2015 GN Mercantile Law - 27 July PDF

LETTERS OF CREDIT
LETTERS OF CREDIT Duration of Letters of Credit
DEFINITION AND NATURE OF LETTER OF CREDIT 1. Upon the period fixed by the parties; or
2. If none is fixed, one year from the date of issuance.
Letter of Credit (L/C) Incidents in the life of a Letter of Credit (SAIS-ERR)
It is any arrangement, however named or described, 1. Contract of Sale between the buyer and seller
whereby the issuing bank acting at the request and on the 2. Application for L/C by the buyer with the bank
instructions of a customer (applicant) or on its own 3. Issuance of L/C by the bank
behalf, binds itself to: (PAN) 4. Shipping of goods by the seller
5. Execution of draft and tender of documents by the
1. Pay to the order of, or accept and pay drafts drawn by a seller
third party (Beneficiary), or 6. Redemption of draft (payment) and obtaining of
2. Authorize another bank to pay or to accept and pay documents by the issuing bank
such drafts, or 7. Reimbursement to the bank and obtaining of
3. Authorizes another bank to Negotiate, against documents by the buyer
stipulated documents
Essential conditions of a Letter of Credit
Provided, the terms and conditions of the credit are
complied with (Uniform Customs & Practice for 1. Issued in favor of a definite person.
Documentary Credits, Art. 2). 2. Limited to a fixed or specified amount, or to one or more
amounts, but with a maximum stated limit (Code of
Nature of Letters of Credit as a Financial Device Commerce, Art. 568).
A letter of credit is a financial device developed by NOTE: If any of these essential conditions is not present,
merchants as a convenient a relatively safe mode of the instrument is merely considered as a letter of
dealing with sales of goods to satisy the seemingly recommendation.
irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants Q: Letters of Credit are financial devices in
to have in control of the goods before paying. The use of commercial transactions which will ensure that the
credits in commercial transactions serves to reduce the seller of the goods is sure to be paid when he parts
risk of nonpayment of the purchase price under the with the goods and the buyer of the goods gets control
contract of sale of the goods and to reduce the risk of non- of the goods upon payment. Which statement is most
performance of an obligation in a non-sale setting accurate? (2012 Bar)
(Transfield Philippines, Inc. vs. Luzon Hydro Corp., GR. No.
146717, November 22,2004). A: A.The use of the Letter of Credit serves to reduce the
risk of nonpayment of the purchase price in a sale
Purpose of Letter of Credit transaction
The purpose of a letter of credit is to ensure certainty of Kinds of Letter of Credit

payment. The bank makes the commitment to pay. This
addresses problems arising from seller’s refusal to part COMMERCIAL L/C STANDBY L/C
with his goods before being paid and the buyer’s refusal Involves the payment of
Involves non-sale
to part with his money before acquiring the goods, thus, money under a contract of
transactions.
facilitating commercial transactions. sale.
Payable upon certification
Laws governing Letters of Credit by the beneficiary of the
applicant’s non-
Payable upon the
Letter of credit is governed by theUniform Customs and performance of the
presentation by the seller-
Practice for documentary Credits issued by the agreement. The
beneficiary of documents
International Chamber of Commerce (Metropolitan documents that
that show he has taken
Waterworks vs. Daway, G.R. No. 160723, July 21, 2004). accompany the
affirmative steps to comply
beneficiary's draft must
with the sales agreement
NOTE: The law on contracts and damages shall also apply show that the applicant
to provide remedies to the party aggrieved by the breach has not performed the
of the main contract although such breach will not affect undertaking
the obligation of the bank to pay the beneficiary or its (Transfield Philippines, Inc. v. Luzon Hydro Corp., supra).
right to obtain reimbursement from the applicant of the
letter of credit if the terms of the letters of credithave been
complied with.
1 UN IVERSITY OF SAN TO TOM AS

FACULTY OF C IVIL LA W
MERCANTILE LAW
Irrevocable Letter of Credit v. Confirmed Letter of 2. Issuing Bank – one which, whether a paying bank or
Credit not, Issues the L/C and undertakes to pay the seller upon
receipt of the draft and proper documents of title from the
BASIS IRREVOCABLE seller and to surrender them to the buyer upon
CONFIRMED L/C
L/C reimbursement. After due payment, issuing bank is
What it Kind of obligation entitled to reimbursement as a matter of right.
pertains Duration of the L/C assumed by the Reimbursement includes debiting the bank account of the
to correspondent bank. applicant, if any. The failure of the beneficiary to present
The correspondent the draft to the applicant does not affect the right of the
bank gives an issuing bank to reimbursement.
The issuing bank
absolute assurance to
may not, without 3. Beneficiary/Seller/Exporter – in whose favor the
the beneficiary that it
the consent of the instrument is executed. One who delivers the documents
What it will undertake the
beneficiary and the of title and draft to the issuing bank to recover payment.
means issuing bank’s
applicant, revoke He has a prestation to do under the main contract but his
obligation as its own
its undertaking failure to fulfill his obligation under the main contract
according to the
under the letter. does not negate his right to payment from the issuing
terms and condition
of the credit. bank as long as he is able to submit the required
(FEATI Bank and Trust Company v. CA, G.R. No. 94209, April documents and comply with the terms of the credit,
30, 1991). without prejudice to his liability against the account party
under the law on contracts and damages.
Courts cannot order the release to the applicant of the
proceeds of an Irrevocable Letter of Credit without NOTE: The number of parties may be increased. The
the consent of the Beneficiary following additional parties may be:
Such order violates the irrevocable nature of the L/C. The a) Advising/notifying bank – the correspondent bank
terms of an irrevocable letter of credit cannot be changed (agent) of the issuing bank and determines the
without the consent of the parties, particularly the apparent authenticity of the L/C. it assumes no liability
beneficiary thereof (Phil. Virginia Tobacco Administration except to notify and/or transmit to the beneficiary the
v. De Los Angeles, G.R. No. L-27829, August 19, 1988). existence of the L/C.
Non-payment of the buyer of its obligation under the b) Confirming bank –lends credence to the L/C issued by a
Letter of Credit does not give the bank the right to lesser known bank as if it were the one that issued the
take possession of the goods covered by the Letter of letter of credit. Its obligation is similar to the issuing
Credit bank. Thus, beneficiary may tender documents to the
confirming bank and collect payment. It collects fees for
The opening of a L/C does not vest ownership of the goods such engagement and obtains reimbursement from the
in the bank in the absence of a trust receipt agreement. A issuing bank (Divina, 2013).
letter of credit is a mere financial device developed by
merchants as a convenient and relatively safe mode of c) Paying bank – bank on which the drafts are to be drawn,
dealing with the sales of goods to satisfy the seemingly which may be the issuing bank, the advising bank or
irreconcilable interests of a seller, who refuses to part another bank not in the city of the beneficiary.
with his goods before he is paid, and a buyer, who wants
to have control of the goods before paying (Transfield d) Negotiating bank – buys or discounts a draft under the
Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. letter of credit. Its liability is dependent upon the stage
146717, November 22, 2004). of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation,
PARTIES TO A LETTER OF CREDIT a contractual relationship will then prevail between the
negotiating bank and the beneficiary.
Parties to a Letter of Credit transaction
RIGHTS AND OBLIGATIONS OF PARTIES
1. Applicant/Buyer/Importer/Account Party – procures
the letter of credit, purchases the goods and obliges Three (3) distinct but intertwined contracts in a
himself to reimburse the issuing bank upon receipt of the Letter of Credit transaction (2002, 2008 Bar)
documents of title. The aplicant has no obligation to
reimburse the issuing bank if the latter pays without the 1. Between the applicant/buyer/importer/account party
and the beneficiary/seller/exporter - The applicant is the
stipulated documents or in case of discrepant documents,
unless the applicant waives the discrepancy. He has the one who procures the letter of credit and obliges himself
right to have the marginal deposit deducted from the to reimburse the issuing bank upon receipt of the
principal obligation under the L/C and to have the interest documents of title while the beneficiary is the one who in
computed only on the balance and not on the face value compliance with the contract of sale ships the goods to the
thereof. buyer and delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The
relationship between them is governed by the law on
UN IVERSITY OF SAN TO TOM AS

2015GOLDE N N OTES 2
LETTERS OF CREDIT
sales if it is a commercial L/C but if it is a stand-by letter the L/C (Bank of authority. (Bank
of credit it is governed by the law on obligations and America NT & SA of America NT &
contract. v. CA, G.R. No. SA v. CA, G.R. No.
105395, 105395, December
2. Between the issuing bank and the beneficiary/ December 10, 10, 1993)
seller/exporter - The issuing bank is the one that issues the 1993).
letter of credit and undertakes to pay the beneficiary upon It does not
strict compliance of the latter to the requirements set guarantee the
forth in the letter of credit. On the other hand, the genuineness or
beneficiary surrenders document of title to the bank in due execution of
compliance with the terms of the L/C. Their relationship the L/C. It is not
is governed by the terms of the L/C. liable for
damages even if
3. Between the issuing bank and the applicant/ the L/C turns out
buyer/importer - The applicant obliges himself to to be spurious
reimburse the issuing bank upon receipt of the provided the
documents of title. Their relationship is governed by the spurious
terms of the application and agreement for the issuance character is not
of the L/C by the bank. apparent on the
face of the
An Issuing Bank is not a guarantor instrument.
The concept of guarantee vis-a-vis the concept of Confirming Lends credence Direct obligation,
irrevocable L/C is inconsistent with each other. L/Cs are Bank to the L/C issued as if it is the one
primary obligations and not security contracts and while by a lesser- which issued the
they are security arrangements, they are not converted known bank. L/C.
thereby into contracts of guaranty (MWSS v. Hon. Daway,
G.R. No.160732, June 21, 2004). The confirming Its obligation is
bank collects similar to the
NOTE: The liability of issuing bank is primary and fees for such issuing banks.
solidary. Neither is the issuing bank entitled to the benefit engagement and Thus, beneficiary
of excussion. obtains may tender
reimbursement documents to the
Entitlement of a bank to reimbursement from the issuing confirming bank
bank. and collect
Once the issuing bank shall have paid the beneficiary after payment.
the latter’s compliance with the terms of the L/C. Negotiating Buys the seller’s Depends on the
Presentment for acceptance to the customer/applicant is Bank draft and later stage of
not a condition sine qua non for reimbursement on sells the draft negotiation, thus:
(Prudential Bank v. IAC, G.R. No. 74886, December 8, 1992). to the issuing
bank. 1. Before
Consequence of payment upon an expired Letter of negotiation – No
Credit liability with
respect to the
An issuing bank which paid the beneficiary upon an seller. Merely
expired L/C can recover the payment from the applicant suggests its
which obtained the goods from the beneficiary to prevent willingness to
unjust enrichment (Rodzssen Supply Co. v. Far East Bank negotiate.
and Trust Co, G.R. No. 109087, May 9, 2001).
2. After
Different roles and liabilities of the banks involved in negotiation – A
Letter of Credit transactions contractual
relationship will
KIND OF ROLE LIABILITY then arise,
BANK making the bank
Notifying/ Serves as an Does not incur liable. As holder,
Advising agent of the any obligation it has the right to
Bank issuing bank; more than just payment from the
notifying the bank primarily
Warrants the seller/beneficiary liable on the draft
apparent of the opening of (either the issuing
(Appearance to the L/C after it or confirming
unaided senses) has determined bank). If the party
authenticity of its apparent

MERCANTILE LAW
primarily liable with documents and not goods (BPI v. De Reny Fabric
on the L/C Industries, Inc., L-2481, October 16, 1970). In effect, the
refuses to honor buyer has no course of action against the issuing bank.
the draft, the
negotiating bank
has the right to
proceed against
the drawer Two-Fold nature of the Independence Principle
thereof.
Paying May either be Direct obligation. 1. Independence in toto where the credit is independent
Bank the issuing bank from the justification aspect and is a separate obligation
or any other from the underlying agreement. This principle is
bank in the place illustrated by standby L/C; or
of the issuing
bank to facilitate 2. Independence only as to the justification aspect which
payment to the is identical with the same obligations under the
beneficiary. underlying agreement. This principle is illustrated by a
commercial L/C or repayment standby (Transfield v.
Luzon Hydro Corp., supra).
BASIC PRINCIPLES OF LETTER OF CREDIT
Effect of the buyer’s failure to procure a Letter of
Letters of Credit are not considered as Negotiable
Credit to the main contract
Instruments
The L/C is independent from the contract of sale. The
A L/C is not considered a negotiable instrument.
failure of Reliance to open, the appropriate L/C did not
However, drafts issued in connection with L/C’s can be
prevent the birth of that contract, and neither did such
considered negotiable instruments. The presumption that
failure extinguish that contract. The opening of the L/C in
the drafts drawn in connection with the L/C’s have
favor of Daewoo was an obligation of the buyer and the
sufficient consideration applies (Lee v. CA, G.R. No. 117913,
performance of that obligation by buyer was a condition
February 1, 2002).
of enforcement of the reciprocal obligation of seller to
ship the subject matter of the contract to buyer. But the
Q: ABC Company filed a Petition for Rehabilitation
contract itself between the buyer and the sellerhad
with the Court. An order was issued by the Court, (1)
already sprung into legal existence and was enforceable.
staying enforcement of all claims, whether money or
otherwise against ABC Company, its guarantors and
The failure of a buyer seasonably to furnish an agreed L/C
sureties not solidarily liable with the company; and
is a breach of the contract between buyer and seller.
(2) prohibiting ABC Company from making payments
Where the buyer fails to open a letter of credit as
of the liabilities, outstanding as of the date of the filing
stipulated, the seller or exporter is entitled to claim
of the Petition. XYC Company is a holder of an
damages for such breach. Damages for failure to open a
irrevocable Standby Letter of Credit which was
commercial credit may, in appropriate cases, include the
previously procured by ABC Company in favor of XYC
loss of profit which the seller would reasonably have
Company to secure performance of certain
made had the transaction been carried out (Reliance
obligations. In the light of the Order issued by the
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No.
Court, can XYC Company still be able to draw on their
100831, December 17, 1993).
Irrevovable Standby Letter of Credit when due?
Explain your answer. (2012 Bar)
Partial payments on the loan cannot be added in
computing the issuing bank’s liability under its own
A: XYC Company, the beneficiary of the standby letter of
Standby Letter of Credit
credit, can draw on the letter of credit despite filing of
petition for corporate rehabilitation. The liability of the
Although these payments could result in the reduction of
bank that issued the letter of credit is primary and
the actual amount, which could ultimately be collected
solidary. Being solidary, the claims against them can be
from the issuing bank, the latter’s separate undertaking
pursued separately from and independently of the
under its letters of credit remain. The letter of credit is an
rehabilitation case (MWSS v. Daway, supra).
absolute and primary undertaking which is separate and
distinct from the contract underlying it (Insular Bank of
DOCTRINE OF INDEPENDENCE
Asia & America v. IAC, G.R. No. 74834, November 17, 1988).
Doctrine of Independence/ Independence Principle
In a standby letter of credit securing a loan obligation, any
payment of the debtor to the creditor should not be
The relationship of the buyer and the bank is separate and
deducted from the total obligation of the issuing bank to
distinct from the relationship of the buyer and seller in the
the beneficiary. The issuing bank, after payment of the full
main contract; the bank is not required to investigate if
amount, is entitled to full reimbursement from the debtor.
the contract underlying the L/C has been fulfilled or not
But the debtor may recover excess payment from the
because in transactions involving L/C, banks deal only
creditor to prevent unjust enrichment.

LETTERS OF CREDIT
In other words, PNB cannot evade responsibility on the
Q: SMC entered into an Exclusive Dealership sole ground that the RTC judgment found Goroza liable
Agreement with Goroza wherein the latter was given and ordered him to pay the amount sought to be
by SMC the right to trade, deal and market or recovered by SMC. PNB's liability, if any, under the letter
otherwise sell its various beer products. of credit is yet to be determined (Philippine National Bank
vs San Miguel Corporation, GR No. 186063, January 15,
Goroza applied for a credit line with SMC, but one of 2014).
the requirements for the credit line was a letter of
credit. Thus, Goroza applied for and was granted a Q: AAA Carmakers opened an Irrevocable Letter of
letter of credit by the PNB in the amount of Credit with BBB Banking Corporation with CCC Cars
P2,000,000.00 and subsequently an additional credit Corporation as beneficiary. The irrevocable Letter of
line of P2,400,000.00 which the latter approved. Credit was opened to pay for the importation of ten
Under the credit agreement, the PNB has the (10) units of Mercedes Benz S class. Upon arrival of
obligation to release the proceeds of Goroza's credit the cars, AAA Carmakers found out that the cars were
line to SMC upon presentation of the invoices and all not in running condition and some parts were
official receipts of Goroza's purchases of SMC beer missing. As a consequence, AAA Carmakers instructed
products to PNB. Initially, Goroza was able to pay his BBB Banking Corporation not to allow drawdown on
credit purchases with SMC. However, Goroza started the Letter of Credit. Is this legally possible? (2012
to become delinquent with his accounts. Demands Bar)
were made by the SMC against Goroza and PNB but
neither of them paid. SMC filed a Complaint for A: a. No, because under the "Independence Principle",
collection of sum of money against PNB and Goroza. conditions for the drawdown on the Letters of Credit are
RTC rendered a decision in favor of the plaintiff based only on documents, like shipping documents, and
ordering Goroza to pay. In the meantime, trial not with the condition of the goods subject of the
continued with respect to PNB. importation.
PNB moved to terminate the proceedings on the Q: X Corporation entered into a contract with PT
ground that a decision was already rendered finding Construction Corporation for the latter to construct
Goroza solely liable. The RTC denied the PNB's motion and build a sugar mill within six (6) months. They
and issued a Supplemental Judgment which stated agreed that in case of delay, PT Construction
that the RTC omitted by inadvertence to insert in its Corporation will pay X Corporation P100,000.00 for
decision the phrase "without prejudice to the decision everyday of the delay. To ensure payment of the
that will be made against the other co-defendant, agreed amount of damages, PT Construction
PNB, which was not declared in default." The CA Corporation secured from Atlantic Bank a confirmed
affirmed the Resolution of RTC. and irrevocable letter of credit which was accepted by
X Corporation in due time. One week before the
Was the CA incorrect in affirming the RTC despite expiration of the six (6) month period, PT
complete adjudication of relief to SMC and the Construction Corp. requested for an extension of time
perfection of appeal by Goroza? to deliver claiming that the delay was due to the fault
of X Corporation. A controversy as to the cause of
A: No. It is clear from the proceedings held before and the delay which involved the worksmanship of the
orders issued by the RTC that the intention of the trial building ensued. The controversy remained
court is to conduct separate proceedings to determine the unsolved. Despite the controversy, X corporation
respective liabilities of Goroza and PNB, and thereafter, to presented a claim against Atlantic Bank by executing
render several and separate judgments for or against a draft against the letter of credit.
them.
a. Can Atlantic Bank refuse payment due to the
The propriety of a several judgment is borne by the fact unresolved controversy? Explain.
that SMC's cause of action against PNB stems from the b. Can X Corporation claim directly from PT
latter's alleged liability under the letters of credit which it Construction Corp.? Explain. (2008 Bar)
issued. On the other hand, SMC's cause of action against
Goroza is the latter's failure to pay his obligation to the A:
former. As to the separate judgment, PNB has a a. No. Atlantic Bank cannot refuse to pay X Corporation.
counterclaim against SMC which is yet to be resolved by This is because of the Doctrine of Independence which
the RTC. The so-called "independence principle" assures provides that the obligation of the issuing bank to pay
the seller or the beneficiary of prompt payment the beneficiary does not depend on the fulfillment or
independent of any breach of the main contract and non-fulfillment of the contract supporting the letter of
precludes the issuing bank from determining whether the credit. The only instance where Atlantic Bank can
main contract is actually accomplished or not.As the refuse payment is when X Corporation was not able to
principle's nomenclature clearly suggests, the obligation strictly comply with the letter of credit.
under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is b. Yes. X Corporation may directly claim from PT
separate and distinct from the underlying transaction. Construction Corporation. A letter of credit by itself
does not come into operation without a contract

MERCANTILE LAW
supporting it. It is no a contract that can stand on its Q: BV agreed to sell to AC, a Ship and Merchandise
own, it needs a supporting contract. It is merely an Broker, 2500 cubic meters of logs at $27 per cubic
alternative course and does not in any way prevent the meter FOB. After inspecting the logs, CD issued a
beneficiary from directly claiming from the applicant purchase order.
(Transfield Philippines, Inc. v. Luzon Hydro Corporation,
supra). On the arrangement made upon instruction of the
consignee, H&T Corporation of LA, California, the SP
FRAUD EXCEPTION PRINCIPLE Bank of LA issued an irrevocable letter of credit
available at sight in favor for the total purchase price
The Exception to the Independence Principle (2010 of the logs. The letter of credit was mailed to FE Bank
Bar) with the instruction "to forward it to the beneficiary".
The letter of credit provided that the draft to be
The “Fraud Exception Principle”is the exception to the drawn is on SP Bank and that it be accompanied by,
Independence Principle. It provides that the among other things, a certification from AC, stating
untruthfulness of a certificate accompanying a demand that the logs have been approved prior shipment in
for payment under a standby letter of credit may qualify accordance with the terms and conditions of the
as fraud sufficient to support an injunction against purchase order.
payment.
Before loading of the vessel chartered by AC, the logs
Under the fraud exception principle, the beneficiary may were inspected by custom inspectors and
be enjoined from collecting on the letter of credit if the representatives of the Bureau of Forestry, who
beneficiary committed fraud by substituting fraudulent certified to the good condition and exportability of
documents even if on their face the documents complied the logs. After loading was completed, the Chief Mate
with the requirements. of the vessel issued a mate receipt of the cargo which
stated that the logs are in good condition. However,
This principle refers to fraud in relation with the AC refused to issue required certification in the letter
independent purpose or character of the L/C and not only of credit. Because of the absence of certification, FE
fraud in the performance of the obligation or contract Bank refused to advance payment on the letter of
supporting the letter of credit (Transfield vs. Luzon Hydro credit.
Corp., supra).
a. May FE Bank be held liable under the Letter of
Remedy for fraudulent abuse Credit? Explain.
b. Under the facts above, the seller, BV, argued
Injunction against payment is the remedy; provided the that FE Bank, by accepting the obligation to
requisites enumerated immediately below this item are notify him that the irrevocable letter of credit
present. has been transmitted to it on his behalf, has
confirmed the letter of credit. Consequently, FE
Requisites in order to enjoin the Beneficiary from Bank is liable under the letter of credit. Is the
drawing or collecting under the Letter of Credit on the argument tenable? Explain. (1993 Bar)
basis of fraud (PAI)
A.
1. Clear Proof of fraud; a. FE Bank cannot be held liable under the letter of
2. Fraud constitutes fraudulent Abuse of the independent credit since the certificate is not issued by BV. It is a
purpose of the letter of credit and not only fraud under settled rule in commercial transactions involving letters
the main agreement; and of credit that the documents tendered must strictly
3. Irreparable Injury might follow if injunction is not conform to the terms of the letter of credit. The tender of
granted or the recovery of damages would be seriously documents by the beneficiary (seller) must include all
damaged (Ibid.) documents required by the letter. A correspondent bank
which departs from what has been stipulated under the
DOCTRINE OF STRICT COMPLIANCE letter of credit, as when it accepts a faulty tender, acts on
(1993, 2008 Bar) its own risks and it may not thereafter be able to recover
from the buyer or the issuing bank, as the case may be, the
The documents tendered by the seller/beneficiary must money thus paid to the beneficiary. Thus the rule of strict
strictly conform to the terms of the L/C. The tender of compliance. (Feati Bank and Trust Company v. CA, supra).
documents must include all documents required by the
letter. It is not a question of whether or not it is fair or The argument made by BV is untenable. The FE Bank in
equitable to require submission of documents but this case is only a notifying bank and not a confirming
whether or not the documents were agreed upon. Thus, a bank. It is tasked only to notify and/or transmit the
correspondent bank which departs from what has been required documents and its obligation ends there. It is not
stipulated under the L/C acts on its own risk and may not privy to the contract between the parties, its relationship
thereafter be able to recover from the buyer or the issuing is only with that of the issuing bank and not with the
bank, as the case may be, the money thus paid to the beneficiary to whom he assumes no liability.
beneficiary (Feati Bank and Trust Company v. CA, supra).

TRUST RECEIPTS LAW
Doctrine of Strict Compliance v. Independence
Principle TRUST RECEIPTS LAW
Basis Doctrine of Doctrine of DEFINITION/CONCEPT OF A TRUST RECEIPT

Strict Independence TRANSACTION
Compliance
Principle Documents Relationship of Trust Receipt (TR) transaction
tendered by the the buyer and
seller or the bank is It is any transaction between the entruster and entrustee:
beneficiary must separate and
strictly conform distinct from the 1) Whereby the entruster who owns or holds title or
to the terms of relationship of security interests over certain specified goods,
the letter of the buyer and documents or instrument (GDI), releases the same to
credit. seller in the main the possession of entrustee upon the latter’s execution
contract. of a TR agreement.
Consequence of A correspondent The bank is not
the Doctrine bank which required to 2) Wherein the entrustee binds himself to hold the GDI in
departs from investigate trust for the entruster and, in case of default,
what has been whether the a) to sell or otherwise dispose such GDI with the
stipulated and contract obligation to turn over to the entruster the
acts on its own underlying the proceeds to the extent of the amount owing to it or
risk may not L/C has been b) to turn over the GDI itself if not sold or otherwise
thereafter be fulfilled or not. disposed of in accordance with the terms and
able to recover. conditions specified in the TR.
Payment of the Beneficiary Fraud Exception
Beneficiary cannot draw on Principle can A TR is considered a security transaction intended to aid
the letter of enjoin in financing importers and retail dealers who do not have
credit if he did beneficiary from sufficient funds or resources to finance the importation or
not comply with drawing or purchase of merchandise, and who may not be able to
its terms and collecting under acquire credit except through utilization, as collateral, of
conditions. the L/C if there is the merchandise imported or purchased. Similarly,
fraud in relation American Jurisprudence demonstrates that TR
with the transactions always refer to a method of “financing
independent importations or financing sales.” The principle is of
purpose of the course not limited in its application to financing
L/C. importations, since the principle is equally applicable to
domestic transactions. Regardless of whether the
transaction is foreign or domestic, it is important to note
Q: At the instance of CCC Corporation, AAA Bank
that the transactions discussed in relation to trust
issued an irrevocable Letter of Credit in favor of BBB
receipts mainly involved sales (Anthony Ng vs. People, G.R.
Corporation. The terms of the irrevocable Letter of
no. 173095, April 23, 2010; 1992, 2007 Bar).
Credit state that the beneficiary must present certain
documents including a copy of the Bill of Lading of the
Subjects of a Trust Receipt transaction (GDI)
importation for the bank to release the funds. BBB
Corporation could not find the original copy of the Bill
1. Goods – shall include chattels and personal property
of Lading so it instead presented to the bank a xerox
other than: money, things in action, or things so affixed to
copy of the Bill of Lading. Would you advise the bank
land as to become a part thereof (P.D. 115, Sec. 3 [d]).
to allow the drawdown on the Letter of Credit? (2012
Goods must be object of lawful commerce.
Bar)
2. Documents – written or printed evidence of title to
A: a. No, because the rule of strict compliance in
goods (P.D. 115, Sec. 3 [a]). E.g. L/C.
commercial transactions involving letters of credit,
requiring documents set as conditions for the release of
3. Instruments – negotiable instruments; certificates of
the fund, has to be strictly complied with or else funds will
stock, or bond or debenture for the payment of money
not be released.
issued by a corporation, or certificates of deposit,
participation certificates or receipts, credit or investment
instruments of a sort marketed in the ordinary course of
business or finance (P.D. 115, Sec. 3 [e]). E.g. checks, drafts,
promissory notes, bills of exchange.
Parties to a Trust Receipt transaction
1. Entruster - A lender, financer or creditor. Person

holding title over the GDI subject of a TR transaction;

MERCANTILE LAW
releases possession of the goods upon execution of TR A Trust Receipt is not a negotiable instrument
(P.D. 115, Sec. 3[c]).
Like L/C’s, TR’s are not negotiable instruments. The
2. Entrustee - A borrower, buyer, importer or debtor. He is presumption of consideration under the negotiable
the person to whom the goods are delivered for sale or instrument law may not necessarily be applicable to trust
processing in trust, with the obligation to return the receipts (Lee v. CA, supra).
proceeds of sale of the goods or the goods to the entruster
(P.D. 115, Sec. 3[b]). Q: C contracted D to renovate his commercial
building. D ordered construction materials from E
Transactions not considered as a Trust Receipt and received delivery thereof. The following day, C
went to F Bank to apply for a loan to pay the
1. A sale by a person in the business of selling for profit construction materials. As security for the loan, C was
who retains general property rights in the GDI. made to execute a trust receipt. One year later, after C
failed to pay the balance on the loan, F Bank was
2. Where the seller retains title or other interest as charged with violation of the Trust Receipts Law.
security for the payment of the purchase price (P.D. 115,
Sec. 4). a. What is a Trust Receipt?
b. Will the case against C prosper? Reason
NOTE: The sale of goods by a person in the business of briefly. (2007 Bar)
selling goods, for profit, who at the outset of the
transaction, has as against the buyer, general property A:
rights in such goods, or who sells goods to the buyer on a. A TR is a written or printed document signed by the
credit, retaining title or other interest as security for the entrustee in favor of the entruster containing terms and
payment of the purchase price, does not constitute as conditions substantially complying with the provision of
trust receipt transaction. There is no trust receipt, PD 115 whereby the bank as entruster releases the goods
notwithstanding the label, if goods offered as security for to the possession of the entrustee but retain ownership
a loan accommodation are goods sold to the debtor unde thereof while the entrustee may sell the goods and apply
a supposed trust receipt transaction (Sps. Dela Cruz vs. the proceeds for the full payment of his liability to the
Planters Products, Inc., G.R. No. 158649, February 18, 2013, bank (P.D. 115, Sec. 3(j)).
in Divina, 2014).
It is also defined as a document in which is expressed a
3. If the entrustee is already the owner or in security transaction, whereunder the lender, having no
possession of the goods before delivery of the loan and prior title in the goods on which the lien is to be given, and
execution of the trust receipt transaction, the transaction not having possession which remains in the borrower,
shall be considered a simple loan even though the parties lends his money to the borrower on security of the goods,
may have denominated the agreement as one of TR. To be which the borrower is privileged to sell clear of lien on
in the nature of TR, the entruster should have financed the agreement to pay all or part of the proceeds of sale to the
acquisition or importation of the goods. The funds should lender. The term is specifically applied to a written
have been delivered before or simultaneously with instrument whereby a banker having advanced money for
delivery of the goods. purchase of imported merchandise and having taken title
in his own name, delivers possession to an imported on
4. Where the entruster bank knew even before the agreement in writing to hold the merchandise in trust fir
execution of the trust receipt agreements that the the banker till he is paid.
construction materials covered were never intended by
the entrustee for resale or for the manufacture of items to Finally, a document executed between an entruster and
be sold (Hur Tin Yang v. People, supra). entrustee, under which the goods are released to the
latter who binds himself to hold the goods in trust, or to
Two views regarding Trust Receipts sell or dispose of the goods with the obligation to turn
over the proceeds to the entrustor to the extent of the
1. As a commercial document - the entrustee binds entrustee's obligation to him, or if unsold, to return the
himself to hold the designated GDI in trust for the same.
entruster and to sell or otherwise dispose of GDI with the
obligation to turn over to the entruster the proceeds if b. The case of estafa against C will not prosper. PD 115
they are unsold or not otherwise disposed of, in does not apply in this case because the proceeds of the
accordance with the terms and conditions specified in the loan are used to renovate C's commercial building. TR
TR (P.D. 115, Sec. 4). transactions are intended to aid in financial importers and
retail dealers who do not have sufficient funds or
2. As a commercial transaction – It is a separate and resources to finance the importation or purchase of
independent security transaction intended to aid in merchandise and who may not be able to acquire credit
financing importers and retail dealers who do not have except through utilization, as collateral, of the
sufficient funds (Nacu v. CA, G.R. No. 108638, March 11, merchandise imported or purchased. The transactions
1994). contemplated under the Trust Receipts Law mainly
involved acquisition of goods for the sale thereof. The
transaction is properly called a simple loan with the trust

TRUST RECEIPTS LAW
receipt as merely a collateral or security for the loan (Ng LOAN/SECURITY FEATURE
vs. People, supra).
Two features of a Trust Receipt transaction
Q: Supermax is a domestic corporation engaged in the
construction business. On various occasions, 1. Loan feature - is brought about by the fact that the
Metrobank extended several commercial letters of entruster financed the importation or purchase of the
credit to Supermax. These commercial credits were goods under TR (Sps. Vintola vs. Insular Bank of Asia and
used by Supermax to pay for delivery of several America, G.R. No. 73271, May 29, 1987).
construction materials to be used in their
construction business. Thereafter, Metrobank 2. Security feature - property interest in the GDI to secure
required Hur Tin Yang, as representative and Vice- performance of some obligation of the entrustee or of
President for Internal Affairs of Supermax, to sign 24 some third persons to the entruster (Rosario Textile
trust receipts as security for the construction Mills Corp. v. Home Bankers Savings and Trust Company,
materials. When 24 TRs fell due and despite the G.R. No. 137232, June 29, 2005).
receipt of demand letter, Supermax failed to pay or
deliver the goods or proceeds to Metrobank. As the Effects of the dual features of a Trust Receipt
demands fell on deaf ears, Metrobank filed a
complaint for estafa against Hur Tin Yang. 1. The entrustee cannot absolutely be relieved of the
obligation to pay his loan just because he surrendered
Hur Tin Yang, while admitting signing the trust the goods to the entruster if the entruster refuses to
receipts, argued that said trust receipts were accept and subsequently deposited them in the custody
demanded by Metrobank as additional security for of the court (Sps. Vintola vs. Insular Bank of Asia and
the loans extended to Supermax for the purchase of America, supra).
construction equipments and materials, and that
Metrobank knew all along that the construction 2. The entrustee cannot be relieved of his obligation to
materials subject of the TRs were not intended for pay the loan in favor of the entruster bank in case of loss
resale but for personal use of Supermax relating to its or destruction of the GDI (Rosario Textile Mills Corp. vs.
construction business. Home Bankers Savings and Trust Company, supra).
Is Hur Tin Yang not guilty of estafa? 3. Where the proceeds of the sale are insufficient to satisfy
the loan executed by the entrustee, the entruster bank
A: Yes. In the instant case, the factual findings of the trial can institute an action to collect the deficiency (Landl
and appellate courts reveal that the dealing between Hur Co. vs. Metropolitan Bank and Trust Co. G.R. No. 159622,
Tin Yang and Metrobank was not a TR transaction but one July 30, 2004).
of simple loan. His admission – that he signed the TRs on
behalf on Supermax, which failed to pay the loan or turn 4. Repossession by the entruster of the GDI does not
over the proceeds of the sale or the goods to Metrobank amount to dacion en pago. The repossession of the
upon demand – does not conclusively prove that the goods by the entrustee was merely to secure the
transaction was, indeed, a trust receipts transaction. In payment of its obligation to the entrustor and not for
contract to the nomenclature of the transaction, the the purpose of transferring ownership in satisfaction of
parties really intended a contract of loan. The Court, in Ng the obligation (PNB vs. Pineda, G.R. No. L-46658 May 13,
vs. People, and Land Bank of the Philippines v. Perez ,cases 1991).
which are in all four corners the same as the instant case,
ruled that the fact that the entruster bank knew even OWNERSHIP OF THE GOODS, DOCUMENTS, AND
before the execution of the trust receipt agreements that INSTRUMENTS UNDER A TRUST RECEIPT
the construction materials covered were never intended
by the entrustee for resale or for the manufacture of items Real owner of the articles subject of the Trust Receipt
to be sold is sufficient to prove that the transaction was a transaction
simple loan and not a trust receipts transaction.
The real owner of the articles subject of the TR is the
When both parties enter into an agreement knowing fully entrustee who binds himself to hold the designated GDI.
well that the return of the goods subject of the trust The entruster merely holds a security interest. If under
receipt is not possible even without any fault on the part the trust receipt, the bank is made to appear as the owner,
of the trustee, it is not a trust receipt transaction it was but an artificial expedient, more of legal fiction than
penalized under Sec. 13 of PD 115 in relation to Art. 315, fact, for if it were really so, it could dispose of the goods in
par. 1(b) of the RPC, as the only obligation actually agreed any manner it wants, which it cannot do, just to give
upon by the parties would be the return of the proceeds consistency with purpose of the trust receipt of giving a
of the sale transaction. This transaction becomes a stronger security for the loan obtained by the
mere loan, where the borrower is obligated to pay the importer. To consider the bank as the true owner from the
bank the amount spent for the purchase of the goods inception of the transaction would be to disregard the
(Hur Tin Yang vs. People, supra). loan feature thereof (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, supra).

MERCANTILE LAW
The entrustee, however, cannot mortgage the goods or whatever form, separate and capable of
because one of the requisites of a valid mortgage is that identification as property of the entruster;
the mortgagor must be the absolute owner of the property
mortgaged or must have free disposal thereof. Entrustee 5. To Return GDI to the entruster in case they could not be
is not the absolute owner of the goods under trust receipt sold or upon demand of the entruster; and
nor has free disposal thereof.
6. To Observe all other conditions of the TR (P.D. 115, Sec.
The entrustee is not responsible as principal or vendor 9).
under any sale or contract to sell made by the entrustee.
NOTE: Not all obligations of the entrustee are criminal in
RIGHTS OF THE ENTRUSTER nature. The gravamen of the criminal offense under the
trust receipts law is the failure of the entrustee to deliver
(PRCS) the proceeds of the sale to the entruster up to the extent
1. To be entitled to the Proceeds from the sale of the GDI of the entrutee's obligations or the return of the same in
to the extent of the amount owing to him. case of non-sale.
2. To the Return of the GDI in case of non-sale and
enforcement of all other rights conferred to him in the PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
TR. DISPOSITION OF GOODS, DOCUMENTS OR
3. May Cancel the trust and take possession of the goods, INSTRUMENTS
upon default or failure of the entrustee to comply with
any of the terms and conditions of the TR (P.D. 115, Sec. Disposition of the proceeds of the sale of the goods,
7). documents or instruments
4. To Sell the goods with at least five day notice to the
entrustee and apply the proceeds in payment of the The proceeds of the sale of GDI shall be applied in the
obligation. Entrustee liable to pay deficiency, if any. following (SDP):
VALIDITY OF THE SECURITY INTEREST AS AGAINST 1. Expenses of the Sale;

THE CREDITORS OF THE ENTRUSTEE/ INNOCENT 2. Expenses Derived from re-taking, keeping and storing
PURCHASERS FOR VALUE the GDI; and
3. Principal obligation (P.D. 115, Sec. 7).
Entruster has a better right over the goods than that
of the creditors of the entrustee NOTE: Full payment of the loan or delivery of the sale
proceeds equivalent to the full amount of the obligation
The entruster’s security interest in goods, documents, or extinguishes both criminal and civil liabilities of the
instruments pursuant to the written terms of a TR shall be entrustee. In case of deficiency, the entrustee shall be
valid as against all creditors of the entrustee for the liable thereon. However, any excess shall belong to him.
duration of the TR agreement (P.D. 115, Sec. 12).
Q: The President of Novachem, Crisologo, applied for
The security interest of the entruster over the goods commercial letters of credits from private
under the trust receipt is superior to the monetary claims respondent Chinabank to finance the purchase of
of the laborers of the entrustee. 1,600 kgs. of amoxicillin trihydrite micronized from
Hyundai Chemical Company in South Korea and glass
Purchaser in good faith can defeat the rights of the containers from San Miguel Corporation.
entruster over the goods Subsequently, Chinabank issued Letters of Credit.
After petitioner received the goods, he executed for
A purchaser in good faith acquires the goods, documents and in behalf of Novachem the corresponding trust
or instruments free from the entruster's security interest receipt agreements in favour of Chinabank.
(P.D. 115, Sec. 11).
On January 2004, Chinabank, through its staff
OBLIGATION AND LIABILITY OF THE ENTRUSTEE assistant, filed before the City Prosecutor’s Office a
Complaint-Affidavit charging Crisologo for violation
Obligations and liabilitites of the Entrustee (HR-IKRO) of P.D. No. 115 in relation to Article 315 of RPC for his
purported failure to turn-over the goods or the
1. To Hold GDI in trust for the entruster and to dispose of proceeds from the sale thereof. RTC rendered a
them strictly in accordance with the terms of TR; Decision acquitting Crisologo of criminal charges. It
however adjudged him civilly liable to Chinabank. On
2. To Receive the proceeds of the sale for the entruster appeal of the civil aspect, the CA affirmed the RTC
and to turn over the same to the entruster to the extent Decision. It noted that the Crisologo signed the
of amount owing to the latter; “Guarantee Clause” of the trust receipt agreements in
his personal capacity and even waived the benefit of
3. To Insure GDI against loss from fire, theft, pilferage or excussion against Novachem. As such, he is personally
other casualties; and solidarily liable with Novachem. Is the decision of
CA correct?
4. To Keep GDI or the proceeds thereof, whether in money

TRUST RECEIPTS LAW
A: Yes. Section 13 of the Trust Receipts Law explicitly proceeds of the sales, CCC Car Inc. used the proceeds
provides that if the violation or offense is committed by a to buy another ten (10) units of BMW 3 series.
corporation, as in this case, the penalty provided for
under the law shall be imposed upon the directors, a. Is the action of CCC Car, Inc. legally justified?
officers, employees or other officials or person Explain your answer.
responsible for the offense, without prejudice to the civil b. Will the corporate officers of CCC Car, Inc. be
liabilities arising from the criminal offense. held liable under the circumstances? Explain
your answer. (2012 Bar)
In this case, Crisologo was acquitted of the charge for A:
violation of the Trust Receipts Law in relation to Article a. No. It is the obligation of the entrustee, CCC Car,Inc.
315 of the RPC. As such, he is relieved of the corporate to receive the proceeds of the sale of the goods covered by
criminal liability as well as the corresponding civil the trust receipts in trust for the entruster and to turn
liability arising therefrom. However, as correctly found by over the same to him th extent of the obligation (P.D. 115,
the RTC and CA, he may still be held liable for the trust Sec. 4)
receipts and L/C transactions he had entered into in
behalf of Novachem. b. Yes. Failure of the entrustee to turn over the
proceeds of the sale of the goods shall constitute the crime
Settled is the rule that debts incurred by directors, of estafa. If the violation is committed by a juridical entity,
officers, and employees acting as corporate agents are not the penalty shall be imposed upon the directors, officers,
the direct liability but of the corporation they represent, employees or other officials or persons therein
EXCEPT if they contractually agree/stipulate or assume to responsible for the offense, without prejudice to the civil
be personally liable for the corporate’s debts, as in this liabilities arising from the criminal offense. Hence, the
case. The RTC and CA correctly adjudged petitioner corporate officers are criminally liable for the violation of
personally and solidarily liable with Novachem for the the law being he human agent responsible for the same
obligations secured by the subject trust receipts based on (P.D. 115, Sec. 13).
the finding that he signed the guarantee clauses therein in
his personal capacity an even waived the benefit of LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR
excussion (Crisologo vs. People of the Philippines, G.R. No. INSTRUMENTS
199481, December 3, 2012).
Entrustee shall bear the loss of the goods, documents,
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS or instruments which are the subject of a Trust
IN CASE OF NON-SALE Receipt
Obligation of the Entrustee in case the goods, Loss of the GDI which is the subject of a TR, pending their
documents or instruments were not sold disposition, irrespective of whether or not it was due to
the fault or negligence of the entrustee, shall not
The entrustee should return the GDI to the entruster (P.D. extinguish his obligation to the entruster for the value
115, Sec. 4). thereof (P.D. 115, Sec. 10).
The return of the GDI in case of non-sale extinguishes only Principle of Res Perit Domino is not a valid defense
the criminal liability of the entrustee unless he pays in full against an Entrustee in cases of loss or destruction of
his loan obligation. The consequent acquittal of the the goods, documents, or instrumentssecured by a
entrustee in the criminal case does not bar the filing of a Trust Receipt
separate civil action to enforce the civil liability of the
entrustee. For the principle of res perit domino to apply the entrustee
must be the owner of the goods at the time of the loss. A
The failure to turn over goods or proceeds realized from TR is a security agreement, pursuant to which a bank
the sale thereof is a criminal offense under Art. 315(l) (b) acquires a ‘security interest’ in the goods. It secures an
of RPC (estafa) except if he disposed of the goods in indebtedness and there can be no such thing as security
accordance with the terms. interest that secures no obligation.If under a trust receipt
transaction, the entruster is made to appear as the owner,
Q: CCC Car, Inc. obtained a loan from BBB Bank, which it was but an artificial expedient, more of legal fiction than
fund was used to import ten (10) units of Mercedes fact, for if it were really so, it could dispose of the goods in
Benz S class vehicles. Upon arrival of the vehicles and any manner it wants. Thus, the ownership of the goods
before release of said vehicles to CCC Car, Inc. X and Y, remaining with the entrustee, he cannot be relieved of the
the President and Treasurer, respectively, of CCC Car, obligation to pay his/her loan in case of loss or
Inc. signed the Trust Receipt to cover tha value of the destruction (Rosario Textile Mills vs. Home Bankers
ten (10) units of Mercedes Benx S class vehicles after Association, supra).
which, the vehicles were all delivered to the Car
display room of CCC Car, Inc. Sale of the vehicles were
slow, and it took a month to dispose of the ten (10)
units. CCC Car, Inc. wanted to be in business and to
save on various documentations required by the
bank, decided that instead of turning over the

MERCANTILE LAW
PENAL SANCTION IF OFFENDER IS A CORPORATION To be a TR transaction, the goods must be intended for
sale or resale. The Supreme Court, in one case, held that
Elements to be established in order to validly the trial court erred in ruling that the agreement in the
prosecute the Entrustee for Estafa case was a TR transaction because the goods involved
were intended to be used in the fabrication of steel
In order that the entrustee may be validly prosecuted for communication towers.
estafa under Art. 315, paragraph 1(b) of the RPC, in
relation with Sec. 13 of PD 115, the following elements The Court further ruled that, “the true nature of a trust
must be established (R-MAD): receipt transaction can be found in the ‘whereas’ clause of
PD 115 which states that a trust receipt is to be utilized
1. The entrustee Received the subject goods in trust or ‘as a convenient business device to assist importers and
under the obligation to sell the same and to remit the merchants solve their financing problems.’ Obviously,
proceeds thereof to the entruster, or to return the the State, in enacting the law, sought to find a way to assist
goods if not sold; importers and merchants in their financing in order to
encourage commerce in the Philippines.”
2. The entrustee Misappropriated or converted the The principle is of course not limited in its application to
goods and/or the proceeds of the sale; financing importations, since the principle is equally
applicable to domestic transactions. Regardless of
3. The entrustee performed such acts with Abuse of whether the transaction is foreign or domestic, it is
confidence to the damage and prejudice of entruster; important to note that the transactions discussed in
and relation to trust receipts mainly involved sales (Ng vs.
People, G.R. No. 173905, April 23, 2010).
4. A Demand was made on the entrustee by entruster
for the remittance of the proceeds or the return of the In another case it was held that when both parties enter
unsold goods (Land Bank of the Philippines vs. Perez, into an agreement knowing that the return of the goods
GR No. 166884, June 13, 2012). subject of the trust receipt is not possible even without
any fault on the part of the entrustee, it is not a trust
NOTE: If proof as regards the delivery of GDI to the receipt transaction penalized under Section 13 of P.D.
accused (entrustee) is insufficient, estafa cannot lie 115; the only obligation actually agreed upon by the
(Ramos vs. CA, G.R. No. L-3992-25, August 21, 1987). parties would be the return of the proceeds of the sale
transaction. The transaction becomes a mere loan, where
Compliance with the obligation under the Trust the borrower is obligated to pay the bank the amount
Receipt agreement vis-a-vis criminal liability spent for the purchase of the goods (LBP vs. Perez, supra).
1. If compliance occurred before the criminal charge- Penal sanction when the offender is a corporation
there is no criminal liability.
2. If compliance occurred after the charge even before Though the entrustee is a corporation, nevertheless, the
conviction- the criminal action will not be law specifically makes the officers, employees or other
extinguished. officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or
P.D. 115 does not violate the prohibition in the board of directors, officers, or other officials or employees
Constitution against imprisonment for non-payment responsible for the offense.
of a debt
If the crime is committed by a corporation or other
What is being punished is the dishonesty and abuse of juridical entity, the directors, officers, employees or other
confidence in the handling of money or goods to the officers thereof responsible for the offense rshall be
prejudice of another regardless of whether the latter is charged and penalized for the crime, precisely because of
the owner or not. It does not seek to enforce payment of the nature of the crime and the penalty therefor. A
the loan. Thus, there can be no violation of a right against corporation cannot be arrested and imprisoned; hence,
imprisonment for non-payment of a debt (People vs. cannot be penalized for a crime punishable by
Nitafan, G.R. No. 81559, April 6, 1992). imprisonment (Ching vs. Secretary of Justice, supra).
Q: Is lack of intent to defraud a bar to the prosecution Rationale behind the accountability of the officers of
of these acts or omissions? (2006 Bar) the corporation
A: No. The mere failure to account or return gives rise to The rationale is that such officers or employees are vested
the crime which is malum prohibitum. There is no with the authority and responsibility to devise means
requirement to prove intent to defraud (Ching vs. necessary to ensure compliance with the law and, if they
Secretary of Justice, G.R. No. 164317, February 6, 2006). fail to do so, are held criminally accountable; thus, they
have a responsible share in the violations of the law (ibid).
Penal sanction is not available if the goods are not
intended for sale or resale NOTE: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate

TRUST RECEIPTS LAW
personality of the corporation, where “he is the actual, The civil action may be instituted in the criminal action or
present and efficient actor.” Corporate officers or separately filed independently of the criminal action. The
employees, through whose act, default or omission the criminal action is based on ex-delictu for violation of the
corporation commits a crime, are individually guilty of the law while the civil action is based on ex-contractu for
crime. The principle applies whether or not the crime violation of the trust receipt arrangement.
requires the consciousness of wrongdoing (Ching vs.
Secretary of Justice, supra). Repossession of the goods by the Entruster cannot be
considered as payment
REMEDIES AVAILABLE
Payment would legally result only after the entruster has
Defenses available to negate CRIMINAL liability of the foreclosed on the securities, sold the same and applied the
Entrustee (CoCo CaCo No LP) proceeds thereof to the entrustee’s obligation. Since the
TR is a mere security arrangement, the repossession by
1. Compliance with the terms of the TR either by the entruster cannot be considered payment of the
payment, return of the proceeds or return of the loan/advances given to the entrustee under the letter of
goods (P.D. 115, Sec. 13). credit/trust receipt (PNB v. Pineda, supra).
2. Consignment. In the event of default by the Entrustee on his

obligation under the Trust Receipt agreement, it is
3. Cancellation of the TR agreement and taking into NOT absolutely necessary for the Entruster to cancel
possession of the goods by the entruster. the trust and take possession of the goods to be able
to enforce his right thereunder.
NOTE: Repossession of the goods will extinguish
only the criminal liability. The law uses the word "may" in granting to the entruster
the right to cancel the trust and take possession of the
4. Compromise by parties before filing of information in goods. Consequently, the entrustee has the discretion to
court. Compromise of estafa case arising from TR avail of such right or seek any alternative action, such as a
transaction, after the case has been filed in court does third party claim or a separate civil action which it deems
not amount to novation and does not erase the best to protect its right, at any time upon default or failure
criminal liability of the accused (Ong vs. CA, G.R. No. of the entrustee to comply with any of the terms and
L-58476, September 2, 1983). conditions of the trust agreement (South City Homes, Inc.
vs. BA Finance Corporation, G.R. No. 135462, December 7,
5. Non-receipt of the goods by the entrustee or where 2001).
proof of delivery of goods to the accused is
insufficient. (Ramos vs. CA, supra). Q: BBB Banking Corporation issued a Letter of Credit
in the amount of P5Million, for the purchase of five (5)
6. Loss of goods without fault of the entrustee. tons of corn by X. Upon arrival of the goods, the goods
were delivered to the warehouse of X. Thereafter he
7. The transaction does not fall under PD 115 (Colinares was asked to sign a Trust Receipt covering the goods.
vs. CA, G.R. No. 90828, September 5, 2000, Consolidated When the goods were sold, X did not deliver the
Bank and Trust Corporation vs. CA, G.R. No. 114286, proceeds to BBB Banking Corporation, arguing that
April 19, 2001). he will need the fund for the subsequent importation.
Is there sufficient basis to sue for criminal action?
NOTE: In these cases, the execution of a TR was made (2012 Bar)
after the goods covered by it had been purchased, making
the buyer the owner thereof. The transaction does not A: B. When the trust receipt was signed, the ownership of
involve a TR but a simple loan even though the parties the goods was already with X.
denominate the transaction as one of a TR.
Q. Dennis failed to comply with his undertaking under
Failure of the entrustee to deliver the proceeds of sale the TR he issued in favor of ABC bank. The bank filed
will give the entruster the right to file a civil action both criminal and civil cases against Dennis. The
and a criminal action for estafa (1991, 1997, 2006 court proceeded with the civil case independently
Bar) from the criminal case. Is the court correct in
proceeding independently although a criminal case is
Sec. 13 of P.D. 115, Trust Receipts Law, provides that the also instituted?
failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a A: Yes, the complaint against Dennis is based on the
trust receipt to the extent of the amount owing to the failure of the latter to comply with his obligation as
entruster or as appears in the trust receipt or to return spelled out in the TR. This breach of obligation is separate
said goods, documents or instruments if they were not and distinct from any criminal liability for "misuse and/or
sold or disposed of in accordance with the terms of the misappropriation of goods or proceeds realized from the
trust receipt shall constitute the crime of estafa. sale of goods, documents or instruments released under
trust receipts", punishable under Sec. 13 of the PD 115.
Being based on an obligation ex contractu and not ex

MERCANTILE LAW
delicto, the civil action may proceed independently of the whether public or bailment contracts other
criminal proceedings instituted against petitioners private, bonded or not. than warehouse receipts
regardless of the result of the latter (Sarmiento vs. CA, G.R. (NCC, Art.1507-1520)
No. 122502, December 27, 2002).
Warehouseman (WHM)
Effect of novation of a Trust Agreement
A person, natural or juridical, lawfully engaged in the
Where the entruster and entrustee entered into an business of storing of goods for profit (WHR Law, Sec. 58).
agreement which provides for conditions incompatible
with the TR agreement, the obligation under the trust Warehouse (WH)
receipt is extinguished. Hence, the breach in the
subsequent agreement does not give rise to a criminal The building or place where goods are deposited and
liability under P.D. 115 but only civil liability (Philippine stored for profit.
Bank vs. Ong, G.R. No. 133176, August 8, 2002).
Persons who may issue a Warehouse Receipt
Deposits in a savings account opened by the buyer
subsequent to the Trust Receipttransaction cannot be 1. WHM, whether public or private, bonded or not
automatically applied to outstanding obligations (WHR Law, Sec. 1).
under the Trust Receipt account 2. A person authorized by a WHM.
The receipt of the bank of a sum of money without Form and essential terms of a Warehouse Receipt
reference to the TR obligation does not obligate the bank
to apply the money received against the trust receipt It need not be in particular form but must embody within
obligation. Neither does compensation arise because its written or printed terms (LCD-DSWD-LF):
compensation is not proper when one of the debts
consists in civil liability arising from criminal 1. Location of the WH
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 2. Consecutive number of the receipt
134436, Aug. 16, 2000). 3. Date of the issue
4. A statement whether the goods received will be
Q: E received goods from T for display and sale in E's Delivered to bearer, to a specified person or to a
store. E was to turn over to T the proceeds of any sale specified person or his order
and return the ones unsold. To document their 5. Signature of the WHM
agreement, E executed a trust receipt in T’s favor 6. If the receipt is issued for goods of which the
covering the goods. When E failed to turn over the Warehouseman is the owner, either solely or jointly
proceeds from his sale of the goods or return the ones or in common with others, the fact of such
unsold despite demand, he was charged in court for ownership; and
estafa. E moved to dismiss on the ground that his 7. Description of the goods
liability is only civil. Is he correct? (2011 Bar) 8. A statement of the amount of advances made and of
liabilities incurred for which the warehouseman
A: No, since his breach of the trust receipt agreement claims a Lien.
subjects him to both civil and criminal liability for estafa. 9. Fees (WHR Law, Sec. 2)
Effects of omission of any of the essential terms (CIV-

WAREHOUSE RECEIPTS LAW
N)
(ACT 2137, AS AMENDED)
1. Conversion of the contract to ordinary deposit.
Warehouse Receipt (WHR) 2. Injured person can hold WHM liable for all damages
caused by the omission
It is a written acknowledgment by the warehouseman 3. Validity of receipt not affected
that he has received and holds certain goods therein 4. Negotiability of receipts not affected (Gonzales vs. Go
described in his warehouse for the person to whom the Fiong & Luzon Surety Co., G.R. No. 91776, August 30,
document is issued.The warehouse receipt has two-fold 1958).
functions, that is, it is a contract and a receipt (Telengtan
Bros. & Sons vs. CA, G.R. No. L-110581, September 21, 1994). Prohibited terms in a Warehouse Receipt
Warehouse receipt law v. Documents of title under A warehouseman may insert in a receipt issued by him,
the Civil Code any other terms and conditions provided that such terms
and conditions shall not be (C2-RMN):
WAREHOUSE DOCUMENTS OF TITLE
RECEIPTS LAW UNDER CIVIL CODE 1. Contrary to the Warehouse Receipts Law (Sec. 3).
Warehouse receipts Other receipts of 2. Contrary to law, morals, good customs, public order
issued by warehouses, documents issued in or public policy.
3. Terms Reducing the required diligence of the
warehouseman (Ibid)

4. Those exempting the warehouseman from liability 2. There is no Direct obligation of the WHM; and
for Misdelivery or for not giving statutory notice in
case of sale of goods. 3. The transferee can Compel the transferor to complete
5. Those exempting the warehouseman from liability the negotiation by indorsing the instrument. Negotiation
for Negligence. takes effect as of the time when the indorsement is
actually made.
Effect when the goods deposited are incorrectly
described Rights of the owner of the Negotiable Warehouse
Receipt in case the signature of an owner was forged
GR: Warehouseman shall be liable for damages for non- and the forger was able to withdraw the goods from
existence or misdescription of goods at the time of its the Warehouseman
issue.
1. If under WHR, the goods are deliverable to the
XPN: When the goods are described based on: depositor or to his order, the owner of the said negotiable
1. Series or labels upon them receipt may proceed against the WHM and/or the holder.
2. Statement that the goods are of certain kind.
2. Without the valid indorsement of the owner to the
Person to whom the goods should be delivered (PDO) holder or in blank, the WHM is liable to the owner for
conversion in the misdelivery.
1. To the person lawfully entitled to the Possession of the
goods, or his agent; 3. If the goods are deliverable to bearer, the owner may
only proceed against the holder. The WHM is not liable for
2. To the person entitled to Delivery under a non- conversion where the goods are delivered to a person in
negotiable instrument or with written authority; or possession of a bearer negotiable instrument.
3. To the lawful Order of a negotiable receipt (person in Duplicate receipts must be so marked in case one
possession of a negotiable receipt) (WHR Law, Sec. 9). negotiable receipt is issued for the same goods
KINDS A WHM shall be liable for all damages caused by his failure
to do so to anyone who purchased the subsequent receipt
Kinds of Warehouse Receipt for value supposing it to be an original, even though the
purchase be after the delivery of the goods by the WHM to
1. Negotiable warehouse receipt the holder of the original receipt (WHR Law, Sec. 6).
2. Non-negotiable warehouse receipt
NOTE: The word “duplicate” shall be plainly placed upon
Negotiable WHR the face of every such receipt, except the first one issued
(ibid.).
It is a receipt in which it states that the goods received will
be delivered to the bearer or to the order of any person Non-Negotiable Warehouse Receipt
named in such receipt (WHR Law, Sec. 5). It is negotiated
by delivery or indorsement plus delivery. It is a receipt in which it is stated that the goods received
will be delivered to the depositor or to any other specified
NOTE: No provision shall be inserted in a negotiable person (WHR Law, Sec. 4).
receipt that it is non-negotiable. Such provision, if
inserted, shall be void, and the receipt shall remain NOTE: To make it non-negotiable, it is needed to be
negotiable. A negotiable warehouse receipt cannot be indicated in the face of the WHR by the warehouseman
converted into non-negotiable (WHR Law, Sec. 5). issuing it that the same is “non-negotiable,” or “not
negotiable” (WHR Law, Sec.7).
Person who may negotiate a Negotiable WHR
Effect of failure to place an indication of non-
1. The owner; negotiability in the WHR
2. Any person to whom the possession or custody of the
receipt has been entrusted by the owner, if, by the terms Failure to mark the WR as “non-negotiable” shall entitle
of the receipt, the goods are deliverable to the order of the the holder, who purchased it for value supposing it to be
person to whom the possession or custody of receipt has negotiable, to treat such receipt negotiable (ibid).
been entrusted or in such form that it may be negotiated
by delivery (WHR Law, Sec. 40). Transfer of a Non-Negotiable Warehouse Receipt
Effect when a Negotiable Warehouse Receipt was A non-negotiable WHR may be transferred by its delivery
delivered without the necessary indorsement (Ac - to the transferee accompanied by a deed of assignment,
DC) donation or other form of transfer.
1. The transferee Acquires title against the transferor

MERCANTILE LAW
Effect of indorsement of a Non-Negotiable Warehouse and notice of dishonor receipt to fulfill their
Receipt given, the endorser shall obligations they may be held
pay the holder. liable for breach of
Even if the receipt is indorsed, the transferee acquires no warranties such as: (1)
additional right (WHR Law, Sec. 39). receipt is genuine and in
respect what it purports to
Warranties on a Warehouse Receipt be (2) they have legal title to
the instrument (3) goods are
A person who, for value, negotiates or transfers a receipt fit for consumption and
by indorsement or delivery, including one who assigns for merchantable (4) they are
value a claim secured by a receipt, unless a contrary not aware of any information
intention appears warrants(GRIT): that will make the
instrument worthless
1. Receipt is Genuine
2. Legal Right to negotiate or transfer it Rights of a holder of a Negotiable Warehouse Receipt
3. No knowledge of defects that may Impair the v. the Rights of a transferee of a Non-Negotiable
validity or worth of the receipt Warehouse Receipt
4. That he has a right to Transfer title to the goods
and that the goods are merchantable or fit for a NEGOTIABLE WAREHOUSE NON-NEGOTIABLE
particular purpose whenever such warranties RECEIPT WAREHOUSE RECEIPT
would have been to transfer without a receipt of May be acquired through May be acquired through
goods represented thereby (WHR Law, Sec. 44). negotiation transfer or assignment
Rights of transferee:
NOTE: The indorsee does not guarantee that the WHM
will comply with his duties (WHR Law, Sec. 45). Rights of the holder of the
1. Acquires title to the
receipt:
goods subject to the terms
When no warranty implied of any agreement with the
1. If indorsed:
transferor (WHR Law, Sec.
A mortgagee, pledgee, or holder for security of a receipt 42).
who, in good faith, demands or receives payment of the a. Acquires title to the
debt for which such receipt is security, whether from a goods as the person
2. Acquires the right to
party to a draft drawn for such debt or from any other negotiating (WHR Law,
notify the warehouseman
person, shall not, by so doing, be deemed to represent or Sec. 41).
of the transfer and thereby
to warrant the genuineness of such receipt or the quantity acquires the direct
or quality of the goods therein described. In short, a b. Acquires the direct
obligation of the
creditor receiving the WHR given as collateral makes no obligation of the
warehouseman to hold
warranty (WHR Law, Sec. 46). warehouseman to hold
possession of the goods for
possession of the goods
him (ibid).
DISTINCTION BETWEEN A NEGOTIABLE for him as if the
INSTRUMENT AND A NEGOTIABLE WAREHOUSE warehouseman directly
NOTE: Prior to notice, the
RECEIPT contracted with him
title of the transferee may
(ibid). be defeated by the levy of an
NEGOTIABLE attachment or execution
NEGOTIABLE WHR 2. If not indorsed:
INSTRUMENT upon the goods by a
Does not contain an He may compel creditor of the transferor or
Contains an indorsement; other-wise, he
unconditional promise to by a notification to the
unconditional promise to would acquire title as that of
pay a sum certain in money. warehouseman by the
pay a sum certain in an assignee (WHR Law, Sec.
The obligation is to deliver transferor or a subsequent
money. 43).
goods. purchaser from the
The subject is money. The subject is merchandise. transferor of a subsequent
The negotiable sale of the goods by the
The warehouse receipt is
instrument is the object transferor (ibid.).
not the object of value.
of value. Defeats the lien of the seller
Acquires the title as that of
Intermediate parties are not of the goods covered thereby
his transferor.
Intermediate parties liable for the warehouse (WHR Law, Sec. 49).
become secondarily man’s failure to deliver the Good covered cannot be Pending notification to the
liable. goods. garnished, attached or levied warehouseman, goods can
on execution by unless: be garnished, attached or
The general endorsers Although endorsers or levied on execution
warrant that the intermediate parties are not 1. Receipt is surrendered. Reason: Absent such notice,
instrument after due liable for any failure on the 2. Its negotiation is enjoined both the warehouseman
presentment shall be paid part of the warehouseman or by the court. and the sheriff have a right
and in case of dishonor previous endorsers of the to assume that the goods

3. The goods are impounded are still owned by the Rule where a warehouse receipt is transferred to
by the court (WHR Law, Sec. person whose name secure payment of a loan by way of pledge or
25). appears in the receipt. mortgage
NOTE: This shall not apply if The pledgee or mortgagee does not automatically become
the person depositing is not the owner of the goods but merely retains the right to
the owner of the goods or keep, and with the consent of the owner to sell them so as
one who has no right to to satisfy the obligation from the proceeds for the simple
convey title to the goods reason that the transaction is not a sale but only a
binding upon the owner. mortgage or pledge. Likewise, if the property is lost
Protects the purchaser in The assignee only steps into without the fault or negligence of the mortgagee or
good faith and for value. the shoes of the assignor. pledgee, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor (PNB vs.
Breach of duty on the part of the person making the Sayo, Jr., G.R. No. 129198, July 9, 1998).
negotiation or fraud, mistake or duress on the owner
of the receipt to entrust possession or custody DOES Non-payment by the original depositors of the
NOT impair the validity of negotiation of a WHR purchase price will NOT render the further
negotiation of the receipt invalid
The same is true provided that the person to whom the
receipt was negotiated or a person to whom the receipt The negotiation of the warehouse receipt by the buyer of
was subsequently negotiated paid value therefor, without goods purchased from and deposited to the
notice of the breach of duty, or fraud, mistake or duress warehouseman is valid even if the warehouseman who
(WHR Law, Sec. 47). issued the negotiable warehouse receipt was not paid by
the buyer. The validity of the negotiation cannot be
Q: Coco was issued by a Warehouseman a negotiable impaired by the fact that the owner/warehouseman was
receipt for safekeeping by the latter of his goods. Can deprived of the possession of the same by fraud, mistake
the judgment creditor of Coco levy by execution the or conversion (PNB vs. Noah’s Ark Sugar Refinery, G.R. No.
goods covered by the negotiable receipt? 107243, September 1, 1993).
A: The goods cannot, while in the possession of the WHM, Q: Alex deposited goods for which Billy,
be attached by garnishment or otherwise, or be levied warehouseman, issued a negotiable warehouse
upon under an execution unless the receipt is first receipt wherein the goods were deliverable to Alex or
surrendered to the WHM, or its negotiation enjoined. The order. Alex negotiated the receipt to Caloy.
warehouseman cannot be compelled to deliver the actual Thereafter, Dario, a creditor secured judgment
possession of the goods until the receipt is surrendered to against Alex and served notice of levy over the goods
it or impounded by the court. on the warehouseman.
Q: Assuming that prior to the levy, the receipt was a. To whom should the warehouseman deliver
sold to Yoyo on the basis of which he filed a claim with goods upon demand?
the sheriff. Would Yoyo have better rights to the b. Would your answer be the same if the
goods than the creditor? Explain your answer. (1999 warehouseman issued a non-negotiable
Bar) werehouse receipt? (2007 Bar)
A: Yes. Yoyo, as a holder for value of the receipt, has a A:

better right to the goods than the creditor. It is Yoyo that a. Billy should deliver the goods to Caloy. Under the
can surrender the receipt which is in its possession and Warehouse Receipts Act, the goods covered by the
can comply with the other requirements which will oblige negotiable receipt cannot be attached or levied upon
the warehouseman to deliver the goods, namely, to sign a directly by the creditor. The creditor must resort to
receipt for the delivery of the goods, and to pay the attaching or levying the receipt itself, not the goods, while
warehouseman's liens and fees and other charges. in the possession of the debtor, Alex. Since Alex has
already negotiated it to Caloy, Dario cannot anymore
Q: What is the proper recourse of the warehouseman attach or levy the goods under the warehouse receipt.
if he is uncertain as to who is entitled to the goods?
Explain. (2005 Bar) b. A non-negotiable WHR is transferred thru simple
assignment. Since Alex negotiated it instead of having it
A: Since there is a conflicting claim of ownership or title, assigned, the conveyance of the warehouse receipt to
the warehouseman should file a complaint in interpleader Caloy is not valid. Hence, Alex is still the owner of the said
requiring the claimants to interplead. The matter involves goods. Dario could now attach or levy the goods.
a judicial question as to whose claim is valid.
Q: Jojo deposited several cartons of goods with SN
Warehouse Corporation. The correseponding
warehouse receipt was issued to the order of Jojo. He
endorsed the warehouse receipt to EJ who paid the
value of the goods deposited. Before EJ could

MERCANTILE LAW
withdraw the goods, Melchor informed SN have been delivered, if such signature is requested
Warehouse Corporation that the goods belonged to by the warehouseman (WHR Law, Sec. 8).
him and were taken by Jojo without his consent. 3. Keep the goods separate from the goods of other
Melchor wants to get the goods, but EJ also wants to depositors, except if authorized by agreement or by
withdraw the same. custom, fungible goods may be mingled with other
goods of the same kind and grade.
a. Who has a better right to the goods? Why?
b. If SN Warehouse Corporation is uncertain as to Instance when the need for a demand by the
who is entitled to the property, what is the proper depositor is not necessary
recourse of the corporation? Explain (2005 Bar)
A demand by the depositor is not necessary when the
A: warehouseman has rendered it beyond his power to
a. Ej has better right to the goods. The goods are deliver the goods.
covered by a negotiable warehouse receipt which was
indorsed to EJ for value. The negotiation to EJ was not Justified refusal to deliver by the warehouseman (Sa
impaired by the fact that Jojo took the goods without the S.B. Co(nfa) F(elvis))
consent of Melchor, as EJ had no notice of such fact.
Moreover, EJ is in possession of the warehouse receipt 1. If the warehouseman’s lien is not SAtisfied by the
and only he can surrender it to the warehouseman (Sec. 8, claimants (WHR Law, Sec. 31);
WHL).
2. Where the goods have already been Sold to satisfy
b. Under the Sec. 17 of Act 2137, Warehouse Receipts the warehouseman’s lien or because of their
Law, SN Warehouse Corporation may file an action for perishable or hazardous nature (WHR Law, Sec. 34);
interpleader and implead EJ and Melchor to determine
who is entitled to the said goods. 3. If the warehouse receipt is negotiatedBack to him;
Q: T delivers two refrigerators to the warehouse of W 4. When the holder does not satisfy the COnditions
who then issues a negotiable receipt undertaking the prescribed in Sec. 8, WHR Law:
delivery of the refrigerators to “T or bearer.” T a. Non-satisfaction of warehouseman’s lien.
entrusted the receipt to B for safekeeping only. B b. Failure to surrender warehouse receipt.
negotiated it, however, to F who bought it in good c. Refusal to sign the Acknowledgement receipt,
faith and for value. Who is entitled to the delivery of acknowledging the receipt of the goods from the
the refrigerators? (2011 Bar) warehouse;
A: F, since he is a purchaser in good faith and for value. 5. The failure was not due to any Fault on the part of the
warehouseman:
Between the real owner of the goods and an innocent a. Upon request by or on behalf of the person lawfully
purchaser for value acquiring the Warehouse Receipt Entitled (WHR Law, Sec. 10).
from a thief, the former prevails b. If the goods are Lost, due to a fortuitous event
exclusively.
If the goods were stolen from the owner and deposited to c. If the warehouseman needs reasonable time to
the warehouseman who subsequently issued a ascertain the Validity of the claim if someone other
warehouse receipt which in turn was duly negotiated to than the depositor claims title to the goods (WHR
an innocent purchaser for value, the owner has the better Law, Sec. 18).
right than the holder of the negotiable warehouse receipt. d. If he had Information that the delivery about to be
This is because a thief transfers no title. made was to one not lawfully entitled (WHR Law,
Sec. 10)
DUTIES OF A WAREHOUSEMAN e. If Several persons claim the goods (WHR Law, Sec.
17).
Obligations of a warehouseman (TD [sasusi] K)
Q: The warehouseman, by issuing the warehouse
1. Take care of the goods entrusted to his safekeeping receipt, acknowledges that the goods are in his
with the same care as a reasonably careful owner of possession, but he can refuse to deliver the goods to
similar goods would exercise. the holder of the warehouse receipt covering the
2. Deliver them to the holder of the receipt or the goods if - (2012 Bar)
depositor provided there is demand by the depositor
accompanied by either: A: d. A WHM is bound to deliver the goods upon a demand
a. An offer to satisfy the warehouseman’s lien made if such is accompanied with (1) an offer to satisfy
b. An offer to surrender the receipt, if negotiable the WHM’s lien; (2) offer to surrender the receipt if
with such indorsements as would be necessary for negotiable; and (3) readiness to sign an acknowledgment
the negotiation of the receipts receipt when the goods are delivered (WHR Law, Sec. 8).
c. A readiness and willingness to sign, when the
goods are delivered, an acknowledgment that they HOWEVER, Sec. 31 of the said Law expressly provides that
a WHM having a lien valid against the person demanding

the goods may refuse to deliver the goods to him until the Effects of alteration of the receipt on the liability of
lien is satisfied. the warehouseman
Further, Sec. 13 provided that the alteration of a receipt
shall not excuse the WHM who issued it from any liability 1. Alteration immaterial – whether fraudulent or not,
if such alteration was: (1) immaterial, (2) authorized, or whether authorized or not, the warehouseman is liable
(3) made without fraudulent intent. on the altered receipt according to its original tenor
Warehouseman has no cause of action for 2. Authorized material alteration – the warehouseman
repossession and damages on the basis of a falsified is liable according to the terms of the receipt as altered
delivery permit
3. Material alteration innocently made – the
Warehouseman has no cause of action against the person warehouseman is liable on the altered receipt according
to whom it delivered deposited articles where the real to its original receipt
parties interested in the questioned articles have not yet
sued the warehouseman for damages on account of 4. Material alteration fraudulently made – warehouseman
wrongful delivery (Consolidated Terminals Inc. vs. Artex is liable according to the original tenor of the receipt to a
Development Co. Inc. G.R. No. L-25748, March 10, 1975). purchaser of the receipt for value without notice, and
even to the alterer and subsequent purchasers with notice
Remedy if the Warehouse Receipt is lost or destroyed except that as regards to the last two, the
warehouseman’s liability is limited only to delivery as he
A court of competent jurisdiction may order the delivery is excused from any liability.
of the goods only:
Instances where a Warehouse man is criminally liable
a. Upon satisfactory proof of the loss or destruction of for his acts (GF-DOOM-C)
the receipt; and
b. Upon the giving of a bond with sufficient sureties to 1. Issuance of warehouse receipts for Good not
be approved by the court (WHR Law, Sec. 14). received (WHR Law, Sec. 50).
NOTE: The delivery of the goods under an order of the 2. Issuance of receipt containing False statement (WHR
court shall NOT relieve the WHM from liability to a person Law, Sec. 51).
to whom the negotiable receipt has been or shall be
negotiated for value without notice of the proceedings or 3. Issuance of Duplicate negotiable warehouse receipt
of the delivery of the goods (ibid.). not marked as such (WHR Law, Sec. 52).
Instances when the duty to insure the goods arise 4. Issuance of a negotiable warehouse receipt of which
(RIEL) he is an Owner without stating such fact of
ownership (WHR Law, Sec. 53).
1. Where the warehouse receipt contains a
Representation to that effect. 5. Delivery of goods without Obtaining negotiable
2. Where it was an Inducement for the depositor to warehouse receipt (WHR Law, Sec. 54).
enter into the contract;
3. Established practice; or 6. Negotiation of receipt for Mortgaged goods (WHR
4. Where the Law provides Law, Sec. 55).
Conversion 7. Commingling of goods (WHR Law, Sec. 24).
It is an unauthorized assumption and exercise of the right Other acts for which Warehouse Man is liable (DuMP-
of ownership over goods belonging to another through SICC)
the alteration of their condition or the exclusion of the
owner’s right (Bouvier’s Law Dictionary). 1. Failure to stamp “Duplicate” on copies of negotiable
receipt (WHR Law, Sec.6).
Instances where a Warehouseman is liable for
conversion 2. Misdelivery of goods (WHR Law, Sec. 10).
1. Where the delivery is made to person other than 3. Failure to Place “non-negotiable” or “not-negotiable”
those authorized; on a non-negotiable receipt (WHR Law, Sec. 7).
2. Even if delivered to persons entitled, he may still be 4. Failure to give notice in case of Sale of goods to
liable for conversion if prior to delivery: satisfy lien (WHR Law, Sec. 33) or because the goods
are perishable or hazardous (WHR Law, Sec. 34).
a. He had been requested not to make such delivery;
or 5. Issuing receipt for non-existing goods or
b. He had received notice of the adverse claim or misdescribed goods (WHR Law, Sec.20).
title of a third person.

MERCANTILE LAW
6. Failure to take Care of the goods (Sec. 21, WHR Law).
The WHM shall not thereafter be liable for failure to
7. Failure to effect Cancellation of a negotiable receipt deliver the goods to the depositor or owner of the goods
upon delivery of the goods (WHR Law, Sec. 11). or to a holder of the receipt given for the goods when they
were deposited, even if such receipt be negotiable (WHR
WAREHOUSEMAN’S LIEN Law, Sec. 36).
Charges covered by a Warehouseman’s lien (PMA) Manner of conducting the execution sale to satisfy the
warehouseman’s lien
1. Charges for storage and Preservation of the goods
(insurance and others may be included as long as it is 1. Notice of the sale
stipulated) a. published once a week for two consecutive weeks in
a newspaper published in the place where such sale
2. Money advanced, interest, insurance, transportation, is to be held; or
labor, weighing, coopering and other charges and b. If there is no newspaper published in such place, the
expenses in relation to such goods advertisement shall be posted at least ten days
before such sale in not less than six conspicuous
3. Charges and expenses for notice, and places therein.
Advertisements of sale, and for sale of the goods
where default had been made in satisfying the NOTE: The notice shall indicate the following:
WHM’s lien (WHR Law, Sec. 27). 1. Description of the goods to be sold;
2. Name of the owner or person on whose account
Remedies available to a Warehouseman to enforce his the goods are held; and
Warehouseman’s lien (REC) 3. Time and place of the sale
1. By Refusing to deliver the goods until the lien is 2. Sale shall be held not less than fifteen days from the
satisfied; time of the first publication.
2. By causing the Extrajudicial sale of the property and 3. In the place where the lien was acquired.
applying the proceeds of the value of the lien;
NOTE: The balance, if any, of the proceeds of the
3. By filing a civil action for Collection of the unpaid execution sale shall be held by the WHM and delivered on
charges or by way of counterclaim in an action to demand to the person to whom he would have been
recover the property from him or such other bound to deliver or justified in delivering goods (WHR
remedies allowed by law for the enforcement of a Law, Sec.31).
lien against personal property or to a creditor against
his debtor, for the collection from the depositor of all Effect of the non-publication of the notice of sale
the charges which the depositor has bound himself to
pay. Where the sale was made without the publication
required and before the time provided by law, such sale is
Lien over the goods does not preclude the WHM to void and the purchases of the goods acquires no title to
avail all other remedies them.
Whether a warehouseman has or has not a lien upon the A person claiming right over the property may stop
goods, he is entitled to all remedies allowed by law to a the execution sale of the goods
creditor against a debtor for the collection from the
depositor of all charges and advances which the depositor At any time before the goods are so sold, any person
has expressly or impliedly contracted with the claiming a right of property or possession therein may
warehouseman to pay (WHR Law, Sec 32). pay the WHM the amount necessary to satisfy his lien and
to pay the reasonable expenses and liabilities incurred
Enforcement of a Lien inserving notices and advertising and preparing for the
sale up to the time of such payment (WHR Law, Sec.33).
The lien may be enforced against the goods of the
following: Instances when a warehouseman may lose his lien
1. Goods belonging to the person who is liable as 1. By surrendering possession thereof, or

debtor; and 2. By refusing to deliver the goods when a demand is
2. Goods belonging to others which have been made with which he is bound to comply (WHR Law
deposited at any time by the debtor with authority to Sec. 29).
make a valid pledge (WHR Law, Sec. 28).
NOTE: Where a negotiable receipt is issued, with the
Effect of sale made to satisfy a warehouseman’s lien exception of the charges for the storage or preservation of
or in case when the goods are perishable or goods for which a negotiable receipt has been issued, the
hazardous in nature lien exists only for other charges expressly enumerated in

NEGOTIABLE INSTRUMENTS LAW
the receipt so far as they are written although the amount When Warehouseman fees and charges cease to
of the said charge is not stated. accrue
Reasons which a warehouseman may invoke to The warehouseman fees and charges cease to accrue from
legally refuse to effect delivery of the goods: the date of rejection by the warehouseman to heed the
lawful demand by the endorsee of the quedan for the
1. That the holder of the receipt does not satisfy the release of the goods (PNB v. Sayo, Jr., Supra).
conditions prescribed in Section 8 of the WHR Law.
2. That the warehouseman has legal title in himself on
the goods, such title or right being derived directly or
indirectly from a transfer made by the depositor at Negotiable Instrument (1992, 1993, 1996-1999,
the time of or subsequent to the deposit for storage, 2002, 2005, 2007 Bar)
or from the warehousemans lien (WHR Law, Sec. 16).
It is a written contract for the payment of money which is
3. That the warehouseman has legally set up the title or intended as a substitute for money and passes from one
right of third persons as lawful defense for non- person to another as money, in such a manner as to give a
delivery of the goods as follows: holder in due course the right to hold the instrument free
a. Where the warehouseman has been requested, by from defenses available to prior parties (Sundiang Sr. &
or on behalf of the person lawfully entitled to a Aquino, 2011). For an instrument to be considered as a
right of property of or possession in the goods, not negotiable one, it must comply with Section 1 of the
to make such delivery (WHR Law, Sec. 10), in which Negotiable Instruments Law, to wit:
case, the warehouseman may, either as a defense
to an action brought against him for nondelivery of (a) It must be in writing and signed by the maker or
the goods, or as an original suit, whichever is drawer;
appropriate, require all known claimants to
interplead (WHR Law, Sec. 17); (b) Must contain an unconditional promise or order to
b. Where the warehouseman had information that pay a sum certain in money;
the delivery about to be made was to one not
lawfully entitled to the possession of the goods (c) Must be payable on demand, or at a fixed or
(WHR Law, Sec. 10), in which case, the determinable future time;
warehouseman shall be excused from liability for
refusing to deliver the goods, either to the (d) Must be payable to order or to bearer; and
depositor or person claiming under him or to the
adverse claimant, until the warehouseman has had (e) Where the instrument is addressed to a drawee, he
a reasonable time to ascertain the validity of the must be named or otherwise indicated therein with
adverse claims or to bring legal proceedings to reasonable certainty.
compel all claimants to interplead (WHR Law, Sec.
18); and A negotiable instrument is characterized by negotiability
c. Where the goods have already been lawfully sold (capability of being transferred from one person to
to third persons to satisfy a warehousemans lien, another so as to make him a holder who is entitled to the
or have been lawfully sold or disposed of because payment thereof) and its accumulation of secondary
of their perishable or hazardous nature (WHR Law, contracts resulting from indorsements at the back
Sec. 36). thereof.
4. That the warehouseman having a lien valid against Negotiable instrument v. Non-negotiable instrument
the person demanding the goods refuses to deliver
the goods to him until the lien is satisfied (WHR Law, NEGOTIABLE NON-NEGOTIABLE
Sec. 31). Basis
INSTRUMENT INSTRUMENT
Governing NIL. The Civil Code or
5. That the failure was not due to any fault on the part Law pertinent special
of the warehouseman, as by showing that, prior to laws should apply
demand for delivery and refusal, the goods were (GSIS v. CA,
stolen or destroyed by fire, flood, etc., without any G.R. No. L-40824,
negligence on his part, unless he has contracted so as February 23, 1989).
to be liable in such case, or that the goods have been
taken by the mistake of a third person without the Manner of Can be Can be transferred
knowledge or implied assent of the warehouseman, Transfer transferred by only by assignment.
or some other justifiable ground for non- negotiation or
delivery(Philippine National Bank, vs. Hon. Marcelino by
L. Sayo, JR., in his capacity as Presiding Judge of the assignment.
Regional Trial Court of Manila (Branch 45), et al., G.R.
No. 129918, July 9, 1998).

MERCANTILE LAW
Status of The transferee The transferee can Laws governing a negotiable instrument
Transferee can be a never be a holder in
holder in due due course but 1. NIL -For instruments which meet the requisites of
course if all remains to be an negotiability.
the assignee.
requirements 2. New Civil Code (NCC) – Applies suppletorily in cases
of Section 52 of assignment and demand for payment of an NIL.
of the NIL are
complied with. 3. Code of Commerce (CC) – Applies suppletorily to NIL
in cases of crossed checks.
Defenses All defenses
Available available to prior Incidents in the life of a negotiable instrument
parties may be
raised against the 1. Issue
last transferee. 2. Negotiation
3. Presentment for acceptance (in certain kinds of
(Sundiang Sr. & Aquino, 2014). BOE’s)
4. Acceptance
Q: Discuss the negotiability or non-negotiability of the 5. Dishonor by non-acceptance
following notes (1993 Bar) 6. Presentment for payment
7. Dishonor by non-payment
1) 8. Notice of dishonor
Manila, September 1, 1993 9. Protest in case of foreign bill
10. Discharge
P2,500.00
Negotiable instruments are not legal tender
I promise to pay Pedro San Juan or order the sum of
P2,500. Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA, Sec.
(Sgd.) Noel Castro 60).
GR: The delivery of a negotiable instrument does not by

2)
itself produce the effect of payment (Roman Catholic
Manila, June 3, 1993
Bishop of Malolos vs. Intermediate Appellate Court, G.R. No.
P10,000.00
72110, November 16, 1990).
For value received, I promise to pay Sergio Dee or
XPNs: Negotiable instruments shall produce the effect of
order the sum of P10,000.00 in five (5) installments,
payment when:
with the first installment payable on October 5, 1993
and the other installments on or before the fifth day
1. When they have been cashed, or when through the
of the succeeding month or thereafter.
fault of the creditor they have been impaired (NCC,
Art. 1249).
(Sgd.) Lito Villa
2. If a check representing demand deposit has been
A: cleared and credited to the account of the creditor,
1) The instrument is negotiable because it complied with such shall be equivalent to delivery to the creditor
the requirements provided by section 1 of the NIL namely of cash (NCBA, Sec. 60).
that it is in writing, signed by the maker or drawer,
contains an unconditional promise or order to pay a sum Q: Negotiable instruments are used as substitutes for
certain in money, payable on demand or at a fixed or money, which means - (2012 Bar)
determinale future time and payable to order or to bearer.
It is signed by Noel Castro as maker or drawer, it contains A: B. When negotiated, negotiable instruments can be
an unconditional promise to pay a sum certain in money used to pay indebtedness.
in the amount of P2,500 and it is payable on demand since
there was no date stated. Characteristics or features of a negotiable instrument
2) The instrument is negotiable because it complied with 1. Negotiability – The note may pass from hand to
the requirements provided by section 1 of the NIL. The hand similar to money so as to give the holder in
fact that it is payable in installments does not make the due course (HIDC) the right to hold the instrument
instrument non-negotiable as long as it is stated and collect the sum payable for himself free from
installments and the maturity of each installment must be any infirmity in theinstrument or defect in the title
fixed or determinable (NIL, Sec. 2[b]). of any of the prior parties or defenses available to
them among themselves.

2. Accumulation of secondary contracts– A
characteristic of a negotiable instrument where 5. Where the instrument is Addressed to a drawee, he
additional parties become involved as they are must be named or otherwise indicated therein with
transferred from one person to another. Once an reasonable certainty (NIL, Sec.1).
instrument is issued, additional parties can
become involved (De Leon, 2010). NOTE: A NI need not follow the exact language of NIL, as
long as the terms are sufficient which clearly indicate an
Q: Indicate and explain whether the promissory note intention to conform to the requirements of the law (NIL,
is negotiable or non-negotiable. Sec. 10).
a. I promise to pay A or bearer Php100,000.00 from The requirements stated in Sec. 1 must appear on the face
my inheritance which I will get after the death of my of the instrument otherwise the instrument would not be
father. negotiable.
b. I promise to pay A or bearer Php100,000 plus the Rules governing the use of phrases in the negotiable
interest rate of ninety (90) – day treasury bills. instruments
c. I promise to pay A or bearer the sum of Php100,000 1. As to promissory note

if A passes the 2012 bar exams.
a. The word “promise” need not be used. Any
d. I promise to pay A or bearer the sum of Php100.000 expression equivalent to a promise is sufficient.
on or before December 30, 2012.
b. Mere acknowledgment of a debt is not a
e. I promise to pay A or bearer the sum of Php100,000. promissory note.
(2012 Bar)
c. Language used must indicate a written
A: undertaking to pay
a. Non-negotiable. It is based on a contingency and not
an unconditional promise or order to pay sum certain in 2. As to bill of exchange
money. (NIL, Sec. 1 [b])
a. It must contain an order for payment as
b. Negotiable. The instrument is negotiable despite the distinguished from a mere request.
inclusion of interest since the sum to be paid with said
interest is still certain. (NIL, Sec. 2 [a]) b. The order is not invalidated because it contains
words of civility. Thus, insertion of polite words
c. Non-negotiable. The instrument is not an like “please” does not alter the character of the
unconditional promise or order to pay a sum certain in instrument; as long as the language expresses the
money since payment depends upon the happening of an drawer’s will that the money be paid.
event. (NIL, Sec. 1 (b])
Q: A promissory note which does not have the words
d. Negotiable. There is certainty in payment since it is "or order" or "or bearer" will render the promissory
payable on or before a fixed or determinable future time note non-negotiable, and therefore - (2012 Bar)
specified. (NIL, Sec. 4(b])
A: b. The note can still be assigned and the maker made
e. Negotiable. It is a bearer instrument that is payable liable
upon demand. (NIL, Sec. 7 [b] and Sec. 9 [b])
Rules of construction in case of ambiguities in a
FORMS AND INTERPRETATION negotiable instrument
Form of negotiable instruments (Requisites of 1. Words prevail over figures

negotiability)
2. If date from which interest is to run is unspecified,
An instrument to be negotiable must conform to the interest runs from the date of the instrument; if
following requirements: (SUn-DOrA) undated, from the issue thereof
1. It must be in writing and Signed by the maker or
drawer; 3. If undated, instrument is considered dated as of the
time it was issued
2. Must contain an Unconditional promise or order to
pay a sum certain in money; 4. Written provisions prevail over printed
3. Must be payable on Demand, or at a fixed or 5. If there is doubt whether it is a bill or note, the holder
determinable future time; may treat it as either at his election
4. Must be payable to Order or to bearer; and

MERCANTILE LAW
6. When not clear in what capacity it was signed, 1. An indication of particular fund out of which
deemed signed as an indorser reimbursement is to be made or a particular account
to be debited with the amount; or
7. When two or more persons signed a negotiable
instrument stating "I promise to pay,"in case of 2. A statement of the transaction which gave rise to the
liability, they shall be deemed to be jointly and instrument. But an order or promise to pay out of a
severally liable (NIL, Sec. 17). particular fund is conditional (NIL, Sec 3).
REQUISITES OF NEGOTIABILITY Indication of particular fund for reimbursement v.

Indication of particular fund for payment
Factors to determine the negotiability (FRI)
FUND FOR FUND FOR PAYMENT
1. Words that appear on the Face of negotiable REIMBURSEMENT
instrument
1. The drawee pays the There is only one act - the
2. Requirements enumerated in Section 1 of NIL payee from his own drawee pays directly
funds. from the particular fund
3. Intention of the parties by considering the whole of indicated.
the instrument. 2. The drawee pays
himself from the
NOTE: In determining the negotiability of an instrument, particular fund indicated.
consider the instrument in its entirety and only what
appears on its face. It must comply with the requirements Particular fund indicated Particular fund indicated
under Section 1 of the NIL (Sundiang Sr. & Aquino, 2014 is not the direct source of is the direct source of
citing Caltex Phils. v. CA, G.R. 97753, August 20, 1992). payment. payment.
The instrument must be in writing Instrument is negotiable. Instrument is non-

negotiable. The fund
It must be reduced in writing or in tangible form. The specified is the direct
negotiability or non-negotiability of an instrument is source of payment;
determined from the writing on the face of the instrument therefore, it is subject to
itself (De Leon, 2010). the availability of fund,
hence conditional.
The instrument must be signed by the maker or
drawer (Sundiang Sr. & Aquino, 2014).
It is placed at the lower right hand corner of the Certainty as to sum (1993, 2002 Bar)
instrument. Nonetheless, it may appear in any part of the
instrument whether at the top, middle or bottom or at the A sum is certain within the contemplation of Section 1(b)
margin (De Leon, 2010). of the NIL if the amount that is to be unconditionally paid
by the maker or drawee can be determined on the face of
However, where a signature is so placed upon the the instrument even if it requires mathematical
instrument that it is not clear in what capacity the person computation (Sundiang Sr. & Aquino, 2014).
making the same intended to sign, he is to be deemed an
indorser (NIL, Sec. 17 [f]). The sum payable is a sum certain within the meaning of
this Act, although it is to be paid: (ISDEA)
NOTE: The signature is valid and binding as long as it
appears that a person intended to make the instrument 1. With Interest; or
his own. The signature is prima facie evidence of a 2. By Stated installments; or
person’s intention to be bound as either maker or drawer. 3. By stated installments, with a provision upon Default
in payment of any installment or of interest, the
Unconditional promise or order to pay whole shall become due ( acceleration clause);
4. With Exchange, whether at a fixed rate or at the
The word “promise” or “order” need not appear in the current rate; or
instrument to satisfy the requirements of Section 1(b) of 5. With cost of collection or an Attorney’s fees, in case
the NIL (Sundiang Sr. & Aquino, 2014). The promise or payment shall not be made at maturity (NIL, Sec. 2).
order to pay must not be subject to any condition or
contingency. An instrument payable upon a contingency Payment with interest
is not negotiable even if the condition thereon has been
fulfilled. Interest at fixed rate or at increased or reduced rate will
not destroy negotiability because the presence of such
An unqualified order or promise to pay is unconditional interest does not make uncertain the sum payable.
though coupled with:
In the absence of a date as to which interest is to run, it

shall be from the date of instrument, or in the absence ceases to be negotiable in the full commercial sense (De
thereof, at the date of issue. In the absence of interest rate, Leon, 2010).
it shall be the legal rate.
Payment by installment Payable in Philippine Peso
Payment by installment is certain if the dates of each The “money” referred into may be our legal tender or
installment are fixed and the amount to be paid for each foreign currency. An instrument is still negotiable
installment is stated (NIL, Sec. 2; Sundiang Sr. & Aquino, although the amount to be paid is expressed in currency
2009). that is not legal tender so long as it is expressed in money
(PNB v Zulueta, G.R. No., L-7271, August 30, 1957).
Payment with an acceleration clause
NOTE: An agreement to pay in foreign currency is valid
Acceleration clause is a provision, that upon default in (RA 8183).
payment of any installment or interest, the whole shall
become due (NIL, Sec.2[c]). Effect if a bill or note is payable other than in money
1. If the option to accelerate the maturity is on the
GR: The note or bill must be payable in money. If payable
maker, whether such option is absolute or conditional, in goods, wares, or merchandise, or in property, the same
it is negotiable.
is not negotiable.
2. Where acceleration is at the option of the holder and
can only be exercised upon the happening of the XPNs: Negotiability is not affected if the note contains an
specified event, still negotiable. additional provision which: (SECo Law)
3. But where the holder’s right to accelerate is 1. Authorizes the sale of collateral Securities in case the
unconditional, the time of payment is rendered instrument be not paid at maturity; or
uncertain, the instrument would not be negotiable.
2. Gives the holder an Election to require something to
Extension clause be done in lieu of payment of money; or
Extension Clauses are provisions extending the time of 3. Authorizes a Confession of judgment if the
payment. instrument be not paid at maturity; or
GR: An extension clause does not affect the negotiability 4. Waives the benefit of any Law intended for the
of the instrument. advantage or protection of the obligor (NIL, Sec. 5).
XPN: Where a note with a fixed maturity provides that the Payable on demand or at a fixed or determinable
maker has the option to extend time of payment until the future time
happening of a contingency, the date is uncertain and the
instrument is non-negotiable. 1. Payable on demand – The holder may call for
payment any time, likewise, the maker may also pay any
Sum to be paid with exchange time and the refusal of the holder to accept payment shall
stop the running of interest should there be any, but
The exchange is the charge for the expense of providing obligation to pay the note subsist.
funds at the place where the instrument is payable to
cover such instrument which is issued at another place. An instrument is payable on demand:
It may be at a fixed rate or at the current rate. It is a. When it is so expressed to be payable on demand, or at
applicable only to foreign bills (De Leon, 2010). sight, or on presentation; or
b. In which no time for payment is expressed (NIL, Sec 7).
Inland BOE v. Foreign BOE c. Where an instrument is issued, accepted, or indorsed
when overdue, it is, as regards the person so issuing,
An inland BOE is one which is, or on its face purports to accepting, or indorsing it, payable on demand (ibid).
be, both drawn and payable within the Philippines and
any other bill is a foreign bill. 3. At a fixed time – A term or time instrument is payable
only upon the arrival of the time for payment.
NOTE: Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (NIL, Sec. 109). 3. At a determinable future time-An instrument is
payable at a determinable future time which is expressed
Sum to be paid with costs of collection and/or to be payable:
attorney’s fees a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future time
It does not affect the certainty of the amount payable at specified therein; or
maturity since the increase in the amount due, even if c. On or at a fixed period after the occurrence of a
uncertain, takes place after maturity when the instrument specified event which is certain to happen, though

MERCANTILE LAW
the time of happening be uncertain (NIL, Sec. 4). PESOS. The note has no date, no place of payment and
no consideration mentioned. It was signed by MK and
Payable to order written under his letterhead specifying the address,
which happens to be his residence. TH accepted the
The instrument is payable to order where it is drawn promissory note as payment for services rendered to
payable to the order of a specified person or to him or to SH, who in turn received the note from Juan Tan as
his order. It may be drawn payable to the order of: (PaDD payment for a prepaid cell phone card worth 450
JoinSH) pesos. The payee acknowledged having received the
note on August 1, 2000. A Bar reviewee had told TH,
1. A Payee who is not a maker, drawer, or drawee;
who happens to be your friend, that TH is not a holder
2. The Drawer or maker; or
in due course under Article 52 of the Negotiable
3. The Drawee; or nstruments Law (Act 2031) and therefore does not
4. Two or more payees Jointly; or
enjoy the rights and protection under the statute.
5. One or some of Several payees; or TH asks for our advice specifically in connection with
6. The Holder of an office for the time being (Sec. 8, NIL). the note being undated and not mentioning a place of
payment and any consideration. What would your
Payable to bearer (1997, 2002 Bar) (ENaF PaLa)
advice be? (2000 Bar)
1. When it is Expressed to be so payable; (e.g. I promise to
A:
pay to bearer P10,000.00)
a. The view of KR is correct. The note is payable to a
specific person hence it is not negotiable. The law
2. When it is payable to a person Named therein or bearer;
provides that for an instrument to be negotiable, it must
(e.g. Pay to P or bearer P10,000.00)
comply with the requirements of section 1 of the NIL
pertaining to the part that a note must be payable to order
3. When it is payable to the order of a Fictitious person or
or bearer. In the given case, there were no words of
non-existing person, and such fact was known to the
negotiability and it is silent as to whether it is payable to
person making it so payable; (e.g. Pay to John Doe or
order or bearer. Hence, the instrument is non-negotiable.
order)
b. The place and date are not essential to the
4. When the name of the Payee does not purport to be the
negotiability of the instrument except in certain cases
name of any person; (Pay to cash)
when the date is necessary say to determine when the
note is due or the interest is to run when the payment of
5. When the only or the Last indorsement is an
interest has been stipulated or whether the holder is
indorsement in blank (NIL, Sec 9).
barred by the statute of limitations from enforcing the
note. The fact that there is no mention of consideration is
Illustration:
not essential because it is presumed.
Back of NI (indorsement)
Difference between having a check payable to a
fictitious payee and payable to a specified payee
Pay to A Sgd. P
If a check is payable to a specified payee, it is an order
Pay to B Sgd. A
instrument, which requires indorsement from the payee
or holder before it may be validly negotiated; but it may
Sgd. B
nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person,
Q: A. MP bought a used cell phone from JR. JR and such fact is known to the person making it so payable.
preferred cash but MP is a friend so JR accepted Thus, checks issued to “Prinsipe Abante” or “Si Malakas at
MR‘s promissory note for P10,000. JR thought of si Maganda,” who are well-known characters in Philippine
converting the note into cash by endorsing it to his mythology, are bearer instruments because the named
brother KR. The promissory note is a piece of paper payees are fictitious and non-existent (De Leon, 2010).
with the following hand-printed notation: ― MP WILL
PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS Fictitious-Payee rule
CELLPHONE 1 WEEK FROM TODAY. Below this
notation MP‘s signature with ―8/1/00 next to it, A check is a “bill of exchange” (BOE) drawn on a bank
indicating the date of the promissory note. When JR payable on demand. It is either an order or a bearer
presented MP‘s note to KR, the latter said it was not a instrument but when the payee is fictitious or not
negotiable instrument under the law and so could not intended to be the true recipient of the proceeds of the
be a valid substitute for cash. JR took the opposite check, the check is considered as a bearer instrument and
view, insisting on the note‘s negotiability. You are as such it does not require indorsement to be validly
asked to referee. Which of the opposing views is negotiated. It is negotiable by mere delivery (PNB v.
correct? Rodriguez, G.R. No. 170325, September 26, 2008 in Divina,
2010).
B. TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER 400

Application of the fictitious-payee rule Q: Which of the following stipulations or features of a
promissory note (PN) affect or do not affect its
A “fictitious payee” is not limited to person having no real negotiability, assuming that the PN is otherwise
existence. An actual, existing, and living payee may also be negotiable? Indicate your answer by writing the
“fictitious” if the maker of the check did not intend for the paragraph number of the stipulation or feature of the
payee to in fact receive the proceeds of the check (PNB v. PN as shown below and your corresponding answer,
Rodriguez, supra). either ―Affected or ―Not affected. Explain.
As to who bears the loss in a fictitious-payee situation a) The date of the PN is ―February 30, 2002.
In a fictitious-payee situation, the drawee bank is b) The PN bears interest payable on the last day of
absolved from liability and the drawer bears the loss. each calendar quarter at a rate equal to five
When faced with a check payable to a fictitious payee, it is percent (5%) above the then prevailing 91-day
treated as a bearer instrument that can be negotiated by Treasury Bill rate as published at the beginning
delivery. The underlying theory is that one cannot expect of such calendar quarter.
a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this c) The PN gives the maker the option to make
limitation, he must have intended for the instrument to be payment either in money or in quantity of palay
negotiated by mere delivery. Thus, in case of controversy, or equivalent value.
the drawer of the check will bear the loss (Ibid).
d) The PN gives the holder the option either to require
Exception to the fictitious-payee rule payment in money or to require the maker to
serve as the bodyguard or escort of the holder for
A showing of commercial bad faith on the part of the 30 days. (2002 Bar)
drawee or any transferee of the check for that matter, will
work to strip it of this defense (Ibid). A:
a. Paragraph 1: NOT AFFECTED. Date is not one of the
When drawee must be named with reasonable requirements for negotiability therefore it is not essential
certainty except when the date is necessary to determine when the
note is due
1. In a BOE, the drawee must be named or otherwise
designated with reasonable certainty (NIL, Sec. 1). b. Paragraph 2: NOT AFFECTED. An instrument
payable with interest determinable at a fixed time is
2. A bill may be addressed to two or more drawees negotiable. The law provides under section 2a of the NIL,
jointly, but not to two or more drawees in the a sum is still considered as certain although it is to be paid
alternative or in succession (NIL, Sec. 127). Eg. An within interest. It does not make the promise
instrument may be addressed “to A and B” but not “to unconditional
A or B”.
c. Paragraph 3: AFFECTED. An option given to the
maker makes the promise conditional
3. An instrument payable “to the order of the bearer”
has been held to be an instrument payable to “order”
d. Pa ragraph 4: NOT AFFECTED. An option given to
(10 C.J.S. 575-576).
the holder does not make the promise conditional
Provisions that do not affect the negotiability of an
Q: B borrowed Php1 million from L and offered to him
instrument (DVNo S. CurSECo Law)
his BMW car worth Php 1 Million as collateral. B then
executed a promissory note that reads: “I, B, promise
1. Omission of Date
to pay L or bearer the amount of Php1 Million and to
2. Non-specification of Value given or that any value had
keep my BMW car (loan collateral) free from any
been given other encumbrance. Signed, B.” Is this note
3. Non-specification of place where it is drawn or payable
negotiable? (2011 Bar)
4. Bears a Seal
5. Designation of particular kind of Currency in which
A: No, since it contains a promise to do an act in addition
payment is to be made. (Sec. 6, NIL.) to the payment of money.
Additional provisions which: NOTE: What will not affect the negotiability of the
1. Authorizes the sale of collateral Securities on default
instrument is an additional provision which gives an
2. Gives the holder an Election to require something to election to require something to be done in lieu of
be done in lieu of payment of money.
payment of money.
3. Authorizes Confession of judgment on default
4. Waives the benefit of the Lawintended for the
Q: A writes a promissory note in favor of his creditor,
protection of the obligor (NIL, Sec. 5). B. It says: “Subject to my option, I promise to pay B
Php1 Million or his order or give Php1 Million worth
of cement or to authorize him to sell my house worth

MERCANTILE LAW
Php1 Million. Signed, A.” Is the note negotiable? (2011 certificates,
Bar) warehouse
receipts and
A: No, because the exercise of the option to pay lies with pawn tickets.
A, the maker and debtor. The subject
Actually stands
Subject matter is a sum
Note: In order not to affect the negotiability of the for the goods it
Matter certain in
instrument, the option must be with the holder/creditor. covers
money
Capable of Not capable of
Q: Antonio issued the following instrument: accumulating accumulating
August 10, 2013 Capability of secondary secondary
Makati City Accumulating contracts contracts
Secondary resulting from resulting from
P100,000.00 Contracts indorsements indorsements
at the back at the back
Sixty days after date, I promise to pay Bobby or his thereof thereof.
designated representative the sum of ONE HUNDRED
THOUSAND PESOS(P 100,000.00) from my BPI Acct. KINDS OF NEGOTIABLE INSTRUMENTS
No. 1234 if, by this due date, the sun still sets in the
west to usher in the evening and rises in the east the
Kinds of negotiable instruments
following morning to welcome the day.
1. Promissory notes (PN) – An unconditional promise in
(Sgd.) Antonio Reyes
writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or
Explain each requirement of negotiability present or
determinable future time, a sum certain in money to
absent in the instrument. (2013 Bar)
order or to bearer (NIL, Sec. 184).
A: The instrument contains a promise to pay and was
2. Bill of exchange (BOE) – An unconditional order in writing
signed by the maker, Antonio Reyes (NIL, Sec. 1[a]).
addressed by one person to another signed by the
person giving it, requiring the person to whom it is
The promise to pay is unconditional insofar as the
addressed to pay on demand or at a fixed or
reference to the setting of the sun in the west in the
determinable future time a sum certain in money to
evening and its rising in the east in the morning are
order or to bearer (NIL, Sec. 126).
concerned. These are certain to happen (NIL, Sec. 4[c). The
promise to pay is conditional, because the money will be
NOTE: A check is a bill of exchange drawn on a bank
taken from a particular fund, the BPI Account No. 1234
payable on demand (NIL, Sec 185).
(NIL, Sec. 3).
The instrument contains a promise to pay a sum certain Promissory note v. Bill of exchange
in money, P100,000.00 (NIL, Sec. 1 [b])
PROMISSORY
The money is payable at a determinable future time, sixty BILL OF EXCHANGE
BASIS NOTE
days after August 10, 2013 (NIL, Sec. 4[a]).
Undertaking Promise to pay Order to pay
The instrument is not payable to order or to bearer (NIL, 3 parties (upon
As to number of
Sec. 1[d]). 2 parties acceptance of the
original parties
drawee)
Q: Distinguish a negotiable document from a As to liability of Maker is Drawer is
negotiable instrument (2005 Bar) parties primarily liable secondarily liable
Only 1 2 presentments (for
As to number of
NEGOTIABLE NEGOTIABLE presentment acceptance and for
BASIS presentments
INSTRUMENT DOCUMENT (for payment) is payment) are
needed
A written Held to be non- needed generally needed
contract which negotiable in
is intended as a the technical A bill of exchange is not considered as an assignment
Substitute for substitute for sense because of funds in the hands of the drawee
money money like they do not
promissory have the A bill of exchange itself does not operate as an assignment
notes and bill of requisites of the funds in the hands of the drawee available for the
exchange under the NIL payment thereof, and the drawee is not liable on the bill
It may either be It has various unless and until he accepts the same (NIL, Sec. 127).
a bill of forms such as
Forms exchange or a but not limited
promissory to bill of lading,
note stock

A bill of exchange may be addressed to more than one which fails to comply with the requirements set forth
drawee under Sec. 1 of the NIL. It is merely considered as a
negotiable document that does not result in the
A bill of exchange may be addressed to two or more accumulation of contracts.
drawees jointly, whether partners or not; but not to two
or more drawees in the alternative or in succession (NIL, e. A treasury warrant require appropriations from the
Sec. 128). national government which means that the particular
fund may or may not exists which renders it conditional,
Instances when a bill of exchange may be treated as thereby non-negotiable.
promissory note
Parties to a negotiable instrument and their
1. Where in a bill the drawer and the drawee are the same liabilities
person (NIL, Sec. 130)
BASIS PARTIES FUNCTION LIABILITY
2. The drawee is a fictitious person (NIL, Sec. 130) One who
makes the
Primarily
3. The drawee does not have the capacity to contract (NIL, Maker promise and
liable
Sec. 130) signs the
instrument.
PN
The party to
4. Whether the instrument is so ambiguous that there is
whom
doubt whether it is a bill or a note, the holder may treat
Payee payment is
it either at his election (NIL, Sec. 17[e]; 1998 Bar)
originally
payable.
Q: State and explain whether the following are
Secondarily
negotiable instruments under the Negotiable The person
liable, except
Instruments Law: who issues
Drawer when drawee
and draws
refused to
a. Postal Money Order the bill
accept
b. A certificate of time deposit which states “This is
The party Not liable
to certify that bearer has deposited in this bank
upon whom until he
the sum of FOUR THOUSAND PESOS (P4,000) Drawee
the bill is becomes
only, repayable to the depositor 200 days after
drawn. acceptor
date.” BOE
c. Letters of Credit The party to The party to
whom whom
d. Warehouse Receipts
Payee payment is payment is
e. Treasury warrants payable from a specific fund
originally originally
(2005 Bar)
payable. payable.
A: The acceptor
a. Postal Money Order is not a negotiable instrument is the drawee Primarily
Acceptor
because, as held in Phil. Education Co. vs Soriano, there are who accepts liable
many restrictions which make them incompatible with the bill
concepts of negotiable instruments, thereby making the
order conditional, in contrast to Sec. 1 of the NIL. Referee in case of need
Furthermore, such is governed by postal rules and
regulation and it may only be negotiated once. Referee in case of need is the person named by the drawer
or indorser in the NI as the one to whom the holder may
b. The certificate of time deposit is a negotiable resort in case the BOE is dishonored by non-acceptance or
instrument because it is an acknowledgement in writing non-payment.
by the bank of the amount of deposit with a promise to
repay the same to the depositor or bearer thereof at a NOTE: It is the option of the holder to refer to the referee
specific time (Caltex v. CA, supra.). in case of need or not as he may see fit (NIL, Sec. 131).
c. A letter of credit is not negotiable because it is Acceptance of the bill of exchange by the drawee is not
generally conditional and has limited negotiability an important requisite for the instrument’s
because it is issued in favor of a specific person. But the negotiability
Supreme Court held in Lee vs. Court of Appeals, that the
drafts issued in connection with the letters of credit are The acceptance of a BOE is not important in the
negotiable instruments. determination of its negotiability. The nature of
acceptance is important only in the determination of the
d. A warehouse receipt is not a negotiable instrument kind of liabilities of the parties involved (Philippine Bank
because the obligation of a warehouseman is not to pay of Commerce v. Aruego, G.R. Nos. L-25836-37, January 31,
but to deliver the goods under the warehouse receipt 1981).

MERCANTILE LAW
Drawer v. Maker course, then it is valid and effective for all purpose in his
hands because the defense of not filling it up in
BASIS DRAWER MAKER accordance with the authority given is only a personal
Kind of NI defense that cannot be raised against a holder in due
Issues a BOE Issues a PN course. Based on the foregoing, Jun is liable to Marie,
involved
being a holder in due course, for the incomplete
Only secondarily instrument which he delivered to Ruth.
Liability Primarily liable
liable
b. No. The check is an incomplete instrument not
Can limit his delivered in contemplation of law. An incomplete
Limitation of liability by Cannot limit instrument not delivered is not a valid contract in the
Liability putting “without liability hands of any holder as against any person whose
recourse” signature was placed thereon before delivery. As such, Jun
is not liable to Marie since he does not assume any
responsibility whatsoever upon the said check (NIL, Sec.
COMPLETION AND DELIVERY 15)
Steps in the issuance of a negotiable instrument Various situations involving negotiable instruments
1. The mechanical act of writing the instrument 1. Incomplete instrument
completely and in accordance with Sec. 1 of NIL. a. Delivered
i. With forgery and alteration
2. Delivery of the complete instrument by the maker or ii. Without forgery and alteration
the drawer to the payee or holder with the intention b. Not delivered
of giving effect to it. i. With forgery and alteration
ii. Without forgery and alteration
Delivery
2. Complete instrument
It refers to the transfer of possession, actual or a. Delivered
constructive, from one person to another (NIL, Sec. 191), i. With forgery and alteration
with the intent to transfer title to payee and recognize him ii. Without forgery and alteration
as holder thereof. b. Not delivered
i. With forgery and alteration
Incomplete instrument ii. Without forgery and alteration
An instrument is incomplete when it is wanting in any
Rule when an instrument is complete and delivered
material particular (NIL, Sec. 14).
If an instrument is complete and delivered without
Q: Jun was about to leave for a business trip. As his
forgery and alteration, all parties are bound.
usual practice, he signed several blank checks. He
instructed Ruth, his secretary, to fill them as payment
INSERTION OF DATE
for his obligations. Ruth filled one check with her
name as payee, placed P30,000.00 thereon, endorsed
Necessity of a date in order to make an instrument
and delivered it to Marie. She accepted the check in negotiable
good faith as payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and GR: The date is not essential to the negotiability of the
apologized to Jun. Immediately he directed the
instrument (not one of the requirements under Sec. 1).
drawee bank to dishonor the check. When Marie
encashed the check it was dishonored.
NOTE: If the negotiable instrument is dated, such date is
a. Is Jun liable to Marie?
deemed a prima facie proof that it is the true date of the
b. Supposing the check was stolen while in Ruth's making, drawing, acceptance or indorsement of the
possession and a thief filled the blank check, instrument (NIL, Sec. 11).
endorsed and delivered it to Marie in payment for the
goods he purchased from her, is Jun liable to Marie if XPNs: Date is important to determine maturity:
the check is dishonored? (2006 Bar)
1. Where the instrument is payable within aspecified
period after date, or after sight.
A:
2. When the instrument is payable on demand, date is
a. Yes. When a delivered instrument is wanting in any
necessary to determine whether the instrument was
material particular (NIL, Sec. 14), the person in possession presented within a reasonable time from issue, or from
thereof has prima facie authority to complete it by filling the last negotiation.
up the blanks. But if it was not filled up strictly in
3. When the instrument is an interest-bearing one, to
accordance with the authority given, it cannot be enforced
determine when the interest starts to run.
against any person who became party thereto prior to its
completion. However, if it is negotiated to a holder in due

Q: Can a bill of exchange or a promissory note qualify COMPLETION OF BLANKS
as a negotiable instrument if:
A. it is not dated; Meaning of a material particular
B. or the day and the month, but not the year of its
maturity, is given; or It is any particular proper to be inserted in a negotiable
C. it is payable to ―cash instrument to make it complete.
D. it names two alternative drawees (1997 Bar)
Prima facie authority to fill up the blanks
A:
A. Yes. Date is not an essential requirement for the A signature on a blank paper delivered by the person
negotiability of an instrument as provided for in section 1 making the signature in order that the paper may be
of the NIL converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount
B. No. Since the year is not determined, the time for (ibid).
payment is not determinable
NOTE: In order, however, that any such instrument when
C. Yes. When the name of the payee does not purport to completed may be enforced against any person who
be the name of any person, the law provides in section 9d became a party thereto prior to its completion, it must be
of the NIL that the maker or drawer intends the same to filled up strictly in accordance with the authority given
be payable to bearer, hence the instrument qualifies as a and within a reasonable time (ibid).
negotiable instrument
Effect if a completed instrument was negotiated to a
D. No. When the bill is addressed to two or more payees holder in due course
in the alternative, the law provides in section 128 of the
NIL that it is conditional and therefore non-negotiable. After completion, the completed instrument which was
The objection to the drawers being in the alternative or in subsequently negotiated to an HIDC, is valid and effectual
succession is the difficulty in determining the exact date for all purposes in his hands, and he may enforce it as if it
of dishonor of the bill inasmuch as it cannot be said that had been filled up strictly in accordance with the
the bill is dishonored until all of the drawers have authority given and within a reasonable time (ibid).
dishonored it and if the presentment takes place for a
period covering several days when the last dishonor is NOTE: Hence, the defense that the blanks were filled up
made, the first drawee who dishonored it may have beyond the authority given and/ or beyond the
already been released from his secondary liability due to reasonable time, is not available as against a HIDC. This
the lapse of time before notice of dishonor was made by defense is merely a personal one.
the holder. Notice of dishonor could not have been made
earlier by the holder since there is still a remaining INCOMPLETE BUT DELIVERED INSTRUMENTS
drawee, who has not yet dishonored it. (NIL, Sec. 14)
(1997, 2005, 2008 Bar)
Instance when a holder may insert the date in an
instrument Person authorized to fill up the blanks in an
incomplete but undelivered instrument
1. Where an instrument expressed to be payable at a fixed
period after date is issued undated, or The holder has a prima facie authority to complete it (NIL,
2. Where the acceptance of an instrument payable at a Sec. 14).
fixed period after sight is undated (NIL, Sec. 13).
Difference between Sec. 14, 15, and 16
Effect of insertion of a wrong date
SEC 14 SEC 15 SEC 16
The insertion of a wrong date does not avoid the Incomplete Incomplete Complete
instrument in the hands of a subsequent holder in due instrument and instrument but
course, but as to a HIDC, the date so inserted is to be which has been undelivered undelivered.
regarded as the true date (ibid.). delivered by the instrument.
maker or the
NOTE: With respect to the person who inserted the wrong drawer to the
date, however, the instrument is avoided (Bank of payee or holder.
Houston v. Day, 145 Mo. Appl. 410, 122 SW 756). 1. Where the Instrument 1. If instrument
instrument is will not be a is not in
Effect of ante-dating or post-dating an instrument wanting in any valid contract possession of
material in the hands party who
If the instrument is ante-dated or post-dated, the particular, the of any holder, signed, a valid
instrument is not invalid by that fact alone, provided it is person in if completed and intentional
not done for illegal or fraudulent purpose (NIL, Sec. 12). possession has and delivery by him
prima facie negotiated

MERCANTILE LAW
authority to without is prima facie such instrument against the party whose signature was
complete it by authority. presumed. placed before delivery (NIL, Sec. 15).
filing up blanks
therein. 2. If holder is NOTE: Non-delivery of an incomplete instrument is a
HIDC, valid real defense (ibid.)
2. When the delivery by all
instrument is parties prior to Enforcement of the instrument against the party
merely a him so as to whose signature was placed after delivery
signature on make them
blank paper liable to him is The instrument can be validly enforced against the party
delivered by conclusively whose signature was placed after delivery like an
person making presumed. indorser because the indorser warrants the instrument to
the signature in be genuine and in all respect what it purports to be.
order that the
paper may be NOTE: An HIDC cannot hold liable a maker for
converted into a instruments which are incomplete and undelivered even
NI, the person in supposing that the note was stolen, filled-up, and was
possession has subsequently negotiated. The law is specific that the
prima facie instrument is not a valid contract in the hands of any
authority to fill up holder. The phrase “any holder” includes an HIDC.
as such for any
amount. Q:
a) PN makes a promissory note for P5,000.00, but
NOTE: The leaves the name of the payee in blank because he
holder must only wanted to verify its correct spelling first. He
act in accordance mindlessly left the note on top of his desk at the end
with the of the workday. When he returned the following
authority granted morning, the note was missing. It turned up later
him, otherwise it when X presented it to PN for payment. Before X, T
may be used as a who turned out to have filched the note from PN’s
defense against office, had endorsed the note after inserting his own
him. name in the blank space as the payee. PN dishonored
the note, contending that he did not authorize its
completion and delivery. But X said he had no
Q: Lorenzo signed several blank checks instructing participation in, or knowledge about the pilferage
Nicky, his secretary, to fill them as payment for his and alteration of the note and therefore he enjoys the
obligations. Nicky filled one check with her name as rights of a holder in due course under the Negotiable
payee, placed P30,000.00 thereon, endorsed and Instruments Law. Who is correct and why?
delivered it to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found out b) Can the payee in a promissory note be a “holder
about the transaction, he directed the drawee bank to in due course” within the meaning of the Negotiable
dishonor the check. When Evelyn encashed the check, Instruments Law (Act 2031)? Explain your answer
it was dishonored. Is Lorenzo liable to Evelyn? (2006 (2000 Bar)
Bar)
A:
A: Yes. This covers the delivery of an incomplete a) Since the negotiable instrument is still incomplete
instrument, under Section 14 of the Negotiable and has not yet been delivered, PN is correct in
Instruments Law, which provides that there was prima dishonoring the said instrument. Sec. 15 of Act 2031
facie authority on the part of Nicky to fill-up any of the provides that where an incomplete instrument has not
material particulars thereof. Having done so, and when it been delivered, it will not, if completed and negotiated
is first completed before it is negotiated to an HIDC like without authority, be a valid contract in the hands of any
Evelyn, it is valid for all purposes, and she may enforce it holder, as against any person whose signature was placed
within a reasonable time, as if it had been filled up strictly thereon before delivery. Thus, under this section, it is a
in accordance with the authority given. real defense that can even be interposed against a holder
in due course.
INCOMPLETE AND UNDELIVERED INSTRUMENTS
(NIL, SEC. 15) b) A payee may be an HIDC provided that he was
(2000 and 2006 Bar) able to establish the conditions entitling him to
be a holder in due course (De Ocampo vs
Rule when an instrument is incomplete and Gatchalian, G.R. No. L-15126, November 30,
undelivered 1961).
Where an incomplete instrument has not been delivered,

the holder, whether HIDC or not, cannot validly enforce

COMPLETE BUT UNDELIVERED INSTRUMENTS Immediate parties
(NIL, SEC. 16)
Immediate parties are persons having knowledge of the
Effect if an instrument is undelivered conditions or limitations placed upon the delivery of an
instrument. It means privity, and not proximity.
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, Sec. 16). Remote parties
Delivery is essential to the validity of any negotiable
instrument (Sundiang Sr. & Aquino, 2009). Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument,
Where a debtor who drew two checks payable to his even if he is the next party physically.
creditor never delivered the checks to his creditor and a
third party was able to collect the proceeds of the checks SIGNATURE
by forging the endorsement of the creditor as payee, the
creditor has no cause of action against anyone on the basis Validity of signature in a negotiable instrument
of the checks, since the payee acquires no interest in the
check until its delivery to him (Development Bank of Rizal A party may use his full name, surname, initials or even
v. Sim Wei, G.R. No. 85419, March 9, 1993). any mark in signing a negotiable instrument to indicate
his intention to bind himself.
However, in another case, the Court held that the payee of
a check can sue a collecting bank to whom the check was NOTE: A signature may be made in any manner as long as
deposited with a forged endorsement even if the check the person signing has the intention to be bound.
was never delivered to the payee, to avoid a circuity of
suits (Westmont Bank v. Ong, G.R 132560, January 30, Persons liable on an instrument
2002).
GR: Only persons whose signatures appear on an
NOTE: The defense of want of delivery of a complete instrument are liable thereon (NIL, Sec. 18).
instrument is only a personal defensewhich means that it
is only available against a holder NOT in due course. XPNs: Notwithstanding the absence of their signatures in
their own names, the following persons are deemed
Issuance of an instrument liable: (TraP FAP)
The instrument is deemed issued upon the first delivery 1. Person who signs in Trade or assumed name (NIL, Sec.
of the instrument, complete in form, to a person who takes 18) – Party who signed must have intended to be bound
it as holder (NIL, Sec. 191). by his signature.
Conditional delivery or delivery for a special purpose 2. Principal who signs through a duly authorized agent
and such agent discloses the name of his principal and
The delivery is made conditional or for a special purpose adding words to show he is merely signing in a
if it was made not for the purpose of transferring the representative capacity (NIL, Sec. 19, 20).
property (title) to the instrument. In such case, if the
instrument lands in the hands of an HIDC (one who does 3. Forger (NIL, Sec. 23)
not know of the conditional delivery or of its special
purpose), the instrument is treated as if there is no 4. Acceptor, who makes his acceptance of a bill on a
condition if such delivery was made to a holder not in due separate paper (NIL, Sec. 134)
course, prior parties are not bound by the instrument
(NIL, Sec. 16). 5. Person, who makes a written Promise to accept the bill
before it is drawn (NIL, Sec. 135)
NOTE: The law contemplates that the condition is orally NOTE: Where a signature is so placed upon the
or verbally conveyed to the holder upon delivery, because instrument that it is not clear in what capacity the person
of the rule that the negotiability is determined only upon signed, he is deemed to be an indorser (NIL, Sec. 17[f]), not
the face of the instrument. a maker or drawer.
Presumption as to delivery Q: Juan borrowed P10,000.00 from Joe as evidenced

by a promissory note. All other requisites of
If the instrument is in the possession of an HIDC, valid negotiability are present except that Juan did not affix
delivery is conclusively presumed. his usual signature thereon as he was ailing at that
time and was only able to put “X” in the blank space
If the instrument is in the possession of a party other than meant for the signature of the maker. Is the requisite
an HIDC, possession of such party constitutes only prima that the instrument must be signed by the maker
facie presumption of delivery. complied with?
A: Yes. The letter “X” is sufficient to comply with the

requirement. It appears from the problem that such letter

MERCANTILE LAW
was adopted by Juan with the intent to authenticate the Transfer of instrument by a minor
instrument. It is not necessary that the signature is the
usual signature of the maker. While a minor is not bound by his indorsement for lack of
capacity, he is however not incapacitated to transfer his
SIGNING IN TRADE NAME rights.
As a general rule, only persons whose signatures appear Minor can be bound by his representation that he is of
on an instrument are liable thereon. But one who signs in legal age
a trade or assumed name is liable as if he signed his own
name (NIL, Sec. 18). It is necessary, however, that the Where he committed actual fraud by specifically stating
party who signed intended to be bound by his signature. that he is of legal age, a minor can be bound by his
signature in an instrument (PNB v. CA, G.R. No. L-34404,
SIGNATURE OF AGENT June 25, 1980).
Requisites for an agent to be exempt from liability Q: A executed a promissory note in favor of M which
(AWDi) reads:
1. He is duly Authorized I promise to pay P (16 years old) or order P10,000.

2. He adds Words to his signature indicating that he Sgd. M
signs as an agent/representative and
3. He Discloses the name of his principal (NIL, Sec. 20). P indorsed it to A.
Legal effects of an agent’s signature 1. May A collect from M notwithstanding that P, the
indorser is a minor?
Provided that the above requisites are complied with, the 2. In case that A cannot collect from M, can he collect
legal effects of an agent’s signature in a negotiable from P?
instrument are:
A:
1. His signature will bind his principal; and 1. Yes. A can collect from M. Notwithstanding the fact that
2. He will be exempt from personal liability. A is a minor, the indorsement of P (the minor) passes title
to A (the holder). M cannot invoke the defense of minority
Procuration because such defense would only be available to P.
It is the act by which a principal gives power to another to 2. No. A cannot collect from P, as he has a real defense of
act in his place as he could himself (Fink v. Scott, 143 S.E. minority on his part.
305).
FORGERY
Effect of a signature by procuration (1990, 1997, 1999, 2004, 2006, 2008 Bar)
It operates as notice or a warning that the agent has but a It is the counterfeit making or fraudulent alteration of any
limited authority to sign and the principal is bound only writing. It happens when a signature is affixed by one who
in case the agent in so signing acted within the actual does not claim to act as an agent and who has no authority
limits of his authority (NIL, Sec. 21). to bind the person whose signature he has forged (NIL,
Sec. 23).
INDORSEMENT BY MINOR OR CORPORATION
Burden of proof in proving forgery
Effects of indorsement made by an infant or a
corporation Forgery, as any other mechanism of fraud must be proven
clearly and convincingly, and the burden of proof lies on
1. Minor–A contract entered into by a minor is voidable, at the party alleging forgery (Chiang Yia Min v. CA, G.R. No.
the option of the minor. It is a real defense that can be 137932, Mar. 28, 2001).
invoked by a minor. However, it is not a defense which
may be setup by parties other than a minor. Extent and effects of forgery
2. Incapacitated person – An incapacitated person may 1. Only the signature forged or made without authority
also use as a real defense his incapacity to enter into a is the one inoperative, the instrument itself and the
contract. Contract entered into by the incapacitated are genuine signatures are valid.
voidable. Incapacitated persons include: a) insane or
demented persons and b) deaf and blind who does not 2. An instrument indorsed which on its face is payable to
know how to write. bearer may be enforced by the holder to whose title
over the instrument the forged signature is not
3. Corporation- Issuance or indorsement of an instrument necessary.
by a corporation acting beyond its powers is a REAL
defense.

3. The instrument can be enforced against those who are 2. Those who by their acts, silence, or negligence, are
precluded from setting up forgery. estopped from claiming forgery;
Illustration 3. A holder of a bearer instrument who subsequently

negotiates such instrument with a prior forged
Pay to P or order P10,000 30 days after sight. indorsement (forged indorsement is not necessary to his
title it being a bearer instrument).
(Sgd)D, (forged by P)
To X Liabilities of the parties to a negotiable instrument
where an indorsement is forged
P presented the instrument for acceptance. X accepted the
instrument without detecting the forgery. P then indorses ORDER INSTRUMENTS
the bill to A, A to B, B to C, the present holder. In this case, ORDER PROMISSORY ORDER BILL OF
if after 30 days the holder presented the instrument to X NOTE EXCHANGE
for payment the latter is liable despite the forgery, Prior parties are not Prior parties are not
because by preclusion, the acceptor admits the bound. Forged signature bound. Forged signature
genuineness of the drawer’s signature (NIL, Sec. 62) is wholly inoperative is wholly inoperative
unless estoppel sets in unless estoppel sets in
A payee may sue the collecting bank for the amount of with regard prior parties with regard prior parties
the checks it paid under a forged indorsement even (cut-off rule). (cut-off rule).
when the instrument has not been delivered to him
Subsequent parties to the Subsequent parties to the
The collecting bank is liable to the payee and must bear forgery are bound forgery are bound
the loss because it is its legal duty to ascertain that the
payee’s indorsement (signature), its customer, was NOTE: A drawer’s
genuine before cashing the check. That there was no account cannot be
delivery yet and therefore he never became the owner of charged by the drawee.
the check is immaterial since the payee merely used one
action to reach, by desirable shortcut, the person who The drawer is not liable to
ought in any event to be ultimately liable as among the the collecting bank, since
innocent persons. The payee is allowed to directly recover the duty of the latter is
from the collecting bank to simplify proceedings only to the payee.
(Westmont Bank v. Ong, supra). Collecting bank bears the
loss.
Effects of forgery
The payee can recover
GR: It does not avoid the instrument but only the forged from either the drawer or
signature. The signature is wholly inoperative. In other collecting bank, but not
words, rights may still exist and be enforced by virtue of from the drawee unless he
such instrument as to those signatures thereto are found accepts the bill.
to be genuine.
However, a forged indorsement prevents any subsequent BEARER INSTRUMENTS

parties from acquiring any right against any party prior to BEARER PROMISSORY BEARER BILL OF
the forgery. Such forged indorsement cuts off the rights NOTE EXCHANGE
against prior parties to the forger (Cut-off rule). Prior parties liable. Prior parties liable
XPNs: However, the forged However, the forged

1. If the party against whom it is sought to enforce such signatory is not liable to a signatory is not liable to a
right is precluded from setting up forgery or want of party who is not a holder party who is not a holder
authority (NIL, Sec. 23). in due course. in due course.
2. Where the forged signature is not necessary to the Illustration

holder’s title, in which case, the forgery may be
disregarded (NIL, Sec. 48).
Persons precluded from setting up the defense of

forgery (2010 Bar)
1. Those who admit/warrant the genuineness of the

signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).

MERCANTILE LAW
a. If the instrument is payable to order and the bank, since the duty of collecting bank is only to the
indorsement of one of the indorsers is forged, C can payee (Manila Lighter Transportation, Inc. v. CA, G.R.
enforce the note against X and B but not against M, P or A, No. L-50373 February 15, 1990).
because were it not for the forgery of X the instrument will
not reach the possession of C. b. Drawee-bank can recover from the collecting bank
because even if the indorsement on the check
b. If the instrument is payable to bearer, the indorsement deposited by the bank's client is forged, collecting bank
of X is not necessary to vest title to C because negotiation is bound by its warranties as an indorser and cannot
on bearer instrument requires only delivery. set up defense of forgery as against drawee bank
(Associated Bank v. CA, supra, Great Eastern Life Ins. Co.
Legal consequences when a bank honors a forged v. Hongkong & Shanghai Bank, G.R. No. 18657, Aug. 23,
check 1922).
1. When drawer's signature is forged – Drawee-bank by Q: Discuss the legal consequences when a bank
accepting the check cannot set up the defense of forgery, honors a forged check. (2006 Bar)
because by accepting the instrument, the drawee bank
admits the genuineness of signature of drawer (BPI A: When the drawer’s signature is forged, the drawee-
Family Bank v. Buenaventura, G.R. No. 148196, September bank by accepting the check cannot set up the defense of
30, 2005; NIL, Sec. 23). forgery because by accepting the instrument, the drawee
bank admits the genuineness of the signature of the
Unless a forgery is attributable to the fault or negligence drawer (BPI Family Bank vs. Buenaventura, supra).
of the drawer himself, the remedy of the drawee-bank is
against the party responsible for the forgery. Otherwise, When the payee’s signature is forged, the drawee-bank
the drawee-bank bears the loss. A drawee-bank paying on who pays the same must be considered as paying out of
a forged check must be considered as paying out of its its own funds since it is the primary duty of the bank to
funds and cannot charge the amount to the drawer verify the authenticity of the payee’s signature. (Traders
(Samsung Construction Co. Phils, v. Far East Bank, G.R. No. Royal Bank v. RPN, supra).
129015, August 13, 2004). If the drawee-bank has charged
drawer's account, the latter can recover such amount When the forged signature is that of an indorsement, the
from the drawee-bank (Associated Bank v. CA, G.R. No. drawer’s account cannot be charged, and if charged, he
107382, January 31, 1996; BPI v. Case Montessori can recover from the drawee-bank because the liability to
Internationale, G.R. No. 149454, May 28, 2004). pay still falls on the drawee bank for having guaranteed
the genuineness of all prior indorsements. However, a
However, the drawer may be precluded or estopped from collecting bank is not guilty of negligence over a forged
setting up the defense of forgery as against the drawee-
indorsement on checks for it has no way of ascertaining
bank, when it is shown that the drawer himself had been
the authority of the indorsement unless it further
guilty of gross negligence as to have facilitated the forgery
indorses the forged check wherein he becomes liable
(Metropolitan Waterworks v. CA, G.R. No. L-62943, July 14,
upon the same as a general indorser. (ibid.)
1986).
Q: X fraudulently obtained possession of the check
2. Drawee bank versus collecting bank – When the
and forged P’s signature and then indorsed and
signature of the drawer is forged, as between the drawee-
deposited the check with XYZ bank which honored
bank and collecting bank, the drawee-bank sustains the
the check and placed the amount thereof to his credit.
loss, since the collecting bank does not guarantee the
Thereafter, XYZ Bank indorsed the check to the
signature of the drawer. The payment of the check by the
drawee bank-ABC bank which paid it and charged the
drawee bank constitutes the proximate negligence since account of the drawer. Illustrate the liability of a
it has the duty to know the signature of its client-drawer.
drawer and a drawee-bank in an 1) instrument
(Philippine National Bank v. CA, G.R. No. L-26001, October payable to order and in an 2) instrument payable to
29, 1968).
bearer in case of a forgery on payee’s signature.
3. Forged payee's signature – When drawee-bank pays
the forged check, it must be considered as paying out of
Pay to P or order P10,000.
its funds and cannot charge the amount so paid to the
account of the depositor. In such case, the bank becomes
(Sgd)D
liable since its primary duty is to verify the authenticity of
To: ABC Bank
the payee's signature (Traders Royal Bank v. Radio
Philippines Network, G.R. No. 138510, October 10, 2002;
Westmont Bank v. Ong, supra). A:
1. If the instrument is payable to order,
4. Forged indorsement – Drawer's account cannot be a. The drawee bank is liable to the drawer for the amount
charged, and if charged, he can recover from the drawee- of the check and his account cannot be charged because
bank (Associated Bank v. CA, supra). the indorsement of the payee is a forgery. Hence, it is
wholly inoperative and therefore, ABC Bank has no right
a. The Drawer has no cause of action against collecting to ask the drawer for its payment.

b. XYZ Bank is however, liable to the drawee bank the checks and was able to withdraw his money. Is the
because of his warranty as an indorser. (NIL, Sec. 66) drawee bank liable for the amounts withdrawn by the
secretary?
c. D, the drawer, is not liable on the check because its
order is to pay P or his order and not to any other person.
A: No, he is precluded from setting up the forgery due to
his own negligence in entrusting to his secretary his credit
2. If the instrument is payable to bearer:
cards and check book including the verification of his
a. ABC Bank, the drawee-bank, may charge the amount statements of account (Ilusorio v. CA, G.R. No. 139130,
thereof to the account of the drawer because the forged November 27, 2002).
indorsement did not prevent the transfer of title. The
remedy of the drawer is against the forger. Q: The drawer’s signature was forged. There is,
however, a provision in the monthly bank statement
b. Drawer has no cause of action against collecting bank, that if the drawer’s signature was forged, the drawer
since the duty of collecting bank is only to the payee should report it within 10 days from receipt of the
(Manila Lighter Transportation, Inc. v. CA, G.R. No. L- statement to the drawee. The drawer, however, failed
50373 February 15, 1990). The drawee-bank can recover to do so. What will be its effect insofar as the drawer’s
from the collecting bank because even if the indorsement right is concerned?
on the check deposited by the bank's client is forged,
collecting bank is bound by its warranties as an indorser A: The failure of the drawer to report the forgery within
and cannot set up defense of forgery as against drawee ten days from receipt of the monthly bank statement from
bank (Associated Bank v. CA, supra). the drawee bank does not preclude the drawer from
questioning the mistake of the drawee bank despite the
Q: P sold to M 10 grams of shabu worth Php5,000.00. provision (BPI v. CASA Montessori Internationale, supra).
As he had no money at the time of the sale, M wrote a
promissory note promising to pay P or his order Q: If forgery was committed by an employee of the
Php5,000.00. P then indorsed the note to X (who did drawer whose signature was forged, does the
not know about the shabu), and X to Y. Unable to relationship amount to estoppel such that the drawer
collect from P, Y then sued X on the note. X set up the is precluded in recovering from the drawee bank?
defense of illegality of consideration. Is he correct?
(2011 Bar) A: The bare fact that the forgery was committed by an
employee of the party whose signature was forged can not
A: No, since X, a general indorser, warrants that the note necessarily imply that such party’s negligence was the
is valid and subsisting. cause of the forgery in the absence of some circumstances
raising estoppel against the drawer (Samsung
Remedy of the drawee bank in case of a forged Construction Co. v. Far East Bank and Trust Company, G.R.
indorsement No. 129015, August 13, 2004).
The drawee bank may not debit the account of the drawer CONSIDERATION
but may generally pass liability back through the (2000, 2009 Bar)
collection chain to the party who took from the forger and,
of course, to the forger himself, if available. If the forgery It is an inducement to a contract that is the cause, price or
is that of the payee's or holder's indorsement, the impelling influence, which induces a party to enter into a
collecting bank is held liable, without prejudice to the contract.
latter proceeding against the forger.
NOTE: Every negotiable instrument is deemed prima
Since a forged indorsement is inoperative, the collecting facie to have been issued for a valuable consideration
bank had no right to be paid by the drawee bank. The (NIL, Sec. 24).
former must necessarily return the money paid by the
latter because it was paid wrongfully (Associated Bank v. A check constitutes an evidence of indebtedness and is a
CA, supra). veritable proof of an obligation. Thus, based on Sec. 24 of
the NIL, checks complete and delivered to a person by
Liability of the drawee bank and the drawer for the another are sufficient by themselves to prove the
amount paid on checks with forged indorsements, if existence of the loan obligation obtained by the latter
the same was due to the negligence of both the drawee from the former. (Ting Ting Pua v. Spouses Tiong and
bank and the drawer Caroline Teng, G.R. No. 198660, October 23, 2013, in Divina,
2014)
The loss occasioned by such negligence should be divided
equally between the drawer/depositor and the drawee. Q: Virginia, the General Manager of North Star, in
accommodation and upon the instruction of its client,
Q: X entrusted his check books, credit cards, Engr. Cayanan, sent the amount of US$60,000 to View
passbooks, bank statements and cancelled checks to Sea Ventures Ltd., in Nigeria from her personal
his secretary. He also introduced the secretary to the account in Citibank Makati. Virginia again sent
bank for purposes of reconciliation of his accounts. US$40,000 to View Sea Ventures by telegraphic
Subsequently, X’s secretary forged his signature on transfer, with US$15,000 coming from Engr. Cayanan.

MERCANTILE LAW
To cover payment of the foregoing obligations, Engr. Want or absence of consideration v. Failure of
Cayanan issued five checks to North Star. When consideration (1996, 2007 Bar)
presented for payment, two of the checks were
dishonored for insufficiency of funds while the other WANT OR ABSENCE OF FAILURE OF
three checks were dishonored because of a stop CONSIDERATION CONSIDERATION
payment order from Engr. Cayanan. North Star Total lack of any valid Failure or refusal of one
demanded payment, but Engr. Cayanan failed to settle consideration for the of the parties to do,
his obligations. Hence, North Star instituted a contract perform or comply with
criminal case, charging Engr. Cayanan with violation the consideration agreed
of the Bouncing Checks Law. Engr. Cayanan insists upon
that the US$85,000 sent to View Sea Ventures was not
sent for the account of North Star but for the account Effect of want of consideration
of Virginia as her investment. Engr. Cayanan claims
that North Star did not give any valuable It becomes a matter of defense as against any person not
consideration for the checks since the US$85,000 was a holder in due course, thus, a PERSONAL defense (NIL,
taken from the personal dollar account of Virginia Sec. 28).
and not the corporate funds of North Star.
Effect of partial failure of consideration
A: Upon issuance of a negotiable check, in the absence of
evidence to the contrary, it is presumed that the same was Partial failure of consideration is a defense pro tanto,
issued for valuable consideration which may consist whether the failure is an ascertained and liquidated
either in some right, interest, profit or benefit accruing to amount or otherwise (ibid.).
the party who makes the contract, or some forbearance,
detriment, loss or some responsibility, to act, or labor, or Inadequacy of consideration
service given, suffered or undertaken by the other side.
Under the Negotiable Instruments Law, it is presumed GR: Inadequacy of consideration does not invalidate the
that every party to an instrument acquires the same for a instrument.
consideration or for value. As Engr. Cayanan alleged that
there was no consideration for the issuance of the subject XPN: There has been fraud, mistake or undue influence
checks, it devolved upon him to present convincing (NCC, Art. 1355).
evidence to overthrow the presumption and prove that
the checks were in fact issued without valuable NOTE: However, knowledge of inadequacy of
consideration. Engr. Cayanan, however, has not presented consideration would render the holder not HIDC liable
any credible evidence to rebut the presumption, as well as (NIL, Sec. 53).
North Star’s assertion, that the checks were issued as
payment for the US$85,000 Engr. Cayanan owed to the Q: X borrowed money from Y in the
corporation and not to the manager who facilitate the amount of Php 1Million and as payment,
fund transfer. (Engr. Cayanan v. North Star International issued a check. Y then indorsed the check to his sister
Travel Inc., G.R. No. 172954, October 5, 2011). Z for no consideration. When Z deposited the check to
her account, the check was dishonored for
Holder for value insufficiency of funds. Is Z a holder in due course?
Explain your answer (2012 Bar)
A holder for value is one who has given a valuable
consideration for the instrument. A holder for value is A: No, Z is not an HIDC. Under Sec. 52 (c), NIL, it is
deemed as such not only as regards the party to whom the expressly provided that the instrument must be acquired
value has been given to by him but also in respect to all in good faith and for value to consider him a HIDC.
those who became parties prior to the time when value
was given. ACCOMMODATION PARTY
NOTE: Where the holder has a lien on the instrument Accommodation party
arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien (NIL, An accommodation party is one who has signed the
Sec. 27). instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
Value lending his name to some other person (NIL, Sec. 29).
It is any consideration sufficient to support a simple Requisites to be an accommodation party (1990,

contract. 1991, 1993, 1996, 1998, 2005, 2008 Bar)
NOTE: An antecedent or pre-existing debt constitutes 1. Accommodation party must sign as maker, drawer,
value and is deemed such whether the instrument is acceptor or indorser
payable on demand or at a future time (NIL, Sec. 25).
2. No value is received by the accommodation party from
the accommodated party; and

3. The purpose is to lend the name. indorse the note to Facundo. Is Dagul an
accommodation party? Explain. (2005 Bar)
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received A: No. An accommodation note is one to which the
some consideration for the use of his name. The phrase accommodation party has put his name, without
“without receiving value therefor” only means that no consideration, for the purpose of accommodating some
value has been received “for the instrument” and not “for other party who is to use it and is expected to pay it. The
lending his name.” accommodation is not one to the person who takes the
note — that is, the payee or indorsee, but one to the maker
Q: Susan Kawada borrowed P500,000 from XYZ Bank or indorser of the note. In this case, the indorser, Dagul, in
which required her, together with Rose Reyes who making the indorsement to the lender, Facundo, was
did not receive any amount from the bank, to execute merely acting as agent for the latter or, as a mere vehicle
a promissory note payable to the bank, or its order on for the transference of the naked title from the borrower
stated maturities. The note was executed as so or maker of the note and was not acting as an
agreed. What kind of liability was incurred by Rose, accommodation party.
that of an accommodation party or that of a solidary
debtor? Explain. (2003 Bar) Accommodation party v. Regular party
A: Rose incurs the liability of an accommodation party ACCOMMODATION PARTY REGULAR PARTY
since she executed the promissory without receiving Signs an instrument
value therefor and for the purpose of lending his name to Signs the instrument for
without receiving value
Susan Kawada, the accommodated party. Nonetheless, value (NIL, Sec. 24)
therefor (NIL, Sec. 29)
as an accommodation maker, Rose is primarily and Purpose of signing is to lend
unconditionally liable on the promissory note to a holder his name to another person Not for that purpose
for value, regardless of whether she stands as a surety or (NIL, Sec. 29)
solidary co-debtor since such distinction would be May always show, by parol
entirely immaterial and inconsequential as far as a holder Cannot disclaim personal
evidence, that he is only
for value is concerned. liability by parol evidence
such
Cannot avail of the defense
Q: Juan Sy purchased from “A” Appliance Center one of absence/failure of
generator set on installment with chattel mortgage in May avail of such defense
consideration against a
favor of the vendor. After getting hold of the holder not in due course
generator set, Juan Sy immediately sold it without May sue reimbursement
consent of the vendor. Juan Sy was criminally charged after paying the May not sue
with estafa. To settle the case extra judicially, Juan holder/subsequent party
Sy paid the sum of P20,000 and for the balance of
P5,000.00 he executed a promissory note for said Q: PCIB granted a credit line to Gonzales through the
amount with Ben Lopez as an accommodation party. execution of the COHLA. Gonzales drew from said
Juan Sy failed to pay the balance. credit line through the issuance of check. Gonzales
issued a check in favor of Rene Unson, drawn against
a. What is the liability of Ben Lopez as an the credit line. However, upon presentment for
accommodation party? Explain. payment by Unson of said check, it was dishonored by
b. What is the liability of Juan Sy? (2003 Bar) PCIB due to the termination by PCIB of the credit line
under COHLA for the unpaid periodic interest dues
A: from the loans of Gonzales and the spouses Panlilio.
a. Section 29 of the Negotiable Instruments Law Gonzales, through counsel, wrote PCIB insisting that
provides that an accommodation party is liable on the the check he issued had been fully funded, and
instrument to a holder for value, notwithstanding that demanded the return of the proceeds of his FCD as
such holder at the time of taking the instrument knew him well as damages for the unjust dishonor of the check.
to be only an accommodation party. As an Was it proper for PCIB to dishonor the check issued
accommodation party, Ben Lopez is primarily and by Gonzales against the credit line under the COHLA?
unconditionally liable on the promissory note to a holder
for value as if the contract was not for accommodation. A: No. While a maker who signed a promissory note for
the benefit of his co-maker (who received the loan
b. Under Section 14 of the NIL, Juan Sy is primarily proceeds) is considered as an accommodation party, he is,
liable to the extent of P5,000 in the hands of a holder in nevertheless, entitled to a written notice on the default
due course. However, if Ben Lopez paid the note, Juan Sy and the outstanding obligation of the party
has the obligation to reimburse the former to the extent accommodated. There being no such written notice, the
of the amount paid. Bank is grossly negligent in terminating the credit line of
the accommondation party for the unpaid interest dues
Q: Dagul has a business arrangement with Facundo. from the loans of the party accommodated and in
The latter would lend money to another, through dishonoring a checkdrawn against such credit line
Dagul, whose name would appear in the promissory (Eusebio Gonzales v. Philippine Commercial and
note as the lender. Dagul would then immediately

MERCANTILE LAW
International Bank, Edna Ocampo, and Roberto Noceda,
G.R. No. 180257, February 23, 2011). A: Yes, Jorge is liable. By the clear mandate of section 29
of the Negotiable Instruments Law, an accommodation
Extent of liability of an accommodation party party is "liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the
1. Right to revoke accommodation – before the instrument instrument knew him to be only an accommodation
has been negotiated for value. party." It is not a valid defense that the accommodation
party did not receive any valuable consideration when he
2. Right to reimbursement from the accommodated party – executed the instrument (Ang Tiong vs Ting, supra).
the accommodated party is the real debtor. Hence, the
cause of action is not on the instrument but on an implied Q: For the purpose of lending his name without
contract of reimbursement. receiving value therefor, Pedro makes a note for
P20,000 payable to the order of X, who in turn
3. Right to contribution from other solidary negotiates it to Y, the latter knowing that Pedro is not
accommodation maker (Sadaya v. Sevilla, G.R. No. L-17845, a party for value.
April 27, 1967).
a. May Y recover from Pedro if the latter interposes
Accommodation party cannot raise the defense of the absence of consideration?
absence or want of consideration b. Supposing under the same facts, Pedro pays the
said Php20,000.00 may he recover the same amount
An accommodation party who lends his name to enable from X? (1998 Bar)
the accommodated party to obtain credit or raise money
is liable on the instrument to a holder for value even if he A:
receives no part of the consideration. He assumes the a. Yes, Y may recover from Pedro. Section 29 of the NIL
obligation to the other party and binds himself to pay the provides that a person who has signed the instrument as
note on its due date. By signing the note, the maker, drawer, acceptor, or indorser, without receiving
accommodation party thus became liable for the debt value therefor, and for the purpose of lending his name to
even if he had no direct personal interest in the obligation some other person is liable on the instrument to a holder
or did not receive any benefit therefrom (Dela Rama v. for value, notwithstanding the fact that such holder at the
Admiral United Savings Bank, G.R. No. 154740, April 16, time of taking the instrument knew him to be only an
2008). accommodation party. Pedro, being an accommodation
maker of a note, may thus be held primarily and
Holder for value may recover from an unconditionally liable therefor.
accommodation party notwithstanding his
knowledge of such fact (1990, 1991, 1993, 1996, b. Yes, Pedro may recover from X. When the
1998, 2005, 2008 Bar) accommodation party makes payment to the holder of the
note, he has the right to sue the accommodated party for
This is so because an accommodation party is liable on the reimbursement, since the relation between them is in
instrument to a holder for value, notwithstanding that effect that of principal and surety, the accommodation
such holder at the time of taking the instrument knew him party being the surety. Thus, after paying the holder,
to be only an accommodation party. The accommodation Pedro may seek reimbursement from X, the
party is liable to a holder for value as if the contract was accommodated party.
not for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable Q: On June 1, 1990, A obtained a loan of ₱100,000
consideration when he executed the instrument. Nor is it from B, payable not later than December 20, 1990. B
correct to say that the holder for value is not a holder in required A to issue him a check for that amount to be
due course merely because at the time he acquired the dated December 20, 1990. Since he does not have
instrument, he knew that the indorser was only an any checking account, A, with the knowledge of B,
accommodation party (Ang Tiong v. Ting, G.R. No. L-26767, requested his friend, C, President of Saad Banking
February 22, 1968). Corporation (Saad) to accommodate him. C agreed,
he signed a check for the aforesaid amount dated
Q: To accommodate Carmen, maker of a promissory December 20, 1990, drawn against Saad’s account
note, Jorge signed as indorser thereon, and the with the ABC Commercial Banking Co. The By-laws of
instrument was negotiated to Raffy, a holder for Saad requires that checks issued by it must be signed
value. At the time Raffy took the instrument, he by the President and the Treasurer or the Vice-
knew Jorge to be an accommodation party only. President. Since the Treasurer was absent, C
When the promissory note was not paid, and Raffy requested the Vice-President to co-sign the check,
discovered that Carmen had no funds, he sued Jorge. which the latter reluctantly did. The check was
Jorge pleads in defense the fact that he had endorsed delivered to B. The check was dishonoured upon
the instrument without receiving value therefor, and presentment on due date for insufficiency of funds.
the further fact that Raffy knew that at the time he
took the instrument Jorge had not received any value a. Is Saad liable on the check as an accommodation
or consideration of any kind for his indorsement. Is party?
Jorge liable? Discuss. (1990, 1996 Bar)

b. If it is not, who then, under the above facts, Methods of transferring an instrument
is/are liable? (1991 Bar)
1. Issuance – first delivery of the instrument complete in
A: form to a person who takes it as a holder.
a. No, Saad is not liable as an accommodation party. 2. Negotiation
This is because the issue or indorsement of negotiable 3. Assignment – transfer of the title to the instrument, with
paper by a corporation without consideration and for the the assignee generally taking only such title as his
accommodation of another is ultra vires. Hence, one who assignor has, subject to all defenses available against
has taken the instrument with knowledge of the the assignor.
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. DISTINGUISHED FROM ASSIGNMENT
While it may be legally possible for a corporation whose
business is to provide financial accommodations in the NEGOTIATION ASSIGNMENT
ordinary course of business, such as one given by a Non-negotiable
financing company, to be an accommodation party, this instrument may be
situation, however, is not the case at bar. Only a negotiable
assigned absent any
instrument may be
prohibition against
b. Considering that both the President and the Vice- negotiated.
assignment written on its
President were signatories to the accommodation, they face.
themselves can be subject to the liabilities of
accommodation parties to the instrument in their The transferee can have
personal capacity (Crisologo-Jose v. CA, G.R. No. 80499, The transferee, if he is a
no better right than his
September 15, 1989). HIDC may acquire better
transferor; he merely
rights than his
steps into the shoes of the
Q: Nora applied for a loan of Php100,000.00 with BUR transferor.
assignor
Bank. By way of accommodation, Nora’s sister, Vilma,
executed a promissory note in favor of BUR Bank. The holder can hold the
When Nora defaulted, BUR bank sued Vilma, despite The transferee has no
drawer and the indorsers
its knowledge that Vilma received no part of the loan. right of recourse for
liable if the party
May Vilma be held liable? Explain. (1996 Bar) payment against
primarily liable does not
immediate parties.
pay.
A: Yes, Vilma may be held liable. A person who has signed
the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of MODES OF NEGOTIATION
lending his name to some other person is liable on the
instrument to a holder for value, notwithstanding the fact Modes of negotiation
that such holder at the time of taking the instrument knew
him to be only an accommodation party. Thus, as an 1. If payable to bearer- it is negotiated by mere delivery
accommodation maker, Vilma is primarily and 2. If payable to order- it is negotiated by the indorsement
unconditionally liable on the promissory note to BUR of the holder completed by delivery (NIL, Sec. 30).
Bank, a holder for value.
Q: Ligaray charged Wagas with estafa, alleging that
Accomodation made by a corporation Wagas placed an order of 200 bags of rice over the
telephone with a post-dated check payable to cash as
The issue or indorsement of a negotiable paper by a payment. The seller Ligaray delivered the rice to
corporation without consideration and for the Cañada, brother-in-law of Wagas. In turn Ligaray
accommodation of another is ultra vires. Hence, one who received a post-dated check issued by Wagas, which
has taken the instrument with knowledge of the was later on dishonored due to insufficiency of funds.
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party During trial, Wagas averred that he issued the check
(Crisologo-Jose v. CA, G.R. No. 80599, September 15, 1989). to Cañada, and that it was the latter who had
transacted with Ligaray. While admitting that he
NEGOTIATION signed a letter acknowledging his debt to Ligaray,
(1997, 1998, 2002 Bar) Wagas insisted that he signed the same just to
accommodate the please of his sister and her husband
Negotiation is the transfer of an instrument from one Cañada.
person to another so as to constitute the transferee the
holder thereof (NIL, Sec. 30). Is Wagas guilty of estafa?
NOTE: A holder is the payee or indorsee of a bill or note, A: No. In order to constitute estafa under Article 315,
who is in possession of it, or the bearer thereof (NIL, Sec. paragraph 2(d) of the RPC, as amended, the act of
191). postdating or issuing a check in payment of an obligation
must be the efficient cause of the defraudation. This

MERCANTILE LAW
means that the offender must be able to obtain money or Later, C, without indorsing the promissory note,
property from the offended party by reason of the transfers and delivers the same to D. The note is
issuance of the check, whether dated or postdated. In subsequently dishonored by A. May D proceed against
other words, the Prosecution must show that the person A for the note? (1998 Bar)
to whom the check was delivered would not have parted
with his money or property were it not for the issuance of A: Yes. D may collect from A. The note made by A is a
the check by the offender. bearer instrument. Where an instrument, payable to
bearer, is indorsed, it may nevertheless be further
Under the NIL (Sec. 9 and Sec. 30), a check made payable negotiated by delivery. Despite the special indorsement
to cash is payable to the bearer and could be negotiated made by B, the note remained a bearer instrument and
by mere delivery without the need of indorsement. can be negotiated by mere delivery. When C delivered
and transferred the note to D, the latter became a holder
This rendered it highly probable that Wagas had issued thereof. As such, D can proceed against A.
the check not to Ligaray, but to somebody else like
Cañada, his brother-in-law, who then negotiated it to Q: X executed a promissory note with a face value of
Ligaray. Relevantly, Ligaray confirmed that he did not Php50,000.00, payable to the order of Y. Y indorsed
himself see or meet Wagas at the time of the transaction the note to Z, to whom Y owed Php30,000.00. If X has
and thereafter, and expressly stated that the person who no defense at all against Y, for how much may Z collect
signed for and received the stocks of rice was Cañada. from X? (2011 Bar)
It bears stressing that the accused, to be guilty of estafa as A: Php 50,000.00, but with the obligation to hold
charged, must have used the check in order to defraud the Php20,000.00 for Y's benefit.
complainant. What the law punishes is the fraud or deceit,
not the mere issuance of the worthless check. Wagas Effect of assignment of a negotiable instrument
could not be held guilty of estafa simply because he had
issued the check used to defraud Ligaray. The proof of The transferee does not become a holder and he merely
guilt must still clearly show that it had been Wagas as the steps into the shoes of the transferor. Any defense
drawer who had defrauded Ligaray by means of the check available against the transferor is available against the
(People v. Gilbert Wagas, G.R. No. 157943, September 4, transferee (Salas v. CA, G.R. No. 76788, January 22, 1990).
2013).
Effect of the delivery of an order instrument without
Delivery of negotiable instrument indorsement
Delivery means transfer of possession, actual or The transfer operates as an ordinary assignment (NIL, Sec.
constructive, from one person or another (NIL, Sec. 191). 49). The transfer vests in the transferee such title as the
transferor had therein and the transferee acquires in
NOTE: Where the instrument is no longer in the addition the right to have the indorsement of the
possession of the party whose signature appears thereon, transfereror.
there is a prima facie presumption of a valid and
intentional delivery by him (NIL, Sec. 16). NOTE: For the purpose of determining whether the
transferee is a HIDC, the negotiation takes effect at the
Effect if a bearer instrument is negotiated by time when the indorsement is actually made.
indorsement and delivery
KINDS OF INDORSEMENTS
A bearer instrument, even when indorsed specially, may
nevertheless be further negotiated by delivery, but the Indorsement
person indorsing specially shall be liable as indorser to
only such holders as make title through his indorsement It is the signing of the name of the indorser on the
(once a bearer instrument, always a bearer instrument) instrument with the intent to transfer title to the same.
(NIL, Sec. 40).
Where the indorsement should be placed
NOTE: This rule applies only to instruments originally
payable to bearer. It does not apply to instruments 1. On the instrument itself; or
originally payable to order converted to bearer because 2. On a separate piece of paper attached to the instrument
the only or last indorsement is in blank. called “allonge” (NIL, Sec. 31)
Q: A makes a promissory note payable to bearer and Rules on indorsement

delivers the same to B. B, however, endorses it to C in
this manner: GR: Indorsement must be of the entire instrument (NIL,
Sec. 32).
"Payable to C. Signed: B."
XPN: When the instrument has been paid in part.

NOTE: Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the instrument. NOTE: Any of them can indorse to effect negotiation of the
instrument.
Different kinds of indorsement Rights of an indorsee in a restrictive indorsement
1. Special (NIL, Sec. 34) – Specifies the person to whom or 1. To receive payment of the instrument;
to whose order the instrument is to be payable. It is also
known as specific indorsement, or indorsement in full. 2. To bring any action thereon that the indorser could
bring; and
NOTE: An instrument payable to bearer indorsed
specially may nevertheless be negotiated by delivery 3. To transfer his rights as such indorsee, where the form
(once a bearer always a bearer) (NIL, Sec. 40). of the indorsement authorizes him to do so (NIL, Sec.
37,).
2. Blank (NIL, Sec. 34) –Specifies no indorsee.
a. Instrument is payable to bearer and may be NOTE: All subsequent indorsees acquire only the title of
negotiated by delivery; the 1st indorsee under the restrictive indorsement (NIL,
b. May be converted to special indorsement by Sec. 37).
writing over the signature of the indorser in blank
any contract consistent with the character of Effect of a qualified indorsement
indorsement (NIL, Sec. 35).
A qualified indorsement does NOT destroy the
3. Restrictive (NIL, Sec. 36)–When the instrument: negotiability of the instrument. It only means that the
a. Prohibits further negotiation of the instrument (it qualified indorser is NOT liable when the maker is
destroys the negotiability of the instrument); insolvent. A qualified indorser is liable only if the
b. Constitutes the indorsee the agent of the indorser; instrument is dishonored by non-acceptance or non-
c. Vests the title in the indorsee in trust for or to the payment due to:
use of some persons.
1. Forgery;
NOTE: But mere absence of words implying power to 2. Lack of good title on the part of the indorser;
negotiate does not make an instrument restrictive. 3. Lack of capacity to indorse on the part of the prior
parties; or
4. Qualified (NIL, Sec. 38) – Constitutes the indorser a 4. The fact that at the time of the indorsement, the
mere assignor of the title to the instrument made by instrument was valueless or not valid at the time of the
adding to the indorser’s signature words like, without indorsement which fact was known to him.
recourse, sans recourse or at the indorsee’s own risk (this
serves as an ordinary equitable assignment). Instances when the indorsement is considered only as
equitable assignment
5. Absolute–The indorser binds himself to pay:
a. Upon no other condition than failure of prior 1. Indorsement of only a part of the amount of the
parties to do so; instrument (NIL, Sec. 32)
b. Upon due notice to him of such failure
2. In cases of qualified indorsement (NIL, Sec. 38)
6. Conditional (NIL, Sec. 39)–Right of the indorsee is made
to depend on the happening of a contingent event. The 3. Transfer of an instrument payable to order by mere
party required to pay may disregard the conditions. delivery (NIL, Sec. 49).
NOTE: The condition refers to the indorsement not on Joint indorsement

the instrument itself.
GR: All must indorse in order for the transaction to
7. Joint (NIL, Sec. 41) – Indorsement made payable to 2 or operate as a negotiation (NIL, Sec. 41).
more persons who are not partners.
XPN: Only one of them may indorse in case the
NOTE: All of them must indorse unless the one 1. Payees or indorsees are partners; and
indorsing has authority to indorse for the others. 2. Payee or indorsee indorsing has authority to indorse for
the others.
8. Irregular (NIL, Sec. 64) – A person who, not otherwise a
party to an instrument, places thereon his signature in Effect of indorsing an instrument to a person as
blank before delivery. cashier or other officers of a corporation
9. Facultative –Indorser waives presentment and notice The negotiable instrument is deemed prima facie payable
of dishonor, enlarging his liability and his indorsement. to the corporation of which said person is such an officer.
It may be negotiated further by either indorsement of the
10. Successive – Indorsement to two persons or more in corporation or indorsement of the officer (NIL, Sec. 42).
succession.

MERCANTILE LAW
Date of indorsement RIGHTS OF THE HOLDER
GR: Every negotiation is deemed prima facie to have been Holder

effected before the instrument was overdue.
The payee or indorsee of a bill or note who is in
XPN: Except where an indorsement bears date after the possession of it or the bearer thereof (NIL, Sec. 191).
maturity of the instrument (NIL, Sec. 45).
Classes of holders
Continuation of negotiable character
1. Holders in general (Simple Holders) (NIL, Sec. 51).
GR: An instrument negotiable in origin is always 2. Holders for value (NIL, Sec. 26).
negotiable until paid, which is still true even if the NI was 3. Holders in due course (NIL, Secs. 52, 57).
dishonored or is already overdue.
Rights of a holder in general
XPNs:
1. When the instrument has been restrictively 1. Right to sue
indorsed; 2. Right to receive payment (NIL, Sec. 51).
2. When discharged by payment or otherwise (NIL, Sec.
47) NOTE: If the payment is in due course, the instrument is
discharged.
Striking out of an indorsement
HOLDER IN DUE COURSE (HIDC)
The holder may, at any time, strike out any indorsement
which is not necessary to his title. Indorser whose To be considered as a HIDC, the requisites under Sec. 52
indorsement is struck out, and all indorsers subsequent to of the NIL must be complied with. A HIDC takes a NI under
him are relieved from liability on the instrument (NIL, Sec. the following conditions (COFI) (1992-1996, 2000 Bar):
48).
1. That is Complete and regular upon its face;
Negotiation by a prior party
NOTE: Absence of the required documentary stamp will
Where an instrument is negotiated back to a prior party, not make the instrument incomplete (It is not a requisite
such party may reissue and further negotiate the same. of negotiability under Sec. 1, NIL and it is not a material
But, he is not entitled to enforce payment thereof against particular under Sec. 125, NIL).
any intervening party to whom he was personally liable
(NIL, Sec. 50). However, he may strike out the intervening 2. Became the holder before it was Overdue, and without
indorsements because they are not necessary for his title notice that it has been previously dishonored, if such was
and he is liable to them because of his initial indorsement the fact;
(NIL, Sec. 48).
NOTE: If the instrument is payable on demand, the date of
e.g. “A” payee indorsed the instrument to B, then B maturity is determined by the date of presentment, which
indorsed it to C, C to D, then D to B. B can further negotiate must be made within a reasonable time after its issue, if it
the instrument. He may also strike out the indorsement of is a note, or after the last negotiation thereof, if it is a bill
C and D (Sundiang Sr. & Aquino, 2014). of exchange (NIL, Secs. 71 and 143[a]).
Limitations on re-negotiation 3. Took it in good Faith and for value;
In the following cases, a prior party cannot further 4. At the time it was negotiated to him, he had no notice of
negotiate the instrument: any Infirmity in the instrument or defect in the title of the
person negotiating it. (NIL, Sec. 52)
1. Where it is payable to the order of a third person, and
it has been paid by the drawer (NIL, Sec. 121[a]). Where the transferee receives notice of any infirmity in
the instrument or defect in the title of the person
2. Where it was made or accepted for accommodation negotiating the same before he had paid the full amount
and has been paid by the party accommodated (NIL, agreed to be paid, he will be deemed a holder in due
Sec. 121[b]). course only to the extent of the amount paid by him (NIL,
Sec. 54).
3. In other cases, where the instrument is discharged
when acquired by a prior party (NIL, Sec. 119[e]). NOTE: Knowledge of the agent is constructive knowledge
of the principal.
Q: R issued a check for P1M which he used to pay S for

killing his political enemy.

a. Can the check be considered a negotiable Baby could enforce the note against Larry the same way
instrument? as Devi could enforce it.
b. Does S have a cause of action against R in case of
dishonor by the drawee bank? Q: X borrowed money from Y in the amount of Php 1
c. If S negotiated the check to T, who accepted it in Million and as payment, issued a check. Y then
good faith and for value, may R be held indorsed the check to his sister Z for no consideration.
secondarily liable by T? (2007 Bar) When Z deposited the check to her account, the check
was dishonored for insufficiency of funds. Is Z a
A: holder in due course? Explain your answer. (2012
a. Yes. The check can be considered as a negotiable Bar)
instrument since it complied with the requirements of
negotiability under Sec. 1 of the Negotiable Instruments A: No. A holder in due course is a holder who has taken
law. The unlawful consideration for the issuance of the the instrument under the following conditions: (a)That it
check is of no moment and will not affect the negotiability is complete and regular upon its face; (b) That he became
of the check as it merely constitutes a defect of title under the holder of it before it was overdue, and without notice
Sec. 55 of the NIL. that it had been previously dishonored, if such was the
fact; (c) That he took it in good faith and for value; (d) That
b. No. S does not have a cause of action against R in case at the time it was negotiated to him he had no notice of
of dishonor by the drawee bank. S is not a holder in due any infirmity in the instrument or defect in the title of the
course, thus, R can raise the defense that the check was person negotiating it. All of the four conditions must
issued for an illegal consideration. concur in order for a holder to qualify as a holder in due
course. In the case at hand, Z did not acquire the
c. Yes. R may be held liable by T since T is a holder in due instrument for value. As such she cannot be considered as
course of the instrument. The unlawful consideration of a holder in due course.
the check is only a personal defense that cannot be
interposed to a holder in due course who receives the A holder is presumed to be an HIDC (1993, 2007 Bar)
check free from the defect of title of S.
GR: Every holder is deemed prima facie to be an HIDC.
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the amount XPN: When it is shown that the title of any person who
in blank with his loan account in the sum of P1,000. has negotiated the instrument was defective. But this is
However, Evelyn inserted P5,000 in violation of the only as regards a party who became such after the
instruction. She negotiated the note to Julie who had acquisition of the defective title (NIL, Sec.59).
no knowledge of the infirmity. Julie in turn negotiated
said note to Devi for value and who had no knowledge Payment in due course
of the infirmity.
In order for payment to constitute payment in due course,
a. Can Devi enforce the note against Larry and if she it must be made:
can, for how much? Explain.
1. At or after the maturity of the instrument
b. Supposing Devi endorses the note to Baby for 2. To the holder thereof, in good faith and without notice
value but who has knowledge of the infirmity, can the that his title is defective (NIL, Sec. 88).
latter enforce the note against Larry? (1993 Bar)
Availability of rights to a party who derives his title
A: from a holder in due course
a. Devi can enforce the note against Larry since she is
a holder in due course. Since the document delivered to A holder who derives his title through an HIDC, and who
Evelyn is in blank and she was authorized to fill up the is not himself a party to any fraud or illegality affecting the
amount in the promissory note, Devi can enforce against instrument has all the rights of such former holder in
Larry the amount of P5,000.00 as this case falls squarely respect to all parties prior to the latter (NIL, Sec. 58).
under Sec 14 of the Negotiable Instruments Law. As Specifically, a holder is entitled to the following rights:
against a holder in due course, the instrument is always (1998, 2007, 2009 Bar)
valid and enforceable to the full extent. The defense of
filing-up contrary to authorization is a mere personal or 1. Hold the instrument free from defenses available to
equitable defense (Villanueva, 2009). parties among themselves;
2. Hold the instrument free from any defect of title of
b. Baby cannot enforce the note against Larry since she is prior parties;
not a holder in due course because Larry could interpose 3. Receive payment;
the real and personal defenses to defeat the claim of Baby. 4. Enforce payment of the instrument for the full amount
However, because of the shelter principle in Negotiable thereof against all parties liable; and
Instruments Law, Baby could be elevated to a status of a 5. Sue
holder in due course since a person not holder in due
course steps in the shoes of the prior party. Therefore,

MERCANTILE LAW
Shelter principle unlawful means, or for an
illegal consideration or
Under the "shelter principle," the HIDC, by negotiating the when he negotiates it in
instrument, to a party not an HIDC, transfers all his rights breach of faith, or under
as such holder to the latter and acquires the right to any other circumstances
enforce the instrument as if he was an HIDC. The principle as amount to a fraud.
applies to a "sheltered" holder who is not a party to any (NIL, Sec. 55)
fraud or illegality impairing the validity of the instrument.
Instances when the title of a person (transferor) is
That it is complete and regular upon its face defective
An instrument is complete when it is not wanting in any 1. In its acquisition – When he obtained the instrument, or
material particular and regular when there is no any signature thereto, by fraud, duress, or force and fear,
alteration apparent on the face of the instrument. or other unlawful means, or for an illegal consideration.
That he became the holder before it was overdue 2. In the negotiation – When he negotiates it in breach of
faith, or under such circumstances as amount to a fraud
An overdue instrument is still negotiable, and although it (NIL, Sec. 55).
is subject to defenses existing at the time of transfer. A
negotiable instrument in circulation past its maturity date Notice of defect on the transferee
carries strong indication that it has been dishonored. An
overdue instrument puts all person on notice that it might The person to whom it is negotiated must have had actual
not have been paid because of a valid defense to such knowledge of such facts or knowledge of other facts that
payment (De Leon, 2010). his action in taking the instrument amounted to bad faith
(NIL, Sec. 56).
Without notice that it has been previously
dishonored, if such was the fact Effect of notice before the full amount is paid
An instrument may be dishonored either by: Where the transferee receives notice of any infirmity in
the instrument or defect in the title of the person
1. Non-acceptance (refers to a bill of exchange) or negotiating the same before he has paid the full amount
2. Non-payment agreed to be paid therefor, he will be deemed a holder in
due course only to the extent of the amount therefore paid
An overdue or dishonored instrument may still be by him (NIL, Sec. 54).
negotiated either by indorsement or by delivery to the
same extent as before maturity. However, in case of Q: A drawer issued a check for the payment of a car,
negotiation of an overdue instrument, the holder cannot which check was delivered to the agent of the owner
be an HIDC while in case of negotiation of a dishonored of the car for safekeeping. The check was then used by
instrument, the holder without notice can be a holder in the agent to pay the medical bills of his wife in a clinic.
due course (De Leon, 2010). The projected purchase did not materialize. Is the
clinic considered a holder in due course?
That he took it in good faith and for value A: No, the rule that a possessor of the instrument is prima
facie a HIDC does not apply to the clinic because it cannot
Good faith is the holder’s well founded or honest belief be said to have acquired the negotiable instrument in
that the person from whom he received the instrument good faith for there was a defect in the title of the holder
was the owner thereof, with the right to transfer it (Duran (agent), since the instrument was not payable “to the
v IAC, G.R. No. L-64159, September 10, 1985). agent or to bearer;” also the drawer had no account with
the clinic, the agent did not show or tell the payee why he
Value may be some right, interest, profit or benefit to the had the check in his possession and why he was using it
party who makes the contract or some forbearance, for the payment of his own account.
detriment, loan, responsibility, etc. to the other (BPI v.
Roxas, G.R. No. 157833, October 15, 2007). As the holder’s title was defective or suspicious, it cannot
be stated that the payee acquired the check without
At the time it was negotiated to him, he had no notice knowledge of said defect in holder’s title, the presumption
of any infirmity in the instrument or defect in the title that the clinic is a HIDC does not exist (De Ocampo & Co. v.
of the person negotiating it Gatchalian, G.R. No. L-15126, November 30, 1961).
INFIRMITY DEFECT Possession of a negotiable instrument after

Refers to those that Refers to how he presentment and dishonor
vitiate the instrument obtained the instrument
itself or the signature thereto, It does not make the possessor a holder for value within
as by fraud, duress, or the meaning of the law. It gives rise to no liability on the
force and fear, or other

part of the maker or drawer or indorsers (STELCO Rights of a holder who is not a holder in due course
Marketing Corp. vs. CA, G.R. No. 96160, June 17, 1992).
The rights of a holder not an HIDC are similar to an
Q: Is a corporation to which four crossed checks were assignee. The other rights are:
indorsed by the payee corporation a holder in due
course and hence entitled to recover the amount of 1. He may receive payment and if the payment is in due
the checks when the same had been dishonored for course, the instrument is discharged;
the reason of “payment stopped”?
2. He is entitled to the instrument but holds it subject to
A: The checks were crossed checks and specifically the same defenses as if it were non-negotiable;
indorsed for deposit to payee’s account only. From the
beginning, the corporation was aware of the fact that the 3. He may sue on the instrument in his own name (NIL,
checks were all for deposit only to payee’s account. Sec. 51).
Clearly then, it could not be considered an HIDC (Atrium
Management Corp. v. CA, G.R. No. 109491, February 28, DEFENSES AGAINST THE HOLDER
2001).
Defenses against the holder
NOTE: Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to The defenses available against the holder are classified as
the holder. follows:
Payee as holder in due course 1. Real or Absolute Defenses – those that are attached to
the instrument itself and are available against all parties,
There can be no doubt that a proper interpretation of NIL both immediate and remote, including holders in due
as a whole leads to the conclusion that a payee may be a course.
holder in due course under the circumstances in which he
meets the requirements of Sec. 52 (De Ocampo v. 2. Personal or Equitable Defenses –defenses which are
Gatchalian, supra). only available against a holder not in due course. Those
which grow out of the agreement or conduct of a
Drawee as holder in due course particular person which renders it inequitable for him,
though holding the legal title, to enforce it against the
A drawee does not become a HIDC by simply paying a bill. party sought to be made liable.
A holder refers to one who has taken the instrument as it
passes along in the course of negotiation; whereas a Real defenses available against a holder v. Personal
drawee, upon acceptance and payment, strips the defenses
instrument of negotiability and reduces it to a mere
voucher or proof of payment. REAL DEFENSES PERSONAL DEFENSES
(IM In Ultra. AFForD (InnocentS2 ADD FUn In
Instances when a person is deemed not a holder in PODIF) Fraud)
due course 1. Incomplete and 1. Innocent alteration or
undelivered spoliation
1. A holder who acquires the instrument after its date of instrument 2. Discharge of party
maturity. 2. Minority (available Secondarily liable by
only to the minor) discharge of prior
2. Where an instrument payable on demand is negotiated 3. Incapacity as far as party.
for an unreasonable length of time after its issue (NIL, incapacitated persons 3. Set-off between
Sec. 53). are concerned immediate parties
4. Ultra –vires acts of a 4. Filling up of blanks not
NOTE: A note payable on demand is due when payment corporation in accordance with the
is demanded. A check becomes overdue when it is not 5. Want of Authority, Authority given
presented for payment within a reasonable time, apparent and real 5. Acquisition of
usually 6 months from date the thereof, afterwards, it 6. Fraudulent alteration instrument by Duress
becomes a stale check. 7. Forgery or force and fear;
8. Duress amounting to unlawful means or for
3. Where the instrument contains an acceleration clause, Forgery an illegal consideration
knowledge of the holder at the time of acquisition 9. Prescription 6. Discharge by payment
thereof that one installment or interest, or both, is 10. Other infirmities or renunciation or
unpaid is a notice that it is overdue. appearing on the face release before maturity
of the instrument 7. Failure or absence of
NOTE: Where indorsement is not dated, it is deemed 11. Discharge in consideration.
prima facie to have been negotiated before the insolvency 8. Undelivered complete
instrument was overdue (NIL, Sec. 45). An overdue 12. Illegal Contract instrument
instrument is still negotiable but it is subject to the
defenses existing at the time of the transfer.

MERCANTILE LAW
13. Fraud in Factum or 9. Insertion of a wrong A: No, since F can treat U as maker due to the minority of
Esse Contractus date T, the drawee.
10. Fraud in inducement
or simple fraud NOTE: Where the drawee does not have the capacity to
NOTE: Fraud in factum NOTE: Fraud in contract, the holder may treat the bill as a PN (NIL, Sec.
exists in those cases in inducement relates to the 130).
which a person, without quality, quantity, value or
negligence, has signed an character of the Q: Eva issued to Imelda a check in the amount of
instrument, but was consideration of the P50,000 post-dated Sept. 30, 1995, as security for a
deceived as to the instrument. Here, deceit diamond ring to be sold on commission. On Sept. 15,
character of the is not in the character of 1995, Imelda negotiated the check to MT investment
instrument and without the instrument but in its which paid the amount of P40,000 to her.
knowledge of it, as where amount or terms. This
a note was signed by one exists when a person is Eva failed to sell the ring, so she returned it to Imelda
under the belief that he induced to sign a note for on Sept. 19, 1995. Unable to retrieve her check, Eva
was signing as a witness the price of a worthless withdrew her funds from the drawee bank. Thus,
to a deed. This kind of stock which was when MT Investment presented the check for
fraud is a real defense fraudulently represented payment, the drawee bank dishonored it. Later on,
because there is no by the payee as to its when MT Investment sued her, Eva raised the defense
contract, since the person value. Such type of fraud of absence of consideration, the check having been
did not know what he was is only a personal defense issued merely as security for the ring that she could
signing (De Leon, 2010). because it does not not sell. Does Eva have a valid defense? Explain. (1996
prevent a contract (De Bar)
Leon, 2010).
A: No. Eva does not have a valid defense. Her defense that
Q: Brad was in desperate need of money to pay his there was no consideration is not available to defeat the
debt to Pete, a loan shark. Pete threatened to take claim of MT Investment since it is a holder in due course
Brad’s life if he failed to pay. Brad and Pete went to who holds the post dated check free from any defect of
see Señorita Isobel, Brad’s rich cousin, and asked her title of prior parties and from defenses available to prior
if she could sign a promissory note in his favor in the parties among themselves. Eva can raise the defense of
amount of P10,000.00 to pay Pete. Fearing that Pete absence of consideration against MT Investment only if
would kill Brad, Señorita Isobel acceded to the the latter was privy to the purpose for which the checks
request. She affixed her signature on a piece of paper were issued, and therefore, not a holder in due course.
with the assurance of Brad that he will just fill it up
later. Brad then filled up the blank paper, making a Q: X makes a promissory note for P10,000 payable to
promissory note for the amount of P100,000.00. He A, a minor, to help him buy school books. A endorses
then indorsed and delivered the same to Pete who the note to B for value, who in turn endorses the note
accepted the note as payment of the debt. to C. C knows A is a minor. If C sues X on the note, can
X set up the defenses of minority and lack of
What defense or defenses can Señorita Isobel set up consideration? (1998 Bar)
against Pete? Explain. (2005 Bar)
A: X cannot set-up the defense of minority to defeat the
A: Señorita Isobel can set-up both real and personal claim of C since only A, the minor could invoke minority
defenses against Pete, who cannot claim to be a holder in as a defense. X cannot set up the defense against C. Lack of
due course because he knew of the compulsion used upon consideration is a personal defense which is only
Señorita Isobel, thus: available between immediate parties who are not holders
in due course. C’s knowledge that A is a minor does not
a) the real defenses available are incompleteness of the prevent C from being a holder of due course. C took the
instrument because Señorita Isobel only signed on a blank promissory from a holder for value B.
piece of paper, duress amounting to forgery, alteration of
the holder by changing the amount to a higher figure; and LIABILITIES OF PARTIES
b) the personal defenses of fraud in inducement Party Primarily liable v. Party secondarily liable
incompleteness when the paper was delivered, and lack
of consideration. PRIMARILY LIABLE SECONDARILY LIABLE
Unconditionally bound Conditionally bound
Q: A bill of exchange has T for its drawee, U as drawer, Undertakes to pay only
and F as holder. When F went to T for presentment, F after the ff. conditions
learned that T is only 15 years old. F wants to recover Absolutely required to have been fulfilled:
from U but the latter insists that a notice of dishonor pay the instrument 1. Due presentment for
must first be made, the instrument being a bill of upon maturity payment or acceptance to
exchange. Is he correct? (2011 Bar) primary party (NIL, Sec.
143);

2. Dishonor by such party iv. Instrument, at the time transferee. (NIL, par. 2,
(NIL, Sec.70); of indorsement, was Sec. 65)
3. Taking of proceedings valid and subsisting;
required by law (NIL, NOTE: Person negotia-
Sec.152) b. On due presentment, it ting by mere delivery and
shall be accepted or paid, or a qualified indorser’s
Parties primarily liable both according to its tenor secondary liability is
limited, namely, to their
1. Maker – of a promissory note; c. If the instrument is warranties
2. Acceptor – of a bill of exchange; and dishonored and the ne-
3. Certifier of a check cessary proceedings on
dishonor be duly taken, he
Parties secondarily liable will pay the holder. (NIL,
Sec. 66.)
1. Drawer of a bill; and Irregular indorser
2. Indorser of a note or a bill a. In an order instrument,
liable to the payee and all
Person to whom the negotiable instrument should be subsequent parties
presented
b. If bearer instrument or
NI should be presented for payment to the party primarily payable to order of maker
liable (NIL, Sec. 72[d]): or drawer, liable to all
parties subsequent to the
1. Promissory note – maker maker or drawer
2. Bill of exchange – drawee/acceptor
c. If he signs for
The drawee is notliable for payment of a bill of accommodation of the
exchange payee, liable to all parties
subsequent to payee. (NIL,
The mere issuance of a bill does not operate as an Sec. 64.)
assignment of the funds in the hands of a drawee. The
drawee must accept the instrument (thus, becomes an MAKER
acceptor) in order that he may be primarily liable for the
payment of a BOE. Maker
Warranties and liabilities of parties who are The maker of a negotiable instrument, by making such
secondarily liable instrument:
1. Engages that he will pay it according to its tenor, and
ABSOLUTE LIABILITY LIMITED LIABILITY 2. Admits the existence of the payee and his then capacity
Drawer of a BOE Qualified Indorser to indorse (NIL, Sec. 60; 1995, 2001 Bar).
Warrants: Warrants that the: NOTE: The maker is liable the moment he makes the NI.
a. The existence of payee a. Instrument is His liability is primary and unconditional.
and his then capacity to genuine;
indorse; b. He has good title to it; Q: A issued a promissory note payable to B or bearer.
b. That the instrument will c. Capacity to contract A delivered the note to B. B indorsed the note to C. C
be accepted or paid upon of all prior parties; and; placed the note in his drawer, which was stolen by the
due presentment by the d. No knowledge of any janitor X. X indorsed the note to D by forging C's
party primarily liable fact which would impair signature. D indorsed the note to E who in turn
according to its tenor; and the validity of the delivered the note to F, a holder in due course,
c. That if dishonored, he instrument. (NIL, without indorsement. Discuss the individual
will pay the party entitled Sec.65) liabilities to F of A, B and C. (2001, 1997 Bar)
to be paid. (NIL, Sec. 61.) NOTE: He is liable to all
parties who derive their A: A is primarily and unconditionally liable to F as the
titlethrough his maker of the promissory note. Section 60 provides that,
indorsement. by making the instrument, the maker obliges himself to
General indorser Person negotiating by pay according to the tenor of the instrument. He is liable
delivery to both payee and subsequent holder in due course.
a. Warrants that: Same warranties as a Despite the presence of the special indorsements on the
i. Instrument is genuine qualified indorser. But note, these do not detract from the fact that a bearer
ii. He had good title to it unlike a qualified indor- instrument, like the promissory note in question, is
iii. All prior parties had ser, a person negotiating always negotiable by mere delivery, until it is indorsed
capacity to contract by mere delivery is liable restrictively “For Deposit Only”
only to his immediate

MERCANTILE LAW
B as a general indorser is secondarily liable to F. By DRAWER
placing his signature on the bearer instrument, he
warrants that the instrument is genuine and in all Drawer
respects what it purports to be; that he has good title to it;
that all prior parties had capacity to contract; that he has The drawer, by drawing the instrument:
no knowledge of any fact which would impair the validity
of the instrument or render it valueless; that at the time of 1. Admits the existence of the payee and his then capacity
indorsement, the instrument is valid and subsisting; and to indorse; and
that on due presentment, it shall be accepted or paid, or
both, according to its tenor, and that if it be dishonored 2. Engages that on due presentment the instrument will
and the necessary proceedings on dishonor be duly taken, be accepted or dishonored; and
he will pay the amount thereof to the holder, or to any 3. That if the necessary proceedings on dishonor be duly
subsequent indorser who may be compelled to pay. taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it
C, however, cannot be held liable because the signature (Sec. 61, NIL; 1991 Bar).
purporting to be his is a product of forgery. C can raise the
defense of forgery since it his signature that was forged. Secondary liability of the drawer
Q: On the right bottom margin of a PN appeared the The drawer is secondarily liable to the following:
signature of the corporation’s president and 1. The holder or
treasurer above their printed names with the phrase 2. To any subsequent indorser who may be compelled to
“and in his personal capacity.” The corporation failed pay it (ibid.).
to pay its obligation. Are the officers liable?
The drawer maylimit his liability to the holder
A: Yes, persons who sign their names on the face of
promissory notes are makers and liable as such. The The drawer may insert in the NI an express stipulation
officers are co-makers and as such, they cannot escape negativing or limiting his own liability to the holder (ibid.).
liability arising therefrom (Republic Planters Bank v. CA,
G.R. No. 93073, December 21, 1992). Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it in
Q: Richard Clinton makes a promissory note payable blank to D. E steals the instrument from D and, forging
to bearer and delivers the same to Aurora Page. the instrument of D, succeeds in "negotiating" it to F
Aurora Page, however, endorses it to X in this who acquires the instrument in good faith and for
manner: "Payable to X. Signed: Aurora Page." value.
Later, X, without endorsing the promissory note, a. If for any reason, the drawee bank refuses to honor
transfers and delivers the same to Napoleon. The note the check, can F enforce the instrument against the
is subsequently dishonored by Richard Clinton. May drawer?
Napoleon proceed against Richard Clinton for the b. In case of the dishonor of the check by both the
note? (1998 Bar) drawee and the drawer, can F hold any of B, C and D
liable secondarily on the instrument? (1997 Bar)
A: Yes, Richard Clinton is liable for the promissory note.
Under Section 60 of the NIL, the maker of a negotiable A:
instrument, by making the same, engages that he will pay a. Yes, F can proceed against the drawer, A, in case of
according to its tenor, and admits the existence of the dishonor by the drawee bank. Section 61 of the NIL
payee and his then capacity to indorse. The liability of the provides that by drawing the instrument, the drawer
maker is primary which means he is absolutely and engages that the instrument will be accepted or paid or
unconditionally required to pay. He engages to pay the both according to its tenor. Not only is the drawer obliged
instrument according to its terms without any condition. to pay the amount of the instrument to the holder, but he
He is not only liable to the payee but also to the shall likewise be liable to the subsequent indorser who
subsequent holder in due course. Since the instrument is was compelled to pay it. The forged signature is
a bearer instrument (which nature was not changed even unnecessary to presume the juridical relation between or
if it was specially indorsed by Aurora), Napoleon became among the parties prior to the forgery and the parties
a legal holder thereof by mere delivery from X to him. after the forgery. Moreover, the only party who can raise
Thus, as a legal holder of the promissory note, he is the defense of forgery against a holder in due course is the
entitled to proceed against the maker thereof, Richard person whose signature is forged.
Clinton.
b. Only B and C can be held liable by F. According to
Section 67, when a person puts his signature on a bearer
instrument as a form of indorsement, he becomes subject
to all liabilities of an indorser. D cannot be held liable as
an indorser because his signature is forged by E--hence,
there was no consent from D. The forged signature is
deemed inoperative and no right can arise out of it.

However, the effect of being inoperative affects only the acceptor. As acceptor, the bank became primarily and
signature which is the product of forgery. It will not deem directly liable to the payee/holder B.
to affect other signatures subscribed with knowledge and
voluntariness. Therefore, B and C are liable as indorsers. The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show that
Q: D draws a bill of exchange that states: “One month he has sufficient funds.
from date, pay to B or his order Php100,000.00.
Signed, D.” The drawee named in the bill is E. B INDORSER
negotiated the bill to M, M to N, N to O, and O to P. Due
to non-acceptance and after proceedings for dishonor Indorser
were made, P asked O to pay, which O did. From whom
may O recover? (2011 Bar) A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to be an
A: D, being the drawer. indorser, unless he clearly indicates by appropriate words
his intention to be bound in some other capacity (NIL, Sec.
ACCEPTOR 63).
Acceptor NOTE: A person who places his indorsement on a bearer

instrument incurs all liabilities of an indorser (NIL, Sec.
The acceptor, by accepting the instrument: 67).
1. Engages that he will pay the NI accordingto the tenor of
his acceptance; and General indorser v. Irregular indorser (2005 Bar)
2. Admits the existence of the drawer, the genuineness of his
GENERAL INDORSER IRREGULAR INDORSER
signature and his capacity and authority to draw the
instrument; Makes either a blank or Always makes a blank
3. Admits the existence of the payee and his then capacity to special indorsement indorsement
indorse (NIL, Sec. 62, 1992; 1998 Bar).
Indorses the instrument Indorses before its
after its delivery to the delivery to the payee
Party who can accept the bill of exchange
payee
GR: Only the drawee may accept. A stranger or volunteer
Liable only to parties Liable to the payee and
is not bound by acceptance.
subsequent to him subsequent parties unless
he signs for the
XPN: In case of a bill which is accepted for honor supra
accommodation of the
protest (NIL, Sec. 161).
payee in which case he is
liable only to all parties
NOTE: Drawee does not become liable until he accepts the
subsequent to the payee
instrument in which case he becomes an acceptor. An
(NIL, Secs. 64, 66; De Leon, supra)
acceptor engages to pay according to the tenor of his
acceptance, which may not be the same as the tenor of the
NOTE: The holder or subsequent indorser who tries to
bill itself because the acceptance may be qualified.
claim under the instrument which had been dishonored
for "irregular indorsement" must not be the irregular
Difference between the liability of an acceptor or
indorser himself who gave cause for the dishonor.
drawee-acceptor and a maker
(Gonzales v. Rizal Commercial Banking Corporation, G.R.
No. 156294, Novembber 29, 2006)
While both are primarily liable, the acceptor engages to
pay the negotiable instrument according to the tenor of
Qualified indorser
his acceptance. On the other hand, the maker engages to
pay the negotiable instrument according to the tenor of A qualified indorser is a person who indorses without
the bill itself. recourse (NIL, Sec. 65).
Q: X draws a check against his current account with Drawer v. Indorser
Bonifacio Bank in favor of B. Although X does not have
sufficient funds, the bank honors the check when it is DRAWER INDORSER
presented for payment. Apparently, X has conspired Party only to a bill Party either a bill or note
with the bank's bookkeeper so that his ledger card
Makes admission as to No such admission
would show that he still has sufficient funds.The bank
the existence of the payee
files an action for recovery of the amount paid to B
and his capacity to
because the check presented has no sufficient funds.
indorse
Decide the case (1998 Bar).
Makes no warranties, but Has warranties
engages to pay after
A: The bank cannot recover the amount paid to B for the
certain conditions are
check. When the bank honored the check, it became an
complied with

MERCANTILE LAW
Order of liability among the indorsers WARRANTIES
(1995, 2001, 2005 Bar)
1. Among themselves – Liable prima facie in the order in
which they indorse (NIL, Sec. 68) The following are the warranties a person provides in
2. To the holder – In any order negotiating an instrument:
NOTE: Every indorser is liable prima facie to all indorsers 1. That the instrument is genuine and in all respects
subsequent to him, but not those indorsers prior to him what it purports to be;
(NIL, Sec. 68) 2. That he has good title to it;
3. That all prior parties had capacity to contract;
Liability of an agent or broker who negotiates an 4. That he has no knowledge of any fact which would
instrument without indorsement impair the validity of the instrument or render it
useless.
He incurs all the liabilities prescribed to a general
indorser unless he discloses the name of his principal and NOTE: Indorser’s liability as warrantor is distinct from
the fact that he is acting only as an agent (NIL, Sec. 69) his liability to pay the instrument. Even a qualified
indorser may incur liability for breach of implied
NOTE: Parol evidence is NOT admissible to relieve an warranties. As warrantor, his liability is unconditional.
agent or broker whose endorsement brings him within
the above liability. PRESENTMENT FOR PAYMENT
Q: Can a collecting bank debit the account of the Presentment for payment
depositor when the checks indorsed to it (bank) were
forged? It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
A: Yes, because the depositor of a check as indorser receiving payment.
warrants that it is genuine and in all respects what it
purports to be. Thus, when the checks deposited had Manner of presentment
forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the drawee GR: Instrument must be exhibited to the person from
bank, the collecting bank can debit the account of the whom payment is demanded; when paid, it must be
depositor for his breach of warranty (Jai-Alai Corporation delivered to the person paying it (NIL, Sec. 74).
of The Philippines v. BPI, G.R. No. L-29432, August 6, 1975).
XPNs: When exhibition is excused:
Q: Phebean, the drawer issued a check to James. 1. Debtor does not demand to see the instrument and
James, subsequently indorsed it to Trude. When refuses payment on some other grounds; or
Trude is about to encash the check, the drawee Union 2. Instrument is lost or destroyed.
Bank refused to encash it due to insufficiency of
funds. Trude sued James for payment of money. James Liability of a bank paying a certificate of deposit
alleged that the suit should be dismissed because payable to bearer without requiring its surrender
Phebean is an indispensable party. Does James’
argument hold water? The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without requiring
A: No, there is no privity between the drawer and the its surrender (Far East Bank & Trust Company v. Querimit,
holder. The drawer is merely secondarily liable. As G.R. No. 148582, January 16, 2002).
indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid, or Payee cannot claim payment for a promissory note
both, according to their tenor, and that in case they were which was stolen and as such is not in his possession
dishonored, she would pay the corresponding amount.
After an instrument is dishonored by non-payment, To make presentment for payment, it is necessary to
indorsers cease to be merely secondarily liable; they exhibit the instrument, which he cannot do because he is
become principal debtors whose liability becomes not in possession thereof.
identical to that of the original obligor (Tuazon v. Heirs of
Bartolome Ramos, G.R. No. 156262, July 14, 2005). Q:
A. AB issued a promissory note for P1,000 payable to
Q: X is the holder of an instrument payable to him (X) CD or his order on September 15, 2002. CD indorsed
or his order, with Y as maker. X then indorsed it as the note in blank and delivered the same to EF. GH
follows: “Subject to no recourse, pay to Z. Signed, X.” stole the note from EF and on September 14, 2002
When Z went to collect from Y, it turned out that Y's presented it to AB for payment. When asked by AB, GH
signature was forged. Z now sues X for collection. Will said CD gave him the note in payment for two cavans
it prosper? (2011 Bar) of rice. AB therefore paid GH P1,000 on the same date.
On September 15, 2002, EF discovered that the note
A: Yes, because X, as a qualified indorser, warrants that of AB was not in his possession and he went to AB. It
the note is genuine. was then that EF found out that AB had already made

payment on the note. Can EF still claim payment from 1. By the holder, or his agent authorized to receive
AB? Why? payment on his behalf;
2. At a reasonable hour on a business day;
B. As a sequel to the same facts narrated above, EF, out 3. At a proper place;
of pity for AB who had already paid P1,000 to GH, 4. To the person primarily liable, or if he is absent or
decided to forgive AB and instead go after CD who inaccessible, to any person found at the place where
indorsed the note in blank to him. Is CD still liable to the presentment is made (NIL, Sec. 72).
EF by virtue of the indorsement in blank? Why? (2002
Bar) Time for presentment for payment
A: INSTRUMENT TIME FOR PRESENTMENT

A. Since the instrument became a bearer instrument, EF GR: On the day it falls due (NIL, Sec.
could no longer claim payment from AB. EF is not a 85)
holder of the promissory note. To make the presentment
for payment, it is necessary to exhibit the instrument, XPN: If the due date falls on a
which EF cannot do because he is not in possession Payable at a
Saturday, presentment must be
thereof. fixed or
made on the next Monday.
determinable
B. No, because CD negotiated the instrument by delivery. future time
NOTE: If presentment for payment is
made before maturity, it will not
NECESSITY OF PRESENTMENT FOR PAYMENT result to a discharge of the
instrument (NIL, Sec. 50).
Instance when presentment for payment is necessary Promissory note
Within a reasonable time after its
payable on
Presentment for payment is only necessary to charge issue.
demand
persons secondarily liable—drawer and indorsers (NIL, Within a reasonable time after the
Sec. 70). last negotiation thereof (NIL, Sec. 71).
NOTE: Presentment for payment is not necessary in order NOTE: “Last negotiation” means the
to charge the person primarily liable on the instrument. last transfer for value. Subsequent
transfers between banks for
Instance when presentment for payment is not Bill of exchange
purposes of collection are not
necessary to charge persons secondarily liable payable on
negotiations within Sec. 71.
demand
1. As to drawer, where he has no right to expect or require “Reasonable time” means not more
that the drawee or acceptor will pay the instrument than 6 months from the date of issue.
(Sec. 79, NIL). Beyond said period, the check
becomes stale and valueless and
2. As to indorser where the instrument was made or thus, should not be paid.
accepted for his accommodation and he has no reason
to expect that the instrument will be paid if presented NOTE: Every NI is payable at the time fixed therein
(NIL, Sec. 80). without grace.
3. When dispensed with under Sec. 82, NIL such as: Rules on presentment for payment when maturity
a. Where, after the exercise of reasonable diligence, date is fixed
presentment cannot be made;
b. Where the drawee is a fictitious person; TIME OF MATURITY OF WHEN TO PRESENT FOR
c. By waiver of presentment, express or implied INSTRUMENT PAYMENT
On a Sunday or holiday On the next succeeding
Rule if the instrument is, by its terms, payable at a business day
special place On a Saturday On the next succeeding
business day
If the instrument is, by its terms, payable at a special place, If instrument which falls Before 12:00 noon on
and the person primarily liable is able and willing to pay due on a Saturday is Saturday, or on Monday, at
it there at maturity, such ability and willingness are payable on demand the option of the holder
equivalent to a tender of payment upon his part (Sec. 70,
NIL).
Instances when delay in making presentment is
excused
Requisites for a sufficient presentment for payment
(1994, 2002 Bar)
1. When caused by circumstances beyond the control of
the holder; and
Presentment for payment, to be sufficient, must be made:
2. Not imputable to his default, misconduct, or negligence
(NIL, Sec. 81).

MERCANTILE LAW
NOTE: Only the delay in presentment is excused and not presentment must be made to the drawee although he
the presentment itself. Hence, as soon as the cause of is not automatically liable on the bill.
delay ceases to operate, presentment must be made with
reasonable diligence (ibid.). XPNs: Where the person/s primarily liable is/are:
Q: Is the bank liable to the payee for depositing and 1. Dead – payment must be made to his personal
encashing the crossed checks to an unauthorized representative (NIL, Sec. 76).
person?
2. Liable as partners and no place of payment specified
A: Yes, the effects of crossing a check relate to the mode – payment may be made to any of them though there has
of its presentment for payment. Under Sec. 72 of the NIL, been dissolution of the firm (NIL, Sec. 77).
presentment for payment, to be sufficient, must be made
by the holder or by some person authorized to receive on 3. Several persons, not partners, and no place of
his behalf. The checks here had been crossed and issued payment is specified – payment must be made to all of
“for payee’s account only.” This only signifies that the them (NIL, Sec. 78).
drawer had intended the same for deposit only by the 4. If the person primarily liable is absent or
person indicated (Associated Bank v. CA, G.R. No. 89802, inaccessible, then presentment must be made to any
May 7, 1992). person of sufficient discretion at the proper place of
presentment (NIL, Sec. 72[d]).
Order of preference with regard to the place of
presentment DISPENSATION WITH PRESENTMENT OF PAYMENT
1. Specified place in the instrument Effect when presentment is not made

2. Address of the person to make the payment if given
in the instrument GR: Drawer and the indorsers are discharged from their
3. Usual place of business or residence of the person to secondary liability.
make the payment
4. Wherever he can be found; or XPNs:
5. At his Last known place of business or residence
(NIL, Sec. 73). 1. Presentment for payment is not required to charge
drawer and indorser when:
Time of presentment where the instrument is payable a. Drawer- when he has no right to expect or require
at a bank that the drawee or acceptor will pay the instrument
(NIL, Sec. 79).
Presentment must be made during banking hours, unless b. Indorser – When the NI was made or accepted for
the person to make payment has no funds there to meet it his accommodation and he has no reason to expect
at any time during the day, in which case presentment at that the instrument will be paid if presented (NIL,
any hour before the bank is closed on that day is sufficient Sec. 80).
(NIL, Sec. 75).
2. When presentment for payment is dispensed with
Requisites of payment in due course under Sec. 82, NIL
Payment is made in due course when (MHG) 3. When the BOE has been dishonored by non-acceptance,
since no PP for is necessary (NIL, Sec. 151).
1. It is made at or after the date of Maturity;
2. To the Holder thereof; Instances when presentment for payment maybe
3. In Good faith and without notice that holder’s title is dispensed with
defective (NIL, Sec. 88).
1. Where, after the exercise of reasonable diligence,
NOTE: The term “in good faith” refers to the maker or presentment cannot be made;
acceptor and not to the holder. 2. Where the drawee is a fictitious person; or
3. By waiver of presentment, express or implied (NIL,
PARTIES TO WHOM PRESENTMENT FOR PAYMENT Sec. 82).
SHOULD BE MADE
Parties to whom presentment for paymentshould be

made
GR: Presentment for payment must be made to the

primary party; to the:
1. The maker in case of a promissory note, or

2. The acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the

DISHONOR BY NON-PAYMENT a. Place of business – Before close of business hours on
the day following
Instances when an instrument is dishonored by non-
payment b. Residence – Before the usual hours of rest on the day
following
NON-PAYMENT UPON NON-PAYMENT W/OUT
DUE PRESENTATION PRESENTATION c. By mail – Deposited in the post office in time to reach
The instrument is duly Presentment is excused him in the usual course on the day following (NIL, Sec.
presented for payment to and the instrument is 103)
party primarily liable and overdue and unpaid
it is either refused or 3. Parties reside in different places
cannot be obtained a. By mail – Deposited in the post office in time to go by
(NIL, Sec. 83). mail (actual departure in the course of mail from the
post office in which the notice was deposited) the day
Effect of dishonor by non-payment following the day of dishonor.
Subject to the provisions of the law, when the instrument b. If no mail – At a convenient hour (of the sender) on
is dishonored by non-payment, an immediate right of that day, by the next mail thereafter
recourse to all parties secondarily liable thereon accrues
to the holder (NIL, Sec. 84). c. Other than by post office (e.g. personal messenger) –
Within the time that notice would have been received
NOTICE OF DISHONOR in due course of mail, if it has been deposited in the
post office within the time specified in (a) (NIL, Sec.
Notice of dishonor 104).
It is a notice given by the holder to the parties secondarily 4. Time of notice to antecedent parties – Same time for
liable, drawer and each indorser, that the instrument was giving notice that the holder has after the dishonor
dishonored by non-payment or non-acceptance by the (NIL, Sec. 107).
drawee/maker.
NOTE: Actual receipt of the party within the time
NOTE: Persons primarily liable need not be given notice specified by law is sufficient though not sent in the places
of dishonor because they are the ones who dishonored the specified above (NIL, Sec. 108).
instrument.
Instances when a negotiable instrument is considered
Purposes for requiring notice of dishonor dishonored
1. To inform parties secondarily liable that the maker A. For BOE,

or acceptor has failed to meet his engagement; and 1. If not accepted when presented for acceptance; or
2. If presentment for acceptance is excused and the bill
2. To advise them that they are required to make is not accepted (NIL, Sec. 149).
payment.
B. For PN,
Q: Notice of dishonor is not required to be made in all 1. Not paid (that is, payment is refused or not
cases. One instance where such notice is not obtained) when presented for payment at maturity; or
necessary is when the indorser is the one to whom the 2. Where presentment is excused or waived and the
instrument is supposed to be presented for payment. instrument is overdue and unpaid (NIL, Sec. 83).
The rationale here is that the indorser (2011 Bar)
Liability of a person secondarily liable when the
A: Already knows of the dishonor and it makes no sense instrument is dishonored
to notify him of it.
After the necessary proceedings for dishonor had been
Time and place of giving the notice of dishonor duly taken, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder (NIL, Sec.
1. GR: As soon as instrument was dishonored (NIL, Sec. 84).
10.)–Party is allowed one entire day for the purpose of
giving notice. PARTIES TO BE NOTIFIED
XPN: Delay is excused (NIL, Sec. 113,). Parties to whom notice must be given
NOTE: An instrument cannot be dishonored by non- Notice of dishonor should be given to:
payment until afterthe maturity. 1. The drawer; or
2. Indorser; or
2. Parties reside in the same place 3. His agent (NIL, Sec. 97)

MERCANTILE LAW
4. Where party is dead – to a personal representative or NOTE: Holder is not required to notify all indorsers, he
sent to the last residence or last place of business of may select to hold only one or more indorsers. Indorsers
the deceased (NIL, Sec. 98) who are discharged from liability by reason that no notice
5. When the parties to be notified are partners – notice of dishonor was given to them is still liable for breach of
to any one partner though there has been a warranties as to the NI.
dissolution (NIL, Sec. 99)
6. Notice to joint parties who are not partners must be FORM OF NOTICE
given to each of them (NIL, Sec. 100)
7. Where a party has been adjudged a bankrupt – to the Form and contents of a notice of dishonor
party himself or to his trustee or assignee (NIL, Sec.
101) 1. Oral; or
2. In writing;
Parties to whom the notice of dishonor should be 3. It may be given by personal delivery, or by mail (NIL,
given in case the instrument was dishonored in the Sec. 96)
hands of the agent 4. Must contain the following:
a. Description of the instrument;
1. To the parties secondarily liable – Within the time fixed b. Statement that it has been presented for payment or
by Secs. 102-104, and 107, otherwise, they are for acceptance and that it has been dishonored (If
discharged. protest is necessary, notice must also contain a
statement that it has been protested); and
2. To his principal – The principal must give notice to c. Statement that the party giving the notice intends to
parties secondarily liable as if his agent were an look for the party addressed for payment.
independent holder (NIL, Sec. 94).
NOTE: A written notice need not be signed, and an
NOTE: A party who receives notice of dishonor is entitled insufficient notice may be supplemented or validated by
to give notice of such dishonor to prior parties within the verbal communication. A misdescription of the
same period of time that the holder has after the dishonor, instrument does not vitiate the notice unless the party to
as if he were the said holder (NIL, Sec. 107). whom the notice is given is in fact misled thereby (NIL,
Sec. 95).
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
WAIVER
1. Holder;
2. Another in behalf of the holder; Waiver of notice
3. Any party to the instrument, who may be compelled to
pay and who, upon taking it up, would have a right to It is the willingness on the part of the drawer or indorser
reimbursement from the party to whom notice is given to be bound as such even without due notice of dishonor.
(NIL, Sec. 90).
Time when awaiver of notice maybe given
EFFECT OF NOTICE
1. Before the time of giving notice has arrived; or
Effect of notice of dishonor if given by or on behalf of 2. After the omission to give due notice (NIL, Sec.
the holder 109).
Notice of dishonor inures to the benefit of: Ways to give a waiver of notice
1. All holders subsequent to the holder who has given
notice; and It can either be:
1. Express; or
2. All parties prior to the holder but subsequent to the 2. Implied (e.g. Payment by an indorser after he learns
party to whom notice has been given and against of the default of the maker; admission of liability after
whom they may have a right of recourse (NIL, Sec. 92) dishonor) (NIL, Sec. 109).
Effect of notice of dishonor if given by party entitled Parties affected by the waiver of notice
thereto
1. All parties (if embodied on the face of the
Notice of dishonor inures to the benefit of: instrument); or
1. The holder; and 2. Particular indorser (if written above the signature of
2. All parties subsequent to the party to whom notice is such indorser) (NIL, Sec. 110).
given (NIL, Sec. 93).
Waiver of protest
Effect of failure to give notice of dishonor
It is the waiver of the formal instrument executed usually
Any drawer or indorser to whom such notice is not given by a notary public certifying that the legal steps necessary
is discharged (NIL, Sec. 89) to fix the liability of the drawee and the indorsers have
been taken. Thus, it is deemed to be a waiver not only of a

formal protest but also of presentment and notice of Instances when it is not necessary to give a notice of
dishonor (NIL, Sec. 111). dishonor to the indorser
DISPENSATION WITH NOTICE 1. Drawee is fictitious or has no capacity to contract,

and indorser was aware of these facts at the time he
Instances when notice of dishonor is not necessary indorsed the instrument;
2. Indorser is person to whom the instrument is
1. Waiver of notice (NIL, Sec. 109) presented for payment; or
2. Waiver of protest (NIL, Sec. 111) 3. Instrument was made or accepted for his
3. When notice is dispensed with when after exercise of accommodation (NIL, Sec. 115).
reasonable diligence, notice cannot be given or does
not reach the parties sought to be charged (NIL, Sec. EFFECT OF FAILURE TO GIVE NOTICE
112)
4. Drawer in cases under Sec. 114, NIL. Effect of the omission of a previous holder to give
5. Indorser in cases under Sec. 115, NIL.; and notice of dishonor by non-acceptance
6. Where due notice of dishonor by non-acceptance has
been given (notice of dishonor by non-payment not It does not prejudice the rights of a holder in due course
necessary). (NIL, Sec. 116.) subsequent to the omission to present the instrument to
the drawee for acceptance and notify the drawer and
Instances when a notice of dishonor to the drawer indorsers if acceptance is refused (NIL, Sec. 117).
may be dispensed with
Effect of failure to give notice of dishonor
1. When drawer and drawee is the same person
2. Drawee is fictitious or does not have the capacity to GR: Any person to whom such notice is not given is
contract discharged, but he will still be liable for breach of
3. Drawer is the person to whom the instrument is warranties pertaining to the instrument.
presented for payment (he is the one who dishonored
the instrument) XPNs:
4. Drawer has no right to expect or require that the 1. Waiver (NIL, Sec. 109)
drawee or acceptor will honor the instrument. 2. Notice is dispensed with (NIL, Sec. 112)
5. Drawer has countermanded the payment (e.g. stop 3. Notice not necessary to drawer (NIL, Sec. 114)
payment order) (NIL, Sec. 114.) 4. Notice not necessary to indorser (NIL, Sec. 115)
NOTE: The holder of two checks which were dishonored Effect of lack of notice of dishonor on the instrument
because the drawer withdrew her funds from the bank which is payable in installments
can hold the drawer liable even if no notice of dishonor
was given to the drawer, since the drawer had no right to 1. No acceleration clause – Failure to give notice of
expect that the drawee bank would honor the checks. dishonor on a previous installment does not discharge
(State Investment House, Inc. vs. Court of Appeals, G.R. No. drawers and indorsers as to succeeding installments.
101163, January 11, 1993)
2. With acceleration clause – It depends upon whether the
Q: P authorized A to sign a negotiable instrument in clause is automatic or optional.
his (P’s) name. It reads: “Pay to B or order the sum of a. Automatic – failure to give notice of dishonor as to a
Php1 million. Signed, A (for and in behalf of P).” The previous installment will discharge the persons
instrument shows that it was drawn on P. B then secondarily liable as to the succeeding installments;
indorsed to C, C to D, and D to E. E then treated it as a b. Optional – if not exercised, the rule would be the same
bill of exchange. Is presentment for acceptance as if there is no acceleration clause. If exercised, the rule
necessary in this case? (2011 Bar) would be the same as if the installment contains an
automatic acceleration clause (Town Savings Bank v. CA,
A: No, since the drawer and drawee are the same person. G.R. No. 106011, June 17, 1993).
Q: Juben issued to Y two post-dated checks as security DISCHARGE OF NEGOTIABLE INSTRUMENT

for pieces of jewelry to be sold. Y negotiated the check
to S. When Juben failed to sell the jewelry, he It is the release of all parties, whether primary or
withdrew all his funds from the drawee bank. After secondary, from the obligations arising thereunder. It
dishonor, Juben contends that the holder failed to renders the instrument without force and effect, and
give him a notice of dishonor. Is notice of dishonor consequently, it can no longer be negotiated.
necessary?
Methods for discharge of instrument
A: No, Juben was responsible for the dishonor of his
checks, hence, there was no need to serve him notice of 1. Payment by principal debtor:
dishonor (State Investment House, Inc. v. CA, supra.). a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof

MERCANTILE LAW
d. In good faith and without notice that the holder’s unequivocal terms as novation is never presumed.
title is defective Secondly, the old and the new obligations must be
incompatible on every point.
2. Payment by accommodated party
3. Intentional cancellation of instrument by the holder (by In this case, J.Y. Bros.’s acceptance of the Solid Bank check,
expressly stating it in the instrument or when the which replaced the dishonored Prudential Bank check,
instrument is torn up, burned or destroyed) did not result to novation as there was no express
agreement to establish that Salazar was already
4. Any act which discharges a simple contract for the discharged from his liability. Neither was there any
payment of money under Art. 1231 of the NCC incompatibility, since both checks were given to
specifically remission, novation, and merger. terminate a single obligation arising from the same
transaction (Anamer Salazar v. J.Y. Brothers Marketing
NOTE: Loss of the negotiable instrument will not Corporation, G.R. No. 171998, October 20, 2010, in Divina
extinguish liability; compensation is not available so long 2014).
as an obligation is evidenced by a negotiable instrument
(Villanueva, 2009). DISCHARGE OF PARTIES SECONDARILY LIABLE
5. Reacquisition by principal debtor in his own right. Methods of discharge of secondary parties (ACS TReE)
Reacquisition must be:
a. By the principal debtor 1. Any Act which discharges the instrument;
b. In his own right 2. Intentional Cancellation of his signature by the
c. At or after date of maturity (instrument is holder
discharged; if made before, it may be 3. Discharge of prior party which may be made when
renegotiated) (NIL, Sec. 119). signature is Stricken out
4. Valid Tender of payment by a prior party;
Q: Salazar with Calleja and Kallos procured from J. Y. 5. Release of the principal debtor, unless holder
Bros. 300 cavans of rice. As payment, Salazar expressly reserves his right of recourse against the said
negotiated and indorsed to J.Y. Bros. Prudential Bank subsequent parties
Check issued by Timario with the assurance that the 6. Extension of time of payment, unless:
check is good as cash. On that assurance, J.Y. Bros. a. Extension is consented to by such party
parted with 300 cavans of rice to Salazar. However, b. Holder expressly reserves his right of recourse
upon presentment, the check was dishonored due to against such party (NIL, Sec. 120)
"closed account." Calleja, Kallos and Salazar delivered
to J.Y. Bros. a replacement cross Solid Bank Check Q: The rule is that the intentional cancellation of a
again issued which bounced due to insufficient funds. person secondarily liable results in the discharge of
Despite demands, Salazar failed to settle the amount the latter. With respect to an indorser, the holder's
due. J.Y. Bros., charged Salazar and Timario with the right to cancel his signature is: (2011 Bar)
estafa.
A: Limited to the case where the indorsement is not
Salazar contends that the issuance of the Solid Bank necessary to his title.
check and the acceptance thereof by J.Y. Bros, in
replacement of the dishonored Prudential Bank Effects of payment by persons secondarily liable
check, amounted to novation that discharged the
latter check; that respondent's acceptance of the Solid 1. Instrument is not discharged
Bank check, notwithstanding its eventual dishonor by
the drawee bank, had the effect of erasing whatever 2. It only cancels his own liability and that of the parties
criminal responsibility, under Article 315 of the RPC, subsequent to him
the drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof; and that 3. GR: Instrument may be renegotiated
a check is a contract which is susceptible to a novation
just like any other contract. Is Salazar correct? XPNs:
a. Where it is payable to the order of a third person, and
A: No. While Section 119 of the NIL in relation to Article has been paid by the drawer; and
1231 of the Civil Code provides that one of the modes of b. Where it is paid by the accommodated party
discharging a negotiable instrument is by any other act
which will discharge a simple contract for the payment of NOTE: (a) and (b) has the same effect as payment by the
money, such as novation, the acceptance by the holder of party primarily liable.
another check which replaced the dishonored bank check
did not result to novation. 4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his own and
There are only two ways which indicate the presence of all subsequent indorsements (NIL, Sec. 121).
novation and thereby produce the effect of extinguishing
an obligation by another which substitutes the same.
First, novation must be explicitly stated and declared in

RIGHTS OF A PARTY WHO DISCHARGED THE 3. The time or place of payment
INSTRUMENT 4. Number or the relations of the parties
5. Currency in which payment is to be made
GR: The party so discharging the instrument is remitted 6. Adds a place of payment where no place is specified
to his former rights as regards all prior parties, and he 7. Any other change or addition which alters the effect of
may strike out his own and all subsequent indorsements, the instrument (NIL, Sec. 125.)
and again negotiate the instrument.
NOTE: The change in the date of indorsement is not
XPNs: material where the date is not necessary to fix the
1. Where it is payable to the order of a third person, maturity of the instrument.
and has been paid by the drawee; and
2. It was made or accepted for accommodation, and Spoliation
has been paid by the party accommodated.
It refers to material alteration of an instrument done by a
RENUNCIATION BY HOLDER stranger. It has the same effect as alteration.
Renunciation EFFECT OF MATERIAL ALTERATION
It is the act of surrendering a claim or right with or Effect of material alteration of a negotiable
without recompense (a PERSONAL defense). instrumentwithout the assent of all parties liable
thereon
Manner of making renunciation by the holder
1. Avoids the instrument except against:
1. Must be written a. A party who has made the alteration;
2. If oral, the instrument must be surrendered to the b. A party who authorized or assented to the alteration;
person primarily liable (NIL, Sec. 122). or
c. The indorsers who indorsed subsequent to the
Effects of renunciation alteration (because of their warranties).
1. Made in favor of principal debtor made at or after the 2. If negotiated to an HIDC, he may enforce the payment
maturity (made absolutely and unconditionally) of the thereof according to its original tenor against the person
instrument – discharges the instrument (NIL, Sec. 122). not a party to the alteration. He may also enforce payment
thereof against the party responsible for the alteration for
2. Made in favor of a secondary party may be made by the
the altered amount.
holder before, at or after maturity – discharges only the
secondary parties and all subsequent to him (NIL, Sec.
3. If negotiated to a holder not an HIDC, he cannot enforce
122).
payment against the person not a party prior to the
3. Renunciation does not affect the rights of a holder in alteration. He may, however enforce payment according
due course without notice (NIL, Sec. 120). to the altered tenor from the person who caused the
alteration and from the indorsers (NIL, Sec. 12).
Rule regarding the cancellation of an instrument
Q: Can a drawee who accepts a materially altered
It is presumed intentional. It is inoperative if check recover from the holder and the drawer? (2011
unintentional, or under a mistake or without the authority Bar)
of the holder. But where an instrument or any signature
appears to have been cancelled, the burden of proof lies A: No, he cannot recover from either of them.
on the party alleging that the cancellation was made
unintentionally, or under a mistake or without authority There is no material alteration when the serial
(NIL, Sec. 123). number of a check had been altered
MATERIAL ALTERATION An alteration is said to be material if it alters the effect of

the instrument. It means an unauthorized change in an
CONCEPT instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words
Material alteration or numbers or other change to an incomplete instrument
relating to the obligation of a party. The alteration of the
It is any change in the instrument which affects or changes serial number of a check did not change the relations
the liability of the parties in any way. between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check is
Instances that constitute material alteration not a material alteration (International Corporate Bank v.
CA, G.R. No. 141968, February 12, 2001).
Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest

MERCANTILE LAW
Q: A material alteration of an instrument without the a. It may be acceptance as to an existing bill; or
assent of all parties liable thereon results in its b. it may be acceptance as to a non-existing bill.
avoidance, except against: (2011 Bar)
If the bill is non-existent, the acceptance on a separate
A: A party who has made, authorized or assented to the paper must comply with following requirements:
alteration and subsequent indorser.
1. The contemplated drawee shall describe the bill to be
ACCEPTANCE drawn and promise to accept it;
DEFINITION 2. Bill shall be drawn within a reasonable time after such

promise is written; and
Acceptance of a bill
3. The holder shall take the bill upon the credit of the
It is a signification by the drawee of his assent to the order promise.
of the drawer (NIL, Sec. 132).
Kinds of acceptance
Requisites for acceptance
1. General Acceptance -It assents without qualification to
1. In writing, except constructive acceptance and to a the order of the drawer (NIL, Sec. 139).
foreign bill payable in another state (unless the other state
requires for written acceptance); 2. Qualified Acceptance - An acceptance which in express
terms varies the effect of the bill as drawn (ibid.).
2. Signed by the drawee (without it, he is not liable);
NOTE: A holder may refuse to accept a qualified
3. Must express a promise to pay money (not goods); acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by non-
4. Delivered to the holder (before delivery or notification, acceptance (NIL, Sec. 142).
acceptor may revoke or cancel his acceptance).
Effect of acceptance Kinds of qualified acceptance
Upon acceptance, the bill, in effect becomes a note. The 1. Conditional – makes payment by the acceptor dependent
drawee who thereby becomes an acceptor assumes the on the fulfillment of a condition therein stated.
liability of the maker (who has primary liability) and the
drawer, that of the first indorser. 2. Partial – an acceptance to pay part only of the amount
for which the bill is drawn.
Q: A bill of exchange states on its face: “One (1) month
after sight, pay to the order of Mr. R the amount of 3. Local – an acceptance to pay only at a particular place.
Php50,000.00, chargeable to the account of Mr. S.
Signed, Mr. T.” Mr. S, the drawee, accepted the bill 4. Qualified as to time– a bill is accepted to be paid on or
upon presentment by writing on it the words “I shall after a specified date.
pay Php30,000.00 three (3) months after sight.” May
he accept under such terms, which varies the 5. As to drawee - acceptance of some one or more of the
command in the bill of exchange? (2011 Bar) drawees but not of all (NIL, Sec. 141).
A: Yes, since a drawee is allowed to effect a qualified Other kinds of acceptance

acceptance in which case he shall be liable according to
the tenor of his acceptance. 1. Constructive/implied (NIL, Sec. 137).
a. Drawee to whom the bill is delivered for acceptance
Q: X, drawee of a bill of exchange, wrote the words: destroys it; or
“Accepted, with promise to make payment within two b. Drawee refuses, within 24 hours after such delivery, or
days. Signed, X.” The drawer questioned the within such time as is given him, to return the bill
acceptance as invalid. Is the acceptance valid? accepted or non-accepted
A: Yes, because the acceptance is in reality a clear assent 2. Extrinsic– the acceptance is written on a paper other
to the order of the drawer to pay. Qualified acceptance as than the bill itself. To be binding upon the acceptor:
to time is allowed (NIL, Sec. 141 [d]). a. Acceptance must be shown to the person to whom the
instrument is negotiated; and
MANNER b. Such person must take the bill for value on the faith of
such acceptance (NIL, Sec. 134).
Manner of making an acceptance
3. Virtual
Acceptance may be made a. Unconditional promise in writing to accept a bill
1. On the bill itself, b. Promise made before it is drawn
2. On a separate paper; and if on a separate paper

c. Any person who, upon faith thereof, receives the bill for PRESENTMENT FOR ACCEPTANCE
value (NIL, Sec. 135).
Presentment for acceptance
TIME FOR ACCEPTANCE
It is the production or exhibition of a bill of exchange to
The drawer has 24 hours after presentment to decide the drawee for his acceptance or payment (also includes
whether or not he will accept the bill. The acceptance, if presentment for payment).
given, dates as of the day of presentation (NIL, Sec. 136).
Necessity of presentment for acceptance
NOTE: Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is presented GR: It is not necessary to render any party to the bill liable
for payment, not acceptance. (NIL, Sec. 143, par. 2).
RULES GOVERNING ACCEPTANCE XPNs:
Effect of accepting an instrument with a qualified 1. Where bill is payable after sight, or when it is necessary
acceptance in order to fix the maturity of the instrument;
GR: When the holder takes a qualified acceptance the 2. When bill expressly stipulates that it shall be presented
drawer and indorsers are discharged from liability on the for acceptance; or
bill.
3. Where the bill is drawn payable elsewhere than at the
NOTE: The holder may refuse to take a qualified residence or place of business of the drawee (NIL, Sec. 143,
acceptance and if he does not obtain an unqualified par. 1).
acceptance, he may treat the bill as dishonored by non-
acceptance (Sundiang Sr. & Aquino, 2014). NOTE: The holder must either present it for acceptance or
negotiate it within a reasonable time, otherwise, the
XPNs: drawer and all indorsers are discharged (NIL, Sec. 144).
1. When they have expressly or impliedly authorized the TIME/PLACE/MANNER OF PRESENTMENT

holder to take a qualified acceptance; or
Proper presentment for acceptance
2. Subsequently assent thereto;
It must be made:
3. Implied assent (when they did not express their dissent 1. By or on behalf of the holder
to the holder within a reasonable time when they received 2. At a reasonable hour on a business day
a notice of qualified acceptance) (NIL, Sec. 142). 3. Before the bill is overdue; and
4. To the drawee or some person authorized to accept or
NOTE: When the drawer or indorser receives notice of a refuse to accept on his behalf (NIL, Sec. 145).
qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to WHEN PRESENTMENT MUST BE
have assented thereto (Sundiang Sr. & Aquino, 2014). MADE TO
Bill addressed to 2 All of them unless one has
Acceptance of an incomplete bill
or more drawees authority to accept or refuse
who are not acceptance for all, in which
Acceptance may be made before the bill has been signed
partners case presentment may be
by the drawer or while otherwise incomplete, or after it is
made to him only (NIL, Sec.
overdue, or even after it has been dishonored by non-
145, [a]).
acceptance or non-payment (NIL, Sec. 138).
Drawee is dead Drawee's personal represen-
Effect of the certification by the drawee bank
tative (NIL, Sec. 145, [b]).
Certification implies that the check is drawn upon NOTE: Presentment is merely
sufficient funds in the hands of the drawee, that they have
permissive since it is excused
been set apart for its satisfaction and that they shall be so by (NIL, Sec.148 [a]).
applied whenever the check is presented for payment.
Where a check is certified by the bank on which it is
Drawee is To drawee or his trustee/
drawn, the certification is equivalent to acceptance (NIL, adjudged a assignee (NIL, Sec 145, [c]).
Secs. 187, 189; New Pacific Timber v. Seneris, G.R. No. L- bankrupt or
41764, December. 19, 1980).
insolvent or has
made an
assignment for the
benefit of creditors

MERCANTILE LAW
EFFECT OF FAILURE TO MAKE PRESENTMENT
4. In case of non-payment, holder must give the
Effect of failure to make presentment for payment of corresponding notice of dishonor; otherwise, secondary
a check within a reasonable time parties are discharged.
Failure to make such presentment will discharge the Rights of a holder when bill is not accepted
drawer from liability or to the extent of the loss caused by
the delay (NIL, Sec. 186; Republic of the Philippines vs. PNB, When a bill is dishonored by non-acceptance, an
G.R. No. L-16106, December 30, 1961). immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment for
Instance when delay in presentment may be excused payment is necessary (NIL, Sec. 151).
Where the holder of a bill drawn payable elsewhere than Acceptance for honor
at the place of business or the residence of the drawee has
no time with the exercise of reasonable diligence, to It is an undertaking by a stranger to a bill after protest for
present the bill for acceptance before presenting it for the benefit of any party liable thereon or for the honor of
payment on the day that it falls due (NIL, Sec. 147). the person for whose account the bill is drawn which
acceptance inures to the benefit of all parties subsequent
Instances when presentment is excused to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due if the
1. Where the drawee is dead, or has absconded, or is a original drawee does not pay it (NIL, Sec. 161).
fictitious person not having capacity to contract by bill;
Requisites of acceptance for honor (WIS)
2. Where, after exercise of reasonable diligence,
presentment cannot be made; or 1. Must be in Writing
2. Must Indicate that it is an acceptance for honor;
3. Where, although presentment has been irregular, 3. Must be Signed by the acceptor for honor (NIL, Sec. 162)
acceptance has been refused on some other ground (NIL,
Sec. 148). PROMISSORY NOTES
DISHONOR BY NON-ACCEPTENCE Promissory note
Instances when a bill is dishonored by non- An unconditional promise in writing made by one person
acceptance to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum
1. When it is duly presented for acceptance and such an certain in money to order or to bearer (NIL, Sec. 184).
acceptance is refused or cannot be obtained; or
Special types of promissory notes
2. When presentment for acceptance is excused, and the
bill is not accepted (NIL, Sec. 149). 1. Certificate of deposit – a written acknowledgment by a
bank of the receipt of money on deposit on which the bank
NOTE: It is not sufficient that presentment for acceptance promises to pay to the depositor or to him or his order or
is excused, it is also necessary that the bill remains not to some other person or to him or his order, or to a
accepted. specified person or bearer, on demand or on a fixed date,
often with interest.
Duty of the holder where bill is not accepted
2. Bonds – an evidence of indebtedness issued by a public
If within 24 hours after due presentment, the bill is not or private corporation which constitutes a promise, under
accepted, the person presenting it must treat the bill as seal, to pay money. It runs for a longer period of time than
dishonored by non-acceptance otherwise he will lose the a PN.
right of recourse against the drawer and indorsers (NIL, 3. Registered Bond – one payable only to the person whose
Sec. 150). name appears on the face of the certificate.
Rules when a bill is dishonored by non-acceptance 4. Coupon Bond – one to which are attached coupons
which entitle the holder to interest when due.
1. Right of recourse against all secondary party accrues to
the holder. 5. Bank Note – instrument issued by a bank for circulation
as money payable to bearer on demand.
2. No presentment for payment is necessary since dishonor
of the instrument by non-payment is to be expected. 6. Due Bill - PN which shows on its face that one person
acknowledges his indebtedness to another. The word
3. If the instrument is accepted after it has been dishonored “due” is commonly used.
by non-acceptance, presentment for payment is
necessary upon maturity.

7. Mortgage Note – an instrument secured by either a real Instances when a bill of exchange may be treated as a
(REM) or personal property (Chattel). promissory note
8. Title-Retaining Note – an instrument used to secure the 1. The drawer and the drawee are the same person;
purchase price of goods. It ordinarily provides that title to 2. The drawee is a fictitious person;
the goods shall remain in payee’s name until the note is 3. The drawee has no capacity to contract;
paid in full. 4. The instrument is so ambiguous that there is doubt
whether it is a bill or a note (Sundiang Sr. & Aquino, 2014,
9. Collateral Note – it is used when the maker pledges citing NIL, Secs. 17[e] and 130).
securities to the payee to secure the payment of the
amount of the note. CHECKS
10. Judgment Note – this is a note to which a power of DEFINITION

attorney is added enabling the payee to take judgment (1991, 1994-1996, 2002, 2004, 2005 Bar)
against the maker without the formality of a trial if the
note is not paid on its due date (De Leon, supra). It is a bill of exchange drawn on a bank and payable on
demand (NIL, Sec. 185).
Q: Prudential Bank received from the CIR a Final
Assessment Notice and a Demand Letter for NOTE: A check must be presented for payment within a
deficiency Documentary Stamp Tax for the taxable reasonable time after its issue or the drawer will be
year 1995 on its Repurchase Agreement with the BSP, discharged from liability thereon to the extent of the loss
Purchase of Treasury Bills from the BSP, and on its caused by the delay.
SAP product. Prudential Bank protested the
assessment on the ground that the documents subject Essential characteristics of checks
matter of the assessment are not subject to DST. It
contends that its SAP is not subject to DST because it There are 2 essential distinct characteristics of checks:
is not included in the list of documents under Section 1. They are drawn on a bank; and
180 of the old NIRC, as amended. Prudential Bank 2. Payable instantly on demand.
insists that unlike a time deposit, its SAP is evidenced
by a passbook and not by a deposit certificate. In Q: Tan maintained a current and savings account with
addition, its SAP is payable on demand and not on a PCIB, now EPCIB, with a balance of P35,147.59. He
fixed determinable future. To support its position, issued a post-dated PCIB check in favor of SLI in the
petitioner relies on the legislative intent of the law amount of P34,588.72. After clearing, the amount of
prior to Republic Act (RA) No. 9243 and the historical the check was immediately debited by EPCIB from
background of the taxability of certificates of deposit. Tan’s account thereby leaving him with a balance of
only P558.87. He thereafter issued three (3) checks
Prudential Bank further contends that even assuming payable to ASELCO, ANECO, and the other payable in
that its SAP is subject to DST, the CTA En Banc cash. When the latter were presented for payment,
nonetheless erred in denying Prudential Bank’s the three (3) checks were dishonored for being drawn
withdrawal of its petition considering that it has paid against insufficient funds. As a result, the electric
under the IVAP, which it claims is 100% of the basic power supply for the two mini-sawmills owned and
tax of the original assessment BIR. Prudential Bank operated by Tan, was cut off and it was restored only
insists that the payment it made should be deemed after sometime. After trial, the RTC ruled in favor of
substantial compliance considering the refusal of the EPCIB and dismissed the complaint. On appeal the CA
CIR to issue the letter of termination and authority to reversed the decision of the RTC. Is EPCIB liable due
cancel assessment. Is Prudential Bank’s contention to its premature debiting of the post-dated check,
tenable? thereby affecting Tan’s business operations?
A: No. A certificate of deposit is defined as a written A: Yes. The premature debiting of the postdated check by
acknowledgment by a bank or banker of the receipt of a the bank which resulted to insufficiency of funds that
sum of money on deposit which the bank or banker brought about the dishonor of two checks causing the
promises to pay to the depositor, to the order of the electric supply to be cut-off and affected business
depositor, or to some other person or his order, whereby operations indicates the negligence of the bank. For its
the relation of debtor and creditor between the bank and failure to exercise extra-ordinary diligence, it should be
the depositor is created. A document to be considered a made liable in the case (Equitable PCI Bank v. Arcelito B.
certificate of deposit need not be in a specific form. Thus, Tan, G.R. No. 165339, August 23, 2010, in Divina, 2014).
a passbook issued by a bank qualifies as a certificate of
deposit drawing interest because it is considered a
written acknowledgement by a bank that it has accepted
a deposit of a sum of money from a depositor. Thus, it is
subject to documentary stamp tax (Prudential Bank v.
Commissioner of Internal Revenue, G.R. No. 180390, July 27,
2011, in Divina, 2014).

MERCANTILE LAW
Check v. Bill of exchange the issuance of a check by itself is not an assignment of
funds by the drawee. If a bank pays a check after it has
BASIS CHECKS BOE been notified to stop payment, it pays in its own
Drawee Always drawn on a May or may not be responsibility and will not be permitted to charge the
bank or banker drawn on a bank account. The drawer may countermand payment if he has
against a previous and need not be a valid defense against the holder of the check. Thus,
deposit of funds drawn against a countermanding of a check is proper where the payee
deposit failed to deliver the goods that he was supposed to deliver
Payability Always payable on Either payable on (Sundian Sr. & Aquino, 2014, citing Bataan Cigar and
demand demand or at a fixed Cigarette Factory v. CA, GR. No. 93048, March 3, 1994).
or determinable
future time (NIL, KINDS
Sec.4)
Special types of checks
Function Ordinarily intended Intended for
for immediate circulation as 1. Cashier’s Check – a BOE drawn by the bank upon itself
payment instrument of credit
and is accepted at its issuance. It is usually signed by the
Present- Must be presented Must be presented cashier of the bank.
mentfor for payment within for payment within
Payment a reasonable time a reasonable time 2. Manager’s Check – a BOE drawn by the bank upon itself
after its issue(NIL, after its last and is accepted at its issuance and signed by a manager on
Sec.186) negotiation behalf of a bank.
(NIL, Sec. 171)
Discharge When a check is They remain liable 3. Certified Check – Drawn by a depositor upon funds to
of accepted or despite acceptance his credit in a bank which an officer of a bank certifies will
Liability certified, the drawer (NIL, Sec. 84) be paid on presentation.
& indorsers are
discharged from 4. Crossed Check – Done by writing 2 parallel lines on the
liability thereon left top portion of the check. The marking signifies that
(NIL, Sec. 188) the bank should pay only with the intervention of the
company only.
Effect of Death of the drawer Death of the drawer
the Death of a check with the of an ordinary bill
of the knowledge of the does not revoke the 5. Memorandum Check – A check with “Memorandum”
written on its face. The writing signifies that the drawer
Drawer bank revokes the authority of the
engages to pay the bona fide holder absolutely, without
authority of the drawee to pay.
bank to pay. any condition concerning its presentment.
Present- Need not be Must be presented 6. Traveler’s Checks – Instruments purchased from banks
ment for presented for for acceptance in or express companies which can be used like cash upon
Accep- acceptance (NIL, certain cases (NIL, the second signature by the purchaser (De Leon, supra).
tance Sec. 185) Sec. 143)
Q: What is a crossed check? What are the effects of
crossing a check? Explain. (1991, 1994-1996, 2002,
Q: A check was dishonored due to material alteration.
2004, 2005 Bar)
The creditor then filed an action against drawee bank
for the amount. Will the action prosper?
A: A crossed check is a check with two (2) parallel lines,
written diagonally on the upper right corner thereof. It is
A: No. If a bank refuses to pay a check (notwithstanding
a warning to the drawee bank that payment must be made
the sufficiency of funds), the payee-holder cannot, as
to the right party; otherwise the bank has no authority to
provided under Sections 185 and 189 of the NIL, sue the
use the drawer's funds deposited with the bank.
bank. The payee should instead sue the drawer who might
in turn sue the bank. This is so because no privity of
To be assured that it will avoid any mistake in paying to
contract exists between the drawee-bank and the payee
the wrong party, banks adopted the policy that crossed
(Villanueva v. Nite, G.R. No. 148211, July 25, 2006).
checks must be deposited in the payee's account. When
withdrawal is made, the banks can be sure that they are
NOTE: A check of itself does not operate as an assignment
paying to the right party. The crossing becomes a warning
of any part of the funds to the credit of the drawer with
also to whoever deals with the said instrument to inquire
the bank, and the bank is not liable to the holder, unless
as to the purpose of its issuance. Otherwise, if something
and until it accepts or certifies the check (NIL, Sec. 189).
wrong happens to the payment thereof, that person
cannot claim to be a holder in due course. Hence, he is
Stopping payment
subject to the personal defense on the part of the drawer
that there is breach of trust committed by the payee in not
The drawer has the right to order the drawee to stop
complying with the drawer's instruction.
payment of a check and this right flows from the rule that

Hence, the effects of crossing a check are: Consequently, Po Press cannot be made liable to pay the
face value of the check.
1. That the check may not be encashed but only deposited
in the bank; Purpose of crossing a check
2. That the check may be negotiated only once- to one who The purpose is to insure payment to the payee. It can only
has an account with a bank; be deposited but may not be converted into cash by the
drawer. Crossing a check does not destroy its
3. That the act of crossing the check serves as a warning negotiability but the check may be negotiated only once –
to the holder that the check has been issued for definite to one who has an account with the bank (De Ocampo v.
purpose so that he must inquire if he has received the Gatchalian, supra).
check pursuant to the purpose. Otherwise, he is not an
HIDC (State Investment House v. IAC, G.R. No. 72764, July Q: PCIB filed an action against Balmaceda, it alleging
13, 1989). that between 1991 and 1993, by taking advantage of
his position as branch manager, he fraudulently
Q: Po Press issued in favor of Jose a postdated crossed obtained and encashed 31 Managers checks in the
check, in payment of newsprint which Jose promised P10,782,150.00. PCIB moved to be allowed to file an
to deliver. Jose sold and negotiated the check to Excel amended complaint to implead Rolando Ramos as
Inc. at a discount. Excel did not ask Jose the purpose one of the recipients of a portion of the proceeds from
of crossing the check. Since Jose failed to deliver the Balmacedas alleged fraud. Since Balmaceda did not
newsprint, Po ordered the drawee bank to stop file an Answer, he was declared in default. On the
payment on the check. Efforts of Excel to collect from other hand, Ramos filed an Answer denying any
Po failed. Excel wants to know from you as counsel: knowledge of Balmacedas scheme. The RTC issued a
decision in favor of PCIB. On appeal, the CA dismissed
a. What are the effects of crossing a check? the complaint against Ramos. According to the CA, the
b. Whether as second indorser and holder of the mere fact that Balmaceda made Ramos the payee in
crossed check, is it a holder in due course? some of the Managers checks does not suffice to prove
c. Whether Po’s defense of lack of consideration as that Ramos was complicit in Balmacedas fraudulent
against Jose is also available as against Excel? (1994, scheme. Is PCIB itself at fault as employer?
1995, 2005 Bar)
A: Yes. While its manager forged the signature of the
A: authorized signatories of clients in the application for
a. The effects of crossing a check are: manager’s checks and forged the signatures of the payees
thereof, the drawee bank also failed to exercise the
1. The check may not be encashed but only deposited
highest degree of diligence required of banks in the case
in the bank;
at bar. It allowed its manager to encash the Manager’s
checks that were plainly crossed checks. A crossed check
2. The check may be negotiated only once to one who
is one where two parallel lines are drawn across its face
has an account with a bank; and
or across its corner. Based on jurisprudence, the crossing
of a check has the following effects: (a) the check may not
3. The act of crossing the check serves as a warning to
be encashed but only deposited in the bank; (b) the check
the holder that the check has been issued for a definite
may be negotiated only once — to the one who has an
purpose so that he must inquire if he has received the
account with the bank; and (c) the act of crossing the
check pursuant to that purpose, otherwise he is not a
check serves as a warning to the holder that the check has
holder in due course.
been issued for a definite purpose and he must inquire if
he received the check pursuant to this purpose;
b. Excel Inc. is not a holder in due course. The act of
otherwise, he is not a holder in due course. In other words,
crossing the check imposes upon the holder thereof the
the crossing of a check is a warning that the check should
duty to ascertain the indorser’s, title to the check or the
be deposited only in the account of the payee. When a
nature of his possession or the purpose for which it was
check is crossed, it is the duty of the collecting bank to
issued. Excel is guilty of gross negligence amounting to
ascertain that the check is only deposited to the payee’s
legal absence of good faith for its failure to inquire from
account. In complete dis-regard of this duty, PCIB’s
Jose the purpose for which the three checks were crossed
systems allowed Balmaceda to encash 26 Manager’s
despite the warning of the crossing, hence, it is not
checks which were all crossed checks, or checks payable
deemed a holder in due course.
to the “payee’s account only.” (PCIB v. Balmaceda and
Ramos, G.R. No. 158143 September 21, 2011, in DIvina,
c. Yes, the defense of lack of consideration as against Jose
2014).
is also available as against Excel. For not being a holder
in due course, Excel is subject to personal defenses as if
Rule on crossed check with notataion “Account Payee
the check were non-negotiable, such as lack of
Only”
consideration between Po Press and Jose. In this case,
Jose’s failure to deliver the newsprint resulted in the
A crossed check with the notation account payee only can
absence of consideration for the issuance of the check.
only be deposited in the named payees account. It is gross
negligence for a bank to ignore this rule solely on the basis

MERCANTILE LAW
of a third partys’ oral representations of having a good If Fund House files a complaint against Pentium and
title thereto. CD Bytes for the payment of the dishonored check,
will the complaint prosper? Explain (1996 Bar)
The fact that a person, other than the named payee of the
crossed check, was presenting it for deposit should have A: The case will prosper as against the CD Bytes, the
put the bank on guard. It should have verified if the payee immediate indorser but not as against Pentium Company.
authorized the holder to present the same in its behalf or The effect of crossing a check relates to the mode of its
indorsed it to him. The bank’s reliance on the holder’s presentment for payment which must be made by the
assurance that he had good title to the three checks holder, or by some person authorized to receive payment
constitutes gross negligence even though the holder was on his behalf. Thus, in the absence of due presentment, as
related to the majority stockholder of the payee. While the in this case where the check was not presented by the
check was not delivered to the payee, the suite may still payee (CD Bytes) or the proper party authorized to make
propser because the payee did not assert a right based on presentment of the checks, the drawer (Pentium
the undelivered check but on quasi-delict (Equitable Company) cannot be held liable. However, Fund House
Banking Corporation v. Special Steel Products, G.R. No. may recover from the immediate indorser, if the latter has
175350, June 13, 2012, in Divina, 2014). no valid excuse for refusing payment.
Q: Distinguish clearly crossed checks from cancelled Stale check

checks (2004 Bar)
A check which has not been presented for payment within
A: A crossed check is one with two parallel lines drawn a reasonable time after its issue. It is valueless and thus,
diagonally on the left portion of the check. On the other should not be paid. A check becomes stale 6 months from
hand, a cancelled check is one marked or stamped "paid" date of issue.
and/or "cancelled" by or on behalf of a drawee bank to
indicate payment thereof. When drawer of check discharged from liability
Q: On Oct 12, 1993, Chelsea Straights, a corporation 1. The check is not presented within a reasonable time
engaged in the manufacture of cigarettes, ordered after its issue;
from Moises 2,000 bales of tobacco. Chelsea issued to 2. The drawer suffers loss; and
Moises two crossed checks postdated 15 Mar 94 and 3. The loss suffered by the drawer is attributable to the
15 Apr 94 in full payment therefor. On 19 Jan 94 delay (De Leon, 2010).
Moises sold to Dragon Investment House at a discount
the two checks drawn by Chelsea in his favor. Memorandum check
Moises failed to deliver the bales of tobacco as agreed
despite Chelsea’s demand. Consequently, on 1 Mar 94 A memorandum check is an evidence of debt against the
Chelsea issued a “stop payment” order on the 2 checks drawer and although may not be intended to be
issued to Moises. Dragon, claiming to be a holder in presented, has the same effect as an ordinary check and if
due course, filed a complaint for collection against passed on to a third person, will be valid in his hands like
Chelsea for the value of the checks. Rule on the any other check (People v. Nitafan, G.R. No. 75954, October
complaint of Dragon. Give your legal basis. (1995 Bar) 22, 1992).
A: The complaint should be dismissed. The act of crossing PRESENTMENT FOR PAYMENT
the check imposes upon the holder thereof the duty to
ascertain the indorser’s, in this case Moises’ title to the TIME
check or the nature of his possession. Failing in this
respect, Dragon cannot be deemed a holder in due course A check must be presented for payment within a
and as such, Moises is subject to personal defenses as if reasonable time after its issue (NIL, Sec. 186).
the check were non-negotiable, such as lack of
consideration between Chelsea and Moises for Moises’ EFFECTS OF DELAY
failure to deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea Effects of delay
cannot thus be made liable to pay the face value of the
check and this constitutes a defense not only against 1. The drawer will be discharged from liability thereon to
Moises but even against Dragon who is not a holder in due the extent of the loss caused by the delay. (ibid.)
course. 2. The indorser shall be discharged from liability (PNB vs.
Seeto, G.R. No. L-4388, August 13, 1952).
Q: On March 1, 1996, Pentium Company ordered a
computer from CD Bytes, and issued a crossed check NOTE: PP is not dispensed with by Sec. 186 of the NIL.
in the amount of P30,000 post-dated Mar 31, 1996. Hence, if there is no PP, the drawer cannot be held
Upon receipt of the check, CD Bytes discounted the irrespective of the loss or injury suffered by the payee (Pio
check with Fund House. On April 1, 1996, Pentium Barretto Realty Corp. v. CA, G.R. No. 132362, June 28, 2001).
stopped payment of the check for failure of CD Bytes
to deliver the computer. Thus, when Fund House
deposited the check, the drawee bank dishonored it.

INSURANCE LAW
Q: When will the delivery of a check produce the effect
of payment even if the same had not been encashed? INSURANCE LAW
A: If the debtor was prejudiced by the creditor's Laws governing contracts of insurance in the
unreasonable delay in presentment. Acceptance of a Philippines
check implies an undertaking of due diligence in
presenting it for payment. If no such presentment was 1. R.A. 10607
made, the drawer cannot be held liable irrespective of loss 2. New Civil Code
or injury sustained by the payee. Payment will be deemed 3. Special Laws
effected and the obligation for which the check was given
as conditional payment will be discharged (Pio Barretto CONCEPT OF INSURANCE
Realty Corp. v. CA, supra).
Contract of insurance
Q: To ensure payment and as a business practice, SMC
required Puzon to issue postdated checks equivalent It is an agreement whereby one undertakes for a
to the value of the products purchased on credit consideration to indemnify another against the loss,
before the same were released to him. Said checks damage or liability arising from an unknown or
were returned to Puzon when the transactions contingent event (IC, Sec. 2[a]).
covered by these checks were paid or settled in full.
Puzon purchased products on credit and issued to NOTE: A contract of insurance, to be binding from the
SMC, two (2) BPI checks to cover the said transaction. date of application, must have been a completed contract
During on of his visits to the SMC Paranaque Sales (Perez vs. CA, GR No. 112329, January 28, 2000). Thus, it
Office, he allegedly requested to see BPI Check No. must have all the essential elements of a valid contract as
17657. However, when he got hold of BPI Check No. enumerated in Art. 1318 of the New Civil Code:
27903 which was attached to a bond paper together
with BPI Check No. 17657, he allegedly immediately 1. Subject matter in which the insured has an insurable
left the office with his accountant, bringing the checks interest;
with them. SMC sent a letter to Puzon, demanding the 2. Consideration, which is the premium paid by the
return of the said checks. Puzon ignored the demand insured, for the insurer’s promise to indemnify the former
hence SMC filed a complaint against him for theft. The upon the happening of the event or peril insured against;
investigating prosecutor recommended the dismissal
of the case for lack of evidence. On appeal, the CA 3. Meeting of minds of the parties.
agreed with the prosecutor. Were the prosecutor and
the DOJ correct in finding no probable cause for theft? “Doing an insurance business” or “transacting an
insurance business”
A: Yes. If the subject check was given by Puzon to SMC in
payment of the obligation, the purpose of giving effect to The term “doing an insurance business” or “transacting an
the instrument is evident thus title to or ownership of the insurance business” means: (ISRA)
check was transferred upon delivery. However, if the 1. Making or proposing to make, as Insurer, any insurance
check was not given as payment, there being no intent to contract;
give effect to the instrument, then ownership of the check 2. Making or proposing to make, as Surety, any contract of
was not transferred to SMC. suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
The evidence of SMC failed to establish that the check was 3. Doing any kind of business, including a reinsurance
given in payment of the obligation of Puzon. There was no business, specifically Recognized as constituting the
provisional receipt or official receipt issued for the doing of an insurance business.
amount of the check. What was issued was a receipt for 4. Doing or proposing to do any business in substance
the document, a POSTDATED CHECK SLIP. equivalent to Any of the foregoing in a manner designed
to evade the provisions of the Insurance Code (Sec. 2[b],
Furthermore, SMC’s demand letter sent to Puzon states: ibid).
“As per company policies on receivables, all issuances are
to be covered by post-dated checks. However, you have NOTE: In the application of the provisions of the
deviated from this policy by forcibly taking away the Insurance Code, the fact that no profit is derived from the
check you have issued to us to cover the December making of the insurance contracts, agreements or
issuance. Notably, the term payment was not used instead transactions or that no separate or direct consideration is
the terms covered and cover were used” (San Miguel received therefor, shall NOT be deemed conclusive to
Corporation v. Bartolome Puzon, Jr., G.R. No. 167567, show that the making thereof does not constitute the
September 22, 2010). doing or transacting of an insurance business (Ibid).
Since the subject CBA provision is an insurance contract,

the rights and obligations of the parties must be
determined in accordance with the general principles of
insurance law. (Mitsubishi Motors Philippines Salaried

MERCANTILE LAW
Employees Union vs. Mitsubishi Motors Corporation, G.R. Parties to the contract of insurance
No. 175773, June 17, 2013, in Divina 2014).
1. Insurer – party who assumes or accepts the risk of loss
Insurance as an Uberrimae Fides contract (1993 Bar) and undertakes for a consideration to indemnify the
insured on the happening of a specified contingency or
The contract of insurance is one of perfect good faith event.
(uberrimae fidei) not for the insured alone, but equally so
for the insurer; in fact, it is more so for the latter, since its 2. Insured – person in whose favor the contract is
dominant bargaining position carries with it stricter operative and is indemnified.
responsibility (Qua Chee Gan vs. Law Union and Rock
Insurance, Co. Ltd., GR No. L-4611, December 17, 1955).It NOTE: The insured is not always the person to whom the
requires the parties to the contract to communicate that proceeds are paid.
which a party knows and ought to communicate, that is,
the duty to disclose in good faith all facts material to the 3. Assured/Beneficiary- a person designated by the terms
contract. This doctrine is essential on account of the fact of the policy to receive the proceeds of the insurance. He
that the full circumstances of the subject matter of may be the insured or a third party in the contract for
insurance are, as a rule, known to the insured only and the whose benefit the policy is issued and to whom the loss is
insurer, in deciding whether or not to accept a risk, must payable.
rely primarily upon the information supplied to him by
the applicant (Sundiang Sr. & Aquino, 2014). Insurer
Insurance as contracts of adhesion (Fine Print Rule) Every corporation, partnership, or association duly
authorized (by the Insurance Commission) to transact
While generally, stipulations in a contract come about insurance business may be an insurer (IC, as amended by
after deliberate drafting by the parties thereto, there are RA 10607, Sec. 6).
certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation. NOTE: The term “insurer” no longer includes
Such contracts are called contracts of adhesion, because “individuals” under RA 10607. Hence, an individual
the only participation of the other party is the signing of natural person is no longer allowed to be an insurer.
his signature or his 'adhesion' thereto. Insurance However, it includes the following:
contracts fall into this category (Sweet Lines, Inc. vs. Teves,
GR No. L-37750, May 19, 1978). An illustration of a 1. “Professional reinsurer” as any person, partnership,
contract of adhesion is when the insurer used “fine print” association or corporation that transacts solely and
letters in conditions stated in a contract of insurance exclusively reinsurance business in the Philippines.
(Ibid). 2. “Mutual Insurance Companies” are also included. The
law also provides for the procedure for mutualization of
A contract of insurance is a contract of adhesion. So when domestic stock life insurance companies. A new provision
the terms of the insurance contract contain limitations on on RA 10607 is on demutualization or conversion of
liability, courts should construe them in such a way as to mutual insurance companies into stock corporations (IC,
preclude the insurer from non-compliance with his as amended by RA 10607, Sec. 280).
obligation (Alpha Insurance and Surety Co. vs. Castor, GR
No. 198174, September 2, 2013, in Divina 2014). 3. Cooperatives are now expressly included in the term
“insurer” or “insurance company.” However, the
Rules in the construction or interpretation of cooperative must:
insurance contracts a. Have a sufficient capital and asset required under
the Insurance Code and the pertinent regulations
By reason of the exclusive control of the insurance issued by the Commission (IC, as amended, Sec. 192).
company over the terms and phraseology of the contract,
the ambiguity must be held strictly against the insurer b. Have a certificate of authority to operate issued by
and liberally in favor of the insured (Qua Chee Gan v Law the Commission which should be renewed every year
Union and Rock Insurance, supra).However, if the terms, (IC, as amended, Sec. 193, Sundiang Sr. & Aquino, 2014).
which the parties themselves have used, are clear and
unambiguous, they must be taken and understood in their Q: Philippine Health Care Providers, Inc. is engaged in
plain, ordinary and popular sense (Sun Life Office, Ltd. vs. operating a prepaid group practice health care
CA, G.R. No. 92383, July 17, 1992). delivery system or a health maintenance organization
(HMO) to take care of the sick and disabled persons
The phraseology used in medical or hospital service enrolled in the health care plan. Individuals enrolled
contracts, such as “standard charges”, must be liberally in its health care programs pay an annual
construed in favor of the subscriber, and if doubtful or membership fee and are entitled to various medical
reasonably susceptible of two interpretations, the services provided by its duly licensed physicians,
construction conferring coverage is to be adopted, and specialists and other professional technical staff
exclusionary clauses of doubtful import should be strictly participating in the group practice health delivery
construed against the provider (Fortune Medicare Inc. vs. system at a hospital or clinic operated or accredited
Amorin, G.R. No. 195872, March 12, 2014, in Divina 2014).

INSURANCE LAW
by it.Is Philippine Health Care Providers, Inc. a health Event or peril insured against
maintenance organization or an insurance company?
It is any contingent or unknown event, whether past or
A: HMOs are not insurance business. One test that they future, which may damnify a person having an insurable
have applied is whether the assumption of risk and interest, or create a liability against him subject to the
indemnification of loss (which are elements of an provisions of Chapter I of the Insurance Code (IC, Sec. 3).
insurance business) are the principal object and purpose
of the organization or whether they are merely incidental Consent of spouse not necessary
to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely The consent of the spouse is not necessary for the validity
incidental and service is the principal purpose, then the of an insurance policy taken out by a married person on
business is not insurance. his or her life or that of his or her children (IC, Sec. 3).
Philippine Health Care Providers appears to provide NOTE: Prior to the effectivity of the Insurance Code of
insurance-type benefits to its members (with respect to 2013, the term used was “husband” instead of “spouse”
its curative medical services), but these are incidental to (IC, Sec. 3).
the principal activity of providing them medical care. The
"insurance-like" aspect of Philippine Health Care Effect of death of policy’s original owner
Providers’ business is miniscule compared to its
noninsurance activities. Therefore, since it substantially All rights, title and interest in the policy of insurance
provides health care services rather than insurance taken out by an original owner on the life or health of the
services, it cannot be considered as being in the insurance person insured shall automatically vest in the latter upon
business (Philippine Health Care Providers, Inc., v. the death of the original owner, unless otherwise
Commissioner of Internal Revenue, G.R. No. 167330, provided for in the policy (IC, Sec. 3).
September 18, 2009).
NOTE: Prior to the effectivity of the Insurance Code of
Persons who may be insured (2000 Bar) 2013, the term used was “minor” instead of “the person
insured.” A minor cannot enter into any contract of
Anyone except a public enemy may be insured (IC, Sec. 7). insurance with any insurance company.
NOTE: A public enemy is a nation at war with the Games of chances cannot be insured
Philippines and every citizen or subject of such nation. It
does not include mobs, thieves or robbers (Bouvier’s Law An insurance for or against the drawing of any lottery, or
Dictionary). for or against any chance or ticket in a lottery drawing a
prize is not authorized (IC, Sec. 4).
NOTE: If majority of the stockholders of the respondent
corporation were German subjects who became an enemy ELEMENTS OF CONTRACT OF INSURANCE
corporation upon the outbreak of the war between the (SPEAR)
United States and Germany, it stands to reason that an
insurance policy ceases to be allowable as soon as an 1. Scheme to distribute losses – Such assumption of risk is
insured becomes a public enemy. The respondent having part of a general scheme to distribute actual losses
become an enemy corporation on December 10, 1941, the among a large group or substantial number of persons
insurance policy issued in its favor on October 1, 1941, by bearing a similar risk.
a Philippine corporation had ceased to be valid and
enforceable, and since the insured goods were burned 2. Payment of premium – As consideration for the insurer’s
after December 10, 1941, and during the war, the promise, the insured makes a ratable contribution
respondent was not entitled to any indemnity under said called “premium,” to a general insurance fund.
policy from the petitioner. However, elementary rules of
justice (in the absence of specific provision in the 3. Existence of insurable interest – The insured possesses
Insurance Law) require that the premium paid by the an interest of some kind susceptible of pecuniary
respondent for the period covered by its policy from estimation, known as “insurable interest.”
December 11, 1941, should be returned by the petitioner
(Filipinas Compaña de Seguros v. Christern, Huenfeld and NOTE: In general (except in life insurance policies), a
Co., Inc., G.R. No. L-2294 May 25, 1951). person is deemed to have an insurable interest in the
subject matter insured where he has a relation or
Subject matter of a contract of insurance connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation
Anything having an appreciable pecuniary value, which is and will suffer pecuniary loss from its destruction or
subject to loss or deterioration or of which one may be injury by the happening of the event insured against.
deprived so that his pecuniary interest is or may be
prejudiced. A life insurance policy may be taken by the creditor on the
life of the debtor to the extent of the debt owed by the
debtor.

MERCANTILE LAW
On the other hand, no contract of policy of insurance on NOTE: An aleatory contract is a contract where one or
property shall be enforceable except for the benefit of both of the parties reciprocally bind themselves to give
some person having an insurable interest in the property or do something upon the happening of an event which
insured (1994, 1997, 2000, 2001 Bar). The lessor cannot is uncertain, or which is to occur at an indeterminate
be validly a beneficiary of an insurance policy taken by a time (NCC, Art. 2010).
lessee over his merchandise, and the provision in the
lease contract for such automatic assignment is void for 4. Unilateral – It imposes legal duties only on the insurer
being contrary to law and/or public policy – the insurer who promises to indemnify in case of loss.
cannot be compelled to pay the proceeds of the policy to
a person who has no insurable interest in the property NOTE: It is executed as to the insured after the payment
insured (Cha v. Court of Appeals, G.R. No. 124520, August of the premium, and executory on the part of the insurer
18, 1997). in the sense that it is not executed until payment for a
loss.
4. Assumption of Risk – The insurer assumes that risk of
loss for a consideration. 5. Conditional – It is subject to conditions, the principal
one of which is the happening of the event insured
5. Risk of loss – The insured is subject to a risk of loss against.
through the destruction or impairment of that interest
by the happening of designated peril. 6. Contract of indemnity – Recovery is commensurate with
the amount of the loss suffered.
NOTE: The inherent uncertainty of events is normally
described in terms of risk. A contract possessing only the GR: The insurer promises to make good only the loss of
last threeelements enumerated above is a risk-shifting the insured.
device, but NOT a contract of insurance which is a risk-
distributing device (De Leon, 2006). XPN: The principle is not applicable to life and accident
insurance where the result is death because life is not
Consequently, however, the existence of insurance could capable of pecuniary estimation. The only situation where
have the perverse effect of increasing the probability of the principle of indemnity is applicable to life insurance is
loss. This is when the insured, having in mind the when the interest of a person insured is capable of exact
indemnification for loss or damage caused by the pecuniary measurement. An example would be in a case
happening of the event insured against, would have where a creditor insures the life of his debtor to the
reduced incentive to take steps to protect himself or his extent of the latter’s debt to the former.
property, subject of insurance. This phenomenon is called
moral hazard (ibid). 6. Personal – Each party having in view the character,
credit and conduct of the other.The law presumes that the
CHARACTERISTICS AND NATURE OF AN INSURANCE insurer considered the personal qualifications of the
CONTRACT insured in approving the insurance application (Sundiang
Sr. & Aquino, 2014).
Characteristics of an insurance contract
7. Property – Since insurance is a contract, it is property in
1. Consensual – It is perfected by the meeting of the minds legal contemplation.
of the parties as to the object, cause and consideration of
the insurance contract. There should be acceptance of the 9. Risk-distributing device – Insurance serves to distribute
application for insurance. the risk of economic loss among as many as possible of
those who are subject to the same kind of loss.By paying
2. Voluntary – The parties may incorporate such terms a pre-determined amount into a general fund out of which
and conditions as they may deem convenient: Provided payment will be made for an economic loss of a defined
they do not contravene any provision of law and are not type, each member contributes to a small degree toward
opposed to public policy, law, morals, good customs, or compensation for losses suffered by any member of the
public order. group. This broad sharing of economic risk is the principle
of risk-distribution (Sundiang Sr. & Aquino, 2014).
GR: The taking out of an insurance contract is not
compulsory. 10. Onerous – There is a valuable consideration called the
premium.
XPN: Liability insurance may be required by law in certain
instances (E.g. compulsory motor vehicle liability CLASSES OF INSURANCE
insurance, or employees under Labor Code, or as a
condition to granting a license to conduct a business or 1. Life insurance
calling affecting the public safety or welfare). a. Individual life
b. Group life
3. Aleatory – The liability of the insurer depends upon c. Industrial life
some contingent event. 2. Non-Life Insurance
a. Marine

INSURANCE LAW
b. Fire therewith such as insurance of aircraft, goods while being
c. Casualty packed or assembled, injury to passengers, precious
3. Contracts of suretyship or bonding (De Leon, supra). stones, jewels, jewelry whether in the course of
4. Compulsory Motor Vehicle Liability Insurance transportation or not. (Perez, 2010).
5. Microinsurance
Cargo can be the subject of marine insurance, and once it
NOTE: For purposes of determining the liability of a is entered into, the implied warranty of seaworthiness
health care provider to its members, a health care immediately attaches to whoever is insuring the cargo,
agreement is in the nature of non-life insurance, which is whether he be the ship owner or not (Roque v. IAC, GR No.
primarily a contract of indemnity (Fortune Medicare Inc. L-66935, Nov. 11, 1985).
vs. Amorin, G.R. No. 195872, March 12, 2014).
As a general rule, the marine insurance policy needs to be
MARINE INSURANCE presented in evidence before the trial court or even
belatedly before the appellate court. However, as in
Traditionally, marine insurance includes policies that general rule, there are admitted exceptions. The policy
cover risk connected with navigation to which a ship, can still be considered in court as long as it has been
cargo, freightage, profits or other insurable interest in properly identified by testimony duly recorded and has
movable property may be exposed during a certain been incorporated in the records of the case (Asian
voyage or a fixed period of time. However, under the Terminal vs. CIR, G.R. No. 171406, April 4, 2011, in Divina
present laws, it also covers inland marine insurance 2014).
(Sundiang Sr. & Aquino, 2014). Marine insurance includes:
Marine protection and indemnity insurance
a. Insurance against loss or damage to:
1. Vessels, craft, aircraft, vehicles, goods, freights, cargoes, It is an insurance against, or against legal liability of the
merchandise, effects, disbursements, profits, moneys, insured for loss, damage, or expense incident to
securities, choses in action, instruments of debts, valuable ownership, operation, chartering, maintenance, use,
papers, bottomry, and respondentia interests and all other repair, or construction of any vessel, craft or
kinds of property and interests therein, in respect to, instrumentality in use of ocean or inland waterways,
appertaining to or in connection with any and all risks or including liability of the insured for personal injury,
perils of navigation, transit or transportation, or while illness or death or for loss of or damage to the property of
being assembled, packed, crated, baled, compressed or another person (IC, Sec. 101, [b]).
similarly prepared for shipment or while awaiting
shipment, or during any delays, storage, transshipment,
or reshipment incident thereto, including war risks, Major divisions of marine insurance
marine builder’s risks, and all personal property floater
risks; 1. Ocean marine insurance –covers primarily sea perils of
ships and cargoes. Scope: (GELS)
2. Person or property in connection with or appertaining a. Goods or cargoes
to a marine, inland marine, transit or transportation b. Earnings such as freight, passage money
insurance, including liability for loss of or damage arising c. Liability incurred by reason of maritime perils
out of or in connection with the construction, repair, d. Ships or hulls
operation, maintenance or use of the subject matter of
such insurance (but not including life insurance or surety NOTE: The insurer is liable only for such losses or
bonds nor insurance against loss by reason of bodily damages proximately caused by the perils insured against
injury to any person arising out of ownership, (De Leon, supra).
maintenance, or use of automobiles);
2. Inland marine insurance – Covers primarily the land or
3. Precious stones, jewels, jewelry, precious metals, over the land transportation perils of property shipped by
whether in course of transportation or otherwise; and railroads, motor trucks, airplanes, and other means of
transportation. It also covers risks of lake, river, or the
4. Bridges, tunnels and other instrumentalities of other inland waterway transportation and other
transportation and communication (excluding buildings, waterborne perils outside of those risks that fall definitely
their furniture and furnishings, fixed contents and within the ocean marine category. Classes: (Pit-BaFF)
supplies held in storage); piers, wharves, docks and slips, a. Property In Transit – Provides protection to the
and other aids to navigation and transportation, including property frequently exposed to loss while it is being
dry docks and marine railways, dams and appurtenant transported from one location to another.
facilities for the control of waterways. b. Bailee liability – Provides protection to persons who
have temporary custody of the goods or personal
b. Marine protection and indemnity insurance (IC, Sec. property of others, such as carriers, laundrymen,
101). warehousemen, and garagekeepers.
NOTE: From the foregoing enumeration, marine c. Fixed transportation property – Covers bridges, tunnels
insurance now includes, not only risks connected with and other instrumentalities of transportation and
marine navigation, but which are otherwise connected communication, although as a matter of fact they are

MERCANTILE LAW
fixed property. They are so insured because they are held wind, water, and salt conditions. Moreover, it isa cardinal
to be an essential part of transportation system. rule in the interpretation of contracts that any ambiguity
d. Floater– Provides insurance to follow the insured therein should be construed against the
property wherever it may be located subject always to maker/issuer/drafter thereof, namely, the insurer.
the territorial limits of the contract (De Leon, 2010). Besides the precise purpose of insuring cargo during a
voyage would be rendered fruitless (Cathay Insurance Co.,
Risk insured against in marine insurance v. CA, et. al., G.R. No. L-76145, June 30, 1987).
GR: In the usual form of a marine policy, the risks insured Q: A marine insurance policy on a cargo states that
against are only “perils of the sea”. “the insurer shall be liable for losses incident to perils
of the sea.” During the voyage, seawater entered the
NOTE: The insured is bound to prove that the cause of the compartment where the cargo was stored due to the
loss is a peril of the sea. defective drainpipe of the ship. The insured filed an
action on the policy for recovery of the damages
XPN: When the insurance is an “all risk policy” and thus caused to the cargo. May the insured recover
covers even “perils of the ship”. damages? (1998 Bar)
XPN to XPN: When the risks are expressly excepted by A: No. The proximate cause of the damage to the cargo
the “all risk policy”. insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in the
NOTE: The burden rests on the insurer to prove that the drainpipe was the result of the ordinary use of the ship.
loss is caused by a risk that is excluded (Sundiang Sr. & To recover under a marine insurance policy, the
Aquino, 2014, citing Go Tiaco Y Hermanos vs. Union proximate cause of the loss or damage must be peril of the
Insurance Society of Canton, G.R. No. 13983, Sept. 1, 1919; sea.
Filipino Merchants Ins. Co. vs. CA, G.R. No. 85141, November
28, 1989; and Choa Tiek Seng vs. CA, G.R. No. 85407, March “All risks” marine insurance policy
15, 1990
GR: It is that which insures against allcauses of
“Perils of the sea or perils of navigation” (1998 Bar) conceivable loss or damage.
It includes only those casualties due to the (WiN): XPNs:

1. Unusual violence or extraordinary action of WInd and 1. As otherwise excluded in the policy; or
wave, or
2. Other extraordinary causes connected with 2. Due to fraud or intentional misconduct on the part of
Navigation (De Leon, 2010). the insured (Choa Tiek Seng v. CA, supra).
“Perils of the ship” NOTE: An “all risks” policy grants greater protection than
that afforded by the “perils clause” (De Leon, supra).The
It is a loss which, in the ordinary course of events, results insured under an "all risks insurance policy" has the initial
from the (NON): burden of proving that the cargo was in good condition
1. Natural and inevitable action of the sea; when the policy attached and that the cargo was damaged
2. Ordinary wear and tear of the ship; when unloaded from the vessel; thereafter, the burden
3. Negligent failure of the ship’s owner to provide the then shifts to the insurer to show the exception to the
vessel with proper equipment to convey the cargo coverage (Filipino Merchants Insurance Co. vs. CA, supra).
under ordinary conditions.
Extent of the insurable interest
Q: Remington Industrial Sales Corporation
(Remington) shipped on board a vessel, seamless 1. Ship owner
steel pipes from Japan to the Philippines and insured a. Over the value of the vessel, even when it has been
the shipment with Cathay Insurance Co. (Cathay). chartered by one who covenants to pay him its value in
Upon receipt of said shipment, losses and damages case of loss. In such a case, the insurer shall be liable for
were discovered. Upon demand under the insurance only that part of the loss which the insured cannot
contract, it was denied by Cathay. Remington recover from the charterer (IC, Sec. 102).
contends that the rust on the seamless still pipes is b. If hypothecated by a bottomry loan, the insurable
not an inherent vice of the shipment, thus the same is interest is only the excess of the value of the vessel over
considered as a peril of the sea. Cathay, on the other the amount secured by bottomry (IC, Sec. 103).
hand claims that the loss was occasioned by an c. He also has an insurable interest on expected
inherent defect or vice in the insured article. Is the freightage (IC, Sec. 104).
“rusting” of the seamless steel pipes considered as a
“peril of the sea”? 2. Cargo owner – over the cargo and expected profits (IC,
Sec. 107).
A: Yes. The rusting of steel pipes in the course of a voyage
is a “peril of the sea” in view of the toll onthe cargo of 3. Charterer

INSURANCE LAW
a. Over the vessel, to the extent of the amount he is liable Insurable interest in expected profits
to the shipowner, if the ship is lost or dameged during the
voyage (IC, Sec. 108). Insurable interest in expected profits exists:
b. Over his expected profits or freightage if he accepts 1. When the interest in the thing involved is based on a
cargoes from other persons for a fee (Sundiang Sr. & legal right.
Aquino, 2014). 2. When the interest in thing involved is based on valuable
c. Over his own cargo or his client’s cargo (Sundiang Sr. & consideration.
Aquino, 2014).
Special marine insurance contracts and clauses
4. Creditor/lender – over the amount of the loan.
1. All-risks policy
Loan on bottomry or respondentia
2. Barratry clause –a clause which provides that there can
be no recovery on the policy in case of any willful
A loan in which under any condition whatever, the
misconduct on the part of the master or crew in
repayment of the sum loaned, and of the premium
pursuance of some unlawful or fraudulent purpose
stipulated, depends upon the safe arrival in port of the
without the consent of the owner and to the prejudice of
goods on which it is made or of the price they may receive
owner’s interest. It requires an intentional and willful act
in case of accident (Code of Commerce, Art. 719).
in its commission. No honest error or judgment or mere
negligence, unless criminally gross, can be barratry
Loan on bottomry v. Loan on respondentia
(Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985).
They are basically the same. The only distinction is, a loan 3. Inchmaree clause – a clause which makes the insurer
on bottomry involves a vessel as a security, while a liable for loss or damage to the hull or machinery arising
respondentia has cargo as its security (Perez, 2010). from the:
a. Negligence of the captain, engineers, etc.
Freightage
b. Explosion, breakage of shafts; and
It signifies all the benefits derived by the owner, either
from the chartering of the ship or its employment for the c. Latent defect of machinery or hull (Thames and Mersey
carriage of his own goods or those of others (IC, Sec. 104). Marine Insurance Co v. Hamilton Fraser and Co [1887] 12
AC 484).
Insurable interest in expected freightage in a charter 4. “Sue and labor” clause – a clause which makes the
party insurer liable for
Insurable interest in expected freightage in a charter a. all the expenses attendant upon a loss which forces the
party exists from the time the vessel has broken ground ship into port to be repaired; and
on the chartered voyage (IC, Sec. 106). b. expenses incurred, where it is stipulated in the policy
that the insured shall labor for the recovery of the
Insurable interest in expected freightage if there is no property (IC, Sec. 165).
charter party
NOTE: Insurer is liable for such expense, in either case,
If a price is to be paid for the carriage of goods, insurable being in addition to a total loss, if that afterwards occurs
interest in expected freightage exists when they are (ibid).
actually on board, or there is some contract for putting
them on board, and both ship and goods are ready for the Concealment in marine insurance
specified voyage (ibid).
It is the failure to disclose any material fact or
Instances when there is no insurable interest in circumstance which in fact or law is within, or which
freight ought to be within the knowledge of one party and of
which the other has no actual or presumptive knowledge
1. When there is no contract and no part of the goods (De Leon, 2010).
expected to be carried are on board, although there
are goods ready for shipment or the master is NOTE: Information of the belief or expectation of a third
provided with funds for the purpose of purchasing a person, in reference to a material fact, is material (IC, Sec.
cargo. 110).
2. Where the vessel is a mere “seeking ship”, the owner
has no insurable interest in freight to be earned on Presumption of knowledge of prior loss in marine
goods not loaded. insurance
NOTE: A “seeking ship” is a vessel looking for cargo to be A person insured by a contract of marine insurance is
transported (De Leon, 2010). presumed to have knowledge, at the time of insuring, of a
prior loss, if the information might possibly have reached
him in the usual mode of transmission and at the usual

MERCANTILE LAW
rate of communication (IC, Sec. 111).The presumption, 3. Warranty of Neutrality – The ship will carry the
however, is rebuttable. requisite documents too show the nationality or
neutrality of the ship or its cargo and will not carry any
Concealment in respect to any of the following documents that cast reasonable suspicion on it if the
matters does not vitiate the entire contract but nationality or neutrality of the ship or its cargo is
merely exonerates the insurer from a loss resulting expressly warranted (IC, Sec. 122);
from the risk concealed
4. Non-deviation from the Agreed voyage (IC, Secs. 125,
1. National character of the insured; 126, 127);
2. The liability of the thing insured to capture and
detention; 5. Presence of Insurable interest.
3. The liability to seizure from breach of foreign laws of
trade; Seaworthiness
4. The want of necessary documents; and
5. The use of false and simulated papers (IC, Sec. 112). A ship is seaworthy when reasonably fit to perform the
service and to encounter the ordinary perils of the voyage
NOTE: Ordinarily, the matters concealed need not be the contemplated by the parties to the policy (IC, Sec. 116).
cause of the loss. In marine insurance, the above-
mentioned matters, although concealed, will not vitiate Scope of the seaworthiness of a vessel
the contract except when they caused the loss.
A warranty of seaworthiness extends not only to the
Concealment in marine insurance v. Concealment in condition of the structure of the ship itself, but requires
other property insurance that it be properly laden, and provided with a competent
master, a sufficient number of competent officers and
OTHER PROPERTY seamen, and the requisite appurtenances and equipment,
MARINE INSURANCE such as ballasts, cables and anchors, cordage and sails,
INSURANCE
The information or belief food, water, fuel and lights, and other necessary or proper
The information or the stores and implements for the voyage (IC, Sec. 118).
of a 3rd party is not
belief or expectation of 3rd
material and need not be
persons in reference to a Compliance with the warranty of seaworthiness
communicated, unless it
material fact is material
proceeds from an agent of
and must be GR: It is complied with if the ship is seaworthy at the time
the insured whose duty is
communicated. of the commencement of the risk (IC, Sec. 117).
to give information.
The concealment of any
fact in relation to any of Concealment of any XPNs:
the matters stated in Sec. material fact will vitiate 1. In the case of time policy- the ship must be seaworthy at
112 does not vitiate the the entire contract, the commencement of every voyage it undertakes
entire contract but merely whether or not the loss during that time (IC, Sec. 117, [a]).
exonerates the insurer results from the risk 2. In the case of cargo policy- each vessel upon which cargo
from a risk resulting from concealed. is shipped or transshipped must be seaworthy at the
the fact concealed. commencement of each particular voyage (IC, Sec. 117,
[b]).
Effect of falsity of a representation by the insured 3. In the case of voyage policy contemplating a voyage in
different stages- the ship must be seaworthy at the
1. Promissory Representation - If a representation by the commencement of each portion of the voyage (IC, Sec.
insured is intentionally false in any material respect or in 119).
respect of any fact on which the character and nature of
the risk depends, the insurer may rescind the entire Admission of seaworthiness by the insurer
contract (IC, Sec. 113).
Seaworthiness is admitted by the insurer when:
2. Representation of Expectation -The eventual falsity of a 1. The warranty of seaworthiness is to be taken as
representation as to expectation does not, in the absence fulfilled; or
of fraud, avoid a contract of marine insurance (IC, Sec. 2. The risk of unseaworthiness is assumed by the
114). insurer (ibid).
Implied warranties in marine insurance (SINAI) Effect of the admission of seaworthiness by the
(2000 Bar) insurer
1. Seaworthiness (IC, Sec. 115 to 121); If the policy provides that the seaworthiness of the vessel
as between insured and insurer is admitted, the issue of
2. Non-engagement from Illegal venture; seaworthiness cannot be raised by the insurer without
showing concealment or misrepresentation by the

INSURANCE LAW
insured (Phil. American General Insurance Co. v. CA, G.R. delay in pursuing the voyage or the commencement of an
No. 116940, June 11, 1997). entirely different voyage (IC, Sec. 125).
Effect if unseaworthiness is unknown to the owner of Instances when deviation is proper (2000, 2005 Bar)
the cargo
1. When caused by circumstances over which neither
It is immaterial in ordinary marine insurance and may not the master nor the owner of the ship has any control;
be used by him as a defense in order to recover on the 2. When necessary to comply with a warranty, or to
marine insurance policy. It becomes the obligation of a avoid a peril, whether or not peril is insured against;
cargo owner to look for a reliable common carrier, which 3. When made in good faith, and upon reasonable
keeps its vessels in seaworthy conditions. The shipper grounds of belief in its necessity to avoid a peril; or
may have no control over the vessel but he has control in 4. When made in good faith, for the purpose of saving
the choice of the common carrier that will transport his human life or relieving another vessel in distress (IC,
goods (Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985). Sec. 126).
Effect of payment made by the insurer to the insured Improper deviation

for the latter’s lost cargo in case the ship is
unseaworthy Every deviation not specified under Sec. 126 is improper
(IC, Sec. 127).
Payment made by the insurer to the insured for the
latter’s lost cargo operates as waiver of the insurer’s right NOTE: In improper deviation, an insurer is not liable for
to enforce the implied warranty of seaworthiness. any loss happening to the thing insured subsequent to an
However, this waiver extends only in favor of the insured. improper deviation (IC, Sec. 128, 2005 Bar).
There is no waiver in favor of the carrier that transported
the cargo. The insurer can still claim payment against the Kinds of losses
carrier for breach of contract based on the insurer’s right
of subrogation (Sundiang Sr. & Aquino, 2014 citing Delsan 1. Total, which may be (1992 Bar):
Transport Lines, Inc. v. CA, G.R. No. 127897, Nov. 15, 2001). a. Actual total loss
b. Constructive total loss
Effect when the ship becomes unseaworthy during 2. Partial
the voyage
Actual v. Constructive loss
An unreasonable delay in repairing the defect exonerates
the insurer on ship or shipowner's interest from liability CONSTRUCTIVE TOTAL
ACTUAL TOTAL LOSS
from any loss arising therefrom (IC, Sec. 120). LOSS
It is one which the loss,
Express warranty as to nationality and neutrality It exists when the subject
although not actually total,
matter of the insurance is
is of such a character that
1. As to nationality – imports that the vessel belongs to wholly destroyed or lost
the insured is entitled, if he
the subject of a particular country. or when it is so damaged
thinks fit, to treat it as total
2. As to neutrality – imports that the property insured is as no longer to exist in its
by abandonment (IC, Sec.
neutral in fact, that is it belongs to neutrals and that original character.
133).
no act of insured or his agent shall be done which can Abandonment by the
legally compromise its neutrality. The insured has the right
insured is necessary in
to claim the whole
order to recover for a total
Rule regarding voyage in marine insurance insurance without notice
loss (IC, Sec. 141) in the
of abandonment (IC, Sec.
absence of any provision to
When the voyage contemplated by a marine insurance 137).
the contrary in the policy.
policy is described by the places of beginning and ending,
the voyage insured is one which conforms to the course of Actual total loss (1996 Bar)
sailing fixed by mercantile usage between those places
(IC, Sec. 123). The following constitutes actual total loss:
1. A total destruction of the thing insured;
NOTE: If the course of sailing is not fixed by mercantile 2. The irretrievable loss of the thing by sinking, or by
usage, the voyage insured is that way between the places being broken up;
specified, which to a master of ordinary skill and 3. Any damage to the thing which renders it valueless
discretion, would mean the most natural, direct and to the owner for the purpose for which he held it; or
advantageous (IC, Sec. 124). 4. Any other event which effectively deprives the
owner of the possession, at the port of destination,
Deviation of the thing insured (IC, Sec. 132).
It is a departure from the course of the voyage insured, NOTE: Complete physical destruction is not essential to
mentioned in Sec. 123 and Sec. 124, or an unreasonable constitute actual total loss.

MERCANTILE LAW
there is no constructive total loss to speak of.
An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss, which b. No. The case did not qualify as one for total
necessarily results in depriving the insured of the constructive loss. Deduced from the facts of the case, the
possession, at the port of destination, of the entire thing loss incurred during the peril did not amount to three-
insured(IC, Sec. 139). fourths of its value. As provided in Sec. 139,
abandonment may be availed of if the loss is more than
Constructive total loss three-fourths of its value or the expense to recover it from
peril.
There is constructive total loss when:
1. More than ¾ thereof in value is actually lost, or c. Sec.93 of the Insurance Code provides that double
would have to be expended to recover it from the insurance exists where the same person is insured by
peril; several insurers separately, in respect to the same subject
2. The thing insured is injured to such extent as to and interest.
reduce its value more than ¾;
3. The thing insured is a ship, and the contemplated d. In double insurance, the insurers are considered as
voyage cannot be lawfully performed without co-insurers. Each one is bound to contribute ratably to the
incurring either an expense to the insured of more loss in proportion to the amount for which he is liable
than ¾ the value of the thing abandoned or a risk under his contract. This is known as the “principle of
which a prudent man would not take under the contribution” or “contribution clause.” (IC, Sec. 94 [e])
circumstances; or
4. The thing insured, being cargo or freightage, and the Presumption of actual loss
voyage cannot be performed, nor another ship
procured by the master, within a reasonable time Actual loss may be presumed from the continued absence
and with reasonable diligence, to forward the cargo, of a ship without being heard of. The length of time which
without incurring the like expense or risk mentioned is sufficient to raise his presumption depends on the
in no. (3). But freightage cannot in any case be circumstances of the case (IC, Sec. 134).
abandoned (and thus declared constructively lost)
unless the ship is also abandoned (IC, Sec. 141).
Liability of the insurer as regards the cargo in case of
Q: M/V Pearly Shells, passenger and cargo vessel, was reshipment
insured for P40,000,000.00 against “constructive
total loss.” Due to a typhoon, it sank near Palawan. When a ship is prevented, at an intermediate port, from
Luckily, there was no casualties, only injured completing the voyage, by the perils insured against, the
passengers. The shipowner sent a notice of liability of a marine insurer on the cargo continues after
abandonment of his interest over the vessel to the they are thus reshipped. The insurer may, however,
insurance company which then hired professionals to require additional premium if the hazard be increased by
afloat the vessel for P900,000.00. When re-floated, his extension of liability (IC, Sec. 135).
the vessel needed repairs estimated at
P2,000,000.00. The insurance company refused to Additional liabilities of the insurer of goods referred
pay the claim of the shipowner, stating that there was to in the reshipment of cargo
“no constructive total loss.”
The marine insurer is bound for:
a. Was there “constructive total loss” to entitle the
1. Damages;
shipowner to recover from the insurance company?
2. Expenses of discharging;
Explain.
3. Storage;
b. Was it proper for the shipowner to send a notice 4. Reshipment;
of abandonment to the insurance company? Explain 5. Extra freightage; and
6. All other expenses incurred in saving cargo
c. When does double insurance exist? reshipped, up to the amount insured (IC, Sec. 136).
d. What is the nature of liability of the several
insurers in double insurance? (2005 Bar) NOTE: Nothing in Sec. 136 and Sec. 135 shall render a
marine insurer liable for any amount in excess of the
A: insured value or, if there be none, of the insurable value.
a. No. A constructive total loss is one which gives the
insured the right to abandon. (Sec 131,ICP) Abandonment Average
of the thing insured may be availed of if the loss is more
than three-fourths of its value or the expense to recover it It is any extraordinary or accidental expense incurred
from peril (Sec 139, ICP). In this case, the constructive loss during the voyage for the preservation of the vessel,
claimed by the shipowner pertains to the vessel. The cargo, or both and all damages to the vessel and cargo
expenses for refloating and estimated repairs did not from the time it is loaded and the voyage commenced
amount to three-fourths of the value of the vessel , hence, until it ends and the cargo unloaded (Code of Commerce,
Art. 806).

INSURANCE LAW
Kinds of average Effect of a valid abandonment
1. Gross or general averages – damages or expenses which It is equivalent to a transfer by the insured of his interest,
are deliberately caused by the master of the vessel or to the insurer, with all the chances of recovery and
upon his authority, in order to save the vessel, her cargo indemnity (Sec. 148, ibid).
or both at the same time from a real and known risk
(Code of Commerce, Art. 811). Requisites of valid abandonment
NOTE: This kind of average must be borne equally by 1. There must be an actual relinquishment by the
all of the interests concerned in the venture (De Leon, person insured of his interest in the thing insured
2010). (Sec. 140, ibid).
2. Simple or particular averages – they include all damages 2. There must be a constructive total loss (Sec. 141,
and expenses caused to the vessel or to her cargo which ibid).
have not inured to the common benefit and profit of all
the persons interested in the vessel and her cargo (Code 3. The abandonment must neither be partial nor
of Commerce, Art. 809). conditional (Sec. 142, ibid).
NOTE: This kind of average is suffered by and borne 4. It must be made within a reasonable time after
alone by the owner of the cargo or of the vessel, as the receipt of reliable information of the loss (Sec. 143,
case may be (De Leon, 2010). ibid).
Requisites to the right to claim general average 5. It must be factual (Sec. 144, ibid).
contribution
6. It must be made by giving notice thereof to the
a. There must be a common danger to the vessel or cargo; insurer which may be done orally or in writing;
Provided, that if the notice be done orally, a written
b. Part of the vessel or cargo was sacrificed deliberately; notice of such abandonment shall be submitted
c. The sacrifice must be for the common safety or for the within 7 days from such oral notice (Sec. 145, ibid).
benefit of all;
7. The notice of abandonment must be explicit and
d. It must be made by the master or upon his authority; must specify the particular cause of abandonment
(Sec. 146, ibid).
e. It must be successful, i.e. Resulted in the saving of the
vessel or cargo; and NOTE: Such notice must state only enough to show that
there is probable cause for abandonment, but need not be
f. It must be necessary (Sundiang Sr. & Aquino, 2014). accompanied with proof of interest or of loss.
Liability of the insurer as to averages Person who may make notice of abandonment
GR: The marine insurer is liable both for general average The abandonment need not necessarily be made by the
and particular average loss. insured but may be made by an authorized agent, and an
agent having an authority to insure has prima facie an
XPN: When there is “Free From Particular Average” authority to abandon (De Leon, 2010).
Clause in the policy making the insurer liable only for
general average. Person to whom notice of abandonment may be made
NOTE: Free From Particular Average Clause (FFPA To the insurer or his authorized agent or the broker who
Clause) - A clause agreed upon in a policy of marine is the agent for both parties (ibid).
insurance in which it is stated that the insurer shall not be
liable for a particular average. Forms of acceptance of abandonment
XPN to XPN: When particular average loss has the 1. Express
effect of depriving the insured of the possession at the 2. Implied from the conduct of the insurer
port of destination of the whole of the thing insured
(IC, Sec. 138). NOTE: Mere silence of the insurer for unreasonable
length of time after notice shall be construed as an
Abandonment acceptance (IC, Sec. 152).
It is the act of the insured by which, after a constructive Effects of acceptance of abandonment
total loss he declared the relinquishment to the insurer of
his interest in the thing insured (Sec. 140, ibid). 1. The insurer becomes at once liable for the whole
amount of the insurance and also becomes entitled to

MERCANTILE LAW
all rights which insured possessed in the thing but without reference to any loss incurred in raising
insured (Sec. 148, ibid). money for its purchase, or to any drawback on its
exportation, or to the fluctuation of the market at the port
2. GR: It fixes the rights of the parties; whether express of destination, or to expenses incurred on the way or on
or implied, it is conclusive upon them, (Sec. 153, ibid.) arrival.
and irrevocable (Sec. 154, ibid). c. Value of freightage – gross freightage exclusive of
primage, which is a small compensation paid by a shipper
XPN: Where the ground upon which it was made to the master of the vessel for his care and trouble
proves to be unfounded (Sec. 154, ibid).Under Sec. bestowed on the shipper’s goods and which the master is
147, abandonment can be sustained only upon the entitled to retain in the absence of an agreement to the
ground specified in the notice thereof. contrary with the owners of the vessels.
d. Cost of insurance – the cost of insurance is always added
3. It stops the insurer to rely on any insufficiency in the in calculating the value of the ship, cargo, or freightage or
form, time, or right, of abandonment(Sec. 145, 143, other subject matter in an open policy (De Leon, 2010).
141, ibid).Whether the insured has a right to abandon
is immaterial where the abandonment is accepted Drawback
and there is no fraud (New Orleans Ins. Co. vs. Piaggio,
16 Wall. [US] 378). It is an allowance made by the government upon the
duties due on imported merchandise when the importer,
4. On accepted abandonment of a ship, freightage instead of selling there, re-exports it; or the refunding of
earned previous to the loss belongs to the insurer of such duties if already paid (Perez, 2006).
said freightage; but freightage subsequently earned Primage
belongs to the insurer of the ship (Sec. 155, ibid).
It is a small allowance or compensation payable to the
Effect of the insurer’s refusal to accept a valid master or owner of the vessel for the use of his cables and
abandonment ropes to discharge the goods, and to the mariners for
lading and unlading in any port (Perez, 2006).
If the insurer refuses to accept a valid abandonment, he is
liable as upon an actual total loss, deducting from the NOTE: Drawback and primage are not included in
amount any proceeds of the thing insured which may have determining the loss in a marine open policy.
come to the hands of the insured (Sec. 156, ibid).
Co-Insurance
NOTE: However, if the abandonment was improper, the
insured may nevertheless recover to the extent of the Co-insurance is a form of insurance in which the person
damage proved (De Leon, 2010). who insures his property for less than the entire value is
understood to be his own insurer for the difference which
Effect of insured’s failure to make abandonment exists between the true value of the property and the
amount of insurance.
The insured has an election to abandon or not, and cannot
be compelled to abandon although abandonment is In such a case, a marine insurer is liable upon a partial loss
proper. If the insured fails to abandon, he may only for such proportion of the amount insured by him as
nevertheless recover his actual loss (IC, Sec. 157). the loss bears to the value of the whole interest of the
insured in the property insured (IC, Sec. 159).
Measure of indemnity
Requisites for co-insurance
1. Valued policy – the parties are bound by the valuation,
if the insured had some interest at risk and there is no There is co-insurance when the following requisites
fraud (Sec. 158, ibid). concur:
1. The loss is partial; and
NOTE: Overvaluation of property by the insured may 2. The amount of insurance is less than the value of the
take place either at the time of making the contract or property insured (Sundiang Sr. & Aquino, 2014).
at the time of submission of the proof of loss. In either
event, such overvaluation, if fraudulent, entirely avoids Co-insurance in marine insurance v. Co-insurance in
the insurance. However, such fraudulent intent must be fire insurance
alleged and clearly proven by the insurer (Perez, 2006).
CO-INSURANCE IN CO-INSURANCE IN FIRE
2. Open policy – the following rules shall apply in MARINE INSURANCE INSURANCE
estimating a loss: There is co-insurance by There has to be an express
a. Value of the ship – value at the beginning of the risk. virtue of Section 159 of stipulation to that effect.
b. Value of the cargo – actual cost to the insured, when the Insurance Code, as
laden on board, or where that cost cannot be ascertained, long as the above-
its market value at the time and place of lading, adding the enumerated requisites
charges incurred in purchasing and placing it on board, are present.

INSURANCE LAW
Co-insurance v. Reinsurance (1994 Bar) The insured is considered a co-insurer as to the uninsured
portion of P200,000. (1M – 800,000).
CO-INSURANCE REINSURANCE
NOTE: If the loss is total, the insurer is liable for the full
A plan of indemnity It is a contract through
amount of P800,000. On the other hand, if the property is
insurance under which which the insurer
insured to its full value, the insured is entitled to recover
the reinsurer assumes procures a third person
the full amount of the partial loss of P400,000.
the obligation on the to isnure him against loss
amount reinsured, in the or liability by reason of
Amount the insured is entitled to recover in case of
same fashion as the such original insurance.
loss if profits to be realized are separately insured
insurer is obligated to In every reinsurance, the
the insured (excluding original contract of
Where profits are separately insured in a contract of
policy loans). For this insurance and the
marine insurance, the insured is entitled to recover, in
risk, the insurer the contract of reinsurance
case of loss, a proportion of such profits equivalent to the
insurer usually pays to are separate and distict
proportion which the value of the property lost bears to
the reinsurer the gross from each other and
the value of the whole (IC, Sec. 160).
premium (less covered by separate
commissions and policies.
Conclusive presumption of loss of profits
expense, allowances) it
has collected from the
When profits are valued and insured by a contract of
insured on the amount
marine insurance, a loss of them is conclusively presumed
insured (it should be
from a loss of the property out of which they were
noted that the insurer
expected to arise, and the valuation fixes their amount (IC,
has no relationship with
Sec. 162).
the insured or
beneficiary).
“Port of refuge expenses”
(Diaz, et. al. 2014)
These are the additional expenses incurred in repairing
CO-INSURANCE REINSURANCE the damages suffered by a vessel because of the perils
The insurer remains as The insurer becomes the insured against as well as those incurred for saving the
the insurer of the original insured, insofar as the vessel from such perils, such as the expense of launching
insured reinsurer is concerned or raising the vessel or of towing or navigating it into port
The subject of insurance The subject is the original for her safety. These are items to be borne by the insurer
is the property insurer’s risk in addition to a total loss if that afterwards takes place (IC,
An insurance of the same Insurance of a different Sec. 165).
interest interest
The insured party is the The original insured has FIRE INSURANCE
party in interest in all no interest in the contract
contracts of reinsurance which is It is a contract of indemnity by which the insurer, for a
independent of the consideration, agrees to indemnify the insured against
original contract of loss of or damage by fire, lightning, windstorm, tornado or
insrurance earthquake and other allied risks, when such risks are
The insured has to give Consent of the original covered by extension to fire insurance policies or under
consent insured (who is hardly separate policies(IC, Sec. 169).
even aware of the
reinsurance transaction) NOTE: The liability of an insurer is to pay for direct loss
is not necessary. only. The insurer may be liable to pay for consequential
(De Leon, 2014). or indirect losses if covered by extension to such fire
policies or insured under separate policy (De Leon, 2010).
Formula to determine the amount recoverable in co-
insurance Indirect losses
Illustration The following are indirect losses:

If a vessel valued at P1M is insured for only P800, 000 and
(Partial) Loss X Amount of = Amount of recovery
is damaged to the extent of P400, 000, the insurer will be
required to pay only 80% of the loss suffered, or Insurance
P320,000; the other 20% or P80,000 being borne by the
insured himself. (Insurer’s Liability)
Value of thing Insured
P400,000 or 2/5 X P800,000 = P320, 000 1. Physical damage caused to other property.
P1M 2. Loss of earnings due to the interruption of business
by damage to the insured’s property.

MERCANTILE LAW
3. Additional expenses incurred by the insurer Requisites in order that the insurer may rescind a fire
following the damage to the property or contents by insurance policy on the ground of alteration made in
an insured peril (De Leon, 2010). the use or condition of the thing insured
Friendly fire v. Hostile fire 1. The use or condition of the thing is specially limited
or stipulated in the policy;
FRIENDLY FIRE HOSTILE FIRE
Fire that burns in a place Fire that escapes and 2. Such use or condition is altered;
where it is supposed to burns in a place where it
burn. is not supposed to be. It 3. The alteration is made without the consent of the
E.g. Gas stove, fire place may also refer to fire that insurer;
started out as a friendly
fire but escapes from its 4. The alteration is made by means within the control
original place or it of the insured; and
becomes too strong as it
becomes out of control 5. The alteration increases the risk (IC, Sec. 170).
(Sundiang Sr. & Aquino,
2014). 6. There must be a violation of a material policy
provision (Sundiang Sr. & Aquino, 2014).
Ocean Marine Insurance v. Fire Insurance
NOTE: A contract of fire insurance is not affected by any
OCEAN MARINE FIRE act of the insured subsequent to the execution of the
A policy of insurance on a Where the hazard is fire policy, which does not violate its provisions even though
vessel engaged in alone and the subject is an it increases the risk and is the cause of the loss (IC, Sec.
navigationis a contract of unfinished vessel, never 172).
marine insurance afloat for a voyage, the
although it insures contract to insure is a fire Q: United Merchants Corporation (UMC)’s General
against fire risks only. risk, especially in the Manager Alfredo Tan insured UMC’s stocks in trade of
absence of an express Christmas lights against fire with Country Bankers
agreement that it shall Insurance Corporation (CBIC). Unfortunately, a fire
have the incidents of gutted the warehouse rented by UMC. When UMC
marine policy, or where it demanded for payment under the insurance policy,
insures materials in a CBIC rejected its claim due to breach of Condition No.
shipyard for use in 15 of the policy which states that if the claim be in any
constructing vessels. respect fraudulent, or if any false declaration be made
or used in support thereof, all the benefits under the
Also where a policy policy shall be forfeited.CBIC contends that because
insures against fire, a arson and fraud attended the claim, UMC is not
vessel while moored and entitled to recover under Condition No. 15 of the
in use as a hospital. insurance policy. Is UMC is entitled to claim from CBIC
the full coverage of its fire insurance policy?
(De Leon, 2010).
A: No. The Insurance Code provides that a policy may
Marine v. Fire insurance declare that a violation of specified provisions thereof
shall avoid it. Thus, in fire insurance policies, which
Marine Insurance Fire Insurance contain provisions such as Condition No. 15 of
Rules on constructive Not in a fire insurance theinsurance policy, a fraudulent discrepancy between
total loss (IC, Secs. 133, the actual loss and that claimed in the proof of loss voids
141) and abandonment the insurance policy. Mere filing of such a claim will
(IC, Sec. 140) apply exonerate the insurer (United Merchants Corporation v.
Country Bankers Insurance Corporation, G.R. No. 198588,
In case of partial loss of a The insured may only July 11, 2012).
thing insured for less than become a co-insurer if
its actual value, the expressly agreed upon by Q: On May 13, 2014, Freedom Insurance Company
insured in a marine policy the parties (IC, Sec. 174) (Freedom) issued Fire Insurance Policy to BCP
is a co-insurer of the Corporation for the latter’s machineries and
uninsured portion (IC, equipment located at Tower 1 Building located in
Sec. 159) Concepcion, Tarlac which was used as a factory for
(De Leon, 2010). automotive parts. The insurance, which was for 10
million and effective for a period of one year, was
procured by BCP Corporation for Rizal Commercial
Banking Corporation (RCBC), the mortgagee of the
insured machineries and equipment. On October 12,
2014, the insured machineries were totally lost by

INSURANCE LAW
fire. BCP Corporation filed a fire insurance claim with Co-insurance clause in fire policies
Freedom which denied the claim upon the ground
that at the time of loss, the insured machineries and The co-insurance clause is a clause requiring the insured
equipment were transferred by BCP Corporation to a to maintain insurance to an amount equal to the value or
location different from that indicated in the policy. specified percentage of the value of the insured property
The insured machineries were transferred from the under penalty of becoming co-insurer to the extent of
Tower 1 Buiding to the Tower 2 Building also found in such deficiency. This is to prevent the property owners
Concepcion, Tarlac which was used as a warehouse from taking out such small amount of insurance, and
for storing old and unused machineries of the thereby reducing the premium payments and thereby
corporation. Was the refusal of Freedom justified? increasing the rates of premium for all (De Leon, 2010).
A: Yes. The policy stipulated that the insured properties NOTE: A co-insurance cannot exist in fire insurance if
were located at the Tower1 Building but BCP Corporation there is no stipulation to that effect.
transferred the machineries without the consent of
Freedom. The alteration of the location increased the risk Option to rebuild clause
of loss. The transfer affected Freedom’s ability to control
the risk by guarding against the risk brought about by the It gives the insurer the option to rebuild the destroyed
change in condition, specifically the change in the location property instead of paying the amount of the loss or
of the risk. Tower 2 Building was not the location damage, notwithstanding a fixed valuation in the policy
stipulated in the policy. There being an unconsented (IC, Sec. 174). This clause serves to protect the insurer
removal, the transfer was at BCP’s own risk and it must against unfairness in the appraisal and award rendered
suffer the consequences of the fire (Malayan Insurance by a packed board of arbitrators, or in the proof of loss.
Company, Inc. v. PAP Co., Ltd. G.R. No. 200784, August 7,
2013). NOTE: The insurer must exercise his option to rebuild
within the time stipulated in the policy, or in the absence
Effect when the insured has no control or knowledge of stipulation, within a reasonable time. The choice by the
of the alteration insurer shall produce no effect except from the time it has
been communicated to the insured (Article 1201, NCC).
GR: The insurer is not relieved from liability if the acts or
circumstances by which the risk is increased are Unless the policy has limited the cost of rebuilding to the
occasioned by accident, or a cause over which the insured amount of the insurance, the insurer, after electing to
has no control. rebuild, can be compelled to perform his undertaking,
even though the cost may exceed the original amount of
XPNs: insurance (De Leon, 2010).
1. Actually known to the insured or
2. Insured is presumed to know of the alteration when the Insured can pledge, hypothecate or transfer a fire
acts or circumstances, permanently and substantially insurance policy or rights thereunder
affects the conditions of the property so as to constitute
an increase in risk (De Leon, supra, 2010). He may do so after a loss has occurred and even without
the consent of, or notice to, the insurer. In such a case, it is
not the personal contract which is being assigned, but a
Measure of indemnity in open and valued policies in claim under or a right of action on the policy against the
fire insurance insurer (De Leon, 2010).
OPEN POLICIES VALUED POLICIES Limitation to the right of the insured in pledging,
The expense it would be to The parties are bound by hypothecating or transferring his right under a fire
the insured at the time of the valuation, in the insurance policy
the commencement of the absence of fraud.
fire to replace the thing Section 175 of the Insurance Code prohibits the exercise
lost or injured in the of this right in the case where the pledging, hypothecating,
condition in which it was or transferring is made to any person, firm or company
at the time of the injury. who acts as agent for or otherwise represents the insurer.
In an open policy, the NOTE: Any such pledge, etc. shall be void and of no effect
actual loss, as determined, insofar as it may affect other creditors of the insured
will represent the total (ibid).
indemnity due the insured
except only that the total CASUALTY INSURANCE
indemnity shall not exceed
the total value of the policy It is an insurance covering loss or liability arising from
(Sundiang Sr. & Aquino 2014, citing Development accident or mishap, excluding certain types of loss which
Insurance Corporation v. IAC, G.R. No. 713610, July 19, by law or custom are considered as falling exclusively
1986).

MERCANTILE LAW
within the scope of other types of insurance such as fire events resulting in injury, it is the intention
or marine (IC, Sec. 176). damage or loss due to of the person inflicting
fault, recklessness or the injury that is
Coverage of casualty insurance negligence of third controlling. If the
parties (Sundiang Sr. & injuries suffered by the
1. Employer's liability and workmen’s insurance – the Aquino, 2014 citing Pan insured clearly resulted
risk insured against is the liability of the assured to Malayan Insurance Corp. from the intentional act
make compensation or pay damages for an accident, V. CA, G.R. No. 81026, of a third person, the
injury, or death, occurring to a servant or other April 3, 1990). insurer is relieved from
employee, in the course of his employment under liability as stipulated
statutes imposing such liability on employers. (Sundiang Sr. & Aquino,
2. Public utility insurance – indemnifies against liability 2014 citing Biagtan v.
on account of injuries to the person or property of The Insular Life
another. It may extend to automobiles, elevators, fly Assurance Co. Ltd, G.R.
wheels, libel, theaters, and vessels. No. L-25579, March 29,
3. Motor vehicle liability insurance – is a contract of 1972).
insurance against passenger and third-party liability
for death or bodily injuries and damage to property Rules on Third party liability insurance
arising from, motor vehicle accidents.
4. Plate glass insurance – an insurance against loss from 1. Insurable interest is based on the interest of the insured
accidental breaking of plate-glass windows, doors, in the safety of the persons, and their property, who may
showcases, etc. maintain an action against him in case of their injury or
5. Burglary and theft insurance – an insurance against destruction respectively (De Leon, 2010).
loss of property by the depredations of burglars and
thieves. 2. In a TPL insurance contract, the insurer assumes the
6. Personal accident insurance – a form of insurance obligation by paying the injured third party to whom the
which undertakes to indemnify the assured against insured is liable. Prior payment by the insured to the
the expense, loss of time, and suffering resulting from injured third person is not necessary in order that the
accidents causing him physical injury, usually by obligation of the insurer may arise. The moment the
payment at a fixed rate per week while the insured becomes liable to third persons, the insured
consequent disability lasts, and sometimes including acquires an interest in the insurance contract which may
the payment of a fixed sum to his heirs in case of his be garnished like any other credit (Perla Compania de
death by accident within the term of the policy. Seguros, Inc. vs. Ramolete, G.R. No. L-60887, November 13,
7. Health insurance – an indemnity to persons for 1991).
expense and loss of time occasioned by disease.
8. Other substantially similar kinds of insurance (Perez, 3. In burglary, robbery and theft insurance, the
2006). opportunity to defraud the insurer (moral hazard) is so
great that insurer have found it necessary to fill up the
Two divisions of casualty insurance policies with many restrictions designed to reduce the
hazard. The purpose of the exception is to guard against
1. Accident or health insurance – Insurance against liability should theft be committed by one having
specified perils which may affect the person and/or unrestricted access to the property (Fortune Insurance &
property of the insured. (E.g. personal accident, Surety Co. vs. CA, G.R. No. 115278, May 23, 1995)
robbery/theft insurance)
2. Third party liability insurance (TPL) – Insurance against 4. The right of the person injured to sue the insurer of the
specified perils which may give rise to liability on the party at fault (insured), depends on whether the contract
part of the insured of claims for injuries or damage to of insurance is intended to benefit third persons also or
property of others (De Leon, 2010). only the insured (Eulogio vs. Del Monte, GR No. L-22042,
August 17, 1967). If the contract provides for:
“Accidental” v. “Intentional” as used in insurance a. Indemnity against third party liability – The third
persons to whom the insured is liable, can sue
ACCIDENTAL INTENTIONAL directly the insurer upon the occurrence of the injury
or event upon which the liability depends.The
The terms “accident” Intentional as used in an
purpose is to protect the injured person against the
and “accidental” have accident policy
insolvency of the insured who causes such injury and
been taken to mean that excepting intentional
to give him a certain beneficial interest in the
which happens by injuries inflicted by the
proceeds of the policy. It is as if the injured person
chance or fortuitously, insured or any other
were especially named in the policy (Shafer vs. RTC
without intention or person, implies the
Judge, G.R. No. 78848, November 14, 1988, 1996 Bar).
design, which is exercise of the reasoning
unexpected, unusual or faculties, consciousness,
b. Indemnity against actual loss or payment –The third
unforeseen. The term and volition. Where a
persons cannot proceed against the insurer, the
does not, without provision of the policy
contract being solely to reimburse the insured for
qualification, exclude excludes intentional

INSURANCE LAW
liability actually discharged by him through payment accrues immediately upon the occurrence of the injury or
to third persons, said third person’s recourse being event upon which the liability depends (Shafer vs. RTC
thus limited to the insured alone (Guingon vs. Del Judge, supra).
Monte, G.R. No. L-22042, August 17, 1967) Prior
payment by the insured is necessary to give rise to Liability of insurer if the insured was committing a
the obligation of the insurer. felony
Source of liability of third party liability insurance Liabilities arising out of acts of negligence, which are
(1996, 2000 Bar) also criminal, are also insurable on the ground that such
acts are accidental. Thus, a motor insurance policy
The direct liability of the insurer under indemnity covering the insured’s liability for accidental injury
contract against third party liability does not mean that caused by his negligence, even though gross and attended
the insurer can be held solidarily liable with the insured. by criminal consequences such as homicide through
The insurer’s liability is based on contract; that of the reckless imprudence, will not be void as against public
insured is based on tort. (Figuracion vda. De Maglana, et. policy. But liability consequences of deliberate criminal
al. v. Hon. Francisco Consolacion, G.R. No. 60506, August 6, acts are not insurable (Sundiang Sr. & Aquino, 2014).
1992).
“No action” clause
Q: Lawrence, a boxer, is a holder of an accident
insurance policy. In a boxing match, he died after It is a requirement in a policy of liability insurance which
being knocked out by the opponent. Can his father provides that suit and final judgment be first obtained
who is a beneficiary under said insurance policy against the insured, that only thereafter can the person
successfully claim indemnity from the insurance injured recover on the policy. It expressly disallows suing
company? (1990 Bar) the insurer as co-defendant (Guingon v. Del Monte, supra).
A: Yes. Clearly, the proximate cause of death was the NOTE: A “no action” clause must yield to the provisions of
boxing contest. Death sustained in a boxing contest is an the Rules of Court regarding multiplicity of suits (Shafer v.
accident (De la Cruz v. Capital Insurance & Surety Co., G.R. RTC Judge, supra.).
No. L-21574, June 30, 1966).
Liability of the insurer v. Liability of the insured Rules in accident insurance
INSURER INSURED 1. For death or injury to be covered by the policy, such

The liability is direct but Liability is direct and can should not be the natural or probable result of the
the insurer cannot be be held liable with all the insured’s voluntary act, or if something unforeseen
held solidarily liable with parties at fault. occurs in the doing of the act which produces the
the insured and other injury, which may result to death (Dela Cruz vs.
parties at fault. Capitol Insurance & Surety Co., supra).
Liability is based on Liability is based on tort.
contract 2. Suicide and willful exposure to needless peril are in
pari matere because they both signify a disregard for
The third-party liability The liability extends to
one’s life. Voluntary exposure to a known danger is
is only up to the extent of the amount of actual and
generally held to negate the accidental character of
the insurance policy and other damages.
whatever followed from the known danger (De Leon,
that required by law
2010).
(Heirs Poe v. Malayan Insurance, G.R. No. 156302, April 7,
2009) 3. The insured’s beneficiary has the burden of proof in
demonstrating that the cause of death is due to the
Q: While driving his car along EDSA, Cesar sideswiped covered peril. Once that fact is established, the
Roberto, causing injuries to the latter, Roberto sued
burden shifts to the insurer to show any excepted
Cesar and the third party liability insurer for damages
peril that may have been stipulated by the parties
and/or insurance proceeds. The insurance company (Vda. De Gabriel vs. CA, G.R. No. 103883, Novembber
moved to dismiss the complaint, contending that the 14, 1996).
liability of Cesar has not yet been determined with
finality. Is the contention of the insurer correct?
SURETYSHIP
(1996 Bar)
Contract of suretyship
A: No, the contention of the insurer is not correct. There
is no need to wait for the decision of the court determining It is an agreement whereby a party called the “surety”
Cesar’s liability with finality before the third party guarantees the performance by another party called the
liability insurer could be sued. The occurrence of the “principal or obligor” of an obligation or undertaking in
injury to Roberto immediately gave rise to the liability of favor of a third party called the “obligee”. It includes
the insurer under its policy. Where an insurance policy official recognizances, stipulations bonds or undertakings
insures directly against liability, the insurer’s liability issued by any company by virtue and under the

MERCANTILE LAW
provisions of Act No. 536, as amended by Act No. 2206 (IC, 1. The premium becomes a debt as soon as the contract
Sec. 177). of suretyship or bond is perfected and delivered to
the obligor (IC, Sec. 77);
The extent of surety’s liability is determined by the
language of the suretyship contract or bond itself. It 2. The contract of suretyship or bonding shall not be
cannot be extended y implications beyond the terms of valid and binding unless and until the premium
the contract. Having accepted the bond, the creditor is therefor has been paid;
bound by the recital in the surety bond that the terms and
conditions of distributorship contract be reduced in 3. Where the obligee has accepted the bond, it shall be
writing or at the very least communicated in writing to valid and enforceable notwithstanding that the
the surety. Such non-compliance by the creditor impacts premium has not been paid (Philippine Pryce
not on the validity or legality of the surety-contract but on Assurance Corp. v. CA, G.R.No. 107062, February 21,
the creditor’s right to demand performance. (First 1994);
Lepanto–Taisho Insurance Corporation vs. Chevron
Philippines, G.R. No. 177839, January 18, 2012). 4. If the contract of suretyship or bond is not accepted
by, or filed with the obligee, the surety shall collect
Nature of liability of surety only a reasonable amount;
The liability of the surety or sureties shall be: 5. If the non-acceptance of the bond be due to the fault
1. Solidary – Joint and several with the obligor and or negligence of the surety, no service fee, stamps, or
taxes imposed shall be collected by the surety; and
2. Limited or fixed – Limited to the amount of the bond
(It cannot be extended by implication). 6. In the case of continuing bond (for a term longer than
one year or with no fixed expiration date), the obligor
3. Contractual – It is determined strictly by the terms of shall pay the subsequent annual premium as it falls
the contract of suretyship in relation to the principal due until the contract is canceled (IC, Sec. 179) (De
contract between the obligor and the obligee (IC, Sec. Leon, 2010).
178).
NOTE: By law and by the specific contract involved in this
Suretyship v. Property Insurance case, the effectivity of the bond required for the obtention
of a license to engage in the business of receiving rice for
SURETYSHIP PROPERTY INSURANCE storage is determined not alone by the payment of
It is an accessory contract. The principal contract premiums but principally by the Administrator of the
itself. NFA. A continuing bond, as in this case where, there is no
There are three parties: There are only two parties: fixed expiration date, may be cancelled only by the
the surety, obligor/debtor, insurer and insured obligee, which is the NFA, by the Insurance
and the obligee/creditor. Commissioner, and by the court. (Country Bankers
More of a credit Generally a contract of Insurance Corporation vs. Lagman, G.R. No. 165487, July 13,
accommodation with the indemnity 2011, in Divina, 2014).
surety assuming primary
liability Types of surety bonds
Surety is entitled to No right of recovery for the
reimbursement from the loss the insurer may 1. Contract bonds – These are connected with construction
principal and his sustain except when the and supply contracts. They are for the protection of the
guarantors for the loss it insurer is entitled to owner against a possible default by the contractor or
may suffer under the subrogation. his possible failure to pay materials, men, laborers and
contract. sub-contractors.The position of surety, therefore, is to
A bond may be canceled by May be canceled answer for a failure of the principal to perform in
or with the consent of the unilaterally either by the accordance with the terms and specifications of the
obligee or by the insured or by the insurer on contract.There may be two bonds:
commissioner or by the grounds provided by law. a. Performance bond – One covering the faithful
court. performance of the contract; and
b. Payment bond – One covering the payment of
Requires acceptance of the Does not need acceptance
obligee before it becomes of any third party. laborers and material men.
valid and enforceable.
2. Fidelity bonds –They pay an employer for loss growing
A risk-shifting device, the A risk-distributing device,
out of a dishonest act of his employee. For the purposes
premium paid being in the the premium paid being
of underwriting, they are classified as:
nature of a service fee. considered a ratable
a. Industrial bond – One required by private
contribution to a common
employers to cover loss through dishonesty of
fund.
employees; and
(De Leon, 2010).
Rules of payment of premiums in suretyship

INSURANCE LAW
b. Public official bond – One required of public officers program shall be considered a life insurance contract for
for the faithful performances of their duties and as a purposes of the Insurance Code (IC, Sec. 181).
condition of entering upon the duties of their offices.
Every contract or pledge for the payment of endowments
3. Judicial bonds – They are those which are required in or annuities shall also be considered a life insurance
connection with judicial proceedings (ibid). contract under the Insurance Code (IC, Sec. 182).
Q: Fumitechniks Corporation, represented by Ma.

Lourdes Apostol, had applied for and was issued a Who may exercise any right under the policy
surety bond by First Lepanto-Taisho Insurance
Corporation (First Lepanto-Taisho) for the amount of In the absence of a judicial guardian, the father, or in the
P15,700,000.00. As stated in the attached rider, the latter’s absence or incapacity, the mother, of any minor,
bond was in compliance with the requirement for the who is an insured or a beneficiary under a contract of life,
grant of a credit line with the Chevron Philippines, health, or accident insurance, may exercise, in behalf of
Inc. (Chevron) to guarantee payment of the cost of fuel said minor, any right under the policy, without necessity
products withdrawn within the stipulated time in of court authority or the giving of a bond, where the
accordance with the terms and conditions of interest of the minor in the particular act involved does
agreement between Chevron and Fumitechniks. not exceed Five hundred thousand pesos
When Fumitechniks defaulted on its obligation, (P500,000.00) or in such reasonable amount as may
Chevron notified First Lepanto-Taisho of be determined by the Commissioner. Such right may
Fumitechniks’ unpaid purchases. First Lepanto- include, but shall not be limited to, obtaining a policy loan,
Taisho thereafter demanded to Fumitechniks the surrendering the policy, receiving the proceeds of the
submission of a copy of the agreement secured by the Policy, and giving the minor’s consent to any transaction
bond, together with copies of documents such as on the minor’s consent to any transaction on the policy.
delivery receipts. Fumitechniks, however, denied that
it executed such an agreement with Chevron, thus no In the absence or in case of the incapacity of the father
copy of such agreement could be submitted. Because or mother, the grandparent, the eldest brother or
of this, Chevron Philippines, Inc. sued First Lepanto- sister at least eighteen (18) years of age, or any
Taisho for the payment of unpaid oil and petroleum relative who has actual custody of the minor insured
purchases made by Fumitechniks. Is the surety liable or beneficiary, shall act as a guardian without need of
to the creditor in absence of a written contract with a court order or judicial appointment as such
the principal? guardian, as long as such person is not otherwise
disqualified or incapacitated. Payment made by the
A: No. Section 176 of the Insurance Code is clear that a insurer pursuant to this section shall relieve such
surety contract should be read and interpreted together insurer of any liability under the contract (IC, Sec. 182).
with the contract entered into between the creditor and
the principal.A surety contract is merely a collateral one, Life insurance is also a contract of indemnity
its basis is the principal contract or undertaking which it
secures. Necessarily, the stipulations in such principal This is because of the following reasons:
agreement must at least be communicated or made 1. The liability in life insurance is absolutely certain
known to the surety. Having accepted the bond, Chevron 2. Amount of life insurance generally is without limit
as creditor must be held bound by the recital in the surety 3. The policy is a valued policy
bond that the terms and conditions of its distributorship 4. There is no direct pecuniary loss required (De Leon,
contract be reduced in writing or at the very least 2010).
communicated in writing to the surety. Such non-
compliance by the Chevron impacts not on the validity or Kinds of life insurance policies
legality of the surety contract but on the creditor’s right to
demand performance (First Lepanto-Taisho Insurance v. 1. Ordinary life, general life or old line policy – Insured pays
Chevron Philippines, Inc., G.R. No. 177839, January 18, a premium every year until he dies. Cash surrender
2012). value after 3 years.
LIFE INSURANCE 2. Limited payment – Insured pays premium for a limited

period. If he dies within the period, his beneficiary is
It is insurance on human lives and insurance appertaining paid; if he outlives the period, he does not get anything.
thereto or connected therewith (Sec. 181, Insurance
Code).It is made payable on the death of the person, or on 3. Endowment – insured pays premium for specified
his surviving a specified period, or otherwise contingently period. If he outlives the period, the face value of the
on the continuance or cessation of life (IC, Sec. 182). policy is paid to him; if not, his beneficiaries receive the
benefit.
NOTE: Every contract or undertaking for the payment of
annuities including contracts for the payment of lump 4. Term insurance – insured pays premium only once, and
sums under a retirement program where a life insurance he is insured for a specified period. If he dies within the
company manages or acts as a trustee for such retirement period, his beneficiaries benefit. If he outlives the
period, no person benefits from the insurance.

MERCANTILE LAW
5. Industrial life – entitles the insured to pay premiums since the death was an accident (Sun Insurance v CA, G.R.
weekly, or where premiums are payable monthly or Nos. 79937-38, February 13, 1989).
oftener (Sundiang Sr. & Aquino, 2014).
Q: X, in January 30, 2009, or two (2) years before
Contract of life annuity reaching the age of 65, insured his life for
Php20Million. For reason unknown to his family, he
It is a contract to pay the insured, or a named person or took his own life two (2) days after his 65th birthday.
persons, a sum or sums periodically during life or certain The policy contains no excepted risk. Which
period (Perez, 2006). statement is most accurate? (2012 Bar)
Measure of indemnity under a policy of insurance A: A.The insurer will be liable under Sec. 183 of the
upon life or health Insurance Code. The suicide is committed after the policy
has been in force for a period of 2 years from the date of
GR: The measure of indemnity under a policy of insurance its issue.
upon life or health is the sum fixed in the policy.
Life insurance v. Fire/Marine insurance
XPN: The interest of a person insured is susceptible of
exact pecuniary measurement (IC, Sec. 186). FIRE/MARINE
LIFE INSURANCE
INSURANCE
Liability of the insurer in case of suicide It is a contract of
It is a contract of
investment not contract of
The insurer shall be liable in case of suicide by the insured indemnity.
indemnity.
if: Always regarded as valued
1. The suicide is committed after the policy has been in May be open or valued.
policy.
force for a period of 2 years from the date of its issue May be transferred or The transferee or
or of its last reinstatement. assigned to any person assignee must have an
2. The suicide is committed within a shorter period as even if he has no insurable insurable interest in the
provided in the policy. interest. thing insured.
3. The suicide is committed in the state of insanity The consent of the insurer
regardless of the date of commission (IC, Sec. 183) Consent, in the absence
is not essential to the
of waiver by the insurer,
validity of the assignment
Q: Sun Insurance Co. issued to Tan a life policy having is essential in the
of a life policy unless
this provision: “the company shall not be liable in assignment of the policy.
expressly required.
respect of ‘bodily injury’ consequent upon the insured Insurable interest in the
person who willfully exposes himself to needless Insurable interest in the
property insured must
peril except in an attempt to save human life". Tan life or health of the person
exist not only when the
designated his wife, Beverly as beneficiary. insured need not exist
insurance takes effect but
after the insurance takes
also when the loss
One evening, Tan, while playing with his hand gun, effect or when loss occurs.
occurs.
suddenly stood in front of his secretary and pointed
Insurable interest need Insurable interest must
the gun at her. Startled, she pushed the gun aside and not have any legal basis. have a legal basis.
said that it may be loaded. Thus, Tan, to assure her
Contingency that is
that it was not loaded, pointed it at his temple. The
contemplated is a certain The contingency insured
next moment, there was an explosion and Tan
event, the only uncertainty against may or may not
slumped to the floor lifeless.
being the time when it will occur.
take place.
Beverly, then claimed the proceeds from Sun
The liability of the insurer
Insurance, but the latter rejected her claim on the Liability is uncertain
to make payment is
ground that the death of Tan was not accidental. because the happening of
certain, the only uncertain
Beverly sued the insurer. Will Beverly’s claim the peril insured against
element being when such
prosper? (1993, 1994 Bar) is uncertain.
payment must be made.
A: Beverly can recover the proceeds of the policy from the May be terminated by the
May be cancelled by
insurer. The death of the insured was not due to suicide insured but cannot be
either party and is
or willful exposure to needless peril which are excepted cancelled by the insurer
usually for a term of one
risks. The insured’s act was purely an act of negligence and is usually a long term
year
which is covered by the policy and for which the insured contract.
got the insurance for his protection. In fact, he removed The “loss” to the
the magazine from the gun and when he pointed the gun beneficiary caused by the The reverse is generally
to his temple he did so because he thought that it was safe death of the insured can true of the loss of
for him to do so. He did so to assure his sister that the gun seldom be measured property, i.e., it is capable
was harmless. There is none in the policy that would accurately in terms of cash of pecuniary estimation.
relieve the insurer of liability for the death of the insured value.

INSURANCE LAW
The beneficiary is under
The insured is required
no obligation to prove Any fare-paying person being transported and conveyed
to submit proof of his
actual financial loss as a in and by a motor vehicle for transportation of passengers
actual pecuniary loss as a
result of the death of the for compensation, including persons expressly
condition precedent to
insured in order to collect authorized by law or by the vehicle’s operator or his
collecting the insurance.
the insurance. agents to ride without fare (IC, Sec. 386, [b]).
COMPULSORY MOTOR VEHICLE LIABILITY 3. Third-party

INSURANCE
Any person other than a passenger as defined in this
Motor vehicle liability insurance section (ibid.) and shall also exclude a member of the
household, or a member of the family within the second
It is a protection coverage that will answer for legal degree of consanguinity or affinity, of a motor vehicle
liability for losses and damages for bodily injuries or owner or land transportation operator, as likewise
property damage that may be sustained by another defined herein, or his employee in respect of death, bodily
arising from the use and operation of a motor vehicle by injury, or damage to property arising out of and in the
its owner (Compulsory Motor Vehicle Liability Insurance, course of employment (Sec. 386, [c], ibid).
prepared and distributed by the Insurance Commission).
4. Owner or Motor vehicle owner (MVO)
The Insurance Code makes it unlawful for any land
transportation operator or owner of a motor vehicle to Actual legal owner of a motor vehicle, whose name such
operate the same in public highways unless there is an vehicle is duly registered with the Land Transportation
insurance or guaranty to indemnify the death or bodily Office (Sec. 386, [d], ibid).
injury of a third party or passenger arising from the use
thereof (IC, Sec. 387). Registration of any vehicle will not 5. Land transportation operator (LTO)
be made or renewed without complying with the
requirement (IC, Sec. 389). The owner or owners of motor vehicles for transportation
of passengers for compensation, including school buses
(Sec. 386, [e], ibid).
Purpose of motor vehicle liability insurance
Persons required to maintain a compulsory motor
To give immediate financial assistance to victims of motor vehicle liability insurance (CMVLI) policy to operate
vehicle accidents and/or their dependents, especially if motor vehicle/s in public highways
they are poor regardless of financial capability of motor
vehicle owners or operators responsible for the accident 1. Motor vehicle owner (MVO)
sustained (First Integrated Bonding Insurance Co., Inc. v. 2. Land transportation operator (LTO) (Sec. 387, ibid).
Hernando, G.R. No. L-51221, July 31, 1991).
Scope of coverage required for compulsory motor
NOTE: The insurer’s liability accrues immediately upon vehicle liability insurance
the occurrence of the injury or event upon which the
liability depends, and does not depend on the recovery of 1. For MVOs, the coverage must be comprehensive
judgment by the injured party against the insured (Shafer against third party liability for death or bodily
v. Judge, RTC, supra). injuries. If the private motor vehicle is being used to
transport passengers for compensation, the coverage
Definitions shall include passenger liability.
2. For LTOs, coverage must be comprehensive against
1. Motor vehicle both passenger and third-party liabilities for death or
bodily injuries (Ins. Memo. Cir. No. 3-81).
Any vehicle propelled by any power other than muscular
power using the public highways, but excepting road Substitutes for a compulsory motor vehicle liability
rollers, trolleys cars, street sweepers, sprinklers, lawn insurance policy
mowers, bulldozers, graders, forklifts, amphibian trucks,
and cranes if not used in public highways, vehicles which Instead of a CMVLI policy, MVOs or LTOs may either:
run only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for 1. Post a surety bond with the Insurance Commissioner
agricultural purposes (Sec. 3[a] of RA 4136). who shall be made the obligee or creditor in the bond
in such amount or amounts required as limits of
NOTE: Trailers having any number of wheels, when indemnity to answer for the same losses sought to be
propelled or intended to be propelled by attachment to a covered by a CMLVI policy; or
motor vehicle shall be classified as separate motor vehicle 2. Make a cash deposit with the Insurance Commission in
with no power rating (ibid). such amount or amounts required as limits of
indemnity for the same purpose(Sec. 390, ibid).
2. Passenger

MERCANTILE LAW
NOTE: After the cash deposit or surety bond has been Rules under the “no fault indemnity clause”
proceeded against by the Insurance Commissioner, such
cash deposit shall be replenished or such surety bond 1. The total indemnity in respect of any one person shall
shall be restored by the MVO or LTO in the right amount/s not exceed P15,000 for all motor vehicles (Ins. Memo.
required as limit of liability within 60 days after Circ. No. 4-2006).
impairment or expiry, otherwise, he shall secure a CMLVI
required (ibid). 2. Proof of loss:
a. Police report of accident
Duties of motor vehicle owner or land transportation b. Death certificate and evidence sufficient to
operator in contemplation of the cancellation of the establish proper payee
policy c. Medical report and evidence of medical or hospital
disbursement (IC, Sec. 391 [3]).
Contemplating the cancellation of the policy, the MVO or
LTO shall: 3. Claim may be made against one motor vehicle only (Sec.
1. Give to the insurance or surety company concerned a 391 [c], ibid).
written notice of his intention to cancel;
2. Secure, before the insurance policy or surety bond 4. In case injury of an occupant of a vehicle, the claim shall
ceases to be effective, another similar policy or bond to lie against the insurer of the vehicle in which the
replace that one canceled; occupant is riding, mounting or dismounting from
3. Without making any replacement, make a cash deposit (ibid).
in sufficient amount with the Insurance Commissioner
and secure a certification from the Insurance 5. In any other case (not an occupant), claim shall lie
Commissioner regarding the deposit made for against the insurer of the directly offending vehicle
presentation to and filing with the Land Transportation (ibid).
Office (CMVLI, supra) (IC, Sec. 393-394). 6. In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for
Effects of the cancellation of the policy the accident shall be maintained (ibid).
GR: Upon receipt of the notice of such cancellation, the NOTE: The claimant is not free to choose from which
Land Transportation Office shall order the immediate insurer he will claim the "no fault indemnity," as the law,
confiscation of the plates of the motor vehicle concerned. by using the word "shall”, makes it mandatory that the
claim be made against the insurer of the vehicle in which
XPNs: No confiscation will be ordered if said Office the occupant is riding, mounting or dismounting from.
receives any of the following: That said vehicle might not be the one that caused the
accident is of no moment since the law itself provides that
1. An evidence or proof of a new and valid CMVLI cover the party paying may recover against the owner of the
which may be either an insurance policy or guaranty in vehicle responsible for the accident (Perla Compania de
cash or surety bond; Seguros, Inc. v. Ancheta, G.R. No. L-49599, August 8, 1988).
2. A signed duplicate of an endorsement or addendum This no-fault claim does NOT apply to property damage. If
issued by the insurance company concerned showing the total indemnity claim exceeds P15, 000 and there is
revival or continuance of the CMVLI cover; or controversy in respect thereto, the finding of fault may be
availed of by the insurer only as to the excess. The first
3. A certification issued by the Insurance Commissioner to P15, 000 shall be paid without regard to the fault (CMVLI,
the effect that a cash deposit in the amount required as supra).
limit of indemnity has been made with him by the MVO or
LTO (CMVLI, supra, IC, Sec. 393). Q: X is a passenger of a jeepney for hire being driven
by Y. The jeepney collided with another passenger
“Own damage” coverage jeepney being driven by Z who was driving recklessly.
As a result of the collision, X suffered injuries. Both
It simply meant that the insurer had assumed to passenger jeepneys are covered by Comprehensive
reimburse the costs for repairing the damage to the Motor Vehicular Insurance Coverage. If X wants to
insured vehicle, as opposed to damage to third party claim under the "no fault indemnity clause", his claim
vehicle/property. The phrase “own damage” does not will lie (2012 Bar)
mean damage to the insured car caused by the assured
itself, instead, of third parties (Pan Malayan Insurance A: Against the insurer of the passenger jeepney driven by
Corporation v. Court of Appeals, supra) Y because X was his passenger. The Insurance Code states
that in the case of an occupant of a vehicle, the claim shall
No fault indemnity clause (1994 Bar) lie against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from.
It is a clause where the insurer is required to pay a third
party injured or killed in an accident without the necessity
of proving fault or negligence on the part of the insured.
There is a stipulated maximum amount to be recovered.

INSURANCE LAW
Authorized driver clause 1. The vehicle is returned;
2. The vehicle was stolen by the driver of the insured
It indemnifies the insured owner against loss or damage (Alpha Insurance and Surety Company v. Castor, G.R.
to the car but limits the use of the insured vehicle to: 198174, September 2, 2013);
1. The insured himself; or 3. The vehicle was taken to the owner of a repair shop for
the purpose of repair and in order to attach
NOTE: The insured need not prove that he has a driver’s accessories (Paramount Insurance v. Spouses
license at the time of the accident if he was the driver Remondeulaz, G.R. No. 173773, November 28, 2012)
(Sundiang Sr. & Aquino, 2014). (Sundiang Sr. & Aquino, 2014).
2. Any person who drives on his order or with his Limitations with respect to compulsory motor vehicle
permission; provided, that the person driving is liability insurance over solicitation
permitted to drive the motor vehicle in accordance with
the law, and is not disqualified (Villacorta v. Insurance 1. No government office or agency having the duty of
Commissioner, G.R. No. 54171, October 28, 1980). implementing the provisions of the Insurance Code on
CMVLI shall act as agent in procuring the insurance
NOTE: The main purpose of this clause is to require a policy or surety bond required;
person other than the insured, who drives the car on the
insured’s order or with his permission, to be duly licensed 2. No official or employee of such office or agency shall
drivers and have no disqualification to drive a motor similarly act as such agent; and
vehicle (Villacorta v. Insurance Commission, G.R. No. L-
54171, October 28, 1980). 3. The commission of an agent procuring the
corresponding insurance policy or surety bond shall in
An Irish citizen whose 90-day tourist visa had expired, no case exceed 10% of the amount of premiums
cannot recover on his car insurance policy, not being therefore (IC, Sec. 400).
authorized to drive a motor vehicle without a Philippine
driver’s license (Stokes v. Malayan Insurance Co., Inc. G.R. Q: When a passenger jeepney, insured but with an
No. L-34768, February 24, 1984). authorized driver’s clause and was driven by a driver
who only holds a Traffic Violation Report (TVR)
A driver with an expired Traffic Violation Receipt or because his license was confiscated, met an accident,
expired Temporary Operator’s permit is not considered may the owner of the jeepney claim from the
an authorized driver within the meaning of the insurance insurance company? (2003 Bar)
policy. The Traffic Violation Receipt is coterminous with a
confiscated license under the Motor Vehicle Law A: Yes. The fact that the driver was merely holding a TVR
(Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L- does not violate the condition that the driver should have
26287, June 29, 1984) a valid and existing driver’s license. Besides, such a
condition should be disregarded because what is involved
Theft clause is a passenger jeepney, and what is involved here is not
own damage insurance but third party liability where the
It is that which includes theft as among the risks insured injured party is a third party not privy to the contract of
against. Where a car is unlawfully and wrongfully taken insurance.
without the knowledge and consent of the owner, such
taking constitutes “theft” and it is the theft clause, not the MICROINSURANCE
authorized driver clause which should apply (Perla
Compania de Seguros, Inc. v. CA, supra). It is a financial product or service that meets the risk
protection needs of the poor where:
The “Theft Clause” of a comprehensive motor vehicle
insurance policy has been interpreted by the Court in a. The amount of contributions, premiums, fees or
several cases to cover situations like (1) when one takes charges, computed on a daily basis, does not exceed seven
the motor vehicle of another without the latter’s consent and a half percent (7.5%) of the current daily minimum
even if the motor vehicle is later returned, there is theft- wage rate for nonagricultural workers in Metro Manila;
there being intent to gain as the use of the thing and
unlawfully taken constitutes gain or (2) when there is
taking of a vehicle by another person without the b. The maximum sum of guaranteed benefits is not more
permission or authority from the owner thereof. than one thousand (1000) times of current daily minimum
(Paramount Insurance vs. Spouses Remondeulaz, G.R. No. wage rate for nonagricultural workers in Metro Manila
173773, November 28, 2012). (IC, Sec. 187).
Theft NOTE: No insurance company or mutual benefit

association shall engage in the business of microinsurance
There is theft if the vehicle is taken with intent to gain unless it possesses all the requirements as may be
without the consent of the insured-owner. Thus, there is prescribed by the Commissioner. The Commissioner shall
theft even if: issue such rules and regulations governing
microinsurance (IC, Sec. 188).

MERCANTILE LAW
INSURABLE INTEREST The beneficiary The beneficiary
need not have must have
An insurable interest is that interest which a person is insurable interest insurable interest
deemed to have in the subject matter insured, where he over the life of the over the thing
has a relation or connection with or concern in it, such insured if the insured.
that the person will derive pecuniary benefit or advantage insured himself
from the preservation of the subject matter insured and As to the secured the
will suffer pecuniary loss or damage from its destruction, beneficiary’ policy. However, if
termination, or injury by the happening of the event s interest the life insurance
insured against(Violeta R. Lalican vs. The Insular Life was obtained by
Assurance Company Limited, G.R. No. 183526, August 25, the beneficiary,
2009). the latter must
have insurable
NOTE: The existence of insurable interest is a matter of interest over the
public policy and is not susceptible to the principle of life of the insured.
estoppel. The existence of an insurable interest gives a (De Leon, 2010; Sundiang Sr. & Aquino, 2014).
person the legal right to insure the subject matter of the
policy of insurance (ibid). Existence of insurable interest in life and property
insurance
When does a person has insurable interest?
For both life and property insurance, the insurable
GR: A person is deemed to have an insurable interest in interest is required to exist at the time of perfection of the
the subject matter insured where he has a relation or policy. For property insurance, the insurable interest
connection with or concern in it that he will derive must also exist at the time of loss, however, in case of life
pecuniary benefit or advantage from its preservation and insurance, the insurable interest need to exist only at the
will suffer pecuniary loss from its destruction or injury by time of perfection and not thereafter (IC, Sec. 19).
the happening of the event insured against. Q: X owned a house and lot. X insured the house. The
house got burned. Then he sold the partially burnt
XPN: To have an insurable interest in the life of a person, house and the lot to Y. Which statement is most
the expectation of benefit from the continued life of that accurate? (2012 Bar)
person need not necessarily be of pecuniary nature (De
Leon, 2010). a. X is not anymore entitled to the proceeds of the
insurance policy because he already sold the partially
Insurable interest in life insurance v. Insurable burnt house and lot.
interest in property insurance (2002 Bar) b. X is still entitled to the proceeds of the insurance
policy because what is material is that at the time of
LIFE PROPERTY the loss, X is the owner of the house and lot.
GR: Every person Limited to the
has an unlimited actual value of the c. No one is entitled to the proceeds because
insurable interest property ownership over the house and lot was already
in his own life transferred.
d. Y will be the one entitled to the proceeds because
XPN: Where life he now owns the partially burnt house and lot.
As to extent insurance is taken
out by a creditor A: b. X is still entitled to the proceeds of the insurance
on the life of the policy because what is material is that at the time of the
debtor, insurable loss, X is the owner of the house and lot. After the loss
interest is limited occurs, the right of the insured under the policy becomes
to the amount of fixed and a subsequent conveyance by the insured cannot
debt affect the insurer’s liability (Perez, supra, pg. 43, citing
Must exist at the GR: Must exist both Florea vs. Iowa State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).
time the policy at the time the
takes effect and policy takes effect Mere hope or expectancy is not insurable
need not exist and the time of loss,
When must
thereafter (IC, Sec. but need not exist A mere contingent or expectant interest in any thing, not
insurable
19). in the period in founded on an actual right to the thing, nor upon any valid
interest
between (Sec. 19, contract for it, is not insurable(ICC, Sec. 16).
exist
ibid).
Right of the insured to change the beneficiary he
XPN: Secs. 21-24; designated
25, ibid.
GR: The insured shall have the right to change the
beneficiary he designated in the policy

INSURANCE LAW
XPN: If the insured expressly waived this right in the said The question of insurable interest is immaterial where the
policy. policy is procured by the person whose life is insured. A
person who insures his own life can designate any person
NOTE: Under Sec. 64 of the Family Code, the innocent as his beneficiary, whether or not the beneficiary has an
spouse is allowed to revoke the designation of the other insurable interest in the life of the insured subject to the
spouse as irrevocable beneficiary after legal separation. limits under Articles 739 and 2012 of the New Civil Code
(De Leon, 2010).
Effect of the irrevocable designation of the
beneficiary to the assignment of the policy 2. Insurance upon life of another – are those taken out by
the insured upon the life of another. Where a person
The insured cannot assign the policy if the designation of names himself beneficiary in a policy he takes on the life
the beneficiary is irrevocable. The irrevocable beneficiary of another, he must have insurable interest in the life of
has a vested right (Sundiang Sr. & Aquino, 2014, 2005 Bar). the latter (De Leon, 2010). This class includes the
following (1997, 2000, 2002 Bar):
When designation of beneficiary is deemed a. His spouse and of his children.
irrevocable b. Any person on whom he depends wholly or in part for
education or support, or in whom he has a pecuniary
The insured shall have the right to change the beneficiary interest.
he designated in the policy, unless he has expressly c. Of any person under a legal obligation to him for the
waived this right in said policy. Notwithstanding the payment of money, or respecting property or services,
foregoing, in the event the insured does not change the of which death or illness might delay or prevent the
beneficiary during his lifetime, the designation shall be performance.
deemed irrevocable (IC, Sec. 11). d. Of any person upon whose life any estate or interest
vested in him depends (IC, Sec. 10).
NOTE: The foregoing provision is an amendment
incorporated in the Insurance Code of 2013. NOTE: In paragraph (a) of Section 10 of the Insurance
Code, mere relationship is sufficient while the rest (pars.
Void stipulations in an insurance contract b, c, and d) requires pecuniary interest. Thus, the interest
of the creditor over the life of the debtor ceases upon full
Every stipulation in an insurance contract: payment (Sundiang Sr. & Aquino, 2009).
1. For the payment of loss whether the person insured
has or does not have any insurable interest in the Persons prohibited from being designated as
subject-matter of insurance, or beneficiaries (1998 Bar)
2. That the policy shall be received as proof of such Under the Article 739 of the New Civil Code, the following
interest, and are prohibited designation of beneficiaries:
1. Those made between persons who were guilty
3. Every policy executed by way of gaming or wagering (finding of guilt in a civil case is sufficient) of
is VOID (ICC, Sec. 25). adultery or concubinage at the time of donation
NOTE: The Insurance Code provides that a policy may 2. Those made between persons found guilty of the
declare that a violation of specified provisions thereof same criminal offense, in consideration thereof
shall avoid it. Thus, in fire insurance policies, which
contain provisions that if the claim be in any respect 3. Those made to a public officer or his wife,
fraudulent or if any false declaration be made or used in descendants or ascendants by reason of his office.
support thereof, all the benefits under the policy shall be
forfeited, a fraudulent discrepancy between the actual NOTE: The designation of the above-enumerated persons
loss and that claimed in the proof of loss voids the is void but the policy is binding. The estate will get the
insurance policy. Mere filing of such a claim will exonerate proceeds (Sundiang Sr. & Aquino, 2009).
the insurer (United Merchants Corporation vs. Country
Bankers Insurance Corporation, G.R. No. 198588, July 11, Q: Can a common-law wife named as beneficiary in
2012). the life insurance policy of a legally married man
claim the proceeds thereof in case of death of the
IN LIFE/ HEALTH latter?
Two general classes of life policies A: No. Under Article 2012 of the New Civil Code, any
person who is forbidden from receiving any donation
1. Insurance upon one’s life – are those taken out by the under Article 739 cannot be named beneficiary of a life
insured upon his own life (IC, Section 10[a]) for the benefit insurance policy by the person who cannot make a
of himself, or of his estate, in case it matures only at his donation to him. Common-law spouses are, definitely,
death, for the benefit of third person who may be barred from receiving donations from each other. In
designated as beneficiary (1997, 2000, 2002 Bar). essence, a life insurance policy is no different from a civil
donation insofar as the beneficiary is concerned. Both are
founded upon the same consideration: liberality. A

MERCANTILE LAW
beneficiary is like a donee, because from the premiums of A: a) X as sole beneficiary under the life insurance policy
the policy which the insured pays out of liberality, the on the life of Y will be entitled to the proceeds of the life
beneficiary will receive the proceeds or profits of said insurance.
insurance (The Insular Life Assurance Company, Ltd., v.
Carponia T. Ebrado and Pascuala Vda. De Ebrado, G.R. Common-law spouses are definitely barred from
No.L-44059, October 28, 1977). receiving donations from each other. In essence, a life
insurance policy is no different from a civil donation
Because no legal proscription exists in naming as insofar as the beneficiary is concerned. Both are founded
beneficiaries children of illicit relationships by the upon the same consideration: liberality. A beneficiary is
insured, the shares of the common-law spouse in the like a donee, because from the premiums of the policy
insurance proceeds, whether forfeited by the Court in which the insured pays out of liberality, the beneficiary
view of the prohibition on donation under Article 739 of will receive the proceeds or profits of said insurance. As a
the Civil Code or by the insurers themselves for reasons consequence, the proscription in Article 739 of the New
based on the insurance contracts, must be awarded to the Civil Code should equally operate in life insurance
said illegitimate children, the designated beneficiaries, to contracts. The mandate of Article 2012 cannot be laid
the exclusion of the legitimate heirs (Heirs of Loreto aside: any person who cannot receive a donation cannot
Maramag vs. Maramag, G.R. No. 181132, June 5, 2009). be named as beneficiary in the life insurance policy of the
person who cannot make the donation (Insular Life
Extent of the creditor’s recovery from the insurance Assurance, Co. vs. Ebrado, GR No. L-44059, supra).
he procured upon the life of the debtor, if the latter
dies Q: Juan de la Cruz was issued Policy No. 8888 of the
Midland Life Insurance Co. on a whole life plan for
It is limited only to the extent of the amount of the debt at P20,000 on August 19, 1989. Juan is married to
the time of debtor’s death and the cost of carrying the Cynthia with whom he has three legitimate children.
insurance on the debtor’s life. He, however, designated Purita, his common-law
wife, as the revocable beneficiary. Juan referred to
Consent of the person insured is not essential to the Purita in his application and policy as the legal wife.
validity of the policy Three (3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
So long as it could be proved that the insured has an beneficiary therein. The widow, Cynthia, also filed a
insurable interest at the inception of the policy, the claim as the legal wife. To whom should the proceeds
insurance is valid even without such consent (IC, Sec. 10). of the insurance policy be awarded? (1998 Bar)
Effect if the beneficiary willfully brought about the A: The estate is entitled to claim for the proceeds of the
death of the insured (2008 Bar) insurance policy. As a general rule, the insured may
designate anyone he wishes to be his/her beneficiary.
GR: The interest of a beneficiary in a life insurance policy However, Art. 2012 of the Civil Code, which applies
shall be forfeited when the beneficiary is the principal, suppletorily to the Insurance Code, provides that any
accomplice, or accessory in willfully bringing about the person who is forbidden from receiving any donation
death of the insured. In such a case, the share forfeited under Art. 739 cannot be named beneficiary of a life
shall pass on to the other beneficiaries, unless otherwise insurance policy by the person who cannot make any
disqualified. In the absence of other beneficiaries, the donation to him, according to said article. Art. 739
proceeds shall be paid in accordance with the policy specifically bars the donations as between persons who
contract. If the policy contract is silent, the proceeds shall were guilty of adultery or concubinage. Since Purita is a
be paid to the estate of the insured (Sec. 12, ibid). common-law wife of Juan, she falls squarely in to this
category therefore she is disqualified to receive insurance
NOTE: The rule provided was an amendment stated in the proceeds and when this happens, the estate of the
Insurance Code of 2013. deceased is the one entitled to the proceeds (Insular Life
Assurance Company, Ltd. vs. Capronia Ebrado, supra).
XPNs:
1. The beneficiary acted in self-defense; IN PROPERTY
2. The insured’s death was not intentionally caused (2000 Bar)
(e.g., thru accident);
3. Insanity of the beneficiary at the time he killed the Every interest in property, whether real or personal, or
insured. any relation thereto, or liability in respect thereof, of such
nature that contemplated peril might directly damnify the
Q: X is the common law wife of Y. Y loves X so much insured, is insurable interest (IC, Sec. 13).
that he took out a life insurance on his own life and
made her the sole beneficiary. Y did this to ensure Insurable interest in property may consist of the
that X will be financially comfortable when he is gone. following (1991 Bar):
Upon the death of Y, -(2012 Bar)
1. An existing interest – The existing interest in the
property may be legal or equitable title.

INSURANCE LAW
Examples of insurable interest arising from legal title: and received by the carrier for transportation until the
a. Trustee, as in the case of the seller of property not yet same are delivered, actually or constructively, by the
delivered; carrier to the consignee, or to the person who has a right
b. Mortgagor of the property mortgaged; to receive them (Eastern Shipping Lines vs. BPI/MS
c. Lessor of the property leased (De Leon, supra). Insurance Corp. and Mitsui Sum Tomo, G.R. No. 193986,
January 15, 2014).
Examplesof insurable interest arising from equitable title:
a. Purchaser of property before delivery or before he has Effect of change of interest in any part of a thing
performed the conditions of the sale insured unaccompanied by a corresponding change
b. Mortgagee of property mortgaged; of interest in the insurance
c. Mortgagor, after foreclosure but before the expiration
of the period within which redemption is allowed (De GR: A change of interest in any part of a thing insured
Leon, 2010). unaccompanied by a corresponding change in interest in
the insurance suspends the insurance to an equivalent
2. An inchoate interest founded on an existing interest or extent, until the interest in the thing and the interest in
the insurance are vested in the same person (Sec. 20;
Example: A stockholder has an inchoate interest in the Sec.58, ibid).
property of the corporation of which he is a stockholder,
which is founded on an existing interest arising from his NOTE: “Change of interest” contemplated by law is an
ownership of shares in the corporation (De Leon, 2014). absolute transfer of the insured’s entire interest in the
property insured to one not previously interested or
3. An expectancy coupled with an existing interest in that insured (Perez, 2006).
out of which the expectancy arises.
When there is an express prohibition against alienation in
NOTE: Existence of insurable interest is a matter of public the policy, in case of alienation, the contract of insurance
policy. Hence, the principle of estoppel cannot be invoked is not merely suspended but avoided (Sundiang Sr. &
(Sundiang Sr. & Aquino, 2014). Aquino, 2014, citing NCC, Article 1306).
Measure of insurable interest in property (2000 Bar) XPNs:

1. When there is a prohibition against alienation or
The extent to which the insured might be damnified by change of interest without the consent of the insurer in
loss or injury thereof (IC, Sec. 17). Insurable interest in which case the policy is not merely suspended but avoided
property does not necessarily imply a property interest (ibid., citing Curtis vs. Girard Fire and Marine Ins., 11 SE 3,
in, or lien upon, or possession of, the subject matter of the 190 Ga. 954).
insurance, and neither title nor a beneficial interest is
requisite to the existence thereof. It is sufficient that the 2. In life, accident, and health insurance (IC, Sec. 20).
insured is so situated with reference to the property that
he would be liable to loss should it be injured or destroyed 3. A change of interest in a thing insured, after the
by the peril against which it is insured. Anyone has an occurrence of an injury which results in a loss does NOT
insurable interest in property who derives a benefit from affect the right of the insured to indemnity for loss (IC, Sec.
its existence or would suffer loss from its destruction 21).
(Gaisano Cagayan, Inc. v. Insurance Company of North
America, G.R. No. 147839, June 8, 2006). 4. A change of interest in one or more distinct things,
separately insured by one policy does NOT avoid the
Extent of insurable interest of a common carrier or insurance as to the others (IC, Sec. 22).
depository in a thing held by him
5. A change of interest by will or succession, on the
To the extent of his liability but not to exceed the value death of the insured, does NOT avoid an insurance; and
thereof (IC, Sec. 15) because the loss of the thing by the his interest in the insurance passes to the person taking
carrier or depository may cause liability against him to his interest in the thing insured (IC, Sec. 23).
the extent of its value.
6. A transfer of interest by one of several partners,
NOTE: When the goods were damaged even before they joint owners, or owners in common, who are jointly
were turned over to the stevedore and such damage was insured, to the others does NOT avoid an insurance even
even compounded by the negligent acts of the common though it has been agreed that the insurance shall cease
carrier and stevedore when both mishandled the goods upon an alienation of the thing insured (IC, Sec. 24).
during the discharging operation, the common carrier
cannot deny its liability. From the nature of their business 8. When the policy is so framed that it will inure to the
and for reasons of public policy, common carriers are benefit of whomsoever, during the continuance of the
bound to observe extraordinary diligence in the vigilance risk, may become the owner of the interest insured(IC,
over the goods transported by them. The extraordinary Sec. 57).
responsibility of the common carrier lasts from the time
the goods are unconditionally placed in the possession of,

MERCANTILE LAW
DOUBLE INSURANCE AND OVER INSURANCE beyond the value of his
insurable interest.
Double insurance (1999, 2005 Bar)
Rules when the insured in a policy other than life is
Double insurance exists where the same person is insured over insured by double insurance
by several insurers separately, in respect to the same
subject and interest (Sec. 95, ibid). 1. The insured, unless the policy otherwise provides,
may claim payment from the insurers in such order as
Requisites of double insurance (STRIP) he may select, up to the amount which the insurers are
severally liable under their respective contracts;
1. Subject matter is the same
2. Two or more insurers insuring separately 2. Where the policy under which the insured claims is a
3. Risk or peril insured against is the same valued policy, any sum received by him under any
4. Interest insured is the same other policy shall be deducted from the value of the
5. Person insured is the same policy without regard to the actual value of the subject
matter insured;
There is no double insurance even though two policies
were both issued over the same subject matter and both 3. Where the policy under which the insured claims is an
covered the same peril insured against if the two policies unvalued policy, any sum received by him under any
were issured to two different entitites (Malayan Insurance policy shall be deducted against the full insurable
Co. vs. Philippine First Insurance Co., G.R. No. 184300, July value, for any sum received by him under any policy;
11, 2012.)
4. Where the insured receives any sum in excess of the
Double insurance is not prohibited by law valuation in the case of valued policies, or of the
insurable value in the case of unvalued policies, he
It is not contrary to law and hence, in case of double must hold such sum in trust for the insurers, according
insurance, the insurers may still be made liable up to the to their right of contribution among themselves.
extent of the value of the thing insured but not to exceed
the amount of the policies issued (Perez, 2006). 5. Each insurer and the other insurers, to contribute
ratably to the loss in proportion to the amount for
NOTE: A provision in the policy that prohibits double which he is liable under his contract (Sec. 96, ibid).
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed (ibid). Additional or other insurance clause (2008 Bar)
Nature of the liability of the several insurers in double A clause in the policy that provides that the policy shall be
insurance (2005 Bar) void if the insured procures additional insurance without
the consent of the insurer (Pioneer Insurance and Surety
In double insurance, the insurers are considered as co- Corp vs. Yap, G.R. No. L-36232, December 19, 1974).
insurers. Each one is bound to contribute ratably to the
loss in proportion to the amount for which he is liable Q: Wyeth Philippines, Inc. (Wyeth) procured amarine
under his contract. This is known as the “principle of policy from Philippines First Insurance Co., Inc.
contribution” or “contribution clause” (IC, Sec. 96 [e]). (Philippines First) to secure its interest over its own
products while the same were being transported or
Overinsurance shipped in the Philippines. Thereafter, Wyeth
executed its annual contract of carriage with
There is overinsurance whenever the insured obtains a Reputable Forwarder Services, Inc. (Reputable).
policy in an amount exceeding the value of his insurable Under the contract, Reputable undertook to answer
interest (Perez, 2006). for all risks with respect to the goods and shall be
liable to Wyeth, for the loss, destruction, or damage of
Double Insurance v. Over Insurance the goods/products due to any and all causes
whatsoever, including theft, robbery, flood, storm,
DOUBLE INSURANCE OVER INSURANCE earthquakes, lightning, and other force majeure
There may be no over When the amount of the while the goods/products are in transit and until
insurance as when the insurance is beyond the actual delivery to the customers, salesmen, and
sum total of the amounts value of the insured’s dealers. The contract also required Reputable to
of the policies issued insurable interest. secure an insurance policy on Wyeth’s goods.Thus,
does not exceed the Reputable signed a Special Risk Insurance Policy (SR
insurable interest of the Policy) with Malayan Insurance Co., Inc., (Malayan)
insured. for the amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR policy
Two or more insurers. There may be only one between Malayan and Reputable) so as to preclude
insurer, with whom the Philippine First from claiming indemnity from
insured takes insurance Malayan?

INSURANCE LAW
A: No.The interest of Wyeth over the property subject Francis filed with the insurance company a claim for
matter of both insurance contracts is different and its value. However, the company denied his claim on
distinct from that of Reputable’s. The policy issued by the ground that he failed to pay the premium
Philippines First was in consideration of the legal and/or resulting in the cancellation of the policy. Can Francis
equitable interest of Wyeth over its own goods. On the recover from the Peninsula Insurance Company?
other hand, what was issued by Malayan to Reputable was (2006 Bar)
over the latter’s insurable interest over the safety of the
goods, which may become the basis of the latter’s liability A: Yes. As a general rule, no policy is binding unless the
in case of loss or damage to the property and falls within premiums thereof have been paid. However, one of the
the contemplation of Section 15 of the Insurance exceptions is when there is an agreement allowing the
Code.Therefore, even though the two concerned insured to pay the premium in installments and partial
insurance policies were issued over the same goods and payment has been made at the time of loss. In the case at
cover the same risk, there arises no double insurance hand Francis already paid two installments at the time of
since they were issued to two different persons/entities the loss and as such may recover on the policy (Makati
having distinct insurable interests. Necessarily, over Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6,
insurance by double insurance cannot likewise exist 1992). Furthermore, the contention of the insurer that the
(Malayan Insurance Co., Inc., v. Philippine First Insurance failure to pay premium resulted in the cancellation of the
Co., Inc. and Reputable Forwarder Services, Inc., G.R. No. policy since no policy of insurance shall be cancelled
184300, July 11, 2012). except upon notice thereof to the insured (IC, Sec. 64).
An insurer may provide that the insured may not Waiver of violation
procure additional insurance
When the insurer, with the knowledge of the existence of
The insurer may insert an “other insurance clause” which other insurances, which the insurer deemed a violation of
will prohibit double insurance. The rationale is to prevent the contract, preferred to continue the policy, its action
the danger that the insured will over insure his property amounted to a waiver of annulment of the contract(Perez,
and thus avert the possibility of perpetration of fraud 2006 citing Gonzales Lao v. Yek Tong Lin Fire & Marine Ins.
(ibid). It is lawful and specifically allowed under Sec. 75 of Co., G.R. No. L-33131, December 13, 1930).
the Insurance Code which provides that “a policy may
declare that a violation or a specified provision thereof MULTIPLE OR SEVERAL INTERESTS ON SAME
shall avoid it, otherwise the breach of an immaterial PROPERTY
provision does not avoid it.”
Instances where more than one insurable interest
Absence of notice of existence of other insurance may exist in the same property
constitutes fraud
1. In trust, both trustor and trustee have insurable interest
When the insurance policy specifically requires that over the property in trust.
notice should be given by the insured of the existence of 2. In a corporation, both the corporation and its
other insurance policies upon the same property, the total stockholders have insurable interest over the assets.
absence of such notice nullifies the policy. Such failure 3. In partnership both the firm and partners have insurable
to give notice of the existence of other insurance on the interest over its assets.
same property when required to do so constitutes 4. In assignment both the assignor and assignee have
deception and it could be inferred that had the insurer insurable interest over the property assigned.
known that there were many other insurance policies on 5. In lease, the lessor, lessee and sub-lessees have insurable
the same property, it could have hesitated or plainly interest over the property in lease.
desisted from entering into such contract (Perez, 2006). 6. In mortgage, both the mortgagor and mortgagee have
Cancellation of policy of insurance by reason of over insurable interest over the property mortgaged.
insurance
Insurable interest of mortgagor and mortgagee in
Sec. 64 of the Insurance Code of 2013 provides that upon case of a mortgaged property are NOT the same
discovery of other insurance coverage that makes the (1999, 2010 Bar)
total insurance in excess of the value of the property
insured, the insurer may cancel such policy of insurance; Each has an insurable interest in the property mortgaged
provided there is prior notice and such circumstance and this interest is separate and distinct from the other.
occurred after the effective date of the policy. Therefore, insurance taken by one in his name only and in
his favor alone does not inure to the benefit of the other.
Q: The Peninsula Insurance Company offered to The same is not open to objection that there is double
insure Francis' brand new car against all risks in the insurance (RCBC vs. CA, 289 G.R. Nos. 128833-34, 128866,
sum of P1 Million for 1 year. The policy was issued April 20, 1998; IC, Sec. 8).
with the premium fixed at P60,000.00 payable in 6
months. Francis only paid the first two months
installments. Despite demands, he failed to pay the
subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped.

MERCANTILE LAW
Extent of insurable interest of mortgagor and does not constitute payment until the proceeds are
mortgagee (1999 Bar) realized or collected (Perez, 2006).
1. Mortgagor – The mortgagor of property, as owner, has Effects of “mortgage redemption” insurance procured
an insurable interest to the extent of its value even by the mortgagor
though the mortgage debt equals such value.
2. Mortgagee –The mortgagee as such has an insurable A“mortgage redemption insurance” is simply a kind of life
interest in the mortgaged property to the extent of the insurance procured by the mortgagor with the mortgagee
debt secured; such interest continues until the as beneficiary up to the extent of the mortgage
mortgage debt is extinguished (Sundiang Sr. & Aquino, indebtedness. Its rationale is to give protection to both the
2014). mortgagee and the mortgagor. In case the mortgagor-
insured dies, the proceeds of such insurance will be
NOTE: In case of an insurance taken by the mortgagee applied to the payment of the mortgage debt to the
alone and for his benefit, the mortgagee, after recovery mortgagee, thereby relieving the heirs of the mortgagor of
from the insurer, is not allowed to retain his claim against the burden of paying the debt (Perez, 2006 citing Great
the mortgagor but it passes by subrogation to the insurer Pacific Assur. Corp. v. Court of Appeals, et. al., G.R. No.
to the extent of the insurance money paid (De Leon, 2010). 113899, October 13, 1999).
The mortgagee as a beneficial payee Standard or union mortgage clause
The mortgagee may be made a beneficial payee through It is a clause that states that the acts of the mortgagor do
any of the following: not affect the mortgagee. The purpose of the clause is to
1. He may become the assignee of the policy with the make a separate and distinct contract of insurance on the
consent of the insurer interest of the mortgagee (De Leon, 2010).
2. He may be the mere pledgee without such consent
3. A rider making the policy payable to the mortgagee “as Open or loss-payable mortgage clause
his interest may appear” may be attached
4. A “standard mortgage clause” containing a collateral It is a clause which provides for the payment of loss, if any,
independent contract between the mortgagee and the to the mortgagee as his interest may appear and under it,
insurer may be attached the acts of the mortgagor affect the mortgagee (ibid).
5. The policy, though, by its terms payable absolutely to
the mortgagor; may have been procured by a In a policy obtained by the mortgagor with loss payable
mortgagor under a contract duty to insure for the clause in favor of the mortgagee as his interest may
mortgagee’s benefit, in which the mortgagee acquires appear, the mortgagee is only a beneficiary under the
an equitable lien upon the proceeds (ibid.). contract, and recognized as such by the insurer but not
made a party to the contract itself. This kind of policy
Insurance procured by mortgagor for benefit of covers only such interest as the mortgagee has at the
mortgagee, or policy assigned to mortgagee issuance of the policy (Sundiang Sr. & Aquino, 2014,
Geagonia v. CA, supra).
1. The contract is deemed to be upon the interest of the
mortgagor; hence he does not cease to be party to the PERFECTION OF THE INSURANCE CONTRACT
contract;
2. Any act of the mortgagor prior to the loss, which Policy of insurance
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of the It is the written instrument in which the contract of
mortgagee; insurance is set forth (IC, Sec. 49.). It is the written
3. Any act which under the contract of insurance is to document embodying the terms and stipulations of the
be performed by the mortgagor may be performed by contract of insurance between the insured and insurer.
the mortgagee with the same effect;
4. In case of loss, the mortgagee is entitled to the NOTE: The policy is not necessary for the perfection of the
proceeds to the extent of his credit at the time of loss contract (Sundiang Sr. & Aquino, 2014).
and
5. Upon recovery by the mortgagee to the extent of his Form of an insurance contract
credit, the debt is extinguished (ibid., citing IC, Sec. 8).
1. The policy shall be in printed form which may
NOTE: The rule on subrogation by the insurer to the right contain blank spaces to be filled in;
of the mortgagee does not apply in this case. 2. Any rider, clause, warranty or endorsement
Assignment of policy to mortgagee is not a payment purporting to be part of the contract of insurance and
which is pasted or attached to said policy is not binding
The assignment is merely to afford the mortgagee a on the insured, unless the descriptive title or name of the
greater security for the settlement of the mortgagor’s rider, clause, warranty or endorsement is also mentioned
obligation and should not be construed as payment in just and written on the blank spaces provided in the policy.
the same way that delivery of negotiable instruments

INSURANCE LAW
3. Unless applied for by the insured or owner, any 1. The cover note shall be issued or renewed only upon
rider, clause, warranty or endorsement issued after the prior approval of the Insurance Commission;
original policy shall be countersigned by the insured or 2. The cover note shall be valid and binding for not more
owner. than sixty (60) days from the date of its issuance;
NOTE: Notwithstanding the foregoing, the policy may be 3. No separate premium (separate from the policy or
in electronic form subject to the pertinent provisions of main contract) is required for the cover note;
Republic Act No. 8792, otherwise known as the
‘Electronic Commerce Act’ and to such rules and 4. The cover note may be canceled by either party upon
regulations as may be prescribed by the Commissioner prior notice to the other of at least seven (7) days;
(IC, Sec. 50).
5. The policy should be issued within sixty (60) days
Types of policy of insurance after the issuance of the cover note;
1. Open – one in which the value of the thing insured is 6. The sixty (60)-day period may be extended upon
not agreed upon, and the amount of the insurance merely written approval of the Insurance Commission; and
represents the insurer’s maximum liability. The value of
such thing insured shall be ascertained at the time of the 7. The written approval of the Insurance Commission is
loss (IC, Sec. 60). dispensed with upon the certification of the president,
2. Valued – is one which expresses on its face an vice-president or general manager of the insurer that the
agreement that the thing insured shall be valued at a risk involved, the values of such risks and premium
specific sum (IC, Sec. 61). therefor, have not as yet been determined or established
3. Running – one which contemplates successive and the extension or renewal is not contrary to or is not
insurances, and which provides that the object of the for the purpose of violating the Insurance Code or any rule
policy may be from time to time defined, especially as to (Sundiang Sr. & Aquino, 2014).
the subjects of insurance, by additional statements or
indorsements (IC, Sec. 62). OFFER AND ACCEPTANCE/CONSENSUAL
Basic contents of a policy Perfection of an insurance contract
1. Parties; The contract of insurance is perfected when the assent or

2. Amount of insurance, except in open or running consent is manifested by the meeting of the offer and the
policies; acceptance upon the thing and the cause which are to
3. Rate of premium; constitute the contract. Mere offer or proposal is not
4. Property or life insured; contemplated (De Lim v. Sun Life Assurance Co., G.R. No. L-
5. Interest of the insured in the property if he is not the 15774, Novebmer 29, 1920).
absolute owner;
6. Risk insured against; and NOTE: Mere submission of the application without the
7. The period during which the insurance is to continue corresponding approval of the policy does not result in
(IC, Sec. 51). the perfection of the contract of insurance.
Rider Insurance contracts through correspondence follow the

“cognition theory” wherein an acceptance made by letter
An attachment to an insurance policy that modifies the shall not bind the person making the offer except from the
conditions of the policy by expanding or restricting its time it came to his knowledge (Enriquez v. Sun Life
benefits or excluding certain conditions from the Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).
coverage (Black’s Law Dictionary).
Q: On June 1, 2011, X mailed to Y Insurance Co. his
Riders are not binding on the insured unless the application for life insurance. On July 21, 2011, the
descriptive title or name thereof is mentioned and written insurance company accepted the application and
on the blank spaces provided in the policy. It should be mailed, on the same day, its acceptance plus the cover
countersigned by the insured or owner unless he was the note. It reached X's residence on August 11. On August
one who applied for the same (IC, Sec. 50). 4, 2011, X figured in a car accident. He died a day later.
May X's heirs recover on the insurance policy? (2011
Cover notes Bar)
Persons who wish to be insured may get protection before A: No, since X had no knowledge of the insurer's
the perfection of the insurance contract by securing a acceptance of his application before he died. What is being
cover note. The cover note issued by the insurer shall be followed in insurance contracts is what is known as the
deemed an insurance contract as contemplated under “cognition theory”.
Section 1(1) of the Insurance Code subject to the
following rules: NOTE: Where the applicant died before he received notice
of the acceptance of his application for the insurance,

MERCANTILE LAW
there is no perfected contract (Perez v. Court of Appeals, b. By agent –If delivered to the agent of the insurer,
G.R. No. 112329, January 28, 2000). whose duty is ministerial, or delivered to the agent of
Offer in property and liability insurance the insured, the policy is considered constructively
delivered (De Leon, 2010).
It is the insured who makes an offer to the insurer, who
accepts the offer, rejects it, or makes a counter-offer. The Importance of delivery
offer is usually accepted by an insurance agent on behalf
of the insurer (De Leon, 2010). 1. It becomes the evidence of the making of a contract
and of its terms;
Offer in life and health insurance
2. It is considered as communication of the insurer’s
It depends upon whether the insured pays the premium acceptance of the insured’s offer;
at the time he applies for insurance.
1. If he does not pay the premium, his application is 3. It becomes the determination of policy period;
considered an invitation to the insurer to make an offer,
which he must then accept before the contract goes into 4. It marks the end of insurer’s opportunity to decline
effect. coverage (De Leon, 2010).
2. If he pays the premium with his application, his
application will be considered an offer (De Leon, 2010).
PREMIUM PAYMENT
DELAY IN ACCEPTANCE
Premium
Kind of acceptance that must be given
It is an agreed price for assuming and carrying the risk –
The acceptance of an insurance policy must be that is, the consideration paid an insurer for undertaking
unconditional, but it need not be by a formal act (De Leon, to indemnify the insured against a specified peril (De
2010). Leon, 2010).
Effect of delay Premium v. Assessment
Unreasonable delay in returning the premium raises the PREMIUM ASSESSMENT

presumption of acceptance of the insurance application Levied and paid to meet Collected to meet actual
(Gloria v. Philippine American Life Ins. Co., CA 73 O.G. anticipated losses losses
[No.37] 8660).
Premium is not a debt Assessment when
Mere delay in acceptance of the insurance application will properly levied, unless
not result in a binding contract. Court cannot impose upon otherwise expressly
the parties a contract if they did not consent. However, in agreed, is a debt.
proper cases, the insurer may be liable for tort (Sundiang
Sr. & Aquino, 2014). Instances when payment of premium becomes a debt
or obligation
DELIVERY OF POLICY
1. In fire, casualty and marine insurance, the premium
Delivery is not necessary in the formation of the payable becomes a debt as soon as the risk attaches.
contract of insurance 2. In life insurance, the premium becomes a debt only
when, in the case of the first premium,the contract has
Since the contract of insurance is consensual, delivery of become binding, and in the case of subsequent
the policy is not necessary for its perfection (Sundiang Sr. premiums,when the insurer has continued the insurance
& Aquino, 2014). after maturity of the premium, in consideration of the
insured’s express or implied promise to pay (De Leon,
The mere delivery of an insurance policy to someone does 2010).
not give rise to the formation of a contract in the absence
of proof that he had agreed to be insured. Payments in addition to regular premium
Two types of delivery An insurer may contract and accept payments, in addition
to regular premium, for the purpose of paying future
1. Actual – delivery to the person of the insured. premiums on the policy or to increase the benefits thereof
2. Constructive (IC, Sec. 84).
a. By mail –If policy was mailed already and premium
was paid and nothing is left to be done by the insured, NOTE: This is a new provision under the Insurance Code
the policy is considered constructively delivered if of 2013.
insured died before receiving the policy.

INSURANCE LAW
1. The insurer has become insolvent and has suspended
Non-payment of balance of premiums does not cancel business, or has refused without justification a valid
the policy tender of premiums (Gonzales v. Asia Life Ins. Co., G.R.
No. L-5188, Oct. 29, 1952).
A contrary rule would place exclusively in the hands of the
insured the right to decide whether the contract should 2. Failure to pay was due to the wrongful conduct of the
stand or not (Philippine Phoenix Surety & Insurance, Co., insurer.
Inc., v. Woodworks, Inc., G.R. No. L-22684, August 31, 1967).
3. The insurer has waived his right to demand payment
Effects of non-payment of premiums (De Leon, 2010).
Non-payment of the first premium unless waived, NOTE: But the insurer will not be deemed to have waived
prevents the contract from becoming binding his privilege of forfeiture by mere inaction or silence if the
notwithstanding the acceptance of the application or the ground be default in the payment of premiums, going as it
issuance of the policy. But nonpayment of the balance of does to the whole consideration inducing the insurer to
the premium due does not produce the cancellation of the enter into the contract (De Leon, 2010).
contract.
While the insured has the privilege of continuing the
Non-payment of the subsequent premiums does not affect policy in force by making premium payments, the insurer
the validity of the contracts unless, by express stipulation, cannot ordinarily force the insured to make these
it is provided that the policy shall in that event be payments (De Leon, 2010).
suspended or shall lapse (De Leon, 2010). Effect of acceptance of premium
NOTE: In case of individual life or endowment insurance Acceptance of premium within the stipulated period for
and group life insurance, the policyholder is entitled to a payment thereof, including the agreed grace period,
grace period of either 30 days or 1 month within which merely assures continued effectivity of the insurance
the payment of any premium after the first may be made policy in accordance with its terms (Stoke v. Malayan
(IC, Secs. 233[a], 234[a]). Insurance Co., Inc., G.R. No. L-34768, February 28, 1984).
In case of industrial life insurance, the grace period is 4 Payment of the premium to agent of the insurance
weeks, where premiums are payable monthly, either 30 company is binding on it (Malayan Insurance v. Arnaldo
days or 1 month (IC, Sec. 236 [a]). G.R. No.L-67835, October 12, 1987 and Areola v. CA G.R. No.
95641, September 22, 1994). If an insurance company
Q: If the applicant failed to pay premium and instead delivers a policy to an insurance broker, it is deemed to
executed a promissory note in favor of the insurer have authorized him to receive the payment of the
payable within 30 days which was accepted by the premium (Sec. 306, South Sea v. CA G.R. No. 102253, June 2,
latter, is the insurer liable in case of loss? 1995; American Home Assurance v. Chua, G.R. No. 130421,
June 28, 1999).
A: Yes, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted the An acknowledgment in a policy of the receipt of the
promise of the applicant to pay the insurance premium premium is conclusive evidence of its payment for the
within thirty 30 days from the effective date of policy. By purpose of making the policy binding despite a stipulation
so doing, it has implicitly agreed to modify the tenor of the that it will not be binding until the premium is actually
insurance policy and in effect, waived any provision paid (IC, Sec. 78; American Home v. Chua, supra).
therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium. Effect of payment of premium by post-dated check
Considering that the insurance policy is silent as to the Delivery of a promissory note or a check will not be
mode of payment, insurer is deemed to have accepted the sufficient to make the policy binding until the said note or
promissory note in payment of the premium. This check has been converted into cash. This is consistent
rendered the policy immediately operative on the date it with Article 1249 of the New Civil Code.
was delivered (Capital Insurance & Surety Co. Inc. v. Plastic
Era Co., Inc. G.R. No. L-22375, July 18, 1975). NOTE: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
Rule on non-payment of premiums by reason of availability of the funds thereof, would be sufficient even
fortuitous event if it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
GR: Non-payment of premiums does not merely suspend date of the instrument and its acceptance by the creditor
but put an end to an insurance contract since the time of (2007 Bar).
the payment is peculiarly of the essence of the contract
(De Leon, 2010). Non-payment of the premium will not entitle the
insurer to recover the premium from the insured
XPN:

MERCANTILE LAW
The continuance of the insurer’s obligation is conditioned E.g. In compulsory motor vehicle insurance, if the policy
upon the payment of the premium, so that no recovery can was issued without payment of premium by the vehicle
be had upon a lapsed policy, the contractual relation owner, the insurer will still be held liable. To rule
between the parties having ceased. If the peril insured otherwise would prejudice the 3rd party victim.
against had occurred, the insurer would have had a valid
defense against recovery under the policy. NOTE: Under Section 77 as amended by RA 10607, a
ninety (90)-day credit extension may be given whenever
Q: Is the insurance company liable when a car, bought credit extension is given under the broker and agency
on installment basis, met an accident but the car is not agreements with duly licensed intermediaries. The
yet fully paid? (2006 Bar) requisites are as follows:
A: Yes, when insured and insurer have agreed to the 1. The credit extension must be provided for under the
payment of premium by installments and partial payment broker and agency agreements;
has been made at the time of loss, then the insurer 2. The credit extension to a duly licensed intermediary
becomes liable. When the car loss happened on the 5th should not exceed ninety (90) days from date of
month, the six months agreed period of payment had not issuance of the policy (Sundiang Sr. & Aquino, 2014).
yet elapsed. The owner may recover from Peninsula
Insurance Company, but the latter has the right to deduct Employees of the Republic of the Philippines, including its
the amount of unpaid premium from the insurance political subdivisions and instrumentalities, and
proceeds. government-owned or -controlled corporations, may pay
their insurance premiums and loan obligations through
“Cash and carry” rule (2003 Bar) salary deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
GR: No policy or contract of insurance issued by an government employee is authorized, notwithstanding the
insurance company is valid and binding unless and until provisions of any existing law, rules and regulations to the
the premium thereof has been paid. Any agreement to the contrary, to make deductions from the salary, wage or
contrary is void. income of the latter pursuant to the agreement between
the insurer and the government employee and to remit
XPN: A policy is valid and binding even when there is non- such deductions to the insurer concerned, and collect
payment of premium: such reasonable fee for its services (IC, Sec. 78,). This is a
new provision.
1. In case of life or industrial life policy whenever the
grace period provision applies, or whenever under the
Q: Stable Insurance Co. (SIC) and St. Peter
broker and agency agreements with duly licensed
Manufacturing Co. (SPMC) have had a long-standing
intermediaries, a ninety (90)-day credit extension is
insurance relationship with each other; SPMC secures
given. No credit extension to a duly licensed the comprehensive fire insurance on its plant and
intermediary should exceed ninety (90) days from date facilities from SIC. The standing business practice
of issuance of the policy (IC, Sec. 77). between them has been to allow SPMC a credit period
2. When there is acknowledgment in a policy of a receipt of 90 days from the renewal of the policy within which
of premium, which the law declares to be conclusive to pay the premium.
evidence of payment, even if there is stipulation therein
that it shall not be binding until the premium is actually Soon after the new policy was issued and before
paid. This is without prejudice however to right of premium payments could be made, a fire gutted the
insurer to collect corresponding premium (Sec. 77, covered plant and facilities to the ground. The day
ibid). after the fire, SPMC issued a manager's check to SIC
for the fire insurance premium, for which it was
3. When there is an agreement allowing the insured to pay issued a receipt; a week later SPMC issued its notice
the premium in installments and partial payment has of loss. SIC responded by issuing its own manager's
been made at the time of loss (Makati Tuscany check for the amount of the premiums SPMC had paid,
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992, and denied SPMC's claim on the ground that under the
2006, 2007 Bar). "cash and carry" principle governing fire insurance,
4. When there is an agreement to grant the insured credit no coverage existed at the time the fire occurred
extension for the payment of the premium. (Art. 1306, because the insurance premium had not been paid.Is
NCC), and loss occurs before the expiration of the credit SPMC entitled to recover for the loss from SIC? (2003,
term (UCPB General Insurance v. Masagana Telemart, 2013 Bar)
G.R. No. 137172, Apr. 4, 20012006, 2007 Bar).
A: St. Peter Manufacturing Company is entitled to recover
5. When estoppel bars the insurer to invoke non-recovery for the loss from Stable Insurance Company. Stable
on the policy. Insurance Company granted a credit term to pay the
6. When the public interest so requires, as determined by premiums. This is not against the law, because the
the Insurance Commissioner standing business practice of allowing St. Peter
Manufacturing Company to pay the premiums after 60 or
90 days, was relied upon in good faith by SPMC. Stable
Insurance Company is in estoppels (UCPB General

INSURANCE LAW
Insurance Company, Inc. v. Masagana Telemart, Inc., G.R. payment of premium, unless the cash surrender value
No. 137172, April 4, 2001). has been paid, or the extension period expired, upon
Effect of acknowledgment of receipt of premium in production of evidence of insurability satisfactory to
policy the company and the payment of all overdue premiums
and any indebtedness to the company upon said policy
Conclusive evidence of its payment, in so far as to make (IC, Sec. 233 [j]).
the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is REINSTATEMENT OF A LAPSED POLICY OF LIFE
actually paid (IC, Sec. 79). INSURANCE
When the policy contains such written acknowledgment, Purpose of the reinstatement provision
it is presumed that the insurer has waived the condition
of prepayment. It hereby creates a legal fiction of The purpose of the provision is to clarify the
payment. The presumption is however, extended only to requirements for restoring a policy to premium-paying
the question of the binding effect of the policy. status after it has been permitted to lapse.
As far as the payment of the premium itself is concerned, Period within which the holder of the policy is
the acknowledgment is only a prima facie evidence of the entitled to reinstatement of the contract
fact of such payment. The insurer may still dispute its
acknowledgment but only for the purpose of recovering The law requires that the policy owner be permitted to
the premium due and unpaid. Whether payment was reinstate the policy, subject to the violations specified,
indeed made is a question of fact. any time within three (3) years from the date of default
of premium payment. A longer period, being more
NON-DEFAULT OPTIONS IN LIFE INSURANCE favorable to the insured, may be used.
Devices used to prevent the forfeiture of a life Reinstatement of a lapsed policy is not an absolute
insurance after the payment of the first premium right of the insured
1. Grace period – After the payment of the first premium, Reinstatement is not an absolute right of the insured, but
the insured is entitled to a grace period of 30 days discretionary on the part of the insurer, which has the
within which to pay the succeeding premiums (Sec. 233 right to deny reinstatement if it were not satisfied as to
[a], ibid). the insurability of the insured, and if the latter did not
pay all overdue premiums and other indebtedness to the
2. Cash surrender value – The amount the insurer agrees insurer (McGuire vs. Manufacturer’s Life Ins. Co., G.R. No.
to pay to the holder of the policy if he surrenders it and
L-3581, September 21, 1950).
releases his claim upon it (Cyclopedia Law Dictionary,
3rd ed.).
Evidence of insurability
3. Extended insurance – It is where the insured is given a
right, upon default, after payment of at least three full Evidence of Insurability is broader phrase than
annual premiums (IC, Sec. 233 [f]) to have the policy “Evidence of Good Health” and includes such other
continued in force from the date of default for a time factors as the insured’s occupation, habits, financial
either stated or equal to the amount as the net value of condition, and other risk selection factors.
the policy taken as a single premium, will purchase (De
Leon, 2010). Q: A life insurance policy lapsed. The insured applied
for reinstatement of the policy and paid only a part
4. Paid up Insurance – The insured is given a right, upon of the overdue premiums. Subsequently, the insured
default, after the payment of at least three annual died. Was the insurer liable?
premiums to have the policy continued in force from
the date of default for the whole period of the insurance A. The insurer is not liable as the policy was not
without further payment of premiums (ibid). It results reinstated. The failure to pay the balance of the overdue
to a reduction of the original amount of insurance, but premiums prevented reinstatement and recovery of the
for the same period originally stipulated (6 Couch 2d., face value of the policy (Andres vs. Crown Life Ins. Co., 55
355; 37 C.J.S. 364). O.G. 3483).
5. Automatic Loan Clause – A stipulation in the policy
providing that upon default in payment of premium, the Q: Eulogio took out a life insurance policy which
same shall be paid from the loan value of the policy until contained a provision which allows for
that value is consumed. In such a case, the policy is reinstatement any time within three years after it
continued in force as fully and effectively as though the lapsed. Eulogio paid the premiums due on the first
premiums had been paid by the insured from funds two months. However, he failed to pay subsequent
derived from other sources (6 Couch 2d., 383). premiums. One month after the policy lapsed, he
filed an application for the reinstatement of his
6. Reinstatement – Provision that the holder of the policy policy. He deposited the overdue premiums and
shall be entitled to reinstatement of the contract at signed a reinstatement policy stating that the
anytime within 3 years from the date of default in the

MERCANTILE LAW
payment deposit only and shall not bind the 2. Pro rata:
Company until this application is finally approved. a. When the insurance is for a definite period and the
Hours later, Eulogio died of electrocution. The insured surrenders his policy before the termination
insurance company denied the claim of his thereof; (IC, Sec. 80 [b]); except:
beneficiaries stating that the policy was never i. Policy not made for a definite period of time;
approved. Is the contention of the insurance ii. Short period rate is agreed upon;
company valid? iii. Life insurance policy.
b. When there is over-insurance. The premiums to be
A: Yes. The stipulation in a life insurance policy giving returned shall be proportioned to the amount by which
the insured the privilege to reinstate it upon written the aggregate sum insured in all the policies exceeds the
application does not give the insured absolute right to insurable value of the thing at risk (IC, Sec. 83).
such reinstatement by the mere filing of an application. i. In case of over-insurance by double insurance, the
The insurer has the right to deny the reinstatement if it insurer is not liable for the total amount of the
is not satisfied as to the insurability of the insured and if insurance taken, his liability being limited to the
the latter does not pay all overdue premium and all other property insured. Hence, the insurer is not entitled
indebtedness to the insurer. After the death of the to that portion of the premium corresponding to the
insured, the Insurance Company cannot be compelled to excess of the insurance over the insurable interest
entertain an application for reinstatement of the policy of the insured (1990 Bar).
because the conditions precedent to reinstatement can ii. In case of over-insurance by several insurers, the
no longer be determined and satisfied. insured is entitled to a ratable return of the
premium, proportioned to the amount by which the
Eulogio’s death, just hours after filing his Application for aggregate sum insured in all the policies exceeds the
Reinstatement and depositing his payment for overdue insurable value of the thing insured (IC, Sec. 83).
premiums and interests does not constitute a special
circumstance that can persuade to consider the policy Illustration
reinstated. Said circumstance cannot override the clear
and express provisions of the Policy Contract and Where there is a total over insurance of P500,000.00 in an
Application for Reinstatement, and operate to remove aggregate P2,000,000.00 policy (P1,500,000.00 is only
the prerogative of Insular Life thereunder to approve or the insurable value), 25% (proportion of P500k to P2M)
disapprove the Application for Reinstatement (Violeta R. of the premiums paid to the several insurers should be
Lalican vs. The Insular Life Assurance Company Limited, returned.
supra).
Instances when the insured is not entitledto return of
REFUND OF PREMIUMS premiums paid
Instances when the insured entitled to recover 1. If the peril insured against has existed, and the insurer
premiums already paid or a portion thereof (2000 has been liable for any period, the peril being entire and
Bar) indivisible (IC, Sec. 81);
2. In life insurance policies (IC, Sec. 80 [b]);
1. Whole: 3. If the policy is annulled, rescinded or if a claim is
a. When no part of the thing insured has been exposed to denied by reason of fraud (IC, Sec. 82);
any of the perils insured against (IC, Sec. 80). 4. If contract is illegal and the parties are in pari delicto.
b. When the contract is voidable because of the fraud or
misrepresentations of the insurer of his agent (IC, Sec. Q: Teodoro Cortez, applied for a 20-year endowment
82). policy with Great Pacific Insurance Corporation
c. When the insurance is voidable because of the (Great Pacific). His application, with the requisite
existence of facts of which the insured was ignorant medical examination, was accepted and approved by
without his fault (IC, Sec. 82). the Great Pacific and in due course, an endowment
d. When the insurer never incurred any liability under policy was issued in his name. Thereafter, Great
the policy because of the default of the insured other than Pacific advised Cortez that the policy was not in force.
actual fraud (IC, Sec. 82). To make it enforceable and operative, Cortez was
e. When rescission is granted due to insurer’s breach of asked to remit the balance to complete his initial
contract (IC, Sec. 74). annual premium and to see Dr. Felipe V. Remollo for
another full medical examination at his own expense.
NOTE: When the contract is voidable, a person insured is Because of this, Cortez informed that it that he was
entitled to a return of the premium when such contract is cancelling the policy and he demanded the return of
subsequently annulled under the provisions of the New his premium plus damages. Great Pacific ignored his
Civil Code. demand. Is Cortez is entitled to a refund of his
premium?
A person insured is not entitled to a return of premium if
the policy is annulled, rescinded or if a claim is denied by A: Yes. Great Pacific should have informed Cortez of the
reason of fraud (IC, Sec. 82). deadline for paying the first premium before or at least
upon delivery of the policy to him, so he could have

INSURANCE LAW
complied with what was needful and would not have been Under Section 27 of the Insurance Code, “a concealment
misled into believing that his life and his family were entitles the injured party to rescind a contract of
protected by the policy, when actually they were not. And, insurance.” Moreover, under Section 168 of the Insurance
if the premium paid by Cortez was unacceptable for being Code, the insurer is entitled to rescind the insurance
late, it was the company's duty to return it. Since his policy contract in case of an alteration in the use or condition of
was in fact inoperative or ineffectual from the beginning, the thing insured (Malayan Insurance Company vs. PAP Co.
the company was never at risk, hence, it is not entitled to (Phil. Branch), G.R. No. 200784, August 7, 2013, in Divina
keep the premium (Great Pacific Life Insurance 2014).
Corporation v. CA, et al., G.R. No. L-57308, April 23, 1990).
Requisites
RESCISSION OF INSURANCE CONTRACTS
1. A party knows a fact which he neglects to
Instances wherein a contract of insurance may be communicate or disclose to the other party
rescinded (1991, 1994, 1996 - 1998 Bar) 2. Such party concealing is duty bound to disclose such
fact to the other
1. Concealment 3. Such party concealing makes no warranty as to the
2. Misrepresentation/ omission fact concealed
3. Breach of warranties 4. The other party has no means of ascertaining the
fact concealed
Instances wherein a contract of insurance may be 5. The fact must be material
canceled by the insurer
Test of materiality (2000 Bar)
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing the It is determined not by the event, but solely by the
hazard insured against; probable and reasonable influence of the facts upon the
3. Discovery of fraud or material misrepresentation; party to whom the communication is due, in forming his
4. Discovery of willful or reckless acts or omissions estimate of the disadvantages of the proposed contract, or
increasing the hazard insured against; in making his inquiries (IC, Sec. 31).
5. Physical changes in the property insured which result
in the property becoming uninsurable; NOTE: As long as the facts concealed are material,
6. Discovery of other insurance coverage that makes the concealment, whether intentional or not, entitles the
total insurance in excess of the value of the property injured party to rescind (IC, Sec.27).
insured; or
7. A determination by the Commissioner that the Concealment in marine insurance
continuation of the policy would violate or would place
the insurer in violation of the Insurance Code (IC, Sec. 64). Rules on concealment are stricter since the insurer would
have to depend almost entirely on the matters
NOTE: No policy of insurance other than life shall be communicated by the insured. Thus, in addition to
canceled by the insurer except upon prior notice thereof material facts, each party must disclose all the
to the insured, and no notice of cancellation shall be information he possesses which are material or the
effective unless it is based on the occurrence, after the information of the belief or expectation of a third person,
effective date of the policy, of one or more of the in reference to a material fact. But concealment in a
abovementioned instances (Sec. 64, ibid). marine insurance in any of the following matters
enumerated under Section 112 Insurance Code does not
Notice of cancellation of the contract vitiate the entire contract, but merely exonerates the
insurer from a loss resulting from the risk concealed.
All notices of cancellation shall be in writing, mailed or
delivered to the named insured at the address shown in Test in ascertaining the existence of concealment
the policy, or to his broker provided the broker is
authorized in writing by the policy owner to receive the If the applicant is aware of the existence of some
notice of cancellation on his behalf, and shall state: circumstances which he knows would probably influence
1. Which of the grounds set forth in Section 64 is relied the insurer in acting upon his application, good faith
upon; and requires him to disclose that circumstance, though
2. That, upon written request of the named insured, the unasked.
insurer will furnish the facts on which the cancellation is
based (Sec. 65, ibid). Matters that need not be disclosed
CONCEALMENT GR: The parties are not bound to communicate

information of the following matters:
Concealment 1. Those which the other knows
2. Those which, in the exercise of ordinary care, the other
Concealment is a neglect to communicate that which a ought to know and of which, the former has no reason to
party knows and ought to communicate (IC, Sec. 26). suppose him ignorant

MERCANTILE LAW
3. Those of which the other waives communication was a typical mongoloid child upon filling out the
4. Those which prove or tend to prove the existence of a application form. It is evident that he withheld a fact
risk excluded by a warranty, and which are not otherwise material to the risk to be assumed by the insurance
material company had the plan be approved.
5. Those which relate to a risk excepted from the policy
and which are not otherwise material; The contract of insurance is one of perfect good faith,
6. The nature or amount of the interest of one insured uberrima fides, absolute and perfect candor; the absence
(except if he is not the owner of the property insured) (IC, of any concealment or demotion. Concealment is a neglect
Sec. 34). to communicate that which needs to be communicated
whether intentional or unintentional. In case of
XPN: In answer to inquiries of the other (IC, Sec. 30). concealment, the insurer is entitled to rescind the
contract of insurance. In the case at bar, the respondent is
NOTE: Neither party is bound to communicate, even upon guilty of such concealment. Ultimately, there was no
inquiry, information of his own judgment, because such perfected contract of insurance since the conditions in the
would add nothing to the appraisal of the application (IC, binding receipt were not complied with by the applicant
Sec. 35). (Great Pacific Life Assurance Company v. CA, G.R. No. L-
31845, April 30, 1979).
The parties are bound to know all the general causes
which are open to his inquiry, equally with the other, and Q: Benny applied for life insurance for Php 1.5 Million.
all general usages of trade (IC, Sec. 32). The insurance company approved his application and
issued an insurance policy effective Nov. 6, 2008.
Matters that must be disclosed even in the absence of Benny named his children as his beneficiaries. On
inquiry April 6, 2010, Benny died of hepatoma, a liver
ailment.
1. Those material to the contract
2. Those which the other has no means of ascertaining The insurance company denied the children's claim
3. Those as to which the party with the duty to for the proceeds of the insurance policy on the ground
communicate makes no warranty that Benny failed to disclose in his application two
previous consultations with his doctors for diabetes
NOTE: Matters relating to the health of the insured are and hypertension, and that he had been diagnosed to
material and relevant to the approval of the issuance of be suffering from hepatoma. The insurance company
the life insurance policy as these definitely affect the also rescinded the policy and refunded the premiums
insurer’s action to the application. It is well-settled that paid.
the insured need not die of the disease he had failed to
disclose to the insurer, as it is sufficient that his non- Was the insurance company correct? (2013 Bar)
disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making A: The insurance company correctly rescinded the policy
inquiries (Sunlife Assurance Company of Canada v. CA, G.R. because of concealment (Section 27 of Insurance Code).
No. 105135, June 22, 1995). Benny did not disclose that he was suffering from
diabetes, hypertension, and hepatoma. The concealment
Information as to the nature of interest need not be is material, because these are serious ailments (Florendo
disclosed except in property insurance, if the insured is v. Philam Plans, Inc., G.R. No. 186983, February 22, 2012).
not the owner. If somebody is insuring properties of Benny died less than two years from the date of the
which he is not the owner, he must disclose why he has issuance of the policy (IC, Sec. 48).
insurable interest that would entitle him to ensure it, and
the extent thereof (IC, Secs. 34 & 51 [e]). Right to information of material facts may be waived
Q: Ngo Hing filed an application with the Great Pacific Right to information of material facts may be waived:
Life Assurance Company (Pacific Life) for a twenty- 1. By the terms of the contract
year endownment policy on the life of his one-year 2. By the failure to make an inquiry as to such facts,
old daughter Helen Go. Ngo Hing supplied the where they are distinctly implied in other facts from
essential data and filed the application to Mondragon, which information is communicated (IC, Sec. 33).
the branch manager.After sometime, Helen Go died of
influenza with complication of bronchopneumonia. Rules on concealment
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in his 1. If there is concealment under Section 27, the remedy
effort, he filed the action for the recovery of the same. of the insurer is rescission since concealment vitiates the
Did Ngo Hing concealed the state of health and contract of insurance (1996 Bar).
physical condition of Helen Go, which rendered void
the binding receipt? 2. The party claiming the existence of concealment
must prove that there was knowledge of the fact
A: Ngo Hing intentionally concealed the state of health of concealed on the part of the party charged with
his daughter Helen Go. He was fully aware that his child concealment.

INSURANCE LAW
3. Good faith is not a defense in concealment. NOTE: Failure on the part of the insured to disclose such
Concealment, whether intentional or unintentional facts known to his agent, or wholly due to the fault of the
entitles the injured party to rescind the contract of agent, will avoid the policy, despite the good faith of the
insurance (IC, Sec. 27). insured.
4. The matter concealed need not be the cause of loss MISREPRESENTATION/OMISSION

(IC, Sec. 31).
Representation
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of the An oral or written statement of a fact or condition
effectivity of the policy. affecting the risk made by the insured to the insurance
company, tending to induce the insurer to assume the
In order for concealment to produce the effect of risk.
avoiding the policy, it should take place at the time
the contract is entered into NOTE: Representation should be made, altered or
withdrawn at the time of or before the issuance of the
Concealment should take place at the time the contract is policy. (Sec. 37, Insurance Code). It may be altered or
entered into and not afterwards in order that the policy withdrawn before the insurance is effected, but not
may be avoided. The duty of disclosure ends with the afterwards (Sec.41, ibid).
completion of the contract. Waiver of medical
examination in a non-medical insurance contract renders Kinds of representation
even more material the information required of the
applicant concerning previous condition of health and 1. Oral or written (Sec. 36, ibid);
diseases suffered, for such information necessarily 2. Affirmative (Sec. 42, ibid); or
constitutes an important factor which the insurer takes 3. Promissory (Sec. 39, ibid).
into consideration in deciding whether to issue the policy
or not. Failure to communicate information acquired after Affirmative representation
the effectivity of the policy will not be a ground to rescind
the contract. Any allegation as to the existence or non-existence of a
fact when the contract begins (e.g. the statement of the
NOTE: The reason for this is that if concealment should insured that the house to be insured is used only for
take place after the contract is entered into, the residential purposes is an affirmative representation).
information concealed is no longer material as it will no
longer influence the other party to enter into such Promissory representation
contract.
Any promise to be fulfilled after the contract has come
Q: Joanna applied for a non-medical life insurance. into existence or any statement concerning what is to
Joanna did not inform the insurer that one week prior happen during the existence of the insurance.
to her application for insurance, she was examined
and confined at St. Luke’s Hospital where she was Misrepresentation
diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable Misrepresentation is an affirmative defense. To avoid
considering that the fact concealed had no bearing liability, the insurer has the duty to establish such a
with the cause of death of the insured? Why? (2001 defense by satisfactory and convincing evidence (Ng Gan
Bar) Zee v. Asian Crusader Life Assn. Corp., G.R. No. L- 30685,
May 30, 1983). [See also Sec. 44 (when the facts fail to
A: No. The concealed fact is material to the approval and correspond to the assertions or stipulations), Insurance
issuance of the insurance policy. It is well settled that the Code].
insured need not die of the disease she failed to disclose
to the insurer. It is sufficient that his nondisclosure misled NOTE: In the absence of evidence that the insured has
the insurer in forming his estimate of the risks of the sufficient medical knowledge to enable him to distinguish
proposed insurance policy or in making inquiries (Sun between “peptic ulcer” and “tumor”, the statement of
Life v. CA, supra). deceased that said tumor was “associated with ulcer of
the stomach” should be considered an expression in good
Instances whereby concealment made by an agent faith. Fraudulent intent of insured must be established to
procuring the insurance binds the principal entitle insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an
1. Where it was the duty of the agent to acquire and affirmative defense which must be proved (Ng Gan Zee v.
communicate information of the facts in question; Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30,
2. Where it was possible for the agent, in the exercise of 1983).
reasonable diligence to have made such communication
before the making of the insurance contract.

MERCANTILE LAW
Requisites of misrepresentation 2. Oral or written
3. Made at the time of, or before issuing the policy and
1. The insured stated a fact which is untrue; not after
2. Such fact was stated with knowledge that it is untrue 4. Altered or withdrawn before the insurance is
and with intent to deceive or which he states positively effected but not afterwards
as true without knowing it to be true and which has a 5. Must be presumed to refer to the date the contract
tendency to mislead; goes into effect (IC, Sec. 42).
3. Such fact in either case is material to the risk.
Similarities of concealment and representation
NOTE: A representation cannot qualify an express
provision in a contract of insurance but it may qualify an 1. Both refer to the same subject matter and both take
implied warranty (IC, Sec. 40). place before the contract is entered.
2. Concealment or representation prior to loss or
Representation as to a future undertaking death gives rise to the same remedy; that is rescission or
cancellation.
A representation as to the future is to be deemed a
promise unless it appears that it was merely a statement 3. The test of materiality is the same (IC, Secs. 31, 46).
of belief or an expectation that is susceptible to present,
actual knowledge (IC, Sec. 39). 4. The rules of concealment and representation are the
same with life and non-life insurance.
An erroneous opinion or belief will not avoid the
insurance policy 5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on ground of
The statement of an erroneous opinion, belief or concealment or false representation.
information, or of an unfulfilled intention, per se, will not
avoid the contract of insurance, unless fraudulent. 6. Since the contract of insurance is said to be one of
utmost good faith on the part of both parties to the
Test of materiality agreement, the rules on concealment and representation
apply likewise to the insurer.
It is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the Concealment v. Misrepresentation
party to whom the representation is made, in forming his
estimates of the disadvantages of the proposed contract Concealment Misrepresentation
or in making his inquiries (similar with concealment) (IC,
The insured withholds the The insured makes
Sec. 46).
information of material erroneous statements of
facts from the insurer facts with the intent of
Effects of misrepresentation inducing the insurer to
enter into the insurance
1. It renders the insurance contract voidable at the option contract
of the insurer, although the policy is not thereby rendered
void ab initio.The injured party entitled to rescind from
Application of concealment and misrepresentation in
the time when the representation becomes false;
case of loss or death
2. When the insurer accepted the payment of premium
GR: If the concealment or misrepresentation is
with the knowledge of the ground for rescission, there is
discovered before loss or death, the insurer can cancel the
waiver of such right;
policy. If the discovery is after loss or death, the insurer
can refuse to pay.
3. There is no waiver of the right of rescission if the
insurer had no knowledge of the ground therefor at the
XPN: The incontestability clause under paragraph 2 of
time of acceptance of premium payment.
Section 48.
Effect of collusion between the insurer’s agent and the
XPN to XPN: (i.e., when the contract may be rescinded
insured
even beyond the incontestability period)
It vitiates the policy even though the agent is acting within
1. Non-payment of premiums.
the apparent scope of his authority. The agent ceases to
2. Violation of condition (IC, Secs. 233 [b], 234 [b]).
represent his principal. He, thus, represents himself; so
3. No insurable interest
the insurer is not estopped from avoiding the policy.
4. Cause of death was excepted or not covered
5. Fraud of a vicious type
Characteristics of representation
6. Proof of death was not given (IC, Sec. 248).
7. That the conditions of the policy relating to military
1. Not a part of the contract but merely a collateral
or naval service (IC, Secs. 233 [b], 234 [b]).
inducement to it

INSURANCE LAW
8. That the action was not brought within the time Omission
specified (IC, Sec. 63).
The failure to communicate information on matters
Incontestability clause (1991, 1994, 1996 – 1998 Bar) proving or tending to prove the falsity of warranty. In case
of omission, the aggrieved party may rescind the contract
After the policy of life insurance made payable on the of insurance.
death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from BREACH OF WARRANTIES
the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is Warranties (1993 Bar)
rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (Sundiang Statements or promises by the insured set forth in the
Sr. & Aquino, 2014, citing IC, Sec. 48; Florendo v. Philam policy itself or incorporated in it by proper reference, the
Plans, G.R. No. 186983, February 22, 2012). untruth or non-fulfillment of which in any respect, and
without reference to whether the insurer was in fact
The “Incontestability Clause” under Section 48 of the prejudiced by such untruth or non-fulfillment render the
Insurance Code regulates both the actions of the insurers policy voidable by the insurer.
and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained Purpose of warranties
by fraud, concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their To eliminate potentially increasing moral or physical
attempts at insurance fraud would be timely uncovered- hazards which may either be due to the acts of the insured
thus deterring them from venturing into such nefarious or to the change of the condition of the property.
enterprise (Manila Bankers Life Insurance Corporation vs.
Cresencia-Aban, G.R. No. 175666, July 29, 2013). Basis of warranties
Defenses that are not barred by incontestability The insurer took into consideration the condition of the
clause property at the time of effectivity of the policy.
The following defenses are not barred by the Kinds of warranties

incontestability clause:
1. That the person taking the insurance lacked insurable 1. Affirmative warranty – one which relates to matters
interest as required by law; which exist at or before the issuance of the policy.
2. That the cause of the death of the insured is an excepted
risk; 2. Promissory warranty – one in which the insured
3. That the premiums have not been paid (IC, Secs. 77, undertakes that something shall be done or omitted
233[b], 236[b]); after the policy takes effect and during its continuance.
4. That the conditions of the policy relating to military or
naval service have been violated (IC, Secs. 233[b], 234[b]); 3. Express warranty – a statement in a policy, of a matter
5. That the fraud is of a particularly vicious type; relating to the person or thing insured, or to the risk, as
6. That the beneficiary failed to furnish proof of death or a fact.
to comply with any condition imposed by the policy after
the loss has happened; or 4. Implied warranty – an agreement or stipulation not
7. That the action was not brought within the time expressed in the policy but the existence of which is
specified (Sundiang Sr. & Aquino, 2014). admitted or presumed from the fact that the contract of
insurance has been executed.
Remedy of the injured party in case of
misrepresentation Peculiar only to marine insurance, and therefore is
deemed included in the contract, although not
If there is misrepresentation, the injured party is entitled expressly mentioned:
to rescind from the time when the representation a. That the ship will not deviate from the agreed voyage
becomes false. unless deviation is proper
b. That the ship will not engage in illegal venture
Exercise of the right to rescind the contract c. Warranty of neutrality, that the ship will carry the
requisite documents of nationality or neutrality where
The right to rescind must be exercised previous to the such nationality or neutrality is warranted
commencement of an action on the contract (the action d. Presence of insurable interest
referred to is that to collect a claim on the contract) (IC, e. That the ship is seaworthy at the time of the
Sec.48, par.1). commencement of the insurance contract.

MERCANTILE LAW
Warranty v. Representation CLAIMS SETTLEMENT AND SUBROGATION
WARRANTY REPRESENTATION NOTICE AND PROOF OF LOSS

Considered parts of the Collateral inducement to the
contract. contract. Loss in insurance
Always written on the May be written in a totally
face of the policy, disconnected paper or may be The injury, damage or liability sustained by the insured in
actually or by reference. oral. consequence of the happening of one or more of the perils
Must be strictly Only substantial proof is against which the insurer, in consideration of the
complied with. required. premium, has undertaken to indemnify the insured. It
Its falsity or non- may be total, partial, or constructive in marine insurance.
Its falsity renders the policy
fulfillment operates as a
void on the ground of fraud. Conditions before the insured may recover on the
breach of contract.
Insurer must show its policy after the loss
Presumed material.
materiality in order to defeat
an action on the policy. 1. The insured or some person entitled to the benefit of
the insurance, without unnecessary delay, must give
Effects of breach of warranty written notice to the insurer (IC, Sec. 90);
1. Material 2. When required by the policy, insured must present a

preliminary proof loss which is the best evidence he has
GR: Violation of material warranty or of material in his power at the time (IC, Sec. 91).
provision of a policy will entitle the other party to rescind
the contract. NOTE: For other non-life insurance, the Commissioner
may specify the period for the submission of the notice of
XPN:(with regard to “promissory” warranties) loss (IC, Sec. 90).
1. Loss occurs before the time of performance of the
warranty; Notice of loss
2. The performance becomes unlawful at the place of the
contract; and It is the more or less formal notice given the insurer by the
insured or claimant under a policy of the occurrence of the
3. Performance becomes impossible (IC, Sec. 73).
loss insured against.
2. Immaterial
Purposes of notice of loss (IFC)
GR: It will not avoid the policy.
1. To give insurer Information by which he may determine
XPN: When the policy expressly provides or declares that the extent of his liability;
2. To afford the insurer a means of detecting any Fraud
a violation thereof will avoid it.
that may have been practiced upon him; and
For instance, an “Other Insurance Clause” which is a 3. To operate as a Check upon extravagant claims.
condition in the policy requiring the insured to inform the
insurer of any other insurance coverage of the property. Effect of failure to give notice of loss
A violation of the clause by the insured will not constitute
a breach unless there is an additional provision stating FIRE INSURANCE OTHER TYPES OF INSURANCE
that the violation thereof will avoid the policy (IC, Sec. 75). Failure to give notice will not
Failure to give notice
exonerate the insurer, unless
defeats the right of
Effect of a breach of warranty without fraud there is a stipulation in the
the insured to
policy requiring the insured to
recover.
The policy is avoided only from the time of breach (IC, Sec. do so.
76) and the insured is entitled:
1. To the return of the premium paid at a pro rata from Instances when the defects in the notice or proof of
the time of breach or if it occurs after the inception of loss are considered waived (MaJoR-DeW)
the contract; or
2. To all premiums if it is broken during the inception When the insurer:
of the contract. 1. Writes to the insured that he considers the policy null
and void as the furnishing of notice or proof of loss
would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the amount of
the loss by arbitration, making no objections on account
of notice and preliminary proof; or

INSURANCE LAW
5. Makes Objection on any ground other than the formal 2. Evidence as to numbers and types of valid and
defect in the preliminary proof. justifiable complaints to the Commissioner against an
insurance company, and the Commissioner’s
Instances when delay in the presentation of notice or complaint experience with other insurance companies
proof of loss deemed waived writing similar lines of insurance shall be admissible
in evidence in an administrative or judicial proceeding
If caused by: brought under this section (IC, Sec. 247 [b]).
1. Any act of the insurer; and
2. By failure to take objection promptly and specifically Claims settlement in life insurance
upon that ground (IC, Sec. 93).
1. The proceeds shall be paid immediately upon the
Proof of loss maturity of the policy if there is such a maturity date.
It is the more or less formal evidence given the company 2. If the policy matures by the death of the insured, within
by the insured or claimant under a policy of the sixty (60) days after presentation of the claim and filing
occurrence of the loss, the particulars thereof and the data of the proof of the death of the insured (Sundiang Sr. &
necessary to enable the company to determine its liability Aquino, 2014; IC, Section 248).
and the amount thereof.
Claims settlement in property insurance
Time for payment of claims
1. Proceeds shall be paid within thirty (30) days after
LIFE POLICIES NON-LIFE POLICIES proof of loss is received by the insurer and
1. Maturing upon the The proceeds shall be ascertainment of the loss or damage is made either
expiration of the term– paid within 30 days after by agreement or by arbitration.
the proceeds are the receipt by the insurer
immediately payable to of proof of loss and 2. If no ascertainment is made within sixty (60) days
the insured, except if ascertainment of the loss after receipt of proof of loss, it shall be paid within
proceeds are payable in or damage by agreement ninety (90) days after such receipt (Sundiang Sr. &
installments or annuities of the parties or by Aquino, 2014; IC, Sec. 249).
which shall be paid as arbitration but not later
they become due. than 90 days from such UNFAIR CLAIMS SETTLEMENT; SANCTIONS
receipt of proof of loss,
2. Maturing at the death whether or not Unfair settlement practices (MAI-GL)
of the insured, occurring ascertainment is had or
prior to the expiration of made (IC, Sec. 249). The following constitutes unfair settlement practices:
the term stipulated – the 1. Knowingly misrepresenting to claimants pertinent
proceeds are payable to facts or policy provisions relating to coverage at
the beneficiaries within issue;
60 days after
presentation of claim and 2. Failing to acknowledge with reasonable promptness
filing of proof of death pertinent communications with respect to claims
(IC, Sec. 248). arising under its policies;
GUIDELINES ON CLAIMS SETTLEMENT 3. Failing to adopt and implement reasonable

standards for the prompt investigation of claims
Claim Settlement arising under its policies;
Claim settlement is the indemnification of the suffered by 4. Not attempting in good faith to effectuate prompt,
the insured. The claimant may be the insured or fair and equitable settlement of claims submitted in
reinsured, the insurer who is entitled to subrogation, or a which liability has become reasonably clear; or
third party who has a claim against the insured.
5. Compelling policyholders to institute suits to recover
Purpose of the rule amounts due under its policies by offering without
justifiable reason substantially less than the amounts
To eliminate unfair claim settlement practices. ultimately recovered in suits brought by them.
Rules in claim settlement Sanction for the insurance companies which engaged
to unfair settlement practices
1. No insurance company doing business in the
Philippines shall refuse, without justifiable cause, to The suspension or revocation of an insurance company’s
pay or settle claims arising under coverages provided certificate of authority (IC, Sec 247).
by its policies, nor shall any such company engage in
unfair claim settlement practices.

MERCANTILE LAW
Effect of refusal or failure to pay the claim within the under COGSA, the suit will not be dismissed if the delay
time prescribed was not due to the claimant’s fault. The insurer therefore
should bear the loss with interest on account of such delay
The insurer shall be liable to pay interest twice the ceiling (New World International Development Phils. Inc. vs. NYK-
prescribed by the Monetary Board on the proceeds of the FILJAPAN Shipping Corp., G.R. No. 171468, August 24, 2011,
insurance from the date following the time prescribed in Divina, 2014).
under the Insurance Code, until the claim is fully satisfied
(Prudential Guarantee and Assurance, Inc. v. Trans-Asia Q. From what time shall the period of prescription be
Shipping Lines, Inc. G. R. No. 151890, June 20, 2006). computed in case the insured asked for
reconsideration of the denial of claim? (1996 Bar)
NOTE: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such refusal A: In case the claim was denied by the insurer but the
or failure to pay is based on the ground that the claim is insured file a petition for reconsideration, the
fraudulent. prescriptive period should be counted from the date the
claim was denied at the first instance and not from the
Where the mortgagor and the mortgagee were both denial of the reconsideration. To rule otherwise would
claiming the proceeds of a fire insurance policy and the give the insured a scheme or devise to waste time until
creditors of the mortgagor also attached the proceeds, the any evidence which may be considered against him is
insurance company cannot be held liable for damages for destroyed (Sun life Office, Ltd. vs. CA, supra).
withholding payment since the delay was not malevolent
(Rizal Commercial Bank Corporation v. Court of Appeals, Prescriptive period in motor vehicle insurance
supra).
It is one year from denial of the claim and not from the
PRESCRIPTION OF ACTIONS date of the accident.
Rules on the prescriptive period for filing an SUBROGATION

insurance claim
Principle of Subrogation
1. The parties to a contract of insurance may validly agree
that an action on the policy should be brought within a If the plaintiff’s property has been insured, and he has
limited period of time, provided such period is not less received indemnity from the insurance company for the
than 1 year from the time the cause of action accrues. If injury or loss arising out of wrong or breach of contract
the period agreed upon is less than 1 year from the time complained of, the insurance company shall be
the cause of action accrues, such agreement is void (IC, subrogated to the rights of the insured against the
Sec. 63, 1996 Bar). wrongdoer or the person who has violated the contract
a. The stipulated prescriptive period shall begin to run (NCC, Art. 2207).
from the date of the insurer’s rejection of the claim filed
by the insured or beneficiary and not from the time of The insurer, upon happening of the risk insured against
loss. and after payment to the insured is subrogated to the
b. In case the claim was denied by the insurer but the rights and cause of action of the latter. As such, the insurer
insured filed a petition for reconsideration, the has the right to seek reimbursement for all the expenses
prescriptive period should be counted from the date the paid (Eastern Shipping Lines vs. Prudential Guarantee and
claim was denied at the first instance and not from the Assurance, Inc., G.R. No. 174116, September 1, 2009).
denial of the reconsideration (Sun Life Office, Ltd. vs. CA,
supra). NOTE: The principle of subrogation inures to the insurer
without any formal assignment or any express stipulation
2. If there is no stipulation or the stipulation is void, the
to that effect in the policy. Said right is not dependent
insured may bring the action within 10 years in case the
upon nor does it grow out of any private contract.
contract is written.
Payment to the insured makes the insurer a subrogee in
3. In a comprehensive motor vehicle liability insurance equity (Malayan Insurance Co., Inc. v. CA, G.R. No. L-36413,
(CMVLI), the written notice of claim must be filed within Sept. 26, 1988).
6 months from the date of the accident; otherwise, the
claim is deemed waived even if the same is brought within Incapacity of the insured will not affect the capacity of the
1 year from its rejection (Vda. De Gabriel vs. CA, GR No. subrogee because capacity is personal to the holder
103883, Nov 14, 1996). (Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724,
June 8, 2004).
4. The suit for damages, either with the proper court or
with the Insurance Commissioner, should be filed within Purposes of subrogation
1 year from the date of the denial of the claim by the
insurer, otherwise, claimant’s right of action shall 1. To make the person who caused the loss legally
prescribe (IC, Sec. 397). responsible for it.
2. To prevent the insured from receiving double
NOTE: Notwithstanding the fact that the case was filed recovery from the wrongdoer and the insurer.
beyond the one-year prescriptive period provided for

INSURANCE LAW
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of 6. For recovery of loss in excess of insurance coverage
public policy.
NOTE: Since the insurer can be subrogated to only such
Rules on subrogation rights as the insured may have, should the insured, after
receiving payment from the insurer, release the
1. Applicable only to property insurance – the value of wrongdoer who caused the loss, the insurer loses his
human life is regarded as unlimited and therefore, no rights against the latter. But in such a case, the insurer will
recovery from a third party can be deemed adequate be entitled to recover from the insured whatever it has
to compensate the insured’s beneficiary. paid to the latter, unless the release was made with the
2. The right of insurer against a third party is limited to consent of the insurer (Manila Mahogany Manufacturing
the amount recoverable from latter by the insured. Corporation v. Court of Appeals, G.R. No. L-52756, October
12, 1987).
Rules on indemnity
Q: Malayan Insurance Company issued a car
1. Applies only to property insurance except when the insurance policy in favor of First Malayan Leasing and
creditor insures the life of his debtor. Finance Corporation (First Malayan), insuring a
2. Insurance contracts are notwagering contracts or Mitsubishi Galant against third party liability, own
gambling contracts. damage and theft, among others. Unfortunately, the
Galant encountered a vehicular accident at the corner
NOTE: Under the collateral source rule, if an injured of EDSA and Ayala Avenue, Makati. The accident
person receives compensation for his injuries from a involves a Nissan Bus operated by Aladdin Transit, an
source wholly independent of the tortfeasor, the payment Isuzu Tanker, and a Fuzo Cargo Truck. Because of this,
should not be deducted from the damages which he would Malayan Insurance was constrained to pay First
otherwise collect from the tortfeasor. It finds no Malayan of the damages sustained by it. Maintaining
application to cases involving no-fault insurances under that it has been subrogated to the rights and interests
which the insured is indemnified for losses by insurance of the assured, Malayan Insurance sent several
companies, regardless of who was at fault in the incident demand letters to Rodelio Alberto (Alberto) and
generating the losses. Here, it is clear that MMPC is a no- Enrico Alberto Reyes (Reyes), the registered owner
fault insurer. Hence, it cannot be obliged to pay and the driver, respectively, of the Fuzo Cargo Truck,
hospitalization expenses of the dependents of its requiring them to pay the amount it had paid to the
employees which had already been paid by separate assured. No settlement of liability was made, thus,
health insurance providers of said dependents. Malayan Insurance filed a complaint for damages for
(Mitsubishi Motors Philippines Salaried Employees Union gross negligence against Alberto, et al. Is Malayan
vs. Mitsubishi Motors Corporation G.R. No. 175773, June 17, Insurance entitled to the right of subrogation?
2013, in Divina, 2014).
A: A: Yes. The payment by the insurer to the insured
When amount paid by the insurance company does operates as an equitable assignment to the insurer of all
not fully cover the injury or loss the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss.
The aggrieved party shall be entitled to recover the The right of subrogation is not dependent upon, nor does
deficiency from the person causing the loss or injury (NCC, it grow out of, any privity of contract. It accrues simply
Art. 2207). upon payment by the insurance company of the insurance
claim. When it is not disputed that the insurance company
Instances where the right of subrogation does not indeed paid, then there is valid subrogation in its favor.
apply (Malayan Insurance Co., Inc., vs. Rodelio Alberto, et al., G.R.
No. 194320, February 1, 2012).
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or damage
from liability
2. The insurer loses his rights against the wrongdoer

since the insurer can only be subrogated to only such
rights as the insured may have
3. Where the insurer pays the insured the value of the

loss without notifying the carrier who has in good
faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or risk

not covered by the policy
5. Life insurance

MERCANTILE LAW
Zarates’ claim against the Pereñas was upon breach of
the contract of carriage for the safe transport of
TRANSPORTATION LAW
Aaron; but that against PNR was based on quasi-delict
Laws that govern contracts of transportation under Article 2176, Civil Code.
Contracts of transportation, whether by land, sea or air, if In their defense, the Pereñas adduced evidence to
within the Philippines or if the transportation of goods be show that they had exercised the diligence of a good
from a foreign country to the Philippines shall be father of the family in the selection and supervision of
governed by the following laws, arranged by order of Alfaro, by making sure that Alfaro had been issued a
application: driver’s license and had not been involved in any
1. Provisions of the New Civil Code on “Common vehicular accident prior to the collision.
Carriers”;
2. Code of Commerce; and a) Is the defense of Perenas tenable?
3. Special laws such as Carriage of Goods by the Sea b) Is the operation of a bus service considered as a
(COGSA); Salvage Law; Public Service Act; Land private carrier?
Transportation and Traffic Code; Tariff and Customs
Code; and Civil Aeronautics Act (NCC, Art. 1735 and A:
1766; American President Lines, Ltd. vs. Klepper, GR a. No. Such defense as inappropriate in an action for
No. L-15671, November 29, 1960). breach of contract of carriage.
NOTE: In the case of international carriage in Air b. No. There is no question that the Pereñas as the
Transportation, Warsaw Convention (R.A. 9497) applies. operators of a school bus service were: (a) engaged in
transporting passengers generally as a business, not just
If the goods are to be transported from Philippines to as a casual occupation; (b) undertaking to carry
foreign country, the law of the latter country shall govern passengers over established roads by the method by
the transportation contract (CC, Art. 1753, National which the business was conducted; and (c) transporting
Development Co. v. CA, G.R. No. L-49407, August 19, 1988). students for a fee. Despite catering to a limited clientèle,
the Pereñas operated as a common carrier because they
COMMON CARRIERS held themselves out as a ready transportation
indiscriminately to the students of a particular school
Requisites for an entity to be classified as a common living within or near where they operated the service and
carrier (1996, 1997, 2000, 2002 Bar) (PBL-FP) for a fee.
1. Must be a Person, corporation, firm or association The true test for a common carrier is not the quantity or
2. Must be engaged in the Business of carrying or extent of the business actually transacted, or the number
transporting passengers or goods or both and character of the conveyances used in the activity, but
3. The carriage or transport must either be by Land, water whether the undertaking is a part of the activity engaged
or air in by the carrier that he has held out to the general public
4. The service is for a Fee as his business or occupation. If the undertaking is a single
5. The service is offered to the Public (NCC, Art. 1732). transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the
NOTE: A pipeline operator who carries oil and other general public, the individual or the entity rendering such
petroleum products through pipes/ pipelines is a service is a private, not a common, carrier. The question
common carrier. The law does not distinguish as to the must be determined by the character of the business
means by which transportation is carried out, as long as it actually carried on by the carrier, not by any secret
is by land, water or air. Neither does the law require that intention or mental reservation it may entertain or assert
transportation be through a motor vehicle (First Phil. when charged with the duties and obligations that the law
Industrial Corp. v. CA, G.R. 125948, December 29, 1998). imposes (Spouses Teodoro and Nanette Perena v. Spouses
Teresita Philippine Nicolas and L. Zarate, G.R. No. 157917,
Q: The Pereñas were engaged in the business of August 29, 2012).
transporting students from their respective
residences in Parañaque City to Don Bosco in Pasong Test for determining whether or not one is a common
Tamo, Makati City, and back. They employed carrier (1996 Bar)
Clemente Alfaro (Alfaro) as driver of the van. In June
1996, the Zarates contracted the Pereñas to transport Whether the person or entity, for some business purpose
their son, Aaron, to and from Don Bosco. However, the and with general or limited clientele, offers the service of
train hit the rear end of the van driven by Alfaro, and carrying or transporting passengers or goods or both for
the impact threw nine of the 12 students in the rear, compensation.
including Aaron, out of the van. Aaron landed in the
path of the train, which dragged his body and severed
his head, instantaneously killing him.
The Zarates commenced this action for damages

against Alfaro, the Pereñas, PNR and Alano. The

TRANSPORTATION LAWS
It is not required that the carrier’s principal activity 2. No. AM Trucking may not set up the hijacking as
is carriage of persons or goods in order to be a a defense to defeat Reynaldo’s claim as the facts given do
common carrier not indicate that the same was attended by the use of
grave or irresistible threat, violence, or force. It would
Article 1732 makes no distinction between one appear that the truck was left unattended by its driver
whose principal business activity is the carrying of and was taken while he was visiting his girlfriend (Pedro
persons or goods or both, and one who does such carrying de Guzman v. CA, L-47822 Dec 27, 1988).
only as an ancillary activity (in local idiom, as “a
sideline”). Article 1732 also carefully avoids making any Q: Alejandro Camaling of Alegria, Cebu, is engaged in
distinction between a person or enterprise offering buying copra, charcoal, firewood, and used bottles
transportation service on a regular or scheduled and in reselling them in Cebu City. He uses 2 big Isuzu
basis and one offering such services on a an occasional, trucks for the purpose; however, he has no certificate
episodic or unscheduled basis. Neither does Article 1732 of public convenience or franchise to do business as a
distinguish between a carrier offering its services to the common carrier. On the return trips to Alegria, he
“general public,” i.e., the general community or loads his trucks with various merchandise of other
population, and one who offers services or solicits merchants in Alegria, and the neighboring
business only from a narrow segment of the general municipalities of Badian and Ginatilan. He charges
population. Article 1733 deliberately refrained from them freight rates much lower than the regular rates.
making such distinctions (Perez, 2009, citing Caltex [Phils.] In one of the return trips, which left Cebu City at 8:30
vs. CA, GR No. 131166, September 30, 1999). p.m. 1 cargo truck was loaded with several boxes of
sardines, valued at P100th, belonging to one of his
Q: AM Trucking, a small company, operates to trucks customers, Pedro Rabor. While passing the zigzag
for hire on selective basis. It caters only to a few road between Carcar and Barili, Cebu, which is
customers, and its trucks do not make regular or midway between Cebu City and Alegria, the truck was
scheduled trips. It does not even have a certificate of hijacked by 3 armed men who took all the boxes of
public convenience. sardines and kidnapped the driver and his helper,
releasing them in Cebu City only 2 days later.
On one occasion, Reynaldo contracted AM to
transport for a fee, 100 sacks of rice from Manila to
Tarlac. However, AM failed to deliver the cargo, Pedro Rabor sought to recover from Alejandro the
value of the sardines. The latter contends that he is
because its truck was hijacked when the driver
not liable therefore because he is not a common
stopped in Bulacan to visit his girlfriend.
carrier under the Civil Code. If you were the judge,
1. May Reynaldo hold AM liable as a common would you sustain the contention of Alejandro? (1991
carrier? Bar)
2. May AM set up the hijacking as a defense to
defeat Reynaldo’s claim? (1996 Bar) A: If I were the Judge, I would hold Alejandro as having
engaged as a common carrier. A person who offers his
A: services to carry passengers or goods for a fee is a
1. Yes. Reynaldo may hold AM Trucking liable as a common carrier regardless of whether he has a certificate
common carrier. The fact that AM Trucking operates of public convenience or not, whether it is his main
only two trucks for hire on a selective basis, caters only business or incidental to such business, whether it is
to a few customers, does not make regular or scheduled scheduled or unscheduled service, and whether he offers
trips, and does not have a certificate of public his services to the general public or to a limited few (De
convenience are of no moment as: Guzman v. CA, G.R. 47822, December 27, 1988).
a. the law does not distinguish between Q: Discuss whether or not the following stipulations
one whose principal business activity is the in a contract of carriage of a common carrier are
carrying of persons or goods or both and valid:
anyone who does such carrying only as an 1. A stipulation limiting the sum that may be
ancillary activity, recovered by the shipper or owner to 90% of the
value of the goods in case of loss due to theft.
b. the law avoids making any distinction
between a person or enterprise offering 2. A stipulation that in the event of loss,
transportation service on a regular or scheduled destruction or deterioration of goods on account of
basis and one offering such service on an occasional, the defective condition of the vehicle used in the
episodic or unscheduled basis, and contract of carriage, the carrier’s liability is limited to
the value of the goods appearing in the bill of lading
c. the law refrains from making a distinction between a unless the shipper or owner declares a higher value
carrier offering its services to the general public and (2002 Bar)
one who offers services or solicits
business only from a narrow segment of the A:
general population (Pedro de Guzman v. CA, L-47822 1. Invalid. Article 1745 provides that the following
Dec 27, 1988) or similar stipulations shall be considered unreasonable,

MERCANTILE LAW
unjust and contrary to public policy, among which is the of or injuries to 101503, Sept. 15,
common carriers liability for acts committed by thieves or passengers (NCC, 1993).
robbers who do not act with grave and irresistible force, Arts. 1735 and
threat or violence is dispensed with or diminished. 1756).
Whether Subject to NOT subject to
2. Valid. The stipulation limiting the carrier’s liability
subject to regulation by a regulation by a
to the value of the goods appearing in the bill of lading
regulation regulatory agency regulatory agency
unless the shipper or owner declares a higher value, is
expressly recognized in Article 1749 of the New Civil or not
Code. Exemption A common carrier A private carrier
from cannot stipulate may validly enter
Private carrier that it is exempt
liability into such
from liability for
A carrier which does not qualify under the requisites of a stipulation
negligence of its
common carrier is deemed a private carrier (National agents or (Sundiang Sr. &
Steel Corporation v CA, G.R. No. 112287, December 12, employees. Such Aquino, 2014).
1997). stipulation is void
as it is against
A private carrier is one who, without making the activity public policy
a vocation, or without holding himself or itself out to the (Sundiang Sr. &
public as ready to act for all who may desire his or its Aquino, 2014).
services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one
place to another either gratuitously or for hire (Spouses Public utility
Perena vs. Spouses Zarate, GR No. 157917, August 29,
2012). A business or service engaged in supplying the public with
some commodity or service of public consequence, or
Common carrier v. Private carrier (2002 Bar) essential to the general public (Perez, 2006, citing Albano
vs. Reyes, G.R. 83551, July 1, 1989; KMU Labor Center vs.
COMMON PRIVATE Garcia, G.R. 115381, December 23, 1994).
CARRIER CARRIER
To whom Undertakes to Carriage is Public service
does the carry passengers generally
carrier or goods for the undertaken by Every person that may own, operate, manage, control in
cater its public special agreement the Philippines, for hire/compensation, with
service (First Philippine and it does not hold general/limited clientele whether permanent, occasional
Industrial Pipeline itself out to carry or accidental, and done for general business purposes,
vs. CA, supra). goods for the any common carrier, with or without fixed route and
general public whatever may be its classification, engaged in the
(Loadmasters transportation of passengers or freight or both, canal,
Customs Services, irrigation system, gas, electric light, heat and power,
Inc. vs. Glodel water supply power, petroleum, sewerage system, wire or
Brokerage G.R. No. wireless communication systems, wire or wireless
179446, January 10, broadcasting stations and stations and other similar
2011). public services (Public Service Act, Sec. 13 [b]).
Governing Civil Provisions on Civil Code
laws Common Carriers, provisions on A casual or incidental service devoid of public character
Public Service Act, ordinary contracts and interest is not brought within the category. The
and other special (ibid). question depends on such factors as the extent of services,
laws relating to whether such person or company has held himself or
transportation itself out as ready to serve the public or a portion of the
(Spouses Perena vs. public generally (Luzon Stevedoring v. PSC, G.R. L-5458,
Spouses Zarate, September 16 1953).
supra).
Degree of Extraordinary Ordinary diligence NOTE: The terms “public utility” and “public service” are
Diligence diligence (NCC, Art. or diligence of a used interchangeably (Perez, 2006).
required 1733). good father of the
family (Spouses Certificate of public convenience (CPC)
Perena v. Spouses
Zarate, supra). It is an authorization issued for the operation of public
Presumptio 1. If the goods are No presumption as services for which no franchise, either municipal or
n of lost, destroyed or to negligence legislative, is required by law, such as a common carrier.
Negligence deteriorated. (Planters Products
2. In case of death vs. CA, GR No.

TRANSPORTATION LAWS
Certificate of public convenience is not necessary Grounds that oppositors may raise to the application
before a carrier can be considered a common carrier for a certificate of public convenience
A person or entity is a common carrier even if he did not 1. The area has already a well-established operator – Prior
secure CPC. Its liability as a common carrier arises as soon operator rule (Mandbusco, Inc. vs. Francisco, G.R. L-23688,
as it acted as a common carrier, without regard as to April 30, 1970).
whether or not such carrier has complied with the Prior Operator or Old Operator Rule
requirements of the applicable regulatory statute and
implementing regulations and has been granted a The rule allows an existing franchised operator to invoke
certificate of public convenience or other franchise (De a preferential right within the authorized territory as long
Guzman v CA. G.R. No. L-47822, December 22, 1988). as he renders satisfactory and economical service (Martin,
1989). The prior operator must first be given the
Certificate of public convenience (CPC) v. Certificate opportunity to extend its service in order to meet public
of public convenience and necessity (CPCN) needs in the matter of transportation (ibid).
CPC CPCN Third Operator Rule

Issued whenever the Public Issued upon approval of
Service Commission any franchise or privilege On the other hand, under the Third Operator Rule, where
(Commission) finds that granted by any political two operators are more than serving the public there is
the operation of the subdivision of the no reason to permit a third operator to engage in
proposed public service Philippines when in the competition with them. The fact that it is only one trip and
will promote the public judgment of the political of little consequence is not sufficient reason to grant the
interests in a proper and subdivision of the application (Yangco v. Esteban, G.R. No. 38586, Aug. 18,
suitable manner, for which Philippines when in the 1933).
a municipal or legislative judgment of the
franchise is NOT necessary Commission such franchise 2. Where there are various applicants for a public utility
(Public Service Act, Sec. 16 or privilege will properly over the same territory, all conditions being equal,
[a]). conserve the public priority in the filing of the application for CPC becomes a
interest factor – Prior applicant rule.
(Public Service Act, Sec. 16
[b]). Prior Applicant Rule
Instances where a certificate of public convenience is It presupposes a situation when two interested persons
not necessary (WAR-PIPA) apply for a certificate to operate a public utility in the
same community over which no person has as yet granted
1. Warehouses any certificate (Martin, 1989).
2. Animal-drawn vehicles or banca powered by oar or
by sail; tug boats and lighters 3. Interpose an objection stating that the grant of the
3. Radio companies, except as to fixing of rates application would result to a ruinous competition (Halili
4. Public market vs. Ice and Cold Storage Industries, Inc., G.R. L-1871,
5. Ice plants November 18, 1949). One of the purposes of PSA is to
7. Public utilities operated by the national government protect and conserve the investments which have already
or Political subdivision except as to rates. been made for that purpose by public service operators –
8. Airships except as to fixing rates Protection of investment rule (Batangas Trans. Co. vs.
Orlanes, G.R. L-28865, December 19, 1928).
Requirements for the grant of certificate of public
convenience (COPS) NOTE: Mere possibility of reduction in the income of an
existing operator holding a public service permit does not,
1. Applicant must be a Citizen of the Philippines. If the of itself, establish that issuing a permit to another to
applicant is a Corporation, 60% of its capital must be operate within the same territory will result in ruinous
owned by Filipinos. competition. To prove the latter, it should be shown that
2. Applicant must prove the Operation of proposed the oppositor will not obtain sufficient profits to pay a
public service will promote public interest in a dividend or reasonable interest upon invested capital
proper and suitable manner. (Halili vs. Ice and Cold Storage Industries, Inc., supra).
3. Applicant must prove Public necessity.
4. Applicant must have Sufficient financial capability to 4. Attack the citizenship of the applicant (Sec. 11, Art. XII
undertake proposed services and meeting of the 1987 Constitution prohibits the granting of franchise
responsibilities incidental to its operation (KMU or certificate for the operation of public utility in favor of
Labor Center vs. Garcia, supra). non-Filipino citizens); or
5. The applicant does not have the necessary financial

capacity (KMU Labor Center vs. Garcia, supra).

MERCANTILE LAW
Exceptions to the application of Prior operator rule or to justifiable exceptions. The primary consideration in the
Protection of investment rule grant of a certificate of public convenience must always be
public convenience. (Fortunato F. Halili v. Ruperto Cruz,
1. Where public interest would be better served by the G.R. No. L-21061, June 27, 1968). In this case, Bayan Bus
new operator (Intestate Estate of Teofilo Tiongson vs. Lines had been given an opportunity to improve its
Commission, G.R> L-24701, December 16, 1970). service but despite its efforts, its services still proved
inadequate which rendered the need to avail of the
2. Where the old operator has failed to make an offer to services of Pasok Transportation, Inc. as the addition
meet the increase in traffic (Manila Yellow Taxicab would better serve public convenience, which is the
Co., Inc. vs. Castelo, GR No. L-131910, May 30, 1960). paramount consideration in the granting of a certificate of
public convenience.
3. Where the certificate of public convenience granted
to the new operator is a maiden certificate, which 100% foreign corporation may own facilities and
does not overlap with the entire route of the old equipment of a public utility such as EDSA LRT III
operator but only a short portion thereof as a
convergence point (Mandbusco, Co. vs. Francisco, While the Constitution requires that a franchise is needed
supra). for the operation of public utility and that no franchise
shall be granted to corporation without at least 60% of its
4. If the application of the rule will be conducive to capital owned by Filipinos, it does not require however, a
monopoly of the service, and contrary to the franchise before one can own the facilities needed to a
principle that promotes healthy competition (Villa public utility. The right to operate a public utility may
Rey Transit, Inc. vs. Pangasinan Trans. Inc., G.R. L- exist independently and separately from the ownership of
17684-85, May 30, 1962). the facilities thereof. One can own facilities without
operating them as a public utility, or conversely one may
5. If the old operator unjustifiably abandoned his operate a public utility without owning the facilities
service for two or three years by not registering the (Tatad, et al. vs. Sec. Garcia and EDSA LRT Corp Ltd., April
necessary equipment forfeits his right to said 16, 1995).
equipment and the service authorized to him
(Fariñas vs. Estate of Florencio Buan, GR No. 12306-7, Certificate of public convenience does not confer
November 29, 1961). upon the holder any proprietary right or interest in
the route covered thereby
6. The service of the prior operator is inefficient.
A CPC does not confer upon the holder any proprietary
7. The prior operator denies that there is a need to right in the route covered thereby (Luque v. Villegas, G.R.
expand his service. No. L-22545, November 28, 1969).However, with respect
to other persons and other public utilities, a CPC as
8. The prior operator has abandoned his service. property, which represents the right and authority to
operate its facilities for public service, cannot be taken or
9. The prior operation is operating less units than he interfered with without due process of law. Appropriate
was authorized. actions may be maintained in courts by the holder of the
certificate against those who have not been authorized to
10. The prior operator was given the opportunity to operate in competition with the former and those who
expand his service and failed to do so. invade the rights which the former has pursuant to the
authority granted by the Commission (A.L. Animen
Q: Bayan Bus Lines had been operating satisfactorily Transportation Co. vs. Golingco, G.R. No. 17151, April 6,
a bus service over the routeManila to Tarlac and vice 1922).
versa via the McArthur Highway. With the upgrading
of the new North Expressway, Bayan Bus Lines service Under the PSA, a CPC can be sold by the holder thereof
became adequate despite its efforts of improving the because it has considerable material value and is
same. Pasok Transportation, Inc. now applies for the considered a valuable asset (Raymundo vs. Luneta Motor
issuance to it by the Land Transportation Franchising Co., G.R. No. 39902, November 29, 1933). It is a “property”
and Regulatory Board of a certificate of public and and it can be the subject of sale or attachment (Cogeo-
convenience for the same Manila – Tarlac – Cubao Operators and Drivers Association vs. CA, G.R. No.
Manilaroute. Could Bayan Bus Lines, Inc. invoke the 100727, March 18, 1992), Raymundo v. Luneta Motor Co.,
prior operator rule against Pasok Transportation, Inc? supra)
Why? (2003 Bar)
Approval by the Commission of the sale, encumbrance
A: No, Bayan Bus Lines Inc. cannot invoke the prior or lease of property is not a condition precedent to
operator rule.As a general principle, public utility the validity of a contract
operators must be protected from ruinous competition,
such that before permitting a new operator to serve in a While in the old law, the sale without the approval of the
territory already served by another operatior, the latter Public Utility Commission was declared null and void,
should first be given an opportunity to improve his under PSA, the new law, the sale may not only be
equipment and service. This principle, however, is subject negotiated but completed before said approval. In other

TRANSPORTATION LAWS
words, the approval by the Commission is not a condition carrier because the degree of diligence required of a
precedent to the validity of the contract. The approval is common carrier is not the diligence of a good father of a
only necessary to protect public interest (Darang vs. family but extraordinary diligence, i.e., diligence of the
Belizar, G.R. No. L-19487, January 31, 1967). greatest skill and utmost foresight.
However, in case the registered owner leased to another Duration for the exercise of extraordinary diligence
a vehicle being used for public service, the former will still by the common carrier in connection to the transfer
be liable to a customer whose goods were of goods
misappropriated by the latter if there was no approval of
the PSC since the lease is not binding upon the parties It lasts from the time the goods are unconditionally placed
(Galisan vs. Alday, G.R. L-30212, Septemeber 30, 1987). in the possession of, and received by the carrier for
transportation until the same are delivered, actually or
Liability of a holder of Certificate of Public constructively, by the carrier to the consignee, or to the
Convenience person who has a right to receive them (Art. 1736, NCC).
GR: The holder of the CPC (registered owner) is primarily NOTE: Thus, this duty remains in full force and effect even
and vicariously liable for the negligent operation of the when they are temporarily unloaded or stored in transit,
vehicle (ibid., pg. 138; Art. 2176, in relation to Art. 2180, unless the shipper or owner had made use of the right or
NCC; Filcar Transport vs. Espinas, G.R. No. 174156, June 20, stoppage in transit (Art. 1737, NCC).
2012).
However, this extraordinary liability continues to be
XPNs: The registered owner is not liable if: operative even during the time the goods are stored in a
1. The vehicle was taken or stolen from his garage; warehouse of the carrier at the place of destination, until
2. The vehicle was driven without his knowledge or the consignee has been advised of the arrival of the goods
consent (ibid., pg. 138, citing Duavit vs. CA, G.R. No. 82318, and has been reasonable opportunity thereafter to
May 8, 1989 and Duquillo vs. Bayot, G.R. L-45080, April 3, remove them or otherwise dispose of them (NCC, Art.
1939). 1738).Hence, where the consignee failed to claim a
machinery after its arrival and the carrier deposited it in
Note: The registered owner cannot exculpate himself a warehouse, the carrier is not liable for the damages
from vicarious liability by proving who the supposed sustained by the machinery after its delivery to the
transferee or owner is (ibid., pg. 139, citing Orix Metro warehouse (Sea-Land Service, Inc. v. CA, G.R. 122605, April
Leasing vs. Mangalinao, G.R. 174089, January 25, 2012). 30, 2001).
DILIGENCE REQUIRED OF COMMON CARRIERS Duration for the exercise of extraordinary diligence
(2002, 2008 Bar) by the common carrier in connection to
transportation of passengers
The diligence required of common carriers is
extraordinary diligence (NCC,Art. 1733). The nature of the The duty of the common carrier commence from the
business of common carriers and the exigencies of public moment the person who purchases the ticket from the
policy demand that they observe extraordinary diligence carrier presents himself at the proper place and in a
(Martin, 198). proper manner to be transported. The relation of carrier
and passenger continues until the passenger has been
It is that extreme measure of care and caution which landed at the port of destination and has left the vessel
persons of unusual prudence and circumspection use for owner's dock or premises. Once created, the relationship
securing and preserving their own property or rights. The will not ordinarily terminate until the passenger has, after
law requires common carriers to render service with the reaching his destination, safely alighted from the carrier's
greatest skill and utmost foresight (Loadmasters Services conveyance or had a reasonable opportunity to leave the
vs. Glodel Brokerage, G.R. 197446, January 10, 2011). carrier's premises (Aboitiz Shipping Corp. v. CA, G.R. No.
84458, Nov. 6, 1989).
Reason for the requirement of extra-ordinary
diligence Q: Fil-Asia Air Flight 9 I 6 was on a scheduled
passenger flight from Manila when it crashed as it
1. Nature of the business of common carrier which is landed at the Cagayan de Oro airport; the pilot
public service; miscalculated the plane's approach and undershot
2. Public policy, the common carriers are supposed to the runway. Of the I50 people on board, ten (10)
serve the public interest and therefore, they have to passengers died at the crash scene.
exercise extra-ordinary diligence (Martin, 1989).
Of the ten who died, one was a passenger who
Q: Why is the defense of due diligence in the selection managed to leave the plane but was run over by an
and supervision of an employee not available to a ambulance coming to the rescue. Another was an
common carrier? (2002 Bar) airline employee who hitched a free ride to Cagayan
de Oro and who was not in the passenger manifest.
A: The defense of due diligence in the selection and
supervision of an employee is not available to a comon

MERCANTILE LAW
It appears from the Civil Aeronautics Authority Exercise of extraordinary diligence in the carriage of
investigation that the co-pilot who had control of the goods v. Exercise of extraordinary diligence in the
plane's landing had less than the required flying and transport of passengers
landing time experience, and should not have been in
control of the plane at the time. He was allowed to fly EXTRAORDINARY DILIGENCE in
as a co-pilot because of the scarcity of pilots - Carriage of Goods Transport of Passengers
Philippine pilots have been recruited by foreign Commences from the time Commences from the
airlines under vastly improved flying terms and the goods are moment the person who
wages so that newer and less trained pilots are being unconditionally placed in purchases the ticket from
locally deployed. The main pilot, on the other hand, the possession of, and the carrier presents
had a very high level of blood alcohol at the time of the received by the carrier for himself at the proper place
crash. transportation (NCC, Art. and in a proper manner to
1736). be transported (Aboitiz
You are part of the team that the victims hired to Shipping Corp. vs. CA G.R.
handle the case for them as a group. In your case 84458, November 6, 1989).
conference, the following questions came up: Continues until the goods Continues until the
are delivered, actually or passenger has been landed
a. Explain the causes of action legally possible constructively, by the at the port of destination
under the given facts against the airline and carrier to the consignee, or and has left the vessel
the pilots; whom will you specifically implead to the person who has a owner’s dock or premises
in these causes of action? right to receive them. (NCC, (Aboitiz, supra).
b. How will you handle the cases of the passenger Art. 1736)
run over by the ambulance and the airline
employee allowed to hitch a free ride to Note: This duty remains in
Cagayan de Oro? (2013 Bar) full force and effect even
when they are temporarily
A: unloaded or stored in transit,
a) A complaint for breach of contract of carriage can be unless the shipper or owner
filed against Fil-Asia Air for failure to exercise had made use of the right or
extraordinary diligence in transporting the passengers stoppage in transit (NCC,
safely from their point of embarkation to their destination Art. 1737).
(NCC, Art. 1755).
It also continues even
A complaint based on a quasi-delict can be filed against during the time the goods
the pilots because of their fault and negligence (NCC, Art. are stored in a warehouse of
2176). Fil-Asia Air can be included for negligence in the the carrier at the place of
selection and supervision of the pilots (NCC, Art. 2180). destination until the
consignee has been advised
A third cause of action may be a criminal prosecution for of the arrival of the goods
the reckless imprudence resulting in homicide against and has been given a
two pilots. The airline will be subsidiary liable for the civil reasonable opportunity
liability only after the pilots are convicted and found to be thereafter to remove them
insolvent. or otherwise dispose of
them (NCC, Art. 1738)
b) It is the driver of the ambulance and his employer who GR: There is a presumption There is a presumption of
should be held liable for damages, because a passenger of negligence if the goods negligence if there is death
was run over. This is in accordance with Articles 2176 and are lost, destroyed or or injuries to passengers
2180 of the Civil Code. There could also be a criminal deteriorated (NCC, Art. (NCC, Art. 1756)
prosecution for reckless imprudence resulting in 1735)
homicide against the ambulance driver and the
consequent civil liability. XPNs: 1. Natural disaster or
calamity which is the
Since the airline employee was being transported proximate cause of the loss
gratuitously, Fil-Asia Air was not required to exercise (flood, storm, earthquake,
extraordinary diligence for his safety and only ordinary lightning)
care (Lara v. Valencia, G.R. L-9907, June 30, 1958). 2. Acts of public enemy in
war, whether international
or civil;
3. Act of omission of the
shipper or passenger;
4. Character of the goods or
defects in the packing or
container;

TRANSPORTATION LAWS
5. Order or act of competent CAUSE OF ACTION OF
public authority; THE INJURED BASIS OF CAUSE OF
6. Exercise of extraordinary PASSENGER OR HIS ACTION
diligence. HEIRS, IF THE
The carrier and shipper Cannot be dispensed with PASSENGER DIES:
may agree on the or lessened by stipulation. Against the negligent Culpa criminal
observance of diligence to a driver
degree less than Note: If the driver is
extraordinary (but not total convicted and it turns out
exemption), provided the that he is insolvent, the
stipulation is: heirs/ passengers may run
(1) In writing; after the employer of the
(2) Supported by a valuable driver, pursuant to the
consideration other than employer’s subsidiary
service rendered by the liability under Article 103, in
carrier; and relation to Arts. 100 and
(3) Reasonable, just and not 102, RPC.
contrary to public policy (J. Against the carrier and Tort
Dimaampao, supra, pg. 137) driver operating the
other vehicle at fault
Q: X, while driving his Toyota Altis, tried to cross the Against the common Subsidiary liability
railway tract of Philippine (xxx line 2 unread text xxx) carrier at fault
approached Blumentritt Avenida Ext., applied its Note: The liability of the
horn as a warning to all the vehicles that might be common carrier and his
crossing the railway tract, but there was really driver as well as the
nobody manning the crossing. X was listening to his operator of the other vehicle
lpod touch, hence, he did not hear the sound of the and his driver is joint and
horn of the train and so his car was hit by the train. As several (J. Dimaampao,
a result of the accident, X suffered some injuries and citing Tiu vs. Arriesgado, G.R.
his car was totally destroyed as a result of the impact. No. 138060, September 1,
Is PNR liable? (2012 Bar) 2004).
A: PNR is liable because Railroad companies owe to the LIABILITIES OF COMMON CARRIERS
public a duty of exercising a reasonable degree of care to
avoid injury to person and property at railroad crossings Presumption of negligence in the carriage of goods
which means a flagman or a watchman should have been (1997, 2001, 2008 Bar)
posted to warn the public at all times.
In all cases other than those mentioned in Nos. 1, 2, 3, 4,
Causes of action for failure to observe diligence and 5 of Article 1734 of the NCC, if the goods are lost,
required destroyed or deteriorated, common carriers are
presumed to have been at fault or to have acted
PERSON WHO HAS BASIS OF CAUSE OF ACTION negligently (NCC, Art. 1735).
CAUSE OF ACTION AGAINST THE COMMON
CARRIER Presumption of negligence in the transportation of
Third person who Tort (extra-contractual passengers (1990, 1994 Bar)
suffered damages negligence)
Shipper of the goods Breach of the contract of In case of death of or injuries to passengers, common
damaged carriage (Culpa Contractual) carriers are presumed to have been at fault or to have
Heir/s of the deceased Breach of the contract of acted negligently (NCC, Art. 1756).
passengers or the carriage (Culpa Contractual)
passenger himself for Presumption of negligence is rebuttable
the injuries sustained
by him Both articles 1735 and 1756 of the NCC provides that such
presumption may be refuted by proving observance of
extraordinary diligence as prescribed by article 1733 of
the NCC.
Note: Though it is true that common carriers are

presumed to have been at fault or to have acted
negligently if the goods transported by them are lost,
destroyed, or deteriorated, and that the common carrier
must prove that it exercised extraordinary diligence in

MERCANTILE LAW
order to overcome the presumption, the plaintiff must be considered included in the “analogous cases” used in
still, before the burden is shifted to the defendant, prove Article 2219 of the NCC. This is likewise to consider that
that the subject shipment suffered actual shortage. This Art. 2176 of the NCC expressly excludes the cases where
can only be done if the weight of the shipment at the port there is a “pre-existing contractual relation between the
of origin and its subsequent weight at the port of arrival parties” (Versoza vs. Baytan, et al., G.R. L-14092, April 29,
have been proven by a preponderance of evidence, and it 1960).
can be seen that the former weight is considerably greater
than the latter weight, taking into consideration the XPNs: Moral damages may be recovered even in case of
exceptions provided in Article 1734 of the Civil CodeIn breach of contract of transportation in the following
this case, respondent failed to prove that the subject cases:
shipment suffered shortage, for it was not able to 1. Where the mishap results in the death of the
establish that the subject shipment was weighed at the passenger (M. Ruiz Highway Transit, Inc. vs. CA, G.R.
port of origin at Darrow, Louisiana, U.S.A. and that the L-16086, May 29, 1964).
actual weight of the said shipment was 3,300 metric tons. 2. Where it is proved that the carrier was guilty of
(Asian Terminals, Inc. v. Simon Enterprises, Inc., G.R. No. fraud or bad faith, even if death does not result (Rex
177116, February 27, 2013). Taxicab Co. vs. Bautista, GR No. L-15392, September
30, 1960).
Q: Peter so hailed a taxicab owned and operated by
Jimmy Cheng and driven by Hermie Cortez. Peter NOTE: Although the relation of passenger and carrier is
asked Cortez to take him to his office in Malate. On the "contractual both in origin and nature" nevertheless “the
way to Malate, the taxicab collided with a passenger act that breaks the contract may be also a tort" when said
jeepney, as a result of which Peter was injured i.e. he act is done with gross negligence or with bad faith (Air
fractured his left leg. Peter sued Jimmy for damages, France v Carrascoso, G.R. No. L-21438, September 28,
based upon a contract of carriage, and Peter won. 1966).
Jimmy wanted to challenge the decision before the SC
on the ground that the trial court erred in not making Q: Vivian Martin was booked by PAL, which acted as
an express finding as to whether or not Jimmy was ticketing agent of Far East Airlines, for a round trip
responsible for the collision and, hence, civilly liable flight on the latter’s aircraft, from Manila–Hongkong-
to Peter. He went to see you for advice. He went to see Manila. The ticket was cut by an employee of PAL. The
you for advice. What will you tell him? Explain (1990 ticket showed that Vivian was scheduled to leave
Bar) Manila at 5:30p.m. on 05 January 2002 aboard Far
East’s Flight F007. Vivian arrived at the Ninoy Aquino
A: I will advise Jimmy to desist from challenging the International Airport an hour before the time
decision. The action of Peter being based in culpa scheduled in her ticket, but was told that Far East’s
contractual, the carrier’s negligence is presumed upon the Flight 007 had left at 12:10p.m. It turned out that the
breach of contract. The burden of proof instead would lie ticket was inadvertently cut and wrongly worded.
in Jimmy to establish that despite an exercise of utmost PAL employees manning the airport’s ground
diligence the collision could not have been avoided. services nevertheless scheduled her to fly two hours
later aboard their plane. She agreed and arrived in
Q: In a court case involving claims for damages Hongkong safely. The aircraft used by Far East
arising from death and injury of bus passengers, Airlines developed engine trouble, and did not make
counsel for the bus operator file sa demurrer to it to Hongkong but returned to Manila. Vivian sued
evidence arguing that the complaint should be both airlines, PAL and Far East, for damages because
dismissed because the plaintiffs did not submit of her having unable to take the Far East flight. Could
any evidence that the operator or its employees either or both airlines be held liable to Vivian? Why?
were negligent. If you were the judge, would you (2003 Bar)
dismiss the complaint? (1997 Bar)
A: The instant petition was based on breach of contract of
A: No. In the carriage of passengers, the failure of the carriage; therefore, Vivian can only sue Far East Airlines
common carrier to bring the passengers safely to their alone, and not PAL, since the latter was not a party to the
destination immediately raises the presumption that contract. However, this is not to say that PAL is relieved
such failure is attributable to the carrier‘s fault or from any liability due to any of its negligent acts. In
negligence. In the case at bar, the fact of death and injury China Air Lines, Ltd. v. Court of Appeals, while not exactly
of the bus passengers raises the presumption of fault or in point; however, illustrates the principle which governs
negligence on the part of the carrier. The carrier must this particular situation. In that case, the carrier (PAL),
rebut such presumption. Otherwise, the conclusion can acting as an agent of another carrier, is also liable for its
be properly made that the carrier failed to exercise own negligent acts or omission in the performance of its
extraordinary diligence as required by law. duties. Far East Airline may also file a third-party
complaint against PAL for the purpose of determining
Moral damages in case of breach of contract of who was primarily at fault between them. It is but logical,
transportation fair and equitable to allow BA to sue PAL for
indemnification, if it is proven that the latter’s negligence
GR: Moral damages are not recoverable in breach of was the proximate cause of Vivian’s unfortunate
contract of transportation because such contract cannot experience, instead of totally absolving PAL from any

TRANSPORTATION LAWS
liability. (British Airways v. CA, G.R. 121824, January 29, a. X as the owner is exempt from liability because
1998) he was not the one driving.
Boundary system b. X as the owner is exempt from liability because

precisely the arrangement is one under the
Under this system the driver is engaged to drive the "boundary system."
owner/operator’s unit and pays the latter a fee commonly c. X will not be exempt from liability because he
called boundary for the use of the unit. Whatever he remains to be the registered owner and the
earned in excess of that amount is his income (Paguio boundary system will not allow the
Transport Corp. v. NLRC, G.R. No. 119500, August 28, 1998). circumvention of the law to avoid liability.
The gasoline consumed by the jeep is for the account of
the driver (National Labor Union v. Dinglasan, G.R. No. L- d. Y is the only one liable because he drove
14183, Nov. 4, 1993). recklessly.
Relationship between the owner of the vehicle and A: C. X will not be exempt from liability because he
the driver under a boundary system arrangement remains to be the registered owner and the boundary
system will not allow the circumvention of the law to
The relationship between jeepney owners/ operators on avoid liability.
one hand and jeepney drivers on the other under the
boundary system is that of employer-employee and not of Kabit system
lessor-lessee (Martinez v. NLRC, G.R. No. 117495, May 29,
1997). The kabit system is an arrangement whereby a person
who has been granted a CPC allows other persons who
The owner of the public vehicle operating under the own motor vehicles to operate them under his license,
boundary system is not exempt from liability in a case sometimes for a fee or percentage of the earnings (Lim v.
of injury to or death of passengers CA, G.R. No. 125817, January 16, 2002).
To exempt from liability the owner of a public vehicle who NOTE: Although not outrightly penalized as a criminal
operates it under the “boundary system” on the ground offense, the kabit system is invariably recognized as being
that he is a mere lessor would be not only to abet flagrant contrary to public policy and therefore, void and
violations of the PSA, but also to place the riding public at inexistent under Art. 1409 of the New Civil Code. It is a
the mercy of reckless and irresponsible drivers. fundamental principle that the court will not aid either
Moreover, due care in the selection of employees is called party to enforce an illegal contract, but will leave them
for by Article 2180 of the Civil Code. Failing on this, the both where it finds them (Lita Enterprises, Inc. v. IAC, G.R.
owner of the vehicle, who is likewise the employer, shall No. 64693, April 27, 1984).
not be exempt from liability (Hernandez vs. Dolor, G.R.
160286, July 30, 2004). Q: Discuss the “kabit system” in land transportation
and its legal consequences (2005 Bar)
Q: Baldo is a driver of Yellow Cab Company under
the boundary system. While cruising along the A: The “kabit system” is an agreement whereby a
South Expressway, Baldo‘s cab figured in a collision, person who has been granted a certificate of convenience
killing his passenger, Pietro. The heirs of Pietro sued allows another person who owns motor vehicles to
Yellow Cab Company for damages, but the latter operate under such franchise for a fee. It has been
refused to pay the heirs, insisting that it is not liable identified as one of the root causes of the prevalence of
because Baldo is not its employee. Resolve with graft and corruption in the government transportation
reasons. (2005 Bar) offices. It is recognized as a contract which is against
public policy and therefore void and inexistent under Art.
A: Yellow Cab Company shall be liable with Baldo, on 1409 (Lita Enterprises, Inc. vs. IAC, G.R. L-64693, April 27,
a solidary basis, for the death of passenger Pietro. 1984). As a consequence, both the owner of the certificate
Baldo is an employee of Yellow Cab under the of public convenience and the actual owner of the motor
boundary system. As such, the death of passenger vehicle should be held jointly and severally liable for
Pietro is breach of contract of carriage, making both damages to third persons as a consequence of the
the common carrier Yellow Cab and its employee, negligent operation of the motor vehicle.
Baldo, solidarily liable (Hernandez v. Dolor, G.R. No.
160286, July 30, 2004). The registered owner of the vehicle may not be
allowed to prove that there is already a transfer of
ownership to another person under the kabit system
Q: X owns a fleet of taxicabs. He operates it through
what is known as boundary system. Y drives one of One of the primary factors considered in the granting of a
such taxicabs and pays X a fixed amount of Php1 ,000 CPC for the business of public transportation is the
daily under the boundary system. This means that financial capacity of the holder of the license, so that
anything above Php1,000 would be the earnings of Y. liabilities arising from accidents may be duly
Y, driving recklessly, hit an old lady crossing the compensated. The kabit system renders illusory such
street. Which statement is most accurate? (2012 Bar) purpose and, worse, may still be availed of by the grantee

MERCANTILE LAW
to escape civil liability caused by a negligent use of a for himself a certificate of public convenience for its
vehicle owned by another and operated under his license. operation. Thus, per the records of the Land
Transportation Franchising and Regulatory Board,
If a registered owner is allowed to escape liability by Enteng remained its registered owner and operator.
proving who the supposed owner of the vehicle is, it One day, while the jeepney was traveling southbound,
would be easy for him to transfer the subject vehicle to it collided with a ten-wheeler truck owned by
another who possesses no property with which to Emmanuel. The driver of the truck admitted
respond financially for the damage done (Lim v. CA, responsibility for the accident, explaining that the
supra). truck lost its brakes.
Q: Can the grantee of CPC engaged in a “kabit system” Procopio sued Emmanuel for damages, but the latter
be held liable for damages arising from the crime of moved to dismiss the case on the ground that
reckless imprudence resulting to the death and Procopio is not the real party in interest since he is
injuries to third persons, to which the driver was not the registered owner of the jeepney. Resolve the
convicted? motion with reasons (2005 Bar)
A: Yes. The driver, the operator, and the real owner of the A: The motion to dismiss should be denied. In the case
vehicle are jointly and severally liable for damages. of Lim v. Court of Appeals, G.R. No. 125817, January 16,
However, the registered owner or operator has the right 2002, the Supreme Court held that Procopio may sue for
to be indemnified by the real or actual of the amount that damages against Emmanuel despite the existence of kabit
he may be required to pay as damage for the injury system because, (a) neither parties to the kabit system is
caused. Recovery by the registered owner or operator being held liable for damages; (b) the case arose from the
may be made in any form—either by a cross-claim, third negligence of another vehicle using the public road to
party complaint, or an independent action, and the result whom no representation, or misrepresentation, as
is the same (Perez, 2009, citing Jereos v. CA, G.R. L-48747, regards ownership and operation of the passenger
September 20, 1982; Zamboanga Trans. Co. v. CA, L-25292, jeepney was made to whom such representation, or
November 29, 1969). misrepresentation was necessary (Villanueva, 2009)
Q: Johnny owns a Sarao jeepney. He asked his Q: X owns a passenger jeepney covered by Certificate
neighbor Van if he could operate the said jeepney of Public Convenience. He allowed Y to use its
under Van‘s certificate of public convenience. Van Certificate of Convenience for a consideration. Y
agreed and, accordingly, Johnny registered his therefore was operating the passenger jeepney under
jeepney under Van’s name. On June10, 1990, one of the same Certificate of Public Convenience (Kabit
the passenger jeepneys operated by Van bumped System) under the name of X. The passenger jeepney
Tomas. Tomas was injured and in due time, he filed a met an accident. Who will be liable? (2012 Bar)
complaint for damages against Van and his driver for
the injuries he suffered. The court rendered judgment A: X and Y will be jointly and severally liable.
in favor of Tomas and ordered Van and his driver,
jointly and severally, to pay Tomas actual and moral VIGILANCE OVER GOODS
damages, attorney‘sfees, and costs.
EXEMPTING CAUSES
The Sheriff levied on the jeepney belonging to
Johnny but registered in the name of Van. Johnny Presumption on the loss, destruction, or
filed a 3rd party claim with the Sheriff alleging deterioration of goods
ownership of the jeepney levied upon and stating
that the jeepney was registered in the name of Van GR: The common carrier is presumed to have been at fault
merely to enable Johnny to make use of Van‘s or to have acted negligently when the goods transported
certificate of public convenience. May the Sheriff are lost, destroyed or deteriorated (NCC, Art. 1735).
proceed with the public auction of Johnny‘s jeepney.
Discuss with reasons. (1990 Bar) XPNs: When the same is due to any of the following causes
only: (FA2 – C O)
A: Yes, the Sheriff may proceed with the auction sale of 1. Fortuitous events (Flood, storm, earthquake, lightning
Johnny‘s jeepney. In contemplation of law as regards the or other natural disaster or calamity). Provided, the
public and third persons, the vehicle is considered the following conditions are present: (1994-1996 Bar)
property of the registered operator (Santos v. Sibug, G.R. a. Natural disaster was the proximate and only cause;
L-26815, May 26, 1981). b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the occurrence
Q: Procopio purchased an Isuzu passenger jeepney of the natural disaster; and
from Enteng, a holder of certificate of public c. The common carrier has not negligently incurred
convenience for the operation of public utility plying delay in transporting the goods (NCC, Art. 1739-1740).
the Calamba-Los Baños route. While Procopio d. The common carrier exercised due diligence to
continued offering the jeepney for public transport prevent or minimize the loss before, during or after its
services, he did not have the registration of the occurrence.
vehicle transferred in his name. Neither did he secure

TRANSPORTATION LAWS
2. Act of the public enemy in war, whether international 2. Defective brakes cannot be considered fortuitous in
or civil, provided: character (Vergara v. CA, G.R. No. 77679, September 30,
a. Act was the proximate and only cause; and 1987).
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the act (NCC, Occurrence of a typhoon as a fortuitous event
Art. 1739-1740).
GR: If all the elements of a natural disaster or calamity
3. Act or omission of the shipper or owner of the goods, concur and there was no contributory negligence or delay,
provided: the occurrence of a typhoon as a fortuitous event. This
a. If proximate and only cause – exempting holds true especially if the vessel was seaworthy at the
b. If contributory negligence – mitigating time it undertook that fateful voyage and that it was
confirmed with the Coast Guard that the weather
4. The Character of the goods or defects in the packing or condition would permit safe travel of the vessel to its
in the containers; provided, carrier exercised due destination (Philippine American General Insurance Co.,
diligence to forestall or prevent loss (NCC, Art 1742). Inc. v. MGG Marine Services, Inc., G.R. No. 135645, March 8,
2002).
NOTE: If the fact of improper packing is known to the
carrier or its servants, or apparent upon ordinary The loss of cargoes due to the sinking of a seaworthy
observation, but it accepts the goods notwithstanding tugboat which was suddenly tossed by waves of
such condition, it is not relieved from responsibility for extraordinary height is due to a force majeure (Philippine
loss or injury resulting there from (Southern Lines Inc., v. American General Insurance Company v. PKS Shipping
CA, GR No. L-16629, January 31, 1962). Company, G.R. 149038, April 9, 2003).
5. Order or act of competent authority; provided, the XPN: If a vessel sank due to a typhoon, and there was
authority is with power to issue the order (Art. 1743). If failure to ascertain the direction of the storm and the
the officer acts without legal process, the common carrier weather condition of the path they would be traversing, it
will be held liable (Ganzon vs. CA, GR No. L-48757, May 30, constitutes lack of foresight and minimum vigilance over
1988). its cargoes taking into account the surrounding
circumstances of the case. Thus, the common carrier will
NOTE: In all cases other than those enumerated above, still be liable (Arada v. CA, G.R. No. 98243, July 1, 1992).
there is presumption of negligence even if there is an
agreement limiting the liability of the common carrier in However, where a vessel encountered stormy weather
the vigilance over the goods. and the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the damage
REQUIREMENT OF ABSENCE OF NEGLIGENCE was not due to a fortuitous event, because heavy rains are
foreseeable and rain would not have entered the hatch if
Requisites of a fortuitous event (FEU-I) it was closed properly (Eastern Shipping Lines v. CA, G.R.
97412, July 12, 1994).
1. The debtor must be Free from any participation in or
aggravation of the injury to the creditor. Q: On a clear weather, M/V Sundo, carrying insured
cargo, left the port of Manila bound for Cebu. While at
2. The Event must be such as to render it impossible for sea, the vessel encountered a strong typhoon forcing
the debtor to fulfill his obligation in a normal manner. the captain to steer the vessel to the nearest island
where it stayed for seven days. The vessel ran out of
3. The event must be Unforeseen or unavoidable. provisions for its passengers. Consequently, the
vessel proceeded to Leyte to replenish its supplies.
4. The cause of the breach of obligation must be
Independent of the will of the debtor (Real v. Belo, GR a. Assuming that the cargo was damaged because
of such deviation, who between the insurance
No. 146224, January 26, 2007).
company and the owner of the cargo bears the
Mechanical defects are not considered fortuitous loss? Explain.
events b. Under what circumstances can a vessel properly
proceed to a port other than its port of
Mechanical defects in the carrier are NOT considered destination? Explain. (2005 Bar)
a caso fortuito that exempts the carrier from
responsibility (Sweet Lines, Inc. v. CA, GR No. L-46340, Apr. A:
29, 1983). Other SC decisions on the matter are: a) The insurance company is liable. It is an instance of
a valid deviation because the strong typhoon is a
1. Tire blowout of a jeep is not a fortuitous event where
there exists a specific act of negligence by the carrier fortuitous event over which neither the master nor the
consisting of the fact that the jeepney was overloaded owner has any control. Deviation is likewise proper in
and speeding at the time of the incident (Juntilla v. order to avoid a peril. (Sec.124 (b)) Art. 1734 of the New
Civil Code further provides that common carriers are
Fontanar, GR No. L-45637, May 31, 1985).
responsible for the loss, destruction, deterioration of the
goods unless the same is due to any of the following

MERCANTILE LAW
causes only, among others is when there is flood, storm, A bus operator is not liable for the injury suffered by a
earthquake, lightning or other natural disaster or passenger when a bystander stoned the bus, because a
calamities. Moreover, a common carrier is bound to common carrier is not liable for the injury of passengers
transport cargo and passengers with extraordinary caused by strangers over whom it had no control and the
diligence. Such deviation is just proper in its exercise of bus operator is only responsible if the bus operator could
extraordinary diligence. have prevented such injury by the exercise of the
diligence of a good father of a family, for the bus operator
b) Sec.124 of the Insurance Code provides that a
is not an isurer of the absolutely safety of passengers
deviation is proper when: (Pilapil v. CA, G.R. No. 52159, December 22, 1989).
(a.) When caused by the circumstances over which
neither the master nor the owner of the ship has any
Q: M. Dizon Trucking entered into hauling contract
control; with Fairgoods Co whereby the former bound itself to
(b.) When necessary to comply with a warranty, or haul the latter’s 2000 sacks of soya bean meal from
to avoid a peril, whether or not the peril is insured Manila Port Area to Calamba, Laguna. To carry out
against; faithfully its obligation Dizon subcontracted with
Enrico Reyes the delivery of 400 sacks of the Soya
(c.) When made in good faith, and upon reasonable bean meal. Aside from the driver, three male
grounds of belief in its necessity to avoid a peril; or employees of Reyes rode on the truck with the cargo.
(d.) When made in good faith, for the purpose of While the truck was on its way to Laguna two
saving human life or relieving another vessel in strangers suddenly stopped the truck and hijacked
distress. the cargo. Investigation by the police disclosed that
one of the hijackers was armed with a bladed weapon
Fire is not considered a natural disaster while the other was unarmed. For failure to deliver
the 400 sacks, Fairgoods sued Dizon for damages.
This must be so as it arises almost invariably from some Dizon in turn set up a third party complaint against
act of man or by human means. It does not fall within the Reyes which the latter registered on the ground that
category of an act of God UNLESS caused by lightning or the loss was due to force majeure. Did the hijacking
by other natural disaster or calamity. It may even be constitute force majeure to exculpate Reyes from any
caused by the actual fault or privity of the carrier (Eastern liability? (1995 Bar)
Shipping Lines v. IAC, GR No. L-69044, May 29, 1987).
A: No. The hijacking in this case cannot be considered as
But if the outbreak of fire is due to a crack in the auxiliary force majeure. Only one of the two hijackers was armed
engine fuel oil service truck, which resulted in the loss of with a bladed weapon. As against four male employees of
cargoes, that is not due to a force majeure but to Reyes, two (2) hijackers, with only one of them being
negligence (Edgar Cokaliong Shipping Lines, Inc. v. UCPB armed with a bladed weapon, cannot be considered force
General Insurance Company, Inc., G.R. No. 146018, June 25, majeure. The hijackers did not act with grave or
2008). irresistible threat, violence, or force.
NOTE: In case that the goods have been already deposited ABSENCE OF DELAY
in the warehouse of Bureau of Customs then the goods
was destroyed by fire, the carrier is not anymore liable Rules regarding the time of delivery of goods and
(Servando vs. Philippine Steam Navigation, GR No. L- delay
36481-2, October 23, 1982).
1. If there is an agreement as to time of delivery – delivery
Common carrier’s liability for the acts of strangers or must be within the time stipulated in the contract or
criminals bill of lading.
GR: A common carrier is liable even for acts of strangers 2. If there is no agreement – delivery must be within a
like thieves or robbers. reasonable time (Saludo, Jr. v. CA, G.R. No. 95536,
March 23, 1992).
XPN: Where such thieves or robbers acted "with grave or
irresistible threat, violence or force." The common carrier Liability of the carrier if there is delay in the delivery
is not liable for the value of the undelivered merchandise of goods
which was lost because of an event that is beyond his
control (De Guzman v. CA, supra). The carrier shall be liable for damages immediately and
proximately resulting from such neglect of duty (ibid;
When an airline company was not authorized to search NCC, Art. 1170).
passengers for firearms, the loss of the jewelry and cash
of a passenger because of an armed robbery committed However, where the delay in the transportation of the
by other passengers is a force majeure, for which the remains of a deceased person was due to the fault of the
airline company is not liable (Quisumbing v. CA, G.R. No L- mortuary service, who erroneously switched the casket
50076, September 14, 1990). with that of another deceased person, the airline company
cannot be held liable for damages because of the delay
(Saludo v. CA, supra).

TRANSPORTATION LAWS
Although the delivery of the suitcase of a passenger was
delayed by eleven days, an airline company cannot be Contributory negligence on the part of the passenger does
held liable for moral damages, exemplary damages, and not justify the common carrier’s exemption from liability
attorney’s fees, where the airline company was not guilty (Martin, 1989).
of bad faith and exerted efforts in tracing the suitcase
(Philippine Air Lines v. Miano, G.R. No. 106664, March 8, Q: Nelson owned and controlled the Sonnel
1995). Construction Company. Acting for the company,
Nelson contracted the construction of a building.
Effect to the limited liability in case of an unjust delay Without first installing a protective net atop the
in the transportation of goods or a deviation from sidewalks adjoining the construction site, the
stipulated or usual route company proceeded with the construction work. One
day, a heavy piece of lumber fell from the building. It
If the common carrier, without just cause, delays the smashed a taxicab which at that time had gone
transportation of the goods or changes the stipulated or offroad and onto the sidewalk in order to avoid the
usual route, the contract limiting the common carrier’s traffic. The taxicab passengers died as a result.
liability cannot be availed of in case of the loss,
a. Assume that the company had no more account
destruction, or deterioration of the goods (NCC, Art. 1747).
and property in its name. As counsel for the heirs of
A stipulation limiting the common carrier’s liability the victim, whom will you sue for damages, and
what theory will you adopt?
for delay on account of riots is valid
b. If you were the counsel for Sonnel Construction,
how would you defend you client? What would be
An agreement limiting the common carrier’s liability for
your theory?
delay on account of strikes or riots is valid (NCC, Art.
c. Could the heirs hold the taxicab owner and driver
1748).
liable? Explain. (2008 Bar)
DUE DILIGENCE TO PREVENT OR LESSEN LOSS
A:
a. I will sue Nelson as owner of Sonnel Corporation
Duty of the common carrier before, during and after a
natural disaster or acts of a public enemy as invoking the Doctrine of piercing the veil of corporate
fiction. As a general rule, the liability of a corporation is
contemplated under Article 1734 of the NCC
separate and distinct from the person composing it.
However, when the veil of corporate fiction is used as a
The common carrier must exercise due diligence to
shield to perpetrate fraud, to defeat public convenience,
prevent or minimize loss before, during and after the
occurrence of flood, storm or other natural disaster or an or to avoid a clear legal obligation, this fiction shall be
disregarded and the individuals composing it will be
act of a public enemy in order that the common carrier
treated identically.
may be exempted from liability for the loss, destruction or
deterioration of the goods (NCC, Art. 1739). In the case at bar, Sonnel was negligent in not installing a
protective net atop the sidewalk before the beginning of
NOTE: This exemption from liability also requires that the the construction work. Since the company had no more
common carrier must prove that the natural disaster or account and property in its name, the heirs can rightfully
the act of the public enemy is the proximate and only pursue the claim against the owner instead. The doctrine
cause of the loss (ibid.). Further, if the common carrier of separate personality cannot be invoked to avoid
negligently incurs delay in transporting the goods, a liability, much more when it is used to perpetuate an
natural disaster shall not free such carrier from injustice.
responsibility (NCC, Art. 1740).
b. I shall raise the affirmative defense of contributory
Duty of the common carrier if the loss, destruction, or negligence. The proximate cause of death is the violation
deterioration of the goods was caused by the of the taxi driver of traffic rules and regulations when it
character of the goods, or the faulty nature of the drove offroad to avoid heavy traffic. The lumber that fell
packing or the containers from the building was only the immediate cause of death
of the victims. I will further substantiate my defense by
If the loss, destruction, or deterioration of the goods was invoking the principle that my client, Sonnel Construction,
caused by the character of the goods, or the faulty nature had exercised due diligence in the selection and
of the packing or the containers, the common carrier must supervision of its employees.
exercise due diligence to forestall or lessen the loss. c. Yes. Both taxicab owner and driver may be held
liable based on breach of contract of carriage and
CONTRIBUTORY NEGLIGENCE negligence in the selection and supervision of employees
for quasi-delict. The driver can be held criminally liable
Contributory negligence is the failure of a person who has for reckless imprudence resulting to homicide. He can
been exposed to injury by the fault or negligence of also be held liable for damages under quasi-delict as
another, to use such degree of care for his safety and provided in Article 2180— an employer may be held
protection an ordinarily prudent man would use under solidarily liable for the negligent act of his employee.
the circumstances (Martin, 1989, citing Rakes vs. Atlantic Hence, in this case, the taxicab owner is exempted from
Gulf Co., G.R. No. 1719, January 23, 1907).

MERCANTILE LAW
liability while the taxi cab driver is liable solely and The execution of a receipt or bill of lading is not
personally for criminal prosecution. required for the commencement of the responsibility
to observe extraordinary diligence
Rule if there is contributory negligence on the part of
the shipper The requirement to observe extraordinary diligence
begins with the actual delivery of the goods for
If the shipper or owner merely contributed to the loss, transportation, and not merely with the formal execution
destruction or deterioration of the goods, the proximate of a receipt or bill of lading; the issuance of a bill of lading
cause thereof being the negligence of the common carrier, is not necessary to complete delivery and acceptance by
the latter shall be liable for damages, which however, shall the carrier (Compania Maritima v. Insurance Co. of North
be equitably reduced (NCC, Art. 1741). America, G.R. No. L-18965, October 30, 1964).
Rule if there is contributory negligence on the part of ACTUAL OR CONSTRUCTIVE DELIVERY

the shipper
Party to whom delivery should be made
If the shipper or owner merely contributed to the loss,
destruction or deterioration of the goods, the proximate It must be delivered, actually or constructively, to the
cause thereof being the negligence of the common carrier, consignee or to the person who has a right to receive them
the latter shall be liable for damages, which however, shall (Art.1736, NCC).
be equitably reduced (NCC, Art. 1741).
NOTE: Delivery of the cargo to the customs authorities is
DURATION OF LIABILITY not delivery to the consignee, or to the person who has a
right to receive them (Lu Do & Lu Ym Corp. vs. Binamira,
DELIVERY OF GOODS TO A COMMON CARRIER G.R. No. L-9840, April 22, 1957).
Duration of the extraordinary responsibility of the Constructive delivery

common carrier
There is constructive delivery when delivery is effected
It lasts from the time the goods are unconditionally placed not by actually transferring the possession of thing to the
in the possession of, and received by the carrier for vendee (in this case, the other party, either the carrier or
transportation until the same are delivered, actually or the consignee) but by legal formalities or by symbolic
constructively, by the carrier to the consignee or to the tradition (Pineda, 2010).
person who has a right to receive them(NCC, Art. 1736).
Party liable for the misdelivery by a carrier who was
Meaning of the phrasse “Unconditionally placed in the chosen by the buyer
possession of, and received by the carrier for
transportation” Misdelivery of the goods is attributable to the carrier and
not to the seller. And, since the carrier was chosen and
It is the delivery of the goods to the carrier for immediate authorized to make the delivery by the buyer itself, the
transportation, that is, as soon as the delivery is complete seller cannot be held responsible for such misdelivery
so as to place on the carrier the exclusive duty of seeing (Smith, Bell & Co. [Phils.] vs. Gimenez, G.R. No.L-17617, June
after their safety (Perez, 2006 citing Charles J. Webb & Sons 29, 1963).
vs. Central R. Co. of NJ, 36 F. 2d 702).
TEMPORARY UNLOADING OR STORAGE
NOTE: When the goods are unconditionally placed in the
possession and control of the common carrier, and upon Right of stoppage in transitu
their receipt by the carrier for transportation, the contract
of carriage was deemed perfected. The fact that part of the It is the right exercised by the seller by stopping the
shipment had not been loaded on board the lighter did not delivery of the goods to a certain buyer or consignee
impair the said contract of transportation as the goods (because of insolvency) when such goods are already in
remained in the custody and control of the carrier, albeit transit (NCC, Art. 1530).
still unloaded (Ganzon vs. CA, supra).
NOTE: The seller may exercise this right either by
Liability governed by Philippine law even if cargo was obtaining actual possession of the goods or by giving
transhipped notice of his claim to the carrier or other bailee in whose
possession the goods are. Such notice may be given either
The liability of a shipping company for damage to cargo it to the person in actual possession of the goods or to his
shipped to Davao City is governed by Philippine law even principal. In the latter case, the notice, to be effectual,
if the cargo was transshipped to the United States, must be given at such time and under such circumstances
because as against the first shipping company, Davao City that the principal, by the exercise of reasonable diligence,
was the destination (Lorenzo Shipping Corporation v. may prevent a delivery to the buyer (NCC, Art. 1532).
Chubb and Sons, Inc., G.R. 147724, June 8, 2004).

TRANSPORTATION LAWS
Rule as to unloading, storage and stoppage in transitu availed of in case of the loss, destruction, or deterioration
of the goods (NCC, Art. 1747).
GR: The common carrier’s duty to observe extraordinary
diligence in the vigilance over the goods remains in full Q: X took a plane from Manila bound for Davao via
force and effect even when they are temporarily unloaded Cebu where there was a change of planes. X arrived in
or stored in transit. Davao safely but to his dismay, his two suitcases were
left behind in Cebu. The airline company assured X
XPN: When the shipper or owner has made use of the that the suitcases would come in the next flight but
right of stoppage in transit (NCC, Art. 1737). they never did. X claimed P2,000.00 for the loss of
both suitcases, but the airline was willing to pay only
Diligence required to be exercised by the carrier if the P500.00 because the airline ticket stipulated that
right of stoppage in transit was exercised unless a higher value was declared, any claim for loss
cannot exceed P250 for each piece of luggage. X
The diligence required is ordinary diligence because of reasoned out that he did not sign the stipulation and
the following: in fact had not even read it. X did not declare a greater
a. It is holding the goods in the capacity of an ordinary value despite the fact that the clerk had called the
bailee or warehouseman and not as a carrier attention to the stipulation in the ticket. (1998 Bar)
b. There is a change of contract from a contract of carriage
to a contract of deposit (NCC, Art. 1737). A: X is bound by the stipulation written in the ticket
because he consented to the terms and conditions thereof
Obligation required of the common carrier in case of from the moment he availed the services of the carrier.
stoppage in transitu The fact that he did not sign the ticket and he was not able
to declare the true value of his luggage is not a valid claim
When notice of stoppage in transitu is given by the seller in order for the carrier to pay for the value of the lost
to the carrier, he must redeliver the goods to, or according luggage. As a general rule, the liability of the common
to the directions of, the seller. The expenses of such carrier shall not exceed the stipulation in a contract of
delivery must be borne by the seller (NCC, Art. 1532). carriage even if the loss or damage results from the
carrier’s negligence (Eastern and Australian Shipping Co.,
NOTE: If the seller instructs to deliver it somewhere else, v. Great American Insurance Co., G.R. No. L-37604, October
a new contract of carriage is formed and the carrier must 23, 1981). However, it is subject to an exception as when
be paid accordingly. the shipper or owner of the goods declares a greater value
and pays corresponding freight (Art. 1749). X, therefore is
STIPULATION FOR LIMITATION OF LIABILITY entitled to P500 for the two pieces of luggage lost.
Valid stipulations that a common carrier of goods may Q: Suppose A was riding on an airplane of a common
indicate in a contract in order to escape liability carrier when an accident happened and A suffered
injuries. In an action by A against the common
1. A stipulation limiting the liability of the common carrier carrier, the latter claimed that:
for the loss, destruction, or deterioration of the goods to a
a) There was a stipulation in the ticket
degree less than extraordinary diligence, provided it be:
issued to A absolutely exempting the carrier
a. In writing, signed by the shipper or owner; from liability from the passenger’s death or
b. Supported by a valuable consideration other than injuries and notices were posted by the common
the service rendered by the common carrier, and carrier dispensing with the extraordinary
c. Reasonable, just and not contrary to public policy. diligence of the carrier, and
2. An agreement limiting the common carrier's liability for b) A was given a discount on his plane fare
delay on account of strikes or riots (NCC, Art. 1748). thereby reducing the liability of the common
carrier with respect to A in particular. Are those
3. A stipulation that the common carrier's liability is valid defenses? (2001 Bar)
limited to the value of the goods appearing in the bill of
lading, unless the shipper or owner declares a greater A:
value (NCC, Art. 1749, 1998, 2002 Bar). a) No. Article 1757 provides that responsibility of a
common carrier for the safety of passengers as
4. A contract fixing the sum that may be recovered by the
required in Articles 1733 and 1755 cannot be
owner or shipper for the loss, destruction, or
dispensed with or lessened by stipulation, by the
deterioration of the goods (NCC, Art. 1750). posting of notices, by statements on tickets, or
otherwise.
NOTE: Notwithstanding these valid stipulations, a
common carrier can be held liable for the loss, or b) The defenses available to any common carrier to
destruction or deterioration of the goods. If the common limit or exempt it from liability are:
carrier, without just cause, delays the transportation of 1. Observance of extraordinary diligence,
the goods or changes the stipulated or usual route, the
contract limiting the common carrier's liability cannot be 2. The proximate cause of the incident is a
fortuitous event or force majeure,

MERCANTILE LAW
3. The actor’s omission of the shipper or owner of Q: Discuss whether or not the following stipulations
the goods, in a contract of carriage of a common carrier are
valid:
4. The character of the goods or defects in the
packing or in the containers, and 1. A stipulation limiting the sum that may be
recovered by the shipper or owner to 90% of the
5. Order or act of competent public authority, with value of the goods in case of loss due to theft.
out the common carrier being guilty of even
simple negligence (NCC, Art. 1734). 2. A stipulation that in the event of loss,
destruction or deterioration of goods on account of
Annulment of a stipulation limiting the common the defective condition of the vehicle used in the
carrier’s liabilityby the shipper or owner contract of carriage, the carrier’s liability is limited to
the value of the goods appearing in the bill of lading
A stipulation limiting the common carrier’s liability may unless the shipper or owner declares a higher value
be annulled by the shipper or owner if the common (2002 Bar)
carrier refused to carry the goods unless the shipper or
owner agreed to such stipulation (NCC, Art. 1746). A:
However, under this provision, annulment of the 1. Invalid. Article 1745 provides that the following
agreement limiting the carrier’s liability is still necessary or similar stipulations shall be considered unreasonable,
(Martin, 1989). unjust and contrary to public policy, among which is the
common carriers liability for acts committed by thieves or
Effect of the stipulation to limit liability to the robbers who do not act with grave and irresistible force,
presumption of negligence of the carrier threat or violence is dispensed with or diminished.
Even if there is an agreement limiting the liability of the 2. Valid. The stipulation limiting the carrier’s liability
common carrier in the vigilance over the goods, the to the value of the goods appearing in the bill of lading
common carrier is still disputably presumed to have been unless the shipper or owner declares a higher value, is
negligent in case of its loss, destruction or deterioration expressly recognized in Article 1749 of the New Civil
(NCC, Art. 1752). Code.
VOID STIPULATIONS LIMITATION OF LIABILITY TO FIXED AMOUNT
Void stipulations in a contract of carriage of goods Requirements in order that a stipulation which limits
(CR2UELED) the liability of common carriers in the carriage of
goods be valid
1. That the common carrier need not observe any
diligence in the Custody of the goods A contract fixing the sum that may be recovered for the
loss, destruction, and deterioration of goods is binding
2. That the goods are transported at the Risk of the provided that it is:
owner or shipper 1. Just and reasonable under the circumstances and
2. It has been fairly and freely agreed upon (NCC, Art.
3. That the common carrier’s liability for acts 1750).
committed by thieves, or of Robbers who do not act
with grave or irresistible threat, violence or force, is LIMITATION OF LIABILITY IN ABSENCE OF
dispensed with or diminished DECLARATION OF GREATER VALUE
4. Any similar stipulation that is Unreasonable, unjust Extent of the liability of the common carrier in case
and contrary to public policy there is a stipulation fixing specified amount
5. That the common carrier shall Exercise a degree of GR: The liability of the common carrier shall not exceed
diligence less than that of a good father of a family, or the stipulation in a contract of carriage even if the loss or
a man of ordinary prudence in the vigilance over the damage results from the carrier's negligence (Eastern and
movables transported Australian Shipping Co. vs. Great American Insurance Co.,
GR No. L-37604, October 23, 1981).
6. That the common carrier will not be liable for any
Loss, destruction, or deterioration of the goods XPN: Where the shipper or owner of the goods declares a
greater value and pays corresponding freight (NCC, Art.
7. That the common carrier shall not be responsible for 1749).
the acts or omissions of his or its Employees
The liability of an airline company for lost baggage is
8. That the common carrier is not responsible for the limited to the amount stated in the ticket unless the
loss, destruction or deterioration of goods on account passenger declared a higher valuation and paid additional
of the Defective condition of the car, vehicle, ship, fare (Pan American World Airways, Inc. vs. Intermediate
airplane or other equipment used in the contract of Appellate Court, G.R. No. 70462, August 11, 1988).
carriage (NCC, Art. 1745).

TRANSPORTATION LAWS
But when the goods being shipped are packed in cartons 5. The common carrier cannot free himself from
placed in containers supplied by the carrier and the responsibility by posting notices to the effect that he is not
number of cartons is disclosed in the shipping documents, liable for the articles brought by the passenger. Any
it is the number of cartons and not of the containers that stipulation between the common carrier and the shipper
should be used in computing the liability of the carrier for whereby the responsibility of the former as set forth in
the loss of the goods, as it is the cartons that constitute the Articles 1998 to 2001 is suppressed or diminished shall
packages (Eastern Shipping Lines, Inc. vs. Intermediate be void (NCC, Art. 2003).
Appellate Court, G.R. No. L-71478, May 29, 1987).
A common carrier can be held liable for the loss of a
Requirements in order that a common carrier’s valuable item stolen by other passenger when the
extent of liability may be increased victim told the driver that he has valuable item (1997
Bar)
The common carrier’s liability may be extended beyond
the specified amount mentioned if; Ordinarily, the common carrier is not liable for acts of
1. The shipper or owner of the goods declares a other passengers. But the common carrier cannot relieve
greater value and itself from liability if the common carrier’s employees
2. Pays corresponding freight (NCC, Art. 1749). could have prevented the act or omission by exercising
due diligence. In this case, the passenger asked the driver
LIABILITY FOR BAGGAGE OF PASSENGERS to keep an eye on the bag which was placed beside the
driver’s seat. If the driver exercised due diligence, he
CHECKED-IN BAGGAGE could have prevented the loss of the bag.
Rule on checked-in baggage of passengers Q: A shipped thirteen pieces of luggage through LG

Airlines from Teheran to Manila as evidenced by LG
The provisions of Articles 1733 to 1753 of the NCC shall Air Waybill which disclosed that the actual gross
apply (NCC, Art. 1754). weight of the luggage was 180 kg. Z did not declare an
inventory of the contents of the value of the thirteen
An airline company is liable for moral damages where it (13) pieces of luggage. After the said pieces of luggage
left behind the luggage of a passenger and its employees arrived in Manila, the consignee was able to claim
did not assist the passenger in locating his luggage but from the cargo broker only twelve pieces, with total
instead treated him boorishly (Pan American World weight 174kg. . X advised the airline of the loss of one
Airways vs. Intermediate Appellate Court, G.R. No. 68988, of the 13 pieces of luggage and of the contents thereof.
June 21, 1990). Efforts of the airline to trace the missing luggage were
fruitless. Since the airline failed to comply with the
BAGGAGE IN POSSESSION OF PASSENGERS demand of X to produce the missing luggage were
fruitless. Since the airline failed to comply with the
Rules applicable when the baggage is in the personal demand of X to produce the missing luggage, X filed an
custody of the passengers action for breach of contract with damages against LG
Airlines. In its answer, LG Airlines alleged that the
The rules in articles 1998 and 2000 to 2003 concerning Warsaw Convention which limits the liability of the
the responsibility of hotel-keepers for necessary deposit carrier, if any, with respect to cargo to a sum of $20
shall be applicable (ibid): per kilo or $9.07 per pound, unless a higher value is
1. The common carrier shall be responsible for shipper’s declared in advance and additional charges are paid
baggage as depositaries, provided that notice was given to by the passengers and the condition of the contract as
them, or to their employees, of the effects brought by the set forth in the air waybill, expressly subject the
guests and that, on the part of the shipper, they take the contract of the carriage of cargo to the Warsaw
precautions which said common carriers or their Convention. May the allegation of the LG Airlines be
substitutes advised relative to the care and vigilance of sustained? Explain. (1993 Bar)
their effects (NCC, Art. 1998).
A: Yes. Unless the contents of a cargo are declared or the
2. The responsibility shall include the loss of, or injury to contents of a lost luggage are proved by satisfactory
the personal property of the shipper caused by the evidence other than the self-serving declaration of one
employees of the common carrier as well as strangers; but party, the contract should be enforced as it is the only
not that which may proceed from any force majeure (NCC, reasonable basis to arrive at a just award. The passenger
Art. 2000). or shipper is bound by the terms of the passenger ticket
or the waybill (Pan American World Airways v. Rapadas,
3. The act of a thief or robber, who has entered the carrier G.R. No. 60673, May 19, 1992).
is not deemed force majeure, unless it is done with the use
of arms or through an irresistible force (NCC,Art. 2001).
4. The common carrier is not liable for compensation if

the loss is due to the acts of the shipper, his family, or
servants, or if the loss arises from the character of the
things brought into the carrier (NCC, Art. 2002).

MERCANTILE LAW
SAFETY OF PASSENGERS itself liable for any breach thereof (Pilapil v. CA, G.R. No.
52159, Dec. 22, 1989).
Extent of the extraordinary diligence of common
carrier to passengers (1996 Bar) DURATION OF LIABILITY
A common carrier is bound to carry the passengers safely Commencement of the duty to observe extraordinary
as far as human care and foresight can provide, using the diligence over passengers
utmost diligence of very cautious persons, with a due
regard for all the circumstances (NCC, Art. 1755). The duty exists from the moment the person offers to be
transported places himself in the care and control of the
Who are not considered passengers (WAMU) common carrier who accepts him as such passenger. The
duty continues until the passenger has, after reaching his
1. One who has boarded a Wrong vehicle, has been destination, safely alighted from the carrier’s conveyance
properly informed of such fact, and on alighting, is or has had a reasonable opportunity to leave the carrier’s
injured by the carrier. premises and to look after his baggage and prepare for his
departure (La Mallorca vs. CA, GR No. L-20761, July 27,
2. Invited guests and Accommodation passengers. 1966; Aboitiz Shipping, supra).
3. One who attempts to board a Moving vehicle, WAITING FOR CARRIER OR BOARDING OF CARRIER
although he has a ticket, unless the attempt be with
the knowledge and consent of the carrier. Duty of the common carriers in boarding of
passengers
4. One who remains on a carrier for an Unreasonable
length of time after he has been afforded every safe It is the duty of common carriers of passengers, including
opportunity to alight. common carriers by railroad train, streetcar, or motorbus,
to stop their conveyances a reasonable length of time in
NOTE: The carrier is thus NOT obliged to exercise order to afford passengers an opportunity to board and
extraordinary diligence but only ordinary diligence in enter, and they are liable for injuries suffered by boarding
these instances. passengers resulting from the sudden starting up or
jerking of their conveyances while they are doing so
VOID STIPULATIONS (Dangwa vs. CA, G.R. No. 95582, October 7, 1991).
Stipulations limiting the liability of common carrier Q: A bus of GL Transit on its way to Davao stopped to
in case of injury or death enable a passenger to alight. At that moment, Santiago
who had been waiting for a ride, boarded the bus.
GR: The responsibility of a common carrier for the safety However, the bus driver failed to notice Santiago who
of passengers cannot be dispensed with or lessened by was still standing on the bus platform, and stepped on
stipulation, by posting of notices, by statements on tickets, the accelerator. Because of the sudden motion,
or otherwise (NCC, Art. 1757). Santiago slipped and fell down suffering serious
injuries. May Santiago hold GL Transit liable for
XPN: When a passenger is carried gratuitously, a breach of contract of carriage? Explain (1996 Bar)
stipulation limiting the common carrier’s liability for
negligence is valid (NCC, Art. 1758). A: Yes. Santiago may hold GL Transit liable for breach of
contract of carriage. It was the duty of the driver, when he
NOTE: The passenger must be carried gratuitously. If it is stopped the bus, to do no act that would have the effect of
only a reduction of fare, then any limitation of the increasing the peril to a passenger such as Santiago while
common carrier’s liability is not justified (ibid; 2001, 2009 he attempting to board the same. When a bus is not in
Bar). motion there is no necessity for a person who wants to
ride the same to signal his intention to board. A public
XPN to the XPN: Notwithstanding the exception, common utility bus, once it stops, is in effect making continuous
carriers will be liable nevertheless forwillful acts or gross offer to bus riders. It is the duty of common carriers of
negligence (ibid). passengers to stop heir conveyances while they are doing
so. Santiago, by stepping and standing on the platform of
Assumption of risk on the part of passengers the bus is already considered as a passenger and is
entitled to all the rights and protection pertaining to a
Passengers must take such risks incident to the mode of contract of carriage (Dangwa Trans. Co. v. CA, G.R. 95582,
travel. The passenger must observe the diligence of a good October 7, 1991).
father of a family to avoid injury to himself (NCC, Art.
1761). Q: City Railways, Inc. (CRI) provides train service, for
a fee, to commuters from Manila to Calamba, Laguna.
NOTE: Carriers are not insurers of any and all risks to Commuters are required to purchase tickets and then
passengers and goods. It merely undertakes to perform proceed to designated loading and unloading
certain duties to the public as the law imposes, and holds facilities to board the train. Ricardo Santos purchased
the ticket for Calamba and entered the station. While

TRANSPORTATION LAWS
waiting, he had an altercation with the security guard The passenger is not considered negligent if the bus
of CRI leading to a fistfight. Ricardo Santos fell on the started moving slowly when the passenger is
railway just as a train was entering the station. boarding the same
Ricardo Santos was run over by the train. He died. In
action for damages filed by the heirs of Ricardo Further, even assuming that the bus had "just started" and
Santos, CRI interposed lack of cause of action, "was still in slow motion" at the point where the victim
contending that the mishap occurred before Ricardo had boarded and was on its platform, the victim cannot be
Santos boarded the train and that it was not guilty of considered negligent under the said circumstances
negligence. Decide. (2008 Bar) (Dangwa v. CA, ibid).
A: The contention of CRI must fail. In the case of Light Q: P, a sales girl in a flower shop at the Ayala Station
Rail Transit Authority vs. Navidad, G.R. No. 145804 of the Metro Rail Transit (MRT) bought two tokens or
February 6, 2003, the Supreme Court held that the duty of tickets, one for her ride to work and another for her
a common carrier to provide safety to its passengers is not ride home. She got to her flower shop where she
only during the course of the trip but for so long as the usually worked from 8 a.m. to 5 p.m. At about 3 p.m.,
passenger are within its premises and where they ought while P was attending to her duties at the flower shop,
to be in pursuance to the contract of carriage. two crews of the MRT got into a fight near the flower
Furthermore, the New Civil Code provision provides that shop, causing injuries to P in the process. Can P sue
the common carrier will still be liable even though its the MRT for contractual breach as she was within the
employees acted beyond the scope of their work. MRT premises where she would shortly take her ride
Therefore, CRI is liable for the damages the heirs of home? (2011 Bar)
Ricardo Santos had suffered.
A: No, since P had no intention to board an MRT train
When a Public Utility Vehicle is not in motion, it is not coach when the incident occurred.
necessary for a person who wants to ride the same to
signal his intention to board ARRIVAL AT DESTINATION
When the bus is not in motion there is no necessity for a Liability for death or injury to passengers upon
person who wants to ride the same to signal his intention arrival at destination
to board. A public utility bus, once it stops, is in effect
making a continuous offer to bus riders. Hence, it becomes Once created, the relationship will not ordinarily
the duty of the driver and the conductor, every time the terminate until the passenger has, after reaching his
bus stops, to do no act that would have the effect of destination, safely alighted from the carrier's conveyance
increasing the peril to a passenger while he was or had a reasonable opportunity to leave the carrier's
attempting to board the same. The premature premises. All persons who remain on the premises a
acceleration of the bus in this case was a breach of such reasonable time after leaving the conveyance are to be
duty (Dangwa Trans. Co. v. CA, supra). deemed passengers, and what is a reasonable time or a
reasonable delay within this rule is to be determined from
Common carrier may be held liable to a passenger all the circumstances, and includes a reasonable time to
who died while trying to board their vehicle see after his baggage and prepare for his departure (La
Mallorca v. CA, G.R. No. L-21486, May 14, 1966).
It is the duty of common carriers of passengers to afford
passengers an opportunity to board and enter, and they The victim’s presence in a vessel after 1 hour from his
are liable for injuries suffered by boarding passengers disembarkation is not enough in order to absolve the
resulting from the sudden starting up or jerking of their carrier from liability in his death
conveyances while they are doing so. The victim, by
stepping and standing on the platform of the bus, is Carrier-passenger relationship continues until the
already considered a passenger and is entitled all the passenger has been landed at the port of destination and
rights and protection pertaining to such a contractual has left the vessel-owner’s premises (Aboitiz Shipping
relation (ibid). Corporation v. CA, GR No. 84458, November 6, 1989).
A person who is merely stepping on the platform of a Q: Robert De Alban and his family rode a bus owned
bus is already considered a passenger by Joeben Bus Company. Upon reaching their desired
destination, they alighted from the bus but Robert
A person, by stepping and standing on the platform of the returned to get their baggage. However, his youngest
bus, is already considered a passenger and is entitled all daughter followed him without his knowledge. When
the rights and protection pertaining to such a contractual he stepped into the bus again, the bus accelerated that
relation. Hence, it has been held that the duty which the resulting to Robert’s daughter death. The bus ran
carrier owes to its patrons extends to persons boarding over her. Is the bus company liable?
cars as well as to those alighting therefrom (Dangwa v. CA,
ibid). A: Yes. The relation of carrier and passenger does not
cease at the moment the passenger alights from the
carrier’s vehicle at a place selected by the carrier at the
point of destination, but continues until the passenger has

MERCANTILE LAW
had a reasonable time or reasonable opportunity to leave employees through the exercise of the diligence of a good
the current premises (La Mallorca v. CA, GR L-20761, July father of a family would have prevented or stopped the act
27 1966). or omission (NCC, Art. 1763).
LIABILITY FOR ACTS OF OTHERS Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, the bus driver, the
EMPLOYEES conductor, and the passengers disembarked for
lunch. P decided, however, to remain in the bus, the
Common carriers are liable for the acts of their door of which was not locked. At this point, V, a
employees vendor, sneaked into the bus and offered P some
refreshments. When P rudely declined, V attacked
Common carriers are liable for the death of or injuries to him, resulting in P suffering from bruises and
passengers through the negligence or willful acts of the contusions. Does he have cause to sue Sentinel Liner?
former’s employees, although such employees may have (2011 Bar)
acted beyond the scope of their authority or in violation
of the orders of the common carriers. The liability of the A: Yes, since the carrier's crew did nothing to protect a
common carriers does not cease upon proof that they passenger who remained in the bus during the stop-over.
exercised all the diligence of a good father of a family in
the selection and supervision of their employees (NCC, Q: In a jeepney, Angela, a passenger, was injured
Art. 1759). because of the flammable material brought by
Antonette, another passenger. Antonette denied her
NOTE: The liability of the common carrier to the personal baggage to be inspected invoking her right to privacy.
violence of its employees or agents upon its passengers Should the jeepney operator be held liable for
extends only to those acts which the carrier could foresee damages?
or avoid through the exercise of the diligence required.
A: No. The operator is not liable for damages. In overland
Liability of the common carrier as regards to the acts transportation, the common carrier is not bound nor
of employees may not be limited by stipulation empowered to make an examination on the contents of
packages or bags, particularly those handcarried by
The common carrier’s responsibility cannot be eliminated passengers (Nocum v. Laguna Tayabas Bus Company, G.R.
or limited by stipulation, by the posting of notices, by No. L-23733, October 31, 1969).
statements on the tickets or otherwise (NCC, Art. 1760).
Q: In the question above, if it were an airline company
Rationale behind the carrier’s liability involved, would your answer be the same? (1992 Bar)
The basis of the carrier's liability for assaults on A: No. The common carrier should be made liable. In case
passengers committed by its drivers rests on the principle of air carriers, it is unlawful to carry flammable materials
that it is the carrier's implied duty to transport the in passenger aircrafts, and airline companies may open
passenger safely. As between the carrier and the and investigate suspicious packages and cargoes
passenger, the former must bear the risk of wrongful acts pursuant to RA 6235.
or negligence of the carrier's employees against
passengers, since it, and not the passengers, has power to Q: A passenger was injured because a bystander
select and remove them (Maranan v. Perez, GR No. L- outside the bus hurled a stone. Is the bus company
22272, June 26, 1967). liable? (1994 Bar)
Q: The AAA Bus Company picks up passengers along A: No. There is no showing that any such incident
EDSA. X, the conductor, while on board the bus, drew previously happened so as to impose an obligation on the
his gun and randomly shot the passengers inside. As a part of the personnel of the bus company to warn the
result, Y, a passenger, was shot and died instantly. Is passengers and to take the necessary precaution. Such
AAA Bus Company liable? (2012 Bar) hurling of a stone constitutes fortuitous event in this case.
The bus company is not an insurer of the absolute safety
A: Yes. The bus company is liable because common of its passengers (Pilapil vs. CA, G.R. No. 52159, December
carriers are liable for the negligence or willful act of its 22, 1989).
employees even though they acted beyond the scope of
their responsibility. The registered owner of the vehicle may be held liable
for damages suffered by a third person in the course
OTHER PASSENGERS AND STRANGERS of the operation of the vehicle
Extent of liability of common carriers for acts of co- The registered owner of a public service vehicle is
passengers or strangers (1997, 2005 Bar) responsible for damages that may arise from
consequences incident to its operation or that may be
A common carrier is responsible for injuries suffered by a caused to any of the passengers therein (Gelisan vs. Alday,
passenger on account of the willful acts or negligence of G.R. No. L-30212, September 30, 1987).
other passengers or of strangers, if the carrier’s

TRANSPORTATION LAWS
Also, the liability of the registered owner of a public 2. An indemnity for loss of Earning capacity of the
service vehicle for damages arising from the tortious acts deceased;
of the driver is primary, direct, and joint and several or
solidary with the driver (Philtranco Service Enterprises, 3. Moral damages;
Inc. vs. CA, G.R. No. 120553, June 17, 1997).
4. Exemplary damages;
Q: Marites, a paying bus passenger, was hit above her
left eye by a stone hurled at the bus by an unidentified 5. Attorney's fees and expenses of litigation;
bystander as the bus was speeding through the
National Highway. The bus owner’s personnel lost no 6. Interest in proper cases (Briñas v. People,G.R. No. L-
time in bringing Marites to the provincial hospital 30309, Nov. 25, 1983).
where she was confined and treated. Marites wants to
sue the bus company for damages and seeks your 7. Hospital and funeral expenses
advice whether she can legally hold the bus company
liable. What will you advise her? (1994 Bar) NOTE: Carrier is not liable for exemplary damages where
there is no proof that it acted in a wanton, fraudulent,
A: As counsel, I will advise her that the company is not reckless, oppressive or malevolent manner.
liable. As a general rule, if the death or injury was due to a
cause beyond the control of the carrier, it will not be liable Jurisprudential indemnity of a common carrier in
to the passenger. However, it must do everything in its case of death of a passenger
power to try to prevent any passenger from getting hurt.
Article 1763 provides that although a common carrier is In case of death of a passenger, the common carrier is
responsible for the death or injuries suffered by a liable to pay 50,000 Pesos as indemnity for the life of a
passenger on account of the willful acts or negligence of passenger (Victory Liner v s.Gammad, G.R. No. 159636,
other passengers, such is not applicable in this case. The November 25, 2004).
driver has no control over the situation. It happened while
the bus was speeding through the national highway and Formula for computing the indemnity for lost
such event occurred haphazardly, without any earnings in case of death of a victim
contributory negligence on the part of the carrier nor
even if extraordinary diligence be exercised, the same The formula for the computation of unearned income is:
would not prevent the event from happening because 1. Net Earning Capacity = Life Expectancy x (Gross annual
such is independent and out of control of the driver. More income - Reasonable and necessary living
to the point, the carrier cannot be faulted and be liable for expenses).
damages because it immediately responded to the injury
suffered by the passenger. Furthermore, as held in the 2. Life expectancy is determined in accordance with the
case of Pilapil v. CA, there is no showing that any such formula: 2 /3 x (80 – age of deceased at the time of
incident previously happened so as to impose an death)(Heirs of Ochoa vs. VS.G & S Transport
obligation on the part of the personnel of the bus company Corporation, G.R. No. 170071, March 09, 2011 ).
to warn the passengers and to take the necessary
precaution. Such hurling of a stone constitutes fortuitous NOTE: When there is no showing that the living expenses
event in this case. The bus company is not an insurer of constituted the smaller percentage of the gross income,
the absolute safety of its passengers. the Court fixes the living expenses at half of the gross
income.
The registered owner of the vehicle may be held liable for
damages suffered by a third person in the course of the Liability with regard to moral damages
operation of the vehicle. The registered owner of a public
service vehicle is responsible for damages that may arise GR: Moral damages are not recoverable for breach of
from consequences incident to its operation or that may contract of carriage in view of Art. 2219-20 of the Civil
be caused to any of the passengers therein (Gelisan vs. Code.
Alday, G.R. No. L-30212, September 30, 1987).
XPN:
Also, the liability of the registered owner of a public 1. Where the mishap results in the death of the passenger
service vehicle for damages arising from the tortious acts 2. Where it is proved that the common carrier was guilty
of the driver is primary, direct, and joint and several or of fraud or bad faith, even if death does not result.
solidary with the driver (Philtranco Service Enterprises,
Inc. vs. CA, G.R. No. 120553, June 17, 1997). Jurisprudential amount of moral damages to which
the heirs of a deceased passenger are entitled to
EXTENT OF LIABILITY FOR DAMAGES recover
Kinds of damages that may be recovered in case of The current jurisprudential award for the loss of life of a
death of a passenger (DEMEx-AIH) passenger is 100,0000 pesos by way of moral damages
(Victory Liner vs. Gammad, Ibid, Heirs of Ochoa v VS.G & S
1. An indemnity for the Death of the victim Transport Corporation, Ibid).

MERCANTILE LAW
Defenses available in culpa contractual (FEC) the RPC. (Carpio vs.
Doroja, supra.)
1. Exercise of extraordinary due diligence
2. Fortuitous event Action to enforce liability of the employer of the
3. Contributory negligence of passengers – it does not negligent driver under Art. 103 of the RPC vs. Action
bar recovery of damages for death or injury if the based on quasi-delict
proximate cause is the negligence of the common
carrier but the amount of damages shall be equitably ART. 103, RPC ART. 2180, NCC (QUASI-
reduced (NCC, Art. 1762). DELICT)
Employer is only Liability is primary and
The diligence of the passenger may be considered in
determining liability in case of injury subsidiarily liable. direct.
There must be a judgment Action may proceed
The passenger must observe the diligence of a good father of conviction against the independently from the
of a family or ordinary diligence to avoid injury to himself negligent driver otherwise criminal action.
(NCC, Art. 1761). This means that if the proximate cause of the action against the
the passenger’s injury is his negligence, the common employer would be
carrier is not liable. premature.
The defense of due diligence The defense of due
Options available to recover damages in case of death in selection and supervision diligence in selection and
or injuries to persons, which resulted from a collision of employees cannot be supervision of employees
invoked. may be invoked.
BASIS OF DEFENDANT OF THE
CIVIL CASE BILL OF LADING
LIABILITY
(Damages) It is a written acknowledgment of receipt of goods and
1. Culpa Contract of Filed against the common agreement to transport them to a specific place and to a
contractual carriage carrier wherein he is a named person or to his order (Unsworth Transport
passenger. (NCC, Art. International [Phils] vs. CA, G.R. No. 166520, 26 July 2010;
1733, 1755-1764) 1992, 1998 Bar).
2. Culpa Quasi-delict May be filed by third
aquiliana persons or the passenger THREE-FOLD CHARACTER OF A BILL OF LADING
against the drivers (may
also be the owners) of It is a receipt for the goods shipped and a contract to
both vehicles and the transport and deliver the same as therein stipulated.
owners thereof.
1. As a receipt, it recites the date and place of shipment,
If the owner is an describes the goods as to quantity, weight,
employer of the driver, dimensions, identification marks and condition,
still the former has a quality, and value.
primary liability for an
action brought on the 2. As a contract, it names the contracting parties, which
ground of quasi delict include the consignee, fixes the route, destination,
under Art. 2180, NCC. and freight rate or charges, and stipulates the rights
(Carpio vs. Doroja, GR No. and obligations assumed by the parties (Phoenix
84516, December 5, Assurance Co., Ltd. v. United States Lines, G.R. No. L-
1989.) 24033, Feb. 22, 1968).
3. Culpa Crime May be filed by the third
persons or the 3. As a documentof title it regulates the relations between
criminal a carrier and a holder of the same.
passengers against the
driver (may also be the
NOTE: In the absence of a bill of lading, their respective
owner) at fault if his act
claims may be determined by legal proofs which each of
amounts to a crime.
the contracting parties may present in conformity with
law.
If the owner is an
employer of the driver,
then the former has a
subsidiary liability (Art.
103, Revised Penal Code
[RPC].) for an action
brought on the ground of
civil liability arising from
crime under Art. 100 of

TRANSPORTATION LAWS
Two types of bill of lading 6. Through- Issued by a carrier who is obliged to use the
facilities of other carriers as well as his own facilities
1. Negotiable – If issued to the bearer or to the order of for the purpose of transporting the goods from the
any person named in such bill. city of the seller to the city of the buyer, which bill of
lading is honored by the second and other interested
2. Non-negotiable – If issued to a specific person named in carriers who do not issue their own lading.
such bill.
7. Custody – The goods are already received by the carrier
Q: X is a trader of school supplies in Calapan, Oriental but the vessel indicated has not yet arrived in the
Mindoro. To bring the school supplies to Calapan, it port.
has to be transported by a vessel. Because there were
so many passengers, the two (2) boxes of school 8. Port- The vessel indicated in the bill of lading that will
supplies were loaded but the shipping company was transport the goods is already in the port.
not able to issue the Bill of Lading. So, on board, the
Ship Captain issued instead a "shipping receipt" to X Q: A bill of lading indicated that the contract of
indicating the two (2) boxes of school supplies being carriage was under a "said to weigh" clause. What are
part of the cargo of the vessel. Which phrase the responsibilities of the shipper and the carrier?
therefore, is the most accurate? (2012 Bar)
A: This means that the shipper was solely responsible for
a. the owner of the vessel is not liable because no bill the loading of the container, while the carrier was
of lading was issued to X hence, no contract of oblivious to the contents of the shipment. The arrastre
carriage was perfected. operator was, like any ordinary depositary, duty-bound to
b. it is possible to have a contract of carriage of cargo take good care of the goods received from the vessel and
even without a bill of lading, and the "shipping to turn the same over to the party entitled to their
receipt" would be sufficient. possession, subject to such qualifications as may have
c. the only acceptable document of title is a Bill of validly been imposed in the contract between the
Lading. parties. The arrastre operator was not required to verify
d. None of the above. the contents of the container received and to compare
them with those declared by the shipper because, as
A: B. Although Article 359 of the Code of Commerce earlier stated, the cargo was at the shipper’s load and
provides that “the shipper as well as the carrier of count (Asian Terminals Inc. vs. Simon Enterprises, Inc., G.R.
merchandise or goods may mutually demand that a bill of No. 177116, February 27, 2013).
lading be made,” still, said bill of lading is not
indispensable. For as long as there is a meeting of the DELIVERY OF GOODS
minds of the parties, a contract of carriage exists even in
the absence of a bill of lading (Perez, supra, citing Robles The surrender of the bill of lading is necessary upon
vs. Santos, 44 OG 2268, September, 6, 1947; Compania delivery of the goods
Maritima vs. Insurance Co. of NA, G.R. No. L-18965, October
30, 1964). If the carrier fails to require such surrender:
Technical jargon 1. If non-negotiable – Action against the carrier does not

lie.
1. On Board –States that the goods have been received on
board the vessel which is to carry the goods and is 2. If negotiable – Action by the shipper may lie against
issued when goods have been placed aboard a ship the carrier
with every reasonable expectation that the shipment
is as good as on its way. However, where the seller instructed the shipping
company to deliver the cargoes to the buyer without
2. Received for Shipment Bill– States that the goods have requiring the presentation of the bill of lading, the
been received for shipment with or without shipping company is not liable for releasing the cargoes
specifying the vessel by which the goods are to be to the buyer (Macam vs. CA, G.R. No. 125524, August 25,
shipped and are issued whenever conditions are not 1999).
normal and that there is insufficiency of shipping
space. NOTE: The surrender of the original bill of lading is not a
condition precedent for a common carrier to be
3. Clean – Does not contain any notation indicating defect discharged of its contractual obligation. If surrender of
in the goods. the original bill of lading is not possible, acknowledgment
of the delivery by signing the delivery receipt
4. Foul – Contains a notation indicating a defect in the suffices (National Trucking and Forwarding Corporation
goods. vs. Lorenzo Shipping Corporation, G.R. No. 153563,
February 27, 2005).
5. Spent – If the goods were already delivered but the bill
of lading was not returned.

MERCANTILE LAW
Period of delivery of goods Requisites before claim for damages under Art. 366
may be demanded
If a period has been fixed for the delivery of the goods, it
must be made within such time, and, for failure to do so, 1. Consignment of goods through a common carrier, by
the carrier shall pay the indemnity stipulated in the bill of a consignor in one place to a consignee in another
lading, neither the shipper nor the consignee being place; and
entitled to anything else (Code of Commerce [CC], Art. 370).
2. The delivery of the merchandise by the carrier to the
Duty of the carrier if there is no period of time fixed consignee at the place of destination (New Zealand
for the delivery of goods Ins. Co., Ltd. v. Choa Joy, G.R. No. L-7311, Sept. 30,
1955).
The carrier shall be under the obligation to forward them
with the first shipment of the same or similar Effect of paying the transportation charges in the
merchandise he may make to the point where he must filing of an action on account of damages to goods
deliver them, and should he not do so, the damages
occasioned by the delay shall be suffered by him (CC, Art. 1. If paid before checking the goods – The right to file a
358). claim is not waived.
Determination of indemnity if the same is not 2. If paid after the goods were checked – The right to file
stipulated a claim is alreadywaived (Southern Lines, Inc. v. CA,
G.R. No. L-16629, Jan. 31, 1962).
If no indemnity has been stipulated and the delay exceeds
the time fixed in the bill of lading, the carrier shall be liable NOTE: The filing of claim is a condition precedent for
for the damages which the delay may have caused (CC, Art. recovery of damages.
370).
Doctrine of combined or connecting services
Grounds for the refusal of a consignee to take delivery
of the goods (PLD2) The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those
1. When a Part of the goods transported are delivered who preceded him in the conveyance of the goods.
and the consignee is able to prove that he cannot
make use of the part without the others; CC, Art. 365) The shipper or consignee should proceed against the one
who executed the contract or against the others who
2. If the cargo consists of Liquids and they have leaked received the goods without reservation. But even if there
out, nothing remaining in the containers but one- is reservation, they are not exempted from liabilities that
fourth (¼) of their contents, on account of inherent they may have incurred by reason of their own acts (CC,
defect of cargo; (CC, Art. 687) Art. 373).
3. If the goods are Damaged and such damage renders The carrier may then file a third-party complaint against
the goods useless for the particular purpose for the one who is really responsible. The carrier is an
which there are to be used; (CC, Art. 365) indispensable party. But the shipper or consignee may
sue all of them as alternative defendants.
4. When there is Delay on account of the fault of the
carrier; (CC, Art. 371) Commencement of action if delivery was made to
arrastre operator
NOTE: In all cases, the shipper may exercise the right of
abandonment by notifying the carrier. Ownership over Commencement of action should be computed from the
damaged goods passes to the carrier and carrier must pay time of delivery to the arrastre operator. To use as basis
shipper the market value of the goods at point of for computing the one year period, the delivery to the
destination. consignee would be unrealistic and might generate
confusion between the loss or damage sustained by the
PERIOD FOR FILING CLAIMS goods while in the carrier’s custody and those occurring
while in the arrastre operator’s possession (Martin,
1. Immediately after delivery – if the damage is 1989).
apparent; or
2. Within 24 hours from delivery – If the damage is not A claim against the arrastre operator must be filed within
apparent (Code of Commerce, Art. 366) fifteen days from the delivery of goods (International
Container Terminal Services, Inc. vs. Prudential Guarantee
and Assurance Company, Inc. G.R. No. L-134514, December
Applicability of Article 366 of the Code of Commerce 8, 1999).
It applies in case of domestic transportation (inter-island) The filing of a provisional claim is substantial compliance
where there is damage to the goods transported. with the provision in the management contract of the
arrastre operator that a formal claim for the loss of goods

TRANSPORTATION LAWS
must be filed within thirty days from the filing of the entry time or use for the conveyance of goods, in consideration
(Metro Port Service Inc. vs. Intermediate Appellate Court, of the payment of freight (Caltex vs. Sulpicio Lines, G.R. No.
G.R. No. 66253, August 31, 1992). 131166, September. 30, 1999).
NOTE: The 1 year period of prescription is not applicable Classes of charter party
to misdelivery or conversion of goods.
1. Bareboat or demise – the ship owner gives possession
PERIOD FOR FILING ACTIONS of the entire vessel to the charterer. In turn, the charterer
supplies, equips, and mans the vessel. The charterer is the
For coastwise or carriage within the Philippines, Within 6 owner pro hac vice (2004 Bar).
years if no bill of lading has been issued or within 10 years
if a bill of has been issued. For international carriage from As owner pro hac vice of the vessel, the charterer assumes
foreign port to the Philippines within 1 year from delivery the rights and liabilities of the owner to third parties who
of goods or the date when the goods have been delivered. deal with the vessel, it is the charterer and its agent who
are liable for the wages of seamen hired by the master of
NOTE: The compliance with a requirement in the bill of the vessel, as the master of the vessel is acting in behalf of
lading that the consignee must file a claim for loss or the charterer (Litonjua Shipping Co., Inc. vs. National
damage to the goods shipped within thirty days from Seamen Board, G.R. No. L-51910, August 10, 1989, 1991
delivery is a condition precedent to the accrual of a right Bar).
of action against the carrier (Philippine American General
Insurance Co. v. Sweet Lines, Inc., G.R. No. 87434, August 5, Owner pro hac vice
1992).
The charterer is considered the owner of the vessel
for the voyage or service stipulated. The charterer,
Q: Akiro of Tokyo, Japan sent various goods to his not the owner of the vessel, is liable for vessel’s
friend Juan in Cebu City, Philippines, through one of expenses, including seaman’s wages.
the vessels of Worth Well Shippers, Inc., an American
corporation. En route to Cebu City, the vessel had two 2. Contract of affreightment – the owner of the vessel
stops, first in Hong Kong, and second, in Manila.While leases a part or all of its space to haul goods for others. It
travelling from Tokyo to Hong Kong, the goods were can either be:
damaged. What law will govern? (2013 Bar) a. Time charter– Vessel is chartered for a particular
time or duration. While the ship owner still retains
A: D. Philippine Law possession and control of the vessel, the charterer
has the right to use all vessel’s facilities. The
Q: Assuming Philippine law to be applicable and Juan charterer may likewise designate vessel’s
fails to file a claim with the carrier, may he still destination.
commence an action to recover damages with the
court? (2013 Bar) Since in a time charter the shipowner retains
possession and control of the ship, the ship remains
A: B. Yes, provided he files the complaint within 10 years a common carrier. (Planters Products, Inc. vs. CA, G.R.
from delivery. No. 101503, September 15, 1993)
MARITIME COMMERCE b. Voyage charter– Vessel is chartered for a carriage

of goods from one or more ports of loading to one
Agents of maritime commerce or more ports of unloading.
1. Ship-owners and ship agents Voyage charter

2. Captains and masters of the vessel
3. Officers and Crews of the vessel A voyage charter is a contract wherein the ship was leased
4. Supercargoes (Sundiang, Sr. & Aquino, 2011) for a single voyage for the conveyance of goods, in
consideration of the payment of freight. The shipowner
Supercargoes retains the possession, command and navigation of the
ship, the charterer merely having use of the space in the
Persons especially employed by the owner of a cargo to vessel in return for his payment of freight.
take charge of and sell to the best advantage merchandise
which has been shipped, and to purchase returning An owner who retains possession of the ship remains
cargoes and to receive freight, as he may be authorized. liable as carrier and must answer for loss or non-delivery
of the goods received for transportation (Cebu Salvage
CHARTER PARTIES Corp. vs. Philippine Home Assurance Corp., G.R. No. 150403,
Jan. 25, 2007).
Charter party contract
NOTE: The same concept applies to a time charter.
A contract whereby the whole or part of the ship is let by
the owner to a merchant or other person for a specified

MERCANTILE LAW
Bareboat or demise charter party v. Contracts of a. War – There is a governmental prohibition of
affreightment commercial intercourse, intended to bring about an
entire cessation for the time being of all trade
BAREBOAT/DEMISE CONTRACT OF whatever.
CHARTER CONTRACT AFFREIGHTMENT b. Embargo – A proclamation or order of State,
Negligence of the charterer Ship owner remains liable usually issued in times of war or threatened
gives rise to its liability to and carrier must answer hostilities, prohibiting the departure of ships or
others. for any breach of duty. goods from some or all the ports of such State until
further order; or
Charterer is regarded as
Charterer is not regarded c. Blockade – A sort of circumvallation around a place
owner pro hac vice. Ship
as owner. Ship owner by which all foreign connection and correspondence
owner temporarily
retains ownership over is, as far as human power can effect it, to be cut off.
relinquishes possession and
the vessel. d. PROhibition to receive cargo at port of destination.
ownership of the vessel.
e. Inability of the vessel to Navigate (Code of
(Coastwise Lighterage vs. CA, G.R. No. 114167, July 12,
Commerce, Art. 640).
1995)
LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS
A written contract of affreightment may be amended by
oral agreement and since in such a case the terms of the
Three-fold character of the captain (GVG)
contract shall be those embodied in the bill of lading, no
demurrage charges can be collected where this was not
1. General agent of the ship owner
stipulated in the bill of lading (Market Developers, Inc. v.
2. Vessel’s technical director
Intermediate Appellate Court, G.R. No. L-47978, September
3. Government representative of the flag he navigates
8, 1989).
under
Q: For the transportation of its cargo from the Port of
Inherent powers of the ship captain (A2-C3-O)
Manila to the Port of Kobe, Japan, Osawa&Co.,
c hartered bareboat M/V Ilog of Karagatan
1. To Appoint or make contracts with the crew in the ship
Corporation. M/V Ilog met a sea accident resulting in
agent’s absence, and to propose said crew, should said
the loss of the cargo and the death of some of the
agent be present; but the ship agent may not employ any
seamen manning the vessel.Who should bear the loss
member against the captain's express refusal
of the cargo and the death of the seamen? Why?
2. To Command the crew and direct the vessel to the port
A: Osawa & Co. should bear the loss because it chartered
of its destination, in accordance with the instructions he
bareboat M/V Ilog which in effect gave it exclusive
may have received from the ship agent
control over the vessel. In a demise, in contrast to other
charters, the charterer is considered the owner pro hac 3. To impose Correctional punishment:
vice. The charterer is accordingly liable in personam for a. Upon those who fail to comply with orders; or
all liabilities arising out of the operation of the vessel; he b. Those wanting in discipline
is responsible for the actions of the master and crew
(Litonjua Shipping Company, Inc. v. National Seamen 4. To make Contracts for the charter of the vessel in the
Board and Gregorio P. Candongo, G.R. No. 51910, August absence of the ship agent or of its consignee
10, 1989).
5. To Adopt all proper measures to keep the vessel well
Instances when a charter party may be rescinded supplied and equipped, purchasing all that may be
necessary for the purpose, provided there is no time to
1. At the request of the charterer by: (FARER) request instruction from the ship agent
a. Failure to place vessel at charterer’s disposal
b. Abandoning the charter and paying half the price 6. To Order, in similar urgent cases while on a voyage, the
c. Return the vessel due to pirates, enemies, and bad repairs on the hull and engines of the vessel and in its
weather rigging and equipment, which are absolutely necessary to
d. Error in tonnage or flag enable it to continue and finish its voyage (Code of
e. Arrival at port for Repairs - if repairs take less than Commerce, Art. 610).
30 days, pay full freightage; if more than, freightage
in proportion to the distance covered. Obligations of the captain
2. At the request of the ship owner: (Sa-Te) 1. Inventory of equipment

a. If extra lay days TErminate without the cargo being 2. Keep a copy of Code of Commerce on board
placed alongside vessel; and 3. Have a log Book, freight book, accounting book
b. SAle by the owner of the vessel before loading by 4. Conduct a marine survey of vessel before loading
the charterer. 5. Remain on board while loading
6. Demand pilot on departure and on arrival at each
3. Due to fortuitous event: (WEB-Pro-N) port
7. Be on deck when sighting land

TRANSPORTATION LAWS
8. Arrivals under stress: to file marine protest in 24 Q: Under a charter party, XXO Trading Company
hours shipped sugar to Coca-Cola Company
9. Record bottomry loan with Bureau of Customs through SS Negros Shipping Corp., insured by
10. Keep papers and properties of crew members who Capitol Insurance Company. The cargo arrived but
might die with shortages. Coca-Cola demanded from Capitol
11. Conduct himself according to the instuctions of the Insurance Co. P500.000 in settlement for XXO
ship agent Trading. The MM Regional Trial Court, where the civil
12. Report to ship agent on arrival suit was filed, "absolved the insurance company,
13. Observe rules on the situation of lights and declaring that under the Code of Commerce, the
maneuvers to prevent collisions shipping agent is civilly liable for
14. Remain on board until the last hope to save the vessel damages in favor of third persons due to the conduct
is lost and to abide by the decision of the majority of the carrier's captain, and the stipulation in the
whether to abandon or not charter party exempting the owner from liability is
15. In case of shipwreck: file marine protest, within 24 not against public policy. Coca-Cola
hours appealed. Will its appeal prosper? Reason
16. Comply with rules and regulation on navigation (CC, briefly. (2004 Bar)
Art. 612).
A: No. The appeal of Coca-Cola will not prosper. Under
LIABILITY FOR ACTS OF THE CAPTAIN Article 587 of the Code of Commerce, the shipping agent
is civilly liable for damages in favor of third persons due
Cases where the ship owner/agent shall be liable to to the conduct of the carrier's captain, and the shipping
the damages caused by the captain agent can exempt himself therefrom only by abandoning
the vessel with all his equipment and the freight he may
1. Damages suffered by the vessel and its cargo by reason have earned during the voyage. On the other hand,
of want of skill or negligence on his part assuming there is bareboat charter, the stipulation in the
charter party exempting the owner from liability is not
2. Thefts committed by the crew, reserving his right of against public policy because the public at large is not
action against the guilty parties; involved (Home Insurance Co. vs. American Steamship
Agencies, Inc., G.R. No. L-25599, April 4, 1968)
3. Losses, fines, and confiscations imposed an account of
violation of customs, police, health, and navigation laws EXCEPTIONS TO THE RULE
and regulations;
Exemption from liability of the captain for loss or
4. Losses and damages caused by mutinies on board the injury to persons or cargo
vessel or by reason of faults committed by the crew in
the service and defense of the same, if he does not prove The captain shall not be liable for the loss or injury to
that he made timely use of all his authority to prevent persons or cargo if the loss or the injury is based on the
or avoid them; following causes:
1. Force majeure
5. Those caused by the Misuse of the powers; 2. Obligations contracted for the vessel’s benefit, except
when the captain expressly agrees to be liable.
6. For those arising by reason of his going out of his course
or taking a course which he should not have taken A captain may not have himself substituted by
without Sufficient cause, in the opinion of the officers of another
the vessel, at a meeting with the shippers or
supercargoes who may be on board. No exceptions A captain may not have himself substituted n the absence
whatsoever shall exempt him from this obligation; of consent from the ship agent, and should he do so he
shall be liable for all the acts of the substitute. (CC, Art.
7. For those arising by reason of his Voluntarily entering 615)
a port other than that of his destination, outside of the
cases or without the formalities referred to in Article Q: T, the captain of MV Don Alan, while asleep in his
612; and cabin, dreamt of an Intensity 8.0 earthquake along the
path of his ship. On waking up, he immediately
8. For those arising by reason of non-observance of the ordered the ship to return to port. True enough, the
Provisions contained in the regulations on situation of earthquake and tsunami struck three days later and
lights and manoeuvres for the purpose of preventing his ship was saved. Was the deviation proper? (2011
collisions (Code of Commerce, Art. 618). Bar)
NOTE: Ship owner/agent is not liable for the obligations A: No, because no reasonable ground for avoiding a peril
contracted by the captain if the latter exceeds his powers existed at the time of the deviation.
and privileges inherent in his position of those which may
have been conferred upon him by the former. However, if
the amount claimed were used for the benefit of the
vessel, the ship owner or ship agent is liable.

MERCANTILE LAW
Instances when may the captain and crew members contracts, except by reason of insubordination in
rescind their contractual employment serious matters, robbery, theft, habitual
drunkenness, or damage caused to the vessel or to
In case of: (WOND) its cargo through malice or manifest or proven
1. War negligence (CC, Art. 605).
2. Outbreak of disease
3. New owner of vessel ii. If the captain should be the vessel’s co-owner, he
4. Change of Destination (CC, Art. 647). may not be discharged unless ship agent returns
his amount of interest therein. In the absence of
Shipowner of a vessel agreement between the parties, interest shall be
appraised by experts appointed in the manner
The person in possession, management, control over the established by civil procedure.
vessel, and the right to direct her navigation. While in
their possession, the ship owners also receive freight Doctrine of inscrutable fault (1995, 1997 Bar)
earned and paid.
Under this doctrine, where fault is established but it
Ship agent cannot be determined which of the two vessels were at
fault, both shall be deemed to have been at fault.
The person entrusted with provisioning or representing
the vessel in the port in which it may be found. Hence, Doctrine of limited liability (1991, 1994, 1997, 2000,
whether acting as agent of the ownerof the vessel or as 2008 Bar)
agent of the charterer, he will be considered as the ship
agentand may be held liable as such, as long as he is the Also called the “no vessel, no liability doctrine,” it
one that provisions or represents the vessel (Macondray provides that liability of ship owner is limited to ship
& Co., Inc. v. Provident Insurance Corp, G.R. No. 154305, Dec. owner’s interest over the vessel. Consequently, in case of
9, 2004). loss, the ship owner’s liability is also extinguished.
Limited liability likewise extends to ship’s appurtenances,
Civil liabilities of ship owners and agents equipment, freightage, and insurance proceeds. The ship
owner’s or agent’s liability is merely co-extensive with his
1. Damages suffered by a 3rd person for tort committed by interest in the vessel, such that a total loss of the vessel
the captain; results in the liability’s extinction. The vessel’s total
2. Contracts entered for provisioning and repair of vessel; destruction extinguishes maritime liens because there is
3. Indemnities in favor of 3rd persons arising from the no longer any res to which they can attach (Monarch
conduct of the captain from the care of goods; and Insurance v. CA, G.R. No. 92735, June 8, 2000).
4. Damages in case of collision due to fault or negligence
or want of skill of the captain. Rationale of the doctrine: the Real and Hypothecary
5. Damages for the acts of the captain. nature of Maritime Law
Powers, functions, and liabilities of ship agents (ID) To offset against innumerable hazards and perils in sea
voyage and to encourage ship building and maritime
1. Indemnity for expenses incurred for ship’s benefit. commerce. By abandonment, the ship owner and ship
2. Discharge of captain and/or crew members. agent exempt themselves from liability, thus avoiding the
possibility of risking his whole fortune in the business.
The following are the rules observed by the ship agent:
a. Captain and/or crew member’s contract not for a Q: On October 30, 2007, M/V Pacific, a Philippine
definite period or voyage: registered vessel owned by Cebu Shipping Company
i. Before vessel sets out to sea: Ship agent at his (CSC), sank on her voyage from Hongkong to Manila.
discretion may discharge the captain and Empire Assurance Company (Empire) is the insurer of
members of the crew. Ship agent must pay captain the lost cargoes loaded on board the vessel which
and/or crew members salaries earned according were consigned to Debenhams’ company. After it
to their contracts, and without any indemnity indemnified Debenhams, Empire as subrogee filed an
whatsoever, unless there is an expressed action for damages against CSC.
agreement;
a. Assume that the vessel was seaworthy. Before
ii. During voyage: Captain and/or crew member shall departing, the vessel was advised by the Japanese
receive salary until return to the port where Meteorological Center that it was safe to travel to its
contract was made. Article 637 of the Code of destination. But while at sea, the vessel received a
Commerce enumerates the just causes for report of a typhoon moving within its general path. To
discharge. avoid the typhoon, the vessel changed its course.
However, it was still at the fringe of the typhoon when
b. Where captain and members of the crew’s contracts it was repeatedly hit by huge waves, foundered and
with ship agent be for a definite period or voyage: eventually sank. The captain and the crew were saved
i. Captain and/or crew members may not be except three (3) who perished. Is CSC liable to
discharged until after the fulfillment of their

TRANSPORTATION LAWS
empire? What principle of maritime law is Cases in which the doctrine of limited liability is
applicable? Explain. allowed (1994, 2004 Bar) (SOLE)
b. Assume the vessel was not seaworthy as in fact
its hull had leaked, causing flooding in the vessel, will 1. Civil liability of the Ship agent or shipowner for the
your answer be the same? Explain. indemnities in favor of third persons; (CC, Art. 587)
c. Assume the facts in question (b). Can the heirs of
the three (3) crew members who perished recover 2. Civil liability of the co-Owners of the vessel for the
from CSC? Explain fully. (2008 Bar) results of the acts of the captain; (CC, Art. 590)
A: 3. If the vessel and her cargo be totally Lost, by reason of

a) No. The principle of limited liability will apply because capture or shipwreck, all the rights shall be extinguished,
the exclusively real and hypothecary nature of maritime both as regards the right of the crew to demand wages and
law operates to limit the liability of the ship owner to the the right of the ship agent to recover the advances made;
value of the vessel, earned freightage and proceeds of the (CC, Art. 643) or
insurance, if any “No vessel, No liability,” expresses in a
nutshell the limited liability rule (Monarch Insurance v. CA, 4. Extinction of civil liability incurred by the shipowner or
G.R No. 92735, June 8, 2000). The total destruction of the agent in cases of maritime collisions (CC, Art. 837).
vessel extinguishes maritime lien as there is no longer any
res to which it can attach. In this case, the ship was Exceptions to the doctrine of limited liability
seaworthy. It exercised extraordinary diligence when it
changed its course to avoid the typhoon but 1. Repairs and provisioning of the vessel before the loss of
unfortunately, it was hit by huge waves and sank. Since the vessel; (CC, Art. 586)
the vessel sank at no fault by CSC, it cannot be held liable
by virtue of “No vessel, no liability rule.” 2. Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim from the
b) No. The insurance company is not liable for loss if shipowner; (Vasquez vs. CA, G.R. No. L-42926, Sept. 13,
the vessel is not seaworthy (Tiangco Company v. Hanson, 1985)
Orth, and Stevenson, Inc.,G.R. No. L- 610607, April 18, 1958
).A ship is seaworthy if it is reasonably fit to perform the 3. When the shipowner is guilty of fault or negligence;
service and to encounter the ordinary perils of the voyage
contemplated by the parties to the policy (ICP, Sec. 114). NOTE: But if the captain is the one who is guilty,
In this case, there was a leak in the hull of the ship making doctrine may still be invoked, hence, abandonment is
it unseaworthy; thereby, insurance company is exempt still an option.
from liability.
4. Private carrier; or
c) Yes. Although the proximate cause of death of the
crew members is their negligence in not attending to the 5. Voyage is not maritime in character.
ship’s seaworthiness which is their duty to do so and the
company cannot be blamed for the acts imputable to its Q: A cargo ship of X Shipping, Co. ran aground off the
employees’ negligence; however, they can claim against coast of Cebu during a storm and lost all its cargo
the employee’s compensation because the accident amounting to Php50 Million. The ship itself suffered
causing their death occurred during the course of damages estimated at Php80 Million.
employment and there was no notorious negligence on
the part of the crew members as to exempt the heirs from The cargo owners filed a suit against X Shipping but it
claiming under the employee’s compensation. The fund invoked the doctrine of limited liability since its
used for payment of claims is derived from the State vessel suffered an Php80 Million damage, more than
Insurance Fund, which, upon payment, will be the collective value of all lost cargo. Is X Shipping
reimbursed by the employer. correct? (2011 Bar)
Person who can invoke the limited liability rule A: No, since X Shipping neither incurred a total loss nor
abandoned its ship.
The only persons who could avail of this are the
shipowner and the shipping agent. He is the very person ACCIDENTS AND DAMAGES IN MARITIME COMMERCE
whom the Limited Liability Rule has been conceived to
protect. The petitioners cannot invoke this as a defense Accidents in maritime commerce (CASA)
(Philippine Trigon Shipyard Corporation, et al. vs.
Crisostomo G. Concepcion, et al., G.R. No. 160088, July 13, 1. Collision
2011). 2. Averages
3. Shipwreck
4. Arrival under stress

MERCANTILE LAW
GENERAL AVERAGE 2. Fuel for the vessel if there is more than sufficient fuel
for the voyage (Rule IX, York-Antwerp Rule)
Averages
Jettison (2000, 2009 Bar)
All extraordinary or accidental expenses which may be
incurred during the voyage for the preservation of the Act of throwing overboard part of a vessel’s cargo or hull
vessel or cargo or both. in hopes of saving a ship from sinking.
Goods jettisoned for the common safety, shall not pay
Kinds of averages freight; but its latter amount (freight lost) shall be
considered as general average, computing the same in
1. General average – Damages or expenses deliberately proportion to the distance covered when they were
caused in order to save the vessel, its cargo or both from jettisoned (Code of Commerce, Art. 660).
real and known risk.
2. Particular average – Damages or expenses caused to the Orderof goods to be cast overboard in case of jettison
vessel or cargo that did not inure to the common benefit,
and borne by respective owners. 1. Those on deck, preferring the bigger bulk with least
value.
General average v. Particular average 2. Those below upper deck, beginning with the heaviest
with least utility.
GENERAL AVERAGE PARTICULAR AVERAGE
Q: Distinguish between overseas and inter-island
Both the ship and cargo No common danger to both trade regarding reimbursement and payment of
are subject to the same the vessel and the cargo general averages on jettisoned deck cargo.
danger
There is a deliberate Expenses and damages are A:
sacrifice of part of the not deliberately made 1. In case of overseas trade, the York-Antwerp Rules
vessel, cargo, or both prohibit the loading of cargo on deck. In case such
Damage or expenses Did not inure to common cargo is jettisoned, the owner will not be entitled to
incurred to the vessel, its benefit and profit of all reimbursement in view of the violation. If the cargo
cargo, or both, redounded persons interested in the were saved, the owner must contribute to general
to the benefit of the vessel and her cargo. average.
respective owners.
All those who have Only the owner of the goods 2. In case of interisland trade, the York-Antwerp Rules
benefited shall satisfy the benefiting from the damage allow deck cargo. If the cargo loaded on deck is
average. shall bear the expense of jettisoned as a result of which the vessel was saved,
average. the cargo owner is entitled to reimbursement. If the
cargo is saved, the cargo owner must contribute to
Requisites of general average (CD-PS) the general average.
1. Common danger present;

2. Deliberate sacrifice of part of the vessel or cargo; Reason: In interisland trade, voyages are usually short and
3. Successful saving of vessel and/or cargo; and there are intervening islands and the seas are generally
4. Proper procedure and legal steps. not rough. In overseas trade, the vessel is exposed for
many days to the peril of the sea making deck cargo is
Persons liable for the amount of the general averages dangerous to navigation.
All persons having an interest in the vessel and cargo COLLISIONS

therein at the time of the occurrence of the average shall
contribute (CC, Art. 812). Collision
Personwho shall be liable for the amount of the It is the impact of two moving vessels.
particular averages
Allision
The owner of the things which gave rise to the expenses
or suffered the damage shall bear the simple or particular It is the impact between a moving vessel and a stationary
averages (CC, Art. 810). one.
Goods not covered by general average even if not Error in extremis

sacrificed
The sudden movement made by a faultless vessel during
1. Goods not recorded in the books or records of the vessel the third zone of collision with another vessel which is at
(CC, Art. 855[2]) fault under the second zone. Even if sudden movement is
wrong, no responsibility will fall on the faultless vessel.

TRANSPORTATION LAWS
Rules governing liabilities of parties in case of Role of a “protest” with respect to collisions (2007
collision Bar)
1. One vessel at fault – The ship owner of such vessel shall The action for recovery of damages arising from collisions
be liable for all resulting damages. cannot be admitted if a protest or declaration is not
presented within twenty-four hours before the
2. Both vessels at fault – Each vessel shall suffer their competent authority of the point where the collision took
respective losses but as regards the owners of the place, or that of the first port of arrival of the vessel, if in
cargoes, both vessels shall be jointly and severally liable Philippine territory, and to the Filipino consul if it
(1991, 1995, 1998 Bar). occurred in a foreign countr y (CC, Art. 835).
3. Vessel at fault not known – Each vessel shall suffer its NOTE: Failure to make a protest is not an impediment to
own losses and both shall be solidarily liable for loses or the maintenance of a civil action based on quasi-delict.
damages on the cargo. (Doctrine of Inscrutable Fault)
Instances when a protest is required
4. Fortuitous event – Each shall bear its own damage (1995
Bar). 1. Arrival under stress; (CC, Art. 612 [8])
2. Shipwreck; (CC, Arts. 601 [15], 843)
5. Third vessel at fault – The third vessel shall be liable for 3. If the vessel has gone through a hurricane or where
losses and damages sustained. the captain believes that the cargo has suffered
damages or averages; (CC, Art. 642) and
Zones of time in the collision of vessel 4. Maritime collision (CC, Art. 835).
1. First zone – all time up to the moment when risk of Persons who can file a maritime protest
collision begins.
1. In case of maritime collision, the passenger or other
NOTE: One vessel is a privileged vessel and the persons interested who may be on board the vessel or
other is a vessel required to take action to avoid who were in a condition who can make known their
collision. wishes (CC, Arts. 835-836) or the captain himself (Verzosa
and Ruiz vs. Lim, G.R. No. 20145, Nov. 15, 1923).
2. Second zone – time between moment when risk of
collision begins and moment it becomes practically a 2. The captain in cases of:
certainty. a. Arrival under stress
b. Shipwreck; or
NOTE: In this zone, the conduct of the vessels is c. If the vessel has gone through a hurricane or where
primordial. It is in this zone that vessels must the captain believes that the cargo has suffered
observe nautical rules, unless a departure therefrom damages or averages.
becomes necessary to avoid imminent danger. The
vessel which does not make such strict observance Q: Two vessels figured in a collision resulting in
is liable. considerable loss of cargo. The damaged vessels were
safely conducted to a port. Kim, a passenger and Ruby,
3. Third Zone – time when collision is certain and up to the a shipper who suffered damage to his cargo, did not
time of impact. file maritime protest. Can Kim and Ruby successfully
maintain an action to recover losses and damages
NOTE: An error at this point no longer bears any arising from the collision? (2007 Bar)
consequence.
A: Ruby, the shipper can successfully maintain an action
Even if a collision which resulted in the damage to the to recover losses and damages arising from the collision
cargoes of a vessel was due to the fault of the other vessel, notwithstanding his failure to file a maritime protest since
the shipowner is still liable where the vessel did not the filing thereof is required only on the part of Kim, who,
exercise due diligence to avoid collision (Maritime being a passenger of the vessel at the time of the collision,
Company of the Philippines vs. CA, G.R. No 47004, March 8, was expected to know the circumstances of the collision.
1989). Kim's failure to file a maritime protest will therefore
prevent him from successfully maintaining an action to
A vessel is guilty of negligence even if it correctly recover his losses and damages (CC, Art 836).
navigated to the right to avoid the collision where it did
not make such maneuver at an early stage and allowed the Shipwreck
two vessels to come to close quarters (Mecenas vs. CA, G.R.
No. 88052, December 14, 1989). The loss of the vessel at sea as a consequence of its
grounding, or running against an object in sea or on the
coast. If the wreck was due to malice, negligence, or lack
of skill of the captain, the owner of the vessel may demand
indemnity from said captain.

MERCANTILE LAW
Person who shall bear the losses in shipwreck Also, the deterioration of goods due to delay in their
transportation is not covered by Sec. 6 of COGSA (Mitsui
GR: The loss of a ship and her cargo shall fall upon their O.S.K. Lines Ltd. vs. CA, G.R. No. 119571, March 11, 1998).
respective owners (CC, Art. 840)
NOTICE OF LOSS OR DAMAGE
XPN: If the wreck was due to malice, negligence, or lack of
skill of the captain, or because the vessel put to sea was Notice is not required to be filed in case of damage to
insufficiently repaired and equipped, the ship agent or the goods under the COGSA
shippers may demand indemnity from the captain for the
damage caused to the vessel or to the cargo by the There is no consequence on the right to bring suit if no
accident (CC, Art. 841) notice is filed unlike under the Code of Commerce. It only
gives rise to a presumption that the goods are delivered
Arrival under stress in the same condition as they are shipped.
It is the arrival of a vessel at the nearest and most Failure to file notice of loss does not bar an action against
convenient port, if during the voyage the vessel cannot the carrier if the action was filed within one year (Belgian
continue the trip to the port of destination on account of Overseas Chartering & Shipping N.V. vs. Philippine First
the lack of provisions, well-founded fear of seizure, Insurance Company, Inc, G.R. No. 143133, June 5, 2002).
privateers or pirates, or by reason of any accident of the
sea disabling it to navigate (CC, Art. 819). There is also no consequence if the transportation
charges and expenses are paid unlike under the Code of
NOTE: In arrival under stress, the captain must file a Commerce.
Protest which is merely a disclaimer for the shipowner
not to be liable. PERIOD OF PRESCRIPTION
Instances when arrival under stress is unlawful (LR- Time when suits for loss or damage of cargo should be
DM) brought (1992, 1995, 2000, 2004 Bar)
1. Lack of provisions is due to negligence to carry The suit should be brought within one year from:
according to usage and customs 1. Delivery of the goods, in case of damage; or
2. Risk of enemy not well known of manifest 2. The date when the goods should have been delivered,
3. Defect of vessel is due to improper repair; or in case of loss.
4. Malice, negligence, lack of foresight or skill of captain
(CC, Art. 820). NOTE: The parties may agree to extend the one-year
period to file a case under the Carriage of Goods by Sea
CARRIAGE OF GOODS BY SEA ACT (COGSA) (Universal Shipping Lines, Inc. vs. Intermediate Appellate
Court, G.R. No. 74125, July 31, 1990).
APPLICATION OF COGSA
Q: To whom should such delivery be made as basis of
It will only be applied in terms of loss or damage of goods the computation of the one-year period?
transported to and from Philippine ports in foreign trade.
It may also apply to domestic trade when there is a A: The one-year period is computed from the delivery of
paramount clause in the contract. goods to the operator and not to the consignee.
Paramount Clause – it is a stipulation or clause either on Instances when the one-year period applies (AFLS)
the bill of lading or charter party stipulating the laws that
the parties agreed to be used of that particular transport. 1. Amendment of pleadings for suing the wrong party
In the event that there will be a breach, the parties shall 2. Filing of third party complaint
follow the law stipulated in the paramount clause (Martin, 3. Loss or damage to cargo, excluding delay or
1989). misdelivery
4. Subrogation (NCC, Art 2207).
The Carriage of Goods by Sea Act applies up to the final
port of destination even if the transhipment was made on Time when the one year period in the COGSA is
an inter-island vessel (Sea Land Service Inc. vs. IAC, G.R. No. interrupted
75118, August 31, 1987).
1. When an action is filed in court; or
Cases covered under the COGSA 2. When there is an agreement between the parties to
extend it.
It applies only in case of non-delivery or damage, and not
to misdelivery or conversion of goods (Ang vs. American Art. 1155 of the Civil Code (providing that the
Steamship Agencies, Inc., G.R. No. L-22491, Jan. 27, 1967). prescription of actions is interrupted by the making
of an extrajudicial written demand by the creditor) is
not applicable to actions brought under the COGSA

TRANSPORTATION LAWS
Written claims do not toll the running of the one-year the loss and damage that the goods on board his
prescriptive period under the COGSA since matters vessel suffered.
affecting the transportation of goods by sea must be
decided as soon as possible (Dole Philippines, Inc. vs. Since Seaboard, New World’s insurer, covered the
Maritime Company of the Philippines, G.R. No. L-61352, goods with a marine insurance policy, New World
February 27, 1987). sent it a formal claim dated November 16, 1993.
Replying on February 14, 1994, Seaboard required
Persons who can give notice to, and bring suit against New World to submit to it an itemized list of the
the carrier (SCA) damaged units, parts, and accessories, with
corresponding values, for the processing of the claim.
1. The Shipper But New World did not submit what was required of
2. The Consignee; or it, insisting that the insurance policy did not include
3. Any legal holder of the bill of lading like the indorsee, the submission of such a list in connection with an
subrogee, or the insurer of the goods (Kuy vs. Everett insurance claim. Reacting to this, Seaboard refused to
Steamship Corporation, G.R. No. L-5554, May 27, process the claim.
1953).
On October 11, 1994 New World filed an action for
The one-year prescriptive period within which to file specific performance and damages against all the
a case against the carrier also applies to a claim filed respondents before the RTC. On August 16, 2001 the
by an insurer who stands as a subrogee to the insured RTC rendered a decision absolving the various
respondents from liability with the exception of NYK.
The one-year prescriptive period within which to file a The RTC ruled, however, that petitioner New World
case against the carrier also applies to a claim filed by an filed its claim against the vessel owner NYK beyond
insurer who stands as a subrogee to the insured. Also, the one year provided under the Carriage of Goods by
whether the insurer files a third party complaint or Sea Act (COGSA). New World filed its complaint on
maintains an independent action is of no moment October 11, 1994 when the deadline for filing the
(Filipino Merchants Insurance Co., Inc. vs. Alejandro, G.R. action (on or before October 7, 1994) had already
No. L-54140, Oct. 14, 1986). lapsed. On appeal, the CA rendered judgment on
January 31, 2006, affirming the RTCs rulings except
Where an insurer was sued by the consignee of imported with respect to Seaboards liability. Is the Decision of
goods filed a third-party complaint against the carrying CA correct?
vessel more than a year after the delivery of the goods, the
third party complaint is barred by the one-year A: No. With respect to the prescriptive period, the last day
prescriptive period under the COGSA, as otherwise the for filing such a suit fell on October 7, 1994. The record
prescriptive period can be avoided by the consignee by shows that petitioner New World filed its formal claim for
filing a claim against the insurer (Filipino Merchant its loss with Seaboard, its insurer, a remedy it had the
Insurance Co., Inc. vs. Alejandro, ibid). right to take, as early as November 16, 1993 or about 11
months before the suit against NYK would have fallen due.
NOTE: The ruling in the above-cited case should apply
only to suits against the carrier filed either by the shipper, In the ordinary course, if Seaboard had processed that
the consignee or the insurer, not to suits by the insured claim and paid the same, Seaboard would have been
against the insurer. The basis of the insurer’s liability is subrogated to petitioner New Worlds right to recover
the insurance contract and such claim prescribes in 10 from NYK. But Seaboard made an unreasonable demand
years, in accordance with Art. 1144 of the Civil Code on February 14, 1994 for an itemized list of the damaged
(Mayer Steel Pipe Corporation vs. CA, G.R. No. 124050, June units, parts, and accessories, with corresponding values
19, 1997). when it appeared settled that New Worlds loss was total
and when the insurance policy did not require the
Q: New World bought from DMT Corporation (DMT) production of such a list in the event of a claim.
through its agent, Advatech Industries, Inc.
(Advatech) three emergency generator sets. DMT Notwithstanding the fact that the case was filed beyond
shipped the generator sets by truck from Wisconsin, the one-year prescriptive period provided for under
United States, to LEP Profit International, Inc. (LEP COGSA, the suit will not be dismissed if the delay was not
Profit) in Chicago, Illinois. From there, the shipment due to the claimant’s fault. Had the insurer processed and
went by train to Oakland, California, where it was examined New World’s claim promptly – either rejecting
loaded on S/S California Luna V59, owned and or paying New World, the latter could have taken judicial
operated by NYK Fil-Japan Shipping Corporation action on time. But as in this case, the insurer made an
(NYK) for delivery to petitioner New World in Manila. unreasonable demand for an itemized list of damages
which caused the delay. The insurer therefore should bear
NYK unloaded the shipment in Hong Kong and the loss with interest on account of such delay (New World
transshipped it to S/S ACX Ruby V/72 that it also International Development Phils. Inc. v. NYK-FILJAPAN
owned and operated. On its journey to Manila, Shipping Corp., G.R. No. 171468, August 24, 2011, in Divina,
however, ACX Ruby encountered typhoon Kadiang 2014).
whose captain filed a sea protest on arrival at the
Manila South Harbor on October 5, 1993 respecting

MERCANTILE LAW
With respect to Seaboard’s liability, the marine open A: Section 3 will prevail. Any clause, Sec. 3 of the COGSA
policy that Seaboard issued to New World was an all-risk provides that any covenant, or agreement in a contract of
policy. Such a policy insured against all causes of carriage relieving the carrier or the ship from liability for
conceivable loss or damage except when otherwise loss or damage to or in connection with the goods or
excluded or when the loss or damage was due to fraud or lessening such liability otherwise than as provided, shall
intentional misconduct committed by the insured. The be null and void and of no effect." (E. E. Elser, Inc. vs. CA,
policy covered all losses during the voyage whether or not G.R. No. L-6517, November 29, 1954).
arising from a marine peril (New World International
Development Phils. Inc. v. NYK-FILJAPAN Shipping Corp., THE WARSAW CONVENTION
G.R. No. 171468, August 24, 2011.)
The Warsaw Convention (WC) for Unification of Certain
Prescriptive period in case of misdelivery and Rules Relating to International Carriage by Air provides
conversion of goods for rules applicable to international transportation by air.
The Philippines is one of the signatories to WC (Santos III
In case of misdelivery or conversion, the proper periods vs. Northwest Orient Airlines, G.R. No. 101538, June 23,
are: 1992). Hence, this has the force and effect of law in the
1. If there is a written contract – 10 years (NCC, Art. Philippines (Cathay Pacific Airways, Ltd. vs. CA, G.R. No.
1144) 60501, March 5, 1993).
2. Oral contract – 6 years (NCC, Art. 1145)
3. For quasi-delict – 4 years (NCC, Art. 1146) APPLICABILITY
NOTE: The prescriptive period for an action against a The WC applies to all international carriage of persons,
broker is ten years and not one year under the COGSA, luggage or goods performed by aircraft for reward. It
since the broker is not a carrier, charterer or holder of the applies equally to gratuitous carriage by aircraft
bill of lading (Reyma Brokerage Inc. vs. Philippine Home performed by an air transport undertaking (WC, Art. 1[1]).
Assurance Corporation, G.R. No. 93464, October 7, 1991).
International carriage
LIMITATION OF LIABILITY
Any carriage in which, according to the contract made by
Amount of the carrier’s liability under the COGSA the parties, the place of departure and the place of
destination, whether or not there be a break in the
1. The liability limit is set at $500 per package or carriage or a transshipment, are situated either:
customary freight unless the nature and value of such 1. Within the territories of two High Contracting
goods is declared by the shipper. Parties; or
2. Shipper and carrier may agree on another maximum 2. Within the territory of a single High Contracting
amount, but not more than amount of damage Party, if there is an agreed stopping place within a
actually sustained. territory subject to the sovereignty, suzerainty,
mandate or authority of another Power, even
NOTE: When the packages are shipped in a container though that Power is not a party to the Convention
supplied by carrier and the number of such units is stated (WC, Art. 1[2]).
in the bill of lading, each unit and not the container
constitute the “package.” NOTE: High Contracting Parties are the signatories to the
WC and those which subsequently adhered to it. (Mapa vs.
Instances where there is no liability under COGSA CA, G.R. No. 122308, July 8, 1997)
(FDUD)
Q: How should carriage performed by several
1. If the nature or value of goods knowingly and successive air carriers be treated under Warsaw
fraudulently misstated by shipper Convention?
2. If damage resulted from Dangerous nature of
shipment loaded without consent of carrier A: A carriage to be performed by several successive air
3. If Unseaworthiness not due to negligence carriers is deemed, for the purposes of WC to be one
4. If Deviation was to save life or property at sea. undivided carriage, if it has been regarded by the parties
as a single operation, whether it had been agreed upon
Q: Clause 18 of the bill of lading provides that the under the form of a single contract or of a series of
owner should not be liable for loss or damage of cargo contracts (WC, Art. 1 [3]).
unless written notice thereof was given to the carrier
within 30 days after receipt of the goods. However, NOTE: Such carriage does not lose its international
Section 3 of the COGSA provides that even if a notice character merely because one contract or a series of
of loss or damage is not given, "that fact shall not contracts is to be performed entirely within a territory
affect or prejudice the right of the shipper to bring subject to the sovereignty, suzerainty, mandate or
suit within one year after the delivery of the goods." authority of same High Contracting Party (Ibid).
Which of these two provisions should prevail?

TRANSPORTATION LAWS
Documents of carriage issued under WC 3. Delay in the transport by air of passengers, baggage or
goods.
The following are the documents of carriage:
1. Passenger Ticket NOTE: The list is not exclusive.
2. Luggage Ticket
3. Air Consignment note Venue in the filing of an action for violation of a
contract of international carriage
Function of the air consignment note
An action for damage must be brought at the option of the
It is prima facie evidence of: plaintiff, in the territory of one of the High Contracting
1. The conclusion of the contract Parties, either before the court:
2. Receipt of the goods 1. of the domicile of the carrier or
3. Conditions of carriage (WC, Art. 11 [1]). 2. of his principal place of business, or
3. where the ticket was purchased, or
Exercise of the consignor of its right to dispose of the 4. at the place of destination (WC, Art. 28 [1]).
goods
LIMITATION OF LIABILITY
The consignor may exercise its right to dispose of the
goods by: Limitations to the liability of air carriers (1993 Bar)
1. Withdrawing them at the aerodrome of departure or 1. In the carriage of persons – 250,000 francs for each
destination, or passenger. Nevertheless, by special contract, the carrier
and the passenger may agree to a higher limit of liability.
2. Stopping them in the course of the journey on any
landing, or 2. In the carriage of registered baggage and of cargo – Two
hundred and fifty (250) francs per kilogramme, unless the
3. Calling for them to be delivered at the place of passenger or consignor has made, at the time when the
destination or in the course of the journey to a person package was handed over to the carrier, a special
other than the consignee named in the air consignment declaration of interest in delivery at destination and has
NOTE, or paid a supplementary sum if the case so requires.
4. Requiring them to be returned to the aerodrome of 3. As regards objects of which the passenger takes charge
departure (WC, Art. 12). himself – Five thousand (5,000) francs per passenger (WC,
Art. 22).
NOTE: In the exercise of this right, the carrier or other
consignors must not be prejudiced. For the carrier to obey
the orders for disposition, the carrier must require the NOTE: Carrier is not entitled to the foregoing limit if the
production of the part of the air consignment note damage is caused by willful misconduct or default on its
delivered to the consignor (ibid). part (WC, Art. 25). Where the loss of the baggage of a
passenger was due to the fault or recklessness of an
Time when the right to disposition ceases to continue airline company, the limitation on the liability of airline
companies under the Warsaw Convention is not
It ceases as soon as the consignee, on arrival of the goods applicable (Alitalia v. IAC, G.R. No. 71929, December 4,
at the place of destination, require the carrier to hand 1990).
over to him the air consignment note and to deliver the
goods to him, on payment of charge due and on complying Stipulation relieving the carrier from or limiting its
with the conditions of carriage set out in the air liability is not valid
consignment note(WC, Art. 13)
Any provision tending to relieve the carrier of liability or
Where the supervisor of the consignee signed the delivery to fix a lower limit than that which is laid down in this
receipt for the goods shipped, the consignee cannot sue Convention shall be null and void but the nullity of such
the shipping company for non-delivery of the goods provision does not involve the nullity of the whole
(Republic vs. Lorenzo Shipping Corporation, G.R. No. contract (WC, Art. 23[1]).
153563, Februry 7, 2005).
Exceptions to these limitations (WD-PG)
LIABILITIES UNDER THE CONVENTION:
1. Willful misconduct
1. Damage sustained in the event of the death or 2. Default amounting to willful misconduct
wounding of a passenger taking place on board the 3. Accepting Passengers without ticket
aircraft or in the course of any of the operations of 4. Accepting Goods without airway bill or baggage
embarking or disembarking; without baggage check
2. Loss or damage to any check baggage or goods

sustained during the transport by air;

MERCANTILE LAW
Time when the right to damages will be extinguished evidenced by a flagrantly or shamefully wrong or
improper conduct (Luna vs. CA, GR No. 100374-75,
The right to damages shall be extinguished if an action is November 27, 1992).
not brought within two years, reckoned from the date of
arrival at the destination, or from the date on which the The act of the carrier in guessing which luggage
aircraft ought to have arrived, or from the date on which contained the firearm constitutes willful misconduct
the carriage stopped.
Theguessing of which luggage contained the firearms
NOTE: Despite the express mandate that an action for amounted to willful misconduct under Section 25(1) of
damages should be filed within 2 years from the arrival at the Warsaw Convention (Northwest Airlines vs. CA, GR No.
the place of destination, such rule shall not be applied 120334, January 20, 1998).
where delaying tactics were employed by airline itself in
a case where a passenger wishes to settle his complaint The allegation of willful misconduct resulting in a
out-of-court but the airline gave him the runaround, tort is insufficient to exclude the case from the realm
answering the passenger’s letters but not giving in to his of Warsaw Convention
demands, hence, giving the passenger no time to institute
the complaint within the reglementary period (United A cause of action based on tort did not bring the case
Airlines vs. Uy, G.R. No. 127768, Nov. 19, 1999). outside the sphere of the Warsaw Convention (Lhuiller vs.
British Airways, GR No. 171092, March 15, 2010).
A person cannot recover a claim covered by Warsaw
Convention after the lapse two years
A claim covered by the Warsaw Convention can no longer

be recovered under local law, if the statute of limitations
of two years has already lapsed (PAL. v. Savillo, G.R. No.
149547, July 4, 2008).
However, the action filed by a passenger of an airline

company for loss of his luggage is not barred by the two-
year prescriptive period under the Warsaw Convention,
where the passenger immediately made a demand upon
the airline company and the action was delayed because
of the evasion of the airline company (United Air Lines, Inc.
v. Court of Appeals, G.R. No. 124110, April 20, 2001).
Where an airline company failed to deliver the baggage of

a passenger on time, a passenger may maintain an action
for damages under the Civil Code even if he did not file a
claim with the airline company within fourteen days as
required by the Warsaw Convention, for he may still sue
under the Civil Code (Luna v. CA, G.R. No. 100374-75,
November 27, 1992).
WILLFULL MISCONDUCT
The definition of "willful misconduct" depends in some

measure on which court is deciding the issue. Some
common factors that courts will consider are:
1. Knowledge that an action will probably result in
injury or damage
2. Reckless disregard of the consequences of an
action, or
3. Deliberately failing to discharge a duty related to
safety.
Courts may also consider other factors.
The failure of the carrier to deliver the passenger’s

luggage at the designated time and place does not ipso
facto constitutes willful misconduct
There must be a showing that the acts complained of

were impelled by an intention to violate the law, or were
in persistent disregard of one's rights. It must be

CORPORATION CODE
THE CORPORATION CODE (CC) A: Article XII, Section 16 of the 1987 Consitution provides
that Congress shall not, except by general law, provide for
the formation, organization, or regulation of private
CORPORATION corporations. Government-owned and controlled
corporations may be created or established by special
DEFINITION charters in the interest of the common good and subject
to the test of economic viability.
A corporation is an artificial being created by operation of
law, having the right of succession and the powers, Q: A corporation was created by a special law. Later,
attributes and properties expressly authorized by law or the law creating it was declared invalid. May such
incident to its existence (CC, Sec. 2). corporation claim to be a de facto corporation?
ATTRIBUTES OF A CORPORATION A: No. A private corporation may be created only under

(1996, 1998, 1999, 2009 Bar) (ALS– PAPI) the Corporation Code. Only public corporations may be
created under a special law. Where a private corporation
1. It is an Artificial being is created under a special law, there is no attempt at a
2. It is created by operation of Law valid incorporation and it cannot claim a de facto status.
3. It enjoys the right of Succession
4. It has the Powers, Attributes and Properties expressly Franchise
authorized by law or Incident to its existence.
A franchise includes any special privilege or right affected
Rules for the creation of a corporation with public interest, conferred by the State on
corporations or persons and which does not belong to the
GR: A legislative grant or authority is necessary for the citizens of the country, generally as a matter of common
creation of a corporation. right (De Leon, 2010, citing JRS Business Corp. v. Imperial
Insurance, Inc., G.R. No. L-19891, July 31, 1964)
XPN: For corporations by prescription, such authority is
not necessary (De Leon, 2010). Kinds of franchise
NOTE: A corporation by prescription is one which has The kinds of franchise are the following:
exercised powers for an indefinite period without 1. Primary/ Corporate/ General Franchise – the right to
interference on the part of the sovereign power and which exist as a corporation.
by fiction of law, is given the status of a corporation (De 2. Secondary/ Special Franchise –the franchise to
Leon, 2010). exercise powers and privileges granted to such
corporation to the business for which it was created,
The creation of a corporation is by operation of law including those conferred for purposes of public benefit
such as the power of eminent domain and other powers
No corporation can exist without the consent or grant of and privileges enjoyed by public utilities (De Leon,
the sovereign, and that the power to create corporations 2010).
is one of the attributes of sovereignty. Corporations
cannot come into existence by mere agreement of the Primary v. Secondary Franchise
parties (De Leon, 2010).
SECONDARY
NOTE: The Philippine jurisprudence adopted the PRIMARY FRANCHISE
FRANCHISE
Concession or fiat theory, which states that a corporation Special authority given to
is conceived as an artificial person owing existence a corporation to engage
through creation by a foreign power. Further, a in a specialized business
corporation has without any existence until it has (e.g. banks, insurance
received the imprimatur of the State acting according to companies, right to use
law, through the SEC (Tayag v. Benguet Consolidated, Inc., the streets of a
GR No. L-23145, November 29, 1968). municipality to lay pipes
of tracks, erect poles, or
Congress cannot create a private corporation by The franchise or authority
string wires).
enactment of a special law to exist as a corporation
Certain rights and
Congress shall not, except by general law, provide for the privileges conferred
formation, organization, or regulation of private upon existing
corporations (1987 Constitution, Art. XII, Sec. 16). corporations (J.R.S.
Business Corp. v. Imperial
Q: Since February 8, 1935, the legislature has not Insurance, supra).
passed even a single law creating a private Granted by a Government
corporation. What provision of the constitution GR: Granted by the
Agency, or a Municipal
precludes the passage of such law? (2008 Bar) Corporation Code,
Corporation

MERCANTILE LAW
XPN: In GOCC’s with a Parties who intends to participate or has actually
special charter, a special participated in the business affairs of the proposed
law grants the franchise corporation would be considered as partners under a de
Secondary franchises of a facto partnership.
corporation may
ordinarily be conveyed or On the other hand, parties who took no part
mortgaged under a notwithstanding their subscriptions do not become
general power granted to partners with other subscribers (Pioneer Insurance vs. CA,
a corporation to dispose GR No. 84197, July 28, 1989).
of its property (i.e.
Through board Engagement into a contract of partnership or a joint
Cannot be transferred venture
resolution or approval of
without the approval of
stockholders) (Villarey v.
Congress (Sundiang Sr. &
Ferrer G.R. No. L-23893, GR: Corporations have no power to enter into
Aquino, 2011).
October 29, 1968). partnership.
A secondary franchise XPN: The SEC allowed corporations to enter into

can be subject to levy and partnerships with other corporations and
sale on execution individuals provided:
together with corporate
property (Sundiang Sr. & 1. The authority to enter into partnership relation is
Aquino, 2011). expressly conferred by the Charter or the Articles of
Incorporation (AOI) and the nature of the business
Right to succession venture to be undertaken by the partnership is in
line with the business authorized by the charter or
A corporation has a capacity of continuous existence the AOI (SEC Opinions, Feb. 29, 1980, December 1,
irrespective of the death, withdrawal, insolvency, or 1993, and February 23, 1994).
incapacity of the individual stockholders or members and 2. The partnership must be a limited partnership
regardless of the transfer of their interest or shares of and the corporation must be a limited partner
stock (De Leon, 2010). A corporation may exist up to the 3. If it is a foreign corporation, it must obtain a
period stated in the articles of incorporation as long as not license to transact business in the country.
exceeding 50 years from the date of incorporation, unless
sooner dissolved or unless said period is extended (CC, Q: May a corporation enter into a joint venture? (1996
Sec. 11). Bar)
Powers that a corporation can exercise A: Yes. A corporation may enter into a joint venture with
another where the nature is in line with the business
The powers that a corporation can exercise are only those authorized by its charter. (Tuason v. Bolanos, G.R. L-4935,
which are granted by the law of its creation. All powers May 28, 1954) However, in as much as the term “joint
which may be implied from those expressly provided by venture” has no precise legal definition, it may take
law and those which are incidental or essential to the various forms. It could take the form of a simple pooling
corporation’s existence may also be exercised (CC, Sec. of resources (not involving incorporation) between two
36). or more corporations for a specific project, purpose or
undertaking, or for a limited time. It may involve the
The power to institute expropriation proceedings is creation of a more formal structure, and, hence, the
not granted to all corporations formation of a corporation. What is prohibited by law is
the creation of partnership between corporations but not
Only quasi-public corporations or those affected with the creation of joint venture.
public interest are given the power to institute
condemnation proceedings against owners of private Advantages v. Disadvantages of a Corporation
property. To grant the right of eminent domain to purely
private entities exercising functions, which are not public ADVANTAGES DISADVANTAGES
in nature, would be using the right to take property for The capacity to act as a More complicated in
private use (De Leon, 2010, citing SEC Opinion, October 28, legal unit formation and
1968). management
Limitation of, or Higher cost of formation
Rule on whether a defective incorporation result into exemption from liability and operation
a partnership of shareholders
Continuity of Existence Lack of personal element
The answer depends on whether or not there is a clear Transferability of shares Greater government
intent to participate in the management of the business control and regulation
affairs on the part of the investor.

CORPORATION CODE
Centralized management Management and control Joint Account v. Partnership
of BOD are separate from
ownership JOINT ACCOUNT PARTNERSHIP
Standardized method of Stockholders have little Has no firm name and is Has a firm name.
organization and finance voice in the conduct of conducted In the name of
business the ostensible partner.
Has no juridical Has juridical personality
personality and can sue or and may sue or be sued
be sued only in the name of under its firm name
the ostensible partner.
Has no common fund. Has a common fund.
The ostensible partner All general partners have
manages its business the right of management.
operations.
Liquidation thereof can Liquidation may, by
only be done by the agreement, be entrusted to
ostensible partner. a partner or partners.
Corporation v. Partnership
BASIS PARTNERSHIP CORPORATION

Created by mere agreement of the parties and Created by operation of law and governed by the
As to creation and governed by the Civil Code Corporation Code
governing law
From the moment of meeting of /minds of the Existence of the corporation commences from
partners the date of issuance of the Certificate of
Incorporation by the Securities and Exchange
Commission (SEC).
Commencement of The term of a partnership may be
juridical established for any period of time stipulated by Existence canNOT be for a term in excess of 50
personality and the partners years. The term of a corporation may be
term of existence extended to not more than 50 years at any single
instance.
May be organized byat least 2 persons GR: Requires at least 5 incorporators but not
Number of more than 15.
incorporators
XPN: Corporation sole
GR: May exercise any power authorized by the May exercise only such powers as may be
partners. granted by law and its articles of incorporation,
Powers implied therefrom or incidental thereto.
XPN: Acts which are contrary to law, morals,
good customs, public order, public policy
When management is not agreed upon, every GR: Power to do business and manage its affairs
partner is an agent of the partnership is vested in the Board of Directors (BOD) /
Board of Trustees (BOT).
XPNs:
Management 1) Executive Committee (Sec. 35, CC)
2) Management Contract (Sec. 44, CC)
3) The AOI of a close corporation may provide
that the business of the corporation shall be
managed by the stockholders of the corporation
rather than by a board of directors (Sec. 97, CC).
A partner as such can sue a co-partner who The suit against a member of the BOD or BOT
Effect of mismanages. who mismanages must be brought in the name
mismanagement of the corporation (Derivative suit).

MERCANTILE LAW
GR: Partners are liable personally and Stockholders are liable only to the extent of the
subsidiarily(sometimes solidarily) for shares subscribed by them whether paid or not.
Extent of liability to
partnership debts to third persons
third persons
XPN: Limited partner
Right of Succession No right of succession Has right of succession
Partner cannot transfer his interest in the Stockholder has the right to transfer his shares
Transferability of
partnership without the consent of all the without prior consent of the other stockholders
Shareholder’s
other existing partners. unless the right of first refusal is embodied in
interest
the articles of incorporation.
May be dissolved any time by the will of any or Can only be dissolved with the consent of the
all of the partners. State.
Dissolution
Death, civil interdiction and insolvency of a Death or insolvency of shareholders cannot
partner dissolve the partnership. dissolve the corporation.
CLASSES OF CORPORATIONS a. De jure‐ one existing both in fact and in law

b. De facto‐ one existing in fact but not in law
Classes of corporation 7. As to whether they are open to the public or not:
a. Close‐ one which is limited to selected persons
The following are the classes of corporation: or members of the family (Sec. 96‐ 105, CC).
1. As to whether their membership is represented by b. Open‐ one which is open to any person who may
shares of stock or not: wish to become a stockholder or member
a. Stock‐ one which have capital stock divided into thereto.
shares and are authorized to distribute to the 8. As to their relation to another corporation:
holders of such shares dividends or allotments a. Parent or Holding‐ one which is related to
or the surplus profits on the basis of the shares another corporation that it has the power either,
held (Sec. 3, CC). directly or indirectly to, elect the majority of the
b. Non-Stock‐ is one which do not issue shares and director of such other corporation
are created not for profit but for public good and b. Subsidiary‐ one which is so related to another
welfare and where no part of its income is corporation that the majority of its directors can
distributable as dividends to its members, be elected either, directly or indirectly, by such
trustees, or officers (Sec. 87, CC). other corporation
2. As to the number of persons who compose them: 9. As to whether they are corporations in a true sense
a. Corporation aggregate ‐ corporation consisting or only in a limited sense:
of more than one member or corporator. The CC a. True‐ one which exists by statutory authority
requires that these corporations must be b. Quasi‐ one which exist without formal legislative
formed by “not less than 5 persons” (Sec. 10, CC). grant.
b. Corporation Sole‐ religious corporation which i. Corporation by prescription‐ one which has
consists of one member or corporator only and exercised corporate powers for an indefinite
his successor. period without interference on the part of
3. As to whether they are for religious purpose or not: the sovereign power and which by fiction of
a. Ecclesiastical corporation‐ one organized for law, is given the status of a corporation;
religious purpose. ii. Corporation by estoppel‐ one which in reality
b. Lay corporation‐ one organized for a purpose is not a corporation, either de jure or de
other than for religion. facto, because it is so defectively formed, but
4. As to whether they are for charitable purpose or is considered a corporation in relation to
not: those only who, by reason of theirs acts or
a. Eleemosynary [charitable]‐ one established for admissions, are precluded from asserting
religious purposes. that it is not a corporation (Sec. 21, CC).
b. Civil‐ one established for business or profit. 10. As to whether they are for public (government) or
5. As to state or country under or by whose laws they private purpose: (2001, 2004 Bar)
have been created: a. Public- one formed or organized for the
a. Domestic‐ one incorporated under the laws of government of a portion of the State (like cities
the Philippines and municipalities) for the purpose of serving
b. Foreign‐ one formed, organized, or existing the general good and welfare (Aquino, 2014). If
under any laws other than those of the the corporation is created for political or public
Philippines and whose laws allow Filipino purpose connected with the administration,
citizens and corporations to do business in its then it is public (Diaz, et al., 2014).
own country or state (Sec. 123, CC).
6. As to their legal right to corporate existence:

CORPORATION CODE
b. Private- one formed for some private purpose, Sheriff were about to implement the writ of execution
benefit or end. It may either be a stock or non- against the company, he discovered that UPC is not a
stock (Aquino, 2014). registered corporation. Consequently, the president
of UPC was substituted in the writ of execution. The
NOTE: The fact that a certain juridical entity is president invoked the separate legal personality of
impressed with public interest does not, by that the corporation as his defense.
circumstance alone, make the entity a public a) Is UPC a de facto corporation?
corporation, inasmuch as a corporation may be b) Can the defense that UPC is a corporation by
private although its charter contains provisions estoppel be invoked by the president?
of a public character, incorporated solely for the c) Who is liable for the debts of the
public good. This class of corporations may be corporation?
considered quasi-public corporations, which are A:
private corporations that render public service, 1. No. UPC cannot be a considered a de facto corporation
supply public wants, or pursue other because it was not registered with the SEC
eleemosynary objectives. While purposely
organized for the gain or benefit of its members, 2. No. One who has induced another to act upon his willful
they are required by law to discharge functions misrepresentation that a corporation was duly organized
for the public benefit. Examples of these and existing under the law, cannot thereafter set up
corporations are utility, railroad, warehouse, against his victim the principle of corporation by estoppel.
telegraph, telephone, water supply corporations
and transportation companies. It must be 3. The president who negotiated with Albert is liable. A
stressed that a quasi-public corporation is a person acting or purporting to act on behalf of a
species of private corporations, but the corporation which has no valid existence assumes such
qualifying factor is the type of service the former privileges and obligations and becomes personally liable
renders to the public: if it performs a public for contracts entered into or for other acts performed as
service, then it becomes a quasi-public such agent (Albert v. University Publishing Co., G.R. No. L-
corporation (Philippine Society for the 19118, January 30, 1965).
Prevention of Cruelty to Animals v. Commission
on Audit, G.R. No. 169752, September 25, 2007). Liabilities of officers and directors/trustees of a de
facto corporation
Requisites for the formation of a stock corporation
The liabilities and penalties attending to officers and
For a stock corporation to exist, two requisites must be directors/ trustees of a de jure corporation shall be the
complied with, to wit: same as those of a de facto corporation. This includes the
1. A capital stock divided into shares and liability under the criminal law.
2. An authority to distribute to the holders of such shares, Members of a de facto corporation cannot be held
dividends or allotments of the surplus profits on the liable as partners by third persons
basis of the shares held (Sec. 3, CC; Collector of
Internal Revenue vs Club Filipino de Ceb, G.R. No. L- The members of a de facto corporation cannot be held
12719, May 31, 1962). liable as partners by third persons who deal with them in
their supposed corporate capacity, merely on account of a
Requisites of a de facto corporation (LAP) technical defect in the formation of the corporation.
(1994, 2004 Bar)
On the other hand, where an attempt to organize a
1. Organized under a valid Law. corporation fails by omission of some substantial step or
2. Attempt in good faith to form a corporation according proceeding required by the law, its members or
to the requirements of the law. stockholders are liable as partners (De Leon, 2010).
NOTE: Issuance of Certificate of Incorporation by SEC The existence of a de facto corporation cannot be
is a minimum requirement for the formation of the collaterally attacked
Corporation in good faith (Sundiang Sr. & Aquino, 2009).
GR: The existence of a de facto corporation shall not be
3. Use of corporate Powers - The corporation must have inquired into collaterally in any private suit to which such
performed the acts which are peculiar to a corporation corporation may be a party. Such inquiry may be made by
like entering into a subscription agreement, adopting the Solicitor General in a quo warranto proceeding (Sec.
by-laws, and electing directors. 20, CC).
Q: University Publishing Company (UPC), through its XPN: Collateral attack will be permitted, however, when
president, entered into a contract with Albert to the lack of right or the wrong doing of the corporation is
publish the commentaries on the Revised Penal Code. in issue because it is in violation of public policy or of
UPC published the commentaries but it did not remit express or implied statutory requirement, such as denial
the amount due to Albert. This prompted Albert to file of its right to enforce contracts entered into without
a collection suit. The RTC ruled against UPC. When the

MERCANTILE LAW
compliance with prohibitions of express or implied Fishing Gear filed a collection suit against Chua, Yao
statutory or public policy. and Lim Tong Lim. The suit was brought against the
three in their capacities as general partners, on the
Thus, the defendant may question the personality of a allegation that Ocean Quest Fishing Corporationwas a
foreign corporation transacting business in the nonexistent corporation. The trial court ruled in
Philippines to maintain a suit on the ground that it is not favor of Philippine Fishing Gear and that Chua, Yao
duly licensed to do business in our country (De Leon, 2010, and Lim are liable as general partners. Lim contends
citing 18 Am. Jur. 2d 606 and Sec. 133 of the CC). that the doctrine of corporation by estoppel applies
only to Yao and Chua. Lim insists that only those who
De facto Corporation v. De jure Corporation dealt in the name of the ostensible corporation should
be held liable. Since his name does not appear on any
DE FACTO DE JURE of the contracts and since he never directly
One which actually One created in strict or transacted with the Ocean Quest Fishing Corporation,
exists for all practical substantial conformity ergo, he cannot be held liable. Is Lim jointly liable
purposes as a corporation with the mandatory with Chua and Yao?
but which has no legal statutory requirements for
right to corporate incorporation. A: Yes. Lim should be held liable jointly with Chua and
existence as against the Yao. Unquestionably, Lim benefited from the use of the
State. nets found inside F/B Lourdes, the boat which has earlier
There is a colorable There is substantial been proven to be an asset of the partnership. Lim, Chua
compliance with the compliance with the and Yao decided to form a corporation. Although it was
requirements of the law requirements of the law never legally formed for unknown reasons, this fact alone
creating the corporation. creating the corporation. does not preclude the liabilities of the three as contracting
Can be attacked directly Its right to exist as a parties in representation of it. Clearly, under the law on
but not collaterally. corporation cannot be estoppel, those acting on behalf of a corporation and those
successfully attacked or benefited by it, knowing it to be without valid existence,
questioned by any party are held liable as general partners. Technically, it is true
even in direct proceeding that Lim did not directly act on behalf of the
for that purpose by the corporation. However, having reaped the benefits of the
State (De Leon, 2010). contract entered into by persons with whom he
previously had an existing relationship, he is deemed to
Rules governing a corporation by estoppel be part of said association and is covered by the scope of
the doctrine of corporation by estoppel (Lim Tong Lim v.
1. All persons who assume to act as a corporation Philippine Fishing Gear Industries, Inc., G.R. No. 136448,
knowing it to be without authority to do so shall be November 3, 1999).
liable as general partners for all debts, liabilities and
damages incurred or arising as a result. Q: Francisco Co, Jr. sued Abante Tonite, a daily tabloid
of general circulation; and its Publisher Allen A.
2. When any such ostensible corporation is sued on Macasaet; its Managing Director Nicolas V. Quijano;
any transaction entered by it as a corporation or on its Circulation Manager Isaias Albano; its Editors
any tort committed by it as such, it shall not be Janet Bay, Jesus R. Galang and Randy Hagos; and its
allowed to use as a defense its lack of corporate Columnist/Reporter Lily Reyes (Macaset, et al.),
personality. claiming damages because of an allegedly libelous
article Macaset, et al.published in an issue of Abante
3. One who assumes an obligation to an ostensible Tonite.
corporation as such, cannot resist performance
thereof on the ground that there was in fact no Macasaet, et al moved, among others, to drop Abante
corporation (CC, Sec. 21). Tonite as a defendant by virtue of its being neither a
natural nor a juridical person that could be
NOTE: Where there is no third person involved and the impleaded as a party in a civil action.
conflict arises only among those assuming the form of a
corporation who know that the corporation has not been The RTC denied Macasaet, et al.’s motion, holding that
registered, there is NO corporation by estoppel (Lozano v. assuming “Abante Tonite” is not registered with the
Judge Delos Santos, G. R. No. 125221, June 19, 1997). Securities and Exchange Commission, it is deemed a
corporation by estoppel considering that it possesses
Q: On behalf of Ocean Quest Fishing Corporation, attributes of a juridical person, otherwise it cannot be
Antonio Chua and Peter Yao entered into a contract held liable for damages and injuries it may inflict to
for the purchase of fishing nets of various sizes from other persons. The CA affirmed the RTC ruling.
the Philippine Fishing Gear Industries, Inc. They
claimed that they were engaged in a business venture Was the CA incorrect in upholding the inclusion of
with Petitioner Lim Tong Lim, who however was not a Abante Tonite as a party defendant despite its lack of
signatory to the agreement. The buyersfailed to pay juridical personality?
for the fishing nets and the floats; hence, Philippine

CORPORATION CODE
A: No. The Court cannot sustain Macasaet, et al.’s incorporation. Once filed, a separate juridical character is
contention that Abante Tonite could not be sued as a acquired which is separate and distinct from his natural
defendant due to its not being either a natural or a character.
juridical person. In rejecting their contention, the CA
categorized Abante Tonite as a corporation by estoppel as NOTE: A corporation sole is not required to file by-laws,
the result of its having represented itself to the reading it is governed by the rules, regulations and discipline of its
public as a corporation despite its not being incorporated. religious denomination, sect or church.
Thereby, the CA concluded that the RTC did not gravely
abuse its discretion in holding that the non-incorporation Nationality of a corporation sole
of Abante Tonite with the Securities and Exchange
Commission was of no consequence, for, otherwise, A corporation sole does not have any nationality but for
whoever of the public who would suffer any damage from purposes of applying nationalization laws, nationality is
the publication of articles in the pages of its tabloids determined not by the nationality of its presiding elder
would be left without recourse. The SC cannotdisagree but by the nationality of its members, constituting the sect
with the CA, considering that the editorial box of the daily in the Philippines. Thus, the Roman Catholic Church can
tabloid disclosed that although Monica Publishing acquire lands in the Philippines even if it is headed by the
Corporation had published the tabloid on a daily basis, Pope (Roman Catholic Apostolic Church v. Land
nothing in the box indicated that Monica Publishing Registration Commission, G.R. No. L-8451, December 20,
Corporation had owned Abante Tonite (Allen A. Macasaet, 1957).
et al.v. Francisco R. Co, Jr., G.R. No. 156759, June 5, 2013).
Acquisition of property by a corporation sole
Note: This case involves the legality of a court order
denying a motion to dismiss to drop as a party defendant A corporation sole may acquire property even without
Abante Tonite for not being a corporation registered with court intervention by purchase, donation and other lawful
the SEC. There is no ruling yet on the liability of such means (ibid).
corporation. It will be interesting to see how the SC will
eventually rule on how to enforce a judgment against a Q: Father X, an American priest who came from New
corporation by estoppel (independently of those who York, registered the Diocese of Bacolod of the Roman
represented themselves as a corporation, who under the Catholic Church which was incorporated as a
law, are liable as general partners) (Divina, 2014). corporation sole. There were years when the head of
the Diocese was a Filipino, but there were more years
De facto corporation v. Corporation by estoppel when the heads were foreigners. Today, the head is an
American again. Y donated a piece of land located in
DE FACTO CORPORATION BY Bacolod City for use as a school. Which statement is
CORPORATION ESTOPPEL (2004 Bar) most accurate? (2012 Bar Question)
There is no existence in a. The Register of Deeds of Bacolod City can refuse to
There is existence in law register and transfer the title because the present
law
The dealings among the The dealings among the head of the corporation sole is not a Filipino.
parties on a corporate parties on a corporate b. The nationality of a corporation sole depends
basis is not required basis is required upon the nationality of the head at any given time.
The State reserves the c. A corporation sole, regardless of the nationality of
right to question its Quo warranto proceeding the head, can acquire real property either by sale
existence through a quo is not applicable or donation.
warranto proceeding d. A corporation sole is not legally allowed to own
Stockholders in a de facto Stockholders are liable as real property.
corporation are liable as a general partners for all
de jure corporation debts, liabilities and A: C. “Any corporation sole may purchase and hold real
damages incurred estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive
A religious group is not required to be registered as a bequests or gifts for such purposes” (Sec. 113, CC).
corporation
Being a mere administrator of the temporalities or
The Corporation Code does not require any religious properties titled in his name, constitutional provisions
groups to be registered as a corporation but if it wants to requiring 60 (or 100) per centum Filipino ownership are
acquire legal personality, its members should incorporate not applicable to the corporation sole. The ownership
under the Code. thereof devolves upon the church or congregation
acquiring the same. To own the property, compliance with
Organization of a corporation sole the constitutionally required 60 (or 100) per centum
Filipino capital is determined by the nationality of the
A corporation sole is organized by the mere filing of the constituents of the diocese (church or congregation), and
verified articles of incorporation by the head of any not the nationality of the actual incumbent of the parish
religious denomination, sect or church with the SEC (the Corporation Sole or the head of the church or
without the need of an issuance of a certificate of congregation) (De Leon, 2010, citing SEC Opinions, Nov. 6,
1990 and Sept. 21, 1993).

MERCANTILE LAW
Code allows the application to religious corporations of
Alienation of properties by a corporation sole the general provisions governing non-stock corporations.
A corporation sole may alienate properties by: In non-stock corporations, the amendment needs the
concurrence of at least two-thirds of its membership. If
1. Obtaining an order from the RTC of the province such approval mechanism is made to operate in a
where the property is situated after notice of the
corporation sole, its one member in whom all the powers
application for leave to sell or mortgage has been
of the corporation technically belongs, needs to get the
given by publication or otherwise and by showing concurrence of two-thirds of its membership (Iglesia
that it is for the interest of the corporation that leave
Evangelica Metodista v. Bishop Lazaro, GR. 184088, July 6,
to sell or mortgage should be granted.
2010).
2. In cases where the rules, regulations and discipline of
the religious denomination, sect or church, religious Q: A Special Audit Team from COA audited the
society or order concerned represented by such accounts of Leyte Metropolitan Water District
corporation sole regulate the method of acquiring, (LMWD). Subsequently, LMWD received a request for
holding, selling and mortgaging real estate and payment of auditing fees from COA. As General
personal property, such rules, regulations and Manager of LMWD, Engr. Feliciano sent a reply
discipline shall control, and the intervention of the informing COA that the water district could not pay
courts shall not be necessary (Sec. 113, CC). the auditing fees. Feliciano cited as basis for his
action Presidential Decree 198 (PD 198) as well as
Purchase and sale of property by a corporation sole Republic Act No. 6758 (RA 6758). Thereafter,
for its church, charitable, benevolent or educational Feliciano asked COA for refund of all auditing fees
purposes. LMWD previously paid to COA. The COA Chairman
denied LMWD’s request. Feliciano maintains that
Any corporation sole may purchase and hold real estate LWDs are not GOCCs with original charters. He
and personal property for its church, charitable, argues that LWDs are private corporations, and thus
benevolent or educational purposes, and may receive LWDs are not subject to COA’s jurisdiction.
bequests or gifts for such purposes. Such corporation may Is a Local Water District created under PD 198, as
mortgage or sell real property held by it upon obtaining amended, a government-owned or controlled
an order for that purpose from the [Regional Trial Court] corporation subject to the audit jurisdiction of COA?
of the province where the property is situated; xxx
provided, that in cases where the rules, regulations and A: Yes. LWDs are GOCCs subject to the audit jurisdiction
discipline of the religious denomination, sect or church, of COA. The Constitution and existing laws mandate COA
religious society or order concerned represented by such to audit all government agencies, including GOCCs with
corporation sole regulate the method of acquiring, original charters. An LWD is a GOCC with an original
holding, selling and mortgaging real estate and personal charter. The Constitution recognizes two classes of
property, such rules, regulations and discipline shall corporations. The first refers to private corporations
control, and the intervention of the courts shall not be created under a general law. The second refers to GOCCs
necessary (Iglesia Filipina Independiente v. Heirs of created by special charters. Congress cannot enact a law
Bernardino Tazea, G.R. No. 179597, February 3, 2014, in creating a private corporation with a special
Divina, 2014). charter. Such legislation would be
unconstitutional. Private corporations may exist only
Thus, when the Canons of the Iglesia Filipino under a general law. The Constitution authorizes
Independiente provide that all real properties of the Congress to create GOCCs through special charters. Since
church can be disposed of only with the approval and private corporations cannot have special charters, it
conformity of the laymen’s committee, the parish priest, follows that Congress can create corporations with
the Diocesan Bishop, with sanction of the Supreme special charters only if such corporations are
Council, and finally with the approval of the Supreme government-owned or controlled. Obviously, LWDs are
Bishop, as administrator of all the temporalities of the not private corporations because they are not created
Church, yet the Supreme Bishop sold motu propio a parcel under the Corporation Code (Engr. Ranulfo C. Feliciano v.
of land of the IFI despite the objection of the laymen, the COA, et al., G.R. No. 147402, January 14, 2004).
sale is void and the land must be reconveyed to IFI (Iglesia
Filipina Independiente v. Heirs of Bernardino Tazea, G.R. Q: In Liban, et al. v. Gordon (July 15, 2009) the Court
No. 179597, February 3, 2014). held that Richard Gordon did not forfeit his seat in the
Senate when he accepted the chairmanship of the
Dissolution of a corporation sole is not necessary for PNRC Board of Governors, as the office of the PNRC
it to become a corporation aggregate Chairman is not a government office or an office in a
government-owned or controlled corporation for
There is no point in dissolving the corporation sole of one purposes of the prohibition in Section 13, Article VI of
member to enable the corporation aggregate to emerge the 1987 Constitution. The Decision, however, further
from it. The Corporation Code provides no specific declared void the PNRC Charter insofar as it creates
mechanism for amending the articles of incorporation of the PNRC as a private corporation and consequently
a corporation sole but Section 109 of the Corporation ruled that the PNRC should incorporate under the
Corporation Code and register with the SEC if it wants

CORPORATION CODE
to be a private corporation. Philippine National Red A: No. RPN is not a GOCC. A GOCC is a stock or a non-stock
Cross (PNRC) then filed a Motion for Partial corporation, whether performing governmental or
Reconsideration praying that the Court sustain the proprietary functions, which is directly chartered by a
constitutionality of its Charter. Is PNRC a private special law or if organized under the general corporation
corporation? law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary
A: No. PNRC is not a private corporation. Although the corporation, to the extent of at least a majority of its
PNRC was created by a special charter, it cannot be outstanding capital stock or of its outstanding voting
considered as a GOCC in absence of the essential elements capital stock. It is vested with functions relating to public
of ownership and control by the government. It does not needs whether governmental or proprietary in nature,
have government assets and does not receive any and owned by the government directly or indirectly
appropriation from the Philippine Congress. It is a non- through its instrumentalities either wholly, or where
profit, donor-funded, voluntary organization, whose applicable as in the case of stock corporations to the
mission is to bring timely, effective and compassionate extent of at least 51% of its capital stock. Although it is
humanitarian assistance for the most vulnerable without true that the Sandiganbayan ordered the transfer to the
consideration of nationality, race, religion, gender, social PCGG of Benedicto’s shares that represented 72.4% of the
status or political affiliation. This does not mean however total issued and outstanding capital stock of RPN, such
that the charter of PNRC is unconstitutional. PNRC is sui quantification of Benedicto’s shareholding cannot be
generis. Although it is neither a subdivision, agency or controlling in view of Benedicto’s timely filing of a motion
instrumentality of the government nor a GOCC or a for reconsideration whereby he clarified and insisted that
subsidiary thereof, so much so that Gordon was correctly the shares ceded to the PCGG had accounted for only
allowed to hold his position as Chairman thereof 32.4%, not 72.4%, of RPN’s outstanding capital stock.
concurrently while he served as a Senator, such a With the extent of Benedicto’s holdings in RPN remaining
conclusion does not ipso facto imply that the PNRC is a unresolved with finality, concluding that the Government
private corporation within the contemplation of the held the majority of RPN’s capital stock as to make RPN a
provision of the Constitution, that must be organized GOCC would be bereft of any factual and legal basis
under the Corporation Code. The PNRC enjoys a special (Antonio M. Carandang v. Aniano A. Desierto, et al., G.R. Nos.
status as an important ally and auxiliary of the 148076& 153161, January 12, 2011).
government in the humanitarian field in accordance with
its commitments under international law (Dante V. Liban, Q: Dennis A.B. Funa requested the COA for a copy of
et al., v. Richard J. Gordon, G. R. No. 175352, January 18, the latest financial and audit report of the respondent
2011, in Divina, 2014). Manila Economic and Cultural Office (MECO). The
MECO was organized as a non-stock, non-profit
Q: Benedicto was a stockholder of RPN, a private corporation under the Corporation Code, in view of
corporation duly registered with SEC. The the desire of the Philippines and Taiwan to maintain
Government ordered the sequestration of RPN’s an unofficial relationship in lieu of official diplomatic
properties, assets, and business. Thereafter, PCGG ties severed by the One-China policy.
entered into a compromise agreement with
Benedicto, whereby he ceded to the Government, all Upon receipt of COA’s reply that it does not audit
his shares of stock in RPN. Consequently, upon motion MECO, Funa filed a petition for mandamus to compel
of the PCGG, the Sandiganbayandirected the COA to audit MECO as the latter was a GOCC as it
president and corporate secretary of RPN to transfer performs functions relating to public needs and is
to the PCGG Benedicto’s shares representing 72.4% of controlled by the government through the
the total issued and outstanding capital stock of RPN. appointment of its board of directors.
However, Benedicto moved for reconsideration,
contending that his RPN shares ceded to the Is Funa correct?
Government, through the PCGG, represented only
32.4% of RPN’s outstanding capital stock, not 72.4%. A: No. The MECO is not is not owned or controlled by the
Benedicto’s motion for reconsideration has remained government, hence it is not a GOCC or a government
unresolved. instrumentality.
Carandang assumed office as general manager and GOCCs are "stock or non-stock" corporations "vested with
chief operating officer of RPN. Subsequently, functions relating to public needs" that are "owned by the
Carandang and other RPN officials were charged with Government directly or through its instrumentalities." By
grave misconduct before the Ombudsman. The charge definition, three attributes thus make an entity a GOCC:
alleged that Carandang had entered into a contract
with AF Broadcasting Incorporated despite his being  first, its organization as stock or non-stock
an incorporator, director, and stockholder of that corporation;
corporation and that he had thus held financial and  second, the public character of its function;
material interest in a contract that had required the
 and third, government ownership over the same
approval of his office. Carandang argues that the
Ombudsman had no jurisdiction over him because
RPN is not a GOCC. Is RPN a GOCC? Possession of all three attributes is necessary to deem an
entity a GOCC.

MERCANTILE LAW
In this case, there is not much dispute that the MECO NATIONALITY OF CORPORATIONS
possesses the first and second attributes. It is the third
attribute, which the MECO lacks. Tests in determining the nationality of corporations
The MECO is not owned or controlled by the government. 1. Place of Incorporation test
Organization as a non-stock corporation and the mere 2. Control test
performance of functions with a public aspect, however, 3. Grandfather rule – Nationality is attributed to the
are not by themselves sufficient to consider the MECO as percentage of equity in the corporation used in
a GOCC. In order to qualify as a GOCC, a corporation must nationalized or partly nationalized area. This test is
also, if not more importantly, be owned by the an exception to the Control Test and was applied by
government. the SEC in several cases.
4. Domiciliary test – Determined by the principal place
The government owns a stock or non-stock corporation if of business of the corporation.
it has controlling interest in the corporation. In a stock
corporation, the controlling interest of the government is PLACE OF INCORPORATION TEST
assured by its ownership of at least fifty-one percent
(51%) of the corporate capital stock. In a non-stock In using the Place of Incorporation test, the nationality of
corporation, like the MECO, jurisprudence teaches that a corporation is determined by the state of incorporation,
the controlling interest of the government is affirmed regardless of the nationality of the stockholders.
when "at least majority of the members are government
officials holding such membership by appointment or XPN: A corporation organized/incorporated abroad and
designation" or there is otherwise "substantial registered as doing business in the Philippines under the
participation of the government in the selection" of the Corporation Code, of which 100% of the capital stock
corporation’s governing board. outstanding and entitled to vote is wholly owned by
Filipinos, may be considered a Philippine National under
The fact of the incorporation of the MECO under the the Foreign Investments Act of 1991. This is the only
Corporation Code is the key. The MECO was correct in exception to the place of incorporation test (SEC Opinion
postulating that, as a corporation organized under the No. 04-14, March 3, 2004; De Leon, 2010).
Corporation Code, it is governed by the appropriate
provisions of the said code, its articles of incorporation CONTROL TEST
and its by-laws. In this case, it is the by-laws of the MECO
that stipulates that its directors are elected by its Control test
members; its officers are elected by its directors; and its
members, other than the original incorporators, are In determining the nationality of a corporation, the
admitted by way of a unanimous board resolution. control test uses the nationality of the controlling
stockholders or members of the corporation.
It is significant to note that none of the original
incorporators of the MECO were shown to be government This test was adopted by the Foreign Investment Act of
officials at the time of the corporation’s organization. 1991 (RA 7042) as a general guideline in determining the
Indeed, none of the members, officers or board of nationality of corporations engaged in a nationalized
directors of the MECO, from its incorporation up to the activity (Sec Opinion No. 07-20, November 20, 2007).
present day, were established as government appointees
or public officers designated by reason of their office. Requisites of the control test (CFC)
There is, in fact, no law or executive order that authorizes
such an appointment or designation. Hence, from a 1. Control, not mere majority or complete stock control,
strictly legal perspective, it appears that the presidential but Complete domination, not only of finances but of
"desire letters" pointed out by Funa are, no matter how policy and business practice in respect to the
strong its persuasive effect may be, merely transaction attacked such that the corporate entity as
recommendatory. to this transaction had at that time no separate mind,
will or existence of its own;
It is a sui generis private entity especially entrusted by the 2. Such control must have been used by the defendant to
government with the facilitation of unofficial relations commit Fraud or wrong, to perpetuate the violation
with the people in Taiwan without jeopardizing the of a statutory or other positive legal duty, or
country’s faithful commitment to the One China policy of dishonest or unjust act in contravention of plaintiffs
the PROC. However, despite its non-governmental legal right; and
character, the MECO handles government funds in the 3. The control and breach of duty must proximately Cause
form of the "verification fees" it collects on behalf of the the injury or unjust loss complained of (Velarde v.
DOLE and the "consular fees" it collects under Section Lopez, Inc., G.R. No. 153886, January 14, 2004; Heirs of
2(6) of EO No. 15, s. 2001. Hence, under existing laws, the Ramon Durano, Sr. v. Uy, G.R. No. 136456, October 24,
accounts of the MECO pertaining to its collection of such 2000).
"verification fees" and "consular fees" should be audited
by the COA (Dennis A.B. Funa v. Manila Economic and
Cultural Office and COA, G.R. No. 193462, February, 2014).

CORPORATION CODE
Who are considered as Philippine Nationals December 9, 2010).This applies in cases where the
stocks of a corporation are owned by another
Under RA 7042(Foreign Investment Act of 1991), the corporation with foreign stockholders exceeding
following are considered Philippine Nationals: 40% of the capital stock of the corporation.
2. The Grandfather Rule will not apply in cases where
1. Corporations organized under Philippine laws of which the 60-40 Filipino-alien equity ownership in a
60% of the capital stock outstanding and entitled to vote particular natural resource corporation is not in
is owned and held by Filipino citizens. doubt (DOJ Opinion No. 19, s. 1989). If the stockholder
corporation is 60% or more owned by Filipinos, all
NOTE: RA 7042 provides that where a corporation and its the stock held by the stockholder corporation is
non-Filipino stockholders own stocks in a SEC-registered deemed to be held by Filipinos.
enterprise, at least 60% of the capital stock outstanding 3. When there is doubt as to the actual extent of Filipino
and entitled to vote of both corporations and at least 60% equity in the investee corporation, the SEC is not
of the members of the board of directors of both precluded from using the Grandfather Rule (SEC-OGC
corporations must be Filipino citizens (DOUBLE 60% Opinion No. 22-07 dated December 7, 2007).
RULE).
Q: Several American doctors wanted to set up a group
2. Corporations organized abroad and registered as doing clinic in the Philippines so they could render modern
business in the Philippines under the Corporation Code of medical services. If the clinic is to be incorporated
which 100% of the capital stock entitled to vote belong to under our laws, what is the required foreign equity
Filipinos. participation in such a corporation? (2011 Bar)
Q: What is the nationality of a corporation organized A: 0%

and incorporated under the laws of a foreign country,
but owned 100% by Filipinos? (1998 Bar) Q: Redmont, a mining company, sought to invalidate
the Mining Production and Sharing Agreement
A: Under the control test of corporate nationality, a applications of three domestic mining companies,
corporation organized and incorporated under the laws namely: Narra, Tesoro and McArthur, on the ground
of a foreign country, but owned 100% by Filipinos is that at least 60% of the capital stock of Narra, et al.are
classified as a Philippine National. Where the grounds for owned and controlled by MBMI, a 100% Canadian
piercing the veil of corporate entity are present, the corporation; thus they were disqualified to engage in
corporation will follow the nationality of the controlling mining activities though MPSAs, which are reserved
members or stockholders, since the corporation will then only for Filipino Citizens.
be considered as one and the same.
Narra, et al.claimed that the issue on nationality
GRANDFATHER RULE should not be raised since they are in fact Philippine
Nationals as 60% of their capital is owned by citizens
Application of the Grandfather Rule in determining of the Philippines. They asserted that though MBMI
the nationality of a corporation owns 40% of the shares of PLMDC (which owns
majority shares of Narra), 40% of the shares of MMC
To ensure compliance with the constitutional (which owns majority shares of McArthur) and 40%
limitation(s) of corporations engaging in nationalized of the shares of SMMC (which, in turn, owns majority
activities, the nationality of a corporation must be shares of Tesoro), the shares of MBMI will not make it
determined by ascertaining if 60% of the investing the owner of at least 60% of the capital stock of each
corporation’s outstanding capital stock is owned by of petitioners. They added that the best tool used in
“Filipino citizens”, or as interpreted, by natural or determining the nationality of a corporation is the
individual Filipino citizens. If such investing corporation “control test,” embodied in Sec. 3 of RA 7042 or the
is in turn owned to some extent by another investing Foreign Investments Act of 1991.
corporation, the same process must be observed
(Redmont Consolidated MinesCorporation vs. McArthur The controversy reached the CA, which used the
Mining Corporation, SEC En Banc Case No. 09-09-177, grandfather rule to hold that MBMI in effect owned
March 25, 2010). majority of the common stocks of Narra, et al., and
thus the latter were foreign corporations.
Reason: One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of a) Was the CA incorrect in applying the Grandfather
investing corporations have been established, for this is Rule instead of the Control Test?
the very essence of the Grandfather Rule (ibid). b) Will the Grandfather Rule apply only when less
than 60% of the capital stock are Filipino-owned?
Rules governing the application of the Grandfather
Rule A:
a) No. Basically, there are two acknowledged tests in
1. The grandfather rule should be used in determining determining the nationality of a corporation: the control
the nationality of a corporation engaged in a partly test and the grandfather rule. The "control test" is still the
nationalized activity (SEC-OGC Opinion No. 10-31, prevailing mode of determining whether or not a

MERCANTILE LAW
corporation is a Filipino corporation, within the ambit of 3. Manufacture, repair, stockpiling and/or distribution
Sec. 2, Art. II of the 1987 Constitution, entitled to undertake of biological, chemical and radiological weapons and
the exploration, development and utilization of the Anti-personnel mines (Various treaties to which the
natural resources of the Philippines. When in the mind of
Philippines is a signatory and conventions supported
the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity by the Philippines).
ownership in the corporation, then it may apply the 4. Mass media except recording
"grandfather rule" (Narra Nickel Mining and 5. Utilization of MArine resources (Sec. 2, Art. XII,
Development Corp., et al. v. Redmont Consolidated Constitution);
Mines,G.R. No. 195580, April 21, 2014). 6. Manufacture, repair, stockpiling and/or distribution
of Nuclear weapons (Sec. 8, Art. II, Constitution);
b) No. The assertion of Narra, et al. that “doubt” only
7. COckpits (Sec. 5, P.D. 449);
exists when the stockholdings are less than 60% fails to
convince this Court. It would be ludicrous to limit the 8. Small-scale MIning (Sec. 3, R.A. 7076);
application of the said word only to the instances where 9. Private SEcurity agencies (Sec. 4, R.A. 5487);
the stockholdings of non-Filipino stockholders are more 10. Retail trade enterprises with paid-up capital of less
than 40% of the total stockholdings in a corporation. The than US$2.5 M (Sec. 5, R.A. 8762);
corporations interested in circumventing our laws would
clearly strive to have “60% Filipino Ownership” at face 80 % Filipino Owned
value. It would be senseless for these applying
(Up to twenty percent (20%) foreign equity)
corporations to state in their respective articles of
incorporation that they have less than 60% Filipino (Code: Prc)
stockholders since the applications will be denied
instantly. Thus, various corporate schemes and layerings 1. Private Radio Communications network (R.A. 3846).
are utilized to circumvent the application of the
Constitution (Narra Nickel Mining and Development Corp., 75 % Filipino Owned
et al. v. Redmont Consolidated Mines, supra). (Up to twenty percent (25%) foreign equity)
(Code: LoRD F)
A corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino 1. Contracts for the construction and repair of LOcally-
corporation if there is no doubt as to who has the
funded public works (Sec. 1, CA 541, LOI 630) except:
“beneficial ownership” and “control” of the corporation.
In this case, a further investigation as to the nationality of a. infrastructure/development projects covered in
the personalities with the beneficial ownership and R.A. 7718; and
control of the corporate shareholders in both the b. projects which are foreign funded or assisted
investing and investee corporations is necessary. “Doubt” and required to undergo international competitive
refers to various indicia that the “beneficial ownership” bidding (Sec. 2[a], R.A. 7718);
and “control” of the corporation do not in fact reside in 2. Private Recruitment, whether for local or overseas
Filipino shareholders but in foreign stakeholders. Even if
employment (Art. 27, P.D. 442);
at first glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present 3. Contracts for the construction of Defense-related
case that gives rise to a reasonable suspicion that the structures (Sec. 1, CA 541).
Filipino shareholders do not actually have the requisite 4. Under the Flag Law, in the purchase of articles for the
number of control and beneficial ownership in petitioners Government, preference shall be given to materials
Narra, Tesoro, and McArthur. and supplies produced, made, or manufactured in the
Philippines, and to domestic entites. Domestic entites
Hence, the Court is correct in using the Grandfather Rule
in determining the nationality of the petitioners (Narra means any citizen of the Philippines or commercial
Nickel Mining and Development Corp., et al. v. Redmont company at least 75% of the capital of which is owned
Consolidated Mines, G.R. No. 195580, January 28, 2015) by citizens of the Philippines (Sec. 1, CA 138)
NATIONALIZED ACTIVITIES RESERVED FOR 70 % Filipino Owned

FILIPINOS UNDER THE CONSTITUTION AND SPECIAL (Up to twenty percent (30%) foreign equity)
LAWS
(Code: AdPawn)
100% Filipino Owned 1. Advertising (Art. XVI, Constitution)

(Zero percent (0%) foreign equity) 2. Corporations engaged in pawnshop business (Sec. 8,
P.D. 114)
(Code: CoFi AMMaN Co. – MiSe- US$2.5M)
60 % Filipino Owned
1. COoperatives(Art. 26, Ch. III, R.A. 6938); (Up to twenty percent (40%) foreign equity)
2. Manufacture of FIrecrackers and other pyrotechnic (Code: Go LEARN CUPIDCo)
devices (Sec. 5, R.A. 7183).

CORPORATION CODE
1. Contracts for the supply of materials, goods and
commodities to GOCC, agency or municipal Rule on the legality of Bernanrd Fleet’s current
corporation (Sec. 1, R.A. 5183); holdings. (Bar 2013)
2. Ownership of private Lands (Sec. 7, Art. XII,
A: The holding of Bernard Fleet equivalent to the
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182); outstanding common shares is illegal. His holdings of
3. Ownership/establishment and administration of preferred shares could not exceed 40%. Since the
Educational institutions (Sec. 4, Art. XIV, Constitution); constitutional requirement of 60% Filipino ownership of
4. Adjustment Companies (Sec. 323, P.D. 613); the capital of public utilites applies not only to voting
5. Culture, production, milling, processing, trading control but also to beneficial ownership of the
excepting retailing, of rice and corn and acquiring, by corporation, it should also apply to the preferred shares.
Preferred shares are also entitled to vote in certain
barter, purchase or otherwise, Rice and corn and the
corporate matters (Gamboa v. Teves, G.R. No. 176579, June
by-products thereof (Sec. 5, P.D. 194); 28, 2011). The state shall develop a self-reliant and
6. Exploration, development and utilization of Natural independent national eonomy effectively controlled by
resources (Sec. 2, Art. XII, Constitution); Filipinos (1987 Consitution, Art. II, Sec. 19). The effective
7. Ownership of Condominium units where the common control here should be mirrored across the board on all
areas in the condominium project are co-owned by the kinds of shares.
owners of the separate units or owned by a
CORPORATE JURIDICAL PERSONALITY
corporation (Sec. 5, R.A. 4726).
8. Operation and management of public Utilities (Sec. 11, DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
Art. XII, Constitution; Sec. 16, CA 146);
9. Project Proponent and Facility Operator of a BOT The doctrine of corporate juridical personality states that
project requiring a public utilities franchise (Sec. 11, a corporation is a juridical entity with legal personality
Art. XII, Constitution; Sec. 2a, R.A. 7718); separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it
10. Manufacture, repair, storage and/ or distribution of
(Francisco v. Mallen Jr. G.R. No. 173169, September 22,
products/ Ingredients requiring PNP clearance (R.A. 2010).
7042 as amended by R.A. 8179);
11. Operation of Deep sea commercial fishing vessel (Sec. Q: Through a writ of sequestration, the PCGG
27, R.A. 8550); sequestered all the assets, properties, records, and
12. Corporations engaged in Coastwise shipping (Sec. 806, documents of the Palm Companies. The PCGG had
P.D. 1464) relied on a letter from the Palm Companies’ Attorney-
in-Fact, specifically identifying Romualdez, a known
crony of former President Marcos, as the beneficial
40 % Filipino Owned owner of the Benguet Corporation shares in the Palm
(Up to twenty percent (60%) foreign equity) Companies’ name. The Republic, represented by the
(Code: FI [SEC] ) PCGG, filed a complaint with the Sandiganbayan but it
did not initially implead the Palm Companies as
1. Financing companies regulated by the SEC(Sec. 6, R.A. defendants. However, the Sandiganbayan issued a
5980 as amended by R.A. 8556); Resolution ordering said companies to be impleaded.
Pursuant to the said order, the Republic filed an
2. Investment houses regulated by the SEC(Sec. 5, P.D. 129 amended complaint and named therein the Palm
as amended by R.A. 8366). Companies as defendants. Palm Companies filed
another motion to order the PCGG to release all the
Q: Bell Philippines, Inc. (BellPhil.) is a public utility companies’ shares of stock and funds in its custody on
company, duly incorporated and registered with the the ground since they were not impleaded as parties-
SEC. Its authorized capital stock consists of voting defendants in the Civil Case within the period
common shares and non-voting preferred shares, prescribed by the Constitution. The Sandiganbayan
with equal par values of P100.00/share. Currently, granted the foregoing motion.
the issued and outstanding capital stock of BellPhil
consists only of common shares shared between Is the suit against Romualdez, as shareholder of the
Bayani Cruz, a Filipino with 60% of the issued Palm Companies, considered a suit against the latter?
common shares, and Bernard Fleet, a Canadian, with
40%. A: No. Under Sec. 26, Article XVIII of the 1987
Constitution, it mandates the Republic to file the
To secure additional working fund, BellPhil issued corresponding judicial action or proceedings within a six-
preferred shares to Bernard Fleet equivalent to the month period (from its ratification on February 2, 1987)
currently outstanding common shares. A suite was in order to maintain sequestration, non-compliance with
filed questioning the corporation action on the which would result in the automatic lifting of the
ground that the foreign equity holdings in the compny sequestration order. Hence, there is a necessity on the
would now exceed 40% foreign equity limit allowed part of the Republic to actually implead corporations as
under the Constitution for public utilities. defendants in the complaint, out of recognition for their

MERCANTILE LAW
distinct and separate personalities, failure to do so would people comprising it. Under this corporate reality, Subic
necessarily be denying such entities their right to due Water cannot be held liable for OCWD’s corporate
process. obligations in the same manner that OCWD cannot be held
liable for the obligations incurred by Subic Water as a
Here, the writ of sequestration issued against the assets of separate entity (Olongapo City v. Subic Water and
the Palm Companies is not valid because the suit in the Sewerage Co., Inc., G.R. No. 171626, August 6, 2014).
civil case against Romualdez as shareholder in the Palm
Companies is not a suit against the latter. Thus, the failure Q: Richard owns 90% of the shares of the capital stock
to implead these corporations as defendants and merely of GOM Co. On one occasion, GOM represented by
annexing a list of such corporations to the complaints is a Richard as President and General Manager executed
violation of their right to due process for it would be, in a contract to sell a subdivision lot in favor of Tomas.
effect, disregarding their distinct and separate For failure of GOM to develop a subdivision, Tomas
personality without a hearing (Palm Avenue Holding Co., filed an action for recission and damages against GOM
Inc. et. al. v. Sandiganbayan 5th Division, represented by the and Richard. Will the action prosper? Explain (Bar
PCGG, G.R. No. 173082, August 6, 2014). 1996)
Q: The Olongapo City filed a complaint for sum of A: The action will prosper against GOM Corporation but it
money and damages against Olongapo City Water shall not be the same with regard to the action against
District (OCWD). It alleged that OCWD failed to pay its Richard. Such is the case because Richard has a separate
electricity bills to Olongapo City and remit its and distinct personality from the corporation. His mere
payment under the contract to pay, pursuant to ownership of 90% of the shares of the capital stock of
OCWD’s acquisition of Olongapo City’s water system. GOM does not make him as one with the corporation.
In the interim, OCWD entered into a Joint Venture Mere ownership by a single stockholder, or by another
Agreement with SBMA, Biwater and DMCI. Pursuant corporation, of all or nearly all of the capital stock of a
to this agreement, Subic Water– a new corporate corporation is not itself a sufficient ground for
entity – was incorporated, with the following equity disregarding the separate corporate personality. (Secosa
participation from its shareholders: SBMA 19.99% or v. Heirs of Erwin Suarez Francisco, G.R. No. 160039, June 29,
20%; OCWD 9.99% or 10%; Biwater 29.99% or 30%; 2004).
and DMCI 39.99% or 40%. Subic Water was granted
the franchise to operate and to carry on the business Significance of the doctrine of separate personality
of providing water and sewerage services in the Subic
Bay Free Port Zone, as well as in Olongapo City. Hence, 1. Liability for acts or contracts – As a general rule, the
Subic Water took over OCWD’s water operations in obligation of the corporation is not the liability of the
Olongapo City. To finally settle their money claims stockholders, officers or directors (Remo vs. IAC, G.R.
against each other, Olongapo City and OCWD entered No. L-67626, April 18, 1989; 1992, 1996, 2010 Bar).
into a compromise agreement.
A corporation may not, generally, be made to answer
To enforce the compromise agreement, Olongapo City for acts or liabilities of its stockholders or those of the
filed a motion for the issuance of a writ of execution legal entities to which it may be connected, and vice
with the RTC. OCWD’s former counsel filed a versa (Cease vs. CA, G.R. No. L-33172, October 18,
manifestation alleging that OCWD had already been 1979).
dissolved and that Subic Water is now the former
OCWD. Because of this assertion, Subic Water also It can incur obligations and its obligations are not the
filed a manifestation informing the RTC that as borne obligations of its stockholders, directors, and officers
out by the articles of incorporation and general (Vasquez vs. De Borja, G.R. No. L-48930, February 23,
information sheet of Subic Water, OCWD is not Subic 1994).
Water. The manifestation also indicated that OCWD
was only a ten percent (10%) shareholder of Subic Q: As a result of perennial business losses, a
Water; and that its 10% share was already in the corporation's net worth has been wiped out. In fact, it
process of being transferred to Olongapo City is now in negative territory. Nonetheless, the
pursuant to a Deed of Assignment. stockholders did not like to give up. Creditor-banks,
however, do not share the confidence of the
Is Subic Water can be made liable under the writ of stockholders and refuse to grant more loans.
execution issued by RTC in favor of Olongapo City a. What tools are available to the stockholders
to replenish capital?
A: No. OCWD and Subic Water are two separate and b. Assuming that the corporation continues to
different entities. Subic Water clearly demonstrated that operate even with depleted capital, would the
it was a separate corporate entity from OCWD. OCWD is stockholders or the managers be solidarily
just a ten percent (10%) shareholder of Subic Water. As a liable for the obligations incurred by the
mere shareholder, OCWD’s juridical personality cannot be
corporations? (Bar 1999)
equated nor confused with that of Subic Water. It is basic A:
in corporation law that a corporation is a juridical entity
vested with a legal personality separate and distinct from a. In the case where the creditor-banks refused to
those acting for and in its behalf and, in general, from the grant more loans to the stockholders, the stockholders

CORPORATION CODE
can publicly sell their shares and assets. They can also 4. Acquisition of jurisdiction – service of summons may
demand payment from stockholders of their unpaid be made on the president, general manager,
subscriptions where there is no due date inscribed in the corporate secretary, treasurer or in-house counsel
subscription contract. (Rules of Court, Rule 14, Sec. 11, Rule 14).
b. No, the stockholders or managers cannot be held 5. Changes in individual membership – corporation
solidarily liable for the obligations incurred by the remains unchanged and unaffected in its identity by
corporation. They cannot be held personally liable for as changes in its individual membership or ownership
long as their acts are for and in behalf of the corporation, of its stocks.
within the scope of their authority and in good faith. Also,
a corporation has a personality separate and distinct from Stockholders are not the owners of corporate
its individual stockholders (Consolidated Bank and Trust properties and assets
Corp. v. CA, G.R. No. 114286, April 19, 2001).
The interest of the shareholder in the properties of the
Q: Marulas Creative Technology Inc., an e-business corporation is inchoate only. The interest of the
enterprise engaged in the manufacture of computer shareholder on a particular property becomes actual,
media accessories, rents an office and store space at a direct and existing only upon the liquidation of the assets
commercial building owned by X. Being a start-up of the corporation and the provided that the same
company, Marulas enjoyed some leniency in its rent property is assigned to the shareholder concerned.
payments; but after three years, X put a stop to it and
asked Marulas President and General Manager, Y, Under the trust fund doctrine, the capital stock, property,
who is a stockholder, to pay back rentals amounting and other assets of a corporation are regarded as equity
to a hundred thousand pesos or to vacate the in trust for the payment of corporate creditors which are
premises at the end of the month. Marulas neither preferred over the stockholders in the distribution of
paid its debt nor vacated the premises. X sued corporate assets. The distribution of corporate assets and
Marulas and Y for collection of unpaid rentals, plus property cannot be made to depend on the whims and
interests and costs of litigation. Will the suit prosper caprices of the stockholders, officers, or directors of the
against Marulas? Against Y? (2000) corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are
A: Yes. The suit against Marulas can prosper because followed (Ryuichi Yamamoto v. Nishino Leather Industries,
Marulas is the one renting the office and store space for Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008).
its office and business operations. While the suit against Y
cannot prosper because the corporation has a separate Q: RISCO ceased operation due to business reverses.
and distinct personality from its officers, directors, Due to Merelo, Matias III, Jose, all surnamed Aznar,
stockholders and members. This separate legal Rosario Barcenilla, Jose Enad and Ricardo Gabuya’s
personality is recognized by law. They are separate desire to rehabilitate RISCO, they contributed a total
entities and the liabilities arising from the obligation of amount of P212,720.00 which was used in the
one cannot extend to the other, and vice versa. purchase of the three (3) parcels of land located in
various areas in the Cebu Province. Pursuant to the
2. Right to bring actions – may bring civil and criminal Minutes of the Special Meeting of the Board of
actions in its own name in the same manner as Directors of RISCO, the contributed amounts
natural persons (Art. 46, Civil Code). constitute liens and encumbrances on the
aforementioned properties as annotated in the titles
Rights belonging to the corporation cannot be of the said lots. Such annotation was made.
invoked by the stockholders (or directors and Thereafter, various subsequent annotations were
officers) even if the latter owns substantial majority made on the same titles in favor of PNB. As a result, a
of the shares of the shares in that corporation and Certificate of Sale was issued in favor of PNB, being
rights of the stockholders, directors and officers the lone and highest bidder of the three (3) parcels of
cannot be invoked by the corporation (Stonehill vs. land and was also issued Transfer Certificate of Title
Diokno, G.R. 19550, June 19, 1967). over the said parcels of land. Aznar, et. al filed a
complaint seeking the quieting of their supposed title
3. Right to acquire and possess property – property to the subject properties. They alleged that the
conveyed to or acquired by the corporation is in law subsequent annotations on the titles are subject to
the property of the corporation itself as a distinct the prior annotation of their liens and encumbrances.
legal entity and not that of the stockholders or On the other hand, they assert that, as mere
members (Art. 44[3], Civil Code). stockholders of RISCO, they do not have any legal or
equitable right over the properties of the corporation.
The property of its stockholders, directors, and The trial court declared that the Minutes of the
officers are not the properties of the corporation. The Special Meeting of the Board of Directors of RISCO
interest of the stockholders over the properties are annotated on the titles of the subject properties is an
merely inchoate (Saw vs. CA, G.R. No. 90580, April 8, express trust whereby RISCO was a mere trustee and
1991; 1996, 2000 Bar) the above-mentioned stockholders as beneficiaries
being the true and lawful owners of the subject
properties. On appeal, the CA set aside the ruling of

MERCANTILE LAW
the trial court and ruled that there was no trust position as President and Manager of the corporation.
created. The lien is merely an evidence of the loan. Do Turtle Corporation has a separate juridical personality
the defendants herein (Aznar et. al.) have the legal or from its officers.Corporate officers cannot be personally
equitable rights over the subject properties? liable for the consequences of their acts, for as long as
these are for and behalf of the corporation, within the
A: No. Stockholders cannot claim ownership over scope of their authority and in good faith. (Consolidated
corporate properties by virtue of the Minutes of a Bank and Trust Corp. v. CA, G.R. No. 114286, April 19, 2001)
Stockholder’s Meeting which merely evidence a loan
agreement between the stockholders and the Circumstances not enough to warrant disregard of the
corporation. As such, their interest over the properties is separate juridical personality of the corporation:
merely inchoate (Philippine National Bank v. Merelo B.
Aznar, et al, G.R. No. 171805, May 30, 2014). a) ownership of controlling shares
Stockholders are not real parties in interest to claim Q: Rufina Lim is the surviving spouse of the late Pastor
damages and recover compensation Lim whose estate is the subject of probate
proceedings in another case. In the inventory of the
The personality of a corporation is distinct and separate estate of Pastor Lim, the properties registered in the
from the personalities of its stockholders. Hence, its names of Auto Truck Corporation, et al., were
stockholders are not themselves the real parties in included. Auto Truck Corporation, et al., thereafter
interest to claim and recover compensation for the filed a motion for exclusion of certain properties from
damages arising from the wrongful attachment of the estate of Pastor Lim. The Probate Court granted
corporate assets. Only the corporation is the real party in the same.
interest for that purpose (Stronghold Insurance Company,
Inc. v. Cuenca, G.R. No. 173297, March 6, 2013). Subsequently, Rufina Lim filed an amended
petition which averred that Auto Truck Corporation,
Q: Nine individuals formed a private corporation et al.’s capital, assets and equity were personally
pursuant to the provisions of the Corporation Code of owned by Pastor Lim and that the alleged
the Philippines. Incorporator S was elected director stockholders and officers appearing in the AOI of Auto
and president-general manager. Part of his Truck Corporation, et al., were mere dummies of
emolument is a Ford Expedition, which the Pastor Y. Lim, and they were listed therein only for
corporation owns. After a few years, S lost his purposes of registration with the SEC. Because of this,
corporate positions but he refused to return the the Probate Court reversed its earlier order and held
motor vehicle claiming that as stockholder with a that the subject properties should be included in the
substantial equity share, he owns that portion of the estate of Pastor Lim. The Probate court held that the
corporate assets in his possession. Is the contention corporations were mere alter egos or
of S valid? Explain. (Bar 2000) instrumentalities of Pastor Lim and that the issue
involves the piercing of the corporate veil. Should the
A: No, the contention of S is not valid. The Ford Expedition subject properties registered in the name of Auto
is a corporate property. A corporation has a separate and Truck Corporation, et al. be included in the estate of
distinct personality that when it owns a property, it shall Pastor Lim?
not be deemed to be the property of its stockholder no
matter how substantial the ownership of his shares is. A: No. The real properties included in the inventory of the
Shareholders are in no legal sense the owners of estate of the late Pastor Y. Lim are in the possession of and
corporate property owned by the corporation as a distinct are registered in the name of Auto Truck Corporation,
legal personality. (Concepcion Magsaysay-Labrador v. CA, which under the law possesses a personality separate and
G.R. No. 58168, December 19, 1989) distinct from its stockholders, and in the absence of any
cogency to shred the veil of corporate fiction, the
Q: Ronald Sham doing business under the name of presumption of conclusiveness of said titles in favor of
SHAMRON Machineries (Shamron) sold to Turtle Auto Truck Corporation should stand undisturbed. A
Mercantile (Turtle) a diesel farm tractor. In payment, corporation is vested by law with a personality distinct
Turtle’s President and Manager Dick Seldon issued a and separate from its stockholders or members. In the
check for P50,000 in favor of Shamron. A week later, same vein, a corporation by legal fiction and convenience
Turtle sold the tractor to Briccio Industries (Briccio) is an entity shielded by a protective mantle and imbued
for P 60,000. Briccio discovered that the engine of the by law with a character alien to the persons comprising it.
tractor was reconditioned so he refused to pay Turtle. Furthermore, mere ownership by a single stockholder or
As a result, Dick Seldon ordered “Stop Payment” of the by another corporation of all or nearly all of the capital
check issued to Shamron. Shamron sued Turtle and stock of a corporation is not of itself a sufficient reason for
Dick Seldon. Shamron obtained a favourable disregarding the fiction of separate corporate
judgment holding co-defendants Turtle and Dick personalities (Rufina Luy Lim v. CA, G.R. No. 124715,
Seldon jointly and severally liable. Comment on the January 24, 2000).
decision of the trial court. Discuss fully. (Bar 1995)
Q: Equitable PCI Bank (the Bank) filed a petition for
A: I disagree with the trial court’s ruling. Dick Seldon extrajudicial foreclosure of the real estate mortgages
should not be solidarily liable with Turtle because of his petitioners Spouses Ramon Nicse and Natividad

CORPORATION CODE
Paras-Nicse (Sps. Nicse) executed to secure their PNB and DBP contend that HRCC lacks cause of action
promissory note obligations to the Bank. Days before against them, as NMIC had a separate juridical
the public auction, the Sps. Nicse filed a complaint for personality from PNB and DBP. The RTC found PNB
the nullity of the suretyship agreement and alleged and DBP solidarily liable and pierced the veil of
that they have previously requested the bank to setoff corporate fiction of NMIC, as both banks own NMIC, all
[sic] the peso equivalent of their obligation against the members of the board are from both banks and
their US Dollar account with PCI Capital Asia Limited the business of NMIC conducted and controlled by
(Hong Kong), a subsidiary of the Bank. PNB and DBP. The CA affirmed the RTC decision.
The spouses Nisce likewise alleged that since they and Was the CA incorrect in disregarding the separate
the Bank were creditors and debtors with respect to legal personality of NMIC from PNB and DBP?
each other, their obligations should have been offset
by legal compensation to the extent of their account A: Yes. While ownership by one corporation of all or a
with the Bank. The Bank retorted that the Sps. Nicse great majority of stocks of another corporation and their
had no cause of action for legal compensation since interlocking directorates may serve as indicia of control,
PCI Capital was a different corporation with a by themselves and without more, however, these
separate and distinct personality; if at all, offsetting circumstances are insufficient to establish an alter ego
may occur only with respect to the spouses’ relationship or connection between DBP and PNB on the
US$500.00 deposit account in its Paseo de Roxas one hand and NMIC on the other hand, that will justify the
branch. puncturing of the latter’s corporate cover.
Are the Sps. Nicse and the Bank mutual debtors and Mere ownership by a single stockholder or by another
creditors? corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for
A: No. Admittedly, PCI Capital is a subsidiary of disregarding the separate corporate personality. The
respondent Bank. Even then, PCI Capital has an existence of interlocking directors, corporate officers and
independent and separate juridical personality from that shareholders is not enough justification to pierce the veil
of the respondent Bank, its parent company; hence, any of corporate fiction in the absence of fraud or other public
claim against the subsidiary is not a claim against the policy considerations (DBP v. Hydro Resources Contractors
parent company and vice-versa. The evidence on record Corporation, G.R. Nos. 167603, 167561, & 167530, March
shows that PCIB, which had been merged with Equitable 13, 2013).
Bank, owns almostall of the stocks of PCI Capital.
However, the fact that a corporation owns all of the stocks b) common directors and similarity of business
of another corporation, taken alone, is not sufficient to
justify their being treated as one entity. If used to perform Q: Indophil Union is a legitimate labor organization
legitimate functions, a subsidiary’s separate existence and the exclusive bargaining agent of all the rank-
shall be respected, and the liability of the parent and-file employees of Indophil Textile. Indophil
corporation, as well as the subsidiary shall be confined to Union and Indophil Textile executed a CBA. After
those arising in their respective business. A corporation some time, Indophil Acrylic was formed. Acrylic
has a separate personality distinct from its stockholders became operational and hired workers according to
and from other corporations to which it may be its own criteria and standards. Subsequently, the
conducted. This separate and distinct personality of a workers of Acrylic unionized and a duly certified CBA
corporation is a fiction created by law for convenience was executed.
and to prevent injustice (Spouses Ramon M. Nicse and
Natividad Paras-Nicse v. Equitable PCI Bank, Inc., G.R. no. A year after, Indophil Union claimed that the plant
167434, Ferbruary 19, 2007). facilities built and set up by Acrylic should be
considered as an extension or expansion of the
Q: DBP and PNB foreclosed on certain mortgages facilities of Indophil Textile and in other words,
made on the properties of Marinduque Mining and Acrylic is part of Indophil Textile bargaining unit. On
Industrial Corporation (MMIC). As a result of the the other hand, Indophil Textile submits that it is a
foreclosure, DBP and PNB acquired substantially all juridical entity separate and distinct from Acrylic and
the assets of MMIC and resumed the business hence Acrylic is not part of its bargaining unit. Are the
operations of the defunct MMIC by organizing NMIC. rank-and-file employees working at Indophil Acrylic
The members of the Board of NMIC were either from a part of, and/or within the scope of the bargaining
DBP or PNB. unit of Indophil Textile?
Subsequently, NMIC engaged in the services of A: No. The rank-and-file employees of Acrylic are not
Hercon, Inc. Hercon made several demands on NMIC within the scope of the bargaining unit of Indophil Textile.
for the latter’s unpaid balance, but they were not The fact that the businesses of Indophil Textile and Acrylic
heeded. Hercon filed a complaint for sum of money are related, that some of the employees of Indophil Textile
with the RTC seeking to hold NMIC, PNB and DBP are the same persons manning and providing for auxiliary
solidarily liable. Hercon was later acquired by Hydro services to the units of Acrylic, and that the physical
Resources Contractors Corporation (HRCC). plants, offices and facilities are situated in the same
compound, are of no moment. These facts are not

MERCANTILE LAW
sufficient to justify the piercing of the corporate veil of RECOVERY OF MORAL DAMAGES
Acrylic. It must be emphasized that the legal corporate
entity is disregarded only if it is sought to hold the officers Recovery of moral damages
and stockholders directly liable for a corporate debt or
obligation. In the instant case, Indophil Union does not GR: A corporation is not entitled to moral damages
seek to impose a claim against the members of the Acrylic because it has no feelings, no emotions, no senses (ABS-
(Indophil Textile Mill Workers Union-PTGWO, v. Voluntary CBN Broadcasting Corporation v. CA, G.R. No. 128690
Arbitrator Teodorico P. Calica, G.R. No. 96490, February 3, January 21, 1999 and Phillip Brothers Oceanic, Inc, G.R. No.
1992). 126204, November 20, 2001).
Entitlement of corporations to Constitutional rights XPNs:
Corporations are entitled to the following rights under the 1. The corporation may recover moral damages under
constitution; item 7 of Article 2219 of the New Civil Code because said
provision expressly authorizes the recovery of moral
1. Right to Due Process (Sec. 1, Art. III, Constitution).
damages in cases of libel, slander, or any other form of
2. Right against unreasonable searches and seizures (Sec. defamation.
2, ibid).
Article 2219(7) does not qualify whether the injured
However, the corporation is not entitled to the right party is a natural or juridical person. Therefore, a
against self-incrimination, being a mere creature of law. corporation, as a juridical person, can validly complain for
(Bataan Shipyard & Engineering v. PCGG , G.R. No. 75885, libel or any other form of defamation and claim for moral
May 27, 1987). damages (Filipinas Broadcasting Network, Inc. v. AMEC-
BCCM, G.R. No. 141994, January 17, 2005).
LIABILITY FOR TORTS AND CRIMES
2. When the corporation has a reputation that is debased,
A corporation may be held liable for torts resulting in its humiliation in the business realm (Manila
Electric Company v. T.E.A.M. Electronics Corporation, et. al.,
The corporation is liable for every tort which it expressly G.R. No. 131723, December 13, 2007).
directs or authorizes (PNB v. CA, G.R. No. L-27155, May 18,
1978). Q: "Exposé" is a radio documentary program hosted
by Rima and Alegre. It is aired every morning over
Reason for liability in cases of torts DZRC-AM which is owned by FBNI. One morning, Rima
and Alegre exposed various alleged complaints from
A corporation is civilly liable in the same manner as students, teachers and parents against AMEC and its
natural persons for torts, because generally speaking, the administrators. Claiming that the broadcasts were
rules governing the liability of a principal or master for a defamatory, AMEC and Ago, as Dean of AMEC’s College
tort committed by an agent or servant are the same, of Medicine, filed a complaint for damages against
whether the servant or agent is a natural or artificial FBNI, Rima and Alegre. The trial court ruled in favor
person (ibid). of AMEC and Ago. The CA affirmed. Among others,
FBNI claims that AMEC is not entitled to moral
Corporations incapable of intent damages because it is a corporation. Is AMEC is
entitled to moral damages?
Corporations are incapable of intent, hence they cannot
commit felonies that are punishable under the Revised A: Yes. AMEC is entitled to moral damages. A juridical
Penal Code. They cannot commit crimes that are person is generally not entitled to moral damages
punishable under special laws because crimes are because, unlike a natural person, it cannot experience
personal in nature. In addition, the penalty of physical suffering or such sentiments as wounded
imprisonment cannot be imposed. However, the feelings, serious anxiety, mental anguish or moral
corporation may be dissolved for violations of the shock. Nevertheless, AMEC’s claim for moral damages
Corporation Code (CC, Sec. 144). falls under item 7 of Article 2219 of the Civil Code. This
provision expressly authorizes the recovery of moral
Liability of a corporation in cases of crimes damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the
GR: A corporation is not liable in cases of crimes. Since a plaintiff is a natural or juridical person. Therefore, a
corporation is a mere creation of legal fiction, it cannot be juridical person such as a corporation can validly
held liable for a crime committed by its officers, since it complain for libel or any other form of defamation and
does not have the essential element of malice; in such case claim for moral damages (Filipinas Broadcasting Network,
the responsible officers would be criminally liable (People Inc., v. AMEC-BCCM, G.R. No. 141994, January 17, 2005).
v. Tan Boon Kong, G.R. No. L-32066, March 15, 1930).
Q: Meralco and T.E.A.M. Electronics Corporation
XPN: If the penalty of the crime is only fine or forfeiture (TEC) were parties to two separate contracts for the
of license or franchise (Ching v Secretary of Justice, supra). sale of electric energy.Meralco undertook to supply
TEC’s building known as DCIM with electric

CORPORATION CODE
power. One day, Meralco conducted a surprise trimmed his property by 92 square meters. Hence,
inspection of the electric meters installed at the DCIM OLFI was made to pay Roxas the value of the 92 square
building. Two meters were found to be allegedly meters.
tampered with and did not register the actual power
consumption in the building. Meralco informed TEC To collect the aforementioned amount, Notices of
of the results of the inspection and demanded from Garnishment were then issued by the sheriff to the
the latter the payment of its unregistered managers of the Development Bank of the Philippines
consumption. TEC failed to pay the same. and the United Coconut Planters Bank for them to
garnish the account of Bishop Robert Arcilla-Maullon
For failure to pay Meralco disconnected the electricity (Arcilla-Maullon), OLFI’s general manager. Is the
supply to the DCIM building.TEC demanded from general manager of OLFI liable for the debts of the
Meralco the reconnection of electrical service, latter?
claiming that it had nothing to do with the alleged
tampering but the latter refused to heed the A: No. In order for the Court to hold the officer of the
demand. The ERB immediately ordered the corporation personally liable alone for the debts of the
reconnection of the service but Meralco did not corporation and thus pierce the veil of corporate fiction,
immediately comply. After this, a second and third the Court has required that the bad faith of the officer
inspection was conducted by Meralco, and the same must first be established clearly and convincingly. Roxas,
yielded to same result as the first inspection. Thus, however, has failed to include any submission pertaining
Meralco demanded payment with a warning of to any wrongdoing of the general manager. Necessarily, it
disconnection if TEC will refuse to pay. TEC filed a would be unjust to hold the latter personally liable.
complaint for damages against Meralco before the RT. Moreso, if the general manager was never impleaded as a
The RTC ruled in favor of TEC and it awarded, among party to the case (Mercy Vda. de Roxas, represented by
others, moral damages. Is TEC entitled to moral Arlene C. Roxas-Cruz, in her capacity as substitute
damages? appellant-petitioner v. Our Lady's Foundation, Inc. G.R. No.
182378, March 6, 2013).
A: No. TEC is not entitled to moral damages. TEC’s claim
was premised allegedly on the damage to its goodwill and DOCTRINE OF PIERCING THE CORPORATE VEIL
reputation. As a rule, a corporation is not entitled to moral (2006 Bar)
damages because, not being a natural person, it cannot
experience physical suffering or sentiments like wounded The doctrine of piercing the corporate veil is the doctrine
feelings, serious anxiety, mental anguish and moral that allows the State to disregard for certain justifiable
shock. The only exception to this rule is when the reasons the notion that a corporation has a personality
corporation has a reputation that is debased, resulting in separate and distinct from the perattorsons composing it.
its humiliation in the business realm. But in such a case, it
is imperative for the claimant to present proof to justify NOTE: This is an exception to the Doctrine of Separate
the award. It is essential to prove the existence of the Corporate Entity.
factual basis of the damage and its causal relation to
Meralco’s acts. In the present case, the records are bereft Requirement to justify the piercing of the corporate
of any evidence that the name or reputation of TEC/TPC veil
has been debased as a result of Meralco’s acts (Manila
Electric Company v. T.E.A.M. Electronics Corporation, et al., In order to justify the piercing of the corporate veil,
G.R. No. 131723, December 13, 2007). allegation or proof of fraud or other public policy
considerations is needed (Hacienda Luisita Incorporated
Q: Salve Dealca Latosa filed before the RTC a vs. Presidential Agrarian Reform Council, G.R. No. 171101,
Complaint for the recovery of ownership of a portion November 22, 2011).
of her residential land located at Our Lady’s Village,
Bibincahan, Sorsogon, Sorsogon. According to her, Effect of piercing the corporate veil
Atty. Henry Amado Roxas (Roxas), represented by
petitioner herein, encroached on a quarter of her Courts will look at the corporation as an aggregation of
property by arbitrarily extending his concrete fence persons undertaking the business as a group or two
beyond the correct limits. corporations will be treated as identical.
In his Answer, Roxas imputed the blame to NOTE: When the veil of corporate fiction is pierced in
respondent Our Lady’s Village Foundation, Inc., now proper cases, the corporate character is not necessarily
Our Lady’s Foundation, Inc. (OLFI). He then filed a abrogated. It continues for legitimate objectives (Reynoso
Third-Party Complaint against OLFI and claimed that IV vs. CA, G.R. Nos. 116124-25, November 22, 2000).
he only occupied the adjoining portion in order to get
the equivalent area of what he had lost when OLFI
trimmed his property for the subdivision road. The
trial court held that Latosa had established her claim
of encroachment by a preponderance of evidence. It
found that Roxas occupied a total of 112 square
meters of Latosa’s lots, and that, in turn, OLFI

MERCANTILE LAW
GROUNDS FOR APPLICATION OF DOCTRINE
(1991, 1995, 1996, 2000, 2001, 2004, 2006, 2008 Bar) Q: Lim, a supplier of scrap papers, cartons, and other
raw materials, delivered scrap papers to Arco Pulp
It applies upon the following circumstances: (FACO) and Paper Company, Inc. through its CEO and
President, Santos. The parties allegedly agreed that
a. if the fiction is used to perpetrate fraud (Fraud Arco Pulp and Paper would either pay Lim the value
Test); of the raw materials or deliver to him their finished
products of equivalent value. Arco Pulp and Paper
b. the complete control of one corporate entity to issued a post-dated check as partial payment, with the
another which perpetuated the wrong is the assurance that the check would not bounce. When
proximate cause of the injury (Control Test); Lim deposited the check, it was dishonored for being
drawn against a closed account. On the same day, Arco
c. if a certain corporation is only an adjunct or an Pulp and Paper and Eric Sy executed a MOA where
extension of the personality of the corporation Arco Pulp and Paper bound themselves to deliver
(Alter ego or Instrumentality Test); and their finished products to Megapack Container
Corporation, owned by Eric Sy, for his account; that
d. if the fiction is pierced to make the stockholders the raw materials would be supplied by Lim, through
liable for the obligation of the corporation his company. Despite repeated demands by Lim, Arco
(Objective Test) Pulp and Paper did not pay. Lim filed a complaint for
collection of sum of money with prayer for
Q: WPM International Trading, Inc. (WPM) is engaged attachment with the RTC. The trial court dismissed
in the restaurant business, with Warlito P. Manlapaz as the complaint, holding that when Arco Pulp and Paper
its president. WPM entered into a management and Eric Sy entered into the MOA, novation took place,
agreement with the Labayen, by virtue of which the which extinguished Arco Pulp and Paper’s obligation
Labayen was authorized to operate, manage and to Lim. The CA reversed the said decision. Must the
rehabilitate Quickbite, a restaurant owned and corporate veil of Arco Pulp and Paper be pierced
operated by WPM. As part of her tasks, Labayen looked thereby making Santos solidarily liable with Arco
for a contractor who would renovate the two existing Pulp and Paper?
Quickbite outlets. However, out of the renovation cost,
the remaining balance was not paid to CLN. CLN filed a A: Yes. Here, Santos entered into a contract with
complaint for sum of money and damages before the respondent in her capacity as the President and Chief
RTC against Labayen. The RTC found the respondent Executive Officer of Arco Pulp and Paper. She also issued
liable to pay CLN. As a result, Labayen instituted a the check in partial payment of petitioner corporation’s
complaint for damages against WPM and Manlapaz. obligations to respondent on behalf of petitioner Arco
She alleged that she should be entitled to Pulp and Paper. This is clear on the face of the check
reimbursement. The RTC found that based on the bearing the account name, "Arco Pulp & Paper, Co., Inc."
records, there is a clear indication that WPM is a mere Any obligation arising from these acts would not,
instrumentality or business conduit of Manlapaz and ordinarily, be Santos’ personal undertaking for which she
as such, WPM and Manlapaz are considered one and would be solidarily liable with petitioner Arco Pulp and
the same. The RTC also found that Manlapaz had Paper.Piercing the veil of corporate fiction is an equitable
complete control over WPM considering that he is its doctrine developed to address situations where the
chairman, president and treasurer at the same time. separate corporate personality of a corporation is abused
The RTC thus concluded that Manlapaz is liable in his or used for wrongful purposes. Santos cannot be allowed
personal capacity to reimburse the respondent the to hide behind the corporate veil. When Arco Pulp and
amount she paid to CLN in connection with the Paper’s obligation to Lim became due and demandable,
renovation agreement. CA affirmed the decision of the she not only issued an unfunded check but also contracted
RTC applying the principle of piercing the veil of with a third party in an effort to shift petitioner Arco Pulp
corporate fiction. Is the CA correct in applying the and Paper’s liability. She unjustifiably refused to honor
principle of piercing the veil of corporate fiction? Arco Pulp and Paper’s obligations to Lim. These acts
clearly amount to bad faith. In this instance, the corporate
A: No. In the present case, the attendant circumstances do veil may be pierced, and Santos may be held solidarily
not establish that WPM is a mere alter ego of Manlapaz. liable with petitioner Arco Pulp and Paper (Arco Pulp and
Aside from the fact that Manlapaz was the principal Paper Co., Inc. et. al. v. Dan T. Lim, G.R. No. 206806, June 25,
stockholder of WPM, records do not show that WPM was 2014).
organized and controlled, and its affairs conducted in a
manner that made it merely an instrumentality, agency, Q: Rosario Lorezo received, upon inquiry, a letter
conduit or adjunct of Manlapaz. Mere ownership by a single from the Social Security System, informing her that
stockholder of even all or nearly all of the capital stocks of she cannot avail of their retirement benefits since per
a corporation is not by itself a sufficient ground to their record she has only paid 16 months.
disregard the separate corporate personality. To disregard Aggrieved, Lorezo then filed her Amended Petition
the separate juridical personality of a corporation, the before the SSC, alleging that she was employed as
wrongdoing must be clearly and convincingly established laborer in Hda. Cataywa managed by Jose Marie
(WPM International Trading, Inc. et. al. v. Labayen, G.R. No. Villanueva in 1970 but was reported to the SSS only in
182770, September 17, 2014). 1978. She alleged that SSS contributions were

CORPORATION CODE
deducted from her wages from 1970 to 1995, but not intended merely as a case of “estate tax planning” (Tan
all were remitted to the SSS which, subsequently, Boon Bee v. Jarencio, G.R. No. 41337, June 30, 1988).
caused the rejection of her claim. She also impleaded
Talisay Farms, Inc. by virtue of its Investment ACQUISITION OF JURISDICTION AS PREREQUISITE
Agreement with Mancy and Sons Enterprises. She also FOR THE APPLICATION OF THE DOCTRINE
prayed that the veil of corporate fiction be pierced
since she alleged that Mancy and Sons Enterprises Q: Romeo Morales was able to obtain a favorable
and Manuel and Jose Marie Villanueva are one and the judgment for a sum of money against Kukan, Inc. With
same. Should Mancy and Sons Enterprises’ veil of the judgment attaining finality, the sheriff levied on
corporate fiction be pierced? execution various personal properties found atwhat
was supposed to be Kukan’s office. Petitioner Kukan
A: No. The Court has expressed the language of piercing International Corporation (KIC) filed a third-party
doctrine when applied to alter ego cases, as follows: complaint, alleging that it was the owner of the levied
Where the stock of a corporation is owned by one person properties. Morales prayed that the principle of
whereby the corporation functions only for the benefit of piercing the veil of corporate fiction be applied in
such individual owner, the corporation and the individual order to satisfy the judgment debt of Kukan. The RTC
should be deemed the same. granted the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
This Court agrees with the petitioners that there is no affirmed the RTC.
need to pierce the corporate veil. Respondent failed to
substantiate her claim that Mancy and Sons Enterprises, Did the RTC properly apply the doctrine?
Inc. and Manuel and Jose Marie Villanueva are one and the
same. She based her claim on the SSS form wherein A: No. The principle of piercing the veil of corporate
Manuel Villanueva appeared as employer. However, this fiction, and the resulting treatment of two related
does not prove, in any way, that the corporation is used to corporations as one and the same juridical person with
defeat public convenience, justify wrong, protect fraud, or respect to a given transaction, is basically applied only to
defend crime, or when it is made as a shield to confuse the determine established liability; it is not available to
legitimate issues, warranting that its separate and distinct confer on the court a jurisdiction it has not acquired, in
personality be set aside. Also, it was not alleged nor the first place, over a party not impleaded in a case.
proven that Mancy and Sons Enterprises, Inc. functions Elsewise put, a corporation not impleaded in a suit
only for the benefit of Manuel Villanueva, thus, one cannot cannot be subject to the courts process of piercing the
be an alter ego of the other (Hacienda Cataywa/Manuel veil of its corporate fiction. In that situation, the court has
Villanueva, et al. v. Rosario Lorezo, G.R. No. 179640, March not acquired jurisdiction over the corporation and,
18, 2015). hence, any proceedings taken against that corporation
and its property would infringe on its right to due
Q: Mr. Pablo, a rich merchant in his early forties, was process. Aguedo Agbayani, a recognized authority on
a defendant in a lawful suit which could subject him Commercial Law, stated that piercing the veil of
to substantial damages. A year before the court corporate entity applies to determination of liability not
rendered judgment, Pablo sought his lawyer’s advice of jurisdiction because the doctrine of piercing the veil of
on how to plan his estate to avoid taxes. His suggested corporate fiction comes to play only during the trial of
that he should form a corporation with himself, his the case after the court has already acquired jurisdiction
wife, and his children (all students and still over the corporation. Hence, before this doctrine can be
unemployed) as stockholders and then transfer all his applied, based on the evidence presented, it is imperative
assets and liabilities to this corporation. Mr. Pablo that the court must first have jurisdiction over the
followed the recommendation of his lawyer. 1 year corporation.
later, the court rendered judgment against Pablo and
the plaintiff sought to enforce this judgment. The The implication of the above comment is two-fold:
sheriff, however, could not locate any property in the
(1) the court must first acquire jurisdiction over
name of Pablo and therefore returned the writ of
thecorporation or corporations involved before its or
execution unsatisfied. What remedy, if any, is
their separate personalities are disregarded; and
available to the plaintiff? (1994 Bar)
(2) the doctrine of piercing the veil of corporate entity
A: The plaintiff can avail himself of the doctrine of can only be raised during a full-blown trial over a cause
piercing the veil of corporate fiction which can be invoked of action duly commenced involving parties duly brought
when a corporation is formed or used in avoiding a just under the authority of the court by way of service of
obligation. While it is true that a family corporation may summons or what passes as such service.
be organized to pursue an estate tax; planning which is
not per se illegal or unlawful (Delpher Trades Corp. v. IAC, The issue of jurisdiction or the lack of it over KIC has
G.R. No L-69259, January 26, 1988) the factual settings, already been discussed. Anent the matter of the time and
however, indicate the existence of a lawful suit that could manner of raising the principle in question, it is
subject Pablo to a substantial amount of damages. It undisputed that no full-blown trial involving KIC washad
would thus be difficult for Pablo to convincingly assert when the RTC disregarded the corporate veil of KIC. The
that the incorporation of the family corporation was reason for this actuality is simple andundisputed: KIC
was not impleaded in Civil Case and that the RTC did not

MERCANTILE LAW
acquire jurisdiction over it. It was dragged to the case substantially all of its assets or business; suspend its
after it reacted to the improper execution of its business operations; substantially change the nature
properties and veritably hauled to court, not thru the of its business; and declare bankruptcy or insolvency.
usual process of service of summons, but by mere motion
of a party with whom it has no privity of contract and CBB paid the initial amount but failed to pay the rest
after the decision in the main case had already become as the company ceased operations. The LA, upon
final and executor (Kukan International Corporation v. motion by Livesey, issued a writ of execution, but it
Hon. Amor Reyes and Romeo Morales, G.R. No. 182729, was not enforced. Livesey then moved for the
September 29, 2010). issuance of an alias writ of execution, alleging that
CBB and Keith Elliot have organized another
Q: Ma. Concepcion Lacsa (Concepcion), was riding a corporation, Binswanger Philippines, Inc.” He
Goldline passenger bus owned and operated by Travel claimed that there was evidence showing that CBB
&Tours Advisers, Inc. when the bus collided with a and Binswanger Philippines, Inc. (Binswanger) are
passenger jeepney, which resulted to her instant death. one and the same corporation, pointing out that CBB
The Heirs of Concepcion instituted a suit in the RTC for stands for Chesterton Blumenauer Binswanger.
damages due to breach of contract, with the complaint Invoking the doctrine of piercing the veil of corporate
set against “Travel & Tours Advisers, Inc. (Goldline)” and fiction, Livesey prayed that an alias writ of execution
the bus driver. The RTC ruled in favor of the Heirs, be issued against Binswanger and Elliot, CBB’s former
holding TTAI (Goldline) to pay the heirs damages and President, and now Binswanger’s President and Chief
expenses. A writ of execution was served upon TTAI Executive Officer (CEO).
and William Cheng, operator of the Goldline bus. Cheng
failed to settle the judgment, thus a tourist bus was Is the doctrine of piercing the veil of corporate fiction
levied. applicable?
Gold Line Tours, Inc. (GLTI) filed a third-party claim, A: Yes. Shortly after Elliot forged the compromise
claiming that the levied tourist bus be returned to GLTI agreement with Livesey, CBB ceased operations. Then
because it was its owner and GLTI had not been made a Binswanger suddenly appeared. It was established almost
party to the case, and it was a corporation entirely simultaneously with CBB’s closure, with no less than
different from TTAI. The RTC dismissed the third-party Elliot as its President and CEO. A reasonable mind would
claim, observing that the identity of TTAI cannot be arrive at the conclusion that Binswanger is CBB’s alter ego
divorced from that of GLTI, considering that Cheng had or that CBB and Binswanger are one and the same
claimed to be the operator as well as the corporation. There are also indications of badges of fraud
President/Manager/incorporator of both entities; and in Binswanger’s incorporation. It was a business strategy
that Travel & Tours Advisers, Inc. had been known in to evade CBB’s financial liabilities, including its
Sorsogon as Goldline. The CA affirmed the RTC outstanding obligation to Livesey. Piercing the veil of
decision. corporate fiction is an equitable doctrine developed to
address situations where the separate corporate
Did the RTC lack legal basis to declare TTAI and GLTI personality of a corporation is abused or used for
one and the same? wrongful purposes.
A: No. As the Court sees it, the RTC had sufficient factual In the present case, the Court sees an indubitable link
basis to find that Goldline and Travel and Tours Advisers, between CBB’s closure and Binswanger’s
Inc. were one and the same entity, specifically: (a) incorporation. CBB ceased to exist only in name; it re–
documents submitted by Goldline in the RTC showing that emerged in the person of Binswanger for an urgent
William Cheng, who claimed to be the operator of Travel purpose — to avoid payment by CBB of the last two
and Tours Advisers, Inc., was also the President/Manager installments of its monetary obligation to Livesey, as
and an incorporator of the petitioner; and (b) Travel and well as its other financial liabilities. It was not just
Tours Advisers, Inc. had been known in Sorsogon as coincidence that Binswanger is engaged in the same line
Goldline (Gold Line Tours, Inc. v. Heirs of Maria Concepcion of business CBB embarked on: (1) it even holds office in
LAcsa, G.R. No. 159108, June 18, 2012). the very same building and on the very same floor where
CBB once stood; (2) CBB’s key officers, Elliot, no less, and
Q: Eric Livesey (Livesey) filed a complaint for illegal Catral moved over to Binswanger (3) the use of
dismissal with money claims against CBB Philippines Binswanger of CBB’s paraphernalia (receiving stamp) (4)
Strategic Property Services, Inc. (CBB) and Paul Binswanger’s takeover of CBB’s project with the PNB.
Dwyer. CBB was a domestic corporation engaged in
real estate brokerage and Dwyer was its President. While the ostensible reason for Binswanger’s
The LA ruled in favor of Livesey and ordered CBB to establishment is to continue CBB’s business operations in
reinstate the former position as Managing Director the Philippines, which by itself is not illegal, the close
and pay him accrued salaries, back salaries and proximity between CBB’s disestablishment and
attorney’s fees. Livesey and CBB entered into a Binswanger’s coming into existence was to evade CBB’s
compromise agreement where Livesey is to receive a unfulfilled financial obligation to Livesey under the
sum of money with a downpayment. Further, unless compromise agreement.
and until the agreement is fully satisfied, CBB shall
not sell, alienate, or otherwise dispose of all or This underhanded objective, it must be stressed, can only

CORPORATION CODE
be attributed to Elliot as it was apparent that suit. Proper service of summons is used to protect one’s
Binswanger’s stockholders had nothing to do with right to due process.”
Binswanger’s operations as noted by the NLRC and which
the respondents did not deny. Elliot was well aware of the As [Fairfield] Bank was neither served with summons, nor
compromise agreement that the last two installments of has it voluntarily appeared before the court, the judgment
CBB’s obligation to Livesey were due. These installments sought to be enforced against [D-Securities] cannot be
were not met and the reason is that after the alleged sale made against its parent company, [Fairfield] Bank.
of the majority of CBB’s shares of stock, it closed down. [Fairfield] Bank has consistently disputed the RTC
The Court, therefore, finds Elliot as liable as Binswanger jurisdiction, commencing from its filing of an Omnibus
for CBB’s unfulfilled obligation to Livesey (Eric Godfrey Motion by way of special appearance during the execution
Stanley Livesey v. Binswanger Philippines, Inc. and Keith stage until the filing of its Comment before the Court
Elliot, G.R. No. 177493, March 19, 2014). wherein it was pleaded that “RTC never acquired
jurisdiction over [Fairfield] Bank. [Fairfield] Bank was not
Q: In an action for collection of a sum of money, the pleaded as a party in this case. It was never served with
Regional Trial Court (RTC) of Makati City issued a summons by nor did it voluntarily appear before RTC as
decision finding D-Securities, Inc. liable to Rehouse to be subjected to the latter’s jurisdiction” (Pacific
Corporation for P10,000,000.00. Subsequently, the Rehouse Corporation v. Export Industry Bank, G.R. No.
writ of execution was issued but returned unsatisfied 201537, G.R. No. 199687 March 24, 2014).
because D-Securities had no more assets to satisfy the
judgment. Rehouse moved for an Alias Writ of NOTE: There appears to be a lack of consclusive
Execution against Fairfield Bank (FB), the parent yardstick as to when the court may pierce the veil of
company of D-Securities. FB opposed the motion on corporate fiction of a corporation which as not been
the grounds that it is a separate entity and that it was brought to its jurisdiction by summons, voluntary
never made a party to the case. The RTC granted the appearance or other recognized modes of acquiring
motion and issued the Alias Writ of Execution. In its jurisdiction. To be safe, any bar question should be
Resolution, the RTC relied on the following facts: answered based on similarity with the facts of each case
499,995 out of the 500,000 outstanding shares of (Divina, 2014).
stocks of D-Securities are owned by FB; FB had actual
knowledge of the subject matter of litigation as the CIRCUMSTANCES WHICH DO NOT WARRANT THE
lawyers who represented D-Securities are also the PEIRCING OF THE CORPORATE VEIL
lawyers of FB. As an alter ego, there is no need for a
finding of fraud or illegality before the doctrine of The mere fact that: (FCS)
piercing the veil of corporate fiction can be applied.
1. A corporation owns fifty (50%) of the capital stock of
The RTC ratiocinated that being one and the same another corporation, or the majority ownership of
entity in the eyes of the law, the service of summons the stocks of a corporation is not per se a cause for
upon D-Securities has bestowed jurisdiction over piercing the veil.
both the parent and wholly-owned subsidiary. Is the
RTC correct? (2014 Bar) 2. Two corporations have common directors or same or
single stockholder who has all or nearly all of the
A: No. The Court already ruled in Kukan International capital stock of both corporations is not in itself
Corporation v. Reyes that compliance with the recognized sufficient ground to disregard separate corporate
modes of acquisition of jurisdiction cannot be dispensed entities.
with even in piercing the veil of corporate fiction.
3. There is a substantial identity of the incorporators of
From the preceding, it is therefore correct to say that the the 2 corporations does not necessarily imply fraud
court must first and foremost acquire jurisdiction over and does not warrant piercing the corporate veil.
the parties; and only then would the parties be allowed to
present evidence for and/or against piercing the veil of Q: Land Bank of the Philippines (LBP) extended a
corporate fiction. If the court has no jurisdiction over the series of credit accommodations to ECO using the
corporation, it follows that the court has no business in trust funds of PVTA. The proceeds of the credit
piercing its veil of corporate fiction because such action accommodations were received on behalf of ECO by
offends the corporation’s right to due process. Emmanuel Oñate. Upon maturity of the loans, ECO
failed to pay the same. Despite demands, ECO was
“Jurisdiction over the defendant is acquired either upon a unable to pay. ECO then submitted a Plan of Payment
valid service of summons or the defendant’s voluntary to LBP, however, the latter rejected the same. LBP
appearance in court. When the defendant does not filed a complaint for collection of sum of money
voluntarily submit to the court’s jurisdiction or when against ECO and Oñate. The RTC rendered judgment
there is no valid service of summons, ‘any judgment of the against ECO and absolved Oñate from personal
court which has no jurisdiction over the person of the liability. The CA affirmed. LBP contends that the
defendant is null and void.’” “The defendant must be personalities of Oñate and of ECO should be treated as
properly apprised of a pending action against him and one, for the particular purpose of holding Oñate liable
assured of the opportunity to present his defenses to the for the loans incurred by ECO from Land Bank. Is

MERCANTILE LAW
Oñate jointly and severally liable with ECO for the TEST IN DETERMINING APPLICABILITY
loans incurred from LBP?
The following are the tests in determining the
A: No. Oñate should not be held jointly and severally liable applicability of the doctrine of piercing the corporate veil:
with ECO. A corporation, upon coming into existence, is (ECAO)
invested by law with a personality separate and distinct
from those persons composing it as well as from any other 1. When the corporation is used to defeat of public
legal entity to which it may be related. By this attribute, a convenience as when the corporate fiction is used as
stockholder may not, generally, be made to answer for a vehicle for the evasion of an existing obligation;
acts or liabilities of the said corporation, and vice (Equity Cases)
versa. The mere fact that Oñate owned the majority of the
shares of ECO is not a ground to conclude that Oñate and 2. In fraud cases or when the corporate entity is used to
ECO are one and the same. Mere ownership by a single justify a wrong, protect fraud, or defend a crime;
stockholder of all or nearly all of the capital stock of a (Control Test)
corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate 3. In Alter ego cases, where a corporation is merely a
personalities. Neither is the fact that the name “ECO” farce since it is a mere alter ego or business conduit
represents the first three letters of Oñate’s name of a person, or where the corporation is so organized
sufficient reason to pierce the veil. Even if it did, it does and controlled and its affairs are so conducted as to
not mean that the said corporation is merely a dummy of make it merely an instrumentality, agency, conduit or
Oñate. A corporation may assume any name provided it is adjunct of another corporation (Timoteo H. Sarona vs.
lawful. There is nothing illegal in a corporation acquiring National Labor Relations Commission, Royale Security
the name or as in this case, the initials of one of its Agency, et al., G.R. No. 185280, January 18, 2012).
shareholders (Land Bank ofthe Philippines v. CA, et al., G.R.
No. 127181, September 4, 2011). 4. The Objective test where the end result in piercing
the veil of corporate fiction is to make the
Q: X owns 99% of the capital stock of SSS Corporation. stockholders liable for debts and obligations of the
X also owns 99% of TTT Corporation. SSS Corporation Corporation not to make the Corporation liable for
obtained a loan from VW Bank. On due date, SSS the debts and obligations of the stockholders (Umali
Corporation defaulted. TTT Corporation is financially v CA, G.R. No. 89561, September 13, 1990).
healthy. Which statement is most accurate? (2012
Bar) Three-pronged test to determine the application of
the alter ego/ instrumentality theory:
a. X being a controlling owner of SSS Corporation
can automatically be held personally liable for 1. Control, not mere majority or complete stock control,
the loan of SSS Corporation. but complete domination, not only of finances but of
b. TTT Corporation, owned 99% by X, can policy and business practice in respect to the
automatically be held liable. transaction attacked so that the corporate entity asto
c. SSS Corporation and TTT Corporation, although this transaction had at the time no separate mind,
both are owned by X, are two (2) distinct will or existence of its own;
corporations with separate juridical
personalities hence, the TTT Corporation cannot 2. Such control must have been used by the defendant
automatically be held liable for the loan of SSS to commit fraud or wrong, to perpetuate the
Corporation. violation of a statutory or other positive legal duty, or
d. The principle of piercing the veil of corporate dishonest and unjust act in contravention of
fiction can be applied in this case. plaintiff’s legal right; and
3. The aforesaid control and breach of duty must have

A: C. Mere ownership by a single stockholder of all or proximately caused the injury or unjust loss
nearly all of the capital stock of a corporation is not by complained of.
itself sufficient reason for disregarding the fiction of
separate corporate personalities (Land Bank of the The first prong is the “instrumentality” or “control” test.
Philippines, GR No. 127181, September 4, 2001). Thus, the This test requires that the subsidiary be completely under
fact that X owns majority of the shares in both the control and domination of the parent. It examines the
corporations does not automatically arise to one and the parent corporation’s relationship with the subsidiary. It
same personality or an intertwined ownership of said inquires whether a subsidiary corporation is so organized
corporations. and controlled and its affairs are so conducted as to make
it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no autonomy and
the parent corporation, though acting through the
subsidiary in form and appearance, “is operating the
business directly for itself.”

CORPORATION CODE
control, but ownership of another corporation, per se,
The second prong is the “fraud” test. This test requires without proof of actuality of the other conditions are
that the parent corporation’s conduct in using the insufficient to establish an alter ego relationship or
subsidiary corporation be unjust, fraudulent or wrongful. connection between the two corporations, which will
It examines the relationship of the plaintiff to justify the setting aside of the cover of corporate fiction.
thecorporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way An application of the doctrine of piercing the corporate
that harms the plaintiff creditor. As such, it requires a veil should be done with caution. A court should be
showing of “an element of injustice or fundamental mindful of the milieu where it is to be applied. It must be
unfairness.” certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed
The third prong is the “harm” test. This test requires the against another, in disregard of its rights. The wrongdoing
plaintiff to show that the defendant’s control, exerted in a must be clearly and convincingly established; it cannot be
fraudulent, illegal or otherwise unfair manner toward it, presumed. Otherwise, an injustice that was never
caused the harm suffered. A causal connection between unintended may result from an erroneous application
the fraudulent conduct committed through the (Pacific Rehouse Corporation v. Export Industry Bank, G.R.
instrumentality of the subsidiary and the injury suffered No. 201537, supra).
or the damage incurred by the plaintiff should be
established. The plaintiff must prove that, unless the Piercing the veil of corporate fiction on the basis of
corporate veil is pierced, it will have been treated unjustly equity
by the defendant’s exercise of control and improper use
of the corporate form and, thereby, suffer damages. Equity cases applying the piercing doctrine are what are
termed the "dumping ground", where no fraud or alter
To summarize, piercing the corporate veil based on the ego circumstances can be culled by the Court to warrant
alter ego theory requires the concurrence of three piercing.
elements: control of the corporation by the stockholder or
parent corporation, fraud or fundamental unfairness The main feature of equity cases is the need to render
imposed on the plaintiff, and harm or damage caused to justice in the situation at hand or to brush aside merely
the plaintiff by the fraudulent or unfairact of the technical defenses. Often, equity cases of piercing appear
corporation. The absence of any of these elements in combination with other types of piercing (Villanueva,
prevents piercing the corporate veil (DBP v. Hydro 2010).
Resources Contractors Corporation, G.R. Nos. 167603,
167561, & 167530, March 13, 2013). Specifically, the equity test can be applied when:
1. The corporate personality would be inconsistent
The absence of any one of these elements prevents
‘piercing the corporate veil’ in applying the with the business purpose of the legal fiction, or
‘instrumentality’ or ‘alter ego’ doctrine, the courts are 2. The piercing the corporate fiction is necessary to
concerned with reality and not form, with how the achieve justice or equity for those who deal in good
corporation operated and the individual defendant’s faith with the corporation,
relationship to that operation. Hence, all three elements
should concur for the alter ego doctrine to be applicable. 3. When the use of the separate juridical personality is
used to confuse legitimate issues.
Control, by itself, does not mean that the controlled
corporation is a mere instrumentality or a business Indications that a subsidiary corporation is a mere
conduit of the mother company. Even control over the instrumentality of its parent corporation
financial and operational concerns of a subsidiary
company does not by itself call for disregarding its 1. The parent corporation owns all or most of the
corporate fiction. There must be a perpetuation of fraud capital stock of the subsidiary.
behind the control or at least a fraudulent or illegal 2. The parent and subsidiary corporations have
purpose behind the control in order to justify piercing the common directors or officers.
veil of corporate fiction. Such fraudulent intent is lacking 3. The parent corporation finances the subsidiary.
in this case. 4. The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its
Moreover, there was nothing on record demonstrative of incorporation.
Export Bank’s wrongful intent in setting up a subsidiary, 5. The subsidiary has grossly inadequate capital.
E–Securities. If used to perform legitimate functions, a 6. The parent corporation pays the salaries and other
subsidiary’s separate existence shall be respected, and the expenses or losses of the subsidiary.
liability of the parent corporation as well as the subsidiary 7. The subsidiary has substantially no business except
will be confined to those arising in their respective with the parent corporation or no assets except those
business. conveyed to or by the parent corporation.
8. In the papers of the parent corporation or in the
Furthermore, ownership by Export Bank of a great statements of its officers, the subsidiary is described
majority or all of stocks of E–Securities and the existence as a department or division of the parent
of interlocking directorates may serve as badges of corporation, or its business or financial

MERCANTILE LAW
responsibility is referred to as the parent formally protested the assessment on the ground that
corporation's own. it was not the party liable for the assessed deficiency
9. The parent corporation uses the property of the taxes. After receiving the letter from Co,
subsidiary as its own. Commissioner Tan communicated in writing the
10. The directors or executives of the subsidiary do not detailed computation of the tax liability, stressing
act independently in the interest of the subsidiary that the Bureau of Customs would not issue any
but take their orders from the parent corporation. clearance to Oilink unless the amount demanded as
11. The formal legal requirements of the subsidiary are Oilink’s tax liability be first paid, and a performance
not observed (PNB v. Ritratto Group, G.R. No. 142616, bond be posted by URC/Oilink. May the Commissioner
July 31, 2001). of Customs pierce the veil of corporate fiction?
Q: PNB-IFL a subsidiary company of PNB, organized A: No. A corporation, upon coming into existence, is
and doing business in Hong Kong, extended a letter of vested by law with a personality separate and distinct
credit in favor of Ritratto Group Inc., et al., in the from those of the persons composing it as well as from any
amount of US$300,000.00. However, as their other legal entity to which it may be related. URC and
outstanding obligations stood at US$1,497,274.70, Oilink had the same Board of Directors and Oilink was
and the same remains unpaid, PNB-IFL, through its 100% owned by URC. The Court held that the doctrine of
attorney-in-fact PNB, notified the Ritratto Group Inc., piercing the corporate veil has no application here
et al., of the foreclosure of all the real estate because the Commissioner of Customs did not establish
mortgages and that the properties subject thereof that Oilink had been set up to avoid the payment of taxes
were to be sold at a public auction. Ritratto Group Inc., or duties, or for purposes that would defeat public
et al., filed a complaint for injunction against PNB for convenience, justify wrong, protect fraud, defend crime,
the latter to be restrained from foreclosing and confuse legitimate legal or judicial issues, perpetrate
eventually selling its property. The RTC granted the deception or otherwise circumvent the law
injunction. It applied the doctrine of Piercing the Veil (Commissioner of Customs v. Oilink International
of Corporate Identity by stating that PNB is merely Corporation, G.R. No. 161759, July 2, 2014).
an alter ego or a business conduit of PNB-IFL. Is PNB
is merely an alter ego or business conduit of PNB-IFL? Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's decision, X
A: No. PNB is not an alter ego or business conduit of PNB- Corporation was found to be without assets.
IFL. Aside from the fact that PNB-IFL is a wholly owned Thereafter, the plaintiffs filed an action against its
subsidiary of PNB, there is no showing of the indicative present and past stockholder, Y Corporation, which
factors that the former corporation is a mere owned substantially all of the stocks of X corporation.
instrumentality of the latter are present. Neither is there The two corporations have the same board of
a demonstration that any of the evils sought to be directors and Y Corporation financed the operations
prevented by the doctrine of piercing the corporate veil of X corporation. May Y Corporation be held liable for
exists. Inescapably, therefore, the doctrine of piercing the the debts of X Corporation? Why? (2001 Bar)
corporate veil based on the alter ego or instrumentality
doctrine finds no application in the case at bar. In any A: Yes. Y Corporation may be held liable for the debts of X
case, the parent-subsidiary relationship between PNB and Corporation. The doctrine of piercing the veil of
PNB-IFL is not the significant legal relationship involved corporation fiction applies to this case. The two
in this case since PNB was not sued because it is the corporations have the same board of directors and Y
parent company of PNB-IFL. Rather, PNB was sued Corporation owned substantially all of the stocks of X
because it acted as an attorney-in-fact of PNB-IFL in Corporation, which facts justify the conclusion that the
initiating the foreclosure proceedings. A suit against an latter is merely an extension of the personality of the
agent cannot without compelling reasons be considered a former, and that the former controls the policies of the
suit against the principal. Under the Rules of Court, every latter. Added to this is the fact that Y Corporation controls
action must be prosecuted or defended in the name of the the finances of X Corporation which is merely an adjunct,
real party-in-interest, unless otherwise authorized by law business conduit or alter ego of Y Corporation (CIR v.
or these Rules (PNB v. Ritratto Group Inc., et al., supra). Norton & Harrison Company, G.R. No. L‐17618, August 31,
1964).
Q: In the course of its business undertakings, Union
Refinery (Union) imported oil products into the Q: X Corp. operates a call center that received orders
country. Union and Oilink had interlocking directors for pizzas on behalf of Y Corp. which operates a chain
when Oilink started its business. They had the same of pizza restaurants. The two companies have the
Board of Directors and Oilink was 100% owned by same set of corporate officers. After 2 years, X Corp.
URC. The District Collector of the Port of Manila, dismissed its call agents for no apparent reason. The
formally demanded that Union must pay the taxes and agents filed a collective suit for illegal dismissal
duties on its oil imports that had arrived at the Port of against both X Corp. and Y Corp. based on the doctrine
Lucanin in Mariveles, Bataan. Commissioner Tan of piercing the veil of corporate fiction. The latter set
made a final demand for the total liability upon Union up the defense that the agents are in the employ of X
and Oilink. Co requested from Commissioner Tan a Corp. which is a separate juridical entity. Is this
complete finding of the facts and law in support ofthe defense appropriate? (2011 Bar)
assessment made in the latter’s final demand. Oilink

CORPORATION CODE
A: Yes, it is not shown that one company completely Kinds of Underwriting Agreement
dominates the finances, policies, and business practices of
the other. 1. English – the underwriter sells what the corporation
cannot sell
INCORPORATION AND ORGANIZATION 2. Firm Commitment – the underwriter purchases
outright the securities and then resells the same
Incorporation 3. Best Efforts – the underwriter merely sells for
commission.
It is the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts, PROMOTER
certification or records, which give the corporation its
existence. A promoteris a person who, acting alone or with others,
takes initiative in founding and organizing the business or
Steps in the creation of a corporation enterprise of the issuer and receives consideration
therefor (SRC, Sec. 3.10).
1. Promotion
2. Incorporation (Sec. 10, CC) Specifically, a promoter is a person who brings about or
cause to bring about the formation and organization of a
3. Formal organization and commencement of business corporation by:
operations (Sec. 22, CC) 1. Bringing together the incorporators or the
persons interested in the enterprise,
Components of a corporation (DUMP-ISCO) 2. Procuring subscriptions or capital for the
corporation and
1. Corporators – Those who compose a corporation, 3. Setting in motion the machinery which leads to
whether as stockholders or members the incorporation of the corporation itself.
2. Incorporators – They are those mentioned in the Promotional activities
Articles of Incorporation as originally forming and
composing the corporation and who are signatories Promotional activities includes: (DIA)
thereof. 1. Discovery – consists of finding a business opportunity
to be developed.
3. Directors and trustees – The Board of Directors is the
governing body in a stock corporation while the 2. Investigation – entails an analysis of the proposed
Board of Trustees is the governing body in a non- business to determine whether or not it is
stock corporation. economically feasible.
4. Corporate Officers – Officers who are identified as such 3. Assembly – Includes the bringing together of the
in the Corporation Code, the Articles of necessary personnel, property or money to set the
Incorporation, or the By-laws of the corporation. business in motion as well as secondary details of
setting up the corporation itself (De Leon, supra).
5. Stockholders – Owners of shares of stock in a stock
corporation. Promoter v. Promotee
6. Members – Corporators of a corporation which has no
PROMOTER PROMOTEE
capital stock. They are not owners of shares of stocks,
and their membership depends on terms provided in Those who merely
the articles of incorporation or by-laws (CC, Sec. Involved in the initial
subscribe to the shares of
91,CC). steps that finally led to the
stock of a corporation to
incorporation
be formed
7. Promoter – A person who, acting alone or with others,
takes initiative in founding and organizing the Promoters organize a
business or enterprise of the issuer and receives corporation and are active
Merely passive investors
consideration therefor. (Securites and Regulation participants in its
Code [SRC], Sec. 3.10) formation
A mere promotee should
8. Subscriber – persons who have agreed to take and pay Promoter(s) have joint not be held liable for a
for original, unissued shares of a corporation formed personal liability for a promoter’s liability in a
or to be formed. corporation which was not corporation which was not
formed formed
9. Underwriter – a person who guarantees on a firm
commitment and/or declared best effort basis the Relation of the promoter to the corporation
distribution and sale of securities of any kind by
another. The promoter occupies a fiduciary or quasi-trust relation
toward the corporation when it comes into existence and

MERCANTILE LAW
towards the subscribers prior to its organization, as long promotional or development expenses and it is so
as they are acting as promoters (De Leon, supra).This applied, the promoters are not personally liable for the
fiduciary relation imposes upon the promoter to act in amount paid on the subscription (De Leon, 2010).
good faith in all dealings in behalf of the corporation to
protect the corporation from dishonest promoters (ibid). 2. If Corporation was formed;
Promoter is not an agent of the corporation GR: If the contract is partly to be performed before
incorporation, the promoters solely are liable even if the
The promoters are not in any sense agents of the promoter signed "on behalf of corporation to be formed,
corporation before it comes into existence for there who will be obligor" (Stanley J. How & Assoc., Inc. v. Boss,
cannot be an agency unless there is a principal. But, they 222 F. Supp. 936, 1963 U.S. Dist. 1963).
may become the agents of the corporation after it has
been formed provided there is assent, express or implied, XPN: The promoter may be absolved from liability by the
on the part of the corporation (ibid). adoption of the corporation of the contract. The adoption
must be expressed in a novation or agreement to the
Promoter as agent of an incorporator/corporator/ effect:
subscriber before the commencement of the 1. That the creditor agreed to look solely to the new
corporate existence corporation for payment; or
2. That the promoter did not have any duty toward the
Before the corporation is formed, the promoters are creditor to form the corporation and give the corporation
considered agents of the subscribers, the incorporators or the opportunity to assume and pay the liability (ibid).
corporators.
LIABILITY OF CORPORATION FOR PROMOTER’S
NOTE: The subscribers for stock in a proposed CONTRACT
corporation do not, without agreement to such effect,
become partners with the promoters of it (ibid). GR: Since a corporation cannot, before its organization,
have agents contract for itself, or be contracted with, it is
Promoter v. Corporation by estoppel not liable upon any contract which a promoter attempts
to make for it prior to its organization.
CORPORATION BY
PROMOTER
ESTOPPEL XPNs:
Persons assume to act as 1. The contract is expressly or impliedly adopted or
No misrepresentation that ratified by the corporation after its organization is
a corporation knowing it
the corporation does not completed or
to be without authority
yet exist 2. Liability is imposed by statute.
to do so
LIABILITY OF PROMOTER NOTE: Until such assumption of liability is made by the

corporation, the better rule is that the contracts entered
Rules governing the liability of promoters in pre- into by promoters “should at most be deemed suspended
incorporation agreements and enforceable only after the incorporation and
organization” of the corporation (Ibid).
1. If Corporation was never formed - The promoter is liable
for his pre-incorporation acts and assumes the risk that Liability of corporation for promotion fees
he may not be reimbursed or relieved of liability in the
event that the corporation is not formed (Wells v. Fay & GR: The corporation is not liable to its promoters for their
Egan Co., 143 Ga. 732).If the promoter contracts as an service fees incurred before incorporation.
agent, when in fact he has no principal, he will be
personally liable (Ibid). XPNs:
1. The corporation expressly agrees to make such
Thus, payment or;
2. From other facts the court can infer a new contract to
GR: The promoter is liable to return the money paid by reimburse (Ibid) or
the subscribers for shares in a projected corporation, 3. If the same is provided for in the registration
which failed to organize, this notwithstanding that the statement of securities filed with the SEC (Sec. 8[34],
money has been already applied in payment of Revised Securities Act).
preliminary expenses or otherwise.
Stockholders of the corporation cannot be held
NOTE: It must be shown by the subscriber that the person personally liable for compensation claimed by
receiving the money sought to be recovered was promoters
authorized to receive it and the fact that the said person
actually received it. Stockholders cannot be held personally liable for the
compensation for services performed by promoters in the
XPN: Where the subscriber agrees that the amount paid organization of the corporation in the absence of any
on his subscription may be applied on certain showing that said stockholders contracted such services.

CORPORATION CODE
The fact that they benefited from such services is no upon sale of his case of stock
justification to hold them personally liable therefore shares corporation.
(Ibid., citing Caram, Jr. vs. CA, G.R. No. L-48627, June 30,
1987). In case of non-
stock corporation,
NUMBER AND QUALIFICATIONS OF INCORPORATORS when the
corporator ceases
Number and the qualifications of incorporators in a to be a member.
stock corporation (N5L - R1) GR: 5 to 15 natural
persons
1. GR: Natural person
XPN: Under the Rural Banks Act of 1992, XPNs:
incorporated cooperatives are allowed to be Number of GR: No limit
1. In case of rural
incorporators of rural banks. incorporator XPN: Close
banks, registered
s/corproator corporations
cooperatives may be
2. GR: Incorporators must not be less than 5 but not incorporators.
more than 15 2. corporation sole –
XPNS: only 1 incorporator
a) Corporation sole GR: Filipino
b) Educational institutions citizenship is not a
3. An incorporator must be of Legal age requirement.
4. Majority of the incorporators must be Residents of
the Philippines (2006 Bar). Filipino XPN: When engaged
5. Each must own or subscribe to at least 1 share Same rule applies
Citizenship in a business which
(Sec.10, CC). is partly or wholly
nationalized where
Q: What is the minimum and maximum number of majority must be
incorporators required to incorporate a stock citizens.
corporation? Is this also the same minimum and
maximum number of directors required in a stock NOTE: Non-residents may be incorporators because the
corporation? (2006, 2010 Bar) law only requires that the majority of incorporators be
residents of the Philippines.
A: Any number of natural persons not less than five (5)
but not more than fifteen (15) may form a private Q: X is a Filipino immigrant residing in Sacramento,
corporation. (CC. Section 10). Likewise, the number of California. Y is a Filipino residing in Quezon City,
directors must not be less than five (5) nor more than Philippines. Z is a resident alien residing in Makati
fifteen (15) as indicated in the AOI. (CC, SeC. 14). City. GGG Corporation is a domestic corporation –
40% owned by foreigners and 60% owned by
Q: Must all incorporators and directors be residents Filipinos, with T as authorized representative. CCC
of the Philippines? (2006 Bar) Corporation is a foreign corporation registered with
the Philippine Securities and Exchange Commission.
A: No. The Corporation Code only provides that majority KKK Corporation is a domestic corporation (100%)
of incorporators and directors of a corporation must be Filipino owned. S is a Filipino, 16 years of age, and the
residents of the Philippines, (CC, Secs. 10 and 23). daughter of Y.
Corporator v. Incorporator a.) Who can be incorporators? Who can be

subscribers?
BASIS INCORPORATOR CORPORATOR b.) What are the differences between an incorporator
Those stockholders and a subscriber, if there are any? (2012 Bar)
or members
Those who
mentioned in the A:
compose a
AOI as originally a.) X, Y, and Z can be incorporators. Sec. 10 of the CC
Who are corporation,
forming and merely requires majority of the incorporators to be
they? whether as
composing the residents (not necessarily citizens) of the Philippines.
stockholders or as
corporation and who Further, said incorporators must be natural persons, of
members.
are signatories legal age and must own or subscribe to at least 1 share.
thereof.
May or may not be Meanwhile, X, Y, Z, GGG, CCC, KKK can be subscribers.
Signatory of A signatory of the
signatory of the Residency requirement is immaterial in subscription
the AOI? AOI
AOI contracts. However, the citizenship requirement is
Effect upon Ceases to be a material in subscription contracts if the corporation is
Does not cease to be engaged in nationalized activities requiring at least
the sale of corporator by sale
an incorporator
his shares of his shares in majority Filipino citizenship as a requirement.

MERCANTILE LAW
b.) The following are the differences between an 2. No corporate name may be allowed by the SEC if the
incorporator and a subscriber: proposed name is identical or deceptively or
BASIS INCORPORATORS SUBSCRIBER confusingly similar to any other name already
protected by law (Sec. 18, CC).
They are
Those stockholders persons who 3. The proposed name is patently deceptive, confusing
or members have agreed to or contrary to existing laws (Sec. 18, CC).
mentioned in the take and pay for
Who are 4. If the name applied for is similar to the name of a
AOI as originally original,
they? registered firm, the applicant shall at least contain
forming and unissued shares
composing the of a corporation one or more distinctive words to the proposed name
corporation. formed or to be to remove the similarity or differentiate it from the
formed. registered name. However, the addition of these
May or may not distinctive words shall not be allowed if the
Signatory of A signatory of the registered name is coined or unique unless the board
be signatory of
the AOI? AOI of directors of the subject corporation gives its
the AOI
GR: 5 to 15 natural consent to the applied name (De Leon, 2010, citing
persons GR: No limit SEC Memo, Cir. No. 5, Series of 2008).
5. The corporate name shall contain the word

XPNs: XPN:Close
1. In case of rural corporations – “Corporation” or its abbreviation “Corp.” or
Number of “Incorporated”, or “Inc.” The corporate name of a
banks, registered not more than a
incorporator foundation shall use the word “Foundation” (SEC
cooperatives may specified
s/subscriber Memo. Circ. No. 5, Series of 2008).
be incorporators. number of
persons, usually
6. A person’s full name or surname may be used in a
2. corporation sole not exceeding
corporate name:
– only 1 20 (CC, Sec. 96).
a. If he is a stockholder of the corporation and
incorporator
has consented to such use;
GR: Filipino
b. If the person is already deceased, the consent
citizenship is not a
shall be given by his estate;
requirement.
c. The Commission may require a registrant to
explain to its satisfaction the reason for the use
XPN: When
Filipino Same rule of a person’s name;
engaged in a
Citizenship applies d. The meaning of initials used in a name shall be
business which is
stated by the registration the articles of
partly or wholly
incorporation in a separate document signed by
nationalized where
an incorporator or director (SEC Memo. Circ. No.
majority must be
5, Series of 2008).
citizens.
Majority of the 7. The name of a dissolved firm shall not be allowed to
Residency
Residence incorporators must be used by other firms within 3 years after the
requirement is
requirement be residents of the approval of the dissolution of the corporation by SEC,
not applicable.
Philippines. unless allowed by the last stockholders representing
at least majority of the outstanding capital stock of
CORPORATE NAME – LIMITATIONS ON USE OF the dissolved firm (SEC Memo. Circ. 14, Series of
CORPORATE NAME 2000).
Q: What is required to be used as a part of the 8. For as long as a corporation is existing regardless of
corporate name? whether or not it is in operation, its corporate name
cannot be used by any other group or corporation
A: The word, “corporation” or “incorporated” or an (SEC Opinion, Sept. 2, 1993).
abbreviation of either of them is required to be used as a
part of the corporate name. This is to distinguish the NOTE: Priority of adoption determines the right to the
corporation from a partnership and other business exclusive use of a corporate name with freedom from
organizations (SEC Memo. Circ. No. 5, Series of 2008). infringement. Further, to determine whether a given
corporate name is “identical” or “confusingly or
Limitations on the use of corporate name deceptively similar” with another entity’s corporate
name, the corporate names must be evaluated in their
1. No corporate name may be allowed by the SEC if the entirety (Lyceum of the Philippines v. CA, G.R. No. 101897,
proposed name is identical or deceptively or March 5, 1993).
confusingly similar to that of any existing corporation
(CC, Sec. 18). Q: Lepanto Consolidated Mining Company filed with
the RTC a Complaint against NM Rothschild & Sons

CORPORATION CODE
(Australia) Limited praying for a judgment declaring its identity and being represented by the same counsel as
the loan and hedging contracts between the parties that of the defendant in the case sought to be dismissed, is
void for being contrary to Article 2018 of the Civil the entity that will be benefited if this Court grants the
Code of the Philippines and for damages. NM dismissal prayed for.
Rothschild filed a Special Appearance with Motion to
Dismiss, but the same was denied. NM Rothschild Since the main objection of Lepanto to the verification and
sought redress via a Petition for Certiorari with the certification against forum shopping likewise depends on
Court of Appeals, alleging that the trial court the supposed inexistence of the corporation named
committed grave abuse of discretion in denying its therein, the Court gives no credit to said objection in light
Motion to Dismiss. The CA dismissed the petition. of the foregoing discussion (NM Rothschild & Sons
(Australia) Limited, v. Lepanto Consolidated Mining
Should NM Rothschild’s petition be dismissed for not Company, G.R. No. 175799, November 28, 2011).
being filed by a real party in interest and for lack of a
proper verification and certificate of non-forum Q: Refractories Corporation of the Philippines (RCP)
shopping? is a corporation for the purpose of engaging in the
business of manufacturing, producing, selling,
A: No. Lepanto argues that the present Petition should be exporting and otherwise dealing in any and all
dismissed on the ground that NM Rothschild no longer refractory bricks, its by-products and derivatives. On
existed as a corporation at the time said Petition was filed. June 22, 1977, it registered its corporate and business
Lepanto points out that as of the date of the filing of the name with the Bureau of Domestic Trade. Industrial
Petition, there is no such corporation that goes by the Refractories Corporation of the Philippines (IRCP) on
name NM Rothschild and Sons (Australia) Limited. Thus, the other hand, was incorporated originally under the
according to respondent, the present Petition was not name Synclaire Manufacturing Corporation. It
filed by a real party in interest, citing the Court’s ruling in amended its AOI on August 23, 1985 to change its
Philips Export B.V. v. Court of Appeals, wherein it held that corporate name to Industrial Refractories Corp. of the
a name is peculiarly important as necessary to the very Philippines. It is engaged in the business of
existence of a corporation. Its name is one of its attributes, manufacturing all kinds of ceramics and other
an element of its existence, and essential to its identity. products, except paints and zincs. Both companies are
The general rule as to corporations is that each the only local suppliers of monolithic gunning mix.
corporation must have a name by which it is to sue and be Discovering that IRCP was using such corporate
sued and do all legal acts. The name of a corporation in name, RCP filed with SEC a petition to compel IRCP to
this respect designates the corporation in the same change its corporate name on the ground that its
manner as the name of an individual designates the corporate name is confusingly similar with that of
person, and the right to use its corporate name is as much RCP’s such that the public may be confused or
a part of the corporate franchise as any other privilege deceived into believing that they are one and the
granted. same corporation. Is Industrial Refractories
Corporation of the Philippines confusingly similar
In its Memorandum before this Court, NM Rothschild with Refractories Corporation of the Philippines?
started to refer to itself as Investec Australia Limited
(formerly NM Rothschild & Sons [Australia] Limited) and A: Yes. To fall within the prohibition of the law, two
captioned said Memorandum accordingly. NM Rothschild requisites must be proven, to wit:(1) that the complainant
claims that NM Rothschild and Sons (Australia) Limited corporation acquired a prior right over the use of such
still exists as a corporation under the laws of Australia corporate name; and (2) the proposed name is either: (a)
under said new name. It presented before us documents identical, or (b) deceptively or confusingly similar to that
evidencing the process in the Australian Securities & of any existing corporation or to any other name already
Investment Commission on the change of NM Rothschild’s protected by law; or (c) patently deceptive, confusing or
company name from NM Rothschild and Sons (Australia) contrary to existing law. In this case, RCP was
Limited to Investec Australia Limited. incorporated on October 13, 1976 and since then has been
using the corporate name “Refractories Corp. of the
The Court finds the submissions of NM Rothschild on the Philippines”. Meanwhile, IRCP was incorporated on
change of its corporate name satisfactory and resolve not August 23, 1979 originally under the name “Synclaire
to dismiss the present Petition for Review on the ground Manufacturing Corporation”. It only started using the
of not being prosecuted under the name of the real party name “Industrial Refractories Corp. of the Philippines”
in interest. While the Court stands by its when it amended its Articles of Incorporation on August
pronouncement in Philips Export on the importance of the 23, 1985, or nine (9) years after respondent RCP started
corporate name to the very existence of corporations and using its name. Thus, being the prior registrant,
the significance thereof in the corporations right to sue, it respondent RCP has acquired the right to use the word
shall not go so far as to dismiss a case filed by the proper “Refractories” as part of its corporate name (Industrial
party using its former name when adequate identification Refractories Corporation of the Philippines v. CA, et al., G.R.
is presented. A real party in interest is the party who No. 122174, October 3, 2002).
stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit. There is
no doubt in the Court’s mind that the party who filed the
present Petition, having presented sufficient evidence of

MERCANTILE LAW
Doctrine of Secondary Meaning regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
It is the doctrine which states that a word or phrase discretionary on the bank. Unless there is a law,
originally incapable of exclusive appropriation with regulation or circular from the SEC or BSP requiring the
reference to an article on the market, because formal notification of all debtors of banks of any change in
geographically or otherwise descriptive, might corporate name, such notification remains to be a mere
nevertheless have been used so long and so exclusively by internal policy that banks may or may not adopt. A change
one producer with reference to his article that, in that in the corporate name does not make a new corporation,
trade and to that branch of the purchasing public, the whether effected by a special act or under a general law. It
word or phrase has come to mean that the article was his has no effect on the identity of the corporation, or on its
product (Philippine Nut Industry, Inc. vs. Standard Brands. property, rights, or liabilities. The corporation, upon such
Inc. G.R. No.L-23035, July 31, 1975). change in its name, is in no sense a new corporation, nor
the successor of the original corporation. It is the same
The doctrine of secondary meaning requires that the corporation with a different name, and its character is in
word or phrase used in the corporate name has been for no respect changed (P.C. Javier & Sons, Inc., v. CA et al., G.R.
such length of time with such exclusivity as to have No. 129552, June 29, 2005).
associated or identified the corporation in the mind of the
general public (or at least that portion of the general CORPORATE TERM
public to do with the corporation’s market) (Lyceum of the
Philippines vs. CA, supra). Term of corporate existence
NOTE: The application of this trademark law doctrine has GR: The period stated in the AOI, this in no case, shall
been extended to corporate names since the right to use a exceed 50 years.
corporate name to the exclusion of others is based upon
the same principle which underlies the right to use a XPN: Unless sooner dissolved or unless said period is
particular trademark or trade name (De Leon, 2010). extended (CC, Sec. 11).
A corporation that changes its corporate name is not NOTE: Extension may be made for periods not exceeding
considered as a new corporation 50 years in any single instance by an amendment of the
articles of incorporation. However, extension must be
A corporation that changes its corporate name is not made within 5 years before the expiry date of the
considered as a new corporation. It is the same corporate term, unless there are justifiable reasons for an
corporation with a different name, and its character is in earlier extension as may be determined by the SEC (CC,
no respect changed (Republic Planters Bank v. CA, G.R. No. Sec. 11).
93073, December 21, 1992).
Extension must also comply with procedural
Q: P.C. Javier and Sons Services, Inc., (PC) applied with requirements for amendment of AOI.
First Summa Savings and Mortgage Bank, later on
renamed as PAIC Savings and Mortgage Bank (The Doctrine of Relation or Relating Back Doctrine
Bank) for a loan accommodation under the Industrial
Guarantee Loan Fund (IGLF). Upon maturity, PC failed GR: The filing and recording of a certificate of extension
to pay, hence, the Bank initiated an extrajudicial after the term cannot relate back to the date of the
foreclosure of the real estate mortgage. The instant passage of the resolution of the stockholders to extend the
complaint was filed to forestall the extrajudicial life of the corporation.
foreclosure sale of a piece of land mortgaged by PC in
favor of PAIC Savings and Mortgage Bank, Inc. PC XPNs: The doctrine of relation applies if the failure to file
argues that they are legally justified to withhold their the application for extension within the term of the
amortized payments to the bank until such time they corporation is due to:
would have been properly notified of the change in 1. The neglect of the SEC officer with whom the certificate
the corporate name. They claim that they have never is required to be filed; or
received any formal notice of the alleged change of 2. A wrongful refusal on his part to receive it (Aquino,
corporate name of First Summa Savings and Mortgage 2006).
Bank to PAIC Savings & Mortgage Bank, Inc. Is the
Bank required to notify PC Javier & Sons, Inc., of the Q: The term GGG Corporation in accordance with its
change in its corporate name? Articles of Incorporation ended last January 30, 2012.
The term was not extended. What will happen to the
A: No. The bank is not required to notify PC of its change corporation? (2012 Bar)
of name. After going over the Corporation Code and
Banking Laws, as well as the regulations and circulars of A: A. The corporation ceases to exist and is dissolved ipso
both the SEC and the Bangko Sentral ng Pilipinas (BSP), facto upon the expiration of the period fixed in the
the Supreme Court found that there is no such original AOI, in the absence of compliance with the legal
requirement. This being the case, the Court cannot impose requisites of extension of period (PNB vs. CFI of Rizal, G.R.
on a bank that changes its corporate name to notify a No. 63201, May 27, 1992).
debtor of such change absent any law, circular or

CORPORATION CODE
MINIMUM CAPITAL STOCK AND SUBSCRIPTION CONTENTS
REQUIREMENTS (1990 Bar)
Capital stock requirements All corporations organized under the Code shall file with
the SEC an AOI in any of the official languages duly signed
GR: There is no minimum authorized capital stock as long and acknowledged by all of the incorporators, containing
as the paid-up capital is not less than P5,000.00. substantially the following matters, except as otherwise
prescribed by the Code or by special law: (NaP-
XPN: As provided by special law. PlaTINum-ASONO)
Minimum stock subscription and paid-up capital 1. NAme of corporation

requirements
2. Purpose/s, indicating the primary and secondary
At least 25% of the authorized capital stock as stated in purposes(Purpose Clause)
the AOI must be subscribed at the time of incorporation,
and at least 25% of the total subscription must be paid 3. PLAce of principal office
upon subscription (Sec 13, CC).
4. Term of existence
Each subscriber is not required to pay 25% of
eachsubscribed share 5. Names, nationalities and residences of Incorporators
It is not required that each subscriber pay 25% of each 6. NUMber of directors or trustees, which shall not be
subscribed share. It is only required that at least 25% of less than 5 nor more than 15, except for corporation
the total subscribed capital must be paid. sole
Paid-up capital 7. Names, nationalities, and residences of the persons

who shall Act as directors or trustees until the first
Paid-up capital forms part of the authorized capital stock regular ones are elected and qualified
of the corporation, subscribed and then actually paid for.
The assets transferred and the loans extended to a 8. If a Stock corporation, the amount of its authorized
corporation should not be considered in computing the capital stock, number of shares and in case the shares
paid-up capital of the corporation (MISCI-NACUSIP Local are par value shares, the par value of each share;
Chapter v. National Wages and Productivity Commission,
G.R. No. 125198, March 3, 1997). 9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the Original
subscribers which shall not be less than 25% of
Time when the unpaid subscription is payable
authorized capital stock;
The balance or the unpaid subscription shall be payable:
10. If Non-stock, the amount of capital, the names,
1. On a date or dates fixed in the contract of subscription
residences, and amount paid by each contributor,
without need of call;, or
which shall not be less than 25% of total
2. In the absence of a fixed date or dates, upon call for
subscription; name of treasurer elected by
payment by the BOD (Sec. 13, CC).
subscribers; and
ARTICLES OF INCORPORATION (AOI)
11. Other matters as are not inconsistent with law and
which the incorporators may deem necessary and
NATURE AND FUNCTION OF ARTICLES
convenient (Sec. 14, CC).
Articles of Incorporation
Incorporator may delegate the signing of the AOI
The Articles of Incorporation (AOI) is one that defines the
An incorporator may delegate to an attorney-in-fact the
charter of the corporation and the contractual
signing of the AOI in a special power of attorney to such
relationships between the State and the corporation, the
effect. However, the acknowledgment required under Sec.
stockholders and the State, and between the corporation
15 of the CC must reflect this fact (De Leon, 2010, citing
and its stockholders (Government of the Philippine Islands
SEC Opinion, Dec. 26, 1972).
v. Manila Railroad Co., G.R. No. L-30646, January 30, 1929).
Reason for the statement of the purpose clause in the
Three-fold nature of AOI
AOI
An AOI, which stands as the corporate charter is a
The purpose clause determines whether the acts
contract of three-fold nature because it is a contract
performed by the corporation are authorized or beyond
between:
its powers. Acts beyond the corporation’s powers are
1. The State and the corporation;
called ultra vires acts.
2. The corporation and the stockholders; and
3. The stockholders inter se.

MERCANTILE LAW
Rules in the statement of the purpose clause XPN: However, SEC has authority to pass upon the
lawfulness of the object or purpose of the corporation as
1. If there is more than one stated purpose, specify which expressed in the AOI. Such determination is an exercise of
the main or primary purpose is and which is or are the judgment, that is, judicial function on a question of law
secondary or subsidiary purpose/s (Sec. 14[2], CC). (ibid).
NOTE: This specification is important in the application of NOTE: If the SEC errs in the determination of the
the prohibition under Sec. 42 of the CC which states that lawfulness of the purpose of the corporation stated in the
the corporation is prohibited from investing corporate AOI and refuses to file the said AOI, its decision is subject
funds “for any purpose other than the primary purpose to review and correction by the court (ibid).
for which it was organized” unless such investment is
approved by both majority of the BOD or BOT and ratified AMENDMENT
by the stockholders representing at least 2/3 of the
outstanding capital stock or by at least 2/3 of the Limitations in the amendment of AOI
members in the case of a non-stock corporation.
1. The amendment must be for legitimate purposes and
2. The purposes must be capable of being lawfully must not be contrary to other provisions of the CC and
combined. special laws;
3. A non-stock corporation may not include a purpose 2. Approved by majority of BOD/BOT;

which would change or contradict its nature as such
(ibid). 3. Vote or written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of members;
Requirements of the SEC as regards the address
specification of the corporation in the AOI 4. The original and amended articles together shall
contain all provisions required by law to be set out in
SEC requires that the applicant corporation must state in the AOI. Such articles, as amended, shall be indicated
its AOI the: by underscoring the change/s made;
1. Specific address of their principal office, which shall
include, if feasible, the street name, barangay, city or 5. Certification under oath by corporate secretary and a
municipality; and majority of the BOD/BOT stating the fact that said
2. Specific residence address of each incorporator, amendment/s have been duly approved by the
stockholder, director, trustee, or partner. required vote of the stockholders or members, shall be
submitted to the SEC;
NOTE: SEC likewise prohibits the use of “Metro Manila” as
address of the principal office. 6. Must be approved by SEC (Sec. 16, CC);
Residence of the corporation 7. Must be accompanied by a favorable recommendation

of the appropriate government agency in cases of:
The corporation is “in a metaphysical sense a resident of a. Banks
the place where its principal office is located as stated in b. Banking and quasi-banking institutions
the AOI” (Golden Arches Dev’t Corp. vs. St. Francis Square c. Building and loan associations
Holdings, Inc., GR 183843, January 19, 2011).This ruling d. Trust companies and other financial
regarding the residence of the corporation holds true intermediaries
even though the corporation has closed its office therein e. Insurance companies
and relocated to another place (Hyatt Elevators and f. Public utilities
Escalators Corp. vs. Goldstar Elevators Phils., Inc., GR g. Educational institutions
161026, Oct. 24, 2005). h. Other corporations governed by special laws (Sec.
17 [2], CC)
Duty of the SEC to file the AOI and to issue a certificate
of incorporation Time when the amendment of the AOI takes effect
GR: The duty of the SEC to file the AOI and to issue a The amendment of the AOI takes effect either:
certificate of incorporation is ministerial provided that 1. Upon approval by the SEC, that is, upon issuance of
the AOI substantially comply with the statute. The SEC’s amended certificate of incorporation or
discretion can only be exercised on matters of form and 2. From the date of filing with the SEC:
does not extend to the merits of an application for a. If not acted upon within 6 months from the date of
incorporation (Asuncion vs. De Yriarte, GR No. 9321, filing; and
Sepember 24, 1914). b. For a cause not attributable to the corporation.
NOTE: If the SEC refuses to file the AOI, which NOTE: The provision on automatic approval in Sec. 16
substantially complied with the statute, the remedy of the does not apply to the dissolution of the corporations in the
applicant is to file a petition for mandamus (ibid). light of Sec. 120, CC (SEC Opinion, March 30, 1982).

CORPORATION CODE
Conversion of a stock corporation into a non-stock No automatic rejection of the AOI or any amendment
corporation (2001 Bar) thereto
A stock corporation may be converted into a non-stock There is no automatic rejection of the AOI or any
corporation by mere amendment provided, all the amendment thereto. The SEC shall give the incorporators
requirements are complied with. Its rights and liabilities a reasonable time within which to correct or modify the
will remain (CC, Sec. 16). objectionable portions of the AOI or amendment (Sec.
17[1], CC).
Note: A non-stock corporation cannot be converted into a
stock corporation through mere amendment of its Effect of non-use of corporate charter and continuous
Articles of Incorporation. This would violate Section 87 of inoperation of a corporation
the Corporation Code, which prohibits distribution of
income as dividends to members. Giving the members 1. Failure to organize and commence business within 2
shares, is tantamount to distribution of its assets or years from incorporation – its corporate powers
income (SEC Opinion, March 20, 1995). Under Section 122 ceases and the corporation shall be deemed
of the Corporation Code, th non-stock corporation must dissolved.
be dissolved first.
2. Continuous inoperation for at least 5 years – ground for
NON-AMENDABLE ITEMS the suspension or revocation of corporate franchise
or certificate of incorporation (Sec. 22, CC).
Non-amendable items in the AOI
NOTE: The above shall not be applicable if it is due to
Those matters referring to accomplished facts, except to causes beyond the control of the corporation as
correct mistakes. E.g. determined by SEC.
1. Names of incorporators
2. Names of original subscribers to the capital stock of the Suspension or revocation of the certificate of
corporation and their subscribed and paid up capital registration due to failure to operate or continuous
3. Names of the original directors inoperation is not automatic
4. Treasurer elected by the original subscribers
5. Members who contributed to the initial capital of the Under PD No. 902-A, SEC should afford due process or
non‐stock corporation proper notice and hearing before the suspension or
6. Witnesses to and acknowledgment with AOI revocation of certificate of registration. The suspension or
revocation of the certificate of registration due to failure
Grounds for the rejection or disapproval of the AOI or to operate or continuous inoperation is not automatic.
amendment thereto
REGISTRATION AND ISSUANCE OF CERTIFICATE OF
1. If such is not substantially in accordance with the INCORPORATION
form prescribed by the CC;
2. The purpose/s of the corporation is/are patently Basic requirements for the registration and issuance
unconstitutional, illegal, immoral, or contrary to of a certificate of incorporation of a stock corporation
government rules and regulations;
3. The treasurer’s affidavit concerning the amount of 1. Name verification slip;
capital stock subscribed and/or paid is false; 2. AOI and by-laws;
4. The required percentage of ownership of the capital 3. Treasurer’s affidavit;
stock to be owned by Filipino citizens has not been
complied with (CC, Sec. 17). NOTE: Content of a treasurer’s affidavit
NOTE: The above grounds are not exclusive. The grounds That at least 25% of the authorized capital stock of the
according to PD No. 902‐A are: corporation has been subscribed, and at least 25% of the
1. Fraud in procuring its certificate of total subscription has been fully paid in actual cash
incorporation; and/or property; such paid-up capital being not less than
2. Serious misrepresentation as to what the P5,000 (Sec. 14, 15, CC).
corporation can do or is doing to the great
prejudice of, or damage to, the general public; 4. Registration data sheet;
3. Refusal to comply with, or defiance or a lawful 5. Proof of payment of subscription like Bank Certificate
order of the SEC restraining the commission of of Deposit if the paid-up capital is in cash;
acts which would amount to a grave violation of 6. Favorable endorsement from proper government
its franchise; agency in case of special corporations; and
4. Continuous inoperation for a period of at least 7. Undertaking of incorporators or directors to change
five (5) years after commencing the transaction corporate name.
of its business (CC, Sec. 22);
5. Failure to file the by‐laws within the required Q: You are asked to incorporate a new company to be
period; called FSB Savings & Mortgage Bank,Inc. List the
6. Failure to file required reports. documents that you must submit to the Securities and

MERCANTILE LAW
Exchange Commission(SEC) to obtain a Certificate of corporate incident, said power is expressed in Sec. 36(5)
Incorporation for FSB Savings & Mortgage Bank,Inc. and Sec. 46 of the CC.
(2002 Bar)
The by-laws supplement the AOI. The function of by-laws
A: The documents to be submitted for the issuance of a is to define the rights and duties of corporate officers and
certificate of incorporation in favor of FSB Savings & directors or trustees, and of stockholders or members
Mortgage Bank, Inc. are the following: towards the corporation and among themselves with
 Articles of Incorporation reference to the management of corporate affairs and to
 Treasurer’s Affidavit regulate transaction of the business of the corporation in
 Certificate of Authority by the Monetary Board a particular way (De Leon, 2010).
of BSP
 Verification slip from the records of the SEC A corporation sole is not governed by by-laws
whether or not the proposed name has already
been registered under a different entity A corporation sole is not govered by by-laws. It is instead
 An undertaking stating the proposed name shall governed by Rules, Regulations and Discipline of its
be changed in case another entity has been religious denomination which already contain the
registered under the proposed name provisions embodied in the by-laws of ordinary
 Registration sheet corporations.
 Bank certificate of deposit covering the paid-up
capital REQUISITES OF VALID BY-LAWS
 Letter containing authorization to the SEC or (2000, 2001 Bar)
Monetary Board or any of its duly authorized
representative to inspect bank records The following are the requisites for the validity of by-
concerning the paid-up capital laws: (CoMorO-RAG)
1. Must be consistent with the COrporation Code,
Doctrine of corporate entity other pertinent laws and regulations
GR: A corporation comes into existence upon the issuance 2. Must not be contrary to MORals and public policy
of the certificate of incorporation by the SEC under its
3. Must not impair Obligations and contracts or
official seal. Then and only then will it acquire a juridical
property rights of stockholders
personality (CC, Sec. 19).
4. Must be Reasonable
XPN: In case of a corporation sole, the corporation sole
commences existence upon the filing of the articles of
5. Must be consistent with the charter or AOI
incorporation.
6. Must be of General application and not directed
ADOPTION OF BY-LAWS against a particular individual.
By-laws Rule in case of conflict between the by-laws and the
AOI
By-laws are rules and regulations or private laws enacted
by the corporation to regulate, govern and control its own In case of conflict between the by-laws and the AOI, the
actions, affairs and concerns and of its stockholders or AOI prevails because the by-laws are intended merely to
members and directors and officers in relation thereto supplement the former.
and among themselves in their relation to it (Valley Golf &
Country Club, Inc. vs. Vda. De Caram, GR 158805, April 16, BINDING EFFECTS
2009).
Contents of by-laws
By-laws are relatively permanent and continuing rules of
action adopted by the corporation for its for its own 1. Time, place and manner of calling and conducting
government and that of individuals composing of it and regular or special meetings of directors or trustees
those having the direction, management, and control of its
affairs, in whole or in part, in the management and control 2. Time and manner of calling and conducting regular
of its affairs and activities (China Banking Corporation v. or special meetings of the stockholder or members
CA, G.R. No. 117604, March 26, 1997).
3. The required quorum in meeting of stockholders or
NATURE AND FUNCTIONS OF BY-LAWS members and the manner of voting therein
Nature and functions of by-laws 4. The form for proxies of stockholders and members
and the manner of voting them
The corporate power to adopt by-laws is inherent in every
corporation. However, to give emphasis to such necessary 5. The qualification, duties and compensation of
directors or trustees, officers and employees

CORPORATION CODE
6. Time for holding the annual election of directors or 2. As to third persons – 3rd persons are not bound unless
trustees and the mode or manner of giving notice they have knowledge of by-laws. (PMI College vs.
thereof NLRC, G.R. No. 121466, August 15, 1997).
7. Manner of election or appointment and the term of NOTE: By-laws have no extra-corporate force and are not
office of all officers other than directors or trustees in the nature of legislative enactments so far as third
persons are concerned.
8. Penalties for violation of the by-laws
Q: PMI Colleges (PMI) an educational institution
9. In case of stock corporations, the manner of issuing offering courses on basic seaman’s training and other
certificates marine-related courses, hired Alejandro Galvan as
contractual instructor. Pursuant to this engagement,
10. Such other matters as may be necessary for the proper Galvan then organized classes in marine
or convenient transaction of its corporate business engineering.Initially, Galvan and other instructors
and affairs (CC, Sec. 47). were compensated for services rendered during the
first three periods of the abovementioned
Adoption of the Original By-laws contract. However, for reasons unknown, Galvan
stopped receiving payment for the succeeding
Filed within one (1) month from notice of issuance of rendition of services. Despite repeated demands, PMI
certificate of incorporation , in which case it must be: (i) failed to pay and hence, Galvan filed a
approved by stockholders constituting at least a majority complaint seeking payment for salaries earned. In the
of outstanding capital and (ii) a copy (signed by approving proceedings, PMI manifested that a member of the
stockholders or members, certified by majority of PMI’s Board of Trustees wrote a letter to the
directors or trustees, and countersigned by corporate Chairman of the Board clarifying the case of Galvan
secretary) filed with the SEC. and stating therein, inter alia, that under PMI’s by-
laws only the Chairman is authorized to sign any
Note: Non-filing within one (1) month is a ground to contract. Hence, according to PMI, the employment
forfeit franchise and does not result in automatic contract which was not signed by the Chairman is not
dissolution (LGVHAI vs. CA, G.R. No. 117188, August 7, binding upon PMI.
1997).
Is the employment contract invalid because it
Procedures in adopting by-laws violated PMI’s by-laws stating that the Chairman of
the BOD should be the signatory thereon?
The by-laws may be adopted before or after
incorporation. In all cases, the By-laws shall be effective A: No. The employment contract is not invalidated by the
only upon the issuance by the SEC of a certification that failure of the Chairman to sign such. Since by-laws operate
the by-laws are not inconsistent with the AOI. merely as internal rules among the stockholders, they
cannot affect or prejudice third persons who deal with the
1. Pre - incorporation – It shall be approved and signed by corporation, unless they have knowledge of the same.No
all the incorporators and submitted to the SEC, together proof appears on record that Galvan ever knew anything
with AOI. about the provisions of said by-laws. In fact, PMI itself
merely asserts the same without even bothering to attach
2. Post – incorporation a copy or excerpt thereof to show that there is such a
a. Vote of the majority of the stockholders provision (PMI Colleges v. NLRC, et al., supra).
representing the outstanding capital stock or
members; Q: FEPI., a party to a Project Agreement to develop the
b. By-laws shall be signed by the stockholders or Forest Hills Residential Estates and the Forest Hills
members voting for them Golf and Country Club, undertook to market the golf
c. It shall be kept in the principal office of the club shares of Forest Hills Golf and Country Club, Inc.
corporation and subject to the inspection of the for a fee. FEPI assigned its rights and obligations
stockholders ore members during office hours under the Project Agreement to FEGDI. FEPI and
d. Copy thereof, duly certified by the BOD or BOT FEGDI engaged FEMAI to market and offer for sale the
countersigned by the secretary of the corporation, shares of stocks of Forest Hills. Membership in the
shall be filed with the SEC and shall be attached Club was a privilege, such that purchasers of shares of
with the original AOI (Sec. 46, CC). stock would not automatically become members of
the Club, but must apply for and comply with all the
Binding effects of by-laws requirements in order to qualify them for
membership, subject to the approval of the Board of
The following are the binding effects of by-laws: Directors.
1. As to members/ stockholders, officers, trustees/ directors Gardpro, Inc. bought class “C” common shares of
and corporation – They are bound by and must stock, which were special corporate shares that
comply them. They are presumed to know the entitled the registered owner to designate two
provisions of the by-laws. nominees or representatives for membership in the

MERCANTILE LAW
Club. Subsequently, Albert, the General Manager of for the revocation
the Club, notified the shareholders that it was already of the franchise
accepting applications for membership. In that Essentially a
regard, Gardpro designated Martin and Reyes to be its For the internal
contract between
nominees; hence, the two applied for membership in government artiof
the corporation
the Club. Forest Hills charged them membership fees the corporation
and the
each. With Albert assuring that the fees were but has the force of
stockholders/
temporary, both nominees of Gardpro paid the fees. a contract between
members;
Both nominees of Gardpro were then admitted as Essence the corporation
between the
members upon approval of their applications by the and the
stockholders/
Board of Directors. Later, Gardpro decided to change stockholders/
member inter se,
its designated nominees, and Forest Hills charged members, and
and between the
Gardpro new membership fees per nominee. When between the
corporation and
Gardpro refused to pay, the replacement did not take stockholders and
the State;
place. Later, Gardpro filed a complaint in the SEC. members;
May be executed
Is Forest Hill’s act authorized under its articles of after
incorporation and by-laws to collect new incorporation. Sec.
membership fees for the replacement nominees of Time of Executed before 46 allows the filing
Gardpro? execution incorporation of the by-laws
simultaneously
A: No. The relevant provisions of the articles of with the Articles of
incorporation and the by-laws of Forest Hills governed Incorporation
the relations of the parties as far as the issues between
Amended by a
them were concerned. The charter and the by-laws were
majority of the
thus the fundamental documents governing the conduct
directors/ May be amended
of Forest Hills’ corporate affairs; they established norms
trustees and by a majority vote
of procedure for exercising rights, and reflected the
stockholders of the BOD and
purposes and intentions of the incorporators. Until
representing 2/3 majority vote of
repealed, the by-laws were a continuing rule for the Manner of
of the outstanding
government of Forest Hills and its officers, the proper amendment
outstanding capital stock or a
function being to regulate the transaction of the incidental
capital stock, or majority of the
business of Forest Hills. The by-laws constituted a binding
2/3 of the member in non-
contract as between Forest Hills and its members, and as
members in case stock corporation
between the members themselves. Every stockholder
of non-stock
governed by the by-laws was entitled to access them. The corporations
by-laws were self-imposed private laws binding on all
members, directors and officers of Forest Hills. The
AMENDMENT OR REVISION
prevailing rule is that the provisions of the articles of
incorporation and the by-laws must be strictly complied
Ways of amending, repealing or adopting new by-laws
with and applied to the letter (Forest Hills Golf and Country
Club, Inc. v. Gardpro, Inc. G.R. No. 164686, October 22,
1. Amendment may be made by stockholders together with
2014).
the Board – by majority vote of directors and owners of at
least a majority of the outstanding capital
Effect of non-filing of the by-laws within the required
stock/members; or
period
3. By the board only after due delegation by the
Failure to submit the by-laws within 30 days from
stockholders owning 2/3 of the outstanding capital
incorporation does not automatically dissolve the
stock/members. Provided, that such power delegated to
corporation. It is merely a ground for suspension or
the board shall be considered as revoked whenever
revocation of its charter after proper notice and hearing.
stockholders owning at least majority of the outstanding
The corporation is, at the very least, a de facto corporation
capital stock or members, shall vote at a regular or special
whose existence may not be collaterally attacked
meeting (CC, Sec. 48).
(Sawadjaan v. CA, G.R. No. 142284, June 8, 2005).
Articles of incorporation v. By-laws
BASIS AOI BY-LAWS

Condition
Requirement Condition
precedent in the
for subsequent; its
acquisition of
corporate absence merely
corporate
existence furnishes a ground
existence

CORPORATION CODE
CORPORATE POWERS the corporation, save in those instances where the Code
requires stockholders’ approval for certain specific acts
1. Express powers – granted by law, Corporation Code, and (Great Asian Sales Center Corporation v CA, G.R. No.
its Articles of Incorporation or Charter, and 105774, April 25, 2002).
administrative regulations;
Q: Eliodoro C. Cruz was theformer president of
2. Inherent/incidental powers – not expressly stated but Filport.During the general stockholders’ meeting, he
are deemed to be within the capacity of corporate wrote a letterto the corporation’s Board of Directors
entities; questioning the board’s creation of certain positions
with their corresponding monthly renumeration.
3.Implied/necessary powers – exists as a necessary Because his letter was not heeded favorably, Cruz,
consequence of the exercise of the express powers of purportedly in representation of Filport and its
the corporation or the pursuit of its purposes as stockholders, among which is Mindanao Terminal
provided for in the Charter. and Brokerage Services, Inc. (Minterbro), filed with
SEC a petition which he describes as a derivative suit
Q: Sea Lion International Port Terminal Services, Inc. against the the incumbent members of Filport’s Board
filed a complaint for prohibition and mandamus of Directors, for alleged acts of mismanagement
against NPC and Philippine Ports Authority (PPA), detrimental to the interest of the corporation and its
wherein Sea Lion alleged that NPC had acted in bad shareholders at large. Did Filport’s Board of Directors
faith and with grave abuse of discretion in not act within its powers in creating the executive
renewing its contract for stevedoring services for committee and the positions of AVPs for Corporate
coal-handling operations at NPC's plant, and in taking Planning, Operations, Finance and Administration,
over its stevedoring services. The RTC ruled in favor and those of the Special Assistants to the President
of Sea Lion. National Power Corporation (NPC), seeks and the Board Chairman, each with corresponding
to annul the order of the RTC in issuing a writ of remuneration?
preliminary injunction which enjoined NPC from
further undertaking stevedoring and arrastre A: Yes. The governing body of a corporation is its board
services in its pier and directing it either to enter into of directors. Section 23 of the Corporation Code explicitly
a contract for stevedoring and arrastre services or to provides that unless otherwise provided therein, the
conduct a public bidding therefor. Does NPC have the corporate powers of all corporations formed under the
power to undertake stevedoring and arrastre Code shall be exercised, all business conducted and all
services in its pier? property of the corporation shall be controlled and held
by a board of directors. Thus, with the exception only of
A: Yes. NPC has the power to undertake stevedoring and some powers expressly granted by law to stockholders
arrastre services. To carry out the national policy of total (or members, in case of non-stock corporations), the
electrification of the country, the NPC was created and board of directors (or trustees, in case of non-stock
empowered not only to construct, operate and maintain corporations) has the sole authority to determine policies,
power plants, reservoirs, transmission lines, and other enter into contracts, and conduct the ordinary business of
works, but also to exercise such powers and do such the corporation within the scope of its charter, i.e., its
things as may be reasonably necessary to carry out the articles of incorporation, by-laws and relevant provisions
business and purposes for which it was organized, or of law. Verily, the authority of the board of directors is
which, from time to time, may be declared by the Board to restricted to the management of the regular business
be necessary, useful, incidental or auxiliary to accomplish affairs of the corporation, unless more extensive power is
said purpose. If that act is one which is lawful in itself and expressly conferred. In the present case, the board’s
not otherwise prohibited, and is done for the purpose of creation of the subject positions was in accordance with
serving corporate ends, and reasonably contributes to the the regular business operations of Filport as it is
promotion of those ends in a substantial and not in a authorized to do so by the corporation’s by-laws,
remote and fanciful sense, it may be fairly considered pursuant to the Corporation Code (Filipinas Port Services,
within the corporation's charter powers. The rule is that Inc., v. Victoriano S. Go, et al., G.R. No. 161886, March 16,
a corporation is not restricted to the exercise of powers 2007).
expressly conferred upon it by its charter, but has the
power to do what is reasonably necessary or proper to Three levels of control in the corporate hierarchy
promote the interest or welfare of the corporation. The
stevedoring services which involve the unloading of the 1. The board of directors, which is responsible for
coal shipments into the NPC pier for its eventual corporate policies and the general management of
conveyance to the power plant are incidental and the business affairs of the corporation;
indispensable to the operation of the plant (National
Power Corporation, v. Honorable Abraham P. Vera, et al., 2. The officers of the corporation, who in theory execute
G.R. No. 83558, February 17, 1989). the policies laid down by the board, but in practice
often have wide latitude in determining the course
Exercise of corporate powers of business operations;
The Corporation Code of the Philippines vests in the 3. The stockholders who have the residual power over
board of directors the exercise of the corporate powers of fundamental corporate changes, like amendments

MERCANTILE LAW
of the articles of incorporation (City Bank NA vs. With regard to private land, 60% of the corporation must
Chua, G.R. No. 102300, March 17, 1993). be owned by the Filipinos, same with the acquisition of a
condominium unit.
GENERAL POWERS, THEORY OF GENERAL NOTE: No law disqualifies a person from purchasing
CAPACITY shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law
Theory of General Capacity (1993, 1998, 2000, 2002 disqualifies is the corporation from owning land (JG
Bar) Summit Holdings, Inc. vs. CA, G.R. No. 124293, January 31,
2005).
The general powers of a corporation also called Theory of
General Capacity are the following: (SuSuCo-ABS- 3. Special law – subject to the provisions of the Bulk Sales
PEDRO) Law and law against monopoly, illegal combination or
restraint of trade.
1. To SUe and be sued;
Requisites for a valid donation (RPAI)
2. Of Succession;
1. Donation must be Reasonable;
3. To adopt and use of COrporate seal;
2. Must be for valid Purposes including public welfare,
4. To amend its Articles of Incorporation; hospital, charitable, cultural, scientific, civic or similar
purposes;
5. To adopt its By-laws;
3. Must not be an Aid in any
6. For Stock corporations: issue and sell stocks to a. Political party,
subscribers and treasury stocks; for non-stock b. Candidate and
corporations: admit members; c. Partisan political activity
7. To Purchase, receive, take or grant, hold, convey, sell, 4. Donation must bear a reasonable relation to the
lease, pledge, mortgage and deal with real and personal corporation’s Interest and not be so remote and fanciful.
property, securities and bonds;
Corporation as surety or guarantor
8. To Enter into merger or consolidation;
GR: A corporation cannot act as a surety or guarantor.
9. To make reasonable Donations for public welfare, Acting as a surety or guarantor will be contrary to the
hospital, charitable, cultural, scientific, civic or similar primary purpose for which the corporation was created.
purposes, provided that no donation is given to any
a. Political party, XPN: Such guaranty may be given in the accomplishment
b. Candidate and of any object for which the corporation was created, or
c. Partisan political activity. when the particular transaction is reasonably necessary
or proper in the conduct of its business.
10. To establish pension, Retirement, and other plans for
the benefit of its directors, trustees, officers and Implied powers of a corporation
employees – basis of which is the Labor code;
A corporation is not restricted to the exercise of powers
11. To exercise Other powers essential or necessary to expressly conferred upon it by its charter but has the
carry out its purposes power to do what is reasonably necessary or proper to
promote the interest or welfare of the corporation
Commencement of the power to sue and be sued (NAPOCOR v. Vera, G.R. No. 83558, February 27, 1989).
The power to sue and be sued commences upon issuance SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
by SEC of Certificate of Incorporation.
Theory of Specific Capacity
Limitations of the corporation in dealing with
property The specific powers of a corporation also called Theory of
Specific Capacity are the following: (ESB-PA-SIDE-A)
1. In dealing with any kind of property, it must be in the
furtherance of the purpose for which the corporation was 1. Power to Extend or shorten corporate term (CC, Sec.
organized. 37).
2. Constitutional limitations – cannot acquire public lands 2. Increase or decrease corporate Stock (CC, Sec. 38).
except by lease.
3. Incur, create, or increase Bonded indebtedness (CC, Sec.
38).

CORPORATION CODE
4. Deny Pre-emptive right (CC, Sec. 39). 3. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each
5. Sell, dispose, lease, encumber all or substantially all of stockholder or member at his place of residence as shown
corporate Assets (CC, Sec. 40). on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
6. Purchase or acquire Shares (CC, Sec. 41). served personally;
7. Invest corporate funds in another corporation or 4. Copy of the amended AOI shall be submitted to the SEC
business for other purpose other than primary for its approval; and
purpose (CC, Sec. 42).
5. In case of Special Corporation, a favorable
8. Declare Dividends out of unrestricted retained recommendation of appropriate government agency (CC,
earnings (CC, Sec. 43). Sec. 37).
9. Enter into management contract with another 6. The extension must be done during the lifetime of the
corporation (not with an individual or a partnership corporation not earlier than 5 years prior to the expiry
– within general powers) whereby one corporation date unless exempted. The extension must not exceed 50
undertakes to manage all or substantially all of the years (CC, Sec 16).
business of the other corporation for a period not
longer than five (5) years for any one term (CC, Sec. NOTE: After the term had expired without extension, the
44). corporation is deemed ipso facto dissolved. The remedy of
the stockholders is reincorporation. Any dissenting
10. Amend Articles of Incorporation (CC, Sec. 16). stockholder may exercise his appraisal right in case of
shortening or extending corporate term (CC, Sec. 37).
Authority to enter into contract (1996 Bar)
Q: T Corp. has a corporate term of 20 years under its
The Board of Directors or Trustees must act together as a Articles of Incorporation or from June 1, 1980 to June
body in order to bind the corporation by their acts (Yao 1, 2000. On June 1, 1991 it amended its Articles of
Ka SinTrading v. CA, et. al. G.R. No. 53820, June 15, 1992). Incorporation to extend its life by 15 years from June
1, 1980 to June 1, 2015. On June 1, 2011, however, T
The acts of the President do not fall within his apparent Corp decided to shorten its term by 1 year or until
authority, and do not bind the corporation without prior June 1, 2014. Both the 1991 and 2011 amendments
authority of the Board of Directors, which under Sec. 23 of were approved by majority vote of its Board of
the Corporation Code is the sole repository of corporate Directors and ratified in a special meeting by its
powers (2007 Bar). stockholders representing at least 2/3 of its
outstanding capital stock. The SEC, however,
Corporate powers which are exercised by the BOD disapproved the 2011 amendment on the ground that
and stockholders jointly (ASIA-IDEA- MC) it cannot be made earlier than 5 years prior to the
expiration date of the corporate term, which is June 1,
1. Amendments to by-laws 2014. Is this SEC disapproval correct? (2011 Bar)
2. Extending or Shortening the corporate term
3. Increase or decrease of capital stock A: No, since the 5-year rule on amendment of corporate
4. The sale or other disposition of All or substantially all term applies only to extension, not to shortening, of term.
of the corporate assets
5. Investment of corporate funds in another corporation POWER TO INCREASE OR DECREASE CAPITAL
or business or for any other purpose STOCK OR INCUR, CREATE, INCREASE BONDED
6. Issuance of stock Dividends INDEBTEDNESS
7. Entering into management contract
8. Amendment to Articles of incorporation Procedural requirements in increasing or decreasing
9. Merger or consolidation capital stock
10. Grant of Compensation to directors
1. Majority vote of the BOD;
POWER TO EXTEND OR SHORTEN CORPORATE
TERM 2. Ratification by stockholders representing 2/3 of the
outstanding capital stock;
Procedural requirements in extending/shortening
corporate term 3. Written notice of the proposed increase or diminution
of the capital stock and of the time and place of the
1. Majority vote of the BOD or BOT;
stockholder’s meeting at which the proposed increase or
diminution of the capital stock must be addressed to each
2. Ratification by 2/3 of the SH representing outstanding
stockholder at his place of residence as shown on the
capital stock or by at least 2/3 of the members in case of
books of the corporation and deposited to the addressee
non-stock corporation;
in the post office with postage prepaid, or served
personally;

MERCANTILE LAW
4. A certificate in duplicate must be signed by a majority Basis of the required 25% subscription
vote of the directors of the corporation and countersigned
by the chairman and the secretary of the stockholder’s The 25% subscription shall be based on the additional
meeting, setting forth: amount by which the capital stock increased and not on
a. That the foregoing requirements have been the total capital stock as increased.
complied with;
b. The amount of increase or diminution of the NOTE: Treasurer’s affidavit is required in increasing
capital stock; capital stock, NOT in decreasing capital stock.
c. If an increase of the capital stock, the amount of
capital stock or number of shares of no par stock Additional requirement with respect to the decrease
actually subscribed, the names, nationalities and of capital stock
residences of the persons subscribing, the amount
of capital stock or number of no par stock In case of decrease in capital stock, the same must not
subscribed by each, and the amount paid by each on prejudice the right of the creditors.
his subscription in cash or property, or the amount
of capital stock or number of shares of no par stock Ways of increasing or decreasing the capital stock
allotted to each stockholder if such increase is for
the purpose of making effective stock dividend By increasing or decreasing the:
authorized; 1. Number of shares and retaining the par value;
d. The amount of stock represented at the meeting; 2. Par value of existing shares and retaining the
and number of shares;
e. The vote authorizing the increase or diminution 3. Number of shares and increasing or decreasing
of the capital stock, or the incurring, creating or the par value.
increasing of any bonded indebtedness.
NOTE: In decreasing the capital stock, resorting to
NOTE: The increase or decrease in the capital stock or the reduction of number of shares may also be done through:
incurring, creating or increasing bonded indebtedness 1. Redeeming redeemable shares (CC, Sec. 8); or
shall require prior approval of the SEC. 2. purchasing of own shares(CC, Sec. 41); or
3. Cancelling or retiring the shares, including the
Additional requirement with respect to increase of treasury shares (CC, Sec. 9); or
capital stock 4. The corporation may accept a surrender of shares
and give the holders in exchange therefor a
The application to be filed with the SEC shall be proportionate amount of its assets, provided no
accompanied by the sworn statement of the treasurer of rights of creditors are involved; or
the corporation, showing that at least 25% of the increase 5. Issue bonds for that purpose or
in the capital stock was subscribed and 25% of the said 6. Exchange another class of stock for that retired; or
amount has been paid either in actual cash to the 7. Exchange the corporation’s outstanding shares for
corporation or that there has been transferred to the a smaller number of shares; or
corporation property the valuation of which is equal to 8. Cancelling shares which have not yet been issued
25% of the subscription. (De Leon, 2010).
NOTE: A corporation is not prohibited from increasing its Q: Can there be a distribution of surplus on reduction?
authorized capital stock even if the same has not yet been
fully subscribed. Once an increase in authorized capital A: It depends whether there is an impairment of capital.
stock is effected, it may be necessarily accompanied by an 1. If there is no impairment of capital, the surplus
actual increase in the assets and additional subscriptions may be equitably distributed by the directors or
in order to comply with the 25% subscription so much thereof as may not be required in
requirement. However, if such increase is for the purpose carrying on the business for the best interests of
of effecting a stock dividend previously authorized, then the stockholders: Provided the rights of creditors
additional subscriptions are NOT urgent. will not be affected nor the capital impaired.
Reason: The actual capital is increased by accumulated 2. If there is reduction to meet an impairment –
profits and such profits are distributed to the there will be no distribution.
stockholders in the form of stock dividends, the capital
stock is increased, for the profits are reinvested in the NOTE: The distribution stated above is not mandatory,
corporation by transferring the same from surplus notwithstanding the authority granted by the CC for the
account to a capital account. The amount corresponding same under Sec. 122, last par (ibid.).
to the stock dividends declared may be used to cover the
required 25% subscription to increase the authorized Over-issue of shares is not allowed
capital stock and, if sufficient, will obviate the necessity of
taking in new subscription (De Leon, supra). An issue of stock by a corporation in excess of the amount
prescribed or limited by its AOI is ultra vires and the stock
so issued is void even in the hands of a bona fide purchaser
for value (ibid.).

CORPORATION CODE
NOTE: An over-issued stock is a spurious stock (De Leon, 1. Resolution increasing the authorized capital stock
2010). of PPI; and
2. Resolution authorizing the Board of Directors to
Over-issue of stock does not avoid the original issue issue, for cash payment, the new shares from the
proposed capital stock increase in favor of outside
There is no avoidance of the original issue (ibid). investors who are non‐stockholders.
The foregoing resolutions were approved by
NOTE: There is no over-issue in the case of shares, which stockholders representing 99% of the total
were surrendered and new shares issued in their stead. outstanding capital stock. The sole dissenter was
The new issue in such case merely takes the place of the Jimmy Morato who owned 1% of the stock. Are the
shares surrendered (ibid). resolutions binding on the corporation and its
stockholders including Jimmy Morato, the dissenting
Effects of an attempted unauthorized increase of stockholder? (1998 Bar)
capital stock
A: No. The resolutions are not binding on the corporation
An attempted unauthorized increase of capital stock and its stockholders including Jimmy Morato. While these
amounts to an over-issue and such stock is, therefore, resolutions were approved by the stockholders, the
absolutely void and cannot be validated by application of directors' approval, which is required by law in such case,
the doctrine of estoppel. does not exist.
Thus, the following are the effects of such unauthorized Q: What remedies, if any, are available to Morato?
increase: (1998 Bar)
1. Subscriptions for such stock are likewise void both on A: Jimmy Morato can petition the Securities and Exchange
the ground of illegality and for want of consideration; Commission to declare the two (2) resolutions, as well as
any and all actions taken by the Board of Directors
2. Subscribers for or purchasers of such stock acquire thereunder, null and void.
none of the rights of stockholders;
Evidence of the corporation’s indebtedness
3. Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on a When a corporation borrows money, its indebtedness
winding up as stockholders for unpaid subscriptions, may be evidenced by notes or bonds as its primary
and are not subject to a statutory liability to creditors security (De Leon, 2010).
imposed upon stockholders; and
Difference between a note and a bond
4. Subscribers for or purchasers of such shares from the
corporation may recover from it money paid to it 1. If the amount borrowed is small and it is borrowed in a
under their subscription or purchase as upon a failure single sum, or from a few persons, or for a short time
of consideration, or breach of warranty fo the notes are usually given.
existence of the thing sold, unless they are precluded
from such relief as parties in pari delicto(ibid). 2. If, however, the amount is large and obtained from a
number of people and extends over a period of years, the
The board of directors may issue additional issuances corporate obligation is preferably and usually evidenced
of shares of stock without approval of the by bonds (ibid).
stockholders.
Bonded indebtedness
A stock corporation is expressly granted the power to
issue or sell stocks. The power to issue stocks is lodged It is a long-term indebtedness secured by real or personal
with the Board of Directors and no stockholder’s meeting property (corporate assets).
is required to consider it because additional issuance of
stock (unlike increase in capital stock) does not need NOTE: The requirements for the power to incur, create or
approval of the stockholders. What is only required is the increase bonded indebtedness is also the same with the
board resolution approving the additional issuance of the power to increase or decrease capital stock.
shares. The corporation shall also file the necessary
application with the SEC to excempt these from the Registration of the bonds issued by the corporation
registration requirements under the SRC (Majority
Stockholders of Ruby Industrial Corporation v. Lim & Bonds issued by a corporation shall be registered with the
MinorityStockholders of Ruby Industrial Corporation, SEC which shall have the authority to determine the
supra). sufficiency of the terms thereof (CC, Sec. 38).
Q: The stockholders of People Power, Inc. (PPI)

approved two resolutions in a special stockholders'
meeting:

MERCANTILE LAW
Stockholders’ approval is not required for all shares of the same value. Assume that stockholder A
borrowings of the corporation presently holds 200 out of the 1000 original shares.
Would A have a pre‐emptive right to 200 of the new
Not all borrowings of the corporation need stockholders’ issue of 1000 shares? Why?
approval. Only bonded indebtedness requires such
approval. A: Yes, A would have a pre‐emptive right to 200 of the
new issue of 1000 shares. A is a stockholder of record
POWER TO DENY PRE-EMPTIVE RIGHTS holding 200 shares in X Corporation. According to the
Corporation Code, each stockholder has the pre‐emptive
Pre-emptive right (1999, 2001, 2004 Bar) right to all issues of shares made by the corporation in
proportion to the number of shares he holds on record in
It is the preferential right of shareholders to subscribe to the corporation.
all issues or disposition of shares of any class in
proportion to their present shareholdings (CC, Sec. 39). Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the shares,
NOTE: The stockholder must exercise his pre-emptive may the stockholder invoke his appraisal rights and
right within the time fixed in the resolution authorizing demand payment for his shareholdings? (1999 Bar)
the increase of capital stock.
A: No, the stockholder may not exercise appraisal right
Purpose of pre-emptive right because the matter that he dissented from is not one of
those where right of appraisal is available under the
The purpose of pre-emptive right is to enable the Corporation Code.
shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus. Denial by the corporation of pre-emptive right
Exercise of pre-emptive right The corporation can deny pre-emptive right if the AOI or
any amendment thereto denies such right (Sec. 39, CC).
Pre-emptive right must be exercised within the period
stated in the AOI or the By-Laws. When the AOI and the NOTE: A stockholder whose pre-emptive right is violated
By-Laws are silent, the Board may fix a reasonable time may maintain an action to compel the corporation to give
within which the stockholders may exercise the right. him that right. If the denial is by amendment to the AOI,
he may exercise his appraisal right under Sec. 81(1).
NOTE: Pre-emptive right can only be exercised to the
same class of shares issued or disposed with that owned Instances when pre-emptive right is not available
by the stockholder (Share-a-like basis).
1. Shares to be issued to comply with laws requiring
Pre-emptive right is available on the re-issuance of stock offering or minimum stock ownership by the
treasury shares public;
2. Shares issued in good faith with the approval of the
When a corporation reacquires its own shares which stockholders representing 2/3 of the outstanding
thereby become treasury shares, all shareholders are capital stock in exchange for property needed for
entitled to pre-emptive right when the corporation corporate purposes;
reissues or sells these treasury shares. The re-issuance of 3. Shares issued in payment of previously contracted
treasury shares is not among the exception provided by debts;
Sec. 39 when pre-emptive right does not exist. 4. In case the right is denied in the AOI;
5. Waiver of the right by the stockholder.
Pre-emptive right may be waived
The validity of issuance of additional shares may be
Pre-emptive right may be waived either expressly or questioned if done in breach of trust by the
impliedly as when the stockholder fails to exercise his controlling stockholders notwithstanding the non-
pre-emptive right after being notified and given an existence of the pre-emptive right.
opportunity to avail of such right.
Eve if pre-emptive right does not exist either because the
Transferability of pre-emptive right of a stockholder issue comes within the exeptions in Sec. 39 of the CC or
because it is denied in the AOI, an issue of shares may still
The pre-emptive right of a stockholder is transferable be objectionablew if the directors acted in breach of trust
unless there is an express restriction in the AOI. and their primary purpose is to perpetuate or shift control
of the corporation or to “freeze out” the minority interest.
Q: Suppose that X Corporation has already issued the The issuance of unissued shares out of the original
1000 originally authorized shares of the corporation authorized capital stock pursuant to a rehabilitation plan
so that its Board of Directors and stockholders wish the propriety or validity of which was on question by the
to increase X's authorized capital stock. After minority stockholders and subsequently disapproved by
complying with the requirements of the law on the Supreme Court amounts to unlawful dilution of the
increase of capital stock, X issued an additional 1000 minority shareholdings (Majority Stockholders of Ruby

CORPORATION CODE
Industrial Corporation vs. Miguel Lim and Minority Further, in case of non-stock corporations, where there
Stockholders of Ruby Industrial Corporation, G.R. Nos. are no members with voting rights, the vote of at least a
165887 & 165929, June 6, 2011, in Divina, 2014). majority of the trustees in office will be sufficient
authorization for the corporation to enter into any
Pre-emptive right v.Right of first refusal transaction authorized by this section (ibid).
BASIS PRE-EMPTIVE RIGHT OF FIRST Instances when the corporation may forego the
RIGHT REFUSAL ratification by stockholders / members
Right to subscribe to 1. If sale is necessary in the usual and regular course of
all issuance or business;
Right to purchase
dispositions of 2. If the proceeds of the sale or other disposition of such
shares of a
Descrption shares of the property and assets are to be appropriated for the
stockholder.
corporation even to conduct of the remaining business;
the subsequent sale 3. If the transaction does not cover all or substantially all
of treasury stocks. of the assets.
Pertains to
Pertains to the
To what unsubscribed Remedy of a stockholder who disagrees with the plan
sale of the stocks
does it portion of the of SLEMPAD of all or substantially all of corporate
by another
pertain? authorized capital assets
stockholder
stock.
Against who Right exercised Right exercised Any dissenting stockholder shall have the option to
is it against the against a co- exercise his appraisal right.
exercised? corporation. stockholder.
Can only be Abandonment of the plan for SLEMPAD even after the
Effect of the May be exercised vote of the stockholders or members
exercised when
absence of even when there is
so provided in
express no express provision The BOD, in its discretion, may abandon the plan for
the AOI, by-laws
provision in in the AOI or SLEMPAD even after such authorization or approval by
and printed in the
the AOI amendment thereto. the stockholders, subject to the rights of third parties
stock certificate.
Treasury It includes treasury Does not include under any contract relating thereto, without further
shares shares. treasury shares action or approval by the stockholders or members (ibid).
POWER TO SELL OR DISPOSE OF CORPORATE ASSETS Effect of sale of all or substantially all of assets of one
(SLEMPAD) corporation to another corporation (1996, 2005 Bar)
Substantially all of corporate assets GR: The corporation who acquired all or substantially all
of the assets of the selling corporation shall not be liable
There is a sale, lease, exchange, mortgage, pledge, and for the debts of the latter.
any other disposition (SLEMPAD) of substantially all of
corporate asset if in the SLEMPAD thereof, the XPNs:
corporation would be rendered: 1. Express or implied assumption of liabilities;
1. Incapable of continuing the business, or 2. Merger or consolidation;
2. Incapable of accomplishing the purpose for which it 3. If the purchase was in fraud of creditors;
was incorporated (Sec 40, CC). 4. If the purchaser becomes a continuation of the seller;
5. If there is violation of the Bulk Sales Law.
Procedural requirements for SLEMPAD of all or
substantially all of corporate assets Q: Divine Corporation is engaged in the manufacture
of garments for export. In the course of its business, it
1. Majority vote of the BOD or BOT; was able to obtain loans from individuals and
2. Ratification by stockholders representing at least 2/3 financing institutions. However, due to the drop in the
of the outstanding capital stock or by at least 2/3 of the demand for garments in the international market,
members in case of non-stock corporation; Divine Corporation could not meet its obligations. It
3. Written notice of the proposed action and of the time decided to sell all its equipments such as sewing
and place of the meeting addressed to each machines, permapress machines, highspeed sewers,
stockholder or member at his place of residence as cutting tables, ironing tables, etc., as well as its
shown on the books of the corporation and deposited supplies and materials to Top Grade Fashion
to the addressee in the post office with postage Corporation, its competitor.
prepaid, or served personally (Sec. 40, CC).
a. How would you classify the transaction?
NOTE: The sale of the assets shall be subject to the b. Can Divine Corporation sell aforesaid items to
provisions of existing laws on illegal combinations and its competitor, Top Grade Fashion
monopolies (ibid). Corporation? What are the requirements to
validly sell the items? Explain. (Bar 2005)

MERCANTILE LAW
A: 1. Redeemable shares may be acquired even without
a. The transaction is deemed classified as a sale of all or surplus profit for as long as it will not result to the
substantially allof the corporate assets because the insolvency of the Corporation
corporation would be rendered incapable of continuing 2. In cases that the corporation conveys its stocks in
the business or accomplishing the purpose for which it payment of a Debt
was incorporated. 3. In a Close corporation, a stockholder may demand
the payment of the fair value of shares regardless of
b. Yes. The law does not prohibit sale of all or existence of retained earnings for as long as it will not
substantially all of corporate assets to competitor result to the insolvency of the corporation.
company providedsaid sale is subject to laws against
illegal combination, monopoly, or restraint of trade and Unrestricted retained earnings (URE)
Bulk Sales Law. Nowhere in the facts state that the
competitor company lies within the restrictions It represents the surplus profits of the corporation. It is
provided for by law. For the transaction to be valid, it determined by subtracting the liabilities (L), the Capital
needs a majority vote of its board of directors and Stock (CS) and the Restricted Retained Earnings (RRE)
stockholder’s approval representing at least 2/3 of from the assets (A) of the corporation (URE = A – (L + CS+
outstanding capital stock. Further, since bulk sales RRE)).
apply to sale of all or substantially all of corporate
assets, it also requires the following: a) list of creditors Unrestricted Retained Earnings shall include
under oath must be given by the seller to the buyer 10 accumulated profits and gains realized out of the normal
days before the sale containing the lists of their and continuous operations of the company after
respective names, addresses, due dates and amount deducting therefrom distributions of stockholders and
owing each; b) inventory of goods or properties to be transfers to capital stock or other accounts. It does NOT
sold, cost price and the amount for which it has been include:
sold; and c) the list of inventory is filed with the DTI, 1. Funds appropriated by its BOD for corporate
otherwise, it will be null and void for being in fraud of expansion projects or programs;
creditors. 2. Funds covered by a restriction for dividend
declaration under a loan agreement;
POWER TO ACQUIRE OWN SHARES 3. Funds required to be retained under special
circumstances obtaining in the corporation such as
Instances when a corporation may acquire its own when there is a need for a special reserve for probable
shares (1991, 1992, 2005 Bar) circumstances.
1. To eliminate fractional shares out of stock dividends Guidelines for the acquisition of its own shares
(CC, Sec. 41);
2. To collect or compromise an indebtedness to the 1. The capital of the corporation must not be impaired.
corporation, arising out of unpaid subscription, in a There shall be URE’s to purchase the shares;
delinquency sale and to purchase delinquent shares 2. Legitimate or proper corporate objective is
sold during said sale (ibid.); advanced;
3. To pay dissenting or withdrawing stockholders (in 3. Condition of the corporate affairs warrants it;
the exercise of the stockholder’s appraisal right) 4. Transaction is designed and carried out in good faith;
(ibid.); 5. Interest of creditors is not impaired, that is, the same
4. To acquire treasury shares (CC, Sec. 9); is not violative of the trust fund doctrine (Sec. 41, SEC
5. Redeemable shares regardless of existence of Opinions, October. 12, 1992, September 11, 1985, and
retained earnings (CC, Sec 8); April 11, 1994).
6. To effect a decrease of capital stock (CC, Sec. 38);
7. In close corporations, when there is a deadlock in the POWER TO INVEST CORPORATE FUNDS IN ANOTHER
management of the business, the SEC may order the CORPORATION OR BUSINESS
purchase at their fair value of the shares of any
stockholder by a corporation regardless of the The corporation is not allowed to engage in a business
availability of unrestricted retained earnings (URE’s) different from those enumerated in its AOI
in its books (CC, Sec. 104, par. 1 [4]).
The corporation is not allowed to engage in a business
NOTE: Where a corporation reacquires its own shares, it different from those enumerated in its AOI unless the
does not thereby become a subscriber thereof. purpose will be amended to include the desired business
activity among its secondary purpose.
Rule in order that a corporation may acquire its own
shares NOTE: However, in the case of pawnshops organized as
corporations and partnerships, they may be allowed to
GR: The corporation may only acquire its own stocks in engage in ancillary activity of directly purchasing or
the presence of unrestricted retained earnings (URE) selling goods or articles. The Pawnshop Regulation Act
contains no prohibition to engage in ancillary activities.
XPNs: (RDC) Hence, by implication, their scope may be extended to

CORPORATION CODE
other unrelated business unless clearly prohibited by the powerplant project and a concrete road project are
said Act. neither primary purposes nor reasonably necessary for
the accomplishment thereof, majority votes of the board
The only requirement is that the person or entity engaged of directors plus the ratification of the stockholders
at the same time in other business not directly related or representing 2/3 of the outstanding capital stock are
not incidental to pawnshop business, shall keep such needed.
business distinct and separate from his pawnshop
operations (De Leon, 2010 citing SEC Opinion, March 28, On the other hand, quarry operations for limestone are
1985). reasonably necessary or incidental to attain the primary
purpose of the corporatio, i.e. the manufacture of cement.
Rule in case a corporation wants to invest in an Hence, only the majority approval of the board of
undertaking directors is needed. The ratification by the stockholders is
no longer necessary.
GR: Investment of a corporation in a business which is in
line with its primary purpose requires only the approval b. To secure the aforementioned approvals, there must
of the board. be a written notice of the proposed investment and the
time and place of the meeting shall be addressed to each
XPN: Where the corporation undertakes to invest in stockholder or member at his place of residence as shown
another corporation or business or for any purpose other on the books of the corporation and deposited to the
than a primary purpose, it has to comply with the addressee in the post office with postage prepaid, or
statutory requirements before it can do so (Sec. 42, CC). served personally (CC, Sec. 42).
Statutory requirements that the corporation needs to POWER TO DECLARE DIVIDENDS

comply with to invest in another corporation or (2001, 2008, 2009 Bar)
business or for any purpose other than a primary
purpose (1995, 1996 Bar) Requirements for the declaration of dividends
1. Approval by the majority vote of the BOD or BOT 1. Existence of URE’s;

2. Ratification by stockholders representing at least 2. Resolution of the board; and
2/3 of the outstanding capital stock or by at least 2/3 3. Additional Requirements for stock dividends:
of the members in case of non-stock corporation a. A vote representing 2/3 of outstanding capital. (Sec.
3. Ratification must be made at a meeting duly called 43, CC)
for the purposes, and b. A corporation must have also a sufficient number of
4. Prior written notice of the proposed investment and authorized unissued shares for distribution to
the time and place of the meeting shall be made stockholders.
addressed to each stockholder or member by mail or
by personal service. Q: Under what circumstances may a corporation
declare dividends? (Bar 2005)
NOTE: Investment of a corporation in a business which is
A: A corporation may declare dividends when there is
in line with its primary purpose requires only the
unrestricted retained earnings, a resolution of the Board
approval of the board. Any dissenting stockholder shall
have appraisal right. of Directors and in case of declaration of stock dividends,
a ratification of the stockholders representing two-thirds
Q: Stikki Cement Co. was organized primarily for (2/3) of the outstanding capital stock.
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest in a) Q: At least 2/3 of the stockholders of Solar
a powerplant project, b) a concrete road project, and Corporation, meeting upon the recommendation of
c) quarry operations for limestone in the the BOD, declared a 50% stock dividend during their
manufacture of cement. annual meeting. The notice of the annual
stockholders’ meeting did not mention anything
a. What corporate approvals or votes are needed about a stock dividend declaration. The matter was
for the proposed investments? Explain. taken up only under the item “other business” in the
agenda of the meeting. C.K. Senwa, a stockholder, who
b. Describe the procedure in securing these
received his copy of the notice but did not attend the
approvals (Bar 1995)
meeting, subsequently learned about the 50% stock
dividend declaration. He desires to have the stock
A:
dividend declaration cancelled and set aside, and
a. Section 42 provides that when the investment of
wishes to retain your services as a lawyer for the
corporate funds is directed at a purpose not primary in
purpose. Will you accept the case? Discuss with
character or not reasonably necessary for the
reasons. (Bar 1990)
accomplishment of the primary purpose, majority of the
votes of the board of directors or trustees along the the
A: I will not accept the case. Sec 43 of the Corp Code states
ratification of stockholders representing 2/3 of the
that no stock dividend shall be issued without the
outstanding capital stock or 2/3 of the members, in case
approval of the stockholders representing not less than
of a non-stock corporation, are required. Since a

MERCANTILE LAW
2/3 of the outstanding capital stock at a regular or special Declared only by the Declared by the board with
meeting duly called for that purpose. Conformably with board of directors at its the concurrence of the
Sec 50 of the Corp Code, a written notice of the holding of discretion stockholders representing at
the regular meeting sent to the shareholders will suffice. (majority of the quorum least 2/3 of the outstanding
The notice itself specified the said subject matter. only, not majority of all capital stock at a
the board) regular/special meeting
Alternative answer: Does not increase the Corporate capital is
Yes, I will accept the case. The problem does not indicate corporate capital increased
that there is action by the BOD which is also necessary for Its declaration creates a
the declaration of 50% stock dividend. debt from the No debt is created by its
corporation to each of declaration
Q: During the annual stockholders meeting, its stockholders
Riza, a stockholder proposed to the body that a part If received by individual:
of the corporation’s unreserved earned surplus be subject to tax; Not subject to tax either
capitalized and stock dividends be distributed to the If received by received by individual or a
stockholders, arguing that as owners of the company, corporation: not subject corporation
the stockholders, by a majority vote, can do anything. to tax
As chairman of the meeting, how would you rule on Can be revoked despite
the motion to declare stock dividends? (Bar 1991) Cannot be revoked after
announcement but before
announcement
issuance
A: As the chairman of the meeting, I would rule against the Applied to the unpaid Can be withheld until
motion considering that a declaration of stock dividends balance of delinquent payment of unpaid balance
should initially be taken by the BOD and thereafter to be shares of delinquent shares
concurred in by a 2/3 vote of the stockholders (CC, Sec.
43). There is no prohibition, however, against the Q: From what funds are cash and stock dividends
stockholders’ resolving to recommend to the BOD that it sourced? Explain why (Bar 2005)
consider a declaration of stock dividends for concurrence
thereafter by the stockholders. Sec 43 of the Corporation A: Dividends either cash or stock dividend must be
Code provides that the board of directors of a stock declared out of unrestriscted retained earnings because
corporation may declare dividends out of the unrestricted of the Trust Fund Doctrine. The Trust Fund Doctrine
retained earnings which shall be payable in cash, provides that subscription to the capital stock of a
property, or in stock to all stockholders. corporation constitute a fund to which the creditors have
the right to look for the satisfaction of their claims (Ong vs
Forms of dividends Tiu, G.R. No. 144476, April 8, 2003). Thus, dividends must
never impair the subscribed capital stock.
1. Cash
Scrip dividend
NOTE: Cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the subscription plus A scrip dividend is dividend issued by the corporation
cost and expenses (Sec. 43, CC). when the obligation to pay becomes absolute. Thus, it
becomes a debt absolutely due to the stockholders
2. Stock although payment is postponed to a future date (De Leon,
supra).
NOTE: Stock dividends are withheld from the delinquent
stockholder until his unpaid subscription is fully paid Stock split
(ibid).
It is merely a dividing up of the outstanding shares of a
3. Property corporation into a greater number of units, without
disturbing the stockholder’s original proportional
NOTE: Stockholders are entitled to dividends PRO‐RATA participating interest in the corporation.
based on the total number of shares and not on the
amount paid on shares. Stock split is different from stock dividend. Stock dividend
is a capitalization of earnings or profits, together with a
Cash dividends v. Stock dividends distribution of the added shares which evidence the
assets transferred to capital. The stock split, on the other
CASH DIVIDENDS STOCK DIVIDENDS hand, is a mere increase in the number of shares which
Part of general fund Part of capital evidence ownership without altering the amount of the
Results in cash outlay No cash outlay capital, surplus, or segregated earnings (De Leon, supra).
Once issued, can be levied by
Not subject to levy by corporate creditors because Sources of retained earnings
corporate creditors they’re part of corporate
capital 1. Paid-in surplus – It is the difference between the par
value and the issued value or selling price of the

CORPORATION CODE
shares. It cannot be declared as cash dividend but can Q: For the past three years of its commercial
be declared only as stock dividends operation, X, an oil company, has been earning
tremendously in excess of 100% of the corporation’s
2. Operational Income - The amount of profit realized from paid-in capital. All of the stockholders have been
a business's operations after taking out operating claiming that they share in the profits of the
expenses. It is available for both cash and stock corporation by way of dividends but the Board of
dividends Directors failed to lift its finger.
3. Revaluation surplus – Increase in the value of a fixed a. Is Corporation X guilty of violating a law? If in
the affirmative, state the basis.
asset as a result of its appreciation. They are by
b. Are there instances when a corporation shall
nature subject to fluctuations.
not be held liable for not declaring dividends? (2001
GR: It cannot be declared as dividends because there is no Bar)
actual gain.
A:
XPN: It can be used in the declaration of dividends a. Corporation X is guilty of violating Section 43 of the
provided the following conditions exist: Corp Code. This provision prohibits stock corporations
1. The corporation has sufficient income from operations from retaining surplus profits in excess of 100% of their
from which the depreciation on the appraisal paid-in capital.
increase was charged;
b. The instances when a corporation shall not be held
2. It has no deficit at the time the depreciation on the liable for not declaring dividends are: (CC, Sec.43) Note:
appraisal increase was charged to operations; and See above XPNs.
3. Such depreciation on appraisal increase previously Penalty in case of unjustifiable retention of surplus
charged to operations has not been erased or profits
impaired by subsequent losses; otherwise, only that
portion not impaired by subsequent losses is The penalty in case a corporation unjustifiably retains
available for dividend (SEC Opinions, Oct. 2, 1981 and surplus profits in excess of one hundred (100%) percent
March 19, 1992). of the paid in accumulated capital is the payment of
Improperly Earnings Tax equal to 10% of the improperly
4. Reduction surplus – the surplus arises from the accumulated taxable income (NIRC OF 1997, Sec. 29 [A]).
reduction of the par value of the issued shares of
stocks. It cannot be declared as cash dividend but can Q: During the annual stockholders meeting, Cheryl, a
be declared only as stock dividends. majority stockholder, proposed that a part of the
corporation’s URE's be capitalized and stock
5. Gain from Sale of Real Property - Available as dividends dividends be distributed to the stockholders. Can she
compel the corporation to declare stock dividends?
6. Treasury Shares – Gain realized from reissuance of (2001 Bar)
treasury shares. It cannot be declared as stock or
cash dividends but it may be declared as property A: No. Stock dividends should initially be taken by the
dividend BOD and thereafter to be concurred in by a 2/3 vote of the
stockholders. A stockholder cannot compel the
Prohibition imposed by law on URE's of a stock corporation to declare neither cash nor stock dividends as
corporation it rests with the sound discretion of the board.
GR: Stock corporations are prohibited from retaining Sources of dividends

surplus profits in excess of one hundred (100%) percent
of their paid-in capital stock. GR: Dividends can only be declared out of actual and bona
fide unrestricted retained earnings
XPNs:
1. When justified by definite corporate expansion projects XPN: Dividends can be declared out of capital in the
or programs approved by the board of directors; following instances:
2. When the corporation is prohibited under any loan 1. Dividends from investments wasting assets
agreement with any financial institution or creditor, corporation;
whether local or foreign, from declaring dividends 2. Liquidating dividends
without its/his consent, and such consent has not yet
been secured; Wrongful or illegal declaration of dividends
3. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in In case of wrongful or illegal declaration of dividends, the
the corporation, such as when there is need for Board of Directors is liable. The stockholders should
special reserve for probable contingencies (CC, Sec. return the dividends to the corporation (solutio indebiti).
43).

MERCANTILE LAW
Persons entitled to receive dividends Q: ABC Management Inc. presented to the DEF Mining
Co, the draft of its proposed Management Contract. As
Dividends are payable to the stockholders of record as of an incentive, ABC included in the terms of
the date of the declaration of dividends or holders of compensation that ABC would be entitled to 10% of
record (Cojuanco and Prime Holdings, Inc., v. any stock dividend which DEF may declare during the
Sandiganbayan G.R. No. 183278, April 24, 2009). lifetime of the Management Contract. Would you
approve of such provision? If not, what would you
Rule on the receipt of dividends in case of mortgaged suggest as an alternative? (1991 Bar)
or pledged shares
A: I would not approve a proposed stipulation in the
GR: The mortgagor or the pledgor has the right to receive management contract that the managing corporation, as
the dividends. an additional compensation to it, should be entitled to
10% of any stock dividend that may be declared.
XPN: When the mortgagor or pledgor defaults and the Stockholders are the only ones entitled to receive stock
mortgagee or pledgee acquires the pledged stocks and the dividends (Nielson & Co v. Lepanto Mining G.R.No. L-21601,
transfer is recorded in the books of the corporation, the December 17, 1966). I would add that the unsubscribed
mortgagee or pledgee is entitled to receive the dividends. capital stock of a corporation may only be issued for cash
or property or for services already rendered constituting
Q: May stock dividends be issued to a person who is a demandable debt (CC, Sec. 62). As an alternative, I would
not a stockholder in payment of services rendered? suggest that the managing corporation should
instead be given a net profit participation and, if
A: No. Only stockholders are entitled to payment of stock it later so desires, to then convert the amount that may be
dividends (Nielson & Co., Inc. v. Lepanto Consolidated due thereby to equity or shares of stock at no less than the
Mining Co., G.R. No. 21763, December 17, 1966). par value thereof.
POWER TO ENTER INTO MANAGEMENT CONTRACT A corporation can enter into a management contract
with a natural person without complying with the
Management contract requisites of Sec. 44
It is any contract whereby a corporation undertakes to Sec 44 refers only to a management contract with another
manage or operate all or substantially all of the business corporation. Hence, it does not apply to management
of another corporation, whether such contracts are called contracts entered into by a corporation with natural
service contracts, operating agreements or otherwise (CC, persons.
Sec. 44).
Period for every management contract entered into
NOTE: Sec. 44 refers only to a management contract with by the corporation
another corporation. Hence, it does not apply to
management contracts entered into by a corporation with GR: Management contract shall be entered into for a
natural persons (ibid). period not longer than 5 years for any one term.
Requirements for a management contract to be valid XPN: In cases of service contracts or operating
agreements which relate to the exploitation,
1. Contract must be approved by the majority of the BOD development, exploration or utilization of natural
or BOT of both managing and managed corporation; resources, it may be entered for such periods as may be
provided by the pertinent laws or regulations.
2. Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or members in ULTRA VIRES ACTS
case of a non-stock corporation, of both the managing and (1991, 1993, 2009 Bar)
the managed corporation, at a meeting duly called for the
purpose An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers. The
3. Contract must be approved by the stockholders of the concept also includes those acts that may ostensibly be
managed corporation owning at least 2/3 of the within such powers but are, by general or special laws,
outstanding capital stock entitled to vote or 2/3 of the either proscribed or declared illegal (Rural Bank of Milaor
members when: v. Ocefemia, G.R. No. 137686, February 8, 2000).
a. Stockholders representing the same interest in
both of the managing and the managed corporation It is one committed outside the object for which a
own or control more than 1/3 of the total corporation is created as defined by the law of its
outstanding capital stock entitled to vote of the organization and therefore beyond the power conferred
managing corporation (interlocking stockholders); upon it by law (Atrium Management Corporation vs. CA,
b. Majority of the members of the BOD of the G.R. No. 109491, February 28, 2001).
managing corporation also constitute a majority of
the BOD of the managed corporation. (Interlocking
Directors; CC, Sec. 44)

CORPORATION CODE
Types of UVA power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through
1. Acts done beyond the powers of the corporation such agent, be estopped from denying the agent’s
(through BOD) authority.
2. Ultra vires acts by corporate officers
3. Acts or contracts which are per se illegal as Instance when the corporation is estopped to deny
being contrary to law. ratification of contracts or acts entered by its officers
or agents
APPLICABILITY OF ULTRA VIRES DOCTRINE
Generally, when the corporation has knowledge that its
Ultra vires acts by reason of lack of authority v. Ultra officers or agents exceed their power, it must promptly
vires acts by reason of illegality (illegal acts) disaffirm the contract or act, and allow the other party or
third person to act in the belief that it was authorized or
ULTRA VIRES has been ratified. Otherwise, if it acquiesces, with
BASIS ILLEGAL ACTS
ACT knowledge of the facts, or if it fails to disaffirm, ratification
Not necessarily Unlawful; will be implied (Premiere Development Bank v. CA, G.R. No.
unlawful, but against law, 159352, April 14, 2004).
Lawfulness outside the morals, public
powers of the policy, and Q: The Rural Bank of Milaor (RBM) acquired
corporation public order ownership over 5 parcels of land formerly owned by
the spouses Felicisimo and Juanita Ocfemia after the
Merely voidable bank foreclosed the mortgage over the said
and may be properties. These parcels of land were in the
enforced by Cannot be possession of the grandchildren of the spouses
Enforceability performance, validated Felicisimo and Juanita because they were sold by RBM
ratification or bank to the children of the spoues. The properties
estoppel have not been, however transferred in the name of
Cannot be the children of the spouses after they were sold
Ratification Can be ratified because according to the Assessor's Office they
ratified
cannot be transferred in the name of the buyers as
Can bind the there is a need to have the document of sale
parties if wholly Cannot bind registered with the Register of Deeds (RD). Marife, the
Binding effect or partly the parties grandchild of the spouses went to the RD with the
executed Deed of Sale in order to have the same registered. The
RD however, informed her that the document of sale
cannot be registered without a board resolution of
Distinguished from acts that do not comply with
RBM. Marife went to the bankand requested the for a
formalities and unauthorized acts
board resolution so that the property can be
transferred to the name of Renato Ocfemia. RBM
ACTS THAT DO NOT
refused her request.
COMPLY WITH UNAUTHORIZED ACTS
FORMALITIES
May the board of directors of a rural banking
If certain procedures or The act may be within the corporation be compelled to confirm a deed of
formalities are powers of the corporation absolute sale of real property owned by the
prescribed in the AOI or but not within the powers corporation which deed of sale was executed by the
BL and the same are not of the particular officer. bank manager without prior authority of the board of
complied with, the The latter is sometimes directors of the rural banking corporation?
resulting act is not an referred to as ultra vires
ultra vires act of the act of the officer. The law A: Yes. The corporation may be compelled. A bank is
corporation. on agency applies. liable to innocent third persons where representation is
made in the course of its normal business by an agent like
Instances when the acts of the officers bind the the bank manager, even though such agent is abusing her
corporation authority. Clearly, persons dealing with her could not be
blamed for believing that she was authorized to transact
1. If it is provided in the by-laws business for and on behalf of the bank. The bank is
2. If authorized by the board estopped from questioning the authority of the bank
3. Under the doctrine of apparent authority manager to enter into the contract of sale. If a corporation
4. When the act was ratified knowingly permits one of its officers or any other agent to
act within the scope of an apparent authority, it holds the
Doctrine of apparent authority agent out to the public as possessing the power to do
those acts; thus, the corporation will, as against anyone
If a corporation knowingly permits one of its officers, or who has in good faith dealt with it through such agent, be
any other agent, to act within the scope of an apparent estopped from denying the agent's
authority, it holds him out to the public possessing the authority. Unquestionably, the bank has authorized its

MERCANTILE LAW
manager to enter into the Deed of Sale. Accordingly, it has Bank’s Vice-President, Corporate Secretary and a
a clear legal duty to issue the board resolution sought by member of its Board of Directors. The Bank accepted
the Ocfemias. Having authorized her to sell the property, the Sps. Pronstroller’s offer of P7.5 million, and the
it behooves the bank to confirm the Deed of Sale so that latter paid 10% downpayment.
the buyers may enjoy its full use (Rural Bank of Milaor
(Camarines Sur) v. Francisca Ocfemia, et al., G.R. No. Sps. Pronstroller and Atty. Soluta executed two
137686, February 8, 2000). Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a final
Q: Inland Construction and Development Corp. order from the Supreme Court in the Vaca case and
(Inland) obtained various loans and other credit the delivery of the property to the Sps. Pronstroller
accommodations from Westmont Bank (WB). Inland free from occupants.
executed real estate mortgages and issued
promissory notes in favor of WB. Inland defaulted on The Bank was later on reorganized, and Atty. Soluta
the payment of the notes. was relieved from his duties. The Bank, through its
Assistant Vice-President, Atty. Dayday, informed Sps.
It appeared that the Aranda, president of Inland, Pronstroller that their request for extension was
assigned and conveyed all his rights at Hanil-Gonzales disapproved by ARRMC and, in view of their breach of
Corporation in favor of Abrantes, and that Abrantes the contract, the Bank was rescinding the same and
assumed, among other obligations of Inland and forfeiting their deposit.
Aranda, a promissory note under the latter’s
obligation with WB. WB’s Account Officer, Lionel Calo, Is the Associated Bank bound by the Letter-
Jr. (Calo) signed for its conformity to the deed. Agreement signed by Atty. Soluta under the doctrine
of apparent authority?
Inland was notified of the foreclosure of its real estate
mortgages by WB. Inland filed an injunction suit A: Yes.The authority of a corporate officer or agent in
against WB. The latter underscored that it had no dealing with third persons may be actual or
knowledge, much less did it give its conformity to the apparent. Apparent authority is derived not merely from
alleged assignment of the obligation. practice. Its existence may be ascertained through 1) the
general manner in which the corporation holds out an
Did Calo’s conformity to the deed bind WB? officer or agent as having the power to act, or in other
words, the apparent authority to act in general, with
A: Yes. The general rule remains that, in the absence of which it clothes him; or 2)the acquiescence in his acts of a
authority from the board of directors, no person, not even particular nature, with actual or constructive knowledge
its officers, can validly bind a corporation. If a thereof, within or beyond the scope of his ordinary
corporation, however, consciously lets one of its officers, powers. Accordingly, the authority to act for and to bind a
or any other agent, to act within the scope of an apparent corporation may be presumed from acts of recognition in
authority, it will be estopped from denying such officers other instances, wherein the power was exercised
authority. without any objection from its board or
shareholders. Undoubtedly, Associated Bank had
The records show that Calo was the one assigned to previously allowed Atty. Soluta to enter into the first
transact on WB’s behalf respecting the loan transactions agreement without a board resolution expressly
and arrangements of Inland as well as those of Hanil- authorizing him; thus, it had clothed him with apparent
Gonzales and Abrantes. Since it conducted business authority to modify the same via the second letter-
through Calo, who is an Account Officer, it is presumed agreement. It is not the quantity of similar acts which
that he had authority to sign for the bank in the Deed of establishes apparent authority, but the vesting of a
Assignment. corporate officer with the power to bind the corporation
(Associated Bank v. Spouses Rafael and Monaliza
WB cannot feign ignorance of the Deed of Pronstroller, G.R. No. 148444, July 14, 2008).
Assignment. Notably, assignee Abrantes notified WB
about his assumption of Inlands obligation. That WB sent Q: The Sps. Magsalang obtained a loan from
a reply-letter indicates that it had full and complete Philippine Countryside Rural Bank (PCRB), secured
knowledge of the assumption by Abrante’s of Inland’s by a real estate mortgage over their property,
obligation (Westmont Bank vs. Inland Construction and including the house constructed thereon owned by
Development Corporation, G.R. Nos. 123650 & 123822, the Sps. Cortel. The Sps. Magsalang and Sps. Cortel
March 23, 2009). asked permission from PCRB to sell the subject
properties. Pancraiso Mondigo, Branch Manager of
Q: Associated Bank (the Bank) purchased in a PCRB, verbally agreed to their request but first
foreclosure sale the real properties the Sps. Vaca required full payment of the loan. The subject
mortgaged in its favor. The Sps. Vaca, however, properties were later sold to Banate. The title issued
prayed for the nullification of the mortgage and to Banate, however, carried over the mortgage lien in
foreclosure sale. In the meantime, the Bank PCRB’s favor. PCRB refused to release the property
advertised for sale the subject properties, and the Sps. from the lien.
Prosntroller offered to buy the same. The offer was
made through Atty. Jose Soluta, Jr. (Atty. Soluta), the

CORPORATION CODE
Did the purported agreement between Banate and those acts.But, here, it is plain from the guarantee Grey
Mondigo novate the mortgage contract over the executed that he was acting for himself, not in
subject properties and is thus binding upon PCRB? representation of UCPB. UCPB cannot be bound by Grey’s
above undertaking since he appears to have made it in his
A: No. The Court would be unduly stretching the doctrine personal capacity. He signed it under his own name, not
of apparent authority if the Court would consider the in UCPB’s name or as its branch manager. Indeed, the
power to undo or nullify solemn agreements validly wordings of the undertaking do not at all make any
entered into as within the doctrine’s ambit. Although a allusion to UCPB (United Coconut Planters Bank v. Planters
branch manager, within his field and as to third persons, Products, Inc., et al., G.R. No. 179015, June 13, 2012).
is the general agent and is in general charge of the
corporation, with apparent authority commensurate with Q: Arma Traders is a domestic corporation engaged in
the ordinary business entrusted him and the usual course the wholesale and distribution of school and office
and conduct thereof, yet the power to modify or nullify supplies, and novelty products. Antonio Tan (Tan)
corporate contracts remains generally in the board of was formerly the President while Uy Seng Kee Willy
directors. Being a mere branch manager alone is (Uy) is the Treasurer. They represented Arma
insufficient to support the conclusion that Mondigo has Traders when dealing with its supplier, Advance
been clothed with “apparent authority” to verbally alter Paper, for about 14 years.
terms of written contracts, especially when viewed
against the telling circumstances of this case: the Arma Traders purchased on credit several paper
unequivocal provision in the mortgage contract; PCRB’s products from Advance Paper. Upon the
vigorous denial that any agreement to release the representation of Tan and Uy, Arma Traders was able
mortgage was ever entered into by it; and, the fact that the to obtain a loan from Advance Paper, which the latter
purported agreement was not even reduced into writing granted due to its good business relations with Arma
considering its legal effects on the parties’ interests. To Traders.
put it simply, the burden of proving the authority of
Mondigo to alter or novate the mortgage contract has not Arma Traders issued postdated checks signed by Tan
been established (Violeta Tudtud Banate,et al., v. and Yu, who were its authorized bank signatories.
Philippine Countryside Rural Bank, Inc., et al., G.R. Upon presentment by Advance Papers, the checks
No. 163825, July 13, 2010). were dishonored due to insufficient balance. Arma
Traders failed to settle the loan despite several
Q: PPI, a fertilizer manufacturer, entered into an demands, claiming that the purchase on credit and
arrangement with Janet Layson for the delivery of the loan were spurious as the Board of Arma Traders
fertilizers to her, payable from the proceeds of the did not issue a resolution authorizing the same.
loan that UCPB extended to her. Layson executed a
document called “pagares,” written on the dorsal side Is the Doctrine of Apparent Authority applicable?
of a UCPB promissory note. The pagares stated that
Layson had an approved loan with UCPB-Iloilo A. Yes. Apparent authority is derived not merely from
Branch. The second portion of the pagares, signed by practice. Its existence may be ascertained through (1)
that branch’s manager Gregory Grey, stated that the the general manner in which the corporation holds out an
assignment has been duly accepted and payment duly officer or agent as having the power to act or, in other
guaranteed within 60 days from PPI’s Invoice. But words the apparent authority to act in general, with which
contrary to her undertakings, Layson withdrew with it clothes him; or (2) the acquiescence in his acts of a
branch manager Grey’s connivance, the loan that particular nature, with actual or constructive
UCPB granted her. On the strength of the three knowledge thereof, within or beyond the scope of his
documents, PPI delivered quantities of fertilizers to ordinary powers. It requires presentation of evidence
Layson. When PPI presented the documents of the of similar act(s) executed either in its favor or in favor
financed transactions to UCPB for collection, the bank of other parties. It is not the quantity of similar acts
denied the claim on the ground that it neither which establishes apparent authority, but the vesting
authorized the transactions nor the execution of the of a corporate officer with the power to bind the
documents which were not part of its usual banking corporation.
transactions. UCPB claimed that branch manager
Grey exceeded his authority in guaranteeing payment The Court does not agree with the CA’s findings that Arma
of Layson’s purchases on credit. UCPB contends that Traders is not liable to pay the loans due to the lack of
the pagares were illegal and void since banking laws board resolution authorizing Tan and Uy to obtain the
prohibit bank officers from guaranteeing loans of loans. To begin with, Arma Traders’ Articles of
bank clients. Is UCPB bound by Grey’s undertaking on Incorporation provides that the corporation may borrow
its behalf to deliver to PPI the proceeds of the bank’s or raise money to meet the financial requirements of
loan in payment of the fertilizers Layson bought? its business by the issuance of bonds, promissory notes
and other evidence of indebtedness. Likewise, it states
A: No. UCPB is not bound. A corporation like UCPB is that Tan and Uy are not just ordinary corporate officers
liable to innocent third persons where it knowingly and authorized bank signatories because they are also
permits its officer, or any other agent, to perform acts Arma Traders’ incorporators along with respondents Ng
within the scope of his general or apparent authority, and Ting, and Pedro Chao. Furthermore, Arma Traders, et
holding him out to the public as possessing power to do al., through Ng who is Arma Traders’ corporate secretary,

MERCANTILE LAW
incorporator, stockholder and director, testified that the Q: Which of the following corporate acts are valid,
sole management of Arma Traders was left to Tan and void or voidabe? Indicate your answer by writing the
Uy and that he and the other officers never dealt with paragraph number of the query, followed by your
the business and management of Arma Traders for 14 corresponding answer as “valid,” “void,” or
years. He also confirmed that since 1984 up to the filing “voidbale,” as the case may be. If your answer is “void”
of the complaint against Arma Traders, its explain your answer. In case of “voidable” answer,
stockholders and board of directors never had its specify what conditions must be present or complied
meeting. with to make the corporate act valid.
Thus, Arma Traders bestowed upon Tan and Uy broad a. XL Food Corporation, which is engaged in the
powers by allowing them to transact with third persons fast-food business, entered into a contract with
without the necessary written authority from its non- its President, Jose Cruz, whereby the latter
performing board of directors. Arma Traders failed to would supply the corporation with its meat and
take precautions to prevent its own corporate officers poultry requirements.
from abusing their powers. Because of its own laxity in its b. The Board of Drectors of XL Foods Corporation
business dealings, Arma Traders is now estopped from declared and paid cash dividends without
denying Tan and Uy’s authority to obtain loan from approval of the stockholders.
Advance Paper (Advance Paper Corporation vs. Arma c. XL Foods Corporation guaranteed the loan of
Traders Corporation, G.R. No 176897, December 11, 2013). its sister company XL Meat Products, Inc. (Bar
2002)
CONSEQUENCES OF ULTRA VIRES ACTS
A:
Effects of an ultra vires act a. Voidable – A contract of the corporation with one
or more of its directors or trustees or officers is voidable,
Ultra vires actsentered into by the board of directors at the option of such corporation (Sec 32, Corporation
binds the corporation and the courts will not interfere Code). Such contract can be ratified by the vote of the
unless terms are oppressive and unconscionable (Gamboa stockholders representing at least two-thirds of the
vs. Victoriano, G.R. No. L-43324. May 5, 1979). outstanding capital stock in a meeting called for the
purpose: Provided, that full disclosure of the adverse
These are the effects for the specific acts: interest of the directors or trustees involved is made at
such meeting: Provided, however, That the contract is fair
1. Executed contract – courts will not set aside or interfere and reasonable under the circumstances.
with such contracts;
2. Executory contracts – no enforcement even at the suit of b. Valid – Approval of the stockholders is not required
either party (void and unenforceable); in declaring cash dividends
3. Partly executed and partly executory – principle of “no
unjust enrichment at expense of another” shall apply; c. Void – This is an ultra vires act on part of XL Foods
4. Executory contracts apparently authorized but ultra Corporation, and is not one of the powers provided for in
vires – the principle of estoppel shall apply. Sec. 36 of the Corporation Code. It can be ratified provided
it is not illegal per se but merely beyond the power of the
Remedies in case of ultra vires act corporation by the approval of the majority of the board
and vote of the stockholders representing at least two
1. State thirds of the outstanding capital stock. Where the contract
a. Obtain a judgment of forfeiture; or or act is not illegal per se but merely beyond the power of
b. The SEC may suspend or revoke the certificate of the corporation, the same is merely voidable and may be
registration enforced by performance, ratification, or estoppels, or on
equitable grounds (Republic v. Acoje Mining Co., Inc.)
2. Stockholders especially if no creditors are prejudiced thereby and no
a. Injunction; or rights of the state or the public are involved (Flecher,
b. Derivative suit p.585).
3. Creditors - Nullification of contract in fraud of creditors. POWERS, HOW EXERCISED
Q: X Corp., whose business purpose is to manufacture BY THE SHAREHOLDERS

and sell vehicles, invested its funds in Y Corp., an
investment firm, through a resolution of its Board of The shareholders participate in controlling the affairs of
Directors. The investment grew tremendously on the corporation by exercising their right to vote. They can
account of Y Corp.'s excellent business judgment. But elect the directors who will actually govern the
a minority stockholder in X Corp. assails the corporation and they can also vote on important matters
investment as ultra vires. Is he right and, if so, what is that are still reserved to them by the Corporation Code
the status of the investment? (2011 Bar) (Aquino, 2006).
A: Yes, it is an ultra vires act of its Board of Directors but

voidable only, subject to stockholders’ ratification.

CORPORATION CODE
BY THE BOARD OF DIRECTORS to Rockland Co. under a Deed of Assignment of the
same date. MLDC eventually learned that Tablante
The Board of Directors is primarily responsible for the had executed a contract of lease with MC Home Depot,
governance of the corporation. Their primary duty is to Inc. over the same parcel of land. Thereafter, MC
set the policies for the accomplishment of the corporate Home Depot, Inc. constructed improvements on the
objectives (Revised Code of Corporate Governance, Art. 3). land and subdivided the area into fifty-nine (59)
They elect the officers who carry out the policies that they commercial stalls, which it leased to various entities.
have established. Upon the expiration of the lease, MLDC demanded
that Tablante, MC Home Depot, and Rockland vacate
Q: Sheryl Oabel was initially hired by Maranaw Hotel the land. MLDC filed a case for unlawful detainer
as an extra beverage attendant.Oabel worked in against Tablante, MC Home Depot, and Rockland. The
Century Park Hotel, an establishment owned by the MTC held that it has no jurisdiction over the case. The
Maranaw Hotels. Maranaw Hotels contracted with RTC affirmed. The CA dismissed the petition on the
Manila Resource Development Corporation ground that the verification and certification against
(MANRED). Subsequently, Oabel was transferred to non-forum shopping was signed by a certain Antonio
MANRED, with the latter deporting itself as her A. Merelos as General Manager of MLDC without
employer. After sometime, Oabel filed before the attaching therewith a Corporate Secretary’s
Labor Arbiter a petition for regularization of certificate or board resolution that he is authorized to
employment against the Maranaw Hotels. However, sign for and on behalf of the MLDC. Does the failure to
Oabel was dismissed from employment. Oabel attach the verification and certification against forum
converted her petition for regularization into a shopping in petition justify the dismissal of the case?
complaint for illegal dismissal. The NLRC found that
Oabel was illegally dismissed. Maranaw Hotels A: No. It must be borne in mind that Sec. 23, in relation to
subsequently appealed before the CA. The CA Sec. 25 of the Corporation Code, clearly enunciates that all
dismissed the petition on account of the failure of the corporate powers are exercised, all business conducted,
Maranaw Hotels to append the board resolution and all properties controlled by the board of
authorizing the counsel for Maranaw Hotels to file the directors. Thus, it is clear that an individual corporate
petition before the Court of Appeals. Maranaw Hotels officer cannot solely exercise any corporate power
invokes substantial justice as justification for a pertaining to the corporation without authority from the
reversal of the resolution of the Court of Appeals. It board of directors.
contends that the filing of a motion for
reconsideration with the certificate of non-forum However, the Court has recognized the authority of some
shopping attached constitutes substantial corporate officers to sign the verification and certification
compliance with the requirement. Did the petition against forum shopping. In sum, the following officials or
before the CA comply with the procedural employees of the company can sign the verification and
requirements under the law and the rules? certification without need of a board resolution: (1) the
Chairperson of the Board of Directors, (2) the President of
A: No. Well-settled is the rule that the certificate of non- a corporation, (3) the General Manager or Acting General
forum shopping is a mandatory requirement. Substantial Manager, (4) Personnel Officer, and (5) an Employment
compliance applies only with respect to the contents of Specialist in a labor case.The rationale applied in the
the certificate but not as to its presence in the pleading foregoing cases is to justify the authority of corporate
wherein it is required. Furthermore, the lawyer acting for officers or representatives of the corporation to sign the
the corporation must be specifically authorized to sign verification or certificate against forum shopping, being in
pleadings for the corporation.Specific authorization, the a position to verify the truthfulness and correctness of the
Court held, could only come in the form of a board allegations in the petition.
resolution issued by the Board of Directors that
specifically authorizes the counsel to institute the petition From the foregoing, it is thus clear that the failure to
and execute the certification, to make his actions binding attach the Secretary’s Certificate, attesting to General
on his principal, i.e., the corporation. The SC has not Manager Antonio Merelos’s authority to sign the
wavered in stressing the need for strict adherence to Verification and Certification of Non-Forum Shopping,
procedural requirements. The rules of procedure exist to should not be considered fatal to the filing of the petition.
ensure the orderly administration of justice. They are not Nonetheless, the requisite board resolution was
to be trifled with lightly (Maranaw Hotels and Resort subsequently submitted to the CA, together with the
Corporation v. CA, et al., G.R. No. 149660, January 20, 2009). pertinent documents. Considering that Mid-Pasig
substantially complied with the rules, the dismissal of the
Q: MLDC is the registered owner of a piece of land. petition was, therefore, unwarranted. (Mid-Pasig Land
MLDC represented by its Chairman and President, DevelopmentCorporation v. Mario Tablante, doing business
Ronaldo Salonga, and ECRM Enterprises, represented under the name and style ECRM Enterprises, G.R. No.
by its proprietor, Mario P. Tablante, executed an 162924, February 4, 2010).
agreement whereby the former would lease to the
latter an areato be used as the staging area for the
Home and Garden Exhibition Fair. On the date of the
expiration of the Lease Agreement, Tablante assigned
all his rights and interests under the said agreement

MERCANTILE LAW
BY THE OFFICERS Power to amend or repeal
Power to amend/repeal
by-laws or adopt new by-
articles cannot be
After the election of directors, the latter must formally laws may be delegated by
delegated by the
organize by electing the corporate officers (Sec. 25, the 2/3 of the outstanding
stockholders/ members to
CC).The corporate officers are tasked to carry out the capital stock or 2/3 of the
the board of directors/
policies laid down by the Board, the AOI and the by-laws. members in the case of
trustees
non-stock corporation
Corporate officer’s position
A party in a suit against a corporation cannot compel
1. An “office” that is created by the charter of the the latter’s officers to appear as witnesses without
corporation and first serving written interrogatories upon the latter,
2. The officer is elected by the directors or stockholders as said officers are also considered as adverse parties
(Easycall Communications Phils., Inc. v. Edward King,
G.R. No.145901, December 15, 2005). In a complaint for nullification of mortgage and
foreclosure with damages against the mortgagee-bank,
Limitations on the holding of a corporate officer’s the plaintiff cannot compel the officers of the bank to
position appear and testify as plaintiff’s initial witnesses unless
written interrogatories are first served upon the bank
Any two or more positions may be held concurrently by officers. This is in line with the Rules of Court provision
the same person, except that no one shall act as president that calling the adverse party to the witness stand is not
and secretary or as president and treasurer at the same allowed unless written interrogatories are first served
time (CC, Sec. 25). upon the latter. This is because the officers of a
corporation are considered adverse parties as well in a
Positions of corporate officers to be filled up by the case against the corporation itself based on the principle
Directors that corporations act only through their officers and duly
authorized agents (Spouses Afulugencia vs. Metropolitan
CORP. MEMBERSHIP CITIZE- Bank and Trust Co., G.R. No. 185145, February 5, 2014, in
RESIDENCY Divina, 2014).
OFFICER REQUIREMENT NSHIP
1. Must be a
director at the Q: Ricardo Coros was dismissed by Matling Industrial
time he and Commercial Corporation (Matling) as its Vice
assumes office Need Need NOT President for Finance and Administration. Because of
NOT be a be a this, Coros filed a complaint for illegal suspension and
1.President illegal dismissal against Matling and some of its
2. must be the Filipino Philippine
stockholder on Citizen Resident corporate officers with the NLRC. Matling, et al.,
record of at moved to dismiss the complaint, raising the ground,
least 1 share of among others, that the complaint pertained to the
stock jurisdiction of the SEC due to the controversy being
May or may not intra-corporate inasmuch as Coros was a member of
Must be Must be a Matling’s Board of Directors aside from being its Vice-
be a director,
a Filipino Philippine President for Finance and Administration prior to his
2.Secretary unless required
Citizen Resident termination. It further argues that the power to
by the by-laws
Need create corporate offices and to appoint the
Must be a individuals to assume the offices was delegated by
May or may not NOT be a
3.Treasurer Philippine Matling’s Board of Directors to its President through
be a director Filipino
Resident its By-Laws; and that any office the President created,
Citizen
4. Such other Qualifications may be provided for in the like the position of the Coros, was as valid and
officers as by-laws effective a creation as that made by the Board of
may be Directors, making the office a corporate office. Is
provided in Coros a corporate officer of Matling?
the by-laws
A: No. Pursuant to Section 25 of the Corporation Code,
whoever are the corporate officers enumerated in the by-
Corporate officer v.Corporate employee
laws are the exclusive officers of the corporation and the
Board has no power to create other offices without
CORPORATE OFFICER CORPORATE EMPLOYEE
amending first the corporate By-laws. However, the
Position is provided for in Employed by the action of
Board may create appointive positions other than the
the by-laws or under the the managing officer of
positions of corporate officers, but the persons occupying
Corporation Code. the corporation.
such positions are not considered as corporate officers
RTC acting as a special within the meaning of Section 25 of the Corporation Code
Labor Arbiter has
commercial court has
jurisdiction in case of and are not empowered to exercise the functions of the
jurisdiction over intra-
labor disputes. corporate officers, except those functions lawfully
corporate controversies.
delegated to them. Their functions and duties are to be
determined by the Board of

CORPORATION CODE
Directors/Trustees.Moreover, the Board of Directors of dispute.Applying the case of Matling Industrial and
Matling could not validly delegate the power to create a Commercial Corporation v. Coros, GR No. 157802, October
corporate office to the President, in light of Section 25 of 13, 2010, to the present case, the LA had the original
the Corporation Code requiring the Board of Directors jurisdiction over the complaint for illegal dismissal
itself to elect the corporate officers. Verily, the power to because Cosare, although an officer of Broadcom for being
elect the corporate officers is a discretionary power that its AVP for Sales, was not a “corporate officer” as the term
the law exclusively vested in the Board of Directors, and is defined by law (Raul C. Cosare v. Broadcom Asia, Inc., et
could not be delegated to subordinate officers or al., G.R. No. 201298, February 5, 2014).
agents.The office of Vice President for Finance and
Administration created by Matling’s President pursuant AWARDS FOR DAMAGES IN INTRA-CORPORATE
to the By-Law was an ordinary, not a corporate, office CONTROVERSIES
(Matling Industrial and Commercial Corporation, et al., v.
Ricardo R. Coros, G.R. No. 157802, October 10, 2010). As can be gleaned from the title of A.M. No. 01-2-04-SC,
the amendment of Section 4, Rule 1 of the Interim Rules
Q: Arevalo set up the company Broadcomwith Cosare, of Procedure Governing Intra-Corporate Controversies
his former employee, was an incorporator. Cosare was crafted precisely to clarify the previous rule that
was later promoted to the position of Assistant Vice- decisions on intra-corporate disputes are immediately
President for Sales and Head of the Technical executory, by specifically providing for an exception.
Coordination. Abiog was appointed as Broadcom’s VP Thus, the prevailing rule now categorically provides that
for Sales and thus, became Cosare’s immediate awards for moral damages, exemplary damages, and
superior. Later, Cosare sent a confidential memo to attorney’s fees in intra-corporate controversies are not
Arevalo to inform him of the anomalies which were immediately executor (Heirs of Santiago Divinagracia, v.
allegedly being committed by Abiog against the Ruiz, G.R. No. 172508, Janaury 12, 2011).
company. Subsequently, Cosare was totally barred
from entering the company premises. Cosare TRUST FUND DOCTRINE
attempted to furnish the company with a memo by
which he addressed and denied the accusations cited The subscribed capital stock of the corporation is a trust
in Arevalo’s memo. Soon after, Cosare filed a labor fund for the payment of debts of the corporation which
complaint, claiming that he was constructively the creditors have the right to look up to satisfy their
dismissed from employment by Boradcom and credits, and which the corporation may not dissipate. The
Arevalo. The LA dismissed the complaint on the creditors may sue the stockholders directly for the latter’s
ground of Cosare’s failure to establish that he was unpaid subscription.
dismissed, constructively or otherwise, from his
employment. The NLRC reversed the decision of the Effects of the trust fund doctrine
LA. On appeal, the CA ruled that the case is an intra-
corporate controversy and is under the RTC’s 1. Dividends must never impair the subscribed capital
jurisdiction. stock and must only be declared out of URE’s
2. Subscription commitments cannot be condoned or
Is the CA correct? remitted
3. GR: The corporation cannot buy its own shares using
A: No. The Court has determined that contrary to the the subscribed capital as the consideration therefore
ruling of the CA, it is the LA, and not the regular courts, (NTC v. Court of Appeals, G.R. No. 127937. July 28,
which has the original jurisdiction over the subject 1999).
controversy. An intra-corporate controversy, which falls
within the jurisdiction of regular courts, has been XPN: (RDC)
regarded in its broad sense to pertain to disputes that a. Redeemable shares may be acquired even without
involve any of the following relationships: (1) between 0o]surplus profit for as long as it will not result to the
the corporation, partnership or association and the insolvency of the Corporation
public; (2) between the corporation, partnership or b. In cases that the corporation conveys its stocks in
association and the state in so far as its franchise, permit payment of a Debt
or license to operate is concerned; (3) between the c. In a Close corporation, a stockholder may demand
corporation, partnership or association and its the payment of the fair value of shares regardless of
stockholders, partners, members or officers; and (4) existence of retained earnings for as long as it will not
among the stockholders, partners or associates, result to the insolvency of the corporation
themselves. Settled jurisprudence, however, qualifies that
when the dispute involves a charge of illegal dismissal, the 4. Rescission of a subscription agreement is not allowed
action may fall under the jurisdiction of the LA’s upon since it will effectively result in the unauthorized
whose jurisdiction, as a rule, falls termination disputes distribution of the capital assets and property of the
and claims for damages arising from employer-employee corporation (Ong v Tiu, ibid).
relations as provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere fact that Exceptions to the trust fund doctrine
Cosare was a stockholder and an officer of Broadcom at
the time the subject controversy developed failed to The Code allows distribution of corporate capital only in
necessarily make the case an intra-corporate these instances:

MERCANTILE LAW
1. Amendment of the AOI to reduce authorized capital 3. Corporations with secondary franchise.
stock;
2. Purchase of redeemable shares by the corporation Required number of independent directors for the
regardless of existence of unrestricted retained earnings; corporations covered by the Revised Code of
3. Dissolution and eventual liquidation of the corporation. Corporate Governance (RCCG)
The trust fund doctrine covers not only capital stock At least 2, or such number of independent directors that
but also unpaid subscriptions, and other corporate constitute 20% of the members of the board, whichever is
property and assets. lesser, but in no case less than 2 (RCCG, Art. 3 [A]).
The creditor is allowed to maintain an action upon any Q: May the composition of the board of directors of
unpaid subscriptions (in the same collection suit against the National Power Corporation be validly reduced to
the corporation) and thereby steps into the shoes of the three (3)? Explain you answer fully. (Bar 2008)
corporation for the satisfaction of the debt. To make out a
prima facie case in a suit against stockholders of an A: Yes. NPC is a government owned and controlled
insolvent corporation to compel them to contribute to the corporation created by a special charter. Its charter
payment of its debts by making good the balances upon allows composition of its board of directors to be reduced.
their subscriptions, it is only necessary to establish that The prohibition only applies to private corporations. As
the stockholders have not in good faith paid the par value clearly enunciated in Article XII, Section 16, 1987
of the stocks of the corporation. Subscriptions to the Constitution: Congress shall not, except by general law,
capital stock of a corporation constitute a fund to which provide for the formation, organization, or regulation of
creditors have the right to look for satisfaction of their private corporations. The general law creating private
claims. The scope of the doctrine when the corporation is corporations is governed by Batas Pambansa Blg. 68
insolvent encompasses not only the capital stock, but also otherwise known as the Corporation Code of the
other property and assets generally regarded in equity as Philippines where the number of of directors or trustees
a trust fund for the payment of corporate debts (Halley v. shall not be less than five (5) nor more than fifteen (15).
Printwell, Inc., G.R. No. 157549, May 30, 2011, in Divina, Since NPC is not governed by the Corporation Code, the
2014). standard number of directors is not required.
BOARD OF DIRECTORS AND TRUSTEES BUSINESS JUDGMENT RULE
DOCTRINE OF CENTRALIZED MANAGEMENT Business Judgment Rule
The Doctrine of Centralized Management states that all GR: Contracts intra vires entered into by the board of
corporate powers are exercised by the BOD or BOT (CC, directors are binding upon the corporation beyond the
Sec. 23). However, this doctrine is not applicable to the interference of courts. The courts are barred from
following instances: intruding into business judgments of corporations, when
1. In case of delegation to the Executive Committee duly the same are made in good faith (Ong v Tiu, G.R. No.
authorized in the by-laws; 144476. April 8, 2003).
2. Authorization pursuant to a contracted manager which
may be an individual, a partnership, or another XPNs: Courts can inquire unto contracts which are:
corporation; 1. Unconscionable and oppressive as to amount to wanton
3. In case of close corporations, the stockholders may destruction to the rights of the minority (Ong v Tiu, ibid).
manage the business of the corporation instead by a 2. Bad faith or gross negligence by the directors (Republic
board of directors, if the articles of incorporation so Communications Inc v CA, G.R. No. 135074, January 29,
provide. 1999).
Independent director Consequences of Business Judgment Rule
For this purpose, an “independent director” shall mean a 1. Resolutions and transactions entered into by the
person other than an officer or employee of the Board within the powers of the corporation cannot
corporation, its parent or subsidiaries, or any other be reversed by the courts not even on the behest of
individual having a relationship with the corporation, the stockholders.
which would interfere with the exercise of independent
2. Directors and officers acting within such business
judgment in carrying out the responsibilities of a director.
judgment cannot be held personally liable for such
acts.
Cases where independent directors are required
3. If the cause of the losses is merely error in business
At least two (2) independent directors are required in the judgment, not amounting to bad faith or negligence,
following companies; directors and/or officers are not liable (Filipinas Port
1. Any corporation with a class of equity securities Services v. Go, G.R. No. 161886, March 16, 2007).
listed for trading on an Exchange (Publicly traded
companies); 4. The Board of Directors has the power to create
2. Banks; positions not provided for in the corporation's

CORPORATION CODE
bylaws since the board is the corporation’s 4. Other qualifications as may be prescribed in special
governing body, clearly upholding the power of its laws or regulations or in the by-laws of the
board to exercise its prerogatives in managing the corporation
business affairs of the corporation (Filipinas Port
Services v. Go, ibid). A director cannot be elected without owning any
stock in the corporation
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of their
A person who does not own a stock at the time of his
authority and act in good faith, do not become liable, election or appointment does not disqualify him as
whether civilly or otherwise, for the consequences of
director if he becomes a shareholder before assuming the
their acts, which are properly attributed to the
duties of his office (SEC Opinions, November 9, 1987 & April
corporation alone (Benguet Electric Cooperative, 5, 1990).
Inc. v. NLRC,GR 89070, May 18, 1992).
Q: Grace Christian High School is an educational
Q: PALI sought to offer its shares to the public in order institution at the Grace Village in Quezon City. Grace
to raise funds for development of properties and pay Village Association, Inc., on the other hand, is an
its loans with several banks. To facilitate the trading organization of lot and/or building owners, lessees
of its shares, PALI applied for a listing in the and residents at Grace Village. From 1975 up to 1990,
Philippine Stock Exchange Inc. (PSE), a non-profit Grace Christian High School was given a permanent
corporation. Subsequently, PSE received a letter from seat in the board of directors of the association. After
the Heirs of Marcos, requesting PSE to defer PALI’s some time, the association’s committee on election
registration, contending that certain properties of informed James Tan, principal of the school, that all
PALI are owned by Marcos. Consequently, PSE directors should be elected by members of the
rejected PALI’s application. The SEC reversed the association. For this reason, Tan was told that the
ruling of the PSE. Is the SEC correct? proposal to make the Grace Christian High School
representative as a permanent director of the
A: No. In applying the business judgment rule, the SEC and association, although previously tolerated in the past
the courts are barred from intruding into business elections should be reexamined. Grace Christian High
judgments of corporations, when the same are made in School argues that it had acquired a vested right to a
good faith. The said rule precludes the reversal of the permanent seat in the board of directors. Did Grace
decision of the PSE to deny PALI's listing application, Christian High School acquire vested right to a
absent a showing of bad faith on the part of the PSE. permanent seat in the board of directors?
Under the listing rules of the PSE, to which PALI had A: No. The board of directors of corporations must be
previously agreed to comply, the PSE retains the elected from among the stockholders or
discretion to accept or reject applications for listing (PSE members. Section 28 of the Old Corporation Code
v. CA, G.R. No. 125469, October 27, 1997). provides that unless otherwise provided, the corporate
powers of all corporations formed under this Act shall be
TENURE, QUALIFICATIONS AND DISQUALIFICATIONS exercised, all business conducted and all property of such
OF DIRECTORS OR TRUSTEES corporations controlled and held by a board of not less
than five nor more than eleven directors to be elected
Term of office of BOD/BOT from among the holders of stock or, where there is no
stock, from the members of the corporation. Section 29
GR: The regular director shall hold office for 1 year. also states that directors of the corporation shall be
elected annually by the stockholders if it be a stock
XPN: If no election is held, the directors and officers will corporation or by the members if it be a non-stock
continue to occupy position even after the lapse of 1 year corporation, and if no provision is made in the by-laws for
under a hold-over capacity until their successors are the time of election the same shall be held on the first
elected and qualified. Tuesday after the first Monday in January. Moreover, the
term of the board of directors or trustee is embodied in
NOTE: This is applicable to a going concern where there Section 23 stating that a member of the board of director
is no break in the exercise of the duties of the officers and should be elected from among the holders of stocks, or
directors (SEC Opinion, Dec. 15, 1989). where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and
Common qualifications of a director and trustee until their successors are elected and qualified. Since the
provision in question is contrary to law, the fact that for
1. Majority of the directors/trustees must be residents fifteen years it has not been questioned or challenged but,
of the Philippines (CC, Sec. 23). on the contrary, appears to have been implemented by the
2. He must not have been convicted by final judgment members of the association cannot forestall a later
of an offense punishable by imprisonment for period challenge to its validity. Neither can it attain validity
exceeding 6 years or a violation of the Corporation through acquiescence because, if it is contrary to law, it is
Code, committed within 5 years prior to the date of beyond the power of the members of the association to
his election (CC, Sec. 27). waive its invalidity (Grace Christian High School v. CA, et
3. He must be of legal age al., G.R. No. 108905, October 23, 1997).

MERCANTILE LAW
Additional qualifications provided by the Revised Q: The BOD of X Co., acting on a standing authority of
Code of Corporate Governance the stockholders to amend the by-laws, amended its
by-laws so as to disqualify any of its stockholders who
A director should have the following: is also a stockholder and director of a competitor
1. College education or equivalent academic degree from being elected to its BOD. Y, a stockholder holding
2. Practical understanding of the business of the sufficient assets to assure him of a seat in the BOD,
corporation filed a petition with the SEC for a declaration of nullity
3. Membership in good standing in relevant industry, of the amended by-law. He alleged among other
business or professional organizations things that as a stockholder, he had acquired rights
4. Previous business experience (RCCG, Art. 3 [D]) inherent in stock ownership such as the right to vote
and be voted upon in the election of directors. Is the
Grounds for disqualification of a director stockholder’s petition tenable?
1. Conviction by final judgment of an offense A: No. In a similar case, Gokongwei v. SEC, it was held that
punishable by imprisonment exceeding 6 years; a corporation is authorized to prescribe the qualifications
2. Violation of the Corporation Code committed within of its directors. A provision in the by-laws of the
5 years prior to his election or appointment (CC, Sec. corporation that no person shall qualify or be eligible for
27). nomination for elections to the BOD if he is engaged in any
business which competes with that of the corporation is
NOTE: Disqualification by reason of violation of the valid, provided, however, that before such nominee is
Corporation Code does not require conviction for the disqualified, a director stands in a competition from being
reason that the decision of the SEC is final and executory elected to the board of directors is a reasonable exercise
unless appealed in CA and a TRO is obtained. of corporate authority. Sound principles of corporate
management counsel against sharing sensitive
Q: John Gokongwei Jr., as stockholder of San Miguel information with a director whose fiduciary duty to
Corporation, filed with SEC a petition for declaration loyalty may well require that he discloses this information
of nullity of amended by-laws against the majority of to a competitive rival. In the case at bar, the petition of Y
the members of the Board of Directors and San Miguel is not tenable because he has no vested right to be elected
Corporation. Among others, it was claimed that prior as a director. When a person buys stock in a corporation,
to the questioned amendment, Gokongwei had all the he does so with the knowledge that its affairs are
qualifications to be a director of the corporation, dominated by a majority of the stockholders. Such
being a substantial stockholder thereof, that as a amendment are made in the by-laws is valid.
stockholder, Gokongwei had acquired rights inherent
in stock ownership, such as the rights to vote and to Foreigners are not disqualified from being elected/
be voted upon in the election of directors, and that in appointed as members of the BOD
amending the by-laws, Soriano, et. al. purposely
provided for Gokongwei's disqualification and While foreigners are disqualified from being elected/
deprived him of his vested right as aforementioned, appointed as corporate officers in wholly or partially
hence the amended by-laws are null and void. Is a nationalized business activities, they are allowed
provision on the by-laws disqualifying a person for a representation in the BOD or governing body of said
position in the board of directors on the ground that entities in proportion to their shareholding (Anti-Dummy
he is engaged in a business which competes with that Law, Sec. 2-A; 1987Constitution, Art. XII, Sec. 11).
of the Corporation valid?
Reason: The BOD/ governing body performs specific
A: Yes. A corporation is authorized to prescribe the duties as a “body”. Unlike corporate officers, each member
qualifications of its directors. A provision in the by-laws of the BOD/ governing body has no individual power or
of the corporation that no person shall qualify or be authority to perform management functions (De Leon,
eligible for nomination for elections to the board of supra).
directors if he is engaged in any business which compete
with that of the Corporation is valid; provided, however,
that before such nominee is disqualified, he should be Q: A Korean national joined a corporation which is
given due process to show that he is not covered by the engaged in the furniture manufacturing business. He
disqualification. A director stands in fiduciary relation to was elected to the Board of Directors. To complement
the corporation and its stockholders. The disqualification its furniture manufacturing business, the corporation
of a competitor from being elected to the board of also engaged in the logging business. With the
directors is a reasonable exercise of corporate authority. additional logging activity, can the Korean national
Sound principles of corporate management counsel still be a member of the Board of Directors? Explain
against sharing sensitive information with a director (Bar 2005)
whose fiduciary duty to loyalty may well require that he
discloses this information to a competitive rival (John A: Yes. The Korean national can still be a member of the
Gokongwei, Jr. v. SEC, et al., G.R. No. L-45911, April 11, Board of Directors as long as sixty percent (60%) of the
1979). Board of Directors are Filipinos. Corporations that are
sixty percent (60%) owned by Filipinos can engage in the
business of exploration, development and utilization of

CORPORATION CODE
natural resources (1987 Constitution, Art. XII, Sec. 2). The controlling (Premium Marble Resources, Inc. v. CA, G.R. No.
election of aliens as members of the Board of Directors 96551, Nov. 4, 1996).
engaging in partially-nationalized activities is allowed in
proportion to their allowable participation or share in the CUMULATIVE VOTING/ STRAIGHT VOTING
capital of such entities (Anti-Dummy Law, Sec. 2-A).
Nothing in the facts shows that more than forty percent Different methods of voting
(40%) of the Board of Directors are foreigners.
1. Straight voting – every stockholder may vote such
ELECTIONS number of shares for as many persons as there are
directors to be elected.
Requirements for the election of directors in a stock
corporation 3. Cumulative voting for one candidate – a stockholder is
allowed to concentrate his votes and give one candidate,
1. Stockholders, representing a majority of the as many votes as the number of directors to be elected
outstanding capital stock of the corporation must be multiplied by the number of his shares shall equal.
present, either in person or by a representative
authorized to act by written proxy, 3. Cumulative voting by distribution – a stockholder may
2. The election must be by ballot, if requested by any cumulate his shares by multiplying the number of his
voting stockholder or member. shares by the number of directors to be elected and
3. The total number of votes cast by him must not distribute the same among as many candidates as he shall
exceed the number of shares owned by him as shown see fit.
in the books of the corporation multiplied by the
whole number of directors to be elected: NOTE: Cumulative voting in case of non-stock
4. No delinquent stock shall vote or be voted for. corporations only if it is provided in the AOI. The
members of non-stock corporations may cast as many
Limitations on the election of directors/ trustees votes as there are trustees to be elected but may cast not
more than one vote for one candidate.
1. At a meeting of stockholders or members called for
the election of directors or trustees, there must be QUORUM
present either in person or by representative
authorized to act by written proxy, the owners of the Quorum required in a stock or non-stock corporation
majority of the outstanding capital stock or majority
of the members entitled to vote. Unless otherwise provided for in the by-laws, a quorum
2. The election must be by ballot if requested; shall consist of the stockholders representing a majority
3. A stockholder cannot be deprived in the articles of of the outstanding capital stock entitled to vote or a
incorporation or in the by-laws of his statutory right majority of the members in the case of non-stock
to use any of the methods of voting in the election of corporations (CC, Sec. 52).
directors;
4. No delinquent stock shall be voted; When the stock and transfer book is inaccurate and
5. The candidates receiving the highest number of votes deficient, it cannot be the sole basis of the quorum.
shall be declared elected (CC, Sec. 24). The AOI may be used as the basis of the quorum.
Permanent representation is not allowed in the BOD To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and transfer
The board of directors of corporations must be elected book, and completely disregarding the issued and
from among the stockholders or members directors every outstanding shares as indicated in the articles of
year. Estoppel does not set in to legitimize what is incorporation would work injustice to the owners and/or
wrongful (Grace Christian High School v. CA, G.R. No. successors in interest of the said shares. This case is one
108905, October 23, 1997). instance where resort to documents other than the stock
and transfer books is necessary. The stock and transfer
Jurisdiction over election contests in stock and non- book of PMMSI cannot be used as the sole basis for
stock corporations determining the quorum as it does not reflect the totality
of shares which have been subscribed, more so when the
As amended by R.A. 8799 (The Securities Regulation articles of incorporation show a significantly larger
Code), the jurisdiction of the SEC under Sec. 5 P.D. No. amount of shares issued and outstanding as compared to
902‐A (SEC Reorganization Act) is now transferred to that listed in the stock and transfer book (Lanuza, et al. v.
Courts of General Jurisdiction (Regional Trial Court). CA, et al., G.R. No. 131394, March 28, 2005).
Thus, RTC now has jurisdiction over election contest.
Q: In case where there are 2 lists of BOD submitted to

SEC, which one is controlling?
A: It is the list of directors in the latest general

information sheet as filed with the SEC which is

MERCANTILE LAW
REMOVAL other than by removal by the stockholders or members or
by expiration of term (CC, Sec. 29).
Power to remove directors or trustees (1991, 2001
Bar) NOTE: The phrase “may be filled” in Sec. 29 indicates that
the filling of vacancies in the board by the remaining
The power to remove belongs to the stockholders directors constituting a quorum is merely permissive.
exclusively (Sec. 28, CC). Corporations may choose how vacancies in their boards
may be filled up, either by the remaining directors or
GR: Removal may be with or without cause trustees constituting a quorum or by all stockholders or
members.
XPN: If the director was elected by the minority, there
must be cause for removal because the minority may not However, if the by-laws prescribe the specific mode of
be deprived of the right to representation to which they filling up existing vacancies, the provisions of the by-laws
may be entitled under Sec. 24 of the Code (Sec. 28, CC). should be followed (De Leon, supra).
Requisites for removal of directors or trustees (1991, Duration of the term of a replacement director
2001 Bar)
A director elected to fill vacancy shall serve the unexpired
1. It must take place either at a regular meeting or term of the director he replaced (CC, Sec. 29).
special meeting of the stockholders or members
called for the purpose; Filling-up a vacancy caused by resignation of a
2. Previous notice to the stockholders or members of director in a hold-over position
the intention to remove a director;
3. A vote of the stockholders representing 2/3 of The vacancy caused by resignation of a director in a hold-
outstanding capital stock or 2/3 of members. over position can only be filled up by the stockholders or
members, for the cause of vacancy is not resignation but
Q: In 1999, Corporation A passed a board resolution by expiration of term because the hold-over period is not
removing X from his position as manager of said a part of the director’s original term of office, nor is it a
corporation. The by‐laws of A corporation provide new term (De Leon, supra).
that the officers are the president, vice‐president,
treasurer and secretary. Upon complaint filed with Q: During the Annual Stockholders’ Meeting of Valle
the SEC, it held that a manager could be removed by Verde Country Club, Inc. (VVCC), Jaime Dinglasan, et
mere resolution of the board of directors. On motion al., were elected as new members of the board of
for reconsideration, X alleged that he could only be directors. In the succeeding years however, the
removed by the affirmative vote of the stockholders requisite quorum for the holding of the stockholders’
representing 2/3 of the outstanding capital stock. Is meeting could not be obtained. Consequently,
X's contention legally tenable. Why? (2001 Bar) Dinglasan, et al., continued to serve in the VVCC Board
in a hold-over capacity. Subsequently, Dinglasan
A: No. Stockholders' approval is necessary only for the resigned from his position as member of the VVCC
removal of the members of the Board. For the removal of Board. In a meeting, the remaining directors, still
a corporate officer or employee, the vote of the Board of constituting a quorum of VVCC’s nine-member board,
Directors is sufficient for the purpose. elected Eric Roxas to fill in the vacancy created by the
resignation of Dinglasan. A year later, Eduardo
FILLING OF VACANCIES Makalintal also resigned as member of the VVCC
Board. He was replaced by Jose Ramirez, who was
Ways of filling up the vacancies in the board elected by the remaining members of the VVCC Board.
Victor Africa, a member of VVCC, questioned the
1. Vacancies filled up by stockholders or members: election of Roxas and Ramirez as members of the
(ERORI) VVCC Board with the SEC and the RTC. May the
a. Expiration of term; remaining directors of the corporation’s Board, still
b. Removal; constituting a quorum, elect another director to fill in
c. Grounds Other than removal or expiration of term, a vacancy caused by the resignation of a hold-over
where the remaining directors do not constitute a director?
quorum for the purpose of filling the vacancy;
d. If the vacancy may be filled by the remaining A: No. The remaining directors of the corporation’s Board,
directors or trustees but the board Refers the matter even if still constituting a quorum, cannot elect another
to stockholders or members; or director to fill in a vacancy caused by the resignation of a
e. Increase in the number of directors results to hold-over director. The Section 23 of the Corporation
vacancy. Code means that the term of the members of the board of
directors shall be only for one year; their term expires one
2. Vacancies filled up by members of the board -If still year after election to the office. The holdover period –
constituting a quorum, at least a majority of the members that time from the lapse of one year from a member’s
are empowered to fill any vacancy occurring in the board election to the Board and until his successor’s election and
qualification – is not part of the director’s original term of

CORPORATION CODE
office, nor is it a new term; the holdover period, however, 1. When their compensation is fixed in the by-laws.
constitutes part of his tenure. Corollary, when an 2. When granted by the vote of stockholders
incumbent member of the board of directors continues to representing at least a majority of the outstanding
serve in a holdover capacity, it implies that the office has capital stock at a regular or special meeting.
a fixed term, which has expired, and the incumbent is 3. If they perform services other than as directors of the
holding the succeeding term. With the expiration of corporation (i.e. where directors are also corporate
Makalintal’s term of office, a vacancy resulted which, by officers or employees of the corporation) (Sec. 30,
the terms of Section 29 of the Corporation Code, must be CC).
filled by the stockholders of VVCC in a regular or special
meeting called for the purpose. His resignation as a hold- BOD is not prohibited from securing an insurance
over director did not change the nature of the vacancy; the policy for the life of its members and making the
vacancy due to the expiration of Makalintal’s term had directors the beneficiaries instead of the corporation
been created long before his resignation (Valle Verde
Country Club, Inc., et al., v. Victor Africa, G.R. No. 151969, The Insurance Code does not contain any prohibition as
September 4, 2009). to such. However, the premium paid thereon is analogous
to a continuing bonus and gift and thus falls within the
Q: In June 2012, two (2) of Greenville Corporation's context of additional compensation. A corporation may
directors- Director A and Director B -resigned from not be used by its officers or stockholders as a means of
the board. Relying on Section 29 of the Corporation diverting profits or proceeds to the payment of premium
Code, the remaining six (6) directors elected two (2) on insurance policies to the enrichment of its
new directors to fill in the vacancy caused by the beneficiaries at the expense of, or to the detriment of, its
resignation of Directors A and B. creditors (SEC Opinion, December 8, 1987).
Stockholder X questioned the election of the new
Limitation on the amount of compensation to be
directors, initially, through a letter-complaint
received by the directors
addressed to the board, and later (when his letter-
complaint went unheeded), through a derivative suit
In no case shall the total yearly compensation of directors,
filed with the court. He claimed that the vacancy in the
as such directors exceed 10% of the net income before
board should be filled up by the vote of the income tax of the corporation during the preceding year
stockholders of Greenville Corporation. Greenville
(CC, Sec. 30).
Corporation's directors defended the legality of their
action, claiming as well that Stockholder X's
Remedy of the stockholders if there was no proper
derivative suit was improper. Rule on the issues
authorization for the grant of compensation to the
raised. (2013 Bar) directors
A:
Compensation to the directors of a corporation without
The remaining directors cannot elect new directors to fill proper authorization in the by-laws or by the vote of the
in the two vacancies. The board of directors may fill up
stockholders may be recovered in a stockholders’ suit (De
vacancy only if the ground is not due to expiration of term,
Leon, supra).
removal or increase in the number of board seats. In this
case, the term of the two directors expired after one year.
Q: Is the general rule that directors are not entitled to
They remained in office in a hold-over period is not part compensation applicable to corporate officers, who
of their term. The vacancies should be filled up by election are not directors?
by the stockholders (Valle Verde Country Club, Inc. v.
Africa, G.R. No. 151969, September 4, 2009).
A: No. Such officers, not being directors and having no
control over the funds and property of the corporation,
The derivative suit was improper. In a derivative suit, the
even though they may be stockholders, do not occupy the
corporation, not the individual stockholder, must be the relation of trustees to the corporation (De Leon, supra,
aggrieved party and that the stockholder is suing on
citing Cheeney vs. Lafayette, BOR Co., 61 III. 570).
behalf of the corporation. What stockholder X is asserting
is his individual right as a stockholder to elect the two Q: Ricardo T. Salas, et al., are the majority and
directors. The case partake more of an election contest controlling members of the Board of Trustees of
under the rules on intra-corporate controversy (Legaspi
Western Institute of Technology, Inc. (WIT), a stock
Towers 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012). corporation engaged in the operation of an
educational institution. According to Homero Villasis,
COMPENSATION et al., the minority stockholders of WIT, a special
board meeting was held whereby the the Board of
Compensation of directors
Trustees passed resolution granting monthly
compensation to Salas, et al., as corporate officers.
GR: Directors, in their capacity as such, are not entitled to Villasis, et al., filed an affidavit-complaint against
receive any compensation except for reasonable per
Salas, et al., for falsification of a public documentand
diems.
estafa. After trial, Salas, et al., were acquitted. Villasis,
et al., would like to hold Salas, et al., civilly liable
XPNs:
despite their acquittal in the criminal cases. They

MERCANTILE LAW
base their claim on the alleged illegal issuance by Majority Rule Doctrine in the dealings of directors
Salas, et al., of the resolution ordering the with stockholders
disbursement of corporate funds representing the
retroactive compensation in favor of the board The majority rule, states that a director has a fiduciary
members of WIT. They maintain that this grant of duty with respect to the corporation as an entity, and not
compensation is proscribed under Section 30 of the to the stockholders as individuals. Consequently, he is
Corporation Code. Is the resolution granting Salas, et subject to the duty to disclose all material facts only to the
al., compensation for services rendered as officers of corporation and not to the stockholders (American T. Co.
WIT valid? v. California etc. Ins. Co., 15 Cal.2d 42, 1940).
A: Yes. The resolution is valid. There is no argument that Special Fact Doctrine
directors or trustees, as the case may be, are not entitled
to salary or other compensation when they perform The special fact doctrine is an exception to the majority
nothing more than the usual and ordinary duties of their rule doctrine. It states that where special circumstances
office. This rule is founded upon a presumption that or facts are present which make it inequitable for the
directors /trustees render service gratuitously and that director to withhold information from the stockholder,
the return upon their shares adequately furnishes the the duty to disclose arises, and concealment is fraud
motives for service, without compensation. Under Section (ibid).
30, there are only two (2) ways by which members of the
board can be granted compensation apart from Instances where the Special Fact Doctrine has been
reasonable per diems: (1) when there is a provision in the applied
by-laws fixing their compensation; and (2) when the
stockholders representing a majority of the outstanding In foreign US jurisprudence, the special fact doctrine was
capital stock at a regular or special stockholders’ meeting applied in the following cases:
agree to give it to them.This proscription, however, 1. Where a director actively participation in the
against granting compensation to directors/trustees of a negotiations for a transfer of the corporate property
corporation is not a sweeping rule. Section 30 states that (Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed.
the directors shall not receive any compensation, as such 853).
directors. The phrase “as such directors” is not without 2. Where a director undertakes to speak or become
significance for it delimits the scope of the prohibition to active in inducing the sale, he must speak fully,
compensation given to them for services performed frankly, and honestly, and conceal nothing to the
purely in their capacity as directors or trustees. The disadvantage of the selling stockholder (Poole v.
unambiguous implication is that members of the board Camden, 79 W. Va. 310).
may receive compensation, in addition to reasonable per 3. Where a director personally seeks a stockholder for
diems, when they render services to the corporation in a the purpose of buying his shares without making
capacity other than as directors/trustees. In the case at disclosure of material facts within his peculiar
bench, the resolution granted monthly compensation to knowledge and not within reach of the stockholders,
Salas, et al., not in their capacity as members of the board, the transaction will be closely scrutinized and relief
but rather as officers of the corporation, more particularly may be granted in appropriate instances (Strong v.
as Chairman, Vice-Chairman, Treasurer and Secretary of Repide, Ibid).
Western Institute of Technology (Western Institute of
Technology, Inc., v. Ricardo T. Salas, et al., G.R. No. 113032, Liability of the directors/ trustees or officers of a
August 21, 1997). corporation for their official acts (1996, 1997 bar)
FIDUCIARY DUTIES AND LIABILITY RULES GR: The officers of a corporation are not personally liable
for their official acts.
Nature of the obligation of the directors to the
corporation XPNs: If it is shown that they exceeded their authority. In
the following instances, the directors/ trustees may be
The directors’ character is that of a fiduciary insofar as the held personally liable for damages:
corporation and the stockholders as a body are
concerned. As agents entrusted with the management of 1. They willfully and knowingly vote for or assent to
patently unlawful acts of the corporation; or
the corporation for the collective benefit of the
stockholders, they occupy a fiduciary relation, and in this 2. They are guilty of gross negligence or bad faith in
directing the affairs of the corporation; or
sense the relation is one of trust.
NOTE: Bad faith or negligence is a question of fact.
The ordinary trust relationship of directors of a
Bad faith does not simply mean bad judgment or
corporation and stockholders springs from the fact that
directors have the control and guidance of corporate negligence. It imparts a dishonest purpose or some
affairs and property and hence of the property interests moral obliquity and conscious doing of wrong. It
means breach of a known duty through some motive
of the stockholders. Equity recognizes that stockholders
or interest or ill-will; it partakes of the nature of
are the proprietors of the corporate interests and are
fraud (Ford Phils., Inc., et al. vs. CA, GR 99039, Feb. 3,
ultimately the only beneficiaries thereof (Gokongwei vs.
1997).
SEC, supra).

CORPORATION CODE
4. They acquire any personal or pecuniary interest in personality that is distinct and separate from other
conflict with their duty as such directors or trustees persons including its stockholders, officers, directors,
(CC, Sec. 31); or representatives, and other juridical entities. As a general
rule, therefore, a corporation’s representative who did
5. When they consent to the issuance of watered stocks or not personally bind himself or herself to an arbitration
who, having knowledge thereof, does not forthwith agreement cannot be forced to participate in arbitration
file with the corporate secretary his written proceedings made pursuant to an agreement entered into
objection thereto (CC, Sec. 65); or by the corporation. He or she is generally not considered
a party to that agreement.
6. When they are made, by a specific provision of law, to
personally answer for their corporate action (CC, Sec. However, there are instances when the distinction
144; PD 115, Sec.13; Uichico vs. NLRC, GR 121434, June between personalities of directors, officers, and
2, 1997); or representatives, and of the corporation, are disregarded.
The Court calls this piercing the veil of corporate fiction.
6. When they agree to hold themselves personally and When there are allegations of bad faith or malice against
solidarily liable with the corporation (Tramat corporate directors or representatives, it becomes the
Mercantile, Inc. vs. CA, G.R. No. 111008, November 7, duty of courts or tribunals to determine if these persons
1994). and the corporation should be treated as one (Lanuza, Jr.
v. BF Corporation, et. al., G.R. No. 174938, October 01,
NOTE: When the officers of the corporation exceeded 2014).
their authority, their actions are not binding upon the
corporation unless ratified by the corporation or is Requisites before a Director or Officer of a
estopped from disclaiming them (Reyes v. RCPI Credit Corporation can be held personally liable for
Employees Union, G.R. No. 146535, August 18, 2006). corporate obligations:
Q: BF Corporation, in a collection complaint filed Before a director or officer of a corporation can be held
against Shangri-La and its Board of Directors, alleged personally liable for corporate obligations, however, the
that Shangri-La induced BF Corporation to continue following requisites must concur:
with the construction of the buildings using its own
(1) The complainant must allege in the complaint that the
funds and credit despite Shangri-La’s default.
director or officer assented to patently unlawful acts of
According to BF Corporation, Shangri- La
the corporation, or that the officer was guilty of gross
misrepresented that it had funds to pay for its
negligence or bad faith; and
obligations with BF Corporation, and the delay in
payment was simply a matter of delayed processing of (2) The complainant must clearly and convincingly prove
BF Corporation’s progress billing statements. BF such unlawful acts, negligence or bad faith. (Heirs of Fe
Corporation eventually completed the construction of Tan Uy vs. International Exchange Bank, G.R. No. 166282,
the buildings. Shangri‐La allegedly took possession of G.R. No. 166283, February 13, 2013). The fact that the
the buildings while still owing BF Corporation an corporation ceased operations the day after the
outstanding balance. Petitioners’ main argument promulgation of the SC resolution finding the corporation
arises from the separate personality given to juridical laible does not prove bad faith on the part of the
persons vis‐à-vis their directors, officers, incorporator of the corporation (Polymer Rubber
stockholders, and agents. Since they did not sign the Corporation v. Ang, G.R. No. 185160, July 24, 2013, in Divina,
arbitration agreement in any capacity, they cannot be 2014).
forced to submit to the jurisdiction of the Arbitration
Tribunal in accordance with the arbitration Q: Rana and Burgos are the President and General
agreement. The Arbitral Tribunal rendered a Manager of SKILLEX. Skillex entered into a service
decision, finding that BF Corporation failed to prove contract with Robinsons Land Corporation. Halfway
the existence of circumstances that render through the service contract, Skillex asked the
petitioners and the other directors solidarily liable. It respondents-employees Seva, et al. to execute
ruled that petitioners and Shangri-La’s other individual contracts which stipulated that their
directors were not liable for the contractual respective employments shall end at the last day of
obligations of Shangri-La to BF Corporation. the year. Skillex and Robinsons no longer extended
their contract of janitorial services. Consequently, the
Are Shangri-La’s directors liable for the contractual Skillex dismissed Seva, et al. as they were project
obligations of Shangri-La to BF Corporation? employees whose duration of employment was
dependent on the petitioner's service contract with
A: No. Indeed, as petitioners point out, their personalities Robinsons. Respondents filed a complaint for illegal
as directors of Shangri-La are separate and distinct from dismissal with the NLRC.
Shangri-La.
Should Rana and Burgos be held solidarily liable with
A corporation is an artificial entity created by fiction of the corporation for respondents-employees’
law. This means that while it is not a person, naturally, the monetary claims against the corporation?
law gives it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with a

MERCANTILE LAW
A: No. In the present case, Seva, et al. failed to show the cancelling her COO assignment, citing the
existence of the first requisite. They did not specifically management’s decision to undertake an
allege in their complaint that Rana and Burgos willfully "organizational restructuring" in line with the
and knowingly assented to the petitioner's patently merger, and further ordering Ico to turn over her
unlawful act of forcing the respondents to sign the work to one Victoria Luz, who shall function as STI-
dubious employment contracts in exchange for their Makati’s School Administrator. Based on a report it
salaries. The respondents also failed to prove that Rana was recommended that an investigation committee
and Burgos had been guilty of gross negligence or bad be formed to investigate Ico for grave abuse of
faith in directing the affairs of the corporation. authority, falsification, gross dishonesty, maligning
and causing intrigues, and other charges. The LA
To hold an officer personally liable for the debts of the found Ico to have been illegally, constructively and in
corporation, and thus pierce the veil of corporate fiction, bad faith, dismissed by STI, Jacob and Fernandez. On
it is necessary to clearly and convincingly establish the appeal, the NLRC reversed the ruling of the LA. On
bad faith or wrongdoing of such officer, since bad faith is petition for certiorari before the CA, it affirmed the
never presumed (FVR Skills and Services Exponents, Inc. ruling of the NLRC.
[SKILLEX], et. al. v. Seva, et. al., G.R. No. 200857, October 22,
2014). Is Jacob solidarily liable with STI?
Liability of a director for termination of employees A: No. A corporation, as a juridical entity, may act only
through its directors, officers and employees. Obligations
Without any evidence of bad faith or malice, directors may incurred as a result of the directors’ and officers’ acts as
not be held personally liable. Only when the termination corporate agents, are not their personal liability but the
is done with malice or in bad faith on the part of the direct responsibility of the corporation they represent. As
director may the director be held solidarily liable with the a rule, they are only solidarily liable with the corporation
corporation (Equitable Banking Corporation vs. NLRC, GR for the illegal termination of services of employees if they
No. 02467, June 13, 1997). acted with malice or bad faith.
Article 212(e) does not state that corporate officers are To hold a director or officer personally liable for
personally liable for the unpaid salaries or separation pay corporate obligations, two requisites must concur: (1) it
of employees of the corporation. The liability of corporate must be alleged in the complaint that the director or
officers for corporate debts remains governed by Section officer assented to patently unlawful acts of the
31 of the Corporation Code. A director is not personally corporation or that the officer was guilty of gross
liable for the debts of the corporation, which has a negligence or bad faith; and (2) there must be proof that
separate legal personality of its own. A director is the officer acted in bad faith (Girly G. Ico v. STI, Inc., et. al,
personally liable for corporate debts only if he wilfully G.R. No. 185100, July 9, 2014).
and knowingly votes for or assents to patently unlawful
acts of the corporation or he is guilty of gross negligence Q: Pasawilan, et al. were all employed by Alert
or bad faith in directing the affairs of the corporation. Security as security guards and were assigned at the
However, to hold a director personally liable for debts of DOST. Claiming that they were underpaid, Pasawilan,
the corporation, and thus pierce the veil of corporate et al. filed a complaint for money claims (and later on
fiction, the bad faith or wrongdoing of the director must for illegal dismissal) against Alert Security and its
be established clearly and convincingly. Bad faith is president and general manager, petitioner Manuel D.
never presumed. Moreover, bad faith does not Dasig, with the Labor Arbiter. The LA ruled that
automatically arise just because a corporation fails to Pasawilan, et al. were illegally dismissed and held
comply with the notice requirement of labor laws on Alert and Dasig solidarily laible. The NLRC dismissed
company closure or dismissal of employees. The failure the complaint for illegal dismissal. The CA reinstated
to give notice is not an unlawful act because the law does the LA decision and held that Alert Security and Dasig
not define such failure as unlawful. Such failure to give are solidarily liable for payment of the monetary
notice is a violation of procedural due process but does awards in favor of Pasawilan, et al.
not amount to an unlawful or criminal act. Patently
unlawful acts are those declared unlawful by law which Is the CA correct?
imposes penalties for commission of such unlawful acts.
There must be a law declaring the act unlawful and A: No. Basic is the rule that a corporation has a separate
penalizing the act (Carag v. NLRC, G.R. No. 147590, April 2, and distinct personality apart from its directors, officers,
2007, in Divina, 2014). or owners. In exceptional cases, courts find it proper to
breach this corporate personality in order to make
Q: Jacob and Fernandez are STI officers, the former directors, officers, or owners solidarily liable for the
being the President and CEO and the latter as the companies’ acts. Section 31 of the Corporation
Senior VP. Ico, was hired as Faculty Member by STI Code provides for the basis of the liability of directors,
College Makati, Inc., a wholly-owned subsidiary of STI. trustees or officers. Article 212(e) of the Labor Code, by
Ico was subsequent promoted as Dean of STI College- itself, does not make a corporate officer personally liable
Parañaque and, thereafter, as COO of STI-Makati. for the debts of the corporation. The governing law on
However, after the merger between STI and STI personal liability of directors for debts of the corporation
College Makati (Inc.), Ico received a memorandum is still Section 31 of the Corporation Code.In the present

CORPORATION CODE
case, there is no evidence to indicate that Manuel D. Dasig, they were grossly negligent in handling its affairs.
as president and general manager of Alert Security, is Aside from documents and contracts, the corporation
using the veil of corporate fiction to defeat public also submitted in evidence records of the officers’ U.S.
convenience, justify wrong, protect fraud, or defend crime Dollar deposits in several banks overseas – Boston
(Alert Security and Investigation Agency, Inc., et al., Saidali Bank, Bank of Switzerland, and Bank of New York.
Pasawilan, G.R. No. 182397, September 14, 2011).
For their part, the officers filed a criminal complaint
Liability of directors for the issuance of watered against the directors of Hi Yielding Corporation for
stocks violation of Republic Act No. 6426, otherwise known
as the Foreign Currency Deposit Act of the
Any director or officer of a corporation consenting to the Philippines. The officers alleged that their bank
issuance of stocks for a consideration less than its par or deposits were illegally disclosed for want of court
issued value or for a consideration in any form other than order, and that such deposits were not even the
cash, valued in excess of its fair value, or who, having subject of the case against them.
knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate Will the complaint filed against the directors of Hi
secretary, shall be solidarily, liable with the stockholder Yielding Corporation prosper? Explain.
concerned to the corporation and its creditors for the
difference between the fair value received at the time of A: No. Foreign Currency Deposits law applies to foreign
issuance of the stock and the par or issued value of the currency deposit accounts constituted in the Philippines
same (CC, Sec. 65). and not when constituted abroad. In this instance, the
foreign currency deposit was made abroad.
Liability of the director, trustee or officer who
attempts to acquire or acquires any interest adverse Doctrine of Corporate Opportunity (2001, 2005 Bar)
to the corporation in respect of any matter which has
been reposed in him in confidence Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to
When a director, trustee, or officer attempts to acquire or the corporation, thereby obtaining profits to the prejudice
acquires, in violation of his duty, any interest adverse to of such corporation (CC, Sec. 34)
the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes A director shall refund to the corporation all the profits he
a disability upon him to deal in his own behalf, he shall be realizes on a business opportunity which:
liable as a trustee for the corporation and must account 1. The corporation is financially able to undertake;
for the profits which otherwise would have accrued to the 2. From its nature, is in line with corporations business
corporation (CC, Sec. 31). and is of practical advantage to it; and
3. The corporation has an interest or a reasonable
NOTE: Private or secret profits obtained must be expectancy (ibid).
accounted for, even though the transaction on which they
are made is advantageous or is not harmful to the NOTE: The rule shall be applied notwithstanding the fact
corporation, or even though the director/ trustee or that the director risked his own funds in the venture
officer acted without intent to injure the corporation. (ibid).
Q: Is the above rule changed by the fact that the However, if such act is ratified by a vote of the
agreement whereby the director/ trustee or officer is stockholders representing at least 2/3 of the outstanding
to receive a secret profit is made prior to the time he capital stock, the director is excused from remitting the
becomes as such director/ trustee or officer? profit realized (ibid).
A: No. Even though the agreement to receive a secret Non-applicability of the Doctrine of Corporate
profit is made prior to the time the recipient becomes a Opportunity
director/ trustee or officer, he is still liable under the
above rule (De Leon, supra). The doctrine is not applicable to the following instances:
1. When a director engages in a distinct enterprise of
Q: Is the above rule changed by the fact that the secret the same general class of business as that which his
profits were obtained from ultra vires transactions? corporation is engaged in, so long as he acts in good
faith.
A: No. Notwithstanding the fact that the profits were
derived from transaction ultra vires, the director/ trustee 2. The opportunity is one which is not essential to the
or officer is still liable (ibid). corporation’s business, or employment of company’s
resources, or where the director or officer embracing
Q: Hi Yielding Corporation filed a complaint against opportunity personally is not brought into direct
five of its officers for violation of Section 31 of the competition with the corporation.
Corporation Code. The corporation claimed that he
said officers were guilty of advancing their personal 3. When the property or business opportunity has
interests to the prejudice of the corporation, and that ceased to be a “corporate opportunity” and has

MERCANTILE LAW
transformed into a “personal opportunity”. In such a corporate officer by itself is not enough to hold him
case the corporation is definitely no longer able to criminally liable.
avail itself of the opportunity, which may “arise from
financial insolvency”, or from legal restrictions, or INSIDE INFORMATION
from any other factor which prevents it from acting
upon the opportunity for its own advantage (SEC Inside Information
Opinion, March 4, 1982).
Any material non-public information about the issuer of
Q: Malyn, Schiera and Jaz are the directors of Patio the securities (corporation) or the security obtained by
Investments, a close corporation formed to run the being an insider, which includes: (ID-ReGoL)
Patio Cafe, an al fresco coffee shop in Makati City. In 1. The Issuer;
2000, Patio Cafe began experiencing financial 2. A Director or officer (or any person performing
reverses, consequently, some of the checks it issued similar functions) of, or a person controlling the
to its beverage distributors and employees bounced. issuer;
3. A person whose RElationship or former
In October 2003, Schiera informed Malyn that she relationship to the issuer gives or gave him access
found a location for a second cafe in Taguig City. to material information about the issuer or the
Malyn objected because of the dire financial condition security that is not generally available to the public;
of the corporation. 4. A GOvernment employee, director, or officer of an
exchange, clearing agency and/or self-regulatory
Sometime in April 2004, Malyn learned about Fort organization who has access to material
Patio Cafe located in Taguig City and that its information about an issuer or a security that is not
development was undertaken by a new corporation generally available to the public; or
known as Fort Patio, Inc., whereboth Schiera and Jaz 5. A person who Learns such information by a
are directors. Malyn also found that Schiera and Jaz, communication from any forgoing insiders (SRC,
on behalf of Patio Investments, had obtained a loan of Sec. 3.8).
P500, 000.00, from PBCom Bank, for the purpose of
opening Fort Patio Cafe. This loan was secured by the CONTRACTS
assets of Patio Investments and personally
guaranteed by Schiera and Jaz. BY SELF-DEALING DIRECTORS WITH THE
CORPORATION
Malyn then filed a corporate derivative action before
the Regional Trial Court of Makati City against Schiera Dealings of directors, trustees or officers with the
and Jaz, alleging that the two directors had breached corporation (1995, 1996, 2001, 2002, 2008 Bar)
their fiduciary duties by misappropriating money and
assets of Patio Investments in the operation of Fort A contract of the corporation with one or more of its
Patio Cafe. directors or trustees or officers is voidable, at the option
of the corporation, unless all the following conditions are
Did Schiera and Jaz violate the principle of corporate present:
opportunity? Explain. (2005 Bar) 1. That the presence of such director or trustee in the
board meeting in which the contract was approved
A: Yes, Shciera and Jaz violated the Principle of Corporate was not necessary to constitute a quorum for such
Opportunity, because they used Patio Investments to meeting;
obtain a loan, mortgaged its assets and used the proceeds 2. That the vote of such director or trustee was not
of the loan to acquire a coffee shop through a corporation necessary for the approval of the contract;
they formed. (CC, Sec. 34). 3. That the contract is fair and reasonable under the
circumstances; and
RESPONSIBILITY FOR CRIMES 4. That in the case of an officer, the contract with the
officer has been previously authorized by the board of
Where a law requires a corporation to do a particular act, directors (CC, Sec. 32, par. 1).
failure of which on the part of the responsible officer to do
so constitutes an offense, the responsible officer is Contract entered with a director or trustee may be
criminally liable therefore. The reason is that a ratified by the vote of stockholders
corporation can act through its officers and agents and
where the business itself involves a violation of law all A contract of the corporation with one or more of its
who participate in it are liable. While the corporation may directors or trustees or officers may be ratified by the vote
be fined for such criminal offense if the law so provides, of the stockholders representing at least 2/3 of the
only the responsible corporate officer can be imprisoned outstanding capital stock or 2/3 of the members in a
(People vs. Tan Boon Kong, GR L-35262, March 15, 1930). meeting called for the purpose. However, the following
should be concur:
However, a director or officer can be held liable for a 1. Any of the first 2 conditions set forth in the 1st
criminal offense only when there is a specific provision of paragraph of Sec. 32, CC is absent;
law making a particular officer liable because being a
2. Contract is with a director or trustee;

CORPORATION CODE
NOTE: If the contract is with an officer of the MANAGEMENT CONTRACTS
corporation, there must be a prior board resolution
authorizing the same. Management contract
3. Full disclosure of the adverse interest of the directors A management contract is any contract whereby a
or trustees involved is made at the stockholders’ corporation undertakes to manage or operate all or
meeting called for the purpose; substantially all of the business of another corporation,
whether such contracts are called service contracts,
4. The contract is fair and reasonable under the operating agreements or otherwise. A corporation under
circumstances (CC, Sec. 32, par. 2). management is bound by the acts of the managing
corporation and is estopped to deny its authority
NOTE: Hence, in all such instances, the element that the (National Bank vs. Producers’ Warehouse Association, G.R.
contract is fair and reasonable cannot be dispensed with No. L-16510, January 9, 1922).
for the transaction is to be valid and enforceable.
EXECUTIVE COMMITTEE
Q: Suppose that the by-laws of X Corporation, a mining
firm, provides that "The directors shall be relieved Executive Committee
from all liability for any contract entered into by the
corporation with any firm in which the directors may An executive committee is a body created by the by-laws
be interested." Thus, director A acquired claims and composed of not less than three members of the
which overlapped with X's claims and were necessary board which, subject to the statutory limitations, has all
for the development and operation of X's mining the authority of the board to the extent provided in the
properties. Is the by-law provision valid? Why? (2001 board resolution or by-laws. The committee may act by a
Bar) majority vote of all of its members (CC, Sec. 35).
A: No. It is in violation of Sec. 32 of the Corporation Code. NOTE: An executive committee can only be created by
virtue of a provision in the by-laws and that in the absence
Q: What happens if director "A" is able to consummate of such by-law provision, the board of directors cannot
his mining claims over and above that of the simply create or appoint an executive committee to
corporation's claims?(2001 Bar) perform some of its functions (SEC Opinion, Sept. 27,
1993).
A: "A" should account to the corporation for the profits
which he realized from the transaction. He grabbed the In such a case where there was an unauthorized creation
business opportunity from the corporation (CC, Sec. 34). of executive committee by the board, the principle of de
facto officers may be applied insofar as third persons are
BETWEEN CORPORATIONS WITH INTERLOCKING concerned. However, insofar as the corporation is
DIRECTORS concerned, the unauthorized act of appointment of an
executive committee may be subject to Sec. 144, which
Contracts between corporations with interlocking provides for penalties in violation of the Code (ibid).
directors
Non-members of the board may be appointed as
A contract between two or more corporations having members of the executive committee
interlocking directors shall not be invalidated on that
ground alone. Provided that: Non-members of the board may be appointed as members
1. Contract is not fraudulent; of the executive committee provided that there are at
2. Contract is fair and reasonable under the least 3 members of the board who are members of the
circumstances; and committee (SEC Opinion, Sept. 16, 1986). A person not a
3. If the interest of the interlocking director in one director can be a member of the executive committee but
corporation or corporations is merely nominal (not only in a recommendatory or advisory capacity.
exceeding 20% of the outstanding capital stock), he
shall be subject to the provisions of Sec. 32 insofar as A foreigner is allowed to be a member of the executive
the latter corporation or corporations are concerned committee
(CC, Sec. 33).
A foreigner can be allowed representation in the
Substantial interest executive committee since he can be allowed in the BOD.
An Executive Committee is a governing body which
Stockholdings exceeding 20% of the outstanding capital functions as the board itself. Thus, membership therein
stock shall be considered substantial for purposes of shall be governed by the same law/ rules applicable to the
interlocking directors (ibid). BOD as provided in Sec. 35 (SEC Opinion, June 3, 1998).

MERCANTILE LAW
Executive committees provided in the Revised Code 9. As provided in the 2. Be sent to every
of Corporate Governance by-laws director or trustee
a. Within the period
1. Audit Committee Venue: provided in the by-laws
2. Nomination Committee 1. Venue fixed by b. In the absence of
3. Compensation and Remuneration Committee the by-laws; or provision in the by-
2. If venue is not laws, at least 1 day
Limitations on the powers of the executive committee provided by the prior to the scheduled
by-laws, meeting.
The executive committee cannot act on the following: anywhere in or
1. Matters needing stockholder approval outside of the A director or trustee may
2. Filling up of board vacancies Philippines. waive this requirement,
3. Amendment, repeal or adoption of by-laws either expressly or
4. Amendment or repeal of any resolution of the Board impliedly.
which by its express terms is not amendable or
repealable Q: The petitioner Lopez Realty, Inc. issued a Board
5. Cash dividend declaration (CC, Sec. 35). Resolution authorizing Arturo, a member of the
Board of Directors of the corporation, to negotiate
Quorum required of the executive committee with the Tanjanco spouses for the sale of the ½ shares
of Lopez Realty Corporation. Because of this, Arturo
The quorum requirement for executive committee is the and the spouses executed a Deed of Sale for the shares
same as that of the BOD. for Php3.6M. However, Asuncion, another Board of
Director of the said corporation, submitted a letter
Decisions of the executive committee are not subject requesting the Board to defer any transaction with
to appeal to the board Tanjanco as she was not apprised and given notice of
the said transaction. Despite this, the execution of the
Decisions of the executive committee are not subject to Deed of Absolute Sale between Arturo and spouses
appeal to the board. However, if the resolution of the Tanjanco proceeded. Asuncion then filed a complaint
Executive Committee is invalid, i.e. not one of the powers for the Annulment of the Deed of Sale with a prayer
conferred to it, it may be ratified by the board (SEC for a writ of preliminary injuction in the RTC.
Opinion, July 29, 1995). Asuncion alleges that she was neither notified nor
apprised of the on-going sale of the shares of LRI. Is
MEETINGS Asuncion’s contention correct?
REGULAR OR SPECIAL A: No. The general rule is that a corporation, through its
board of directors, should act in the manner and within
Meetings of BOD/BOT the formalities, if any, prescribed by its charter or by the
general law. Thus, directors must act as a body in a
i. DATE AND PLACE OF ii. REQUIRED WRITTEN meeting called pursuant to the law or the corporation's
MEETING /VERBAL NOTICE by-laws, otherwise, any action taken therein may be
Regular Meeting questioned by any objecting director or shareholder.
Notice must: However, the actions taken in such a meeting by the
1. State the date, time and directors or trustees may be ratified expressly or
4. The date fixed in the impliedly. In the present case, the ratification was
place of the meeting
by-laws; or expressed through the July 30, 1982 Board Resolution.
2. Be sent to every
5. If there is no date in Asuncion claims that the July 30, 1982 Board Resolution
director or trustee
the by-laws – shall did not ratify the Board Resolution dated August 17, 1981
a. Within the period
be held monthly for lack of the required number of votes because Juanito
provided in the by-laws
b. In the absence of is not entitled to vote while Leo voted "no" to the
Venue: ratification of the sale even if the minutes stated
provision in the by-
6. Venue fixed by the otherwise (Lopez Realty, Inc. et. al. v. Spouses Tanjangco,
laws, at least 1 day
by-laws; or G.R. No. 154291, November 12, 2014).
prior to the scheduled
7. If venue is not
meeting.
provided by the by- Meeting held in the absence of some of the directors
laws, anywhere in or and without any notice given to them is illegal
A director or trustee may
outside of the
waive this requirement,
Philippines. It is illegal, and the action at such meeting although by a
either expressly or
impliedly. majority of the directors, is invalid unless:
1. Subsequently ratified or waived, expressly or
Special Meeting
impliedly, by the absent directors or
8. Any time upon the Notice must: 2. Rights have been acquired by innocent third
call of the 1. State the date, time and persons, as against whom the corporation must be
president; or place of the meeting held estopped to set up the failure to observe
formalities (De Leon, supra).

CORPORATION CODE
WHO PRESIDES
Directors or trustees cannot attend or vote by proxy
at board meetings The president shall preside at all meetings of the directors
or trustees as well as of stockholders or members unless
Directors or trustees cannot attend or vote by proxy at the by-laws provide otherwise (CC, Sec. 54).
board meetings (CC, Sec. 25). The members of the BOD are
required to exercise their judgment and discretion in Q: Under the articles of incorporation of Manila
running the affairs of the corporation and they cannot be Industrial Corp., its principal place of business shall
substituted by others (SEC Opinion, May 27, 1970). be in Pasig, Metro Manila. The principal corporate
offices are at Ortigas Center, Pasig, Metro Manila,
Requisites for a valid tele/ videoconferencing while factory processing leather products is in
Manila. The corporation holds its annual
R.A. 8792, as implemented by SEC Memo. Circular No. 15, stockholders’ meeting at the Manila Hotel in Manila
Nov 30, 2001, provides that: and its BOD meeting at a hotel in Makati, Metro
1. Directors must express their intent on Manila. The by-laws are silent as to the place of
teleconferencing; meeting of the stockholders and directors.
2. Proper identification of those attending; a. Who shall preside at the meeting of the
3. The corporate secretary must safeguard the directors?
integrity of the meeting by recording it. There is no b. Can Ting, a stockholder, who did not attend the
violation of the Anti-Wire Tapping Act (R.A. 4200) stockholders’ annual meeting in Manila,
because all the parties to the board meeting are question the validity of the corporate
aware that all the communications are recorded. resolutions passed at such meeting?
c. Can the same stockolder question the validity
NOTE: The basic types of teleconferencing are: of the resolutions adopted by the BOD at the
1. Video conferencing; meeting held in Makati? (1993 Bar)
2. Computer conferencing; A:
3. Audio conferencing.
a. Section 54 of the Code provides that it is the
Contents of the notice, which should be sent to every President who shall preside over the directors’ meeting,
director in case of a tele/videoconferencing unless the by-laws provide otherwise. However, in
practice, it is the Chairman who presides because the
The Corporate Secretary shall send out the notices of the President only reports to the Chairman. Only in the
meeting to all directors in accordance with the manner of absence of a Chairman can a President preside over
giving notice as stated in the corporate by-laws. directors’ meetings.
The notice shall include the following: b. No. Section 51 provides that the annual
stockholders’ meeting shall be held in the city or
1. Inquiry on whether the director will attend physically municipality where the principal office is located. For this
or through tele/videoconferencing; purpose, the law also provides that Metro Manila is
2. Contact number/s of the Secretary and office staff considered a city or municipality. Since the principal
whom the director may call to notify and state whether he office or business of MIC is Pasig, Metro Manila, the
shall be physically present or attend through holding of the annual stockholders’ meeting in Manila is
tele/videoconferencing; proper.
3. Agenda of the meeting; c. No. Ting cannot question the validity of corporate
4. All documents to be discussed in the meeting, including resolutions passed in the BOD meeting because Section 53
of the Code does not require that the meeting must be held
attachments, shall be numbered and duly marked by the
within the city or municipality where the principal office
Secretary in such a way that all the directors, physically or
electronically present, can easily follow, refer to the of the corporation is located. The directors’ meeting can
documents and participate in the meeting (SEC Memo Circ. be held anywhere in or outside the Philippines.
No. 15, Series of 2001).
QUORUM
NOTE: If the director chooses tele/videoconferencing, he
shall give notice of at least five days prior to the scheduled Quorum in board meetings
meeting to the Secretary. The latter shall be informed of
GR: Majority of the number of directors or trustees.
his contact number/s. In the same way, the Secretary shall
inform the director concerned of the contact number/s he
XPN: If AOI or the by-laws provide for a greater number
will call to join the meeting. The Secretary shall keep the
records of the details, and on the date of the scheduled (CC, Sec. 25).
meeting, confirm and NOTE such details as part of the
NOTE: The quorum is the same even if there is vacancy in
minutes of the meeting (ibid).
the board.
In the absence of an arrangement, it is presumed that the
director will physically attend the Board meeting (ibid).

MERCANTILE LAW
Rule as to the decision of the quorum 2. The inherent unfairness involved when a party takes
advantage of such information knowing it is unavailable
GR: Every decision of at least a majority of the directors to those with whom he is dealing (SEC v. Interport
or trustees present at a meeting at which there is quorum Resources Corporation, G.R. No. 135808, October 6,
shall be valid as a corporate act (ibid). 2008).
XPNs: STOCKHOLDERS AND MEMBERS

1. The election of officers which shall require the vote of a
majority of all the members of the board (ibid). A person becomes a shareholder the moment he:
2. No board approval is necessary where there is custom, 1. Enters into a subscription contract with an existing
usage and practice in the corporation not requiring prior corporation (he is a stockholder upon acceptance of the
board approval or where subsequent approval is corporation of his offer to subscribe whether the
sufficient (Board of Liquidators v. Kalaw, G.R. No. L‐18805, consideration is fully paid or not);
August 14, 1967). 2. Purchase treasury shares from the corporation; or
3. Acquires shares from existing shareholders by sale or
Three out of five directors of the board of directors any other contract, or acquires shares by operation of law
present in a special meeting do not constitute a quorum like succession (Sundiang Sr. & Aquino, 2009).
to validly transact business when its by-laws requires at
least four members to constitute a quorum. Under Section RIGHTS OF A STOCKHOLDER AND MEMBER
25 of the Corporation Code, the articled of incorporation (1996 Bar)
or by-laws may fix a greater number than the majority of
the number of directors to constitute a quorum. Any 1. Management Right
number less than the number provided in the articles or a. To attend and vote in person or by proxy at a
by-laws cannot constitute a quorum; any act therein stockholders’ meetings (CC, Secs. 50, 58).
would not bind the corporation; all that the attending b. To elect and remove directors (CC, Secs. 24, 28).
directors could do is to adjourn (Pena vs. CA, G.R. No. c. To approve certain corporate acts (CC, Sec. 58)
91478, February 7, 1991, in Divina, 2014). d. To adopt and amend or repeal the by-laws of
adopt new by-laws (CC, Secs. 46, 48).
RULE ON ABSTENTION e. To compel the calling of the meetings (CC, Sec. 50).
f. To enter into a voting trust agreement (CC, Sec. 59).
Effect of Abstention g. To have the corporation voluntarily dissolved (CC,
Secs. 118, 119).
No inference can be drawn in a vote of abstention. When
a director or trustee abstains, it cannot be said that he 2. Proprietary rights
intended to acquiesce in the action taken by those who a. To transfer stock in the corporate book (CC, Sec.
voted affirmatively. Neither, for that matter, can such 63).
inference be drawn from the abstention that he was b. To receive dividends when declared (CC, Sec. 43).
abstaining because he was not then ready to make a c. To the issuance of certificate of stock or other
decision (Lopez v. Ercita, G.R. No. L-32991, June 29, 1972). evidence of stock ownership (CC, Sec. 64).
d. To participate in the distribution of corporate
Instances when a director is required to abstain in assets upon dissolution (CC, Sec. 118, 119).
voting e. To pre-emption in the issue of shares (CC, Sec. 39).
Whenever a director believes he/she has a conflict of 10. Remedial rights

interest, the director should abstain from voting on the a. To inspect corporate books (CC, Sec. 74).
issue and make sure his/her abstention is noted in the b. To recover stock unlawfully sold for delinquent
minutes (Robert's Rules, 10th ed.). The other reason a payment of subscription (CC, Sec. 69).
director might abstain is that he/she believes there was c. To be furnished with most recent financial
insufficient information for making a decision. Otherwise, statements or reports of the corporation’s operation
directors should cast votes on all issues put before them. (CC, Sec. 74, 75).
Failure to do so could be deemed a breach of their d. To bring suits (derivative suit, individual suit, and
fiduciary duties. representative suit).
e. To demand payment in the exercise of appraisal
Example where a director needs to abstain right (CC, Secs. 41, 81)
To avoid “Insider Trading”, Insiders are obligated to DOCTRINE OF EQUALITY OF SHARES

abstain from trading the shares of his corporation. This
duty to abstain is based on two factors: Where the articles of incorporation do not provide for any
distinction of the shares of stock, all shares issued by the
1. The existence of a relationship giving access, directly or corporation are presumed to be equal and enjoy the same
indirectly, to information intended to be available only for rights and privileges and are also subject to the same
a corporate purpose and not for the personal benefit of liabilities (CC, Sec. 6).
anyone;

CORPORATION CODE
PARTICIPATION IN MANAGEMENT Duration of proxy
Under the Corporation Code, stockholders or members 1. Specific proxy – authority granted to the proxy holder to
periodically elect the board of directors or trustees, who vote only for a particular meeting on a specific date.
are charged with the management of the corporation.The 2. Continuing proxy – grants authority to a proxy to appear
board, in turn, periodically elects officers to carry out and vote for and in behalf of a shareholder for a
management functions on a day-to-day basis. As owners, continuing period which should not be more than 5
though, the stockholders or members have residual years at any one time. By-laws may provide for a
powers over fundamental and major corporate shorter duration of a continuing proxy.
changes.
Extent of authority of a proxy
While stockholders and members (in some instances) are
entitled to receive profits, the management and direction 1. General proxy – A general discretionary power to attend
of the corporation are lodged with their representatives and vote at an annual meeting, with all the powers the
and agents -- the board of directors or trustees. In other undersigned would possess if personally present, to vote
words, acts of management pertain to the board; and for directors and all ordinary matters that may properly
those of ownership, to the stockholders or members. In come before a regular meeting.
the latter case, the board cannot act alone, but must seek
approval of the stockholders or members (Tan v. Sycip, NOTE: A holder of a general proxy has no authority
G.R. No. 153468, August 17, 2006). to vote for a fundamental change in the corporate
charter or other unusual transactions such as merger
PROXY or consolidation.
The term “proxy” designates the formal written authority 2. Limited proxy – Restrict the authority to vote to
given by the owner or holder of the stock, who has a right specified matters only and may direct the manner in
to vote it, or by a member, as principal, to another person, which the vote shall be cast (ibid.)
as agent, to exercise the voting rights of the former.
Requirements of a valid proxy
It is also used to apply to the holder of the authority or
person authorized by an absent stockholder or member 1. Proxies shall be in writing and shall be signed by the
to vote for him at a stockholders’ or members’ meeting. stockholder or member concerned;
It also refers to the instrument which evidences the NOTE: Oral proxies are NOT valid.
authority of the agent (De Leon, supra).
2. The proxy shall be filed before the scheduled meeting
NOTE: A proxy is a special form of agency. A proxy holder with the corporate secretary;
is an agent and as such a fiduciary (De Leon, supra).Since
a proxy acts for another, he may act as such although he 3. Unless otherwise provided (continuing in nature) in the
himself is disqualified to vote his shares.A proxy- proxy, it shall be valid only for the meeting for which it
stockholder disqualified to vote because his stock has is intended; and
been declared delinquent may vote the stocks of his
principal which is not delinquent. NOTE: The authority may be general or limited.
Purposes of proxies 4. No proxy shall be valid and effective for a period longer
than 5 years at any one time (CC, Sec. 58, as amended by
The purposes and use of proxies are as follows: SRC, Sec. 20).
1. Assures the presence of a quorum in meetings of
stockholders of large corporations; Instances when the right to vote by proxy may be
2. Enables those who do not wish to attend a exercised
stockholders’/ members’ meeting to protect their
interest by exercising their right to vote through a 1. Election of the BOD/BOT (CC, Sec. 24)
representative; and 2. Voting in case of joint ownership of stock (CC, Sec. 56)
3. One of the devices in securing voting control or 3. Voting by trustee under VTA (CC, Sec. 59, last par.)
management control in the corporation (ibid.). 4. Voting by members in non-stock corps (CC, Sec. 89,
par. 2)
Who may be a proxy
NOTE: In non-stock corporations the right to vote by
Any person whom the stockholder or member sees fit to proxy, or even the right to vote may be denied to
represent him. members in the articles of incorporation or the by-
laws as long as the denial is not discriminatory.
NOTE: By-laws restricting the stockholder’s or member’s
right in this respect are void (De Leon, supra).Further, 5. In considering other matters:
same person may act as proxy for one or several 1. Pledge or mortgage of shares (CC, par. 2, Sec.
stockholders or members. 55).

MERCANTILE LAW
2. In all other matters as may be provided in the 3. To enable the owners of the majority of the stock of the
by-laws (CC, Sec. 47[4]). corporation to control the corporation;
3. In all meetings of stockholders or members (CC,
Sec. 58). 4. To vest and retain the management of the
corporation in the persons originally promoting it;
Power to appoint a proxy is a personal right
5. To prevent a rival concern from acquiring control of the
The right to vote is inseparable from the right of corporation;
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to vote 6. To carry out a proposed sale of the corporation’s assets
stock must have been given by the person who is the legal and to facilitate its dissolution;
owner of the stock entitled to vote the same at the time it
is be voted (SEC Opinion, Dec. 3, 1993, citing 5 Fletcher, Sec. 7. To enable two holding companies to operate jointly a
2053). corporation controlled by them;
Unless the stockholder or member who executed a proxy 8. To effect a plan for reorganization of a corporation
gives his consent in writing, a designated proxy may not in financial difficulty or in bankruptcy proceedings; and
further re-designate another under the same proxy. An
alternate proxy can only act as proxy in case of non- 9. To aid a financially embarrassed corporation to obtain
attendance of the other designated proxy (De Leon, supra). a loan and protect its creditors (De Leon, supra).
Revocation of proxy Procedural requirements and limitations imposed on

VTA’s
A proxy may be revoked in writing, orally or by conduct.
GR: One who has given a proxy the right to vote may 1. The agreement must be in writing and notarized and
revoke the same at anytime. specify the terms and conditions thereof.
XPN: Said proxy is coupled with interest, even if it may 2. A certified copy of such agreement shall be filed with
appear by its terms to be revocable (De Leon, supra) the corporation and with the SEC, otherwise, it is
ineffective and unenforceable.
NOTE: Last proxy given revokes all previous proxies. (SEC
Opinion, October 14, 1991). 3. The certificate/s of stock covered by the VTA shall be
canceled.
SEC may pass upon the validity of the issuance and use
of proxies 4. A new certificate shall be issued in the name of the
trustee/s stating that they are issued pursuant to the
PD 902-A empowers the SEC, among others, “to pass upon VTA.
the validity of the issuance and use of proxies and voting
trust agreements for absent stockholders or members” 5. The transfer shall be noted in the books of the
(Sec. 6[g]). corporation, that it is made pursuant to said VTA.
VOTING TRUST 6. The trustee/s shall execute and deliver to the

transferors voting trust certificates, which shall be
Voting trust agreement transferable in the same manner and with the same
effect as certificates of stock.
A voting trust agreement (VTA) is an agreement whereby
one or more stockholders transfer their shares of stocks 7. No VTA shall be entered into for a period exceeding 5
to a trustee, who thereby acquires for a period of time the years at any one time (i.e., for every voting trust)
voting rights (and/or any other specific rights) over such except in the case of a voting trust specifically
shares; and in return, trust certificates are given to the requiring a longer period as a condition in a loan
stockholder/s, which are transferable like stock agreement, in which case, the period may exceed 5
certificates, subject, to the trust agreement. years but shall automatically expire upon full
payment of the loan.
Purposes of a VTA
8. No VTA shall be entered into for the purpose of
The following are the purposes of a VTA: circumventing the law against monopolies and illegal
1. VTA makes possible a unified control of the affairs of combinations in restraint of trade.
the corporation and a consistent policy by binding
stockholders to vote as a unit; 9. The agreement must not be used for purposes of fraud
(CC, Sec. 59).
2. To assure continuity of policy and management
especially of a new corporation desirous of attracting
investors;

CORPORATION CODE
Duration of a VTA Pooling agreement
Unless expressly renewed, all rights granted in a voting This is an agreement, also known as voting agreement,
trust agreement shall automatically expire at the end of entered into by and between 2 or more stockholders to
the agreed period, and the voting trust certificates as well make their shares as one unit (ex: Shareholders, A,B,C,D,E,
as the certificates of stock in the name of the trustee or holds 50% of the outstanding capital stock, entered into a
trustees shall thereby be deemed canceled and new pooling agreement to vote for F as a member of the board
certificates of stock shall be reissued in the name of the of director). This usually relates to election of directors
transferors (CC, Sec. 59). where parties often provide for arbitration in case of
disagreement. This does not involve a transfer of stocks
Effect of a voting trust agreement with respect to the but is merely a private agreement (CC, Sec. 100).
rights of the trustor and the trustee
Validity of pooling agreements
It is the trustee of the shares who acquires legal title to the
shares under the voting trust agreement and thus entitled Pooling agreements are valid as long as they do not limit
to the right to vote and the right to be elected in the board the discretion of the BOD in the management of corporate
of directors while the trustor-stockholder has the affairs or work any fraud against stockholders not party
beneficial title which includes the right to receive to the contract.
dividends (Lee v. CA, G.R. No. 93695, February 4, 1992).
Pooling agreement v. Voting Trust Agreement
Voting trust agreement v.Proxy
In Pooling Agreement, the stockholders themselves
VOTING TRUST PROXY exercise their right to vote. On the other hand, the trustees
If validly executed, VTA is are the ones who exercise the right to vote under the
A proxy, unless coupled Voting Trust Agreement.
intended to be irrevocable for
with interest, is
a definite and limited period of
revocable at anytime. Q: A distressed corporation executed a VTA for a
time.
Trustee acquires legal title to Proxy has no legal title period of three years over 60% of its outstanding paid
the shares of the transferring to the shares of the up shares in favor of a bank to which it was indebted,
stockholder principal with the Bank named as trustee. Additionally, the
Right to vote as well as other Company mortgaged all its properties to the Bank.
rights may be given except the Because of the insolvency of the Company, the Bank
Only right to vote is foreclosed the mortgaged properties, and as the
right to receive dividends. The
given. The proxy must highest bidder, acquired said properties and assets of
trustee may vote in person or
vote in person. the Company.
by proxy unless the agreement
provides otherwise
The agreement must be Proxy need not be The three-year period prescribed in the Voting Trust
notarized notarized Agreement having expired, the company demanded
Proxy can only act at a the turn-over and transfer of all its assets and
Trustee is not limited to act at specified stockholder’s properties, including the management and operation
any particular meeting meeting (if not of the Company, claiming that under the
continuing) Voting Trust Agreement, the Bank was constituted as
The stock certificate shall be trustee of the management and operations of the
cancelled and a new one in the Company. (1992 Bar)
No cancellation of the
name of the trustee shall be
certificate shall be made A: The demand of the company does not tally with the
issued stating that they are
issued pursuant to a VTA. concept of a VTA. The VTA merely conveys to the trustee
A trustee can vote and exercise the right to vote the shares of grantor/s. The consequence
A proxy can only vote in of foreclosure of the mortgaged properties would be alien
all the rights of the stockholder
the absence of the to the VTA and its effects.
even when the latter is
owner of the stocks
present.
A proxy is usually of
An agreement must not exceed
shorter duration
5 years at any one time except
although under Sec. 58
when the same is made a
it cannot exceed 5 years
condition of a loan.
at any one time
Governed by the law on
Governed by the law on trust
agency
A proxy does not have a
A trustee has the right to
right of inspection of
inspect corporate books.
corporate books.

MERCANTILE LAW
CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED
Corporate powers exercised jointly by the BOD and stockholders (I.4PA.2G.E2-SMAV)
VOTE REQUIREMENT
CORPORATE ACT
BOARD OF DIRECTORS STOCKHOLDERS
1. Amendments, repeal, or Majority vote of the BOD GR: Majority vote of the outstanding capital
adoption of new by-laws stock
XPN: If delegated by the stockholders to the
board
2. Entering into management Majority of the quorum of the GR: Vote of the majority of the outstanding
contract BOD shares of stock or members ofboth the
managing and the managed corporation.
XPN: The vote required for the managed

corporation is not merely majority but 2/3 of
the outstanding capital stock in cases where:
1. A stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own or control more than one-third (1/3)
of the total outstanding capital stock
entitled to vote of the managing
corporation; or
2. Majority of the members of the board of

directors of the managing corporation also
constitute a majority of the members of
the board of directors of the managed
corporation.
3. Issuance of stock dividends Majority of the quorum of the Vote representing 2/3 of the outstanding
BOD capital stock
4. Amendment to articles of Majority vote of the BOD Vote representing 2/3 of the outstanding
incorporation capital stock
5. Grant of compensation to Approval of the Board Majority vote of the outstanding capital stock
directors
6.Extending or shortening the Majority vote of the BOD Vote representing 2/3 of the outstanding
corporate term capital stock
7. Increase or decrease of capital Majority vote of the BOD Vote representing 2/3 of the outstanding
stock capital stock
8. To incur, create, or increase Majority vote of the BOD Vote representing 2/3 of the outstanding
bonded indebtedness capital stock
9. Deny Pre-emptive Right Majority vote of the BOD Vote representing 2/3 of the outstanding
(CC, Sec. 39). capital stock
10. Investment of corporate funds Majority vote of the BOD Vote representing 2/3 of the outstanding
in another corporation or capital stock
business or for any other purpose
other than the primary purpose

CORPORATION CODE
11. The sale or other disposition Approval of the board Vote representing 2/3 of the outstanding
of all or substantially all of the capital stock
corporate assets
12. Merger or consolidation Majority vote of the BOD Vote representing 2/3 of the outstanding
capital stock
13. Voluntary dissolution Majority vote of the BOD Vote representing 2/3 of the outstanding
capital stock
14. To adopt a plan of distribution Majority vote of the Trustees 2/3 of the members having voting rights
of assets of a non-stock
corporation
Corporate powers exercised solely by the stockholders
CORPORATE ACT APPROVAL OF STOCKHOLDERS

1. Election of directors or trustees; filling up of vacancies by Candidates receiving the highest number of votes from the
the stockholders due to the expiration of term, removal from outstanding capital stock or members entitled to vote
office or increase in the number of board seats (plurality, NOT majority)
2. To elect officers of the corporation Plurality vote of the BOD listed in the AOI, not merely those
present constituting a quorum
3. Fixing the issued price of no-par value shares Majority of the quorum of the BOD if authorized by the AOI
or in the absence of such authority, by a majority of the
outstanding capital stock
4. Declaration of cash and other dividends other than stock Majority of the quorum of the board
dividends
5. To adopt by laws Majority of the outstanding capital stock or of the members
6. To revoke the power delegated to the BOD to amend or Majority of the outstanding capital stock or of the members
repeal the by-laws or adopt new by laws
7. To call a special meeting to remove directors or trustees Majority of the outstanding capital stock or of the members
entitled to vote
8. Removal of directors Vote representing 2/3 of the outstanding capital stock or of
members entitled to vote
9. Delegation of the power to amend by-laws to the board of Vote representing 2/3 of the outstanding capital stock
directors
10. Ratification of corporate contract with a director Vote representing 2/3 of the outstanding capital stock
11. To delegate to the BOD the power to amend or repeal the 2/3 of the outstanding capital stock or of the members
by-laws or adopt new by laws

MERCANTILE LAW
PROPRIETARY RIGHTS Instances where a stockholder may exercise his
appraisal right (1999, 2007 Bar)
The following are the proprietary rights of the
stockholders: Any stockholder of a corporation shall have the right to
1. Right to Dividend dissent and demand payment of the fair value of his
2. Right of First Refusal shares in the following instances:
3. Pre-emptive Right 1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
RIGHT TO DIVIDENDS the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
Right to dividend of a stockholder those of outstanding shares of any class, or of
extending or shortening the term of corporate
It is the right of the stockholder to demand payment of existence.
dividends after board declaration. Stockholders are 2. In case of sale, lease, exchange, transfer, mortgage,
entitled to dividends pro rata based on the total number pledge or other disposition of all or substantially all
of shares that they own and not on the amount paid for of the corporate property and assets as provided in
the shares (SEC Opinion, October 10, 1992 and July 16, the Code.
1996). 3. In case of merger or consolidation (CC, Sec. 81).
Entitlement to receive dividends This appraisal right is likewise available to a dissenting

stockholder in case the corporation decides to invest its
GR: Those stockholders at the time of declaration are funds in another corporation or business for any purpose
entitled to dividends (Sundiang Sundiang Sr. & Aquino, other than its primary purpose as provided in Sec. 42 of
2009, citing SEC Opinion, July 15, 1994). the CC.
NOTE: Dividends declared before the transfer of shares Under Sec. 105, any stockholder of a close corporation
belong to the transferor and those declared after the may, for any reason, compel said corporation to purchase
transfer, belong to the transferee (ibid). his shares at their fair value, which shall not be less than
their par or issued value, when the corporation has
XPNs: sufficient assets in its books to cover its debts and
1. In case a record date is provided for. liabilities exclusive of capital stock.
NOTE: A record date is the date fixed in the resolution Limitations on the exercise of appraisal right
declaring dividends, when the dividend shall be payable
to those who are stockholders of record on a specified 1. Any of the instances provided by law for the exercise of
future date or as of the date of the meeting declaring said the right by a dissenting stockholder must be present (CC,
dividend (De Leon, supra). Secs. 81, 42);
2. Holders of shares not fully paid which are not 2. The dissenting stockholder must have voted against the
delinquent shall have all the rights of a stock holder. proposed corporate action (CC, Sec. 82);
Rule in applying dividends in delinquent shares NOTE: The right is not available to a stockholder
who was either absent at the meeting where the
Cash Cash dividends due on delinquent stock corporate action was approved, or was present at
shall first be applied to the unpaid such meeting but abstained from casting his vote;
balance on the subscription plus cost and
expenses. 3. A written demand on the corporation for payment of his
Stock Stock dividends are withheld from the shares must be made by him within 30 days after the date
delinquent stockholder until his unpaid the vote was taken. (ibid.);
subscription is fully paid.
NOTE: Failure to make the demand within such
RIGHT TO APPRAISAL period shall be deemed a waiver of the appraisal
right.
Appraisal right
4. The price must be based on the fair value of the shares
Appraisal right refers to the right of the stockholder to as of the day prior to the date on which the vote was take
demand payment of the fair value of his shares, after (ibid.);
dissenting from a proposed corporate action involving a
fundamental change in the corporation in the cases NOTE: If the proposed corporate action is
provided by law (De Leon, 2010). implemented or effected, the payment shall be made
upon surrender of the certificate(s) of stock
representing his shares.

CORPORATION CODE
5. Such fair value must be determined as provided in Sec. (Philip Turner, et al., v. Lorenzo Shipping Corporation, G.R.
82 (ibid); No. 157479, November 24, 2010).
NOTE: The fair value shall exclude any appreciation Effects of the exercise of the right of appraisal
or depreciation in anticipation of such corporate
action. 1. Once the dissenting stockholder demands payment
of the fair value of his shares:
6. Payment of the shares must be made only out of the a. All rights accruing to such shares including
unrestricted earnings of the corporation (ibid); and voting and dividend rights shall be suspended; and
b. He shall be entitled to receive payment of the
7. Upon such payment, the stockholder must transfer his fair value of his shares as agreed upon between him
shares to the corporation (ibid.). and the corporation or as determined by the
appraisers chosen by him;
Q: Assuming a stockholder disagrees with the c. GR: He is not allowed to withdraw his
issuance of new shares and the pricing for the shares, demand for payment of his shares
may the stockholder invoke his appraisal rights and
demand payment for his shareholdings? (1999 Bar) XPN: Unless the corporation consents thereto.
A: No, the stockholder may not exercise appraisal right 2. If the dissenting stockholder was not paid the value
because the matter that he dissented from is not one of of his shares within 30 days after the award, his
those where right of appraisal is available under the voting and dividend rights shall be immediately
Corporation Code. restored until payment of his shares (CC , Sec. 83).
Q: Philip Turner, et al., held 1,010,000 shares of stock

of Lorenzo Co. Lorenzo Co. decided to amend its NOTE: Even if his rights as stockholder are
articles of incorporation to remove the stockholders’ suspended after his demand in writing is made, he
pre-emptive rights to newly issued shares of stock. cannot be considered as an ordinary creditor of the
Turner, et al., voted against the amendment and corporation (SEC Opinion, Jan. 11, 1982).
demanded payment of their shares. The appraisal
committee reported its valuation of P2.54/share. 3. But, upon payment of the stockholder’s shares, all his
Turner, et al., demanded payment based on the rights as stockholders are terminated, not merely
valuation of the appraisal committee, plus 2%/month suspended (CC, Sec. 82).
penalty from the date of their original demand for
payment, as well as the reimbursement of the 4. If before the stockholder is paid the proposed corporate
amounts advanced as professional fees to the action is abandoned is abandoned, his rights and status as
appraisers. Lorenzo Co. refused Turner, et al.’s a stockholder shall thereupon be permanently restored
demand, explaining that pursuant to the Corporation (CC, Sec. 84).
Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the
corporation had unrestricted retained earnings to Rule if there is a disagreement between the
cover the fair value of the shares, but that it had no withdrawing stockholder and the corporation as to
retained earnings at the time of the Turner, et al.’s the fair value of the shares
demand.Is Lorenzo Co. obliged to pay the value of the
shares of a dissenting stockholder even if at the time If within a period of 60 days from the date the corporate
of demand, the corporation has no unrestricted action was approved by the stockholders, the
retained earnings? withdrawing stockholder and the corporation cannot
agree on the fair value of the shares, it shall be determined
A: No. The corporation need not pay the value of the and appraised by three (3) disinterested persons, one of
shares of a dissenting stockholder if at the time of the whom shall be named by the stockholder, another by the
demand, the corporation has no unrestricted retained corporation, and the third by the two thus chosen.
earnings. No payment shall be made to any dissenting
stockholder unless the corporation has unrestricted The findings of the majority of the appraisers shall be
retained earnings in its books to cover the final, and their award shall be paid by the corporation
payment.The trust fund doctrine backstops the within 30 days after such award is made (CC, Sec. 82).
requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing Cost of appraisal
stockholders. In this case Lorenzo Co. had indisputably no
unrestricted retained earnings in its books at the time The costs and expenses of appraisal shall be borne as
Turner, et al., commenced the complaint. This proved that follows:
Lorenzo Co.’s legal obligation to pay the value of Turner, 1. By the corporation—
et al.’s shares did not yet arise. The fact that the a. Where the price which the corporation offered to
Corporation subsequent to the demand for payment and pay the dissenting stockholder is lower than the fair
during the pendency of the collection case posted surplus value as determined by the appraisers named by
profit did not cure the prematurity of the cause of action them;

MERCANTILE LAW
b. Where an action is filed by the dissenting XPN: The stock and transfer book may be kept in the
stockholder to recover such fair value and the refusal principal office of the corporation or in the office of its
of the stockholder to receive payment is found by the stock transfer agent, if one has been appointed by the
court to be justified. corporation (ibid).
2. By the dissenting stockholder—
a. Where the price offered by the corporation is Requirement in order for the minutes of the board
approximately the same as the fair value ascertained meetings be given probative value
by the appraisers;
b. Where the same action is filed by the dissenting The minutes of board meetings should be signed by the
stockholder and his refusal to accept payment is corporate secretary. Without such signature, neither
found by the court to be unjustified (De Leon, 2010). probative value nor credibility could be accorded such
minutes (Union of Supervisors [RB]- NATU v. Sec. of Labor,
Q: In case of disagreement between the corporation G.R. No. L- 39889, November 12, 1981).
and a withdrawing stockholder who exercises his
appraisal right regarding the fair value of his shares, Right to inspect
a three-member group shall by majority vote resolve
the issue with finality. May the wife of the The right to inspect is the right of a stockholder to inspect
withdrawing stockholder be named to the three the books of the corporation is subject to the following
member group? (2011 Bar) limitations:
5. The right must be exercised during reasonable hours
A: No, the wife of the withdrawing shareholder is not a on business days
disinterested person. 6. The person demanding the right has not improperly
used any information obtained through any previous
Q: When does the right to payment cease? examination of the books and records of the
corporation
A: The right of the dissenting stockholder to be paid the 7. The demand is made in good faith or for legitimate
fair value of his shares shall cease, his status as a purpose germane to his interest as a stockholder (CC,
stockholder shall thereupon be restored, and all dividend Sec. 74).
distributions which would have accrued on his shares 8. It should follow the formalities that may be required in
shall be paid to him if: the by-laws
9. The right does not extend to trade secrets
1. Demand for payment is withdrawn with the consent 10. It is subject to limitations under special laws, e.g.
of the corporation or Secrecy of Bank Deposits and FCDA or the Foreign
2. The proposed corporate action is abandoned by the CurrencyDeposits Act.
corporation or
3. The proposed corporate action is rescinded by the NOTE: The right extends, in compliance with equity, good
corporation or faith, and fair dealing, to a foreign subsidiary wholly-
4. The proposed corporate action is disapproved by the owned by the corporation.
SEC where such approval is necessary or
5. The SEC determines that the dissenting stockholder However, this right does not apply where the corporation
is not entitled to the appraisal right (CC, Sec. 84). is not organized under the Philippine law as in such a case,
the right of the stockholder is governed by the inspection
RIGHT TO INSPECT requirements in the jurisdiction in which the corporation
was organized (De Leon, 2010).
Books and records required to be kept by the
corporation The right to inspect extends to the books and records
of the wholly-owned subsidiary of the corporation.
The following are the books and records required to be
kept by private corporations: It would be more in accord with equity, good faith and
1. A record of all business transactions; fair dealing to construe the statutory right of the
2. Minutes of all meetings of stockholders or members; stockholder to inspect the books and records of the
3. Minutes of all meetings of directors or trustees; and corporation as extending to books and records of its
4. Stock and transfer book, in case of stock corporations wholly-owned subsidiary whch are in the corporation’s
(CC, Sec. 74). possession and control (Gokongwei v. SEC, supra).
NOTE: The duty to keep these books is imperative and Rationale behind the right of inspection of a
mandatory.The stockholder can likewise inspect the corporation
financial statements of the corporation (CC, Sec. 75).
The stockholder's right of inspection of the corporation's
Place where the books and records shall be kept books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an
GR: All the above books and records must be kept at the incident of ownership of the corporate property (Republic
principal office of the corporation (ibid). v. Sandiganbayan, G.R. No. 88809, July 10, 1991).

CORPORATION CODE
Persons entitled to inspect corporate books Q: Who are the persons who may be held liable under
Section 74?
The following are entitled to inspect the corporate books:
1. Any director, trustee, or stockholder or member of A: A perusal of the second and fourth paragraphs of
the corporation at reasonable hours on business day Section 74, as well as the first paragraph of the same
(CC, Sec. 74). section, reveal that they are provisions that obligates a
2. Voting trust certificate holder- The term corporation: they prescribe what books or records a
“stockholder”, as used in Sec. 74 means not only a corporation is required to keep; where the corporation
stockholder of record; it includes a voting trust shall keep them; and what are the other obligations of the
certificate holder who has become merely an corporation to its stockholders or members in relation to
equitable owner of the shares transferred (CC, Sec. 59 such books and records. Hence, by parity of reasoning, the
[3]). second and fourth paragraphs of Section 74, including the
3. Stockholder of a sequestered company (Republic vs. first paragraph of the same section, can only be violated
Sandiganbayan, supra). by a corporation.
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is provided It is clear then that a criminal action based on the violation
that his interest is clearly established by evidence. of the second or fourth paragraphs of Section 74 can only
be maintained against corporate officers or such other
Q: The deceased Carlos L. Puno, was an incorporator persons that are acting on behalf of the corporation.
of Puno Enterprises, Inc. (Puno, Inc). Joselito Musni Violations of the second and fourth paragraphs of Section
Puno, claiming to be an heir of Carlos L. Puno, 74 contemplates a situation wherein a corporation, acting
initiated a complaint for specific performance against thru one of its officers or agents, denies the right of any of
Puno, Inc. Joselito averred that he is the son of the its stockholders to inspect the records, minutes and the
deceased with the latter’s common-law wife, Amelia stock and transfer book of such corporation (Aderito Z.
Puno. As surviving heir, he claimed entitlement to the Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and
rights and privileges of his late father as stockholder Eric C. Pilapil, G.R. No. 180416, June 2, 2014).
of Puno, Inc. The complaint thus prayed that Joselito
be allowed to inspect its corporate book, and be given Remedies for enforcement of right to inspect
an accounting and all the profits pertaining to the
shares of Puno. Puno, Inc. filed a motion to dismiss on 1. Action for mandamus or damages
the ground that Joselito did not have the legal 2. Civil and criminal liability
personality to sue because his birth certificate names
him as “Joselito Musni Muno.” As proposed, there was Liability of a corporate officer or agent in case he
yet a need for a judicial declaration that “Joselito violates the stockholder’s right to inspection
Musni Puno” and “Joselito Musni Muno” were one and
the same. Any officer or agent of the corporation who shall refuse to
allow any director, trustees, stockholder or member of the
May an heir of a stockholder can automatically corporation to examine and copy excerpts from its
exercise the rights (inspection, accounting, records or minutes, shall be liable to such director,
dividends) pertaining to the deceased? trustee, stockholder or member for damages, and in
addition, shall be liable for by a fine of not less than one
A: No. The stockholder’s right of inspection of the thousand (P1,000.00) pesos but not more than ten
corporation’s books and records is based upon his thousand (P10,000.00) pesos or by imprisonment for not
ownership of shares in the corporation and the necessity less than thirty (30) days but not more than five (5) years,
for self-protection. After all, a shareholder has the right to or both, in the discretion of the court (CC, Sec 75 and Sec
be intelligently informed about corporate affairs.Such 144).
right rests upon the stockholder’s underlying ownership
of the corporation’s assets and property.Similarly, only Requisites for existence of probable cause to file a
stockholders of record are entitled to receive dividends criminal case of violation of a stockholder’s right to
declared by the corporation, a right inherent in the inspect corporate books
ownership of the shares.Upon the death of a shareholder,
the heirs do not automatically become stockholders of the 1. A director, etc. has made a prior demand in writing for
corporation and acquire the rights and privileges of the a copy or excerpts from the corporation’s records or
deceased as shareholder of the corporation. The stocks minutes;
must be distributed first to the heirs in estate 2. Any officer or agent of the concerned corporation shall
proceedings, and the transfer of the stocks must be refuse to allow the said director, etc., to examine and copy
recorded in the books of the corporation. During such said excerpts;
interim period, the heirs stand as the equitable owners of 3. If such refusal is made pursuant to a resolution or order
the stocks, the executor or administrator duly appointed of the BOD’s the liability for such action shall be imposed
by the court being vested with the legal title to the stock upon the directors or trustees who voted such refusal;
(Joselito Musni Puno v. Puno Enterprises, Inc., G.R. No. and
177066, September 11, 2009). 4. Where the officer or agent of the corporation sets up the
defense that the person demanding to examine and copy
excerpts from the records and minutes has improperly

MERCANTILE LAW
used any information secured through any prior complying with the requirements of the law on
examination of the same or was not acting in good faith or increase of capital stock, X issued an additional 1000
for a legitimate purpose in making his demand, the shares of the same value.Assume that stockholder A
contrary must be shown or proved (De Leon, supra, citing presently holds 200 out of the 1000 original shares.
Ang-Abaya v. Ang, G.R. No. 178511, December 4, 2008). Would A have a pre-emptive right to 200 of the new
issue of 1000 shares? Why?
Refusal to allow inspection is a criminal offense
A: Yes. A would have a pre-emptive right to 200 of the
We find inaccurate the pronouncement of the RTC that the new issue of 1000 shares. A is a stockholder of record
act of refusing to allow inspection of the stock and holding 200 shares in X Corporation. According to the
transfer book is not a punishable offense under the Corporation Code, each stockholder has the pre-emptive
Corporation Code. Such refusal, when done in violation of right to all issues of shares made by the corporation in
Section 7 4(4) of the Corporation Code, properly falls proportion to the number of shares he holds on record in
within the purview of Section 144 of the same code and the corporation.
thus may be penalized as an offense (Aderito Z. Yujuico
and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C. Denial by the corporation of the pre-emptive right
Pilapil, supra).
The corporation can deny pre-emptive right if the articles
PRE-EMPTIVE RIGHT of incorporation or amendment thereto denies such right.
It is the preferential right of shareholders to subscribe to The stockholder must be given a reasonable time within
all issues or disposition of shares of any class in which to exercise their preemptive rights. Upon the
proportion to their present shareholdings (CC, Sec. 39) expiration of said period, any stockholder who has not
exercised such right will be deemed to have waived it
Purpose of pre-emptive right (Majority Stockholders of Ruby Industrial Corporation vs.
Lim and the Minority Stockholders of Ruby Industrial
To enable the shareholder to retain his proportionate Corporation, G.R. Nos. 165887 & 165929, June 6, 2011).
control in the corporation and to retain his equity in the
surplus. Instances when pre-emptive right is not available
Exercise of pre-emptive right 1. Shares to be issued to comply with laws requiring stock
offering or minimum stock ownership by the public;
Pre-emptive right must be exercised in accordance with 2. Shares issued in good faith with the approval of the
the Articles of Incorporation or the By-Laws. When the stockholders representing 2/3 of the outstanding capital
Articles of Incorporation and the By-Laws are silent, the stock in exchange for property needed for corporate
Board may fix a reasonable time within which the purposes;
stockholders may exercise the right. 3. Shares issued in payment of previously contracted
debts;
Pre-emptive right on the re-issuance of treasury 4. In case the right is denied in the Articles of
shares Incorporation; (CC, Sec. 39)
5. Waiver of the right by the stockholder.
When a corporation reacquires its own shares which
thereby become treasury shares, all shareholders are Notwithstanding the non-existence of the pre-
entitled to pre-emptive right when the corporation emptive right, the validity of the issuance of
reissues or sells these treasury shares. The re-issuance of additional shares may be questioned if done in breach
treasury shares is not among the exception provided by of trust by the controlling stockholders.
Sec. 39 when pre-emptive right does not exist.
The validity of issuance of additional shares may be
Transferability of pre-emptive right questioned if done in breach of trust by the controlling
stockholders. Thus, even if the pre-emptive right does
Pre-emptive right is transferable unless there is an not exist, either because the issue comes within the
express restriction in the AOI. exceptions in Section 39 or because it is denied or limited
in the articles of incorporation, an issue of shares may still
Waiver of pre-emptive rightby the stockholder be objectionable if the directors acted in breach of trust
and their primary purpose is to perpetuate or shift control
The stockholder may waive his pre-emptive right either of the corporation, or to “freeze out” the minority
expressly or impliedly as when the stockholder fails to interest(Majority Stockholders of Ruby Industrial
exercise his pre-emptive right after being notified and Corporation v. Lim and the Minority Stockholders of Ruby
given an opportunity to avail of such right. Industrial Corporation, supra).
Q:Suppose that X Corporation has already issued the Q: A special meeting of the Board of Directors of
1000 originally authorized shares of the corporation LIMPAN approved a resolution making a partial
so that its Board of Directors and stockholders wish payment for the legal services of Gilda C. Lim in the
to increase X's authorized capital stock. After handling of various cases on behalf of, or involving the

CORPORATION CODE
corporation to be paid in equivalent value in shares of Conditions for the issuance of non-voting shares
stock of the corporation. Patricia Lim Yu, a sister of
the Lim filed a complaint against the members of the The issuance of non- voting shares is subject to the
Board of Directors of LIMPAN who approved the following conditions under Section 6 of the Corporation
resolution. In their answer, the Board of Directors Code:
and Lim asserted that Yu had no legal capacity to 1. Only preferred or redeemable shares may be made
sueand that the issuance of the shares in LIM’s favor non-voting shares;
was bona fide and valid pursuant to law and LIMPAN’s 2. There must remain other shares with full voting
By-Laws. In support of their ground that Yu had no rights
legal capacity to sue, the Lim pointed out that she had
previously filed a petition for guardianship praying Instances when non-voting shares are entitled to vote
for the issuance of letters of guardianship over
Yu. The judge issued an order, enjoining Yu from The non-voting shares may still vote in the following
entering into, or signing, contracts or documents on matters:
her behalf or on behalf of others. Is Yu capacitated to 1. Amendment of the articles of incorporation
file the complaint before the SEC? 2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
A: Yes. Yu has the legal capacity. Simply put, the TRO disposition of all or substantially all of the corporate
allows Respondent Patricia Lim-Yu to act for herself and property.
to enter into any contract on her own behalf. However, 4. Incurring, creating or increasing bonded
she cannot transact in representation of or for the benefit indebtedness
of her parents, brothers or sisters, or the Limpan 5. Increase or decrease of capital stock
Investment Corporation. Contrary to what Lim suggest, 6. Merger or consolidation of the corporation with
all that is prohibited is any action that will bind them. In another corporation or other corporations
short, she can act only on and in her own behalf, not that 7. Investment of corporate funds in another
of petitioners or the Corporation. There appears to be a corporation or business in accordance with the
confusion on the nature of the suit initiated before the corporation code
SEC. Lim describe it as a derivative suit, which has been 8. Dissolution of the corporation (CC, Sec 6).
defined as an action brought by minority shareholders in
the name of the corporation to redress wrongs committed Treasury shares are not entitled to vote
against it, for which the directors refuse to sue. If the suit
filed by Yu was indeed derivative in character, then Yu Treasury shares shall have no voting right as long as such
may not have the capacity to sue. The reason is that she shares remain in treasury.
would be acting in representation of the corporation, an
act which the TRO enjoins her from doing. However, that Rule in case of joint ownership of stock
the suit of Yu cannot be
characterized as derivative, because she was GR: In case of shares of stock owned jointly by two or
complaining only of the violation of her preemptive right more persons, in order to vote the same, the consent of all
under Section 39 of the Corporation Code. She was merely the co-owners shall be necessary.
praying that she be allowed to subscribe to the additional
issuances of stocks in proportion to her shareholdings to XPN: If there is a written proxy, signed by all the co-
enable her to preserve her percentage of ownership in the owners, authorizing one or some of them or any other
corporation. She was therefore not acting for the benefit person to vote such share or shares. Provided, that when
of the corporation. Quite the contrary, she was suing on the shares are owned in an "and/or" capacity by the
her own behalf, out of a desire to protect and preserve her holders thereof, any one of the joint owners can vote said
preemptive rights. Unquestionably, the TRO did not shares or appoint a proxy therefor (CC, Sec. 56).
prevent her from pursuing that action (Gilda C. Lim, et al.,
v. Patricia Lim-Yu, in her capacity as a minority stockholder Rule in case of pledged or mortgaged shares
of Limpan Investment Corporation, G.R. No. 138343,
February 19, 2001). GR: The pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders even though
RIGHT TO VOTE their shares are pledged or mortgaged
Exercise the right to vote XPN: The pledgee or mortgagee has the right to vote and
attend meetings if he is expressly given by the pledgor or
The stockholders can exercise their right to vote through mortgagor such right in writing which is recorded on the
the election, replacement and removal of Board of appropriate corporate books (CC, Sec. 55).
Directors or Trustees and on other corporate acts which
require stockholders’ approval. RIGHT OF FIRST REFUSAL
A right that grants to the corporation or another

stockholder the right to buy the shares of stock of another
stockholder at a fixed price and only valid if made on
reasonable terms and consideration.

MERCANTILE LAW
Right of first refusal is not a substantive right under INDIVIDUAL SUIT
the Corporation Code
When the injury is suffered directly by an individual
GR: The right of first refusal can only arise by means of a shareholder as to affect his proprietary rights, as when his
contractual stipulation, or when it is provided for in the right to vote is unlawfully withheld or his right to inspect
AOI corporate books arbitrarily denied, an action may be
brought by the injured stockholder in his own name and
XPN:In the case of a close corporation where the right of for his own benefit against the corporation (Salonga,
first refusal is required to be a feature to be found in the 1968).
AOI.
REPRESENTATIVE SUIT
NOTE: When only the by-laws provide a right of first
refusal without the corresponding provision in the AOI A representative suit is one filed by the shareholder
and not printed in the stock certificate, it is null and void. individually, or on behalf of a class of shareholders to
There is no authority to create property restrictions in by- which he or she belongs, for injury to his or her interest
laws provisions (Hodges v. Lezama, G.R. No. L-17327, as a shareholder (Cua v. Tan, GR 182008, December 4,
August 30, 1963). 2009).
AOI may validly grant a right of first refusal in favor of It is proper where the wrong is done to a group of
other stockholders stockholders, as where preferred stockholders’ rights are
violated, a class or representative suit will be proper for
The SEC, as a matter of policy, allows restrictions on the protection of all stockholders belonging to the same
transfer of shares in the AOI if the same is necessary and group (ibid).
convenient to the attainment of the objective for which
the company was incorporated, unless palpably Representative suit v. Derivative suit
unreasonable under the circumstances (SEC Opinion, Feb.
20, 1995). REPRESENTATIVE SUIT DERIVATIVE SUIT
Initiated by the stockholder Initiated by the
Pre-emptive right v. Right of first refusal under his own name or on stockholder on behalf of
behalf of other stockholders the corporation
RIGHT OF FIRST Seeks vindication for injury to Seeks to recover for the
PRE-EMPTIVE RIGHT
REFUSAL his or her interest as a benefit of the corporation
Arises only by virtue of shareholder and its whole body of
May be exercised even contractual stipulations shareholders when injury
when there is no express but is also granted is caused to the
provision of law under the provisions on corporation that may not
close corporation otherwise be redressed
Pertains to unsubscribed because of failure of the
portion of the authorized Exercisable against corporation to act
capital stock. A right that another stockholder of Deals with individual Deals with corporate
may be claimed against the the corporation of his stockholders or a class of rights (ibid.)
corporation. It includes shares of stock stockholder’s rights
treasury shares.
Remedies of representative suit and derivative suit
REMEDIAL RIGHTS are mutually exclusive
Actions that the stockholders or members can bring The two actions are mutually exclusive: i.e., the right of
action and recovery belongs to either the shareholders
1. Derivative suit – one brought by one or more (direct action) or the corporation (derivative action)
stockholders or members in the name and on behalf (ibid.)
of the corporation to redress wrongs committed
against it or to protect or vindicate corporate rights, DERIVATIVE SUIT
whenever the officials of the corporation refuse to
sue or are the ones to be sued or hold control of the Requisites for the existence of a derivative suit (1993,
corporation. 2004, 2005, 2008, 2009 Bar) (C-SENA)
2. Individual suit – an action brought by a stockholder 1. Corporate cause of action: the cause of action must
against the corporation for direct violation of his devolve upon the corporation itself; the wrongdoing
contractual rights. or ham having been casued to the corporation and
not to the particular stockholder brining the suit
3. Representative suit – one brought by a person in his own (Reyes v. Hon. RTC of Makati Br. 142, G.R. No. 165744,
behalf and on behalf of all similarly situated. August 11, 2008);

CORPORATION CODE
2. Stockholder: the party bringing the suit must be a mismanagement. Petitioners’ only possible cause of
stockholder action as minority stockholders against the actions of the
a. At the time the acts or transactions subject Board of Directors is the common law right to file a
of the action occurred and derivative suit. Section 1, Rule 8 of the Interim Rules of
b. at the time the action was filed Procedure Governing Intra Corporate Controversies
imposes the following requirements for derivative suits:
NOTE: if the cause of action is continuing in
nature, the only requisite is that the party is a
(1) He was a stockholder or member at the time the
stockholder at the time the action was filed acts or transactions subject of the action occurred
(Dean Divina’s Lecture, April 29, 2015).
and at the time the action was filed;
3. Exhaustion of all intra-corporate remedies available (2) He exerted all reasonable efforts, and alleges the
under the AOI, By-Laws, laws or rules governing the same with particularity in the complaint, to exhaust
corporation or partnership to obtain the relief he all remedies available under the articles of
desires; incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he
4. Not a Nuisance or Harrasment suit; desires;
(3) No appraisal rights are available for the act or
5. Appraisal right is not available acts complained of; and
(4) The suit is not a nuisance or harassment suit.
(Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies, Cited in Anthony S. Yu, et al., With regard to the second requisite, we find that
v. Joseph S. Yukayguan, et al., G.R. No. 177549, June 18, petitioners failed to state with particularity in the
2009). Complaint that they had exerted all reasonable efforts to
exhaust all remedies available under the articles of
Q: Nestor Ching and Andrew Wellington filed a incorporation, by-laws, and laws or rules governing the
Complaint with the RTC on behalf of the members of corporation to obtain the relief they desire. The
Subic Bay Golf and Country Club, Inc. (SBGCCI) against Complaint contained no allegation whatsoever of any
the said country club and its Board of Directors and effort to avail of intra-corporate remedies. Indeed, even if
officers under the provisions of Presidential Decree petitioners thought it was futile to exhaust intra-
No. 902-A in relation to Section 5.2 of the Securities corporate remedies, they should have stated the same in
Regulation Code. The complaint alleged that the the Complaint and specified the reasons for such opinion.
defendant corporation sold shares to plaintiffs at Failure to do so allows the RTC to dismiss the Complaint,
US$22,000.00 per share, presenting to them the even motu proprio, in accordance with the Interim Rules.
Articles of Incorporation. However, an amendment to The requirement of this allegation in the Complaint is not
the Articles of Incorporation was approved by the a useless formality which may be disregarded at will
Securities and Exchange Commission (SEC). (Ching et. al. v. Subic Bay Golf and Country Club, Inc., et. al.,
G.R. No. 174353, September 10, 2014).
Ching and Wellington claimed in the Complaint that
SBGCCI did not disclose to them the above Q: MC Home Depot occupied Rockland area in Pasig.
amendment which allegedly makes the shares non- The property was part of the area owned by Mid-Pasig
proprietary, as it takes away the right of the Development Corporation. PPC obtained an option to
shareholders to participate in the pro-rata lease portions of Mid-Pasig's property, including the
distribution of the assets of the corporation after its Rockland area. PPC's board of directors issued a
dissolution. According to them, this is in fraud of the resolution waiving all its rights, interests, and
stockholders who only discovered the amendment participation in the option to lease contract in favor
when they filed a case for injunction to restrain the of the law firm of Atty. Villamor. PPC, represented by
corporation from suspending their rights to use all Villamor, entered into a MOA with MC Home Depot
the facilities of the club. RTC dismissed the complaint where MC Home Depot would continue to occupy the
and held that the action is a derivative suit. The CA area as PPC's sub-¬lessee for 4 years, renewable for
affirmed the decision of the RTC. Is the CA correct? another 4 years, at a monthly rental plus goodwill.
A: No. The nature of an action, as well as which court or In compliance with the terms of the MOA, MC Home
body has jurisdiction over it, is determined based on the Depot issued 20 post-dated checks. The checks were
allegations contained in the complaint of the plaintiff, given to Villamor who did not turn these or the
irrespective of whether or not the plaintiff is entitled to equivalent amount over to PPC, upon encashment.
recover upon all or some of the claims asserted therein. Balmores, stockholder and director of PPC, wrote a
letter addressed to PPJC's directors informing them
While there were allegations in the Complaint of fraud in that Villamor should be made to deliver to PPC and
their subscription agreements, such as the account for MC Home Depot's checks or their
misrepresentation of the Articles of Incorporation, equivalent value. Due to the alleged inaction of the
petitioners do not pray for the rescission of their directors, Balmores filed with the RTC an intra-
subscription or seek to avail of their appraisal rights. corporate controversy complaint against petitioners
Instead, they ask that defendants be enjoined from for their alleged devices or schemes amounting to
managing the corporation and to pay damages for their fraud or misrepresentation. Balmores alleged that

MERCANTILE LAW
because of petitioners' actions, PPC's assets were "not Time when a person must be a stockholder for him to
only in imminent danger, but have actually been be justified in filing a derivative suit
dissipated, lost, wasted and destroyed." The RTC
denied respondent Balmores' prayer. According to it, He must be a stockholder at the time the cause of action
PPC's entitlement to the checks was doubtful. The accrued. If the cause of action is general and continuing,
resolution issued by PPC's board of directors; waiving said person must be a stockholder at the time of filing of
its rights to the option to lease contract in favor of the suit and at the time the cause of action accrued.
Villamor's law firm, must be accorded prima facie
validity. Balmores filed with CA a petition for Q: A became a stockholder of Prime
certiorari which was given due course. It reversed the Real Estate Corporation (PREC) on July 10, 1991,
trial court's decision. The CA considered the danger of when he was given one share by another stockholder
dissipation, wastage, and loss of PPC's assets if the to qualify him as a director. A was not re-elected
review of the trial court's judgment would be delayed. director in the July 1, 1992 annual meeting but he
It stated that the board's waiver of PPC's rights in continued to be a registered shareholder of PREC.
favor of Villamor's law firm without any
consideration, and that the case filed by Balmores When he was still a director, A discovered that on Jan
with the trial court "was a derivative suit because 5, 1991, PREC issued free of charge 10,000 shares to X
there were allegations of fraud or ultra vires acts by a lawyer who assisted in a court case involving PREC.
PPC's directors.” Does a derivative suit exist in this
a. Can A now bring an action in the
case?
name of the corporation to question the
issuance of the shares to X without receiving any
A: No. Balmores' action in the trial court failed to satisfy
payment?
all the requisites of a derivative suit. Balmores failed to
b. Can X question the right of A to sue him in behalf
exhaust all available remedies to obtain the reliefs he
of the corporation on the ground that A has only one
prayed for. Though he tried to communicate with PPC's
directors about the checks in Villamor's possession before share in his name?
c. Can the shares issued to X be considered as
he filed an action with the trial court, Balmores was not
watered stock? (1993 Bar)
able to show that this comprised -all the remedies
available under the articles of incorporation, by¬laws,
A:
laws, or rules governing PPC. Neither did respondent
a) As a general rule, A cannot bring a derivative suit in
Balmores implead PPC as party in the case nor did he
the name of the corporation concerning an act that took
allege that he was filing on behalf of the corporation.
place before he became a stockholder. However, if the act
Balmores did not bring the action for the benefit of the
corporation. Instead, he was alleging that the acts of PPC’s complained of is a continuing one, A may do so.
directors, specifically the waiver of rights in favor of b) No. In a derivative suit, the action
Villamor’s law firm and their failure to take back the MC is instituted/ brought in the name of a corporation
Home Depot checks from Villamor, were detrimental to and reliefs are prayed for therein for the corporation,
his individual interest as a stockholder. In filing an action, by a minority stockholder. The law does
therefore, his intention was to vindicate his individual not qualify the term “minority” in terms of the
interest and not PPC’s or a group of stockholders’ number of shares owned by a stockholder bringing the
(Villamor, Jr. v. Umale, in substitution of Balmores, G.R. No. action in behalf of the corporation. (SMC v. Khan, G.R. No.
172843, September 24, 2014). 85339, August 11, 1989)
Rationale for a derivative suit c) No. Watered shares are those sold by the
corporation for less than the par/book value. In the
Under the Corporation Code, where a corporation is an instant case, it will depend upon the value of services
injured party, its power to sue is lodged with its board of rendered in relation to the total par value of the shares.
directors or trustees. But an individual stockholder may
be permitted to institute a derivative suit on behalf of the Allegation of tort can coexist with a derivative suit in
corporation in order to protect or vindicate corporate the same petition
rights whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold control of the Personal injury suffered by a stockholder cannot
corporation (Hi-Yield Realty v. CA, G.R. No. 168863, June 23, disqualify him from filing a derivative suit on behalf of the
2009). corporation. It merely gives rise to an additional cause of
action for damages against the erring directors (Goachan
Stockholder is not a real party in interest in a v. Young, G.R. No. 131889, March 12, 2001).
derivative suit
Jurisdiction over a derivative suit
The corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation, is only a A derivative suit is an intra-corporate controversy hence
nominal party (Ibid). under the jurisdiction of the RTC acting special
commercial court.

CORPORATION CODE
Q: AA, a minority stockholder, filed a suit against BB, Anastacia; he only stands as a transferee-heir whose
CC, DD, and EE, the holders of majority shares of MOP rights to the share are inchoate and unrecorded. Second,
Corporation, for alleged misappropriation of in order that a stockholder may show a right to sue on
corporate funds. The complaint averred, inter alia, behalf of the corporation, he must allege with some
that MOP Corporation is the corporation in whose particularity in his complaint that he has exhausted his
behalf and for whose benefit the derivative suit is remedies within the corporation by making a sufficient
brought. In their capacity as members of the Board of demand upon the directors or other officers for
Directors, the majority stockholders adopted a appropriate relief with the expressed intent to sue if relief
resolution authorizing MOP Corporation to withdraw is denied.Lastly, the Court finds no injury, actual or
the suit. Pursuant to said resolution, the corporate threatened, alleged to have been done to the corporation
counsel filed a Motion to Dismiss in the name of the due to Oscar’s acts. If indeed he illegally and fraudulently
MOP Corporation. Should the motion be granted or transferred Anastacia’s shares in his own name, then the
denied? Reason briefly. damage is not to the corporation but to his co-heirs; the
wrongful transfer did not affect the capital stock or the
A: It should not be denied. The requisites for a valid assets of Zenith (Oscar C. Reyes v. RTCof Makati, Branch
derivative suit exist in this case. First, AA was exempt 142, et al., G.R. No. 165744, August 11, 2008).
from exhausting his remedies within the corporation and
did not have a demand on the Board of Directors for the Q: Pursuant to the by-laws of Legaspi Towers 300, Inc.
latter to sue. Here, such a demand would be futile, since (Legaspi), petitioners Lilia Marquinez Palanca,et al.,
the directors who comprise the majority (namely BB, CC, the incumbent Board of Directors, fixed the annual
DD and EE are the ones guilty of the wrong complained of. meeting of the members of the condominium
Second, AA appears to be a stockholder at the time of the corporation and the election of the new Board of
alleged misappropriation of corporate funds. Third, the Directors. Out of a total number of 5,723 members
suit is brought on behalf and for the benefit of MOP who were entitled tovote, 1,358 were supposed to
Corporation. In this connection, it was held in Commart vote through their respective proxies and their votes
(Phils.) Inc. v. SEC, G.R. No. 85318, June 3, 1991, that to were critical in determining the existence of a
grant to the corporation concerned the right of quorum. The Committee on Elections of Legaspi,
withdrawing or dismissing the suit, at the instance of the however, found most of the proxy votes, at its face
majority stockholders and directors who themselves are value, irregular, thus, questionable; and for lack of
the persons alleged to have committed the breach of trust time to authenticate the same, Palanca, et al.,
against the interests of the corporation would be to adjourned the meeting for lack of quorum.Despite
emasculate the right of the minority stockholders to seek Palanca et al.'sinsistence that no quorum was
redress for the corporation. Filing such action as a obtained during the annual meeting, Muer, et al.,
derivative suit even by a lone stockholder is one of the pushed through with the scheduled election and were
protections extended by law to minority stockholders elected as the new Board of Directors and officers of
against abuses of the majority. Legaspi.Subsequently, they submitted a General
Information Sheetto the Securities and Exchange
Q: Oscar and Rodrigo C. Reyes are two of the four Commission (SEC) with the new set of officers.
children of the spouses Pedro and Anastacia Reyes. Palanca, et al., filed a complaint for the declaration of
Pedro, Anastacia, Oscar, and Rodrigo each owned nullity of electionsagainst Muer, et al.,in a form of a
shares of stock of Zenith Insurance Corporation derivative suit. Is the derivative suit proper?
(Zenith), a domestic corporation established by their
family. Pedro and Anastacia died. Pedro’s estate was A: No. The derivative suit is not proper. The complaint for
judicially partitioned among his heirs, however, no nullification of the election is a direct action by Palanca, et
similar settlement and partition appear to have been al., who were the members of the Board of Directors of the
made with Anastacia’s estate, which included her corporation before the election, against Muer, et al., who
shareholdings in Zenith.Zenith and Rodrigo filed a are the newly-elected Board of Directors. The cause of
complaint with the SEC against Oscar. The complaint action devolves on Palanca, et al., not the condominium
stated that it is a derivative suit initiated and filed by corporation, which did not have the right to vote. Hence
the complainant Rodrigo to obtain an accounting of the same is improper for derivative suit (Legaspi Towers
the funds and assets of Zenith which are now or 300, Inc., et al., v. Amelia P. Muer, et al., G.R. No. 170783,
formerly in the control, custody, and/or possession of June 18, 2012).
Oscar and to determine the shares of stock of
deceased spouses Pedro and Anastacia Reyes that Q: Sunrise Marketing (Bacolod), Inc. (SMBI) is owned
were arbitrarily and fraudulently appropriated by by the Ang family and among its stockholders are
Oscar. Oscar denied the charge. Furthermore, Oscar Juanito Ang and Roberto Ang. Nancy Ang (Nancy), the
claimed that the suit is not a bona fide derivative suit sister of Juanito and Roberto, and her husband,
because the requisites therefor have not been Theodore Ang (Theodore), agreed to extend a loan to
complied with. Is the complaint filed by Rodrigo is a settle the obligations of SMBI and other corporations
derivative suit? owned by the Ang family. Nancy and Theodore issued
a payable to Juanito (and his spouse Anecita) and/or
A: No. The complaint filed by Rodrigo does not qualify as respondents Roberto and Rachel (Roberto’s wife).
a derivative suit. First, Rodrigo is not a shareholder with
respect to the shareholdings originally belonging to

MERCANTILE LAW
Nancy and Theodore demanded payment after MEETINGS
payments to them ceased. Roberto and Rachel replied
that they will not comply with the demand as they REGULAR OR SPECIAL
have not personally contracted the loan. Juanito and
Anecita, on the other hand, affirmed that he and Meeting of stockholders/members
Theodore obtained a loan, which shall be secured by
their properties. Juanito filed a complaint for
i. DATE AND PLACE OF ii. REQUIRED WRITTEN
derivative suit against Theodore and Rachel, alleging
MEETING NOTICE
that the latter’s refusal to pay the loan will affect the
financial viability of SMBI. Regular meeting
Is the action a derivative suit? The notice of meetings shall
1. Annually on date fixed
be in writing, and the time
A: No. The Complaint is not a derivative suit. The in the by-laws; or
and place thereof stated
Complaint failed to show how the acts of Rachel and therein.
Roberto resulted in any detriment to SMBI. The CA-Cebu 2. If there is no date in the
correctly concluded that the loan was not a corporate by-laws – any date in April
The notice shall be sent to
obligation, but a personal debt of the Ang brothers and as determined by the board.
the stockholder:
their spouses. The check was issued to "Juanito Ang 1. Within the period
and/or Anecita Ang and/or Roberto Ang and/or Rachel Venue: In the city or
municipality where the provided in the by-laws
Ang" and not SMBI. The proceeds of the loan were used 2. In the absence of
for payment of the obligations of the other corporations principal office is located,
and if practicable in the provision in the by-laws –
owned by the Angs as well as the purchase of real at least 2 weeks prior to
properties for the Ang brothers. SMBI was never a party principal office of the
the meeting.
to the Settlement Agreement or the Mortgage. It was corporation: Provided, that
never named as a co-debtor or guarantor of the loan. Both Metro Manila shall be
Notice may be waived,
instruments were executed by Juanito and Anecita in their considered a city or
expressly or impliedly, by
personal capacity, and not in their capacity as directors or municipality.
any stockholder or member.
officers of SMBI. Thus, SMBI is under no legal obligation Special meeting
to satisfy the obligation.
The notice of meetings shall
Records show that Juanito, apart from being Vice be in writing, and the time
President, owns the highest number of shares, equal to 1. Any time deemed and place thereof stated
those owned by Roberto. Also, as explained earlier, there necessary; or therein.
appears to be no damage to SMBI if the loan extended by 2. As provided in the by-laws
Nancy and Theodore remains unpaid. The CA-Cebu The notice shall be sent to
correctly concluded that a plain reading of the allegations Venue: In the city or the stockholder:
in the Complaint would readily show that the case was municipality where the 1. Within the period
mainly filed to collect a debt allegedly extended by the principal office is located, provided in the by-laws
spouses Theodore and Nancy Ang to SMBI. Thus, the and if practicable in the 2. If no provision in the by-
aggrieved party is not SMBIbut the spouses Theodore and principal office of the laws – at least 1 week prior
Nancy Ang, who are not even stockholders (Juanito Ang, corporation: Provided, that to the meeting
for and in behalf of Sunrise Marketing (Bacolod) v. Sps. Metro Manila shall be
Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013). considered a city or Notice may be waived,
municipality. expressly or impliedly, by
OBLIGATIONS OF A STOCKHOLDER any stockholder or member.
The following are the obligations of the stockholder:

1. Liability to the corporation for unpaid subscription (CC, Requirements for a valid meeting whether
Sec. 67-70) stockholders/members or the board
2. Liability to the corporation for interest on unpaid 1. It must be held in the proper place;
subscription if so required by the by laws (CC, Sec. 66) 2. It must be held at the stated date and at the appointed
time or at a reasonable time thereafter;
3. Liability to the creditors of the corporation for unpaid 3. It must be called by the proper person:
subscription (CC, Sec. 60) a. The person or persons designated in the by-laws
have authority to call stockholders’ or members’
4. Liability for watered stock (CC, Sec. 65) meeting
b. In the absence of such provision in the by-laws it
5. Liability for dividends unlawfully paid (CC, Sec. 43) may be called by a director or trustee or by an officer
entrusted with the management of the corporation
6. Liability for failure to create corporation (CC, Sec. 10) c. A stockholder or member may make the call on
(Sundiang Sr. & Aquino, 2014). order of the SEC whenever for any cause there is no
person authorized to call a meeting

CORPORATION CODE
4. The special meeting for the removal of directors or which registered them in their own names;
trustees may be called by the secretary or by and
stockholder or member. 2. Where the capitalization of shares that were
a. There must be a previous notice acquired with public funds somehow landed in
b. There must be a quorum private hands (Republic vs. Sandiganbayan,
G.R. No. 107789, April 30, 2003).
Rules on meeting or voting which are applicable to
certain kinds of shares 7. Pledgor, mortgagor, or administrator shares (CC, Sec.
55)-pledgor or mortgagor has the right to attend and vote
1. Delinquent shares shall not be entitled to vote. at meetings unless pledge or mortgagee is expressly given
2. Treasury shares have no voting rights while they remain such right in writing, as recorded on the books.
in the treasury (CC, Sec. 57).
3. Fractional shares shall not be entitled to vote. Executor, administrators, receivers, and other legal
4. Escrow shares shall not be entitled to vote before the representatives may attend and vote in behalf of the
fulfillment of the condition imposed thereon. stockholder or members without need of any written
5. Unpaid shares, if not delinquent, are entitled to all the proxy. In Gochan v. Young, G.R. No. 131889, Mar. 12, 2001,
rights of a stockholder including the right to vote. it was held that heirs are not prohibited from
representing the deceased with regard to shares of stock
6. Sequestered shares- registered in the name of the latter, especially when no
GR: The registered owner of the shares of a administrator has been appointed.
corporation, even if they are sequestered by the
government through the PCGG, exercises the right 8. Shares jointly owned (CC, Sec. 56) – consent of all the co-
and the privilege of voting on them. owners is necessary, unless there is a written proxy
signed by all the co-owners. If shares are owned in an
The PCGG as a mere conservator cannot, as a rule, “and/or” capacity by the holders thereof, any one of the
exercise acts of dominion by voting these shares. joint owners can vote or appoint a proxy thereof.
XPN: Two-tiered test: The registered owner of WHO CALLS THE MEETING
sequestered shares may only be deprived of these
voting rights, and the PCGG authorized to exercise The “call” for a meeting is exercised by the person who has
the same, only if it is able to establish that: the power to call the meeting.
1. There is prima facie evidence showing that
the said shares are ill-gotten and thus belong The following persons may exercise the power to “call” for
to the State; and a meeting:
2. There is an imminent danger of dissipation, 1. The person or persons designated in the by-laws to
thus necessitating the continued sequestration have the authority to call stockholders’/ members’
of the shares and authority to vote thereupon meeting;
by the PCGG while the main issue is pending 2. In the absence of such provision in the by-laws, the
before the Sandiganbayan (Trans Middle East director/trustee or officer entrusted with the
[Phils.] v. Sandiganbayan, GR 172556, June 9, management of the corporation unless otherwise
2006). provided by law;
3. A stockholder/ member may make the call on order of
Under the two-tiered test, the government, through the SEC whenever for any cause, there is no person
PCGG, may vote sequestered shares if there is a authorized to call a meeting (CC, Sec. 50) or the officers
prima facie evidence that the sahres are ill-gotten authorized fail or refuse to call a meeting.
wealth and there is imminent danger of dissipation
of assets while the case is pending. However, the NOTE: SEC may compel the officers of any corporation
two-tiered test contemplates a situation where the registered by it to call meetings of stockholders/members
registered stockholders were in control and had thereof under its supervision (PD No. 902-A, Sec. 6 [f]).
been dissipating company assets and the PCGG
wanted to vote the sequestered shares to save the 4. Corporate Secretary or a stockholder/member for a
company. It does not apply when the PCGG had special meeting intended for the removal of directors or
voted the shares and is in control of the sequestered trustees (CC, Sec. 28).
corporation (Africa v. Sandiganbayan and Migallos,
G.R. Nos. 172222, 174493 & 184636, November 11, QUORUM
2013, in Divina, 2014).
GR: Shall consist of the stockholders representing
XPN to the XPN: The two-tiered test does not apply majority of the outstanding capital stock or a majority of
in cases involving funds of public character (public the actual and living members with voting rights, in the
character exception). In such cases, the government case of non-stock corporation (Tan v. Sycip, G.R. No.
is granted the authority to vote said shares, namely: 153468, Aug. 17, 2006).
1. Where the government shares are taken
over by private persons or entities who or XPNs:
1. A different quorum may be provided for in the by-laws;

MERCANTILE LAW
2. The corporation code provides for certain resolutions stockholders agree contract for non-fulfillment
that must be approved by at least 2/3 of the outstanding thereto and no creditor is of the contract by the buyer
capital stock, in which case, majority of the outstanding thereby prejudiced
capital stock is insufficient to constitute a quorum, Corporate creditors may
presence of the stockholders representing 2/3 of the proceed against the Creditors may not proceed
outstanding capital stock is necessary for such purpose. subscriber for his unpaid against the buyer for the
subscription in case the unpaid price as there is no
MINUTES OF THE MEETINGS assets of the corporation privity of contract between
are not sufficient to pay them
The minutes are a brief statement not only of what their claims
transpired at a meeting, usually of stockholders/ In purchase amounting to
members or directors/ trustees, but also at meeting of an Not covered by the more than 500 pesos, the
executive committee. Statute of Frauds Statute of Frauds shall
apply
The minutes are usually kept in a book especially Subscription price are
designed for that purpose, but they may also be kept in Purchase price does not
considered assets of the
the form of memoranda or in any other manner in which become assets of the
corporation, hence,
they can be identified as minutes of a meeting (People v. corporation unless fully
creditors may go after
Dumlao, GR 168918, March 2, 2009). paid
them
To have probative value and credibility, the minutes must Stock option v. Warrant
be signed by the corporate secretary, notwithstanding
that the one taking the minutes was a mere clerk (Union STOCK OPTION WARRANT
of Supervisors [RB]-NATU v. Sec. of Labor, supra). A privilege granted to a A type of security which
party to subscribe to a entitles the holder the right
CAPITAL STRUCTURE certain portion of the to subscribe to a pre-
unissued capital stock of a determined number of
SUBSCRIPTION AGREEMENTS corporation within a unissued capital stock of a
certain period and under corporation (subscription
Subscription contract the terms and conditions warrant), or to purchase a
of the grant exercisable by pre-determined number of
It is a contract for the acquisition of unissued stock in an the grantee at anytime issued or existing shares in
existing corporation or a corporation still to be formed. It within the period granted. the future (covered
is considered as such notwithstanding the fact that the warrant).
parties refer to it as purchase or some other contract (CC,
Sec. 60). NOTE: A warrant is
detachable if it may be
Nature of a subscription contract sold, transferred or
assigned to any person by
A subscription contract is indivisible. Consequently, the warrant holder
where stocks were subscribed and part of the separate from and
subscription contract price was not paid, the whole independent of the
subscription shall be considered delinquent and not only corresponding beneficiary
the shares which correspond to the amount not paid. securities, or shares of
stock or other securities of
NOTE: This is called the Doctrine of Individuality the issuer which form the
(Indivisibility) of Subscription. A subscription is one basis of the entitlement in
entire and indivisible whole contract. It cannot be divided a warrant. It is non-
into portions (CC, Sec. 64). detachable if it may not be
sold etc.
Subscription v. Purchase
(SEC Rules, in De Leon, 2010)
SUBSCRIPTION PURCHASE
May be made before or May be made only after Kinds of subscription contracts
after incorporation incorporation
Buyer does not become a 1. Pre-incorporation subscription – entered into before
Subscriber becomes a stockholder until the incorporation (CC, Sec. 61).
stockholder even if he has fulfillment of the terms of
not fully paid the the sale and registration 2. Post-incorporation subscription–entered into after
subscription thereof in the books of the incorporation (Sundiang Sr. & Aquino, 2009).
corporation
Cannot be released from The corporation may
his subscription unless all rescind or cancel the

CORPORATION CODE
Rules governing pre-incorporation subscription rescinded since the subject matter of the contract was the
contracts unissued shares of the Corporation allocated to the
subscriber. Since these were unissued shares, the Pre-
GR: A pre-incorporation subscription agreement is Subscription Agreement was in fact a subscription
irrevocable for a period of six (6) months from the date of contract as defined under Section 60, Title VII of the
subscription. Corporation Code: “Any contract for the acquisition of
unissued stock in an existing corporation or a corporation
XPNs: still to be formed shall be deemed a subscription within
1. If all of the other subscribers consent to the revocation, the meaning of this Title, notwithstanding the fact the
2. If the incorporation of said corporation fails to parties refer to it as a purchase or some other contract.” A
materialize within said period or within a longer period subscription contract necessarily involves the
as may be stipulated in the contract of subscription. corporation as one of the contracting parties since the
subject matter of the transaction is property owned by the
XPN to XPN: No pre-incorporation subscription corporation - its shares of stock. Thus, the subscription
may be revoked after the submission of the AOI to contract was one between the subscriber and the
the Securities and Exchange Commission (CC, Sec. corporation and not between the stockholders.
61).
The trust fund doctrine provides that subscriptions to the
Payment of a subscription contract cannot be capital stock of a corporation constitute a fund to which
condoned by a corporation the creditors have a right to look for the satisfaction of the
claims. This doctrine is the underlying principle in the
A corporation has no power to release an original procedure for the distribution of corporate capital only in
subscriber to its capital stock from the obligation of three instances:
paying for his shares, without a valuable consideration for
such release (PNB v Bitulok Sawmill Inc, G.R. Nos. L-24177- 1) amendment of the articles of incorporation to reduce
85, June 29, 1968). the authorized capital stock;
2) purchase of redeemable shares by the corporation
Stockholder is entitled to the rights pertaining to regardless of the existence of unrestricted retained
shares of stock subscribed although not fully paid earnings; and
3) dissolution and eventual liquidation of the
As long as the shares are not considered delinquent, corporation.
stockholders are entitled to all rights granted to it
whether or not the subscribed capital stocks are fully Furthermore, the doctrine is articulated in Section 41 of
paid. the Corporation Code on the power of the corporation to
acquire its own shares and in Section 122 on the
Q: FLADC, which was owned by the Tius, encountered prohibition against the distribution of corporate assets
dire financial difficulties. It was heavily indebted to and property unless the stringent requirements are
PNB for P190 million. Thus, the construction of the complied with (Ong, et al. v. Tiu, et al., G.R. Nos. 144476 &
Masagana Citimall was threatened with stoppage and 144629, Apri 8, 2003).
incompletion. To prevent foreclosure of the mortgage
on the two lots where the mall was being built, the CONSIDERATION FOR STOCKS
Tius invited the Ongs to invest in FLADC. Under the
Pre-Subscription Agreement they entered into, the Valid considerations in a subscription agreement
Ongs and the Tius agreed to maintain equal
shareholdings in FLADC. Accordingly, the Ongs 1) Actual cash paid to the corporation;
paid P100 million in cash for their subscription to 2) Property, tangible or intangible (i.e. patents or
1,000,000 shares of stock while the Tius committed to copyrights), the requisites are as follows:
contribute to FLADC a four-storey building and two a) The property is actually received by the
parcels of land respectively to cover their additional corporation
549,800 stock subscription therein. The business b) The property is necessary or convenient for its
harmony between the Ongs and the Tius in FLADC, use and lawful purposes
however, was short-lived because the Tius, rescinded c) It must be subject to a fair valuation equal to the
the Pre-Subscription Agreement. The Tius accused par or issued value of the stock issued
the Ongs of violation of the terms of their agreement. d) The valuation thereof shall initially be
Because of this, the Tius filed a case at SEC, seeking determined by the incorporators; and
confirmation of their rescission of the Pre- e) The valuation is subject to the approval by the
Subscription Agreement. The SEC granted the same. SEC.
Could the Tius legally rescind the Pre-Subscription 3) Labor or services actually rendered to the corporation
Agreement? 4) Prior corporate obligations or indebtedness
5) Amounts transferred from unrestricted retained
A: No. When a subscriber assigned properties and infused earnings to stated capital (in case of declaration of
capital to the corporation upon invitation of a majority stock dividends)
stockholder and in exchange for shares of stocks under a 6) Outstanding shares in exchange for stocks in the event
pre-subscription agreement, the agreement cannot be of reclassification or conversion (CC, Sec. 6).

MERCANTILE LAW
NOTE: Promissory notes or future services are not valid stocks, coupled with appropriate voting rights, is
considerations (ibid.) essential” (Heirs of Gamboa v. Teves, supra).
Persons required to pay in full their subscription NOTE: Since the constitutional requirement of at least 60
upon incorporation percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial
The following are required to pay their subscription in full ownership of the corporation, it is therefore imperative
upon incorporation: that such requirement apply uniformly and across the
1. Non‐resident foreign subscribers upon incorporation board to all classes of shares, regardless of nomenclature
must pay in full their subscriptions unless their unpaid and category, comprising the capital of a corporation.
subscriptions are guaranteed by a surety bond or by an
assumption by a resident stockholder through an affidavit Under the Corporation Code, capital stock consists of all
of liability. classes of shares issued to stockholders, that is, common
2. In case of no‐par value shares, they are deemed fully shares as well as preferred shares, which may have
paid and non‐assessable (CC, Sec. 6). different rights, privileges or restrictions as stated in the
articles of incorporation. The Corporation Code allows
NOTE: The issued price of no-par value shares may be denial of the right to vote to preferred and redeemable
fixed in the AOI or by the BOD pursuant to authority shares, but disallows denial of the right to vote in specific
conferred upon it by the AOI or the by-laws, or in the corporate matters. Thus, common shares have the right to
absence thereof, by the stockholders representing at least vote in the election of directors, while preferred shares
a majority of the outstanding capital stock at a meeting may be denied such right. Nonetheless, preferred shares,
duly called for the purpose (CC, Sec. 62). even if denied the right to vote in the election of directors,
are entitled to vote on certain corporate matters.
SHARES OF STOCK
Since a specific class of shares may have rights and
Stock or share of stock is one of the units into which the privileges or restrictions different from the rest of the
capital stock is divided. It represents the interest or right shares in a corporation, the 60-40 ownership
which the owner has— requirement in favor of Filipino citizens in Section 11,
1. In the management of the corporation in which he takes Article XII of the Constitution must apply not only to
part through his right to vote (if voting rights are shares with voting rights but also to shares without voting
permitted for that class of stock by the AOI); rights (This is because when only preferred shares
2. In a portion of the corporate earnings, if and when without voting rights are issued, the requirement of full
segregated in the form of dividends; and beneficial ownership will be used as the standard).
3. Upon its dissolution land winding up, in the property Preferred shares, denied the right to vote in the election
and assets of the corporation remaining after the payment of directors are anyway still entitled to vote on the eight
of corporate debts and liabilities to creditors (De Leon, specific corporate matters under Sec, 6. Thus, if a
2010, citing 11 Fletcher, 1971). corporation, engaged in a partially nationalized industry,
issues a mixture of common and preferred non-voting
Q: In order to comply with the 60% capital shares, at least 60 percent of the common shares and at
requirement for ownership by Filipinos of certain least 60 percent of the preferred non-voting shares must
corporations, what does the term capital refer to? be owned by Filipinos. Of course, if a corporation issues
only a single class of shares, at least 60 percent of such
A. The term “capital” refers to shares with voting rights, shares must necessarily be owned by Filipinos. In short,
as well as with full beneficial ownership, which must be the 60-40 ownership requirement in favor of Filipino
owned and held by citizens of the Philippines (Heirs of citizens must apply separately to each class of shares,
Gamboa v. Teves, G.R. No. 176579, October 9, 2012). whether common, preferred non-voting, preferred voting
or any other class of shares. This uniform application of
NOTE: This is precisely because the right to vote in the the 60-40 ownership requirement in favor of Filipino
election of directors, coupled with full beneficial citizens clearly breathes life to the constitutional
ownership of stocks, translates to effective control of a command that the ownership and operation of public
corporation (Heirs of Gamboa v. Teves, supra) utilities shall be reserved exclusively to corporations at
least 60 percent of whose capital is Filipino-owned.
Legal title without beneficial title of stocks is not
sufficient to meet the ownership requirement Applying uniformly the 60-40 ownership requirement in
favor of Filipino citizens to each class of shares, regardless
Mere legal title is insufficient to meet the 60% Filipino- of differences in voting rights, privileges and
owned “capital” required in the Constitution. Full restrictions, guarantees effective Filipino control of
beneficial ownership of 60% of the outstanding capital public utilities, as mandated by the Constitution.
stock, coupled with 60% of the voting rights, is required. Moreover, such uniform application to each class of
The legal and beneficial ownership of 60% of the shares insures that the “controlling interest” in public
outstanding capital stock must rest in the hands of utilities always lies in the hands of Filipino citizens. This
Filipino nationals in accordance with the constitutional addresses and extinguishes Pangilinan’s worry that
mandate. Otherwise, the corporation is “considered as foreigners, owning most of the non-voting shares, will
non-Philippine nationals. Full beneficial ownership of the exercise greater control over fundamental corporate

CORPORATION CODE
matters requiring two-thirds or majority vote of all WATERED STOCK
shareholders (Heirs of Gamboa v. Teves, supra)
DEFINITION
NATURE OF STOCK
Watered stock
The ownership of share of stock confers no immediate
legal right or title to any of the property of the A watered stock is a stock issued in exchange for cash,
corporation. Each share merely represents a distinct property, share, stock dividends, or services lesser than
undivided share or interest in the common property of its par value or issued value (CC, Sec. 65).
the corporation (De Leon, ibid., citing 18 Am. Jur. 2d 737).
Watered Stocks include stocks:
The interest over the share is purely inchoate, or a mere 1. Issued without consideration (bonus share)
expectancy of a right in the management of the 2. Issued for a consideration other than cash, the fair
corporation and to share in the profits thereof and in the valuation of which is less than its par or issued value;
properties and assets thereof on dissolution, after 3. Issued as stock dividend when there are no sufficient
payment of the corporate debts and obligations (ibid., retained earnings to justify it; and
citing Saw vs. CA, supra). Further, the stockholder’s 4. Issued as fully paid when the corporation has received
interest in the corporate property is merely equitable or a lesser sum of money than its par or issued value
beneficial in nature; hence he cannot be said to be a co- (discount share) (De Leon, supra).
owner of the corporate property (ibid., citing Stockholders
of F. Guanzon & Sons , Inc. vs. Register of Deeds). NOTE: Both par and no par value shares can be watered
stocks.
Shares of stocks are personal property
Reason behind the prohibition on the issuance of
Shares of stock are personal property. They are watered stocks
incorporeal in nature (NCC, Art. 417 and 2095).
It is to protect persons who may acquire stock and the
Share of stock does not constitute an indebtedness of creditors of the corporation particularly those who may
the corporation to the shareholder become such on the faith of its outstanding capital stock
being fully paid. The prohibition secures equality among
They are in the nature of choses in action but are not in a subscribers and prevents discriminations against those
strict sense. They do not constitute an indebtedness of the who have paid in full the par or issued value of their
corporation to the shareholder and are therefore, not shares (ibid.).
credits as to make the stockholder a creditor of the
corporation (De Leon, 2010). Not all exchanges of stocks worth less than their value
are considered watered stock
The board of directors may additional issuances of
shares of stock without approval of the stockholders. The watered stocks refer only to original issue of stocks
but not to a subsequent transfer of such stocks by the
A stock corporation is expressly granted the power to corporation, for then it would no longer be an “issue” but
issue or sell stocks. The power to issue shares of stock in a sale thereof (De Leon,2010, citing Rochelle Roofing Co. vs.
a corporation is lodged in the board of directors and no Burley, 115 NE 478).
stockholders’ meeting is required to consider it because
additional issuances of shares of stock do not need Treasury shares are not subject to the prohibition on
approval of the stockholders. the issuance of watered stocks
What is only required is the board resolution approving Treasury shares are not original issuances. They are
the additional issuance of shares. The corporation shall shares of stocks which have been issued and fully paid for,
also file the necessary application with the SEC to exempt but subsequently reacquired by the issuing corporation
these from the registration requirements under the by purchase, redemption, donation, or through some
Revised Securities Act (now the Securities Regulation other lawful means (CC, Sec. 9). Since they do not lose their
Code) (Majority Stockholders of Ruby Industrial status as issued shares, they cannot be treated as new
Corporation v. Lim and the Minority Stockholders of Ruby issues when disposed of or reissued.
Industrial Corporation, supra).
Limitation on the re-disposal of treasury shares
SUBSCRIPTION AGREEMENTS
Treasury shares may again be disposed of for a
*Please see page 238 for the extensive discussion regarding reasonable price fixed by the BOD. Since they are not
this topic. subject to the prohibition on the issuance of watered
stock, they may be sold for less than their par or issued
CONSIDERATION FOR SHARES OF STOCK value as long as the price for re-disposal is reasonable.
*Please see page 239 for the extensive discussion regarding

this topic.

MERCANTILE LAW
The issuance of watered stock cannot be ratified by XPN: Trust fund doctrine is not violated in case treasury
the stockholders shares are reacquired and subsequently re-issued for a
lesser consideration by the corporation. The only
It is not merely ultra vires, but is illegal per se as it is a limitation for the reissuance of treasury shares is that
violation of Sec. 62, CC. their price must be reasonable.
LIABILITY OF DIRECTORS FOR WATERED STOCKS SITUS OF SHARES OF STOCK
Liability of directors for watered stocks Generally, the situs of shares of stock is the country where
the corporation is domiciled (Wells Fargo Bank v. CIR, G.R.
Any director or officer of a corporation shall be solidarily No. L-46720, June 28, 1940).
liable with stockholder concerned to the corporation and
its creditors for difference between the fair value received Domicile of the corporation
at the time of the issuance of the stock and the par or
issued value of the same, if: The residence of the corporation is the place where the
1. He consents to the issuance of stocks for consideration principal office of the corporation is located as stated in
less than its par or issued value; or its AOI even though the corporation has closed its office
2. He consents to the issuance of stocks for a therein and relocated to another place (Hyatt Elevators
consideration in any form other than cash, valued in and Escalators Corp. v. Goldstar Elevator Phils., Inc.,
excess of its fair value; or supra.).
3. Who, having knowledge thereof, does not forthwith
express his objection in writing and file the same with Exception to the situs of shares
the corporate secretary (CC, Sec. 65).
The exception is when the case involves property
Basis for the solidary liability of directors consenting taxation. For that purpose, the situs of intangible
to the issuance of watered stock property, such as shares of stocks, is at the domicile or
residence of the owner. However, this exception admits of
The solidary liability of the directors emanates from the its own exceptions, i.e.—
fiduciary character of the position of director or corporate 1. When a nonresident alien has shares of stock in a
officer. domestic corporation, then the situs will be in the
Philippines.
Defenses that can be invoked in order that a director 2. For purposes of the estate tax, the gross estate of a
or an officer can escape liability for the issuance of resident decedent, whether citizen or alien, or a citizen
watered stocks decedent, whether resident or nonresident, includes his
intangible personal property wherever situated (De Leon,
1. The director or officer did not consent and did not have 2010).
knowledge in the issuance of the watered stock.
2. The director or officer objected to its issuance CLASSES OF SHARES OF STOCK
a. Objection must be directed to the issuance of the
watered stocks Kinds or classifications of shares
b. In writing
c. File the same with the corporate secretary 1. Par value shares
d. Such objection must be done before the sale of 2. No par value shares
stocks (CC, Sec. 65). 3. Common shares
4. Preferred shares
TRUST FUND DOCTRINE FOR LIABILITY FOR 5. Redeemable shares
WATERED STOCK 6. Treasury shares
7. Founder’s share
Trust fund doctrine 8. Voting shares
9. Non-voting shares
The subscribed capital stock of the corporation is a trust 10. Convertible shares
fund for the payment of debts of the corporation which 11. Watered stock
the creditors have the right to look up to satisfy their 12. Fractional share
credits, and which the corporation may not dissipate. The 13. Shares in escrow
creditors may sue the stockholders directly for the latter’s 14. Over-issued stock
unpaid subscription. 15. Street certificate
16. Promotion share
There is a violation of the trust fund doctrine when
stocks of the corporation are issued less than the par Who may classify shares
value
1. Incorporators - the classes and number of shares which
GR: The trust fund doctrine is violated where stocks are a corporation shall issue are first determined by the
issued by the corporation for a consideration which is less incorporators as stated in the articles of
than its par value. incorporation filed with the SEC.

CORPORATION CODE
2. Board of directors and stockholders - after the 2. Participating preferred shares – Entitled to participate
corporation comes into existence, classification of with the common shares in excess distribution
shares may be altered by the board of directors and 3. Non-participating preferred shares – Not entitled to
the stockholders by amending the articles of participate with the common shares in excess
incorporation pursuant to Sec. 16. distribution.
4. Preferred shares as to dividends– Shares which are
Par value shares entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are
Shares with a value fixed in the articles of incorporation paid to the holders of common stock.
and the certificates of stock. The par value fixes the 5. Cumulative preferred shares – If a dividend is omitted in
minimum issue price of the shares (CC, Sec. 62). any year, it must be made up in a later year before
any dividend may be paid on the common shares in
Rule on the issuance of shares less than its par value the later year.
6. Non-cumulative preferred shares – There is no need to
GR: A corporation cannot issue shares at less than its par make up for undeclared dividends
value.
Holders of preferred shares are not creditors
XPN: The prohibition applies only to original issuance of
shares and not to the subsequent sale of treasury shares Holders of preferred shares cannot compel the
corporation to give them dividends. The preference only
and sale of shares made by stockholders.
applies once dividends are declared.
No par value shares
Preferred cumulative participating share of stock
These are shares having no stated value in AOI.
This is a kind of share which gives the holder preference
Limitations on no par value shares (5DP - B2tip - AP) in the payment of dividends ahead of common
stockholders and to be paid the dividends due for prior
years and to participate further with common
1. Shares which are no par value, cannot have an issued
price of less than P5.00; stockholders in dividend declaration.
2. The entire consideration for its issuance constitutes
Redeemable shares
capital so that no part of it should be Distributed as
dividends;
These are shares of stocks issued by a corporation which
3. They cannot be issued as Preferred stocks;
4. They cannot be issued by Banks, Building and loan said corporation can purchase or take up from their
holders upon expiry of the period stated in certificates of
association, Trust companies, Insurance companies,
stock representing said shares (CC, Sec. 8).
and Public utilities;
5. The Articles of incorporation must state the fact that
Kinds of redeemable shares
it issued no par value shares as well as the number
of said shares;
1. Compulsory - the corporation is required to redeem the
6. Once issued, they are deemed fully Paid and non-
shares.
assessable (CC, Sec. 6).
2. Optional - the corporation is not mandated to redeem
Common shares the shares.
Limitations on redeemable shares (ATVI)

These are ordinarily and usually issued stocks without
extraordinary rights and privileges, and entitle the
1. Issuance of redeemable shares must be expressly
shareholder to a pro rata division of profits. It represents
the residual ownership interest in the corporation. The provided in the Articles of incorporation;
2. The Terms and conditions affecting said shares must
holders of this kind of share have complete voting rights
be stated both in the articles of incorporation and in
and they cannot be deprived of the said rights except as
provided by law. the certificates of stock;
3. Redeemable shares may be deprived of Voting rights
in the articles of incorporation, unless otherwise
Preferred shares
provided in the Code (CC, Sec. 6 [6])
4. Redemption cannot be made if it will cause
These entitle the shareholder to some priority on
distribution of dividends and assets over those holders of Insolvency of the corporation.
common shares. Preferred shares may be issued only with
Reissuance of redeemed shares
a stated par value (CC, Sec. 6).
Kinds of preferred shares
Redeemable shares, once redeemed are retired unless
reissuance is expressly allowed in the AOI.
1. Preferred shares as to assets – Shares which gives the
holder preference in the distribution of the assets of
Q: Planters Bank issued preferred redeemable shares
the corporation in case of liquidation.
with a feature that entitles them to be preferred in the

MERCANTILE LAW
payment of dividends. Subsequently, the bank 4. The amount of URE equivalent to the cost of treasury
experienced liquidity problems. The Central Bank shares being held shall be restricted from being
ruled that the bank has a reserve deficiency. Despite declared and issued as dividends.
of the condition, one of the stockholders holding the
preferred shares filed an action against the NOTE: When treasury shares are sold below its par or
corporation to redeem his shares and pay the issued value, there can be no watering of stock because
dividends due. Will the suit prosper? such watering of stock contemplates an original issuance
of shares.
A: No. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained Treasury shares distributed by way of dividends
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books They can be distributed only as property dividends. They
to cover debts and liabilities inclusive of capital stock. cannot be declared as stock or cash dividends because
Redemption, therefore, may not be made where the they are not considered part of earned or surplus profits.
corporation is insolvent or if such redemption will cause The distribution of cash or stock dividends out of treasury
insolvency or inability of the corporation to meet its debts shares would be converting the corporation into both a
as they mature. debtor and creditor for the same amount at the same time,
or requiring it to take money or stock from one of its
Furthermore, the declaration of dividends is dependent pockets and putting it in another, which is absurd.
upon the availability of surplus profit or unrestricted Treasury shares may be declared as property divided to
retained earnings, as the case may be. Shareholders, both be issued out of the retained earnings previously used to
common and preferred, are considered risk takers who support their acquisition provided that the amount of the
invest capital in the business and who can look only to said retained earnings has not been subsequently
what is left after corporate debts and liabilities are fully impaired by losses (SEC Opinion, July 17, 1984).
paid. (Republic Planters Bank v. Judge Agana, G.R. No.
51765. March 3, 1997) Treasury shares v .Redeemable shares
Treasury shares TREASURY REDEEMABLE

SHARES SHARES
Shares that have been earlier issued as fully paid and have Description Shares so
thereafter been acquired by the corporation by purchase, acquired by the
donation, and redemption or through some lawful means corporation Issued by the
(CC, Sec. 9). through corporation
purchase, when expressly
Rights that can be denied to treasury shares donation, so provided in
redemption or the AoI.
1. Voting Rights any other lawful
2. Right to dividends means.
Manner of Redeemable
NOTE: Treasury shares are not retired shares. They do acquisition shares may be
not revert to the unissued shares of the corporation but Can only be acquired even
are regarded as property acquired by the corporation acquired in the without
which may be reissued or resold at a price to be fixed by presence of unrestricted
the Board of Directors (SEC Rules Governing Redeemable Unrestricted retained earnings
and Treasury Shares, CCP No. 1-1982). retained for as long as it
earnings will not result to
Other means in which a corporation may acquire its the insolvency of
own shares the Corporation.
Applicability of Must comply Is an exception to
1. To collect or compromise unpaid indebtedness to the the trust fund with the trust the trust fund
corporation; doctrine fund doctrine doctrine
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing stockholders Founders' shares
entitled to payment for their shares;
4. Redemption; and Shares classified as such in the articles of incorporation
5. Close corporation. which may be given special preference in voting rights
and dividend payments.
Limitations on treasury shares
Limitations in the issuance of founders' shares
1. They may be re-issued or sold again as long as it is for
a reasonable price fixed by the BOD. The exclusive right to vote and be voted for as director is
2. Cannot participate in dividends. granted, this privilege is subject to approval by the SEC,
3. It cannot be represented during stockholder’s
meetings.

CORPORATION CODE
and cannot exceed 5 years from the date of approval (CC, Over-issued stock
Sec. 7).
It is a stock issued in excess of the authorized capital
Voting shares stock. Stocks which are issued in this manner are null and
void.
Shares with a right to vote. If the stock is originally issued
as voting stock, it may not thereafter be deprived of the
right to vote without the consent of the holder. Street certificate
Non-voting shares It is a stock certificate endorsed by the registered holder

in blank and the transferee can command its transfer to
Shares without right to vote. The law only authorizes the his name from issuing corporation.
denial of voting rights in the case of redeemable shares
and preferred shares, provided that there shall always be Promotional share
a class or series of shares which have complete voting
rights (CC, Sec. 6). This is a share issued to promoters or those in some way
interested in the company, for incorporating the
Instances when holders of non-voting shares are company, or for services rendered in launching or
allowed to vote promoting the welfare of the company.
These redeemable and preferred shares, when such Watered stock

voting rights are denied, shall nevertheless be entitled to
vote on the following fundamental matters: Shares issued below its par value or issued value.
1. Amendment of articles of incorporation NOTE: Watered stocks pertain only to original issuance of
2. Adoption and amendment of by-laws shares.
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate A corporation can designate other classes of stocks
property
4. Incurring, creating or increasing bonded There can be other classifications as long as they are
indebtedness indicated in the AOI, stock certificate and not contrary to
5. Increase or decrease of capital stock law.
6. Merger or consolidation of the corporation with
another corporation or other corporations PAYMENT OF BALANCE OF SUBSCRIPTION
7. Investment of corporate funds in another
corporation or business in accordance with this Code Time when the balance of the subscription should be
8. Dissolution of the corporation (CC, Sec. 6). paid
Convertible shares 1. On the date specified in the subscription contract,

without need of demand or call, or
A share that is changeable by the stockholder from one 2. If no date of payment has been specified, on the date
class to another at a certain price and within a certain specified on the call made by the BOD; (CC, Sec. 67)
period. 3. If no date of payment has been specified on the call
made, within 30 days from the date of call;
GR: Stockholder may demand conversion at his pleasure. 4. When insolvency supervenes upon a corporation and
the court assumes jurisdiction to wind it up, all unpaid
XPN: Otherwise restricted by the articles of subscriptions become payable on demand, and are at once
incorporation. recoverable, without necessity of any prior call.
Fractional share Accrual of interest on unpaid balance
A fractional share is a share of equity that is less than Unpaid balance will accrue interest if so required by the
one full share. by‐laws and at the rate of interest fixed in the by‐laws. If
no rate of interest is fixed in the by‐laws, such rate shall
Shares in escrow be deemed to be the legal rate (CC, Sec. 66).
Subject to an agreement by virtue of which the share is The above interest is different from the interest
deposited by the grantor or his agent with a third person contemplated by Sec. 67, the unpaid balance involved in
to be kept by the depositary until the performance of which, will only accrue interest, by way of penalty, on the
certain condition or the happening of a certain event date specified in the contract of subscription or on the
contained in the agreement. date stated in the call made by the board.
NOTE: Interest contemplated in Sec. 66 pertains to

moratory interest which is the interest on account of

MERCANTILE LAW
subscription in an installment basis, while Sec. 67 speaks 3. It must operate uniformly upon all the shareholders.
of compensatory interest which is the interest on account
of delay The call of the board of directors is not always
necessary to collect payment for unpaid subscription
Moratory v. Compensatory interest
The necessity for calls depends upon the provisions of the
Compensatory interest Moratory Interest contract of subscription. When no time is fixed for
(CC, Sec. 67) (CC, Sec. 66) payment, the subscription is payable only upon call by the
Interest which accrues by Interest on unpaid BOD which may be made at any time the board may
way of penalty, on the subscription by reason of decide (De Leon, supra).
date specified in the amortization/
contract of subscription or installments. It can be However, a call is not necessary where:
on the date stated in the collected only if stipulated 1. The subscription contract specifies the date of
call made by the board. and for the rate specified payment; or
The stockholder liable for in the contract and fixed 2. The corporation becomes insolvent (Sundiang Sr. &
interest at the legal rate by the by-laws. If the rate Aquino, 2009)
on such balance, unless a is silent the legal rate 3. The subscriber becomes insolvent (De Leon, supra)
different rate of interest is shall be followed.
provided in the by-laws, NOTICE REQUIREMENT
computed from such date
until full payment. The notice of the call has to be served on the stockholders
concerned in the manner prescribed in the call, which
Effect of failure to pay the subscription on the date it may either be by registered mail and/or personal delivery
is due and publication.
It shall render the entire balance due and payable and Notice of call is necessary to bind the stockholders (ibid.,
shall make the shareholder liable for compensatory citing Baltazar v. Lingayen Gulf Electric Power, G.R. No. L-
interest at the legal rate on such balance, unless a 16236, June 30, 1965)
different rate of interest is provided in the by‐laws.
SALE OF DELINQUENT SHARES
Remedies of corporations to enforce payment of
stocks If within 30 days from expiry of the date of payment or
from the date stated in the call made by the board, and no
1. Extra-judicial sale at public auction (CC, Sec. 67) payment is made, all stocks covered by said subscription
2. Judicial action (CC, Sec. 70). shall thereupon become delinquent and shall be subject to
delinquency sale unless the BOD orders otherwise (CC,
CALL BY BOARD OF DIRECTORS Sec. 67).
Call for the payment by the board of directors for EFFECT OF DELINQUENCY
unpaid subscription
Effects of stock delinquency (1997, 2008 Bar)
A call is made in a form of board resolution that unpaid
subscription to the capital stock are due and payable and 1. Upon the stockholder
the same or such percentage thereof shall be collected, a. Accelerates the entire amount of the unpaid
together with all accrued interest, on a specified date and subscription;
that if no payment is made within 30 days from said date, b. Subjects the shares to interest expenses and costs;
all stocks covered by said subscription shall thereupon c. Disenfranchises the shares from any right that
become delinquent and shall be subject to public auction inheres to a stockholder, except the right to
sale. dividends (CC, Sec. 71) (but which shall be applied
to any amount due on said shares, or, in the case of
Unpaid claim stock dividends, to be withheld by the corporation
until full payment of the delinquent shares (CC, Sec.
It refers to any unpaid subscription, and not to any 43).
indebtedness which a subscriber or stockholder may owe
the corporation arising from any other transaction 2. Upon the director owning delinquent shares
(Sundiang Sr. & Aquino, 2009, citing China Bank v. CA, G.R. a. If the delinquent stockholder is a director, the
No. 117604, March 26, 1997). director shall continue to be a director but he
cannot run for re-election (Sundiang Sr. & Aquino,
Requisites for a valid call 2009)
b. A delinquent stockholder seeking to be elected as
SEC opined on July 21, 1976 that the following are the director may not be a candidate for, not be duly
requisites for a valid call: elected to, the board.
1. It must be made in the manner prescribed by law;
2. It must be made by the BOD; and

CORPORATION CODE
Status of the stockholder from delinquency date 2. Published once a week for 2 consecutive weeks in a
before auction sale newspaper of general circulation in the province or city
where the principal office of the corporation is located
All the rights of the stockholder are suspended except the (CC, Sec. 68)
right to dividends. With respect to dividends, Section 43
states that cash dividends should be applied against AUCTION SALE AND THE HIGHEST BIDDER
unpaid subscription while stock dividends should be
withheld until full payment of the subscription. Procedure for the sale of delinquent stocks
Q: Ace Cruz subscribed to 100,000 shares of stock of 1. Resolution – the board shall issue resolution ordering
JP Development Corporation, which has a par value of the sale of delinquent stock
P 1 per share. He paid P25,000.00 and promised to 2. Notice – notice of said sale, with a copy of the resolution,
pay the balance before December 31, 2008. JP shall be sent to every delinquent stockholder either
Development Corporation declared cash dividends personally or by registered mail
on October 15, 2008 payable on December 1, 2008. 3. Publication – the notice shall furthermore be published
once a week for two consecutive weeks in a
a. For how many shares is Ace Cruz entitled to be newspaper of general circulation in the province or
paid cash dividends? Explain. city where the principal office of the corporation is
b. On December 1, 2008, can Ace Cruz compel JP located
Development Corporation to issue to him the 4. Sale – the delinquent stock shall be sold at the public
stock certificate corresponding to the P25,000 auction to be held not less than 30 days nor more
paid by him? (2008 Bar) than 60 days from the date stocks become
delinquent;
A: 5. Transfer – the stock so purchased shall be transferred
a. Ace is entitled to the whole amount of his shares to such purchaser in the books of the corporation and
which is 100,000. A contract of subscription is an a certificate for such stock shall be issued in his favor;
indivisible contract. If only partial payment for the and
subscription was made, it cannot be the basis for the 6. Credit remainder – the remaining shares, if any, shall be
amount of cash dividend in favor of the stockholder. Cash credited in favor of the delinquent stockholder who
dividends due on delinquent stocks shall first be applied shall likewise be entitled to the issuance of a
to the unpaid balance on the subscription plus cost and certificate of stock covering the same (CC, Sec. 68;
expenses. (Sec. 43) Stocks become delinquent 30 days Aquino, 2014).
from the due date specified in the contract of subscription
or in the date stated in the call made by the board (Sec 67). Discontinuance or cancellation of delinquency sale
In this case, the cash dividend is not yet delinquent. Ace
Cruz, therefore can claim the entire cash dividend payable Delinquency sale may be discontinued or canceled if the
on December 1, 2008. delinquent stockholder pays the unpaid balance plus
interest, costs and expenses on or before the date
b. No. No certificate of stock shall be issued to a specified for the sale or when the BOD orders otherwise
subscriber until the full amount of subscription together (CC, Sec. 68).
with interest and expenses (in case of delinquent shares),
if any is due, has been paid (Sec 64). Clearly, since Ace Cruz Winning bidder in a delinquency sale
did not pay the full subscription yet, the certificate of
stock shall not be issued to him. 1. The person participating in the delinquency sale who
offers to pay the full amount of the balance of the
CALL BY RESOLUTION OF THE BOARD OF DIRECTORS subscription together with the accrued interest, costs of
advertisement and expenses of sale, for the smallest
Stocks become delinquent when the unpaid subscription number of shares;
and accrued interests thereon are not paid within 30 days
from their due date as specified in the subscription 2. If there is no bidder as mentioned above, the
contract or in the call by the board of directors. corporation, subject to the provisions of Sec. 68, CC, may
bid for the same, and the total amount due shall be
The delinquency is automatic after said 30 day period and credited as paid in full in the books of the corporation. The
does not need a declaration by the board making the stock purchase by the corporation must be made out of net
delinquent. earnings in view of the trust fund doctrine. Thereafter, the
reacquired shares shall be considered as treasury shares
NOTICE OF SALE (CC, Sec. 41; De Leon, 2010).
The notice of sale and copy of the board resolution NOTE: The board is not bound to accept the highest bid
ordering the sale shall be: unless the contrary appears. The bidder is the one making
the offer to purchase, which the corporation is free to
1. Sent to every delinquent stockholder either personally accept or reject (ibid.).
or by registered mail or;

MERCANTILE LAW
Q: What happens to the remaining shares, if any, were UNCERTIFICATED SHARES
not sold?
An uncertificated share is a subscription duly recorded in
A: The remaining shares, if any, shall be credited in favor the corporate books but has no corresponding certificate
of the delinquent stockholder who shall likewise be of stock yet issued.
entitled to the issuance of a certificate of stock covering
such shares (CC, Sec. 68). Stockholder may alienate his shares even if there is
no certificate of stock issued by the corporation
Rule on questioning the sale of delinquent share in
public auction The absence of a certificate of stock does not preclude the
stock holder from alienating or transferring his shares of
GR: The sale at public auction of delinquent share is stock.
absolute and not subject to redemption.
Transfers of fully paid subscription but the
XPN: An action may be filed to question the sale, the corporations has not yet issued a certificate of stock
requisites for which are:
1. There should be allegation and proof of irregularity or In case of a fully paid subscription, without the
defect in the notice of sale or in the sale itself. corporation having issued a certificate of stock, the
2. The party filing the action must first pay the party transfer may be effected by the subscriber or stockholder
holding the stock the sum for which the stock was sold executing a contract of sale of deed of assignment
with legal interest from the date of sale. covering the number of shares sold and submitting said
3. The action is filed within 6 months from the date of sale contract or deed to the corporate secretary for recording.
(CC, Sec. 69).
Transfers of subscription not fully paid
Prescription period of the action to question a In case of subscription not fully paid, the corporation may
delinquency sale record such transfer, provided that the transfer is
approved by the board of directors and the transferee
For stock corporations, the action prescribes 6 months executes a verified assumption of obligation to pay the
from such sale. However, in case of non-stock unpaid balance of the subscription.
corporations, the applicable period is 4 years under the
Civil Code. NEGOTIABILITY
CERTIFICATE OF STOCK Stock certificate is not negotiable
It is a written evidence of the shares of stock but it is not Although a stock certificate is sometimes regarded as
the share itself (Sundiang Sr. & Aquino, 2009, citing Lincoln quasi-negotiable, in the sense that it may be transferred
Phils. Life v. CA, G.R. No. 118043, July 23, 1998) by delivery, it is well-settled that the instrument is NON-
NEGOTIABLE, because the holder thereof takes it without
Shares of stock v. Certificates of stock prejudice to such rights or defenses as the registered
owner or creditor may have under the law, except insofar
SHARE OF STOCK CERTIFICATE OF STOCK as such rights or defenses are subject to the limitations
Evidence of the holder’s imposed by the principles governing estoppel (Republic v.
ownership of the stock Sandiganbayan,G.R. Nos. 107789 & 147214, April 30, 2003).
Unit of interest in a
and of his right as a
corporation
shareholder and of his Q: A is the registered owner of Stock Certificate No.
extent specified therein. 000011. He entrusted the possession of said
It is an incorporeal or certificate to his best friend B who borrowed the said
It is concrete and tangible endorsed certificate to support B's application for
intangible property
It may be recognized by passport (or for a purpose other than transfer). But B
It may be issued only if sold the certificate to X, a bona fide purchaser who
the corporation even if
the subscription is fully relied on the endorsed certificates and believed him
the subscription is not
paid. to be the owner thereof. Can A claim the shares of
fully paid.
stocks from X? Explain. (2001 Bar)
NATURE OF THE CERTIFICATE
A: No. Since the shares were already transferred to "B",
A certificate of stock is a prima facie evidence of "A" cannot claim the shares of stock from "X". The
ownership and evidence can be presented to determine certificate of stock covering said shares have been duly
the real owner of the shares (Bitong vs. CA, supra). endorsed by "A" and entrusted by him to "B". By his said
acts, "A" is now estopped from claiming said shares from
It is not essential to the existence of a share of stock or the "X", a bona fide purchaser who relied on the endorsement
creation of the relation of the shareholder with the by “A” of the certificate of stock.
corporation (Tan v. SEC, G.R. No. 95696, March 3, 1992)

CORPORATION CODE
REQUIREMENTS FOR VALID TRANSFER OF STOCK be transferred. The “unpaid claim” refers to the unpaid
subscription on the shares transferred and not to any
Requirements for valid transfer of stocks other indebtedness that the transferor may have to the
corporation (CC, Sec. 63).
The following are the requirements for valid transfer of
stocks: NOTE: If the contract of subscription is still not fully paid,
1. If represented by a certificate, the following must be the consent of the corporation must be obtained first
strictly complied with: since there would be a change of debtor. Hence, the
a. Indorsement by the owner and his agent consent of the creditor (corporation) is necessary.
b. Delivery of the certificate
c. To be valid to third parties and to the corporation, Kind of transfer that requires registration in the
the transfer must be recorded in the books of the books of the corporation
corporation (Rural Bank of Lipa v. CA, G.R. No. 124535,
Sepember 28, 2001). Only absolute transfers are required to be registered in
2. If NOT represented by a certificate (such as when the the books of the corporation. Hence, registration in the
certificate has not yet been issued or where for some stock and transfer book is not necessary if the conveyance
reason is not in the possession of the stockholder): is by way of chattel mortgage. However, registration must
` a. By means of deed of assignment; and be had with the Register of Deeds (Chua Guan v. Samahan,
b. Such is duly recorded in the books of the supra.).
corporation (Sundiang Sr. & Aquino, 2009).
Validity of a transfer that is not recorded
Effect of the non-payment of Documentary Stamp Tax
If the transfer is not recorded, t is valid but only insofar as
No sale, exchange, transfer or similar transaction the parties to the transfer are concerned. To bind the
intended to convey ownership of, or title to any share of corporation, the deed affecting the transfer must be duly
stock shall be registered in the books of the corporation recorded in the corporate books (CC, Sec. 63).
unless the receipts of payment of the tax herein imposed
is filed with and recorded by the stock transfer agent or Q: Enrique Razon organized the E. Razon, Inc. for the
secretary of the corporation (Revenue Regulations No. 6- purpose of bidding for the arrastre services in South
2008, Sec. 11). Harbor, Manila. Stock certificate No. 003 for 1,500
shares of stock of E. Razon was issued in the name of
Stockholder may bring suit to compel the corporate Juan T. Chuidian.From the time the certificate of stock
secretary to register valid transfer of stocks was issued Razon had not questioned the ownership
by Juan of the shares of stock in question and had not
It is the corporate secretary’s ministerial duty and brought any action to have the certificate of stock
obligation to register transfers of stocks provided all the over the said shares cancelled. However, the
requirements for a valid transfer had been complied with. certificate of stock was in the possession of Razon
who refused to deliver said shares to Juan, until the
Remedies where corporation refuses to transfer same was surrendered by Razon and deposited in a
certificate of stocks safety box in Philippine Bank of Commerce. The CFI
declared that Razonis the owner of the said shares of
1. Petition for mandamus stock. The then IAC, however, reversed the trial
2. Suit for specific performance of an express or implied court's decision and ruled that Juan T. Chuidian, the
contract deceased father of Vicente B. Chuidian is the owner of
3. May sue for damages where specific performance the shares of stock. Who is the owner of the subject
cannot be granted shares of stock?
NOTE: There must be a special power of attorney A: Juan is the owner. In the instant case, there is no
executed by the registered owner of the share authorizing dispute that the questioned 1,500 shares of stock of E.
transferor to demand transfer in the stock and transfer Razon, Inc. are in the name of the late Juan Chuidian in the
book (Ponce v. Alsons Cement, G.R. No. 139802, December books of the corporation. Moreover, the records show
10, 2002). that during his lifetime Chuidian was elected member of
the Board of Directors of the corporation which clearly
The law does not prescribe a period within which the shows that he was a stockholder of the corporation. From
registration of the transfer of shares should be effected. the point of view of the corporation, therefore, Chuidian
Hence, the action to enforce the right does not accrue until was the owner of the 1,500 shares of stock. In such a case,
there has been a demand and a refusal concerning the Razon who claims ownership over the questioned shares
transfer. of stock must show that the same were transferred to him
by proving that all the requirements for the effective
Valid refusal by the corporation to register the transfer of shares of stock in accordance with the
transfer of shares corporation's by laws, if any, were followed. The law is
clear that in order for a transfer of stock certificate to be
The corporation may refuse to register the transfer of effective, the certificate must be and that title to such
shares if it has an existing unpaid claim over the shares to certificate of stock properly indorsed ock is vested in the

MERCANTILE LAW
transferee by the delivery of the duly indorsed certificate ACC failed to issue the certificates of stock in Ponce’s
of stock. Since the certificate of stock covering the name. Ponce filed a petition for mandamus with the
questioned 1,500 shares of stock registered in the name SEC for the issuance of the certificates in his name.
of the late Juan Chuidian was never indorsed to Razon, the
inevitable conclusion is that the questioned shares of Ponce contends that when a corporate secretary is
stock belong to Chuidian. The Razon’s asseveration that presented with a document of transfer of fully paid
he did not require an indorsement of the certificate of shares, it is his duty to record the transfer in the stock
stock in view of his intimate friendship with the late Juan and transfer book of the corporation, issue a new
Chuidian can not overcome the failure to follow the stock certificate in the name of the transferee, and
procedure required by law or the proper conduct of cancel the old one. Ergo, the failure to record the
business even among friends (Enrique Razon v. IAC, et al., transfer does not mean that the transferee cannot ask
G.R. No. 74306, March 16, 1992). for the issuance of stock certificates. ACC, on the other
hand maintains that the transfer of shares of stock not
Q: Nemesio Garcia filed an action for injunction recorded in the stock and transfer book of the
against spouses Jose and Sally Atinon and Nicolas corporation is non-existent insofar as the corporation
Jomouad, ex-officio sheriff. Said action stemmed from is concerned and no certificate of stock can be issued
an earlier case for collection of sum of money, filed by in the name of the transferee.
the spouses Atinon against Jaime Dico. In that case the
trial court rendered judgment ordering Dico to pay May the corporate secretary be compelled to register
the spouses Atinon. After said judgment became final transfer of shares on the basis merely of an
and executory, the sheriff proceeded with its indorsement of stock certificates?
execution. In the course thereof, the Proprietary
Ownership Certificate (POC) in the Cebu Country A: No. Under Section 63 of the Corporation Code, a
Club, which was in the name of Dico, was levied on and transfer of shares of stock not recorded in the stock and
scheduled for public auction. Claiming ownership transfer book of the corporation is non-existent as far as
over the subject certificate, Garcia filed the action for the corporation is concerned. As between the corporation
injunction to enjoin the spouses Antinon from on the one hand, and its shareholders and third persons
proceeding with the auction. The trial court on the other, the corporation looks only to its books for
dismissed the complaint. The CA affirmed. Garcia the purpose of determining who its shareholders are.It is
contends that the subject stock of certificate, albeit in only when the transfer has been recorded in the stock and
the name of Dico, cannot be levied upon the execution transfer book that a corporation may rightfully regard the
to satisfy his judgment debt because even prior to the transferee as one of its stockholders. From this time, the
institution of the case for collection of sum of money consequent obligation on the part of the corporation to
against him, the spouses Atinon had knowledge that recognize such rights as it is mandated by law to
Dico already conveyed back the ownership of the recognize arises. Hence, without such recording, the
subject certificate to Garcia and that Dico executed a transferee may not be regarded by the corporation as one
deed of transfer covering the subject certificate in among its stockholders and the corporation may legally
favor of Garcia. refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the
Is a bona fide transfer of the shares of a corporation, requirements of Section 64 of the Corporation Code. The
not registered or noted in the books of the situation would be different if Ponce himself the
corporation, valid as against a subsequent lawful registered owner of the stock which he sought to transfer
attachment of said shares, regardless of whether the to a third party, for then he would be entitled to the
attaching creditor had actual notice of said transfer or remedy of mandamus (Vicente C. Ponce v. Alsons Cement
not? Corporation,et al., G.R. NO. 139802, December 10, 2002).
A: No. A transfer of shares not registered in the books of Q: Fil-Estate Golf and Development, Inc. (FEGDI) is a
the corporation is not valid as against subsequent stock corporation whose primary business is the
attachment of the shares. All transfers of shares not so development of golf courses. Fil-Estate Land, Inc.
entered in the books of the corporation are invalid as to (FELI) is also a stock corporation, but is engaged in
attaching or execution creditors of the assignors, as well real estate development. FEGDI was the developer of
as to the corporation and to subsequent purchasers in the Forest Hills Golf and Country Club (Forest Hills)
good faith, and, indeed, as to all persons interested, except and, in consideration for its financing support and
the parties to such transfers. Hence, the transfer of the construction efforts, was issued several shares of
subject certificate made by Dico to Garcia was not valid as stock of Forest Hills.
to the spouses Atinon, the judgment creditors, as the same
still stood in the name of Dico, the judgment debtor, at the FEGDI sold on installment, to RS Asuncion
time of the levy on execution (Nemesio Garcia v. Nicolas Construction Corporation (RSACC) one common
Jomouad, et al., G.R. No. 133969, January 26, 2000). share of Forest Hills. Prior to the full payment of the
purchase price, RSACC sold the share to respondent
Q: Vicente C. Ponce acquired 239,500 shares of the Vertex Sales and Trading, Inc. (Vertex). RSACC
Alsons Cement Corporation (ACC) from its advised FEGDI of the sale to Vertex and FEGDI, in turn,
incorporator, Fausto Gaid. Despite Gaid’s instructed Forest Hills to recognize Vertex as a
endorsement and the repeated demands of Ponce,

CORPORATION CODE
shareholder. For this reason, Vertex enjoyed Q: May Forest Hills appeal the CA decision which
membership privileges in Forest Hills. ordered the recisision of the sale?
Despite Vertex’s full payment, the share remained in A: No. While Forest Hills questioned and presented its
the name of FEGDI. Vertex made several demands to arguments against the CA ruling rescinding the sale of the
FEGDI to issue a stock certificate in its name. As the share in its petition, it is not the proper party to appeal
demands went unheeded, Vertex filed a Complaint for this ruling.
Rescission with Damages and Attachment against
FEGDI, FELI and Forest Hills. It averred that the As correctly pointed out by Forest Hills, it was not a party
petitioners defaulted in their obligation as sellers to the sale even though the subject of the sale was its
when they failed and refused to issue the stock share of stock. The corporation whose shares of stock are
certificate covering the subject share despite the subject of a transfer transaction (through sale,
repeated demands. On the basis of its rights under assignment, donation, or any other mode of conveyance)
Article 1191 of the Civil Code, Vertex initiated a suit need not be a party to the transaction, as may be inferred
for the rescission of the sale and demanded the from the terms of Section 63 of the Corporation Code.
reimbursement of the amount it paid However, to bind the corporation as well as third parties,
(or P1,100,000.00), plus interest. it is necessary that the transfer is recorded in the books
of the corporation. In the present case, the parties to the
The RTC dismissed the case, and held that the delay in sale of the share were FEGDI as the seller and Vertex as
the issuance of a stock certificate does not warrant the buyer (after it succeeded RSACC). As party to the sale,
rescission. The CA reversed the RTC, holding that FEGDI is the one who may appeal the ruling rescinding
under Section 63 of the Corporation Code, there can the sale. The remedy of appeal is available to a party who
be no valid transfer of shares when there is no has "a present interest in the subject matter of the
delivery of the stock certificate, and that that the litigation and is aggrieved or prejudiced by the judgment.
delay was a substantial breach that warranted A party, in turn, is deemed aggrieved or prejudiced when
rescission. his interest, recognized by law in the subject matter of
the lawsuit, is injuriously affected by the judgment, order
Is the delay in the issuance of the stock certificate a or decree." The rescission of the sale does not in any way
substantial breach of the sale which entitles Vertex prejudice Forest Hills in such a manner that its interest
entitled to the rescission thereof? in the subject matter – the share of stock – is injuriously
affected. Thus, Forest Hills is in no position to appeal the
A: Yes. Section 63 of the Corporation Code provides, ruling rescinding the sale of the share. Since FEGDI, as
among others, that shares of stock may be transferred by party to the sale, filed no appeal against its rescission, we
delivery of the certificate or certificates indorsed by the consider as final the CA’s ruling on this matter (Forest
owner or his attorney-in-fact or other person legally Hills Golf & Country Club v. Vertex Sales and Trading, Inc.,
authorized to make the transfer. G.R. No. 202205, March 6, 2013).
In this case, Vertex fully paid the purchase price by ISSUANCE

February 11, 1999 but the stock certificate was only
delivered on January 23, 2002 after Vertex filed an action Issuance of certificate of stock
for rescission against FEGDI.
It may only be issued until the full amount of the
Under these facts, considered in relation to the governing stockholder’s subscription together with the interest and
law, FEGDI clearly failed to deliver the stock certificates, expenses (in case of delinquent shares) if due has been
representing the shares of stock purchased by Vertex, paid (CC, Sec. 64).
within a reasonable time from the point the shares should
have been delivered. This was a substantial breach of Requisites for the issuance of the certificate of stock
their contract that entitles Vertex the right to rescind the
sale under Article 1191 of the Civil Code. It is not entirely 1. The certificate must be signed by the president or vice-
correct to say that a sale had already been consummated president, countersigned by the corporate secretary or
as Vertex already enjoyed the rights a shareholder can assistant secretary (Bitong v. CA, G.R. No. 123553, July 13,
exercise. The enjoyment of these rights cannot suffice 1998)
where the law, by its express terms, requires a specific
form to transfer ownership. NOTE: Unless it complies with the foregoing, it is not
deemed issued.
Mutual restitution is required in cases involving
rescission under Article 1191 of the Civil Code; such 2. The certificate must be sealed with the seal of the
restitution is necessary to bring back the parties to their corporation;
original situation prior to the inception of the 3. The certificate shall be issued in accordance with the
contract. Accordingly, the amount paid to FEGDI by by-laws;
reason of the sale should be returned to Vertex (Fil-Estate 4. The certificate must be delivered;
Golf and Development, Inc. and Fil-Estate Land, Inc. v. 5. The par value as to par value shares, or full subscription
Vertex Sales and Trading, Inc., G.R. No. 202079, June 10, as to no par value shares must be fully paid, the basis of
2013). which is the doctrine of indivisibility of subscription

MERCANTILE LAW
6. The original certificate must be surrendered where the may be issued even before the expiration of the 1 year
person requesting the issuance of a certificate is a period provided herein.
transferee from the stockholder (CC, Sec. 64.).
4. Provided that if a contest has been presented to said
Rules on right to issuance corporation or if an action is pending in court regarding
the ownership of said certificate of stock which has been
A corporation may now, in the absence of provisions in lost, stolen or destroyed, the issuance of the new
their by-laws to the contrary, apply payments made by certificate of stock in lieu thereof shall be suspended until
subscribers-stockholders, either as: the final decision by the court regarding the ownership of
1. Full payment for the corresponding number of shares said certificate of stock which has been lost, stolen or
of stock, the par value of each of which is covered by such destroyed (CC, Sec. 73).
payment; OR
2. Payment pro-rata to each and all the entire number of Oppositions on the issuance of new certificates
shares subscribed for (Baltazar v. Lingayen Gulf Electric
Power Co., Inc, G.R. No. L-16236-38, June 30, 1965). If there are oppositions on the issuance of new
certificates, the corporation may file an interpleader
LOST OR DESTROYED CERTIFICATES proceeding to compel the parties to litigate among
themselves.
Procedure for the issuance of a new stock certificate
in lieu of those which have been lost, stolen or Liability of the corporationfor the issuance of new
destroyed certificates of stock in case of lost or destroyed
certificate
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with the GR: No action may be brought against any corporation
corporation an affidavit in triplicate setting forth: which shall have issued certificate of stock in lieu of those
a. If possible, the circumstances as to how the lost, stolen or destroyed pursuant to the procedure
certificate was lost, stolen or destroyed, above-described.
b. The number of shares represented by such
certificate, XPN: Where there is fraud, bad faith, or negligence on the
c. The serial number of the certificate and the name of part of the corporation and its officers (ibid).
the corporation which issued the same.
Q: A stockholder claimed that his stock certificate was
NOTE: He shall also submit such other information and lost. After going through with the procedure for the
evidence which he may deem necessary. issuance of lost certificate, and no contest was
presented within 1 year from the last publication, the
2. After verifying the affidavit and other information and corporation issued a new certificate of stock in lieu of
evidence with the books of the corporation, the latter shall the supposed lost certificate. The stockholder
publish a notice in a newspaper of general circulation immediately sold his shares and endorsed the
published in the place where the corporation has its replacement certificate to a buyer. It turned out that
principal office, once a week for three (3) consecutive the original certificate was not lost, but sold and
weeks at the expense of the registered owner of the endorsed to another person.
Certificate of Stock.
1. May the corporation be made liable by the
NOTE: Contents of notice: aggrieved party?
2. Who will have a better right over the shares, the
a. Name of the corporation endorsee of the original certificate or the endorsee of
b. Name of the registered owner the replacement certificate?
c. Serial number of the certificate of stock.
d. Number of share represented by the certificate of stock. A:
1. No. The corporation cannot be made liable. Except in
3. After the expiration of one (1) year from the date of the cases of fraud, bad faith, or negligence on the part of the
last publication, if no contest has been presented to said corporation and its officers, no action may be brought
corporation regarding said certificate of stock, the against any corporation which has issued certificates of
corporation shall cancel in its books the certificate of stock in lieu of those lost, stolen, or destroyed pursuant to
stock which has been lost, stolen or destroyed and issue the procedure prescribed by law.
in lieu thereof new certificate of stock.
2. The endorsee of the replacement certificate has a better
NOTE: After the expiration of the 1 year period to contest, right to the shares. After expiration of 1 year from the date
such right shall be barred unless the registered owner of the last publication, and no contest has been presented
files a bond or other security in lieu thereof as may be to said corporation regarding said certificate, the right to
required, effective for a period of 1 year, for such amount make such contest has been barred and said corporation
and in such form and with such sureties as may be already canceled in its books the certificate which have
satisfactory to the BOD, in which case, a new certificate been lost, stolen, or destroyed and issued in lieu thereof
new certificate.

CORPORATION CODE
Q: Juan was a stockholder of X Co. He owned a total of Q: Judge Torres was the majority stockholder of
500 shares evidenced by Cert of Stock No 1001. He Tormil Realty & Development Corporation (Tormil)
sold the shares to Pedro. After getting paid, Juan while Antonio Torres, et al., who are the children of
indorsed and delivered said Certificate of Stock No Judge Torres’ deceased brother constituted the
1001 to Pedro. The following day, Juan went to the minority stockholders. During the 1987 annual
offices of the corporation and claimed that his stockholders meeting and election of directors of
Certificate of Stock No 1001 was lost and that, despite Tormil, Judge Torres assigned from his own shares,
diligent efforts, the certificate could not be located. one (1) share each to Tobias, et al. These assigned
The formalities prescribed by law for the shares were in the nature of qualifying shares, for the
replacement of the ―lost certificate were complied sole purpose of meeting the legal requirement to be
with. Eventually X Co issued in substitution of the able to elect them to the Board of Directors as Torres’
―lost certificate, Cert of Stock No 2002. Juan forthwith nominees. The nominees were thereafter elected.
transferred for valuable consideration the new Consequently, Antonio, et al., instituted a complaint
certificate to Jose who knew nothing of the previous with the SEC praying that the election of the nominees
sale to Pedro. In time, the corporation was confronted to the Board of Directors be annulled. They alleged
with the conflicting claims of Jose and Pedro. The BOD that the petitioners-nominees were not legitimate
of X Co invited you to enlighten them on these stockholders of Tormil because the assignment of
questions; viz: shares to them violated the minority stockholders’
right of pre-emption as provided in the corporation’s
a) If a suit were to be initiated in order to resolve
articles and by-laws. Among others, the nominees
the controversy between Pedro and Jose, should insist that the assignment of “qualifying shares” to
the matter be submitted to the SEC or to the
them of the late Judge Torres (herein petitioners)
regular courts?
does not partake of the real nature of a transfer or
b) Between Jose and Pedro, whom should the
conveyance of shares of stock as would call for the
corporation so recognize as the rightful
“imposition of stringent requirements of recording of
stockholder? How would you respond to the above the transfer of said shares.” Anyway, the nominees
queries? (1997 Bar)
add, there was substantial compliance with the
above-stated requirement since said assignments
A: were entered by the late Judge Torres himself in the
a) The jurisdiction of the matter belongs to the regular
corporation’s stock and transfer book prior to the
courts. Under section 5.2 of the SRC as amended, the
annual stockholders meeting. Are the entries made by
jurisdiction for intra-corporate controversies was
Judge Torres in the stock and transfer book valid?
transferred from the SEC to the regular courts.
b) The corporation should recognize both Pedro and A: No. The entries are not valid. In the absence of any
Jose as rightful stockholders if there is no over-issuance provision to the contrary, the corporate secretary is the
of shares resulting from the two transactions without custodian of corporate records. Corollarily, he keeps the
prejudice to the right of the corporation to claim against stock and transfer book and makes proper and necessary
Juan for the value of the shares sold to Jose. entries therein. Contrary to the generally accepted
corporate practice, the stock and transfer book of TORMIL
STOCK AND TRANSFER BOOK was not kept by Ms. Maria Cristina T. Carlos, the corporate
secretary but by respondent Torres, the President and
CONTENTS Chairman of the Board of Directors of TORMIL. In
contravention Section 74, the stock and transfer book was
1. All stocks in the name of the stockholders not kept at the principal office of the corporation either
alphabetically arranged but at the place of Torres. Any entries made in the stock
2. Amount paid and unpaid on all stocks and the date of and transfer book on March 8, 1987 by Torres of an
payment of any installment alleged transfer of nominal shares to Pabalan and Co.
3. Alienation, sale or transfer of stocks cannot therefore be given any valid effect (Manuel A.
4. Other entries as the by-laws may prescribe Torres, Jr., et al., v. CA, et al., G.R. No. 120138, September 5,
(Sundiang Sr. & Aquino, 2009). 1997).
WHO MAY MAKE VALID ENTRIES Probative value of the stock and transfer book
Entries in stock and transfer books The stock and transfer book is the best evidence of the
transactions that must be entered or stated therein.
The obligation and duty to make proper entries in stock However, the entries are considered prima facie evidence
and transfer books falls on the corporate secretary. If the only and may be subject to proof to the contrary (Bitong
corporate secretary refuses to comply, the stockholder vs. CA, supra).
may rightfully bring suit to compel performance. The
stockholder cannot take the law on to his hands;
otherwise such entry shall be void (Torres, Jr. v. CA, G.R.
No. 120138, Sept. 5, 1997).

MERCANTILE LAW
DISPOSITION AND ENCUMBRANCE OF SHARES shares cannot compel the corporation to record the
transfer of shares in its books, even though he has no
Registration by the corporation of the transfer of knowledge that they are not fully paid (CC, Sec. 63).
shares in case of alienation
SALE OF A PORTION OF SHARES NOT FULLY PAID
As between the parties to the contract of sale, registration
of the transfer of shares is not required. However, until Stockholder cannot sell a portion of the shares not
the shares are fully paid, such transfer cannot be recorded fully paid
in the books of the corporation. Consequently, the
transferee will not be considered as a stockholder. A stockholder who has not paid the full amount of his
subscription cannot transfer a portion of his subscription
Reasons for the recording of the alienation of shares in view of the indivisible nature of the subscription
contract (Villanueva, 2009).
1. To enable the corporation to know at all times their
actual stock holders; Liability of the transferee for the balance of the
purchase price in case the stockholder on record fails
2. To afford the corporation the opportunity to object or to pay the same
refuse its consent to the transfer in case it has any claim
against the stock; and In case the stockholder on record fails to pay the pay the
balance of the purchase price, he is still liable for the
3. To avoid fictitious and fraudulent transfer. balance of the purchase price. Unless the transfer of the
shares is recorded, the stockholder is still the owners of
ALLOWABLE RESTRICTIONS ON THE SALE OF the shares as far as the corporation is concerned.
SHARES
REASON: The subscriber is as much bound to pay his
Requisites for a restriction to be valid subscription as he would be to pay any other debt. (Nava
v. Peers Marketing Corporaiton, G.R. No. L-28120
1. Restrictions are provided in the articles of November 25, 1976)
incorporation and
2. It must be printed at the back of the certificate of Q: Po subscribed to 80 shares of Peers Marketing
stock. Corporation at one hundred pesos a share with a total
3. Must not be more onerous than the right of first value of 8,000 pesos. Po initially paid 2,000 pesos
refusal (25% of the amount of subscription). Without paying
the full subscription price, Po sold to Nava 20 of his 80
Corporation can provide regulations to the shares. Nava requested the officers of the corporation
sale/transfer of the shares of stockholders to register the sale in the books of the corporation.
The request was denied because Po has not paid fully
Corporation can provide regulations to the sale/transfer the amount of his subscription. Can Nava compel the
of the shares of stockholders but the authority granted to corporation to register the sale?
a corporation to regulate the transfer of its stock does not
empower it to restrict the right of a stockholder to A: No. The corporation has a claim on the said shares for
transfer his shares, but merely authorizes the adoption of the unpaid balance of Po's subscription. A stock
regulations as to the formalities and procedure to be subscription is a subsisting liability from the time the
followed in effecting transfer (Thomson v. CA, G.R. No. subscription is made. The subscriber is as much bound to
116631, October 28, 1998). pay his subscription as he would be to pay any other debt
(Ibid).
SALE OF PARTIALLY PAID SHARES
SALE OF ALL SHARES NOT FULLY PAID
A stockholder can transfer his shares without being
fully paid The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of
The incomplete payment of the subscription does not stock. However, the transfer shall be valid only between
preclude the subscriber from alienating his shares of the parties. The corporation has the right to refuse from
stock. However, the transfer shall be valid only between recording the sale in its books.
the parties.
SALE OF FULLY PAID SHARES
A transferee of the partially paid shares cannot
compel the corporation to record the transfer of Sale of fully paid shares is allowed even without the
shares in its books, even though he has no knowledge consent of the corporation as long as the requisites for the
that they are not fully paid valid transfer of shares are complied.
Shares of stock against which the corporation holds any Q: Four months before his death, PX assigned 100
unpaid claim shall not be transferable in the books of the shares of stock registered in his name in favor of his
corporation. Hence, a transferee of the partially paid wife and his children. They then brought the deed of

CORPORATION CODE
assignment to the proper corporate officers for DISSOLUTION AND LIQUIDATION
registration with the request for the transfer in the
corporation's stock and transfer books of the Dissolution
assigned shares, the cancellation of the stock
certificates in PX's name, and the issuance of new It is the extinguishment of the franchise of a corporation
stock certificates in the names of his wife and his and the termination of its corporate existence (Sundiang
children as the new owners. The officers of the Sr. & Aquino, 2009).
Corporation denied the request on the ground that
another heir is contesting the validity of the deed of Effects of the dissolution of a corporation
assignment. May the Corporation be compelled by
mandamus to register the shares of stock in the 1. Corporation ceases as a body corporate to continue
names of the assignees? (2004 Bar) the business for which it was established (CC, Sec.
122).
A: Yes. The corporation may be compelled by mandamus 2. The assets of the corporation will then be liquidated
to register the shares of stock in the name of the assignee. and legal title to the remaining corporate properties
The only legal limitation imposed by Section 63 of the are transferred to the stockholders who become co-
Corporation Code is when the Corporation holds any owners thereof
unpaid claim against the shares intended to be 3. The Corporation continues as a body corporate for 3
transferred. The alleged claim of another heir of PX is not years only for the purpose of winding up or
sufficient to deny the issuance of new certificates of stock liquidation.
to his wife and children. It would be otherwise if the 4. A dissolved corporation cannot be revived. However,
transferee's title to the shares has no prima facie validity those interested may reincorporate by refilling a new
or is uncertain. AOI and by-laws (Rebollido vs. CA, G.R. No. 81123,
February 28, 1989).
Recording of a deed of assignment with the SEC
without the transfer of shares does not bind the Q: Philippine College of Criminology Inc. (PCCI) is a
corporation and third persons non-stock educational institution, while the
petitioners were janitors, janitresses and supervisor
The recording of a deed of assignment does not give rise in the Maintenance Department of PCCI under the
to any legal benefit to the corporation or any person (Sec supervision and control of Atty. Florante A. Seril (Atty.
Memo Circular No. 17, Series of 2004). Seril), PCCI’s Senior Vice President for
Administration. The petitioners, however, were made
REQUISITES OF A VALID TRANSFER to understand, upon application with respondent
school, that they were under Metropolitan Building
*Please refer to page 249 for the extensive discussion Services, Inc. (MBMSI), a corporation engaged in
regarding this topic. providing janitorial services to clients where Atty.
Seril is also the President and General Manager.
INVOLUNTARY DEALINGS WITH SHARES Sometime in 2008, PCCI discovered that the
Certificate of Incorporation of MBMSI had been
Involuntary dealing revoked. Hence, PCCI, through its President, Gregory
Alan F. Bautista (Bautista), citing the revocation,
It refers to such writ, order or process issued by a court of terminated the school’s relationship with MBMSI,
record affecting shares of stocks which by law should be resulting in the dismissal of the employees or
registered to be effective, and also to such instruments maintenance personnel under MBMSI, except Alfonso
which are not the willful acts of the registered owner and Bongot (Bongot) who was retired. Thus, the
which may have been executed even without his dismissed employees filed their respective
knowledge or against his consent. complaints for illegal dismissal, reinstatement, back
wages, underpayment of salaries, overtime pay,
Examples of involuntary dealings of a share holiday pay, service incentive leave, and 13th month
pay against MBMSI, Atty. Seril, PCCI, and Bautista.
1. Attachment
2. Sale on execution of judgment or sales for taxes Subsequently, PCCI submitted several documents
3. Adverse claims before the labor arbiter (LA), including releases,
4. Foreclosure of mortgage of stocks waivers and quitclaims in favor of MBMSI executed by
the complainants to prove that they were employees
Involuntary dealings must be registered of MBMSI and not PCCI. After due proceedings, the LA
handed down his decision, finding that (a) PCCI was
It is the act of registration which creates a constructive the real principal employer of the complainants ; (b)
notice to the whole world of such instrument or court writ MBMSI was a mere adjunct or alter ego/labor-only
or process and is the operative act that conveys contractor; (c) the complainants were regular
ownership (Aquino, 2007). employees of PCCI; and (d) PCCI/Bautista were in bad
faith in dismissing the complainants. On appeal, both
the NLRC and the CA affirmed the said decision.

MERCANTILE LAW
May a dissolved corporation enter into an agreement liability already incurred by the corporation, its
such as releases, waivers and quitclaims beyond the stockholders, directors, or officers. In short, Section 145
3-year winding up period under Section 122 of the preserves a corporate actor’s cause of action and remedy
Corporation Code? against another corporate actor. In so doing, Section 145
also preserves the nature of the controversy between the
A: Yes. The executed releases, waivers and quitclaims are parties as an intra-corporate dispute.
valid and binding notwithstanding the revocation of
MBMSI’s Certificate of Incorporation. The revocation does The dissolution of the corporation simply prohibits it
not result in the termination of its liabilities. Section 122 from continuing its business. However, despite such
of the Corporation Code provides for a three-year winding dissolution, the parties involved in the litigation are still
up period for a corporation whose charter is annulled by corporate actors. The dissolution does not automatically
forfeiture or otherwise to continue as a body corporate convert the parties into total strangers or change their
for the purpose, among others, of settling and closing its intra-corporate relationships. Neither does it change or
affairs. Even if said documents were executed in 2009, six terminate existing causes of action, which arose because
(6) years after MBMSI’s dissolution in 2003, the same are of the corporate ties between the parties. Thus, a cause of
still valid and binding upon the parties and the dissolution action involving an intra-corporate controversy remains
will not terminate the liabilities incurred by the dissolved and must be filed as an intra-corporate dispute despite
corporation pursuant to Sections 122 and 145 of the the subsequent dissolution of the corporation (Aguirre v.
Corporation Code (Vigillia v. Philippine College of FQB+7 Inc., GR No. 170770, January 9 2013).
Criminology, G.R. No. 200094, June 10, 2013).
Q: Alabang Development Corporation (ADC),
Q: Vitaliano Aguirre, II, one of the original subscribers of developer of Alabang Hills Village, filed with the RTC
FQB+7, filed a complaint for intra-corporate dispute and a complaint for injunction against respondent
examination of corporate books and records against Alabang Hills Village Association, Inc. and its
Nathaniel Bocobo, Priscilla Bocobo and Antonio De Villa president, Rafael Tino, alleging that AHVAI started
upon learning that they have filed, as corporate officers of the construction of a multi-purpose hall and a
FQB+7, a GIS which showed a different set of Directors swimming pool on one of the parcels of land still
and Subscribers from that of the AoI. owned by ADC, without the latter’s consent and
approval.
In response, Nathaniel, et al. filed a petition for certiorari
with the CA for the annulment of the proceedings in the AHVAI claimed that ADC had no legal capacity to sue
RTC. One of the grounds they raised was that the SEC had since its existence as a registered corporate entitiy
already revoked FQB+7’s certificate of registration almost was revoked by the SEC on May 26, 2003. The RTC
a year before Aguirre filed his complaint with the RTC. dismissed ADC’s petition due to lack of personality,
and the CA affirmed the RTC.
The CA ruled that the complaint must be dismissed as the
complaint, being geared towards the continuation of Did the CA err in declaring that ADC lacked the
FQB+7, Inc.’s business, should be dismissed because the capacity to file the complaint?
corporation has lost its juridical personality. Moreover,
the CA held that the trial court does not have jurisdiction A: No. In the instant case, there is no dispute that ADC's
to entertain an intra-corporate dispute when the corporate registration was revoked on May 26, 2003.
corporation is already dissolved. Based on Section 122 of the Corporation Code, it had three
years, or until May 26, 2006, to prosecute or defend any
Is the case an intra-corporate dispute and is thus under suit by or against it. The subject complaint, however,
the jurisdiction of the RTC? was filed only on October 19, 2006, more than three years
after such revocation.
A: Yes. The Court finds and so holds that the case is
essentially an intra-corporate dispute. It obviously arose In the present case, ADC filed its complaint not only after
from the intra-corporate relations between the parties, its corporate existence was terminated but also beyond
and the questions involved pertain to their rights and the three-year period allowed by Section 122 of the
obligations under the Corporation Code and matters Corporation Code. Thus, it is clear that at the time of the
relating to the regulation of the corporation. The Court filing of the subject complaint ADC lacks the capacity to
further holds that the nature of the case as an intra- sue as a corporation. To allow ADC to initiate the subject
corporate dispute was not affected by the subsequent complaint and pursue it until final judgment, on the
dissolution of the corporation. ground that such complaint was filed for the sole purpose
of liquidating its assets, would be to circumvent the
It bears reiterating that Section 145 of the Corporation provisions of Section 122 of the Corporation Code
Code protects, among others, the rights and remedies of (Alabang Development Corporation v. Alabang Hills Village
corporate actors against other corporate actors. The Association and Rafael Tinio, G.R. No. 187456, June 2, 2014).
statutory provision assures an aggrieved party that the
corporation’s dissolution will not impair, much less
remove, his/her rights or remedies against the
corporation, its stockholders, directors or officers. It also
states that corporate dissolution will not extinguish any

CORPORATION CODE
Procedure for dissolution of a corporation sole
The requirements for dissolution mandated by the CC
In case of a corporation sole, by submitting to the SEC for should be strictly complied with (Vesaga vs. CA, G.R. No.
approval, a verified declaration of dissolution which will 142924, December 5, 2001).
set forth the following:
1. The name of the corporation; Q: AAA Corporation is a bank. The operations of AAA
2. The reason for dissolution and winding up; Corporation as a bank were not doing well. So, to
3. The authorization for the dissolution of the corporation avert any bank run, AAA Corporation, with the
by the particular religious denomination, sect or church; approval of the Monetary Board, sold all its assets and
4. The names and addresses of the persons who are to liabilities to BBB Banking Corporation which includes
supervise the winding up of the affairs of the corporation. all deposit accounts. In effect then, BBB Corporation
will service all deposits of all depositors of AAA
Corporation.
Upon approval of such declaration of dissolution by the
Securities and Exchange Commission, the corporation a. Will the sale of all assets and liabilities of AAA
shall cease to carry on its operations except for the Corporation to BBB Banking Corporation
purpose of winding up its affairs (CC, Sec. 115). automatically dissolve or terminate the
corporate existence of AAA Corporation? Explain
Dissolution by merger or consolidation your answer.
b. What are the legal requirements in order that a
Upon issuance of SEC of a Certificate of Merger or corporation may be dissolved? (2012 Bar)
Consolidation, the corporate existence of the absorbed
corporation and the constituent corporations in case of A:
consolidation shall automatically cease. No liquidation a. No. AAA Corporation is an artificial being created by
proceedings will thereafter be conducted (CC, Sec. 80). law and has a legal personality of its own. A corporation
does not owe its existence upon the presence of assets and
MODES OF DISSOLUTION properties. It can only be dissolved in cases provided for
by law. As such, AAA Corporation will subsist regardless
Modes of dissolution of the sale of all of its assets and liabilities to another
corporation.
The following are the modes of dissolution of the b. A corporation may be dissolved voluntarily, by
corporation: shortening of the corporate term and through involuntary
dissolution. In voluntary dissolution, the action for
1. Voluntary dissolution must be approved by majority of the directors
a. By the vote of the BOD/ BOT and the stockholders/ or trustees and 2/3 of the stockholders representing the
members where no creditors are affected (CC, Sec. outstanding capital stock or members, publication
118). requirement and filed with SEC which will issue
b. By the judgment of the SEC after hearing of petition certificate of dissolution. If there are creditors affected,
for voluntary dissolution, where creditors are there must be a hearing to hear the objections and claims
affected (CC, Sec. 119). of the creditors. In case of shortening of corporate term,
c. By amending the AOI to shorten the corporate term through amendment of the AOI. In involuntary
(CC, Sec. 120). dissolution, through filing of a verified complaint with the
d. In case of a corporation sole, by submitting to the SEC based on any ground provided by law or rules.
SEC a verified declaration of the dissolution for
approval (CC, Sec. 115). VOLUNTARY
e. Merger or consolidation
WHERE NO CREDITORS ARE AFFECTED
2. Involuntary
a. By expiration of corporate term provided for in the Procedure of dissolution of a corporation where no
AOI (CC, Sec. 11). creditors are affected (2001, 2002 Bar) (Meet-NAC-
b. By legislative enactment PA)
c. By failure to formally organize and commence the
transaction of its business within 2 years from the 1. A MEETing must be held on the call of directors or
date of incorporation (CC, Sec. 22). trustees;
d. By order of the SEC on grounds under existing laws
(CC, Sec. 121). 2. Notice of the meeting
e. Judicial decree on Quo Warranto Proceeding (CC, a. Given to each stockholder or member either by
Sec. 20). registered mail or by personal delivery at least thirty
(30) days prior to the said meeting and
b. Published for three (3) consecutive weeks in a
NOTE: Methods effecting dissolution as prescribed by
newspaper published in the place where the principal
statute are exclusive, and a corporation cannot be
office of said corporation is located and if no
dissolved except in the manner prescribed by law (De
Leon, 2010).

MERCANTILE LAW
newspaper is published in such place, then in a 6. If no objection is sufficient and the material allegations
newspaper of general circulation in the Philippines. of the petition are true, it shall render Judgment
dissolving the corporation and directing such disposition
3. Resolution to dissolve must be Approved by majority of its assets as justice requires, and may appoint a receiver
vote of the board of directors or trustees and adopted by to collect such assets and pay the debts of the corporation.
the affirmative vote of stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of members. Creditor’s consent is not necessary for dissolution
4. Copy of the resolution is then certified by the majority Consents of creditors are not necessary to approve
of Board of directors or trustees and countersigned by the dissolution for the reason that liquidation proceedings
secretary of the Corporation. will be conducted to protect their interest.
5. Petition for dissolution together with the signed and BY SHORTENING THE CORPORATE TERM
countersigned copy of the resolution is then filed with the
SEC. Procedure for dissolving the corporation by
shortening of the corporate term (ASAF)
6. Approval of SEC of the petition and issuance of
certificate of dissolution (CC, Sec. 118). 1. Amending the Articles of Incorporation pursuant to Sec.
16
WHERE CREDITORS ARE AFFECTED a. Approved by majority vote of the board of
directors or trustees
Procedure of dissolution of a corporation where b. Ratified at a meeting by the stockholders
creditors are affected (APSIVECSO – CPUPOOJ) representing at least 2/3 of the outstanding capital
stock or by at least two-thirds (2/3) of the members
1. Approval of the stockholders representing at least 2/3 in case of non-stock corporations).
of the outstanding capital stock or by at least two-thirds
(2/3) of the members at a meeting of its stockholders or 2. Copy of the amended AOI shall be submitted with the
members called for that purpose. SEC.
2. Filing of Petition for dissolution with SEC, petition must 3. Approval of SEC of the amended AOI.
be (SiVeCS)
a. SIgned by a majority of its board of directors or 4. As an additional requirement, the SEC requires to
trustees or other officers having the management of its submit the final audited Financial statement not older
affairs; than 60 days before the application for shortening the
b. VErified by its president or secretary or one of corporate term (CC, Sec. 120 in relation to Sec. 16).
its directors or trustees
c. Set forth all Claims and demands against it Q: The Securities and Exchange Commission
approved the amendment of the articles of
d. State that its dissolution was approved by the incorporation of GHQ Corporation shortening its
required votes of Stockholders or members. corporate life to only 25 years in accordance with Sec.
120 of the Corporation Code. As shortened, the
3. SEC shall issue an Order reciting the purpose of the corporation continued its business operations until
petition and fix a date when objections thereto may be May 30, 1997, the last day of its corporate existence.
filed by any person. Said date must not be less than thirty Prior to said date, there were a number of pending
(30) days nor more than sixty (60) days after the entry of civil actions, of varying nature but mostly money
the order. claims filed by creditors, none of which was expected
to be completed or resolved within five years from
4. Copy of the order shall be: May 30, 1997. If the creditors had sought your
a. PUblished at least once a week for three (3) professional help at that time about whether or not
consecutive weeks in a newspaper of general their cases could be pursued beyond May 30, 1997,
circulation published in the municipality or city what would have been your advice? (2000 Bar)
where the principal office of the corporation is
situated, or if there be no such newspaper, A: The cases can be pursued even beyond May 30, 1997,
then in a newspaper of general circulation in the the last day of the corporate existence of GHQ
Philippines, and Corporation. The corporation is not actually dissolved
b. POsted for three (3) consecutive weeks in three upon the expiration of its corporate term. There is still the
(3) public places in such municipality or city. period for liquidation or winding up.
4. After expiration of the time to file objections and upon Q: X Corporation shortened its corporate life by
prior 5-day notice to hear the objections, SEC shall amending its articles of incorporation. It has no debts
proceed to hear the petition and try any issue made by the but owns a prime property located in Quezon City.
Objections file. How would the said property be liquidated among the
five stockholders of said corporation? Discuss two
methods of liquidation. (2001 Bar)

CORPORATION CODE
A: The prime property of X Corporation can be liquidated Remedy in case the stockholders want to still
among the five stockholders after the property has been continue the business of the corporation after its term
conveyed by the corporation to the five stockholders, by expired
dividing or partitioning it among themselves in any two of
the following ways: The remedy of the stockholders is reincorporation.
Amending the articles of the incorporation to extend the
1. By physical division or partition based on the corporate term is not an available remedy as the
proportion of the values of their stockholdings; or corporation has ceased to exist.
2. By selling the property to a third person and dividing
the proceeds among the five stockholders in proportion There is nothing to prevent the stockholders from
to their stockholdings; or conveying their shareholdings toward the creation of a
3. After the determination of the value of the property, by new corporation to continue the business of the old.
assigning or transferring the property to one stockholder Winding up is the sole activity of a dissolved corporation
with the obligation on the part of said stockholder to pay that does not intend to incorporate anew.
the other four stockholders the amount/s in proportion to
the value of the stockholding of each. It is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
INVOLUNTARY corporation to the new corporation intended to be
created as long as the stockholders have given their
EXPIRATION OF CORPORATE TERM consent (Chung Ka Bio v Intermediate Appellate Court, G.R.
No. 71837, July 26, 1988).
The corporation shall exist within the period stated in the
AOI not exceeding 50 years unless sooner legally FAILURE TO ORGANIZE AND COMMENCE BUSINESS
dissolved (CC, Secs. 19, 22, 117-122, 144, 145) or unless its WITHIN 2 YEARS FROM INCORPORATION
registration is revoked upon any of the grounds provided
by law (CC, Sec. 6, PD 902-A & Sec. 22). In the absence of Meaning of “formally organize”
any express stipulation, it shall exist for a period not
exceeding fifty (50) years from the date of incorporation. Organize as used in reference to corporations means;
After the term had expired without extension, the 1. Election of officers, providing for the subscription and
corporation is dissolved. 2. Payment of the capital stock, and
3. Adoption of by-laws,
Q: XYZ Corporation entered into a contract of lease 4. Such other similar steps as are necessary to endow the
with ABC, Inc., over a piece of real estate for a term of legal entity with the capacity to transact the legitimate
20 years, renewable for another 20 years, provided business for which it was created (Benguet Consolidated
that XYZ's corporate term is extended in accordance Mining Co. v Pineda, G.R. No. L-7231, March 28, 1956)
with law. Four years after the term of XYZ Corporation
expired, but still within the period allowed by the
lease contract for the extension of the lease period, Effect of failure of a corporation to formally organize
XYZ Corp. notified ABC, Inc., that it is exercising the
option to extend the lease. ABC, Inc., objected to the If a corporation does not formally organize and
proposed extension, arguing that since the corporate commence the transaction of its business or the
life of XYZ Corp. had expired, it could no longer opt to construction of its works within two (2) years from the
renew the lease. XYZ Corp. countered that date of its incorporation, its corporate powers cease and
withstanding the lapse of its corporate term it still has the corporation shall be deemed dissolved (CC, Sec 22).
the right to renew the lease because no quo warranto
proceedings for involuntary dissolution of XYZ Corp. LEGISLATIVE DISSOLUTION
has been instituted by the Office of the Solicitor
General. Is the contention of XYZ Corp. meritorious? A corporation created by special law can be dissolved by
Explain briefly (2004 Bar). an enactment of special law or expiration of its charter.
A: No. XYZ Corporation’s contention is not meritorious DISSOLUTION BY THE SEC ON GROUNDS UNDER
XYZ Corp. was dissolved ipso facto upon the expiration of EXISTING LAWS
its original term. It ceased to be a body corporate for the
purpose of continuing the business for which it was Dissolution by the SEC
organized, except only for purposes connected with its
winding up or liquidation. Extending the lease is not an A corporation may be dissolved by the Securities and
act to wind up or litigate XYZ’s affairs. It is contrary to the Exchange Commission upon filing of a verified complaint
idea of winding up the affairs of the corporation (PNB v. and after proper notice and hearing on the grounds
CFI of Rizal, G.R. No. 63201, May 27, 1992). provided by existing laws, rules and regulations (CC, Sec.
121).
The following are some of the grounds, which may result

to the issuance of a dissolution order by the SEC after
conduct of appropriate proceedings:

MERCANTILE LAW
1. Violations of the Corporation committed by the and stockholders or duly appointed liquidation trustee
corporation. Such violations are generally penalized (SEC Opinion, July 23, 1996).
by Sec. 144 as the Code did not specifically penalize
the same. Q: Lucia prayed before the RTC-Iriga to annul the
2. Deadlocks in a close corporation (CC, Sec. 104) extrajudicial partition and deed of mortgage executed
3. Mismanagement of a close corporation (CC, Sec. 105) by her children, Roy Barrameda, et al., over the estate
4. On any of the following grounds, wherein the SEC of her deceased husband, having been executed
retains its power to suspend or revoke, after proper without her knowledge and consent. She also prayed
notice and hearing, the franchise or certificate of for damages.
registration of the corporations, partnerships or
associations: (FMI-DBR) After the case was set for pre-trial, RBCI filed a motion
a. Fraud or misrepresentation in procuring its to withdraw after being informed by the PDIC would
Certificate of Registration; handle the case as RBCI had already been closed and
b. Serious Misrepresentation as to what the placed under the receivership of the
PDIC. Consequently, the lawyers of PDIC took over the
corporation can do or is doing to the great
case of RBCI.
prejudice of or damage to the general public;
c. Continuous Inoperation for a period of at least 5 The RTC-Iriga dismissed the case as it is RTC-Makati
years (Sec. 22, CC); which had jurisdiction. Lucia appealed to the CA,
d. Refusal to comply or Defiance with any lawful which ordered the consolidation of her petition for
order, rules or regulations of SEC restraining annulment of the partition, and the liquidation case of
RBCI.
commission of acts which would amount to a grave
violation of its franchise; May Lucia’s petition proceed independently of the
e. Failure to file By-laws within the required period. liquidation proceedings of RBCI?
However, SEC must give the corporation the
opportunity to explain such failure; A: No. After the Monetary Board has declared that a bank
f. Failure within the prescribed period to submit is insolvent and has ordered it to cease operations, the
Board becomes the trustee of its assets for the equal
required Reports in appropriate forms as
benefit of all the creditors, including depositors. The
determined by the SEC (e.g. General Information assets of the insolvent banking institution are held in trust
Sheet, Financial Statements) (De Leon, 2010). for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a
NOTE: All actions filed with the SEC must be prosecuted preference over another by an attachment, execution or
and defended in the name of the real party-in-interest otherwise.
(SEC Rules of Procedure , Rule III, Sec. 2).
Thus, to allow Lucia’s case to proceed independently of
METHODS OF LIQUIDATION the liquidation case, a possibility of favorable judgment
and execution thereof against the assets of RBCI would
Liquidation not only prejudice the other creditors and depositors but
would defeat the very purpose for which a liquidation
Process by which all the assets of the corporation are court was constituted as well. It would be more in keeping
converted into liquid assets (cash) in order to facilitate with law and equity if Lucia’s case is consolidated with the
the payment of obligations to creditors and the remaining liquidation case in order to expeditiously determine
balance if any is to be distributed to the stockholders whether she is entitled to recover the property subject of
(Sundiang Sr. & Aquino, 2014). mortgage from RBCI and, if so, how much she is entitled
to receive from the remaining assets of the bank
Method of liquidation (Barrameda v. Rural Bank of Canaman, Inc., G.R. No.
176260, November, 24 2010, in Divina 2014).
1. By the corporation itself or its board of directors or
trustees; (CC , Sec. 122 [1]) Period of Liquidation
2. By a trustee to whom the assets of the corporation had
been conveyed. (CC, Sec. 122[2]); (Board of Liquidators v. The period of liquidation is three (3) years.
Kalaw, G.R. No. L-18805, Aug. 14, 1967)
3. By a management committee or rehabilitation receiver Corporation in the process of liquidation does not
appointed by SEC (CC, Sec. 119) have legal authority to engage in any new business
Approval of the SEC is not required in order to A corporation in the process of liquidation has no legal
liquidate and distribute the assets of a dissolved authority to engage in any new business, even if the same
corporation is in accordance with the primary purpose stated in its
article of incorporation.
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal concern of
the corporation and falls within the power of the directors

CORPORATION CODE
Suits brought against the corporation within the 3- 5. Acquisition of own shares (CC, Sec. 41)
year period but remained pending beyond said 6. Declaration of dividends (CC, Sec. 43)
period 7. Purchase of shares of any stockholder in case of
deadlocks in a close corporation (CC, Sec. 10)
Pending actions against the corporation are not 8. Withdrawal of a stockholder in a close corporation
extinguished. They may still be prosecuted against the (CC, Sec 105)
corporation even beyond said period. 9. Upon lawful dissolution and after payment of all
debts and liabilities (CC, Sec. 122)
The creditors of the corporation who were not paid within
the 3-year period may follow the property of the Order of distribution of assets in case of liquidation
corporation that may have passed to its stockholders (CreSt-PreComE)
unless barred by prescription or laches or disposition of
said property in favor of a purchaser in good faith. 1. Payment of claims of CREditors who are not
stockholders (based on preference or concurrence of
Suits not brought against the corporation within the credits)
3-year period 2. Payment of claims of STockholders who are creditors
of the corporation, as to the amount of their claim as
Suits not brought against the corporation within the 3- creditors.
year periodmay still be prosecuted against the 3. Residual Balance shall be distributed proportionately:
corporation, since there is nothing in Sec. 122, par. 1 a. Holders of PREferred stock, if any; then to the
which bars action for the recovery of the debts of the b. Holders of COMmon stock
corporation against the liquidator thereof after the lapse 4. If the creditor or stockholder cannot be found, their
of the winding up period of 3 years (Republic of the claims or shares shall be Escheated in favor of the city or
Philippines vs. Marsman Dev. Co., G.R. No. L-175109, April municipality where the asset is located.
27, 1972)
BY THE CORPORATION ITSELF
Right of the corporation to appeal a judgment is not
extinguished by the expiration of the 3-year period Liquidation by the corporation itself
Corporations whose certificate of registration was Every corporation whose charter expires by its own
revoked by the SEC may still maintain actions in court for limitation or is annulled by forfeiture or otherwise, or
the protection of its rights which includes the right to whose corporate existence for other purposes is
appeal (Paramount Insurance Corp. v. A.C. Ordonez Corp., terminated in any other manner:
G.R. No. 175109, August 6, 2008). 1. Shall nevertheless be continued as a body corporate for
3 years after the time when it would have been so
Liquidation is not necessary in case a corporation is dissolved,
dissolved by merger and consolidation 2. For the purpose of
a. Prosecuting and defending suits by or against it;
In case of merger or consolidation, the surviving or the b. Enabling it to settle and close its affairs;
consolidated corporation shall thereupon and thereafter c. To dispose of and convey its property; and
possess all the rights, privileges, immunities and d. to distribute its assets
franchises of each of the constituent corporations; and all 3. But NOT for the purpose of continuing the business for
property, real or personal, and all receivables due on which it was established (CC, Sec. 122 [1]).
whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR
or belonging to, or due to each constituent corporation, PERIOD
shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act Conveyance to a trustee within a 3 year-period
or deed (CC, Sec 80).
At anytime during the 3-year period for liquidation, said
Distribution of the corporation’s assets prior to corporation is authorized and empowered to convey all of
dissolution its property to trustees for the benefit of its stockholders,
members, creditors and other persons in interest.
GR: A corporation cannot distribute its assets prior to
dissolution. This will violate the trust fund doctrine. A From and after any such conveyance by the corporation
corporation is allowed to distribute its assets or property of its property in trust for the benefit of its stockholders,
only upon lawful dissolution and after payment of all its members, creditors and others in interest, all interest
debts and liabilities (CC, Sec. 122). which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial
XPNs: interest in the stockholders, members, creditors or other
1. Decrease of Capital Stock (CC, Sec. 38) persons in interest(par. [2], Sec. 122, CC).
2. Redemption of Redeemable Shares (CC, Sec. 8)
4. Reacquisition of shares which are considered as
treasury shares (CC, Sec. 9)

MERCANTILE LAW
Period of existence of the trusteeship against it and of enabling it to settle and close its
affairs, culminating in the final disposition and
Where no time limit has been fixed with respect to the distribution of its remaining assets. If the 3 year
existence of the trusteeship, the trustee has authority to extended life expires without a trustee or receiver
close the affairs of the corporation even after the being designated by the corporation within that
expiration of the statutory 3-year period and claims not period and by that time (expiry of the 3 year extended
barred by the statute of limitations can be presented and term), the corporate liquidation is not yet over, how,
allowed until the liquidation is terminated (National if at all, can a final settlement of the corporate affairs
Abaca & Other Fibers Corp. v. Pore, G.R. No. L-16779, August be made? (1997 Bar)
16, 1979).
A: The liquidation can continue with the winding up. The
Suits brought by the corporation within the 3-year members of the BOD can continue with the winding of the
period but remained pending beyond said period corporate affairs until final liquidation. They can act as
trustees or receivers for this purpose.
A corporation that has a pending action and which cannot
be terminated within the 3 year period after its BY MANAGEMENT COMMITTEE OR REHABILITATION
dissolution is authorized under Sec. 122 of the CC to RECEIVER
convey all its property to a trustee to enable it to
prosecute and defend suits by or against the corporation Liquidation by a receiver
beyond the 3-year period. The trustee may commence a
suit which can proceed to final judgment even beyond the In the case of a dissolution order where creditors are
3-year period. The director may be permitted to continue affected, the SEC may appoint a receiver to take charge of
as trustees to complete the liquidation (Clemente v. CA, the liquidation of the corporation (CC, Sec. 119).
G.R. No. 82407, March 27, 1995)
NOTE: Thus, the appointment of receiver is addressed to
Q: The SEC approved the amendment of the Articles of the sound discretion of the court or the SEC.
Incorporation of GHQ Corp shortening its corporate
life to only 25 years in accordance with Sec 120 of the Appointment of receiver for a going corporation
Corp Code. As shortened, the corporation continued
its business operations until May 30, 1997, the last The appointment of a receiver for a going corporation is a
day of its corporate existence. Prior to said date, there last resort remedy, and should not be employed when
were a number of pending civil actions, of varying another remedy is available. Relief by receivership is an
nature but mostly money claims filed by creditors, extraordinary remedy and is never exercised if there is an
none of which was expected to be completed or adequate remedy at law or if the harm can be prevented
resolved within five years from May 30, 1997. If the by an injunction or a restraining order. Bad judgment by
creditors had sought your professional help at that directors, or even unauthorized use and misapplication of
time about whether or not their cases could be the company’s funds, will not justify the appointment of a
pursued beyond May 30, 1997, what would have been receiver for the corporation if appropriate relief can
your advice? (2000 Bar) otherwise be had (Rev. Ao-As v. CA, G.R. No. 128464, June
20, 2006).
A: The cases can be pursued even beyond May 30, 1997,
the last day of the corporate existence of GHQ Corp. The The corporation, through its president cannot
Corporation is not actually dissolved upon the expiration condone penalties and charges after it had been
of its corporate term. There is still the period for placed under receivership
liquidation or winding up.
The appointment of a receiver operates to suspend the
Suits brought by the corporation beyond the 3-year authority of a corporation and of its directors and officers
period are not barred over its property and effects, such authority being
reposed in the receiver (Yam v. CA, G.R. No. 104726,
The trustee of a dissolved corporation may commence a February 11, 1999).
suit which can proceed to final judgment even beyond the
3-year period. The expiration of 3 years after the CORPORATE REHABILITATION
dissolution of a corporation does not affect its right to
enforce a favorable judgment, because under Sec. 145 of Nature of Rehabilitation proceedings
the CC, no right or remedy in favor or against any
corporation shall be removed or impaired either by Rehabilitation proceedings are summary and non-
subsequent dissolution of said corporation or by any adversarial in nature, and do not contemplate
subsequent amendment or repeal of the CC or any part adjudication of claims that must be threshed out in
thereof (Knecht v. United Cigarette Corp., G.R. No. 139370, ordinary court proceedings.
July 4, 2002)
The jurisdiction of the rehabilitation court is over claims
Q: The corporation, once dissolved, thereafter against the debtor that is under rehabilitation, not over
continues to be a body corporate for three years for claims by the debtor against its own debtors or against
purposes of prosecuting and defending suits by and third parties.

CORPORATION CODE
The corporation under rehabilitation must file a separate The Court found nothing onerous in the terms of PALI’s
action against its debtors/insurers to recover whatever rehabilitation plan. The Interim Rules on Corporate
claim it may have against them (Steel Corporation v. Rehabilitation provides for means of execution of the
Mapfre Insular Insurance Corporation, G.R. No. 201199, rehabilitation plan, which may include, among others, the
October 16, 2013, in Divina, 2014). conversion of the debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or sale of assets
Under Section 6 (c) of PD 902-A, receivers may be or of the controlling interest.The restructuring of the
appointed whenever: (1) necessary in order to preserve debts of PALI is part and parcel of its rehabilitation.
the rights of the parties-litigants; and/or (2) protect the Moreover, per findings of fact of the RTC and as affirmed
interest of the investing public and creditors. by the CA, the restructuring of the debts of PALI would not
be prejudicial to the interest of PWRDC as a secured
The stay order and appointment of a rehabilitation creditor. There is nothing unreasonable or onerous about
receiver is an "extraordinary, preliminary, ex parte the 50% reduction of the principal amount when, as found
remed[y]." The effectivity period of a stay order is only by the courta quo, a Special Purpose Vehicle (SPV)
"from the date of its issuance until dismissal of the acquired the credits of PALI from its creditors at deep
petition or termination of the rehabilitation discounts of as much as 85% (Puerto Azul Land, Inc. v.
proceedings." It is not a final disposition of the case. It is Pacific Wide Realty Development Corporation, G.R. No.
an interlocutory order defined as one that "does not 184000, September 17, 2014)
finally dispose of the case, and does not end the Court’s
task of adjudicating the parties’ contentions and Under Rule 3, Section 5 of the Rules of Procedure on
determining their rights and liabilities as regards each Corporate Rehabilitation, the review of any order or
other, but obviously indicates that other things remain to decision of the rehabilitation court or on appeal
be done by the Court." therefrom shall be in accordance with the Rules of Court,
unless otherwise provided. In the case at bar, TIDCORP’s
The Interim Rules does not require a hearing before the Petition for Review sought to nullify the pari passu
issuance of a stay order. What it requires is an initial sharing scheme directed by the trial court and to grant
hearing before it can give due course to or dismiss a preferential and special treatment to TIDCORP over other
petition. Nevertheless, while the Interim Rules does not WGC creditors, such as RBC. This being the case, there is
require the holding of a hearing before the issuance of a no visible objection to RBC’s participation in said case, as
stay order, neither does it prohibit the holding of one. it stands to be injured or benefited by the outcome of
Thus, the trial court has ample discretion to call a hearing TIDCORP’s Petition for Review – being both a secured and
when it is not confident that the allegations in the petition unsecured creditor of WGC (Robinson's Bank Corporation
are sufficient in form and substance, for so long as this v. Hon. Samuel H. Gaerlan, et al., G.R. No. 195289,
hearing is held within the five (5)-day period from the September 24, 2014).
filing of the petition — the period within which a stay
order may issue as provided in the Interim Rules (Pryce Cram-down clause
Corporation v. China Banking Corporation, G.R. No. 172302,
February 18, 2014, in Divina, 2014). Section 23, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules) states that a
Sec. 146 of the FRIA, which makes it applicable to “all rehabilitation plan may be approved even over the
further proceedings in insolvency, suspension of opposition of the creditors holding a majority of the
payments and rehabilitation cases x x x except to the corporation’s total liabilities if there is a showing that
extent that in the opinion of the court their application rehabilitation is feasible and the opposition of the
would not be feasible or would work injustice,” still creditors is manifestly unreasonable. Also known as the
presupposes a prospective application. The wording of "cram-down" clause, this provision, which is currently
the law clearly shows that it is applicable to all further incorporated in the FRIA, is necessary to curb the
proceedings. In no way could it be made retrospectively majority creditors’ natural tendency to dictate their own
applicable to the Stay Order issued by the rehabilitation terms and conditions to the rehabilitation, absent due
court in 2002. regard to the greater long-term benefit of all stakeholders.
Otherwise stated, it forces the creditors to accept the
At the time of the issuance of the Stay Order, the rules in terms and conditions of the rehabilitation plan, preferring
force were the 2000 Interim Rules of Procedure on long-term viability over immediate but incomplete
Corporate Rehabilitation. Under those rules, one of the recovery (BPI v. Sarabia Manor Hotel, G.R. no. 175844, July
effects of a Stay Order is the stay of the "enforcement of 29, 2013).
all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against Q: Foreseeing the impossibility of meeting its
the debtor, its guarantors and sureties not solidarily liable obligations to the availing plan holders as they fall
with the debtor. Nowhere in the Interim Rules is the due, PPI filed a Petition with the Rehabilitation Court.
rehabilitation court authorized to suspend foreclosure The latter issued a Stay Order, directing the
proceedings against properties of third-party mortgagors suspension of payments of the obligations of
(Situs Development Corporation, et al. v. Asiatrust Bank, et respondent and ordering all creditors and interested
al., G.R. No. 180036, January 16, 2013). parties to file their comments/oppositions,
respectively, to the Petition. The same Order also
appointed Marcelo as the rehabilitation receiver.

MERCANTILE LAW
APEC submitted to the Rehabilitation Court its could not be taken lightly (Philippine Bank of
proposed rehabilitation plan. Later on, Marcelo Communications v. Basic Polyprinters and Packaging
submitted an Alternative Rehabilitation Plan (ARP) Corporation, G.R. No. 187581, October 20, 2014).
for the approval of the Rehabilitation. Under the ARP,
the benefits under the PEPTrads shall be translated Suspension of claims against the corporation during
into fixed-value benefits. The creditors/oppositors rehabilitation
did not oppose/comment on the Marcelo’s ARP. PPI
commenced with the implementation of its ARP in The suspension of all actions and/or claims against a
coordination with, and with clearance from, Marcelo. corporation under rehabilitation does not only cover
cases which are pending in court. The automatic
In the meantime, the value of the Philippine Peso suspension of an action for claims embraces all phases of
strengthened and appreciated PPI submitted a the suit, that is, the entire proceedings of an action or suit
manifestation with the Rehabilitation Court stating and not just the payment of the claims.
that the continued appreciation of the Philippine
Peso has grossly affected the value of the U.S. Dollar- The actions that were suspended cover all claims against
denominated NAPOCOR bonds, which stood as a distressed corporation whether for damages founded on
security for the payment of the Net Translated Values a breach of contract of carriage, labor cases, collection
of the PEPTrads. Thereafter, the Marcelino filed a suits or any other claims of a pecuniary nature. A claim
Manifestation where the ARP previously approved by arising from illegal dismissal is a claim covered by the
the Rehabilitation Court is modified. The suspension order issued by the SEC, as it is one for
Rehabilitation Court issued a Resolution approving pecuniary consideration.
the MRP. Victorio-Aquino questioned the approval of
the MRP before the CA. It was denied by the CA. Will Furthermore, jurisprudence is settled that the suspension
Victorio-Aquino’s petition prosper? of proceedings referred to in the law uniformly applies to
“all actions for claims” filed against a corporation xxx
A: No. The “cram-down” power of the Rehabilitation under management or receivership, without distinction,
Court was carried over in the Rehabilitation Rules, which except only those expenses incurred in the ordinary
maintains that the court may approve a rehabilitation course of business (Molina v. Pacific Plans, Inc., G.R.
plan over the objection of the creditors if, in its judgment, No. 165476, August 15, 2011, in Divina, 2014).
the rehabilitation of the debtors is feasible and the
opposition of the creditors is manifestly unreasonable. The suspension of claims in corporate rehabilitation does
Based on the “cram-down” clause, Victorio-Aquino’s not extend to criminal actions against the distressed
outright censure of the concept of the cram-down power corporations or its directors and officers. It would be
of the rehabilitation court cannot be countenanced. To absurd for one who has engaged in criminal conduct to
adhere to the reasoning of petitioner would be a step escape punishment simply because the corporation of
backward — a futile attempt to address an outdated set of which he is director or officer filed a petition for
challenges. It is undeniable that there is a need to move to rehabilitation. The prosecution of the officers of the
a regime of modern restructuring, cram-down and court corporation has no bearing on the pending rehabilitation
supervision in the matter of corporation rehabilitation in of the corporation (Panlilio v. Regional Trial Court, Branch
order to address the greater interest of the public. This is 51, City of Manila, GR No. 173846, February 2, 2011, in
clearly manifested in Section 64 of Republic Act No. Divina, 2014).
10142, otherwise known as Financial Rehabilitation and
Insolvency Act of 2010 (Victorio-Aquino v. Pacific Plans The return of the car subject of the writ of replevin is
Inc., G.R. No. 193108, December 10, 2014). correct notwithstanding the pendency of the
rehabilitation proceedings. This is the necessary
A corporation’s material financial commitment is consequence of the dismissal of the replevin case for
significant for purposes of rehabilitation failure to prosecute without prejudice. Upon the dismissal
of the replevin case, the writ of seizure, which is merely
A material financial commitment becomes significant in ancillary in nature, became functus officio and should
gauging the resolve, determination, earnestness and good have been lifted. There was no adjudication on the merits,
faith of the distressed corporation in financing the which means that there was no determination of the issue
proposed rehabilitation plan. This commitment may who has the better right to possess the subject
include the voluntary undertakings of the stockholders or car. Returning the seized vehicle is not an enforcement
the would-be investors of the debtor-corporation of a claim against the distressed corporation which must
indicating their readiness, willingness and ability to be suspended by virtue of the stay order issued by the
contribute funds or property to guarantee the continued rehabilitation court. The issue in a replevin case is who
successful operation of the debtor corporation during the has a better right of possession. So long as the respondent
period of rehabilitation. Due to the rehabilitation plan is not interposing a monetary claim, respondent’s prayer
being an indispensable requirement in corporate for the return of the car subject of the replevin suit is not
rehabilitation proceedings, Basic Polyprinters was in anyway violative of the Rules on Corporate
expected to exert a conscious effort in formulating the Rehabilitation (Advent Capital and Medical Corporation v.
same, for such plan would spell the future not only for Young, G.R. No. 183018, August 3, 2011, in Divina, 2014).
itself but also for its creditors and the public in general.
The contents and execution of the rehabilitation plan

CORPORATION CODE
The prevailing rule now categorically provides that rehabilitation proceedings or upon the lifting of the stay
awards for moral damages, exemplary damages, and order (Yngson, Jr. [in his capacity as Liquidator of Arcam &
attorney’s fees in intra-corporate controversies are not Company, Inc.] v. Philippine National Bank, G.R. No.
immediately executory (Heirs of Santiago Divinagracia v. 171132, August 15, 2012, in Divina, 2014).
Ruiz, G.R. No. 172023, July 7, 2010, in Divina, 2014).
The Stay Order cannot suspend foreclosure proceedings
The actions to be suspended cover all claims against a already commenced over properties belonging to third
distressed corporation whether for damages founded on party mortgagors. The Stay Order can only cover those
a breach of contract of carriage, labor cases, collection claims directed against petitioner corporations or their
suits or any other claims of pecuniary nature. properties, against petitioners’ guarantors, or against
Jurisprudence is settled that the suspension of petitioners’ sureties who are not solidarily liable with
proceedings referred to in the law uniformly applies to them.
"all actions for claims" filed against the corporation,
partnership or association under management or Likewise, the enforcement of the mortgage lien cannot be
receivership, without distinction, except only those considered as a claim against a guarantor or a surety not
expenses incurred in the ordinary course of business. The solidarily liable with the debtor corporations. While the
stay order is effective on all creditors of the corporation third party mortgagors also executed Continuing
without distinction, whether secured or unsecured Guaranty and Comprehensive Surety undertakings in
(Veterans Philippine Scout Security Agency, Inc. v. First favor of the bank, the latter did not proceed against them
Dominion Prime Holdings, Inc., G.R. No. 190907, August 23, as individual guarantors or sureties. Rather, by initiating
2012, in Divina, 2014). extrajudicial foreclosure proceedings, the bank was
directly proceeding against the property mortgaged to
Qualifications under the Rules must be strictly them by the spouses as security (Situs Development
complied with Corporation, et al. v. Asiatrust Bank, et al., G.R. No. 180036,
July 25, 2012).
It is well to emphasize that the remedy of rehabilitation
should be denied to corporations that do not qualify Considering that Metrobank acquired ownership over the
under the Rules. Neither should it be allowed to mortgaged properties upon the expiration of the
corporations whose sole purpose is to delay the redemption period on 6 February 2002, TCEI is also out
enforcement of any of the rights of the creditors, which is on a limb in invoking the Stay Order issued by the
rendered obvious by: (a) the absence of a sound and Rehabilitation Court on 8 October 2002 and the approval
workable business plan; (b) baseless and unexplained of its rehabilitation plan. An essential function of
assumptions, targets, and goals; and (c) speculative corporate rehabilitation is, admittedly, the Stay Order
capital infusion or complete lack thereof for the execution which is a mechanism of suspension of all actions and
of the business plan. Unfortunately, these negative claims against the distressed corporation upon the due
indicators have all surfaced to the fore, much to SMMCI’s appointment of a management committee or
chagrin. In one case, not only has SMMCI failed to show rehabilitation receiver. The Stay Order issued by the
that it has formally began its operations which would Rehabilitation Court cannot, however, apply to the
warrant restoration, but also it has failed to show mortgage obligations owing to Metrobank which had
compliance with the key requirements under the Rules, already been enforced even before TCEI’s filing of its
the purpose of which are vital in determining the petition for corporate rehabilitation on 1 October 2002. In
propriety of rehabilitation. Thus, for all the reasons Equitable PCI Bank, Inc v. DNG Realty and Development
hereinabove explained, the Court is constrained to rule in Corporation, the Court upheld the validity of the writ of
favor of BPI Family and hereby dismiss SMMCI’s possession procured by the creditor despite the
Rehabilitation Petition (BPI Family Savings Bank, Inc v. St. subsequent issuance of a stay order in the rehabilitation
Michael Medical Center, Inc., G.R. No. 205469, March 25, proceedings instituted by the debtor (Town and Country
2015). Enterprises Inc v. Honorable Quisumbing, G.R. No. 173610,
October 1, 2012, in Divina, 2014).
Right of the creditor-mortgagee to foreclose
corporate property Q: PA Assurance (PA) was incorporated in 1980 to
engage in the sale of pre-need educational plans. It
The court has already settled and upheld the right of the sold open-ended educational plans which guaranteed
secured creditor to foreclose the mortgages in its favor the payment of tuition and other fees to planholders
during the liquidation of a debtor corporation. irrespective of the cost at the time of availment. It also
engaged in the sale of fixed value plans which
The creditor-mortgagee has the right to foreclose the guaranteed the payment of a pre-determined amount
mortgage over a specific real property whether or not the to planholders. In 1982, PA was among the country’s
debtor-mortgagor is under insolvency or liquidation top corporations. However, it subsequently suffered
proceedings. The right to foreclose such mortgage is financial difficulties.
merely suspended upon the appointment of a
management committee or rehabilitation receiver or On September 8, 2005, PA filed a Petition for
upon the issuance of a stay order by the trial court. Corporate Rehabilitation before the Regional Trial
However, the creditor-mortgagee may exercise his right Court (RTC) of Makati City. On October 17, 2005, ten
to foreclose the mortgage upon the termination of the (10) plan holders filed an Opposition and Motion to

MERCANTILE LAW
Exclude Planholders from Stay Order on the ground Did the foreclosure sale and writ of possession in
that planholders are not creditors as they favor of EPCIB affect the Stay Order? (2014 Bar)
(planholders) have a trust relationship with PA. Are
the planholders correct? (2014 Bar) A: No. Since the foreclosure of respondent DNG's
mortgage and the issuance of the certificate of sale in
A: No. Under the 2000 Interim Rules of Corporate petitioner EPCIB's favor were done prior to the
Rehabilitation, claim shall include all claims or demands appointment of a Rehabilitation Receiver and the Stay
of whatever nature or character against a debtor or its Order, all the actions taken with respect to the foreclosed
property, whether for money or otherwise. Creditor shall mortgage property which were subsequent to the
mean any holder of a claim. Hence, the claim of the issuance of the Stay Order were not affected by the Stay
policyholders for payment of tuition fees from [PA Order. Thus, after the redemption period expired without
Assurance] CAP is included in the definition of “claims” DNG redeeming the foreclosed property, EPCIB becomes
under the Interim Rules. the absolute owner of the property and it was within its
right to ask for the consolidation of title and the issuance
What is to be determined at this point is whether or not of new title in its name as a consequence of ownership;
claims arising from the pre-need contracts between the thus, it is entitled to the possession and enjoyment of the
policyholders and [PA Assurance] CAP can be stayed property (Equitable PCI Bank, Inc. v. DNG Realty and
under Section 6, Rule 4 of the Interim Rules or Section 6(c) Development Corporation, G.R. No. 168672, August 8,
of P.D. No. 902-A. 2010).
It does not provide that a claim arising from a pre-need LIQUIDATION AFTER 3 YEARS
contract is an exception to the power of the trial court to
stay enforcement of all claims upon the finding that the If the 3-year extended life has expired without a receiver
petition for rehabilitation is sufficient in form and or trustee having been expressly designated by the
substance. corporation within that period:
The foregoing provision echoes the provision in Section 1. The BOT/BOT itself may be permitted to so continue
6(c) of the governing law, P.D. No. 602-A, as amended by as ‘trustees” by legal implication to complete the
P.D. No. 1758, which mandates that upon appointment of liquidation.
a management committee, rehabilitation receiver, board 2. Still, in the absence of BOD/BOT, those having a
or body, x x x all actions for claims against corporations, pecuniary interest in the corporate assets, including
partnerships or associations under management or not only the stockholders but likewise the creditors
receivership pending before any court, tribunal, board or of the corporation, acting for and in its behalf, may
body shall be suspended accordingly. make proper representations with the SEC which has
primary and sufficiently broad jurisdiction in
The Interim Rules of Procedure on Corporate matters of this nature, for working out a final
Rehabilitation of 2000 has been amended by the Rules of settlement of the corporate concerns.
Procedure on Corporate Rehabilitation of 2009, which 3. The only surviving stockholder or director of a
took effect on January 16, 2009. Under the 2009 Rules of corporation whose term of existence has expired
Procedure, the power of the RTC to issue a Stay Order may act as trustee-in-liquidation after the 3-year
when it finds the petition for rehabilitation to be sufficient period to liquidate has expired without the
in form and substance is contained in Section 7, Rule 3, appointment of a trustee-in-liquidation.
[17] which likewise does not exempt claims arising from 4. The counsel who prosecuted and defended the
pre-need contracts from the Stay Order (Abrera, et al., v. interest of the corporation and who, in fact, appeared
Hon. Barza and College Assurance Plan, G.R. No. 171681, in behalf of the corporation, may be considered a
September 11, 2009). trustee of the corporation at least with respect to the
matter in litigation only (De Leon, supra, pgs. 768-769,
Q: DNG Realty And Development Corporation (DNG) citing: Sec. 145, CC; Clemente vs. CA, supra; SEC
obtained a loan from petitioner Equitable PCI Bank Opinion No. 10-96, January 29, 2010, Reburiano vs. CA,
(EPCIB) secured by a real estate mortgage over DNG’s G.R. No. 102965, January 21, 1999).
property. When DNG defaulted payment, EPCIB
foreclosed the mortgage and bought the property at
public auction. The sheriff issued a certificate of sale
in favor of EPCIB.
Months later, DNG filed a petition for rehabilitation

with the SEC, and SEC issued a stay order. Afterwards,
the Registry of Deeds issued a title in favor of EPCIB,
prompting DNG to seek the annulment of the
foreclosure proceedings. To gain possession of the
property, PCIB filed an Ex-Parte Petition for Issuance
of Writ of Possession before the RTC, which later
directed the issuance of a writ of possession.

CORPORATION CODE
OTHER CORPORATIONS needed no authorization from the board to enter into
the subject contract.It adds that, being solely owned
CLOSE CORPORATION by the Spouses Gruenberg, the company can be
treated as a close corporation which can be bound by
A close corporation is one which AOI provides that: the acts of its principal stockholder who needs no
specific authority. Is Motorich a close corporation?
1. All of the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of record by not A: No. The articles of incorporation of Motorich Sales
more than a specified number of persons, not exceeding Corporation does not contain any provision stating that
20; (1) the number of stockholders shall not exceed 20, or (2)
a preemption of shares is restricted in favor of any
2. All of the issued stock of all classes shall be subject to stockholder or of the corporation, or (3) listing its stocks
one or more specified restrictions on transfer permitted in any stock exchange or making a public offering of such
by the provisions on close corporations; and stocks is prohibited. From its articles, it is clear that
Motorich is not a close corporation.Motorich does not
3. The corporation shall not list in any stock exchange or become one either, just because Spouses Reynaldo and
make any public offering of any of its stock of any class. Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The mere ownership by a single stockholder
Notwithstanding the foregoing, a corporation shall be or by another corporation of all or nearly all of the capital
deemed NOT a close corporation when at least 2/3 of its stock of a corporation is not of itself sufficient ground for
voting stock or voting rights is owned or controlled by disregarding the separate corporate personalities. So too,
another corporation which is not a close corporation a narrow distribution of ownership does not, by itself,
within the meaning of this Code. make a close corporation (San Juan Structural and Steel
Fabricators, Inc., v. CA, G.R. No. 129459, September 29,
Any corporation may be incorporated as a close 1998).
corporation, EXCEPT: (MOSBI-PEP)
1. Mining or Oil companies, CHARACTERISTICS OF A CLOSE CORPORATION
2. Stock exchanges,
3. Banks, Nature of a close corporation
4. Insurance companies,
5. Public utilities, A close corporation is essentially an incorporated
6. Educational institutions and partnership in which the stockholders consider each
7. Corporations declared to be vested with Public other as partners but which the law treats as a
interest in accordance with the provisions of the corporation. Thus, stockholders in a close corporation are
Corporation Code (CC, Sec. 96). very much like members in a partnership. They owe to
one another the same duty of utmost good faith and
Not all corporations with 20 or less stockholders are diligence that partners owe one another. This strict duty
close corporations applies particularly to controlling stockholders (De Leon,
2010).
The Corporation is not a close corporation even if the
shares belong to only twenty or less stockholders if not all Peculiar characteristic of a close corporation
the requisites (under Sec. 96) are present (San Juan
Structural and Steel Fabricators, Inc. v. CA, G.R. No. 129459, What is outstandingly peculiar with a close corporation is
September 29, 1998). the fact that all the outstanding stock is owned by the
persons who are active in the management and conduct
Q: San Juan Structural and Steel Fabricators, Inc.’s of the business (De Leon, 2010).
(San Juan) entered into an agreement with Motorich
Sales Corporation (Motorich) for the transfer to it of a Other characteristics of a close corporation
parcel of land which was still in the name of ACL
Development Corporation. Motorich despite The following are the other characteristics of a close
repeated demands refused to execute the Transfer of corporation:
Rights/Deed of Assignment which is necessary to
transfer the certificate of title. Later on, ACL 1. Where the AOI provide that the business of the
Development Corporation and Motorich entered into corporation shall be managed by the stockholders
a sale whereby the former transferred to the latter themselves rather than by a BOD, then the
the subject property. Because of this, San Juan filed a stockholders shall be deemed to be the directors with
case for damage against Motorich and Nenita Lee all the liabilities imposed by the Code on directors
Gruenberg. Among others, San Juan, Inc. argues that (CC, Sec. 97). The stockholders shall likewise be
the veil of corporate fiction of Motorich should be personally liable for corporate torts unless the
pierced, because the latter is a close corporation has obtained reasonably adequate
corporation. Since the spouses Reynaldo L. liability insurance (CC, Sec. 100).
Gruenberg and Nenita R. Gruenberg owned all or 2. Quorum may be greater than mere majority (ibid).
almost all or 99.866% to be accurate, of the
subscribed capital stockof Motorich, the spouses

MERCANTILE LAW
3. Restrictions on transfer of shares can be validly companies to render their services to the office
imposed. Right of first refusal can be exercised (CC, building. Are the service contracts valid? Explain.
Sec. 98). (2008 Bar)
4. Any action by the directors of a close corporation
without a meeting shall nevertheless be deemed A: No. This is a case of close corporation where the
valid if any of the circumstances on Sec. 101, CC is provision on interlocking directors in open corporations
present. also applies. As a general rule, the presence of interlocking
5. Pre-emptive right extends to all stock issuances, directors does not make the contract void or
including treasury shares (CC, Sec. 102). unenforceable. It is further validated when there is no
6. Deadlock in the board is settled by the SEC, on the fraud; the contract is fair and reasonable under the
written petition by any stockholder (CC, Sec. 104). circumstances; the interest of the interlocking director in
7. A stockholder may withdraw and avail of his right of one corporation is substantial and his interest on the
appraisal (CC, Sec. 105). other corporation or corporations is merely nominal and
8. The rules primarily governing close corporations are compliance with the requirement under Sec 32 in so far
set forth under Title XII of the Corporation Code. as the nominal corporation is concerned. In this case,
Other titles of the Code apply suppletorily. Pedro owns a substantial interest in both business
enterprise, parties to the contract in violation of the legal
Q: CFTI held a concessionaire's contract with AAFES requirement that in order for a contract with interlocking
for the operation of taxi services within Clark Air directors be valid, there must only be substantial interests
Base. Sergio Naguiat was CFTI's president, while in one of the corporation he represents and not in both.
Antolin T. Naguiat was its vice-president. CFTI was a Pedro has substantial interest in both businesses. He
family-owned corporation. Individual respondents owns a substantial portion of the company which Paolo
were previously employed by CFTI as taxicab and Juan are also stockholders while at the same time the
drivers. Due to the phase-out of the US military bases owner of the security, janitorial and catering business.
in the Philippines, from which Clark Air Base was not Directors/officers are discouraged by law to personally
spared, the AAFES was dissolved, and the services of contract with the corporation in which they are directors,
individual respondents were officially terminated. trustees and officers because they have fiduciary
The AAFES Taxi Drivers Association (drivers' union) relationship with the corporation and there can be no real
and CFTI held negotiations as regards separation bargaining where the same is acting on both sides of the
benefits that should be awarded in favor of the trade.
drivers. They arrived at an agreement. However,
individual respondents herein refused to accept Close corporation v. Closely-held corporation.
theirs.Instead, after disaffiliating themselves from
the drivers' union, individual respondents filed a CLOSE CLOSELY HELD
complaint for payment of separation pay due to CORPORATION CORPORATION
termination/phase-out. Said complaint was later A close corporation is that A closely-held
amendedto include CFTI with Antolin T. Naguiat as defined in Sec. 96. It corporation focuses more
vice president and general manager, as party emphasizes a on the number of
respondent. Is Antolin Naguiat liable for payment of determination on the part shareholders in the
separation benefits of employees terminated for of the participants in the corporation at that
authorized causes? enterprise to keep particular time, indicating
outsiders from acquiring that they are few in
A: Yes. Section 100 of the Corporation Code states that to any interest in the number.
the extent that the stockholders are actively engaged in business.
the management or operation of the business and affairs
of a close corporation, the stockholders shall be held to VALIDITY ON RESTRICTIONS ON TRANSFER OF
strict fiduciary duties to each other and among SHARES
themselves. Said stockholders shall be personally liable
for corporate tortsunless the corporation has obtained Rationale for stock transfer restrictions in close
reasonably adequate liability insurance. Nothing in the corporations
records show whether CFTI obtained reasonably
adequate liability insurance, thus, what remains is to The reason for the stock transfer restriction in close
determine whether there was corporate tort. In the corporation is that the stockholders seek to maintain
present case, Sergio Naguiat is held solidarily liable for delectus personae. The close corporation is essentially an
corporate tort because he had actively engaged in the incorporated partnership, wherein one of the major
management and operation of CFTI, a close corporation objectives of the shareholders is to remain close and be
(Sergio Naguiat v. NLRC, G.R. No. 116123, March 13, 1997). able to prevent changes in the control of the corporation
which might otherwise result from the transfer of voting
Q: Pedro owns 70% of the subscribed capital stock of shares (De Leon, 2010).
a company which owns an office building. Paolo and
Juan own the remaining stock equally between them.
Paolo also owns a security agency, a janitorial
company and a catering business. In behalf of the
office building company, Paolo engaged his

CORPORATION CODE
Conditions for validity of restrictions on transfer of
shares Any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed to
1. Restrictions on the right to transfer shares must appear have notice:
in the AOI and in the by-laws as well as in the certificate a. That he is a person not eligible to be a holder of stock of
of stock, otherwise they shall not be binding on any the corporation,
purchaser thereof in good faith; and b. The transfer of stock to him would cause the stock of
2. They shall not be more onerous than granting the the corporation to be held by more than the number of
existing stockholders or the corporation the option to persons permitted by its articles of incorporation to hold
purchase the shares of the transferring stockholders with stock of the corporation,
such reasonable terms, conditions, or period stated c. The transfer of stock is in violation of a restriction on
therein (CC, Sec. 98). transfer of stock (CC, Sec. 99 [4]).
NOTE: Any transfer made should not result in exceeding Conclusive presumption of knowledge of restrictions
the number of stockholders as allowed by the Code.
There is a conclusive presumption of knowledge of
Exercise of right of first refusal exercised in Sec. 98 restrictions when the stock certificate issued or
transferred conspicuously shows the qualifications of
The corporation or the stockholders have the right of first persons entitled to be holders of record; number of
refusal, that is, the stockholder who wants to sell his persons, not exceeding 20 allowed to be stockholders; and
shares to any third person must first offer it either to the other restrictions as provided in the AOI of the close
corporation or to the other existing stockholders usually corporation (CC, Sec. 99 [1],[2],[3]).
under the same terms and conditions. The right pertains
to shares already issued to stockholders. If the existing Stock transfers in violation of the restrictions can
stockholders or the corporation fails to exercise the still be registered in the books of the Corporation
option to purchase within the period stated, the
transferring stockholder may sell his shares to any third Stock transfers in violation of the restrictions can still be
person. registered in the books of the Corporation in the
following cases:
Option period to exercise the right of first refusal 1. If all the stockholders consent;
2. If the AOI of the close corporation was duly amended
The option period to exercise the right of first refusal is (CC, Sec. 99 [5]).
that period stated in the AOI, By-laws and Certificate of
Stock. The SEC likewise limits the period to 1 month
which is deemed sufficient for the stockholders or for the NOTE: In both the above cases, the corporation will no
corporation to signify their desire to buy the shares of longer be a close corporation if the conditions under Sec.
stock being offered for sale by any stockholder (SEC 96 will no longer be present, as in the case where the
Opinion, Oct. 13, 1964). transfer results in the presence of more than 20
stockholders.
AOI cannot provide that the consent of the
corporation shall be obtained in case the stockholder Breach of any of these restrictions does not bar
sells his shares rescission by the transferee of the transaction
The AOI cannot provide that the consent of the The breach in any of the restrictions shall not in any way
corporation shall be obtained in case the stockholder sells impair any right of a transferee regarding any right to
his shares because such restriction is more onerous than rescind the transaction or to recover under any applicable
the right of first refusal. warranty, express or implied (CC, Sec. 99[7]).
ISSUANCE OR TRANSFER OF STOCK IN BREACH OF WHEN BOARD MEETING IS UNNECESSARY OR

QUALIFYING CONDITION IMPROPERLY HELD
Transfer Effect of unnecessary or improperly held board

meeting
The term “transfer” as used in Sec. 99, is not limited to a
transfer for value. This therefore includes donations (CC, Unless the by-laws of the close corporation otherwise
Sec. 99[6]). provides, any action by the directors of a close
corporation without a meeting shall be valid if: (CKAO)
Refusal to register the transfer of stock by a close 1. Before or after such action is taken, written Consent is
corporation signed by all the directors
2. All the stockholders have actual or implied Knowledge
A close corporation may, at its option, refuse to register of the action and make no prompt objection
the transfer of stock in the name of the transferee if the 3. The directors are Accustomed to take informal action
person is not qualified to be a stockholder and has notice with the express or implied acquiescence of all the
thereof. stockholders

MERCANTILE LAW
4. All the directors have express or implied knowledge of by not more that 20 stock holders. The deletion of such
the action in question and make no prompt Objection special feature would render Corporation A, no longer a
thereto. close corporation.
If a director's meeting is held without proper call or DEADLOCKS

notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to Deadlock in a close corporation
attend, unless he promptly files his written objection with
the secretary of the corporation after having knowledge It is when the directors or stockholders are so divided
thereof(CC, Sec. 101). respecting the management of the business and affairs of
the corporation that the votes required for any corporate
SEC can interfere with the management of a close action cannot be obtained and as a result, business and
corporation in case of disagreement of the affairs can no longer be conducted to the advantage of the
stockholders or directors stockholders generally (CC, Sec. 104).
In case of deadlock in the management of the corporation, NOTE: Dissolution of the corporation is one of the
the SEC may intervene and can do certain acts which possible consequences of deadlock (CC, Sec. 104).
would have not been allowed to do in open corporations.
Remedy in case of deadlocks in a close corporation
PRE-EMPTIVE RIGHT
The SEC may be asked, upon written petition by any
Pre-emptive right in an ordinary corporation v. Pre- stockholder, to intervene. And SEC shall have the
emptive right in a close corporation authority to do the following:
4. To arbitrate the dispute
As compared to ordinary corporations, in close 5. Cancel or alter any provision contained in the articles
corporations, the pre-emptive right can be exercised even of incorporation, by-laws, or any stockholder's
as to stocks issued for corporate purposes or for payment agreement;
of a previously contracted debt. 6. Cancel, alter or enjoin any resolution or act of the
corporation or its board of directors, stockholders, or
AMENDMENT OF THE ARTICLES OF INCORPORATION officers;
7. Direct or prohibit any act of the corporation or its
Requirements for the amendment of the AOI to delete board of directors, stockholders, officers, or other
or remove any provision required for close persons party to the action;
corporations or to reduce a quorum or voting 8. Require the purchase at their fair value of shares of
requirement stated in the AOI any stockholder, either by the corporation regardless
of the availability of unrestricted retained earnings in
Any amendment to the articles of incorporation which its books, or by the other stockholders;
seeks to delete or remove any provision required for close 9. Appoint a provisional director;
corporations or to reduce a quorum or voting 10. Dissolve the corporation; or
requirement stated in the articles of incorporation must 11. Grant such other relief as the circumstances may
be: warrant. (ibid.)
1. Approved by the affirmative vote of at least two-thirds Provisional director

(2/3) of the outstanding capital stock,
a. Whether with or without voting rights, or A provisional director is an impartial person who is
b. A greater proportion of shares as may be specifically neither a stockholder nor a creditor of the corporation or
provided in the articles of incorporation of any subsidiary or affiliate of the corporation. A
2. In a meeting duly called for the purpose. provisional director has all the rights and powers of a
director of the corporation, including the right to notice of
Q: Corporation A, a close corporation, amended its and to vote at meetings of directors, until such time as he
articles of incorporation and removed the provision shall be removed by order of the Commission or by all the
that all shares of stock, exclusive of treasury stock, stockholders.
shall be held by a specified number of shareholders
not exceeding 20. What is the effect of such NOTE: A provisional director is not considered as a
amendment to Corporation A? receiver of the corporation. He does not have the title and
powers of a custodian or receiver.
A: It is a special feature of a close corporation that its
shares of stock exclusive of treasury shares shall be held

CORPORATION CODE
Widely held v. Close corporation
WIDELY HELD CLOSE CORPORATION

CORPORATION
Number of No limit Not exceeding 20(CC, Sec. 96)
Stockholders
Public Offering/ Allowed Not Allowed (CC, Sec. 96)
Listing of Shares in
the Stock Exchange
Corporate powers are exercised, all business The articles of incorporation of a close
conducted and all property of such corporation may provide that the business of
Who may exercise
corporations controlled and held by the board the corporation shall be managed by the
corporate Powers
of directors or trustees (CC, Sec. 23) stockholders of the corporation rather than by
a board of directors (CC, Sec. 97).
Qualification of Qualifications of stockholders are not normally Specific qualifications are usually provided for
Stockholders prescribed (CC, Sec. 97).
Restriction on A restriction need not be provided for There must be a restriction on the transfer of
transfers of shares shares (CC, Sec. 96)
All stockholders of a stock corporation shall The pre-emptive right of stockholders in close
enjoy pre-emptive right to subscribe to all corporations shall extend to all stock to be
issues or disposition of shares of any class, in issued, including reissuance of treasury shares,
proportion to their respective shareholdings, whether for money or for property or personal
unless such right is denied by the AOI or services, or in payment of corporate debts,
amendment thereto: Provided, that such unless the AOI provide otherwise (CC, Sec.
pre-emptive right shall not extend to shares to 102).
Pre-emptive Right be issued in compliance with laws requiring
stock offerings or minimum stock ownership
by the public; or to shares to be issued in good
faith with the approval of the stockholders
representing 2/3 of the outstanding capital
stock, in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt (CC, Sec. 39).
Only to those cases provided by law under Sec. Can be exercised with or without reason and
42 and 81. regardless of whether the corporation has
unrestricted retained earnings (CC, Sec. 105).
Appraisal Right
Required that the Corporation has unrestricted
retained earnings at the time of demand (CC,
Sec. 82).
Interference of SEC as Not allowed. Based on the Business Judgment Allowed in case of deadlocks (CC, Sec. 104).
to the management of Rule
the Corporation’s
business.
For voluntary dissolutions, approval of Dissolution may be effected by any stockholder
majority of the Board of Directors or Trustees upon petition to the SEC whenever any of acts
and of stockholders representing 2/ 3 of the of the directors, officers or those in control of
outstanding capital stock or 2/3 of the the corporation is illegal, or fraudulent, or
Dissolution
members in case of non-stock corporations is dishonest, or oppressive or unfairly prejudicial
necessary (CC, Sec. 118 and 119). to the corporation or any stockholder, or
whenever corporate assets are being
misapplied or wasted (CC, Sec. 105).
Requires vote or written assent of stockholders Amendment as to the matters stated in Sec. 103
Amendment of AOI representing at least 2/3 of the outstanding requires affirmative vote of at least 2/3 of the
capital stock (CC, Sec. 16). outstanding capital stock (CC, Sec. 103).
Oral objection is sufficient to preserve the right Written objection is required (CC, Sec. 101).
Objection in a meeting of the director to question the validity of an
without proper notice action taken in a meeting held without proper
notice (CC, Sec. 53).

MERCANTILE LAW
NON-STOCK CORPORATION REMOVAL IN HOLD-OVER CAPACITY
DEFINITION Q: Adventist University of the Philippines (AUP) is a

non-stock, non-profit educational institution.
Non-stock corporation Petonillo Barayuga was appointed by the AUP’s Board
of Trustees as its President in 2001. AUP
It is one where no part of its income is distributable as subsequently amended its By-Laws to state that
dividends to its members, trustees or officers.Any profit members of the Board of Trustees were to serve a
which it may obtain as an incident to its operations shall term of office of only two years; and the officers, who
whenever necessary or proper, be used in furtherance of included the President, were to be elected from
the purpose or purposes for which it was organized (CC, among the members of the Board of Trustees during
Sec. 87). their organizational meeting, which was held during
the election of the Board of Trustees every two years.
Foundation
In 2003, the Board voted to remove Barayuga as
A foundation is a non-stock, non-profit corporations with president. This prompted Barayuga to file a petition
funds established to maintain or aid charitable, religious, for injunction with damages against AUP, contending
educational, athletic, cultural, literary, scientific, social among others, that the Board relieved him of the
welfare or similar activities primarily through extending presidency without valid grounds despite his five-
grants or endowments. A foundation, as distinguished year term. The RTC ruled in favor of Barayuga. The CA,
from an ordinary non-stock corporation requires a on the other hand, ruled in favor of AUP.
minimum capital of 1 million Pesos (SEC Memo. Circular
No. 1 Series of 2004). Can an officer-elect of a non-stock educational
corporation occupying a hold-over capacity be
Characteristics of a non-stock corporation removed without cause upon the appointment of his
or her successor?
1. It does not have capital stock divided into shares;
2. No part of its income during its existence is A: Yes. Although setting the term of the members of the
distributable as dividends to its members, trustees, Board of Trustees at five years, Sec. 108, par 2 contains a
or officers; proviso expressly subjecting the duration to what is
3. As a general rule, it is not empowered to engage in otherwise provided in the articles of incorporation or by-
business with the object of making income or profits laws of the educational corporation. That contrary
directly or indirectly. However, it is not prohibited to provision controls on the term of office.
make income or profits as an incident to its
operation. (CC, Sec. 87) In light of the amended By-Laws of AUP the members of
4. There is non-transferability of membership (CC, Sec. the Board of Trustees were to serve a term of office of only
90) two years; and the officers, who included the President,
5. The right to vote of members may be limited, were to be elected from among the members of the Board
broadened, or even denied in the AOI or the by-laws of Trustees during their organizational meeting, which
(CC, Sec. 89). was held during the election of the Board of Trustees
6. Non-stock corporations may, through their articles of every two years. Naturally, the officers, including the
incorporation or their by-laws designate their President, were to exercise the powers vested by Section
governing boards by any name other than as BOT 2 of the amended By-Laws for a term of only two years,
(CC, Sec. 138). not five years.
7. By-laws may provide that the members may hold
their meetings at any place even outside the place Ineluctably, the Barayuga, having assumed as President of
where the principal office of the corporation is AUP on January 23, 2001, could serve for only two years,
located, provided that such place is within the or until January 22, 2003. By the time of his removal for
Philippines (CC, Sec. 93). A non-stock corporation is cause as President on January 27, 2003, he was already
not allowed to distribute any of its assets or any occupying the office in a hold-over capacity, and could be
incidental income or profit made by the corporation removed at any time, without cause, upon the election or
during its existence. appointment of his successor. His insistence on holding on
8. Non-availability of conversion into stock corporation to the office was untenable, therefore, and with more
(SEC Opinion, February 24, 1989). reason when one considers that his removal was due to
the loss of confidence on the part of the Board of Trustees
(Barayuga v. Adventist University of the Philippines, G.R.
No. 168008, August 17, 2011).

CORPORATION CODE
Stock Corporation v. Non-stock Corporation
STOCK- CORPORATION NON-STOCK CORPORATION

Existence of Has capital stock divided into shares (CC, No capital stock.
Capital Stock Sec. 3)
Non-stock corporations has capital is in the form
of contributions or donations.
Purpose Organized for profit. Not organized for profit.
Distribution of Profits are distributed to the stockholders Profits are not distributed to members. Any
Profit through dividends(CC, Sec. 3) profit earned by the non-stock corporation is
used for the furtherance of the purpose or
purposes for which it is organized (CC, Sec. 87).
Number of Not less than 5 but not more than 15. Not less than 5 and may be more than 15 except
Directors or Non-stock educational institutions (maximum of
Trustees Except corporation sole and banks (in case 15 trustees).
of merger or consolidation) which can have
a maximum of 21 directors
Term of Office of Term of one year until their successors are Subject to the provision in AOI and By-laws, 3
Directors elected and qualified, subject to the years on a staggered basis.
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not by Members may directly elect officers. (CC, Sec. 92)
Officers the stockholders
Place of meeting Stockholders meeting shall be held in city May be held at any place outside the principal
or municipality where the principal office of place of business of the corporation provided it
the corporation is located or at the shall be within the Philippines (CC, Sec. 93).
principal office of the corporation (CC, Sec.
51).
Right to vote Stockholders can resort to cumulative No cumulative voting unless allowed by AOI.
voting.
Right to vote may be limited, broadened or
Only preferred and redeemable shares can denied by the AOI and by-laws (CC, Sec. 89).
be denied the right to vote except those
matters in Sec. 6. Regional or district voting of trustees is allowed.
Voting of directors may be made only

through general voting. Regional or district
voting of directors is not allowed.
Transferability Shares may be transferred by the Membership is personal in character and is not
of Shares/ stockholder with or without the consent of transferable unless allowed by the AOI or by-
Membership the corporation. laws (CC, Sec. 90).
Right to expel Stockholders may be expelled only for Membership shall be terminated in the manner
members grounds provided by law. and for the causes provided in the articles of
incorporation or the by-laws (CC, Sec. 91).
Distribution of Assets of stock corporation shall be Assets of non-stock corporation shall be
Assets in case of distributed in the following order: distributed as follows:
dissolution 1. Payment of claims of creditors
1.Payment of claims of creditors who are 2. Assets held on condition of return or
not stockholders (based on preference of subject to limitation of use shall be
credit) returned, transferred or conveyed.
2.Payment of claims of stockholders as 3. Distribution to member based on
creditors distributive rights stated in AOI or by-law.
3.Residual balance is distributed 4. In case of default, distribution pursuant to
proportionately to preferred shares, if any, Plan of Distribution of Assets.
then to common stock.
Conversion the members shares is tantamount to distribution of its

assets or income (Sundiang Sr. & Aquino, 2014 citing SEC
1. A non-stock corporation cannot be converted into a Opinion, March 1995).
stock corporation through mere amendment of its AOI.
This would violate Section 87 which prohibits 2. A non-stock corporation can be converted into a stock
distribution of income as dividends to members. Giving corporation only if the members dissolve it first and then

MERCANTILE LAW
organize a stock corporation. However, there is a 5. Cultural,
resulting new corporation (Sundiang Sr. & Aquino, 2014 6. Fraternal,
citing SEC Opinion, May 13, 1992). 7. Literary,
8. Scientific,
3. A stock corporation may be converted into a non-stock 9. Social,
corporation by mere amendment provided all the 10. Civic service, or
requirements are complied with. Its rights and liabilities 11. Similar purposes, like trade, industry, agriculture and
will remain (Sundiang Sr. & Aquino, 2014). like chambers, or any combination thereof (CC, Sec. 88).
Termination of Membership NOTE: A non-stock corporation organized to promote

educational objectives may not be an educational
The power to admit members pertains to the Board in the corporation as contemplated in Secs. 106 to 108, CC.
absence of any contrary provisions on the AOI and by-
laws. Consistently, it is also the Board who has the power The formation of a non-stock corporation for political
to terminate membership. purpose is not allowed
1. Standards - A non-stock corporation is authorized to Political purpose is not included on the purposes for
terminate the membership in accordance with the which a non-stock corporation may be established. SEC
standards fixed in the AIO or the by-laws (CC, Sec. 91). may reject the AOI if the purpose of the corporation is to
engage in election campaign or partisan political activity
2. When property rights are involved - Membership may (SEC Opinion, April 10, 1985).
involve property rights. Example: Membership in a
golf club where the purchase of the share is a sine qua TREATMENT OF PROFITS
non (Valley Golf & Country Club Inc. v. Caram, G.R. No.
158805, April 16, 2009). Non-stock corporation may earn profit
3. Lien -Non payment of dues may be a ground for Mere intangible or pecuniary benefit to the members does
termination or suspension of membership. The AOI not change the nature of the corporation. The fact that a
or the by-laws of a non-stock corporation may non‐stock corporation earns a profit does not make it a
provide that unpaid dues shall constitute a lien on the profit‐making corporation where such profit or income is
member’s share. However, Section 68 of the used for purposes set forth in its articles of incorporation
Corporation Code does not apply if the membership and is not distributed to its incorporators, members or
shares are sold under the provisions that provide for officers.
the constitution of lien (Calatagan Golf & Country
Club Inc. V. Caram, G.R. No. 165443, April 16, 2009); DISTRIBUTION OF ASSETS UPON DISSOLUTION
4. Notice - For the termination of membership to be valid, Order of distribution of assets on dissolution of non-
there should be reasonable notice to the member stock corporations
concerned and he must be given a fair opportunity to
be heard in his defense; 1. All liabilities of the corporation shall be paid or
adequate provision thereof shall be made;
5. Effect of death of a member - Membership in and all 2. Assets held upon a condition requiring return, transfer
rights arising from a non-stock corporation are or conveyance upon, and which condition occurs by
personal and non-transferable, unless the AOI or the reason of the dissolution, shall be returned, transferred or
by-laws of the corporation provide otherwise. conveyed;
Deceased members who are dropped from the 3. Assets received and held by the corporation subject to
membership roster in the manner and for the cause limitations permitting their use only for charitable,
provided for in the by-laws are not to be counted in religious, benevolent, educational or similar purposes
determining the requisite vote in corporate matters shall be transferred or conveyed to one or more
or the requisite quorum for the annual member’s corporations, societies or organizations engaged in
meeting (Tan v. Sycip, G.R. No. 153468, August 17, activities in the Philippines substantially similar to those
2006). of the dissolving corporation.
4. All other assets shall be distributed to the members as
PURPOSES provided by the articles of incorporation or the by-laws.
5. In the absence of provision in the AOI or by-laws,
Purposes for which a non-stock corporation may be distribution may be made in accordance to a plan of
organized distribution adopted by the board of trustees by majority
vote and by at least 2/3 of the members (CC, Sec. 94).
Non-stock corporations may be formed or organized for:
(CREP-CFLSS-CS)
1. Charitable,
2. Religious,
3. Educational,
4. Professional,

CORPORATION CODE
A non-stock corporation cannot offset unused has transacted business in
contributions of members against the balance of the Philippines whether
receivables from the same members licensed or registered
The unused contributions of members cannot be offset 3. Service of summons to

against the balance of receivables because this would its resident agent in an
amount to distribution of the capital of the corporation. isolated transaction.
Members of Non-stock Corporation are not entitled to
distribution of capital. They are only entitled to
distribution of capital upon dissolution when it is BASES OF AUTHORITY OVER FOREIGN
provided for in the articles of incorporation or by-laws CORPORATION
(SEC Opinion, November 27, 1985).
Bases of authority or jurisdiction
FOREIGN CORPORATIONS
The following are the two bases of authority (jurisdiction)
A foreign corporation is done, formed, organized or over foreign corporations:
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and 1. A corporation may give actual consent to judicial
corporations to do business in its own country or State jurisdiction manifested normally by compliance with
(CC, Sec. 123). the State’s foreign corporation qualification
requirements (licensing requirements and other
Features that make a foreign corporation within the requisites to lawfully transact business in the
coverage of the law Philippines); and
2. A corporation, even though not qualified (not
1. Place of incorporation - The corporation must be licensed), by engaging in sufficient activity (doing
formed, organized, or existing under foreign law. business) within the State, established judicial
jurisdiction over the foreign corporation. (Foreign
NOTE: Due to the enactment of RA 7042, the control test Corporations: The Interrelation of Jurisdiction and
is now used in the determination of nationality of the Qualification, Indiana Law Journal, Article 4, Vol. 33,
corporation in case of nationalized or partly nationalized Issue 3, retrieved on April 29, 2013).
activities. However, this does not preclude the use of
other tests in determining the nationality of the CONSENT
corporation.In fact, as per SEC Opinion on Nov. 28, 2009,
the SEC opined that the grandfather rule can be useful Through compliance with the Philippines’ legal
when a corporation’s economic activity is strictly limited requirements to lawfully engage in business within the
by law to Filipino citizens, such as certain types of retail country’s territory, the foreign corporation gives its
trading and mass media. Further, according to the actual consent to be subjected to the jurisdiction of the
commission, the control test, which is more liberal, is Philippines (ibid).
applied for corporations intending to engage in commerce
where 60%-40% equity ratio is allowed by law. By securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the foreign
2. Principle of reciprocity -It allows Filipino citizens to entity would be giving assurance that it will abide by the
do business in the foreign state or country. This is decisions of our courts, even if adverse to it (Eriks PTE,
merely prescribed as a requirement to secure a Ltd. v. CA, GR 118843, February 6, 1997).
license and not an essential element of being a
foreign corporation (De Leon, 2010). Under Sec. 123, CC, foreign corporations shall not be
permitted to transact or do business in the Philippines
Jurisdiction over a foreign corporation until they have secured a license for that purpose from the
SEC and certificate of authority from the appropriate
IF THE FOREIGN IF THE FOREIGN government agency.
CORPORATION IS THE CORPORATION IS THE
PLAINTIFF DEFENDANT DOCTRINE OF DOING BUSINESS
1.GR: Voluntary
1. Voluntary appearance Doing business in the Philippines
appearance of the
before the local courts by
corporation by
the filing of an action by a To be doing or “transacting business in the Philippines”
interposing a defense
licensed corporation
for purposes of Section 133 of the Corporation Code, the
XPN: A special foreign corporation must actually transact business in the
2. If the foreign
appearance to file a Philippines, that is, perform specific business transactions
corporation is a co-
motion to dismiss based within the Philippine territory on a continuing basis in its
plaintiff with a domestic
on lack of jurisdiction own name and for its own account. A foreign company
corporation and latter filed
that merely imports goods from a Philippine exporter,
a suit here in the
2. Service of summons to a without opening an office or appointing an agent in the
Philippines.
foreign corporation which Philippines, is not doing business in the Philippines

MERCANTILE LAW
(Cargill Inc. v. Intra Strata Assurance Corporation, G.R. No. Acts which are considered as doing or transacting
168266, March 15, 2010). business in the Philippines for foreign corporations
(2002 Bar)
Q: When is a foreign corporation deemed to be “doing
business in the Philippines?” (1998 Bar) 1. Soliciting orders, entering into service contracts, and
opening offices, whether called “liason” offices or
A: A foreign corporation is deemed to “deemed business branches.
in the Philippines” if it is continuing the body or substance
of the business or enterprise for which it was organized. 2. Appointing representatives, distributors domiciled
It is the intention of an entity to continue the body of its in the Philippines or who stay for a period or periods
business in the country. The grant and extension of 90- totaling 180 days or more.
day credit terms of a foreign corporation to a domestic
corporation for every purchase shows an intention to 3. Participating in the management, supervision or
continue transacting with the latter. control of any domestic business, firm, entity, or
corporation in the Philippines.
Jurisdictional tests of “doing or transacting business”
in the Philippines for foreign corporations 4. Any act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to some
1. Twin Characterization Test extent the performance of acts or works or the
exercise of some functions normally incident to and
a. Continuity Test – Doing business implies a in progressive prosecution of, the purpose and object
continuity of commercial dealings and arrangements, and of its organization (RA 7042, Sec. 3[d]).
contemplates to some extent the performance of
acts or works or the exercise of some functions normally Acts which are not considered doing business under
incident to and in progressive prosecution of, the the Foreign Investment Act (R.A. 4072)
purpose and object of its organization.
b. Subsequent Test – a foreign corporation is doing 1. Mere investment as a shareholder by a foreign entity
business in the country if it is continuing the body or in a foreign corporation duly registered to do
substance of the enterprise of business for which it business;
was organized (Sundiang Sr. & Aquino, 2009).
2. The exercise of rights as a stock investor and
2. Contract Test - Whether the contracts entered into by
the foreign corporation, or by an agent acting under the 3. Having a nominee director or officer to represent its
control and direction of the foreign corporation, are interest in such corporation;
consummated in the Philippines.
4. Appointing a representative or distributor domiciled
in the Philippines which transacts business in its own
NOTE: Actual transaction of business within the name and for its own account;
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign 5. Publication of general advertisement through any
corporation and thus require the foreign corporation to print or broadcast media;
secure a Philippine business license (B. Van Zuiden Bros.,
Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 6. Maintaining a stock of goods in the Philippines solely
147905, May 28, 2007). for the purpose of having the same processed by
another entity in the Philippines
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing business in 7. Consignment by a foreign entity of equipment with a
the Philippines? (2002 Bar) local company to be used in the processing of
products for export; and
A: The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply a 8. Performing services auxiliary to an existing isolated
continuity of commercial dealings or arrangements, and contract of sale which are not on a continuing basis,
contemplate to that extent the performance of acts or such as installing in the Philippines machinery it has
works, or the exercise of some of the functions normally manufactured or exported to the Philippines,
incident to, and in progressive prosecution of, commercial servicing the same, training domestic workers to
gain or of the purpose and object of the business operate it and similar incidental services (ibid).
corporation.
Q: Steelcase is a foreign corporation existing under
the laws of Michigan, USA, and engaged in the
manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Steelcase and DISI orally entered into a dealership

CORPORATION CODE
agreement whereby Steelcase granted DISI the right or officers is voidable, at the option of such corporation,
to market, sell, distribute, install, and service its unless al the following conditions are present: 1) that the
products to end-user customers within presence of such director or trustee in the board meeting
the Philippines. The business relationship continued in which the contract was approved was not necessary to
smoothly until it was terminated after the agreement constitute a quorum for such meeting; 2) that the vote of
was breached with neither party admitting any such director or trustee was not necessary for the
fault.Steelcase filed a complaintfor sum of money approval of the contract; 3) that the contract is fair and
against DISI alleging, among others, that DISI had an reasonable under the circumstances; and 4) that in case
unpaid account of US$600,000.00. of an officer, the contract has been previously authorized
by the board of directors.
DISI alleged that the complaint failed to state a cause
of action and to contain the required allegations on Q: Chito Santos is a director of both Platinum
Steelcase’s capacity to sue in the Philippines despite Corporation and Kwik Silver Corporation. He owns
the fact that Steelcase was doing business in 1% of the outstanding capital stock of Platinum and
the Philippines without the required license to do 40T of Kwik. Platinum plans to enter into a contract
so. Consequently, it posited that the complaint with Kwik that will make both companies earn very
should be dismissed because of Steelcase’s lack of substantial profits. The contract is presented at the
legal capacity to sue in Philippine courts. Is Steelcase respective board meetings of Platinuma and Kwik.
doing business in the Philippines without the a. In order that the contract will not be voidable,
required license? what conditions will have to be complied with?
Explain.
A: No. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing b. If these conditions are not met, how may this
business” unless it is under the full control of the foreign contract be ratified? Explain (1995 Bar)
corporation. If the distributor is an independent entity A:
which buys and distributes products, other than those of a. Under Section 32 of BP 68, the law provides that: 1)
the foreign corporation, for its own name and its own the presence of such director or trustee in the board
account, the latter cannot be considered to be doing meeting in which the contract ws approved was not
business in the Philippines. It should be kept in mind that necessary to constitute a quorum for such meeting; 2) the
the determination of whether a foreign corporation is vote of such director or trustee was not necessary for
doing business in the Philippines must be judged in light the approval of the contract; 3) the contract is fair and
of the attendant circumstances. reasonable under the circumstances; and 4) in case of an
officer, the contract has been previously authorized by the
In this case, it is undisputed that DISI was founded in 1979 board of directors. In the case at bar, Chito must make
and is independently owned and managed by the spouses sure that the following conditions be met for in order that
Leandro and Josephine Bantug. In addition to Steelcase the contract will not be voidable.
products, DISI also distributed products of other
companies including carpet tiles, relocatable walls and b. Under Section 32 of BP 68, the law provides that
theater settings. The dealership agreement between where any of the first two conditions set forth in the
Steelcase and DISI had been described by the owner preceding paragraphis absent, in the case of a contract
himself a buy and sell arrangement. This clearly belies with a director or trustee, such contract may be ratified
DISI’s assertion that it was a mere conduit through which by the vote of the stockholders representing atleast 2/3 of
Steelcase conducted its business in the country. From the the outstanding capital stock or of at least 2/3 of the
preceding facts, the only reasonable conclusion that can members in a meeting called for the purpose. Provided,
be reached is that DISI was an independent contractor, that full disclosure of the adverse interest of the directors
distributing various products of Steelcase and of other or trustees involved is made at such meeting. Provided,
companies, acting in its own name and for its own account however, that the contract is fair and reasonable under
(Steelcase, Inc., v. Design InternationalSelections, Inc., G.R. the circumstances.
No. 171995, April 18, 2012).
NOTE: See Section 33 as well on interlocking directors.
Q: Leonardo is the Chairman and President, while
Raphael is a director of NT Corporation. On one NECESSITY OF A LICENSE TO DO BUSINESS
occasion, NT Corp., represented by Leonardo and A
Enterprises, a single proprietorship owned by The purpose of the law in requiring that a foreign
Rpahael, entered into a dealership agreement corporation doing business in the Philippines be licensed
whereby NT Corp. appointed A Enterprises as to do so is to subject such corporation to the jurisdiction
exclusive distributor of its products in Northern of the courts. The object is not to prevent foreign
Luzon. Is the dealership agreement valid? Explain corporation from performing single acts but to prevent it
(1996 Bar) from acquiring a domicile for the purpose of business
without taking steps necessary to render it amenable to
A: The dealership agreement is valid PROVIDED the suits in local courts (Marshall-Wells Co. vs. Elser & Co, G. R.
following conditions under Section 32 of BP 68 are No. 22015, September 1, 1924)
complied with. The law provides that a contract of the
corporation with one or more of its directors or trustees

MERCANTILE LAW
Further, the following are considered objectives of the countries specific commercial acts that would constitute
statutory provisions prescribing regulation of foreign doing business in the importing countries. The mere act
corporations: of exporting from one’s own country, without doing any
specific commercial act within the territory of the
1. To place the foreign corporations under the importing country, cannot be deemed as doing business
jurisdiction of the court; in the importing country. The importing country does not
2. To place them in the same footing as domestic require jurisdiction over the foreign exporter who has not
corporation; yet performed any specific commercial act within the
3. To protect the public in dealing with the said territory of the importing country. Without jurisdiction
corporation. over the foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
A corporation engaged in exporting goods to the business in the importing country (Cargill, Inc., v. Intra
Philippines is not required to obtain a license Strata Assurance Corporation, G.R. No. 168266, March 15,
2010).
If a foreign corporation does not transact such kind of
business in the Philippines, even if it exports its products REQUISITES FOR ISSUANCE OF LICENSE
to the Philippines, the Philippines has no jurisdiction to
require such foreign corporation to secure a Philippine Requisites for the issuance of license to a foreign
business license. Actual transaction of business within the corporation
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign The foreign corporation will submit to SEC the following:
corporation and thus require the foreign corporation to 1. Copy of its articles of incorporation and by-laws,
secure a Philippine business license (B. Van Zuiden Bros., certified in accordance with law and their translation to
Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. an official language of the Philippines, if necessary.
147905, May 28, 2007). 2. The application, which shall be under oath.
3. Attached to the application for license shall be a duly
executed certificate under oath by the authorized official
Q: Cargill is a corporation organized and existing or officials of the jurisdiction of its incorporation,
under the laws of the State of Delaware, United States attesting to the fact that:
of America. Cargill and Northern Mindanao a. The laws of the country or state of the applicant
Corporation (NMC) executed a contract whereby NMC allow Filipino citizens and corporations to do business
agreed to sell to Cargill molasses provided that Cargill therein
would open a Letter of Credit with the BPI. The
amended contract required NMC to put up a NOTE: This oath of reciprocity is one of the
performance bond which represents the value of requirements to secure a license under Sec. 123,
10,500 metric tons of molasses.The performance CC, which defines a foreign corporation.
bond was intended to guarantee NMC’s performance
to deliver the molasses during the prescribed b. The applicant is an existing corporation in good
shipment periods according to the terms of the standing.
amended contract.In compliance with the terms of c. If such certificate is in a foreign language, a
the third amendment of the contract, respondent translation thereof in English under oath of the
Intra Strata Assurance Corporation (Intra Strata) translator shall be attached thereto.
issued a performance bondto
guarantee NMC’s delivery of the 10,500 tons of 4. Statement under oath by the President or other person
molasses, and a surety bond. NMC was only able to authorized by the Corporation showing to the satisfaction
deliver 219.551 metric tons of molasses out of the of the SEC and other governmental agency in the proper
agreed 10,500 metric tons. Thus, Cargill sent demand cases that the
letters to NMC claiming payment under the a. applicant is solvent and in sound financial
performance and surety bonds. When NMC refused to condition
pay, Cargill filed a complaint for sum of money against b. the assets and liabilities of the corporation as of
NMC and Intra Strata. Does Cargill, an unlicensed the date not exceeding one (1) year immediately prior to
foreign corporation, has legal capacity to sue before the filing of the application.
Philippine courts? 5. An agreement or stipulation stating the designated
resident agent who will receive summons and other legal
A: Yes, it has the capacity to sue. In this case, Cargill and processes for the corporation together with a Special
NMC amended their contract three times to give a chance Power of Attorney.
to NMC to deliver to Cargill the molasses, considering that 6. An agreement that if it ceases to transact business or if
NMC already received the minimum price of the contract. there is no more resident agent, summons shall then be
There is no showing that the transactions between Cargill served through SEC; and
and NMC signify the intent of Cargill to establish a 7. Deposit securities for the benefit of present and future
continuous business or extend creditors, within 60 days after the issuance of license.
its operations in thePhilippines.An exporter in one
country may export its products to many foreign NOTE: Foreign banking, financial and insurance
importing countries without performing in the importing corporations shall, in addition to the above requirements,

CORPORATION CODE
comply with the provisions of existing laws applicable to NOTE: The appointment of a resident agent of a foreign
them. corporation is revocable at any time at the instance of the
corporation (ibid).
The AOI and by-laws of a licensed and registered
foreign corporation is valid despite the fact that said Duty of the resident agent in case it changes its
AOI and by-laws are not approved by SEC address
Since the SEC will grant a license only when the foreign It shall be his or its duty to immediately notify in writing
corporation has complied with all the requirements of the SEC of the new address (CC, Sec. 128).
law, it follows that when it decides to issue such license, it
is satisfied that the applicant's by-laws, among the other Instances when service of summons or other legal
documents, meet the legal requirements. This, in effect, is processes made upon the SEC instead of a resident
an approval of the foreign corporation’s by-laws (Citibank agent
v. Chua, G.R. no. 102300, March 17, 1993).
1. If a foreign corporation, previously granted a license,
RESIDENT AGENT ceases to transact business in the Philippines, or
2. Shall be without any resident agent in the Philippines
1. An individual, who must be of good moral character on whom any summons or other legal processes may be
and of sound financial standing, residing in the served, then in any action or proceeding arising out of any
Philippines; or business or transaction which occurred in the Philippines,
2. A domestic corporation lawfully transacting business in service of any summons or other legal process may be
the Philippines (CC, Sec. 127). made upon the SEC (ibid.)
Purpose of appointing a resident agent Effect of service made upon the SEC
The appointment of a resident agent is required for the Such service made upon the SEC shall have the same force
purpose of accepting and receiving, on behalf of the and effect as if made upon the duly authorized officers of
foreign corporation: the corporation at its home office (ibid).
1. Notice affecting the corporation pending the
establishment of its local office and Whenever such service shall be made upon the SEC, it
2. Summons and other legal processes in all proceedings must, within 10 days thereafter, transmit by mail a copy
for or against the corporation. of such summons or other legal process to the corporation
at its home or principal office. The sending of such copy
Effect of service of summons and notices to the by the Commission shall be a necessary part of and shall
resident agent complete such service.
Service upon any agent of a foreign corporation, whether PERSONALITY TO SUE

or not engaged in business in the Philippines, constitutes
personal service upon the corporation (CC, Sec. 128; Personality to sue by foreign corporations
Facilities Management Corp. v. Dela Rosa, G.R. No. L-38649,
March 26, 1979).
GR: Only foreign corporations that have been issued a
Resident agent cannot sign the certificate of non- license to operate a business in the Philippines have the
forum shopping personality to sue (CC, Sec.133).
While a resident agent may be aware of the actions filed XPN: Under the rule on estoppel, a party is estopped to
against the principal, he may not be aware of the actions challenge the personality of a foreign corporation to sue,
initiated by the principal, therefore he cannot sign the even if it has no license, after having acknowledged the
certificate of non-forum shopping that is a requirement same by entering to a contract with it.
for filing of an initiatory pleading in court (Expert Travel
& Tours Inc. v. CA, G.R. No. 152392, May 26, 2005). One who has dealt with a corporation of foreign origin as
a corporate entity is estopped to deny its corporate
Replacement of a resident agent existence.
SEC requires the submission of: Personality to sue of dissolved corporations

1. A duly authenticated copy of board resolution or a
certification from the authorized officer of the company In the instant case, there is no dispute that petitioner's
formally revoking his appointment as a resident agent of corporate registration was revoked on May 26, 2003.
the corporation, Based on the above-quoted provision of law, it had three
years, or until May 26, 2006, to prosecute or defend any
2. Accompanied by a duly authenticated written power of suit by or against it. The subject complaint, however,
attorney designating the substitute or the new resident was filed only on October 19, 2006, more than three years
agent (SEC Opinion, Sept. 4, 1990). after such revocation.

MERCANTILE LAW
In the present case, petitioner filed its complaint not only Tensuan, G.R. No. 61950, September 28, 1990; SEC Opinion,
after its corporate existence was terminated but also Jan. 10, 1995).
beyond the three-year period allowed by Section 122 of
the Corporation Code. Thus, it is clear that at the time of INSTANCES WHERE AN UNLICENSED FOREIGN
the filing of the subject complaint petitioner lacks the CORPORATION BE ALLOWED TO SUE
capacity to sue as a corporation. To allow petitioner to
initiate the subject complaint and pursue it until final 1. Isolated transactions;
judgment, on the ground that such complaint was filed for 2. A license subsequently granted enables the foreign
the sole purpose of liquidating its assets, would be to corporation to sue on contracts executed before the grant
circumvent the provisions of Section 122 of the of the license;
Corporation Code (Alabang Development Corporation v. 3. In an action for infringement of patent or other
Alabang Hills Village Association and Rafael Tinio, G.R. No. intellectual property rights, provided that the country of
187456, June 2, 2014). the foreign corporation is a party to the Paris Convention.
4. If the foreign corporation is co-plaintiff with a domestic
A foreign corporation which is not licensed to do corporation and the domestic corporation is the one who
business in the Philippines is not absolutely instituted the suit in the Philippines; and
incapacitated from filing a suit in local courts 5. By reason of the doctrine of estoppel.
Only when that foreign corporation is “transacting” or Isolated transaction

“doing business” in the country will a license be necessary
before it can institute suits. It may, however, bring suits The Court has not construed the term “isolated
on isolated business transactions, which is not prohibited transaction” to literally mean “one” or a mere single act.
under Philippine law. Thus, a foreign insurance company The phrase “isolated transaction” has a definite and fixed
may sue in Philippine courts upon the marine insurance meaning, i.e., a transaction or series of transaction set
policies issued by it abroad to cover international-bound apart from the common business of a foreign enterprise
cargoes shipped by a Philippine carrier, even if it has no in the sense that there is no intention to engage in
license to do business in this country. It is the act of progressive pursuit of the purpose and object of the
engaging in business without the prescribed license business organization (Lorenzo Shipping Corp., v. Chubb
which bars a foreign corporation from access to our and Sons, G.R. No. 147724, June 8, 2004)
courts (Aboitiz Shipping Corp. vs. Insurance Co. of North
America, G.R. No. 168402, August 6, 2008, in Divina, 2010). Q: May a foreign corporation not engaged in business
in the Philippines and a national of a country which is
SUABILITY OF FOREIGN CORPORATIONS a party to any convention, treaty, or agreement
relating to intellectual property rights or the
A foreign corporation, which was granted a license to repression of unfair competition, to which the
transact business in the Philippines, is suable before Philippines is also a party or extend reciprocal rights
local courts or administrative agencies sue in trademark or service mark enforcement
action?
It is suable since any foreign corporation lawfully doing
business in the Philippines shall be bound by all laws, A: Yes. The foreign corporation mentioned above may sue
rules and regulations applicable to domestic corporations in trademark or service mark enforcement action. This is
of the same class, save and except: in accordance with Section 160, in relation to Section 3 of
1. Such only as provide for the creation, formation, R.A. No. 8393, The Intellectual Property Code (Sehwani
organization or dissolution of the corporations or Inc. v. In-n-Out Burger, G.R. No. 171053, Oct. 15, 2007).
2. Such as fix the relations, liabilities, responsibilities, or
duties of stockholders, members or officers of Q: Surecomp, a foreign corporation duly organized
corporationsto each other or to the corporation (CC, Sec. and existing under the laws of the Netherlands,
129). entered into a software license agreement with ABC,
a domestic corporation, for the use of its IMEX
NOTE: Matters relating to the organization or internal Software System (System) in the bank’s computer
affairs of the corporation are governed by the laws of the system for a period of twenty (20) years.ABC merged
home or incorporating State unless they offend any public with Global Business Holdings, Inc. (Global), with
policy of the Philippines. Global as the surviving corporation.
A foreign corporation without any license, engaged in When Global took over the operations of ABC, it found
doing business in the Philippines, may be sued in the the System unworkable for its operations, and
country informed Surecomp of its decision to discontinue
with the agreement and to stop further payments
While an unlicensed foreign corporation doing business thereon. Consequently, for failure of Global to pay its
in the country cannot maintain any action, said obligations under the agreement despite demands,
corporation can be sued in the country, under the Surecomp filed a complaint for breach of contract
doctrine of quasi-estoppel by acceptance of benefits. It with damages before the RTC.
shall not be allowed to invoke its lack of license to impugn
the jurisdiction of the courts (Marubeni Nedeland BV v.

CORPORATION CODE
In its complaint, Surecomp alleged that it is a foreign 6. Failure to pay any and all taxes, imposts, assessments
corporation not doing business in the Philippines and or penalties, if any, lawfully due to the Philippine
is suing on an isolated transaction. Pursuant to the Government or any of its agencies or political
agreement, it installed the System in ABC’s computers subdivisions;
for a consideration of US$298,000.00 as license fee. 7. Transacting business in the Philippines outside of the
Global filed a motion to dismiss on the ground that purpose or purposes for which such corporation is
Surecomp had no capacity to sue because it was doing authorized under its license;
business in the Philippines without a license. Is 8. Transacting business in the Philippines as agent of or
Global is estopped from questioning Surecomp’s acting for and in behalf of any foreign corporation or
capacity to sue? entity not duly licensed to do business in the
Philippines; or
A: Yes, Global is estopped. As a rule, unlicensed foreign 9. Any other ground as would render it unfit to transact
non-resident corporations doing business in business in the Philippines (CC, Sec 134).
the Philippines cannot file suits in the Philippines.This is
mandated under Section 133 of the Corporation Code. A Revocation of the license to transact business in the
corporation has a legal status only within the state or Philippines
territory in which it was organized. For this reason, a
corporation organized in another country has no A certificate of revocation shall be issued by the SEC. A
personality to file suits in the Philippines. In order to copy thereof shall be furnished to the appropriate
subject a foreign corporation doing business in the government agency in the proper cases.The SEC shall also
country to the jurisdiction of our courts, it must acquire a mail to the corporation at tits registered office in the
license from the Securities and Exchange Commission and Philippines a notice of such revocation accompanied by a
appoint an agent for service of process. Without such copy of the certificate of revocation. (CC, Sec. 135)
license, it cannot institute a suit in the Philippines.
Effects of revocation of license of a foreign
The exception to this rule is the doctrine of estoppel. corporation
Global is estopped from challenging Surecomp’s capacity
to sue.A foreign corporation doing business in The following are the effects of such revocation:
the Philippines without license may sue in Philippine 1. The revocation cannot affect the validity of contracts
courts a Filipino citizen or a Philippine entity that had entered into by it before the revocation nor its right to
contracted with and benefited from it. A party is estopped maintain an action to enforce them (Billmeyer Lumber Co.
from challenging the personality of a corporation after vs. Merchants’ Coal Co., 69 SE 1073).
having acknowledged the same by entering into a contract
with it. The principle is applied to prevent a person 2. The revocation shall not affect the validity of contracts
contracting with a foreign corporation from later taking entered into by a foreign corporation after revocation.
advantage of its non-compliance with the statutes, chiefly The only effect of the revocation is that the foreign
in cases where such person has received the benefits of corporation cannot seek redress from the courts to
the contract (Global Business Holdings, Inc., v. Surecomp enforce such contracts. It simply removes its legal
Software, B.V., G.R. No. 173463, October 13, 2010). standing to sue (SEC Opinion No. 10-07, Feb. 5, 2010).
GROUNDS FOR REVOCATION OF LICENSE 3. Innocent parties can enforce such contracts whether
the same are considered valid or not. However, the
Grounds for revocation of license of a foreign foreign corporation can no longer transact business in the
corporation Philippines, and it cannot maintain any suit or action in
any court or administrative agency (CC, Sec. 133).
Without prejudice to other grounds provided by special
laws, the license of a foreign corporation to transact Withdrawal by foreign corporation licensed to
business in the Philippines may be revoked or suspended transact business in the Philippines from said license
by the SEC upon any of the following grounds:
1. Failure to file its annual report or pay any fees as A foreign corporation licensed to transact business in the
required by the Code; Philippines may be allowed to withdraw from the
2. Failure to appoint and maintain a resident agent in the Philippines by filing a petition for withdrawal of license.
Philippines; However, no certificate of withdrawal shall be issued by
3. Failure, after change of its resident agent or of his the SEC unless all the following requirements are met:
address, to submit to the Securities and Exchange 1. All claims which have accrued in the Philippines have
Commission a statement of such change; been paid, compromised or settled;
4. Failure to submit to the SEC an authenticated copy of
any amendment to its articles of incorporation or by- 2. All taxes, imposts, assessments, and penalties, if any,
laws or of any articles of merger or consolidation lawfully due to the Philippine Government or any of its
within the time prescribed by the Corporation Code; agencies or political subdivisions have been paid; and
5. A misrepresentation of any material matter in any
application, report, affidavit or other document 3. The petition for withdrawal of license has been
submitted by such corporation pursuant to this Title; published once a week for three (3) consecutive weeks in

MERCANTILE LAW
a newspaper of general circulation in the Philippines (CC, of the absorbed
Sec. 136). corporation(s). The
absorbing corporation
MERGERS AND CONSOLIDATIONS continues its existence
while the life or lives of
DEFINITION AND CONCEPT the other corporation(s)
is or are terminated.
Common forms of corporate combinations
(Bank of Commerce v. Radio Philippines Network, Inc., et
1. Sale of assets – One corporation sells all or substantially al., G.R. No. 195615, April 21, 2014)
all of its assets to another. Such sale, usually, though
not necessarily made in the course of the dissolution Asset sale v. Stock sale
of the vendor corporation.
2. Lease of assets – A corporation, without being dissolved, ASSET SALE STOCK SALE
leases its property to another corporation for which The corporate entity sells The individual or corporate
the lessor merely receives rental paid by the lessee. all or substantially all of its shareholders sell a
This is similar to the sale of assets, except that under assets to another entity. controlling block of stock
a lease, nothing passes, except the right to use the to new or existing
property leased. shareholders.
3. Sale of stock – The purpose of a holding corporation is
to acquire a sufficient amount of the stock of another The seller in good faith is Notwithstanding the stock
corporation for the purpose of acquiring control. The authorized to dismiss the sale, the corporation
acquiring corporation is called the parent/ holding affected employees, but is continues to be the
company. The corporation whose stocks were liable for the payment of employer of its people and
acquired is the subsidiary. separation pay under the continues to be liable for
4. Merger – One where a corporation absorbs another law. The buyer in good the payment of their just
corporation and remains in existence while others faith, on the other hand, is claims. Furthermore, the
are dissolved. not obliged to absorb the corporation or its new
5. Consolidation - One where a new corporation is created employees affected by the majority share holders are
and consolidating corporations are extinguished sale, nor is it liable for the not entitled to lawfully
(ibid). payment of their claims. dismiss corporate
The most that it may do, for employees absent a just or
Merger reasons of public policy authorized cause.
and social justice, is to give
Two or more corporations unite, one corporation which preference to the qualified
retains its corporate existence absorbing or merging in separated personnel of the
itself the other which disappears as a separate selling firm.
corporation. It is the absorption of one corporation by (SME Bank, Inc., et al., v. Gaspar, et al., G.R. Nos. 184517 &
another which survives (De Leon, 2010). 186641, October 8, 2013).
Merger v. De Facto Merger Q: One of the stipulations in the sale of petitioner SME
Bank to petitioner Abelardo Samson was that Agustin
Merger De Facto Merger and De Guzman, the majority stockholders and
Merger is a re- Can be pursued by one corporate directors of SME, shall terminate/retire its
organization of two or corporation acquiring all or employees. At the behest of Samson’s wife, SME’s
more corporations that substantially all of the general manager urged its employees, respondents
results in their properties of another Gaspar, et al., to tender their resignations on the
consolidating into a single corporation in exchange of promise that they will be rehired. The majority shares
corporation, which is one shares of stock of the of SME were then sold to the Sps. Samson, and SME did
of the constituent acquiring corporation. The not rehire De Guzman, et al.
corporations, one acquiring corporation would
disappearing or end up with the business Gaspar, et al. filed a complaint for illegal dismissal
dissolving and the other enterprise of the target against SME, Samson, Agustin and De Guzman. The LA
surviving. To put it corporation; whereas, the ruled that the labor buyer of an enterprise is not
another way, merger is target corporation would end bound to absorb its employees, unless there is an
the absorption of one or up with basically its only express stipulation to the contrary. The NLRC found
more corporations by remaining assets being the that there was only a mere transfer of shares – and
another existing shares of stock of the therefore, a mere change of management – from
corporation, which acquiring corporation. Agustin and De Guzman to the Samson Group. As the
retains its identity and change of management was not a valid ground to
takes over the rights, terminate respondent bank employees, the NLRC
privileges, franchises, ruled that they had indeed been illegally dismissed. It
properties, claims, further ruled that Agustin, De Guzman and the
liabilities and obligations

CORPORATION CODE
Samson Group should be held jointly and severally challenging the legality of their separation from the
liable. service.
a. Was there a transfer of business such that b. No. Respondent employees argue that the Samson
Samson,, being an innocent transferee, has no Group had already taken over and conducted an inventory
obligation to retain the employment of Gaspar, et al. before the execution of the share purchase agreement.
? Agustin and De Guzman likewise argued that it was at
b. May the Spouses Samson be held liable? Olga Samson’s behest that the employees were required
to resign from their posts. Even if this statement were
A: true, it cannot amount to a finding that spouses Samson
a. No. The argument is misleading and unmeritorious. should be treated as corporate directors or officers of SME
Contrary to petitioner bank’s argument, there was no Bank. The records show that it was Espiritu who asked the
transfer of the business establishment to speak of, but employees to tender their resignation and or retirement
merely a change in the new majority shareholders of the letters, and that these letters were actually tendered to
corporation. him. He then transmitted these letters to the
representative of the Samson Group. That the spouses
There are two types of corporate acquisitions: asset sales Samson had to ask Espiritu to require the employees to
and stock sales. In contrast with asset sales, in which the resign shows that they were not in control of the
assets of the selling corporation are transferred to corporation, and that the former shareholders – through
another entity, the transaction in stock sales takes place Espiritu – were still in charge thereof. As the spouses
at the shareholder level. Because the corporation Samson were neither corporate officers nor directors at
possesses a personality separate and distinct from that of the time the illegal dismissal took place, we find that there
its shareholders, a shift in the composition of its is no legal basis in the present case to hold them in their
shareholders will not affect its existence and continuity. personal capacities solidarily liable with SME Bank for
Thus, notwithstanding the stock sale, the corporation illegally dismissing respondent employees, without
continues to be the employer of its people and continues prejudice to any liabilities that may have attached under
to be liable for the payment of their just claims. other provisions of law.
Furthermore, the corporation or its new majority share
holders are not entitled to lawfully dismiss corporate Furthermore, even if spouses Samson were already in
employees absent a just or authorized cause. control of the corporation at the time that Simeon, Jr. was
constructively dismissed, we refuse to pierce the
In the case at bar, the Letter Agreements show that their corporate veil and find them liable in their individual
main object is the acquisition by the Samson Group of steads. There is no showing that his constructive
86.365% of the shares of stock of SME Bank. Hence, this dismissal amounted to more than a corporate act by SME
case involves a stock sale, whereby the transferee Bank, or that spouses Samson acted maliciously or in bad
acquires the controlling shares of stock of the faith in bringing about his constructive dismissal (SME
corporation. Thus, following the rule in stock sales, Bank, Inc., et al., v. Gaspar, et al., G.R. Nos. 184517 & 186641,
respondent employees may not be dismissed except for October 8, 2013).
just or authorized causes under the Labor Code.
Q: Petitioner Bank of Commerce (BOC) and Traders
The transfer only involved a change in the equity Royal Bank (TRB) executed a Purchase and
composition of the corporation. To reiterate, the Assumption agreement, where the former acquired
employees are not transferred to a new employer, but the latter’s specified assets and liabilities, excluding
remain with the original corporate employer, liabilities arising from judicial actions which were
notwithstanding an equity shift in its majority covered by a BSP-mandated escrow fund of P50
shareholders. This being so, the employment status of the million. Shortly after, the Supreme Court, in TRB v.
employees should not have been affected by the stock RPN, ordered TRB to pay respondents Radio
sale. A change in the equity composition of the corporate Philippines Network, Intercontinental Broadcasting
shareholders should not result in the automatic Corporation, and Banahaw Broadcasting Corporation
termination of the employment of the corporation’s (RPN, et al.) actual damages with legal interest. RPN,
employees. Neither should it give the new majority et al. filed a motion for execution against TRB before
shareholders the right to legally dismiss the corporation’s the RTC. But rather than pursue a levy in execution of
employees, absent a just or authorized cause. the corresponding amounts on escrow, RPN, et al.
filed a Supplemental Motion for Execution where they
It is thus erroneous on the part of the corporation to described TRB as “now BOC” based on the assumption
consider the employees as terminated from their that TRB had been merged into BOC.
employment when the sole reason for so doing is a change
of management by reason of the stock sale. The BOC opposed RPN, et al.’s motion and denied that
conformity of the employees to the corporation’s act of there was a merger between itself and TRB. The RTC
considering them as terminated and their subsequent granted the writ of execution to cover all assets of
acceptance of separation pay does not remove the taint of TRB, including those subject of the P & A agreement.
illegal dismissal. Acceptance of separation pay does not The RTC held that the P & A agreement was a mere
bar the employees from subsequently contesting the tool to effectuate merger.
legality of their dismissal, nor does it estop them from

MERCANTILE LAW
BOC appealed to the CA, which affirmed with and TRB since the elements required of both were not
modification the RTC decision, by declaring that no present.
merger existed between BOC and TRB and deleting
the phrase that the P & A agreement was a farce or a Third, the evidence in this case fails to show that BOC was
mere tool to effectuate a merger or consolidation a mere continuation of TRB. TRB retained its separate and
between TRB and BOC. The CA limited the execution distinct identity after the purchase. Although it
to TRB’s properties found in BOC’s possession. subsequently changed its name to Traders Royal
Holding’s, Inc. such change did not result in its dissolution.
The RTC issued an alias writ of execution against BOC,
and BOC sought reconsideration of the same Fourth, to protect contingent claims, the BSP directed BOC
considering that the CA declared that no meorger and TRB to put up P50 million in escrow with another
existed between BOC and TRB. The RTC denied BOC’s bank. It was the BSP, not BOC that fixed the amount of the
motion. escrow. Consequently, it cannot be said that the latter
bank acted in bad faith with respect to the excluded
a. Was there a merger between BOC and TRB? liabilities. They did not enter into the P & A Agreement to
b. Should BOC be considered as RPN, et al.’s enable TRB to escape from its liability to creditors with
judgment debtor? pending court cases.
A: Since there had been no merger, BOC cannot be

a. No. What happened is that TRB sold and BOC considered as TRB’s successor-in-interest and against
purchased identified recorded assets of TRB in which the Court’s Decision in TRB v. RPN may be enforced.
consideration of BOC’s assumption of identified recorded BOC did not hold the former TRBs assets in trust for it as
liabilities of TRB including booked contingent accounts. to subject them to garnishment for the satisfaction of the
There is no law that prohibits this kind of transaction latter’s liabilities to RPN, et al. BOC bought and acquired
especially when it is done openly and with appropriate those assets and thus, became their absolute owner.
government approval. In a strict sense, no merger or
consolidation took place as the records do not show any The enforcement, therefore, of the decision in the main
plan or articles of merger or consolidation. case should not include the assets and properties that
BOC acquired from TRB. These have ceased to be assets
In his book, Philippine Corporate Law, Dean Cesar and properties of TRB under the terms of the BSP-
Villanueva explained that under the Corporation Code, “a approved P & A Agreement between them. They are not
de facto merger can be pursued by one corporation TRB assets and properties in the possession of BOC (Bank
acquiring all or substantially all of the properties of of Commerce v. Radio Philippines Network, Inc., et al.,
another corporation in exchange of shares of stock of supra).
the acquiring corporation. The acquiring corporation
would end up with the business enterprise of the target Consolidation
corporation; whereas, the target corporation would end
up with basically its only remaining assets being the Two or more corporations unite, giving rise to a new
shares of stock of the acquiring corporation.” (Emphasis corporate body and dissolving the constituent
supplied) corporations which cease to exist as separate
corporations (De Leon, 2010).
No de facto merger took place in the present case simply
because the TRB owners did not get in exchange for the Merger v. Consolidation
bank’s assets and liabilities an equivalent value in BOC
shares of stock. BOC and TRB agreed with BSP approval to BASIS MERGER CONSOLIDATION
exclude from the sale the TRB’s contingent judicial One where a
liabilities, including those owing to RPN, et al. corporation One where a new
absorbs another corporation is
The Bureau of Internal Revenue (BIR) treated the corporation and created and
transaction between the two banks purely as a sale of Definition remains in consolidating
specified assets and liabilities when it rendered its existence while corporations are
opinion on the tax consequences of the transaction given others are extinguished. (CC,
that there is a difference in tax treatment between a sale dissolved (CC, Sec. Sec. 76)
and a merger or consolidation. 76).
All of the
b. No. First, BOC agreed to assume those liabilities of Consequent
constituent All consolidated
TRB that are specified in their P & A Agreement. That dissolution of
corporations corporations are
agreement specifically excluded TRB’s contingent a corporation
involved are dissolved without
liabilities that the latter might have arising from pending or
dissolved except exception
litigations in court, including the claims of RPN, et al. corporations
one
Consequent No new A new
Second, as already pointed out above, the sale did not creation of a corporation is corporation
amount to merger or de facto merger of Bancommerce new created emerges

CORPORATION CODE
corporation CONSTITUENT V. CONSOLIDATED CORPORATION
The surviving All assets,
corporation liabilities, and Constituent Corporation
Acquisition of
acquires all the capital stock of all
Assets, The parties to a merger or consolidation are constituent
assets, liabilities, consolidated
Liabilities, corporations (McLeod v. NLRC, G.R. No. 146667, January
and capital stock corporations are
Capital Stock 23, 2007).
of all constituent transferred to the
corporations new corporation
Consolidated corporation
A partnership cannot merge or to consolidate with a
corporation Sec. 76 of the CC authorizes two or more corporations to
merge under one of the participating constituent
Only corporations can merge or consolidate into a single corporations, or to consolidate into a new single
corporation. Hence, a partnership may NOT be allowed to corporation called consolidated corporation (BPI vs. BPI-
merge with a corporation but the partnership may Employees Union-Davao Chapter Federation of Unions in
transfer all its assets and liabilities to the corporation BPI Unibank, GR 164301, August 10, 2010, J. Brion,
which will issue its shares of stock to be distributed to the dissenting).
partners in proportion to their respective interest in the
partnership, provided the partnership shall be dissolved PLAN OF MERGER OR CONSOLIDATION
in accordance with the Civil Code (De Leon,2010, citing
SEC Opinion, Jan 3, 1984). Plan of merger or consolidation
Q: Where one corporation sells or otherwise transfers The plan of merger or consolidation is a plan created by
all of its assets to another corporation, is the latter the representatives of the constituent corporations,
liable for the debts and liabilities of the transferor? providing for the details of such merger.
A: GR: No. Contents of a plan of merger or consolidation
XPNs: The BOD/ BOT of each corporation party to the merger or

1. Where the purchaser expressly or impliedly agrees to consolidation must set forth the following in their plan of
assume such debts; merger or consolidation:
2. Where the transaction amounts to a consolidation or 1. The names of the corporations proposing to merge or
merger of the corporations; consolidate, hereinafter referred to as the
3. Where the purchasing corporation is merely a constituent corporations;
continuation of the selling corporation; and 2. The terms of the merger or consolidation and the mode
4. Where the transaction is entered into to fraudulently to of carrying the same into effect;
escape liability for such debts (Edward J. Nell Co. vs. 3. A statement of the changes, if any, in the AOI of the
Pacific Farms, Inc., G.R. No. L-20850, November 29, surviving corporation in case of a merger; and, with
1965). respect to the consolidated corporation in case of
consolidation, all the statements required to be set
Q: E Co. sold its assets to M Inc. after complying with forth in the AOI for corporations organized under the
the requirements of the Bulk Sales Law. CC; and
Subsequently, one of the creditors of E Co. tried to 4. Such other provisions with respect to the proposed
collect the amount due it, but found out that E Co. hasd merger or consolidation as are deemed necessary or
no more assets left. TH creditors sued M Inc. on the desirable (CC, Sec. 76).
theory that M Inc. is a mere alter ego of E Co. Will the
suit prosper? (1996 Bar) Approvals required for an effective plan of merger or
consolidation
A: The suit will not prosper. The sale by E Co. of ts assets
to M Inc. does not result in the transfer of liabilities of the The plan of merger or consolidation must be approved by
latter to, nor in the assumption therefore by, the former. majority vote of each of the BOD/ BOT of the constituent
The facts given do not indicate that such transfer or corporation. Thereafter, it shall be submitted for approval
assumption took place or was stipulated upon by the by the stockholders or members of each of such
parties in their agreement. Furtheremore, the sale by E corporations at separate corporate meetings duly called
Co. of its assets is a sale of its property. It does not involve for the purpose. The affirmative vote of the stockholders
the sale of the shares of stock of the corporation belonging representing at least 2/3 of the outstanding capital stock
to its stockholders. There is therefore no merger or of each corporation in the case of stock corporations or at
consolidaton that took place. E Co. continues to exist and least 2/3 of the members in the case of non-stock
remains liable to the creditor corporations, shall be necessary for the approval of such
plan (CC, Sec. 77).

MERCANTILE LAW
Amendment of a plan of merger or consolidation a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
Any amendment may be made, provided such amendment outstanding; in non-stock, the number of members; and
is approved by majority vote of the respective BOD / BOT c. As to each corporation, number of shares or
of all the constituent corporations and ratified by the members voting for and against such plan, respectively.
affirmative vote of stockholders representing at least 8. Four copies of the Articles of Merger or Consolidation
2/3 of the outstanding capital stock or 2/3 of the shall be submitted to the SEC for approval. Special
members of each of the constituent corporations (ibid). corporations like banks, insurance companies, building
and loan associations, etc., need the prior approval of the
NOTE: Such plan, together with any amendment, shall be respective government agency concerned.
considered as the agreement of merger or consolidation. 9. If SEC is satisfied that the merger or consolidation is not
inconsistent with the provisions of the Corporation Code
Appraisal right is available to a dissenting and existing laws, it shall issue the Certificate of Merger or
stockholder to a plan of merger or consolidation the Certificate of Incorporation, as the case may be.
10. If, upon investigation, the SEC has reason to believe
Any dissenting stockholder in stock corporations may that the proposed merger or consolidation is contrary to
exercise his appraisal right in accordance with this Code: or inconsistent with the Corporation Code or other
Provided, that if after the approval by the stockholders of existing laws, it shall set a hearing to give the corporations
such plan, the BOD should decide to abandon the plan, the the opportunity to be heard and written notice of said
appraisal right shall be extinguished (ibid.) hearing shall be given to each constituent corporation at
least two weeks prior to the said hearing (CC, Secs. 76-79).
ARTICLES OF MERGER OR CONSOLIDATION
EFFECTIVITY
After approval of the plan of merger or consolidation, an
article of merger or consolidationis executed by each of Effectivity of merger or consolidation
the constituent corporations to be signed by the president
or vice-president of the each corporation and signed by The merger or consolidation shall become effective upon
their secretary or assistant secretary setting forth: issuance by the SEC of the certificate of merger and
1. The plan of the merger or the plan of consolidation consolidation (CC, Sec. 79).
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations, the In the case of merger or consolidation of banks or banking
number of members institutions, building and loan associations, trust
3. As to each corporation, the number of shares or companies, insurance companies, public utilities,
members voting for and against such plan, respectively educational institutions and other special corporations
(CC, Sec. 78). governed by special laws, the favorable recommendation
of the appropriate government agency shall first be
PROCEDURE obtained (ibid).
1. Board of each corporation shall draw up a plan of Q: FISLAI and DSLAI entered into a merger, with
merger or consolidation. DSLAI as the surviving corporation.The articles of
2. Plan of merger or consolidation shall be approved by merger were not registered with the SEC due to
majority vote of each board of the concerned corporations
incomplete documentation.DSLAI changed its
at separate meetings.
3. The plan of merger or consolidation shall be submitted corporate name to MSLAI. The business of MSLAI,
for approval by the stockholders or members of each such however, failed.
corporation at separate corporate meetings duly called
for the purpose. Notice should be given to all Prior to the closure of MSLAI, Remedios Uy filed an
stockholders or members at least two (2) weeks prior to action for collection of sum of money against FISLAI.
date of meeting, either personally or by registered mail. The RTC ruled in favor of Uy and hence, six (6) parcels
4. Affirmative vote of 2/3 of the outstanding capital stock
of land owned by FISLAI were sold to Willkom, the
in case of stock corporations, or 2/3 of the members of a
non-stock corporation shall be required. highest bidder.
5. Dissenting stockholders may exercise the right of
appraisal.But if Board abandons the plan to merge or MSLAI filed a complaint for annulment of
consolidate, such right is extinguished. sheriff’s sale. Willkom, et al., averred that MSLAI had
6. The plan may still be amended before the same is filled no cause of action against them or the right to recover
with the SEC; however, any amendment to the plan must
the subject properties because MSLAI is a separate
be approved by the same votes of the board members of
trustees and stockholders or members required for the and distinct entity from FISLAI. They further
original plan. contended that the “unofficial merger” between
7. After such approval, Articles of Merger or Articles of FISLAI and DSLAI (now MSLAI) did not take effect
Consolidation shall be executed by each of the constituent considering that the merging companies did not
corporations, signed by president or VP and certified by comply with the formalities and procedure for
secretary or assistant secretary, setting forth:

CORPORATION CODE
merger or consolidation as prescribed by the The RTC issued an Order granting and issuing the writ
Corporation Code of the Philippines. Was the merger of execution to cover any and all assets of TRB. On
between FISLAI and DSLAI (now MSLAI) valid and appeal, the CA denied BOC’s petition.The RTC granted
effective? the motion to cause the issuance of an alias writ of
execution against BOC, filed by RPN, et al. based on the
A: No. The merger was not valid. Merger does not become CA Decision. BOC sought reconsideration of the RTC
effective upon the mere agreement of the constituent Order considering that the CA Decision actually
corporations. Since a merger or consolidation involves declared that no merger existed between TRB and
fundamental changes in the corporation, as well as in the BOC.
rights of stockholders and creditors, there must be an
express provision of law authorizing them. The RTC issued the assailed Order denying BOC’s
pleas. On appeal the CA dismissed BOC’s petition
The merger shall only be effective upon the issuance of a outright for its supposed failure to file a motion for
certificate of merger by the SEC, subject to its prior reconsideration of the assailed order.Was there a
determination that the merger is not inconsistent with the valid merger to make BOC liable for TRB’s judgment
Corporation Code or existing laws. debts?
In this case, it is undisputed that the articles of merger A: What happened is that TRB sold and BOC purchased
between FISLAI and DSLAI were not registered with the identified recorded assets of TRB in consideration of
SEC due to incomplete documentation. Consequently, the BOC’s assumption of identified recorded liabilities of TRB
SEC did not issue the required certificate of merger. Even including booked contingent accounts. There is no law
if it is true that the Monetary Board of the Central Bank of that prohibits this kind of transaction especially when it
the Philippines recognized such merger, the fact remains is done openly and with appropriate government
that no certificate was issued by the SEC. Such merger is approval. x x x In strict sense, no merger or
still incomplete without the certification. consolidation took place as the records do not show any
plan or articles of merger or consolidation. More
The issuance of the certificate of merger is crucial because importantly, the SEC did not issue any certificate of
not only does it bear out SEC’s approval but it also marks merger or consolidation (Bank of Commerce v. Radio
the moment when the consequences of a merger take Philippines Network, Inc., et al., G.R. No. 195615, April 21,
place. By operation of law, upon the effectivity of the 2014).
merger, the absorbed corporation ceases to exist but its
rights and properties, as well as liabilities, shall be taken LIMITATIONS
and deemed transferred to and vested in the surviving
Limitations with regard to merger or consolidation of
corporation (Mindanao Savings and Loan Association, Inc.,
corporations
et al., v. Edward Willkom, et al., G.R. No. 178618, October 11,
2010). Subject to the limitations provided by the Constitution,
the merger or consolidation should not create illegal
Q: TRB proposed to sell to petitioner BOC for P10.4B combinations nor create monopolies and it should not
its banking business consisting of specified assets and eliminate free and healthy competition.
liabilities. BOC agreed subject to prior BSP’s approval
Monopoly
of their Purchase and Assumption (P & A) Agreement.
The latter approved that Agreement subject to the A "monopoly" embraces any combination the tendency of
condition that BOC and TRB would set up an escrow which is to prevent competition in the broad and general
fund of P50M with another bank, which was complied sense, or to control prices to the detriment of the public
by TRB through MBTC. Based on a prior decision (Gokongwei v. SEC, G.R. No. L-45911, April 11, 1979).
rendered by the SC, RPN, IBC, and BBC (RPN, et. al.)
filed a motion for execution against TRB before the EFFECTS
RTC. But rather than pursue a levy in execution of
Effects of a merger or consolidation
the corresponding amounts on escrow with MBTC,
RPN, et al. filed a Supplemental Motion for Execution The effects of merger or consolidation are:
where they described TRB as “now Bank of 1. The constituent corporations shall become a single
Commerce” based on the assumption that TRB had corporation which:
been merged into BOC.
2. In case of merger, shall be the surviving corporation
designated in the plan of merger

MERCANTILE LAW
3. In case of consolidation, shall be the consolidated impleaded therein. Consequently, by virtue of its merger
corporation designated in the plan of consolidation with BPI, the latter, as the surviving corporation,
effectively became the garnishee, thus the “virtual party”
4. The separate existence of the constituent corporations to the civil case. (BPI v. Lee, G.R. No. 190144, August 1,
shall cease, except that of the surviving or the 2012).
consolidated corporation
5. The surviving or the consolidated corporation shall Transfer of employees of the absorbed corporation to
possess all the rights, privileges, immunities and powers the surviving corporation.
and shall be subject to all the duties and liabilities of a
corporation organized under this Code It is contrary to public policy to declare the former
6. The surviving or the consolidated corporation shall employees of the absorbed corporation as forming part of
thereupon and thereafter possess: its assets or liabilities that were transferred to and
absorbed by the surviving corporation in the Articles of
7. All the rights, privileges, immunities and franchises of Merger. Assets and liabilities, in this instance, should be
each of the constituent corporations deemed to refer only to property rights and obligations
and do not include the employment contracts of its
8. All property, real or personal, and all receivables due on personnel. A corporation cannot unilaterally transfer its
whatever account, including subscriptions to shares and employees to another employer like chattel. Certainly, if
other choses in action, and all and every other interest of, the surviving corporation as an employer had the right to
or belonging to, or due to each constituent corporation choose who to retain among the employees of the
absorbed corporation, the latter employees had the
9. These shall be deemed transferred to and vested in such concomitant right to choose not to be absorbed by the
surviving or consolidated corporation without further act corporation. Even though the employees of the absorbed
or deed corporation had no choice or control over the merger of
their employer, they had a choice whether or not they
10. The surviving or consolidated corporation shall: would allow themselves to be absorbed by the surviving
a. Be responsible and liable for all the liabilities and corporation. Certainly nothing prevented the employees
obligations of each of the constituent corporations of the absorbed corporation from resigning or retiring
in the same manner as if such surviving or and seeking employment elsewhere instead of going
consolidated corporation had itself incurred such along with the proposed absorption. (Bank of the
liabilities or obligations Philippine Islands v. BPI Employees Union – Davao Chapter,
b. Any pending claim, action or proceeding brought G.R. No. 164301, October 19, 2011).
by or against any of such constituent corporations
may be prosecuted by or against the surviving or On motion for reconsideration, however, the Supreme
consolidated corporation Court ruled that it is more in keeping with social justice
c. The rights of creditors or liens upon the property that the employees of the absorbed corporation be
of any of such constituent corporations shall not be considered employees of the surviving corporation
impaired by such merger or consolidation (CC, Sec. without break in the continuity of their employment even
80; BPI v. Lee, G.R. No. 190144, August 1, 2012). without express stipulation in the Articles of Merger
(Bank of the Philippine Islands v. BPI Employees Union –
Garnishment upon the surviving corporation for the Davao Chapter, supra).
liabilities of the absorbed corporation
Q: Associated Banking Corporation and Citizens Bank
Citytrust was dissolved, no winding up of its affairs or and Trust Company (CBTC) merged to form just one
liquidation of assets, privileges, powers and liabilities banking corporation known as Associated Citizens
took place. As the surviving corporation, BPI simply Bank, the surviving bank. The Associated Citizens
continued the combined businesses of the two banks and Bank changed its corporate name to Associated Bank
absorbed all the rights, privileges, assets, liabilities and by virtue of the Amended Articles of Incorporation.
obligations of City Trust, including the latter’s obligation
over the garnished deposits of the defendants. Lorenzo Sarmiento executed in favor of CBTC a
promissory note. Upon maturity and despite
Through the service of the writ of garnishment, the repeated demands Sarmiento failed to pay the
garnishee becomes a “virtual party”to, or a “forced amount due. Associated Bank filed a collection suit
intervenor” in, the case and the trial court thereby against Sarmiento. Sarmiento contends that
acquires jurisdiction to bind him to compliance with all Associated Bank is not the proper party in interest
orders and processes of the trial court with a view to the because the promissory note was executed in favor of
complete satisfaction of the judgment of the court. Associated Citizens Bank.
Citytrust, therefore, upon service of the notice of The trial court ordered Sarmiento to pay. The CA
garnishment and its acknowledgment that it was in however, held that the Associated Bank had no cause
possession of defendants’ deposit accounts became a of action against Lorenzo Sarmiento Jr., since said
“virtual party” to or “forced intervenor” in the civil case. bank was not privy to the promissory note executed
As such, it became bound by the orders and processes by Sarmiento in favor of Citizens Bank and Trust
issued by the trial court despite not having been properly Company (CBTC). The court ruled that the earlier

SECURITIES REGULATION CODE
merger between the two banks could not have vested SECURITIES REQUIRED TO BE REGISTERED
Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such Securities (1996 Bar)
merger.
Securities are shares, participation or interests in a
May Associated Bank, the surviving corporation, corporation or in a commercial enterprise or profit-
enforce the promissory note made by Sarmiento in making venture and evidenced by a certificate, contract,
favor of CBTC, the absorbed company, after the instrument, whether written or electronic in character. It
merger agreement had been signed? includes: (DO DIET)
A: Yes. Associated Bank may enforce the promissory note. 1. Debt instruments – bonds, debentures, notes, evidence
Ordinarily, in the merger of two or more existing of indebtedness, asset-backed securities
corporations, one of the combining corporations survives
and continues the combined business, while the rest are NOTE: Asset-backed securities (ABS) - These are financial
dissolved and all their rights, properties and liabilities are securities the value of which depends on the assets
acquired by the surviving corporation. Although there is underlying it. For investors, ABS are alternative to
dissolution of the absorbed corporations, there is no investing in corporate debt. An ABS is essentially the same
winding up of their affairs or liquidation of their assets, thing as a mortgage-backed security, except that the
because the surviving corporation automatically acquires securities backing it are assets such as loans, leases, credit
all their rights, privileges and powers, as well as their card debt, a company’s receivables, royalty and so on, and
liabilities. All contracts of the absorbed corporations, not mortgage-based securities, hence, the risk involved in
regardless of the date of execution shall pertain to the ABS is greater.
surviving corporation (Associated Bank v. CA, G.R. No.
123793, June 29, 1998). 2. Other instruments as may in the future be determined
by the SEC.
3. Derivatives– options and warrants
STATE POLICY, PURPOSE NOTE: Options - are contracts that give the buyer the
right, but not the obligation, to buy or sell an underlying
Nature of the Securities Regulation Code (SRC) security at a predetermined price called the exercise or
strike price, on or before a predetermined date, called the
The SRC is the law that regulates securities (its issuance, expiry date, which can only be extended in accordance
distribution and sale) and the person who deals with such with Exchange rules (Sundiang Sr. & Aquino, 2014).
securities. It is enacted to protect the public from
unscrupulous promoters, who stake business or venture Kinds of Options
claims which have really no basis, and sell shares or
interests therein to investors. The SRC also serves to a. Call option - option to buy
protect investors, promote investor confidence, and b. Put option - option to sell
stabilize the financial markets. c. Straddle - combination of both call and put option
The law does not guarantee that a person who invests in Warrants - are rights to subscribe or purchase new shares
securities will make money. The law only ensures that or existing shares in a company, on or before a
there will be a fair and full disclosure of information predetermined date called the expiry date, which can only
regarding securities so that the investor could make an be extended in accordance with Exchange rules. Warrants
informed judgment (Divina, 2014). generally have a longer exercise period than options.
State policy with regard to the SRC 4. Investments instruments – Investment contracts,
fractional undivided interests in oil, gas, or other mineral
1. Establish a socially-conscious free market that rights
regulates itself
2. Encourage widest participation of ownership in NOTE: Investment contract - An investment contract is a
enterprises contract, transaction or scheme whereby a person invests
3. Enhance democratization of wealth his money in a common enterprise and is led to expect
4. Promote development of the capital market profits primarily from the efforts of others.
5. Protect investors
6. Ensure full and fair disclosure about securities Howey Test
7. Minimize, if not totally eliminate, insider trading and
other fraudulent or manipulative devices and For an investment contract to exist, the following
practices which creates distortion in the free market. elements must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits

MERCANTILE LAW
e. Profits arissing primarily from the effort of others Securities Act, which requires a prior license to sell or deal
in securities.
Network marketing, a scheme adopted by companies for
getting people to buy their products outside the usual It bears pointing out that the definition of “securities” set
retail system where products are brought from the store’s forth in Section 2 of the Revised Securities Act includes
shelf and where the buyer can become a down-line seller, “commercial papers evidencing indebtedness of any
earning commissions from purchases made by new person, financial or non-financial entity, irrespective of
buyers whom he refers to the person who sold the maturity, issued, endorsed, sold, transferred or in any
product to him, is not an investment contract. The manner conveyed to another.”A check is a commercial
commissions are incentives to down-line sellers to bring paper evidencing indebtedness of any person, financial or
in other customers. These can hardly be regarded as non-financial entity. Since the checks in this case were
profits from investment of money under the Howey Test generally rolled over to augment the creditor’s existing
(SEC v. Prosperity.Com, Inc., G.R. No. 164197, January 25, investment with ASBHI, they most definitely take on the
2012). attributes of traditional stocks.A different rule would
open the floodgates for a similar scheme, by companies
5. Equity instruments – Shares of stock, certificates of without prior license or authority from the SEC.This
interest or participation in a profit sharing agreement, cannot be countenanced (Gabionza v. CA, G.R. No. 161057,
certificates of deposit for a future subscription, September 12, 2008).
proprietary or non-proprietary membership certificates
in corporations A corporation is absolutely proscribed in selling and
distributing unregistered timeshare certificates unless it
6. Trust instruments – Certificates of assignments, complies with the registration requirements under the
certificates of participation, trust certificates, voting trust SRC. Corporate registration is just one of the several
certificates or similar instruments (SRC, Sec. 3). requirements before it may deal with timeshares
(Timeshare Realty Corporation v. Cesar Lao, G.R. No.
Q: Betty Go Gabionza and other investors lent, 158941, February 11, 2008).
invested or deposited money with ASBHI. For this,
ASBHI issued two (2) postdated checks to its lenders, Test on determining whether or not it is a security
one representing the principal amount and the other
covering the interest thereon. On the maturity of the The test is: Does it represent a share, participation, or
checks, the individual lenders renewed the loans, interest interest in a commercial enterprise or any profit
either collecting only the interest earnings or rolling making venture? If yes, then, it is a security. If it is a
over the same with the principal amounts. security, then, it cannot be sold, or offered for sale or
distribution within the Philippines without a registration
After sometime, DBS Bank refused to pay for the statement duly filed with and approved by the SEC
checks by virtue of “stop payment” orders from (Divina, 2014).
ASBHI. The series of events led to the filing of the
complaints by Gabionza, et al., for estafa under Article Requirement before securities are sold or offered for
315(2)(a) and (2)(d) of the Revised Penal Code, estafa sale or distribution within the Philippines
under Presidential Decree No. 1689, violation of the
Revised Securities Act and violation of the General They are required to be registered with and approved by
Banking Act. the SEC. Registration also includes the disclosure to SEC
of all material and relevant information about the issuer
The DOJ concluded that ASHBHI, et al., are liable for of the security. Prior to the sale, the information on the
violating such prohibition against the sale of securities, in such form and with such substance as the
unregistered securities. However, the CA reversed the SEC may prescribe, shall be made available to each
DOJ holding that the postdated checks issued by prospective purchaser (SRC, Sec. 8).
ASBHI did not constitute a security under the Revised
Securities Act. Are the checks issued by ASHBHI Reason for registration requirement
“securities”?
The reason for the registration requirement is to protect
A: Yes. The checks issued constitutes securities, hence, the public from fraud.
the non-registration thereof is a violation of the Revised
Securities Act. It is one thing for a corporation to issue Exceptions to the registration requirement
checks to satisfy isolated individual obligations, and
another for a corporation to execute an elaborate scheme The following need not be registered:
where it would comport itself to the public as a pseudo- 1. Exempt securities
investment house and issue postdated checks instead of 2. Securities sold in exempt transactions.
stocks or traditional securities to evidence the
investments of its patrons.The Revised Securities Act was However, as an exception to the above exceptions, SRC
geared towards maintaining the stability of the national provides that the resale of securities previously sold in an
investment market against activities such as those exempt transaction must be registered.
apparently engaged in by ASBHI. ASBHI adopted this
scheme in an attempt to circumvent the Revised

Effect of non-registration 1. Broker - A person engaged in the business of buying and
selling securities for the account of others (SRC,
The issuer would be penalized.Issuers of securities not Sec.3.3).
registered shall be subjected to criminal, civil and
administrative charges. 2. Dealer - Any person who buys and sells securities for
his/her own account in the ordinary course of
Q: Timeshare Corp. sold to Spouses Cortez one business (SRC, Sec. 3.4).
timeshare of Laguna de Boracay. After sometime, the
SEC issued a resolution to the effect that Timeshare 3. Associated person of a broker or dealer - He is an
Corp. was without authority to sell securities, like employee of a broker or dealer who directly
timeshares. It held therefore that the purchaser may exercises control of supervisory authority but does
exercise the option to unilaterally rescind the not include a salesman, or an agent, or a person,
purchase agreement and receive the refund of money whose functions are solely clerical or ministerial
paid applies to all purchase agreements entered into (SRC, Sec. 3.5).
by Timeshare Corp. prior to the effectivity of the
Registration Statement. Hence, Spouses Cortez 4. Salesman - He is a natural person, employed as such, or
demanded their right to cancel their contract, as it as an agent, by a dealer, issuer or broker to buy and
appears that Laguna de Boracay is selling said shares sell securities; but for the purpose of registration,
without license or authority from the SEC. shall not include any employee of an issuer whose
compensation is not determined directly or
Despite repeated demands, Timeshare Corp. failed indirectly on sales of securities of the issuer.
and refused to refund the same. Timeshare Corp.
contends that its mere registration as a corporation Obligation of the broker to his client
already authorizes it to deal with unregistered
timeshares. Does the registration of Timeshare Corp. The primary obligation of the broker is to ensure his
as a corporation authorize it to deal with account’s compliance with the law (Abacus Securities
unregistered timeshares? Corp. v. Ampil, G.R. No. 160922, February 27, 2006).
A: No. Mere registration as a corporation does not NOTE: Since a brokerage relationship is essentially a
authorize it to deal with unregistered contract for the employments of an agent, the law on
timeshares.Corporate registration is just one of several contracts govern the broker-principal relationship.
requirements before it may deal with timeshares. Prior to
fulfillment of all the other requirements of Section 8, Registration of security market professionals
Timeshare Corp. is absolutely proscribed from dealing
with unregistered timeshares No securities, except of a Security market professionals are required to be
class exempt under the SRC or unless sold in any registered. No broker shall sell any securities unless he is
transaction exempt under the same, shall be sold or registered with the SEC (Revised Securities Act, Sec. 1,)
offered for sale or distribution to the public within the (Nicolas v. CA, et al., G.R. No. 12285, Mar. 27, 1998)
Philippines unless such securities shall have been
registered and permitted to be sold as provided by the Q: Can a stock broker without license from the SEC,
SRC (Timeshare Realty Corporation v. Cesar Lao, G.R. No. recover management fees allegedly earned from
158941, February 11, 2008). handling the securities transactions of a client?
Validity of the sale of shares acquired 12 months after A: No. An unlicensed person may not recover
the approval of the Registration Statement compensation for services as a broker where a statute or
ordinance is applicable and such is of a regulatory nature.
If the person who acquired the security did so after the
issuer has made generally available to its security holders EXEMPT SECURITIES
an income statement covering a period of at least twelve (2009 Bar) (PC-RIBO)
months beginning from the effective date of the
registration statement the right of recovery shall be 1. Any security issued or guaranteed by the Government
conditioned on proof that the person who acquired the of the Philippines, or by any political subdivision or
security relying upon such untrue statement in the agency thereof, or by any person controlled or supervised
registration statement or relying upon the registration by, and acting as an instrumentality of said government.
statement and not knowing of such income statement, but
such reliance may be established without proof of the 2. Any security issued or guaranteed by the government
reading of the registration statement by such person (SRC, of any Country with which the Philippines maintains
Sec. 56). diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity. Provided,
Securities market professionals (persons who deal that the SEC may require compliance with the form and
with securities) content of disclosures the Commission may prescribe.
3. Certificates issued by a Receiver or by a trustee in
They are the broker, dealer, associated person of a broker bankruptcy duly approved by the proper adjudicatory
or dealer, and a salesman. body.

MERCANTILE LAW
4. Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of 9. Share Subscriptions in capital stock prior to
the Office of Insurance Commission, Housing and Land incorporation or in pursuance of an increase in its
Use Regulatory Board, or the Bureau of Internal Revenue. authorized capital stock under the Corporation Code
when no expense is incurred, or no commission,
5. Any security issued by a Bank except its own shares of compensation or renumeration is paid or given in
stock (which serves to promote the sale of securities
connection with the sale or disposition of such securities,
issued by heavily regulated banks).
and only when the purpose for soliciting, giving or taking
6. Other securities as determined by the SEC by rule or of such subscriptions is to comply with the requirements
regulation, after public hearing. (SRC, Sec. 9) of such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized capital
Note: Being an issuer of an exempt security does NOT increased.
exempt such issuer from the requirement of submission
of reports under the regime of full and fair disclosure. 10. EXchange of securities by the issuer with its existing
security holders exclusively, when no commission or
Rationale for the exemption of securities from other remuneration is paid or given directly or indirectly
registration for soliciting such exchange
The reason for the exemption of these enumerated 11. Sale by issuer to fewer than 20 persons in the
securities from registration is that they are either Philippines during any 12 month period, otherwise
guaranteed by the government or they are already known as private placement transactions
regulated by another government agency or body other
than the SEC. 12. Sale of securities to any number of the following
Qualified Buyers:
EXEMPT TRANSACTIONS a) banks,
(JuDe ISCaRIOT’S Ex-20-QB’s) b) registered investment houses,
c) insurance companies,
1. Any JUdicial sale, or sale by an executor, administrator, d) pension funds or retirement plans maintained by
guardian, receiver or trustee in insolvency or bankruptcy the Government of the Philippines or any
political subdivision thereof or managed by a
2. Those sold by a pledge holder, mortgagee, or any other bank or other persons authorized by the Bangko
similar lien holder, to liquidate a bona fide debt a security Sentral to engage in trust functions,
pledged in good faith as security for such Debt investment companies, and
e) other persons or entities ruled qualified by the
3. Those sold or offered for sale in an Isolated transaction SEC on the basis of such factors such as financial
for the owner’s account and the owner not being an sophistication, net worth, knowledge, and
underwriter experience in financial and business matters, or
amount of assets under management (SRC,
4. Distribution by the corporation of Securities to its stock Sec. 10.1).
holders or other security holders as stock dividends or
distribution out of surplus Rationale behind exempt transactions
5. Sale of CApital stock of a corporation to its own Although the securities themselves must still be
stockholders exclusively wherein no commission or registered, the sale or issue need not be registered
remuneration is paid or given directly or indirectly in because the investors involved herein are considered as
connection with the sale of such capital stock highly sophisticated investors or specialized investors
and as such, have a greater risk tolerance or do not need
NOTE: Also, this sale must not involve an underwriter or strict protection from the Commission.
financial advisor
List of exempt transactions under SRC is not exclusive
6. Bonds or notes secured by a mortgage upon Real estate
or tangible personal property, where the entire mortgage The list of exempt transaction under the SRC is not
together with all the bonds or notes secured thereby are exclusive because under Section 10.2 of Republic Act
sold to a single purchaser at a single sale 8799, the Commission may exempt other transactions, if
it finds that the requirements of registration under the
7. Issue and delivery of any security in exchange for any Code is not necessary in the public interest or for the
other security of the same Issuer pursuant to the right of protection of the investors such as by reason of the small
conversion entitling the holder of the security amount involved or the limited character of the public
surrendered in exchange to make such conversion. offering.
8. Broker’s transactions executed upon customer’s

Orders, on any registered Exchange or other Trading
market

PROCEDURE FOR REGISTRATION OF SECURITIES the issuer, at its own expense, in two newspapers of
general circulation in the Philippines; once a week for two
Purpose for registration of securities consecutive weeks, or in such other manner as the
Commission by rule shall prescribe, reciting that:
Registration of securities allows the subsequent release of a. A registration statement for the sale of such
these securities to the investing public and serves to security has been filed, and
protect investors. b. The aforesaid registration statement as well as
the papers attached thereto is open to inspection
Procedure for registration of securities (A- POSE- at the Commission during business hours.
CsFP- RulE) c. Copies thereof, photo static or otherwise, shall be
furnished to interested parties at such reasonable
1. Application – All securities required to be registered charges as the Commission may prescribe.
shall be registered through the filing by issuer with SEC,
of a sworn registration statement with respect to such 9. RULing– Within 45 days after the date of the filing of
securities in such form and containing such information the registration statement, or by such later date to which
or documents as the Commission shall prescribe. the issuer has consented, the SEC shall declare the
registration statement effective or rejected, unless the
2. Prospectus – The registration statement shall include applicant is allowed to amend the registration statement.
any prospectus required or permitted to be delivered; The Commission shall enter an order declaring the
registration statement to be effective if it finds that the
3. Other information– The information required for the registration statement together with all the other papers
registration of any kind and all securities shall include, and documents attached thereto is on its face complete
among others, the effect of the securities’ issue on and that the requirements have been complied with. The
ownership, on the mix of ownership, especially foreign Commission may also impose such terms and conditions
and local ownership; as may be necessary or appropriate for the protection of
the investors.
4. Signatories to registration statement– The registration 10. Effectivity – Upon effectivity of the registration
statement shall be signed by the issuer’s: statement, the issuer shall state under oath in every
a. Executive officer prospectus that all registration requirements have been
b. Principal operating officer met and that all information are true and correct as
c. Principal financial officer represented by the issuer or the one making the
d. Comptroller statement.
e. Principal accounting officer
f. Corporate secretary or persons performing NOTE: Any untrue statement or fact of omission to state a
similar functions material fact required to be stated therein or necessary to
make the statement therein not misleading shall
NOTE: It shall be accompanied by a duly verified constitute fraud.
resolution of the Board of Directors of the issuer
corporation. Grounds for rejection of a registration statement and
revocation of the effectivity of a registration
5. Written consent of Expert – The written consent of the statement and the registration of a security [I-ICE]
expert named as having certified any part of the
registration statement or any document used in After due notice and hearing by issuing an order to such
connection therewith shall also be filed effect, the Commission may reject the registration
statement or revoke the registration of a security based
6. Certification by Selling stockholders– Where the on the following grounds:
registration statement includes shares to be sold by the
selling shareholders, a written certification by such 1. The Issuer: [REFaCo]
selling shareholders as to the accuracy of any part of the a. Has been judicially declared Insolvent
registration statement contributed by such selling b. Has violated any of the provisions of the Code,
shareholders shall also be filed the Rules promulgated pursuant thereto, or any
order of the SEC of which the issuer has notice
7. Fees – Upon filing of the registration statement, the in connection with the offering for which a
issuer shall pay to the SEC a fee of not more than one tenth registration statement has been filed
of one percent (1/10 of 1%) of the maximum aggregate c. Has been or is Engaged or is about to engage in
price at which such securities are proposed to be offered; fraudulent transactions
the SEC shall prescribe by rule, diminishing the fees in d. Has made any False or misleading
inverse proportion, the value of the aggregate price of the representation of material facts in any
offering prospectus concerning the issuer or its
securities; or
NOTE: This fee paid to the SEC is called a diminishing fee. e. Has failed to comply with any requirement that
the Commission may impose as a condition for
8. Notice and Publication – Notice of the filing of the registration of the security for which
registration statement shall be immediately published by registration statement has been filed.

MERCANTILE LAW
2. The registration statement is on its face Incomplete not be published, unless it shall appear that the order of
or inaccurate in any material respect or includes any suspension has been violated after notice.
untrue statement of a material fact or omits to state
a material fact required to be stated therein or However, if the Commission finds that the sale of the
necessary to make the statements therein not security will neither be fraudulent nor result in fraud, it
misleading. shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its
3. The issuer, any officer, director or Controlling person status as a registered security as of the date of such order
of the issuer, or any person performing similar of suspension.
functions, or any underwriter has been convicted by
a competent judicial or administrative body, upon PROHIBITIONS ON FRAUD, MANIPULATIONS AND
plea of guilty, or otherwise, of an offense involving INSIDER TRADING
moral turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent judicial or MANIPULATION OF SECURITY PRICES
administrative body for violations of securities,
commodities and other related laws. Acts which are considered manipulation of security
prices (2001 Bar)
4. Any issuer who refuses to permit the Examination to
be made by the Commission. The price of securities should be dictated by market
forces. It cannot be pegged or stabilized. The following
NOTE: The Commission may compel the production of all acts are considered as manipulation of security prices and
the books and papers of the issuer, and may administer are therefore prohibited:
oaths to, and examine the officers of such issuer or any
other person connected therewith as to its business and 1. Transactions intended to create a false or misleading
affairs. appearance of active trading in any listed security traded
in an Exchange or any other trading market:
Grounds for suspension of registration (I-FIRe) a. Wash Sale – is a transaction in which there is no
genuine change in the beneficial (or actual)
1. If any time, the Information contained in the ownership of a security
registration statement filed is or has become misleading, b. Matched Sale – is a change of ownership in the
incorrect, inadequate or incomplete in any material securities by entering an order for the purchase
respect; or or sale of a security with the knowledge that a
2. The sale or offering for sale of the security registered simultaneous order of substantially the same
thereunder may work or tend to work a Fraud; size, time, and price, for the sale or purchase of
3. Pending Investigation of the security registered, if the any such security, has or will be entered by or for
Commission deems it necessary, to ascertain whether the the same or different parties.
registration of such security should be revoked on any c. Similar transactions where there is no change
ground specified the SRC; of beneficial ownership.
4. Refusal to furnish information required by the
Commission (SRC, Sec. 15). 2. Effecting a series of transactions that will raise or
depress the price of securities to induce the purchase or
Grounds for suspension or cancellation of certificate sale of securities respectively, or creating active trading to
of registration (ROSe Co BRO) induce transactions through manipulative devices:
a. Marking the close – buying and selling of securities at
1. Fraud in procuring Registration the close of the market in an effort to alter the
2. Serious misrepresentation as to Objectives of closing price of these securities.
corporation b. Painting the tape – engaging in a series of
3. Refusal to comply with lawful order of SEC transactions effected by brokers in securities that are
4. COntinuous non-operation for at least 5 years reported publicly to give the impression or illusion
5. Failure to file By-laws within required period of activity or price movement in a security, which
6. Failure to file Reports may trick investors into trading in these securities
7. Other similar grounds (SRC, Sec. 6 [L]). because of the alleged trading volume or
indications of interest.
Order of suspension by the SEC requires a subsequent c. Squeezing the float – refers to taking advantage of a
hearing shortage of securities in the market by controlling
the demand side and exploiting market congestion
An order of suspension must be followed by a hearing to during such shortages in a way to create artificial
be conducted by the Commission. If the Commission prices. This prevents the actual market from
determines that the sale of any security should be determining the price of these securities.
revoked, it shall issue an order prohibiting the sale of such d. Hype and dump – engaging in buying activity at
security. Until the issuance of a final order, the suspension increasingly higher prices and then selling securities in
of the right to sell, though binding upon the persons the market at the higher prices.
notified thereof, shall be deemed confidential, and shall e. Boiler room operations – refers to activities that
involve the use of high pressure sale tactics such as

direct mail offers or telephone follow-ups to investors material fact necessary in order to make the statement
to promote purchase and sale of securities wherein made not misleading.
there is misrepresentation in these securities. This is a 3. Engaging in any act, transaction, practice or course of
fraudulent transaction that tricks investors into trading business, which operates as a fraud or deceit upon
in a fake market. any person.
f. Daisy chain – refers to a series of purchase and sales
of the same issue at successively higher prices by INSIDER TRADING
the same group of people with the purpose of
manipulating prices are drawing unsuspecting A purchase or sale made by an insider, or such insider’s
investors into the market leaving them defrauded of spouse or his relative by affinity or consanguinity within
their money and securities. the second degree, legitimate or common-law, shall be
g. Front-Running – is the prohibited practice of a presumed to be effected while in possession of material
broker-dealer executing its proprietary order before non-public information if transacted after such
the customer’s order for the same security. This information came into existence but prior to the public
violates the fiduciary responsibility by the broker- dissemination of such information, and lapse of
dealer to its customer accounts as well as placing the reasonable time for the market to absorb such
customer’s order first. information.
h. Churning – involves the excessive trading of
securities by a broker-dealer in a customer’s Insider
discretionary account in order to generate
commissions, without regard to the customer’s A person who is in possession of corporate material
investment objective. information not generally available to the public.
3. Circulating or disseminating information that the price Who may be an insider (1994, 1995, 2004, 2008 Bar)
of any security listed in an Exchange will or is likely to rise
or fall because of manipulative market operations of any 1. The issuer
one or more persons conducted for the purpose of raising 2. A director or officer (or person performing similar
or depressing the price of that security for the purpose of functions) of, or a person controlling the issuer
inducing the purchase or sale of such security. 3. A person whose relationship or former relationship to
the issuer gives or gave him access to material
4. To make false or misleading statement with respect to information about the issuer or the security that is not
any material fact, which he knew or had reasonable generally available to the public
ground to believe was so false or misleading, for the 4. A government employee, or director , or officer of an
purpose of inducing the purchase or sale of any security exchange, clearing agency and/or self-regulatory
listed or traded in an Exchange. organization who has access to material information
about an issuer or a security that is not generally available
5. To effect, either alone or with others, any series of to the public; or
transactions for the purchase and/or sale of any security 5. Constructive Insider – A person who learns such
traded in an exchange for the purpose of pegging, fixing or information by a communication from any of the
stabilizing the price of such security, unless otherwise foregoing insiders (SRC, Sec. 3.8).
allowed by the Code or by rules of the Commission.
Other prohibited acts in an insider trading
SHORT SALES
1. For an insider to communicate material non-public
It is the selling of shares which the seller does not actually information about the issuer or the security to any person
own or possess and therefore he cannot, himself, supply who by virtue of the communication thereby becomes an
the delivery. Short selling leads to speculation of price of insider, where the original insider communicating the
securities. information knows or has reason to believe that such
person will likely buy or sell a security of the issuer while
Short swing transaction in possession of such information;
It is a transaction by the director, issuer or any person 2. When a tender offer has commenced or is about to
controlling the issuer (stockholder owning 10% of the commence, it is unlawful for any person, other than the
stocks), whereby such person buys and sells securities tender offeror, who is in possession of material non-
within six (6) months. public information relating to such tender offer to buy or
sell the securities of the issuer that are sought or to be
FRAUDULENT TRANSACTIONS sought by such tender offer, if such person knows or has
reason to believe that the information is non-public and
The following are considered as fraudulent transactions: has been acquired directly or indirectly from the tender
1. Employment of any device, scheme or artifice to offer, or those acting on its behalf, the issuer of the
defraud investors. securities sought or to be sought by such tender offer, or
2. Obtaining money or property by means of any untrue any insider of such issuer;
statement of a material fact or any omission to state a

MERCANTILE LAW
3. When a tender offer has commenced or is about to to material information about the issuer or security that
commence, it is also unlawful for any tender offeror, or is not generally available to the public. The said
those acting on its behalf, the issuer of securities covered employees because of their relationship with the issuer,
by such tender offer, and any insider, to communicate Grand Gas Corporation as their printer, where able to
material non-public information to any person relating to obtain material information. They too became liable for
the tender offer which would likely result in violation of insider trading when they bought the shares in the
prohibition of the insider from trading. company and at the same time possessing undisclosed
material information
Material non-public information (1995 Bar)
Q: In insider trading, what is a fact of special
1. Information about the issuer or the security has not significance? (1991 Bar)
been generally disclosed to the public and would likely
affect the market price of the security after being A: It is in addition to being material, such fact as would
disseminated to the public and the lapse of a reasonable likely, on being made generally available, to affect the
time for the market to absorb the information; or market price of a security to a significant extent, or which
a reasonable person would consider as especially
2. Would be considered by a reasonable person important important under the circumstances in determining his
under the circumstances in determining his course of course of action in the light of such factors as the degree
action whether to buy, sell or hold a security (SRC, Sec. of its specificity, the extent of its difference from
27.2). information generally available previously, and its nature
and reliability (RSA, Sec. 30 [c]).
Q: Grand Gas Corporation, a publicly listed company,
discovered after extensive drilling a rich deposit of Q: You are a member of the legal staff of a law firm
natural gas along the coast of Antique. For five (5) doing corporate and securities work for Coco
months, the company did not disclose the discovery Products Inc., a company with unique products
so that it could quietly and cheaply acquire derived from coconuts and whose shares are traded
neighboring land and secure mining rights to the in the Philippine Stock Exchange. A partner in the law
land. Between the discovery and its disclosure of the firm, Atty. Buenexito, to whom you report, is the
information to the Securities and Exchange Corporate Secretary of Coco Products. You have long
Commission, all the directors and key officers of the been investing in Coco Products stocks even before
company bought shares in the company at very low you became a lawyer.
prices. After disclosure, the price of the shares went
up. The directors and officers sold their shares at While working with Atty. Buenexito on another file,
huge profits. he accidentally gave you the Coco Products file
containing the company's planned corporate
a. What provision of the Securities Regulation Code financial rehabilitation. While you knew you had the
(SRC) did they violate, if any? Explain. wrong file, your curiosity prevailed and you browsed
b. Assuming that the employees of the through the file before returning it. Thus, you learned
establishment handling the printing work of Grand that a petition for financial rehabilitation is
Gas Corporation saw the exploration reports which imminent, as the company could no longer meet its
were mistakenly sent to their establishment together obligations as they fell due.
with other materials to be printed. They too bought
shares in the company at low prices and later sold Soon after, your mother is rushed to the hospital for
them at huge profits. Will they be liable for violation an emergency operation, and you have to raise money
of the SRC? Why? (2008 Bar) for her hospital bills. An immediate option for you is
to sell your Coco Products shares. The sale would be
A: very timely because the price of the company's stocks
a) The directors and officers of the corporation violated are still high. Would you sell the shares to raise the
Sec. 27 of the Securities and Regulation Code on the needed funds for your mother's hospitalization? Take
prohibition on insider’s trading. Sec. 27.1 of the Securities into account legal and ethical considerations (2013
and Regulation Code provides that it shall be unlawful for Bar)
an insider to sell or buy a security of the issuer, while in
possession of material information with respect to the A: The sale of the shares does not constitute insider
issuer or the security that is not generally available to the trading. Although Atty. Buenexito, as corporate secretary
public. In this case, the directors and officers falls squarely of Coco Products, Inc., was an insider, it did not obtain the
into the definition of an insider under Sec. 3.8 of the information regarding the planned corporate
Securities and Regulation Code. Thus, the directors and rehabilitation by communication from him. He just
officers are liable for violating the prohibition on Insider accidentally gave the wrong file (Section 3.8 of Security
trading. Regulations Code).
b) The said employees will be also liable for engaging in It would be unethical to sell the shares. Rule 1.01 of the
insider trading. Sec. 3.8 of the Securities and Regulation Code of Professional Responsibility provides, “A lawyer
Code, an insider is also a person whose relationship or shall not engage in unlawful, dishonest, immoral or
former relationship to the issuer gives or gave him access deceitful conduct.”

A lawyer should not only refrain from performing Purpose of tender offer
unlawful acts. He should also desist from engaging in
unfair deceitful conduct to conceal form the buyer of the Tender offer is in place to protect the interest of minority
shares of the planned corporate rehabilitation. stockholders of a target company against any scheme that
dilutes the share value of their investments. It affords
Possible defenses against insider trading such minority shareholders the opportunity to withdraw
or exit from the company under reasonable terms or a
1. That the information was acquired not on account of his chance to sell their shares at the same price as those of the
relationship with the issuer; or majority stockholders.
2. That he disclosed the information to the other party
who knew or had the reason to believe he knew the Public company
material information;
3. That the purchaser or seller was not aware of the The following are considerer as public company:
material, non-public information at the time of the 1. Those listed on an exchange; or
purchase or the sale. 2. Those with assets of at least PHP 50M and having 200
shareholders owning at least 100 shares each.
PROTECTION OF INVESTORS 3. Those companies that have an effective registration
statement under Section 12 of the SRC.
Provisions in the SRC intended to protect the
investors Mandatory tender offer (2002 Bar)
1. Tender Offer Rule Tender offer is required to be made in the following

2. Rules on Proxy Solicitation instances:
3. Disclosure Rule 1. Any person or group of persons acting in concert who
intends to acquire 35% or more of any class of equity
TENDER OFFER RULE shares in a public company shall disclose such intention
and contemporaneously make a tender offer for the
Tender offer (2002, 2010 Bar) percent sought to all shareholders of such class.
It is the publicly declared intention by a person alone or NOTE: In the event that the tender offer is
in concert with others to buy securities of a public oversubscribed, the aggregate amount of securities to be
corporation. It is an invitation by the acquirer of shares of acquired at the close of such tender offer shall be
a company for other stockholders to tender their shares proportionately distributed across both selling
to the acquirer so that they may sell their shares in the shareholder with whom the acquirer may have been in
same price and conditions as the previously acquired private negotiations and the minority shareholders.
shares.
2. Any person or group of persons acting in concert who
It is given to all stockholders by: intends to acquire 35% or more of any class of equity
1. Filing with the SEC a declaration to that effect, and shares of a public company (corporation with assets of at
paying the filing fee. least P 50,000,000.00 and having 200 or more
2. Furnishing the issuer a statement containing the stockholders with at least 100 shares for each stock
information required of the issuers as SEC may prescribe, holder) pursuant to an agreement made between or
including subsequent or additional materials. among the person or group of persons and one or more
3. Publishing all requests or invitations for tender, or sellers.
materials making a tender offer or requesting or inviting
letters of such security. 3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of a
Q: What is tender offer? (2002 Bar) public company in one or more transactions within a
period of 12 months shall be required to make a tender
A: Tender offer means a publicly announced intention by offer to all holders of such class for the number of shares
a person acting alone or in concert with other persons to so acquired within the same period.
acquire equity securities of a public company. It is also an
offer by the acquiring person to stockholders of a public 4. If any acquisition of even less than 35% would result in
company for them to tender their shares therein on the ownership of over 51% of the total outstanding equity
terms specified in the offer. Tender offer is in place to securities of a public company, the acquirer shall be
protect their minority shareholders against any scheme required to make a tender offer under this Rule for all the
that dilutes the share value of any investments. It gives the outstanding equity securities to all remaining
minority shareholders the chance to exit the company stockholders of the said company at a price supported by
under reasonable terms, giving them opportunity to sell a fairness opinion provided by an independent financial
their shares at the same price as those of the majority advisor or equivalent third party. The acquirer in such
shareholders (CEMCO HOLDINGS, INC. v. National Life tender offer shall be required to accept any and all
Insurance Company, Inc. G.R. No. 171815, August 7, 2007). securities thus tendered.

MERCANTILE LAW
5. In any transaction covered by this Rule, the sale of 2. At least (2) business days prior to the date of the
shares pursuant to the private transaction shall not be commencement of the tender offer:
completed prior to the closing and completion of the a. File with the SEC a required form for tender offer
tender offer. Transactions with any of the seller/s of including all exhibits thereto (and any amendments
significant block of shares with whom the acquirers may thereto), with the prescribed filing fees; and
have been in private negotiation shall close at the same b. Hand deliver a copy of such form including all
time and upon the same terms as the tender offer made to exhibits (and amendments thereto) to the target
the public under this Rule. For paragraph (2)(B), the last company and its principal executive office and to
sale meeting the threshold shall not be consummated each Exchange where such class of target company’s
until the closing and completion of the tender offer. securities are listed for trading.
Coverage of the application of tender offer 3. Report the results of the tender offer by filing with the
SEC, not later than ten (10) calendar days after the
The mandatory tender offer rule covers not only direct termination of the tender offer, copies of the final
acquisition but also indirect acquisition or “any type of amendments to the form (Sundiang Sr. & Aquino, 2014).
acquisition.” The legislative intent of Section 19 of the
Code is to regulate activities relating to acquisition of Unlawful and prohibited acts relating to tender offers
control of the listed company and for the purpose of
protecting the minority stockholders of a listed It shall be unlawful for any person to:
corporation. Whatever may be the method by which
control of a public company is obtained, either through 1. Make any untrue statement of a material fact or omit to
the direct purchase of its stocks or through an indirect state any material fact necessary in order to make
means, mandatory tender offer applies. What is decisive statements made, in the light of the circumstances under
is the determination of the power of control. The which they are made, not misleading, or
legislative intent behind the tender offer rule makes clear
that the type of activity intended to be regulated is the 2. Engage in any fraudulent, deceptive, or manipulative
acquisition of control of the listed company through the acts or practices, in connection with any tender offer or
purchase of shares. Control may be effected through a request or invitation for tenders, or any solicitation of
direct and indirect acquisition of stock, and when this security holders in opposition to or in favor of any such
takes place, irrespective of the means, a tender offer must offer, request, or invitation.
occur (Cemco Holdings v. National Life Insurance Company,
G.R. No. 171815, August 7, 2007). Margin trading (2009 Bar)
Illustration of the application of tender offer in direct A kind of trading that allows a broker to advance for the
acquisition: customer/investor part of the purchase price of the
security and to keep the same security as collateral for
The shares of stock of X company are owned by A (19%), such advance.
B (16%), C (20%), D (14%), E (31%). If Aljon buys the
shares of A (19%), the transaction is not subject to Margin allowance standard
mandatory tender offer. However, if Aljon buys the shares
of A (19%) and the shares of B (16%), then tender offer GR: The credit extended must be for an amount not
must be made because the total shares bought by Aljon is greater than, whichever is higher of:
35%.
1. 65% of the current market price of the security; or
Illustration of the application of tender offer in indirect 2. 100% of the lowest market price during the preceding
acquisition: 36 calendar months, but not more than 75% of the current
market price.
The shares of stock of X company are owned by A (16%),
B (19%), C (15%), D (18%), and Corporation E (32%) XPN: The Monetary Board may increase or decrease the
respectively. The shares of Corporation E are owned by above percentages, in order to achieve the objectives of
Kenneth (50%), King (25%) and Jacq (25%). If Aljon the Government with due regard for promotion of the
acquires the shares of B (19%), the transaction is not economy and prevention of the use of excessive credit.
subject to mandatory tender offer because it did not reach
the 35% threshold limit required by law. However, if Purposes of the margin requirements
Aljon acquires the shares of B (19%) and the shares of
Kenneth in Corporation E (50% of 32 is 16%), then, They are primarily intended to achieve a macroeconomic
tender offer must be made because the total shares purpose – the protection of the overall economy from
bought by Aljon directly and indirectly is 35%. excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.
Obligations of person making a tender offer
Burden of compliance with margin requirements
1. Make an announcement of his intention in a newspaper
of general circulation, prior to the commencement of the The brokers and dealers have the burden of compliance
offer; with margin requirements.

Note: In securities trading, the brokers are essentially the DISCLOSURE RULE
counterparties to the stock transactions at the Exchange.
Since the principals of the broker are generally Beginning of disclosure requirement
undisclosed, the broker is personally liable for the
contracts thus made. Brokers have a right to be It begins at registration and continues periodically
reimbursed for sums advanced by them with the express through the regular filing of periodic report.
or implied authorization of the principal (Abacus
Securities Corporation v. Ampil, G.R. No. 160016, February Suspension of disclosure
27, 2006).
It may be suspended for any fiscal year after the year such
RULES ON PROXY SOLICITATION registration became effective if such issuer as of the first
day of any such fiscal year, has less than 100 shareholders
Requisite for valid proxy solicitation of such class of securities and it notifies the Commission
of such (SRC IRR, Rule 17.1).
1. It must be in writing
2. It must be signed by the stockholder or his duly End of disclosure requirement
authorized representative
3. It must be filed before the scheduled meeting with the GR: Disclosure does not end because once an issuer
corporate secretary (SRC, Sec. 20). becomes a reporting company, it remains as such even
when the registration of securities has been revoked (SRC
NOTE: For public companies, the period to submit proxy IRR, Rule 13).
solicitation should not be later than five (5) days before
the meeting unless the by-laws provides for a longer XPN: If the primary license is revoked.
period.
XPN to the XPN: In the case of hospitals and educational
Unless otherwise provided in the proxy, the proxy shall be institutions if the primary license is revoked, the
valid only for the meeting for which it is intended. No disclosure requirement still continues because of public
proxy shall be valid and effective for a period longer than interest.
5 years at one time.
Reportorial requirements
Rules on proxy solicitation with regard to broker or
dealer 1. Issuers:
a) Shall file with the Commission within 135
1. No broker or dealer shall give any proxy, consent or days, after the end of the issuer’s fiscal year, or such
authorization, in respect of any security carried for the other time as the Commission may prescribe, an
account of a customer, to a person other than the annual report which shall include among others, a
customer, without the express written authorization of balance sheet, profit and loss statement and
such customer. statement of cash flows, for such last fiscal year,
2. A broker or dealer who holds or acquires the proxy for certified by an independent certified public
at least 10% or such percentage as the Commission may accountant, and a management discussion and
prescribe of the outstanding share of the issuer, shall analysis of results of operations; and
submit a report identifying the beneficial owner within 10 b) Such other periodical reports for interim fiscal
days after such acquisition, for its own account or periods and current reports on significant
customer, to the issuer of the security, to the Exchange developments of the issuer as the Commission may
where the security is traded and to the Commission. (SRC, prescribe as necessary to keep current
Sec. 20) information on the operation of the business and
financial condition of the issuer (SRC, Sec. 17).
Jurisdiction over violations of the SEC rules on proxy
solicitation 2. Types of issuers required to file reports
a) An issuer which has sold a class of its securities
The power of the SEC to investigation violations of its pursuant to a registration statement under Section
rules on proxy solicitation is unquestioned when proxies 12 of the SRC;
are obtained to vote on matters unrelated to the cases b) An issuer with a class of securities listed for
enumerated under Section 5 of PD 902-A. However, when trading in an Exchange;
proxies are solicited in relation to the election of c) An issuer with assets of at least PHP 50M and
corporate directors, the resulting controversy, even if it having 200 or more holders each holding at least
ostensibly raised the violation of the SEC rules on proxy 100 shares
solicitation, should be properly seen as an election
controversy within the jurisdiction of the RTC special 3. Persons acquiring securities - If the issuer is one that has
commercial court (GSIS vs. CA, G.R. Nos. 183905 and to make a report, any person who acquires directly or
184275, April 16, 2009). indirectly the beneficial ownership of more than 5% of
such class, or in excess of such lesser per centum as the
Commission by rule may prescribe, shall, within 10 days
after such acquisition or such reasonable time as fixed by

MERCANTILE LAW
the Commission, submit to the issuer of the security, to since Union Bank and its dealings would be totally beyond
the Exchange where the security is traded, and to the the reach of respondent Commission and the investing
Commission a sworn statement containing: public (Union Bank of the Philippines v. SEC, G.R. No.
a) His personal circumstances 138949, June 6, 2001).
b) The nature of such beneficial ownership
c) If the purpose was to acquire control of the CIVIL LIABILITY
business, any plans the recipient may have
affecting a major change in the business Grounds for civil liability to arise
d) The number of shares beneficially owned, and the
number of shares for which there is a right to 1. False Registration Statement (SRC, Sec. 56)
acquire 2. Fraud with connection to prospectus, communications
e) granted to such person or his associates and reports (SRC, Sec. 57)
f) Information as to any agreement with a third 3. Fraud in connection with security transactions (SRC,
person regarding the securities (SRC, Sec. 18). Sec. 58)
4. Manipulation of security prices (SRC , Sec. 60)
4. Persons that has beneficial ownership of 10% or more - 5. Insider trading (SRC, Sec. 61)
Every person who is directly or indirectly the beneficial
owner of more than 10% of any class of any equity Persons that may be liable in case of false registration
security, or who is director or an officer of the issuer of statement
such security, shall file:
a) Statement with the SEC and, if such security is 1. The issuer and every person who signed the
listed for trading on an Exchange, also with the registration statement
Exchange, of the amount of all equity securities
of such issuer of which he is the beneficial 2. Every person who was a director of, or any other person
owner, performing similar functions, or a partner in, the issuer at
b) Within 10 days after the close of each calendar the time of the filing of the registration statement or any
month, if there is a change in ownership during part, supplement or amendment thereof with respect to
such month, a statement indicating his which his liability is asserted
ownership at the close of the calendar month
and such changes in his ownership as have 3. Every person who is named in the registration
occurred during such calendar month (SRC, Sec. statement as being or about to become a director of, or a
23). person performing similar functions, or a partner in, the
issuer and whose written consent thereto is filed with the
Q: Union Bank, through its General Counsel and registration statement
Corporate Secretary, sought the opinion of the SEC as
to the applicability and coverage of the Full Material 4. Every auditor or auditing firm named as having
Disclosure Rule on banks, contending that said rules, certified any financial statements used in connection with
in effect, amend Section 5 (a) (3) of the Revised the registration statement or prospectus
Securities Act which exempts securities issued or
guaranteed by banking institutions from the 5. Every person who, with his written consent, which shall
registration requirement. The SEC, in reply, informed be filed with the registration statement, has been named
Union Bank that while the requirements of as having prepared or certified any part of the registration
registration do not apply to securities of banks which statement, or as having prepared or certified any report
are exempt under Section 5(a) (3) of the Revised or valuation which is used in connection with the
Securities Act, however, banks with a class of registration statement, with respect to the statement,
securities listed for trading on the Philippine Stock report, or valuation, which purports to have been
Exchange, Inc. are covered by certain Revised prepared or certified by him
Securities Act Rules governing the filing of various
reports with SEC. The CA affirmed the SEC. Is Union 6. Every selling shareholder who contributed to and
Bank required to comply with SEC’s full disclosure certified as to the accuracy of a portion of the registration
rules? statement, with respect to that portion of the registration
statement which purports to have been contributed by
A: Yes. Union Bank is required to comply with SEC’s full him
disclosure rule. The exemption from the registration
requirement enjoyed by Union Bank does not necessarily 7. Every underwriter with respect to such security
connote that it isexempted from the other reportorial
requirements. Having confined the exemption enjoyed by Persons liable with regard to fraud with connection to
Union Bank merely to the initial requirement of prospectus, communications and reports
registration of securities for public offering, and not to the
subsequent filing of various periodic reports, the SEC, as Any person who offers to sells or sells
the regulatory agency, is able to exercise its power of 1. In violation any provisions on registration of securities;
supervision and control over corporations and over the and
securities market as a whole. Otherwise, the objectives of
the `Full Material Disclosure’ policy would be defeated

2. By the use of any means or instruments of 3. Malevolence or
transportation or communication, by means of a 4. Wantonness in the violation of SRC or the Rules and
prospectus or other written or oral communication. Regulations promulgated by the Commission
Persons liable with regard to fraud in connection with SECURITIES AND EXCHANGE COMMISSION
security transactions
ADMINISTRATIVE AND REGULATORY JURISDICTION
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26 of SRC. Q: Does the SEC have the power to recall and cancel a
stock and transfer book which was erroneously
Persons liable for the manipulation of security prices registered.
Any person who willfully participates in any act or A: Yes. Considering that the SEC, after due notice and
transaction in violation of Section 24 shall be liable to any hearing, has the regulatory power to revoke the corporate
person who shall purchase or sell any security at a price franchise -- from which a corporation owes its legal
which was affected by such act or transaction. existence -- the SEC must likewise have the lesser power
of merely recalling and canceling a STB that was
Persons liable with regard to insider trading erroneously registered (Provident International Resources
Corporation vs. Venus, G.R. No. 167041, June 17, 2008)
Any person in case of legal tender who:
1. Purchases or sells a security while in possession of Q: Does the SEC’s jurisdiction extend to the
material information not generally available to the public. liquidation of a corporation?
2. Communicates material non-public information.
A: SEC’s jurisdiction does not extend to the liquidation of
a corporation. While the SEC has jurisdiction to order the
NOTE: The liability of the persons enumerated shall be dissolution of a corporation, jurisdiction over the
jointly and severally. liquidation of the corporation now pertains to the
appropriate regional trial courts. This is the correct
Prescriptive period for filing of action procedure because the liquidation of a corporation
requires the settlement of claims for and against the
Two years after the discovery of the facts constituting the corporation, which clearly falls under the jurisdiction of
cause of action and within five years after such cause of the regular courts. The trial court is in the best position to
action accrued convene all the creditors of the corporation, ascertain
their claims, and determine their preferences. (Bank of the
Jurisdiction over civil liabilities Philippine Islands, as successor-in-interest of Far East Bank
and Trust Company vs. Eduardo Hong, doing business under
The court which has jurisdiction over cases involving civil the name and style Super Line Printing Press and the Court
liabilities is the Regional Trial Court. of Appeals, G.R. No. 161771, February 15, 2012)
Q: In civil liabilities, is it required that the action be Violation of the SRC

filed first with the SEC before filing the same with the
RTC? Q: What are the elements of the violation of Sec. 28 of
the SRC?
A: No. As ruled by the Court that “all complaints for any
violation of the [SRC] x x x should be filed with the SEC.” It A: The violation of Sec. 28 of the SRC has the following
should be construed as to apply only to criminal and not elements:
to civil suits such as petitioners’ complaint. It is apparent a. engaging in the business of buying and selling of
that the SRC provisions governing criminal suits are securities as a broker or dealer;
separate and distinct from those which pertain to civil b. acting as salesman; or
suits (Pua vs. Citibank, N. A., G.R. No. 180064, September 16, c. acting as associated person of any broker or dealer
2013). unless registered as such with the SEC.
Limitation for awarding damages Thus, a person is liable for violating Sec. 28 of the SRC
where acting as a broker, dealer or salesman, is in the
1. The court can award not exceeding triple the amount of employ of a corporation which sold or offered for sale
the transaction plus actual damage unregistered securities in the Philippines. (Securities and
2. The court is also authorized to award attorney’s fees Exchange Commission vs. Santos, G.R. No. 195542, March
not exceeding 30% of the award 19, 2014)
Award exemplary damages When it is mentioned in paragraph 4(c) of A.M. No. 04-9-
07-SC that in case a petition appealing or assailing the
The court may award exemplary damages in cases of: decision and/or final order is filed directly with the Court
1. Bad Faith of Appeals within the reglementary period, petition shall
2. Fraud be considered a petition for review under Rule 3, it is

MERCANTILE LAW
presumed that the mode of appeal resorted to was an INTRA-CORPORATE CONTROVERSIES
ordinary appeal and not a special civil action. (China (2006, 2009 Bar)
Banking Corporation vs. Cebu Printing and Packaging
Corporation, G.R. No. 172880, August 11, 2010) An intra-corporate controversy is one which arises
between a stockholder and the corporation and pertains
Under Sec. 62 of the SRC, no action shall be maintained to to the enforcement of the parties’ correlative rights and
enforce any liability created under Sec. 56 of the SRC and obligations under the Corporation Code and the internal
Sec. 57 unless brought within 2 years after discovery of and intra-corporate regulatory rules of the corporation
the untrue statement or omission of after the violation (Real vs. Sangu Philippines Inc., G.R. No. 168757, January
upon which it is based but not more than 5 years after the 19, 2011).
security was bona fide offered to the public or more than
5 years after the security was bona fide offered to the Q: Is the Securities and Exchange Commission the
public or more than 5 years after the sale, respectively. venue for actions involving intra-corporate
controversies? (2006, 2009 Bar)
Under Sec. 73 of the SRC, violation of its provisions is
punishable by imprisonment of not less than seven years A: No. The venue for actions involving intra-corporate
nor more than 21 years. Applying ACT no. 3326, criminal controversies is now under the jurisdiction of the RTC
prosecution for violations of SRC prescribes in 12 years. acting as a special commercial court. (Sec. 5, A.M. NO. 01-
(Citibank N.A. vs. Tanco-Gabaldon, et.al., G.R. No. 198444, 2-04-SC)
September 4, 2013)
TESTS TO DETERMINE INTRA-CORPORATE
Issuance by the SEC of the cease and desist order CONTROVERSY
There are three distinct bases for the issuance by the SEC 1. Relationship Test- No doubt exists that the parties
of the CDO: were members of the same association, but this
conclusion must still be supplemented by the
1. The first, allocated by Section 5(i), is predicated on a controversy test before it may be considered as an
necessity to prevent fraud or injury to the investing intra-corporate dispute.
public. No other requisite or detail is tied to this CDO
authorized under Section 5(i). 2. Controversy Test- The dispute must be rooted in the
existence of an intra-corporate relationship, and
2. The second basis, found in Section 53.3, involves a must refer to the enforcement of the parties’
determination by the SEC that any person has engaged or correlative rights and obligations under the
is about to engage in any act or practice constituting a Corporation Code, as well as the internal and intra-
violation of any provision of this Code, any rule, regulation corporate regulatory rules of the corporation, in
or order thereunder, or any rule of an Exchange, order to be an intra-corporate dispute. (Gulfo vs.
registered securities association, clearing agency or other Ancheta, G.R. No. 175301, August 15, 2012)
self-regulatory organization. The provision additionally
requires a finding that there is a reasonable likelihood of Doctrine of Primary Jurisdiction
continuing [or engaging in] further or future violations by
such person. The maximum duration of the CDO issued Under the doctrine of primary jurisdiction, courts will not
under Section 53.3 is ten (10) days. determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the
3. The third basis for the issuance of a CDO is Section question demands the exercise of sound administrative
64. This CDO is founded on a determination of an act or discretion within the jurisdiction of the administrative
practice, which unless restrained, will operate as a fraud tribunal. The Securities Regulation Code is a special law.
on investors or is otherwise likely to cause grave or Its enforcement is particularly vested in the SEC. Hence,
irreparable injury or prejudice to the investing public. all complaints for any violation of the Code and its
Section 64.1 plainly provides three segregate instances implementing rules and regulations should be filed with
upon which the SEC may issue the CDO under this SEC. Where the complaint is criminal in nature, SEC shall
provision: (1) after proper investigation or verification, indorse the complaint to the DOJ for preliminary
(2) motu proprio, or (3) upon verified complaint by any investigation and prosecution. (Baviera vs. Standard
aggrieved party. While no lifetime is expressly specified Chartered Bank, G.R. No. 170602, February 8, 2007)
for the CDO under Section 64, the respondent to the CDO
may file a formal request for the lifting thereof, which the Q: DC is a unit owner of Medici Condominium located
SEC must hear within fifteen (15) days from filing and in Pasig City. On September 7, 2011, Medici
decide within ten (10) days from the hearing. Condominium Corp. (Medici) demanded from DC
payment for alleged unpaid association dues and
A singular CDO could not be founded on Section 5.1, assessments amounting to P195,000.00. DC disputed
Section 53.3 and Section 64 collectively. At the very least, the claim, saying that he paid all dues as shown by the
the CDO under Section 53.3 and under Section 64 have fact that he was previously elected as Director and
their respective requisites and terms (GSIS vs. CA, G.R. Nos. President of Medici. Medici, on the other hand,
183905 and 184275, April 16, 2009). claimed that DC’s obligation was a carry-over of his
obligations to the condominium developer, Medici

Construction Corporation. Consequently, DC was of X Co invited you to enlighten them on these
prevented from exercising his right to vote and be questions; viz:
voted for during the 2011 election of Medici’s Board
of Directors. This prompted DC to file a complaint for a. If a suit were to be initiated in order to resolve the
damages before the Special Commercial Court of controversy between Pedro and Jose, should the
Pasig City. Medici filed a motion to dismiss on the matter be submitted to the SEC or to the regular
ground that the court has no jurisdiction over the courts?
intra-corporate dispute which the Housing and Land b. Between Jose and Pedro, whom should the
Use Regulatory Board (HLURB) has exclusive corporation so recognize as the rightful stockholder?
jurisdiction over. Is Medici correct? (2014 Bar) How would you respond to the above queries? (1997
Bar)
A: Medici is incorrect. Where a member of the
condominium corporation was denied the right to vote for A:
alleged non-payment of condominium dues and a. The jurisdiction of the matter belongs to the regular
assessment, the action although denominated as one for courts. Under section 5.2 of the SRC as amended, the
damages is an intra-corporate controversy and therefore, jurisdiction for intra-corporate controversies was
falling within the jurisdiction of the regional trial court transferred from the SEC to the regular courts.
designated as a special commercial court.
b. The corporation should recognize both Pedro and Jose
In determining whether a dispute constitutes an intra- as rightful stockholders if there is no over-issuance of
corporate controversy, the Court uses two tests, namely, shares resulting from the two transactions without
the relationship test and the nature of the controversy prejudice to the right of the corporation to claim against
test. Applying these two tests, the present case is indeed Juan for the value of the shares sold to Jose.
an intra-corporate controversy.
Q: Because of disagreement with the BOD and a threat
Anent the first test, it is admitted that Medici is a by the BOD to expel her for misconduct and
condominium corporation. On the other hand, DC is a inefficiency, Carissa offered in writing to resign as
member of the condominium corporation. President and member of the BOD, and to sell to the
company all her shares therein for P300,000.00 Her
As regards the second test, the cases principally dwells offer to resign was ―effective as soon as my shares are
on the propriety of the assessment made by Medici fully paid. At its meeting, the BOD accepted Carissa‘s
against DC as well as the validity of the act of preventing resignation, approved her offer to sell back her
the latter from participating in the election of the former’s shares of stock to the company, and promised to buy
Boar d of Directors. To be sure, this action partakes of the the stocks on a staggered basis. Carissa was informed
nature of intra-corporate controversy. of the BOD Resolution in a letter-agreement to which
she affixed her consent. The Company‘s new
Also, while R.A. No. 9904 empowers the HLURB to hear President singed the promissory note. After payment
and decide inter-association and/or intra-associations, P100,000 the company defaulted in paying the
the same cannot be applied in the present case as it balance of P200,000. Carissa wants to sue the
involves a controversy between a condominium unit Company to collect the balance. If you were retained
owner and a condominium corporation. While the term by Carissa as her lawyer, where will you file the suit?
association as defined in the law covers homeowners’ A) Labor Arbiter; b) RTC; or c) SEC?
associations of other residential real property which is
broad enough to cover a condominium corporation, it A: RTC has jurisdiction. Under section 5.2 of the SRC, the
does not seem to be the legislative intent (Medical Plaza commission’s jurisdiction over all cases enumerated
Makati Condominium Corporation vs. Robert Cullen, G.R. under section 5 of Presidential Decree No. 902-A is hereby
No. 18141, November 11, 2013). transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the
Q: Juan was a stockholder of X Co. He owned a total of Supreme Court in the exercise of its authority may
500 shares evidenced by Cert of Stock No 1001. He designate the Regional Trial Court branches that shall
sold the shares to Pedro. After getting paid, Juan exercise jurisdiction over these cases. The Commission
indorsed and delivered said Certificate of Stock No shall retain jurisdiction over pending cases involving
1001 to Pedro. The following day, Juan went to the intra-corporate disputes submitted for final resolution
offices of the corporation and claimed that his which should be resolved within 1 year from the
Certificate of Stock No 1001 was lost and that, despite enactment of this Code. The commission shall retain
diligent efforts, the certificate could not be located. jurisdiction over pending suspension of
The formalities prescribed by law for the payments/rehabilitation cases filed as of 30 June 2000
replacement of the ―lost certificate were complied until finally disposed.
with. Eventually X Co issued in substitution of the
―lost certificate, Cert of Stock No 2002. Juan forthwith Q: In 1970, Magno joined AMD Co as a Junior
transferred for valuable consideration the new Accountant. He steadily rose from the ranks until he
certificate to Jose who knew nothing of the previous became AMD‘s Executive VP. Subsequently, however
sale to Pedro. In time, the corporation was confronted because of his involvement in certain anomalies, the
with the conflicting claims of Jose and Pedro. The BOD AMD BOD considered him resigned from the company

MERCANTILE LAW
due to loss of confidence. Aggrieved, Magno filed a A: When the officer claiming to have been illegally
complaint in the SEC questioning the validity of his dismissed is an ordinary employee of the corporation,
termination, and seeking reinstatement to his former jurisdiction over the same lies with the labor arbiter. It is
position, with backwages, vacation and sick leave only when the officer claiming to have been illegally
benefits, 13th month pay and Christmas bonus, plus dismissed is classified as a corporate officer that the issue
moral and exemplary damages, attorney‘s fees and is deemed intra-corporate dispute which falls within the
costs. AMD filed a motion to dismiss, arguing that the jurisdiction of the trial court designated as special
SEC has no jurisdiction over cases of illegal dismissal, commercial court (Cosare v. Bradcom Asia, G.R. No.
and has no power to award damages. Should the 201298, February 5, 2014).
motion to dismiss be granted? Explain. (1996, 1997
Bar) Q: Under what jurisdiction does an intra-corporate
dispute involving a corporation under sequestration
A: RTC has jurisdiction. Under section 5.2 of the SRC, the of the PCGG fall?
commission’s jurisdiction over all cases enumerated
under section 5 of Presidential Decree No. 902-A is hereby A: An intra-corporate dispute involving a corporation
transferred to the Courts of general jurisdiction or the under sequestration of the PCGG falls under the
appropriate Regional Trial Court: Provided, That the jurisdiction of the RTC, not the Sandiganbayan. (Philippine
Supreme Court in the exercise of its authority may Overseas Telecommunications Corporation v. Africa, et. al.,
designate the Regional Trial Court branches that shall G.R. No. 184622, July 3, 2013)
exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving Q: Is the office of Vice President for Finance and
intra-corporate disputes submitted for final resolution Administration created by the President of the
which should be resolved within 1 year from the Corporation pursuant to the pertinent provision in
enactment of this Code. The commission shall retain the by-laws of the corporation a corporate office?
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 The power to elect the corporate officers is a
until finally disposed. discretionary power that the law exclusively vested in the
Board of Directors, and cannot be delegated to
Q: Jennifer and Gabriel owned the controlling stocks subordinate officers or agents. The office of Vice President
in MFF Co and CLO Inc, both family corporations. Due for Finance and Administration created by the President
to serious disagreements, Jennifer assigned all her of the Corporation pursuant to the pertinent provision in
shares in MFF to Gabriel, while Gabriel assigned all the by-laws of the corporation was an ordinary, not a
his shares in CLO to Jennifer. Subsequently, Jennifer corporate office (Matling Industrial and Commercial
and CLO filed a complaint against Gabriel and MFF in Corporation vs. Coros, supra).
the SEC seeking to recover the corporate records and
funds of CLO which Gabriel allegedly refused to turn Q: Is a complaint filed by the condominium unit
over, and which remained in the offices of MFF. Is owners against the developer of the condominium for
there an intra-corporate controversy in this case? unsound business practice and violation of the Master
(1996 Bar) Deed and Declaration of Restrictions an intra-
corporate controversy?
A: Yes. An intra-corporate controversy is one which
"pertains to any of the following relationships: (1) A: Yes. An intra-corporate controversy is one which
between the corporation, partnership or association and "pertains to any of the following relationships: (1)
the public; (2) between the corporation, partnership or between the corporation, partnership or association and
association and the State in so far as its franchise, permit the public; (2) between the corporation, partnership or
or license to operate is concerned; (3) between the association and the State in so far as its franchise, permit
corporation, partnership or association and its or license to operate is concerned; (3) between the
stockholders, partners, members or officers; and (4) corporation, partnership or association and its
among the stockholders, partners or associates stockholders, partners, members or officers; and (4)
themselves." It is therefore clear that there exists an intra- among the stockholders, partners or associates
corporate controversy between MFF Co and CLO Inc. themselves."
Furthermore, in the case of SEC vs. CA, G.R. 93832, August
23, 1991, it was held that the fact that when the complaint Based on the foregoing definition, there is no doubt that
in SEC Case No. 03328 was filed with the SEC, the private the controversy in this case is essentially intra-corporate
respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua in character, for being between a condominium
were no longer stockholders of the UBS Marketing corporation and its members-unit owners (Go v.
Corporation did not divest the SEC of its jurisdiction over Distinction Properties Development Corporation, G.R. No.
the case. Hence, there exists an intra-corporate 194024, April 25, 2012).
controversy (Lim v. DPDCI G.R. 194024, April 25, 2012).
Q: Does the completion of sale of a condominium unit
Q: Under what jurisdiction does an action for illegal bar the condominium unit owner from questioning
dismissal of an ordinary employee fall? the amount of the unpaid dues?

A: The propriety and legality of the sale of the petitioners, who were members of the Board of Directors
condominium unit is different from the propriety and of the corporation before the election, against
legality of the unpaid assessment dues. The latter respondents, who are the newly-elected Board of
partakes of the nature of an intra-corporate dispute Directors. Under the circumstances, the derivative suit
(Chateau de Baie Condominium Corporation v. Spouses filed by petitioners in behalf of the condominium
Moreno, G.R. No. 186271, February 23, 2011). corporation is improper (Legaspi Towers 300 Inc., vs. Muer
et. al., supra).
Q: Is the rule on bill of particulars applicable to intra-
corporate controversies? INDEPENDENT DIRECTORS
A: In ordinary cases, the failure to specifically allege the Requirement of independent director
fraudulent acts does not constitute a ground for illegal
dismissal since such a defect can be cured by a bill of The Securities Regulations Code requires an independent
particulars. The above-stated rule, however, does not director when any corporation with a class of equity
apply to intra-corporate controversies. In cases governed securities listed for trading on an exchange or with assets
by the Interim Rules of Procedure on Intra-Corporate in excess of Fifty Million Pesos and having two hundred or
Controversies a bill of particulars is a prohibited pleading. more holders, at least 200 of which are holding at least
It is essential, therefore, for the complaint to show on its one hundred shares of a class of its equity securities or
face what are claimed to be the fraudulent acts if the which has sold a class of equity securities to the public
complainant wishes to invoke the court’s special pursuant to sec. 12 must have at least two independent
commercial jurisdiction (Guy vs. Guy, G.R. No. 189486, directors or such directors must constitute at least twenty
September 5, 2012). percent of the board, whichever is less.
Q: May the Board create appointive positions other Q: Section 38 of The Securities Regulation Code
than the positions of corporate officers? defines an independent director as a person who
must not have a relation with the corporation which
A: Though the Board may create appointive positions would interfere with his exercise of independent
other than the positions of corporate officers, the persons judgment in carrying out the responsibilities of a
occupying such positions cannot be viewed as corporate director. To ensure independence therefore, he must
officers under Sec. 25 of the Corporation Code. (March II be – (2012 Bar)
Marketing vs. Joson, G.R. No. 171993, December 12, 2011)
A: B. He must be nominated and elected by the minority
Q: What must be alleged in filing a derivative suit? shareholders
A: The stockholder filing a derivative suit should have

exerted all reasonable efforts to exhaust all remedies
available under the AOI, by-laws, laws or rules governing
the corporation to obtain the relief he desires and to
allege such fact with particularity in the complaint. The
allegation that the suing stockholder talked to the other
stockholder regarding the dispute hardly constitutes all
reasonable efforts to exhaust all remedies available. The
complaint should also allege the fact that there was no
appraisal right available for the acts complained of and
that the suit was not a nuisance or harassment suit. The
fact that the corporation involved is a family corporation
should not in any way exempt the suing stockholder from
the requirements and formalities for filing a derivative
suit. (Yu vs. Yukayguan, G.R. No. 177549, June 18, 2009)
Q: Is a derivative suit proper when the petitioners

seek the nullification of the election of the Board of
Directors who pushed through the election even if
petitioners had adjourned the meeting allegedly due
to lack of quorum?
A: Petitioners are the injured party, whose rights to vote

and to be voted upon were directly affected by the
election of the new set of board of directors. The party-in-
interest are the petitioners as stockholders, who wield
such right to vote. The cause of action devolves on
petitioners, not the condominium corporation, which did
not have the right to vote. Hence, the complaint for
nullification of the election is a direct action by

MERCANTILE LAW
banking functions, and similar institutions (NCBA,
BANKING LAWS Sec. 3).
THE NEW CENTRAL BANK ACT (NCBA, R.A. 7653) Primary objectives of Bangko Sentral ng Pilipinas
Bangko Sentral ng Pilipinas (BSP) 1. To maintain price stability conducive to a balanced and
sustainable growth of the economy; and
It is the state’s central monetary authority. It is the 2. To promote and maintain monetary stability and the
government agency charged with the responsibility of convertibility of the peso (NCBA, Sec. 3).
administering the monetary, banking and credit system of
the country and is granted the power of supervision and Functions of Bangko Sentral ng Pilipinas (BRAGS-
examination over bank and non-bank financial CHB)
institutions performing quasi-banking functions,
including savings and loan associations (Busuego vs. CA, 1. Banker of the government – the BSP shall be the
G.R. No. L-48955, June 30, 1987). official depository of the Government and shall
represent it in all monetary fund dealings (NCBA,
Bangko Sentral ng Pilipinas as an institution Secs. 110- 116).
2. Custodian of Reserves (NCBA, Secs. 64-66, 94, 103)
The BSP is a government-owned corporation which 3. Financial Advisor of the government (NCBA, Secs.
enjoys fiscal and administrative autonomy. 123-124) – Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract or
STATE POLICIES guarantee foreign loans but with the prior
concurrence of the Monetary Board.
Policy of the state with respect to the creation of the 4. Government agent (NCBA, Secs. 117-122)
Bangko Sentral ng Pilipinas 5. Source of credit (NCBA, Secs. 61-63, 81-89, 109)
6. Issuer of Currency (NCBA, Sec. 49-60)
The State shall maintain a central monetary authority that 7. Clearing channel or House; especially where the
shall function and operate as an independent and PCHC does not operate (NCBA, Sec. 102)
accountable body corporate in the discharge of its 8. Supervisor of the Banking system (NCBA, Sec. 25) –
mandated responsibilities concerning money, banking shall include the power to:
and credit (NCBA, Sec 2). While it is a government owned
corporation it enjoys fiscal and administrative autonomy. a. Examine, which power extends to enterprises
wholly or majority-owned or controlled by the
CREATION OF THE BANGKO SENTRAL NG PILIPINAS bank (GBL, Sec. 7); this power may not be
(BSP) restrained by a writ of injunction unless there is
convincing proof that the action of the BSP is
Salient considerations on the creation of Bangko plainly arbitrary (NCBA, Sec. 25)
Sentral ng Pilipinas
b. Place a bank under receivership or liquidation
1. It is established as an independent central monetary (NCBA, Sec. 30)
authority.
2. Its capital shall be P50,000,000,000, to be fully c. Initiate criminal prosecution of erring officers of
subscribed by the Philippine Government. banks
3. The P10,000,000,000 of the capital shall be fully paid
for by the Government upon the effectivity of NCBA POWERS AND FUNCTIONS OF THE MONETARY
and the balance to be paid for within a period of 2 BOARD
years from the effectivity of NCBA in such manner
and form as the Government, through the Secretary Monetary Board
of Finance and the Secretary of Budget and
Management, may thereafter determine (ibid). It is the body through which the powers and functions of
the BSP are exercised (NCBA, Sec 6).
RESPONSIBILITY AND PRIMARY OBJECTIVE
Powers and functions of the Monetary Board (RASBI)
Responsibilities of Bangko Sentral ng Pilipinas
(1992, 1998 Bar) (PSR) 1. Issue Rules and regulations it considers necessary for
the effective discharge of the responsibilities and exercise
1. To provide policy directions in the areas of money, of its powers.
banking, and credit 2. Direct the management, operations, and
Administration of the BSP, reorganize its personnel, and
2. To supervise bank operations issue such rules and regulations as it may deem necessary
or convenient for this purpose.
3. To regulate the operations of finance companies and 3. Establish a human resource management System.
non-bank financial institutions performing quasi- 4. Adopt an annual Budget for and authorize such
expenditures by the BSP as are in the interest of the

BANKING LAWS
effective administration and operations of the BSP in 4. And such other powers as the monetary Board deems
accordance with applicable laws and regulations. necessary
5. Indemnify its members and other officials of the BSP, 5. Exercise all powers necessary to restore its viability,
including personnel of the departments performing with the power to overrule or revoke the actions of the
supervision and examination functions against all costs previous management and board of directors of the bank
and expenses reasonably incurred by such persons in or quasi-bank
connection with any civil or criminal action (NCBA, Sec 6. To bring court actions to Assail or Repudiate contracts
15). entered into by the bank. (First Philippine International
Bank vs. CA, G.R. No. 115849, Jan. 24, 1996).
NOTE: In the event of a settlement or compromise,
indemnification shall be provided only in connection with Power of a conservator does not extend to the
such matters covered by the settlement as to which the revocation of valid and perfected contracts
BSP is advised by external counsel that the person to be
indemnified did not commit any negligence or The powers of a conservator cannot extend to post facto
misconduct. The costs and expenses incurred in repudiation of valid and perfected transactions. Thus, the
defending the aforementioned action, suit or proceeding law merely gives the conservator power to revoke
may be paid by the BSP in advance of the final disposition contracts that are deemed to be defective- void, voidable,
of such action, suit or proceeding upon receipt of an unenforceable or rescissible. Hence, the conservator
undertaking by or on behalf of the member, officer, or merely takes the place of the bank’s board.
employee to repay the amount advanced should it
ultimately be determined by the Monetary Board that he Termination of conservatorship
is not entitled to be indemnified as provided in this
subsection (ibid.). Conservatorship is terminated when the Monetary Board
is satisfied that the bank can operate on its own.
Liabilities of the members of the Monetary Board
NOTE: When the Monetary Board, on the basis of the
Members of the Monetary Board, officials, examiners, and report of the conservator or of its own findings, determine
employees of the BSP who: that the continuance in business of the institution would
1. Willfully violate RA 7653 involve probable losses to its depositors or creditors, the
bank will go under liquidation.
2. Who are guilty of negligence, abuses or acts of
malfeasance or misfeasance or CLOSURE
3. Fail to exercise extraordinary diligence in the Grounds for closure of a bank or a quasi bank
performance of his duties
1. Cash Flow test - Inability to pay liabilities as they
Shall be held liable for any loss or injury suffered by the become due in the ordinary course of business (NCBA, Sec.
BSP or other banking institutions as a result of such 30 [a], 1997 Bar).
violation, negligence, abuse, malfeasance, misfeasance or 2. Balance sheet test – Insufficiency of realizable assets
failure to exercise extraordinary diligence (NCBA, Sec 16). to meet its liabilities (NCBA, Sec 30 [b], 1997 Bar).
3. Inability to continue business without involving
HOW BSP HANDLES BANKS IN DISTRESS probable losses to its depositors and creditors (NCBA, Sec
30 [c], 1997 Bar).
In case of a distressed bank, the BSP appoints a 4. Willful violation of a cease and desist order under
conservator or receiver or closure of the bank. Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the
CONSERVATORSHIP assets (NCBA, Sec 30 [d], 1997 Bar).
5. Notification to the BSP or public announcement of a
Conservator (2006 Bar) bank holiday (GBL, Sec 53).
6. Suspension of payment of its deposit liabilities
One appointed if the bank is in the state of illiquidity or continuously for more than 30 days (GBL, Sec 53).
the bank fails or refuses to maintain a state of liquidity 7. Persisting in conducting its business in an unsafe or
adequate to protect its depositors and creditors. The bank unsound manner (GBL, Sec 56).
still has more assets than its liabilities but its assets are
not liquid or not in cash thus it cannot pay its obligation Close now-hear later doctrine
when it falls due. The bank, not the BSP, pays for fees.
It is to prevent unwarranted dissipation of the bank’s
Powers of a conservator (CARe BEAr) assets and as a valid exercise of police power to protect
the depositors, creditors, stockholders and the general
1. Collect all monies and debts due to the said bank public. The law does not contemplate prior notice and
2. To take charge of the Assets, liabilities, and the hearing before the bank may be directed to stop
management thereof operations and placed under receivership (Central Bank
3. REorganize, the management thereof of the Philippines v. CA, G.R. No. 76118 Mar. 30, 1993).

MERCANTILE LAW
No prior hearing is necessary in appointing a receiver and prejudice of the national economy. (Vivas, on his behalf
in closing the bank. It is enough that subsequent judicial and on behalf of the Shareholders of Eurocredit Community
review is provided for. Indeed, to require such previous Bank v. The Monetary Board of the Bangko Sentral ng
hearings would not only be impractical but would tend to Pilipinas, G.R. No. 191424, August 07, 2013).
defeat the very purpose of the law (Rural Bank of Lucena
v. Arca, G.R. No. L-21146, September 20, 1965). Q: Upon maturity of the time deposit, the bank failed
to remit. By reason of punitive action taken by Central
BSP may order the closure of the bank even without prior Bank, the bank has been prevented from performing
hearing. BSP may rely on the report of either the banking operations. Is the bank still obligated to pay
conservator, receiver or the head of the supervising and the time deposits despite the fact that its operations
examining department. It is not required to conduct a were suspended by the Central Bank?
thorough audit of the bank before ordering its closure.
The "close now, hear” later doctrine justifies BSP in A: Yes, the suspension of operations of a bank cannot
ordering bank closures even without prior hearing. Thus, excuse non-compliance with the obligation to remit the
injunction does not lie against BSP in the exercise of the time deposits of depositors which matured before the
power and function. A contrary rule may lead to bank’s closure (Overseas Bank of Manila v. CA, G.R. No.
dissipation of assets and trigger bank run. Judicial review 45886, April 19, 1989).
comes only after action of the Monetary Board if the same
was attended with bad faith and grave abuse of discretion Bank not liable to pay interest when closed
(Bangko Sentral ng Pilipinas v. Valenzuela, G.R. No. 184778,
October 2, 2009). As a general rule, the bank is not liable to pay interest on
DEPOSIT once it is closed and ceased operations.
The closure and liquidation of a bank, which is
considered an exercise of police power may be the RECEIVERSHIP
subject of judicial inquiry
Receiver (2006 Bar)
The validity of such exercise of police power is subject to
judicial inquiry and could be set aside if it is either One appointed if the bank is already insolvent which
capricious, discriminatory, whimsical, arbitrary, unjust or means that its liabilities are greater than its assets. The
a denial or due process and equal protection clauses of the Court has no authority to appoint a receiver for a bank if
Constitution (Central Bank v. CA, G.R. No. L-50031-32, July the latter will function as such under BSP law. The power
27, 1981). to appoint belongs to BSP.
The order of closure (receivership or conservatorship) NOTE: For banks, the receiver would be the Philippine
may be assailed: a) by the stockholders representing at Deposit Insurance Corporation; for quasi-banks, it could
least majority of the outstanding capital stock; b) within be any person of recognized competence in banking or
ten days from receipt by the board of directors of the finance (NCBA, Sec. 30).
order; c) thru a petition for certiorari on the ground that
the action taken by the BSP was in excess of jurisdiction Duties of a receiver
or with grave abuse of discretion as to amount to lack of
jurisdiction. 1. The receiver shall immediately gather and take charge
of all the assets and liabilities of the institution.
Under R.A .No. 7653, the power of the Monetary Board 2. Administer the same for the benefit of the creditors, and
(MB) over banks, including rural banks, was increased exercise the general powers of a receiver under the
and expanded. The Court, in several cases, upheld the Revised Rules of Court
power of the MB to take over banks without need for prior 3. Shall not, with the exception of administrative
hearing. It is not necessary inasmuch as the law entrusts expenditures, pay or commit any act that will involve the
to the MB the apprec-iation and determination of whether transfer or disposition of any asset of the institution:
any or all of the statutory grounds for the closure and Provided that the receiver may deposit or place the funds
receiver-ship of the erring bank are present. The MB, of the institution in non-speculative investments.
under R.A. No. 7653, has been invested with more power 4. Within 90 days from the take-over, the receiver shall
of closure and placement of a bank under receivership for determine whether the institution may be rehabilitated or
insolvency or illiquidity, or because the bank’s otherwise placed in such a condition that it may be
continuance in business would probably result in the loss permitted to resume business with safety to its depositors
to depositors or creditors. and creditors and the general public
5. If the receiver determines that the institution cannot be
The doctrine is founded on practical and legal rehabilitated or permitted to resume business, then the
considerations to obviate unwarranted dissipation of the Monetary Board shall notify in writing the board of
bank’s assets and as a valid exercise of police power to directors of the institution of its findings and direct the
protect the depositors, creditors, stock-holders, and the receiver to proceed with liquidation of the institution
general public. Swift, adequate and determined actions (NCBA, Sec 30).
must be taken against fi-nancially distressed and
mismanaged banks by government agencies lest the
public faith in the banking system deteriorate to the

BANKING LAWS
The receiver is not authorized to transact business in Commencement of liquidation proceedings bar the
connection with the bank’s assets and property filing of a separate action or petition to assail the
order of closure
A receiver can only perform acts of administration and
not acts of dominion. The receiver cannot approve an Once liquidation proceedings have been initiated, the
option to purchase real property. He has only the majority stockholders of the bank can no longer file a
authority to administer the same for the benefit of its separate action or petition to assail the order of closure.
creditors (Abacus Real Estate Development Center, Inc. v. Instead, issues on validity of closure should be raised as
Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005). affirmative defenses in the liquidation proceeding. This is
necessary to prevent multiplicity of suits or conflicting
Nature of order of receivership resolutions (Salud vs. Central Bank of the Philippines, G.R.
No. L-17620, August 19, 1986).
While resolutions of the Monetary Board forbidding a
bank to do business on account of a condition of Liquidation proceedings may be carried out with or
insolvency and appointing a receiver to take charge of the without tax clearance
bank’s assets or determining whether the bank may be
rehabilitated or should be liquidated are by law “final and Unlike in a voluntary dissolution of a corporation under
executory.” However, they can be set aside by the court on the Corporation Code, BSP can liquidate the bank with or
one specific ground - if the action is plainly arbitrary and without tax clearance. This is based on the General
made in bad faith. Such contention can be asserted as an Banking Law.
affirmative defense or a counterclaim in the proceeding
for assistance in liquidation (Salud v. Central Bank, G.R. No. Filing of the claims against the insolvent bank
L-17630, August 19, 1986).
GR: All claims against the insolvent bank should be filed
LIQUIDATION in the liquidation proceeding. It is not necessary that a
claim be initially disputed in a court or agency before it is
Liquidation of a bank filed with the liquidation court (Ong v. CA, G.R. No. 112830,
Feb. 1, 1996).
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to XPN: Where it is the bank that files a claim against
money or the sale, assignment or disposition of the s to another person or legal entity, the claim should be filed in
creditors and other parties for the purpose of paying the regular courts.
debts of such institution (Banco Filipino v. Central Bank,
G.R. No. 70054, December 11, 1991). Reason: The judicial liquidation is intended to provide an
orderly mode for payment of all claims. In addition such
Liquidator of a distressed bank can prosecute and petition is not in the nature of a disputed claim against the
defend suits against the bank bank.
Prosecution of suits, collection and the foreclosure of Q: Aaron, a well known architect, is suffering from
mortgages against debtors of the bank by the financial reverses. He has four creditors with a total
liquidatorare among the usual and ordinary transactions claim of P 26 million. Despite his intention to pay
pertaining to the administration of a bank (Banco Filipino these obligations, his current assets are insufficient to
v. Central Bank, ibid). cover all of them. His creditors are about to sue him.
Consequently, he was constrained to file a Petition for
A liquidator may foreclose mortgages due to a bank Insolvency (Act 1956).
while the issue of receivership is pending
a. Since Aaron was merely forced by circumstances
A liquidator can foreclose mortgages for and in behalf of to petition the court to declare him insolvent, can
the judge properly treat the petition as one for
the bank even if the issue on receivership and liquidation
involuntary insolvency. Explain.
is still pending (Supra).
b. If Aaron is declared an insolvent by the court,
Q: An intra-corporate case was filed before RTC. On what would be the effect, if any, of such declaration
on hid creditors? Explain.
the other hand, another complaint was filed before
BSP to compel a bank to disclose its stockholdings c. Assuming that Aaron has guarantors for his
debts, are the guarantors released from their
invoking the supervisory power of the latter. Is there
a forum shopping? obligations once Aaron is discharged from his
debts? Explain.
d. What remedies are available to the guarantors in
A: None. The two proceedings are of different nature
praying for different relief. The complaint filed with the case they are made to pay the creditors? Explain.
BSP was an invocation of its supervisory powers over (2005 Bar)
banking operations which does not amount to a judicial
A:
proceeding (Suan v. Monetary Board, A.C. No. 6377, March
a. No. In involuntary insolvency, it is the creditors who
12, 2007).
ask for the declaration of the debtor’s insolvency. In this

MERCANTILE LAW
case, it is the debtor who filed a petition for insolvency. Rule of promissory estoppel
The fact that Aaron has the intention to pay his obligations
and was just constrained to file a petition as one for The BSP may not thereafter renege on its representation
involuntary insolvency. and liquidate the bank after majority stockholders of the
bank complied with the conditions and parted with value
b. A declaration of the court that the debtor is insolvent to the profit of CB, which thus acquired additional security
shall have the following effects: (Sec.59 of Insolvency for its own advances, to the detriment of the bank’s
Law): stockholders, depositors and other creditors (Ramos v.
i. All debtors assets placed in sheriff custody until a Central Bank of the Philippines, G.R. No. L-29352, Oct. 4,
receiver or assignee has been appointed; 1971).
ii. Payment to debtor of any debt due to him, or
delivery of any property due to him, and transfer or A final and executory judgment against an insolvent
conveyance of any property by him, are forbidden; bank may be stayed
iii. Time and place is fixed for a meeting of creditors to
select the assignee in insolvency; After the Monetary Board has declared that a bank is
iv. And all civil proceedings against insolved are insolvent and has ordered it to cease operations, the
stayed assets of the insolvent bank are held in trust for the equal
benefit of all creditors. One cannot obtain an advantage or
c. No. By virtue of the doctrine of excussion provided preference over another by attachment, execution or
under Art. 2058, the creditor can go against the guarantor otherwise. The final judgment against the bank should be
after the former has exhausted all the properties of the stayed as to execute the judgment would unduly deplete
principal debtor and has resorted to all legal remedies the assets of the banks to the obvious prejudice of other
against such debtor. In this case, Aaron has insufficient depositors and creditors (Lipana v. Development Bank of
property to discharge his obligations prompting him to Rizal, G.R. No. L-73884, Sept. 24, 1987).
file a petition for insolvency which stays claims against
him. The fact that Aaron was declared insolvent permits Q: The Blue Star Corporation filed with the Regional
the creditor to enforce his claim against the guarantor. Trial Court a petition for rehabilitation on the ground
that it foresaw impossibility of paying its obligations
d. The guarantor is entitled to be reimbursed by the as they fall due. Finding the petition sufficient in form
debtor for the following: and substance, the court issued an Order appointing
i. total amount of the debt paid; a rehabilitation receiver and staying the enforcement
ii. legal interest from the time payment was made of all claims against the corporation. What is the
known to the debtor; rationale for the Stay Order? (2006 Bar)
iii. expenses incurred after notifying debtor that
demand to pay was made upon him; and A: The reason behind the indiscriminate suspension or
iv. damages in accordance with law. stay order in relation to the creditors’ claim is to expedite
the rehabilitation of the distressed corporation by
Bank deposits as a rule not preferred credits enabling the management committee or the rehabilitation
receiver to effectively exercise its/his powers free from
The exception is when the deposits are covered by a any judicial or extrajudicial interference that might
cashier's check purchased from the bank when the bank unduly hinder or prevent the rescue of the debtor
officers knew or ought to have known that the bank is company. It also recognizes the assets of a corporation
insolvent (Miranda v. PDIC, G.R. No. 169334 under rehabilitation held under trust for the equal benefit
September 8, 2006). of all creditors under the doctrine equality is equity,
whereby all the creditors ought to stand on equal footing,
and not one of them should be paid ahead of others.
Conservatorship v. Receivership v. Liquidation
CONSERVATORSHIP RECEIVERSHIP LIQUIDATION
Grounds 1.Continuing inability 1. Inability to pay liabilities as 1. Insolvency

2.Unwillingness to maintain condition they fall due e.g: bank run, 2. Bank cannot be
of liquidity rumors, etc. rehabilitated
2. Assets are less than its
liabilities
3. Cannot continue business
without causing damage;
4. Violation of a cease and
desist order

BANKING LAWS
5. “Bank holiday” for more than
30 days (NCBA, Sec. 30).
Effects 1. Juridical personality is retained. 1. Juridical personality is Same with conservator-ship

2.Perfected transactions cannot be retained
repudiated 2. Suspension of operation
/stoppage of business
3. Assets deemed in custodia
legis (Domingo v. NLRC, G.R.
156761, October 17, 2006).
HOW BSP HANDLES EXCHANGE CRISIS Exercise of the power to determine rates of exchange
Legal Tender (2000 Bar) 1. The Monetary Board shall determine the rates at
which the BSP shall buy and sell spot exchange, and
All notes and coins issued by the BSP are fully guaranteed shall establish deviation limits from the effective
by the Republic and shall be legal tender in the Philippines exchange rate or rates as it may deem proper.
for all debts, both public and private (NCBA, Sec. 52).
2. The Monetary Board shall similarly determine the
Legal tender power of coins rates for other types of foreign exchange transactions
by the BSP, including purchases and sales of foreign
1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not notes and coins, but the margins between the
exceeding P1,000.00 effective exchange rates and the rates thus
established may not exceed the corresponding
2. 25 centavo coin or less: In amounts not exceeding margins for spot exchange transactions by more than
P100.00 (Circular No. 537, 2006). the additional costs or expenses involved in each
type of transactions (NCBA, Sec. 74).
NOTE: Notes, regardless of denomination, are legal
tender for any amount. Instances where the Banko Sentral may exercise its
exchange regulating powers
Rules on the authority of the Bangko Sentral ng
Pilipinas to replace legal tender 1. The international reserve of the BSP falls to a level
which the Monetary Board considers inadequate to
1. Notes and coins called in for replacement shall remain meet the prospective demands
legal tender for a period of one year from the date of call.
2. After that period, they shall cease to be legal tender 2. Whenever the international reserve appears to be in
during the following year or for such longer period as MB imminent danger of falling to such a level
may determine. 3. Whenever the international reserve is falling as a
3. After the expiration of this latter period, the notes and result of payments or remittances abroad which, in
coins which have not been exchanged shall cease to be a the opinion of the Monetary Board are contrary to
liability of BSP and shall be demonetized (NCBA, Sec. 57). the national welfare (NCBA, Sec 67).
NOTE: Checks representing demand deposits do not have Actions taken by the Bangko Sentral when
legal tender power and their acceptance in the payment international stability of Peso is threatened
of debts, both public and private, is at the option of the
creditor.However, a check which has been cleared and 1. Take such remedial measures as are appropriate and
credited to the account of the creditor shall be equivalent within the powers granted to the Monetary Board,
to a delivery to the creditor of cash in an amount equal to and the BSP.
the amount credited to his account (NCBA, Sec. 60).
2. Submit to the President of the Philippines and the
Period of replacement Congress, and make public a detailed report which
shall include, as a minimum, a description and
1. Notes for any series or denomination – More than 5 analysis of:
years old a. The nature and causes of the existing or
2. Coins – More than 10 years old imminent decline;
NOTE: Coins which show signs of filing, clipping or b. The remedial measures already taken or to be
perforation and notes which have lost more than 2/5s of taken by the Monetary Board
their surface or all of the signatures inscribed therein
shall be withdrawn from the circulation and demonitized c. The monetary, fiscal or administrative
without compensation to the bearer. measures further proposed

MERCANTILE LAW
d. The character and extent of the cooperation LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405, AS
required from other government agencies for AMENDED)
the successful execution of the policies of the
Monetary Board (NCBA, Sec. 67). PURPOSE
Emergency restrictions on the foreign exchange The purposes of RA 1405 are:

operations 1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may lend
1. Temporarily suspending and restricting sales of foreign such funds and assist in the economic development
exchange by the BSP; of the country.
2. Subjecting all transactions in gold and foreign exchange
PROHIBITED ACTS
to license by the BSP;
3. Requiring that any foreign exchange thereafter The following are the prohibited acts in RA 1405:
obtained by any person residing or entity operating in the 1. Examination/inquiry/looking into all deposits of
Philippines be delivered to the BSP or to any bank or whatever nature with banks or banking institutions
agent designated by the BSP for said purpose, at the in the Philippines (including investment in bonds
effective exchange rate or rates (NCBA, Sec. 72). issued by the government) by any person,
government official or office (RA 1405, Sec. 2).
NOTE: To ensure sufficiency of foreign exchange
resources, convertibility of the peso, and promotion of 2. Disclosure by any official or employee of any banking
domestic investment of bank resource, the Monetary institution to any unauthorized person of any
Board may require the banks to sell to the BSP or to other information concerning said deposit (RA 1405, Sec.
banks all or part of their surplus holdings of foreign 3).
exchange. (NCBA, Sec. 76)
ACTS NOT COVERED BY THE PROHIBITION
Q: X maintains a savings deposit in the amount of
Php·1 Million with ABC Bank Corporation. X also has Non-bank official or employee is not covered by the
obtained a loan from ABC Bank Corporation in the prohibition. Neither is disclosure by a bank official or
amount of Php1 Million. In case of default: (2012 Bar) employee of information about bank deposit in favor of a
co-employee in the course of the performance of his
a. ABC Bank can set-off the loan from the savings duties is not covered by the prohibition.
account being maintained by X with ABC Bank.
b. Set-off is not possible because legal Q: Manosa, a newspaper columnist, while making a
compensation is not allowed in banking deposit in a bank, overheard a pretty bank teller
transaction. informing a co-employee that Gigi, a well-known
c. Deposit accounts are usually earmarked for public official, has just a few hundred pesos in her
specific purpose hence offsetting is not legally bank account and that her check will in all probability
possible. bounce. Manosa wrote this information in his
d. Off -setting is not possible because the obligation newspaper column. Thus, Gigi filed a complaint with
of X is a "simple loan". the City Fiscal of Manila for unlawfully disclosing
information about her bank account.
A: A. The relationship between a bank and its depositor is
that of creditor and debtor. For this reason, a bank has the a. Will the said suit prosper? Explain your answer.
right to set-off the deposits in its hands for the payment of
b. Supposing that Gigi is charged with unlawfully
a depositor’s indebtedness (Equitable PCI Bank v. Ng acquiring wealth under R.A. 1379 and that the fiscal
Sheung Ngor, et al., 171545, December 19, 2007).
issued a subpoena duces tecum for the records of
the bank account of Gigi. May Gigi validly oppose
the said issuance on the ground that the same
violated the law on secrecy of bank deposits?
Explain your answer. (1990 Bar)
A:
a. No. The suit will not prosper. It is clear as provided in
section 3 of R.A. 1405 that it shall be unlawful for any
official or employee of a banking institution to disclose to
any person other than those mentioned in section two of
the said law any information concerning said deposits.
Manosa as a columnist is not one of those persons
contemplated under the law. Furthermore, he merely
overheard what appeared to be a vague remark of the
bank teller therefore is not in a sense an inquiry or a
disclosure.

BANKING LAWS
4. In cases where the money deposited or invested is the
b. No. Gigi cannot oppose the said issuance because the subject matter of the litigation (ibid)
law provides as an exception from the coverage of R.A.
1405 that upon order of a competent court in cases of 5. Upon order of the Commissioner of Internal Revenue in
anti-graft and corruption cases, the examination of the respect of the bank deposits of a decedent for the
deposits may be allowed. purpose of determining such decedent’s gross estate
(NIRC, Sec. 6[F][1])
DEPOSITS COVERED
(1990-1992, 1994, 1995, 1997, 1998, 2000, 2001, 6. Upon the order of the Commissioner of Internal
2004-2006 Bar) Revenue in respect of bank deposits of a taxpayer
who has filed an application for compromise of his
1. All deposits of whatever nature with banks or banking tax liability by reason of financial incapacity to pay
institutions found in the Philippines; or his tax liability (ibid)
2. Investments in bonds issued by the Philippine
government, its branches, and institutions. (R.A. 1405, Sec. 7. The Commissioner of Internal Revenue is authorized to
2) inquire into bank deposits of a specific taxpayer upon
3. Trust accounts are included in the scope of the law. request for tax information from a foreign tax
authority pursuant to an international convention or
Meaning of the phrase "of whatever nature and kind" agreement on tax matters to which the Philippines is
a party (ibid)
R.A.1405 is no longer limited to deposits governed by the
law on loans giving rise to creditor-debtor relationship 8. In case of dormant accounts/deposits for at least 10
but it covers fund of whatever nature so long as the bank years under the Unclaimed Balances Act (Act No.
may use and utilize it in authorized loans. 3936, Sec. 2)
Trust funds covered by the term “deposit” 9. The prohibition against examination of bank deposit
does not preclude its garnishment to satisfy a
The money deposited under the trust agreement (“Trust judgment against the depositor (Oñate vs. Abrogar,
account”) is intended not merely to remain with the bank G.R. No. 107303, February 21, 1994)
but to be invested by it elsewhere. To hold that this type
of account is not protected by R.A. 1405 would encourage 10. Presidential Commission on Good Government may
private hoarding of funds that could otherwise be require the production of bank records material to its
invested by banks in other ventures, contrary to the policy investigation (Opinion of the Secretary of Justice,
behind the law (Ejercito v. Sandiganbayan, G.R. No. February 27, 1987)
157294-95, November 30, 2006).
11. The Anti-Money Laundering Council (AMLC) may
NOTE: Despite such pronouncement that trust funds are inquire into any deposit with any bank in case of
considered deposits, trust funds remain not covered by violation of the RA 9160 or the AMLA if there is
PDIC. probable cause that it is related to an unlawful
activity (RA 9160, as amended, Sec. 11)
Confidentiality granted by RA 1405 does NOT extend
to Letters of Credit and Trust Receipts 12. The PDIC and the BSP may examine deposit accounts
and all information related to them in case of a
The confidentiality granted by the law does NOT extend finding of unsafe or unsound banking practices (RA
to other documents and records like L/C’s, TR’s, bank 3591, as amended, Sec. 8)
drafts and promissory notes (Opinion of the Secretary of
13. With court order:
Justice No. 5, Series of 1982; Opinion of the Secretary of
a. In cases of unexplained wealth under Sec. 8
Justice No. 126, Series of 1989).
of the Anti-Graft and Corrupt Practices Act
(PNB v
EXCEPTIONS
b. . Gancayco, L-18343, September 30, 1965)
c. In cases filed by the Ombudsman and upon
Instances where examination or disclosure of
the latter’s authority to examine and have
information about deposits can be allowed (1990-
access to bank accounts and records
1992, 1994, 1995, 1997, 1998, 2000, 2001, 2004-
(Marquez v. Desierto, GR 138569, September
2006 Bar)
11, 2003)
1. Upon written consent of the depositor (RA 1405,Sec. 2)
14. Without court order: If the AMLC determines that a
particular deposit or investment with any banking
2. In cases of impeachment (ibid)
institution is related to the following (HK-MADS):
3. Upon order of competent court in cases of bribery or a. Hijacking,
dereliction of duty of public officials (ibid) b. Kidnapping,
c. Murder,
d. Destructive Arson, and

MERCANTILE LAW
e. Violation of the Dangerous Drugs Act. truck from a government bank. The check is delivered
f. Acts of Terrorism or in violation of Human to A who deposits it to his account with XYZ bank
Security Act. before the insurance company realizes it as a scam.
Upon such realization, the insurance company files an
15. In case the law is repealed, superseded or modified action against A for recovery for the amount
by any law to the contrary. defrauded and obtains a writ of preliminary
attachment. In addition to the writ, the Bank is also
Q: The Bank Secrecy Law (RA 1405) prohibits served a subpoena to examine the account records of
disclosing any information about deposit records of A. The Bank declines to provide any information in
an individual without court order except - (2012 Bar) response to the writ and moves to quash subpoena in
a. in an examination to determine gross estate invoking secrecy of bank deposits under R.A. 1405
of a decedent. and a) not respond to the writ b)quash the subpoena
b. in an investigation for violation of Anti-Graft for examination? (1998 Bar)
and Corrupt Practices.
c. in an investigation by the Ombudsman. A: Yes. Whether the transaction is considered a sale of
d. in an impeachment proceeding money placement does not make the money subject
matter of litigation within the meaning of Section 2 of R.A.
A: C. In order that the Ombudsman may inspect a bank 1405 which prohibits the disclosure or inquiry into bank
deposit: deposits except “in cases where the money deposited or
invested is the subject matter of litigation” nor will it
1. there must be a case pending in court, matter whether the money was “swindled”.
2. the account must be clearly identified,
3. the inspection must be limited to the subject matter Foreign currency deposits
of the pending case,
4. the inspection may cover only the account identified, Foreign currency deposits are covered by R.A. 6426
and otherwise known as the “Foreign Currency Deposits Act”.
5. the bank personnel and the account holder must be
notified to be present during the inspection Secrecy of foreign currency deposits
(Marquez vs. Desierto, G.R. No. 135882, June 27, 2001;
Office of the Ombudsman vs. Ibay, G.R. No. 137538, GR: Foreign currency deposits cannot be inquired or
September 3, 2001). looked into. All foreign currency deposits are absolutely
confidential (RA 6426, Sec. 8).
Q: GP is suspected jueteng lord who is rumored to be
enjoying police and military protection. The envy of Republic Act 6426 is a special law designed especially for
many drug lords who had not escaped the dragnet of foreign currency deposits in the Philippines. RA 1405
the law, GP was summoned to a hearing of the which covers all bank deposits in the Philippines is the
Committee on Racketeering and Other Syndicated general law which does not nullify the special law on
Crimes of the House of Representatives, which was foreign currency deposits. The surety which issued a bond
conducting congressional investigation-in aid of to secure the obligation of the principal debtor cannot
legislation on the involvement of police and military inquire into the foreign currency deposits of the debtor
personnel, and possibly even of local government even if its purpose is to determine whether or not the loan
officials, in the illegal activities of suspected gambling proceeds were used for the purpose specified in the
and drug lords. Subpoenaed to attend the surety agreement. The foreign currency deposits cannot
investigation were officers of certain identified banks be examined without the consent of the depositor. The
with a directive to them to bring the records and subpoena issued by the bank should be quashed because
documents of bank deposits of individuals mentioned foreign currency deposits are not subject to court order
in the subpoenas, among them GP. GP and the banks except for violation of the anti-money laundering law
opposed the production of the bank records of (GSIS vs. Court of Appeals GR 189206, June 8, 2011, in
deposits on the ground that no such inquiry is allowed Divina, 2014).
under the Law on Secrecy of Bank Deposits (R.A. 1405
as amended). Is the opposition of GP and the banks XPNs:
valid? Explain. (2010 Bar) 1. The depositor has given his written permission
(ibid.)
A: Yes. The opposition is valid. GP is not a public official.
The investigation does not involve one of the exceptions 2. Where the funds deposited in a joint foreign currency
to the prohibition against the disclosure of any savings account belonged exclusively to one of the
information concerning bank deposits under the Law on depositors and were held in trust for him by the other
Secrecy of Bank Deposits. The Committee conducting the depositor and the other depositor unilaterally closed
investigation is not a competent court or the Ombudsman the joint account and transferred the funds to her
authorized under the law involving such disclosure. personal account, the latter cannot invoke the
exemption from court processes under RA 6426
Q: An insurance company is deluded into releasing a because she is not the owner of the deposit in the
check to A for P35th o pay for Treasury Bills (T-Bills) account. Consequently, the depositor who owned the
which A claims to be en route on board an armored funds can have her enjoined from making

BANKING LAWS
withdrawals from her personal account (Van Twest v. instituted an action in court against Michael,
Court of Appeals, G.R. No. 106235, February 10, 1994). Prosperity, and Eastern to compel Michael to return
the subject funds to the partnership and pending
3. A father who sued his daughter for illegally litigation to order both banks to disallow any
withdrawing funds from his foreign currency deposit
withdrawal from his accounts. At the initial hearing of
and transferring to another bank in the name of her the case, the court ordered Prosperity to produce the
sister, can inquire into the deposit of the sister,
records of his Michael’s peso current account and
because the money deposited belongs to him (China
Eastern to produce the records ofhis foreign currency
Banking Corp. vs. CA, G.R. No. 140687, December 18, savings account. Can the court compel Prosperity and
2006).
Eastern to disclose the bank deposits of Michael?
4. The exemption from court process of foreign Discuss fully. (1995 Bar)
currency deposits under RA 6426 cannot be invoked
by a foreign transient who raped a minor, escaped A: Yes, with regard to Michael’s peso current account.
and was held liable for damages to the victim. The This is pursuant to Section 2 of R.A. 1405 which allows the
garnishment of his foreign currency deposit should disclosure of bank deposits in case where the money
be allowed to prevent an injustice and for equitable deposited is the subject matter of litigation. However with
grounds. The law was enacted to encourage foreign regard to his foreign currency savings account, the
currency deposit and not to benefit a wrongdoer disclosure cannot be allowed. Pursuant to the Foreign
(Salvacion vs. Central Bank of the Philippines, G.R. No. Currency Law, the exemption to the prohibition against
94723, August 21, 1997). disclosure of information concerning foreign bank
deposits is to acquire the written consent of the depositor.
5. The Commissioner of Internal Revenue is authorized
to inquire into bank deposits of the following: Q: A, an individual, secured a loan from XYZ Company.
a. A decedent to determine his estate; and C, a surety company, issued a bond to further secure
the obligation. A has dollar deposits with ABC Bank.
b. Any taxpayer who has filed for an application for Can C inquire to ABC Bank about the foreign currency
compromise of his tax liability deposits of A to determine whether or not the loan
c. A specific taxpayer upon request for tax proceeds were used for the purpose specified in their
information from a foreign tax authority surety agreement?
pursuant to an international convention or
agreement on tax matters to which the A: No. The surety company which issued the bond cannot
Philippines is a party. (NIRC, Sec. 6 [f]) inquire into the foreign currency deposits. It cannot be
examined without the consent of the depositor except in
6. AMLC may inquire into any deposit with a bank or certain situations like violation of anti-money laundering
financial institution in case of violation of RA 9160 if law (GSIS v. CA, G.R. No. 189206, June 8, 2011).
there is probable cause that it is related to an
unlawful activity (RA 9160, Sec. 11). Q: X, a private individual, maintains a dollar deposit
with ABC Bank. X is suspected to be the leader of a
7. Upon ex parte application by a law enforcer
Kidnap for Ransom Gang and he is suspected of
authorized by the Anti-Terrorism Council, the
depositing all ransom money in said deposit account
justices of the CA designated as special court to
which are all in US Dollars. The police want to open
handle anti-terrorism cases may authorize the
said account to know if there are really deposits in big
examination of deposits in a financial institution
amounts. Which statement is most accurate? (2012
upon finding probable cause of the commission of
Bar)
terrorism or conspiracy to commit terrorism (RA
9372, Sec. 27-28). a. The same rules under Secrecy of Bank Deposit
Act will apply.
8. PDIC and BSP may examine deposit accounts and all
information related to them in case of a finding of b. An approval from the Monetary Board is
unsafe or unsound banking practices (RA 3591, as necessary to open the account.
amended, Sec. 8).
c. Because the deposit is in US Dollars, it is
9. AMLC can investigate (a) any property of funds covered by the Foreign Currency Deposit Act
related to financing terrorism; (b) property or funds which allows disclosure only upon the written
of any person if there is probable cause to believe he permission of the depositor.
is committing or attempting or conspiring to commit d. Approval from the Court is necessary to order
terrorism or financing terrorism (RA 10168, Sec. 10). disclosure of the account (2012 Bar).
Q: Michael withdrew without authority funds of the A: C. The deposit, being in US Dollars, is covered by the
partnership in the amounts of P500th and US$50th Foreign Currency Deposit Act which allows disclosure
for services he claims rendered for the benefit of the only upon the written permission of the depositor.
partnership. He deposited the P 500 th in his personal
peso current account with Prosperity Bank and the A bank can be compelled to disclose the records of the
US$50th in his personal foreign currency savings accounts of a depositor under the investigation for
account with Eastern Bank. The partnership unexplained wealth

MERCANTILE LAW
name of the persons other than the one responsible for
Since cases of unexplained wealth are similar to cases of illegal acquisition. Hence, in the case at bar, the disclosure
bribery and dereliction of duty, no reason is seen why it should be allowed and it should not be subject to an order
cannot be excepted from the rule making bank deposits to strike out.
confidential. In this connection, inquiry into illegally
acquired property in anti-graft cases extends to cases Q: The Law in Secrecy of Bank Deposits provides that
where such property is concealed by being held or all deposits of whatever nature with banks or banking
recorded in the name of other persons. This is also institutions are absolutely confidential in nature and
because the Anti-Graft and Corrupt Practices Act, bank may not be examined, inquired or looked into by any
deposits shall be taken into consideration in determining person, government official, bureau or office.
whether or not a public officer has acquired property However, the law provides exceptions in certain
manifestly out of proportion with his lawful income (PNB instances. Which of the following may not be among
v. Gancayco, G.R. No. L-18343, September 30, 1965). the exceptions:
In an action filed by the bank to recover the money 1.In cases of impeachment
transmitted by mistake, the bank is allowed to 2.In cases involving bribery
3.In cases involving BIR inquiry
present the accounts which it believed were
4.In cases of anti-graft and corrupt practices
responsible for the acquisition of the money
5.In cases where the money involved is the subject of
litigation.
R.A. 1405 allows the disclosure of bank deposits in cases
where the money deposited is the subject matter of Explain your answer or choice briefly (2004 Bar)
litigation. In an action filed by the bank to recover the
A: Under Section 6 (F) of the NIRC, the CIR can inquire into
money transmitted by mistake, necessarily, an inquiry
the deposits of a decedent for the purpose of determining
into the whereabouts of the amount extends to whatever
the gross estate of such decedent. Apart from this case, a
is concealed by being held or recorded in the name of the
persons other than the one responsible for the illegal BIR inquiry into bank deposits cannot be made. Thus,
exception 3 may not be always applicable. Turning to
acquisition.
exception 4, an inquiry into bank deposits is possible only
Q: Socorro received $10,000 from a foreign bank in prosecutions for unexplained wealth under the Anti-
Graft and Corrupt Practices Act, according to the Supreme
although she was entitled only to $1,000. In an
Court in the cases of Philippine National Bank v. Gancayco,
apparent plan to conceal erroneously sent amount,
G.R. No. L-18343, September 30, 1965 and Banco Filipino
she opened a dollar account with her local bank,
Savings and Mortgage Bank v. Purisima, G.R. No. L-56429,
deposited $ 10,000 and issued 4 checks in the amount
of $2,000 and 1 check for $1,000 each payable to May 28,1988. However, all other cases of anti-graft and
corrupt practices will not warrant an inquiry into bank
different individuals who deposited the same in their
deposits. Thus, exception 4 may not always be applicable.
respective dollar accounts with different local banks.
The sender bank then brought a civil suit before the Like any other exception, it must be interpreted strictly.
Exceptions 1,2 and 5, on the other hand, are provided
RTC for the recovery of erroneously send amount. In
expressly in the Law onSecrecy of Bank Depositors. They
the course of trial, the sender presented testimonies
are available to depositors at all times.
of bank officials to show that the funds were, in fact,
deposited in a bank by Socorro and paid out to several
persons, who participated in the concealment and Q: Miguel, a special customs agent is charged before
dissipation of the amount that Socorro had the Ombudsman with having acquired property out of
erroneously received. Socorro moved to strike out the proportion to his salary, in violation of the Anti-Graft
and Corrupt Practices Act. The Ombudsman issued a
testimonies from the record invoking the law on
secrecy of bank deposits. If you were the Judge, would subpoena duces tecum to the Banco De Cinco
commanding its representative to furnish thr
you issue and order to strike them out? Why? (1992
Bar) Ombudsman records of transactions by or in the
name of Miguel, his wife and children. A second
subpoena was issued expanding the first by including
A: If I am the judge I would not issue an order to strike
them out. The testimonies of the bank officials showing the production of records of friends of Miguel in said
that the funds were in fact deposited in a bank by Socorro bank and in all its branches and extension offices,
specifically naming them, Miguel moved to quash the
and paid our to several persons, who participated in the
concealment and dissipation of the amount that Socorro subpoenas arguing that they violate the Secrecy of
Bank Deposits Law. In addition, he contends that the
had erroneously received,were presented in the course of
the trial. Therefore, the said testimonies must be subpoenas are in the nature of - fishing expedition or
general warrants and are constitutionally
considered as involved in the litigation. In the case of
impermissible with respect to private individuals
Mellon Bank vs. Magsino, G.R. No. 71479, October 18, 1990,
it was held that R.A. 1405 allows the disclosure of bank who are not under investigation. Is Miguel’s
deposits in cases where the money deposited is the contention tenable?
subject matter of litigation. In an action filed by a bank to
A: No. The contention of Miguel is not tenable. In the case
recover money it transmitted by mistake, necessarily, an
of Banco Filipino v. Purisima, it was held that the inquiry
inquiry to its whereabouts of the amount extends to
into illegally acquired property-or property not
whatever concealed by, being held or recorded in the

BANKING LAWS
legitimately acquired- extends to cases where such Central Bank of the Philippines, G.R. 94723, August 21,
property is concealed by being held or recovered in the 1997).
name of other persons. This proposition is made clear by
R.A. 3019 which quite categorically states that the term Penalties for violation of R.A. 1405
“legitimately acquired property of a public officer or
employee shall not include property unlawfully acquired 1. Imprisonment of not more than five (5) years
by the respondent, but its ownership is concealed by its 2. Fine of not more than P20,000.00
being recorded in the name of, or held by, respondent’s 3. Both, in the discretion of the court (RA 1405, Sec. 5).
spouse, ascendants, descendants, relatives or any other
persons. To sustain the petitioner’s theory, and restrict Q: R.A. 6832 creating a Commission to conduct a
the inquiry only to property held by or in the name of the Thorough Fact-Finding Investigation of the failed
government official or employee, or his spouse and Coup d’etat of December 1989, recommend measures
unmarried children is unwarranted in the light of the to prevent the occurrence of similar attempts at a
provisions of the statutes in question, and would make violent seizure of power and for other purposes,
available to persons in government who illegally acquire provides that the Commission may ask the Monetary
property an easy and fool-proof means of evading Board to disclose information on and/or to grant
investigation and prosecution; all they have to do would authority to examine any bank deposits, trust or
be to simply place the property in possession or name of investment funds, or banking transactions in the
persons other than their spouse and unmarried children. name of and/or utilized by a persons, natural or
This is an absurdity that we will not ascribe to the juridical, under investigation by the Commission, in
lawmakers. any bank or banking institution in the Philippines ,
when the Commission has reasonable ground to
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN believe that said deposits, trust or investment funds,
DEPOSITS or banking transactions have been used in support or
in furtherance of the objectives of the said coup d’etat.
Garnishment of a bank deposit does not violate the Does the above provision not violate the Law on
law Secrecy of Bank Deposits (R.A. 1405)? (1991 Bar)
The prohibition against examination or inquiry does not A: The above provision does not violate R.A. 1405 because
preclude its being garnished for satisfaction of judgment. the enactment of R.A. 6832 is valid exercise of police
The disclosure is purely incidental to the execution power. R.A. 1405 is in itself a statutory enactment which
process and it was not the intention of the legislature to can be validly be modified, amended or repealed by a
place bank deposits beyond the reach of judgment subsequent law. The Secrecy of Bank Deposits Act did not
creditor (PCIB v. CA, G.R. No. 84526, January 28, 1991). amount to a contract between the depositors and
depository banks within the meaning of the non-
Garnishment of foreign currency deposits impairment clause of the Constitution. Even if it did, the
police power of the State is superior to the non-
GR: Foreign currency deposits shall be exempt from impairment clause.
attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any GENERAL BANKING LAW OF 2000 (R.A. 8791)
administrative body whatsoever (R.A. 6426, Sec 8).
Policy of the state behind the General Banking Act (RA
XPN: The application of Section 8 of R.A. 6426 depends on 8791)
the extent of its justice. The garnishment of a foreign
currency deposit should be allowed to prevent injustice The State recognizes the vital role of banks in providing
and for equitable grounds, otherwise, it would negate an environment conducive to the sustained development
Article 10 of the New Civil Code which provides that “in of the national economy and the fiduciary nature of
case of doubt in the interpretation or application of laws, banking that requires high standards of integrity and
it is presumed that the lawmaking body intended right performance. In furtherance thereof, the State shall
and justice to prevail (Salvacion vs. Central Bank of the promote and maintain a stable and efficient banking and
Philippines, G.R. 94723, August 21, 1997). financial system that is globally competitive, dynamic and
responsive to the demands of a developing economy (RA
The foreign currency deposit of a transient foreigner 8791, Sec 2).
who illegally detained and raped a minor Filipina can
be garnished to satisfy the award for damages to the
victim
The exemption from garnishment of foreign currency

deposits under R.A. 6426 cannot be invoked to escape
liability for the damages to the victim. The garnishment of
the transient foreigner’s foreign currency deposit should
be allowed to prevent injustice and for equitable grounds.
The law was enacted to encourage foreign currency
deposit and not to benefit a wrongdoer (Salvacion vs.

MERCANTILE LAW
DEFINITION AND CLASSIFICATION OF BANKS Ownership of foreign individuals in a bank
Bank The percentage of foreign-owned voting stocks in a bank

shall be determined by the citizenship of the individual
A bank is an entity engaged in the lending of funds stockholders in that bank. The citizenship of the
obtained from the public in the form of deposits. corporation which is a stockholder in a bank shall follow
the citizenship of the controlling stockholders of the
Elements for an entity to be considered doing corporation, irrespective of the place of incorporation
business as a bank (GBL, Sec 2).
1. The entity is engaged in the lending of funds Different classifications of banks (2002, 2010 Bar)
2. Funds obtained from the public with at least 20
depositors 1. Universal banks- Primarily governed by the General
3. Funds are in the form of deposits Banking Law. They can exercise the powers of an
investment house and invest in non-allied enterprises and
NOTE: A transaction involving not a loan but purchase of have the highest capitalization.
receivables at a discount within the purview of
2. Commercial banks- Ordinary banks governed by the
investing, reinvesting, or trading in securities which
an investment company may perform is not banking. GBL which have a lower capitalization requirement than
universal banks and can neither exercise the powers of an
Extent of ownership of foreign individuals and non- investment house nor invest in non-allied enterprises.
bank corporations in a bank 3. Thrift banks – These are a) Savings and mortgage banks;
b) Stock savings and loan associations; and c) Private
Foreign individuals may own or control up to forty development banks, which are primarily governed by the
percent (40%) of the voting stock of a domestic bank Thrift Banks Act (R.A. 7906).
(GBL, Sec 2).
4. Rural banks – these are mandated to make needed
Extent of ownership of a non-banking corporations in credit available and readily accessible in the rural areas
a bank on reasonable terms and which are primarily governed by
the Rural Banks Act of 1992 (RA 7353).
GR: A corporation may only own 40% of the bank 5. Cooperative banks –banks whose majority shares are
owned and controlled by cooperatives primarily to
XPNs: provide financial and credit services to cooperatives. It
1. A universal bank can own up to 100% of a thrift bank shall include cooperative rural banks. They are governed
2. A corporation whose shares are listed in the stock primarily by the Cooperative Code (RA 6938).
exchange can own up to 60% of the bank. This privilege
can be exercised only once. 6. Islamic banks – Banks whose business dealings and
3. If the corporation is in existence for 10 years it can activities are subject to the basic principles and rulings of
own up to 60% of the bank. This privilege can be Islamic Shari’ a, such as the Al Amanah Islamic Investment
exercised only once. Bank of the Philippines which was created by RA 6848.
4. Under Foreign Bank Liberalization Law (RA 7721), 7. Other classification of banks as determined by the
the Monetary Board may authorize foreign banks to Monetary Board of the Bangko Sentral ng Pilipinas.
operate in the Philippines.

BANKING LAWS
Universal banks v. Commercial banks v. Thrift banks
UNIVERSAL BANKS COMMERCIAL BANKS THRIFT BANKS
Governing Laws General Banking Law (GBL) GBL Thrift Banks Act (R.A. 7906)
1. Has the authority to To engage in allied All the powers of a
exercise the powers of a undertakings and, in commercial bank, except:
commercial bank. addition to the general
powers incident to a 1. To issue imported LC
2. To act as an investment corporation, may exercise
house – a corporation that 2. To accept or open
all such powers as may be
sells and guarantees sale of necessary to carry on the checking account except
securities and shares of business of commercial with prior approval by the
Powers stocks. i.e. Petron will tap an Monetary Board (MB
banking.
investment house in order requires at least a net asset
to sell its stocks. worth of 28M)
NOTE: Allied undertakings
3. To engage in a non-allied are those activities or
undertaking – which is not entities which enhance or
related at all to banking. complement banking.
e.g. Realty
4.95 Billion 2.4 Billion 1. Metro Manila – 1 Billion
2. Cebu and Davao – 500
Million
Capitalization
3. Elsewhere 250 Million
(BSP Circular No. 0715, Apr
2011)
Can be a stock holder in Only allied undertaking Only allied undertaking
Equity Investment both allied and non-allied
undertaking
Can invest but shall not Cannot invest Cannot invest
Non- Allied Transaction exceed 25% of the investee
(receiving) corporation.
Total Amount of Not to exceed 50% of the Not to exceed 35% of bank’s Not to exceed 35% of bank’s
Investment Equity bank’s net worth. net worth. net worth.
Single Equity Investment Not to exceed 25% of bank’s net worth

MERCANTILE LAW
DISTINCTION OF BANKS FROM QUASI-BANKS AND a debt in good faith and property it may acquire during
TRUST ENTITIES execution sale to satisfy judgment. Banks cannot acquire
real property in settlement of a civil liability arising from
Quasi-bank crime.
These are entities engaged in the borrowing of funds 3. A universal and commercial bank can both invest in
through the issuance, endorsement or assignment with equity but only universal bank is allowed to invest in
recourse or acceptance of deposit substitutes for equity of non-allied enterprises.
purposes of re-lending or purchasing of receivables and
other obligations (GBL, Sec 4). Unlike banks, quasi-banks BANKING AND INCIDENTAL POWERS
do not accept deposits. Neither are funds obtained
insured with the PDIC. Certificate of Authority to Register
Trust entities This is a requirement before a bank may register or

amend their articles of incorporation with SEC. It is issued
These are entities engaged in trust business that act as a by the Monetary Board (GBL, Sec. 14). The following must
trustee or administer any trust or hold property in trust be provenby the bankto satisfy the Monetary Board and
or on deposit for the use, benefit, or behalf of others (GBL, in order for the latter to grant such certificate:
Sec. 79). A bank does not act as a trustee. 1. All requirements of existing laws and regulations to
engage in the business for which the applicant is proposed
Financial intermediaries to be incorporated have been complied with
2. That the public interest and economic conditions, both
Persons or entities whose principal functions include the general and local, justify the authorization
lending, investing, or placement of funds on pieces of 3. The amount of capital, the financing, organization,
evidence of indebtedness or equity deposited with them, direction and administration, as well as the integrity and
acquired by them or otherwise coursed through them, responsibility of the organizers and administrators
either for their own account or for the account of others. reasonably assure the safety of deposits and the public
interest. (ibid).
Deposit substitutes
General powers and functions of a bank
It is an alternative form of obtaining funds from the
public, other than deposits, through the issuance, 1. Accepting drafts and issuing letters of credit
endorsement, or acceptance of debt instruments, for the
borrower's own account, for the purpose of relending or 2. Discounting and negotiating promissory notes,
purchasing of receivables and other obligations. These drafts, bills of exchange and other instrument evidencing
instruments may include, but need not be limited to, debt
banker’s acceptances, promissory notes, participations,
certificates of assignment and similar instruments with 3. Accepting or creating demand deposits, receiving
recourse, and repurchase agreements. other types of deposit and deposit substitutes
Q: XYZ Corporation is engaged in lending funds to 4. Buying and selling FOREX and gold or silver bullion
small vendors in various public markets. To fund the
lending, XYZ Corporation raised funds through 5. Acquiring marketable bonds and other debt
borrowings from friends and investors. Which securities
statement is most accurate? (2012 Bar)
6. Extending credit
a. XYZ Corporation is a bank.
b. XYZ Corporation is a quasi-bank. 7. Determination of bonds and other debt securities
c. XYZ Corporation is an Investment Company. eligible for investment including maturities and aggregate
d. XYZ is none of the above. amount of such investment, subject to such rules as the
Monetary Board may promulgate.
A: B. XYZ Corporation is a quasi bank
8. And all other powers as may be necessary to carry
BANK POWERS AND LIABILITIES on the business of a bank (GBL, Sec. 29).
CORPORATE POWERS Rules regarding the issuance of stocks by a bank
1. All powers provided by the corporation code, like 1. The Monetary Board may prescribe rules and
issuance of stocks and entering into merger or regulations on the types of stock a bank may issue.
consolidation with other corporation or banks. 2. Banks shall issue par value stocks only (GBL, Sec. 9).
3. GR: No bank shall purchase or acquire shares of its own
2. It can only acquire real property when it is needed for capital stock or accept its own shares as a security for
business, in settlement of debt incurred in the course of a loan.
the business, property as may be mortgaged to it to secure XPN: When authorized by the Monetary Board.

BANKING LAWS
merged bank. Each bank used to have eleven (11)
NOTE: That in every case the stock so purchased or members of the board. The maximum number of
acquired shall, within six months from the time of its directors of the merged bank is - (2012 Bar)
purchase or acquisition, be sold or disposed of at a public
A: C. In case of a merged bank, the maximum number of
or private sale. (GBL, Sec. 10)
directors is 21.
4. Foreign individuals and non-bank corporations may
Limitation on the grant of compensation to the
own or control up to 40% of the voting stock of a domestic
bank. This rule shall apply to Filipinos and domestic non- directors by the Monetary Board
bank corporations.
The Monetary Board may limit the grant of compensation
NOTE: The percentage of foreign-owned voting stocks in to the directors of a bank only in exceptional cases and
when the circumstances warrant, such as but not limited
a bank shall be determined by the citizenship of the
individual stockholders in that bank. The citizenship of to the following:
the corporation which is a stockholder in a bank shall 1. When a bank is under comptrollership or
follow the citizenship of the controlling stockholders of conservatorship
2. When a bank is found by the Monetary Board to be
the corporation, irrespective of the place of incorporation.
conducting business in an unsafe or unsound manner
(GBL, Sec 11)
3. When a bank is found by the Monetary Board to be in
an unsatisfactory financial condition (GBL, Sec. 18).
5. Stockholdings of individuals related to each other
within the fourth degree of consanguinity or affinity,
DILIGENCE REQUIRED BY BANKS
legitimate or common-law, shall be considered family
groups or related interests and must be fully disclosed in
Degree of diligence required of banks in handling
all transactions by such corporations or related groups of
deposits
persons with the bank. (GBL, Sec 12)
Banks are expected to exercise extraordinary diligence in
6. Two or more corporations owned or controlled by the
its dealings with depositors. Consequently, the diligence
same family group or same group of persons (Corporate
Stockholdings) shall be considered related interests and required of banks is more than that of a Roman pater
familias or a good father of a family (PCI Bank v Balcameda
must be fully disclosed in all transactions by such
G.R. No. 158143, September 21, 2011).
corporations or related group of persons with the bank.
(GBL, Sec 13)
Q: FFCCI opened a savings/current and dollar savings
Instances when a bank is prohibited from declaring account PNB at its Timog Avenue Branch. Its
President Felipe and Secretary-Treasurer Angelita
dividends
were the named signatories for the said accounts.
1. Its clearing account with the Bangko Sentral is While Felipe and Angelita were thus out of the
country, applications for cashiers and managers
overdrawn; or
checks bearing Felipes signature were presented to
2. It is deficient in the required liquidity floor for and both approved by the PNB. When Angelita
government deposits for five or more consecutive days, or returned to the country, she noticed the deductions of
P9,950,000.00 and P3,260,500.31. Claiming that
3. It does not comply with the liquidity standards/ratios these were unauthorized and fraudulently made,
prescribed by the Bangko Sentral for purposes of FFCCI requested PNB to credit back and restore to its
determining funds available for dividend declaration; or account the value of the checks. PNB refused, and thus
constrained [FFCCI] filed the instant suit for damages
4. It has committed a major violation as may be against the PNB and its own accountant Aurea
determined by the Bangko Sentral (GBL, Sec. 57). Caparas. On its part, PNB alleged that it exercised due
diligence in handling the account of FFCCI; that he
Independent directors in banks applications for managers check have passed through
the standard bank procedures and it was only after
Section 16 of the GBL provides for two (2). finding no infirmity that these were given due course;
that In fact, it was no less than Caparas, the
Effect of merger or consolidation of banks to the accountant of FFCCI, who confirmed the regularity of
number of directors allowed the transaction. Is PNB guilty of negligence in
handling FFCCI’s account?
The number of directors may be more than 15 but should
not exceed 21 (GBL, Sec. 17). A: As between a bank and its depositor, where the bank’s
negligence is the proximate cause of the loss and the
Q: XXX Bank Corporation and ZZZ Corporation were depositor is guilty of contributory negligence, the greater
merged into XX ZZ Bank Corporation. So as not to proportion of the loss shall be borne by the bank. The
create any unnecessary conflict, all the former bank was negligent because it did not properly verify the
directors of both banks wanted to be appointed genuineness of the signatures in the applications for
/elected as members of the Board of Directors of the manager’s checks while the depositor was negligent

MERCANTILE LAW
because it clothed its accountant/bookkeeper with accepted a post-dated check for deposit and sent it for
apparent authority to transact business with the Bank and clearing and the drawee bank which cleared and honored
it did not examine its monthly statement of account and the check are both liable to the drwer for the entire face
report the discrepancy to the Bank. The court allocated value of the check (Allied Banking Corporation v. Bank of
the damages between the bank and the depositor on a 60- the Philippine Islands, G.R. No. 188363, February 27, 2013,
40 ratio (Philippine National Bank v. FF Cruz and Company, in Divina, 2014).
G.R. No. 173259, July 25, 2011, in Divina, 2014).
Being a banking institution, DBP, the mortgagee, owed it
Degree of diligence required of banks with its other to Guariña Corporation to exercise the highest degree of
dealings diligence, as well as to observe the high standards of
integrity and performance in all its transactions because
The diligence more than that of a Roman pater familias its business was imbued with public interest. Yet, the
only applies only to cases where banks act under their bank failed in its duty to exercise the highest degree of
fiduciary capacity, that is, as depositary of the deposits of diligence by prematurely foreclosing the mortgages and
their depositors. The same degree of diligence is not unwarrantedly causing the foreclosure sale of the
expected to be exerted by banks in commercial mortgaged properties despite the mortgagor not being
transactions (Reyes v CA G.R. No. 118492. August 15, 2001). yet in default (DBP V. Guariña Agricultural and Realty
Development Corporaiton,G.R. No. 160758, January 15,
Q: On Oct. 10, 2002, a check in the amount of 2014, in Divina, 2014).
P1,000,000.00 payable to MMGI was presented for
deposit and accepted at petitioner’s Kawit Branch. Effect when the teller gave the passbook to a wrong
The check, post-dated “Oct. 9, 2003”, was drawn person
against the account of Silva with BPI Bel-Air Branch.
Banks must exercise a high degree of diligence in insuring
The check was cleared by BPI and ABC credited the that they return the passbook only to the depositor of his
account of MMGI with P1,000,000.00. On Oct. 22, authorized representative. For failing to return the
2002, MMGI’s account was closed and all the funds passbook to authorized representative of the depositor,
therein were withdrawn. A month later, Silva the bank presumptively failed to observe such high degree
discovered the debit of P1,000,000.00 from his of diligence in safeguarding the passbook and insuring its
account. In response to Silva’s complaint, BPI credited return to the party authorized to receive the same.
his account with the aforesaid sum.
However, a bank’s liability may be mitigated by the
On March 21, 2003, respondent returned a photocopy depositor’s contributory negligence such as allowing a
of the check to petitioner for the reason: “Postdated.” withdrawal slip signed by authorized signatories to fall
Petitioner, however, refused to accept and sent back into the hands of an impostor (Consolidated Bank and
to respondent a photocopy of the check. Thereafter, Trust Corporation vs. CA, GR No, 138569, September
the check, or more accurately, the Charge Slip, was 11, 2003).
tossed several times from ABC to BPI, and back to
ABC, until on May 6, 2003, BPI requested the PCHC to The bank is liable when an employee encashed a
take custody of the check. Acting on the request, PCHC check without the required indorsement
directed BPI to deliver the original check and
informed it of PCHC’s authority under CHOM No. 279 The fiduciary nature of the relationship between the bank
dated 06 September 1996 to split 50/50 the amount and the depositors must always be of paramount concern
of the check subject of a “Ping-Pong” controversy (Philippine Savings Bank vs. Chowking, G.R. No. 177526,
which shall be implemented thru the issuance of July 4, 2008).
Debit Adjustment Tickets against the outward
demands of the banks involved. PCHC likewise NATURE OF BANK FUNDS AND BANK DEPOSITS
encouraged respondent to submit the controversy for
resolution thru the PCHC Arbitration Mechanism. The Deposit function of banks
latter rendered its Decision in favor of ABC and
against BPI. Respondent filed a motion for The function of the bank to receive a thing, primarily
reconsideration14 but it was denied by the PCHC money, from depositors with the obligation of safely
Board of Directors. The RTC affirmed with keeping it and returning the same.
modification the Arbitration Committee’s decision.
By its Decision, the CA set aside the RTC judgment and Kinds of deposits between a bank and its depositors
ruled for a 60-40 sharing of the loss as it found
petitioner guilty of contributory negligence in 1. As debtor-creditor:
accepting what is clearly a post-dated check. 2. Special Kinds of Deposits
a. Demand deposits – all those liabilities of banks which
A: A collecting bank is guilty of contributory negligence are denominated in the Philippine currency and are
when it accepted for deposit a post-dated check subject to payment in legal tender upon demand by
notwithstanding that said check had been cleared by the representation of checks.
drawee bank which failed to return the check within the b. Savings deposits – the most common type of deposit
24-hour reglementary period. The collecting bank which and is usually evidenced by a passbook.

BANKING LAWS
Nature of a bank deposit
NOTE: The requirement of presentation of passbooks
is required by the Manual of Regulations for Banks. A All kinds of bank deposits are loan. The bank can make use
bank is negligent if it allows the withdrawal without as its own the money deposited. Said amount is not being
requiring the presentation of passbook (BPI v. CA, GR held in trust for the depositor nor is it being kept for
No. 112392, February 29, 2000). safekeeping (Tang Tiong Tick v. American Apothecaries,
G.R. No. 43682, March 31, 1938).
c. Negotiable order of withdrawal account (NOWA) –
Interest-bearing deposit accounts that combine the Mandamus will not lie in the enforcement of
payable on demand feature of checks and investment obligations concerning deposit
feature of saving accounts.
d. Time deposit – an account with fixed term; payment All kinds of deposit are loans. Thus, the relationship being
of which cannot be legally required within such a contractual in nature, mandamus cannot be availed of
specified number of days. because mandamus will not lie to enforce the
performance of contractual obligations (Lucman v.
3. As trustee-trustor: Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).
NOTE: Trust account – a savings account, established Contract between banks and depositors is not a trust
under a trust agreement containing funds administered agreement
by the bank for the benefit of the trustor or another
person or persons. The fiduciary nature of the bank-depositor relationship
does not convert the contract between banks and
4. As agent-principal: depositors to a trust agreement.Thus, failure by the bank
a. Deposit of checks for collection to pay the depositor is failure to pay simple loan, and not
b. Deposit for specific purpose a breach of trust (Consolidated Bank and Trust Corp. v. CA,
c. Deposit for safekeeping G.R. No. 138569, September 11, 2003).
Types of deposit accounts Nature of safety deposit box
1. Savings The contract for the use of a safety deposit box should be
2. Current governed by the law on lease.
3. Time
In the case of Sia vs. CA and Security Bank and Trust
NOTE: Deposit accounts may also be classified as: Company and under the old banking law, a safety deposit
1. Individual; or box is a special deposit. However, the new General
2. Joint: Banking Law, while retaining the renting of safe deposit
a. “And” account – the signature of both co- box as one of the services that the bank may render,
depositors are required for withdrawals. deleted reference to depository function (Divina,
b. “And/or” account – either one of the co- Handbook on Philippine Commercial Law).
depositors may deposit and withdraw from
the account without the knowledge consent Q: After procuring a checking account, the depositor
and signature of the other. issued several checks. He was surprised to learn later
that they had been dishonored for insufficient funds.
Joint accounts may be subject of a survivorship agreement Investigation disclosed that deposits made by the
whereby the co-depositors agree to permit either of them depositor were not credited to its account. Is the bank
to withdraw the whole deposit during their lifetime and liable for damages?
transferring the balance to the survivor upon the death of
one of them (Vitug v. CA, G.R. No. 82027, March 29, 1990). A: Yes, the depositor expects the bank to treat his account
with utmost fidelity, whether such account consist only of
Anonymous account a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last
GR: Anonymous accounts or those under fictitious names centavo, and as promptly as possible. This has to be done
are prohibited (R.A. 9160 as amended by by R.A. 9194; BSP if the account is to reflect at any given time the amount of
Circular No. 251, July 21, 2000). money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever
XPN: In case where numbered accounts is allowed such as he directs. A blunder on the part of the bank, such as the
in foreign currency deposits. However, banks/non-bank dishonor of the check without good reason, can cause the
financial institutions should ensure that the client is depositor not a little embarrassment if not also financial
identified in an official or other identifying documents loss and perhaps even civil and criminal litigation (Simex
(R.A. 6426 as amended, FCDA, Sec. 8). Intl. v. CA, G.R. No. 88013, March 19, 1990).

MERCANTILE LAW
STIPULATION ON INTERESTS maximum period of one year and that such ratio shall be
applied uniformly to banks of the same category (GBL, Sec.
Rules on stipulation of interests 34).
Old rule Effect of non-compliance with the ratio
1. Central Bank Circular 416 – 12% per annum in cases of: 1. Distribution of net profits may be limited or prohibited
a. Loans and MB may require that part or all of the net profits be
b. Forbearance of money, goods and credits used to increase the capital accounts of the bank until the
c. Judgment involving such loan or forbearance, in the minimum requirement has been met; or
absence of express agreement as to such rate of interest
2. GR: Acquisition of major assets and making of new
investments may be restricted.
2. Interest accruing from unpaid interest– interest due
shall earn interest from the time it is judicially demanded XPN: Purchases of evidence of indebtedness guaranteed
although the obligation may be silent upon this point. by the Government can be exempted from restrictions
(GBL, Sec. 34).
New rule
SINGLE BORROWER’S LIMIT
Through Circular No. 799, the Monetary Board declared
that effective July 1, 2013 the rate of interest for the loan Limitations imposed upon banks with respect to its
or forbearance of any money, goods or credits and the rate loan function
allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be 6 percent per 1. GR: Single borrower’s limit – The total amount of loans,
annum (Section 1, Circular 799, Seies of 2013 amending credit accommodations and guarantees that the bank
Section 2 of Circular No. 905, Series of 1982). could grant should at no time exceed 25% of the bank’s
net worth (GBL, Sec 35.1, 2002 Bar).
This means that if the parties fail to state in writing the
interest payable on any of the transactions mentioned, or XPN:
on account of a court judgment involving a related money a. As the Monetary Board may otherwise prescribe for
claim, the imposable interest is 6 percent every year. reasons of national interest
b. Deposits of rural banks with government-owned or
A bank forbidden by Central Bank to do business is controlled financial institutions like LBP, DBP, and
NOT obligated to pay interest on deposit PNB.
A bank lends money, engages in international 2. The total amount of loans, credit accommodations and
transactions, acquires foreclosed mortgaged properties guarantees prescribed in (a) may be increased by an
or their proceeds and generally engages in other banking additional 10% of the net worth of such bank provided
and financing activities in order that it can derive income that additional liabilities are adequately secured by trust
therefrom. Therefore, unless a bank can engage in those receipt, shipping documents, warehouse receipts and
activities from which it can derive income, it is other similar documents which must be fully covered by
inconceivable how it can carry on as a depository an insurance (GBL, Sec. 35.2).
obligated to pay interest on money deposited with it 3. Loans and other credit accommodations secured by
(Fidelity & Savings and Mortgage Bank v. Cenzon, G.R. No.
REM shall not exceed 75% of the appraised value of the
L-46208, April 5, 1990).
real estate security plus 60% of the appraised value of the
insured improvements (GBL, Sec. 37) CM/intangible
GRANT OF LOANS AND SECURITY REQUIREMENTS property such as patents, trademarks, etc. shall not exceed
75% of the appraised value of the security (GBL, Sec. 38).
RATIO OF NET WORTH TO TOTAL RISK ASSETS
4. Loans being contractual, the period of payment may be
Net worth subject to stipulation by the parties. In the case of
amortization, the amortization schedule has no fixed
The total of the unimpaired paid-in surplus, retained period as it depends on the project to be financed such
earnings and undivided profit, net of valuation reserves that if it was capable of raising revenues, it should be at
and other adjustments as may be required by the BSP least once a year with a grace period of 3 years if the
(GBL, Sec. 24.2). project to be financed is not that profitable which could
be deferred up to 5 years if the project was not capable of
Risked based capital raising revenues (GBL, Sec. 44).
5. Loans granted to DOSRI:
The minimum ratio prescribed by the Monetary Board
a. Director
which the net worth of a bank must bear to its total risk
b. Officer
assets which may include contingent accounts.
c. Stockholder, having at least 1% ownership over the
bank
NOTE: The Monetary Board may require or suspend
compliance with such ratio whenever necessary for a

BANKING LAWS
d. Related Interests, such as DOS’s spouses, their Effect of non-compliance with the foregoing
relatives within the first degree whether by requirement
consanguinity or affinity, partnership whereby DOS is
a partner or a corporation where DOS owns at least Violation of DOSRI is a crime and carries with it penal
20%. sanction.
Exclusions from the aforesaid loan limitations It does not make the transaction void but only renders the
responsible officers and directors criminally liable.
Non-risk loans, such as: (Republic v. Sandiganbayan, G.R. No. 166859, 169203,
180702, April 12, 2011).
1. Loans secured by obligations of the Bangko Sentral ng
Pilipinas or the Philippine Government Transactions covered by the DOSRI regulation
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits maintained in The transactions covered are loan and credit
the lending bank and held in the Philippines accommodation. Not being a loan, the ceiling will not
4. Loans, credit accommodations and acceptances under apply to lease and sale. However, it should still comply
letters of credit to the extent covered by margin deposits
with the procedural requirement.
5. Other loans or credit accommodations which the MB
may specify as non-risk items. Arms-length rule
Joint and solidary signature (JSS) practice It provides that any dealings of a bank with any of its
DOSRI shall be upon terms not less favorable to the bank
It is a common banking practice requiring as an additional
than those offered to others (GBL, Sec. 36 [2]).
security for a loan granted to a corporation the joint and
solidary signature of a major stockholder or corporate
The bank may terminate the loan and demand
officer of the borrowing corporation (Security Bank v. immediate payment if the borrower used the funds
Cuenca, G.R. No. 138544, October 3, 2000).
for purposes other than that agreed upon
RESTRICTIONS ON BANK EXPOSURE TO DOSRI If the bank finds that the borrower has not employed the
(DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR
funds borrowed for the purpose agreed upon between the
RELATED INTERESTS)
bank and the borrower, the bank may terminate the loan
and demand immediate payment (Banco de Oro v. Bayuga,
Requirements that must be complied with in case of
G.R. No. L-49568, Oct. 17, 1979).
DOSRI accounts (2002 Bar)
Q: Pio is the president of Western Bank. His wife
1. Procedural requirement - Loan must be approved by the
applied for a loan with the said bank to finance an
majority of all the directors not including the director internet cafe. The loan officer told her that her
concerned. CB approval is not necessary; however, there
application will not be approved because the grant of
is a need to inform them prior to the transaction. Loan
loand to related interests of bank directors, officers,
must be entered in the books of the corporation (GBL, Sec.
and stockholders is prohibited by the General
36).
Banking Law. Explain whether the loan officer is
correct. (2006 Bar)
2. Substantive requirement - Loan must not exceed the
paid in contribution and unencumbered deposits. (Not to A: No. The loan officer should have advised the wife to ask
exceed 15% of the portfolio or 100% of the net worth,
her husband to secure approval of the bank’s Board of
whichever is lower) (GBL, Sec. 36 [4]). Directors for the intended loan and to limit the same in an
amount not to exceed its unencumbered deposits and
In the case of Go v. Bangko Sentral ng Pilipinas,G.R. No. book value of its paid in capital contribution in the bank;
178429, October 23, 2009, it was held that the
if the intended loan should exceed the foregoing limit, the
requirements are: (1) Approval requirement which
borrower should have the same secured by a non-risk
means that the DOSRI transaction must be approved by at assets determined by the Monetary Board, unless the loan
least majority of the directors excluding the director shall be in the form of a fringe benefit. (GBL, Sec. 36)
concerned. (2) Reportorial requirement means that the
transaction must be recorder in the books of the bank and A bank officer violates the DOSRI law when he acquires
reported to the BSP. (3) Ceiling requirement which means
bank funds for his personal benefit, even if such
that the amount of the loan shall not exceed the book acquisition was facilitated by a fraudulent loan
valued of the paid-in contribution and the amount of the
application. Directors, officers, stockholders, and their
unencumbered deposits. Three different offenses are
related interests cannot be allowed to interpose the
committed by those who fail to observe the board fraudulent nature of the loan as a defense to escape
approval, reporting and ceiling requirements. culapability or their circumvention of the law. The
prohibition under the law covers loand by a bank director
or officer which are made directly, indirectly, for himself
or as the representative or agent of others. At the same
time, he is liable for estafa through falsification of

MERCANTILE LAW
commercial documents. The bank money which came to 3.
his possession as a result of the fraudulent loan 4. Geographic indications;
application was not his. He remained bank’s fiduciary 5. Industrial designs;
with respect to that money, which makes it capable of 6. Patents;
misappropriation or conversion in his hands (Soriano v. 7. Layout designs (Topographies) of Integrated Circuits;
People of the Philippines, et al., G.R. No. 162336, February 8. Protection of Undisclosed Information (TRIPS).
1, 2010, in Divina, 2014).
Basic Principles
Intellectual Property Code National Treatment - A Member country shall accord to
the nationals of other Member countries treatment no less
INTELLECTUAL PROPERTY RIGHTS IN GENERAL favourable than it accords to its own national with regard
to the protection of intellectual property.
INTELLECTUAL PROPERTY RIGHTS
Most Favored Nation - Any advantage, favour, privilege or
Coverage of intellectual property rights (CTG- IPLP) immunity granted by a Member to the nationals of any
other country shall be accorded immediately and
1. Copyright and Related Rights; unconditionally to the nationals of all other Members
2. Trademarks and Service Marks;
INTELLECTUAL
DEFINITION
PROPERTY RIGHTS
Copyright and Related exists over original and derivative intellectual creations in the literary and artistic domain
Rights protected from the moment of their creation
Trademarks and Service any visible sign capable of distinguishing the goods (trademark) or services (service mark)
Marks of an enterprise and shall include a stamped or marked container of goods.
indications which identify a good as originating in the territory of a Member of the
Agreement, or a region or locality in that territory, where a given quality, reputation or
Geographic Indications
other characteristic of the good is essentially attributable to its geographical origin. (Article
22, TRIPS Agreement)
any composition of lines or colors or any three-dimensional form, whether or not
associated with lines or colors, provided that such composition or form gives a special
Industrial Designs
appearance to and can serve as pattern for an industrial product or handicraft. It must be
new or ornamental
any technical solution of a problem in any field of human activity which is new, involves an
Patents inventive step and is industrially applicable. It may be, or may relate to, a product, or
process, or an improvement of any of the foregoing.
is synonymous with 'Topography' and means the three-dimensional disposition, however
expressed, of the elements, at least one of which is an active element, and of some or all of
Layout Designs
the interconnections of an integrated circuit, or such a three-dimensional disposition
prepared for an integrated circuit intended for manufacture
protection of information lawfully held from being disclosed to, acquired by, or used by
others without their consent in a manner contrary to honest commercial practices so long
as such information: (a) is secret in the sense that it is not, as a body or in the precise
configuration and assembly of its components, generally known among or readily
Protection of Undisclosed
accessible to persons within the circles that normally deal with the kind of information in
Information
question; (b) has commercial value because it is secret; and (c) has been subject to
reasonable steps under the circumstances, by the person lawfully in control of the
information, to keep it secret. (Article 39, TRIPS Agreement)
is a plan or process, tool, mechanism or compound known only to its owner and those of
his employees to whom it is necessary to confide it. The definition also extends to: (a) a
secret formula or process not patented, but known only to certain individuals using it in
compounding some article of trade having a commercial value; or (b) any formula, pattern,
Trade Secrets
device, or compilation of information that: (1) is used in one's business; and (2) gives the
employer an opportunity to obtain an advantage over competitors who do not possess the
information. (Air Philippines Corporation vs. Pennwell, Inc., G.R. No. 172835 December 13,
2007)

INTELLECTUAL PROPERTY CODE
DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS, AND PATENT
PATENT TRADEMARK COPYRIGHT

A patent is the right granted to Any visible sign capable of Literary and artistic works
an inventor by a State, or by a distinguishing the goods which are original intellectual
regional office acting for (trademark) or services creations in the literary and
several States, which allows (service mark) of an enterprise artistic domain protected from
Definition the inventor to exclude anyone and shall include a stamped or the moment of their creation.
else from commercially marked container of goods. (RA (Pearl and Dean (Phil) Inc. v.
exploiting his invention for a 8293, Sec. 121.1) Shoemart Inc., G.R. No. 148222,
limited period. (Understanding August 15, 2003)
Industrial Property, WIPO, p.5)
20 years from filing date of 10 years and renewable upon It depends on the type of work.
Term of application (RA 8293, Sec. 54) expiration. (RA 8293, Secs. 145- (Term of Protection , Golden
protection 146) Notes Mercantile Law)
1. In general A person may NOT: 1. Performance of a work, once
1. Use a name if the word is it has been lawfully made
a. GR: If put on the market in generic (Lyceum of the accessible to the public, if done
the Philippines by the Philippines v. CA, G.R. No. privately and free of charge or
owner of the product, or 101897, March 5, 1993). for a charitable or religious
with his express consent. 2. Use any name indicating a institution or society.
geographical locations (Ang Si 2. The Making of quotations
XPN: Drugs and medicines Heng vs. Wellington from a published work if they
- introduced in the Department Store G.R. No. L- are compatible with fair use and
Philippines or anywhere 4531, January 10, 1953). only to the extent justified for
else in the world by the 3. Use any name or designation the purpose.
patent owner, or by any contrary to public order or 3. Communication to the public
party authorized to use morals by mass media of articles on
the invention (Sec. 72.1, as 4. Use a name if it is liable to current political, social,
amended by R.A. 9502) deceive trade circles or the economic, scientific or religious
public as to the nature of the topic, lectures, addresses and
b. Where the act is done enterprise identified by that other works of the same nature
privately and on a non- name (IPC, Sec. 165.1). 4. As Part of reports of current
commercial scale or for a 5. Subsequently use a trade events (e.g. music played or
non-commercial purpose. name likely to mislead the tunes on the occasion of a
(IPC, Sec. 72.2) public as a third party (IPC, sporting event and such tunes
Sec. 165.2 [b]). were picked up during a new
Limitations c. Exclusively for 6. Copy or simulate the name of coverage of the event).
on the use of experimental use of the any domestic product (for 5. For Teaching purposes,
right invention for scientific imported products). provided that the source and of
purposes or educational 7. Copy or simulate a mark the name of the author, if
purposes (experimental registered in accordance with appearing in the work, are
use provision). (IPC, Sec. the provisions of IPC (for mentioned.
72.3) imported products). 6. Recording made in
8. Use mark or trade name Educational institutions of a
d. Bolar Provision - In the calculated to induce the public work included in a broadcast for
case of drugs and to believe that the article is the use of such educational
medicines, where the act manufactured in the institutions, provided that such
includes testing, using, Philippines, or that it is recording must be deleted
making or selling the manufactured in any foreign within a reasonable period after
invention including any country or locality other than they were first broadcast.
data related thereto, solely the country or locality where 7. The making of Ephemeral
for purposes reasonably it is in fact manufactured. recordings by a broadcasting
related to the organization by means of its
development and NOTE: Items 4, 5 and 6 only own facilities and for use in its
submission of information applies to imported products own broadcast.
and issuance of approvals and those imported articles shall 8. The Use made of a work by or
by government regulatory not be admitted to entry at any under the direction or control of
agencies required under customhouse of the Philippines the government, by the National
any law of the Philippines (IPC, Sec. 166). Library or by educational,
or of another country that scientific or professional
regulates the institutions where such use is in

MERCANTILE LAW
manufacture, the public interest and is
construction, use or sale of compatible with fair use.
any product. (IPC, Sec. 9. The Public performance of a
72.4) work, in a place where no
admission fee is charged.
e. Where the act consists of 10. Public Display of the original
the preparation for or a copy of the work not made
individual cases, in a by means of a film, slide,
pharmacy or by a medical television image or otherwise
professional, of a medicine on screen or by means of any
in accordance with a other device or process (e.g.
medical prescription. (IPC, Public display using posters
Sec. 72.5) mounted on walls and display
boards.
f. Where the invention is 11. Any use made of a work for
used in any ship, vessel, the purpose of any Judicial
aircraft, or land vehicle of proceedings or for the giving of
any other country professional advice by a legal
entering the territory of practitioner.
the Philippines
temporarily or
accidentally. (IPC, Sec.
72.5)
2. Prior user– Person other

than the applicant, who in
good faith, started using the
invention in the Philippines,
or undertaken serious
preparations to use the
same, before the filing date
or priority date of the
application shall have the
right to continue the use
thereof, but this right shall
only be transferred or
assigned further with his
enterprise or business. (IPC,
Sec. 73)
3. Use by Government– A
government agency or third
person authorized by the
government may exploit
invention even without
agreement of a patent owner
where:
a. Public interest, as
determined by the
appropriate agency of the
government, so requires;
or
b. A judicial or
administrative body has
determined that the
manner of exploitation by
owner of patent is anti-
competitive. (IPC, Sec. 74)
4. Reverse reciprocity of
foreign law– Any condition,
restriction, limitation,
diminution, requirement,

penalty or any similar
burden imposed by the law
of a foreign country on a
Philippine national seeking
protection of intellectual
property rights in that
country, shall reciprocally be
enforceable upon nationals
of said country, within
Philippine jurisdiction. (IPC,
Sec. 231)
Prescriptive 4 years from time of 4 years from the time the cause 4 years from the time the cause
period for commission of infringement of action arose. of action arose. (IPC, Sec. 226)
filing of an (IPC, Sec.79)
action for
damages due
to
infringement
1. Literal infringement Test – 1. That it is duly registered in A person infringes a right
Resort must be had, in the the Intellectual Property Office protected under this Act when
first instance, to words of 2. The validity of the mark one:
the claim. If the accused 3. The plaintiff’s ownership of (a) Directly commits an
matter clearly falls within the mark infringement;
the claim, infringement is 4. The use of the mark or its (b) Benefits from the
committed. colorable imitation by the infringing activity of
alleged infringer results in another person who
Minor modifications are “likelihood of confusion” commits an infringement if
sufficient to put the item (McDonald’s Corp v. L.C. Big Mak the person benefiting has
beyond literal infringement Burger, Inc., G.R. No. been given notice of the
(Godines v. CA, G.R. No. L- 143993, Aug 18, 2004) infringing activity and has
97343, Sept. 13, 1993). 5. Used without the consent of the right and ability to
2. Doctrine of Equivalents – the owner (Prosource control the activities of the
Tests or There is infringement where International Inc.v. Horphag other person;
elements a device appropriates a Research Management SA G.R. (c) With knowledge of
which will prior invention by No. 180073, November 25, 2009) infringing activity, induces,
establish the incorporating its innovative causes or materially
presence of concept and, although with contributes to the
infringement some modification and infringing conduct of
change, performs another (IPC, as amended
substantially the same by R.A. No. 10372, Sec. 216).
function in substantially the
same way to achieve
substantially the same result
(Ibid.).
3. Economic interest test –
when the process-discoverer’s
economic interest are
compromised, i.e., when others
can import the products that
result from the process, such
an act is said to be prohibited.
1. Civil action for infringement 1. Civil – i.e. preliminary 1. Injunction
– (IPC, Sec 76.3). injunction with damages 2. Damages, including legal
2. Criminal action for 2. Criminal — remedies costs and other expenses, as
infringement available shall also include he may have incurred due
Remedies 3. Administrative remedy the seizure, forfeiture and to the infringement as well
against 4. Destruction of infringing destruction of the as the profits the infringer
infringers material (IPC, Sec.76.5). infringing goods and of any may have made due to such
materials and implements infringement
the predominant use of 3. Impounding during the
which has been in the pendency of the action sales
commission of the offense.

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3. Administrative invoices and other
documents evidencing sales
4. Destruction without any
compensation all infringing
copies
5. Moral and Exemplary
damages (IPC, Sec. 216.1); or
6. Seizure and impounding of
any article, which may serve
as evidence in the court
proceedings. (IPC, Sec.
216.2)
TECHNOLOGY TRANSFER ARRANGEMENTS PATENTS
Technology transfer arrangement General Principles
Contracts or agreements involving the transfer of The primary purpose of the patent system is not the
systematic knowledge for the manufacture of a product, reward of the individual but the advancement of the arts
the application of the process, or rendering of a service and sciences. The function of a patent is to add to the sum
including management contracts; and the transfer, of useful knowledge and one of the purposes of the patent
assignment or licensing of all forms of intellectual system is to encourage dissemination of information
property rights, including licensing of computer software concerning discoveries and inventions (Manzano vs. Court
except computer software developed for mass market of Appeals, G.R. No. 113388, September 5, 1997).
(IPC, Sec. 4.2).
The patent law has a threefold purpose: first, patent law
Nature of technology transfer arrangement seeks to foster and reward invention; second, it promotes
disclosures of inventions to stimulate further innovation
Technology transfer arrangement is in the nature of a and to permit the public to practice the invention once the
Voluntary License Contract. It is a contract between an patent expires; and third, the stringent requirements for
intellectual property right owner (licensor) and a second patent protection seek to ensure that ideas in the public
party (licensee), authorizing the latter to commercially domain remain there for the free use of the public. (Pearl
exploit the same intellectual property right under & Dean (Phil.), Incorporated vs. Shoemart, Incorporated,
specified terms and conditions (Salao, 2012). G.R. No. 148222, August 15, 2003)
Undisclosed information Coverage of patents
It is an information which: 1. Invention – any technical solution of a problem in any

1. Is a secret in the sense that it is not, as a body or in field of human activity which is new, involves an inventive
precise configuration and assembly of components, step and is industrially applicable. It may be, or may relate
generally known among, or readily accessible to persons to, a product, or process, or an improvement of any of the
within the circles that normally deal with the kind of foregoing (Sec. 21, IPC).
information in question.
2. Has commercial value because it is a secret 2. Utility Model – An invention qualifies for registration as
3. Has been subjected to reasonable steps under the a utility model if it is new and industrially applicable. (Sec.
circumstances, by the person lawfully in control of the 109, IPC)
information, to keep it a secret (TRIPS Agreement, Article
39). Utility models differ from inventions for which patents for
invention are available mainly in two respects. First, the
Nature of undisclosed information or trade secret technological progress required is smaller than the
technological progress (“inventive step”) required in the
Those trade secrets are of a privileged nature. The case of an invention for which a patent for invention is
protection of industrial property encourages investments available. Second, the maximum term of protection
in new ideas and inventions and stimulates creative provided in the law for a utility model is generally much
efforts for the satisfaction of human needs. It speeds up shorter than the maximum term of protection provided in
transfer of technology and industrialization, and theresby the law for an invention for which a patent for invention
bring about social and economic progress. is available (WIPO Handbook, Chapter 2, “Fields of
Intellectual Property Protection”, WIPO Publication No.
Verily, the protection of industrial secrets is inextricably 489 (E), 2nd Edition, p. 40.).
linked to the advancement of our economy and fosters
healthy competition in trade (Air Philippines Corporation The provisions regarding non-patentable subject-matter,
v. Pennswell, Inc., G.R. No. 172835, Dec. 13, 2007). industrial applicability, novelty and sufficiency of
disclosure under invention patent will apply, mutatis

mutandis, to utility models (Revised Implementing Rules & Prior Art
Regulations for RA 8293, pp. 36-38.).
(a) Everything which has been made available to the
3. Industrial Design – any composition of lines or colors or public anywhere in the world, before the filing date or the
any three-dimensional form, whether or not associated priority date of the application claiming the invention;
with lines or colors, provided that such composition or and
form gives a special appearance to and can serve as
pattern for an industrial product or handicraft. It must be (b) The whole contents of an earlier published Philippine
new or ornamental (Sec. 112, 113 IPC). application or application with earlier priority date of a
different inventor.
An industrial design is not considered new if it differs
from prior designs only in minor respects that can be N.B. The ultimate goal of a patent system is to bring new
mistaken as such prior designs by an ordinary observer. designs and technologies into the public through
(World Intellectual Property Organization, 2004). disclosure; hence ideas, once disclosed to the public
PATENTABLE INVENTIONS without protection of a valid patent, are subject to
appropriation without significant restraint (Pearl & Dean
Patentable inventions vs. Shoemart Inc., G.R. No. 148222, August 15, 2003).
Coverage of patents
Any technical solution of a problem in any field of human
activity which is new, involves an inventive step and is 1. Invention – creation of an object which does not exist in
industrially applicable. It may be, or may relate to, a nature; it requires novelty, inventive step and industrial
product, or process, or an improvement of any of the application for patentability.
foregoing (IPC, Sec. 21).
2. Utility Model - any technical solution of a problem in any
Product patent v. Process patent field of human activity which is new and industrially
applicable. It may be, or may relate to, a product, or
PRODUCT PATENT PROCESS PATENT process, or an improvement of any of the aforesaid. It is
The right to make, use, sell The right to restrain, prevent sometimes referred to as a device or useful object.
and import the product. or prohibit any unauthorized
3. Industrial Design – the utility value or
person or entity from using
ornamental/aesthetic aspect of a useful article (Amador,
the process, and from 2007).
manufacturing, dealing in,
using, selling or offering for Rules on public disclosure
sale, or importing any
product obtained directly or GR: When a work has already been made available to the
public, it shall be non-patentable for absence of novelty.
indirectly from such process.
(IPC, Sec. 71) XPNs: Non-prejudicial disclosure – the disclosure of
information contained in the application during the 12-
Product - e.g. machine, a device, a microorganism. month period before the filing date or the priority date of
the application if such disclosure was made by:
Process - e.g. a method of use, a method of manufacturing, 1. The inventor;
a non-biological process, a microbiological process. 2. A patent office and the information was contained:
a. In another application filed by the inventor and
Improvement – enhancement or modification of any of should have not have been disclosed by the office, or
the foregoing subject to patentability criteria. b. In an application filed without the knowledge or
consent of the inventor by a third party which
Criteria for Patentability (NIA) obtained the information directly or indirectly from
the inventor;
1. Novelty – An invention shall not be considered new if it 3. A third party who obtained the information directly or
forms part of a prior art (Sec. 23, IPC). indirectly from the inventor (IPC, Sec. 25).
2. Inventive Step –if, having regard to prior art, it is not N.B. If the disclosure was made by the designer in the
obvious to a person skilled in the art at the time of the filing case of industrial design the period is 6 months. In other
date or priority date of the application claiming the words, the application must be filed within 6 months after
invention. disclosure for it to be non-prejudicial.
3. Industrially Applicable – An invention that can be Burden of proving want of novelty of an invention
produced and used in any industry (IPC, Sec. 27).
The burden of proving want of novelty is on him who
avers it and the burden is a heavy one which is met only
by clear and satisfactory proof which overcomes every

MERCANTILE LAW
reasonable doubt (Manzano v. CA, G.R. No. 113388, Sept. 5, interconnections of an integrated circuit, or such a three-
1997). dimensional disposition prepared for an integrated
circuit intended for manufacture. Registration is valid for
Inventive step 10 years without renewal counted from date of
commencement of protection.
GR: An invention involves an inventive step if, having 4. Utility model – A name given to inventions in the
regard to prior art, it is not obvious to a person skilled in mechanical field
the art at the time of the filing date or priority date of the
application claiming the invention (IPC Sec. 26). Requisites for an invention to be considered as a
utility model
XPN: In the case of drugs and medicines, there is no
inventive step if the invention results from the mere If it is new and industrially applicable. A model of
discovery of a new form or new property of a known implement or tools of any industrial product even if not
substance which does not result in the enhancement of possessed of the quality of invention but which is of
the known efficacy of that substance (IPC, as amended by practical utility(IPC, Sec. 109.1).
R.A. 9502, Sec. 26.2).
N.B. Only prior art made available to the public before the
filing date or priority date is considered in assessing Industrial Applicability
inventive step (Revised IRR for RA 8293, Rule 206).
An invention that can be produced and used in any
Test of non-obviousness industry meets the industrial application requirement of
patent registrability. This means an invention is not
If any person possessing ordinary skill in the art was able merely theoretical, but also has a practical purpose. If the
to draw the inferences and he constructs that the invention is a product, it should be able to produce a
supposed inventor drew from prior art, then the latter did product and if the invention is a process, it should be able
not really invent. to lay out a process (WIPO, IP Handbook 2nd Edition,
Chapter 2: “Fields of Intellectual Property Protection”
Person skilled in the art Publication No. 489 (E), p. 18.)
A person with ordinary skills in a certain art or field who

is aware of what is a common general knowledge in the Term of a utility model
field at the time of the application. “He is presumed to
have knowledge of all references that are sufficiently 7 years from date of filing of the application (IPC, Sec.
related to one another and to the pertinent art and to have 109.3).
knowledge of all arts reasonably pertinent to the
particular problems with which the inventor was NON-PATENTABLE INVENTIONS
involved. He is presumed also to have had at his disposal
the normal means and capacity for routine work and Non-patentable inventions (PAD-SCAD)
experimentation,” goes the description in the patent rules
(Revised IRR for RA 8293, Rule 207). 1. Plant varieties or animal breeds or essentially
biological process for the production of plants or animals.
Other forms of patentable inventions This provision shall not apply to micro-organisms and
non-biological and microbiological processes
1. Industrial design– Any composition of lines or colors or 2. Aesthetic creations
any three-dimensional form, whether or not associated 3. Discoveries, scientific theories and mathematical
with lines or colors. Provided that such composition or methods
form gives a special appearance to and can serve as 4. Schemes, rules and methods of performing mental acts,
pattern for an industrial product or handicraft (IPC, Sec. playing games or doing business, and programs for
11). computers
5. Anything which is Contrary to public order or morality
NOTE: Generally speaking, an industrial design is the (IPC as amended by R.A. 9502, Sec. 22).
ornamental or aesthetic aspect of a useful article (Amador, 6. Methods for treatment of the human or Animal body
2007). 7. In the case of Drugs and medicines, mere discovery of a
new form or new property of a known substance which
2. Integrated circuit – A product, in its final form, or an does not result in the enhancement of the efficacy of that
intermediate form, in which the elements, at least one of substance
which is an active elements and some of all of the
interconnections are integrally formed in and or on a Patentability of computer programs
piece of material, and in which is intended to perform an
electronic function. GR: Computer programs are not patentable but are
3. Layout design/topography – The three dimensional copyrightable.
disposition, however expressed, of the elements, at least
one of which is an active element, and of some or all of the

XPN: They can be patentable if they are part of a process INVENTIONS CREATED PURSUANT TO A
(e.g. business process with a step involving the use of a COMMISSION
computer program).
Pursuant to a commission
Q: Supposing Albert Einstein were alive today and he
filed with the Intellectual Property Office (IPO) an The person who commissions the work shall own the
application for patent for his theory of relativity patent, unless otherwise provided in the contract.
expressed in the formula E=mc2. The IPO
disapproved Einstein's application on the ground that Pursuant to employment
his theory of relativity is not patentable. Is the IPO's
action correct? (2006 Bar) In case the employee made the invention in the course of
his employment contract, the patent shall belong to:
A: Yes, the IPO is correct because under the Intellectual
Property Code, discoveries, scientific theories and (a) The employee, if the inventive activity is not a part
mathematical methods, are classified to be as of his regular duties even if the employee uses the
"non¬patentable inventions". Einstein's theory of time, facilities and materials of the employer;
relativity falls within the category of being a non-
patentable "scientific theory". (b) The employer, if the inventive activity is the result of
the performance of his regularly-assigned duties,
OWNERSHIP OF A PATENT unless there is an agreement, express or implied, to
the contrary (IPC, Sec. 30).
RIGHT TO A PATENT
Q. X works as a research computer engineer with the
Persons entitled to a patent Institute of Computer Technology, a government
agency. When not busy with his work, but during
1. Inventor, his heirs, or assigns (IPC, Sec 28). office hours, he developed a software program for law
2. Joint invention – Jointly by the inventors (IPC, Sec. 28). firms that will allow efficient monitoring of the cases,
3. Two or more persons invented separately and which software is not at all related to his work.
independently of each other – To the person who filed an Assuming the program is patentable, who has the
application; right over the patent? (2012 Bar)
4. Two or more applications are filed – the applicant who
has the earliest filing date or, the earliest priority date. A. X. In case the employee made the invention in the
First to file rule (IPC, Sec. 29). course of his employment contract, the patent belongs to
5. Inventions created pursuant to a commission – Person the employee, if the inventive activity is not part of his
who commissions the work, unless otherwise provided in regular duties even if the employee uses the time,
the contract (IPC, Sec. 30.1). facilities and materials of the employer.
6. Employee made the invention in the course of his
employment contract: N.B. Take note software program is protected by
a. The employee, if the inventive activity is not a part copyright not patent. However, there are computer
of his regular duties even if the employee uses the related inventions which maybe patentable
time, facilities and materials of the employer.
b. The employer, if the invention is the result of the RIGHT OF PRIORITY
performance of his regularly-assigned duties, unless
there is an agreement, express or implied, to the Priority date
contrary (IPC, Sec. 30.2).
An application for patent filed by any person who has
FIRST-TO-FILE RULE previously applied for the same invention in another
country which by treaty, convention, or law affords
First-to-file rule similar privileges to Filipino citizens, shall be considered
as filed as of the date of filing the foreign application(IPC,
The First-to-File rule states that: Sec. 31).
1. If two (2) or more persons have made the invention
separately and independently of each other, the right to Note: Filing Date is accorded only when all the
the patent shall belong to the person who filed an “requirements” provided under Section 40 are present.
application for such invention, or Priority Date comes into play when there is an application
2. Where two or more applications are filed for the same for patent for the same invention that was filed in another
invention, to the applicant which has the earliest filing country (Salao, 2012).
date (IPC, Sec. 29).
Conditions in availing of priority date
1. The local application expressly claims priority;

2. It is filed within 12 months from the date the earliest
foreign application was filed; and

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3. A certified copy of the foreign application together with “divisional applications” (Smith-Kline Beckman Corp. vs.
an English translation is filed within 6 months from the CA, GR No. 126627, August 14, 2003).
date of filing in the Philippines (Sec. 31, IPC).
Q: Leonard and Marvin applied for Letters Patent
Three (3) Main Areas of Activity in the Grant of claiming the right of priority granted to foreign
Invention Patent applicants. Receipt of petitioners’ application was
acknowledged by respondent Director on March 6,
1. Examination as to form or formality examination; 1954. Their Application for Letters Patent in the US
2. Classification, search and first publication; and for the same invention indicated that the application
3. Examination as to substance or substantive in the US was filed on March 16, 1953. They were
examination advised that the "Specification" they had submitted
was "incomplete" and that responsive action should
Steps in the registration of a patent be filed with them four months from date of mailing,
which was August 5, 1959. On July 3, 1962, petitioners
The procedure for the grant of patent may be summarized submitted two complete copies of the Specification.
as follows: (FAFCS – PuSGraPI) Director of patents held that petitioners' application
1. Filing of the application may not be treated as filed. Is the director correct?
2. Accordance of the filing date
3. Formality examination A: Yes, it is imperative that the application be complete in
4. Classification and Search order that it may be accepted. It is essential to the validity
5. Publication of application of Letters Patent that the specifications be full, definite,
6. Substantive examination and specific. The purpose of requiring a definite and
7. Grant of Patent accurate description of the process is to apprise the public
8. Publication upon grant of what the patentee claims as his invention, to inform the
9. Issuance of certificate (Salao, 2008). Courts as to what they are called upon to construe, and to
convey to competing manufacturers and dealers
Manner of making disclosure information of exactly what they are bound to avoid. To
be entitled to the filing date of the patent application, an
The application shall disclose the invention in a manner invention disclosed in a previously filed application must
sufficiently clear and complete for it to be carried out by a be described within the instant application in such a
person skilled in the art. manner as to enable one skilled in the art to use the same
for a legally adequate utility (Boothe v. Director of Patents,
Claim G.R. No. L-24919, Jan. 28, 1980).
Defines the matter for which protection is sought. Each Rights conferred by a patent application after the first
claim shall be clear and concise, and shall be supported by publication
the description. It must point out and distinctly show the
part, improvement, or combination which the applicant The applicant shall have all the rights of a patentee against
regards as his invention. any person who, without his authorization, exercised any
of the rights conferred under Section 71 in relation to the
Abstract invention claimed in the published patent application, as
if a patent had been granted for that invention, provided
A concise summary of the disclosure of the invention as that the said person had:
contained in the description, claims and merely serves as
technical information. 1. Actual knowledge that the invention that he was using
was the subject matter of a published application; or
Unity of invention 2. Received written notice that the invention was the
subject matter of a published application being identified
The application shall relate to one invention only or to a in the said notice by its serial number
group of inventions forming a single general inventive
concept (IPC, Sec. 38.1). If several independent inventions NOTE: That the action may not be filed until after the
which do not form a single general inventive concept are grant of a patent on the published application and within
claimed in one application, the application must be four (4) years from the commission of the acts
restricted to a single invention (IPC, Sec. 38.2). complained of (IPC, Sec. 46).
Concept of divisional applications Effectivity of a patent
Divisional applications come into play when two or more A patent shall take effect on the date of the publication of
inventions are claimed in a single application but are of the grant of the patent in the IPO Gazette (IPC, Sec. 50.3).
such a nature that a single patent may not be issued for
them. The applicant, is thus required to “divide”, that is, to
limit the claims to whichever invention he may elect,
whereas those inventions not elected may be made the
subject of separate applications which are called

GROUNDS FOR CANCELLATION OF A PATENT REMEDY OF THE TRUE AND ACTUAL INVENTOR
Any interested party may petition to cancel any patent or Remedies of persons with a right to a patent
any claim or parts of a claim any of the following grounds:
(NDCIS) If a person other than the applicant is declared by final
court order or decision as having the right to a patent, he
1. The invention is Not new or patentable; may within 3 months after such decision has become
final:
2. The patent does not Disclose the invention in a manner 1. Prosecute the application as his own
sufficiently clear and complete for it to be carried out by
2. File a new patent application
any person skilled in the art; or
3. Request the application to be refused; or
3. Contrary to public order or morality (IPC, Sec. 61.1). 4. Seek cancellation of the patent (IPC, Sec. 67.1).
4. Patent is found Invalid in an action for infringement Remedies of the true and actual inventor (1993, 2005
(IPC, Sec. 82); Bar)
5. The patent includes matters outside the Scope of the
disclosure contained in the application (IPC, Sec 21, If a person, who was deprived of the patent without his
Regulations on Inter Partes Proceeding, Sec.1). consent or through fraud is declared by final court order
or decision to be the true and actual inventor, the court
Ground/s for cancellation that relate to some of the shall order for his substitution as patentee, or at the
claims or parts of the claim only option of the true inventor, cancel the patent, and award
actual damages in his favor if warranted by the
Cancellation may be effected to such extent only. (IPC, Sec. circumstances (IPC, Sec. 68).
61.2)
Publication of the court order
Grounds for cancellation of a utility model (QCNO)
In the two circumstances aforementioned, the court shall
1. The invention does not Qualify for registration as a furnish the Office a copy of the order or decision which
utility model shall be published in the IPO Gazette within three (3)
2. That the description and the claims do not Comply with months from the date such order or decision became final
the prescribed requirements and executor, and shall be recorded in the register of the
3. Any drawing which is Necessary for the understanding Office (IPC, Sec. 69).
of the invention has not been furnished Time to file action in court
4. That the Owner of the utility model registration is not
the inventor or his successor in title (IPC, Sec. 109.4). The actions indicated in Sections 67 and 68 shall be filed
within one (1) year from the date of publication made in
Grounds for cancellation of an industrial design accordance with Sections 44 and 51, respectively (IPC,
Sec. 70).
1. The subject matter of the industrial design is not
registrable; Q: Cezar works in a car manufacturing company
2. The subject matter is not new; or owned by Joab. Cezar is quite innovative and loves to
3. The subject matter of the industrial design extends tinker with things. With the materials and parts of the
beyond the content of the application as originally filed car, he was able to invent a gas-saving device that will
(IPC, Sec. 120). enable cars to consume less gas. Francis, a co-worker,
saw how Cezar created the device and likewise, came
Grounds for Cancellation of Layout-Design of up with a similar gadget, also using scrap materials
Integrated Circuits. and spare parts of the company. Thereafter, Francis
filed an application for registration of his device with
1. The layout-design is not protectable; the Bureau of Patents. Eighteen months later, Cezar
2. The right holder is not entitled to protection: filed his application for the registration of his device
3. Where the application for registration of the layout- with the Bureau of Patents.
design, was not filed within two (2) years from its first a. Is the gas-saving device patentable? Explain.
commercial exploitation anywhere in the world.
b. Assuming that it is patentable, who is entitled to
N.B. Where the grounds for cancellation are established the patent? What, if any, is the remedy of the losing
with respect only to a part of the layout-design, only the party? (2005 Bar)
corresponding part of the registration shall be cancelled.
(IPC, Sec. 120.3, IPC, as amended by RA 9150) A:
a. Yes. For the gas saving device to be patentable
invention it must be new; must involve an inventive step;
and must be industrially applicable. In the given case, it
shows that the gas saving device is new and with the
innovativeness of Cezar using certain materials of the car,

MERCANTILE LAW
it provides a useful application to save on the has expired, there is no more basis for the issuance of a
consumption of gas. restraining order or injunction against Pharmawealth
insofar as the disputed patent is concerned (Phil.
b. Cezar is entitled to the patent because he is the true and Pharmawealth, Inc. vs. Pfizer Inc., G.R. No. 167715,
actual inventor. While it is true that Francis was the November 17, 2010).
first to file the application for registration of patent, the
same will not work in his favor because he was in bad b. Yes. In the case at bar, the question in the CA concerns
faith. However, considering that under the IP Code, it an interlocutory order, and not a decision. According to IP
adopts the first to file rule, Cezar will have to take action Code, it is the Director General of the IPO that exercises
against Francis within one (1) year from the date of exclusive jurisdiction over decisions of the IPO-BLA.
publication. If he is declared by final court order or However, the IP Code and the Rules and Regulations are
decision as having the right to a patent, he may within 3 bereft of any remedy regarding interlocutory orders of
months after such decision has become final: a) prosecute the IPO-BLA, the only remedy available to Pfizer is to
the application as his own application in place of the apply the Rules of Court suppletorily. Under the Rules of
applicant; b) file a new patent application in respect of the Court, a petition for certiorari to the CA is the proper
same invention; c) request the application to be refused; remedy. Hence, the CA had jurisdiction to rule on the
or d) seek cancellation of the patent, if one has already order.
been issued.
REMEDY IN CASES OF INTERLOCUTORY ORDERS OF
Q: Pfizer is the registered owner of a patent BLA-IPO
pertaining to Sulbactam Ampicillin. It is marketed
under the brand name “Unasyn.” Pfizer later on RA 8293 is silent with respect to any remedy available to
discovered that Pharmawealth submitted bids for the litigants who intend to question an inter-locutory order
supply of Sulbactam Ampicillin to several hospitals issued by the BLA-IPO. Moreover, Section 1(c), Rule 14 of
without the Pfizer’s consent. Pfizer filed a complaint the Rules and Regula-tions on Administrative Complaints
for patent infringement with a prayer for permanent for Violation of Laws Involving Intellectual Property
injunction and forfeiture of the infringing products. A Rights simply provides that interlocutory orders shall not
preliminary injunction effective for 90 days was be appealable. The said Rules and Regulations do not
granted by the IPO’s Bureau of Legal Affairs (IPO- prescribe a procedure within the administrative
BLA). Aggrieved by the denial of the motion for machinery to be followed in assailing orders issued by the
extension of the preliminary injunction, Pfizer then BLA-IPO pending final resolution of a case filed with them.
filed a Special Civil Action for Certiorari in the Court Hence, in the absence of such a remedy, the provisions of
of Appeals (CA) assailing the denial. The CA the Rules of Court shall apply in a suppletory manner, as
subsequently issued a temporary restraining order in provided under Section 3, Rule 1 of the same Rules and
favor of Pfizer. While the case was pending in the CA, Regulations. Hence, in the present case, respondents
Pfizer filed with the Regional Trial Court of Makati correctly resorted to the filing of a special civil action for
(RTC) a complaint for infringement and unfair certiorari with the CA to question the as-sailed Orders of
competition against Pharmawealth. Pending the the BLA-IPO, as they cannot appeal therefrom and they
said case, a motion to dismiss the case was filed for have no other plain, spee-dy and adequate remedy in the
being moot and academic, contending that Pfizer's ordinary course of law. This is consistent with Sections 1
patent had already lapsed. In the same manner, and 4, Rule 65 of the Rules of Court, as amended.
Pharmawealth also moved for the reconsideration of (Philippine Pharmawealth v. Pfizer Inc., G.R. No. 167715,
the temporary restraining order issued by the CA on November 17, 2010, in Divina, 2014).
the same basis that the patent right sought to be
protected has been extinguished due to the lapse of RIGHTS CONFERRED BY A PATENT
the patent license and on the ground that the CA has
no jurisdiction to review the order of the BLA-IPO as Rights conferred by a patent
said jurisdiction is vested by law in the Office of the
Director General of the IPO. 1. Subject matter is a product – Right to restrain, prohibit
and prevent any unauthorized person or entity from
a. Can Pfizer validly seek for the issuance of a making, using, offering for sale, selling or importing the
restraining order or injunction to enjoin product.
Pharmawealth from selling the product when the
patent allegedly infringed has already lapsed? 2. Subject matter is a process – Right to restrain prohibit
and prevent any unauthorized person or entity from
b. Did the Court of Appeals have jurisdiction to rule on manufacturing, dealing in, using, offering for sale, selling
the order of the IPO-BLA? or importing any product obtained directly or indirectly
from such process (IPC, Sec. 71).
A:
a. No. The exclusive right to make, use and sell the 3. Right to assign the patent, to transfer by succession, and
patented machine, article, product, and to use the to conclude licensing contracts (IPC, Sec. 71.2).
patented process for the purpose of industry or
commerce, throughout the territory of the Philippines Effectivity of the rights conferred by a patent
exists only during the term of the patent. Since the patent

The rights conferred by a patent application take effect Prior user
after publication in the Official Gazette (IPC, Sec 46).
Person other than the applicant, who in good faith,
LIMITATIONS OF PATENT RIGHTS started using the invention in the Philippines, or
undertaken serious preparations to use the same,
The owner of a patent has no right to prevent third parties before the filing date or priority date of the application
from making, using, offering for sale, selling or importing shall have the right to continue the use thereof, but this
a patented product in the following circumstances: right shall only be transferred or assigned further with
his enterprise or business (IPC, Sec. 73).
a. Using a patented product after it has been put on the
market in the Philippines by the owner of the Use by Government
product, or with his express consent.
A Government agency or third person authorized by the
N.B. In case of drugs or medicines the said limitation Government may exploit the invention even without
applies after a drug or medicine has been introduced agreement of the patent owner where:
in the Philippines or anywhere else in the world by
the patent owner, or by any party authorized to use (a) The public interest, in particular, national security,
the invention. This allows parallel importation nutrition, health or the development of other sectors, as
for drugs and medicines. determined by the appropriate agency of the government,
so requires; or
The right to import the drugs and medicines shall be
available to any government agency or any private (b) A judicial or administrative body has determined
third party. (IPC, Sec. 72.1, as amended by RA No. that the manner of exploitation, by the owner of the
9502) patent or his licensee, is anti- competitive; or
b. Where the act is done privately and on a non- (c) In the case of drugs and medicines, there is a
commercial scale or for a non-commercial purpose national emergency or other circumstance of extreme
(IPC, Sec. 72.2). urgency requiring the use of the invention; or
c. Exclusively for experimental use of the invention for (d) In the case of drugs and medicines, there is a public
scientific purposes or educational purposes. (IPC, non-commercial use of the patent by the patentee,
Sec. 72.3). without satisfactory reason; or
d. In the case of drugs and medicines, where the act (e) In the case of drugs and medicines, the demand for
includes testing, using, making or selling the the patented article in the Philippines is not being met to
invention including any data related thereto, solely an adequate extent and on reasonable terms, as
for purposes reasonably related to the development determined by the Secretary of the Department of Health.
and submission of information and issuance of
approvals by government regulatory agencies NOTE: The use by the Government, or third person
required under any law of the Philippines or of authorized by the Government shall be subject, where
another country that regulates the manufacture, applicable, to the following provisions:
construction, use or sale of any product.
(a) In situations of national emergency or other
The data submitted by the original patent holder may circumstances of extreme urgency, the right holder shall
be protected from unfair commercial use provided in be notified as soon as reasonably practicable;
Article 39.3 of the TRIPS Agreement (IPC, Sec. 72.4).
(b) In the case of public non-commercial use of the patent
e. Where the act consists of the preparation for by the patentee, without satisfactory reason, the right
individual cases, in a pharmacy or by a medical holder shall be informed promptly;
professional, of a medicine in accordance with a
medical prescription. (Sec. 72.5, IPC) (c) If the demand for the patented article in the
Philippines is not being met to an adequate extent and on
f. Where the invention is used in any ship, vessel, reasonable terms as determined by the Secretary of
aircraft, or land vehicle of any other country entering Health, the right holder shall be informed promptly;
the territory of the Philippines temporarily or
accidentally: Provided, That such invention is used (d) The scope and duration of such use shall be limited to
exclusively for the needs of the ship, vessel, aircraft, the purpose for which it was authorized;
or land vehicle and not used for the manufacturing of
anything to be sold within the Philippines. (IPC, Sec. (e) Such use shall be non-exclusive;
72.5).
(f) The right holder shall be paid adequate remuneration
in the circumstances of each case, taking into account the
economic value of the authorization; and

MERCANTILE LAW
(g) The existence of a national emergency or other ELEMENTS TERM OF
circumstances of extreme urgency, in the case of drugs PROTECTION
and medicines shall be subject to the determination of the INVENTION New Twenty (20)
President of the Philippines for the purpose of
Inventive years from the
determining the need for such use or other exploitation,
which shall be immediately executory. Step date of filing with
Industrial payment of
Reverse reciprocity of foreign law annuities. No
Applicability renewal. (ipc, Sec.
Any condition, restriction, limitation, diminution, 54).
requirement, penalty or any similar burden imposed by
UTILITY New Seven (7) years
the law of a foreign country on a Philippine national
MODEL Industrial from the date of
seeking protection of intellectual property rights in that
filing without
country, shall reciprocally be enforceable upon nationals
renewal
of said country, within Philippine jurisdiction. (Sec. 231, Applicability
(IPC, Sec. 109.3).
IPC)
Q: X invented a device which, through the use of noise, INDUSTRIAL New or Five (5) years
can recharge a cellphone battery. He applied for and DESIGN Ornamental from the date of
was granted a patent on his device, effective within filing with 2 five
the Philippines. As it turns out, a year before the grant year term
of X's patent, Y, also an inventor, invented a similar renewals upon
device which he used in his cellphone business in
payment of fees
Manila. But X files an injunctive suit against Y to stop
him from using the device on the ground of patent (IPC, Sec. 118.2).
infringement. Will the suit prosper? (2011 Bar)
PATENT INFRINGEMENT
A: No, since Y is a prior user in good faith.
Civil Infringement
Parallel importer
The making, using, offering for sale, selling, or importing
One which imports, distributes, and sells genuine a patented product or a product obtained directly or
products in the market, independently of an exclusive indirectly from a patented process, or the use of a
distributorship or agency agreement with the patented process without the authorization of the
manufacturer. patentee constitutes patent infringement.
Doctrine of exhaustion
Exemption:
Also known as the doctrine of first sale, it provides that the
patent holder has control of the first sale of his invention. a. Parallel importation for patented drugs and medicines;
He has the opportunity to receive the full consideration
for his invention from his sale. Hence, he exhausts his b. In the case of drugs and medicines, where the act
rights in the future control of his invention. includes testing, using, making or selling the invention
including any data related thereto, solely for purposes
It espouses that the patentee who has already sold his reasonably related to the development and submission of
invention and has received all the royalty and information and issuance of approvals by government
consideration for the same will be deemed to have regulatory agencies required under any law of the
released the invention from his monopoly. The invention Philippines or of another country that regulates the
thus becomes open to the use of the purchaser without manufacture, construction, use or sale of any product;
further restriction. (Adams v. Burke, 84 U.S. 17, 1873)
c. Use of Invention by Government;
Application of the doctrine of exhaustion in the
Philippine jurisdiction d. Compulsory licensing;
GR: Patent rights are exhausted by first sale in the e. Procedures on Issuance of a Special Compulsory
Philippines (Domestic exhaustion). License under the TRIPS Agreement for patented drugs
and medicines.
XPN: On drugs and medicines: first sale in any jurisdiction
exhausts the rights of the owner thereof (International Contributory Infringement
exhaustion) (R.A. 9502).
Anyone who actively induces the infringement of a patent
Duration of protection of an invention, utility model or provides the infringer with a component of a patented
and industrial design product or of a product produced because of a patented
process knowing it to be especially adopted for infringing
the patented invention and not suitable for substantial

non-infringing use shall be liable as a contributory is an infringement of the patent, if the substitute performs
infringer and shall be jointly and severally liable with the the same function and was well known at the date of the
infringer (Sec. 76.6, IPC) patent as a proper substitute for the omitted ingredient
(Gsell v. Yap-Jue, G.R. No. L-4720, Jan. 19, 1909).
Criminal Infringement
Meaning of “equivalent device”
If infringement is repeated by the infringer or by anyone
in connivance with him after finality of the judgment of It is such as a mechanic of ordinary skill in construction of
the court against the infringer, the offenders shall, similar machinery, having the forms, specifications and
without prejudice to the institution of a civil action for machine before him, could substitute in the place of the
damages, be criminally liable. (IPC, Sec. 84) mechanism described without the exercise of the inventive
faculty.
TEST IN PATENT INFRINGEMENT
Doctrine of file wrapper estoppel
Literal Infringement - The extent of protection conferred
by the patent shall be determined by the claims, which are This doctrine balances the doctrine of equivalents.
to be interpreted in the light of the description and Patentee is precluded from claiming as part of patented
drawings. (Sec. 75, IPC) product that which he had to excise or modify in order to
avoid patent office rejection, and he may omit any
Equivalents - Account shall be taken of elements which additions that he was compelled to add by patent office
are equivalent to the elements expressed in the claims, so regulations.
that a claim shall be considered to cover not only all the
elements as expressed therein, but also equivalents. (Sec. Remedies of the owner of the patent against
75, IPC) infringers
Literal Infringement - In using literal infringement, 1. Civil action for infringement – The owner may bring a
resort must be had, in the first instance, to the words of civil action with the appropriate Regional Trial Court to
the claim. If accused matter clearly falls within the claim, recover from infringer the damages sustained by the
infringement is made out and that is the end of it. To former, plus attorney’s fees and other litigation
determine whether the particular item falls within the expenses, and to secure an injunction for the
literal meaning of the patent claims, the Court must protection of his rights. (IPC, Sec 76.2) If the damages
juxtapose the claims of the patent and the accused are inadequate or cannot be reasonably ascertained
product within the overall context of the claims and with reasonable certainty, the court may award by way
specifications, to determine whether there is exactly of damages a sum equivalent to reasonable royalty (IPC,
identity of all material elements. (Godines vs. The Sec 76.3).
Honorable Court of Appeals, G.R. No. 97343, September 13, 2. Criminal action for infringement – If the infringement is
1993) repeated, the infringer shall be criminally liable and
upon conviction, shall suffer imprisonment of not less
Doctrine of Equivalents - According to the doctrine of than six (6) months but not more than three (3) years
equivalents, an infringement also occurs when a device and/or a fine not less than P100,000.00 but not more
appropriates a prior invention by incorporating its than P300,000.00
innovative concept and, despite some modification and
change, performs substantially the same function in 3. Administrative remedy – Where the amount of damages
substantially the same way to achieve substantially the claimed is not less than P200,000.00, the patentee may
same result. (Godines vs. The Honorable Court of Appeals, choose to file an administrative action against the
G.R. No. 97343, September 13, 1993) infringer with the Bureau of Legal Affairs (BLA). The
BLA can issue injunctions, order direct infringer to pay
The doctrine of equivalents thus requires satisfaction of patentee damages, but unlike regular courts, the BLA
the function-means- and-result test, the patentee having may not issue search and seizure warrants or warrants
the burden to show that all three components of such of arrest.
equivalency test are met. (Smithkline Beckman
Corporation vs. The Honorable Court of Appeals, G.R. No. 4. Destruction of Infringing material- The court may, in its
126627, August 14, 2003) discretion, order that the infringing goods, materials
and implements predominantly used in the
Q: Does the use of a patented process by a third infringement be disposed of outside the channels of
person constitute an infringement when the alleged commerce of destroyed, without compensation (IPC,
infringer has substituted, in lieu of some unessential Sec.76.5).
part of the patented process, a well-known
mechanical equivalent? Limitations to the civil/criminal action
A: Yes, under the doctrine of mechanical equivalents, the 1. No damages can be recovered for acts of infringement
patentee is protected from colorable invasions of his committed more than four (4) years before the filing of
patent under the guise of substitution of some part of his the action for infringement (IPC, Sec. 79).
invention by some well-known mechanical equivalent. It

MERCANTILE LAW
2. The criminal action prescribes in three (3) years from 2. Those pursuant to which the licensor reserves the
the commission of the crime (IPC, Sec. 84). right to fix the sale or resale prices of the products
manufactured on the basis of the license;
Persons who can file an action for infringement
3. Those that contain restrictions regarding the volume
1. The patentee or his successors-in-interest may file an and structure of production;
action for infringement (Creser Precision Systems, Inc. v.
CA, G.R. No. 118708, Feb. 2, 1998). 4. Those that prohibit the use of competitive
2. Any foreign national or juridical entity who meets the technologies in a non-exclusive technology transfer
requirements of Sec. 3 and not engaged in business in agreement;
the Philippines, to which a patent has been granted or
assigned, whether or not it is licensed to do business in 5. Those that establish a full or partial purchase option
the Philippines (IPC, Sec. 77). in favor of the licensor;
DEFENSES IN ACTION FOR INFRINGEMENT 6. Those that obligate the licensee to transfer for free to
the licensor the inventions or improvements that
Defenses in action for infringement (IGNDC) may be obtained through the use of the licensed
technology;
1. Invalidity of the patent (IPC, Sec. 81);
7. Those that require payment of royalties to the
2. Any of the Grounds for cancellation of patents: owners of patents for patents which are not used;
a. That what is claimed as the invention is not New or 8. Those that prohibit the licensee to export the
patentable licensed product unless justified for the protection of
the legitimate interest of the licensor such as exports
b. That the patent does not Disclose the invention in to countries where exclusive licenses to manufacture
a manner sufficiently clear and complete for it to and/or distribute the licensed product(s) have
be carried out by any person skilled in the art; or already been granted;
c. That the patent is Contrary to public order or 9. Those which restrict the use of the technology
morality (IPC, Sec. 61). supplied after the expiration of the technology
transfer arrangement, except in cases of early
3. Prescription termination of the technology transfer arrangement
due to reason(s) attributable to the licensee;
LICENSING
10. Those which require payments for patents and other
Modes of obtaining license to exploit patent rights industrial property rights after their expiration,
1. Voluntary licensing (IPC, Sec. 85) and termination arrangement;
2. Compulsory licensing (IPC, Sec. 93).
11. Those which require that the technology recipient
VOLUNTARY LICENSING shall not contest the validity of any of the patents of
the technology supplier;
The grant by the patent owner to a third person of the
right to exploit a patented invention. 12. Those which restrict the research and development
activities of the licensee designed to absorb and
Rights of a licensor in voluntary licensing adapt the transferred technology to local conditions
or to initiate research and development programs in
In the absence of any provision to the contrary in the connection with new products, processes or
technology transfer arrangement, the grant of a license equipment;
shall not prevent the licensor from granting further
licenses to third person nor from exploiting the subject 13. Those which prevent the licensee from adapting the
matter of the technology transfer arrangement himself imported technology to local conditions, or
(IPC, Sec. 89). introducing innovation to it, as long as it does not
impair the quality standards prescribed by the
Prohibited clauses licensor;
1. Those which impose upon the licensee the obligation 14. Those which exempt the licensor for liability for non-
to acquire from a specific source capital goods, fulfillment of his responsibilities under the
intermediate products, raw materials, and other technology transfer arrangement and/or liability
technologies, or of permanently employing arising from third party suits brought about by the
personnel indicated by the licensor; use of the licensed product or the licensed
technology; and
15. Other clauses with equivalent effects (IPC, Sec. 87).

Exception on prohibited clauses that it is the Director General of the IPO who may
grant a license to exploit patented invention under
In exceptional or meritorious cases where substantial the grounds enumerated therein.
benefits will accrue to the economy, such as high
technology content, increase in foreign exchange NOTE: Clarification either by legislation of judicial
earnings, employment generation, regional dispersal of interpretation as to who has jurisdiction should be made
industries and/or substitution with or use of local raw to avoid confusion (Salao, 2012).
materials, or in the case of Board of Investments,
registered companies with pioneer status, exemption The Director General of the Intellectual Property Office
from any of the above requirements may be allowed by may grant a license to exploit a patented invention, even
the Documentation, Information and Technology without the agreement of the patent owner, in favor of any
Transfer Bureau after evaluation thereof on a case by case person who has shown his capability to exploit the
basis (IPC, Sec. 91). invention, under any of the following circumstances:
Mandatory provisions 1. National emergency or other circumstances of

extreme urgency;
1. That the laws of the Philippines shall govern the 2. Where the public interest, in particular, national
interpretation of the same and in the event of security, nutrition, health or the development of
litigation, the venue shall be the proper court in the other vital sectors of the national economy as
place where the licensee has its principal office; determined by the appropriate agency of the
Government, so requires; or
2. Continued access to improvements in techniques and 3. Where a judicial or administrative body has
processes related to the technology shall be made determined that the manner of exploitation by the
available during the period of the technology transfer owner of the patent or his licensee is anti-
arrangement; competitive; or
4. In case of public non-commercial use of the patent by
3. In the event the technology transfer arrangement the patentee, without satisfactory reason;
shall provide for arbitration, the Procedure of 5. If the patented invention is not being worked in the
Arbitration of the Arbitration Law of the Philippines Philippines on a commercial scale, although capable
or the Arbitration Rules of the United Nations of being worked, without satisfactory reason:
Commission on International Trade Law Provided, that the importation of the patented article
(UNCITRAL) or the Rules of Conciliation and shall constitute working or using the patent; and
Arbitration of the International Chamber of 6. Where the demand for patented drugs and medicines
Commerce (ICC) shall apply and the venue of is not being met to an adequate extent and on
arbitration shall be the Philippines or any neutral reasonable terms, as determined by the Secretary of
country; and the Department of Health. (IPC, Sec. 93, as amended
by RA 9502).
4. The Philippine taxes on all payments relating to the
technology transfer arrangement shall be borne by Procedures on Issuance of a Special Compulsory
the licensor (IPC, Sec. 88). License under the TRIPS Agreement.
Effect of non-conformance with the prohibited The Director General of the Intellectual Property Office,
clauses and mandatory provisions upon the written recommendation of the Secretary of the
Department of Health, shall, upon filing of a petition, grant
GR: Non-conformance shall automatically render the a special compulsory license for the importation of
technology transfer arrangement unenforceable. patented drugs and medicines. The special compulsory
license for the importation contemplated under this
XPN: Unless said technology transfer arrangement is provision shall be an additional special alternative
approved and registered with the Documentation, procedure to ensure access to quality affordable
Information and Technology Transfer Bureau under the medicines and shall be primarily for domestic
provisions of Section 91 on exceptional cases (IPC, Sec. consumption: Provided, that adequate remuneration shall
92). be paid to the patent owner either by the exporting or
importing country. The compulsory license shall also
COMPULSORY LICENSING contain a provision directing the grantee the license to
exercise reasonable measures to prevent the re-
Jurisdiction exportation of the products imported under this
provision.
1. The Director of Legal Affairs may grant a license to
exploit a patented invention, even without the The grant of a special compulsory license shall be
agreement of the patent owner, in favor of any immediately executory.
person who has shown his capability to exploit the
invention (IPC, Sec. 93). No court, except the Supreme Court of the Philippines,
2. R.A. 9502 (Universally Accessible Cheaper and Quality shall issue any temporary restraining order or
Medicines Act of 2008) however amended Sec. 93 so preliminary injunction or such other provisional

MERCANTILE LAW
remedies that will prevent the grant of the special cross-license on reasonable terms to use the
compulsory license. invention claimed in the second patent;
3. The use authorized in respect of the first patent shall
A compulsory license shall also be available for the be non- assignable except with the assignment of the
manufacture and export of drugs and medicines to any second patent; and
country having insufficient or no manufacturing capacity 4. The terms and conditions of Sections 95, 96 and 98
in the pharmaceutical sector to address public health to 100 of IP Code.
problems: Provided, That, a compulsory license has been
granted by such country or such country has, by Compulsory Licensing of Patents Involving Semi-
notification or otherwise, allowed importation into its Conductor Technology.
jurisdiction of the patented drugs and medicines from the
Philippines in compliance with the TRIPS Agreement. In the case of compulsory licensing of patents involving
semi-conductor technology, the license may only be
The right to grant a special compulsory license under this granted in case of public non-commercial use or to
section shall not limit or prejudice the rights, obligations remedy a practice determined after judicial or
and flexibilities provided under the TRIPS Agreement and administrative process to be anti-competitive (IPC, Sec.
under Philippine laws, particularly Section 72.1 and 96).
Section 74 of the Intellectual Property Code, as amended
under this Act. It is also without prejudice to the extent to Terms and condition of a compulsory license
which drugs and medicines produced under a compulsory
license can be exported as allowed in the TRIPS 1. The scope and duration of such license shall be
Agreement and applicable laws. (IPC, Sec. 93-A, as limited to the purpose for which it was authorized;
amended by RA 9502) 2. The license shall be non-exclusive;
3. The license shall be non-assignable, except with that
Requirement to obtain authorization from the patent part of the enterprise or business with which the
owner on reasonable commercial terms and invention is being exploited;
conditions 4. Use of the subject matter of the license shall be
devoted predominantly for the supply of the
General Rule: The license will only be granted after the Philippine market: Provided, that this limitation shall
petitioner has made efforts to obtain authorization from not apply where the grant of the license is based on
the patent owner on reasonable commercial terms and the ground that the patentee's manner of exploiting
conditions but such efforts have not been successful the patent is determined by judicial or administrative
within a reasonable period of time (IPC, Sec. 95.1). process, to be anti-competitive.
5. The license may be terminated upon proper showing
Exceptions: that circumstances which led to its grant have ceased
to exist and are unlikely to recur: Provided, That
1. Where the petition for compulsory license seeks to adequate protection shall be afforded to the
remedy a practice determined after judicial or legitimate interest of the licensee; and
administrative process to be anti-competitive; 6. The patentee shall be paid adequate remuneration
2. In situations of national emergency or other taking into account the economic value of the grant
circumstances of extreme urgency; or authorization, except that in cases where the
3. In cases of public non-commercial use; and license was granted to remedy a practice which was
4. In cases where the demand for the patented drugs determined after judicial or administrative process,
and medicines in the Philippines is not being met to to be anti-competitive, the need to correct the anti-
an adequate extent and on reasonable terms, as competitive practice may be taken into account in
determined by the Secretary of the Department of fixing the amount of remuneration (IPC, Sec. 100).
Health (R.A. 8293, Sec. 95 as amended by R.A. 9502).
Amendment of compulsory license
Compulsory License Based on Interdependence of
Patents. Upon the request of the patentee or the licensee, the
Director of Legal Affairs may amend the decision granting
If the invention protected by a patent, hereafter referred the compulsory license, upon proper showing of new facts
to as the "second patent," within the country cannot be or circumstances justifying such amendment. (IPC, Sec.
worked without infringing another patent, hereafter 101.1).
referred to as the "first patent," granted on a prior
application or benefiting from an earlier priority, a Cancellation of compulsory license
compulsory license may be granted to the owner of the
second patent to the extent necessary for the working of Upon the request of the patentee, the Director may cancel
his invention, subject to the following conditions: the compulsory license:
1. The invention claimed in the second patent involves (a) If the ground for the grant of the compulsory license
an important technical advance of considerable no longer exists and is unlikely to recur;
economic significance in relation to the first patent; (b) If the licensee has neither begun to supply the
2. The owner of the first patent shall be entitled to a domestic market nor made serious preparation therefor;

(c) If the licensee has not complied with the prescribed Manner of effecting transfer of rights
terms of the license. (IPC, Sec. 101.2).
1. By inheritance or bequest
Surrender of compulsory license 2. License contract
The licensee may surrender the license by a written Effect of an assignment of a patent
declaration submitted to the Intellectual Property Office.
The assignment works as an estoppel by deed, preventing
NOTE: The Director shall cause the amendment, the assignor from denying the novelty and utility of the
surrender, or cancellation in the Register, notify the patented invention when sued by the assignee for
patentee, and/or the licensee, and cause notice thereof to infringement.
be published in the IPO Gazette. (IPC, Sec. 101.3 and
101.4). Effect if the assignment was not recorded in the IPO
Licensee’s exemption from liability A deed of assignment affecting title shall be void as against
any subsequent purchaser or mortgagee for valuable
Any person who works a patented product, substance consideration and without notice unless, it is so recorded
and/or process under a license granted under this in the Office, within three (3) months from the date of said
Chapter, shall be free from any liability for infringement: instrument, or prior to the subsequent purchase or
Provided however, that in the case of voluntary licensing, mortgage. However, even without recording, the
no collusion with the licensor is proven. This is without instruments are binding upon the parties.
prejudice to the right of the rightful owner of the patent
to recover from the licensor whatever he may have Maintenance of a suit for infringement by a licensee
received as royalties under the license (Sec. 102, IPC).
GR: A licensee may NOT maintain a suit for infringement.
Licensee’s exemption from liability Only the patentees, his heirs, assignee, grantee or
personal representatives may bring an action for
Any person who works a patented product, substance infringement.
and/or process under a license granted under this
Chapter, shall be free from any liability for infringement: XPN: If the licensing agreement provides that the licensee
Provided however, that in the case of voluntary licensing, may bring an action for infringement or if he was
no collusion with the licensor is proven. This is without authorized to do so by the patentee through a special
prejudice to the right of the rightful owner of the patent power of attorney.
to recover from the licensor whatever he may have
received as royalties under the license (IPC, Sec. 102). TRADEMARKS
ASSIGNMENT AND TRANSMISSION OF RIGHTS DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE

NAMES
Patents or applications for patents and invention to which
they relate, shall be protected in the same way as the "Mark" means any visible sign capable of distinguishing
rights of other property under the Civil Code. the goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
Inventions and any right, title or interest in and to patents container of goods;
and inventions covered thereby, may be assigned or
transmitted by inheritance or bequest or may be the "Collective mark" means any visible sign designated as
subject of a license contract (IPC, Sec. 103). such in the application for registration and capable of
distinguishing the origin or any other common
Assignment of Inventions characteristic, including the quality of goods or services of
different enterprises which use the sign under the control
An assignment may be of the entire right, title or interest of the registered owner of the collective mark;
in and to the patent and the invention covered thereby, or
of an undivided share of the entire patent and invention, "Trade name" means the name or designation
in which event the parties become joint owners thereof. identifying or distinguishing an enterprise.
An assignment may be limited to a specified territory (IPC, (IPC, Sec. 121.1, 121.2, 121.3)
Sec. 104).
Trademark v. Tradename
Form of Assignment.
TRADEMARK TRADE NAME
The assignment must be in writing, acknowledged before Identifies or distinguishes Identifies or distinguishes
a notary public or other officer authorized to administer the goods or services the business or enterprise
oath or perform notarial acts, and certified under the Registration is not
hand and official seal of the notary or such other officer. Registration is required
required.
(Sec. 105, IPC)

MERCANTILE LAW
Functions of trademark General and reinstated that of the BLA. Did
Birkenstock acquire ownership over the said marks
1. Indicator of source or origin; by mere application or registration?
2. Indicator of quality;
3. Indicator of goodwill or business reputation; A: No. It is not the application or registration of a
4. Advertise the product or service it symbolizes trademark that vests ownership thereof, but it is the
ownership of a trademark that confers the right to
Obligations under the Paris Convention register the same. A trademark is an industrial property
over which its owner is entitled to property rights which
In view of the obligations under the Paris Convention, the cannot be appropriated by un-scrupulous entities that, in
Philippines is obligated to assure nationals of the one way or another, happen to register such trademark
signatory-countries that they are afforded an effective ahead of its true and lawful owner. The presumption of
protection against violation of their intellectual property ownership accorded to a registrant must then necessarily
rights in the Philippines in the same way that their own yield to superior evidence of actual and real ownership of
countries are obligated to accord similar protection to a trademark. (Birkenstock Orthopaedie GMBH and Co. KG
Philippine nationals. "Thus, under Philippine law, a trade v. Philippine Shoe Expo Marketing Corporation G.R. No.
name of a national of a State that is a party to the Paris 194307, November 20, 2013, in Divina, 2014)
Convention, whether or not the trade name forms part of
a trademark, is protected "without the obligation of filing Q: E.Y. Industrial is a domestic corporation engaged in
or registration. Thus, the applicant for registration of the production, distribution and sale of air
trademark is not the lawful owner thereof and is not compressors and other industrial tools and
entitled to reg-istration if the trademark has been in prior equipment. Shen Dar is a Taiwan-based foreign
use by a national of a country which is a signatory to the corporation engaged in the manufacture of air
Paris Convention (Ecole De Cuisine Manille Inc. v. Renaud compressors. Both companies claimed to have the
Cointreau & Cie and Le Condron Bleu Int’l B.V., GR 185830, right to register the trademark "VESPA" for air
June 5, 2013, in Divina, 2014). compressors.
ACQUISITION OF OWNERSHIP OF MARK On June 9, 1997, Shen Dar filed Trademark

Application with the IPO for the mark "VESPA,
Acquisition of marks Chinese Characters and Device" for use on air
compressors and welding machines. On July 28, 1999,
The rights in a mark shall be acquired through EYIS filed Trademark Application also for the mark
registration made validly in accordance with the "VESPA," for use on air compressors.
provisions of the IP Code (IPC, Sec. 122).
On June 21, 2004, Shen Dar filed a Petition for
NOTE: Registration does not confer upon the registrant Cancellation of EYIS’ COR. Shen Dar primarily argued
an absolute right to the registered mark. The certificate of that the issuance of the COR in favor of EYIS violated
registration is merely a prima facie proof that the Section 123.1 paragraphs (d), (e) and (f) of Republic
registrant is the owner of the registered mark or trade Act No. (RA) 8293, otherwise known as the
name. Evidence of prior and continuous use of the mark Intellectual Property Code (IP Code), having first filed
or trade name by another can overcome the presumptive an application for the mark.
ownership of the registrant and may very well entitle the
former to be declared owner in an appropriate case. Who is the true owner of the mark?
Q: Birkenstock, applied for various trademark A: E.Y. Industrial is the true owner of the mark. Under the
registrations before the IPO. However, registration Intellectual Property Code, the registration of a mark is
proceedings of the subject applications were prevented with the filing of an earlier application for
suspended in view of an existing registration of the registration. This must not, however, be interpreted to
mark "BIRKENSTOCK AND DEVICE" in the name of mean that ownership should be based upon an earlier
STIIC, predecessor-in-interest of PSEMC. Birkenstock filing date. Notably, the Court has ruled that the prior and
filed a cancellation case on the ground that it is the continuous use of a mark may even overcome the
lawful and rightful owner of the Birkenstock marks. presumptive ownership of the registrant and be held as
However, STIIC/PSEMC’s registration expired, the owner of the mark. Registration, without more, does
thereby resulting in the cancellation of such mark. not confer upon the registrant an absolute right to the
Accordingly, the cancellation case was dismissed for registered mark. The certificate of registration is merely a
being moot and academic. prima facie proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior and
The aforesaid cancellation paved the way for the continuous use of the mark or trade name by another can
publication of the subject applications in the IPO e- overcome the presumptive ownership of the registrant
Gazette. In response, respondent filed three (3) and may very well entitle the former to be declared owner
separate Inter Partes Cases. The BLA-IPO sustained in an appropriate case.
STIIC/PSEMC’s opposition. IPO Director General
reversed and set aside the ruling of the BLA. The CA E.Y. Industrial’s prior adoption and continuous use of the
reversed and set aside the ruling of the IPO Director mark "VESPA" on air compressors is bolstered by

numerous documentary evidences. The use by E.Y. Ownership of a mark or trade name may be acquired not
Industrial in the concept of owner is shown by necessarily by registration but by adoption and use in
commercial documents, sales invoices unambiguously trade or commerce. As between actual use of a mark
describing the goods as "VESPA" air compressors. E.Y. without registration, and registration of the mark without
Industrial have sold the air compressors bearing the actual use thereof, the former prevails over the latter. For
"VESPA" to various locations in the Philippines, as far as a rule widely accepted and firmly entrenched is that
Mindanao and the Visayas since the early 1990’s. actual use in commerce or business is a pre requisite to
the acquisition of the right of ownership. (Shangri-la Hotel
As such, E.Y. Industrial must be considered as the prior Management Ltd. v Developers Group of companies, March
and continuous user of the mark "VESPA" and its true 31, 2006 G.R. No. 159938).
owner and is entitled to the registration of the mark in its
name (E.Y. Industrial Sales v. Shen Dar Electricity and The two concepts of corporate name or business name
Machinery Co., Ltd., G.R. No. 184850, October 20, 2010). and trademark or service mark, are not mutually
exclusive. It is common, indeed likely, that the name of a
Marks which may be registered corporation or business is also a trade name, trademark
or service mark. (Shangri- La International Hotel
Any word, name, symbol, emblem, device, figure, sign, Management, Ltd. vs. Developers Group of Companies, Inc.,
phrase, or any combination thereof except those G.R. No. 159938, March 31, 2006)
enumerated under Section 123, IPC.
A trade name of a national of a State that is a party to the
Requirements for a mark to be registered Paris Convention, whether or not the trade name forms
part of a trademark, is protected “without the obligation of
1. A visible sign (not sounds or scents); and prior filing or registration.” (Fredco Manufacturing
2. Capable of distinguishing one’s goods and services from Corporation vs President and Fellows of Harvard College
another. (Harvard University), G.R. No. 185917, June 1, 2011)
Q: Is there an infringement of trademark when two NON-REGISTRABLE MARKS

similar goods use the same words, “PALE PILSEN”?
Non-registrable marks (IFNIIIM-GCDS)
A: None, because “pale pilsen” are generic words
descriptive of the color (pale) and of a type of beer 1. Consists of Immoral, deceptive or scandalous matter
(pilsen), which is a light bohemian beer with strong hops or falsely suggest a connection with persons,
flavor that originated in the City of Pilsen in institutions, beliefs, or national symbols
Czechoslovakia. Pilsen is a primarily geographically
2. Consists of the Flag or coat of arms or other insignia
descriptive word, hence, non-registrable and not
of the Philippines or any of its political subdivisions,
appropriable by any beer manufacturer (Asia Brewery, Inc.
or of any foreign nation
v. CA, G.R. No. 103543, July 5, 1993).
3. Consists of a Name, portrait or signature identifying
Person who may file an opposition to trademark a particular living individual except by his written
registration and grounds for filing the same consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life
Any person who believes that he would be damaged by of his widow except by written consent of the widow
the registration of a mark may, upon payment of the
required fee and within thirty (30) days after the 4. Identical with a registered mark belonging to a
publication referred to in Subsection 133.2, file with the different proprietor or a mark with an earlier filing or
Office an opposition to the application (IPC, Sec. 134). priority date, in respect of:
a. The same goods or services, or
ACQUISITION AND OWNERSHIP OF TRADE NAME b. Closely related goods or services, or
c. If it nearly resembles such a mark as to be
Acquisition of trade names likely to deceive or cause confusion;
A name or designation may not be used as a trade name if 5. Is Identical with an internationally well-known mark,
by its nature or the use to which such name or designation whether or not it is registered here, used for identical
may be put, it is contrary to public order or morals and if, or similar goods or services
in particular, it is liable to deceive trade circles or the 6. Is Identical with an internationally well-known mark
public as to the nature of the enterprise identified by that which is registered in the Philippines with respect to
name. non-similar goods or services. Provided, that the
interests of the owner of the registered mark are
In particular, any subsequent use of the trade name by a likely to be damaged by such use
third party, whether as a trade name or a mark or
collective mark, or any such use of a similar trade name or 7. Is likely to Mislead the public as to the nature, quality,
mark, likely to mislead the public, shall be deemed characteristics or geographical origin of the goods or
unlawful (Sec. 165, IPC). services

MERCANTILE LAW
8. Consists exclusively of signs that are Generic for the SFCRI was registered with the SEC in May 1995. It
goods or services that they seek to identify registered the business name SAN FRANCISCO
COFFEE & ROASTERY, INC. with the DTI in June 1995.
9. Consists exclusively of signs that have become
Customary or usual to designate the goods or services
In June 2001, SFCRI discovered that CPI was about to
in everyday language and established trade practice open a coffee shop under the name SAN FRANCISCO
10. Consists exclusively that may serve in trade to COFFEE in Libis, Quezon City. SFCRI sent a letter to CPI
Designate the kind, quality, quantity, intended demanding that the latter stop using the name SAN
purpose, value, geographical origin, time or FRANCISCO COFFEE. Does CPI ‘s use of the trademark
production of the goods or rendering of the services, SAN FRANCISCO COFFEE constitutes infringement of
or other characteristics of the goods or services SFCRI ‘s trade name SAN FRANCISCO COFFEE &
ROASTERY, INC., even if the trade name is not
11. Consists of Shapes that may be necessitated by registered with the Intellectual Property Office (IPO)?
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value A:Yes. Petitioner’s argument that “San Francisco” is just a
12. Consists of Color alone, unless defined by a given form; proper name referring to the famous city in Cal-ifornia
or and that “coffee” is simply a generic term, is untenable.
Respondent has acquired an exclu-sive right to the use of
13. Is Contrary to public order or morality (IPC, Sec. 123). the trade name “SAN FRANCISCO COFFEE & ROASTERY,
INC.” since the registration of the business name with the
Q: Laberge, Inc., manufactures and markets after- DTI in 1995. Thus, respondent’s use of its trade name
shave lotion, shaving cream, and deodorants using from then on must be free from any infringement by
the trademark “PRUT”, which is registered with the similarity. Of course, this does not mean that respondent
Intellectual Property Office. Laberge does not has exclusive use of the geographic word “San Francisco”
manufacture briefs and underwear and these items or the generic word “coffee.” Geographic or generic words
are not specified in the certificate of registration. JG are not, per se, subject to exclusive appropriation. It is
who manufactures briefs and underwear, wants to only the com-bination of the words “SAN FRANCISCO
know whether, under our laws, he can use and COFFEE,” which is respondent’s trade name in its cof-fee
register the trademark “PRUTE” for his merchandise. business, that is protected against infringement on
Can JG register the trademark? matters related to the coffee business to avoid confusing
or deceiving the public (Coffee Partners, Inc. v. San
A: Yes. The trademark registered in the name of Laberge, Francisco Coffee and Roastery, Inc., G.R. No. 169504, March
Inc covers only after-shave lotion, shaving cream, 3, 2010, in Divina, 2014).
deodorant, talcum powder and toilet soap. It does not
cover briefs and underwear. The limit of the trademark is In trademark registration, while both competing marks
stated in the certificate issued to Laberge Inc. It does not refer to the word “KOLIN” written in upper case letters
include briefs and underwear which are different and in bold font, but one is italicized and colored black
products protected by Larberge’s trademark. JG can while the other is white in pantone red color background
register the trademark “PRUTE” to cover its briefs and and there are differing features between the two,
underwear (Faberge Inc v IAC, G.R. No. 71189, November 4, registration of the said mark could be granted. It is
1992). hornbook doctrine that emphasis should be on the
similarity of the products involved and not on the
NOTE: Modern law recognizes that the protection to arbitrary classification or general description of their
which the owner of a trademark is entitled is not limited properties or characteristics. The mere fact that one
to guarding his goods or business from actual market person has adopted and used a trademark on his goods
competition with identical or similar products of the would not, without more, prevent the adoption and use of
parties, but extends to all cases in which the use by a the same trademark by others on unrelated articles of a
junior appropriator of a trademark or trade name is likely different kind (Taiwan Kolin Corporation, LTD. v. Kolin
to lead to a confusion of source, as where prospective Electronics Co., Inc., G.R. No. 209843, March 25, 2015).
purchasers would be misled into thinking that a
complaining party has extended his business into the field Person who may file an opposition to application for
or is in any way connected with the activities of the trademark registration
infringer; or when it forestalls the normal potential
expansion of his business (Dermaline, Inc. vs. Myra Any person who believes that he would be damaged by
Pharmaceuticals, Inc., G.R. No. 190065, August 16, 2010). the registration of a mark may, upon payment of the
required fee and within thirty (30) days after the
Q: CPI was registered with the SEC in January 2001. It publication referred to in Subsection 133.2 of the IP Code,
has a franchise agreement with Coffee Partners Ltd. file with the IP Office an opposition to the application (IPC,
(CPL) for a non-exclusive right to operate coffee shops Sec. 134).
in the Philippines using trademarks designed by CPL
such as SAN FRANCISCO COFFEE.

Prior use of the mark is NOT a requirement for through valid registration. Actual prior use in commerce
registration in the Philippines has been abolished as a condition for
the registration of a trademark (Record of the Senate, Vol.
Under the present IP Code, actual prior use in commerce II, No. 29, 8 Oct.1996; Journal of the House of
is no longer needed as a condition for the registration of a Representatives, No. 35. 12 Nov. 1996, 34).
trademark.
b) Shangrila’s international affiliation shall result in a
NOTE: Failure to file a Declaration of Actual Use (DAU) decision favorable to it. The Paris Convention mandates
within the required period results in the automatic that protection should be afforded to internationally
cancellation of registration of a trademark. In turn, such known marks as signatory to the Paris Convention,
failure is tantamount to the abandonment or withdrawal without regard as to whether the foreign corporation is
of any right or interest the registrant has over his registered, licensed or doing business in the Philippines.
trademark (Birkenstock Orthopaedie GMBH and Co. KG v. Shangrila’s separate personalities from their mother
Philippine Shoe Expo Marketing Corporation, G. R. No. corporation cannot be an obstacle in the enforcement of
194307, November 20, 2013). their rights as part of the Kuok Group of Companies and
as official repository, manager and operator of the subject
Instances when non-use of a mark is excused mark and logo. Besides, R.A. No. 166 did not require the
party seeking relief to be the owner of the mark but "any
1. If caused by circumstances arising independently of person who believes that he is or will be damaged by the
the will of the owner. Lack of funds is not an excuse. registration of a mark or trade name." (Shangri-la
2. A use which does not alter its distinctive character International Hotel Management, LTD., et.a.l v. Developers
though the use is different from the form in which it is Group of Companies, Inc. G.R. No. 159938, March 31,2006).
registered.
3. Use of mark in connection with one or more of the Instances when non-use is excused
goods/services belonging to the class in which the
mark is registered. 1. If caused by circumstances arising independently of
4. The use of a mark by a company related to the the will of the owner. Lack of funds is not an excuse.
applicant/registrant. 2. A use which does not alter its distinctive character
5. The use of a mark by a person controlled by the though the use is different from the form in which it is
registrant (IPC, Section 152). registered.
PRIOR USE OF MARK AS A REQUIREMENT 3. Use of mark in connection with one or more of the
goods/services belonging to the class in which the
Prior use of the mark is NOT a requirement for mark is registered.
registration
4. The use of a mark by a company related to the
Actual prior use in commerce in the Philippines has been applicant/registrant.
abolished as a condition for the registration of a
trademark 5. The use of a mark by a person controlled by the
registrant (IPC, Section 152).
Q: S Development Corporation sued Shangrila
Corporation for using the “S” logo and the tradename TEST TO DETERMINE CONFUSING SIMILARITY
“Shangrila.” The former claims that it was the first to BETWEEN MARKS
register the logo and the tradename in the Philippines
and that it had been using the same in its restaurant Two (2) types of confusion
business.
1. Confusion of Goods
Shangrila Corporation counters that it is an affiliate of
an international organization which has been using The ordinarily prudent purchaser would be induced to
such logo and tradename “Shangrila” for over 20 purchase one product in the belief that he was purchasing
years. the other.
However, Shangrila Corporation registered the 2. Confusion of Origin (Confusion of Business)

tradename and logo in the Philippines only after the
suit was filed. The goods of the parties are different, the defendant’s
a. Which of the two corporations has a better right product is such as might reasonably be assumed to
to use the logo and the tradename? Explain. originate from the plaintiff, and the public would then be
b. How does the international affiliation of deceived either into that belief or into the belief that there
Shangrila Corporation affect the outcome of the is some connection between the plaintiff and defendant
dispute? Explain. (2005 Bar) which, in fact, does not exist.
A: See: Nestle v. Dy, GR No. 172276, August 8, 2010, citing

a) S Corporation. Sec. 122 of the Intellectual Property Sterling Products International, Inc. v. Farbenfabriken
Code provides that the rights in a trademark are acquired

MERCANTILE LAW
Bayer Aktiengesellschaft and Callman, G.R. No. L-19906,
April 30, 1969 Applying the Dominancy Test, it cannot be gainsaid that
Abyadang’s "NS D-10 PLUS" is similar to Berris’ "D-10 80
Two (2) tests to determine colorable imitation WP," that confusion or mistake is more likely to occur.
1. Dominancy and Undeniably, both marks pertain to the same type of goods
2. Holistic Test – fungicide with 80% Mancozeb as an active ingredient
and used for the same group of fruits, crops, vegetables,
DOMINANCY TEST and ornamental plants, using the same dosage and
manner of application. They also belong to the same
If the competing trademark contains the main or essential classification of goods under R.A. No. 8293. Both
or dominant features of another, and confusion and depictions of "D-10," as found in both marks, are similar
deception are likely to result, infringement takes place. in size, such that this portion is what catches the eye of the
Duplication or imitation is not necessary; nor is it purchaser. Undeniably, the likelihood of confusion is
necessary that the infringing label should suggest an present (Berris Agricultural Co., Inc., v. Norvy Abyadang,
effort to imitate (C. Neilman Brewing Co. v. Independent G.R. No. 183404, October 13, 2010).
Brewing Co., 191 F. 489, 495, citing Eagle White Lead Co. vs.
Pflugh [CC] 180 FED. 579; See Del Monte vs. CA, GR No. L- Q: On October 21, 2006, Dermaline, Inc. filed before
78325, January 25, 1990). the Intellectual Property Office (IPO) an application
for registration of the trademark DERMALINE
Focuses on the similarity of the prevalent features of the DERMALINE, INC. On May 8, 2007, Myra
competing marks. If the competing trademark contains Pharmaceuticals, Inc. filed a Verified Oppositio
the main or essential or dominant features of another, and alleging that the trademark sought to be registered by
confusion is likely to result, infringement takes place (Asia Dermaline so resembles its trademark DERMALIN
Brewery v. CA, G.R. No. 103543, July 5, 1993). and will likely cause confusion, mistake and
deception to the purchasing public. Myra claimed
Duplication or imitation is not necessary; nor is it that, despite Dermaline’s attempt to differentiate its
necessary that the infringing label should suggest an applied mark, the dominant feature is the term
effort to imitate. The question is whether the use of marks DERMALINE, which is practically identical with its
involved is likely to cause of confusion or mistake in the own DERMALIN, more particularly that the first eight
mind of the public or deceive purchasers (Sundiang Sr. & (8) letters of the marks are identical, and that
Aquino 2014 citing Societe Des Produit Nestle S.A v. CA, G.R. notwithstanding the additional letter E by Dermaline,
No. 112012, April 4, 2001) the pronunciation for both marks are identical.
Further, both marks have three (3) syllables each,
Q: On January 16, 2004, respondent Norvy A. with each syllable identical in sound and appearance,
Abyadang (Abyadang), proprietor of NS Northern even if the last syllable of DERMALINE consisted of
Organic Fertilizer, filed with the Intellectual Property four (4) letters while DERMALIN consisted only of
Office (IPO) a trademark application for the mark "NS three (3).
D-10 PLUS" for use in connection with Fungicide
(Class 5) with active ingredient 80% Mancozeb. On Dermaline countered that a simple comparison of the
August 17, 2005, petitioner Berris Agricultural Co., trademark DERMALINE DERMALINE, INC. vis-a-vis
Inc. (Berris), with business address in Barangay Myra’s DERMALIN trademark would show that they
Masiit, Calauan, Laguna, filed with the IPO Bureau of have entirely different features and distinctive
Legal Affairs (IPO-BLA) a Verified Notice of presentation, thus it cannot result in confusion,
Opposition against the mark under application mistake or deception on the part of the purchasing
allegedly because "NS D-10 PLUS" is similar and/or public. Dermaline contended that, in determining if
confusingly similar to its registered trademark "D-10 the subject trademarks are confusingly similar, a
80 WP," also used for Fungicide (Class 5) with active comparison of the words is not the only determinant,
ingredient 80% Mancozeb. but their entirety must be considered in relation to
the goods to which they are attached, including the
Is the "NS D-10 PLUS" mark of Abadyang confusingly other features appearing in both labels.
similar with "D-10 80 WP" mark of Berris?
Are the arguments of Dermaline tenable?
A: Comparing Berris’ mark "D-10 80 WP" with A: No. Dermaline’s insistence that its applied trademark
Abyadang’s mark "NS D-10 PLUS," as appearing on their DERMALINE DERMALINE, INC. had differences too
respective packages, one cannot but notice that both have striking to be mistaken from Myra’s DERMALIN cannot,
a common component which is "D-10." On Berris’ therefore, be sustained. While it is true that the two marks
package, the "D-10" is written with a bigger font than the are presented differently Dermaline’s mark is written
"80 WP." Admittedly, the "D-10" is the dominant feature with the first DERMALINE in script going diagonally
of the mark. The "D-10," being at the beginning of the upwards from left to right, with an upper case D followed
mark, is what is most remembered of it. Although, it by the rest of the letters in lower case, and the portion
appears in Berris’ certificate of registration in the same DERMALINE, INC. is written in upper case letters, below
font size as the "80 WP," its dominancy in the "D-10 80 and smaller than the long-hand portion; while Myra’s
WP" mark stands since the difference in the form does not mark DERMALIN is written in an upright font, with a
alter its distinctive character. capital D and followed by lower case letters the likelihood

of confusion is still apparent. This is because they are 1, and NAN-2. Clearly, NANNY contains the prevalent
almost spelled in the same way, except for Dermaline’s feature NAN. The first three letters of NANNY are exactly
mark which ends with the letter E, and they are the same as the letters of NAN. When NAN and NANNY are
pronounced practically in the same manner in three (3) pronounced, the aural effect is confusingly similar.
syllables, with the ending letter E in Dermaline’s mark NANNY and NAN have the same classification, descriptive
pronounced silently. Thus, when an ordinary purchaser, properties and physical attributes. Both are classified
for example, hears an advertisement of Dermaline’s under Class 6, both are milk products, and both are in
applied trademark over the radio, chances are he will powder form. Also, NANNY and NAN are displayed in the
associate it with Myra’s registered mark. same section of stores the milk section (Societes Des
Products Nestle vs. Dy,Jr.,, G.R. No. 172276, August 8, 2010).
Further, Dermaline’s stance that its product belongs to a
separate and different classification from Myra’s products Applying the Dominancy Test to the case at bar, this Court
with the registered trademark does not eradicate the finds that the use of the stylized "S" by respondent in its
possibility of mistake on the part of the purchasing public Strong rubber shoes infringes on the mark already
to associate the former with the latter, especially registered by petitioner with the IPO. While it is
considering that both classifications pertain to treatments undisputed that petitioner’s stylized "S" is within an oval
for the skin. design, to this Court’s mind, the dominant feature of the
trademark is the stylized "S," as it is precisely the stylized
Thus, the public may mistakenly think that Dermaline is "S" which catches the eye of the purchaser (Sketchers USA
connected to or associated with Myra, such that, vs. Inter Pacific Industrial Trading Corporation, G.R. No.
considering the current proliferation of health and beauty 164321, March 28, 2011, in Divina, 2014).
products in the market, the purchasers would likely be
misled that Myra has already expanded its business TOTALITY OR HOLISTIC TEST
through Dermaline from merely carrying pharmaceutical
topical applications for the skin to health and beauty Confusing similarity is to be determined on the basis of
services (Dermaline, Inc. v. Myra Pharmaceuticals, Inc., G.R. visual, aural, connotative comparisons and
No. 190065, August 16, 2010). overall impressions engendered by the marks in
controversy as they are encountered in the marketplace.
Q: Petitioner Societe Des Produits Nestle, S.A. (Nestle)
is a foreign corporation organized under the laws of The trademarks in their entirety as they appear in their
Switzerland. It manufactures food products and respective labels are considered in relation to the goods
beverages. As evidenced by Certificate of Registration to which they are attached. The discerning eye of the
No. R-14621 issued on 7 April 1969 by the then observer must focus not only on the predominant words
Bureau of Patents, Trademarks and Technology but also on the other features appearing in both labels in
Transfer, Nestle owns the NAN trademark for its line order that he may draw his conclusion whether one is
of infant powdered milk products, consisting of PRE- confusingly similar to the other (Bristol Myers Co. vs.
NAN, NAN-H.A., NAN-1, and NAN-2. NAN is classified Director of Patents, 17 SCRA 131; See also Fruit of the Loom
under Class 6 diatetic preparations for infant feeding. Inc. vs. CA, GR No. L-32747, November 29, 1984.)
Dy, Jr. owns 5M Enterprises. He imports Sunny Boy NOTE: The dominancy test only relies on visual
powdered milk from Australia and repacks the comparisons between two trademarks whereas the
powdered milk into three sizes of plastic packs totality or holistic test relies not only on the visual but also
bearing the name NANNY. Nestle filed before the RTC, on the aural and connotative comparisons and overall
a complaint against Dy, Jr. for infringement. impressions between the two trademarks (Societe Des
Produits Nestl, S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
Is Dy, Jr. liable for infringement?
Q: N Corporation manufactures rubber shoes under
A: Yes. Among the elements, the element of likelihood of the trademark “Jordann” which hit the Philippine
confusion is the gravamen of trademark infringement. market in 1985, and registered its trademark with the
There are two types of confusion in trademark Bureau of Patents, Trademarks and Technology in
infringement: confusion of goods and confusion of 1990. PK Company also manufactures rubber shoes
business. There are two tests to determine likelihood of with the trademark “Javorski” which it registered
confusion: the dominancy test and holistic test. The with BPTTT in 1978. In 1992, PK Co adopted and
dominancy test focuses on the similarity of the main, copied the design of N Corporation’s “Jordann” rubber
prevalent or essential features of the competing shoes, both as to shape and color, but retained the
trademarks that might cause confusion. Infringement trademark “Javorski” on its products. May PK
takes place when the competing trademark contains the Company be held liable to N Co? Explain. (1996 Bar)
essential features of another.
A: PK Co may be liable for unfairly competing against N
Applying the dominancy test in the present case, the Court Co. By copying the design, shape and color of N
finds that NANNY is confusingly similar to NAN. NAN is Corporation’s “Jordann” rubber shoes and using the same
the prevalent feature of Nestles line of infant powdered in its rubber shoes trademarked “Javorski,” PK is
milk products. It is written in bold letters and used in all obviously trying to pass off its shoes for those of N. It is of
products. The line consists of PRE-NAN, NAN-H.A., NAN-

MERCANTILE LAW
no moment that the trademark “Javorski” was registered Inc. v. The Honorable Court of Appeals, G.R. No. L-29971,
ahead of the trademark “Jordann.” August 31, 1982)
Priority in registration is not material in an action for Generic figure

unfair competition as distinguished from an action for
infringement of trademark. The basis of an action for A trademark device is susceptible to registration if it is
unfair competition is confusing and misleading similarity crafted fancifully or arbitrarily and is capable of
in general appearance, not similarity of trademarks. identifying and distinguishing the goods of one
(Converse Rubber Co. v. Jacinto Rubber & Plastics Co., G.R. manufacturer or seller from those of another. Apart from
Nos. 27425, 30505, April 28, 1980). its commercial utility, the benchmark of trademark
registrability is distinctiveness. Thus, a generic figure as
Q: The “Test of Dominancy” in the Law on that of a shark, if employed and designed in a distinctive
Trademarks, is a way to determine whether there manner, can be a registrable trademark device, subject to
exist an infringement of a trademark by --- (2012 Bar) the provisions of the IP Code. (Great White Shark
Enterprises, Inc. v. Danilo M. Caralde, Jr., G.R. No. 192294,
A: Focusing on the similarity of the prevalent features of November 21, 2012)
the competing trademarks that might cause confusion
(Amador, 2007) Ownership of trademark
Principle of related goods Ownership of a mark or trade name may be acquired not
necessarily by registration but by adoption and use in
In resolving whether goods are related, several factors trade or commerce. As between actual use of a mark
come into play: without registration, and registration of the mark without
actual use thereof, the former prevails over the latter. For
a) the business (and its location) to which the goods a rule widely accepted and firmly entrenched, because it
belong; has come down through the years, is that actual use in
b) the class of product to which the goods belong; commerce or business is a pre-requisite to the acquisition
c) the product’s quality, quantity, or size, including the of the right of ownership. By itself, registration is not a
nature of the package, wrapper or container; mode of acquiring ownership (E.Y. Industrial Sales, Inc. v.
d) the nature and cost of the article; Shen Dar Electricity and Machinery Co., Ltd. G.R. No.
e) the descriptive properties, physical attributes or 184850, October 20, 2010).
essential characteristics with reference to their
form, composition, texture or quality; Certificates of Principal Registration does not
f) the purpose of the goods; conclusively establish ownership of the disputed
g) whether the article is bought for immediate trademarks as dominion over trademarks is not acquired
consumption, that is, day- to-day household items; by the fact of registration alone. At best, registration
h) fields of manufacture; merely raises a presumption of ownership that can be
i) the conditions under which the article is usually rebutted by contrary evidence. (Superior Commercial
purchased; and Enterprises Inc. v. Kunnan Enterprises Ltd. And Sports
j) the channels of trade through which the goods flow, Concept & Distributor, Inc. G.R. No. 169974, April 20, 2010)
how they are distributed, marketed, displayed and
sold. (Mighty Corporation vs. E. J. Gallo Winery, G.R. Rule of idem sonans
No. 154342, July 14, 2004)
Two names are said to be "idem sonantes" if the attentive
Goods are related when they belong to the same class or ear finds difficulty in distinguishing them when
have the same descriptive properties; when they possess pronounced (Martin v. State, 541 S.W. 2d 605).
the same physical attributes or essential characteristics
with reference to their form, composition, texture or Applicability of idem sonans rule
quality. They may also be related because they serve the
same purpose or are sold in grocery stores. (Esso Similarity of sound is sufficient to rule that the two marks
Standard Eastern, Inc. vs. The Honorable Court of Appeals; are confusingly similar when applied to merchandise of
Canon Kabushiki Kaisha v. Court of Appeals, G.R. No. the same descriptive properties (Marvex Commercial v.
120900, July 20, 2000) Director of Patent, G.R. No. L-19297, December 22, 1966).
Non-competing goods may be those which, though they Types of confusion that arise from the use of similar
are not in actual competition, are so related to each other or colorable imitation marks
that it might reasonably be assumed that they originate
from one manufacturer. Non-competing goods may also 1. Confusion of goods/product confusion - there is
be those which, being entirely unrelated, could not confusion of goods when the products are competing
reasonably be assumed to have a common source. In the 2. Confusion of business/source or origin confusion - the
former case of related goods, confusion of business could products are non-competing but related enough to
arise out of the use of similar marks; in the latter case of produce confusion of affiliation (McDonald’s Corp. v. L.C.
non-related goods, it could not. (Esso Standard Eastern, Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004).

Colorable imitation instead, what is shown is “buffalo design.” Moreover,
based on the certificate issued by the Intellectual Property
Such a close or ingenious imitation as to be calculated to Office, “LS JEANS TAILORING” was a registered trademark
deceive ordinary persons, or such a resemblance to the of Diaz. He had registered his trademark prior to the filing
original as to deceive an ordinary purchaser giving such of the present cases. The Intellectual Property Office
attention as a purchaser usually gives, as to cause him to would certainly not have allowed the registration had
purchase the one supposing it to be the other (Societe des Diaz’s trademark been confusingly similar with the
Produits Nestlé, S.A. v. CA, G.R. No. 112012, April 4, 2001). registered trademark for LEVI’S 501 jeans (Diaz vs People
of the Philippines and Levi Strauss (Phil.), GR N0. 180677,
Doctrine of Secondary Meaning February 18, 2013, in Divina, 2014).
This doctrine is to the effect that a word or phrase WELL-KNOWN MARKS

originally incapable of exclusive appropriation with
reference to an article on the market, because Internationally well-known mark
geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by The following constitutes internationally well-known
one producer with reference to his article that, in that mark
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his 1. Considered by the competent authority of the
product (Ang vs. Teodoro, G. R. No. 48226, December 14, Philippines to be “well-known” internationally and in the
1942). Philippines as the mark of a person other than the
applicant or registrant
When there is no confusing similarity between the 2. Need not be used or registered in the Philippines
trademarks 3. Need not be known by the public at large but only by
relevant sector of the public.
The Court finds no confusing similarity between the
subject marks. While both marks use the shape of a shark, Rules regarding internationally-well known marks
it noted distinct visual and aural differences between
them. In Great White Shark's “GREG NORMAN LOGO,” 1. A mark cannot be registered if it is identical with, or
there is an outline of a shark formed with the use of green, confusingly similar to, or constitutes a translation of a
yellow, blue and red lines/strokes. In contrast, the shark mark which is considered by the competent authority of
in Caralde's “SHARK & LOGO” mark isillustrated in letters the Philippines to be well-known internationally and in
outlined in the form of a shark with the letter “S”forming the Philippines, whether or not it is registered here, as
the head, the letter “H” forming the fins, the letters “A” and being already the mark of a person other than the
“R” forming the body and the letter “K” forming the tail. In applicant for registration, and used for identical or
addition, the lattermark includes several more elements similar goods or services: Provided, That in determining
such as the word “SHARK” in adifferent font underneath whether a mark is well-known, account shall be taken of
the shark outline, layers of waves, and a tree on the right the knowledge of the relevant sector of the public, rather
side, and liberally used the color blue with some parts in than of the public at large, including knowledge in the
red,yellow, green and white. The whole design is enclosed Philippines which has been obtained as a result of the
in an elliptical shape with two linings. The visual promotion of the mark;
dissimilarities between the two (2) marks are evident and
significant, negating the possibility or confusion in the 2. A mark cannot be registered if it is identical with, or
minds of the ordinary purchaser, especially considering confusingly similar to, or constitutes a translation of a
the distinct aural difference between the marks (Great mark considered well-known in accordance with the
White Shark Enterprises v. Caralde, G.R. No. 192294, preceding paragraph, which is registered in the
November 21, 2012). Philippines with respect to goods or services which are
not similar to those with respect to which registration
The jeans trademarks of Levi’s Philippines and Diaz must is applied for: Provided, That use of the mark in relation
be considered as a whole in deter-mining the likelihood of to those goods or services would indicate a connection
confusion between them. The consuming public could between those goods or services, and the owner of the
easily discern if the jeans were original or fake or were registered mark: Provided further, That the interests of
manufactured by other brands of jeans. Confusion and the owner of the registered mark are likely to be damaged
deception were remote since maong jeans are expensive by such use (Sec. 123.IPC).
and the casual buyer is predisposed to be more cau-tious NOTE: Section 123.1 (e) does not require that the well-
and discriminating in and would prefer to mull over his known mark be used in commerce in the Philippines but
purchase. Further, Diaz used the trade-mark “LS JEANS only that it be well-known in the Philippines. Thus, while
TAILORING” for the jeans he produced and sold. under the territoriality principle a mark must be used in
commerce in the Philippines to be entitled to protection,
His trademark was visually and aurally different from the internationally well-known marks are the exceptions to
trademark “LEVI STRAUSS & CO” appearing on the patch this rule (Fredco Manufacturing Corporation vs President
of original jeans. Diaz also aptly noted that the design used and Fel- lows of Harvard College (Harvard University), G.R.
by LEVIS was an image of two horses but the evidence will No. 185917, June 1, 2011).
show that there was no such design in the seized jeans,

MERCANTILE LAW
Factors to be considered in determining well known United States of America are both signatories to the Paris
marks Convention for the Protection of Intellectual Property
(Paris Convention). The Philippines is obligated to assure
In determining whether a mark is well-known, account nationals of countries of the Paris Convention that they
shall be taken of the knowledge of the relevant sector of are afforded an effective protection against violation of
the public, rather than of the public at large, including their intellectual property rights in the Philippines in the
knowledge in the Philippines which has been obtained as same way that their own countries are obligated to accord
a result of the promotion of the mark. The following similar protection to Philippine nationals. Thus, under
criteria or any combination thereof may be taken into Philippine law, a trade name of a national of a State that is
account in determining whether a mark is well-known: a party to the Paris Convention, whether or not the trade
name forms part of a trademark, is protected “without the
a) the duration, extent and geographical area of any use of obligation of filing or registration.”
the mark; in particular, the duration, extent and
geographical area of any promotion of the mark, “Harvard” is the trade name of the world famous Harvard
including advertising or publicity and the presentation, University, and it is also a trademark of Harvard
at fairs or exhibitions, of the goods and/or services to University. Under the Paris Convention, Harvard
which the mark applies; University is entitled to protection in the Philippines of its
trade name “Harvard” even without registration of such
b) the market share, in the Philippines and in other trade name in the Philip-pines. This means that no
countries, of the goods and/or services to which the educational entity in the Philippines can use the trade
mark applies; name “Harvard” without the consent of Harvard
University. The essential requirement under the Paris
c) the degree of the inherent or acquired distinction of the Convention (and the Intellectual Property Code) is that
mark; the trademark to be protected must be “well-known” in
the country where protection is sought. The power to
d) the quality-image or reputation acquired by the mark; determine whether a trademark is well-known lies in the
competent authority of the country of registration or use.
e) the extent to which the mark has been registered in the The competent authority would either be the registering
world; authority if it has the power to decide this, or the courts
of the country in question if the issue comes before the
f) the exclusivity of registration attained by the mark in courts. “Harvard” is a well-known name and mark not
the world; only in the United States but also internationally,
including the Philippines. It is internationally known as
g) the extent to which the mark has been used in the one of the leading educational institutions in the world. As
world; such, even before Harvard University ap-plied for
registration of the mark “Harvard” in the Philippines, the
h) the exclusivity of use attained by the mark in the world; mark was already protected under the Paris Convention.
Again, even without applying the Paris Convention,
i) the commercial value attributed to the mark in the Harvard University can invoke the law which prohibits
world; the registration of a mark “which may disparage or falsely
suggest a connection with persons, living or dead,
j) the record of successful protection of the rights in the institutions, and beliefs (Fredco Manufacturing
mark; Corporation vs. President and Fellows of Harvard College,
GR No. 185917, June 1, 2011).
k) the outcome of litigations dealing with the issue of
whether the mark is a well-known mark; and Division of application
l) the presence or absence of identical or similar marks Any application referring to several goods or services,
validly registered for or used on identical or similar hereafter referred to as the "initial application," may be
goods or services and owned by persons other than the divided by the applicant into two (2) or more applications,
person claiming that his mark is a well-known mark. hereafter referred to as the "divisional applications," by
distributing among the latter the goods or services
Provided, further, that the mark is well-known both referred to in the initial application. The divisional
internationally and in the Philippines (Sec. 2, Rule 18, A.M. applications shall preserve the filing date of the initial
No. 10-3-10-SC, October 18, 2011). application or the benefit of the right of priority (Sec. 129,
IPC).
Fredco’s use of the mark “Harvard,” for jeans coupled with
its claimed origin in Cambridge, Massa-chusetts, Priority right
obviously suggests a false connection with Harvard
University. Fredco’s registration of the mark “Harvard” An application for registration of a mark filed in the
should not have been allowed because the law prohibits Philippines by a person referred to in Section 3 of the IP
the registration of a mark “which may disparage or falsely Code, and who previously duly filed an application for
suggest a connection with persons, living or dead, registration of the same mark in one of those countries,
institutions, beliefs “Second, the Philippines and the shall be considered as filed as of the day the application

was first filed in the foreign country. No registration of a A fifth anniversary use is also required. This is done by
mark shall be granted until such mark has been registered filing a declaration of actual use and evidence to that
in the country of origin of the applicant. (Sec. 131, IPC) effect within one year from the fifth anniversary of the
registration. The form and evidence of use required are
The owner of a mark seeking priority right is not entitled similar to the third year DAU. Failure to submit the fifth
to sue for acts committed prior to the date on which his anniversary use and evidence to that effect shall merit the
mark was registered in the Philippines: except in the case cancellation of the mark.
of an owner of a well-known mark.
Renewal of registration
RIGHTS CONFERRED BY REGISTRATION
A certificate of registration may be renewed for periods of
Certificate of registration prima facie evidence of ten (10) years at its expiration. Each request for renewal
validity of registration must be made within 6 months before the
expiration of the registration or within 6 months after
A certificate of registration of a mark shall be prima facie such expiration on payment of the additional fee
evidence of the validity of the registration, the registrant’s prescribed (IPC, Sec. 146).
ownership of the mark, and of the registrant’s exclusive
right to use the same in connection with the goods or Rights of a registered mark owner
services and those that are related thereto specified in the
certificate (IPC, Sec. 138). Except in cases of importation of drugs and medicines
allowed under Section 72.1 of the IP Code and of off-
Issuance and publication of certificate patent drugs and medicines, the owner of a registered
mark shall have the exclusive right to prevent all third
The certificate of registration shall be issued when the parties not having the owner’s consent from using in the
period for filing the opposition has expired, or when the course of trade identical or similar signs or containers for
Director of Legal Affairs shall have denied the opposition, goods or services which are identical or similar to those
and upon payment of the required fee (IPC, Sec. 136). in respect of which the trademark is registered where
such use would result in a likelihood of confusion. In case
The registered mark shall be published, in the form and of the use of an identical sign for identical goods or
within the period fixed by the Regulations. Marks services, a likelihood of confusion shall be presumed.
registered at the Office may be inspected free of charge
and any person may obtain copies thereof at his own There shall be no infringement of trademarks or
expense. This provision shall also be applicable to tradenames of imported or sold patented drugs and
transactions recorded in respect of any registered mark medicines allowed under Section 72.1 of the IP Code, as
(IPC, Sec. 138). well as imported or sold off-patent drugs and medicines;
Provided, That said drugs and medicines bear the
Duration of a certificate of trademark registration registered marks that have not been tampered, unlawfully
modified, or infringed upon, under Section 155 of the IP
A certificate of registration shall remain in force for ten Code (Sec. 147, IPC).
(10) years: Provided, That the registrant shall file a
declaration of actual use and evidence to that effect, or USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO
shall show valid reasons based on the existence of REGISTERED MARK
obstacles to such use, as prescribed by the Regulations,
within one (1) year from the fifth anniversary of the date Effect of use of indications by third parties for
of the registration of the mark. Otherwise, the mark shall purposes other than those for which the mark is used
be removed from the Register by the Office (IPC, Sec. 145).
Registration of the mark shall not confer on the registered
NOTE: The applicant or the registrant shall file a owner the right to preclude third parties from using bona
declaration of actual use of the mark with evidence to that fide their names, addresses, pseudonyms, a geographical
effect, as prescribed by the Regulations within three (3) name, or exact indications concerning the kind, quality,
years from the filing date of the application. Otherwise, quantity, destination, value, place of origin, or time of
the application shall be refused or the mark shall be production or of supply, of their goods or services.
removed from the Register by the Director (IPC, Sec.
124.2). INFRINGEMENT AND REMEDIES
Effect of failure to file Declaration of Actual Use Trademark infringement
The applicant or the registrant shall file a declaration of Use without consent of the trademark owner of any
actual use (DAU) of the mark with evidence to that effect, reproduction, counterfeit, copy or colorable limitation of
within three (3) years from the filing date of the any registered mark or trade name. Such use is likely to
application. Otherwise, the application shall be refused or cause confusion or mistake or to deceive purchasers or
the mark shall be removed from the Register by the others as to the source or origin of such goods or services,
Director (IPC, Sec. 124.2). or Identity of such business (Esso Standard Eastern v. CA,
supra).

MERCANTILE LAW
Infringement takes place when the competing trademark Counterfeit Goods v. Colorable Imitation
contains the essential features of another. Imitation or an
effort to imitate is unnecessary. The question is whether COUNTERFEIT GOODS COLORABLE
the use of the marks is likely to cause confusion or deceive IMITATION
purchasers (Societe Des Produits Nestle, S. A. vs. Martin any goods, including "such a close or ingenious
T.Dy, G.R. No. 172276, August 9, 2010). packaging, bearing imitation as to be
without authorization a calculated to deceive
A crucial issue in any trademark infringement case is the trademark which is ordinary purchasers, or
likelihood of confusion, mistake or deceit as to the identical to the trademark such resemblance of the
identity, source or origin of the goods or identity of the validly registered in infringing mark to the
business as a consequence of using a certain mark. respect of such goods, or original as to deceive an
Likelihood of confusion is admittedly a relative term, to which cannot be ordinary purchaser
be determined rigidly according to the particular (and distinguished in its giving such attention as a
sometimes peculiar) circumstances of each case. Thus, in essential aspects from purchaser usually gives,
trademark cases, more than in other kinds of litigation, such a trademark, and and to cause him to
precedents must be studied in the light of each particular which thereby infringes purchase the one
case. (Mighty Corporation vs. E. J. Gallo Winery, G.R. No. the rights of the owner of supposing it to be the
154342, 14 July 2004) the trademark in question other (Emerald vs. CA, G.R.
under the law of the No. 100098, December 29,
Failure to present proof of actual confusion does not country of importation 1995).
negate their claim of trademark infringement. Trademark (TRIPs Agreement).
infringement requires the less stringent standard of
“likelihood of confusion” only. While proof of actual Unauthorized use of container bearing a registered
confusion is the best evidence of infringement, its absence trademark
is inconsequential (McDonalds Corporation v. L. C. Big Mak
Burger, Inc., G.R. No. 143993, August 18, 2004). The mere unauthorized use of a container bearing a
registered trademark in connection with the sale,
Elements to be established in trademark distribution or advertising of goods or services which is
infringement likely to cause confusion, mistake or deception among the
buyers or consumers can be considered as trademark
The elements of infringement are as follows: infringement (Republic Gas Corporation v. Petron
Corporation, G. R. No. 194062, June 17, 2013).
1) The trademark being infringed is registered. In case of
tradename, it need not be registered; Unauthorized use of a container bearing a registered
trademark in connection with the sale, distribution or
2) The trademark or trade name is reproduced, advertising of goods or services which is likely to cause
counterfeited, copied, or colorably imitated by the confusion, mistake or deception among the
infringer; buyers/consumers can be considered as trademark
infringement (Yao v. People of the Philippines, G. R. No.
3) The infringing mark or trade name is used in 168306, June 19, 2007).
connection with the sale, offering for sale, or advertising
of any goods, business or services; or the infringing mark The mere unauthorized use of a container bearing a
or trade name is applied to labels, signs, prints, packages, registered trademark in connection with the sale,
wrappers, receptacles or advertisements intended to be distribution or advertising of goods or services which is
used upon or in connection with such goods, business or likely to cause confusion, mistake or deception among the
services; buyers or consumers can be considered as trademark
infringement. Here, peti-tioners have actually committed
4) The use or application of the infringing mark or trade trademark infringement when they refilled, without the
name is likely to cause confusion or mistake or to deceive respon-dents’ consent, the LPG containers bearing the
purchasers or others as to the goods or services registered marks of the respondents. Petitioners’ acts will
themselves or as to the source or origin of such goods or inevitably confuse the consuming public, since they have
services or the identity of such business; and, no way of knowing that the gas con-tained in the LPG
tanks bearing respondents’ marks is in reality not the
5) It is without the consent of the trademark or trade latter’s LPG product after the same had been illegally
name owner or the assignee thereof. (Prosource refilled. The public will then be led to believe that
International, Inc. vs. Horphag Research Management SA, petitioners are autho-rized refillers and distributors of
G.R. No. 180073, November 25, 2009; Diaz v. People of the respondents’ LPG products, considering that they are
Philippines and Levi-Strauss (Phil.), G. R. No. 180677, accepting empty containers of respondents and refilling
February 18, 2013). them for resale.
In the present case, respondents pertinently observed

that by refilling and selling LPG cylinders bearing their
registered marks, petitioners are selling goods by giving
them the general appearance of goods of another

manufacturer. Obviously, the mere use of those LPG to have had notice of the registration of the mark
cylinders bearing the trademarks "GASUL" and (which is presumed if a letter R within a circle is
"SHELLANE" will give the LPGs sold by REGASCO the appended) and stop him permanently from using the
general ap-pearance of the products of the petitioners mark.
(Republic Gas Corp. v. Petron Corp., G.R. No. 194062, June
17, 2013, in Divina 2014). 2. Criminal— the owner of the trademark may ask the
court to issue a search warrant and in appropriate
The trademark “Marlboro“is not only valid for being cases, remedies available shall also include the
neither generic nor descriptive, it was also ex-clusively seizure, forfeiture and destruction of the
owned by PMPI, as evidenced by the certificate of infringing goods and of any materials and
registration issued by the Intellectual Property Office. implements the predominant use of which has been
Infringement of trademark clearly lies since the in the commission of the offense.
counterfeit cigarettes were intend-ed to confuse and
deceive the public as to the origin of the cigarettes 3. Administrative—same as in patent infringement cases.
intended to be sold, as they not only bore PMPI’s If the amount of damages claimed is not less than
trademark but they were packaged almost exactly as P200,000.00, the registrant may choose to seek
PMPI’s products (Ong vs. People of the Philippines, GR No. redress against the infringer by filing an
169440, November 23, 2011). administrative action against the infringer with
the Bureau of Legal Affairs.
Non-competing goods
Ascertainment of the amount of damages in a civil
Those which, though they are not in actual competition, action for infringement
are so related to each other that it might reasonably be
assumed that they originate from one manufacturer. Non- The owner of a trademark which has been infringed is
competing goods may also be those which, being entirely entitled to actual damages:
unrelated, could not reasonably be assumed to have a 1. The reasonable profit which the complaining party
common source. In the case of related goods, confusion of would have made, had the defendant not infringed his
business could arise out of the use of similar marks; in the said rights; or
lattercase of non-related goods, it could not (Esso
Standard Eastern, Inc. v. CA, supra). 2. The profit which the defendant actually made out of
infringement; or
In a later case, in defining trademark infringement,
Section 22 of RA 166 deleted the requirement in question 3. The court may award as damages a reasonable
and expanded its scope to include such use of the mark or percentage based upon the amount of gross sales of the
its colorable imitation that is likely to result in confusion defendant or the value of the services in connection with
on "the source or origin of such goods or services, or which the mark or trade name was issued.
identity of such business." Thus, while there is confusion
of goods when the products are competing, confusion of NOTE: In cases where actual intent to mislead the public
business exists when the products are non-competing but or to defraud the complainant is shown, in the discretion
related enough to produce confusion of affiliation. of the court, the damages may be doubled (IPC, Sec. 156.3).
Modern law recognizes that the protection to which the Court which has jurisdiction over violations of
owner of a trademark is entitled is not limited to guarding intellectual property rights
his goods or business from actual market competition
with identical or similar products of the parties, but It is properly lodged with the Regional Trial Court even
extends to all cases in which the use by a junior if the penalty therefore is imprisonment of less than six
appropriator of a trade-mark or trade-name is likely to years, or from 2 to 5 years and a fine ranging from
lead to a confusion of source, as where prospective P50,000 to P200,000.
purchasers would be misled into thinking that the
complaining party has extended his business into the field NOTE: R.A. 8293 and R.A. 166 are special laws conferring
or is in any way connected with the activities of the jurisdiction over violations of intellectual property rights
infringer; or when it forestalls the normal potential to the Regional Trial Court. They should therefore prevail
expansion of his business (Mcdonald’s Corporation v. L & over R.A. No. 7691, which is a general law (Samson v.
C Big Mak Burger, Inc. August 18, 2004). Daway, G.R. No. 160054-55, July 21, 2004).
Remedies of the owner of the trademark against Q: K-9 Corporation, a foreign corporation alleging
infringers itself to be the registered owner of trademark “K-9”
and logo “K”, filed an Inter Partes case with the
1. Civil —filed with the Regional Trial Courts. The owner Intellectual Property Office against Kanin
of the registered mark may ask the court to issue a Corporation for the cancellation of the latter’s mark
preliminary injunction to quickly prevent infringer “K-9” and logo “K.” During the pendency of the case
from causing damage to his business. Furthermore, before the IPO, Kanin Corporation brought suit
the court will require infringer to pay damages to against K-9 Corporation before the RTC for
the owner of the mark provided defendant is shown

MERCANTILE LAW
infringement and damages. Could the action before Limitations on the actions for infringement
the RTC prosper? Why? (2003 Bar)
1. Right of prior user– registered mark shall be without
A: Yes, the action before the RTC can prosper. According affect against any person who, in good faith, before filing
to Section 151.2 of the IPO, the filing of a suit to enforce or priority date, was using the mark for purposes of his
the registered mark with the proper court or agency shall business (IPC, Sec 159.1).
exclude any other court or agency from assuming
jurisdiction over a subsequently filed petition to cancel 2. Relief against publisher– injunction against future
the same mark. On the other hand, the earlier filing of printing against an innocent infringer who is engaged
petition to cancel the mark with the Bureau of Legal solely in the business of printing the mark (IPC, Sec.
Affairs shall not constitute a prejudicial question that 159.2).
must be resolved before an action to enforce the rights to
same registered mark may be decided. The issues raised 3. Relief against newspaper –injunction against the
before the different the IPO and the RTC are different. The presentation of advertising matter in future issues of the
issue raised before the IPO is whether or not the newspaper, magazine or in electronic communications in
cancellation of the subsequent trademark is proper case the infringement complained of is contained in or is
because of the prior ownership of the disputed mark by part of paid advertisement in such materials(IPC, Sec.
K-9. While the issue raised before the RTC pertains to 159.3)
infringement. Furthermore, an action for infringement or
unfair competition, as well as the remedy of injunction Trademark Dilution
and relief for damages, is explicitly and unquestionably
within the competence and jurisdiction of ordinary courts Trademark dilution is the lessening of the capacity of a
(Shangri-la International Hotel Management, Ltd., v. famous mark to identify and distinguish goods or
Makati Shangri-la Hotel and Resort Inc., G.R. No. services, regardless of the presence or absence of: (1)
111580. June 21, 2001). competition between the owner of the famous mark and
other parties; or (2) likelihood of confusion, mistake or
Venue in filing actions for infringment deception. Subject to the principles of equity, the owner
of a famous mark is entitled to an injunction against
A.M. 02-1-06-SC (The Rule on Search and Seizure in Civil another person’s commercial use in commerce of a mark
Ac-tions for Infringement of Intellectual Property Rights) or trade name, if such use begins after the mark has
governs the issuance of a writ of search and seizure in a become famous and causes dilution of the distinctive
civil action for infringement filed by an intellectual quality of the mark. (Levi Strauss & Co., vs. Clinton
property right owner against the supposed infringer of his Apparelle, Inc., G.R. No. 138900, September 20, 2005).
trademark or name. Under this rule, the claim for
damages should be filed with the same court that issued UNFAIR COMPETITION
the writ of search and seizure.
Employing deception or any other means contrary to
However, Philip Morris, the manufacturer of Marlboro good faith by which a person passes off his goods or
cigarettes did not go by this route. Philip Morris did not business or services for those of one who has already
file a civil action for infringement of its trademark against established goodwill thereto (IPC, Sec. 168.2).
the Del Rosarios before the RTC of Angeles City. Instead,
Philip Morris sought assistance from the NBI for the It is the passing off (or palming off) or attempting to pass
apprehension and criminal prosecution of those off upon the public of the goods or business of one person
reportedly appropriating its trademark and selling fake as the goods or business of another with the end and
Marlboro cigarettes. In turn, the NBI instituted a police probable effect of deceiving the public. Passing off (or
action that included applying for a search and seizure palming off) takes place where the defendant, by imitative
warrant under Sections 3, 4, 5 and 6 of Rule 126 of the devices on the general appearance of the goods, misleads
Rules of Criminal Procedure (not under the provisions of prospective pur-chasers into buying his merchandise
A.M. 02-1-06-SC) against the Del Rosarios upon the belief under the impression that they are buying that of his
that they were storing and selling fake Marlboro competi-tors. Thus, the defendant gives his goods the
cigarettes in violation of the penal provisions of the general appearance of the goods of his competitor with
intellectual property law. the intention of deceiving the public that the goods are
those of his competitor (Republic Gas Corp. v. Petron Corp.,
The proceeding under Rule 126, a limited criminal one, ibid. in Divina 2014).
does not provide for the filing of counterclaims for
damages against those who may have improperly sought Infringement of trademark v. Unfair competition
the issuance of the search warrant. Consequently, the
Del Rosarios had the right to seek damages, if the INFRINGEMENT OF UNFAIR
circumstances warranted, by separate civil action for the TRADEMARK COMPETITION
wrong inflicted on them by an improperly obtained or Unauthorized use of a The passing off of one’s
enforced search warrant (Del Rosario, et al. v. Doanto, Jr.
trademark. goods as those of another.
et al., G.R. No. 180595, March 4, 2010, in Divina, 2014).
Fraudulent intent is Fraudulent intent is
unnecessary. essential.

GR: Prior registration of unfairness or fraud. Conduct constitutes unfair
the trademark is a Registration is not competition if the effect is to pass off on the public the
prerequisite to the action. necessary. (Del Monte goods of one man as the goods of another (Mighty
Corp. v. CA, G.R. No. Corporation v. E. & J. Gallo Winery, G.R. No. 154342, July 14,
XPN: Well-known 78325, January 23, 1990) 2004).
marks An action for unfair competition is based on the
proposition that no dealer in merchandise should be
Q: In what way is an infringement of a trademark allowed to dress his goods in simulation of the goods of
similar to that which pertains to unfair competition? another dealer, so that purchasers desiring to buy the
(2003 Bar) goods of the latter would be induced to buy the goods of
the former. The most usual devices employed in
A: The similarity lies in both their ability to disrupt fair committing this crime are the simulation of labels and the
competition amongst business enterprises and other reproduction of form, color and general appearance of the
businesses. They can also create confusion, mistake, and package used by the pioneer manufacturer or dealer
deception as to the minds of the consumers with regard (Caterpillar, Inc. vs. Samson, G.R. No. 164605, October 27,
to the source or identity of their products or services due 2006).
to its similarity in appearance or packaging.
Jurisprudence also formulated the following “true test” of
Right protected under unfair competition unfair competition: whether the acts of the defendant
have the intent of deceiving or are calculated to deceive
A person who has identified in the mind of the public the the ordinary buyer making his purchases under the
goods he manufactures or deals in, his business or ordinary conditions of the particular trade to which the
services from those of others, whether or not a registered controversy relates. One of the essential requisites in an
mark is employed, has a property right in the goodwill of action to restrain unfair competition is proof of fraud; the
the said goods, business or services so identified, which intent to deceive, actual or probable must be shown
will be protected in the same manner as other property before the right to recover can exist (Superior Enterprises,
rights (IPC, Sec. 168.1). Inc. vs. Kunnan Enterprises Ltd., supra).
Persons guilty of unfair competition Essential Elements of an action for unfair competition
1. Any person, who is selling his goods and gives them the The essential elements of an action for unfair competition
general appearance of goods of another manufacturer or are (1) confusing similarity in the general appearance of
dealer, either as to the goods themselves or in the wrapping the goods, and (2) intent to deceive the public and defraud
of the packages in which they are contained, or the devices a competitor. The confusing similarity may or may not
or words thereon, or in any other feature of their result from similarity in the marks, but may result from
appearance, which would be likely to influence other external factors in the packaging or presentation of
purchasers to believe that the goods offered are those of the goods. The intent to deceive and defraud may be
a manufacturer or dealer, other than the actual inferred from the similarity of the appearance of the
manufacturer or dealer, or who otherwise clothes the goods as offered for sale to the public (McDonalds
goods with such appearance as shall deceive the public and Corporation vs. L. C. Big Mak Burger, Inc., G.R. No. 143993,
defraud another of his legitimate trade, or any subsequent August 18, 2004).
vendor of such goods or any agent of any vendor engaged
in selling such goods with a like purpose; The key elements of unfair competition are deception,
passing off, and fraud upon the publics (Torres vs. Perez,
2. Any person who by any artifice, or device, or who GR No.188225, November 28, 2012).
employs any other means calculated to induce the false
belief that such person is offering the services of another 1. Confusing similarity in the general appearance of the
who has identified such services in the mind of the public; goods; and
3. Any person who shall make any false statement in the NOTE: The confusing similarity may or may not result
course of trade or who shall commit any other act contrary from similarity in the marks, but may result from other
to good faith of a nature calculated to discredit the goods, external factors in the packaging or presentation of the
business or services of another. (IPC, Sec. 168.3) goods.
The law on unfair competition is broader than the law 2. Intent to deceive the public and defraud a competitor.
on trademark infringement
NOTE: The intent to deceive and defraud may be inferred
Trademark infringement is more limited but it recognizes from the similarity in appearance of the goods as offered
a more exclusive right derived from the trademark for sale to the public (McDonald’s Corporation v. L.C. Big
adoption and registration by the person whose goods or Mak Burger, Inc., et al., G.R. No. 143993, Aug. 18, 2004).
business is first associated with it. Hence, even if one fails
to establish his exclusive property right to a trademark, The element of passing off
he may still obtain relief on the ground of his competitor’s

MERCANTILE LAW
In order to prove a case of unfair competition, it is to the public, which were even packaged in bottles
sufficient to show that such deception will be the natural identical to that of the original, thereby giving rise to the
and probable cause of defendants acts. presumption of fraudulent intent. In light of the foregoing
definition, it is thus clear that Co, together with the Laus,
Q: The NBI found that SG Inc. is engaged in the committed unfair competition, and should, consequently,
reproduction and distribution of counterfeit be held liable therefor. Although liable for unfair
"playstation games" and thus applied with the Manila competition, the Court deems it apt to clarify that Co was
RTC warrants to search respondent's premises in properly exculpated from the charge of trademark
Cavite. RTC granted such warrants and thus, the NBI infringement considering that the registration of the
served the search warrants on the subject premises. trademark "Greenstone" – essential as it is in a trademark
SG Inc. questioned the validity of the warrants due to infringement case – was not proven to have existed
wrong venue since the RTC of Manila had no during the time the acts complained of were committed
jurisdiction to issue a search warrant enforceable in (Roberto Co v. Keng Huan Jerry Yeung and Emma Yeung,
Cavite. Is the contention of SG Inc. correct? G.R. No. 212705, September 10, 2014).
A: No, unfair competition is a transitory or continuing Applicability of Rules on the Issuance of the Search
offense under Section 168 of Republic Act No. 8293. As and Seizure Order in Civil Actions for Infringement
such, petitioner may apply for a search warrant in any
court where any element of the alleged offense was The Rules on the Issuance of the Search and Seizure in
committed, including any of the courts within Metro Civil Actions for Infringement of Intellec-tual Property
Manila and may be validly enforced in Cavite (Sony Rights are not applicable in this case as the search
Computer Entertainment Inc. v. Supergreen Inc. G.R. No. warrants were not applied based thereon, but in
161823, Mar. 22, 2007). anticipation of criminal actions for violation of intellectual
NOTE: Section 2, Rule 10 of the Rules of Procedure on IP property rights under RA 8293. It was established that
Cases (A.M. No. 10-3-10 SC, October 18, 2011) provides respondent had asked the NBI for assistance to conduct
that Special Commercial Courts in Quezon City, Manila, investigation and search warrant implementation for
Makati, and Pasig shall have authority to act on possible apprehension of several drugstore owners
applications for the issuance of search warrants involving selling imitation or counterfeit TOP GEL T.G. & DEVICE OF
violations of the Intellectual Property Code, which search A LEAF papaya whitening soap. What is applicable is Rule
warrants shall be enforceable nationwide. Within their 126 of the Rules of Criminal Procedure. A core requisite
respective territorial jurisdictions, the Special before a warrant shall validly issue is the existence of
Commercial Courts in the judicial regions where the probable cause. The pendency of a similar action for
violation of intellectual property rights occurred shall infringement of trademark and unfair competition against
have concurrent jurisdiction to issue search warrants. the very person who applied for search warrant does not
bar the issuance of the warrant if it is based on probable
Section 168 of Republic Act No. 8293, otherwise known as cause (Century Chinese Medicine Co., et.al. v. People of the
the “Intellectual Property Code of the Philippines” (IP Philippines and Ling Na Lau. G.R. No. 188526, November 11,
Code), provides for the rules and regulations on unfair 2013, in Divina, 2014).
competition. Section 168.2 proceeds to the core of the
provision, describing forthwith who may be found guilty TRADE NAMES OR BUSINESS NAMES
of and subject to an action of unfair competition — that is,
“any person who shall employ deception or any other Any individual name or surname, firm name, device nor
means contrary to good faith by which he shall pass off the word used by manufacturers, industrialists, merchants,
goods manufactured by him or in which he deals, or his and others to identify their businesses, vocations or
business, or services for those of the one having occupants (Converse Rubber Corp. vs. Universal Rubber
established such goodwill, or who shall commit any acts Products, GR No. L-27425, L-30505, April 28, 1980).
calculated to produce said result x x x.” In this case, the
Court finds the element of fraud to be wanting; hence, Limitations on use of trade name or business name
there can be no unfair competition (Shang Properties
Realty Corporation (formerly The Shang Grand Tower A person may not:
Corporation) and Shang Properties, Inc. (formerly EDSA
Properties Holdings, Inc.) v. St. Francis Development 1. Use a name if the word is generic (Lyceum of the
Philippines v. CA, G.R. No. 101897, March 5, 1993)
Corporation, G.R. No. 190706, July 21, 2014).
2. Use any name indicating a geographical locations
(Ang Si Heng vs. Wellington Department Store, supra).
Unfair competition is defined as the passing off (or
3. Use any name or designation contrary to public order
palming off) or attempting to pass off upon the public of
or morals
the goods or business of one person as the goods or
4. Use a name if it is liable to deceive trade circles or the
business of another with the end and probable effect of
public as to the nature of the enterprise identified by
deceiving the public. This takes place where the
that name (IPC, Sec. 165.1).
defendant gives his goods the general appearance of the
5. Subsequently use a trade name likely to mislead the
goods of his competitor with the intention of deceiving
public as a third party (IPC, Sec. 165.2 [b]).
the public that the goods are those of his competitor. Here,
6. Copy or simulate the name of any domestic product
it has been established that Co conspired with the Laus in
(for imported products).
the sale/distribution of counterfeit Greenstone products

7. Copy or simulate a mark registered in accordance Cancellation of trademark registration
with the provisions of IPC (for imported products).
8. Use mark or trade name calculated to induce the A: A trademark registration may be cancelled by any
public to believe that the article is manufactured in person who believes that he will be damaged by the
the Philippines, or that it is manufactured in any registration of the mark:
foreign country or locality other than the country or 1. Within 5 years, from the date of the registration of
locality where it is in fact manufactured. the mark; or
2. At any time;
NOTE: Items 4, 5 and 6 only applies to imported products a. If the registered mark becomes the generic name
and those imported articles shall not be admitted to entry for the goods or services, or a portion thereof, for
at any customhouse of the Philippines (IPC, Sec. 166). which it is registered;
b. If the mark has been abandoned;
Change in the ownership of a trade name c. If its registration was obtained fraudulently or
contrary to the provisions of the IPC;
The change in the ownership of a trade name is made with d. If the registered mark is being used by, or with the
the transfer of the enterprise or part thereof identified by permission of, the registrant so as to misrepresent
that name (IPC, Sec. 165.4). the source of the goods or services on or in
connection with which the mark is used;
COLLECTIVE MARKS e. Non-use of the mark within the Philippines,
without legitimate reason, for an uninterrupted
A "collective mark" or “collective trade-name" is a mark period of 3 years.
or trade-name used by the members of a cooperative, an
association or other collective group or organization (RA NOTE: If in a petition for cancellation of a trademark, it
166, Sec. 40). was established that the petitioner was not its owner,
prior registration can be cancelled without need of filing
Contents of an application for registration of a a separate petition (E.Y. Industrial Sales, Inc. v. Shen Dar
collective mark Electricity and Machinery Co. Ltd., G.R. No. 184850, October
20, 2010).
1. The application shall designate the mark as a collective
mark; Transliteration v. Translation of mark
2. Accompanied by a copy of the agreement, if any, Transliteration Translation

governing the use of the collective mark (IPC, Sec. 167.2) is an act, process or is an act, process or
instances of representing instance of translating as
Grounds for the cancellation of collective marks or spelling of words, letters rendering from one
or characters of one language or
1. The Court shall cancel the registration of a collective language in the letters and representational system
mark if the person requesting the cancellation proves that characters of another into another.
only the registered owner uses the mark, language or alphabet
2. Or that he uses or permits its use in contravention of
the agreements referred to in Subsection 166.2, COPYRIGHTS
3. Or that he uses or permits its use in a manner liable to Copyright

deceive trade circles or the public as to the origin or any
other common characteristics of the goods or services A right over literary and artistic works which are original
concerned (IPC, Sec 167.3). intellectual creations in the literary and artistic domain
protected from the moment of creation (IPC, Sec. 171.1).
NOTE: The registration of a collective mark, or an
application therefore shall not be the subject of a license BASIC PRINCIPLES
contract.
Elements of copyrightability
Criminal penalties under the Intellectual Property
Code for unfair competition, infringement, false 1. Originality – Must have been created by the author’s
designation of origin and false representations own skill, labor, and judgment without directly copying or
evasively imitating the work of another (Ching Kian Chuan
A criminal penalty of imprisonment from two (2) years to v. CA, G.R. No. 130360, Aug. 15, 2001).
five (5) years and a fine ranging from Fifty thousand pesos
(P50,000) to Two hundred thousand pesos (P200,000), 2. Expression – Must be embodied in a medium sufficiently
shall be imposed on any person who is found guilty of permanent or stable to permit it to be perceived,
committing any of the acts. The penalty shall be reproduced or communicated for a period more than a
independent of the civil and administrative sanctions transitory duration.
imposed by law (IPC, Sec 170).
Copyright, in the strict sense of the term, is purely a
statutory right. Being a mere statutory grant, the rights

MERCANTILE LAW
are limited to what the statute confers. It may be obtained recording, a computer program, a compilation of data and
and enjoyed only with respect to the subjects and by the other materials or a musical work in graphic form,
persons, and on terms and conditions specified in the irrespective of the ownership of the original or the copy
statute. Accordingly, it can only cover the works falling which is the subject of the rental;
within the statutory enumeration or description (Pearl &
Dean (Phil.), Incorporated vs. Shoemart, Incorporated, G.R. e) public display of the original or a copy of the work;
No. 148222, August 15, 2003; Joaquin, Jr. vs. Drilon, G.R. No.
108946, January 28, 1999; Ching vs. Salinas, G.R. No. f) public performance of the work; and
161295, June 29, 2005).
g) other communication to the public of the work. (IPC,
The subject of copyright refers to finished works. The Sec. 177).
copyright does not extend to an idea, procedure, process,
system, method of operation, concept, principle, or Elements of originality
discovery, regardless of the form in which it is described,
explained, illustrated, or embodied in such work (Joaquin, 1. It is independently created by the author, and
Jr. vs. Drilon, G.R. No. 108946, January 28, 1999). 2. It possesses some minimal degree of creativity
A person to be entitled to a copyright must be the original Time when copyright vests
creator of the work. He must have created it by his own
skill, labor and judgment without directly copying or Works are protected from the time of their creation,
evasively imitating the work of another (Kian Chuan vs. irrespective of their mode or form of expression, as well
Hon. Court of Appeals, G.R. No. 130360, August 15, 2001; as of their content, quality and purpose (IPC, Sec. 172.2).
Sambar vs. Levi Strauss & Co., G.R. No. 132604, March 6,
2002). Unprotected Subject Matter
Functional components of useful articles, no matter how Notwithstanding the provisions of Sections 172 and 173,
artistically designed, have generally been denied no protection shall extend, under this law, to any idea,
copyright protection unless they are separable from the procedure, system method or operation, concept,
useful article. (Ching vs. Salinas, G.R. No. 161295, June 29, principle, discovery or mere data as such, even if they are
2005). expressed, explained, illustrated or embodied in a work;
news of the day and other miscellaneous facts having the
Only the expression of an idea is protected by copyright, character of mere items of press information; or any
not the idea itself. (Pearl & Dean (Phil.), Incorporated v. official text of a legislative, administrative or legal nature,
Shoemart, Incorporated, G.R. No. 148222, August 15, 2003) as well as any official translation thereof (IPC, Sec. 175).
While works of applied art, original intellectual, literary Copyright and Material Object
and artistic works are copyrightable, useful articles and
works of industrial design are not. A useful article may be The copyright is distinct from the property in the material
copyrightable only if and only to the extent that such object subject to it. Consequently, the transfer,
design incorporates pictorial, graphic, and sculptural assignment or licensing of the copyright shall not itself
features that can be identified separately from and are constitute a transfer of the material object. Nor shall a
capable of existing independently of the utilitarian transfer or assignment of the sole copy or of one or
aspects of the article. (Ching vs. Salinas, G.R. No. 161295, several copies of the work imply transfer, assignment or
June 29, 2005). licensing of the copyright (IPC, as amended by R.A. 10372,
Sec. 181).
Q: What intellectual property rights are protected by
the copyright? (1995 Bar) COPYRIGHTABLE WORKS
(1995, 1997, 1998, 2007, 2008 Bar)
A: Copyright protects copyright or economic rights which
consist of the exclusive right to carry out, authorize, or 1. Literary and Artistic Works
prevent the following: (BOLD-MAN-GAS-PAP-CO)
a) reproduction of the work or substantial portion of the a. Books, pamphlets, articles and other writings
work; b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not reduced in
b) dramatization, translation, adaptation, bridgment, writing or other material form
arrangement or other transformation of the work; c.Letters
d.Dramatic, choreographic works
c) the first public distribution of the original and each e.Musical compositions
copy of the work by sale or other forms of transfer of f. Works of Art
ownership; g. Periodicals and Newspapers
h. Works relative to Geography, topography,
d) rental of the original or a copy of an audiovisual or architecture or science
cinematographic work, a work embodied in a sound i. Works of Applied art

j. Works of a Scientific or technical character effort, has contributed a distinguishable variation from
k.Photographic works the older works.” In such a case, of course, only those
l.Audiovisual works and cinematographic works parts which are new are protected by the new copyright.
m.Pictorial illustrations and advertisements Hence, in such a case, there is no case of infringement.
n.Computer programs; and Juan Xavier is no less an “author” because others have
o. Other literary, scholarly, scientific and artistic works preceded him.
(IPC, Sec. 172.1).
NON-COPYRIGHTABLE WORKS
2. Derivative Works
Non-copyrightable works (INOD-PGTSS)
a. Dramatizations, translations, adaptations,
abridgements, arrangements, and other alterations of 1. Idea, procedure, system, method or operation, concept,
literary or artistic works; principle, discovery or mere data as such
b. Collections of literary, scholarly, or artistic works and 2. News of the day and other items of press information
compilations of data and other materials which are 3. Any Official text of a legislative, administrative or legal
original by reason of the selection or coordination or nature, as well as any official translation thereof
arrangement of their contents (IPC, Sec. 173).
4. Pleadings
NOTE: Derivative works shall be protected as new works, 5. Decisions of courts and tribunals – this refers to original
provided that such new work shall not affect the force of decisions and not to annotated decisions such as the SCRA
any subsisting copyright upon the original works or SCAD as these already fall under the classification of
employed or any part thereof, or be construed to imply derivative works, hence copyrightable
any right to such use of the original works, or to secure or
extend copyright in such original works (IPC, Sec. 173.2). 6. Any work of the Government of the Philippines
GR: Conditions imposed prior the approval of the
Q: P&D was granted a copyright on the technical
government agency or office wherein the work is created
drawings of light boxes as "advertising display units".
shall be necessary for exploitation of such work for profit.
SMI, however, manufactured similar or identical to Such agency or office, may, among other things, impose as
the light box illustrated in the technical drawings
condition the payment of royalties.
copyrighted by P&D for leasing out to different
advertisers. Was this an infringement of P&D’s XPN: No prior approval or conditions shall be required for
copyright over the technical drawings? the use of any purpose of statutes, rules and regulations,
and speeches, lectures, sermons, addresses, and
A: No. P&D’s copyright protection extended only to the dissertations, pronounced, read, or rendered in courts of
technical drawings and not to the light box itself. The light justice, before administration agencies, in deliberative
box was not a literary or artistic piece which could be assemblies and in meetings of public character (IPC, Sec.
copyrighted under the copyright law. If SMI reprinted 176).
P&D’s technical drawings for sale to the public without
license from P&D, then no doubt they would have been 7. TV programs, format of TV programs (Joaquin v. Drilon,
guilty of copyright infringement. Only the expression of an G.R. No. 108946, Jan. 28, 1999)
idea is protected by copyright, not the idea itself. If what 8. Systems of bookkeeping; and
P&D sought was exclusivity over the light boxes, it should
have instead procured a patent over the light boxes itself 9. Statutes.
(Pearl and Dean Inc. v. Shoe Mart Inc., GR No. 148222,
August 15, 2003). Q: BJ Productions, Inc. (BJPI) is the holder/grantee of
a copyright of “Rhoda and Me”, a dating game show
Q: Juan Xavier wrote and published a story similar to aired from 1970 to 1977. Subsequently, however,
an unpublished copyrighted story of Manoling RPN aired the game show “It’s a Date”, which was
Santiago. It was, however, conclusively proven that produced by IXL Productions, Inc. (IXL). As such, an
Juan Xavier was not aware that the story of Manoling information for copyright infringement was filed
Santiago was protected by copyright. Manoling against RPN. The DOJ Secretary directed the
Santiago sued Juan Xavier for infringement of prosecutor to dismiss the case for lack of probable
copyright. Is Juan Xavier liable? (1998 Bar) cause. Was the decision of the DOJ Secretary correct?
A: Yes. Juan Xavier is liable for infringement of copyright. A: Yes. The format of a show is not copyrightable. The
It is not necessary that Juan Xavier is aware that the story copyright law enumerates the classes of work entitled to
of Manoling Santiago was protected by copyright. The copyright protection. The format or mechanics of a
work of Manoling Santiago is protected from the time of television show is not included in the list of protected
its creation (Habana v. Robles, G.R. No. 131522, July 19, works. For this reason, the protection afforded by the law
1999). cannot be extended to cover them. Copyright, in the strict
sense of the term, is purely a statutory right. It is a new or
NOTE: There will still be originality sufficient to warrant independent right granted by the statute, and not simply
copyright protection if “the author, through his skill and a pre-existing right regulated by the statute. Being a

MERCANTILE LAW
statutory grant, the rights are only such as the statute where the pseudonym leaves no doubt as to identity of the
confers, and may be obtained and enjoyed only with author (IPC, Sec. 219.1).
respect to the subjects and by the persons, and on terms
and conditions specified in the statute (Joaquin v. Drilon, The person or body corporate, whose name appears on
G.R. No. 108946, Jan. 28, 1999). the audio-visual work in the usual manner shall, in the
absence of proof to the contrary, be presumed to be the
Q: Rural is a certified public utility providing maker of said work (IPC, Sec. 219.2).
telephone service to several communities in Manila.
It obtains data for the directory from subscribers, Note: Copyright protection commences from the time of
who must provide their names and addresses to creation.
obtain telephone service. Feist Publications, Inc., is a
publishing company that specializes in area-wide Rights of an author
telephone directories covering a much larger
geographic range than directories such as Rural's. 1. Economic rights – The right to carry out, authorize or
Feist extracted the listings it needed from Rurals’s prevent the following acts:
directory without its consent. Are directories
a. Reproduction of the work or substantial portion
copyrightable?
thereof
b. Carry-out derivative work (dramatization,
A: No. Directories are not copyrightable and therefore the
translation, adaptation, abridgement, arrangement or
use of them does not constitute infringement. The
other transformation of the work)
Intellectual Property Code mandates originality as a
c. First distribution of the original and each copy of the
prerequisite for copyright protection. This requirement
work by sale or other forms of transfer of ownership
necessitates independent creation plus a modicum of
d. Rental right
creativity. Since facts do not owe their origin to an act of
e. Public display
authorship, they are not original, and thus are not
f. Public performance
copyrightable. A compilation is not copyrightable per se,
g. Other communications to the public.
but is copyrightable only if its facts have been "selected,
coordinated, or arranged in such a way that the resulting
2. Moral rights – For reasons of professionalism and
work as a whole constitutes an original work of
propriety, the author has the right:
authorship." Thus, the statute envisions that some ways
of selecting, coordinating, and arranging data are not a. To require that the authorship of the works be
sufficiently original to trigger copyright protection. Even attributed to him (attribution right)
a compilation that is copyrightable receives only limited b. To make any alterations of his work prior to, or to
protection, for the copyright does not extend to facts withhold it from publication
contained in the compilation (Feist Publications, Inc. v. c. Right to preserve integrity of work, object to any
Rural Telephone Service Co., 499 U.S. 340). distortion, mutilation or other modification which
would be prejudicial to his honor or reputation; and
Copyright as distinct from material object d. To restrain the use of his name with respect to any
work not of his own creation or in a distorted version
GR: The copyright is distinct from the property in the of his work (IPC, Sec.193).
material object subject to it. Consequently, the transfer or
assignment of the copyright shall not itself constitute a 3. Droit de suite or “art proceeds right” is the artist’s resale
transfer of the material object. Nor shall a transfer or right, which requires that a percentage of the resale
assignment of the sole copy or of one or several copies of price of an artistic work is paid to the author. The right
the work imply transfer or assignment of the copyright. is exercisable even after the author’s death, provided
the work is still in copyright. (David Bainbridge,
XPN: WORK OF ARCHITECTURE - Copyright in a work of Intellectual Property, 3rd Ed., p. 220 1996, also cited in
architecture shall include the right to control the erection Copyright Law of the Philippines by D. Funa)
of any building which reproduces the whole or a
substantial part of the work either in its original form or In every sale or lease of an original work of painting or
in any form recognizably derived from the original: sculpture or of the original manuscript of a writer or
Provided, That the copyright in any such work shall not composer, subsequent to the first disposition thereof
include the right to control the reconstruction or by the author, the author or his heirs shall have an
rehabilitation in the same style as the original of a inalienable right to participate in the gross proceeds of
building to which that copyright relates (IPC, Sec. 186). the sale or lease to the extent of five percent (5%). (Sec.
200, IPC)
RIGHTS OF A COPYRIGHT OWNER
Rights which are not covered under a Droit de suite
Presumption of authorship (PEEWS)
The natural person whose name is indicated on a work in 1. Prints

the usual manner as the author shall, in the absence of 2. Etchings
proof to the contrary, presumed to be the author of the 3. Engravings
work. This is applicable even if the name is a pseudonym, 4. Works of applied art

5. Similar works wherein the author primarily derives Nature of moral rights
gain from the proceeds of reproductions (IPC, Sec. 201).
These are personal rights independent from the economic
Q: ABC is the owner of certain musical compositions rights. Being a personal right, it can only be given to a
among which are the songs entitled: "Dahil Sa Iyo", natural person. Hence, even if he has licensed or assigned
"Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao his economic rights, he continues to enjoy the above-
Lamang" and "The Nearness Of You.” Soda Fountain mentioned moral rights (Amador, 2007).
Restaurant hired a combo with professional singers
to play and sing musical compositions to entertain Term of moral rights
and amuse customers. They performed the above-
mentioned compositions without any license or The right[s] of an author shall last during the lifetime of
permission from ABC to play or sing the same. the author and IN PERPETUITY after his death While the
Accordingly, ABC demanded from Soda Fountain rights under sections 193.2, 193.3 and 193.4 shall be
payment of the necessary license fee for the playing coterminous with the economic rights, the moral rights
and singing of aforesaid compositions but the shall not be assignable or subject to license. The person or
demand was ignored. ABC filed an infringement case persons to be charged with the posthumous enforcement
against Soda Fountain. Does the playing and singing of these rights shall be named in a written instrument
of musical compositions inside an establishment which shall be filed with the National Library. In default
constitute public performance for profit? of such person or persons, such enforcement shall
devolve upon either the author’s heirs, and in default of
A: Yes. The patrons of the Soda Fountain pay only for the the heirs, the Director of the National Library (IPC, Sec.
food and drinks and apparently not for listening to the 198).
music, but the music provided is for the purpose of
entertaining and amusing the customers in order to make Exceptions to moral rights
the establishment more attractive and desirable. For the
playing and singing the musical compositions involved, 1. Absent any special contract at the time creator
the combo was paid as independent contractors by Soda licenses/permits another to use his work, the following
Fountain. It is therefore obvious that the expenses are deemed not to contravene creator’s moral rights,
entailed thereby are added to the overhead of the provided they are done in accordance with reasonable
restaurant which are either eventually charged in the customary standards or requisites of the medium:
price of the food and drinks or to the overall total of a. Editing
additional income produced by the bigger volume of b. Arranging
business which the entertainment was programmed to c. Adaptation
attract. Consequently, it is beyond question that the d. Dramatization
playing and singing of the combo in defendant-appellee's e. Mechanical and electric reproduction
restaurant constituted performance for profit (FILSCAP v.
Tan, G.R., No. L-36402, Mar. 16, 1987). 2. Complete destruction of work unconditionally
transferred by creators (IPC, Sec. 197).
An author cannot be compelled to perform his
contract Waiver of moral rights
An author cannot be compelled to perform his contract to GR: Moral rights can be waived in writing, expressly so
create a work or for the publication of his work already in stating such waiver.
existence. However, he may be held liable for damages for
breach of such contract (IPC, Sec. 195). XPN: Even in writing, waiver is not valid if:
1. Use the name of the author, title of his work, or his
Q: X, an amateur astronomer, stumbled upon what reputation with respect to any version/adaptation of his
appeared to be a massive volcanic eruption in Jupiter work, which because of alterations, substantially tend to
while peering at the planet through his telescope. The injure literary/artistic reputation of another author
following week, X, without notes, presented a lecture on 2. Use name of author in a work that he did not create
his findings before the Association of Astronomers of the
Philippines. To his dismay, he later read an article in a Neighboring rights
science journal written by Y, a professional astronomer,
repeating exactly what X discovered without any 1. Performers rights
attribution to him. Has Y infringed on X's copyright, if any? 2. Producers of sound recordings
(2011 Bar) 3. Broadcasting organizations
A: No, since no protection extends to any discovery, even Scope of a performer’s rights
if expressed, explained, illustrated, or embodied in a
work. Performers shall enjoy the following exclusive rights:
1. As regards their performances, the right of authorizing:

a. The broadcasting and other communication to the
public of their performance; and

MERCANTILE LAW
b. The fixation of their unfixed performance. form; the placing of these reproductions in the market
and the right of rental or lending
2. The right of authorizing the direct or indirect
reproduction of their performances fixed in sound 2. The right to authorize the first public distribution of the
recordings or audiovisual works or fixations in any original and copies of their sound recordings through sale
manner or form; or rental or other forms of transferring ownership;
3. The right of authorizing the first public distribution of 3. The right to authorize the commercial rental to the
the original and copies of their performance fixed in public of the original and copies of their sound recordings,
sound recordings or audiovisual works or fixations even after distribution by them by or pursuant to
through sale or rental of other forms of transfer of authorization by the producer; and
ownership;
4. The right to authorize the making available to the public
4. The right of authorizing the commercial rental to the of their sound recordings in such a way that members of
public of the original and copies of their performances the public may access the sound recording from a place
fixed in sound recordings or audiovisual works or and at a time individually chosen or selected by them, as
fixations, even after distribution of them by, or pursuant well as other transmissions of a sound recording with like
to the authorization by the performer; and effect (IPC, Sec. 208, IPC, as amended by R.A. No. 10372).
5. The right of authorizing the making available to the NOTE: Fair use and limitations to copyrights shall apply
public of their performances fixed in sound recordings or mutatis mutandis to performers (IPC, Sec. 210).
audiovisual works or fixations, by wire or wireless means,
in such a way that members of the public may access them Scope of the rights of broadcasting organizations
from a place and time individually chosen by them. (IPC as
amended by R.A. No. 10372, Sec. 203). Broadcasting organizations shall enjoy the exclusive right
to carry out, authorize or prevent any of the following
Moral rights of performers acts:
The performer, shall, as regards his live aural 1. The rebroadcasting of their broadcasts;
performances or performances fixed in sound recordings,
have the right to claim to be identified as the performer of 2. The recording in any manner, including the making of
his performances, except where the omission is dictated films or the use of video tape, of their broadcasts for the
by the manner of the use of the performance, and to object purpose of communication to the public of television
to any distortion, mutilation or other modification of his broadcasts of the same;
performances that would be prejudicial to his reputation
(IPC, Sec. 204). 3. The use of such records for fresh transmissions or for
Loss of performer’s rights fresh recording (IPC, Sec. 211).
Once the performer has authorized the broadcasting or NOTE: Broadcasting is the transmission by wireless
fixation of his performance, his performer’s rights means for the public reception of sounds or of images or
provided for in Section 203 shall have no further of representations thereof; such transmission by satellite
application (IPC, Sec 205). is also broadcasting where the means for decrypting are
provided to the public by the broadcasting organization
NOTE: Fair use and limitations to copyrights shall apply or with its consent. Rebroadcasting under the 1961 Rome
mutatis mutandis to performers (Ibid.). Convention is the simultaneous broadcasting by one
broadcasting organization of the broadcast of another
Additional remuneration for subsequent broadcasting organization. While the Rome Convention
communications or broadcasts gives broadcasting organizations the right to authorize or
prohibit the rebroadcasting of its broadcast, however, this
The performer shall be entitled to an additional protection does not extend to cable retransmission (ABS-
remuneration equivalent to at least 5% of the original CBN Broadcasting Corporation vs. Philippine Multimedia
compensation he received for the first communication or System, Inc., G.R. Nos. 175769-70, January 19, 2009).
broadcast in every communication to the public or
broadcast of a performance subsequent to the first Applicability of rights
communication or broadcast, unless otherwise provided
in the contract (IPC, Sec. 206). The provisions of Chapter VIII shall apply mutatis
mutandis to the rights of performers, producers of sound
Scope of the rights of producers on sound recordings recordings and broadcasting organizations:
1. Exclusive use of a natural person for own personal
Producers of sound recordings shall enjoy the following purposes;
exclusive rights:
2. Short excerpts for reporting current events;
1. The right to authorize the direct or indirect
reproduction of their sound recordings, in any manner or

3. Sole use for the purpose of teaching or for scientific
research; NOTE: The provisions of IPC shall also apply to works,
performers, producers of sound recordings and
4. Fair use of the broadcast (IPC, as amended by R.A. No. broadcasting organizations that are to be protected by
10372, Sec. 212). virtue of and in accordance with any international
convention or other international agreement to which the
Term of protection given to performers, producers Philippines is a party (IPC, Sec. 221.2 and 224.2).
and broadcasting organizations
1. For performances not incorporated in recordings, 50

years from the end of the year in which the performance
took place; and
2. For sound or image and sound recordings and for
performances incorporated therein, 50 years from the
end of the year in which the recording took place.
3. In case of broadcasts, the term shall be 20 years from
the date the broadcast took place. The extended term shall
be applied only to old works with subsisting protection
under the prior law (IPC, Sec. 215).
Persons whom the rights are granted (copyrightable

works applicable)
A:
1. For works
a. Works of authors who are nationals of, or have
their habitual residence in, the Philippines;
b. Audio-visual works the producer of which has his
headquarters or habitual residence in the
Philippines;
c. Works of architecture erected in the Philippines or
other artistic works incorporated in a building or
other structure located in the Philippines;
d. Works first published in the Philippines; and
e. Works first published in another country but also
published in the Philippines within thirty days,
irrespective of the nationality or residence of the
authors (IPC, Sec. 221).
2. For performers
a. Performers who are nationals of the Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
i. Take place in the Philippines; or
ii. Are incorporated in sound recordings that are
protected under IPC; or
iii. Which has not been fixed in sound recording
but are carried by broadcast qualifying for
protection under IPC (IPC, Sec. 222)
3. Of sound recordings
a. Sound recordings the producers of which are
nationals of the Philippines; and
b. Sound recordings that were first published in the
Philippines (IPC, Sec. 223).
4. For broadcasts
a. Broadcasts of broadcasting organizations the
headquarters of which are situated in the
Philippines; and
b. Broadcasts transmitted from transmitters situated
in the Philippines (IPC, Sec. 224)

MERCANTILE LAW
RULES ON OWNERSHIP OF COPYRIGHT
TYPE OF WORK OWNER

ORIGINAL LITERARY AND Author (IIPC, Sec. 178.1).
ARTISTIC WORKS
JOINT AUTHORSHIP Co-authors – in case of works of joint authorship; in the absence of agreement,
their rights shall be governed by the rules on co-ownership.
NOTE: If work of joint authorship consists of parts that can be used separately,
then the author of each part shall be the original owner of the copyright in the
part that he has created (IPC, Sec. 178.2).
AUDIOVISUAL WORK GR: Producer, the author of the scenario, the composer of the music, the film
director, and the author of the work so adapted
XPN: Unless otherwise provided in an agreement, the producers shall exercise

the copyright to an extent required for the exhibition of the work in any manner,
except for the right to collect performing license fees for the performance of
musical compositions, with or without words, which are incorporated into the
work (IPC, Sec. 178.5).
ANONYMOUS AND The publishers shall be deemed to represent the authors of articles and other
PSEUDONYMOUS WORKS writings published without the names of the authors or under pseudonyms,
unless the contrary appears, or the pseudonyms or adopted name leaves no doubt
as to the author's identity, or if the author of the anonymous works discloses his
identity (IPC, Sec. 179).
COMMISSIONED WORK The person who commissioned the work shall own the work but the copyright
thereto shall remain with the creator, unless there is a written stipulation to the
contrary (IPC, Sec. 178.4).
COLLECTIVE WORKS When an author contributes to a collective work, his right to have his contribution
attributed to him is deemed waived unless he expressly reserves it. (IPC, Sec. 196).
IN THE COURSE OF The employee, if not a part of his regular duties even if the employee uses the
EMPLOYMENT time, facilities and materials of the employer.
The employer, if the work is the result of the performance of his regularly-
assigned duties, unless there is an agreement, express or implied, to the contrary.
(IPC, Sec. 178.3).
LETTERS In respect of letters, the copyright shall belong to the writer subject to the
provisions of Article 723 of the Civil Code. (IPC, Sec. 178.6).
Civil Code of the Philippines
Article 723. Letters and other private communications in writing are owned by
the person to whom they are addressed and delivered, but they cannot be
published or disseminated without the consent of the writer or his heirs.
However, the court may authorize their publication or dissemination if the public
good or the interest of justice so requires.

Collective work v. Joint work. Rudy and the cafeteria operator immediately
confronted Bernie. While admitting that he did not do
COLLECTIVE WORK JOINT WORK the painting, Bernie claimed ownership of its
Elements remain Separate elements merge copyright since he had already registered it in his
unintegrated and disparate. into a unified whole. name with the National Library as provided in the
Intellectual Property Code.
Work created by 2 or more
persons at the initiative and Who owns the copyright to the painting? Explain. (Bar
Work prepared by 2 or
under the direction of 2013)
more authors with the
another with the
intention that their A: Rudy owns the copyright to the painting because he
understanding that it will be
contributions be merged was one who actually created it (Section 178.1 of the
disclosed by the latter under
into inseparable or Intellectual Property Code). His rights existed from the
his own name and that of the
independent parts of the moment of its creation (Section 172 of the Intellectual
contributions of natural Property Code; Unilever Philippines (PRC) v. Court of
unitary whole.
persons will NOT be Appeals, G.R. No. 119280, August 10, 2006). The
identified registration of the painting by Bernie with the National
Each author shall enjoy Joint authors shall be co- Library did not confer copyright upon him. The
copyright to his own owners. Co-ownership registration is merely for the purpose of completing the
records of the National Library (IPC, Sec. 191).
contribution shall apply.
The work will be attributed Q: BR and CT are noted artists whose paintings are
to the person under whose Joint authors shall be both highly prized by collectors. Dr. DL commissioned
initiative and direction it entitled to the them to paint a mural at the main lobby of his new
was created unless the acknowledgment as hospital for children. Both agreed to collaborate on
contributor expressly authors of the work. the project for a total fee of 2 million pesos to be
reserves his right. equally divided between them. It was also agreed that
Dr. DL had to provide all the materials for the painting
and pay for the wages of technicians and laborers
Q: T, an associate attorney in XYZ Law Office, wrote a needed for the work on the project.
newspaper publisher a letter disputing a columnist’s
claim about an incident in the attorney’s family. T Assume that the project is completed and both BR and
used the law firm’s letterhead and its computer in CT are fully paid the amount of P2M as artists' fee by
preparing the letter. T also requested the firm’s DL. Under the law on intellectual property, who will
messenger to deliver the letter to the publisher. Who
own the mural? Who will own the copyright in the
owns the copyright to the letter? (2011 Bar)
mural? Why? Explain. (2004 Bar)
A: T, since he is the original creator of the contents of the
A: According to Section 178.4 of the IPC, when the work is
letter.
commissioned by a person other than an employer of the
author, the owner of the work shall be the one who
Q: Solid Investment House commissioned Mon Blanco
commissioned the work, but the copyright of the work
and his son Steve, both noted artists, to paint a mural shall be owned by the person who is responsible for its
for the Main Lobby of the new building of Solid for a creation, unless there is a written stipulation to the
contract price of P2M. contrary. Hence, DL owns the mural while both BR and CT
a) Who owns the mural? Explain. jointly own the copyright thereto. This is so because the
b) Who owns the copyright of the mural? Explain. mural was commissioned by DL and a consideration was
(1995 Bar) paid to BR and CT in exchange thereof.
A: Q: Eloise, an accomplished writer, was hired by
a) The mural is owned by Solid. It commissioned the work Petong to write a bimonthly newspaper column for
and paid Mon and Steve Blanco P2M for the mural. Diario de Manila, a newly-established newspaper of
b) Even though Solid owns the mural, the copyright of the which Petong was the Editor-in-chief. Eloise was to be
mural is jointly owned by Mon and Steve, unless there is a paid P1,000.00 for each column that was published. In
written stipulation to the contrary. (IPC, Sec. 178.4) the course of two months, Eloise submitted three
columns which, after some slight editing, were
Q: Rudy is a fine arts student in a university. He stays printed in the newspaper. However, Diario de Manila
in a boarding house with Bernie as his roommate. proved unprofitable and closed only after two
During his free time, Rudy would paint and leave his months. Due to the minimal amounts involved, Eloise
finished works lying around the boarding house. One chose not to pursue any claim for payment from the
day, Rudy saw one of his works -an abstract painting newspaper, which was owned by New Media
entitled Manila Traffic Jam - on display at the Enterprises,
university cafeteria. The cafeteria operator said he
purchased the painting from Bernie who represented
Three years later, Eloise was planning to publish an
himself as its painter and owner.
anthology of her works, and wanted to include the

MERCANTILE LAW
three columns that appeared in the Diario de Manila occasion of a sporting event and such tunes were picked
in her anthology. She asks for your legal advice: up during a new coverage of the event) by means of
photography, cinematography or broadcasting to the
a. Does Eloise have to secure authorization from extent necessary for the purpose;
New Media Enterprises to be able to publish Diario de
Manila columns in her own anthology. Explain fully. 5. The inclusion of a work in a publication, broadcast, or
b. Assume that New Media Enterprises plans to other communication to the public, sound recording or
publish Eloise’s columns in its own anthology film, if such inclusion is made by way of illustration for
entitled, “The best of Diario de Manila.”Eloise wants Teaching purposes and is compatible with fair use:
to prevent the publication of her columns in that Provided, That the source and of the name of the
anthology since she was never paid by the newspaper. author, if appearing in the work, are mentioned;
Name one irrefutable legal argument Eloise could cite
to enjoin New Media Enterprises from including her 6. Recording made in Educational institutions of a work
columns in its anthology. (Bar 2008) included in a broadcast for the use of such educational
institutions, provided that such recording must be deleted
A: within a reasonable period after they were first broadcast.
a) No. In the case of a work commissioned by a person
7. The making of Ephemeral recordings by a
other than an employer of the author and who pays for it
and the work is made in pursuance of the commission, the broadcasting organization by means of its own facilities
and for use in its own broadcast.
person who so commissioned the work shall have
ownership of work, but the copyright thereto shall remain 8. The Use made of a work by or under the direction or
with the creator, unless there is a written statement to the control of the government, by the National Library or by
contrary (IPL, Sec 178.4) Thus, though Diario de Manila educational, scientific or professional institutions where
commissioned the work, it cannot be considered as its such use is in the public interest and is compatible with
owner because it did not pay Eloise. Ownership and fair use;
copyright still belong to Eloise. Authorization is no longer
needed to publish Diario de Manila in her anthology 9. The Public performance or the communication to the
because Eloise has moral and economic rights over her public of a work, in a place where no admission fee is
works. charged in respect of such public performance or
communication, by a club or institution for charitable or
b) The fact that Eloise was not paid, ownership over educational purpose only, whose aim is not profit
her work, published in the newspaper, did not vest upon making, subject to such other limitations as may be
the latter. She retains full moral and economic rights over provided in the Regulations;
it. 10. Public Display of the original or a copy of the work not
made by means of a film, slide, television image or
LIMITATIONS ON COPYRIGHT otherwise on screen or by means of any other device or
process (e.g. Public display using posters mounted on
General limitations on copyright walls and display boards), Provided, That either the work
has been published, or, that original or the copy displayed
The following acts shall not constitute infringement of has been sold, given away or otherwise transferred to
copyright: (PeMaCoP-TEEUP-DJB) another person by the author or his successor in title;
1. The recitation or Performance of a work, once it has 11. Any use made of a work for the purpose of any Judicial
been lawfully made accessible to the public, if done proceedings or for the giving of professional advice by
privately and free of charge or if made strictly for a a legal practitioner.
charitable or religious institution or society;
12. The reproduction or distribution of published articles
2. The Making of quotations from a published work if or materials in a specialized format exclusively for the
they are compatible with fair use and only to the extent use of the Blind, visually- and reading-impaired
justified for the purpose, including quotations from persons: Provided, That such copies and distribution
newspaper articles and periodicals in the form of press shall be made on a nonprofit basis and shall indicate the
summaries: Provided, That the source and the name of copyright owner and the date of the original publication
the author, if appearing on the work, are mentioned; (IPC, Sec. 184, as amended by R.A. No. 10372).
3. Communication to the public by mass media of articles
on current political, social, economic, scientific or Principle of automatic protection
religious topic, lectures, addresses and other works of the
same nature, which are delivered in public if such use is Works are protected by the sole fact of their creation
for information purposes and has not been expressly irrespective of their content, quality or purpose. Such
reserved: Provided, That the source is clearly rights are conferred from the moment of creation.
indicated;
Other limitations on copyright
4. The reproduction and communication to the public of
literary, scientific or artistic works as Part of reports of 1. Copyright in a work of architecture shall include the
current events (e.g. music played or tunes on the right to control the erection of any building which

reproduces the whole or a substantial part of the work • If the author's identity is
either in its original form or in any form recognizably revealed or is no longer in doubt
derived from the original, provided, that the copyright in before the 50-year period, the
any such work shall not include the right to control the
provisions on original and
reconstruction or rehabilitation in the same style as the
original of a building to which that copyright relates (IPC, derivative works , as well as
Sec. 186). works of joint authorship, shall
apply.
2. The private reproduction of a published work in a
single copy, where the reproduction is made by a natural Unpublished
person exclusively for research and private study, shall be Anonymous or fifty (50) years counted from the
permitted, without the authorization of the owner of
copyright in the work but shall not extend to the pseudonymous making of the work
reproduction of: works
a. A work of architecture in the form of building or
other construction; Work of an applied
b. An entire book, or a substantial part thereof, or of a art of an artistic
musical work in graphic form by reprographic creation with
means;
utilitarian
c. A compilation of data and other materials;
d. A computer program except as provided in Section functions or
189; and incorporated in a
e. Any work in cases where reproduction would useful article 25 years from the time of the
unreasonably conflict with a normal exploitation of whether made by making.
the work or would otherwise unreasonably hand or produced
prejudice the legitimate interests of the author (IPC,
on an industrial
Sec. 187).
scale
3. The reproduction in one back-up copy or adaptation of photographic fifty (50) years from publication
a computer program shall be permitted, without the works of the work and, if unpublished,
authorization of the author of, or other owner of copyright fifty (50) years from the making
in, a computer program, by the lawful owner of that
computer program, provided, the copy or adaptation is Audio-visual works
necessary for: including those
a. The use of the computer program in conjunction produced by
with a computer for the purpose, and to the extent, process analogous
for which the computer program has been obtained; 50 years from date of publication
to photography or
and and, if unpublished, from the date
any process for
b. Archival purposes, and, for the replacement of the of making
lawfully owned copy of the computer program in making audio-
the event that the lawfully obtained copy of the visual recordings
computer program is lost, destroyed or rendered
unusable (IPC, Sec. 187). NOTE: The term of protection subsequent to the death of
the author shall run from the date of his death or of
Term of protection of copyright publication, but such terms shall always be deemed to
begin on the first day of January of the year following the
TYPE OF WORK Term of Protection event which gave rise to them (IPC, Sec. 214).
Original and DOCTRINE OF FAIR USE

derivative works, as During the life of the author and
well as posthumous for fifty (50) years after his death “Fair use” permits a secondary use that “serves the
works. copyright objective of stimulating productive thought and
public instruction without excessively diminishing the
incentives for creativity”.
Economic rights shall be
Works of joint protected during the life of the The fair use of a copyrighted work for criticism, comment,
authorship last surviving author and for fifty news reporting, teaching including limited number of
(50) years after his death copies for classroom use, scholarship, research, and
similar purposes is not an infringement of copyright.
Published
• fifty (50) years from the date on Decompilation may be considered fair use
Anonymous or
which the work was first lawfully
pseudonymous Decompilation, which is the reproduction of the code and
published
works translation of the forms of the computer program to

MERCANTILE LAW
achieve the inter-operability of an independently created Reproduction of published work
computer program with other programs, may also
constitute fair use under the criteria established Sec. 185, The private reproduction of a published work in a single
to the extent that such decompilation is done for the copy, where the reproduction is made by a natural person
purpose of obtaining the information necessary to exclusively for research and private study, shall be
achieve such interoperability (IPC, Sec. 185). permitted, without the authorization of the owner of
copyright in the work but shall not extend to the
Factors that should be considered in order to reproduction of:
determine fair use
a. A work of architecture in the form of building or
1. The purpose and character of the use, including other construction;
whether such use is of a commercial nature or is for non- b. An entire book, or a substantial part thereof, or of a
profit educational purpose; musical work in graphic form by reprographic
2. The nature of the copyrighted work; means;
3. The amount and substantiality of the portion used in c. A compilation of data and other materials;
relation to the copyrighted work as a whole; and d. A computer program except as provided in Section
4. The effect of the use upon the potential market for or 189; and
value of the copyrighted work. e. Any work in cases where reproduction would
unreasonably conflict with a normal exploitation of
the work or would otherwise unreasonably
NOTE: The fact that a work is unpublished shall not by prejudice the legitimate interests of the author (IPC,
itself bar a finding of fair use if such finding is made upon Sec. 187).
consideration of all the above factors (IPC, Sec. 182.2). If Reprographic Reproduction by Libraries
you copy to the extent that you reduce the marketability
of the book, it is no longer fair use. Any library or archive whose activities are not for profit
may, without the authorization of the author or copyright
Must carry rule owner, make a limited number of copies of the work, as
may be necessary for such institutions to fulfill their
Must-carry rule is another limitation on copyright. It mandate, by reprographic reproduction:
obligates operators to carry the signals of local channels a. Where the work by reason of its fragile character
within their respective systems. This is to give the people or rarity cannot be lent to user in its original form;
wider access to more sources of news, information, b. Where the works are isolated articles contained in
education, sports event and entertainment programs composite works or brief portions of other
other than those provided for by mass media and afforded published works and the reproduction is necessary
television programs to attain a well informed, well-versed to supply them, when this is considered expedient,
and culturally refined citizenry and enhance their socio- to persons requesting their loan for purposes of
economic growth (ABS-CBN Broadcasting Corporation v. research or study instead of lending the volumes or
Philippine Multimedia System, G.R. No. 175769-70, Jan. 19, booklets which contain them; and
2009). c. Where the making of such limited copies is in
order to preserve and, if necessary in the event that
The must-carry rule mandates that the local television it is lost, destroyed or rendered unusable, replace a
(TV) broadcast signals of an authorized TV broadcast copy, or to replace, in the permanent collection of
station, such as the GMA Network, Inc., should be carried another similar library or archive, a copy which has
in full by the cable antenna television (CATV) operator, been lost, destroyed or rendered unusable and
without alteration or deletion. In this case, the Central copies are not available with the publisher.
CATV, Inc. was found not to have violated the must-carry
rule when it solicited and showed advertisements in its But it shall not be permissible to produce a volume
cable television (CATV) system. Such solicitation and of a work published in several volumes or to
showing of advertisements did not constitute an produce missing tomes or pages of magazines or
infringement of the “television and broadcast markets” similar works, unless the volume, tome or part is out
under Section 2 of E.O. No. 205 (GMA Network, Inc. v. of stock (IPC, Sec. 188, as amended by R.A. No.
Central CATV, Inc., G.R No. 176694, July 18, 2014). 10372).
Published works Public performance v. Communication to the public of

a performance
Those works which, with the consent of the authors, are
made available to the public by wire or wireless means in COMMUNICATIONS TO THE
such a way that members of the public may access these PUBLIC
PUBLIC OF A
works from a place and time individually chosen by them: PERFORMANCE
PERFORMANCE
provided, that availability of such copies has been such, as
to satisfy the reasonable requirement of the public, having Performance at a place The transmission to the
regard to the nature of the work (IPC, Sec. 171.7). or at places where public, by any medium,
persons outside the otherwise than by
normal circle of a family broadcasting, of sounds of a

and that family’s closest performance or the Infringement
social acquaintances are representations of sounds
or can be present. fixed in a sound recording. A person infringes a right protected under this Act when
The communication can be one:
It is performed at a accessed through wired or (a) Directly commits an infringement;
specific time and place. wireless means at a time and
(e.g. The Pacquiao- place convenient to the (b) Benefits from the infringing activity of another person
Clottey Match in Dallas viewer (e.g. The Pacquiao- who commits an infringement if the person benefiting has
Texas Stadium) Clottey Match watched via been given notice of the infringing activity and has the
YouTube) right and ability to control the activities of the other
person;
Transfer or assignment of copyright
(c) With knowledge of infringing activity, induces, causes
The copyright may be assigned or licensed in whole or in or materially contributes to the infringing conduct of
part. Within the scope of the assignment or license, the another (IPC, Sec. 216, as amended by R.A. No. 10372).
assignee or licensee is entitled to all the rights and
remedies which the assignor or licensor had with respect Q: Diana and Piolo are famous personalities in
to the copyright (IPC, Sec. 180.1). showbusiness who kept their love affair secret. They
use a special instant messaging service which allows
Requisites for a transfer of copyright to take effect them to see one another’s typing on their own screen
as each letter key is pressed. When Greg, the
1. If inter vivos, there must be a written indication of controller of the service facility, found out their
such intention; and identities, he kept a copy of all the messages Diana
2. Filed in National Library upon payment of prescribed and Piolo sent each other and published them. Is Greg
fees (IPC, Sec. 182). liable for copyright infringement? Reason briefly.
(2007 Bar)
The filing of the assignment or license of copyright is
NOT a mandatory requirement
A: Yes. The messages which Diana and Pablo sent each
other fall under the category of letters as provided in
Section 182 uses the permissive word “may” in reference
Sec. 172.1.d which provides that literary and artistic
to the filing of the deed of assignment or transfer of
works, hereinafter referred to as “works,” are original
copyright, this filing should not be understood as
intellectual creations in the literary and artistic domain
mandatory for validity and enforceability. The filing is
protected from the moment of their creation and shall
entirely optional for the parties and may be useful only for
include in particular, among others , letters. Infringement
evidentiary and notification purposes (Amador, 2007).
of such consist in the doing by any person, without the
consent of the owner of the copyright, of anything the sole
Limitation regarding submission of a literary,
right to do which is conferred by statute on the owner of
photographic or artistic work to a newspaper,
the copyright . Reproduction and first public distribution
magazine or periodical for publication
of the work are economic rights of the authors of the
work. Such cannot be done by the person not the author
Unless a greater right is expressly granted, such
of the work. In this instance, Greg is not the owner of the
submission shall constitute only a license to make a single
messages. He merely copied it without the consent of the
publication (IPC, Sec. 180.3).
authors thereof and subsequently published the same in
violation of the latter’s economic rights.
NOTE: If two or more persons jointly own a copyright or
any part thereof, neither of the owners shall be entitled to
grant licenses without the prior written consent of the Q: In a written legal opinion for a client on the
other owner or owners (Ibid.). difference between apprenticeship and learnership,
Liza quoted without permission a labor law expert's
COPYRIGHT INFRINGEMENT comment appearing in his book entitled "Annotations
on the Labor Code." Can the labor law expert hold Liza
It is the doing by any person, without the consent of the liable for infringement of copyright for quoting a
owner of the copyright, of anything the sole right to do portion of his book without his permission? (2006
which is conferred by statute on the owner of the Bar)
copyright. The act of lifting from another’s book
substantial portions of discussions and examples and the A: No. One of the limitations on copyright is the making of
failure to acknowledge the same is an infringement of quotations from a published work if they are compatible
copyright (Habana v. Robles, G.R. No. 131522, July 19, with fair use, provided that the source and the name of the
1999). author, if appearing on the work, are mentioned. The legal
opinion made by Liza is consistent with fair use since the
quoted part is merely used to explain a concept of law for
the benefit of the client and not to defeat the rights of the
author over his copyright (IPC, Sec. 184.1 (b)).

MERCANTILE LAW
Q: The Victoria Hotel chain reproduces videotapes, defense that the pirate did not know whether or not he
distributes the copies thereof to its hotels and makes was infringing any copyright; he at least knew that what
them available to hotel guests for viewing in the hotel he was copying was not his, and he copied at his peril. In
guest rooms. It charges a separate nominal fee for the cases of infringement, copying alone is not what is
use of the videotape player. prohibited. The copying must produce an “injurious
a) Can the Victoria Hotel be enjoined for infringing effect” (Habana v. Robles, G.R. No. 131522, July 19, 1999).
copyrights and held liable for damages?
b) Would it make any difference if Victoria Hotel does Q: May a person have photocopies of some pages of
not charge any fee for the use of the videotape? (1994 the book of Professor Rosario made without violating
Bar) the copyright law? (1998 Bar)
A: A: Yes, a person may photocopy some of pages of

a) Yes. Victoria Hotel may be held liable for infringing Professor Rosario’s book for as long as it is not for public
copyrights of the said videotapes because the use or distribution and it does not copy the substantial
reproduction and distribution thereof are not merely for text or “heart” of the book. It is considered as fair use of
private viewing. Instead, it was used as a means to gain the copyrighted work.
extra profit by making it as an extra amenity for its hotel
services. However, if such performances contained in the Plagiarism
videotapes became available to the public even prior to its
registration, then there is no copyright infringement Plagiarism means the theft of another person’s language,
because the videotapes are already considered as public thoughts, or ideas. To plagiarize, is to take (ideas,
property. writings, etc.) from (another) and pass them off as one’s
b) No. Notwithstanding the non-charging of fee for the use own. The passing off of the work of another as one’s own
of the videotapes, Victoria Hotel still uses the videotapes is thus an indispensable element of plagiarism. (In the
for business purposes, serving as an attraction to matter of the charges of plagiarism against Associate
prospective and current guests, unless the performances Justice Mariano C. Del Castillo, A.M. No. 10-7-17-SC, October
in the videotapes had been long before available to the 12, 2010)
public prior to registration; hence, it is already public
property (Filipino Society of Composers, Authors, Plagiarism presupposes intent and a deliberate, conscious
Publishers, Inc. v. Benjamin Tan, G.R. No. L-36402, March effort to steal another’s work and pass it off as one’s own
16, 1987). (In the matter of the charges of plagiarism against
Associate Justice Mariano C. Del Castillo, supra).
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the Copyright Infringement v. Plagiarism
alleged pirate) raised the defense that he was
unaware that what he had copied was a copyright COPYRIGHT
material. Would this defense be valid? (1997 Bar) PLAGIARISM
INFRINGEMENT
The The use of
A: No. In copyright infringement, intent is irrelevant. A unauthorized another’s
person may consciously or unconsciously copy or infringe use of information,
a copyrighted material and still be held liable for such act. copyrighted language, or
material in a writing, when
Q: Juan Xavier wrote and published a story similar to manner that done without
an unpublished copyrighted story of Manoling violates one of proper
Santiago. It was, however, conclusively proven that the copyright acknowledgmen
Juan Xavier was not aware that the story of Manoling owner’s t of the original
Santiago was protected by copyright. Manoling Definition
exclusive rights, source.
Santiago sued Juan Xavier for infringement of such as the right
copyright. Is Juan Xavier liable? (1998 Bar) to reproduce or
perform the
A: No. Although intent is irrelevant in cases of copyright copyrighted
infringement, Juan had no access to Manoling’s work, or to make
copyrighted story because it is unpublished. Hence, he can derivative works
put up independent creation as a defense being that he that build upon
has no reasonable access to the unpublished copyrighted it.
story of Manoling.
Copyright Plagiarism is
infringement is a specific as it
Meaning of substantial reproduction very broad term refers only to
that describes a using someone
It is not necessarily required that the entire copyrighted Coverage
variety of acts. It else’s work
work, or even a large portion of it, be copied. If so much is
may be without proper
taken that the value of the original work is substantially duplication of a acknowledgeme
diminished, there is an infringement of copyright and to
work, rewriting nt.
an injurious extent, the work is appropriated. It is no

a piece, to the filing fee of the infringement action but not less than
performing a Fifty thousand pesos (P 50,000.00). (IPC, as amended by
written work or R.A. No. 10372, Sec. 216.1).
doing anything
that is normally Technological Measure
considered to be
the exclusive Technological measure’ means any technology, device or
right of the component that, in the normal course of its operation,
copyright restricts acts in respect of a work, performance or sound
holder. recording, which are not authorized by the authors,
There is no Public performers or producers of sound recordings concerned
copyright documents can or permitted by law (IPC, Sec. 171.12, as amended).
Public
infringement on be plagiarized so
Document Rights Management Information
public long as it is not
documents. acknowledged.
In copyright Rights management information’ means information
In plagiarism the which identifies the work, sound recording or
infringement,
Manner of copying need performance; the author of the work, producer of the
the copying
copying not be sound recording or performer of the performance; the
must be
substantial owner of any right in the work, sound recording or
substantial
In copyright Plagiarism, may performance; or information about the terms and
infringement, exist even if conditions of the use of the work, sound recording or
the copying none of the same performance; and any number or code that represent
Expression such information, when any of these items is attached to
must refer to the words are used
expression of an to express an a copy of the work, sound recording or fixation of
idea. idea. performance or appears in conjunction with the
communication to the public of a work, sound recording
Remedies in case of copyright infringement (IDID-MS) or performance (IPC, Sec. 171.13).
1. Injunction NOTE: The copyright owner may elect, at any time before
2. Damages, including legal costs and other expenses, final judgment is rendered, to recover instead of actual
as he may have incurred due to the infringement as damages and profits, an award of statutory damages for
well as the profits the infringer may have made due all infringements involved in an action in a sum equivalent
to such infringement to the filing fee of the infringement action but not less than
3. Impounding during the pendency of the action sales Fifty thousand pesos (Php50,000.00) (IPC, Sec. 216.1, as
invoices and other documents evidencing sales amended by R.A. No. 10372).
4. Destruction without any compensation all infringing
copies Factors to be considered by the court in awarding
5. Moral and Exemplary damages (IPC, Sec. 216.1); or statutory damages
6. Seizure and impounding of any article, which may
serve as evidence in the court proceedings. (IPC, Sec. 1. the nature and purpose of the infringing act;
216.2) 2. the flagrancy of the infringement;
3. Whether the defendant acted in bad faith;
Double damages 4. the need for deterrence;
5. Any loss that the plaintiff has suffered or is likely to
The amount of damages to be awarded shall be doubled suffer by reason of the infringement; and
against any person who: 6. Any benefit shown to have accrued to the defendant
(i) Circumvents effective technological measures; or by reason of the infringement
(ii) Having reasonable grounds to know that it will induce,
enable, facilitate or conceal the infringement, remove or Copying is demonstrated by:
alter any electronic rights management information from
a copy of a work, sound recording, or fixation of a 1. Direct Evidence
performance, or distribute, import for distribution, 2. By circumstantial evidence of access and substantial
broadcast, or communicate to the public works or copies inquiry (most common test) (Amador, 2007)
of works without authority, knowing that electronic
rights management information has been removed or NOTE: ACCESS- having reasonable opportunity to view or
altered without authority (IPC, as amended by R.A. No. hear the plaintiff’s work. THRESHOLD INQUIRY: whether
10372, Sec. 216.1). there is reasonable opportunity to copy
NOTE: The copyright owner may elect, at any time before

final judgment is rendered, to recover instead of actual Criminal penalties in case of copyright infringement
damages and profits, an award of statutory damages for
all infringements involved in an action in a sum equivalent 1. Imprisonment of one (1) year to three (3) years plus a
fine ranging from Fifty thousand pesos (P50,000) to One

MERCANTILE LAW
hundred fifty thousand pesos (P150,000) for the first many copies you want, subject to Customs regulations
offense. (pcdspo.gov.ph).
2. Imprisonment of three (3) years and one (1) day to six Reproduction of copyrighted material for personal
(6) years plus a fine ranging from One hundred fifty purposes is not punishable by RA 10372
thousand pesos to Five hundred thousand (P500,000) for
the second offense. Infringement in this context refers to the economic rights
of the copyright owner. Transferring music from a
3. Imprisonment of six (6) years and one day to nine (9) lawfully acquired CD into a computer, then downloading
years plus a fine ranging from Five hundred thousand it to a portable device for personal use, is not
pesos (P500,000) to P1,500,000 for the third offense. infringement. But if, multiple copies of the CD were
reproduced for sale, then infringement occurs (Ibid).
4. In all cases, subsidiary imprisonment in cases of
insolvency (IPC, See Sec. 217). Possession of a music file procured through an
infringing activity is a violation of the law
Determination of penalty
The possession of a music file procured through an
In determining the number of years of imprisonment and infringing activity is a violation of the law only if it can be
the amount of fine, the court shall consider the value of proven that the person benefitting from the music file has
the infringing materials that the defendant has produced knowledge of the infringement, and the power and ability
or manufactured and the damage that the copyright to control the person committing the infringement (Ibid).
owner has suffered by reason of the infringement:
Provided, that the respective maximum penalty stated in Liability of mall owners for the infringement
Section 217.1. (a), (b) and (c) herein for the first, second, activities of their tenants
third and subsequent offense, shall be imposed when the
infringement is committed by: Mall owners are not automatically penalized for the
(a) the circumvention of effective technological infringing acts of their tenants. When a mall owner or
measures; lessor finds out about an infringement activity, he or she
(b) the removal or alteration of any electronic rights must give notice to the tenant, then he or she will be
management information from a copy of a work, afforded time to act upon this knowledge. The law
sound recording, or fixation of a performance, by a requires that one must have both proven knowledge of
person, knowingly and without authority; or the infringement, and the ability to control the activities
(c) the distribution, importation for distribution, of the infringing person, to be held liable. The mall owner
broadcast, or communication to the public of works must also have benefitted from the infringement (Ibid).
or copies of works, by a person without authority,
knowing that electronic rights management Other beneficial provisions brought by RA 10372
information has been removed or altered without
authority. (IPC, Sec. 217.2, as amended by R.A. No. 1. Grant of enforcement powers to IPOPHL (Sec. 2)
10372).
The law grants visitorial powers to IPOPHL and allows it
Affidavit evidence to undertake enforcement functions with the support of
concerned agencies such as PNP, NBI, BOC, OMB and
An affidavit made before the notary public in actions for LGUs. IPOPHL itself will not be conducting raids or
infringement, reciting the facts required to be stated seizures but will be coordinating with the said agencies.
under the (IPC, Sec. 216.1). However, as IP rights remain to be private rights, there
must be a complaint from the IP right owner. So, if an
NOTE: As a prima facie proof, the affidavit shifts the author sees pirated copies of his book in a certain store,
burden of proof to the defendant, to prove the ownership he may notify IPOPHL. IPOPHL can now initiate together
of the copyrighted work. with any of the said agencies to address the problem.
Q: Due to the amendment of the IP Code under RA 2. Establishment of the Bureau of Copyright and other
10372 APPROVED ON FEBRUARY 28, 2013, deleting related rights (Secs. 1 and 3)
the provision entitling importation in the Philippines
of up to three (3) copies of copyrighted works in a At present there is no entity performing the more
personal baggage, can one still be allowed to import substantial function of policy formulation, rule making,
books, DVDs, and CDs from abroad? adjudication, research and education, which is envisioned
to be handled by the Bureau of Copyright. Although a
A: Yes. In fact, the amendments to the Intellectual Copyright Division exists in the National Library, the
Property Code have removed the original limitation of function of such office is merely to accept deposits of
three copies when bringing legitimately acquired copies copyrighted works. The Copyright Bureau is dedicated to
of copyrighted material into the country. Only the serving the needs of the copyright-based industries and
importation of pirated or infringed material is illegal. As stakeholders could give more focus and rally more
long as they were legally purchased, you can bring as resources and support for the creative industry, which is

very important for protection of works by Filipinos both RULES OF PROCEDURE FOR INTELLECTUAL
here and abroad. PROPERTY RIGHTS CASES (A.M. NO. 10-3-10-SC)
3. Accreditation of collective management In what courts applicable

organizations or CMOs (Sec. 10) Regional Trial Courts designated by the Supreme Court as
CMOs are organizations that enforce the copyright of the Special Commercial Courts
copyright holders. Through this mandate, IPOPHL will be
able to monitor and promote good corporate governance TRO/Preliminary Injunctions
among CMOs, benefitting not only the rights holders
themselves but also the users of copyrighted works. A.M. No. 10-3-10-SC does not provide a provision on
Members of the Philippine Retailers Association (PRA), provisional remedies. However, under Rule 1, Section 33
mall owners, restaurants, and other heavy users of music of the same Rules, it explicitly states that, where
in their establishments will greatly benefit from this applicable, the Rules of Court shall apply suppletorily to
provision, as they are ensured that only legitimate proceedings under A.M. No. 10-3-10-SC. Thus, the existing
collecting agencies can collect royalties from them on provisions on TRO/Preliminary Injunctions and other
behalf of copyright owners. remedies under the Rules of Court shall be applied in
intellectual property cases.
4. Clarification of the concept of copyright
infringement, including secondary liability (Secs. 22 CIVIL PROCEDURE
and 23)
When the court determines that the civil or criminal
The provisions on copyright infringement have been action involves complex issues, it shall issue a special
refined to include contributory infringement (secondary order that the regular procedure prescribed in the Rules
liability), circumvention of technological measures and of Court shall apply, stating the reason therefor. Where
rights management information as aggravating applicable, the Rules of Court shall apply suppletorily to
circumstances, and the option to collect statutory proceedings under these Rules (Rule 1, Sec. 3).
damages instead of actual damages. However, under Sec.
22 of the amendments, to be secondarily liable, a landlord Any order issued by the court under these Rules is
or mall must: (1) benefit from the infringing activity; (2) immediately executory unless restrained by a superior
must have been given notice of the infringing activity and court. (Rule 1, Sec. 4).
a grace period to act on the same; and (3) has the right
and ability to control the activities of the person who is Any pleading, motion, opposition, defense or claim filed
doing the infringement. The complainant has the burden by any interested party shall be supported by verified
of proof to provide evidence that all 3 elements are statements that the affiant has read the same and that the
present. If a landlord or mall owner is not aware of the factual allegations therein are true and correct of his
infringement, he cannot be liable for infringement, even if personal knowledge or based on authentic records, and
he benefits from it (from rental payments) or has control shall contain as annexes such documents as may be
over the premises. deemed by the party submitting the same as supportive of
the allegations in the affidavits (Rule 1, Sec. 5).
5. Fair use for the blind, visually- and reading-
impaired (Sec. 11) Nature of Proceedings
This provision would give a special fair use exemption for Special Commercial Courts in the National Capital
the non-commercial reproduction of works for use by Judicial Region with authority to issue writs of search
visually-impaired persons. Before this amendment, and seizure enforceable nationwide.
hundreds of thousands of blind Filipinos could not buy
Braille works at cheap prices because copyright Special Commercial Courts in Quezon City, Manila,
protection operates. Now with this amendment, blind and Makati, and Pasig shall have authority to act on
visually impaired Filipinos can have easier access to applications for the issuance of writs of search and
copyrighted works in Braille. seizure in civil actions for violations of the Intellectual
Property Code, which writs shall be enforceable
6. Formulation of IP Policies within universities and nationwide. The issuance of these writs shall be governed
colleges (Sec. 27) by the rules prescribed in Re: Proposed Rule on Search
and Seizure in Civil Actions for Infringement of
This will ensure that the rights of the academic Intellectual Property Rights (A.M. No. 02-1-06-SC, which
community (professors, researchers, students) over their took effect on February 15, 2002). Within their respective
literary, scholarly and artistic works are clearly territorial jurisdictions, the Special Commercial Courts in
delineated and respected. With an IP Policy in existence, the judicial regions where the violation of intellectual
these sectors within the academe will have a clear property rights occurred shall have concurrent
delineation of their respective rights and benefits, thus, jurisdiction to issue writs of search and seizure (Rule 2,
avoiding disputes and costly litigation within their ranks Sec. 2).
which would be detrimental to education, research and
development (http://www.ipophil.gov.ph/index.php/20-
what-s-new/135-fact-sheet-on-ip-code-amendments).

MERCANTILE LAW
Commencement of Action The complaint shall further be accompanied by proof of
payment of docket and other lawful fees.
The only pleadings allowed to be filed are the complaints,
compulsory counterclaims and cross-claims pleaded in Failure to comply with the foregoing requirements shall
the answer, and the answers thereto. All pleadings shall not be remedied by mere amendment of the complaint.
be verified. (Rule 3, Sec. 1) The court, motu proprio, shall dismiss the case without
prejudice.
Any intellectual property right owner, or anyone
possessing any right, title or interest under claim of The submission of a false certification or non-compliance
ownership in any intellectual property right, whose right with any of the undertakings therein shall constitute
may have been violated, may file an action under these indirect contempt, without prejudice to the
Rules. corresponding administrative, civil and criminal
liabilities. If the acts of a party or his counsel clearly
Any person who is a national or who is domiciled or has a constitute willful and deliberate forum shopping, the
real and effective industrial establishment in a country same shall be a ground for summary dismissal with
which is a party to any convention, treaty or agreement prejudice and shall constitute direct contempt. (Rule 3,
relating to intellectual property rights or the repression Sec. 3)
of unfair competition, to which the Philippines is also a
party, or extends reciprocal rights to nationals of the Prohibited pleadings
Philippines by law, shall be entitled to file an action under
these Rules. a) Motion to dismiss;
b) Motion for a bill of particulars;
Any foreign national or juridical person who meets the
c) Motion for reconsideration of a final order or
requirements of the immediately preceding paragraph,
judgment, except with regard to an order of destruction
and does not engage in business in the Philippines, may
also file an action under these Rules. (Rule 3, Sec. 2) issued under Rule 20 hereof;
d) Reply;
The complaint shall be verified and shall state the full e) Petition for relief from judgment;
names of the parties to the case. Facts showing the
f) Motion for extension of time to file pleadings or other
capacity of a party to sue or be sued, or the authority of a written submissions, except for the answer for
party to sue or be sued in a representative capacity, or the meritorious reasons;
legal existence of an organized association of persons that
is made a party, must be averred. In case of juridical g) Motion for postponement intended for delay;
persons, proof of capacity to sue must be attached to the h) Third-party complaint;
complaint. i) Intervention;
j) Motion to hear affirmative defenses; and
The complaint shall contain a concise statement of the
ultimate facts constituting the complainant’s cause or k) Any pleading or motion which is similar to or of like
causes of action. It shall specify the relief(s) sought, but it effect as any of the foregoing. (Rule 3, Sec. 4)
may add a general prayer for such further or other
relief(s) as may be deemed just or equitable. Failure to file complaint where a writ of search and
seizure is issued
The affidavits in question-and-answer format referred to
in Sec. 5 hereof and the relevant evidence shall be made
part of the complaint. Upon motion of the party whose goods have been seized,
with notice to the applicant, the issuing court may lift its
The complaint shall include a certification that the party writ and order the return of the seized goods if no case is
commencing the action has not filed any other action or filed with the appropriate court and/or appropriate
proceeding involving the same issue or issues before any quasi-judicial agency, including the Intellectual Property
tribunal or agency nor is such action or proceeding Office of the Philippines, within thirty-one (31) calendar
pending in other quasi-judicial bodies; Provided, however, days from the date of issuance of the writ.
that if any such action is pending, the status of the same
must be stated, and should knowledge thereof be If no motion for the return of the seized goods is filed
acquired after the filing of the complaint, the party within sixty (60) days from the issuance of the writ under
concerned shall undertake to notify the court within five the preceding paragraph, the court shall order the
(5) days from such knowledge. disposal of the goods, as may be warranted, after hearing
with notice to the parties. (Rule 3, Sec. 6)
When the party-litigant is a corporation, the
verification/certification of non-forum shopping required Service of Summons, Orders and Other Court
should be executed by a natural person duly authorized Processes
by the corporation, through a special power of attorney or
a board resolution for the purpose, attached to the Summons, orders and other court processes may be
complaint. served by the sheriff, his deputy or other proper court
officer or for justifiable reasons, by the counsel or

representative of the plaintiff or any suitable person The failure of the defendant to submit a pre-trial brief
authorized by the court issuing the summons. within the specified period or to appear in the pre-trial
shall be a cause for the 16 dismissal of the counterclaim.
Any private person who is authorized by the court to The plaintiff who submits a pre-trial brief and who
serve summons, orders and other court processes shall, appears during the pre-trial shall be entitled to a
for that purpose, be considered an officer of the court. judgment on the complaint unless the court requires
evidence ex parte for a judgment (Rule 6, Sec. 3).
When the defendant is a foreign private juridical entity,
service may be made on its resident agent designated in Applicability of Rules on the Issuance of the Search
accordance with law for that purpose, or, if there be no and Seizure Order in Civil Actions for Infringement
such agent, on the government official designated by law
to that effect, or on any of its officers or agents within the The Rules on the Issuance of the Search and Seizure in
Philippines. Civil Actions for Infringement of Intellectual Property
If the foreign private juridical entity is not registered in Rights are not applicable in this case as the search
the Philippines or has no resident agent, service may, with warrants were not applied based thereon, but in
leave of court, be effected out of the Philippines through anticipation of criminal actions for violation of intellectual
any of the following means: property rights under RA 8293. It was established that
respondent had asked the NBI for assistance to conduct
a) By personal service coursed through the investigation and search warrant implementation for
appropriate court in the foreign country with the
possible apprehension of several drugstore owners
assistance of the Department of Foreign Affairs; selling imitation or counterfeit TOP GEL T.G. & DEVICE OF
b) By publication once in a newspaper of general A LEAF papaya whitening soap. What is applicable is Rule
circulation in the country where the defendant may 126 of the Rules of Criminal Procedure. A core requisite
be found and by serving a copy of the summons and before a warrant shall validly issue is the existence of
the court order by registered mail at the last known probable cause. The pendency of a similar action for
address of the defendant; infringement of trademark and unfair competition against
the very person who applied for search warrant does not
c) By facsimile or any recognized electronic means that bar the issuance of the warrant if it is based on probable
could generate proof of service; or cause (Century Chinese Medicine Co., et.al. v. People of the
d) By such other means as the court may, in its discretion, Philippines And Ling Na Lau. G.R. No. 188526, November
direct. 11, 2013, in Divina, 2014).
Should either personal or substituted service fail, CRIMINAL PROCEDURE

summons by publication shall be allowed. In the case of
juridical entities, summons by publication shall be done Special Commercial Courts with authority to issue
by indicating the names of the officers or their duly search warrants
authorized representative. (Rule 4, Sec. 2)
Special Commercial Courts in Quezon City, Manila,
Modes of Discovery Makati, and Pasig shall have authority to act on
applications for the issuance of search warrants involving
Any mode of discovery, such as interrogatories, request violations of the Intellectual Property Code, which search
for admission, production or inspection of documents or warrants shall be enforceable nationwide. Within their
things, may be objected to within ten (10) days from respective territorial jurisdictions, the Special
receipt of the request for discovery and only on the Commercial Courts in the judicial regions where the
ground that the matter requested is manifestly violation of intellectual property rights occurred shall
incompetent, immaterial, or irrelevant or is undisclosed have concurrent jurisdiction to issue search warrants.
information or privileged in nature, or the request is for
harassment. The requesting party may comment in Accordingly, the Executive Judges are hereby relieved of
writing within three (3) days from receipt of the the duty to issue search warrants involving violations of
objection. Thereafter, the court shall rule on the objection the Intellectual Property Code in criminal cases as stated
not later than ten (10) days from receipt of the comment in Sec. 12, Chapter V of A.M. No. 03-8-02-SC (Guidelines on
or the expiration of the three-day period. (Rule 5, Sec. 2) the Selection and Appointment of Executive Judges and
Defining their Powers, Prerogatives and Duties, Rule 10,
Effect of failure to appear in the pre-trial proceedings Sec. 2)
The failure of the plaintiff to submit a pre-trial brief within Disposition of goods seized pursuant to search
the specified period or to appear in the pre-trial shall be a warrant
cause for the dismissal of the complaint with prejudice,
unless otherwise ordered by the court. The defendant If a criminal action has been instituted, only the trial court
who submits a pre-trial brief and who appears during the shall rule on a motion to quash a search warrant or to
pre-trial shall be entitled to a judgment on the suppress evidence obtained thereby or to release seized
counterclaim unless the court requires evidence ex parte goods.
for a judgment. Any cross-claim shall be dismissed.

MERCANTILE LAW
It shall be the duty of the applicant or private complainant COMMON RULES ON ADMISSIBILITY AND WEIGHT OF
to file a motion for the immediate transfer of the seized EVIDENCE
goods to the trial court, which motion shall be
immediately acted upon by the issuing court. Evidence of good faith
If no criminal action has been instituted, the motion to In cases of patent infringement, trademark infringement,
quash a search warrant or to suppress evidence obtained and copyright infringement, fraudulent intent on the part
thereby or to release seized goods may be filed in and of the defendant or the accused need not be established.
resolved by the issuing court. If pending resolution of the Good faith is not a defense unless the defendant or the
motion, a criminal case is meanwhile filed in another accused claims to be a prior user under Sections 73 and
court, the incident shall be transferred to and resolved by 159 of the Intellectual Property Code or when damages
the latter court. may be recovered under Sections 76, 156, and 216 of the
Code. (Rule 16, Sec. 1)
Upon motion of the party whose goods have been seized,
with notice to the applicant, the issuing court may quash EVIDENCE IN PATENT CASES
the search warrant and order the return of the seized
goods if no criminal complaint is filed within sixty (60) Burden of proof in patent infringement
days from the issuance of the search warrant.
a) The burden of proof to substantiate a charge for
If no criminal action is filed before the office of the patent infringement rests on the party alleging the
prosecutor and no motion for the return of the seized same, subject, however, to sub-Section b) below, and
goods is filed within sixty (60) days from the issuance of other applicable laws.
the search warrant, the issuing court shall require the
parties, including the private complainant, if any, to show b) If the subject matter of a patent is a process for
cause why the search warrant should not be quashed obtaining a product, any identical product is
(Rule 11, Sec.4). presumed to have been obtained through the use of
the patented process if:
Prohibited motions
(i) the product is new; or
a) Motion to quash the information, except on the
ground of lack of jurisdiction; (ii) there is substantial likelihood that the
identical product was made by the process and
b) Motion for extension of time to file affidavits or any the owner of the patent has been unable,
other papers; and despite reasonable efforts, to determine the
c) Motion for postponement intended for delay (Rule process actually used. In such cases, the court
11, Sec. 5). shall then order the defendant or alleged
infringer to prove that the process to obtain
Arraignment the identical product is different from the
patented process, subject to the court’s
The arraignment shall be conducted in accordance with adoption of measures to protect, as far as
Rule 116 of the Rules of Court. If the accused is in custody practicable, said defendant or alleged
for the crime charged, he shall be immediately arraigned. infringer’s manufacturing and business
If the accused enters a plea of guilty, he shall forthwith be secrets. (Rule 17, Sec. 1)
sentenced. After arraignment, the court shall immediately
schedule the case for pre-trial. (Rule 13, Sec. 1) Patents issued presumed valid
Referral to mediation a) In all cases, a letters patent issued by the Intellectual

Property Office – Bureau of Patents, or its
Before conducting the trial, the court shall call the parties predecessor or successor-agencies, is prima facie
to a pre-trial. Upon appearance of the parties during pre- evidence of its existence and validity during the
trial, the judge shall order the parties to appear before the term specified therein against all persons, unless
Philippine Mediation Center for court-annexed mediation the same has already been cancelled or voided by a
on the civil aspect of the criminal action. The pre-trial final and executory judgment or order.
judge shall suspend the court proceedings while the case
is undergoing mediation. Upon termination of the b) Moreover, letters patents issued by the Intellectual
mediation proceedings, the court shall continue with the Property Office – Bureau of Patents, or its
pre-trial. (Rule 13, Sec. 2) predecessor or successor-agencies, are presumed to
have been validly issued by said government agency
Non-appearance at the pre-trial in accordance with applicable laws, unless otherwise
contradicted or overcome by other admissible
If the counsel for the accused or the prosecutor does not evidence showing that the same was irregularly
appear at the pre-trial and does not offer an acceptable issued. (Rule 17, Sec. 2)
excuse for his lack of cooperation, the court may impose
proper sanctions or penalties. (Rule 13, Sec. 4)

For purposes of awarding damages in patent The person or body corporate whose name appears on an
infringement cases, it is presumed that the defendant or audio-visual work in the usual manner shall, in the
alleged infringer knew of the existence of a patent over a absence of proof to the contrary, be presumed to be the
protected invention or process, if: (a) on the patented maker of said work. (Rule 19, Sec. 3)
invention or product manufactured using the patented
process; (b) on the container or package in which said ORDER OF DESTRUCTION
article is supplied to the public; or (c) on the advertising
material relating to the patented product or process, are At any time after the filing of the complaint or
placed the words "Philippine Patent" with the number of information, the court, upon motion and after due notice
the patent. (Rule 17, Sec. 3) and hearing where the violation of the intellectual
property rights of the owner is established, may order the
EVIDENCE IN TRADEMARK INFRINGEMENT AND destruction of the seized infringing goods, objects and
UNFAIR COMPETITION CASES devices, including but not limited to, sales invoices, other
documents evidencing sales, labels, signs, prints,
packages, wrappers, receptacles, and advertisements and
A certificate of registration of a mark shall be prima facie the like used in the infringing act.
evidence of:
a) the validity of the registration; Such hearing shall be summary in nature with notice of
hearing to the defendant or accused to his last known
b) the registrant’s ownership of the mark; and address to afford the defendant or accused the
c) the registrant’s exclusive right to use the same in opportunity to oppose the motion. (Rule 20, Sec. 1)
connection with the goods or services and those that
are related thereto specified in the certificate. (Rule 18, RULE ON SEARCH AND SEIZURE IN CIVIL ACTIONS
Sec. 1) FOR INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS
A registered mark shall not be deemed to be the generic
name of goods or services solely because such mark is also Where any delay is likely to cause irreparable harm to the
used as a name of or to identify a unique product or intellectual property right holder or where there is
service. demonstrable risk of evidence being destroyed, the
intellectual property right holder or his duly authorized
The test for determining whether the mark is or has representative in a pending civil action for infringement
become the generic name of goods or services on or in or who intends to commence such an action may apply ex
connection with which it has been used shall be the parte for the issuance of a writ of search and seizure
primary significance of the mark to the relevant public directing the alleged infringing defendant or expected
rather than purchaser motivation. (Rule 18, Sec. 7) adverse party to admit into his premises the persons
named in the order and to allow the search, inspection,
EVIDENCE IN COPYRIGHT CASES copying, photographing, audio and audiovisual recording
or seizure of any document and article specified in the
In copyright infringement cases, copyright shall be order (Sec. 2).
presumed to subsist in the work or other subject matter
to which the action relates, and ownership thereof shall The premises may not be searched except in the presence
be presumed to belong to complainant if he so claims of the alleged infringing defendant, expected adverse
through affidavit evidence under Section 218 of the party or his representative or the person in charge or in
Intellectual Property Code, as amended, unless defendant control of the premises or residing or working m therein
disputes it and shows or attaches proof to the contrary in who shall be given the opportunity to read the writ before
his answer to the complaint. A mere denial of the its enforcement and seek its interpretation from the
subsistence of copyright and/or ownership of copyright Commissioner. In the absence of the latter, two persons of
based on lack of knowledge shall not be sufficient to rebut sufficient age and discretion residing in the same locality
the presumption. (Rule 19, Sec. 1) shall be allowed to witness the search or in the absence of
the latter, two persons of sufficient age and discretion
Registration and deposit of a work with the National residing in the nearest locality (Sec. 13).
Library or the Intellectual Property Office shall not carry
with it the presumption of ownership of the copyright by The writ shall also. Upon motion of the expected adverse
the registrant or depositor, nor shall it be considered a party, be set aside and the seized documents and articles
condition sine qua non to a claim of copyright returned to the expected adverse party if no case is filed
infringement (Rule 19, Sec. 2) with the appropriate court or authority within thirty-one
(31) calendar days from the date of issuance of the writ
The natural person whose name is indicated on a work in (Sec. 20).
the usual manner as the author shall, in the absence of
proof to the contrary, be presumed to be the author of the A.M. 02-1-06-SC governs the issuance of a writ of search
work. This presumption applies even if the name is a and seizure in a civil action for infringement filed by an
pseudonym, provided the pseudonym leaves no doubt as intellectual property right owner against the supposed
to the identity of the author. infringer of his trademark or name. Under this rule, the

MERCANTILE LAW
claim for damages should be filed with the same court that
issued the writ of search and seizure.
However, Philip Morris, the manufacturer of Marlboro

cigarettes did not go by this route. Philip Morris did not
file a civil action for infringement of its trademark against
the Del Rosarios before the RTC of Angeles City. Instead,
Philip Morris sought assistance from the NBI for the
apprehension and criminal prosecution of those
reportedly appropriating its trademark and selling fake
Marlboro cigarettes. In turn, the NBI instituted a police
action that included applying for a search and seizure
warrant under Sections 3, 4, 5 and 6 of Rule 126 of the
Rules of Criminal Procedure (not under the provisions of
A.M. 02-1-06-SC) against the Del Rosarios upon the belief
that they were storing and selling fake Marlboro
cigarettes in violation of the penal provisions of the
intellectual property law.
The proceeding under Rule 126, a limited criminal one,

does not provide for the filing of counterclaims for
damages against those who may have improperly sought
the issuance of the search warrant. Consequently, the
Del Rosarios had the right to seek damages, if the
circumstances warranted, by separate civil action for the
wrong inflicted on them by an improperly obtained or
enforced search warrant (Del Rosario, et al. v. Doanto, Jr.
et al., G.R. No. 180595, March 4, 2010, in Divina, 2014).
INTELLECTUAL PROPERTY AND ANTI-MONEY

LAUNDERING
IP violations are now considered a predicate crime

for anti-money laundering offenses
"(i) ‘Unlawful activity’ refers to any act or omission or

series or combination thereof involving or having direct
relation to the following:
xxx
"(29) Violation of Republic Act No. 8293, otherwise

known as the Intellectual Property Code of the Philippines
(RA 9160, as amended by RA 10365, Sec. 3 (i)).

SPECIAL LAWS
SPECIAL LAWS
ANTI-MONEY LAUNDERING ACT OF 2001

(R.A. 9160 ,AS AMENDED BY RA 9194, 10167,
10365)
POLICY OF THE LAW
Policy of the State
1. To protect and preserve the integrity and

confidentiality of bank accounts and to ensure that the
Philippines shall not be used as a money laundering site
for the proceeds of any unlawful activity.
2. To pursue the State’s foreign policy to extend

cooperation in transnational investigation and
prosecutions of persons involved in money laundering
activities wherever committed. (R.A. 9160, Sec. 1)
OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160)
CATEGORY RA 9160, as amended by RA 9194 and

RA 10365, amending RA 9160
(Based on 10167
(Amendments and New Provisions)
Bar 2014 Syllabus)
COVERED Covered institution refers to: NOTE: Covered “Institutions” was changed to
INSTITUTION Covered “Persons”
(1) banks, non-banks, quasi-banks, trust
entities, and all other institutions and Covered persons, natural or juridical, refer to:
their subsidiaries and affiliates
supervised or regulated by the Bangko (1) banks, non-banks, quasi-banks, trust
Sentral ng Pilipinas (BSP); entities, foreign exchange dealers,
pawnshops, money changers, remittance
and transfer companies and other similar
(2) Insurance companies and all other entities and all other persons and their
institutions supervised or regulated by subsidiaries and affiliates supervised or
the Insurance Commission; and regulated by the Bangko Sentral ng
Pilipinas (BSP);
(3) (i) securities dealers, brokers, salesmen,
investment houses and other similar (2) insurance companies, pre-need companies
entities managing securities or rendering and all other persons supervised or
services as investment agent, advisor, or regulated by the Insurance Commission
consultant, (IC);
(ii) mutual funds, close and investment
companies, common trust funds, pre- (3) (i) securities dealers, brokers, salesmen,
need companies and other similar investment houses and other similar
entities, persons managing securities or rendering
(iii) foreign exchange corporations, services as investment agent, advisor, or
money changers, money payment, consultant,
remittance, and transfer companies and
other similar entities, and (ii) mutual funds, close-end investment
(iv) other entities administering or companies, common trust funds, and other
otherwise dealing in currency, similar persons, and
commodities or financial derivatives (iii) other entities administering or
based thereon, valuable objects, cash otherwise dealing in currency,
substitutes and other similar monetary commodities or financial derivatives
instruments or property supervised or based thereon, valuable objects, cash
regulated by Securities and Exchange substitutes and other similar monetary
Commission. instruments or property supervised or
regulated by the Securities and Exchange
Commission (SEC);

MERCANTILE LAW
(4) jewelry dealers in precious metals, who, as

a business, trade in precious metals, for
transactions in excess of One million pesos
(P1,000,000.00);
(5) jewelry dealers in precious stones, who, as

a business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
(6) company service providers which, as a

business, provide any of the following
services to third parties:
(i) acting as a formation agent of

juridical persons;
(ii) acting as (or arranging for another
person to act as) a director or corporate
secretary of a company, a partner of a
partnership, or a similar position in
relation to other juridical persons;
(iii) providing a registered office,
business address or accommodation,
correspondence or administrative address
for a company, a partnership or any other
legal person or arrangement; and
(iv) acting as (or arranging for another
person to act as) a nominee shareholder
for another person; and
(7) persons who provide any of the following

services:
(i) managing of client money, securities
or other assets;
(ii) management of bank, savings or
securities accounts;
(iii) organization of contributions for the
creation, operation or management of
companies; and
(iv) creation, operation or management
of juridical persons or arrangements, and
buying and selling business entities.
Exclusions: The term ‘covered persons’ shall

exclude lawyers and accountants
Requisites for exclusion
1. Acting as independent legal professionals

2. In relation to information concerning their
clients or
3. Where disclosure of information would
compromise client confidences or the attorney-
client relationship. (RA 10365, Sec. 1, amending
RA 9160, Sec. 3[a]).
OBLIGATIONS OF a. Customer Identification - Covered a. (same; not amended)

COVERED institutions shall establish and record the true
INSTITUTIONS identity of its clients based on official b. (same; not amended)
documents. They shall maintain a system of
verifying the true identity of their clients and, c. Reporting of Covered and Suspicious
in case of corporate clients, require a system Transactions. – Covered persons shall report to

SPECIAL LAWS
of verifying their legal existence and the AMLC all covered transactions and
organizational structure, as well as the suspicious transactions within five (5) working
authority and identification of all persons days from occurrence thereof, unless the AMLC
purporting to act on their behalf. prescribes a different period not exceeding
fifteen (15) working days.
The provisions of existing laws to the contrary
notwithstanding, anonymous accounts, “Lawyers and accountants acting as
accounts under fictitious names, and all other independent legal professionals are not
similar accounts shall be absolutely required to report covered and suspicious
prohibited. Peso and foreign currency non- transactions if the relevant information was
checking numbered accounts shall be obtained in circumstances where they are
allowed. The BSP may conduct annual testing subject to professional secrecy or legal
solely limited to the determination of the professional privilege.
existence and true identity of the owners of
such accounts. “x x x
“x x x
b) Record Keeping - All records of all
transactions of covered institutions shall be “When reporting covered or suspicious
maintained and safely stored for five (5) years transactions to the AMLC, covered persons and
from the date of transactions. With respect to their officers and employees are prohibited
closed accounts, the records on customer from communicating, directly or indirectly, in
identification, account files and business any manner or by any means, to any person or
correspondence, shall be preserved and entity, the media, the fact that a covered or
safety stored for at least five (5) years from suspicious transaction has been reported or is
the dates when they were closed. about to be reported, the contents of the report,
or any other information in relation thereto.
c) Reporting of Covered and Suspicious Neither may such reporting be published or
Transactions - Covered institutions shall aired in any manner or form by the mass media”,
report to the AMLC all covered transactions electronic mail, or other similar devices. In case
and suspicious transactions within five(5) of violation thereof, the concerned officer and
working days from occurrences thereof, employee of the covered person and media shall
unless the Supervising Authority prescribes a be held criminally liable.”(Sec. 7, RA 10365
longer period not exceeding ten (10) working amending Sec. 9, RA 9160).
days.
"Should a transaction be determined to be both

a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.
When reporting covered or suspicious

transactions to the AMLC, covered institutions
and their officers and employees shall not be
deemed to have violated Republic Act No. 1405,
as amended, Republic Act No. 6426, as
amended, Republic Act No. 8791 and other
similar laws, but are prohibited from
communicating, directly or indirectly, in any
manner or by an means, to any person, the fact
that a covered or suspicious transaction report
was made, the contents thereof, or any other
information in relation thereto. In case of
violation thereof, the concerned officer and
employee of the covered institution shall be
criminally liable. However, no administrative,
criminal or civil proceedings, shall lie against
any person for having made a covered or
suspicious transaction report in the regular
performance of his duties in good faith, whether
or not such reporting results in any criminal
prosecution under this Act of any other law.

MERCANTILE LAW
"When reporting covered or suspicious
transactions to the AMLC, covered instituting
and their officers and employees are prohibited
from communicating directly or indirectly, in
any manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction report was made, the
contents thereof, or any other information in
relation thereto. Neither may such reporting be
published or aired in any manner or form by the
mass media, electronic mail, or other similar
devices. In case of violation thereof, the
concerned officer and employee of the covered
institution and media shall be held criminally
liable (Sec. 9, RA 9160 as amended by RA 9194).
COVERED 'Covered transaction' is a transaction in cash or
TRANSACTIONS other equivalent monetary instrument
involving a total amount in excess of Five Same; not amended
hundred thousand pesos (PhP 500,000.00)
within one (1) banking day. (RA 9160, Sec. 3 [b]).
SUSPICIOUS 'Suspicious transaction' are transactions with
TRANSACTIONS covered institutions, regardless of the amounts
involved, where any of the following
circumstances exist:
1. There is no underlying legal or trade

obligation, purpose or economic justification;
2. The client is not properly identified;
3. The amount involved is not commensurate
with the business or financial capacity of the
client;
4. Taking into account all known circumstances,
it may be perceived that the client's transaction
Same; not amended
is structured in order to avoid being the subject
of reporting requirements under the Act;
5. Any circumstances relating to the transaction
which is observed to deviate from the profile of
the client and/or the client's past transactions
with the covered institution;
6. The transactions is in a way related to an
unlawful activity or offense under this Act that
is about to be, is being or has been committed;
or
7. Any transactions that is similar or analogous
to any of the foregoing." (RA 9160, Sec. 3[b-1]).
WHEN IS MONEY Money laundering is a crime whereby the Money laundering is committed by any person
LAUNDERING proceeds of an unlawful activity, as herein who, knowing that any monetary instrument or
COMMITTED defined, are transacted thereby making them property represents, involves, or relates to the
(DEFINITION OF appear to have originated from legitimate proceeds of any unlawful activity:
MONEY sources. It is committed by the following:
LAUNDERING) (a) transacts said monetary instrument or
(a) Any person knowing that any monetary property;
instrument or property represents, involves, or
relates to, the proceeds of any unlawful activity, (b) converts, transfers, disposes of, moves,
transacts or attempts to transact said monetary acquires, possesses or uses said monetary
instrument or property. instrument or property;
(c) conceals or disguises the true nature, source,

(b) Any person knowing that any monetary location, disposition, movement or ownership of
instrument or property involves the proceeds of or rights with respect to said monetary
any unlawful activity, performs or fails to instrument or property;
perform any act as a result of which he

SPECIAL LAWS
falicitates the offense of money laundering (d) attempts or conspires to commit money
referred to in paragraph (a) above. laundering offenses referred to in paragraphs
(a), (b) or (c);
(c) Any person knowing that any monetary
instrument or property is required under this (e) aids, abets, assists in or counsels the
Act to be disclosed and filed with the Anti- commission of the money laundering offenses
Money Laundering Council (AMLC), fails to do referred to in paragraphs (a), (b) or (c) above;
so."( RA 9160, as amended by RA 9194, Sec. 4) and
(f) performs or fails to perform any act as a

result of which he facilitates the offense of
money laundering referred to in paragraphs (a),
(b) or (c) above.
“Money laundering is also committed by any

covered person who, knowing that a covered or
suspicious transaction is required under this Act
to be reported to the Anti-Money Laundering
Council (AMLC), fails to do so.” (Sec. 4, RA 10365,
amending Sec. 4, RA 9160).
UNLAWFUL 'Unlawful activity' refers to any act or omission ‘Unlawful activity’ refers to any act or omission
ACTIVITIES OR or series or combination thereof involving or or series or combination thereof involving or
PREDICATE CRIMES having direct relation to following: having direct relation to the following:
(1) Kidnapping for ransom under Article 267 of (1) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the Revised Act No. 3815, otherwise known as the Revised
Penal Code, as amended; Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and

(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known
16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of
as the Comprehensive Dangerous Act of 2002; 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of (3) Section 3 paragraphs B, C, E, G, H and I of

republic Act No. 3019, as amended, otherwise Republic Act No. 3019, as amended, otherwise
known as the Anti-Graft and Corrupt Practices known as the Anti-Graft and Corrupt Practices
Act; Act;
(4) Plunder under Republic Act No. 7080, as (4) Plunder under Republic Act No. 7080, as
amended; amended;
(5) Robbery and extortion under Articles 294,

(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised
295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended;
Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;
gambling under Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised
(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree
Penal Code, as amended and Presidential under No. 532;
the Revised Penal Code, as amended and
Presidential Decree No. 532; (8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
(8) Qualified theft under Article 310 of the (9) Swindling under Article 315 and Other
Revised penal Code, as amended; Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
(9) Swindling under Article 315 of the Revised
Penal Code, as amended; (10) Smuggling under Republic Act Nos. 455 and
1937;

MERCANTILE LAW
(10) Smuggling under Republic Act Nos. 455 (11) Violations of Republic Act No. 8792,
and 1937; otherwise known as the Electronic Commerce
Act of 2000;
(11) Violations under Republic Act No. 8792,
otherwise known as the Electrinic Commerce (12) Hijacking and other violations under
Act of 2000; Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal
Code, as amended;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson and (13) Terrorism and conspiracy to commit
murder, as defined under the Revised Penal terrorism as defined and penalized under
Code, as amended, including those perpetrated Sections 3 and 4 of Republic Act No. 9372;
by terrorists against non-combatant persons
and similar targets; (14) Financing of terrorism under Section 4 and
offenses punishable under Sections 5, 6, 7 and 8
(13) Fraudulent practices and other violations of Republic Act No. 10168, otherwise known as
under Republic Act No. 8799, otherwise known the Terrorism Financing Prevention and
as the Securities Regulation Code of 2000; Suppression Act of 2012:
(14) Felonies or offenses of a similar nature that (15) Bribery under Articles 210, 211 and 211-A
is punishable under the penal laws of other of the Revised Penal Code, as amended, and
countries." Corruption of Public Officers under Article 212
of the Revised Penal Code, as amended;
(16) Frauds and Illegal Exactions and

Transactions under Articles 213, 214, 215 and
216 of the Revised Penal Code, as amended;
(17) Malversation of Public Funds and Property

under Articles 217 and 222 of the Revised Penal
Code, as amended;
(18) Forgeries and Counterfeiting under Articles

163, 166, 167, 168, 169 and 176 of the Revised
Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic Act

No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of Chapter

IV, of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the
Philippines, as amended;
(21) Violations of Sections 86 to 106 of Chapter

VI, of Republic Act No. 8550, otherwise known
as the Philippine Fisheries Code of 1998;
(22) Violations of Sections 101 to 107, and 110

of Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995;
(23) Violations of Section 27(c), (e), (f), (g) and

(i), of Republic Act No. 9147, otherwise known
as the Wildlife Resources Conservation and
Protection Act;
(24) Violation of Section 7(b) of Republic Act No.

9072, otherwise known as the National Caves
and Cave Resources Management Protection
Act;

SPECIAL LAWS
(25) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping Act of
2002, as amended;
(26) Violations of Sections 1, 3 and 5 of

Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
(27) Violation of Presidential Decree No. 1612,

otherwise known as the Anti-Fencing Law;
(28) Violation of Section 6 of Republic Act No.

8042, otherwise known as the Migrant Workers
and Overseas Filipinos Act of 1995, as amended
by Republic Act No. 10022;
(29) Violation of Republic Act No. 8293,

otherwise known as the Intellectual Property
Code of the Philippines;

9995, otherwise known as the Anti-Photo and
Video Voyeurism Act of 2009;

9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d)

and (e), 11, 12 and 14 of Republic Act No. 7610,
otherwise known as the Special Protection of
Children Against Abuse, Exploitation and
Discrimination;
(33) Fraudulent practices and other violations

under Republic Act No. 8799, otherwise known
as the Securities Regulation Code of 2000; and
(34) Felonies or offenses of a similar nature that

are punishable under the penal laws of other
countries.
ANTI-MONEY The Anti-Money Laundering Council is hereby
LAUNDERING created and shall be composed of
COUNCIL (AMLC) 1. The Governor of the Bangko Sentral ng
Pilipinas as Chairman,
2. The Commissioner of the Insurance Same; not amended
Commission and
3. The Chairman of the Securities and Exchange
Commission as members. (RA 9160, as amended
by RA 9194, Sec. 7).
FUNCTIONS The AMLC shall shall act unanimously in the The AMLC shall act unanimously in the
discharge of its functions as defined hereunder: discharge of its functions as defined hereunder:
(1) to require and receive covered or suspicious (1) (Same; not amended.)
transaction reports from covered institutions;
(2) (Same; not amended.)
(2) to issue orders addressed to the appropriate (3) (Same; not amended.)
Supervising Authority or the covered
institutions to determine the true identity of the

MERCANTILE LAW
owner of any monetary instrument or preperty (4) (Same; not amended.)
subject of a covered transaction or suspicious
transaction report or request for assistance (5) (Same; not amended.)
from a foreign State, or believed by the Council,
on the basis fo substantial evidence, to be, in (6) to apply before the Court of Appeals, ex
whole or in part, wherever located, parte, for the freezing of any monetary
representing, involving, or related to directly or instrument or property alleged to be laundered,
indirectly, in any manner or by any means, the proceeds from, or instrumentalities used in or
proceeds of an unlawful activity. intended for use in any unlawful activity as
defined in Section 3(i) hereof;
(3) to institute civil forfeiture proceedings and
all other remedial proceedings through the (7) (Same; not amended.)
Office of the Solicitor General;
(8) (Same; not amended.)
(4) to cause the filing of complaints with the (9) (Same; not amended.)
Department of Justice or the Ombudsman for
the prosecution of money laundering offenses; (10) (Same; not amended.)
(5) to investigate suspicious transactions and (11) (Same; not amended.)

covered transactions deemed suspicious after
an investigation by AMLC, money laundering (12)to require the Land Registration
activities and other violations of this Act; Authority and all its Registries of Deeds to
submit to the AMLC, reports on all real estate
(6) to apply before the Court of Appeals, ex transactions involving an amount in excess of
parte, for the freezing of any monetary Five hundred thousand pesos (P500,000.00)
instrument or property alleged to be the within fifteen (15) days from the date of
proceeds of any unlawful activity as defined in registration of the transaction, in a form to be
Section 3(i) hereof; prescribed by the AMLC. The AMLC may also
require the Land Registration Authority and all
its Registries of Deeds to submit copies of
(7) to implement such measures as may be relevant documents of all real estate
necessary and justified under this Act to transactions (Sec. 6, RA 10365 amending Sec. 7,
counteract money laundering; RA 9160).
(8) to receive and take action in respect of, any

request from foreign states for assistance in
their own anti-money laundering operations
provided in this Act;
(9) to develop educational programs on the

pernicious effects of money laundering, the
methods and techniques used in the money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;
(10) to enlist the assistance of any branch,

department, bureau, office, agency, or
instrumentality of the government, including
government-owned and -controlled
corporations, in undertaking any and all anti-
money laundering operations, which may
include the use of its personnel, facilities and
resources for the more resolute prevention,
detection, and investigation of money
laundering offenses and prosecution of
offenders; and
(11) to impose administrative sanctions for the

violation of laws, rules, regulations, and orders
and resolutions issued pursuant thereto. (Sec. 7,
RA 9160 as amended by RA 9194.)

SPECIAL LAWS
FREEZING OF Upon verified ex parte petition by the AMLC Upon a verified ex parte petition by the AMLC
MONEY and after determination that probable cause and after determination that probable cause
INSTRUMENT OR exists that any monetary instrument or exists that any monetary instrument or property
PROPERTY property is in any way related to an unlawful is in any way related to an unlawful activity as
activity as defined in Section 3(i) hereof, the defined in Section 3(i) hereof, the Court of
Court of Appeals may issue a freeze order, which Appeals may issue a freeze order which shall be
shall be effective immediately. The freeze order effective immediately, and which shall not
shall be for a period of twenty (20) days unless exceed six (6) months depending upon the
extended by the court. In any case, the court circumstances of the case: Provided, That if
should act on the petition to freeze within there is no case filed against a person whose
twenty-four (24) hours from filing of the account has been frozen within the period
petition. If the application is filed a day before a determined by the court, the freeze order shall
nonworking day, the computation of the be deemed ipso facto lifted: Provided,
twenty-four (24)-hour period shall exclude the further, That this new rule shall not apply to
nonworking days." pending cases in the courts. In any case, the
court should act on the petition to freeze within
"A person whose account has been frozen may twenty-four (24) hours from filing of the
file a motion to lift the freeze order and the court petition. If the application is filed a day before a
must resolve this motion before the expiration nonworking day, the computation of the twenty-
of the twenty (20)-day original freeze order." four (24)-hour period shall exclude the
nonworking days.
"No court shall issue a temporary restraining A person whose account has been frozen may
order or a writ of injunction against any freeze file a motion to lift the freeze order and the court
order, except the Supreme Court. (RA 9160 as must resolve this motion before the expiration
amended by RA 10167, Sec. 10.) of the freeze order.
No court shall issue a temporary restraining

order or a writ of injunction against any freeze
order, except the Supreme Court. (Sec. 8, RA
10365, amending RA 9160.)
AUTHORITY TO Notwithstanding the provisions of Republic Act
INQUIRE INTO No. 1405, as amended; Republic Act No. 6426, as
BANK DEPOSITS amended; Republic Act No. 8791; and other
laws, the AMLC may inquire into or examine any Same; but the following new provisions were
particular deposit or investment, including inserted:
related accounts, with any banking institution
or non-bank financial institution upon order of Nothing contained in this Act nor in related
any competent court based on an ex antecedent laws or existing agreements shall be
parte application in cases of violations of this construed to allow the AMLC to participate in
Act, when it has been established that there is any manner in the operations of the BIR. (Sec. 20,
probable cause that the deposits or RA 10365, amending RA 9160.)
investments, including related accounts
involved, are related to an unlawful activity as The authority to inquire into or examine the
defined in Section 3(i) hereof or a money main account and the related accounts shall
laundering offense under Section 4 hereof; comply with the requirements of Article III,
except that no court order shall be required in Sections 2 and 3 of the 1987 Constitution, which
cases involving activities defined in Section are hereby incorporated by reference. Likewise,
3(i)(1), (2), and (12) hereof, and felonies or the constitutional injunction against ex post
offenses of a nature similar to those mentioned factolaws and bills of attainder shall be
in Section 3(i)(1), (2), and (12), which are respected in the implementation of this Act. (RA
Punishable under the penal laws of other 10365 amending RA 9160, Sec. 21.)
countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
under Republic Act No. 9372.
The Court of Appeals shall act on the

application to inquire into or examine any
deposit or investment with any banking
institution or non-bank financial institution
within twenty-four (24) hours from filing of the
application.

MERCANTILE LAW
To ensure compliance with this Act, the Bangko
Sentral ng Pilipinas may, in the course of a
periodic or special examination, check the
compliance of a Covered institution with the
requirements of the AMLA and its implementing
rules and regulations.
For purposes of this section, ‘related accounts’

shall refer to accounts, the funds and sources of
which originated from and/or are materially
linked to the monetary instrument(s) or
property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained

before the AMLC can inquire into these related
Accounts: Provided, That the procedure for
the ex parte application of the ex parte court
order for the principal account shall be the same
with that of the related accounts.
"The authority to inquire into or examine the

main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference (RA 9160,
as amended by RA 10167, Sec. 11).
Safe Harbor Provision requires no previous conviction for the unlawful activity
(RA 9160, as amended by RA 10365, Sec. 4).
No administrative, criminal or civil proceedings, shall lie
against any person for having made a COVERED Jurisdiction for violations of AMLA
transaction report or a SUSPICIOUS transaction report in
the regular performance of his duties and in good faith, 1. RTC – all cases on money laundering
whether or not such reporting results in any criminal 2. Sandiganbayan – Those committed by public officers
prosecution under this Act or any other Philippine law. and private persons in conspiracy with them. (R.A. 9160,
as amended by RA 10167, Sec. 5)
The report to AMLC will not violate the law on Secrecy
of Bank Deposits, Foreign Currency Deposit Act and Party entitled to file freeze order
General Banking Law
The AMLC, through the OSG, may file an ex-parte verified
The report to AMLC will not violate the law on Secrecy of petition for freeze order on any monetary instrument,
Bank Deposits, Foreign Currency Deposit Act and General property or proceeds relating to or involving an unlawful
Banking Law but it cannot otherwise communicate to any activity.
person or media, fact of report of covered transaction or
contents of the said report nor can the fact of reporting be Jurisdiction to issue a freeze order
published or aired in mass media, electronic mail or
similar devices (RA 9160 as amended by RA 10167, Sec. It is solely the CA which has the authority to issue a freeze
11). order upon application ex parte by the AMLC and after
determination that probable cause exists. It also has the
Q: Alvin is jobless but is reputed to be a jueteng exclusive jurisdiction to extend existing freeze orders
operator. He has never been charged or convicted of previously issued by the AMLC vis-à-vis accounts and
any crime. He maintains several bank accounts deposits related to money-laundering activities. (Republic
amounting to P100 Million. AMLC charged Alvin with v. Cabrini Green & Ramos, G.R. No. 154522, May 5, 2006)
violation of the Anti-Money Laundering Law. Can
Alvin move to dismiss the case on the ground that he Probable cause under AMLA
has no criminal record?
Probable cause includes such facts and circumstances
A:No. The contention of Alvin is not tenable because which would lead a reasonably discreet, prudent or
under AMLA, "money laundering crime" committed when cautious man to believe that an unlawful activity and/or a
the proceeds of an "unlawful activity," like jueteng money laundering offense is about to be, is being or has
operations, are made to appear as having originated from been committed and that the account or any monetary
legitimate sources. Money laundering crime is separate instrument or property subject thereof sought to be
from the unlawful activity of being a jueteng operator, and frozen is in any way related to said unlawful activity

SPECIAL LAWS
and/or money laundering offense. (R.A. 9194, as amended, terrorism and conspiracy to commit terrorism (AMLA as
Rule 10.2) amended, Section 11).
Period of effectivity of freeze orders The Anti-Money Laundering Council cannot order Banco
de Plata to hold all withdrawals and other transactions
Freeze orders shall be effective for period not exceeding involving the accounts of Congressman Abner. It is the
6 months depending upon the circumstances (RA 9160 as Court of Appeals which has the power to issue a freeze
amended by RA 10365, Sec. 10). order over the accounts upon petition of the Anti-Money
Laundering Council (AMLA; Republic v. Cabrini Green Ross,
Related accounts G.R. No. 154522, May 5, 2006).
Those accounts, funds and sources of which originated Q: Rudy is jobless but is reputed to be a jueteng
from and/or are materially linked to the monetary operator. He has never been charged or convicted of
instrument or property subject of the freeze order. any crime. He maintains several bank accounts and
has purchased 5 houses and lots for his children from
Instances when the Anti-Money Laundering Council the Luansing Realty I Inc. Since he does not have any
(AMLC) may inquire into bank deposits
visible job, the company reported his purchases to the
GR: Only upon order of any competent court in cases of Anti-Money Laundering Council (AMLC). Thereafter,
AMLC charged him with violation of the Anti-Money
violation of R.A. 9160, as amended.
Laundering Law. Upon request of the AMLC, the bank
disclosed to it Rudy's bank deposits amounting to
XPNs:No need of court order in cases of (KHDAM)
P100 Million. Subsequently, he was charged in court
1. Kidnapping,
for violation of the Anti-Money Laundering Law.
2. Hijacking,
3. Drugs- violation of Dangerous Drugs Act, a. Can Rudy move to dismiss the case on the ground
4. Arson, that he has no criminal record?
5. Murder. (Sec. 11 R.A. 9160, as amended)
b. To raise funds for his defense, Rudy sold the
From his first term in 2007, Congressman Abner has houses and lots to a friend. Can Luansing Realty, Inc.
been endorsing his pork barrel allocations to Twin be compelled to transfer to the buyer ownership of
Rivers in exchange for a commission of 40% of the the houses and lots?
face value of the allocation. Twin Rivers is a non- c. In disclosing Rudy's bank accounts to the AMLC,
governmental organization whose supporting did the bank violate any law?
papers, after audit, were found by the Commission on
Audit to be fictitious. Other than to prepare and d. Supposing the titles of the houses and lots are in
submit falsified papers to support the encashment of possession of the Luansing Realty Inc., is it under
the pork barrel checks, Twin Rivers does not appear obligation to deliver the titles to Rudy? (2006 Bar)
to have done anything on the endorsed projects and
Congressman Abner likewise does not appear to have A:
bothered to monitor the progress of the projects he a) No. The contention of Rudy is not tenable because
endorsed. The congressman converted most of the under AMLA, "money laundering crime" committed
commissions he generated into US dollars, and when the proceeds of an "unlawful activity," like
deposited these in a foreign currency account with jueteng operations, are made to appear as having
Banco de Plata (BDP). Based on amply-supported tips originated from legitimate sources. Money laundering
given by a congressman from another political party, crime is separate from the unlawful activity of being a
the Anti-Money Laundering Council sent BDP an jueteng operator, and requires no previous conviction
order: for the unlawful activity. (AMLA, Sec. 3)
(1) to confirm Cong. Abner's deposits with the bank b) Yes. Rudy is still the owner of the house and lot in
and to provide details of these deposits; and question and as such he may dispose the same as he
(2) to hold all withdrawals and other transactions pleases. Absent any freeze order filed by the OSG on
involving the congressman's bank accounts. behalf of the AMLC, Rudy may dispose said properties
and compel Luansing Realty to transfer to the buyer
As counsel for BDP, would you advise the bank to ownership of the properties sold.
comply with the order? (2013 Bar)
c) Yes. Under the Anti-money Laundering Law, as
A: I shall advise Banco de Plata not to comply with the amended, the AMLC may into bank accounts upon
order of the Anti-Money Laundering Council. It cannot order of any competent court based in ex parte
inquire into the deposits of Congressman Abner, application when it has been established that said
regardless of currency, without a bank inquiry order from accounts are related to an unlawful activity. In the case
a competent court, because crimes involved are not at hand, the AMLC merely requested the disclosure of
kidnapping for ransom, violations of the Comprehensive said accounts without court order. The bank therefore
Dangerous Drugs Act, hijacking and other violations of violated the secrecy of bank account of Rudy when it
Republic Act No. 6235, destructive arson, murder, and

MERCANTILE LAW
allowed the AMLC to look into said accounts without “DOING BUSINESS” IN THE PHILIPPINES
court order. (AMLA as amended, Sec. 11)
“Doing Business” in the Philippines
d) Yes. The properties are validly sold in favor of Rudy
and as such Luansing Realty is under the obligation to Foreign corporations are considered “doing or
deliver the titles to the buyer. This is without transacting business” in the Philippines if they are:
prejudice to the application of freeze order by the OSG 1. Soliciting orders, service contracts, and opening offices
on behalf of the AMLC. whether called liason offices of branches;
2. Appointing representatives, distributors domiciled in
FOREIGN INVESTMENTS ACT the Philippines or who stay for a period or periods
totaling 180 days or more;
POLICY OF THE LAW 3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
State policy of the law (NOSE Part) corporation in the Philippines;
4. Doing any act or acts that imply a continuity of
1. It is the policy of the State to attract, promote and commercial dealings or arrangements, and
welcome productive investments in activities which contemplate to some extent the performance of acts or
significantly contribute to National industrialization and works or the exercise of some functions normally
socio-economic development to the extent that foreign incident to and in progressive prosecution of, the
investment is allowed in such activity by the Constitution purpose and object of its organization.( R.A. 7042, Sec 3
and relevant laws from: [d])
a. Foreign individuals;
b. Partnerships; Instances that are considered as “not doing or
c. Corporations; transacting business” in the Philippines for foreign
d. Governments, including their political subdivisions. corporations
2. Foreign investments shall be encouraged in the 1. Mere investment as shareholder and exercise of rights
enterprises that significantly expand livelihood and as investor;
employment Opportunities for Filipinos by: 2. Having a nominee director or officer to represent its
a. Enhancing economic value of farm products; interest in the corporation;
b. Promoting the welfare of Filipino consumers; 3. Appointing a representative or distributor which
c. Expanding the scope, quality and volume of exports transacts business in its own name and for its own
and their access to foreign markets; account;
d. And/or transferring relevant technologies in 4. Publication of a general advertisement through any
agriculture, industry and support services. print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely
3. Foreign investments shall be welcome as a Supplement for the purpose of having the same processed by another
to Filipino capital and technology in those enterprises entity in the Philippines;
serving mainly the domestic market. 6. Consignment by the foreign corporation of equipment
with a local company to be used in the processing of
4. GR: There are no restrictions on extent of foreign products for export;
ownership of Export enterprises. In domestic market 7. Collecting information in the Philippines;
enterprises, foreigners can invest as much as 100% equity Performing services auxiliary to an existing isolated
XPN:In areas included in the negative list. contract of sale which are not on a continuing basis (RA
7042, Sec. 3 [d]).
5. Foreign-owned firms catering mainly to the domestic
market shall be encouraged to undertake measures that EXPORT ENTERPRISE
will gradually increase Filipino PARTicipation in their
businesses by It is an enterprise wherein a manufacturer, processor or
a. Taking in Filipino partners; service [including tourism] enterprise exports sixty
b. Electing Filipinos to the board of director; percent (60%) or more of its output, or wherein a trader
c. Implementing transfer of technology to Filipinos; purchases products domestically and exports sixty per
d. Generating more employment for the economy; and cent (60%) or more of such purchases (Sec 3 [e], RA 7042).
e. Enhancing skills of Filipino workers (RA 7042, Sec. 2).
DOMESTIC MARKET ENTERPRISE
DEFINITION OF TERMS
It is an enterprise which produces goods for sale, or
FOREIGN INVESTMENT renders services to the domestic market entirely or if
exporting a portion of its output fails to consistency
It isan equity investment made by non-Philippine national export at least 60% thereof (R.A. 7042, Sec 3 [f]).
in the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly registered
with the Central Bank which shall assess and appraise the
value of such assets other than foreign exchange.

SPECIAL LAWS
REGISTRATION OF INVESTMENTS OF NON- partner, must disclose the fact and the names and
PHILIPPINE NATIONALS addresses of the partners in the existing joint venture in
his application for registration with the SEC.
Philippine nationals
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
1. A citizen of the Philippines;
2. A domestic partnership or association wholly owned Rules regarding foreign registration in export
by citizens of the Philippines; enterprises
3. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and 1. Foreign investment in export enterprises whose
entitled to vote is owned and held by Filipino citizens; products and services do not fall within Lists A and B of
4. Corporations organized abroad and registered as the Foreign Investment Negative List is allowed up to
doing business in the Philippines under the 100% ownership.
Corporation Code of which 100% of the capital stock 2. Export enterprises which are non-Philippine nationals
entitled to vote belong to Filipinos; and shall register with BOI and submit the reports that may be
5. Trustee of funds for pension or other employee required to ensure continuing compliance of the export
retirement or separation benefits, where the trustee is enterprise with its export requirement.
a Philippine national and at least sixty (60%) of the 3. BOI shall advise SEC or BTRCP, as the case may be, of
fund will accrue to the benefit of the Philippine any export enterprise that fails to meet the export ratio
nationals. requirement.
4. The SEC or BTRCP shall thereupon order the non-
Non-Philippine nationals complying export enterprise to reduce its sales to the
domestic market to not more than 40% of its total
Those who do not belong to the definition of a Philippine production; failure to comply with such SEC or BTRCP
national. order, without justifiable reason, shall subject the
enterprise to cancellation of SEC or BTRCP registration,
A non-Philippine national may own fully a domestic and/or the penalties provided in this law (R.A. 7042, Sec
market enterprise 6).
A non-Philippine national may own up to 100% of a FOREIGN INVESTMENT DOMESTIC MARKET

domestic market enterprise (RA 7042, Sec. 7). ENTERPRISES
Requirements for a non-Philippine national to own A domestic market enterprise may change its status to
up to 100% of a domestic market enterprise export enterpriseif the Domestic market enterprise
consistently exports in each year thereof sixty per cent
1. A non-Philippine national must register with the SEC or (60%) or more of its output over a three (3) year period
with the Bureau of Trade Regulation and Consumer (RA 7042, Sec. 7).
Protection (BTRCP) of DTI in the case of single
proprietorship for it to do business or invest in a domestic FOREIGN INVESTMENT NEGATIVE LIST
enterprise up to 100% of its capital.
2. The participation of non-Philippine national in the Foreign Investment Negative List
enterprise is must not be prohibited or limited to a
smaller percentage by existing law and/ or under Foreign It is a list of areas of economic activity whose foreign
Investment Negative list (RA 7042, Sec. 5). ownership is limited to a maximum of 40% of the equity
capital of the enterprises engaged therein (RA 7042, Sec. 3
Imposition of additional limitation on the extent of [g]).
foreign ownership in an enterprise other than those
provided for under RA 7042 by the SEC or BTRCP List A of the Foreign Investment Negative List
GR: The SEC or BTRCP, as the case may be, shall not Filipino Ownership must be: (CODES are as follows)
impose any limitations on the extent of foreign ownership 1. 100% - CoFi AMMaN Co.- ProMiSe -US$2.5M
in an enterprise additional to those provided in R.A. 7042. 2. 80% - Prc
3. 75% - LoRD
XPNs: 4. 70% - Ad
1. That any enterprise seeking to avail of incentives under 5. 60% - Go LEARN CUPID
the Omnibus Investment Code of 1987 must apply for 6. 40% - FI (SEC)
registration with the Board of Investments (BOI), which
shall process such application for registration in 100% Filipino Owned
accordance with the criteria for evaluation prescribed in (Zero percent (0%) foreign equity)
said Code;
(Code: CoFi AMMaN Co. – MiSe- US$2.5M)
2. That a non-Philippine national intending to engage in
the same line of business as an existing joint venture, in 1. COoperatives(Art. 26, Ch. III, R.A. 6938);
which he or his majority shareholder is a substantial

MERCANTILE LAW
2. Manufacture of FIrecrackers and other 70 % Filipino Owned
pyrotechnic devices (Sec. 5, R.A. 7183). (Up to twenty percent (30%) foreign equity)
3. Manufacture, repair, stockpiling and/or (Code: AdPawn)
distribution of biological, chemical and 1. Advertising (Art. XVI, Constitution)
radiological weapons and Anti-personnel mines 2. Corporations engaged in pawnshop business
(Sec. 8, P.D. 114)
(Various treaties to which the Philippines is a
signatory and conventions supported by the 60 % Filipino Owned
Philippines). (Up to twenty percent (40%) foreign equity)
4. Mass media except recording (Code: Go LEARN CUPIDCo)
5. Utilization of MArine resources (Sec. 2, Art. XII,
Constitution); 1. Contracts for the supply of materials, goods and
6. Manufacture, repair, stockpiling and/or commodities to GOCC, agency or municipal corporation
distribution of Nuclear weapons (Sec. 8, Art. II, (Sec. 1, R.A. 5183);
Constitution);
7. COckpits (Sec. 5, P.D. 449); 2. Ownership of private Lands (Sec. 7, Art. XII,
8. Small-scale MIning (Sec. 3, R.A. 7076); Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182);
9. Private SEcurity agencies (Sec. 4, R.A. 5487); 3. Ownership/establishment and administration of
10. Retail trade enterprises with paid-up capital of Educational institutions (Sec. 4, Art. XIV, Constitution);
less than US$2.5 M (Sec. 5, R.A. 8762);
4. Adjustment Companies (Sec. 323, P.D. 613);
80 % Filipino Owned 5. Culture, production, milling, processing, trading
(Up to twenty percent (20%) foreign equity) excepting retailing, of rice and corn and acquiring, by
(Code: Prc) barter, purchase or otherwise, Rice and corn and the
by-products thereof (Sec. 5, P.D. 194);
1. Private Radio Communications network (R.A.
3846). 6. Exploration, development and utilization of Natural
resources (Sec. 2, Art. XII, Constitution);
75 % Filipino Owned
(Up to twenty percent (25%) foreign equity) 7. Ownership of Condominium units where the
(Code: LoRD F) common areas in the condominium project are co-
owned by the owners of the separate units or owned by
1. Contracts for the construction and repair of a corporation (Sec. 5, R.A. 4726).
LOcally-funded public works (Sec. 1, CA 541, LOI 630)
8. Operation and management of public Utilities (Sec.
except:
11, Art. XII, Constitution; Sec. 16, CA 146);
a. infrastructure/development projects covered in
R.A. 7718; and 9. Project Proponent and Facility Operator of a BOT
b. projects which are foreign funded or assisted project requiring a public utilities franchise (Sec. 11,
and required to undergo international Art. XII, Constitution; Sec. 2a, R.A. 7718);
competitive bidding (Sec. 2[a], R.A. 7718);
10. Manufacture, repair, storage and/ or distribution of
2. Private Recruitment, whether for local or products/ Ingredients requiring PNP clearance (R.A.
overseas employment (Art. 27, P.D. 442); 7042 as amended by R.A. 8179);
3. Contracts for the construction of Defense-related 11. Operation of Deep sea commercial fishing vessel
structures (Sec. 1, CA 541). (Sec. 27, R.A. 8550);
4. Under the Flag Law, in the purchase of articles for 12. Corporations engaged in Coastwise shipping (Sec.
the Government, preference shall be given to 806, P.D. 1464)
materials and supplies produced, made, or
manufactured in the Philippines, and to domestic 40 % Filipino Owned
entites. Domestic entites means any citizen of the (Up to twenty percent (60%) foreign equity)
Philippines or commercial company at least 75% of
the capital of which is owned by citizens of the (Code: FI [SEC] )
Philippines (Sec. 1, CA 138)
1. Financing companies regulated by the SEC(Sec. 6, R.A.
5980 as amended by R.A. 8556);
2. Investment houses regulated by the SEC(Sec. 5, P.D. 129
as amended by R.A. 8366).

SPECIAL LAWS
c. It is a list of business activities or enterprises that
List B of the Foreign Investment Negative List are open to foreign investments provided it is with
1. GR: Defense-related activities, requiring prior the approval of the Board of Investment.
clearance and authorization from the Department of d. It is a list of business activities or enterprises that
National Defense to engage in such activity, such as the : are open to foreign investments provided it is with
a. Manufacture the approval of the Securities and Exchange
b. Repair Commission.
c. Storage
d. Distribution of, firearms, ammunition, lethal A: A. It is a list of business activities or enterprises in the
weapons, military ordnance, explosives, pyrotechnics, Philippines that foreigners are disqualified to engage in.
similar materials
XPN: Such manufacturing or repair activity is specifically Strategic industries
authorized, with a substantial export component, to a
non-Philippine national by the Secretary of National Industries that are characterized by all of the following:
Defense; or a. Crucial to the accelerated industrialization of the
2. Those that have implications on public health and country.
morals, such as the manufacture and distribution of: b. Require massive capital investments to achieve
a. Dangerous drugs economies of scale for efficient operations.
b. All forms of gambling c. Require highly specialized or advanced technology
c. Nightclubs which necessitates technology transfer and proven
d. Bars production techniques in operations;
e. Beer houses d. Characterized by strong backward and forward
f. Dance halls linkages with most industries existing in the country,
g. Sauna and steam bathhouses and
h. Massage clinics. (RA 7042, Sec. 8) e. Generate substantial foreign exchange savings through
import substitution and collateral foreign exchange
NOTE: There is no significant difference between List A earnings through export of part of the output that will
and List B. result with the establishment, expansion or
development of the industry.
Rule regarding small and medium-sized domestic
market enterprises Penalties provided under R.A. 7042
GR: Small and medium-sized domestic market 1. A person who violates any provision of R.A. 7042 or of
enterprises with paid-in equity capital less than the the terms and conditions of registration or of the rules
equivalent of US$200,000.00, are reserved to Philippine and regulations issued pursuant thereto, or aids or
nationals. abets in any manner any violation shall be subject to a
fine not exceeding P100,000.
XPNs: 2. If the offense is committed by a juridical entity, it shall
1. They involve advanced technology as determined by be subject to a fine in an amount not exceeding 1/2 of
the DOST; 1% of total paid-in capital but not more than
2. They employ at 50 direct employees, then a minimum P5,000,000.00 The president and/or officials
paid-in capital of US$100,000.00 (RA 7042, Sec. 8) responsible therefor shall also be subject to a fine not
exceeding P200,000.00
List C of the Foreign Investment Negative List 3. In addition to the foregoing, any person, firm or
juridical entity involved shall be subject to forfeiture of
List C shall contain the areas of investment in which all benefits granted under R.A. 7042 (RA 7042, Sec 14).
existing enterprises already serve adequately the needs of
the economy and the consumer and do not require further
foreign investments, as determined by NEDA and
approved by the President and promulgated in a
Presidential Proclamation.
Q: The main feature of the Foreign Investment Act of

1991 is to introduce the concept of "Negative Lists".
Under the said law, what is a "Negative List"? (2012
Bar)
a. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified to
engage in.
b. It is a list of business activities or enterprises in
the Philippines that foreigners are qualified to
engage in.

MERCANTILE LAW
Corporation Law World Intellectual Property Organization (2nd
Ed.).(2004) WIPO Handbook (PDF).
Aquino, T. (2006). Philippine Corporate Law Compendium.
Manila: Rex Book Store. Negotiable Instruments Law
Aquino, T. (2014). Philippine Corporate Law Compendium. De Leon, H.S. and De Leon, Jr., H.M. (Eds.).(2010). The
Manila: Rex Book Store. Philippine Negotiable Instruments Law, Annotated.
Manila: Rex Bookstore, Inc.
De Leon, H. S. & De Leon, H. M., Jr. (10th Ed.). (2010). The
Corporation Code of the Philippines Annotated. Manila: Rex Divina, N.T. (Eds.). (2010). Handbook on Philippine
Book Store. Commercial Law. Makati City: CIBI Information, Inc.
Divina, N. (2nd Ed.).(2010). Handbook on Philippine Divina, N. T. (2014). Handbook on Philippine Commercial
Commercial Law. Manila: Central Lawbook Publishing Law 2014 Supplement
Company.
Sundiang, Sr., J.R. and Aquino, T.B. (2014).Reviewer on
Divina, N. T. (2014). Handbook on Philippine Commercial Commercial Law. Manila: Rex Bookstore, Inc.
Law 2014 Supplement
Villanueva, C.L. (2009). Commercial Law Reviewer. Manila:
Maurer School of Law: Indiana University. (1958). Foreign Rex Bookstore, Inc.
Corporations: The Interrelation of Jurisdiction and
Qualification. Indiana Law Journal, 20, 358-377. Securities Regulation Code
Salonga, J. (3rd Ed.).(1968). Philippine Law on Private Sundiang, J. R. Sr. (7th Ed.).(2014). Reviewer on
Corporations. Manila: Central Lawbook Publishing Commercial Law. Manila: Rex Book Store.
Company.
Divina, N. T. (2014). Handbook on Philippine Commercial
Sundiang, J. R. Sr. & Aquino, T. (4th Ed.).(2009). Reviewer Law 2014 Supplement
on Commercial Law. Manila: Rex Book Store.
Special Commercial Laws
Sundiang, J. R. Sr. & Aquino, T. (5th Ed.).(2011). Reviewer
on Commercial Law. Manila: Rex Book Store. Divina, N. (2nd Ed.).(2010). Handbook on Philippine
Commercial Law. Manila: Central Lawbook Publishing
Sundiang, J. R. Sr. & Aquino, T. (7th Ed.).(2014). Reviewer Company.
Insurance Law Law 2014 Supplement
Bouvier, J. (Revised 6th Ed.). (1856). Bouvier’s Law Transportation Law

Dictionary. Philadelphia: Childs & Peterson
De Leon, H.S. and De Leon, Jr., H.M. (Eds.). (2010). The Law 2014 Supplement
Insurance Code of the Philippines, Annotated. Manila: Rex
Bookstore, Inc. Martin, Teodorico C. (1988). Commentaries and
Jurisprudence on the Philippine Commercial Laws. Manila:
Diaz, et al. (2014), Lex Pareto Notes 2014 Edition, Volume Central Book Supply, Inc.
III: Mercantile Law and Criminal Law. Manila: Conanan
Educational Supply, Inc. Pineda, Ernesto L. (2010). Law on Property. Quezon
City: Central Book Supply, Inc.
Law 2014 Supplement Sundiang, J. R. Sr. & Aquino, T. (5th Ed.).(2011). Reviewer
Perez, H. (Eds.). (2006). Quizzer and Reviewer in
Commercial Laws Volume I. Manila: Rex Bookstore, Inc.
Sundiang, Sr., J.R. and Aquino, T.B. (2014).Reviewer on

Commercial Law. Manila: Rex Bookstore, Inc.
Intellectual Property Law
Amador, V. (2007). Intellectual Property Fundamental.

Manila: Rex Bookstore, Inc.


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LETTERS OF CREDIT

LETTERS OF CREDIT Duration of Letters of Credit

The purpose of a letter of credit is to ensure certainty of Kinds of Letter of Credit

1 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

3 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

5 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

Basis Doctrine of Doctrine of DEFINITION/CONCEPT OF A TRUST RECEIPT

Parties to a Trust Receipt transaction

1. Entruster - A lender, financer or creditor. Person

7 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

9 UN IVERSITY OF SAN TO TOM AS

VALIDITY OF THE SECURITY INTEREST AS AGAINST 1. Expenses of the Sale;

UN IVERSITY OF SAN TO TOM AS

11 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

2. Consignment. In the event of default by the Entrustee on his

13 UN IVERSITY OF SAN TO TOM AS

Effects of omission of any of the essential terms (CIV-

UN IVERSITY OF SAN TO TOM AS

1. The transferee Acquires title against the transferor

15 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

A: Yes. Yoyo, as a holder for value of the receipt, has a A:

17 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

Conversion 7. Commingling of goods (WHR Law, Sec. 24).

19 UN IVERSITY OF SAN TO TOM AS

1. Goods belonging to the person who is liable as 1. By surrendering possession thereof, or

UN IVERSITY OF SAN TO TOM AS

21 UN IVERSITY OF SAN TO TOM AS

GR: The delivery of a negotiable instrument does not by

UN IVERSITY OF SAN TO TOM AS

c. I promise to pay A or bearer the sum of Php100,000 1. As to promissory note

Form of negotiable instruments (Requisites of 1. Words prevail over figures

4. Must be payable to Order or to bearer; and

23 UN IVERSITY OF SAN TO TOM AS

REQUISITES OF NEGOTIABILITY Indication of particular fund for reimbursement v.

The instrument must be in writing Instrument is negotiable. Instrument is non-

UN IVERSITY OF SAN TO TOM AS

Payment by installment Payable in Philippine Peso

25 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

27 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

29 UN IVERSITY OF SAN TO TOM AS

UN IVERSITY OF SAN TO TOM AS

31 UN IVERSITY OF SAN TO TOM AS

Where an incomplete instrument has not been delivered,

UN IVERSITY OF SAN TO TOM AS

Presumption as to delivery Q: Juan borrowed P10,000.00 from Joe as evidenced

A: Yes. The letter “X” is sufficient to comply with the

33 UN IVERSITY OF SAN TO TOM AS

1. He is duly Authorized I promise to pay P (16 years old) or order P10,000.

UN IVERSITY OF SAN TO TOM AS

Illustration 3. A holder of a bearer instrument who subsequently