pay the
corresponding insurance premium.
However, it executed an acknowledgment
receipt with a promise to pay the premium
within 30 days. Two days after the
insurance premium had become due, the
things insured was damaged by fire. Is the
insurer liable for the loss? Was there a
perfected insurance contract between the
insurer and the insured?
A: Yes, the insurer is liable because there has
been a perfected insurance contract. C
Insurance accepted the promise of P
Manufacturing to pay the insurance premium
within thirty (30) days from the effective date of
policy. By so doing, it has implicitly agreed to
modify the tenor of the insurance policy and in
effect, waived any provision therein that it
would only pay for the loss or damage in case
the same occurs after the payment of the
premium. Considering that the insurance
policy is silent as to the mode of payment, C
Insurance is deemed to have accepted the
promissory note in payment of the premium.
This rendered the policy immediately operative
on the date it was delivered. (Capital
Insurance & Surety Co. Inc. v. Plestic Era Co.,
Inc. G.R. No. L-22375, July 18, 1975)
UST GOLDEN NOTES 2010
Q: Various tax surety bonds posted by P
Surety Co., in. behalf of respondent A
Corporation, as principal in favor of the
Republic of the Philippines through the
Bureau of Customs and the Board of
Industries. In consideration of the
obligation assumed by the P Surety Co., A
Corporation agreed to pay the premiums
and cost of documentary stamps due
thereon as per stipulations contained in the
separate agreement. A Corporation was
granted tax exemption by the Board of
Industries Thereafter, the respondent
stopped paing premiums and costs of
documentary stamps to the P. Surety Co.
As such, P Surety Co. filed a case for sum
of money for the value of the premiums.
Can A Corporation be held liable for the
unpaid premiums?
A: No, it could not possibly be liable for any
violation under the original surety bonds which
were already void and of no force and effect.
Suretyship cannot exist without a valid
obligation. The insurance company incurred no
risk from the time A Corporation's tax
exemption application was approved. Any
renewals were void from the beginning
because the cause or object of said renewals
did not exist at the time of the purported
transaction. (Plaridel Surety & Insurance
Company v. AI1ex Development Company,
Inc. G.R. No. L-30554, Feb. 28, 1983)
Q: Can fortuitous event excuse the insured
from not paying the premiums?
A:
GR: NO, non-payment of premiums does
not merely suspend but put an end to an
insurance contract since the time of the
payment is peculiarly of the essence of the
contract.
XPN:
1. The insurer has become insolvent
and has suspended business, or has
refused without justification a valid
tender of premiums. (Gonzales v.
Asia Life Ins. Co., G.R. No. L-5188,
Oct. 29, 1952)
2. Failure to pay was due to the
wrongful conduct of the insurer.
3. The insurer has waived his right to
demand payment.
Q: What is the effect of acceptance of
premium?
A: Acceptance of premium within the
stipulated period for payment thereof, including
the agreed grace period, merely assures
continued effectivity of the insurance policy in
accordance with its terms. (Stoke v. Malayan
Insurance Co., Inc., G.R. No. L-347.8, Feb.
28, 1984) .
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium in its behalf. The
insurer is bound by its agent's
acknowledgment of the receipt of payment of
premium.
Q: What is the effect of payment of
premium by post-dated check?
A: Delivery of a promissory note or a check
will not be sufficient to make the policy binding
until the said note or check has been
converted into cash. This is consistent with
Article 1249 of the Civil Code.
Note: Payment by means of a check or note,
accepted by the insurer, bearing a date prior to
the loss, assuming availability of the. funds
thereof, would be sufficient even if it remains
unencashed at the time of the loss. The
subsequent effects of encashment 'would
retroact to the date of the instrument and its
acceptance by the creditor.
Q: What if there was no premium paid, may
the insurer recover the unpaid premium
from the insured?
A: No, the continuance of the insurer's
obligation is conditioned upon the payment of
the premium, so that no recovery can be had
upon a lapsed policy, the contractual relation
between the parties having ceased. If the peril
insured against had occurred, the insurer
would have had a valid defense against
recovery under the policy.
UNIVERSI-TY OF SANTO TOMAS C""'.
' Facu{ tad de (] ) er ecf i o Ci vi C '9"225
INSURANCE LAW: PREMIUM
Q: What is the "cash and carry" rule?
I
A:
GR: No policy or contract of insurance
issued by an insurance company is valid
and binding unless and until the premium
thereof has been paid. Any agreement to
the contrary is void. (2003 Bar Question)
XPN: A policy is valid and binding even
whenthere is non-payment of premium:
1. In case of life or industrial life policy
whenever the grace period provision
applies.
2. When there is acknowledgment in a
policy of a receipt of premium, which
the law declares to be conclusive
evidence of payment, even if there is
stipulation therein that it shall not be
binding until the premium is actually
paid. This is without prejudice
however to right of insurer to collect
corresponding premium. (Sec. 77)
3. When there is an agreement allowing
the insured to pay the premium in
installments and partial payment has
beenmade at the time of loss (Makati
Tuscany Condominium Corp. v. CA,
G.R. No. 95546, Nov. 6, 1992).
4. When there is an agreement to grant
the insured credit extension for the
payment of the premium. (Art. 1306,
NCC), and loss occurs before the
expiration of the credit term. (UCPB
General Insurance v. Masagana
Teiemart, G.R. No. 137172, Apr. 4,
2001).
5. When estoppel bars the insurer to
invoke non-recovery onthe policy
6. When the public interest so requires,
as determined .by the Insurance
Commissioner
E.g.: In compulsory motor vehicle
insurance, if the policy was issued
without payment of premium by the
vehicle owner, the insurer will still be
'-J leld liable. To rule otherwise would
prejudice the 3
rd
party victim.
226
Q: What is the effect of acknowledgment of
receipt of premium in policy?
A: Conclusive evidence of its paymeni, in so
far as to make the policy binding,
notwithstanding any stipulation therein that it
shall not be binding until the premium is
actually paid (Sec. 78).
When the policy contains such written
acknowledgment, it is presumed that the
insurer has waived the condition of
prepayment. It hereby creates a legal fiction of
payment. The presumption is however,
extended only to the question of the binding
effectof the policy.
As far as the payment of the premium itself is
'concerned, the acknowledgment is only a
prima facie evidence of the fact of such
payment. The insurer may still dispute its
acknowledgment but only for the purpose of
recovering the premium due and unpaid.
Whether payment was indeed made is a
questionof fact. .
Q: The Peninsula Insurance Company
offered to insure Francis' brand new car
against all risks in the sum of Pi Million for
1 year. The policy was issued with the
premium fixed at 160,000.00 payable in 6
months. Francis only paid the first two
monthly installments. Despite demands, he
failed to pay the subsequent installments.
Five months after the issuance of the
policy, the vehicle was catnapped.
Francis filed with the insurance company a
claim for its value. However, the company
denied his claim on the ground that he
failed to pay the premium resulting in the
cancellation of the policy. Can Francis
recover from the Peninsula Insurance
Company?
A: Yes, when insured and insurer have agreed
tothe payment of premium by installments and
partial payment has been made at the time of
loss, then the insurer becomes liable. When
the car loss happened on the 5th month, the
six months agreed period of payment had not
yet elapsed. (Ibid.) Francis can recover from
Peninsula Insurance Company, but the latter
has the right to deduct the amount of unpaid
premium from the insurance proceeds. (2006
Bar Question)
UST GOLDEN NOTES2010
Q: When is the insured entitled to recover
premiums already paid or a portion
thereof?
A:
1. Whole:
a. When no part of the thing insured
has been exposed to any of the
perils insured against (Sec. 79)
b. When the contract is voidable
because of the fraud or
misrepresentations of the insurer
of his agent (Sec. 81).
c. When the insurance is voidable
because of the existence of facts
of which the insured was
ignorant without his fault
(Sec.81).
d. When the insurer never incurred
any liability under the policy
because of the default of the
insured other than actual fraud
(Sec. 81).
e. When rescission is granted due to
insurer's breach of contract (Sec.
74).
2. Pro rata:
a. When the insurance is for a
definite period and the insured
surrenders his policy before the
termination thereot, (Sec. 79 [b));
except:
i. Policy not made for a definite
period of time;
ii. Short period rate is agreed
upon;
iii. Life insurance policy.
b. When there is over-insurance.
The premiums to be retumed
shall be proportioned to the
amount by which the aggregate
sum insured in all the policies
exceeds the insurable value of
the thing at risk. (Sec. 82)
i. In case of over-insurance by
double insurance, the insurer
is not liable for the total
amount of the insurance
taken, his liability being
limited to the property
insured. Hence, the insurer is
not entitled to that portion of
the premium corresponding to
the excess of the insurance
over the insurable interest of
the insured.
ii. In case of over-insurance by
several insurers, the insured
is entitled to a ratable return
of the premium, proportioned
to the amount by which the
aggregate sum insured in all
the policies exceeds the
insurable value of the thing
insured (Sec. 82). i
i
E.g. Where there i(>a total
over insuraRC.~ of
P500,00000 in an iggregate
P2,000,000.00 policy
(Pi ,500,000.00 is 'only the
insurable value), 25%
(proportion of P500k to P2M)
of the premiums paid to the
several insurers should be
returned.
Q: When insured not entitled to return of
premiums paid?
A:
1. The risk has already attached and the
risk is entire and indivisible;
2. Inlife policies; .
3. If contract is void ab initio because of
fraud by the insured;
4. If contract is illegal and the parties
are inpari delicto.
Q: What are the devices used to prevent
the forfeiture of a life insurance after the
payment of the first premium?
A:
1. Grace period - After the payment of
the first premium, the insured is
entitled to a grace period of 30 days
within which to pay tile succeeding
premiums.
2. Cash surrender value - The amount
the insurer agrees to pay to the
holder of the policy if he surrenders it
and releases his claim upon it.
3. Extended insurance - It is where the
insured is given a right, upon default,
after payment of at least three full
annual premiums (see Sec. 227 [fj) to
have the policy continued in force
from the date of default for a time
either stated or equal to the amount
as the net value of the policy taken as
a single premium, will purchase.
(Hector S. de Leon The Insurance
Code of the Philippines Annotated,
2006)
4. Paid up Insurance - Tile insured is
given a right, upon default, after the
payment of at least three annual
j
UN I V E R S I TY OF SAN T a To M A.S ~~.(. 227
Pacu[ ta{ de Der ech o Ci vtf ~
INSURANCE LAW: PREMIUM
premiums to have the policy
continued in force from the date of
default for the whole period of the
insurance without further payment of
premiums.{ibid.) It results to a
reduction of the original amount of
insurance, but for the same period
originally stipulated.
5. Automatic Loan Clause A
stipulation in the policy providing that
upon default in payment of premium,
the same shall be paid from the loan
value of the policy until that value is
consumed. In such a case, the policy
is continued in force as fully and
effectively as though the premiums
had been paid by the insured from
I funds derived from other sources.
6.1
i
Reinstatement - Provision that the
holder of the policy shall be entitled to
reinstatement of the contract at
anytime within 3 years from the date
of default in the payment of premium,
unless the cash surrender value has
been paid, or the extension period
expired, upon production of evidence
of insurability satisfactory to the
company and the payment of all
overdue premiums' and any
indebtedness to the company upon
said policy
2 2 8
Academics COIl1111ittcc
Chair penr m: Abraham D. (; clluill() I J
Vue-Chai r ] : ...-L/,udemi o: Jeannie 1\. Laurcntino
Vi a-Chai r li)f- .Admi n e: ,., Fi nan: Aissa Celine II. Luna
T/ia!-Cj,~ir.JfJr l -q} ' ol l t & J)e.r~gJl: Loise Rae (; . Nav al
Mercantile Law Committee
.\ " " bj edl -f ear !. 1-1011'T. i\mJ 1aguc),
/I.r.rl. J" bj ed ' -' ear l ' Manilyn Rosc S. Sotelo
Members:
I edwin Marc T. Baldin
Au-ccn M, (~ach()
Socrates Bcnjie I. ~hrbi\
Ron Cherric S. Mendoza
Edison J ames F. Pagalilauan
Maybellinc M. Santiago
UST GOLDEN NOTES 2010
, ,LOSS' -
Q: What is loss?
A: It is the injury, damage, or liability sustained
by the insured in consequence of one or more
of the perils against which the insurer, in
consideration of the premium, has undertaken
to indemnify the insured. It may be total, partial'
or constructive.
It embraces:
1. Bodily injury;
2. Death;
3. Property damage or destruction
(Bonifacio Bros. v. Mora, GR. No. L-
20853, May, 29, 1967)
4. Loss of income or profits;
5. Legal liability to a third party.
Q: Can the insured transfer his claim
against the insurer after a loss has
occurred?
: Yes, and there is no need to obtain the
consent of the insurer because it is not the
ersonal contract which is being assigned but
2 money claim under or a right of action on the
ooucy (Ocean Acci. & G. Corp. v.
S uthwestern Bell Telephone. Co., 122 A.L.R.
- 3). Any stipulation to the contrary is void if
"12de after the loss except as otherwise
orovideo in the case of life insurance. (Sec.
~
: When is a fire friendly and when is it
ostile?
1. A fire is friendly - when it burns in a
place where it was intended to burn,
and ought to be, it is to be regarded
as merely an agency for the
accomplishment of some purpose.
2. A fire is hostile - when it occurs
outside of the usual confines or
begins as a friendly fire and becomes
hostile by escaping from the place
where it ought to be to some place
where it ought not to be.
ote:
1. Even though a fire remains entirely
within its proper place, it may become
hostile if it, by accident, becomes
excessive as to be beyond control. (In
O'Connor v. Queens Ins. Co., 122
N.W. 1038)
2. A fire caused by a lighted cigarette on
a rug is a hostile fire. But recovery
would not be allowed for damage to a
rug accidentally dropped on a burning
stove. (Swerling v. Connecticut Fire
Ins. Co., 180 A. 343)
Q: When is the insurer liable for the loss
and when is it not liable?
LOSS for which
LOSS for which' .: 'I
' Insurer is NOT
Insurer is LIABLE
LIABLE'
When the proximate
cause of the loss is Loss due to insured's
the peril insured willful act. (Sec. 87)
~gainst (Sec. 84)
Loss the immediate
cause of which is the
peril insured against, Loss due to the
except where the connivance of the
proximate cause is an insured. (Sec. 87)
excepted peril (Sec.
86)
Loss through simple
Loss where the
excepted peril is the
negligence of the
proximate cause.
insured.
(Sec. 86)
Loss caused by
efforts to rescue the
thing insured from a
peril insured against.
(Sec. 85) I
When the thing
I
I
insured is rescued
from a peril insured
against that would
have otherwise
caused a loss, if, in
the course of such
rescue, the thing is
exposed to a peril not
insured against,
which permanently
deprives the insured
of its possession, in
whole or in part. (Sec.
85)
U N.I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5
fJ'acu(tad de De re clio ci ou
~i;229
INSURANCELAW:Loss
NOTICEAND PROOFOF LOSS
Q: What is notice of loss?
A: It is tHe more or less formal notice given
the insurer by the insured or claimant under a
policy of the occurrence of the loss insured
against.
Q: What are the conditions before the
insured may recover on the policy after the
loss?
A:
1. The insured or some person entitled
to the benefit of the insurance,
without unnecessary delay; must give
notice to the insurer; (Sec. 88)
2. When required by the policy, insured
must present a preliminary proof loss
which is the best evidence he has in
his power at the time. (Sec. 89)
Q: What are the purposes of notice of loss?
A:
1. To give insurer information by which
he may determine the extent of his
liability;
2. To afford the insurer a means of
detecting any fraud that may have
been practiced upon him; and
3. To operate as a check upon
extravagant claims.
Q: What is the effect of failure to give
notice of loss?
A:
I FIRE OTHER TYPESOF
I' INSURANCE INSURANCE
Failure to give
notice defeats
the right of the
insured to
recover.
Failure to give notice will
not exonerate the insurer,
unless there is a
stipulation inthe policy
requiring the insured to do
so.
Q: What are the instances when the defects
in the notice or proof of loss are
considered waived?
I
A: W:henthe insurer: MaJ oR-DeW
I'
! - ..
1. Writes to the insured that he
Considers the policy null and void as
the furnishing of notice or proof of
loss would be useless;
2. Recognizes his liability to pay the
claim;
3. Denies all liability under the policy
230
2. Maturing at the
death of the insured,
occurring prior to the
expiration of the term
stipulated - the
proceeds are payable
to the beneficiaries
within 60 days after
presentation of claim
and filing of proof of
death (Sec. 242)
4. J oins in the proceedings for
determining the amount of the loss by
arbitration, making no objections on
account of notice and preliminary
proof; or
5. Makes Objection on any ground other
than the formal defect in the
preliminary proof.
Q: When is delay in the presentation of
notice or proof of loss deemed waived?
A: If caused by:
1. Any act of the insurer; and
2. By failure to take objection promptly
and specifically upon that ground.
(Sec. 91)
Q: What is proof of loss?
A: It is the more or less formal evidence given
the company by the insured or claimant under
a policy of the occurrence of the loss, the
particulars thereof and the data necessary to
enable the company to determine its liability
and the amount thereof.
Q: What is the time for payment of claims?
LIFE POLICIES NON L1FEPOLICIES I
1. Maturing upon the
expiration of the term -
the proceeds are
immediately payable to
the insured, except if
proceeds are payable
ininstallments or
annuities which shall
be paid as they
become due
The proceeds shall
be paid within 30'
days after the receipt
by the insurer of proof
of loss and
ascertainment of the
loss or damage by
agreement of the
parties or by
arbitration but not
later than 90 days
from such receipt of
proof of loss, whether
or not ascertainment
is had or made. (Sec.
243)
UST GOLDEN NOTES 2010
Q: What is the effect of refusal or failure to
pay the claim within the time prescribed?
A: Secs. 242, 243 and 244 provide that the
insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board
which means twice 12% per annum (legal rate
of interest prescribed in CB No. 416) or 24%
per annum interest on the proceeds of the
insurance from the date following the time
prescribed in Secs. 242 or 243 until the claim
is fully satisfied (Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines,
Inc. G. R. No. 151890, June 20, 2006)
Note: Refusal or failure to pay the loss or
damage will entitle the assured to collect
interest UNLESS such refusal or failure to pay
is based on the ground that the claim is
fraudulent
PRESCRIPTIVE PERIOD ..
Q: What are the rules on the prescriptive
period?
A:
1. The parties to a contract of insurance
may validly agree that an action on
the policy should be brought within a
limited period of time, provided such
period is not less than 1 year from the
time the cause of action accrues. If
the period agreed upon is less than 1
year from the time the cause of action
accrues, such agreement is void.
(Sec. 63)
a. The stipulated prescriptive period
shall begin to run from the date
of the insurer's rejection of the
claim filed by the insured or
beneficiary and not from the time.
of loss.
b. In case the claim was denied by
the insurer but the insured filed a
petition for reconsideration, the
prescriptive period should be
counted from the date the claim
was denied at the first instance
and not from the denial of the
reconsideration (Sun Life Office,
Ltd. VS. CA, GR. No. 89741, Mar
13, 1991)
2. If there is no stipulation or the
stipulation is void, the insured may
bring the action within 10 years in
case the contract is written.
3. In a comprehensive motor vebicle
liability insurance (CMVLI), the written
notice of claim must be filed within 6
months from the date of the accident;
otherwise, . the claim is deemed
waived even if the same is brought
within 1 year from its rejection. (Vda.
Oe Gabriel vs. CA, GR No. 103883,
Nov 14, 1996)
4. The suit for damages, either-with the
proper court or with the Insurance
Commissioner, should be filed within
1 year from the date of the denial of
the claim by the insurer, otherwise,
claimant's right of action shall
prescribe. (Sec. 384)
Academics Committee
Chai r per son: Abraham D. (-;< ':Iluinc) 11
f / i ce-C/ wi r j i Jr / -/ c(u/ emi tJ: J eannie r \ . ] .aurcu rino
l / i t: e-C' btJj r ./ nr ... ..: Jdmi " i""' Fill~/lIa:: /\iSStl Coline If. 1.. .una
r 'ia:-C/;lIir/or l .L ..' youl 16'"'"ne.f~~IJ: Loise Rae C; . Naval
Mercantile Law Committee
JIII'Ied Fi c,,' / ' - J J oly T i\ Illpaglley
/ 1 . .. . 1 . Subj Cd !-l ead; Manilyn Rose S. Sotelo
Mem hers:
Edwin Marc T. Baldia
Aireen M. Cacho
Socrates 13enjie J . l'vfarbil
Ron Cherric S. l'vfenc.\{)%;l
Edison J ames F. Pagalilauan
~r'1ybcllil1c M. Sal1[iago
'.--l';""~.--.,
UNIVERSITY OF SANTO TOMAS
Fa cu.I t a d' de (j ) er ecno Ci o i l
INSURANCE LAW: DOUBLE INSURANCE
DOUBLE INSURANCE
Q: Whbn does double insurance exist?
I
A: Double insurance exists where the same
person is insured by several insurers
separately, in respect to the same subject and
interest. (Sec. 93)
Q: Give the requisitasof double insurance.
A: STRIP
1. Personinsured is the same;
2. Iwo . or .more insurers insuring
separately;
3. .ubjectmatter is the same;
4. Interest insured is the same; and
5. Risk or peril insured against is the
same
Q: What is the purpose of the rule on
double insurance?
A: To prevent over-insurance and thus avert
the perpetrationof fraud. The public, as well as
the insurer, is interested in preventing the
situation inwhich a loss would be profitable to
the insured (Pioneer Insurance and Surety
Corp v. Yap, G.R. No. L-36232, Oec. 19, 1974)
Q: Is double insurance prohibited by law?
A: No. A personmay therefore procure two or
more insurancesto cover his property. What is
prohibited bylawis over insurance.
Q: Terrazas de Patio Verde, a
condominium building, has a value of P50
Million. The owner insured the building
against fire with three (3) insurance
companies for the following 'amounts:
Northern Insurance Corp. - P20M
Southern Insurance Corp. - P30M
Eastern Insurance Corp. - P50M
Is the owner's taking of insurance tor the
building with three (3) insurers valid?
Discuss.
A: Yes, the owner's taking of insurance for the
building with three (3) insurers is valid. This is
a case of double insurance whereby the same
personi is insured by several insurers
separately in respect to the same subject and
interest. Itis lawful to obtain double insurance,
and the insured can make claim to several
insurers in the event of a loss because they
are liable under their respective policies.
Provided however, that the insured can only
recover up to the value of his insurable
interest which, at the instant case, is P50
Million.
232
Q: The building was totally razed by fire. If
the owner decides to claim from Easterh
Insurance Corp. only P50 Million, will the
claim prosper? Explain.
A: Yes, the claim will prosper if the owner
decides to claim from Eastern Insurance
Corporation only P50 Million because the
amount sought to be claimed does not exceed
the value of his insurable interest. Eastern
Insurance Corporation, however, can recover
from Northern Insurance Corporation and
Southern Insurance Corporation their
proportionateshare of the amount it paidtothe
owner. (2008 Bar Question).
Q: Can an insurer provide that the insured
may not procure additional insurance?
A: Yes, the insurer may insert an "other
insurance clause" which will prohibit double
insurance. The rationale is to prevent the
danger that the insured will over insure his
property.
Q: What is additional or other insurance
clause?
A: A condition in the policy requiring the
insured to inform the insurer of any other
insurance coverage of the property insured. It
is lawful and specifically allowed under Sec. 75
which provides that "apolicy may declare that
a violation or a specified provision thereof shall
avoid it, otbetwi se the breach of an immaterial'
provision does not avoid it.
Q: What are Its purposes?
A:
1. To prevent an increase in the moral
hazard; and
2. Toprevent over-insurance andfraud
Q: julie and Alma formed a business
partnership. Under the business name Pino
Shop, the partnership engaged in a sale of
construction materials. julie insured the
stocks in trade of Pino Shop with WGC
Insurance Co for P350,000.00.
Subsequently, she again got an insurance
contract with RSI for P1,000,000.00 and
then from EIC for P200,OOO.OO. A fire of
unknown origin gutted the store of the
partnership. J ulie filed her claims with the
three insurance companies.
However, her claims were denied
separately for breach of policy condition
which required the insured to give notice of
any insurance effected covering the stocks
in trade. J ulie.went to court and contended
that she should not be blamed for the
UST GOLDEN NOTES 2010
omission, alleging that the insurance
agents for WGC, RSI and EIC knew of the
existence of the additional insurance
coverage and that she was not informed
about the requirement that such other or
additional insurance should be stated in
the policy.
Is the contention of J ulie tenable? Explain.
May she recover on her fire insurance
policies? Explain.
A:
1. No. An insured is required to disclose
the other insurances covering the
subject matter of the insurance being
applied for.
2. No, because she is guilty of violation
of a warranty/ condition. (1993 Bar
Question)
Q: What are the distinctions between
double insurance and over insurance?
A:
I DOUBLE -
INSURANCE 0'f:~~;INS,U~NCE
There may be no over
insurance as when the
sumtotal of the
amounts of the policies
issued does not
exceed the insurable
interest of the insured.
When the amount of
the insurance is
beyond the value of
the insured's
insurable interest.
Two or more insurers.
There may be only
one insurer, with
whom the insured
takes insurance
beyond the value of
his insurable
interest.
Not prohibited by law,
unless there is a
stipulation to the
contrary.
Prohibited by law
because it is a
wagering contract
and no longer a
contract of
indemnity.
Q: What are the rules where the insured is
over-insured by double insurance?
A:
1. The insured, unless the policy
otherwise provides, may claim
payment from the insurers in such
order as he may select, up to the
amount which the insurers are
severally liable under their respective
contracts.
2. Where the policy under which the
insured claims is a valued policy, the
insured must give credit as against
the valuation for any sum received by
him under any other policy without
regard to the actual value of, the
subject matter insured. .
3. Where the policy under whlQh! the
insured claims is an unvalued pblicy
he must give credit, as against the full
insurable value, for any sum received
by him under any policy.
4. Where the insured receives any sum
in excess of the valuation in the case
of valued policies, or of the insurable
value in the case of unvalued
policies, he must hold such sum in
trust for the insurers, according to
their right of contribution among
themselves.
5. Each insurer and the other insurers,
to contribute ratably to the loss in
proportion to the amount for which he
is liable under his contract. (Sec. 94)
Q: What is the nature of the liability of the
several insurers in double insurance?
Explain.
A: In double insurance, the insurers are
considered as co-insurers. Each one is bound
to contribute ratably to the loss in proportion to
the amount for which he is liable under his
contract. This is known as the "principle of
contribution" or "contribution clause." (Sec. 94
[e)) (2005 Bar Question)
UNIVERSITY OF SANTO TOMAS ~~')233
Pacu.(taa de (j ) er ecl i o Ci vi {
INSURANCE LAW: REINSURANCE
REINSURANCE
Q: What are the two kinds of reinsurance
treaties?
Q: What is contract of reinsurance?
A:
A: It is that which one party, the reinsurer,
agrees to indemnify another,. the reinsured
(original insurer), either in whole or in part,
against loss or liability which the latter may
sustain or incur under a separate and original
contract of insurance with a third party, the
original insured. It is also known as
"reinsurance cession".
AUTOMATIC I
REINSURANCE FACULTATIVE
TREATY REINSURANCE
There IS no
obligation to cede or
accept participation
inthe risk each party
having a free choice.
But once the share
is accepted, the
obligation is
absolute and the
liability can be
discharged only by
payment. (Equitable
Ins. & Casualty Co.,
Inc. v. Rural Ins. &
Surety Co. Inc., G.R.
No. L- 17436, Jan.
31, 1962
The reinsured is bound
to cede and the
reinsurer is obligated
to accept afixed share
of the risk which has to
be reinsured under the
contract.
Note: In every reinsurance, the original
contract of insurance and the contract of
reinsurance are covered by separate policies.
Q: What is the duty of the insurer in
obtaining reinsurance?
A: ~e must communicate all the
representatlons of the original insured, and
also ~II the knowledge and information he
possesses, whether previously or
subsequently acquired, which are material to
the risk, except under "automatic" reinsurance
treaties. (Sec. 96)
Q: What are the distinctions between
double insurance and reinsurance?
Q: What are, the distinctions between
reinsurance policy and reinsurance treaty?
A:
DOUBLE
REINSURANCE
INSURANCE
(Sec. 95)
(Sec, 93)
Insurer remains as
Insurer becomes the
the insurer of the
insured, inso far as the
original insured.
reinsurer is concerned.
Subject matter is
Subject matter is the
property
original insurer's risk
Involves the same
Insurance is of different
interest
interest
The original insured has no
The insured is the
interest inthe contract of
party interest in all
reinsurance which is
the contracts
independent of the original
contract of insurance
The insured has to
The consent of the original
give his consent
insured is not necessary
A:
I REINSURANCE REINSURANCE
I POLICY TREATY
It is merely an
agreement between
two insurance
companies whereby
one agrees to cede
and the other to
accept reinsurance
business pursuant to
provisions specified
inthe treaty.
It is a contract of
indemnity where
insurer makes with
another to protect the
first insurer from a
risk it has already
assumed.
It is a contract for
insurance.
(American Life Ins.
Co. v. Auditor
General, G.R. No. L-
19255, Jan. 18,
1968)
It is a contract of
insurance.
Q: What is retrocession?
A: It is a transaction whereby the reinsurer, in
turn, passes to another insurer a portion of the
risk reinsured. It is really the reinsurance of the
reinsurance. The ceding reinsurer is called a
"retrocedent" and the second assuming
reinsurer is known as a "retrocessionaire."
UST GOLDEN NOTES 2010
Q: MC\yC\reinsurer be held directly liable to
the original insured?
A:
GR: The original insured has no interest in
a contract of reinsurance (Sec. 98). There
is no privity of contract between the original
insured and the reinsurer.
XPN: The contract may contain a provision
whereby the reinsurer binds himself to pay
the policyholder any loss for wi uch the
insurer may become liable. Thus, the
reinsurer who has promised to pay the loss
accruing under the original policy will be
liable to a suit by the original insured under
the contract of reinsurance. In such case,
the contract of reinsurance amounted to
novation of the original contract which
operates to discharge that contract and the
original insurer from all obligations
thereunder. Tile original insurer will be
released only when the insured agrees with
the insurer and the reinsurer to the
novation.
Academics Committee
C.!JclirJJeJ~lOlJ: Abraham D. Genuine Il
Vi (r.-CJJi l i rjf Jr /L/au/cl JJi n: Jeannie A. Laurcntino
1,.-/jre-Cbai -rj()J' /Jdt l l i J1 ~~ r' i Jl t JIh' l 1: Aiss," \ Ccline H . Lun.i
r ' i a-Cbai r f or L-L!yol Il e.'" neJ~~I1: Loise Hat: G. Naval
Mer cantile Law Comrnirrec
1 ' ' ' ' ' 1 ' .-1 l l end: Holy T. I\mpagllc)'
..-4 .ul . .f 1l 1? Jf : d Head: Manilyn Rose S. Sow]u
MeJnber s:
Edwin Marc T lialdia
Aircco M. Cacho
Socrates Belliic I. l\farbil
Ron Chcrric S. Mendoza
Edison James F. Pagali! auan
Maybcllinc M. Santi'lgo
UNIVERSITY OF SANTO TOMAS
Fac ul t a d' de CDer ecl i o Ci vi l
~.~235
INSURANCE LAw: MARINE INSURANCE
MARINE INSURANCE
Q: What is marine insurance?
A: Insurance against risks connected with
navigation, to which a shlp, cargo, freightage,
profits or other insurable interest in movable
property, may be exposed during a certain
voyage or fixed period of time.
Q: What vessels ar:econtemplated in
marine insurance?
A: Those used, or at least, intended for
navigation. E.g ., one for shipping, chartering,
voyage and the like. Vessels which are used
as museums or those that are stationary are
not entitled to be insured under this a marine
insurance.
Q: What does marine insurance include?
A: Marine insurance includes:
1. Insurance against loss or damage to:
a. Vessels, goods, freight, cargo,
merchandise, profits, money,
valuable papers, bottomry and
respondentia, and interest in
respect to all risks or perils of
navigation;
b. Persons or property in
connection with marine
insurance;
c. Precious stones, jewels, jewelry
and precious metals whether in
the course of transportation or
otherwise; and
d. Bridges, tunnels, piers, docks
and other aids to navigation and
transportation (Sec. 99)
Note: Cargo can be the subject of
marine insurance, and once it is
entered into, the implied warranty of
seaworthiness immediately attaches
to whoever is insuring the cargo,
whether he be the ship owner or not.
(Roque v. lAC, G.R. No. L-66935,
Nov. 11, 1985)
2. "Marine protection and Indemnity
insurance" which means insurance
against, or against legal liability of the
insured for loss, damage, or expense
incident to ownership, operation,
chartering, maintenance, use, repair,
or construction of any vessel, craft or
instrumentality in use of ocean or
inland waterways, including liability of
the insured for personal injury, illness
or death or for loss of or damage to
236
the property of another person. (Sec.
99)
Measure of indemnity:
a. Valued policy - the parties
are bound by the valuation,
if the insured had some
interest at risk and there is
no fraud (Sec. 156)
b. Open policy - the following
rules shall apply in
estimating a loss:
I. value of the ship- value
at the beginning of the
risk
ii. value of the cargo-
actual cost when laden
on board or market
value at the time and
place of lading
iii. value of freightage-
gross freightE)ge
exclusive of primage
iv. cost of insurance - in
each case to be added
to the estimated value
(Sec. 161)
Q: What are the two major divisions of
Marine insurance?
A:
1. Ocean marine insurance - covers
primarily sea perils of ships and
cargoes. Scope: GELS
a. .oods or cargoes;
b. Earnings such as freight,
passage money;
c. .biability incurred by reason of
maritime perils;
d. hips or hulls.
2. Inland marine insurance - covers
primarily the land or over the land
(but sometimes water) transportation
perils of property shipped by
railroads, motor trucks, airplanes, and
other means of transportation. It also
covers risks of lake, river, or the other
inland waterway transportation and
other waterborne perils outside of
those risks that fall definitely within
the ocean marine category. Classes:
Pt-BFF
a. Eroperty in Ira nsit - Provides
protection to the property
frequently exposed to loss while
it is being transported from one
location to another.
b. ailee liability - Insurance for
those who have temporary
custody of the goods.
UST GOLDEN NOTES 2010
c. fixed transportation property _
They are so insured because
they are held to be an essential
part of transportation system
such as bridges, tunnels, etc.
d. floater - Provides insurance to
follow the insured property
wherever it may be located
subject always to the territorial
limits of the contract.
Q: Does an insurer undertake to insure
against "perils of the ship"?
A: In the absence of any stipulation to the
contrary, the insurer does not undertake to
insure against perils of the ship. The purpose
of an ocean marine policy is to secure an
indemnity against accidents which may
happen notagainst event which must happen.
Q: A marine insurance policy on a cargo
states that "the insurer shall be liable for
losses incident to perils of the sea." During
the voyage, seawater entered the
compartment where the cargo was stored
due to the defective drainpipe of the ship.
The insured filed an action on the policy for
recovery of the damages caused to the
cargo. May the insured recover damages?
A: No. The proximate cause of the damage to
the cargo insured was the defective drainpipe
of the ship. This is peril of the ship, and not
peril of the sea. The defect in the drainpipe
was the result of the ordinary use of the ship.
To recover under a marine insurance policy,
the proximate cause of the loss or damage
must be peril of the sea. (1998 Bar Question)
Q: What is an "all risks" marine insurance
policy?
A:
GR: It is that which insures against all
causes of conceivable loss or damage.
XPN:
1. As otherwise excluded in the policy;
or
2. Due to fraud or intentional
misconduct onthe part of the insured.
(Choa Tiek v. CA, G.R. No. 84507,
Mar. 15, 1990) This type of policy
grants greater protection than that
afforded bythe "perils clause."
Q: Who has the burden of proof in an "all
risks" marine insurance policy?
A: The insured Linder an "all risks insurance
policy" has the initial burdenof proving thatthe
cargo was in good condition when the policy
attached and that the cargo was damaged
when unloaded fromthe vessel; thereafter, the
burden then shifts to the insurer to show the
exceptiontothe coverage.
I NSURABL E I NTEREST
Q: What is the extent of the insurable
interest of the following?
A:
1. Shipowner
a. Over the vessel to the extent of
its value, except that if chartered,
the insurance is only up ;to the
amount not recoverable fromthe
charterer (Sec. 100).
b. If hypothecated by a bottomry
loan, the insurable interest is
only Lip to the excess of the
values of the vessel over the
loan(Sec. 101).
c. He also has an insurable interest
on expected freightage (Sec.
103).
2. Cargo owner - over the cargo and
expected profits (Sec. 105)
3. Charterer - over the amount he is
liable to the ship owner, if the ship is
lost or damaged during the voyage
(Sec. 106).
4. Creditor/lender - amountof tile loan
Q: What is the risk insured against in
marine insurance?
A:
GR: Only perils of the sea is insured
against.
XPN: Unless perils of the ship are covered
by anall-risks policy.
UNIVERSITY OF SANTO TOMAS ~) "',...
' Fa cu l t a d' de (] ) er ecl i o Civj{' . _J I
INSURANCE LA \\I: MARINE INSURANCE
Q: What are the distinctions between perils
of the sea and perils of the ship?
Q: Where is freightage derived from?
A:
PERILSOF THE PERILSOF THE
SEA SHIP
Includes only those
asualties due to the:
1. Unusual
A loss which in the
ordinary course of
events, results from
the:
1. Natural
inevitable action
of the sea;
2. Ordinary wear
and tear of the
ship; or
Negligent failure
of the ship's
owner to provide
the vessel with
proper equipment
to convey the
cargo under
ordinary
conditions.
2.
violence; or
Extraordinary
action of wind
~nd wave; or
Other
extraordlnary
causes
connected with 3.
navigation.
3.
Q: What does the phrase " perils of the sea
or perils of navigation" mean?
A: It includes only those casualties due to the
unusual violence or extraordinary action of
wind and wave, or to other extraordinary
causes connected with navigation.
Q: What does " perils of the ship" mean?
A: It is a loss which, in the ordinary course of
events.rresults from:
1. The natural and inevitable action of
the sea;
2. The ordinary wear and tear of the
ship;
3. The negligent failure of the ship's
owner to provide the vessel with
proper equipment to convey the
cargo under ordinary conditions.
Q: What is a loan on bottomry?
A: It is one which is payable only if the vessel
given as security for the loan completes in
safety the contemplated voyage.
Q: Whatls freightage?
A: It is the benefit which is to accrue to the
owner of the vessel from its use in the voyage
contemplated or benefit derived from the
employment of the ship.
2 38
and
1. The chartering of the ship;
2. Its employment for the carriage of his
own goods; and
3. Its employment for the carriage of
goods of others (Sec. 102).
Q: When does insurable interest in
expected freightage in a charter party
exist?
A: It exists when the insured has an inchoate
right to freight, that is, he must be in such
position with regard to freight that nothing
could prevent him from ultimately having a
perfect right to it but the intervention of the
perils insured against.
Q: Wheh does inchoate right to freight
exists?
A:
1. Where freight is the price to be paid
for the hire of the ship under a charter
party, the ship owner has an inchoate
right to freight as soon as there is an
inception of performance by the ship
under the charter party.
2. As soon as the goods are actually put
on board and where part of the goods
has been loaded and the balance is
ready, there is an insurable interest in
the whole freight.
3. Where the ship owner has made a
binding contract for freight and the
ship is in readiness to receive the
goods, he has an insurable interest.
Q: When is insurable interest in expected
freightage in a charter party non-existent?
A:
1. Where there is no contract and no
part of the goods expected to be
carried are on board, there is no
insurable interest in freight although
there are goods ready for shipment or
the master is provided with funds for
the purpose of purchasing a cargo.
2. Where the vessel is a mere "seeking
ship" or a vessel looking for cargo to
be transported, the owner has no
insurable interest in freight to be
earned on goods not loaded.
UST GOLDEN NOTES 2010
Q: What are special marine insurance
contracts and clauses?
A:
1. All-risks policy - insurance against all
causes of conceivable loss or
damage, except:
a. as otherwise included in the
policy, or
b. due to fraud or intentional
misconduct on the part of the
insured (Chao Tiek Seng v. CA,
GR. No. 84507, Mar. 15, 1990)
The insured has the initial burden
of proving that the cargo was in
good condition when the policy
attached and that the cargo was
damaged when unloaded from
the vessel; thereafter, the burden
shifts to the insurer to show the
exception to the coverage.
2. Barratry clause - a clause which
provides that there can be no
recovery on the policy in case of any
willful misconduct on the part of the
master or crew in pursuance of some
unlawful or fraudulent purpose
without the consent of the owner and
to the prejudice of owner's interest. It
requires an intentional and willful act
in its commission. No honest error or
judgment or mere negligence, unless
criminally gross, can be barratry.
(Roque v. lAC, G.R. No. L- 66935,
Nov. 11, 1985)
3. Inchmaree clause - a clause which
makes the insurer liable for loss or
damage to the hull or machinery
arising from the:
a. Negligence of the captain,
engineers, etc.
b. Explosion, breakage of shafts;
and
c. Latent defect of machinery or
hull. (Thames and Mersey
Marine Insurance Co v. Hamilton
Fraser and Co [1887) 12AC 484)
4. Sue and labor clause - a clause
under which the insurer may become
liable to pay the insured in addition to
the loss actually suffered, such
expenses as he may have incurred in
his efforts to protect the property
against a peril for which the insurer
would have been liable (Sec. 163)
Note: Such clause constitutes an exception to
the principle that an insurance contract is one
of indemnity (where the insurer promises to
make good only the loss of the insured) since
the insurer is liable to pay additional expenses
for the protection of the property against an
insured peril.
Q: What is concealment in marine
insurance?
A: It is the failure to disclose any material fact
or circumstance which in fact or law is within,
or which ought to be within the knowledge of
one party and of which the other has no actual
or presumptive knowledge.
Q: Is information of the belief or
expectation of a third person, in reference
to amaterial fact, material?
A: Yes. Thus, there is concealment where the
insured at the time of application for insurance
did not disclose the opinion of marine experts
who inspected the vessel insured that it was
unseaworthy. (Sec. 108) ,
Q: When is the insured presumed to have
knowledge of a prior loss in ~arine
insurance? !
A: The insured is presumed to have
knowledge of a prior loss at the time of
insuring, if the information might possibly have
reached him inthe usual mode of transmission
and at the usual rate of communication. (Sec.
109)
Q: What matters, when concealed, do not
vitiate the entire insurance contract, but
merely exonerates the insurer from a loss
resulting from the risk concealed?
A:
1. National character of the insured;
2. The liability of the thing insured to
capture and detention;
3. The liability to seizure from breach of
foreign laws of trade;
4. The want of necessary documents;
5. The use of false and simulated
papers. (Sec. 110)
UNIVERSITY OF SANTO TOMAS
' Fa cu l t a d: de ([ ) er ecl i o Ci -o i l
INSURANCE LA \\I: MARINE INSURANCE
i
Q: What are the distinctions on
concealment in marine insurance and other
property insurance?
A:
MARINE OTHER PROPERTY
INSURANCE INSURANCE
The information or
the belief or
expectation of 3'd :
persons in reference
to amaterial fact is
material and must be
communicated.
The concealment of
any fact in relation to
any of the matters
stated in Sec. 110
does not vitiate the
entire contract but
merely exonerates
the insurer from a risk
resulting from the fact
concealed.
The information or
belief of a 3'd party is
not material and
need not be
communicated,
unless it proceeds
from an agent of the
insured whose duty
is to give
information.
:: -,' 'REPRESENTATION '
Concealment of any
material fact will
vitiate the entire
contract, whether or
not the loss results
from the risk
concealed.
Q: What is the effect of false representation
by the insured?
A: Any misrepresentation of a material fact
made with fraudulent intent avoids the policy. If
the misrepresentation is not intentional or
fraudulent but the fact misrepresented is
material to the risk, the insurer may rescind the
contract from the time representation becomes
false. (Sec. 111)
Q: What is the effect of falsity as to
expectation?
A: Representations of expectation or intention,
unless made with fraudulent intent, their failure
of fulfillment is not ground for rescission. (Sec.
112)
240
Q: What are the distinctions between
promissory representation and
representation of expectation?
A:
PROMISSORY REPRESENTATION
REPRESENTATION OF EXPECTATION
It is any promise to
be fulfilled after the
contract has come
into existence or any
statement
concerning what is to
happen during the
existence of the
insurance
It is a statement of
future facts or events
which are in their
nature contingent
and which the insurer
is bound to know that
the insured could not
have intended to
state as known facts,
but as intentions or
ex ectations merel
. . ' " , ," , WARRANTIES '
Q: What is warranty in marine insurance?
A: It is a stipulation, either express or implied,
forming part of the policy as to some fact,
condition or circumstance relating to the risk.
Q: What are the implied Warranties in
marine insurance?
A:
1. Seaworthiness (Sec. 113)
2. Non-deviation from the agreed
voyage; (Sees. 123, 124, 125)
3. Non-engagement from illegal venture.
4. Warranty of neutrality - the ship will
carry neutrality of the ship or cargo
where such nationality or neutrality is
expressly warranted. (Sec. 120)
5. Presence of insurable interest
Q: What is seaworthiness?
A: It is a relative term depending upon the
nature of the ship, voyage, service and goods
denoting ingeneral, a ship's fitness to perform
the service and to encounter the ordinary
perils of the voyage, contemplated by the
parties to the policy. (Sec. 114)
Q: When is the warranty of seaworthiness
complied with?
A:
GR: The warranty of seaworthiness is
complied with if the ship be seaworthy at
the time of the commencement of the risk.
(Sec. 115) There is no implied warranty
that the vessel will remain in seaworthy
condition throughout the life of the policy.
UST GOLDEN NOTES 2010
XPN:
1. In the case of time policy, the ship
must be seaworthy at the
commencement of every voyage she
may undertake. (Sec. 115[a))
2.
In the case of cargo policy, each
vessel upon which cargo is shipped
or transshipped must be seaworthy at
the commencement of each particular
voyage (Sec. 115[b))
3. In the case of voyage policy
contemplating a voyage in different
stages, the ship must be seaworthy at
the commencement of each portion.
(Sec. 117)
Q: What is the effect of the admission of
seaworthiness by the insurer?
A: If the policy provides that the seaworthiness
of the vessel as between insured and insurer
is admitted, the issue of seaworthiness cannot
be raised by tile insurer without showing
concealment or misrepresentation by the
insured. (Phil. American General Insurance
Co. v. CA, G.R. No. 116940, June 11, 1997)
Q: What does the admission of
seaworthiness by the insurer mean?
A: It may mean:
1. That the warranty of seaworthiness is
to be taken as fulfilled; or
2. That the risk of unseaworthiness is
assumed by the insurer. (Philippine
American General Insurance Co., Inc.
v CA, GR No. 116940. June 11,
1997)
Q: What is the effect if unseaworthiness is
unknown to the owner of the cargo?
A: It is immaterial inordinary marine insurance
and may not be used by him as a defense in
order to recover on the marine insurance
policy. It becomes the obligation of a cargo
owner to look for a reliable common carrier,
which keeps its vessels in seaworthy
conditions. The shipper may have no control
over the vessel but he has control in the
choice of the common carrier that will transport
his goods. (Roque v. lAC, GR. No. L- 66935,
Nov. 11, 1985)
Q: What is the scope of the seaworthiness
of avessel?
A: A warranty of seaworthiness extends not
only to the condition of the structure of the ship
itself, but requires that it be properly laden,
and provided with a competent master, a
sufficient number of competent officers and
seamen, and the requisite appurtenances and
equipment, such as ballasts, cables and
anchors, cordage and sails, food, water, fuel
and lights, and other necessary or proper
stores and implements for the voyage. (Sec.
116)
VOYAGE AND DEVI ATI ON
Q. What is deviation in marine insurance
policy?
A: Deviation is a departure of the vessel from
the course of the voyage, or an unreasonable
delay in pursuing the voyage, or the
commencement of an entirely new voyage.
(Sec. 123)
Q: What are the four cases of deviation in
marine insurance?
A:
1. Departure from the course of sailing
fixed by mercantile usage between
the places of beginning and ending
specified inthe policy. (Sec. 121)
2. Departure from the most natural,
direct, and advantageous route
between the places specified if the
course of sailing is not fixed by
mercantile usage. (Sec. 122)
3. Unreasonable delay in pursuing the
voyage. (Sec. 123)
4. The commencement of an entirely
different voyage.
Q: What are the two kinds of deviation?
A:
1. Proper - This will not vitiate a policy
of marine insurance because
deviation is considered justified or
caused by actual necessity ~hich is
equal inimportance to such deviation.
(Sec. 124)
2. Improper - The insurer becomes
immediately absolved from further
liability under the policy for losses
occurring subsequent to the deviation
because deviation is considered to be
without just cause. Every deviation
not specified in Sec. 124 is improper.
(Sec. 125)
U N I V E R 5 I T Y 0 F 5 ANT 0 T 0 'M A 5
Fac u i t a d: de CDer ecf i o Ci'fJi{
INSURANCE LAW: MARINE INSURANCE
. LOSS'
A:
Q: What are the two kinds of total loss?
1. Actual total loss; and
2. Constructive total loss.
Q: What are the distinctions between the
two?
A:
- ACTUAL TOTAL - _ . - -CONSTRUCtIvE --
LOSS ' TOTAL L OSS
It exists when the
subject matter of
the insurance is
wholly destroyed or
lost or when it is so
damaged as no
longer to exist in its
original character.
It is one which the loss,
although not actually
total, is of such a
character that the
insured is entitled, if he
thinks fit, to treat it as
total by abandonment
(Sec. 131)
The right of the
insured to claim the
whole insurance is
absolute. No need
to give notice of
abandonment.
(Sec. 1352
Abandonment by the
insured is necessary in
order to recover for a
total loss (Sec. 138) in
the absence of any
provision to the
contrary intheyolicy.
A:
Q: What causes actual total loss?
1. A total destruction of the thing
insured;
2. The irretrievable loss of the thing by
sinking, or by being broken up;
! 3. Any damage to the thing which
renders it valueless to the owner for
the purpose for which he held it; or
4. Any other event which effectively
deprives the owner of the possession,
at the port of destination, of the thinq
insured. (Sec. 130)
Note: Complete physical destruction is not
essential to constitute actual total loss.
A:
Q: What is constructive total loss?
1. Actual loss of more than :y., of the
value of the object;
2. Damage reducing value by more than
:y., of the value of the vessel and of
cargo; and
3. Expense of transshipment exceeds :y.,
of the value of the cargo. (Sec. 131)
242
Q: OC Corporation purchased rice from
Thailand, which it intended to sell locally.
Due to stormy weather, the ship was
submerged in seawater, and with it the rice
cargo. When the cargo arrived in Manila,
OC filed a claim for total loss with the
insurer, because the rice was no longer fit
for human consumption. Admittedly, the
rice could still be used as animal feed. Is
RC's claim for total loss justified? Explain.
A: Yes. The rice, which was imported from
Thailand for sale locally, is obviously intended
for consumption by the public. The complete
physical destruction of the rice is not essential
to constitute an actual total loss. Such a loss
exists in this case since the rice, having been
soaked in sea water and thereby rendered
unfit for human consumption, has become
totally useless for the purpose for which it was
imported. (1996 Bar Question)
Q: When is actual loss presumed?
A: It may be presumed from the continued
absence of a ship without being heard of. The
length of time which is sufficient to raise his
presumption depends on the circumstances of
the case. (Sec. 132)
Q: In an insurance upon cargo, what is the
liability of the insurer in case of
reshipment?
A: If the original ship be disabled, and the
master, acting with a wise discretion, as the
agent of the merchant and the ship owners,
forwards the cargo in another ship, such
necessary and justifiable change of ship will
not discharge the underwriter on the goods
from liability for any loss which may take place
on goods subsequently to such reshipment
(Sec. 133) The insurer may, however, require
additional premium if the hazard be increased
by his extension of liability.
Q: What is the additional liability of the
insurer of goods referred to in the
reshipment of cargo?
A: The marine insurer is bound for:
1. Damages;
2. Expenses of discharging;
3. Storage;
4. Shipment;
5. Extra freightage; and
6. All other expenses incurred in saving
cargo reshipped. (Sec. 134)
Note: The liability of the insurer cannot exceed
the amount of the insurance.
UST GOLDEN NOTES 2010
Q: When may the insured, by a contract of
marine insurance, abandon the thing
insured?
A:
1. If more than three-fourths thereof in
value is actually lost, or would have to
be expended to recover it from the
peril;
2. If it is injured to such an extent as to
reduce its value more than three-
fourths;
3. If the thing insured is a ship, and the
contemplated voyage cannot be
lawfully performed without incurring
either an expense to the insured of
more than three-fourths the value of
the thing abandoned or a risk which a
prudent man would not take under
the circumstances; or
4. If the thing insured is cargo or
freightage, and the voyage cannot be
performed, nor another ship procured
by the master, within a reasonable
time and with reasonable diligence to
forward the cargo, without incurring
the like expense or risk mentioned in
the preceding sub-paragraph. (Sec.
139)
Note: Freiqhtage cannot in any case be
abandoned, unless tile ship is also
abandoned.
Q: What is the three-fourth rule?
A: What is contemplated as "I. under the law
must be more than "I.. When what was lost
was exactly "I., the rule cannot be applied.
Q: An insurance company issued a marine
insurance policy covering a shipment by
sea from Mindoro to Batangas of 1,000
pieces of Mindoro garden stones against
"total loss only." The stones were loaded in
two lighters, the first with 600 pieces and
the second with 400 pieces. Because of
rough seas, damage was caused the
second lighter resulting in the loss of 325
out of the 400 pieces. The owner of the
shipment filed claims against the insurance
company on the ground of constructive
total loss inasmuch as more than % of the
value of the stones had been lost in one of
the lighters. Is the insurance company
liable under its policy? Why?
A: The insurance company is not liable under
its policy covering against "total loss only" the
shipment of 1,000 pieces of Mindoro garden
stones. There is no constructive total loss that
can be claimed since the "I. rule is to be
computed on the total 1,000 pieces of Mindoro
garden stones covered by the single policy
coverage. (1992 Bar Question)
Q: What is abandonment?
A: It is the act of the insured by which, after a
constructive total loss he declared the
relinquishment to the insurer of his interest in
the thing insured.
Q: What are the requisites for the validity of
abandonment?
A:
,
I
i
There must be an Iactual
relinquishment by the person insured
of his interest in the thing insured
(Sec. 138)
1.
2. There must bea constructive total
loss (Sec. 139)
3. The abandonment must neither be
partial nor conditional (Sec. 140)
4. It must be made within a reasonable
time after receipt of reliable
information of the loss (Sec. 141)
5. It must be factual (Sec. 142)
6. It must be made by giving notice
thereof to the insurer which may be
done orally or inwriting (Sec. 143)
7. The notice of abandonment must be
explicit and must specify the
particular cause of abandonment
(Sec. 144)
Q: What is the form of notice of
abandonment?
A: Abandonment may be done orally, or in
writing; Provided that if the notice be done
orally a written notice of such abandonment
shall be submitted within 7days from such oral
notice. (Sec. 143)
Q: What is the effect of a valid
abandonment?
A: It is equivalent to a transfer by the insured
of his interest, to the insurer, with all the
chances of recovery and indemnity. The
UNIVERSITY OF SANTO TOMAS (, ..'t'~243
Pacu(taa de !JJer ecl i oCi vi C.
INSURANCE LA \,\1: MARINE INSURANCE
insurer becomes entitled to all the rights which
the insured possessed in the thing insured.
(Sec. 146)
Q: What are the forms of acceptance of
abandonment?
A:
1.i Express;
2. II Implied from the conduct of the
insurer;
3.1 Mere silence of the insurer for
unreasonable length of time after
notice. (Sec. 150)
Q: What are the effects of acceptance of
abandonment?
A:
1. The insurer becomes at once liable
for the whole amount of the insurance
and also becomes entitled to all rights
which insured possessed in the thing
insured. (Sec. 146)
2. It fixes the rights of the parties;
whether express or implied, is
conclusive upon them, and
irrevocable. (Sec. 152)
3. It stops the insurer to rely on any
insufficiency in the form, time, or
right, of abandonment. Whether the
insured has a right to abandon is
immaterial where the abandonment is
accepted and there is nofraud.
4. On accepted abandonment of a ship,
the freightage earned subsequent to
the loss belongs to the insurer of the
ship. But freightage earned previously
belongs to the insurer of said
freightage who is subrogated to the
rights of the insured up to the time of
the loss. (Sec. 153)
XPN: Where the ground upon which it
was made proves to be unfounded. (Sec.
152) Under Sec. 145, abandonment can
be sustained only upon the ground
specified inthe notice thereof.
Q: What is the effect of the insurer's refusal
to accept avalid abandonment?
A: If the insurer declines to accept a proper
abandonment, he is liable as upon an actual
total loss less any proceeds the insured may
have received on account of the damaged
property as when the insured succeeds in
selling the property as damaged (Sec. 154). If
the abandonment was improper, the insured
244 ! team:lli.'!
may nevertheless recover to the extent of the
damage proved.
Q: What is the effect of insured's failure to
make abandonment?
A: The insured has an election to abandon or
not, and cannot be compelled to abandon
although abandonment is proper. If the insured
fails to abandon, he may nevertheless recover
his actual loss (Sec. 155).
MEASURE OF INDEMNITY
Q: When does co-insurance exist?
A: There is co-insurance if the value of the
insured's interest exceeds the amount of
insurance; he is considered the co-insurer for
an amount determined by the difference
between the insurance taken out and the value
of the property.
A marine insurer is liable upon a partial loss
only for such proportion of the amount insured
by him as the loss bears to the value of the
whole interest of the insured in the property
insured (Sec. 157).
Note: Co-insurance applies only to marine
insurance. Logically, there cannot be co-
insurance in life insurance. But co-insurance
applies in fire insurance only when expressly
stipulated by the parties.
There is co-insurance when the following
requisites concur:
1. The amount of insurance is less than
the insured's insurable interest;
2. The loss is partial.
UST GOLDEN NOTES 2010
Formula to determine the amount recoverable:
(Partial) Loss X Amount of Insurance =Amount
of recovery
Value of thing
insured
Illustration:
lf .a vessel valued at P1M is insured for only
P800, 000 and is damaged to the extent of
P400, 000, the insurer will be required to pay
only 80% of the loss suffered, or P320,000; the
other 20% or P80,000 being borne by the
insured himself.
P400,000 or 2/5 X P800,000 = P320, 000
P1M
The insured is considered a co-insurer as to
the uninsured portion of P200,000.
Note: If the loss is total, the insurer is liable for
the full amount of P800,or)0. On the other
hand, if the property is insured to its full value,
the insured is entitled to recover the full
amount of the partial loss of P400,000.
Q: In case of loss, what is the insured
entitled to recover if profits to be realized
are separately insured?
A: If profits to be realized are separately
insured from the vessel or cargo, the insured is
entitled to recover, in case of loss, such
proportion of the profits as the value of the
property lost bears to the value of the whole
property. (Sec. 158)
Q: When is the loss of profits conclusively
presumed?
A: When profits are valued and insured by a
contract of marine insurance, a loss of them is
conclusively presumed from a loss of the
property out of which they were expected to.
arise, and the valuation fixes their amount.
(Sec. 160)
Q: What are the rules for estimating loss
under an open policy of marine insurance?
A:
1. Value of the ship - Inascertaining the
value of the vessel, the value is to be
taken as of the commencement of the
risk and not its value at the time she
was built;
2. Value of cargo - The value of the
cargo is its actual cost to the insured,
when laden on board, or where that
cost cannot be ascertained, its
market value at the time and place of
lading it on board, but without
reference to any loss incurred in
raising money for its purchase, or to
any drawback on its exportation, or to
the fluctuation of the market at the
port of destination, or to expenses
incurred onthe way or on arrival;
3. Value of freightage - the gross
freightage, exclusive of primage,
without reference to the cost of
earning;
Note: Primage is a compensation
paid to the captain after a successful
voyage.
4. Cost of insurance - It is always
added in calculating the value of the
ship, cargo, or freightage or other
subject matter in an open policy.
(Sec. 161)
Q: What does the phrase "port of refuge
expenses" mean?
A: These are the additional expenses incurred
in repairing the damages suffered by a vessel
because of the perils insured against as well
as those incurred for saving the vessel from
such perils, such as the expense of launching
or raising the vessel or of towing or navigating
it into port for her safety..These are items to be
borne by the insurer in addition to atotal loss if
that afterwards takes place. (Sec. 163)
Q: What are the rights of the insured in
case of general average?
A:
GR: The insurer is liable for any general
average loss (Sec. 136) where it is payable
or has been paid by the insured in
consequence of a peril insured against.
The insured may either hold the insurer
directly liable for the whole of the insured
value of the property sacrificed for the
general benefit, subrogating himto his own
right of contribution or demand contribution
from the other interested parties as soon as
the vessel arrives at her destination (Sec.
135). .
XPN: There can be no recovery for general
average loss against the insurer:
1. After the separation of the interests
liable to contribution, that is to say,
after the cargo liable for contribution
has been removed from the vessel; or
UNIVERSITY OF SANTO TOMAS
' Facu{ taa de Der ec h o Ci vi f
INSURANCE LAW: MARINE INSURANCE
2. When the insured has neglected or
waived his right to contribution.
Note: General average is a principle
of law whereby, when it is decided by
the master of a vessel, acting for all
the interest concerned to sacrifice a
part of a venture exposed to a
common and imminent peril in order
to save the rest, the interests so
saved are compelled to contribute
ratably or proportionately to the
owner of the interest sacrificed, so
that the cost of the sacrifice shall fall
equally upon all. (Hector S. De Leon,
The Law on Insurance, 2003)
Q: What is Free From Particular Average
Clause (FPA Clause)?
A: A clause agreed upon in a policy of marine
insurance in which it is stated that the insurer
shall not be liable for a particular average. The
insurer is liable only for general average and
not for particular average unless such
particular average loss as the effect of
depriving the insured of the possession at the
port of destination of the whole of the thing
insured. (Sec. 136)
Q: What is the limit as to liability of
insurer?
I
A: Th~ liability of the insurer for any general
average loss is limited to the proportion of
contnbution attaching to his policy value where
this is!less than the contributing value of the
thing insured. (Sec. 164)
246
Acaderuics Committee
C/;airjJfD"OIl: Abraham D. (;clluill() 1T
Vi r r -Cbai r ] : A" udemi o' : .J eannie t\ . Laurcntjno
l / i a~ -C./ ; (/ i r ./ ; ) 1 " / l dmi l l i t: " Fill,lI1l1!: Ais sn (:elinc II. Luna
1~I~e-(,J,{/ir.Jf)f'l--,-!}'fJ/tIc.... 1)('.!1,~J1; 1,(lise Rae (;. Naval
Mer cantile Law Com mittco
.1 ' 1 1 / ' 1 " " I l eml .-l l " l ) ' '1', 111ll1'"gue),
/1.1'.1"1 . 1 ' 1 1 / ' 1 < < " 1I l ead' Mnnilvn RosL' S. Sotei"
Members:
L,dwin M;U'c T. Balelia
,\iI'L'L'n M. Cacho
Socrales llenjiL' I. I\"iarbil
Ron Chen-it: S. '(\.:iL'nd(J %a
i':disol1 jamcs I,', Paga!jhuan
. Maybcllinc M. Sanliago
UST GOLDEN NOTES 2010
Q: What is fire insurance?
, . FIRE INSURANCE . ;" ,_
A: It is a contract of indemnity by which the
insurer, for a consideration, agrees to
indemnify tile insured aqatnst loss of or
damage by fire, lightning, windstorm, tornado
or eerthqueke and other allied risks, when
such risks are covered by extension to fire
insurance policies or under separate policies.
(Sec. 167)
Note: The liability of an insurer is to pay for
direct loss only. The insurer may be liable to
pay for consequential losses if covered by
extension to such fire policies or insured under
separate policy
Q: What are the distinctions of ocean
marine and fire policies?
A:
I. OCEAN MARINE FIRE INSU N '
A policy of insurance
on a vessel engaged
in navigation is a
contract of marine
insurance although it
insures against fire
risks only.
Where the hazard is
fire alone and the
subject is an
unfinished vessel,
never afloat for a
voyage, the contract to
insure is a fire risk,
especially in the
absence of an express
agreement that it shall
have the incidents of
marine policy, or
where it insures
materials in a shipyard
for use in constructing
vessels.
Also where a policy
insures against fire, a
vessel while moored.
and in use as a
hos ital
Q: Why is the distinction between marine
and fire insurance important?
A:
1. In marine insurance, the rules on
constructive total loss (Sees. 131,
139) and abandonment (Sec. 138)
apply but not infire insurance;
2. In case of partial loss of a thing
insured for less than its actual value,
the insured in a marine policy is a co-
insurer of the uninsured portion (Sec.
157), while the insured may only
become a co-insurer in fire insurance
if expressly agreed upon by the
parties. (Sec. 172)
Q: When does alteration in the thing
insured entitle the insurer to rescind?
A: In order that the insurer may rescind a
contract of fire insurance for any alteration
made in the use or condition of the thing
insured, the following requisites must be
present:
1. The use or condition of the thing is
specially limited or stipulated in the
policy;
2. Such use or condition as limited by
the policy is altered;
3. The alteration is made without the
consent of the insurer;
4. The alteration is made by means
within the control of the insured; and
5. The alteration increases the risk.
Note: A contract of fire insurance is not
affected by any act of the insured subsequent
to the execution of the policy, which does not
violate its provislons even though it increases
the risk and is the cause of the loss. (Sec. 170)
Q: What is the measure of indemnity in
open and valued policies in fire insurance?
A:
" . VALUED' ,"
. OPEN POLICIES . POLICIES
The expense necessary
to replace the thing lost
or injured in the
condition it was at the
time of the injury.
The parties are
bound by the
valuation, in the
absence of fraud.
Q: What is a co-insurance clause?
A: It is that which requires the insured to
maintain insurance to an amount equal to the
value or specified percentage of the value of
the insured property under penalty of
becoming co-insurer to the extent of such
deficiency.
Note: The insured is not a co-insurer under
fire policies inthe absence of stipulation.
UNIVERSITY OF SANTO TOMAS
' Facu(tad de De r e ch o Ci vi [
~i~247
Q: What is a fall of building clause?
INSURANCE LAW: FIRE INSURANCE
A: It is that which provides, in a fire insurance
policy, that if the building or any part thereof
falls, except as a result of fire, all insurance by
the policy shall immediately cease.
Q: What is an option to rebuild clause?
A: It gives the insurer the option to rebuild the
destroyed property instead of paying the
indemnity, This clause serves to protect the
insurer against unfair appraisals friendly to the
insured. (Sec. 172)
1
2 4 8
Acadcru ics Cotnillittec
OlClilpmofl: Abraham D. Gcnuin II
1/"i((J~CI/(Jir;rJr /l l -l ./{/emil -:r :.J cannic A. I .aurcn tino
Vi ce-Cbai r I or /l dmil l i~Fi na,: Aiss~ Cclinc I r. Luria
J/iL~'-ChairjfJr 1 J!),0It / i ~ {)c.r~~I1: Loise Rae (; . Nnvnl
Mercantile Law Committce
J"hjed ffead' I 1(1), T. AIllpagucy
//',:1-;. Jllilji'd fle",l I\'ianilyn I~osc S. Solei"
Mcmbers:
! edwin Marc 'I' ! laldia
Airccn M. Cach"
Socrates Belljic I. ~hrbil
Ron Chcrric S. Mcndoxn
Edisoll.lames 1" . J >~lgalilaL1all
Maybcllinc M. Santiago
. ~ l<~.~"'" - .
. 'v'
UST GOLDEN NOTES 2010
, ' ',.' CASUALTY INSURANCe .,&
Q: What is casualty insurance?
A: Itis that which covers loss or liability arising
from accident or mishap, excluding those
falling under types of insurance as fire or
marine, (Sec, 174)
Q: What are the two divisions of casualty
insurance?
A:
1. Accident or health insurance -
insurance against specified perils
which may affect the person and/or
property of the insured,
E.g, personal accident, robbery/theft
insurance
2, Third party liability insurance -
Insurance against specified perils
which may give rise to liability onthe
part of the insured of claims for
injuries or damage to property of
others.
Q: What is "third party liability insurance"?
A:
1, Insurable interest is based on the
interest of the insured inthe safety of
the persons, and their property, who
may maintain anactionagainst himin
case of their injury or destruction
respectively,
2, In a third party liability (TPL)
insurance contract, the insurer
assumes the obligation by paying the
injured third' party to whom the
insured is liable, Prior payment bythe
insured to the third person is not.
necessary in order that the obligation
may arise, The moment the insured
becomes liable to third persons, the
insured acquires an interest in the
insurance contract which may be
garnished like any other credit
3, In burglary, robbery and theft
insurance, the opportunity to defraud
the insurer (moral hazard) is so great
that insurer have found it necessary
to fill up the policies with many
restrictions designed to reduce the
hazard. Persons frequently excluded
are those inthe insured's service and
employment The purpose of the
exception is to guard against liability
should theft be committed by one
having unrestricted access to the
property,
4, Right of third party injured to sue the
insurer of party at fault depends on
whether the contract of insurance is
intended to benefit third persons also
or onlythe insured
Q: When does the injured person have the
right to sue insurer of the party at fault?
A:
1 , Indemnity against third party liability -
injured third party candlrectly sue the
insurer,
Purpose: To protect injured person
against the insolvency of the insured
who causes such injury.
2, Indemnity against actual loss or
payment - third party has nocause of
action against 'the insurer. The third
person's recourse is limited to the
insured alone. The contract is solely
for the insurer to reimburse the
insured for liability actually satisfied
by him,
Note: The insurer is not solidarily liable with
the insured, The insurer's liability is based on
contract; that of the insured is based o~torts,
Furthermore, the insurer's liability is limited by
the amount of the insurance coverage, I
i
Q: Luis was the holder of an accident
insurance policy effective Nov, 1, 1988 to
Oct 31, 1989. At a boxing contest held on
J an. 1, 1989 and sponsored by his
employer, he slipped and was hit by his
opponent. He fell and his head hit one of
the posts of the boxing ring. He was
rendered unconscious and was dead on
arrival at the hospital due to "intra-cranial
hemorrhage." Can his father who is a
beneficiary under said insurance policy
successfully claim indemnity from the
insurance company? Explain.
A: Yes. Clearly, the proximate cause of death
was the boxing contest Death sustained in a
boxing contest is an accident (De la Cruz v.
Capital Insurance & Surety Co., G.R. No. L-
21 574, June 30, 1966) (1990Bar Question)
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de (j ) er ecl i o Ci vi t
'i~249
INSURANCE LAW: CASUALTY INSURANCE
Q: Sun-Moon Insurance issued a Personal
Accident Policy to Henry Dy with a face
value of P500,OOO. A provision in the policy
states that "the company shall not be liable
in respect of "bodily injury' consequent
upon the insured person attempting to
commit suicide or willfully exposing
himself to needless peril except in an
attempt to save human life." Six months
later Henry Dy died of a bullet wound in his
head. Investigation showed that one
evening Henry was in a happy mood
although he was not drunk.
He was playing with his handgun from
which he had previously removed its
magazine. He pointed the gun at his sister
who got scared. He assured her it was not
loaded. He then pointed the gun at his
temple and pulled the trigger. The gun fired
and Henry slumped on the floor.
Henry's wife Beverly, as the designated
beneficiary, sought to collect under the
policy. Sun-Moon Insurance rejected her
claim onthe ground that the death of Henry
was not accidental. Beverly sued the
insurer. Decide and Discuss fully ..
A: Beverly can recover the proceeds of the
policy from the insurer. The death of the
insured was not due to suicide or willful
exposure to needless peril which are excepted
"risks. The insured's act was purely an act of
negligencewhich is covered by the policy and
for which the insured got the insurance for his
protection. In fact, he removed the magazine
fromthe gun and when he pointed the gun to
his temple he did so because he thought that it
was safe for himto do so. He did soto assure
his sister that the gun was harmless. There is
none in the policy that would relieve the
insurer of liability for the death of the insured
since the death was an accident. (1995 Bar
Question)
Q: What is liability insurance?
A: It 'has been said to be a contract of
indemhity for the benefit of the insured and
those in privity with him, or those to whomthe
law uponthe grounds of public policy extends
the indemnityagainst liabllity.
250
Q: While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the
latter, Roberto sued Cesar and the third
party liability insurer for damages and/or
insurance proceeds. The insurance
company moved to dismiss the complaint,
contending that the liability of Cesar has
not yet been determined with finality.
1. Is the contention of the insurer
correct? Explain.
2. May the insurer be held liable with
Cesar?
A: No, the contention of the insurer is not
correct. There is no need to wait for the
decision of the court determining Cesar's
liability with finality before the third party
.liability insurer could be sued. The occurrence
of the injury to Roberto immediately gave rise
to the liability of the insurer under its policy. In
other words, where an insurance policy
insures directly against liability, the insurer's
liability accrues immediately upon the
occurrence of the injury or event upon which
the liability depends. The insurer cannot be
held solidarily liable with Cesar. The liability of
the insurer is. based on contract while that of
Cesar is based on tort. If the insurer was
solldarily liablewith Cesar, it could be made to
pay more thanthe amount stated inthe policy.
This would, however, be contrary to the
principles underlying insurance contracts. On
the other hand, if the insurer was solidarily
liable with Cesar and it is made to pay only up
to the amount stated in the insurance policy,
the principles underlying solidary obligations
would be violated. (1996 Bar Question)
UST GOLDEN NOTES 2010
Q: What's the difference between the
liability of the insurer and that of the
insured in case for indemnity against third
person liability?
A:
: ,'INSURe;R ,.' INSURED ,.;.~ ~
The liability is direct
but the insurer
cannot be held
solidarily liable with
the insured and other
parties at fault.
Liability is direct and
can be held liable with
all the parties at fault.
Liability is based on
contract
Liability is based on
tort.
The third-party
liability is only up to
the extent of the
insurance policy and
that required by law
The liability extends to
the amount of actual
and other damages.
(Heirs of George Y.
Poe v. Malayan
Insurance Company,
Inc. G.R. No. 156302,
Apr. 7, 2009)
Q: What is a "no action" clause?
A: It is a requirement in a policy of liability
insurance which provides that suit and final
judgment be first obtained against the insured,
that only thereafter can the person injured
recover on the policy. (Guingon v. Del Monte,
G.R. No. L-21806, Aug. 17, 1967)
Note: A "no action" clause must yield to the
provisions of the Rules of Court regarding
multiplicity of suits. (Shatter v. RTC, G.R. No.
78848, Nov. 14, 1988)
Academics Committee
Chai tper .mJt: Abraham D. Cenuillo 11
r ' i r e-(/ wi r Jor AalclclJlil:f.' J t:tlnnic i \ . Laurcruino
[/iL"C-C}wirlor " ; 1 d" ,," fi'" I ' l l l una: : l\iSS;l Ccline r L Luna
r fi(c-Cf1oirfot" L.1!JI(JJI/ C;-'f)C.I~~II: I .oisc Rae (;. Naval
Mercantile Law Comm ittee
S" b/ cd r l c" d' ITnil' T. i\ mpaguc)'
/lJ .fi. SIII')cd H ead' J v[anilyn RflSC S. Sotelo
Members:
Edwin Marc T. Baldia
,\ireen iVI.Cacho
Socrates Benjie 1. I\farbil
Ron Cherne S. Mendoza
Edis()l1 J ames 1", P<1galilauan
Maybelline )\,1.San tiagfl
UNIVERSITY OF SANTO TOMAS ( ..~u,
Pacu{ taa de D' er ech o Ci vi l 'V' 251
INSURANCE LAW: SURETY SHIP
SURETYSHIP
Q: w~at is suretyship?
A: It I is an agreement whereby the. surety
guarantees the performance by another of an
undertaking or an obligation in favor of a third
party. (Sec. 175)
Q: What are the distinctions between
suretyship and property insurance?
A: .
SURETYSHIP
PROPERTY
INSURANCE
It is an accessory The principal
contract.
contract itself.
There are three parties:
There are only two
the surety, parties: insurer and
obligor/debtor, and the
insured
oblioee/creditor.
More of a credit A contract of
accommodation with indemnity
the surety assuming
primary liability
Surety is entitled to
No right of recovery
reimbursement from the for the loss the
principal and his insurer may sustain
guarantors for the loss it
except when the
may suffer under the insurer is entitled to
contract.
subrogation.
A bond may be May be cancelled
cancelled by or with the
unilaterally either by
consent of the obligee the insured or by
or by the commissioner the insurer on
or by the court. grounds provided
by law.
Requires acceptance of Does not need
the obligee before it acceptance of any
becomes valid and third party.
enforceable.
A risk-shifting device, A risk-distributing
the premium paid being
device, the
in the nature of a premium paid being
service fee.
considered
a
ratable contribution
to a common fund.
Q: What is the nature of liability of surety?
A:
1. Solidary with the bond obligor;
1
2 1 Limited to the amount in the bond (it
! cannot be extended by implication);
3'1 It is determined strictly by the terms
of the contract of suretyship in
relation to the principal contract
between the obligor and the obligee.
Q: What are the rules in the payment of
premiums in suretyship?
A:
1. The premium becomes a debt as
soon as the contract of suretyship or
bond is perfected and delivered to the
obligor (Sec. 77);
2. The contract of suretyship or bonding
shall not be valid and binding unless
and until the premium therefore has
been paid;
3. Where the obligee has accepted the
bond, it shall be valid and enforceable
notwithstanding that the premium has
not been paid; (Philippine Pryce
Assurance Corp. v. CA, GR. No.
107062, Feb. 21,1994);
4. If the contract of suretyship or bond is
not accepted by, or filed with the
obligee, the surety shall collect only a
reasonable amount;
5. If the non-acceptance of the bond be
due to the fault or negligence of the
surety, no service fee, stamps, or
taxes imposed shall' be collected by
the surety; and
6. In the case of continuing bond (for a
term longer than one year or with no
fixed expiration date), the obligor
shall pay the subsequent annual
premium as it falls due until the
contract is cancelled. (Sec. 177)
UST GOLDEN NOTES 2010
Q: What are the types of surety bonds?
A:
1. Contract bonds These are
connected with . construction and
supply contracts. They are for the
protection of the owner against a
possible default by the contractor or
his possible failure to pay
materialmen, laborers and sub-
contractors.
The position of surety, therefore, is to
answer for a failure of the principal to
perform in accordance with the terms
and specifications of the contract.
There may be two bonds:
a. Performance bond One
covering the faithful performance
of the contract; and
b. Payment bond - One covering
the payment of laborers and
material men.
2. Fidelity bonds - They pay an
employer for loss growing out of a
dishonest act of his employee.
For the purposes of underwriting,
they are classified as:
a. Industrial bond One
required by private
employers to cover loss
through dishonesty of
employees; and
b. Public official bond - One
required of publicofficers for
the faithfui performances of
their duties and as a
condition of entertaining
upon the duties of their
offices.
3. judicial bonds - They are those
which are required in connection with
judicial proceedings.
Academics Comrnittee
Chai l pCf )f JJZ: Abraham D. GCl1uino T1
l /i a-Cbui r.FJI- ..L /ctidemiG: Jeannie : \. Laurcn tinu
' -' i a-Chui r.Jf J1 .Admi n ~.... 1 ~'lIa'h-e:Aissa Celin e J-1. Luna
r / i ce-Chai r I or !-" .' Yf Jl Il e,:.....De.l i gl 1: Loise Rae G. Naval
Mer cantile Law Com mitte e
J"b;i-d H ead- If oil' T. rl mpague)'
A.t' i l . f"b;i-d l -l cad. IIhnilyn Rose S. Sorci"
Members:
l,d\Vin J \.hrc r.Baldia
Airccn M. Cacho
Socrates Bcnjic I. Marbil
Ron Cherrie S. Mendoza
l~:J i:'iUnJames F. Pag,1iilallan
Maybelline 111.Santiag()
U N I V E R 5 I T Y aF 5 ANT 0 TOM A 5 c't' I
Pacu{taa de (])erecfio Ci'fJif9' 253
INSURANCE LAW: LIFE INSURANCE
~, , .' LIFE INSURANCE '.
Q: What is life insurance?
A: It is that which is payable on the death of a
person or on his surviving a specified period,
or otherwise contingently on the continuance
of cessation of life (Sec. 180), It is a mutual
agreement by which a party agrees to pay a
given sum on the happening of a particular
event contingent on the duration of human life,
in consideration of the payment of a smaller
sum immediately, or in periodical payments by
the other party.
A:
Q: What are the distinctions between life insurance and fire/marine insurance?
UOl::tl~~l! '~[
~~=lH'l'.:.mm=lI~t-"1'l"f':"~LIj
It is a contract of investment not contract of
It is a contract of indemnity.
indemnity.
Always regarded as valuedpolicy.
May be open or valued.
May be transferred or assigned to any person
The transferee or assignee must have all
even if he has no insurable interest.
insurable interest in the thing insured,
The consent of the insurer is not essential to the
Consent, inthe absence of waiver by the insurer,
validity of the assignment of a life policy unless
I
expresslL required.
is essential inthe assignment of the policy.
I
Insurable interest inthe life or health of the
Insurable interest inthe property insured must
person insured need not exist after the insurance
exist not only when the insurance takes effect but
I takes effect or when loss occurs.
also when the loss occurs.
Insurable interest need not have any legal basis.
Insurable interest must have a legal basis.
Contingency that is contemplated is a certain
The contingency insured against mayor may not
event, the only uncertainty being the time when it
will take place.
occur.
The liability of the insurer to make payment is
Liability is uncertain because the happening of
certain, the only uncertain element being when
such payment must be made.
the peril insured against is uncertain.
May be terminated by the insured but cannot be
May be cancelled by either party and is usually
cancelled by the insurer and is usually a long
for a term of one year
term contract.
The "loss" to the beneficiary caused by the death
The reverse is generally true of the loss of
of the insured can seldom be measured
property, i.e., it is capable of pecuniary
accurately interms of cash value.
estimation.
The beneficiary is under no obligation to prove
The insured is required to submit proof of his
actual financial loss as a result of the death of
actual pecuniary loss as a condition precedent to
the insured inorder to collect the insurance.
collecting the insurance.
Q: What are the kinds of life insurance
policies?
A:
1. Ordinary life, general life or old line
policy - Insured pays a premium
every year until he dies. Surrender
value after 3 years.
2. Limited payment - 'Insured pays
premium for a limited period. It is
payable only at the death of the
insured,
3, Endowment Insured pays a
premium for a specified period. If he
outlives the period, the face value of
the policy is paid to him; if not, his
beneficiaries receive benefit.
4. Term insurance - Insured pays once
only, and he is insured for a specified
period. If he dies within the period, his
beneficiaries benefit. If he outlives the
period, no person benefits from the
insurance. Also known as temporary
insurance.
5. Industrial life - Life insurance entitling
the insured to pay premiums weekly,
or where premiums are payable
monthly or oftener;
6. Variable contract - Any policy or
contract on either a group or
individual basis issued by an
UST GOLDEN NOTES 2010
insurance company providing for
benefits or other contractual
payments or values thereunder to
vary so as to reflect investment
results of any segregated portfolio of
investment.
Q: What is the effect if the beneficiary will
fully bring about the death of the insured?
A:
GR: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice;
accessory in willfully bringing about the
death of the insured, in which event, the
nearest relative of the insured shall receive
the proceeds of said insurance, if not
otherwise disqualified. (Sec. 12)
XPN:
1. The beneficiary acted in self-defense;
2. The insured's death was not
intentionally caused (e.g., - thru
accident);
3. Insanity of the beneficiary at the time
he killed the insured.
Q: When is the insurer liable in case of
suicide?
A:
1. The suicide is committed after the
policy has been in force for a period
of 2 years from the date of its issue or
of its last reinstatement.
2. The suicide is committed after a
shorter period provided in the policy
although within the 2 year period
3. The suicide is committed in the state
of insanity regardless of the date of
commission, unless suicide is an
excepted risk. (Sec. 180-A)
Note: The policy cannot provide a period
longer than 2 years If the policy provides for a
lohqer period and the suicide is committed
within said period but after 2 years, the insurer
is liable.
The insurer is not liable if it can show that the
policy was obtained with the intention to
commit suicide even in the absence of any
suicide exclusion inthe policy
Q: What is the measure of indemnity under
a policy of insurance upon life or health?
A: Unless the interest of a person insured is
susceptible of exact pecuniary measurement,
the measure of indemriity under a policy of
insurance upon life or health is the sum fixed
inthe policy. (Sec. 183)
Academics' Commrttee
C} ,ai l per .mn: Abraham D. Genuine I1
Vi ce-Chai r fiJl-//allklJlitJ: J cannie r \ . Laurcnrino
I / i a: -(} Jai ,./ nr /1dmil1 i ~ FillllIlL-e: r\issa C91inc H. Luna
r ' i ,r -Cbl l i r / l l r 1 _1 ' ) ' 1 1 1 1 1 e: > -nc.r (~ I / : j,oisc rac C;. Naval
Mercantile Law Committee
.rllb/cd / -I ,utl . IT 01)' 'f. ;\Il1paguey
A.lJ I. SlIb/cd 1 -1 Ct1 d- Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Aireen T\1. Cacho
Socrates Bcnjie 1. Marbil
Ron Cherric: S. Mendoza
Edison .I ames 1'. Pagalilauan
Maybcllinc M. Santiag"
UNIVERSITY OF SANTO TOMAS t~ .?r -r -
' Facu(taa de Der ecl u: Ci vi C' .. . .J .J
INSURANCE LA W: COMPULSORY MOTOR VEHICLE INSURANCE
COMPULSORY MOTOR VEHICLE
:.' LlABILlT--Y INSURANCE > -
Q: What is a no fault indemnity clause?
Q: What is motor vehicle liability
insurance?
A: It is a protection coverage that will answer
for legal liability for losses and damages for
bodily injuries or property damage that may be
sustained by another arising from the use and
operation of a motor vehicle by its owner.
Q: What is the purpose of motor vehicle
liability insurance?
A: To give immediate financial assistance to
victims of motor vehicle accidents and/or their
dependents, especially if they are poor
regardless of financial capability of motor
vehicle owners of operators responsible for the
accident sustained. (First Integrated Bonding
Insurance Co., Inc. v. Hernando, GR. No. L-
51221, July 31, 1991)
Q: Who is a passenger?
A: Any fare paying person being transported
and conveyed in and by a' motor vehicle for
transportation of passengers for
compensation, including persons expressly
authorized by law or by the vehicle's operator
or his agents to ride without fare. (Sec. 373 (b})
Q: Who is athird-party?
A: Any person other than a passenger as
defined! inthis section and shall also exclude a
member of the household, or a member of the
family I within the second degree of
consangUinity or affinity, of a motor vehicle
owner [or land transportation operator, as
likewise defined herein, or his employee in
respect of death, bodily injury, or damage to
property arising out of and in the course of
employment. (Sec. 373, (c])
Q: What is the meaning of a "motor vehicle
owner"?
A: It means the actual legal owner of a motor
vehicle, whose name such vehicle is duly
registered with the Land Transportation Office.
(Sec. 373, (dJ)
Q: What is the meaning of "land
transportation operator"? (
A: It means the owner or owners of motor
vehicles for transportation of a passenger for
compensation, including school buses. (Sec.
373, (eJ)
256
A: It is a clause where the insurer is required
to pay a third party injured or killed in an
accident without the necessity of proving fault
or negligence on the part of the insured. There
is a stipulated maximum amount to be
recovered, (1994 Bar Question)
Q: What are the rules under the "no fault
clause?"
A:
1. The total indemnity in respect of any
one person shall not exceed P15,000
for all motor vehicles (Insurance
Memorandum Circular No. 4-2006)
(Sec. 378)
2. Proof of loss:
a. Police report of accident;
b. Death certificate and evidence
sufficient to establish proper
payee;
c. Medical report and evidence of
medical or hospital
disbursement. (Sec. 378 [iiJ)
3. Claim may be made against one
motor vehicle only;
4. In case of an occupant of a vehicle,
the claim shall lie against the insurer
of the vehicle in which the occupant is
riding, mounting or dismounting from;
5. In any other case, claim shall lie
against the insurer of the directly
offending vehicle;
6. In all cases, the right of the party
paying the claim to recover against
the owner of the vehicle responsible
for the accident shall be maintained.
Note: The claimant is not free to choose from
which insurer he will claim the "no fault
indemnity," as the law, by using the word
"shall", makes it mandatory that the claim be
made against the insurer of the vehicle in
which the occupant is riding, mounting or
dismounting from. That said vehicle might not
be the one that caused the accident is of no
moment since the law itself provides that the
party paying may recover against the owner of
the vehicle responsible for the accident. (Perla
Campania de Seguros, Inc. v. Ancheta, GR.
No. L-49599, Aug. 8, 1988)
This no-fault claim does not apply to property
damage. If the total indemnity claim exceeds
P15, 000 and there is controversy in respect
thereto, the finding of fault may be availed of
UST GOLDEN NOTES 2010
by the insurer only as to the excess. The first
P15,OOO shall be paid without regard to the
fault.
Q: X was riding a suburban utility vehicle
(SUV) covered by a comprehensive motor
vehicle liability insurance (CMVLI)
underwritten by Fast Pay Insurance
Company when it collided with aspeeding
bus owned by RMTravel, Inc. The collision
resulted in serious injuries to X, Y,
passengers of the bus; and Z, a pedestrian
waiting for a ride at the scene of the
collision. The police report established that
the bus was the offending vehicle. The bus
had a CMVLI policy issued by Dragon
Insurance Corporation. X, Y and Z jointly
sued RM Travel and Dragon Insurance for
indemnity under the Insurance Code of the
Philippines (P.O. 1460). The lower court
applied the "no-fault" indemnity policy of
the statute, dismissed the suit against RM
Travel, and ordered Dragon Insurance to
pay indemnity to ali three plaintiffs. Doyou
agree with the court's judgment? Explain.
A: No. The cause of actionof Y is based on
the contract of carriage, while that of X and Z
is based on torts. The court should not have
dismissed the suit against RM Travel. The
court should have ordered Dragon Insurance
to pay each of X, Y and Ztothe extentof the
insurance coverage, but whatever amount is
agreed uponinthe policy should be answered
first by RM Travel and the succeedingamount
should be paid by DragonInsuranceuptothe
amountof the insurancecoverage. Theexcess
of the claims of X, Y and Z, over and above
such insurance coverage, if any, should be
answered or paid by RM Travel. (2000 Bar
Question)
Q: What is the authorized driver clause?
A: It indemnifies the insured owner against
loss or damage to the car butlimits the use of
the insuredvehicleto:
1. The insuredhimself; or
2. Any person who drives on his order
or with his permlssion. (Villacorta v.
Insurance Commissioner, G.R. No.
54171, Oct. 28, 1980)
Q: What is the main purpose of an
authorized driver clause?
A: Its main purpose is to require a person
other thanthe insured, who drives the car on
the insured's order, such as, his regulardriver,
or with his permlsslon, such as a friend or
member of the family or the employees of a
car service or repair shopto be duly licensed
drivers and have no disqualificationto drive a
motor vehicle. (Villacorta v. Insurance
Commission, G.R. No. L-54171, Oct. 28, 1980)
Q: Rick de la Cruz insured his passenger
jeepney with Asiatic Insurers, lnc, The
policy provided that the authorized driver
of the vehicle should have a valid and
existing driver's license. The passenger
jeepney of Rick de la Cruz which wa~at the
time driver) by J ay Cruz, figured in an
accident resulting in the death of a
passenger. At the time of the accident, J ay
Cruz was licensed to drive but it was
confiscated by an LTO agent who issued
him a Traffic Violation Report (TVR) just
minutes before the accident. Could Asiatic
Insurers, lnc., be made liable under its
policy? Why?
A: Asiatic Insurers, Inc., shouldbe made liable
under the policy. The fact that the driver was
merely holding a TVR does not violate the
condition that the driver should have a valid
and existinq driver's license. Besides, such a
conditionshould be disregarded becausewhat
is involvedis apassenger jeepney, andwhatis
involvedhere is not owndamageinsurancebut
third party liability where the injured party is a
third party not privy to the contract of
insurance. (2003Bar Question)
Q: HL insured his brand new car with Pins
Co for comprehensive coverage wherein
the insurance company undertook to
indemnify him against loss or damage to
the car a) by accidental collision b) by fire,
external explosion, burglary, or theft, and c)
malicious act. After a month, the car was
carnapped while parked in the parking
space in front of the Intercontinental Hotel
in Makati. HL's wife who was driving said
car before it was carnapped reported
immediately the incident to various
government agencies in compliance with
the insurance requirements. Because the
car could not be recovered, HL fileda claim
for the loss of the car with the insurance
company but it was denied on the ground
that his wife who was driving the car when
it was carnapped was in the possession of
an expired driver's license, a violation of
the "authorized driver" clause of the
insurance company.
May the insurance company be held liable
to indemnify HL for the loss of the insured
vehicle? Explain.
A: Yes. The car was lost due to theft. What
applies in this case is the "theft" clause, and
not the "authorized driver" clause. It is
immaterial that HL's wife was driving
l
the car
. . I
UNIVERSITY OF SANTO TOMAS ~~ttl~257
Fa cu.I t a d' d e ([ ) er ecl i o Ci vi i '9'
INSURANCE LAW: COMPULSORY MOTOR VEHICLE INSURANCE
with an expired driver's license at the time it
was carnapped. (1993 Bar Question)
Q: Supposing that the car was brought by
HL on installment basis and there were
installments due and payable before the
loss of the car as well as installments not
yet payable. Because of the loss of the car,
the vendor demanded from HL the unpaid
balance of the promissory note. HL
resisted the demahd and claimed that he
Wasonly liable for the installments due and
payable before the loss of the car but no
longer liable for other installments not yet
due at the time of the loss of the car.
Decide.
A: The promissory note is not affected by
whatever befalls the subject matter of the
accessory contract. The unpaid balance onthe
promissory note should be paid and not only
the inStallments due and payable before the
loss of the car.
Q: What is the theft clause?
A: It is that which includes theft as among the
risksinsuredagainst. Where a car is unlawfully
and wrongfully taken without the knowledge
and consent of the owner, such taking
constitutes "theft" and it is the theft clause, not
the authorized driver clause which should
apply. (Palermo v. Pyramid lnc., G.R. No. L-
36480, May 31, 1988)
Q: What is acooperation clause?
A: It is that which provides that the insured
shall give all such information and assistance
as the insurer may require, usually including
attendance attrials or hearings.
Q: Who are the persons subject to the
compulsory motor vehicle liability
insurance requirement?
A:
1. Motor vehicle owner (tV1VO)or one
who is the actual legal owner of a
motor. vehicle in whose name such
vehicle is registered with the LTO; or
2. Land transportation operator (LTO) or
one who is the owner of a motor
vehicle or vehicles being used for
conveying passengers for
compensation including school
buses.
258
Q: What are the
compulsory motor
insurance policy?
substitutes
vehicle
for a
liability
A: MVOs or LTOs, instead of a CMLVI policy,
mayeither:
1. Post a surety bond with the
Insurance Commissioner who shall
be made the obligee or creditor in
the bond in such amount or
amounts required as limits of
indemnity to answer for the same
losses sought to be covered by a
CMLVI policy; or
2. Make a cash deposit with the
Insurance Commission in such
amount or amounts required as
limits of indemnity for the same
purpose.
Academics Commit tee
Cf,(}irpenrw: Abraham D. Gcnuino II
[./i!1.'*()ltJirfor Avdcm; ,: e J eannie A. J .aurcntino
I / j ((!-C.hati ) ; u' /ld;lIiu i : --, ,F' i ndl 1 cc.: Aissa Coline , I. J .una
l/l~'(!-C.hair.l;J/' LqyrJUI e:'~/)e.rigfl; J .oise Rae G. Naval
Mercantile Law Committee
Jub} ed UC(} r / .- 11(1), T. /\mpaguey
A.fyl. ~rflbjed '-/flU!- l'vlanilyn Rose S. Sotelo
Members:
I ':J ",in Marc T. Baldi"
Airccn M. Cacho
Socrates llcnjic l. Marbil
Ron Chcrric S. Mendoza
Edison .lames I", Pagalilauan
Ma),bcllillc M. Salltiago
.. '~.l"".~.---- .
UST GOLDEN NOTES 2010
TRANSPORTATION LAWS
Q: What are the governing laws?
A:
1 . Coastwise shipping
a. New Civil Code - primary law
b. Code of Commerce - suppletory
law
2. Carriage from foreign ports to
Philippine ports
a. New Civil Code - primary law
b. Code of Commerce - all matters
which are not regulated by the
NCC
c. Carriage of Goods by Sea Act -
suppletory to the Civil Code
3. Carriage from Philippine ports to
foreign ports - the laws of the country
to which the goods are to be
delivered
4. Overland transportation
a. New Civil Code - primary law
b. Code of Commerce - suppletory
law
5. Air transportation
a. New Civil Code - primary law
b. Code of Commerce - suppletory
law
c. Warsaw Convention
convention for the unification of
the rules on Intemational
Carriage by Air which was signed
inWarsaw on Oct. 12, 1929.
Q: What is a contract of transportation?
A: It is a contract whereby a certain person or
association of persons obligate themselves to
transport persons, things, news from one place
to another for afixed price. .
Q: Who are the parties to a contract of
transportation?
A:
1. Carrier - Engaged in the business of
carrying or transporting passengers
or goods or both, by land, water or
air, for compensation, offering their
services to the public (Art. 1732,
NCC);
2. Shipper or consignor - A person,
partnership or corporation who
delivers the goods to the carrier for
transportation and pays the
consideration or on whose behalf
payment is made;
3. Consignee - The party to whom the
carrier is to deliver the things being
transported; the one to whom the
carrier may lawfully make delivery in
accordance with its contract of
carriage;
Note: The shipper and the consignee
may be one person.
4. Passenger - A person who has
entered into a contract of carriage,
express or'implied, with the carrier
and is entitled to extraordinary
diligence from it.
Q: What is freight?
A: It is the price or compensation paid for the
transportation of goods by a carrier, at sea,
from port to port. This term also pertains to
the hire paid for the carriage of goods on land
from place to place, or on inland streams or
lakes.
However, this term may be used in either of
these two (2) senses:
1. To designate the price for the
carriage, also called freightage; or
2. To designate the goods carried.
Q: What is the test to establish shipper-
carrier relationship?
A: When the control and possession of goods
passes tothe carrier and nothing remains to
be done by the shipper, then it can be said
with certainty that the relation of shipper and
carrier has been established (Campania
Maritima v. Insurance Co. of North America,
G.R. No. L-18965, Oct. 30, 1964).
Q: Is the ticket issued to a passenger by
the carrier a complete contract?
A: Yes, the ticket has all the elements of a
complete contract, namely:
1. The consent of the contracting
parties;
2. Cause or consideration - The fare
paid by the passenger as stated in
the ticket; and
3. Object - The transportation of the
passenger from the place of
departure to the place of destination
which are stated in the ticket.
(Guerrero v. Madrigal Shipping Co.,
G.R. No. L-12951, Nov. 17, 1959)
UNIVERSITY OF SANTO TOMAS
Pacu{ tad de (j ) er ecl i o Ci-ui]
~.~, 259
TRANSPORTATION LA\X/S
Note: Issuance of aticket is not indispensable
in dealing with the contract of carriage of
passengers.
Q: What are the 2 aspects of aticket?
A:
1. A contract to carry (at some future
time), which contract is consensual
and is necessarily perfected by mere
consent; and
2. A contract 'of carriage' or 'of common
carriage' itself which should be
considered as a real contract for not
until the carrier is actually used can
the carrier be said to have already
assumed the obligation of a carrier.
(British Airways, Inc. v. CA, G.R. No.
92288,Feb.9,1993)
Q: City Railways, Inc. (CRI) provides train
service, for a fee, to commuters from
Manila to Calamba, Laguna. Commuters are
required to purchase tickets and then
proceed to designated loading and
unloading facilities to board the train.
Ricardo Santos purchased a ticket for
Calamba and entered the station. While
waiting, he had an altercation with the
security guard of CRI leading to a fistfight.
Ricardo Santos fell on the railway just as a
train was entering the station. Ricardo
Santos Wasrun over by the train. He died.
In the action for damages filed by the heirs
of Ricardo Santos, CRI interposed lack of
cause of action, contending that the
mishap occurred before Ricardo Santos
boarded the train and that it was not gUilty
of negligence. Decide.
A: CRI's contention that there is lack of cause
of actionis incorrect.
I
A contract of transportation already exists
betweenthe carrier and the passenger at that
time since a ticket was issued. This is
evidenced by the fact that a ticket was issued
to himand he presented himself at the proper
place and in a proper manner for
transportation. Also, the duty of a common
carrier to provide safety to its passengers so
obligates it not only during the course of the
trip but for so long as the passengers are
within its premises and where they ought to be
inpursuance tothe contract of carriage.
Assuming that the employer of the security
guard is CRI, the latter now becomes liable for
the death of the passenger through the
negligence or willful acts of its employee,
although he may have acted beyond the scope
260
of his authority or in violation of the orders of
the common carrier. This liability does not
cease upon proof that they exercised all the
diligence of a good father of a family in the
selection and supervision of their employees.
(LRTA v. Navidad, G.R. No. 145804, Feb. 6,
2003) (2008 Bar Question)
Acadcm ics Commirrec
C.h(} i r peJ: r r Jl l : Abraham D. (;clluin() 11
I., i (e~ Cj ,tJi r j () ,. .///."(Jdcmit:r: J canni.. A. Lauren tino
Via!*Cf,a;rji;r/ldmi" e.~FillfJl1a: Aissa Cclinc II. Luna
I/;<r-C,bmi-.fi!r 1 J1 ) ' 01 l 1 C.,., f)e.r!~Il: Loise Rru- (;. Naval
Mercantile LawCommittee
J ,,;';i'd / 1 " 1 ' " I [oil' T ,11111'''gllc),
./[.r.r/ . .fllli;ed l l cad: Manil),n Rosc S. SOlclo
Members:
I':d",in Marc T. Baldi"
Airccn [Vi. Cael",
Soccatcs Benjic I. Macbil
Ron Chcrric S. rVIcnJ o%'il
Edison .lames F. Pagalilawl! 1
Maybe/line [Vi. Santiago
UST GOLDEN NOTES 2010
THE NEW CIVIL CODE
'(ARTS. 1732 1766)
Q: What are common carriers?
A: Common carriers are . persons,
corporations, firms or associations engaged in
the business of carrying or transporting
passengers or goods or both, by land, water,
'or air, for compensation, offering their services
tothe public (Art. 1732).
Q: What are the elements of a common
carrier:
A: PeBuLaCoPu
1. Must be a Person, corporation, firm or
association;
2. Must be engaged in the Business of
carrying or transporting passengers
or goods or both;
3. The carriage or transport must either
be by Land, water or air;
4. The service is for Compensation; and
5. The service is offered to the Public.
Q: What are the tests for determining
, hether a party is a common carrier?
A:
1. He must undertake to carry for ali
people indifferently;
2. He must also be engaged in the
business of carrying goods for others
as a public employment, and must
hold himself out as ready to engage
in the transportation of goods or
person generally as a business and
not as a casual occupation;
3. He must undertake to carry goods of
the kind to which his business is
confined;
4. He must undertake to carry by the
method by which his business is
conducted and over his established
roads; and
5. The transportation must be for hire
(First Philippine Industrial Corporation
v. CA, G.R. No. 12594B, Oec. 29,
199B)
Note: The contract of carriage is basically a
contract of lease of services.
A customs broker may be regarded as a
common carrier. Article 1732 does not
distinguish between one whose principal
business activity is the carrying of goods and
one who does such c~rrying only as an
ancillary activity. (Schmitz Transport V.
Transport Venture Inc" G.R. No. 150255, Apr.
22,2005)
Q: What factors justify refusal to accept
contract by a common carrier?
A:
1. Suitability of the vessels of the
company for the transportation of
such products;
2, Reasonable possibility of danger or
disaster, resulting from their
transportation in the form and under
the conditions in which they are
offered for carriage;
3. The general nature of the business
done by the carrier; or
4. All the attendant circumstances which
might affect the question of the
reasonable necessity for the refusal
by the carrier to undertake the
transportation of a class of
merchandise. (Pal V. CA, G.R. No.
119706, Mar. 14, 1996)
UNIVERSITY OF SANTO TOMAS ~~.,:,"'~
Pacu[ tad de CDer ecf i o Ci ' Vi !' 261
,TRANSPORTATION LAWS: NEW CIVIL CODE: COI\1MON CARRIERS
Q: Di~tih9UiSh
private carrier.
A: I
a common carrier from a
I
COMMON
PRIVATE CARRIER
CARRIER
Holds itself out to
,Agrees in some special
all persons who
case with some private
choose to employ
individual to carry for
him, as ready to hire.
carry for hire.
Requires
Only ordinary diligence
extraordinary
diliqence.
Bound to carry all
Not bound to carry for
who offer such any reason, unless it
goods as it is enters into a special
accustomed to
agreement to do so.
carry and tender
reasonable
compensation for
carrying them.
Except
as Parties may limit the
provided by law, carrier's
liability,
parties
cannot provided that the
agree on limiting
limitation is not contrary
the carrier's
to law, public morals or
liability
good customs
It is a public
Does not hold itself out
service and is as engaged in the
therefore subject
business for the public,
to regulation.
and is therefore not
subject to regulation as
a common carrier
There is a
No fault or negligence
presumption
of is presumed
negligence or fault
in case of injury or
damage to goods.
Q: Can' a common carrier be converted into
a private carrier?
A: Yes, in case of a charter party contract, the
charter party may convert a common carrier
into a private carrier provided that it must be a
bareboat or demise charter where the
charterer mans the vessel with his own people
and becomes, in effect, the owner for the
voyage or service stipulated (Cstiex Phils. v.
Sulpicio Lines, GR. No. 131166, Sept. 30,
1999).
Q: How is common carrier distinguished
from towage, arrastre and stevedoring?
I
I
A:
1. Contract of towage - A contract
whereby a vessel pulls another.
vessel from one place to another
regardless of whether or not the latter
262
vesselis laden with merchandise.' It is
not a contract of carriage.
2. Arrastre - refers to hauling of cargo,
comprehends the handling of cargo
on the wharf or between tile
establishment of the consignee or
shipper and the ship's tackle.
3. Stevedoring - refers to the handling
of the cargo in the holds of the vessel
or between the ship's tackle and the
holds of the vessel: (Compania
Maritima v. Allied Free Workers
Union, GR. No. L-43813, May 24,
1977)
Q: If avessel was not issued a certificate of
public convenience, and did not have a
regular trip or schedule nor a fixed route,
may it still be considered a common carrier
and not a private carrier?
A: Yes. To be considered a common carrier, it
is not necessary that the carrier be issued a
certificate of public convenience, and this
public character is not altered by the fact that
the carriage of the goods in question was
periodic, occasional, episodic, or unscheduled,
Art. 1732 of the Civil Code avoids making any
distinction between a person or enterprise
offering transportation service on a regular or
scheduled basis and one offering SUchservice
on occasional, episodic, or unscheduled basis.
It also makes no distinction between one
whose principal business activity is the
carrying of person or goods or both, and one
who does such carrying on as an ancillary
activity.
Neither does Art. 1732 distinguish between a
carrier offering its services to the general
public, and one who offers services or solicits
business only from a narrow segment of the
general population or limited clientele.
(Loadstar Shipping Co., Inc. v. CA, G.R. No.
131621, Sept. 28, 1999)
UST GOLDEN NOTES2010
Q: What is the rule on "prohibition on
discrimination"?
A:
GR: The law requires common carriers to
carry for all persons, either passengers or
property, for exactly the same charge for a
like or contemporaneous service in the
transportation of like kind of traffic under
substantially similar circumstances or
conditions.
XPN: When the actual cost of handling and
transporting is different, then different rates
may be charged:
1. Merchandise of like quantity may not
be considered alike - The quantity,
kind and quality may be exactly the
same, and yet not be alike, so far as
the cost of transportation is
concerned;
2. Shipments may be alike although
composed of different classes of
merchandise - Difference in the
charge for handling and transporting
may only be made when the
difference is based upon actual cost.
(United States v. Quinajon and
Quitoriano, G. R. No. 8686, July 30,
1915)
~l6f.l:\1116j_j.llij')lllllt.1Ij
Q: What is meant by extraordinary
diligence?
A: It is that extreme measure of care and
caution which persons of unusual prudence
and circumspection use for securing and
preserving their own property or rights. The
law requires common carriers to render
service with the greatest skllt and utmost
foresiqht.
Q: What is the reason for requiring
common carriers to observe extraordinary
diligence?
A: The nature of the business of common
carriers and the exigencies of public policy
demand that they observe extraordinary
diligence.
Q: When does the duty to exercise
extraordinary diligence start and end with
respect to carriaqe of goods?
A: It lasts from the time the goods are
unconditionally placed in the possession of,
and received by the carrier for transportation
until the same are delivered, actually or
constructively, by the carrier to the consignee
or to the person who has a right to receive
them. (Art. 1736)
Q: When does liability of the common
carrier begin?
A: It begins with the actual delivery of the
goods for transportation, and not merely with
the formal execution of a receipt or bill of
lading; the issuance of a bill of lading is not
necessary to complete delivery and
acceptance. (Compania Maritima v. Insurance
Co. of North America, G.R. No. L-18965, Oct.
30, 1964)
Q: WHen does the duty to exercise
extraordinary diligence start and end with
respect to transport of passengers?
A: From the moment the person who
purchases the ticket from the carrier presents
himself at the proper place and in a proper
manner to be transported.
The relation of carrier and passenger
continues until the passenger has been landed
at the port of destination and has left the
vessel owner's dock or premises. Once
created, the relationship will not ordinarily
terminate until the passenger has, after
reaching his destination, safely alighted from
the carrier's conveyance or had a reasonable
opportunity to leave the carrier's premises.
(Aboitiz Shipping Corp. v. CA, G.R. No. 84458,
Nov. 6, 1989)
Q: If the passenger, who was still in the
carrier's premises after the lapse of one
hour from the time he disembarked, was
injured, may he still be considered a
passenger? Should the common carrier
still exercise extraordinary diligence?
A: All persons who remain on the premises
within a reasonable time after leaving the
conveyance are to be deemed passengers,
and what is a reasonable time or a reasonable
delay within this rule is to be determined from
all the circumstances, and includes a
reasonable time to see after his baggage and
prepare for his departure. The carrier-
passenger relationship is not terminated
merely by the fact that the person transported
UNIVERSITY OF SANTO TOMAS ~~-"--")263
Pacu[ taa de i } ) er ecl i o Ci vi f ' .
TRANSPORTATION LAWS: NEW CIVIL CODE: COMMON CARRIERS
has been carried to his destination if, for
example, such person remains in the carrier's
premises to claim his baggage. (Aboitiz
Shipping Corp. v. CA, G.R. No. 84458, Nov. 6,
1989) I
Q: Ma~a common carrier be held liable to a
passenger who was injured and eventually
died While trying to board the vehicle?
I
A: Yes. It is the duty of common carriers of
passengers to afford passengers an
opportunity to board and enter, and they are
liable for injuries suffered by boarding
passengers resulting from the sudden starting
up or jerking of their conveyances while they
are doing so.
The victim, by stepping and standing on the
platform of the bus, is already considered a
passenger and is entitled all the rights and
protection pertaining to such a contractual
relation. (Dangwa Transportation Co., Inc. v.
CA, G.R. No. 95582, Oct. 7, 1991)
Q: What is the presumption on the loss,
destruction, or deterioration of goods?
A:
GR: The common carrier is presumed to
have been at fault or to have acted
negligently when the qoods transported are
lost, destroyed or deteriorated.
Note: The presumption of fault or
negligence against the carrier is only a
disputable presumption. The law, in
creating such a presumption merely
relieves the owner of the goods, for the
time being, from introducing evidence to
fasten the negligence on the former,
because the presumption stands in the
place of evidence.
XPN: When the same is due to any of the
following causes only:
1. Flood, storm, earthquake, lightning or
other natural .disaster or calamity.
Provided, the following conditions are
present:
a. natural disaster was the
proximate and only cause;
b. carrier exercised diligence to
prevent or minimize loss before,
during and after the occurrence
of the natural disaster; and
c. no delay. (Art. 1740, NCC)
2. Act of the public enemy in war,
whether international or civil,
provided:
a. act was the proximate and only
cause;
b. carrier exercised diligence to
prevent or minimize loss before,
during and after the act; and
c. no delay. (Art. 1740, NCC)
3. Act or omission of the shipper or
owner of the goods, provided:
a. if proximate and only cause,
exempting;
b. if contributory negligence,
mitigating.
4. The character of the goods or defects
in the packing or in the containers.
Provided, carrier exercised due
diligence to forestall or prevent loss.
Note: If the fact of improper packing
is known to the carrier or its servants,
or apparent upon ordinary
observation, but it accepts the goods
notwithstanding such condition, it is
not relieved from responsibility for
loss or injury resulting therefrom.
(Southern Lines lrtc., v. CA, G.R. No.
L-16629, Jan. 31, 1962)
5. Order or act of competent authority.
Provided, the authority is with power
to issue order.
Note: In all cases other than those
enumerated above, there is
presumption of negligence even if
there is an agreement limiting the
liability of the common carrier in the
vigilance over the goods.
Q: Are mechanical defects' considered
fortuitous events? Give illustrations.
A: No. (Sweet Lines, Inc. v. CA, G.R. No. L-
46340, Apr. 29, 1983)
1. Tire blowout of a jeep is not a
fortuitous event where there exists a
specific act of negligence by the
carrier consisting of the fact that the
jeepney was overloaded and
speeding at the time of the incident.
(Juntilla v. Fontanar, G.R. No. L-
45637, May 31, 1985)
2. Defective brakes cannot be
considered fortuitous in character.
(Vergara v. CA, G.R. No. 77679,
Sept. 30, 1987)
UST GOLDEN NOTES 2010
Q: Is fire a natural disaster? .
A: No. This must be so as it arises almost
invariably from some act of man or by human
means. It does not fall within the category of
an act of God unless caused by lightning or by
other natural disaster or calamity. It may even
be caused by the actual fault or privity of the
carrier. (Eastern Shipping Lines v. lAC, G.R.
No. L-69044, May 29, 1987)
Q: Is the occurrence of a typhoon a
fortuitous event?
A:
GR: Yes, if all the elements of a natural
disaster or calamity concur. This holds true
especially if the vessel was seaworthy at
the time it undertook that fateful voyage
and that it was confirmed with the Coast
Guard that the weather condition would
permit safe travel of the vessel to its
destination. (Philippine American General
Insurance Co., Inc. v. MGG Marine
Services, Inc., G.R. No. 135645, Mar .. 8,
2002)
XPN: If a vessel sank due to a typhoon,
and there was failure to ascertain the
direction of the storm and the weather
condition of the path they would be
traversing, it constitutes lack of foresight
and minimum vigilance over its cargoes
taking into account the surrounding
circumstances of the case. Thus, the
common carrier will still be liable. (Arada v.
CA, G.R. No. 98243, July 1, 1992)
Q: Pedro contracted with J uan for the
hauling of 750 cartons of milk from a
warehouse in Makati to Pedro's
establishment in Urdaneta, Pangasinan.
J uan loaded in Makati the merchandise on
to his trucks: 150 cartons were loaded on a.
truck driven by himself, while 600 cartons
were placed on board the other truck which
was driven by Manny, J uan's driver and
employee. Only 150 boxes of milk were
delivered to Pedro. The other 600 boxes
never reached him, since the truck which
carried these boxes was hijacked along the
MacArthur Highway in Paniqui, Tarlac, by
armed men who took with them the truck,
its driver, his helper and the cargo.
Pedro demanded payment of the value of
the lost merchandise and argued that J uan
should be held liable for the value of the
undelivered goods for failure to exercise
extraordinary diligence. Decide.
A: A common carrier is liable evenfor acts of
strangers like thieves or robbers, exceptwhere
such thieves or robbers acted "with grave or
irresistible threat, violence or force." Therefore,
J uan is not liable for the value of the
undelivered merchandise which was lost
because of an eventthat is beyond his control.
(De Guzman v. CA, G.R. No. L-47822, Dec.
22, 1988)
Q: M. Dizon Trucking entered into ahauling
contract with Fairgoods Co whereby the
former bound itself to haul the latter's 2000
sacks of soya bean meal from Manila Port
Area to Calamba, Laguna. To carry out
faithfully its obligation Dizon
subcontracted with Enrico Reyes the
delivery of 400 sacks of the soya bean
meal. Aside from the driver, three male
employees of Reyes rode on the truck with
the cargo. While the truck was onits way to
Laguna two strangers suddenly stopped
the truck and hijacked the cargo.
Investigation by the police disclosed that
one of the hijackers was armed with a
bladed weapon while the other was
unarmed. For failure to deliver the 400
sacks, Fairgoods sued Dizon for damages.
Dizon in turn set up a 3rd party complaint
against Reyes where he contended that the
loss was due to force majeure. Did the
hijacking constitute force majeure to
exculpate Reyes from any liability to
Dizon? Discuss fully.
A: No. The hijacking in this case cannot be
considered force majeure. Only one of the two
hijackers was armed with a bladedweapon. As
against the 4 male employees of Reyes, 2
hijackers, with only one of them being armed
with a bladed weapon, cannot be considered
force majeure. The hijackers did not act with
grave or irresistible threat, violence or force.
(1995 Bar Question)
UN I V ER SIT Y 0 F SAN T 0 To M AS
Pacu(taa ae Der e ch o Ci vi C
TRANSPORTATION LAWS: NEW CIVIL CODE: COMMON CJ \RRIERS
Q: What is, the rule if there is contributory
negligence on the part of the shipper?
A: If the shipper or owner merely contributed
to the loss, destruction or deterioration of the
goods, the proximate cause thereof being the
negligence of the common carrier, the latter
shall be liable for damages, which however,
shall be equitably reduced. (Art. 1741)
i
Q: ArJ there exceptions to Art. 1741?
I
A: Yes. In a collision case (moving object
strikes' another moving object) and allision
cases (moving object strikes a stationary
object). Insuch cases, the parties are liable for
their own damages.
Q: What are the defenses available to any
common carrier to limit or exempt it from
liability?
A:
1. Observance of extraordinary
diligence; or
2. Proximate cause of the incident are
those mentioned in Art. 1734. (2001
Bar Question)
Q: What is the rule as to unloading, storage
and stoppage i n t ransi t u?
A:
GR: The common carrier's duty to observe
extraordinary diligence inthe vigilance over
the goods remains in fUll force and effect
even when they are temporarily unloaded
or stored intransit.
XPN: When the shipper or owner has
\\\u\i~ ,,'<:o~ r:::,f, \\;\~ 'i1'B\;\\ r:::,f, '<:o\c>ppage in
transitu.
Q: What is the right of stoppage i n
t ransi t u?
A: It is the right exercised by the seller by
stopping the delivery of the goods to a certain
buyer or consignee (because of insolvency)
when such goods are already intransit.
266
Q: What is the diligence required in
exercising the right of stoppage i n
t ransi t u?
A: Ordinary diligence because of the following:
1. It is holding the goods in the capacity
of an ordinary bailee or
warehouseman and not as a carrier;
2, There is a change of contract from a
contract of carriage to a contract of
deposit;
Note: If the seller instructs to deliver
it somewhere else, a new contract of
carriage is formed and the carrier
must be paid accordingly.
l@ j t4J ' , mrtU4 ii,t . mr n
Q: What are. the rules regarding the time of
delivery of goods and delay?
A:
1. If there is an agreement as to time of
delivery - delivery must be within the
time stipulated inthe contract or bill of
lading;
2. If there is no agreement - delivery
must be within a reasonable time.
(Saludo, Jr. v. CA, G.R. No. 95536,
Mar. 23, 1992)
Q: To whom should delivery be made?
A: It must be delivered, actually or
constructively, to the consignee or to the
person who has a right to receive them,
Note: Delivery of the cargo to the customs
autnonuas 'IS not delivery to the consignee :-
to the person who has a right to receive ~~:;;-
(lu Do &Lu Ym Corp. v. Binamira, G.R. No. L-
9840, Apr. 22, 1957)
Q: If there is delay in the delivery of goods,
what is the liability of the carrier?
A: The carrier shall be liable for damages
immediately and proximately resulting from
such neglect of duty. (Saluda, Jr. v. CA, GR
No. 95536, Mar, 23, 1992)
UST GOLDEN NOTES 2010
Q: What are the Civil Code provisions
regarding delay in the transportation of
goods?
A:
1. Those who in the performance of
their obligations are guilty of fraud,
negligence, or delay, and those who
in any manner contravene the tenor
thereof, are liable for damages; (Art.
1170)
2. If the common carrier negligently
incurs in delay in transporting the
goods, a natural disaster shall not
free such carrier from responsibility;
(Art. 1740)
3. If the common carrier, without just
cause, delays the transportation of
the goods or changes the stipulated
or usual route, the contract limiting
the common carrier's liability cannot
be availed of in case of the loss,
destruction, or deterioration of the
goods; (Art. 1747)
4. An agreement limiting the common
carrier's liability for delay on account
of strikes or riots is valid. (Art. 1748)
Q: Are stipulations limiting the carrier's
liability valid?
A: Yes, provided itbe:
1. In writing, signed by the shipper or
owner;
2. Supported by a valuable
consideration other than the service
rendered by the common carrier; and
3. Reasonable, just and not contrary to
public policy (Art. 1744).
Q: What are void stipulations in a contract
of carriage?
A:
1. That the goods are transported at the
risk of the owner or shipper;
2. That the common carrier will not be
liable for any loss, destruction, or
deterioration of the goods;
3. That the common carrier need not
observe any diligence in the custody
of the goods;
4. That the common carrier shall
exercise a degree of diligence less
than that of a good father of a family,
or a man of ordinary prudence in the
vigilance over the movables
transported;
5. That the common carrier shall not be
responsible for the acts or omissions
of his or its employees;
6. That the common carrier's liability for
acts committed by thieves, or of
robbers who do not act with grave or
irresistible threat, violence or fcirce, is
dispensed with or diminished; .
7. That the common carrier is not
responsible for the loss, destruction
or deterioration of goods on account
of the defective condition of the car,
vehicle, ship, airplane or other
equipment used in the contract of
carriage; and
8. Any similar stipulation that is
unreasonable, unjust and contrary to
public policy. (Art. 1745)
Q: Are stipulations made in a contract of
private carriage subject to the same rules
as that of common carriers?
A: In a contract of private carriage, the parties.
may freely stipulate their duties and obligations
which perforce would be binding on them.
Unlike in a contract involving a common
carrier, private carriage does not involve the
general public. Thus, a charterer, in exchange
for convenience and economy, may opt to set
aside the protection of the law on common
carriers. When the charterer decides to
exercise this option, he takes a normal
business risk. (Valenzuela Hardwood and
Industrial Supply, Inc. v. CA, G.R. No. 102316,
June 30, 1997)
UNIVERSITY OF SANTO TOMAS
Eo cul r a d' de i } ) er ecl i oCi vi f
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TRANSPORTATION LAWS: NEW CIVIL CODE: COMMON CARRIERS
Q: What are some stipulations limiting the
liability of common carriers which may be
valid?
A:
1. An agreement limiting the common
carrier's liability for delay on account
of strikes or riots. (Art. 1748)
A stipulation that the common
carrier's liability is limited to the value
of the goods appearing in the bill of
lading, unless the shipper or owner
declares a greater value and pays
/
1 corresponding freight. (Art. 1749)
3., A contract fixing the sum that may be
recovered for the loss, destruction,
and deterioration of goods is binding
I provided that it is just and reasonable
under the circumstances and it has
been fairly and freely agreed upon.
(Art. 1750)
2.
4. When a passenger is carried
gratuitously, a stipulation limiting the
common carrier's liability for
negligence is valid, but not for willful
acts or gross negligence. However,
the reduction of fare does not justify
any limitation of the common carrier's
liability. (Art. 1758)
Note: When a shipper shipped his goods on
.board the vessel and paid the corresponding
freight, he in effect, impliedly accepted the
terms and conditions stated inthe bill of lading
as if he actually signed it. This is more so
where he is both the shipper and consignee.
Thus, such bill of lading is valid and binding.
(American President Lines Ltd. v. Klepper, 110
Phil.243)
But where the letters were so small that they
are hard to read, this would not warrant a
presumption that the passenger was aware of
those conditions such that he fairly and freely
agreed. He is not and cannot therefore be
bound by such conditions printed at the back
of the ticket. (Shewaram v. Philippine Airlines,
Inc., GR No. L-20099, July 7, 1966)
Q: Maya stipulation limiting the common
carrier's liability be annulled by the shipper
or owner?
A: Yes, if the common carrier refused to carry
the goods unless the shipper or owner agreed
to such stipulation. However, under this
provision, annulment of the agreement limiting
the carrier's liability is still necessary (Alt.
1746).
268
Note: There is no need to annull, if the
common carrier without just cause:
1. Delays the transportation of the
goods; or
2. Changes the stipulated or usual
route, the contract limiting the
common carrier's liability cannot be
availed of in case of loss, destruction,
or deterioration of the goods. (Art.
1747)
Q: What is the effect of the agreement
limiting liability to the presumption of
negligence of the carrier?
A: Even if there is an agreement limiting the
liability of the common carrier in the vigilance
over the goods, the common carrier is still
disputably presumed to have been negligent in
case of its loss, destruction or deterioration.
(Art. 1752)
Q: What law shall govern the liability of the
common carrier in case of loss,
destruction, or deterioration?
A: The law of the country to which the goods
are to be transported.
Q: What if the parties stipulate that the law
of some other country shall govern, is that
valid?
A: Yes. This is called a paramount clause - a
stipulation that a particular law will govern,
provided that it is not against public policy.
Q: What are the rules with regard to
passenger's baggage?
A:
1. If the baggage is not in the personal
custody of passenger or his
employee: The provisions of Articles
1733 to 1753 shall apply to the
passenger's baggage; and
2. If the baggage is in the passenger's
personal custody or his employee:
a. The common carrier shall be
responsible for shipper's
baggage as depositaries,
provided that notice was given to
them, or to their employees, of
the effects brought by the guests
and that, on the part of the
shipper, they take the
precautions which said common
carriers or their substitutes
advised relative to the care and
vigilance of their effects. (Art.
1998, NCC)
UST GOLDEN NOTES 2010
b. The responsibility shall include
the loss of, or injury to the
personal property of the shipper
caused by the employees of the
common carrier as well as
strangers; but not that which may
proceed from any force majeure.
(Art. 2000, NCC)
c. The act of a thief or robber, who
has entered the carrier is not
deemed force majeure, unless it
is done with the use of arms or
through an irresistible force. (Art.
2001, NCC)
Q: Marino was a passenger on a train.
Another passenger, J uancho, had taken a
gallon of gasoline placed in a plastic bag
into the same coach' where Marino was
riding. The gasoline ignited and exploded
causing injury to Marino who filed a civil
suit for damages against the railway
company claiming that J uancho 'should
have been subjected to inspection by its
conductor. The railway company
disclaimed liability resulting from the
explosion contending that it was unaware
of the contents of the plastic bag and
invoking the right of J uancho to privacy.
1. Should the railway company be
held liable for damages?
d. The common carrier is not liable
for compensation if the loss is
due to the acts of the shipper, his
family, or servants, or if the loss
arises from the character of the
things brought into the carrier.
(Art. 2002, NCC) A:
e. The common carrier cannot free
himself from responsibility by
posting notices to the effect that
he is not liable for the articles
brought by the passenger. Any
stipulation between the common
carrier, and the shipper whereby
the responsibility of the former as
set forth in Articles 1998 to 2001
is suppressed or diminished shall
be void. (Art. 2003, NCC)
-. tonio, a paying passenger, boarded a
_~S bound for Batangas City. He chose a
at the front row, near the bus driver,
ri old the bus driver that he hadvaluable
. s in his hand carried bagwhich hethen
d beside the driver's seat. Not having
s = : for 24 hours, he requested the driver
- zeepan eye on the bag should he doze
- during the trip. While Antonio was
as=ep, another passenger took the bag
and alighted at Calamba, Laguna.
Id the common carrier be held liable by
- . niofor the loss?
'. r'es. Ordinarily. the common carrier is not
~ e 'or acts of other passengers. But the
--r;"lon carrier cannot relieve itself from
::..:: I J if the common carrier's employees
_.d have prevented the act or omission by
3 ~cising due diligence. In this case, the
cassenqsr asked the driver to keep an eye on.
- :; bag which was placed beside the driver's
sea . If the driver exercised due diligence, he
co Id have prevented the loss of the bag.
(1997BarQuestion)
2. If it were an airline company
involved, would your answer be
the same? Explainbriefly.
1. No. The railway company is not liable
for damages. In overland
transportation, the common carrier is
not bound nor empowered to make
an examination on the contents of
packages or bags, particularly those
handcarried by passengers. (Nocum
v. Laguna Tayabas Bus Company,
G.R. No. L-23733, Oct. 31, 1969)
2. If it were an airline company, the
common carrier should be made
liable. In case of air carriers, it is
unlawful to carry flammable materials
in passenger aircrafts, and airline
companies may open and investigate
suspicious packages and cargoes
pursuant to R.A. 6235. (1992 Bar
Question)
UNIVERSITY OFSANTO TOMAS
Pacu[ taa de (] ) er ecl i o Ci o i]
~i 269
TRANSPORTATION LA\X! S:NEW CIVIL CODE: COMMON CARRIERS
Q: Who are hot considered passengers?
A:
b. One who remains on a carrier for an
unreasonable length of time after he
has been afforded every safe
opportunity to alight;
c. One who has boarded by fraud,
stealth, or deceit;
d. One who attempts to board a moving
vehicle, although he has a ticket,
unless the attempt be with .the
knowledge and consent of the carrier;
e. One who has boarded a wrong
I
:vehicle, has been properly informed
1
0f such fact, and on alighting, is
! injured by the carrier;
f. 'Invited guests and accommodation
passengers.
Note: The carrier is thus not obliged to
exercise extraordinary diligence but only
ordinary diligence inthese instances.
Q: What is the duty of a common carrier to
its passengers?
A: A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost
diligence of very cautious persons, with due
regard for all the circumstances. (Art. 1755)
Q: When does this duty begin to exist?
A: The duty exists from the moment the
person offers to be transported placing himself
in the care and control of the common carrier
who accepts him as such passenger. The
duty continues until the passenger has, after
reaching his destination, safely alighted from
the carrier's conveyance or has had a
reasonable opportunity to leave the carrier's
premises and to look after his baggage and
prepare for his departure.
Q: Is there a presumption of negligence in
safety of passengers? .
A: In case of death of or injuries to
passengers, common carriers are presumed to
have been at fault or to have acted negligently,
unless they prove that they observed
extraordinary diligence. (Art. 1756)
Q: In a court case involving claims for
270
damages arising from death and injury of
bus passengers, counsel for the bus
operator files a demurrer to evidence
arguing that the complaint should be
dismissed because the plaintiffs did not
submit any evidence that the operator or its
employees were negligent. If you Were the
judge, would you dismiss the complaint?
A: No. In the carriage of passengers, the
failure of the common carrier to bring the
passengers safely to their destination
immediately raises the presumption that such
failure is attributable to the carrier's fault or
negligence. In the case at bar, the fact of
death and injury of the bus passengers raises
the presumption of fault or negligence on the
part of the carrier. The carrier must rebut such
presumption. Otherwise, the conclusion can be
properly made that the carrier failed to
exercise extraordinary diligence as required by
law. (1997 Bar Question)
Q: Are stipulations limiting the common
carrier's responsibility for the safety of
passengers valid?
A: No. The responsibility of a common carrier
for the safety of passengers as required in
Articles 1733 and 1755 cannot be dispensed
with or lessened by stipulation, by posting of
notices, by statements on tickets, or otherwise.
(Art. 1757)
Q: What is the rule in case of non-payihg
passengers or if the fare is reduced?
A: When a passenger is carried gratuitously, a
stipulation limiting the common carrier's liability
for negligence is valid, but not for willful acts or
gross negligence. However, the reduction of
fare does not justify any limitation of the
common carrier'sl1ability. (Art. 1758)
Q: What is assumption of risk on the part of
passengers?
A: Passengers must take such risks incident to
the mode of travel.
Note: Carriers are not insurers of any and all
risks to passengers and goods. It merely
undertakes to perform certain duties to the
public as the law imposes, and holds itself
liable for any breach thereof. (Pi/api! v. CA,
G.R. No. 52159, Oec. 22, 1989)
Q: Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at the
bus by an unidentified bystander as the
bus was speeding through the National
Highway. The bus owner's personnel lost
UST GOLDEN NOTES 2010
no time in bringing Marites to the provincial
hospital where she was confined and
treated. Marites wants to sue the bus
company for damages and seeks your
advice whether she can legally hold the
bus company liable. What will you advise
her?
A: Marites cannot legally hold the bus
company liable. There is no showing that any
such incident previously happened so as to
impose an obligation on the part of the
personnel of the bus company to warn the
passengers and to take the necessary
precaution. Such hurling of a stone constitutes
fortuitous event in this case. The bus company
is not an insurer of the absolute safety of its
passengers. (Pi/api/ v, CA; GR No. 52159,
Dec. 22, 1989) (1994 Bar Question)
Q: Is a carrier liable to its passengers for
damages caused by mechanical defects of
equipments/appliances installed in the
carrier?
A: Yes, whenever it appears that the defect
would have been discovered by the carrier if it
had exercised the degree of care which under
the circumstances was incumbent upon it, with
regard to inspection and. application of the
necessary tests. The manufacturer is
considered as being in law the agent or
servant of the carrier, as far as regards the
work of constructing the appliance. The good
repute of the manufacturer will not relieve the
carrier from liability.
The rationale of the carrier's liability is the fact
that the passenger has neither choice nor
control over the carrier inthe selection and use
of the equipment and appliances in use by the
carrier. Having no privity whatever with the
manufacturer or vendor of the defective
equipment, the passenger has no remedy
against him, while the carrier usually has. It IS
but 10gicE:I.therefore, that the carrier, while not
in insurer of the safety of his passengers,
should nevertheless be held to ans~verfor the
flaws of his equipment if such flaws were at all
discoverable. (Necesito v. Paras, GR. No. L-
10605, June 30, 1958)
Q: Are common carriers liable for acts of
its employees?
A: Common carriers are liable for the death of
or injuries to passengers through the
negligence or willful acts of the former's
employees, although such employees may
have acted beyond the scope of their authority
or in violation of the orders of the common
carriers.
The liability of the common carriers does not
cease upon proof that they exercised all the
diligence of a good father of a family in the
selection and supervision of their employees.
(Art. 1759)
Q: What is the rationale behind this
principle?
A: The basis of the carrier's liability for
assaults on passengers committed by its
drivers rests on the principle that it is the
carrier's implied duty to transport the
passenger safely. As between the carrier and
the passenger, the former must bear the risk of
wrongful acts or negligence of the carrier's
employees against passengers, since it, and
not the passengers, has power to select and
remove them. (Maranan v. Perez, GR. No. L-
22272, June 26, 1967)
!
I
Q: What is the extent of liability of common
carriers for acts of co-passengers or
strangers?
A: A common carrier is responsible for injuries
suffered by a passenger on account of the
willful acts or negligence of other passengers
or of strangers, if the carrier's employees
through the exercise of the diligence of a good
father of a family would have prevented or
stopped the act or omission. (Art. 1763)
Q: Should the diligence of the passenger
be considered in determining liability in
case of injury?
A: Yes. The passenger must observe the
diligence of a good father of a family or
ordinary diligence to avoid injury to himself
(Art. 1761). This means that if the proximate
cause of the passenger's injury is his
negligence, the common carrier is not liable.
Q: Who has the burden of proof in cases of
contributory negligence?
A: The common carrier since it will benefit
from such mitigated liability.
UNIVERSITY OF SANTO TOMAS
Pacu(taa de Wer ecl i o Ci vi t
~i~ 271
TRANSPORTATION LAWS: NEW CIVIL CODE: COMMON CARRIERS
passenger in case of a
A :
1. Culpa contractual - negligence based
on contract; filed against the common
carrier wherein he is a passenger.
2. Culpa aquiliana - negligence based
on tort; filed against the drivers of
both vehicles and the owners thereof.
3. Culpa criminal- negligence based on
a crime; filed against the driver at
fault if his act amounts to a crime.
Q: What are the defenses available in culpa
contractual?
A:
1. Exercise of extraordinary due
diligence;
2. Due diligence in the selection and
supervision of employees;
3. Fortuitous event;
4. Contributory negligence of
passengers - it does not bar recovery
of damages for death or injury if the
proximate cause is the negligence of
the common carrier but the amount of
damages shall be equitably reduced.
(Art. 1762)
Q: What are the items of damages that may
be recovered in case of' death of a
passenger (culpa contractual)?
A:
1. An indemnity for the death of the
victim;
2. An indemnity for loss of earning
capacity of the deceased;
3. Moral damages;
4. Exemplary damages;
Note: Carrier is not liable for
exemplary damages where there is
no proof that it acted in a wanton,
fraudulent, reckless, oppressive or
malevolent manner
5. Attorney's fees and expenses of
litigation; and
6. Interest in proper cases. (Brinas v.
People, G.R. No. L-30309, Nov. 25,
1983)
Q: What is the liability with regard to moral
damages?
A:
GR: Moral damages are not recoverable
for breach of contract of carriage in view of
Art. 2219-20 of the Civil Code.
XPN:
1. Where the mishap results in the
death of the passenger; and
2. Where it is proved that the common
carrier was guilty of fraud or bad faith,
even if death does not result.
Q: What are the distinctions between an
action to enforce liability of the employer of
the negligent driver under Art. 103 of the
Revised Penal Code, and an action based
on quasi-delict?
A:
ART. 103, RPC
ART. 2180, NCC
(QUASI-DELICT)
Employer is only Liability is primary
subsidiarily liable. and direct.
There must be a Action
may proceed
judgment of conviction
independently from
against the negligent
the criminal action.
driver otherwise the
action against the
employer would be
J J remature.
The defense of due
The defense of due
diligence in selection
diligence in selection
and supervision of and supervision
of
employees cannot be
employees
may be
invoked.
invoked.
Q: May the registered owner of the vehicle
be held liable for damages suffered by a
third person in the course of the operation
of the vehicle?
A: Yes. The registered owner of a public
service vehicle is responsible for damages that
may arise from consequences incident to its
operation or that may be caused to any of the
passengers therein (Gelisan \I. Alday, G.R. No.
L-30212, Sept 30, 1987). Also, the liability of
the registered owner of a public service vehicle
for damages arising from the tortious acts of
the driver is primary, direct, and joint and
several or solidary with the driver. (Philtranco
Service Enterprises, Inc. v. CA, G.R. No.
120553, June 17, 1997)
UST GOLDEN NOTES 2010
Q: What is the rationale behind the liability
of the registered owner?
A: It rests upon the principle that in dealing
with vehicles registered under the Public
Service Law, the public has the right to
assume that the registered owner is the actual
:or lawful owner thereof. It would be very
! difficult and often impossible as a practical
I
matter, for members of the general public to
,enforce the rights of action that they may have
[for injuries inflicted by the vehicles being
i negligently operated if they should be required
I to prove who the actual owner is. The
i registered owner is not allowedto deny liability
by proving the identity of the alleged
transferee.
Thus, the aggrieved party is not required to go
beyond the vehicle's certificate of registration
to ascertain the owner of the carrier. To permit
the ostensible .or registered owner to prove
who the actual owner is, would be to set at
naught the purpose or public policy which
infuses that doctrine. (Benedicta v. lAC, G.R.
No. 70876, July 19, 1990)
Academics Committee
Cll(.Jirpel:l"()Jz: Abraham D. Genuine 1J
f / i tC!-Cbai r j r Jr Academi cs: J eannie ,\, Laurentino
f / i c' e-Cbai r [ (Jr Admi l t 'L'" Fi nt/ l l ce: J \iSS;l Celinc H. Luna
f " i w" O' ; ' i r / or L L I ) ' ol ti c> [ ) ' -' (g i l : Loise Rae C;. Naval
Mer cantile Law Committee
J/ l bj ed ' -' ead' f T Diy T. 1\ Ihpagucy
//.l".Il. Subj e" J-I!!lid: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldia
Aireen 1\.1.Cacho
Socrates Benjie 1. l\.farbil
Ron Chcrrie S. Mendoza
Edisonjames I", Pagalibuan
Maybelline 1\.1.Santiago
.~,..-'~.~ ..
... :,,~'
UNIVERSITY OF SANTO TOMAS \', ...) 273
' Facu{ taa de (j ) er ecno Ci vi C .
TRANSPORTATION LA \,\/S: CODE OF COJ vIMERCE
CODE OF COMMERC~.~ ,
(ART. 349 - 379) . "
.~,::;.
,
Q: What matters are governed by the Code
of Commerce?
A: Inall matters not regulated by the New Civil
Code, the rights and obligations of common
carriers shatl be governed by the Code of
Commerce and by special laws,
Q: What is the rule regarding bay and river
license?
A: No vessel shall be permitted to engage in
the business of towing or transportation in the
bays, harbors, rivers and inland waters
navigable from the sea unless proper license
has been procured,
A bay and river license shall specify the
particular port or other body of water in which
the vessel may engage in business.
Q: What vessels are exempted from
requirement of bay and river license?
A:
'1. Vessels 3tons net or less;
2. Yachts, launches, and other crafts
used exclusively for pleasure and
recreation;
3. Ship's boat and launches bearing the
name and home port of the vessel
plainly marked thereon; and
4, Vessels owned by the Government of
the Philippines,
Q: What is a bill of lading?
A: It is awritten acknowledgement of receipt of
goods and agreement to transport them to a
specific place and to a named person or to his
order,
Q: Is it indispensable?
A: The Code of Commerce does not demand,
as a necessary requisite inthe contract of
transportation, the delivery of the bill of lading
to the shipper, but gives right to both the
carrier and the shipper to mutually demand of
each other the delivery of said bill. (Compania
Maritima v. Insurance Co. of North America;
G.R No. L-18965, Oct 30,1964)
274 Iteam:B
Q: Howshould a bill of lading be construed?
A: It partakes of the nature of a contract of !
adhesion and as such must be construed
strictly against the party who drafted the same
or gave rise to any ambiguity therein. (Saluda,
Jr. v. CA, G.R. No. 95536, Mar. 23, 1992)
Q: What are the two types of bill of lading?
1. Negotiable - If issued to the bearer or
to the order of any person named in
such bill.
2. Non-negotiable - If issued to a
specific person named in such bill.
Q: What is a clean bill of lading?
A: It is a bill of lading which has no notation of
any defect or damages in the goods. It
constitutes prima facie evidence of the receipt
by the carrier of the goods as therein
described. (Lorenzo Shipping Corp. v. Chubb
and Sons, Inc., G.R No. 147724, J une 8,
2004)
Q: Is the surrender of the bill of lading
necessary upon delivery of the goods?
A: Yes, If the 'carrier fails to require such
surrender:
1. If non-negotiable - Action against the
carrier does not lie. .
2. If negotiable - Action by the shipper
may lie against the carrier
Q: What is the two-fold character of a bill of
lading?
A: A bill of lading operates both as a receipt
and as a contract. It is a receipt for tile goods
shipped and a contract to transport and deliver
the same as therein stipulated. As a receipt, it
recites the date and place of shipment,
describes the goods as to quantity, weight,
dimensions, identification marks and condition,
quality, and value. As a contract, it names the
contracting parties, which include the
consignee, fixes the route, destination, and
freight rate or charges, and stipulates the
rights and obligations assumed by the parties.
(Phoenix Assurance Co., Ltd. v. United States
Lines, G.R No. L-24033, Feb. 22, 1968)
UST GOLDEN NOTES 2010
Q: What is the function of a bill of lading in
acharter party?
A: Itis merelyareceiptand adocumentof title
becausethe contractisthe charterparty.
Q: What are the three kinds of stipulations
often made in a bill of lading and their
corresponding effects?
A:
1. Stipulationexemptingthe carrierfrom
any and all liabilityfor loss or damage
occasioned by its own negligence _
invalid for being contrary to public
policy;
2. That providing for unqualified
limitationof such liabilityto anagreed
valuation - invalid for being contrary
to publicpolicy; and
3. One limiting the liability of the carrier
to an agreed valuation unless the
shipper declares a higher value and
pays a higher rate of freight - valid
and enforceable. (Loadstar Shipping
Co., Inc. v. CA,G.R. No. 131621,
Sept. 28, 1999)
Q: When does a bill of lading become
binding on aconsignee?
A: After accepting the bill of lading, receiving
noticesof arrival of the shipment, andfailingto
object thereto, a consignee carinot now deny
that it is bound by the terms in the bill of
lading. (Keng Hua Paper Products Co. Inc. v.
CA, G.R. No. 116863,Feb. 1~ 199~
Q: Star Shipping Lines accepted 100
cartons of sardines from Master to be
delivered to 555 Company in Manila. Only
88 cartons were delivered, however, these
were in bad condition. 555 Company
claimed from Star Shipping Lines the value
of the missing goods, as well as the
damaged .goods. Star Shipping Lines
refused because the former failed to
present a bill of lading. Resolve with
reasons the claim of 555 Company.
A: Star Shipping Lines should paythe claimof
555 Company. The mere fact that some
cartons were lost and the 88 cartons were
damaged is sufficient proof of the fault of Star
Shipping Lines (Lorenzo Shipping Lines v.
Chubb and Sons, Inc., G.R. No. 147724, June
8, 2004). The fact that 555 Companyfailed to
present a bill of lading makes no difference,
because it was the actual consignee (Eastern
Shipping Lines, Inc. v. CA, 1990, G.R. No.
97412, July 12, 1994). Moreover, underArticle
353 of the Code of Commerce, the surrender
of the original bill of lading is not a condition
precedent for a common carrier to be
dischargedof its obligation. If surrenderof the
original bill of lading is not possible,
acknowledgment of delivery by Signing the
delivery receipt suffices. (Republic v. Lorenzo
Shipping Lines, G.R. No. 153563, Feb. 7,
2005) (2005 Bar Question) i
i
Q: J RT entered into acontract with C Coof
J apan to export anahaw fans valued at
$ 23,000. As payment thereof, a letter of
credit was issued to J RT by the buyer. The
letter of credit required the issuance of an
on-board bill of lading and prohibited the
transshipment. The President of J RT then
contracted a shipping agent to ship the
anahaw fans through 0 Containers Lines,
specifying the requirements of the letter of
credit. However, the bill of lading issued by
the shipping lines bore the notation
"received for shipment" and contained an
entry indicating transshipment in
Hongkong. The President of J RT personally
received and Signed the bill of lading and
despite the entries, he delivered the
corresponding check in payment of the
freight. The shipment was delivered at the
port of discharge but the buyer refused to
accept the anahaw fans because there was
no on-board bill of lading, and there was
transshipment since the goods were
transferred in Hongkong from MV Pacific,
the feeder vessel, to MV Oriental, a mother
vessel. J RT argued that the same cannot
be considered transshipment because both
vessels belong to the same shipping
company.
J RT argued that assuming that there was
transshipment, it cannot be deemed to
have agreed thereto even if it signed the
bill of lading containing such entry
because it was made known to the
shipping lines from the start that
transshipment was prohibited under the
letter of credit and that, therefore, it had no
intention to allow transshipment of the
subject cargo. Is the argument tenable?
Reason.
A: No. J RT is bound by the terms of the bill of
lading when it accepted the bill of lading with
full knowledge of its contents which included
transshipmentinHongkong. Acceptanceunder
such circumstances makes the bill of ladinga
bindingcontract(1993 Bar Ouestion)
UN I V E RS I TV 0 F SAN ToT 0 MAS ( ..4>-.< 2 _
Pacu{taa de (j)erecfto Civ i]
TRANSPORTATION LAWS: CODE OF COi\1MERCE
Q: What is the duty of the carrier if there is
no period of time fixed for the delivery of
goods?
A: The carrier shall be under the obligation to
forward them with the first shipment of the
same or similar merchandise he may make to
the point where he must deliver them, and
should he not do so, the damages occasioned
by the delay shall be suffered by him. (Art.
358)
Q: Can the carrier change the route to be
taken by the vessel? I
A: Generally, no. The route which the carrier
and the shipper have agreed upon cannot be
changed unless by reason of terce majeure If
the carrier changes the route without just
cause,! the carrier' shall be liable for all
damages which may be suffered by the goods.
(Art. 359)
I
I
Q: On'a clear weather, MiV Sundo, carrying
insured cargo, left the port of Manila bound
for Cebu. While at sea, the vessel
encountered a strong typhoon forcing the
captain to steer the vessel to the nearest
island where it stayed for seven days. The
vessel ran out of provisions for its
passengers. Consequently, the vessel
proceeded to Leyte to replenish its
supplies.
Assuming that the cargo was damaged
because of such deviation, who between
the insurance company and the owner of
the cargo bears the loss? Explain.
A: The insurance company should bear the
loss. Since the deviation was caused by a
strong typhoon, it was caused by
circumstances beyond the control of the
captain, and also to avoid a peril whether or
not insured against. Deviation is 'therefore
proper. (2004 Bar Question)
Q: May the shipper change the consignee
and the destination of the goods?
A: Yes. Before the ship where the goods are
boarded leaves, the shipper may change the
consignee and the destination of the goods.
After the ship has left, only a change of the
consignee is allowed. In any case the bill of
lading subscribed by the carrier must be
returned to the shipper, if one were issued,
exchanging it for another containing the
novation of the contract. (Art. 360 in relation to
Art. 1532 of the NCC)
276
Q: When maya consignee refuse to accept
the goods?
A:
1. When a part of the goods transported
are delivered and the consignee is
able to prove that he cannot make
use of the part without the others;
(Aft 365)
2, If the goods are damaged and such
damage renders the goods useless
for the particular purpose for which
there are to be used; (Art. 365)
3. When there is delay on account of the
fault of the carrier; (Art. 371) or
4. If the cargo consists of liquids and
they have leaked out, nothing
remaining in the containers but one-
fourth (Y-o) of their contents, on
account of inherent defect of cargo.
(Art. 687) ,
Note: In all cases, the shipper may exercise
the right of abandonment by notifying the
carrier. Ownership over damaged goods
passes to the carrier and carrier must pay
shipper the market value of the goods at point
of destination.
Q: When does Article 366 of the Code of
Commerce apply?
A: It applies in case of domestic transportation
(inter-Island) where there is damage to the
goods transported.
Note: Art. 366 of the Code of Commerce
reads: "Within the 24hrs. following the receipt
of the merchandise, a claim may be brought
against the carrier on the account of damage
or average found therein on opening the
packages, provided that the signs of the
damage or average giving rise to the claim
may not be known from the exterior part of the
packages, and in case that they may be so
ascertained, said claim shall only be admitted
at the time of the receipt of the packages. After
the periods mentioned have elapsed, or after
the transportation charges have been paid, no
claim whatsoever shall be admitted against the
carrier with regard to the condition in Whichthe
goods transported were delivered,"
UST GOLDEN NOTES 2010
: In filing claims, what are the periods in
covering damages from carriers for
carriage of goods?
1. Inter-island - in case the goods
arrived in damaged condition the
claim should be filed:
a. Immediately after delivery - if the
damage is apparent; or
b. Within 24 hours from delivery - If
the damage is not apparent.
2. Overseas - Under Sec. 3(6), of the
Carriage of Goods by Sea Act
(COGSA), where goods arrived in a
damaged condition from a foreign
port to a Philippine port of entry, the
claim should be filed:
a. Upon the discharge of goods - If
the damage is apparent; or
b. Within 3 days from delivery - if
the damage is not apparent.
18: See discussion on the Carriage of
- =-= - by Sea Act.
. V.rnat are the requisites before claim for
-- ages under Art. 366 may be
anded?
Consignment of goods through a
common carrier, by a consignor in
one place to a consignee in another
place; and
2 The delivery of the merchandise by
the carrier to the consignee at the
place of destination (New Zealand
Ins. Co., Ltd. v. Choa Joy, G.R. No.
L-7311, Sept. 30, 1955).
hat is the effect of paying the.
ra portation charges in the filing of an
2... ion on account of damages to goods?
'.
.""'-
If paid before checking the goods-
The right tofile a claim is not waived.
2. If paid after the goods were checked
- The right to file a claim is already
waived (Southern Lines, Inc. v. CA,
G.R. No. L-16629, Jan. 31, 1962).
ote: The filing of claim is a condition
:yecedent for recovery of damages.
Q: What happens if there are disputes with
regard to the condition of the goods
transported at the time of their delivery to
the consignee'?
A: The goods shall be examined by experts
appolnteo by the parties and, in case of
disagreement, by a third one to be appointed
by judicial authority, the result of the
examination being reduced to writing; and if a
person interested should not agree to the
report of the experts and do not settle their
disputes, said judicial authority shall order the
deposit of the merchandise in a safe
warehouse, and the parties interested shall
make use of their rights in the proper manner.
(Art. 367)
Note: If the goods are perishable, the goods
shall be subjected tojudicial sale.
Q: To whom are the goods deliverable?
A:
GR: The carrier has the obligation to
deliver to the consignee who has been
designated by the shipper.
i
XPN: Consignation is allowed lif
one
consignee:
1. cannot be found;
2. refuses to accept the goods; or
3. refuses to pay freightage.
Q: What is the rule with regard to payment
by consignee?
A: The consignee cannot defer payment after
24 hours from delivery. In case there is delay
in payment, the carrier may demand the
judicial sale of the goods for an amount
sufficient to cover the transportation charges
and expenses. This right shall prescribe within
30 days from delivery. After such period, the
carrier loses his right but he is still considered
as an ordinary creditor, meaning, he is
subordinated to insolvency proceedings. (Aft
374-376)
Incaseof non-payment of fare of a passenger,
the carrier may hold on to the personal effects
of the passenger but not on the goods covered
by the bill of lading.
UN I V ER5 I T Y Of SAN ToT 0 MAS f-..... ' 27
Pacu(tac! de (j ) er ecno Ci vi f
TRANSPORTATION LAWS: CODE OF CONIMERCE
Q: Wh~t is the doctrine of combined or
connecting services?
I
A: The carrier which delivered the goods tothe
consiqnso shall assume the obligations, rights
and actions of those who preceded him in the
conveyance of the goods.
The shipper or consignee should proceed
against the one who executed the contract or
against the others who received the goods
without reservation. But even if there is
reservation, they are not exempted from
liabilities that they may have incurred by
reason of their own acts. (Art. 373)
The carrier may then file a third-party
complaint against the one who is really
responsible. The carrier is an indispensible
party. But the shipper or consignee may sue
all of them as alternative defendants.
. . MARITIME" COMMERCE .
Q: What is the real and hypothecary nature
of maritime transactions?
A:
4. Real - Maritime transactions bind
third persons. Thus, maritime lien
over the vessel binds third persons.
However, as evidence of this 'real'
nature of the maritime law we have:
a. the limitation of the liability of the
agents to the actual value of the
vessel and the freight money;
and
b. the right to retain the cargo and
the embargo and detention of the
vessel even in cases where the
ordinary civil law would not allow
more than a personal action
against the debtor or person
liable. (Phifippine Shipping Co. v.
F. G. Vergara, G.R. No. 1 600,
June 1, 1906); (Luzon
Stevedoring Corp. v. CA, G.R.
No. L-58897, Oec 3, 1987)
5. Hypothecary - owner's liability over
the vessel is limited to the vessel
itself.
The real and hypothecaty, nature of
maritime law simply means that the
liability of the carrier in connection
with losses related to maritime
! contracts is confined to the vessel,
: which is hypothecated for such
obligations or which stands as the
guaranty for their settlement. It has
278 Iteam:&
its origin by reason of the conditions
and risks attending maritime trade in
its earliest years when such trade,
was replete with innumerable and
unknown hazards since vessels had
to go through largely uncharted
waters to ply their trade. (AiJoitiz
Shipping Corp. v. General Accident
Fire and Life Insurance Cotp., G.R.
Nos. 1 0044-1 6, Jan. 21, 1993)
Q: A vessel is considered what kind of
property?
A: Under Article 585 of the Code of
Commerce, a vessel is essentially personal
property because it is movable. But the
Supreme Court has characterized maritime
transactions as having a real nature (Rubiso
and Gelito v. Rivera, G.R. No. 11407, Oct. 30,
1917) in so far as these transactions are
similar to transactions over real property with
respect to effectivity against third persons
which are effected through registration.
Q: What is a merchant vessel?
A: It refers solelyto merchant ships, which are
engaged in the transportation of passengers
and freight from one place to another whether
coastal or foreign, It is considered personal
property.
Q: What are the requisites for a ship to be
considered a merchant vessel?
A: It must:
4. Not be a mere accessory to another
vessel;
5, Be licensed to engage in the
transportation of passengers and/or
freight;
6. Be by sea - not merely in rivers, inlet,
lakes, coves or bays, whether in
foreign or coastwise trade.
UST GOLDEN NOTES 2010
P.D.1521,(The Ship Mortgage Decre of
'. - 1978)
Q: What is maritime lien?
A: It constitutes a present right of property in
the ship, ajus in re, to be afterward enforced
in admiralty by process in rem. Any person
furnislling repairs, supplies or other
necessaries to a vessel on credit will have a
maritime lien on the vessel. (PNB v. CA, GR.
No. 128661, Aug 13,2000)
Note: P.O. 1521 is an action in rem in
admiralty - an action against the vessel alone
without including the owner. This is allowed
because a vessel in transportation has its own
juridical personality.
Q: In what cases is the law applicable?
A: It is applicable in cases of domestic and
overseas shipping.
Q: What is the purpose of the mortgage?
A: It is to finance the construction, acquisition,
purchase of vessels or initial operation of
vessels. (Sec. 2)
The mortgage must be recorded with the
Maritime Industry Authority (MARINA),
otherwise, it will only be valid between the
parties and cannot be enforced against third
parties except those who have actual notice
thereof and it shall not be a preferred
mortgage. (Memorandum Circular No. 100)
Q: Who may constitute a ship mortgage?
A:
1_ Any citizen of the Philippines; or
2_ Any association or corporation, at
least 60% of the capital of which is
owned by citizens of the Philippines.'
(Sec. 2)
Note: P.O. 1521 was enacted primarily to
protect Filipino suppliers and was not intended
to create a lien from a contract for supplies
between foreign entities delivered in a foreign
port. (Crescent Petroleum v. MIV Lok
Maheshwari, GR. No. 156969, Nov. 11,2005)
Q: When shall a ship mortgage be
considered as a preferred mortgage?
A:
1. When recorded;
2. An affidavit is filed with the record of
such mortgage to the effect that the
mortgage is made in good faith and
without any design to hinder, delay,
or defraud any existing or future
creditor of the mortgagor or any lien
or of the mortgaged vessel; and
3. The mortgage does not stipulatethat
the mortgagee ,waives the preferred
status thereof, (Sec. 4)
Q: What are the grounds for a vessel to be
arrested?
A:
1. .Failure to comply with the preferred
mortgage conditions; or
2. Non-payment of necessaries and
maritime liens,
Q: What is the procedure in judicial
foreclosure of a vessel?
A:
1. File a petition for judicial foreclosure
of a preferred ship mortgage;
2. Apply, ex parte, for an order for the
arrest of the mortgaged vessel;
3. An affidavit must be attached
showing that the preferred mortgage
or maritime liens were violated or
unpaid;
4. Applicant files a bond; and
5. The court shall then issue the order of
arrest. (Sec. 11)
Q: What is the procedure in the arrest,
seizure and extra-judicial foreclosure of a
vessel?
A: Chattel Mortgage Law shall apply, For the
purpose of taking possession of the vessel:
1. The creditor may secure from ajudge
of the Regional Trial Court of the
province where the vessel may be
found or where the creditor or debtor
resides, an order for the arrest or
seizure of the vessel.
2. Upon such order of seizure or arrest
being issued, the sheriff shall
immediately take possession of the
vessel or vessels for the. purpose of
foreclosure and sale.
UNIVERSITY OF SANTO TOMAS
Pacu(taa de (] ) er ecf i o Ci ui I
~9~279
TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
Q: Can the order of arrestlseizure be
discharged?
Doctrine of Limited Liabili
A: Yes:
1.
If properly arrested - By posting a
counterbond or cash deposit double
the amount of the claim. (Sec. 12)
2.
If improperly arrested No
counterbond is necessary because
the vessel is not deemed to have
been arrested.
Q: What is
counterbond?
A: I
3.
the purpose of
To fumish another security other than
the vessel; and
4. I It takes the place of the vessel.
Note: If posted by a fake insurance company,
the vessel will be arrested.
Q: What is the order of preference under
this law?
A: A properly registered mortgage lien over
the vessel becomes a preferred credit over
said vessel. This lien has priority over all
claims against the vessel except the following
claims inthe order stated:
1. Costs taxed by the court and taxes
due to the government;
2. Crew's wages;
3. General average;
4. Salvage including contract salvage;
5. Maritime liens arising prior in time to
the recording of the preferred
mortgage; .
6. Damages arising out of tort, e.g.
collision damage;
7. Preferred mortgage registered prior in
time.
Note: The preferred mortgage lien will then be
paid after the above items have already been
complied with.
Q: What if the proceeds of the sale are not
sufficient to pay all creditors included in
one class?
A: The residue shall be divided among them
pro rata. All credits not paid shall subsist as
ordinary credits enforceable by personal action
against the debtor. The unpaid portion shall
be enforceable by personal action against the
debtor. (Sec. 17)
280
the
Q: What is the doctrine of limited liability?
A: Also called the "no vessel, no liability
doctrine", it provides that liability of ship owner
is limited to ship owner's interest over the
vessel. Consequently, in case of loss, the ship
owner's liability is also extinguished. Limited
liability likewise extends to ship's
appurtenances, equipment, freightage, and
insurance proceeds.
The ship owner's or agent's liability is merely
co-extensive with his interest in the vessel,
such that a total loss of the vessel results in
the liability's extinction. The vessel's total
destruction extinguishes maritime liens
'because there is no longer any res to Which
they can attach. (Monarch Insurance v. CA,
G.R. No. 92735, June 8, 2000)
Q: What is the rationale of this doctrine?
A: To offset against innumerable hazards and
perils in sea' voyage and to encourage ship
building and maritime commerce. By
abandonment, the ship owner and ship agent
exempt themselves from liability, thus avoiding
the possibility of risking his whole fortune in
the business. (Real and tiypciiiecer nature of
Maritime Law)
Q: What are the cases in which the doctrine
of limited liability is allowed?
A:
1. Civil liability of the ship agent or
shipowner for the indemnities in favor
of third persons; (Art. 587)
2. Civil liability of the co-owners of the
vessel for the results of the acts of
the captain; (Art. 590)
3. If the vessel and her cargo be totally
lost, by reason of capture or
shipwreck, all the rights shall be
extinguished, both as regards the
right of the crew to demand wages
and the right of the ship agent to
recover the advances made; (Aft
643) or
4. Extinction of civil liability incurred by
the shipowner or agent in cases of
maritime collisions. (Art. 837)
UST GOLDEN NOTES 2010
Q: What are the exceptions to the doctrine
of limited liability?
A:
c. Repairs and provisioning of the
vessel before the loss of the vessel;
(Art. 586)
d. Insurance proceeds. If the vessel is
insured, the proceeds will go to the
persons entitled to claim from the
shipowner; (Vasquez v. CA, G.R. No.
L-42926, Sept. 13, 1985)
e. Workmen's Compensation cases
(now Employees' Compensation
under the Labor Code); (Oching et.
at. v. San Diego, G.R. No. 775, Dec.
17, 1946)
f. When the shipowner is guilty of fault
or negligence;
Note: But if the captain is the one
who is guilty, doctrine may still be
invoked, hence, abandonment is still
an option.
g. Privatecarrier; or
11. Voyage is notmaritimeincharacter.
Q: On October 30, 2007, MN Pacific, a
Philippine registered vessel owned by
Cebu Shipping Company (CSC), sank on
her voyage from Hong Kong to Manila.
Empire Assurance Company (Empire) is
the insurer of the lost cargoes loaded on
board the vessel which were consigned to
Debenhams Company. After it indemnified
Debenhams, Empire as subrogee filed an
action for damages against CSC.
1. Assume that the vessel was
seaworthy. Before departing, the
vessel was advised by the
J apanese Meteorological Center
that it was safe to travel to its
destination. But while at sea, the
vessel received a report of a
typhoon moving within its general
path. To avoid the typhoon, the
vessel changed its course.
However, it was still atthe fringe of
the typhoon when it was
repeatedly hit by huge waves,
foundered and eventually sank.
The captain and the crew were
saved except three (3) who
perished. Is CSC liable to Empire?
What principle of maritime law is
applicable? Explain.
2. Assume that the vessel was not
seaworthy as in fact its hull had.
leaked, causing flooding in the
vessel. Will your answer ?e the
same? Explain.
3. Assume the facts in question b.
Canthe heirs of the three (3) crew
members who perished recover
from CSC? Explain fully.
A:
1. CSC is not liable to Empire. In this
case, there is a fortuitous event that
took placewhich istile proximateand
only causeof the loss. Italsoappears
that there is exercise of due diligence
to prevent or minimize the loss
before, during and after the
occurrence of the disaster or
calamity. Thus, tile doctrine of limited
liability is applicable in this situation
which limits the liability of shipowner
to the value of the vessel, ship's
appurtenances, equipment,
freightage, and insurance proceeds.
In other words, the shipowner's
liability is merely coextensivewith his
interestinthe vessel suchtilat atotal
lossthereof, as whathappenedinthis
case, resultsinits extinction.
2. CSC will now be liable to Empire if
the vessel was not seaworthy. The
doctrine of limited liability is not
applicable in cases where there is
fault or negligence on the part of the
commoncarrier.
3. The heirs of the three crewmembers
may recover under the Workmen's
Compensation Act (now Employee's
Compensation under the Labor
Code). The total loss of the vessel
nor the doctrine of limited liability
cannot affectthe rights of the heirsto
compensation as it is one of the
recognized exceptions to the
applicability of the rule. (2008 bar
Question)
Q: Thinking that the impending typhoon
was still 24 hours away, MV Pioneer left
port to sail for Leyte. There was a
miscalculation of the typhoon signals by
both the ship-owner .andthe captain as the
typhoon came earlier and overtook the
vessel. The vessel sank and a number of
passengers disappeared with it. I
I
Relatives of the missing passengers
claimed damages against the ship-owner.
The ship-owner set up the defense that
under the doctrine of limited liability, his
liability was co-extensive with his interest
UNIVERSITY OF SANTO TOMAS f"~';281
' Facu(tad de CDer ecf to CiviC ..,.
TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
in the vessel. As the vessel was totally lost,
his liability had also been extinguished.
r .' .# hf H .' ,' ,,[ 4a'
How will you advice the claimants?
Discuss the Doctrine of Limited Liability in
Maritime Law.
A: Underthe doctrine of limited liability inmari-
time law, the liability of the shipowner arising
fromthe operation of a ship is confined to the
vessel, equipment, and freight, or insurance, if
any, so that if the ship owner abandoned the
ship, equipment, and freight, his liability is
extinguished. However, the doctrine of limited
liability does not apply when the ship owner or
captain is guilty of negligence as in this case.
(1999 Bar Question)
Q: Assuming that the vessel Was insured,
may the claimants go after the insurance
proceeds?
A. Yes. In case of a lost vessel, the claimants
may go after the proceeds of the insurance
coveringthe vessel. (1999 Bar Question)
Q: X Shipping Company spent almost a
fortune in refitting and repairing its luxury
passenger vessel, the MV Marina, which
plied the inter-island routes of the company
from La Union in the north to Davao City in
the south. The MV Marina met an untimely
fate during its post-repair voyage. It sank
off the coast of Zambales while en route to
La Union from Manila. The investigation
showed that the captain alone was
negligent. There were no casualties in that
disaster. Faced with a claim for the
payment of the refitting arid repair, X
Shipping Company. asserted exemption
from liability on' the basis of the
hypothecary or limited liability rule under
Article 587 of the Code of Commerce. Is X
Shipping Company's assertion valid?
Explain.
A: No. The assertion of X Shipping Company
is notvalid. The total destruction of the vessel
does not affect the liability of the ship owner
for repairs on the vessel completed before its
loss. (2000Bar Question)
Q: What is the concept of abandonment in
maritime commerce?
A: The shipowner or shipagent shall be civilly
liable for the indemnities in favor of third
persons arising from acts of the captain and
his conduct inthe case of the qoods.loaded on
the vessel. But the owner/agent may exempt
himself from liability by abandoning the vessel
with all her equipments and the freight it may
haveearned during the voyage.
Q: What is the extent of the ship agent's or
ship owners's liability?
A: The vessel with all her equipment and the
-freiqht it may have earned during the voyage,
and to the insurance thereof if any. (Yangco v.
Laserna, G.R. No. 47447, Oct. 29, 1941)
Q: Who may exercise the right of
abandonment?
A: The shipowner, the ship agent and/or the
bareboat charterer can exercise the right of
abandonment. But inthe case of co-ownership
of a vessel, a co-owner may exempt himself
from liability by the abandonment of only the
partof the vessel belongingto him.
Q: When is the right of abandonment not
applicable?
A: It does not apply to cases where the injury
or averagewas occasioned by the shipowner's
own fault. (Luzon Stevedoring Corp. v. CA,
G.R. No. L-58897, Dec. 3, 1987)
Q: What is the effect of abandonment?
A: Itamounts to:
1. An offer of the value of the vessel;
and
2. Cessationof responsibility of the ship
owner and ship agent. The offer of
the value of vessel and freight is
directed towards the injured parties.
(Switzerland General Insurance Co.,
Ltd. v. Ramirez, G.R. No. L-48264,
Feb. 21, 1980)
UST GOLDEN NOTES 2010
Q: What are the requisites of abandonment
in marine insurance?
Q: Who < Ire the parties in maritime
commerce?
A:
1. Actual relinquishment of claim of
ownership;
2. Constructive total loss (loss, injury or
expenses suffered must be more than
Y .. of the value of the thing
abandoned);
3. The abandonment must neither be
partial nor conditional;
4. Must be done within reasonable time
after receipt of reliable information of
constructive total loss;
5. Notice to the insurer, whether orally
or in writing must be explicit
specifying the cause of
abandonment; and
6. If done orally, a written notice must
be given within 7 days from such oral
notice.
Q: What are the distinctions between
abandonment in maritime commerce from
abandonment in maritime insurance.
A:
i;" ',/" .?MA~ITJ ME
MARITIME
"
roo ,
COMMERCE "
INSURANCE
Abandonment is made
Abandonment is not
by the shipowner/ship
necessarily made by
agent
the shipowner/ship
agent
The thing abandoned
The thing abandoned
is the vessel with all
is the thing insured,
its appurtenances and
not necessarily the
freight
vessel
Basis is breach of
Basis is constructive.
maritime contract
total loss inwhich the
because of the
loss, injury or
conduct of the captain
expenses be more
inthe vigilance over
than Y .. of the value
the goods and safety
of the thing insured
of passengers
which is abandoned.
Purpose is to limit the
Purpose is to recover
liability of the ship
from the insurer
owner or agent to third
indemnity for atotal
persons to the value
loss, although the
of the vessel with her
thing insured does
appurtenances and
not suffer actual total
freight
loss.
A:
1.
2.
3.
4.
5.
6.
Shipowners and ship agents;
Captain or master of the vessel;
Officers of the vessel (Sailing or first
mate, the quarter mate or second
mate, the engineers);
Seamen (sailors or crew);
Persons who make up the
complement of the vessels, including
the stokers and supercargoes; and
Pilot.
mnx I%ltilit fJ@il! i1
Q: Who is the shipowner of a vessel?
A: The person in possession, management,
control over the vessel, and the right to direct
her navigation. While in their possession, the
ship owners also receive freight earned and
paid. i
Q: Who is aship agent?
A: The person entrusted with provisioning or
representing the vessel in the port in which it
may be found. Hence, whether acting as agent
of the owner of the vessel or as agent of the
charterer, he will be considered as the ship
agent and may be held liable as such, as long
as he is the one that provisions or represents
the vessel. (Macondray & Co., Inc. v.
Provident Insurance Corp, G. R. No. 154305,
Dec. 9, 2004)
Q: What are the civil liabilities of ship
owners and agents?
A:
1. Damages suffered by a 3
rd
person for
tort committed by the captain;
2. Contracts entered for provisioning
and repair of vessel;
3. Indemnities in favor of 3
rd
persons
arising from the conduct of the
captain from the care of goods; and
4. Damages in case of collision due to
fault or negligence or want of skill of
the captain.
UNIVERSITY OF SANTO TOMAS
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TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
Q: What are the powers, functions, and
liabilities of ship agents?
Captains and Masters of the Vessel
A:
1. Indemnity for expenses incurred for
ship's benefit. A:
Q: What is the three-fold character of the
captain?
2. , Discharge of captain and/or crew
I members. The following are the rules
observed by the ship agent:
a. Captain and/or crew member's
contract not for a definite period
or voyage:
i. Before vessel sets out to sea:
. Ship agent at his discretion
may discharge the captain and
members of the crew. Ship
agent must pay captain and/or
crew members salaries earned
according to their contracts,
and without any indemnity
whatsoever, unless there is an
expressed agreement;
ii. During voyage: Captain and/or
crew member shall receive
salary until return to the port
where contract was made.
Article 637 of the Code of
Commerce enumerates the
just causes for discharge.
b. Where captain and members of
the crew's contracts with ship
agent be for a definite period or
voyage:
i. Captain and/or crew members
may not be discharged until
after the fulfillment of their
contracts, except by reason of
insubordination in serious
matters, robbery, theft,
habitual drunkenness, or
damage caused to the vessel
or to its cargo through malice
or manifest or proven
negligence. (Art. 605, Code of
Commerce)
ii. If the captain should be the
vessel's co-owner, he may not
be discharged unless ship
agent returns his amount. of
interest therein. Inthe absence
of agreement between the
parties, interest shall be
appraised by experts
appointed in the manner
established by civil procedure.
1. General agent of the ship owner;
2. Vessel's technical director; and
3. Government representative of the flag
he navigates under.
Q: What are the inherent powers of the ship
captain?
A:
3. To appoint or make contracts with the
crew inthe ship agent's absence, and
to propose said crew, should said
agent be present; but the ship agent
may not employ any member against
the captain's express refusal;
4. To command the crew and direct the
vessel to the port of its destination, in
accordance with the instructions he
may have received from the ship
agent;
5. To impose correctional punishment:
a. Upon those who fail to comply
with orders; or
b. Those wanting indiscipline;
6. To make contracts for the charter of
the vessel in the absence of the ship
agent or of its consignee;
7. To adopt all proper measures to keep
the vessel well supplied and
equipped, purchasing all that may be
necessary for the purpose, provided
there is no time to request instruction
from the ship agent;
8. To order, in similar urgent cases
while on a voyage, the repairs on the
hull and engines of the vessel and in
its rigging and equipment, which are
absolutely necessary to enable it to
continue and finish its voyage. (Art.
610)
UST GOLDEN NOTES 2010
Q: What are the obligations of the captain?
A:
1. Inventory of equipment;
2. Keep a copy of Code of Commerce
on board;
3. Have a log book, freight book,
accounting book;
4. Conduct a marine survey of vessel
before loading;
5. Remain on board while loading;
6. Demand pilot on departure and on
arrival at each port;
7. Be on deck when sighting land; .
8. Arrivals under stress: to file marine
protest in24' hours;
9. Record bottomry loan with Bureau of
Customs;
10. Keep papers and properties of crew
members who might die;
11. Conduct himself according to the
instuctions of the ship agent;
12. Report to ship agent on arrival;
13. Observe rules on the situation of
lights and maneuvers to prevent
collisions;
14. Remain on board til the last hope to
save the vessel is lost and to abide by
the decision of the majority whether to
abandon or not;
15. In case of shipwreck: file marine
protest, within 24 hours; and
16. Comply with rules and regulation on
navigation. (Art. 612)
Q: In what cases shall the ship owner/agent
be liable to the damages caused by the
captain?
A:
2. Damages suffered by the vessel and
its cargo by reason of want of skill or
negligence on his part;
3. Thefts committed by the crew,
reserving his right of action against"
the guilty parties;
4. Losses, fines, and confiscations
imposed an account of violation of
customs, police, health, and
navigation laws and regulations;
5. Losses and damages caused by
mutinies on board the vessel or by
reason of faults committed by the
crew in the service and defense of
the same, if he does not prove that he
made timely use of all his authority to
prevent or avoid them;
6. Those caused by the misuse of the
powers;
7. For those arising by reason of his
going out of his course or taking a
course which he should not have
taken without sufficient cause, in the
opinion of the officers of the vessel, at
a meeting with the shippers or
supercargoes who may be on board.
No exceptions whatsoever shall
exempt himfrom this obligation;
8. For those arising by reason. of Ilis
voluntarily entering a port other than
that of his destination, outside of the
cases or without the formalities
referred to inArticle 612; and
9. For those arising by reason of non-
observance . of the provisions
contained in the regulations on
situation of lights and maneuvers for
the purpose of preventing collisions
(Art. 618).
Note: Ship owner/agent is not liable for the
obligations contracted by the captain if the
latter exceeds his powers and privileges
inherent in his position of those which may
have been conferred upon him by the former.
However, if the amount claimed were used for
the benefit of the vessel, the ship owner or
ship agent is liable.
Q: In what causes shall the captain be not
liable for loss or injury to persons or
cargo?
A:
1. Force majeure; and
2. Obligations contracted for the
vessel's benefit, except when the
captain expressly agrees to be liable.
Q: May the captain have himself
substituted by another?
A: No, inthe absence of consent from the ship
agent, and should he do so he shall be liable
for all the acts of the substitute. (Art. 615)
A:
crew lof the
\
1. Sailing/first mate - Second chief of
the vessel. The first mate takes over
the vessel in the captain's inability to
discharge powers.
2. Second mate - Takes command of
the vessel in case of
disability/discharge of the captain and
first mate.
3. Engineers - Officers in-charge of the
vessel's motor apparatus. In event
two or more of them are hired, one
shall be chief engineer.
Q: Who are the officers and
vessel?
UNIVERSITY OF SANTO TOMAS
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TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
4. Members of the vessel - Crew
members hired by the ship agent. In
case of ship agent's absence, they
are hired by the captain. In no case
may the ship agent or captain take a
number of foreigners more than 1/5 of
the vessel's complement.
Q: When may the captain and crew
members rescind their contractual
employment?
A: Incase of:
1. War;
2. Change of destination;
3. Outbreak of disease; or
4. Newowner of vessel. (Art. 647)
Q: Who makes up the complement of the
vessel?
A: All persons embarked, from the captain to
the cabin boy, necessary for the management,
maneuvers, and service. It includes the crew,
sailing mates, engineers, stockers, and others
working on borad not having specific names.
But it does not include the passengers. (Art.
648)
Q: Who are supercargoes?
A: Persons assigned with administrative duties
by the ship agent or shippers. They keep
account of the vessel's transaction. (Art. 649)
I ,
Q: WhJ are pilots? .
!
A: Persons duly qualified, and licensed, to
conduct a vessel into or out of ports, or in
certain waters. These are persons taken on
board at a particular place for the purpose of
conducting a ship through a river, road or
channel, or from a port.
Note: The pilot is the master pro hac vice in
the command and navigation of the ship.
Q: What is the nature of the liability of a
pilot in case of collision?
A: A pilot is personally liable for damages
caused by his own negligence or default to the
owners of the vessel, and to third parties for
damages sustained in a collision. Such
negligence of the pilot in the performance of
duty constitutes a maritime tort. (Far Eastern
Shipping v. CA, G.R. No. 130068, Oct. 1,
1998)
Q: When may the .master of the vessel
interfere with or even displace the pilot?
286
A: When the pilot is obviously incompetent or
.intoxicated and the circumstances require that
the master displace a pilot because of
incompetency or physical incapacity. If,
however, the master does nor observe that a
pilot is incompetent or physically incapacitated.
the master isjustified in relying onthe pilot. but
not blindly.
Note: The master's failure to interfere with or
displace the pilot when necessary makes the
master personally liable for any resulting
damage caused. (Far Eastem Shipping v. CA,
G.R. No. 130068, Oct. 1, 1998)
Special Contracts of Maritime Commerce
Q: What is a charter party contract?
A: A contract whereby the whole or part of the
ship is let by the owner to a merchant or other
person for a specified time or use for the
conveyance of goods, in consideration of the
payment of freight. (Caltex v. Sulpicio Lines,
G.R. No. 131166, Sept. 30, 1999)
Q: What are the classes of charter party?
A:
1. Bareboat or demise - the ship owner
gives possession of the entire vessel
to the charterer. Inturn, the charterer
supplies, equips, and mans the
vessel. The charterer is the owner pro
hac vice.
2. Contract of affreightment - the owner
of the vessel leases a part or all of its
space to haul goods for others. It can
either be:
a. Time charter Vessel is
chartered for a particular time or
duration. While the ship owner
still retains possession and
control of the vessel, the
charterer has the right to use all
vessel's facilities. The charterer
may likewise designate vessel's
destination.
b. Voyage charter - Vessel is
chartered for a particular voyage
or series of voyages.
Q: What is meant by owner pro hac vice?
A: The charterer is considered the owner of
the vessel for the voyage or service stipulated.
The charterer and not the owner of the vessel
is liable for vessel's expenses, including
seaman's wages.
UST GOLDEN NOTES 2010
Q: What is avoyage charter?
Q: What are the obligations of charterer?
A: A voyage charter is a contract wherein the
ship was leased for a single voyage for the
conveyance of goods, in consideration of the
payment of freight. The shipowner retains the
possession, command and navigation of the
ship, the charterer merely having use of the
space in the vessel in retum for his payment of
freight. An owner who retains possession of
the ship remains liable as carrier and must
answer for loss or non-delivery of the goods
received for transportation. (Cebu Salvage
Corp. vs. Philippine Home Assurance Corp.,
G . R . N o . 1 5 0 4 0 3 , J a n . 2~ 2 0 0 ~
Note: The same concept applies to a time
charter.
Q: What are the distinctions between a
bareboat or demise charter party from
contracts of affreightment?
A:
BAREBOATIDEMISE CONTRACT OF
CHARTER
CONTRACT AFFREIGHTMENT
Ship owner remains
liable and carrier
must answer for any
breach of duty.
Negligence of the
charterer gives rise to
its liability to others.
Charterer is regarded
as owner pro hac vice.
Ship owner
temporarily.
relinquishes
possession and
ownership of the
vessel.
Charterer is not
regarded as owner.
Ship owner retains
ownership over the
vessel. (Coastwise
Lighterage v. CA,
G.R. N o . 1 1 4 1 6 7 ,
Julv 12, 1995)
Q: What are the rights and obligations of
ship owner or ship agent?
A:
1. If vessel is wholly chartered, not to
accept cargo from others;
2. To preserve the represented
capacity;
3. To unload cargo clandestinely placed;
4. To substitute another vessel when
cargo is less than 3/5 capacity;
5. To leave port when charterer does
not bring cargo to vessel within the
lay/ extra-lay days agreed upon;
6. To place vessel in a condition to
navigate; and
7. To bring vessel to nearest neutral
port in case of war.
A:
1. Pay the agreed price;
2. Pay freightage on unboarded cargo;
3. Pay losses to others for
unloadinglloading uncontracted or
illicit cargo;
4. To wait if vessel needs repair; and
5. Pay expenses for deviation.
Q: May the charterer unload the vessel
even before reaching the port of
destination?
A: Yes:
1. Before beginning the trip, paying half
of the freightage;
2. Before reaching the port of
destination, freightage is paid infull.
Q: What are the instances when a charter
party may be rescinded?
A:
1. At the request of the charterer:
4. By abandoning the charter and
paying half the price;
5. Error intonnage or flag;
6. Failure to place vessel at
charterer's disposal; i.
7. Return the vessel due to pirates,
enemies, and bad weather;
8. Arrival at port for repairs - if
repairs take less than 30 days,
pay full freightage; if more than,
freightage in proportion to the
distance covered.
2. At the request of the ship owner:
a. If extra lay days terminate
without the cargo being placed
alongside vessel; and
b. Sale by the owner of the vessel
before loading by the charterer.
3. Due to fortuitous event:
a. War - There is a governmental
prohibition of commercial
intercourse, intended to bring
about an entire cessation for the
time being of all trade whatever;
b. Blockade A sort of
circumvallation around a place
by which all foreign connection
and correspondence is, as far as
human power can effect it, to be
cut off;
c. Prohibition to receive cargo at
port of destination;
d. Embargo =, A proclamation or
order of State, usually issued in
UNIVERSITY OF SANTO TOMAS ~>.~! 287
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TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
times of war or threatened
hostilities, prohibiting the
departure of ships or goods from
some or all the ports of such
State until further order; or
e. Inability of the vessel to navigate.
(Art. 640)
Q: What is a primage?
A: The bonus paid to the captain for a
successful voyage.
Q: What is a demurrage?
A: It is the sum due, by express contract, for
the detention of the vessel for a time longer
than time set for loading. It is another name for
a penal clause to compensate the owner of the
vessel for its non-use.
Q: What are lay days?
A: The period when the vessel shall be
delayed in port for loading and unloading.
Q: What are extra lay days?
A: The days which follow after the lay days
have lapsed.
Q: What is deadfreight?
A: Amount paid by or recoverable from a
charterer of a ship for the portion of the ship's
capacity the latter contracted for but failed to
occupy.
Q: What is transshipment?
A: The act of taking cargo out of one ship and
loading it in another, or the transfer of goods
from the vessel stipulated in the contract of
affreightment to another vessel before the
place of destination named in the contract has
been reached, or the transfer for further
transportation from one ship or conveyance to
another.
Q: What is loan on bottomry?
I
A: ~ loan secured by the ship owner or ship
agent guaranteed by the vessel itself and
payable only upon the arrival of vessel at
destination. It can be secured by the captain
outside the residence of the ship owner or ship
agent.
Q: What is loan on respondentia?
A: A loan secured by the owners of the cargo
payable upon safe arrival of cargo at
288 I team: hij li.,W
destination. The ship owner, agent or captain
cannot secure the loan.
Q: What is the effect on the loan when the
security on the loan on bottomry or
respondentia is lost during voyage?
A:
GR: If the ship of goods given as security
in a loan on bottomry or respondentia is
lost during voyage, the loan is
extinguished.
XPN: Loan still exists where:
-1-.- Loss is due to inherent defect of the
ship or goods;
2. Loss is due to the barratry on the part
of the captain;
3. Loss is due to the fault or malice of
the borrower;
4. The vessel was engaged in
contraband; or
5. The cargo loaded on the vessel be
different from that agreed upon.
Q: What are the common elements of
bottomry and respondentia?
A:
1. Exposure of security to marine peril;
and
2. Obligation of the debtor conditioned
only upon safe arrival of the security
at port of destination. (Art. 732)
Q: What are the distinctions between loan
on bottomry or respondentia and ordinary
loan?
A:
BOTTOMRY OR
ORDINARY LOAN
RESPONDENTIA
Not subject to the
Subject to the Usury
Usury Law.
Law
Liability is contingent
Absolutely payable
upon the safe arrival
of the vessel.
The last lender is the
The first lender is the
preferred creditor.
preferred creditor
Q: When is loan on bottomry or
respondentia regarded as simple loan?
A:
1. Lender loaned an amount larger than
the value of the object due to
fraudulent means employed by the
borrower. (Sec. 726, Code of
Commerce)
UST GOLDEN NOTES 2010
2. Full amount of the loan is not used for
the cargo or given on the goods if all
of them could not have been loaded,
the balance will be considered a
simple loan. (Art. 727, Code of
Commerce)
3. If tile effects on which the money is
taken is not subjected to any risk.
(Art. 729, Code of Commerce)
Q: When loan on bottomry or respondentia
and marine. insurance concur, how much
does the insurer and lender recover in the
value saved in case of shipwreck?
A: The value of what may be saved in case of
shipwreck shall be divided between the lender
and the insurer, in proportion to the legitimate
interest of each one, taking into consideration
the principal with respect to the loan.
Note: The insurable interest of the owner of
the vessel is tile value of the vessel less the
loan.
Accidents in Maritime Commerce
Q: What are the accidents in maritime
commerce?
A:
1. Averages;
2. Arrival under stress;
3. Collision; Ot'
4. Shipwreck.
Q: What are averages?
A: All extraordinary or accidental expenses
which may be incurred during the voyage for.
the preservation of the vessel or cargo or both.
Q: What are the kinds of averages?
A:
1. General average - Damages or
expenses deliberately caused in
order to save the vessel, its cargo or
both from real and known risk.
2. Particular average - Damages or
expenses caused to the vessel or
cargo that did not inure to the
common benefit, and borne by
respective owners.
Q: What are the requisites for general
average?
A:
1. Common danger present;
2. Deliberate sacrifice of part of the
vessel or cargo;
3. Successful saving of vessel and/or
cargo; and
4. Proper procedure and legal steps.
Q: Who shall satisfy the amount of the
general averages?
A: All persons having an interest in the vessel
and cargo therein at the time of the occurrence
of the average shall contribute. (Art. 812)
Q: Who shall satisfy the amount of the
particular averages?
A: The owner of the things which gave rise to
the expenses or suffered the damage shall
bear the simple or particular averages (Art.
810).
Q: What are the distinctions between
general average and particular average?
A:
GENERAL PARTICULAR
AVERAGE AVERAGE
Both the ship and No common da~ger to
cargo are subject to both the vessel and
the same danger the cargo
There is a deliberate Expenses and
sacrifice of part of the damages are not
vessel, cargo, or both deliberately made
Damage or expenses Did not inure to
incurred to the common benefit and
vessel, its cargo, or profit of all persons
both, redounded to interested in the.
the benefit of the vessel and her cargo.
respective owners.
All those who have Only the owner of the
benefited shall satisfy goods benefiting from
the average. the damage shall bear
the expense of
averaqe.
Q: What are goods not covered by general
average even if not sacrificed?
A:
1. Goods not recorded in the books or
records of the vessel (Art. 855[2])
2. Fuel for the vessel if there is more
than sufficient fuel for the voyage
(Rule IX, York-Antwerp Rule)
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TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
Q: What is jettison?
A: Act of throwing overboard part of a vessel's
cargo or hull in hopes of saving a ship from
sinking.
Q: What is the order of goods to be .cast
overboard in case of jettison?
A:
3. Those on deck, preferring the bigger
bulk with least value.
4. Those below upper deck, beginning
with the heaviest with least utility.
Q: Distinqulshbetwsan overseas and inter-
island trade regarding reimbursement and
payment of general averages on jettisoned
deck cargo.
A:
1. In case of overseas trade, the York-
Antwerp Rules prohibit the loading of
cargo on deck. In case such cargo is
jettisoned, the owner will not be
entitled to reimbursement in view of
the violation. If the cargo were saved,
the owner must contribute to general
average.
2. In case of interisland trade, the York-
Antwerp Rules allow deck cargo. If
the cargo loaded on deck is jettisoned
as a result of which the vessel was
saved, the cargo owner is entitled to
reimbursement. If the cargo is saved,
the cargo owner must contribute to
the general average.
Reason: In interisland trade, voyages are
usually short and there are intervening islands
and the seas are generally not rough. In
overseas trade, the vessel is exposed for
many days to the peril of the sea making deck
cargo is dangerous to navigation.
Q: MV SuperFast, a passenger-cargo
vessel owned by SF Shipping Company
plying the inter-island routes, was on its
way I to Zamboanga City from the Manila
port when it accidentally, and without fault
or negligence of anyone on the ship, hit a
hug~ floating object. The accident caused
damiage to the vessel and loss of an
accornpanyinq crated cargd of passenger
PRo In order to lighten the vessel and save
it from sinking and in order to avoid risk of
damage to or loss of the rest of the shipped
items (none of which was located on the
deck), some had to be jettisoned. SF
Shipping had the vessel repaired at its port
of destination. SF Shipping thereafter filed
290 ! team:l,ijll.t&
a complaint demanding all the other cargo
owners to share in the total repair costs
incurred by the company and in the value
of the lost and jettisoned cargoes. In
anSWer to the complaint, the shippers' sole
contention Was that, under the Code of
Commerce, each' damaged party should
bear its or his own damage and those that
did not suffer any loss or damage were not
obligated to make any contribution in favor
of those who did. Is the shippers'
contention valid? Explain.
A: No. The shippers' contention is not valid.
The owners of the cargo jettisoned, to save the
vessel from sinking and to save the rest of the
cargoes, are entitled to contribution. The
jettisoning of said cargoes constitutes general
average loss which entitles the owners thereof
to contribution from the owner of the vessel
and also from the owners of the cargoes
saved.
SF Shipping is not entitled to
contribution/reimbursement for the costs of
repairs on the vessel from the shippers. (2000
Bar Question)
Arrival Under Stress
Q: What is arrival under stress?
A: It is the arrival of a vessel at the nearest
and most convenient port, if during the voyage
the vessel cannot continue the trip to the port
of destination on account of the lack of
provisions, well-founded fear of seizure,
privateers or pirates, or by reason of any
accident of the sea disabling it to navigate.
(Art. 819)
Note: In arrival under stress, the captain must
file a Protest which is merely a disclaimer for
the shipowner not to be liable.
Q: When is arrival under stress unlawful?
A:
1. Lack of provisions is due to
negligence to carry according to
usage and customs;
2. Risk of enemy not well known of
manifest;
3. Defee! of vessel is due to improper
repair; or
4. Malice, negligence, lack of foresight
or skill of captain. (Art. 820)
UST GOLDEN NOTES 2010
Collision and Allision
Q: What is collision?
A: It is the impact of two moving vessels.
Q: What is allision?
A: It is the impact between a moving vessel
and a stationary one.
Q: What are the zones of time in the
collision of vessel?
A:
1. First zone - all time up to the moment
when risk of collision begins.
Note: One vessel is a privileged
vessel and the other is a vessel
required to take action to avoid
collision.
2. Second zone - time between moment
when risk of collision begins and
moment it becomes practically a
certainty.
Note: In this zone, the conduct of the
vessels are primordial. It is in this
zone that vessels must observe
nautical rules, unless a departure
therefrom becomes necessary to
avoid imminent danger. The vessel
which does not make such strict
observance is liable.
3. Third Zone. - time when collision is
certain and upto the time of impact.
Note: An error at this point no longer
bears' any consequence.'
Q: What is an error in extremis?
A: The sudden movement made by a faultless
vessel during the third zone of collision with
another vessel which is at fault under the
second zone. Even if sudden movement is
wrong, no responsibility will fall on the faultless
vessel.
Q: What are the rules governing liabilities
of parties in case of collision?
A:
1. One vessel at fault - The ship owner
of such vessel shall be liable for all
resulting damages.
2. Both vessels at fault - Each vessel
shall suffer their respective losses but
as regards ""/the owners of the
cargoes, both vessels shall be jointly
and severally liable.
3. Vessel at fault not known - Each
. vessel shall suffer its own losses and
both shall be solidarlly liable for loses
or damages on the cargo. (Doctrine
of Inscrutable Fault)
4. Fortuitous event - Each shall bear its
.own damage.
5. Third vessel at fault - The third
vessel shall be liable for losses and
damages sustained.
Q: What is the role of a "protest" with
respect to collisions?
A: The action for recovery of damages arising
from collisions cannot be admitted if a protest
or declaration is not presented within twenty-
four hours before the competent authority of
the point where the collision took place, or that
of the first port of arrival of the vessel, if in
Philippine territory, and to the Filipino consul if
it occurred inaforeign country (Art. 835).1
I
Note: Failure to make a protest is net an
impediment to the maintenance of a civil rction
based on quasi-delict. i
Q: When is a protest required?
A:
1. Arrival under stress; (Art. 612 [8])
2. Shipwreck; (Arts. 601 [15J, 843)
3. If the vessel has gone through a
hurricane or where the captain
believes that the cargo has suffered
damages or averages; (Art. 642) and
4. Maritime collision. (Art. 835)
Q: Who can file a maritime protest?
,A:
1. In case of maritime collision, the
passenger or other persons
interested who may be on board the
vessel or who were in a condition
who can make known their wishes
(Arts. 835-836) or the captain himself.
(Verzosa and Ruiz, Rementeria y Cia.
v. Lim, G.R. No. 20145, Nov. 15,
1923)
2. The captain incases of:
a. Arrival under stress;
b. Shipwreck; or
c. If the vessel has gone through a
hurricane or where the captain
believes that the cargo has
suffered damages or averages.
UNIVERSITY OF SANTO TOMAS ,~.~ 291
Pacu(tad de (j ) er ecl i o Ci oi l 'V
TRANSPORTATION LAWS: SHIP MORTGAGE DECREE OF 1978
I
Q: liwo vessels figured in a collision along
the i Straits of Guimaras resulting in
con~iderable loss of cargo. The damaged
vessels were safely conducted to the Port
of Iloilo. Passenger A failed to file a
maritime protest. B, a non-passenger but a
shipper Who suffered damage to his cargo,
likeWise did not file a maritime protest at
all. Can A and B successfully maintain an
action to' recover losses and damages
arising from the collision? Reason briefly.
A: B, the shipper can successfully maintainan
action to recover losses and damages arising
fromthe collision notwithstanding his failure to
file amaritime protest since the filing thereof is
required only on the part of A, who, being a
passenger of the vessel at the time of the
collision, was expected to know the
circumstances of the collision. A's failure tofile
a maritime protest will therefore prevent him
from successfully maintaining an action to
recover his losses and damages. (Art 836)
Alternative Answer:
A can maintain an action to recover damages
if he was not ina condition to make knownhis
wishes. B can maintain an action to recover
damages since he was not on board the
vessel. (Art. 836) (2007Bar Question)
Q: A severe typhoon was raging Whim the
vessel SS Masdaam collided With MIV
Princess. It is conceded that the typhoon
was the major cause of collision, although
there was a very strong possibility that it
could have been avoided if the captain of
the SS Masdaam was not drunk and the
captain of the MIV Princess Was not asleep
at the time of collision.
Who should bear the damages to the
vessels and their cargoes?
A: The ship owners of SS Masdaamand MN
Princess shall each bear their respective loss
of vessels. For the losses and damages
suffered by their cargoes, both ship owners
are solidarilyliable. (1998 Bar Question) ,
Q: W.hatis ashipwreck?
I
A: ~he loss of the vessel at sea as a
consequence of its grounding, or running
agai~st anobject insea or onthe coast. If the
wreck was due to malice, negligence, or lack
of skill of the captain, the owner of the vessel
maydemandindemnityfromsaid captain.
292
Q: Who shall bear the losses in shipwreck?
A:
GR: The loss of a shipand her cargo shall
fail upontheir respective owners. (Art. 840)
XPN: If the wreck Was due to malice,
negligence, or lack of skill of the captain, or
because the' vessel put to sea was
insufficiently repaired and equipped, the
ship agent or the shippers may demand
indemnity from the captain for the damage
caused to the vessel or to the cargo by the
accident, (Art. 841)
Academics Committee
C/Jm;pCIJIIII: Abraham D. Cenuino II
/ / i cc-C/ .JtJi r .Fw /1~'(JdeJJ/i,.:f: J eannie A. Lnurcnrino
l / i a: -Cbai r j hr Admi " e.,:"l-'i-lIan(t.': Aissa Celine I-I. Luna
V,< " -O' cJi r / or LiYII,,1 e:", f)e.r{~1/.' Loise Rae (;. Naval
Mercantile Law Committec
Jul i ed H ead: "in! y '1'. /\mpaguey
A.r.rl. Jubj cd tl cad: Manilyn Rose S. Sotelo
Members:
Edwin Marc T. Baldi"
/\ ircen 1\1. Cncb
Socrates Belljie I. Marbil
Ron Cherric S. Mcndoxa
[~dison J ames I', Pngali! auan
Maybcllinc M. Santiago
UST GOLDEN NOTES 2010
Q: What are the two concepts of Salvage?
A:
1. Service which one person renders to
the owner of a ship or goods by his
own labor, preserving the goods or
the ship which the owner or those
entrusted with the care of them have
either abandoned in distress at sea,
or are unable to protect or secure.
2. Compensation allowed to persons by
whose voluntary assistance a ship at
sea or her cargo or both have been
saved in whole or in part from
impending sea peril or such property
recovered from actual peril or loss, as
in cases of shipwreck, derelict or
recapture.
Q: What are the requisites to a valid
salvage claim?
A:
1. Valid object of salvage;
2. Object must have been exposed to
marine peril (not perils of the ship);
3. Services voluntarily rendered when
not required as an existing duty or
from special contract; and
4. Services are successful, total or
partial.
Q: What is the right of a salvor over the
object salvaged?
A: A salvor acquires a right to be paid for his
services a reasonable and proper
compensation out of the property itself. He has
an interest in the property called a lien. He is,
to all intents and purposes, ajoint owner and if
the property is lost he must bear his share like
the other joint owners. (Erlanger v. Swedish
East Asiatic, G.R. No. L - 10051, Mar. 9,
1916)
Q: What may be the subjects of salvage?
A:
1. Ship itself;
2. Jetsam - goods which are cast into
the sea;
3. Flotsam - goods which float upon the
sea when cast overboard; or
4. Ligan or Lagan - goods cast into the
sea tied to a buoy so that they may
be found again by the owners. (p.17:],
Judge Diaz)
Note: Taking passengers from a sinking ship,
without rendering any service in rescuing the
vessel, is not a salvage service, the same
being a duty of humanity and notfor reward.
Q: Who are the persons who have no right
to areward for salvage?
A:
1. Crew of the vessel saved;
2. Person who commenced salvage in
spite of opposition of the captain or
his representative; and
3. A person who fails to deliver a
salvaged vessel or cargo to the
Collector of Customs
Q: What is aderelict?
A: It is a ship or her cargo which is abandoned
and deserted at sea by those who are in
charge of it, without any hope of recovering it,
or without any intention of returning to it. It is a
proper subject of salvage.
Q: What is the procedure in the claiming of
reward in case of aderelict? .
A:
1. The salvor must bring the cargo or
tow the vessel to the nearest port
where it will be delivered to the
collector of customs, the provincial
treasurer or to the municipal mayor
who will advertise the fact of salvage;
2. If the owner of the salvaged cargo or
vessel apears, he may take
possession of the cargo or vessel
paying a reward not exceeding 50%
of the value of the object salvaged;
3. If no claim is made within 3 months
after the publication of tile
advertisement, the thing/s saved shall
be sold at public auction and the
proceeds, after deducting the reward
and expenses, shall be deRosited
with the Treasury; I
4. If no one claims the same after 3
years, %shall go the salvors and %to
the government.
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de CDer ecl i o Ci vi ]
.~293
TRANSPORTATION LAWS: SALVAGE LAW
Q: When is a service regarded as that of
towage or that of salvage?
A: If a vessel, by towing, is aided to escape
present or .prospectlvs danger, the servite will
be regarded as one of salvage, and the
towage as merely incidental. If the towage is
made not for the purpose of aiding the vesseal
from escaping present or prospective danger
but taking it to some other place, then the
service will be regarded as that of simple
towage. (Alhambra Cigar & Cigarette Factory
v. La Granja, 40 Off. Gaz. t t' " Supp. 252)
294
Academics Com mittcc
C:hmipclTfll1: Abraham D. (;cnuino 11
I / i ~ r -Ch(j i r ./ or / -l mdemi tJ: J eannie 1\. I .aurentino
I/i,"-Chtlzijill' Admill i,N FiIl,lI/<': Aissn Coline 11. J .una
l/i~'e-CJI"irjf)r iJf),fJlIl i'" l Je' ' ' { ~ I I : Loise Rae (;. Naval
Mercantile Law Committce
Jubj ed l -tcad: Hoi), 'J '. /\Illpagul')'
/l.f.r/. JII/?/(!d H ead- Manilvn Rn:->cS. Sotdo
Members:
Edwin Mnrc'! ' llaldia
Airccu M. Cacho
Socrates Bcnjic I. Marbil
Ron Chcrric S. Mendoza
Edison J ames F. Pagalilauan
rViaybclLinc M. Santiago
UST GOLDEN NOTES 2010
'CARRIAGE OF GOODS BY SEA ACT
, (COGSA) (C. 65)
Q: When will COGSA apply?
A: It will only be applied in terms of loss or
damage of goods transported to and from
Philippine ports in foreign trade. It may also
apply to domestic trade when there is a
paramount clause inthe contract.
Q: What is the evidentiary value of a bill of
lading?
A:
GR: It is a peculiar contract because the
evidence of the contract of carriage is the
bill of lading. The bill of lading is the
contract of carriage.
XPN: With respect to charter parties, the
contract of carriage is the charter party
contract. The bill of lading merely becomes
a document of title. It specifically becomes
a receipt over thl" goods.
XPN to XPN: When the bill of lading is
subsequently negotiated to a third party,
follow the general rule. It now becomes the
contract of carriage and not the charter-
party contract.
Note: Issuance of the bill of lading is merely
permissive as it shall be issued only upon
demand of the shipper.
Q: What is the "tackle to tackle" rule?
A: It states that the shipper shall be
responsible for the goods the moment it
passes through one side of the ship for the
purpose of loading until it passes through the
other side for discharging.
Q: What are the responsibilities of the
carrier?
A: The carrier shall be bound to exercise due
diligence to:
1. make the ship seaworthy;
2. properly man, equip, and supply the
ship; and
3. make the holds, refrigerating and
cooling chambers, and all other parts
of the ship in which goods are
carried, fit and safe for their
reception, carriage, and preservation.
Q: When is a vessel considered seaworthy
and/or cargoworthy?
A: A vessel is seaworthy if its hull, tackle and
machinery are in a state of good repair, if she
is sufficiently provided with fuel and ballast,
and is manned by an efficient crew.
A vessel is cargoworthy if it is sufficiently
strong and equipped to carry the particular
kind of cargo which she has contracted to
carry, and her cargo must be so loaded that it
is safe for her to proceed on her voyage.
(Santiago Lighterage Corp. v. CA, G.R. No.
139629, June 21, 2004)
Q: What cases are covered under the
COGSA?
A: It applies only in case of loss or damage,
and not to misdelivery or conversion of goods.
(Ang v. American Steamship AgenCies, lnc.,
G.R. No. L-22491, Jan. 27, 2967)
Also, the deterioration of goods due to delay in
their transportation constitutes "loss" or
"damage" within the meaning of Sec. 3(6) of
COGSA. (Mitsui O.S.K. Lines Ltd. v. Court of
Appeals, G.R. No. 119571, Mar. 11, 1998)
Q: What is the amount of the carrier's
iability under the COGSA?
A:
1. The liability limit is set at $500 per
package or customary freight unless
the nature and value of such goods is
declared by the shipper.
2, Shipper and carrier may agree on
another maximum amount, but not
more than amount of damage actually
sustained.
Note: When the packages are shipperf in a
container supplied by carrier and the number
of such units is stated inthe bill of lading, each
unit and not the container constitute the
"package".
UNIVERSITY OF SANTO TOMAS
Pacu{ taa de CDer ecf i o Civif
TRANSPORTATION LAWS: CARRIAGE OF GOODS BY SEA ACT
Q: What are the instances where there is no
liability?
A:
1. If the nature or value of goods was
knowingly and fraudulently misstated
by the shipper;
2. If damage resulted from the
dangerous nature of the shipment
loaded without the consent of the
carrier;
3. If unseaworthy, which is not due to
the negligence of the carrier; or
4. If the deviation was to save life or
property at sea.
Q: When should notice be filed in case of
damage to goods under the COGSA?
A:
1. If the damage is apparent - Notice
must be immediately given. The
notice may either be in writing or
orally.
2. If the damage is not apparent -
Notice must be given within 3 days
after delivery.
Q: What is the consequence if no notice
Was filed?
A: There is no consequence on the right to
bring suit if no notice is filed unlike under the
Code of Commerce. It only gives rise to a
presumption that the goods are delivered in
the same condition as they are shipped.
There is also no consequence if the
transportation charges and expenses are paid
unlike under the Code of Commerce.
I
Q: When should suits for loss or damage of
cargo be brought?
,
A: The suit should be brought Withinone year
from:
1.
2.
Delivery of the goods, in case of
damage; or
The date when the goods should
have been delivered, in case of loss.
Q: To whom should such delivery be made
as basis of the computation of the one-year
period?
A: The one-year period is computed from the
delivery of goods to the arrastre operator and
not tothe consignee.
296
Q: When is the one year period in the
COGSA interrupted?
A:
1. When an action is filed in court; or
2. When there's a contrary agreement
between the parties.
Q: Is Art. 1155 of the Civil Code providing
that the prescription of actions is
interrupted by the making of an
extrajudicial written demand by the creditor
applicable also to actions brought under
the COGSA?
A: No, written claims does not toll the running
of the one-year prescriptive period under the
COGSA. (Dole Philippines, Inc. v. Maritime
Company of the Philippines, G.R. No. L-
61352, Feb. 27, 1987)
Q: Who are the persons who can give
notice to, and bring suit against the
carrier?
A:
1. The shipper;
2. The consignee; or
3. Any legal holder of the bill of lading
like the indorsee, subrogee, or the
insurer of the goods. (Chua Kuy v.
Everett Steamship Corporation, GR.
No. L-5554, May 27, 1953)
Q: Does the one-year prescriptive period
within which to file a case against the
carrier also apply to a claim filed by an
insurer who stands as a- subrogee to the
insured?
A: Yes, it includes the insurer of goods. Also,
whether the insurer files a third party complaint
or maintains an independent action is of no
moment (Filipino Merchants Insurance Co.,
Inc. v. Alejandro, G.R. No. L-54140, Oct. 14,
1986).
Note: The ruling in the above-cited case
should apply only to suits against the carrier
filed either bythe shipper, the consignee or the
insurer, not to suits by the insured against the
insurer. The basis of the insurer's liability is the
insurance contract and such claim prescribes
in 10 years, in accordance with Art. 1144 of
the Civil Code. (Mayer Steel Pipe Corporation
v. CA, GR. No. 124050, June 19, 1997)
UST GOLDEN NOTES 2010
Q: AA entered into a contract with BB thru
CC to transport ladies' wear from Manila to
France with transshipment at Taiwan.
Somehow the goods were not loaded at
Taiwan on time. Hence, when the goods
arrived in France, they arrived "off-season"
and AA was paid only for one-half the value
by the. buyer. AA claimed damages from
the shipping company and its agent. The
defense of the BB and CC was prescription.
Considering that the ladies' wear suffered
"loss of value," as claimed by AA, should
the prescriptive period be' one year under
the Carriage of Goods by Sea Act, or ten
years under the Civil Code? Explain briefly.
A: The applicable prescriptive period is ten
years under the Civil Code. The one-year
prescriptive period under the Carriage of
Goods by Sea Act applies in cases of loss or
damages to the cargo. The term "loss" as
interpreted by the Supreme Court in Mitsui
O.S.K Lines Ltd. v. CA (G.R. No. 119571,
Mar. 11, 1998), contemplates a situation
where no delivery at all was made by the
carrier of the goods because the same had
perished or gone out of commerce,
deterioratedor decayedwhile intransit.
In the present case, the shipment of ladies'
wear was actually delivered. The "loss of
value" is not the total loss contemplatedby the
Carriage of Goods by Sea Act. (2004 Bar
Question)
Q: Does the arrastre operator have a legal
standing to file anaction against the carrier
A:
GR: No. He has nothingtodowiththe
transportationof the goods. The 1-year
periodgoverns only transport of goods
through commoncarrier.
XPN: If he is suedas analternative
defendant, then he canfile anaction
against the carrier. The actionshould be
institutedwithinthe 1-year period.
Q: Clause 18 of the bill of lading provides
that the owner should not be liable for loss
or damage of cargo unless written notice
thereof was given to the carrier within 30
days after receipt of the goods. However,
Section 3 of the Carriage of Goods by Sea
Act provides that even if a notice of loss or
damage is not given as required, "that fact
shall not affect or prejudic.e the right of the
shipper to bring suit within one year after
the delivery of the goods." Which of these
two provisions should prevail?
A: Clause 18 must of necessity yield to the
provisions of the Carriage of Goods by Sea
'Act in view of the proviso contained in the
same Act which says: "Any clause, covenant,
or agreementina contract of carriagerelieving
the carrier or the ship from liability for loss or
damage to or inconnectionwith the goods xxx
or lessening such liability otherwise than as
provided inthis Act, shall be null and void and
of noeffect." (Sec. 3) This means that acarrier
cannot limit its liability ina manner contraryto
what is providedfor insaid Act, and so clause
18 of the bill of lading mustof necessitybe null
and void. (E. E. Elser, Inc. v. CA, G.R. No. L-
6517, Nov. 29, 1954)
Q: What is the prescriptive period in case
of misdelivery and conversion of go09s?
A: In case of misdelivery or conversi6b, the
proper periodsare: i
1. If there is a written contract - 10
years (Art. 1144, Civil Code)
2. Oral contract- 6years (Art. 1145)
3. For quasi-delict- 4 years (Art. 1146)
Academics Corn mittee
CI Jt1 i r per ,wu: Abraham D. Gcnuin o IT
' Vi a: -Chai r .!r Jr Acudcttl l ' (c' J eannie A. Luurcntino
Vi a: -Cbai r ./ or Admi n i'" j-:','1ltflw:: Aissa Celine [-I. Luna
r ' i ce-Cbai r l or L tyl Jtl l &De.f{gll: Loise Rae G. Naval
Mer cantile Law Committee
Jtl i yi : d H ead.' l-loly T. t\ mpaglle)'
A.f.fl. SI I h; i : d H cai l : Manilyn Rose S. Sotelo
Members:
Edwin Marc T Baldia
Ain ..:en 1'\'1.C,lcho
Socrates Benjic I. Marbil
Ron Chcrric S. Mendoza
Edison J J .I11t:S I,'. Pag:l1ilau:ll1
Maybcllinc M. Santiagn
UNIVERSITY OF SANTO TOMAS
Pacu(taa de De r ech o Ci oi ]
.~297
TRANSPORTATION LAWS: PUBLIC SERVICE ACT
PUBLIC SERVICE ACT
(Commonwealth Act No. 146)
Q: What are the purposes of the Public
Service Act?
A:
1. Protect the public against
t unreasonable charges and poor,
I
inefficient service;
2. Protect and secure investments in
I
publicservices; and
3., Prevent ruinous competition.
i
Q: What is apublic service?
A: Every person that may own, operate,
manage, control in the Philippines, for
hire/compensation, with general/limited
clientele whether permanent, occasional or
accidental, and done for general business
purposes, any common carrier, railroad, street
railway, traction railway, subway motor vehicle,
steamboat, or steamship line, ferries and
watercraft, shipyard, ice-plant, electric light,
heatand power or any other public utility.
Q: What is a public utility?
A: A business or service engaged in regularly
supplying the public with some commodity or
service of public consequence sush as
electricity, gas, water, transportation,
telephone or telegraph service.
Q: What is a Certificate of Public
Convenience (CPC)?
A: An authorization issued for the operation of
public services for which no franchise, either
municipal or legislative, is required by law,
such as acommoncarrier.
Under the Public Service Law, a certificate of
public convenience can be sold by the holder
thereof because it has considerable material
value and is considered a valuable asset
(Raymundo v. Luneta Motor Co., G.R. No.
39902, Nov. 29, 1933).
Q: What is a certificate of public
convenience and necessity (CPCN)?
A: A certificate issued by the appropriate
government agency for the operation of a
public service for which prior franchise is
required bylaw.
Note: There is no more distinction between a
CPC and a CPCN. Unless otherwise exempt,
no public service shall operate without having
beenissued a CPC or aCPCN.
298
Q: Antonio was granted a Certificate of
Public Convenience (CPC) in 1986 to
operate a ferry between Mindoro .and
Batangas using the motor vessel "MV
Lotus." He stopped operations in 1988 due
to unserviceability of the vessel. In 1989,
Basilio was granted a CPC for the same
route. After a few months, he discovered
that Carlos was operating on his route
under Antonio's CPC. Because Basilio filed
a complaint for illegal operations with the
Maritime Industry Authority, Antonio and
Carlos jointly filed an appllcation for sale
and transfer of Antonio's CPC and
substitution of the vessel "MV Lotus" with
another owned by Carlos. Should Antonio's
and Carlos' joint application be approved?
Give your reasons.
A: The joint application of Antonio and Carlos
for the sale and transfer of Antonio's CPC and
substitution of the vessel MV Lotus with
another vessel owned by the transferee should
not be approved. The certificate of public
convenience and MV Lotus are inseparable.
The unserviceability of the vessel covered by
the certificate had likewise rendered ineffective
the certificate itself, and the holder thereof may
not legally transfer the same to another.
(Cohon v. CA, G.R. No. 82558, Aug 20, 1990)
(1992 Bar Question)
Q: Does the CPC confer upon the holder
any proprietary right or interest in the route
covered thereby?
A: No. (Luque v. Villegas, G.R. No. L-22545,
Nov. 28, 1969). .
However, with respect to other persons and
other public utilities, a certificate of public
convenience as property, which represents the
right and authority to operate its facilities for
public service, cannot be taken or interfered
with without due process of law. Appropriate
actions may be maintained in courts by the
holder of the certificate against those who
have not been authorized to operate in
competition with the former and those who
invade the rights which the former has
pursuant tothe authority granted by the Public
Service Commission (A.L. Animen
Trensponetior. Co. v. Golingco, G.R. No.
17151, Apr. 6, 1922)
UST GOLDEN NOTES 2010
Q: What are the requirements for the grant
of certificate of public convenience?
A:
1. Applicant must be a citizen of the
Philippines. If the applicant is a
Corporation, 60% of its capital must
be owned by Filipinos;
2. Appli cant must
necessity;
prove public
3. Applicant must prove the operation of
proposed public service will promote
public interest in a proper and
suitable manner; and
4. Applicant must have sufficient
financial capability to undertake
proposed services and meeting
responsibilities incidental to its
operation. (Kilusang Mayo Uno v,
Garcia GR No. 108584, Oec. 22,
1994)
Q: Cite instances where a certificate of
public convenience is not necessary?
A:
1. Warehouses;
2. Animal-drawn vehicles or banca
powered by oar or by sail; tug boats
.and lighters;
3. Airships except as to fixing rates;
4. Radio companies, except as to fixing
of rates;
5. Ice plants;
6. Public market; and
7. Public utilities operated by the
national government or political
subdivision except as to rates.
Q: The Batong Bakal Corporation filed with
the Board of Energy an application for a .
Certificate of Public Convenience for the
purpose of supplying electric power and
lights to its factory and its employees living
within the compound. The application was
opposed by the Bulacan Electric
Corporation, contending that the Batong
Bakal Corporation has not secured a
franchise to operate and maintain an
electric plant. Is the opposition's
contention correct?
A: No. A Certificate of Public Convenience
may be granted to Batong Bakal Corporation,
though not possessing a legislative franchise,
if it meets all the other requirements. There is
nothing in the law nor the Constitution, which
indicates that a legislative franchise is
necessary or required for an entity ,to operate
as supplier of electric power and light to its
factory and its employees living within the
compound. (1998 Bar Question)
Q: What is the prior operator rule?
A: Provides existinq franchise operator
preferential right within authorized territory as
long as said operator renders satisfactory and
economical service.
This rule subordinates the prior applicant rule
which gives first applicant priority only if things
and circumstances are equal.
A prior operator must be given the opportunity
to extend its transportation services before
'permitting a new operator to operate in the
territory of said prior operator.
Q: What is the prior applicant rule?
A: Applies to situations wherein two applicants
are applying for a certificate of public
convenience over a given territory. Where both
applicants are similarly situated, the prior
applicant shall have the certificate over the
other.
Q: What is the third operator rule?
A: Where two operators are more than serving
the public there is no reason to permit a third
operator to engage in competition with them.
The fact that it is only one trip and of little
consequence is not sufficient reason to grant
the application. (Yangco V. Esteban, GR No.
38586, Aug. 18, 1933)
Q: What is the protection of investment
rule?
A: The law contemplates that the first licensee
will be protected in his investment and will not
be subjected to a ruinous competition.
So long as an operator under a prior license
complies with its terms and conditions and the
reasonable rules and regulations for its
operation, and meets the reasonable demands
of the public, it will be protected rather than
destroy its investment by the granting of the
second license to another person for the same
thing over the same route of travel.
Note: The "prior operator" and "protection of
investment" rules cannot take precedence over
the convenience of the public. (Martires Ereno
Co. v Public Service Commission, GR No. L-
25962, Sept. 30, 1975)
U N I V E R S I TV 0 F SAN ToT 0 MAS
Pacu(taa de CDer ecf i o Ci vi C
~,,~ 299
TRANSPORTATION LAWS: PUBLIC SERVICE ACT
Q: What are the grounds that oppositors
may raise to the application for acertificate
of public convenience?
A:
1. The area has already a well-
established operator - prior operator
rule.
2. Interpose anobjection stating that the
grant of the application would result
to aruinous competition.
3. Attack the citizenship of the applicant
(Sec. 11, Art. XII of the 1987
Constitution prohibits the granting of
franchise or certificate for the
operation of public utility in favor of
non-Filipino citizens); or
4. The applicant does not have the
necessaryfinancial capacity.
Q: When can the Public Service
Commission (Board) exercise its power to
suspend or revoke certificate of public
convenience? .
A: Under Sec. 19(a) of the Public Service Act,
the Commission (Board) can suspend or
revoke a certificate of public convenience
Whenthe operator fails to provide a service
that is safe, proper or adequate, and refuses to
render any service which can be reasonably
demanded and furnished. (1993 Bar
Question).
Q: Robert is a holder of a certificate of
public convenience to operate a taxicab
service in Manila and suburbs. One
evening, one of his taxicab units was
boarded by three robbers as they escaped
after I staging a hold-up. Because of said
incident, the LTFRB revoked the certificate
of public convenience of Robert on the
ground that said operator failed to render
safe, proper and adequate service 'as
required under Sec. 19(a) of the Public
Service Act.
Was the revocation of the certificate of
public convenience of Robert justified?
Explain.
A: No. A single hold-up incident which does
not link Robert's taxicab cannot be construed
that he rendered a service that is unsafe,
inadequate and improper. (Manzanal v.
Ausejo, GR. No. L-31056, Aug 4, 1988)
300
Q: What must be considered in case of
suspension of the certificate to satisfy the
requirement of due process?
A:
GR: Prior notice or hearing must be carried
out beforesuspensionorder is issued.
XPN: Notice and hearing may be
dispensed if necessary to avoid serious or
irreparable damage or inconvenience to
public or private interest. In which case,
suspension not more than 30days prior to
hearing is allowed.
Q: What is the registered owner rule?
A: The registered owner of a certificate of
public convenience is liable to the public for
the injuries or damages suffered by third
persons caused by the operation of said
vehicle, even though the same had been
transferredtoathird person.
Note: The registered owner is not allowed to
escape responsibility by proving that a third
personis the actual and real owner.
Q: What is the so-called "kabit system"?
A: Itis anarrangementwhereby a personwho
has been granted the certificate allows other
persons who own motor vehicles to operate
under his license, sometimes for a fee or
percentage of the earnings. (2005 Bar
Question)
Although not outrightly penalized as a criminal
offense, the kabit system is invariably
recognized as being contrary to public policy
and therefore, void and inexistent under Art.
1409 of the New Civil Code. It is a
fundamental principle that the court will not aid
either party to enforce an illegal contract, but
will leave them both where it finds them. (Lita
Enterprises, Inc. v. lAC, G.R. No. 64693, Apr.
27, 1984)
UST GOLDEN NOTES 2010
Q: May the registered owner of the vehicle
be allowed to prove that there is already a
transfer of ownership to another person
under the kabit system?
A: No. One of the primary factors considered
in. the granting of a certificate of public
convenience for the business of public
transportation is the financial capacity of the
holder of the license, so that liabilities arising
from accidents may be duly compensated. The
kabil system renders illusory such purpose
and, worse, may still be availed of by the
grantee to escape civil liability caused by a
negligent use of a vehicle owned by another
and operated under his license.
If a registered owner is allowed to escape
liability by proving who the supposed owner of
the vehicle is, it would be easy for him to
transfer the subject vehicle to another who
possesses no property with which to
respond financially for the damage done. (Lim
v. CA, G.R. No. 125817, Jan. 16,2002)
Q: What is the reason behind the
proscription against the kabit system?
A: The thrust of the law in enjoining the kabit
system is not so much as to penalize the
parties but to identify the person upon whom
responsibility may be fixed in case of an
accident with the end view of protecting the
riding public. The policy therefore loses its
force if the public at large is not deceived,
much less involved. (Lim v. CA, G.R. No.
125817, Jan. 16, 2002)
Q: What is the so-called "boundary
system"?
A: Under this system the driver is engaged to
drive the owner/operator's unit and pays the
latter a fee commonly called boundary for the
use of the unit. Whatever he earned in excess
of that amount is his income. (Paguio
Transport Corp. v. NLRC, G.R. No. 119500,
Aug. 28, 1998)
Q: What kind of relationship exists between
the owner of the vehicle and the driver
under a "boundary system" arrangement?
A: The relationship between jeepney
owners/operators on one hand and jeepney
drivers on the other under the boundary
system is that of employer-employee and not
of lessor-lessee. (Martinez v. NLRC, GR. No.
117495, May 29, 1997)
The features which characterize, the
"boundary system" - namely, the fact that the
driver does not receive a fixed wage but gets
only the excess of the amount of fares
collected by him over the amount he pays to
the jeep-owner, and that the gasoline
consumed by the jeep is for the account of the
driver - are not sufficient to withdraw, the
relationship between them from that of the
employer and employee. (National Labor
Union v. Dinglasan, GR. No. L-14183, Nov. 4,
1993)
Academics Committee
C};airpenfllt: t\ braham D, Gcnuino 11
Vi a-Cbai r f or r / aul el l l i u: J eannie A. T.aurcntino
f / i ,,-C; ' m' " j or Admi l l ,: - Fmanc: Aissa Cd;nc H. Luna
r ' i a: -(} wi r I () r l ~ !y(Jttl Ii";'" nl'.f~~Jl: Loise Rae (~. Naval
Mercantile Law COlTIIUinee
Jab/ cd I -/ ," d: ITnly T ;\mpaguc)'
A . .. . I. Sub) ,,, 1 -l e" tI -Mauilyn Rose S. Sotelo
Members:
Edwin l\IarcT. Baldia
Airecn M. Cacho
Socrates Bcnjie 1. I\farbil
Ron Cherric S. Mcndoxa
Edison J arl1l:s I,', Pagalihu:lll
.~fa)"bcllinc M. Santiago
~~~~- ...
. , .
UN I V E R 5 I T V 0 F 5ANT 0 ToMAS
PaCU{taa de CJ)erecfio Civif
~.~ 301
TRANSPORTATION LAWS: WARSAW CONVENTION OF 1929
WARSAW CONVENTION OF 1929
Q: What documents are involved under the
Warsaw Convention?
Q: When is this law applicable?
A: This Convention applies to all international
carriage of persons, luggage or goods
performed by aircraft for reward. It applies
equally to gratuitous carriage by aircraft
pertormed by an air transport undertaking.
(Alt. t[1})
Q: What is an international transportation?
I
A: Any carriage in which, according to the
contract made by the parties, the place of
departure and the place of destination,
whether or not there be a break inthe carriage
or atransshipment, are situated either:
1. Within the territories of two High
Contracting Parties; or
2. Within the territory of a single High
Contracting Party, if there is an
agreed stopping place within a
territory subject to the sovereignty,
suzerainty, mandate or authority of
another Power, even though that
Power is. not a party to the
Convention. (Art. 1[2])
Note: A High Contracting Party is one of the
original parties to the convention.
Q: What is the effect if the transportation
shall be performed by several successive
air carriers?
A: It shall be deemed as one undivided
carriage if it has been regarded by the parties
as a single operation, whether it had been
agreed upon under the form of a single
contract or of a series of contracts, and it does
not lose its international character merely
because one contract or a series of contracts
is to be performed entirely within the territory
of the same State (Art. 1[3J, as amended by
The Hague Protocol). This is also known as
the single operation rule.
Carriage to be performed by several
successive carriers under one ticket, or under
a ticket and any conjunction ticket issued
therewith, is regarded as a single operation.
(Art. 15, lATA-Recommended Practice)
A:
1. Passenger ticket;
2. Baggage check (identification card
attached to the baggage); and
3. Airway bill or air consignment note
(counterpart of bill of lading).
Q: What is the role ofa passenger ticket,
baggage check and airway bill?
A: It shall constitute prima facie evidence of
the conclusion and conditions of the contract
of carriage. (Art. 3[2J, as amended by The
Hague Protocol).
Q: What is an airway bill or an air
consignment note?
A: A contract of carriage which is prima facie
evidence of the:
1. Conditions of transportation;
2. Receipt of goods; and
3. Conclusion of contract. (Art. 11[1])
Q: Does an airway bill stand as evidence of
title to goods?
A: No. Hence, the consignor has a right to
demand the retum of the goods while in the
custody of the carrier, except, when the goods
are delivered to the consignee this right may
be exercised:
1. When the goods are still on board;
2. Before delivery to the consignee if the
goods are already in the port of
destination; and
3. Before reaching the port of
destination. (Art. 12)
Q: What is the consequence of absence,
irregularity or loss of passenger ticket,
baggage check or airway bill?
A: Its does not affect the existence or the
validity ofthe contract of carriage which shall,
none the less, be subject to the rules of the
Convention.
Nevertheless, if, with the consent of the
carrier, the passenger embarks without a
passenger ticket t;)aving been delivered, the
carrier shall not be entitled to avail himself of
the provisions of Article 22 on the limitation of
liability of the carrier. (Art. 3[2J, as amended by
The Hague Protocol)
UST GOLDEN NOTES 2010
Q: What are the liabilities of an air carrier
under the Warsaw Convention (WC)?
A:
1. With respect to passengers - The
carrier shall be liable for damages
sustained in the event of death or
wounding of a passenger or any other
bodily injury suffered by a passenger,
if the accident which caused the
damage so sustained took place on
board the aircraft or in the course of
any of the operations of embarking or
disembarking. (Art. 17)
2. With respect to goods - The carrier
shall be liable for damage sustained
in the event of the destruction or loss
of, or of damage to, any checked
baggage or any goods, if the
occurrence which caused the
damage so sustained took place
during the transportation by air. (Art.
18 [1])
Note: The transportation by air within
the meaning of the preceding
paragraph shall comprise the period
during which the baggage or goods
are in the charge of the carrier,
whether in an airport or on board an
aircraft, or, in case of a landing
outside an airport, in any place
whatsoever. (Art. 18[2])
Theperiod of the transportation by air
shall not extend to any transportation
by land, by sea, or by river performed
outside an airport. If however, such
transportation takes place in the
performance of a contract for
transportation by air, for the purpose
of loading, delivery, or transshipment,
any damage is presumed, subject to
proof to the contrary, to have been
the result of an event which took
place during the transportation by air.
(Art. 18[3])
3. In case of delay - The carrier is liable
for damage occasioned by delay in
the carriage by air of
passengers, luggage or
goods. (Art. 19)
Note: In the COGSA, the carrier
incurs liability in case of loss or
damage of goods but not delay,
whereas under the Warsaw
Convention, carrier is also liable for
delay.
Q: What are the limitations to the liability of
air carriers?
A:
1. In the carriage of. persons - Two
hundred and fifty thousand (250,000)
francs for each passenger.
Nevertheless, by special contract, the
carrier and the passenger may agree
to a higher limit of liability.
2. In the carriage of registered baggage
and of cargo - Two hundred and fifty
(250) francs per kilogramme, unless
the passenger or consignor has
made, at the time when the package
was handed over to the carrier, a
special declaration of interest in
delivery at destination and has paid a
supplementary sum if the case so
requires.
Note: In the case of loss, damage or
delay of part of registered baggage or
cargo, or of any object contained
therein, the weight to be taken into
consideration in determining the
amount to which the carrier's liability
is limited shall be only the total weight
of the package or packages
concerned. Nevertheless, when the
loss, damage or delay of a part of the
registered baggage or cargo, or of an
object contained therein, affects the
value of other packages covered by
the same baggage check or the same
air waybill, the total weight of such
package or packages shall also be
taken into consideration in
determining the limit of liability.
3. As regards objects of which the
passenger takes charge himself -
Five thousand (5,000) francs per
passenger. (Art. 22)
Note: Carrier is not entitled to the
foregoing limit if the damage is
caused, by willful rnlsconduct or
default on its part (Art. 25)
UNIVERSITY OF SANTO TOMAS
Pacu{taa de !Derecfio Ci vi C
~i~ 303
TRANSPORTATION LAWS: WARSAW CONVENTION OF 1929
Q: When should the notice of complaint be
made?
A: In the case of damage, the person entitled
to delivery must complain to the carrier
forthwith after the discovery of the damage,
and, at the latest, within:
1. Three (3) days from the date of
receipt inthe case of baggage;
2. Seven (7) days from the date of.
receipt inthe case of cargo; or
3. Fourteen (14) days from the date on
which the baggage or cargo have
been placed at his disposal, in case
of delay. (Art. 26)
Q: Where should the complaint be
instituted?
A: The complaint could be instituted only inthe
territory of one of the High Contracting Parties,
before:
1. The court of the domicile of the
carrier;
2. The court of its principal place of
business;
3. The court where it has a place of
business through which the contract
had been made; or
4. The court of the place of destination.
I (Art. 28[1])
Note:llt is the passenger's ultimate destination
not an agreed stopping place that determines
the country where suit is determined by the
terms of the contract of carriage.
I
Q: CPA purchased from NoA a round-trip
ticket in San Francisco, U.S.A. for his flight
from San Francisco to Manila via Tokyo
and back. No date was specified for his
return to San Francisco. Despite a previous
confirmation and re-confirmation, he was
informed that he had no reservation for his
flight from Tokyo to Manila. He therefore
had to be wait-listed. CPA sued NOA for
damages in the RTC of Makati. NOA moved
to dismiss the complaint on the ground of
lack of jurisdiction contending that the
complaint could be instituted only in the
territory of one of the High Contracting
Parties. CPA argued that Philippines had
jurisdiction because it is the place of
destination. Decide.
A: The complaint should be dismissed. The
place of destination is determined by the terms
of the contract of carriage or, specifically inthis
case, the ticket between the passenger and
304
the carrier. CPA's ticket shows that his
ultimate destination is San Francisco. Although
the date of the retum flight was left open, the
contract of carriage between the parties
indicates that NOA was bound to transport
CPA to San Francisco from Manila. Manila
should therefore be considered merely an
agreed stopping place and not the destination.
Q: When will one's right to damages be
extinguished?
A: The right to damages shall be extinguished
if an action is not brought within two years,
reckoned from the date of arrival at the
destination, or from the date on which the
aircraft ought to have arrived, or from the date
on which the carriage stopped.
Note: Despite the express mandate that an
action for damages should be filed within 2
years from the arrival at the place. of
destination, such rule shall not be applied
where delaying tactics were employed by
airline itself in a case where a passenger
wishes to settle his complaint out-of-court but
the airline gave him the runaround, answering
the passenger's letters but not giving in to his
demands, hence, giving the passenger no time
to institute the complaint within the
reglamentary period. (United Airlines v. Uy,
G.R. No. 127768, Nov. 19, 1999)
Q: Is a stipulation relieving the carrier from
or limiting its liability valid?
A: Any provision tending to relieve the carrier
of liability or to fix a lower limit than that which
is laid down in this Convention shall be null
and void but the nullity of such provision does
not involve the nullity of the whole contract.
(Art. 23[1])
UST GOLDEN NOTES 2010
Q: Marc purchased passenger tickets from
PAL with the ft. points of passage: Manila-
Singapore-J akarta-Singapore-Manila. He
was made to understand by PAL that its
plane would take him from' Manila to
Singapore,. while Singapore Airlines would
take them from Singapore to J akarta. Marc
took the PAL flight to Singapore. Singapore
Airlines rejected the ticket of Marc because
it was not endorsed by PAL. Marc tried to
contact PAL's office but it was closed. Left
with no recourse, Marc was in panic and at
a loss where to go; and was subjected to
humiliation, embarrassment, mental
anguish, serious anxiety, fear and distress.
Marc was forced to purchase tickets from
Garuda Airlines.
Upon arrival in Manila, he brought the
matter to the attention of PAL and
Singapore Airlines. However, both airlines
disowned liability. PAL filed a Motion to
Dismiss on the ground that the complaint
was barred on the ground of prescription.
PAL argued that the Warsaw Convention
provides that any claim for damages in
connection with the international
transportation of persons is subject to the
prescription period of two years. Since the
Complaint was filed more than three years
after PAL received the demand, it was
already barred by prescription. Decide.
A: A claimcoveredbythe WarsawConvention
canno longer be recovered under local law, if
the statute of limitations of two years has
already lapsed. Nevertheless, this Court notes
that jurisprudence in the Philippines and the
UnitedStatesalsorecognizesthattheWarsaw
Conventiondoes not "exclusivelyregulate"the
relationshipbetweenpassengerand carrieron
an international flight. The Court held that
damage to the passenger's baggage is
covered by the Warsaw Convention which
prescribes in 2 years. On the other hand, the
humiliationMarc suffered at the hands.of the
airline's employees was covered by the
provisions of the Civil Code on torts which
prescribes in 4 years. If the complaintmerely
consisted of claims incidental to the airlines'
delay intransporting the passengers, it would
have been time-barred under Art. 29 of the
WarsawConvention. (Phil. Airlines Inc. v. Han.
Adriana Savilla, et. AI. and Simplicia Grine,
557 SeRA' 66)
Academics Committee
Chui r per .wl I : Abraham D. Genuine 11
Vi .-e-C' !Jai r ./ i w A' " (l dcmi t: c ,J eannie A. r... aurcntino
Vi a-Cbai r ] or Admi n ~ - FilII""': Aissa Celine H. Llin,\
r ' i ,r Owi r j i Jl " Li)!IiJl/c' n,.'{~II:Loise Rae G. Naval
Mer cantile Law Committee
JJlblcd f{,,,d IIDly T ,'\mpaguey
/1.1.1'1. J,,/ !/ cd H em/ .- l'vEanilyn Rose S. Sotelo
Members:
Edwin Marc T Baldia
Aircen M. Cacho
Socrates Benjie 1. l\farbil
ROil Chertie S. MeDeI""a
Edison J ames I'. Pagalilauan
Maybclline M. Santiago
".~~:~.~ ..
UNIVERSITY OF SANTO TOMAS
Pacu(taa de ([)erecfio Ci vi {
"'-'-'-,
, . 305
,';. INTELLECTUAL PROPERTY LAWS
INTELLECTUAL PROPERTY LA \'('S
Q: What are covered by intellectual
property rights?
A:
1. Copyright and Related Rights;
2. Mark (trade, service and collective);
3. Geographic indications;
4. Industrial designs;
5. Patents;
6. Layout designs (Topographies) of
Integrated Circuits; and
7. Protection of Undisclosed Information
(Sec. 4.1, Intellectual Property Code
(IPC])
Q: What are the distinctions among
trademark, patent and copyright?
A:
Any ible sign capable
of distinguishing the
goods (trademark) or
services (service mark) of
an enterprise and shall
include a stamped or
marked container of
Literaryand artistic works
which are original
intellectual creations in
the literary and artistic
, domain protected from
the moment of their
creation.
Q: What is a geographic indication?
A: An indication which identifies a good as
originating in the territory, where a given
quality, reputation or other characteristic of the
good is essentially attributable to its
geographical origin. (Art. 22, Trade-Related
Aspects of Intellectual Property Rights)
30 6
Q: What is a technology transfer
arrangement?
A: Contracts or arrangements involving the
transfer of systematic knowledge for the
manufacture of a product, the application of
the process, or rendering a service including
management contracts, and transfer,
assignment or licensing of all forms of
intellectual property rights, including licensinq
of computer software except computer
software developed for mass market. (Sec.
4.2,IPC)
Q: What is undisclosed information?
A: Itis an information which:
1. Is a secret in the sense that it is not,
as a body or in precise configuration
and assembly of components,
generally known among, or readily
accessible to persons within the
circles that normally deal with the
kind of information in question.
2. Has commercial value because it is a
secret
3. Has been subjected to reasonable
steps under the circumstances, by
the person lawfully in control of the
information, to keep it a secret.
(Article 39, TRIPS Agreement)
Q: What is the nature of undisclosed
informationltrade secret?
A: Those trade secrets are of a privileged
nature. The protection of industrial property
encourages investments in new ideas and
inventions and stimulates creative efforts for
the satisfaction of human needs. It speeds up
transfer of technology and industrialization,
and thereby bring about social and economic
progress. Verily, the protection of industrial
secrets is inextricably linked to the
advancement of our economy and fosters
healthy competition in trade. (Air Philippines
Corporation v. Pennswell, Inc., G.R. No.
172835, Oec. 13, 2007)
UST GOLDEN NOTES 2010
Q: What is copyright?
A: A right over literary and artistic works
which are original intellectual creations in the
literary and artistic domain protected from the
moment of creation. (Sec. 171.1, fPC)
Q: What are the
copyrightability?
elements
A:
1. Originality - Must have been created
by the author's own skill, labor, and
judgment without directly copying or
evasively imitating the work of
another. (Ching Kian Chuan v. CA,
G.R. No. 130360, Aug. 15, 2001)
2. Expression - Must be embodied ina
medium sufficiently permanent or
stable to permit it to be perceived,
reproduced or communicated for a
period more than a transitory
duration.
: When does copyright vest?
A: orks are protected by the sole fact of their
zrea ion, irrespective of their mode or form of
expresslon, as well as of their content, quality
2'1d purpose.
: What is the scope of copyright?
1. Literary and Artistic Works
BOLD-MAN-GAS-PAP-CO
a. ooks, pamphlets, articles and
other writings;
b. Lectures, sermons, addresses,
dissertations prepared for Qral
delivery, whether or not reduced
inwriting or other material form;
c. .hetters
d. Qramatic, choreographic works;
e. Musical compositions;
f. Works of ~rt;
g. Periodicals and Newspapers;
h. Works relative to Qeography,
topography, architecture or
science;
i. Works of ~pplied art;
j. Works of a cientific or technical
character;
k. ehotographic works;
I. ~udiovisual works and
cinematographic works;
m. eictorial illustrations and
advertisements;
n. ~omputer programs; and
of
o. Qther literary, scholarly, scientific
and artistic works. (Sec. 1
i
72.1,
fPC) i
!
2. Derivative Works
a. Dramatizations, translations,
adaptations, abridgements,
arrangements, and other
alterations of literary or artistic
works;
b. Collections of literary, scholarly,
or artistic works and compilations
of data and other materials which
are original by reason of the
selection or coordination or
arrangement of their contents.
(Sec. 173)
Note: Derivative Works shall be
protected as new works, provided
that such new work shall not affect
the force of any subsisting copyright
upon the original works employed or
any part thereof, or be construed to
imply any right to such use of the
original works, or to secure or extend
copyright in such original works. (Sec.
173.2, fPC)
Q: P&D was granted a copyright on the
technical drawings of light boxes ;'IS
"advertising display units", SMI, however,
manufactured similar or identical to the
light box illustrated in the technical
drawings copyrighted by P&D for leasing
out to different advertisers, Was this an
infringement of P&D's copyright over the
technical drawings?
A: No, P&D's copyright protection extended
only to the technical drawings and not to the
light box itself. The light box was not a literary
or artistic piece which could be copyrighted
under the copyright law. If SMI reprinted P&D's
technical drawings for sale to the public
without license from P&D, then no doubt they
would have been guilty of copyright
infringement. Only the expression of an idea is
protected by copyright, not the idea itself. If
what P&D sought was exclusivity over the ligl1t
boxes, it should have instead procured a
patent over the light boxes itself. (Pear! and
Dean fnc. v. Shoe Mart fnc., GR No. 148222,
Aug. 15, 2003) .
'I
I
!
UNIVERSITY OF SANTO TOMAS
' Fa cul t a d. de (] ) er ecf i o Ci v i]
~i~ 307
INTELLECTUAL PROPERTY LAWS: COPY RIGHT AND RELATED RIGHTS
Q: What is the difference between
collection of work and collective work?
A:
f -COLLECTION OF COLLECTIVE WORK
I WORK
It is not necessary
that there is an
agreement. Individual
contribution is
capable of copyright
rotection.
There is an
agreement whereby
the authors bound
themselves not to be
identified with the
work.
Q: J uan Xavier wrote and published a story
similar to an unpublished copyrighted
story of Manoling Santiago. It was,
however, conclusively proven that J uan
Xavier was not aware that the story of
Manoling Santiago was protected by
copyright. Manoling Santiago sued J uan
Xavier for infringement of copyright. Is
J uan Xavier liable?
A: Yes. J uan Xavier is liable for infringement of
copyright. It is not necessary that J uan Xavier
is aware that the story of Manoling Santiago
was Iprotected by' copyright. The work of
Manoling Santiago is protected from the time
of its treation. (1998 Bar Question)
I
Note! There will still be originality sufficient to
warrant copyright protection if "the author,
through his skill and effort, has contributed a
distinguishable variation from the older works."
In such a case, of course, only those parts
which are new are protected by the new
copyright. Hence, in such a case, there is no
case of infringement. J uan Xavier is no less an
"author" because others have preceded him.
Q: What are the subjects not protected?
A:
1. Idea, procedure, system, method or
operation, concept, principle,
discovery or mere data as such;
2. News of the day and other items of
press information;
3. Any official text of a legislative,
administrative or legal nature, as well
as any official translation thereof;
4. Pleadings;
5. Decisions of courts and tribunals -
this refers to original decisions and
not to annotated decisions such as
the SCRA or SCAD as these already
fall under the classification of
derivative works, hence
copyrightable;
6. Any work of the Government of the
Philippines
308 Iteam:I.! li.;
A: Yes, the format of a show is not
copyrightable. The copyright law enumerates
the classes of work entitled to copyright
protection. The format or mechanics of a
television show is not included in the list of
protected works. For this reason, the
protection afforded by the law cannot be
extended to cover them. Copyright, in the strict
sense of the term, is purely a statutory right. It
is a new or independent right granted by the
statute, and not simply a pre-existing right
regulated by the statute. Being a statutory
grant, the rights are only such as the statute
confers, and may be obtained and enjoyed
only with respect to the subjects and by the
persons, and on terms and conditions
specified inthe statute. The copyright does not
extend to the general concept or format of its
dating game show. (Joaquin v. Drilon, G.R.
No. 108946, Jan. 28, 1999)
GR: Conditions imposed prior the
approval of the government agency
or office wherein the work is created
shall be necessary for exploitation of
such work for profit. Such agency or
office, may, among other things,
impose as condition the payment of
royalties.
XPN: No prior approval or conditions
shall be required for the use of any
purpose of statutes, rules and
regulations, and speeches, lectures,
sermons, addresses, and
dissertations, pronounced, read, or
rendered in courts of justice, before
administration agencies, in
deliberative assemblies and in
meetings of public character. (Section
176, fPC)
7. TV programs, format of TV programs
(Joaquin v. Dri/on, G.R. No. 108946,
Jan. 28, 1999)
8. Systems of bookkeeping; and
9. Statutes.
Q: BJ Productions, Inc. (BJ PI) is the
holder/grantee of a copyright of "Rhoda
and Me", a dating game show aired from
1970 to 1977. Subsequently, however, RPN
aired the game show "It's a Date", which
was produced by IXL Productions, Inc.
(IXL). As such, an information for copyright
infringement was filed against RPN. The
OOJ Secretary directed the prosecutor to
dismiss the case for lack of probable
cause. Was the decision of the OOJ
Secretary correct?
UST GOLDENN OTES 2010
Q:Rural is a certified public utility
providing telephone service to several
communities in Manila. It obtains data for
the directory from subscribers, who must
provide their names and addresses to
obtain telephone service. Feist
Publications, Inc., is a publishing company
that specializes in area-wide telephone
directories covering a much larger
geographic range than directories such as
Rural's. Feist extracted the listings it
needed from Rurals's directory without its
consent. Are directories copyrightable?
A: No, directories are not copyrightable and
therefore the use of them does not constitute
infringement. The Intellectual Property Code
mandates originality as a prerequisite for
copyright protection. This requirement
necessitates independent creation plus a
modicum of creativity. Since facts do not owe
their origin to an act of authorship, they are not
original, and thus are not copyrightable. A
compilation is not copyrightable per se, but is
copyrightable only if its facts have been
"selected, coordinated, or arranged in such a
way that the resulting work as a whole
constitutes an original work of authorship."
Thus, the statute envisions that some. ways of
selecting, coordinating, and arranging data are
not sufficiently original to trigger copyright
protection. Even a compilation that is
copyrightable receives only limited protection,
for the copyright does not extend to facts
contained in the compilation. (Feist
Publications, Inc. v. Rural Telephone Service
Co., 499 U.S. 340)
Q: Who owns copyright?
A:
1. Author - Original literary and artistic
works. (Sec. 178.1, IPC)
2. Co-authors Works of joint
authorship; in the absence of
agreement, their rights shall be
governed by the rules on co-
ownership.
Note: If work of joint authorship
consists of parts that can be used
separately, then the author of each
part shall be the original owner of the
copyright in the part that he has
created. (Sec. 178.2, IPC)
3. In the course of employment, the
copyright shall belong to:
a. The employee, if not a part of his
regular duties even if the
employee uses the time, facilities
and materials of the employer.
(Sec. 178.3, fPC)
b. The employer, if the work is the
result of the performance of his
regularly-assigned duties, unless
there is an agreement, express
or implied, to the contrary. (ibid.)
4. The person who commissioned the
work shall own the work but the
copyright thereto shall remain with
the creator - In cases of work
pursuant to commission, unless there
is a written stipulation to the contrary.
(Sec. 178.4, IPC) i
5. GR: Producer, the author of the
scenario, the composer of the music,
the film director, and the author of the
work so adapted - audiovisual work.
XPN: The producers shall exercise.
the copyright to an extent required
for the exhibition of the work in any
manner. (Sec. 178.5, IPC)
6. Writer - in respect of letters subject to
the provisions of Article 723, Civil
Code. (Sec. 178.6, IPC)
7. GR: Publishers deemed
representatives of the author in case
of anonymous and pseudonymous
works.
XPN: When the contrary appears or
where the pseudonym or adopted
name. leaves no doubt as to the
author's identity; or author discloses
his identity.
8. In case of collective works -
contributor is deemed to have waived
his right unless he expressly reserves
it. (Sec. 196, IPC)
UNIVERSITY OF SANTO TOMAS
Pacu(tar i de (] ) er ecl i o Ci ' Vi C
.~309
INTELLECTUAL PROPERTY LAWS: COPY RIGHT AND RELATED RIGHTS
Q: Distinguish collective work from joint
work.
A:
COLLECTIVE
J OINT WORK
WORK
Elements remain Separate elements
unintegrated and merge into a unified
disparate. whole.
Workicreated by 2
or more persons at
the initiative and
Work prepared by 2 or
under the direction
of ahother with
more authors with the
the understanding
intention that their
contributions be
that it will be
merged into
disclosed bythe
latter under his own
inseparable or
name and that of the
independent parts of
contributions of
the unitary whole.
natural persons will
NOT be identified
Each author shall J oint authors shall be
enjoy copyright to co-owners. Co-
his own contribution ownership shall apply.
The work will be
attributed to the
person under whose
J oint authors shall be
initiative and both entitled to the
direction it was acknowledgment as
created unless the authors of the work.
contributor expressly
reserves his right.
Q: BR and CT are noted artists whose
paintings are highly prized by collectors.
Dr. DL commissioned them to paint a mural
at the main lobby of his new hospital for
children. Both agreed to collaborate on the
project for a total fee of two million pesos
to be equally divided between them. It was
also agreed that Dr. DL had to provide all
the materials for the painting and pay for
the wages of technicians and laborers
needed for the work on the project.
Assume that the project is completed and
both BR and CT are fully paid the amount
of P2M as artists' fee by DL. Under the law
on intellectual property, who will own the
mural? Who will own the copyright in the
mural? Why? Explain.
A:' Under Sec. 178.4 of the Intellectual
Property Code, in case of commissioned work,
the creator (in the absence of a ..written
stipulation to the contrary) owns the copyright,
but the work itself belongs to the person who
commissioned the creation. Accordingly, the
mural belongs to DL. However, BR and CT
own the copyright, since there is no stipulation
to the contrary. (1995 Bar Question)
Q: What is the principle of "automatic
protection"?
A: Works are protected by the sole fact of their
creation irrespective of their content, quality or
purpose. Such rights are conferred from the
moment of creation.
Q: What is the tenn of protection of
copyright?
A:
surviving co-creator
and for 50years after
his death.
50 years after the
date of thei r first
publication; except
where before the
expiration of said
period, the author's
identity is revealed or
is no longer in doubt,
the 1
51
two mentioned
rules shall apply; or if
unpublished, 50
years from their
maki
25 years from the
time of the making.
50 years from date of
publication and, if
unpublished, from the
date of making.
Lifetime of the author
and 50years after.
213,
UST GOLDEN NOTES 2010
Q: What are the general limitations on
copyright?
A: The following acts shall not constitute
infringement of copyright:
1. Performance of a work, once it has
been lawfully made accessible to the
public, if done privately and free of
charge or for a charitable or religious
instltution or society.
2. The making of quotations from a
published work if they are compatible
with fair use and only to the extent
justified for the purpose.
3. Communication to the public by mass
media of articles on current political,
social, economic, scientific or
religious topic, lectures, addresses
and other works of the same nature
As part of reports of current events
(e.g. music played or tunes on the
occasion of a sporting event and such
tunes were picked up during a new
coverage of the event).
5. For teaching purposes, provided that
the source and of the name of the
author, if appearing in the work, are
mentioned.
6. Recording made in educational
institutions of a work included in a
broadcast for the use of such
educational institutions, provided that
such recording must be deleted within
a reasonable period after they were
first broadcast.
7. The making of ephemeral recordings
by a broadcasting organization by
means of its own facilities and for use
in its own broadcast.
8. The use made of a work by or under
the direction or control of the
government, by the National Library
or by educational, scientific or
professional institutions where such
use is in the public interest and is
compatible with fair use.
9. The public performance of a work, in
a place where no admission fee is
charged.
10. Public display of the original or a copy
of tile work not made by means of a
film, slide, television image or
otherwise on screen or by means of
any other device or process (e.g.
Public display using posters mounted
onwalls and display boards).
11. Any use made of a work for the
purpose of any judicial proceedings
or for the giving of professional
advice by a legal practitioner.
Q: What are the other limitations on
copyright?
A:
1. The fair use of a copyrighted work for
criticism, comment, news reporting,
teaching including multiple copies for
classroom use, scholarship, research,
and similar purposes is not an
infringement of copyright. (Sec. 185,
fPC)
Note: Decompilation, which, is the
reproduction of the code and
translation of the forms of the
computer program to achieve the
inter-operability of an independently
created computer program with other
programs, may also constitute fair
use (e.g. the software program for
Windows 7 will be disassembled by a
skilled programmer in order to
understand much of the structure and
operation of the program).
2. Copyright in a work of architecture
shall include the right to control the
erection of any building which
reproduces the whole or a substantial
part of the work either in its original
form or in any form recognizably
derived from the original, provided,
that the copyright in any such work
shall not include the right to control
the reconstruction or rehabilitation in
the same style as the original of a
building to which that copyright
relates. (Sec. 186, fPC)
3. The private reproduction of a
published work in a single copy,
where the reproduction is made by a
natural person exclusively for
research and private study, shall be
permitted, without the authorization of
the owner of copyright inthe Workbut
shall not extend to the reproduction
of:
a. A work of architecture inthe form
of, building or other construction;
b. An entire book, or a substantial
part thereof, or of a musical work
UNIVERSITY OF SANTO TOMAS ~'-:"-'. 311
Pacu(taa de CDerecfio Civif '.
INTELLECTUAL PROPERTY LAWS: COPY RIGHT AND RELATED RIGHTS
in graphic form by reprographic
means;
c. A compilation of data and other
materials;
d. A computer program except as
provided in Section 189; and
e. Any work in cases where
reproduction would unreasonably
conflict with a normal exploitation
of the work or would otherwise
unreasonably prejudice the
legitimate interests of the author.
(Sec. 187, fPC)
4. Any library or archive whose activities
are not for profit may, without the
authorization. of the author of
copyright owner, make a single copy
of the work by reprographic
reproduction:
a. Where the work by reason of its
fragile character or rarity cannot
be lent to user inits original form;
b. Where the works are isolated
articles contained in composite
works or brief portions of other
published works and the
reproduction is necessary to
supply them, when this is
considered expedient, to persons
requestinq their loan for
purposes of research or study
instead of lending the volumes or
booklets which contain them; and
c. Where the making of such a copy
is in order to preserve and, if
necessary in the event that it is
lost, destroyed or rendered
unusable, replace a copy, or to
replace, in the permanent
collection of another similar
library or archive, a copy which
has been lost, destroyed or
rendered unusable and copies
are not available with the
publisher.
But it shall not be permissible to
produce a volume of a work
published in several volumes or to
produce missing tomes or pages of
magazines or similar works, unless
the volume, tome or part is out of
stock. (Sec. 188, fPC) .
5. The reproduction inone back-up copy
or adaptation of a computer program
shall be permitted, without the
authorization of the author of, or other
owner of copyright in, a computer
program, by the lawful owner of that
312
computer program, provided, the
copy or adaptation is necessary for:
a. The use of the computer program
in conjunction with a computer
for the purpose, and to the
extent, for which the computer
program has been obtained; and
b. Archival purposes, and, for the
replacement of the lawfully
owned copy of the computer
program in the event that the
lawfully obtained copy of the
computer program is lost,
destroyed or rendered unusable.
(Sec. 187, fPC)
6. The importation of a copy of a work
by an individual for his personal
purposes shall be permitted without
the authorization of the author of, or
other owner of copyright in, the work
under the following circumstances:
a. When copies of the work are not
available inthe Philippines and:
i. Not more than one copy at one
time is imported for strictly
individual use only; or
ii. The importation is by authority
of and for the use of the
Philippine Government; or
iii. The importation, consisting of
not more than three such
copies or likenesses in any
one invoice, is not for sale but
for the use only of any
. religious, charitable, or
educational society or
institution duly incorporated or
registered, or is for the
encouragement of the fine
arts, or for any state school,
college, university, or free
public library inthe Philippines.
b. When such copies form parts of
libraries and personal baggage
belonging to persons or families
arriving from foreign countries
and are not intended for sale,
provided, that such copies do not
exceed three. (Sec. 190, fPC)
UST GOLDEN NOTES 2010
Q: What is the "Must carry rule"?
A: Must-carry rule is another limitation on
copyright. It obligates operators to carry the
signals of local channels within their respective
systems. This is to give the people wider
access to more sources of news, information,
education, sports event and entertainment
programs other than those provided for by
mass media and afforded television programs
o attain a well informed, well-versed and
culturally refined citizenry and enhance their
socio-economic . growth. (ABS-CBN
3roadcasting Corporation v. Philippine
Aultimedia System, G.R. No. 175769-70, Jan.
~9, 2009)
: What factors are to be considered In
etenrnining whether the use made of a
vork in any particular case is fair use?
1. The purpose and character of the
use, including whether such use is of
a commercial nature or is for non-
profit educational purposes;
2. The nature of the copyrighted work;
3. The amount and substantiality of the
portion used in relation to the
copyrighted work as awhole; and
4. The effect of the use upon the
potential market for or value of the
copyrighted work.
te: The fact that a work is unpublished shall
not by itself bar a finding of fair use if
~_ h finding is made upon consideration of all
--cabove factors.
: Ford contracted with H&R Publishing to
ubi ish his unwritten memoirs. The
agreement gave H&R the exclusive first
serial right to license prepublication
excerpts. As the memoirs were nearing
ompletion, H&R, as the copyright holders,'
egotiated a prepublication licensing
agreement with Time Magazine. Shortly
before the Time article's scheduled release,
an unauthorized source provided The
ation Magazine with the unpublished Ford
manuscript. An editor of The Nation
produced an article which consisted of
erbatim quotes of copyrighted expression
aken from the manuscript which were the
gist of the memoirs. As a result, Time
refused to pay H&R as agreed upon in the
prepublication agreement. H&R brought an
action for infringement against Nation
agazine. Nation magazine contended that
the article it published constitutes fair use
and thus it cannot be held liable for
infringement. Is the contention correct?
A: No, the article does not constitute fair use.
Taking into account the factors as especially
relevant in determining fair use, leads to the
conclusion that the use in question here was
not fair. First of all, the purpose or character of
the use was commercial (to scoop a
competitor), meaning that The Nation's use
was not a good faith lise of fair use in simply
reporting news. Also, although the verbatim
quotes in question were an insubstantial
portion of the Ford manuscript, they
qualitatively embodied Mr. Ford's distinctive
expression, and played a key role :in the
infringing article. And lastly, the effect: of the
use on the potential market for the value of the
copyrighted work was also great, because the
Nation's liberal lise of verbatim excerpts posed
substantial potential for damage to the
marketability of first serialization rights in the
copyrighted work. (Harper & Row v. Nation
Enterprises, 471 U.S. 539, 1985)
Q: What are published works?
A: Those works which, with the consent of the
authors, are made available to the public by
wire or wireless means in such a way that
members of the public may access these
works from a place and time individually
chosen by them: provided, that availability of
such copies has been such, as to satisfy the
reasonable requirement of the public, having
regard to the nature of the work. (Sec. 171.7,
fPC)
Q: What is the difference between public
performance and communication to the
public of a perfonrnance?
A:
PUBLIC COMMU~'PATlON~;"'~1
PERFORMANCE TO THE PUBLIC.~F A' 1
. PERFORMANCE,. ,j
Performance at a
place or at places
where persons
outside the normal
circle of afamily
and that family's
closest social
acquaintances are
or can be present.
The transmission to the
public, by any medium,
otherwise than by
broadcasting, of sounds
of a performance or the
representations of
sounds fixed ina sound
recording.
The communication can
be accessed throuqh
wired or wireless
means at a time and
place convenient to the
viewer (e.g. The
Pacquiao-Clottey Match
watched viaYouTube)
It is performed at a
specific time and
place. (e.g. The
Pacquiao-Clottey
Match in Dallas
Texas Stadium)
UNIVERSITY OF SANTO TOMAS ~'''','-) 313
If'acu{taa de Der ecf i o Ci vi C ' .
INTELLECTUAL PROPERTY LAWS:. COPY RIGHT AND RELATED RIGHTS
Q: May a
transferred/assigned?
copyright
Q: What is infringement?
A: It may be assigned in whole or in part.
Within the scope of the assignment, the
assignee is entitled to all the rights and
remedies which the assignor had with respect
to the copyright. (Sec. 180.1, IPC)
Q: Is copyright similar with the material
object?
A: No, the copyright is distinct from the
property in the material object subject to it.
Consequently, the transfer or assignment of
the popyright shall not itself constitute a
transfer of the material object. Nor shall a
transfer or assignment of the sale copy or of
one :or several copies of the work imply
transfer or assignment of the copyright. (Sec.
181, fPC)
Q: What are the requisites for a transfer of
copyright to take effect?
A:
1. If inter vivos, must be inwriting; and
2. Filed in National Library upon
payment of prescribed fees. (Sec.
182, fPC)
Q: Is filing of the assignment or license of
copyright a mandatory requirement?
A: No, Section 182 uses the permissive Word
"may" in reference to the filing of the deed of
assignment or transfer of copyright, this filing
should not be understood as mandatory for
validity and enforceability. The filing is entirely
optional for the parties and may be useful only
for evidentiary and notification purposes.
(Vicente Amador, Intel/ectual Property
Fundamentals, 2007)
Q: What is the limitation regarding
submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication?
A: Unless a greater right is expressly granted,
such submission shall constitute only a license
to make a single publication. (Sec. 180.3, IPC)
Note: If two or more persons jointly own a
copyright or any part thereof, neither of the
owners shall be entitled to grant licenses
without the prior written consent of the other
owner or owners. (Ibid.) .
314
be
A: It is the doing by any person, without the
consent of the owner of the copyright, of
anything the sole right to do which is conferred
by statute on the owner of the copyright. The
act of lifting from another's book substantial
portions of discussions and examples and the
failure to acknowledge the same is an
infringement of copyright. (Habana et al., v.
Robles et el., G.R. No. 131522, July 19, 1999)
Q: What does substantial reproduction
mean?
A: It is not necessarily required that the entire
copyrighted work, or even a large portion of it,
be copied. If so much is taken that the value of
the original work is substantially diminished,
there is an infringement of copyright and to an
injurious extent, the work is appropriated. It is
no defense that the pirate did not know
whether or not he was infringing any copyright;
he at least knew that what he was copying was
not his, and he copied at his peril. In cases of
infringement, copying alone is not what is
prohibited. The copying must produce an
"injurious effect". (Habana v. Robles, G.R. No.
131522, July 19, 1999)
Q: What is plagiarism?
A: It is the practice of claiming or implying
original authorship of (or incorporating material
from) someone else's written or creative work,
in whole or in part, into one's own without
adequate acknowledgment.
Q: What is the difference between
copyright infringement and plagiarism?
COPYRIGHT I
INFRINGEMENT PLAGIARISM
The unauthorized use
of copyrighted material
ina manner that
violates one of the
copyright owner's
exclusive rights, such
as the right to
reproduce or perform
the copyrighted work, or
to make derivative
works that build upon it.
The use of
another's
information,
language, or
writing, when done
without proper
acknowledgment of
the original source.
Copyright infringement
is a very broad term
that describes avariety
of acts. It may be
duplication of a work,
rewriting a piece,
performing a written
work or doinq anythinq
Plagiarism is
specific as it refers
only to using
someone else's
work without proper
acknowledgement.
UST GOLDEN NOTES 2010
that is normally
considered to be the
exclusive right of the
copyright holder.
There is no copyright
Public documents
can be plagiarized
infringement on pub-lic
so long as it is not
documents.
acknowledged.
Q: What are the available remedies in case
of copyright infringement?
A:
1. Injunction;
2. Damages, including legal costs and
other expenses, as he may have
incurred due to the infringement as
well as the profits the infringer may
have made due to such infringement;
3. Impounding during the pendency of
the action sales invoices and other
documents evidencing sales;
4. Destruction without any
compensation all infringing copies;
5. Moral and exemplary damages (Sec.
216.1); or
6. Seizure and impounding of any
article, which may serve as evidence
inthe court proceedings. (Sec. 216.2)
Q: What is an affidavit evidence?
A: An ~ffidavit made before the notary public
in actions for infringement, reciting the facts
required to be stated under the IPC. (Sec.
216.1)
Note: As a prima facie proof, the affidavit
shifts the burden of proof to the defendant, to
prove the ownership of the copyrighted work.
Q: What is the presumption of authorship?
A: The natural person whose name is
indicated on a work inthe usual manner as the
author shall, in the absence of proof to the
contrary, presumed to be the author of the
work. This is applicable even If the name IS a
pseudonym, where the pseudonym leaves no
doubt as to identity of the author. (Sec. 219.1,
IPC)
The 'person or body corporate, whose name
appears on the audio-visual work in the usual
manner shall,in the absence of proof to the
contrary, be presumed to be the maker of said
work. (Sec. 219.2, IPC)
Q: What are the rights of an author?
A:
;
1. Economic rights - The right ito carry
out, authorize or prevent the following
acts:
1. Reproduction of the work or
substantial portion thereof;
2. Carry-out derivative work
(dramatization, translation,
adaptation, abridgement,
arrangement or other
transformation of the work);
3. First distribution of the original
and each copy of the work by
sale or other forms of transfer of
ownership;
4. Rental right;
5. Public display;
6. Public performance;
7. Other communications to the
public.
2. Moral rights - For reasons of
professionalism and propriety, the
author has the right:
a. To require that the authorship of
the works be attributed to him
(attribution right);
b. To make any alterations of his
work prior to, or to withhold it
from publication;
c. Right to preserve integrity of
work, object to any distortion,
mutilation or other modification
which would be prejudicial to his
honor or reputation; and
d. To restrain the use of his name
with respect to any work not of
his own creation or in a distorted
version of his work. (Sec. 193,
IPC)
3. Droit de suite (Right to proceeds in
subsequent transfers or follow up
rights) - This is an inalienable ri.ghtof
the author or his heirs to receive to
the extent of 5% of the gross
proceeds of the sale or lease of a
work of painting or sculpture or of the
original manuscript of a writer or
composer, subsequent to its first
disposition by the author.
The following works are not covered:
a. Prints;
b. Etchings;
c. Engravings;
d. Works of applied art; and
e. Similar works wherein the au h
primarily derives gain ro --"
UNIVERSITY OF SANTO TOMAS
Pacur tad de l J) er ecf zo Ci vi !
~)....., -
J " ' I
INTELLECTUAL PROPERTY LA \\IS: COPY RIGHT AND RELATED RIGHTS
proceeds of reproductions. (Sec.
201,IPC)
Q: ABC is the owner of certain musical
compositions among which are the songs
entitled: "Dahil Sa lyo", "Sapagkat Ikaw Ay
Akin," "Sapagkat Kami Ay Tao Lamang"
and "The Nearness Of You." Soda Fountain
Restaurant hired a combo with
professional singers to play and sing
musical compositions to entertain and
amuse customers. They performed the
above-mentioned compositions without
any license or permission from ABC to play
or sing the same. Accordingly, ABC
demanded from Soda Fountain payment of
the necessary license fee for the playing
and singing of aforesaid compositions but
the demand was ignored. ABC filed an
infringement case against Soda Fountain.
Does the playing and singing of musical
compositions inside an establishment
constitute public performance for profit?
A: Yes. The patrons of the Soda Fountain pay
only for the food and drinks and apparently not
for listening to the music, but the music
provided is for the purpose of entertaining and
amusihg the customers in order to make the
establishment more attractive and desirable.
For the playing and singing the musical
compositions involved, the combo was paid as
independent contractors by Soda Fountain. It
is therefore obvious that the expenses entailed
thereby are added to the overhead of the
restaurant which are either eventuaJ lycharged
in the price of the food and drinks or to the
overall total of additional income produced by
the bigger volume of business which the
entertainment was programmed to attract.
Consequently, it is beyond question that the
playing and singing of the combo in defendant-
appellee's restaurant constituted performance
for profit. (FILSCAP v. Tan, G.R., No. L-
36402, Mar. 16, 1987)
Q: Malang Santos designed . for
Ambassador Neri for his personal
christmas greetings for the year 1959 a
christmas card depicting a Philippine rural
Christmas time scene. The followlnq year
McCullough Printing Company, without the
knowledge and authority of Santos,
displayed the very design in its album of
Christmas cards and offered it for sale.
Santos filed for copyright infringement
contending that the publication of his
design was limited as it was intended only
for Ambassador Neri's use, hence, it could
not be used for public consumption. Is
there copyright infringement?
316
A: No. If there were a condition that the cards
are to be limitedly published, then Ambassador
Neri would be the aggrieved party, and not
Santos. And even if there was such a limited
publication or prohibition, the same was not
shown on the face of the design. When the
purpose is a limited publication, but the effect
is general publication, irrevocable rights
thereupon become vested in the public, in
consequence of which enforcement of the
rights under a copyright becomes impossible.
(Malang v. McCullough Printing Company,
G.R. No. L-19439, Oct. 31, 1964)
Q: Mayan author be compelled to perform
his contract?
A: An author cannot be compelled to perform
. his contract to create a work or for the
publication of his work already in existence.
However, he may be held liable for damages
for breach of such contract. (Sec. 195, IPC)
Q: What is the nature of moral rights?
A: These are personal rights independent from
the economic rights. Being a personal right, it
can only be given to a natural person. Hence,
even if he has licensed or assiqnad his
economic rights, he continues to enjoy the
above-mentioned moral rights. (Vicente
Amador, Intellectual Property Fundamentals,
2007)
Q: What is the term of moral rights?
A: It shall last during the lifetime of the author
and for fifty (50) years after his death and shall
not be assignable or subject to license. (Sec.
198,IPC)
Note: The person/s to be charged with the
posthumous enforcement of moral rights shall
be named in writing to be filed with the
National Library. In default of such person or
persons, such enforcement shall devolve upon
either the author's heirs, and in default of the
heirs, the Director of the National Library.
(Ibid.)
Q: What are the exceptions to moral rights?
A:
1. Absent any special contract at the
time creator licenses/permits another
to use his work, the following are
deemed not to contravene creator's
moral rights, provided they are done
in accordance with reasonable
customary standards or requisites of
the medium:
a. Editing;
UST GOLDEN NOTES 2010
b. Arranging;
c. Adaptation;
d. Dramatization;
e. Mechanical and
reproduction
electric
2. Complete destruction of
unconditionally transferred
creators. (Sec. 197, IPC)
work
by
Q: Can moral rights be waived?
A:
GR: Moral rights can be waived in writing,
expressly SQstating such waiver.
XPN: Even inwriting, waiver is not valid if:
1. Use the name of the author, title of
his work, or his reputation with
respect to any version/adaptation of
his work, which because of
alterations, substantially tend to
injure literary/artistic reputation of
another author
2. Use name of author in a work that he
did not create
: What are the neighboring rights?
: These are the rights of performers,
J 'oducers of sound recording and
oadcasting organizations.
: What is the scope of a perfonner's
iqhts ? .
. Performers shall enjoy the following
exclusive rights:
1. As regards their performances, the
right of authorizing:
a. The broadcasting and other
communication to the public of.
their performance; and
b. The fixation of their unfixed
performance.
2. The right of authorizing the direct or
indirect reproduction of their
performances fixed in sound
recordings, inany manner or form;
3. The right of authorizing the first public
distribution of the original and copies
of their performance fixed in the
sound recording through sale or
rental or other forms of transfer of
ownership;
4. The right of authorizing the
commercial rental to the public of the
original and copies of their
performances fixed in sound
recordings, even after distribution of
them by, or pursuant to the
authorization by the performer; and
5. The right of authorizing the making
available to the public of their
performances fixed in sound
recordings, by wire or wireless
means, in such a way that members
of the public may access them from a
place and time individually chosen by
them. (Sec. 203, IPC)
Q: What are the moral rights of
perfonners?
A: The performer, shall, as regards his live
aural performances or performances fixed in
sound recordings, have the right to claim to be
identified as the performer of his
performances, except where the omission is
dictated by the manner of the use of the
performance, and to object to any distortion,
mutilation or other modification of his
performances that would be prejudicial to his
reputation.
Q: When are performer's rights lost?
A: Once a performer has authorized
broadcasting or fixation of his performance.
(Sec 205, IPC)
Note: Fair use and limitations to copyrights
shall apply mutatis mutandis to performers.
(Ibid.)
Q: When are performers
additional remuneration
perfonnance? .
entitled to
on their
A: The performer shall be entitled to an
additional remuneration equivalent to at least
5% of the original compensation he received
for the first communication or broadcast in
every communication to the public or
broadcast of a performance subsequent to the
first communication or broadcast, . unless
otherwise provided in the contract. (Sec. 206,
fPC)
U N I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~ ; ; ' .' v.. 31 7
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INTELLECTUAL PROPERTY LAWS: COPY RIGHT AND RELATED RIGHTS
Q: What is the scope of the rights of
producers on sound recordings?
A: Producers of sound recordings shall enjoy
the following exclusive rights:
1. The right to authorize the direct or
indirect reproduction of their sound
recordings, in any manner or form;
the placing of these reproductions in
the market and the right of rental or
lending; .
2. The right to authorize the first public
distribution of the original and copies
of their sound recordings through sale
or rental or other forms of transferring
ownership; and
3. The right to authorize the commercial
rental to the public of the original and
copies of their sound recordings,
even after distribution by them by or
pursuant to authorization by the
producer. (Sec. 208, fPC)
Note: Fair use and limitations to copyrights
shall apply mutatis mutandis to performers.
(Sec. 210, fPC)
Q: What is the scope of the rights of
broadcasting organizations?
A: Broadcasting organizations shall enjoy the
exclusive right to carry out, authorize or
prevent any of the following acts:
1.'11 The rebroadcasting
broadcasts;
2., The recording in any manner,
I including the making of films or the
I use of video tape, of their broadcasts
for the purpose of communication to
the public of television broadcasts of
the same; and
3. The use of such records for fresh
transmissions or for fresh recording.
(Sec. 211, fPC)
of
Q: When are neighboring rights not
applicable?
A:
1. Exclusive use of a natural person for
own personal purposes.
2. Short excerpts for reporting current
events
3. Sole use for the purpose of teaching
or for scientific research
4. Fair use of the broadcast
318
their
Q: What are the term of protection given to
perfonners, producers and broadcasting
organizations?
A :
1. For performances not incorporated in
recordings, 50 years from the end of
the year in which the performance
took place; and
2. For sound or image and sound
recordings and for performances
incorporated therein, 50 years from
the end of the year in which the
recording took place.
3. In case of broadcasts, the term shall
be 20 years from the date the
broadcast took place. The extended
term shall be applied only to old
works with subsistinq protection
under the prior law. (Sec. 215, fPC)
Q: To whom are the rights granted to
copyrightable works applicable (points of
attachment)?
A:
1. For literary and artistic works and
derivative works
a. Works of authors who are
nationals of, or have their
habitual residence in, the
Philippines;
b. Audio-visual works the producer
of which has his headquarters or
habitual residence in the
Philippines;
c. Works of architecture erected in
the Philippines or other artistic
works incorporated in a bUilding
or other structure located in the
Philippines;
d. Works first published in the
Philippines; and
e. Works first published in another
country but also published in the
Philippines within thirty days,
irrespective of the nationality or
residence of the authors. (Sec.
221, fPC)
. 2. For petiomers
a. Performers who are nationals of
the Philippines;
b. Performers Whoare not nationals
of the Philippines but whose
performances:
i. Take place in the
Philippines; or
ii. Are incorporated in sound
recordings that are protected
under IPC; or
UST GOLDEN NOTES 2010
iii. Which has not been fixed in
sound recording but are
carried by broadcast
qualifying for protection
under IPC. (Sec. 222, fPC)
3. Of sound recordings
a. Sound recordings the producers
of which are nationals of the
Philippines; and .
b. Sound recordings that were first
published in the Philippines.
(Sec. 223, fPC)
4. For broadcast
a. Broadcasts of broadcasting
organizations the headquarters
of which are situated in the
Philippines; and
b. Broadcasts transmitted from
transmitters situated in the
Philippines. (Sec. 224, fPC)
Note: The provisions of IPC shall" also
apply to works, performers, producers of
sound recordings and broadcasting
organizatins that are to be protected by
virtue of and in accordance with any
international convention or other
international agreement to which the
Philippines is a party. (Sec. 221.2 and
224.2, JPC)
.. -- .)<.~. ~ ..
Academics Cornm ittee
Cbair pc! )" (m: Abr aham D. C; enuino I T
!/i (c--C,' hui rj(JI- At " l l l l emi t : f : Jeannie A. Laurcntino
Vi te-C} wl i j l l r Admi n i ~ Fi nan: Aissa Celine H. Luna
r -~/a:-Chllir})r L~!JIf)JJ' t : .: " ' : } )c.i " i gn: l.()isL.: Rae (; . Naval
Mercantile Law Committee
Sub/ ed H aul : Holy T. 1\ mpague)'
."'I.ul. SlIbJ,d i -l ead tVboili o Rose S. Sotelo
Members:
Edwin Marc T. Baldi.
Airccn 1\'1.Cacho
Socrates Benjie 1. Marbil
Ron Cherric S. Mendoza
Edison James 1' . Pagalilauan
l\bybclline M. Santiago
UNIVERSITY OF SANTO TOMAS
Pacu(tad de Der ec l i o Ci-ui]
INTELLECTUAL PROPERTY LA \XIS:TRADEMARl<:S
I iiiile' 1
l
l JM! " 1; 13
Q: What is a trademark and how does it
differ from atrade name?
I
A: Any visible sign capable of distinguishing
the goods (trademark) or services (service
mark) of an enterprise. A trade name is a
name or designation identifying or
distinguishing an enterprise.
I
TRA DEMA RK
' TRADE NAME
A natural or artificial
Goods or services
person who does
offered by a proprietor
business and
or enterprise are
produces or
designated by
performs the goods
trademark (goods) or
or services
service marks
designated by
(services).
trademark or service
mark.
Refers to the goods.
Refers to business
and its goodwill.
Acquired only by
Need not be
reqistration.
registered.
Q: What is a collective mark?
A: A "collective mark" or collective trade-
name" is a mark or trade-name used by the
members of a cooperative, an association or
other collective group or organization. (Sec.
40, R.A. 166)
Q: What are the functions of trademark?
A:
1. To point out distinctly the origin or
ownership of the articles to which it is
affixed. .
2. To secure to him who has been
instrumental in bringing into market a
superior article or merchandise the
fruit of his industry and skill; and
3. To prevent fraud and imposition.
(Etepha v. Director of Patents, G.R.
No. L-20635, Mar. 31, 1966)
Q: 5 Development Corporation sued
Shangrila Corporation for using the "5"
logo and the tradename "Shanqrlla", The
former claims that it was the first to
regist~r the logo and the trade name in the
Philippines and that it had been using the
same in its restaurant business. Shangrila
Corporation counters that it is an affiliate of
an international organization which has
been using such logo and tradename
"Shangrila" for over 20 years. However,
Shangrila Corporation registered the
320
tradename and logo in the Philippines only
after the suit was filed.
Which of the two corporations has a better
right to use the logo and the tradename?
Explain.
A: S Development Corporation has a better
right to use the logo and tradename, since it
was the first to register the logo and
tradenarns.
Alternative Answer:
S Development Corporation has a better right
to use the logo and tradename, because its
certificate of registration upon which the
infringement case is based remains valid and
subsistinq for as long as it has not been
cancelled. (Shangrila International Hotel
Management v. CA, G.R. No. 111580, June
21, 2001) (2005 Bar Question)
Q: How does the international affiliation of
Shangrila Corporation affect the outcome
of the dispute? Explain.
A: Since Shangrila Corporation is not the
owner of the logo and tradename but is merely
an affiliate of the international organization
which has been using them it is not tile owner
and does not have the rights of an owner.
(Sec. 147, IPC)
Alternative Answer:
The international affiliation of Shangrila
Corporation shall have no effect on the
outcome of the dispute. Section 8of the Paris
Convention provides that 'there is no
automatic protection afforded an entity whose
tradename is alleged to be infringed through
the use of that name as a trademark by a local
entity." (Kabushi Kaisha Isetan v. lAC, G.R.
No. 75420, Nov. 15, 1991) (2005 Bar
Question)
Q: What are the salient features of the Paris
convention of trademarks?
A:
1. National Treatment Principle - foreign
nationals are to be given the' same
treatment in each of the member
countries as that country makes
available inits own citizens.
2. Right of Priority - any person who
has duly filed registration for
trademark shall enjoy a right of
priority of 6 months (Rule 203,
Trademark Rules)
3. Protection against Unfair Competition
UST GOLDEN NOTES 2010
4. Protection of Tradenames - protected
in all countries without obligation of
filing or registration.
5. Protection of Well-Known Marks
Q: Howare marks acquired?
A: The rights in a mark shall be acquired
through registration made validly in
accordance with the provisions of the IPC.
(Sec. 122, IPC) .
Q: What marks may be registered?
A: Any word, name, symbol, emblem, device,
figure, sign, phrase, or any combination
thereof except those enumerated under
Section 123, IPC.
Q: What are the requirements for amark to
be registered?
A:
1. A visible sign (not sounds or scents);
and
2. Capable of distinguishing one's
goods and services from another.
Q: What marks may not be registered?
A:
1. Consists of immoral, deceptive or
scandalous matter or falsely suggest
a connection with persons,
institutions, beliefs, or national
symbols;
2. Consists of the flag or coat of arms or
other insignia of the Philippines or
any of its political subdivisions, or of
any foreign nation;
3. Consists of a name, portrait or
signature identifying a particular living
individual except by his written
consent, or the name, signature, or
portrait of a deceased President of
the Philippines, during the life of his
widow except by written consent of
the widow;
4. Identical with a registered mark
belonging to a different proprietor or a
mark with an earlier filing or priority
date, inrespect of:
a. The same goods or services, or
b. Closely related goods or
services, or
c. If it nearly resembles such a
mark as to be likely to deceive or
cause confusion;
5. Is identical with an internationally
well-known mark, whether or not it is
registered here, used for identical or
similar goods or services;
6. Is identical with an internationally
well-known mark which is registered
inthe Philippines with respect to non-
similar goods or services. Provided,
that the interests of the owner of the
registered mark are likely to be
damaged by such use;
7. Is likely to mislead the public as to the
nature, quality, characteristics or
geographical origin of the goods or
services;
8. Consists exclusively of signs that are
generic for the goods or services that
they seek to identify;
9. Consists exclusively of signs that
have become customary or usual to
designate the goods or services in
everyday language and established
trade practice; I
10. Consists exclusively that may serve
in trade to designate the kind, quality,
quantity, intended purpose, value,
geographical origin, time or
production of the goods or rendering
of the services, or other
characteristics of the goods or
services;
11. Consists of shapes that may be
necessitated by technical factors or
by the nature of the goods
themselves or factors that affect their
intrinsic value;
12. Consists of color alone, unless
defined by a given form; or
13. Is contrary to public order or morality.
(Sec. 123)
Q: What constitutes an internationally well-
known mark?
A:
1. Considered by the competent
authority of the Philippines to be
"well-known" international and in the
Philippines as the mark of a person
other than the applicant or registrant;
2. Need not be used or registered in the
Philippines;
UNIVERSITY OF SANTO TOMAS
Pacu[ taa de (] ) er echo Ci vi i
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INTELLECTUAL PROPERTY LAWS: TRADEMARKS
Need not be known by the public at
large but only by relevant sector of
the public.
3.
I
Q: What does the law provide as
internationally-well known marks?
regards
A:
GR: Prohibition on subsequent registration
does not include services and goods of
different nature or kind.
XPN:
1. If the internationally well-known mark
is not registered in the Philippines,
the application for registration of a
subsequent or similar mark can be
rejected only if the goods or services
specified in the application are similar
to those of the internationally well-
known mark;
2. If the internationally well-known mark
is registered in the Philippines, the
application for registration of a
subsequent or similar mark can be
refused even if the goods or services
specified in .the application are not
identical or similar to those of the
internationally well-known mark.
Q: Is there an infringement of trademark
when two similar goods use the same
words, "PALE PILSEN"?
A: No, because "pale pilsen" are generic
words descriptive of the color (pale) and of a
type of beer (pilsen), which is a light bohemian
beer with strong hops flavor that originated in
the City of Pilsen in Czechoslovakia. Pilsen is
a primarily geographically descriptive word,
hence, non-registrable and not appropriable by
any beer manufacturer (Asia Brewery, Inc. v.
CA, G.R. No. 103543, July 5, 1993).
Q: Who mayfile anopposition to trademark
registration and onwhat ground?
A: Any person who believes that he would be
damaged by the registration of a mark may,
upon payment of the required fee and within
thirty (30) days after the publication referred to
in Subsection 133.2, file with the Office an
opposition to the application. (Sec. 134, IPC)
Q: Laberge, Inc., manufactures and
markets after-shave lotion, shaving cream,
deodorant, talcum powder and toilet soap,
using! the trademark "PRUT", which is
regist'ered with the Phil. Patent Office.
Laberge does not manufacture briefs and
underwear and these items are not
322
specified in the certificate of registration.
J G who manufactures briefs and
underwear, wants to know whether, under
our laws, he can use and register the
trademark "PRUTE" for his merchandise.
What is your advice?
A: Yes, he can use and register the trademark
"PRUTE" for his merchandise. The trademark
registered in the name of Laberge Inc. covers
only after-shave lotion, shaving cream,
deodorant, talcum powder and toilet soap. It
does not cover briefs and underwear. The limit
of the trademark is stated in the certificate
issued to Laberge Inc. It does not include
briefs and underwear which are different
products protected by Laberge's trademark.
J G can register the trademark "PRUTE" to
. cover its briefs and underwear (Faberge Inc. v.
lAC, G.R. No. 71189, Nov. 4, 1992) (1994Bar
Question)
Q: The NBI found that SG Incorporated is
engaged in the reproduction and
distribution of counterfeit "playstation
games" and thus applied with the Manila
RTC warrants to search respondent's
premises in Cavite. RTC granted such
warrants and thus, the NBI served the
search warrants on the subject premises.
SG Incorporated questioned the validity of
the warrants due to wrong venue since the
RTC of Manila had nojurisdiction to issue a
search warrant enforceable in Cavite. Is the
contention of SG Incorporated correct?
A: No, unfair competition is a transitory or
continuing offense under Section 168 of
Republic Act No. 8293. As such, petitioner
may apply for a search warrant in any court
where any element of the alleged offense was
committed, including any of the courts within
Metro Manila and may be validly enforced in
Cavite. (Sony Computer Entertainment Inc. v.
Supergreen Inc. G.R. No. 161823, Mar. 22,
2007)
Q: What is trademark infringement?
A: The use without consent of the trademark
owner of any a) reproduction, b) counterfeit, c)
copy or d) colorable imitation of any registered
mark or tradename in connection with the sale,
offering for sale, or advertising of any goods,
business or services on or in connection with
which such use is likely to cause confusion or
mistake or to deceive purchasers or others as
to the source or origin of such goods or
services, or identity of such business; or
reproduce, counterfeit, copy or colorably
imitate any such mark or tradename and apply
such reproduction, counterfeit, copy or
UST GOLDEN NOTES 2010
colorable limitation to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used uponor in
connection with such goods, business or
services (Esso Standard Eastern v. CA, G.R.
No. L-29971, Aug. 31, 1982)
Q: How can the ownership of a trademark
be acquired?
A:
1. Marks are acquired solely through
registration. (Sec. 122, IPC)
Note: Actual prior use in commerce
inthe Philippines has beenabolished
as aconditionfor the registrationof a
trademark.
2. Trade names or business names are
acquired through adoption and use.
Registration is not required. (Sec.
165,IPC)
Q: What is the duration of a certificate of
rademark registration?
A: 10 years, reneweble for aperiod of another
o years. Each request for renewal must be
made within 6 months before or after the
expirationof the registration.
Q: What are the rights of a registered mark
owner?
A:
1. Protection against reproduction, or
imitation or unauthorized use of the
mark (infringement of mark);
2. To stop entry of imported
merchandise into the country
containing a mark identical or similar
tothe registered mark; and
3. Totransfer or license outthe mark.
Q: What is the doctrine of secondary
meaning?
A: This doctrine is to the effect that a word or
phrase originally incapable of exclusive
appropriation with reference to an article on
the market, because it is geographical or
otherwise descriptive, may nevertheless be
used exclusively by one producer with
reference to his article so long as inthat trade
and to that branch of the purchasing public,
the word or phrase has come to meanthat the
article was his product. (G. and C. Merriam
Co. v. Saalfield, 198 F. 369, 373, cited in Ang
v. Teodoro, G.R. No. L-48226, Dec. 14, 1942)
Q: What is colorable imitation?
A: Such a close or ingenious imitationas to be
calculated to deceive ordinary persons, or
such a resemblance to the original as to
deceive an ordinary purchaser giving such
attention as a purchaser usually gives, as to
cause himto purchase the one supposing it to
be the other. (Societe des Produits Nestle,
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001)
Q: What are the tests in determining
whether there is atrademark infringement?
A:
1. Dominancy test - Focuses (In the
similarity of the prevalent features of
the competing marks. If the
competing trademark contains the
main or essential or dominant
features of another, and confusion is
likely to result, infringement takes
place. (Asia Brewery v. CA, G.R. No.
103543, 5 July 1993)
2. Totality or holistic test - Confusing
similarity is to be determined on the
basis of visual, aural, connotative
comparisons and overall impressions
engendered by the marks in
controversy as they are encountered
inthe marketplace.
Note: The dominancy test only relies on visual
comparisons between two trademarks
whereas the totality or holistic test relies not
only on the visual but also on the aural and
connotative comparisons and overall
impressions between the two trademarks.
(Societe Des Produits Nestl, S.A. v. CA, G.R.
No. 112012, Apr. 4, 2001)
Q: N Corporation manufactures rubber
shoes under the trademark "J ordann"
which hit the Philippine market'in 1985, and
registered its trademark with the Bureau of
Patents, Trademarks and Technology in
1990. PK Company also manufactures
rubber shoes with the trademark
"J avorski" which it registered with BPTTT
in 1978. In 1992, PK Co adopted and copied
the design of N Corporation's "J ordann"
rubber shoes, both as to shape and color,
but retained the trademark "J avorski" on
its products. May PK Company be held
liable to N Co? Explain.
A: PK Comay be liable for unfairly competing
against N Co. By copying the design, shape
and color of N Corporation's "J ordann" rubber
shoes and using the same in its rubber shoes
trademarked "J avorski," PK is obviously trying
UN I V ER5I T V 0 F SAN ToT 0 MAS f~-'.323
Pacu{taa de Der ec ho Ci'f.'i{ V
INTELLECTUAL PROPERTY LA \XIs: TRADEMARIZS
to pass off its shoes for those of N. It is of no
moment that the trademark "J avorski" was
registered ahead of the trademark "J ordann."
Priority in registration is not material in an
action for unfair competition as distinguished
from an action for infringement of trademark.
The basis of an action for unfair competition is
confusing and misleading similarity in general
appearance, not similarity of trademarks.
(Converse Rubber Co. v. Jacinto Rubber &.
Plastics Co., G.R. Nos. 27425, 30505, Apr. 28,
1980) (1996 Bar Question)
I
I
Q: W,hat is the so-called "related goods
principle"?
i
A: Goods are related when they; 1) belong to
the same class or have the same descriptive
propehies; 2) when they possess the same
physical attributes or essential characteristics
with reference to their form, composition,
texture or quality.
Q: What is the rule of idem sonans?
A: Two names are said to be "idem sonantes"
if the attentive ear finds difficulty in
distinguishing them when pronounced. (Martin
v. State, 541 S. W. 2d 605)
Note: Similarity of sound is sufficient to rule
that the two marks are confusingly similar
when applied to merchandise of the same
descriptive properties. (Marvex Commercial v.
Director of Patent, G.R. No. L-19297, Dec.
22, 1966)
Q: What are the elements to be established
in trademark infringement?
A:
1. The validity of the mark;
2. The plaintiff's ownership of the mark;
and
3. The use of the mark or its colorable
imitation by the alleged infringer
results in "likelihood of confusion."
(McDonald's Corporation v. L. C. Big
Mak Burger, lnc., et al., G.R. No.
143993, Aug 18,2004)
Q: What are the types of confusion that
arise from the use of similar or colorable
imitation marks?
A:
1. Confusion of goods (product
confusion); and
2. Confusion of business (source or
origin confusion). (McDonald's
Corporation v. L. C. Big Mak Burger,
inc., et a/., G.R. No. 143993, Aug.
18,2004) ,
324 team:'
Note: While there is confusion of goods when
the products are competing,
confusion of business exists when the
products are non-competing but related
enough to produce confusion of affiliation.
Q: What is. meant' by non-competing
goods?
A: Those which, though they are not in actual
competition, are so related to each other that it
might reasonably be assumed that they
originate from one manufacturer.
Non-competing goods may also be those
which, being entirely unrelated,
could not reasonably be assumed to have a
common source. Inthe case of related goods,
. confusion of business could arise out of the
use of similar marks; in the latter_case of non-
related goods, it could not. The vast majority
of courts today follow the modern theory or
concept of "related goods" which the court has
likewise adopted and uniformly recognized and
applied. (Esso Standard Eastern, Inc. v. CA,
G.R. No. L-29971, Aug. 31, 1982)
Q: Is there infringement even if the goods
are non-competing?
A:
.GR: No.
XPN: If it prevents the natural expansion of
his business and, second, by having his
business reputation confused with and put
at the mercy of the second user. (Ang v.
Teodoro, G.R. No. L-48226, Dec. 14, 1942)
Q: What are the remedies of the owner of
the trademark against infringers?
A:
1. Civil - both civil and criminal actions
may be filed with the Regiohal Trial
Courts. The owner of the registered
mark may ask the court to issue a
preliminary injunction to quickly
prevent infringer from causing
damage to his business.
Furthermore, the court will require
infringer to pay damages to the owner
of the mark provided defendant is
shown to have had notice of the
registration of the mark (which is
presumed if a letter R within a circle
is appended) and stop him
permanently from using the mark.
2. Criminal - Elements of the crime of
trademark infringement:
UST GOLDEN NOTES 2010
a. Deceitful act of giving one's
goods the general appearance of
goods of another manufacturer
or dealer;
b. Deceptive similarity either in the
goods themselves, in the trade
dress, in the word or devices, or
in any other feature of
appearance;
c. Offender offers to sell or sells the
goods, or gives others the
opportunity to do the same; and
d. Actual intent to deceive the
public or defraud the competitor
3. Administrative - This remedy is the
same as in patent infringement
cases. If the amount of damages
claimed is not less than P200,OOO.OO,
the registrant may choose to seek
redress against the infringer by filing
an administrative action against the
infringer with the Bureau of Legal
Affairs.
Q: What court has jurisdiction over
violations of intellectual property rights?
A: It is properly lodged with the Regional Trial
Court even if the penalty therefore is
imprisonment of less than six years, or from 2
to 5 years and a fine ranging from P50,OOOto
P200,OOO.
Note: R.A. 8293 and R.A. 166 are special laws
conferring jurisdiction over violations of
intellectual property rights to the Regional Trial
Court. They should therefore prevail over R.A.
No. 7691, which is a general law. (Samson v.
oaway, GR. No. 160054-55, July 21, 2004)
Q: What are the limitations on the actions
for infringement?
A:
1. Right of prior user - registered mark
shall be without affect against any
person who, in good faith, before
filing or priority date, was using the
mark for purposes of his business.
(Sec 159.1, IPC)
2. Relief against printer - injunction
against future printing against an
innocent infringer who is engaged
solely in the business of printing the
mark. (Sec. 159.2, IPC)
3. Relief against newspaper - injunction
against the presentation of
advertising matter in future issues of
the newspaper', magazine or in
electronic communications in case
the infringement complained of is
contained in or is part of paid
advertisement in such materials.
(Sec. 159.3, IPC)
111~1t31;:.ll1J liliiii[ m
Q: What distinguishes infringement of
trademark from unfair competition?
INFRINGEMENT OF UNFAIR: Of', I
TRADEMARK COMPETITION '..
Unauthorized use of a
The passing off of
trademark.
one's goods as those
of another.
Fraudulent intent is Fraudulent intent is
unnecessary, essential.
Prior registration of
Registration is not
necessary. (Del
the trademark is a
Monte Corp. v, CA,
prerequisite tothe
G.R. No. 78325, Jan.
action.
23, 1990)
Q: What is the right protected under unfair
competition?
A: A person who has identified in the mind of
the public the goods he manufactures or deals
in, his business or services from those of
others, whether or not' a registered mark is
employed, has a property right in the goodwill
of the said goods, business or services so
identified, which will be protected in the same
manner as other property rights. (Sec. 168.1,
IPC)
Q: Who are guilty of unfair competition?
A :
1, Any person, who is selling hls.qoods
and gives them the general
appearance of goods of another
manufacturer or dealer, either as to
the goods themselves or in the
wrapping of the packages in which
they are contained, or the devices or
words thereon, or in any other feature
of their appearance, which would be
likely to influence purchasers to
believe that the goods offered are
those of a manufacturer or dealer,
other than the actual manufacturer or
dealer, or who otherwise clothes the
goods with such appearance as shall
deceive the public and defraud
another or his legitimate trade, or any
U N r VE R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~'~. ~325
' Facu(taa de (} ) er ecl i o Ci vi C ' .
INTELLECTUAL PROPERTY LAWS: TRADEMARKS
subsequent vendor of such goods or
any agent of any vendor engaged in
selling such goods with a like
purpose;
2. Any person who by any artifice, or
device, or who employs any other
means calculated to induce the false
belief that such person is offering the
services of another who has identified
such services in the mind of the
public; or
3. Any person who shall make any false
statement in the course of trade or
who shall commit any other act
contrary to good faith of a nature
calculated to discredit the goods,
business or services of another. (Sec.
168.3)
Q: Is the law on unfair competition broader
than the law on trademark?
A: Yes. For the latter (trademark infringement)
is more limited but it recognizes a more
exclusive right derived from the trademark
adoption and registration by the person whose
goods or business is first associated with it.
Hence, even if one fails to establish his
exclusive property right to a trademark, he
may still obtain relief on the ground of his
competitor's unfairness or fraud. Conduct
constitutes unfair competition if the effect is to
pass off on the public the goods of one man as
the goods of another. (Mighty Corporation v. E.
&J . Gallo Winery, G.R. No. 154342, July 14,
2004) I
,
Q: W~at are the elements of an action for
unfair' competition?
A:
1. Confusing similarity in the general
appearance of the goods; and
Note: The confusing similarity mayor
may not result from similarity in the
marks, but may result from other
external factors in the packaging or
presentation of the goods.
2. Intent to deceive the public and
defraud a competitor.
Note: The intent to deceive and
defraud may be inferred from the
similarity inappearance of the
goods as offered for sale to the
public. Actual fraudulent intent need
not be shown. (McDonald's
Corporation v. L. C. Big Mak Burger,
326
lnc., et al., G.R. No. 143993, Aug, 18,
2004)
Q: Can trademark registration be
cancelled?
A: Yes, by any person who believes that he
will be damaged by the registration of the
mark:
1. Within 5 years, from the date of the
registration of the mark; or
2. At any time;
a. if the registered mark becomes
the generic name for the goods
or services, or a portion thereof,
for which it is registered;
b. if the mark has been abandoned;
c. if its registration was obtained
fraudulently or contrary to the
provisions of the IPC;
d. if the registered mark is being
used by, or with the permission
of, the registrant so as to
misrepresent the source of the
goods or services on or in
connection with which the mark
is used;
e. non-use of the mark within the
Philippines, without legitimate
reason, for an uninterrupted
period of 3 years.
Q: When is non-use excused?
A:
1. If caused by circumstances arising
independently of the will of the owner,
Lack of funds is not an excuse.
2. A use which does not alter its
.distinctive character though the use is
different from the form in which it is
registered.
3. Use of mark in connection with one or
more of the goods/services belonging
to the class in which the mark is
registered.
4. The use of a mark by a company
related to the applicant/registrant.
5. The use of a mark by a person
controlled by the registrant. (Section
152,IPC)
UST GOLDEN NOTES 2010
Q: What is a patent?
A: A statutory grant which confers to an
inventor or his legal successor, inreturnfor the
disclosure of the invention to the public, the
right for a limited period of time to exclude
others from making, using, selling or importing
the invention within the territory of the country
that grants the patent.
Q: What are the patentable inventions?
A: Any technical solution of a problem in any
field of human activity which is new, involves
an inventive step and is industrially applicable.
It may be, or may relate to, a product, or
process, or an improvement of any of the
foregoing. (Sec. 21)
Q: What are the conditions for
patentability?
A: NIA
1. !:lovelty - An invention shall not be
considered new if it forms part of a
prior art. (Sec. 23, IPC)
2. Involves an inventive step - if, having
regard to prior art, it is not obvious to
a person skilled in the art at the time
of the filing date or priority date of the
application claiming the invention.
3. Industrially &Jplicable - An invention
that can be produced and used in any
industry, shall be industrially
applicable (Sec. 27, IPC).
Q: What is prior art?
A :
1. Everything which has been made
available to the public anywhere in'
the world, before the filing date or the
priority date of the application
claiming the invention
2. The whole contents of a published
application, filed or effective in the
Philippines, with a filing or priority
date that is earlier than the filing or
priority date of the application.
Provided, that the application which
has validly claimed the filing date of
an earlier application under Section
31 of the IPC, there shall be a prior
art with effect as of the filing date of
such earlier application: Provided
further, that the applicant or the
inventor identified in both applications
are not one and the same.
(Sec. 24, IPC)
Q: What is meant by "made available to the
public" and what are its effects?
i
A: To be "made available to the public" fneans
at least one member of the public has been
able to access knowledge of the invention
without any restriction on passing that
knowledge onto others.
GR: When a work has already been made
available to the public, it shall be non-
patentable for absence of novelty.
XPN: Non-prejudicial disclosure - the
disclosure of information contained in the
application during the 12-month period
before the filing date or the priority date of
the application if such disclosure was made
by:
1. The inventor;
2. A patent office and the information
was contained:
a. In another application filed bythe
inventor and should have not
have been disclosed by the
office, or
b. In an application filed without the
knowledge or consent of the
inventor by a third party which
obtained the information directly
or indirectly from the inventor;
3. A third party which obtained the
information directly or indirectly from
the inventor. (Sec. 25, IPC)
Q: Who has the burden of proving want of
novelty of an invention?
A: The burden of proving want of novelty is on
him who avers it and the burden is a heavy
one which is met only by clear and satisfactory
proof which overcomes every reasonable
doubt. (Manzano v. CA, G.R. No. 113388.
Sept. 5, 1997)
UNIVERSITY OF SANTO TOMAS
Fa cul t a d' de (j ) er ecno Ci vi t
~i~ 327
INTELLECTUAL PROPERTY LA \\IS: PATENTS
Q: Where the defendant has shown that the
patent of the plaintiff is invalid for want of
novelty, will a preliminary injunction issue?
A: For the patentee to be entitled to protection,
the invention must be new to the world.
Accordingly, public use of the invention for
more than one year before the date of
application for patent will be fatal to the validity
of the patent issued. If the defendant has
shown that the patent of the plaintiff for powder
puff is invalid for want of novelty, the plaintiff is
not entitled to injunctive relief. (Maguan v, CA,
G.R. No. L-4510, Nov. 28, 1986)
Q: What is inventive step?
A:
GR: An invention involves an inventive step
if, having regard to prior art, it is not
obvious to a person skilled in the art at the
tim'e of the filing date or priority date of the
application claiming the invention. (Sec. 26,
IPC)
I
I
xpN: In the case of drugs and medicines,
there is no inventive step if the invention
results from. the mere discovery of a new
form or new property of a known substance
which does not result in the enhancement
of the known efficacy of that substance.
(Sec. 26.2, as amended by R.A. 9502)
Q: What is the test of: non-obviousness?
A: If any person possessing ordinary skill in
the art was able to draw the inferences and he
constructs that the supposed inventor drew
from prior art, then the latter did not really
invent. .
Q: Who is considered a person of ordinary
skill?
A: A person who is presumed to be an
ordinary practitioner aware of what was
common general knowledge in the art at the
relevant date. He is presumed to have
knowledge of all references that are sufficiently
related to one another and to the pertinent art
and to have knowledge of all arts reasonably
pertinent to the particular problems with which
the inventor was involved. He is presumed to
have had at his disposal the normal means
and capacity for routine work and
experimentation. (Rules and Regulations on
Inventions, Rule 207)
328
Q: What are other forms of patentable
inventions?
A:
a. Industrial design Any
composition of lines or
colors or any three-
dimensional form, whether
or not associated with lines
or colors. Provided that
such composition or form
gives a special appearance
to and can serve as pattern
for an industrial product or
handicraft. (Sec. 112, IPC)
Generally speaking, an industrial
design is the ornamental or aesthetic
aspect ofa useful article. (Vicente
Amador, Intellectual Property
Fundamentals, 2007)
b. Integrated circuit A
product, in its final form, or
an intermediate form, in
which the elements, at least
one of which is an active
elements and some of all of
the interconnections are
integrally formed in and or
on a piece of material, and
in which is intended to
perform an electronic
function.
c. Layout design/topography -
The three dimensional
disposition, however
expressed, of the elements,
at least one of which is an
active element, and of some
or all of the interconnections
of an integrated circuit, or
such a three-dimensional
disposition prepared for an
integrated circuit intended
for manufacture.
Registration is valid for 10
years without renewal
counted from date of
commencement of
protection.
d. Utility model- A name given
to inventions in the
mechanical field
UST GOLDEN NOTES 2010
Q: When does an invention qualify as a
utility model?
Q: Who is entitled to a patent?
A: If it is new and industrially applicable. A
model of implement or tools of any industrial
product even if not possessed of the quality of
invention but which is of practical utility. (Sec.
109.1, IPC)
Q: What is the term of a utility model?
A: 7years from date of filing of the application.
(Sec. 109.3, IPC)
Q: What are not patentable?
A: PAD-SCAD
1. Qiscoveries, scientific theories and
mathematical methods;
2. In the case of Qrugs and medicines,
mere discovery of a new form or new
property of a known substance which
does not result inthe enhancement of
the efficacy of that substance.
3. ~chemes, rules and methods of
performing mental acts, playing
games or doing business, and
programs for computers;
4. Methods for treatment of the human
or ~nimal body;
5. elant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-
organisms and non-biological and
microbiological processes.
6. ~esthetic creations; and
7. Anything which is ~ontrary to public
order or morality. (Sec. 22, IPC as
amended by R.A. 9502)
Q: Are computer programs patentable?
A:
GR: Computer programs are not
patentable but are copyrightable.
XPN: They can be patentable if they are
part of a process (e.g. business process
with a step involving the use of a computer
program).
A:
1. Inventor, his heirs, or assigns.
2. J oint invention - Jointly by the
inventors. (Sec. 28, IPC)
3. 2 or more persons invented
separately and independently of each
other - To the person who filed an
application;
4. 2 or more applications are filed - the
applicant who has the earliest filing
date or, the ear/iest priority date. First
to file rule. (Sec. 29, IPC)
5. Inventions created pursuant to a
commission Person who
commissions the work, unless
otherwise provided in the contract.
(Sec. 30.1, IPC)
6. Employee made the invention in the
course of his employment contract:
a. The employee, if the inventive
activity is not a part of his regular
duties even if the employee uses
the time, facilities and materials
of the employer.
b. The employer, if the. invention is
the result of the performance of
his regularly-assigned duties,
unless there is an
agreement, express or implied,
to the contrary. (Sec. 30.2, IPC)
Q: Cheche invented a device that can
convert rainwater into automobile fuel. She
asked Macon, a lawyer, to assist in getting
her invention patented. Macon suggested
that they form a corporation with other
friends and have the corporation apply for
the patent, 80% of the shares of stock
thereof to be subscribed by Cheche and 5%
by Macon. The corporation was formed and
the patent application was filed. However,
Cheche died 3 months later of a heart
attack. Franco, the estranged husband of
Cheche, contested the application of the
corporation and filed his own patent
application as the sole surviving heir of
Cheche. Decide the issue with reasons.
A: The estranged husband of Cheche cannot
successfully contest the application. The right
over inventions accrue from the moment of
creation and as a right it can lawfully be .
assigned. Once the title thereto is vested inthe
transferee, the latter has the right to apply for
its registration. The estranged husband of
Cheche, if not disqualified to inherit, merely
UN I V E R 5 I T Y 0 F 5 ANT 0 TOM A 5 ~ " " t .. ; 329
' Facu(taa de < Der ecf i o Ci vi l 'W'
INTELLECTUAL PROPERTY LAWS: PATENTS
interest of Cheche.
Q: What is unity of invention?
would I succeed to the
(1990IBar Question)
Q: Who may apply for a patent?
A: Any person who is a national or who is
domiciled or has a real and effective industrial
establishment in a country which is a party to
any convention, treaty or agreement relating to
intellectual property rights or the repression of
unfair competition, to which the Philippines is
also a party, or extends reciprocal rights to
nationals .of the Philippines by law, shall be
entitled to benefits to the extent necessary to
give effect to any provlslon of such convention,
treaty or reciprocal law, in addition to the rights
to which any owner of an intellectual property
right is otherwise entitled by the Intellectual
Property Code (Sec. 3, IPC)
Q: What are the steps in the registration of
a patent?
A: The procedure "for the grant of patent may
be summarized as follows:
1. Filing of the application
2. Accordance of the filing date
3. Formality examination
4. Classification and Search
5. Publication of application
6. Substantive examination
7. Grant of Patent
8. Publication upon grant
9. Issuance of certificate (Sa/ao,
Essentials of Intellectual Property
Law: a Guidebook on Republic Act
No. 8293 and Related Laws., 2008)
Q: How is disclosure made?
A: The application shall disclose the invention
in a manner sufficiently clear and complete for
it to be carried out by a person skilled in the
art.
Q: What is a claim?
A: Defines the matter for which protection is
sought. Each claim shall be clear and concise,
and shall be supported by the description.
Q: Whlat is an abstract?
A: A concise summary of the disclosure of the
invention as contained in the description,
claims
l
and merely serves as technical
information.
330 I team: hSlI .im
A: The application shall relate to one invention
only or to a group of inventions forming a
single general inventive concept. (Sec. 38.1) If
several independent inventions which do not
form a single general inventive concept are
claimed in one application, the application
must be restricted to a single invention. (Sec.
38.2,IPC)
Q: What is the concept of divisional
applications?
A: Divisional applications come into play when
two or more inventions are claimed in a single
application but are of such a nature that a
single patent may not be issued for them. The
applicant, is thus required to "divide", that is, to
Iimit the claims to whichever invention he may
elect, whereas those inventions not elected
may be made the subject of separate
applications which are called "divisional
applications" (Smith-Kline Beckman Corp. v.
CA, GR No. 126627, Aug. 14,2003)
Q: What is priority date?
A: An application for patent filed by any
person who has previously applied for the
same invention in another country which by
treaty, convention, or law affords similar
privileges to Filipino citizens, shall be
considered as filed as of the date of filing the
foreign application. (Sec. 31, IPC)
Q: What are the conditions ln availing of
priority date?
A:
1. The local application expressly claims
priority;
2. It is filed within 12 months from the
date the earliest foreign application
was filed; and
3. A certified copy of the foreign
application together with an English
translation is filed within 6 months
from the date of filing in the
Philippines. (Sec. 31, IPC)
Q: Leonard and Marvin applied for Letters
Patent claiming the right of priority granted
to foreign applicants. Receipt of
petitioners' application was acknowledged
by respondent Director on March 6, 1954.
Their Application for Letters Patent in the
US for the same invention indicated that
the application in the US was filed on
March 16, 1953. They were advised that the
"Specification" they had submitted was
UST GOLDEN NOTES 2010
"incomplete" and that responsive action
should be filed with them four months from
date of mailing, which was August'5, 1959.
On J uly 3, 1962, petitioners submitted two
complete copies of the Specification.
Director of patents held that petitioners'
application may not be treated as filed. Is
the director correct?
A: Yes, it is imperative that the application be
complete in order that it may be accepted. It is
essential to the validity of Letters Patent that
he specifications be full, definite, and specific.
The purpose of requiring a definite and
accurate description of the process is to
apprise the public of what the patentee claims
as his invention, to inform the Courts as to
.' hat they are called upon to construe, and to
convey to competing manufacturers and
ealers information of exactly what they are
oound to avoid. To be entitled to the filing date
. the patent application, an invention
cisclosed in a previously filed application must
~described within the instant application in
such a manner as to enable one skilled inthe
2 l to use the same for a legally adequate
_jlity. (Boothe v. Director of Patents, G.R. No.
--24919, Jan. 28, 1980)
: What are the rights conferred by a
patent application after the first
publication?
: The applicant shall have all the rights of a
atentes against any person who, without his
2' horization, exercised any of the rights
nferred under Section 71 in relation to the
'1 ention claimed in the published patent
aoplicatlon, as if a patent had been granted for
:"'1ai invention, provided that the said person
ad:
1.
2.
Actual knowledge that the invention
that he was using was the subject
matter of a published application; or
Received written notice that the
invention was the subject matter of a
published application being identified
inthe said notice by its serial number
Note: That the action may not be filed until
a er the grant of a patent on the published
application and within four (4) years from the
commission of the acts complained of (Sec.
46,IPC).
Q: When shall the patent take effect?
A: A patent shall take effect on the date of the
publication of the grant of the patent inthe IPO
Gazette. (Sec. 50.3, IPC)
Q: What is the duration of a patent, utility
model and industrial deslqn?
A:
1. Patent - 20 years from. date of filing
of application without renewal. (Sec.
54,IPC)
2. Utifity Model - 7 years from the filing
date of the application without
renewal. (Sec. 109.3, fPC)
3. Industrial Design - 5 years from the
filing date of the application,
renewable for not more than two (2)
consecutive periods of five (5) years
each. (Sec, 118.2, fPC)
Q: What are the' grounds for the
cancellation of patents?
A: NOel
1. The invention is ~ot new or
patentable;
2. The patent does not Qisclose the
invention in a manner sufficiently
clear and complete for it to be carried
out by any person skilled inthe art; or
3. .Qontrary to public order or
morality.(Sec. 61.1, IPC) !
4. Patent is found invalid in an action for
infringement (Sec. 82, IPC)
Q: What if the ground/s for. cancellation
relate to some of the claims or parts of the
claim only?
A: Cancellation may be effected to such
extent only. (Sec. 61.2, fPC)
Q: What are the grounds for cancellation of
a utility model?
A:
1. The invention does not qualify for
registration as a utility model;
2. That the description and the claims
do not comply with the prescribed
requirements;
3. Any drawing which is necessary for
the understanding of the invention
has not been furnished;
4. That the owner of the utility model
registration is not the inventor or his
successor intitle. (Sec. 109.4, IPC)
UN I V E R5 I T Y 0 F 5ANT 0 TOM A 5 ~."-'-'-"~
Pacu[ taa de Der ec I i o Ci v i] .. 331
INTELLECTUAL PROPERTY LAWS: PATENTS
i
Q: Whkt are the grounds for cancellation of
an industrial design?
I
A:
1. The subject matter of the industrial
design is not registrable;
2. The subject matter is not new; or
3. The subject matter of the industrial
design extends beyond the content of
the application as originally filed (Sec.
120IPC).
Q: What are the rights conferred by a
patent?
A:
1. Subject matter is aproduct - Right to
restrain, prohibit and prevent any
unauthorized person or entity from
making, using, offering for sale,
selling or importing the product.
2. Subject matter is a process - Right to
restrain prohibit and prevent any
unauthorized person or entity from
manufacturing, dealing in, using,
offering for sale, selling or importing
any product obtained directly or
indirectly from such process (Sec. 71,
IPC).
3. Right to assign the patent, to transfer
by succession, and to conclude
licensing contracts (Sec. 71.2, IPG).
Q: What are the exceptions to the rights
conferred by a patent?
A:
1. In general
a. GR: If put on the market in the
Philippines by the owner of the
product, or with his express
consent.
XPN: Drugs and medicines -
introduced in the Philippines or
anywhere else in the world by
the patent owner, or by any party
authorized to use the invention
(Sec. 72.1, as amended by R.A.
9502)
b. Where the act is done privately
and on a non-commercial scale
or for a non-commercial purpose
(Sec. 72.2, IPC);
c. Exclusively for experimental use
of the invention for scientific
purposes or educational
332
purposes (experimental use
provision) (Sec. 72.3, IPC);
d. In the case .of drugs and
medicines, where the act
includes testing, using, making or
selling the invention including
any data related thereto, solely
for purposes reasonably related
to the development and
submission of information and
issuance of approvals by
government regulatory agencies
required under any law of the
Philippines or of another country
that regulates the manufacture,
construction, use or sale of any
product (bolar provision) (Sec.
72.4, IPC);
e. Where the act consists of the
preparation for individual cases,
in a pharmacy or by a medical
professional, of a medicine in
accordance with a medical
prescription (Sec. 72.5, IPC).
f. Where the invention is used in
any ship, vessel, aircraft, or land
vehicle of any other country
entering the territory of the
Philippines temporarily or
accidentally (Sec. 72.5, IPC).
2. Prior user - Person other than the
applicant, who in good faith, started
using the invention in the Philippines,
or undertaken serious preparations to
use the same, before the filing date or
priority date of the application shall
have the right to continue the use
thereof, but this right shall only be
transferred or assigned further with
his enterprise or business (Sec. 73,
IPC)
3. Use by Government - A government
agency or third person authorized by
the government may exploit invention
even without agreement of a patent
owner where:
a. Public interest requires;
b. The manner of exploitation by
owner of patent is anti-
competitive (Sec. 74, fPC).
4. Reverse reciprocity of foreign law -
Any condition, restriction, limitation,
diminution, requirement, penalty or
any similar burden imposed by the
law of a foreign country on a
UST GOLDEN NOTES 2010
Philippine national seeking protection
of intellectual property rights in that
country, shall reciprocally be
enforceable upon nationals of said
country, within Philippine jurisdiction
(Sec. 231, IPC).
Q: Who is a parallel importer?
A: One which imports, distributes, and sells
genuine products in the market, independently
of an exclusive distributorship or agency
agreement with the manufacturer. Such acts of
"underground sales and marketing" of genuine
goods, undermines the property rights and
goodwill of the rightful exclusive distributor.
Such goodwill is protected by the law on unfair
competition. (Solid Triangle v. Sheriff, G.R. No.
144309, Nov. 23, 2001)
Q: What is the doctrine of exhaustion?
A: Also known as the doctrine of first sale, it
provides that the patent holder has control of
the first sale of his invention. He has the
opportunity to receive the full consideration for
his invention from his sale. Hence, he
exhausts his rights in the future control of his
invention.
It espouses that the patentee who has already
sold his invention and has received all the
royalty and consideration for the same will be
deemed to have released the invention from
his monopoly. The invention thus becomes
open to the use of the purchaser without
further restriction. (Adams v. Burke, 84 U.S.
17, 1873)
Q: How does the doctrine apply in
Philippine jurisdiction?
A:
GR: Exhausted by first sale in the.
Philippines (Domestic exhaustion).
XPN: R.A. 9502 on drugs and medicines:
first sale in any jurisdiction exhausts
(Intemational exhaustion).
Q: What are the different kinds of
.exhaustion?
A:
1. International exhaustion - allows any
party to import into the national
territory a patented product from any
other country in which the product
was placed on the market by the
patent holder or any authorized party.
2. Regional exhaustion - allows the
possibility of importing into the
national territory a patented product
originating from any other member'
state of a regional trade agreement.
3. National exhaustion - limits the
circulation of products covered by
patent in one country to only those
put on the market by the patent
owner or its authorized agents in that
same country. In this case, there can
be no parallel importation.
4. Modified exhaustion - all respect
identical to the International
exhaustion except for the allowance
of the restriction of the extent of
exhaustion through explicit
contractual terms. (Carlos Correa,.
"Internationalization of the Patent
System and' New Technologies".
International Law Journal, Vol. 20.
No.3,2002)
Q: What constitutes infringement of
patent?
A:
1. Making, using, offering for sale,
selling or importing a patented
product or
2. A product obtained directly or
indirectly from a patented process; or
3. Use of a patented process without
authorization of the owner of the
patent (Sec. 76, IPC)
Q: What are the tests .ln patent
infringement?
A:
1. Literal infringement test - Resort
must be had, in the first instance, to
words of the claim. If the accused
matter clearly falls within the claim,
infringement is committed.
Minor modifications are sufficient to
put the item beyond literal
infringement. (Godines v. CA, G.R.
No. L-97343, Sept. 13, 1993)
2. Doctrine of equivalents - There is
infringement where a device
appropriates a prior invention by
incorporating its innovative concept
and, although with some modification
and change, performs substantially
the same function in substantially the
UNIVERSiTY OF SANTO TOMAS \:,~ 333
Pacu{ taa de C] ) er ecno Ci vi C 'y.
I
, I
I
INTELLECTUAL PROPERTY LAWS: PATENTS
same way to achieve substantially the
same result. (Ibid.)
3. Economic interest test - when the
process-discoverer's economic
interest are compromised, i.e., when
others can import the products that
result from the process, such an act
is said to be prohibited.
Q: Does the use of a patented process
by a third person constitute an
infringement when the alleged infringer has
substituted, in lieu of some unessential
part of the patented process, a well-known
mechanical equivalent." .
A: Yes, under the doctrine of mechanical
equivalents, the patentee is protected from
colorable invasions of his patent under the
guise of substitution of some part of his
invention by some' well known mechanical
equivalent. It is an infringement of the patent, if
the substitute performs the same function and
was well known at the date of the patent as a
proper substitute for the omitted ingredient.
(Gsell v. Yap-Jue, G.R. No. L-4720, Jan. 19,
1909)
Q: What is meant by "equivalent device"?
A: It is such as a mechanic of ordinary skill in
construction of similar machinery, having the
forms, specifications and machine before him,
could substitute in the place of the mechanism
'described without the exercise of the inventive
faculty.
Q: What is the "doctrine of file wrapper
estoppel"?
A: This doctrine balances the doctrine of
equivalents. Patentee is precluded from
claiming as part of patented product that which
he had to excise or modify in order to avoid
patent office rejection, and he may omit any
additions that he was compelled to add by
patent office regulations.
Q: W\1at is the "doctrine of contributory
infringement"?
i
A: Aside from the infringer, anyone who
actively induces the infringement of a patent or
provides the infringer with a component of a
patented product or of a product produced
because of a patented process knowing it to
be especially adapted for infringing the
patented invention and not suitable for
substantial non-lntrinqinq use is liable jointly
and severally with the infringer as a
contributory infringer. It must be proven that
the product can only be used for infringement
purposes. If it can be used for legitimate
purposes, the action shall not prosper.
Q: What are the remedies of the owner of
the patent against infringers?
A:
1. Civil action for infringement - The
owner may bring a civil action with
the appropriate Regional Trial Court
to recover from infringer the damages
sustained by the former, plus
attorney's fees and other litigation
expenses, and to secure an injunction
for the protection of his rights.
2. Criminal action for infringement - If
the infringement is repeated, the
infringer shall be criminally liable and
upon conviction, shall suffer
imprisonment of not less than six (6)
months but not more than three (3)
years and/or a fine not less than
Pi 00,000.00 but not more than
P300,OOO.00
3. . Administrative remedy - Where the
amount of damages claimed is not
less than P200,OOO.00, the patentee
may choose to file an .admlnistrative
action against the infringer with the
Bureau of Legal Affairs (BLA). The
BLA can issue injunctions, direct
infringer to pay patentee damages,
but unlike regular courts, the BLA
may not issue search and seizure
warrants or warrants of arrest.
Q: What are the limitations to the
civil/criminal action?
A:
1. No damages can be recovered for
acts of infringement committed more'
than four (4) years before the filing of
the action for infringement. (Sec. 79,
IPC)
2. The criminal action prescribes in
three (3) years from the commission
of the crime. (Sec. 84, IPC)
UST GOLD:EN NOTES 2010
Q: Who can file an action for infringement?
Q: What is voluntary licensing?
A:
1. The patentee or his successors-in-
interest may file an action for
infringement. (Creser Precision
Systems, Inc. v. CA, GR. No.
118708, Feb. 2, 1998)
2. Any foreign national or juridical entity
who meets the requirements of Sec.
3 and not engaged in business inthe
Philippines, to which a patent has
been granted or assigned, whether or
not it is licensed to do business inthe
Philippines. (Sec. 77, IPC)
Q: What are the remedies of persons not
having the right to a patent?
A: If a person other than the applicant is
declared by final court order or decision as
having the right to a patent, he may within 3
months after such decision has become final:
1. prosecute the application as his own
2. file a new patent application
3. request the application to be refused;
or
4. seek cancellation of the patent.
Q: What are the defenses in an action for
infringement?
A:
1. Invalidity of the patent; (Sec. 81, IPC);
2. Any of the grounds for cancellation of
patents:
a. That what is claimed as the
invention is not new or
patentable
b. That the patent does not disclose
the invention in a manner
sufficiently clear and complete
for it to be carried out by any.
person skilled inthe art; or
c. That the patent is contrary to
public order or morality. (Sec.
61,IPC)
Q: What are the modes of obtaining license
to exploit?
A:
1. Voluntary licensing (Sec. 85, IPC)
and
2. Compulsory licensing (Sec. 93, IPC)
A: The grant by the patent owner to a third
person of the right to exploit a patented
invention.
Q: What are the rights of a licensor in
voluntary licensing?
A: In the absence of any provision to the
contrary in the technology transfer
arrangement, the grant of a license shall not
prevent the licensor from granting further
licenses to third person nor from exploiting the
subject matter of the technology transfer
arrangement himself (Sec. 89, IPC).
Q: Who can grant a compulsory license?
A: The Director of Legal Affairs may grant a
license to exploit a patented invention, even
without the agreement of the patent owner, in
favor of any person who has shown his
capability to exploit the invention (Sec. 93,
IPC).
R.A. 9502 (Universally Accessible Cheaper
and Quality Medicines Act of 2008) however
amended Sec. 93 so that it is the Director
General of the IPO who may grant a license to
exploit patented invention under the grounds
enumerated therein. Clarification either by
legislation of judicial interpretation as to who
has jurisdiction should be made to avoid
confusion. (Ernesto C. Salao, Essential of
Intellectual Property Law: a Guidebook on
Republic Act No. 8293 .and Related Laws,
2008) I
Q: What are the grounds for compulsory
licensing and the period for filing a
petition?
A:
1. National emergency;
2. Where the public interest, at any time
after the grant of the patent;
3. Where a judicial or administrative
body has determined that the manner
of exploitation by the owner of the
patent or his licensee is anti-
competitive at any time after the grant
of the patent;
4. In case of public non-commercial use
of the patent by the patentee, without
satisfactory reason at any time after
the grant of the patent;
5. If the patented invention is not being
worked in the Philippines on a
UNIVERSITY OF SANTO TOMAS ~.""T~ 335
' Facu{ taa de Der ec I i o Ci ui ] ...,
INTELLECTUAL PROPERTY LAWS: PATENTS
commercial scale, although capable
of being worked, without satisfactory
reasonafter the expiration of 4 years
from the date of filing of the
applicationor 3years fromthe dateof
the patentwhichever is later. (Sec. 93
in relation to Sec. 94)
6. Where the demand for patented
drugs and medicines is not being met
to an adequate extent and on
reasonable terms, as determined by
.the Secretary of the Department of
Health(Sec. 10, R.A. 9502)
Q: Grounds for cancellation of the
compulsory license?
A:
1. Ground for the grant of the
compulsory license no longer exists
andis unlikelyto recur;
2. Licenseehas neither begunto supply
the domestic market nor made
serious preparationtherefore;
3. Licensee has not complied with the
prescribedterms of the license.
Q: Cezar works in a car manufacturing
company owned by J oab. Cezar is quite
innovative and loves to tinker with things.
With the materials and parts of the car, he
was able to invent agas-saving device that
will enable cars to consume less gas.
Francis, a co-worker, saw how Cezar
created the device and likewise, came up
with a similar gadget, also using scrap
materials and spare parts of the company .
. Thereafter, Francis filed an application for
registration of his device with the Bureau
of Patents. Eighteen months later, Cezar
filed his application for the registration of
his device with the Bureau of Patents.
Is the gas-saving device patentable?
Explai,n.
A: Yes because it is new, it involves an
inventivestepandit is industriallyapplicable.
Q: Assuming that it is patentable, who is
entitled to the patent? What, if any, is the
remedy of the losing party?
A: Francisis entitledtothe patent, because he
had the earlier filing date. The remedy of
Cezar is to file a petition in court for the
cancellation of the patent of Francis on the
ground that he is the true and actual inventor,
and ask for his substitutionas patentee. (2005
Bar Question)
336
Q: Supposing Albert Einstein were alive
today and he filed with the Intellectual
Property Office (IPO) an application for
patent for his theory of relativity expressed
in the formula E=mc2. The IPO disapproved
Einstein's application on the ground that
his theory of relativity is not patentable. Is
the IPO's action correct?
A: Yes, the IPO's actionis correct. Section22
of the Intellectual Property Law expressly
states that discoveries, scientific theories and
mathematical methods are among those
matters which are not patentable. (2006 Bar
Question)
Academics Com mit tee
CbtJI i pcr .r on: Abraham I). C;clluin() 1"1
Vi a: -CI ' tl i r ./ or / l cademi t_: r : J eannie 1 \ . J .aurcntino
Vl ~ ' (!-Chtl i r ; r Jr ./ 1 dl t/ i 1 J i : -o 1 " I 1 1 1 1 (c: Aissa Coline 11. Luria
J/,~c-C.b(}ir.FJ! L l -!) ,oJ(/ &J) e.l { ~ " : Loise Rae C. Naval
Mercantile Law Committee
.rllhled l l ead: 11,,1)' T Aillpagllc)'
/I.I".rl. .l"lIh;ed Uea,," Mallil)"1l Rr isc S. S"lcI"
Members:
I ,elwin Marc T. Ihldi"
,\irCl'll Ivl. each! I
Socrates Iklljic I. Iv! arbil
Run Chcrric S. Mcnd()""
Edison J ames I'. Paga! ibuan
Maybcllinc M. Sanl-iago
..~.~""""',