Reviewer in Commercial Law Sundiang and Aquino 2013 PDF

.
'
JOSE R. SUND1ANG, SR,

AB, BSE LL.B
Dean. Arellano Law Poiinciaiaor:
Professor of Law, San Bede College eC Law ark;
Arellano Law; Foundation
Reviewer on Commercial Lav.;, San Beds College of Lav.
Arellano Law Foundation, Recoietos Review Centex
(Manila & Cebu), UP Lave Center's Bar Preview Institute,
and Cosmopolitan Review Center
Former Dean, San Beda College of Lan
TIMOTEO B, AQUINO
AB, LL.B
Professor of Law
Angeles University Foundation, College of Lav.,
___________ Pre-Bar Reviewer
Recoletos Review Center
San Sebastian College Manila
Former Professor
San Beda College of Law,
Philippine judicial Academy,
University of Perpetual HeJp-DALTA
(Las Pinas}, Arellano Law Foundation
Former Prefect of Student Affairs, Bar; B eat Colley: of Law
Sixth .Edition
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by
COCF Si SCXTCLcNC bli. To my wife Felicitas, my children Macaria, Jocelyn, Jose, Jr.,
and Reriato and their families
Jose R. Sundiang
T M fh T B fi B . AQUINO
ISBN 978 -971 -23 -6489 “1 To my wife Bea and my children Leona Isabelle, Lean Carlo
and Lauren Margaret
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iii
PREFACE TO THE SIXTH EDITION
Books that are designed primarily to answer the needs of

Bar reviewees should be constantly updated to meet the ebb and
flow of the law and jurisprudence. Hence, this edition.
This edition adheres to the basic aim of the previous
; editions — to present the core subjects of Commercial Law in
; a simplified but comprehensive manner. The structure of the
.
book was purposely designed to help students review for the
Bar Examinations.
; The authors extend their heartfelt gratitude to all those

who used this book in the past ten years. The authors hope that
this new edition will continue to be of help to students and Bar
Reviewees.
THE AUTHORS
iv
PREFACE
This book aims to provide law students with materials

for careful review of the fundamental principles, doctrines,
and rules on the cluster of laws that encompasses Commercial
Law. Like similar books of its type, this book does not contain
extended discussion of the statutory provisions or jurisprudence.
It includes rules that are presented in outline form, concise
statements of doctrinal pronouncements of the Supreme Court,
summary of significant cases, sample bar examination problems,
and problems based on cases.
However, since the book embodies what should be a
student's core knowledge of Commercial Law, it may be used
not only by students who are preparing for the bar examinations
but also as study guide of students who are taking Commercial
Law subjects in law school, especially Commercial Law Review.
The present edition incorporates new laws and
jurisprudence. For instance, this work includes salient features
of the Human Security Act of 2007, Civil Aviation Act of 2008
and the Universally Accessible Cheaper and Quality Medicine
Act of 2008. New topics like the laws on real estate mortgage,
salvage, and ship mortgage are now included. The authors re
arranged the different parts of the book without deviating from
the general format of presentation of the materials. All laws and
discussion involving credit transactions are now part of Part V of
this volume.
The authors, in the preparation of the present edition,
are still guided by their belief that there is no such thing as
exceedingly early preparation for the bar examinations. Indeed,
such preparation should properly start when the law student
embarks on his study of law. Every student should heed the
caution given by Professor Henry Ballentine who declared that
Vll
students should not wait for the writing on the was — ' Thin; au
to be weighed in tiie balance by bar examiners, Vdor wire thee if thm;
art found wanting."
THE AUTHORS
CONTENTS
Introduction.............. ...... .... ......................................... ......... ....... 1

1. General Concepts...................... .............. ........ ...................... 1
1.01. Commercial Law................................... .... . 1
1.02. Commerce................. ........ ................ ......... . 1
2. Applicable Laws.............. ........... ................................... . 2
2.01. Code of Commerce........................ ............................ 2
2.02. New Civil Code ......................... .............. ............... . 2
2.03. Special Laws.................. ....... ........... ..... ............. 2
3. Commercial Contracts........................... ............................ . 3
3.01. Concept and Formalities ............................................ 3
3.02. Perfection ........ ................... ............................... ........ 3
PART I
Negotiable Instruments Law
.:........................... - ..............(A c tM o ja m )_______________________
1. What is a Negotiable Instrument? ........... ...................... 5
2. Requisites of Negotiability............... ............................. . 5
2.01. What does negotiation mean?......................... . 6
2.02. How is negotiability of an instrument
determined?.................................. ...... ................... 6
3. Governing Law.......................................................... . 6
3.01. Code of Commerce................. ........... ......... ........ . 6
3.02. Civil Code suppletorily applies.................. .... . 6
3.03. Applicability of the NIL...... ...... ........ ................... 7
4. Functions................................. .................. ................ 7
4.01. Functions of negotiable instrument............................ 7
4.02. Not legal tender...... ............. ..... ........ .................. 7
4.03. Coins as legal tender.......................... ........... .......... . 8
: 5. Two important features of negotiable instrument......... 8
5.01. Negotiability................... ........................ . 8
5.02. Accumulation of secondary contracts................... 8
6. Kinds of negotiable instruments ................ 8
6.01. Bill of Exchange............... ..... .............................. . 8
ix
I
1
6J2, Promissory Note............. ......... ......... ......................... 9 14. Persons with secondary and primary liability 54
6,03. Kinds of Bils of E x c h a n g e . ........................ ........ 9 14.01. Liabilities............. .......... ......... . 54
6,04 tends of Promissory N ote..... .................. .............. . 10 14.02. Warranties................... ................ .......... 55
6.05. When can a Bill of Exchange be treated as 1403. .Who Is an accommodation party?.................. .......... 56
promissory note?...... ........ ...................................... 10 15. How to enforce liability...,............ ................................... . 58
6.06. Negotiable Promissory Note vs. Negotiable 15.01. Primarily liable.............. ............. ........ ...... ............... 58
Bill of Exchange......... .................... ....................... . 10 15.02. Secondary liable.............................. ............... ............ 59
6.07. Are Commercial papers negotiable instruments?.... 11 15.03. Rules on presentment for payment.............. ........... . 60
7. Persons involved........................................ ............................ 12 15.04. Presentment for acceptance........ ........ ...................... 62
8. Distinctions......................... ...................... .— ........... . 13 15.05. Acceptance............ .................. ......... .......................... 63
8.01. Distinctions between negotiable instruments 15.06. Notice of Dishonor.................... .................................. 65
and non-negotiable instruments.......... ..... ............... 13 15.07. Protest....................... ..... ...... ..... ..... ............... ..... . 68
8.02 Distinguish negotiability from assignability............ 14 15.08. Acceptance for Honor............................................ . 69
9. Requisites of Negotiability .................................................... 14 15.09. Payment for Honor........................................... .......... 70
9.01. In Writing and signed by maker or drawer........... 14 16. Bills in S et..................................... ............ ............. ............... 71
9.02. Must contain an unconditional promise or 16.01. Bills in Set ................... .................. ............ ..... .......... 71
order to pay a sum certain in money...................... . 15 16.02. Purpose................................... ................................ . 71
9.03. Payable in sum certain in money.............................. 18 16.03. Liability of Acceptor..................................... . 71
9.04. Payable on demand or at a fixed or 16.04. Obligations of Transferors.......................................... 72
determinable future time............................................ 20 17. Discharge............................................. ............. ..................... 72
9.05. Payable to order or bearer .................................... 21 17.01. How may negotiable instrument be discharged?.... 72
9.06. Identification of the drawee................................... . 24 17.02. What is payment in due course?............................... 72
10. Omissions and Provisions that do not affect 17.03. When is a person secondarily liable discharged?.... 73
negotiability........................................... ................................. 24 18. Checks.................................................... ......... ......... ............. 73
_____ 11. Transfer and negotiation.............. ......................................... 27 18.01. Definition................ ....... .— ................. .................... -Z3.
11.01. If instrument is negotiable, effected through........... 27 18.02. Kinds............. .......................................................... . 74
11.02. Issuance..................... ............. .... .......... .............. ...... 28 18.03. Stopping payment................ ...................................... 76
11.03. Indorsement ................ ...... .............. ............. ........ . 30
11.04. Negotiation by prior party . ....................... 32 PART II
12. Holders.............. ........d..........;.................... .............. ............. . 32
12.01. Holder............................................ .............. .............. 32 Insurance Code
12.02. Requisites.................................. ............................... . 32 (P.D. No. 1450, as amended)
12.03. Rights of HDC............................................... . 38
13. Real and Personal Defenses ...,....d..,..d.„,„.Ld................. . 40 1. Definitions............... ...... .................. ...................................... 77
13.01. Distinguish Real from Personal Defenses............ . 40 1.01. Contract of Insurance................... .............. .......... ..... 77
13.02. Forgery.................. .................. 41 1.02. Contract of Suretyship.................................... ........ ... 77
13.03. Effects .................................................. ......... ............. 46 1.03. Insurance or transacting an insurance business...... 77
13.04. Undated Instrument................................................. . 49 2. Characteristics............... ......................................................... 78
13.05. What is Material Alteration? What are 2.01. Insurance as a risk distributing device...................... 78
the effects? ............... ....... ................... 49 2.02. Contract of Adhesion or Fine Print Rule.................. 78
13.06. Fraud....... ............. ............................ ........ ................. 5Q 2.03. Aleatory............ ..................................................... . 79
13.07. Failure, absence of, or illicit consideration............ . 51 2.04. Contract of Indemnity.............................................. . 79
2.05. UberrimaeFides Contract,. . . . . . .................... . 79
' 13.08. Minority or incapacity or wantof authority............. 52
2.06. Personal Contract......................................... . 80
■ 13.09. Prescription..... ......... ..... ....................53
X xi
3. Elements of insurance....... ........................... .......... ....... . 80 13.01. Double Insurance......... ............... ..... ........................ 127
4. Perfection............... ................. ................... ........... ........ . 83 13.02. Effects of Double Insurance and Over Insurance..... 127
4.01. Cover notes....................... .............. ............ ........ ....... 86 13.03. Reinsurance............. .... .......................... .................. 128
4.02. The Policy ...........,.... ....... .......... . 87 13.04. Distinctions.................. .... .......... ..... ......... ....... ....... . 128
5. Types of Insurance Contracts.................... .................... ....... 90 14. Loss and Claims Settlement........................................... ...... 131
6 . Parties to insurance contract.................................. ........ ...... 91 14.01, Proximate Cause,and Immediate Cause 131
6.01. Insurer................ ......... .................. ............ ......... ...... 91 14.02, Notice arid Proof in Fire. Insurance..,,.............. ........ 132
6.02. Insured..................... ....................... ........... ................ 92 14.03, Claims;S.e.ttl:ement............................... . 133
6.03. Beneficiary................................... ............... ........... . 93 15. Period of Prescription........................................ .......... ..... . 135
7. Insurable Interest........ ............ ....... ................. ................... 95 16. Right of S u b r o g a t i o n . ............................... ...... . 136
7.01. Basic Concepts. . . . . . . . . . . . . . . ....... 95 16.01. Principle of Subrogation...................................... 136
7.02. Insurable Interest in property vs. insurable 16.02, Cases when there is ho Right of Subrogation........... 136
interest in life.............................................................. 100 17. Marine Insurance............. .................................. ....... ........... 137
7.03. Insurable interest of mortgagor and 17.01. Coverage.................................................. .............. . 137
mortgagee over mortgaged property........ . 103 17.02. Implied Warranties................... ......... ....................... 139
7.04. When interest retained............... ............ . 106 17.03. insurable Interest........................... .................. 139
7.05. Insurable interest of beneficiary and 17.04. Perils of the Sea vs. Perils of the Ship...................... . 140
assignee of the policy................................ ........... . 107 17.05. Concealment.................. ....................................... . 141
7.06. Expectancy not insurable..................... ............ .... . 109 17.06. General Average Loss vs. Particular Average Loss... 141
7.07. Effect of change of interest............................. ........... 109 1-7.07. What is Co-insurance Clause?.................. 143
8 , Risks insured against .....................................---- ----------- - 110 17.08. Seaworthiness...................... 145
9. Premium............... 110 17.09. Deviation.............................................................. 147
9.01. General Rule......... .i .hi^^.v;.;i.■;*............................. 110 17.10. Loss and Abandonment........................ 148
9.02. Effect of payment of the premium ......................... 112 18. Fire Insurance................................................................ ........ 149
9.03. When insured entitled to return of premiums......... 112 — -— 18y01t Fire Insurance.c. ................................................ ~ ...... 149~
9.04. Suretyship................................................ 112 18.02. Extent of Liability.............................. 150
9.05. Non-default options in life insurance..................... 113
18.03. Alteration.................................................. 150
10 . Transfer of policy................... 113
18.04. Friendly Fire vs. Hostile Fire...................................... 151
10.01. May the policy be transferred?.................................. 113
19. Casualty Insurance....................................... ...................... 151
10.02. What is the effect of the transfer?.............................. 113
19.01. Casualty Insurance.............................. 151
11. Devices used for ascertaining and controlling
risk and loss............................................... .......................... . 114 19.02. Intentional vs. Accidental Insurance............. 151
11.01. Four primary concerns................................. ............ . 114 19.03. Third-party Lability................. 152
11.02. Devices used by the insurer...... ............. ................... 114 20. Compulsory Motor Vehicle Liability Insurance.................. 153
11.03. Concealment.................................................. . 115 20.01. Mandatory insurance........ ....... .......... ......... ............ 153
11.04. Representation.................... ...... ............. ...... ............. 120 20.02. Purpose............................... 154
11.05. Warranty................... ................. ............................ 121 20.03. No Fault Clause............................ 154
11.06. Distinctions....................... 122 20.04. From whom to Recover?.................. 155
11.07. Other Insurance Clause.............................................. 122 20.05. Time to File and Process Claim................................. 155
12 . Incontestability clause......................... ............. ............... . 124 20.06. Liability of Insurer............................ 156
12.01. Definition.................................. ..... ............................. 124 20.07. Other Rules concerning Motor Vehicles.............. 157
12.02. Requisites............................................. ...... .... .... . 124 21. Suretyship................... ............. ............. ....... ............... . 159
12.03. Defenses that are not Mrred..................................... 126 21,01. Suretyship........... ................. 159
13. Double Insurance and Reinsurance....... ................ ....... . 127
xiii
xii*
22. Lite insurance.................. .......... .............................. . 160 4. Advantages and Disadvantages................................. 192
22.01. Life insurance........................ ......... ........... ............... . 160 4.01 Advantages..................................... ................ 192
22.02. Effect of death of insured ............. ...................... ....... 160 4.02. Disadvantages.......... ....... ....... .......................... 192
22.03. Kinds ............................. .................... ...... ..... ............ . 160 5. Components of a Corporation 192
23. Variable Contract................ ......................... . 161 5.01. Components.............................. ........... . 192
24. Powers of the Insurance Commissioner................ ..... . 161 5.02. Foreign Stockholders..................................... . 194
24.01, Adjudicatory or quasi-judicial powers....................... 161 6. Formation of a Corporation.............................. .... . 196
24.02. Revocation of certificate of authority......................... 162 6.01. Articles of Incorporation ......... ......................... 197
6.02. Amendment of Articles of Incorporation ........ 201
PART HI 6.03. Suspension of Certificates of Registration
by SEC ............. ........ ........................................ . 202
Business Organizations 7. By-Laws........... ......... ............. ....... ..... ......... ............ . 202
7.01. Definition ......... .... ...... ...................... . 202
A, Bask Types of Business Organizations.,....................... . 164 7.02. Requisites of valid By-laws ........ ......... ..... . 202
1. Individuals and Sole Proprietorship........................... 164 7.03. Adoption and Amendment.................. ....... . 203
1.01. Business name...... .......................... ......... ....... . 164 7.04. Binding Effect of Provisions of By-laws .......... 204
1.02. Merchants................... ..... ................................ 166 8. Powers of a Corporation .............................................. 204
1.03. Disqualification to engage in commerce .......... 168 8.01. Kinds............................................................. 204
1.04. Disqualifications under the Constitution ........ 169 8.02. Express Powers under the Corporation Code 205
2. Partnerships ............................. 170 8.03. Ultra vires Acts ........................ .......................... 206
2.01. Partnership...... .............................................. . 170 8.04. Exercise of Powers................ ................ ........ . 208
2.02. Registration ..... .............................................. . 170 8.05. When Corporation may acquire own Shares .. 213
3. Joint Accounts................. 170 8.06. Dividends ........... ......... ....... ............................. 213
3.01. Concept............. ..... .......................................... 170 8.07. Sale of all or Substantially all Properties ........ 219
3.02. Distinguished from partnership....................... 171 _____8.08. Increase or Decrease of Capital ........... ......... . 221
“ 47“ Business Trusts...... ........................................................ 171 9. Directors and Officers ..................................... ............ 221
5. Joint Venture................................................................... 171 9.01. Qualifications of Directors..................... ......... 221
5.01. Joint venture ........................... ...... ............ . 171 9.02. Business Judgment Rule ................... ....... . 222
6. Cooperatives ...................... 172 9.03. Criminal Liability............... ...... ....... . 222
9.04. Methods of Voting............... ......................... . 223
B. Corporation Code of the Philippines 9.05. Removal and Vacancies in the Board ............. . 224
(B.P. Big. 68).... 172 9.06. Doctrine of Corporate Opportunity ........... . 225
1. What is a Corporation? .......... 172 9.07. Interlocking Director......... ......... ......... ..... . 226
1.01. Attributes of a Corporation.............................. 173 9.08. Are Corporate Agents solidarity liable? .......... 227
2. Discussion of Attributes.......................... 173 9.09. Self-dealing Directors / Trustees / Officers 227
2.01. Artificial, being with Separate Personality ....... 173 9.10. Corporate Officers of a Corporation ............. 229
2.02. Created by Operation of Law........................... 183 9.11. Meetings of the Board ....... . 230
2.03. Right of Succession..... ............... ....... ............... 185 10. Trust Fund Doctrine .......................... .................. 232
2.04. Powers, Attributes and Properties ......... ......... 185 10.01. Trust Fund Doctrine .................................. . 232
3. Classifications and Distinctions.................... 185 10.02. Examples of Cases ................ 232
3.01. Classes of Corporation ................ ..... ............... 185 10.03. Distribution of Assets and Trust Fund
3.02. Distinguished from Partnership ................. 189 Doctrine ........... ................................................. 232
3.03. De facto Corporations vs. De jure 11. Stockholders and Shares.................. ....... ............. . 235
Corporations............................ ......... ........... . 190 11.01. Subscription Contract........ ............................................................ 235
xiv X¥
11.02. Shares of Stock ........... ............... ..................... 21.02. What constitutes "Doing Business" in the
12. Certificate o£ Stock................................... .................... 2^/ Philippines for Foreign Corporations? ............ 266
12.01. Formality ....... ........... ................................... ...... 244 21.03. Does an "Isolated Transaction" by a foreign
12.02. When Issued .................. ..................... 244 corporation qualify as "doing business"
13. Transfers of shares................................ ..................... 244 in the Philippines?.......... ...... ............. ............. 266
13.01. How are Shares of Stocks Transferred?..... 244 21.04. Explain the Contract Test of "doing business"
13.02 May a Stockholder bring Suit to Compel in the Philippines............ ........... ...................... 267
the Corporate Secretary to Register Valid 21.05. "Doing Business" under the Foreign
Transfer of Stocks? ........... ......... ..................... . 245 Investment Act of 1991........................................ 268
14. Rights and Obligations of Stockholders ............. . 247 21.06. Requisites for Obtaining License to do
14.01. Basic Rights of Shareholders ........................... 247 Business .............................. 269
14.02. Suits by Stockholders/'Members .................. . 248 21.07. Effect of Estoppel and Subsequent
14.03. Pre-emptive Right Defined.............. ................ 249 Compliance.......... 269
14.04. Right to Vote ................................ .......... ...... . 250 22. Close Corporations......................................... ............. 270
14.05. Appraisal Right................. .......... ...... ........ . 253 22.01 Requirements for Close Corporations............... 270
15. Collection of Unpaid Subscription............................. 255 22.02. What are those that cannot be a Close
15.01. What are the Remedies of Corporations Corporation................... ............ .......... ....... . 271
to enforce Payment of Stocks?.......................... 255
22.03. Pre-emptive Right in Close Corporations........ 271
15.02. What does the term Unpaid Claim mean?...... 255
22.04. Deadlocks........................ ..... .......................... . 271
15.03. Call................................ ........................ ............. 255
22.05. Characteristics............ ............ ...... ............. ..... 272
15.04. Procedure for Collection and Delinquency
23. Non-stock Corporations........................................... 272
Sale............. ............ ............... ..... .......... ...... .... 256
15.05. What are the effects of Stock Delinquency? .... 256 23.01. Purposes of Non-Stock Corporations.............. 272
16. Books.............................. .............. .......... ...................... 257 23.02. Rights of Members.................. ............. ............ 272
16.01. What books are required to be maintained 23.03. Termination of Membership......................... 273
by the Corporation?................................... . 15T --------- ---- 23.04. ■Conversion.■ ;..■;;y; .............. 274"
16.02. Entries in Stock and Transfer Book.................. 257 23.05. Order of Distribution of Assets......... . 275
16.03. Right of Stockholders to inspect Books......... . 258 24. Religious Corporations.......................... 276
17. Merger vs. Consolidation ................. .......................... 258 24.01. Kinds..................... ............................. .......... . 276
17.01. Definitions................ ........ ......... ......... ..... ........ 258 24.02. Corporation Sole........................ .............. ........ 276
17.02. Effects of Merger or Consolidation......... ........ 259
17.03. Procedure............. ............................................... 260 C. Securities Regulations Code and Related Laws................. 277
18. Non-use of Corporate Charter....................... ............ 261 1. State the powers and functions of the SE C 277
18.01. Effects of Non-use of Corporate Charter 1.01. Transferred Jurisdiction ......... .............. ...... . 279
and Continuous Inoperation of Corporation... 261 2. What are Securities .................. 280
19. Dissolution ..................................................................... 262 3. Definitions.................... 281
19.01. Dissolution of a Corporation........................... . 262 3.01. What are Investment Contracts?...................... 282
19.02. Modes of Dissolution........................................ 262 3.02. What are Derivatives?...................... ..... . 283
19.03. Effects of Dissolution.................... .................... 264 3.03. What are Commodity Futures Contracts?
19.04. Liquidation after Three Years........ ................... 265 What is a Commodity?........................ ............. 283
20. Liquidation .....................;............................... ............ . 265 4. How does the SRC protect the Public from
20.01. Modes of Liquidation........................................ 265 Investors? ............. ............ .................................... 284
21. Foreign Corporation................................ ................ ... 265 5. State the basic rules regarding Registration
21.01. Foreign Corporation...... ................. ................. . 266 of Securities ......... ........ ....... ...................... ................... 284
xvi xvii
6.
What Securities are exempt from the Requirement 3.03. Prohibiten Acts.... ...... ...... ................ ........ ....... 305
of Registration ....... ......... ................ ............................. 285 4. Deposit Function........... ....... .......... ......... ................... 305
7. What transactions are exempt from Registration 4.01. Simple Loan.................. .......................... <......... 305
Requirement under SRC .......... ............. . 286 4.02. Depositors......... ................................................ 306
8. Grounds for Revocation and/or Rejection of the 4.03. Kinds of Deposits............ .... ............... .... ..... . 306
Registration of Securities ........ ................... ........ ........ 289 4.04. Other Accounts...................... ........................... 308
9. State the Devices and Practices on Manipulation 4.05. Secrecy of Bank Deposits ............ ........ . 308
of Security Prices identified under the SRC............ . 290 4.06. Garnishment.................... ...... .................. . 312
10. What is the rule regarding the Three Practices 4.07. Deposit Insurance............... ............ ............... . 312
in the SRC? ............... ............. .................. ........ . 292 4.08. Unclaimed Balances ............................... .......... 317
11. Enumerate Acts that are considered Unlawful with 5. Loan function of Banks ............ ................................. . 318
respect to Purchase and Sale of Securities......... 293 5.01. Basic rules/restrictions ........................................ 318
12. Who is an Insider? .................... . 293 5.02. DOSRI Accounts.............................. ...... ......... . 319
12.01. Duties of an Insider............. 294 5.03. Collaterals ..................................... .......... . 322
12.02. Presumption................................. 294 6. Prohibited Acts of Borrowers............ .............. .......... 323
12.03. Material Non-Public Information...................... 294 7. Ownership of Banks ......................... ........... ........... . 324
12.04. Prohibition Imposed on Insiders regarding 7.01. Foreign Ownership..................... ......... ........... 324
Material Non-Public Information..................... 29S 7.02. Filipino Stockholdings ......... .................... . 325
13. Tender Offer ......................... .............. ............. ............. 295 7.03. Stockholdings of Family Groups or related
13.01. Definition of Tender Offer............... ............... . 295 interests.................... ...... ........... .................. ..... 325
13.02. When Tender Offer is Mandatory.................... 296 8. Directors and officers .............. ............. ........... ....... . 326
13.03. Exempt from Mandatory Tender Offer 8.01. Composition of Board ............... ............. ....... . 326
Requirement............... ......... ........ ............... ..... 296 8.02. Meetings ......... ....................... ........................ 326
13.04. Obligations of Persons making a Tender 8.03. Qualifications............. .... .............. ................ . 326
_______________Offer..................................................................... 22Z_ “9;-----Regulations to maintain Liquidity and SBCiirlty'T7~'.7
13.05. Direct and Indirect Acquisition......................... 297 9.01. Dividends.................. ................................ ....... 328
14. Margin. Trading ....................................... ..................... 298 10. Ownership of Real Property .......... ............................. 328
14.01. Prohibitions................... 298 10.01. Acquisition of Real Estate by Any Bank.......... 328
14.02 Parties to be consideredin Pari Delicto............ 299 10.02. Limitations of Acquisition.................. ............. 329
15. Violations of SRC.................. ............ ............ .............. 299 11. Loan to banks .................... ........ .......................... 329
11.01. Loans Without Collateral.................... ............. 329
PART IV 11.02. Emergency Loans....................... ................. ..... 329
A. General Banking Law (R.A. No. 8791), Law on Secrecy 12. Conservatorship............ ...................... ........ .............. 330
of Deposits and Related Laws ........... ............................. . 300 12.01. Grounds................ ......... .......... .................. ..... . 330
1. Banks......................... ............. ......... ...... ................ . 300 12.02. Powers of Conservator............. ........................ 330
1.01. Nature of business .... 301 13. Receivership and Liquidation ........................ 330
1.02. Authority to incorporate and operate ...... 302 13.01. Grounds..... ....... .......................... ............. ........ 330
2. Classification of Banks .............. ................... . 302 13.02. Duties of Receiver.................. ................. . 331
2.01. Classification............... 302 13.03. Close Now-Hear Later Scheme....... ......... ....... 332
2.02. Distinctions................... 303 13.04. Effect of Receivership and Liquidation........... 332
3. Functions of Banks ........................................................ 304 13.05. Judicial Review................ ..................... .......... . 333
3.01. -■Basic functions........ .................................... 304 14. Trust Operations.of Banks ............................ ............. . 334
3.02. Other functions......................... ... ..... ...... . 304 14.01. Prior Authority....................... ......... .............. 334
xviii x ix
'14.02, Trust Business............................. .... ..... . 334 PART ¥
14.03. Powers of Trust Entity........ 335
Credit Transactions
14.04. Separation of Trust Business of Banks.............. 336
15. The Bangko Sentrai rig Pilipinas................................. 336
15.01. Bangko Sentral rtg Pilipinas as an A, Warehouse Receipts Law (Act No. 2137)............................ 361
independent and Accountable Body................. 336 1. Definitions................i....... .............. 361
15.02. Responsibilities and Objectives....................... 336 1.01. Document of Title to Goods......... ............... . 361
15.03. Corporate Powers.................. ........................ . 337 1.02. Common Types.......... ......... ................ ............. 361
15.04. Bank Supervision............................ 338 2. Three Functions of Documents of Title ....... 362
15.05. Banker and Financial Adviser of 3. Negotiability of Warehouse Receipts........................... 362
Government..................................... 339 4. Formalities ........ ............ 362
15.06. The Governor.............................. 339 5. Negotiation of Warehouse Receipts ..................... . 364
5.01. Negotiation by Delivery only ................... . 364
B. Other Related Laws .................................. ....... ......... .......... 340
5.02. Indorsement coupled with Delivery .......... . 364
1. Philippine Deposit Insurance Corporation................ 340
6. Effects of Negotiation of WR.................... 365
1.01. Primary Functions ....................... ............... ..... 340
7. Who may negotiate a Warehouse Receipt?.... ........... 368
1.02. Insurer of deposit.............. ........... ........ ........ . 340
8. Warranties............... 369
1.03. Regulator: Examination and Investigation
of Banks ............................ . 340 8.01. Not Guarantor ............................................. . 369
1.04. Rehabilitation Receiver of Banks .............. . 341 8.02. Warranties of Transferor .......... ..... ......... ........ 370
2. Anti-Money Laundering A ct.............................. 343 9. Non-negotiable Receipts ................... 370
2.01. Money Laundering ........................... 343 9.01. Rights of Transferee of Non-negotiable
2.02. Covered Transactions...... ................. ............... 343 receipt .................... ..... ............................. ....... 370
2.03. Covered Entities ...... .......... .................. ............ 343 10. Warehouseman's Defenses for Non-delivery or
2.04. Suspicious Transaction..................... ...... ........ 344 Misdelivery................. ................................................. 371
------------- ±05-.— Dnlawfni Activity ........................ 344 ------- IT-—Wareheuseman^-hien ................. 374
2.06. Prevention of Money Laundering ...... 347 11.01. Claims that are Included........................... . 374
2.07. Freezing of Monetary Instrument 11.02. Properties that are Subject to Lien.......... 375
or Property.............................. .......... ............. . 348 11.03. Loss of Lien ........................... ............... .......... . 375
2.08. Authority of AMLC to inquire into and 12. Adverse Claimant........................ 375
Examine Bank Deposits ......................... ......... 349 13. Attachment or Levy................ 376
3. Truth in lending ......... 350 13.01. Creditor's remedies to reach Negotiable
3.01. Truth in Lending A c t........ ................. 350 Receipts ................................................. 376
4. Consumer A ct.... ...... 353 B. General Bonded Warehouse Law (Act No. 3893,
5. Human Security Act of 2007 ............. 355 R.A. No. 247)..................... 377
5.01. Examination and Sequestration 1. Obligations of Warehouseman.................. 377
of Deposits ................. ..... ............. ........... ..... . 355
5.02. Examination of Bank Deposits .......... 355 C Letters of Credit .............. 377
5.03. Sequestration :............................... »............. . 357 1. Letters of Credit ............. 377
6. The Terrorism Financing and Prevention and 2. Governing Laws ........... 377
Suppression Act .................... ............... ............... . 358 3. Parties..... ..... .......... ............. 378
6.01. Financing Terrorism................. ........................ 358 4. Independent Contracts................... 379
6.02. Authority of AMLC-to Investigate .................... 359 4.01. Independence Principle ..... ........................ 379
6.03. Authority to Freeze ........... 359 4.02. Independence Principle ..... .............................. 380
XX xxi
4,03. Fraud Exception ................. .... .......................... 380 G. Recto Law MS4, NCO .... ....................... .............. 400
4.04 Doctrine or Strict Compliance......................... 380 EL Mn&iiCia! Rehabilitation anci insolvency Act of 2010
5. Kinds of Letters of C redit.......................... ................. 381 OLA. No, 10142) and Concurrence and Preference
D. Trust Receipts Law (P.D. No. 115)................................ ....... 382 of Credits (Arts. 2241-2244, NCC) ....................................... 401
1. Background ....... ....................................................... 382 Policies .......................................................... ................ 401
2. What is a Trust Receipt? .............. ..... ................ ....... . 383 1.01. Key Definitions ........................... . 402
3. Obligations....................... ........... ..... .............. ,..... ..... 384 1.02. Proceedings covered by FRIA ..................... . 404
W K»
3.01. Remedies of the Entrusted ............. . 384 Excluded Debtors.......... .............. ................... ......... . 406
.4. No Agency is Established ................ 385 Meaning of Rehabilitation..... .......... ....... ................... 406
5. Nature of Entrusteds Title ........... .......................... ..... 385 3.01. Rehabilitation of Sole Proprietorship,
5.01. Security Interest.......... ........ .................... . 386 Partnership and Corporation ............... . 407
3.02. Rehabilitation Plan............ .......................... 407
6. Novation of Agreement ............ ......... ............. ....... . 388
3.03. Stay Order ............. ...... .......... ........ ........ ......... 408
E. Bulk Sales Law (Act No. 3952) ........... 389 3.04. Suspended Claim ............................. 409
1. When is a Sale considered a Sale in Bulk?.......... . 389 3.05. Who will Manage .................... ............ ............ . 412
2. What is the purpose of the Bulk Sales Law? ............... 389 3.06. Court Action on Petition for Rehabilitation .... 413
3. What are the Formalities required by the BSL?........ 389 4. Out-of-court Rehabilitation ............ 414
4. What Formalities /Requirements need not 5. Suspension of Payments....................... 415
be complied? ....... ................... ....... .......... ............... . 389 5.01. Distinctions............... .................................... . 415
5. Effects of the violation of BSL?................ ................... 390 5.02. Suspension Order......... ............... ................ . 417
5.03. Prohibited A cts........... ......... . 417
K Mortgage ......................... ...... ..... ....................... .................. 390 5.04. Creditors' Meeting ..................... ...... ............ . 418
1. Requisites common to Real Estate Mortgage, 6. Liquidation of Individual Debtors ........... 419
Chattel Mortgage and Pledge .............................. ...... 390 7. Liquidation Process .................... 420
1.01. Features of Mortgage.......................... ............. 390 7.01. Liquidation Order .............. ............. ................. 420
—■
— 2r.----ReaKEstate-Mortgage ...... .t.-.— ,..............39T 7702. Effects of Liquidation Order ........... ................ ! 421
2.01. Subject............. ......... ........ ..... .......................... 391 7.03. Rights of Secured Creditors......................... . 421
2.02. Registration ......... ............... ............................... 391 8. Distribution of Assets................. 422
2.03. Mortgagee in Good Faith................................. 391 8.01. Preference as to Specific Properties ................ . 423
2.04. Nature ............ ............... ............. ....................... 392 8.02. Order of Preference with Respect to other
2.05. After-acquired Property.............. ........ ......... . 392 Properties ........... ............................... 426
2.06. After-incurred or Future Obligations....... 392 9. Cross-Border Insolvency ................ 428
2.07. Foreclosure of Mortgage......... ........................ 393
2.08. Extrajudicial foreclosure and Supreme PART VS
Court Circular .............. ..................... ..... .......... 393
3. Chattel Mortgage .......................... ........... ................... 396 Laws on Transportation and Public Utilities
3.01. Subject Matter ............................. ............. ......... 396 A. General Concepts ............................. ...... . 430
3.02. After-acquired Properties .............................. 397 1. Concept of Common Carriers ........... 430
3.03. After-incurred Obligations ........... ........... . 398 1.01. Tests............................ ................................... . 430
3.04. Formalities ................ ............... ............... ........ 398 1.02. Common Carriers distinguished from
3.05. Right of Redemption...................................... . 399 Private Carrier.................................................... 433
3.06. Deficiency after Foreclosure .............. .............. 400 2. Governing Laws................ 437
3. Extraordinary Diligence and Presumption of
Negligence .............................................................. . 438
xxii xxiii
4. Defenses of Common Carriers............ ........... ............ 439
5. Duration of Liability ...................... .................. ........... 443 17.03. Officers and Crew oi the Vessel ..... .... 461
5.01. Goods ................... 443 17.04. Supercargoes.................. ...... ...... . ...... 461
5.02. Passengers ............................................. 443 17.05. Desertion ................. ...... ................ ...... .......... 462
6. Liability for Acts of Employees and Passengers ........ 446 18. General Average v. Particular Average ................. ...... 462
7. Stipulations Reducing Diligence or Limiting 18.01. General Average ........................................... . 462
Liability ...... ................ ................... ..... ........... . 447 18.02. Particular Average ................ ...... ............ . 465
7.01. Reduction of Diligence ...... ....... 447 19. Charter party................... .................................... 467
7.02. Valid Stipulations relative to Liability of 20. Bill of Lading ............................................... —• 467
Common Carriers ....... ......................... 448 20.01. Functions of a Bill of Lading ...................... 468
7.03. Invalid Stipulations with Common Carriers .. 448 20.02. Types of Bills of Lading ...................................... 468
7.04. Carriage of Goods by Sea Act ................ 449 21. Loans on Bottomry and Respondentia ........................ 469
7.05. Purpose of Stipulation Limiting Liability ........ 450 21.01. Definitions.............................. ........ . 469
8. Registered Owner Rule and Kabit System ........ ...... . 450 21.02. Distinguished from Ordinary Loan ................. 469
8.01. Registered Owner Rule ................................ 450 22. Procedure and Prescriptive Period for Claims..... . 469
8.02. Kabit System ................. 451 22.01. Coastwise or within the Philippines ....... . 469
9. Concurrent Causes of Action .................. ......... .......... 452 22.02. International carriage from foreign port
9.01. Driver and Third Persons .......... 452 to the Philippines ..................................... . 470
9.02. Joint and Several Liability ................ 452 22.03. Prescriptive period by COGSA......... 470
9.03. Arrasire Operator................................... 452 23. The Ship Mortgage Decree of 1978 ............... ....... . 471
10. Passenger's Baggages ................. ............................ 453 23.01. Who may constitute a Ship Mortgage ............. 472
10.01. Baggage in the Custody of Passenger
23.02. Formal Requirements ................................... 472
or Employee ....... ........... ........... ..................... . 453
23.03. Arrest and Foreclosure ........... .................... . 473
10.02. Baggage in the Custody of the Carrier ........... 454
23.04. Concurrence and Preference of Credits...... 474
11. Successive carriers ....... ................................................ 454
_________ 23.05. Maritime Lien ....... 474
— .---- ----- ILQl^Successive--Camers^y-Agreemeat-for............. —-------
Combined Services ............. ......... .......... ......... 454 24. Salvage Law ........................... 475
11.02. Liability of Successive Air Carriers ................ 454 24.01. Definition..................... ...................... 475
24.02. Requirements for Compensation................ 476
B. Maritime Law ................... .......................................... .......... 454 24.03. Amount of Reward or Compensation ............. 476
12. General Concepts ....................... ............... ..... .......... . 454 24.04. Who is entitled to Reward ............. . 477
12.01. Definition of Maritime Law.................... 454
12.02. Vessel........... ......... ................. ......... ....... .......... 455 C. The Warsaw Convention and Civil Aviation Laws
13. Limited Liability Rule ...................................... .......... 455 (R.A.No. 9497 and R.A. No. 6235) ............................... 477
13.01. Doctrine of Limited Liability............. ............ . 455 25. Warsaw Convention.................... 477
13.02. How Claims are Satisfied under the Limited 25.01. Transportation by A ir................ ............ . 478
Liability Rule .......................... ..... ............. ...... 457 25.02. Damage or Injury for which the Carrier
14. Protest ............. ..... ................................................ . 458 is liable....................... .......... ......... ..... ....... . 478
15. Collision .................. .............. ............ .............. ...... . 458 25.03. Limit of Liability of Carrier ...................... 478
15.01. Doctrine of Inscrutable Fault............................. 458 25.04. Tort Liability ................. 479
15.02. Rules on Collision of Vessels ..................... . 458 25.05. Jurisdiction/Venue .................... .......... . . 480
15.03. Doctrine of Error in Extremis............. . 459 26. Civil Aviation....................... 480
16. Arrival Under Stress ................... .............. .............. . 460 26.01. Definitions .......... 481
17. Persons involved in Maritime Commerce......... 460 26.02. Inspection of Aircraft ............... . 482
17.01. Ship agents................................ ..... ............ . 460 26.03. -Nationality and Ownership of Aircraft ........... 484
xxiv XXV
fX Public Service A ct............................. .............................. 485 5.10. Acts that do not Infringe Copyright ....... ........... ..... 5U7
27, Public Service A c t........................................ ..... .......... 485 5.11. f air U se .................... ....... ...................... .................... 509
27.01. Government Agencies replaced by the 5.12. Importation for Personal Purposes....... ............... . 509
Public Service Commission ............. . 485 5.13. Infringement.................. ............................................ 510
27.02. Conditions that must Concur to Grant 6, Trademarks .............................. .......................... ...... . 513
certificate of Public Convenience................ . 486 6.01. Functions.................. ....... ........... .......................... . 513
27.03. Certificate of Public Convenience Property .... 486 6.02. How marks are acquired............. ...................... . 513
27.04. Certificate of Public Convenience and 6.03. Marks that cannot be registered ................................. 515
Certificate of Public Convenience and 6.04. Limitations.............. ......... . 516
Necessity............ ........... ........... ........ .............. 486 6.05. Internationally Well-known Marks ................. ..... . 517
27.05. Prior or Old Operator Rule ....................... 487 6.06. Rights conferred..................................... . 517
27.06. Grounds for Revocation of Certificate........ 487 6.07. Duration................ ..... ...................... ..................... . 518
27.07. Notice and Hearing ....... ........... ................... . 487 6.08. Infringement ......................... . 518
27.08. Franchise .................. ....... .................. ....... ..... . 488 6.09. Protection of Tradename ........................... ............. . 524
27.09. Public Utility............. ...................... ................ . 489 6.10. Unfair Competition .......................... .................. . 524
27.10. Regulation of Rates ........ ................. ................. 490 6.11. Inter partes cases ...................................... .................. 526
27.11. Foreign Equity in Public Utilities .................... 493 7, Patents .................................... .......................... .... ............ . 529
27.12. Non-exclusivity...................... .......................... 493 7.01. Patentable Inventions........................ ........................ 529
27.13. Acts Requiring Approval by Successor 7.02. Classes of Patentable Inventions ......... ...... .............. 531
Agencies............................... .................. .......... 494 7.03. Non-patentable inventions .................... .................... 532
7.04. Persons entitled to Right ................. ................. ....... 532
PART VII 7.05. Limitations of Patent Rights ........................ ............ 533
7.06. Prejudicial Disclosure ................... ............................ 534
.Intellectual Property Code 7.07. Non-prejudicial Disclosure....................................... 534
(R.A. No. 8293) _____21QA__TarromfLaJfatejit---------— ------535-
1. State policies ................. ......................... ................. ............ . 495 7.09. Infringement................ ............................. ............ . 535
2. Intellectual Property Code defined ................................. 496 7.10. Compulsory Licensing.................... .......................... 536
3. International Law Related Provisions ...................... . 498 7.11. Voluntary License and Technology Transfer
3.01. Reciprocity.......... ......... .......... ................................ . 498 Agreements ............ ................................ ............ . 538
3.02. National Treatment............. ....................................... 498 7.12. Concept of Divisional Applications......... ....... ........ 540
3.03. Most-favoured-nation treatment............ .............. . 498 8, Trade Secrets.............. ................ ............ ..... .................... . 542
4. Intellectual Property Office ............... ............ ............. ......... 499 8.01. Applicable laws .............................................. .......... . 543
4.01. Functions of the IPO............................ ............ ......... 499 8.02. Factors...................................................................... . 543
5. Copyright........................ ........................ ...... ......... . 500
5.01. Definitions .......................................... ............. .......... 500
5.02. Civil Code Provisions ................... ........... ................. 500
5.03. Rights over Copyrights conferred................. .......... 501
5.04. Ownership of Copyright............... .......... ............. . 501
5.05. Duration of Copyright.............................. ........... . 502
5.06. Copyrightable Objects .................. .......... ...... .......... 503
5.07. Unprotected Works ........... ........................................ 504
5.08. Rights of Authors...................... ........... ........... ......... 506
5.09. Publisher's Rights ........................... ............... ...... . 507
xxvi xxvii
■INTRODUCTION
1. GENERAL CONCEPTS
1.01. Commercial Law
It is defined as that branch of private law which
regulates the juridical relations arising from com
mercial acts and according to which the questions or
controversies which may arise therefrom are resolved
(Vivante's Institutioms, p. 3; Espejo de Hinojasa, p. 61
cited in Tolentino, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, 6th Ed., Vol. 1, p. 1).
a) Traditionally, Commercial laws in the Philip
pines include laws governing the following: (1)
commercial documents sudhnas negotiable iir--
struments, warehouse receipts, letters of credit
and the like, (2) business organizations like cor
porations, single proprietorship and joint ac
counts, (3) commercial contracts like insurance
or mortgage, (4) banking regulations, (5) insol
vency, (6) securities, (7) intellectual properties,
and (8) public utilities and other activities or
transactions involving commerce.
1.02. Commerce
The mass of acts of human life, which tend to the
satisfaction of necessities by means of exchange or of
the rendition of services, effected with a purpose of
gain and falling within the domain of mercantile laws
(ibid.).
l
REVIEWER ON COMMERCIAL LAW INTRODUCTION 3
2. APPLICABLE LAWS e) Securities Regulation Code (R.A. No. 8799);

2.01. Code of C om m erce f) General Banking Law (R.A. No, 8791);
This law was extended to the Philippines by g) New Central Bank Act (R.A. No. 7653);
Royal Decree of August 6, 1888. It took effect on
December 1, 1888. However, with the passage of the h) Warehouse Receipts Law (Act No. 2137);
New Civil Code, only the following are still governed i) Trust Receipts Law (P.D. No. 115);
by the Code of Commerce:
j) Business Name Law. (Act No. 3883);
a) Merchants, Commercial Registries, Book of Mer
chants, General Provisions on Commercial Con k) Chattel Mortgage Law (Act No. 1508);
tracts (Arts. 1-63); l) Public Service Law (C.A. No. 146);
b) Joint Accounts (Arts. 239-243);
m) Intellectual Property Code (R.A. No. 8293).
c) Transfer of Non-Negotiable Credits (Arts. 347-
348); COMMERCIAL CONTRACTS
d) Overland Transportation (Arts. 349-379); 3.01. Concept and Formalities
e) Letters of Credit (Arts. 567-572); and
Contracts that are governed by the Code of
f) Maritime Commerce (Arts. 573-869). Commerce are called Commercial Contracts.
2.02. New Civil Code a) In the absence of any requiremenLunrlpr the
The New Civil Code repealed the provisions of Code of Commerce or Special Law that certain
the Code of Commerce on: (1) Sales, (2) Partnership, formalities are required, commercial contracts
(3) Agency, (4) Loan, (5) Guaranty, and (6) Deposit. are valid in whatever form they appear (Arts. 51
Hence, the New Civil Code provisions now govern and 52, CO- (Example: Joint Accounts.)
such contracts.
b) Contracts that are expressly required to be in
The New Civil Code is likewise the primary writing under the Code of Commerce are: (1)
governing law on Common Carriers. Letters of Credit (Art. 267, CC), (2) Loans on
2.03. Special Laws Bottomry and Respondentia (Art. 720, CC), and
(3) Charter Parties (Art. 652, CC).
Commercial laws include but are not limited to
the following statutes: 3.02. Perfection
a) Corporation Code of the Philippines (B.P. Big. The general rule under the New Civil Code is
68); that contracts are perfected upon the meeting of minds
b) Negotiable Instruments Laws (Act No. 2031); with respect to the object and the consideration.
c) Insurance Code of the Philippines (P.D. No. 1460 a) In perfection by correspondence, the applicable
as amended); rule is the Cognition Theory under which the
d) Financial Rehabilitation and Insolvency Act of contract is perfected the moment the offeror
2010 (R.A. No. 10142); learns about the acceptance of his offer by the
REVIEWER ON COMMERCIAL LAW
offeree {-Art-1409, NCC), Thus, Cognition Theory

should apply to all .consensual contracts that are
governed by Commercial laws.
b) Article 54 of the Code of Commerce upholds the
Manifestation Theory under which the contract
is perfected the moment the acceptance of the
offer is "manifested" or made (Example: Sending
NEGOTIABLE INSTRUMENTS LAW
of acceptance letter). This applies to all contracts (Act No. 2031)
that are still governed by the Code of Commerce
(Example: Loan on Bottomry).
c) However, even if the contract is still governed by 1. m M IS A NEGOTIABLE INSTRUMENT?
the Code of Commerce, neither the Manifestation
It is a written contract for the payment of money which
Theory nor the Cognition Theory applies if the
is intended as a substitute for money and passes from one
contract is perfected by delivery (real contract
person to another as money, in such a manner as to give a
like the contract of carriage proper) or through
holder in due course the right to hold the instrument free
the execution of formalities (formal contracts).
from defenses available to prior parties. The instrument
hiiist comply with Section 1 of the Negotiable Instruments
Law (NIL for short) to be considered negotiable.
2. REQUISITES OF NEGOTIABILITY (Sec. f, NIL; Caltex

Phils. v. CA, 212 SCRA448)
W a) Must be in writing and signed by the maker
or drawer;
U b) Must contain an unconditional promise or
order to pay a sum certain in money;
P c) Must be payable on demand, or at a fixed or
determinable future time;
O d) Must be payable to order or bearer; and
A e) When the instrument is addressed to a
■drawee, he must be named or otherwise
indicated therein with reasonable certainty.
K ey:W U ';F O A '
5
6 REVIEWER ON COMMERCIAL LAW PART 1 — NEGOTIABLE INSTRUMENTS LAW 7
(Act No. 2031)
2.01. What does negotiation mean? 3.03. APPLICABILITY OF THE NIL

The transfer of an instrument from one person a) The provisions of the NIL can be applied only to
to another in such a manner as to constitute the negotiable instruments. If the instrument is not
transferee a holder .thereof, A holder is the payee or negotiable, the pertinent provisions of the Civil
indorsee of a bill or note who is in possession of it, or Code or pertinent special laws should apply
the bearer thereof (Secs. 30 and 191, NIL). (GSIS v. CA, 170 SCRA 533 [1989]; Kauffman v.
PNB, 42 Phil. 182 [1921]).
2.02. How is negotiability of an instrument determined?
b) The NIL can be applied but only by analogy if
In determining the negotiability of an instru the instrument is not negotiable if there is no law
ment, consider the instrument in its entirety and only that can be applied (Borromeo v. Sun, 317 SCRA
what appears on its face. It must comply with the 176 [1999]).
requirements under Section 1 of the NIL (Caltex Phils.
v.CA/212 SCRA 448). 3.04. Decisions of the courts in the United States and in
England based on the American Uniform Negotiable
a) When negotiability ends. Section 47 of the NIL Instruments Law arid the Bills of Exchange Act of
provides that "an instrument negotiable in its 1882 can be applied in this jurisdiction because those
origin continues to be negotiable until (1) it has foreign laws served as bases of NIL.
been restrictively indorsed or (2) discharged
by payment or otherwise." Note however, that 4. FUNCTIONS
_________ restrictive„ indorsement makes the instrument
----- 4.01. What are the functions of ^ negotiable Instrument?"
npn-negdtiable only if it is the first type — it
prevents further negotiation of the instrument a) It operates as a substitute for money.
— and not the two other types (constitute the b) It is a means of creating and transferring credit.
indorsee the agent or trusteie). ■
c) : It facilitates the sale of goods.
3. GOVERNING LAW d) It increases the purchasing medium in circula
3.01. CODE OF COMMERCE/ tion.
In addition to Act No. 2031, otherwise known as 4.02. NOT LEGAL TENDER
the Negotiable Instruments Law (NIL for short), ne Section 52 of the New Central Bank Act (NCBA
gotiable instruments are governed by the provisions for short), Republic Act No. 7653, provides that only
of the Code of Commerce that were not impliedly re notes and coins issued by the Bangko Sentral ng Pilipi
pealed by the NIL. Example: Code of Commerce provi nas are considered legal tender.
sions on crossed checks are still in force because there
Section 60 of the same law expressly provides
is no provision in the NIL that deals with crossed
that checks .are not legal tender. Section 60 ;provides
checks (Chan Wan v. Tim Kim, 109 Phil. 70611960]).
that "checks representing demand deposits do not
3.02. The New Civil Code applies suppletorily. Example: have legal tender power arid their acceptance in the
Article 1216 of the New Civil Code (Metropolitan Bank payment of debts, both public and private, is at the
and Trust Co. v. CA, et ah, 194 SCRA 169 [1991]). option of the creditor: Provided^ however, That a check
8 REVIEWER ON COMMERCIAL LAW PAST 1 — NEGOTIABLE INSTRUMENTS LAW 9
(Act No. 2031)
which has beeii icfeated a M credited to die account by the person giving it, requiring the person to whom
of the creditor shall be equivalent to delivery to the it is addressed to pay on demand or at a fixed or de
creditor of cash in an amount equal to the amount terminable future time a sum certain in money to cr
credited to his account/' uder or to bearer (Sec. 126, NIL).
4.03. COINS AS LEGAL TENDER .02. Promissory Note
Pursuant to Section 52 of Republic Act No.
7653 and BSP Circular No. 537, Series of 2006, the promise in writing made by one person to another,
maximum amount of coins to be considered as legal signed by the maker, engaging to pay on demand, or
tender is adjusted as follows: at a fixed or determinable future time, a sum certain
a) One thousand pesos (PI,000.00) for denomina in money to order or to bearer. Where a note is drawn
tions of 1-Peso, 5-Peso and 10-Peso coins; and to the maker's own order, it is not complete until
indorsed by him (Sec. 184, NIL).
b) One hundred pesos (PiOO.OO) for denominations
of 1-centavo, 5-centavo, 10-centavo, and 25-cen 03. Kinds of Bills of Exchange
tavo coins.
a) Draft — used synonymously with bill of ex
change although it normally refers to a bill of
5. WHAT A RE THE TWO IMPORTANT FEATURES OF A
NEGOTIABLE INSTRUM ENT?
exchange used in documentary exchange like
letters of credit transactions.
5.01. Negotiability ______________ ^
'5) Inland and Foreign Bill — An inland bill is a
It is that attribute or property whereby a bill or bill which is, or on its face purports to be, both
note or check may pass from hand to hand similar to drawn and payable within the Philippines. Any
money, so as to give the holder in due course the right other bill is a foreign bill.
to hold the instrument and to collect the sum payable
for himself free from defenses. c) Time draft — draft that is payable at a fixed
date.
5.02. Accumulation of Secondary Contracts
d) Sight or Demand draft — draft that is payable
Secondary contracts are picked up and carried when the holder presents it for payment.
along with them as they are negotiated from one
person to another, or in the course of negotiation e) Trade acceptance —-bill that is used in contracts
of a negotiable instrument, a series of juridical ties of sale where the seller as drawer orders the buy
between the parties thereto arise either by law or by er (as drawee) to pay a sum certain to the same
privity. seller (payee).
f) Banker's acceptance — a time draft across the
6. KINDS OF NEGOTIABLE INSTRUM ENTS
face of which the drawee has written the word
6.01. Bill of Exchange accepted.
A bill of exchange is an unconditional order In g) Check — a bill of exchange drawn on a bank
writing addressed by one persOh to another, signed payable on demand.
REVIEWER ON COMMERCIAL LAW PART I — NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
6.04. Kinds of Promissory Notes

Maker primarily liable Drawer secondarily liable
a) Certificate of deposit — a form of promissory
note which is a written acknowledgment of a. Only one presentment Generally, 2
hank o£ its receipt of a certain sum with a promise (for payment) presentments: acceptance
to repay the same. and for payment
b) Bonds — a certificate or evidence of a debt on
which the issuing company or governmental
body promises to pay the bondholders a speci b) Bill of Exchange vs. Check
fied amount of interest for a specified length of
time, and to repay the loan on the expiration ORDINARY BILL OF
CHECK
date. ■EXCHANGE
c) Debenture — a promissory note of bond backed Not drawn on a deposit. It is necessary that a check
by the general credit of a corporation and usu It is not necessary that a is drawn on a deposit.
ally not secured by a mortgage or lien on any drawer of a BOE should Otherwise, there would be
specific property. have funds in the hands of fraud.
the drawee.
6.05. When can a Bill of Exchange be treated as a pro
missory note? Death of the drawer of a Death of the drawer of
RfYE with thp-knowledge— a check, with the kn-ow-- —
---------------- Instances when a bill may be treated as a
of the bank, does not ledge by the bank, revokes
promissory note by the holder (Secs. 17[e] and 130,
revoke the authority of the the authority of the banker
NIL).
bankertopay. to pay;
a) the drawer and the drawee are the same person;
May be presented for Must be presented
b) the drawee is a fictitious person; payment within a reason for payment within a
c) the drawee has no capacity to contract; able time after its last reasonable time after its
negotiation (Sec. 71). issue (Sec. 186).
d) the instrument is so ambiguous that there is
doubt whether it is a bill or a note.
6.06. a) Negotiable Promissory Note vs. Negotiable 6.07. Are the following commercial papers negotiable
Bill of Exchange instruments under the NIL?
1) a crossed check
- PROMISSORY NOTE : BILL OF EXCHANGE 2) a trade acceptance
Unconditional promise Unconditional order 3) a money order

4) a warehouse receipt
Involves 2 parties Involves 3 parties
5) pawnticket
W/v-.V-r :-N;'W w.-vN

12 REVIEWER'ON COMMERCIAL LAW PART 1 — NEVDTJABLE INSTRUMENTS LAW 13
(Act No. 2031)
6) treasury warrant c) Drawer — the person who draws the bill of

exchange and orders the drawee to pay a sum.
7) bill of lading certain in money.
8) trust receipt d) Drawee — the person to whom the order to pay
a) Crossed check — usually negotiable as it nor is addressed in a bill of exchange.
mally complies with the requirements under e) Acceptor a drawee who accepts the order
Section 1, NIL, but issued for a special purpose to pay made by the drawer. It is only when a
and can be negotiated only once. drawee becomes an acceptor that he is primarily
liable.
b) Trade acceptance — .negotiable, it is a Bill of
Exchange addressed by the' seller of the goods to f) Holder —■the person who is in possession of
' 'the buyer. However, Section 1 must be complied a bearer instrument or an indorsee of an order
with. instrument who is in possession thereof. A
holder is the obligee, a person who can enforce
c) Money Order — non-negotiable as it is gov payment of the instrument.
erned by postal rules and regulations which may
g) Referee in ease of need — a person who may be
be inconsistent with the NIL and it can only be
designated in the instrument as the person who
negotiated once.
may be resorted to by the parties in case of dis
d) Warehouse receipt — not negotiable under the pute.
NIL for the same reason as in Bill of Lading.
t. DISTINCTIONS----------------------------------------------------------
e) Pawn Ticket — non-negotiable, it does not
represent money but the pawned articles. 8.01. Distinctions between negotiable instruments and
npn-negotiable instruments may be stated as fol
f) Treasury warrant —- non-negotiable being pay
lows:
able out: of a particular fund.
a) Only negotiable instruments are governed by
g) Bill of Lading — not negotiable under die NIL,
the NIL. If an instrument is not negotiable, the
it represents goods, not money.
NIL does not apply. Application of the NIL to
.............. h) Trust Receipt — not negotiable under the NIL, it non-negotiable instruments is only by analogy.
is an evidence of ownership of goods, not mon b) Negotiable instruments can be transferred by
ey* negotiation or by assignment. Non-negotiable
instruments can be transferred only by assign
7. PERSONS INVOLVED ment.
a) Maker — the person who makes a promissory c) The transferee of a non-negotiable instrument
note and promises to pay the amount stated can never be a holder in due course but remains
therein. to be an assignee. A transferee of a negotiable
b) Payee — the obligee, that is, the person who, by -instrument can be a holder -in due course if all
the terms of the note or the bill, is to receive pay the requirements under Section 52 of the NIL are
ment. complied with,
(Act No. 2031)
d) Since the transferee of a non-negotiable instru the word * ‘written' includes printed, and 'writingr
ment cannot be a holder-'in due course, all includes print."
defenses available to prior parties may be raised
b) Signed by the maker or drawer — the signature
against the last transferee.
inay be in one's handwriting, printed, engraved,
8.02. Distinguish Negotiability from Assignability lithographed, or photographed so long as they
are adopted as the signature of the signer. What
a) Assignability pertains to contracts in general,
"is important is that the maker or the drawer used
negotiability pertains to negotiable instruments.
what he affixed as his own signature for authen
b) One who takes an instrument by assignment tication.
takes the instrument subject to the defenses
obtaining among the original parties, whereas a PROBLEM:
person, who takes the instrument by negotiation, 1. Juan Cruz borrowed PI, 000.00 from Pedro Santos
takes it free from personal defenses available as evidenced by a promissory note executed by X as
among the parties. maker. All other requisites of negotiability are present
in the note except that Juan Cruz did not affix his usu
9. R E Q U ISIT E S OF NEGOTIABILITY al signature thereon. As Juan was ailing at that time,
Section 1. Bonn o f negotiable instruments. — An he was only able to put "X" in the blank space meant
instrument to be negotiable must conform to the following for the signature of the maker. Is -die requisite that the
requirements: instrument must be signed by the maker complied
with?_______ ___ ________ — — ------------------------------
~~ (a) It must be in writing and signed b y the maker or
drawer; A: Yes. The letter "X" is sufficient to comply with the
requirement that the instrument must be signed by
(b) Must contain an unconditional promise or order the maker. It appears from the problem that such
to pay a sum certain in money; letter was adopted by Juan Cruz with the intent to
(c) Must be payable oh demand, or at a fixed or authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
determinable f uture time;
(d) Must be payable to order or to bearer; and 9.02. IT MUST CONTAIN AN UNCONDITIONAL
P R A I S E OR ORDER TO PAY A SUM CERTAIN
Te) Where the instrument is addressed to a drawee,
IN MONEY
he'm ust be named; or otherwise indicated therein with
reasonable certainty, a) Promise or Order to Pay
The promise in a promissory note is the
9.01. IN WRITING AND SIGNED BY THE MAKER OR
undertaking made by the maker to pay a sum
DRAWER
certain in money to the payee or the holder.
a) Must be in writing — may be printed, in ink The "order" in a bill is a command made by the
or in pencil, arid it may be written in any mate drawer addressed to the drawee ordering the
rial that substitutes paper like cloth, leather, or latter to pay 'the payee or the holder a sum cer
parchment. Section 191. -of the NIL provides that tain in money.
(Act No. 2031)
1) The word "promise" or "order" need d) Indication of a Particular Fund for Payment vs.
not appear in the instrument to satisfy the Fund for Reimbursement
requirements of Section 1(b) of the NIL, Examples:
(1) "An acknowledgment may become a promise Fund for Indicating Particular
by the addition of words by which a promise of Reimbursement ■Fund
payment is naturally implied, such as, 'payable/
'payable on a given day/ 'payable on demand/ A. (1) The draweepays A, There is only one
' paid. . . when called for'; the payee from act — the drawee
his own funds pays directly from
2) 'Due A.B. or order US$325, payable afterwards. the particular fund
on demand/ or, 'I acknowledge myself to be in indicated.
(2) The drawee pays
debted to the order of A in US$109, to be paid on
himself from the
demand, for value received/ or, 'I.O.U. US$85 to
particular fund
be paid on May 5th / are held to be promissory
indicated.
notes, significance being given to words of pay
ment as indicating a promise to pay." (Jimenez v, B. Particular fund B. Particular fund indi
Bucoy, 103 Phil 40 [1958]). indicated is not cated is the direct
the direct source of source of payment.
b) Promise or Order to Pay Must be Uncondition payment.
al
------ An unqualified order or promise lo pay is~ T e /' e) Is a promissory note wherein the maker prom-
unconditional within the meaning of NIL though ises to pay "as soon as his means permit him to
coupled with: do so" negotiable?
1) An indication of a particular fund out of No. The phrase "as soon as his means per
which reimbursement is to be made or a mit him to do so" renders the promise condi
particular account to be debited with the tional, although under the Civil Code, it may be
amount; or considered as an obligation with a period.
2) A statement of the transaction which gives
PROBLEMS: )
rise to the instrument. Example: An instru
ment that contains the following, "per con A treasury warrant was issued by Mr. BA in his capa
tract of sale dated Jan. 1,2003." city as disbursing officer of the Food Administration,
a government instrumentality. The warrant states that
c) - Conditional
it is "payable for additional cash advances for the Food
(1) An order or promise to pay out of a particu Program Campaign in La'Union" and the amount
lar fund; stated therein is "payable from the appropriation
(2) An instrument payable upon a contingency for Food Administration." The warrant is now in the
(the happening of the event does not cure hands of Mr. BA, who claims to b e -a holder in due
the defect). ,. course. Can BA be considered a. holder in due course?
18 REVIEWER ON COMMERCIAL LAW PART 1— NEGOV: MR - •METAJ - W L ■W 19
{Aft No. }
A t. Mr. BA cannot be considered a holder in due course be paid is expressed in c c r -m c y that is not legal
because he is not even a holder of the warrant, tender so long as it is expressed in money (PNB
He cannot be a holder because the warrant is not v. Zulueta, 101 Phil. 1071) Example: payable in
negotiable. The-promise to pay is conditional because
the- sum is payable out of a particular fund, that is, Under Republic Act No. 8183, the agree
the appropriation for food -administration (Benjamin ment to pay in foreign currency is valid.
Abubakar v. The Auditor General, G.R. No. L-1405, July
b) If the obligor like the maker is given the option
31,1948, 31 Phil 359).
to deliver something in lieu of money, the ins
2. A bookstore received five postal money orders total trument is not negotiable (Sec. 5, NIL). Example:
ing PI,000.00 as part of sales receipts, and deposited A note where the maker "promises to deliver
the same with a bank, A day after, the bank tried, to P1,000.0Q or a sack of rice" at his option.
clear them with the Bureau of Posts. It turned out,
c) If the instrument gives the holder an election to
however, that the postal money orders were irregu require something to be done in lieu of payment
larly issued, thereby prompting the Bureau of Posts of money, the instrument is still negotiable (Sec.
to serve notice upon all banks not to pay orders if 5[dJ). Example: Where the maker promises to pay
presented for payment. The Bureau of Posts further P I,000.00 or a sack of rice at the option of the
informed the bank that the amount of P1;0Q0.00 had holder
been deducted from the bank's clearing account for
the same amount. A complaint was filed by the book d) A sum is certain within the contemplation of
store against the Bureau of Posts and the bank for the Section 1(b) of the NIL if the amount that is to
recovery of the sum of P I,000.00 which however, was ” Be unconditionally paid by the maker or drawee
dismissed by the trial court. The bookstore appealed can be determined on the face of the instrument
contending that postal money orders are negotiable even if it requires mathematical computation.
instruments and that their nature could not have been e) The sum payable is a sum certain within the
affected by the notice sent by the Bureau of Posts to meaning of this act, although it is to be paid (Sec.
the banks. How would you resolve the controversy? 2, NIL):
A: The bookstore's contention is untenable. Postal 1) With interest; or
money orders are not negotiable instruments. Pos 2) By stated installments; or
tal money orders are under the restrictions and
limitations of the postal laws. Hence, they do not 3) By stated installments, with a provision
contain an unconditional promise or order required that, upon default in payment of any install
by Sections 1 and 3 of the NIL (1980 Bar; Philippine ment or of interest, the whole shall become
Education Company, Inc. v, Mauricio A. Soriano, et ah, due; or
G.R. No. 1-22405, June30,1971, 39 SCRA 587). 4) With exchange, whether at a fixed rate or at
the current rate; or
9.03. PAYABLE IN A SUM CERTAIN IN MONEY 5) Wifheosts o fE le ctio n or an attorney's fee,
a) Money need not be "legal tender." An instru in case payment shall not be made at matu
ment is still negotiable although the amount to rity.
20 REVIEWER ON COMMERCIAL LAW
PART I — NEGOTIABLE INSTRUMENTS LAW 21
■Act No. 2031)
£} STATED INSTALLMENTS
uncertain. Example: "payable within five (5)
The dates of each installment must be fixed
days from.- death of Mr. X."
or at least determinable and the amount to be
c ) ' Acceleration Clauses
paid for each installment must be stated. Example;
The instrument is not negotiable if "payable in The negotiability of the instrument is not
affected even if it is to be paid by stated install
5 installments in the amount of PI,000.00 per ments, with a provision that, upon default in
installment" without stating the dates of each payment of any installment or of interest, the
installment. whole shall become due (Sec. 2, NIL).
9.04. PAYABLE ON DEMAND OR AT A FIXED OR d) Insecurity Clauses
DETERMINABLE FUTURE TIME
Provisions in the contract which allow the
a) Payable on Demand holder to accelerate payment "if he deems him
The instrument should be paid the moment self insecure." The instrument is rendered non-
it is presented for payment. An instrument is negotiable.
payable on demand (Sec. 7, NIL): e) Extension Clauses
1) When it is so expressed to be payable on An instrument is payable at a definite time
demand, or at sight, or on presentation; or if by its terms it is payable at a definite time sub
2) In which no time for payment is expressed; ject to extension at the option of the holder, or to
____ ________ ....■■■and.............. ............................ ........................ ....... ^tensiondo...a..fiirlher:.definite.tlme.at.the.option.
of the maker or acceptor dr automatically upon
3) Where an instrument is issued, accepted, or
or after a specified act or event.
indorsed when overdue, It is, as regards the
person so issuing, accepting, or indorsing Example: An instrument is still negotiable if
it, payable on demand. it is payable "two (2) years from date subject to
extension for another one (1) year at the option
b) Payable at a-Determinable Future Time
of the maker."
An instrument is payable at a determinable
9.05. PAYABLE TO ORDER OR BEARER
future time if it is expressed to be payable (Sec. 4,
NIL): a) An instrument that is payable to a specified person
or entity is not negotiable because the NIL
1) At a fixed period after date or sight. Exam
requires that the instrument must be payable to
ple: "twenty days after date."
order or to beiarer.
2) On or before a fixed or determinable future
time specified therein. Example: "payable b) :Is a certificate of time- deposit wherein it is stated:
on or before Jan. 5, 2006." "This is to certify that bearer has deposited x x x ,
repayable to said depositor" negotiable?
3) On or at a fixed period after the occurrence
of a specified event which is certain to wit-Is negotiable being payable to bearer.
happen, though the time of happening be However, where the Certificates of Time Depo-
22 REVIEWER ON COMMERCIAL LAW PART I — NEGOTIABLE INSTRUMENTS LAW 23
(Act No, 2031)
sits (CTD) were delivered, but not endorsed order instrument the persons to whose order
as security, there is no -negotiation; at most the the instrument, may be made: payable. The ins
holder would be a holder for value up to the trument may be payable to the order of:
extent of his lien under Section 27 of the NIL or a
1) A payee who is not the maker, drawer, or
ilwisSliiiSL
pledgee under the Civil Code.
drawee; or
c) When is an instrument payable to bearer (Sec. 2) The drawer or maker; or
9, NIL)
3) The drawee; or
1) When it is expressed to be so payable; or
4) Two or more payees jointly; or
2) When it is payable to a person named there 5) One or some of several payees; or
in or bearer; or
6) The holder of an office for the time being.
3) When ib is payable to the order of a ficti
tious or mon-exisfing person, and such fact PROBLEMS:
was known to the person making it so pay
able; or 1. Determine if the following instrument is negotiable:
"FOR VALUE RECEIVED, I /we jointly and severally
4) When the name of the payee does not pur promise to pay to the ITM Corporation, the sum
port to be the name of any person (Example: of ONE MILLION NINETY THREE THOUSAND
"pay to cash"); or SEVEN HUNDRED EIGHTY NINE PESOS &
. 5) When the only or last indorsement is an ______71/100 only (PI .093.789.71), Philippine Currency,
indorsement in blank. the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of
Note: In No. 3, the payee need not be
the month thereafter until fully paid..
actually fictitious or non-existent. It can
still be payable to bearer even if the payee A: The note is not negotiable because it is not payable to
is existing if the maker or drawer does not order or to bearer. It is payable to a specified person
intend the payee to have any right over the (Consolidated Plywood Industries, Inc., et a l v. IFC
instrument. Leasing & Acceptance Corporation, G.R. No. L-72593,
April 30,1987, US SCRA 448,458-459).
d) Order Instruments
2. ATL drew a check on Nov. 16, 2000 upon C Bank for
There are only two (2) ways by which an
the sum of P4,000.00 payable to the order of cash. He
instrument can be made payable to order under
delivered the check to Mr. LHH on the same day in
Section 8 of the NIL. The instrument can either
exchange for money. LHH gave the money to ATL
be payable to the order of a specified person (i.e.,
because the latter represented that he badly needed
"pay to the order of Juan De La Cruz") or to a
the amount but could not withdraw from this-bank
specified person or his order ("pay to Juan De La
because the bank was already closed. ATL's check
Cruz or order")
was later dishonored because the account on which it
Section 8 of the NIL likewise identifies the was drawn did not have sufficient funds. When ATL
: persons who can be designated as payees in an was later prosecuted for estafa under Article 315(d)
R EV IEW ® ON COMMERCIAL LAW PARI I — NEGOTIABLE INSTRUMENTS LAW 23
(Act No, 2031)
(2) of the Revised Penal Code, he alleged that he is not 2) Does not specify the value given, or that any
liable arguing that the check should not have been, value hadheen given therefor; or
presen ted for payment because he- did not indorse the
same. Is the argument of ATL tenable? 3) Does not specify the place where it is drawn or
the place where it is payable; or
A: The argument of ATL is untenable. A check that is
payable to the order of cash is a bearer instrument 4) Bears a seal; or
(Sec. 9[d], NIL). Hence, the drawee bank may pay it 5) Designates a particular kind of current money in
to the person presenting it for payment without the which payment is to be made;
drawer's indorsement. "A check payable to bearer is
6) Addressed to more than one drawee jointly.
authority for payment to the holder. Where a check
is in the ordinary form, and is payable to bearer, so 10.02. When date may be inserted by holder
that no indorsement is required, a bank, to which it
When date is necessary in order to determine the
is presented for payment, need not have the holder
identified, and is not negligent in failing to do so" maturity date of the instrument. Examples: (1) where
(AngTek Lian v. CA, 87 Phil. 383). an instrument expressed to be payable at a fixed
period after date is issued undated; (2) where the
9.06. IDENTIFICATION OF THE DRAWEE acceptance of an instrument payable at a fixed period
a) Where the instrument is addressed to a drawee after sight is undated.
(meaning in a bill of exchange), he must be
N ote: Under Section 11 of the NIL, "where the
named or otherwise indicated therein with
-------- instrument or—an acceptance or-nny..indorsement
v .. ... reasonable certainty. The holder must know
thereon is dated, such date is deemed prima facie to be
to whom he should present it for acceptance
the true date of the making, drawing, acceptance, or
and/or for payment, otherwise, the purpose of
indorsement, as the case may be."
negotiable instrument as a tool in commercial
dealings will be greatly hampered.
PROBLEM:
b) A bill may be addressed to more than one draw
ee jointly, whether they are partners or not; but 1. Can a bill of exchange or a promissory note qualify as
not to two or more drawees in the alternative or a negotiable instrument if: (a) it is not dated; (b) or the
in succession (Sec. 128, NIL). Example: An instru day and the month, but not the year of its maturity,
ment may be addressed "to Juan De La Cruz and is given; (c) or it is payable to "cash"; (d) or it names
Pedro Santos" but not "to Juan De La Cruz or two alternative drawees; (e) or it does not state the
Pedro Santos." place:where it is made or payable?
A: (a) " Yes. Section 6(a) provides that the negotiability
10. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT
of an instrument is not affected if it is not
NEGOTIABILITY
dated. The date of issuance is not a requisite of
10.01. The validity and negotiable character of an instrument negotiability prescribed by Section 1, NIL.
are not affected by the fact that (Sec. 6, NIL):
(b) No. Absence of the year of maturity affects the
.I) It is. not dated (date of issuance); or . negotiability. The evident intent is to make the
REVIEWER ON COMMERCIAL LAW PART I — NEGOTIABLE INSTRUMENTS LAW 27
(Act No. 2031)
instrument payable on a fixed date but the year PNB the amount of P.61,000.00, The note contains the
was omitted. Hence, the time for payment is not following stipulations; .."Without-defalcation, value
determinable in this case. received; and do hereby authorize any attorney in the
. Philippines, in case this note be not paid at maturity
(c) Yes. Under Section 9(d) of the NIL, an instrument
■to. appear in the name and. confess judgment for the
is payable to bearer if the name of the payee does
above sum ..with..interest,. .cost of ...suit and attorney's
not purport to be the name of any person. The
fees of ten percent ,(10%) for collection, a release of
name of a payeie (cash) is an inanimate object,
all errors and waiver of all rights to inquisition and
hence, it is a bearer instrument.
appeal, and to the benefit of all laws exempting
(d) No. Section 128 of the NIL provides a bill may property, real or personal, from levy or sale." MORB
not be addressed to two or more drawees in the claims that the instrument is not negotiable because
alternative or in succession. Otherwise, there is the above stipulations are invalid. Is MORB correct?
no certainty as to the person to whom the instru
A: The negotiability of the instrument is not affected by
ment may be presented for payment.
the stipulations, Although MORB is correct in stating
(e) The negotiability of an instrument is not affected that the stipulations are void, it is still negotiable if all
if it does not state the place where it is made or other requirements of Section 1 are present. They are
where it is payable. All that is required under the in the nature of stipulations authorizing confession of
NIL is compliance with Section 1 thereof (1988 judgment which is considered void for being against
and 1997 Bar). public policy in this jurisdiction. However, Section 5
10fl3rAdditional provisions ..... ' of the NIL provides that the negotiable character of
an instrument otherwise negotiable is not affected by
An instrument is still negotiable even if the a provision which authorizes confession of judgment
following are present (Sec. 5, NIL): if the instrument be not paid at maturity. In other
1) Authorizes the sale of collateral securities in case words, only the stipulation is avoided (Philippine
the instrument be not paid at maturity; or National Bank v. Manila Oil Refining & By-Products Co.,
43 Phil. 444).
2) Authorizes a confession of judgment if the ins
trument be not paid at maturity; or
11. TR A N SFER AND NEGOTIATION
3) Waives the benefit of any law intended for the
11.01. If the instrument is negotiable, transfer thereof can
advantage,or protection of the obligor; or
be effected either through; (a) negotiation; or (b)
4) Gives the holder an election to require some assignment.
thing to be done in lieu of payment of money.
a) If the instrument is merely assigned, the trans
feree does not become a holder and he merely
PROBLEM:
steps into the shoes of the transferor (Salas v. CA,
1. ' The manager and treasurer of MORB Company G.R. No. 76788, Jan. 22,1990). Any defense avail
executed and delivered to PNB a promissory note able against the transferor is available against
:. whereby the company promises to pay to the order of the transferee. Example: Where the instrument
(Act No. 2031)
that- is payable to order was merely delivered

such holders as make title through his indorse-
without indorsement.
m m ti& ec. 46, NIL),
02. a) ISSUANCE
" Issue" is the first delivery of the instru
PROBLEM: j
ment complete in form to a person who takes it 1. Richard Clinton makes a promissory note payable to
as a holder (Sec. 191, NIL). bearer and delivers the same to Aurora Page. Aurora
Page, however, indorses it to X in this manner:
1) Issuance to the payee is negotiation because
the transfer constitutes the payee the holder "Payable to X. Signed: Aurora Page"
of the instrument. The payee may even be
a holder in due. ,course if he has acquired Later, without indorsing the promissory note, X
the note from another holder or he has not transfers and delivers the same to Napoleon. Richard
=directly dealt with the maker thereof. Clinton subsequently dishonors the note. May Napo
2) Delivery is defined as the transfer of pos leon proceed against Richard Clinton for the note?
session of the instrument by the maker or A: Yes, Napoleon may proceed against Richard Clinton.
drawer with the intention to transfer title The instrument was negotiated by delivery to
to the payee and recognize him as holder Napoleon. Despite the special indorsement of Ms.
thereof (De la Victoria v. Burgos, 245 SCRA Page it can still be negotiated by delivery because
_________ 374119951). ___________ ^ it is originally a bearer instrument (Sec. 40, NIL)._____________
b) NEGOTIATION Hence, Napoleon became a holder who has the right
to enforce the instrument against the maker, Richard
An instrument is negotiated when it is Clinton (1998 Bar).
transferred from one person to another in such
manner as to constitute the transferee the holder d) INCOMPLETE 'NEGOTIATION OF ORDER
thereof. INSTRUMENT
1) If .payable to bearer, it is negotiated by de 1) Where the holder of an instrument payable
livery. to his order transfers it for value without
2) If payable to order, it is negotiated by the indorsing it, the transfer vests in the trans
indorsement of the holder completed by feree such title as the transferor had therein,
delivery. and the transferee acquires in addition, the
right to have the indorsement of the trans
c) BEARER INSURANCE ALWAYS A BEARER
feror (Sec. 49, NIL).
INSURANCE
2) For the purpose of determining whether
Where an instrument, payable to bearer,
the transferee is a holder in due course, the
is indorsed specially it may nevertheless be
negotiation takes effect as o f the time when
further negotiated by delivery; but any person
the indorsement is actually made (Sec. 49,
indorsing specially is liable as indorser to only
NIL).
(Act No. 2031)
Example: Mr. M through fraud was in 2) .Special indorsement -— designates the
duced by Mr. A to issue a negotiable prom indorsee. "Pay to X."
issory note payable to the order of Mr. A. Note: The holder may convert a blank
The payee, Mr. A, delivered the note to Mr. indorsement into a special indorsement by
B on May 3, 2003 without indorsing it. On writing over the signature of the indorser in
May 20, 2003, Mr. A, upon Mr. B's request, blank any contract consistent with the char
placed his indorsement at the back of the acter of the indorsement (Sec. 35, NIL).
note: "Pay to B, Sgd. A." If Mr. B learned
about the fraud committed by Mr. A prior 3) Qualified Indorsement ■ — qualified in
to May 20, 2003, Mr. B cannot be a holder dorsement constitutes the indorser a mere
in due course because he had knowledge of assignor of the title to the instrument. It
the defect of title of Mr. A at the time the may be made by adding to the indorser's
negotiation was made complete. He can be signature the words "without recourse" or
a holder in due course if he had no such any words of similar import. Such an in
knowledge at the time the indorsement was dorsement does not impair the negotiable
made on May 20, 2003. character of the instrument.
4) Conditional Indorsement (Sec. 39, NIL) —
11.03. INDORSEMENT
the party required to pay the instrument
a) Where indorsem ent should be placed may disregard the condition and make
payment to the-indorsee or his-transferee
1) on the instrument itself; or
whether the condition has been fulfilled or
2) separate piece of paper attached to the not.
instrument called "allonge" (Sec. 31, NIL).
5) Restrictive Indorsement (Sec. 36, NIL).
b) Indorsement must be of the entire instrument (Sec.
(i) Prohibits the further negotiation of the
32, NIL). Example: An instrument for P5,000.00 can
instrument ("Pay to X only"); or
not be indorsed for less like PI,000.00. Exception:
when there was previous partial payment. (ii) Constitutes the indorsee the agent of
the indorser ("Pay to X for collection");
c) Section 32 of the NIL disallows negotiation to two or
or more indorsees severally. Example: Indorse
ment of a P20,000.G0 note that states "Pay to Jose (iii) Vest the title in the indorsee in trust
Cruz, P15,000.00 and Pedro Santos P5,000.00" is for or to the use of some other persons
not considered negotiation although it may be ("Pay to X in trust for Y").
considered an assignment. 6) Rights of Restrictive Indorsee (Sec. 37,
NIL)
d) Kinds of Indorsem ent
(i) To receive payment of the instrument;
1) Blank indorsem ent — no indorsee is speci
fied and it is done by affixing the indorser's (ii) To bring any action thereon that the
signature. indorser could bring;
I — NEGOTIABLE INSTRUMENTS LAW 33
32 REVIEWER ON COMMERCIAL LAW (Act No. 2031)
been previously dishonored, if such was

(iii) To transfer, his rights., as such indorsee, the fact;
where the .rforrn of th e. indorsement
y 3) That he. took it in good faith and for value;
authorizes .him to do so. In case of
transfer, all subsequent indorsees ac 4) That at the time it was negotiated to him,
quire only the title of the first indorsee he had no notice of any infirmity in the
under the restrictive indorsement. instrument or defect in the title of the
11.04. Negotiation by Prior Party person negotiating it;
Where an instrument: is negotiated back to a a) 1) Even a holder not in due course may sue
prior party, such party may reissue and further nego thereon in his own name and payment to
tiate the same. But he is not entitled to enforce pay him in due course discharges the instru
ment thereof against any intervening party to whom ment (Sec. 51, NIL). The only disadvantage
he was personally liable (Sec. 50, NIL). However, he of a holder not in due course is that the ins
may strike out the intervening indorsements because trument is subject to defenses as if it were
they are not necessary for his title and he is liable to non-negotiable (Dino v. judal-Loot, G.R. No.
them because of his initial indorsement (Sec. 48, NIL). 170912, AprilM, 2010).
Example: "A" payee indorsed the instrument to B, 2) A payee can be a holder in due course. Section
then B indorsed it to C, C to D, then D to B. B can fur 191 defines "holder" as the payee or indorsee
ther negotiate the instrument. He may also strike out — — — of a bill or 'note, who is in possession of
the indorsements of C and D. ~ if or the bearer thereof. Hence, the word
"holder" in the first clause of Section 52
12. HOLDERS and in the second subsection thereof "may
12.01. "Holder" be replaced by the definition in Section
191 so as to read a holder in due course is
The payee or indorsee of a bill or note who is in
a payee or an indorsee in possession, etc."
possession of it or the bearer thereof (Sec. 191, NIL). In
(De Ocampo v. Gatchalian, 3 SCRA 596 [1961];
other words, the payee or indorsee is the holder of an
Prudencio v. CA, 143 SCRA 7 [1986]).
order instrument while the payee or the bearer is the
holder of bearer instrument. This applies even to crossed checks
where the payee was not involved in the
12.02. REQUISITES (Sec. 52, NIL)
underlying transaction (Yang v. CA, G.R.
A holder in due course is a holder who has taken No. 138074, Aug. 15,2003).
the instrument under the following conditions:
b) Demand Instruments
C 1) That it is complete and regular upon its
Where an instrument payable on demand
.face;.. ,;r 'w
is negotiated after an unreasonable length of
O 2) That he became the holder of it before it time after its issue, the holder is not deemed a
was overdue/, and without notice that it has • holder in due course.(Sec. 53, NIL).
(Act No. 2031)
■■ ■ What can be considered "unreason indue course. The act of crossing a check serves
able" is relative. Section 193 of the NILprovides •as warning to the holder that the check has been
that "in determining what is 'reasonable time" issued'ior a definite.purpose so that he must in
or an 'unreasonable time/ regard is to be had in quire if he has received the check pursuant to
the nature of the instrument, the usage of trade that purpose (Bataan Cigar & Cigarette Factory v.
or business (if any) with respect to such instru CA,230SCRA 643 [1994]).
ments, and the facts of the particular case."
Holderfor ^ l u e
c) Notice of Infirmity and Defect
Value — a consideration sufficient to sup
Infirmity in the instrument means any port a simple contract. These include antecedent
irregularity in the instrument. Thus, notice of debts and a lien on the instrument.
an alteration which is apparent is notice of an
1) The holder is a holder for value only to the
infirmity in the instrument. Notice of forgery
extent that the consideration agreed upon
in the maker or the drawer's signature is also
has been paid, delivered, or performed.
notice of infirmity in the instrument. On the
Non-performance of the obligation will
other hand, a title of a prior party is defective
give rise to partial or full defense of failure
when he obtained the instrument, or any signa
of consideration as the case may be.
ture thereto, by fraud, duress^ or force and
fear, or other unlawful means, or for an illegal 2) Where the transferee receives notice of any
-------consideration, or when-he-negotiales ibiribf-each- infirmuly in the instrument u r defect in the'
of faith, or under such circumstances as amount title of the person negotiating the same
to a fraud (Sec. 57, NIL). before he has paid the full amount agreed
to be paid therefor, he will be deemed a
d) Good Faith
holder in due course only to the extent of the
The Supreme Court explained in Vicente R. amount paid therefor by him. Example: If the
De Ocampo & Co. v. Anita Gatchalian, et al. (No. holder took the instrument on the strength
L-15126, Nov. 3 0 ,1961,3 SCRA596), that although of his promise to deliver P20Q,000.00, but
good faith on the part of the holder is presumed, he had only delivered P100,000.00, he is a
such presumption is destroyed if the payee or holder in due course only up to P100,000.00
indorsee "acquired possession of the instrument if he receives notice of infirmity before he
under circumstances that should have put him could fully pay the consideration.
to inquiry as to the title of the holder who ne
3) As regards an accommodation party, the
gotiated the instrument." The burden is now on
the part of the holder to show that notwithstand fourth condition, ie,, lack of notice of any
infirmity in the instrument or defect in title
ing the suspicious circumstances, it acquired the
check in actual good faith. of the persons negotiating it, has no appli
cation (Stelco Manufacturing Corp. v. CA, 210
Note: A person who bakes a crossed check SCRA 51). However, the inapplicability of
without making further inquiries is not a holder fire fourth requisite is limited to notice of
(Act No. 2031}
absence of consideration, tha-; is, -solace of Rolando, intending to .buy' a car, saw an old friend,
the fact that -the party is a mere accommo Roger, who is an agent to .sell the car .belonging to
dation party who did not receive any con Delgado Clinic. After negotiation, (Rolando decided
sideration on the instrument. If the holder to buy said car. He drew .upon, .request of Roger,
has notice of other infirmity in the instru & crossed check for P600.00, payable to Delgado
ment or defect in title of the persons nego Clinic as evidence of his good faith, but which was
tiating the instrument, then the holder is merely meant to be shown to Delgado Clinic by
subject to personal defenses. Roger who received said check. The check would
then be returned when Roger brings the car and its
PROBLEMS: registration certificate for Rolando's inspection. For
failure of Roger to bring the car and its certificate of
1. A is indebted to B in the amount of P100,000.00. In registration, and to return the check, Rolando issued
order to raise funds to pay for his obligation, A sold a "stop payment order" to the ^drawee bank. In the
his old car to C for P100,000.00 on Jan. 20, 2001. meantime, Roger paid the check to the Delgado Clinic
A agreed to deliver the car to C on Jan. 25, 2001. for the hospital bill of his wife and was given P158.25
However, A convinced C to immediately issue a as change. May Delgado Clinic be considered a holder
check and to make the check payable to B. A informed in due course, hence entitled to recover? Decide with
C that the check will be issued to B because of A's reasons.
outstanding obligation. Hence, C issued a check to B
Delgado Clinic may not be considered a holder in
-------- to pay for the-loan-e fA -payabie-eR-Jaftf-25> 2Q91-.--The-
due course, hence not entitled to recover. Although
check was delivered to B through A. B and C were
Delgado Clinic was not in fact aware of the cir
not aware at that time that the car was sold, it was
cumstances with respect to the delivery of the check
already destroyed by fire. A fraudulently hid such
to Roger, there are circumstances that should have
fact in order to convince C to issue the check and to put him on inquiry. Thus, it should have noted that
convince B to acceptihe check. Can B, the payee of Rolando had no relation with it; that the amount of the
the check be considered a holder in due course? check did not correspond exactly with the obligation
A: Yes, he can be considered a holder in due course. of Roger to the clinic; and that the check is a crossed
Nothing in the problem indicates that he is not a check, which means that the check could only be
holder in due course, hence, the presumption that he deposited but may not be converted into cash should
is a holder in due course stands. All the requirements have put the clinic to inquiry as to the possession of
of Section 52 of the NIL are present in the case because the check by Roger, and why he used it to pay his
...... . it appears that B is -a holder of the;instrument who accounts (1977 and 1962 Bar).
has taken the instrument complete and regular on its Po Press issued in favor of Jose a postdated crossed
face, he took it before it was overdue and it was not check, in payment of newsprint which Jose promised
previously dishonored; he took it in good faith and to deliver. Jose sold and negotiated the check to Excel
for value and he had no notice of any infirmity in the Inc. at a discount. Excel did not ask Jose the purpose
instrument or a defect of the title of a prior party. of crossing the check. Since Jose failed to deliver
the newsprint, Po ordered the drawee bank to stop
(Act No. 2031)
payment on the check. Efforts of Excel to collect from c) May one who fails to inquire as to an infirmity
Po failed. Excel wants to know from yon as counsel: iri a negotiable. instrument and defect in the
1) Is Excel a holder in due course? 2) Can Po Press holder's title, be a holder in due-coiirse?
raise absence or failure of consideration as a defense? YES, because the law does not impose on
A: 1) Excel is not a holder in due course. The instru a holder the obligation to inquire into the infir
ment involved 'is a crossed check and was mity in the instrument or defect of the title of the
supposed to be deposited only. Excel is therefore person negotiating it to him, However, failure to
obligated to inquire regarding the circumstances make inquiry, when the circumstances indicate
involving the issuance of the check. Failure on defect,, renders the holder not a.bolder in due
his part, as in this case, will prevent him from course. Gross negligence may amount to legal
becoming a holder in due course; such failure or absence of good faith (De Ocampo v. Gatchalian, 3
refusal constituted bad faith. SCRA 596).
i
2) Yes. Since Excel is not a holder in due course,
Excel is subject to the personal defense which Po PROBLEM:
Press can set up against Jose. There was failure 1. Larry issued a negotiable promissory note to Evelyn
of consideration in the problem because Jose and authorized the latter to fill up the amount in
failed to deliver the newsprint to Po Press (1994 blank with his loan account in the sum of P I,000.00.
Bar) . ; However, Evelyn inserted P5,000.00 in violation
™ of the instruction. She negotiated the note to Julie
12.03. RIGHTS OF A HDC who had knowledge of the infirmity. Julie in turn
a) A holder in due course holds the instrument free negotiated said note to Devi for value and who had no
from any defect of title of prior parties, and free knowledge of the infirmity. Supposing Devi endorses
from defenses available to prior parties among the note to Baby for value but who has knowledge of
themselves, and may enforce payment of the the infirmity, can the latter enforce the note against
instrument for the full amount thereof against Larry?
all parties liable thereon. .A: Yes. The problem indicates that Baby is not a holder
1) a holder in due course is free from personal in due course. When she took the instrument, she had
defenses. knowledge of the breach of trust committed by Evelyn
against Larry. However, she has all the rights of a
2) a holder indue course is not free from real
holder in due course because she took the instrument
defenses.
from Devi, a holder in due course. Although Baby is
b) A holder not in due course is subject to personal not a holder in due course, she did not participate
and real defenses. in the breach of trust committed by Evelyn. Hence,
U Larry cannot set up the defense ithat the instrument
Exception: A holder who is not a holder in
was completed in breach of trust against Baby because
due course but he derived his title from a holder
such defense is a personal defense (1993 Bar).
in due course (Sec. 58, NIL).
40 REVIEWER ON COMMERCIAL LAW PART I — NEGOTIABLE INSTRUMENTS LAM' «
(Act No. 2031)
13. REAL AND PERSONAL DEFENSES entitled to raise them. -While- personal or equitable
defenses are available only against the holder who
REAL DEFENSES PERSONAL DEFENSES stands in privity with .the party who is entitled to set
up or those who are not or do not have the rights of a
1. Minority (available only 1. Failure or Absence of holder in due course.
to the minor) Consideration
13M .F 0R G 11Y -
2. Forgery 2. Illegal Consideration
a. What are the. effects of Forger/? (Sec. 23, NIL)
3. Non-delivery of Incom 3. Non-delivery of Com When a signature is forged or made with
plete Instrument plete instrument out the authority of the person whose signature
4. Material Alteration 4. Conditional delivery of it purports to be, it is wholly inoperative, and
complete instrument no right to retain the instrument, or to give a
discharge therefor, or to enforce payment there
5. Ultra Vires act of Corpo 5. Fraud in inducement of against any party thereto, can be acquired
ration through or under such signature, unless the
party against whom it is sought to enforce such
6. Fraud in Factum or in 6. Filling up blank not
right is precluded from setting up the forgery or
.Esse Contractus within authority
want of authority.
7. Illegality — if declared 7. Duress or Intimidation b. Take note of the following rules in relation to123
--------void for any purpose------
8. Vicious Force or Violence 8. Filling up blank beyond 1) Only the forged signature is wholly inope
reasonable time rative not the instrument itself, and not the
genuine signatures;
9. Want of authority 9. Transfer in breach of
faith 2) In case of forgery of an indorsement of an
instrument payable to order, it is not only
10. Prescription 10. Mistake the person whose signature was forged
11. Discharge in Insolvency 11. Insertion of wrong date who would not be liable but also the par
ties prior to such person. Payment under a
12. Ante-dating or Post-dat forged indorsement is not to the drawer's
ing for illegal or fraudu ; order;
lent purpose
3) Despite the forgery of the signature, there
may be parties who shall be precluded
13.01. Distinguish Real Defenses from Personal Defenses from Setting up forgery or want of author
ity, such as: (i) those who warrants like the
" Real or absolute defenses attached Id the instru acceptors, indorsers; (ii) those who ratified
ment and are available1against all holders, whether the forgery express or implied; and (iii)
...in'due courseor nohbut only.by.the party or parties those who were negligent.
(Act No. 2031)
in one '■case, the drawer was not although said checks were payable to BIR.
allowed to recover although Ins signature Hence,.the drawee was clearly- negligent in
was allegedly forged because it was encashing the checks.
established that the person who encashed
5) If the signature of the drawer in a check is
the checks was his trusted secretary. The
forged, the drawee cannot charge the ac
drawer's negligence was considered the
count of the drawer and the drawee cannot
proximate cause of his loss because he
recover from the collecting bank.
entrusted his blank checks and credit cards
to his secretary He also entrusted to his
PROBLEMS:
secretary the verification and reconciliation
of his accounts. He did not personally check 1. M, maker, prepared a promissory note payable to
his statement of accounts and cancelled or the order of A, but he did not sign the same and left
used checks as the same were also entrusted it inside his drawer. X, a thief, stole the instrument,
to his secretary (Ramon K. Ilusorio v. CA, forged M's signature and delivered the same to A. A
G.R.No. 139130, Nov. 27,1002). indorsed the instrument to B, B in turn indorsed it to
C, then C to D, the present holder, (a) Against whom
4) The general rule is that in case of forgery of
can D enforce payment? (b) Will your answer be the
the indorsement of the payee of the check
same if the instrument is a bearer instrument?
the drawee bank cannot debit the drawer's
account and that loss shall be borne by the A: (a) D can enforce payment from X, A, B, and C but
drawee bank. The depositary or collecting not against M. Under Section 23 of the MIL, the
bank is liable to the drawee in case of forged forged signature of M is wholly inoperative
indorsement because it guarantees all prior and no right to enforce payment was acquired
indorsement. N ote: This is subject to the against M by virtue of the forged signature.
qualification that the drawee himself was However, the indorsers A, B, and C are
not negligent or guilty of such conduct as liable because they are parties after the forger}/
would estop him from asserting the forged and are therefore precluded from setting up such
character of the indorsement as against the forgery against the present holder, D. When A, B,
drawer. and C indorsed the instrument, they warranted
In another case, the Supreme Court that the instrument is genuine and in all respects
explained that only the drawee may be what it purports to be.
held liable if it was not established that On the other hand, the forger will be
the checks containing forged indorsements deemed the principal debtor because his wrong
passed through the alleged collecting bank doing prevented recovery from M. He is in effect
(Traders Royal Bank v. RPN, Inc., et ah, G.R. the maker of the instrument.
No. 138510, Oct. 10, 2002). The drawee in
(b) Yes, the answer would still be the same if the
this case encashed checks (one of which is
instrument is a bearer instrument. The forged
crossed) presented by unknown persons
signature of M is still inoperative as to him.
(Act No. 2031)
Hernan issued a check payable to the order of

The indorsers : are still secondarily liable
Fernando in the sum of P12,000.00, and drawn on X
because tihe MIL -provides that persons who
Bank. The check was delivered to Matilde by Adriano
indorse bearer instruments are liable to subse
for encashment. A t that time, the check had the
quent parties who acquired tide through their
indorsements of Fernando and Rosa. When Matilde
indorsement. In this case, D acquired title
encashed it with X Bank, she affixed her signature on
through the indorsement of A, B, and C.
the check. Upon Matilde's receipt of the cash proceeds
2. Juan de la Cruz signs a promissory note payable to of the check she turned over the amount to Adriano.
Pedro Lim or bearer, and delivers it personally to X Bank was informed that the alleged indorsement of
Pedro Lim. The latter somehow misplaces the said the payee Fernando was a forgery, since the latter had
note and Carlos Ros finds the note lying around the died 2 years ago. X Bank having refunded the amount
corridor of the building. Carlos Ros endorses the to Hernan, sued Matilde, who refused to return the
promissory note to Juana Bond, for value, by forging money, a) Was X Bank correct in paying Hernan? b)
the signature of Pedro Lim. May Juana Bond hold Does X Bank have a cause of action against Matilde?
Juan de la Cruz liable on the note? a) Yes. X Bank was correct in paying Heman.
A; Yes, Juana Bond may hold Juan de la Cruz liable. The The forged signature of the payee is wholly
promissory note is payable to bearer hence title is inoperative and no right to give discharge to the
transferred through negotiation by mere delivery of instrument was acquired by X Bank through the
the note. Juana Bond may obtain title even if there is forged signature. When X Bank paid Matilde,
TT~mrto4ndorseinent:----------:----------------- :------------ ------- It- d-id -not comply with the- order of its client.
Hence, it is the duty of the bank to reimburse its
However, Juan de la Cruz may validly invoke client Hernan.
the defense of non-delivery of a complete instrument
by Pedro Lim if Juana Bond is not a holder in due b) Yes, X Bank has a cause of action against
course. It does not appear however that Juana Bond Matilde. Matilde is a general indorser and as
is not a holder in due course, so she is presumed to be such she warrants that she has good title to the
such holder in due course (1980 Bar). instrument. Having Breached such warranty,
she is now responsible to the collecting bank.
3. Fenando forged the name of Daniel, manager of a Even if she encashed the check for Adriano as
Trading Company, as the drawer of a check. The an accommodation party, her liability as an
Bank of the Philippine Islands, the drawee bank, did indorser remains (Sec. 29, NIL).
not detect the forgery and paid the amount. May the
bank charge the amount paid against the account of In fact, she is liable even if she was merely
the alleged drawer? Reasons. an agent of Adriano as it does not appear that she
disclosed the fact that the check was delivered to
A; No. The drawee may not charge the account of her for encashment (1982 Bar).
the trading company. A bank is charged with the
A delivers a bearer instrument to B. B then specially
knowledge of the signature of its customer and it
indorses it to C and C later indorses it in blank to
should not honor any checkbearing a forged signature
D. E steals the instrument from D and, forging the
of the drawer (1977 Bar).
46 REVIEWER ON COMMERCIAL LAW EAKTI —•NEGOTIABLE INSTRUMENTS LAW 47
(Act No. 2031)
signature of D, succeeds in "negotiating" it to F who I : Toth cases, however, the instrument

acquirer, the instrument in good faith and for value. must be filled up strictly in accordance with the
If for any reason, the drawee bank refuses to honor authority given and within reasonable time in
the check, can F enforce the instrument against the order that it may be enforced against any person
: drawer? In case of the dishonor of the check by both who became a party thereto prior to its comple
the drawee and the drawer, can F hold any of B, C, tion. However, persons negotiating after its com
and D liable secondarily on the instrument? pletion are liable because of their warranties.
A: F can enforce it against the drawer but he cannot A holder in due course may enforce the
hold B, C and D liable. The instrument involved is instrument as if it had been filled up strictly in
a negotiable instrument that is payable to bearer. accordance with the authority given and within
The holder thereof is whoever is in possession of the a reasonable time (Sec, M, NIL).
instrument and indorsement is not necessary for the ^Hencefi it risAno: defense in an action to I
title of the holder-indorsee. Hence, the drawer is liable enforce a negotiable promissory note that it was |
to the holder. Nevertheless, persons who indorse signed in blank asSection 14 of the NIL concedes
the instrument are liable to those who acquired prima facie authority of the person in possession
title through their indorsements. In this case, F did of negotiable instruments to fill in the blanks
not acquire his title through the indorsements of B, (Quirino Gonzalez Logging Concessiomire, et al. v.
C, and D. D did not even indorse the instrument CA, G.R. No. 126568, April 30,2003).
and the title of F cannot be traced from B and C s
b) Delivery is essential to the validity of any nego-
—------ mdurseineuL because of "the.. break created by the
tiable instrument. As between immediate parties
forged indorsement of D. The fact that F is a holder and those who are similarly situated, delivery
in due course is not material because forgery is a real must be coupled with the intention of transfer
defense (2997 Bar). ring title to the instrument.
13.03. Give the effects of each of the following: a) Incom However, if the instrument is in the hands
plete but delivered instrument; b) Complete but of a holder in due course, valid delivery to him
undelivered instrument; c) Incomplete undelivered is conclusively presumed.
instrument -r
a) Where the instrument is Wanting in any mate instrument is only a personal defense (Sec. 16,
rial particular the person in possession thereof, NIL).
is prima facie presumed authorized to complete
c) Non-delivery of an incomplete instrument is a
;; it.
real defense (Sec. 15, NIL).
A signature on a blank paper delivered by
the person making the signature in order that it PROBLEMS:
may be converted into a negotiable instrument 1. Jose Reyes signed a blank check, and in his haste to
operates as prima facie authority to fill it up as attend a party, left the check at the top of his executive
such for any amount. deskin his office. Later, Nazarenp forced open the door
REVIEWER ON COMMERCIAL LAW PART I ~ NEGOTIABLE INSTRUMENTS LAW 49
(Act No. 2031)
to Reyes" office, and stole the blank check, Nazareno YES, my answer will be the same even if D is a
immediately filled in the amount of P5Q,0OO.OG and a holder in due course because the law, Section 15, NIL
.fictitious name as payee on the said check. Nazareno says "any holder."
then endorsed the check in the payee's name and YES, B and C are liable. B because he was the
passed it to Roldan. Thereafter, Roldan endorsed the forger and besides .an indorser, and he warrants that
check to Dantes. the instrument is genuine-, and in all respects what it
a) Can Dantes enforce the check against Jose Reyes? purports to be. So also with G
Explain.
13.04. UNDATED INSTRUMENT
b) If Dantes is a holder in due course will your
A negotiable promissory note payable at a fixed
answer to- question (a) be the same? Explain.
period after date was issued undated and without
A: a) Dantes cannot enforce the instrument against any amount and was delivered to the payee named
Jose Reyes. Jose Reyes can raise the defense that therein. Will the filling up of the blanks with any date
the incomplete instrument was not delivered and for any amount avoid the note in the hands of the
since the check was only stolen and filled up by holder?
Nazareno. No. Under Section 13 of the NIL, the insertion
b) My answer will be the same even if Dantes is a of a wrong date will not avoid the instrument in the
holder in due course. If an incomplete instrum ent hands of a subsequent holder in due course; but as to
__________ has not been delivered, it will not, if completed him, the date so inserted is to be regarded as the true
and negotiated without authority be a valid date. And under Section 14, NIL, if an incomplete
contract against any holder, even a holder in due instrument, after completion, is negotiated to a holder
course (Sec. 15, NIL; 1985 Bar). in due course, it is valid and effectual for all purposes
in his hands and he may enforce it as if it had been
2. A signed a blank check and kept it inside the drawer
filled up strictly in accordance with the authority
of his desk in his office. B, a janitor of the office opened
given within reasonable time.
the drawer, got the check and filled in the amount of
P I00,000.00 with B's name as payee. Thereafter; B 13.05. What is Material Alteration? What are the effects of
indorsed the check to C and C indorsed the check to Material Alterations? (Secs. 1M and 125, NIL)
D. Should the drawee bank dishonor the check? Can
Material Alteration — any alteration which
D hold A liable? Would your answer be the same if D
changes the date, sum payable, time or place of
was a holder in due course? How about B and C, are
payment, number or relation of parties, or medium
they liable to D?
or currency of payment, or adds a place of payment
At ' NO, D cannot hold A liable because the instrument is where none is specified or which alters the effect of
incomplete and undelivered. Under Section 15, NIL, the instrument in any respect (PNB v. CA).
an incomplete and . .undelivered instrument would a. Effect of Material Alteration
not be a valid instrument in the hands of any Holder
as against any person whose signature was placed Avoids the instrument, except as against
before delivery. the party who made, authorized, or assented to
REVIEWER. ON COMMERCIAL LAW PART I — NEGOTIABLE INSTRUMENTS LAW 51
(Act No. 2031)
the Îteration and, subsequent indorsers. HDC due course. Can C file an action successfully against
can enforce it according to, its original tenor, B, the maker of the note, for the amount of the note?
Explain. .. ■
b. Is the alteration @f the 'Serial nwfi&er ©f a check
a material, alteration? A: a) No, B may raise the defense of fraud in induce
ment against A who is not a holder in due course.
NO. The alteration' of the serial number
This is specially true in this case where A was
of the check does not alter the effect of the
the one who fraudulently induced B to issue the
instrument, nor does it modify in any respect the
note.
obligation of a party thereto. If does not change
the items which are required to be stated under b) Yes. C can file an action successfully against
Section 1, NIL (PNB v. CA), B. C is presumed to be a holder in due course.
Hence, in the absence of proof that he is not, he is
13,06. FRAUD
a holder in due course who is free from personal
a) "Fraud in execution" (fraud in factum or fraud defenses including fraud in inducement.
in esse contractus) — present when a person is
induced to sign an instrument not knowing its 13.07. FAILURE, ABSENCE OI- OR ILLICIT CONSIDER
character as a note or a bill. The person who signs ATION
the instrument does not know that he is signing These are only personal defenses. However, with
a negotiable instrument. Example: A blind person
!§i respect to illegality, the exceptional case when it is a
was made to sign a piece of paper he believes real defense is if the statute declares the instrument*1
------- to be -a-ercdit application although-it is really a void for any purpose.
promissory note.
b) "Fraud in inducement" — the person who PROBLEMS:
signs the instrument intends to sign the same 1. NM issued 2 postdated checks to CV, as security for
as a negotiable instrument but was induced to pieces of jewelry to be sold. Each check has a face value
do so only through fraud; his consent to issue a of P50,000.00. Thereafter, CV negotiated the check to
negotiable instrument was vitiated by fraud. SIH, Inc. without the knowledge of NM. NM returned
c) Fraud in factum is a real defense while fraud in the jewelries to CV and tried to retrieve the checks.
inducement is a personal defense. Having failed to do so, NM withdrew her funds from
the drawee bank and the checks were consequently
PROBLEM: dishonored when presented for payment. SIH sued
NM who interposed the defense that the checks do
1, A induced B by fraud to make a promissory note not have any consideration. However, NM did not
payable on demand to the order of A in the sum of present proof that SIH is not a holder in due course.
P5,000,000.00. (a) Can A file an action successfully
Will the- defense of absence of consideration prosper
against the maker B for the amount of the note?
against: SIH?
Reasons, (b) Going further, A transfers the note to C
who pays P5,000,000.00 therefor and acquires the note A: NM cannot invoke the defense of absence of consid
under circumstances that make him (C) a holder in eration against SIH. There is no showing that SIH is
52 REVIEWER ON COMMERCE A !. LAW PART I — NEGOTJ ABLE INSTRUMENTS lAW 53
(Act No. 2031)
riot a Holder in due course,.hence, the 'presumption on defense. However, other parties who are capaci
due course holding stands. As a holder in due course, tated cannot invoke such defense. The defense
M. V. >
SIH is free from personal defenses of prior parties is personal to the minor or incapacitated only.
(1993 Bar). Transfer of title by the minor is however effec
tive negotiation.
2. A hill of exchange was issued because of the love and
affection of the drawer for the payee. Can the drawer b) The fact that indorsement or issuance of an
be held secondarily liable (assuming non-acceptance instrument as m ulira vires act of a corporation is
by the drawee) on the instrument: (a) by the payee; a real defense. .
(b) by a holder in due course?
A: a) NO. The drawer cannot be held secondarily M O S L E M ::
liable by the payee because while the love and 1. Where the President of a corporation issues a com
affection may be a good consideration, it is pany check and signs it in his capacity as president
not a valuable consideration. Want or absence (being an authorized signatory) in payment of a car I
of consideration is a valid defense between a |
I.
which he purchased for his office use, but without the
drawer and a payee. approval of the Board of Directors, and the check is
b) YES, a holder in due course can hold the drawer dishonored by the drawee bank, may the seller of the
secondarily liable. Want or absence of consider car recover from the drawee bank, the corporation,
ation is only a personal defense and cannot be and the president of the corporation?
raised against a holder in due course (Sec. 28,
' ~ — — -A:----- The drawee.bank — NO, A check itself does not
I
operate as an assignment of any part of the funds to
3. Pedro issued a negotiable note to Juan, a government the credit of the drawer with the bank and the bank is
employee, to facilitate the early release of the not liable to the holder, unless and until it accepts or
government approval of the application that he filed. certifies,the .check.:;
Juan negotiated the instrument to Pablo, a holder in
The corporation — NO. There being no board
'M
due course. When Pablo presented the instrument to
approval of the purchase of the car (assuming such
Pedro for payment, PedrO claims that he is not liable
board approval is required) the corporation is not
because the consideration was illicit. Is the refusal of
»1V'* ••«* ..... liable unless it is estopped.
Pedro justified?
.
The President— YES, he is liable. It is one of the
A: The refusal is not justified. Illegality of consideration
cases where an officer of the corporation can be held
is only a personal defense. Since Pablo is a holder in
personally liable for his official act.
due course, the illegality of the consideration cannot
be invoked? : 13,09. PRESCRIpTIQN.
13.08. MINORITY OR INCAPACITY OR WANT OF Real defense that may be raised against a holder
AUTHORITY in due course. The prescriptive period for the filing
a) Minority or incapacity (i.e., insanity) may be of a claim based on negotiable instruments is ten (10)
invoked by the minor or incapacitated as real years from the time the cause of action accrued. In
(Act No. 2031)
case of'>checksA.the action of the ..depositor age ii:si. (3) admits the existence of the payee and his
■his drawee bank commences to m n from the time capacity to indorse.
he is given notice of payment (Philippine Commercial
c) Drawer — secondary liability: (1) admits the
International Bank v. CA, 550 SCRA 446 [2001]),
existence of payee and his capacity to indorse;
In Myron C. Papa v. AM, Valencia, ei a l (248 (2) engages that the instrument will be accepted
SCRA 643 [1998]), the payee did not encash the or paid by the party primarily liable; and (3)
check for more than ten (10) years from the issuance engages that if the instrument is dishonored and
thereof. The Supreme Court ruled that failure of proper proceedings are brought, he will pay to
the payee to encash a check for more than ten (10) the party entitled to be paid.
years "undoubtedly resulted in the impairment of
the check through his unreasonable and unexplained PROBLEM:
delay." The Court invoked Article 1249 of the Civil
Code stating that acceptance by the payee "of the Does the payee or holder of a check have a cause of
check implies an undertaking of due diligence in action against the drawee bank if the latter dishonors the
presenting it for payment and if he from whom it is check?
received sustains loss by want of such diligence, it
NO. The payee has no cause of action against the bank.
will be held to operate as actual payment of the debt
The bank is not liable to the holder unless and until it accepts
or obligation for which it was given." However, in The
or certifies the check. The remedy of the holder is against
International Corporate Bank v. Sps. Gueco, 351 SCRA*1
516. the Supreme Court ruled that the eontrachiaf- the drawer, provided, notice of dishonor is given to him on
the basis of the transaction that gave rise to the issuance
obligation remains even if the check is not presented
of the check. Once the bank certifies the check, the bank
for payment (Art. 1249, CC).
becomes liable thereon because certification is equivalent to
acceptance and if procured by .the holder, the drawer and
14. PERSONS WITH SECONDARY AND PRIMARY LIABILITY
all indorsers are discharged from liability (Secs. 188 and 189,
14.01. What are the liabilities of: a) maker (Sec, 60); b) NIL),
. drawer (Sec. an^ chacceptor (Sac. 62|
Note: However, exceptionally, a payee may sue the
a) Maker — primary liability: (1) engages to pay drawee based on Article 19 of the Civil Code if there was
according to the tenor of the instrument; and (2) dishonor despite the instruction of the drawer to pay (HSBC
admits the existence of the payee and his capa v. Catalan, 440 SCRA 498 [2004]).
city to indorse.
b) Acceptor (and Drawee .....who. pays without 14.02. Warranties of: (a) qualified endorser (Sec. 65); (b)
accepting the instrument) — primary liability: general endorser (Sec. 66)
(1) engages to pay according to the tenor of a) Qualified Indorser and Persons negotiating by
his acceptance; ;(2)uadmits the existence of the delivery (Sec. 65) — Every person negotiating
drawer,'the genuineness of his signature and h.:s an instrument by delivery or by a qualified
capacity and authority to draw the instrument; endorsement warrants:
(Act No. 2031)
1) that the instrument is genuine and in all ;

notwithstanding such holder, at the time of taking the
respects what it purports to be; that he has instrument, knew him to be only an accommodation
a good title to it; party. The fourth condition in Section 52, (d) of the
2} that all prior parties had capacity to con NIL (Lack of notice in the infirmity of the instrument
tract; or defect in -the title of. the person negotiating it), has
no application but only with respect to absence of
3) that he has no knowledge of any fact which consideration...
would impair the vali dity of the instrument
or render it valueless. N ote: A corporation cannot abt as an accommo
dation party. The issue or endorsement of negotiable
N ote: The warranty of persons negotiat
instrument by a corporation without consideration
ing by mere delivery extends to the immediate
and for the accommodation of another is ultra vires
transferee only.
(Crisologov.CA,117SC#ji594).
b) General Indorser (Sec. 66) — Every indorser
who endorses without qualification, warrants to PROBLEMS:
1 I '
all subsequent holders in due course:
1. On June 1,1990, A obtained a loan of P100,000.00 from
1) that the instrument is genuine and in all B, payable not later than Dec. 21,1990. B required A to
• “■ ' I ' M .
respects what it purports to be; issue him a check for that amount to be dated Dec. 20,
2) that he has a good title to it;34 1990. Since he does not have any checking account,
---------A,-with the knowledge.criHO, requesiedHsdxieiid;' C~; ■+
3) that all prior parties had capacity to president of X Banking Corporation, to accommodate
contract;
........ ..
him. C agreed. He signed a check for the aforesaid
4) that the instrument is, at the time of the amount, dated Dec. 20, 1990, drawn by X Banking
.. ........... ....... . ..... ,|UI H M " I .

endorsement, valid and subsisting. Corporation with the ABC Commercial Banking
Corporation as drawee. The by-laws of X Banking
The general indorser also engages that on due
presentment, it shall be accepted or paid, or both, Corporation requires: that checks issued by it must be
signed by the President and the Treasurer or the Vice-
as the case may be, according to its tenor; and if it
be dishonored and the necessary proceedings on
i ........... ........... ........... ........... .. .
President. Since the Treasurer was absent, C requested
dishonor be duly taken, he will pay the amount the Vice-President to co-sign the check, which the
thereof to the holder, or to any subsequent indorser latter reluctantly did. The check was delivered to
who may be compelled to pay it. B. The check was dishonored upon presentation on
due date for insufficiency of funds, (a) Is X Banking
14.03. Who is an accommodation party? (Sec 29, NIL) Corporation liable on the check as an accommodation
An accommodation party is one who has party? (b) If it is not, who then, under the above facts,
»
signed the instrument as maker, drawer, acceptor, or is/are liable? :■

indorser, without receiving value therefor and for the A: (a) X Banking Corporation is not liable because the
purpose of lending his name to some other person. act of accommodating the check is an ultra vires
An accommodation party is liable to holder for value, act. It Is outside the powers of a corporation to
WB
m v ' V : ■_ ' - • - 5 9
(Act No. 2031)
accommodate another not in line with its own 15.02, SECONDARY LIABLE
business, a) Steps to Charge Secondary Parties in Promis
(b) The president and the vice-president who si gned sory Note
for X Banking Corporation are liable to the 1) Presentment for payment must be made
instrument in their personal capacities (Crisologo within the required period to the maker
Jose v. CA, Sept 15,1989). (1991) (Sec. 70, NIL). "
2. Santos purchased Vera's car for P50,O0G.00. Not having 2) Notice of dishonor should be given, if
enough cash at hand, Santos offered to pay in check. promissory note is dishonored by non-pay
Vera refused to accept the check unless it is indorsed ment by the maker (Sec. 89, NIL).
by Reyes, their mutual friend. Reyes indorsed Santos'
check and Vera, knowing that Reyes ha&not received b) Steps to Charge Secondary Parties in Bill of
any value for indorsing the check, accepted it. The Exchange
next day, Vera presented the check to the drawee bank 1) Presentment for acceptance or negotiation
for payment. Payment was refused for lack of funds. within a reasonable time after it was
Vera gave notice of dishonor to Reyes, but Reyes acquired — should be made only in the
refused to pay, saying that he indorsed merely as a instances required in Section 143.
friend. In the event Reyes voluntarily pays Vera, does
Reyes have a right to recover from Santos? Explain. 2) If dishonored by non-acceptance:*3
A: Yes, Reyes can recover from Santos. The relation ________________ (i) Notice of Dishonor should be given to
between Santos and Reyes is in effect that ot principal) the indorsers and drawer (Sec. 89).
and surety, the accommodation party. Reyes, being (ii) If the bill is a foreign bill, there must
the surety, of Santos, can recover from, the latter be protest for dishonor by non-accep
whatever amount that he paid to Vera (PNB v. Maza
tance (Sec. 159).
and Macenas, 48 Phil. 207; Sec. 29, NIL).
3) If the bill is accepted:
15. HOW TO ENFORCE LIABILITY (i) Presentment for payment to the accep
15.01. PRIMARILY LIABLE tor should be made.
a) The maker is liable the moment he makes the (a) If the bill is dishonored upon
instrument Section 60 of the NIL provides presentment for payment.
that the maker by making the promissory note (b) Notice of dishonor must be given
"engages to pay the instrument according to its to person secondarily liable.
tenor."
(ii) If the bill is a foreign bill, protest for
b) A drawee becomes liable the moment he accepts dishonor by non-payment must be
the instrument. Section 62 provides that the made.
"acceptor, by accepting the instrument, engages
that he will pay it according to the tenor of his c) Steps to Charge Acceptor for Honor and
acceptance." Referee in case;, of Need
(Act No. 2031)
1) Protest for non-payment by the drawee

5) The person entitled to present the instru
(Sec. 165)
ment for payment must exhibit the
15.03. Rules on presentment for payment instrument to the person from whom the
payment is demanded and upon payment
a) WHEN NOT NECESSARY
must be delivered to the person paying it.
Presentment for payment is not necessary to If the instrument is not surrendered and
charge persons primarily liable. But it is neces cancelled, there is a danger that it may fall
sary to charge persons secondarily liable except: in the hands of other persons who might
1) as to drawer, under Section 79, where he claim rights over the instrument.
has no right to expect or require that the
drawee or acceptor will pay the instrument; PROBLEM:
2) as to indorser, under Section 80, where the 1. Gemma drew a check on Sept. 13, 1990. The holder
instrument was made or accepted for his presented the check to the drawee bank only on
accommodation and he has no reason to March 5,1994. The bank dishonored the check on the
expect that the instrument will be paid if same date. After dishonored by the drawee bank, the
presented; holder gave a formal notice of dishonor to Gemma
through a letter dated April 27,1994. (a) What is meant
3) when dispensed with under Section 82, by “unreasonable time" as applied to presentment?
such as: (i) where, after the exercise of rea- (b) is Gemma liable to the holder? _________
-------------- sonable -drligence; presentmei it cannot be"
made; (ii) where the drawee is a fictitious A: (a) The concept of what is reasonable is relative.
person; (iii) by waiver of presentment, ex "Reasonable time" has been defined as so much
press or implied; and time as is necessary under the circumstances
for a reasonable, prudent and diligent man to
4) when the instrument has been dishonored do, conveniently, what the contract or duty
by non-acceptance. requires should be done, having a regard for the
b) REQUISITES rights and possibility of loss, if any, to the other
party (Far Realty Investment, Inc. v. CA, G.R. Nc.
1) Presentment must be by the holder, or by
L-36549,Oct.5,1998)/
some person authorized to receive pay
ment oh his behalf; However, with respect to checks, the
Supreme Court had taken cognizance of the
2) If m.ust be made, at a reasonable hour on a
current banking practice that check becomes
'.■^business day on the proper date;
stale after more than six (6) months or 180 days
3) Presentment must be at the proper place; (Luis S. V/ong v. Court o f Appeals, G.R. No. 117857,
4) Presentment must be to the person primari Feb. 2 , 2001).
ly liable on the instrument, or if he is absent (b) No, Gemma is no longer liable to the holder
or inaccessible, to any person found at the based on the instrument. Gemma is already
place where the presentment is made; and discharged from secondary liability under the
(Act No. 2031)
■check, because presentment and notice of dis What is excused is the delay in presenting
honor was made after an unreasonable length of it for payment caused by presentment for
time of more than three (3) years, The check was acceptance (Sec, 147, NIL).
already stale at the time of presentment. 2) Where the drawee is dead, or has abscond
However, Gemma may still be liable to ed, or is a fictitious person or a person not
the holder if the latter is her contracting party. having capacity to-contract by bill.
Failure to present the instrument on time does 3) Where, after the:exercise of reasonable dili
not totally wipe out all liability based on contract. gence, presentment can not be made.
Although she may not be liable on the check, she
4) Where, although presentment has been
may be liable on their contract (1994 Bar).
irregular, acceptance has been refused on
15.04. PRESENTMENT FOR ACCEPTANCE some other ground (Sec. 149, NIL).
a) WHEN MANDATORY (See. M3, NIL) 15.05. ACCEPTANCE
Presentment for acceptance is required in a) ACCEPTANCE
the following cases:
The signification by the drawee of his assent
1) Where the bill is payable within a fixed to the order of the drawer. The acceptance must
period after sight, or in any other case, be in writing and signed by die drawee. It must
where presentment for acceptance is neces- not express that the drawee will perform his
——— sary in order to fix the maturity of the promise by any other means than die payment
instrument; or of money (Sec. 132, NIL).
2) Where the bill expressly stipulates that it b) REQUISITES
shall be presented for acceptance; or 1) The acceptance must be in writing;
3) Where the bill drawn is payable elsewhere 2) The written acceptance must be signed by
th an at the residence or place of business of the drawee; and
the drawee.
3) The drawee must assent to the promise to
N ote: It is not necessary to present a pay a sum certain in money and not by any
check for acceptance because it is not one other means.
of those required to be presented for accep
c) Proof of Acceptance
tance Under Section 143.
The written acceptance may be in the
b) WHEN EXCUSED OR DISPENSED WITH
instrument itself or in a separate instrument.
1) Delay is excused — A bill drawn payable However, under Section 133, "the holder of a bill
elsewhere than at the place of business or presenting the same for acceptance may require
the residence of the drawee and the holder; that the acceptance be written on the bill, and,
with the exercise of reasonable diligence, if such request is refused, may treat the bill as
failed to present die bill for acceptance. dishonored."
REVIEWER ON COMMERCIAL LAW PAR T I — NEGOTIABLE INSTRUMENTS LAW 65
(Act No, 2031)
EFFECTS: When an acceptance Is written f) Kinds of Acceptance (Sec. 141, NIL)

on a paper other than the bill itself, it does not
1) Conditional; that is . to say which makes
bind the acceptor except in favor of a person to
payment by the acceptor dependent on the
whom it is shown and who, on the faith, thereof,
fulfillment of a condition therein stated;
receives the bill for value,
2) Partial; that is to say, an acceptance to pay
d) When deemed accepted: part only of the amount for which the bill is
The drawee is deemed to have accepted the drawn;:
instrument under the said section in the follow 3) Local; that is to say, an acceptance to pay
ing instances: only at a particular place;
1) The bill was delivered to the drawee and 4) Qualified as to time;
the latter destroys the same. 5) The acceptance of some, one or more of the
2) The bill was delivered to the drawee but the drawees but not of all.
drawee refuses within twenty-four hours g) RIGHT TO UNQUALIFIED ACCEPTANCE
or within such other period as the holder
may allow to return the bill accepted or The holder may refuse to take a qualified
non-accepted (Sec. 137, NIL). acceptance and if he does not obtain an unqua
lified acceptance, he may treat the bill as dis-
N ote: Section 136 provides that "the drawee ■ ______honored by non-acceptance. Where a qualified
' is allowed twenty-four hours after presentment acceptance is taken, the drawer and indorsers
in which to decide whether or not he will accept are discharged from liability on the bill unless
the bill; the acceptance, if given, dates as of the they have expressly or impliedly authorized
day of presentation." On the other hand, Section the holder to take a qualified acceptance, or
137 provides that "where a drawee to whom subsequently assent thereto. When the drawer
a bill is delivered for acceptance destroys the or an indorser receives notice of a qualified
same, or refuses within twenty-four hours after acceptance, he must, within a reasonable time,
such delivery or within such other period as the express his dissent to the holder or he will be
holder may allow, to return the bill accepted or deemed to have assented thereto.
non-accepted to the holder, he will be deemed to
However, acceptance is presumed to be un
have accepted the same."
qualified or absolute.
e) Future Bills
15.06. NOTICE OF DISHONOR
An unconditional promise in writing to
accept a bill before it is drawn is deemed an a) Who should give:
actual acceptance in favor of every person who, (1) holder; (2) agent or representative of
upon the faith thereof, receives the bill for value holder; (3) any party who may be compelled to
(Sec. 135, NIL). pay like indorsers; and (4) agent of any party
who may be compelled ( Sec. 90, NIL).
( A d No. 203i ;
b) Who will benefit: as if the indorser becomes primarily liable in the

1) Given by or on behalf of the holder — inures - sense that the holder need not claim payment
to the benefit of all subsequent holders and from the person primarily liable.
all prior parties who have a right of recourse d) Time to give notice (Secs. 103 and 104 NIL)
against the party to whom it is given.
1) Where parties reside in same place.
2) If the notice is given by the indorser who
may be compelled to pay, such notice inures i (i) If given at the place of business of
to the benefit of the holder and all parties f the person to receive notice, it must
subsequent to the party to whom notice is be given before the close of business
given. hours on the day following.
Examples: M, maker, issued a negotiable (ii) If given at his residence, it must be

note to P, the payee, payable to P or his order. P i given before the usual hours of rest on
indorsed the instrument to A, then A to B, B to 1 the day following.
C, and C to D, the present holder. If M dishonors (iii) If sent by mail, it must be deposited in
the instrument, D may notify C since C may be the post office in time to reach him in
compelled to pay D. C, in turn may notify any usual course on the day following.
person who may be secondarily liable to him,
that is, B, A and P. B may notify A and P and A 2) Where parties reside in different places.
------- may notify^ —-------------------------------------------------f- II) If sent by mail, it must be deposited
If D gave notice of dishonor to P, A, B and > in the post office in time to go by mail
C, the latter (C) need not notify P, A and B again the day following the day of dishonor,
because notice by the holder inures to the benefit I or if there be no mail at a convenient
of all prior parties who have the right of recourse r hour on the last day, by the next mail
against the party to whom it is given. ; thereafter.
On the other hand, if D notified only C but -- (ii) If given otherwise than through the
C, in turn, notified P, A and B, D can already hold ' post office, then within the time that
P, A and B liable because notice by an indorser ; notice would have been received
(C in this case) inures to the benefit of the holder. in due course of mail, if it had been
Additionally, P need not be notified by A and B deposited in the post office within the
anew because the notice given by C inures to the ; time specified in the last subdivision.
benefit of all parties subsequent to the party to :
whom notice is given (P having been given no- - e) 1) When not required, excused or dispensed
tice by C). with
c) Effect (i) After the exercise of reasonable dili

gence, it cannot be given to or does not
Upon valid notice of dishonor, immediate ] reach the parties sought to be charged
right of recourse against the indorser arises. It is (Sec. 112, NIL).
REVIEWER ON COMMERCIAL LAW PART I — NEGOTIABLE i NSTKUMEn T u LAM 69
(Act No. 2031)
2) Not Necessary: Drawer 2) If a foreign bill which was not previous!)

presented for acceptance lias been dishon
(!) Where the drawer and drawee are the ored by non-payment (Sec. 152. NILh
same person;
3) If a stranger to a bill will accept the instru
(ii) When the drawee is a fictitious person ment for honor (Sec. 161, NIL);
or a person not having capacity to con
tract; 4) If the bill will be presented for payment to
acceptor for honor or referee in case of need
(iii) When the drawer is the person to (Sec. 167, NIL)’, and
whom the instrument is presented for
5) When the bill is dishonored by the acceptor
payment;
for honor (Sec. 170, NIL).
(iv) Where the drawer has no right to ex
Note: Without protest of a dishonored foreign
pect or require that the drawee or ac
bill, the drawer and indorser are not liable based on
ceptor will honor the instrument;
the instrument. However, the drawer may still be
(v) Where the drawer has countermanded liable based on contract.
payment.
b) Requisites (Secs. 153 and 154, NIL)
3) Not necessary: Indorser
1) The protest must be made by a notary pub
(i) When the drawee is a fictitious per- lic or any respectable resident of the place
ilIL
-------------- son or person not having capa-city to -----------------------where the bttlis'dishonored;---------------------
contract, and the indorser was aware
2) It must be made in front of two witnesses;
of that fact at the time he indorsed the
instrument; 3) It must be annexed to the bill or must con
tain a copy thereof;
(ii) Where the indorser is the person to
whom the instrument is presented for 4) It must be under the hand and seal of the
payment; notary making the protest;
(iii) Where the instrument was made or ac 5) The protest must specify the following: (i)
time and place of presentment, (ii) the fact
cepted for his accommodation.
that presentment was made and the man
15.07. PROTEST ner thereof, (iii) cause or reason for protest,
Protest is a formal declaration, drawn and signec and (iv) demand was made and the answer
by a notary, that the foreign bill has been presented given, if any, or that the drawee or acceptor
for acceptance or payment and that the acceptance c cannot be found.
payment is refused. 15.08. ACCEPTANCE FOR HONOR (Secs. 161-170)
a) When protest is NECESSARY? a) Acceptance for honor
1) If a foreign bill has been dishonored by 1 It is an undertaking by a stranger to a bill
non-acceotance (Sec. 152, NIL): I after protest for the benefit of any party liable
A ' !
REVIEWER ON COMMERCIAL LAW PART i — NEGOTIABLE INSTRUMENTS LAW 71
(Act No. 2031)
thereon or for the honor of the person for whose b) Requisites for Payment for Honor
account the bill is drawn which acceptance in
ures also to the benefit of all parties subsequent 1) the bill has been dishonored by non-pay
to the persons for whose honor it is accepted, ment;
and conditioned to pay the bill when it becomes 2) it has been protested for non-payment;
due if the original drawee does not pay it. 3) payment supra protest is made by any per
b) Requisites for Acceptance for Honor son, even by a party thereto;
4) the payment is attested by a notarial act of
1) the bill must have been protested for dis
honor which must be appended to the pro
honor by non-acceptance or for better secu
test or form an extension of it;
rity;
5) the notarial act must be based on the
2) the acceptor for honor must be a stranger declaration made by the payor for honor or
and not a party already liable on the instru his agent of his intention to pay the bill for
ment; honor and for whose honor he pays.
3) bill must not be overdue; c) What is the effect of non-compliance with the
4) acceptance for honor must be with the con formalities?
sent of the holder of the instrument. Payment will operate as a mere voluntary
______c) Formal Requisites___________________________ _ payment and the payer will acquire no right to
full reimbursement against the party for whose
1) must be in writing; honor he pays.
2) must indicate that it is an acceptance for
honor; 16. BILLS IN SET (Secs. 178-183}
3) signed by the acceptor for honor; 16.01. BILL IN SET
4) must contain an express or imp] ied promise The only one bill that is composed of several
to pay money; parts, each part being numbered and containing a
reference to the other parts.
5) the accepted bill for honor must be deliv
16.02. PURPOSE
ered to the holder.
Bills in set are usually availed of in cases where
15.09. PAYMENT FOR HONOR (Secs, 171-177} a bill had to be sent to a distant place through some
a) Payment for honor conveyance. If each part is sent by different means of
conveyances, the chance that at least one part of the
Payment made by a person, whether a par set would reach its destination would be greater.
ty to the bill or not, after it has been protested for
non-payment, for the benefit of any party liable 16.03. LIABILITY OF ACCEPTOR
thereon or for the benefit of the person for whose a) The acceptor is bound to accept only one part of
account -it was drawn. a bill. If different parts of the bill are negotiated
REVIEWER ON COMMERCIAL LAW PARI : — .A y , 73
separately and both are holders in due course, 1 17.03. When is a person secondarily liable discharged?
the holder whose title first accrues is considered
Section 120 of the f AL provides that a person
the true owner of the bill. 1 secondarily liable on the instrument is discharged:
b) If he accepts more than one part, he is liable to 1 a) By any act which discharges the instrument;
all the holders of the parts he accepted.
I b) By the intentional cancellation of his signature
16.04. OBLIGATIONS OF TRANSFERORS 1 by the holder;
When the holder indorses two or more parts of 1 c) By the discharge of a prior party;
the bill in set: I d) By a valid tender or payment made by a prior
a) the person shall be liable on every such part; I party;
b) every indorser subsequent to him is liable on e) By a release of the principal debtor unless the
the part he has himself indorsed, as if such parts holder's right of recourse against the party
were separate bills. secondarily liable is expressly reserved;
DISCHARGE § f) By any agreement binding upon the holder to

extend the time of payment or to postpone the
17.01. How may a negotiable instrument be discharged? I holder's right to enforce the instrument unless
______a) By payment in due course by or in behalf of the |ft made with the assent of the party secondarily li-
principal debtor; iI able or unless the right of recourse against such
n party is expressly reserved.
b) By payment in due course by the party accom
#>■
modated, where the instrument is made or S|i
18. CHECKS
accepted for his accommodation;
1
31- 18.01. A check is a bill of exchange drawn on a bank payable
c) By the intentional cancellation thereof by the on demand (Sec. 185, NIL).
holder;
a) A check must be presented for payment within a
d) By any other act which will discharge a simple reasonable time after its issue or the drawer will
contract for the payment of money; be discharged from liability thereon to the extent
e) When the principal debtor becomes the holder of the loss caused by the delay.
of the instrument at or after maturity in his own
b) When check operates as an assignment. A check
right (Sec. 119, NIL). of itself does not operate as an assignment of any
17.02. What is payment in due course? part of the funds to the credit of the drawer with
the bank, and the bank is not liable to the holder
Payment in due course • — payment made at or unless ;and until it-accepts -or certifies the check
after the maturity of the instrument, to the holder (Sec, 189, NIL).
thereof in good faith and without notice that his title
is defective (Sec. 88, NIL).
® *1!S
(Act No. 2031)
18.02. KINDS 1) Effects

a) Cashier's check The crossing of a check relates to the
mode of its presentment for payment.
A bill of exchange drawn by a bank upon it Under Section 72 of the NIL, presentment
self, and is accepted by its issuance. A manager's for payment, to be sufficient, must be made
check is of the same nature, although instead of by the holder or by some person authorized
being signed by the cashier, it is the manager to receive payment on his behalf. Who the
who signs the same for the bank. holder or authorized person is depends
b) Certified check on the instruction stated on the face of the
crossed check (Ibid.).
One drawn by a depositor upon funds to
his credit in a bank which a proper officer of the (i) The check may not be encashed but
bank certifies will be paid when duly presented only deposited in the bank;
for payment. (ii) The check may be negotiated only
once — to one who has an account
1) Certification is equivalent to acceptance
with the bank; and
(Sec,187,NlL).
(iii) The act of crossing serves as a warning
2) Where the holder of a check procures it to
to the holder that the check has been
be accepted or certified, the drawer and
issued for a definite purpose so that
_______________ all indorsers are discharged from liability
he must inquire.jfheitaFTCcetwdTiTr
thereon (Sec. 188, NIL).
check pursuant to that purpose.
3) A check of itself does not operate as an
Memorandum check
assignment of any part of the funds to the
credit of the drawer with the bank, and the In the form of an ordinary check, with
bank is not liable to the holder unless and the word "memorandum," "memo" or "mem"
until it accepts or certifies the check (Sec. written across its face, signifying that the maker
189, NIL). or drawer engages to pay the bona fide holder
absolutely, without any condition concerning
c) Crossed Check
its presentment. Such a check is an evidence of
Done by writing two (2) parallel lines debt against the drawer, and although it may not
diagonally on the left top portion of the checks. be intended to be presented, has the same effect
The crossing is special where -the name of a bank as an ordinary check, and if passed to a third
or a business institution is written between the person, will be valid in his hands like any other
two (2) parallel lines, which means that the check (People v. Nitafan, G.R. No. 75954, Oct. 22,
drawee should pay only with the intervention 1992).
of that company. The crossing is general where
Traveler's checks
the words written between two (2) parallel lines
are "and Co." or "for payee's account only" Instruments purchased from banks, express
(Associated Bank v. CA, 208 SCRA 468). companies, or the like, in various denominations,
which can be used like cash upon second signa

ture by the purchaser. It has the characteristics
of a cashier's check of the issuer. It requires the
signature of the purchaser at the time he buys it PA R T I I
and also at the time he uses it — that is when he
obtains the check from the bank and also at the INSURANCE CODE
time he delivers the same to the establishment
that will be paid thereby (Black's Law Dictionary,
(P.D. No. 1460sas amended)
5th cd., p. 1344).
18.03. STOPPING PAYMENT 1. DEFINITIONS
The drawer has the right to order the drawee 1.01. A Contract of Insurance
to stop payment of a check and this right flows from
An agreement whereby one undertakes for a
the rule that the issuance of a check by itself is not an
consideration to indemnify another against loss,
assignment of funds by the drawee. If a bank pays a
damage or liability arising from an unknown or con
check after it has been notified to stop payment, it pays
tingent event (Sec. 2, par. 2, Insurance Code o f the Philip
on its own responsibility and will not be permitted to
charge the account. pines, hereinafter referred to as 1CP).
The drawer may countermand payment if he has 1.02. A Contract of Suretyship

— — a valid defense against the ho]d^TT>fthe check.Thas; ~ An agreement whereby a party called the surety
countermanding of a check is proper where the payee guarantees the performance by another called the
failed to deliver the goods that he was supposed to principal or obligor of an obligation or undertaking
deliver (Bataan Cigar and Cigarette Factory v. CA, supra). in favor of a third party called the obligee. It shall
be deemed to be an insurance contract if made by a
surety who or which, as such, is doing an insurance
business (Sec. 175 and Sec. 2, par. 3, ICP).
1.03. Doing an insurance or transacting an insurance
business
A person is doing or transacting an insurance
business if he performs any of the following: a)
making or proposing to make as insurer, any insurance
contract; b) making or proposing to make, as surety
any contract of suretyship as a vocation, not as a mere
incident to any other legitimate business of a surety;
c) doing any insurance business like reinsurance and
77
H
REVIEWER ON COMMERCIAL LAW part n — in s u r a n c e c o d e 79
(P.D. No. 1460, as amended)
similar acts; and d) doing or proposing to do any However, if the terms of the contract are clear,
business equivalent to the above (Sec, 2, par, 4, ICP). there is no room for interpretation and the courts are
bound to adhere to the insurance contract although
a) Mutual Insurance Companies the contract may be rather onerous. Courts cannot
An entity owned by the policyholders that make a new contract for the parties where they
caters only to the insurance needs of the same themselves have employed dear and unambiguous
policyholders / members is still engaged in in words.
surance business. These entities are mutual in 2.03. Aleatory
surance companies which have no capital stock
The obligation of the insurer to pay the proceeds
and the contributions of members are the only of the insurance arises only upon the happening of
sources of funds to meet losses and expenses an event which is uncertain, or which is to occur at
(Republic v. Sunlife Ins, Co., G.R. No. 158085, Oct an indeterminate time (Art. 2010, NCC). In a sense,
14, 2005; White Gold Marine Services v. Pioneer however, the contract of insurance is commutative
Ins., G.RNo. 154514, July 28, 2005). because there is still exchange of equivalents — the
amount paid by the insured is deemed the equivalent
2. c h a r a c t e r is t ic s ; of the protection given by the insurer based on the f
insurance contract.
2.01. Insurance as a risk distributing device |
2.04. Contract of Indemnity
The device of insurance serves to distribute the
______ risk of economic loss among as many as possible to The contract of instiranro is a rontrarii-ol
those who are subject to the same kind of risk. By indemnity. It is the basis of all property insurance.
paying a pre-determined amount into a general fund It simply means that the insured who has insurable
out of which payment will be made for an economic interest over a property is only entitled to recover the
loss of a defined type, each member contributes to a amount of actual loss sustained and the burden is
small degree toward compensation for losses suffered upon him to establish the amount of such loss.
by any member of the group. This broad sharing of a) Applicable only to property insurance, except
economic risk is the principle of risk-distribution. creditor insuring the life of his debtor.
2.02. Contract of Adhesion or Fine Print Rule b) Life insurance is not a contract of indemnity.
There is no over insurance in life insurance. There
Insurance is a contract of adhesion considering is over insurance: only in property insurance and
that most of the terms of the contract do not result if this is present, the insurer is only liable up to
from mutual negotiations between the parties as they the extent of the loss.
are prescribed by the insurer in printed form to which
c) Insurance contracts are not wagering contracts
the insured may "adhere" if he chooses but which he
(Sec. 4, ICP).
cannot change. Hence, in case of doubt, the contract
shall be interpreted strictly against, the insurer and 2.05. Uherrimae Tides Contract
liberally in. favor of the insured (Rizal Surety and The contract of insurance is one of perfect good
Insurance Co. v. CA, 336 SCRA12 12000]). faith not for the-insured alone, but equally so for the
I.
-ifcM
Insurer; in fact, It is more so foi we latter since its promises to represent suck clients Its all suits for or
dominant bargaining position car; es with it stricter against them are not insurance contracts (Philippine
responsibility. Health Care Providers, Inc. v. CIR, G.R. No. 167330, Sept.
18,2009).
Insurance policies are traditionally contracts
uberrimae fidae, that is, contracts of utmost good faith. 2) Considered Insurance Business
It requires the parties to the contract of insurance to A contract by which a corporation, in consider
disclose conditions affecting the risk of which he is ation of a stipulated amount, agrees at its own expense
aware, or material fact, which the applicant knows,
to defend a physician against ail suits for damages for
and those, which he ought to know. This doctrine
malpractice is one of insurance, and the corporation
is essential on account of the fact that the full
will be deemed as engaged in the business of insur
circumstances of the subject matter of insurance are,
ance (Philippine Health Care Providers, Inc. v. CIR, G.R.
as a rule, known to the insured only and the insurer,
No. 167330, Sept. 18,2009).
in deciding whether or not to accept a risk, must rely
primarily upon the information supplied to him by
the applicant. PROBLEM:
2.06. Personal contract Q: The P Corporation, a health maintenance organization

(HMO), entered into a health care agreement with Mr.
The law presumes that the insurer considered the A. Under the agreement with the HMO, Mr. A pays
personal qualifications of the insured in approving the HMO a predetermined consideration in exchange
_________ th£insurance..ap-p.licaliQrL__________________________ ---------for-the-hospilal, medical;-and professional services
rendered by the HMD's physician or affiliated
3. ELEMENTS OF INSURANCE physician to him. In case of availment by a member
a) existence of an insurable interest (Secs. 12-14, of the benefits under the agreement, HMD does not
ICP); reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the HMO
b) risk of loss (Sec. 51, par. 9, ICP);
who pays the participating physicians and other
c) assumption of risks (Sec. 2, ICP); health care providers for the services rendered at pre
d) scheme to distribute losses; and agreed rates. The member does not make any such
payment. According to the agreement, a member can
e) payment of premiums (Sec. 77, ICP) (Philamcare take advantage of the bulk of the benefits anytime,
Health Systems, Inc. v. CA, G.R. No. 125678, March e.g., laboratory services, x-ray, routine annual
18, 2002; Gulf Resorts, Inc. v. Phil. Charter Insur physical examination and consultations, vaccine
ance Corp., G.R. No. 156167, May 16, 2005). administration as well as family planning counseling,
Examples: even in the absence of any peril, loss or damage on his
or her part. In case of emergency, the HMO is obliged
1) Not Insurance
to reimburse the member who receives care from a
Contracts of law firm with clients whereby in non-participating physician or hospital. However,
.consideration of periodical payments, the law firm this is only a very minor part of the list of services
REVIEWER ON COMMERCIAL LAW FART II — INSURANCE CODE S3
(P.IJ. No. 1460,. as amended)
available. The assumption of the expense by the HMO insurance claims might be higher than the premiums
is not confined to the happening of a contingency but paid. The amount of premium is calculated on the
includes incidents even -in the absence of illness or basis of assumptions made relative, to the insured.
injury. Can the contract between Mr. A and the HMO
However, assuming that the HMD's commitment
be considered an insurance contract?
to provide medjcai services to its members can be
No. The contract is not an insurance contract. Not all . construed as an. acceptance of the risk that it will shell
the necessary elements of a contract of insurance are out more than the prepaid fees, it still will not qualify
present in HMD's agreements. To begin with, there is as an insurance contract because the HMD's objective
no loss, damage or liability on the part of the member is to provide medical services at reduced cost, not to
that should be indemnified by HMO. In other words, distribute risk like an insurer (Philippine Health Care
there is nothing in agreement that gives rise to a Providers, Inc. v. CIR, G.R. No. 167330, Sept 18,2009).
monetary liability on the part of the member to any
third party-provider of medical services which might 4. PERFECTION
in turn necessitate indemnification from the HMO.
a) An insurance contract is a consensual
The terms "indemnify" or "indemnity" presuppose that
contract and is therefore perfected the moment there
a liability or claim has already been incurred. There is
is a meeting of minds with respect to the object and the
no indemnity precisely because file member merely
cause or consideration (See Arts. 1315,1318 and 1319,
avails of medical services to be paid or already paid in CO. What is being followed in insurance contracts is
advance at a pre-agreed price under the agreements. _________ what is known as the "cognition theory." _______
Indemnity of the member was not the focal point b) Generally, the insured is the one making
of the agreement but the extension of medical services the offer by submitting an application to the insurer
to the member at an affordable cost; the agreement did and the latter accepts the offer by approving the
not partake of the nature of a contract of insurance. application. Thus, mere submission of the application
Although risk is a primary element of an insur without the corresponding approval of Hie policy
ance contract, it is not necessarily true that risk alone does not result in the perfection of the contract of
is sufficient to establish it. Almost anyone who under insurance (Great Pacific Life Assurance Corp. v. CA, 89
takes a contractual obligation always bears a certain SCRA 543; See Exception: Eternal Gardens Memorial
degree of financial risk. Consequently, there is a need
Park v. PhilAmLife, April 9,2008).
to distinguish prepaid service contracts (like those of c) Delivery of Policy
the HMO) from the usual insurance contracts.
Since the contract of insurance is consensual
Indeed, the HMO undertakes a business risk (and not a formal or real contract), delivery of the
when it offers to provide health services: the risk policy is not necessary for its perfection.
that it might fail to earn a reasonable return on its Note: Prof. Agbayani opined that delivery of
investment. But it is not the risk of the type peculiar the p o h ^ is necessary to make file policy binding.
only to insurance companies. Insurance risk, also However, he also said that this requirement of
known as actuarial risk, is the risk that the cost of delivery is satisfied if the parties intention is to be
REVIEWER ON COMMERCIAL LAW !;•. ET C — INSURANCE COPE 85
{P.D, No. a460, as amended)
bound by the insurance. In effect even under this from .-: iru."xr.v 'Enriquez v. Sun Life Assurance Co. of
t y
view, mere consent is enough to bind the parties. Canadc. 41 PM 269; See also Sec. 79[a]>.
d) Delay in Approval of Policy DBF rxcendec ? loan in favor of JD secured by a
real estate mortgage. One of the requirements of
Mere delay in acceptance of the insurance
DBF was for. JD to obtain a Mortgage Redemption
application will not result in a binding contract. Court
Insurance with DBF MRI Pool, hence, JD filed the
cannot impose upon the parties a contract if they did
corresponding application. Although JD was more
not consent However, in proper cases, the insurer than 60 years of age at that time, DBF accepted the
may be liable for tort. application for the Pool without disclosing to JD the
N ote: See exceptional case of Eternal Gardens fact that it is authorized to accept an application for
Memorial P$rk Corp. v. PM. American Life Ins. Corp., the Pool only if the applicant is not more than 60 years.
G.R. No. 166245, April 9, 2008, where there is a prior When the loan was released, DBF already deducted
agreement fixing the date of effectivity, that is, one the premium from the loan proceeds The premium
year starting from the party's purchase of a memorial was credited to the savings account of DBF and DBF
MRI Pool was advised accordingly. No approval of
lot on installment from the memorial park.
the insurance application had been received by JD
as of said date. JD died of cardiac arrest twenty days
PROBLEMS,* thereafter. When the beneficiaries tried to recover
from DBF MRI Fobl, the latter refused to pay. The
1. On Sept. 24, 2002, KC applied for a life insurance
beneficiaries then sued DBP MRI Pool and DBP itself.
policy with SLInsurmce Company, KC submitted...the..
Will the action prosper?
application to the branch manager of SL and paid the
required premium. The manager then forwarded the The action against DBP MRI Pool for non-payment of
application to the head office for approval. On Nov. the proceeds of the insurance will not prosper but the
26, 2002, SL's head office sent a notice of acceptance action against DBP will prosper.
to KC. However, KC died before receiving the notice The power to approve the insurance application
of acceptance. KC's heirs now want to recover rests with DBF MRI Pool Since the Pool did not
the premium that was paid. Can they recover the approve the application, no insurance contract was
premium? perfected. The fact that the premium was deducted
A: Yes, the heirs may recover the premium because no from the loan proceeds is not material because it
does not appear that the Pool accepted the premium
contract of insurance was perfected in this case. Article
payment. Hence, there is no contractual obligation to
1319 of the Civil Code provides that acceptance of an
pay the insurance proceeds.
offer by letter does not bind the offerer except from
the time it came to his knowledge. In this case, KC did However, the claim against DBP should prosper.
not receive the letter of acceptance, hence, the contract DBP was wearing two hats in the transactions — as
was never perfected and the obligation of the insurer a lender and as an insurance agent. As an insurance
which was supposed to be covered by the premium agent, DBP made JD go through the motion of
did not materialize. Consequently, the insurer is applying for an insurance and led him to believe that
.bound to return the consideration that it received all the requirements were fulfilled. JD was also made
to believe that the approval is already forthcoming f) The sixty (60 )-day peri od mar he ex tend ed *«>vox ■
although in truth, no such approval can be expe •-^ written approval of the Insurance Commission,
because the authority of DBF is to accept an applies .a and
only if the applicant is less than 60 years old. Under g) The written approval of the Insurance Com
the Civil Code, an agent is liable to third per:, v a mission is dispensed with upon the certification
(like JD's beneficiaries) if they are unaware of the
of the president, vice-president or general
limit of the authority of the agent and they have h -:e-;
manager of the insurer that the risk involved, the
deceived by the non-disclosure thereof by the agent.
values of such risks and premium therefor, have
However, DBF is not liable for the entire value of the
not as yet been determined or established and
insurance policy because the loss of such amount is
speculative in nature. To assume that were it not for the extension or renewal is not contrary to or is
DBF's concealment of the limits of its authority, Dans not for the purpose of violating the ICP or any
would have secured an insurance coverage from rule (Ins. Memo. Circ. No. 3-75).
another company is highly speculative (Development
4.02. THE POLICY
Bank of the Philippines v. CA, 231 SCRA 370).
a) Policy of Insurance
4.01. COVER NOTES
It is a written instrument where the terms
Persons who wish to be insured may get protec and conditions of the contract of insurance are
tion before the perfection of the insurance contract —
set forth (Sec. 49, ICP).
notice of approval of the application — by securing a
--------- cover note. The cover note issued by thefirtsutrer shall - The policy is not necessary for the perfection
be deemed an insurance contract as contemplated of the contract. However, the law provides that
under Section 1(1) of the ICP subject to the following no policy of insurance shall be issued or delivered
rules (Sec. 52, ICP): unless in the form previously approved by the
a) The cover note shall be issued or renewed only Insurance Commission (Sec. 226, ICP).
upon prior approval of the Insurance Commis The Code does not provide for prescribed
sion; forms but requires certain provisions to be
b) The cover note shall be valid and binding not included in the policy (Secs. 227-229, ICP).
more than sixty (60) days from the date of its
b) Basic Contents of a Policy (Sea 51, IC P)
issuance;
c) No separate premium (separate from the policy 1) parties;
or main contract) is required for the cover note 2) amount of insurance, except in open or run
(Pacific Timber Export Corp. v. CA, 112 SCRA 199); ning policies;
d) The cover note may be cancelled by either party 3) rate of premium;
upon prior notice to the other of at least seven (7)
y • x days; 4) property or life insured;
e) The policy should be issued within sixty (60) 5) interest of the insured in the property if he
days after the issuance of the cover note; is not the absolute owner;
risk insured agaii fid prior notice to the insured, ana lb; any oi
7) the period during which the insurance • c the following grounds:
continue. (i) non-payment of premium;
c) Rider (ii) conviction of a crime out of acts in
creasing the hazard insured against;
An attachment to an insurance policy . .-A
modifies the conditions of the policy by expand (iii) fraud or material misrepresentation;
ing or restricting its benefits or excluding cer (iv) willful or reckless acts or omissions
tain conditions from the coverage (Black's Law increasing the risk insured against;
Dictionary, 5th ed., p. 1189).
(v) physical changes in the property
1) Riders, together with other attachments to insured making it uninsurable; and
the policy like clause, warranty or endor (vi) determination by the Insurance Com
sements, are not binding on the insured missioner that the policy would vio
unless the descriptive title or name thereof late the Insurance Code.
is mentioned and written on the blank
spaces provided in the policy (Sec. 50, ICP); 2) Requisites fo r Cancellation (Sec. 65, ICP)
2) Riders and the like shall be countersigned (i) prior notice of cancellation to insured;
by the insured or owner unless he was the (ii)__notice must be based on the occurrence
___ _______one who applied for the rider, clause, war- ___________ after effective date of the policy of one
ranty, etc. (Sec. 50, ICP); or more of the grounds mentioned;
3) When the requirements for a rider are com (iii) notice must be in writing, mailed or
plied with (including clause, warranty, or delivered to the insured at the address
endorsement), it is considered part of the shown in the policy; and
policy. Thus, a rider containing an "auto (iv) notice must state the grounds relied
matic increase clause" — one that increases upon provided in Section 64 of the
the coverage subject to the attainment of a Insurance Code and upon request
certain age of the insured — is not a sepa of insured, to furnish facts on which
rate contract. It is part of the original policy cancellation is based (Sec. 65, ICP;
which is in the nature of a conditional ob Philamcare Health Systems v. CA, G.R.
ligation (Commissioner o f Internal Revenue No. 125678, March 18,2002).
v, Lincoln Philippine Life Insurance Company,
e) Kinds of Policies
G.R. No. 119176, March 19, 2002).
Property insurance policies are classified
d) Cancellation of NON-LIFE Policy
into:
1) Grounds (Sec. 64, IC P)
1) open policy — value of thing insured is not
Cancellation by the insurer of an in agreed upon, but left to be ascertained at
surance policy other than life requires: (a) time of loss (Sec. 60);
2} valued policy —•definite '.-aiuatior. ig agreed be typewritten (Sec. 50, Iasi paragraph, ICP)
by both parties,, and written on the face of but the law prescribes the contents of such
poliq/ (Sec. 61); and policy (Sec. 228, ICP); and
3} running policy — contemplates successive 3) industrial life — a form of life insurance
insurances and which provides that the under which the premiums are payable
subject of the policy may from time to time either monthly or oftener, if the face amount
be defined (Sec. 62). of insurance provided in any policy is not
more than five hundred times that of the
Life insurance policies are always valued
current statutory minimum daily wage
policies.
in the City of Manila and if the words
f) Reinstatement of the Policy "industrial" policy are printed upon the
policy as part of the descriptive matter (Sec.
The stipulation in a life insurance policy
229, ICP).
giving the insured the privilege to reinstate
it upon written application does not give the b) Non-life insurance
insured absolute right to such reinstatement by 1) Marine (Secs. 99-166, ICP);
the mere filing of an application. The insurer
has the right to deny the reinstatement. After 2) Fire (Secs. 167-173, ICP); and
the death of the insured, the insurance company 3) Casualty (Sec. 174, ICP).
cannot be compelled to entertain an application *1
c) Contract of Suretyship (Secs, 175=173}--------------
---------------- :— for reinstatement of the policy because ~the~
conditions precedent to reinstatement can no
6. PARTIES TO INSURANCE CONTRACT
longer be determined and satisfied (Lalican v. The
Insular Life Assurance Co., Ltd., G.R. No. 183526, 6.01. Insurer
Aug. 25,2009). The person who undertakes to indemnify
another.
5. TYPES OF INSURANCE CONTRACTS UNDER THE SCP
a) Insurers may be individuals, partnerships, asso
a) Life insurance ciations or corporations who are duty authorized
1) Individual life — insurance on human lives by the Insurance Commission to engage in
and insurance appertaining thereto or con insurance business (Secs. 184-187, ICP).
nected therewith (Sec. 179, ICP); b) Insurance Corporation
2) Group life — a blanket policy covering a Corporations formed or organized to save
number of individuals. Its most common any person or persons or other corporations
form is an insurance that provides life or harmless from loss, damage, or liability aris
health insurance coverage for the employ ing from any unknown or future or contingent
ees of a single employer (See Pineda v. CA, event, or to indemnify or to compensate any
226 SCRA 754, 45 SCAD 30 [1993]). The person or persons or other corporations for any
policy need not be in printed form and may a - such loss, damage, or liability, or to guarantee
the performance of or compliance with contrac or subjects, with whom the Philippines is at war.
tual obligations or the pavment of debt of others With respect to corporations, the nationality
(Sec. 185, 1CP). is determined by the controlling stockholders
1) It must have sufficient capital and assets irrespective of the place of incorporation
required under the Insurance Code and (Pilipinas Cia de Seguras v. Chrisiern Henefeld and
the pertinent regulations issued by the Co., 89 Phil. 54 [1951]). The property insurance
Commission (Sec. 186, ICP). entered into before the war automatically
loses its binding effect the moment the insurer
2) It must have a certificate of authority to
operate issued by the Insurance Com becomes a public enemy (Ibid.).
mission which should be renewed every b) Minors can no longer enter into insurance
year (Sec. 187, ICP). contracts. The exception under the Insurance
c) Foreign insurance corporations Code is no longer controlling because the age of
majority is now 18 years (R.A. No. 6809).
They maybe authorized by the Commission
to engage in insurance business in the Philip c) Married women can enter into insurance con
pines. The requirements, among others, include: tracts without the assistance of their husbands
(R.A. No. 7192).
1) appointment of a resident of the Philippines
as general agent on whom any notice or Beneficiary
proof of loss may be served and on whom
------- gerson-designated4Q-r€€ewe-^pgQ€eeds-of-poli€y-
summons other processes may be served;
when risk attaches.
2) It must possess paid-up unimpaired assets
or capital and reserve not less than that a) Designation of the beneficiary
required of domestic corporation; 1) When one insures his own life, he may des
3) It must deposit for the benefit and security ignate any person as the beneficiary, wheth
of policyholders, securities satisfactory to er or not the beneficiary has an insurable
the Commission; and interest in the life of the insured.
4) Its investments should not exceed 20% of Exceptions: Persons specified in
the net worth of the foreign corporation or Article 739 (in re Art. 2012) of the Civil Code
20% of the capital of the registered enter cannot be designated: (a) those made bet
prise. ween persons who were guilty of adultery
6.02. Insured or concubinage at the time of donation; (b)
those made between persons found guilty of
The person with capacity to contract and having the same criminal offense, in consideration
an insurable interest in the life or property of the thereof; (c) those made to a public officer
insured; and or his wife, descendants or ascendants by
a) A public enemy may not be insured (Sec. 7, ICP). reason of his office. In par. (a), conviction is
A public enemy is a nation, including its citizens not a condition precedent.
94 REVIEWER ON COMMERCIAL LAW PART II — INSURANCE CODE 95
The reason tor the apr cation of Ar (Hi) If the insured refuses to pay the pre
ticle 739 is that in essence, r :fe insurance miums, the designated irrevocable
policy is no different from a ~onation inso beneficiary may continue the policy by
far as the beneficiary is concerned. Both are paying premiums that are due.
founded on liberality. A beneficiary is like 5) If premiums are paid out of the conjugal
a donee because from the premiums of the funds, the proceeds are considered con
policy which the insured pays out of liberal jugal. If the beneficiary is other than the
ity, the beneficiary will receive the proceeds insured's estate, the source of premiums
of the insurance (The Insular Life Assurance would not be relevant (Del Val v. Del Val, 29
Co. v. Ebrado, 80 SCR A 181 [1977]). Phil. 534; BPI v. Posadas, 56 Phil 215).
Note, however, that the designation 6) If the insured or beneficiary is a minor,
of persons mentioned in Article 739 is void and the amount involved does not exceed
but the policy is binding. The estate will get P50,000.00, the father, in the absence of a
the proceeds. judicial guardian, or in his absence or inca
pacity, the mother, may exercise the minor's
2) If a person will insure the life of another rights under the policy, without the need of
payable to himself, he must have insurable a court authority or a bond (Sec. 180, ICP;
interest on the life of the person whose life Art. 225, PC).
he is insuring. __________ 7) The designation of the illegitimate chil-
3) In property insurance, the beneficiary must dren as beneficiaries in the deceased
have insurable interest on the property. father's insurance policy is valid because
no legal proscription exists in naming
4) The designation is revocable unless the as beneficiaries the children of illicit
right to revoke is expressly waived in the relationships by the insured (Heirs o f Loreto
policy (Sec. 11, ICP). Note: Section 64 of the Maramag v. Maramag, G.R. No. 181132, June
Family Code, allows the innocent spouse to 5, 2009).
revoke the designation of the other spouse
as irrevocable beneficiary after legal sepa INSURABLE INTEREST
ration. 7.01. Basic Concepts
(i) The insured cannot assign the policy a) Life Insurance
if the designation of the beneficiary
Every person has an insurable interest in
is irrevocable. The irrevocable benefi
the life and health:
ciary has a vested right.
1) of himself, of his spouse, and of his chil
(ii) If there is no waiver of the right to dren;
revoke under Section 181, assignment
2) of any person on whom he depends wholly
of the policy may be deemed as
or in part for education or support, or in
implied revocation.
whom he has a pecuniary interest;
3) of any person under a legal obligation to The law does not distinguish between a married child,
him for the payment of money, or respect or a minor child. Besides, the obligation to support
ing property or services, of which death or under the Family Code remains even if one reaches
illness might delay or prevent the perfor majority age.
mance; and
3. Mr. A insured the life of his wife Mrs. B. Later, they
4) of any person upon whose life any estate were legally separated pursuant to a judgment of a
or interest vested in him depends (Sec. 10, court, a) B dies after the legal separation, can Mr. A
1CP). recover? b) Will your answer be the same if Mr. A
insured the life of B when they were already legally
N otes; (i) In general, the test is whether or
separated?
not the person is interested in the preservation of
the insured life despite the insurance. A: a) A can recover because he has insurable interest
over the life of B at the time he obtained the
(ii) In paragraph (a) of Section 10, mere
insurance. One has insurable interest over the
relationship is sufficient while the rest (pars, b,
life of one's wife (Sec. 10, ICP).
c, and d) requires pecuniary interest. Thus, the
interest of the creditor over the life of the debtor b) My answer would be the same. A decree of
ceases upon full payment. legal separation does not remove the insurable
interest of a spouse over the other. Section 10 of
PROBLEMS; _______ __________ the Insurance Code does not distinguish._______
1. On July 14, 1985, X, a homosexual, took an insurance 4. On May 12, 2002, Mr. X insured the life of his debtor,
policy on the life of his boyfriend, Y. In the insurance Mr. Y, for P100,000.00 for a period of one year. At that
application, X misrepresented that Y was in perfect time he took the policy, Mr. Y owes him P I00,000.00
health although he knew all the time that Y was payable on May 12,2003. Mr. Y paid his debt to Mr. X
afflicted with AIDS. On Oct. 18,1987, Y died in a motor in full on March 1, 2003. Mr. Y died on May 10, 2003.
accident. Shortly thereafter, X filed his insurance Can Mr. X recover the insurance proceeds? Can the
claim. Should the insurer pay? Reasons. heirs of Mr. Y recover from the insurer?
A; The insurer has no obligation to pay. A person has A: Mr. X cannot recover because he has no insurable
insurable interest over the life of another only if he has interest at the time of Mr. Y's death because the
pecuniary interest over the life of such person except amount owed to him was fully paid. Neither can
if the person insured is his spouse or child. Friendship the heirs of Y recover because there is no privity of
alone is not the insurable interest contemplated in life contract between them and the insurer.
insurance.
b) In what does insurable interest in property
2. Can a parent insure the life of his son who is no longer consist?
a minor and who is now married?
1) Insurable interest in property is any inter
A; YES, Section 10 of the Insurance Code provides that est therein, or liability in respect thereof,
one has insurable interest over the life of his children. and it may consist in an existing interest.
an inchoate interest founded on an existing 2 Is mere hope or expectancy insurable?

interest or any expectancy coupled with an A: NO. In order for hope or expectancy to be incurable,
existing interest (Secs. 13 and 14, ICP). it must be coupled with existing interest out of which
2) In general, a person has an insurable inter the expectancy arises. It must be founded on ait actual
est in the property, if he derives pecuniary right to the thing or upon a valid contract.
benefit or advantage from its preservation 3. Can a depositary insure the things deposited to him?
or would suffer pecuniary loss, damage or
prejudice by its destruction whether he has A: YES. A depositary is responsible for the property
or has no title in, or lien upon, or possession deposited to him and he will be liable in case of
of the property (Filipino Merchants insurance damage or destruction to the thing. Hence, he has
Co., Inc. v. CA, 179 SCRA 638). insurable interest over the thing deposited because
he will be damnified by its loss.
Hence, pecuniary interest over the
property is always necessary. 4) A person having a mere right of possession
3) Existence of insurable interest is a matter of of the property may insure its full value in
public policy. Hence, the principle of estop his own name, even when he is not respon
pel cannot be invoked. sible for its safekeeping and even if he is not
even paying rentals. He stands to benefit
PROBLEMS: ______________ ___________________ _ from its continued existence or to be preju
diced by its destruction. The insurance on
1. A piece of machinery was shipped to Mr. Pablo on
such interest would not be a wager, wheth
the basis of C & F, Manila. Mr. Pablo insured said
er the interest was an ownership, in or a
machinery with the Talaga Merchandise Insurance
right to possession of, the property or sim
Corp. (TAMIC) for loss or damage during the voyage.
ply an advantage of a pecuniary character
The vessel sank en route to Manila. Mr. Pablo then
having legal basis but depended upon the
filed a claim with TAMIC which was denied for
continued existence of the subject (Ang Ka
the reason that prior to delivery, Mr. Pablo had no
Yu v. Phoenix Assurance Co. Ltd., CA-G.R. No.
insurable interest. Decide the case.
27881-R, Sept 28, 1961, 1 CAR2s 704; Har-
A: The case should be decided in favor of Pablo. vardian Colleges of San Fernando v. Country
Although delivery is a mode of transferring owner Bankers Ins. Corp., CA-G.R. CV No. 03771,
ship in a contract of sale, it does not mean that the Jan. 6,1986,1 CARA 1).
buyer had no existing insurable interest over the
5) An heir has no insurable interest over pro
goods that he purchased. A purchaser of goods
perties that he will inherit. The execution of
under a perfected contract of sale already acquires
interest on the property pending delivery. Hence,
a last will and testament does not vest to
an heir, even a compulsory heir, insurable
Pablo had insurable interest over the machinery even
before actual receipt of the goods (Filipino Merchants interest over the property that he will
Insurance Co. v, CA, 179 SCRA 638). inherit as stipulated in the will.
100 REVIEWER ON COMMERCIAL LAW PART II — INSURANCE CODE
6) An owner whose property was levied upon In life insurance, the beneficiary need not have
by a judgment creditor and who lost the insurable interest over the life of the insured if
same in an execution sale retains insurable the insured himself secured the policy. However,
interest thereon during the redemption pe if the life insurance was obtained by the benefi
riod. He is still the owner of the property ciary, the latter must have insurable interest over
during that period. However, the buyer the life of the insured.
during the auction sale also has an inter
est over the subject property subject to the PROBLEMS:
condition that the property will not be re
1. Does the buyer of the goods, after the perfection of the
deemed. Hence, the purchaser acquires in
contract and before delivery of the articles purchased,
surable interest at the time of the purchase.
have insurable interest in the goods?
7.02. Insurable interest in property vs. insurable interest
in life A: YES. A buyer of goods has an insurable interest in
the goods purchased after perfection of the contract
a) As to extent' and before delivery of the goods. The shipping
Insurable interest in life is unlimited (save arrangement, F.O.B., C.I.F., or C.F. is immaterial in
in life insurance effected by a creditor on the life determining whether the vendee has an insurable
of the debtor); insurable interest in property is interest or not in the goods in transit. The perfected
limited to the actual value of the interest there- contract of sale, even without delivery, vests in the
-------------------- 0m -------:----------------------------:------- ;---------------------------:------- — ~------- vendee an equitable title, an existing interest over the
b) As to time when insurable interest must exist goods sufficient to be the subject of insurance.
In life insurance, it is enough that the insur 2. "N " owns a condominium unit presently insured with
able interest exists at the time the policy takes Holy Insurance Company for PI Million. "N" later
effect and need not exist at the time of the loss; sells the condominium unit to "O." Somehow, "O"
while in property insurance, it is necessary that fails to obtain the transfer of the insurance policy to
the insurable interest exists when the insurance his name from "N ." Subsequently, a fire of unknown
takes effect and when the loss occurs, but need origin destroys completely the condominium unit.
not exist in the meantime. Who may collect the insurance?
c) As to expectation of benefit to be derived A: Both "N " and "O" may not collect from the insurer.
In property insurance, the insured must have
In life insurance, the expectation of the
insurable interest over the property at the time of the
benefit to be derived need not have any legal
perfection of the contract and at the time of the loss.
basis; in property insurance, there must be a
"N " cannot recover because he had already sold the
legal basis.
condominium unit at the time of the loss. Although
d) As to the beneficiary's interest "N " had insurable interest over the unit at the time of
The beneficiary must have insurable inter the inception of the policy, he did not have insurable
est over the thing insured in property insurance. interest on the insured property at the time of the loss.
102 REVIEWER ON COMMERCIAL LAW PARTII — INSURANCE CODE 103
"O" cannot also recover because he is not a party riage with the insured will not prevent recovery on
to the insurance contract. The transfer of the property the policy.
does not include the transfer of the insurance policy.
3. In a civil suit, the court ordered Benjie to pay Nat 7.03. Insurable interest of mortgagor and mortgagee over
P500,000.00. To execute the judgment, the sheriff mortgaged property
levied upon Benjie's registered property (a parcel of Both the mortgagor and mortgagee have an
land and the building thereon), and sold the same insurable interest in the property mortgaged and
at a public auction to Nat, the highest bidder. The this interest is separate and distinct from the other.
latter, on March 18,1992, registered with the register They may take out separate policies at the same or at
of deeds the certificate of sale issued to him by the
separate times (Rizal Commercial Banking Corporation
sheriff. Meanwhile, on Jan. 27, 1993, Benjie insured
v. CA, 289 SCRA 292 [19981).
with. Garapal Insurance for PI Million the same
building that was sold at public auction to Nat. Benjie a) Mortgagor
failed to redeem the property by March 18, 1993.
The mortgagor of property, as owner, has
On March 19, 1993, a fire razed the building to the
an insurable interest to the extent of its value,
ground. Garapal Insurance refused to make good
even though the mortgage debt equals such
its obligation to Benjie under the insurance contract.
value. The reason is that the loss or destruction
Is Garapal Insurance legally justified in refusing
of the property insured will not extinguish his
payment to Benjie?
mortgage debt. The Supreme Court explained in
Armando Geagonia v. Court o f Appeals (24JF 5CKA
payment to Benjie. Although Benjie had insurable 152,161 [1995]) that when the mortgagor secures
interest over the insured property when he took out the insurance, the mortgagee may he made the
an insurance policy thereon, he lost his insurable beneficial payee in the following ways:
interest when he failed to redeem the property on
March 18,1993. Hence, Benjie did not have insurable 1) He may become the assignee of the policy
interest over the property at the time of the loss. The with the consent of the insurer;
Insurance Code requires in property insurance that 2) He may be the pledgee without the consent
he has insurable interest at the time of the issuance of of the insurer;
the policy and also at the time when the loss occurs.
3) The original policy may contain a mortgage
4. Can there be recovery of the insurance proceeds clause;
where the husband took out a life insurance on the
life of his wife who (wife) died a few days after the 4) A rider making the policy payable to the
decree of their annulment became final? mortgagee as his interest may appear, may
be attached (loss payable clause);
A: Yes, in life insurance, it is only necessary that the
person who took out the insurance on the life of 5) A standard mortgage clause containing a
another has insurable interest on such life at the time collateral independent contract between
the policy takes effect. He need not have insurable the mortgagor and the insurer, may be
interest thereafter. Thus, the annulment of the mar- attached;
6) The policy, though by its terms is absolutely the contract itself. This kind of policy covers
payable to the mortgagor, may have been only such interest as the mortgagee has at the
procured by a mortgagor under a contract issuance of the policy (Armando Geagonia v. CA,
duty to insure for the mortgagee's benefit,
in which case the mortgagee acquires an
equitable lien upon the proceeds.
ihCROBLEM;
b) Mortgagee
To secure the payment of a loan of P3M, D mortgaged
The mortgagee as such has an insurable his house worth P5M in favor of C, the creditor, a)
interest in the mortgaged property to the extent Who has an insurable interest in the house? What
of the debt secured; such interest continues until is the extent of said insurable interest? b) Will an
the mortgage debt is extinguished. insurance of said house procured by D in his own
A mortgagee may procure a policy as a con name and for his own benefit inure to the benefit of
tracting party in accordance with the terms of C? c) If C insures the house for P3M, in his own name
an agreement by which the mortgagor is to pay and for his own interest only and the loss occurs after
the premiums upon such insurance. It has been the full payment of the loan, who can recover under
noted, however, that although the mortgagee is the policy?
himself the insured, as where he applies for a
a) Both the mortgagor and the mortgagee have
policy, fully informs the authorized agent of his
insurable interest in the house. D's insurable
intereslwpays-pimmimn^^ interest will still be up to the value of the house
on the assurance that it insures him, the policy
despite the mortgage thereon, simply because
is in fact in the form used to insure a mortgagor
the loss of the house will not extinguish the loan.
with "loss payable clause" (Armando Geagonia v.
C's insurable interest is P3M that is the extent he
CA, 241 SCRA 152,161 [1995]).
shall be damnified by the loss of the house (Secs.
c) Standard or union mortgage clause vs. open or 8 and 17, ICP).
loss payable mortgage clause
b) NO. An insurance procured by either the mort
In a standard or union mortgage clause, the gagor or mortgagee will not inure to the benefit
subsequent acts of the mortgagor cannot affect of the other. Insurance is a personal contract
the rights of the mortgagee. While in an open and just like any Other contract it takes effect
or loss payable mortgage clause, the mortgagor only between the contracting parties, their heirs,
does not cease to be a party to the contract (Secs. successors and assignees, unless it contains
8 and 9, ICP). a stipulation in favor of a third person (Art.
In the policy obtained by the mortgagor with 1311, NCC and Sec. 53, ICP). However, while an
loss payable clause in favor of the mortgagee as insurance procured by a mortgagor does not
his interest may appear, the mortgagee is only a inure for the benefit of the mortgagee, the latter
beneficiary under the contract, and recognized has a lien on the proceeds of the policy under
as such by the insurer but not made a party to Article 2127, NCC.
REVIEWER ON COMMERCIAL LAW PART II — INSURANCE CODE 107
c) Neither D nor C may recover under the policy, be parties to the contract. Consequently, if DBF
C cannot recover because the law (Sec. 19, ICP) (mortgagee) already recovered the total amount
requires that insurable interest in property of the obligation by resorting to foreclosure, it
must exist when the insurance takes effect and can no longer recover under the group insurance
when the loss occurs. While C had an insurable policy. However, the heirs of the mortgagors can
interest in the house when the insurance took recover because the mortgagors did not cease to
effect, he did not have the interest when the loss be parties to the contract.
occurred, the loan having been paid in full. D
c) Where the mortgagor takes out an insurance
cannot recover because he was not a party to the
over the mortgaged property and endorsed the
contract. -
same to the mortgagee, Section S3 of the Insur
7.04. When interest retained by mortgagor ance Code ordains that the insurance proceeds
of the endorsed policy shall be applied exclu
a) Section 8 of the Insurance Code provides that sively to the proper interest of the person for
''unless the policy otherwise provides, where a whose benefit it was made — the mortgagee.
mortgagor of property effects insurance in his Hence, creditors of the mortgagor cannot gar
own name providing that the loss shall be pay nish or levy upon the proceeds up to the extent
able to the mortgagee, or assigns a policy of in
of the debt to the mortgagee (Rizal Commercial
surance to a mortgagee, the insurance is deemed Banking Corporation v. CA, 289 SCRA 292 [1998]).
to be upon the interest of the mortagor, who
does not cease to be a party to the original con- 7.05. Insurable interest of beneficiary and assignee of the
tract and any act of his, prior to the loss, whicFT policy
would otherwise avoid the insurance, will have a) Property Insurance
the same effect, although the property is in the
hands of the mortgagee, but any act which, un The beneficiary and the assignee must have
der the contract of insurance, is to be performed insurable interest. Consent of the insurer must
by the mortgagor, may be performed by the be secured before the assignment.
mortgagee therein named, with the same effect b) Life Insurance
as if it had been performed by the mortgagor."
If the insured takes the insurance on his
b) The above-quoted provision was applied in Great own life, he can designate anybody who does
Pacific Life Assurance Corp. v. Court of Appeals (316 not have insurable interest. If a third person
SCRA 677). The case involved a group insurance takes the policy, the beneficiary must have insur
policy known as a mortgage redemption able interest. In case of assignment, the assignee
. insurance whereby the insurer insured the lives need not have insurable interest.
of the eligible housing loan mortgagors of the
Dev. Bank of the Phils. The mortgagors paid the
PROBLEMS:
premiums but the losses were made payable
to the mortgagee, DBF. Hence, the insurance 1. Spouses NC and SC leased the property of CKS. The
policies were held to be on the mortgagors' lease contract provides that the lessees (the spouses)
interests and that the mortgagors continue to shall not insure against fire the goods, placed at the
108 REVIEWER ON COMMERCIAL LAW PART II ~ INSURANCE CODE 109
leased premises without the consent of CKS and if policy, hewould have been allowed to recover only
an insurance is obtained ’without the consent of CKS, P50,000.00, the extent of his insurable interest.
the policy is deemed assigned and transferred to the
lessor (CKS). The spouses insured their goods without 7.06. Expectancy not insurable unless coupled with an
the consent of CKS. On the day the lease contract was interest in the thing from which it shall arise
to expire, fire broke out inside the leased premises
destroying the goods of the spouses. CKS learned Insurable interest in property need not be an
about the insurance and promptly demanded that the existing interest. It may exist merely in an inchoate
insurer pay the proceeds directly to CKS. The insurer interest or as an expectancy. However, the expectancy
refused to pay. Does CKS have the right to demand must be coupled with an existing interest in that out
payment of the proceeds? of which such expectancy arises. Example: An owner
of a business can insure against a contingency which
A: No. CKS cannot demand payment of the insurance may cause loss of profits resulting from the cessation
proceeds from the insurer. CKS cannot be validly a or interruption of his business (See Sec. 14, ICP).
beneficiary of the fire insurance policy because he
did not have insurable interest over the goods. The 7.07. Effect of change of interest in thing insured
automatic assignment of the policy to CKS under unaccompanied by a change of interest in insurance.
the provision of the lease contract is void for being Exceptions. .
contrary to law and/or public policy (Cha v. CA, 277 a) General Rule: A change of interest in any part of a
SCRA 690 [1997]).2 thing insured unaccompanied by a correspond-*1
ing change of interest in the insurance suspends
2. Blanco took out a PI Million life insurance policy
the insurance to an equivalent extent, until the
naming his friend and creditor, Montenegro as his
interest in the thing and the interest in the insur
beneficiary. When Blanco died, his outstanding loan
ance are vested in the same person (Sec. 20, ICP).
to Montenegro was only P50,000.00. Blanco's executor
contended that only P50,000.00 out of the insurance Exceptions:
proceeds should be paid to Montenegro and the
1) in life, health and accident insurance (Sec.
balance of P950,000.00 should be paid to Blanco's
20, ICP);
estate. Is the executor's contention correct? Reason
out your answer. 2) a change of interest in the thing insured
after the occurrence of an injury which
A: The executor's contention is incorrect. The insured results in a loss (Sec. 21, ICP);
took out an insurance policy over his own life. Hence,
he can designate any person as his beneficiary and 3) a change of interest in one or more of
such beneficiary can recover the full amount. The several distinct things, separately insured
conclusion would have been different had it been by one policy (Sec. 22, ICP);
Montenegro who took out the life insurance policy 4) a change of interest by will or succession on
on the life of Blanco because a creditor's insurable the death of the insured (Sec. 23, ICP);
interest extends only up to the amount of the credit.
5) a transfer of interest by one of several part
Thus, had it been Montenegro who secured the
ners, joint owners, or owners in common,
110 REVIEWER ON COMMERCIAL LAW M E T II — INSURANCE CODE HI
who are jointly insured,- to the others' (Sec, credit or time to pay the premium and consider
24, ICP); the policy binding before actual payment."
However, the petitioner filed a Motion for
6) when a policy is so framed that it will inure Reconsideration and the same was granted by
to the benefit of whomsoever, during the the Supreme Court. On April 4, 2001, the Court
continuance of the risk, may become the reversed its earlier Decision. The April 4, 2001
owner of the interest insured (Sec, 57, ICP). Resolution of the High Court enumerates five (5)
b) When there is an express prohibition against exceptions to the general rule stated in Section
alienation in the policy, in case of alienation, the 77 —■that the Insurance Policy is not valid and
contract of insurance is not merely suspended binding until actual payment of premium:
but avoided (Art. 1306, NCC). Exceptions:
8. RISKS INSURED AGAINST 1) In case of life and industrial life whenever

the grace period provision applies (Sec. 77).
The risk insured against may be any contingency or
unknown event the happening of which will damnify a 2) Where there is an acknowledgment in the
person having insurable interest or will create liability contract or policy of insurance that the pre
mium had already been paid (Sec. 78, ICP).
against him (Sec. 3, ICP). Even fortuitous events may be
insured against. 3) The rule laid down in Makati Tuscany Condo
minium v. Court of Appeals to the effect that
General Rule; A future event is the only event that can ------:--------Section 77 may not apply if the parties have
be covered by an insurance contract. agreed to the payment of the premium in
Exception; A past event may be covered by a marine installments and partial payment has been
insurance — if the loss of the vessel in the past could not made at the time of the loss.
have been known by ordinary means of communication. 4) Where a credit term was agreed upon like
the agreement in UCPB General Insurance,
9. PREMIUM (S e c s . 77 a n d 78, ICP) Inc. v. Masagana Telamart where the insurer
granted a 60-90-day credit term for the pay
Premium is the consideration paid to an insurer for
ment of the premiums despite full aware
undertaking to indemnify the insured against a specified
ness of Section 77. -
peril.
5) Where the parties are barred by estoppel.
9.01. General Rule: No insurance policy issued or
b) Note, however, the rule that where an insurer
renewed is valid and binding until actual payment
■authorizes an insurance agent or broker to de
of the premium. Any agreement to the contrary is
liver a policy to the insured, it is deemed to have
voi & (Sec. 77, ICP)
authorized said agent to receive the premium
v : a) The Supreme Court observed in UCPB General in its behalf (Ibid., citing Section 306, Insurance
Insurance Co., Inc. v. Masagana Telamart, Inc. Code). The insurer is also bound by its agent's
(308 SCRA 259) that "the parties may not agree acknowledgment of receipt of payment of pre
expressly or impliedly on the extension of mium (American Home Assurance Co. v. Chua).
112 REVIEWER ON COMMERCIAL LAW M KT II — INSURANCE CODE 113
9.02- What is the effect of the payment of the premium by } 9,05. Non-Default Options in Life Insurance
a post-dated check? (1) To prevent the lapse of life insurance policy, the
The payment of a premium by a post-dated insured may avail of:
check at a stated maturity subsequent to the loss is ;
a) Grace period, (2) automatic policy loan
insufficient to put the insurance into effect. Payment,
from the policies' cash surrender value, (3)
however, by means of a check or a note, accepted by
application of dividend, arid (4) restate
the insurer, bearing a date prior to the loss, assuming
an availability of the funds thereof, would be sufficient ment clause.
even if it remains unencashed at the time of the loss. b) Reinstatement of a Lapsed Policy of Life
The subsequent effects of encashment would retroact ; Insurance
to the date of the instrument and its acceptance by the
Policy holders in life insurance shall
creditor (Vitug, Pandect on Commercial Law).
have the policy reinstated at any time with
9.03. When the Insured is Entitled to Return of Premiums in three (3) years from the date of default of
Paid . premium payment unless the cash surren
a) If thing insured was never exposed to the risks der value has been duly paid to the insurer
insured against (Sec. 79, ICP); or the extension period has expired. How
ever, there must be (1) proof of insurability,
b) Contract is voidable due to the fraud or misrep
and (2) payment of overdue premiums and
resentation of insurer;
any indebtedness plus interest (Sec. 227[j],
--------- e)---- festtrer-neveHnem r^ SlyiCPf,------- :---------------------- ICF7. '
d) When the insurance is for a definite period and
the insured surrenders his policy before the ter 10. TRANSFER OF POLICY
mination thereof;
U . 10.01. May the policy be transferred without the consent
e) Contract is voidable because of the existence of
of the insurer?
facts of which the insured was ignorant without
his fault; YES in life insurance but NO in property
insurance. Transfer of the life insurance policy even
f) When there is over-insurance (Sec. 82, ICP); and
without the consent of the insured is allowed in
g) When rescission is granted due to the insurer's Section 181 of the Insurance Code.
■ breach of contract.
On the other hand, property insurance cannot be
9.04. Suretyship transferred without the consent of the insurer because
Premium is also necessary in order for the the insurer approved the policy based on the personal
contract of suretyship or bond to be binding. qualification and the insurable interest of the insured.
Exception: where the obligee has accepted the 10.02. What is the effect of the transfer of the property
bond it is binding even if the premium has not been : insurance policy without the consent of the insurer?
paid subject to the right of the insurer to recover the
premium from its principal (Sec. 177, ICP; Phil. Pryce The insurance policy is suspended and will
Assurance Corp. v. CA, 230 SCRA164 [1994]). not be avoided until the interest in the thing and
114 REVIEWER ON COMMERCIAL LAW M K T II — INSURANCE CODE 113
(P.D, No. 1460, as amended)
the interest in the insurance are vested in the same to whether the insurer was in fact prejudiced
person,:. by such untruth or nonfulfillment render the
policy voidable by the insurer. The same may be
11 DEVICES USED FOR ASCERTAINING AND CONTROL - expressed, implied, affirmative, or promissory.
LING RISK AND LOSS d) CONDITION
11.01. What are the four primary concerns of the insurer?
The insurer must also protect himself
a) Correct estimation of risk which enables insurer against fraudulent claims of loss and attempts
to determine if he will approve the policy appli to do by inserting in the policy various condi
cation and if so at what premium rate; tions which take the form of either conditions
precedent or subsequent. For instance, there are
b) Delimitation of the risk;
conditions (subsequent) requiring immediate
c) ' Control of risk to guard against increase of risk; notice of loss or injury and detailed proofs of
•a and: ■-■•
•
• loss within a limited period.
d) Determine if loss occurs and if so, the amount e) EXCEPTIONS
thereof.
Exceptions make more definite the cover
11.02. What are the devices used by the insurer for ascer age indicated by the general description of the
taining and)controlling, risks and loss? risk by excluding certain specified risks that oth
erwise would be included under the general lan-
a) Concealment; b) Representation:
" guage describing the risks assumed.
c) Warranty; d) Condition; and
The burden of proving that the loss was
e) Exception.
caused by an excepted peril rests with the insurer.
a) CONCEALMENT Thus, in Country Banker's Insurance Corporation
A neglect to communicate that which a v. Lianga Bay and Community Multi-purpose
party knows and ought to communicate (Sec. 26, Cooperative (G.R. No. 136914, Jan. 25, 2002),
ICP). the insurer denied the claim on the insurance
covering the insured's stocks-in-trade on the
b) REPRESENTATIONS ground that they were set fire by the NPA, an
Factual statements made by the insured at excepted peril. The Court rejected the position of
the time of or prior to the issuance of the policy the insurer because the latter failed to prove that
to give information to the insurer and otherwise the ground for non-coverage or that the peril
induce him to enter into tine insurance contract. that caused the loss falls within the exemption
or exception clause.
c) WARRANTIES
11.03. CONCEALMENT
Statements or promises by the insured set
forth in the policy itself or incorporated in it by a) Test of Materiality
proper reference, the untruth or nonfulfillment Materiality is determined not by the event,
of which in any respect, and without reference but solely by the probable and reasonable influ-
ence of the facts upon the party to whom the b) Effects of .Concealment
communication is due, in forming his estimate It vitiates the contract and entitles the
of the disadvantages of the proposed contract, insurer to rescind, even if the death or loss is due
or in making his inquiries or in fixing the pre to a cause not related to the concealed matter
mium rate (Sec. 3 1 , 1CP; Vda. De Canilang v. CA, (Sec. 27, ICP).
223 SCRA 443 [1993]).
c) Cause of Loss
1) For instance, matters relating to the health
of the insured are material and relevant. The matter concealed need not be the cause
Hence, the waiver of a medical examina of the loss.
tion in a non-medical insurance contract In Sunlife Assurance Company of Canada v.
renders even more material the information Court of Appeals (G.R. No. 105135, June 22, 1995,
required of the applicant concerning previ 245 SCRA268), the insured who applied for a life
ous conditions of health and diseases suf insurance policy was asked the following ques
fered (Sunlife Assurance Company o f Canada tions: "Within the past five (5) years have you:
v. CA and Rolando and Bernarda Bacani, 246 a) consulted any doctor or other health prac
SCRA 268; See also Sec. 31, ICP). Matters titioner? b) submitted to ECG? X-rays? blood
relating to health would affect the insurer tests? other tests? c) attended or been admitted
either by approving it with the correspond to any hospital or other medical facility? Have
ing adjustment for a higher premium or re- _____ you_ev£xJiad..or-.s.o.u.ght.....a.d¥ice....ioi.U£ine,._kidr-
jecting the same (Ibid.). : ’ ney or bladder disorder?" The insured disclosed
2) The Supreme Court ruled in Philamcare the fact that he consulted a doctor but only for
Health Systems, Inc. v. Court of Appeals and cough and flu complications and answered in
Julita Trinos (G.R. No. 125678, March 18, the negative all other questions although two
2002) that answers of the applicant, who weeks prior to his application he was confined
is not a doctor, regarding the medical his at a hospital for renal failure. The insured died in
tory of his wife largely depends on opinion a plane crash after the issuance of the policy. The
rather than fact. Where matters of opinion Supreme Court sustained the denial of the poli
or judgment are called for, answers made cy on the ground of material concealment. The
in good faith and without intent to deceive fact that the matter concealed had no bearing to
will not avoid the policy even though they the cause of death of the insured is not important
are untrue. In this case, the insured an because it is well-settled that the insured need
swered "NO" to the following question but not die of the disease he had failed to disclose to
no concealment was ascribed: "Have you or the insurer. It is sufficient that his non-disclosure
any of your family members ever consult misled the insurer in forming his estimates of the
ed or been treated for high blood pressure, risks of the proposed insurance policy or in mak
heart trouble, diabetis, peptic ulcer, cancer, ing inquiries (citing Henson v. The Phil American
. liver disease or asthma?" . Life Ins. Co., 56 O.G. No. 48 [I960]).
!i 8 i; HVIBWER ON COMMERCIAL iMVv FART fi — INSURANCE CODE 119
d) Is good faith a defense in concealment? insurance agent in collusion with die medical
examiner. When the insured signed the applica
NO. Good faith is no defense in conceal
tion in blank and authorized the soliciting agent
ment. Section 27 of the Insurance Code of the
an d /or the medical examiner to write for him,
Philippines clearly provides that, "the conceal
he made them his own agents for that purpose
ment whether intentional or unintentional en and he was responsible for their acts in that con
titles the injured party to rescind a contract of nection (The Insular Life Ltd. v. Serafin D. Feliciano,
insurance." Indeed, the materiality of the facts 74. Phil 4.68 [1943] but note the dissenting opinion
concealed does not depend on the state of mind therein and the original Decision in 73 Phil. 201).
of the insured but rather to the probable and rea
sonable influence of the facts upon the party to PROBLEMS:
whom communication should have been made
(Vda. de Canilang v. CA, supra). 1. X applied for Life Insurance with Metropolitan Life
Insurance Company. The application contained this
e) Waiver and-Estoppel question: "Have you ever had any ailment or disease
An insurer may be deemed estopped from of x x x (b) the stomach or intestines, liver, kidney
raising concealment (as well as exclusionary or genitourinary organ?" X, a laundry woman, who
conditions or warranties) as a defense if it has no medical knowledge answered "No." The
accepts the premium payments and issued the application was approved, premium was paid and
policy even if the insured already supplied the six months later, X died from cancer of the stomach.
-------msuêr-suehHfaets or informah tm~whfdh^^ --------- The post-medical examination of X shows that she
hardly be overlooked in the application form had the cancer at the time she applied for a policy.
considering its prominence and its materiality Can the beneficiary of X collect on the policy?
to the coverage applied for (Edillon v. Manila A: The beneficiary of X cannot collect from the insurer on
Bankers Life Insurance Co., 117 SCRA 187 [1982]). the policy. X was guilty of concealment of a material
This may also be true if the insured already fact because she did not disclose her illness. The fact
supplied such information that requires further that X had no medical knowledge does not excuse her
inquiries from the insurer but it failed to do so. concealment because Section 27 of the Insurance Code
However, the insurer is not estopped from makes concealment available as a defense against
raising concealment as a defense if there was liability by the insurer, whether the concealment was
intentional or unintentional.
connivance between the insured and the so
liciting insurance agent as well as the medical 2. Juan procured a "non-medical" life insurance from
examiner. Thus, there was concealment in one Good Life Insurance. He designated his wife, Petra,
case where the insured was suffering from an as the beneficiary. Earlier in his application in
advanced state of pulmonary tuberculosis but response to the question as to whether or not he had
he still answered in the negative when asked in ever been hospitalized, he answered in the negative.
the policy whether he suffered any ailment of He forgot to mention his confinement at the Kidney
the lungs. The insured signed the application in Hospital. After Juan died in a plane crash, Petra filed
blank and the false answer was supplied by the a claim with Good Life. Discovering Juan's previous
hospitalization, Good Life rejected Petra's claim on whom communication is due, in forming Ms
the ground of concealment and misrepresentation. estimate of the contract, risks and premium (Sec.
Petra sued Good Life, invoking good faith on the part 31).
of Juan. Will Petra's suit prosper? Explain.
d) Effects of Misrepresentation
A: No, Petra's suit will not prosper. Juan was guilty of
concealment of a material fact. Matters relating to the The injured party is entitled to rescind from
health of the insured are material and relevant. Hence, the time when the representation becomes false.
the waiver of a medical examination in a non-medical
11.05. WARRANTY
insurance contract renders even more material the
information required of the applicant concerning a) Warranty
previous conditions of health and diseases suffered
It is a statement or promise set forth in
(Sunlife Assurance Company of Canada v.CAand Rolando
the policy or by reference incorporated therein,
and Bernarda Bacani, 246 SCRA 268;, See also Sec. 31,
the untruth or nonfulfillment of which in any
ICP).
respect, and without reference to whether the
The answer would be different if the policy of insurer was in fact prejudiced by such untruth
life insurance has been in force for a period of two or nonfulfillment, renders the policy voidable.
years or more from the date of its issue (on which
the given facts are vague) then Good Life can no b) Kinds (Sec, 67)*2
34
longer prove that the policy is void ab initio or is ________ 1) Express;_________________________________
---------rescindable by reason of the fraudulent concealment
or misrepresentation of Juan (Sec. 48, ICP). 2) Implied — warranties that are deemed
included in the contract, although not
11.04. REPRESENTATION expressly mentioned. They are found only
in marine insurance;
a) Representation
3) Affirmative — asserts the existence of a fact
,,..,11 is ^n qrai pr written statement of a fact or or condition at the time it is made; and
condition affecting the risk, made by insured to
- . insurer, tending to induce insurer to. assume risk 4) Promissory — the insured stipulates that
(Sec. 36, ICP). certain facts or conditions shall exist or
thing shall be done or omitted.
b) Kinds (Sec. 39, ICP)
c) Effect of Breach of Warranty
V)' affirmative -— affirmation of a fact when the
It gives the insurer the right to rescind (Secs.
74-76).
2) promissory — promise to be performed
,. after the policy was issued. Exceptions;
c) Test of Materiality - 1) loss occurs before the time of performance
of the warranty;
" Tt is determined by the probable and rea-
J soMaBle ' inluerice 'of the facts on the party on 2) the performance becomes unlawful;
122 REVIEWER ON COMMERCIAL LAW PART JI - INSURANCE CODE 123
(P.D. No. i4f»U, as amended)
3) performance becomes impossible (Sec, 73). a) The "other insurance clause " may be subject to
d) Immaterial Provisions waiver but the waiver must either be express or if it is
to be implied from conduct mainly, said conduct must
Not all breach of the provisions in the be clearly indicative of a clear intent to waive such
policy may give the right to rescind the policy. right. There must be clear showing that the insurer
Immaterial provisions do not avoid the policy knew about the violation of the clause (Ibid., see also
(Sec. 75, ICP). Gonzales La O v. Yek Tong Lin, 55 Phil 386).
Exception: When the parties stipulate
that violation of particular provision, though PROBLEMS:
normally immaterial, shall avoid the policy. 1. Jose insured his two-storey commercial building
In effect, the parties converted the immaterial with XX Insurance Co. There is a warranty in the
provision into a material one. policy that Jose will not store flammable substances
like gasoline or kerosene on the insured premises.
11.06. DISTINCTIONS
Later, .fire destroyed the second floor of the insured
a) Warranty vs. Representation building. However, the first floor remained intact but
1) A warranty is part of the contract while rep it was discovered that there are several unopened
resentation is a collateral inducement. cans that contain gasoline. Can the insurer invoke
breach of warranty?
2) A warranty is written on the policy or in a*34
valid rider or attachment while a reprcsen • A: Yes, breach of warranty.mayJaeJiivQked-hy. liteJii^
tation need not be written. surer. Although it appears that the breach (storage
of gasoline) was not the cause of the damage to the
3) A warranty is generally conclusively pre second floor, the insurer may still raise breach of war
sumed to be material while representation ranty as a defense. The ICP provides that the nonful
: should be established to be material.
fillment of the warranty renders the contract voidable
4) The fact warranted must be strictly com whether or not the insurer was in fact prejudiced.
plied with while representation requires
2. Afire insurance policy in favor of the insured contained
only to be substantially true.
a stipulation that the insured shall give notice to the
11.07. OTHER INSURANCE CLAUSE company of any insurance already effected or which
may subsequently be effected, covering the property
A clause in the policy that provides that the
insured, and unless such notice be given before the
policy shall be void if the insured procures additional
occurrence of any loss, all benefits shall be forfeited.
insurance without the consent of the insurer. The
The face of the policy bore the annotation "Co-
purpose is to prevent over-insurance and thus avert
insurance declared." The things insured were burned,
the possibility of perpetration of fraud (Pioneer
it turned out that several insurance were obtained on
Insurance and Surety Corp. v. Yap, 61 SCRA 426 [1974]).
the same goods for the same term. The insurer refused
It is a warranty fhat entitles the insurer to rescind in
to pay on the ground of concealment.
case of breach (General Ins. and Surety Corp. v. Ng Hua,
106 Phit. 1117). May the insured recover? Reason.
REVIEWER ON COMMERCIAL LAW M K T II ~ INSURANCE CODE 125
A: Yes, the insured may recover, since there is noviolatic the lifetime of the insured for a period of two (2) years
of the "other insurance clause." The face of the poli< : . from the -date of its issue or of its last reinstatement,
contains a notation "Co-insurance declared." A foe insurer cannot prove that the policy is void ab
means that the insurer is deemed notified of tl; initio or is rescindible by reason of the fraudulent
existence of other insurance contracts on the proper- ■ > :concealment dr misrepresentation of the insured or
insured (See General Insurance and Surety Corporation his agent (Sec. 48, ICP; Florendo v. Philam Plans, G.R.
Ng, G.R. No. L-14373, Jan. 30,1960). 1 No. 186983, Feb. 22,2012)..
3. Julie and Alma formed a business partnership. Unde 12.02. REQUISITES
the business name Pino Shop, the partnership -s
engaged in the sale of construction materials. Jul c a) The insurance is a life insurance policy payable
insured the stocks in trade of Pino Shop with WG' : on the death of the insured.
Insurance Company for P350,000.00. Subsequently, b) It has been in force during the lifetime of the
she again got an insurance contract with RSI £c,. insured for at least two (2) years from its date
P I million and then from E1C for P200,000.00. A fire oi of issue or of its last reinstatement (Sec. 48, ICP).
unknown origin gutted the store of the partnership The period of two (2) years may be shortened
Julie filed her claim with the three insurance compa but it cannot be extended by stipulation.
nies. However, her claim was denied separately foi
breach of policy condition which required the insured
PROBLEMS!1
to give notice of any insurance effected covering the
__________ stocks in trade. Julie went to court andjcontended-lli.it 1. A life lnsnrmic&.jpcdk.ymim^
she should not be blamed for the omission, alleging A on Nov. 6, 2001 and the insured died on April
that the insurance agents for WGC, RSI and EIC knew 26, 2002. The insurer rescinded the contract on the
of the existence of the additional insurance coverages ground, of material concealment and returned the
and that she was not informed about the requirement premium on Sept. 11, 2002. The beneficiary claims
that such other ■or additional insurance should l ' that the insurance policy can no longer be rescinded
stated in the policy. under the incontestability clause because the insured
Is the contention of Julie tenable? Explain. died within the two-year period without the insurer
having rescinded the same. Is the argument of the
A: No, Julie's contention is not tenable. The condition i ’■ beneficiary tenable?
the policy requires the insured to disclose the othc--
insurances covering the subject matter of the insu- A: The argument of the beneficiary is not tenable. The
ance being applied for and a violation thereof bars insurer has two (2) years from the date of issuance
recovery of the insured. The fact that the agents of of the insurance contract or of its last reinstatement
the insurer were aware of the other insurance is not -■ within which to contest the policy, whether or not,
:valid -defense. : - the insured still lives within such period. The phrase
"during the lifetime" found in Section 48 of the
12. INCONTESTABILITY CLAUSE Insurance Code simply means that the policy is no
12.01. After a policy of life insurance made payable an th; longer considered in force after the insured has died.
death of the insured shall have been in force durirr- The beneficiary's interpretation would give rise to
PART II — INSURANCE CODE
d) That the conditions of the policy relating to mili

insured who dies right after taking out and paying for tary or naval service have been violated (Secs.
a life insurance policy, would be allowed to collect on 227[b], 228[b], 1CP);
the policy even if the insured fraudulently concealed
material facts (Tan v. CA, 174 SCRA 403, June 29,1989). e) That the fraud is of a particularly vicious type;
2. On May 15, 1982, Juan applied for a life insurance f) . That the beneficiary failed to famish proof of
policy with Acme Life Insurance Company. The death or to comply with any condition imposed
policy was issued to Juan on June 1, 1982, the date by the policy after the loss has happened; or
of his application. Juan subsequently realized that
g) That the action was not brought within the time
some of his answers in the insurance application were
specified.
erroneous. Accordingly, he supplied the insurance
company with the correct replies. However; his letter
to the insurance company giving the correct answers 13. DOUBLE INSURANCE AND REINSURANCE
was lost in the mails. Juan died on July 1, 1984. 13.01. DOUBLE INSURANCE .
The insurance company now refuses to pay Juan's
beneficiaries contending that he (Juan) misrepresent It exists where the same person is insured by
ed the state of his health at the time of his application. several insurers separately in respect to same subject
Is the insurance company liable? State your reason. and interest (Sec. 93,1CP). It is not prohibited by law
but it may be prohibited by "other insurance clause."
Ai Yes, the insurance company is liable. Although there
--------- was material misrepresentation or concealment, the
Requisites of-double insurance
insurer is now barred from questioning the policy on
those grounds because of the incontestability clause. a) The person insured is the same;
The policy of life insurance of Juan had been in force
b) There are two or more insurers insuring sepa
for a period of more than two (2) years from its
rately;
issuance, hence, the policy has become incontestable
under Section 48 of the Insurance Code. c) The subject matter is the same;
12.03. DEFENSES THAT ARE NOT BARRED BY INCON d) The interest insured is also the same;
TESTABILITY CLAUSE
e) The risk or peril insured against is likewise the
The following defenses are not barred by the same.
incontestability clause:
13.02. EFFECTS OF DOUBLE INSURANCE AND OVER
a) That' the person taking the insurance lacked INSURANCE
insurable interest as required by law;
When there is double insurance and over insur
b) That the cause of the death of the insured is an ance results, the insured can claim in case of loss only
excepted risk;
up to the agreed valuation or up to the full insurable
c) That the premiums have not been paid (Secs. 77, value from any, some or all insurers, without prejudice
227[b], 2281b], 23Q[b], 1CP);.. to the insurers ratably apportioning the payments.
Insured can also recover before or after the loss, front b) Double insurance vs. Reinsurance
both insurers the excess premium, he has paid (Sec, 94,
1CP). Double Insurance Reinsurance
(Sec. 93) (Sec. 95)
13.03. REINSURANCE
involves same interest insurance of different-
It is a contract through which the insurer pro interests
cures a third person to insure Mm against loss or
liability by reason of such original insurance (also insurer remains in such insurer becomes an
known as Reinsurance Cession) (Sec, 95, ICP). In every capacity insured in relation to
reinsurance, the original contract of insurance and the reinsurer
contract of reinsurance are separate and distinct from insured in the 1st original insured has no
each other and covered by separate policies. contract is a party in interest in reinsurance
Reinsurance may be through a treaty (where interest in the 2nd contract
there is a prior agreement for the re-insurer to accepr contract
the insurance ceded by the re-insured/original subject of insurance is subject of insurance is
insurer) or facultative (where the reinsurer maj property the original insurer's
refuse to accept the ceded policy). risk
13.04. DISTINCTIONS1 insured has to give his consent of original

J.X1C?%TTv>»CLf ilvl i LvCvSBuXj
a) Policy of Insurance vs. Reinsurance : "~~
1) Section 49 defines the policy of insurance as
the written document embodying the terms BAR PROBLEMS:
and stipulations of the contract of insurance
1. Suppose that Fortune owns a house valued at
between the insured and insurer.
P600,000.00 and insured the same against fire with
Reinsurance, on the other hand, ii: three insurance companies as follows:
defined under Section 95, which provides
X — P400,000.00
that it is any contract by which an insure:
procures a third person to insure him Y — P200,000.00
against loss or liability by reason of ar- Z — P600,000.00
original insurance.
In the absence of any stipulation in the policies,
2) Policy of insurance is a formal writtei from which -insurance company or companies may
instrument evidencing the contract or Fortune recover in case of fire should destroy his
insurance. In every reinsurance, the original house completely ?
contract of insurance and the contract
of reinsurance are covered by separate A: Fortune may recover from any, any two or all of
policies. ' the insurers provided that the total amount that he
will recover does not exceed his loss (Sec. 94, ICP).
Fortune may demand Indemnity from Z alone for value of the property was P600,000.00, hence, if he
P60G,000.00. In the alternative, Fortune may recover collected P200,000.00 from Y and P600,000.00 from
from all insurers P200,000.00 each. Fortune may also Z, there is an excess of P200,000.00. Fortune can only
opt to recover P4QQ,000.00 from X and recover the be indemnified for his loss. Fortune must hold the
balance from any or both Y or Z. excess amount of his insurable interest in the house,
P200,000.00, in trust for the insurers Y and Z (par. [d],
2. If each of the policies obtained by Fortune in
Sec. 94, ICP).
problem (1) is an open policy and it was immediately
determined after the fire that the value of the house 5. In problem (1) what is the extent of the liability of the
was P2.4 Million, how much may he collect fromX, Y, insurance companies among themselves?
andZ? -
A: Each insurer is bound to contribute ratably to the loss
A: Fortune may recover the full amount of the coverage in proportion to the amount for which he is liable
from each insurer if all policies are open policies. under his contract (par. [e], Sec. 94, ICP). The ratable
The value of the property to be considered is the contribution of each insurer will be determined based
actual value of P2.4 Million. Since the total amount on the following formula:
of the insurance coverage is less than the actual loss,
Fortune may recover P400,000.00 from X, P200,000.00 Amount of policy x joss _ liability of insurer
from Y and P600,000.00 from Z or a total amount of Total insurance taken
P1.2 Million.
Using the foregoing formula, the extent
------ If each of the fire insurance policies obtained by ---------of liability of each insurer out of the total loss
Fortune in problem (3) is a valued policy and the value of P600,000.00 are as follows: X - P200,000.00
of his house was fixed in each policies at PI Million, (400,000.00/1,200,000.00 x 600,000.00), Y - P100,000.00
how much would Fortune recover from X if he has (200,000.00/1,200,000.00 x 600,000.00) and Z -
already obtained full payment from the insurance P300,000.00 (600,000.00/1,200,000.00 x 600,000.00)
policies issued by Y and Z?
A: Fortune can only recover P200,000.00 from X. The m , LOSS AND CLAIMS SETTLEMENT
valuation of the property (in this case PI Million) is 14.01. Proximate Cause and Immediate Cause
binding on the parties and it is no longer necessary to
determine the actual value thereof. The valuation in a) The insurer is liable if:
the policy is deemed the actual value of the property 1) loss, the proximate cause of which is the
(par. [b], Sec. 94, ICP). peril insured against (Sec. 84);
4. Supposing in problem (1), Fortune was able to collect 2) loss, the immediate cause of which is the
from both Y and Z, may he keep the entire amount peril insured against except where the
he was able to collect from the said two (2) insurance proximate cause is an excepted peril;
companies? Explain your answers.
3) loss through negligence of insured except
A: NO. Fortune may not keep the amount that he where there was gross negligence amount
collected from Y and Z, -In problem (1), the total ing to willful act; and
132 REVIEWER ON COMMERCIAL LAW PARTII — INSURANCE CODE 133
4) loss caused by efforts to rescue the thing deuce he has in his power to present and need
from peril insured against — if during the not submit proof that is necessary in court (Sec.
course of rescue, the thing is exposed to a 89, ICP).
peril not insured against, which perma In fact, even if there is a provision in
nently deprives the insured of its posses the policy specifying the kind of proof that is
sion, in whole or in part (Sec. 85, ICP). necessary, substantial compliance will always
b) The insurer is not liable be deemed sufficient(Finman General Assurance
Corporation v. Court of Appeals, G.R. No. 138737,
1) loss by insured's willful act or gross negli
July 21,2001).
gence;
2) loss due to connivance of the insured (Sec. c) Notice of Settlement
87, ICP); and Is a stipulation in a policy of insurance re
3) loss where the excepted peril is the proxi quiring that the consent of the insurer must first
mate cause. be obtained before any payment by the person
responsible for the loss in the settlement of the
c) Liability of Insurer if insured was committing claim against the insured can be made, valid?
a felony
YES. The stipulation is valid, the purpose of
Liabilities arising out of acts of negligence, which is to avoid collusion between the insured
which are also criminal, are also insurable on __________ and the claimant (Perla Compania De Seguros v.
----------------the ground that such acts aie accidental. Thus, CA, 185 SCRA 741).
a motor insurance policy covering the insured's
liability for accidental injury caused by his 14.03. CLAIMS SETTLEMENT
negligence, even though gross and attended
a) Life Insurance (Sec. 242, ICP)
by criminal consequences such as homicide
through reckless imprudence, will not be void as 1) The proceeds shall be paid immediately
against public policy. But liability consequences upon the maturity of the policy if there is
of deliberate criminal acts are not insurable. such a maturity date.
14.02. NOTICE AND PROOF IN FIRE INSURANCE 2) If the policy matures by the death of the in
sured, within sixty (60) days after presenta
a) Notice tion of the claim and filing of the proof of
In case of loss upon an insurance against the death of the insured.
fire, notice of loss should be given without
b) Property Insurance (Sec. 243, ICP)
unnecessary delay, otherwise, the insurer is exo
nerated (Sec. 88, ICP). 1) proceeds shall be paid within thirty (30)
days after proof of loss is received by the
' b) Proof • ' - - -
insurer and ascertainment of the loss or
If proof of loss is required under the policy, damage is made either by agreement or by
it is sufficient that-the insured-give the best evi- arbitration.
2) if no ascertainment is made within sixty ? 15. PERIOD OF PRESCRIPTION (Secs, 63, 364, ICP)
(60) days after receipt of proof of loss, the -r In the absence of an express stipulation-in the policy,
loss shall be paid within ninety (90) days it being based on a written contract, the action prescribes in
after such receipt. ten (10) years. However, the parties may validly agree on a
c) Effects of Delay of Insurer shorter period provided it is not less than one (1) year from
the time the cause of action accrues. The cause of action
If the prescribed period for both life and
accrues from the final rejection of the claim of the insured
property insurance (a and b above) are not
and not from the time of loss.
complied with, the beneficiary is entitled to
payment of: (a) interest for the duration of . 15,01. Where a policy of insurance provides for a prescriptive
the delay at the rate of twice the legal interest period of one (1) year from the time the cause of
(ceiling prescribed by the Monetary Board); (b) : action accrues, when should the period of one (1)
attorney's fees and other litigation expenses; (c) year commence to run if the insured files a motion for
appropriate damages under the Civil Code like reconsideration upon the initial denial of his claim?
moral and exemplary damages when requisites It shall commence to run from the denial of
are present (Sec. 244, ICP; Zenith Insurance Corp. the claim, not from the resolution of the motion for
v. CA, 185 SCRA 389 [1990]; Tio Kho Chio v. CA, reconsideration filed by the insured, otherwise, it can
202 SCRA 119 [1991]). be used by the insured as a scheme or device to waste
d) When is an insurer liable to pay damages and time until the evidence which may be used against
-------interest-ittttderSectretts-£4-3-a:aid:-244ôf-''tlie~f€ P?' ------------------- him is destroyed. Furthermore, the "contract o f
adhesion" or "fine print rule" does not apply where the
Sections 243 and 24.4 shall apply only when terms of the contract are clear (Sun Insurance Office,
the Court or Commissioner finds that there was Ltd. v. CA, 195 SCRA 193).
unreasonable delay or refusal by the insurer in
the payment of the claim. The legal rate is 6%, as In the absence of a stipulation or when it is void,
provided under Article 2209, NCC. The adjusted the prescription of actions based on written contract
rate under Central Bank Circular 416, pursuant (10 years from accrual) under Article 1144, NCC, shall
to Pres. Decree No. 116 refers only to loans and apply.
forbearance of money, goods or credit and court [Note: Under Section 384, ICP, notice of claim must
judgments thereon (Tio Kho Chio v. CA, 202 SCRA be filed within six (6) months from the date of accident,
119). otherwise the claim shall be deemed waived. Action or suit
N ote: While the legal rate in judgments must be brought in proper cases, with the Commission or
based on actions for damages is 6%, from the the courts within one (1) year from the denial of the claim,
time of the finality of the judgment up to actual otherwise, the claimant's right of action shall prescribe
payment, the rate is 12%, because during said (Jacqueline Jimenez Vda. De Gabriel v. CA, G.R. No.
period, it partakes of the nature of a forbearance 103883, Nov. 4,1996).]
for the use of money.
136 REVIEWER ON COMMERCIAL LAW PART II — INSURANCE CODE 13?
(P.D. No, 1460, as amended)
16. RIGHT OF SUBROGATION c) In life insurance;

16.01. The principle of subrogation is a normal inci d) For recovery of loss in excess of insurance cover
of indemnity property insurance as a legal effect uf age.
payment; it inures to the insurer without any formal
assignment or any express stipulation to that effect in 17. MARINE INSURANCE
the policy. Said right is not dependent upon nor does 17.01. COVERAGE
it grow out of any privity of contract. Payment to the
insured makes the insurer an assignee in equity (Art. Traditionally, marine insurance includes policies
2207, CC; Pan Malayan Ins. v. CA, 184 SCRA 54 [1990]). that covers risks connected with navigation, to which
a ship, cargo, freightage, profits, or other insurable
a) No need of a formal assignment or an express interest in movable property, may be exposed during
stipulation in the policy. It is a legal effect of pay a certain voyage or a fixed period of time. However,
ment. under the present laws, it also covers inland marine
b) The insurer can only recover from the third insurance (Sec. 99, ICP). Thus, Section 99 of the
person what the insured could have recovered. Insurance Code provides:
Thus, there can be no recovery if the insurer vol
Section 99. Marine Insurance includes:
untarily paid even if the loss is not covered by
the policy. (1) Insurance against loss of or damage to:
c) The insured can no longer recover from the ___________________ (a) Vessels, craft, aircraft, vehicles.
offending party what was paid to him by the goods, freights, cargoes, merchandise, effects,
insurer but he can recover any deficiency, that disbursements, profits, moneys, securities,
is, if his damages is more than what was paid. choses in action, evidences of debts, valuable
The deficiency is not covered by the right of papers, bottomry, and respondentia interests
subrogation. and all other kinds of property and interests
therein, in respect to, appertaining to or in con
d) The insurer must present the policy as evidence
nection with any and all risks or perils of navi
to determine the extent of its coverage (Wallen gation, transit or transportation, or while being
Phil. Shipping, Inc. v. Prudential Guarantee Assur
assembled, packed, crated, baled, compressed
ance, Inc., G.R. No. 152158, Feb. 7, 2003). or similarly prepared for shipment or while
16.02. CASES WHEN THERE IS NO RIGHT OF SUB awaiting shipment, or during any delays, stor
ROGATION age, transhipment, or reshipment incident
thereto/ including war risks, marine builder's
a) The insured by his own act releases the wrong risks, and all personal property floater risks;
doer/third person liable for the loss;
•(b) Person or property in connection with
b) Where the insurer pays the insured for a loss or appertaining* to a marine, inland marine,
or risk not covered by the policy (Pan Malayan transit or transportation insurance, including
Insurance Co. v. CA, 184 SCRA 54); liability for loss of or damage arising out of
REVIEWER ON COMMERCIAL LAW' EARTII — INSURANCE CODE 139
or in connection with the construction, repair, -.7.02. Implied warranties in marine insurance
operation, maintenance, or use of the subject
matter of such insurance (but not including
a) That the ship is seaworthy at the inception of the
insurance (Sec. 113, ICP);
life insurance or surety bonds nor insurance
against loss by reason of bodily injury to any b) That the ship will not deviate from the agreed
person arising out of ownership, maintenance, voyage unless deviation is proper (Secs. 123,124.
or use of automobiles); 125, ICP);
(c) Precious stones, jewels, jewelry, pre c) That the ship will not engage in an illegal ven
cious metals, whether in course of transporta ture;
tion or otherwise; d) Warranty of possession of documents of neut
(d) Bridges, tunnels and other instru rality: that the ship will carry the requisite
mentalities of transportation and communica documents of nationality or neutrality of the ship
tion (excluding buildings, their furniture and or cargo where such nationality or neutrality is
furnishings, fixed contents and supplies held expressly warranted;
in storage); piers, wharves, docks and ships, e) Presence of insurable interest.
and other aids to navigation and transporta
17.03. Insurable interest in marine insurance
tion, including dry docks and marine railways,
dams and appurtenant facilities for the control a) Shipowner*2
of waterways._____________________ _________ ----------------t)— over the value of the vessel (even if char~
(2) "Marine protection and indemnity insur tered and the charterer agreed to pay the
ance," meaning insurance against, or against legal shipowner the value of the vessel in case of
liability of the insured for loss, damage, or expense loss, however, the shipowner can recover
incident to ownership, operation, chartering, main only the amount not recoverable from the
tenance, use, repair, or construction of any vessel, charterer [Sec. 100, ICP]). However, if the
craft or instrumentality in use of ocean or inland ship is hypothecated by a bottomry loan,
waterways, including liability of the insured for the insurable interest is only up to the
excess of the value of the vessel over the
personal injury, illness or death or for loss of or
loan (Sec. 101, ICP).
damage to the property of another person.
2) over expected freightage.
a) Cargo can be the subject of marine in
surance, and once it is entered into, the implied b) Cargo owner/Shipper — over the cargo and
warranty of seaworthiness immediately attach expected profits (Sec. 105, ICP).
es to whoever is insuring the cargo, whether he c) Charterer
be the shipowner or not. Although he has no
control over the vessel, the shipper has control 1) over the vessel up to the extent of the
in the choice of vessel (Roque v. LAC, 139 SCRA amount he is liable to the shipowner, if the
596), ship is lost or damaged during the voyage
(Sec. 106, ICP).
PART II — INSURANCE CODE 141
2) over his expected profits or freightage if he

v. CA.179 SCRA 638 [1989); Choa Tiek Seng v. CA,
accepts cargoes from other persons for a
183 SCRA 223 [1990]).
fee. ■■
e) Barratry — willful misconduct on the part of the
3) over his own cargo or his client's cargo. master or crew in pursuance of some unlawful or
17=04. Perils of the sea vs. perils of the ship fraudulent purpose without the consent of own
ers, and to the prejudice of owner's interest. This
a) Perils of the sea or perils of navigation include
may be expressly covered by the policy. When
only those casualties due to the unusual violence
so covered, proof of wilfull and intentional act is
or extraordinary causes connected with naviga necessary. No honest error of judgment or mere
tion. It has been said to include only such losses negligence, unless criminally gross, can be bar
as are of extraordinary nature or arise from some ratry (Roque v, IAC, 139 SCRA 596 [1985]).
overwhelming power which cannot be guarded
17.05. Concealment
against by the ordinary exertion of human skill
or prudence, as distinguished from the ordinary a) Opinions and Beliefs
wear and tear of the voyage and from injuries Belief and expectation of a third person in
suffered by the vessel in consequence of her not reference to a material fact is material and must
being unseaworthy. be disclosed in marine insurance (Sec. 108, ICP).
b) Perils of the ship is a loss which in the ordinary The rule is different from the general rule where
course of events, results:123 matters of belief, judgment or opinion of third*1
---------------- persons (except experts) are not material (Sec. 35,
1) from the ordinary, natural, and inevitable ICP).
action of the sea;
b) Ordinarily, the matters concealed need not be
2) from ordinary wear and tear of the ship; the cause of the loss. In marine insurance, there
and are instances when matters, although concealed,
3) from the negligent failure of the ship's will not vitiate the contract except when they
owner to provide the vessel with the proper caused the loss (Sec. 110, ICP):
equipment to convey the cargo under ordi 1) national character of the insured;
nary conditions.
2) liability of insured thing to capture or
c) In the absence of stipulation, the risks insured detention;
against are only perils of the sea (Go Tiaco Y Her-
3) liability to seizure from breach of foreign
manos v. Union Insurance Society o f Canton, 40 Phil laws;
40). Thus, the insured is bound to prove that the
cause of the loss is a peril of the sea. 4) want of necessary documents; and
d) However, in an "all risk policy," all risks are cov 5) use of false or simulated papers.
ered unless expressly excepted. The burden rests 17.06. General average loss vs. particular average loss
: oh iEHie; that the loss is caused by The insurer of the vessel or cargo that are saved
a risk that is excluded (Filipino Merchants Ins. Co. is liable for general average contribution and not for
particular average. Only the insurer of the damaged by him as the loss bears to the value of the whole
cargo or vessel is liable for particular average if interest of the insured in the property insured.
covered by the policy.
a) GENERAL AVERAGE LOSS includes damages PROBLEM:
and expenses which are deliberately caused by 1. The vessel owned by "A " valued at P5 Million, is on
the master of the vessel or upon his authority in the way to Singapore to deliver the goods belonging
order to save the vessel, her cargo, or both at the to X, Y and Z. The value of the cargoes belonging to
same time from a real or known risk. It must be each of them (X, Y, and Z) are valued at PI Million
borne equally by all of the interests concerned each (a total of P3 Million worth of cargoes are on
in the venture. Under this, the requisites to the board the vessel). Later, a strong tyhoon placed the
right to claim general average contribution are: vessel at peril forcing the captain and its crew to
1) There must be a common danger to the lighten its lpad by jettisoning the cargoes belonging
vessel or cargo; to X. As a result, the vessel and the cargoes of Y and
Z safely reached Singapore. The vessel is insured
2) Part of the vessel or cargo was sacrificed with RR Insurance company for its full value while
deliberately; the cargoes of Z are fully insured with SS Insurance
3) The sacrifice must be for the common safety company? Can X recover from RR and SS?
or for the benefit of all; A: YES, X can recover from RR and SS. The case involves
-------- a general average, hence, those who benefited from
authority; the loss incurred by X are liable for general average
contribution. The facts show that A, Y and Z are liable
5) It must be successful, i.e., resulted in the
for contribution because their properties were saved
saving of the vessel or cargo; and
when the cargoes of X were jettisoned. Consequently,
6) It must be necessary the insurers of A and Z are also liable.
b) PARTICULAR AVERAGE LOSS includes all 17.07. W hat do you understand by the co-insurance
damages and expenses caused to the vessel or to clause?
her cargo which have not inured to the common
benefit and profit of all persons interested in a) Where the property is insured for less than its
the vessel and her cargo. It refers to those losses value, the insured is considered a co-insurer for
which occur under such circumstances as do not the difference between the amount of insurance
entitle the unfortunate owners to receive contri and the value of the property In marine insur
bution from other owners concerned in the ven ance, there is co-insurance by virtue of Section
ture as where a vessel accidentally runs aground 157, ICP, as long as the requisites are present,
and goes to pieces after the cargo is saved (Sec. namely:
136,1CP). 1) the loss is partial; and
c) A marine insurer is liable upon a partial loss, 2) the amount of insurance is less than the
only for such proportion of the amount insured value of the property insured.
V ;V •' V— W MN'WVW
b) In fire insurance, there has to be an express slip- ' ,17.08. SEAWORTHINESS

ulation to that effect. a) A ship is seaworthy, when reasonably fit to per
c) The formula to determine the extent of the form the service, and to encounter the ordinary
insurer's liability is; ■ perils of the voyage, contemplated by the parties
to the policy (Sec. 114, ICP). There should be
■Loss due consideration to the nature of the ship, the
---------- x Insurance = Insurer's Liability voyage and the service to be performed (See
Value
Caliex [Phils.], Inc. v. Sulpicio Lines, Inc., 315 SCRA
709(1999]).
PROBLEMS:
A warranty of seaworthiness extends not
1. A vessel valued at PI Million owned by X was insured only to the condition of the structure of the ship
for only P800,000.00 with A Insurance Corp. The vessel itself, but requires that it be properly laden, and
was damaged because of a storm and the extent of provided with a competent master, a sufficient
the damage was determined to be P200,000.00. How number of competent officers and seamen, and
much can X recover from A Insurance Corp.? the requisite appurtenances and equipment,
A: X can recover only P160,000.00 (200,000.00/ such as ballasts, cables and anchors, cordage and
1,000,000.00 x 800,000.00). The co-insurance clause sails, food, water, fuel, and lights, and other nec
operates in this case because the vessel was insured*23 essary or proper stores and implements for the*1
--------- for less than the value of the properly and there was- ------- voyage (Sec. 116, ICPj:------------------ ---------- --------
only partial loss. Under the Insurance Code, a ma b) When ship should be seaworthy
rine insurer is liable upon a partial loss, only for such
proportion of the amount insured by him as the loss An implied warranty of seaworthiness is
bears to the value of the whole interest of the insured complied with if the ship be seaworthy at the
in the property insured (Sec. 157,1CP). time of the commencement of the risk, except in
the following cases:
2. Suppose the vessel was totally destroyed in problem
No. 1, how much can X recover from his insurer? 1) Time policy — When the insurance is made
for a specified length of time, the implied
A: X can recover the full amount of the policy warranty is not complied with unless the
(P800,000.00). The co-insurance clause cannot apply vessel is seaworthy at the commencement
because the loss is total. of every voyage it undertakes during that
3. Will your answer to problem No. 1 be the same if the time (Sec. T15[a]);
insurance is fire insurance and the property involved 2) When the insurance is upon the cargo
is a building? which, by the terms of the policy, descrip
tion of the voyage, or established custom of
A: NO. If there is no co-insurance clause provided for in
the trade, is to be transhipped at an inter
the policy. There is no co-insurance in fire insurance
mediate port, at the commencement of each
unless it is expressly stipulated in the policy.
' particular voyage (Sec. 115[b]);
3) Where different portions of the voyage are carrier which keeps its vessel in seaworthy con
contemplated, at the commencement of ditions. The shipper of the cargo may have no
each portion (Sec, 117, ICP); control over the vessel, but it has full control in
4) When the ship was seaworthy at the com the choice of the common carrier that will trans
mencement of the voyage but becomes un- port its goods (Roque v. IAC, 139 SCRA 596).
seaworthy during the voyage to which an e) Effect of Payment
insurance relates, an unreasonable delay in
repairing the defect exonerates the insurer Payment made by the insurer to the insured
on ship or shipowner's interest from liabil for the latter's lost cargo operates as waiver of
ity from any loss arising therefrom (Sec, 118, the insurer's right to enforce the implied war
ICP). ranty of seaworthiness. However, this waiver
extends only in favor of the insured. There is no
c) Applicability of implied warranty of seawor
waiver in favor of the carrier that transported
thiness to cargo owners
the cargo. The insurer can still claim payment
The fact that the unseaworthiness of the against the carrier for breach of contract based
ship was unknown to the insured is immaterial on the insurer's right of subrogation (Delsan
in ordinary marine insurance and may not be Transport Lines, Inc. v. CA, G.R. No. 127897, Nov.
used by him as a defense in order to recover on 15,2001).1
the marine insurance policy.
17.09. Deviation_______________________________ ________
-------------- Since the law provides for an implied war-
ranty of seaworthiness in every contract of ordi Departure of vessel from course of voyage, or
nary marine insurance it becomes the obligation an unreasonable delay in pursuing voyage, or the
of a cargo owner to look for a reliable common commencement of an entirely different voyage (Sec.
carrier which keeps its vessels in seaworthy con 123, ICP).
ditions. The shipper may have no control over a) Deviation is:proper when (Sec. 124, ICP)
the vessel but he has full control in the choice
of the common carrier that will transport his 1) if due to circumstances outside the control
goods. Or the cargo owner may enter into a con of the ship captain or ship owner;
tract of insurance which specifically provides 2) if done to comply with a warranty;
that the insurer answers not only for the perils
of the sea but also provides for coverage of perils 3) if made in good faith to avoid a peril;
of the ship (Roque v. IAC, 139 SCRA 596). 4) if made to save human life or another dis
d) If a vessel is unseaworthy, is the insurer of the tressed vessel.
cargo liable even if the owner of the cargo was
not even aware of the unseaworthiness of the PROBLEM:
vessel? 1. X, the master of MV Strongwind, received an advice
NO. The insurer is not liable. It is the obli from PAGASA that there is an approaching typhoon
gation of the cargo owner to look for a common along the course that was being pursued by his vessel.
REVIEWER ON COMMERCIAL LAW PARTII — INSURANCE CODE
X thereafter changed the course of Ills voyage because merit-to the insurer of his interest in the thing
of his belief that -the information given by PAGASA insured (Sec. 138, ICP}.
was true. The vessel was damaged thereafter. Can
( c l ) Requisites for valid abandonment
the insurer deny the claim on the ground of improper
deviation? 1) There must be an actual relinquish
ment by the person insured of his in
A: NO, the insurer cannot deny the claim. There was
terest in the thing insured (Sec. 138,
proper deviation in this case so long as the master
ICP);
acted in good faith in relying on the information of
PAGASA. 2) There must be a constructive total loss
(Sec. 139, ICP);
17.10. LOSS AND ABANDONMENT
3) . The abandonment be neither partial
a) Actual total loss (Sec. 130, ICP) nor conditional (Sec. 140, ICP);
1) total destruction; 4) It must be made within a reasonable
2) loss by sinking; time after receipt of reliable informa
tion of the loss (Sec. 141, ICP);
3) damage rendering the thing valueless; or
total deprivation of owner of possession of 5) It must be factual (Sec. 142, ICP);
4)
thing insured. 6) It must be made by giving notice there-
Dj (constructive total loss {bee. id i, m relation to ■A--------------------------------- of to the insurer which may-be done
Sec. 139, ICP) orally or in writing (Sec. 143, ICP); and
1) actual loss of more than three-fourths (3/4) 7) The notice of abandonment must be
of the value of the object; explicit and must specify the particu
lar cause of the abandonment (Sec.
2) damage reducing value by more than three-
144, ICP).
fourths (3/ 4) of the value of the vessel and
of cargo; and
18. FIRE INSURANCE
3) expenses of shipment exceed three-fourths
(3 /4 ) of value of cargo. ■ 18.01. Fire Insurance
In case of constructive total loss, It is a contract of indemnity by which the insurer

insured may abandon the goods or vessel for a consideration agrees to indemnify the insured
to the insurer and claim for whole insured against loss of, or damage to, property by fire, but
value, or he may, without abandoning may include loss by lightning, windstorm, tornado,
vessel, claim for partial actual loss. or earthquake and other allied risks, when such risks
c) Abandonment t are covered by extension to fire insurance policies or
under separate policies (Sec. 167, ICP).
The act of the insured by which, after a con
structive total loss, he declares: the relinquish-
18.02. What is the extent of liability of an insurer under art 3) The alteration is made without the consent
open policy? of the insurer;
a) In an open policy, the actual loss, as determined, 4) The.alteration is made by means within the
will represent the total indemnity due the insured control of the insured;
except only that the total indemnity shall not 5) The alteration increases the risk; and
exceed the total value of the policy (Development
Insurance Corporation v. IAC, 143 SCRA 62). 6) There must be a violation of a material
policy provision.
b) Suppose A constructed a house in 1987 at a cost
of P200,000.00, which he insured against fire for 18.04. Friendly Fire vs. Hostile Fire
the said amount. The policy for P200,000.00 was a) Friendly Fire — fire that bums in a place where
renewed every year. This year, when the said it is supposed to burn (e.g., Gas stove, fire place,
house was already P400,000.00, one-fourth of the etc.).
house was destroyed by fire. How much can A
recover from the insurer? b) Hostile Fire — fire that escapes and bums in a
place where it is not supposed to be. It may also
It depends. If the policy is a valued pol refer to fire that started out as a friendly fire but
icy (valued at P200,000.00), A can recover only escapes from its original place or it becomes too
P50,000.00. If the policy is an open policy, A can strong as it becomes out of control.
recover his actual loss of P100,000.00.
18.03. ALTERATION 19. CASUALTY INSURANCE
An alteration in the use or condition of a thing 19.01. Casualty Insurance

insured from that to which it is limited by the policy An insurance covering loss or liability arising
made without the consent of the insurer, by means from accident or mishap, excluding those falling
within the control of the insured, and increasing the under other types of insurance such as fire or marine
risks, entitles the insurer to rescind a contract of fire (Sec. 174).
insurance (Sec. 168, ICP).
19.02. "Intentional" vs. "Accidental" as used in insurance
a) In fire insurance, what is the effect of an altera
tion in the use or condition of a thing insured a) Intentional as used in an accident policy except
from that which it is limited by the policy? ing intentional injuries inflicted by the insured
or any other person implies the exercise of the
The insurer may rescind a contract of fire reasoning faculties, consciousness and volition.
insurance provided the following requisites are Where a provision of the policy excludes inten
present: tional injury, it is the intention of the person
1) The use or condition of the thing insured isp inflicting the injury that is controlling. If the
specially limited or stipulated in the policy; injuries suffered by the insured clearly resulted
from the intentional act of a third person, the
2) Such use or condition is altered; insurer is relieved from liability as stipulated
152 REVIEWER ON COMMERCIAL LAW part h — in s u r a n c e c o d e 153
(ED, No. 3460, as amended/
(Biagtan v. The Insular Life Assurance Co, Ltd., 44 c) Liability of insurer if insured was committing
SCRA 58 (19721), a felony
b) The terms " accident" and " accidental" as used in Liabilities arising out of acts of negligence,
insurance contracts, have not acquired any tech which are also criminal, are also insurable on
nical meaning. They are construed by the courts the ground that such acts are accidental. Thus,
in the ordinary and common acceptation. Thus, a motor insurance policy covering the insured's
the terms have been taken to mean that which liability for accidental injury caused by his negli
happens by chance or fortuitously, without in
gence, even though gross and attended by crimi
tention or design, which is unexpected, unusual
nal consequences such as homicide through
and unforeseen. The terms do not, without qual
reckless imprudence, will not be void as against
ification, exclude events resulting in damage
public policy But liabil ity consequences of delib
or loss due to fault, recklessness or negligence
erate criminal acts are not insurable.
of third parties. The concept is not necessarily
synonymous with "no fault, " It may be utilized
PM. COMPULSORY MOTOR VEHICLE LIABILITY INSUR-
simply to distinguish intentional or malicious
ANCE (CTPL)
acts from negligent or careless acts of man (Pan
Malayan Insurance Corp. v. CA, 184 SCRA 54). ; 20.01. Mandatory Insurance
19.03. THIRD-PARTY LIABILITY The Insurance Code makes it unlawful for any
Casualty Insurance may provide for third party --------------land transportation operator or owner of a motor
liability (in the nature of stipulation pour autrui vehicle to operate the same in public highways unless
for personal injury and even damage to prop there is an insurance or guaranty to indemnify the
erty), in which case, the third party may directly death or bodily injury of a third party or passenger
sue the insurer upon the occurrence of the loss. arising from the use thereof ( Sec. 374, ICP). Registration
However, the insurer is not solidarily liable with of any vehicle will not be made or renewed without
the insured or the tortfeasor for the latter's obli complying with the requirement (Sec. 376, ICP).
gation (First Integrated Bonding and Ins. Co., Inc. v. a) The protection may be complied with using any
Hernando, 199 SCRA 769 [1991]; Vda. de Maglana of the following: (1) insurance policy; (2) surety
v. Consolacion, 212 SCRA 268 [1992]). If the insur bond; (3) cash bond.
er pays the third person, the right of subrogation
operates.. . b) "Motor Vehicle" is any vehicle as defined in Sec
tion three, paragraph (a) of Republic Act No.
If there is no stipulation in favor of third person
4136, otherwise known as the "Land Transporta
but the insurance is an insurance against liability
tion and Traffic Code."
to third persons, any third person who might be
injured may not sue the insurer (Guingon v. Del c) "Passenger" is any fare paying person being
Monte, 20 SCRA 1043 [1991]). Only the insured transported and conveyed in and by a motor
(sought to be held liable by the third person) can vehicle for transportation of passengers for
recover from the insurer. compensation, including persons expressly
authorized by law or by the vehicle's operator c.■ b) The following proofs of loss, when submitted
his agents to ride without fare. under oath, shall be sufficient evidence to sub
stantiate the claim:
d) "Third-Party" is any person other than a passer
ger as defined in this section and shall also a - 1) Police report of accident; and
elude a member of the household, or a members 2) Death certificate and evidence sufficient to
of the family within the second degree of con establish the proper payee; or
sanguinity or affinity, of a motor vehicle own
3) Medical report and evidence of medical or
er or land transportation operator, as likewise
hospital disbursement in respect of which
defined herein, or his employee in respect c'
refund is claimed.
death, bodily injury, or damage to property ark
ing out of and in the -course of employment. c) Claim may be made against one motor vehicle
only.
e) "Owner" or "Motor vehicle owner" means the
actual legal owner of a motor vehicle, in whose 20.04. From whom should the injured recover?
name such vehicle is duly registered with the'
a) In the case of an occupant of a vehicle, claim shall
Land Transportation Commission.
lie against the insurer of the vehicle in which the
f) "Land transportation operator" means the own occupant is riding, mounting or dismounting
er or owners of motor vehicles for transports from.
tion of passengers for compensation, including
b) If not an occupant, claim shall lie against the
__________ school buses,------------------- ,------------------------------
insurer of the directly offending vehicle.
20.02. What is the purpose of Compulsory Third Party
c) In all cases, the right of the party paying the
Liability ‘Insurance?
claim to recover against the owner of the vehicle
To give immediate financial assistance to victims responsible for the accident shall be maintained.
of motor vehicle accidents and / or their dependents,
20.05. TIME TO FILE AND PROCESS CLAIM UNDER
especially if they are poor regardless of the financia
CTPL
capability of motor vehicle owners or operator';
responsible for the accident sustained (Shafer v. Judge, a) Period to File Notice
RTC, 167 SCRA 386; First Integrated Bonding and Ins. The written notice of claim (setting forth
Co., Inc. v. Hernando, 199 SCRA 746). the nature, extent and duration of the injuries as
20.03. NO FAULT CLAUSE (Sec. 378, ICP) certified by a duly licensed physician) must be
presented within six (6) months from the date
-The injured third party or passenger is given the of :the accident otherwise the claim is deemed
option to file a claim for death or injury without the
. waived (Sec. 384, ICP; Traveller's Insurance Surety
necessity of proving fault or negligence of any kino Corporation v. CA, 272 SCRA 536 [1997]).
under the following conditions;
b) Prescriptive Period
a) The total indemnity in respect of any person shall
not exceed fifteen thousand pesos (P15,000.00! The action must be filed in court or the In
(Insurance Memo. Circular 4-2006); surance Commission within one (1) year from
FART II — INSET;. -.NICE CODE 157
(P.D. No. 1 4 6 0 , . amended)
denial of the claim (Sec. 384, ICP; Via. de Gabriel cl May the proceeds of a third party liability
v. CA, 264 SCRA137 [1996]; Country Bankers Ins. insurance be garnished?
Corp, v. Travellers Ins. and Surety Corp., 176 SCRA Yes. In a third party liability insurance, the
523 [1989]; Summit Guaranty v. Arnaldo, 158 SCRA insurer assumes the obligation of paying the
332 [1988]). injured party to whom the insured is liable. The
c) If there is an agreement, the insurance company insurer becomes liable as soon as the liability
concerned shall forthwith ascertain the truth and of the insured attaches. From the moment the
extent of the claim and make payment within insured becomes liable to the third person,
five (5) working days after reaching an agree the insured acquires interest in the insurance
ment (Sec. 385, ICP). contract, which interest may be garnished just
d) If no agreement is reached, the insurance com like any other credit.
pany shall pay only the "no-fault" indemnity It is not necessary that summons be served
without prejudice to the claimant from pursuing upon the insurer, the writ of garnishment is
his claim further, in which case, he shall not be enough. By such service, the garnishee becomes
required or compelled by the insurance compa a "virtual party" or a "forced intervenor" in this
ny to execute any quit claim or document releas case (Perla Compania de Seguros, Inc. v. Ramolete,
ing it from liability under the policy of insurance
203 SCRA 487).
or surety bond issued (Sec. 385, ICP).
d) Coverage and Extent of Liability.
20.iML.3h_ May a thirdqpegson sue the Insurer directly?__ _
(1) Coverage — P I00,000.00 (plus additional
It depends. If the policy provides for
P100,000.00 if what is involved is used as
indemnity against liability, the insurer can be
public utility). (Insurance Memo. Circular
sued directly by a third person. However, if the
4-2006).
policy provides for "reimbursement after actual
payment by the insured," or for the indemnity (2) Death Indemnity — P70,000.00 plus
against loss, a third person has no cause of P30,000.00 funeral expenses (Ibid.).
action against the insurer (Sec. 53, ICP; Bonifacio
Notes: The insurer's maximum liability will
Brothers v. Mora, 20 SCRA 261).
not exceed P I00,000.00 (plus another P100,000.00
b) Is the insurer solidarity liable with the in if common carrier or P200,000.00) regardless of
sured? the number of passengers killed or injured (First
No. While the insurer's liability may be Quezon City, Co., Inc. v.CA, 218 SCRA 525).
direct, it does not mean that the insurer can 20.07. OTHER RULES CONCERNING MOTOR VEHI
be held solidarily liable with the insured. The CLES
insurer's liability is based on contract; that of
~ - - the insured is based on torts; Furthermore, the a) AUTHORIZED DRIVER CLAUSE
insurer's liability is limited to the amount of
A stipulation in a motor vehicle insurance
the insurance coverage (Pan Malayan Insurance
which provides that the driver, other than the
Corporation v. CA, 184 SCRA 54).
REVIEWER ON COMMERCIAL LAW M K T II — INSURANCE CODE
insured owner, must be duly licensed to drive the owner's consent or knowledge, such taking
the motor vehicle, otherwise the insurer is constitutes theft, and therefore, it is the "theft
excused from liability (Villacorta v. I.C., 100 SCRA clause" and not the "authorized driver's clause"
467 [1980]). that should apply. The fact that the driver using
the car before it was carnapped had an expired
The clause means that the insurer indemni-;
license is of no moment (Perla Compania de Segu
fi.es the insured owner against loss or damage to ros, Inc. v. CA, 100 SCRA and Palermo v. Pyramids
the car but limits the use of the insured vehicle Ins., 161 SCRA 677).
to the insured himself or any person who drives
on his order or with his permission. Thus, there is theft if an employee (or any
person without juridical possession) took the
1) The insured need not prove that he has a vehicle of his employer without the latter's
driver's license at the time of the accident if consent-and is'therefore liable to the insured
he was the driver. for damage to the vehicle even if the employee
2) If the claimant was able to present a driv did not have a driver's license. The theft clause
er's license the same is presumed to be gen operates (this is present in a comprehensive
uine. Thus, even if it was established that policy unless theft is excepted) and not the
the driver does not know how to read and "authorized driver clause." This is also true if
write, the license will still be sustained in an employee of a repair shop took the car that
the absence of proof that it was not validly*3 is being repaired for a "joy ride." (Villacorta v.
------- issued (CCC Insurance Corp. v. CA, 31 SCRA ■^nsttrmtce-GmnmTi^0^6RA-46^T^ssl7r^Bnptist~
264). for World Evangelism, Inc. v, Fieldmen's Ins. Co.,
Inc., 124 SCRA 618; See also Paramount Insurance
3) A driver (not the insured himself) who v. Remondeulaz, G.R. No. 173773, Nov. 28,2012).
holds an expired driver's license is not an
authorized driver (Gutierrez v. Capital Ins. 21. SURETYSHIP
Co., 130 SCRA 618).
gi;;: 21.01. Suretyship
THEFT CLAUSE
Agreement whereby the surety guarantees the
The risks insured against in the policy may
performance by another of an undertaking or an
include theft. If there is such a provision and the obligation in favor of a third party (Sec. 175,1CP).
vehicle was unlawfully taken, the insurer is li
able under the theft clause and the authorized a) Fidelity Bond — contract of insurance against loss
driver clause does not apply. The insured can from misconduct.
recover even if the thief has no driver's license b) Fidelity Guaranty Insurance — a contract whereby
(Perla Compania de Seguros, Inc. v. CA, 208 SCRA. one, for a consideration, agrees to indemnify
487 [1992]). ihesassured‘;againsbloss arising from the want"
In other words, where the motor vehicle of integrity, fidelity or honesty of employees or
is unlawfully and wrongfully taken without other persons holding positions of trusts.
22. LIFE INSURANCE e) Industrial Life ■

— life insurance entitling the
22.01. Life Insurance insured to pay premiums weekly, or where
premiums are payable monthly or oftener.
Insurance on human life and insurance apper
taining thereto or connected therewith which VARIABLE CONTRACT
includes every contract or pledge for the payment of
endowments or annuities (Sec. 179, ICP). Any policy or contract on either a group or individual
basis issued by an insurance company providing for benefits
22.02. Effect of death of insured through suicide or other contractual payments or values thereunder to vary
so as to reflect investment results of any segregated portfolio
The insurer in a life insurance contract shall be
of investment.
liable in case of suicide by the insured if:
a) suicide was committed after the policy has been POWERS OF THE INSURANCE COMMISSIONER
in force for a period of two (2) years from the
date of its issue or its last reinstatement, unless
24.01. ADJUDICATORY OR QUASI-JUDICIAL POWERS
the policy provides a shorter period; a) Concurrent Jurisdiction (with regular civil
courts) — cases where any single claim does not
b) suicide committed in a state of insanity; it shall
exceed P100,000.00 involving liability arising
make the insurer liable regardless of the date of
from the following: (1) insurance contract; (2)
the commission of the suicide (Sec. 180-A, ICP).
contract of suretyship; (3) reinsurance contract;
— :------------an^44)-membembip-Geffifi€ate4ssuedr-by-ffl^jw
bers of mutual benefit associations (Sec. 416,
a) Ordinary Life, General Life or Old Line Policy —
ICP).
insurer pays a premium every year until he dies.
Surrender value after three (3) years. b) Primary and exclusive Jurisdiction — claim for
benefits involving pre-need plans where the
b) Limited Payment Policy — insured pays premium
amount of benefits does not exceed P100,000.00
for a limited period. If he dies within the period,
(Sec. 55, Pre-Need Code, R.A. No. 9829).
his beneficiary is paid; if he outlives the period,
he does not get anything. c) For the purpose of any proceeding under Section
416 of the ICP, the Commissioner or any officer
c) Endowment Policy — pays premium for specified thereof designated by him, is empowered to
period. If he outlives the period, the face value oi administer oaths and affirmation, subpoena
the policy is paid to him; if not, his beneficiaries witnesses, compel their attendance, take evi
receives the benefit. dence and require the production of any books,
d) =•Term Insurance — insured pays premium only papers, documents or contracts or other records
once, and he is insured for a specified period, which are relevant or material to the inquiry
' If he dies within the period/ his beneficiaries (Sec. 416, par. 9, ICP).
benefits. If he outlives the period, no persor d) Does the Insurance Commission have jurisdic
benefits from the insurance. tion to decide the legality of a contract of agen-
162 EEVlEWElx ON CQMMEP.G a : PART 11 — INSURANCE CODE 163
cy entered into between an insurance company Before restoring such authority, the Com
and its agent? missioner shall require the company concerned
NO. The same is not covered by the term to submit to him a business plan showing the
"doing or transacting insurance business" under company's estimated receipts and disburse
Section 2 of the Insurance Code, neither is it ments, as well as the basis therefor, for the next
covered by Section 416 of the same Code which succeeding three (3) years.
grants the Commissioner adjudicatory powers. b) Insolvency
24.02. REVOCATION OF CERTIFICATE OF AUTHORITY If the company is determined by the Com
a) The Certificate of Authority issued to the do missioner to be insolvent or cannot resume busi
mestic or foreign company by the Commission ness, he shall, if public interest requires, order its
may be revoked or suspended by the Insur liquidation (Sec. 249, ICP).
ance Commissioner for any of the following This should be distinguished from a
grounds (Sec, 247, ICP): situation where a conservator is appointed when
1) The company is in an unsound condition; the Commissioner finds that a company is in a
state of continuing inability or unwillingness
2) That it has failed to comply with the provisions to maintain a condition of solvency or liquidity
of law or regulations obligatory upon it; deemed adequate to protect the policyholders
3) That its condition or method of business is such*45 and creditors. The conservator will take charge
------- of the management of the insurance company
public or to its policyholders; (Sec. 248, ICP).
4) That its paid-up capital stock, in the case of a
domestic stock company, or its available cash
assets, in the case of a domestic mutual company,
or its security deposits, in the case of a foreign
company, is impaired or deficient;
5) That the margin of solvency required of such
company is deficient.
The Commissioner is authorized to suspend
or revoke all certificates of authority granted to
such insurance company, its officers and agents,
and no new business shall thereafter be done
by such company or for such company by its
agent in the Philippines while such suspension,
revocation, or disability continues or until
its authority to do business is restored by the
Commissioner.
PART III — BUSINESS ORGANIZATIONS 165
transaction; and any billboard conspicuously

exhibited in plain view in or at the place of her/
his business or elsewhere, announcing her/his
PART III business.
b) A proprietor is required to register his business
BUSINESS ORGANIZATIONS name other than his true name with the Bureau
of Trade Regulation and Consumer Protection
A. BASIC TYPES OF BUSINESS ORGANIZATION; of the Department of Trade and Industry (Sec.
1, Act No. 3883). The requirement also includes
Persons who are engaged in business use different business firm name or style. If not registered he cannot:
organizations and business arrangements as vehicles therefor. 1) use or sign the business name in connection
These include: (1) Sole Proprietorship, (2) Partnership, (3) Joint with his business on any written or printed
Account or Cuentas en Participation, (4) Business Trust, (5) Joint receipts or any evidence of agreement or
Venture, (6) Cooperative, and (7) Corporation. other documents;
1. INDIVIDUALS AND SOLE PROPRIETORSHIP 2) he cannot exhibit the business name or sign
thereof in plain view.
A person personally conducts business under his
name or a business name. The business is an organization c) Juridical persons need not register the names
------- composed of the proprietor himself and his employees W b-4— _____that are registered with the Securities and Ex*-
has no personality separate and distinct from the proprietor. change Commission. However, if they are us
ing different names for their business, they must
a) A sole proprietorship does not possess a juridical register the same.
personality and has no legal personality to file or d) Prohibited Names
defend an action in court (Anita Mangila v. CA, G.R.
No. 125027, Aug. 12, 2002). The following BNs are not registrable:
1,01. BUSINESS NAME (Act No. 3883) 1) The name or the nature of business itself is
illegal, offensive, scandalous, or contrary to
a) Definition of Business Name. A Business Name propriety;
(BN) refers to any name that is different from
the true name of an individual which is used 2) Names which are identical or resemble a
or signed in connection with her/his business BN already registered with the DTI, the
on any written or printed receipts including Securities and Exchange Commission,
receipts for business taxes, duties and fees and Cooperative Development Authority, Inte
withdrawal or delivery receipts; any written or llectual Property Office, Food and Drug
printed evidence of any agreement or business - - , Administration, Department of Labor and
Employment or any other government
office authorized by law to register names,
164 as likely to cause confusion or mistake
REVIEWER ON COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS 167
in the minds of the public taking into Commerce. Although the concept of merchants is
consideration the following: now rendered obsolete by the provisions of law that
provide for different qualifications and requirements,
(i) nature of the business;
it is important to note such term in so far as they are
(ii) product/service handled; still referred to in the Code of Commerce provisions
(iii) location/place of business; that are still in force.
(iv) dominant word; a) MERCHANTS — as to individuals, they are

those who having capacity to engage in com
(v) use of descriptive words; and
merce, habitually devote themselves to it (Art 2,
(vi) spelling, sound and / or meaning; Code of Commerce).
3) Names composed of purely generic or Note: Corporations and partnerships (orga
geographic words; nized for business) are also merchants from the
4) Names which by law or regulation cannot time they are registered with the Securities and
be appropriated; Exchange Commission.
5) Names, words, or terms or expressions b) QUALIFICATIONS OF MERCHANTS:
used to designate or distinguish or sugges
1) at least 18 years;
tive of quality of any class of goods, articles,
merchandise, or service; 2) must have free disposition of his property;*1
6) The names or abbreviation ot names used ^ 3] must habitually involve themselves in com-
•
by the government in its governmental merce.
functions;
c) HABITUALITY
7) The names or abbreviation of names of any
nation, inter-governmental or international 1) Habituality — repetition and continua
organization; and tion of commercial acts in such manner that
they are related to each other by reason of
8) Names which are deceptive, misleading or the commercial purpose or end which they
which misrepresent the nature of the busi tend to have, which is the exchange or cir
ness (DTI Department Order No. 16-01 as culation of products. However, it may be
amended). shown by a single act of commerce if he
Note: There must be a separate registration of manifests the intention to engage habitu
a BN for a branch or satellite office. The BN of the ally in commerce.
branch or satellite office should be the same as the
2) When Habituality is Presumed —- the mo
registered BN for the main office.
ment a person who intends to engage in
1.02;' MERCHANTS (CODE OF COMMERCE) commerce announces through circulars,
newspapers, handbills, posters exhibited
Private individuals or single proprietors may
also be considered merchants under the Code of to the public, or in any other manner what-
168 REVIEWER ON COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS
soever, an establishment which has for its MCIj-02-1443, July 31, 2002) that judges are still
object some commercial acts, disqualified from engaging in commerce within
their jurisdiction despite the abrogation of Article
1,03, DISQUALIFICATION TO ENGAGE IN COM
14. Rule 5.02 of the Code of Judicial Conduct
MERCE (CODE OF COMMERCE)
supplies the void created by the abrogation.
a) ABSOLUTE DISQUALIFICATIONS Under such rule, a judge is enjoined to refrain
from financial and business dealings that tend
1) Those serving the penalty of civil interdic
to reflect adversely on the court's impartiality,
tion;
interfere with the proper performance of judicial
2) Those judicially d e c la r e d insolvent until activities or increase involvement with lawyers
they would have obtained a discharge; or persons likely to come before the court.
3) Those who are absolutely disqualified under 1.04. DISQUALIFICATIONS UNDER THE CONSTITU
special laws (Art. 13, Code o f Commerce). TION
b) RELATIVE DISQUALIFICATIONS — these a) Senators and Congressmen — they shall not,
apply in specified te rrito r ie s such as in places directly or indirectly, be interested financially in
where they exercise their functions, or under any contract with, or in any franchise or special
certain circumstances or for s p e c ific activities privilege granted by the Government during
only12345 his term of office. He shall not intervene in any
1) Justices, judges and prosecutors;__________ matter before any office of the Government for
his pecuniary benefit or where he may be called
2) Administrative, economic or military heads upon to act on account of his office (Art. VI, Sec.
of districts, provinces or posts; 14, Constitution).
3) Those employed in the collection and b) The President, Vice-President, Members o f the
administration of funds of the State; Cabinet, and their Deputies or Assistants — shall
4) Stock and commercial brokers of whatever not, during his tenure, practice any profession,
c la s s ; a n d . - participate in any business, be financially
interested in any contract or franchise granted
5) Those disqualified under special laws (Art. by the Government. They shall avoid conflict of
14, Code of Commerce). interest in the conduct of their office (Art. VII,
c) The Supreme Court ruled in Macariola v. Asuncion Sec. 13, Constitution).
(114 SCRA 7 7 [19821) th a t A r tic le 14 of the Code c) Member of the Constitutional Commission —•shall
of Commerce is in the nature of p o litic a l law not engage in the practice of any profession or
- and since it was extended to this country by active management of any business which may
' Spain, it was necessarily abrogated upon the be affected: by The functions of his office, nor
-■ change of sovereignty from Spain to the United shall he be financially interested wifii'’a n y ^ n -
States. However, the Supreme Court explained tract or franchise with the Government (Art. IX,
in josie Berin v. judge Feiixberto R Barte (G.R. No. Sec. 2, Constitution).
170 REVIEWER ON COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS 171
d; President, Vice-President, Members o f the Cabinet, commonly called an accidental partnership: and there
Congress, Supreme Court and the Constitutional is no- indication to the public that there is an existing
Commission, Ombudsman during their tenure — arrangement because only the ostensible partner is
no loan, guaranty, or other form of financial conducting the business. ;
accommodation for any business purpose may
3.02. DISTINGUISHED FROM PARTNERSHIP
be granted by any government-owned or con
trolled bank (Art. XI, Sec. 16, Constitution). a) As to juridical personality. A joint account has
no juridical personality while a partnership has
e) Practice o f Profession — Foreigners are disquali
a personality separate a n d distinct from the part
fied. The practice of profession (engineering,
ners.
medicine and allied professions, accountancy,
etc.) is limited to Filipinos (Art XII, Sec. 14, Con- b) As to business name. No commercial name
common to all participants can be adopted in
joint accounts (Art. 241, Code o f Commerce). A
2. PARTNERSHIPS partnership can adopt a partnership name.
; 2.01. PARTNERSHIP — tw o . or more persons bind c) As to management. The general partners are
themselves to contribute money, property, or industry all managers in the partnership while only
to a common fund with the intention of dividing the
the ostensible partner manages and transacts
profits among themselves (Art. 1767, CO.
business in his own name and under his
2.02. REGISTRATION — Registration with the Securities individual liability (Art, 241, Code of Commerce).*4
5
— ----------and Exchange Commission (SEC) is~necessary where-
the capital of the partnership is P3,000.00 or more d) As to parries in eases. Only the ostensible partner
(Art. 1772, CO. When so registered with the SEC, its — the person carrying on the joint business —-
partnership name need not be registered anew under can be sued by and is liable to persons transacting
the Business Names Law. with the former. In partnership, all general
partners may be liable even up to the extent of
a) Registration with the SEC is not necessary for a their personal properties and may therefore be
partnership to acquire juridical personality. Even sued by third persons.
an unregistered partnership has a personality
separate and distinct from its partners. 4. BUSINESS TRUSTS
3. JOINT ACCOUNTS (CUENTAS EN PARTICIPACION) I t is a legal relation whereby one person, called the
trustor, conveys a property to andther for the benefit
3. 01. CONCEPT ■ of a person called the beneficiary. The person in whom
An arrangement whereby merchants may inter confidence is reposed as regards the property is called the
est themselves in the transaction of other merchants, trustee (Art. 1440, CC).
contributing thereto the amount of capital they may
~ agree upon, and participating in the favorable and 5 . JOINT VENTURE
unfavorable results thereof in the proportion they
5.01. JOINT VENTURE — an association of persons or
may determine (Art 239, Cods o f Commerce). This is
* . companies jo in tly u n d e rta k in g : some co m m e rc ia l
172 RE.VIEWER ON COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS 173
enterprise;-generally all contribute assets and share 1.01. What are the attributes of a corporation?
risks. It requires a community interest in the perfor a) It is an artificial being with separate and distinct
mance of the subject, a right to direct and govern the personality;
policy connected therewith, and duty, which may be
b) It is created by operation of law;
altered by agreement to share both in profit and- loss
es (Kilosbayan, Inc. v. Guingona, 232 SCRA. 110 [1994]). c) It has the right to succession; and
a) A joint venture is actually a form of partnership d) It has powers and attributes conferred by law or
and should thus be governed by the laws of part incident to its existence.
nership (Aurbach v. Sanitary Wares Manufacturing
Carp., 180 SCRA130 [1989]). ;2. DISCUSSION OF ATTRIBUTES
b) Corporations can enter into joint venture agree ? 2.01. ARTIFICIAL BEING WITH SEPARATE PERSON
ments (Ibid.). ALITY
c) Joint Ventures may result in a formation of joint a) Consequences of Separate Personality
venture corporation. In such case, it must com 1) Property. It is entitled to own properties
ply with the applicable nationalization laws (JG
in its own name and its properties are not
Summit v. CA, G.R. No. 124293, Nov. 20, 2000). the properties of its stockholders, direc
tors and officers (Wise v. Man Sung Lung, 69
6. COOPERATIVES
__________________ Phil. 309). Consistently, the properties of its
A cooperative is an autonomous and duly registered stockholders, directors and officers are not
association of persons with a common bond of interest, the properties of the corporation. The inter
who have voluntarily joined together to achieve their social, est of the stockholders over the properties
economic, and cultural needs and aspirations by making of the corporation is merely inchoate (Saw
equitable contributions to the capital required, patronizing v. CA, 195 SCRA 740 [1991]).
their products and services and accepting a fair share of the
2) Obligations. It can incur obligations and
risks and benefits of the undertaking, in accordance with
its obligations are not the obligations of its
universally accepted cooperative principles (Art. 3, R.A. No.
stockholders, directors and officers (Vasquez
9520).
v. De Borja, 74 Phil 560). As corollary to this
rule, obligations of the stockholders, direc
B. CORPORATION CODE OF THE PHILIPPINES tors and officers are not the obligations of
(B.P. BLG. 68, CCP) the corporation.
3) Rights. Rights belonging to the corpora
1. WHAT IS A CORPORATION? tion cannot be invoked by the stockholders
A corporation is an artificial being created by operation (or directors and officers) even if the latter
of law, having the right of succession and the powers, owns substantial majority of the shares in
attributes and properties expressly authorized by law or that corporation and rights of the stock
incident to its existence. holders, directors and officers cannot be
invoked by the corporation (Stonehill v. Dio~ (it) Investment purposes. ■— The Foreign
kno, G.R. No. 19550, June 19, 1967). Exam Investment Act of 1991 (R.A. No. 7042
ple: The constitutional right of individuals as amended) gives the definition of a
against unreasonable searches and seizure "Philippine National" —-
is personal to him and cannot be invoked
(1) a corporation organized under
by the corporation. Tax exemptions in favor
Philippine laws of which 60%
of the corporation cannot likewise be used
of the capital stock outstanding
by its stockholders (Manila Gas Corp. v. Col
and entitled to vote is owned and
lector of Internal Revenue, 62 Phil 895 [1936]).
held by Filipino citizens;
4) Constitutional rights. Corporations are (2) a corporation organized abroad
entitled to certain constitutional rights. and registered as doing business
Example: Right against unreasonable in the Philippines under the Cor
searches and seizure. It is also considered poration Code of which 100% of
a person under the due process clause (Art. the capital stocks entitled to vote
Ill, Sec. 1, Constitution). belong to Filipinos.
However, it is not entitled to certain Note: Where a corporation and its
constitutional right not only because it is an non-Filipino stockholders own stocks in a
artificial being but also because it is a mere*56 SEC-registered enterprise, at least 60% of
------- creature of law. Example: The right against the capital stock outstanding and entitled
self~incrimination particularly production to vote of each of both corporations must
of corporate documents. be owned and held by citizens of the Philip
5) Torts. It is liable for tort (PNB v. CA, 83 pines and at least 60% of the members of the
SCRA 237 [1978]). It is liable when the Board of Directors of each of both corpora
tions must be citizens of the Philippines, in
act was committed by the officer or agent
order that the corporation shall be consid
under express direction or authority from
ered a Philippine national (Sec. 3[a], R.A. No.
the stockholders or members acting as a
7042 as amended by R.A. No. 8179). Example:
body or generally from the directors as the
X corporation owns 65% of the outstanding
governing body (Ibid.). shares, entitled to vote in "A " corporation.
6) Nationality. Generally, the corporation is The 70% shares outstanding entitled to vote
considered a national of the country where in X corporation are owned by Pedro, a Fili
it was incorporated (Place of Incorporation pino and four of its five directors are also
Test; Sec. 123, CCP). Filipinos. “A" corporation is a Philippine
national in this example. However, "A"
- (i) Public Enemy — in times of war, the corporation is not a Philippine national if
nationality of a corporation is deter 70% of the shares outstanding entitled to
mined by the nationality of the con vote in X corporation (which owns 65% of
trolling stockholders (Control Test). A corporation) belong to aliens. The same
conclusion will be reached even if only 55% cannot be imposed. However, the corpora
of the shares outstanding entitled to vote in. tion may be dissolved for violations of one
X belong to aliens but more than 60% of its Corporation Code (Sec. 144).
directors are aliens (e.g., 4 of 5 directors are
aliens). If the crime is committed by a corpora
tion or other juridical entity the directors,
7) What is your understanding: of the "Grand officers, employees or other officers thereof
father Rule?" responsible for the offense shall be charged
Grandfather Rule is a method of de and penalized for the crime, precisely be
termining the nationality of a corporation cause of the nature of the crime and the
which in turn is owned by another corpora penalty therefor. A corporation cannot be
tion by breaking down the equity structure arrested and imprisoned; hence, it cannot
of the shareholders of the corporation. The be penalized for a crime punishable by im
percentage of shares held by the second prisonment. However, a law may be passed
corporation in the first is multiplied by the to specifically provide that a corporation is
latter's own Filipino equity and the prod criminally liable. There can be a criminal
uct of these percentages is determined to be statute under which corporation may be
the ultimate Filipino ownership of the sub charged and prosecuted for a crime if the
sidiary corporation. This applies only if the imposable penalty is fine. Even if the stat-
Filipino equity is less than 60% of the out-
_____ute...pj£scrib£sdM3tLfinaaiad- imprisonment
standing capital of a corporation that owns
as penalty a corporation may be prosecut
shares in a partly nationalized enterprise -
ed and, if found guilty may be fined (Ching
at least 60% must be owned by Philippine
v. Secretary of Justice, G.R. No. 164317, Feb. 6,
nationals (See Aquino, Philippine Corporate
Law Compendium). 2006).
3) Moral Damages. It cannot be awarded in
b) Artificial Being
favor of corporations because they do not
It exists by fiction of law only hence, it is have feelings and mental state. They may
subject to limitations that are inherent because of not even claim moral damages for be
its nature. . smirched reputation. Mental suffering can
1) Actions. It can act only through its direc be experienced only by one having a ner
tors, officers and employees. vous system and it flows from real ills, sor
rows, and griefs of life— all of which cannot
2) Criminal Liability. Corporations are inca
be suffered by an artificial person (National
pable of intent, hence, they cannot com
Power Corporation v. Philipp Brothers Oceanic,
mit felonies that are punishable under the
Inc., G.R. No. 126204, Nov. 20, 2001; See dis
Revised Penal Code. They cannot commit
crimes that are punishable under special
senting opinion for the contrary view).
laws because crimes are personal in nature. The Supreme Court clarified in ABS~
In addition, the penalty of imprisonment CBN Broadcasting Corporation v. Honorable
178 REVIEWER ON COMMERCIAL LAV/ PART m ...BUE1NE5;> ORvMTAVATICAN 179
Court o f Appeals (C.R, No. 128690, Jan. 21, obligations of stockholders or officer under
1999) that moral damages are awarded to the doctrine of piercing the veil of corporate
enable the injured party to obtain means, fiction, in some instances, the doctrine
diversion, or amusements that will serve to cannot be used to support an action for the
obviate the moral suffering he has under- ; enforcement of the personal obligations of
gone. The statement in People v. Manero and the directors, officers and incorporators.
Mambulao Lumber Co. v. PNB that a corpora In Francisco Motors v. Court o f Appeals
tion may recover moral damages if it "has (309 SCRA 72), a lawyer was hired by the
a good reputation that is debased, resulting directors and officers of a corporation (all
in social humiliation" is an obiter dictum. members of the same family) to represent
them in an intestate proceedings. Later, the
However, the Supreme Court ruled said lawyer sought to recover the fees for
in Pilipinas Broadcasting Network, Inc. v. Ago such services in a counterclaim against the
Medical and Educational Center (G.Rt No. corporation. The Supreme Court rejected
141994, Jan. 17, 2005) that a corporation
this move ruling that the doctrine cannot
can recover moral damages under Article
be applied to make the corporation liable
2219(7) if it was the victim of defamation.
for the personal obligations of directors,
c) What do you understand by the doctrine of officers or shareholders. According to
piercing the veil of corporate entity? the High Court, it is far fetched to allege
that the corporation is protecting fraud or
-----------------------------The doctrine that a corporation is a legal-----
promoting injustice. It was also pointed out
entity distinct from the persons composing it. It
is a theory introduced for the purposes of conve that the doctrine is normally invoked to make
nience and to serve the ends of justice. But when the directors, officers and shareholders liable for
the veil of corporate fiction is used as a shield to the obligations of the corporation. What the
perpetuate fraud, to defeat public convenience, justify lawyer sought was the reverse.
wrong or defend crime, this fiction shall be disre However, in Bank of America NT &
garded and the individuals composing it will SA, et al. v. Court of Appeals, et al. (G.R. No.
be treated identically. This is a judicial function 120135, March 31,2003), the Supreme Court
(Cruz v. Dalisay, AM No. R-181-P, July 31,1987). allowed the filing of a complaint by the
Also, the corporate veil cannot be used to stockholders of a corporation asking the
shield otherwise blatant violation of the prohi petitioner bank to render an accounting of
bition against forum shopping (First Philippine the income of the vessels that are registered
International Bank v. CA, G.R. No. 115849, Jan. 4, in the name of the said corporations (which
1996). the said stockholders wholly-owned). The
Supreme Court ruled that such course
1) Obligations of Directors, Officers, etc. would preclude multiplicity of suits and
Although there are instances when would result in the definitive determina
a corporation may be held liable for the tion and termination of the dispute.
180 REVIEWER ON COMMERCIAL LAW PART ID — BUSINESS ORGANIZATIONS 181
2) What are the circumstances that may be (viii) The parent corporation uses the prop
considered to -justify the application of the erty of the subsidiary as its own.
doctrine to make the parent corporation li (ix) The directors or executives of the sub
able for the obligations of Its subsidiary? sidiary do not act independently in the
Any a combination of or all of the interest of the subsidiary but take their
following may be considered (Philippine . orders from the parent corporation.
National Bank v. Ritratto Group, Inc., G.R. No. (x) The formal legal requirements of the
142616, July 31, 2001, cited in MR Holdings subsidiary are not observed.
Ltd. v. Sheriff Carlos P. Bajar, G.R. No. 138104,
April 11, 2002): 3) Examples of cases when doctrine was
applied.
(i) The parent corporation owns all or
most of the capital stock of the subsid The separate personality may be disre
iary. garded if such personality is:
(ii) The parent and subsidiary corpora (i) used to evade obligations to employees
tions have common directors or offi or used as a pretext to dismiss emplo
cers. yees;
(iii) The parent company finances the sub (ii) used to evade lawful obligations or a
sidiary money judgment;
(iv) The parent company subscribed to all (iii) dominated by officers or stockholders
the capital stock of the subsidiary or or other person or entity to the extent
otherwise causes its incorporation. that the corporation is a mere alter
ego, adjunct, or business conduit;
(v) The subsidiary has grossly inadequate
capital. (iv) used to defeat public convenience;
(vi) The subsidiary has substantially no (v) used to justify wrong;

business except with the parent cor (vi) used to protect fraud;
poration or no assets except those con
veyed to or by the parent corporation.
(vii) used to defend crime;
(viii) used to confuse legitimate legal or ju
(vii) The papers of the parent corporation
dicial issues; or
or in the statements of its officers, the
subsidiary is described as a depart (ix) used to perpetrate deception or other
ment or division of the parent cor wise circumvent the law (Land Bank o f
poration, or its business or financial the Philippines v. CA, G.R. No. 127181,
' responsibility is referred to as the par Sept. 4, 2001; Luisiio Padilla v. CA, G.R.
ent corporation's own. No. 123893, Nov. 2 2 , 2001).
182 REVIEWER ON COMMERCIAL LAW PAILf HI — BUSINESS ORGANIZATIONS
4| Is ownership of substantial portion o the corporate entity as to this transac

the outstanding capital in a corpor. tion had at the time no separate mind,
enough justification to apply the docfc will or existence of its own;
NO. Mere ownership by a s. ? (ii) Such control must have been used by
stockholder or by another corporation of al- the defendant to commit a fraud or
or nearly all of the capital stock of the c-. wrong to perpetuate the violation of a
poration does not justify the application o.' statutory or other positive legal breach
the doctrine. There must be other circum of duty, or a dishonest and an unjust
stances that must be present (Francisco t act in contravention of the plaintiff's
Mejia, G.R. No. 141617, Aug. 14, 2001; PNB legal right; and
v. Ritratto Group, Inc., G.R. No. 142616, juiu
(iii) The said control and breach of duty
31, 2001).
must have proximately caused the in
Thus, the mere fact that a corporator jury or unjust loss complained of (PNB
owns all of the stocks of another corpo v. Andrada Electric & Engineering Com
ration, taken alone, is not sufficient 10 pany, G.R. No. 142936, April 17, 2002).
justify their being treated as one entity. If
Thus, in one case, one corporation
the subsidiary is used to perform legitii nate
was considered a mere alter ego or
functions, a subsidiary's separate existence
adjunct, or instrumentality of the
shall be respected and the liability of the*5
____________________ other because the s tockholders are the...
------- parent company as well as the subskhaia—
same, the manager (and the person in
will be confined to those arising from their
control of operations) is the same, they
respective business (MR Holdings Ltd. v.
have the same customers, they hold
Sheriff Carlos P. Bajar, supra).
office in the same building owned
The general rule will be followed ever by the majority stockholders, and
if the new corporation was the result of a the business operations of the two
"spin-off" of a former division of the parent corporations are merged. Hence, the
company (San Miguel Corp. Employees Union adjunct corporation's obligations are
v. Confessor, 262 SCRA 81 '[1996]). considered the obligations of the other
5) What are the elements that must be pre corporation and the latter's properties
sent to justify the piercing of the veil ol were made to answer for the said
corporate fiction on the ground that the obligations (Estelita Burgos Lipat v.
corporation is a mere alter ego? Pacific Banking Corporation, et a l, G.R.
No. 142435, April 30, 2003).
(i) Control — not mere stock control but
2.02. CREATED BY OPERATION OF LAW
complete domination — not only ol
finances, hut of policy and business - a) CONCESSION THEORY '
practice in respect to the transaction
It is a principle in the creation of corpora
attacked and must have been such.that j tions, under which a corporation is an artifi-
REVIEWER ON COMMERCIAL LAVE PART III — BUSINESS ORGANIZATIONS 185
cial creature without any existence until it has the appropriate Articles of Incorporation
received the imprimatur of the State acting ac with the Securities and Exchange Commis
cording to law, through the SEC. The life of the sion; the life of the corporations starts from
corporation is a concession made by the State. the issuance of the Certificate of Incorpora
tion.
b) FRANCHISES OF CORPORATION
2) Special Law — public corporations are
1) Primary, corporate or general franchises —
created through special laws. Private
the franchise to exist as a corporation. The
corporations cannot be created by special
primary franchise of a corporation, that is,
laws. Exceptions: Government-owned or
the right to exist as such, is vested 'in the
controlled corporations which are actually
individuals who compose the corporation
private corporations.
and not in the corporation itself' (JRS Busi
ness Corp. v. Imperial Insurance, Inc., 11 SCRA 2.03. RIGHT OF SUCCESSION — capacity to have con
634 [19641). tinuity of existence despite the changes on the per
sons who compose it. Thus, the personality continues
(i) cannot be transferred without approv
despite the change of stockholders, members, board
al of Congress.
members or officers.
2) Special or secondary franchises —■certain
rights and privileges conferred upon exist 2.04. POWERS, ATTRIBUTES AND PROPERTIES
ing corporations, such as the right to use _________ a) Theory of Special Capacities/Limited Capacity
the streets of a municipality to lay pipes Doctrine
of tracks, erect poles or string wires, or the
right to engage in delivery service (Ibid.). No corporation, under this Code, shall pos
sess or exercise any corporate powers, except
(i) the special or secondary franchises of a those conferred by law, its Articles of Incorpo
corporation are vested in the corpora ration, those implied from express powers and
tion and may ordinarily be conveyed those as are necessary or incidental to the exer
or mortgaged under a general power cise of the powers so conferred. The corpora
granted to a corporation to dispose of tion's capacity is limited to such express, implied
its property, except such special or sec and incidental powers.
ondary franchises as are charged, with
a public use. b) If the act of the corporation is not one of those
express, implied or incidental powers, the act is
(ii) is subject to levy and sale on execution
ultra vires.
together and including all the proper
ty necessary for the enjoyment thereof.
3. CLASSIFICATIONS AND DISTINCTIONS
c) HOW ARE THEY CREATED
3.01. What are the classes of corporation? ■
1) General Law — private corporations are
generally created under the provisions of a) As to organizers;
the Corporation Code. This is done by filing 1) public ~~ by State only; and
REVIEWER ON COcvIMEROAL LAV-7 PART III — BUSINESS ORGANIZATIONS
2) private ■
— by private persons alone or with strength of such appearance cannot be permit
the State. ted to deny its existence in an action under said
contract (Sec, 21, CCP),
b) As to functions:
Note: This is actually not a real corporation.
1) public — government of a portion of the
State; and 1) Those who assume to act as a corporation
2) . private — usually for profit-making func knowing it to be without authority to do so
tions. shall be liable as general partners (meaning
up to th e ir personal properties). Those who
c) As to governing law:
were not aware of the defect are liable only
1) public — Special Laws and Local Govern up to their investment.
ment Code; and
2) The Supreme Court ruled in one case that
2) ■ private — Law on Private Corporations. all those who d e riv e d benefit from the
d) As to legal status. tra n s a c tio n made by the ostensible corpo
ration, d e s p ite knowledge of its legal de
1) de jure corporation — corporation orga fects, may be held liable for contracts they
nized in accordance with requirements of impliedly assented to or took advantage
law; of (him v. Philippine Fishing Gear Industries,
2) de fa c to corporation — a corporation where Inc., 317 SCRA 728 [1999]).________________
there exists a flaw in its incorporation. The
f) corporation b y prescription — a corporation
requisites for its existence are:
that was not fo rm a lly organized as such but has
(i) The existence of a valid law under been d u ly r e c o g n iz e d b y im m e m o ria l usage as a
which it may be incorporated; and corporation, with rig h ts and duties maintainable
(ii) An attempt in good faith to incorpo- at law. Example: Roman Catholic Church.
■rate; - g) As to existence of stocks:
(iii) Use of corporate powers.
1) Stock corporation — a corporation in
N ote: Issuance of certificate of in which capital s to c k is divided into shares
corporation by the SEC is a minimum an d is authorized to distribute to h o ld e rs
requirement of continued good faith. thereof of such shares dividends or allot
If there is substantial compliance, ments of the surplus profits on the basis o f
de jure corporation is resulted; only the sh a re s h e ld (Sec. 3, CCP).
colorable compliance results in de facto In Collector of Internal Revenue v. Club
corporation. Filipino de Cebu (5 SCRA 321 [1962]), the
e) corporation by estoppel — group of persons Supreme Court ruled that even if there is a
which holds itself out as a corporation and en statement of capital stock, the corporation
ters into a contract with a third person on the is sMITnot a stock corporation if dividends
are not supposed to be declared, that is, k) Real Estate Investment Trust (REIT)
there is no distribution of retained earning,
A stock corporation established in accor
2) Non-stock corporation — a corporation dance with the Corporation Code of the Philip
which does not issue stocks and does not pines and the rules and regulations promulgated
distribute dividends to their members. by the SEC principally for the purpose of own
h) As to laws of incorporation: ing income-generating real estate assets. (Sec. 3
fee], R.A. No. 9856).
1) Domestic corporation —■ corporation
formed, organized or existing under Philip 3.02. DISTINGUISHED FROM PARTNERSHIP
pine laws.
a) As to manner of creation. — Partnership is
2) Foreign Corporation — a corporation created by mere agreement while the existence
formed, organized or e x is tin g under any of the corporation commences only from the
laws other than th o s e of the Philippines issuance of a Certificate of Incorporation by the
and whose laws allow Filipino citizens and SEC or in proper cases, passage of a special law.
corporation to do b u s in e s s in its own coun
b) As to the number of organizers. — Even two
try or state (Sec. 123, CCP).
persons may form a partnership while a corpo
i) Other Corporations: ration needs at least five (5) incorporators.
1) Close Corporation________________________ _____ c) As to powers. — A corporation is more restrict-
ed in its powers because of its limited personal
2) Special Corporation
ity while a partnership is subject only to what
3) Educational Corporation may be agreed upon by the partners.
4 ) . Religious Corporation d) Authority of those who compose. — There is
a. Corporation Sole mutual agency in partnership and each general
partner can represent and bind the partnership
* b. Religious Societies while stockholders are not agents of the corpora
j) Corporations going public vs. Corporations go tion in the absence of express authority.
ing private e) Transfer of interest. — Corporate shares are
A corporation is deemed to be "going-pub freely transferable without the consent of other
lic" when it decides to list its shares in the stock stockholders (unless there is a stipulation) while
exchange. This includes corporations that will interest in the partnership cannot be transferred
make initial public offering of its shares. without the consent of the other partners.
. A corporation is said to be "going private" £) Succession. — There is no right of succession in

when it would restrict the shareholders to a cer partnership as death of a general partner dis
tain group. In a sense, this also includes close or solves the partnership.
closely held corporation.
190 REVIEWER ON COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS
3.03. De F acto Corporations vs. D e Jure Corporations on installment basis. A Corp. paid the downpayment
and Taktak Corp. issued the corresponding receipt. To
his chagrin, Mamuhunan discovered that the Articles
DEJURE DE FACTO
of Incorporation had not been filed by his friends
1. one created in strict or ' 1. one which actually on that date so he hurriedly attended to the matter.
substantial conformity exists for all practical No sooner had the Certificate of Incorporation been
with the statutory purposes as a issued by the SEC, A Corp. became bankrupt after
requirements for corporation but which three months.
incorporation. has no legal right to Upon being sued by Taktak Corporation in his
corporate existence as personal capacity, Mamuhunan raised among its
against the State. defenses the doctrines of de facto corporations and
2. right to exist cannot be 2. right to exist cannot be corporations by estoppel.
successfully attacked successfully attacked Can the two defenses be validly raised? Explain.
even in a direct even in a direct
NO. The two defenses cannot be raised because they
proceeding by the proceeding by the
are not available to Mamuhunan. In the first, there
- State.. State.
was no de facto corporation because the Articles of
Incorporation was not filed with the SEC. There
PROBLEMS:*2 can be no attempt in good faith to incorporate if no
Articles of Incorporation was filed with the SEC. In
■h------ A corporation was created by a special law. Later, addition, Mamuhunan cannot raise the defense that
the law creating it was declared invalid. May such his corporation is a de facto corporation to defeat a
corporation claim to be a de facto corporation? claim. Until the personality is attacked by the State,
Ac NO. The corporation is not a de facto corporation the de facto corporation can continue as a corporation.
because the requisites for its existence are absent. The allegation that there was a corporation by
There is no valid law under which it 'was organized estoppel may be correct but the same is not a defense
and there would be no continuity of good faith. against claimants. The concept of corporation by
-This is- specially -true if the corporation that estoppel is precisely for the purpose of protecting
was created was a private corporation which was third persons or creditors. The defense is established
not a government-owned or controlled corporation. in favor of persons with whom the corporation deals
Private corporations can only be created by special but not in favor of those who represent themselves as
law if it is government-owned or controlled. such corporation although it is not, like Mamuhunan.
2. Mamuhunan was invited by his friends to invest in However, Mamuhunan can raise his good faith
A Corp., a newly organized firm engaged in money as a defense and claim that his liability is only up to the
market and financing operation. Because of his heavy extent of his investment. Section 21 of the Corporation
investments, Mamuhunan became the firm's president Code makes liable as general partner only those
and, as such, purchased a big number of computers, who assume to act as a corporation knowing it to be
typewriters and other equipment from Taktak Corp. without authority,
4, ADVANTAGES AND DISADVANTAGES 2) At least five (5) but not more than fifteen
' 4.01. ADVANTAGES (15);
3) They must be of legal age;
a) The capacity to act as a legal unit;
4) Majority must be residents of the Philip
b) Limitation of, or exemption from, individual
pines; and
liability of shareholders;
5) Each must own or subscribe to at least one
c) Continuity of existence;
share.
d) Transferability of shares;
b) CORPORATORS — all the stockholders and
e) Centralized management of board of directors; members of a corporation including the incor
and : - porators who are still stockholders.
f) Standardized method of organization, and c) STOCKHOLDERS AND MEMBERS — stock
finance (Salonga, Phil Law on Private Corporations, holders are persons who hold or own shares in a
3rd ed., p. 9). stock corporation while members are those who
4.02. DISADVANTAGES compose the non-stock corporation.
a) More complicated in formation and manage d) DIRECTORS AND TRUSTEES — the Board of
Directors is the governing body in a stock corpo
ment;
ration while Board of Trustees is the governing
b) Higher cost of formation and operation; body in a non-stock corporation. They exercise
c) Lack of personal element; the powers of the corporation.
d) Greater governmental control and regulation; e) CORPORATE OFFICERS — they are the offi
cers who are identified as such in the Corpora
e) Management and control are separate from tion Code, the Articles of Incorporation or the
ownership; and By-laws of the corporation.
f) Stockholders have little voice in the conduct of f) PROMOTER •— a self-constituted organizer
business (De Leon, The Corporation Code o f the who finds an enterprise or venture and helps
Phil, Annotated, 2002 ed., pp. 48-49). to attract investors, forms a corporation and
launches it in business, all with a view to pro
5. COMPONENTS OF A CORPORATION motion profits (Salonga, p. 71).
5.01. a) INCORPORATORS — those mentioned in the 1) The corporation is not bound by the con
articles of incorporation as originally forming tract entered into by the promoter before
and composing the corporation, having signed incorporation unless the contract is ratified
the articles and acknowledged the same before (Cagayan Fishing Dev. Co., Inc. v. Sandiko, 65
a notary public. They have no powers beyond Phil 223).
those vested in them by the statute.
2) The promoter is personally liable for con
1) They must be natural persons; tracts or agreements with third persons con-
tracted in behalf of the future corporation if 1) Where no foreign stockholder is allowed:

the corporation does not ratify the same or
(i) Mass Media except recording (Art
unless the agreement was expressly made
XVI, Sec, 11, Constitution).
subject to such approval or ratification,
(ii) Retail trade enterprises with paid-up
3) The promoter should remit to the corpora capital of less than US$2.5 Million
tion profits that he derived that properly (Sec. 5, R.A. No. 8762).
pertains to the corporation.
(iii) Private security agencies (Sec. 4, R.A.
g) DIFFERENTIATE CORPORATORS FROM No. 5487).
INCORPORATORS
(iv) Small-scale mining (Sec. 3, R.A. No.
7076).
INCORPORATORS CORPORATORS
• (v) Utilization of natural resources (Art.
1. Signatory to 1. Stockholder of XII, Sec. 2, Constitution).
Articles. . • stock corporation (vi) Cockpits (Sec. 5, P.D. No. 449).
or member of non
(vii) Manufacture, repair, stockpiling and/
stock corporation.
or distribution of nuclear weapons
2. Do not cease to be 2. Cease to be such if (Art II, Sec. 8, Constitution).
such. they are no longer (viii) Manufacture of firecrackers and
stockholders. ___________other pyrotechnic devices-XSgcz-A.
R.A. No. 7183).
3. Number is limited 3. No restriction as to
from 5 to 15. number. 2) Up to twenty percent (20%) foreign equity.
Private radio communications network
4. Must have 4. May be such (R.A. No. 3846).
contractual through his
3) Up to twenty-five percent (25%) foreign
capacity. guardian. equity
(!) Private recruitment, whether for local
or overseas, employment (Art. 27, P.D.
5.02. FOREIGN STOCKHOLDERS
No. 442).
a) Can all the stockholders in a corporation be (ii) Construction and repair of locally
foreigners? funded works (Sec. 1, C.A. 541).
YES, except in fully or partly nationalized (iii) Construction of defense-related struc
corporations. For example, a manufacturer that tures (Sec. 1, C.A. 541).
exports all its products can be wholly-owned by
4) Up to forty percent (40%) foreign equity
foreigners.
(i) Exploration, development and utiliza
b) What are the fully or partly nationalized corpo tion of natural resources (Art. XII, Sec.
rations? 2, Constitution),
PART ID — BUSINESS ORGANIZATIONS
6.01. THE ARTICLES OF INCORPORATION

(it) Realty companies and other corpora
tions that own private lands (Art XII, a) m a t are the contents of the Articles of Incor
Sec. 7, Constitution). poration prescribed under Sec.. 14 of the Corpo
ration Code?
(ill) Operation and management of public
utilities (Art. XII, Sec. 11, Constitution). 1) name of corporation;
(iv) Culture, production, milling, process 2 ) purpose/s, indicating the primary and
ing, trading except retail of rice and secondary purposes;
com and by-products (Sec. 5, P.D. No. 3) place of principal office;
194; Sec. 15, R.A. No. 8762).
4) term which shall not be more than 50 years;
(v) Adjustment companies (Sec. 323, P.D.
No. 612). 5) names, citizenship and residences of incor
porators;
(vi) Sauna and steam bath houses, mas
sage clinics and similar activities (R.A. 6) number, names, citizenship and residences
No. 7042). of directors;
(vii) Domestic market enterprises with 7) in stock corporation, amount of authorized

paid-in capital stock of less than capital stock, number of shares;
US$200,000.00. However, the thresh- ___________ 8) in par value stock corporations, the par
old paid-in capital is US$100,000.00 value of each share;
if enterprise involves advanced tech
9) number of shares and amounts of subscrip
nology or they employ at least 50 di
rect employees (Sec. 8, R.A. No. 7042). tion of subscribers which shall not be less
than 25% of Authorized Capital Stock;
(Thus, it can be 100% owned by for
eigners if the corporation is engaged 10) amount paid by each subscriber on their
entirely in export.). subscription, which shall not be less than
25% of subscribed capital and shall not be
5) Up to sixty percent (60%) foreign equity
less than P5,000.00;
(i) Financing companies (Sec. 6, R.A. No.
11) name of treasurer elected by subscribers;
5980, as amended by R.A. No. 8556).
and
(ii) Investment houses (Sec. 5, P. D. No. 129,
12) if the corporation engages in a national
as amended by R.A. No. 8366).6
ized industry, a statement that no transfer
of stock will be allowed if it will reduce the
6. FORMATION OF A CORPORATION
. stock ownership, of Filipinos to a percent
The life of a corporation commences from the issuance age below the required legal minimum.
of the Certificate of Registration by the SEC upon filing of
the Articles of Incorporation and other documents.
m
PART III — BUSINESS ORGANIZATIONS
b) What documents should be filed with the SBC

the name and (b) the name is either of three
for purposes of securing a certificate of regis (3) mentioned above (industrial Refractories
tration of a stock corporation? Corp. o f the Phils, v. Refractories Corp. of the
1) Articles of Incorporation. Philippines, G.R. No. 122174, Oct. 3, 2002).
2) Treasurer's Affidavit certifying that 25% of The corporation chooses its name at its peril;
the total authorized capital stocks has been and the use of a name similar to one adopted by
subscribed and at least 25% of such have another corporation, whether a business or a
been fully paid in cash or property. non-profit organization, if misleading or likely
to injure in the exercise of its corporate functions,
3) Bank certificate covering the paid-up capi
regardless of intent, may be prevented by the
tal.
corporation having a prior right, by a suit for
4) Letter authority authorizing the SEC to injunction to prevent its use. It may likewise be
examine the bank deposit and other cor directed to change its corporate name (Ang Mga
porate books and records to determine the Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K.
existence of paid-up capital. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay
5) Undertaking to change the corporate name Cristo Jesus, Haligi at Suhay ng Katotohanan, G.R.
in case there is another person or entity No. 137592, Dec. 12, 2001, where petitioner was
with same or similar name that was previ ordered to change its name for being similar to the
ously registered. respondent's name).
6) Certificate of authority from proper gov d) What is the importance/significance of the prin
ernment agency whenever appropriate like cipal place of business stated in the Articles of
BSP for banks and Insurance Commission Incorporation?
for insurance corporations.
The principal place of business may
c) What corporate name cannot be used? determine the venue of court cases involving
corporations. It may also determine if service of
1) Names w hich. are identical, deceptively
summons and notices was properly made (Sy
or confusingly similar to that of any ex
isting corporation including internation
v. Tyson Enterprises, Inc., 119 SCRA 367 [1982]).
ally known foreign corporation though not (Note: A specific address is now required; Metro
used in the Philippines; Manila is no longer allowed, SEC Circular No. 3,
Series o f2006).
2) Name already protected by law;
e) What is the maximum term of a corporation?
3) Name which is contrary to law, morals or Can it be extended?
public policy.
A corporation has a maximum term of fifty
- - - " ' N otes: A corporation which seeks to (50) years. It may be extended for a period not
prevent another from using its name must exceeding fifty (50) years in any single instance.
show that it (a) acquired prior right to use However, no extension can be made earlier than
REVIEWER ON COMMERCIAL LAW PART III ~ BUSINESS ORGANIZATIONS 201
five (5) years prior to the expiration of the term shall be located in Region III, in such municipality
(Sec. 11, CCP). therein as its Board of Directors may designate," c)
"Seventh Article. The capital stock of the corporation
£) Define the following terms: (1) authorized
is One Million Pesos (PI,000,000.00), Philippine
capital stock; (2) subscribed capital stock; (3)
paid-up capital; (4) outstanding capital; and (5) Currency."
capital. . . . . . . . What are your comments and suggested changes
1) Authorized Capital Stock —■the amount to the proposed articles?
fixed in the articles of incorporation to be A: a) The First Article does not comply with the SEC
subscribed and paid by the stockholders Memorandum Circular No. 5 dated July 17,2008,
of the corporation (SEC Opinion, Aug. 11, which requires the corporate name to contain the
1997). word "corporation" or its abbreviation "Corp.,"
2) Subscribed"Capital"— that portion of the Incorporated or "Inc." Hence, the name should
authorized capital stock that is covered by be either be "Toho Marketing Corporation"
subscription agreements whether fully paid or "Toho Marketing Company, Incorporated,"
or not. "Toho Marketing Corp.," "Toho Marketing, Inc."
3) Paid-Up Capital — the portion of the b) The Third Article should indicate the specific
authorized capital stock which has been address in the Philippines, and not merely the
subscribed and actually paid (MSCI- region (SEC Circular No. 3, Series o f2006),
NACUSIP Local Chapter v. National Wages*45
and Productivity Commission, ZbU SLKA l / J — — -e)—
[1997]). of shares into which the capital stock is divided,
and the par value if any as well as those without
4) Outstanding Capital Stock — the total par value.
shares of stock issued to subscribers or
stockholders, whether or not fully or par 6.02. AMENDMENT OF ARTICLES OF INCORPORA
tially paid except treasury shares so long as TION
there is a binding subscription agreement
a) Procedure. Majority vote of directors or trustees,
(Sec. 137, CCP).
and written assent of the stockholders represent
5) Capital — properties and assets of the cor ing 2/3 of outstanding capital or 2 /3 of mem
poration that are used for its business or bers of non-stock corporations.
operation.
b) When effective. Upon approval of SEC or if not
PROBLEM: acted upon by , SEC within six (6) months from
the date of filing provided that delay cannot be
1. The Articles of Incorporation to be registered in the attributed to the corporation.
Securities and Exchange Commission contained the
following provisions: a) "First Article. The name of the of statutes amending the
corporation shall be Toho Marketing Company." b) Corporation-Code or special laws may result in
"Third Article. The principal office of the corporation the amendment of the Articles of Incorporation
provided th a t n o v e ste d right is impaired (Sec, o f In c o r p o r a tio n prevails (Loyola Grand Villas
145, CCP). Homeowners [South] Asso., Inc. v. CA, 276 SCRA
681 [1997]).
6.03. WHEN CAN SEC SUSPEND OR CANCEL CERTI
FICATE OF REGISTRATION (Sec. 6[L], P.D. No. c) It must be reasonable and not arbitrary o r
9&2-A) oppressive.
a) fraud in procuring registration; d) It must not disturb vested rights, impair contract
or property rights of stockholders or members
b) serious misrepresentation as to objectives of cor
or create obligations unknown to law (See Thom
poration;
son v. CA, 298 SCRA 280 [1998]), where the Court
c) refusal to comply with lawful order of SEC; disallowed absolute restriction on the right to
d) continuous inoperation for at le a s t 5 years; transfer and Salafranca v. Philamlife (Pamplona),
300 SCRA 469 (1998), where the Court declared
e) failure to file by-laws within required period;
that amended By-laws should not undermine
f) failure to file reports; and the security of tenure of an employee by declar
g) other s im ila r grounds. ing the position non-existent.
7.03. ADOPTION AND AMENDMENT

7. BY-LAWS
a) Original By-laws:
7.01.--BY-LAWS —- relatively permanent and continuing
-------------- rules of action adopted by the corporation for its own ________ ,__ 1}__ may accompany the Articles of Incorpora-
government and that of the individuals composing tion and SEC will approve it together with
it and those having the direction, management the Articles; or
and control of its affairs, in whole or in part, in th e 2) filed within one (1) month from notice of
management and control of its affairs and activities issuance of certificate of incorporation,
(China Banking Corporation v. CA, 270 SCRA 503 [1997]; in which case it must be: (i) approved by
8 Fletcher, Sec. 4166). stockholders constituting at least a major
7.02. REQUISITES OF VALID BY-LAWS ity of outstanding capital and (ii) a copy
(signed by approving stockholders or
a) It must be consistent with Corporation Code,
members, certified by majority of directors
other pertinent laws and regulations ( See Fleish-
or trustees, and countersigned by corporate
cher v. Botica Nolasco, 47 Phil. 583; Barretto v. La
secretary) must be filed with the SEC.
Previsora Filipina, 59 Phil. 212). Example: A p r o v i
sion in the By-laws granting a permanent seat N ote: Non-filing within one (1) month
in the Board of Directors is contrary to the Code is a ground to forfeit franchise and will
(Grace Christian High School v. CA, 281 SCRA 133 not result in automatic dissolution (Loyola
[1997]). Grand Villas [South] Homeowners v. CA, 276
b) It must be consistent with the Articles of Incor SCRA 681 [1997]).
poration. Hence, in case of conflict, the Articles
h) Amendment. May be made by the (1) Stockhold

ers together with the Board, or (2) by the Board from or necessary for the exercise of the express
only, : powers.
1) Stockholders together with Board: majority c) Incidental Powers — those that are incidental to
of board plus majority of outstanding capi the existence ,of the corporation.
tal stock.
Note: There are express powers that are
2) By the Board as delegated by 2 /3 of out incidental powers like the power to acquire
standing capital stock or 2 /3 of members. properties.
7.04. BINDING EFFECT OF PROVISIONS OF BY-LAWS
8.02. EXPRESS'POWERS UNDER THE CORPORATION
a) As to the Corporation and its components — ■ CODE -
binding not only upon the corporation but also
aj GENERAL POWERS (Sec. 36, CCP)
on its stockholder, members and those having
direction, management and control of its affairs. 1) sue and be sued in its corporate name;
b) As to Third Persons — not binding unless there 2) succession;
is actual knowledge. Third persons are not even 3) adopt and use a corporate seal;
bound to investigate the content because they
are not bound to know the By-laws which are 4) amend Articles of Incorporation;
merely provisions for the government of a cor™ 5) adopt, amend or repeal by -laws;
__________ poration. and, notice to them will not be pre-
sumed (China Banking Corp. v. CA, 270 SCRA 503 6) for stock corporations — issue stocks to
[1997]). subscribers and to sell treasury stocks; for
non-stock corporations — admit members;
Examples: Provisions of the By-laws on
delinquency sale shall not be binding on a 7) purchase, receive, take, or grant, hold, con
pledgee (Ibid.). In PMI Colleges v. NLRC (277 vey, sell, lease, pledge, mortgage and other
SCRA 462 [1997]), the provision in the By wise deal with real and personal property,
laws enumerating the contract signatory is not pursuant to its lawful business;
binding on third persons who signed a contract
with the corporation as represented by the 8) enter into merger or consolidation;
Chairman who is not one of those enumerated. 9) to make reasonable donations for public
welfare, hospital, charitable, cultural, scien
POWERS OF A CORPORATION tific, civil or similar purposes. Prohibited: for
8.01. KINDS partisan political activity;
a) Express — those expressly authorized by the 10):: to establish pension, retirement and other
Corporation - Code and other laws, and its plans for the benefit of directors, trustees,
Articles of Incorporation or Charter. officers and employees; and
b) Implied Powers — those that can be inferred .11) other powers essential or necessary to carry
out its purposes.
b) SPECIFIC POWERS (S ec, 3 7 to S ec, 44, C C P ) c) Effects of Ultra Vires Act
1) Power to extend or shorten corporate term 1) executed contract .... courts will not set
(Sec. 37,, CCP); aside or interfere with such contracts.
2) Increase / Decrease Corporate Stock (Sec. 38, 2) ■ executory contracts — no enforcement

CCP); even at the suit of either party (void and
3) Incur or create Bonded Indebtedness (Sec. unenforceable).
38, CCP); 3) part executed and part executory — prin
4) Deny pre-emptive right (Sec. 39, CCP); ciple against unjust enrichment shall apply.
5) Sell, dispose, lease, encumber all or sub d) Distinguished from Acts that do not comply
stantially all of corporate assets (Sec. 40, with-formalities
CCP);
If certain procedures or formalities are pre
6) Purchase or acquire own shares (Sec. 41, scribed in the Articles of Incorportion or By-laws
CCP); and the same are not complied with, the result
7) Invest in : another corporation, business ing act is not ultra vires act of the corporation.
other than the primary purpose (Sec. 42, Thus, if the By-laws prescribe a procedure in
CCP); entering into contracts and the same was not
8) Declare dividends (Sec. 43, CCP); complied with when the contract involved in
the case was executed, the contract may even be
9) Enter into management contract (Sec. 44,
valid to third persons who are not familiar with
CCP); and
the By-laws.
10) Amend the articles of incorporation (Sec.
16, CCP). e) Distinguished from Unauthorized Acts
8.03. ULTRA VIRES ACTS The act may be within the powers of the
corporation but not within the powers of the
a) Ultra vires acts of the corporation — An ultra
particular officer. The latter is not an ultra vires
vires act is one committed outside the object for
act of the corporation but is sometimes referred
which a corporation is created as defined by the
to as an ultra vires act of the officer. The law on
law of its organization and therefore beyond the
agency applies. For instance, the authority of the
power conferred upon it by law (Atrium Manage
ment Corporation v. CA, G.R. No. 109491, Feb. 28, agent must be in writing in a sale of land through
2001). an agent under Article 1874 of the Civil Code,
otherwise the sale shall be void. Hence, if there is
b) Ultra vires act vs. illegal acts The term ultra no written authority from the Board of Directors
vires is distinguished from an illegal act for the
N to sell the land in the form of a Resolution, the
former is merely voidable which may be en
5 sale of the realty by an officer shall be void (AF
forced by performance, ratification, or estoppel,
Realty & Dev. v. Dieselman Freight Services, G.R.
while the latter is void and cannot be validated
: No. 111448, Jan. 16,2002).
(Ibid.).
208 REVIEWER ON COMMERCIAL LAW FA IT III — BUSINESS ORGANIZATIONS 209
8.04. EXERCISE OF POWERS Corporation Code. However, the board, as

the governing body, may create "executive"
a) Who may exercise the powers of the corpora
committees that may help in managing the
tion?
affairs of the corporation but not under
The Board of Directors exercises the powers Section 35 (Pilipinas Pori Services v. Go, et al,
of the corporation. Generally, the Board alone, G.R. No. 161886, March 16,2007).
without the concurrence of the stockholders,
3) In some cases, corporate officers like the
may exercise the powers. The stockholders can
President can also bind the corporation.
not overrule the directors in its exercise of the The authority of such individuals to bind
corporate powers. the corporation is generally derived from:
1) When not exercised by the board: The pow (i) law;
ers are not exercised by the board directly
if: (i) there is a management contract; and (ii) corporate by-laws; or
(ii) the powers of the board are delegated (iii) authorization from the board, either
by majority vote (of board) to an executive expressly or impliedly by habit, cus
committee. tom or acquiescence in the general
course of business (Inter-Asia Invest
2) What are the powers that cannot be exer
ment Industries, Inc. v. CA, G.R. No.*4
cised by or cannot _be delegated to the
_________ 125778, June 10, 2003, citing People's
---------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- — -
Aircargo and Warehousing Co., Inc. v.
The executive committee cannot exer CA, 297 SCRA170 [1998]).
cise any of the following:
4) A corporate officer or agent may represent
(i) approval of action requiring concur and bind the corporation in transactions
rence of stockholders; with third persons to the extent that the
(ii) filling of vacancies in the board; authority to do so has been conferred upon
him, and these include:
(iii) adoption, amendment or repeal of by
laws; (i) powers that, in the usual course of the
particular business, are incidental to
(iv) amendment or repeal of board reso
those expressly provided;
lution which by its terms cannot be
.amended or repealed; or (ii) powers that may be implied from the
(v) distribution of cash dividends. powers intentionally conferred;
(iii) powers added by custom and usage,
N ote: The executive committee is com as usually pertaining to the particular
posed of at least three (3) members of the
officer or agent; and
board and must be created under the by
laws. The board may not by itself create the (iv) such apparent powers as the corpo
executive committee under Section 35 of the ration has caused person dealing with
. the officer or agent to believe that it of reflecting a net worth, it turned out that "F" had
has conferred (Inter-Asia Investment a deficiency of PI .2 Million. Hence, IAI is obligated
Industries, Inc, v. CA, ibid,),
to reimburse AI the amount of P13.2 Million (P12
5) An officer may also bind the corporation Million plus the deficiency of P I.2 Million). However,
if he has apparent authority. Apparent au considering that AI retained P7.5 Million, the balance
thority is derived not merely from practice. to be reimbursed is only P5.2 million. Later, LG,
Its existence may be ascertained through: the president of IAI proposed in writing that AFs
(i) the general manner in which the cor claim for refund be reduced to P4.09 Million but he
poration holds out an officer or agent promised to pay the costs of certain superstructures
as having the power to act or, in other in behalf of AI. AI accepted the proposal. Later, IATs
words, the apparent authority to act in Board refused to implement the accepted proposal
general, with which it clothes him; or on the ground that while the said Board authorized
LG to purchase the shares, it did not authorize LG to
(ii) the acquiescence in his acts of a partic
make the last proposal. Is the position of IAFs Board
ular nature, wi th actual or constructive
tenable?
knowledge thereof, within or beyond
the scope of his ordinary powers. The position of the Board of IAI is not tenable. An
It requires presentation of evi officer of a corporation who is authorized to purchase
dence of similar act(s) executed either the stock of another corporation has the implied power
to perform all other....nbligaIfom„AEismgMhem£mm^
It is not the quantity of similar acts such as payment of the shares of stock. By allowing
which establishes apparent authority, its president to sign the agreement to purchase the
but the vesting of a corporate officer share on its behalf, the corporation clothed him
with power to bind the corporation with apparent capacity to perform all acts which are
(Inter-Asia Investment Industries, Inc. v. expressly provided for or impliedly and inherently
CA, ibid.). included therein (Inter-Asia Investment Industries, Inc.
v. CA, ibid.).
PROBLEM; . ; : bA
b) In what instances is concurrence of the stock
1. IAfi rIncL ;:(IAI)- by a Stock Purchase Agreement,
holders necessary for the exercise of the powers
sold to AI, Inc, (AI) for the sum of P19.5 Million all
of the corporations?
its ôutstanding, shares of stocks in "F" Corp. The
agreement was signed by LG and JV, presidents of 1) Approval of the majority of the board and
IAI and AI respectively. IAI expressly warranted in concurrence of the-stockholders represent
" the' agreementrtM t the rietwdrth of "F" Corp. is P12 ing 2ZiM&eouMiadffigvapM (or 2/3 of
Million. IAI agreed that if the networth is less than . the member whenever applicable) is neces
P12 Million,TAI will pay Al the deficiency. AI paid IAI sary in the exercise of the following powers:
P12 Million and --retained the amount of P7.5 million (!) Power to extend or shorten corporate
- - ■■••toanswer f o r ^ y ;deficiency in the net worth. Instead term (Sec. 37, CCP);
REVIEWER OH COMMERCIAL LAW PART III — BUSINESS ORGANIZATIONS 213
(ii) Increase / Decrease Corporate Stock (i) To enter into management contract if
(Sec. 38, CCP); any of the two instances stated above
are absent (see: viiiflj and [2] above).
(iii) Incur or create Bonded Indebtedness
(Sec. 38, CCP); (ii) To adopt, amend or repeal the by-laws
(Secs. 46 and 48, CCP).
(iv) To deny pre-emptive right (Sec. 39,
CCP); 3) Without board resolution, the stockholders
may by:
(v) Sell, dispose, lease, encumber all or
substantially all of corporate assets (i) 2 /3 of Outstanding Capital —■Dele
(Sec, 40, CCP); gate to the board the power to amend
the by-laws (Sec. 48, CCP).
(vi) To invest in another corporation, busi
ness other than the primary purpose (ii) Majority of Outstanding Capital —
(Sec. 42, CCP); Revoke the power of the board to
amend the by-laws which was previ
(vii) To declare stock dividends (Sec. 4.3,
ously delegated.
CCP); and
8.05. Instances when corporation may acquire its own
(viii) To enter into management contract
shares (Sec. 41)
(Sec. 44, CCP) if:*2
a) the corporation has unrestricted retained earn-*1
__________(1) a stockholder or stockholders
ings in its books to cover the shares to be pur-
representing the same interest of
chased/ acquired.
both the managing and the man
aged corporations own or control b) for a legitimate corporate purpose/s including
more than 1 /3 of the total out but not limited to the following:
standing capital entitled to vote 1) to eliminate fractional shares arising out of
of the managing corporation; or stock dividends;
(2) a majority of the members of the 2) to collect or compromise an indebtedness
board or directors of the manag to the corporation arising out of unpaid
ing corporation also constitute a subscription in a delinquency sale and to
majority of the members of the purchase delinquent shares sold during the
board of the managed corpora- sale; and
tion;
3) to pay dissenting or withdrawing stock
(ix) To amend the articles of incorporation holders entitled to payment of their shares.
(Sec. 16, CCP).
8.06. DIVIDENDS
2) Approval of the stockholders representing
a) Who may declare dividends? (Sec. 43)
niajod&L^ capita 1 is nec-
- essary together with board approval in the 1) Board of Directors alone — cash, property
following instances: dividends.
PART III — BUSINESS ORGANIZATIONS 21S
obtaining in the corporation. Example:

2) Bp_a£4,..Qf .Pim.ctors with, the approval <
jtfiddhddeiijepesef^ : When there is a need for special reserve for
of Outstanding Capital — stock dividends. '; probable contingencies.
b) What are the conditions that must be present to 1 d) Dividends cannot be declared out of the capi
declare dividends? tal. Exception: Wasting Assets Corporation —
corporations solely or principally engaged in the
1) unrestricted retained earnings
exploitation of "wasting assets" to distribute the
2) resolution of the board or if stock divi net proceeds derived from exploitation of their
dends, the board with the concurrence of § holdings such as mines, oil wells, patents and
2/3 of outstanding capital. leaseholds, without allowance or deduction for
c) Can the board be compelled to declare divi- : depletion.
dends every year? The trust fund doctrine will be violated if
.NO. Declaration of dividends is discretion- J dividends are declared out of capital except only
ary upon the board. Dividends are payable only in two instances: (1) liquidating dividends; and
when there are profits earned by the corporation (2) dividends from investments in wasting asset
and as a general rule, even if there are existing corporation.
profits, the Board of Directors has the discretion e) (1) What can be included in unrestricted
to determine whether or not dividends are de-1 retained earning? (2) What items cannot be
-------dared (Republic Planters Bank v. Agana, 209 5CRA— used for dividend distribution? (3) Can gain
1 [1997]). Exception: Stock corporations are pro
from sale of real property be considered part of
hibited from retaining surplus profits in excess
unrestricted retained earnings? (4) Can treasury
of 100% of their paid-in capital.
shares be distributed by way of dividends?
However, even if the retained surplus prof- I
1) Unrestricted Retained Earning shall only
its are in excess of 100% of the paid in capital, the
include accumulated profits and gains
board may still refuse to declare dividends if: T
realized out of the normal and continuous
1) Justified by definite corporate expansion ;= operations of the company after deducting
projects/programs approved by the Board; / therefrom distributions of stockholders and
. or transfers to capital stock or other accounts,
2) the corporation is prohibited under any and which is: (1) not appropriated by its
loan agreement with any financial institu Board of Directors for corporate expansion
tion or creditor, whether local or foreign, projects or programs; (2) not covered by a
from declaring dividends without its/his restriction for dividend declaration under
consent, and such consent has not yet been a loan agreement; and (3) not required to
secured; or be retained under special circumstances
obtaining in the corporation such as when
3) it can be clearly shown that such retention
there is a need for a special reserve for
is necessary under special circumstances
probable contingencies (SEC Memorandum the option of recognizing actuarial gains

Circular [MC] No. 11, Series o f2008). or losses directly to profit or loss statement
For such purpose, the surplus profits (SEC MC No. 11, Series o f2008).
•or income must be a bonafide income found (iv) Fair...yaljie . adjustment or the
ed upon actual earnings or profits. The ex gains arising only from market-to-market
istence, therefore, of surplus profits arising valuation which are not yet realized (SEC
from the operation of corporate business is MCNo. 11, Series o f2008)'
a condition precedent to the declaration of
dividend. The phrase "actual earnings or (v) The amount of recognized de
profits" as mentioned above shall be the net ferred tax asset that reduced the amount of
income for the year based on the audited income tax expense and increased the net
financial statements (SEC MC No. 11, Series income and retained earnings, until real
o f 2008). ized (SEC MC No. 11, Series o f2008).
2) The following unrealized items and other (vi) Paid-in-surplus cannot be dec
items are not available for dividend decla lared as dividend. Paid-in surplus is the
ration: difference between the par value and the is
sued value or selling price of the shares and
d) Share/equit_y_in net income of the are not therefore considered profits earned
associate or joint venture accounted for
in the conduct of the business of the corpo-
------- equity method as the same is not yet actu-
ration. They are considered part of capital.
ally earned or realized. It is only after the
investee company declares such income as (vii) Revaluation surplus or the in
dividend that said income is actually real crease in the value of assets cannot be con
ized or the earnings become available for sidered earnings of the corporation. They
dividend declaration. Due to the effect on are not income from operation. They are by
the investment account, the investor com nature subject to fluctuations (SEC Opinions
pany shall consider only cash or property dated Oct. 2,1981 and March 19,1992).
dividends declared by the investee-com
(viii) Reduction surplus cannot like
pany as earnings declarable as dividends
wise be included in the amount to be
(SEC MC No. 11, Series o f 2008).
declared as dividends because they are not
(U) Unrealized__ foreign exchange income from operation. Reduction surplus
gains, except those attributable to cash and are those arising from the reduction of the
cash equivalents, for the time being that par value of the issued shares of stocks
they are not yet actual income prior to real (SEC Opinion dated Aug. 8,1991).
ization of such foreign exchange gain (SEC
MC No. 11, Series o f2008). 3) Gains on s_ale_of the corporation's real prop
erties can be considered part of retained
(Hi) Unrealized actuarial gains which earnings. The sale can be part of the busi
is the result when the company chooses ness of the corporation. Retained earnings
include not only earnings realized from the and not on the amount paid for the shares
ordinary course of business of the corpora (SEC Opinion dated July 16,1996).
tion but also those arising from transactions
not associated with but incidental to or nec 2) Stockholders at the time of declaration are
essary in keeping the business for which entitled to dividends. Dividends declared
the corporation was organized (other ex before the transfer of shares belong to
amples of the latter are earnings from rent, the transferor and those declared after
royalties, fees and interests for the use by the transfer belong to the transferee (SEC
others of the corporate assets and resourc Opinion dated July 15,1994).
es). However, there must be surplus profits. 3) The stockholder's right to be paid divi
Hence, the corporation cannot distribute dends accrues as soon as the declaration
gains from sale of real properties as divi is m a d e i n a c c o rd a n c e with Section 4 3 of
dends if the value of the remaining assets the Corporation Code. From that time, the
after distribution is less than the amount of stockholder can already demand payment
legal or stated capital and liabilities (SEC thereof (SEC Opinion dated Oct. 10,1992).
Opinion dated May 9,1990).
4) Stock dividends can be declared at a premi
4) Yes, but only as property dividends. Trea um (at value higher than par) (SEC Opinion
sury shares cannot be declared as stock div dated Oct. 23,1992).
idend or cash dividends because they are
-5)— Ehreir-iiiTpHTtrArtjfe
not considered part of earned or surplus
d iv id e n d s .
profits. The distribution of cash or stock
dividends out of treasury shares would be 8.07. SALE OF ALL OR SUBSTANTIALLY ALL PROP
converting the corporation into both a debt ERTIES
or and creditor for the same amount at the
same time, or requiring it to take money or a) Requisites:
stock from one of its pockets and putting it 1) approval of majority of the directors or
in another, which is absurd. Treasury shares trustees;
may be declared as property dividend to be
2) assent of stockholders representing 2 /3 of
issued out of the retained earnings previ
outstanding capital or 2 /3 of member in a
ously used to support their acquisition pro
meeting duly called for the purpose after
vided that the amount of the said retained
written notice; and
earnings has not been subsequently im
paired by losses (SEC Opinion dated July 17, 3) it must comply with the formalities of the
1984). Bulk Sales Law.
f) Other Rules Concerning Dividends - b) When covered. A sale or other disposition shall
be deemed to cover substantially all corporate
1) Stockholders are entitled to dividends pro
property and assets if thereby the corporation
rata based on the total number of shares
would be rendered incapable of continuing
221
2. AA Corporation is engaged in the business of printing

the business or accomplishing the purpose for books. Around 70% of its assets consists of cash in the
which it was incorporated. bank, 25% printing machine and the remaining office
equipment and supplies. AA Corporation plans to sell
c) Effect on creditors. The transferee / buyer of all
the machine. Can it be considered sale of substantially
or substantially all of the assets (or even shares)
all of the assets of the corporation?
will not be liable for the debts of the transferor.
Exceptions: A: YES. It may be considered sale of substantially all of
the assets because without a printing machine, the
1) if there is an express assumption of liabili corporation would be rendered incapable of continu
ties; ing its printing business. The fact that it is only 25% of
2) there is a consolidation or merger; the total assets of the corporation, is immaterial.
3) if the purchase was in fraud of creditors; 8.08. INCREASE OR DECREASE OF CAPITAL

and
a) What are the ways of increasing the capital
4) if the purchaser becomes a continuation of stock?
the seller.
1) by increasing the number of shares and
retaining the par value;
PROBLEMS:
2) by increasing the par value of existing
1. X Corporation is engaged in selling pencils on shares without changing the number of
---------wholesale basis. It is merely renting a bodega and sKaieiTdr
90% of its assets consist of its stocks of pencil. "A,"
3) by increasing the number of shares and in
a school supply dealer, purchased all the stocks of X creasing the par value.
Corporation. Is the transaction a sale of substantially
all of the assets of the corporation requiring b) What are the ways of decreasing the capital
concurrence of stockholders representing 2/3 of the stock?
outstanding capital stock? 1) by decreasing the number of shares and re
taining the par value;
A: NO. Section 40 of the Corporation Code provides
that nothing in the law is intended to restrict the 2) by decreasing the par value of existing
power of any corporation, without authorization by shares without changing the number of
the stockholders or members, to sell or otherwise shares; or
dispose of any of its property and assets if the same is 3) by decreasing the number of shares and
necessary in the usual and regular course of business decreasing the par value.
or if the proceeds of the sale or other disposition of 9. DIRECTORS AND OFFICERS
such property and assets be appropriated for the
• conduct of its remaining business. The sale in the . _ 9.01. QUALIFICATIONS OEDIRECTORS
given problem appears to be a sale in the regular a) Stock Corporation — must own at least one
course of business because X Corporation is engaged (1) share capital stock of the corporation in his
in wholesale business.
REVIEWER ON COMMERCIAL LAW M K T III — BUSINESS ORGANIZATIONS 223
own name; Non-stock corporation —- must be s the corporation commits a crime, will be individually
member (Sec. 23, CCP). He must be a stodcholde. held answerable for the crime (Espiritu, Jr. u Petron
in his own right. It must be legal title no. Corporation, ei a l, G.R. No. 170891, Nov. 24, 2009).
beneficial title. Example: The stockholder-trasto. There are special laws that specify the officers who
in a voting trust agreement cannot be a directo: ■ are criminally liable for corporate crimes.
because he only has beneficial title; the truster
can be elected as director because he has legal 9.04. METHODS OF VOTING — Election of Directors
title. (Sec. 24)
b) A majority of the directors / trustees must be resi a. Stockholders have the option to adopt any of the
dents of the Philippines (Sec. 23, CCP). following:
c) He must not have been convicted by final judg 1) Straight Voting — every stockholder "may
ment of an offense punishable by imprisonmen. vote such number of shares for as many
for a period exceeding six (6) years or a violatior persons as there are directors" to be elected.
of the Corporation Code, committed within five 2) Cumulative Voting for One Candidate — a
(5) years before the date of his election (Sec. 27, stockholder is allowed to concentrate his
CCP). votes and "give one candidate as many
d) He must be of legal age. votes as the number of directors to be elect
ed multiplied by the number of his shares
e) He must possess other qualifications as may be
shall equal."
prescribed in the by-laws of the corporation. Fo;
---------------- example, the percentage of equity participation ---------------- 3)— Cumulative Voting by Distribution — a stock-
of foreigners with respect to nationalized activi holder may cumulate his shares by mul
ties must be complied with or he must not be a tiplying also the number of his shares by
director in a competing corporation. the number of directors to be elected and
distribute the same among as many candi
9.02. "Business Judgment Rule." Questions of policy o:
dates as he shall see fit.
management are left solely to the honest decision o'
officers and directors of a corporation and the court?: Note: Cumulative voting is not avail
are without authority to substitute their judgment fo: able in non-stock corporations.
the judgment of the board of directors; the board is b. Election should be at large in stock corpora
the business manager of the corporation and so long tions — Election of directors in a stock corpora
as it acts in good faith, its orders are not reviewable tion should be by the stockholders constituting a
by the courts or the SEC. The directors are also not quorum. All shareholders holding voting shares
liable to the stockholders in performing such acts have the right to vote (Secs. 6 and 24, CCP). There
(Montelibano v. Bacolod-Murcia Milling Co., 5 SCRA 36 can be no voting by district or region in a stock
[1962]; Phil. Stock Exchange, Inc. v. CA, 281 SCRA 232 corporation (Rev. Ao-As, ei al. v. CA, G.R. No.
119971). 128464, June 20,2006).
9.03. Criminal Liability. Directors, Corporate officers, or 1) ■ Non-stock corporation —- there can be elec
employees, through whose act, default or omission tion by region in a non-stock corporation,
224 REVIEWER ON COMMERCIAL LAW M E L III ~ BUSINESS ORGANIZATIONS
because the right to vote in a non-stock cor term of office expires. The loss of right of the
poration may be limited, broadened or dec directors is automatic upon the expiration of
nied in the Articles of Incorporation or By their term. However, if election is not held, the
laws (Sec. 89, CCP; Rev. Ao-As, et at. v. CA, directors whose term expired can continue to
G.R. No. 128464, June 20, 2006). function in a holdover capacity. If one of the
9.05. REMOVAL AND VACANCIES IN THE BOARD holdover directors resigns, the remaining hold
over directors cannot replace him even if they
a) Requisites for Removal constitute a quorum. The power of the remaining
1) It must take place either at a regular meet members of the board to fill in a vacancy applies
ing or s p e c ia l meeting o f the stockholders only if a director resigns before the expiration
or members called fo r the purpose; of his term. With respect to the board authority
2) There must be previous notice to the to replace, Section 29 contemplates a vacancy
s to c k h o ld e r s o r m e m b e r s o f th e in te n tio n to occurring within the director's term of office
remove; (Valle Verde Country Club v. Africa, G.R. No.
151969, Sept 4,2009).
3) The removal must be by a vote of the stock
holders representing 2/3 of Outstanding 9.06. DOCTRINE OF CORPORATE OPPORTUNITY
Capital Stock or 2 /3 of members; and If there is presented to a corporate officer or
4) The director may be removed with or with director a business opportunity which:
out cause unless he was elected by the*1
a) corporation is financially.aMetoQjLfflderlak^____
----------------------- minority, in winch case, it is required llial
there is cause for removal (Sec. 28, CCP). b) from its nature, is in line with corporations busi
ness and is of practical advantage to it; and
b) Filling of vacancies in the Board
c) one in which the corporation has an interest or a
1) B y s to c k h o ld e r s o r m e m b e r s
if v a c a n c y
reasonable expectancy.
results because of: (i) removal; (ii) expi
ration of term; (iii) the ground is other By embracing the opportunity, the self-in
th a n r e m o v a l or expiration of term (e.g., terest of the officer or director will be brought
death, resignation, abandonment) where into conflict with that of his corporation. Hence,
the remaining directors do not constitute the law does not permit him to seize the oppor
a quorum; (iv) increase in the number o f tunity even if he will use his own funds in the
' directors-. - venture.
2) By board i f r e m a in in g directors constitute a If he seizes the opportunity thereby obtain
quorum — cases not reserved to stockhold ing profits to the expense of the corporation, he
ers or members. must account all the profits by refunding the
c) - Replacement of Hold-Over Directors same to the corporation unless the act has been
ratified by a vote of the stockholders owning or
Directors must be replaced by the stock representing at least two-thirds (2/3) of the out
holders or members in an election when their standing capital stock (Sec. 34, CCP).
:T:S'“ ' S’'-'-;-.:1' ' - - v'

PART III ~~ BUSINESS ORGANIZATIONS 227
226 REVIEWER ON COMMERCIAL, LAW
2) the contract is fair and reasonable under the

9.07. Who is an Interlocking Director?
circumstances.
There is an interlocking director in a corporation;
9*08. Are corporate agents such as directors, trustees or
when one (or some or all) of the directors in one
officers of a corporation solidarity liable with the
corporation is (or are) a director in another corporation.
corporation they represent?
a) If the interests of the interlocking director in the
As a rule, NO, they are not solidarity liable with
corporations are both substantial (sfockhold-
the corporation. Obligations incurred by them, acting
ings exceed 20% of Outstanding Capital^tock).
as such corporate agents, are not theirs but the direct
General Rule: A contract between two or accountabilities of the corporation they represent.
more corporations having interlocking directors
However, in the following cases, solidary/per
shall NOT be invalidated on that ground alone.
sonal liabilities may be incurred:
-Exception: If the contract is fraudulent or
a) when directors and trustees or, in appropriate
not fair and reasonable.
cases, the officers of the corporation:
b) If the interest of the interlocking director in one
1) votes or assents to patently unlawful acts of
of the corporations is nom inal while substantial
the corporation;
in the other (stockholdings 20%._o^more)/ the
contract shall be valid, provided the following 2) act in bad faith or with gross negligence in
conditions are present:*23 directing the affairs of the corporation;
___________1) the presence-oi-siidhjiiig^ __________ 3) are guilty of conflicts of interest to the pre-
board meeting in which the contract was judice of corporation, its stockholders or
approved was NOT necessary to constitute members, and other persons;
a quorum for such meeting; b) when a director has consented to the issuance
of watered stocks or who, having knowledge
2) that the vote of such director/trustee was
thereof, did not forthwith file with the corporate
not necessary for the approval of the con
secretary his written objection thereto;
tract; and
3) that the contract is fair and reasonable un c) when the director, trustee or officer has contrac
tually agreed or stipulated to hold himself
der the circumstances.
personally and solidarily liable with the corpo
Where any of the first two is absent, the contract ration; and
can be ratified by the vote of the stockholders
representing at least 2 /3 of Outstanding Capital d) when a director, trustee or officer is made, by
Stock or by the vote of the stockholders representing specific provisions of law, personally liable for
his corporate actions (MAM Realty Development
at least 2 /3 of the members in a meeting called for the
Corp. v. NLRC, G.R. No. 114787, June 2 , 1995).
purpose. P rovided, That:
' 1 ) ’ full disclosure of the adverse interest of 9.09. a) Who are self-dealing directors/tmstees/officers?
the directors / trustees involved is made on ■7 : b) What are the rales when there is a self-dealing
such meeting; director/trastee/officer in a corporation?
a) Self-dealing directors /trustees /offi cers — those

9.10. (a) Who are the corporate officers of a corporation?
who personally contract with the corporation
in which they are directors. It is discouraged i) The Corporate Officers are the President (who
because the directors, trustees and officers have shall be a director), Treasurer (who may or may
fiduciary relationship with the corporation and not be a director), Corporate Secretary (who
there can be no real bargaining where the same shall be a resident and citizen of the Philippines)
is acting on both sides of the trade. and such other officers as may be provided in
the By-laws.
b) The contract between the corporation and the
self-dealing director / trustee / officer is voidable ii) Corporate officers. A position must be expressly
unless the following requirements for its validity mentioned in the By-Laws in order to be consid
are present: ered as a corporate office and the person elected
to such office a corporate officer. Thus, the cre
1) The presence of such director/trustee in the
ation of an office by the Board pursuant to or un
board meeting approving the contract was
der a By-Law enabling provision is not enough
not necessary for constituting a quorum for
to make a position a corporate office (Marc II
such meeting; Marketing v. Joson, Dec. 12, 2011; Mailing Indus
2) The vote of such director/trustee in the trial and Commercial Corp. v. Corns, Oct. 13,2010).
board meeting approving the contract was
iii) Is service of summons on a secretary of the
not necessary for the approval of the con-
president of a domestic private corporation
_______________ tract;____________________________________
----------------binding on the corporation?---------------------------
3) The contract is fair and reasonable under
NO. Section 11, Rule 14 of the 1997 Rules of
the circumstances; and
Civil Procedure provides that: "When the defen
4) In the case of an officer, there was previous dant is a corporation, partnership or association
authorization by the board of directors or organized under the laws of the Philippines with
trustees. a juridical personality, service may be made on
However, even if the requirements are not present, the president, managing partner, general man
the contract with the self-dealing director, trustee or officer ager, corporate secretary, treasurer, or in-house
may still be ratified by a vote of stockholders representing counsel."
at least 2 /3 of Outstanding Capital Stock or by the vote of - •The list: of authorized persons to receive
the stockholders representing at least 2 /3 of the members in the summons is now limited. The phrase "agent
a meeting called for the purpose. Provided, That: or any of its directors" which was stated in the
old rule is now deleted by Section 11, Rule 14.
a) full disclosure of the adverse interest of the Hence, the present rule calls for strict compli
directors/trustees involved is made on such ance. Service of summons must only be to the
. . , _ meeting; .... . officers mentioned in the list (E.B. Villarosa &
b) the contract is fair and reasonable under the cir Partner v. Benito, 312 SCRA 65 [1999]). Hence, the
cumstances. summons cannot be served on any managerial
employee because the' rule now mentions gen-
W-
230 REVIEWER ON COMMERCIAL LAW PART 111 — BUSINESS ORGANIZATIONS 231
era! manager. Service to an ordinary secretary is (2) Regular monthly unless otherwise speci
not likewise effective as the law requires corpo fied in the By-laws. .
rate secretary; service cannot even be justified on
the pretext that the secretary is an agent. (3) Special Meetings — upon the call of the
President or as provided in the By-laws.
PROBLEM: b) Notice — one (1) day prior to the scheduled reg
1. "A," a s owner of a certain number shares o f stock in ular or special meeting unless a different period
X corporation, entered into a voting trust agreement is provided in the By-Laws.
with B. On the basis of the voting trust agreement, B c) Quorum — majority of the Directors or Trustees
announced his desire to run for a seat in the Board
as fixed in the Articles of Incorporation (Sec. 25,
of Directors of X corporation. C, another stockholder,
CCP). The quorum is the same even if there is a
objected and questioned the eligibility of B to be a
vacancy. The quorum properly fixed continues
director of X corporation.
even if some of the directors will leave or abstain
: I s C 's c o n te n tio n , correct? Why? thereafter. However, the By-laws may require
more than the majority of Directors or Trustees
At The contention of C is not correct. Under paragraph 1,
as a quorum.
of Section 59, a trustee under a voting trust agreement
becomes registered as a stockholder in the corporate d) Proxy Not Allowed — Directors and Trustees
books and as such he becomes the legal title holder or cannot attend the Board meetings by Proxy.
______owner of the shares of stock transferred. By becoming
"e] President — he can also vote during the meeting
the registered title holder of the stocks, he becomes
even if he is the presiding officer because he is
eligible to run for a position in the Board of Directors.
also a Director.
(b) Who can appoint and remove the officers of the f) Pledge or Mortgaged Share — If the shares
corporation? are pledged or mortgaged, the shareholder-
mortgagor-pledgor can still attend the meeting
Unless th e by-laws specifies other officers unless the right is given to the pledgee or
(Example: the by-laws may authorize the president to mortgagee and such right is recorded in the
appoint) who can appoint, the board of directors shall books of the corporation (Sec. 55, CCP).
appoint the officers and as a n incident of the power
of appointment, they may also remove or discharge g) Board Meeting through Teleconference or
those that they appointed (Nectarina Raniel v. Paul Video Conference is allowed (SEC M.C. No.
Jochico, G.R. No. 153413, March 1,2007). 15 dated Nov. 20, 2011). (1) The Corporation
Secretary must include in the notice of meeting
9.11. MEETINGS OF THE BOARD an inquiry if the Director / Trustee will attend
physically or through video conferencing; (2)
a) Kinds ‘
A Director/Trustee must choose and give notice
(1) Annual Meeting — the date is as specified that he wants tele/videoconferencing; (3) The
in the By-laws. proceedings must be recorded and the recording
V4
(e.g., tapes, etc.) shall be stored by the Corporate titute a fund to which the creditors have a right to
Secretary - - ■ look for the satisfaction of their claims. This doctrine
is the underlying principle and/or articulated in the
10. TRUST FUND DOCTRINE following:
10.01. Trust Fund Doctrine. The capital stock, property anc a) Procedure for the distribution of capital assets,
other assets of the corporation are regarded as equity embodied in the Corporation Code, which al
in trust for the payment of the corporate creditors. lows the distribution of corporate capital only in
The subscribed capital stock of the corporation is v three instances: (1) amendment of the Articles of
trust fund for the payment of debts of the corporation Incorporation to reduce the authorized capital
which the creditors have the right to look up to satisfy stock, (2) purchase of redeemable shares by the
their credits. Corporation may not dissipate this corporation, regardless of the existence of unre
and the creditors may sue stockholders directly for stricted/ retained earnings, and (3) dissolution
the unpaid subscription (Phil Trust Co. v. Rivera, 44 and eventual liquidation of the corporation;
Phil 469 [1923]; Lumanlan v. Cura, 59 Phil 746 [1934];
Commissioner o f Internal Revenue v. CA, 301 SCRA 152 b) Section 41 on the power of a corporation to
[1999]). acquire its own shares; and
a) Money received for subscription of increase of c) In Section 122 on the prohibition against the
authorized capital are not covered by the trust distribution of corporate assets and property
fund doctrine prior to the approval of such unless the stringent requirements therefor are
increase by the SEC (Central Textile Mills v. complied with.
NWPC, 260 SCRA 368 [1996]).
The distribution of corporate assets and property
10.02. Give examples of cases where the trust fund doctrine cannot be made to depend on the whims and caprices
is violated. of the stockholders, officers or directors of the
a) When the corporation releases or condones corporation, or even, for that matter, on the earnest
payment of the unpaid subscription. desire of the court a quo "to prevent further squabbles
and future litigations" unless the indispensable
b) When there is payment of dividends without b conditions and procedures for the protection of
unrestricted retained earnings. corporate creditors are followed. Otherwise, the
c) When properties are transferred in fraud of "corporate peace" laudably hoped for by the court
creditors. will remain nothing but a dream because this time,
it will be the creditors' turn to engage in "squabbles
d) When properties are disposed or undue prefer
ence is given to some creditors even if the corpo- :: and litigations" should the court order an unlawful
ration is insolvent. distribution in blatant disregard of the Trust Fund
Doctrine (Ong Yong, et ai. v. David S. Tiu, ei a l, G.R. No.
10.03. Distribution of Assets and the Trust Fund Doctrine 144476, April 8, 2003).
The Trust Fund Doctrine provides that subs
criptions to the capital stock of a corporation cons- v
PR O BLEM : contract necessarily involves the corporation as one

of the contracting parties since the subject matter of
1, FLAD Corporation (FLA DC for short) was original the transaction is property owned by the corporation
ly incorporated with an authorized capital stock of
•— its shares of stock. Thus, the subscription contract
P500,000,00 shares with the m embers of the "T" fam (denominated by the parties as a Pre-Subscription
ily owning P450,200.00 shares representing the out Agreement) whereby the "O" family invested P100.G0
standing capital. The "T" family invited the members million for PI,000,000.00 shares of stock was, from the
of the "O" family to invest in FLADC as stockhold viewpoint of the law, one between the "O" family and
ers necessitating an increase of the authorized capital FLADC, not between the "O" and the "T." Hence, it
stock to give each group equal (50-50) shareholdings is the corporation and not the "T" family that has the
as agreed upon in the Pre-Subscription Agreement. personality to rescind the contract. Even if there was
Pursuant to the said subscription agreement, the a violation of the agreement, the "T" family has other
authorized capital stock was thus increased from remedies but rescission is not one of them.
P500,000.00 shares to P2,000,000.00 shares with a par
value of P100.00 each, with the "O" family subscrib b) Granting but not conceding that the mem
bers of the "T" family possess the legal standing to sue
ing to PI,000,000.00 shares and the "T" to P549,800.00
for rescission based on breach of contract, said action
more shares in addition to their P450,200.00 shares to
will nevertheless still not prosper since rescission will
complete PI,000,000.00 shares. The Pre-Subscription
violate the Trust Fund Doctrine and the procedures
Agreement likewise provides that the "T" family
for the valid distribution of assets and property
______ shall nominate the Vice-President and Treasurer and
----------------unden-the-Gerperatien-Geder-The-êseesienr-ef-the-
five directors while the "O" family shall nominate the
Pre-Subscription Agreement will effectively result
President and six directors. The " O " family is sup
in the unauthorized distribution of the capital assets
posed to manage the mall owned by FLADC. Later,
and property of the corporation, thereby violating the
alleging non-compliance with the obligation under
Trust Fund Doctrine and the Corporation Code, since
the agreement (the members of the "T" family were
rescission of a subscription agreement is not one of
allegedly prevented from acting as Vice-President
the instances when distribution of capital assets and
and Treasurer), the "T" family filed an action for re property of the corporation is allowed. Rescission
scission of the Pre-Subscription Agreement and asked will, in the final analysis, result in the premature
for the liquidation of the assets of FLADC. Will the liquidation of the corporation without the benefit of
action prosper? Explain. prior dissolution in accordance with Sections 117,118,
A: The action will not prosper for the following reasons: 119 and 120 of the Corporation Code (Ong Yong, et al.
v. David S. Tiu, et a l, G.R. No. 144476, April 8, 2003).
a) The "T" family cannot rescind the contract
because they are not the real parties in interest. The
11. STOCKHOLDERS AND SHARES
subject matter of the contract was the PI,000,000.00
unissued shares of FLADC stock allocated to the "O" 11.01. SUBSCRIPTION CONTRACT •— any contract
Family. The parties' Pre-Subscription Agreement for the acquisition of unissued stock in an existing
was in fact a subscription contract as defined under corporation or a corporation still to be formed. It is
Section 60 of the Corporation Code. A subscription considered as such notwithstanding the fact that the
■ ■

6) Outstanding shares in exchange for stocks

parties refer to it as purchase- or some other contract
in the event of reclassification or conver
'(Sec. 60, CCP).
sion.
a) H ow does one becom e a shareholder in a cor
Note: Promissory notes or future ser
p o ratio n ? :
vices are not valid considerations.
A person becomes a shareholder the mo
d) What is an underwriting agreement?
ment he: (1) enters into a subscription contract
with an existing corporation (he is a stockholder An underwriting agreement is an agree
upon acceptance of the corporation of his offer ment between a corporation and a third person,
to subscribe whether the consideration is fully termed the "underwriter," by which the latter
paid or not); (2) purchases treasury shares from agrees, for a certain compensation, to take a
the corporation; or (3) acquires shares from ex stipulated amount of stocks or bonds, specified
isting shareholders by sale or any other contract, in the underwriting agreement, if such securities
or acquires shares by operations of law like suc are not taken by those to whom they are first
cession. offered.
b) What are the kinds of subscription contracts? e) Doctrine of Individuality and Indivisibility of
Subscription
1) Pre-incorporation subscription — entered
into before the incorporation and irrevoca- A subscription is one, entire and indivisible
-------------- ble for a ppriod of six (6) months from the __________cwhole_£Qntmct_ey_erL.i£.lwQ_Qr„more shares are
date of subscription unless all other sub covered. The subscriber is not entitled to the cer
scribers consent or if the corporation failed tificate for part or all of certificates covered until
to materialize. It cannot also be revoked af full payment of the subscription price.
ter filing the Articles of Incorporation with
11.02. SHARES OF STOCK — interest or right which an
the SEC (Sec. 61, CCP).
owner has in the management of the corporation,
2) Post-incorporation subscription — entered and its surplus profits, and, on dissolution, in all of
into after incorporation. ~ . its assets remaining after the payment of its debt.
c) What are the valid considerations for subscrip The stockholder may own the share even if he is not
tion agreements? holding a certificate of stock.
1) Cash; DISTINCTIONS:
2) Property; . SHARE OF STOCK CERTIFICATE OF STOCK

3) Labor or services actually rendered to the 1. Unit of interest in a 1. Evidence of the hold
corporation; corporation. er's ownership of the
4) Prior corporate obligations; : stock and of his right
as a shareholder and up
5) Amounts transferred from unrestricted
retained earnings to stated capital (in case , to the extent specified
herein.
of declaration of stock dividends); and
the corporation. Preferred shares are not entitled to

2. It is an incorporeal or 2. It is concrete and tan payment of dividends as a m atter of right (Republic
Intangible property. gible. . l Planters Bank v. Aganar 269 SCRA1 [1997]).
3. It m ay be issued by the 3. May be issued only if I
(c) The Board of Directors cannot be given
corporation even if the the subscription is fully blanket authority to fix the terms, conditions, and
subscription is not fully paid. rights of preferred shares unless the guidelines are
paid.
spelled out in the Articles of Incorporation (SEC
Opinion, May 24,1994).
a) Classification of Shares (Sec, 6, CCP) 3) Redeemable-shares (Sec. 8, CCP) — are
1) Common shares — the most common type those which permit tide issuing corporation
of shares which enjoy no preference. to redeem or purchase its own shares.
2) Preferred shares — par value shares which Limitations pn..jhe_j§g_uance of redeemable
enjoy preference as to dividends or assets Shares:
upon dissolution as stated in the Articles of
: Incorporation. (i) Redeemable shares may be issued
only when expressly provided for in
(i) Cumulative — the shareholder is the Articles of Incorporation (Sec. 8).
entitled to recover dividends in
arrears. While dividend declaration (ii) The terms and conditions affecting
" may not be compelled, once it is said shares must be stated both in the
declared, the shareholder is entitled to Articles of Incorporation and in the
the said arrears. certificate of stock representing such
share (Sec. 8).
(ii) ■Non-cumulative not entitled to
arrears only to present dividends. (iii) Redeemable shares may be deprived
of voting rights in the Articles of Incor
(iii) Participating — participates with poration, unless otherwise provided
common shares after receiving its divi in the Code.
dends at preferred rate.
(iv) The corporation is required to main
(iv) Non-participating — where there is no tain a sinking fund to answer for
such participation. redemption price if the corporation is
Notes: (a) Preferred shares must have par required to redeem.
value (Sec. 5, CCP). (v) The redeemable shares are deemed
(b) Preferred shares cannot have, as its pre retired upon redemption unless other
ference, fixed demandable annual interest because wise provided in the Articles of Incor-
they represent investment to, rather than a debt : 9 poration. • -
of the corporation. Prdexences._do_ not give them a (vi) Unrestricted retained earning is not
lien upon the property nor make them creditors of necessary before shares can be re-
deem ed but there must be sufficient deposited by the grantor or his agent with
assets to pay the creditors and to an a third person to be held by the latter until
swer for operations (Republic Plant the performance of a certain condition. The
ers Bank v. Agana, 269 SCRA 1 [1997]). beneficiary of the agreement is not yet a
Redemption cannot be made if such stockholder until the performance of such
redemption will result in insolvency conditions and is not therefore entitled to
or inability of the corporation to meet the rights of shareholders (SEC Opinion,
its obligations (SEC Opinion, Aug. 24., Nov. 20,1989).
1987). b) What is your understanding of "treasury
4) Treasury shares (Sec. 9, CCP) — shares shares?" Are said shares considered; (a) issued;
which have been earlier issued as fully (b) fully paid; (c) outstanding; (d) entitled to
paid and have thereafter been acquired dividends?; (e) may such shares be distributed
by the corporation by purchase, donation, to the stockholder by way of dividends? If your
redemption or through some lawful means. answer is yes, how would you classify the divi
dend — cash or stock dividend?
5) Par value and.no-par value shares — Par
value shares have a nominal value in the Treasury shares are shares of stock which
certificate of stock while no-par value share have been issued fully paid for, but subsequent
are those which do not have nominal value. ly reacquired by the issuing corporation by pur-*1
__________________ dMsex_redempJion,..dmmtionMaiJimiiglL-SQme-
(i) Both par value shares and no-par val- other lawful means (Sec. 9, CCP).
ue shares have issued values (the val
ue fixed for their issuance). The issued 1) Yes, treasury shares are still considered
value may be higher but not lower issued.
than the par value. 2) Yes, they are considered fully paid (Sec. 9,
(ii) The issued value of no-par value CCP).
shares may be fixed in the Articles of 3) No, they are not considered outstanding
Incorporation or fixed by the board. shares as they are held by the corporation.
6) Founders shares — classified as such in 4) No, they are not entitled to dividends or to
the Articles of Incorporation which may vote until they are reissued. A corporation
be given certain rights and privileges not cannot declare dividends for itself.
enjoyed by others. However, if the right 5) Generally, treasury shares, being unrealized
is the exclusive right to vote and be voted income, are not part of earned or surplus
for,as director, it must be for a period not profits, and therefore are not distributable
exceeding five (5) years counted from the as dividends, either in cash or stocks. How
approval of the SEC (Sec. 7, CCP). ever, if there are retained earnings arising
7) Eacrow.,.shares — shares subjected to an from the business of the corporation, trea-
agreement by virtue of which the shares are . sury shares, being the property of the cor-
PART III ~~ BUSINESS ORGANIZATIONS 243
poration, may be distributed as property e) What is the doctrine of equality of shares?

■dividends--notstock-dividends.
Doctrine of Equality of Shares provides that
c) ■ WMatt are' instances when non-voting shares where the Articles of Incorporation do not pro
may vote ifSec. 6 ) . ' vide for any distinction of the shares of stock, all
1) , amendirierit of Articles of Incorporation; shares issued by the corporation are presumed
to be equal and enjoy the same rights and privi
2) ; adoption and amendment of By-laws; leges and are also subject to the same liabilities.
3) increase or decrease of bonded indebted £) What are watered stocks?
ness;
Watered stocks are those issued not in
4) increase or decrease of capital stock; exchange for its equivalent either in cash, pro
5) : sale or disposition df all br substantially all perty, share, stock dividends, or services; thus,
of corporate property; the issuance of such stocks are prohibited. These
include stocks:
6) merger or consolidation of corporation;
1) issued without consideration (bonus share);
7) investments of funds in another corpora
tion or another business purpose; and 2) issued as fully paid when the corporation
has received a lesser sum of money than its
8) corporate dissolution. par or issued value (discounted share);
d) What are the limitations; on the, issuance of "no 3) issued for consideration other than actual
par value" shares? cash (i.e., property or services), the fair
1) No-par value shares cannot have an issued valuation of which is less than its par or
issued value; or
price of less than P5.00.
4) issued as stock dividend when there are no
2) The entire consideration for - its issuance
sufficient retained earnings or surplus to
, constitutes capital so that no part of it
justify it.
should be distributed as dividends.
Note: Directors or officers who consented
. , . 3) They, cannot be issued as preferred stocks.
to its issuance is solidarily liable to the corpora
4) They cannot-be issued by banks, trust com- tion for the difference in value.
-pames, insurance companies, public utili
ties :and building -and loan association. 12. CERTIFICATE OF STOCK
5) Tliey'^^ded;6f''InOTiporation must state
' It is a written evidence of the shares of stock but it is
the fact that it issued no par value shares as not the share itself (Lincoln Philippines Life v. CA, 293 SCRA
- - well as the number of 9211998]).
6) -Once issued, they are deemed fully paid a) The certificate is merely a prima facie evidence
and non-assessable. of ownership and evidence can be presented to
244 REVIEWER ON COMMERCIAL LAW LARI 1). — EASINESS ORGANIZATIONS 245
determine the real owner of the shares (Biiong v. registration with the Register of Deeds (Chua Gum v.
CA, 291 SCRA 503 [1998]). Samahan, 62 Phil. 472 [1935]); (2) Registration is also
necessary if the heirs acquire the shares of a deceased
b) Delivery is also essential for its issuance (Ibid.).
shareholder (Reyes v. RTC-Zenith Ins. Corp., Aug. 11,
12.01. FORMALITY 2008).
The certificate of stock must be signed by the 13.02. May a stockholder bring suit to compel the corporate
President or Vice-President and countersigned by secretary to register valid transfer of stocks? To
the Corporate Secretary or the Assistant Secretary be valid and binding on the corporation and third
otherwise it is not deemed issued (Bitong v. CA, 292 parties, is the attachment or mortgage of shares of
SCRA 503 [1998]). stock required to be registered in the corporation's
12.02. When certificate of stock may be issued (Sec, 64, stock and transfer books?
CCP) YES. It is the corporate secretary's duty and
Only until the full amount of his subscription obligation to register transfers of stocks.
together with interest and expenses (in case of NO. An attachment or mortgage of shares of
delinquent shares) if due has been paid, stock need not be registered in the corporation's stock
and transfer books inasmuch as a chattel mortgage
13. TRANSFER* OF SHARES over shares of stock does not involve a "transfer of
13.01. How are shares of stocks transferred?_____________ shares" and that only absolute transfers of shares of*1
stock are required to be recorded m the corporation's
a) If represented by a certificate, the following must
stock and transfer book in order to have "force and
be strictly complied with: (1) delivery of the
effect as against third persons" (Chemphil Export and
certificate; (2) indorsement by the owner or his
Import Corp. v. CA, G.R. Nos. 112438-39, Dec. 12,1995).
agent; (3) to be valid to third parties, the transfer
must be recorded in the books of the corporation
PROBLEMS:
(Rural Bank of Lipa v. CA, G.R. No. 124535, Sept.
28, 2001). 1. FG is an incorporator of VC Corporation having
b) If NOT represented by the certificate (such as subscribed to and fully paid 239,500 shares. However,
when the certificate has not yet been issued or no certificate of stock was issued to FG. In 1968, VCP
where for some reason is not in the possession of and FG signed a document entitled "Undertaking
the stockholder). and Indorsement" which states:
a. by means of a deed of assignment, and "UNDERTAKING: I, VCP, is the owner of the

total subscription of FG with VC Corporation in the
b. such is duly recorded in the books of the total amount of TWO HUNDRED THIRTY-NINE
corporation. THOUSAND FIVE HUNDRED (P239,500.00) PESOS
N otes; (1) Registration in the stock and transfer and that FG does not have any liability whatsoever
book is not necessary if the conveyance is by way on the subscription agreement in favor of VC
of chattel mortgage. However, there must be due Corporation. (SGD.) VCP, CONFORME: (SGD.) FG.
246 REVIEWER ON COMMERCIAL LAW EARL III — BUSINESS ORGANIZATIONS 247
INDORSEMENT: I, FG is indorsing the tote issuance of certificates. Mandamus should not issue
amount of TWO HUNDRED THIRTY-NINE to compel the secretary of the corporation to make a
THOUSAND FIVE HUNDRED (P239,500.00) stock:, transfer of the stock on the books of the corporation
of VC Corporation to VCR (SGD.) FG." unless it affirmatively appears that he has failed or
refused to do so upon demand either of the person in
However, FG remains to be the stockholder in
whose name the stock is registered or of some person
the books of the corporation and it is undisputec holding a power of attorney for that purpose from
that VCP had not made a request upon the corpora^
the registered owner of the stock (Vicente C, Ponce v.
secretary of VC Corporation to record the allegec Alsons Cement Corporation, G.R. No. 139802, Dec. 10,
transfer of stocks. In 1996, VCP made a demanc
2002, citing Hager v. Brayan, 19 Phil 138 [1911]).
for the issuance of certificates of stock in his name
The demand was denied and VCP filed petition fo: 3. Assume in problem No. 1 that VCP can validly file
mandamus for the issuance of the certificates. Will thr the petition for mandamus. Can such petition be
action prosper? dismissed on the ground of prescription considering
that it was filed only 24 years after the execution of
A: The action will not prosper. It is a basic rule that i
the undertaking and indorsement?
transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existen- A: NO. Considering that the law does not prescribe a
as far as the corporation is concerned. Without sud period within which the registration of the transfer
recording, the transferee may not be regarded b)-*2 of shares should be effected, the action to enforce the1
--------- the corporation as one of its stockholders and the— ------ right does not accrue until there has been, a demand
corporation may legally refuse the issuance of stock and a refusal concerning the transfer (Vicente C. Ponce
certificates. In other words, the stock and transfer v. Alsons Cement Corporation, ibid., citing Won v. Wack
book is the basis for ascertaining the persons entitled Wack Golf and Country Club, Inc., 104 Phil 466 [1958]).
to the rights of a stockholder. Where a transferee is
not yet recognized as a stockholder, the corporation is 14. RIGHTS AND OBLIGATIONS OF STOCKHOLDERS
under no specific legal duty to issue stock certificates
14.01. a) What are the basic rights of shareholders?
in the transferee's name (Vicente C. Ponce v. Alsom.
Cement Corporation, G.R. No. 139802, Dec. 10, 2002). 1) direct or indirect participation in manage
ment;
2. In problem No. 1, VCP argued that it is precisely
the duty of the corporate secretary, when presentee 2) voting rights (Sec. 6, CCP);
with the document of fully paid shares, to effect the
3) right to remove directors (Sec. 28, CCP);
transfer by recording the transfer in the stock and
transfer book and to issue stock certificates in the 4) proprietary rights:
name of the transferee. Is the contention tenable?
(i) right to dividends;
A: The contention is not tenable. VCP is not a registered
- (ii) appraisal right (Sec. 81, CCP);
stockholder and the deed of undertaking and
indorsement does not establish, on its face, his right (iii) right to issuance of stock certificate for
to demand for the registration of the transfer and the ; , fully paid shares (Sec. 64, CCP);
(iv) proportionate participation in the dis ration refuse to sue, or the ones to be sued, or has
tribution of assets in liquidation (Secs. control of the corporation.
118-119, CCP);
Requisites of Derivative Action. A stockholder
- (v) right to transfer of stocks in corporate or member may bring an action in the name of
'■
books (Sec. 63, CCP); a corporation or association, as the case may be,
(vi) pre-emptive right (Sec. 39, CCP); provided, that:
5} right to inspect books and records (Sec. 74, 1) He was a stockholder or member at the
.
CCP); time the acts or transactions subject of the
6) right to be furnished with the most recent action occurred and at the time the action
financial statement/financial report (Secs. was filed;
74 and 75, CCP); 2) He exerted all reasonable efforts, and
7) right to recover stocks unlawfully sold for alleges- the same with particularity in the
delinquent payment of subscription; and complaint, to exhaust all remedies available
under the articles of incorporation, by-laws,
8) right to file individual suit, representative
laws or rules governing the corporation or
suit, and derivative suits.
partnership to obtain the relief he desires;
b) What are the obligations of a stockholder?
3) No appraisal rights are available for the act&
1) Liability to the corporation for unpaid __________ or acts complained of; and________________
subscription (Secs. 67-70, CCP); ~~
4) The suit is not a nuisance or harassment
2) Liability to the corporation for interest on suit (Sec. 1, Interim Rules o f Procedure for
unpaid subscription if so required by the ICC; Cua, Jr. v. Ocampo, G.R. Nos. 181455-56
by-laws (Sec. 66, CCP); & 182008, Dec. 4, 2009).
3) Liability to the creditors of the corporation b) Individual Actions those brought by the
for unpaid subscription (Sec. 60, CCP); shareholder in his own name against the corpo
4) Liability for watered stock (Sec. 65, CCP); ration when a wrong is directly inflicted against
him.
5) Liability for dividends unlawfully paid
(Sec. 43, CCP); and c) Representative Actions — those brought by the
6) Liability for failure to create corporation stockholder in behalf of himself and all other
(Sec. 10, CCP). stockholders similarly situated when a wrong is
committed against a group of stockholders.
14.02. SUITS BY STOCKHOLDERS/MEMBERS
14.03. What is a pre-emptive right? (Sec, 39, CCP)
a) Derivative Actions — those brought by one or
more stockholders/members in the name and a) A pre-emptive right is the shareholder's right to
on behalf of the corporation to redress wrongs subscribe to a l l issues o r d i s p o s it i o n o f s h a r e s
committed against it, or protect/vindicate cor o f a n y c la s s in proportion to his present stock
porate rights whenever the officials of the corpo holdings, the purpose being to enable the share-
holder to retain his proportionate control in the

2. If there is 2. In the absence
corporation and to retain his equity in the sur
no date in of provision
plus.
the By-laws in the By
b) Pre-emptive right is not available in the follow — any date laws —■Two
ing: in April as (2) weeks
1) Shares to be issued to comply with laws determined prior to the
requiring stock offering or minimum stock by the Board. meeting.
ownership by the public;
Special Meeting of 1. Any time 1. Within
2) Shares issued in good faith in exchange for Stockholders deemed the period
property needed for corporate purposes; necessary, or provided in
3) Shares issued in payment of previously the By-laws;
contracted debts; or
4) In case the right is denied in the Articles of 2. As provided 2. If there is no

Incorporation; and in the By provision in
laws. the By-laws
5) If one shareholder does not want to exercise
— One (1)
his pre-emptive right, the other sharehold
week prior to
ers are not entitled to purchase the corre-
the meeting.
---------------------spendmg--d;taês--©frthe--9hafeh©Mer-A¥h©-
declined. But if nobody purchased the same
and later on the board re-issued the shares, 1) Quorum of Meeting of Stockholders and
the pre-emptive right applies.
Members — stockholders representing a
14.04. RIGHT TO VOTE majority of the outstanding capital stock or
a) Stockholders' Meeting —- A stockholder is giv a majority of the members.
en the right to participate in the corporate affairs 2) Excluded from the Computation of Quo
by giving him the right to attend meetings after rum — (1) Delinquent shares or members;
due notice and the right to vote thereat in person (2) Non-voting shares or members (Tan v,
or through a proxy or trustee. Sycip, 499 SCRA216 [2006]).
3) Who will Call of Special Meeting of
Kinds of Date of Meeting Required Notice Stockholders - (1) Officer designated in the
Meeting Articles or By-laws; (2) Board of Directors
Regular Meeting 1. The date in 1. Within or Trustees if nobody is designated to call
of Stockholders the By-laws; the period in the Articles and By-laws; or (3) SEC, if
or - provided in there is no person authorized or the person
the By-laws; authorized refuses to call a meeting (Sec. 50,
or CCP).
252 REVIEWER ON COMMERCIAL LAW M K T III — BUSINESS ORGANIZATIONS 253
4) Place of Meeting — city or municipality of 2) Preferred or redeemable shares may be

principal office and if practicable, the prin deprived of the right to vote unless other
cipal place of business (Sec. 51, CCP). wise provided in the Code (Sec. 6, CCP).
b) Proxy 3) Fractional shares of stock cannot be voted
Stockholders and members may vote in unless they constitute at least one full share
person or by proxy in all meetings of Stockhold : (Sec. 41, CCP).
ers or members (Sec. 58, CCP).
4) Treasury shares have no voting rights as
1) Proxy Form — in writing, signed by the long as they remain in the treasury (Sec. 57,
stockholders or member and filed before CCP).
the scheduled meeting with the corporate
5) Holders of stock declared delinquent by the
secretary.
board of directors for unpaid subscription
2) Period of Validity — unless otherwise pro are not entitled to vote or a representation
vided in the proxy, it should be valid only at any stockholder's meeting (Sec. 67, CCP).
for the meeting for which it is intended.
No proxy shall be valid and effective for a 6) A transferee of stock cannot vote if his trans
longer period than five (5) years at any one fer is not registered in the stock and transfer
time.*5 book of the corporation (Sec. 63, CCP).*1
~ c)— --------------------------— — — — - - - .... -----------------

__________ 7) A stockholder is still entitled to vote even if
the shares are mortgaged or pledged unless
One or more stockholder of a stock corpo he authorizes the creditor in writing to vote
ration may create a voting trust for the purpose (SEC Opinion, April 7,1987).
of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the shares 14.05. APPRAISAL RIGHT
for a period not exceeding five (5) years at any
a) Appraisal Right — right to withdraw from the
one time. However, the trustee can also be voted
corporation and demand payment of the fair
as director.
value of his shares after dissenting from certain
However, if the voting trust was a require corporate acts involving fundamental changes
ment for a loan agreement, period may exceed in corporate structure (Sec. 81, CCP).
5 years but shall automatically expire upon full
payment of the loan (Sec. 59, CCP). 1) Upon demand, all rights accruing to the
shares shall be suspended (Sec. 83, CCP).
d) Limitations on right to vote
b) Instances Where It May Be Exercised:
1) Where the Articles of Incorporation pro
vides for classification of shares pursuant 1) extension or reduction of corporate term
to Section 6, non-voting shares are not en (Secs. 37 and 81, CCP);
titled to vote except as provided for in the 2) change in the rights of stockholders, au
last paragraph of Section 6. thorize preferences superior to those stock-
holders, or restrict the right of any stock is abandoned; (iii) the SEC disapproves the
holder (Secs. 37 and 81, CCP); action (Sec. 84, CCP).
3) corporation authorized the board to invest
corporate funds in another business or pur 15. COLLECTION OF UNPAID SUBSCRIPTION (Sec. 68,
pose (Sec. 42, CCP); CCP)
4) corporation decides to sell or dispose of all 15.01. What are the remedies of corporations to enforce
or substantially all assets of corporation payment of stocks?
(Sec. 81, CCP); or a) Extrajudicial sale at public auction — this reme
dy is available upon failure of the stockholder to
5) merger or consolidation (Sec. 81, CCP).
pay the unpaid subscription or balance thereof
c) Rules for exercise of appraisal right: within the grace period of 30 days from the date
specified in the contract of subscription, or in the
1) The stockholder must be a dissenting
absence of such date, from the date stated in the
stockholder — he voted against the pro
call made by the BOD (Sec. 67, CCP);
posed action (Sec. 82, CCP);
b) Judicial action (Sec. 70, CCP); and
2) The stockholder must make a written
demand on the corporation within 30 days c) Collection from cash dividends and withholding
after the vote was taken (Ibid.);3
456 of stock dividends (Sec. 43, CCP).
3) The proposed action is any one of the 15.02. What does the term unpaid claim mean (for purposes
instances enumerated above (b); of declaring the shareholder delinquent)?
4) The price to be paid is the fair value of the It refers to any unpaid subscription, and not to
shares on the date before the vote was taken any indebtedness which a subscriher or stockholder
may owe the corporation arising from any other
(Ibid,);
transaction (China Banking Corp. v. CA, ei a l, March 26,
5) The fair value shall be agreed upon but in 1997).
case there is no agreement within 60 days
i: 15.03. CALL —- a declaration by the board of directors that
from the date the vote was taken, the fair
the unpaid subscriptions are due and payable to the
value shall be determined by a majority of
corporation.
the 3 disinterested persons one of whom
shall be named by the stockholder, another a) A call is necessary if no time to make payment
by the corporation and the third by the two is stated in the subscription agreement. A call is
who were chosen (Sec. 82, CCP); and not necessary if: (1) there is a time fixed in the
agreement for payment; or (2) if the corporation
6) The right of appraisal is extinguished when: becomes insolvent.
(i) he withdraws th e demand with the cor
porations consent (consent of the corpora b) Notice of call is necessary to bind the stockhold
tion is necessary); (ii) the proposed action ers (Baltazar v. Lingayen Gulf Electric Power, 14
SCRA 522 [1965]). ■
15.04. PROCEDURE FOR COLLECTION AND DELIN 2) to be entitled to vote; or

QUENCY SALE 3) to representation at any stockholders' meet
a) Call whenever required must be made by the ing.
: - Board. ■ b) Delinquent stockholder shall not be entitled to
b) Notice of call — the stockholders are given any of the rights of a stockholder but he shall
notice of the board resolution by the corporate still be entitled to receive dividends.
secretary either personally or by registered mail. c) Delinquent stocks shall be subject to delinquen
c) If the stockholders concerned do not pay with cy sale.
in thirty (30) days from the date specified in N ote: If the delinquent stockholder is a director,
the contract of subscription or in the call, all
he shall continue to be a director but he cannot run for
the stocks covered by the subscription shall be re-election.
declared delinquent and shall be subject to sale
under Section 68.
BOOKS (Sec. 74, CCP)
d) Notice of delinquency served on the subscribers
16.01. What books are required to be maintained by the
either personally or registered mail and publi
corporation?
cation in a newspaper of general circulation in
the province or the city where principal office is a) Book of minutes of stockholders meetings;
---------------- located once a week for two consecutive weeks.
b) Book of minutes of board meetings;------------------
Notice shall state the amount due on each
c) Record or Book of all business transactions; and
subscription plus accrued interest, and the date,
time and place of the sale which shall not be less d) Stock and transfer book.
than 30 days nor more than 60 days from the 16.02. Entries in Stock and Transfer Book
date the stocks become delinquent.
a) What are the contents of the stock and transfer
e) Sale — such number of shares as may be neces book?
sary to pay the amount due on subscription,
plus interest and other amounts due, will be sold 1) All stocks in the name of the stockholders
at public auction. which are alphabetically arranged;
The highest bidder is the person offering to pay 2) Amount paid and unpaid on all stocks and
the full amount of the balance on the subscription and the date of payment of any installment;
other amount that are due for the smallest number of 3) Alienation, sale or transfer of stocks; and
shares or fraction of a share (Secs. 67-70, CCP).
4) Other entries as the by-laws may prescribe.
15.05. What are the effects of stock delinquency? (Sec. 71,
b) Who is authorized to make entries in the stock
CCP) and transfer book?
a) Deprives the stockholder the right:
The corporate secretary is the officer who is
1) to be voted for; duly authorized to make entries on the stock and
transfer book. Hence, entries made by the Chair porations. The approval of the SEC is required
man or President are invalid (Torres, Jr. v. CAf 278 (PNB v. Andrada Electric & Engr. Co., G.R. No.
SCRA 793 [1997]). 142936, April 17,2002).
c) What is the probative value of the stock and 17.02. EFFECTS OF MERGER OR CONSOLIDATION
transf er book? (Sec. 80, CCP)
The stock and transfer book is the best evi a) The constituent corporations shall become a
dence of the transactions that must be entered single corporation.
or stated therein. However, the entries are con b) The separate existence of the constituents shall
sidered prima facie evidence only and may be cease except that of the surviving corporation (in
subject to proof to the contrary (Bitong v. CA, 292 merger) or the consolidated corporation (in con
SCRA 503 [1998]). solidation).
16.03. RIGHT OF STOCKHOLDERS TO INSPECT c) The surviving or the consolidated corporation
BOOKS shall possess all the rights, privileges, immuni
a) What are the requirements for the exercise of ties and powers and shall be subject to all duties
the right of inspection? and liabilities of a corporation.
1) It must be exercised at reasonable hours on US W.4U V £. V AA, _ _
business days; shall possess all rights, privileges, immunities

ie stockholder has not improperly usee
any information he secured through any and the properties shall be deemed transferred
previous examination; and to the surviving or the consolidated corporation.
3) Demand is made in good faith or for a e) All liabilities of the constituents shall pertain to
legitimate purpose (Sec. 74, CCP). the surviving or the consolidated corporation.
b) Mandamus is a proper remedy if the stockholder f) Employees of an absorbed corporation are neither
is being improperly deprived of his right to assets nor liabilities that are deemed absorbed
inspect. by the surviving corporation. The Corporation
Code does not mandate the absorption of the
17. MERGER vs. CONSOLIDATION employees of the non-surviving corporation.
17.01. DEFINITIONS. Merger is one where a corporation The absorption of the employees may, however,
absorbs the other and remains in existence while be provided for in Merger Plan. In the absence of
the others are dissolved (Sec. 76, CCP). On the other stipulation, the surviving corporation may not
hand, Consolidation is one where a new corporation be judicially compelled to absorb the employees
is created, and consolidating corporations are of the non-surviving corporation (BPI v. BPI
extinguished (Sec. 76, CCP). ■ Employees Union, G .K No. 164301, Aug. 10,2010).
a) Merger or consolidation does not become effec g) For purposes of applying the Union Shop Clause
tive by mere agreement of the constituent cor- in the Collective Bargaining Agreement between
260 REVIEWER ON COMMERCIAL. LAW PART 111 — BUSINESS ORGANIZATIONS 261
the surviving corporation and the certified union companies, public utilities, educational institu
therein, the absorbed employees of the non tions and other special corporations requires
surviving corporation are considered new em favoraMe n©commendation of government agen
ployees of the surviving corporation. Hence, ■ . cy eoncemed.
Union Shop Agreement applies to the absorbed -
employees (BPI v. BPJ Employees Union, ibid.). 11. NON-USE OF CORPORATE CHARTER
17.03. PROCEDURE 18.01. Effects of Non-Use of Corporate Charter and Con
a) The Board of each corporation shall draw u r ■' tinuous Inoperstion of Corporation (Sec. 22)
plan .ofjiLei:g;er orxons setting forth 1: ; a) When the corporation does not fully organize
names of the corporation involved; (2) terms and and commence the transaction of its business or
mode of carrying it; (3) statement of changes, if the construction of its works within,2 years from
any, in the present articles of the surviving cor .the date of_its incorporation, its corporate pow
poration or the articles of the new corporation to ers cease and the corporation shall be deemed
be formed in the case of consolidation. dissolved.
b) Plan for merger or consolidation shall be b) When the corporation, has commenced the
approved by majority vote of each of the board of transaction of its business but subsequently
the concerned corporations at separate meetings, becomes continuously mo^M BtiveJorapSXiQ dM
and approved by 2 /3 of the Outstanding Capital _______________at least five (5) years., the certificate of registration
Stock or members for non-stock corporations. may be suspended or revoked. Suspension
c) Any amendment to the plan must be approved or cancellation of corporate franchise is not
by the majority vote of the board members or automatic. Exception: Inoperation is beyond the
trustees of the constituent corporations and control of the corporation.
affirmative vote of 2 /3 of the OCS or members.
PROBLEM :
d) Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent 1. In the articles of incorporation of T Corporation,
corporations, signed by the President or Y'ce eleven members were named to constitute the
President and certified by secretary or assis t :" board of directors. These eleven elected from among
secretary setting forth: (1) plan of merger or con themselves a secretary-treasurer but did not elect a
solidation; (2) for stock corporation, the number president. The board used to hold meetings to transact
of shares outstanding; for non-stock, the number business, which was done through the secretary-
of members; (3) as to each corporation, number treasurer. In a proceeding to forfeit its charter, the
Of shares or members voting for and against question was posed as to whether the corporation
such plan respectively. may be considered to have formally organized.
Resolve the question.
e) Four copies of the Articles of Merger or Cone''
.• dation shall be submitted to the SEC for app. l - A: YES. The T Corporation may be considered to have
al. Merger or consolidation of banks, insurance formally organized. The presence/election of a Pre
companies, building and loan associations, t. :■ sident is not absolutely necessary to determine if
REVIEWER ON COMMERCIAL LAW PART ID — BUSINESS ORGANIZATIONS 263
262
the corporation already organized. At the time of b) Voluntary dissolution where creditors are affect-
the issuance of the Certificate of Registration, T ed (Sec, 119, CCP).
Corporation already had a board, a treasurer and a 1) Approval of the stockholders representing
clerk. T Corporation also functioned and engaged in at least 2 /3 of the outstanding capital stock
business. or 2 /3 of members in a meeting called for
that purpose;
19. DISSOLUTION 2) Filing of a Petition with the SEC signed by
19.01. Dissolution of a Corporation — extinguishment of majority of directors or trustees or other
the franchise of a corporation and the termination of officers having the management of its
its corporate existence. affairs verified by President or Secretary
or Director. Claims and demands must be
19.02. Modes of Dissolution: a) Voluntary Dissolution; b)
stated in the petition;
Involuntary Dissolution; c) Shortening of term; and
d) Expiration of term. 3) If Petition is sufficient in form and sub
stance, the SEC shall issue an Order fixing a
a) Voluntary dissolution where no creditors areM- hearing date for objections;
fected (Sec. 118, CCP).
4) A copy of the Order shall be published at
1) A meeting must be held on the call of direc
least once a week for 3 consecutive weeks
tors or trustees;23456 in a newspaper of general circulation or if
2) Notice of the meeting should be given to there is no newspaper in the municipality
the stockholders by personal delivery or or city of the principal office, posting for 3
registered mail at least 30 days prior to the consecutive weeks in 3 public places is suf
meeting; ficient;
3) The notice of meeting should also be pub 5) Objections must be filed no less than 30
lished for 3 consecutive weeks in a newspa days nor more than 60 days after the entry
per published in the place; of the Order;
4) The resolution to dissolve must be ap 6) After the expiration of the time to file
proved by the majority of the directors/ objections, a hearing shall be conducted
trustees and approved by the stockholders upon prior 5-day notice to hear the objec
representing at least 2 /3 of the outstanding tions; and
capital stock or 2 /3 of members; 7) Judgment shall be rendered dissolving the
5) A copy of the resolution shall be certified by corporation and directing the disposition of
the majority of the directors or trustees and assets; the judgment may include appoint
countersigned by the secretary; and ment of a receiver.
6) The signed .and countersigned .copy will be (Sec.
filed with the SEC and the latter will issue 120, CCP). — This is done by amending the
the certificate of dissolution. Articles of Incorporation. The amended Articles
264 REVIEWER ON COMMERCIAL LAW EAR]’ III — BUSINESS ORGANIZATIONS
shall be filed with the SEC and the corporation d) Reincorporation of Dissolved Corporation —
is deemed dissolved upon approval of the Though a dissolved corporation cannot be re
amended Articles or upon expiration of the new vived, those interested ma)?' reincorporate by
term. re-filing the new Articles of Incorporation and
by-laws;
d) Involuntary dissolution (Sec. 121, CCP). — by fil
ing a verified complaint with the SEC based on e) Continuation of a Body Corporation — The cor
any ground provided by law or rules, including: poration continues as a body corporate for 3
years for purposes of winding up or liquidation;
1) Failure to organize and commence business
within 2 years from incorporation (Sec. 22, 0 Ceg§Mipn, Qi.Co.rp.orate Existence,for AJLRur:
CCP); poses — Upon the expiration of the 3 year
2) Continuously inoperative for 5 years (Sec. winding up period, the corporation ceases to
22, CCP); exist for all purposes.
3) Failure to file by-laws within 30 days from 19.04. LIQUIDATION AFTER THREE YEARS
issue of certificate of incorporation; If full liquidation can only be effected after the
4) Continuance of business not feasible as 3-year period and there is no trustee, the directors
found by Management Committee or Reha may be permitted to complete the liquidation by
bilitation Receiver; continuing as trustees by legal implication (Gelano v.
CA, 103 SCRA 90 [19911; Reburiano v. CA, 301 SCRA
---------:— :—§)— Eaudap^prooiringAZeriificate of Registra
---------342 [1999]).------------------- — _______________________ _
tion;
6) Serious Misrepresentation; and 20. LIQUIDATION — process by which all the assets of the
7) Failure to file required reports. corporation are converted into liquid assets (cash) in order
to facilitate the payment of obligations to creditors, and the
19.03. EFFECTS OF DISSOLUTION remaining balance if any is to be distributed to the stock
a) Transfer of Legal Title to Corporate Property. — holders.
Dissolution results in the transfer of legal title to
20.01.; MODES OF LIQUIDATION
properties in the stockholders who become co
owners thereof; a) By the Board of Directors;
b) On Continuation of Corporate Business — The b) Through a trustee to whom the properties are
corporation ceases as a body corporate to con conveyed; and
tinue the business for which it was established;
c) By management committee or rehabilitation
c) Creation of a New Corporation — The stock receiver.
holders are not prevented from conveying their
respective shareholdings toward the creation of 21. FOREIGN CORPORATION — corporation formed,
a new corporation to continue the business of organized or existing under any law other than those of
the old; the Philippines, and whose laws allow Filipino citizens and
corporations to do business in its own country or state (Sec, as "doing business" since it lacks the element of
123, CCP), CONTINUITY. However, where a single or isolated
21.01. Foreign Corporation — power to sue and be sued. transaction is not merely incidental or casual but
indicates the foreign corporation's intention to do
a) Suit By a Foreign. Corp-Qraticm — The foreign other business in the Philippines, said single act
corporation transacting business in the Philip or transaction constitutes "doing business" in the
pines without a license to do business shall not be Philippines.
permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative 21.04. Explain the Contract Test of "doing business" in the
agency. Philippines
b) Suit Against a Foreign Corporation — Any for a) An essential condition to be considered as "do
eign corporation transacting business in the ing business" in the Philippines is the actual
Philippines whether or not with a license, may performance of specific commercial acts within
be sued against/before Philippine courts or ad the territory of the Philippines for the plain rea
ministrative tribunals on any valid cause of ac son that the Philippines has no jurisdiction over
tion recognized under Philippine laws (Doctrine commercial acts performed in foreign territories
of Quasi-Estoppel By Acceptance o f Benefits). (B. Van Zuiden v. GTVL Manufacturing Industries,
21.02. What constitutes "doing business" in the Philippines Inc., G.R. No. 147905, May 28, 2007).
for foreign corporations?
_____ b)__ Activities within the Philippine jurisdictionJhal
Under the Continuity Test, doing business im do not create earnings or profits to the foreign
plies a continuity of commercial dealings and ar corporation do not constitute doing business in
rangements, and contemplates to some extent the the Philippines (Natl. Sugar Trading Corp. v. CA,
performance of acts or works or the exercise of some 316 Phil. 562 [1995]; Cargill, Inc. v. Intra Strata
functions normally incident to and in progressive Assurance Corp., G.R. No. 168266, March 15,2010).
prosecution of, the purpose and object of its organi
zation. c) A foreign company that merely imports goods
from a Philippine exporter without opening an
Under the Substance Test, a foreign corporation
office or appointing an agent in the Philippines
is doing business in the country if it is continuing the
is not doing business in the Philippines (Car
body or substance of the enterprise of business for
gill, Inc. v. Intra Strata Assurance Corp., G.R. No.
which it was organized.
168266, March 15,2010).
N ote: The two tests are referred to as the "Twin-
Characterization Test" (Mentholatum Co. v. Mangaliman, d) A foreign country that exports products to the
72 P hil 524). Philippines, without doing any specific commer
cial act, is not doing business in this country (B.
21.03. Does an "isolated transaction" by a foreign corpora Van Zuiden v. GTVL, supra; Pacific Veg. Oil Corp. v.
tion qualify as "doing business" in the Philippines? Singson, April 1955).
It depends. If a single or isolated transaction is
(See: Aetna Casualty & Surety Co. v. Pacific
incidental and casual transaction, it cannot qualify
Star Lines, 80 SCRA 835 [1970]; Universal Shipping
Lines, Inc, v. IAC, 188 SCRA 170 [1970]; Agilent b) Not doing business (Sec. 3[d])
Technologies v. Integrated Silicon Technology, G.R. 1) Mere investment as shareholder and exer
No. 154618, April 14,20041 cise of rights as investor;
e) The appointment of a distributor in the Philip 2) Having a nominee director or officer to
pines is not sufficient to constitute "doing busi represent its interest in the corporation; and
ness" unless it is under the full control of the
3) Appointing a representative or distributor
foreign corporation. On the other hand, if the
which transact business in its own name
distributor is an independent entity which buys
and for its own account.
and distributes products, other than those of the
foreign corporation, for its own name and its 21.06. Requisites for obtaining license to do business
own account, the latter cannot be considered to
a) The foreign corporation should file a verified
be doing business in the Philippines (Steel case,
application containing and together with the
Inc. v. Design International Selections, Inc., G.R.
following:
No. 171995, April 18, 2012).
1) Designated resident agent (who will receive
21.05. "DOING BUSINESS" UNDER THE FOREIGN summons and notices for the corporation);
INVESTMENT ACT OF 1991 a special power of attorney should also be
a) Doing Business (Sec. 3[d]) 1234 submitted for such purpose;
______ 2) An agreement that if it ceases to trans
1) Soliciting orders, service contracts, opening
act business or” if there is no more resi-
offices (whether branch or liaison officer);
dent agent, summons shall then be served
2) Appointing representatives, distributors through theSEC; and
domiciled in the Philippines or who stay
3) Oath of Reciprocity. Certificate under Oath
for a period or periods totaling 180 days or
of the authorized official o f the foreign
more;
corporation's country that allows Filipino
3) Participating in the management, supervi citizens and corporations to do business in
sion or control of any domestic business, said country.
firm, entity or corporation in the Philip b) Within 60 days from issuance of license, the
pines; and corporation should deposit at least P100,000.00
4) Any act or acts that imply a continuity of (cash, property or bond) for the benefit of credi
commercial dealings or arrangements, and tors subject to further deposit every six months.
contemplate to some extent the perfor
21.07. EFFECT OF ESTOPPEL AND SUBSEQUENT COM
mance of acts or works or the exercise of PLIANCE
some functions normally incident to and
in progressive prosecution of, the purpose a) Estoppel. A party is estopped to challenge the
and object of its organization. personality of a corporation after having ac
knowledged the same by entering into a contract
with it. The principle "'will he applied to prevent N ote; The corporation is not a close corporation
a person contracting with a foreign corporation even if the shares belong to less than twenty if not all
from later taking advantage of its noncompli the requisites are present (San Juan Structural and Steel
ance with the statutes, chiefly in cases where Fabricators, Inc. v. CA, 296 SCRA 631 [1998]). The three
such person has received the benefits of the requisites must concur.
contract" (Steel case, Inc, v. Design International
Selections, Inc., ibid,, citing Rimbunan Hijau Group 22.02. The following cannot be a close corporation*.
of Companies v. Oriental Wood Processing Corpora a) mining companies;
tion, 507 Phil. 631 [2.005] and Merril Lynch Futures
b) oil companies;
v. CA).
c) stock exchanges;
Note: In one case, the Supreme Court cited the In
Pari Delicto in ruling that no remedy could be afforded d) banks;
to parties if one party is a foreign corporation without e) insurance companies;
a license (Top Weld Mfg„ Inc., ECED, SA, 138 SCRA f) public utility;
118).
g) educational institution; and
b) Subsequent Compliance — subsequent com
h) other corporation declared to be vested with
pliance (securing a license) will cure the lack of
public interest.
capacity to sue at the time of the execution of
fHe contm&Tffuriwfnsmimcc-Cmrifpmif^^mte^ ^2J3J?i£êmpii¥.e, Righ t i n . Close Corporations —- shall
Shipping Lines, 123 SCRA 424 [1988]). extend to all stocks to be issued, including re-issuance
of treasury shares, whether for money or property or
22. CLOSE CORPORATIONS personal services, or in payment or corporate debts,
unless the articles of incorporation provide otherwise
22.01. REQUIREMENTS FOR CLOSE CORPORATIONS (Sec, 102, CCP).
a) The Articles of Incorporation must state that the Pre-emptive rights covers even those that are
number of stockholders shall not exceed 20; excluded in Section 39 of the Corporation Code:
b) The Articles of Incorporation must contain (a) issued in compliance with laws requiring stock
restriction on the transfer of issued stocks (which offering or minimum stock ownership; (b) in exchange
must appear in the Articles of Incorporation, By of property needed for corporate purposes upon 2 /3
laws and Certificate of Stock). vote of outstanding capital.
— Restriction on the transfer must not be 22.04. Deadlocks. In case of irreconcilable disputes among
more onerous than granting the existing the directors or shareholders, the SEC may be asked to
SH or corporation the option to purchase intervene and the SEC may perform such actions that
the shares; may be necessary under the circumstances including
the appointment of a provisional director who, as an
c) The stocks cannot be listed in the stock exchange impartial person, will have all the powers of a duly
nor be publicly offered. elected director (not a receiver).
272 REVIEWER ON COMMERCIAL LAW PA EI III ■— BUSINESS ORGANIZATIONS 273
. 22JML CHAEAGfEH.ISTIGS: tion or By-laws (Sec. 89, CCP). Thus, the By-laws
of a non-stock corporation may provide for the
a) The stockholders themselves can directly man
desired voting rights of members, including the
age the corporation and perform the functions of
number of votes (SEC Opinion, Oct. 10,1989).
directors without the need of election:
b) Right to Transfer Membership. As a general
1) when ’they manage; stockholders are liable ■
rule, a member cannot transfer his membership
: as directors;
(and the rights arising therefrom) in a non-stock
2) there is no need to call a meeting to elect corporation. However, by way of exception, the
directors; Articles of Incorporation or By-laws may pro
3) the stockholders are liable for tort. vide for their transferability (Sec. 90, CCP).
b) Despite the presence of the requisites, the corpo- 23.03. TERMINATION OF MEMBERSHIP. The power to
ration shall not be deemed a close corporation if admit members pertains to the Board in the absence
at least 2 /3 of the voting stocks or voting rights of any contrary provision in the Articles and By-laws.
belong to a corporation which is not a close cor Consistently, it is also the Board of Trustees who has
poration. the power to terminate membership.
23. NONSTOCK CORPORATIONS a) Standards. A non-stock corporation is autho

rized to terminate the membership in accor-*1
23.01. PURPOSES 0 F NON-STOCK CORPORATIONS*• __________danm-withJfae^tandaniajfixediiiAe,,AEticles-n£
a) charitable; Incorporation or the By-laws (Sec. 91, CCP).
b) religious; b) When Property Rights are Involved. Mem
c) educational; bership may involve property rights. Example:
Membership in a golf club where the purchase
•• d) professional;
of a share is a sine qua non (Valley Golf & Coun
e) cultural; try Club, Inc. v. Caram, G.R. No. 158805, April 16,
f) fraternal;, 2009).
g) literary; 1) When loss of property rights is involved,
h) scientific; the manner of deprivation of such property
right should also be in accordance with
i) social;
the provisions of the Civil Code including
j) civic service; and Articles 19, 20 and 21 under the Chapter
k) similar purposes, such as chambers or combina on Human Relations (Valley Golf & Country
tions trade, industry or agriculture. Club, Inc. v. Caram, ibid.).
, :23.:02,;RIGHTS OF MEMBERS c) Lien. Non-payment of dues may be a ground for
a) Right :to ¥ote. A member is 'entitled to one (1) termination or suspension of membership. The
' vote. However, such right may be broadened, Articles or the By-Laws of a non-stock corpora
limited, or denied in the Articles of Incorpora- tion may provide that unpaid dues shall con-
274
stitute a lien, on the member's share. However, b) A non-stock corporation can. be converted into
Section 68 of the Corporation Code does not ap stock corporation only if the members dissolve
ply if the membership shares are sold under the it first and then organize a stock corporation.
provisions that provide for the constitution of However, there is a resulting new corporation
lien (Calatagan Golf & Country Club, Inc. v. Caram, (SEC Opinion, May 13,1992).
G.R. No. 165443, April 16,2009). c) A stock corporation may be converted into a
1) The shares may be sold by virtue of a lien. non-stock corporation by mere amendment pro
In such sale by virtue of a lien, the member vided all the requirements are complied with. Its
had already fully paid for the share and no rights and liabilities will remain.
longer had any outstanding obligation to
23.05. ORDER OF DISTRIBUTION OF ASSETS (On
deprive him of full title to his share (Calata
Dissolution of Non-Stock Corporation, Sec. 94,
gan Golf & Country Club, Inc. v. Caram, ibid.).
CCP)
d) Notice. For the termination of membership to be
valid, there should be reasonable notice to the a) all its creditors shall be paid;
member concerned and he must be given a fair b) assets held subject to return on dissolution shall
opportunity to be heard in his defense. be delivered back to their givers;
e) Effect of Death of Member. Membership in c) assets held for charitable, religious purposes,
and all rights arising from a non-stock corpo- etc., without a condition for their return on1
--------------- ration— are— personal— and— non-transferable. _______ dissolution, shall be conveyed to one or more
unless the articles of incorporation or the by organizations engaged in similar activities as
laws of the corporation provide otherwise. dissolved corporation; and
Deceased members who are dropped from the
membership roster in the manner and for the d) all other assets shall be distributed to members,
cause provided for in the By-Laws are not to as provided for in the Articles or By-laws.
be counted in determining the requisite vote in
corporate matters or the requisite quorum for PROBLEM:
the annual members' meeting (Tan v. Sycip, G.R. 1. Can a non-stock corporation offset unused contri
No. 153468, Aug. 17, 2006, 499 SCRA216). butions of members against the balance of receivables
from the same members? .
23.04. CONVERSION
a) A non-stock corporation cannot be converted
A. NO. The unused contributions of members cannot be
into a stock corporation through mere amend offset against receivables because this would amount
ment of its Articles of Incorporation. This would : to distribution of the capital of the corporation.
violate Section 87 which prohibits distribution Members of non-stock corporation are not entitled
of income as dividends to members. Giving the to distribution of capital. They are only entitled to
members shares is tantamount to distribution distribution of capital upon dissolution when it is
of its assets or income (SEC Opinion, March 20, provided for in the Articles or by-laws (SEC Opinion,
1995). • Nov. 27,1985).
24, RELIGIOUS CORPORATIONS even if it is headed by the Pope (Roman Catholic

24.01. KINDS (Sec. 109)
Apostolic Church v. Land Registration Commission,
102 Phil. 596 [1957]).
a) Corporation sole — special form of corporation,
usually associated with the clergy and consists The opinion of the SEC is that for registered
of one person only and his successors, who are corporation sole, it can acquire land if its mem
incorporated by law to give some legal capaci bers constitute at least 60% Filipinos (SEC Opin
ties and advantages; and ion, Aug. 8,1994).
b) Religious societies — non-stock corporation b) Effect of Separation of Members — members

formed by a religious society, group, diocese, of the sect who left and who formed a separate
synod or district of any religious denomination, religious group are not entitled to any right over
sect, or church after getting the approval of 2/3 of the properties of their former sect (Cahete v. CA,
its members (Sec. 116, CCP). 171 SCRA 13 [1989]).
1) The by-laws of the religious corporation c) Conversion to Corporation Aggregate. A cor
may provide that the member may be poration sole may be converted to a corporation
expelled or removed without prior notice. aggregate (Religious corporation) through the
This is justified under Section 91 of the amendment of its Articles of Incorporation. Con
Corporation Code which states that currence of 2 /3 of the members of the corpora
termination of membership may be in the tion sole (and not merely by the head of church
------------------------------ manner provided in the Articles and By- OT'tiisteFhlFmecesHanriorê-ainendment of
laws. If no notice is provided in the By the Articles of Incorporation (IEMELIF v. Bishop
laws, the members are bound because Lazaro, G.R. No. 184088, July 6, 2010).
they consented thereto when they became
members. Consequently, where any member d) Dissolution — by filing a verified declaration
of a religious corporation is expelled from of dissolution stating: (1) the name of the corpo
the membership for espousing doctrines ration; (2)reason for dissolution; (3) authorization
and teachings contrary to that of his church, for the dissolution by the particular religious
such action is conclusive in Court (Alfredo denomination, sect or church; (4) names and
Long v. Lydia Basa, G.R. Nos. 134963-64, Sept. addresses of the persons who will supervise the
27,2001). dissolution and winding up.
24.02. CORPORATION SOLE
C. SECURITIES REGULATIONS CODE
a) Nationality — A corporation sole does not have
(SRC, R.A. No. 8799)
any nationality but for purposes of applying our
nationalization laws, nationality is determined : AND RELATED LAWS
not by the nationality of its head, but by the
nationality of the members constituting the sect State the powers and functions of the SEC
in the Philippines. Thus, the Roman Catholic The Commission shall act with transparency and shall
Church can acquire land in the Philippines have the powers and functions provided by the Securities
Regulation Code, Presidential Decree No. 902-A, the Cor i) Issue cease and desist orders to prevent fraud or
poration Code, the Investment Houses Law, the Financing injury to the investing public;
Company Act and other existing laws. Pursuant thereto, the
Commission shall have, among others, the following pow j) Punish for contempt of the Commission, both
ers and functions: direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed
a) Have jurisdiction and supervision over all corpo by the Rules of Court;
rations, partnerships or associations who are the
k) Compel the officers of any registered corpora
grantees of primary franchises and/or a license
tion or association to call meetings of stockhold
or permit issued by the Government;
ers or members thereof under its supervision;
b) Formulate policies and recommendations on
l) Issue subpoena duces tecum and summon witnesses
issues concerning the securities market, advise
to appear in any proceedings of the Commission
Congress and other government agencies on
and in appropriate cases, order the examination,
all aspects of the securities market and propose
search and seizure of all documents, papers, files
legislation and amendments thereto;
and records, tax returns, and books of accounts
c) Approve, reject, suspend, revoke or require of any entity or person under investigation as
amendments to registration statements, and may be necessary for the proper disposition of
registration and licensing applications; the cases before it, subject to the provisions of
existing laws;
_____ d]__ RegulateAinveM.igate,Aji-aup-er3d££AheL^£tiviti£S-
of persons to ensure compliance; m) Suspend, or revoke, after pro per notice and hear
ing the franchise or certificate of registration of
e) Supervise, monitor, suspend or take over the
corporations, partnerships or associations, upon
activities of exchanges, clearing agencies and
any of the grounds provided by law; and
other SROs;
n) Exercise such other powers as may be provided
f) Impose sanctions for the violation of laws and by law as well as those which may be implied
the rules, regulations and orders issued pursu ■ from, or which are necessary or incidental to the
ant thereto;
earrying out oh the express powers granted the
g) Prepare, approve, amend or repeal rules, regu Commission to achieve the objectives and pur
lations and orders, and issue opinions and pro poses of these laws.
vide guidance on and supervise compliance 1,01. TRANSFERRED JURISDICTION
with such rules, regulations and orders;
a) Under Section 5.2 of the SRC, the Commission's
. h) Enlist the aid and support of and/or deputize jurisdiction over all cases enumerated under
any and all enforcement agencies of the Gov Section 5 of Presidential Decree No. 902-A has
ernment, civil or military as well as any private been transferred to the courts of general juris
institution, corporation, firm, association or diction or the appropriate Regional Trial Court.
person in the implementation of its powers and Thus, the following are within the jurisdiction of
functions under this Code; the RTC:
280 REVIEWED Of'i COMMERCIAL LAW PART HI — BUSINESS ORGANIZATIONS 281
1) fraudulent devices and schemes employed Define the following terms: a) Issuer; b) broker; c) dealer;
by directors detrimental to the public inter d) clearing agency; e) exchange; f| pre-need plans; g)
est and to other firms; promoter; h) prospectus; S) registration statement; j)
uncertlfleafed securities; k) underwriter. .
2) intra-corporate dispute and with the state
in relation to their franchise and right to a) "Issuer" is the originator, maker, obligor, or
exist as such; creator of the security.
3) controversies in election, appointment of b) "Broker" is a person engaged in the business of
directors or trustees; buying and selling securities for the account of
4) petition to be declared in state of suspen others.
sion of payments; and c) "Dealer" means any person who buys and sells
securities for his/her own account in the ordi
5) appointment of Rehabilitation Receiver or
nary course of business.
Management Committee.
d) "Clearing Agency" is any person who acts as in
2. WHAT ARE SECURITIES? termediary in making deliveries upon payment
to effect settlement in securities transactions.
"Securities" are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making e)---- "Exchange" is an organized marketplace or
venture and eyjdeiimdhy-njQeiLiikai^xr^^ ---------------- facility that brings together buyers and sellers
whether written or electronic in character. It includes: and executes trades of securities and/or com
modities.
a) Shares of stock, bonds, debentures, notes, evi
dences of indebtedness, asset-backed securities; f) "Pre-need plans" are contracts, agreements,
deeds or plans for the benefit of the planhold
b) Investment contracts, certificates of interest or
ers which provide for the performance of future
participation in a profit sharing agreement, cer
service/s, payment of monetary considerations
tificates of deposit for a future subscription;
or delivery of other benefits at the time of actual
c) Fractional undivided interests in oil, gas or other need or agreed maturity date, as specified there
mineral rights; in, in exchange for cash or installment amounts
d) Derivatives like option and warrants; with or without interest or insurance coverage
and includes life, pension, education, interment
e) Certificates of assignments, certificates of partic and other plans, instruments, contracts or deeds
ipation, trust certificates, voting trust certificates as may be determined by the Insurance Com
- or similar instruments; and mission (I.C.). Pre-need plans are now being
f) Proprietary or non-proprietary membership regulated by the I.C. under the Pre-need Code of
certificates in corporations; and other instru the Philippines (Sec. 4[c], R.A. No. 9829).
ments as may in the future be determined by the g) "Promoter" is a person who, acting alone or with
Commission. others, takes initiative in founding and organiz
ing the business or enterprise of the issuer and Homes Unlimited Corp. v. SEC, G.R. No. 164182,
receives consideration therefore. Feb. 26,2008; SEC v. Prosperity.Com, Inc., G.R. No.
164197, fan. 25,2012).
h) "Prospectus" is the document made by or on
behalf of an issuer, underwriter or dealer to sell 3.02. What are derivatives?
or offer securities for sale to the public through Derivatives, with respect to equity securities,
a registration statement filed with the Commis means a financial instrument, including options and
sion. warrants, whose value depends on the interest in or
i) "Registration statement" is the application for performance of an underlying security, but which
the registration of securities required to be filed does not require any investment of principal in the
with the Commission. underlying security.
j) "Uncertificated security" is a security evidenced a) "Options" are contracts that give the buyer the
by electronic or similar records. right, but not the obligation, to buy or sell an
underlying security at a predetermined price,
k) "Underwriter" is a person who guarantees on called the exercise or strike price, on or before
a firm commitment and/or declared best effort a predetermined date, called the expiry date,
basis the distribution and sale of securities of which can only be extended in accordance with
any kind by another company. Exchange rules.
3.01. What are investment contracts? b) "Call, options" are rights to buy and "put
An investment contract means a contract, trans ■ ~ options" are rights to sell.
action or scheme (collectively "contract") whereby c) "Warrants" are rights to subscribe or purchase
a person invests his money in a common enterprise new shares or existing shares in a company, on
and is led to expect profits primarily from the efforts or before a predetermined date called the expiry
of others. date, which can only be extended in accordance
a) A presumption that a contract is an investment with Exchange rules. Warrants generally have a
contract arises whenever a person seeks to use longer exercise period than options.
the money of others on the promise of profits. 3.03, What are commodity futures -contracts? What is a
commodity?
b) When two or more investors "pool" their
resources, there is a common enterprise, even if a) "Commodity futures contract" means a contract
the promoter does not do more than receive a providing for the making or taking delivery at a
broker's commission. prescribed time in the future of a specific quanti
ty and quality of a commodity or the cash value
c) Requisites of Investment Contract: (1) an in
thereof, which is customarily offset prior to the
vestment of money, (2) in a common enterprise,
delivery date, and includes standardized con
(3) with expectation of profits, (4) primarily from
tracts having the indicia of commodities futures,
efforts of others. (Note.* This modifies the "How-
commodity options and commodity leverage, or
ey Test" which requires the profit to be derived
margin contracts. .
"solely" from the efforts of others; See: Power
284 REVIEWER ON COMMERCIAL LAW PART Hi — BUSINESS ORGANIZATIONS 285
b) Commodity means any goods/articles, services, communication, including any summary

rights and interests, including any group or in prospectus, shall be deemed not to consti
dex of any of the foregoing, in which commodity tute an offer for sale under this Section.
interests contracts are presently or in the future
dealt in. 3) A record of the registration of securities
shall be kept in a Register of Securities in
4. How does the SRC protect the public who wishes to which shall be recorded orders entered by
invest In securities? the Commission with respect to such secu
rities. Such register and all documents or
The law protects the publicas follows: a) the law requires information with respect to the securities
full disclosure of information to the public regarding the registered therein shall be open to public
securities that are being offered and the issuers, including
inspection at reasonable hours on business
the filing of and approval of the registration statement and
days.
the approval of the prospectus. There is also a continuing
duty to regularly submit material information to the SEC; b) 4) The Commission may audit the financial
close monitoring of the securities and other circumstances statements, assets and other information of
that may affect the same as well as the persons involved a firm applying for registration of its securi
including brokers, issuers, the exchange itself, etc. in order ties whenever it deems the same necessary
to ensure compliance with pertinent laws and regulations; to insure full disclosure or to protect the
c) prohibiting and penalizing different fraudulent practices interest of the investors and the public in
----- and transactions; and d) providing the SEC with powers __ • general.
and functions (Philippine Stock Exchange v. CA, 281 SCRA 232
[1997]; Securities and Exchange Commission v. CA, 246 SCRA b) In approving the registration of the securities,
738 [1995]). the SEC is not only concerned with the require
ment that full disclosure of information is given
5. State the basic rules regarding registration of securities to the public. The SEC is also concerned with the
merit of the securities themselves and the issuer
a) The SRC (Sec. 8.1) provides that securities shall
(Philippine Stock Exchange v. CA, 281 SCRA 232
not be sold or offered for sale or distribution
[1997]).
within the Philippines, without a registration
statement duly filed with and approved by the
Commission. Prior to such sale, information on 6. What securities are exempt from the requirement of
the securities, in such form and with such sub registration?
stance as the Commission may prescribe, shall The requirement of registration shall not, as a general
be made available to each prospective purchaser. rule, apply to any of the following classes of securities:
1) The Commission may conditionally ap a) Any security issued or guaranteed by the
prove the registration statement under such Government of the Philippines, or by any poli
terms as it may deem necessary.. tical subdivision or agency thereof, or by any
2) The Commission may specify the terms person controlled or supervised by, and acting
and conditions under which any written as an instrumentality of said Government.
286 REVIEWER ON COMMERCIAL LAW PART m — BUSINESS ORGANIZATIONS 287
b) Any security issued or guaranteed by the gov date a bona fide debt, a security pledged in good
ernment of any country with which the Philip faith as security for such debt.
pines maintains diplomatic relations, or by any c) An isolated transaction in which any security is
state, province or political subdivision thereof sold, offered for sale, subscription or delivery by
on the basis of reciprocity: Provided, That the the owner thereof, or by his representative for
Commission m ay require compliance with the the owner's account, such sale or offer for sale,
form and content of disclosures the Commission subscription or delivery not being made in the
may prescribe. course of repeated and successive transactions
c) Certificates issued by a receiver or by a trustee of a like character by such owner, or on his
in bankruptcy duly approved by the proper account by such representative and such owner
adjudicatory body. or representative not being the underwriter of
such security.
d) Any security or its derivatives the sale or trans
fer of which, by law, is under the supervision d) The distribution by a corporation, actively
and regulation of the Office of the Insurance engaged in the business authorized by its articles
Commission, Housing and Land Use Regulatory of incorporahon^ of secuMties to its stockholders
Board, or the Bureau of Internal Revenue. or other security holders as a stock dividend or
other distribution out of surplus.
e) Any security issued by a bank except its own
shares of stock. e) The sale of capital stock of a corporation to its
------ own stockholders exclusively, where no com-
Note: The Commission may, by rule or regulation after mission or other remuneration is paid or given
public hearing, add to the foregoing any class of securities directly or indirectly in connection with the sale
if it finds that the enforcement of this Code with respect to of such capital stock.
such securities is not necessary in the public interest and for
the protection of investors. f) The issuance of bonds or notes secured by mort
gage upon real estate or tangible personal prop
7. What transactions are exempt from the registration erty, where the entire mortgage together with all
requirement under SRC? the bonds or notes secured thereby are sold to a
single purchaser at a single sale.
The requirement of registration shall not apply to the
sale of any security in any of the following transactions: g) The issue and delivery of any security in
exchange for any other security of the same issuer
a) At any judicial sale, or sale by an executor, pursuant to a right of conversion entitling the
administrator, guardian or receiver or trustee in holder of the security surrendered in exchange
insolvency or bankruptcy. to make such conversion: Provided, That the
b) By or for the account of a pledge holder, or mort security so surrendered has been registered
gagee or any other similar lien holder selling under this Code or was, when sold, exempt,
or offering for sale or delivery in the ordinary from the provisions of this Code, and that the
course of business and not for the purpose of security issued and delivered in exchange, if
avoiding the provisions of this Code, to liqui- sold at the .conversion'price, would at the time of
such conversion fall within the class of securities (iv) Pension fund or retirement plan maintained
entitled to registration under this Code. Upon by the Government of the Philippines or any
such conversion, the par value of the security- political subdivision thereof or managed by
surrendered in such exchange shall be deemed a bank or other persons authorized by the
the price at which the securities issued and Bangko Sentral to engage in trust functions;
delivered in such exchange are sold,
(v) Investment company; or
h) Broker's transactions, executed upon custom
(vi) Such other person as the Commission may
er's orders, on any registered Exchange or other
by rule determine as qualified buyers, on
trading market.
the basis of such factors as financial sophis
i) Subscriptions for shares of the capital stock c£ tication, net worth, knowledge, and expe
a corporation prior to the incorporation thereof rience in financial and business matters, or
or in pursuance of an increase in its authorized amount of assets under management.
capital stock under the Corporation Code, when
7,01, The Commission may exempt other transactions, if it
no expense is incurred, or no commission, com
pensation or remuneration is paid or given in finds that the requirements of registration under this
connection with the sale or disposition of such Code is not necessary in the public interest or for the
securities, and only when the purpose for solicit protection of the investors such as by reason of the
ing, giving or taking of such subscriptions is to small amount involved or the limited character of the
comply with the requirements of such law as to public offering. Any person applying for an exemption
the percentage of the capital slock of a corpora- - under this Section, shall file with the Commission a
tion which should be subscribed before it can be notice identifying the exemption relied upon on such
registered and duly incorporated, or its autho form and at such time as the Commission by rule
rized capital increased. may prescribe and with such notice shall pay to the
Commission a fee equivalent to one-tenth (1 /10) of
j) The exchange of securities by the issuer with its
one percent (1%) of the maximum aggregate price or
existing security holders exclusively, where no
issued value of the securities.
commission or other remuneration is paid or
given directly or indirectly for soliciting such
8. What are the grounds for revocation and/or rejection of
exchange.
the registration of securities?
k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during The SEC may reject a registration statement' and
5any twelve-month period. refuse registration of the security thereunder, or revoke the
effect!vity of a registration statement and the registration
l) The sale of securities to any number of the of the security thereunder after due notice and hearing by
following qualified buyers: issuing an order to such effect, setting forth its findings in
(i) Bank; respect thereto, if it finds that:
(ii) Registered investment house; a) The issuer:

(iii) Insurance company; (i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this in an Exchange or any other trading market
Code, the rules promulgated pursm (hereafter referred to purposes of this Chapter as
thereto, or any order of the Commission "Exchange"):
which the issuer has notice in connecti .-
with the offering for which a registrath . 1) "Wash sale" —- By effecting any transaction
statement has been, filed; in such security which involves no change
in the beneficial ownership thereof;
(iii) Has been or is engaged or is about to enge ;/-■
in fraudulent transactions; 2) "Matched orders" — By entering an order
(iv) Has made any false or misleading represe. or orders for the purchase or sale of such
tation of material:: facts in any prospecC security with the knowledge that a simul
concerning the issuer or its securities; or taneous order or orders of substantially the
same size, time and price, for the sale or
(v) Has failed to comply with any requireme. ■ purchase of any such security, has or will
that the Commission may impose as a cm be entered by or for the same or different
dition for registration of the security hn
(but colluding) parties; or
which the registration statement has been
filed; or 3) "Market rigging or jiggling" — By perform
ing similar act where there is no change in
b) The registration statement is on its face incom
beneficial ownership.
plete or inaccurate in any material respect or
-------------------- includes any untrue statement of a material
fact or omits to state a material fact required tions in securities that:
to be stated therein or necessary to make the
statements therein not misleading; or 1) Raises their price to induce the purchase of
a security, whether of the same or a differ
c) The issuer, any officer, director or controlling ent class of the same issuer or of a control
person of the issuer, or person performing similar ling, controlled, or commonly controlled
functions, or any underwriter has been convicted, company by others;
by a competent judicial or administrative body,
upon plea of guilty, or otherwise, of an offense 2) Depresses their price to induce the sale of a
#
involving moral turpitude and/or fraud or is security, whether of the same or a different
enjoined or restrained by the Commission or class, of the same issuer or of a controlling,
other competent judicial or administrative body controlled, or commonly controlled com
■
for violations of securities, commodities, and pany by others; or
other related laws, v ,
3) Creates active trading to induce such a
9. State the devices and practices on manipulation of 111 purchase or sale through manipulative
. „devices such as marking the close, painting
security prices identified under the SRC M l the tape, squeezing the float, hype and
a) To create a false or misleading appearance of ■IIS dump, boiler room operations and such
active trading in any listed . security traded other similar devices.
iS B i
i jjl i
■ H
c) To circulate or disseminate information that the The SRC prohibits members of an Exchange from
price of any security listed in an Exchange will directly or indirectly indorsing or guaranteeing the perfor
or is likely to rise or fall because of manipulative mance of a put, call or straddle.
market operations of any one or more persons
conducted for the purpose of raising or depress 11. Enumerate the acts that are considered unlawful with
ing the price of the security for the purpose of respect to the purchase and sale of securities.
inducing the purchase or sale of such security. Under Section 26 of the SRC, it shall be unlawful for
d) To make false or misleading statement with any person, directly or indirectly, in connection with the
respect to any material fact, which he knew or purchase or sale of any securities to:
had reasonable ground to believe was so false a) Employ any device, scheme, or artifice to
or misleading, for the purpose of inducing the defraud;
purchase or sale of any security listed or traded
in an Exchange. b) Obtain money nr property by means of any un
true statement of a material fact or any omis
e) To effect, either alone or others, any series of sion to state a material fact necessary in order
transactions for the purchase and/or sale of any
to make the statements made, in the light of the
security traded in an Exchange for the purpose
circumstances under which they were made, not
of pegging, fixing or stabilizing the price of such
misleading; or
security, unless otherwise allowed by this Code
or by rules of the Commission. c) Engage in any act, transaction, practice or course
of business which operates or would operate as
f) No person shall use or employ, in connection
a fraud or deceit upon any person.
with the purchase or sale of any security any
manipulative or deceptive device or contrivance.
12. Who is an insider?
Neither shall any short sale be effected nor any
stop-loss order be executed in connection with "Insider" means: (a) the issuer; (b) a director or officer
the purchase or sale of any security except in (or person performing similar functions) of, or a person
accordance with such rules and regulations as controlling the issuer; (c) a person whose relationship or
the Commission may prescribe as necessary former relationship to the issuer gives or gave him access
or appropriate in the public interest or for the to material information about the issuer or the security that
protection of investors. is not generally available to the public; (d) a government
employee, or director, or officer of an exchange, clearing
10. Define “put,” “call,” and “straddle.” What is the rule agency and/or self-regulatory organization who has access
regarding the three practices in the SRC? to material information about an issuer or a security that is
not generally available to the public; or (e) a person who
"Put" is a transferable option or offer to deliver a given
learns such information by a communication from any of
number of shares of stock at a stated price at any given time
the foregoing insiders.
during a stated period. "Call" is transferable option to buy
a specified number of shares at a stated price. "Straddle" is
a combination of put and call.
12.01. What are the duties of an insider when he is trading 12.04. What is the prohibition imposed on insiders regard
securities? ing material non-public information?
It shall be unlawful for an insider to sell or buy a It shall be unlawful for any insider to commu
security of the issuer, while in possession of material nicate material non-public information about the
information with respect to the issuer or the security issuer or the security to any person who, by virtue
that is not generally available to the public, unless: of the communication, becomes an insider where the
a) The insider proves that the information insider communicating the information knows or has
was not gained from such relationship; or b) If the reason to believe that such person will likely buy or
other party selling to or buying from the insider (or sell a security of the issuer while in the possession of
his agent) is identified, the insider proves: (i) that such information.
he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party 13. TENDER OFFER
otherwise is also in possession of the information. 13.01. What is Tender Offer— Tender offer means a publicly
12.02. Presumption: A purchase or sale of a security of the announced intention by a person acting alone or in
issuer made by an insider defined in Subsection 3.8, concert with other persons (hereinafter referred to
or such insider's spouse or relatives by affinity or as "person") to acquire equity securities of a public
consanguinity within the second degree, legitimate company.
or common-law, shall be presumed to have been
a) A tender offer is an offer by the acquiring person
effected while in possession of material non-public
to stockholders of a public company for them to
information if transacted after such information
tender their shares therein on the terms speci
came into existence but prior to dissemination of
such information to the public and the lapse of a fied in the offer. Tender offer is in place to pro
reasonable time for the market to absorb such infor tect minority shareholders against any scheme
mation: Provided, however, That this presumption shall that dilutes the share value of their investments.
be rebutted upon a showing by the purchaser or seller It gives the minority shareholders the chance to
that he was not aware of the material non-public exit the company under reasonable terms, giving
information at the time of the purchase or sale. them the opportunity to sell their shares at the
same price as those of the majority shareholders
12.03. What is material non-public information? (CE 'MCO Holdings, Inc. v. National Life Insurance
An information is "material non-public" if: (a) Company, Inc., G.R. No. 171815, Aug. 7,2007).
It has not been generally disclosed to the public and
b) Public Company means any corporation with a
would likely affect the market price of the security
class of equity securities listed on an Exchange
after being disseminated to the public and the
or with assets in excess of Fifty Million Pesos
lapse of a reasonable time for the market to absorb
(P50,000,000.00) and having two hundred (200)
the information; or (b) would be considered by a
or more holders, at least :Two "hundred (200) of
reasonable person important under the circumstances
which are holding at least one hundred (100)
in determining his course of action whether to buy,
shares of a class of its equity securities.
sell or hold a security.
296 REVIEWER ON COMMERCIAL LAW PART HI — BUSINESS ORGANIZATIONS 297
18.02. When tender offer is mandatory 3) purchase in connection with foreclosure pro
a) When any person or group of persons acting in ceedings involving a duly constituted pledge or
security arrangement where the acquisition is
concert, who intends to acquire thirty-five per
cent (35%) or more of equity shares in a public made by the debtor or creditor;
company. (Note: They must disclose their inten 4) purchases in connection with privatization un
tion to acquire the shares contemporaneously dertaken by the government of the Philippines;
with.-the tender offer.)
5) purchases in connection with corporate rehabili
b) Any person or group of persons acting in concert, tation under court supervision;
who intends to acquire thirty-five percent (35%)
6) purchases through an open market at the pre
or more of equity shares in a public company
vailing market price; and
in one or more transactions within a period of
twelve (12) months, shall be required to make a 7) merger or consolidation.
tender offer to all holders of such class for the 13.04. Obligations of person making a tender offer
number of shares so acquired within the said
period. a) Make an a n n o u n c e m e n t o f his intention in a
newspaper of general circulation, prior to the
c) If any acquisition of even less than thirty-five commencement of the offer;
percent (35%) would result in ownership of over
fifty-one percent (51%) of the total outstanding b) At least two (2) business days prior to the date of
equity securities of a public company, the ---------------- the commencement of the tender offer:--------------
acquirer shall be required to make a tender offer 1) File with the SEC a required form for tender
for all the outstanding equity securities to all offer (SEC Form 19-1) including all exhib
remaining stockholders of the said company its thereto (and any amendments thereto),
at a price supported by a fairness opinion pro with the prescribed filing fees; and
vided by an independent financial advisor or
equivalent third party. The acquirer in such a 2) Hand deliver a copy of such form includ
tender offer shall be required to accept any and ing all exhibits (and amendments thereto)
all securities thus tendered. to the target company at its principal execu
tive office and to each Exchange where such
13.03. Exempt from Mandatory Tender Offer Requirement class of the target company's securities are
The mandatory tender offer requirement shall listed for trading.
not apply to the following: c) Report the results of the tender offer by filing
1) any purchase of shares from the unissued capi with the Commission, not later than ten (10)
tal stock provided that the acquisition will not calendar days after the termination of the tender
result to a fifty percent (50%) or more ownership offer, copies of the final amendments to the form.
of shares by the purchaser; - - - 13.05. DIRECT AND INDIRECT ACQUISITION
2) any purchase of shares from an increase in Ownership acquisition means both direct and
authorized capital stock; indirect. What is decisive is the determination of
the power of control The bottom line of the law e) Mandatory Close-Out Rule. When there is an
is to give the shareholder of the public company insufficiency of margin, a call for additional
the opportunity to decide whether or not to sell margin shall be issued promptly by the Broker
in connection with a transfer of control. Thus, the Dealer to the customer. A call for initial margin
rules apply even if one will acquire the shares in the shall be satisfied within five (5) business days
corporation that owns the shares of a public company from the date the insufficiency is created. A call
(including subsidiary). Example: X Corp. owns 61% of for maintenance margin shall be satisfied within
the outstanding shares in B, a public company. The twenty-four (24) hours after the call is issued.
tender offer rules apply if there will be a sale of the
14.02. The parties may be considered in pari delicto if they
controlling shares in X Corp. (CEMCO Holdings, Inc.
violate the limitations on margin trading. If a broker
v. National Life Insurance Company, Inc., supra).
tolerates the purchases of its customer without
14. MARGIN TRADING performing its obligation under the Mandatory Close-
Out Rule and without requiring the latter to deposit
The customer purchases stocks by advising only a cash before embarking on trading stocks any further,
portion of the purchase price with the broker extending broker violated the law at its own peril. Hence, it
credit or making loan for balance due. cannot complain for failing to obtain the full amount
a) The main purpose is to give the government an of its claim for later transactions (Abacus Securities
effective method of reducing the aggregate amount Corp. v. Ampil, ibid.).
__________ of the nation7swirediimasoiiiresLw^
by speculation into the stock market and out of 15. VIOLATIONS OF SRC
other more desirable uses of commerce and industry
All complaints for any violation of the Code and its
(Abacus Securities Corp. v. Ampil, G.R. No. 160016, Feb.
implementing rules and regulations should be filed with
27, 2006).
the SEC. Where the complaint is criminal in nature, the
14.01. PROHIBITIONS SEC shall indorse the complaint to the DOJ for preliminary
investigation and prosecution (Sec. 53.1, SRC; Baviera v.
a) -A, Broken Dealer shall not extend credit to Paglinawan , et a t, G.R. No. 168380, Feb. 8 , 2007).
a customer in an amount that exceeds fifty
percent (50%) of the current market value of
the security at the time of the transaction. In no
event shall new or additional credit be extended
into an account in which the equity is less than
P50,000.00.
b) The margin maintained in a margin account
of a customer shall be no less than twenty-five
all securities "long" in the account and thirty
securities "short" in the account.
PART IV ™ GENERAL BANKING LAW (R.A. NO. 8791), 301
LAW ON SECRECY OF DEPOSITS AND RELATED LAWS
1) Deposit substitutes are alternative forms of

obtaining funds from the public, other than
deposits, through the issuance, endorse
ment, or acceptance of debt instruments for
the borrower's own account, for the pur
A. GENERAL BANKING LAW pose of relending or purchasing of receiv
ables and other obligations (Sec. 95, New
(R.A. NO. 8791), LAW ON SECRECY Central Bank Act, NCSA for short).
OF DEPOSITS AND RELATED LAWS 1.01. NATUREOF BUSINESS
A bank has a vital role in providing an environ
1. BANKS — entities engaged in the lending of funds obtained ment conducive to the sustained national economy.
in the form of deposits from the public (Sec. 3.1, General Banking is fiduciary in nature that requires high
Banking Law, GBLfor short). standards of integrity and performance (Sec. 2, GBL).
a) It is required that banks are stock corporations a) Consequences of nature of business:
and that its funds are obtained from the public,
meaning deposits of twenty (20) or more persons 1) It is subject to heavy and close supervision
(Sec. 8, GBL). and/or regulation h y the Bangko Sentral ng
Pilipinas or BSP (Central Bank o f the Phil. v.*23
------------- -b)— An4weid33xes±rr>rnpany that performs functions ___ CA,208 SCRA 652).
as such is not a bank. Thus, an investment
company that is engaged solely in investing, 2) It is required to exercise utmost diligence
reinvesting or trading in securities is not in the handling of deposits (Simex Interna
engaged in banking (Bahas v. Asia Pacific Finance tional [Manila] Incorporated v. CA, 183 SCRA
Corp., G.R. No. 128703, Oct. 18, 2000). However, 361).
an investment company which loans out the 3) There are special rules on strikes and lock
money of its customers, collects the interests, outs -— any strike or lockout involving
and charges a commission to both lender and banks, if unsettled after seven (7) calendar
borrower is engaged in banking (Republic v. days shall be reported by the BSP to the
Security Credit and Acceptance Corporation, G.R. Secretary of Labor who has two (2) options:
No. L-20583, fan. 23,1967). (1) he may assume jurisdiction over and
c) Quasi-Banks — entities engaged in the borrow decide the dispute or (2) certify the same to
ing of funds through the issuance, endorsement the National Labor Relations Commission
or assignment with recourse or acceptance of (NLRC for Short) for compulsory arbitration.
deposit substitutes for purposes of relending or The law also allows the President of the
purchasing of receivables and other obligations Philippines to, at any time, intervene and
(Sec. 4, GBL). assume jurisdiction over such labor dispute
in order to settle or terminate the same (Sec.
300 22, GBL). ■
302 REVIEWER ON COMMERCIAL LAW PART IV — GENERAL BANKING LAW (R.A. NO. 8791), 303
1.02. AUTHORITY TO INCORPORATE AND OPERATE to cooperative organizations and their members
(Sec. 100, FLA. No. 6938 as amended by R.A. No.
a) A banking or quasi-banking corporation cannot 9520).
be incorporated without authority from the BSE
The Articles of Incorporation to be filed with the f) Islamic Banks (R.A. No. 6848).
Securities and Exchange Commission (SEC for g) Other classification of banks as determined by
short) should be accompanied by the favorable the MB of the BSP.
recommendation of the BSP, otherwise, it shall
not be accepted or approved (Sec, 14, GBL). 2.02. DISTINCTIONS
b) An entity that is performing banking or a quasi- a) As to capitalization — They have different mini
banking function cannot operate without a cer mum capitalization requirements.
tificate of authority from the BSP (Sec. 6, GBL). b) As to purpose — Some of the banks have specific
purposes and social functions. For instance, Rural
2. CLASSIFICATION OF BANKS Banks are meant to hasten rural development.
2.01. Banks are classified under Section 3.2 of the GBL into: c) As to powers or functions — There are functions
a) Universal Banks — banks that have authority to and powers that are not exercised by one that are
exercise, in addition to the powers and functions exercised by others. Some banks may exercise
of commercial banks, powers of an investment certain powers only upon prior approval of the
______________ house and thfi-pmyer to invest in non-alfied __________ Monetary Board. Thus: (i) only universal bank
enterprises. and commercial banks can create and accept
demand deposits without separate authority
b) Commercial Banks — banks that are given all
such power necessary to engage in commercial from the Monetary Board while other banks
must secure authority from the Monetary
banking in addition to general corporate powers;
commercial banking includes the power to Board; (ii) only universal banks may act as an
accept drafts, issue letters of credits, discounting investment house; (iii) generally, only universal
and negotiation of negotiable instruments and banks and commercial banks may be involved in
quasi-banking functions.
evidence of debt, accept and create demand
deposits and the like. , d) As to who can be directors — Public officers can
c) Rural banks — banks that are created to make be directors of Rural Banks while such officers
needed credit available and readily accessible are prohibited from being directors or officers of
in the rural areas for the purpose of promot other types of banks.
ing comprehensive rural development (R.A. No. e) As to incorporators — Consistent with the provi
7353). sions of the Corporation Code, incorporators of
d) Thrift banks — include savings and mortgage banks are natural persons. The exception is with
banks, private development banks, and . stock respect to rural banks which can be organized
. savings and loan .associations (R.A. No. 7906). or established by cooperatives and corporations
e) Cooperative banks -—- banks that primarily primarily organized to hold equities in rural
provide financial, banking and credit services banks.
304 REVIEWER ON COMMERCIAL LAW FART IV — GENERAL !>ANKIN( - l AW (K..A. NC. o79s}. 305
LAW ON SECRECY OF DEPOSITS AMD RELATED LAWS
f) As to foreign equity— A rural bank must be whol 3.03. PROHIBITED ACTS

ly owned by Filipinos while other banks require a) Banks are prohibited from engaging in insur
only forty percent (40%) Filipino ownership of ance business.
their voting stocks. b) Outsourcing of functions are generally prohib
g) As to -necessity,of public offering — Public offering ited. Example: A bank cannot hire another com
of shares is necessary for domestic banks seek pany to accept deposits.
ing authority to act as universal bank while there
4. DEPOSIT FUNCTION
is no such requirement for other banks.
4.01. Simple Loan
3. FUNCTIONS OF BANKS Fixed, savings and current deposits of money in
banks and similar institutions shall be governed by
3.01. BASIC FUNCTIONS
the provisions concerning simple loan (Art 1980, Civil
a) Deposit Function Code). Under the rule, the bank is the debtor while the
depositor is the creditor.
b) Loan Function
Consequences:
3.02. OTHER FUNCTIONS
a) The bank can make use as its own the money
Universal banks and commercial banks (as well deposited. Said amount is not being held in trust
as other banks depending on the type of bank and/or for the depositor nor is it being kept for safe
-------------- ihe-ôtâsponding-auth^ by the Monetary keeping (Tang Tiong Tick v. American Aphothecar-
Board) may also exercise any of the following Tes, 65 PHir414). ~ — ---------------
functions: b) Third persons who may have a right to the money
a) Receive in custody funds, documents and valu deposited cannot hold the bank responsible
able objects; unless there is a court order or garnishment.
The duty of the bank is to its creditor-depositor
b) Act as financial agent and buy and sell, by order and not to third persons (Fulton Iron Works v.
of and for the account of their customers, shares, Chinabank, 55 Phil. 208). If a third person has a
evidences of indebtedness and all types of secu- valid right over the money deposited, he must
- rities; prove the same before a court of competent
c) Make collections and payments for the account jurisdiction.
of others and perform such other services for c) The officers of the bank cannot be held liable for
their customers as are not incompatible with estafa if they authorized the use of the money
banking business; deposited by the depositor. There would be no
liability for estafa under Article 315(l)(b) of the
d) Upon prior approval of the Monetary Board, Revised Penal Code even if the bank failed to
act as managing agent, adviser, consultant or return the amount deposited (Guingona v. City
administrator of investment management/advi- Fiscal of Manila, 128 SCRA 577).
sory/consultancy accounts; and
d) The bank has the right to compensation. It can
■ e) Rent out safety deposit boxes. set off the deposits with the indebtedness of the
306 REVIEWER ON COMMERCIAL LAW Pa RL ; v ■—- N gN E R /W L a N R iN N LAW \K.,A, N O . o79’lj,. 307
LAW ON 3EC R EC V OF DEPOSITS AND RELATED LAWS
depositor that are due and demandable (Gullas merciai bark can accept oi create demand
v. PNB, 62 Phil 519). deposits.
4.02, DEPOSITORS 2) A bank, other than a universal bank or
commercial bank cannot accept demand
a) Minors — they can open bank accounts in their
deposits except upon prior approval of the
own right provided that:
Monetary Board.
1) they are at least seven years of age,
3) Temporary overdrawing against current
2) they are able to read and write and have accounts shall not be allowed unless caused
sufficient discretion, - by normal bank charges and other fees
3) they are not otherwise disqualified by any incidental to handling such accounts.
other incapacity, 4) Drawings against uncollected deposits {i.e.r
4) it should'only be savings or time deposits uncleared checks) are generally prohibited.
(Sec. I, P.D. No. 734).
b) SAVINGS ACCOUNT. This is the most com
N ote: Parents may nevertheless deposit mon type of deposit and is usually evidenced by
for their minor children and guardians for their a passbook.
wards (Sec. 1, P.D. No. 734).
1) Banks are prohibited from issuing/accept-
With respect to Thrift Banks, the law states ing withdrawal slips or any other similar
----------------thaiu£-any-gm notice in writ- _________ instruments designed to effect withdrawals
ing to any thrift bank not to make payments of of savings deposits without requiring the
deposits, dividends, or interest to the minor of depositors concerned to present their pass
whom he is the guardian, then such payment books and accomplishing the necessary
shall be made only to the guardian (Sec. 22, Thrift withdrawal slips, except for bank autho
Banks Act o f 1995). rized by the BSP to adopt the no passbook
b) Married Women — they are allowed to open withdrawal system (Sec. X214, Manual of
. bank accounts without the assistance of their Regulations for Banks, or "Manual").
husbands (R.A. No. 7192). 2) The requirement of presentation of pass
4.03. KINDS OF DEPOSITS books is usually included in the terms and
conditions printed in the passbooks. A bank
The basic types of deposits are: a) demand is negligent if it allows the withdrawal
deposits, b) savings account, c) NOW Accounts, and without requiring the presentation of a
d) time deposits. passbook (BP1 v. CA).
a) DEMAND DEPOSITS — all those liabilities of c) NEGOTIABLE ORDER OF WITHDRAWAL
banks which are denominated in Philippine cur ACCOUNTS (NOW )— interest-bearing deposit
rency and are subject to payment in legal tender accounts that combine the payable on demand
upon demand by presentation of checks subject feature of checks and investment feature of
to the following rules: savings accounts.
1) Generally, only a universal bank or com- d) TIME DEPOSIT — an account with fixed term.
SHIttie
308 REVIEWER ON COMMERCIAL LAW PART j V — GENERAL BANKING LAW {R.A. NO o7L ),
e) INTERESTS — Demand, savings, NOW 2) Impeachment cases;

accounts, time deposits and deposit substitutes 3) Upon the order of a competent court
shall not be subject to interest ceilings (Sec. X242, in cases of bribery or dereliction of
Manual). duty of public officials;
4.04, Other Accounts, — Bank account may be opened by
4) Upon the order of a competent court
one individual or by two or more persons. Whenever
in cases where the money deposited or
two (2) or more persons open an account, the same
invested is the subject of litigation;
may be an "and / or account" or an "and" account.
5) Upon order of the competent court
a) Anonymous Accounts are prohibited (R.A. No.
or tribunal in cases involving unex
9160 as amended by R.A. No. 9194; BSP Circular No.
plained wealth under the Anti-Graft
251, July 21, 2000). Exception: Foreign currency
and Corrupt Practices Act, R.A. No.
deposits which may be a "numbered account."
3019 (Bangko Filipino v. Purisima, 161
However, the law requires that necessary
measures are undertaken by the bank to record SCRA 576);
and establish the true identity of the depositor 6) Upon inquiry by the Commissioner
(Sec. 8, R.A. No. 6426 as amended, Foreign Currency of Internal Revenue for the purpose
Deposits Act). of determining the net estate of a de
b) Joint accounts may be the subject of a survi ceased depositor;
vorship agreement whereby the co-depositors 7) Upon the order of a competent court
agree to permit either of them to withdraw the or in proper cases by the Anti-Money
whole deposit during their lifetime and transfer Laundering Council where there is
ring the balance to the survivor upon the death probable cause of money laundering
of one of them (Vitug v. CA, G.R. No. 82027, March and in some instances even without
29,1990). court order (Sec. 11, R.A. No. 9160);
4.05. SECRECY OF BANK DEPOSITS 8) Disclosure to the Treasurer of the
A. PESO DEPOSITS Philippines for dormant deposits
for at least ten (10) years under the
All deposits of whatever nature with banks
Unclaimed Balances Act (Sec. 2, R.A.
or banking institutions in the Philippines includ
ing investments in bonds issued by the Govern
No. 3936).
ment of the Philippines, its political subdivisions 9) Report of banks to Anti-Money Laun
and its instrumentalities, are considered abso dering Council (AMLC) of covered
lutely confidential and may not be examined, and/or suspicious transactions (Sec. 9,
inquired or looked into by any person, govern R.A. No. 9160 as amended).
ment official, bureau or office (Sec. 2, R.A. No.
10) Upon order of the Court of Appeals,
1405).
examination by law enforcement
a) Exceptions: ■ officers in terrorism cases under the
1) When there is written permission of Human Security Act of 2007 (Secs. 27
the depositor or investor; and 28, RA. No. 8372).
310 REVIEWER ON COMMERCIAL LAW PART IV — GENERAL BANKING LAW ULA. NO. ETA;},
b) Non-disclosure without Court order of any kept in it. It constitutes an attempt by

information relative to the funds or proper the prosecution at an impermissible
ties of its -clients is also required (Sec. 55[b], inquiry into a bank deposit account
GBL). However, bank deposits shall con the privacy and confidentiality of
tinue to be governed by the Law on Secrecy which is protected by law (BSB Group,
of Bank Deposits. Example: A bank cannot Inc. v. Sally Go, G.R. No. 168644, Feb. 16,
disclose matters relating to the trust ac 2010) .
counts of tine client with the bank both un
B. FOREIGN CURRENCY DEPOSITS
der Section 55(b) of the GBL and R.A. No.
1405 (Ejercito v. Sandiganbayan, 509 SCRA The above-enumerated exceptions do not
140 [2006]). apply to foreign currency deposits. There is
only one exception under the Foreign Currency
c) Subject matter of litigation. The inquiry
Deposits Act (Intengan v. CA, G.R. No. 128996, Feb.
into bank deposits allowable under R.A.
15,2002) although another is provided for under
No. 1405 must be premised on the fact that
the Anti-Money Laundering Law. Therefore, the
the money deposited in the account is itself
exceptions are:
the subject of the action.
a) when there is written consent of depositor
(1) Example: The criminal Information
- under Section 8 of the Foreign Currency
filed with the trial court charged the
Deposits Act;
_________accused with qualified theft by abusing
his employer's trust and confidence ------- b)— under Section 11 of the Anti-Money Laun-
and stealing cash in the amount of dering Act; and
P I,534,135.50. On the premise that c) under Sections 27 and 28 of the Human
the accused had deposited the stolen Security Act.
amounts to her personal banking
account, the prosecution moved for C SECRECY OF DEPOSITS UNDER THE ANTI
the issuance of subpoena duces tecum! MONEY LAUNDERING LAW
ad testificandum against the respective The Anti-Money Laundering Council
managers or records custodians of (AMLC) may inquire into deposits upon order
the bank. The trial court granted the of the court when there is probable cause that
motion and issued the corresponding the deposits are related to the crime of unlawful
subpoena. The Supreme Court ruled activities defined in Section 3(1) and Section 4 of
that there is violation of the law on Republic Act No. 9160 as amended by Republic
secrecy of bank deposits. The High Act No. 9194. However, a court order is not even
Court explained that the admission of necessary when the offense or unlawful activity
testimonial and documentary evidence involved is any of the following:
relative to respondent's Security Bank
account serves no other purpose than a) Kidnapping for ransom under Article 267
to establish the existence of such of Act No. 3815, otherwise known as the
account, its nature and the amount Revised Penal Code, as amended;
b) Sections 4, 5, 7, 8, 9,10,12,13,14,15 and 16 a) Meaning of Deposit — the unpaid balance of

of Republic Act No, 9165 otherwise known money or its equivalent received by a bank m
as the Comprehensive Dangerous Drags the usual course of business and for which if has
Act of 2002; and given or is obliged to give credit to a commer
cial, checking, savings, time or thrift account, or
c) Hijacking and other violations under issued in accordance with BSP rules and regu
Republic Act No. 6235; destructive arson lations and other applicable laws. Additionally,
and murder, as defined under the Revised this may also include such other obligations of a
Penal Code, as amended, including those bank, which, consistent with banking usage and
perpetrated by terrorists against non- practices, the PDIC Board shall determine and
combatant persons and similar targets. prescribe by regulations to be deposit liabilities
4.06. GARNISHMENT of the bank.
Bank accounts may be garnished by the creditors (1) In the case of any negotiable certificate of
of the depositor. There is no violation of the Law on deposit, the owner or holder thereof shall
Secrecy of Bank Deposits if the accounts are garnished be recognized as a depositor ONLY if his
(China Bankv. Ortega, 49 SCRA356 [1973]), The amount name is registered as owner/holder thereof
of deposit is actually not disclosed and the intent of in the books of the issuing bank.
the legislature does not cover garnishment (Philippine b) Insured deposit — the amount due to any bona
Commercial and Industrial Bank, et al. v. The Hon. CA, et fide depositor for legitimate deposits in an insured*1
--------- a l, 193 SCRA 452).-------------------------------------------------- ------------bank net of any obligation of the depositor to
the insured bank as of the date of closure, but
a) Deposits that are exempt from garnishment not to exceed Five Hundred Thousand Pesos
1) Foreign Currency Deposits (Sec. 8, PCDA). (P500,000.00).
N ote; The Supreme Court ruled in (1) Can the maximum deposit insurance
Salvation, et al. v. Central Bank o f the Phil be adjusted? Yes, the maximum deposit
ippines/ et al, (Aug. 21, 1997), by way of insurance cover may be adjusted in such
exception that foreign currency deposits of amount, for such a period, and/or for such
an American tourist who was found guilty deposit products, provided the following
of repeatedly raping a twelve (12)-year old are complied with: (i) The Monetary Board
child is subject to garnishment. has determined that there is a condition
that threatens the monetary and financial
2) Those exempt under the Rules of Civil Pro stability of the banking system that may
cedure like provision for the family for four have systemic consequences, as defined in
months (Sec. 13 o f Rule 39 of the 1997 Rules o f Section 17 of Republic Act No. 3591; (ii) the
Civil Procedure). adjustments is approved by a unanimous
4.07. DEPOSIT INSURANCE (R.A. No. 3591) vote of the Board of Directors of PDIC in a
- - meeting called for the purpose and chaired
All deposits- in banks- are insured with the Phil by the Secretary of Finance; and (iii) the
ippine Deposit Insurance Corporation or PDIC (Sec. adjustments are approved by the President
4, R.A. No. 3591 as amended). of the Philippines.
REVIEWER ON COMMERCIAL LAW FART IV — GENERAL BANKING LAW (E.A. MO. 8791), 315
c) Deposits Not Covered by Insurance, The PDIC transferred deposits in their names within 120
shall not pay deposit insurance for the following days immediately preceding or during a bank-
accounts or transactions, whether denominated, declared bank holiday or immediately preceding
documented, recorded or booked as deposit by a closure order issued by the Monetary Board for
the bank: the purpose of availing the maximum deposit
insurance coverage. This is a criminal act and
(1) The amount in excess of insured deposit
the deposits are not entitled to any insurance
of Five Hundred Thousand Pesos
payment.
(P500,000.00);
e) Determination of Amount Due: In determin
(2) Deposit that is payable in a place outside ing such amount due to any depositor, there
the Philippines (Example: in foreign branch shall be added together all deposits in the bank
es); maintained in the same right and capacity for his
(3) Investment products such as bonds and benefit either in his own name or in the name of
securities, trust accounts, and other similar others.
instruments; (1) A joint account regardless of whether the
(4) Deposit accounts or transactions which are conjunction "and," "or," "and/or" is used,
unfounded, or that are fictitious or fraudu shall be insured separately from any indi
lent; vidually-owned deposit account;
(5) Deposit accounts or transactions constitut- (2) If the account is held jointly by two or more*34
ing, and/or emanating from, unsafe and.
unsound banking practice /s; and persons or entities, the maximum insured
deposit shall be divided into as many equal
(6) Deposits that are determined to be the pro
shares as there are individuals, juridical
ceeds ' of an unlawful activity as defined
persons or entities, unless a different shar
under Republic Act No. 9160 or the Anti-
ing is stipulated in the document of depos
Money Laundering Law;
it;
(7) Deposit accounts that resulted from split
(3) If the account is held by a juridical person
ting of deposit; and
or entity jointly with one or more natural
(8) Money placements by the head office of persons, the maximum insured deposit
a foreign bank in its branch in the Phils. shall be presumed to belong entirely to
There is only one entity. (PDIC v. Citibank, such juridical person or entity;
N.A., No. 170290, April 11, 2012). (4) The aggregate of the interest of each co
d) Splitting of Deposit — this occurs whenever owner over several joint accounts, whether
a deposit account with an outstanding balance owned by the same or different combina-
- of more than P500,000.00 under the name of .. ; ; . tions of individuals, juridical persons or
persons is broken down and transferred to two entities, shall likewise be subject to the
or more accounts in the name of persons or maximum insured deposit of Five Hundred
entities who have no beneficial ownership in the Thousand Pesos (P500,000.00).
PART IV — GENERAL BANKING LAW (R.A. NO. 8791), 317
£) WHEN PAYMENT IS MADE, The proceeds of 'When a claim was made on the remaining 20 time
the insurance shall he paid hv the PDIC to the deposits, the PDIC rejected the claim on the ground
depositor whenever the insured bank is closed that they were not deposits made in the usual course
on account of insolvency. An insured bank shall of business. Did PDIC validly reject the claim?
be deemed to have been closed on account of in A: No, PDIC did not validly reject the claim. MB Bank
solvency when ordered closed by the Monetary and its client should be given the benefit of the doubt
Board of the BSP (Sec. I0[b]r R.A. No. 3591 as that they were not aware that the Monetary Board
amended by R.A. No. 7400). Resolution had been passed. Mere conjectures that
g) The liability of the PDIC for insured deposits MB Bank had actual knowledge of its impending
rests upon the existence of deposits with insured closure do not suffice. The Resolution could not thus
bank, not on the negotiability or non-negotiabil have nullified, the transactions that were entered into
ity of the certificates evidencing these deposits. prior to the receipt of the Resolution by MB Bank
In fact, the claimant cannot recover even if he (Philippine Deposit Insurance Corp. v. CA, eta l, G.R. No.
can present a negotiable certificate of deposit if 126911, April 30,2003).
there is actually no deposit (Philippine Deposit In
surance Corp. v. CA, 283 SCRA 462 [1997]). 4.08. UNCLAIMED BALANCES
h) The claim must be .filed within 2 years from a) Deposits that have become dormant for a period
actual takeover by the receiver. of ten (10) years may be escheated in favor of the
government.
PROBLEMS: b) Initially, there should be notice to the depositor
1. X Bank was closed by the Monetary Board on account of the unclaimed balance (Sec. 2, R.A. No. 3936;
of insolvency. At the time it was closed, A has three RCBC v. Hi-Tri Dev. Corp., G.R. No. 192413, June
accounts with X Bank and each account has an out 13, 2012). Thereafter, the bank (including build
standing balance of P250,000.00 or a total amount of ing and loan associations and trust companies)
P750,000.00. How much can A recover from the PDIC? is required to report (sworn statement) to the
Treasurer of the Philippines the existence of such
A: A can recover only P500,000.00. The PDIC law deposits. The Treasurer will in turn inform the
provides that if a depositor has two or more accounts Solicitor General who will then initiate the prop
with the same bank, the maximum coverage pertains er escheat proceedings in Court.
to the sum of all such accounts.
c) Publication of a list of unclaimed balances is also
2. JA has a time deposit with MB Bank. On May 22, required in order to safeguard the right of the
1999, the Monetary Bank issued a resolution placing depositors, their heirs and successors in interest
MB Bank under receivership. After the issuance of to due process (Act No. 3936).
such Resolution but before the receipt thereof by
MB Bank on May 26, 1987, JA went to MB Bank pre d) Such unclaimed balances, together with the in
terminating his time deposits and re-depositing the crease and proceeds thereof, shall be deposited
funds into 28 new time deposits under the names of with the Treasurer of the Philippines to the credit
several co-depositors. Of the new time deposits, JA of the Government of the Republic of the Philip
pre-terminated 8 and withdrew the value thereof. pines to be used as the Congress may direct.
318 REVIEWER ON COMMERCIAL LAW LA K E f\. — D c,N l R/LL LAN iCLN iL i,A rv h k \ 8 7 v l j. 319
lA W k)N s e c r e c y or d e p o b w s a n d r e l a t e d LAWS
e) Unclaimed balances — include credits or depos- to such reasonable terms and conditions as
its of money, bullion, security or other evidence may be agreed upon between the bank and
of indebtedness of any kind, and interest there its borrower (Sec. 45, GBL).
on with banks, buildings and loan associations,
e) SINGLE BORROWER'S LIMIT
and trust corporations, as hereinafter defined, in
favor of any person known to be dead or who 1) CEILING — the total amount of loans,
has not made further deposits or withdrawals credit accommodations and guarantees
during the preceding ten years or more (Sec. 1, that may be extended by a bank to any
Act No. 3936). person, partnership, association, corpora
tion or other entity shall at no time exceed
5. LOAN FUNCTION OF BANKS twenty-five percent (25%) of the net worth
5.01. BASIC RULES/RESTRICTIONS of such bank (as increased by BSP Circular
425). The basis for determining compliance
a) A bank shall grant loans and other credit accom
with single-borrower limit is the total credit
modations only in amounts and for the periods
commitment of the bank to the borrower
of time essential for the effective completion of
(Sec. 35.1, GBL).
the operations to be financed.
The total amount of loans, credit ac
b)Such grant of loans and other credit accommo
commodations and guarantees prescribed
dations shall be consistent with safe and sound
in the preceding paragraph may be in-
______________banking practices._____________________________
----------------------- creased by an additional ten percent (10%)
c) Before granting a loan or other credit accom of the net worth of such bank provided
modation, a bank must ascertain that the debtor the additional liabilities of any borrower
is capable of fulfilling his commitments to the are adequately secured by trust receipts,
bank. shipping documents, warehouse receipts
d) PAYMENTS or other similar documents transferring or
securing title covering readily marketable,
1) Amortization schedule of bank loans and non-perishable goods which must be fully
other credit accommodations shall be covered by insurance (Sec. 35.2, GBL).
adapted to the nature of the operations to
5.02. DOSRI ACCOUNTS
be financed (Sec. 44, GBL).
Restrictions (not total prohibition) are imposed
2) Loans and other credit accommodations
on borrowings and security arrangement by directors,
with maturities of more than five years,
officers and stockholders of the bank directors,
provisions must be made for periodic
officers, stockholders and their related interests
amortization payments, but such payments
(hence, the term DOSRI).'
must be made at least annually (Ibid.).
a) REQUISITES UNDER ART. 26, NCBA
3) A borrower may at any time prior to the
.. .. . . agreed maturity date prepay, in whole or in 1) The borrower is a director, officer or any
part, the unpaid balance of any bank loan stockholder of a hank (and related inter
and other credit accommodation, subject ests);
REVIEWER ON COMMERCIAL LAW rAK* i v — CjN'MixAl fi.'-xNjtLsf-i'A —rivV (K.U. N-i.'. fvV; j a2i
A W ON SECRECY OF DEPOSITS AND RELATED LAWS
2} He contracts a loan or any form of financial merits of such bank in enterprises owned
accommodation; or controlled by said directors, officers,
stockholders and their related interests. The
3) The loan or financial accommodation is
Manual of Regulations for Banks provide
from; (1) his bank, or (2) a bank that is a
subsidiary of a bank holding company ; that the aggregate is fifteen percent (15%)
which both his bank and lending bank are - of the total loan portfolio of the bank or one
subsidiaries, (3) a bank in which a control hundred percent (100%) of the combined
ling proportion of the shares is owned by capital accounts whichever is lower.
the same interest that owns a controlling 5) Individual Ceilings. The outstanding
proportion of the shares of his bank; and loans, credit accommodations and guar
4) The loan or financial accommodation of the antees which a bank may extend to each of
director, officer or stockholder, singly or its stockholders, directors, or officers and
with that of his related interest, is in excess their related interests, shall be limited to an
of 5% of the capital and surplus of the amount equivalent to their respective unen
lending bank or in the maximum amount cumbered deposits and book value of their
permitted by law, whichever is lower. paid-in capital contribution in the bank.
RESTRICTIONS UNDER THE GBL It should be noted however that the

ceilings do not apply to loans, credit accom
DOSRI Accounts are subject to the follow- modations and guarantees (1) secured by*1
_______ __ assets considered by the Monetary Board
1) Procedural Requirement. The account as non-risk items, (2)lIndef~aTfinge"BenSfir
should be upon written approval of the plan approved by the BSP, and (3) extend
majority of all the directors of the lending ed by cooperative banks to its cooperative
bank excluding the director concerned. stockholders.
2) Arms Length Rule. The account should be c) RESTRICTIONS UNDER SEC. 26, NCBA
upon terms not less favorable to the bank 1) The borrower shall be required by the lend
than those offered to others. ing bank to waive the secrecy of his depos
3) Reportorial Requirem ent The resolution its of whatever nature in all banks in the
m
approving the loan shall be entered in the Philippines. The directors, officers or stock
■'iiijgg
records of the bank and a copy of the entry holders are required to make such waiver if
shall be transmitted forthwith to the Super they themselves are the borrowers.
vising and Examination Sector of the BSP. iiiis
2) The accounts are subject to examination but
4) Aggregate Ceilings. The Monetary Board m am any information obtained from an exami
may regulate the amount of loans, credit nation of his deposits shall be held strictly
accommodations and guarantees that may confidential and may be used by examin
be extended, directly or indirectly, by a ip ers only in connection with the supervisory
bank to its directors, officers, stockholders i l l and examination responsibility or by the
and their related interests, as well as invest- ::i i i n Bangko Sentral in an appropriate legal ac~
®1J1SS
-:1firtilfS
m
322 REVIEWER ON COMMERCIAL LAW PART IV — CNNEiLAL BANKING LAW NIL WM/, 323
LAW ON SECRECY OF DEPOSITS AND RELATED LAW:,
tion it has initiated involving the deposit more than three (3) months after fore-
account. closure, whichever is earlier,
5,03. COLLATERALS b) Redemption Price-
A. VALUE OF COLLATERALS Redemption may be exercised by pay

ing the amount due under the mortgage
The loan shall not exceed 75% of the ap deed, with interest thereon at the rate speci
praised value of the real property plus 60% of fied in the mortgage, and all the costs and
the appraised value of the improvement or 75% expenses incurred by the bank or institu
of the appraised value of the chattel (Secs. 37 and tion from the sale and custody of said prop
38, GBL). erty less the income derived therefrom (Sec.
B. FORECLOSURE OF MORTGAGE (Sec. 47, 47, GBL).
GBL) c) Possession
a) Redemption Period The purchaser at the auction sale con
1) Redemption Period for Natural Per cerned whether in a judicial or extrajudi
sons cial foreclosure shall have the right to enter
upon and take possession of such property
The mortgagor or debtor, who is
immediately after the date of the confirma
a natural person, whose real property
tion of the auction sale and administer the
____________________has been sold for the full or partial
----------------------- same in accordance with law (Ibid.),-----------
payment of his obligation shall have
the right within one year after the sale d) Injunction and Bond
of the real estate, to redeem the prop Any petition in court to enjoin or res
erty. The one-year redemption period train the conduct of foreclosure proceedings
should be counted from the date of instituted pursuant to this provision shall
the registration of the certificate of sale be given due course only upon the filing by
with the Register of Deeds (See Section the petitioner of a bond in an amount fixed
1[3] o f Supreme Court Circular AM. No. by the court conditioned that he will pay all
99-10-05, as further amended on Aug. 7, the damages which the bank may suffer by
2001) . the enjoining or the restraint of the foreclo
2) Redemption Period for Juridical Per sure proceeding (Ibid.).
sons
PROHIBITED ACTS OF BORROWERS (Sec. 55.2)
A juridical person, whose property
N o borrower of a bank shall:
has been sold pursuant to an extraju
dicial foreclosure, shall have the right a) Fraudulently overvalue property offered as
to redeem the property but not after security for a loan or other credit accommodation
the registration of the certificate of from the bank;
. foreclosure sale with the proper Regis- b) Furnish false or make misrepresentation or
' ter of Deeds which in no case shall be suppression of material facts for the purpose
REVIEWER ON COMMERCIAL LAW CART; v — lS N tSRALBANK'- i-L L A W («.A . WA. <v’L • 325
l,AW ON SECRECY OF D E PO S-5 AND RELATER 1 LAW
of obtaining, renewing, or increasing a loan or beyond the 60% limit within a period of seven
other credit accommodation or extending the (7) years from the effectivity of the GBL.
period thereof;
Within that seven (7) year period, with pri
c) Attempt to defraud the said bank in the event or authority from the Monetary Board, foreign
of a court action to recover a loan or other credit banks m ay acquire 100% of the voting stocks of
accommodation; or an existing bank or invest in up to 100% of the
d) Offer any director,,: officer, employee or agent of voting stocks of a new subsidiary (Sec. 73, GBL).
a bank any gift, fee, commission, or any other
7.02. FILIPINO STOCKHOLDINGS
form of compensation in order to influence such
persons into approving a loan or other credit a) Section 11 of the GBL provides that the rule
accommodation application. — limiting ownership and control of voting
stocks to forty percent (40%) of voting stock —
7. OWNERSHIP OF BANKS shall apply to Filipinos and domestic non-bank
7.01. FOREIGN OWNERSHIP corporations.
a) Individuals and non-banks (Sec, 11, GBL) b) While the restriction on foreigners refers to the
1) Foreign individuals and non-bank corpora
total equity participation, the restriction on Fili
tions may ow n or control up to forty per pinos and domestic non-bank corporations refer
cent (40%) of the voting stock of a domestic*2 to individual equity participation.
~ ~ bank. -----— ------------------- —-------- — -7^3^-ÎQCKHQLDINGS—£ffi—EAMIQl_GROUPS OR
2) The percentage of foreign-owned voting RELATED INTERESTS
stocks in a bank shall be determined by the a) The law does not prohibit ownership of the
citizenship of the individual stockholders stock by members of the same family or related
in that bank. The citizenship of the corpora interests. However, the law provides that
tion which is a stockholder in a bank shall stockholdings of individuals related to each
follow the citizenship of the controlling- other within the fourth degree of consanguinity
stockholders of the corporation, irrespec or affinity, legitimate or common-law, shall be
tive of the place of incorporation. Control considered family groups or related interests
ling stockholders refer to individuals hold and must be fully disclosed in all transactions by
ing more than fifty percent (50%) of the such an individual with the bank (Sec. 12, GBL).
voting stock of the corporate stockholder of
the bank. b) Two or more corporations owned or controlled
by the same family group or same group of per
b) Foreign Banks sons shall be considered related interests and
Foreign banks are not subject to the 40% must be fully disclosed in all transactions by
limitation prescribed tra d e r Section 11 of the such corporations or related groups of persons
GBL. The law prescribes 60% as the maximum with the bank (Sec. 13, GBL).
foreign bank equity (R.A. No. 7721). However, c) Unlike the former law, the GBL does not im
Section 73 of the GBL allows the acquisition pose a limit on the number .of shares that can be
326 REVIEWER ON COMMERCIAL LAW EARTIV — GENERAL BANKING LAW (R.A. NO. 8791), 327
owned by the same family or related interest but not limited to, teleconferencing and video-confe
However, this should be without prejudice to rencing (Sec, 15, GBL),
the forty percent (40%) restrictions imposed by
Section 11 of the GBL, 8.03. QUALIFICATIONS
a) Fit and Proper Rule
I . DIRECTORS AND OFFICERS
Under the "fit and proper rule," the Mone
8.01. COMPOSITION OF BOARD (Secs. 15 an d 19, GBL)
tary Board is authorized to pass rules providing
a) There shall be at least five (5), and a maximum for the qualifications and disqualifications of in
of fifteen (15) members of the board of directors dividuals elected or appointed bank directors or
of a bank, two (2) of whom shall be independent officers and to disqualify those found unfit after
directors. However, in case of merged or consoli due notice (Sec. 16, GBL).
dated banks, the maximum number of directors
is twenty-one (21). The law further provides that "In deter
mining whether an individual is fit and proper to
b) An "independent director" shall mean a person
hold the position of a director or officer of a bank,
other than an officer or employee of the bank, its
regard shall be given to his integrity, experience,
subsidiaries or affiliates or related interests.
education, training, and competence." (Sec. 16,
c) Non-Filipino citizens may become members of GBL).
the board of directors of a bank to the extent of
■
----- ---- --------- the foreign participation in the equity of said 9. REGULATIONS TO MAINTAIN LIQUIDITY AND SECURITY
bank.
Certain regulatory provisions in the General Banking
d) The law provides that no appointive or elective Law as well as the New Central Bank Act are geared
public official, whether full-time or part-time, towards the purpose of maintaining liquidity and security.
shall at the same time serve as officer of any These regulations include those relating to loans and other
private bank, save in cases where such service matters:
is incident to financial assistance provided by
the government or a government-owned or con a) The Monetary Board shall prescribe the mini
trolled corporation to the bank or unless other mum ratio which the net worth of a bank must
wise provided under existing laws. bear to its total risk assets which may include
contingent accounts (Sec. 34, GBL).
By way of exception, Section 5 of the Rural
Banks Act of 1992 provides that nothing in the b) The law imposes limits on loans, credit accom
said Act "shall be construed as prohibiting any modations and guarantees that may be extended
appointive or elective official from serving as by banks.
director, officer, consultant or in any capacity in
the bank." ' c) Limitation is placed on the bank's exposure to
directors, officers, stockholders and their related
8.02. MEETINGS interest (DOSRI Accounts, See Sec. 36, GBL).
The meetings of the board of directors may be d) The law imposes restrictions on the value of
conducted through modern technologies such as, collaterals on loans.
REVIEWER ON COMMERCIAL LAW RAKT i V —-GENERAL SANK IN A i_AvV (K.A, NO, S79J), 329
e) The Monetary Board may provide for restric another corporation engaged primarily in real
tions on unsecured loans (Sec, 41, GBL), estate shall be considered as part of the bank's
The Monetary Board may prescribe the maturi total investment in real estate (Sec. 51, GBL).
f)
ties and other terms and conditions for various 10.02. However, a bank may acquire, hold or convey real
types of loans and accommodations (Sec, 43, property under the following circumstances:
GBL).
a) Such as shall be mortgaged to it in good faith by
g) The law provides restrictions on dividend decla way of security for debts;
rations (Sec. 57, GBL).
b) Such as shall be conveyed to it in satisfaction of
9.01. DIVIDENDS debts previously contracted in the course of its
Dividend declaration is prohibited in the follow dealings; or
ing instances: c) Such as it shall purchase at sales under judg
a) if it is greater than its accumulated net profits ments, decrees, mortgages, or trust deeds held
then on hand, deducting therefrom its losses and by it and such as it shall purchase to secure debts
bad debts; due it
b) if its clearing account with the Bangko Sentral is Any real property acquired or held under
overdrawn; or the circumstances enumerated in the above para
graph shall be disposed of by the bank within a
__________ r) if it is deficient in the required liquidity floor for
government deposits for five (5) or more consec
by the Monetary Board. After said period, the
utive days; or bank may continue to hold the property for its
d) if it does not comply with the liquidity stan- own use, subject to the limitations mentioned
dards/ratios prescribed by the Bangko Sentral earlier, that is, the investment should not be
for purposes of determining funds available for more than 50% of the combined capital accounts
dividend declaration; or (Sec. 52, GBL).
e) if it has committed a major violation as may be LOAN TO BANKS
determined by the Bangko Sentral.
11.01. LOANS WITHOUT COLLATERAL
10. OWNERSHIP OF REAL PROPERTY The BSP may extend loans and advances to
10.01. Any bank may acquire real estate as shall be neces banking institutions for a period of not more than
sary for its own use in the conduct of its business. seven (7) days without any collateral for the purpose
However, the total investment in such real estate and of providing liquidity (Sec. 83, NCSA).
improvements thereof, including bank equipment, 11.02. EMERGENCY LOANS
shall not exceed fifty percent (50%) of combined capi
The BSP, upon the approval of at least five (5)
tal accounts.
members of the Monetary Board, may also grant
a) Unless otherwise provided by the Monetary emergency loans or advances in the amount not
Board, the equity investment of a bank in exceeding fifty percent (50%) of its total deposits and
330 REVIEWER OH COMMERCIAL LAW EARI IV — GENERAL BANKING LAW (ILA. NO. 331
deposit substitutes. The loans shall be released in two Provided, That this shah not include inability to
tranches (Sec. 84, NCBA). pay caused by extraordinary demands induced
by financial panic in the banking community;
12. CONSERVATORSHIP (S ec , 29, NCBA J b) The bank has insufficient realizable assets, as
12.01. GROUNDS — whenever, on the basis of a report determined by the Bangko Sentral, to meet its
submitted by the appropriate supervising or liabilities; or
examining department, the Monetary Board finds c) The bank cannot continue in business without
that a bank or a quasi-bank is in a state of continuing involving probable losses to its depositors or
inability or unwillingness to maintain a condition creditors; or
of liquidity deemed adequate to protect the interest
of depositors and creditors, the Monetary Board d) The bank has willfully violated a cease and
may appoint a conservator with such powers as desist order under Section 37 that has become
the Monetary Board shall deem necessary. The final, involving acts or transactions which
conservatorship shall not exceed one (1) year. amount to fraud or a dissipation of the assets of
the institution.
12.02. POWERS OF CONSERVATOR
13.02. DUTIES OF RECEIVER
The powers that may be conferred to the conser
vator are such powers as may be necessary for the a) The receiver shall immediately gather and take
following purposes:_____ charge of all the assets and liabilities of the insti-
— ------------ tution. administer the same for the benefit of its
a) To take charge of the assets, liabilities, and the creditors;
management thereof;
b) The receiver shall exercise the general powers of
b) To reorganize the management of the subject
a receiver under the Revised Rules of Court;
bank;
c) The receiver may deposit or place the funds of
c) To collect all monies and debts due said institu
the institution in non-speculative investments;
tion; and
d) To exercise all powers necessary to restore its d) The receiver shall determine as soon as possible,
viability. - but not later than ninety (90) days from take over,
whether the institution may be rehabilitated or
13. RECEIVERSHIP AND LIQUIDATION (S e c . 30, NCBA) otherwise placed in such a condition so that it
may be permitted to resume business with safe
13.01. GROUNDS ty to its depositors and creditors and the general
The PDIC, as the statutory receiver, of a bank, public: Provided, That any determination for the
may be appointed whenever, upon report of the head resumption of business of the institution shall be
of the supervising and examining department, the subject to prior approval of the Monetary Board;
Monetary Board finds that. and
a) The bank is unable to pay its liabilities as they e) The receiver shall not, with the exception of
become due in the ordinary course of business: administrative expenditures, pay or commit any
332 REVIEWER ON COMMERCIAL LAW ' Ar-fl i V —- GENERAL, BANKING; LAW (K..A, NO. rf/91), 333
act that will involve the transfer or disposition of case should be initiated and prosecuted
any asset of the institution. through the liquidator (Manato v. CA, G.R.
13.03. CLOSE NOW-HEAR LATER SCHEME No. 141297, Oct 8, 2001).
No prior hearing is necessary in appointing a 2) The BSP may also forbid the bank from
receiver and in closing the bank. It is enough that doing business. However, when a bank is
subsequent judicial review is provided for. Indeed, not allowed to do business by the BSP, it can
to require such previous hearing would not only be still foreclose mortgage and the prescriptive
impractical but would tend to defeat the very purpose period to foreclose is not tolled (Larrobis v.
of the law when it invested the Monetary Board with Phil. Veterans Bank, G.R. No. 135706, Oct. 1,
such authority (Rural Bank o f Lucena v. Area, G.R. No. 2004).
L-21146, Sept 20,1965). 3) An insolvent bank that was closed by the
13.04. EFFECT OF RECEIVERSHIP AND LIQUIDATION BSP is not liable to pay interests on deposits
(Fidelity Savings and Mortgage Bank v. Cenzon,
a) Garnishment, Levy, Attachment, or Execution 184 SCRA 141). However, interests on loans
1) Section 30 of the New Central Bank Act pro extended by the BSP are still demandable
vides that the assets of an institution under (Sec. 82, NCBA).
receivership or liquidation shall be deemed
13.05. JUDICIAL REVIEW
in custodia legis in the hands of the receiver*1
-------------- and shall, from the moment the institu- a) Remedy under Section 30 of NCBA___________
tion was placed under such receivership . The. actions. of the Monetary Board taken
or liquidation, be exempt from any order under Section 30 or under Section 29 of this
of garnishment, levy, attachment, or execu Act shall be final and executory, and may not
tion (Lipana v. Development Bank ofRizal, 154 be restrained or set aside by the court except
SCRA257). on petition for certiorari on the ground that the
2) There will be no preference even if the action taken was in excess of jurisdiction or with
claimant-depositor obtained a writ of pre such grave abuse of discretion as to amount to
liminary attachment. After the declaration lack or excess of jurisdiction.
of insolvency, the remedy of the deposi The petition for certiorari may only be filed
tors is to intervene in the liquidation pro by the stockholders of record representing the
ceedings (Provident Savings Bank v. CA, 222 majority of the capital stock within ten (10) days
SCRA125). from receipt by the board of directors of the
b) Other Effects institution of the order directing receivership,
liquidation or '.conservatorship.
1) The appointment of a receiver does not dis
solve the corporation nor does it interfere b) Ground: Grave abuse of discretion
with the exercise of corporate rights. Banks The power and authority of the Monetary
under liquidation retain their legal person Board to elosebanks and liquidate them thereafter
ality. The bank can sue and be sued but any when public interest so'requires is an exercise of
lliissitf
llijllS f
334 F.EVJSvvisR ON COMMERCIAL LAW Vhtki iv — ABmcKAL: iiAiErslis'vi u\.A. i-j u . o/yij,
police power of the State. Police power, however, tivity resulting from a contract or agreement
may not he exercised arbitrarily or unreasonably whereby a bank binds itself to render services
and could be set aside if it is either capricious, or to act in a representative capacity such as in
discriminatory, whimsical, arbitrary, unjust, or is an agency, guardianship, administratorship or
tantamount to a denial of due process and equal wills, properties or estates, executorship, receiv
protection clauses of the Constitution (Central ership, and other similar services which do not
Bank v. CA, 106 SCRA143; Banco Filipino Savings create or result in a trusteeship (Ibid., par. b).
and Mortgage Bank v. Monetary Board, 204 SCRA
747). 14.03. POWERS OF TRUST ENTITY
c) Who may question A trust entity, in addition to the general powers

im incident to corporations, shall have the power to:
Section 30 of the NCBA provides that the
petition for certiorari may only be filed by the
i® a) Act as trustee on any mortgage or bond issued
stockholders of record representing the majority ■ ill by any municipality, corporation, or any body
of the capital stock. The petition may not be ililiS A politic and to accept and execute any trust con
filed by the receiver or the conservator that was sistent with law;
appointed.
Act under the order or appointment of any court
as guardian, receiver, trustee, or depositary of the
14. TRUST OPERATIONS OF BANKS
estate of any minor or other incompetent person,
14.01. Priur auiliuiity — A bank may be authorized by -and-as-receiver and depositary of any moneys
the Monetary Board to engage in trust business paid into court by parties to any legal proceed
and act as a trustee or administer any trust or hold ings and of property of any kind which may be
property in trust or on deposit for the use, benefit, brought under the jurisdiction of the court;
or behoof of others (Sec. 79, GBL). The Securities and
Exchange Commission shall not register the articles Act as the executor of any will when it is named
of incorporation and by-laws or any amendment the executor thereof;
thereto, of any trust entity, unless accompanied by a Act as administrator of the estate of any de
certificate of authority issued by the Bangka Sentral ceased person, with the will annexed, or as ad
(Sec. 80, GBL). ministrator of the estate of any deceased person
14.02. Trust Business — Any activity resulting from a when there is no will;
trustor-trustee relationship (trusteeship) involving Accept and execute any trust for the holding,
the appointment of a trustee by a trustor for the management, and administration of any estate,
administration, holding, management of funds and/
real or personal, and the rents, issues and profits
or properties of the trustor by the trustee for the use,
thereof; and
benefit or advantage of the trustor or of others called
beneficiaries (Sec. X403[a], Manual). Establish and manage common trust funds, sub
ject to such rules and regulations as may be pre
a) A trust-licensed bank may also be involved in
other fiduciary business which refer to any ac~ scribed by the Monetary Board.
14.04. SEPARATION OF TRUST BUSINESS OF BANKS 4) It shall have the sole power and authority
to issue currency within the territory of the
The law prohibits the integration of the properties
Republic of the Philippines;
and funds of all the other businesses of the bank with
those of the trust business. The trust business and all 5) The power to issue regulations to prevent
funds, properties or securities received by any trust the circulation of foreign currencies, or cur
entity as executor, administrator, guardian, trustee, rency substitutes as well as the reproduc
receiver, or depositary shall be kept separate and tion of facsimiles of BSP notes;
distinct from the general business including all other 6) It has the power to investigate, make
funds, properties, and assets of such trust entity. The arrests, conduct searches and seizure for
accounts of all such funds, properties, or securities the purpose of maintaining the integrity of
shall likewise be kept separate and distinct from the the currency;
accounts of the general business of the trust entity 7) To engage in foreign exchange transactions
(Sec. 87, GBL). in order to maintain price stability;
8) To make rediscounts, discounts, loans and
15. THE BANGKO SENTRAL NG PILIPINAS
advances to banking and other financial in
15.01. The Bangko Sentral ng Pilipinas (BSP for brevity) is stitutions to influence the volume of credit
the central monetary authority maintained by the consistent with the objectives of price sta
State to function and operate as an independent bility;*1
and accountable body corporate in the discharge
9) lb engage in open market operations —
of its mandated responsibilities concerning money, purchase and sale of securities ■
— exclu
banking and credit (Sec. 1, NCBA, R.A. No. 7653). sively in accordance with its objective of
15.02. RESPONSIBILITIES AND OBJECTIVES achieving price stability;
10) To act as the banker of the government;
a) Primary objective — to maintain price stability
conducive to a balanced and sustainable growth 11) To engage in marketing and stabilization
of the economy. It shall promote and maintain of securities for the account of the govern
monetary stability and the convertibility of the ment; and
p eso(Sec. 3, NCBA). 12) To act as the financial advisor of the gov
b) Basic Functions: ernment.
1) It provides policy directions in the areas of 15.03. CORPORATE POWERS

money, credit and banking; The BSP is a government-owned and controlled
2) It shall have supervision over the opera corporation that is invested by law with corporate
tions of banks; powers (Sec. 1, NCBA). The corporate powers speci
fied in Section 5 of the New Central Bank Act are as
3) It shall exercise regulatory powers over the follows: ... . .
operations of finance companies, and non
bank financial institutions performing qua ' a) the power to adopt, alter and use a corporate
si-banking functions; seal which shall be judicially noticed;
REVIEWER ON COMMERCIAL LAW M R T IV — GENERAL BANKING LAW (R.A. NO. 8791), 339
b) to enter into contracts; e) Inquiring into the solvency and liquidity of the
c) to lease or own real and personal property; institution; or
d) to sell or otherwise dispose of its real and f) Enforcing prompt corrective action.
personal property;
15.05. BANKER AND FINANCIAL ADVISER OF GOV
e) to sue and be sued; ERNMENT
f) to perform any and all things that may be neces a) The BSP is designated as the official depositary
sary or proper to carry out the purposes of the of the Government, its political subdivisions and
New Central Bank Act; and instrumentalities (Sec. 113, NCSA).
g) to compromise, condone or release, in whole or b) It is authorized to engage the services of the
in part, any claim of or settled liability. other banking institutions to act as its agent (Sec.
04. BANK SUPERVISION 115, NCBM
Operations and activities of banks shall be c) It is also authorized to act as agent of the Gov
subject to supervision of the Bangko Sentral (Busuego ernment, its instrumentalities and subdivisions
v. CA, 394 SCRA 473). Section 4 of the GBL provides in the issuance of securities representing the ob
that "supervision" shall include the following: ligations of the Government, its instrumentali
ties and subdivisions (Secs. 117-119, NCSA).
a) Issuance of rules of conduct or the establishment
______ d)__ lhfiLBSRJsJikewiseJhe_fiiiancial advisor of the
of standards of operation for uniform appiica-
Government. Section 123 of the NCBA provides
tion to all banking and financial institutions;
that before undertaking any credit operation
b) The conduct of examination of the bank and its abroad, the Government, through the Secretary
wholly owned or controlled enterprise; of Finance, shall request the opinion, in writing,
of the Monetary Board on the monetary implica
N ote: The PDIC may also conduct a regular tions of the contemplated action.
annual examination upon prior approval of the
MB (Sec. 8[8], R.A. No. 3591 as amended by R.A. 15.06. THE GOVERNOR (Sec. 17, NCBA)
No. 9302]). The Governor shall be the chief executive officer
MB approval may be made by PDIC if there is of the BSP. His powers and duties shall be to:
an impending bank closure (PDIC Reg. No. 2009-
a) prepare the agenda for the meetings of the Mon
05).
etary Board and to submit for the consideration
c) Overseeing to ascertain that laws and regula of the Board the policies and measures to imple
tions are complied with; ment the NCBA;
d) Regular investigation which shall not be oftener b) execute and administer the policies and mea
than once a year from the last date of examina sures approved by the Monetary Board;
tion to determine whether an institution is con c) direct and supervise the operations and internal
ducting its business on a safe or sound basis; administration of the Bangko Sentrab,
340 REVIEWER ON COMMERCIAL LAW M K T IV — GENERAL BANKING LAW (R.A. NO. 8791), 341
d) appoint and fix the remunerations and other laws, rales and regulations. Such a process then
emoluments of personnel below the rank of a involves an intrusion into a bank's records (PDIC
department head; v. Phil Countryside Rural Bank, Inc., ibid.).
e) render opinions, decisions, or rulings, which b) Investigation is conducted based on specific
shall be final and executory on matters regarding findings of certain acts or omissions which are
application or enforcement of laws pertaining subject of a complaint or a Final Report of Exam
to banks, quasi-banks and financial institutions ination made by PDIC. Investigation does not
supervised by the BSP (Note: May be reversed involve a general evaluation of the status of a
or modified by the Monetary Board); and bank. An investigation zeroes in on specific acts
and omissions uncovered via an examination, or
f) exercise such other powers as may be vested in
which are cited in a complaint. Although it also
him by the Monetary Board.
involves a detailed evaluation, an investigation
centers on specific acts of omissions and, thus,
B. OTHER RELATED LAWS requires a less invasive assessment (PDIC v. Phil
Countryside Rural Bank, Inc., ibid.).
1. PHILIPPINE DEPOSIT INSURANCE CORPORATION
(R.A. No. 3591 as amended). c) Prior Consent for Examination. An examina
tion of banks requires the prior consent of the
1.01. Primary functions: to act as (1) deposit insurer, (2) co
Monetary Board (MB), whereas an investigation
regulator of banks, and (3) receiver and liquidator of
does not require prior MB consent (PDIC v. Phil
closed banks (R.A. No. 3bvl, as amended, Sec. 1; PDIC v-.-
Countryside Rural Bank, Inc., ibid.h-------------- -----
Phil. Countryside Rural Bank, Inc., G.R. No. 176438, Jan.
24,2011). d) Reasons why Prior Consent of BSP Not
Necessary for Investigation: (1) Time is always
1.02. INSURER OF DEPOSIT. The PDIC shall, as a basic
of essence, and it is prudent to expedite the
policy, promote and safeguard the interest of the
depositing public by way of providing permanent proceedings if an accurate conclusion is to be
and continuing insurance coverage on all insured arrived at, as an investigation is only as precise
(Sec. 1, R.A. No. 3591 as amended by R.A. No. 9302. See as the evidence on which it is based; (2) An
page 313 of this work). investigation is based on reports of examination
and an examination is conducted with prior
1.03. REGULATOR: EXAMINATION AND INVESTI Monetary Board approval; (3) A lengthy pro
GATION OF BANKS. As a bank regulator, the PDIC cess provide unscrupulous individuals the
is empowered to examine and investigate banks. opportunity to cover their tracks (PDIC v. Phil
These are two different processes. Countryside Rural Bank, Inc., ibid.).
a) Examination involves an evaluation of the cur
1.04. REHABILITATION RECEIVER OF BANKS (Sec.
rent status of a bank and determines its compli
1% R.A. No. 3591 as amended)
ance with the set standards regarding solvency,
liquidity, asset valuation, operations, systems, The PDIC as receiver shall control, manage and
management, and compliance with banking administer the affairs of the closed bank.
342 REVIEWER ON COMMERCIAL LAW PA R T IV — GENERAL BANKING LAW (R.A. NO. 8791), 343
a) Suspension of Powers and Benefits 2. ANTE-MONEY LAUNDERING ACT

Effective immediately upon takeover as 2.01. Money Laundering .... a crime committed by any
receiver of such bank, the powers, functions and person who knowing that any monetary instrument
or property represents, involves, or relates to the
duties, as well as all allowances, remunerations
proceeds of any unlawful activity: (1) transacts
and perquisites of the directors, officers, and
said monetary instrument or property; (2) converts,
stockholders of such bank are suspended,
transfers, disposes of, moves, acquires, possesses or uses
and the relevant provisions of the Articles of
said monetary instrument or property; (3) conceals or
Incorporation and By-laws of the closed bank
disguises the true nature, source, location, disposition,
are likewise deemed suspended.
movement or ownership of or rights with respect to
b) : Properties in Custodia Legis said monetary instrument or property; (4) attempts
or conspires to commit money laundering offenses
The assets of the closed bank under receiv referred to in (1), (2) or (3); (5) aids, abets, assists in or
ership shall be deemed in custodia legis in the counsels the commission of the money laundering
hands of the receiver. From the time the closed offenses referred to in (1), (2) or (3); (6) performs or fails
bank is placed under such receivership, its assets to perform any act as a result of which he facilitates
shall not be subject to attachment, garnishment, the offense of money laundering referred to in (1), (2)
execution, levy or any other court processes. or (3) . (7) This is also committed by failure to report to
Note: A judge, officer of the court or any the Anti-Money Laundering Council (AMLC) by any
-------------- ciysze^j±^T^£m3a3nmm^lh^Ra.j:oAei£d or suspicious
p^Tsurrwho-i^mifiBmE^mUErrpT^sm^m^Mme
the issuance or implementation of the writ of transaction is required under the Anti-Money
Laundering Law to be reported thereto (RA 9160 as
garnishment, levy, attachment or execution shall
amended by RA 10365 approved on 2115/13).
be criminally liable under Section 21 of Republic
Act No. 3591 as amended. 2.02. Covered Transactions — a transaction in cash or other
c) The powers of PDIC as receiver includes the equivalent monetary instrument involving a total
power to: (1) collect loans and other claims of amount in excess of Five hundred thousand pesos
the closed bank, and for the purpose, modify, (P500,000.00) within one (1) banking day (RA 9160 as
compromise or restructure the terms and condi amended by RA 9194).
tions of such loans or claims as may be deemed 2.03. Covered Entities — include banks, non-banks, quasi
advantageous to the interest of the creditors and banks, trust entities, foreign exchange dealers,
claimants of the dosed bank; (2) if the stipulated pawnshops, money changers, remittance and transfer
interest on deposits is unusually high compared companies and other similar entities and all other
with the prevailing applicable interest rate, the persons and their subsidiaries and affiliates supervised
PDIC as receiver may exercise such powers or regulated by the Bangko Sentral ng Pilipinas (BSP),
which may include a reduction of the interest insurance companies, pre-need companies, securities
rate to a reasonable rate; any modification or re dealers, brokers, salesmen, investment houses,
duction shall apply only to unpaid interest (See jewelry dealers in precious metals/stones, who,
Sec. 10, R.A. No. 3591 as amended). as a business, trade in precious metals/stones, for
.JH
transactions in excess of Pl.,000,000.00 (NOTE; Other (z) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of
entities are enumerated under Sec. 3[a], RA 9160, as Republic Act No. 9165, otherwise known as the Com
amended by RA10365). Lawyers and accountants acting prehensive Dangerous Drugs Act of 2002;
as independent legal professionals are NOT covered (3) Section 3 paragraphs B, C, E, G, H and I of Republic
with respect to privileged information covered by .Act No. 3019, as amended, otherwise known as the
confidentiality and attorney-client relationship (ibid.). Anti-Graft and Corrupt Practices Act;
2.04. Suspicions transaction lip i;:. (4) Plunder under Republic Act No. 7080, as amended;
£-
Transactions with covered institutions, regard (5) Robbery and extortion under Articles 294, 295, 296,
less of the amounts involved, where any of the fol 299, 300, 301 and 302 of the Revised Penal Code, as
lowing circumstances exist: amended;
[SKISiS/c (6) and M asiao punished as illegal gambling un
Ju e te n g
a) there is no underlying legal or trade obligation,
purpose or economic justification; SSIISIIt-' der Presidential Decree No. 1602;
■ l l (7) Piracy on the high seas under the Revised Penal

b) the client is not properly identified;
Code, as amended and Presidential Decree No. 532;
c) the amount involved is not commensurate with
(8) Qualified theft under Article 310 of the Revised Penal
the business or financial capacity of the client;
S 1 IS I- Code, as amended;
d) taking into account all known circumstances, it SwiSS!?' (9) Swindling under Article 315 and Other Forms of
may be perceived that the client's transaction is WyfOWwC■ ■ Swindling under Article 316 of the Revised Penal
structured in order to avoid being the subject of 1
1 ~Gocte, as amended;--------- — -— -------------- ----- -------
reporting requirements under the Act;
(10) Smuggling under Republic Act Nos. 455 and 1937;
e) any circumstances relating to the transaction
which is observed to deviate from the profile of (11) Violations of Republic Act No. 8792, otherwise known
wToofvwiOf-'' -
the client and/or the client's past transactions WwJM nl.• as the Electronic Commerce Act of 2000;
AAhjhkmm-
with the covered institution; (12) Hijacking and other violations under Republic Act
S S S S lfe ' No. 6235; destructive arson and murder, as defined
f) the transaction is in any way related to an un
- under the Revised Penal Code, as amended;
lawful activity or offense under this Act that is
about to be, is being or has been committed; or ILWVLlifliWO;.;-- (13) Terrorism and conspiracy to commit terrorism as de
fined and penalized under Sections 3 and 4 of Repub
g) any transaction that is similar or analogous to lic Act No. 9372;
any of the foregoing.
(14) Financing of terrorism under Section 4 and offenses
-AOiAmMmAO . punishable under Sections 5, 6, 7 and 8 of Republic
2.05. Unlawful activity i m tm s ^
W m fs h -. Act No. 10168, otherwise known as the Terrorism Fi
Any act or omission or series or combination nancing Prevention and Suppression Act of 2012;
thereof involving or having relation to the following:
(15) Bribery under Articles 210, 211 and 211-A of the Re
"(1) Kidnapping for ransom under Article 267 of Act No. W tK t. vised Penal Code, as amended, and Corruption of
3815, otherwise known as the Revised Penal Code, as ' Public Officers under Article 212 of the Revised Penal
amended; - Code, as amended;
IMfl l!3 ■
i
i
i 346 REVIEWER ON COMMERCIAL LAW PART IV —•GENERAL BANKING LAW (E.A. MO. 8791}, 347
(16) Frauds and Illegal Exactions and Transactions under (29) Violation of Republic Act No. 8293, otherwise known
Articles 213, 214, 215 and 216 of Lie Revised Penal as.-the Intellectual Property Code of the Philippines;
Code, as amended; (30) . Violation of Section 4 of Republic Act No. 9995, other
(17) Malversation -of Public Funds and Property under wise known as the Anti-Photo and Video Voyeurism
! Articles 217 and 222 or the Revised Penal Code, as Act of 2009;
amended; (31) Violation of Section 4 of Republic Act No. 9775, oth
f
s (18) Forgeries and Counterfeiting under Articles 163,166, erwise known as the Anti-Child Pornography Act of
! 167, 168, 169 and 176 of the Revised Penal Code, as 2009;
amended;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11,
(19) Violations of Sections 4 to 6 of Republic Act No. 9208, 12 and 14 of Republic Act No. 7610, otherwise known
otherwise known as the Anti-Trafficking in Persons as the Special Protection of Children Against Abuse,
s Act of 2003; Exploitation and Discrimination;
(20) Violations of Sections 78 to 79 of Chapter IV, of Presi
dential Decree No. 705, otherwise known as the Re (33) Fraudulent practices and other violations under Re
vised Forestry Code of the Philippines, as amended; public Act No. 8799, otherwise known as the Securi- f
t
1 ties Regulation Code of 2000; and
(21) Violations of Sections 86 to 106 of Chapter VI, of Re
I public Act No. 8550, otherwise known as the Philip (34) Felonies or offenses of a similar nature that are pun- j:
i
pine Fisheries Code of 1998; ishable under the penal laws of other countries." (Sec,
i
I (22) Violations of Sections 101 to 107, and 110 of Repub- 3 (i) RA 9160, as amended by RA10365)
— --------- lir Art No._7942. otherwise known as the Philippine
Mining Act of 1995; 2.06. Prevention of Money Laundering (Sec. 9)
(23) Violations of Section 27(c), (e), (f), (g) and (i), of
a) Customer Identification. —- Covered institu
Republic Act No. 9147, otherwise known as the
Wildlife Resources Conservation and Protection Act; tions shall establish and record the true identity
of its clients based on official documents. They
(24) Violation of Section 7(b) of Republic Act No. 9072,
otherwise known as the National Caves and Cave shall maintain a system of verifying the true
Resources Management Protection Act; identity of their clients and, in case of corporate
(25) Violation of Republic Act No. 6539, otherwise known clients, require a system of verifying their legal
as the Anti-Carnapping Act of 2002, as amended; existence and organizational structure, as well
(26) Violations of Sections 1,3 and 5 of Presidential Decree as the authority and identification of all persons
No. 1866, as amended, otherwise known as the decree purporting to act on their behalf.
Codifying the Laws on Illegal/ Unlawful Possession,
b) Record Keeping. — All records of all transac
Manufacture, Dealing In, Acquisition or Disposition
of Firearms, Ammunition or Explosives; tions of covered institutions shall be maintained
and safely stored for five (5) years from the dates
(27) Violation of Presidential Decree No. 1612, otherwise
known as the Anti-Fencing Law; of transactions. VYifh respect to closed accounts,
the records on customer identification/ account
(28) Violation of Section 6 of Republic Act No; 8042, oth
erwise known as the Migrant Workers and Overseas files and business correspondence, shall be pre
Filipinos Act of 1995, as amended bv Republic Act served and safely stored for at least five (5) years
No.40022; from the dates when they were closed.
348 RBViEVVM-, ON COMMERCIAL LAW PART IV — GENERAL BANKING LAW (RA. NO. 8791), 349
c) Reporting of Covered and Suspicions Trans 2.08. AUTHORITY OF AMLC TO INQUIRE INTO AMD
actions. — Covered institutions shall report to EXAMINE BANK DEPOSITS (Sec. t l f R A . No. 9160
the Anti-Money Laundering Council (AMLC) a s amended by R A . No. 10167)
all covered or suspicious transactions within The AMLC may inquire into or examine any
five (5) working days from occurrence thereof, particular deposit or investment, including related
unless AMLC prescribes a longer period not ex accounts, with any banking institution or non-bank
ceeding fifteen (15) working days. Conviction financial institution. This can be either upon order
of the unlawful activity is not necessary before a of the court or even without court order in certain
report is made. exceptional cases.
2.07. Freezing of Monetary Instrument or Property a. COURT ORDER REQUIRED: Examination
by AMLC based on a Court Order upon Ex
The Court Appeals may issue a Freeze Order
Parte Application — in cases of violations of
under the following conditions: (1) There must be
Republic Act No. 9160 as amended, when it has
a verified ex parte petition by the AMLC, (2) CA
been established that there is probable cause that
must determine that probable cause exists that any
the deposits or investments, including related
monetary instrument or property is in any way
accounts involved, are related to (1) an Unlawful
related to an unlawful activity as defined in Section
Activity (see enumeration in 1.05 above) or (2) a
3(i) of Republic Act No. 9160 (See enumeration in
money laundering offense.
1.05 above), (3) The freeze order shall be effective
immediately, (4) The freeze order shall be for a period ----------------(1) RELATED ACCOUNTS. A court order
not exceeding six (6) months (Sec. 10, R.A. No. 9160 as ex parte must first be obtained before the
amended by R.A. Nos. 10167 and 10365). AMLC can inquire into Related Accounts.
a) The Court of Appeals should act on the petition Note: Related accounts shall refer to
to freeze within twenty-four (24) hours from accounts, the funds and sources of which
filing of the petition. If the application is filed a originated from and/or are materially
day before a nonworking day, the computation linked to the monetary instrument(s) or
of the twenty-four (24)-hour period shall exclude property(ies) subject of the freeze order(s).
the nonworking days (Sec. 10, R.A. No. 9160 as (2) The Court of Appeals must act on the
amended by R.A. No. 10167). application within 24 hours from the filing.
b) A person whose account has been frozen may b. NO COURT ORDER shall be required for the
file a motion to lift the freeze order and the court examination of bank deposits by AMLC in cases
must resolve this motion before the expiration of involving:
freeze order (Sec. 10, R.A. No. 9160 as amended by
R.A,. No. 10167 and 10365). (1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
c) No court shall issue a temporary restraining
Revised Penal Code, as amended;
order or a writ of injunction against any freeze
order, except the Supreme Court (Sec, 10, R.A. (2) Sections 4,5, 7 , 8 , 9 , 1 0 , 1 2 , 1 3 , 1 4 , 1 5 and 16
No, 9160 as amended by R.A. No. 10167), of Republic Act No. 9165 otherwise known
as the Comprehensive Dangerous Drugs 2) the amounts, if any to be credited as down

Act of 2002; payment and/or trade-in;
(3) Hijacking and other violations under 3) the difference between the amounts set
Republic Act No. 6235; destructive arson forth under clauses (1) and (2);
and murder, as defined under the Revised 4) the charges, individually itemized, which
Penal Code, as amended, including those are paid or to be paid by such person in
perpetrated by terrorists against non- connection with the transaction but which
combatant persons and similar targets;
are not incident to the extension of credit;
(4) Felonies or offenses of a nature similar to
5) the total amount to be financed;
those mentioned in Section 3(i)(l), (2), and
(12) which, are punishable under the penal . 6) the finance charge expressed in terms of
laws of other countries; and pesos and centavos; and
(5) Terrorism and conspiracy to commit terror 7) the percentage that the finance bears to the
ism as defined and penalized under Repub total amount to be financed expressed as a
lic Act No. 9372. simple annual rate on the outstanding un
paid balance of the obligation.
c. The authority ofAMLC to inquire into or examine
the main account and the related accounts shall b) The imposition of interest and finance charges is
comply with the requirements of Article III, void if not disclosed in the disclosure statement
______ ________ Sections 2. and 3 of the 1987 Constitution._______ (Heirs of Espiritu v. Landrito, G.R. No. 169618,
------- April 4, 2007).--------------— -----------------------—
d. Inquiry into deposits under Section 11 does not
require a pre-existing criminal case (Republic v. 1) Although penalty charges are not stated in
Eugenio, G.R. No. 174.629, Feb. 14, 2008). the disclosure statement, reference to the
penalty charges in the promissory note con
3. TRUTH IN LENDING stitutes substantial compliance with the dis
3.01. TRUTH IN LENDING ACT (R.A. No. 3765) closure requirement of the Truth in Lending
Act (BPI v. Spouses Yu, G.R. No. 184122, Jan.
a) Disclosure Requirement
20, 2010).
The law assures full disclosure by requiring 2) Even if disclosed, exorbitant interest rate
the lender to give the borrower all the details
may be declared unconscionable.
regarding the transaction. Under Section 4, any
creditor shall furnish to each person to whom c) Rationale —- To protect users of credit from lack
credit is extended, prior to the consummation of awareness of the true cost thereof, proceeding
of the transaction, a clear statement in writing from the experience that banks are able to con
setting forth, to the extent applicable and in ceal such true cost by hidden charges, uncertain
accordance with rules and regulations prescribed ty of interest rates, deduction of interests from
by the Board, the following information: the loaned amount, and the like (United Coconut
1) the cash price or delivered price of the Planters Bank [UCPB] v. Spouses Beluso, G.R. No.
property or service to be acquired; 159912, Aug. 17, 2007).
■
352 REVIEWER ON COMMERCIAL LAW I ‘ART IV GENERAL BANKING LAW (R .A . NO ),

d) Definitions f) Subsequent compliance. Subsequent compli

1) Credit — any loan, mortgage, deed of trust, ance with the disclosure requirement cannot
advance, or discount; any conditional sales be deemed in substantial compliance with the
contract; any contract to sell, or sale or con Truth in Lending Act (UCPB v. Spouses Beiuso,
tract of sale of property or services, either ibid.). Example: The bank gave the details only
when demand for payment was being made.
for present or future delivery, under which
part or all of the price is payable subsequent g) Liability. Violation of the Truth in Lending
to the making of such sale or contract; any Act gives rise to both criminal and civil liabili
rental-purchase contract; any contract or ties (Sec. 6{c], TLA). The penalty therefor is an
arrangement for the hire, bailment, or leas amount of P100 or in an amount equal to twice
ing of property; any option, demand, lien, the finance charge required by the creditor in
pledge, or other claim against, or for the connection with such transaction, whichever is
delivery of, property or money; any pur greater, except that the liability shall not exceed
chase, or other acquisition of, or any credit P2,000.00 on any credit transaction. The action
upon the security of, any obligation of claim to recover such penalty may be instituted by the
arising out of any of the foregoing; and any aggrieved private person separately and inde
transaction or series of transactions having pendently from the criminal case for the same
a similar purpose or effect. offense (UCPB v. Spouses Beluso, ibid.).
21 Finance charge — interest, fees, service h) Fyescriptm d E m M J ^ n ^ ^
charges, discounts, and such other charges of the date of demand and not from the date of
incident to the extension of credit as the execution of the promissory note (Ibid.).
Board may, by regulation, prescribe.
CONSUMER ACT (R.A. No. 7394)
3) Creditor — any person engaged in the
business of extending credit (including any a) The Consumer Act of the Philippines (Repub
lic Act No. 7394) requires disclosure for con
person who as a regular business practice
sumer credits.
make loans or sells or rents property or ser
'msmsKW'-
vices on a time, credit, or installment basis, B S litt; 1) "Consumer" means a natural person who is
either as principal or as agent) who requires SSStlSBN a purchaser, lessee, recipient or prospective
as an incident to the extension of credit, the ■ 1 1 1 ' ■ purchaser, lessor or recipient of consumer
payment of a finance charge. products, services or credit.
e) Escalation Clause. Truth in Lending Act may 2) "Consumer credit" means any credit ex
also be violated if the agreement provides for an " ! tended by a creditor to a consumer for the
escalation clause on interest which is dependent f llilllL ■ ' sale or lease of any consumer product or
solely on the will of the bank (UCPB v. Spouses miBBSS" service under which part or all of the price
flM tilL
Beluso, ibid.). For example, the following provision or payment therefor is payable at some fu
is void: "The interest shall be at the rate indica M v ture time, whether in full or in installments.
- ■
tive of (the bank's) retail rate or as determined 3) "Consumer loan" means a loan made by
by the Branch Head of the Bank." m g m - ■ the lender to a person which is payable in
a to & i
f v
-Jfe -
REVIEWER ON COMMERCIAL LAW PART IV —■GENERAL BANKING LAW (R.A. NO. 8791), 355
installments for which a finance charge Is or of the property to which the securityinterest
m ay be im posed. This term includes credit relates.
transactions pursuant to an open-end-cred c> Exempted Transaction (Art. 1 4 5 , R.A. N o, 7394)
it plan other than a seller credit card.
1) those involving extension of credits for
b) Required Disclosures on C onsum er Loans N ot business or commercial purposes, or to the
Under Open-End C redit Plan (Art. 142, R.A. Government and governmental agencies
No. 7394) and instrumentalities, juridical entities or
Any creditor extending a consumer loan to organizations;
or in a transaction which is neither a consum 2) those in which the debtor is the one specify
er credit sale nor under an open-end consumer ing the definite set of credit terms such as
credit plan shall disclose, to the extent applica bank deposits, insurance contracts, sale of
ble, the following information: bonds or analogous transactions.
1) the amount of credit of which the debtor
will have the actual use, or which is or will HUMAN SECURITY ACT OF 2007
be paid to him or for his account or to an 5.01. EXAMINATION AND SEQUESTRATION OF
other person on his behalf; DEPOSITS
2) all charges, individually itemized, which are Republic Act No. 9372 which was passed on
_________ included in the am ount of credit extended March 6,2007 entitled "An Act to Secure the State and*12
but w hich are not part of the finance charge; ProtecfmrReopteTrorrrfeirerismz£toAerwfee-kROWft-
3) the total amount to be financed or the sum as the "Human Security Act of 2007" (HSA for short)
of the amounts referred to in paragraphs (a) allows examination and sequestration of deposits
and (b); based on certain conditions.
4) the finance charge expressed in terms of 5.02. EXAMINATION OF BANK DEPOSITS

pesos and centavos; The Court of Appeals designated as a special
5) the effective interest rate; court to handle anti-terrorism cases may authorize in
writing any police or law enforcement officer and the
6) the percentage that the finance charge bears
members of his/her team duly authorized in writing
to the total amount to be financed expressed
by the anti-terrorism council:
as a simple annual rate on the outstanding
unpaid balance of the obligation; 1) to examine, or cause the examination of, the
deposits, placements, trust accounts, assets
7) the default, delinquency or similar charges
payable in the event of late payments; and and records in a bank or financial institu
tion; and
8) a description of any security interest held
2) to gather or cause the gathering of any
or to be h e ld 1or to be retained or acquired
relevant information about such deposits,
by the creditor in connection with the
extension of credit and a clear identification
placements, trust accounts, assets, and
records from a bank or financial institution 8) Republic Act No. 6969 (Toxic Substances
(Sec. 27, USA). and Hazardous and Nuclear Waste Control
a) Grounds, The Court of Appeals may authorize' Act of 1990);
the examination after satisfying themselves; 9) Republic Act No. 5207 (Atomic Energy
of the existence of probable cause in a hearing" Regulatory and Liability Act of 1968);
called for the purpose that:
10) Republic Act No. 6235 (Anti-Piracy and
1) a person charged with or suspected of the
Anti-Highway Robbery Law of 1974); or
crime of terrorism or, conspiracy to commit
terrorism; 11) Presidential Decree No. 1866, as amended
2) of a judicially declared and outlawed ter (Decree Codifying the Laws on Illegal and
rorist organization, association, or group of Unlawful Possession, Manufacture, Deal
persons; and ing in, Acquisition or Disposition of Fire
a rm s, Ammunitions or Explosives).
3) of a member of such judicially declared
and outlawed organization, association, or c) Penalty. A person convicted of the crime of ter
group of persons (Sec. 27, HSA). rorism shall suffer the penalty of forty (40) years
of imprisonment, without the benefit of parole
b) Definition of Terrorism. Terrorism is committed
as provided for under Act No. 4103, otherwise
by any person who commits an act punishable
under any of the following provisions of the1234567 known as the Indeterminate Sentence Law, as
Revised Penal Code thereby sowing and creating ____ amended (Sec. 28, Act No. 9372)._______________
a condition of widespread and extraordinary d) Effective Period. Thirty (30) days from the date
fear and panic among the populace, in order to of receipt of the written order of the authorizing
coerce the government to give in to an unlawful division of the Court of Appeals by the applicant
demand: police or law enforcem ent official renewable for
1) Article 122 (Piracy in General and Mu another period which shall not exceed thirty (30)
tiny in the High Seas or in the Philippine days renewable to another thirty (30) days from
Waters); the expiration of the original period.
2) Article 134 (Rebellion or Insurrection); SEQUESTRATION
3) Article 134-A (Coup d' Etat), including acts
The Court of Appeals may likewise order the
committed by private persons;
sequestration of deposits belonging:
4) Article 248 (Murder);
5) Article 267 (Kidnapping and Serious Illegal 1) to any person suspected of or charged
Detention); before a competent Regional Trial Court
for the crime of terrorism or the crime of
6) Article 324 (Crimes Involving Destruction),
conspiracy to commit terrorism;
or under .
2) to a judicially declared and outlawed orga
7) Presidential Decree No. 1613 (The Law on nization, association, or group of persons;
Arson);
PART 1Y — GENERA), BANKING LAW (R.A MO 8791).. 359
LAW ON SECRECY' OF DEPOSIT b AND RELATED LAWS
3) to a m em ber of such organization, asso b) An attempt or conspiracy to commit the same

ciation, or group of persons. They shall be crime are also penalized (Sec. 5, R.A No. 10168).
seized, sequestered, and frozen in order to
prevent their use, transfer, or conveyance 6.02. Authority of AMLC to Investigate
for purposes that are inimical to the safety The AMLC is authorized to investigate: (a) any
and security of the people or injurious to property or funds that are in any way related to
the interest of the State (Sec, 38, HSA). financing of terrorism or acts of terrorism; (b) property
a) Meaning of Sequestration. The sequestered or funds of any person or persons in relation to whom
bank deposits shall be deemed as property held there is probable cause to believe that such person or
in trust by the bank or financial institution for persons are committing or attempting or conspiring
such person and the government during the to commit, or participating in or facilitating the
pendency of the investigation of the person sus financing of terrorism, or acts of terrorism.
pected of or during the pendency of the trial of
a) The AMLC is authorized to inquire into or ex
the person charged with any of the said crimes,
amine deposits and investments with any bank
as the case may be and their use or disposition
ing institution or non-bank financial institution
while the case is pending shall be subject to the
and their subsidiaries and affiliates without a
approval of the court before which the case or
court order (notwithstanding the provisions of
cases are pending (Sec. 40, HSA).
Republic Act No. 1.405, otherwise known as the
a T H E T E R R Q R J S ir F I N A N C I N G A N D P R C T E N T K ffiT A N E r
---------------- "Law on Secrecy of Bank Deposits/' as amend -
SUPPRESSION ACT ( R . A . N o . 1 0 1 6 8 ) ed; Republic Act No. 6426, otherwise known as
the "Foreign Currency Deposit Act of the Philip
6.01. Financing of Terrorism pines," as amended; Republic Act No. 8791, oth
Republic Act No. 10168 imposes criminal liability erwise known as "The General Banking Law of
on any person who, directly or indirectly, willfully and 2000" and other laws) (Sec. 10, R.A. No. 10168).
without lawful excuse, possesses, provides, collects or 6.03. Authority to Freeze
uses property or funds or m akes available property,
funds or financial service or other related services, by The AMLC, either upon its own initiative or at
any means, with the unlawful and willful intention the request of the Anti-Terrorism Council (ATC), is
that they should be used or with the knowledge that authorized to issue an ex parte order to freeze without
they are to be used, in full or in part: (a) to carry out delay: (a) property or funds that are in any way related
or facilitate the commission of any terrorist act; (b) by to financing of terrorism or acts of terrorism; or (b)
a terrorist organization, association or group; or (c) property or funds of any person, group of persons,
by an individual terrorist. They shall be guilty of the terrorist organization, or association, in relation to
crime of financing of terrorism (Sec. 4, R.A. No. 10168). whom there is probable cause to believe that they are
com m itting sor attem pting or conspiring to commit,
a) The penalty is also imposed on any person who
or participating in or facilitating the commission of
organizes or directs others to commit financing
financing of terrorism or acts of terrorism as defined
of terrorism (Sec. 4, R.A. No. 10168).
herein.
a) P eriod o f Effectivity o f Freeze O rder issued

by AMLC — Twenty (20) days. Extendibly by
the C ourt of A ppeals up to a period not exceed
ing six (6) months upon petition by AMLC. The PA RT ¥
twenty-day period shall be tolled upon filing of
a petition to extend the effectivity of the freeze CREDIT TRANSACTIONS
: order, v
b) The AMLC is also authorized to issue a freeze A. W AREHOUSE RECEIPTS LAW
order with respect to property or funds of a (Act No. 2137)
designated organization, association, group or
any individual to comply with binding terrorism-
1. DEFINITIONS
related Resolutions, including Resolution No.
1373, of the UN Security Council pursuant to 1.01. Document of title to goods — includes any bill of
Article 41 of the Charter of the UN. Said freeze lading, dock warrant, "quedan," or warehouse receipt
order shall be effective until the basis for the or order for delivery of goods, or any other document
issuance thereof shall have been lifted (hence, used in the ordinary course of business in the sale or
the 20-day limit does not apply). During the transfer of goods, as proof of possession or control of
effectivity of the freeze order, an aggrieved party the goods, or authorizing or purporting to authorize
m ayuwlihijiiw enty (20) davs from issuance, file the possessor of the document to transfer or receive
--------------ejiheiiiiy indorsement or bv delivery, goods repre
with the Court of Appeals a petition to determine
sented by such document (Art. 1636, NCC).
the basis of the freeze order according to the
principle of effective judicial protection. 1.02. Common types.
c) If the property or funds subject of the freeze order a) Bill of Lading — a document that serves as
under the immediately preceding paragraph are evidence of receipt of goods for shipment issued
found to be in any way related to financing of by a common carrier.
terrorism or acts of terrorism committed within b) Warehouse Receipt —■a document of title which
the jurisdiction of the Philippines, said property is issued by a warehouseman. Under the said
or funds shall be the subject of civil forfeiture law, the term "warehouseman" is defined as a
proceedings. person lawfully engaged in the business of stor
ing goods for profit (Sec. 58[a], Warehouse Receipts
Law, WRLfor short).
c) Quedan — a warehouse receipt that covers
sugar.
d) Dock Warrant — a warrant given by dock-own
ers to the owner of merchandise imported and
361
PART V — CREDIT TRANSACTIONS 363
warehoused on the dock, upon the faith of the

SECTION 2. Form o f receipts: essen tial terms.
W arehouse receipts need not b e in m y particular
bills of lading, as a recognition of his title to the
form but every such receipt must embody within its
goods (Black's Law Dictionary, p. 432).
written or printed terms:
2. THREE FUNCTIONS OF DOCUMENTS OF TITLE (a) The location of the w arehouse where the
goods are stored,
a) It is a contract ■— the underlying contract may
be contract of carriage (bill of lading) or deposit (b) The date of the issue of the receipt,
(warehouse receipt). (c) The consecutive number of the receipt,
b) Evidence of receipt of goods. (d) A statement whether the goods received
w ill be delivered to the bearer, to a specified person
c) Represents the goods and therefore operates as or to a specified person or his order,
transferable document that carries with it con
trol over the goods. It is used to pass title to the (e) The rate of storage charges,
goods. It can be a negotiable document of title. (f) A description of the goods or of the pack
ages containing them,
Note: The Supreme Court, in a number of
cases limited the functions to two-fold — a con (g) The signature of the warehouseman
tract, and a receipt (Telengtan Bros. & Sons v. CA, which may be made by his authorized agent,
______________ 236 SCRA 617)._______________________________ _____(h)___If-Jh e-jecejp i-is-fesn ed . for goods of
which the warehouseman is owner, either solely or
3. NEGOTIABILITY OF WAREHOUSE RECEIPTS jointly or in common with others, the fact of such
ownership, and
3.01. A receipt in which it is stated that the goods received
will be delivered: (a) to the bearer, or (b) to the order (i) A statement of the amount of advances
of any person named in such receipt is a negotiable made and of liabilities incurred for which the
receipt (Sec. 5, WRL). warehouseman claims a lien. If the precise amount
of such advances made or of such liabilities
a) No provision shall be inserted in a negotiable incurred is, at the time of the issue, unknown to
receipt that it is non-negotiable. Such provision, the warehouseman or to his agent who issues it, a
if inserted shall be void. statement of the fact that advances have been made
or liabilities incurred and the purpose thereof is
4. FORMALITIES sufficient.
Additional terms for warehouse receipts are A warehouseman shall be liable to any person
prescribed in Sections 2 and 3 of the WRL. However, injured thereby for all damages caused by the
the absence of any of the provisions will not omission from a negotiable receipt of any of the
necessarily invalidate the receipt. As a rule, receipts terms herein required.
should be liberally construed in order for receipts to
SECTION 3. Form o f receipts. W h at term s may
better serve their purpose.
be inserted. A warehouseman may in sert in a
PART V — CREDIT T R A N S A C T IO N S 365
receipt issued by Mm any other terms and conditions specified person so named (indorsement plus
provided that such terms and conditions shall not* delivery).
(a) Be contrary to the provisions of this Act. b) EFFECTS; If indorsement is necessary but the
(b) In any wise impair his obligation to exer negotiable receipt was only delivered:
cise that degree of care in the safekeeping of the 1) The transferee acquires title against the
goods entrusted to him which a reasonably careful transferor;
man would exercise in regard to similar goods of his
2) There is no direct obligation of the ware
own.
houseman;
5. NEGOTIATION OF WAREHOUSE RECEIPTS 3) The transferee can compel the transferor to
complete the negotiation by indorsing the
5.01. Negotiation by delivery only (Sec. 37, WRL)
instrument (Sec. 43, WRL). The negotiation
a) Where, by terms of the receipt, the warehouse takes effect on the date of indorsement only.
man undertakes to deliver the goods to the bear
er, or 6. EFFECTS OF NEGOTIATION OF WR
b) Where, by the terms of the receipt, the ware 6.01. Negotiation of the document has the effect of manual
houseman undertakes to deliver the goods to the delivery so as to constitute the transferee the owner of
_____ ________ order of a specified person, and such person or a the goods. Negotiation carries with it both the title to
subsequent indorsee of the receipt has indorsed Trust Co. v.
it in blank or to bearer. National Bank, 42 Phil 413 [1922]).
Note; A bearer document of title is NOT ALWAYS 6.02. Transfer of title and possession is accomplished
A BEARER DOCUMENT in the sense that a special because the person to whom the instrument is
indorsement has the effect of converting the bearer negotiated acquires the following rights (Sec. 41,
instrument into an order instrument (Sec, 37, WRL). WRL):
Example: A negotiable document of title states that the a) Such title to the goods as the person negotiating
goods are to be delivered to "A or bearer." A delivered the receipt to him had or had ability to convey
the document to B, who in turn specially indorsed the to a purchaser in good faith for value, and also
same to C. C cannot negotiate the document by mere such title to the goods as the depositor or person
delivery thereafter and indorsement is necessary for to whose order the goods were to be delivered
its negotiation. by the terms of the receipt had or had ability to
convey to a purchaser in good faith for value;
5.02. Indorsement coupled with delivery
-and- . - :
a) A warehouse receipt is an order document if it
b) The direct obligation of the warehouseman to
states that the goods are to be delivered to the
hold possession of the goods for him according
order of a person named therein. It can only
to the terms of the receipt as fully as if the ware
be negotiated through the indorsement of the
houseman had contracted directly with him.
not transfer such right of possession to Z, the good;:

PROBLEMS;
having beers stolen by X. Furthermore, a person
1, Maingat deposited her personal computer (PC) to whom a negotiable warehouse receipt has been
machine in the warehouse of Bodeguero who issued negotiated acquires only such title to the goods as
a negotiable receipt undertaking the delivery of the the person negotiating the receipt to him had or had
computer to Mayaman or bearer. Mayaman entrusted the ability to convey to a purchaser in good faith for
the receipt to Secretario, his secretary who, in turn, value.
delivered the receipt to Bumibili, a purchaser for
value and in good faith. Secretario needed the money 6.03. Vendor's Lien
to pay his gambling debts, (a) Who has the better title The transfer of title to the purchaser for value is
to the computer, Mayaman or Bumibili? (b) Would not affected by the rights of the vendor (Sec. 49, WRL).
the answer be the same if, by terms of Bodeguero's
receipt, the computer is deliverable to the order of
PROBLEM:
Mayaman?
1. A purchased from S 150 cavans of palay on credit.
A: (a) Bumibili has the better title. The negotiable
A deposited the: palay in W's warehouse. W issued
receipt involved is a bearer receipt, hence
to A a negotiable warehouse receipt in the name of
whoever is in possession of the receipt has title
A. Thereafter, A negotiated the receipt to B who
over the property covered by the receipt. A direct
purchased the said receipt for value and in good faith.
obligation of the warehouseman is owed to the
__________ bearer of the receipt.__________________________ (a) Who has better right to the deposit, S, the unpaid
seller, or B, the purchaser of the receipt for value arid
(b) The answer would be different. If the receipt is an in good faith? Why? (b) When can the warehouseman
order receipt, indorsement is necessary to acquire be obliged to deliver the palay to A?
the direct obligation of the warehouseman. In
addition, Bumibili would not be shielded from A: (a) B has the better right. Section 49 of the WRL
the previous transfer which was in breach of provides that where a negotiable receipt has
faith. (1986 Bar) been issued for goods, no seller's lien or right
of stoppage in transitu shall defeat the rights of
2. X stole certain goods from Y. The goods were then
any purchaser for value in good faith to whom
deposited by X with W, a warehouseman, for which
such receipt has been negotiated, whether
W issued to X a negotiable warehouse receipt.
such negotiation be prior or subsequent to the
Thereafter, X negotiated the receipt to Z, a purchaser
notification to the warehouseman who issued
in good faith and for value. W, upon being informed
such receipt of the seller's claim to a lien or right
of the theft of the goods, and upon demand by Y,
of stoppage in transitu.
delivered the goods to Y, without the receipt being
surrendered to him. Can W be held liable by Z for his (b) The warehouseman cannot be obliged to deliver
subsequent failure to deliver the goods to him? the goods to an unpaid seller unless the receipt
is first validly surrendered for cancellation (Sec.
A: NO. The warehouseman would only be liable for his
49, WRL). This means that the unpaid seller has
failure to deliver the goods to Z if the negotiation
validly reacquired the receipt from the holder
would transfer the right to the possession of the
goods. The negotiation of the receipt by X to Z did
for value (1993 Bar).
368 REVIEWER ON COMMERCIAL LAW BART V — CREDIT TRANSACTIONS 369
6.04. Pledge of Receipt houseman undertakes to deliver the goods to the

order of the person to whom the possession or
Negotiation of the receipt may only h e by way
custody of the receipt has been entrusted, or if,
of pledge. In which case, the pledgee may also enjoy
at the time of such entrusting, the receipt is in
preference. However, the Supreme Court observed
such form that it may be negotiated by delivery
in Bank o f Philippine Islands v. J.R. Herridge (47 Phil
(Sec. 40, WRL).
57), that Section 58 provides within the meaning of
the WRL, "to purchase" includes to take as mortgage Note: Under the second paragraph, even a
or pledge and "purchaser" includes mortgagee and thief of the receipt or one who defrauds another can
pledgee. Thus, "as to legal title to the property covered negotiate the receipt but it should be in such aJfaim
by a warehouse receipt, a pledgee is on the same that he need not forge any .si&nature (See also Sec. 47,
footing as a vendee except that the former is under WRL).
obligation of surrendering his title upon the payment
Examples:
of the debt secured." The Court believed that to hold
otherwise would defeat one of the principal purposes 1. X deposited certain goods with W for which
of the law, i.e,, to furnish a basis for commercial credit. the latter issued a negotiable warehouse receipt
by the terms of which the goods are to be
PROBLEM: - delivered to bearer. The receipt was stolen by
1. X sold a quantity of hemp by quedan to Y who took Y and Y delivered the instrument to Z who has
_________ possession of said quedan. X was not paid by Y for no knowledge of the theft. In this case, Z who
the quedan for it was their agreement that the- price is a bona fide transferee may be protected under
of the hemp would be charged against such quedans. "~Sections40 and 47oFthe WRfc; -------------------
Y delivered the quedans to A Bank to secure his 2. In the first example, the conclusion would be
indebtedness. The day after delivery, Y died. May X different if the receipt is not a bearer receipt.
recover the quedans or their corresponding values? If the goods are to be delivered to the order
A: NO. X may not recover the quedans. A Bank is a of X, it would be necessary for Y to forge the
pledgee of the quedan for value and the right of the signature of X in order to completely negotiate
pledgee cannot be defeated by the unpaid seller. the instrument to Z. Hence, the transfer to Z
would be inoperative if it is based on a forged
X may, however, still recover the price of the indorsement (1989 Bar).
goods from the estate of Y. Death of Y will not excuse
him from his contractual liability up to the extent of
WARRANTIES
his properties.
8.01. NOT GUARANTOR
7. WHO MAY NEGOTIATE A WAREHOUSE RECEIPT?
If the warehouseman failed to deliver the goods,
a) By the owner thereof, or the indorser or one who negotiates for value shall
b) By any person to whom the possession or cus not be liable to the bona fide purchaser. He does not
tody of the receipt has been entrusted by the guarantee the performance of the obligation of the
owner, if, by the terms of the receipt, the ware- warehouseman as the case may be (Sec. 45, WRL).
370 REVIEWER ON COMMERCIAL LAW PART V — CREDIT TRANSACTIONS 371
8,02. WARRANTIES OF TRANSFEROR (Sec. 44} acquire the direct obligation of the warehouse
A person who, for value, negotiates or transfers man to hold possession of the goods for him ac
a receipt by indorsement or delivery, including one cording to the terms of the receipt.
who assigns for value a claim secured by a receipt,
unless a contrary intention appears, warrants: N ote: Prior to the notification of the warehouseman by
the transferor or transferee of a non-negotiable receipt, the
a) That the receipt is genuine; title of the transferee to the goods and the right to acquire
b) That he has a legal right to negotiate or transfer the obligation of the warehouseman may be defeated by
i t ;, the levy of an attachment or execution upon the goods
by a creditor of the transferor or by a notification to the
c) That he has knowledge of no fact which would
warehouseman by the transferor or a subsequent purchaser
impair the validity or worth of the receipt; and
from the transferor of a subsequent sale of the goods by the
d) That he has a right to transfer the title to the transferor.
goods and that the goods are merchantable or fit
for a particular purpose whenever such warran PROBLEMS:
ties would have been implied, if the contract of
the parties had been to transfer without a receipt 1. On January 5, 1984, Juan delivered six (6) crates of
of the goods represented thereby goods to Acme Warehousing Co. and received a non-
negotiable warehouse receipt. On January 14, 1984,
9. NON-NEGOTIABLE RECEIPTS________________________ Juan transferred for value the receipt to Manuel.
Meanwhile, Jose oBtainedfa judgment against Juan for-
Warehouse receipt is a non-negotiable receipt if it states
unpaid debt. A writ of execution followed, by virtue
that the goods received will be delivered to the depositor or
of which the sheriff on June 18,1984 levied on the six
to any other specified person (Sec. 4, WRL).
(6) crates of goods covered by the above receipt. What
Anon-negotiable receipt shall have plainly placed upon are the obligations of Acme Warehousing Co. under
its face by the warehouseman issuing it "non-negotiable," the circumstances?
or "not negotiable." In case of the warehouseman's failure
to do so, a holder of the receipt who purchased it for value A: Acme Warehousing must honor the writ. The non-
supposing it to be negotiable, may at his option, treat such negotiable warehouse receipt does not confer upon the
receipt as imposing upon the warehouseman the same transferee the direct obligation of the warehouseman.
liabilities he would have incurred had the receipt been Prior to the notice to the warehouseman, the right
negotiable (Sec. 7, WRL). of the transferee may be defeated by a writ validly
issued by a competent court (1984 Bar).
9.01. RIGHTS OF TRANSFEREE OF NON-NEGOTIA
BLE RECEIPT (Sec. 42, WRL) 10. WAREHOUSEMAN’S DEFENSES FOR NON-DELIVERY
a) The title of the goods subject to the terms of any OR MISDELIVERY
agreement with the transferor. ^ _ . . / ~ a) ~ Loss or destruction'of the goods without fine
b) The right to notify the warehouseman of the fault of tine bailee; .. •■
transfer to him of such receipt and thereby to b) Failure to satisfy the Bailee's Lien (Sec. 8);
c) failure to surrender the negotiable document' c . 1) Where the warehouseman has been
title (Sec. 8); requested, by or on behalf of the person
lawfully entitled to a right of property of or
d) Lack of willingness to sign acknowledgm ent
possession in the goods, not to make such
(Sec. 8);
delivery (Sec. 10, Act No. 2137), in which
e) Receipt by the bailee of a request by or on behalf case, the warehouseman may, either as a
of the person lawfully entitled to a right of prop defense to an action brought against him for
erty-or possession in the goods, not to make such non-delivery of the goods, or as an original
delivery (Sec. 10); suit, whichever is appropriate, require all
f) The bailee has information that the delivery known claimants to interplead (Sec. 17, Act
about to be made was to one not lawfully entitled No. 2137);
to the possession of the goods (Sec. 10); 2) Where the warehouseman had information
g) Delivery to a claimant with better right; that the delivery about to be made was to
one not lawfully entitled to the possession
b) Attachment or levy of the goods by a creditor of the goods (Sec. 10, Act No. 2137), in
where the document is surrendered or its negoti which case, the warehouseman shall be
ation is enjoined or the document is impounded excused from liability for refusing to
(Sec. 25); ................
deliver the goods, either to the depositor
______i) Where the document of title is attached by a or person claiming under him or to the
creditor (Sec. 26). adverse claimant, until the warehouseman
has had a reasonable time to ascertain the
10.01. In Philippine National Bank v. Sayo, Jr. (G.R. No. 12.9918,
July 9,1998), the Supreme Court adopted the following validity of the adverse claims or to bring
enumeration of the reasons which a warehouseman legal proceedings to compel all claimants
may invoke to legally refuse to effect delivery of the to interplead (Sec. 18, Act No. 2137); and
goods covered by the document of title: 3) Where the goods have already been law
a) That the holder of the receipt does not satisfy the fully sold to third persons to satisfy a ware
conditions prescribed in Section 8 of the Act (See houseman's lien, or have been lawfully sold
Sec. 8, Act No. 2137). or disposed of because of their perishable
or hazardous nature (Sec. 36, Act No. 2137).
b) That the warehouseman has legal title in himself
on the goods, such title or right being derived d) That the warehouseman having a lien valid
directly or indirectly from a transfer made by against the person demanding the goods refuses
the depositor at the time of or subsequent to the to deliver the goods to him until the lien is satis
deposit for storage, or from the warehouseman's fied (Sec. 31, Act No. 2137).
lien (Sec. 16, Act No. 2137).
e) That the failure was not due to any fault on the
c) That the warehouseman has legally set up the part of &e warehouseman, as by showing that,
' title or right of third persons as lawful defense prior to demand for delivery and refusal, the
for non-delivery of the goods as follows: goods were stolen or destroyed by fire, flood,
374 TRANSACTIONS
etc,, without any negligence on Ms part, unless 11.02. Properties that are subject to lien (Sec. 28, WRL)
he has contracted so as to be liable in such case, a) Against all goods, whenever deposited, belong
or that the goods have been taken by the mis ing to the person who is liable as debtor for the
take of a third person without the knowledge or claims in regard to which the lien is asserted;
implied assent of the warehouseman, or some and
other justifiable ground for non-delivery (67 C.J. b) Against all goods belonging to others which
532). have been deposited at any time by the person
: : ‘ 10.02. If the warehouseman withholds delivery of the goods who is liable as debtor for the claims in regard
without any valid reason, he is liable for the loss of to which the lien is asserted if such person had
the goods and the liability cannot be eliminated by been so entrusted with the possession of goods
proof of exercise of due diligence, that a pledge of the same by Mm at the time of
the deposit to one who took the goods in good
faith for value would have been valid.
11. WAREHOUSEMAN’S LIEN
11.03. Loss of Lien (Sec. 29, WRL)
11.01. What claims are included in the warehouseman's
lien? a) By surrendering possession thereof; or
Subject to the provisions of section thirty, a b) By refusing to deliver the goods when a demand
warehouseman shall have a lien on goods deposited or is made with, which he is bound to comply.
__________ on the proceeds there o fjn his hands, for: (1) all lawful
charges for storage and preservation of the goods; 12: ADVERSE CLAIMANT
also for (2) all lawful claims for money advanced, If more than one person claims the title or possession
interest, insurance, transportation, labor, weighing, of the goods, the warehouseman may, either as a defense to
coopering and other charges and expenses in relation an action brought against him for non-delivery of the goods
to such goods; also for (3) all reasonable charges and or as an original suit, whichever is appropriate, require all
expenses lor notice,, and advertisements of sale, and .known claimants to interplead (Sec. 17, WRL).
for sale of the goods where default had been made in
satisfying the warehouseman's lien (Sec. 27, WRL). PROBLEM:
a) Must be stated. It is necessary, however, that the 1. What actions may be taken by the warehouseman in
charges that are present at the time of the issuance case two or more persons claim the same goods in his
of the receipt must be so stated in the receipt with warehouse?
the amounts thereof specified. If the existing A: The warehouseman may perform the following: (1)
charges are not stated, the warehouseman shall he can refuse to deliver the goods to anyone of them
have nolien thereon. He shall have a lien only for until he had reasonable time to check the validity of
charges for storage of goods subsequent to the the claims; (2) he may file an action for interpleader
- - — - dat e of the receipt unless the receipt expressly ' and'allow the claims to prove their claim or in case
enumerated other charges for which a lien is an action is filed against him, set up the defense that
claimed (Sec. 30, WRL). there are two or more claimants (1976 Bar),
PARI V — CREDIT TRANSACTIONS
B. GENERAL BONDED WAREHOUSE LAW

If goods are delivered to a warehouseman by the owner (Act No. 3893, R.A. No. 247)
or by a person whose act in conveying the title to them to 1. OBLIGATIONS OF WAREHOUSEMAN
a purchaser in good faith for value would bind the owner,
and a negotiable receipt is issued for them, they cannot A warehouseman cannot receive goods for storage,
thereafter, while in the possession of the warehouseman, be milling or commingling without performing the following:
attached by garnishment or otherwise, or be levied upon a) He must secure a license from Bureau of Com
under an execution unless the receipt be first surrendered merce (Dept. of Trade and Industry).
to the warehouseman or its negotiation enjoined (Sec. 25,
b) He must file a bond equivalent to 3 3 1 / 3% of the
WRL).
market value of maximum quantity of goods to
13.01. Creditor's remedies to reach negotiable receipts be received for the protection of the depositors.
A creditor whose debtor is the owner of a c) 5 He must not discriminate and must open his
negotiable receipt shall be entitled to such aid from warehouse to the public.
courts of appropriate jurisdiction, by injunction and
d) In case of damage to the goods because the
otherwise, in attaching such receipt or in satisfying
warehouseman accepts goods in excess of the
the claim by means thereof as is allowed at law or in
capacity of his warehouse, the latter is liable
equity in these islands in regard to property which
in the amount equivalent to double the market
cannot readily be attached or levied upon by ordinary*1
value of the goods.
______legal process (Sec. 26, WRL).
-e)— ihe-goodîustheinsiuM agaillStfirei________
PROBLEM :
2. The warehouse is not covered by the law if the owner
1. XYZ Corporation receives from A 30 bales of cotton for
merely rents space to a certain group of persons because the
deposit in the said warehouse for which a negotiable
law covers warehouses that accepts goods for: (a) storage,
receipt was issued. While the goods were stored in
(b) milling, and (c) commingling with obligation to return
the warehouse, C obtains judgment against A for the
the same quantity or to pay their value (1974 Bar).
recovery of a sum of money. The sheriff proceeded to
levy upon the goods and directed the warehouseman C. LETTERS OF CREDIT
to deliver the goods, a) Is the warehouseman under
obligation to comply with the sheriff's order? b) What 1. LETTERS OF CREDIT
is the remedy of the attaching creditor?
A letter of credit is an engagement by a bank or other
A: a) NO, the warehouseman is not under obligation person made at the request of a customer that the issuer
to comply. The warehouseman can be compelled to will honor drafts or other demands for payment upon
comply only if the negotiable receipt is surrendered compliance with the conditions specified in the credit
to him or if its negotiation is enjoined (Sec. 25, WRL). (Prudential Bank v. 1AC, 216 SCRA 257 [1992]).
b) The creditor may seek for the attachment of the
receipt or compel A to deliver the receipt by injunction 2. GOVERNING LAWS
or otherwise (Sec. 26, WRL; see 1981 Bar). a) Code of Commerce on Letters of Credit.
REVIEWER ON COMMERCIAL LAW 379
PART V — CREDIT TRANSACTIONS
I AftMe 568 '-provides .-that .a letter .of credit known issuing bank; the confirming bank is
Stafibek .s :\ ,c l -a .. .
directly liable to pay the seller-beneficiary;
1) Issued in favor of a definite persomand not ili) A paying bank which undertakes to encash
to-order; and the drafts drawn by the exporter/seller;
. 2) C:Limited t©;a fixed, and.specified amount or Further, instead of going to the place of the
to oiie or more undetermined'amount but issuing bank to claim payment, the buyer may
" iwtb imximumdimit Stated exactly approach another bank, termed the negotiating
b) Customs, primarily those embodied in the Uni bank to have the draft discounted (Ibid.; see also
form Customs and Practice for Documentary Charles Lee v. CA, G.R. No. 117913, Feb. 1,2002).
L Credits-(UCP for short) which-was adopted by
Note: Unless the contrary is expressly pro
the International Chamber of Commerce (Bank
vided for, the liability of the issuing bank is soli
of America, NT & SA v. CA, 228 SCRA 357 [1993]).
dary with the buyer-applicant (MWSS v. Daway,
G.R. No. 160732, June 21,2004).
3. PARTIES ..
There are at least three (3) parties in a Letter of Credit 4 INDEPENDENT CONTRACTS
Transaction:
There are at least three (3) distinct and independent
a)__ The buyer, who procures the letter of credit and contracts involved in a letter of credit namely: (1) the
Qblig£S.Jiims£]f_fQ_xei.mbuj:s£__the issuing bank ----- contract of sale between the buyer and the seller, (2) the
upon receipt of the documents of title; contract of the buyer with the issuing bank, and (3) the
b) The bank issuing the letter of credit known as letter of credit proper. In the second contract— between the
"issuing bank," which undertakes to pay the buyer and the issuing bank — the bank agrees to issue the
seller upon receipt of the draft and proper docu letter of credit in favor of the seller subject to reimbursement
ments of titles and to surrender the documents or payment by the buyer of whatever is paid to the seller
Vto, the-buyer upon reimbursement; and' plus proper consideration agreed upon by the parties. In
the third contract which is the letter of credit proper, the
c) The seller, who in compliance with the contract
bank obligates itself to pay the seller or to the order of the
of sale ships-the goods to the buyer and delivers seller (that is, it will honor the bills or drafts drawn by the
the .documents -of title and draft to the issuing seller) after presentation to the bank of tender documents
bank to recover payment (Ib id .).
stipulated upon, which normally includes the document of
[ _ - -The number of the parties may be increased title (Keng Hue Paper Products v. CA, 286 SCRA 257 [1998]).
and may include:
401. INDEPENDENCE PRINCIPLE
l.l :.t):y vf^n adyMhgj|iibtifylttg| bank which may
, b e utilized to-convey to .the,'seller-the exis-
-- ■ It is important to emphasize in this connection
- - --- - - -fence of the credit; - - - - - - - ........... - - - - that few things are more clearly, settled in law
than that the contracts involved in- a letter of credit
ii) A confirming bank which will lend cre- arrangement are to be maintained in a state of
in ; : :<.4enmtwiheletter ofcredit issued by a lesser perpetual separation. The undertaking of the bank
of the Credit. Documents that are not stipulated as

to pay, accept, and pay drafts or negotiate and/or
tender documents will not be examined (Art. 13, UCP
fulfill any obligation tinder the Credit is not subject tc
500; Feati Bank & Trust Co. v. CA, G.R. No. 94209, April
claims ox defenses by the Applicant resulting from his
30,1991).
relationship with the issuing bank or the beneficiary.
In the same manner, the beneficiary can, in no case,
5. KINDS OF LETTERS OF CREDIT
avail himself of the contractual relationships existing
between the banks or between the applicant and the a) Confirmed LC — whenever the beneficiary
issuing bank (Keng Hua Paper Products v. CA, ibid.). stipulates that the obligation o f the opening
bank shall also be made the obligation of another
4.02. A direct consequence of the "independence principle"
bank (also bank that notifies) to himself.
is the rule that banks only deal with documents and
not with goods, services or obligations to which they b) Irrevocable LC — is a definite undertaking on
relate (BPI v. De Reny Fabric, 35 SCRA 256). Example: the part of the issuing bank and constitutes the
The bank has no duty to verify whether what has engagement of that bank to the beneficiary and
been described in the letters of credit or drafts or bonafideholders of drafts drawn and or documents
shipping documents actually tallies with what was presented thereunder, that the provisions for
loaded aboard the ship (See Transfield Phils, v. Luzon payment, acceptance, or negotiation contained
Hydro Corp., 443 SCRA307 [2004]; Land Bank v. Monet's in the credit will be duly fulfilled, provided that
Export Mfg. Corp., G.R. No. 161865, March 10, 2005). all the terms and conditions of the credit are
complied with.
4.03. Fraud Exception
~c) Revolving Letter of Lredic — one ihal provides for
Under the "independence principle," the appli renewed credit to become available as soon as the
cant cannot enjoin the payment of the obligation of opening bank has advised that the negotiating
the issuing bank under the Letter of Credit based on or paying bank that the drafts already drawn
any irregularity or non-performance of an obligation. by the beneficiary have been reimbursed to the
The exception is when there is fraud or forgery in the opening bank by the buyer.
underlying transaction or the tender documents (See d) Back-to-Back Letter of Credit — a credit with iden
Transfield Phils, v. Luzon Hydro Corp., 443 SCRA 307 tical documentary requirements and covering
[2004]). the same merchandise as another letter of credit,
4.04. Doctrine of Strict Compliance except for a difference in the price of the mer
chandise as shown by the invoice and the draft.
The Issuing Bank or the Confirming Bank, as the The second letter of credit can be negotiated only
case may be, must examine the Tender Documents after the first is negotiated.
(including shipping documents) and must make sure
e) Standby Letter of Credit —■a security arrangement
that the terms and conditions of the Letter of Credit
for the performance of certain obligations. It can
- ^ are strictly complied with.: Thereds: no discretion on
T TT b e drawn.-against only if another business trans
the part of the bank to waive any requirement. The
action is not performed. It may be issued in lieu
tender documents must not only be complete but they
of a performance bond.
must on their faces be in compliance with the terms
1) Thus, this should be distinguished from d) "Security Interest" means a property interest in goods,
an ordinary commercial credit where the documents, or instruments to secure performance of
beneficiary will recover if he can show some obligations of the entmstee or of some third
that he performed his obligation (delivery persons to the entruster and includes title, whether or
of the purchased goods). In a Standby LC, not expressed to be absolute, whenever such title is in
the beneficiary will prove that the obligor substance taken or retained for security only.
failed to perform the secured obligation.
Example: The contractor failed to construct WHAT IS A TRUST RECEIPT?
. thehuildingon time.
A trust receipt is a security transaction intended to
D. TR U ST RECEIPTS LAW aid in financing importers or dealers in a merchandise by
allowing them to obtain delivery of goods under certain
(P.D. No. 115)
covenants.
1. BACKGROUND - 2.01. The sale of goods, documents or instmments by a
person in the business of selling goods, documents
Abank that issues a letter of credit has the right to ask for
or instmments for profit who, at the outset of the
reimbursement from the applicant-buyer. This obligation to
transaction, has, as against the buyer, general property
pay the issuing bank may also be secured by trust receipts.
rights in such goods, documents or instruments, or
Under the law, the bank becomes the entruster of the goods
who sells the same to the buyer on credit, retaining
----- white thp hnypr-importer is the entrustee. The goods will in
effect be released by the bank to the buyer by the delivery of
the purchase price, does not constitute a trust receipt
the document of title/bill of lading covering the goods. The
transaction and is outside the purview and coverage
buyer as entrustee is obligated to sell the goods and to apply of the Trust Receipt Law (Sec. 4, Trust Receipts Law or
the proceeds thereof to the payment of tihe loan extended by TRLfor short).
the entruster-bank. The buyer will only get the balance of
the proceeds of the sale after making such application. 2.02. Usually the entruster releases the goods to the
entrustee so that the latter may sell the goods.
a) - "Entrustee" shall refer to the person having or taking However, the purpose is not limited to sale (DBF v.
possession *of goods, documents, or instruments Prudential Bank, 475 SCRA623 [2005]; Chingv. Secretary
under a trust receipt transaction, and any successor- o f Justice, 481 SCRA 601 [2006]). Hence, the goods
in-interest of such person for the purpose or purposes may also be released for other purposes substantially
specified in the trust receipt agreement. equivalent to the following:
b) "Entruster" shall refer to the person holding title over 1) Their sale or the procurement of their sale;
the goods, documents, or instruments subject of a
trust receipt transaction, and any successor-in-inter- 2) Their manufacture or processing with the pur
est of such person. pose of ultimate sale, in which case the entruster
- —- retains Jhis-title overdbe said goods whether in
c) "Goods^shalkMcIude diattels and personal property their original or processed form until the en
other than money, things in action, or things so affixed trustee has complied fully with his obligation
to land as to become a part thereof. under the trust receipt; or
3) The loading, unloading, shipment or transship goods and apply the proceeds of the sale to the
ment or otherwise dealing with them in a man expenses of sale and retaking of the goods and
ner preliminary or necessary to their sale. the indebtedness; and (3) as an alternative to
retaking possession and sale, the entruster can
N ote: The entrustee may still be criminally liable under file a case to collect the indebtedness secured by
the TRL even if the goods that were released by virtue of the
the trust receipt.
trust receipt were not resold but were used as spare parts
for machineries. Note: The obligation of the entrustee is not
extinguished in case of repossession and sale of the
3. OBLIGATIONS OF: (A) ENTRUSTER AND goods, the entrustee is entitled to any surplus while
(B) ENTRUSTEE the entruster can still recover the balance of the
indebtedness in case there is a deficiency.
a) Entruster — releases the possession of the goods
to the entrustee upon the latter's execution of
4. NO AGENCY IS ESTABLISHED
the trust receipt.
No agency relationship is established when the
b) Entrustee — entrustee executes the trust receipt. However, an entrustee's
1) Binds himself to hold the goods in trust for breach will make him liable for estafa. As held by the
the entrustor; Supreme Court in People v. Cuervo (104 SCRA 312), the
________ ____ 21 Sell or otherwise dispose of the goods and enactment of Presidential Decree No. 115 within its penal
to turn over to the entrustor the amount
----- sandlQD_iS-_ in reality, merely confirmatory of existing
jurisprudence on situation covered by Article 315(l)(b) of
still owing; and
the Revised Penal Code. The entrustee in a trust receipt who
3) To return the goods if unsold. failed to account for the proceeds of the goods sold or to
Note: The entrustee is still liable to pay the return the goods, as the case may be, is guilty of estafa even
entruster (bank) even if the goods were returned to where the offense was committed before the promulgation
the latter (Landl & Co. [Phil] v. Metrobank, G.R. No. of Presidential Decree No. 115 on June 29, 1973. But unlike
159622, July 30, 2004). the old rule, Presidential Decree No. 115 now expresses
a criminal liability on the part of responsible officers of
3,01. Remedies of the Entraster corporations and juridical entities.
a) If the goods are sold or disposed by the entrustee
and the latter did not remit the proceeds: (1) 5. NATURE OF ENTRUSTER’S TITLE
file estafa case against the entrustee; or (2) file
a) The entruster-bank acquires "security interest"
a separate case to collect the proceeds or the
in the goods as holder of a security title for the
money obligation secured by the trust receipt.
advances it had made to the entrustee (Melvin
b) If the goods are unsold and are still with the - Colinares v. CA, G.R. No. 90828, Sept. 5, 2000). By
entrustee: (1) cancel the trust and take possession fiction of law, the ownership of the merchan
of the goods, documents or instruments subject dise continues to be vested in the person who
of the trust; (2) after taking possession, sell the had advanced payment until he has been paid in
CREDIT 1'RANS ACTIONS
such title is in substance taken or retained for security

full or if the merchandise has been already sold,
only (Sec. 3[h], P.D. No. 115).
the proceeds of the sale should be turned over
to him by the importer or by his representative a) A purchaser in good faith and for value (from an
or successor-in-interest. To secure that the bank entrustee with a right to sell) acquires the goods,
shall be paid, it takes full title to the goods at documents or instrument free from the entrust-
the very beginning and continues to hold that er's security interest (Sec. 11, P.D. No. 115).
title as his indispensable security until the goods
b) The security interest of the entruster prevails as
are sold and the vendee is called upon to pay
against all creditors of the entrustee for the dura
for them; hence, the importer has never owned
tion of the Trust Receipt Agreement (Sec. 12, P.D.
the goods and is not able to deliver possession
No. 115).
(Ibid.).
b) However, since the interest of the entruster is a
PROBLEMS:
mere security interest:
1. In 1973, LTM opened an irrevocable commercial letter
1) The entruster shall not, merely by virtue of
of credit with P Bank for US$498,000. This was in
such interest, be responsible as principal or
connection with its importation of 5,000 spindles for
as vendor under any sale or contract to sell
spinning machinery with drawing frame, simplex fly
made by entrustee (Sec. 8, P.D. No. 115).
frame, ring spinning frame and various accessories,
________________ 21 The entrustee bears the loss of the goods ______spare parts andrtooLgauge. These were released to
after delivery to him (Sec. 11, P.D. No. 115). LTM under covering 'Trust receipts" it executed in
c) Note, however, that in Development Bank of the favor of P Bank. LTM installed and used the items in
Philippines v. Prudential Bank (G.R. No. 143772, its textile mill. On Sept. 10, 1980, D Bank granted a
Nov. 22, 2005), the Supreme Court sustained foreign currency loan in the amount of US$4,807,551
the view that the entrustee is not the owner of to LTM. To secure the loan, Litex executed real
the property in question. Hence, the entrustee estate and chattel mortgages on its plant site in
cannot mortgage the property. However, it is Montalban, Rizal, including the buildings and other
believed that the entrastee is still the owner and improvements, machineries, and equipment there.
the entruster acquires only security interest. Among the machineries and equipment mortgaged
The entrustee cannot mortgage the property in favor of D Bank were the articles covered by the
not because he is not the owner but because he "trust receipts." Was the mortgage over the properties
does not have free disposal of the property to be covered by the trust receipt valid?
mortgaged. A: NO. The mortgage was not valid with respect to the
5.01. Security Interest machineries and equipment covered by the trust
receipts. LTM did not have free disposal nor the
Security interest means a property interest in
authority to freely dispose of the articles. Hence, the
- goods/■'documents or instruments:rto -secures per**
formance of some obligations of the entrustee or of inclusion in the mortgage was void and had ho legal
effect (DBP v. Prudential Bank, G.R. No. 143772, Nov.
some third persons to the entruster and includes title,
22,2005).
whether or not expressed to be absolute, whenever
88 REVIEWER ON COMMERCIAL LAW PARI V — CREDIT TEA NS A CTIC) NL 3A
2. Sometime in 1989, RTMC was granted a credit line by nature and no criminal liability under the Trust Receipts
H Bank for a credit line of P8 million. RTMC availed Law can be imposed.
of the credit line by making numerous drawdowns
for the importation of raw materials, each drawdown E. BULK SALES LAW
being covered by a separate promissory note and (Act No. 3952)
trust receipt over the raw materials. When the
notes became due, RTMC offered to turnover the 1. WHEN IS A SALE CONSIDERED A SALE IN BULK?
imported materials arguing that the importation A sale is a sale in bulk within the contemplation of the
of raw materials under the credit line was with a Bulk Sales Law when: (a) there is a sale, transfer, mortgage
grant of option to them to turnover to the bank the or disposition other than in the ordinary course of trade and
imported raw materials should these fail to meet the regular prosecution of the business; (b) the sale is of all
their manufacturing requirements. However, the or substantially all of the business or trade; or (c) when the
bank refused to accept the same, until the materials sale is of all or substantially all of the fixtures and equipment
were destroyed by a fire which gutted down RTMC's used in business (Sec. 2, Bulk Sales Law or BSLfor short).
premises. RTMC claims that its obligation was
extinguished with the destruction of the materials. Is 2. WHAT IS THE PURPOSE OF THE BULK SALES LAW?
RTMC still liable?
It seeks to prevent the defrauding of creditors by the
A: YES. RTMC is still liable despite the destruction of the secret sale or disposal in bulk of all or substantially all of a
goods. The entruster bank did not become the owner merchant's stock of goods.34
orSFgoodFmd^TelrastreceiptwBsm'terely-^tgned’
as a security for the loan. Loss of the property that 3. WHAT ARE THE FORMALITIES REQUIRED BY THE
served as a security did not extinguish the obligation. BSL?
The entrustee will then bear the loss of the goods
a) The sale in bulk to be accompanied by sworn
or property (Rosario Textile Mills Corporation v. Home
statement of the vendor/mortgagor listing the
Bankers Savings and Trust Co., supra).
names and addresses of, and amounts owing to,
creditors; .
6. NOVATION OF AGREEMENT
b) The sworn statement shall be furnished to the
In Pilipinas Bank v. Alfredo T. Ong (G.R. No. 133176, Aug. buyer;
8, 2002), the Supreme Court ruled that a Memorandum of
c) The seller is required to prepare an inventory of
Agreement entered into between the bank (entruster) and
stock to be sold; and
the entrustee extinguished the obligation under the existing
trust receipt because the agreement did not only reschedule d) The seller is required to notify the creditors of
the debts of the entrustee but it provided principal projected sale at least 10 days before such sale
conditions which are incompatible with the trust agreement. (Secs. 3-4, BSL).
For instance, the agreement provides for a term of 7 years;
it is secured by mortgage/ and it provides for different rates 4. IN WHAT CASES ARE THE FQRMALITIES/REQUIRE-
of interests and charges. Hence, the liability for breach of MENTS NEED NOT BE COMPLIED WITH?
the Memorandum of Agreement would be purely civil in a) Sale is made in the ordinary course of business;
b) There is,a waiver from all the creditors and must c) A third person who is not a party to the principal
1
be written; obligation may mortgage his property to secure
the obligation of the debtor. It is not required that
c) Sale is by virtue of a judicial order; and he benefited from, the principal contract (Via. De
d) Those sold by assignee in insolvency or those Jayme v. CA, 390 SCRA 380 [2002]).
beyond the right of creditors. d) The mortgage is indivisible. When several
things are given to secure the same debt in its
5. WHAT ARE THE EFFECTS OF THE VIOLATION OF BSL? entirety, all of them are liable for the debt and
the creditor does not have to divide his action by
Violation of BSL makes the sale in bulk valid between
distributing the debt among the various things
the parties, void as to affected creditors.
mortgaged. Even if only part of the debt remains
a) Sale in bulk is void as to creditors; unpaid, all the things are liable for such balance
(Vda. De Jayme v. CA, ibid.).
b) Purchaser holds property in trust for seller; and
e) The mortgage secures only the amount stated in
c) Purchaser is liable to seller's creditors for prop
the mortgage deed which may be less than the
erties forming part of bulk, and already disposed
amount of the principal obligation (Landrito, Jr.
by him. v. CA, 466 SCRA 107 [2005]).
F. MORTGAGE 2. REAL ESTATE MORTGAGE (NCC and ACT NO. 3135)

----- 2.01. SUBJECT-------------------------------------------------------------
1. REQUISITES COMMON TO REAL ESTATE MORTGAGEr
CHATTEL MORTGAGE AND PLEDGE (Art. 2085, New Only immovable properties or real right over
Civil Code or NCC for short) such immovable may be the subject of a real estate
mortgage. Buildings are immovable properties, hence
a) The mortgage must be constituted to secure the
they can be separately mortgaged.
fulfillment of a principal obligation.
2.02. REGISTRATION
b) The mortgagor must be the absolute owner of
the thing mortgaged. A real estate mortgage must be registered with
the Register of Deeds where the subject property is
c) The mortgagor must have free disposal of the located in order to affect third persons. However, an
property. unregistered mortgage is valid between the parties.
1.01. FEATURES OF MORTGAGE 2.03. MORTGAGEE IN GOOD FAITH
a) The mortgage cannot exist without a valid prin : A mortgagee will be considered in good faith if
cipal obligation (Arts. 2086 and 2052, NCC). he relies on the face of the Torrens title. A mortgagee
___ __ Jb.).. „The considerationJfor the principaL obligation without notice will not be affected by the claim of
third persons. - - - •— -
‘ " •" is the consideration for the mortgage (Pilipinas
Marble Corporation v. Intermediate Appellate Court, Exception: Banks cannot rely merely on the title.
142 SCRA 180 [1986]). By the nature of their 'functions, banks are required
■
to go beyond the title because they are required to the absence of stipulation, the general rule is that the
exercise the highest degree of diligence. For example, mortgage must be limited to. the amount mentioned
they are required to investigate the title and the in the mortgage (Quintanilla v. CA, 279 SCRA 397
property (Ursal v. CA, 473 SCRA 58 [2005]). [1997]).
2.04. NATURE 2.07. FORECLOSURE OF MORTGAGE
The mortgage constitutes an encumbrance on The three (3) common types of forced sales
the real property. The right of the mortgagee is a right arising from a failure to pay a mortgage debt are:
in rem. The registered mortgage follows the property
1) An extrajudicial foreclosure sale, governed
even if there is a change of ownership.
by Act No. 3135;
a) Since only security interest is acquired, the right
2) A judicial foreclosure sale, regulated by
to possession and jus disponendi is not included
Rule 68 of the Rules of Court; and
unless otherwise stipulated (Ramirez v. CA, 409
SCRA 133 [2003]). 3) An ordinary execution sale, covered by
Rule 39 of the Rules of Court (Concepcion v.
b) The first registered mortgagee has superior CA, 274 SCRA 614 [1997]).
right over junior mortgagees or attaching credi
tors (Rizal Commercial Banking Corp. v. CA, 289 An ordinary execution sale covered by Rule 39
SCRA 292 [1998]). The Manual of Regulations of the Rules of Court is the result of a personal action
____________ for Banks (MORB) provides that banks may also for collection of debt or specific performance. This
grant loans on the security of junior mortgages remedy is alternative to foreclosure. If the mortgagee
on real estate. However, the sum total of the loan opts to foreclose the real estate mortgage, either
to be granted and the outstanding loan on the judicially or extrajudicially, he thereby waives the
senior mortgage must not exceed the loan value action for collection of the debt and vice versa (BPI
of the subject real estate based on the appraisal Savings Bank, Inc. v. Vda. de Coscolluela, 493 SCRA 472
to be made by the junior mortgagee (Sec. X311.1, [2006]).
MORB). 2.08. EXTRAJUDICIAL FORECLOSURE (ACT NO. 3135
2.05. AFTER-ACQUIRED PROPERTY AND SUPREME COURT CIRCULAR A.M. NO. 99-
10-05-0)
The parties may stipulate that after-acquired
properties are automatically included in the mort a) Special Power Necessary. Extrajudicial foreclo
sure under Act No. 3135 is available only if there
gage. Thus, the parties may stipulate that all
is an express authority in the real estate mort
buildings, machineries and equipment attached to the
gage authorizing such extrajudicial sale (Sec.
mortgaged property shall be subject to the mortgage
1, Act No. 3135; Casano v. Magat, 374 SCRA 508
(Mendoza v. CA, G.R. No. 116710, June 25, 2001).
[2002]).
- 2.06. AFTER-INCURRED OR FUTURE OBLIGATIONS
b) Petition. The extrajudicial foreclosure of the real
The Deed of Real Estate Mortgage may expressly estate mortgage is initiated by filing a Petition
- provide th atit may secure future advancements. In • with the Executive Judge through the Clerk of
r e v ie w e r o n c o m m e r c ia l l a w PART V — CREDIT TRANSACTIONS 395
Court who is also Ez Officio Sheriff of the City or date, there must be another posting and
Province where the property is located (AM. 99- publication of the notice of sale for the new
10-05-0). date, otherwise the sale will be considered
Note: The same procedure is prescribed for the extra invalid (Ouano v. CA, 398 SCRA 525 [2003]).
judicial foreclosure of chattel mortgage -and pledge. 4) Personal notice to the mortgagor-debtor is
NOT necessary.
c) There is only one filing fee regardless of the num
ber of properties to be foreclosed. However, the 5) While posting is necessary, a Certificate of
venue of the extrajudicial foreclosure proceed Posting is not indispensable. The certificate
ings is the place where each of the mortgaged may be an evidence if the fact that there
property is located (AM. 99-10-05; Benguet Man was posting is an issue or in question.
agement Corporation v. CA, 411 SCRA 347, 354
f) Price. The fact that the mortgaged property is
[20031).
sold at an amount less than its actual market
d) Requirements of Notice and Publication value is not a ground to invalidate the foreclo
In extrajudicial foreclosure under Act No. sure sale so long as the price is not shocking to
3135, what the Act requires are: the conscience (Suico Rattan & Buri Interiors, Inc.
v. CA, 490 SCRA 560 [2006]).
1) The posting of notices of sale in three public
places; and a) The mortgagee-creditor can recover the de-
-----------------------ficiency if the price of the sale is not suffi-
-------------—2)— The publication of the notice of sale in <T cient to pay for the entire debt or obligation.
newspaper of general circulation (Concep
cion v. CA, supra). g) Possession after Foreclosure. The mortgagor
shall remain in possession of the real property
e) Other Rules on Notice and Posting
even after foreclosure. However, the winning
1) Non-compliance with the posting and pub bidder or purchaser may file a petition in court
lication requirement will render the sale for a writ of possession to obtain possession of
null and void. the property even before the expiration of the
However, the mortgagor may be redemption period (Sec. 7, Act No. 3135).
barred by estoppel or laches from claiming M) Redemption. The debtor-mortgagor can redeem
that the required posting in three (3) public the property within one (1) year from the date
places has not been complied with (MTBTC the certificate of sale is registered with the Regis
v. Wong, G.R. No. 120859, June 26, 2001). ter of Deeds (Sec. 6, Act No. 3135).
2) Posting must be in three (3) public places
N ote: If the mortgagee is a bank, the same rule applies
but it is not necessary that notice is posted
_ in the mortgaged property. : -------- but only.for natural persons. If the mortgagee is a juridical
person, the mortgagor can redeem the property within
3) If the original date of the sale stated in three (3) months from foreclosure but not later than the
the notice of sale is transferred to another registration of the certificate of'sale.
- ■ . REVIEWER-QN COMMERCIAL LAW PART V — CREDIT TRANSACTIONS 397
,'w ^ w ; 1) The:redemption price under Act No. 3135 is the c) Machinery — if any of the following is absent:
purchase price plus interest of one percent (1%) (1) installed by the owner; (2) intended by the
..... ‘p e r month and taxes. owner of the tenement for an Industry or work
being carried on in a building or piece of lands;
............. E xception ; T h e redemption price is the and (3) which tends directly to meet the needs of
::: -whote,obligation secured by the mortgage if the the said industry or works (Art. 415[b], NCC). If
mortgagee-is*bank. - -
all of the requisites are present, the machinery is
2) There must be tender of the whole redemption real and is not, as a rule, proper subject of a chat
price plus interest in order to validly exercise the tel mortgage. .
right of redemption. However, tender using a
Thus, machinery installed by the lessee on
check is sufficient.
the leased premises may be the subject of a chat
3. CHATTEL-MORTGAGE' fAct Wo. 1508) * tel mortgage (Davao Sawmill v. Castillo, 61 Phil.
709).
A chattel mortgage is an accessory contract by virtue
of which personal property is recorded in the Chattel d) Vessels — mortgage is recorded in the office of
Mortgage Register as security for the performance of an the Philippine Coast Guard (now the Maritime
obligation (Art. 2140, NCC). Industry Authority) to be effective as to third
persons; not necessary to be recorded in the Of
a)Not Conditional Sale. The original provisions fice of the Registry of Deeds.
of the Chattel Mortgage Law consider chattel
______________ .mortgage as a conditional "saferThis old view~ e) Motor Vehicles — mortgage registered in LTO (for
has been expressly repudiated by Article 2140 of vehicles used for public services).
the New Civil Code (Serra v. Rodriguez, 56 SCRA f) Buildings — they cannot, as a rule, be subject of
538).
chattel mortgage. They are real properties under
There is no real analogy between a chat Article 415(1) of the New Civil Code even if they
tel mortgage contract and a conditional sale, as are houses of mixed materials (Tumalad v. Vicen-
understood in Civil Law. Itis merely a security. cio, 41 SCRA 143 [1971]) or if the building is on
To regard it as a conditional sale is to rattle the rented land (Makati Leasing and Finance Corp. v.
bones of an antiquated skeleton from which all Wearever Textile Mills, 122 SCRA 296 [1983]).
semblance of animate life lias long since? depart
ed (Bachrach Motor Co. v. Summers, 4 Phil. 3). Exception; The chattel mortgage over a
3.01. SUBJECT MATTER building is considered valid as between the par
ties on the basis of estoppel but not against third
a) It covers personal or movable properties con persons (Evangelista v. Alto Surety & Ins. Co., 103
templated under Articles 416 and 417 of tike New Phil. 401 [1958]).
Civil Code including shares of stocks and inter
est in business. - \ - 3J2.„ :AFTE1-ACQUIRED.PROPERTIES ; -
b) Shares o f stocks -—chattel mortgage thereon need a) Chattel mortgage shall be deemed to cover only
not be registered in the stock and-transfer book. the property'described .-therein and not like or
398 REVIEWER ON COMMERCIAL LAW PART V —•CREDIT TRANSACTIONS 399
substituted property thereafter acquired (Sec, 1) Registration creates a lien that follows the
7[4], Act No. 1508; Tsai v. CA, 366 SCRA 324 property and serves as notice to third per
[2001]). sons (Northern Motors, Inc. v. Coquia, 68
b) The rule regarding after-acquired properties SCRA 374 [1975]).
does not apply to stores that are open to the 2) Unregistered mortgage is binding between
public. A stipulation in the chattel mortgage the parties but not on third persons (Pili
which includes goods that are acquired in pinas Marble Corp. v. I AC, 142 SCRA 180
renewal of or in substitution of goods on hand [1986]).
when the mortgage was executed is valid and
b) Affidavit of Good Faith. It is a subscribed state
binding (Northern Motors, Inc. v. Coquia, 66 SCRA
ment in a contract of chattel mortgage wherein
415 [1975]).
the parties severally swear that the mortgage is
3.03. AFTER-INCURRED OBLIGATIONS made for the purpose of securing the obligation
specified in conditions thereof, and for no other
A chattel mortgage can cover only obligations
purpose, and that the same is a just and valid ob
existing at the time the mortgage is constituted. It
ligation and one not entered into for the purpose
cannot cover after-incurred obligations.
of fraud (Sec. 5, Act No. 1508).
In a pledge, real estate mortgage, or antichresis,
1) The Affidavit of Good Faith gives the mort
after-incurred obligations may be secured so long as
gage a preferred status, that is, it enjoys
______these future debts are accurately described. A chattel
mortgage can only cover obligations existing at the
(Cebu International Finance Corp. v. CA, 268
time the mortgage is constituted. Promise expressed in
SCRA 178 [1997]).
a chattel, mortgage to cover debts yet to be contracted
may be binding but security itself arises only after 2) Even in the absence of the affidavit, the chat-
amending the old contract conformably with the form M mortgage is v a M a s between the parties.
prescribed by the Chattel Mortgage Law. This rule is However, it is not valid as to third persons
the inference from the language of the Affidavit of including other creditors or mortgagees or
Good Faith (Acme Shoe Rubber and Plastic Cory. v. CA, pledgee (Phil Refining Co. v. Jarque, 61 Phil.
260 SCRA 714 [1996]). 229 [1935]).
3.04. FORMALITIES 3.05. Right of Redemption
a) Registration. It must be registered in the Chattel a) The following may redeem if the condition of
Mortgage Register of the Register of Deeds the mortgage is broken: (1) the mortgagor; (2)
where the mortgagor resides or if he resides in a person holding a subsequent mortgage; or (3)
the Philippines in the place where the property a subsequent attaching creditor (Sec. 13, Act No.
is situated (Sec. 4, Act No. 1508). If the place of ■1508).
residence and the place where the property is b) ' However, there is no right of redemption af
situated are different, they must be registered in ter the foreclosure sale (Cabral v. Evangelista, 28
the registers of both province or city (Ibid.). SCRA 1000 [1969]).
8,06. Deficiency after Foreclosure obligation (PCI Leasing v. Girajfe-X Creative

Imaging, Inc., G.R. No. 142618, July 12,2007).
Since, a chattel mortgage is just a security, fore
closure thereof will not prevent the mortgagee from b) Alternative Remedies. The remedies are alter
recovering any deficiency that may result after apply native, not cumulative — the exercise of one
ing the proceeds of the foreclosure sale to the obliga bars exercise of another unless it was not
tion (Bicol Savings & Loan Association v. Guinhawa, 188 actually fully exercised. For instance, the filing
SCRA 642 [1990]). of the collection case bars foreclosure. However,
recovery of the property through a replevin case
Exception: When the transaction secured is a
preparatory to foreclosure will not bar the other
sale of personal property on installment basis under
remedies if there was no actual foreclosure.
Article 1484 of the New Civil Code, otherwise known
as the "Recto Law." c) Effect of foreclosure on deficiency. Foreclosure
of chattel mortgage on the things sold shall bar
G. RECTO LAW recovery of any deficiency. Thus, seller cannot
(Art. 1484, NCC) recover from guarantor. However, if there is a
real estate mortgage over another property, the
1. In a contract of sale of personal property on installment basis, foreclosure thereof will not bar recovery of any
the vendor may exercise any of the following remedies: (a) deficiency because he is in effect availing of the
exact fulfillment of the obligation, should the vendee fail to remedy of exacting fulfillment of the obligation
----- pay; (b) cancel the sale, should the vendee's failure to pay _____________ ____________________________________ _______
cover two or more installments; and (c) foreclose the chattel d) Waiver. If seller-mortgagee opts to exercise rem
mortgage. edy of exacting fulfillment of the obligation, he
2. Rules: shall be deemed to have waived his right as a
mortgagee but may still levy on the mortgaged
a) When applicable. The law applies only to sale of property.
personal property in installments (hence, it does
not apply to a simple loan). H. FINANCIAL REHABILITATION AND INSOLVENCY
1) However, the law applies to contracts that ACT OF 2010 (R.A. No. 10142) AND CONCURRENCE
are in substance,, sale of personal property AND PREFERENCE OF CREDITS
in installments. Thus, it applies to "finan (Arts. 2241 ~ 2244, NCC)
cial lease" or "financial leasing," where a
financing company would, in effect, initial I. POLICIES
ly purchase a mobile equipment and turn
The Financial Rehabilitation and Insolvency Act (FRIA
around to lease it to a client who gets, in
for short) of 2010, which lapsed into law on July 18, 2010,
addition, an option to purchase the propL
expressly repealed the Insolvency Law. * ' ■ ~
'■ ~ erty at the expiry of the lease period. The
Recto Law applies where the supposed les a) FRIA expresses the policy of the State to encour
see will retain the thing if he fully paid the age debtors, both juridical and natural persons,
and their creditors to collectively and realisti b) Insolvent shall refer to the financial condition of
cally resolve and adjust competing claims and a debtor that is generally unable to pay its or his
property rights (Sec. 2, FRIA). liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than
b) The State shall ensure a timely fair, transparent,
its or his assets.
effective, and efficient rehabilitation or liquida
tion of debtors (Sec. 2, FRIA). 1) Liabilities shall refer to monetary claims
against the debtor, including stockholder's
c) The rehabilitation or liquidation shall be made
advances that have been recorded in the
with the following factors in mind: (1) to ensure
debtor's audited financial statements as
or maintain certainty and predictability in com
advances for future subscriptions.
mercial affairs; (2) preserve and maximize the
value of the assets of these debtors; (3) recognize 2) Ordinary course of business shall refer to
creditor rights; (4) respect priority of claims; and transactions in the pursuit of the individual
(5) ensure equitable treatment of creditors who debtor's or debtors' business operations
are similarly situated (Sec. 2, FRIA). prior to rehabilitation or insolvency pro
d) When rehabilitation is not feasible, it is in the ceedings and on ordinary business terms.
interest of the State to facilitate a speedy and c) Creditor shall refer to a natural or juridical per
orderly liquidation of the debtors' assets and the son which has a claim against the debtor that
settlement of their obligations (Sec. 2, FRIA). arose on or before the commencement date.
1.01. KEY DEFINITIONS (Sec, 3, FRIA)------------------------- -------- 1)— G0mmeneemeni-Date-tefers-^& -^tgr-date-mr
a) Debtor shall refer to a sole proprietorship duly which the court issues the Commencement
registered with the Department of Trade and In Order, which shall be retroactive to the date
dustry (DTI), a partnership duly registered with of filing of the petition for voluntary or in
the Securities and Exchange Commission (SEC), voluntary proceedings (See Note 3.03 below).
a corporation duly organized and existing under d) General unsecured creditor shall refer to a credi
Philippine laws, or an individual debtor who tor whose claim or a portion thereof is neither
has become insolvent. secured, preferred nor subordinated under the
1) Individual debtor shall refer to a natural per FRIA.
son who is a resident and citizen of the Phil e) Secured creditor shall refer to a creditor with a se
ippines that has become insolvent. cured claim.
2) Group of debtors shall refer to and can 1) Secured claim shall refer to a claim that is
cover only: (1) corporations That are finan secured by a lien.
cially related to one another as parent
corporations, subsidiaries or affiliates; (2) 2) Lien shall refer to a statutory or contractual
_ ^ •. partneiRMps;that.are ovmed more than fifty : claim or judicial charge on .pfflgonal
percent (50%) by the same person; and (3) property that legally entitles a creditor to
single proprietorships that are owned by resort to said property for payment of the
the same person. claim or debt secured by such lien.
1.02. PROCEEDINGS COVERED BY FRIA AND Pre-Negotiated or approved by

PERSONS WHO WILL FILE AND/OR APPROVE Rehabilitation creditors holding
Plan) at least 223„o£fhe,
Type of Type of Who Will Approve
total liabilities of the
Business Proceeding or File Petition
debtor including
Organization
secured creditors
Sole Voluntary Owner / P ro p rie to r holding more than
P ro p rie to rs h ip Rehabilitation (Sec. 12, FRIA). iO%.Qlthg total
securgdjckim and
P a rtn e rs h ip Voluntary Majority of Partners
unsecured creditors
Rehabilitation (Sec. 12, FRIA).
holding more than
C o rp o r a tio n Voluntary (1) Majority of th e 5P-%..Qf..Uhsecurgd.
Rehabilitation Director or claims (Sec, 76,
Trustees; and FRIA).
(2) Stockholders S o le Voluntary Insolvent debtor
representing 2 /3 Proprietorship, Liquidation
of O u ts ta n d in g Partnership, (Sec. 90, FRIA)
Capital/ 2 / 3 and
of Members of Corporation
N o n -S to c k C o r p r
Sole In v o lu n ta ry a) Three (3) or
(Sec. 12, FRIA).
Proprietorship, Liquidation more creditors, and
Involuntary
S o le P ro p rie to r- Creditor or group Partnership, (Sec. 91, FRIA) b) The aggregate
ship, Partner Rehabilitation of creditors with and of whose claims
ship, and Corpo a claim of, or th e Corporation is at least either
ration aggregate of whose P I,000,000.00 or
claims is, at le a st at least 25% of the
P I , 000,000.00 a ; subscribed capital
a t le a s t 25% of the stock or partner's
s u b s c r ib e d capital contributions of the
stock or partners' debtor, M lic liiY g r ,
contributions, ishjghgr,
whichgYer is higher
(Sec. 13, FRIA). Individual S u s p e n s io n of Individual Debtor
Debtor Payment (Sec.
Sole Prop Pre-Negotiated The insolvent 94, FRIA)
rietorship,- - Rehabilitation - debtor and the - -
Partnership, and (Petition fo r Rehabilitation Plan Individual Voluntary Individual Debtor
C o r p o r a tio n Approval of is endorsed Debtor ' Liquidation with at least
406 REVIEWER ON COMMERCIAL LAW PART V — CREDIT TRANSACTIONS 40?
(Sec. 103, P500,000.00 debts value of payments projected in, the plan, more if the debtor
FRIA) c o n tin u e s a s a going concern than if it is immediately
who does not have
sufficient assets to liquidated (Sec. 4[gg], FRIA).
cover his liabilities.
3.01. REHABILITATION OF SOLE PROPRIETORSHIP,
Individual Involuntary Any creditor or PARTNERSHIP AND CORPORATION
Debtor Liquidation g ro u p of creditors
The grounds for rehabilitation of any of the ihree
(Petition with a claim o f,
business organizations are:
for Acts of or with claims
In s o lv e n c y ) aggregating at least a) VOLUNTARY REHABILITATION. The fol
(Sec. 105, FRIA) P500,000.00. lowing must be alleged (in the verified Petition)
and established: (1) the insolvency of the debtor;
and (2) the viability of its rehabilitation (Sec. 12,
a)G r o u p of D e b t o r s can file . A group of d e b to rs
FRIA; Sec. 12 likewise enumerates the contents and
may jo in tly file a petition for (voluntary) reha
attachments to the Petition).
bilitation under the FRIA when one or more of
its m e m b e rs foresee the impossibility of meeting b) INVOLUNTARY REHABILITATION. A credi
debts w h e n they respectively fall due, and the tor or group of creditors may initiate involun
financial distress would likely adversely affect tary proceedings against the debtor by filing a
the financial condition and/or operations of petition for rehabilitation with the court if:
______________ the other members of the group an d /or the___
1) There is no genuine issue of fact or law on"
participation of the other members of the group
the claim/'S of the petitioner/s, and that the
is essentia] under the terms and conditions of
due and demandable payments thereon
the proposed Rehabilitation Plan (Sec. 12, FRIA).
have not been made for at least sixty (60)
2. EXCLU D ED D E B T O R S days or that the debtor has failed generally
to meet its liabilities as they fall due; or
: Excluded from the operation of the FRIA are debtors
which a re (1) banks, (2) pre-need companies, (3) insurance 2) A creditor, other than the petitioner/s, has
companies, and (4) national and local government agencies initiated foreclosure proceedings against
or units. Rehabilitation of banks, pre-need companies, and the debtor that will prevent the debtor from
insurance companies is still governed by their respective -, paying its debts as they become due or will
governing s p e c ia l laws (Sec. 5, FRIA; see Insurance Code, New render it insolvent (Sec. 13, FRIA).
Central Bank Act and Pre-Need Code), 3.02. REHABILITATION PLAN
3. MEANING OF REHABILITATION Rehabilitation Plan shall refer to a plan by which

the financial well-being and viability of an insolvent
Rehabilitation shall refer to th e restoration of the debtor debtor can be restored using various means includ
to a condition of successful12*5operation add solvency, if it is ‘ ing, but not limited to, debt forgiveness, debt re
shown that its continuance of operation is economically scheduling, reorganization or quasi-reorganization,
feasible and its c re d ito rs can recover by way of the present dacion en pago, debt-equity conversion and sale o f the
REVIEWER ON COMMERCIAL LAW PART V — CREDIT TRANSACTIONS 409
b u s in e s s (or parts of it) as a going c o n c e rn , or setting 4) Prohibit the debtor from making any pay
up o f new business entity, or other similar arrange ment of its liabilities outstanding as of the
ments as may be a p p ro v e d by the c o u r t or creditors commencement date except as may be pro
(See Sec. 62, FRIAfor contents of the Rehabilitation Plan). vided herein (Sec. 16, FRIA).
a) A Rehabilitation Plan is attached to the Petition The Commencement Order and conse
for Rehabilitation. quently the Stay Order shall be effective for the
b) The Rehabilitation Plan: (1) may be approved by entire duration of the rehabilitation proceedings
the c re d ito rs (50% of the total claims) (Sec. 64, (Sec. 21, FRIA; PAL v. Spouses Kurongking, G.R.
FRIA); (2) c o n firm e d by the court after approval No. 146698, Sept. 24, 2002). The order may be
of the creditors or even without such approval lifted if th e re is no s u b s ta n tia l likelihood for the
or even over the objection of th e creditors (Sec. debtor, to .he successfully rehabilitated.
68, FRIA).
3.04. SUSPENDED CLAIMS
c) Cram D o w n Rule. The Rehabilitation Plan
Claim shall re fe r to all c la im s or demands of
(including pre-negotiated plans) confirmed by
whatever nature or character against the debtor or its
the Court shall be binding upon the debtor and
property, whether for money or othenAdse, liq u id a te d
all persons who may be affected by it, including
or unliquidated, fixM-.o r,,contingent, matured. or
creditors, whether or not such persons have
,unmatured., d is p u te d or undisputed, including,
participated in the proceedings, opposed the
-----------b u t-n o h 4 im ite d t o : (1 ) alh-etom is of the g o v e rn m e n t, -
Plan or whether or not their claims have been
whether national or local, including taxes, tariffs, and
scheduled (Secs. 69, 82, and 86, FRIA).
customs duties; and (2) claims a g a in s t directors and
3.03. STAY ORDER officers of the debtor arising from acts done in the
discharge of their functions falling within the scope
The court having jurisdiction over the rehabilita
of their authority (Sec. 3, FRIA.).
tion case shall is s u e a Commencement Order which
shall include a Stay Order (Sec. 16, FRIA). The Stay or The creditors or third : p a rtie s are not prohibited .
Suspension O r d e r shall: from filing cases against the directors and officers
1) Suspend all actions or proceedings, in court acting in their personal capacities (Sec. 3, FRIA).
or otherwise, for the enforcement of claims a) Examples of Claims. Claims include money
- against the debtor; claims or otherwise, w h ic h means even those
2) Suspend all actions to enforce any judg that are not purely monetary claims are includ
ment, attachment or other provisional rem ed.
edies against the debtor; 1) The claim of passengers against a common
_ _ -3)_; Prohibit th e debtor from selling, encumber-. ____ carrier (airline) for missing luggages is a
■ " ‘ ing; transferring or disposing in any man money claim or financial demand th a t the
ner any of its properties except in the ordi la w requires to be suspended pending the
nary course of b u s in e s s ; and r e h a b ilita tio n ; p ro c e e d in g s :■(Philippine Air-
410 REVIEWER ON COMMERCIAL LAW PART V CREDIT TRANSACTIONS 411
lines v. Spouses Sadie and Aisha Kurangking, 1) To cases already pending appeal in the
e t a l, ibid.). Supreme Court as of commencement date.
Any final and executory judgment arising
2) The suspension also covers employees' from such appeal shall be referred to the
claims (Rubberworld [Phils.], Inc. v. NLRC, rehabilitation court for appropriate action;
305 SCRA 721 [1999]).
2) Subject to the discretion of the court, to
3) Cases for revocation of a contract of sale cases pending or filed at a specialized
and restitution of the price filed before the court or quasi-judicial agency which, upon
HLURB. Under the Interim Rules (AM. No. determination by the court is capable of
00-8-10-SC), the claim is suspended even if resolving the claim more quickly, fairly,
the case involves claim that is not purely for and efficiently than the court. Any final and
money (Sps. Sohrejuanite v. ASB Dev. Corp., executory judgment of such court or agency
G.R. No. 165675, Sept 30, 2005). shall be referred to the rehabilitation court
and shall be treated as a non-disputed
b) Rationale of Suspension of Claims: (1) To claim;
enable the rehabilitation receiver to effectively
exercise its/his powers free from or unburdened 3) To the enforcement of claims against sure
by any judicial or extrajudicial interference that ties and other persons solidarily liable with
might unduly hinder or prevent the "rescue" of the debtor, and third party or accommoda
the debtor company (time, resources, and effort tion mortgagors as well as issuers of letters
will be used to litigate); and (2) lb enable the
-------of-credifûnfofesAhe-prQpe-rty subject-ofAe-
third party or accommodation mortgage is
management committee or the rehabilitation
necessary for the rehabilitation of the debt
receiver to substitute the defendant in any
or as determined by the court upon recom
pending action against it before any court,
mendation by the rehabilitation receiver;
tribunal, board, or body (Philippine Airlines v.
Spouses Sadie and Aisha Kurangking, el at, ibid., 4) To any form of action of customers or clients
citing BP Homes, Inc. v. CA, 190 SCRA 262). of a securities market participant to recover
or otherwise claim moneys and securities
c) Secured Credits. The Stay Order covers all entrusted to the latter in the ordinary
creditors, secured or unsecured (RCBC v. IAC, course of the latter's business as well as any
213 SCRA 830 [1992]). The preferred status over action of such securities market participant
the unsecured creditors relative to the mortgage or the appropriate regulatory agency or
liens is retained, but the enforcement of such self-regulatory organization to pay or settle
preference is suspended (See Note 7.03 below; such claims or liabilities;
Metrobank v. ASB Holdings, Inc. et at, G.R. No. 5) To the actions of a licensed broker or dealer
166197, Feb. 27, 2007). to sell pledged securities of a debtor pursu
d) Exceptions to the Stay or Suspension Order ant to a securities pledge or margin agree
(Sec. 18, FRIA). The Stay or Suspension Order ment for the settlement of securities trans
shall not apply: - -- actions in accordance with the provisions.
of the Securities Regulation Code and its 3.06, COURT ACTION ON PETITION FOR REHABILI
implementing rules and regulations; TATION (Sec. 25, FRIA)
6) The clearing and settlement of financial The Court may either: (1) give due course to
transactions through the facilities of a clear the petition; (2) dismiss the petition; or (3) convert the
ing agency or similar entities duly autho proceedings to liquidation proceedings.
rized, registered and/or recognized by
the appropriate regulatory agency like the
Bangko Sentral ng Pilipinas (BSP) and the COURT ACTION REQUIRED COURT
SEC as well as any form of actions of such FINDINGS
agencies or entities to reimburse themselves a) Give DUE COURSE 1) The debtor is insolvent; and
for any transactions settled for the debtor; to the petition. 2) There is a substantial
and
likelihood for the debtor
7) Any criminal action against individual to be successfully
debtor or owner, partner, director, or officer rehabilitated.
of a debtor shall not be affected by any pro
b) DISMISS the peti 1) The debtor is NOT insol
ceeding commenced under the FRIA.
tion. vent;
3.05. WHO WILL MANAGE 2) The petition is a sham filing
The existing Board and/or Management of the intended only to delay the
debtor shall continue. enforcement of the rights
of the creditor/s or of any
Management can be replaced. Upon motion,
group of creditors;
the court may appoint either the Rehabilitation
Receiver or a Management Committee to undertake 3) The petition, the Rehabili
the management of the debtor in the following cases: tation Plan and the attach
ments thereto contain any
1) Actual or eminent danger of dissipation, materially false or mis
loss, wastage, or destruction of the debtor's leading statements; or
■ assets or properties;
4) The debtor has committed
2) Paralyzation of the business operations of acts of misrepresentation
. the debtor; or ■ or in fraud of creditor/s or
3) Gross mismanagement of the debtor, or a group of creditors.
fraud or 'other"wrongful conduct on the c) CONVERT the pro 1) The debtor is insolvent; and
part , of, or gross or willful violation of ceedings into Liqui-
the FRIA by existing management of the 2) There is no substantial like
_ dation Proceedings
debtor, owner, partner, director, officer, or lihood for the debtor to be
representative/s in the management of the successfully rehabilitated.
debtor (Sec. 36, FRIA).
414 REVIEWER ON COMMERCIAL LAW FART V — CREDIT TRANSACTIONS 415
4. OUT-OF-COURT REHABILITATION c) The Cram Down Rule applies upon publication

of the notice of the out-of-court approved reha
Rehabilitation is not necessarily court supervised.
bilitation plan (Sec. 86, FRIA).
An out-of-court or informal restructuring agreement or
rehabilitation plan that meets the minimum requirements is
5. SUSPENSION OF PAYMENTS
recognized under the FRIA.
Only an INDIVIDUAL DEBTOR may file a petition for
a) Minimum Requirements of Out-of-Court or suspension of payment.
Informal Restructuring Agreements and Reha
bilitation Plans (Sec. 84, FRIA): a) The debtor has sufficient properties to cover all
his debts but he foresees the impossibility of
1) The debtor must agree to the out-of-court meeting his debts when they respectively fall
or informal restructuring / workout agree due (Sec. 94, FRIA).
ment or rehabilitation plan;
b) The purpose is to suspend or delay the payment
2) It must be approved by creditors represent of debts.
ing at least sixty-seven percent (67%) of the
c) The amount of indebtedness is not affected (not
secured obligations of the debtor;
reduced or discharged).
3) It must be approved by creditors represent
d) The number of creditors is immaterial.
ing at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and 5.01. DISTINCTIONS
4) It must be approved by creditors holding at
least eighty-five percent (85%) of the total SUSPENSION OF LIQUIDATION
liabilities, secured and unsecured, of the PAYMENTS
debtor.
1. Debtor is not insolvent 1. Debtor is insolvent —
b) Standstill Period (Sec. 85, FRIA). An agreement — The debtor has suffi His assets are insuffi
.. on standstill period may be binding if the fol cient assets to cover its cient to cover the debt
lowing requisites are present: liabilities. or's liabilities.
1) Agreement is approved by creditors repre 2. Payment of obligations 2. The obligations are dis
senting more than fifty percent (50%) of the is stayed. charged.
total liabilities of the debtor; 3. Applies only to 3. Proceedings can cover
2) Notice thereof is published in a newspa individual debtor. juridical persons and
per of general circulation in the Philippines individual debtors.
once a week for two (2) consecutive weeks; 4. May be filed by the 4. May be initiated by the
and debtor. debtor (voluntary insol
• •■ • 3) The standstill period does not exceed one vency) or by the credi
hundred twenty (120) days from the date of tors (involuntary insol
effectivity. - vency).
416 REVIEWER ON COMMERCIAL LAW EAR! V — CREDIT TRANSACTIONS 417
5.02. SUSPENSION ORDER

5. There is no minimum 5. It is required that the
amount of liabilities debt of the individual Upon motion filed by the individual debtor, the
prescribed. debtor is not less than court may issue an order suspending any pending
P500,000.00. execution against the individual debtor (Sec. 96,
FR1A).
6. The rules on concur 6. The rules on concur
rence and preference of rence and preference of a) Properties held as security by secured creditors
credits under the New credits under Articles shall not be the subject of such suspension order
Civil Code do not ap 2236 and 2251 of the (Sec. 96, FRIA).
ply. : New Civil Code apply. b) The suspension order shall lapse when three (3)
months shalbhave .passed without the proposed
agreement being accepted by the creditors or as
soon as such agreement is denied (Sec. 96, FRIA).
SUSPENSION O f
REHABILITATION c) No creditor shall sue or institute proceedings to
PAYMENTS
collect his claim from the debtor from the time of
1) Applies to Individual 1) Applies to Business Or
the filing of the petition for suspension of pay
Debtor. ganizations — Single
ments and for as long as proceedings remain
Proprietorship, Partner
pending (Sec. 96, FRIA).
ship, and Corporation.
d) Exceptions (Sec. 96, FRIA). The following credi-
tors are not affected by the Stay Order.
sufficient assets to cover
its liabilities. 1) Those creditors having claims for personal
labor, maintenance, expense of last illness
3) Secured debtors are not 3) Secured debtors are
and funeral of the wife or children of the
affected. affected by stay order.
debtor incurred in the sixty (60) days im
4) Filed by the debtor. 4) May be initiated by mediately prior to the filing of the petition;
the debtor (voluntary and
rehabilitation) or by the
creditors (involuntary 2) Secured creditors.
rehabilitation). Note: These excepted creditors are not affected by the
5) There is no minimum 5) The claim of, or the proposed agreement with the debtor unless participated
requirement for the aggregate of claims and voted in the creditors meeting (Sec. 98, FRIA).
amount of the claims. against the debtor is at 5.03. PROHIBITED ACTS
least PI,000,000.00 or at
least twenty-five percent The Individual Debtor is prohibited (in the
(25%) of the subscribed Order to be issued by the court after the filing of the
capital stock or Petition for Suspension of Payments) from: ’ ' ....... ...
partners' contributions, a) Selling, transferring, encumbering, or disposing
whichever is higher. in any manner of his property, except those
418 REVIEWER ON COMMERCIAL LAW PART V ~ CREDIT TRANSACTIONS 419
used in the ordinary operations of commerce or 6. LIQUIDATION OF INDIVIDUAL DEBTORS

o f in d u s tr y in which the petitioning individual
Liquidation of Individual Debtors may be (1) voluntary
debtor is engaged, so long as the proceedings
or (2) involuntary. Their similarities and distinctions are as
relative to the suspension of payments are
follows:
p e n d in g (Sec. 95, FRIA); and
b) Making any payment outside of th e necessary or VOLUNTARY INVOLUNTARY

legitimate expenses of his business or in d u stry , LIQUIDATION OF LIQUIDATION OF
so long a s the proceedings relative to the suspen INDIVIDUAL DEBTOR INDIVIDUAL DEBTOR
sion of payments are pending (Sec. 95, FRIA).
1. D e b t o r is insolvent. 1. D e b to r is in so lv e n t.
5.04. CREDITORS' MEETING
2. Acts of insolvency 2. Creditors must prove
The Individual Debtor shall attach to the Petition
need not be alleged acts of insolvency.
for S u s p e n s io n of Payment a proposed agreement and proved.
with the creditors (Sec. 97, FRIA).
3. The d e b ts must be at 3. The debts must be at
a) The proposed agreement shall be approved o r le a s t P500,000.00. least P500,000.00.
rejected in the Creditors' Meeting. The presence
of creditors holding claims amounting to at least 4. The individual debtor 4. A creditor or group of
3 / 5 o f the liabilities of the debtor is necessary for*
1 files the Petition. creditors files the Peti
------------- -the-m eeting,— — --------- -— _ -------------------- tion.
N ote: A creditor has no right to vote if he 5. The d e b to r is n o t 5. Applies even in the case
incurred his credit within 90 days prior to the fil absent as he files th e of A b s e n t Debtor (Debt
in g o f the petition for suspension (Sec. 97, FRIA). Petition. or resides outside or has
departed from the Phil
b) Double Majority is necessary for the approval
ippines, cannot be found
of proposed agreement with the creditors, to wit:
or conceals himself [Sec.
1) Two-thirds (2 /3 ) of the creditors voting 108, FRIA.]).
unite upon the same proposition; and
6. Posting of Bond by 6. Posting of Bond by
2) T h e c la im s r e p r e s e n te d by said majority creditors not required. creditors is required (Sec.
vote amount to at least three-fifths (3/5) of 105, FRIA).
the total liabilities of the debtor mentioned 7. Liquidation O rd e r i s : 7. - L iq u id a tio n Order is
in the petition (Sec. 97, FRIA). issued without trial issued after trial (Sec.
c) Effect of Disapproval by Creditors. If there is no (Sec. 104, FRIA). 107, FRIA).
approval of the double majority, the suspension
, c " 0 | p a y m g fits p r o c e e d in g s w i l f b e te r m in a te d a n d a. Involuntary Liquidation of Individual D e b to rs
the creditors shall be at liberty to enforce their distinguished from Involuntary Liquidation of
rights which correspond to them (Sec. 90, FRIA). B u s in e s s O r g a n iz a t io n s ..
payments a n d / or transfer of property by the debtor;

Involuntary Liquidation Involuntary Liquidation and (5) directing all claims to be filed with the
of Individual Debtor of Business Organizations
liquidator (See Sec. 112, FRIA for other contents of the
— Sole Proprietorship,
Liquidation Order).
Partnership, and
Corporation 7.02. EFFECTS OF LIQUIDATION ORDER (Sec. 113,
FRIA)
1. At le a s t 3 c re d ito rs 1. There can be one or more
a re r e q u ir e d . . creditors. 1) The juridical debtor shall be deemed dissolved
and its corporate or juridical existence terminat
2. The debts must be at 2. The debt or aggregate
ed;
le a s t P 5 0 0 ,0 0 0 .0 0 . o f d e b ts m u s t b e at least
P I,000,000.00 or equiva 2) Legal title to and control of all the assets of the
lent to 25% of the sub debtor, except those that may be exempt from
scribed capital or part execution, shall be deemed vested in the liquida
ners' contribution which tor or, pending his election or appointment, with
ever is higher. - the court;
3. The individual can 3. The business organization 3) All contracts of the debtor shall be deemed
continue his business. will be dissolved. terminated and/or breached, unless the liquid
4. There must be a n act 4. A c t o f in s o lv e n c y is not ator, within ninety (90) days from the date of his
------ of insolvency. ------- re q u ire d ; ---------------- assmnpfitin^f-©ffieer4edares-oAerwise-and-Afi-
contracting party agrees;
7. LIQUIDATION PROCESS 4) No separate action for the collection of an unse

cured claim shall be allowed. (Actions already
T h is is th e p r o c e e d in g w h e re c la im s are file d a n d th e
pending will be transferred to the Liquidator for
a s s e ts of the insolvent debtor are disposed and the proceeds
him to accept and settle or contest.)
are divided among the creditors. These rules apply to
individual debtors, sole proprietorships, partnerships, 5) No foreclosure proceeding shall be allowed for a
and corporation. The rules below apply to original period of one hundred eighty (180) days.
liquidation proceedings and proceedings that are originally
7.03. Rights of Secured Creditors (Sec. 114, FRIA)
rehabilitation proceedings but converted into liquidation
proceedings. The Liquidation Order shall not affect the right
of a secured creditor to enforce his lien in accordance
7.01. LIQUIDATION ORDER
with the applicable contract or law. A secured creditor
The Court that has jurisdiction over the may:
liquidation proceedings shall, in proper cases, issue
1) Waive his right under the security or lien, prove
, - a L iq u id a tio n ,O r d e r -w h ic h includes, among others:
(1) declaring that the debtor is insblvent; (2) ordering *' his claim in the liquidation proceedings and
the liquidation of the debtor; (3) in case of juridical share in the distribution of the assets of the debt
person, declaring it as dissolved; (4) prohibiting or; or .
REVIEWER ON COMMERCIAL LAW PART V ~ CREDIT TRANSACTIONS 423
2) Maintain his rights under the security or lien, preference and the balance (after taxes are deducted)
a) If the secured creditor maintains his rights of the proceeds of the specific movable or immovable
under the security or lien: property, as the case may be shall be divided among
the claimants or creditors in proportion to the value
1) The v a lu e of the p r o p e r ty m a y be fix e d
of the claims or PRO RATA (Arts. 2246-2249, NCC).
in a m a n n e r a g re e d u p o n by th e c re d i
to r a n d th e liq u id a to r. W h e n th e v a lu e c) The excess of the specific p ro p erty , if any, after the
of th e p ro p e rty is le s s th a n ,th e c la im it payment of the credits which enjoy p re fe re n c e , sh a ll
se cu res, the liqui d a to r in ay c o n v e y th e be added to the free property which the debtor may
p ro p e rty to th e se c u re d c re d ito r a n d have, for the payment of the other credits, and shall be
th e la tte r w ill b e a d m itte d in th e liqui disposed in a c c o rd a n c e with th e order o f preference
dation proceedings as a creditor for the u n d e r Article 2244 of the NCC as m o d ifie d by Article
balance. If its v a lu e e x c e e d s the claim 110 of the Labor Code and Section 113 of FRIA (Art.
s e cu re d , th e liq u id a to r m a y c o n v e y 2250, NCC).
the property to the creditor and waive
d) I f there is excess after satisfying the claims or liens
th e d e b to r 's r ig h t of redemption upon
under Article 2244, all other c o m m o n credits sh a ll be
receiving the excess from the creditor;
satisfied PRO RATA (Art. 2251, NCC; Jose Cordova v.
2)
The liquidator may sell th e p ro p e rty Reyes, Daway, et a l, G.R. No. 146555, July 3,2007).*1
and satisfy th e secured creditor's*8
______________ entire claim fro m the p ro c e e d s o f the 8.01. PREFERENCE AS TO SPECIFIC PROPERTIES
sale; or I n the settlement of the assets of an insolvent
3) T h e se cu re d c re d ito r m a y e n fo rc e th e debtor, the claims with re s p e ct to specific properties
lien o r fo re c lo s e o n the property p u r s h a ll be satisfied first in accordance with Articles 2241
su a n t to a p p lic a b le la w s . and 2242.
a) Preference of claims or Hens as to specific

8, DISTRIBUTION OF ASSETS MOVABLE or P E R S O N A L property (A rt 2241,
T h e a s s e ts o f th e in s o lv e n t d e b to r s h a ll b e d iv id e d NCC).
a m o n g th e c re d ito rs in a c c o rd a n c e with L iq u id a tio n P la n 1) Duties, taxes, and fees due thereon to the
s u b m itte d b y th e L iq u id a to r a n d a p p ro v e d b y th e C o u rt. State o r any subdivision thereof;
T h e ru le s on. c o n c u rr e n c e an d p re fe re n c e o f c re d its u n d e r th e
N e w C iv il C o d e a n d o th e r re le v a n t la w s sh a ll b e o b s e rv e d
2) Claims a ris in g from misappropriation,
in th e L iq u id a tio n P la n (Sec. 133, FR1A). T h u s , th e fo llo w in g breach of trust, or malfeasance by p u b lic
o fficia ls committed in the performance of
ru le s s h a ll b e o b s e rv e d :
their duties, on the movables, money or
a) T h e r e is p re fe re n c e w ith re s p e c t to ta x e s O N L Y u n d e r securities obtained by them;
- - A r tic le s 2 2 4 1 a n d 2 2 4 2 o f the N e w C iv il Code (NCC).
3) C la im s for the unpaid price o f m o v a b le s
b) A s to all th e o th e r claims o r lie n s m e n tio n e d in A rtic le s so ld , on said movables, so long as they are
2 2 4 1 a n d 2242 of the NCC, there is NO ORDER of in the possession of the debtor, up to the
REVIEWER ON COMMERCIAL LAW PART V — CREDIT TRANSACTIONS 42S
value of the same; and if the movable has 11) Credits for seeds and expenses for cultiva
been resold by the debtor and the price is tion and harvest advanced to the debtor,
still unpaid, the lien may be enforced on the upon the fruits harvested;
price; this right is not lost by the immobili
12) Credits for rent for one year, upon the per
zation of the thing by destination, provided
sonal property of the lessee existing on the
it has not lost its form, substance, and iden
immovable leased and on the fruits of the
tity; neither is the right lost by the sale of
same, but n o t o n money or instruments of
the thing together with other property for
credit;
a lump sum, when the price thereof can be
determined proportionally; 13) Claims in favor of the depositor if the
4) Credits guaranteed with a pledge so long depositary has wrongfully sold the thing
as the things pledged are in the hands of deposited, upon the price of the sale.
the creditor, or those guaranteed by a chat In the foregoing cases, if the movables
tel mortgage, upon the things pledged or to which the lien or preference attaches
mortgaged, up to the value thereof; have been wrongfully taken, the creditor
5) Credits for the making, repair, safekeeping, may demand them from any possessor,
or preservation of personal property on within thirty days from the unlawful sei
the movable thus made, repaired, kept, or zure.
possessed; A eierieiiceA m lJ^^ IMMXQv
6) Claims for laborers' wages, on the goods ABLE OR REAL Property (Art. 2242, NCC).
manufactured or the work done; 1) Taxes due upon the land or building;
7) For expenses of salvage, upon the goods
2) For the unpaid price of real property sold,
salvaged;
- u p o n the im m o v a b le sold;
8) Credits between the landlord and the ten
3) Claims of laborers, masons, m e c h a n ic s , and
ant, arising from the contract of tenancy on
other workmen, as well as of architects,
shares, on the share of each in the fruits or
harvest; - engineers and contractors, engaged in the
- construction, reconstruction, or repair of
9) Credits for transportation, upon the goods buildings, canals, or other works upon said
carried, for the price of the contract and in buildings, canals or other works;
cidental expenses, until their delivery and
for thirty days thereafter; 4) Claims of furnishers of materials used in
th e construction, reconstruction, or repair
10) Credits for lodging and supplies usually
of buildings, canals, or other works upon
furnished to travellers by hotel keepers, on
—- - said buildings, canals or other works; -
the movables Belonging to the guest as long
as such movables are in the hotel, but not 5) Mortgage credits recorded in the Registry
for-money loaned to the guests; of Property, upon the real estate mortgaged;
REVIEWER ON COMMERCIAL LAW PART V — CREDIT TRANSACTIONS
6) Expenses for the preservation or improve have no property of their own, when approved
ment of real property when the law autho by the court;
rizes reimbursement upon the immovable
3) Expenses during the last illness of the debtor or
preserved or im proved;
of his or her spouse and children under his or
7) Credits annotated in the Registry of Property, her parental authority, if they have no property
in virtue of a judicial order, by attachments of their own;
or executions upon the property affected,
4) Compensation due the laborers or their depen
and only as to later credits;
dents under laws providing for indemnity for
8) Claims of co-heirs for warranty in the par damages in cases of labor accident, or illness re
tition of an immovable among them upon sulting from the nature of the employment;
the real property thus divided; 5) Credits and advancements made to the debtor
9) = C laim s of donors or real property for pecu for support of himself or herself, and family,
niary charges or other conditions imposed during the last year preceding the insolvency;
on the donee upon the immovable donated; 6) Support during the insolvency proceedings, and
10) Credits of insurers, upon the property for three months thereafter;
insured, for the insurance premium for two 7) Fines and civil indemnification arising from a
years. criminal offense;
8) Legal expenses, and expenses incurred m the
OTHER PROPERTIES administration of the insolvent's estate for the
With reference to other property, real and per common interest of the creditors, when properly
sonal, of the debtor, the following claims or credits authorized and approved by the court;
shall be preferred IN THE ORDER NAMED (Art 9) Taxes and assessments due the national govern
2244, NCC, as modified by Art. 110, Labor Code of the ment, other than those mentioned in Articles
Philippines): 2241(1), and 2242(1);
1) Credits for services rendered for the insolvent by 10) Taxes and assessments due any province, other
employees, laborers, or household helpers prior than those referred to in Articles 2241(1), and
to the proceedings in insolvency (As modified 2242(1);
by Art. 110, Labor Code which removed the 1 year
limitation under Art. 2244 and elevated these credits 11) Taxes and assessments due any city or munici
from 2nd to 1st; see also Sec. 133, FRIA which states pality, other than those indicated in Articles
2241(1), and 2242(1);
that labor claims enjoy preference under Art. 2244
of the NCC unless the claims constitute liens under 12) Damages for death or personal injuries caused
Arts. 2241 and 2242, NCC); - - by a quasi-delict; - - - - - - -- - -
2) Proper funeral expenses for the debtor, or chil- 13) Gifts due to public and private institutions of
’ drerr und er his or her parental authority who charity or beneficence; -
428 REVIEWER ON COMMERCIAL LAW 429
PART V — CREDIT TRANSACTIONS
14) Credits which, without special privilege, appear 4) The extent that the foreign proceeding
in (a) a public instrument; or (b) in a final judg recognizes the rights of creditors and other
ment, if they have been the subject of litigation. interested parties in a manner substantially
These credits shall have preference among them in accordance with the manner prescribed
selves in the order of priority of the dates of the in the FRIA; and
instruments and of the judgments, respectively.
5) The extent that the foreign proceeding
has recognized and shown deference to
9. CROSS-BORDER INSOLVENCY
proceedings under the FRIA and previous
The FRIA adopted the Model Law on Cross-Border legislation (Sec. 142, FRIA).
Insolvency of the United Nations Center for International
Trade and Development as part thereof (Sec. 139, FRIA).
a) If there is a rehabilitation proceeding filed by a

foreign entity in another jurisdiction, a petition
may be filed by the latter's representative and
the court may issue orders:
1) Suspending any action to enforce claims
against the entity or otherwise seize or
foreclose the property of the foreign entity*1
located in the Philippines;
2) Requiring the surrender property of the
foreign entity to the foreign representative;
or
3) Providing other necessary relief (See Secs.
140 & 141, FRIA).
b) In determining whether to grant relief to a
foreign entity, the court shall consider;
1) The protection of creditors in the Philip
pines and the inconvenience in pursuing
their claim in a foreign proceeding;
2) The just treatment of all creditors through
resort to a unified insolvency or rehabilita-
- . tion proceedings;
3) Whether - other jurisdictions have given
recognition to the foreign proceeding;
PART VI — LAWS ON TRANSPORTATION 431
AND PUBLIC UTILITIES
person generally as a business and not as a casual

occupation; 2) he must undertake to carry goods
of the kind to which has business is confined; 3) he
PART VI must undertake to carry by the method by which
his business is conducted and over his established
LAWS ON TRANSPORTATION AND roads; and 4) the transportation must be for hire (First
Philippine Industrial Corp. v. CA, 300 SCRA 661).
PUBLIC UTILITIES
In another case, the Supreme Court reiterated
the ruling that the true test of a common carrier is the
A. GENERAL CONCEPTS carriage of goods or passengers, provided it has space
1, CONCEPT OF COMMON CARRIERS fora fee (National Steel Corporation v. CA, 283 SCRA 45,
Article 1732 of the Civil Code provides that: "Common 61 [1997]).
carriers are persons, corporations, firms or associations a) The Supreme Court ruled in First Philippine
engaged in the business of carrying or transporting Industrial Corp. v. Court of Appeals (300 SCRA 661), that
passengers or goods or both, by land, water or air, for pipeline operators are common carriers. The Supreme
compensation, offering their services to the public." Court ruled that a corporation that is engaged in the
It has been defined as "one that holds itself out as ready business of transporting oil and other petroleum
to engage in the transportation of goods for hire as a public products through its pipes can be considered a-
employment and not as a casual occupation." Article 1732 common carrier. The law does not distinguish as to the
of the Civil Code avoids any distinction between a person means of transportation, as long as it is by land, water,
or an enterprise offering trans^rtation on regular and or air. It does not provide that the transportation of
scheduled basis and one offering transportation service on the passengers or goods should be by motor vehicle.
occasional, episodic, and unscheduled basis. Neither does
b) A charter party may transform a common
the law distinguish between a carrier offering its services
carrier into a private carrier. However, it must be a
for the general public, that is, the general community or
bareboat or demise charter where the charterer mans
population and one who offers business only from a narrow
the vessel with his own people and becomes, in effect,
segment of the general population (De Guzman v. CA, G.R.
the owner for the voyage or service stipulated (Caltex
No. L-47822, Dec. 2 2 ,1 9 8 8 ).
[Phils.] v. Sulpicio Lines, 315 SCRA 709 [1999]).
1.01. TESTS
The common carrier is not transformed into
The tests for determining whether a party, is a a private carrier if the charter party is a contract of
common carrier of goods are: 1) he must be engaged affreightment like a voyage charter or a time charter
in the business of carrying goods for others as a (IbidCoastwise Lighterage Corp. v. CA, 245 SCRA 797
....public employment^ and m:ust-hold-hirnself out as
ready to engage in the transportation of goods for
c) The petitioner, a customs broker and ware
430 houseman, was declared to be a common carrier in one
REVIEWER ON COMMERCIAL LAW PART VI — LAWS ON TRANSPORTATION 433
case although she does not indiscriminately hold her and it offers its barges to the public for carrying or
services out to the public but offers the same to select transporting by water for compensation. Petitioner
parties with whom she may contract in the conduct of was considered a common carrier whether its
her business. In the said case, petitioner entered into a carrying of goods is done on an irregular basis rather
contract ■■.with: SMC to transfer paper and kraft board than scheduled manner and with a limited clientele.
from the Port Area in Manila to SMCs warehouse in A common carrier need not have a fixed and publicly
Ermita, Manila. As a common carrier, she is bound known route nor does it have to maintain terminals
to exercise extraordinary diligence in transporting or issue tickets (Ibid.).
the goods and is presumed to be negligent when she
f) The operator of a beach resort that accepts
failed to deliver the same (Virgines Calvo v. UCPB
clients by virtue of a tour-package contracts that
General Insurance Co., G.R. No. 148496, March 19,2002).
included transportation to and from the Resort and
d) In one case, respondent PKS Shipping the point of departure in Batangas is considered a
Corporation was declared a common carrier common carrier. Its ferry services are so intertwined
although it had a limited clientele (Phil. American with its main business as to be properly considered
Genera Insurance Company v. PKS Shipping Company, ancillary thereto. The constancy of respondent's ferry
G.R. No. 149038, April 9, 2003). In the said case, PKS services in its resort operations is underscored by its
transported 75,000 bags of cement of petitioner having its own boats. And the tour packages it offers,
DUMC in a barge. The bags of cement sank together which include the ferry services, may be availed of
with the barge when the latter was being towed by _____ by anyone who can afford to pay the same. These
a tug boat. The Supreme Court declared that PKS services are thus available to the public (Spouses Cruz
was a common carrier because it was engaged in the v. Sun Holidays, Inc., G.R. No. 186312, June 29,2010).
business of carrying goods for others for a fee. "The
regularity of its activities in the area indicates more 1.02. Common Carriers distinguished from Private
than just a casual activity on its part. Neither can the Carrier
concept of a common carrier change merely because The term " common or public carrier" is defined in
individual contracts are executed or entered into with Article 1732 of the Civil Code. The definition extends
the patrons of the carrier." to carriers either by land, air or water which hold
e) The same conclusion was reached in another themselves out as ready to engage in carrying goods
case involving a company that also transports goods or transporting passengers or both for compensation
through barges (Asia Lighterage and Shipping, Inc. v. CA, as public employment and not as Casual occupation.
et a l, G.R. No. 147246, Aug. 19, 2003). The petitioner The distinction between a "common or public
argued that it is a private carrier allegedly because carrier" and a'"private or special carrier" lies in the
it .has no fixed, and publicly known route, maintains character of the business, such that if the undertaking
no terminals, and issues no tickets. It points out that is a single transaction, not a part of a general business
it.-is,.not obligated to carry, indiscriminately^for aiiy*, or occupation, although involving the carriage of the
person. The Supreme Court rejected the argument of goods for a fee, the person or corporation offering
the petitioner pointing out that the principal business such service is a private carrier (Planters Product, Inc.
of the petitioner is that of lighterage and drayage v. CA, G.R, No. MSOPOr-Sept. 15,1993).
434 REVIEWER ON COMMERC ,a w PART VI — LAWS ON TRANSPORTATION 435
a) The common carrier holds himself out in carrying of persons or goods or both and one who
common, that is, to alhpersonsr^ho choose to employ does such carrying drily as an ancillary activity.
: him> -to-£Mi^-iox.:hiE'e>whMe;.the;;priv;ate carrier Article 1732 does not make any distinction between
.or ^special ^carrier; :agpeS:sin\eosie:/special, case with a person or enterprise offering transportation service
. some private individMayoeafry^for :hipe,: on a regular or scheduled basis and one offering such
service on an occasional, episodic, or unscheduled
b) A private carrier is not bound to carry for
basis. Neither does Article 1732 distinguish between
any reason, unless it enters a special agreement to do
a carrier offering its services to the general public, i.e.,
so. A common carrier is bound to carry for all who
the general community or population, and one who
offer such goods as it is accustomed to carry and
offers services or solicits business only from a narrow
tender reasonable compensation for carrying them.
segment of the general population (Fabre, jr: v. CA,
c) A common carrier is subject to regulation as 25$ SCRA 426 [W96]),
it is a public service. A private carrier is not.
2. EC, a junk dealer, was engaged in buying up used
d) The common carrier is bound to exercise bottles and scrap metal in Pahgasinan using two six
extraordinary diligence while a private carrier owes wheeler trucks. Upon gathering sufficient quantities
only diligence of a good father of a family. of such scrap metal in Pangasinan, EC would bring
e) A common carrier cannot stipulate that it is such material to Manila for resale. On the return
exempt from liability for the negligence of its agents trip to Pangasinan, EC would load his vehicles with
or employees. Such stipulation is void as it is against*1 cargo which various merchants wanted to deliver
public policy. A private carrier may validly enter into to differing estabLishments in Pangasinan, For
such stipulation (1980,1981,1984 Bar). that service, EC charged freight rates which were
commonly lower than regular commercial rates.
PROBLEMS:': ' Can EC be characterized as a common carrier who is
bound to exercise extraordinary diligence?
1. EF and his wife were owners of a minibus that was
A: YES. EC is a common carrier and he is Bound to exercise
being used principally in connection with a bus
extraordinary diligence in transporting goods. Article
service for school children which they operated in
1732 of the Civil Code makes no distinction between
Manila. On Nov. 2, 2002, WW Corp., a non-stock
one whose principal business activity is the carrying
and non-profit corporation, arranged with EF for
of persons or goods or both and one who does such
the transportation of 33 members from Manila to La
carrying only as an ancillary activity. Article 1732
Union and back for a consideration. Are the spouses
operating as a common carrier? does not make any distinction between a person
or enterprise offering transportation service on a
A: The spouses are operating as a common carrier. EF regular or scheduled basis and one offering such
and his spouse did not have to be engaged in the service on an occasional, episodic or unscheduled
business of public transportation for the provisions of ^basis.^Neither does Article 1732 distinguish between,, A
the Civil Code on common carriers to apply to them. a carrier offering its services to the general public,'
Article 1732 of the Civil Code makes no distinction i.e., the general community or population, and one
between one whose principal business activity is the who offers: Services of solicits business only from a
r ~ ;w’::c;
436 REVIEWER ON COMMERCIAL LAW PART VI — LAWS ON TRANSPORTATION 437
narrow segment of the general population. This is 4, During the elections last May, AB, a congressional
also consistent with the definition of public service candidate in Marinduque, chartered the helicopter
under the Public Service Act (De Guzman v. CA, 168 owned by Lobe Mining Corporation (LMC) for use
SCRA 612 11988}). in the election campaign. AB paid LMC the same rate
3. Tirso Molina charters a vessel owned and operated by normally charged by companies regularly engaged in
Star Shipping Cov a common carrier, for the purpose the plane chartering business. In the charter agreement
of transporting two tractors to his logging concession. between LMC and AB, LMC expressly disclaimed any
The crane operator of the shipping company somehow responsibility for the acts or omissions of its pilot or
negligently puts the tractors in a place where they for the defective condition of the plane's engine. The
would tilt each other. During the trip, a strong helicopter crashed killing AB. Investigations disclose
wind hits the vessel, causing severe damage to the that the pilot's error was the cause of the accident.
tractors. Tirso Molina sues the shipping company for LMC now consults you on its possible liability for
damages. The latter cites a stipulation in the charter AB's death in the light of the above findings. How
agreement exempting the company from liability would you reply to LMC's query?
for loss or damage arising from the negligence of its
A: LMC is not liable for the death of AB. LMC is a private
agents. Tirso Molina countered by stating that the
aforementioned stipulation is against public policy carrier, hence the stipulation with private carrier
and therefore, null and void. Is the stipulation valid? exempting it from liability for the simple negligence
Would you hold the shipping company liable? of its employees is a valid stipulation.1
-fa YES, if the charter is~a~demise or a bareboat charter.

2. GOVERNING LAWS
However, the stipulation is invalid if the stipulation is
a contract of affreightment. Common carriers shall be governed by the following
Under a demise or bareboat charter, the charterer laws:
mans the vessel and its own people and becomes, in a) Coastw ise Shipping
effect the owner for the voyage or service stipulated.
Hence, the carrier becomes a private carrier at least 1) New Civil Code (Arts. 1732-1766) — prima
insofar as the particular voyage concerning the ry law;
charter-party is concerned. Consequently under this 2) Code of Commerce — governs suppletorily
arrangement, the stipulation in the charter exempting in absence of Civil Code provisions.
the owner from liability for the negligence of its agent
is valid and not against public policy. b) Carriage from Foreign Ports to Philippine Ports
However, the reverse is true if the charter is one 1) New Civil Code — primary law;
of affreightment whether a Voyage charter or a time
2) Code of Commerce — all matters not regu
charter. In such a case, the carrier remains to be a
lated by the Civil Code (National Develop-
common carrier. H ence,the stipulation exempting
— - - - ment Co? v. -CA, 164 SCR A 593);
the carrier from liability for the negligence of its
employees is void for being against public policy and 3) Carriage of Goods by Sea Act — suppleto
the carrier is liable as a consequence. rily to the Civil Code (FbidA*
c) C arriage fro m P h ilip p in e P orts to Foreign P orts order at their destination (or failure to transport
the passenger safely) constitutes a prima facie
1) The laws of the country to which the goods
case of fault or negligence against the carrier.
are to be transported (Art. 1753, Civil Code;
If no adequate explanation is given as to how
National Development Co. v. CA, 164 SCRA
593). the deterioration, the loss, or the destruction
of the goods, happened, the transporter shall
d) Overland Transportation be held responsible (Belgian Overseas Chartering
1) Civil Code — primary law; and Shipping, N.V v. Phil. First Ins. Co., G.R. No.
143133, June 5, 2002).
2) Code of Commerce — suppletorily.
e) Air Transportation c) The presumption also makes the doctrine of
proximate cause inapplicable to contract of
1) Civil Code; carriage. The injured passenger or owner of
2) Code of Commerce; goods need not prove causation to establish
his case. The presumption arises upon the hap
3) For International Carriage — Convention
pening of the accident (Calalas v. CA, G.R. No.
for the Unification of Certain Rules Relat
122039, May 31,2000).
ing to the International Carriage by Air or
" Warsaw Convention " with its amendments
(Alitalia v. Intermediate Appellate Court, 192 4. DEFENSES OF COMMON CARRIERS ,
__________ SCRA 9)._____ ,__________ __________________ ----- Exetetse-el-extraordina^-dlMgeaee............-aad exempting-
causes (Art. 1734, NCC)
3. EXTRAORDINARY DILIGENCE AND PRESUMPTION OF
NEGLIGENCE UNDER THE CIVIL CODE a) Extraordinary diligence requires that the ship
which will transport the goods is seaworthy
a) In case of loss of effects of passengers or death (TranS'Asia Shipping Lines v. CA, 254 SCRA 260
or injuries to passengers, the common carrier is [1996]). Ensuring the seaworthiness of the vessel
presumed to be at fault or have acted negligently is the first step in exercising the required vigilance
unless it had observed extraordinary diligence (Cokaliong Shipping Lines v. WCPB, Gen. Insurance
in the vigilance thereof. The court need not Co., G.R. No. 146018, June 25, 2003). However,
make an express finding of fault or negligence presentation of certificates of seaworthiness is
of common carriers, the law imposes to common not sufficient to overcome the presumption of
carriers strict liability, as long as it is shown that negligence (Delsan Transport Lines v. CA, G.R. No.
there exists a contract between the passenger (or
127897, Nov. 15,2001).
the shipper of the goods to be carried) and the
common carrier and that the loss, deterioration, 4.02. Common carriers are responsible for the loss, des
injury or death took place during the existence truction, or deterioration of the goods, unless it is due
of the contract (Arts. 1735 and 1756, NCC). ■ : ^ to miy of the following causes only; ---
b) Mere proof of delivery of the goods in good order 1) Flood, storm, earthquake, lightning, or
to a common carrier and their arrival in bad other natural disaster or calamity;
2) Acts of the public enemy in war, whether 2) In another case, the carrier was not made
international or civil; liable for its failure to install window grills
3) Act or omission of the shipper or owner of on its buses to protect passengers from in
the goods; juries caused by rocks hurled at the bus by
lawless elements (Pilapil v. CA).
4) The character of the goods or defects in the
packing or in the containers; c) However, it was ruled in one case that seizure of
passenger bus by armed men is not a fortuitous
: 5) Order or act of the competent public event and does not excuse the carrier from liabil
authority (Art. 1734, NCC); or
ity where there was already a report from police
6) Exercise of extraordinary diligence (Arts. agents that a certain group will attack the buses
1735 and 1755, NCC). and the carrier did not take steps to safeguard
The above enumeration is exclusive or the lives and properties of its passengers (For
a closed list. If not one of those enumerated is tune Express, Inc. v. CA, G.R. No. 119756, March
present, the carrier is liable (Belgian Chartering 18,1999). This should be distinguished from Pi
and Shipping, N.V. v. Phil. First Insurance Co., Inc., lapil v. CA, where the injury was not foreseeable.
G.R. No. 143133, June 5, 2002; Delsan Transport d) Requisites of Fortuitous event:
Lines v. CA, G.R. No. 127897, Nov. 15, 2001).
1) The cause of the unforeseen and unexpect
a) It should be pointed out that the requisite dili~ ed occurrence, or of the failure of the debtor
gence would not vary in case the contract is for to comply with his obligation, must be in-
transport of passengers; the carrier is obliged to dependent of the human will;
carry the passenger safely as far as human care
2) It must be impossible to foresee the event
and foresight can provide, using the utmost dili
gence of very cautious persons with due regard which constitutes the caso fortuito, or if it
to all the circumstances (Art. 1755, NCC). can be foreseen, it must be impossible to
avoid;
b) Hiiackmg of the carrier does not fall among the
3) The occurrence must be such as to render it
five categories of exempting causes. It would
impossible for the -debtor to fulfill his obli
follow therefore that the hijacking of the car
rier's vehicle must be dealt with under Article gation in a normal manner; and
1735 of the New Civil Code, in other words, the 4) The obligor (debtor) must be free from any
common carrier ds presumed be at fault or to participation in or the aggravation of the
have acted negligently unless there is a proof of injury resulting to the creditor.
extraordinary diligence on the part of the com
e) The court ruled that the sinking of a barge that
mon carrier.1
was being towed by a tug boat was the result of
1) In a case, the carrier was not held liable ._ a iortuitous, event when it resulted because the
where the goods were lost as a result of rob barge was suddenly tossed by waves of extra
bery attended by grave irresistible threat, ordinary height and buffeted by strong winds
• violence or force (De Guzman v. CA, supra). resulting in the entry of water into the barge's
hatches (Phil American General Insurance Com resulting therefrom (Southern Lines, Inc. v. CA, 4
pany v. PKS Shipping Company, G.R. No. 149038, SCRA258).
April 9, 2003).
f) Fortuitous event, to be a valid defense, must be 8. DURATION OF LIABILITY (Arts-. 1736, 1737 and 1738,
established to be the proximate cause of the loss NOC)
(Asia Lighterage and Shipping, Inc. v. CA, et ah, 5.01. GOODS
G.R. No. 147246, Aug. 19,2003).
Th e duty to exercise extraordinary diligence starts
PROBLEM; - v vh from the time the goods are unconditionally placed
in the possession of, and received by the carrier for
1. M/V Tandag sank due to a fire which resulted from transportation until the same are delivered, actually
a crack in the auxiliary engine fuel oil service tank. or constructively, by the carrier to the consignee or
Fuel spurted out of the crack and dripped to the to the person who has the right to receive them. It
heating exhaust manifold, causing the ship to burst remains in full force and effect even when they are
into flames. The crack was located on the side of the temporarily unloaded or stored in transit unless the
fuel oil tank, which had a mere two-inch gap from shipper or own er has m ade use of the right of stoppage
the engine room walling, thus precluding constant in transitu. It continues to be operative even during
inspection and care by the crew. The vessel sank as the time the goods are stored in a warehouse of the
a consequence. Was the sinking of the vessel due to carrier at the place of destination until the consignee
_____ fortuitous e v e n t ? ____________________ ha3 been advised of the arrival of the goods and has
A: NO. Having originated from an unchecked crack in had reasonable opportunity thereafter to remove
the fuel oil service tank, the fire could not have been them or otherwise dispose of them (Arts. 1736,1737
caused by force majeure. Broadly speaking, force majeure and 1738, NCQ. ;
generally applies to a natural accident, such as that 5.02. ^PASSENGERS:
caused by a lightning, an earthquake, a tempest or a
public enemy. Hence, fire is not considered a natural a) Start. The carrier is bound to exercise utmost
disaster or calamity (Edgar Cokaliong Shipping Lines, diligence with respect to passengers the moment
Inc. v. UCPB General Insurance Company, G.R. No. the person who purchases the ticket (or a "token")
146018, June 25, 2003). from the carrier presents himself at the proper
place and in a proper manner to be transported.
g) Contributory negligence on the part of the Such person must have a bona fide intention to
passenger is not a defense that will excuse the use the facilities of the carrier, possess sufficient
carrier from liability. It will only mitigate such fare with which to pay for his passage, and
liability. present himself to the carrier for transportation
in the place and manner provided. If he does
h) . The carrier,, knowing the fact of improper pack - — , not do so, he will not be considered a passenger..........
ing of the goodshipon ordinary observation, still and the carrier does not owe him extraordinary
accepts the goods notwithstanding such condi diligence (Jesusa Vda. de Nueca, et al. v. The Manila
tion, is not relieved of liability or loss or injury Railroad Company, CA-No. 31731, Jan. 30,1968). It
f AR i V|.— LAWS ON T k ANSiAj RTATICiN 445
from the carrier's conveyance or has had a rea

is the duty of carriers of passengers to stop their
sonable opportunity to leave the carrier's prem
conveyances for a reasonable length of time in
order to afford passengers an opportunity to ises. All persons who remain on the premises
within a reasonable time after leaving the con
board and enter, and they are liable for injuries
veyance are to be deemed passengers, and what
suffered by boarding passengers resulting
is a reasonable time or a reasonable delay within
from the sudden starting up or jerking of their
this rule is to be determined from all the circum
conveyances (Dangwa Transportation Co., Inc, v.
stances, and includes reasonable time to look af
CA, 202 SCRA 575,580 [1991]).
ter his baggage and prepare for his departure.
1) In Dangwa Transportation Co. v. Court of For instance, a person, who, after alighting from
Appeals (Ibid., at p. 580), the victim was a train, walks along the station platform is con
considered a passenger by stepping and sidered still a passenger (La Mallorca v. CA, 17
standing on the platform of the bus. The SCRA 739 [1966]; Aboitiz Shipping Corporation v.
duty which the carrier owes to its patrons CA, G.R. No. 84458, Nov. 6,1989).
extends to persons boarding the carrier as
1) In La Mallorca v. Court of Appeals (Ibid.), the
well as those alighting therefrom. While the
plaintiff spouses together with their three
carrier (i.e., a bus) is not in motion there is
daughters (ages 13, 4, and 2) were the first
no necessity for a person who wants to ride
to go down the bus that they were riding
the same to signal his intention to board. A
when it reached their destination. The hus-
public .utmty_bus,.pncg.j£ stops,, fc.jiD-fiffed;
______ band led his wife and children to a shaded
” making a ,continuous offer,to bus.r i f e r:
spot on the left pedestrian side of the road
2) The petitioner carrier was held liable for about 4 or 5 meters away from the vehicle.
breach of contract in Light Rail Transit The husband returned to the bus to get
Authority (LRTA), et ah v. Marjorie Navidad, his other baggage and he did not notice
et al. (G.R. No. 145804, Feb. 6, 2003) when that his 4-year old daughter followed him.
a certain Nicanor Navidad died after he While he was on the running board of the
. fell on the LRT tracks and was struck by a bus waiting for the conductor to hand him
moving train which was coming in at the his baggage, the bus moved although the
exact moment that Mr.. Navidad fell from conductor had not yet signaled the driver
the platform. Mr. Navidad was treated as to start off. The bus hit the 4-year-old child
a passenger because he entered the LRT as a consequence. The Supreme Court ruled
station after having purchased a "token" that there was breach of duty to exercise ex
and he fell while he was on the platform traordinary diligence with respect to the
waiting for a train. Thus, he was where he 4-year old child and the carrier is liable as
was supposed to be with the intention of a consequence. The presence of passengers
boarding a train. near the bus was not unreasonable and
they'werehtherefore, to be considered still
b) Termination. Once created, the relationship will
as passengers of the carrier, entitled to the
not ordinarily terminate until the passenger has,
protection under their contract.
after reaching his destination, safely alighted
2) The Supreme Court cited in La Mallorca case of the former's employees, although such employees
where a passenger alighted at his destina may have acted beyond the scope of their authority or
tion and is proceeding by the usual way to in violation of the orders of the common carriers. This
leave the company's premises, but before liability does not cease upon proof that they exercised
actually doing so is halted by the report all the diligence of a good father of the family in the
that his brother, a fellow passenger, has selection and supervision of their employees (Art.
been shot, and he in good faith returns to 1759, NCC).
relieve his brother. He is deemed reason
6.02. The liability of the carrier for the personal violence of
ably and necessarily delayed and thus con
its employees or agents upon its passengers extends
tinues to be a passenger entitled as such to fjjl
only to those acts which that the carrier could foresee
the protection of the railroad company and
ft or avoid through the exercise of the degree of diligence
its agents.
required.
3) In Aboitiz Shipping Corporation v. Court
o f Appeals (179 SCRA 95 [1989]) a certain 6.03. The carrier is not liable for acts of the employee not
Anacleto Viana (AV) disembarked from on duty or in the line of duty. However, the rule on
the vessel he was on board. About one (1) strangers apply to them.
hour after he disembarked, AV returned 6.04. A common carrier is responsible for injuries suffered
to the vessel to retrieve a baggage that he by a passenger on account of the willful acts or
left. It was while he was pointing to the negligence of other passengers or of strangers, if the
crew of the said vessel to the place where common carrier's employees through the exercise of
his cargoes were loaded that the crane the diligence of a good father of the family could have
(operated by a stevedoring company to off prevented or stopped the act (Art. 1763, NCC).
load cargoes) hit him, pinning him between
the side of the vessel and the crane. He died 7. STIPULATIONS REDUCING DILIGENCE OR LIMITING
as a consequence. The Supreme Court ruled LIABILITY
that extraordinary diligence was still owed
to AV at the time of the accident. It was 7.01. REDUCTION OF DILIGENCE
ruled that AV's presence in the premises The parties cannot stipulate so as to totally
was not without cause. The victim had to exempt the carrier from exercising any degree of
claim his baggage which was possible only diligence whatsoever; and that the parties cannot
one (1) hour after the vessel arrived since stipulate that the common carrier shall exercise
it was the standard procedure in the case diligence less than the diligence of a good father of
of petitioner's vessels that the unloading a family. In other words, in carriage of goods, the
operation shall start only after that time. parties may stipulate that the diligence to be exercised
by the common carrier be less than the extraordinary
S. LIABILITY FOR ACTS OF EMPLOYEES AND PASSEN- diligence provided that the following requisites are
- GERS (Arts. 1759 and 1763, NCC) - -- complied with: --• - - - -
6.01. Common carriers are liable for the death of or injuries a) That the stipulation be in writing signed by both
to passengers through the negligence or willful acts parties; ^
■
ail
gm m
mm
b) That the stipulation be supported by a valuable c) The carrier need not observe any diligence in the
consideration other than the service rendered by custody of the goods;
the common carrier; and
d) The carrier shall exercise a degree of diligence
c) That the stipulation be reasonable, just and not less than that of a good father of a family over
contrary to law (Art. 1744, NCC). the movable transported;
Notes: (1) This should be distinguished from Article e) The carrier shall not be responsible for the acts
1750 which involves a stipulation fixing the amount or omissions of his or its employees;
that may be recovered which only requires that: (i) it is f) The carrier's liability for acts committed by
reasonable and just under the circumstances; and (ii) it is thieves or robbers who do not act with grave or
fairly and freely agreed upon. (2) No reduction is allowed irresistible threat, violence, or force is dispensed
in carriage of passengers (Art. 1757, NCC). with or diminished;
7.02. Valid stipulations relative to liability of common g) The carrier is not responsible for the loss,
carriers destruction, or deterioration of the goods on
a) An agreement limiting the common carrier's account of the defective condition of the car,
liability for delay on account of strikes or riots. vehicle, ship, or other equipment used in the
contract of carriage (Art. 1745, NCC).
b) A stipulation that the common carrier's liability
is limited to the value of the goods appearing in 7.04. Carriage of Goods by Sea Act (COGSA)
the bill of lading unless the shipper or owner de-
__________ If the goods are to be shipped from a foreign
dares a greater value ( E d g a r C o k a lio n g S h ip p in g
port to the Philippines, the COGSA shall apply
Lines v. UCPB Gen. Insurance Co., supra).
suppletorily. Under the COGSA, that the liability of
c) A contract fixing the sum that may be recovered the carrier is US$500 per package in the absence of a
by the owner or shipper for the loss, destruction, shipper's declaration of a higher value in the bill of
or deterioration of the goods, if it is reasonable lading (Sec. 4[5], COGSA).
and just under the circumstances and has been
fairly and freely agreed upon (Art. 1748, NCC). The condition is part of the bill of lading even if
not expressly stated.
d) When a passenger is carried gratuitously, a
stipulation limiting the carrier's liability for a) If the goods are shipped in cartons, each carton
negligence is valid, but not for willful acts or is considered a package even if they are stored
gross negligence. However, reduction of fare in container vans (Eastern Shipping v. IAC, 150
does not justify any limitation of liability (Art. SCRA 464 [1987]). When what would ordinarily
1758, NCC). be considered packages are shipped in a con
tainer supplied by the carrier and the number
7.03. Invalid Stipulations with Common Carriers
of such units is disclosed in the shipping docu
a) The goods are transported at the risk of the own- ments, each of those units and not the container
" er or shipper; ~ ■ - constitutes the "package" referred to in COGSA.
b) The carrier will not be liable for any loss, b) In Belgian Overseas Chartering v. Phil. First Ins.
destruction, or deterioration of the goods; Co. (June 5, 2002), 242 coils of steel sheets were
’ :T '
450 REVIEWER ON COMMERCIAL LAW EA R ! VI ~ LAWS ON TRANSPORTATION' 451

shipped on board a vessel in Germany for trans subject to his right of recourse against the transferee
port to Manila. These coils were shipped inside or the buyer (Gaudioso Erezo, et a lv . Aguedojepie , G.R.
the containers provided by the carrier. The Let No. L-9605, Sept. 30,1957; Equitable Leasing Corporation
ter of Credit covering the shipment states the v. Lucita Suyon, et at, G.R.:No. 143M0, Sept. 5 , 2002).
per metric ton price of the coils. Later, it was dis a) Leased Vehicles. The registered owner is also
covered that four (4) coils were damaged. The liable even if the vehicle was leased to another
Supreme Court applied the COGSA and ruled person (BA. Finance Corporation v. CA, 215 SCRA
that the liability should not be based on the price 715 [1992]).
declared in the Letter of Credit. The Court con
sidered each coil as a package and awarded $500 b) Stolen Vehicles. The registered owner is not
per coil or a total of US$2,000. liable if the vehicle was taken from his garage
without his knowledge and consent. To hold the
7.05. Purpose of Stipulation Limiting Liability registered owner liable would be absurd as it
The purpose of the limiting stipulation in the would be holding liable the owner of a stolen ve
hicle for an accident caused by the person who
Bill of Lading is to protect the common carrier. Such
stole such vehicle (Duavit v. CA, 173 SCRA 490,
stipulation obliges the shipper/consignee to notify
496 [1989]).
the common carrier of the amount that the latter
may be liable for in case of loss of the goods. The 8.02. K a b it System
common carrier can then take appropriate measures The "registered owner" rule is applicable when-
________ — getting insurance, if needed, to cover or protect —------- ever the persons involved are engaged in what is
itself. This precaution on the part of the carrier is known as the “kabit system." The “kabit system" is an
reasonable and prudent. Hence, a shipper / consignee arrangement whereby a person who has been granted
that undervalues the real worth of the goods it seeks a certificate of public convenience allows other per
to transport does not only violate a valid contractual sons who own motor vehicles to operate them under
stipulation, but commits a fraudulent act when it his license, sometimes for a fee or percentage of the
seeks to make the common carrier liable for more earnings. Although the parties to such an agreement
than the amount it declared in the bill of lading are not outrightly penalized by law, the kabit system
(Edgar Cokaliong Shipping Lines, Inc. v. UCPB General is invariably recognized as being contrary to public
Insurance Company, supra). policy and therefore void and inexistent under Article
1409 of the Civil Code (Aberlardo him, et al. v. CA, et at,
8. REGISTERED OWNER RULE AND KABIT SYSTEM G.R. No. 125817, Jan. 16, 7.002; Baliwag Transit, Inc. v.
CA, 147 SCRA 82 [1987]),: .
8.01. Registered Owner Rule
a) May a jeephey under the “kabit system" be lev
The rule in this jurisdiction is that the person
ied upon by the creditors of the registered opera
who is the registered owner of a vehicle is liable for
tor?
any damages caused, by the negligent operation of
the veKTcle although the same was already sold or YES. A levy is proper and in contemplation
con veyed to another person at the time of the accident. of law as regards the public and third persons,
The registered owner is liable to the injured party the vehicle should be considered the property of
'' ~ ^■
the registered owner under the registered owner Can a common carrier and the arrastre opera
rule (Santos v, Sibug, 104 SCRA 520)j tor be held solidarity liable for damages in the
shipment of goods?
9.' CONCURRENT CAUSES OF ACTION
The legal relationship between the con
9.01. DRIVER AND THIRD PERSONS signee and the arrastre operator is akin to that of
a) What is the basis of a cause of action of a a depositor and a warehouseman. The relation
passenger against the common carrier? Against ship between the consignee and the common
the driver? carrier is similar to that of a consignee and
the arrastre operator. Hence, the duty of the
The basis of a cause of action of a passenger arrastre operator to take care of the goods that
or shipper against the common carrier is culpa are in its custody and to deliver them in good
contractual, while the basis of liability on the part
condition to the consignee also devolves upon
of the driver is either culpa delictual or culpa aq-
the common carrier. Thus, the arrastre operator
uiliana. The driver of the carrier, not being an
and the common carrier are liable in solidum io r
agent but an employee, has himself no contrac
the proper delivery of the goods to the consignee
tual relationship with the passenger. However,
(Fireman's Fund Insurance Co. v. Metro Post Service,
the same act or omission may give rise to both
causes of action. Tort may be a mode of breach. Inc., 182 SCRA 455; Eastern Shipping Lines v. CA,
234SCRA78).
b) Concurrence of Third Person.
--------------------- :— If the negligence of third persons concurs PASSENGER’&BAGQAGES__ ____________ __ _______
with the breach (as in the case where the passen As to baggage of passengers, the law makes a distinction
ger was injured because the carrier collided with between a baggage in possession of the passenger and one
another vehicle), the liability of the third person that is with the carrier.
who was driving the vehicle and / or his employ
er may be based on quasi-delict. The driver (third 1Q.01. Baggage in the custody of the passengers or their
person) alone may be held criminally liable and employee
civil liability may be imposed on him. based on Under this, the baggage in transit which is in the
delict. Ih the latter case, the employer is subsidi- personal custody of the passenger ,or his employee
; arily liable. will be considered as necessary deposits. The com
9.02. JOINT AND SEVERAL LIABILITY mon carrier shall be responsible for the baggage as
depositaries, provided that notice was given to them
In case the negligence of the carrier's driver and or its employees, and the passenger took the neces
a third person concurs, the liability of the parties — sary precaution, which the carrier has advised them
carrier and his driver, third person — is joint and relative to the care and vigilance of their baggage.
several (MMTC v. CA, 223 SCRA 521 (19931). In case of loss due to fault of the passenger the car-
•9.03. A RR ASTRE OPERATOR* ~ — .rier will not be liable. The act of the thief or robber,.
who has entered the coihmon carrier's vehicle is not
a) What is the nature of the legal relationship be deem ed force majeure, unless it is done with the use of
tween the consignee anddh e:urrastre operator? arms or through an irresistible force (Art.1754, NCC).
10,02. Baggage in the custody of the carrier conveyance of persons and property" (Francisco,
Articles 1733 to 1753 of the NCC shall apply p. 254).
in this case. The carrier who has in his custody the 12.02. VESSEL
baggage of a passenger to be carried like any other
goods is required to observe extraordinary diligence. A ship or vessel is any kind, class or type of
In case of loss or damage the carrier is presumed craft or artificial contrivance capable of floating in
water, designed to be used or capable of being used
negligent (Ibid.).
as a means of water transport for the carriage of
passengers or cargo or both, utilizing its own motive
11. SUCCESSIVE CARRIERS
power or that of another (Sec. 3[fl, R.A. No. 9295 and
11.01. Successive carriers by agreement for combined Sec. 3[b], P.D. No. 474).
services-
a) Vessels, any interest thereto as well as conve
In Maritime Law, the second carrier shall assume yances, transfers or mortgages thereof are
the obligations of the first carrier but the second registered with the Maritime Industry Authority
carrier has a right of action against the first carrier, (MARINA for short) (Sec. 10, R.A. No. 9295; Sec.
if the latter is directly responsible for the fault giving 14, E.O. No. 125 and 125-A).
rise to the claim of the shipper or consignee (See Art.
373 of the Code o f Commerce, referring to a case where b) Any unregistered transfer shall not affect third
several carriers successively transport the goods, or by the persons but is considered binding on the parties.
~ use of or through a bill of lading). c) A Philippine flag vessel or watercraft is one that
11.02. Liability of successive air carriers is registered under Philippine laws (Sec. 3[d],
P.D. No. 474). It entitles the vessel to protection
An airline ticket providing that carriage of of the authorities and flag of the Philippines in
successive air carriers is to be regarded as a "single all ports and on the high seas (Sec. 810, Tariff and
operation" is to make the issuer-carrier liable for Customs Code).
the tortious conduct of the other carrier. A printed
provision in the ticket limiting liability only to its own 13. LIMITED LIABILITY RULE
conduct is not enough to rebut that liability (KLM
Dutch Airlines v. CA). 13.01. What is your understanding of the doctrine of
limited liability? When is it applicable under the
Code of Commerce? What are the exceptions?
B. MARITIME LAW
The exclusively real and hypothecary nature
12. GENERAL CONCEPTS of maritime law operates to limit the liability of
the shipowner to the value of the vessel, earned
12.01. DEFINITION OF M ARITIM E LAW
freightage, and proceeds of the insurance, if any. "NO
Maritime law is the system of laws which "par VESSEL, NO LIABILITY," expresses in a nutshell the
ticularly relates to the affairs and business of the sea, limited liability rule (Monarch Ins. Co. v. CA, G.R. No.
to ships, their crews and navigation, and to marine 92735, June 8,2000) . The total destruction of the vessel
extinguishes maritime lien as there is no longer any — when shipowner is negligent ~~~ applies
res to which it can attach. (Monarch Ins. Co. v. CA, supra; Aboitiz Shipping v.
New India Ins. Co., Ltd., 488 SCRA 563 [2006]).
The limited liability rule is embodied in Articles
587, 590, and 837 of the Code of Commerce (Aboitiz c) Abandonment
Shipping Corp. v. Gen. Accident Fire and Life Assurance
Under Article 587 of the Code of Commerce,
Corp., 217 SCRA 359 [1993]).
the shipowner or ship agent may exempt
a) When applicable themselves from liability by abandoning the
vessel with all her equipment and the freight it
The Code of Commerce sanctions the appli
cation of the doctrine in the following cases: may have earned during the voyage. If there is
insurance over the vessel, abandonment covers
1) Civil liability for indemnities in favor of the insurance proceeds while the vessel itself
third persons which arise from the conduct shall be abandoned in favor of the insurer.
of the captain in the care of the goods which
the vessel carried (Art. 587, Code o f Com d) Who can invoke the Limited Liability Rule
merce or CC); It is the shipowner who can invoke the
2) Civil liability arising from collisions (Art. limited liability rule. He is the person for whom
837, CC); the rule has been conceived. The charterer cannot
invoke the limited liability rule as a defense
_____ 3l)__I Jnpaid wages of the captain and the crew
---------------- espednily-Hgainsl^theîpowner (De la Torre v.
if the vessel and its cargo are totally lost by
CA, 653 SCRA 714 [2011]).
reason of capture or shipwreck (Art. 643,
CC). 13.02. How claims are satisfied under the Limited Liability
b) The exceptions are: Rule
1) When the injury to or death of a passenger All claims should be collated before they can
is due either to the fault of the shipowner, be satisfied from what remains of the insurance
or to the concurring negligence of the ship proceeds and freightage at the time of the loss. No
owner and the captain; claimant should be given preference over the others
by the simple expedience of having filed or completed
2) When the vessel is insured (to the extent of
its action earlier than the rest. Thus, execution of
the insurance proceeds); and
judgment in earlier completed cases, even those
3) In Workmen's Compensation claims (Yangco already final and executory, must be stayed pending
v. Laserna, 73 Phil 330 and Chua Yek Hong v. completion of all cases occasioned by the subject
I AC, 166 SCRA 183; Monarch Ins. Co., Inc. v. sinking. Then and only then can all such claims be
CA, supra). simultaneously settled, either completely or pro rata
N ote: The limited liability rule does not ' should the insurance proceeds and freightage be not
apply if the carrier failed to overcome the enough to satisfy the claim (Aboitiz Shipping Co. v.
presumption of negligence. The -first exception General Accident Fire and Life Ins. Corp. Ltd., suvra).
44. PROTEST other member of the complement of the vessel.

The owner of the vessel at fault shall be liable for
Maritime protest is the written statement by the master losses or damages (Art. 826, CC).
of a vessel or any authorized officer, attested by proper of
ficer or a notary, to the effect that damages has been suffered b) The collision may be due to the fault of both ves
by the ship (Aquino & Hernando, Notes & Cases on the Law on sels. Each vessel shall suffer its own losses, but
Transportation & Public Utilities, p. 448). Protest is required .as regards the owner of the cargoes, both ves
under the Code of Commerce in the following cases: sels shall be jointly and severally liable (Art. 827,
1) When the vessel makes an arrival under stress CC).
(Art. 612, CC). c) . If it cannot be determined which vessel is at
2} Where the vessel is shipwrecked (Arts. 612, 624, fault, each vessel shall also suffer its own losses
843, CC). and both shall be solidarily liable for losses or
3) Where the vessel has gone through a hurricane damages on the cargoes (Art. 828, CC).
or the captain believes that the cargo has suf d) The vessels may collide with each other through
fered damages or averages (Art. 624, CC). fortuitous event or force majeure. In this case,
4) Maritime collisions (Art. 835, CC). each shall bear its own damage (Art. 830, CC).
e) Two vessels may collide with each other without
15. COLLISION
their fault but by reason of a third vessel. The
15.01. DOCTRINE OF INSCRUTABLE FAULT third vessel will be liable for losses and damages
In a collision, the vessel at fault shall indemnify (Art. 831, CC).
the damages sustained or losses incurred (Art. 826,
f) A vessel which is properly anchored and moored
CC), and if both vessels were at fault, each shall suffer
its own damages, and both shall be solidarily liable to may collide with those nearby by reason of
others (Arts. 827-828, CC). This solidarity expressed storm or other cause of. force majeure. The vessel
in Article 827 of the Code of Commerce has been held run into shall suffer its own damage or expense
to preclude a common carrier operating a vessel from (Art. 832, CC).
interposing a defense of due diligence in the selection 15.03. DOCTRINE OF ERROR IN EXTREMIS
and supervision of its employees in an action
against it by a shipper of the other colliding vessel There are three (3) zones in collision: (a) first
as distinguished from the ordinary rule in liabilities zone — time up to the moment when risk of collision
for tort or culpa aquiliana. Under the "doctrine of begins; (b) second zone — time between moment
inscrutable fault," where fault is established but it when risk of collision begins up to the moment it
cannot be determined which of the two vessels were becomes practical certainty; and (c) third zone — time
at fault, both shall be deemed to have been at fault. when collision is certain up to the time of impact.
15.02. Rules on Collision of Vessels (Arts. 826, 827, 828, . If a vessel having a right of way suddenly changes
— - - $3 0 ,8 3 1 and 832, CC) - '""1 ’ “ r its course during the third zone, in an effort to avoid
: a) The collision may be due to the fault, negligence, an imminent ; collision due to the fault of another
or lack of skill of the captain, sailing mate, or any vessel,- such act; jnay. be said To be done in extremis,
and even if wrong cannot create responsibility on the 2) The commander and technical director of
part of said vessel with the right of way. the vessel (considered the most important
because it has to do with the operation of
16. ARRIVAL UNDER STRESS the vessel and the protection of the passen
gers, crew and cargo);
It is the arrival of the vessel at the nearest and most
convenient port, if during the voyage the vessel cannot 3) Government representative of the country
under whose flag he navigates (Inter-Orient
continue the trip to the port of destination due to:
Maritime Enterprises, Inc. v. NLRC, 235 SCRA
a) Lack of provisions; 268(1994]).
b) Well founded fear of seizure, privateers or Note: The captain has management and fiduciary
pirates;and . . . .. functions and as such has a reasonable measure of
c) By reason of any accident of the sea disabling it discretionary authority to decide what the safety of
to navigate. the ship and of its crew and cargo specifically requires
on a stipulated ocean voyage (Ibid.).
17. PERSONS INVOLVED IN MARITIME COMMERCE The responsibility of the captain remains even
a) Shipowners and ship agents; if the vessel is on a compulsory pilotage (Wildvattey
Shipping Co. v. CA, G.R. No. 119602, Oct. 6,2000).
b) Captains and masters of the vessel;
b) What are the grounds for discharge of a cap-
— ;----------c)— -Officers And crew ufdrrvessel;---------------------------- faffi?-
d) Supercargoes. 1) Insubordination in serious matters;
17.01. SHIP AGENTS 2) Robbery or theft;
The ship agent is entrusted with the provisioning 3) Habitual drunkenness; and
and representing the vessel in the port in which it 4) Damage caused to the vessel or to its cargo
may be found. His liability to passengers and cargo through malice or manifest or proven
owners for loss or injury is the same as the shipowner. negligence.
He is solidarily liable with the owner for such loss or
damage subject to his right to claim reimbursement 17.03. OFFICERS AND CREW OF THE VESSEL
from the shipowner (NDC v. CA, 164 SCRA 593 a) Sailing M ate/First Mate;
119881).
b) Second Mate;
17.02. CAPTAINS AND MASTERS OF THE VESSEL c) Engineers; and
a) What are the triple roles of the captain? d) Members of the crew.
1) The general agent of the shipowner (hejduiu* 17.04. SUPERCARGOES - - "
' sign bills of lading, agree upon freight rates
and decide whether to take cargo; enter Supercargo is a person who discharges adminis
into contracts with respect to the vessel); trative duties assigned to him by ship agent or ship-
462 REVIEWER ON COMMERCIAL LAW 17 VI — LAWS ON TRANSPORTATION 463
pers, keeping an account and record of transaction as visions, wages, and expenses of the vessel
required in the accounting hook of the captain, detained during the time the arrangement
or redemption is taking place;
17,05. DESERTION
2) The goods jettisoned to lighten the vessel,
Desertion is an act by which a seaman deserts whether they belong to the vessel, to the
and abandons a ship or vessel before the expiration cargo, or to the crew, and the damage suf
of his term of duty and without leave and without fered through said act by the goods which
intention to return (Singa Ship Management Phils, v. are kept on board;
NLRC, 276 SCRA 201 (19971).
3) The cables or masts which are cut or ren
18. GENERAL AVERAGE vs. PARTICULAR AVERAGE dered useless, the anchors and the chains
which are abandoned, in order to save the
18.01. General Average cargo, the vessel or both;
This includes all damages and expenses which 4) The expenses of removing or transferring
are deliberately caused in order to save the vessel, its a portion of the cargo in order to lighten
cargo, or both at the same time from real and known the vessel and place her in condition to
risk (Phil. Home Assurance Corp. v. CA, 257 SCRA 468
enter a port of roadstead, and the damage
[1996]). resulting therefrom to the goods removed
a) Requisites of General Average or transferred;
1) Common danger to ship and the cargo after 5) The damage suffered by the goods through
it has been loaded whether during voyage the opening made in the vessel in order to
or port of loading and unloading; drain her and prevent her sinking;
2) That for the common safety, part of the 6) The expenses caused through floating a
vessel or the cargo or both is sacrificed vessel intentionally stranded for the pur
deliberately; pose of saving her;
3) That from the expenses or damages caused, 7) The damage caused to the vessel which had
follows the successful saving of the vessel to be opened, scuttled or broken in order to
and cargo; and save the cargo;
4) That the expenses or damages should have 8) The expenses of curing and maintaining
been incurred or inflicted after taking legal the members of the crew who may have
steps and authority. been wounded or crippled in defending or
Article 811 of the Code of Commerce pro saving the vessel;
vides that general averages include: 9) The wages of any member of the crew
1) The goods or cash invested in the redemp - detained as hostage by enemies, privateers
tion of the vessel or the cargo captured by or pirates, and the necessary expenses
enemies, privateers, or pirates, and the pro- which he may incur in his imprisonment,
until he is returned to the vessel or to Ms 18.02. Particular Average

domicile, should he prefer it; Simple or particular averages are all the expenses
10) The wages and victuals of the crew of a ves and damages caused to the vessel or to her cargo
sel chartered by the month during the time which have not inured to the benefit and common
it should be embargoed or detained by force profit of all the persons interested in the vessel and
majeure or by order of the government, or in her cargo (Art. 809, CC). Article 809 of the Code of
order to repair the damage caused for the Commerce provides that particular averages include:
common good; -
1) The losses suffered by the cargo from the
11) The loss suffered in the value of the goods time of its embarkation until it is unloaded
sold at arrivals under stress in order to re on account of inherent defects of the goods,
pair the vessel because of gross average; accident at sea or fortuitous event and any
and expense incurred to avoid or repair the
12) The expenses of the liquidation of the aver same;
age. 2) The losses and expenses suffered by the
b) Formalities (Arts. 813 and 814, CC) vessel in her hull, rigging, arms, and equip
ment, for the same causes or reasons, from
The claim for contribution will not prosper the time she puts to sea from the point of
if the formalities prescribed under Articles 813 departure until she anchors in the port of
and 814 are not complied with (Phil Home Assur- ----------------------- destination; . ——-------— --------------------
ance v. CA, ibid.). The formalities are as follows:
3) Losses to merchandise loaded on deck,
1) There must be resolution of the captain, except in coastwise navigation if the mari
adopted after a deliberation with the other time ordinances allow it;
officers of the vessel and after hearing all
4) Wages and victuals of the crew when the
persons interested in the cargoes. If the
vessel is detained or embargoed by a legit
latter disagree, the decision of the captain
imate order or force majeure, if the charter
should prevail but they shall register their
has been contracted for a fixed sum for the
objections.
voyage;
2) The resolution must be entered in the log
5) The necessary expenses on arrival at a port
book, stating the reasons and motives for
in order to make repairs or secure provi
the dissent, and the irresistible and urgent
sions;
causes if he acted in his own accord. It must
be signed, in the first case, by all persons 6) The lowest value of the goods sold by the
present in the hearing. In the second case, captain in arrival under stress for the pay
by the captain and all the officers of the ves ment of provisions and in order to save the
sel. The minutes must also contain a detail "'Mrew, of to covesr'any other requirement of
of all the goods jettisoned and those injuries the vessel against which the proper amount
caused to those on board. shall be charged;
PART VI — LAWS ON TRANSPORTATION
7) The victuals and wages of the crew while

it to proceed to its port of destination. Hence, there
the vessel is in quarantine;
was no general average because if is the safety of the
8) The loss suffered by the vessel or cargo by property and not of the voyage, which constitutes the
reason of an impact or collision with the true foundation of general average. It appears that
other, if it were accidental and unavoidable. the cargoes could have been unloaded by the owners
If the accident should occur through the if they have been required to do so without need of
fault or negligence of the captain, the latter expensive refloating operations (A.Magsaysay, Inc. v.
shall be liable for all the losses caused; and Anastacio Agcni, 96 Phil. 504).
9) Any loss suffered by the cargo through the
i. CHARTER PARTY
fault, negligence, or barratry of the captain
or of the crew, without prejudice to the right 19.01. What is a charter party? What are the kinds of charter
of the owner to recover the corresponding party?;:, ,
indemnity from the captain, the vessel, and A charter party is a contract by which with the
the freightage. entire ship or some principal part thereof is let by the
owner to another person for a specified period of time
PROBLEM: or use.
1. A vessel owned and operated by AM, Inc. (AM) left There are two types of charter parties:
Manila on Oct. 6, 2003 bound for Basco, Batanes via
a) A Contract of Affreightment which involves the
---------- Aparri C agayan w ith gpnpral rarg o belonging tn
---------- 1-------- use of shipping- space leased by the owner in-----
different shippers, among them Mr. A. The vessel
part or as a whole, to carry goods for others:
reached Aparri on the 10th of the month, and after Time Charter — leased for a fixed period of time;
a day's stopover in that port, weighed anchor to and Voyage ~~ for a single voyage.
proceed to Basco. While in the port, it ran aground
at the mouth of the Cagayan river, and, attempts to b) A Charter by Demise or Bareboat — by the terms
refloat it under its own power having failed, plaintiff of which the whole vessel is let to the charterer
which transfers to him its entire command and
had it refloated by LS Co. at an agreed compensation.
possession and consequent control over its
Once afloat,: the vessel returned to Manila to refuel
navigation, including the master and crew who
and then proceeded to Basco.-It was established that
are his servants. The charterer is treated as owner
the stranding, of the vessel was due to the sudden pro hac vice of the vessel. In such case, a common
shifting of the sandbars at the mouth of the river carrier becomes a private carrier (Plantes
which the port pilot did not anticipate. Mr. A claims Products, Inc. v. CA, ei a l, 226 SCRA476).
that he is not liable for general average contribution.
Are the expenses incurred in refloating the vessel . BILL OP LADING
general averages?
_ _ It is a written acknowledgment of receipt of goods and
A: .. -NO. The facts do not disclosC’thaCthetfxpertses âgreement tJtran sp o rf th e m to a 'specific placelolfperson -
were incurred to save the vessel and cargoes from a named or to his order (Campania Maritirna v. Ins. Co. ofNorth
common danger. The vessel was refloated to enable America, 12 SCRA 213),
, ... ........... . .... ............... ......

REVIEWER ON COMMERCIAL LAW PART V! ~ LAWS ON TRANSPORTATION 469
a) The consignee and the shipper who accepts a with or without specifying the vessel on which
bill of lading even without signing are bound they are to be shipped (Magellan Manufacturing
by the terms and conditions thereof (Keng Hua Corp. v. CA, 201 SCRA 102 [1991]).
Paper Products v. CA, 286 SCRA 257 [1998]).
Acceptance of the consignee is implied if he 21. LOANS ON BOTTOMRY AND RESPONDENTIA
claims reimbursement for missing goods and
21.01. DEFINITIONS
files a case based on the bill of lading (Everett
Steamship v. CA, 297 SCRA 496 [1998]; Belgian a) Bottomry — loan secured by the shipowner or
Overseas Chartering v. Phil First Ins. Co., G.R. No. ship agent guaranteed by the vessel itself and
143133, June 5, 2002). payable only upon arrival of vessel at destina
b) Delivery of Goods without Surrender of Bill tion. This can also be secured by the captain
of Lading — The obligation of the carrier is also outside the residence of the shipowner or ship
terminated if the goods are delivered even if the agent.
bill of lading was not surrendered. The surren b) Respondentia — loan secured by the owner of
der of the bill of lading is not necessary for the the cargo payable upon safe arrival of cargo
discharge of the obligation of the carrier (Repub at destination. The shipowner, ship agent or
lic v. Lorenzo Shipping, 450 SCRA 551 [2005]; Art. captain cannot secure this loan.
353, CC).
21.02, DISTINGUISHED FROM ORDINARY LOAN
20.01, Functions of a Bill of Lading .
---------a)— Evtdenee-ef^he^dstenee-ef-ihe--eefttmet-ef-eaf-- LOAN ON BOTTOM RY
OKDINS1YTOAN
riage of cargo (it provides its terms and condi AND RESPONDENTIA
tions including the consignee, the route, destina Usury law if applicable (if Usury law is inapplicable.
tion, freight, and other rights and obligations); there is usury).
b) Commercial document whereby, if negotiable, Right to recover from debt Right to recover is extin
ownership may be transferred by negotiation; or is not extinguished if guished if the thing put up as
and,; thing put up as security is security is lost or destroyed.
c) Receipt of cargo (Telengtan Bros. v. CA, supra; see lost or destroyed.
also Keng Hua Paper Products v. CA, 286 SCRA
257 [1998] and Belgian Overseas Chartering v. Phil
First Ins. Co., supra, where the Court mentioned only 22. PROCEDURE AND PRESCRIPTIVE PERIOD FOR
[a] and [c]). CLAIMS
20.02. Types of Bills of Lading 22.01. Coastwise or within the Philippines (Example:
Manila to Cebu)
a) , "On Board" Bill of Lading — it states that the
goods have been received on board the specified a) When to file a claim with carrier condition
vessel that will carry them. _ _ _ p re ce d e n t.___ _ _ . ______
b) "Received Shipment" Bill of Lading — it states Under Article 366 of the Code of Com
that the goods have been received for shipment merce, if goods arrived in damaged condition
claim mugt be filed bycthe^hip i^ r withm the fol a) The prescriptive period of one (I) year starts after
lowing period, otherwise recovery is barred: the delivery of the goods or the date the goods
should have been delivered (Sea 3, COGSA).
1) Immediately if damage is apparent; or The period does not apply to conversions or
2) Within 24 hours from delivery if damage is misdeliveries. It starts from delivery to the
not apparent. arrasire operator, not consignee. A stipulation
b) When to file a case in court — prescriptive pe reducing the one (1) year period is null and void,
riod but a written agreement to suspend it is valid.
(Note: The arrastre operator cannot invoke the
1) Within 6 years, if no bill of lading has been one [1] year prescriptive period.)
issued; or
b) YES. The rule applies in cases of collision, but it
2) Within 10 years, if a bill of lading has been
starts not from the date of the collision but when
issued.
the goods should have been delivered, had the
22.02. International carriage from foreign port to the cargoes been saved (Maritime Company of the
Philippines (GOGSA) ^ Philippines v. CA, 164 SCRA 593).
a) When to file a claim with carrier — NOT a con c) NO. The period is not suspended by an extraju
dition precedent dicial demand (Dole Philippines v. Maritime Co.,
1) Upon discharge of goods, if the damage is 148 SCRA 118 [1987]).
apparent, claim should be filed immediate- ______d) The insurer 'who is exercising its right of subro-
lyTor gation is also bound by the one (1) year prescrip-
2) If damage is not apparent, claim should be tive period (Fil. Merchants v. Alejandro, 145 SCRA
filed within 3 days from delivery. 42 [1986]).
N ote: The filing of claim is not condi e) It does not apply to claim against the insurer
tion precedent. for the insurance proceeds. The claim against
b) When to file court case — prescriptive period the insurer which is based on a written contract
expires in ten (10) years (Mayer Steel Pipe Corp. v.
1) Within a period of one (1) year from dis-
CA, 274 SCRA 432 [1997]).
. charge. •
22.03, Under the Carriage of Goods by Sea Act, a prescrip f) Damages arising from delay or late delivery is
tive period of one (1) year is expressed, a) when does not the damage or loss contemplated under the
the period start? b) Does the rule apply to collision COGSA. The goods are not actually lost or dam
cases? c) Is the period suspended by a letter-demand aged. The applicable period is ten (10) years
made by the shipper's lawyer to the carrier? d) Is the (Mitsui v. CA, 287 SCRA 366 [1998]).
prescriptive period applicable to an insurer who is 23. THE SHIP MORTGAGE DECREE (SMD) OF 1978
enforcing his right of subrogation? e) Is it applica (P.D. No. 1521) .. .
ble to the claim against the insurer for the insurance
proceeds? f) Is the period applicable in case of dam The provisions of Presidential Deceree No. 1521
age caused by delay or late delivery of.the goods? with respect to preferred mortgage prevail over the
Civil Code provisions on mortgage as well as the 3) The mortgage does not stipulate that the
■provisions of the Code of Commerce. General legisla mortgagee waives the preferred status
tion must give w-ay to special legislation on the same thereof:(Sec. 4, SMD; Poliand Industrial Ltd,
subject, and generally be so interpreted as to embrace v. 'NDC, supra).
only cases in which the special provisions are hot
b) When preferred mortgage covers two or more
applicable (Poliand Industrial Ltd. v. NDC, 467 SCRA
vessels
500).
1) The mortgage rnay provide for separate
23.01. WHO MAY CONSTITUTE A SHIP MORTGAGE
discharge of each vessel by the payment of
Any citizen of the Philippines, or any association a portion of mortgage indebtedness. The
or corporation organized under the laws of the amount of such portion of such payment
Philippines, at least sixty percent (60%) of the capital shall be endorsed upon the documents of
of which is owned by citizens of the Philippines the vessel (Sec. 4[b], SMD)i
may, for the purpose of financing the construction,
2) In case such mortgage does not provide
acquisition, purchase of vessels or initial operation
for the separate discharge of a vessel and
of vessels may freely constitute a mortgage or any
the vessel is to be sold upon the order of a
other lien or encumbrance on his or its vessels and
court of competent jurisdiction in a suit in
its equipment with any bank or other financial
rent in admiralty, the court shall determine
institutions, domestic or foreign (Sec. 2, SMD).
the portion of the mortgage indebtedness
23.02. FORMAL REQUIREMENTS----------------------- — ---- 7"" increased by 20 per centum (20%) (1) which,
The ship mortgage must be recorded or registered in the opinion of the court, the approximate
(now with MARINA), otherwise die same is void value of all the vessels covered by the mort
except as to the parties or their heir and assigns or gage, and (2) upon the payment of which
persons with actual notice (Sec. 3, SMD). the vessel shall be discharged from the
mortgage.
a) The ship mortgage shall be considered a "pre
ferred mortgage" or shall have a preferred status 23.03. ARREST AND FORECLOSURE
only if the following requirements under Section Upon default; o f the obligor; the preferred ship
4 of the SMD are complied with. In other words, mortgage may be foreclosed in a suit in admiralty (Sec.
it is required that: 10, SMD). Upon filing of a petition for foreclosure,
the Court may order the arrest of the vessel upon ex
1) The mortgage is recorded;
, paiie application duly supported by an affidavit of a
2) An affidavit is filed with the record of such person who knows the facts and upon filing of a bond
mortgage to the effect that the mortgage is (Sec. 11, SMD).
made in good faith and without any design
to hinder/delay, or "defraud any existing or Note: The mortgagee may likewise avail of the alterna
future creditor of the mortgagor or any lien tive remedy of specific performance in a suit in personam in
or of the mortgaged vessel; and admiralty (Sec. 18, SMD).
a *
474 REVIEWER ON COMMERCIAL LAW M K T VI — LAWS ON TRANSPORTATION 475

23.04. CONCURRENCE AND PREFERENCE OF CRE The maritime lien is inseparable from the vessel
DITS and until discharged, it follows the vessel. Hence,
Upon the sale of any mortgaged vessel in any the enforcement of a maritime lien is in the nature
extrajudicial sale or by order of a Court of competent and character of a proceeding quasi in rent (Poliand
jurisdiction, all pre-existing claims in the vessel shall Industrial Ltd. v. NDC, supra).
be held terminated and shall thereafter attach in like a) The maritime liens that are superior to the
amount and in accordance with the following order preferred mortgage includes maritime lien for
of preference (Sec. 17, SMB): necessaries (Sec. 21, SMD).
a) The preferred mortgage lien shall have priority 1) Necessaries — repairs, supplies, towage,
over all claims against the vessels.
use of dry dock or marine railway, or other
Exception: The preferred mortgage is inferior to necessaries to any vessel, whether foreign
the following claims IN THE ORDER STATED: or domestic, upon the order of the owner
of such vessel, or of a person authorized by
1) Expenses and fees allowed and costs taxed
the owner.
by the court and taxes due to the Govern
ment; 2) For example, expenses for the payment
2) Crew's wages; of bunker oil/fuel, unused stores and oil,
bonded stores, provisions, and repair and
3) General average;
docking of the vessel are preferred claims
__________ 4) Galvage; including contract salvage;_______ ------------------------------because they are necessaries (Poliand Indus*
5) Maritime liens arising prior in time to the trial Ltd. v. NDC, supra).
recording of the preferred mortgage;
3) The cost of modification are also necessaries
6) Damages arising out of tort; and under Section 21 of the SMD. Such cost
7) Preferred mortgage registered prior in time. is a necessary expense for the vessel's
b) When proceeds not sufficient. If the proceeds navigation. As long as an expense on the
of the,sale, should not be sufficient to pay all vessel is indispensable to the maintenance
creditors included in one number or grade, the and navigation of the vessel, it may properly
residue shall be divided among them pro rata be treated as a maritime lien for necessaries
(Sec. 17, SMD). under Section 21, Presidential Decree No.
1521 (Ibid.).
c) Ordinary credits. All credits not paid, whether
fully or partially, shall subsist as ordinary credits 24. SALVAGE LAW (SL)
enforceable by personal action against the debt
or (Sec. 17, SMD). The applicable law is Act No. 2616, otherwise known
as the Salvage Law.
23.05. MARITIME LIEN
A mantime lien is No. 5 in the order of prefer 24.01. DEFINITION "
ence. It is akin to a mortgage lien in that in spite of the There is salvage where a person (or persons)
transfer of ownership, the lien is not extinguished. picks *up and conveys to a safe place a vessel or its
476 REVIEWER ON COMMERCIAL LAW PART VI ~~ LAWS ON TRANSPORTATION 477
cargo which are beyond the control of the crew or 6} The value of such things after deducting the
shall have been abandoned by them (Sec. 1, SL). expenses (Sec. 10, SL).
Note: However, there can also be a contract of 24.04. WHO IS ENTITLED TO REWARD
salvage that may be voluntarily agreed upon by the
parties. The salvor is entitled to reward or compensation.
The reward for salvage or for assistance shall be
24.02. REQUIREMENTS FOR COMPENSATION divided between the owner, the captain, and the
A salvage claim or compensation may be award remainder of the crew of the latter vessel, so as to
ed to the salvor if the following requirements are give the owner a half, the captain a fourth, and all
present: the remainder of the crew the other fourth of the
reward, in proportion to their respective salaries, in
1) There must be a marine peril; the absence of an agreement to the contrary (Sec. 13,
2) The vessel is shipwrecked beyond the control of SL).
the crew or shall have been abandoned; a) I f two or more persons — divide between them in
3) The service of picking up and conveying the proportion to the services which each one may
vessel of cargo to a safe place is voluntarily have rendered, and, in case of doubt, in equal
rendered; and parts (Those who, in order to save persons, shall
have been exposed to the same dangers shall
4) The service must have been successful in whole*1 also have a right to participation in the reward.)
--------or in part, or that the service rendered contribuf- ----------------------- (Sec. 12, SL).---------------------------------------------------
ed to such success (Sec. 1, SL; Barrios v. Go Thong,
7 SCRA 535). C. THE WARSAW CONVENTION AND CIVIL AVIATION LAWS
24.03. AMOUNT OF REWARD OR COMPENSATION (R.A. No. 9497 and R.A. No. 6235)
The amount of compensation shall be fixed by 25. WARSAW CONVENTION (WC)
the Court taking into account the following:
This Convention applies to international transportation
1) The expenditures made to recover or save the by air. There is international transportation when:
vessel or the cargo or both;
2) The zeal demonstrated; a) The place of departure and the place of destina
tion are within the territories of two contracting
3) The time employed; countries regardless of whether or not there was
4) The services rendered; a break in the transportation or transshipment;
or
4) The excessive express occasioned the number of
persons .who aided; b) The place of departure and the place of destina-
. - . . . . tion are within the territory of a single contract
5) The danger to which they and their vessels were ing country if there is an agreed stopping place
exposed as well as that which menaced the within a territory subject to the sovereignty,
things recovered or salvaged; and . mandate or authority of another power, even
though the power is not a party to the Conven Exception: If the passenger or consignor has
tion (Mapa v. CA, 275 SCR A [1997]). made, at the time when the package was handed
over to the carrier, a special declaration of inter
25.01. TRANSPORTATION BY AIR
est in delivery at destination and has paid a sup
The period during which the baggage or goods plementary sum if the case so requires. In that
are in charge of the carrier, whether in an airport or on case; the carrier will he liable to pay a sum not
board an aircraft, or, in the case of a landing outside exceeding the declared sum, unless he proves
an airport, in any place whatsoever (Sec. 18[b] WC). that sum is greater than the actual value to the
a) It does not cover any transportation by land, by consignor at delivery.
sea, or by river performed outside an airport. Note: (1) In determining the amount of
b) If transportation takes place in the performance the carrier's liability, only the total weight of
of a contract for transportation by air, for the the package or packages concerned- :sh$U be
purpose of loading, delivery, or transshipment, considered, except when the value of other
any damage is presumed, subject to proof to packages covered by the same baggage check or
the contrary, to have been the result of an event the same airway bill are affected, the total weight
of such other package or packages shall also be
which took place during the transportation by
taken into consideration in determining the limit
air (Sec. 18 fc], WC):
of liability.
25.02. DAMAGE OR INJURY FOR WHICH THE CAR-
c) Objects of which the passenger takes charge
-------- RIER IS LIABLE--------------------------------— — ------- -
himself — 5,000 francs per passenger.
a) Passenger — injury took place: (1) on board the
N otes: The Guatemala Protocol of 1971 in
aircraft; (2) in the course of any of the operations
creased the limit for passengers to US$100,000
of embarking; (3) in the course of disembarking;
and US$1,000 for baggage. However, the Su
or (4) when there was or because of delay (Secs.
preme Court noted in Santos III v. Northwest Ori
17 and 19, WC).
ent Airlines, et al. (G.R. No. 101538, June 23,1992)
b) Checked baggage or goods — damage occurred that the Guatemala Protocol isM ll ineffective.
during air transportation or when there is delay
25 04. TORT LIABILITY
(Secs. 18[1] and 19, WC).
The Warsaw Convention does not provide for an
25.03. LIMIT OF LIABILITY OF CARRIER exclusive enumeration of instances when the carrier
a) Carriage of passengers — 250,000 francs. is liable. It does not provide for an absolute limit of
liability and it does not preclude the application of
Exception: By special contract, the carrier
ihe Civil Code and other pertinent local laws. Hence,
and the passenger may agree to a higher limit a complaint for quasi-delict can still be filed even if
of liability (Alitalia v. IAC, G.R. No. 71929, Dec. 4, Jh e filing is beyond the prescriptive period provided
1990). ■ - -* for under the Convention so long as it is; within the
b) Carriage of registered baggage and of cargo — prescriptive period of four (4) years under the Civil
250 francs per kilogramme. -Code.
a) The Warsaw Convention, however, denies to 01. DEFINITIONS

the carrier "availment of the provisions which
exclude or limit his liability, if the damage is
"Aeronautics or Aviation " refers to the science and
art of flight (Sec. 3, CAAA). Other important terms
caused by-his willful misconduct or by such
may be defined as follows (Ibid.):
default on-his part as, in accordance with the
law of the court seized of the case, is considered 1) "Air carrier or operator" refers to a person who
to be equivalent to willful misconduct," or "if undertakes, whether directly or indirectly, or by
the damage is (similarly) caused . . . by any a lease or any other arrangements, to engage in
agent of the carrier acting within the scope of air transportation services or air commerce.
his employment" (WC, as amended by the Hague
2) "Air commerce or commercial air transport opera
Protocol and Montreal Agreement).
tion" refers to and includes scheduled or non-
25.05. JPUWSDICnON/VENUE scheduled air transport services for pay or hire,
the navigation of aircraft in furtherance of a
Under Article 28(1) of the Warsaw Convention,
business, the navigation of aircraft from one
the plaintiff may bring the action for damages before
place to another for operation in the conduct of
a business, or an aircraft operation involving the
1) The court where the carrier is domiciled; transport of passengers, cargo or mail for remu
neration or hire.
2) The court where the carrier has its principal
-----------------------------place of business;________________________ 3) "Aircraft" refers to any machine that can derive
support in the atmosphere from the reactions of
3) The court where the carrier has an estab
the air other than the reactions of the air against
lishment by which the contract has been
the earth's surface. The term "aircraft," when
made; or
used in the CAAA or in regulations issued there
4) The court of the place of destination. under shall refer to civil aircraft only, and will
not include State or public aircraft.
a) Article 28(1) of the Warsaw Convention is juris
dictional in character. 4) "Airworthiness" means that an aircraft, its en
gines, propellers, and other components and ac
b) It is settled that allegations of tortious conduct
cessories, are of proper design and construction,
committed against an airline passenger during
and are safe for air navigation purposes, such
the course of the international carriage do not
design and construction being consistent with
bring the case outside the ambit of the Warsaw
accepted engineering practice and in accordance
Convention (Lhuillier v. British Airways, Inc., G.R.
with aerodynamic laws and aircraft science.
No. 171092, March 15, 2010).
5) "Civil aviation" refers to the operation of any
26. CIVIL AVIATION civil aircraft for the purpose of general aviation -;.,
?opeMionsraerial work orcommercial air tra h s-" 1*’■’ ' ^
The governing law is now Republic Act No. 9497 or port operations.
the Civil Aviation Authority Act o f2008 which was passed on
March 4,200.8 (hereinafter called CAAA). 6) "Domestic air commerce" means and includes air
"- » ;
commerce within thelimits of the PMIippifte ter b) Every ticket issued to a passenger by the
ritory. airline or air carrier concerned shall contain
among others the following condition printed
7) "Domestic air transport" means air transportation thereon: "Holder hereof and his hand-carried
within the limits of the Philippine territory. luggage(s) are subject to search for, and seizure
8) "Foreign air carrier or foreign air operator" means of, prohibited materials or substances. Holder
any operator, not being a Philippine air operator^ refusing to be searched shall not be allowed to
which undertakes, whether directly or indirectly board the aircraft," which shall constitute a part
or by lease or any other arrangement, to engage of the contract between the passenger and the air
in commercial air transport operations within carrier (Sec. 9, R.A. No. 6235).
borders or airspace of the Philippines, whether c) The CAAA likewise authorizes the Director
oh a scheduled or chartered basis. General of the Civil Aviation Authority of the
9) "Foreign air transport" refers to air transportation Philippines (or CAAP) to have access to all civil
between the Philippines and any place outside it aircraft for their inspection (Sec. 38, CAAA).
or wholly outside the Philippines. The Director General is also authorized to
detain civil aircraft if: (1) the aircraft may not be
10) "International commercial air transport" refers to
airworthy; (2) the airman may not be qualified or
the carriage by aircraft of persons or property
physically or mentally capable for the flight; or
for remuneration or hire or the carriage of mail*•
(3) the operation would cause imminent danger*1
__________ between any two (2) or more countries.
— to persons o r property on. the ground (Sec. 39,
11) "Philippine air carrier" means an air carrier who CAAA):
is a citizen of the Philippines.
26.02. INSPECTION OF AIRCRAFT. PROBLEM:".
The duty to inspect aircraft is mandated under 1. A, as paying passenger, boarded a plane of X & Co.,
Republic Act No. 62§5 which prohibits acts inimical a duly authorized air carrier bound from Manila to
to civil aviation, Cebu. Qn the way, the plane exploded in mid-air, and
crashed, causing the death of all persons on board. It
• a) Aircraft companies which operate as public was determined that the mid-air explosion was due
utilities or operators of aircraft which are for to the explosive device contained in a suitcase by
hire are authorized to open and investigate another passenger in the ill-fated aircraft. If you are
suspicious packages and cargoes in the presence the judge, how will you rule?
of the owner or shipper, or his authorized
representatives if present; in order to help the A: I will make the carrier liable. The carrier is bound
authorities in the enforcement of the provisions to exercise extraordinary diligence in carrying its
of Republic Act No. 6235. If the owner, shipper passengers. It is presumed to be negligent when
— or-hi\: representative refuses to have the same ., „its„. passengers,.,jdiedvwheA^the_ aircraft exploded., _
o'peneS'and inspected,' the airline or air carrier is Moreover, the negligence of the carrier is apparent
authorized to refuse the loading thereof (Sec. 8, because an explosive device was brought into the
RA .N o.6235). ' carrier without being detected by the employees.
484 REVIEWER ON COMMERCIAL LAW PART VI — LAWS ON TRANSPORTATION 48S
Under Republic Act No. 6235, the carrier is bound 1) EFFECT IF NOT REGISTERED. Valid only
to inspect and investigate suspicious packages that with respect to the parties and their heirs,
are being brought into the aircraft. This duty was not - assignees, executors, administrators, devi
complied with because the explosive device was not sees, or successors in interest, and any per
detected by the carrier' s personnel, son having actual notice thereof (Secs. 49
and 53, CAAA).
26.03, NATIONALITY AND OWNERSHIP OF AIRCRAFT
2) EFFECT IF REGISTERED. Valid as against
"Philippine aircraft" means an aircraft registered all persons and any instrument, recording
in the Philippines in accordance with the requirements of which is required, shall take effect from
of the CAAA (Sec. 3. CAAA). the date of-its record in the books of the
Authority and not? from the date of its
a) The registry of aircraft and any transfer, lien,
execution (Sec. 49, CAAA).
mortgage or other interests in aircraft or aircraft
engines is maintained by the CAAP. The CAAP e) The requirements are similar to the requirements
is given the sole authority to register aircraft and in land registration (Sec. 50, CAAA).
liens, mortgages or other interests in aircraft or
aircraft engines (Sec. 43, CAAA). p. public Service act
b) The certificate of registration is conclusive
evidence of ownership, except in a proceeding 27. PUBLIC SERVICE ACT " ^
where such ownership is, or may be, at issue 27.01. What are the government agencies that replaced the ’’
(Sec. 44, CAAA). Public Service Commission?
c) No aircraft shall be eligible for registration unless a) Land Transportation Franchising Regulatory Board
it is owned by or leased to a citizen or citizens of (LTFRB) — land transportation. (The Land
the Philippines or corporations or associations Transportation Office registers motor vehicles.)
organized under the laws of the Philippines at
b) Maritime Industry Authority (MARINA) — water
least sixty per centum (60%) of whose capital is
transportation.
owned by Filipino citizens.
c) National Telecommunications’ Commission —
Exception: Foreign-owned or registered air
communication utilities and services, radio
craft may be registered if utilized by members of
communications systems, wire or wireless tele
aero clubs organized for recreation, sport or the
phone and telegraph systems, radio and tele
development of flying skills as a prerequisite to vision broadcasting systems and other similar
any aeronautical activities of such clubs within public utilities.
the Philippine airspace (Sec. 44, CAAA).
d) Energy Regulatory Commission — electric or
-** d-)w~All conveyances*** madei-or executed, which ~~yj?pwer companies (EPIRA Law, RArNo. 9136). —* — - -
. ’ affects the title to, or interest in, any aircraft of
Philippine registry, or any portion thereof shall e) National Water Resources Council — water
be registered with the CAAP. i.-rresourcesc-^
£) Civil Aviation. Authority — air transportation. issued by the Public Service Commission for which no
(The CAAP undertakes the maintenance and franchise, either municipal or legislative, is required
operation of airports and other similar facilities. by law. The latter requires a franchise issued by the
The CAA P also registers aircrafts.) legislative department.
g) Department o f Transportation and Communication 27.05. Prior or old operator rule
— trains or railroad companies.
To carry out the purpose and intent for which
h) Toll Regulatory Board — toll facilities (Example: the Public Service Commission was created, the law
SLEX). c o n te m p la te s that the first licensee will be protected
27.02. What conditions must concur in the grant of certifi in his investment and will not be subjected to ruinous
cate of public convenience (and necessity)? competition. It is not therefore, the policy of the law
fo r the Public Service Commission to issue a certificate
a) The grantee must be a citizen of the Philippines of public convenience to a second operator when
or a corporation or entity sixty percent (60%) of a prior operator is rendering sufficient, adequate
which is owned by such citizens; and satisfactory service, and who in all things and
b) The grantee must have sufficient financial capa respects is complying with the rules and regulations
bility to undertake the service; and of the CoiruhBsion.
c)___The service will promote public interest and 27.06. Grounds for Revocation of Certificate
convenience in a proper and suitable manner.
------—a)— The holder violates or contumaciously refuses to
Note.' The overriding principle, still, is public comply with any order, rule or regulation of the
interest, necessity and convenience. commission.
27.03. Is a certificate of public convenience property in the b) The holder is a mere dummy.
hands of the holder thereof? c) The holder ceases operations or abandons the
A certificate of public convenience is a mere service.
license or a privilege and being neither a franchise nor 27.07. Notice and Hearing
a contract/ it confers no vested or property right or
interest on the holder. However, in its purely private a) Required with respect to th e following:
aspect, it has value and may be considered property 1) Issuance of certificate of public convenience
that can be levied upon. and certificate of public convenience and
27.04. Certificate : of Public" Convenience (CPC) and necessity;
Certificate of Public Convenience and Necessity 2) Fixing of standards and qualifications;
(CPCN)
3) Fixing of standards for measuring quantity;
of Public Convenience is distinct from 4) Establishment of rules to secure accuracy of
Certificate of Public Convenience and Necessity. The all meters and all measuring appliances;
former is any authorization to operate public service
REVIEWER ON COMMERCIAL LAW PART VI — LAWS ON TRANSB@KEA.TION 489
5) Order to compel operators to furnish prop b) Is a legislative franchise necessary before a

er service; and public utility can be allowed to secure a certifi
cate of public convenience?
6) Allowing extension of facilities,
There is a need to qualify the answer.
b) NOT required with respect to the following: NO, if there is no statute requiring the same,
1) Investigation of public utility companies; but YES, if the pertinent law requires such
legislative franchise. Although the trend is to
2) Valuation of properties of public utilities; delegate the legislative power to authorize the
3) Examination and test of measuring appli operation of legislative authorities, there are
ances; laws that still require legislative franchises.
For example, the governing law (P.D. No. 576-
4) Grant of special permits to make extra or A) requires a franchise for the operation of
special trips in territories specified in the radio and television stations, hencer such law
certificate; must be followed and a franchise must be so
acquired. However, there are instances when a
5) Investigation of accidents; and
franchise is not required by law as in the case
6) Compel compliance with the laws and of Executive Order No. 30 which does not
regulations. require the Philippine Ports Authority to secure
a franchise to take over, manage and operate the
27.08. FRANCHISE port complex. Similarly, no legislative franchise
The term "franchise" includes not only authori is necessary for the operation of a domestic air
zations issuing directly from Congress in the form transport (Associated Communications & Wireless
of a statute, but also those granted by administrative Services-United Broadcasting Networks v. National
agencies to which the power to grant franchises has
Telecommunications Commission, supra; Albano v.
Reyes, 175 SCRA 264 [1989]; Philippine Airlines v.
been delegated by Congress (Metropolitan Cebu Water
Civil Aeronautics Board, 270 SCRA 538 [1997]).
District v. Adala, G.R. No. 168194, July 4,2007).
27.09. PUBLIC UTILITY
a) Legislative franchise distinguished from a cer
tificate of public convenience (CPC for short). A "public utility" is a business or service en
gaged in regularly supplying the public with some
A legislative franchise is distinguished commodity or service of public consequence such as
from a CPC in that the former is a grant or privi electricity, gas, water, transportation, telephone or
lege from the sovereign power, while the latter is telegraph service (Metropolitan Cebu Water District v,
a form of regulation through an administrative Adala, G.R. No. 168194, July 4,2007). For example, the
agency (Associated Communications & Wireless Water District is a public utility (Ibid.).
Services-United Broadcasting Networks v. National
a) What are the bases/reasons for regulation of
Telecommunications Commission, G.R. No. 144109,
public utilities?
Feb. 17, 2003, citing Radio Communications Philip
pines v. NTC, 150 SCRA 450 [1987]). The regulation of public utilities is founded
upon the police powers of the State and statutes
prescribing rules for the control and regulation of discretion, good sense, and a fair, enlightened
of public utilities are considered valid exercise arid independent judgment. The requirement
thereof. When private property is used for a pub of reasonableness comprehends such rates
lic purpose and is affected with public interest, it which must not be so low as to be confiscatory,
ceases to b e juris privati only and becomes subject or too high as to be oppressive. In determining
to regulation. The regulation is to promote the whether a rate is confiscatory, it is essential also
common good. Submission to regulation may be to consider the given situation, requirements
withdrawn by the owner by discontinuing use; and opportunities of the utility (Ibid.).
but as long as use of the property is continued,
the same is subject to public regulation (Republic b) What are the factors that should be considered
o f the Philippines v. Manila Electric Company, G.R. in determining the just and reasonable rates?
■No. 141314, Nov. 15, 2002). In determining the just and reasonable
27.10. Regulation of Rates rates to be charged by a public utility, three
major factors are considered by the regulating
In regulating rates charged by public utilities,
agency: a) rate of return; b) rate base; and c)
the State protects the public against arbitrary and
the return itself or the computed revenue to be
excessive rates while maintaining the efficiency and
quality of services rendered. However, the power earned by the public utility based on the rate
to regulate rates does not give the State the right to of return and rate base. The rate of return is a
prescribe rates which are so low as to deprive the judgment percentage which, if multiplied with
public Trtittty~uf a reasonable- return orHrtvestment. the rate base, provides a fair return on the public
Thus, the rates prescribed by the State must be one utility for the use of its property for service to the
that yields a fair return on the public utility upon public. The rate of return of a public utility is not
the value of the property performing the service and prescribed by statute but by administrative and
one that is reasonable to the public for the services judicial pronouncements. The Supreme Court
rendered. The fixing of just and reasonable rates has consistently adopted a 12% rate of return
involves a balancing of the investor and the consumer for public utilities. The rate base, on the other
interests (Ibid.). hand, is an evaluation of the property devoted
by the utility to the public service or the value of
a) What is the standard that should be used when
invested capital or property which the utility is
an administrative body fixes the rates of public
entitled to a return (Ibid.).
: ' Utilities?::-1
c) Should operating expenses be considered in
In the fixing of rates, the only standard
the determination of a just and reasonable rate?
which the legislature is required to prescribe
for the guidance of the administrative authority YES. The principle behind the inclusion of
is that the-rate:be. reasonable and just. It has operating expenses in the determination of a just
been held that even in the absence of an express and reasonable rate is to allow the public utility
requirement as to~reasonableness, this standard to recoup ihe?reasonable amount of expenses it
may be implied. What is a just and reasonable has incurred in connection with the services it
■rate.-is a question of-fact calling for the exercise provides. It does not give the public utility the
..................->
license to indiscriminately charge any and all customers and LGU concerned in its action on
types of expenses incurred without regard to the the application or motion for provisional rate
nature thereof, i.e.r whether or not the expense is adjustment (Ibid.).
attributable to the production of services by the
27.11. Foreign Equity in Public Utilities
public utility. To charge consumers for expenses
incurred by a public utility which are not related a) Section 11 of Article XII of the Constitution
to the service or benefit derived by the custom provides that "No franchise, certificate or any
ers from the public utility is unjustified and in other form of authorization for the operation
equitable (Ibid.). of a public utility shall be granted except to
citizens of the Philippines or to corporations
d) Can an administrative body that regulates a
or associations organized under the laws of
public utility grant a provisional rate increase
the Philippines at least sixty per centum (60%)
^without prior1evidentiary hearing?
of whose capital is owned by such citizens, nor
YES. The Supreme Court ruled in a num shall such franchise, certificate or authorization
ber of cases that an administrative agency may be exclusive in character for a longer period
be empowered by law to approve provisionally, than fifty (50) years." It likewise provides that
when demanded by urgent public need, rates of "the participation of foreign investors in the
public utilities without a hearing. The reason is governing body of any public utility enterprise
easily discerned from the fact that provisional shall be limited to their proportionate share in
rates are by their nature temporary and subject its capital, and all the executive and managing
to adjustment in conformity with the definitive officers of such corporation or association must
rates approved after final hearing. Thus, the Su be citizens of the Philippines."
preme Court sustained the provisional approval b) However, the Supreme Court clarified in Tatad
of increased rates by the Land Franchising and v. Garcia, Jr. (243 SCRA 436 [1995]) that the limit
Regulatory Board and Toll Regulatory Board imposed by the Constitution on foreign equity
(Ceferino Padua, et al. v. Hon. Santiago Ranada, applies only to the operation of a public utility
G.R. No. 141949, Oct. 14,2002). and not to ownership of the facilities. The right to
e) The authority over petitions for authority operate a public utility may exist independently
to increase a generation charge of electricity and separately from the ownership of the
or motions for provisional rate adjustments facilities thereof. For example, a corporation may
now falls within the jurisdiction of the ERC own the rail tracks, rolling stocks like coaches,
(NASECORE v. ERC, G.R. No. 163935, Feb. 2, rail stations terminals and power plant without
2006). To be valid, the approval of an application being a public utility. In the same manner, a
to increase the charge requires: (1) the publication common carrier may lease its vehicle like an
of the application itself, not merely the notice airplane from another corporation which does
of hearing issued, by the ERQ jn ju iew sp ap er not have a franchise. Ownership of the assets
of general circulation in the locality where the ‘~ w0Hly do nbttfequire 60% FiliplnO'eqUity;"
applicant operates; and (2) the need for the ERC c) Voting Control Test and Beneficial Ownership Test
to consider the comments or pleadings of the applies. Full beneficial ownership of 60% of the -
494 REVIEWER ON COMMERCIAL L a W
outstanding capital stock and 60% of the vot

ing shares are both required. Hence, preferred
non-voting shares shall not be included in the
P A R T V II
computation of compliance with the 60% Fili
pino equity requirement under the Constitution
(Gamboa v. Teves, G.R. No. 176579, June 28, 2011 INTELLECTUAL PROPERTY CODE
and Oct. 9, 2012). (R.A. No. 8293)
27.12, Non-exclusivity
Section 11 of Article XII of the Constitution like 1. STATE POLICIES
wise prohibits the issuance of a franchise, certificate,
a) The State recognizes that an effective intellectual
or authorization that is exclusive in character or for a
and industrial property system is: (1) vital to the
longer period than fifty (50) years.
development of domestic and creative activity;
27.13. Acts Requiring Approval (Sec. 20, Public Service (2) facilitates transfers of technology; (3) attracts
Act) by Successor Agencies of the PSC include: foreign investments; and (4) insures market ac
cess for our products (Sec. 2, Intellectual Property
(1) Fixing of rates;
Code, IPC for short).
(2) Establishment, maintenance and operation
of new units and extension of facilities or b)__ The State likewise recognizes that the use of in-
service; ;--------------------------------------- - tellectual property bears social function (Ibid.).
(3) Abandonment of station; c) It is also a State policy to streamline administra

tions of administrative procedures concerning
(4) Issuance of stocks, bonds and other evi intellectual property, liberalize registration of
dence of indebtedness; transfer of technology, and enhance the enforce
(5) Sale, alienation, mortgage, encumbrance, ment of intellectual property rights.
lease, merger or consolidation of proper
d) Protection of intellectual property is likewise
ties, franchises, certificates, privileges, or
mandated by the Constitution. Section 13 of
rights or any part thereof; and
Article XIV of the Constitution provides that
(6) Sale of shares that will make the transferee the: "State shall protect and secure the exclusive
the owner of 40% of the subscribed capital. rights of scientists, inventors, artists, and other
gifted citizens to their intellectual property and
creations, particularly when beneficial to the
. people, for such period as may be provided by
law."- - ^-
•- e) Treaties are part of our laws, hence various
provisions of treaties are incorporated in the IPC.
496 REVIEWER ON COMMERCIAL LAW PART VII — INTELLECTUAL PROPERTY CODE 497
(R.A. No. 8293)
For instance, the enactment of the IPC is partly of its components, generally known among
rhe result of the mandate of the Agreement or readily accessible to persons within the
Establishing the World Trade Organization and circles that normally deal with the kind of
the WTO's Agreement on Trade Related Aspects information in question;
of Intellectual Property Rights or TRIPS (Mirpuri
v. CA, 318 SCRA 516 [1999]). 2) Has commercial value because it is secret;
and ,,..
2. THE TERM “INTELLECTUAL PROPERTY9’ CONSISTS 3) Has been subject to reasonable steps under
OF fSec. 4.1, IPC): the circumstances, by the person lawfully in
a) Copyright and related rights; control of the information, to keep it secret
(Sec. 7, Art 39[2], TRIPS).
b) Trademarks and Service Marks;
c) Patents; c) Trademark, copyright and patents are different
d) Geographic indications; intellectual property rights that cannot be inter
changed with one another. A trademark is any
e) Layout Designs (Topographies) of Integrated
visible sign capable of distinguishing the goods
Circuits;
(trademark) or services (service mark) of an en
f) Protection of Undisclosed Information; and terprise and shall include a stamped or marked
g) Industrial Designs. container of goods. In relation thereto, a trade
2.0L C oncepts;p-’ .....— ■
— — ^ ' — name means the name or designation identify-
ing or distinguishing an enterprise. Meanwhile,
a) Geographic indications —- indications which the scope of a copyright is confined to literary
identify a good as originating in the territory and artistic works which are original intellectual
or a region or locality in that territory, where a creations in the literary and artistic domain pro
given quality, reputation or other characteris
tected from the moment of creation. Patentable
tics of the good is essentially attributable to its
inventions, on the other hand, refer to any tech
geographical origin (Sec. 3, Art. 22[1], TRIPS for
nical solution of a problem in any field of human
short). Example: Indications which identify wine
activity which is new, involves an inventive step
as coming from a specific region in France.
and is industrially applicable (Kho v. CA, G.R.
b) ' Protection of Undisclosed Information — natu No, 115758,March 11,2002),
ral and legal persons shall have the possibility
d) Utility model — models of implement or tools
of preventing information lawfully within their
controkfrom being disclosed to, acquired by, or of any industrial product even if not possessed
used; by others; without their consent in a man of the quality of invention but which is of "prac
ner contrary to honest commercial practices (i.e., tical utility."
„ breach of contract, breach of confidence, fraudu- e) Industrial design — any composition of lines or
lehf inducement, etc.) so long as the information: colors or any three-dimensional form, whether
1) Is secret in the sense that it is not, as a body or not associated with lines or colors (Sec. 112,
or in the precise configuration and assembly ICP). i
498 REVIEWER ON COMMERCIAL LAW PART VII ■— INTELLECTUAL PROPERTY CODE 499
(R.A. No. 8293)
f) "Drugs and medicines" — refer to any chemical 4. THE INTELLECTUAL PROPERTY OFFICE (IPO) — THE
compound or biological substance, other than BODY THAT ADMINISTERS THE POLICIES SOUGHT TO
food, intended for use in the treatment, preven BE IMPLEMENTED UNDER THE iPC
tion or diagnosis of disease in humans or ani 4.01. FUNCTIONS OF THE IPO (Sec. 5, IPC)
mals (Sec. 41c], R.A. No. 9502, otherwise known as
Universally Accessible Cheaper and Quality M edi a) Examine applications for grant of letters patent
cine Act o f 2008). for inventions and register utility models and in
dustrial designs;
3. INTERNATIONAL LAW RELATED PROVISIONS b) Examine applications for the registration of
3.01. RECIPROCITY (Sec. 3, IPC) marks, geographic indications, integrated cir
cuits;
Any person who is a national or who is domiciled
or has a real and effective industrial establishment in a c) Register technology transfer arrangements and
country which is: (1) a party to any convention, treaty, settle disputes involving technology transfer
or agreement relating to intellectual property rights payments;
or the repression of unfair competition to which the d) Promote the use of patent information as a tool
Philippines is also a party; or (2) extends reciprocal for technology development;
rights to nationals of the Philippines by law, shall
e) Publish regularly in its own publication the
be entitled to benefits to the extent necessary to give
-----------------gtforl- i-n an y p ro v is io n nf gnrfi m n v p n tin n f tre a t y n r
patents, marks, utility models and industrial
desi^s;Asstted-mrd--appm¥edr-&ÂkeAedm0^~
reciprocal law, in addition to the rights to which any
logy transfer arrangements registered;
owner of an intellectual property right is otherwise
entitled by this act. f) Administratively adjudicate contested proceed
ings affecting intellectual property rights; and
3.02. NATIONAL TREATMENT
g) Coordinate with other government agencies and
E ach m e m b e r o f t h e W T O 's Agreement on
the private sector to strengthen the protection of
Trade-Related Aspects of Intellectual P ro p e rty Rights
intellectual property rights in the country.
(T R IP S ) s h a ll a c c o r d to n a tio n a ls o f th e o th e r m e m b e r s
n o le s s fa v o r a b le t h a n th a t it a c c o rd s it o w n n a tio n a ls Custody of all records, books, drawings,
w ith re g a rd to th e p ro te c tio n o f in te lle c tu a l p r o p e r ty specifications, documents, and other papers and
(A rt 3, TRIPS). things relating to the intellectual property rights
3.03. MOST-FAVOURED-NATION TREATMENT applications filed with the Office.
W ith r e g a r d t o th e . p r o te c tio n o f in te lle c tu a l Note: While registration of other intellectual proper

property, any advantage, favour, p riv ile g e or ties are with the IPO, copyrighted works are still deposited
immunity granted by: a Member to the nationals of with the National Library and the Supreme Court. However,
... a n y o th e r c o u n tr y .sh a ll be accorded im m e d ia te ly a n d the IPO exercise original jurisdiction over disputes relating
unconditionally to the nationals of all other m e m b e r s to the terms of a license involving the author's rights (Secs.
of WTO's TRIPS (Art 4, TRIPS). 7,l[c] and 191, IPC).
500 REVIEWER ON COMMERCIAL LAW PARTVII — INTELLECTUAL PROPERTY CODE 501
(R.A, No. 8293)
5, COPYRIGHT matic, historical, legal, philosophical, scien

tific or other work;
5.01. DEFINITIONS (Sec. 17% IPC)
a) "Copyright" — right over literary and artistic 2) The composer, as to his musical composi-
works which are original intellectual creations in . tion;
the literary and artistic domain protected from 3) The painter, sculptor, or other artist, with re
the moment of creation (Kho v. CA, supra). spect to the product of his art;
b) "Author" — is the natural person who has 4) The scientist or technologist or any other person
created the work. with regard to his discovery or invention
c) "Collective Work" — is a work which has been (Art. 721, NCC).
created by two (2) or more natural persons at b) Letters and other private communications in
the initiative and under the direction of another writing are owned by the person to whom they
with the understanding that it will be disclosed are addressed and delivered, but they cannot be
by the latter under his own name and that con published or disseminated without the consent
tributing natural persons will not be identified. of the writer or his heirs (Art. 723, NCC).
d) "Joint Work" — is a work prepared by two or 5.03. When rights over copyrights are conferred
more authors with the intention that their con
tributions be merged into inseparable or inter- Rights over copyrights are conferred from the
--------------------- dependent parts of a unitary whole/ i.e., medi- ______ moment of creation (Sec. 172.1, IPC). The work is
cal textbook that is jointly authorized by two or deemed created if something original is expressed in
three experts. a fixed manner.
e) "Work of Applied Art" — is an artistic creation 5.04. Who owns the copyright?
with utilitarian functions or incorporated in a
a) One creator — creator, his heirs or assigns owns
useful article, whether made by hand or pro
copyright.
duced on an industrial scale.
b) Joint creation — co-authors shall be the original
f) "Performers" — are actors, singers, musicians,
owners of the copyright and in the absence of
dancers, and other persons who act, sing,
agreement, their rights shall be governed by the
declaim, play in, interpret, or otherwise perform
rules on co-ownership.
literary and artistic work.
Exception: Work of joint authorship con
5.02. CIVIL CODE PROVISIONS
sists of parts that can be used separately and the
Intellectual creation is one of the modes of author of each part can be identified, the author
acquiring ownership under the Civil Code. of each part shall be the original owner of the
" ' a) ..The following persons acquire ownership by copyright in the part that he has created.
intellectual creation: c) Commissioned work — the person commission
1) The author with regard to -his:literary, dra ing owns the work; ownership of copyright re
(R.A. No. 8293)
mains with the creator, unless there is a written f) Broadcast — twenty (20) years from the date of
stipulation to the contrary. broadcast.
d) Audiovisual work — producer for purposes of 5,06. COPYRIGHTABLE OBJECTS
exhibition; for all other purposes, the producer,
a) Literary and Artistic Works:
the author of the scenario, the composer, the
film director, the photographic director and the 1) Books, pamphlets, articles and other writ
author of the work are the owners. ings;
e) Pseudonymous and anonymoul works— unless 2) Periodicals and newspapers;
the author is undisputably known, the publisher 3) Lectures, sermons,, addresses, dissertations
shall be presumed to be the representative of the prepared for oral delivery, whether or not
author (Secs, 178 and 179, IPC). reduced in writing or other material form;
f) Employee's work during course of employment
4) Letters;
— employer, if the result of regular functions or
duties but the employee owns it if it is not part 5) Dramatic on dramaticctemusical composi
of his duties. tions; choreographic works or entertain
ment in dumb shows;
5.05. Duration of Copyright (Secs. 213 and 214, ICP)
6) Musical compositions, with or without
a)---- Literary artistic works and derivative works — words;
during the lifetime of the crcat e L~and for fifty
(50) years after his death. 7) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
b) Joint creation — the economic rights shall be works of art; models or designs for works
protected during the life of the last surviving
of art; :
author and for fifty (50) years after the death of
the last surviving author. 8) Original ornamental designs: or models
for articles of manufacture, whether or not
c) Anonymous or,a pseu dQnymousjvQrk — till the registrable as an industrial design, and
end of fifty (50) years following the date of their
other works of applied art;
first publication. The fifty (50) year duration
commences from January 1 following the date of 9) Illustrations, maps, plans, sketches, charts
publication. and three (3) dimensional works relative
■ to geography, topography, architecture or
d) Work of applied art — twenty-five (25) years
science;
from the date of making.
■ ■ ..; 10) Drawings or plastic works of a scientific or
e) Photographic works — fifty (50) years from
technical character;
the publication jof thejwork, orjfrom making if
unpublished (the iam e te rm lF given to audio 11) Photographic works including works pro
visual works produced by photography or duced by a process analogous to photogra
analogous processes). phy; lantern slides;
(R.A. No. 8293)
12) Audiovisual works and cinematographic character of mere items op p ress informa
works and works produced by a process tion" (Sec. 175, JPC). Example; The writings
analogous to cinematography or any pro of a columnist in a newspaper is subject to
cess for making audiovisual recordings; copyright but if he mentions a news item
13) Pictorial illustrations and advertisements; like bomb explosion in a certain place, he
cannot claim protection regarding this
14) Computer programs; and news item.
15) Other literary scholarly scientific and artis c) Any official text of a legislative, administrative
tic works (Sec. 172, IPC). or legal nature, as well as any official translation
N ote; The author of speeches, lectures, thereof (Sec. 175, IPC).
sermons, addresses, and dissertations shall have
d) Any work of the Government of ^ P h ilip p in es
the exclusive right of making a collection of his
However prior approval of the government
works (Sec. 176.2, IPC).
agency or office wherein the work is created
b) Derivative works: shall be necessary for exploitation of such work
for profit. Such agency or office may, among
1) Dramatizations, translations, adaptations,
other things, impose as a condition the payment
abridgments, arrangements, and other al
of royalties. No prior approval or conditions
terations of literary or artistic works; and
shall be required for the use of any purpose of
----------------2)— Collections of literary, scholarly or artistic ------ -statutes/ -rules and regulations, and speeches,
works, and compilations of data and other lectures, sermons, addresses, and dissertations,
materials which are original by reason of pronounced, read or rendered in courts of justice,
the selection or coordination arrangement before administrative agencies, in deliberative
of their contents (Sec. 173, IPC). assemblies and in meetings of public character
5.07. UNPROTECTED WORKS
(Sec. 175, IPC).
e) The trade name and container of a medicated
a) Any idea, procedure, system, method or opera
cream is the proper subject of trademark. Hence,
tion, concept, principle, discovery or mere data
copyright and patent registration of the name
as such, even if they are expressed, explained,
and container would not guarantee the regis
illustrated or embodied in a work (Sec. 175, IPC;
trant the right to the exclusive use of the same,
Art. 10[1], TRIPS). Thus, the format of a televi
not being the proper subjects thereof (Kho v. CA,
sion game show is not subject to a copyright (Joa
supra).
quin v. Drilon, G.R. No. 108946, Jan. 28,1999).
f) In the same manner, copyright registration of a
b) News of the day and other miscellaneous facts
drawing or pictorial illustration which depicts
havinguthe character of mere items of press
. ... light.boxesôrjbox-type electrical devices pro
information (Sec. i75, IPC). ~~~~~ tects the drawing but not the light box depicted
1) No protection is given to "news of the day therein (Pearl & Dean [Phil] v. Shoemart, Inc., et
and other miscellaneous facts having the al., G.R. No. 148222, Aug. 15,2003).
506 REVIEWER ON COMMERCIAL LAW FART VII — INTELLECTUAL PROPERTY CODE 507
(R.A. No, 8293)
5.08, RIGHTS OF AUTHORS 5.09. PUBLISHER'S RIGHTS
a) Economic Rights a) The right to publish granted by the author, his

heirs, or assigns;
Economic rights shall consist of the exclu
sive right to: (a) carry out, (b) authorize, or (c) b) The publisher shall have a copyright consisting
prevent the following acts: merely of the right of reproduction of the typo
graphical arrangement of the published edition
1) Reproduction of the work or substantial of the work (Sec. 174, ICP);
portion of the work;
c) If submitted to newspaper, magazine and the
2) Dramatization, translation, adaptation, like, the right to publish once materials sent by
abridgment, arrangement or other transfor a writer, a photographer, an artist to a periodical
mation of the work; or newspaper publisher, but such writer or artist
3) First public distribution of the original and retains his copyright on the piece (Sec. 180.3,
each copy of the work; IPC).
4) Rental of the original or a copy of an audio 5.10. ACTS THAT DO NOT INFRINGE COPYRIGHT
visual or cinematographic work; a) Recitation or performance of a work: (i) made
5) Public display of the original or a copy of accessible to the public, (ii) privately done, (iii)
free of charge, (i.v) strictly for a charitable or reli
the work;
gious institution;
6) Public performance ot the work; and
b) Making of quotations from a published work: (i)
7) Other communication to the public of the compatible with fair use, (ii) extent is justified by
work (Sec. 177, IPC). the purpose, (iii) source and name of the author,
b) Moral Rights appearing on work, must be mentioned;
1) Require that the authorship of the works be c) Reproduction or communication to the public
by mass media of articles on current political,
attributed to him, in a prominent way on
social, economic, scientific or religious topic,
the copies, and with the public use of the
lectures, addresses and other works, delivered
work;
in public: (i) for information purposes, (ii) not
2) Make any alterations of his work prior to, expressly reserved, and (iii) source is already
or to withhold it from publication; indicated;
3) Object to any distortion, mutilation or other d) Reproduction and communication to the pub
modification of, or other derogatory action lic of literary, scientific or artistic works as part
fill!
in relation to, his work which would be of reports of current events by means of photo
prejudicial to his honor or reputation; and graphy, cinematography or broadcasting to the
extent necessary for die purpose; - -
4) Restrain the use of his name with respect
to any work not of his own creation or in a e) Inclusion of a work in a publication, broadcast,
distorted version of his work (Sec. 193, IPC), or other communication to the public, sound
REVIEWER ON COMMERCIAL LAW PART VII — INTELLECTUAL PROPERTY CODE 509
(R.A. No. 8293)
recording o r film if made b y way c f illustration l) Single copy reproduction of a published work
for te a c h in g purposes c o m p a tib le w ith fair u s e by natural person exclusively for research and
and the source and name of th e au th or, appearing private study (even without authorization of
on work, must be mentioned; owner);
f) Recording made in schools, universities, or m) Reproduction by libraries of: (i) fragile works,
educational institutions of a work included in (ii) isolated articles in composite works, (iii)
a broadcast for the use of such schools, univer brief portions of published work, (iv) to preserve
sities or educational institutions. Such recording or replace copy;
must be deleted within a reasonable period; n) One back-up copy of computer program.
such recording may not be made from audio
visual works which are part of the general 5.11. FAIR USE
cinema repertoire of feature films except for
Fair use of a copyrighted work for criticism,
brief excerpts of the work;
comment, news reporting, teaching including mul
g) Making of ephemeral recordings: (i) by a broad tiple copies for classroom ussy scholarship, research
casting organization, (ii) by means of its own and similar purposes is not an infringement of copy
facilities, (iii) for use in its own broadcast; right (Sec. 185,1PC).
h) Use made of a work by or under the direction a) Factors to consider to determine whether use is
or control of the Government (Government, Na- fair or not:
tional Library, Educational, Scientific, or protes-
1) Purpose and the character of the use;
sional institutions) for public interest compatible
with fair use; 2) Nature of the copyrighted work;
i) . Public performance or the communication to the 3) Amount and substantiality of the portions
public of a work in a place where no admission used; and
fee is charged by a club on institution for chari 4) Effect of the use upon the potential market
table or educational purpose only and the aim is of the copyrighted work.
not profit-making;
5.12. IMPORTATION FOR PERSONAL PURPOSES
j) Public display of the original or a copy of the
The importation of a copy of a work by an indi
work not made by means of a film, slide, televi
vidual for his personal purposes shall be permitted
sion image or otherwise on screen or by means of
without the authorization of the author of, or other
any other device or process either the work has
owner of copyright in, the work under the following
been published, sold, given away, or transferred
circumstances:
to another person by the author or his successors
in title; a) Copies of the work are not available in the Phil-
;ippines/aaiid: ~ ^ -- --
k) Any use made of a work for the purpose of any
judicial proceedings; or for the giving of profes 1) ' One (1) copy at one time is imported, for
sional advice by a legal practitioner; strict individual;
(R.A. No. 8293}
2) By Authority of and for the use of the Phil BAR PROBLEMS:

ippine Government; or 1. Solid Investment House (SOLID) commissioned Mon
3) Religious, Charitable or Educational Soci Blanco and his son Steve, both noted artists, to paint
ety or institution imported not more than a mural for the Main Lobby of the new building of
SOLID for a contract price of P52 Million, a) Who
three (3) copies per title (or kind) provided
owns the mural? Explain, b) Who owns the copyright
they are not for sale;
of the mural? Explain.
b) Copies form parts of libraries and personal bag
A; a) SOLID owns the m ural In case of commissioned
gage belonging to persons or families arriving
work, the person who so commissioned the
from foreign countries and are not intended for work shall have ownership of the work (Sec.
sale: Provided, That such copies do not exceed 178.4, IPC).
three (3) (Sec, 190, IPC).
Since SOLID commissioned Mon Blanco
5.13. INFRINGEMENT ; and his son m do the work and paid for the
work in the sum of P52Million, SOLID owns the
a) How made ■ — when there is piracy or substantial
mural.
reproduction. If so much is taken that the value
of the original work is substantially diminished b) Mon Blanco and his son Steve own the copyright.
or the labors of the original author are substan While Section 17&4 of the IPG provides that the
tially and to an injurious extent appropriated by work belongs to the person who commissioned
another (Habana v. Robles, G.R. No. 131522, July ---------------- it, it is also provided that the copyright thereto
19,1999). shall remain with the creator unless there is a
written stipulation to the contrary.
b) Remedies
2. In an action for damages on account of an infringement
1) Injunction to prevent infringement (Sec. of a copyright, the defendant (the alleged pirate)
216). raised the defense that he was unaware that what
he had copied was a copyright material. Would this
2) Action for damages which should be filed
defense be valid?
within four (4) years. Damages are assessed
on the basis of the proof alleged by the A: NO, the defense would not be valid. The rights
plaintiff of sales made by the defendant of conferred by Republic Act No. 8293, otherwise
the infringing work minus whatever costs known as the "Intellectual Property Code/' insofar
the defendant may be able to prove and as copyright is concerned, subsists from the moment
of creation (Sec. 172.1). There would be infringement
appreciated by the court.
of this right the moment the defendant copies the
3) Criminal case. The infringer also exposes copyrighted material. It is immaterial whether the
himself to criminal liability wherein the law defendant was unaware that what he had copied was
^ ** prescribes penalties of imprisonment and ..........-a copyrighted material -—— — .......
fines, including subsidiary imprisonment 3. Diana and Piolo are famous personalities in show-
in case of insolvency (Sec. 218). business who kept their love affair secret. They use a
"" . * ,r, ,, ,i .. , ..
Kmc.
(R.A. -No. 8293)
special instant messaging service which allows them 6. TRADEMARKS

to see one another's typing on their own screen as a) TRADEMARK — any visible sign capable of
each letter key is pressed. When Greg, the controller distinguishing the goods (trademark) or services
of the service facility, found out their identities, he (service mark) of an enterprise and shall include
kept a copy of all the messages Diana and Pidlo sent a stamped or marked container of goods. In
each other and published them. Is Greg liable for relation thereto, a trade name means the name
copyright infringement? Reason briefly. or designation identifying or distinguishing an
A: YES. Greg is liable for copyright infringement enterprise (Kho v. CA, supra). Thus, the basic
Letters are protected works under Section 172 of the requirements are:
Intellectual Property Code. Hence, the publication of 1) There must be a visible sign. Example: A
the letters is an infringement on the right of Diana sound of a musical instrument cannot
and Piolo. The law does not distinguish if the letters be a scent of a perfume. It can be words,
are handwritten or; in electronic form. Hence, the acronyms, logos, slogans, designs, figures,
messages are protected works under the Intellectual pictographs, or portraits.
Property Code.
2) It must be capable of distinguishing the
4. BR and CT are noted artists whose paintings are goods of an enterprise. (Distinctiveness)
highly prized by collectors. Dr. DL commissioned
h) COLLECTIVE MARK — any visible sign desig
them to paint a mural at the main lobby of his new
nated as such in the application for registration
hospital for children. Both agreed to collaborate on
and capable of distinguishing the origin or any
--------- the-pre|eg4-for a totaLfee-oLiw o million pesos to be
-------------------- ether-common characteristic, includingihe qual-
equally divided between them. It was also agreed
ity of goods or services of different enterprises
that Dr. DL had to provide all the materials for the
which use the sign under the control of the reg
painting and pay for the wages of technicians and
istered owner of the collective mark.
laborers needed for the work on the project. Assume
that the project is completed and both BR and CT are Note: There is no need to register trade
fully paid the amount of P2M as artists' fee by DL. names in order to secure protection for them
Under the law on intellectual property, who will own (Sec. 165.21a], IPC).
the mural? Who will own the copyright in the mural? 6.01. FUNCTIONS
Why? Explain. -
a) To indicate the origin of the goods to which they
A: DL owns the mural while BR and CT own the copyright are attached;
over the mural. Section 178.4 of the Intellectual
. Property Code provides that in case of commissioned b) To guarantee the standard of quality of the
work, the creator owns the copyright, but the work goods; and
itself belongs to the person who commissioned its c) To advertise the goods (Mirpuri v. CA, supra).
creation. The person who commissioned the work
6.02. HOW MARKS ARE ACQUIRED
^ -^ -.w ilL o w n the copyright, onlw iC there is a written
stipulation to that effect. Tn the present case, BR and a) The rights*in a mark shall be acquired through
CT own the copyright, since there is no stipulation to registration with the Intellectual Property Office
the contrary. or IPO (Sec. 122>IPC),
■REVIEWER-ON COMMERCIAL LAW PART VII — INTELLECTUAL PROPERTY CODE 515
(R.A. No. 8293)
1) Registration is necessary before one can file competition or false designation of or
an action for infringement. igin (Secs. 168.2 and 169, IPC). Unfair
2) A£t]Muse_, competition is present when: (1) there
is passing off of a product format of
(i) Prior use in the Philippines is not
another; (2) giving goods (or service)
required before registration.
the appearance of goods of another.
(ii) However, there must be actual use
b) When the law states the right is acquired from
after registration. The registrant shall
the time of registration, it is actually referring to
file a declaration of actual use of the
the filing date of application.
mark with evidence to that effect with
in three (3) years from the filing date 1) The filing date of an application shall be the
of application otherwise it may be can date on which the IPO received the follow
celled (Secs. 142.2 and 1511c], IPC). The ing indications and elements: (i) express or
registrant is required to file a declara implicit indication that the registration of
tion of actual use and evidence to that the mark is sought; (ii) identity of the ap
effect, or shall show valid reasons for plicant; (iii) indications sufficient to contact
non-use within one (1) year from the the application or his representative; (iv)
fifth anniversary date of registration reproduction of the mark; (v) list of goods
(Sec. 145, IPC). or services for which registration is sought
that a .certificate-- (Sec. 127, IPC).
of registration of a mark shall be 2) However, the right may also be protected
prima facie evidence of the validity from the priority date. Subject to the rules
of the registration, the registrant's on reciprocity, where the application is filed
ownership of the mark, and of the in the Philippines and the same applicant
registrant's exclusive right to use the previously filed an application in the coun
same (Sec. 138, IPC). This means that tries covered by the reciproeity rule under
registrant's right may be questioned Section 3 of the IPC, the application is
by a person who has a better right, deemed filed as of the day the application
including a prior actual user. This also was fi rst fi led in the foreign country (Sec. 131,
includes persons with internationally IPC). However, there will be no registration
known marks. in the Philippines until registered in a such
(iv) Registration is also not important to foreign country (See. 131.2, IPC).
protect the goodwill that identifies in 6.03. MARKS THAT CANNOT BE REGISTERED
the mind of the public the goods he
a) Immoral, deceptive, or scandalous matter, or
manufactures or deals in (Sec.: 168.1,
matter which may disparage nr falsely suggest a
i f —rp o r- connection with persons, living or dead, institu
(v) Registration of a mark is not necessary tions, beliefs, or national symbols, or bring them
for purposes of filing a case for unfair into contempt or disrepute;
(R.A. No. 8293)
b) Consists of the flag or coat of arms or other in b) Composite marks. Although they cannot be
signia of the Philippines or any of its political registered by themselves, generic and descriptive
subdivisions, or of any foreign nation, or any marks, colors and shapes may he part of a
simulation thereof; composite mark but there should be a disclaimer
and the person who registers them as part of a
c) Consists of a name, portrait or signature iden mark will not acquire ownership thereto.
tifying a particular living individual except by
c) Contractions and Coined Marks. Similarly,
his written consent, or the name, signature, or
marks may be registered even if they are contrac
portrait of a deceased President of the Philip
tions of or coined from generic and descriptive
pines, during the life of his widow, if any, except
terms (Example: "Salompas" [Marvez Commercial
by written consent of the widow;
Co. v. Petra Hawpia & Co., 18 SCRA 1178,1966]).
d) Identical with a registered mark belonging to
d) •Arbitrary Use. Generic and descriptive terms
a different proprietor or a mark with an earlier may also be registered as trademarks if they are
...
filing or priority date, in respect of: (i) the same used in an arbitrary or fanciful manner. Example:
goods or services, or (ii) closely related goods or
- - -■
"Ivory? is generic for elephant tusk but arbitrary
services, or (iii) if it nearly resembles such a mark and can be registered for soap.
as to be likely to deceive or cause confusion;
6.05. INTERNATIONALLY WELL-KNOWN MARKS
e) Generic terms for goods or services;
■-
a) The persons who may question the mark (that is,
---------f)---- Jnrli iHin^jchararteristics of __________ oppose registration, petition for the cancellation
goods like quality or quantity; thereof, sue for unfair competition) include per
g) Customary sign in everyday language; sons whose int^rnmioiiaJJy^jvelh t o
whether or not registered, is identical with or
h) Color by itself; and confusingly similar to or constitutes a transla
tion of a mark that is sought to be registered or is
..... ..............
i) Shapes.
actually registered (Secs. 123[3] and 131.3, IPC).
6.04. LIMITATIONS
b) There is also protection for internationally
a) Doctrine of Secondary Meaning. A generic
.
known marks registered in the Philippines for
or descriptive mark may later acquire the goods thaLare not sim ilar with respect to which
characteristic of distinctiveness and can later registration is applied for (Rule 1011fl. Rules and
be registered if it acquires a meaning which is Regulatmts on Trademarks, etc,).
different from its ordinary connotation. For
6.06. RIGHTS CONFERRED
this to happen, there must be exclusive and
continuous use for a period of at least five (5) a) The right to the exclusive use of the mark for
years (Sec. 123.2, IPL). Examples: (1) "Selecta" for one's own goods or services.
bakery products; (27 "Ang TIbay'r for shoes (Arce b) The right to prevent others from the use of ml"
& Sons v. Selecta Biscuit Co., Inc., 110 Phil 858 same mark for identical goods or services in the
[1961]; Ang v. Teodoro, 74 Phil 50 [1942]). -b ou rse of trade.-
51.8 REVIEWER ON COMMERCIAL LAW
PART VII — INTELLECTUAL PROPERTY CODE 519
(R.A. No, 8293)
c) The right to the exclusive use of one's already

registered mark even for goods or services into of (Prosource International, Inc. v. Horphag
which one's venture expands, it used by others Research Management, GM. No. 180073, Nov,
for dissimilar products is likely to damage the 25, 2009 citing Agpalo; Secs, 155.1 and 155.2,
business interests of the first venturer (Sec, 147, IPC).
IPC). b) Types of Confusion.
*6*07, DURATION 1) "Confusion of goods" — when an other
The duration is ten (10) years subject to indefinite wise prudent purchaser is induced to pur
renewal for periods of ten (10) years each. chase one product in the belief that he is
purchasing another, in which case defen
6.08. INFRINGEMENT
dant's goods are then bought as the plain
a) The elements of trademark infringement under tiff's and its poor quality reflects badly on
Republic Act No. 8293 are as follows: the plaintiff's reputation (Mighty Corpora
1) The trademark being infringed is registered tion v.'E&] Gallo, 434 SCRA 473 [2004]).
in the Intellectual Property Office; how 2) "Confusion of business" • — wherein the
ever, in infringement of trade name, the goods of the parties are different but the
same need not be registered; defendant's product can reasonably (though
2)----The trademark or trade name is repro- mistakenly) be assumed to originate from
--------------------- . dnrprf rmmtprfpjted. copied, or colorably the plaintiff, thus deceiving the public into
imitated by the infringer; believing that there is some connection
between the plaintiff and defendant which,
3) The infringing mark or trade name is used
in connection with the sale, offering for sale, in fact, does not exist (Ibid).
or advertising of any goods, business or ser c) Test. Jurisprudence has developed two tests in
vices; or the infringing mark or trade name determining similarity and likelihood of confu
is applied to labels, signs, prints, packages, sion in trademark resemblance:
wrappers, receptacles or advertisements
intended to be used upon or in connection 1) The Dommaney Test focuses on the simi
with such goods, business or services; larity of the prevalent features of the com
peting trademarks which might cause con
4) The use or application of the infringing
fusion or deception, and thus infringement.
mark or trade name is likely to cause con
If the competing trademark contains the
fusion or mistake or to deceive purchasers
main, essential or dominant features of an
or others as to the goods or services them
other, and confusion or deception is likely
selves or as to the source or origin of such
to result, infringement takes place. Dupli-
goods or services or the identity of such
' ^ ^ business; and . catiorypr imitation is not necessary; nor is
— it necessary tKafthe infringing label should
5) It is without the consent of the trademark suggest an effort to imitate. The question is
or trade name owner or the assignee there- whether the use of the marks involved is
(R.A. No. 8293)
likely to cause confusion or mistake in the In addition, the aural effects of the words and
mind of the public or deceive purchasers letters contained in the marks should be consid
(Ibid). The Dominancy test is now embod ered in determining the issue of confusing simi
ied in Section 155 of the IPL and is there larity. Examples of confusingly similar marks:
fore the controlling test (McDonald's Corp.
"(l) PYCNOGENOL is confusingly similar to
v. L.C. Big Mak Burger, Inc., 437 SCRA 10,
PCO-GENOL, (2) "DERMALINE DER
37 [2004]). Examples: (i) "Mcjoy" and "Big MALINE, INC." is confusingly similar to
Mack" infringe the trademark of McDon
"DERMALIN," (3) "NANNY" is confus
ald's and the latter's dominant feature is
ingly similar to "NAN"; "NAN" is the
"Me" or "Mac" (Ibid.; Me Donald's Corp. v.
prevalent feature (Prosource International
Mcjoy, 514 SCRA 95 [2007]); (ii) "Master
Inc. v. Horphag Research Management, G.R.
Flavor" is an infringement of the registered
No. 180073, Nov. 25, 2009; Dermaline, Inc. v.
marks "Master Roast" and "Master Blend"
Myra Pharmaceuticals, Inc., G.R. No. 190065,
(Societe Des Produit Nestle S.A. v. CA, 356
Aug. 16, 201Q; Societe Des Produits Nestle,
SCRA 207,217).
S.A. v. Martin Dy, Jr. G.R. No. 172276, Aug.
2) The Holistic Test requires that the entirety 8, 2010).
of the marks in question be considered in e) Expansion of Business Rule. The protection to
resolving confusing similarity. Comparison which the owner of a trademark is entitled is
of winds is not the oi tly-êt^mkang-factor. -------not limited to guarding his -goods or business
The trademarks in their entirety as they from actual market competition with identical or
appear in their respective labels or hang similar products of the parties, but extends to all
tags must also be considered in relation cases in which the use by a junior appropriator
to the goods to which they are attached. of a trademark or trade name is likely to lead
The discerning eye of the observer must to a confusion of source, as where prospective
focus not only on the predominant words purchasers would be misled into thinking that
but also on the other features appearing the complaining party has extended his busi
in both labels in order that he may draw ness into the field or is in any way connected
his conclusion whether one is confusingly with the activities of the infringer; or when it
similar to the other (Mighty Corp. v.EJ Gallo, forestalls the normal potential expansion of
supra; Great White Shark Ent. v. Cavalde, Jr., his business (Dermaline, Inc. v. Myra Pharmaceu
G.R. No. 192294, Nov. 21, 2012). ticals, Inc., G.R. No. 190065, Aug. 16,2010; Societe
d) Aural Effects/Idem Sonans Rule. In dominancy
Des Produits Nestle, S.A. v. Martin Dy, Jr., G.R. No.
test, what are taken into account are signs, color, 172276, Aug. 8, 2010).
design, peculiar shape or name, or some special, f) J J s e o f IdenticaLM ^ks Not NecessajfilyJProhib^
easily remembered earmarks !of the brand that *• Tied. The use of identical Mark does not, by itself,
readily attracts and catches the attention of the lead to a legal conclusion that there is trademark
ordinary consumer (Dermaline, Inc. v. Myra Phar infringement if they are NOT used for identical,
maceuticals, Inc., G.R. No. 190065, Aug. 16, 2010). similar or related goods. Examples:
522 REVIEWER ON COMMERCIAL LAW FART VII — INTELLECTUAL PROPERTY CODE 523
(R.A. No. 8293)
1) Registration of the trademark "SHELL" for that it can reasonably be assumed that they
cigarettes was allowed although there is originate from one manufacturer, in which
prior registrant for gasoline and petroleum case, confusion of business can arise out of
products (Shell Company of the Philippines v. the use of similar marks.
CA, G.R. No, 1-4914:5, May 21,1979);
2) Related Goods How Determined. In re
2) The trademark ESSO was allowed for ciga solving whether goods are related, several
rettes although the same was registered factors come into play. No single factor is
by another for petroleum products (Esso preeminent on:
Standard Eastern, Inc. v, CA, 116 SCRA 336
(i) The business (and its location) to
[19821);
which the goods belong;
3) The registration of the trademark CAN
(ii) Tire class of product to which the
NON was allowed for sandals despite the
goods belong;
prior registration of the same for paints,
chemical products, toner and dyestuff (iii) The product's quality, quantity, or
(Canon Kabushiki Kaisha v. CA and NSR Rub size, including the nature of the pack
ber Corporation, 336 SCRA 266 [2000]); and age, wrapper or container;
4) The mark which contains the word GALLO (iv) The nature and cost of the articles;
can be used for cigarettes without infring- (v) The descriptive properties, physical
----------------- ing__the rights of the owner of another mark
attributes or essentia] characteristics
which also contains the same word but
with reference to their form, composi-
which was registered for wine. It was noted tion, texture or quality;
that the dominant feature of the GALLO
cigarette trademark is the device of a roost (vi.) The purpose of the goods;
er and the name of the manufacturer are (vii) Whether the article is bought for im
clearly stated. The labels for the GALLO mediate consumption, that is, day-to-
wine are diverse (Mighty Corporation v . E & day household items;
J Gallo, supra).
(viii) The fields of manufacture;
g ) .. Related. Goods and. Non-Related. Confusion of
(ix) The conditions under which the article
goods is evident where the litigants are actually
is usually purchased; and
in competition. However, confusion of business
may arise between non-competing interests and (x) The channels of trade through which
goods that are related or would tend to indicate the goods flow, how they are distrib
a connection between the goods and the owner uted, marketed, displayed and sold.
of the mark (See Sec. 147.1, IPL).
3) Variables to Consider. It has been held that
- 1) Related Goods. Non-competing goods may a . where the: products are different, the piidfT
be those which, though they are not in actu owner's chance of success is a function of
al competition, are so related to each other many variables, such as the: (a) strength of
PART VII — INTELLECTUAL PROPERTY CODE 525
(R.A. No. 8293)
his mark, (b) degree of similarity between
the two marks, (c) reciprocal of defendant's a) The .essential, elements of unfair competition
good faith in adopting its own mark>.(d) with respect to goods, are:
quality of defendant's product, (e) proxim 1) Confusing similarity in the general appear
ity of the products, (f) likelihood that the ance of the goods; and
prior owner will bridge the gap, (g) actu
2) Fraud or intent to deceive the public and
al confusion, and (h) sophistication of the defraud a competitor.
buyers (Mighty Corp, v. E&J Gallo, supra).
b) TEST of unfair competition: whether the acts of
4) in the case of internationally "well-known"
the defendant have the intent of deceiving or are
marks, it is expressly provided under the : calculated to deceive the ordinary buyer making
IPC that other persons or entities cannot his purchases under the ordinary conditions of
use the internationally "well-known" mark the particular trade to which the controversy
even for unrelated goods (Sec. 123.1[f], 246 relates (Superior Commercial Enterprises, Inc. v.
Corp. v. Daway, 416 SCRA 315 [2003]). Kunnan Enterprises Ltd., G.R. No, 169974, April 20,
h) Importation of Medicine. There is no infringe 2010).
ment of trademarks or trade names of imported c) Distinguish infringement of trademark from
or sold drugs and medicines as well as imported utifaif competition.
or sold off-patent drugs and medicines which
bears marks that have not been tampered, un- The distinctions between infringement and
lawfully moainea or infringed upon (Sec. 159.4, unfair competition are as follows: ________
IPL as amended by R.A. No. 9502). 1) In infringement of trademark, there is un
6.09. PROTECTION OF TRADE NAME authorized use of a trademark, while unfair
competition under the IPC involves pass
A trade name (including a corporate name) need
ing off of one's goods as those of another
not be registered with the IPO before an infringement
and giving one's goods the appearance of
suit may be filed by its owner against the owner of
that of another.
an infringing trademark (Sec. 165.2, IPL). Example, the
trademark "San Francisco Coffee" is an infringement 2) It is not necessary to establish fraudulent
of the trade name "San Francisco Coffee & Roastery, intent in a case for infringement of trade
Inc." even if the said trade name is not registered with mark while it is necessary to establish
the IPO (Coffee Partners, Inc. v. San Francisco Coffee and fraudulent intent in an unfair competition
Roastery, Inc., G.R. No. 169504, March 3 , 2010). case.,
' 6.10. UNFAIR COMPETITION 3) Registration of the trademark is necessary

for the filing of an action for infringement
This involves employing deception or any other of trademark while prior registration of a
_ means contrary to good faith by which a person trademark is not necessaryj n unfair com-
passes off his:goods or business or services for those * petition. * ' . ■ — - *
of one who has already established goodwill thereto
(Sec. 168.2, IPL). 4) Unfair competition is broader as it includes
L;: baseS. that:.are,covered not only, by the IPC
(R.A. No. 8293)
but also by Article 27 of the New Civil Code distinctive

(See Del Monte Corp., ei a l v. CA, 181 SCRA marks that
410), became generic
6.11. INTER PARTES CASES. These are contested cases or descriptive;
filed before the Intellectual Property Office. Inter
(2) Abandon
partes trademark cases include: (a) opposition against
ment — failure
the registration of a mark published for opposition;
to use it for an
and (b) petition to cancel the registration of a mark.
uninterrupted
Note; In the case of patents, inter partes cases period of three
include: (a) petition to cancel an invention patent, (3) years;
utility model registration, industrial design registra
tion or any claim or parts of a claim; and (b) petition (3) Mark is
for compulsory licensing. beihg used to
misrepresent
Inter Partes ■ Period to - the source
Grownd/s Venue of goods or
Cases File
services.
Opposition to Within 30 Registration IPO
application “for "daysafter t vill damage— -
registration publication. the oppositor. Note: An administrative complaint for viola
(Sec. 134, IPL). tions of laws involving intellectual property rights
can be filed with the IPO where the total damages
Cancellation Within5 Mark is IPO claimed are not less than P200 000.00 (Subsec. 10.2,
(Sec. 151, [a]). years from confusingly IPL).
date of similar.
registration. BARPROBLEMS:
Cancellation At any time. (1) Mark IPO 1. Company X sold its wine under the brand "Rose"
(Sec. 151, fb] becomes Brandy; it became very popular So, X registered
an ile]). generic trademark "Rose" for its brandy. Subsequently,
("Genericide Company Y manufactured bicycles and sold it under
Policy") or the name "Rose." Company X now sues Company Y
descriptive. for violation of IPC. Rule on the dispute.
Examples: A: The ruling should be in favor of Company Y. No
Aw.’A- -Aspirin, _ ^ violation of -the iPCjvasxom m itfed by Company Y, *
thermos, and ' - The goods of Coftipany Y, bicycles, are so dissimilar
escalator are from the goods of Company X that there would be no
originally
confusion as to the origin of the goods.
(R.A. No. 8293)
N ote: Section 123.1(f) of the IPC now adopts any other feature of their appearance, which would
whafc is.known as the Theory of Dilution. Section be likely to influence purchasers to believe that the
123.1(f) of the Intellectual Property Code provides goods offered are those of a manufacturer or dealer,
that "a mark cannot be registered if it: x x x (f) Is other than the actual manufacturer or dealer." The
identical with, or confusingly similar to, or constitutes circumstances contemplated by Section 168.3(a) are
a translation of a mark considered well-known x x x present in this case because PK Company gave its
which is registered in the Philippines with respect to shoes the appearance of the shoes of N Corporation
goods or services which are not similar to those with and the same will tend to mislead the public as to the
respect to which registration's applied foi, Provided, origin of the goods.
That use of the mark in relation to those goods or
services would indicate a connection between those 7. PATENTS
goods or services, and the owner of the registered
7.01. Patentable inventions refer to any technical solution
mark, Provided, further, That the interests of the owner
of a problem in any field of human activity which is
of registered mark are likely to be damaged by such
new, involves an inventive step and is industrially
use." However, it is necessary for the application of
applicable (Kho v. CA, supra).
the doctrine that the public may have been, or had
actually been deceived or misled as to the source of a) Requisites:
the good. This is not the case in the given problem.
1) A technical solution of a problem in any
2. N Corporation manufactures rubber shoes under the field of human activity;
trademark "JOEDANN" which hit the Philippine
2) It must be a novel invention; ___________
market in 1985, and registered its trademark with
the Bureau of Patents, Trademarks and Technology 3) Industrially applicable.
Transfer (BPTTT) in 1990. PK Company also
b) Definitions.
manufactures rubber shoes with the trademark
"JAVORSKI" which it registered with the BPTTT in 1) Novel — that which does not form part of
1978. In 2002, PK Company adopted and copied the the prior art (Sec. 23, ICP),
design of N Corporation's "JORDANN" rubber shoes,
2) "Prior art" — (i) that which has been made
both as to shape and color, but retained the trademark
available to the public anywhere in the
"J^VORSKI" on its products. May PK Company be
world before the filing date or the priority
held liable to N Corporation? Explain.
date of application; (ii) that which forms
A: YES. PK Company may be held liable by N part of an application whether for patent,
Corporation for unfair competition. Under Section utility model or industrial designed, effec
168.3(a) of the IPC, a person is committing unfair tive in the Philippines: Provided, That the
competition if he sells his goods and "gives them the inventor or applicants are not the same
general appearance of goods of another manufacturer ■and the contents of the application are pub
_____ .or dealer,_either., as J p , the goods, themselves or in lished in accordance with the requirements
the wrapping of the packages in which they are of patent application rules and the filing
contained, or the devices or words thereon, or in date of prior art is earlier (Sec. 24, IPC).
(R.A. No. 8293)
3) Inventive step *— an invention involves an c) What are the purposes of patent law?
inventive step if, having regard to prior art,
The patent law has a three-fold purpose;/irsL
'it is not Obvious to a "'person skilled in the
patent law seeks to foster and reward invention;
art" at the time of the filing date or priority second, it promotes disclosures of inventions to
date of the application claiming the inven stimulate further innovation and to permit the
tion (Sec. 2 6 ,1PC). public to practice the invention once the patent
Note: In the case of drugs and medi expires; third, the stringent requirements for
cines, there is no inventive step if the inven patent protection seek to ensure that ideas in the
tion results from: public domain remain there for the free use of
the public (Pearl & Dean [Phil.] v. Shoemart, Inc.,
0) Mere discovery of a new form or new
et a l, supra).
property of a known substance which
does not result in the enhancement of The law attempts to strike an ideal balance
the known efficacy of that substance; betw^m the twb inteifests: The patent system
thus embodies a carefully drafted bargain for
(ii) Mere discovery of any new property
encouraging the creation and disclosure of new
or new use for a known substance; or
useful and npri-obvious advances in technology
(iii) Mere use of a known process unless and design, in return fpr the exclusive right to
such known process results in a new practice the invention for a number of years.
------ :--------- ------ product that empleys-aUeast one new The inventor may keep his invention secret and
reactant (Sec. 22, IPC as amended by reap its fruits indefinitely. In consideration of
R.A. No. 9502). its disclosure and the consequent benefit to the
community, the patent is granted. An exclusive
4) Person skilled in the Art presumed to
enjoyment is guaranteed him for twenty (20)
be an ordinary practitioner aware of what
years, but upon the expiration of that period, the
was common general knowledge in the
knowledge of the invention inures to the people,
art at the relevant date. He is presumed to who are thus enabled to practice it and profit by
have knowledge of all references that are its use (Pearl & Dean ['Phit.lv. Shoemart, Inc., et ah,
sufficiently related to one another and to the ibid.).
pertinent art and to have knowledge of all
arts reasonably pertinent to the particular 7.02. Classes of Patentable Inventions
problems with which the inventor was a) Useful machine;
involved. He is presumed also to have had at
b) A product;
his disposal the normal means and capacity
to routine work and experimentation (Rule c) Process;
d) Improvement of (1), (2), or (3);
5) Industrial applicability — an invention that e) Microorganism; and
can be produced and used in any industry f) Non-biological and microbiological process
(Sec. 27, IPC). (Rule 201, Rules 'and Regulations on Inventions).
REVIEWER ON COMMERCIAL LAW PART VII ~ INTELLECTUAL PROPERTY CODE 533
(R.A. No. 8293}
7.93, Non-Patent&Me Indentions c) First to File Rule —•if two or more persons have
made the invention separately and indepen
a) Discoveries, scientific theories, and mathemati
dently of each other, the right to the patent shall
cal method;
belong to the person who first filed an applica
b) Schemes, rules, arid methods of performing tion for such invention (Sec. 29, IPC).
mental acts, playing games, or doing business,
and programs for computer; 7.05. LIMITATIONS OF PATENT RIGHTS
c) Methods for treatment of the human body or The following acts are NOT PROHIBITED:
animal body by surgery or therapy and diagnos a) Using a patented product which has been put
tic methods practiced on the human or animal on the market in the Philippines by the owner of
body; the product, or with his express consent, insofar
d) Plant varieties or animal breeds of essentially as such use is performed after that product has
biological process for the production of plants or been so put on the said market (Sec. 72.1, IPL).
animals;
b) Parallel Importation. Importation of drugs and
e) Aesthetic creations; medicines by a government agency or by any
f) Anything which is contrary to public order or private third party (Secs. 72.1 and 72.5, IPL, as
morality (Sec. 22, IPC); amended by R.A. No. 9502). Private parties must
secure a license to import from BFAD.
---------gL—in Jh e rase of drugs and medicines, there is no
patentable invention in the following instances: --------c)---- Wrtfi Hnnn privntnly and nn a nnn-mmmprnal
scale or for a non-commercial purpose. Condi
1) Mere discovery of a new form or new prop
tion: The act does not significantly prejudice the
erty of a known substance which does not
economic interests of the owner of the patent
result in the enhancement of the known ef
(Sec. 72.2, IPL).
ficacy of that substance;
2) Mere discovery of any new property or new d) The act consists of making or using exclusively
use for a known substance; for experimental use of the invention for scien
tific purposes or educational purposes and such
3) Mere use of a known process unless such other activities directly related to such scientific
known process results in a new product or educational experimental use ( Sec. 72.3, IPL as
that employs at least one new reactant (Sec. amended by R.A. No. 9502).
22, IPC as amended by R.A. No. 9502).
e) Testing, using, making or selling the invention
7.04. PERSON ENTITLED TO RIGHT ‘
including any data related thereto of drugs and
a) The right to a patent belongs to the inventor, his medicine, solely for purposes reasonably related
heirs or assigns, w _ to the development and submission of informa
b) When two or more persons have jointly made an tion and issuariceof approvals by government
invention, the right to a patent shall belong to regulatory agencies required under any law of
themjointly. the Philippines or of another country that regu-
(R.A. No. 8293)
Jates the manufacture, construction, use or sale filed by the inventor that should not have been
of any product (Sec. 72.4, IPL as amended by R.A. disclosed by the office, b) it is contained in a third
No. 9502). person's application filed without the knowledge or
consent of the inventor and the third person obtained
f) Preparation for individual cases, in a pharma the information directly from the inventor; and 3) a
cy or by a medical professional, of a medicine t h ir d p a r t y — such party obtained the information
in accordance with a medical prescription after directly or indirectly from the inventor (Sec. 25.1,
a drug or medicine has been introduced in the IPC).
Philippines or anywhere else in tire world by the
patent owner, or by any party authorized to use 7.08. TERM OF A PATENT
the invention (Sec. 72.5, IPL as amended by R.A. The term of a patent is twenty (20) years from
No. 9502). the filing date of application (Sec. 54, IPC).
7.06. PREJUDICIAL DISCLOSURE 7.09. INFRINGEMENT v
Whatever right one has to the invention covered Infringement is the making, using, offering for
by the patent arises alone from the application date. sale, selling or importing a patented product or a
Thus, if the inventor voluntarily discloses it, such as product obtained directly Or indirectly from a patent
by offering it for sale, the world is free to copy and use ed process, or The use of a patented process without
it with impunity. Ideas, once disclosed to the public the authorization of the patentee{Sec. 76.1, IPC).
______without the protection of a valid patent, are subject
_____ a)__Steps in determining the presence of infringe-
to appropriation without significant restraint (Pearl & ment.
Dean [Phil] v. Shoemart, Inc., et al, ibid., citing Creser
Precision Systems, Inc. v. CA, 286 SCRA13 [1998]). (1) Determine if there is literal infringe
ment. If there is literal infringement, the defen
For example, there would be prejudicial disclo dant is liable.
sure if the inventor secured a copyright certificate for
drawings that depicted light boxes. On the assump (2) If there is no literal infringement, then
tion that the light boxes are patentable inventions, the doctrine of equivalents should be applied.
there would be prejudicial disclosure to the public b) Literal Infringement. There is infringement
by submitting the engineering drawing thereof to the of patent under this test if one makes, uses or
National Library for purposes of registering his copy sells an item that contains all the elements of the
right (Ibid.). patent claim. This test is satisfied in either of the
7.07. NON-PREJUDICIAL DISCLOSURE following:
(1) Exactness rule: The item that is being
Any disclosure of the invention made within
sold, made or used conforms exactly to the pat
twelve (12) months before the filing date does not
ent claim of another;
prejudice the application if the disclosure is made by:
1) inventor himself (or by anyone who has the right to (2) Addition rule: One makes, uses, or
patent); 2) patent office — a) when the information of sells an item that has all the elements of Me
the latter office was contained in another application patent claim of another plus other elements.
536 REVIEWER ON COMMERCIAL LAW' PART VII — INTELLECTUAL PROPERTY CODE 537
(R.A. No, 8293)
cl Doctrine of Equivalents. a) Grounds:

The doctrine of equivalents provides that 1) National emergency or other circumstances
an infringement also takes place when a device of extreme urgency;
appropriates a prior invention by incorporating
2) Where the public interest, in particular,
its innovative concept and, although with some
national security, nutrition, health or the
modification and change, performs substantially
development of other vital sectors of the
the same function in substantially the same way
national economy as determined by the
to achieve substantially the same result. In other
appropriate agency of the Government, so
words,
requires;
be the same or substantially the same. The doc
trine of equivalents thus requires satisfaction of 3) Where a judicial or administrative body has
the function-means-and-result test, the patentee determined that the manner of exploitation
having the burden to show that all three com by the owner of the patent or his licensee is
ponents of such equivalency test are met (Smith anti-competitive;
Kline Beckman Corp. v. The Honorable CA, G.R. No. 4) In case of public non-commercial use of the
126627, Aug. 14,2003). patent by the patentee, without satisfactory
1) The doctrine of equivalents cannot be reason;
applied when the infringing invention is dearly 5) If the patented invention is not being
beyond what is written in the claim. worked in the Philippines on a commercial
-----------------------2)— When the language of the patentee's _________ scale, although capable of being worked,
claims is clear and distinct. The patentee is bound without satisfactory reason: Provided, That
thereby and may not claim anything beyond the importation of the patented article shall
them. And so are the courts bound which may constitute working or using the patent; and
not add to or detract from the claims matters 6) Where the demand for patented drugs and
not expressed or necessarily implied, nor may medicines is not being met to an adequate
they enlarge the patent beyond the scope of that extent and on reasonable terms, as deter
which the inventor claimed and the patent office mined by the Secretary of the Department
allowed, even if the patentee may have been of Health (Secs. 93-93.6, IPL as amended by
entitled to something more than the words it R.A. No. 9502).
had chosen would include (Smith Kline Beckman
b) In whose favor. Compulsory license should be
Corp. v. The Honorable CA, ibid.).
granted to any person who has shown his capa
7.10. COMPULSORY LICENSING bility to exploit the invention.
"Compulsory License" is a license issued by c) Time when application for compulsory license
the Director General of the Intellectual Property cannot be applied: before the expiration of a
Office to exploit a patented invention without the period of |oim (^ years from the date of filing of
permission of the patent holder, either by manufacture the application orTtmee (3) years from the date of
or through parallel importation (Sec. 4, R.A. No. 9502), the patent whichever period expires last.
538 REVIEWER O N COMMERCIAL LAW PART VII — .INTELLECTUAL PROPERTY CODE 539
(R.A. No. 8293)
d) Requirement to obtain a license on reasonable b) Jurisdiction. The IPO through the Director of the
commercial terms. The Compulsory license will Documentation, Information and Technology
only be granted after the petitioner has made Transfer Bureau shall exercise quasi-judicial
efforts to obtain authorization from the patent jurisdiction in the settlement of disputes between
owner on reasonable commercial terms and con parties to a technology transfer arrangement
ditions but such efforts have not been success arising from technpl^ ^ r ^ g f e ^ y m i f e
ful within a reasonable period of time (Sec. 95.2, including the fixing of appropriate amount or
IPL as amended by R.A. No. 9502). Effort to obtain rate of royalty (Sec. 86, IPC).
authorization is not required in the following in
c) Prohibited Provisions. Provisions that are
stances: adverse to competition and trade are prohibited
1) Where the petition for compulsory license (Sec. 87, IPC). These prohibited provisions which
seeks to remedy a practice determined after are deemed prima facie to have an adverse effect
judicial or administrative process to be anti on competition and trade are enumerated in
competitive; Sections 87.1 to 87.13 of the IPC. Examples of
prohibited provisions: (1) licensor reserves the
2) In situations of national emergency or other
right to fix the sale or resale prices of the products
circumstances of extreme urgency;
manufactured on the basis of the license; (2)
3) In cases of public non-commercial use; and restrictions regarding the volume and structure
----------------4)-— In racgc JiArW p t'hp Hpmand fnr the patented of production; and (3) restrictions regarding the
—^ ----volume and structure of production.--------------- ---
drugs and medicines in the Philippines is
not being met to an adequate extent and d) Mandatory Provisions. The following provi
on reasonable terms, as determined by the sions shall be included in voluntary license con
Secretary of the Department of Health (Sec. tracts:
95.2, IPL as amended by R.A. No. 9502). (1) Applicable laws are Philippines laws and
7.11. Voluntary License and Technology Transfer Agree in the event of litigation, the venue shall be
ments.-.. . .. . . . the proper court in the place where the li
censee has its principal office;
a) "Technology Transfer Arrangements " refers to con
tracts or agreements involving the transfer of (2) Continued access to improvements in tech
systematic knowledge for the manufacture of a niques and processes related to the tech
product, the application of a process, or render nology shall be made available during the
ing of a service including management contracts; period of the technology transfer arrange
and the transfer, assignment or licensing of all ment;
forrris of intellectual property rights, including (3) If Arbitration is provided for in the technol-
licensing of computersoftware except computer transfer arrangements the»*applicable
soltwarc'developed^foF mass market (Sec. 4.2, procedure is (a) the Arbitration Law of the
IPC). It is in the nature : of ;a Voluntary License Philippines; (b) the Arbitration Rules of the
Contract. United Nations Commission on Interna-
"- ~ "r ‘-<•’5=— - f ---------- , i- - -

PART VII — INTELLECTUAL PROPERTY CODE M i
540 REVIEWER ON COMMERCIAL LAW (R.A. No. 8293)
an improvement of any of the foregoing." The process

tional Trade Law (UNCITRAL); or (c) the
of improving the tenderness of meat appears to be a
Rules of Conciliation and Arbitration of the
new technical solution.
International -Chamber of Commerce (ICC)
2. X invented a bogus coin detector which can be used
Philippines or any neutral country; and exclusively on self-operating gambling devices
otherwise known as one-armed bandits. Can X apply
(4) The Philippine taxes on all payments relat
for a patent?
ing to the technology transfer arrangement
shall be borne by the licensor. A: X may not apply for the patent. Section 22.6 provides
that anything that is contrary to public order or
e) Unenforceable. A Technology Transfer Agree
morality shall be excluded from patent protection.
ment or any Voluntary License that contains a
The machine involved in this case appears to be
prohibited provision or does not contain any of
a gambling device or a tool that is used to cheat in
the mandatory provisions shall be considered
gambling or in gambling itself, hence is it contrary
unenforceable (Sec. 92, IPC). However, registra
to public order and morality. However, if the
tion with the IPO is not necessary to make it en
machine can be used in legalized gambling such as
forceable (Sec. 92, IPC).
in cases of exclusive use of casinos established by the
7.12. What is the concept of divisional applications? government, such device can be patented.
The concept of divisional applications comes 3. Che-che invented a device that can convert rainwater
__________ into play when two or more inventions are claimed to automobile fuel. She asked Macon, a lawyer, to assist
in a single application but are of such a nature that a ---------in getting her invention patented. Macon suggested--------
single patent may not be issued for them. The appli that they form a corporation with other friends and
cant is thus required "to divide," that is, to limit the have the corporation apply for the patent, 80% of the
' claims to whichever invention he may elect, whereas shares of stock thereof to be subscribed by Che-che
those inventions not elected may be made the subject and 5% by Macon. The corporation was formed and
of separate applications which are called "divisional the patent application was filed. However, Che-che
■ applications" (Smith Kline Beckman Corp. v. The Honor dies three months later of a heart attack.
able CA, supra). Franco, the estranged husband of Che-che,
contested the application of the corporation and filed
BAR PROBLEMS: his own patent application as the sole surviving heir
of Ghe-che. Decide the issue with reasons.
1. X invented a method of improving the tenderness of
meat by injecting an enzyme solution into the liver of A: The case should be decided in favor of Franco.
the animal shortly before a slaughter. Is the invention Section 28 of the IPC provides that the right to a
patentable? patent belongs to the inventor, his heirs or assigns.
Since Che-che is already dead, the heirs, including
A: The invention is patentable. Section 21 of IPC provides
Franco, can file the application. In addition Section
'" " t h a t "any technical solution of a problem m any field
32.2 of the IPC provides that ifthe applicant is hot the '“
of human activity which is new, involves an inventive
inventor, the IPC shall require the applicant to submit
step and is industrially applicable shall be patentable.
the inventor's authority. In this case, it does not
It may be, or maj^ relate to, a product, or process, or
542 REVIEWER ON COMMERCIAL LAW/ PART VII — INTELLECTUAL PROPERTY CODE 543
(R.A. No. 8293)
appear that the corporation was authorized. Besides, c) The ingredients of consumer products are not
it is dear from die problem that the corporation was trade secrets. They should be indicated in the
only used as a conduit of Che-che for the filing of the label under Section 77 of the Consumer Act.
application. However, ingredients of chemicals supplied to
4. Supposing Albert Einstein were alive today and he airline companies are not consumer products.
filed with the Intellectual Property Office (IPO) an Consumer products are primarily for personal,
application for patent for his theory of relativity family, household or agricultural purposes
expressed in the formula E = me2. The IPO disapproved (Ibid.).
Einstein's application on the ground that his theory of 8.01. APPLICABLE LAWS
relativity is not patentable. Is the IPO's action correct?
Trade secrets protection is not covered by the
A: YES, the IPO is correct. Discoveries, scientific theories
constitutional right to information. It is protected
and mathematical methods, are "non-patentable
under Section 66.2 of the Securities Regulations
inventions" under Section 22.1 of the Intellectual
Code, Articles 291 and 292 of the Revised Penal Code,
Property Code. A scientific theory like Einstein's
Section 278 of the National Internal Revenue Code
theory of relativity is discovered, it is not invented.
and Section 12 of Republic Act No. 6969, otherwise
8 . TRADE SECRETS ■ ■ known as Toxic Substances and Hazardous and
Nuclear Waste Control Act of 1990 (Ibid.).
A trade secret is a plan or process, tool, mechanism
or compound known only to its owner and those of his 8.02. FACTORS
employees to whom it is necessary to confide it. Il includes Thefoltowing factors can be utilized to determine
a secret formula or process not patented, but known only if an information is a trade secret, to wit:
to certain individuals using it in compounding some article
of trade having a commercial value (Air Philippines Corp.v. 1) The extent to which the information is known
Pennswell, Inc., G.R. No. 172835, Dec. 13, 2007). outside of the employer's business;
a) A trade secret may consist of any formula, pat 2) The extent to which the information is known by
tern, device, or compilation of information that: employees and others involved in the business;
(1) is used in one's business; and (2) gives the
3) The extent of measures taken by the employer to
employer an opportunity to obtain an advantage
guard the secrecy of the information;
over competitors who do not possess the infor
mation. It can be a (i) chemical composition, (ii) 4) The value of the information to the employer
formulation, (iii) ingredients, (iv) price list, (v) and to competitors;
catalogue, or (vi) specialized customer list (Ibid ).
5) The amount of effort or money expended by the
b) A trade secret is protected even if it is not company in developing the information; and
patentable. It is covered by the propriety rights of
the owner of the trade secret and the said owner 6) The extent to which the information could be
cannot be compelled to disclose its trade secret. easily or readily obtained through an indepen—*
Courts cannot generally issue an injunction to dent source (Ibid.).
compel such disclosure (Ibid.).
»'T -.<-*• * .

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What are the requirements for a trade secret?

What are the requirements for a trade secret?

What are the factors used to determine if information qualifies as a trade secret?

What are the factors used to determine if information qualifies as a trade secret?

.

JOSE R. SUND1ANG, SR,

Any copy of this book without the corresponding

ALL RIGHTS REVERSED

REX pRINTINCj COfVipANy, INC.

Books that are designed primarily to answer the needs of

; The authors extend their heartfelt gratitude to all those

This book aims to provide law students with materials

Introduction.............. ...... .... ......................................... ......... ....... 1

2. APPLICABLE LAWS e) Securities Regulation Code (R.A. No. 8799);

offeree {-Art-1409, NCC), Thus, Cognition Theory

2. REQUISITES OF NEGOTIABILITY (Sec. f, NIL; Caltex

2.01. What does negotiation mean? 3.03. APPLICABILITY OF THE NIL

6.04. Kinds of Promissory Notes

Unconditional promise Unconditional order 3) a money order

W/v-.V-r :-N;'W w.-vN

6) treasury warrant c) Drawer — the person who draws the bill of

that- is payable to order was merely delivered

been previously dishonored, if such was

Hernan issued a check payable to the order of

signature of D, succeeds in "negotiating" it to F who I : Toth cases, however, the instrument

1) that the instrument is genuine and in all ;

.. ........... ....... . ..... ,|UI H M " I .

signed the instrument as maker, drawer, acceptor, or is/are liable? :■

1) Protest for non-payment by the drawee

EFFECTS: When an acceptance Is written f) Kinds of Acceptance (Sec. 141, NIL)

b) Who will benefit: as if the indorser becomes primarily liable in the

Examples: M, maker, issued a negotiable (ii) If given at his residence, it must be

c) Effect (i) After the exercise of reasonable dili­

2) Not Necessary: Drawer 2) If a foreign bill which was not previous!)

3) signed by the acceptor for honor; 16.01. BILL IN SET

DISCHARGE § f) By any agreement binding upon the holder to

18.02. KINDS 1) Effects

which can be used like cash upon second signa­

The drawer may countermand payment if he has 1.02. A Contract of Suretyship

2.06. Personal contract Q: The P Corporation, a health maintenance organization

an inchoate interest founded on an existing 2 Is mere hope or expectancy insurable?

8. RISKS INSURED AGAINST 1) In case of life and industrial life whenever

d) That the conditions of the policy relating to mili­

13.04. DISTINCTIONS1 insured has to give his consent of original

16. RIGHT OF SUBROGATION c) In life insurance;

2) over his expected profits or freightage if he

b) In fire insurance, there has to be an express slip- ' ,17.08. SEAWORTHINESS

In case of constructive total loss, It is a contract of indemnity by which the insurer

An alteration in the use or condition of a thing 19.01. Casualty Insurance

22. LIFE INSURANCE e) Industrial Life ■

transaction; and any billboard conspicuously

(iv) dominant word; a) MERCHANTS — as to individuals, they are

(vi) The subsidiary has substantially no (v) used to justify wrong;

4| Is ownership of substantial portion o the corporate entity as to this transac­

. A corporation is said to be "going private" £) Succession. — There is no right of succession in

tracted in behalf of the future corporation if 1) Where no foreign stockholder is allowed:

6.01. THE ARTICLES OF INCORPORATION

(vii) Domestic market enterprises with 7) in stock corporation, amount of authorized

b) What documents should be filed with the SBC

c) Effect (i) After the exercise of reasonable dili

which can be used like cash upon second signa

d) That the conditions of the policy relating to mili

4| Is ownership of substantial portion o the corporate entity as to this transac

h) Amendment. May be made by the (1) Stockhold

15.04. PROCEDURE FOR COLLECTION AND DELIN 2) to be entitled to vote; or

23. NONSTOCK CORPORATIONS a) Standards. A non-stock corporation is autho

f) As to foreign equity— A rural bank must be whol 3.03. PROHIBITED ACTS

A. VALUE OF COLLATERALS Redemption may be exercised by pay

d) Definitions f) Subsequent compliance. Subsequent compli

3) to a m em ber of such organization, asso b) An attempt or conspiracy to commit the same

7. LIQUIDATION PROCESS 4) No separate action for the collection of an unse