Code of Commerce

Commercial Law Reviewer
CODE OF COMMERCE WHAT IS COMMERCE? Commerce is a branch of human activity the purpose of which is to bring products to the consumer by means of exchanges or operations which tend to supply and extend to him, habitually, with intent to gain at proper time and place and in good quality and quantity. What are ACTS of Commerce? Those acts contained in the Code of Commerce and all other of analogous character. What is COMMERCIAL LAW? It is the branch of private law dealing with Juridical Relations arising from Commercial Acts. Under the CODE OF COMMERCE, the following provisions are still IN FORCE: 1. Merchants, Book of Merchants. 2. Commercial Contracts. 3. Joint Account 4. Transfer of Non-negotiable Credits 5. Commercial Contracts of Overland Transportation 6. Letter of Credit The following SPECIAL COMMERCIAL LAWS repealed certain portions of the Code of Commerce: 1. Corporation Code 2. Negotiable Instruments Law 3. Insurance Law 4. Securities Regulations Code 5. New Civil Code provisions on Partnership, Agency, Sales, Loan, Deposit and Guarantee. Who are Merchants? Merchants are individuals having capacity to engage in commerce and habitually devote themselves to it; Duly organized commercial or industrial companies. When does PRESUMPTION OF HABITUALITY exist? The presumption exists the moment a person who intends to engage in commerce announces through circular, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operation. QUALIFICATIONS to become a Merchant: 1. Legal age. 2. Must have free disposition of his property. DISQUALIFICATIONS: Absolute Disqualifications 1. Those serving the penalty of civil interdiction. 2. Those judicially declared insolvent. 3. Those who are absolutely disqualified under special laws. Relative Disqualifications
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1. Certain government officials, such as judicial officers, prosecutors, department heads, collectors, and custodian of government funds. 2. Commercial and money brokers. 3. Members of Congress. 4. Those under relative disqualification under special laws. 5. President, V. Presidents, members of Cabinet and their deputies and assistants. 6. Member of Constitutional Commissions 7. President, V. President, Members of Cabinet, Congress, Supreme Court, Constitutional Commission, and the Ombudsman with respect to any loan, guaranty, or other form of financial accommodation for any business purpose by any government-owned or controlled bank to them. Absolute Incapacity 1) Incapacity applies throughout the Philippines 2) Effect of Incapacity: Act is null and void. Relative Incapacity Extends to the territory where the officer is exercising his functions Effect of Incapacity: Subjects violator to disciplinary action or punishment.
What are COMMERCIAL CONTRACTS? These are contracts entered into by merchants in the pursuit of their activities as merchants, involving articles of commerce, or those defined as such contract by certain special commercial laws. What are the GOVERNING Laws? Primarily, the Code of Commerce and in a suppletory manner, the New Civil Code. RULE IN CASE OF INCONSISTENCY BETWEEN THE LAWS: The NCC prevails over the Code of Commerce. EXCEPTION: If the contract (such as loans on bottomry and respondentia) is explicitly governed by the Code of Commerce, the same shall be applied. How are Commercial Contracts perfected? General Rule: Commercial Contracts are consensual as to perfection. Exception: When the Code of Commerce require specific forms, such as charter parties and loans on bottomry and respondentia. When shall contracts by correspondence be deemed PERFECTED? Contracts shall be perfected the moment an answer is made accepting the offer or the conditions by which the latter may be modified. This kind of perfection is called the MANIFESTATION THEORY under Art. 54 if the Code of Commerce. On the other hand, the New Civil Code follows the COGNITION THEORY which provides for acceptance to effectively bind the offeror only from the time it came to his knowledge. As regards to which theory governs, there are two conflicting views. One view calls for the Civil Code to supercede Art. 54. The other view provides for the applicability Art. 54 since implied repeals are not favored. What is a JOINT ACCOUNT? A Joint Account is a transaction between or among merchants where said merchants agree to contribute an agreed amount of capital, and participate in the favorable or unfavorable results thereof in the proportion they may undermine.
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Joint Account 1) No firm name 2) No common fund 3) No juridical personality 4) Only ostensible partner liable to third persons 5) Only ostensible partner manages Partnership Has a firm name Has common fund Has juridical personality All general partners liable to third persons All general partners manage
6) Liquidation done by ostensible Liquidation entrusted to any partner/s partner What are LETTERS OF CREDIT? Those issued by one merchant to another for the purpose of attending to a commercial transaction. Kinds: Common Letter of Creditan instrument by which a bank, for the account of a buyer of merchandise, gives formal evidence to a seller, of its willingness to permit the seller to draw bills against it, and stipulates in legal form that all such bills will be honored. Travelers Letter of Credita letter from a bank addressed to its correspondents stating that drafts up to a certain sum drawn by the beneficiary will be honored by the bank. Essential Conditions: 1.) Issued in favor of a definite person and not to order; and 2.) Amount is fixed and specified. Duration: 1.) Upon a period fixed by the parties; 2.) If none is fixed, 6 months from its date if used in the Philippines or 1 year if used abroad. LETTER OF CREDIT (Art. 567-572 Code of Commerce) LETTER OF CREDIT Letter of credit an arrangement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance w/ the conditions specified in the credit. Internationally accepted definition of a LC as provided in the Uniform Customs and Practices for Documentary Credit (UCPDC): Letter of Credit any arrangement, however named or described, whereby a bank also known as the issuing bank, acting upon the request or instruction of another(applicant or customer) or on its own behalf, binds itself to: 1. Pay to the order of a 3rd person known as beneficiary OR 2. Accepts and pay any draft that may be drawn by the beneficiary, OR 3. Authorize another bank to: Pay to the order of a 3rd person known as the beneficiary. Accept and pay any draft by the beneficiary, OR
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4. Authorize another bank to negotiate against the stipulated documents. Note: We are bound by the UCPDC issued by the International Chamber of Commerce. Sec. 2 of the Code of Commerce states that in the absence of any particular provision in the code of Commerce, commercial transactions shall be governed by the usages and customs generally observed (BPI vs. Nery). A Letter of Credit is a special contract designed to answer two concerns: Sellers refusal to part with his goods before being paid coupled with the Buyers want of ownership over the goods before paying. Note: The opening of a LC does not involve specific appropriation of money in favor of the beneficiary. The correspondent bank does not receive in advance the money form the buyer or issuing bank but pays the amount out of its own funds and then later on seek reimbursement from the issuing bank. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. Note: An LC is not a negotiable instrument. It does Not conform w/ Section 1 of the Negotiable Instruments Law. This is because it does not contain an unconditional promise to pay a sum certain in money. The LC is conditioned to the submission of certain documents. Moreover, the LC is issued in favor of a definite person and not to order. Therefore, it also lacks the words of negotiability required. LC is conditioned on 1. Submission of stipulated documents 2. Compliance with the terms of the LC Is LC a commercial transaction? YES. Because it is governed by the Code of Commerce. PARTIES TO THE TRANSACTION: Basic parties to a letter of credit: 1. Applicant/buyer/importer the one who procures the letter of credit and obliges himself to reimburse the Issuing Bank (IB) upon the receipt of the documents of title. He is the party who initiates the operation of the Letter of Credit transaction as the buyer of the merchandise and also of the credit instrument. 2. Issuing Bank is usually the buyers bank; it issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents to the buyer upon reimbursement. 3. Seller/beneficiary is the one who in compliance w/ the contract of sale ships the goods to the buyer and delivers the documents of title and drafts to the issuing bank to recover payment. He is the beneficiary of the instrument because the instrument is addressed to him and in his favor. Additional party/parties to the LC: 4. Correspondent Bank TYPES OF CORRESPONDENT BANK:
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1. Advising/Notifying Bank does not have any contractual relations w/ the buyer but merely serves as an agent of the issuing bank. Its only responsibility is to transmit the LC. Thus, it could validly refuse to negotiate or accept, even if the seller tenders all the documents required under the LC and it does not become liable as the beneficiary has no cause of action against the bank. 2. Confirming Bank lends credence to the LC issued by a lesser known bank. It assumes direct obligation to the seller/beneficiary and becomes principally liable. A notifying bank, who also assumes the role of a negotiating bank does not include assuming the role of a confirming bank and is therefore not liable to the beneficiary. To be liable, there must be an absolute assurance that it will undertake the issuing banks obligation as its own. If it does confirm, the beneficiary become entitled to proceed against either or both banks in case of breach. 3. Paying Bank the bank w/c pays the beneficiary. It may either be the opening/issuing bank or any other bank in the place of the beneficiary. 4. Negotiating Bank any bank in the place of the beneficiary w/c buys or discounts the sellers draft. Its liability depends on the stage of negotiation. If BEFORE negotiation, such that it suggests its willingness to negotiate, it has no liability w/ respect to the seller. But if AFTER negotiation, a contractual relationship will then prevail between them. Note: A bank does not become a negotiating bank unless he pays the draft and becomes the holder of said document. As such, the IB may notify the seller of the opening of the LC either directly or through a correspondent bank, w/c may either be a mere advising bank or a Confirming Bank. Note: The IB has the option to tap a correspondent bank or not. The liability of a Correspondent Bank depends on what kind of function it plays in the LC transaction. RELATIONSHIP OF THE PARTIES is governed by1. Issuing bank and applicant the relationship is governed by the terms of the application and agreement for the issuance of the LC by the bank. 2. Issuing bank and the Beneficiary the relationship is governed by the terms of the LC issued by the bank 3. Applicant and beneficiary the relationship is governed by the contract they entered into. ex. Sales INDEPENDENCE PRINCIPLEThe bank in determining compliance with the terms of the LC is required only to examine the shipping document presented by the seller and is precluded from determining whether the main contract is accomplished or not DOCTRINE OF STRICT COMPLIANCEThe document tendered by the seller must strictly conform to the terms of the LC . The correspondent bank which departs from what has been stipulated under the LC, as when it accepts a faulty tender , acts on his own risk and may not thereafter recover from the buyer or issuing bank , the money paid to the benefic
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In short, the documents presented must comply w/ those stipulated on. In a LC, the banks only deals w/ documents and not w/ goods. Can a breach of contract be invoked against the Issuing Bank? NO. Because if all the documents stipulated have been submitted and the IB finds that they conform w/t the LC requires, then the IB must pay the seller. In a LC transaction the banks deal only w/ documents not goods, so banks pays if the documents are OK and gets reimbursed by the buyer. This relationship is independent so if ever the goods are in bad condition, the applicant still pays the bank. Note: A loan transaction may give rise to LC. An LC does not arise only because of sale or importation. Example: Standby LC. Standby Letter of Credit (SLC) it is a bank issued option on loan involving 3 parties: the bank issuing the credit, the party requesting for such issuance (otherwise known as the account party) and the beneficiary. Under the terms of a SLC, the beneficiary has the right to trigger the loan option (referred to as TAKING DOWN THE LOAN) if the account party fails to meet its commitment, in w/c case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. SLCs may support non-financial obligations such as those of bidders, or financial obligations such as those of borrowers. In the latter case, the borrower purchases an SLC and names the lender as beneficiary. Should the borrower default, the beneficiary has the right to take down the SLC and receive the principal balance from the issuing bank. The borrowers loan obligation is then passed to the bank. When the Notifying Bank (NB) may be held liable: The NB is liable if: 1. It did not notify the seller of the opening of the LC, or 2. It did not determine the apparent authenticity of the required documents. Note: Only the APPARENT AUTHENTICITY is to be determined. The NB does not warrant the authenticity of the LC but only its apparent authenticity. So if the LC turns out to be spurious, NB is not liable for damages unless obvious that it is not authentic. Therefore, Notifying Bank/Advising Bank is liable if it acts beyond the scope of its authority. When may the Advising Bank (AB) be equally liable with the Issuing Bank (IB)? Ordinarily, an AB, whose obligation is merely to advise the seller/beneficiary of the opening of a LC has no liability. The opening of a LC does not make the IB liable at once because there is no liability. The liability is conditioned and dependent on the tender or submission of the documents stipulated upon by the parties. If the beneficiary requires that the obligation of the IB shall also be made the obligation of the AB to him, there is what is known as a CONFIRMED COMMERCIAL CREDIT and the AB shall become a Confirming Bank. In this situation, the liability of the CB is primary and it is as if the credit were issued by the IB and the CB jointly, thus giving the beneficiary or holder for value of the drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. The CB is liable only when the documents are submitted and gets reimbursed by the IB because there is no privity of contract with the applicant.
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Thus, an AB becomes a CB when the above mentioned conditions occur. In such a case, the CB acquires the same liabilities as the Issuing Bank and is bound by the same conditions as an IB. Function of a Negotiating Bank (NB): It accepts or gives value to the draft and w/c later on sells the draft to the IB. The IB then reimburses the NB. What happens is that the NB buys the draft at a discounted price and then sells it to the IB for its face value. If LC is disowned by the IB, can the Negotiating Bank ask reimbursement from the seller? Under what principle? YES. Seller is a drawer of the draft accepted and paid by the Negotiating Bank. Therefore, the seller has contingent liability on such draft. Can a Confirming Bank become a Notifying Bank? NEVER, because they have different liabilities. The CBs liability is primary while the NBs liability comes only after negotiation (Before negotiation, there is no liability). It is the application for the opening of a LC w/c governs the relationship between the buyer and the IB. This implies that the buyer/applicant is not concerned w/ the terms of the LC between the IB and the seller/beneficiary. As to the IB, it is not a guarantor because its liability is not subsidiary since the condition of the submission of the document is determinative of the liability not the nonpayment of the buyer. The IB opens a LC for a consideration w/c comes in the form of a commission. If the IB does not advance the payment in favor of the seller/beneficiary, may the buyer/applicant recover the commission paid? No More because this is the consideration. But he may recover the margin fee. What among other things, should be stipulated upon the application for a LC? The documents w/c the seller should submit to the IB. In LC transactions, the IB deals only w/ the documents, not w/ goods. The IB is not bound or required to examine the goods. For as long as the required documents are submitted by the seller, the IB pays the seller. If the goods turned out to be defective, is this a valid defense to avoid payment by the IB to the seller? NO. As long as the documents submitted by the seller are complete and in conformity w/ what the LC requires, the IB is bound to pay the seller. This is true even if the goods turned out to be defective.
How about the buyer, is he still bound to reimburse the IB despite the defective goods received by him? YES. The buyer has no course of action against the IB. The buyer has a COA against the seller. If the documents submitted by the seller are incomplete and the IB still pays the seller, is the buyer still bound to pay the IB? NO. Because the IB should not have paid the seller knowing the documents to be incomplete. The IB deals only w/ documents.
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Can the beneficiary demand payment form the CB? YES. Since the CB is equally liable w/ the IB. If the beneficiary proceeds against the CB, the CB may ask reimbursement from the IB. But if the beneficiary proceeds directly against the CB; it has no right to collect from the IB. The beneficiary may compel the CB to accept drafts it has drawn. How is payment made by the Issuing Bank? Payment by the IB is done through: 1. Direct payment or wire transfer or credit in the account of the beneficiary 2. Drawing of a draft by the beneficiary against the IB pay to my order 3. IB may authorize the Confirming Bank to pay 4. Authorize Correspondent Bank to accept and pay any draft drawn 5. Authorize the negotiation of any draft drawn by the beneficiary. Note: If the drawee doesnt pay, go to the drawer who is secondarily liable. Apart form the bill of lading, what additional documents may be needed as a condition of the LC for honoring a draft? 1. Commercial invoice it is a document signed and issued by the seller and contains a precise description of the merchandise and the terms of the sale such as unit prices, amount due form the buyer and shipping conditions related to charges such as FOB (Free on Board), FAS (Free Alongside), C and F (Cost and Freight) or CIF (Cost, Insurance, Freight). 2. Consular invoice document issued by the consulate of the importing country to provide customs information and statistics for that country and to help prevent false declaration of value. 3. Certificate of analysis may be required to ascertain that certain specifications of weight, purity, sanitation, etc., have been met. These specifications may be required by health or other officials of the importing country, or they may be insisted by the importer as assurance that it is receiving what it ordered. 4. Export declaration it is a document prepared by the exporter to assist the government to prepare export statistics. Note: Documents to be passed are not unilaterally determined by the bank but agreed upon by the buyer and seller. Document of Title (Bill of Lading) given to the seller upon shipment of goods. This is to be given to the IB to be able for the seller to get payment. Is there a scheme where the IB may release the documents of title to the buyer w/o being reimbursed first by the buyer? YES. By the IB letting the buyer execute a trust receipt. Failure of the buyer to open the Letter of Contract does not prevent the birth of the Sales Contract. The opening of the letter of credit is only a mode of payment. The letter of the credit is not an essential requisite to the contract of sale.
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BULK SALES LAW (Act. No. 3952) Purpose: To prevent fraudulent transfer of goods in bulk the merchant to the prejudice of the merchants creditors. What are to be deemed to be sales and transfers in bulk under the Bulk Sales Law (BSL)? A sale and transfer in bulk under the BSL is ANY SALE, TRANSFER, MORTGAGE OR ASSIGNMENT: Of a stock of goods, wares, merchandise, provisions or materials OTHERWISE than in the ordinary course of trade and the regular prosecution of business(this could be determined by delving into the by laws or articles of incorporation or the business clause); or Of ALL OR SUBSTANITALLY ALL, of the business or trade; or Of ALL OR SUBSTANTIALLY ALL, of the fixtures and equipment used in the business of the vendor, mortgagor, transferor, or assignor. When are sales or transfers in bulk not covered by the BSL? The BSL does not apply to the following: 1. If the sale or transfer is in the ordinary course of trade and in the regular prosecution of business. 2. Sale of NOT all or substantially all of the business of the vendor. 3. A sale in bulk but w/ written waiver of the provisions of the BSL from all the sellers creditors. 4. A sale in bulk by virtue of a judicial order (by an executor, administrator, receiver, assignee in insolvency, or public officer, acting under judicial process). 5. Sale of properties exempt from attachment or execution. 6. If it refers to a sale made in a partnership partner to partner. 7. If it refers to a sale made by a manufacturer. 8. If it refers to a sale of foundry shop. 9. Sale made by a service company (not included in BSL because service is not a good). (BAR: Sale of assets/fixtures of a car repair shop? The fixtures sold is only incidental to the sale of the car repair shop). Foundry shop manufactures iron works or processes or casts metals. It does not sell merchandise (People vs. Wong Szu Tung). Substantially all that w/c would cripple the business to further its activities or operations. When is a sale considered sale of all or substantially all? The Bulk Sales Law is silent to this point; however the Corporation Code provides that the phrase pertains to the sale of assets such that the result of w/c is that the corporation cannot anymore continue w/ its business. The question here is not as to the quantity of the properties sold but whether or not the business could still continue w/ its operation after the sale. Requirements for the seller to comply with for purposes of the Bulk Sales Law: a) Merchant-seller must execute an affidavit listing: Names of all the creditors Amounts owed to all the creditors. Prepare an inventory of stocks, equipment, fixtures to be sold;
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b) Affidavit notifying the creditors of the sale/mortgage 10 days in advance; and c) Both documents must be submitted to the Department of Trade and Industry. The proceeds of the sale or mortgage must be applied to pro rata payment of the creditors claim, failure to do so will render the sale or mortgage fraudulent and therefore void and will subject the offender to criminal liability. NON COMPLIANCE WITH THE BSL effect1. Buyer and Seller Sale /Mortgage is fraudulent and therefore void 2. Rights of a purchaser Can recover amount paid plus damages 3. Purchaser & Sellers Creditor The purchaser holds the property in favor of the sellers creditor The purchaser of properties sold in violation of the BSL holds the properties in trust for the sellers creditors and also , is liable to the sellers creditor for properties forming part of the bulk which was already disposed by him. His recourse is to go after the seller for the return of the payment made for the purchase of the properties and damages. If the purchaser subsequently sold the property to a buyer in good faith and for value , he then hold the proceeds of the sale in favor of the sellers creditors. In this case , the good faith is material on the creditors right to recover the property . But the rule is not the same with regards to the 1 st sale. BSP is penal in nature and it carries with it imprisonment of not less than 6 moths not more than 5 years or fine not exceeding P5000 or both, in the discretion of the court. WAREHOUSE RECEIPTS LAW (Act No. 2137) PURPOSE of the WRL To prescribe the rights and duties of a warehouseman and to regulate the relationship between a warehouseman and the depositor of goods, or the holder of a warehouse receipt for the goods, or other persons. Warehouse receipt 1. It is a written acknowledgement by a warehouseman that he has received certain goods in his warehouse and that he holds the same in trust for the person to whom the document is issued or for any person lawfully entitled to such goods. 2. It is an evidence of title to the property in storage 3. Serves both as an acknowledgement of the receipt of goods and as a contract as between the parties where their rights and obligations are stipulated therein. Warehouse Receipts Law Covers both bonded and unbonded warehouses. General Bonded Warehouse Law (Act No. 3839) Covers only bonded warehouses.
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As differentiated from DOCUMENTS OF TITLE under the Civil Code, Documents of Title cover documents of bailment OTHER THAN warehouse receipts. Warehouseman a person (natural or juridical) lawfully engaged in the business of storing goods for profit. If the person other than a warehouseman as defined by law is the one who issued the WR, then forget applying the WRL. Will WRL apply if a document is issued in accordance w/ the form prescribed by law but not issued by a warehouseman? NO. The law applicable in that case is the law on deposit under the CC. Does WRL supercede the CC provisions on documents of title? NO. In fact there is no inconsistency between the 2. The CC provisions on documents of title covers documents of title OTHER THAN WR. WRL being a specific law covers WR exclusively. Is a WR considered a negotiable instrument? Give their distinctions. NO. A WR even if negotiable is a non-negotiable instrument w/in the meaning of the Negotiable Instruments Law WR 1. Does not contain an unconditional promise to pay a sum certain in money. 2. The subject is merchandise. 3. WR itself is not the object of value. 4. Intermediate parties are not liable for the warehousemans failure to deliver the goods. NEGOTIABLE INSTRUMENT 1. Contain an unconditional promise to pay a sum certain in money. 2. Subject is money. 3. The NI is the object of value. 4. Intermediate parties become secondarily liable.
Is the concept of a holder in due course applicable in WR? NO. Since it is not a negotiable instrument. Who may issue a WR? 1. By a warehouseman, whether public or private, bonded or not. 2. A person authorized by a warehouseman. What are the CONTENTS the receipt? Essential Termsthe following stipulations MUST BE PRESENT in the Warehouse Receipt: a 1.) Location of the Warehouse; b 2.) Date the Receipt was issued; c 3.) Number of the receipt; d 4.) Statement whether instrument is deliverable to bearer to a specified person or his order; e 5.) Storage charges; f 6.) Description of the stored goods; g 7.) Signature of the warehouseman or his agent; h 8.) Fact of the warehousemans ownership over the goods if any; and i 9.) Statements of advances made and liabilities incurred by the depositor for which the lien was constituted. Effect of failure to include any of the above terms? It will not affect the validity of the WR but the warehouseman shall be liable to any person injured by such omission. What are the terms that cannot be included:
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1. Terms contrary to the Warehouse Receipts Law 2. Terms reducing the degree of diligence imposed by law on the warehouseman 3. Terms that are against public policy What is the degree of care required of a warehouseman in the safekeeping of the goods entrusted to him? ORDINARY DILIGENCE 2 kinds of a warehouse receipt: 1. Negotiable receipt it is expressly stated that the goods are deliverable to bearer or to the order of a person specified therein. 2. Non-negotiable receipt it is stated that the goods received will be delivered to the depositor or to any specified person. It should be stamped on its face NON-NEGOTIABLE. Note: A holder of a non-negotiable receipt not stamped non-negotiable believing it to be negotiable may treat the receipt as negotiable. When is WR negotiable? Sec. 5. A WR is negotiable when the goods are deliverable to: 1. A specified person or to his order; or to the order of a specified person 2. Bearer How is the negotiable WR negotiated? 1. If deliverable to bearer either by mere delivery or blank indorsement plus delivery 2. If deliverable to order by proper indorsement plus delivery of the receipt What if deliverable to order but it was transferred only by delivery w/o any indorsement. Who will then hold a better title between the owner of the goods and the innocent purchaser for value? The owner-depositor. The Innocent purchaser for value never acquired the negotiable title of the WR. He has however the right to compel the assignor to make the proper indorsement. If WR is negotiable, what is the effect if the words non-negotiable are inserted in the WR? Such insertion is void and the receipt remains negotiable. Rights of a person to whom a negotiable receipt has been negotiated? A. IF INDORSED: 1. Acquires title to the goods as the person negotiating the receipt has or had ability to convey to a purchaser in good faith and for value. 2. Acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman directly contracted w/ him (Sec. 41). B. IF NOT INDORSED: He may compel indorsement, OTHERWISE, he would only acquire title as that of an
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Advantages of a negotiable WR? 1. It can easily pass form one person to another 2. It protects a purchaser in good faith and for value 3. The goods conveyed by it cannot be attached or levied upon in execution UNLESS the receipt is surrendered or its negotiation enjoined, or impounded by the court 4. If properly negotiated, the holder acquires the direct obligation of the warehouseman to hold possession, w/o need of giving notice to the warehouseman, of the goods for him 5. The goods covered by the receipt cannot be defeated by the sellers lien on or the right to stop the goods in transitu. Sec. 44: Warranties of an indorser: 1. That the receipt is genuine 2. That he has legal right to negotiate or transfer 3. That he has no knowledge of any fact w/c would impair the validity of the receipt and 4. That he has the right to transfer the title of the goods 5. That the goods are merchantable. Is the rule stated in Sec. 45 (that the indorser is not a guarantor) absolute? NO. This only means that he is not liable for any failure on the part of the warehouseman or prior indorsers to fulfill their respective obligations. HOWEVER, he could still be held liable if he violated or breached any of the warranties provided in Sec. 44. Non-negotiable WR when it is indicated therein that the goods received will be delivered to the depositor or to any other specified person. If the WR is non-negotiable, the warehouseman has the duty to indicate to indicate on its face of such fact. Effect of his failure to do so? The holder through subsequent negotiation or the present holder (not the original holder) can treat it as negotiable PROVIDED: 1. He purchased the WR for value 2. He supposed it to be negotiable. In this case, said holder may treat the receipt as his option, the receipt as imposing upon the warehouseman the same liabilities as the warehouseman would have incurred had the receipt been negotiable. Such right is ONLY enforceable against the warehouseman (Roman vs. Asia Banking Corporation-46 Phil705). Rights of a person to whom a non-negotiable WR has been issued? 1. He acquires the title subject to the terms of the deed of transfer 2. To inform the warehouseman of such transfer and thereafter acquires the obligation of the warehouseman to hold possession of the goods for him. Note: Prior to the notification to the warehouseman, the title of the transferee to the goods and the right to acquire the direct obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by the creditor of the transferor. Negotiable WR over Non-negotiable WR RIGHTS ACQUIRED BY PERSON RIGHTS ACQUIRED BY A PERSON HOLDING A NEGOTIABLE WR HOLDING A NON-NEGOTIABLE WR
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1.. IF INDORSED: 1. He acquires the title subject to the a) Acquires title to the goods as the terms of the deed of transfer person negotiating the receipt has or had ability to convey to a purchaser in good faith and for value. b) Acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman directly contracted w/ him (Sec. 41). 2. IF NOT INDORSED: He may compel indorsement; OTHERWISE, he would only acquire title as that of an assignee (Sec. 42). 2. To inform the warehouseman of such transfer and thereafter acquires the obligation of the warehouseman to hold possession of the goods for him.
ADVANTAGES OF NEGOTIABLE WR OVER NON-NEGOTIANLE WR NEGOTIABLE WR 1. The goods covered under this cannot be garnished/attached or levied on execution UNLESS: 1. Receipt is surrender 2. Its negotiation is enjoined by the court or 3. The goods are impounded by the court. NON-NEGOTIABLE WR The rights if the transferee can be defeated by a judgment creditor pending notification to the warehouseman of the fact of transfer (Assignee still need to notify the warehouseman).
Note: The sheriff cannot compel the warehouseman to attach the property deposited even if armed with a court order. 2.If properly negotiated, the holder 2. Acquires the direct obligation in his acquires the direct obligation of the favor only after notifying the warehouseman to hold possession, w/o warehouseman. need of giving notice to the warehouseman, of the goods for him 3. The goods covered by the receipt 3. Acquires the title as that of his cannot be defeated by: transferor. a) creditors/sellers lien or b) The right to stop the goods in transitu.
What are the OBLIGATIONS, DUTIES, AND RIGHTS of the Warehouseman? A) OBLIGATIONS AND DUTIES To deliver the goods.
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WHEN? The warehouseman is obliged to deliver the goods when demand to deliver is accompanied by any of the following: a) An offer to satisfy warehousemans lien; b) An offer to surrender the receipt, if negotiable, together with the proper indorsements; and c) A readiness and willingness to sign an acknowledgement receipt when requested by the warehouseman. TO WHOM? a) To the person in lawful title over the goods; b) To specified name or his agent in a non-negotiable instrument; c) To the lawful order of a negotiable receipt. When is the refusal to deliver the goods by the warehouseman justified ? 1. If he had been requested by a person lawfully entitled to a right of property or possession in the goods not to make delivery to any person. 2. If he had information that the delivery to be made was not the one lawfully entitled to the possession of the goods. 3. If several persons claim the goods. 4. If the warehouseman needs reasonable time to ascertain the validity of the claim if someone other than the depositor claims title to the goods. 5. If the goods are lost, despite ordinary care by the warehouseman. 6. If the warehousemans LIEN IS NOT SATISFIED BY THE CLAIMANTS. 7. If the goods are sold to satisfy the warehousemans lien or because of their perishable or hazardous nature. Note: The warehouseman cannot refuse to deliver the goods on the ground that he is the owner of the said goods UNLESS his title over the goods is derived: 1. Directly or indirectly from the transfer made by the depositor at the time of the deposit or subsequent thereto. 2. From the warehousemans lien. In the event the goods are subject to several claimants, the warehouseman may do the following: a) Refrain delivery until warehouseman ascertains the true ownership over the goods; b) Require claimants to file interpleader action to determine ownership over the goods. Attachment or execution over the goods may prosper only upon surrender of negotiable receipt or its negotiation refrained. Could the warehouseman commingle the goods? General rule: NO. Sec. 22. Exception: Yes, if the goods are: 1. Fungible and of the same kind and grade and 2. There is an agreement (either by stipulation or custom) that commingling is allowed. Note: Both requisites must concur. Note: The rule is different on Law on Deposit. It provides that fungible goods of the same kind and quality may be co-mingled UNLESS otherwise stipulated. So the rule on Law on Deposit is: Gen. Rule: Co-mingling of fungible goods of same kind and quality is allowed. Exception: If there is a stipulation to the contrary.
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Rules in the alteration of the WR (Note that the rule is different under the NIL): The effects are: 1. If the alteration is IMMATERIAL, whether fraudulent or not, authorized or not, the warehouseman is liable according to the original tenor of the WR. 2. If the alteration is MATERIAL BUT AUTHORIZED, the warehouseman is liable to the terms as altered. 3. If the alteration is MATERIAL BUT UNAUTHORIZED W/O FRAUDULENT INTENT, the warehouseman is liable according to the original tenor. 4. If the alteration is MATERIAL BUT UNAUTHORIZED AND W/ FRAUDULENT INTENT, the warehouseman is liable according to the original tenor. (This rule does not relieve him to deliver the goods, only w/ regard to his liability). Note: But as to the purchaser in good faith and for value, the warehouseman is liable as if the receipt was not altered at the time of the purchase. B. RIGHTS To be paid. Extent of the LIEN of the goods to be deposited. a) Storage charges; b) Claims for money advanced; and c) Reasonable charges for sales advertisement over the goods. AGAINST whose goods is the lien enforceable? a) Debtors goods; and b) Goods belonging to other persons but entrusted to the debtor How is the lien ENFORCEABLE? The lien is enforceable by sale at public auction, upon proper notice and publication, in such quantities as to satisfy the lien. How is the lien LOST? a) By surrendering possession thereof; b) By refusing delivery of the goods when demanded. Note: If the lien is lost, it does not mean that the warehouseman does not have anymore any remedy. He could still exercise other remedies as may be provided by law like an action for collection. TRUST RECEIPTS LAW (P.D. No. 115) What is a TRUST RECEIPT? A Trust Receipt is a document executed between bank and buyer whereby the goods are released to the buyer . In turn, the buyer binds himself to hold the goods in trust, or to sell or dispose the goods . Buyer is obligated to turn over the proceeds to the Bank to the extent of the buyers obligation to him, or if unsold, to return the goods. Purposes of the Trust Receipts Law: 1. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade. 2. To regulate trust receipt transactions in order to ensure the protection of the rights and the enforcement of the obligations of the parties involved therein.
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3. To declare the misuse and/or misappropriation of goods or the proceeds realized form the sale of goods, documents, or instruments released under trust receipts as a criminal offense punishable under Art. 315 of the RPC (i.e., swindling, estafa). The TRL being a special law, criminal intent is not necessary. The good faith or bad faith of the entrustee is immaterial. The mere failure of the entrustee to deliver the proceeds of the goods or return the goods to the entruster if unsold would give rise to his criminal liability. Nature and usage of trust receipts: Under the set-up, a bank extends loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the TR transaction has 2 features: 1. LOAN FEATURE represented by the Letter of Credit, and a 2. SECURITY FEATURE w/c is in the covering trust receipt (Vintola vs. Insular Bank of America). Note: The bargaining power of the bank is stronger through the TR because of the criminal liability that may attach because of the some breach of the obligations of the entrustor in the TRA. Entruster the person holding title over the goods, documents, instruments, subject of a trust receipt transaction, and any successor in interest of such person. Entrustee the person having or taking possession of goods. Documents or instruments subject of a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust agreement. What are the rights and obligations between the parties? BUYER receives the goods under a trust receipt issued by the BANK in favor of said buyer. The bank financed the whole transaction. The Buyer is obligated to return the proceeds from the sale of the goods until the full amount advanced by the bank is paid. In event of non-sale, buyer is obligated to return the goods to the Bank. The Bank is also known as the ENTRUSTOR. The entrustor of a trust receipt is not the owner of the goods , as the entrustor-bank merely holds security title. If the trust receipt vests title to the entrustor-bank, the act is an artificial expedient, more fiction than fact. Consequently, the buyers return of the goods to entrustor-bank does not relieve the buyer from his obligation to pay the bank. Imprisonment for non-payment of the buyer does not contravene the Constitutional provision guaranteeing freedom from imprisonment due to nonpayment of debt. Imprisonment for violating the Trust Receipt Law is allowed because it is violation is malum prohibitum. What is penalized is the dishonesty in failing to comply w/ the entrustees obligation such that it constitutes a breach of trust. PD 115 is a valid excuse of the police power of the State (People vs. Nifatan). Intent here is immaterial. Can there be a verbal TR agreement? NO (Sec. 5 PD 115). Although there is no particular form required, by implication, it should be in writing (but need not be notarized, done under oath) as it is required that the following terms be indicated:
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1. 2. Description of goods subject of TR. Total invoice value of the goods and amount of draft to be paid by the entrustee. 3. Undertaking or commitment of entrustee. Note: The TR may contain other terms and conditions provided it they are not contrary to law. RIGHTS OF THE ENTRUSTER1. To receive the proceeds of the sale of the goods, document or instruments released under a TR to the extent of the amount owing to the entruster. 2. To the return of the goods document or instruments release under TR , in case it could not be sold. 3. To cancel the trust in case the entrustee defaults and take possession of the goods document or instruments ,to sell the same in a private /public sale. OBLIGATION OF THE ENTRUSTEE 1. To hold the goods , document or instruments in trust for the entruster and dispose the same strictly in accordance with the terms of the TR 2. To receive the proceeds of the sale in trust for the entruster to the extent of the amount owing to the entruster 3. To insure the goods , document or instruments for their total value against loss , pilferage and other casualties. 4. To keep the goods , document or instruments , or the proceeds thereof , whether in money or other form , separate and capable of identification as property of the entruster. 5. To return the goods, documents or instrument in case they could not be sold. The entruster in a TR agreement is not the owner of the goods but merely a holder of a security title over the goods, document or instruments. The entrustee merchant is the owner of the goods document or instruments and its return does not extinguish its obligation to pay for the money borrowed. The surrender would only extinguish the criminal liability under the TR law , but not the civil liability. The entrustee being the owner of the goods, document or instrument bears the risk of loss. Loss of the subject matter of the TR , pending their disposition regardless of w/not it was due to fault or negligence of the entrustee shall not extinguish his obligation under the TR for the value thereof. DEFENSES OF AN ENTRUSTEEE1. Non delivery of goods 2. The transaction is not a TR within the meaning of PD 115 ex. Loan (Colinares vs.CA) 3. Entruster cancels the TR , and take possession of the goods PROVIDED that the goods are eventually sold and proceeds applied to the obligation OTHERWISE , the liability is not extinguished. 4. Entrustee fulfilled the obligation by returning the proceeds of the sale of the goods / surrendering the goods if unsold.
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5. LOSS of goods: Civil liability is not extinguished Criminal liability may or may not be extinguished by loss : If loss thru fraud not extinguished If loss in good faith not extinguished 6. Novation which result to the conversion of trust receipt transaction to loan (PILIPINAS BANK vs. ONG). 7. Compromise If the compromise was made before the case is filed in court. Can the TR be denominated in foreign currency? Yes. Sec. 6 of TRL allows it. Also allowed under RA 8183(allows parties to stipulate as to what currency is to be used). Is there a possibility that the stipulated currency in peso but still the denomination is still in foreign currency? YES. Mexican peso. Should payment be made in peso or in the currency agreed upon? If w/stipulation as to the currency pay in that currency. If w/ no stipulation payment can be made in peso at the prevailing exchange rate at the time of payment. Between the creditors of entrustee and entrustrer, who has a better right over the goods under the TR? The entruster (Sec. 12). His security liens extend to the goods in the duration of the TRA. Prudential Bank vs. NLRC (Sec. 110 of the Labor Code was not yet effective that time). Which shall prevail Sec. 110 of the Labor Code or Sec. 12 of the TRL? Sec. 110 of the LC applies only when there is insolvency proceeding or if the proceeding is in rem (settlement of estate, dissolution) w/c would cause adjudication of all claims of the creditors. Who can defeat the right of the entruster over the goods subject to the TRA? An Innocent purchaser for value. IPFV has a better right than the entruster. If ownership over the goods is already transferred to the applicant before he signed the TR agreement, then the transaction is merely a loan (Colinares vs. CA). Sec. 7 par. 2. Entrustee is liable for the deficiency. However, any excess shall go to him. What is the penalty for the breach of the entrustee? Under the TRL, the failure of the entrustee to surrender the goods held in trust, or to account for the proceeds of the sales thereof to the entrustor, is estafa. This can make the entrustee liable under both the TRL and the RPC. He is also liable to pay damages under Art. 33 of the Civil Code (Prudential Bank vs. IAC). Not all the obligations enumerated in Sec. 9 will result in criminal liability upon breach of such obligation but it is merely limited to the following: 1. Failure to return the proceeds of the sale to the extent owing to the entrustor or 2. Failure to return the goods if not sold.
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Note: The failure to give the proceeds or return the goods is the gravamen of estafa under the TRL. NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) Negotiable Instruments are meant to be substitutes for money and increase the purchasing media in circulation. DISTINCTIVE FEATURES OF N.I. 1. Negotiability 2. Accumulation of Secondary Contracts as they are transferred from one person to another, as to allow a transferee to have better title than the transferor LEGAL TENDER is that kind of money which the law compels the creditor to accept in payment of his debt. Although a NI is intended to be a substitute for money; it is not generally legal tender (cf. Sec. 60, New Central Bank Act). Hence, a creditor cannot be compelled to accept commercial papers like a check; no matter how good such instrument is, because it does not meet the requirements of legal tender. Negotiable instruments produce the effect of payment only when they have been encashed or through the fault of the creditor have been impaired. (Article 1249, NCC) BASIC DISTINCTIONS Negotiable Instruments Must contain all requisites of Sec. 1 Transferable by negotiation or assignment Holder in due course can have rights better than transferor Prior parties warrant payment (secondary liability) Negotiable Instruments 1. The subject itself is money 2. NI is itself the property with value Non-negotiable Instruments Does not contain all requisites of Sec. 1 Transferable only by assignment Transferee acquires no better right than transferor Prior parties do not warrant payment but merely legality of title Negotiable Documents of Title 1. The subject is goods 2. Document is mere evidence of title. The things of value being the goods mentioned therein. Negotiable Warehouse Receipt 1. If payable to bearer, it will be converted into a receipt payable to order if indorsed specifically 2. Indorsee, even if HIDC, obtains only such title as the person who caused the deposit had over the goods. Negotiation 1. Only negotiable instruments may be negotiated
Negotiable Instrument 1. If originally payable to bearer, it will always remain so regardless of manner of indorsement 2. A HIDC may obtain title better than the one who negotiated the instrument to him Assignment 1. All instruments can be assigned
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2. Assignee is subject to all defenses 2. Good Faith holder is free from personal available against the assignor defenses available among the parties 3. Governed by the NIL 3. Governed by the New Civil Code (Articles 1624-1635) THREE CLASSES OF NI 1. Promissory Note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) 2. Bill of Exchangeis an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) 3. Checka bill of exchange drawn on a bank payable on demand. (Sec. 185) Promissory Note 1. unconditional promise involving 2 parties 2. maker is primarily liable 3. Only one presentment: For payment Bill of Exchange 1. unconditional order involving 3 parties 2. drawer is only secondarily liable 3. Two presentments are made: For acceptance and for payment
Bill of Exchange Check 1. Not necessarily drawn on a 1. Necessary that the check is drawn on a deposit bank deposit. Hence, the drawee is always a bank 2. May or may not be payable on 2. Always payable on demand demand 3. Death of drawer of BOE with 3. Death of drawer of check with knowledge knowledge of the bank does not of the bank revokes authority of bank to revoke authority of bank to pay pay OTHER FORMS OF PROMISSORY NOTE 1. Due bill , An instrument whereby one person acknowledges his indebtedness to another and promises to pay a sum certain in money . 2. Bonds, which are in the nature of PN. 3. Certificate of Deposit issued by banks payable to depositor or his order, or to bearer FORMS OF BILL OF EXCHANGE 1. Trade Acceptance , A BOE drawn by seller on the buyer for the purchase price of goods. 2. Clean Bill of Exchange , A BOE wherein no document is attached upon presentment for acceptance or payment. 3. Documentary Bill of Exchange, A BOE wherein documents are attached upon presentment for acceptance or payment . 4. Bank Acceptance , A draft drawn and accepted by a bank. 5. Drafts, which are BOE drawn by one bank upon another. FORMS OF CHECK 1.Ordinary Check 2.Cashiers Check, A Check payable to third person which is drawn by the bank upon itself. 3.Certified check , A personal check with guaranteed funds to cover the payment of the check.
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4.Voucher Check 5.Travellers Check 6.Managers Check , A check drawn by the manager of the bank. 7.Crossed Check 8.Memorandum Check. HOWEVER, THESE ARE NOT NI 1. Treasury warrant is not negotiable because it is issued in favor of a public officer or employee covering payment for official expenditures and made payable out of a specific fund or appropriation. (Abubakar vs. Auditor General, 81 Phil. 359) 2. Since a postal money order is subject to restrictions and limitations under postal laws and issued by the Government which is not engaged in commercial transactions, it is not governed by NIL. (Phil. Educ. Co., Inc. vs. Soriano, 39 SCRA 587) REQUISITES OF NEGOTIABILITY (Sec. 1) 1. It must be in writing and signed by the maker or drawer; 2. Must contain an unconditional promise or order to pay a sum certain in money; 3. Must be payable on demand, or at a fixed or determinable future time; 4. Must be payable to order or to bearer; and 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The first four requisites are uniformly applicable to all kinds of negotiable Instruments, However, requisite (5) applies only to BOE. A SUM IS CERTAIN EVEN IF IT IS TO BE PAID (Sec. 2) 1. with interest; or 2. by stated installments; or 3. by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or 4. with exchange; or 5. with costs of collection or an attorney's fee ACCELERATION CLAUSErenders the whole debt due and demandable upon failure of the obligor to comply with certain conditions ADDITIONAL PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY (Sec. 5) 1. authorizes the sale of collateral securities in case the instrument be not paid at maturity; or 2. waives the benefit of any law intended for the advantage or protection of the obligor; or 3. authorizes a confession of judgment if the instrument be not paid at maturity; or 4. gives the holder an election to require something to be done in lieu of payment of money. RULE: If some other act is required other than the or in addition to payment of money, the instrument is not negotiable. EXCEPTION: An election given to the creditor/holder for something to be done in lieu of money. VALIDITY OR NEGOTIABILITY IS NOT AFFECTED BY THE FACT THAT (Sec. 6)
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1. it is not dated; or 2. does not specify the value given, or that any value had been given therefor; or 3. does not specify the place where it is drawn or the place where it is payable; or 4. bears a seal; or 5. designates a particular kind of current money in which payment is to be made. AN INSTRUMENT IS PAYABLE ON DEMAND (Sec. 7): 1. When expressed to be payable on demand, at sight or on presentation 2. When no period of payment is stated 3. Where issued, accepted, or indorsed after maturity (as to immediate parties) PAYABLE TO ORDER (Sec. 8) The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order . It may be drawn payable to the order of 1. A payee , who is not a maker , drawer, or drawee; or 2. The drawer or maker : or 3. Two or more payees jointly ; or 4. One or more several payees ; or 5. The holder of an office for the time being PAYABLE TO BEARER (Sec.9) The instrument is payable to bearer when: 1. It is expressed to be so payable; or 2. It is payable to a person named therein or bearer; or 3. It is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or 4. The name of the payee does not purport to be the name of any person; or 5. The only or last indorsement is an indorsement in blank. The General rule is that an instrument payable to order may be negotiated by proper indorsement plus delivery . On the other hand , an instrument payable to bearer , can be negotiated by mere delivery or if originally a order instrument by blank indorsement plus delivery. An instrument originally payable to bearer can be negotiated by mere delivery even if it is endorsed specifically. If originally a bearer instrument, it will always remain a bearer instrument. However, with regards to an original order instrument , when specifically indorsed, it can no longer be negotiated further by mere delivery ; it must be INDORSED. What PROVISIONS do not affect the negotiability of an instrument? 1. Sum payable includes payment of interest; 2. Payment in stated installments; The amount of each installment and the due date of each installment must be indicated. 3. Sum to be paid on installments with acceleration clause; 4. Sum to be paid with cost of collection and attys fees; Reasonable attys fees does not affect negotiability but Plus costs, charges, and attys fees affects the negotiability since the sum is not certain.
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5. Indication of a particular fund to which reimbursement is to be paid or a particular account to which it would be debited. OTHER PROVISIONS not affecting the negotiability of an instrument: 1. Statements which gave rise to the instruments issuance; 2. Provisions of clauses in regards to sale of securities; 3. Clause affecting confessions of judgment; 4. A waiver of benefit intended for the obligor; 5. Giving the holder the election to require something to be done in lieu of payment of money; 6. Absence of date; 7. No seal, place of payment, place of issuance; 8. Absence of a statement of consideration has been paid; 9. Negotiation of a particular kind of money What provisions affect the NEGOTIABILITY OF THE INSTRUMENT? 1. Promise/order to do an act in addition to the payment of money; 2. Promise/order to pay out of a particular fund; or 3. Promise/order to pay depends on a contingency ANTE-DATING/POST-DATING (Sec.12) Ante Dating is effected by : 1.Changing the date of the instrument to an earlier date than when it was made. 2. If the instrument is undated, by placing an earlier date than when it was actually issued. Post - Dating is effected by : 1. Changing the date of the instrument to a later time than when it was made. Rule: Does not invalidate/affect the negotiability of the instrument UNLESS used for illegal/fraudulent purposes. INSERTION OF A WRONG DATE (Sec.13) Rule: If there is a date and it is changed, apply Sec.124 on ALTERATION OF AN INSTRUMENT. Alteration of instrument effect Any material alteration of the instrument without the assent of all parties liable on such instrument would result in the discharge of the instrument. Except, as against parties who has made , authorized , or consented to the alteration and all parties subsequent to him who are considered as regular indorser . As to a holder in due course- the date inserted is the true date. REAL DEFENSES PERSONAL DEFENSES
Those that attach to the instrument Those which are available only against the and are available against all holders holder not in due course who stands in whether in due course or not. privity with the party who is entitled to set it up or those who are not or do not have the rights of a HIDC. Examples of REAL DEFENSES: 1. Alteration; 2. Want of delivery of incomplete instrument; 3. Fraud in factum of fraud in esse contractus;
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4. 5. 6. 7. Minority; Marriage in case of a wife; Insanity were the insane person has a guardian appointed by the Court; Ultra vires act of a corporation (where the corporation is absolutely prohibited by its charter/statute from issuing commercial paper under any circumstances); 8. Want of authority of agent; 9. Execution of an instrument between public enemies; 10. Illegality of contract where it is the contract or instrument itself w/c is expressly made illegal by the statute; and 11. Forgery Examples of PERSONAL DEFENSES 1. Absence or failure of consideration, partial or total; 2. Want of delivery of complete instrument; 3. Insertion of wrong date where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated; 4. Filling up of blank contrary to authority given or not w/in reasonable time where the instrument is delivered; 5. Fraud in inducement; 6. Acquisition of instrument by force, duress, fear or by unlawful means; 7. Acquisition of instrument for an illegal consideration; 8. Negotiation in breach of faith; 9. Negotiation under circumstances amounting to fraud; 10. Mistake; 11. Intoxication; 12. Ultra Vires Acts of corporations where such has the power to issue negotiable paper but such issuance was not authorized for the particular purpose for w/c it was issued; 13. Want of authority of agent where he has apparent authority; 14. Insanity where there is no notice of insanity on the part of the one contracting with the insane person; or 15. Illegality of contract where the form or consideration is illegal EFFECTS OF INCOMPLETE BUT DELIVERED NEGOTIABLE INSTRUMENT (Sec.14) 1. Holder has the prima facie authority to fill up the instrument; 2. Can be enforced if the completion is within reasonable time and strictly in accordance with the authority given; 3. Holder in Due Course can enforce despite such deficiency Rule: Sec. 14 applies if there is a signature on the instrument for the purpose of giving effect thereto. Rule: If no signature, refer to Sec. 15 or 23. Rule: Sec. 14 is merely a PERSONAL DEFENSE. SEC. 14 DISTINGUISHED FROM MATERIALLY ALTERED INSTRUMENT UNDER SEC. 124. Sec. 124 applies when the instrument is complete and delivered but subsequently altered. In which case, the Holder In Due Course may enforce the instrument in accordance with its original tenor. EFFECTS OF AN INCOMPLETE AND UNDELIVERED NEGOTIABLE INSTRUMENT (Sec. 15) If completed and delivered without authority, EFFECTS:
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1. Not a valid contract against a person who has signed before delivery of the contract; 2. Holders in Due Course are not exempted because this is a REAL DEFENSE; 3. Subsequent indorsers, however, are liable EFFECTS OF A COMPLETE BUT UNDELIVERED NEGOTIABLE INSTRUMENT (Sec. 16) 1. Between immediate parties and remote parties not a Holder in Due Course, there must be an authorized delivery; 2. As to a Holder in Due Course, all prior deliveries are conclusively presumed valid; 3. If the instrument is not in the hands of a drawer/maker, valid and intentional delivery is presumed As a RULE, a completed instrument is not given any effect until DELIVERED. If found in the possession of another who is not the maker/drawer, the maker/drawer can interpose the defense that delivery was: a) conditional; or b) for a special purpose only and not for the purpose of transferring the property in the instrument. Rule: Sec. 16 is a PERSONAL DEFENSE which cannot be invoked against a Holder in Due Course. In case of AMBIGUITIES or OMMISSIONS, what are the RULES OF CONSTRUCTION of Negotiable Instruments? (Sec. 17) The following rules of construction apply: 1. Where there is a discrepancy between the amount in figures and that in words, the words prevail; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; 2. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; 3. Where the instrument is not dated, it will be considered to be dated as on the date of issue; 4. Where there is a conflict between the written and printed provisions, written provisions prevail; 5. Where the instrument is ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; 6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; 7. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. What is the rule on FORGERY? (Sec.23) The signature and not the instrument itself is wholly inoperative, and no right to retain the instrument, or give a discharge therefor, or to enforce payment thereof against any party to it, is acquired through or under such signature UNLESS the party against whom it is sought to enforce is precluded from setting up forgery. Forgery refers to both a signature which has been forged or made without authority. Thus, Section 23 is not limited to counterfeit signatures since it also applies to genuine ones.
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Who are PRECLUDED from setting up the defense of forgery? 1. Those who admit/warrant the genuineness of the signature in question: indorsers, persons negotiating by delivery and acceptors; 2. Those who by their acts, silence, or negligence, are estopped from claiming forgery; 3. Holder of a bearer instrument Forged signature is not necessary to the title of the holder. What is MATERIAL ALTERATION? (Sec. 124) Any change in the instrument which affects or changes the liability of the parties in any way. What are the EFFECTS of alteration? 1. Alteration by a PARTY Material alteration by the holder discharged the instrument and all prior parties thereto who did not give their consent to such alteration. Whether the alteration made is favorable or unfavorable to the party making the alteration, no distinction as to the effect is made. The intent of the law is to preserve the integrity of the negotiable instrument. 2. Alteration by a STRANGER If subsequently negotiated to a non-Holder in Due CourseA material alteration avoids the instrument as against any prior party who has not assented to the alteration. If subsequently negotiated to a Holder in Due CourseHe may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. What CHANGES constitute MATERIAL ALTERATIONS? 1. The date; 2. The sum payable, either for principal or interest; 3. The time or place of payment; 4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of payment is specified; or 7. Any other change or addition which alters the effect of the instrument in any respect. (Sec. 125) What is the PRESUMPTION OF CONSIDERATION? Under this section lie 2 presumptions, to wit: 1. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and 2. Every person whose signature appears thereon is presumed to have become a party thereto for value. Absence or lack of consideration is considered a personal defense and therefore not a proper defense against a HIDC. What is an ACCOMMODATION PARTY? (Sec.29) 1. One who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore; and 2. For the purpose of lending his name to some other person .
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Effect: Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. In other words, the person to whom the instrument is subsequently negotiated has a right of recourse against the accommodation party, in spite of such persons knowledge that no consideration has passed between the accommodation party and the party accommodated. Rule: A corporation cannot act as an accommodation party. The issuance or indorsement of a negotiable instrument by a corporation without consideration and for the accommodation of another is an ULTRA VIRES act. Exception: Unless the charter provides for such authority. What are the RIGHTS of the ACCOMMODATION PARTY (AP)? An AP is a surety only in respect to the party accommodated. When an AP makes payment to the holder of the note, he has the right to sue the accommodated party for reimbursement.
What are the RIGHTS of ACCOMMODATION PARTIES against EACH OTHER? Other than demand reimbursement from the principal debtor of the amount which he had paid on the promissory note an AP may demand contribution from his co-accommodation parties without first directing his action against the principal debtor provided: a) He made the payment by virtue of judicial demand; or b) The principal debtor is insolvent What is the LIABILITY of a person SIGNING AS AGENT? An agent is exempt from personal liability, provided he: 1. Acts within the scope of his authority; 2. Discloses the name of his principal; and 3. Discloses that he is acting in a representative capacity (Sec. 20) A SIGNATURE BY PROCURATION operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority (Sec. 21) Rule: Indorsement or assignment of the negotiable instrument by a corporation or an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon (Sec. 22) WHAT ARE THE LIABILITIES OF THE PARTIES? PRIMARILY LIABLE: 1. Maker a) Engages to pay according to the tenor of the instrument; and b) Admits the existence of the payee and his capacity to indorse. 2. Acceptor a) Engages to pay according to the tenor of his acceptance; b) Admits the existence of the drawer, the genuiness of his signature and his capacity and authority to draw the instrument; and c) Admits the existence of the payee and his capacity to indorse. SECONDARILY LIABLE: 1. Drawer a) Admits the existence of the payee and his capacity to indorse;
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b) Engages that the instrument will be accepted or paid by the party primarily liable; and c) Engages that if the instrument is dishonored and proper proceedings are brought, he will pay entitled to be paid. 2. General Indorser Warrants: a) Genuineness of the of the instrument; b) His good title to it; c) Capacity of prior parties to contract; and d) Instrument is valid and subsisting. e) Engages that the instrument will be accepted or paid by the party primarily; and f) If the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid. An Irregular Indorser is a person who, not otherwise a party to an instrument, places his signature thereon in blank before delivery. The following rules govern his liability: a) If instrument payable to the order of a 3 rd person, he is liable to the payee and subsequent parties; b) If the instrument payable to order of maker or drawer, he is liable to all parties subsequent to maker or drawer; and c) If he signs for accommodation of the payee, he is liable to all parties subsequent to payee.
Who are the parties with LIMITED LIABILITY? 1) Qualified Indorser Warrants that: a) Instrument is genuine and in all respects what it purports to be; b) He has good title to it; c) All prior parties had capacity to contract; d) He has no knowledge of any fact which would impair the validity of the instrument or render it valueless. 2) Persons negotiating by DELIVERY a) Warranties same as those of qualified indorsers; b) Warranties extend to immediate transferee only. Negotiating by Qualified General Indorser Indorsements or by Mere Delivery 1. As regard liability: No secondary Has secondary liability liability 2. As regards warranty: Has no Warrants that the instrument is at the time knowledge of any fact which would of his indorsement, valid and subsisting. impair the validity of the instruments or render it valueless. What is NEGOTIATION? It is the transfer of a NI from one person to another as to constitute the transferee the holder thereof. If the NI is payable to bearer, it can be negotiated by delivery; if it is payable to order, it is negotiated by the indorsement of the holder completed by delivery. Indorsement is a legal transaction effected by the writing of ones own name at the:
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a) Back of the instrument; or b) Upon a paper ( allonge) attached thereto with or without additional words specifying the person to whom or to whose order, the instrument shall be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid. RULE: Indorsement must be on the entire instrument. EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue. What are the KINDS of indorsement? SPECIAL OR BLANK A Special Indorsement specifies the person to whom or to whose order, the instrument is payable. A Blank Indorsement specifies no indorsee. the instrument is payable to bearer and may be negotiated by delivery. may be converted to a special indorsement by writing over the signature of indorsement in blank any contract consistent with character of indorsement. ABSOLUTE AND CONDITIONAL Absolute Indorsement is one by which indorser binds himself to pay upon: a) No other condition than failure of prior parties to do so; and b) Due notice to him of such failure. Conditional Indorsement exists when the right of the indorsee is made to depend on the happening of a contingent event. However, the party required to pay may disregard the conditions. RESTRICTIVE OR UNRESTRICTIVE An indorsement is restrictive, when either: a) Prohibits further negotiation of the instrument; or b) Constitutes the indorsee the agent of the indorser; or c) Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive. QUALIFIED OR UNQUALIFIED A Qualified Indorsement constitutes the indorser a mere assignor of the title to the instrument. Said indorsement is made by adding to the indorsers signature words like sans recourse, without recourse, indorser not holder or at the indorsers own risk. As mentioned earlier, Negotiation is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof. To be valid, negotiation must involve the entire instrument. What RIGHTS are transferred during negotiation? Negotiation constitutes transferee a holder of the instrument. A holder is entitled to collect the instrument from the person primarily liable. If dishonored by person primarily liable, holder may go to the persons secondarily liable. He can sue in court on the instrument. If the holder is a Holder in Due Course, he takes the instrument free from defects of title of prior parties, free from defenses of prior parties against themselves and he can enforce the instrument for the full amount thereof against all parties liable thereon.
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What HAPPENS to an INDORSEMENT MADE on an instrument negotiable by delivery? The indorser indorsing on an instrument negotiable by delivery becomes an indorser to said instrument. What is the EFFECT of LACK OF INDORSEMENT on an instrument negotiable by indorsement followed by delivery? Where a holder of an instrument payable to order transfers the instrument without indorsing it, the transferee is vested with title, and acquires the right to have the indorsement of the transferor. For the purpose of determining whether the transferee is a holder in due course or not, the negotiation takes effect on the date indorsement was actually made. What is the EFFECT of the striking out of indorsements? The indorser whose indorsement is struck out and subsequent indorsers are relieved from liability on the instrument. What are the RIGHTS of the holder? In general, the holder of a negotiable instrument may sue under his name. Payment to said holder in due course discharges instrument. (Sec. 51) If a promissory note is non-negotiable, the subsequent holders can never be holders in due course, but become mere assignees against whom defenses may be raised by prior parties. WHO IS A HOLDER IN DUE COURSE? A holder who has taken the instrument under the following conditions: 1) Complete and regular on its face; 2) He became holder before instrument was overdue and without notice that it has been previously dishonored if such were the fact; 3) Holder took instrument for value and in good faith; and 4) At time instrument was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. What constitutes NOTICE OF DEFECT? Either of the following constitutes a notice of defect: 1) Person to whom instrument was negotiated must have actual knowledge; or 2) Knowledge of facts that makes the taking of the instrument an act done in bad faith.
What are the RIGHTS of a Holder in due course? Holder 1. May enforce the instrument and sue thereon in his own name; 2. Holds the instrument free from any defect of title of prior parties; 3. Holds the instrument free from defenses of prior parties; 4. May enforce payment of the instrument for full amount against all parties liable thereon. Who is a Holder NOT IN DUE COURSE? A holder not in due course is holder having some or not all the requisites which constitute a Holder in Due Course. RIGHTS of a Holder not in due course:
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A holder not in due course can enforce the instrument and sue upon it on his own name. Disadvantage: However, such holders are subject to defenses available to prior parties. PRESENTMENT OF PROMISSORY NOTES (PN): Requisites: 1) Made within reasonable time after issue. 2) By the holder or his agent. 3) To the party liable under it. 4) At a reasonable hour on a business day and 5) At a proper place. When is Presentment of P.N. NOT NECESSARY? When: 1. After due diligence, presentment may not be made; 2. Presentment waived; 3. Indorser is the accommodated party. When shall P.N. be considered DISHONORED? When: 1. After due presentment, payment refused; 2. Presentment is excused, instrument is overdue and unpaid. BILL OF EXCHANGE I. Presentment of a BOE for ACCEPTANCE: PURPOSE: To get acceptance of the drawer for purpose of making him primarily liable as an acceptor. Presentment is also prerequisite to the accrual of secondary liability against the drawer and the indorsers. When is presentment for acceptance MUST be made. (Sec. 143) In the following cases: 1. Where the bill is payable after sight ; or in any other case , where presentment for acceptance is necessary in order to fix the maturity of the instrument. 2. Where the bill expressly stipulates that it shall be presented for acceptance. 3.Where the bill is drawn payable elsewhere than the residence or place of business of the drawee. What are the REQUISITES of Presentment? 1. Made within reasonable time 2. By holder or his agent 3. At a reasonable hour on a business day 4. Before bill overdue.
WHERE PRESENTMENT IS EXCUSED. (Sec. 148.) Presentment for acceptance is excused , and a bill may be treated as dishonored by non acceptance , in either of the following cases: 1.Where the drawee is dead , or has absconded , or is a fictitious person or a person not having capacity to contract.
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2.Where, after the exercise of reasonable diligence , presentment cannot be made. 3.Where, although presentment has been irregular , acceptance has been refused on some other ground. When is a bill of exchange DISHONORED by NON-ACCEPTANCE? When: 1. Such acceptance is refused or cannot be obtained; or 2. Presentment for acceptance being excused, bill is not accepted; II. Presentment for PAYMENT of an Accepted Bill PURPOSE: To collect from the acceptor and if refused, to collect from secondary parties. What are the REQUISITES for payment of an accepted bill? 1. Presentment for payment within reasonable time from last negotiation to the acceptor or his agent, 2. At a reasonable hour on a business day, 3. At the proper place defined, 4. The bill must be exhibited to and surrendered to the acceptor when acceptor pays. When is presentment for payment EXCUSED? When: 1. After due diligence, presentment cannot be made; 2. Drawee is a fictitious person; and 3. There is waiver of presentment, express or implied. III. ACCEPTANCE of a BOE: Acceptance is the signification by the drawee of his assent to the order of the drawer. ACCEPTANCE OF BOE HOW MADE. (Sec. 132) Must be: 1. In writing; 2. Signed by the drawee; 3. Must not express that the drawee will perform his promise by means other than money payment. Acceptance of BOE may be made on the bill, on a separate paper, and may be made in writing before the bill is drawn. The drawee, if he wants to dishonor, must do so expressly within 24 hours from presentment to him. If he refuses to act, tears the bill, or refuses to return the bill within said period of 24 hours, he is deemed to have accepted the bill. A SIGHT DRAFT is payable on demand, and needs no acceptance by the drawee. What are the CLASSES of Acceptance? 1. GENERAL AND QUALIFIED: General Acceptance assents without qualification to the order of the drawer. Qualified Acceptance varies the effect of the Bill as drawn. Acceptance is qualified if it is: a) Conditional.
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b) Partial c) Local d) Qualified as to time e) Accepted by some or more of the drawees but not by all. 2. EXPRESS AND CONSTRUCTIVE: Acceptance is express if written on the instrument by the drawee. Acceptance is constructive, if the drawee, within 24 hours from presentment to him of the instrument, destroys the same, or refuses or fails to return the bill accepted or unaccepted What is DISHONOR? In a PROMISSORY NOTE, dishonor by non-payment takes place when the note is duly presented for payment and payment is refused or cannot be obtained; or if presentment is excused, the instrument is overdue and unpaid. In a BILL OF EXCHANGE, where the Bill is presented for acceptance and is returned dishonored, or within 24 hours from presentment, is not returned accepted or unaccepted, there is a dishonor by non-acceptance. There is a dishonor by non-payment if the Bill, after it has been accepted, is not paid when presented for payment, or presentment being excused is not paid on Maturity Date. What is a NOTICE of Dishonor? It is a notice given by the holder to the parties secondarily liable that the instrument was dishonored by: a) Non-acceptance by the drawee of a bill; or b) Non-payment by the acceptor of a bill; or c) Non-payment by the maker of a note. The PURPOSE of the Notice of Dishonor (NOD) is to preserve the holders right of recourse against parties secondarily liable. When may a NOTICE OF DISHONOR BE DISPENSED with? When: 1. Waived; 2. After due diligence, it cannot be given; 3. Party to be notified already knows about the dishonor, actually or constructively. WHEN NOTICE OF DISHONOR NEED NOT BE GIVEN THE DRAWER. (Sec. 114) Notice of dishonor is not required to be given to the drawer in any of the following cases: 1.Drawer and the drawee are the same person; 2.Drawee is a fictitious person or a person not having the capacity to contract; 3.Drawer is the person to whom the instrument is presented for payment; 4.Drawer has no right to expect or require that the drawee will honor the instrument. 5.Drawer has countermanded payment. WHEN NOTICE OF DISHONOR NEED NOT BE GIVEN TO INDORSER. (Sec. 115)
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Notice of Dishonor is not required to be given to an indorser in any of the following cases. 1. Drawee is a fictitious or a person not having the capacity to contract , and the indorser was aware of that fact at the time he indorsed the instrument; 2. Indorser is the person to whom the instrument was presented for payment; and 3. Instrument was made or accepted for his accommodation. What is a PROTEST? A Protest is a formal instrument, executed by a notary or other competent person, certifying that the facts necessary to the dishonor of the instrument by non-acceptance or non-payment have taken place. When a foreign bill is dishonored by non-acceptance it must be protested for non-acceptance. If dishonored by non-payment, it must be protested for nonpayment. If not so protested, the drawer and indorsers are discharged. It must be made on the day of dishonor. Protest is made by a notary or by a respectable citizen of the place of dishonor of the Bill in the presence of two or more credible witnesses. The Protest must be annexed to the Bill, or must contain a copy thereof, and must specify: 1. Time and place of presentment; 2. Fact that presentment was made and the manner thereof; 3. Cause of protest; 4. The demand made and answer given, or that the drawee or the acceptor could not be found. Protest may be dispensed with in those cases where notice of dishonor is dispensed with. What is DISCHARGE? It is the extinguishment of the obligations of the parties to the instrument. When an instrument is discharged, it becomes a worthless piece of paper. What are the CAUSES for the discharge of the instrument? 1. Payment by the debtor 2. Payment by the accommodated party 3. Intentional cancellation by the Holder on the Instrument. 4. Any other act discharging a simple money obligation. 5. Debtor becomes Holder of the Instrument at or after maturity in his own right. What are the causes for the discharge of PARTIES SECONDARILY LIABLE? 1. Any act discharging the instrument. 2. Cancellation of indorsers signature by the Holder. 3. Discharge of a prior party. 4. Tender of payment by prior party 5. Release of the principal debtor 6. Extension of payment by the Holder or postponement of his right to enforce, without the assent of the secondary parties, and without reservation of any right of recourse against the secondary parties. RIGHT OF PARTY WHO DISCHARGES INSTRUMENT. (Sec. 121) A party secondarily liable who pays the instrument does not discharge it , but instead acquires certain rights ;
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1.Collect from prior parties ; or 2. Negotiate the instrument to new parties- but not to subsequent parties. However , Under the exceptions provided in Sec.121, the instrument is considered discharged when ; 1.The BOE is payable to the order of a third person and paid by the drawer himself, or 2. Where it was made or accepted for accommodation , and has been paid by the party accommodated. RENUNCIATION BY HOLDER. (Sec 122) Renunciation- The act of giving up or abandoning a right without transferring the right to another. As a Rule ,the holder may expressly renounce his rights against any party to the instrument before , or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor at or after maturity of the instrument discharges the instrument. However , A renunciation does not affect the rights of a holder in due course without notice of the renunciation. ACCEPTANCE FOR HONOR. (Sec. 161) When a BOE has previously been protested for non acceptance or for better security and is not overdue, any person not being liable thereon may with the consent of the holder, intervene and accept the bill protest for the honor of any party liable thereon , or for the honor of the person for whose account the bill is drawn. The ACCEPTANCE FOR must be; 1. In writing ; 2. Must indicate that it is an acceptance for honor ; 3. Must be signed by the acceptor for honor ; and PAYMENT FOR HONOR. It is the payment of the BOE which has been previously dishonored by non payment and protested for non payment by any person for the honor of the drawer or any indorser of the parties thereto. WHAT IS A CHECK? A check is a bill of exchange drawn on a bank and payable on demand. What is a CROSSED CHECK? A crossed check is a check which in addition to the usual contents of an ordinary check contains also the name of a certain banker or business entity through whom it must be presented for payment. The bankers or entitys name is usually stamped across the face of the check. Crossing of a check is usually done by placing two parallel lines diagonally on the left top portion of the check. The crossing is special when between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company.
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The payee of a crossed check should not encash the check but should deposit it to his account. What are the EFFECTS of crossing a check? 1. The check may not be encashed but only deposited with a bank; 2. The check may be negotiated only onceto one who has an account with a bank; 3. The act of crossing serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check for that purpose. INSURANCE CODE (P.D. 1460, as amended) WHAT IS A CONTRACT OF INSURANCE? It is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Sec. 2) CHARACTERISTICS OF AN INSURANCE CONTRACT 1. Synallagmatic (where both parties have reciprocal obligations of equal value) 2. Aleatory 3. Voluntary 4. Executory 6. Compensatory 5. Personal 7. Contract of perfect good faith Insurance is a contract of Uberrima Fides, or of perfect good faith, because the parties are required to disclose any material fact which the applicant knows or ought to know. An insurance contract is also considered a contract of indemnity, where the insured is indemnified to the extent of the value of loss or damage. EVENT COVERED BY AN INSURANCE CONTRACT General Rule: Only a future event can be covered by and insurance contract. Exception: In marine insurance, even a past event can be covered, provided that the loss of the vessel in the past could not have been known by ordinary means of communication. (Sec. 109) INTERPRETATION OF AN INSURANCE CONTRACT: If the terms are ambiguous, the policy is to be construed strictly against the insurer, and liberally in favor of the insured. If the terms are clear, there is no need for interpretation. CONTRACT OF ADHESION or the FINE PRINT RULE
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Most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured can adhere to if he so chooses but the terms of which he cannot change. Hence, in case of doubt, the contract shall be construed strictly against the insured and liberally in favor of the insured. ELEMENTS OF INSURANCE 1. 2. 3. 4. 5. Existence of insurable interest; Risk of Loss; Assumption of Risk; Payment of premium; and Scheme to distribute losses.
Principle of Risk Distribution. The device of Insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to the same kind of risk. By contributing a pre-determined amount to a general fund, each member contributes to a small degree towards compensating for losses suffered by any member of the group. The Right of Subrogation has its roots in equity. It is designed to promote and accomplish justice and is the mode equity adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay. It does not depend upon any privity of contract or assignment of claim. It accrues simply upon payment by the insurance company of the insurance claim . Consequently, payment made by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies the insured may have against the obligor. (PHILAMGEN vs. CA, 273 SCRA 262)
EXCEPTIONS TO THE RIGHT OF SUBROGATION 1. Where the insured releases wrongdoer from liability; 2. Where insurer pays without notifying the carrier, which in good faith, has already paid the insured; 3. Where the insurer pays for a loss not among the risks insured against by the policy 3 TYPES OF INSURANCE CONTRACTS 1. LIFE a. Individual Life (Secs. 179-183, 227) b. Group Life (Sec. 50, and the last par. of Sec. 228) c. Industrial Life (Secs. 229-231) 2. NON-LIFE a. Marine (Secs, 99-166)
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b. Fire (Secs. 167-173) c. Casualty (Secs. 174) 3. CONTRACT OF SURETYSHIP (Secs. 175-178) PARTIES TO AN INSURANCE CONTRACT 1. The INSURER is the person who undertakes to indemnify the other. 2. The INSURED is the person to be indemnified upon the occurrence of the loss. Anyone can be the insured, subject to the following limits: a. He must have the capacity to contract; b. He must have insurable interest; c. He must not be a public enemy, who is a citizen or subject of a nation with whom the Philippines is at war. (Sec. 7) 3. The BENEFICIARY is the person designated to receive the proceeds of the policy when the risk attaches. GENERAL RULE: The insured may designate anyone as his beneficiary. EXCEPTION: Article 739 of the NCC on forbidden donations. Hence a married man cannot assign as beneficiary his concubine or a married woman her paramour. Under the said article, the action to annul the designation can be proven by preponderance of evidence. In one case a married mans designation of his adulterous children as beneficiaries was held valid. What is the effect of an irrevocable designation of beneficiary? The insured cannot: 1. Assign the policy 2. Take the cash surrender value of the policy 3. Allow his creditors to attach or execute on the policy 4. Add a new beneficiary 5. Change the irrevocable designation to revocable INSURABLE INTEREST is the interest which a person must have in the person or thing insured to prevent the contract from becoming a wagering contract. When is there insurable interest? In LIFE insurance: Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting
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property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends. (Sec. 10) In PROPERTY insurance: An insurable interest in property may consist in: (a) An existing interest (i.e. an owner, a mortgagee); (b) An inchoate interest founded on an existing interest (i.e. carrier on a cargo of freightage); or (c) An expectancy, coupled with an existing interest in that out of which the expectancy arises. (i.e. growing crops) (Sec. 14)
Insurable Interest in Life Insurable Interest in Property 1. Must exist at the time the policy is taken. 1. Must exist at the time the policy is taken and at the time loss occurs.
2. Taken on insureds life, his 2. Beneficiary must have an beneficiaries need not have insurable interest in property insurable interest on his life. insured. 3. No limit on the amount of insurable interest. 3. Insurable interest is limited to the value of interest in property insured.
In life insurance, the general rule is no limit on the amount of insurable interest. The exception is an insurance taken by the creditor on the life of his debtor . In which case, the insurable interest is limited only to the extent of the debt. (Sec. 10) INSURABLE INTEREST OF MORTGAGOR AND MORTGAGEE OVER MORTGAGED PROPERTY Both the mortgagor and mortgagee each have an insurable interest in the property mortgaged and this interest is separate and distinct from the other, such that each of them may insure the same property for his own benefit. While the mortgagor, as owner, has an insurable interest equivalent to the value of the property, the mortgagees interest is only up to the extent of his debt. WHEN IS CONSENT OF INSURER NECESSARY? Consent of insurer is necessary only when the seller assigns the policy in connection with the transfer of ownership of the property such that the seller wants to assign his rights as an insured, to the buyer.
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Mr. X wants to borrow P200 million from a bank and offers his building as collateral. If Mr. X already has an existing policy at the time of the loan application, the policy could be assigned to the bank. The consent of insurer is not necessary because what is assigned is not the policy itself but only the proceeds. DEANS TIP: If the problem is an assignment of policy involving collateral, the insured remains a party to the insurance contract since only the proceeds are assigned to the mortgagee and therefore, the consent of the insurer is not required. WHAT IS the effect of a change of interest unaccompanied by a corresponding change in interest in the insurance? GENERAL RULE: The effect of a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person. (Sec. 20) EXCEPTIONS TO THE REQUIREMENT OF INSURABLE INTEREST: a. in case of life, health and accident insurance (Sec. 20) b. change in interest results after occurrence of an injury which results in loss (Sec. 21) c. change in interest in one or more several distinct things, separately insured by one policy (Sec. 22) d. change in interest by will or succession on death of insured (Sec. 23); and e. transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured, to the others. (Sec. 24) (If the transfer is to a third person other than partner, joint-owner or co-owner, the exception will not apply) WHAT ARE THE PRIMARY CONCERNS OF PARTIES ENTERING TO AN INSURANCE CONTRACT? 1. 2. 3. 4. Correct estimation of the risk; Precise delimitation of the risk; Control of the risk; Determining whether a loss occurred and if so, the amount of loss.
In DELIMITING the risks, the following devices are used: 1. Warranties, whereby parties stipulate that certain circumstances did or did not exist; 2. Exceptions, which is an expressed enumeration of excluded risks which otherwise would have been included; and 3. Conditions, whereby parties stipulate that the contract would be voidable if certain circumstances were found to exist. GROUNDS FOR RECISSION OF AN INSURANCE CONTRACT
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1. Concealment 2. Misrepresentation 3. Breach of Warranty CONCEALMENT is the neglect to communicate that which a party knows and ought to communicate. (Sec. 26) Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract, and which the other has not the means of ascertaining, and as to which he makes no warranty. (Sec. 28). The test is: If the applicant is aware of the existence of some circumstances which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked. Facts: Bacani procured a life insurance providing for double indemnity in case of accidental death and appointed his mother as beneficiary. Subsequently, he died in a plane crash and his mother sought to recover the indemnity. The insurer refused to pay on the ground that Bacani failed to disclose his confinement in the Lung Center for renal failure. Held: The mother is not entitled to receive payment. The insured need not die of the disease he had failed to disclose to the insurer; it is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries. (Sunlife Assurance vs. CA, 245 SCRA 268) Waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. (Saturnino vs. Philippine American Life, 7 SCRA 316) If the policy was procured through fraudulent representations, the contract of insurance was never legally existent. It can be assumed that had the true facts been disclosed by the insured, the insurance would never have been granted. (Argente vs. West Coast Life, 51 Phil. 725) REPRESENTATION is an oral or written statement of a fact or condition affecting the risk, made by insured to insurer, tending to induce insurer to enter into the contract. (Sec. 36) The injured party is entitled to rescind from the time when the representation becomes false. However, the right of the insurer to rescind is waived by acceptance of premium despite knowledge of the ground for rescission. (Sec. 45) Both CONCEALMENT AND REPRESENTATION
1. Refer to the same subject matter and both take place before the contract is entered. 2. Concealment or Misrepresentation prior loss or death
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gives rise to the same remedy: Cancellation by the insurer of the policy. (Secs. 27 and 45) 3. The test of materiality is the same. (Secs. 31 and 46) 4. The rules of concealment and representation is the same with life and non-life insurance.
APPLICATION OF CONCEALMENT AND MISREPRESENTATION GENERAL RULE: If the concealment or misrepresentation is discovered before loss or death, the insurer can cancel the policy. If the discovery is after loss or death, the insurer can refuse to pay. EXCEPTION: The Incontestability Clause under par. 2 of Sec. 48. EXCEPTIONS to the EXCEPTION (Incontestability Clause) 1. 2. 3. 4. 5. 6. Non-payment of premiums; Violation of conditionre: military/naval service in time of war; No insurable interest; Cause of death was excepted or not covered; Fraud of a vicious type; Proof of death was not given.
LIMITATIONS ON THE RIGHT OF INSURER TO RESCIND 1. He must not have accepted premiums despite knowledge of rescission; (Sec. 45) 2. He cannot rescind if he has already commenced any action on the contract; (Sec. 48, par. 1) 3. In life insurance, defenses which may be raised as grounds for rescission are available during the first two years of the life insurance policy. (Sec. 48, par. 2) WARRANTY is a statement or promise set forth in the policy or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable. PURPOSE OF WARRANTY It eliminates the potentially increasing hazards which may either be due to the acts of the insured or to the change to the condition of the property. TYPES OF WARRANTY 1. Express
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2. Impliedpeculiar only to marine insurance, and therefore is deemed included in the contract, although not expressly mentioned: a. that the ship will not deviate from agreed voyage unless deviation is proper; (Sec. 123-125) b. that the ship will not engage in illegal venture; c. warranty of neutrality, that the ship will carry the requisite documents of nationality or neutrality where such nationality or neutrality is warranted; d. presence of insurable interest e. that the ship is seaworthy at the time of the commencement of the Insurance contract; EFFECT OF BREACH OF WARRANTY 1. Violation of a material warrantyentitles insurer to rescind (Sec. 74) 2. Violation of an immaterial warrantywill not avoid the policy EXCEPTION: When the policy expressly declares that a violation thereof will avoid it. (Sec. 75) ILLUSTRATION: An Other Insurance Clause is a condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured will not constitute a breach unless there is an additional provision stating that the violation thereof will avoid the policy. WARRANTY REPRESENTATION 1. Part of the contract 1. Mere collateral inducement 2. Written on the face of the policy, actually or by reference 2. Maybe written on the policy or in a totally disconnected piece of paper 3. Conclusively presumed to be material 3. Insurer has the burden to show materiality 4. Must be actually complied with 4. Substantial truth is required 5. Made only by the insured 5. Made by both insurer and insured
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THREE TYPES OF INSURANCE CONTRACTS 1. PolicyIt is a written instrument in which a contract of insurance is set forth. (Sec. 49) Kinds of Policies: a. OPEN POLICYvalue of thing insured is not agreed upon, but left to be ascertained at time of the loss. (Sec. 60) b. VALUEDdefinite valuation of the property insured is agreed by both parties, and written on the face of the policy. (Sec. 61) c. RUNNINGcontemplates successive insurances and which provides that the subject of the policy may from time to time be defined. (Sec. 62) A Rider is a printed stipulation usually attached to the policy because they constitute additional stipulations between the parties.
May a Policy be unilaterally cancelled? The Insurer may, upon notice to the insured, stating grounds for cancellation, and stating further that it can prove the ground should the insured require it, unilaterally cancel the policy. Only Grounds for Cancellation 1. 2. 3. 4. 5. 6. Non-payment of premium; Physical changes in property making it uninsurable or increasing hazard; Conviction of crime increasing hazard; Discovery of Fraud or misrepresentation; Discovery of willful or reckless acts increasing the hazard; Determination by the Insurance Commission that continuation of policy would violate the Code. (Sec. 64)
Prescriptive Period The Insurer may provide in the policy that unless the insured brings an action within one (1) year from time cause of action accrues, the action shall be barred. (Sec. 63) The one (1) year period is computed from the date the cause of action accrues, which is the denial of the claim and not upon the happening of the loss.
CONDITIONAL or BINDING RECEIPT It is an acknowledgment on behalf of the company that their branch office had
COVER NOTE or BINDING SLIP A written contract issued by the insurer through its authorized agent. It is intended to give the
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received from applicant the insurance premium and had accepted the application subject to processing by the head office. (Great Pacific Life vs. CA, 89 SCRA 543) Apply this term to life insurance
insured temporary protection (good only for 60 days) pending the investigation of the risk by the insurer or until the issuance of a regular policy.
Apply this term to non-life insurance (such as in marine insurance, pending investigation of the vessel which is still at sea)
There are two types of Conditional or Binding Receipt: 1. One that affords immediate protectionInsured is covered so long as he files his application and pays the premium. The prevailing trend now is the use of this type, which is entirely fair to both parties to the contract. 2. One that does not afford immediate protectionThere is no coverage if anything happens to the insured prior to favorable action on his application at the home office. When does the policy become binding? 1. When all the conditions precedent stated in the offer have been satisfied; and 2. When delivered.
Requisites for a valid delivery: 1. Intention of the insurer to give legal effect as a completed instrument; 2. Word or act by insurer putting the instrument beyond his legal, though not necessarily, physical control; 3. Insured must acquiesce in this intention. 2 Types of Delivery 1. Actualdelivery to the person of the insured 2. Constructive a. By mail: If policy was mailed already and premium was paid and nothing is left to be done by the insured, the policy is considered constructively delivered if insured died before receiving the policy. b. By agent: If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of the insured, the policy is considered constructively delivered.
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Who signs the policy? Only the insurer or its authorized officer signs the policy. The policy is not the contract itself but merely sets forth what has been agreed upon. The signature of the insured is needed only when there is a rider or endorsement for countersigning purposes. (par. 3 of Sec. 50) Premium is the consideration paid an insurer for undertaking to indemnify the insured against a specific peril. WHEN IS THE INSURED ENTITLED TO RETURN OF PREMIUMS PAID? 1. If thing insured was never exposed to the risks insured against (Sec. 79); 2. If contract was voidable due to fraud or misrepresentation of insurer (Sec. 81) ; and 3. If insurer never incurred liability WHEN IS THE INSURED NOT ENTITLED TO RETURN OF PREMIUMS PAID? 1. 2. 3. 4. If the risk has already attached and the risk is entire and indivisible; In life policies; If contract is void ab initio because of fraud by the insured; If contract is illegal and the parties are in pari delicto
GENERAL RULE: Cash and Carry Rule.No policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid (Sec. 77) EXCEPTIONS:
Statutory 1. In life or industrial life policy whenever grace period is applicable (Sec. 77)
Jurisprudential 1. When the insured and the insurer have agreed to the payment of premium by installments and partial payment has been made at the time of loss. (Makati Tuscany Condominium Corp. vs. CA, 1992) 2. When public interest so requires, as determined by the Insurance Commissioner.
2. Written acknowledgment by the insurer of receipt of premium, which the law (Example: In Compulsory Motor declares to be conclusive Vehicle insurance, if the policy evidence of payment so as was issued without payment of to make the policy binding premium by the vehicle owner, and the insurer liable, the insurer will still be held without prejudice to the right liable. To rule otherwise would of the insurer to collect prejudice the 3rd party victim. corresponding premium. (Sec. 78)
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Loss is the injury or damage sustained by insured from perils insured against. PROXIMATE CAUSE is the active efficient cause which sets to motion a train of events which in turn brings about a result without intervention of any force operating and working actively from a new and independent force.
Loss for which Insurer is Loss for which Insurer is NOT LIABLE LIABLE 1. Loss the proximate cause of which is a peril insured against (Sec. 84) 2. Loss the immediate cause of which is a peril insured against, except where proximate cause is an excepted peril 3. Loss through simple negligence of insured 4. loss caused by efforts to rescue the thing from peril insured against 5. during the course of the rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of possession, in whole or in part 1. Loss due to insureds willful act 2. Loss due to connivance of the insured (Sec. 87) 3. Loss where an excepted peril is the proximate cause
Simple negligence as a defense will not exonerate the insurer from liability as most loss or damage arises from negligence. However, defense of gross or willful negligence (amounting to bad faith) is a valid defense. EFFECT OF FAILURE TO GIVE NOTICE OF LOSS In fire insurance, such failure defeats the right of insured to recover In other types of insurance, unless a stipulation in the policy requires the insured to give notice, such failure will not exonerate insurer from liability. Double Insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. (Sec. 93) REQUISITES OF DOUBLE INSURANCE 1. Person insured is the same
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2. 3. 4. 5. Two or more insurers insuring separately Subject matter is the same Interest insured is the same Risk or peril insured against is the same
Double insurance is not prohibited by law. A person may therefore procure two or more insurances to cover his property. However, the insurer may insert an Other Insurance Clause which will prohibit double insurance. The rationale is to prevent the danger that the insured will over insure his property.
Double Insurance 1. Two or more insurers
Over Insurance 1. At least one insurer, with whom the insured takes an insurance beyond the value of his insurable interest 2. Prohibited by law because it is a wagering contract, and no longer a contract of indemnity
2. Not prohibited by law, unless there is a stipulation to the contrary
Reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance (Sec. 95) PURPOSE: To distribute the risk, when the insurer finds a single risk so great that the happening of the peril insured against would render him insolvent, it is customary to reinsure such risk with one or more insurers.
Double Insurance (Sec. 93) 1. involves the same interest
Reinsurance (Sec. 95)
1. insurance is of different interest
2. insurer remains in such 2. insurer becomes an insured in capacity relation to the reinsurer 3. subject of insurance is 3. subject of insurance is the property original insurers risk 4. insured has to give his 4. consent of original insured, not consent necessary
TWO KINDS OF REINSURANCE TREATIES 1. Automatic Reinsurance TreatyA mandatory requirement by the Insurance Commission to all insurance companies. The Commission specifies that the maximum retention of value the insurer can cover per policy should not exceed 20% of the companys net worth. Any excess is
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absorbed by the reinsurer through the Automatic Reinsurance Treaty. Note that the contract is between the reinsurer and the insurer. 2. Facultative Reinsurancethe insurer calls out to other insurance companies and invites them to share the risk. MARINE INSURANCE is insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or fixed period of time. (Sec. 99) INSURABLE INTEREST IN MARINE INSURANCE 1. Shipownerover the vessel, EXCEPT: if chartered, the insurance is only up the amount not recoverable from charterer. (Sec. 100) If hypothecated by bottomry, the interest is only the excess of the value of the vessel over the loan. (Sec. 101) shipowner also has insurable interest in expected freightage (Sec. 103) 2. Cargo ownerover the cargo and expected profits (Sec. 105) 3. Chartererover the amount he is liable to the shipowner, if the ship is lost or damaged during the voyage.
Perils of the Sea
Perils of the Ship
Is a loss which in the ordinary course Includes only those of events, results: losses due to unusual violence or 1. From the natural and extraordinary action inevitable action of the of wind and wave or sea; to other 2. From wear and tear of extraordinary the ship; causes connected with navigation. 3. From the negligent failure of the ships owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions
RULE: Marine insurance covers only perils of the sea and not perils of the ship.
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EXCEPTION: The stipulation of an All-Risks Clause, which covers all losses during the voyage whether arising from a marine peril or not. However, it does not cover loss through willful or fraudulent act of the insured. BARRATRY is the willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without consent of owners and to the prejudice of owners interest.
INCHAMAREE CLAUSE covers loss or damage to the hull or machinery through: 1. Negligence of captain, engineers, etc. 2. Explosions, breaking of shafts, etc. 3. Latent defect of machinery or hull. WHAT MATTERS ALTHOUGH CONCEALED, WILL NOT VITIATE THE CONTRACT, EXCEPT WHEN THEY CAUSED THE LOSS? 1. 2. 3. 4. 5. National character of insured; Use of false or simulated papers; Liability of insured thing to capture or detention; Liability to seizure from breach of foreign laws; Want of necessary documents (Sec. 110)
SEAWORTHINESS is a relative term depending upon the nature of the ship, nature of the voyage, nature of the service. In general, a vessel is seaworthy if it is fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy. (Sec. 114) INSURED CARGO OWNERS IMPLIEDLY WARRANT TO THE INSURER THE SEAWORTHINESS OF THE CARRIER It becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods. (PHILAMGEN vs. CA, 273 SCRA 262) DEVIATION is a departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage. (Sec. 123) RULE: Improper or unjustified deviation bars recovery and releases the insurer from liability. Deviation is proper only in the following cases: 1. 2. 3. 4. To comply with a warranty; In good faith to avoid a peril; In good faith to save a human life; Caused by circumstances beyond the control of the vessel. (Sec. 124)
Deviation to save goods belonging to a ship in distress is proper only if incidental to the prime purpose of saving human life.
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LOSS may either be TOTAL or PARTIAL. (Sec. 129) I. TOTAL loss is classified into:
ACTUAL total loss, involving: 1. total destruction; 2. total deprivation of owner of possession of thing insured; 3. loss by sinking; 4. damage rendering thing valueless (Sec. 130)
CONSTRUCTIVE total loss, involving: 1. actual loss of more than of the value of the object; 2. damage reducing value by more than of the value of the vessel and of cargo; and 3. Expense of transshipment exceeds of the value of the cargo (Sec. 131)
II. PARTIAL loss, which is not a total loss. (Sec. 128) ABANDONMENT in marine insurance is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured. (Sec. 138) REQUISITES OF A VALID ABANDONMENT 1. Actual relinquishment by the insured of his interest in thing insured (Sec. 138) 2. Constructive total loss (Sec. 139) 3. Abandonment must not be partial or conditional (Sec. 140) 4. Must be made within reasonable time after receipt of reliable information of the loss (Sec. 141) 5. Must be made by giving notice to the insurer either orally or in writing (Sec. 143) and 6. Notice of abandonment must be explicit and specify the particular cause of the abandonment (Sec. 144)
General Average Loss It is an expense on damage suffered deliberately in order to save the vessel, its cargo, or both, from a real and known risk
Particular Average Loss It is an expense on damage suffered which did not inure to the benefit of all persons interested in the vessel and cargo.
Effect: The insurers of both Effect: Only the insurer of the the ship and cargo bear particular cargo benefiting from the loss equally. the loss shall be liable
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C0-INSURANCE is a relative division of the risk between the insurer and the insured dependent upon the relative amount of the policy and the actual value of the property insured, taking effect only if the actual loss is partial and less than the amount in the policy. ILLUSTRATION Mr. X owns a vessel worth P300,000. He insures it for only P200,000. Mr. X is considered a co-insurer of the vessel to the extent of P100,000 or 1/3 of the vessels value. Hence, if there is a loss of P90,000, the insurer is liable for only P60,000. If Mr. X was not a co-insurer, the insurer would be liable for P90,000. Of course, if a total loss occurred, the insurer would be liable for the entire amount of P300,000, because co-insurance takes place only in case of a partial loss. Rationale: To encourage the insured to insure the full value of the vessel considering that maritime ventures are full of many risks. Co-insurance is implied in a marine insurance. In other forms of insurance, co-insurance must be expressed. FIRE INSURANCE is a contract by which the insurer for a consideration agrees to indemnify the insured against loss of or damage by fire, lightning, windstorm, tornado or earthquake and other allied risks (FLEW-AT), when such risks are covered by extension to fire insurance policies or under separate policies. (Sec. 167) TO DETERMINE LIABILITY OF INSURER, DISTINGUISH BETWEEN:
FRIENDLY FIRE 1. One that burns in a place where it is intended to burn and ought to be (i.e. stove or furnace)
HOSTILE FIRE 1. One that escapes from the place where it was intended to burn and ought to be (i.e. fire escaping from stove or furnace damaging property of the insured)
2. Insurer is not liable. Friendly 2. Insurer is liable. fire is deemed an agency for the accomplishment of some purpose, and not a hostile peril.
FALL OF BUILDING CLAUSE is a clause in fire insurance policy that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease. What is the effect of ALTERATION?
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Alteration results in rescission ifthe alteration violates the contract and increases the risk. 1. 2. 3. 4. alteration in the use or condition from that which is limited in the policy increasing the risk made without consent of insurer means within control of insured (Sec. 168)
Alteration not resulting in rescission ifthe alteration violates the contract but does not increase the risk (Sec. 169) the alteration does not violate the contract but increases the risk (Sec. 170); OPTION TO REBUILD CLAUSE gives the insurer the option to rebuild the destroyed property instead of paying the indemnity. This clause serves to protect the insurer against unfair appraisals friendly to the insured. This clause is sanctioned and recognized under the last sentence of Sec. 172. CASUALTY OR ACCIDENT INSURANCE is insurance covering loss or liability arising from accident or mishap, excluding those falling under other types of insurance as fire or marine. (Sec. 174) Accident or accidental have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual or unforeseen. (Pan Malayan Insurance Corp. vs. CA, 184 SCRA 54) Insured was a boxer. During a bout, he was hit in the face and fell backwards, hitting a post. HELD: Accident (De la Cruz vs. Capital Insurance, 64 O.G. 760) Insured was murdered. In case of murder or homicide, there is intent to kill. HELD: No accident. (Kanapi vs. Insular Life, 94 Phil. 397) Accused charged with robbery with homicide. The intent was to rob. Insured was killed by accident. HELD: Accident (Calanoc vs. CA, 98 Phil. 79) INTENTIONAL as used in Accident Insurance Intentional as used in an accident policy excepting intentional injuries inflicted by the insured or any other person implies the exercise of the reasoning faculties, consciousness and volition . Where a provision of the policy excludes intentional injury, it is the intention if the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieved from liability as stipulated. (Biagtan vs., Insular Life, 44 SCRA 58) SURETYSHIP is an agreement whereby a surety guarantees the performance by another of an undertaking or an obligation in favor of a 3 rd party. (Sec.175) Nature of the LIABILITY of the Surety 1. Solidary;
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2. Limited to the amount in the bond (it cannot be extended by implication); 3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee (Sec. 176) The insurer acts as a surety and not a guarantor. A guarantor, unlike a surety, has the right of exhaustion not available to a contract of suretyship. The rule on payment of premium is the same as ordinary insurance. Pay first before the contract becomes effective. EXCEPTION: If the surety bond is accepted by the obligee irrespective of payment of premium, the contract of suretyship is binding upon the insurer. (Sec. 177) LIFE INSURANCE is insurance on human lives and insurance appertaining thereto or connected therewith. (Sec. 179) KINDS OF LIFE INSURANCE POLICIES 1. Ordinary Life, General Life or Old Line Policy insured pays a premium every year until he dies. Surrender value after 3 years. 2. Limited Paymentinsured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything. 3. Endowmentinsured pays a premium for a specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit. 4. Term Insuranceinsured pays once only, and he is insured for a specified period. If he dies within the period, his beneficiaries benefit. If he outlives the period, no person benefits from the insurance. 5. Industrial Lifelife insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener; and 6. Variable Contractany policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment.
BAR Q: What is the liability of the insurer in case of SUICIDE? After the policy has been in force for a period of two years from its date of issue or last reinstatement, the insurer is liable for suicide committed by the insured. If suicide was committed before the lapse of the two year period, the insurer is not liable. If suicide was committed in the state of insanity, date of commission is immaterial. The insurer is always liable. (Sec. 180-A)
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If the insured was convicted of a capital offense and executed by lethal injection, can the beneficiary recover? Yes. This is part of the risk assumed by the insurer. COMPULSORY MOTOR VEHICLE INSURANCE (Sec. 373) If you are the owner of a motor vehicle, whether public or private, you must secure a compulsory motor vehicle insurance, which is a requisite before you can register your vehicle. Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of financial capability of motor vehicle owners or operators responsible for the accident sustained. Passenger is any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle's operator or his agents to ride without fare. Third-Party is any person other than a passenger as defined in this section and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment. (Sec. 373 pars. (c) and (d)) NO FAULT CLAUSE provides that any claim for death or injury to any passenger or third party shall be paid without necessity of proving fault or negligence provided the indemnity with respect to any one person does not exceed P5,000.00 provided the following proofs of loss under oath are submitted: 1. Death certificate and evidence sufficient to establish proper payee; 2. Police report; 3. Medical report and evidence of medical or hospital disbursement If more than P5,000.00 is sought, negligence which is the basis of the award must be proven in court.
If the offended party is a 1. Passenger, file claim against insurer of the vehicle he was a passenger of. (Sec. 378 (iii)) 2. Pedestrian, file claim against insurer of the directly offending vehicle. The claimant is not free to choose from which insurer he will claim the no fault indemnity as the law makes it mandatory that the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting, or dismounting from. The said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying may recover against
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the owner of the vehicle responsible for the accident. (Perla Compania de Seguros vs. Ancheta, 169 SCRA 144) AUTHORIZED DRIVER CLAUSE indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission. Where a car is admittedly and wrongfully taken without the knowledge and consent of the owner, such taking constitutes theft and it is the theft clause, not the authorized driver clause which should apply. (Perla Compania vs. CA, 208 SCRA 487) COOPERATION CLAUSE is a clause in automobile insurance policy which provides that the insured shall give all such information and assistance as the insurer may require, usually including attendance at trials or hearings.
TRANSPORTATION LAWS COMMON CARRIERS (Arts. 1732-1766, New Civil Code) Common Carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. Common Carrier Private Carrier such
1. Required to observe extraordinary Not required to observe diligence diligence. 2. Transport people and goods for Private carriers do not. compensation 3. In case of damages, the basis of the action is the contract entered into between the carrier and the passengers and/or consignees 4. The law applicable in case of damages The Laws on Torts shall apply. with respect to common carriers Transportation Law
What is the DILIGENCE required by common carriers? Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. PURPOSE of the Code Commission in incorporating ART. 1733-1756 of the New Civil code which requires the 1. highest degree of diligence from common carriers in the safe transport of their passenger and in creating a 2. presumption of negligence against them, is that the recklessness of drivers which is a common sight even in crowded areas and particularly , on highways throughout the country may , somehow , in large measure be curbed. I. VIGILANCE OVER THE GOODS
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RULES governing common carriers LIABILITY over Goods: General RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods, UNLESS the same is due to any of the following causes only: 1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; 2) Act of the public enemy in war, whether international or civil; 3) Act or omission of the shipper or owner of the goods; 4) The character of the goods or defects in the packing or in the containers; 5) Order or act of competent public authority. (Art. 1734) (Art. 1735) In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the preceding article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required in article 1733. RULE: The common carrier (CC for brevity), is at all times, required to observe extraordinary diligence with respect to transport of goods. Hence, in case of damages to cargo, the CC is presumed not to have observed the extraordinary diligence required. However, the CC may absolve itself from liability by proving any of the following DEFENSES: (2) A) That the CC encountered: a. An act of God; there must have been no delay on the part of the common carrier. Otherwise, if delayed and not for good reason, then it shall be held liable notwithstanding the fact that all the subsequent requisites were present. must be an unforeseen event or an event which cannot be avoided The carrier must have exercised extraordinary diligence before, during, and after the time of the accident. The proximate cause must not be committed by the carrier. If the proximate cause of the event is caused by the carrier, then he cannot invoke the act of God defense. Under the rule on Contributory Negligence, if the negligence attributable to carrier is not proximate in character, the carrier shall be responsible, although such liability shall be mitigated. b. c. d. e. Act of public enemy in war; Act by a competent public authority; Acts/omissions of the shipper or his agent; The goods or the packaging is inherently defective.
Even if the loss, destruction, or deterioration of the goods should be caused by the character of the goods, or the faulty nature of the packing or of the containers, the common carrier must exercise due diligence to forestall or lessen the loss. EXEMPTING CAUSE REQUISITES for natural disaster or calamity 1. The natural disaster must have been the proximate cause of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before , during and after the natural disaster
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4. The common carrier has not negligently incurred delay in transporting the goods REQUISITES for act of public enemy 1. The act of public enemy must have been the proximate of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before , during and after the act of public enemy in war. REQUSITE FOR act or omission of Shipper 1. That the act or omission of the shipper /owner of the goods must have been the proximate cause of the loss 2. That it must have been the only cause of the loss. REQUSITES for character of goods , fault in packing or containers1. That the loss , destruction or deterioration was caused by the character of the goods ; or the faulty nature of the packing /containers 2. That the common carrier had exercised due diligence to forestall or lessen the loss. REQUISTES for the act of public authority 1. The common carrier must prove that the public authority had the power to issue the order for the destruction / seizure of the goods. B.) Another defensive strategy to escape liability is to invoke that it exercised extraordinary diligence to prevent or minimize the loss at the time the accident occurred. Negligence is the failure to observe due diligence with respect to the circumstances at hand. Contributory Negligence is the failure to observe due diligence that an ordinary or prudent man undertakes in relation to the negligence of another. When does the carriers responsibility over the goods arise? The carrier shall be liable the moment the goods arrive in his possession whether actual or constructive, until such time that the carrier delivers the same to the consignee OR the consignee has been informed of the arrival of the goods and the consignee had reasonable time to remove the same. Under maritime laws, the responsibility of the carrier ends when the goods were transmitted by the carrier to the customs arrastre operator. Recall that before the goods are delivered to the consignee, the state has the responsibility to ensure that the goods being brought in are in accordance with the law. EFFECT: The carrier would no longer be liable. The succeeding relationship would be between the consignee and the arrastre operator , the relationship governing them would be akin to a contract of Deposit. There is already an existing Contract of carriage when the carrier took possession of the cargo by placing it on a lighter or barge manned by its authorized employees. (COMPANIA MARITIMA vs. INSURANCE COMP ) A bill of lading that was issued covering certain shipment which contained a provision that the carrier does not assume liability for any loss /damage to the goods once they have been under the custody of the custom or other authorities
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or when they have been delivered at ships tackle have been considered valid , because it was held that it is not contrary to morals and public policy ; said stipulation is clear and have been adopted to mitigate the responsibility of the common carrier. (LU DO vs. BINAMIRA) Stoppage in Transitu is the right of the unpaid seller who has parted with the possession of the goods to stop them in transit, when the buyer of goods is or becomes insolvent. Requisites: 1. Seller must be an unpaid seller; 2. Goods must be in transit; 3. Buyer must be in a state of insolvency; EFFECT: Once the right is exercised, the common carrier becomes a mere warehouseman. In the event that the UNPAID Seller exercises its right of stoppage in transitu , the carrier thereafter holds the goods in the capacity of an ordinary bailee or warehouseman and shall be liable only as such , upon the theory that the exercise of the right by the unpaid seller , such terminates the contract of carriage. A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: 1. In writing, signed by the shipper or owner; 2. Supported by a valuable consideration other than the service rendered by the common carrier; and 3. Reasonable, just and not contrary to public policy. Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: 1. That the goods are transported at the risk of the owner or shipper; 2. That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; 3. That the common carrier need not observe any diligence in the custody of the goods; 4. That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; 5. That the common carrier shall not be responsible for the acts or omission of his or its employees; 6. That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; and 7. That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if reasonable and just under the circumstances, and has been fairly and freely agreed upon.
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The law of the country to which the goods are to be transported governs the liability of the common carrier in case of loss, destruction or deterioration. If to be transported in the Phil, the liability shall be governed primarily by the Civil Code . In matter not regulated by the Civil Code , the rights and obligations shall be governed by the Code of Commerce and by Special laws. Hence , the Carriage of Goods by Sea act is suppletory to the provisions of the Civil Code . The provisions of articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable. Fire may not be considered as a natural disaster or calamity. It does not fall within the category of act of God UNLESS caused by lighting or by natural disaster or calamity. It may even be caused by actual privy or fault of the carrier. (EASTERN SHIPPING VS. IAC) The Civil Code provisions on Common carrier shall not be applied when the carrier is not acting as such but as a private carrier. The stipulation in the charter party absolving the owner from liability for loss due to the negligence of its agent would be void only if strict public policy governing common carriers are applied. Such policy has no force when the public at large is not involved , as in the case of a ship totally chartered for the use of a single party (HOME INSURANCE vs. AMERICAN STEAMSHIP) In case where the Common carrier w/o just cause1. Delays the transportation of goods 2. Changes the stipulated route / usual route The annulment of the agreement limiting the carriers liability is no longer necessary ; The carrier cannot simply avail of the benefit /defense of limited liability. When the conditions printed in the back of the ticket stub are in letters so small that they are hard to read, this would not warrant the presumption that the passenger were aware of those conditions such that he had fairly and freely agreed to them . The passenger therefore is not bound by such stipulations. (SHEWARAN vs. PAL) II. SAFETY OF PASSENGERS DUTY: A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. The presumption in case of death of or injuries to passengers is the same with loss or damage to goods: Common carriers are presumed to have been at fault or to have acted negligently , unless they prove that they observed extraordinary diligence as prescribed in articles 1733 and 1755. RULE: The responsibility of a common carrier for the safety of passengers as required in articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. EXCEPTION: When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for willful acts or gross negligence.
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A reduction of fare does not justify any limitation of the common carrier's liability. Is the carrier liable for death of or injuries to the passengers due to the negligence or willful acts of ITS EMPLOYEES? YES, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. Illustrative rule: Two passengers engage in a fist-fight inside a bus terminal. An on-duty driver attempts to pacify them but instead kills one. The carrier is liable! But, if the killing of the passenger occurred while the driver is off-duty, the carrier is not liable. (Recall the case of Gillaco v. Manila Railroad, the carrier was held not liable when its employee, a security guard who harbored a grudge against a fellow passenger, shot and killed the latter. The guard committed the killing while he was off-duty.) The Common carrier is held liable because 1. The driver , although stopping the bus, nevertheless did not put off the engine. 2. He started to run the bus even before the conductor gave him the signal to go and while the passenger was still unloading part of the baggage . ( LA MALLORCA vs. CA) In the case of LACAM vs. SMITH , the Court held that an accident caused by defects in the automobile is not a caso fortuito. The rationale of the carriers liability is the fact that the passenger has neither the choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Is the carrier liable for death of or injuries to the passengers due to the willful acts or negligence of OTHER PASSENGERS OR OF STRANGERS? YES, a common carrier is responsible for injuries suffered by a passenger if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees, as this defense is only available in actions culpa aquiliana. The DUTY of the PASSENGER is to observe the diligence of a good father of a family to avoid injury to himself. The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced. In case of injury as a result of a factory defect of the appliance purchased from the manufacturer whenever it appears that the defect could have been discovered by the carrier if it exercised the degree of care under the circumstances, the manufacture is considered as agent or servant of the carrier ,as far as regards the work constructing the appliance. Accdg. To this theory , the good repute of the manufacturer will not relieve the carrier from liability. Condition printed on the back of a passenger ticket commonly known as CONTRACT OF ADHESION , being drafted only by one party , usually the corporation , and the only participation of the other party (passenger ) is the signing of his signature his adhesion thereto calls for greater strictness and
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vigilance on the part of the court of justice with the view of protecting the weaker party from abuses . Such contract if enforced will be subversive of public good , thus placing the common carrier at a decided advantage over those who may have legitimate claims against it. The said condition is therefore unenforceable , as contrary to public policy- to make the court accessible to all those who have need of their services. Moral damages are not recoverable on breach of contract of carriage in view of ART.2219-20 NCC . EXCEPTIONS1. Where the mishap results in the death of a passenger; Because the common carrier becomes subject to the rule in ART.2206 NCC entitles the spouse, descendants, ascendants to moral damages for mental anguish as a result of the death of the deceased. 2. 2.Where it is proved that carrier was guilty of fraud or bad faith EVEN if death does not result. Mere carelessness does not per se justify an inference of malice or bad faith on the part of the common carrier ; Must be GROSS negligence CODE OF COMMERCE (ART.349-379) ART. 349-379 COVERS COMMERCIAL CONTRACT FOR TRANSPORTATION OVERLAND OR WATERWAYS Bill of lading Written acknowledgement of receipt of goods and agreement to transport them to a specific place to a named person or to his order. It is not indispensable for the creation of contract of carriage. (Compania Maritima vs. Insuarance Co of North America) KINDS: ON BOARD BOL 1. Issued when the goods have been actually placed aboard the ship with very reasonable expectation that the shipment is good as on its way. 2. One which is stated that the goods have been received on board the vessel which is to carry the goods. RECEIVED BOL 1. One which is stated that the goods have been received for shipment with or without specifying the vessel by which the gods are shipped. FUNCTIONS OF BOL 1. The best evidence of the existence of the contract of carriage of cargo 2. Commercial document whereby if negotiable , ownership may be transferred by negotiation; and 3. Receipt of cargo RECOVERY OF DAMAGE FROM CARRIAGE FOR CARRIAGE OF GOODS INTER-ISLAND Art 366 CODE OF COMMERCE provides that in case the goods arrived in damage condition , the claim should be1. Immediately after deliveryif the damage is APPARENT ;or 2. Within 24 hours from deliveryIf the damage is NOT APPARENT The filing of claim under the 2 instances is a condition precedent for recovery,
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When the consignee receives the merchandise transported and indemnity for the delay , paying the freight charges without protest , all actions against the carrier are extinguished If claim is filed , and the carrier refuses to pay , file a case in Court to enforce the carrier liability within 1. 6years- No BOL has been issued 2. 10years-If BOL has been issued OVERSEAS Where goods arrived in a damage condition from a foreign port to a Philippine port of entry. 1. Upon the discharge of goods- If the damage is APPARENT ; or 2. Within 3 days from delivery if the damage is NOT APPARENT The filing is not a condition precedent for recovery , BUT an action must be filed within 1 year from discharge ; if no delivery- within 1 year from the time the same should have been delivered. DOCTRINE OF COMBINED /CONNECTING CARRIERS Under Art. 373 CODE OF COMMERCE , the original carrier that entered into the contract of carriage shall be liable for damages caused by its connecting carrier. A contract of towage is not a contract for the carriage of goods . An agreement wherein a party oblige itself to tow another vessel for a consideration is not a contract of carriage but rather a contract for hire of services. It would be a contract of carriage , however , if the barge towed and its tugboat belong to the same owner and the barge is used continuously in the business of transporting goods. (Standard Vacuum Oil Co. vs. Luzon Stevedoring Co.)
MARITIME COMMERCE A merchant vessel is a vessel engaged in maritime commerce whether coastal or foreign. It is considered personal property. Hence, laws concerning transfer of personal property governs over merchant vessels. CHARACTERISTICS OF MARITIME TRANSACTIONS: RealMaritime transactions bind third persons. Creditor liens over the vessel thus bind third persons. However, creditor liens over the vessel are restricted to the actual value of the vessel, the freight money, and the right to retain cargo, embargo, and detention of the vessel. Hypothecaryowners liability over the vessel is limited to the vessel itself. PREFERENCE OF CREDITS A properly registered mortgage lien over the vessel becomes a preferred credit over said vessel. This lien has priority over all claims against the vessel in an extrajudicial foreclosure for: a) Credit in favor of the public treasury; b) Judicial costs of the proceedings; c.) Pilotage, sea, port and tonnage charges; c) Salaries of depositaries and keepers of the vessel; d) Captains and Crews wages; e) General Average; f) Salvage including contract salvage;
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g) Maritime liens arising prior in time to the recording of the preferred mortgage; h) Damages arising from tort; and i) Preferred mortgage registered prior in time. Requisite to be a Marine or merchant vessels. 1.The vessel should not be an accessory to another vessel 2. Must be licensed to engaged in the trasportation of passengers and/or freight 3.By sea ( not merely in rivers , inlets, lakes, coves , bays) whether in foreign or coast wide trade. DOCTRINE OF LIMITED LIABILITY RULE: Liability of ship owner is limited to ship owners interest over the vessel. Consequently, in case of loss, ship owners liability is also extinguished. Limited liability likewise extends to ships appurtenances, equipment, freightage, and insurance proceeds. The reason is the real and hypothecary nature of maritime law. To offset against innumerable hazards and perils in sea voyage and to encourage ship building and maritime commerce ; it was deemed necessary to confine the liability of SO and SA in the operation of a ship to the vessel , freight , insurance , if any ; so that by abandonment , the SO and Sa exempts himself from liability ; THUS avoiding the possibility of risking his whole fortune in the business. This privilege is evidence of the REAL AND HYPOTHETICAL NATURE OF MARITIME LAW . EXCEPTIONS 1. In case the voyage is not MARTIME , BUT only in river , bay or gulf 2. In case of expenses for equipping ,repairing or provisioning the vessel 3. In case the vessel is not COMMON , but a special carrier 4. In case the vessel would totally sink or totally loss by reason of the Ship owner or Ship agent faults DISTINCTIONS BETWEEN ABANDONMENT IN MARITIME COMMERCE AND MARITIME INSURANCE ; MARITME COMMERCE 1. Abandonment is made by the SO/SA 2. The thing abandoned is the vessel with all its appurtenances and freight 3. BASIS is Breach of Maritime contract because of the conduct of the captain in the vigilance over the goods and safety of passengers 4. The purpose is to limit the liability of the SO/SA to third persons to the value of the vessel with her appurtenances and freight MARITIME INSURANCE 1. Abandonment is not necessarily made by the SO/ SA 2. The thing insured , not necessarily the vessel 3. Constructive total loss in which the loss , injury or expenses be more than of the value of the value of the thing insured which is abandoned. 4. To recover from the insurer indemnity for a total loss , although the thing insured does not suffer actual total loss.
Abandonment in Maritime Insurance REQUISITES 1. There must be actual relinquishment of claim of ownership 2. There must be constructive total loss (Loss, injury or expenses suffered be more than of the value of the thing abandoned 3. The abandonment must neither be partial nor conditional 1. Abandonment must be done within reasonable time after receipt of reliable information of constructive total loss
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2. Notice to the insurer , whether orally or in writing must be EXPLICIT; specify the CAUSE of abandonment 3. if done orally , a written notice must be given within 7 days from such oral notice. Article 372, Code of Commerce: provides for the right to file action for attachment within ten (10) years. Article 375, Code of Commerce: provides for the period within which the right of lien must be exercised; within thirty (3) days. Persons participating in Maritime Commerce 1.SHIPOWNERS 2.SHIP AGENT 3.CAPTAIN OR MASTER OF THE VESSEL 4.OFFICERS OTHER THAN THE CAPTAIN OR MASTER OF THE VESSELS (namely the Sailing or first mate, the quarter mate or second mate , the engineers.) 5. SEAMEN (SAILORS OR CREW) 6.OTHER PERSONS WHO MAKE UP THE COMPLEMENT OF THEVESSELS , INCLUDING THE STOKERS AND SUPERCARGOES. The owner of a vessel and the agent shall be civilly liable for the obligations contracted by the captain to repair , equip and provision the vessel , and this notwithstanding that he contracted in his own name . When the agents buy in their own names , but really for the account of the principal , the SELLER has the option to proceed with the ship owner and agent for payment . UNLESS; 1. He trusted the agent exclusively 2. Usage and Understanding the agent only is held 3. Special circumstances of the case show that only the agent is bound and the seller knew or chargeable with the knowledge of it. I. SHIP OWNERS AND AGENTS
Ship owner has possession, management, control over the vessel, and the right to direct her navigation. While in their possession, the ship owners also receive freight earned and paid. Agent is understood as the person entrusted with provisioning or representing the vessel in the port in which it may be found. The ship agent is not the same as an agent in an ordinary contract of agency, because the ship agent is SOLIDARILY LIABLE with the ship owner (even though he acted within the scope of his authority). In an ordinary agency, the agent is not liable if he acted within the scope of his authority. REASON: The law allows the ship agent to be sued for liabilities appertaining to the principal because it is physically impossible for the owner to be in the place where the vessel is found. The position of ship agent is very lucrative because of the monetary benefits. He has the same rights as an owner of the vessel; he can exercise the right of abandonment, and is considered the ALTER EGO of the SHIPOWNER. The Ship Owners and Agents are CIVILLY LIABLE FOR: 1. Acts of the captain; (Art. 587)
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2. Contracts entered for provisioning and repair of vessel; 3. Indemnities in favor of 3rd persons arising from the conduct of the captain from the care of goods; 4. Damages suffered by a 3rd person for tort committed by the captain; and 5. Damages in case of collision due to fault or negligence or want of skill of the captain Under the DOCTRINE OF ABANDONMENT, the ship owner/ship agent shall be civilly liable for the indemnities in favor of third persons arising from acts of the captain and his conduct in the care of the goods loaded on the vessel. But the owner/agent may exempt himself from liability by abandoning the vessel with all her equipments and the freight it may have earned during the voyage. this right of abandonment is available or exercised only by the owner or agent and never by the captain or charterer. Abandonment amounts to an offer of the value of the vessel and cessation of responsibility of the ship owner and ship agent. The offer of the value of vessel and freight is directed towards the injured parties. The RULE is that TOTAL DESTRUCTION of the vessel extinguishes the MARITIME LIEN , as there is no longer any RES where it can attach. BUT the TOTAL DESTRUCTION DOES NOT AFFECT THE LIABILITY OF THE SO/SA for repairs completed before its LOSS. POWERS, FUNCTIONS, AND LIABILITIES OF SHIP AGENTS. A) Indemnity for expenses incurred for ships benefit. a) Ship agent shall indemnify the captains funds or those of others for expenses benefiting the vessel. B) Discharge of captain and/or crew members, Rules observed by the Ship Agent: (a) Captain and/or crew members contract NOT FOR DEFINITE PERIOD OR VOYAGE: i.) Before vessel sets out to sea: Ship agent at his discretion may discharge the captain and members of the crew. Ship agent must pay captain and/or crew members salaries earned according to their contracts. Unless there is an express and specific agreement in respect thereto, the ship agent may not indemnify them whatsoever; ii.) If the captain or any crew member be discharged during voyage: Captain and/or crew member shall receive salary until return to the port where contract was made. Article 637 of the Code of Commerce enumerates just cause for discharge. (b) Where captain and members of the crews contracts with ship agent be FOR A DEFINITE PERIOD OR VOYAGE: i.) Captain and/or crew members may not be discharged until after the fulfillment of their contracts, except by reason of insubordination in serious matters, robbery, theft, habitual drunkenness, or damage caused to the vessel or to its cargo through malice or manifest or proven negligence. (Article 605, Code of Commerce) ii.) If the captain should be the vessels coowner, he may not be discharged unless ship agent returns captains amount of interest therein. In the absence of agreement between the parties, interest shall be appraised by experts appointed in the manner established by civil procedure. If the captain who is a co-owner should have obtained the command of the vessel by virtue of a special agreement contained in the articles of association,
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he may not be deprived of his office except for the causes mentioned in Art. 605 (supra). In case of the voluntary sale of the vessel, all contracts between the ship agent and the captain shall terminate, reserving to the captain his right to the indemnity which may pertain to him, according to the agreements made with the ship agent. They vessel sold shall remain subject to the security of the payment of said indemnity if, after the action against the vendor has been instituted, the latter is found to be insolvent. II. CAPTAINS AND MASTERS OF VESSELS
Three-fold character of the CAPTAIN 1. General agent and ship owner. 2. Vessels technical director. 3. Government representative of the flag he navigates under. A.) INHERENT powers of the ship captain: 1. To appoint or make contracts with the crew in the ship agents absence, and to propose said crew, should said agent be present; but the ship agent may not employ any member against the captain's express refusal; 2. To command the crew and direct the vessel to the port of its destination, in accordance with the instructions he may have received from the ship agent; 3. To impose while on board correctional punishment: a.) Upon those who fail to comply with orders or b.) Those wanting in discipline; 4. To make contracts for the charter of the vessel in the absence of the ship agent or of its consignee; 5. To adopt all proper measures to keep the vessel well supplied and equipped, purchasing all that may be necessary for the purpose, provided there is no time to request instruction from the ship agent; 6. To order, in similar urgent cases while on a voyage, the repairs on the hull and engines of the vessel and in its rigging and equipment, which are absolutely necessary to enable it to continue and finish its voyage. B.) SOURCES OF FUNDS to comply with the inherent powers of the captain (in the order of succession): 1. From the consignee of the vessel; 2. From the consignee of the cargo; 3. By drawing on the ship agent; 4. By a loan on bottomry; 5. By sale of the cargo. C.) OBLIGATIONS of the Captain: 1. To have on board before starting on a voyage a detailed inventory of the hull, engines, rigging, spare-masts, tackle, and other equipment of the vessel; 2. To have the Code of Commerce and all necessary documents on board; 3. To have a log book, accounting book, and freight book; 4. Before receiving cargo, to make with the officers of the crew and two experts, if required by the shippers and passengers, an examination of the vessel; 5. To remain constantly on board the vessel with the crew while the cargo is being taken on board and to carefully watch the stowage thereof; 6. To demand a pilot at the expense of the vessel whenever required by the navigation, and principally when he has to enter a port, canal, or river, or has to take a roadstead or anchoring place with which neither he nor the officers and crew are acquainted;
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7. To be on deck on reaching land and to take command on entering and leaving ports, canals, roadsteads, and rivers, unless there is a pilot on board discharging his duties. He shall not spend the night away from the vessel except for serious causes or by reason of official business; 8. To protest arrivals under stress in case of shipwrecks; 9. To take the necessary steps before the competent authority in order to record in the certificate of the vessel in the registry of vessels the obligations contracted, and to place under good care and custody all the papers and belongings of any members of the crew who might die on the vessel; 10. To conduct himself according to the rules and precepts contained in the instructions of the ship agent; 11. To inform the ship agent from the port at which the vessel arrives; 12. To observe the rules with respect to situation, lights and maneuvers in order to avoid collisions; 13. To remain on board, in case the vessel is in danger; and 14. To comply with the obligations imposed by the laws and regulations on navigation, customs, health, and others. D.) LIABILITIES of the ship agent/owner with respect to Captains acts towards the passengers and/or goods 1. For all the damages suffered by the vessel and its cargo by reason of want of skill or negligence on his part; 2. For all the thefts committed by the crew, reserving his right of action against the guilty parties; 3. For the losses, fines, and confiscations imposed an account of violation of customs, police, health, and navigation laws and regulations; 4. For the losses and damages caused by mutinies on board the vessel or by reason of faults committed by the crew in the service and defense of the same, if he does not prove that he made timely use of all his authority to prevent or avoid them; 5. For those caused by the misuse of the powers; 6. For those arising by reason of his going out of his course or taking a course which he should not have taken without sufficient cause, in the opinion of the officers of the vessel, at a meeting with the shippers or supercargoes who may be on board. No exceptions whatsoever shall exempt him from this obligation; 7. For those arising by reason of his voluntarily entering a port other than that of his destination, outside of the cases or without the formalities referred to in Article 612; 8. For those arising by reason of non-observance of the provisions contained in the regulations on situation of lights and maneuvers for the purpose of preventing collisions. E.) Captain shall not be liable for loss or injury to persons or cargo when caused by 1. Force majeure; 2. Obligations contracted for the vessels benefit, EXCEPT when the captain expressly agrees to be liable. F.) Grounds for CAPTAINS DISCHARGE 1. Insubordination in serious matters; 2. Robbery; 3. Theft; 4. Habitual drunkenness; 5. Damage caused to the vessel or to its cargo through malice; and 6. Damage caused through manifest or proven negligence. III. OFFICERS AND CREW OF THE VESSEL
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SAILING/FIRST MATE He is the second chief of the vessel. The First Mate takes over the vessel in the Captains inability to discharge powers. Qualifications: He must have the qualifications sets forth by Law or Maritime Regulations AND not be disqualified by the same maritime laws and regulations (All the qualifications and none of the disqualifications) Duties: 1. Provide himself with maps, charts with astronomical table necessary for the first mates discharge of functions; 2. After captains disagreement with the ships officers, the first mate may, after consultation with the captain, change the vessels course; 3. Responsible for all damage caused to vessel and/or cargo arising from his negligence and 4. Keep the binnacle book SECOND MATE He takes command of the vessel in case of disability/discharge of the captain and first mate. Duties: 1. Preserve the vessels hull and rigging; 2. Arrange well the cargo; 3. Assign work to crew members; 4. Discipline the crew; 5. Inventory the rigging and equipment of the vessel, if laid up. ENGINEERS Officers in-charge of the vessels motor apparatus. In event two or more of them are hired, one shall be chief engineer. Duties: 1. In charge of the engine and all appurtenant parts thereto; 2. Keep the engine in good condition; 3. With Captains authorization, change vessels engine; 4. In case of engine or engine-related damage, inform the captain; 5. Keep an engine book; and 6. Supervise all personnel maintaining the engine. MEMBERS OF THE VESSEL Crew members are hired by the ship agent. In case of ship agents absence, they are hired by the captain. In no case may the ship agent or captain take a number of foreigners more than 1/5 of the vessels complement. CLASSES of seamans contract. 1. By Voyage. 2. By Month. 3. By Share in the freightage or profit. Just causes for SEAMANS DISCHARGE while contract subsists. 1. Perpetration of a crime. 2. Physical incapacity 3. Repeated want of discipline 4. Repeated incapacity and negligence. 5. Repeated insubordination 6. Habitual drunkenness
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7. Desertion Just causes for REVOCATION OF VOYAGE. 1. War; 2. Blockade; 3. Prohibition to receive cargo at port of destination; 4. Embargo; 5. Inability of the vessel to navigate. Rules in case of SEAMANS DEATH Seamans heirs are entitled to payment as follows: Natural death. If occurring before voyage: compensation up to death. If occurring during voyage: i.) Voyage out-half amount. ii.) Voyage in-full amount. Death on the occasion of defending the vesselfull amount. Capture after defending the vesselfull amount. Capture due to members negligencewage up to time of capture only. COMPLEMENT OF THE VESSEL are all persons necessary for the vessels management EXCLUDING the captain, first mate, second mate, engineer, members of the vessel. Passengers of the vessel are also EXCLUDED. IV. SUPERCARGOES - persons assigned with administrative duties by the ship agent or shippers. They keep account of the vessels transaction. What is a CHARTER PARTY CONTRACT? It is a contract whereby ship owner/ship agent agrees: 1. To transport merchandise for a price; or 2. To allow another person to use the whole or part of a ship. CLASSES of Charter Party A) BAREBOAT OR DEMISEthe ship owner gives possession of the entire vessel to the charterer. In turn, the charterer supplies, equips, and mans the vessel. Owner Pro Hac Vice is the condition which arises in a bareboat or demise charter contract. This condition considers the charterer as the owner of the vessel for the voyage or service stipulated . The charterer and not the owner of the vessel is liable for vessels expenses, including seamans wages. Bareboat/Demise Charter Contract 1) Negligence of the charterer gives rise to liability to others. 2) Charterer is regarded as owner pro hac vice. 3) Ship owner temporarily relinquishes possession and ownership of the vessel. Contract of Affreightment 1) Ship owner remains liable as carrier must answer for any breach of duty. 2) Charterer is not regarded as owner. 3) Ship owner retains ownership over the vessel.
B) TIME CHARTERVessel is chartered for a particular time or duration. While the ship owner still retains possession and control of the vessel, the charterer has the right to use all vessels facilities . Charterer may likewise designate vessels destination.
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Voyage Chartervessel is chartered for a particular voyage or series of voyages. Contract of Affreightmentthe ship owner leases the boat or part thereof for transport of goods. Stipulation exempting liability of the carrier in a Time Charter Party or Voyage Charter Party is VOID for being against public policy since the same involves public interest. However, if the same stipulation is found in a Bareboat Charter Party or Demise Charter Party, it is VALID because no public interest is involved since the charterer and not the shipowner has control of the vessel and crew. In a Contract of Carriage, there should be no condition that the goods will be delivered on some other day. THERE SHOULD BE AN UNCONDITIONAL INSTRUCTION TO DELIVER. Contract of Carriage is terminated when shipper exercises right of stoppage in transitu because carrier is no longer obligated to exercise extraordinary diligence as carrier but only ordinary diligence as bailee. RIGHTS AND OBLIGATIONS in Charter Party Ship owner or Ship agent 1. If vessel is wholly chartered, not to accept cargo from others; 2. To preserve the represented capacity; 3. To unload cargo clandestinely placed; 4. To substitute another vessel when cargo is less than 3/5 capacity; 5. To leave port when charterer does not bring cargo to vessel within the lay/ extra-lay days agreed upon; 6. To place vessel in a condition to navigate; and 7. To bring vessel to nearest neutral port in case of war. Charterer 1. Pay the agreed price; 2. Pay freightage on unboarded cargo; 3. Pay losses to others for unloading/loading uncontracted or illicit cargo; 4. To wait if vessel needs repair; and 5. Pay expenses for deviation. How is RECISSION of a charter party exercised? At the request of the charterer: 1. By abandoning the charter and paying half the price; 2. Error in tonnage or flag; 3. Failure to place vessel at charterers disposal; 4. Return the vessel due to pirates, enemies, and bad weather; 5. Arrival at port for repairs. At the request of the ship owner: 1. If extra lay days terminate without the cargo being placed alongside vessel; and 2. Sale by the owner of the vessel before loading by the charterer. Primage is the bonus paid to the captain of a successful voyage. Demurrage is the sum due, by express contract, for the detention of the vessel for a time longer than time set for loading.
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Lay Days is the period when the vessel shall be delayed in port for loading and unloading. Contract of Towage is a contract whereby a vessel pulls another vessel from one place to another regardless whether or not the latter vessel is laden with merchandise. A contract of towage is a contract of service rather than a contract of carriage. What are the usual forms of CONSUMMATING contracts? 1. C.I.F.-cost, insurance, and freight 2. F.O.B.- free on board 3. F.A.S.-free alongside ship 4. C and F-cost and freight Transshipment of goods is the act of taking cargo from one ship and loading the same cargo to another ship. If transshipment is not legally excused, a contract violation arises. This is true even if the transfer was done competently and safely. Loan on Bottomry Loan made by the ship owner or ship agent with the ship as guaranty. The loan is repayable upon safe arrival at port of destination by the ship. Loan on Respondentia Loan secured by the cargo on board the vessel. The loan is repayable upon safe arrival at port of destination by the ship.
Common Elements of Bottomry and Respondentia: 1. Exposure of security to marine peril. 2. Obligation of the debtor conditioned only upon safe arrival of the security at port of destination. In Bottomry Loan, the risk begins once the vessel leaves the port. In Loan on Respondentia, the risk begins from the time the goods are loaded on board the vessel unto the port of destination. Forms of a loan on Bottomry/Respondentia: May be executed by means of: 1. Public Instrument; 2. Policy signed by the contracting parties and broker taking part therein; or 3. Private Instrument. Contents of the Loan Contract: 1. Kind, name, registry of the vessel. 2. Name, surname. And domicile of the captain. 3. Name, surname, and domicile of the borrower or lender; 4. Amount of the loan and premium stipulate; 5. Time of repayment; and 6. Goods pledged to secure payment Who may CONTRACT? In a Bottomry loan, Rule: owner; Exception: when owner is absent, the captain. In a Respondentia loan, ONLY the owner of the cargo. Bottomry/Respondentia 1. Not subject to the usury law. Ordinary Loan Subject to the Usury Law*
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2. Liability is contingent upon the safe Not subject to any contingency arrival of the vessel. 3. The last creditor is the preferred The first lender is the preferred creditor creditor. *Under existing law, the parties to any loan, maritime or not, may fix rate of interest. In BOTTOMRY LOAN, the obligation is extinguished when: 1. The loss of the vessel is based on the risk agreed upon; 2. The risk occurred during the voyage. The following are instances wherein the obligation is converted into a Simple Loan with Interest: 1. If the goods or vessel given as security are lost through causes not agreed upon; 2. If the value of the loan is more than the value of the vessel given as security; 3. If the cargo is loaded on board a vessel not agreed upon; 4. If the loan is used for purposes other than what is agreed upon. EXCEPTIONS to the Hypothecary Nature of Bottomry and Respondentia: 1. Loss due to an inherent defect of the vessel; 2. Loss due to barratry on the part of the captain; 3. Loss due to the fault or malice of the borrower; 4. Vessel was engaged in transporting contraband; and 5. Cargo loaded was different in form than agreed upon. ACCIDENTS IN MARITIME COMMERCE: I. Averages II. Arrival under stress III. Collision IV. Shipwreck AVERAGES are defined as DAMAGE DELIBERATELY CAUSED or EXPENSE DELIBERATELY INCURRED due to a maritime peril and which resulted in saving both vessel and cargo or only the vessel or cargo. General Average 1. Damage or expenses incurred to the vessel, its cargo, or both, redounded to the benefit of the respective owners 2. Effect: All those who have benefited shall satisfy the average. Requisites for General Average: 1. Common danger 2. Deliberate sacrifice 3. Success 4. Proper procedure and legal steps What is the PROCEDURE FOR RECOVERY? 1. Captain must issue a resolution. A Resolution is the captains decision after consultation with all ship officers and persons interested over the cargo. The captains decision prevails over ship officers and the advice of an interested Particular Average Damage or expenses incurred to the vessel, its cargo, or both, did not redound to the benefit of the respective owners. Effect: Only the owner of the goods benefiting from the damage shall bear the expense of average.
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party. In which case, the ship officers and other interested persons must register their objections. 2. The resolution must be entered in the logbook. Any objection must also be entered in the logbook. The objections as entered in the logbook shall contain the reasons therefore. Moreover, the reasons why the captain ignored the advice of the interested parties must also be entered. With respect to the objection, the dissenters present in the consultation must sign the dissent. With respect to the captains decision to override the interested partys advice, all the ship officers must sign the captains decision. 3. The minutes must contain detailed description of the goods jettisoned on board. The captain shall deliver it to the maritime judicial authority of the first port arrived. Finally. within 24 hours from arrival, the report must be ratified under oath. What is the ORDER of goods to be cast overboard in case of JETTISON? 1. Those ON DECK, preferring the heaviest one with least utility and value. 2. Those BELOW UPPER DECK, beginning with the heaviest one, with least utility and value. What is ARRIVAL UNDER STRESS? The arrival of a vessel at the port not of destination. In Arrival Under Stress, the captain must file a Protest which is merely a disclaimer. When is such arrival LAWFUL? 1. Lack of provisions. 2. Well-founded fear of seizure by pirates. 3. Accident at sea disabling ship ability to navigate. When is such arrival NOT LAWFUL? 1. Lack of provision due to negligence. 2. Risk of enemy not well-known or manifest. 3. Defect due to improper repair. 4. Malice, negligence, lack of foresight, or skill of the captain. Who bears the EXPENSES of an arrival under stress? RULE: The ship owner bears all expenses for arrival under stress. EXCEPTION: When arrival under stress is unlawful, the ship owner is liable for damages to cargo and passengers. COLLISION ALLISION
It is the IMPACT of two moving It is the IMPACT between a moving vessels. vessel and a stationary one. ZONES OF COLLISIONS: 1st ZONEperiod of the time when all is clear and safe up to the moment when risk of collision begins. 2nd ZONEperiod of time between moment when risk of collision begins till the moment collision becomes a practical certainty. 3rd ZONE time when collision is certain till time of impact.
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Under the Ist Zone, one vessel is a Privileged Vessel and the other is a vessel required to take action to avoid collision. For example, between a steamship and sailboat, the sailboat is the privileged vessel because it is difficult for the sailing vessel to maneuver unless the wind is favorable. Hence, it is the steamship which is required to take action to avoid collision. ERROR IN EXTREMIS is the sudden movement made by a faultless vessel during the third zone of collision with another vessel which is at fault under the second zone. Even if sudden movement is wrong, no responsibility will fall on the faultless vessel. Rules governing LIABILITIES of parties in case of COLLISION: 1. Where collision is due to the negligence or malice of the captain and/or other ship officers of one vessel , the ship owner of such vessel shall be liable for all resulting damages. 2. Where collision is due to the fault of both vessels, each vessel shall suffer their respective losses but as regards to the owners of the cargoes, both vessels shall be jointly and severally liable. 3. If it cannot be determined which vessel is at fault , each vessel shall suffer its own loses and both shall be solidarily liable for loses or damages on the cargo. (DOCTRINE OF INSCRUTABLE FAULT) 4. The vessels may collide with each other through fortuitous event or force majeure. In which case, each shall bear its own damage. 5. Two vessels may collide without their fault but by reason of a third vessel . The third vessel shall be liable for losses and damages sustained. Requisite for RECOVERY arising from collision: 1. Protest must be made within 24 hours before: a) Competent authority at the point of collision or b) At the first port of arrival, if in the Philippines and to the Philippine Consul, if the collision took place abroad. Injuries to persons and damage to cargo of owners not on board on time of collision need not be protested. Article 835, Code of Commerce: In case of collision, there must be a marine protest to recover collision damage; in such a case, the marine protest is a condition sine qua non and not merely a disclaimer unlike in the case of arrival under stress and shipwreck. DOCTRINE OF LIMITED LIABILITYthe ship owner or the ship agent cannot be held liable for more than the value of the vessel including the freightage. Rationale: To promote the shipping industry and encourage investors to engage in the maritime business. EXCEPTIONS to the Doctrine of Limited Liability: 1. It does not apply to liabilities for repairs and provisioning of the vessel before the loss of the vessel; 2. It does not apply to insurance proceeds. If the vessel is insured, the proceeds will go to the people entitled to claim from the ships owner; 3. It does not apply to workmens compensation cases; 4. When the SHIP OWNER is guilty of fault or negligence; but if the captain is the one who is guilty, the Doctrine may be invoked. 5. It does not apply if the vessel is not a common carrier; 6. It does not apply if the voyage is not maritime in character.
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the accident must occur in open sea, not in a voyage along a river, gulf, bay or lake. SHIPWRECK is 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.
CARRIAGE OF GOODS BY SEA ACT (Com. Act 65) APPLICATION: COGSA is suppletory to the Civil Code and the Code of Commerce in the carriage of GOODS from a foreign port to the Philippines. Civil Code and Code of Commerce apply to Domestic Trade whereas the Carriage of Goods by Sea Act applies to Foreign Trade. RULE: It is a peculiar contract because the evidence of the contract of carriage is the Bill of Lading. The Bill of Lading is the contract of carriage. EXCEPTION: With respect to CHARTER PARTIES, the contract of carriage is the Charter Party Contract. The bill of lading merely becomes a document of title. It specifically becomes a receipt over the goods. EXCEPTION TO THE EXCEPTION: When the bill of lading is subsequently negotiated to a third party, follow the general rule. It now becomes the contract of carriage and not the charter-party contract. FUNCTIONS OF BILL OF LADING: 1.evidence of contract of carriage between consignee and carrier 2.evidence of title of goods 3.receipt of goods by carrier Bill of Lading proves two things: 1. receipt of goods by carrier 2. condition of goods when delivered to the carrier The above-mentioned are two pieces of evidence for the presumption of negligence on the part of carrier to arise. Such presumption of negligence compels carriers to exercise extraordinary diligence in the vigilance over the goods. If the carrier merely acts as depositary, extraordinary diligence is not required and no presumption of negligence arises. What are GOODS? Goods subject of a commercial contract. This however does not include animals or other objects categorized as deck cargo. REASON: Animals are not contemplated as commercial goods because animals have a mind of there own. There is a strong possibility that they might do acts prejudicial to themselves, such as throwing themselves overboard. The parties to a bill of lading may agree to consider animals as goods in the commercial sense and not merely deck cargo.
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DECK CARGO are goods not placed in the holding chambers of the ship but are placed topside. They are not commercial in nature unless the bill of lading or the charter party contract states: THEY BE CARRIED ON DECK AND ARE CARRIED ON DECK. This statement must be found in order that they become goods in the commercial sense. It is important to distinguish what are and arent goods because the immunities and protection of the law apply only to delivered goods. A SHIP is any vessel engaged in the shipment of goods. Hence, even a small boat maybe a vessel if it is engaged in the shipment of goods. RULE: COGSA does not apply to the transport of passengers but to goods. The law shall be applied the moment the goods are loaded till they have been delivered. What is the TACKLE TO TACKLE RULE? The shipper shall be responsible for the goods the moment it passes through one side of the ship for the purpose of loading until it passes through the other side for discharging. The reason for this being that there are two tackles involved in this operation; one for loading, the other, unloading. The shipper is responsible for: Loading, Handling, Transport, Carriage, Custody, Discharge Corollary to this is the responsibility of the carrier to transport the goods diligently to preserve the condition it was in when received by the carrier. Therefore, if the goods are delivered to the consignee in a condition other than how it appeared when it was loaded then there is a breach of contract. The carrier shall be bound to exercise to observe due diligence before and at time the goods were loaded. The diligence required to be observed include making sure the ship is sea-worthy, adequately manned and supplied, and ensuring that the cargo-holds/cooling chambers are adequate for cargo. Once the goods have been delivered and the shipper asks for a bill of lading, the common carrier is obliged to show in the bill of the lading the following: External appearance & identifying marks of the goods; Number of packages to be delivered onboard; and Order and condition of the goods RULE: The external appearance is only the concern of the carrier and not the internal quality of the same UNLESS the goods are transported bare. What is the shippers GUARANTEE? In most cases the shipper is the owner of the goods. Hence, at the time the shipper delivers the goods to the carrier, the shipper guarantees that the goods are in good condition. If the carrier later on discovers the false description by the shipper over the goods, the carrier has the right to file an action against the shipper especially if the fraudulent description affects the other goods carried onboard or causes damages the common carrier. If flammable goods were suddenly found during the voyage, the carrier may throw the goods away without incurring any liability, unless the carrier had
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knowledge and allowed them to be carried, the carrier shall be liable in like manner with general average With respect to the vessels seaworthiness , the owner of the vessel is required to exercise extraordinary diligence before and at the beginning of the voyage because the he loses control of the vessel once it starts to move. However, with respect to the goods on board , the owner must observe extraordinary diligence until the discharge of the goods because he is liable up to that point. Three Options of the Carrier in case the Description of the Goods in the Bill of Lading as furnished by the Shipper is Inaccurate: 1. require the shipper to rectify the error; 2. accept the goods, issue the bill of lading without the description and assume liability; 3. refuse to accept the goods if the shipper refuses to rectify the error. What is the Rule for LOSS or DAMAGE to the goods? If the damage is apparent, then notice must be immediately given. The notice may either be in writing or orally. If the damage is not apparent , notice must be given within three days from such delivery. RULE: Failure to give notice is not a bar to the action to file provided the filing of the suit is made within one year from delivery to consignee. Failure to file the claim within the prescribed period shall be prima facie evidence that the goods were delivered in accordance with the description in the bill of lading. In Article 366 of the Code of Commerce, failure to file the claim within the prescribed period bars the filing of a subsequent claim UNLIKE in Carriage of Goods by Sea Act. What is a SHIPPED BILL OF LADING? This means that the goods are already on the ship. If the bill is not stamped as such, it is taken to mean that the goods may still be in the bodega. Once the goods are on board, the carrier shall issue a shipped bill of lading. RULE: Unless the parties otherwise stipulate, the amount of liability for loss or damage shall not exceed $500.00. If the shipper fraudulently declared a lower value for the purpose of paying lower freight charges; the carrier shall not be liable for the true value. PUBLIC SERVICE ACT (Com. Act No. 146) THREE FOLD-PURPOSE: 1) Protect the public against unreasonable charges and poor, inefficient service; 2) Protect and secure investments in public services; 3) Prevent ruinous competition. PUBLIC SERVICE / PUBLIC UTILITY includes every person now or thereafter may own, operate, manage, or control in the Philippines for hire or
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compensation, with general or limited clientele, whether permanent, accidental, and done for general business purposes, any common carrier, shipyard, iceplant, electric light, heat and power or any other utility. The public Service Commission has been abolished. In lieu of said commission, arose the various government agencies such as LTO, LTFRB, ATO, NTC, NEA. CERTIFICATE OF PUBLIC CONVENIENCE (CPC) is an authorization issued for the operation of public services for which no franchise, either municipal or legislative, is required by law, such as a common carrier. The CPC is regarded as property having considerable value. The Certificate can be subject to sale by holder. CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY (CPCN) is a certificate issued by the appropriate government agency for the operation of a public service for which prior franchise is required by law. A Certificate of Public Convenience constitutes neither franchise nor contract. The CPCN confers no property right, and is a license or privilege . The certificate-holder of said certificate does not acquire property right over the route covered thereby. Neither does it confer upon the holder any proprietary right or interest or franchise in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens, alteration or even revocation or annulment thereof is reserved by the state. Requirements for the GRANT of Certificate of Public Convenience: 1) Applicant must be a citizen of the Philippines . If Corporation is the applicant, 60% of said corporations capital must be owned by Filipinos; 2) Applicant must prove public necessity; 3) Applicant must prove the operation of proposed public service will promote public interest in a proper and suitable manner; and 4) Applicant must have sufficient financial capability to undertake proposed services and meeting responsibilities incidental to its operation. Grounds for REVOKING the Certificate: When the HOLDER: 1) Violates or contumaciously refuses to comply with any order, rule, or regulation of the commission; 2) Is a mere dummy; 3) Ceases operation by putting equipment in storage; and 4) Abandons service Grounds for SUSPENDING the Certificate: When the operator willfully or contumaciously refuses to comply with any order, rule, or regulation. RULE: Prior notice or hearing must be carried out before suspension order is issued EXCEPTION: Notice and hearing may be dispensed if necessary to avoid serious or irreparable damage or inconvenience to public or private interest. In which case, suspension not more than 30 days prior to hearing is allowed. What powers REQUIRE prior notice and hearing? 1) Determining public necessity; 2) Fixing of standards and qualifications;
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3) Fixing of standards and measuring quantity; 4) Establishment of rules to secure accuracy of all meters, and measuring appliances; and 5) Extension of facilities. What powers which DO NOT REQUIRE prior notice and hearing? 1) Investigation of Public Utility Companies; 2) Require public services to pay expenses of investigation; 3) Valuation of properties of public services; 4) Examination of measuring appliances; 5) Grant of special permits; 6) Uniform accounting system; and 7) Investigation of accidents. What acts requiring PRIOR APPROVAL by government agency concerned? 1) Establishing and maintenance of individual or joint rates; 2) Establishment and operation of new units; 3) Issuance of free tickets; and 4) Issuance of any stock or stock certificates. What acts by Public Utility Companies are prohibited? 1) Engaging in public service business without first securing the proper certificate; 2) Provide or maintain unsafe, improper, or inadequate service as determined by proper authority; 3) Commit any unreasonable and unjust act and preferential treatment to any particular person, corporation, or entity as determined by proper authority; and 4) Refusal or neglect to carry public mail upon request. PRIOR OPERATOR RULE provides existing franchise operator preferential right within authorized territory as long as said operator renders satisfactory and economical service. This rule subordinates the Prior Applicant Rule which gives first applicant priority only if things and circumstances are equal. A prior operator must be given the opportunity to extend its transportation services before permitting a new operator to operate in the territory of said prior operator. PRIOR APPLICANT RULE applies to situations wherein two applicants are applying for a certificate over a given territory. Where both applicants are similarly situated, the prior applicant shall have the certificate over the other.
WARSAW CONVENTION OF 1929 WHEN APPLICABLE: It is applicable to all INTERNATIONAL transportation of persons, baggage, or goods BY AIRCRAFT operating as COMMON CARRIERS. What is INTERNATIONAL TRANSPORTATION? International Transportation is any transportation where place of departure and place of destination is situated either: a) Within territories of High Contracting Parties regardless of a break in transportation or transshipment;
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b) Within territory of a single High Contracting State, if there is a stopover situated in the territory subject to the sovereignty, mandate, or authority of another power. Transportation performed by several successive air carriers shall be regarded as one undivided operation if the parties agree. The agreement as one operation shall hold regardless whether the said agreement is contained in one or a series of contracts. The agreement shall likewise maintain its international character even if the contract or series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party. In what INSTANCES shall the Warsaw Convention Shall NOT APPLY? a) Willful misconduct on the part of the carriers employee. The Convention does not regulate or exempt the carrier from liability for damages arising from the violation of passengers rights under a Contract of Carriage; b) When Convention contradicts public policy; and c) If the Conventions requirements are not complied with. What is the LIABILITY of air-carriers for damages? 1) Death or injury of a passenger if the accident took place on board the aircraft in the course of its operations; 2) Destruction, loss, or damage, to any luggage or goods, if it took place during the flight; or 3) Delay in the transport of passengers, luggage, or goods. Documents Involved: 1. passenger ticket; 2. baggage check (identification card attached to the baggage); 3. airway bill (counterpart of bill of lading) Airway Bill contract of carriage; stands as prima facie evidence of: 1. conditions of transportation; 2. receipt of goods; 3. conclusion of contract. Airway Bill does not stand as evidence of title to goods. The consignor has a right to demand the return of the goods while in the custody of the carrier EXCEPT when the goods are delivered to the consignee. The right may be exercised: 1. when the goods are still on board; 2.before delivery to the consignee if the goods are already in the port of destination; 3.before reaching the port of destination. In Carriage of Goods by Sea Act, the carrier incurs liability in case of loss or damage and NOT delay; whereas under the Warsaw Convention, carrier is liable upon delay.
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CORPORATION CODE (B.P. Blg. 68) CHARACTERISTICS OF A CORPORATION: 1. Artificial being. 2. Created by operation of law. 3. Enjoys the right of succession. 4. Having powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2) CORPORATION PARTNERSHIP 1. Should be formed by not less than 5 1. Can be formed by two or more incorporators persons. 2. Created by operation of Law 2.Can be formed by mere agreement of the parties . 3.Can be organized only for 50 years , 3.Can be organized for an indefinite renewable for a periods not exceeding period of time. 50 years for each renewal 4.Stockholders in a corporation are 4. General partners are liability for liable only to the extent of their unpaid payment of partnership debts extents to subscription for the payment of their properties. corporate debts. 5.Death , insolvency , insanity or civil 5.Death , insolvency , insanity , civil interdiction of a stockholder does not interdiction of general partner dissolves affect the existence of the corporation. the partnership. 6.Corporation cannot be dissolved 6. A partnership can be dissolved by a without the approval of the BOD and partner by his own act of withdrawal. the stockholders , and consent of the state 7.A stockholder can transfer his 7.A partner need to get the consent of shareholding without the consent of the the other partners to be able to transfer other stockholders. his interest in the partnership. 8. Corporation can exercise only such 8. A partnership can do anything by powers as may be granted by law and agreement among the partners. its AOI , or those that are implied or incidental thereto.
THEORIES ON THE FORMATION OF A CORPORATION: There are two theories: The Concession Theory asserts that a corporation is an artificial creature without any existence until it has received the approval of the state acting in accordance with law through the SEC. On the other hand, the Theory of Corporate Enterprise or Economic Unit maintains that the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. TWO TYPES OF FRANCHISE: 1. Primary or Corporate Franchise is the right or privilege granted by the State to individuals to exist and act as a corporation after its incorporation. 2. Secondary or Special Franchise is the special right or privilege conferred upon an existing corporation to the business for which it was created. PRIMARY FRANCHISE 1. Refers to the franchise of existing as a corporation 2. Vested in the individuals who compose the corporation SECONDARY FRANCHISE 1. Refers to the exercise of rights. 2. Deemed vested in the corporation
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3. It cannot be sold or transferred because it is inseparable from the corporation itself. 3. It may be sold or transferred and be subject to levy and sale on execution.
Corporations are classified according to: 1. ORGANIZERSPublic, by the State only; and Private, by private persons alone or with the State 2. FUNCTIONSPublic, the governance of a portion of the territory; and Private, usually for profit-making purposes 3. GOVERNING LAWPublic, by special laws; and Private, by the law on Private Corporations 4. LEGAL STATUS A) De Jure Corporationorganized in accordance with the requirements of law. B) De Facto Corporationorganized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be inquired only by direct attack by the State through the Solicitor General in a quo warranto proceeding. (Sec. 20) REQUISITES OF DE FACTO CORPORATION: 1. Existence of a valid law under which it may be incorporated; 2. Attempt in good faith to incorporate; 3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a Certificate of Incorporation by the SEC despite defect in its incorporation Difference between a De Facto corporation and a De Jure corporation: De Jure corporation can, successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist. C) Corporation by Estoppela group of persons which assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. It is neither de jure nor de facto. D) Corporation by Prescriptionone which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic Church. 5. EXISTENCE OF SHARES OF STOCK a) Stock corporation has capital stock which is divided into shares, and which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) b) Non-stock corporation does not issue stocks nor distribute dividends to their members. 6. RELATIONSHIP OF MANAGEMENT AND CONTROL a) Holding corporation is one which, by the power to elect management, controls another as a subsidiary. It is a corporation that holds stocks in other companies for purposes of control rather than for mere investment. b) Subsidiary corporation Majority-owned subsidiarywhere one corporation owns 51% to 94% of the capital stock of another corporation. Wholly-owned subsidiarywhere one corporation holds 95% to 100% of the capital stock of another corporation. c) Affiliates are companies subject to common control of a mother holding company and operated as
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part of the system. d) Parent and Subsidiary corporations are separate entities with power to contract with each other. The board of directors of the parent company determines its representatives to attend and vote in the stockholder's meeting of its subsidiary. The stockholders of the parent company demand representation in the board meetings of its subsidiary. 7. PLACE OF INCORPORATION a) Domestic corporationformed, organized, or existing under Philippine laws b) Foreign corporationformed, organized, or existing under any laws other than those of the Philippines (Sec. 123)
3 tests to determine NATIONALITY of Corporations INCORPORATION TEST is determined by the state of incorporation, regardless of the nationality of the stockholders. DOMICILE TEST is determined by the state where it is domiciled. CONTROL TEST is determined by the nationality of the controlling stockholders or members. This test is applied in times of war and is also known as the WARTIME TEST. The control test is applied both with respect to the ownership of shares entitled to vote and the membership in the board of directors. Who is a PHILIPPINE NATIONAL? 1. A corporation organized under the laws of the Philippines of which at least 60% of the outstanding capital stock entitled to vote is owned by Filipino citizens; 2. A foreign corporation licensed as doing business in the Philippines of which 100% of the outstanding capital stock entitled to vote is wholly owned by Filipinos; Double 60% RuleWhere a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Filipino citizens (FOREIGN INVESTMENT ACT OF 1991, R.A. No. 7042) The GRANDFATHER RULE is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where there are corporate shareholders. The present application of the rule embodies the control test: Thus, if the shares belonging to corporations or partnerships at least 60% of the capital is owned by Filipino citizens, such corporation or partnership shall be considered of Philippine nationality. But if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as pertaining to Philippine nationality. What is the DOMICILE of a corporation? The domicile of a corporation is the place fixed by the law creating or recognizing it; in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercises its principal functions (Art. 51, NCC) NATIONALIZED CORPORATIONS: 100% Filipino Owned a) Mass Media which includes radio, television and printed media (Sec. 11(1), Art. XVI, 87 Constitution) b) Rural Banks -100% of its capital stock (RA No. 720, as amended) c) Rice and Corn Industry (RA No. 3018, as amended) d) Security, watchman & Detective Agency (RA No. 5487) 75% Filipino Owned a) Advertising Industry (Sec. 11(2), Art. XVI, 87 Consti) 70% Filipino Owned
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a) Private Development Banks; (RA No. 4093) b) Savings and Loan Associations (RA No. 3779 and RA No. 4378, as amended) 60% Filipino Owned a) Financing Companies60% of the capital stock. (RA No. 5980) b) Fishing and Business Activity relating to Fishery Industry - 60% of the capital stock. c) Banks other than rural banks and new banks established by consolidation of branches or agencies of foreign banks in the Philippines; (RA No. 337) (PD 43 and PD 704) d) Exploration, Development and Utilization of Natural Resources (Sec. 2 Art. XII, 1987 Constitution) e) Ownership of Lands (Sec. 2 Art. XII, 1987 Constitution) f) Operation of Public Utility (Sec. 11 Art. XII, 87 Consti) g) Educational Institutions other than these established by religious groups (Sec. 4[2], Art. XIV, 87 Consti) h) Any business reserved by Congress (Sec. 10, Art. XII, 1987 Consti) Majority Owned by Filipinos a) Investment House (PD 129) What are the OTHER TYPES of corporations? Close corporations (Secs. 96-105) Special corporations a) Educational corporation (Secs.106-108) b) Religious corporation (Sec. 109) i. corporation sole (Sec. 110) ii. religious societies (Sec. 116) WHAT ADVANTAGES DOES A CORPORATION ENJOY OVER AN UNREGISTERED ASSOCIATION? A Corporation 1. enjoys perpetual succession under corporate name and in an artificial form; 2. can acquire and dispose of property; 3. can contract obligations; 4. can sue and be sued in its corporate name as a juridical person; 5. has capacity to receive and enjoy common grants of privileges and immunities; and 6. no personal liability beyond value of their shares What is the DOCTRINE OF SEPARATE PERSONALITY? A corporation has a juridical personality separate and distinct from that of its stockholders or members. Rationale of the Doctrine: For purposes of convenience and to serve the ends of justice. Consequences: A corporation 1. Can own property in its own name, and has capacity to sue and be sued in its own right (Art. 46, NCC); 2. Entitled to constitutional rights, e.g., due process, equal protection; 3. Can be liable for torts , because the law on quasi-delict does not distinguish between a natural person and a n artificial being. 4. Cant be liable for crimes because a corporation cannot be imprisoned being a mere artificial being and not having a physical existence but the corporation can be fined as a consequence of a violation of the law. 5. As a rule is not entitled to moral damages for physical suffering or mental anguish , fright , serious anxiety , wounded feelings , mental shock , social humiliation and similar internal injury because being an artificial being it cannot suffer such internal feelings. However, a corporation can claim moral damages on sufferance of besmirched reputation if warranted by evidence. It is essential for the claim to prosper that said corporation enjoys good reputation. DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY Allows the State to disregard the fiction of juridical personality of the corporation where the entity is formed or used for non-legitimate purposes, such as to evade a just and due obligation or to justify a wrong, to shield or perpetrate fraud, or to carry out similar other unjustifiable aims or intentions. When the defendant corporation's legal personality has been pierced in one case, such corporation still possesses separate juridical personality in any other case, or with respect to other issues.
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Cases Calling for PIERCING the Veil: In Fraud cases, whenever a corporation is used as a cloak to cover fraud, or to do wrong; in Alter Ego cases, whenever the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; and in Equity cases, when piercing the corporate fiction is necessary to achieve justice or equity. INSTRUMENTALITY / ALTER EGO RULE Where one corporation is so organized and controlled and its affairs are conducted so that it is in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. Requisites: 1. ControlThere must be control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy, and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had, at that time, no separate mind, will or existence of its own; 2. Breach of dutySuch control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and 3. Such Control and Breach must proximately cause the injury to the plaintiff. A ONE-MAN CORPORATION is a corporation wherein all or substantially all of the stocks is held directly or indirectly by one person. Such corporation is not necessarily illegal. The corporation should still follow and observe the law throughout its existence and conduct its business affairs lawfully. Otherwise, the doctrine of piercing the veil may be applied in such a case. Who is an INCORPORATION PROMOTER? One who, by contract of lease of services or agency, initiates and undertakes the pre-incorporation steps until the actual formation of the corporation. Contracts by the promoter for and in behalf of a proposed corporation generally bind him only, subject to and to the extent of his representations, and not the corporation, unless and until after these contracts are ratified, expressly or impliedly, by the corporations Board of Directors/Trustees. PRE-INCORPORATION SUBSCRIPTION AGREEMENTS (PISA) RULE: Subscription of shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from date of subscription, UNLESS: 1. All of the other subscribers consent to the revocation; and 2. Incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription; provided that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC. (Sec. 61) SC allowed the rescission of the PISA on the ground of substantial breach of obligations as provided for in Art. 1191 of the NCC. The SC recognized the nature of a PISA as a reciprocal obligation by the original subscribers with the corporation intended to be formed as a beneficiary of a pour autri stipulation in such agreement. (Ong Yong vs. CA, Feb. 1, 2002) ARTICLES OF INCORPORATION is the document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Code. CONTENTS: 1. Name of corporation; 2. Purpose/s, indicating the primary and secondary purposes; 3. Place of principal Office; 4. Term of existence; 5. Names, citizenship and residences of incorporators
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6. Number, names, citizenship and residences of directors or trustees; 7. Names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified; 8. if a stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share; 9. Names, residences, number of shares, and the amounts subscribed and paid by each of the original subscribers which shall not be less than 25% of authorized capital stock; 10. If non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; 11. Name of treasurer elected by subscribers; and 12. If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. (Sec.14) NON-AMENDABLE ITEMS IN THE ARTICLES OF INCORPORATION: Those matters referring to facts existing as of the date of the incorporation such as: 1. Names of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; 3. Treasurer elected by the original subscribers 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the articles of incorporation; and 6. Witnesses to the signing and acknowledgment of the articles and acknowledgment of the articles. IMPORTANCE OF THE AOI. Failure to file the AOI with the SEC and the lack of Certificate of Incorporation from the SEC is fatal to a de facto corporation because the omission would preclude the stockholders from claiming good faith in being a corporation. CERTIFICATE OF INCORPORATION is the document issued by the SEC if after examination and verification the AOI and other papers needed to be filed is found in order. IMPORTANCE OF THE CERTIFICATE OF INCORPORATION: A corporation starts to have juridical personality and legal existence from the moment of the issuance by the SEC to the incorporators of the certificate. Once issued, the certificate and the copy of the AOI filed which is returned becomes the corporate charter enabling the corporation to exercise its corporate powers. In case of GOCCs , it acquires juridical personality from the effectivity of the special charter or law creating it. A corporation cannot sue or be sued prior to the issuance of the certificate of incorporation. BY-LAWS are rules adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. REQUISITES for its validity: 1. Must not be contrary to law nor with the Corporation Code; 2. Must not be contrary to morals and public policy; 3. Must not impair contract obligations; 4. Must be general and uniform;
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5. Must be consistent with the charter or articles of incorporation; and 6. Must be reasonable, not arbitrary or oppressive. Binding effect: AS TO THE MEMBERS AND CORPORATION has the force of contract between the members themselves and between the members having direction, management and control of the corporation and the corporation itself AS TO THIRD PERSONS they are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. Rationale: By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. Articles of Incorporation By-Laws
1) It is a condition precedent in the 1) It is a condition subsequent; its acquisition of corporate existence; absence mere furnishes a ground for the revocation of the franchise; 2) It is essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State; 3) It is incorporation; executed 2) It is for the internal government of the corporation but has the force of contract between the corporation and the stockholders/ members, and between the stockholders and members;
3) It may be executed after incorporation. Sec. 46 allows the filing of the by-laws before simultaneously with the Articles of Incorporation; 4) It may be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the members in a non-stock corporation; and 5) Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the OCS or 2/3 of members in case of non-stock corporation.
4) It is amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/3 of the members in case of non-stock corporations; and 5) Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees.
FORMAL ORGANIZATION AND COMMENCEMENT OF THE TRANSACTION OF BUSINESS are conditions subsequent to the issuance of the Articles in order that a corporation may legally continue as such. The law requires only substantial compliance of formal organization, which means: 1. Adoption of By-Laws and filing of the same with the SEC; 2. Election of board of directors/trustees, and officers; 3. Establishment of principal office; and 4. Providing for subscription and payment of capital stock. PERSONALITIES INVOLVED IN THE DEVELOPMENT OF A CORPORATION 1. PROMOTER is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. 2. INCORPORATORS are those mentioned in the Articles of Incorporation as originally forming and composing the corporation, having sign id the Articles and acknowledged the same before a notary public. They have no powers beyond those vested in them by the statute. QUALIFICATIONS: 1. Natural person;
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2. 3. Not less than 5 but not more than 15; Of legal age; 4. Majority must be residents of the Philippines; and 5. Each must own or subscribe to at least one share. (Sec. 10) RULE: Only natural persons can be incorporators. EXCEPTION: Unless otherwise allowed by law. Under the Rural Banks Act of 1992, incorporated cooperatives are allowed to be incorporators of rural banks. While corporations cannot generally be incorporators, there is no doubt that corporations can be corporators. Incorporators 1) Signatory to the Articles of Incorporation 2) It is a fait accompli or an accomplished fact. Thus, the Articles of Incorporation cannot be amended to replace them. 3) Number is limited to 5-15 4) Must have contractual capacity 3. CORPORATORS a) Stockholders b) Members; Corporators 1) Stockholder (stock corporation) or member (non-stock corporation) 2) They may cease to be such if they subsequently lose their qualifications. 3) No restriction as to number 4) May be such through a guardian
GOVERNING BODY (absolute control and direction) a) Board of Directors (stock); or b) Board of Trustees (non-stock) QUALIFICATIONS: 1. Ownership of at least (1) share of capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. (Sec. 23) For a non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees; 2. Majority of the directors/trustees must be residents of the Philippines; (Sec. 23) 3. Not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election; (Sec. 27) 4. Only natural persons can be elected directors/trustees; and 5. Other qualifications as may be prescribed in the by-laws of the corporation RULE: The Board of Directors/Trustees is the repository of corporate powers. Hence, all powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the Board of Directors or Trustees. (Sec. 23) EXCEPTIONS: 1. Executive Committee duly authorized in the by-laws; 2. Contracted manager which may be an individual, a partnership, or another corporation. 3. Close corporations, the stockholders may manage the business of the corporation instead of a board of directors, if the articles of incorporation so provide. Directors are not entitled to compensation as such directors except that they are allowed reasonable per diems. However , directors may be given compensation when 1. There is a provision in the by-laws authorizing payment of compensation ; or 2. By a vote of the Stockholders representing at least majority outstanding capital stock at a regular or special meeting. of the
4.
In either case , the total yearly compensation of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year.
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This is likewise applicable to trustees of non-stock corporation. Theory of Original Powerthe powers of the Board of directors or trustees are ORIGINAL and UNDELEGATED. The stockholders or members do not confer, nor can they revoke, those powers. They are DERIVATIVE only in the sense that they are given by the State in the act of incorporation. BUSINESS JUDGMENT RULE The board of directors/trustees is the body entrusted with the general control and management of the business of the corporation having plenary power and authority to transact all the ordinary business of the corporation within the scope of its charter power. The SEC, stockholders, and the courts cannot overrule a pure business judgment . THREE-FOLD DUTIES OF DIRECTORS 1. Duty of Obedience to direct the affairs of the corporation only in accordance with the purposes for which it was organized; 2. Duty of Diligence 3. Duty of Loyalty WHEN ARE DIRECTORS PERSONALLY LIABLE? 1. Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; (Sec. 31) 2. Acquiring any personal or pecuniary interest in conflict of duty; (Sec. 31) 3. Gross negligence or bad faith in directing the affairs of the corporation; (Sec. 31) 4. Agreeing or stipulating in a contract to hold himself liable with the corporation; 5. By virtue of a specific provision of law; or 6. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with the secretary;(Sec. 65) 7. Doctrine of Corporate Opportunity (Sec. 34)
REMEDIES IN CASE OF MISMANAGEMENT: receivership; injunction, if the act has not yet been done; : 3. dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act; and 4. derivative suit or complaint filed with SEC 1. 2. DOCTRINE OF SPECIAL FACT Director takes advantage of information obtained by reason of his office to the disadvantage of the corporation. INHERENT POWER OF "AMOTION" It is the inherent power to remove directors, officers or trustees prior to the expiration of their term RULES GOVERNING CONTRACTS DIRECTORS/TRUSTEES OR OFFICERS: Doctrine of Corporate Opportunity The doctrine wherein a director , by virtue of his office, cannot acquire property or business opportunity in which the corporation has interest. When a director violates this doctrine , Unless his act is ratified by a vote of the stockholders representing 2/3 of the outstanding capital stock, the director shall refund to the corporation all the profits he realizes on a business opportunity which the corporation: 1. Is financially able to undertake; 2. Is in line with corporations business and is of practical advantage to it; and 3. Has an interest or a reasonable expectancy. ENTERED INTO BY
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The doctrine shall be applied notwithstanding the fact that the director risked his own funds in the venture. (Sec. 34) Contracts of Self Dealing Directors Contracts entered into by the corporation with one or more of its own directors/trustees, or officers are voidable UNLESS ALL the following conditions are present: a) Presence of such director/trustee in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b) Vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; I c) Contract is fair and reasonable under the circumstances; d) In the case of an officer, there was previous authorization by the board of directors. (Sec. 32) If not all the requisites are present, the corporation may 1. choose to declare the contract voidable; OR 2. choose not to question the validity of the contract, without prejudice to the liability of the director/trustee for damages under Sec. 31. Where any of the first two conditions is absent, said contract must be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/ trustee involved is made at such meeting. (Sec. 32) Contracts of interlocking directors Contracts entered into between corporations with interlocking directors (directors whose interest is substantial or whose stockholdings exceed 20% of the outstanding capital stock of both corporations) are valid, provided that the contract is: a) Not fraudulent; and b) Fair and reasonable under the circumstances. If the interlocking director's interest in one corporation or corporations is "nominal" (not exceeding 20% of the outstanding capital stock), then all the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal interest. (Sec. 33) 5. MANAGING AND ADMINISTRATIVE BODY (limited to the general corporate business) a) Executive committee; and b) Contracted managers. in case the contracted manager is another corporation, apply the rule under Sec. 44. LIMITATIONS ON THE POWERS OF EXECUTIVE COMMITTEE (Sec. 35): It cannot act on the following: 1) Matters needing stockholder approval; 2) Filling up of vacancies in the board; 3) Amendment or repeal or adoption of by-laws; 4) Amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; and 5) Distribution of cash dividend to the shareholders 6. CORPORATE OFFICERS Who are the corporate officers? President, who must be a director; Treasurer, who may or may not be a director, and as a matter of sound corporate practice, he must be a resident. Secretary, who need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and Other such officers as may be provided in the by-laws.
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Corporate officers are those whose offices are created by the Corporation Code or the corporation's own by-laws. They do not enjoy security of tenure, and their incumbency is within the business judgment discretion of the board of directors/trustees. Their removal is considered an intra-corporate controversy and beyond the reach of labor courts. CAPITAL STRUCTURE of Stock Corporations CAPITAL STOCK / LEGAL STOCK / STATED CAPITAL is the amount fixed in the corporate charter to be subscribed and paid in cash, kind or property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation. CAPITAL is the value of the actual property or estate of the corporation whether in money or property. Its net worth or stockholder's equity is its assets less liabilities. AUTHORIZED CAPITAL STOCK is the capital stock divided into shares with par values. Par value stocks are required in the case of corporations issuing preferred shares, as well as in the case of banks, trust companies, insurance companies, building and loan associations, and public utilities. It is the total amount in the charter, which may be raised by the corporation for its operations. SUBSCRIBED CAPITAL STOCK is the total amount of the capital stock subscribed whether fully paid or not. OUTSTANDING CAPITAL STOCK is the portion of the capital stock issued to subscribers except treasury stocks. STATED CAPITAL is the capital stock divided into no par value shares. PAID-UP CAPITAL is the amount paid by the stockholders on subscriptions from unissued shares of the corporation. What are the ways of increasing capital stock? 1) by increasing the number of shares and retaining the par value; 2) by increasing the number of shares and increasing the par value; 3) by increasing the par value of existing shares w/o increasing the number of shares; or 4) by reinvesting retained earnings to the capital and issuing stock dividends What are the available methods to replenish capital? 1) Additional subscription to shares of stock of the corporation by stockholders or by investors; 2) Advances by the stockholders to the corporation; or 3) Payment of unpaid subscription by the stockholders PREREQUISITES TO INCORPORATION 1.Compliance with MINIMUM CAPITAL STOCK RULE: No minimum required for capital stock under the Corporation Code (Sec.12). However, under the Code, a minimum paid-up capital of P5,000.00 is required. (Sec. 13) EXCEPTIONS: a) Domestic Insurance Corporations require P500T capital stock, of which 50% must be subscribed and the balance payable in 12 months. b) Private Development Banks - P4M for class A - P2M for class B - P1M for class C c) Investment Companies need a paid up of at least P500T d) Savings and Loan Corporation is fixed by the Monetary Board, but not less than P100T e) Financing Companies Paid upP2M for Metro Manila P1M for cities
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P500T for others 2. Compliance with MINIMUM SUBSCRIBED CAPITAL STOCK whereby at least 25% of authorized capital stock must be subscribed to. (Sec. 13) 3. Compliance with MINIMUM PAID-UP CAPITAL whereby at least 25% of the total subscription must be paid upon subscription but must not be less than P5,000.00, the minimum capital stock requirement. (Sec. 13) Non-resident aliens should pay their subscriptions in full unless the balance unpaid is assumed by a resident. The subscription payments of the non-resident aliens shall not be included in the computation of the 25% minimum paid-up capital requirement. RULES ON CONVERSION From Stock to Non-stock corporation Conversion may be made by mere amendment of the articles of incorporation. From Non-stock to Stock corporation The corporation must first be dissolved. Mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to one for monetary gain. GENERAL RULES ON CLASSSIFICATION OF SHARES 1. Shares have rights, privileges , or restrictions stated in the AOI. 2. Each share has the same rights unless otherwise provided in the AOI DOCTRINE OF EQUALITY OF SHARES Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are likewise subject to the same liabilities. (Sec. 6) How are shares CLASSIFIED? COMMON SHARES are the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a)assets after dissolution (PREFERRED SHARES AS TO ASSETS) , b)distribution of dividends( PREFERRED SHARES AS TO DIVIDENDS), c)or both, and other preferences. Preferred or Redeemable shares may be deprived of voting rights (Sec. 6). [See discussion of NON-VOTING shares below] KINDS OF PREFERRED SHARES AS TO DIVIDENDS 1.Cumululative preferred share - a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears. 2.Non cumulative preferred share- a share which allows the holder thereof to the payment of current dividends only without regards to dividends in arrears. 3.Participating preferred share- a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate. 4.Non participating preferred share- a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares.. Preferred share holders are not guaranteed dividends by the corporation , such is subject to the availability of surplus profits or unrestricted retained earning plus dividend declaration. They do not have a lien on the property of the corporation nor are creditors of the corporation.
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REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares. LIMITATIONS: a) Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b) Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; c) Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities. KINDS OF REDEEMABLE SHARES 1.Compulsory redeemable shares shares which the issuing corporation must redeem after a stated period or when demanded by the holder. 2. Optional redeemable shares shares which may or may not be redeemed by the issuing corporation. TREASURY SHARES are shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means. (Sec. 9) If purchased from stockholdersthe transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital. If acquired by donation from the stockholders the act would amount to a surrender of their stock without getting back their investments which are instead, voluntarily given to the corporation. When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares. RULE ON THE REACQUISITION BY CORPORATION OF ITS OWN STOCK : A stock corporation may acquire or purchase its own shares for legitimate corporate purposes PROVIDED it has unrestricted retained earnings . 1. To eliminate fractional shares arising out of stock dividends ; 2. To collect or compromise an indebtedness to the corporation arising out of unpaid subscription , in a delinquency sale , and to purchase delinquent shares sold during said sale. 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. FOUNDERS' SHARES are shares issued to organizers and promoters of a corporation in consideration of some supposed right or property. These shares, when classified as such in the articles of incorporation may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. VOTING SHARES are shares with a right to vote. NON-VOTING SHARES are shares without right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. When such voting rights are denied, t hese redeemable and preferred shares shall nevertheless be entitled to vote on the following fundamental matters:
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a) b) c) d) e) f) g) h) Amendment of Articles of Incorporation; Adoption and amendment of by-laws; Sale or disposition of all or substantially all of corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of corporation; Investments of corporate funds in another corporation or another business purpose; and Corporate Dissolution (Sec. 6)
ESCROW STOCK is deposited with a third person to be delivered to a stockholder or his assign, after complying with certain conditions, usually payment of full subscription price. OVER-ISSUED STOCK is stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance is considered null and void. WATERED STOCK is stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. The "water" in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks. PAR VALUE SHARES are shares with a value fixed in the certificates of stock and the articles of incorporation. NO PAR VALUE SHARES are shares having no par value but have an issued value stated in the certificate or articles of incorporation. LIMITATIONS: a) No par value shares can have an issued price of less than P5.00; b) The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c) They cannot be issued as preferred stocks; d) They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; e) The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; f) Once issued, they are deemed fully paid and non-assessable. (Sec. 6) STREET CERTIFICATE is a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from the issuing corporation. CONVERTIBLE SHARE is a share a share that is changeable by the stockholder from one class to another at a certain price and within a certain period. FRACTIONAL SHARE is a share with a value of less than one full share. What is the TRUST FUND DOCTRINE? The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter's unpaid subscription. Instances where the Doctrine was applied: 1) Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2) Where it had released the subscribers to the capital stock from their subscriptions; 3) Where it has transferred corporate property in fraud of its creditors; and 4) Where the corporation is insolvent. If the corporation is solvent , the TFD extends to the capital stock represented by the corporation's legal capital. If the corporation is insolvent, the TFD extends to the capital stock of the corporation and all of its property and assets. Exceptions to the Trust Fund Doctrine 1) Redemption of redeemable shares (Sec. 8)
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2) In a close corporation, when there is a deadlock and the SEC orders the payment of the appraised value of the stockholder's share. (Sec. 104) ISSUANCE OF SHARES is the initial disposition (for consideration not less than par or stated value) of unissued shares, such as by subscriptions, stock dividends, and sale of, or payment of obligations with, shares from the unsubscribed capital stock. SUBSCRIPTION is any contract for the acquisition of unissued stock in an existing corporation or in one still to be formed, irrespective of how the parties refer to the agreement. (Sec. 60) The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting the minds of the parties. The name of the subscriber is recorded in the Stock and Transfer book, and from that time, such subscriber becomes a stockholder of record entitled to all the rights of a stockholder. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable. SUBSCRIPTION 1.refers to unissued shares 2.Corporation still to be form or already in existence 3.The subscriber can exercise all his right as a stockholder even before full payment of the subscription. 4.Corporate creditors may proceed against the subscriber for his unpaid subscription in case the corporate asset are not sufficient to satisfy their claims. 5.Subsciber may not be legally released from the payment of his unpaid subscription UNLESS no creditors would be prejudiced and all the stockholders agree thereto. 6.Subscription may be in any form , not covered by the statute of frauds. PURCHASE OF SHARES 1. refers to issued shares 2.Can only be made when the corporation is already in existence 3.The purchaser can only exercise his right upon full payment of the purchase price. 4. Corporate creditor cannot proceed against the purchaser for the balance of the purchase price , because of the lack of privity of contact between them. 5. The corporation can rescind or cancel the contract in case of non fulfillment by the buyer. 6. Purchase of shares is covered by the statute of frauds in cases of purchases amounting to more than P500.
VALID CONSIDERATIONS IN SUBSCRIPTION AGREEMENT: [COP2AL] 1) Cash actually received; 2) Property, tangible or intangible, actually received AND necessary or convenient for its use and lawful purposes; 3) Labor or services actually rendered to the corporation; 4) Previously incurred corporate indebtedness; 5) Amounts transferred from unrestricted retained earning to stated capital; 6) Outstanding shares in exchange for stocks in the event of reclassification or conversion. (Sec. 62) Shares of stock shall not be issued in exchange for promissory notes or future services. (Sec. 62) STOCK OPTION is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted. WARRANT is a type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation or to purchase issued shares in the future, evidenced by a Warrant Certificate, whether detachable or not, which may be sold or offered for sale to the public.
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SHARES OF STOCK is an interest or right which the owner has in the management of the corporation, its surplus profits, and upon dissolution, in all of its assets remaining after the payment of its debt. CERTIFICATE OF STOCK is the document evidencing the ownership of shares of stocks by a stockholder and the full payment of its issue or subscription price. The certificate is not essential to the ownership and/or existence of the share of stock. Where the certificate of stock reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: If there is an over-issue, the excess issuance (over the authorized capital stock or the stated capital) shall be void as being ultra vires. If there is no over-issue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute "watered" stocks. If there is no over-issue and no watering of stocks , the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party. CAPITAL STOCK Is the amount paid in or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself. SHARES OF STOCK Is the interest or right which the stockholder has in the management of the corporation, its surplus profits, and upon dissolution, in all of its assets remaining after payment of corporate debts. Certificate of Stock 1) Evidence of the holder's ownership of the stock and of his right as a shareholder 2) It is concrete and tangible 3) It may be issued only if the subscription is fully paid
Shares of Stock 1) Unit of interest in a corporation
2) It is incorporeal or intangible property 3) It may be issued by the corporation even if the subscription even if the subscription is not fully paid 4) Situs is the state where the corporation has its domicile
4) Situs may be the place where corporation is located or at the domicile of the owner
ISSUANCE OF CERTIFICATE OF STOCK Under the Doctrine of Individuality of Subscription , subscription is one, entire, indivisible, and whole contract which cannot be divided into portions. Thus, no certificate of stock shall be issued until the full amount of the subscription is paid. What is the Supreme Court ruling on the application of partial payment of subscription? When not prohibited by the corporations by-laws, the board of directors at its option, may apply a partial payment of the subscription to such shares as it may cover and issue the corresponding certificates of stock, OR apply said partial payment to all the shares in which case all the shares are partially paid and therefore, no certificate of stock can be issued therefor.
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What is the PROCEDURE for the ISSUANCE OF NEW CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN OR DESTROYED ONES? Step 1) Filing with the corporation an affidavit in triplicate by the registered owner setting forth the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate and the name of the corporation that issued the same; Step 2) Publication of notice of loss by the corporation in a newspaper of general circulation in the place of the principal office, once a week for 3 consecutive weeks; Step 3) After the Iapse of 1 year from the date of the last publication, if no contest has been presented, the corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed, and issue in lieu thereof a new certificate of stock. However, if the registered owner files a bond or other securities as may be necessary to the board, the new certificate of stock may be issued even before the expiration of one (1) year period. (Sec. 73) SEC Opinion: The prescribed procedure does not apply to a case where the certificates are in the company's possession when lost, stolen or destroyed. In which case, the corporation, not the stockholder, bears the consequences of the loss. What is the rule regarding TRANSFER OF SHARES? RULE: A stockholder has an absolute right to transfer, convey, assign, sell or dispose his shares. UNLESS there is a reasonable restriction in the Articles of Incorporation and in the certificates of stock. Kinds of Restrictions a) Absolute transfers or transfer of ownership b) Limited transfers or transfer of juridical possession only, such as pledge and mortgage. What are the MODES OF ABSOLUTE TRANSFER OF SHARES? 1) When a certificate of stock has already been issued (which presupposes a fully paid subscription) by indorsement and delivery; 2) When no certificate of stock has been issued, by deed of assignment but the transfer shall be valid only between the parties and void as to others until its recording in the stock and transfer book. The rule in the case of PLEDGE OR MORTGAGE OF SHARES, is the pledge or mortgage itself need not be recorded in the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a pledge would require the shares to be placed in the possession of the creditor/pledgee. The agreement must appear in a public instrument to take effect against third persons. An Underwriting Agreement is an agreement between a corporation and a third person, called the "underwriter", who agrees, for compensation, to take a stipulated amount of stocks or bonds, specified in the underwriting agreement, when such securities are not taken by those to whom they are first offered. Underwriting Agreement Stock Subscription Agreement
1) The signers obligate themselves 1) The obligation of the, signer to the to take the shares of stock which purchasers and to the public is absolute. cannot be sold. 2) Underwriters commission. are given 2) There is no commission. 3) He becomes a stockholder of the company and is liable to pay the amount due on the stock.
3) The signer can refuse to become a stockholder/member of the company.
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How are unpaid subscriptions COLLECTED? Either by Voluntary payment a) upon the date specified in the subscription contract b) upon call by the Board of Directors OR by Involuntary payment a) extrajudicial i. delinquency sale ii. application of dividends b) judicial action WHEN do stocks become DELINQUENT? 1) If the subscription contract fixes the date for payment , failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise. 2) If no date is fixed in the subscription contract , the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. (Sec. 67) PROCEDURE FOR THE SALE OF DELINQUENT STOCKS: Step 1) A Call by resolution demanding payment of the balance. However, if the subscription contract already prescribes the date of payment, no call is necessary. Step 2) Notice of the board resolution is given to the stockholders by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required. Step 3) Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of subscription or in the call, the stocks shall be declared delinquent and shall be subject to sale. Step 4) Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. Step 5) Sale of the delinquent shares at public auction. (Sec. 68) Who is the HIGHEST BIDDER? The person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares. In other words, the amount of the bid does not vary but only the number of shares to be bought changes and determines the highest bidder. What are the EFFECTS OF DELINQUENCY? 1) Accelerates the entire amount of the unpaid subscription; 2) Subject the shares to interest, expenses and costs; 3) Disenfranchises the shares from any right that adheres to a shareholder, except the right to dividends (but which shall be applied to any amount due on said shares or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares. (Sec. 43) Effects upon a DIRECTOR owning delinquent shares: 1. He can continue serving in that capacity unless and until said shares are totally bidded away, he continues to be the owner thereof and in the interim he is not disqualified; 2. A delinquent stockholder seeking to be elected as director may not be a candidate for nor be duly elected to the board. HOW ARE THE POWERS OF A CORPORATION CLASSIFIED? Express Powersgranted by law, Corporation Code, and Articles of Incorporation its
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Inherent / Incidental Powersnot expressly stated but are deemed to be within the capacity of corporate entities; Implied / Necessary Powersexists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter THEORY OF GENERAL CAPACITY A corporation is said to hold such powers as are not prohibited or withheld from it by general law (everything is allowed except when prohibited) . GENERAL POWERS AND CAPACITY: [S2A3S PEME2] 1) Sue and be sued; 2) Succession; 3) Adopt and use of corporate seal; 4) Amend its Articles of Incorporation; 5) Adopt its by-laws; 6) For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for non stock corporations: admit members; 7) Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds 8) Enter into merger or consolidation; 9) Make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan political activity. 10) Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees. 11) Exercise other powers essential or necessary to carry out its purposes. (Sec. 36) THEORY OF SPECIAL CAPACITY A corporation cannot exercise powers except those expressly or impliedly given (everything is prohibited except when allowed). SPECIAL POWERS: [PI2S PIPE] 1) Power to extend or shorten corporate term; 2) Increase or decrease corporate stock; 3) Incur, create, or increase bonded indebtedness; 4) Sell, dispose, lease, encumber all or substantially all of corporate assets; 5) Purchase or acquire own shares provided: (i) there is an unrestricted retained earnings, and (ii) it is for a legitimate purpose; 6) Invest corporate funds in another corporation or business for a purpose other than primary purpose; 7) Power to declare dividends out of unrestricted retained earnings; 8) Enter into management contract with another corporation (not with an individual or a partnership) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term. (Sees. 37-44) TYPES OF ULTRA VIRES CASES: 1) Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; 2) Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority; and 3) Acts or contracts, which are per se illegal as being contrary to law. An ultra vires act may be committed by the corporation; the Board of Directors; and the corporate officers.
ULTRA VIRES ACTS AND ILLEGAL ACTS An ultra vires act is not necessarily an illegal act. It is so called ultra vires because it is an act outside or beyond corporate powers. Hence, the act may not be prohibited by law but if it is not among the authorized corporate powers, the act is ultra vires. The TEST in determining whether a corporation may perform an act is to consider the logical and necessary relation between the act questioned
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and the corporate purpose expressed by law or in the charter . If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense.
WHAT ARE THE RIGHTS OF STOCKHOLDERS? 1) MANAGERIAL RIGHTS a) Voting rights; and b) Right to remove directors What are the LIMITATIONS on the stockholders RIGHT TO VOTE? 1) Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6; 2) Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code; 3) Fractional shares of stock cannot be voted; 1) Treasury shares have no voting rights as long as they remain in the treasury; 2) Holders of stock declared delinquent by the board of directors for unpaid subscription are not entitled to vote or to a representation at any stockholder's meeting; and 3) A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation. METHODS OF VOTING ON THE ELECTION OF DIRECTORS 1. STRAIGHT VOTING- Every stockholder through this method , may vote such number of shares for as many persons as there are directors. 2.CUMULATIVE VOTINGEvery stockholder is entitled to such number of votes that his number of shares multiplied by the total number of directors to be elected will bring. He may give all such votes to one candidate (CUMULATIVE VOTING FOR ONE CANDIDATE) or he may distribute them among as many candidates as he sees fit (CUMULATIVE VOTING BY DISTRIBUTION). (Sec. 24) A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28) A PROXY is a written instrument, signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person (as agent) authorizing such person to exercise the voting rights of the former. What is the period of validity of proxy? Unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time. (Sec. 58) Instances whereby Right to vote by proxy may be exercised: 1) Election of the board of directors or trustees; 2) Voting in case of joint ownership of stock; 3) Voting by trustee under voting trust agreement; 4) Pledge or mortgage of shares; 5) As provided for in its by-laws. Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); But directors cannot do so. Directors must always act in person (Sec. 25). A VOTING TRUST is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement.
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Voting Trust 1) The trustee votes as owner rather than as mere agent 2) The trust may vote in person or by proxy unless the agreement provides otherwise 3) Trustee acquires legal title to the shares of the transferring stockholder 4) The agreement must be notarized 5) The agreement is irrevocable 6) Trustee is not limited to act at any particular meeting 7) A trustee can vote and exercise all the rights of the stockholder even when the latter is present 8) An agreement must not exceed 5 years at any one time except when the same is made a condition of a loan. 9) The voting right is divorced from the ownership of stocks
Proxy The proxy holder votes as agent The proxy must vote in person
Proxy has no title to the shares of the principal Proxy need not be notarized Revocable anytime except one with interest Proxy can only act at a specific stockholder's meeting (if not continuing) A proxy can only vote in the absence of the owners of the stock A proxy is usually of shorter duration although under Sec. 58 it cannot exceed 5 years at any one time The right to vote is inherent in or inseparable from the right to ownership of stock
2) PROPRIETARY RIGHTS a) Right to dividends; b) Right to issuance of stock certificate for fully paid shares; c) Proportionate participation in the distribution of assets in liquidation; d) Right to transfer of stocks in corporate books; e) Preemptive right; f) Right to inspect books and records; g) Right to be furnished of the most recent financial statement/financial report; h) Right to recover stocks unlawfully sold for delinquent payment of subscription. WHAT ARE DIVIDENDS? Dividends are corporate profits set aside, declared, and ordered to be paid by the directors for distribution among shareholders at a fixed time. They may be in the form of cash, property or stock. While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance, stock dividends cannot be applied as payment for unpaid subscription. The right to dividends is based on duly recorded stockholdings; accordingly, the corporation is prohibited from entitling thereto anyone else. The declaration of dividends is discretionary, covered by the business judgment rule, provided that the corporation does not have surplus profits in excess of 100% of its paid-in capital. However, even when surplus profits exceed 100%, the board of directors may not be compelled to declare dividends when justifiable reasons exist (Sec. 43).
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What are the SOURCES of dividends? RULE: Dividends can only be declared and paid out of actual and bona fide unrestricted retained earnings. Where a corporation sold its real property which is not being used for business, at a gain, the income derived therefrom may be availed of for dividend distribution; Increase in the value of a fixed asset as a result of its revaluation is not retained earning. However, increase in the value of fixed assets as a result of revaluation (Revaluation surplus) may be declared as cash or stock dividends provided that the company; a) Has sufficient income from operations from which the depreciation on the appraisal increase was charged b) Has no deficit at the time the depreciation on the appraisal increase was charged to operations; and c) Such depreciation on appraisal increase previously charged to operations has not been impaired by losses. Dividends can be declared out of the amount received in excess of the par value of shares when: a) They be declared only as stock dividends and not cash; b) No creditors are prejudiced; and c) There is no impairment of capital. Unlike par value shares, when no par value shares are sold at a premium, the entire consideration paid is considered capital, hence the same cannot be declared as dividends. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. Money cannot be borrowed for the payment of dividends because an indebtedness is not a retained earning of the corporation. Corporate earnings which have not yet been received even though they consist in money which is due cannot be included in the profits out of which dividends may be paid. CASH DIVIDEND 1. Cash dividends declared becomes the absolute property of the stockholder and cannot be reached by corporate creditors 2. May be declared only be the BOD STOCK DIVIDEND 1. stock dividend declared can still be reached by corporate creditors since it still form part of the corporate property. 2. The declaration of the BOD must be with the concurrence of the stockholder representing 2/3 of the outstanding capital stock at a meeting called for that purpose. 3.A declaration of Stock dividends does not create a debt from the corporation in favor of stockholders. 4.It increases the corporate capital
3.A declaration of Cash dividends creates a debt from the corporation in favor of the stockholders. 4. No resulting increase in the corporate capital after cash dividend declaration.
PREEMPTIVE RIGHT OF STOCKHOLDER is the shareholders' preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings. Purpose: To protect from impairment and dilution the basic rights of the stockholders in the corporation. i.e., the right to vote ,dividend payment. This right extends to treasury shares in case of their re-issuance. In case additional issues of originally authorized shares:
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GENERAL RULE: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which the corporation is authorized to issue. EXCEPTION: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion offered for subscription. SEC 2000 OPINION : The RULE now is that whether the issuance pertains to additional issues of originally authorized shares or issuance as a result of an increase in the capital stock , pre-emptive right can be exercised. The reason is that , In the present law, the Corporation Code (BP Blg. 68) the grant of preemptive right is made mandatory except in cases falling under the exceptions provided for in Sec. 39 . All STOCKHOLDERS HAVE PRE-EMPTIVE RIGHT except (Sec.39) 1.When the Pre-emptive right is denied by the AOI or an amendment thereto 2.As to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public. 3. As 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. 3) REMEDIAL RIGHTS a) Individual suita suit instituted by a shareholder for his own behalf against the corporation; b) Representative suita suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation; and c) Derivative suita suit filed in behalf of the corporation by its shareholders upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation. Creditors do not file derivative suits, but rather have remedies which are merely subsidiary such as accion subrogatoria and accion pauliana. 4) APPRAISAL RIGHTS The right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure, namely: [ASIM] 1. An amendment to the articles that has the effect of: a) changing or restricting the rights of shareholders or of authorizing preferences over those of outstanding shares; or b) changing the term of corporate existence; 2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets. (Sec. 81) 3. Investment of corporate funds in another corporation or in a purpose other than the primary purpose; (Sec. 42) and 4. Merger or consolidations It is essential that the dissenting shareholder must have been present, either in person or by proxy,' in the stockholders' meeting and had his dissenting vote recorded. 5) INSPECTION RIGHTS LIMITATIONS: a) Right must be exercised during reasonable hours on business days; b) Person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation; and
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c) Demand is made in good faith or for a legitimate purpose. (Sec. 74) The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-owned by the corporation. Books required to be kept: 1) Book of Minutes a) Minutes of stockholder or members meetings; and b) Minutes of board meetings. 2) Book of all business transactions; 3) Stock and Transfer Book, in case of stock corporations. Corporate records required by the SEC to be kept and/or registered: 4) Books of Account; 5) List of Stockholders or Members; and 6) Financial Records. There are two types of meeting provided by the Code: STOCKHOLDERS' MEETING (Sec. 50-51) WHEN: 1) REGULARheld on the date fixed in the by-laws or if not fixed on any date in April; and 2) SPECIALheld at any time deemed necessary or as so provided in the by-laws. WHERE: In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of the corporation. What remedy is available when there is no person authorized to call a stockholder's meeting? The SEC upon petition of a stockholder may order the petitioning stockholder to call a meeting by giving the required notice to the other fellow stockholders. DIRECTORS' MEETING (Sec. 53) WHEN: 1) REGULARheld monthly, unless otherwise provided in the by-laws; and 2) SPECIALheld at any time upon the call of the president. WHERE: May be held anywhere in or outside of the Philippines. What is MERGER? A union whereby one or more existing corporations are absorbed by another corporation, the latter survives and continues the combined business. What is CONSOLIDATION? The union of two or more existing corporations to form a new corporation called the consolidated corporation. EFFECTS OF MERGER OR CONSOLIDATION 1) The constituent Corporations shall become a single corporation which, in case of merger shall be the surviving corporation and, in the case of consolidation, shall be the consolidated corporation; 2) The separate existence of the constituent corporation shall cease except that of the surviving corporation; 3) The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and subject to all the duties and liabilities of a corporation; 4) The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; 5) All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; 6) The surviving or consolidated corporation shall be responsible for all the
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liabilities and obligations of each of the constituent corporations; 7) Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations; and 8) The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. (Sec. 80) RULE: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation. The two corporations shall still maintain their separate corporate entities, and one will not answer for the debts of the other. EXCEPTIONS TO NON-ASSUMPTION OF LIABILITIES: 1) Express assumption of liabilities; 2) Consolidation or merger; 3) If purchase was in fraud of creditors; and 4) If purchaser is merely a continuation of the seller. WHAT IS A NON-STOCK CORPORATION? It is a corporation where, during its existence, no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution. (Sec. 87) Purposes: charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural. (Sec. 88) Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which it was organized. They are governed by the same rules, established for stock corporations, whenever pertinent, subject however to a number of special features. Stock 1) Has capital stock divided into shares and with authority to distribute dividends to its stockholders 2) Stockholders may transfer their shares 3) Cumulative voting is available in the election of directors 4) Directors cannot exceed 15 in number 5) The term of a director is 1 year 6) Stockholders may vote by proxy 7) Officers are elected by the Board of Directors 8) Stockholders and directors must act in a meeting, except where a Non-stock Does not have shares and may not distribute profits to its members
Members cannot transfer their membership unless allowed by the articles or by-laws Cumulative voting not available unless otherwise provided in the articles or bylaws Trustees may exceed 15 in number The term of a trustee is 3 years; 1/3 of the Board shall be elected annually Members may be deprived of the right to vote by proxy in the articles or bylaws Officers may be directly elected by the members Members may be allowed by the bylaws to vote by mail or other similar
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mere written assent is sufficient or a formal meeting unnecessary means
How are the assets of a Non-stock corporation DISTRIBUTED UPON DISSOLUTION? 1) All its creditors shall be paid; 2)Assets held subject to return upon dissolution shall be delivered back to their respective transferors; 3)Assets held for charitable, religious, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as the dissolved corporation; 4)Other assets shall be distributed to members, as provided for in the articles or by-laws; and 5)|n any other case, assets may be distributed as specified in a plan of distribution. (Sec. 94) WHAT IS A CLOSE CORPORATION? It is a special kind of stock corporation in which its 1) Articles of Incorporation provides that: a) All the corporations issued stock of all classes , exclusive of treasury shares , shall be held of record by not more than a specified number of persons, not exceeding 20; b) All of the issued stocks are subject to transfer restrictions, with a right of preemption in favor of the stockholders or the corporation; and c) Corporation shall not list in the stock exchange or its stocks should not be publicly offered; Notwithstanding the foregoing , it shall NOT be deemed a close corporation when 2) 2/3 of the voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of the corporation code. (Sec. 96) The following cannot be a close corporation: a) mining companies; b) oil companies; c) stock exchanges; d) banks; e) insurance companies; f) public utilities; g) education institutions; h) other corporations declared to be vested with public interest. (Sec. 96) CHARACTERISTICS OF CLOSE CORPORATIONS: 1) Stockholders may act as directors without need of election and therefore are liable as directors; 2) Stockholders who are involved in the management of the corporation are liable in the same manner as directors are; 3) Quorum may be greater than mere majority; 4) Transfer of stocks to others, thus increasing the number of stockholders to more than the maximum is invalid; 5) Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others; 6) Preemptive right extends to all stock issues; 7) Deadlocks in board are settled by the SEC on the written petition by any stockholder; and 8) Stockholder may withdraw and avail of his right of appraisal. Ordinary stock corporation 1) Its articles of incorporation need only contain the general matters enumerated in Sec. 14 of the Code. Close corporation Its articles must contain the special matters prescribed by Sec. 97, aside from the general matters in Sec. 14.
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2) Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights. 3) Its articles cannot classify its directors. 4) Business of the corporation is managed by the board of directors. 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation. Its articles may classify its directors Business of the corporation may be managed by the stockholders if the articles so provide, but they are liable as directors. Its articles may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders. The pre-emptive right is subject to no exceptions unless denied in the articles The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason. In case of an arbitration of an intracorporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings. Arbitration of intra-corporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the management of the corporation.
5) The corporate officers and employees are elected by a majority vote of all the members of the board of directors. 6) The pre-emptive right is subject to the exceptions found in Sec. 39. 7) The appraisal right may be exercised by a stockholder only in the cases provided in Secs. 81 and 42 of the Code 8) Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings. 9) Arbitration of intra-corporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting the management of the corporation.
What are the SPECIAL CORPORATIONS? 1) EDUCATIONAL CORPORATION is a stock or non-stock corporation organized to provide facilities for teaching or instruction. A favorable recommendation of the DECS is essential for the approval of its articles and by-laws. It is primarily governed by special laws and, suppletorily, by the provisions of the Code. 2) RELIGIOUS CORPORATION is a corporation composed entirely of spiritual persons and is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. TWO KINDS OF RELIGIOUS CORPORATIONS: a) CORPORATION SOLE is a special form of corporation, usually associated with the clergy, consisting of one person only and his successors ,
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incorporated by law to administer and manage, as trustee, the affairs, property and temporalities of any religious denomination, sect or church; b) RELIGIOUS SOCIETIES is a non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of persons, (like a religious order, diocese, synod, sect, etc.) WHAT IS DISSOLUTION AND WINDING UP (LIQUIDATION)? DISSOLUTION is the extinguishment of the franchise of a corporation and the termination of its corporate existence. What are the MODES OF DISSOLUTION? VOLUNTARY, through: (4) a) Application for dissolution with the SEC i) Where no creditors are affected ii) Where creditors are affected b) Shortening the corporate term by amending the articles of incorporation. c) In case of a corporation sole , by submitting a verified declaration of dissolution to the SEC. d) In case of merger or consolidation wherein upon issuance by the SEC of the certificate of merger or consolidation , the constituent corporation ceases, EXCEPT the surviving or consolidated corporation . INVOLUNTARY, through: (6) a) Expiration of the corporate term; b) Failure to organize and commence business within 2 years from the date of issuance of the certificate of incorporation; SEC Opinion: Dissolution in this case is not automatic. The corporation continues to exist as such, notwithstanding its non-operational status until the SEC orders its dissolution after notice and hearing c) dissolution by legilative enactment in cases of corporation with a charter of its own; d) Quo warranto suit against a de facto corporation; e) Minority stockholders' suit for dissolution on justifiable grounds; or f) SEC dissolution, upon complaint and after notice and hearing, on the following grounds: (PD 902-A) 1.Fraud in procuring its certificate of registration; 2.Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of , or damage of the public; 3.Refusal to comply or defiance of any lawful order of the commission restraining commission of acts which would amount to grave violation of its franchise; 4.Continous inoperation for a period of at least 5 years; 5.failure to file the by-laws within the required period; 6.Failure to file required reports in appropriate forms as determined by the commission within the prescribed period. SHORTENING OF CORPORATE TERM refers to the dissolution of a corporation prior to the expiration of its term as fixed in the articles of incorporation. This may be done by following the formal requirements of Sec. 16 (not mere written assent) and the procedural requirements of Sec. 37 of the Code (stockholders' approval). EXTENSION OF CORPORATE TERM refers to the continuation of a corporation beyond the term originally fixed in the articles of incorporation. Requisites: 1)The extension cannot be made earlier than 5 years prior to the original or subsequent expiry date unless warranted by a justifiable reason to be determined by the SEC; 2)There can be no more extension after the expiration of the corporate term because there is no more corporate life to extend ; and 3)It should be approved by 2/3 of the outstanding capital stock.
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LIQUIDATION is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members. This process is achieved: 1)By the corporation itself through its board of directors/trustees; 2)By a trustee to whom the corporate assets have been conveyed; and 3)By a management committee or rehabilitation receiver appointed by the SEC. The 3-year period of liquidation does not apply to the 2nd and 3 rd method as long as the trustee or the receiver is appointed within the said period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of the entity or those of its owners and creditors alike (Sec. 145). In the case of a corporation, where the 3year extended life has expired without a trustee or receiver having been expressly designated within the said period, those who have been charged to wind up its affairs or, in their absence, the board of directors/trustees should be permitted to continue as "trustees" by legal implication to complete the corporate liquidation. WHAT IS A FOREIGN CORPORATION? It is a corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. A foreign corporation is not permitted to "transact or do business in the Philippines" until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. Who is a RESIDENT AGENT? An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Sec. 127-128) What are the GROUNDS FOR REVOCATION OF LICENSE? 1) Failure to file annual reports required by the Code; 2) Failure to appoint and maintain a resident agent; 3) Failure to inform the SEC of the change of residence of the resident agent; 4) Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5) A misrepresentation in material matters in reports; 6) Failure to pay taxes, imposts and assessments; 7) Engaging in a business unauthorized by SEC; 8) Acting as dummy of a foreign corporation; and 9) Not licensed to do business in the Philippines. (Sec. 134) What is the test of DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES? The Corporation Code does not define the phrase "doing or transacting business." JURISPRUDENTIAL TESTS: 1) TWIN CHARACTERIZATION TEST a) Substance TestWhether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another); and b) Continuity TestWhether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization
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2) CONTRACT TEST Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. STATUTORY TESTS: Under the Foreign Investment Act of 1991 (R.A. No. 7042) the following acts constitute "doing business": a) Soliciting orders, service contract opening offices, whether called liaison offices or branches; b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; c) Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the Philippines; and d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of, the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose of the business organization. Under the Implementing Rules of R.A. No. 7042, Acts NOT constituting "doing business": a) Mere investment as a shareholder in a domestic exercise of rights as such investor; corporation and/or the
b) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; c) Publication of a general advertisement through any print or broadcast media; c) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; d) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export; e) Collecting information in the Philippines; and f) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis. What are the effects of lack of license ON SUITS? Foreign corporation doing business in the Philippines: RULE: They may not sue or intervene any court or administrative agency of the Philippines. in any action in
EXCEPTION: They may be sued on any valid cause of action recognized in the Philippines under the doctrine of quasi-estoppel by acceptance of benefits . (Sec. 133) Foreign corporation NOT doing business in the Philippines: RULE: Generally, it may not sue and be sued in any court or administrative agency of the Philippines. EXCEPTION: However, it may sue and be sued for isolated transactions, as well as for those which are casual or incidental thereto. What is the DOCTRINE OF ISOLATED TRANSACTIONS?
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Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. It is not the lack of the prescribed license to do business in the Philippines but the doing of business without license which bars a foreign corporation from access to Philippine courts. An unlicensed foreign corporation is not ipso facto barred from bringing an action. The legal prohibition affects only those foreign corporations who do business without license. INSTANCES WHEN A FOREIGN CORPORATION MAY SUE IN THE PHILIPPINES WHETHER OR NOT LICENSED TO DO BUSINESS THEREAT : 1) Seek redress for an isolated business transaction; 2) Enforce a right not arising out of a business transaction, (i.e. a tort that occurred in the Philippines); 3) Protect its corporate reputation, name, and goodwill; 4)Parties have contractually stipulated that Philippines is the venue of actions; and 5)Party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation. 6)If the foreign corporation subsequently acquires license to do business in the Philippines. What are the effects of lack of license ON CONTRACTS? The contracts contemplated are those that satisfy the CONTRACT TEST or contracts that make a foreign corporation as one "doing business in the Philippines." RULE: The contracts are unenforceable. They are enforceable only upon securing a license. EXCEPTION: Contracts are null and void if they are contrary to law, morals, good customs, public order and public policy. SECURITIES AND EXCHANGE COMMISSION REORGANIZATION DECREE (P.D. 902-A) Old Rule: Sec. 5 of PD 902-A granted original and exclusive jurisdiction to the SEC to hear and decide cases involving: 1. Fraudulent devices and schemes employed by directors detrimental to the public interest and to other firms; 2. Intra-corporate disputes with the state in relation to their franchise and right to exist as such; 3. Controversies in election, appointment of directors and trustees; and 4. Petition to be declared in State of suspension of payments New Rule: Subsection 5.2 of the Securities Regulation Code has stripped the SEC of its adjudicatory powers over the aforementioned cases and jurisdiction over these cases now fall under the courts of general jurisdiction (Regional Trial Courts). What are the grounds for suspension or cancellation of the certificate of registration? (Sec. 6) 1. Fraud in procuring registration; 2. Failure to file by-laws within required period; 3. Failure to file reports; 4. Serious misrepresentation as to objectives of corporation; 5. Refusal to comply with lawful order of SEC; 6. Continuous inoperation for at least 5 years; and 7. Other similar grounds THE SECURITIES REGULATION CODE (R.A. 8799)
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The Code is what is termed a blue sky law, enacted to protect the public from unscrupulous promoters who stake business or venture claims which have really no basis and sell shares or interests therein to investors, who are then left holding certificates representing nothing more than a claim to a square of the blue sky. (2002 Villanueva, p. 778) SECURITIES are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: 1. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; 2. Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; 3. Derivatives like option and warrants; 4. Fractional undivided interests in oil, gas or other mineral rights; 5. Certificates of assignments and participation, trust certificates, voting trust certificates or similar instruments; 6. Other instruments as may in the future be determined by the Commission; and 7. Proprietary or non proprietary membership certificates incorporations (Sec. 3.1) POWERS AND FUNCTIONS OF THE SEC (Sec. 5.1) 1. Jurisdiction/supervision over corporations, partnerships, and grantees of primary franchise; 2. Approve, reject registration statements/licensing applications; 3. Suspend, revoke, after notice and hearing, primary franchise on legal grounds; 4. Supervise, monitor, suspend or take over exchanges, clearing agencies and other SROs; 5. Regulate/supervise activities of persons to ensure compliance; 6. Recommend policies, advise, propose legislation to Congress on the securities market; 7. Issue cease and desist orders to prevent fraud or injury; 8. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission; 9. Punish for contempt of the Commission; 10. Prepare, approve, amend or repeal rules, regulations, issue opinions, enlist the aid and support of and/or deputize any and all enforcement agencies of the Government as well as any private institution, corporation, firm, association or person in the implementation of its powers; 11. Exercise such other powers as may be provided by law which are necessary or incidental to the carrying out its express powers; and 12. Compel the officers of any registered corporation or association to call meetings of stockholders or members. GENERAL RULE: Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. (Sec 8.1) EXCEPTIONS: 1. Exempt securities (Sec. 9) 2. Exempt transactions (Sec. 10) What are the exempt securities?
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1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. 2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content of disclosures the Commission may prescribe. 3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. 4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. 5. Any security issued by a bank except its own shares of stock. What are the exempt transactions? 1. Judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy; 2. Sale by a pledge, mortgagee, or any other similar lien holder to liquidate a bona fide debt, a security pledged in good faith as security for such debt; 3. Sale in an isolated transaction by the owner; 4. Distribution by a corporation of stock dividend; 5. Sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid. 6. Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. 7. Issuance of security in exchange of any security from same issuer pursuant to right of conversion; provided the security surrendered had been registered or was, when sold, exempt from registration; 8. Broker's transactions, executed upon customer's orders, on any registered Exchange or other trading market. 9. Share subscriptions prior to incorporation or in pursuance of an increase in its authorized capital stock, when no expense is incurred, or no commission, compensation, or remuneration is paid or given in connection with the sale or disposition of such securities; 10. Exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid for soliciting such exchange; 11. Sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period; 12. Sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Investment company; (v) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; or (vi)Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. GROUNDS FOR REJECTION AND REVOCATION OF REGISTRATION OF SECURITIES (Sec. 13)
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There are 4 Grounds The issuer: a) Has been judicially declared insolvent; b) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed; c) Has been or is engaged or is about to engage in fraudulent transactions; d) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; e) Has failed to comply with any requirement that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or 2. The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or 3. The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the Commission or other competent judicial or administrative body for violations of securities, commodities, and other related laws. (Sec. 13.1) 4. If any issuer shall refuse to permit an examination to be made by the Commission (Sec. 13.3) GROUNDS FOR SUSPENSION OF REGISTRATION (Sec. 15) 1. If at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate of incomplete in any material respect; or 2. Sale or offering for sale of the security registration thereunder may work or tend to work a fraud; 3. Pending investigation of the security registered to ascertain whether the registration of such security should be invoked on any ground specified in this Code; and 4. Refusal to furnish information required by the Commission. PROVISIONS ON THE SRC INTENDED TO PROTECT SHAREHOLDERS INTERESTS 1.Tender offer 2.Limitations on Proxy solicitations (Sec.20) 3.Internal record keeping and accounting controls (Sec. 22) 1.
Who are obliged to make a TENDER OFFER? (Sec. 19) Any person, or group of persons acting in concert, who intends to: acquire at least 15% of; or acquire at least 35% of over a period of 12 months of; any class of equity security of a listed corporation; or any class of equity security of a corporation with assets of at least P50 million and having 200 or more stockholders with at least 100 shares each. How to make a tender offer: 1. Make a tender offer to stockholders by filing with the SEC a declaration to that effect; and furnish the Issuer a statement containing such of the
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information required of issuers as SEC may prescribe, including subsequent or additional materials; 2. Publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security; 3. Pay at time of filing of statement with SEC a filing fee MANIPULATIVE PRACTICES AND INSIDER TRADING Under Sec. 24.1 [Otherwise known as WASH SALES] It shall be unlawful for any person, for himself or through dealer or broker, directly and indirectly: A. To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading: (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering order or orders with knowledge that a simultaneous order or orders of substantially the same size, time and price has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. B. To effect, alone or with others, a series of transactions in securities that: (i) Raises or depresses the price of a security to induce the sale or purchase of such security; (ii) Creates active trading to induce such purchase or sale through MANIPULATIVE DEVICES such as: Marking the closebuying and selling securities at close of market in an effort to alter the closing price of the security Painting the tapeengaging in a series of transactions that are reported publicly to give impression of activity or price movement in a security Squeezing the floattaking advantage of a shortage of securities in the market by controlling demand side and exploiting market congestion during such shortages to create artificial prices Hype and dumpengaging in buying activity at increasingly higher prices and then selling securities in market at higher prices Improper matched ordersengaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties Boiler room operationsa well-organized operation where in a room there would be well-trained salesmen operating over several phones and using highpressure sales-talk to get investors to invest in securities offered Scalpingwhere a person, like an investment advisor, purchases securities for his own account before recommending that security then selling the share at a profit upon a rise in the market price following the recommendation Daisy Chaina pattern of fictitious trading activity by a group of persons who lure innocent people into the scheme FlippingOperated when one office buys a particular stock for customers while another office simultaneously recommends that its customers sell the stock, with the stock being shifted from one office to another, and the firm makes a profit and the brokers ear their commissions (Villanueva, p. 816) C. By the circulation or dissemination of information that the price of any security listed in the Exchange will or is likely to rise or fall because of manipulative market operations
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D. To make, regarding any security registered on an exchange, any statement which is false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe is false or misleading E. To effect series of transactions for the purpose of pegging, fixing or stabilizing the price of such security traded in an Exchange, unless otherwise allowed by this Code or by rules of the Commission. Under Sec. 24.2 [Employment of Manipulative and Deceptive Devices] It shall be unlawful for any person by the use of any facility or exchange to effect a short sale or any stop-loss order in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Short salewhen the seller does not own or control the securities that he is selling and therefore, cannot himself supply the securities for delivery. Stop-loss orderan order by a customer to the broker that if the commodity touches the price named, the latter shall close the trade at the best available price. Under Sec. 25 [Regulation of Option Trading] It shall be unlawful for a member of an Exchange to, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. Putan option or promise to sell Callan option or promise to buy Straddlean option to buy and sell Example: X gives Y an option to buy shares within 15 days. Y pays X a consideration of P100.00 for the option. With the option, Y can control the shares for 15 days without buying them. The danger sought to be avoided is the likelihood that a person to whom the option is given can abuse the same and control a large quantity of shares over a period of time, thus manipulating the market. Under Sec. 26 [Fraudulent Transactions] It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: A. Employ any device, scheme, or artifice to defraud;
B. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made not misleading; or C. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person. Under Sec. 27 [Insider's Trading] INSIDER TRADING Buying / Selling of Securities by an Insider while in possession of a Material Non-Public information.
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The RULE is that it shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to Issuer or the security that is not generally available to the public; UNLESS (a) Insider proves that the information was not gained from such relationship; or (b) Insider proves that the fact is generally available: (i) he disclosed the information to the other party, or (ii) he had reason to believe that the other party otherwise is also in possession of the information. Legal Presumption A purchase or sale of a security of the issuer made by an insider or such insider's spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information (Sec. 27.1) Who is an INSIDER? (a) Issuer; (b) Director or officer of, or a person controlling, controlled by, or under common control with the Issuer; (c) Person whose relationship or former relationship to Issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) Government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) Person who learns such information by a communication from any of the foregoing insiders (Sec. 3.8) Information is MATERIAL NON-PUBLIC if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. (Sec. 27.2) Other acts violating the Prohibitions on Fraud, Manipulation and Insider Trading It shall be unlawful: a. for any insider to communicate material non-public information about the issuer or the security to any person who thereupon, becomes an insider, where the original insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer on basis of such information. b. where a tender offer has commenced or is about to commence for: (i) Any person, other than the tender offeror, who is in possession of material non-public information relating to such tender offer, to buy or sell the securities of the issuer covered by the tender offer; and (ii) Any tender offeror, or those acting on his behalf, the issuer of the securities covered by such tender offer, and any insider, should
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communicate material nonpublic information relating to the tender offer which would likely result in violation of the prohibition of insider trading. Commonly used terms: Fact of special significance In insider trading, the term means, in addition to being material, such fact would likely, on being made generally available, affect the market price of a security to a significant extent, or which a reasonable man would consider as especially important in determining his course of action. Floor traderis a professional trader in securities who acts for himself and not for the account of others, hence, receives no commission at all Over the Counteris a transaction involving securities made not in the stock exchange but elsewhere between the broker and the customer directly Short-swing transactionis a transaction where a person buys securities and sells or disposes of the same within a period of six (6) months
BANKING LAWS GENERAL BANKING LAW OF 2000 RA 8791 BANKS are entities engaged in the lending of funds. These funds are obtained through deposits. Elements of a bank/banking institution: 1. entities authorized by law 2. to engage in the lending of funds 3. obtained from the public 4. through the form of deposits (Sec. 2). Public means 20 or more persons/lenders Deposit that w/c gives rise to creditor-debtor relationship. Does not refer to deposit under CC. Requirements/ Procedure in putting up a bank (Sec. 14, RA 8791) Organize a STOCK ( organized for profit) corporation and register the articles of incorporation (or any amendment) but must be accompanied by a certificate of authority issued by Monetary Board (MB) under its seal. As for the registration of its by-laws or any amendment thereto. It must be accompanied by a certificate of authority from the Bangko Sentral. The certificate shall not be issued by MB UNLESS a. All requirements of existing laws and regulations to engage in business is complied with.
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b. That public interest and economic conditions both general and local justify authorization. c. The amount of capital, the financing, organization, direction and administration, integrity, and responsibility of organizers and administrators reasonably assure the safety of deposit and public interest. d. Must comply with the minimum capital requirement. Accepts fund (deposit) from the public. Deposit- that which gives rise to debtor-creditor relationship does not refer to deposit under NCC. Public- at least 20 persons Lends the money to the public. BANK QUASI-BANK Obtains funds from the public through Obtains funds form the public through deposit and lends the deposits. deposit substitutes w/c is the alternative way of obtaining funds through the issuance, acceptance, and indorsement of debt instruments w/ recourse (relending or purchasing debt instruments). FIDUCIARY NATURE OF BANKING: State recognizes the fiduciary nature of banking and because of that, it requires high standards of integrity. Extra-ordinary diligence is required in handling funds of the public. The law does not require it but SC said that that it should be the case because of the fiduciary nature of banking. CLASSIFICATION OF BANK UNDER THE GENERAL BANKING LAW 2000(RA 8791) 1) Universal Banks 2) Commercial banks 3) Thrift Banks, composed of: i. Savings and Mortgage Banks ii. Stock Savings and Loan Associations. iii. Private development Banks. 4) Rural Banks 5) Islamic Banks 6) Cooperative Banks 7) Other Classifications of banks as determined by the Monetary Board of the Philippines. UNIVERSAL BANKS - Universal Bank (UB) has the authority to exercise the powers of a commercial bank (Sec. 29) & in addition the powers of an investment house as provided in existing laws and the power to invest in non allied enterprises . A universal bank may own up to 100% of the equity of a thrift bank , a rural bank , or a financial allied enterprise. A publicly listed universal bank may own up to 100% of the voting stock of only one other universal or commercial bank. However , the MB may limit the equity investment of a universal bank in a quasi bank to 40%. Conditions prescribed by the Monetary Board:
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1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and 2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank. 3. The equity investment of a UB in a single non allied enterprise shall not exceed 35 % of the net worth of the non allied enterprise , or 35% of its voting stock. Net worth shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. COMMERCIAL BANKS have the general powers of a corporation; and all powers necessary to carry on the business of commercial banking, such as: a.) Accepting drafts and issuing letter of credits; b.) Discount and negotiate promissory notes, bills of exchange, and other evidence of debts; c.) Accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; d.) Buying and selling foreign exchange and other debt securities; and e.) Extending Credit. Rule on INVESTMENTS by a Commercial BankA commercial bank may, SUBJECT TO CONDITIONS, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Conditions prescribed by the Monetary Board: 1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bark; and 2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of tile net worth of the bank. A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. THRIFT BANK- can perform all powers of commercial banks except the ff ; a. Cannot issue import LC only domestic LC, b. Cannot accept or open checking account except with prior MB approval Other banking services (can be exercised only by a UB, Commercial Bank and Thrift Bank): 1. Receive in custody funds, documents and valuable objects 2. act as a financial agent, buy and sell shares, evidences of indebtedness and all other types of securities, by order of an for the account of customers 3. Make collections and payments for the account of others and perform such other services for their customer NOT INCOMPATIBLE w/ banking business 4. Upon prior approval of the MB, act as a managing agent, adviser, consultant, or administrator of investment/management/advisory/consultancy/accounts, subject to prior approval of the MB and 5. Rent out safety deposit boxes.
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Sec. 53 Services banks can render. This is not exclusive since in the law it is stated that: other services not incompatible w/ banking UNIVERSAL BANK 1. Min. capital is P4.9B COMMERCIAL BANK 1. Min. capital is P2.4B THRIFT BANK 1. Min. capital is P32.5M if head office is in Metro Manila and P62.5M if outside Metro Manila 2. Can invest ONLY in allied undertaking
2. Can invest in allied and non-allied undertaking (ex. Cargo business, operation of airport terminal). 3. Can function as an investment house. Illus: Company goes IPO Investment house a corporation that underwrites sale of shares of stocks and other securities. 4. Can issue both import L/C and domestic L/C 5. Can issue checking accounts
2. Can invest ONLY in allied undertaking
3. Cant
3. Cant
4. Can issue both import L/C and domestic L/C 5. Can issue checking accounts
4. Cant issue import L/C but can issue domestic L/C 5. Cant issue checking accounts unless allowed by the MB and have a certain amount of assets
Rule regarding FOREIGN SHAREHOLDINGSForeign individuals may own up to 40% voting stock of a Domestic Bank. This rule shall apply to domestic bank and non-bank corporations. Rule on INVESTMENT in ALLIED ENTERPRISES 1.) Equity Investments of a Universal Bank in Financial Allied Enterprisesa universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise. A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. 2.) Equity Investments of a Universal Bank in Non-Financial Allied Enterprises a universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. Rule on INVESTMENT in NON-ALLIED ENTERPRISES 1.) Equity Investments of a Universal Bank in Non-Allied Enterprisesthe equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise.
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2.) Equity Investments in Quasi-Bankto promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. Rule on ACQUISITION OF PROPERTIES (Sec. 52 GBA OF 2000) The bank may acquire, hold and convey real property only under the ff. circumstances: a. Such as it may be necessary for the conduct of its business. b. Such as shall be mortgaged to it in good faith by way of security of debts. c. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings (Dacion en pago) OR; d. Such as it shall purchase at sales under judgments , decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it . What is the COMPOSITION of board members? At most 15. But in case of merger, not more than 21. Prohibition on public officials as bank officers RULE: No public official, whether full or part-time, may serve as a bank officer. EXCEPT: 1) In Rural banks; 2) Abovementioned service is incidental to financial service rendered by a government owned and controlled corporation; and 3) As provided by existing laws. FIT AND PROPER RULETo maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. May the Monetary Board regulate payment by the bank of compensation and other benefits of Directors and Officers? YES. To protect the funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following: 1. When a bank is under comptrollership or conservatorship; or 2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or 3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests 1.) No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank EXCEPT with the WRITTEN APPROVAL OF THE MAJORITY of all the directors of the bank, excluding the director concerned:
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2.) Provided, such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral 3.) Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. 4.) After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The following rules are SIMILAR to all banking, quasi-banking, and other financial institutions: Limits on loans, credit, accommodation and guarantees : 1.) SINGLE BORROWER LIMITCredit accommodation or guarantees may be lent by a bank to a person, natural or juridical. However, in no case would such accommodation exceed 20% net worth of said bank; 2.) Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance; 3.) The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. For purposes of Section 35, loans, other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government: (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; (d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credit accommodations which the Monetary Board may from time to time may consider as non-risky. The following are the PROHIBITED TRANSACTIONS 1.) No director, officer, employee, or agent of any bank shall
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(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; (b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; (c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; (d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or (e) Outsource inherent banking functions. 2.) No borrower of a bank shall (a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. What is the bank requirement for the grant of LOANS or other CREDIT ACCOMMODATIONS? Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. In this regard, the bank may demand from its credit applicants the following items of information: a) Statement of their assets and liabilities; b) Statement of their income and expenditures; and c) Such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application including corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. Rule in Loans and Other Credit Accommodations AGAINST REAL ESTATE Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. Rule in Loans and Other Credit Accommodations on Security of CHATTELS and INTANGIBLE PROPERTIES Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of
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chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventy-five percent (75%) of the appraised value of the security, an such loans and other credit accommodation may be made to the title-holder of the chattels and intangible properties or his assignees. Rule on Foreclosure of Real Estate Mortgage In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property 1) by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage; and 2) by paying all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding the provisions of Act No. 3135 or the Real Estate Mortgage Law, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.
NEW CENTRAL BANK ACT (RA no. 7653) Declared Policy The Bangko Central ng Pilipinas is the States Central Monetary Authority (Sec 2) mandated in the 1987 Philippine Constitution, which shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. What are the Powers / Duties of Bangko Sentral? (1) to provide policy directions in the areas of money, banking, and credit. (2) to have supervision over the operations of banks and with regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions. (3) to maintain price stability conducive to a balanced and sustainable growth of the economy.
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(4) to promote and maintain monetary stability and the convertibility of the peso. (Sec 3) Note: BSP has the authority to request from government offices and instrumentalities, or government-owned or controlled corporations, data which it may require for the proper discharge of its functions and responsibilities, with power to issue subpoena for the production of books and records. Supervision and Examination . The Bangko Sentral shall have supervision over, and conduct periodic or special examinations of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities. (Sec 25) subsidiary - means a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-bank affiliate - means a corporation the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-bank or which is related or linked to such institution or intermediary through common stockholders or such other factors as may be determined by the Monetary Board.
PRIMARY OBJECTIVE OF BSP 1. To maintain the price stability conducive to a balanced and sustainable growth of the economy 2. To promote and maintain monetary stability and convertibility of peso. Banking institutions and quasi banks , including their subsidiaries and affiliates engaged in allied activities are subject the supervision and periodic or special examination of the BSP. Restraining or injunctions cannot be issued by the court as to enjoin BSP from examining banking institutions and quasi banks , including their subsidiaries and affiliates engaged in allied activities UNLESS; 1. There is convincing proof that the action of the BSP is plainly arbitrary and made in bad faith; and 2. The petitioner files with the clerk of court or the judge of the court in which the action is pending a bond executed in favor of BSP , in an amount to be fixed by the court. Prohibitions on Bank Officers, Directors, Lawyers, Agents BSP Personnel are prohibited from: (a) being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, EXCEPT: non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act;
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(b) directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; (c) revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any institution; and (d) borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board
CONSERVATOR One appointed if the bank is in a state of illiquidity or a bank refuses or fails to maintain a state of illiquidity adequate to protect its depositors and creditors. The Bank in this case , still has more asset than its liabilities but the assets is not in cash or liquid thus it cannot pay it obligation as they fall due. IF MB finds that a bank or quasi bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors , the MB may appoint a conservator who shall be competent and knowledgeable in bank operations and management) to ; a. Take charge of the assets , liabilities ,and management of the bank or quasi bank. b. Reorganize the management thereof c. Collect all monies and debts due it; and d. Exercise all powers necessary to restore its viability. The MB shall terminate the conservatorship a. It is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary b. When it determines that the continuance in the business of the institution would involve probable loss to its creditors and depositors (In which case the institution may be closed) In any case , the Conservatorship shall not exceed 1 year. Conservator may only revoke contracts that are , under existing law , deemed defective. He does not have the power to repudiate perfected and valid contracts of the bank (First Philippine International Bank vs. CA) RECEIVER One appointed when the bank is already insolvent which means that its liabilities is greater than its assets. MB shall appoint a RECEIVER and PROHIBIT a bank or quasi bank from doing business on the Philippines on the ff grounds ; 1. If the bank or quasi bank is unable to pay its liabilities as they fall due in the ordinary course of its business.
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2. If the bank or quasi bank has insufficient realizable assets to meet its liabilities. 3. If the bank or quasi bank has willfully violated a cease and desist order under Sec 37 (Administrative sanctions) that has become final and involves transactions which amounts to fraud or dissipation of assets. 4. If the bank or quasi bank cannot continue its business without involving probable losses to its creditors and depositors. 5. If the bank or quasi bank in any matter suspends the payment of its deposit liabilities continuously for more than 30 days. 6. Bank persist in conducting its business in an unsafe and unsound manner. What is the effect when a bank is put under receivership? The CB may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. What are the Functions and Obligations of Receiver? The receiver shall: (a) immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors; (b) exercise the general powers of a receiver (c) determine as soon as possible, but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public; Note: Any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. Sec 29 of the CB Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of subsequent judicial review. Close Now and Hear Later scheme is for the purpose of protecting the depositors, creditors, stockholders, and general public. (Central Bank vs. CA 220 SCRA 536 )
When may CB place a bank under liquidation? If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver shall: (1) file ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a
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liquidation plan adopted by the Philippine Deposit Insurance Corporation (2) Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted; (3) Convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code. (4) Institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. Note: The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator is not a precondition to the designation of a receiver. The regular courts have no jurisdiction over actions filed by claimants against an insolvent bank other than in the liquidation proceedings. xxx The requirement that all claims against the bank shall be pursued in the liquidation proceedings filed by the CB is intended to prevent multiplicity of against the bank and designed to establish due process and orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. (Ong vs. CA 253 SCRA 105 (1996) ) Valuation reserves- amount the bank set up to cover losses; allowance for probable loses; Regarding Issuance of Peso Coins as Legal Tender: Legal Tender Power. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private. Illustration: A went to the mall to buy shoes. She got her coin purse, the teller told her that they accept only bills. Coins are legal tender only for specific amount which are: - 25 cents or less not exceeding P20; 50 cents and up not exceeding P50 Replacement of Currency Unfit for Circulation (Sec 56)
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The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and dem 7onetized without compensation to the bearer. Retirement of Old Notes and Coins. (Sec 57). The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old. Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call . After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. Demand deposits - means all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of checks. Only banks duly authorized to do so may accept funds or create liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board. Legal Character of Checks (sec 60). Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor However: A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. Ordinary checks are not legal tender under Art. 1249 of the Civil Code while cashiers check and manager checks are . A cashiers check is a check drawn by a bank against itself . The drawee or drawer is the bank. The payee is the person indicated therein. It is considered as legal tender if issued by a bank with good standing bank is supposed to have good credit standing. International Reserves (Sec 65) In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. Composition of the International Reserves (Sec 66) The international reserves of the Bangko Sentral may include but shall not be limited to the following assets:
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(a) gold; and (a) assets in foreign currencies in the form of: documents and instruments customarily employed for the international transfer of funds; (b) demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins. EXEMPTION FROM EXECUTION OF FOREIGN CURRENCY DEPOSIT. Sec 113 of the CB Circular 960 provides that foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court , legislative body, government agencies or any administrative body whatsoever. It is copied verbatim from RA 6426 as amended by PD 1246 , and meant to assure the development and speedy growth of the foreign currency deposit system and the off-shore banking system in the Philippines, as well as to encourage the inflow of foreign currency deposits in the banking institutions. HOWEVER: Salvacion vs. CB , 86 SCAD 144, 278 SCRA 27 (1997), held that the exempting provisions of section 113 of CB cir 968 and PD No. 1246, in so far as it amends Sec 8 of RA 6426, were held to be inapplicable in the dollar accounts of a transient American tourist arising out of a heinous crime committed on a Filipino minor. A bank cannot be ordered to pay interest on the duration of its closure because it cannot derive income to cover payment of such interest by virtue of the closure . (Fidelity & Savings and Mortgage Bank vs. Cenzon) SECRECY IN BANK DEPOSITS (R.A. 1405) Purpose of the law: To encourage people to deposit their money in banks, and thereby discourage private hoarding so that the banks may lend out their money and assist in the economic development of the country DEPOSITS COVERED: 1.) All deposits of whatever nature with banks or banking institutions found in the Philippines; 2.) Investments in bonds issued by the Philippine government, its branches, and institutions. PROHIBITED ACTS 1.) The examination and inquiry or looking into all deposits of whatever nature with banks or banking institutions in the Philippines ( including investment in bonds issued by the government or its political subdivisions and instrumentalities.) 2.) The disclosure by any official or employee of any banking institution to any authorized person of any information concerning said deposits. RULE: These deposits are confidential in nature and may be opened only in the following cases: 1.) Depositor consents in writing; 2.) Impeachment Cases;
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3.) By court order in: a.) cases involving a public officers dereliction of duty; b.) cases where the deposit is subject of litigation. 4.) Anti-graft cases; 5.) Whenever authorized by the Monetary Board in cases where the account is used to defraud the bank. 6.) When made by an independent auditor upon the request of the bank. Furthermore, the information derived therefrom is for bank use only. 7.) Upon request by the Commissioner of Internal Revenue over the following: a.) Decedents Account to determine decedents estate. b.) A taxpayer who files an application for tax compromise. Will the garnishment of a bank deposit violate the law? NO. In China Bank vs. Ortega, the SC said that according to the discussion in the conference committee report on the Senate and House Bills w/c eventually became RA 1405 indicates that it was not the intention of the legislature to place bank deposits beyond the reach of execution to satisfy a final judgment. Furthermore, there is no real injury in an order for garnishment and if the existence of the deposit were disclosed, the disclosure was purely incidental to the execution process. Finally as stated by the SC in the case of RCBC vs. De Castro, to expose garnishees to risks for obeying court orders and processes would only undermine the administration of justice. INTELLECTUAL PROPERTY CODE OF THE PHILIPPINES (R.A. 8293) R.A 8293 Codified all law related to trademarks, patents and copyrights On December 14, 1994, the Philippines ratified the WTO Agreement which included an agreement on the Trade Related Aspects of Intellectual Property Rights (TRIPS). The agreement fixed minimum standards for intellectual property rights which each signatory nation must incorporate into a national law . With the enactment of R.A. 8293 which took effect on January 1, 1998, the Philippines complied with its commitment under the TRIPS regarding the protection of patents, industrial design, trademarks and copyright. A PATENT is a statutory grant, by government, which confers to an inventor or his legal successor, in return for the disclosure of the invention to the public, the right for a limited period of time to exclude others from making, using, selling or importing the invention within the territory of the country that grants the patent. Patent When person, by independent research, arrives at a product already patented, he cannot exploit the invention already patented because of the patent granted to the earlier discoverer. Copyright A copyright may be vested in a work closely similar or even identical to an earlier patented work provided that that the former work is original (owes its existence to the original author)
PURPOSE The exclusive rights granted to the owner of the patent for a certain period enables the inventor to recoup the cost of invention, development, production and marketing of the products and provide the incentive for further capital investment in current and future research that will result in more inventions.
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Through the patent, the invention becomes an appropriate asset thus, facilitating its transfer or licensing which is necessary for its commercialization. Are all inventions patentable? No. Only a product, a process or improvement thereof that provides a technical solution to a problem which is new, involves an inventive step and is industrially applicable are patentable. Are scientific principles such as Pythagorean Theorem or Einsteins Law of Relativity patentable? No. They are basic principles in math and science which cannot be appropriated by an individual enterprise because of its high costs and its fundamental interest to the entire community. It can only become appropriable once it has been reduced to a specific practical application, which means, an invention of a specific technological teaching that is industrially applicable. Are life forms patentable? In a 1980 case decided by the U.S. Supreme Court, the court granted Dr. Chakrabarty the patentability of certain micro-organisms (which the doctor engineered to give them an appetite for eating oil slicks), on the ground that anything under the sun that is made by man was potentially patentable. Therefore, while living material can be the subject of patent, the fundamental rule, which holds equally true in the Philippines, is that one cannot patent nature, but only a product of human invention . WHAT ARE THE THREE CONCURRING PATENTABILITY? Novelty, Inventive Step and Industrial Applicability CONDITIONS FOR
When is an invention not new? An invention is not new if it has been disclosed or used in public, or sold in the marked before the patent application for the invention has been filed. Oftentimes, written disclosures are found in earlier filed and published patent applications. Patent examiners check these past records to determine if the invention subject of the present application is new. the most common mistake is to be unaware that premature disclosure or use of an invention before the filing of any patent application would destroy the novelty of an invention and completely prejudices its chances of obtaining a valid protection. What disclosures do not prejudice the novelty of an invention? The following disclosures, made within 12 months prior to filing date of the application will not prejudice the novelty: 1. Disclosure or use by the inventor (i.e. demonstrating the use of the invention in a trade fair); or 2. Patent Office publishes the application by mistake; or 3. Application that was published was filed without the consent of the inventor What is meant by INVENTIVE STEP or non-obviousness? It should not be obvious to a person who is familiar with the technology taught by the application at the time the application is filed. a person who is familiar does not mean person with special knowledge of the technology to determine if invention involves an inventive step, patent examiners compare the invention with related inventions disclosed in earlier filed and published applications.
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When is an invention INDUSTRIALLY APPLICABLE? When it can be applied for practical purposes. The invention cannot be purely theoretical. If the invention is a product, it must be capable of being made. If it is a process, it must be capable of being carried out. In short, it is capable of being used in practice. WHO IS ENTITLED TO A PATENT? There are four situations: 1. In general, the patent belongs to the inventor, his heirs or assigns. When two or more persons made invention, they own the patent proportionately (i.e. if there are two inventors, each is entitled to one-half share) 2. If two (2) or more persons made the invention separately and independently of each other (one not copying from the other), the right to the patent shall belong to the person who files the application for the invention. Where two or more persons filed for the same invention, the right shall belong to the application which has the earliest filing date or earliest priority date. This is known as the First to File Rule. 3. Inventions pursuant to a commission the person who commissions the work owns the patent, unless otherwise provided by the contract. 4. Employees inventionsin case employee made the invention in the course of his employment contract, the patent shall belong to the: Employee, if the inventive activity is not part of his regular duties, even if he uses the time, facilities and materials of his employer. Employer, if the inventive activity is the result of the performance of employees regularly-assigned duties, unless there is an express or implied agreement to the contrary. Is the First-to-File system unfair to the true inventor? If he was cheated of his right to a patent, what are his remedies? While the true inventor who was cheated of his right to a patent under this system may not enjoin the Intellectual Property Office from processing the questioned application, he may ask the court, once the dubious application is granted, either to substitute him as patentee or to cancel the patent and ask for damages. Why apply for patent? Why not keep the invention a secret? The chances of not keeping the invention a secret is greater than the risk of not getting a patent for an invention that is patentable. Who may file an application in the Philippines? 1. As to nationality a) Filipino nationals b) Foreign nationals who are domiciled or have a real and effective commercial establishment in a country bound by treaty to give Filipino nationals the same rights it grants its own nationals (i.e. the TRIPS agreement) whose country also accepts patent applications of Filipinos 2. As to legal personality of the applicant a) the inventor, or his attorney-in-fact b) the assignee of the inventor In what language must the application for a patent be presented? In Filipino or English Where to file an application?
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At the Bureau of Patents of the Intellectual Property Office What are the requirements to get a FILING DATE? Upon receipt of the application, the examiner checks if the document contains the following requirements to validly obtain a filing date: a) request to obtain a Philippine patent; b) name and address of the applicant; c) description and claims of the invention in Filipino or English Note: Payment of filing fee is not included IMPORTANCE OF THE FILING DATE: Under the current first to file system because the date serves to determine, in case of dispute with another applicant for the same invention, who has the right to the patent. Where and why is the application published? The application is published in the Intellectual Property Gazette. Publication enables research and development institutions to re-orient and avoid unnecessary research activities on similar technology and at the same time, allows the public to submit their observations on the patentability of the invention, which will be noted by the Bureau of Patents. RULE: No protection is granted to the invention BEFORE publication in the IPO Gazette. Nevertheless, the Bureau has the duty to keep the information in the application confidential. The inventor may place on the product that incorporates the invention a notice to the public that a patent application is still pending by the use of the words patent pending. This does not, however, grant any exclusive right on the applicant. AFTER publication, the applicant has all the rights of a patentee against any person who uses the patent without authorization if the said person has actual knowledge that the invention he was using was the subject matter of the published application. Notes: No opposition proceedings can be filed after publication. Only observations by third persons on the patentability of the invention may be filed with the Bureau which will communicate the same to applicant for comment. The patent examiner shall take note of both observations and comments. The application is not automatically examined by the examiner. Within 6 months from the date of publication, the applicant must request for an examination of the application for patentability . The application is considered withdrawn if no request is made within that period. After publication, the applicant is generally not allowed to amend the application. By way of exception, he may do so provided he does not expand the scope of the description to include new features or elements not disclosed at the time he filed his application. If the Director of Bureau of Patents refuses to grant a patent for the invention, the applicant may appeal the decision with the Director General of the IPO.
When does a patent become effective? It becomes effective from the date of publication of the grant in the IPO Gazette.
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the term of the patent shall be 20 years from the FILING DATE of the application. the exclusive rights of a patentee are only effective within the territorial limits of the country which granted the patent. To obtain protection in other countries, an application must be filed in the respective country. the approved application is entered in the Patent Register which is in the custody of the Bureau of Patents. Any transfers, licenses or other rights relating to the patent must be entered in the register to bind third parties. Exclusive rights conferred to an owner of a patent: 1. Making, using, offering for sale, selling, or importing a patented product; or a product obtained directly or indirectly from a patented process or the use of a patented process 2. To assign or transfer by succession the patent and to conclude licensing contracts for the sale EXCEPTIONS to these exclusive rights: 1. Exploitation of the patent is done privately or on a non-commercial scale or purpose; 2. Act of making or using patent is for sole purpose of scientific research and experiment; 3. Act consists of preparation for individual cases, in a pharmacy or by medical professional, of medicine in accordance with a medical prescription; 4. where the patented product was put on the market in the Philippines by the owner of patent or with his authorization; and 5. Use of patented product occurs in vehicles in transit What are the rights of a prior user of the invention in good faith? A 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. May the government use the patent without authority of the patent owner? Yes, subject to the same conditions for the grant of compulsory license: a. on public interest grounds; b. where manner of exploitation by owner of patent is anti-competitive Can one exploit a patent without authorization of the owner of the patent? General rule, no. The exception is through a compulsory license.
What is the reason for a compulsory license of patents? This is a remedy availed against foreign investors who do not make patented technology available at reasonable terms causing harmful economic dependencies to actually arise. 3 Grounds for the Grant of Compulsory License: 1. Public interest grounds (i.e. national emergency or other circumstances of extreme urgency) 2. Grounds to prevent abuse of exclusive rights of the patentee
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a) where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent is anticompetitive; b) non-commercial use of the patent without satisfactory reason; c) if the patented invention is not being worked in the Philippines on a commercial scale, provided importation of the patented article shall constitute working of the patent 3. Compulsory license based on inter-dependence of patents The invention protected by the second patent cannot be worked without infringing another patent (first patent) granted on a prior application. A compulsory license of the first patent may be granted to the owner of the second patent provided: a) the second patent involves an important technological advance of considerable economic significance; b) the owner of the first patent shall be entitled to a cross-license of the second patent; and c) the use of the first patent shall be non-assignable except with the assignment of the second patent What is required of the petitioner of a compulsory licensing case? The petitioner must show his capability to exploit the invention. A further condition is the serious negotiation of the would-be compulsory licensee with the right-holders to obtain the exclusive licenses on reasonable terms but such efforts have not been successful. What are the grounds for the cancellation of patents? 1. Invention is not a patentable subject matter; 2. Invention claimed is not new, does not involve an inventive step, or is not industrially applicable; 3. Patent does not disclose invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art; 4. Patent is contrary to public order or morality; or 5. Patent has already lapsed for non-payment of annual fees What constitutes INFRINGEMENT OF PATENT? 1. Making, using, offering for sale, selling or importing a patented product obtained directly or indirectly from a patented process; or 2. Use of a patented process without authorization of the owner of the patent. What are the REMEDIES of the owner of the patent against infringers? 1. Civil Action for infringementthe owner may bring a civil action with the appropriate Regional Trial Court to recover from infringer the damages sustained by the former, plus attorneys fees and other litigation expenses, and to secure an injunction for the protection of his rights. 2. Criminal Action for infringement if the infringement is repeated, the infringer shall be criminally liable and upon conviction, shall suffer imprisonment of not less than six (6) months but not more than three (3) years and/or a fine not less than P100,000.00 but not more than P300,000.00 3. Administrative Remedywhere the amount of damages claimed is not less than P200,000.00, the patentee may choose to file an administrative action against the infringer with the Bureau of Legal Affairs (BLA). The BLA can issue injunctions, direct infringer to pay patentee damages, but unlike regular courts, the BLA may not issue search and seizure warrants or warrants of arrest.
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Limitations to the Civil/Criminal Action no damages can be recovered for acts of infringement committed more than four (4) years before the filing of the action for infringement. the criminal action prescribes in three (3) years from the commission of the crime. In determining a case of patent infringement, what are considered EQUIVALENTS of an invention? The often-quoted Doctrine of Equivalents states: If two devices do the same work in substantially the same way and produce substantially the same result, they are the same even though they differ in name, form or shape. When does CONTRIBUTORY OR INDIRECT infringement take place? Occurs where a person does not do the infringing act per se but rather encourages, or incites or abet, another person to commit infringing acts . The contributory infringer shall be liable in the same way and extent as the infringer himself. UTILITY MODEL is a model of implement or tools of any industrial product even if not possessed of the quality of invention but which is of practical utility. the term of a utility model shall be 7 years from date of filing of the application. all things being equal, the provisions governing patents apply also to the registration of utility models. INDUSTRIAL DESIGN is any composition of lines or colors or any threedimensional form, whether or not associated with lines or colors provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. the term of an industrial design shall be 5 years from the date of filing of the application and may be renewed for 2 consecutive periods of 5 years each. all things being equal, the provisions governing patents apply also to the registration of industrial design. A TRADEMARK is anything adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from a competitor. a SERVICE MARK distinguishes the services of an enterprise from the services of another. Trademark Goods or services offered by a proprietor or enterprise are designated by trademarks (goods) or service marks (services) Trade Name A natural or artificial person who does business and produces or performs the goods or services designated by trademark or service mark
PURPOSE A mark is an indispensable instrument in communicating to the public the origin of the goods and services. It signifies the companys guarantee of consistent quality and carries with it the companys reputation which it puts at stake for every product it manufactures or service it performs. Is registration a requirement for the protection of a trade name? Unlike trademarks, trade names do not require registration because they are protected even prior to or without registration.
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The law grants the owner of a trade name the right to protected from the subsequent use by a third party, whether as a trade name, mark or collective mark, or any such use of similar trade name or mark, likely to mislead the public. The remedy for unlawful use of trade name is a civil action for damages and injunction.
REQUIREMENTS FOR A MARK TO BE REGISTRABLE: It must be: 1. A visible sign (not sounds or scents); and 2. capable of distinguishing ones goods and services from another The filing of an application for the registration of a mark follows the first-to-file system under the Law on Patents. Hence, the date of filing is likewise important as it serves to determine in case of dispute with another applicant for the same or similar mark, who has prior right, and therefore is entitled to registration of the mark. GROUNDS FOR REFUSAL 1. Absolute grounds: The examiner determines if the mark can distinguish the goods and services of one person from those of another. It must not: a) be a generic term for the goods or services; EXCEPTION: Under the Doctrine of Secondary Meaning, when a mark has become distinctive of the applicants goods in commerce and, in the mind of the public, indicates a single source to consumers, it may be registered. Requisites: i) This common term has been in use for many years; and ii) The public has associated the products of applicant with this common term. Thus the Tagalog term Ang Tibay, which means strong or strength, though a common term was allowed to be registered because it has long been in use for the shoe products of the applicant and the public have associated such term to the products of the applicant. (Ang vs. Teodoro, 74 Phil. 50) b) designate the quality, quantity, value or other characteristic of the goods; c) become a customary sign in everyday language or established trade practice; d) consist of shapes necessitated by technical factors; e) consist of color alone; f) be contrary to public order or morality 2. Relative grounds: The examiner also checks that the mark does not violate the rights of others. It must not: a) consist the flag or coat-of-arms or other insignia or of any other foreign nation; b) consist the name, portrait or signature identifying a living individual or the name, signature of a deceased Philippine president during the life of his widow (although written waivers are permitted to obtain registration); c) be identical with or nearly resemble a prior registered mark with an earlier filing date with respect to the same or closely related goods or services as to likely deceive or confuse the consumers regarding the source or origin of the goods or services;
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ILLUSTRATIONS: Alaska opposed application of Alacta. The latters application was approved because Alacta was registered under pharmaceuticals (milk for babies) while Alaska was for daily use. (Mead Johnson vs. Van Dorp, 7 SCRA 768) Nabisco opposed application of Ambisco. The latters application was denied because they were similar in sound and were both for biscuits. (Operators, Inc. vs. Director of Patents, 15 SCRA 147) d) be identical with or confusingly similar to an internationally wellknown mark, whether or not registered in the Philippines, provided that: i. If the internationally well-known mark is not registered in the Philippines, the application for registration of the mark can be rejected only if the goods or services specified in the application are similar to those of the internationally well-known mark; ii. If the internationally well-known mark is registered in the Philippines, the application for registration of the mark can be refused even if the goods or services specified in the application are not identical or similar to those of the internationally well-known mark. An internationally well-known mark is that which is determined to be such by a competent authority (the regular courts or the Bureau of Legal Affairs of the Intellectual Property Office) AFTER REGISTRATION, THE LAW ON TRADEMARK REQUIRES THE APPLICANT TO USE THE MARK After filing an application for registration, the applicant is required to use the mark in commerce in the Philippines. To show compliance, the applicant must file a Declaration of Actual Use with the Bureau of Trademarks within 3 years from the filing date of the application . Notes: After the application is received by the examiner, it is published in the IPO Gazette to give the public a chance to oppose the registration. If no opposition is made, a certificate of registration will be issued. On completion of registration, the mark is entered in the Trademark Register and any transfers, licenses, or other rights relating to the mark must be entered in the register to affect third parties. The mark has force and effect within Philippine territory only. A registered mark enjoys better protection than an unregistered mark. To succeed in an action on an unregistered mark, the plaintiff must establish the twin elements of goodwill in the mark and the use complained of would be liable to confuse or deceive the public. On the other hand, registration gives the plaintiff the right to stop someone from using the same or similar mark without the need of proving the two elements. Thus, an owner of a mark is well-advised to register the mark where this is possible.
When is the term of the registration of a Mark? A certificate of registration shall remain in force for 10 years. It is incumbent however, that the owner of the mark shows that he is using the mark or that the non-use of the mark is due to circumstances beyond his control by executing an Affidavit of Use or Non-Use within one year from the 5th anniversary of the registration of the mark.
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Registration is an administrative act which does not perfect the trademark, for what does is actual use. Non-use may be excused if caused by circumstances independent of the will of trademark owner (Sec. 152) Non-use that is inexcusable is a ground for removing a mark from the register (Sec. 124.2) RIGHTS OF PROPRIETOR OF A REGISTERED MARK 1. Protection against reproduction, or imitation or unauthorized use of the mark (infringement of mark); 2. To stop entry of imported merchandise into the country containing a mark identical or similar to the registered mark; 3. To transfer or license out the mark TESTS TO DETERMINE TRADEMARK INFRINGEMENT 1. Dominancy TestSimilarity between the dominant features ; If the competing trademark contains the main or essential features of another and confusion and deception is likely to result (Asia Brewery, Inc. vs. CA, 224 SCRA 437) 2. Holistic TestSimilarity between the marks when considered in their entirety as they appear in their respective labels. What are the REMEDIES of the owner of the trademark against infringers? CivilBoth civil and criminal actions may be filed with the Regional trial courts. The owner of the registered mark may ask the court to issue a preliminary injunction to quickly prevent infringer from causing damage to his business. Furthermore, the court will require infringer to pay damages to the owner of the mark provided defendant is shown to have had notice of the registration of the mark (which is presumed if R within a circle is appended) and stop him permanently from using the mark. CriminalElements of the crime of trademark infringement: 1. Deceitful act of giving ones goods the general appearance of goods of another manufacturer or dealer; 2. Deceptive similarity is either in the goods themselves, in the trade dress, in the word or devices, or in any other feature of appearance; 3. Offender offers to sell or sells the goods, or gives Others the opportunity to do the same; and 4. Actual intent to deceive the public or defraud the competitor AdministrativeThis remedy is the same as in patent infringement cases. If the amount of damages claimed is not less than P200,000.00, the registrant may choose to seek redress against the infringer by filing an administrative action against the infringer with the BLA. Infringement of Trademark 1. It is the unauthorized use of a trademark 2. Fraudulent intent is not necessary 3. Prior registration of the trademark is a prerequisite to the action Unfair Competition 1. It is the passing off of ones goods as those of another 2. Fraudulent intent is essential 3. Registration is not necessary
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The remedies against Unfair Competition consist of criminal, civil and/or administrative actions similar to those enumerated under Infringement of trademark. Evidence to prove unfair competition should show: 1. Goodwill has been developed by the business of plaintiff, as shown through registration of his business, length of existence, volume of sales, customer testimonies, etc.; and 2. Accused or defendant clothed his goods with the general appearance of the goods of plaintiff which would likely influence purchasers to believe that the goods offered are those of plaintiff
RIGHTS OF LEGITIMATE USERS OF UNREGISTERED MARKS There are many unregistered marks used legitimately before the filing date of an identical or similar registered mark. What are the rights of other users once such mark is registered by a user? In other words, what are the rights of a (good faith) Prior User of a mark? Users in good faith before the filing date of a registered mark will not be liable for infringement of the mark but their rights are not assignable except together with the business in which the mark is used. A COPYRIGHT is that system of legal protection an author enjoys in the form of expression of ideas. RIGHTS ENJOYED EXCLUSIVELY BY THE HOLDER OF COPYRIGHT Rights to reproduce, distribute, display, perform, and to prepare derivative works based upon the copyrighted work; No formality is required by the author to acquire rights over the copyright. Such rights are conferred from the moment of creation. Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose. (Sec. 172.1) Registration and deposit with the National Library and the Supreme Court library of two copies of the work of the author is for the purpose of completing the records of these libraries. Failure to deposit after formal demand subjects author to a fine. (Sec. 191)
A copyrightable work is created when two elements are met: 1. ORIGINALITYdoes not mean novelty or ingenuity, neither uniqueness nor creativity, it simply means that the work owes its origin to the author. In other words, the work is an independent creation of the author. 2. EXPRESSIONthere must be a fixation. To be fixed, the work must be embodied in a medium sufficiently permanent or stable to permit it to be perceived, reproduced or communicated for a period more than a transitory duration. For copyright purposes, there is no work unless there is something tangible. What is the duration of a copyright? (Sec. 213) LITERARY ARTISTIC WORKS AND DERIVATIVE WORKS OF A SINGLE CREATORlifetime of the creator and for 50 years after his death; JOINT CREATIONlifetime of last surviving joint-creator and for 50 years after his death;
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ANONYMOUS OR PSEUDONYMOUS WORK50 years after the date of its first publication EXCEPT, where the authors identity is revealed or no longer in doubt before the expiration of said period, the rules on single creator/joint creation shall apply; WORK OF APPLIED ART25 years from date of making; PHOTOGRAPHIC AND AUDIOVISUAL WORKS50 years from publication of the work and, if unpublished, 50 years from the making; NEWSPAPER ARTICLElifetime of the author and 50 years thereafter. Note however, that while news of the day and other facts having the character of press information no longer find protection under the law, a column or published comment enjoys copyright protection. The term of protection is computed from the first day of January of the year following the death or last publication. (Sec. 214) SUBJECTS OF COPYRIGHT are divided into: 1) ORIGINAL WORKSBooks, pamphlets, articles and other writings; Periodicals and newspapers; Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; Letters; Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; Musical compositions, with or without words; Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; Drawings or plastic works of a scientific or technical character; Photographic works including works produced by a process analogous to photography; lantern slides; Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; Pictorial illustrations and advertisements; Computer programs; and other literary, scholarly, scientific and artistic works. (Sec. 172) 2) DERIVATIVE WORKSDramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. (Sec. 173) WORKS NOT PROTECTED BY COPYRIGHT 1. No idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; 2. News of the day and other miscellaneous facts having the character of mere items of press information; or 3. Any official text of a legislative, administrative or legal nature , as well as any official translation thereof (Sec. 175) 4. Any work of the Government of the Philippines;
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however, the prior approval of the government agency or office where work was created shall be necessary to exploit the work for profit. Such agency or office may impose as a condition, payment of royalties No prior approval or conditions shall be imposed for the use for any purpose of statutes, rules and regulations, speeches, addresses, sermons, dissertations read or rendered in courts of justice, administrative agencies, in deliberative assemblies and meetings of public character. (Sec. 176) 5. Pleadings; and 6. Decisions of courts and tribunals . they may therefore be freely used and quoted refers to original decisions and not to SCRA published volumes which fall under the classification of derivative works. WHAT ARE THE RIGHTS OF COPYRIGHT? There are two independent rights: Copy or Economic Rightswhich consist of the exclusive right to carry out, authorize or prevent the following acts: 1. Reproduction of the work or substantial portion of the work; 2. Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work; 3. First public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; 4. Rental of the original or a copy of an audiovisual or cinematographic work; 5. Public display of the original or a copy of the work; Public performance of the work; and 6. Other communication to the public of the work (Sec. 177) Moral Rightsthe author likewise has the right to: 1. Require that the authorship of the works be attributed to him , in particular, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work; 2. To make any alterations of his work prior to, or to withhold it from publication; 3. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; and 4. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work. (Sec. 193) To stress, the moral rights are independent of the economic rights. The term of moral rights shall be the lifetime of the author and 50 years after his death. Moral rights are not assignable nor subject to license. The moral rights aforementioned may be waived by a written instrument (Sec. 195) or by the authors act of contributing to a collective work, whereby he waives the right to have the contribution attributed to him, unless he makes an express reservation. (Sec. 196)
Who is the OWNER of copyright? SINGLE CREATORcopyright belongs to the author of the work; JOINT CREATIONcopyright belongs to the authors jointly as co-owners. But if the work consists of identifiable parts, the author of each part owns the part he created;
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EMPLOYEES CREATIONcopyright belongs to the employee if the creation is not part of his regular duties even if he uses the time, facilities and materials of employer; otherwise, it shall belong to the employer. COMMISSIONED WORKwork belongs to the person commissioning but the copyright remains with the creator unless there is a written agreement to the contrary; CINEMATOGRAPHIC WORKproducer has a copyright for purposes of exhibition; for all other purposes, the producer, author of the scenario, the composer, and the film director are all creators; ANONYMOUS AND PSEUDONYMOUS WORKSpublishers shall be deemed representatives of the author unless the: 1) Contrary appears; 2) Pseudonym or adopted name leaves no doubt as to the authors identity; or 3) Author discloses his identity (Sec. 179) COLLECTIVE WORKSthe contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 196) A Collective Work is created by two or more persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that contributions of natural persons will not be identified. (Sec. 171.2) Effect of transfer of copyright the transferee acquires one or more or all economic rights provided: 1) Assignment, if inter vivos, is in writing; and 2) Assignment is filed in National Library upon payment of prescribed fees. (Sec. 182) What is FAIR USE of a copyrighted work? A privilege enjoyed by persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without the owners consent, notwithstanding monopoly granted to the owner of the copyright. Rationale: To balance the monopolies enjoyed by the copyright owner with the interests of the public and society.
What constitutes FAIR USE? 1. Criticizing, commenting, and news reporting; 2. Using for instructional purposes, including multiple copies for classroom use, scholarship, research and similar purposes So long as there is FAIR USE, no infringement of copyright is committed. The concept of FAIR USE is applicable only to works which are copyrightable. FACTORS TO CONSIDER IN DETERMINING FAIR USE 1. Purpose and character of the use, including whether such use is of a commercial nature or is for non-profit education purposes; 2. Amount and substantiality of the portion used in relation to the copyrighted work as a whole; 3. Nature of the copyrighted work; and
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4. Effect of the use upon the potential market for or value of the copyrighted work. (Sec. 185)
What is PERSONAL USE? It is the making of a single reproduction, adaptation, arrangement or other transformation of anothers work exclusively for ones own individual use in such cases as personal research, learning or amusement. What is PRIVATE USE? It is the reproduction, adaptation or other transformation or it, in a single person, as in the case of personal use, but also for a common purpose by a specific circle of persons only. IS REPRODUCTION OF COMPUTER PROGRAMS PERMITTED? Yes, on the following conditions: 1. Only one copy is made; 2. Lawful owner made the copy; 3. Purpose of reproduction is legal, such as: a) use to which program is made and purchased demands reproduction; or b) reproduction is necessary to guarantee against loss or destruction IMPORTATION of a copy of a work by an individual for PERSONAL PURPOSES is allowed under the following circumstances : 1. Copies of the work is not available in the Philippines and a) One copy at a time is imported for strict individual use; b) Or the importation is by authority and for the use of the Philippine Government; or c) Not more than 3 copies (per title) may be imported by Religious, Charitable or Educational societies or institutions provided they are not for sale. 2. Copies form part of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale. Provided, such copies do not exceed 3. (Sec. 190) What are the REMEDIES of the owner of copyright against infringers? The infringers are exposed to both civil and criminal liabilities . In the civil action, an injunction may be prayed for to prevent infringement. Actual damages may be awarded by the court on the basis of proof presented by plaintiff of sales made of the infringed work minus costs which defendant can prove. Damages may also include the award of moral and exemplary damages in the discretion of the court. The court may also order the delivery under oath of the implements employed in the production of the infringing items as well as the products themselves, for impounding or destruction. (Sec. 216) In the criminal action, those liable for infringement include the infringer and those who aid, abet, participate, contribute, authorize or benefit from the infringing acts. (Sec. 217) No damages may be recovered after 4 years from the time the cause of action arose. (Sec. 226) There is no prescriptive period for petitions for injunctive relief nor the impounding and destruction of infringing goods.
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SPECIAL LAWS CHATTEL MORTGAGE LAW (Act 1508 in relation to Articles 1484, 1485,2140 and 2141 of the Civil Code) Chattel Mortgage Under Act. 1508, a chattel mortgage is a conditional sale. However, that definition has already been superceded by Art. 2140 of the NCC. It is only an accessory/security contract because it is intended to secure a principal obligation.

Extinguishment of an accessory obligation does not necessarily extinguish the principal obligation. Nullity of the principal contract necessarily extinguishes the accessory contract. The creditor has the option to foreclose the mortgage if the principal obligation is not paid.
Art. 2140 of the NCC: By chattel mortgage, a personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable instead of being recorded is delivered to the creditor or to a 3 rd person, the contract is a pledge and not a chattel mortgage. Requisites of a CM under Art. 2085 of the NCC: 1. constituted to secure fulfillment of a principal obligation 2. Mortgagor is the absolute owner of the property 3. mortgagor has free disposal of the property, in the absence thereof, that he be legally authorized for such purpose 4. The property mortgaged is a personal property. Chattel Mortgage is different from pledge because: 1. Delivery of the personal property to the mortgagee is not necessary. 2. The registration of the same in the Chattel Mortgage Register is necessary for its validity. 3. If the property is foreclosed, the excess over the amount due goes to the debtor. 4. If the property is foreclosed in CM and there is deficiency, the creditor is entitled to recover the deficiency from the debtor except if the CM is a security for the purchase of personal property in installments. The provisions of the NCC on pledge, insofar as they are not in conflict with the Chattel Mortgage Law, shall be applicable to Chattel mortgages. (Article 2141 NCC) SUBJECT MATTER OF CM 1. Shares of stock in a corporation but if the owner of the shares is not domiciled in the same province where the corporation is domiciled, the registration must be made in both provinces. 2. An interest in business, for it is considered as a personal property capable of appropriation. 3. Machinery treated by the parties as personal property subsequently installed on leased land.
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4. Vessels but it is essential that the mortgage is recorded in the office of the Philippine Coast Guard of the port of documentation of such vessels. 5. Motor vehicles but the mortgage must also be registered in the Land Transportation Office and with respect to vehicles used for public service, the mortgage must also carry the approval of the Land Transportation Franchising and Regulatory Board to make it effective against the public and the Commission. The recording provisions of the Land Transportation and Traffic Code are merely complimentary to those of the Chattel Mortgage Law. A mortgage of any motor vehicle in order to affect third persons should not only be registered in the chattel mortgage registry, but e same should also be recorded in the Land Transportation Office as required by said law. The failure of the mortgagee to report the mortgage executed in his favor has the effect of making said mortgage ineffective against a purchaser in good faith who registers his purchase of the same vehicle in the Motor Vehicles Office. (Borlough vs Fortune Enterprises, Inc and Court of Appeals) 6. House intended to be demolished for what are really mortgaged in this case are the materials thereof and they are, therefore, personal property (3manresa19) 7. House built on rented land where the deed of mortgage considered it as such. The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purpose of said contract is, however, good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of Estoppel . (Standard Oil Co. of New York vs. Jaramillo, Tumalad vs. Vicencio, Navarro vs. Pineda and Piansay vs. David) But the mere fact that a house, whether it is erected by the owner of the land or by the usufructuary or lessee, was the subject of a chattel mortgage and was considered as personal property by the parties does not make said house personal for purposes of the notice to be given for its sale at public auction. This ruling is demanded by the need for a definite, orderly and well-defined regulation for official and public guidance and which would prevent confusion and misunderstanding. Sales on execution affect the public and third persons. (Evangelista vs Alto Surety and Insurance Co., Inc.) 8. Machinery permanently attached to the ground wherein CM is constituted thereon and hence that machinery is considered as personal property . The parties having treated the same as chattel , they should not be allowed to make an inconsistent stand by claiming otherwise.(Makati Leasing and Finance Corp. vs Weaver Textiles Mills, Inc.) . EXTENT OF CHATTEL MORTGAGEDoes not apply to stores open to the public for retail business where goods are constantly sold and substituted with new stock, such as drugstores, grocery stores, dry goods stores etc; otherwise, it would be practically impossible to constitute a mortgage on such stores without closing them contrary to the very spirit and purpose of the Act (the promotion of business and the economic development of the country) CREATION OF CHATTEL MORTGAGEThe law as it now stands provided for only one way for executing a valid chattel mortgage, i.e., the registration of the personal property in the Chattel mortgage
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Register as security for the performance of an obligation. Under the chattel mortgage law, if the property is situated in a different province from that in which the mortgagor resides, the registration must be in both registery; otherwise, the chattel mortgage is void. However, if the chattel mortgage is not recorded, it is nevertheless binding between the parties (Filipinas Marble Corp vs IAC) Where do you register? Chattel mortgage registry where property is located and where the mortgagor resides, if they be different, PLUS: Private vehicles LTO to bind 3rd persons Public vehicles LTRFB Vessels Philippine Coast Guard( MARINA now) Helicopter Air Transportation Office. Note: Even if the aforementioned articles were registered in the CM Registry BUT IF W/o additional registration in the govt agency concerned, still the CM wont bind 3rd persons. House dual registration under Act 1508; If the province w/c the property is located is different from that wherein the owner-mortgagor resides, the CM on the house must be registered in the Registry of Property of both provinces
PERIOD WITHIN WHICH REGISTRATION SHOULD BE MADEThe law does not provide any specific time. In Ledesma vs Perez, the law is substantially and sufficiently complied with where the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of innocent third persons is prejudiced. EFFECT OF REGISTRATIONThe registration of the CM is an effective and binding notice to other creditors of its existence and creates a real right or a lien which, being recorded, follows the chattel whenever it goes. The registration gives the mortgagee symbolical possession. The lien of a chattel mortgagee over the mortgaged property is superior to the levy made on the same by the assignee of the unsecured judgment creditor of the chattel mortgagor. The theory that the breach by the mortgagor of the chattel mortgage should not affect the assignee because he is not a privy to such contract is untenable. A judgment-creditor can only attach the equity or right of redemption of the mortgagor. Although the rule that a mortgagee has the right to rely in good faith on the certificate of title of the mortgagor to the property given as a security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation, generally pertains to real property, particularly registered land, it may also be applied by analogy to personal property, specifically vessels or ships, since shipowners are likewise required by law to register their vessels with the Philippine Coast Guard. (Cebu Intl finance Corp vs. Ca ) The act of recording a chattel mortgage consists in the fact that it operates as a constructive notice of the existence of the contract, and the legal effects of the contract must be discovered in the instrument itself in relation with the fact of notice. Registration adds nothing to the instrument, considered as a source of title and affects nobodys rights except as species of notice. (Standard oil co. of New York vs. Jaramillo)
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REGISTRATION OF ASSIGNMENT OF MORTGAGE NOT REQUIRED Theres no law expressly requiring the recording of the assignment of a mortgage. While such assignment may be recorded, the law is permissive and not mandatory. The debtor is protected if he pays his creditor without actual knowledge that the debt has been assigned. Such notice must be actual, and the recording of the assignment will not operate as constructive notice to the debtor. AFFIDAVIT OF GOOD FAITH Can a CM secure future obligations? Gen. Rule: NO. The SC in the case of Acme Shoe Corp. vs. CA, held that a CM can only cover existing at the time the mortgage is constituted. Basis: Affidavit of Good Faith. The SC in the aforementioned case said that the phrase just and valid obligation in the affidavit refers to, or presupposes an existing obligation. Exception: 1. If a fresh CM is executed or 2. Amendment of the CM Note: Although a promise expressed in a CM to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however does not come into existence until after a CM agreement covering the newly contracted debt is executed either by: 1. Concluding a fresh CM 2. Amending the old contract w/ the form prescribed by the CM law, particularly the execution of Affidavit of Good faith. Note: The effect of the clause is that since it is tantamount to a promise, one can compel the mortgagor to execute a fresh CM or to amend the old one w/c would cause the effectivity of the security. The affidavit of good faith is an oath in a contract of Chattel Motgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud. Its absence vitiates only a mortgage only as against third persons without notice like creditors and subsequent encumbrancers. The special affidavit is required only for the purpose of transforming an already valid mortgage into preferred mortgage. Thus, is not necessary for the validity of the cm itself but only to give it a preferred status. The debt contemplated by the law is a current not an obligation that is yet merely contemplated. A deed of CM is void where it provides that the security stated therein for the payment of any and all obligations hereinbefore contracted and which may hereafter be contracted by the mortgagor in favor of the mortgagee. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. (Jaca vs. Davao Lumber Co.)
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A CM can only cover obligations existing at the time the mortgage is constituted. Once said obligations are paid, there can be no foreclosure in new loans concluded after the execution of the CM since there is no longer any mortgage. REMEDIES AVAILABLE TO THE CREDITOR IN A LOAN SECURED BY CHATTEL MORTGAGE 1. Collection suit 2. Foreclosure of the CM The remedies provided are alternative not cumulative RULE ON DEFICIENCY JUDGMENT Determine the nature of the transaction ; IF ORDINARY LOAN SECURED BY CHATTEL MORTGAGE- Recovery of deficiency is allowed. IF CASE OF SALE OF PERSONAL PROPERTY IN INSTALLMENT - Recovery of deficiency is not allowed , when seller opted to foreclosure the CM on the thing sold . INSTANCES WHERE DEFICIENCY IS BARRED1. ART. 1484 NCC- Where the CM constituted on the thing sold is foreclosed . 2. Accomodation Mortgage- When a 3 rd party secure the obligation of another by mortgaging his property ; recovery is limited to the extent of the value of the mortgage property . The remedy would be to go against the accommodated party. IN THE CONTRACT OF SALE OF PERSONAL PROPERTY THE PRICE OF WHICH IS PAYABLE IN INSTALLMENTS, THE VENDOR MAY EXERCISE ANY OF THE FOLLOWING REMEDIES (ARTICLE 1484 NCC) 1. EXACT FULFILLMENT OF THE OBLIGATION, SHOULD THE VENDEE FAIL TO PAY; 2. CANCEL THE SALE, SHOULD THE VENDEES FAILURE TO PAY COVER TWO OR MORE INSTALLMENTS; 3. FORECLOSE THE CHATTEL MORTGAGE ON THE THING SOLD, IF ONE HAS BEEN CONSTITUTED, SHOULD THE VENDEES FAILURE TO PAY COVER TWO OR MORE INSTALLMENTS. IN THIS CASE, HE SHALL HAVE NO FURTHER ACTION AGAINST THE PURCHASER TO RECOVER ANY UNPAID BALANCE OF THE PRICE. ANY AGREEMENT TO THE CONTRARY SHALL BE VOID. The abovementioned REMEDIES available to the mortgagee are alternative not cumulative and exclusive, that is, the exercise of one would bar the exercise of the other. APPLICATION OF PROCEEDS OF SALE: 1. Costs and expenses of keeping and sale. 2. Payment of the obligation secured by the mortgage. 3. Claims of persons holding subsequent mortgages in their order. 4. The balance, if any, shall be paid to the mortgagor or person holding under him. THE PRECEDING ARTICLE (ART.1484 NCC)SHALL BE APPLIED TO CONTRACTS PURPORTING TO BE LEASES OF PERSONAL PROPERTY WITH OPTION TO BUY, WHEN THE LESSOR HAS DEPRIVED THE LESSEE
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OF THE POSSESSION OR ENJOYMENT OF THE THING. ( ARTICLE 1485 NCC) FORECLOSURE OF CM 1. Public sale 2. Private sale there is nothing illegal, immoral, or against public order in an agreement for the private sale of the personal properties covered by the cm. The mortgagor is in estoppel to question it except on the ground of fraud or duress. PERIOD TO FORECLOSE MORTGAGE After 30days from the time of the condition broken, cause the mortgaged property to be sold at public auction by a public officer. The 30-day period to foreclose a chattel mortgage is the minimum period after violation of the mortgage condition for the mortgage creditor to cause the sale at public auction of the mortgaged chattel with at least 10 days notice to the mortgagor and posing of public notice of time, place, and purpose of such sale, and is a period of grace for the mortgagor, to discharge the mortgage obligation. After the sale of the chattel at public auction, the right of redemption is no longer available to the mortgagor. CIVIL ACTION TO RECOVER CREDIT The mortgagee is not obliged to file an independent action for the enforcement of his credit. To require him to do so would be nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgage chattels. RIGHT OF REDEMPTION Is there right of redemption in CM? Before foreclosure redemption can be made anytime before 30 days from default (grace period). Note: Technically there is no redemption (buy back after the sale) in CM. This is because the 30 day period is more of a grace period for the mortgagee to pay his obligation. After foreclosure NONE. The highest bidder becomes the absolute owner of the property. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could foreclose it. The redemption made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale thereof. RIGHTS ACQUIRED BY SECOND MORTGAGEE AND SUBSEQUENT PURCHASER; BEFORE payment of debt after a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of second mortgage. As between the first and second mortgagees, therefore, the latter can only recover the property from the former by paying him the mortgage debt. Even when the second mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires no more than the right of redemption from the first mortgagee.
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AFTER payment of debt If only leviable or attachable interest of a chattel mortgagor in mortgaged property is his right of redemption, it follows that the judgment or attaching creditor who purchased the property at the execution sale could not acquire anything except such right of redemption. He is not entitled to actual possession and delivery of the property without first paying the mortgage debt. RIGHT OF MORTGAGEE TO POSSESSION AFTER DEFAULT When default occurs and the creditor desires to foreclose, the right of the creditor to take the mortgaged property is clearly implied from the provision which gives him the right to sell. WHERE MORTGAGOR REFUSES TO SURRENDER POSSESSION Where the debtor refuses to yield the property, the creditors remedy is to institute an action either to effect a judicial foreclosure directly or to secure possession as a preliminary to the sale. The creditor cannot lawfully take the property by force against the will of the debtor. The reason is that the creditors right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of controversy. A third party claimant to a property levied upon by a writ of attachment must make an affidavit showing that he has a title thereto or right to the possession thereof. This provision excludes a chattel mortgagee because a cm is merely a security for a loan and does not transfer title to the property mortgaged to the cm. Where the right of the plaintiff to the possession of the specific property is so conceded or evident, the action need only be maintained against him who so possesses the property. Persons having a special right of property in the goods the recovery of which is sought, such as a CM, may maintain an action for replevin therefore. Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may find them. In effect then, the mortgagee, upon the mortgagors default, is constituted an attorney-in-fact of the mortgagor enabling such mortgagee to act for and in behalf of the owner. Accordingly, that the defendant is not privy to the cm should be inconsequential. By the fact that the object of replevin is traced to his possession, one can properly be a defendant in an action for replevin. It is here assumed that the plaintiffs right to possess the thing is not or cannot be disputed. In case the right of possession on the part of the plaintiff, or his authority to claim such possession or that of his principal, is put to great doubt [a contending party might contest the legal basis for plaintiffs cause of action or an adverse and independent claim of ownership or right of possession is raised by that party], it could become essential to have other persons involved and accordingly impleaded for a complete determination and resolution of the controversy. Neither is a chattel mortgagee entitled to the possession of the property upon the execution of the cm for otherwise, the contract becomes a pledge and ceases to be a CM. Real Estate Mortgage Law (Act. No. 3135)
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What are the METHODS OF FORCED SALES arising from failure to pay mortgage debt? 1) Extrajudicial foreclosure sale under Act No. 3135. 2) Judicial Foreclosure sale under Rule 68 of the Rules of Court. 3) Ordinary Execution Sale under Rule 39. APPLICABILITY of Act No. 3135 Act 3135 applies to extrajudicial foreclosure sales. Specifically, when the sale is made under special power inserted in or attached to any real estate mortgage made as security for the payment of money or fulfillment of any obligation, Act 3135 shall govern the sale and redemption, whether or not provision on the same is made in the power. Where the real estate mortgage contract is silent as to the manner of foreclosing the mortgage, apply Rule 68. PROCEDURE: 1.) Sale shall be in the province where the property is situated. If there is a stipulation of the place within the province, the sale shall be made in the place indicated. 2.)Jurisdictional requirements: a. Publication in a newspaper of general circulation once a week for 3 consecutive weeks. Newspaper of general circulation means that w/c caters to the general community as compared to that w/ only caters to a particular class; hence it is not dependent on readership. No need to give personal notice to the mortgagor because publication is notice to the whole world. EXCEPTION: If there is an agreement to have personal notice (Metrobank vs. CA). If there is such stipulation and none is given before the foreclosure sale, the sale is null and void. Posting of the notice of sale in 3 conspicuous places.
b.
Note: these 2 requirements must strictly be complied with; otherwise the foreclosure is null and void. What if there was postponement? In Tambunting vs. CA (167 SCRA) and Lancaan Realty Development vs. CA, the SC held that foreclosure should STILL BE PRECEDED BY COMPLIANCE AGAIN W/ THE 2 JURISDICTIONAL REQUIREMENTS, not merely the difference as for instance schedule of the sale was reset after the 1 st week of publication. In such case, publication should not only be made twice but should still be for 3 consecutive weeks. Foreclosure sale whether originally scheduled or re-set must be preceded w/ publication for once a week for 3 consecutive weeks. Non-compliance therewith makes the sale void. 3.) Sale shall be made in public auction, between 9:00 AM and 4:00 PM, under direction of any of the following persons: a) Sheriff; b) Municipal judge; or
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c) Auxiliary municipal judge of the municipality in which the sale has to be made; or d) Notary public of said municipality. At the sale, creditor, trustee, or any person authorized to act for the creditor may participate in the bidding. Also, any other person may bid unless the contrary is expressly provided in the mortgage or trust deed under which the sale is made. 4.) After sale, debtor, debtors successors in interest, any judicial or judgement creditor; or any person having a lien on the property subsequent to the mortgage or deed of the trust under which the property is sold, may redeem property within 1 year from date of sale. In relation to Sec. 47 of RA8791: The 1 year period does NOT apply; right to redeem can only be exercised until but not after the registration of the certificate of sale or 3 months form foreclosure, whichever is earlier, under the following conditions: 1. Mortgagor must be a juridical person that is either a partnership or a corporation 2. Mortgagee is a bank, quasi-bank or trust entity. 3. Foreclosure is done extra-judicially. Who is the owner of the property during the redemption period? The mortgagor is still the owner, hence, he may still execute attributes of ownership during said period such as executing a 2 nd mortgage on the same property mortgaged 5.) When the property is redeemed, the redeemer can deduct from the redemption price any rentals collected by the purchaser. If the purchaser occupied the property for dwelling purpose OR gainfully-used the property in case property is rural, redeemer may deduct from the price, interest rate of 1% per month. 6.) If property is not redeemed within 12 months after sale, purchaser is entitled to conveyance and possession of property. The consolidation of title is done by filing affidavit w/ the RD. No need to go to court since there is no need for a judicial proceeding. The affidavit of consolidation of title is under oath. It states that there was a mortgage, there was foreclosure sale, no redemption during the redemption period. It must contain the relevant dates (date of mortgage, date of foreclosure sale, date registered) in the RD. The RD in turn will consolidate the title. Note: This enable the mortgagee to acquire full ownership over the property 7.) Cancellation of the title of the mortgagor and issuance of the new title in favor of the mortgagee. What about the junior mortgages if any? It is not carried to the title of the mortgagee. He shall have a clean title 8.) Petition for a writ of possession. This is resorted to when the mortgagor refuses to vacate. It is the ministerial duty of the court to issue it if the petition is filed after the redemption period. This writ may be issued during the redemption period provided the mortgagee issue a bond, but the grant of w/c is discretionary on the part of the court. Purchaser of a sale under this Act may petition the RTC of the
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province or place where property is situated, to have possession of the property during redemption period. The petitioner must furnish a bond equivalent to the use of the property for 12 months. The bond serves to indemnify the debtor in case the sale violated terms of the mortgage or failed to comply with the requirements under the Act. Upon approval of the bond, the court shall order issuance of Writ of Possession addressed to the sheriff of the province where the property is located. Sheriff shall immediately execute the writ. The Debtor may, not later than 30 days after the purchaser is given possession, petition the court in the same proceedings, to set aside the sale and cancel the writ of possession on the following grounds: a) mortgage was not violated or b) sale was not in accordance with Act 3135. The court-taking cognizance of petition shall hear petition in accordance with summary procedure under Sec. 112 of Act 496. If court finds merit on debtors petition, court shall dispose in debtors favor the bond furnished by purchaser. The bond disposed may be in whole or in part. Either party may appeal under Sec 14 of Act 496, but order of possession shall continue during appeal.
INSOLVENCY LAW (Act No. 1956) This law was enacted in 1919. The coverage is not limited to insolvency but also that of suspension of payments. TWO PRINCIPAL PURPOSES: 1) To effect equitable distribution of the property of the bankrupt debtor amongst the creditors; and 2) To permit discharge of debtor thus allowing debtor to start anew. Relief/Remedies available to distressed debtor: 1. He may file a petition for suspension of payments 2. He may file an action for insolvency SUSPENSION OF PAYMENTS 1. The debtors assets are sufficient to cover his debts 2. Purpose here is to delay or suspend payment of debts 3. . The number of creditors will not affect the proceeding. 4. The amount of the debts to be collected remains the same INSOLVENCY 1. The debtors assets are not sufficient to cover his liabilities 2. Purpose here is to discharge the debtor from his debts. 3. There MUST be 3 or more creditors 4. The creditor will collect an amount less than the original debt or may not even collect anything since the debtors assets are not sufficient to cover to cover his liabilities
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(A) SUSPENSION OF PAYMENTSis a remedy of the debtor to pay-off a debt. The debtor contemplated here has assets to pay his debts . However, the debtor foresees the impossibility of paying debt when they fall due. To remedy this problem, the debtor presents a plan in order to pay off the creditors. The plan calls for debt-payment but on a later date. For natural persons, the plan is submitted to the RTC. For juridical persons, the plan is submit to the SEC. PROCEDURE: 1) Filing of petition accompanied by an inventory of assets and a detailed schedule of obligations and due dates; 2) Issue by the court of an order setting the place and date for meeting of creditors; 3) Publication of the order and service of summons to all creditors listed in the petition; 4) Meeting of creditors and approval of debtors proposal by creditors, at least 2/3 number representing at least 3/5 of the liabilities; 5) Objections if any, by the other creditors; and 6) Order by the court to implement agreement. Forms of suspension of payments: 1. Petition for suspension of payments under the Insolvency Law 2. Petition for rehabilitation under the IRCR w/c includes suspension of payments The Insolvency Law expressly is not applicable to corporations engaged principally in the banking business or to any other corporation where there is a special provision of law for its liquidation in case of insolvency. While an individual who is a state of absolute insolvency may resort to declaration of insolvency in order to obtain a discharge from his liabilities, no such discharge is available to corporate debtors under the Insolvency Law. (B) INSOLVENCY, which may be: VOLUNTARY INSOLVENCYis a proceeding taken by the debtor having obligations exceeding P1,000.00 wherein the debtors assets cannot pay said obligation. Therefore, DEBTOR GOES TO COURT to be declared insolvent. PROCEDURE: 1) Filing petition accompanied by an inventory of assets and schedule of liabilities. 2) Court issues order declaring debtor insolvent. 3) Publication of the order, and service of the order on the creditor mentioned in the petition. 4) Creditors meet to elect an assignee to whom debtors assets shall be conveyed. 5) Liquidation and payment of creditors; and a) Composition, if agreed. b) Order of discharge INVOLUNTARY INSOLVENCYis a proceeding filed by 3 or more creditors whose credits aggregate P1,000.00, or filed by a corporation to declare a debtor insolvent, because he has done one of the acts of insolvency enumerated by law. PROCEDURE: 1) Filing of the petition.
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2) Answer of the defendant. 3) Trial and order of court adjudging debtor as insolvent, if supported by facts; 4) Publication of the order and service of it all creditors. 5) Election by creditors of an assignee and conveyance of debtors assets to assignee. 6) Liquidation and payment of creditors. 7) Composition 8) Discharge of the insolvent Involuntary insolvency 1) 3 or more creditors are required Voluntary insolvency One creditor is sufficient.
2) The creditors must be residents of the These are not required. Philippines, whose credits or demand accrued in the Philippines, and none of the creditors has become a creditor by assignment within 30 days prior to the filing of the petition 3) The debtor must behave done any acts The debtor must not have done any of insolvency as enumerated under of the said acts. Sec.20. 4) The amount must not be less than The amount P1,000.00 P1,000.00 MUST exceed
5) The petition must be accompanied by a Bond is not a requirement bond Equitable claims under Insolvency Law: Under Sec. 48, any property found among the property of the insolvent, the ownership of w/c has not been conveyed to him (the insolvent) by legal and irrevocable title shall not be considered as property of the insolvent and shall be placed at the disposal of its lawful owners on order of the court on petition of the assignee or any creditor whose right to the estate of the insolvent has been established. The following shall be considered: 1. Paraphernal property belonging to the wife of the insolvent 2. Property and effects deposited with the insolvent, or administered, leased, rented, or held in usufruct by him 3. Merchandise held by the debtor or commission 4. Negotiable instruments for collection or remittance 5. Money held by the debtor for remittance 6. Amounts due the insolvent for sales or merchandise on commission 7. Merchandise bought by the insolvent on credit where no delivery is made or where the right of ownership or possession has been retained by the seller; and 8. Goods or chattel wrongfully taken by the insolvent on the amount of the value thereof. What are considered ACTS of Involuntary Insolvency? 1) Debtor departing from the Philippines. 2) Debtor is absent and continued to be absent. 3) Debtor conceals himself from judicial processes. 4) Debtor removes or conceals his properties. 5) Debtor allowed his properties to be attached by others.
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6) Debtor confessed or allowed judgement taken against him. 7) Debtor allowed judgment by default against him. 8) Debtor allowed property to be taken by legal processes to give preference to certain creditors. 9) Debtor made assignment, gift, or sale. 10) Debtor, in contemplation of insolvency, made payments or gift to another. 11) Debtor defaulted in payment of obligations for thirty days. 12) Debtor failed after 30 days to surrender money deposited in trust for him. 13) Properties found insufficient to satisfy a judgement. (Act No. 1956)
PHILIPPINE DEPOSIT INSURANCE CORPORATION (R.A. 3591 as amended by P.D. 1937 and R.A. 7400) Objective: To insure the deposit liability of all banks up to P15,000 per depositor in consideration of a premium paid by the bank to the said corporation. By virtue of R.A. 7400, coverage or deposit liability of PDIC has been increased to P100,000 per depositor. Other AMENDMENTS: 1. The following are excluded from PDIC Coverage: a) Trust funds deposited with an insured bank. b) Bearer time deposit certificate with no registered payee are excluded from the insurance coverage; 2. Payment by PDIC or by a PDIC designated bank begins from the date the Central Bank declares Insured Bank as insolvent. Payment by PDIC subrogates it to the claims of the depositor of the Insured Bank. Claims by depositors of the Insured Bank should be made within 18 months from closure by the Central Bank. 3. PDIC can stop insurance coverage if the assessments against the insured bank are not paid in 30 days after notice. RULES: Coverage per account basis and not per depositor The OTHER account maintained by the SAME person in the SAME right and capacity are abrogated and hence constitute only as one account The insured bank may be examined by PDIC and if it deserves closure, the matter will be reported to CB. PDIC is a preferred creditor over all assets of the Insolvent Bank. Coverage under PDIC is not compulsory. TRUTH IN LENDING ACT (R.A. 3765)
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PURPOSE: State seeks to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uniformed use of credit to the detriment of national economy. Whereas the old law (R.A. 3765) covered only two groups of transactions (loans of money and sale on installments of property and allied transactions), the new law known as the CONSUMER ACT OF 1992 applies to: 1) Credit Sale under Sec. 140; 2) Open Consumer credit plan under sec. 141; 3) Consumer loans not opened and consumer credit plan under Sec. 142; and 4) Sale on consumer product on credit basis WHAT IS REQUIRED TO BE DISCLOSED? In Credit Sales: 1) Cash Price 2) Credit for down-payment or trade-in. 3) Total amount to be financed 4) Charges not incident to the sale. 5) Finance charge 6) Percentage of the finance charge to the amount to be financed. 7) Effective interest rate 8) Repayment program 9) Default or delinquency charges or late payments. In Consumer Loans: 1) Amount of Credit 2) Charges 3) Amount to be financed 4) Amount of finance Charges 5) Effective Interest Rates 6) Percentage of finance charges and amount to be financed 7) Default or delinquency charges 8) Description of security CREDIT TRANSACTION OUTSIDE THE SCOPE OF THIS ACT 1. Those does not involve the payment of finance charge by the debtor 2. Those in which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits , insurance contracts , sale of bond etc. FINANCE CHARGES Are the amount to be paid by the debtor incident to the extension of credit such as interests , discounts, collection fees , credit investigation fees and attorneys fees. What is the PENALTY in case of NON-DISCLOSURE? Lender or Seller shall be subject to the following penalties: P1,000.00 or double the finance charge collected. In no case shall the penalty exceed P3,000.00. PRESCRIPTIVE PERIOD: The action must be filed within one year from date of violation.
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