CASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina

I.

Letters of Credit

A. Definition and Nature of Letter of Credit

Usage and customs apply in commercial transactions in the absence
of any particular provision in the Code of Commerce, as provided in
Article 2 of the same Code. Hence, the rule that all parties
concerned in documentary credit operations deal in documents and
not in goods bind the parties in a letter of credit transaction. (Bank
of the Philippine Islands vs. De Reny Fabric Industries, Inc.
35 SCRA 253 (1970))
An order of the court releasing the proceeds of an irrevocable letter
of credit to the applicant, which was issued to pay for tobacco
purchased from the beneficiary of the letter of credit, violates the
irrevocable nature of the letter of credit. An irrevocable letter of
credit cannot, during its lifetime, be cancelled or modified without
the express permission of the beneficiary. (Philippine Virginia
Tobacco Administration vs. De Los Angeles, 164 SCRA 543
(1988))
The primary purpose of the letter of credit is to substitute for and
therefore support, the agreement of the buyer/importer to pay
money under a contract or other arrangement. Hence, the failure of
a buyer/importer to open a letter of credit as stipulated amounts to
a breach of contract which would entitle the seller/exporter to claim
damages for such breach. (Reliance Commodities, Inc. Vs.
Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993))
In a letter of credit transaction, there are three separate and distinct
relationships: a) between the account party (buyer/importer) and
the beneficiary (seller/exporter), which may be a contract of sale or
non-sale; b) between the account party and the issuing bank, where
the former applies to the latter for a specified L/C and agrees to
reimburse the bank for amounts paid by it pursuant to the L/C; and
c) between the issuing bank and the beneficiary where the former,
upon presentation of stipulated documents, pays the latter the
amount under the L/C. Such relationships are interrelated but
independent of one another. (Rodzssen Supply Company, Inc.
vs. Far East Bank and Trust Company, 357 SCRA 618 (2001))
Commercial letters of credit involve the payment of money under a
contract of sale wherein the seller-beneficiary presents to the

issuing bank documents that would show that he has taken

affirmative steps to comply with the sales agreement. On the other
hand, standby letters of credit are used in non-sale setting where
the beneficiary presents documents that would show that the
obligor has not complied with his obligation. (Transfield
Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
The stay order issued by the rehabilitation court pursuant to the
Interim Rules of Corporate Rehabilitation does not apply to the
beneficiary of the letter of credit against the banks that issued it
because the prohibition on the enforcement of claims against the
debtor, guarantors or sureties of the debtors does not extend to the
claims against the issuing bank in a letter of credit. Letters of credit
are primary obligations and not accessory contracts and while they
are security arrangements, they are not thereby converted into
contracts of guaranty. (MWSS vs. Hon. Daway, 432 SCRA 559
(2004))
B. Parties to a Letter of Credit
1. Rights and Obligations of Parties
A buyer who applied for a letter of credit to pay for imported
dyestuffs must reimburse the issuing bank which paid the
beneficiary, even if the shipment contained colored chalks. Banks
are not required to investigate if the contract underlying the letter
of credit has been fulfilled or not because in a transaction involving
letter of credit, banks deal only with documents and not with goods.
(Bank of the Philippine Islands vs. De Reny Fabric
Industries, Inc. 35 SCRA 253 (1970))
The issuing banks (IBAA) obligation under an Irrevocable Standby
Letter of Credit executed to secure a contract of loan cannot be
reduced by the direct payments made by the principal debtors to
the creditor. Although a letter of credit is a security arrangement, it
is not converted thereby into a contract of guaranty; the obligation
of the bank under the letter of credit is original and primary.
(Insular Bank of Asia & America vs. Intermediate Appellate
Court, 167 SCRA 450 (1988))
The mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank, in accepting the
instructions of the issuing bank, has also confirmed the letter of
credit. The petitioner, as a notifying bank, assumes no liability
except to notify the beneficiary of the existence of the letter of
credit; it does not give an absolute assurance to the beneficiary that

it will undertake the issuing banks obligation as its own according

to the terms and conditions of the credit. (Feati Bank & Trust
Company vs. Court of Appeals, 196 SCRA 576 (1991))
Drafts drawn by the beneficiary need not be presented to the
applicant for acceptance before the issuing bank can seek
reimbursement. Once the issuing bank has paid the beneficiary
after the latters compliance with the terms of the letter of credit,
the issuing bank becomes entitled to reimbursement. (Prudential
Bank & Trust Company vs. IAC, 216 SCRA 257 (1992))
When the notifying bank entered into a discounting arrangement
with the beneficiary, it acts independently as a negotiating bank. As
such, the negotiating bank has a right to recourse against the issuer
bank and until reimbursement is obtained, the beneficiary, as the
drawer of the draft, continues to assume a contingent liability
thereon. (Bank of America vs. Court of Appeals, 228 SCRA
357 (1993))
A notifying or advising bank does not incur any liability arising from
a fraudulent letter of credit as its obligation is limited only to
informing the beneficiary of the existence of the letter of credit.
Such notifying bank does not warrant the genuineness of the letter
of credit but is bound only to check its apparent authenticity. (Bank
of America vs. Court of Appeals, 228 SCRA 357 (1993))
While a marginal deposit, a collateral security, earns no interest in
favor of the applicant, the bank is not only able to use the same for
its own purposes, interest-free, but it is also able to earn interest on
the money loaned to the applicant. The buyer/importer's marginal
deposit should then be set off against his debt, for it would be
onerous to compute interest and other charges on the face value of
the letter of credit which the bank issued, without first crediting or
setting off the marginal deposit which the importer paid to the bank.
(Abad vs. Court of Appeals, 181 SCRA 191 (1990);
Consolidated Bank & Trust Corporation vs. Court of Appeals,
356 SCRA 671 (2001))
An issuing bank which paid the beneficiary of an expired letter of
credit can recover payment from the applicant which obtained the
goods from the beneficiary to prevent unjust enrichment.
(Rodzssen Supply Company, Inc. vs. Far East Bank and Trust
Company, 357 SCRA 618 (2001))
C. Basic Principles of Letter of Credit

1. Doctrine of Independence
Where the applicant entered into a contract, the performance of
which is secured by a standby letter of credit, the resort to
arbitration by the applicant/contractor, in the absence of a
stipulation that any dispute must first be settled through arbitration
before the beneficiay can draw on the letter of credit, does not
preclude the beneficiary to draw on the letter of credit upon its
issuance of a certificate of default. The claim of fraud will not be
sufficient to support an injunction against payment by reason of the
independence principle which assures the beneficiary of prompt
payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. (Transfield Philippines,
Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
The issuing bank is not liable for damages even if the shipment did
not conform to the specifications of the applicant. Under the
independence principle, the obligation of the issuing bank to pay
the beneficiary arises once the latter is able to submit the stipulated
documents under the letter of credit. Hence, the bank is not liable
for damages even if the shipment did not conform to the
specifications of the applicant. (Land Bank of the Philippines
vs. Monets Export and Manufacturing Corp., 453 SCRA 173
(2005))
Where the trial court rendered a decision finding the buyer solely
liable to pay the seller and omitted by inadvertence to insert in its
decision the phrase without prejudice to the decision that will be
made against the issuing bank , the bank can not evade
responsibility based on this ground. The seller who is entitled to
draw on the credit line of the buyer from a bank against the
presentation of sales invoices and official receipts of the purchases
and who obtained a court judgment solely against the buyer even
though the suit is against the bank and the buyer may still enforce
the liability of the same bank under a letter of credit issued to
secure the credit line. The so-called "independence principle" in a
letter of credit assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Philippine National
Bank vs. San Miguel Corporation. No. 186063, January 15,
2014.

2. Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for
payment under a standy letter of credit may qualify as fraud
sufficient to support injunction against payment. However, under
the fraud exception principle, this must constitute fraud in relation
to the independent purpose or character of the letter of credit and
not only fraud under the main agreement; moreover, irreparable
injury will be suffered if injunction will not be granted. (Transfield
Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))
3. Doctrine of Strict Compliance
When the letter of credit required the submission of a certification
that the applicant/buyer has approved the goods prior to shipment,
the unjust refusal of the applicant/buyer to issue said certification is
not sufficient to compel the bank to pay the beneficiary thereof.
Under the doctrine of strict compliance, the documents tendered
must strictly conform to the terms of the letter of credit, otherwise,
the bank which accepts a faulty tender, acts on its own risks and
may not be able to recover from the applicant/buyer. (Feati Bank
& Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))
I. Trust Receipts Law
A. Definition/Concept of a Trust Receipt Transaction
1. Loan/Security Feature
The Trust Receipts Law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner or not. The law
does not seek to enforce payment of the loan, thus, there is no
violation of the constitutional provision against imprisonment for
non-payment of debt. (People vs. Hon. Nitafan and Betty Sia
Ang, 207 SCRA 726 (1992))
Compensation shall not be proper when one of the debts consists in
civil liability arising from a penal offense; moreover, any
compromise relating to the civil liability does not automatically
extinguish the criminal liability of the accused. The mere failure of
the entrustee to deliver the proceeds of the sale or the goods if not
sold, constitutes a criminal offense that causes prejudice not only to
another, but more to the public interest. (Metropolitan Bank &
Trust Company vs. Tonda, 338 SCRA 254 (2000))

A trust receipt is a security transaction intended to aid in financing

importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through
utilization, as collateral of the merchandise imported or purchased.
Under a letter of credit-trust receipt arrangement, a bank extends a
loan covered by a letter of credit, with the trust receipt as a security
for the loan; hence, the transaction involves a loan feature
represented by a letter of credit, and a security feature which is in
the covering trust receipt which secures an indebtedness. (Lee vs.
Court of Appeals, 375 SCRA 579 (2002))
2. Ownership of the Goods, Documents and Instruments under a Trust
Receipt
The transaction is a simple loan when the goods subject of the
agreement had been purchased and delivered to the supposed
entrustee prior to the execution of the trust receipt agreement. The
acquisition of ownership over the goods before the execution of the
trust receipt agreement makes the contract a simple loan,
regardless of the denomination of the contract. (Colinares vs.
Court of Appeals, 339 SCRA 609 (2000))
Respondent Corporation is not an importer which acquired the
bunker fuel oil for re-sale; it needed the oil for its own
operations. More importantly, at no time did title over the oil pass
to petitioner bank, but directly to respondent Corporation to which
the oil was directly delivered long before the trust receipt was
executed; thus, the contract executed by the parties is a simple
loan and not a trust receipt agreement. (Consolidated Bank &
Trust Corp. vs. Court of Appeals, 356 SCRA 671 (2001))
In a trust receipt transaction, the entrustee has neither absolute
ownership, free disposal nor the authority to freely dispose of the
articles subject of the agreement. Since the goods could not have
been subjected to a valid mortgage, there can also be no valid
foreclosure especially when the mortgagee who subsequently
foreclosed and purchased the said goods were in bad faith, having
knowledge of the inclusion of such articles in a trust receipt
agreement. (DBP vs. Prudential Bank, 475 SCRA 623 (2005))
B. Rights of the Entruster
1. Validity of the Security Interest as Against the Creditors of the
Entrustee/Innocent Purchaser for Value

The security interest of the entruster pursuant to the written terms

of a trust receipt shall be valid as against all creditors of the
entrustee for the duration of the trust receipt agreement, including
among others, the laborers of the entrustee. The only exception to
the rule is when the properties are in the hands of an innocent
purchaser for value and in good faith. (Prudential Bank vs.
National Labor Relations Commission, 251 SCRA 412 (1995))
C. Obligation and Liability of the Entrustee
Commercial invoices attached to the applications for letters of credit
and of trust receipts, which only provide for the list of items sought
to be purchased and their prices will not prove delivery of the goods
to the entrustee. Hence, criminal liability will not attach and the
accused should be acquitted in the estafa cases. (Ramos vs. Court
of Appeals, 153 SCRA 276 (1987))
While the presumption found under the Negotiable Instruments Law
may not necessarily be applicable to trust receipts and letters of
credit, the presumption of consideration applies on the drafts drawn
in connection with the letters of credit. Hence, the drafts signed by
the beneficiary/suppliers in connection with the corresponding
letters of credit proved that said suppliers were paid by the bank
(entruster) for the account of the entrustee. (Lee vs. Court of
Appeals, 375 SCRA 579 (2002))
When there is a violation of the Trust Receipts Law, what is being
punished is the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of another regardless of whether
the latter is the owner. However, failure to comply with the
obligations due to serious liquidity problems and after the entrustee
was placed under rehabilitation does not amount to dishonesty and
abuse of confidence, thus, the entrustee cannot be said to have
violated the law. (Pilipinas Bank vs. Ong, 387 SCRA 37 (2002))
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods,
Documents or Instruments
When the goods subject of the transaction, such as chemicals and
metal plates, were not intended for sale or resale but for use in the
fabrication of steel communication towers, the agreement cannot
be considered a trust receipt transaction but a simple loan. P.D. No.
115 punishes the entrustee for his failure to deliver the price of the
sale, or if the goods are not sold, to return them to the entruster,
which, in the present case, is absent and could not have been

complied with; therefore, the liability of the entrustee is only civil in

nature. (Anthony L. Ng vs. People of the Philippines, G.R. No.
173905, April 23, 2010)
Under the Trust Receipts Law, intent to defraud is presumed when
(1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or (2) when the
entrustee fails to return the goods under trust, if they are not
disposed of in accordance with the terms of the trust receipts.
When both parties know that the entrustee could not have complied
with the obligations under the trust receipt without his fault, as
when the goods subject of the agreement were not intended for sale
or resale, the transaction cannot be considered a trust receipt but a
simple loan, where the liability is limited to the payment of the
purchase price. (Land Bank of the Philippines vs. Perez, G.R.
No. 166884, June 13, 2012)
When both parties entered into an agreement knowing fully well
that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a
trust receipt transaction penalized under Sec. 13 of PD 115 in
relation to Art. 315, par. 1(b) of the RPC, as the only obligation
actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere
loan, where the borrower is obligated to pay the bank the amount
spent for the purchase of the goods. (Hur Tin Yang vs. People of
the Philippines, G.R. No. 195117, August 14, 2013)
2. Return of Goods, Documents or Instruments in Case of Non-Sale
A trust receipt transaction is a security agreement, pursuant to
which the entruster acquires a security interest in the goods, which
are released to the possession of the entrustee who binds himself to
hold the goods in trust for the entruster and to sell or otherwise
dispose of the goods or to return them in case of non-sale. The
return of the goods to the entruster however, does not relieve the
entrustee of the obligation to pay the loan because the entruster is
not the factual owner of the goods and merely holds them as owner
in the artificial concept for the purpose of giving stronger security
for the loan. (Vintola vs. Insular Bank of Asia and America,
150 SCRA 140 (1987))
3. Liability for Loss of Goods, Documents or Instruments
Under the Trust Receipts Law, the loss of the goods subject of the
trust receipt regardless of the cause and period or time it occurred,

does not extinguish the civil obligation of the entrustee. Hence, the
fact that the entrustee attempted to make a tender of goods to the
bank and as a consequence of the latters refusal, the goods were
stored in the entrustees warehouse and thereafter gutted by fire,
the liability of the entrustee still subsists; the principle of res perit
domino will not apply to the bank which holds only a security of
interest over the goods. (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, 462 SCRA 88 (2005))
4. Penal Sanctions if Offender is a Corporation
Recognizing the impossibility of imposing the penalty of
imprisonment on a corporation, it was provided that if the entrustee
is a corporation, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons responsible for the
offense. However, the person signing the trust receipt for the
corporation is not solidarily liable with the entrustee-corporation for
the civil liability arising from the criminal offense unless he
personally bound himself under a separate contract of surety or
guaranty. (Ong vs. Court of Appeals, 401 SCRA 649 (2003))
When the entrustee is a corporation, the director, officer, employee,
or any person responsible for the violation of the Trust Receipts Law
is held criminally liable without prejudice to the civil liability, which
is imposed upon the entrustee-corporation. The fact that the officer
signed in his official capacity means that the corporation is the one
civilly liable; however, when such officer also signed a trust receipt
in his personal capacity, he will also be held civilly liable together
with the corporation, with the scope of liability depending on
whether he signed as a surety or as a guarantor. (Tupaz IV vs.
Court of Appeals, 475 SCRA 398 (2005))
The fact that the officer who signed the trust receipt on behalf of
the entrustee-corporation signed in his official capacity without
receiving the goods as he had never taken possession of such nor
committing dishonesty and abuse of confidence in transacting with
the entrustor, is immaterial.
The law specifically makes the
director, officer, employee or any person responsible criminally
liable precisely for the reason that a corporation, being a juridical
entity, cannot be the subject of the penalty of imprisonment.
(Alfredo Ching vs. Secretary of Justice, 481 SCRA 609
(2006))
D. Remedies Available

After the infomation is filed in court, compromise of the estafa case

arising from violation of the Trust Receipts Law will not amount to
novation and will not extinguish the criminal liability of the accused.
(Ong vs. Court of Appeals, 124 SCRA 578 (1983))
Although the surrender of the goods to the entruster results in the
acquittal of the accused in the estafa case, it is not a bar to the
institution of a civil action for collection because of the loan feature
(civil in nature) of the trust receipt transaction, which is entirely
distinct from its security feature (criminal in nature). Accordingly,
Article 31 of the New Civil Code provided that when the civil action
is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the
result of the latter. (Vintola vs. Insular Bank of Asia and
America, 150 SCRA 140 (1987))
The entrusters repossession of the subject machinery and
equipment, not for the purpose of transferring ownership to the
entruster but only to serve as security to the loan, cannot be
considered payment of the loan under the trust receipt and letter of
credit. Payment would legally result only after PNB had foreclosed
on said securities, sold the same and applied the proceeds thereof
to TCC's loan obligation. (Philippine National Bank vs. Pineda,
197 SCRA 1 (1991))
When the entrustee defaults on his obligation, the entruster has the
discretion to avail of remedies which it deems best to protect its
right. The law uses the word may in granting to the entruster the
right to cancel the trust and take possession of the goods; hence,
the option is given to the entruster. (South City Homes, Inc. vs.
BA Finance Corporation, 371 SCRA 603 (2001))
A civil case filed by the entruster against the entrustees based on
the failure of the latter to comply with their obligation under the
Trust Receipt agreement is proper because this breach of obligation
is separate and distinct from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized from the sale of
goods released under the trust receipts.
Being based on an
obligation ex contractu and not ex delicto, the civil action may
proceed independently of the criminal proceedings instituted
against the entrustees regardless of the result of the latter.
(Sarmiento vs. Court of Appeals, 394 SCRA 315 (2002))
Novation may take place either by express and unequivocal terms
or when the old and new obligations cannot stand together and are

incompatible on every point. The execution of the Memorandum of

Agreement, which provided for principal conditions incompatible
with the trust agreement, extinguished the obligation under the
trust receipts without prejudice to the debtors civil liability.
(Pilipinas Bank vs. Ong, 387 SCRA 37 (2002))
As provided under Section 7, P.D. No. 115, in the event of default of
the entrustee, the entruster may cancel the trust and take
possession of the goods subject of the trust or of the proceeds
realized therefrom at any time; the entruster may, not less than five
days after serving or sending of notice of intention to sell, proceed
with the sale of the goods at public or private sale where the
entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. This is by reason of the fact that the
initial repossession by the bank of the goods subject of the trust
receipt did not result in the full satisfaction of the entrustees loan
obligation. (Landl & Company vs. Metropolitan Bank, 435
SCRA 639 (2004))
E. Warehousemans Lien
Notwithstanding the right of PNB over the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected only upon
payment of the storage fees. The warehouseman may demand
payment of his lien prior to the delivery of the stocks of sugar
because under Section 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon the goods by surrendering
possession thereof. (Philippine National Bank vs. Se, Jr., 256
SCRA 380 (1996))
A warehouseman may enforce his lien under the following
instances: 1) he may refuse to deliver the goods until his lien is
satisfied; 2) he may sell the goods and apply the proceeds thereof
to the value of the lien; and 3) by other means allowed by law to a
creditor against his debtor, for the collection from the depositor of
all charges and advances which the depositor expressly or impliedly
contracted with the warehouseman; or such remedies allowed by
law for the enforcement of a lien against personal property.
(Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))
The refusal of the warehouseman to deliver the sugar to the
endorsee of the quedans on the ground that it has claimed
ownership over the sugar by reason of non-payment of its buyer,
not being one of the remedies available to the warehouseman to
enforce his lien, caused the loss of the warehousemans lien.
Nevertheless, the loss did not extinguish the obligation to pay the

warehousemans fees but merely caused the fees and charges to

cease to accrue from the date of the rejection by the
warehouseman to heed the previous lawful demand for the release
of the goods. (Philippine National Bank vs. Sayo, Jr., 292 SCRA
202 (1998))
III. Negotiable Instruments Law
A. Forms and Interpretation
1. Requisites of Negotiability
A check which reads Pay to the EQUITABLE BANKING CORPORATION
Order of A/C OF CASVILLE ENTERPRISES, INC. is not negotiable
because the payee ceased to be indicated with reasonable certainty
in contravention of Section 8 of the Negotiable Instruments Law. As
worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee,
or as an agent, for Casville Enterprises, Inc., with the latter being
the ultimate beneficiary. (Equitable Banking Corporation vs. the
Honorable Intermediate Appellate Court and The Edward J.
Nell Co., G.R. No. 74451 May 25, 1988)
Without the words "or order or "to the order of", the instrument is
payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument, but will
merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against
the latter. (Juanita Salas vs. Hon. Court of Appeals and First
Finance & Leasing Corporation, G.R. No. 76788 January 22,
1990)
The indication of Fund 501 as the source of the payment to be made
on the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable.
(Metropolitan Bank & Trust Company vs. Court Of Appeals,
Golden Savings & Loan Association, Inc., Lucia Castillo,
Magno Castillo and Gloria Castillo, G.R. No. 88866 February
18, 1991)
When the documents provide that the amounts deposited shall be
repayable to the depositor, such instrument is negotiable because it
is payable to the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him, but the amounts are to be repayable

to the bearer of the documents or, for that matter, whosoever may
be the bearer at the time of presentment. [Caltex (Philippines),
Inc. vs. Court of Appeals and Security Bank and Trust
Company, G.R. No. 97753, August 10, 1992]
The language of negotiability which characterizes a negotiable
paper as a credit instrument is its freedom to circulate as a
substitute for money. This freedom in negotiability is totally absent
in a certificate indebtedness as it merely to pay a sum of money to
a specified person or entity for a period of time. (Traders Royal
Bank vs. Court of Appeals, Filriters Guaranty Assurance
Corporation and Central Bank of the Philippines, G.R. No.
93397, March 3, 1997)
Under the fictitious payee rule, a check made expressly payable to a
non-fictitious and existing person is not necessarily an order
instrument if the payee is not the intended recipient of the proceeds
of the check. There is, however, a commercial bad faith exception to
this rule which provides that a showing of commercial bad faith on
the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. (Philippine National
Bank vs. Erlando T. Rodriguez and Norma Rodriguez, G.R.
No. 170325, September 26, 2008)
Under the Negotiable Instruments Law, a check made payable to
cash is payable to the bearer and could be negotiated by mere
delivery without the need of an indorsement. However, the drawer
of the post-dated check can not be liable for estafa to the person
who did not acquire the instrument directly from drawer but through
negotiation of another by mere delivery. This is because the drawer
did not use the check to defraud the holder/private complainant.
PEOPLE OF THE PHILIPPINES VS. GILBERT REYES WAGAS.
G.R. No. 157943, September 4, 2013
2. Kinds of Negotiable Instruments
Postal money orders are not negotiable instruments, the reason
being that in establishing and operating a postal money order
system, the government is not engaged in the commercial
transactions but merely exercises a governmental power for the
public benefit. Some of the restrictions imposed upon money orders
by postal laws and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of
money orders may be withheld under a variety of circumstances.

(Philippine Education Co., inc. vs. Mauricio A. Soriano, et al.,

G.R. No. L-22405, June 30, 1971)
Bank withdrawal slips are non-negotiable and the giving of
immediate notice of dishonor of negotiable instruments does not
apply in this case. Since the withdrawal slips deposited with
petitioners current account with Citibank were not checks, Citibank
was not bound to accept the withdrawal slips as a valid mode of
deposit, but having erroneously accepted them as such, Citibank
and petitioner as account-holder must bear the risks attendant to
the acceptance of these instruments. (Firestone Tire & Rubber
Company of the Philippines vs. Court of Appeals and Luzon
Development Bank, G.R. No. 113236, March 5, 2001)
A check is a bill of exchange drawn on a bank payable on demand
which may either be an order or a bearer instrument. Under Section
9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to
the order of a fictitious or non-existing person like checks issued to
Prinsipe Abante or Si Malakas at si Maganda, who are wellknown characters in Philippine mythology. (Philippine National
Bank vs. Erlando T. Rodriguez and Norma Rodriguez, G.R.
No. 170325, September 26, 2008)
A certificate of deposit is defined as a written acknowledgement by a
bank of the receipt of a sum of money on deposit which the bank
promise to pay to the depositor or the order of the depositor or to
some other person or his order whereby the relation of debtor and
creditor between the bank and the depositor is created. A document to
be considered a certificate of deposit need not be in a specific form.
Thus, a passbook of an interest-earning deposit account issued by a
bank is a certificate of deposit drawing interest because it is
considered a written acknowledgment by a bank that it has accepted a
deposit of a sum of money from a depositor. Thus, it is subject to
documentary stamp tax. Prudential Bank v. Commissioner of
Internal Revenue (CIR) G.R. No. 180390, July 27, 2011
B. Completion and Delivery
The 17 original checks, completed and delivered to petitioner, are
sufficient by themselves to prove the existence of the loan
obligation of the respondents to petitioner. Sec. 16 of the NIL
provides that when an instrument is no longer in the possession of
the person who signed it and it is complete in its terms "a valid and
intentional delivery by him is presumed until the contrary is proved.

(Ting Ting Pua vs. Spouses Benito Lo Bun Tiong and Caroline
Siok Ching Teng, G.R. No. 198660, October 23, 2013)
1. Insertion of Date
2. Completion of Blanks
In any case, it is no defense that the promissory notes were signed
in blank as Section 14 of the Negotiable Instruments Law concedes
the prima facie authority of the person in possession of negotiable
instruments to fill in the blanks. (Quirino Gonzales Logging
Concessionaire, Quirino Gonzales and Eufemia Gonzales vs.
the Court of Appeals (CA) and Republic Planters Bank, G. R.
No. 126568, April 30, 2003)
3. Incomplete and Undelivered Instruments
4. Complete but Undelivered Instruments
As Assistant City Fiscal, the source of the salary of the payee is
public funds which he receives in the form of checks from the
Department of Justice. Since the payee of a negotiable interest
acquires no interest with respect thereto until it is delivered, such
checks, as a necessary consequence of being public fund, may not
be garnished because such funds do not belong to him. (Loreto D.
de la Victoria, as City Fiscal of Mandaue City and in his
personal capacity as garnishee vs. Hon. Jose P. Burgos,
Presiding Judge, RTC, Br. XVII, Cebu City, and Raul H.
Sesbreo, G.R. No. 111190, June 27, 1995)
If the post-dated check was given to the payee in payment of an
obligation, the purpose of giving effect to the instrument is evident,
thus title or ownership the check was transferred to the payee.
However, if the PDC was not given as payment, then there was no
intent to give effect to the instrument and ownership was not
transferred. The evidence proves that the check was accepted, not
as payment, but in accordance with the policy of the payee to cover
the transaction ( purchase of beer products ) and in the meantime
the drawer was to pay for the transaction by some other means
other than the check. This being so, title to the check did not
transfer to the payee; it remained with the drawer. The second
element of the felony of theft was therefore not established.
Hence, there is
no probable cause for theft.- San Miguel
Corporation vs. Puzon, Jr. G.R. No. 167567, 22 September
2010

The fact that a person, other than the named payee of the crossed
check, was presenting it for deposit should have put the bank on
guard. It should have verified if the payee authorized the holder to
present the same in its behalf or indorsed it to him. The banks
reliance on the holders assurance that he had good title to the
three checks constitutes gross negligence even though the holder
was related to the majority stockholder of the payee. While the
check was not delivered to the payee, the suit may still prosper
because the payee did not assert a right based on the undelivered
check but on quasi-delict. Equitable Banking Corporation vs
Special Steel Products, June 13, 2012
C. Signature
1. Signing in Trade Name
2. Signature of Agent
Under Section 20 of the Negotiable Instruments Law, where the
instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as
an agent or as filing a representative character, without disclosing
his principal, does not exempt him from personal liability. In the
instant case, an inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was signing as a
representative of the Philippine Education Foundation Company and
such failure to disclose his principal makes him personally liable for
the drafts he accepted. (The Philippine Bank of Commerce vs.
Jose M. Aruego, G.R. Nos. L-25836-37, January 31, 1981)
3. Indorsement by Minor or Corporation
4. Forgery
As a general rule, a bank or corporation who has obtained
possession of a check upon an unauthorized or forged indorsement
of the payees signature and who collects the amount of the check
from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained. The theory of the rule is
that the possession of the check on the forged or unauthorized
indorsement is wrongful and when the money had been collected on
the check, the proceeds are held for the rightful owners who may

recover them. The payee ought to be allowed to recover directly

from the collecting bank, regardless of whether the check was
delivered to the payee or not.
(Westmont Bank (formerly
Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560,
January 30, 2002)
The possession of a check on a forged or unauthorized indorsement
is wrongful, and when the money is collected on the check, the bank
can be held for moneys had and received. The proceeds are held
for the rightful owner of the payment and may be recovered by him.
The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check
and collected without indorsement at all. The act of the bank
amounts to conversion of the check. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes,
doing business under the name and style "Melissas RTW,"
G.R. No. 89802, May 7, 1992)
It is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check
is wholly inoperative and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against any
party, can be acquired through or under such signature. However,
the rule does provide for an exception, namely: "unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority." In the instant case, it is
the exception that applies as the petitioner is precluded from
setting up the forgery, assuming there is forgery, due to his own
negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.
(Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No.
139130, November 27, 2002)
A forged signature is a real or absolute defense, and a person
whose signature on a negotiable instrument is forged is deemed to
have never become a party thereto and to have never consented to
the contract that allegedly gave rise to it. The counterfeiting of any
writing, consisting in the signing of anothers name with intent to
defraud, is forgery. (Bank of the Philippine Islands vs. Casa
Montessori Internationale and Leonardo T. Yabut, G.R. No.
149454, May 28, 2004)
Even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he
or she is not precluded from setting up the defense of forgery. After
all, Section 23 of the Negotiable Instruments Law plainly states that

no right to enforce the payment of a check can arise out of a forged

signature. Since the drawer is not precluded by negligence from
setting up the forgery, the general rule should apply. (Samsung
Construction Company Philippines, Inc. vs. Far East Bank
and Trust Company and Court Of Appeals, G.R. NO. 129015,
August 13, 2004)
As between a bank and its depositor, where the banks negligence
is the proximate cause of the loss and the depositor is guilty of
contributory negligence, the greater proportion of the loss shall be
borne by the bank. The bank was negligent because it did not
properly verify the genuineness of the signatures in the applications
for managers checks while the depositor was negligent because it
clothed its accountant/bookkeeper with apparent authority to
transact business with the Bank and it did not examine its monthly
statement of account and report the discrepancy to the Bank. the
court allocated the damages between the bank and the depositor
on a 60-40 ratio.Philippine National Bank vs. FF Cruz and
Company, G.R. No. 173259, July 25, 2011
While its manager forged the signature of the authorized signatories
of clients in the application for managers checks and forged the
signatures of the payees thereof, the drawee bank also failed to
exercise the highest degree of diligence required of banks in the
case at bar. It allowed its manager to encash the Managers checks
that were plainly crossed checks. A crossed check is one where two
parallel lines are drawn across its face or across its corner. Based on
jurisprudence, the crossing of a check has the following effects: (a)
the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only once to the one who has an
account with the bank; and (c) the act of crossing the check serves
as a warning to the holder that the check has been issued for a
definite purpose and he must inquire if he received the check
pursuant to this purpose; otherwise, he is not a holder in due
course. In other words, the crossing of a check is a warning that the
check should be deposited only in the account of the payee. When a
check is crossed,it is the duty of the collecting bank to ascertain
that the check is only deposited to the payees account. Philippine
Commercial International Bank vs. Balmaceda,G.R. No.
158143, September 21, 2011
D. Consideration
A check which is regular on its face is deemed prima facie to have
been issued for a valuable consideration and every person whose

signature appears thereon is deemed to have become a party

thereto for value. Thus, the mere introduction of the instrument
sued on in evidence prima facie entitles the plaintiff to recovery.
Further, the rule is quite settled that a negotiable instrument is
presumed to have been given or indorsed for a sufficient
consideration unless otherwise contradicted and overcome by other
competent evidence. (Travel-On, Inc. vs. Court of Appeals and
Arturo S. Miranda, G.R. No. L-56169, June 26, 1992)
In actions based upon a negotiable instrument, it is unnecessary to
aver or prove consideration, for consideration is imported and
presumed from the fact that it is a negotiable instrument. The
presumption exists whether the words "value received" appear on
the instrument or not. (Remigio S. Ong vs. People of the
Philippines and Court of Appeals, G.R. No. 139006,
November 27, 2000)
Letters of credit and trust receipts are not negotiable instruments,
but drafts issued in connection with letters of credit are negotiable
instruments. While the presumption found under the Negotiable
Instruments Law may not necessarily be applicable to trust receipts
and letters of credit, the presumption that the drafts drawn in
connection with the letters of credit have sufficient consideration
applies. (Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co vs. Court of Appeals
and Philippine Bank of Communications, G.R. NO. 117913,
February 1, 2002)
When promissory notes appear to be negotiable as they meet the
requirements of Section 1 of the Negotiable Instruments Law, they
are prima facie deemed to have been issued for consideration
unless sufficient evidence was adduced to show otherwise.
(Quirino Gonzales Logging Concessionaire, Quirino Gonzales
and Eufemia Gonzales vs. the Court of Appeals (CA) and
Republic Planters Bank, G. R. No. 126568, April 30, 2003)
Upon issuance of a negotiable check, in the absence of evidence to
the contrary, it is presumed that the same was issued for valuable
consideration which may consist either in some right, interest, profit
or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor,
or service given, suffered or undertaken by the other side. Under
the Negotiable Instruments Law, it is presumed that every party to
an instrument acquires the same for a consideration or for value.
As petitioner alleged that there was no consideration for the
issuance of the subject checks, it devolved upon him to present

convincing evidence to overthrow the presumption and prove that

the
checks
were
in
fact
issued
without
valuable
consideration. Petitioner, however, has not presented any credible
evidence to rebut the presumption, as well as North Stars
assertion, that the checks were issued as payment for the
US$85,000 petitioner owed to the corporation and not to the
manager who facilitate the fund transfer. - Cayanan v. North Star
International Travel Inc.,G.R. No. 172954, October 5, 2011
E. Accommodation Party
Section 29 of the Negotiable Instruments Law by clear mandate
makes the accomodation party "liable on the instrument to a holder
for value, notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation party." It is not
a valid defense that the accommodation party did not receive any
valuable consideration when he executed the instrument. It is not
correct to say that the holder for value is not a holder in due course
merely because at the time he acquired the instrument, he knew
that the indorser was only an accommodation party. (Ang Tiong
vs. Lorenzo Ting, doing business under the name & style of
Prunes Preserves MFG., & Felipe Ang, G.R. No. L-26767,
February 22, 1968)
When a promissory note which is payable to GSIS is not payable to
bearer or order, such instrument is non-negotiable. As such, third
party mortgagor who mortgaged his property to secure the
obligation of another is not liable as an accommodation party but
liable under Article 2085 of the Civil Code to the effect that third
persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (GSIS vs.
Court of Appeals, G.R. No. L-40824, February 23, 1989)
When the checks are dishonored for lack of funds, the party who
indorsed those checks as accommodation endorser is liable for the
payment of the checks. (People vs. Maniego, 148 SCRA 30,
1987)
When a married couple signed a promissory note in favor of a bank
to enable the sister of the husband to obtain a loan, they are
considered as accommodation parties who are liable for the
payment of said loan. (Town Saving and Loan Bank, Inc. vs.
Court of Appeals, 223 SCRA 459, 1993)

While a maker who signed a promissory note for the benefit of his
co-maker ( who received the loan proceeds ) is considered an
accommodation party, he is, nevertheless, entitled to a written
notice on the default and the outstanding obligation of the party
accommodated. There being no such written notice, the Bank is
grossly negligent in terminating the credit line of the
accommodation party for the unpaid interest dues from the loans of
the party accommodated and in dishonoring a check drawn against
the such credit line. Gonzales vs Phillippine Commercial and
International Bank, GR No. 180257, February 23, 2011
F. Negotiation
1. Distinguished from Assignment
If an assigned promissory note had already been extinguished
because its maker is similarly indebted to the assignor, then the
defense of set-off or legal compensation could also be invoked
against the assignee of the note. The debtors consent is not
needed to effectuate assignment of credit and negotiation.
(Sesbreno vs. Court of Appeals, 222 SCRA 466, 1993)
2. Modes of Negotiation
Where a check is made payable to the order of cash, the word
cashdoes not purport to be the name of any person, and hence
the instrument is payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. (Ang Tek Lian vs. the
Court of Appeals, G.R. No. L-2516, September 25, 1950)
Under the Negotiable Instruments Law, an instrument is negotiated
when it is transferred from one person to another in such a manner
as to constitute the transferee the holder thereof, and a holder may
be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof. In case of a bearer instrument, mere delivery
would suffice. [Caltex (Philippines), Inc. vs. Court of Appeals
and Security Bank and Trust Company, G.R. No. 97753,
August 10, 1992]
3. Kinds of Indorsements
G. Rights of the Holder
1. Holder in Due Course

Where the payee acquired the check under circumstances that

should have put it to inquiry as to the title of the holder who
negotiated the check to him, the payee has the duty to present
evidence that he acquired the check in good faith. As holder's title
was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's
title, and for this reason the presumption that it is a holder in due
course or that it acquired the instrument in good faith does not
exist. (Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et
al., G.R. No. L-15126, November 30, 1961)
A holder in due course holds the instrument free from any defect of
title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the
instrument for the full amount thereof. This being so, petitioner
cannot set up against respondent the defense of nullity of the
contract of sale between her and VMS. (Juanita Salas vs. Hon.
Court of Appeals and First Finance & Leasing Corporation,
G.R. No. 76788 January 22, 1990)
Possession of a negotiable instrument after presentment and
dishonor, or payment, is utterly inconsequential; it does not make
the possessor a holder for value within the meaning of the law. It
gives rise to no liability on the part of the maker or drawer and
indorsers. (Stelco Marketing Corporation vs. Hon. Court of
Appeals and Steelweld Corporation of the Philippines, Inc.,
G.R. No. 96160 June 17, 1992)
It is then settled that crossing of checks should put the holder on
inquiry and upon him devolves the duty to ascertain the indorsers
title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amounting
to legal absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, and as such the consensus of authority
is to the effect that the holder of the check is not a holder in due
course. (Bataan Cigar and Cigarette Factory, Inc. vs. the
Court of Appeals and State Investment House, Inc., G.R. No.
93048, March 3, 1994)
The disadvantage of not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were nonnegotiable. One such defense is absence or failure of consideration.
(Atrium Management Corporation vs. Court of Appeals, et
al., G.R. No. 109491, February 28, 2001)

The weight of authority sustains the view that a payee may be a

holder in due course. Hence, the presumption that he is a prima
facie holder in due course applies in his favor. However, said
presumption may be rebutted and vital to the resolution of this
issue is the concurrence of all the requisites provided for in Section
52 of the Negotiable Instruments Law. (Cely Yang vs. Hon. Court
of Appeals, Philippine Commercial International Bank, Far
East Bank & Trust Co., Equitable Banking Corporation, Prem
Chandiramani and Fernando David, G.R. No. 138074, August
15, 2003)
2. Defenses Against the Holder
H. Liabilities of Parties
1. Maker
Under the Negotiable Instruments Law, persons who write their
names on the face of promissory notes are makers and liable as
such. (Republic Planters Bank vs. Court of Appeals, 216 SCRA
730, 1992)
2. Drawer
The acceptance of a check implies an undertaking of due diligence
in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as
actual payment of the debt or obligation for which it was given. If no
presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury unless presentment is otherwise
excused. (Myron C. Papa vs. A.U. Valencia & Co., Inc., et al.
G.R. No. 105188. January 23, 1998)
In the case of DAUD, the depositor has, on its face, sufficient funds
in his account, although it is not available yet at the time the check
was drawn, whereas in DAIF, the depositor lacks sufficient funds in
his account to pay the check. Moreover, DAUD does not expose the
drawer to possible prosecution for estafa and violation of BP 22,
while DAIF subjects the depositor to liability for such offenses.
(Bank of the Philippine Islands vs. Reynald R. Suarez, G.R.
No. 167750, March 15, 2010)
3. Acceptor
To simplify proceedings, the payee of the illegally encashed checks
should be allowed to recover directly from the bank responsible for

such encashment regardless of whether or not the checks were

actually delivered to the payee. (Associated Bank and Conrado
Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing
business under the name and style "Melissas RTW," G.R.
No. 89802, May 7, 1992)
As a general rule, a bank or corporation who has obtained
possession of a check upon an unauthorized or forged indorsement
of the payees signature and who collects the amount of the check
from the drawee, is liable for the proceeds thereof to the payee or
other owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained. The theory of the rule is
that the possession of the check on the forged or unauthorized
indorsement is wrongful and when the money had been collected on
the check, the proceeds are held for the rightful owners who may
recover them. The payee ought to be allowed to recover directly
from the collecting bank, regardless of whether the check was
delivered to the payee or not.
[Westmont Bank (formerly
Associated Banking Corp.) vs. Eugene Ong, G.R. No. 132560,
January 30, 2002]
If a bank pays a forged check, it must be considered as paying out
of its funds and cannot charge the amount so paid to the account of
the depositor. A bank is liable, irrespective of its good faith, in
paying a forged check. (Samsung Construction Company
Philippines, Inc. vs. Far East Bank and Trust Company and
Court Of Appeals, G.R. NO. 129015, August 13, 2004)
4. Indorser
Section 63 of the Negotiable Instruments Law makes "a person
placing his signature upon an instrument otherwise than as maker,
drawer or acceptor" a general indorser "unless he clearly indicates
by appropriate words his intention to be bound in some other
capacity." (Ang Tiong vs. Lorenzo Ting, doing business under
the name & style of Prunes Preserves MFG., & Felipe Ang,
G.R. No. L-26767, February 22, 1968)
After an instrument is dishonored by non-payment, indorsers cease
to be merely secondarily liable; they become principal debtors
whose liability becomes identical to that of the original obligor.The
holder of the negotiable instrument need not even proceed against
the drawer before suing the indorser. (Maria Tuazon vs. Heirs of
Bartolome Ramos, 463 SCRA 408, 2005)

The collecting bank which accepted a post-dated check for deposit

and sent it for clearing and the drawee bank which cleared and
honored the check are both liable to the drawer for the entire face
value of the check. Allied Banking Corporation vs. Bank of the
Philippine Islands, GR. 188363, February 27, 2013
5. Warranties
The subject checks were accepted for deposit by the Bank for the
account of Sayson although they were crossed checks and the
payee was not Sayson but Melissas RTW. The Bank stamped
thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive
act, the Bank had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly, assumed the
warranty of the endorser. (Associated Bank and Conrado Cruz,
vs. Hon. Court of Appeals, and Merle V. Reyes, doing
business under the name and style "Melissas RTW," G.R.
No. 89802, May 7, 1992)
I. Presentment for Payment
The effects of crossing a check relate to the mode of its
presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment must be made by the
holder or by some person authorized to receive payment on his
behalf. Who the holder or authorized person depends on the face of
the check. (Associated Bank and Conrado Cruz, vs. Hon. Court
of Appeals, and Merle V. Reyes, doing business under the
name and style "Melissas RTW," G.R. No. 89802, May 7,
1992)
1. Necessity of Presentment for Payment
Under the Negotiable Instruments Law, an instrument not payable
on demand must be presented for payment on the day it falls due.
When the instrument is payable on demand, presentment must be
made within a reasonable time after its issue. In the case of a bill of
exchange, presentment is sufficient if made within a reasonable
time after the last negotiation thereof. (International Corporate
Bank vs. Gueco, 351 SCRA 516, 2001)
2. Parties to Whom Presentment for Payment Should Be Made
3. Dispensation with Presentment for Payment

4. Dishonor by Non-Payment
J. Notice of Dishonor
The term "notice of dishonor" denotes that a check has been
presented for payment and was subsequently dishonored by the
drawee bank. This means that the check must necessarily be due
and demandable because only a check that has become due can be
presented for payment and subsequently be dishonored. A
postdated check cannot be dishonored if presented for payment
before its due date. (Jaime Dico vs. Hon. Court of Appeals and
People of the Philippines, G.R. NO. 141669, February 28,
2005)
1. Parties to Be Notified
Notice of dishonor to the corporation, which has a personality
distinct and separate from the officer of the corporation, does not
constitute notice to the latter. The absence of notice of dishonor
necessarily deprives an accused an opportunity to preclude a
criminal prosecution. (Lao vs. Court of Appeals, G.R. No.
119178, June 20, 1997)
If the drawer or maker is an officer of a corporation, the notice of
dishonor to the said corporation is not notice to the employee or
officer who drew or issued the check for and in its behalf. (Ofelia
Marigomen vs. People of the Philippines, G.R. No. 153451,
May 26, 2005)
Under the Negotiable Instruments Law, notice of dishonor is not
required if the drawer has no right to expect or require the bank to
honor the check, or if the drawer has countermanded payment. In
the instant case, all the checks were dishonored for any of the
following reasons: "account closed", "account under garnishment",
insufficiency of funds", or "payment stopped." In the first three
instances, the drawers had no right to expect or require the bank to
honor the checks, and in the last instance, the drawers had
countermanded
payment.
(Great
Asian
Sales
Center
Corporation and Tan Chong Lin vs. the Court of Appeals and
Bancasia Finance and Investment Corporation, G.R. No.
105774, April 25, 2002)
2. Parties Who May Give Notice and Dishonor
When what was stamped on the check was Payment Stopped
Funded and DAUD which means drawn against uncollected

deposits, the check was not issued without sufficient funds and was
not dishonored due to insufficiency of funds. Even with uncollected
deposits, the bank may honor the check at its discretion in favor of
favored clients, in which case there would be no violation of B. P. 22.
(Eliza T. Tan vs. People of the Philippines, G.R. No. 141466,
January 19, 2001)
3. Effect of Notice
In the case of DAUD, the depositor has, on its face, sufficient funds
in his account, although it is not available yet at the time the check
was drawn, whereas in DAIF, the depositor lacks sufficient funds in
his account to pay the check. Moreover, DAUD does not expose the
drawer to possible prosecution for estafa and violation of BP 22,
while DAIF subjects the depositor to liability for such offenses.
(Bank of the Philippine Islands vs. Reynald R. Suarez, G.R.
No. 167750, March 15, 2010)
The failure of the prosecution to prove the existence and receipt by
petitioner of the requisite written notice of dishonor and that he was
given at least five banking days within which to settle his account
constitutes sufficient ground for his acquittal in a case for violation
of BP 22. (James Svendsen vs. People of the Philippines, G.R.
NO. 175381, February 26, 2008)
4. Form of Notice
A notice of dishonor received by the maker or drawer of the check is
thus indispensable before a conviction for violation of BP 22 can
ensue. The notice of dishonor may be sent by the offended party or
the drawee bank, and it must be in writing. A mere oral notice to
pay a dishonored check will not suffice. The lack of a written notice
is fatal for the prosecution. (Jaime Dico vs. Hon. Court of
Appeals and People of the Philippines, G.R. NO. 141669,
February 28, 2005)
5. Waiver
6. Dispensation with Notice
7. Effect of Failure to Give Notice
K. Discharge of Negotiable Instrument
1. Discharge of Negotiable Instrument

In depositing the check in his name, the depositor did not become
the out-right owner of the amount stated therein. By depositing the
check with the bank, depositor was, in a way, merely designating
the bank as the collecting bank. This is in consonance with the rule
that a negotiable instrument, such as a check, whether a managers
check or ordinary check, is not legal tender. As such, after receiving
the deposit, under its own rules, the bank shall credit the amount to
the depositors account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check
has been cleared for deposit. The depositors contention that after
the lapse of the 35-day period the amount of a deposited check
could be withdrawn even in the absence of a clearance thereon,
otherwise it could take a long time before a depositor could make a
withdrawal is untenable. Said practice amounts to a disregard of the
clearance requirement of the banking system. Bank of the
Philippine Islands vs. Court of Appeals, 326 SCRA 641 (2000)
Mere delivery of a check does not discharge the obligation. The
obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized. Thus,
although the value of a check was deducted from the funds of the
drawer but the funds were never delivered to the payee because
the drawee bank set off the amount against the losses it incurred
from the forgery of the drawers check, the drawers obligation to
the payee remains unpaid. Cebu International Finance
Corporation vs. Court of Appeals, 316 SCRA 488 (1999)
While Section 119 of the Negotiable Instrument Law in relation to
Article 1231 of the Civil Code provides that one of the modes of
discharging a negotiable instrument is by any other act which will
discharge a simple contract for the payment of money, such as
novation, the acceptance by the holder of another check which
replaced the dishonored bank check did not result to novation.
There are only two ways which indicate the presence of novation
and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be
explicitly stated and declared in unequivocal terms as novation is
never presumed. Secondly, the old and the new obligations must be
incompatible on every point. In the instant case, there was no
express agreement that the holders acceptance of the replacement
check will discharge the drawer and endorser from liability. Neither
is there incompatibility because both checks were given precisely to
terminate a single obligation arising from the same transaction.

Anamer Salazar vs. JY Brothers Marketing Corporation, GR

no. 171998, October 20, 2010
2. Discharge of Parties Secondarily Liable
3. Right of Party Who Discharged Instrument
4. Renunciation by Holder
L. Material Alteration
1. Concept
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable
Instruments Law. (Philippine National Bank vs. Court of
Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508,
April 25, 1996)
The serial number is not an essential requisite for negotiability
under Section 1 of the Negotiable Instrument Law and an alteration
of which is not material. The alteration of the serial number does
not change the relations between the parties. (Philippine National
Bank vs. Court of Appeals, Capitol City Development Bank,
Philippine Bank of Communications, and F. Abante
Marketing, G.R. No. 107508, April 25, 1996)
Alterations of the serial numbers do not constitute material
alterations on the checks. Since there were no material alterations
on the checks, respondent as drawee bank has no right to dishonor
them and return them to petitioner, the collecting bank. (The
International Corporate Bank, Inc. vs. Court of Appeals and
Philippine National Bank, G.R. NO. 129910, September 5,
2006)
2. Effect of Material Alteration
Payment made under materially altered instrument is not payment
done in accordance with the instruction of the drawer. When the

drawee bank pays a materially altered check, it violates the terms

of the check, as well as its duty to charge its client's account only
for bona fide disbursements he had made. Since the drawee bank,
in the instant case, did not pay according to the original tenor of the
instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer's account which it was
expected to treat with utmost fidelity. (Metropolitan Bank and
Trust Company vs. Renato D. Cabilzo, G.R. No. 154469,
December 6, 2006)
M. Acceptance
1. Definition
The acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer. (Prudential Bank, Petitioner,
v. Intermediate Appellate Court, Philippine Rayon Mills Inc.
and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)
Indeed, "acceptance" and "payment" are, within the purview of the
law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance"
thereof. In the words of the Law, "the acceptance of a bill is the
signification by the drawee of his assent to the order of the drawer,"
which, in the case of checks, is the payment, on demand, of a given
sum of money. (Philippine National Bank vs. the Court of
Appeals and Philippine Commercial and Industrial Bank, G.R.
No. L-26001, October 29, 1968)
2. Manner
When a check had been certified by the drawee bank, such
certification is equivalent to acceptance because it enables the
holder to use it as money. Also, where a holder procures a check to
be certified, the check operates as an assignment of a part of the
funds to the creditor. (New Pacific Timber vs. Seneris, 101
SCRA 686, 1980)
Acceptance may be done in writing by the drawee in the bill itself,
or in a separate instrument. (Prudential Bank, Petitioner, v.
Intermediate Appellate Court, Philippine Rayon Mills Inc.
and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)
3. Time for Acceptance

4. Rules Governing Acceptance

N. Presentment for Acceptance
1. Time/Place/Manner of Presentment
Presentment for acceptance is defined as the production of a bill of
exchange to a drawee for acceptance. Presentment for acceptance
is necessary only 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, or where the bill expressly stipulates
that it shall be presented for acceptance, or where the bill is drawn
payable elsewhere than at the residence or place of business of the
drawee. (Prudential Bank vs. Intermediate Appellate Court,
Philippine Rayon Mills Inc. and Anacleto R. Chi, G.R. No.
74886, December 8, 1992)
2. Effect of Failure to Make Presentment
While it is true that the delivery of a check produces the effect of
payment only when it is encashed, pursuant to Art. 1249 of the Civil
Code, the rule is otherwise if the debtor is prejudiced by the
creditors unreasonable delay in presentment. After more than ten
(10) years from the payment in part by cash and in part by check,
the presumption is that the check had been encashed, and the
failure to encash for more than ten (10) years undoubtedly resulted
in the impairment of the check through unreasonable and
unexplained delay on the part of the payee. (Myron C. Papa vs.
A.U. Valencia & Co., Inc., et al. G.R. No. 105188. January 23,
1998)
3. Dishonor by Non-Acceptance
O. Promissory Notes
Where an instrument containing the words I promise to pay is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon. Under Section 17 (g) of the Negotiable
Instrument Law and Art. 1216 of the Civil Code, where the
promissory note was executed jointly and severally by two or more
persons, the payee of the promissory note had the right to hold any
one or any two of the signers of the promissory note responsible for
the payment of the amount of the note. (Philippine National
Bank vs. Concepcion Mining Company, Inc., et al., G.R. No. L16968. July 31, 1962.)

The buyer of a car shall be liable to pay the unpaid balance on the
promissory note and not just the installments due and payable
before the said automobile was carnapped. Being the principal
contract, the promissory note is unaffected by whatever befalls the
subject matter of the accessory contract. (Perla Compania De
Seguros, Inc. vs. the Court of Appeals, Herminio Lim And
Evelyn Lim, G.R. No. 96452, May 7, 1992)
When a promissory note expresses "no time for payment," it is
deemed "payable on demand. (Jose L. Ponce de leon vs.
Rehabilitation Finance Corporation, G.R. No. L-24571,
December 18, 1970)
When there is a discrepancy between the amount in words and the
amount in figures in the check, the rule in the Negotiable
Instruments Law is that it would be the amount in words that would
prevail. (People of the Philippines vs. Martin L. Romero and
Ernesto C. Rodriguez, G.R. No. 112985, April 21, 1999)
An instrument which begins with I, We, or Either of us promise to
pay, when signed by two or more persons, makes them solidarily
liable. Also, the phrase joint and several binds the makers jointly
and individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object
of the suit. (Astro Electronics Corp. and Peter Roxas vs.
Philippine Export and Foreign Loan Guarantee Corporation,
G.R. No. 136729, September 23, 2003)
P. Checks
1. Definition
Settled is the doctrine that a check is the only a substitute for
money and not money; hence, the delivery of such an instrument
does not, by itself, operate as payment. This is especially true in
case of post-dated check. Thus, the issuance of a post-dated check
was not effective payment. It did not comply with the cardholders
obligation to pay his past due credit card charges. Consequently,
the card company was justified in suspending his credit card. BPI
Card Corporation vs. Court of Appeals, 296 SCRA 260 (1998)
2. Kinds
Under accepted banking practice, crossing a check is done by
writing two parallel lines diagonally on the left top portion of the
checks. The crossing is special where the name of a bank or a

business institution is written between the two parallel lines, which

means that the drawee should pay only with the intervention of that
company. The crossing is general where the words written between
the two parallel lines are "and Co." or "for payees account only,"
which means that the drawee bank should not encash the check but
merely accept it for deposit. (Associated Bank and Conrado
Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing
business under the name and style "Melissas RTW," G.R.
No. 89802, May 7, 1992)
The effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be
negotiated only once to one who has an account with a bank; and
(3) that the act of crossing the check 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 pursuant to that
purpose. (State Investment House vs. IAC, 175 SCRA 310,
1989)
A memorandum check is an evidence of debt against the drawer
and although may not be intended to be presented, has the same
effect as an ordinary check and if passed on to a third person, will
be valid in his hands like any other check. (People vs. Nitafan,
G.R. No. 75954, October 22, 1992)
A cashiers check is a primary obligation of the issuing bank and
accepted in advance by its mere issuance. By its very nature, a
cashiers check is the banks order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind
the check. A cashiers check by its peculiar character and general
use in the commercial world is regarded substantially to be as good
as the money which it represents. (Tan vs. Court of Appeals,
G.R. No. 108555, December 20, 1994)
Payment in check by the debtor may be acceptable as valid, if no
prompt objection to said payment is made. Consequently, the
debtors tender of payment in the form of managers check is valid.
Thus, where the seller of real property tendered the return of the
reservation fee in the form of managers check because the sale
agreement was not fully consummated owing to the failure of the
buyer to pay the balance of the purchase price within the stipulated
period, the tender of the managers check was considered a valid
tender of payment. When the buyer refused to accept the check,
the consignation of the check with the court was sufficient to satisfy
the obligation. (Teddy G. Pabugais vs. Dave Sahijiwani, G.R.
No. 156846, February 23, 2004)

While its manager forged the signature of the authorized signatories

of clients in the application for managers checks and forged the
signatures of the payees thereof, the drawee bank also failed to
exercise the highest degree of diligence required of banks in the
case at bar. It allowed its manager to encash the Managers checks
that were plainly crossed checks. A crossed check is one where two
parallel lines are drawn across its face or across its corner. Based on
jurisprudence, the crossing of a check has the following effects: (a)
the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only once to the one who has an
account with the bank; and (c) the act of crossing the check serves
as a warning to the holder that the check has been issued for a
definite purpose and he must inquire if he received the check
pursuant to this purpose; otherwise, he is not a holder in due
course. In other words, the crossing of a check is a warning that the
check should be deposited only in the account of the payee. When a
check is crossed,it is the duty of the collecting bank to ascertain
that the check is only deposited to the payees account. Philippine
Commercial International Bank vs. Balmaceda,G.R. No.
158143, September 21, 2011
3. Presentment for Payment
A judgment creditor cannot validly refuse acceptance of the
payment of the judgment obligation tendered in the form of a
cashiers check. A cashiers check issued by a bank of good
standing is deemed as cash. (New Pacific Timber vs. Seneris,
G.R. No. 41764, December 19, 1980)
The obligation of the judgment debtor subsists when the check
issued by a judgment debtor was made payable to the sheriff who
encashed the same but failed to deliver its proceeds to the
judgment creditor. This is because a check does not produce the
effect of payment until encashed. (Philippine Airlines vs. Court
of Appeals, G.R. No. 49188, January 30, 1990)
Tendering a check on the last day of the grace period to pay the
purchase price is not valid and a seller has a right to cancel the
contract. A check, be it a managers check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused by the creditor.
(Bishop of Malolos vs. Intermediate Appellate Court, G.R.
No. 72110, November 16, 1990)

A check may be used for the exercise of the right of redemption, the
same being a right and not an obligation. (Fortunado vs. Court of
Appeals, 196 SCRA 26, 1991)
The judgment creditor may validly refuse the tender of payment
partly in check and partly in cash. A cashiers check tendered by the
judgment debtor to satisfy the judgment debt is not a legal tender.
(Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290, June 4,
1993)
A check does not constitute legal tender, but once the creditor
accepted a fully funded check to settle an obligation, he is estopped
from later on denouncing the efficacy of such tender of payment. By
accepting the tendered check and converting it into money, the
creditor is presumed to have accepted it as payment and to hold
otherwise would be inequitable and unfair to the obligor. (Far East
Bank & Trust Company vs. Diaz Realty, Inc., G.R. No. 138588,
August 23, 2001)
A stale check is one which has not been presented for payment
within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. (International Corporate Bank vs.
Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No.
141968, February 12, 2001)
Where a managers check made payable to cash and appearing
regular on its face, was presented to another bank that immediately
honors it no faulty may be attributed to such bank in relying upon
the integrity of the check, even if payment thereon was later
ordered stopped by the drawer-bank because the one who encashed
the check was actually not the intended payee. In other words, as
between the bank that honored the managers check and the
drawer-bank, it is the latter that should bear the loss. (Security
Bank and Trust Company vs. Rizal Commercial Banking
Corporation, G.R. No. 170984, 30 January 2009)
a. Time
A check must be presented for payment within a reasonable time
after its issue, and in determining what is a reasonable time,
regard is to be had to the nature of the instrument, the usage of
trade or business with respect to such instruments and the facts of
the particular case. The test is whether the payee employed such
diligence as a prudent man exercise in his own affairs. This is
because the nature and theory behind the use of a check points to
its immediate use and payability. (International Corporate Bank

vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No.
141968, February 12, 2001)
b. Effect of Delay
Failure to present for payment within a reasonable time will result to
the discharge of the drawer only to the extent of the loss caused by
the delay. Failure to present on time, thus, does not totally wipe out
all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this
case, the debtors have not alleged, much less shown that they or
the bank which issued the managers check has suffered damage or
loss caused by the delay or non-presentment. Definitely, the original
obligation to pay certainly has not been erased. (International
Corporate Bank vs. Sps. Francis S. Gueco and Ma. Luz E.
Gueco, G.R. No. 141968, February 12, 2001)
IV. Insurance Code
A. Concept of Insurance
One test in order to determine whether one is engaged in insurance
business is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal
object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is not insurance.
In this case, Health Maintenance Organizations (HMOs) are not
insurance business. (Philippine Health Care Providers, Inc., vs.
Commissioner of Internal Revenue, G.R. No. 167330,
September 18, 2009)
The contract of insurance is one of perfect good faith (uferrimal
fidei) not for the insured alone, but equally so for the insurer; in
fact, it is mere so for the latter, since its dominant bargaining
position carries with it stricter responsibility. (Qua Chee Gan v.
Law Union, 98 Phil 85, 1955)
Being a contract of adhesion, terms of a policy are to be construed
strictly against the party which prepared the contract - the insurer.
By reason of exclusive control of insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of
the insured, especially to avoid forfeiture. (Philamcare Health
System vs. Court of Appeals, 379 SCRA 356, 2002)

The cardinal principle in Insurance Law is that a policy or contract of

insurance is to be construed liberally in favor of the insured and
strictly as against the insurance company, yet, contracts of
insurance, like other contracts, are to be construed according to the
sense and meaning of the terms, which the parties themselves have
used. (Lalican vs. Insular Life Assurance Company, Ltd. 597
SCRA 159, 2009)
Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and
popular sense. Accordingly, in interpreting the exclusions in an
insurance contract, the terms used specifying the excluded classes
therein are to be given their meaning as understood in common
speech. A contract of insurance is a contract of adhesion. So, when
the terms of the insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Alpha Insurance
and Surety Co. vs. Castor, GR No. 198174, September 2,
2013
B. Elements of an Insurance Contract
Under Sec. 2(a) of the Insurance Code, an insurance contract is an
agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an
unknown or contingent event, and with the following elements: 1.)
Insured has an insurable interest; 2.) Insured is subject to a risk of
loss by the happening of the designated peril; 3.) Insurer assumes
risk; 4.) Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons bearing a
similar risk; and 5.) In consideration of the insurers promise, the
insured pays a premium. (Philamcare Health System vs. Court
of Appeals, 379 SCRA 432, 1997)
For purposes of determining the liability of a health care provider to its
members, a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the
member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider
must pay for the same to the extent agreed upon under the contract.
Limitations as to liability must be distinctly specified and clearly
reflected in the extent of coverage which the company voluntary
assume, otherwise, any ambiguity arising therein shall be construed in

favor of the member. Being a contract of adhesion, the terms of an

insurance contract are to be construed strictly against the party which
prepared the contract - the insurer. This is equally applicable to Health
Care Agreements. The phraseology used in medical or hospital service
contracts, such as standard charges , must be liberally construed in
favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted,
and exclusionary clauses of doubtful import should be strictly
construed against the provider. Thus, if the member, while on vacation,
underwent a procedure in the USA, the standard charges referred to in
the contract should mean standard charges in USA and not the cost
had the procedure been conducted in the Philippines. Fortune
Medicare Inc. vs Amorin. G.R. No. 195872, March 12, 2014.

C. Characteristics/Nature of Insurance Contracts

The only persons entitled to claim the insurance proceeds are either
the insured, if still alive; or the beneficiary, if the insured is already
deceased, upon the maturation of the policy. The exception to this
rule is a situation where the insurance contract was intended to
benefit third persons who are not parties to the same in the form of
favorable stipulations or indemnity. In such a case, third parties may
directly sue and claim from the insurer. Because no legal
proscription exists in naming as beneficiaries the children of illicit
relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition
on donations under Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children, the designated
beneficiaries, to the exclusion of heirs. (Heirs Of Loreto c.
Maramag vs. Eva Verna De Guzman Maramag, et al., G.R.
No. 181132, June 5, 2009)
The insurance contract is primarily a risk-distributing device, a
mechanism by which all members of a group exposed to a particular
risk contribute premiums to an insurer. From these contributory
funds are paid whatever losses occur due to exposure to the peril
insured against. Each party therefore takes a risk: the insurer being
compelled upon the happening of the contingency to pay the entire
sum agreed upon; and the insured of a parting with the amount

required as premium, without receiving anything therefore in case

the contingency does not happen. (Tibay vs. Court of Appeals,
257 SCRA 126, 1996)
D. Classes
1. Marine
The evidence shows that the loss of the cargo was due to the perils
of the ship; that the sinking of the barge was due to improper
loading of the logs on one side so that the barge was tilting on one
side and for that it did not navigate on even keel; that it was no
longer seaworthy that was why it developed leak. A loss which, in
the ordinary course of events, results from the natural and
inevitable action of the sea, from the ordinary wear and tear of the
ship, or from the negligent failure of the ship's owner to provide the
vessel with proper equipment to convey the cargo under ordinary
conditions, is not a peril of the sea but such a loss is rather due to
what has been aptly called the 'peril of the ship.' The insurer
undertakes to insure against perils of the sea and similar perils, not
against perils of the ship. (Isabela Roque, doing business under
the name and style of Isabela Roque Timber Enterprises, et
al., vs. The Intermediate Appellate Court, et al., G.R. No. L66935, November 11, 1985)
The rusting of steel pipes in the course of a voyage is a peril of the
sea in view of the toll on the cargo of wind, water, and salt
conditions. (Cathay Insurance Co., vs. The Court of Appeals,
et al., G.R. No. L-76145, June 30, 1987)
Fire may not be considered a natural disaster or calamity since it
almost always arises from some act of man or by human means. It
cannot be an act of God unless caused by lightning or a natural
disaster or casualty not attributable to human agency. In the case at
bar, it is not disputed that a small flame was detected on the
acetylene cylinder and that by reason thereof, the same exploded
despite efforts to extinguish the fire. Verily, the cause of the fire was
the fault or negligence of ESLI. (Philippine Home Assurance
Corporation vs. Court of Appeals, G.R. No. 106999, June 20,
1996)
A marine insurance policy providing that the insurance was to be
against all risks must be construed as creating a special insurance
and extending to other risks than are usually contemplated, and
covers all losses except such as arise from the fraud of the insured.
The burden of the insured, therefore, is to prove merely that the

goods he transported have been lost, destroyed or deteriorated and

thereafter, the burden is shifted to the insurer to prove that the loss
was due to excepted perils. In the present case, there being no
showing that the loss was caused by any of the excepted perils, the
insurer is liable under the policy. (Filipino Merchants Insurance
Co., Inc., vs. Court Of Appeals, et al., G.R. No. 85141,
November 28, 1989)
An all risks provision of a marine policy creates a special type of
insurance which extends coverage to risks not usually contemplated
and avoids putting upon the insured the burden of establishing that
the loss was due to peril falling within the policys coverage. The
insurer can avoid coverage upon demonstrating that a specific
provision expressly excludes the loss from coverage but in this case,
the damage caused to the cargo has not been attributed to any of
the exceptions provided for nor is there any pretension to this
effect. (Choa Tiek Seng, doing business under the name and
style of Sengs Commercial Enterprises vs. The Court of
Appeals, et al., G.R. No. 84507, March 15, 1990)
2. Fire
As defined by Section 60 of the Insurance Code, an open policy is
one in which the value of the thing insured is not agreed upon but is
left to be ascertained in case of loss. This means that the actual
loss, as determined, will represent the total indemnity due the
insured from the insurer except only that the total indemnity shall
not exceed the face value of the policy. Where the actual loss in an
open policy has been ascertained, the factual determination should
be respected in the absence of proof that it was arrived at
arbitrarily.
(Development
Insurance
Corporation
vs.
Intermediate Appellate Court, et al., G.R. No. L-71360, July
16, 1986)
3. Casualty
It should be noted that the insurance policy entered into by the
parties is a theft or robbery insurance policy which is a form of
casualty insurance. Except with respect to compulsory motor
vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance
in particular. These contracts are, therefore, governed by the
general provisions applicable to all types of insurance. Outside of
these, the rights and obligations of the parties must be determined
by the terms of their contract, taking into consideration its purpose
and always in accordance with the general principles of insurance

law. (Fortune Insurance and Surety Co., Inc. vs. Court of

Appeals and Producers Bank of the Philippines, G.R. No.
115278, May 23, 1995)
It has been aptly observed that in burglary, robbery, and theft
insurance, the opportunity to defraud the insurerthe moral hazard
is so great that insurers have found it necessary to fill up their
policies with countless restrictions, many designed to reduce this
hazard. Seldom does the insurer assume the risk of all losses due to
the hazards insured against. Persons frequently excluded under
such provisions are those in the insureds service and employment.
The purpose of the exception is to guard against liability should the
theft be committed by one having unrestricted access to the
property. (Fortune Insurance and Surety Co., Inc. vs. Court of
Appeals and Producers Bank of the Philippines, G.R. No.
115278, May 23, 1995)
4. Suretyship
A surety contract is merely a collateral one, its basis is the principal
contract or undertaking which it secures. Necessarily, the
stipulations in such principal agreement must at least be
communicated or made known to the surety. (First LepantoTaisho Insurance Corporation vs. Chevron Philippines, Inc.,
G.R. No. 177839, January 18, 2012)
The surety bond must be read in its entirety and together with the
contract between NPC and the contractors. The provisions must be
construed together to arrive at their true meaning. Certain
stipulations cannot be segregated and then made to control. In the
case at bar, it cannot be denied that the breach of contract in this
case, that is, the abandonment of the unfinished work of the
transmission line of the NPC by the contractor FEEI was within the
effective date of the contract and the surety bond. Such
abandonment gave rise to the continuing liability of the bond as
provided for in the contract which is deemed incorporated in the
surety bond executed for its completion. (National Power
Corporation vs. Court of Appeals, et al., G.R. No. L-43706,
November 14, 1986)
Under Section 176 of the Insurance Code, as amended, the liability
of a surety in a surety bond is joint and several with the principal
obligor. Finman's bond was posted by Pan Pacific in compliance with
the requirements of Article 31 of the Labor Code in order to
guarantee compliance with prescribed recruitment procedures, rules
and regulations, and terms and, conditions of employment as

appropriate. While Finman has refrained from attaching a copy of

the bond it had issued to its Petition for Certiorari, there can be no
question that the conditions of the surety bond include the POEA
Rules and Regulation. It is settled doctrine that the conditions of a
bond specified and required in the provisions of the statute or
regulation providing for the submission of the bond, are
incorporated or built into all bonds tendered under that statute or
regulation, even though not there set out in printer's ink. (Finman
General Assurance Corporation vs. William Inocencio, et al.,
G.R. No. 90273-75, November 15, 1989)
Section 177 of the Insurance Code states that the surety is entitled
to payment of the premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and until the
premium therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety. A continuing bond, as in this case
where there is no fixed expiration date, may be canceled only by
the obligee, which is the NFA, by the Insurance Commissioner, and
by the court. By law and by the specific contract involved in this
case, the effectivity of the bond required for the obtention of a
license to engage in the business of receiving rice for storage is
determined not alone by the payment of premiums but principally
by the Administrator of the NFA. (Country Bankers Insurance
Corporation vs. Antonio Lagman, G.R. No. 165487, July 13,
2011)
The extent of the suretys liability is determined by the language of the
suretyship contract or bond itself. It can not be extended by
implications beyond the terms of the contract. Having accepted the
bond, the creditor is bound by the recital in the surety bond that the
terms and conditions of its distributorship contract be reduced in
writing or at the very least communicated in writing to the surety. Such
non-compliance by the creditor impacts not on the validity or legality
of the surety contract but on the creditors right to demand
performance. First Lepanto-Taisho Insurance Corporation vs
Chevron Philippines, GR No. 177839, January 18, 2012

5. Life
Where a GSIS member failed to state his beneficiary or beneficiaries
in his application for membership, the proceeds of the retirement

benefits shall accrue to his estate and will be distributed among his
legal heirs in accordance with the law on intestate succession. (Re:
Claims for Benefits of the Heirs of the Late Mario vs.
Chanliongco, Adm. Matter No. I90-RET., October 18, 1977)
A life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned for both are founded upon the same
consideration: liberality. A beneficiary is like a donee, because from
the premiums of the policy which the insured pays, out of liberality,
the beneficiary will receive the proceeds or profits of said insurance.
As a consequence, the proscription in Article 739 of the new Civil
Code should equally operate in life insurance contracts. The
conviction for adultery or concubinage is not necessary before the
disabilities mentioned in Article 739 may effectuate. It would be
sufficient if evidence preponderates upon the guilt of the consort for
the offense indicated. (The Insular Life Assurance Company,
Ltd., vs. Carponia t. Ebrado And Pascuala Vda. De Ebrado,
G.R. No. l-44059, October 28, 1977)
There is nothing in the policy that relieves the insurer of the
responsibility to pay the indemnity agreed upon if the insured is
shown to have contributed to his own accident. Indeed, most
accidents are caused by negligence. Lim was unquestionably
negligent and that negligence cost him his own life. But it should
not prevent his widow from recovering from the insurance policy he
obtained precisely against accident. (Sun Insurance Office, Ltd.,
vs. The Court of Appeals, G.R. No. 92383, July 17, 1992)
The legitimate heirs of the insured who were not designated as
beneficiaries in the life insurance policies are considered third parties
to the insurance contracts and, thus are not entitled to the proceeds
thereof. The insurance companies have no legal obligation to turn over
the insurance proceeds to them. The revocation of the common law
spouse of the insured as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that
the designation of the illegitimate children as beneficiaries in the
Insurance Policies remains valid. Because no legal proscription exists in
naming as beneficiaries children of illicit relationships by the insured,
the shares of the common-law spouse in the insurance proceeds,
whether forfeited by the Court in view of the prohibition on donation
under Article 739 of the Civil Code or by the insurers themselves for
reasons based on the insurance contracts, must be awarded to the said
illegitimate children, the designated beneficiaries, to the exclusion of
the legitimate heirs. It is only in cases where the insured has not
designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy

proceeds shall redound to the benefit of the estate of the insured.

Heirs of Loreto C. Maramag vs. Maramag, GR No. 181132, June
5, 2009

6. Compulsory Motor Vehicle Liability Insurance

Insurers liability under Third Party Liability coverage accrues
immediately upon occurrence of injury or event upon which the
liability depends and does not depend on the recovery of judgment
by the injured party against the insured. Therefore, insurer can be
sued and held directly liable by the injured party to the extent of the
coverage (Vda. De Maglana vs. Hon. Cosolacion, 212 SCRA
268, 1992)
The liability of the insured carrier or vehicle owner is based on tort,
in accordance with the provisions of the Civil Code; while that of the
insurer arises from contract, particularly, the insurance policy. The
third-party liability of the insurer is only up to the extent of the
insurance policy and that required by law; and it cannot be held
solidarily liable for anything beyond that amount. (The Heirs of
George Y. Poe vs. Malayan Insurance Company, Inc., G.R. No.
156302, April 7, 2009 14, 1996)
The main purpose of the authorized driver clause is that a person
other than the insured owner, who drives the car on the insureds
order, such as his regular driver, or with his permission, such as a
friend or member of the family or the employees of a car service or
repair shop must be duly licensed drivers and have no
disqualification to drive a motor vehicle. The mere happenstance
that the employee(s) of the shop owner diverts the use of the car to
his own illicit or unauthorized purpose in violation of the trust
reposed in the shop by the insured car owner does not mean that
the authorized driver clause has been violated such as to bar
recovery, provided that such employee is duly qualified to drive
under a valid drivers license. It is the theft clause, not the
authorized driver clause, that applies. (Jewel Villacorta vs. The
Insurance Commission, et al., G.R. No. 54171. October 28,
1980)
Under the authorized driver clause, an authorized driver must not
only be permitted to drive by the insured but it is also essential that
he is permitted under the law and regulations to drive the motor
vehicle and is not disqualified from so doing under any enactment
or regulation. At the time of the accident, Stokes had been in the

Philippines for more than 90 days and under the law, he could not
drive a motor vehicle without a Philippine drivers license. He was
therefore not an authorized driver under the terms of the
insurance policy in question, and MALAYAN was right in denying the
claim of the insured. (James Stokes, as Attorney-in-Fact of
Daniel Stephen Adolfson vs. Malayan Insurance Co., Inc.,
G.R. No. L-34768. February 24, 1984)
The requirement under the authorized driver clause that the
driver be permitted in accordance with the licensing or other laws
or regulations to drive the Motor Vehicle and is not disqualified from
driving such motor vehicle by order of a Court of Law or by reason
of any enactment or regulation in that behalf, applies only when
the driver is driving on the insureds order or with his permission.
It does not apply when the person driving is the insured himself.
(Andrew Palermo vs. Pyramid Insurance Co., Inc., G.R. No. L36480. May 31, 1988)
Where the drivers temporary operators permit had expired, and
the insurance policy states that a driver with an expired Traffic
Violation Receipt or expired Temporary Operators permit is not
considered an authorized driver within the meaning of the policy,
the expiration of the same bars recovery under the policy. In liability
insurance, the parties are bound by the terms of the policy and the
right of insured to recover is governed thereby. (Agapito Gutierrez
vs. Capital Insurance & Surety Co., Inc., G.R. No. L-26827,
June 29, 1984)
From a reading Section 378, the following rules on claims under the
no fault indemnity provision, where proof of fault or negligence is
not necessary for payment of any claim for death or injury to a
passenger or a third party, are established: 1.) A claim may be
made against one motor vehicle only. 2.) If the victim is an occupant
of a vehicle, the claim shall lie against the insurer of the vehicle in
which he is riding, mounting or dismounting from. 3.) In any other
case (i.e. if the victim is not an occupant of a vehicle), the claim
shall lie against the insurer of the directly offending vehicle. 4.) In
all cases, the right of the party paying the claim to recover against
the owner of the vehicle responsible for the accident shall be
maintained. (Perla Compania De Seguros, Inc., vs. Hon.
Constante A. Ancheta, Presiding Judge of the Court of First
Instance of Camarines Norte, Branch III, et al., G.R. No. L49699, August 8, 1988)
E. Insurable Interest

1. In Life/Health
Every person has an insurable interest in the life and health of: 1.)
Himself, or his spouse and of his children; 2.) Any person: (a) on
whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest; (b) under legal obligation to him
for the payment of money, respecting property or service, of which
death or illness might delay or prevent the performance; and (c)
upon whom whose life any estate or interest vested in him depends.
(Philamcare Health System vs. Court of Appeals, 379 SCRA
356, 2002)
The existence of an insurance interest gives a person the legal right
to insure the subject matter of the policy of insurance. Section 19 of
the Insurance Code states that an interest in the life or health of a
person insured must exist when the insurance takes effect, but need
not exist thereafter or when the loss occurs. (Lalican vs. Insular
Life Assurance Company Ltd, 597 SCRA 159, 2009)
An employer corporation has an insurable interest on its manager
where the death of the manager will be detrimental to the
corporations operations. (El Oriente Fabrica de Tabacos vs.
Posada, 56 Phil 147, 1931)
2. In Property
A non-life insurance policy such as the fire insurance policy taken by
spouses Cha over their merchandise is primarily a contract of
indemnity. Insurable interest in the property insured must exist at
the time the insurance takes effect and at the time the loss occurs.
The basis of such requirement of insurable interest in property
insured is based on sound public policy: to prevent a person from
taking out an insurance policy on property upon which he has no
insurable interest and collecting the proceeds of said policy in case
of loss of the property. In such a case, the contract of insurance is a
mere wager which is void under Section 25 of the Insurance Code.
(Spouses Nilo Cha and Stella Uy Cha vs. Court of Appeals,
G.R. No. 124520. August 18, 1997)
With the transfer of the location of the subject properties, without
notice and without the insurers consent, after the renewal of the
policy, the insured clearly committed concealment, misrepresentation
and a breach of a material warranty. Section 26 of the Insurance Code
provides that a neglect to communicate that which a party knows and
ought to communicate, is called a concealment.

Under Section 27 of the Insurance Code, a concealment entitles the

injured party to rescind a contract of insurance. Moreover, under
Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of
the thing insured. Section 168 of the Insurance Code provides, as
follows: An alteration in the use or condition of a thing insured from
that to which it is limited by the policy made without the consent of the
insurer, by means within the control of the insured, and increasing the
risks, entitles an insurer to rescind a contract of fire insurance.
Malayan Insurance Company vs. PAP Co. (PHIL. BRANCH). G.R.
No. 200784, August 07, 2013.
3. Double Insurance and Over Insurance
A double insurance exists where the same person is insured by
several insurers separately in respect of the same subject and
interest. Since, the insurable interests of a mortgagor and a
mortgagee on the mortgaged property are distinct and separate,
the two policies of the PFIC do not cover the same interest as that
covered by the policy of the private respondent, no double
insurance exists. (Armando Geagonia vs. Court of Appeals, et
al., G.R. No. 114427, February 6, 1995)
By the express provision of Section 93 of the Insurance Code,
double insurance exists where the same person is insured by
several insurers separately in respect to the same subject and
interest. The requisites in order for double insurance to arise are as
follows: 1.) The person insured is the same; 2.) Two or more insurers
insuring separately; 3.) There is identity of subject matter; 4.) There
is identity of interest insured; and 5.) There is identity of the risk or
peril insured against. In the present case, even though the two
insurance policies were issued over the same goods and cover the
same risk, there arises no double insurance since they were issued
to two different persons/entities having distinct insurable interests.
Necessarily, over insurance by double insurance cannot likewise
exist. (Malayan Insurance Co., Inc., vs. Philippine First
Insurance Co., Inc. and Reputable Forwarder Services, Inc.,
G.R. No. 184300, July 11, 2012)
4. Multiple or Several Interests on Same Property
As to a mortgaged property, the mortgagor and the mortgagee
have each an independent insurable interest therein and both
interests may be covered by one policy, or each may take out a
separate policy covering his interest, either at the same or at

separate times. The mortgagor's insurable interest covers the full

value of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property. The mortgagee's
insurable interest is to the extent of the debt, since the property is
relied upon as security thereof, and in insuring he is not insuring the
property but his interest or lien thereon. (Armando Geagonia vs.
Court of Appeals, et al., G.R. No. 114427, February 6, 1995)
Where a mortgagor pays insurance premium under group insurance
policy (Mortgage Redemption Insurance), making loss payable to
mortgagee, the insurance is on mortgagors interest, and mortgagor
continues to be a party to the contract. In this type of policy
insurance, mortgagee is simply an appointee of the insurance fund,
such loss-payable clause does not make mortgagee a party to the
contract (Great Pacific Life vs. Court of Appeals, 316 SCRA
677, 1999)
F. Perfection of the Contract of Insurance
1. Offer and Acceptance/Consensual
It needs not much emphasis to say that an application form does
not prove that insurance was secured. Anybody can get an
application form for insurance, fill it up at home before filing it with
the insurance company. In fact, the very first sentence of the form
states that it merely forms the basis of a contract between you and
NZILife. There was no contract yet. Furthermore, there is no proof
that the insurance company approved the proposal, no proof that
any premium payments were made, and no proof from the record of
exhibits as to the date it was accomplished. It appearing that no
insurance was issued to Lam Po Chun with accused-appellant as the
beneficiary, the motive capitalized upon by the trial court vanishes.
(People of the Philippines vs. Yip Wai Ming, G.R. No. 120959,
November 14, 1996)
Where the provisions in the binding deposit receipt shows that it is
intended to be merely a provisional or temporary insurance contract
and the same is merely an acknowledgment, on behalf of the
company, that the latter's branch office had received from the
applicant the insurance premium and had accepted the application
subject for processing by the insurance company, the acceptance
thereof is merely conditional and is subordinated to the act of the
company in approving or rejecting the application. Since Pacific Life
disapproved the insurance application, the binding deposit receipt
in question never become in force at anytime since in life insurance,
a "binding slip" or "binding receipt" does not insure by itself. (Great

Pacific Life Assurance Company vs. Honorable Court of

Appeals, G.R. No. L-31845. April 30, 1979)
For a valid cancellation of the policy,the following requisites must
concur: 1.) There must be prior notice of cancellation to the insured;
2.) The notice must be based on the occurrence, after the effective
date of the policy, of one or more of the grounds mentioned; 3.) The
notice must be (a) in writing, (b) mailed, or delivered to the named
insured, (c) at the address shown in the policy; 4. It must state (a)
which of the grounds mentioned in Section 64 is relied upon and (b)
that upon written request of the insured, the insurer will furnish the
facts on which the cancellation is based. MICO claims it canceled
the policy in question for non-payment of premium. However, there
is no proof that the notice, assuming it complied with the other
requisites, was actually mailed to and received by Pinca. (Malayan
Insurance Co., Inc. vs. Gregoria Cruz Arnaldo, in her capacity
as the Insurance Commissioner, et al., G.R. No. L-67835,
October 12, 1987)
a. Delay in Acceptance
b. Delivery of Policy
2. Premium Payment
By accepting the promise of Plastic Era to to pay the insurance
premium within thirty (30) days from the effective date of policy,
Capital Insurance has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived the provision therein that it
would only pay for the loss or damage in case the same occurs after
the payment of the premium. Considering that the insurance policy
is silent as to the mode of payment, Capital Insurance is deemed to
have accepted the promissory note in payment of the premium.
This rendered the policy immediately operative on the date it was
delivered. By accepting its promise to pay, Capital Insurance had in
effect extended credit to Plastic Era. Therefore, Capital Insurance
did not have the right to cancel the policy for nonpayment of the
premium except by putting Plastic Era in default and giving it
personal notice to that effect. (Capital Insurance & Surety Co.,
Inc., vs. Plastic Era Co., Inc., et al., G.R. No. L-22375, July 18,
1975)
It is explicit in the policy that PSIC's agreement to indemnify
Woodwork for loss by fire only arises "after payment of premium,".
Compliance by the insured with the terms of the contract is a
condition precedent to the right of recovery. Since the premium had
not been paid, the policy must be deemed to have lapsed. The non-

payment of premiums does not merely suspend but put, an end to

an insurance contract, since the time of the payment is peculiarly of
the essence of the contract. (Philippine Phoenix Surety &
Insurance Company vs. Woodwork, Inc., G.R. No. L-25317,
August 6, 1979)
The non-payment of premium on the cover note is no cause for
Pacific to lose what is due it as if there had been payment of
premium, for non-payment by it was not chargeable against its
fault. Had all the logs been lost during the loading operations, but
after the issuance of the cover note, liability on the note would have
already arisen even before payment of premium. This is how the
cover note as a "binder" should legally operate otherwise, it would
serve no practical purpose in the realm of commerce, and is
supported by the doctrine that where a policy is delivered without
requiring payment of the premium, the presumption is that a credit
was intended and policy is valid. (Pacific Timber Export
Corporation vs. Court of Appeals, et al., G.R. No. L-38613,
February 25, 1982)
It is obvious from both the Insurance Act and the stipulation of the
parties that time is of the essence in respect of the payment of the
insurance premium so that if it is not paid the contract does not
take effect unless there is still another stipulation to the contrary. In
the instant case, Arce was given a grace period to pay the premium
but the period having expired with no payment made, he cannot
insist that Capital is nonetheless obligated to him. (Pedro Arce vs.
Capital Insurance & Surety Co., Inc., G.R. No. L-28501,
September 30, 1982)
Under Section 77 of the Insurance Code, the remedy for the nonpayment of premiums is to put an end to and render the insurance
policy not binding. The non-payment of premium does not merely
suspend but puts an end to an insurance contract since the time of
the payment is peculiarly of the essence of the contract. Unless
premium is paid, an insurance contract does not take effect. Since
admittedly the premiums have not been paid, the policies issued
have lapsed. The insurance coverage did not go into effect or did
not continue and the obligation of Philamgen as insurer ceased.
(Arturo Valenzuela, et al. vs. Court Of Appeals, et al., G.R.
No. 83122, October 19, 1990)
Section 177 of the Insurance Code states that the surety is entitled
to payment of the premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and until the

premium therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes valid and
enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety. (Philippine Pryce Assurance
Corporation vs. Court Of Appeals, et al., G.R. No. 107062,
February 21, 1994)
Section 78 of the Insurance Code explicitly provides that an
acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make
the policy binding, notwithstanding any stipulation therein that it
shall not be binding until the premium is actually paid. This Section
establishes a legal fiction of payment and should be interpreted as
an exception to Section 77. (American Homes Assurance vs.
Antonio Chua, G.R. 130421, June 28, 1999)
Section 77 of the Insurance Code of 1978 provides that an insurer is
entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. The first exception is provided
by Section 77 itself, and that is, in case of a life or industrial life
policy whenever the grace period provision applies. The second is
that covered by Section 78 of the Insurance Code, which provides
that any acknowledgment in a policy or contract of insurance of the
receipt of premium is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until premium is actually paid. A third
exception was laid down in Makati Tuscany Condominium
Corporation vs. Court of Appeals, wherein the Court ruled that
Section 77 may not apply if the parties have agreed to the payment
in installments of the premium and partial payment has been made
at the time of loss. Tuscany has also provided a fourth exception,
namely, that the insurer may grant credit extension for the payment
of the premium. This simply means that if the insurer has granted
the insured a credit term for the payment of the premium and loss
occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss
but within the credit term. Moreover, as a fifth exception, estoppel
bars it from taking refuge under said Section, since Masagana relied
in good faith on such practice. (Ucpb General Insurance Co. Inc.,
vs. Masagana Telemart, Inc., G.R. No. 137172, April 4, 2001)
FEBTC is estopped from claiming that the insurance premium has
been unpaid. FEBTC induced Maxilite and Marques to believe that
the insurance premium has in fact been debited from Maxilites
account. However, FEBTC failed to do so. FEBTCs conduct clearly
constitutes gross negligence in handling Maxilites and Marques

accounts. As a consequence, FEBTC must be held liable for

damages pursuant to Article 2176 of the Civil Code. (Jose Marques
and Maxilite Technologies, Inc., vs. Far East Bank And Trust
Company, et al., G.R. No. 171379, January 10, 2011)
In life insurance, even though insured may have obtained an
endowment policy, payment of premiums is not a debt or obligation,
but an exercise of a right on the part of the insured. If insured wants
to keep policy alive, he may pay premium. But the insurer may not
compel him to pay the premium if insured desires to let the policy
lapse. (Constantino vs. Asia Life, 87 Phil 248, 1950)
The age of the insured was not concealed to the insurance company
for her application for insurance coverage which was on a printed
form furnished by Manila Bankers and which contained very few
items of information clearly indicated her age of the time of filing
the same to be almost 65 years of age. Despite such information
which could hardly be overlooked in the application form, Manila
Bankers received her payment of premium and issued the
corresponding certificate of insurance without question. As there
was sufficient time (45 days) for the Manila Bankers to process the
application and issue notice that the applicant was over 60 years of
age and thereby cancel the policy on that ground if it was minded to
do so, Manila Bankers failure to act, is therefore either attributable
to its willingness to waive such disqualification; or, through the
negligence or to the incompetence of its employees for which it has
only itself to blame. (Regina Edillon vs. Manila Bankers Life
Insurance, et al., G.R. No. L-34200, September 30, 1982)
3. Non-Default Options in Life Insurance
4. Reinstatement of a Lapsed Policy of Life Insurance
The stipulation in a life insurance policy giving the insured the
privilege to reinstate it upon written application within three years
from the date it lapses and upon of evidence of insurability
satisfactory to the insurance company and the payment of all
overdue premiums and any other indebtedness to the company,
does not give the insured absolute right to such reinstatement by
the mere filing of an application therefor. The company has the right
to deny the reinstatement if it is not satisfied as to the insurability
of the insured and of the latter does not pay all overdue premiums
and all other indebtedness to the company. After the death of the
insured the insurance company cannot be compelled to entertain an
application for reinstatement of the policy because the conditions

precedent to reinstatement can no longer be determined and

satisfied. (James McGuire v. The Manufacturers Life Insurance
Co., G.R. No. L-3581. September 21, 1950)
Where a life insurance policy lapsed, and as compliance with the
conditions for reinstatement of the policy, the insured paid only part
of the overdue premium, the failure to pay the balance of the
overdue premium prevented the reinstatement said policy and
thereafter the recovery therefrom. (Andres vs. Crown Life Ins.
Co., G.R. No. L-10875, January 28, 1958)
5. Refund of Premiums
Great Pacific should have informed Cortez of the deadline for paying
the first premium before or at least upon delivery of the policy to
him, so he could have complied with what was needful and would
not have been misled into believing that his life and his family were
protected by the policy, when actually they were not. And, if the
premium paid by Cortez was unacceptable for being late, it was the
company's duty to return it. By accepting his premiums without
giving him the corresponding protection, Great Pacific acted in bad
faith and since his policy was in fact inoperative or ineffectual from
the beginning, the company was never at risk, hence, it is not
entitled to keep the premium. (Great Pacific Life Insurance
Corporation vs. Court of Appeals, et al., G.R. No. L-57308,
April 23, 1990)
G. Rescission of Insurance Contracts
a. Concealment
Where the applicant, in apparent bad faith, withheld the fact
material to the risk to be assumed by the insurance company, the
latter is entitled to rescind the contract of insurance. The contract of
insurance is one of perfect good faith, not for the insured alone but
equally so for the insurer. Where there is concealment or a neglect
to communicate that which a party knows and ought to
communicate, whether intentional or unintentional, rescission is
available as a remedy to the insurer. (Great Pacific Life
Assurance Company vs. Honorable Court of Appeals, G.R.
No. L-31845. April 30, 1979)
Concealment exists where the assured had knowledge of a fact
material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assurer, but he
designedly and intentionally withholds the same. In the absence of

evidence that the insured had sufficient medical knowledge as to

enable him to distinguish between "peptic ulcer" and "a tumor", his
statement that said tumor was "associated with ulcer of the
stomach, " should be construed as an expression made in good faith
of his belief as to the nature of his ailment and operation. (Ng Gan
Zee vs. Asian Crusader Life Assurance Corporation, G.R. No.
L-30685, May 30, 1983)
Where the insured is specifically required to disclose to the insurer
any other insurance and its particulars which he may have effected
on the same subject matter, the knowledge of such insurance by
the insurer's agents, even assuming the acquisition thereof by the
former, is not the "notice" that would estop the insurers from
denying the claim. Obligations arising from contracts have the force
of law between the contracting parties and should be complied with
in good faith. (New Life Enterprises and Julian Sy vs. Court of
Appeals, et al., G.R. No. 94071, March 31, 1992)
Where the insured is specifically required to disclose to the insurer
matters relating to his health, the insured's failure to disclose the
fact that he was hospitalized for two weeks prior to filing his
application for insurance, raises grave doubts about his bona fides.
Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to
whom communication is due, in forming his estimate of the
disadvantages of the proposed contract or in making his inquiries.
(Sunlife Assurance Company of Canada vs. The Court of
Appeals, et al., G.R. No. 105135, June 22, 1995)
In group insurance, there is no medical examination required. But if
in group insurance an application form requires an answer to
previous sickness, and that is falsely denied, then there is
concealment. (Saturnino v. Phil-Am Life, 7 SCRA 316, 1963)
One who solicits insurance is an underwriter and not an agent of the
insurance company. If insurer appoints a general agent, then such
agent can bind the company by virtue of the written appointment.
On the other hand, an underwriter who fills up a policy with false
answers and later insured signs the policy, the false answers
become the insureds own answer because he signed the policy.
(Soliman v. U.S. Life, 104 Phil. 1046, 1958)
b. Misrepresentation/Omissions
When the insured signed the pension plan application, he adopted
as his own the written representations and declarations embodied in

it. It is clear from these representations that he concealed his

chronic heart ailment and diabetes. He cannot sign the application
and disown the responsibility for having it filled up. Thus, the
insurance company had every right to act on the faith of that
certification. (Ma. Lourdes s. Florendo vs. Philam Plans, Inc.,
et al., G.R. No. 186983, February 22, 2012)
By virtue of the incontestability clause, the insurer has two years
from the date of issuance of the insurance contract or of its last
reinstatement within which to contest the policy, whether or not,
the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how
patent or well founded, no longer lie. Considering that the insured
died before the two-year period had lapsed, Phil-Am Insurance is
not, therefore, barred from proving that the policy is void ab initio
by reason of the insureds fraudulent concealment or
misrepresentation. (Emilio Tan vs. The Court of Appeals, G.R.
No. 48049. June 29, 1989)
The "Incontestability Clause" under Section 48 of the Insurance
Code provides that an insurer is given two years from the
effectivity of a life insurance contract and while the insured is alive
to discover or prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the
insured or his agent. After the two-year period lapses, or when the
insured dies within the period, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment,
or
misrepresentation.
(Manila
Bankers
Life
Insurance
Corporation vs. Cresencia p. Aban, G.R. No. 175666, July 29,
2013)
The incontestability clause precludes the insurer from disowning
liability under the policy it issued on the ground of concealment or
misrepresentation regarding the health of the insured after a year of
its issuance. Since insured died on the 11 th month following the
issuance of his plan, the incontestability period has not yet set in.
Consequently, the insurer was not barred from questioning the
beneficiarys entitlement to the benefits of the pension plan. Florendo
vs. Philam Plans, GR. No 186983, February 22, 2012

c. Breach of Warranties
The insurance company is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty, for the reason

that knowing fully all that the number of hydrants demanded

therein never existed from the very beginning, the insurance
company nevertheless issued the policies in question subject to
such warranty, and received the corresponding premiums. It would
be perilously close to conniving at fraud upon the insured to allow
insurance company to claim now as void ab initio the policies that it
had issued to the plaintiff without warning of their fatal defect, of
which it was informed, and after it had misled the defendant into
believing that the policies were effective. (Qua Chee Gan v. Law
Union, 98 Phil 85, 1955)
An alteration in the use or condition of a thing insured from that to
which it is limited by the policy made without the consent of the
insurer, by means within the control of the insured, and increasing
the risks, entitles an insurer to rescind a contract of fire insurance.
(Malayan Insurance Company, Inc. vs. Pap Co., Ltd., G.R. No.
200784, August 7, 2013)
H. Claims Settlement and Subrogation
Where the insurance policy clearly and categorically placed PCSI's
liability for all damages arising out of death or bodily injury
sustained by one person as a result of any one accident at
P12,000.00 and under the law prevailing, P.D. 612, the minimum
liability is P12,000 per passenger, the stipulation regarding PCSIs
liability under the insurance contract not being less than
P12,000.00, and therefore not contrary to law, morals, good
customs, public order or public policy, must be upheld as effective,
valid and binding as between the parties. (Perla Compania De
Seguros, Inc. vs. Court of Appeals, G.R. No. 78860, May 28,
1990)
The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim. When it is not disputed
that the insurance company indeed paid, then there is valid
subrogation in its favor. Malayan Insurance Co vs Alberto, GR
No. 194320, February 1, 2012
1. Notice and Proof of Loss
The Insurance Code provides that a policy may declare that a
violation of specified provisions thereof shall avoid it. Thus, in fire
insurance policies, which contain provisions such as Condition No.
15 of the insurance policy, a fraudulent discrepancy between the
actual loss and that claimed in the proof of loss voids the insurance

policy. Mere filing of such a claim will exonerate the insurer. (United
Merchants Corporation vs. Country Bankers Insurance
Corporation, G.R. No. 198588, July 11, 2012)
A perusal of the records shows that Usiphil Incorporated, after the
occurrence of the fire, immediately notified Finman Gen. Assurance
thereof. Thereafter, Usiphil Incorporated submitted the following
documents: (1) Sworn Statement of Loss and Formal Claim and; (2)
Proof of Loss. The submission of these documents, constitutes
substantial compliance. Indeed, as regards the submission of
documents to prove loss, substantial, not strict as urged by Finman
Gen. Assurance, compliance with the requirements will always be
deemed sufficient. (Finman Gen. Assurance vs. Court of
Appeals, 361 SCRA 214, 2001)
Plaintiff's verified claim totalled P31,860.85, of which, in accordance
with the terms of the policy, three-fourths was asked, or P23,895.64.
Dependant's inventory of the goods found after the fire came to
P13,113. The difference between plaintiff's claim and defendant's
estimate of the loss, which was confirmed in the trial court, was
P18,747.85. In connection with these figures plaintiff suggests too
low a valuation by the representatives of the defendant. Computed
at plaintiff's valuation, the goods inventoried by the defendant's
committee would amount to P19,346.30. There would, however, still
remain a considerable void between the two amounts, of
P12.514.55. In this case, the difference under one hypothesis is
about 50 per cent, and under another hypothesis, about 25 per
cent. Still that constitutes a serious discrepancy between the true
value of the property and that sworn to in the proofs of loss, and is
an outstanding fact to be considered as bearing upon the presence
of fraud. It is more than an honest misstatement, more than
inadvertence or mistake, more than a mere error in opinion, more
than a slight exaggeration, and in connection with all the
surrounding circumstances, discloses a material overvaluation made
intentionally and willfully. The insured cannot therefore recover.
(Tan It v. Sun Insurance, 51 Phil. 212, 1927)
2.

Guidelines on Claims Settlement

a. Unfair Claims Settlement; Sanctions
b. Prescription of Action
There is absolutely nothing in the law which mandates that the two
periods prescribed in Section 384 of the Insurance Codethat is,
the six-month period for filing the notice of claim and the one-year
period for bringing an action or suit must always concur. On the

contrary, it is very clear that the one-year period is only required in

proper cases. The one-year period should instead be counted from
the date of rejection by the insurer as this is the time when the
cause of action accrues. Since in the case at hand, there has yet
been no accrual of cause of action, prescription has not yet set in.
This is because, before such final rejection, there was no real
necessity for bringing suit. (Summit Guaranty And Insurance
Company, Inc. vs. Hon. Jose C. De Guzman, in his capacity as
Presiding Judge of Branch III, CFI of Tarlac, et al., G.R. No. L50997, June 30, 1987)
In case the claim was denied by the insurer but the insured filed a
petition for reconsideration, the prescriptive period should be
counted from the date the claim was denied at the first instance by
the insurance company and not from the denial of the
reconsideration (Sun Life Office, Ltd. vs. Court of Appeals, GR.
No. 89741, Mar 13, 1991)
Where the delay in bringing the suit against the insurance company
was not caused by the insured or its subrogee but by the insurance
company itself, it is unfair to penalize the insured or its subrogee by
dismissing its action against the insurance company on the ground
of prescription. To prevent the insurance company from evading its
responsibility to the insured through this clever scheme, and to
protect the insuring public against similar acts by other insurance
companies, the one-year period under Section 384 should be
counted not from the date of the accident but from the date of the
rejection of the claim by the insurer. It is only from the rejection of
the claim by the insurer that the insureds cause of action accrued
since a cause of action does not accrue until the party obligated
refuse, expressly or impliedly, to comply with its duty. (Country
Bankers Insurance Corp., vs. The Travellers Insurance and
Surety Corp., et al., G.R. No. 82509, August 16, 1989)
c. Subrogation
Payment by the insurer to the assured operates as an equitable
assignment to the former of all remedies which the latter may have
against the third party whose negligence or wrongful act caused the
loss. There are a few recognized exceptions to this rule. For
instance, if the assured by his own act releases the wrongdoer or
third party liable for the loss or damage, from liability, the insurers
right of subrogation is defeated. Similarly, where the insurer pays
the assured the value of the lost goods without notifying the carrier
who has in good faith settled the assureds claim for loss, the
settlement is binding on both the assured and the insurer, and the

latter cannot bring an action against the carrier on his right of

subrogation . And where the insurer pays the assured for a loss
which is not a risk covered by the policy, thereby effecting
voluntary payment, the former has no right of subrogation against
the third party liable for the loss. (Pan Malayan Insurance
Corporation vs. Court Of Appeals, et al., G.R. No. 81026,
April 3, 1990)
The payment by the insurer to the assured operates as an equitable
assignment of all remedies the assured may have against the third
party who caused the damage. Subrogation is not dependent upon,
nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer. (Aboitiz Shipping Corporation v.
Insurance Company Of North America, G.R. No. 168402,
August 6, 2008; Malayan Insurance Co., Inc., vs. Rodelio
Alberto, et al., G.R. No. 194320, February 1, 2012)
The proximate cause of the sinking of the vessel was her condition
of unseaworthiness arising from her having been top-heavy when
she departed from the Port of Zamboanga. Since the vessel was
unseaworthy with reference to the cargo, there was therefore a
breach of warranty of seaworthiness that rendered the assured not
entitled to the payment of its claim under the policy. Hence, when
PhilAmGen paid the claim of the bottling firm there was in effect a
voluntary payment and no right of subrogation accrued in its
favor. In other words, when PhilAmGen paid it did so at its own risk.
(The Philippine American General Insurance Company, Inc.,
vs. Court of Appeals, et al., G.R. No. 116940, June 11, 199)
As the insurer, Fireman's Fund is entitled to go after the person or
entity that violated its contractual commitment to answer for the
loss insured against.. Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the
insured may have against the third person whose negligence or
wrongful act caused the loss. When the insurance company pays for
the loss, such payment operates as an equitable assignment to the
insurer of the property and all remedies which the insured may have
for the recovery thereof. (Firemans Fund Insurance Copany vs.
Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976)
St. Paul, as insurer, after paying the claim of the insured for
damages under the insurance, is subrogated merely to the rights of
the assured. As subrogee, it can recover only the amount that is
recoverable by the latter. Since the right of the assured, in case of
loss or damage to the goods, is limited or restricted by the

provisions in the bill of lading, a suit by the insurer as subrogee

necessarily is subject to like limitations and restrictions. (St. Paul
Fire & Marine Insurance Co. vs. Macondray & Co., Inc., et al.,
G.R. No. L-27796, March 25, 1976)
When Manila Mahogany executed a release claim discharging San
Miguel Corporation from all actions, claims, demands and rights of
action arising out of or as a consequence of the accident after the
insurer had paid the proceeds of the policy, the insurer is entitled to
recover from the insured the amount of insurance money paid.
Since the insurer can be subrogated to only such rights as the
insured may have, should the insured, after receiving payment from
the insurer, release the wrongdoer who caused the loss, the insurer
loses his rights against the wrongdoer. But in such a case, the
insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of
the insurer. (Manila Mahogany Manufacturing Corporation vs.
Court of Appeals, G.R. No. L-52756, October 12, 1987)
The presentation in evidence of the marine insurance policy is not
indispensable before the insurer may recover from the common
carrier the insured value of the lost cargo in the exercise of its
subrogatory right. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of American Home as insurer and
Caltex, as the assured shipper of the lost cargo of industrial fuel oil,
but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance
company of the insurance claim. (Delsan Transport Lines, Inc.
vs. Court of Appeals, et al., G.R. No. 127897, November 15,
2001)
The insurer, upon happening of the risk "insured" against and after
payment to the insured, is subrogated to the rights and cause of
action of the latter. As such, the insurer has the right to seek
reimbursement for all the expenses paid. However, in a contract of
carriage involving the shipment of knock-down auto parts of Nissan
motor vehicles which were allegedly lost and destroyed, the insurer
was not properly subrogated because of the non-presentation of any
marine insurance policy. The submission of a marine risk note
instead of the insurance policy doesn't satisfy the requirement for
subrogation. The marine risk note is not an insurance policy. It is
only an acknowledgment or declaration of the insurer confirming
the specific shipment covered by its marine open policy, the
evaluation of the cargo and the chargeable premium. (Eastern
Shipping Lines, Inc. vs. Prudential Guarantee and
Assurance, Inc., G.R. No. 174116, September 11, 2009)

V. Transportation Laws
I. Transportation Laws
A. Common Carriers
There is no doubt that FPIC is a common carrier. It is engaged in the
business of transporting or carrying goods, i.e. petroleum products,
for hire as a public employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to employ its services,
and transports the goods by land and for compensation. The fact that
FPIC has a limited clientele does not exclude it from the definition of a
common carrier. (First Philippine Industrial Corporation vs.
Court of Appeals, G.R. No. 125948, 29 December 1989)
Article
1732
makes
no
distinction
between
one
whose principal business activity is the carrying of persons or goods
or both, and one who does such carrying only as an ancillary activity
(in local Idiom as "a sideline"). It also carefully avoids making any
distinction between a person or enterprise offering transportation
service on a regular or scheduled basis and one offering such service
on an occasional, episodic or unscheduled basis. Neither does it
distinguish between a carrier offering its services to the "general
public," i.e., the general community or population, and one who offers
services or solicits business only from a narrow segment of the
general population. (Pedro De Guzman vs. Court of Appeals, G.
R. No. L-47822, 22 December 1988).
Article 1732 does not distinguish between one whose principal
business activity is the carrying of goods and one who does such
carrying only as an ancillary activity. The contention of Sanchez
Brokerage that it is not a common carrier but a customs broker whose
principal function is to prepare the correct customs declaration and
proper shipping documents as required by law is bereft of merit. It
suffices that Sanchez Brokerage undertakes to deliver the goods for
pecuniary consideration. (A.F. Sanchez Brokerage Inc. vs. The
Hon. Court of Appeals, G.R. No. 147079, 21 December 2004)
There is no dispute that Cebu Salvage was a common carrier. At the
time of the loss of the cargo, it was engaged in the business of
carrying and transporting goods by water, for compensation, and
offered its services to the public. Cebu Salvage was the one which
contracted with MCCII for the transport of the cargo. It had control
over what vessel it would use. All throughout its dealings with MCCII,
it represented itself as a common carrier. The fact that it did not own

the vessel it decided to use to consummate the contract of carriage

did not negate its character and duties as a common carrier. The
MCCII (respondents subrogor) could not be reasonably expected to
inquire about the ownership of the vessels which petitioner carrier
offered to utilize. As a practical matter, it is very difficult and often
impossible for the general public to enforce its rights of action under
a contract of carriage if it should be required to know who the actual
owner of the vessel is. In fact, in this case, the voyage charter itself
denominated Cebu Salvage as the "owner/operator" of the vessel.
(Cebu Salvage Corporation vs. Philippine Home Assurance
Corporation, G.R. No. 150403, January 25, 2007)
Much of the distinction between a common or public carrier and a
private or special carrier lies in the character of the business, such
that if the undertaking is an isolated transaction, not a part of the
business or occupation, and the carrier does not hold itself out to
carry the goods for the general public or to a limited clientele,
although involving the carriage of goods for a fee, the person or
corporation providing such service could very well be just a private
carrier. (Philippine American General Insurance Company vs.
Pks Shipping Company, G.R. No. 149038, 9 April 2003)
In a contract of private carriage, the parties may validly stipulate that
responsibility for the cargo rests solely on the charterer, exempting
the shipowner from liability for loss of or damage to the cargo caused
even by the negligence of the ship captain. Pursuant to Article
1306 of the Civil Code, such stipulation is valid because it is freely
entered into by the parties and the same is not contrary to law,
morals, good customs, public order, or public policy. Unlike in a
contract involving a common carrier, private carriage does not
involve the general public. Hence, the stringent provisions of the Civil
Code on common carriers protecting the general public cannot
justifiably be applied to a ship transporting commercial goods as a
private carrier. (Valenzuela Hardwood And Industrial Supply,
Inc. vs. Court of Appeals, G.R. No. 102316, 30 June 1997)
A freight forwarders liability is limited to damages arising from its own
negligence, including negligence in choosing the carrier; however,
where the forwarder contracts to deliver goods to their destination
instead of merely arranging for their transportation, it becomes liable
as a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the
transport, even though the forwarder does not carry the merchandise
itself.Unsworth Transport International ( Phils. vs. Court of
Appeals ,G.R. No. 166250, 26 July 2010

A customs broker whose services were engaged for the release and
withdrawal of the cargoes from the pier and their subsequent delivery
to the consignees warehouse and the owner of the delivery truck
whom the customs broker contracted to transport the cargoes to the
warehouse are both common carriers. The latter is considered a
common carrier in the absence of indication that it solely and
exclusively rendered services to the customs broker. Thus, when the
truck failed to deliver one of the cargoes, both the broker and owner of
the truck are liable. Being both common carriers, they are mandated
from the nature of their business and for reasons of public policy, to
observe the extraordinary diligence in the vigilance over the goods
transported by them according to all the circumstances of such case.
Thus, in case of loss of the goods, the common carrier is presumed to
have been at fault or to have acted negligently. Loadmasters
Customs Services, Inc. vs. Glodel Brokerage Corporation, GR
No. 179446, January 10, 2011
Persons engaged in the business of transporting students from their
respective residences to their school and back are considered common
carrier. Despite catering to a limited clientele, they operated as a
common carrier because they held themselves out as a ready
transportation indiscriminately to the students of a particular school
living within or near where they operated the service and for a fee.
Spouses Perena vs Spouses Nicolas, GR No. 157917, August
29, 2012
1. Diligence Required of Common Carriers
Under Article 1733 of the Civil Code, 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 passengers transported by them according to all
circumstances of each case. Thus, under Article 1735 of the same
Code, in all cases other than those mentioned in Article 1734 thereof,
the common carrier shall be presumed to have been at fault or to
have acted negligently, unless it proves that it has observed the
extraordinary diligence required by law. More importantly, common
carriers cannot limit their liability for injury or loss of goods where
such injury or loss was caused by its own negligence. Otherwise
stated, the law on averages under the Code of Commerce cannot be
applied in determining liability where there is negligence. (American
Home Assurance Company vs. The Court of Appeals, G.R. No.
94149, 5 May 1992)

Article 1736 of the Civil Code imposes upon common carriers the duty
to observe extraordinary diligence from the moment the goods are
unconditionally placed in their possession "until the same are
delivered, actually or constructively, by the carrier to the consignee
or to the person who has a right to receive them. However, in the bills
of lading issued for the cargoes in question, the parties agreed to
limit the responsibility of the carrier for the loss or damage by
inserting a stipulation stating that the carrier shall not be responsible
for loss or damage to shipments billed 'owner's risk' unless such loss
or damage is due to negligence of carrier. Since such stipulation is
valid, and there is nothing therein that is contrary to law, morals or
public policy, the absence of negligence on the part of its employees
exempt the carrier from liability for loss of goods due to fire.
(Amparo C. Servando, Clara Uy Bico vs. Philippine Steam
Navigation Co., G.R. No. L-36481-2, 23 October 1982)
A common carrier is presumed at fault in the absence of a
satisfactory explanation on how the airplane crash occured. (Vda. De
Abeto vs. Philippine Air Lines, Inc. 115 SCRA 489, 1982)
When a bus hit a tree and house due to the fast and reckless driving of
the bus driver resulting in injury to one of its passengers, the bus
owner is liable and such liability does not cease even upon proof that
he exercised all the diligence of a good father of family in the selection
and supervision of its employees. R Transport Corporation vs.
Pante, GR No. 162104, September 15, 2009
Though it is true that common carriers are presumed to have been at
fault or to have acted negligently if the goods transported by them are
lost, destroyed, or deteriorated, and that the common carrier must
prove that it exercised extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the burden is shifted to the
defendant, prove that the subject shipment suffered actual shortage.
This can only be done if the weight of the shipment at the port of origin
and its subsequent weight at the port of arrival have been proven by a
preponderance of evidence, and it can be seen that the former weight
is considerably greater than the latter weight, taking into consideration
the exceptions provided in Article 1734 of the Civil Code. Asian
Terminals, Inc vs. Simon Enterprises, Inc. GR No. 177116,
February 27, 2013

2. Liabilities of Common Carriers

If a railroad company maintains a signaling device at a crossing to

give warning of the approach of a train, the failure of the device to
operate is generally held to be evidence of negligence, which may be
considered with all the circumstances of the case in determining
whether the railroad company was negligent as a matter of fact.
(Victorino Cusi and Pilar Pobre vs. Philippine National
Railways, G.R. No. L-29889, 31 May 1979).
For a vessel to be seaworthy, it must be adequately equipped for the
voyage and manned with a sufficient number of competent officers
and crew. The failure of a common carrier to maintain in seaworthy
condition its vessel involved in a contract of carriage is a clear breach
of its duty prescribed in Article 1755 of the Civil Code. (Loadstar
Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621,
September 28, 1999)
The foundation of LRTAs liability is the contract of carriage and its
obligation to indemnify the victim arises from the breach of that
contract by reason of its failure to exercise the high diligence required
of the common carrier. In the discharge of its commitment to ensure
the safety of passengers, a carrier may choose to hire its own
employees or avail itself of the services of an outsider or an
independent firm to undertake the task. In either case, the common
carrier is not relieved of its responsibilities under the contract of
carriage. (Light Rail Transit Authority & Rodolfo Roman vs.
Marjorie Navidad, G.R. No. 145804, 6 February 2003)
The "kabit system" is an arrangement whereby a person who has
been granted a certificate of convenience allows another person who
owns motors vehicles to operate under such franchise for a fee. A
certificate of public convenience is a special privilege conferred by
the government. Although not outrightly penalized as a criminal
offense, the "kabit system" is invariably recognized as being contrary
to public policy and, therefore, void and inexistent under Article 1409
of the Civil Code. (Lita Enterprises, Inc. vs. Intermediate
Appellate Court, G.R. No. L-64693, 27 April 1984)
It is settled in our jurisprudence that only the registered owner of a
public service vehicle is responsible for damages that may arise from
consequences incident to its operation, or maybe caused to any of
the passengers therein. (Victor Juaniza vs. Eugenio Jose, G.R.
No.L-50127-28, 30 March 1979)
In dealing with vehicles registered under the Public Service Law, the
public has the right to assume that the registered owner is the actual
or lawful owner thereof. It would be very difficult and often impossible

as a practical matter, for members of the general public to enforce

the rights of action that they may have for injuries inflicted by the
vehicles being negligently operated if they should be required to
prove who the actual owner is. (Ma. Luisa Benedicto vs. Hon.
Intermediate Appellate Court, G.R. No. 70876, 19 July 1990)
While the registered owner or operator of a passenger vehicle is
jointly and severally liable with the driver of the said vehicle for
damages incurred by passengers or third persons as a consequence
of injuries or death sustained in the operation of the said vehicle, the
registered owner or operator has the right to be indemnified by the
real or actual owner of the amount that he may be required to pay as
damage for the injury caused. The right to be indemnified being
recognized, recovery by the registered owner or operator may be
made in any form-either by a cross-claim, third-party complaint, or an
independent action. (Angel Jereos vs. Hon. Court of Appeals,
G.R. No. L-48747, 30 September 1982)
In an action based on quasi delict, the registered owner of a motor
vehicle is solidarily liable for the injuries and damages caused by the
negligence of the driver, in spite of the fact that the vehicle may have
already been the subject of an unregistered Deed of Sale in favor of
another person. Unless registered with the Land Transportation Office,
the sale -- while valid and binding between the parties -- does not
affect third parties, especially the victims of accidents involving the
said transport equipment. (Equitable Leasing Corporation vs.
Lucita Suyom et al., G.R. No. 143360, 5 September 2002)
The principle of last clear chance only applies in a suit between the
owners and drivers of two colliding vehicles. It does not arise where a
passenger demands responsibility from the carrier to enforce its
contractual obligations, for it would be inequitable to exempt the
negligent driver and its owner on the ground that the other driver was
likewise guilty of negligence. (William Tiu, doing business under
the name and style of D Rough Riders, vs. Pedro A.
Arriesgado, G.R. No. 138060, 1 September 2004)
When an airline issues a ticket to a passenger confirmed on a
particular flight, on a certain date, a contract of carriage arises, and
the passenger has every right to expect that he would fly on that
flight and on that date. If he does not, then the carrier opens itself to
a suit for breach of contract of carriage. Where an airline had
deliberately overbooked, it took the risk of having to deprive some
passengers of their seats in case all of them would show up for the
check in. For the indignity and inconvenience of being refused a
confirmed seat on the last minute, said passenger is entitled to an

award of moral damages. (Spouses Cesar & Suthira Zalamea vs.

Court of Appeals, G.R. No. 104235 November 18, 1993)
In an action for breach of contract of carriage, the aggrieved party
does not have to prove that the common carrier was at fault or was
negligent. All that is necessary to prove is the existence of the
contract and the fact of its non-performance by the carrier.
(Singapore Airlines Limited vs. Fernandez, G.R. No. 142305,
December 10, 2003)
It is PALs duty to provide assistance to Spouses Miranda and, for that
matter, any other passenger similarly inconvenienced due to delay in
the completion of the transport and the receipt of their baggage.
Therefore, its unilateral and voluntary act of providing cash
assistance is deemed part of its obligation as an air carrier, and is
hardly anything to rave about. (Philippine Airlines, Inc., vs. Court
of Appeals, G.R. No. 119641, May 17, 1996)
Assuming arguendo that the airline passengers have no vested right
to these amenities in case a flight is cancelled due to force majeure,
what makes PAL liable for damages in this particular case and under
the facts obtaining herein is its blatant refusal to accord the so-called
amenities equally to all its stranded passengers who were bound for
Surigao City. No compelling or justifying reason was advanced for
such discriminatory and prejudicial conduct. The refund of hotel
expenses was surreptitiously and discriminatorily made by PAL since
the same was not made known to everyone, except through word of
mouth to a handful of passengers. This is a sad commentary on the
quality of service and professionalism of an airline company, which is
the countrys flag carrier at that. The discriminatory act of PAL against
Pantejo ineludibly makes the former liable for moral damages under
Article 21 in relation to Article 2219 (10) of the Civil Code.
(Philippine Airlines, Inc. vs. Court of Appeals, G.R. No.
120262, July 17, 1997)
Cathays contention that there was no contract of carriage that was
breached because Singsons ticket was open-dated is untenable. To
begin with, the round trip ticket issued by the carrier to the passenger
was in itself a complete written contract by and between the carrier
and the passenger. It had all the elements of a complete written
contract, to wit: (a) the consent of the contracting parties manifested
by the fact that the passenger agreed to be transported by the carrier
to and from Los Angeles via San Francisco and Hongkong back to the
Philippines, and the carriers acceptance to bring him to his
destination and then back home; (b) cause or consideration, which
was the fare paid by the passenger as stated in his ticket; and, (c)

object, which was the transportation of the passenger from the place
of departure to the place of destination and back, which are also
stated in his ticket. Clearly therefore Singson was not a mere "chance
passenger with no superior right to be boarded on a specific flight,"
as erroneously claimed by Cathay and sustained by the Court of
Appeals. (Carlos Singson vs. Court of Appeals, G.R. No.
119995, November 18, 1997)
Spouses Vazquez had every right to decline the upgrade and insist on
the Business Class accommodation they had booked for and which
was designated in their boarding passes. They clearly waived their
priority or preference when they asked that other passengers be
given the upgrade. It should not have been imposed on them over
their vehement objection. By insisting on the upgrade, Cathay
breached its contract of carriage with Spouses Vazquez. (Cathay
Pacific Airways, Ltd., vs. Spouses Daniel Vazquez And Maria
Luisa Madrigal Vazquez, G.R. No. 150843, March 14, 2003)
When an airline issues a ticket to a passenger, confirmed for a
particular flight on a certain date, a contract of carriage arises. The
passenger has every right to expect that he be transported on that
flight and on that date, and it becomes the airlines obligation to carry
him and his luggage safely to the agreed destination without delay. If
the passenger is not so transported or if in the process of
transporting, he dies or is injured, the carrier may be held liable for a
breach of contract of carriage. (Philippine Airlines Inc. vs. Court
of Appeals, G.R. No. 123238, September 22, 2008)
It was established that the primary cause of the death of the
passenger of the jeepney was the negligence of the driver of the truck
which collided with the passenger jeepney. Thus, the truck owner is
liable for this failure to rebut the presumption of negligence in hiring
and supervision of his employee. Whenever an employees negligence
causes damage or injury to another, there instantly arises a
presumption juris tantum that the employer failed to exercise
diligentissimi patris families in the selection or supervision of his
employee. Thus, in the selection of prospective employees, employers
are required to examine them as to their qualification, experience and
service record. With respect to the supervision of employees,
employers must formulate standard operating procedures, monitor
their implementation, and impose disciplinary measures for breaches
thereof. These facts must be shown by concrete proof. The Heirs of
the late Ruben Reinoso, Sr. vs. Court of Appeals, GR No.
116121, July 18, 2011

In a contract of carriage, it is presumed that the common carrier is at

fault or is negligent when a passenger dies or is injured. In fact, there
is even no need for the court to make an express finding of fault or
negligence on the part of the common carrier. This statutory
presumption may only be overcome by evidence that the carrier
exercised extraordinary diligence. Unfortunately, the common carrier
miserably failed to overcome this presumption as the accident which
led to the passengers death was due to the reckless driving and gross
negligence of its driver.
Heirs of Josemaria Ochoa vs. G&S
Transport Corporation, March 19, as affirmed in the July 16,
2012 decision

B. Vigilance over Goods

1. Exempting Causes
a. Requirement of Absence of Negligence
It is a well known physical fact that cars may skid on greasy or
slippery roads, as in the instant case, without fault on account of the
manner of handling the car. Skidding means partial or complete loss
of control of the car under circumstances not necessarily implying
negligence. It may occur without fault. (Saturnino Bayasen vs.
Court of Appeals, G.R. No.L-25785, 26 February 1981)
A fortuitous event is possessed of the following characteristics: (a)
the cause of the unforeseen and unexpected occurrence, or the
failure of the debtor to comply with his obligations, must be
independent of human will; (b) it must be impossible to foresee the
event which constitutes the caso fortuito, or if it can be foreseen, it
must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill his obligation in a normal
manner; and (d) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor. Under the
circumstances of this case, the explosion of the new tire may not be
considered a fortuitous event. There are human factors involved in
the situation. The fact that the tire was new did not imply that it was
entirely free from manufacturing defects or that it was properly
mounted on the vehicle. Neither may the fact that the tire bought
and used in the vehicle is of a brand name noted for quality, resulting
in the conclusion that it could not explode within five days
use. (Alberta Yobido vs. Court of Appeals, G.R. No. 113003, 17
October 1997)

In order that a common carrier may be absolved from liability in case

of force majeure, it is not enough that the accident was caused
by force majeure. The common carrier must still prove that it was not
negligent in causing the injuries resulting from such accident.
Considering that the bus driver did not immediately stop the bus at
the height of the commotion; the bus was speeding from a full stop;
the victims fell from the bus door when it was opened or gave way
while the bus was still running; the conductor panicked and blew his
whistle after people had already fallen off the bus; and the bus was
not properly equipped with doors in accordance with law - it is clear
that Bachelor and Rivera have failed to overcome the presumption of
fault and negligence found in the law governing common carriers.
(Bachelor Express, Incorporated vs. The Honorable Court of
Appeals (Sixth Division), G.R. No. 85691, 31 July 1990)
Mechanical defects in the carrier are not considered a caso
fortuito that exempts the carrier from responsibility. Even
granting arguendo that the engine failure was a fortuitous event,
when the vessel finally left the port of Cebu, there was no longer any
force majeure that justified by-passing a port of call. The
"interruption" was caused by the captain upon instruction of
management, hence, the owner of the vessel and the ship agent shall
be civilly liable for the acts of the captain. (Sweet Lines, Inc. vs.
The Honorable Court of Appeals, Micaela b. Quintos, et al.,
G.R. No. L-43640, 28 April 1983)
A mishap caused by defective brakes can not be consideration as
fortuitous in character. Certainly, the defects were curable and the
accident preventable. (Vicente Vergara vs. The Court of Appeals,
G.R. No. 77679, 30 September 1987)
The intervention of the municipal officials was not In any case, of a
character that would render impossible the fulfillment by the carrier
of its obligation. Ganzon was not duty bound to obey the illegal order
to dump into the sea the scrap iron. Moreover, there is absence of
sufficient proof that the issuance of the same order was attended with
such force or intimidation as to completely overpower the will of the
petitioner's employees. The mere difficulty in the fulfillment of the
obligation is not considered force majeure. (Mauro Ganzon vs.
Court of Appeals, G.R. no. L-48757, 30 May 1988)
Despite the report of Philippine Constabulary agent Generalao that
the Maranaos were going to attack its buses, Fortune took no steps to
safeguard the lives and properties of its passengers. The seizure of
the bus of the Fortune was foreseeable and, therefore, was not a
fortuitous event which would exempt petitioner from liability.

(Fortune Express, Inc. vs. Court of Appeals, G.R. No. 119756,

18 March 1999)
Indeed, the typhoon was an inevitable occurrence, yet, having been
kept posted on the course of the typhoon by weather bulletins at
intervals of six hours, the captain and crew were well aware of the
risk they were taking as they hopped from island to island. In so
doing, they failed to observe that extraordinary diligence required of
them explicitly by law. (Pedro Vasquez, et al., vs. The Court of
Appeals, G.R. No. L-42926, 13 September 1985)
Loadstar was at fault or negligent in not maintaining a seaworthy
vessel and in having allowed its vessel to sail despite knowledge of an
approaching typhoon. In any event, it did not sink because of any
storm that may be deemed as force majeure, inasmuch as the wind
condition in the area where it sank was determined to be
moderate. Since it was remiss in the performance of its duties,
Loadstar cannot hide behind the limited liability doctrine to escape
responsibility for the loss of the vessel and its cargo. (Loadstar
Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621, 28
September 1999)
Negligence is conduct that creates undue risk of harm to another. It is
the failure to observe that degree of care, precaution and vigilance
that the circumstances justly demand, whereby that other person
suffers injury. Petitioners vessel was carrying chemical cargoalkyl
benzene and methyl methacrylate monomer. While knowing that their
vessel was carrying dangerous inflammable chemicals, its officers
and crew failed to take all the necessary precautions to prevent an
accident. Petitioner was, therefore, negligent. (Smith Bell Dodwell
Shipping Agency Corporation vs. Catalino Borja, G.R. No.
143008. June 10, 2002)
b. Absence of Delay
The oft-repeated rule regarding a carrier's liability for delay is that in
the absence of a special contract, a carrier is not an insurer against
delay in transportation of goods. When a common carrier undertakes
to convey goods, the law implies a contract that they shall be
delivered at destination within a reasonable time, in the absence, of
any agreement as to the time of delivery. But where a carrier has
made an express contract to transport and deliver property within a
specified time, it is bound to fulfill its contract and is liable for any
delay, no matter from what cause it may have arisen. This result
logically follows from the well-settled rule that where the law creates

a duty or charge, and the party is disabled from performing it without

any default in himself, and has no remedy over, then the law will
excuse him, but where the party by his own contract creates a duty or
charge upon himself, he is bound to make it good notwithstanding
any accident or delay by inevitable necessity because he might have
provided against it by contract. Whether or not there has been such
an undertaking on the part of the carrier to be determined from the
circumstances surrounding the case and by application of the
ordinary rules for the interpretation of contracts. (Aniceto Saludo,
Jr. vs. Hon. Court of Appeals, G.R. No. 95536, March 23, 1992).
Petitioner's late delivery of the baggage for eleven (11) days was not
motivated by ill will or bad faith. In fact, it immediately coordinated
with its Central Baggage Services to trace private respondent's
suitcase and succeeded in finding it. Under the circumstances,
considering that petitioner's actuation was not attendant with bad
faith, the award of moral damages is unfair. (Philippine Air Lines
vs. Florante Miano, G.R. No. 106664, March 8, 1995).
c. Due Diligence to Prevent or Lessen the Loss
The rule is that if the improper packing or, in this case, the defect/s in
the container, is/are known to the carrier or his employees or
apparent upon ordinary observation, but he nevertheless accepts the
same without protest or exception notwithstanding such condition, he
is not relieved of liability for damage resulting therefrom. In this case,
Calvo accepted the cargo without exception despite the apparent
defects in some of the container vans. Hence, for failure of Calvo to
prove that she exercised extraordinary diligence in the carriage of
goods in this case or that she is exempt from liability, the
presumption of negligence as provided under Art. 1735 holds.
(Virgines Calvo doing business under the name and style
Transorient Container Terminal Services, Inc. vs. Ucpb General
Insurance Co., Inc., G.R. No. 148496, 19 March 2002)
While it may be true that the tire that blew-up was still good because
the grooves of the tire were still visible, this fact alone does not make
the explosion of the tire a fortuitous event. No evidence was
presented to show that the accident was due to adverse road
conditions or that precautions were taken by the Camoro to
compensate for any conditions liable to cause accidents. The sudden
blowing-up, therefore, could have been caused by too much air
pressure injected into the tire coupled by the fact that the jeepney
was overloaded and speeding at the time of the accident. (Roberto
Juntilla vs. Clemente Fontanar, G.R. No. L-45637, 31 May
1985)

Immediately before the collision, Llamoso was actually violating the

following traffic rules and regulations. Thus, a legal presumption
arose that Llamoso was negligent, a presumption KBL was unable to
overthrow. (Kapalaran Bus Line vs. Angel Coronado, G.R. No.
85331, 25 August 1989)
Even if the weather encountered by the ship is to be deemed a
natural disaster under Article 1739 of the Civil Code, Central Shipping
failed to show that such natural disaster or calamity was the
proximate and only cause of the loss. Human agency must be
entirely excluded from the cause of injury or loss. In other words, the
damaging effects blamed on the event or phenomenon must not have
been caused, contributed to, or worsened by the presence of human
participation. Hence, if a common carrier fails to exercise due
diligence - or that ordinary care that the circumstances of the
particular case demand, to prevent or minimize the loss before,
during and after the occurrence of the natural disaster, the carrier
shall be deemed to have been negligent. (Central Shipping
Company, Inc., vs. Insurance Company of North America, G.R.
No. 150751, September 20, 2004)
2. Contributory Negligence
Where he contributes to the principal occurrence, as one of its
determining factors, he can not recover. Where, in conjunction with
the occurrence, he contributes only to his own injury, he may recover
the amount that the defendant responsible for the event should pay
for such injury, less a sum deemed a suitable equivalent for his own
imprudence. (M. H. Rakes vs. The Atlantic Gulf and Pacific
Company, G.R. No. 1719, January 23, 1907).
3. Duration of Liability
a. Delivery of Goods to Common Carrier
By the said act of delivery, the scraps were unconditionally placed in
the possession and control of the common carrier, and upon their
receipt by the carrier for transportation, the contract of carriage was
deemed
perfected.
Consequently,
the
petitioner-carrier's
extraordinary responsibility for the loss, destruction or deterioration
of the goods commenced. Pursuant to Art. 1736, such extraordinary
responsibility would cease only upon the delivery, actual or
constructive, by the carrier to the consignee, or to the person who
has a right to receive them. The fact that part of the shipment had
not been loaded on board the lighter did not impair the said contract

of transportation as the goods remained in the custody and control of

the carrier, albeit still unloaded. (Mauro Ganzon vs. Court of
Appeals, G.R. No. L-48757, May 30, 1988)
b. Actual or Constructive Delivery
Delivery to the customs authorities is not the delivery contemplated
by Article 1736, supra, in connection with second paragraph of Article
1498, supra, because, in such a case, the goods are then still in the
hands of the Government and their owner could not exercise
dominion whatever over them until the duties are paid. (Lu Do & Lu
YM Corporation v. I.V. Binamira, G.R. No. L-9840, April 22,
1957)
The receipt of goods by the carrier has been said to lie at the
foundation of the contract to carry and deliver, and if actually no
goods are received there can be no such contract. The liability and
responsibility of the carrier under a contract for the carriage of goods
commence on their actual delivery to, or receipt by, the carrier or an
authorized agent and delivery to a lighter in charge of a vessel for
shipment on the vessel, where it is the custom to deliver in that way,
is a good delivery and binds the vessel receiving the freight, the
liability commencing at the time of delivery to the lighter and,
similarly, where there is a contract to carry goods from one port to
another, and they cannot be loaded directly on the vessel and lighters
are sent by the vessel to bring the goods to it, the lighters are for the
time its substitutes, so that the bill of landing is applicable to the
goods as soon as they are placed on the lighters. (Compaia
Maritima vs. Insurance Company of North America, G.R. No. L18965, October 30, 1964)
The liability of a common carrier does not cease by mere transfer of
custody of the cargo to the arrastre operator. Like the duty of
seaworthiness, the duty of care of the cargo is non-delegable and the
carrier is accordingly responsible for the acts of the master, the crew,
the stevedore and his other agents. The fact that a consignee is
required to furnish persons to assist in unloading a shipment may not
relieve the carrier of its duty as to such unloading. It is settled in
maritime law jurisprudence that cargoes while being unloaded
generally remain under the custody of the carrier. Since the damage to
the cargo was incurred during the discharge of the shipment and while

under the supervision of the carrier, the latter is liable for the damage
caused to the cargo.
The arrastre operator is likewise liable. The functions of an arrastre
operator involve the handling of cargo deposited on the wharf or
between the establishment of the consignee or shipper and the ships
tackle. Being the custodian of the goods discharged from a vessel, an
arrastre operators duty is to take good care of the goods and to turn
them over to the party entitled to their possession. While it is true that
an arrastre operator and a carrier may not be held solidarily liable at all
times, the facts of these cases show that apart from the stevedores of
the arrastre operator being directly in charge of the physical unloading
of the cargo, its foreman picked the cable sling that was used to hoist
the packages for transfer to the dock. Moreover, the fact that the
packages were unloaded with the same sling unharmed is telling of the
inadequate care with which the stevedore handled and discharged the
cargo.Westwind Shipping Corporation vs. UCPB General
Insurance Co., GR no. 2002289, November 25, 2013
c. Temporary Unloading or Storage
4. Stipulation for Limitation of Liability
a. Void Stipulations
Condition No. 14 printed at the back of the passage tickets should be
held as void and unenforceable for first, it is not just and fair to bind
passengers to the terms of the conditions printed at the back of the
passage tickets, and second, Condition No. 14 subverts the public
policy on transfer of venue of proceedings of this nature, since the
same will prejudice rights and interests of innumerable passengers in
different parts of the country who, under Condition No. 14, will have
to file suits against Sweet Lines only in the City of Cebu. (Sweet
Lines, Inc. vs. Hon. Bernardo Teves, Presiding Judge, CFI of
Misamis Oriental, Branch VII, G.R. No. L-37750, 19 May 1978)
b. Limitation of Liability to Fixed Amount
c. Limitation of Liability in Absence of Declaration of Greater Value
The stipulation in the bill of lading limiting the common carrier's
liability to the value of the goods appearing in the bill, unless the
shipper or owner declares a greater value, is valid and binding. This

limitation of the carrier's liability is sanctioned by the freedom of the

contracting parties to establish such stipulations, clauses, terms, or
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs and public policy. A stipulation
fixing or limiting the sum that may be recovered from the carrier on
the loss or deterioration of the goods is valid, provided it is (a)
reasonable and just under the circumstances, and (b) has been fairly
and freely agreed upon. In the case at bar, the shipper and consignee
are, therefore, bound by such stipulations. (St. Paul Fire & Marine
Insurance Co., vs. Macondray & Co, Inc., et al., G.R. No. L27796, 25 March 1976)
A stipulation in a contract of carriage that the carrier will not be liable
beyond a specified amount unless the shipper declares the goods to
have a greater value is generally deemed to be valid and will operate
to limit the carrier's liability, even if the loss or damage results from
the carrier's negligence. Pursuant to such provision, where the
shipper is silent as to the value of his goods, the carrier's liability for
loss or damage thereto is limited to the amount specified in the
contract of carriage and where the shipper states the value of his
goods, the carrier's liability for loss or damage thereto is limited to
that amount. Under a stipulation such as this, it is the duty of the
shipper to disclose, rather than the carrier's to demand the true value
of the goods and silence on the part of the shipper will be sufficient to
limit recovery in case of loss to the amount stated in the contract of
carriage. (Eastern and Australian Steamship Co., Ltd. vs. Great
American Insurance Co., G.R. No. L-37604 October 23, 1981)
5. Liability for Baggage of Passengers
a. Checked-In Baggage
Where airline passengers luggage was left at airlines fault in Manila
and passenger was not adequately or properly given assistance in
Hawaii to locate his luggage an award of moral damages is proper
(Pan American World Airways, Inc. vs. Intermediate Appellate
Court, G.R. No. 68988. June 21, 1990)
b. Baggage in Possession of Passengers
C. Safety of Passengers
A common carrier is bound to carry its passengers safely as far as
human care and foresight can provide, using the utmost diligence of

very cautious persons, with due regard to all the circumstances. In a

contract of carriage, it is presumed that the common carrier was at
fault or was negligent when a passenger dies or is injured. Unless the
presumption is rebutted, the court need not even make an express
finding of fault or negligence on the part of the common carrier. This
statutory presumption may only be overcome by evidence that the
carrier exercised extraordinary diligence. (Victory Liner, Inc. vs.
Rosalito Gammad, G.R. No. 159636, November 25, 2004)
The petitioner has the obligation to transport its passengers to their
destinations and to observe extraordinary diligence in doing so. Death
or any injury suffered by any of its passengers gives rise to the
presumption that it was negligent in the performance of its obligation
under the contract of carriage. (Philippine National Railways vs.
The Honorable Court of Appeals, G.R. No. L-55347. October 4,
1985)
But while petitioner failed to exercise extraordinary diligence as
required by law, it appears that the deceased was chargeable with
contributory negligence. Since he opted to sit on the open platform
between the coaches of the train, he should have held tightly and
tenaciously on the upright metal bar found at the side of said
platform to avoid falling off from the speeding train. Such contributory
negligence, while not exempting the PNR from liability, nevertheless
justified the deletion of the amount adjudicated as moral damages.
(Philippine National Railways vs. The Honorable Court of
Appeals, G.R. No. L-55347. October 4, 1985)
It is a matter of common knowledge and experience about common
carriers like trains and buses that before reaching a station or
flagstop they slow down and the conductor announces the name of
the place. It is also a matter of common experience that as the train
or bus slackens its speed, some passengers usually stand and
proceed to the nearest exit, ready to disembark as the train or bus
comes to a full stop. This is especially true of a train because
passengers feel that if the train resumes its run before they are able
to disembark, there is no way to stop it as a bus may be stopped. It
was negligence on the conductors part to announce the next flag
stop when said stop was still a full three minutes ahead. That the
announcement was premature and erroneous is shown by the fact

that immediately after the train slowed down, it unexpectedly

accelerated to full speed. The negligence of petitioner-appellant in
prematurely and erroneously announcing the next flag stop was the
proximate cause of the deaths of Martina Bool and Emelita
Gesmundo. Any negligence of the victims was at most contributory
and does not exculpate the accused from criminal liability.
(Clemente Brias vs. The People of the Philippines, G.R. No. L30309. November 25, 1983)
1. Void Stipulations
2. Duration of Liability
a. Waiting for Carrier or Boarding of Carrier
A public utility bus, once it stops, is in effect making a continuous
offer to bus riders. Hence, it becomes the duty of the driver and the
conductor, every time the bus stops, to do no act that would have the
effect of increasing the peril to a passenger while he was attempting
to board the same. The premature acceleration of the bus in this case
was a breach of such duty. Pedrito, by stepping and standing on the
platform of the bus, is already considered a passenger and is entitled
all the rights and protection pertaining to such a contractual relation.
Hence, it has been held that the duty which the carrier passengers
owes to its patrons extends to persons boarding cars as well as to
those alighting therefrom. (Dangwa Transportation Co., Inc. vs.
Court of Appeals, G.R. No. 95582, 7 October 1991)
b. Arrival at Destination
Anacleto Viana was still a passenger at the time of the incident. When
the accident occurred, the victim was in the act of unloading his
cargoes, which he had every right to do, from Aboitiz's vessel. A
carrier is duty bound not only to bring its passengers safely to their
destination but also to afford them a reasonable time to claim their
baggage. (Aboitiz Shipping Corporation vs. Hon. Court of
Appeals, Eleventh Division, G.R. No. 884458, 6 November
1989)
It has been recognized as a rule that the relation of carrier and
passenger does not cease at the moment the passenger alights from
the carrier's vehicle at a place selected by the carrier at the point of
destination, but continues until the passenger has had a reasonable
time or a reasonable opportunity to leave the carrier's premises. And,
what is a reasonable time or a reasonable delay within this rule is to

be determined from all the circumstances. In the present case, the

father returned to the bus to get one of his baggages which was not
unloaded when they alighted from the bus. Raquel, the child that she
was, must have followed the father. However, although the father was
still on the running board of the bus awaiting for the conductor to
hand him the bag or bayong, the bus started to run, so that even he
(the father) had to jump down from the moving vehicle. It was at this
instance that the child, who must be near the bus, was run over and
killed. In the circumstances, it cannot be claimed that the carrier's
agent had exercised the "utmost diligence" of a "very cautions
person" required by Article 1755 of the Civil Code to be observed by a
common carrier in the discharge of its obligation to transport safely
its passengers. (La Mallorca vs. Honorable Court of Appeals,
G.R. No. L-20761, July 27, 1966)
3. Liability for Acts of Others
a. Employees
The misconduct on the part of the carriers employees toward a
passenger gives the latter an action for damages against the carrier.
(Sabena Belgian World Airlines vs. Honorable Court of
Appeals G.R. No. 82068. March 31, 1989)
The negligence of the employee gives rise to the presumption of
negligence on the part of the employer. This is the presumed
negligence in the selection and supervision of the employee. The
theory of presumed negligence, in contrast with the American
doctrine of respondent superior, where the negligence of the
employee is conclusively presumed to be the negligence of the
employer, is clearly deducible from the last paragraph of Article 2180
of the Civil Code which provides that the responsibility therein
mentioned shall cease if the employers prove that they observed all
the diligence of a good father of a family to prevent damages.
(Leopoldo Poblete vs. Donato Fabros, G.R. No. L-29803, 14
September 1979)
It must be emphasized that a contract to transport passengers is
quite different in kind and degree from any other contractual
relations, and this is because of the relation, which an air carrier
sustains with the public. Its business is mainly with the travelling
public. It invites people to avail [themselves] of the comforts and

advantages it offers. The contract of air carriage, therefore, generates

a relation attended with a public duty. Neglect or malfeasance of the
carriers employees naturally could give ground for an action for
damages. (Collin A. Morris vs. Court of Appeals, G.R. No.
127957. February 21, 2001)
The basis of the carrier's liability for assaults on passengers
committed by its drivers rests either on (1) the doctrine of
respondeat superior or (2) the principle that it is the carrier's implied
duty to transport the passenger safely. Under the first, which is the
minority view, the carrier is liable only when the act of the employee
is within the scope of his authority and duty. It is not sufficient that
the act be within the course of employment only. Under the second
view, upheld by the majority and also by the later cases, it is enough
that the assault happens within the course of the employee's duty. It
is no defense for the carrier that the act was done in excess of
authority or in disobedience of the carrier's orders.The carrier's
liability here is absolute in the sense that it practically secures the
passengers from assaults committed by its own employees. As can be
gleaned from Art. 1759, the Civil Code of the Philippines evidently
follows the rule based on the second view. At least three very cogent
reasons underlie this rule: (1) the special undertaking of the carrier
requires that it furnish its passenger that full measure of protection
afforded by the exercise of the high degree of care prescribed by the
law, inter alia from violence and insults at the hands of strangers and
other passengers, but above all, from the acts of the carrier's own
servants charged with the passenger's safety; (2) said liability of the
carrier for the servant's violation of duty to passengers, is the result
of the formers confiding in the servant's hands the performance of his
contract to safely transport the passenger, delegating therewith the
duty of protecting the passenger with the utmost care prescribed by
law; and (3) as between the carrier and the passenger, the former
must bear the risk of wrongful acts or negligence of the carrier's
employees against passengers, since it, and not the passengers, has
power to select and remove them. (Antonia Maranan vs. Pascual
Perez, et al, G.R. No. L-22272, June 26, 1967)
b. Other Passengers and Strangers

A tort committed by a stranger which causes injury to a passenger

does not accord the latter a cause of action against the carrier. The
negligence for which a common carrier is held responsible is the
negligent omission by the carrier's employees to prevent the tort
from being committed when the same could have been foreseen and
prevented by them. (Jose Pilapil vs. Hon. Court of Appeals, G.R.
No. 52159, 22 December 1989)
4. Extent of Liability for Damages
It is well-settled that when death occurs as a result of the commission
of a crime (reckless imprudence), the following items of damages
may be recovered: (1) an indemnity for the death of the victim; (2) an
indemnity for loss of earning capacity of the deceased; (3) moral
damages; (4) exemplary damages; (5) attorneys fees and expenses
of litigation, and (6) interest in proper cases. (Clemente Brias vs.
The People of the Philippines, G.R. No. L-30309. November
25, 1983)
Article 1764 in relation to Article 2206 of the Civil Code, holds the
common carrier in breach of its contract of carriage that results in the
death of a passenger liable to pay the following: (1) indemnity for
death, (2) indemnity for loss of earning capacity, and (3) moral
damages. (Victory Liner, Inc. vs. Rosalito Gammad, G.R. No.
159636, November 25, 2004)
The Civil Code, in Article 1764 thereof, expressly makes Article 2206
applicable "to the death of a passenger caused by the breach of
contract by a common carrier." Accordingly, a common carrier is
liable for actual or compensatory damages under Article 2206 in
relation to Article 1764 of the Civil Code for deaths of its passengers
caused by the breach of the contract of transportation. (Sulpicio
Lines, Inc. vs. The Honorable Court of Appeals, G.R. No.
113578, 14 July 1995)
Under Article 1764 and Article 2206 (1) of the Civil Code, the award of
damages for death is computed on the basis of the life expectancy of
the deceased, not of his beneficiary. (Philippine Airlines, Inc. vs.
Hon. Court of Appeals, G.R. No. 54470. May 8, 1990)
Article 2220 of the Civil Code says that moral damages may be
awarded in breaches of contract where the defendant acted
fraudulently or in bad faith. So, proof of infringement of an
agreement by a party, standing alone, will not justify an award of
moral damages. There must, in addition, as the law points out, be
competent evidence of fraud of bad faith by that party. If the plaintiff,

for instance, fails to take the witness stand and testify as to his social
humiliation, wounded feelings, anxiety, etc., moral damages cannot
be recovered. The rules applies, of course, to common carriers. (Pan
American World Airways, Inc. vs. Intermediate Appellate
Court, G.R. No. 68988. June 21, 1990)
In awarding moral damages for breach of contract of carriage, the
breach must be wanton and deliberately injurious or the one
responsible acted fraudulently or with malice or bad faith. Where in
breaching the contract of carriage the defendant airline is not shown
to have acted fraudulently or in bad faith, liability for damages is
limited to the natural and probable consequences of the breach of
obligation which the parties had foreseen or could have reasonably
foreseen. In that case, such liability does not include moral and
exemplary damages. Moral damages are generally not recoverable in
culpa contractual except when bad faith had been proven. However,
the same damages may be recovered when breach of contract of
carriage results in the death of a passenger. The award of exemplary
damages has likewise no factual basis. It is a requisite that the act
must be accompanied by bad faith or done in wanton, fraudulent or
malevolent mannercircumstances which are absent in this case. In
addition, exemplary damages cannot be awarded as the requisite
element of compensatory damages was not present. (Collin A.
Morris vs. Court of Appeals, G.R. No. 127957. February 21,
2001)
The rule is that moral damages are recoverable in a damage suit
predicated upon a breach of contract of carriage only where (a) the
mishap results in the death of a passenger and (b) it is proved that
the carrier was guilty of fraud and bad faith even if death does not
result. For having arrived at the airport after the closure of the flight
manifest, respondents employee could not be faulted for not
entertaining petitioners tickets and travel documents for processing,
as the checking in of passengers for SAS Flight SK 893 was finished.
There was no fraud or bad faith as would justify the courts award of
moral damages. (Collin A. Morris vs. Court of Appeals, G.R. No.
127957. February 21, 2001)
The law distinguishes a contractual breach effected in good faith from
one attended by bad faith. Where in breaching the contract, the
defendant is not shown to have acted fraudulently or in bad faith,
liability for damages is limited to the natural and probable
consequences of the breach of the obligation and which the parties
had foreseen or could reasonably have foreseen; and in that case,
such liability would not include liability for moral and exemplary
damages. Under Article 2232 of the Civil Code, in a contractual or

quasi-contractual relationship, exemplary damages may be awarded

only if the defendant had acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. (China Airlines Limited vs.
Court of Appeals, 211 SCRA 897, 1992)
Exemplary damages may be allowed only in cases where the
defendant acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner, There being no evidence of fraud, malice or bad
faith on the part of petitioner, the grant of exemplary damages should
be discarded. (Philippine National Railways vs. The Honorable
Court of Appeals, G.R. No. L-55347. October 4, 1985)
D. Bill of Lading
A bill of lading is a written acknowledgment of the receipt of goods
and an agreement to transport and to deliver them at a specified
place to a person named or on his or her order. It operates both as a
receipt and as a contract. It is a receipt for the goods shipped and a
contract to transport and deliver the same as therein stipulated. As a
receipt, it recites the date and place of shipment, describes the goods
as to quantity, weight, dimensions, identification marks, condition,
quality, and value. As a contract, it names the contracting parties,
which include the consignee; fixes the route, destination, and freight
rate or charges; and stipulates the rights and obligations assumed by
the parties. (Unsworth Transport International Phils., Inc. vs.
Court of Appeals, G.R. No. 166250, July 26, 2010)
The bill of lading defines the rights and liabilities of the parties in
reference to the contract of carriage. Stipulations therein are valid
and binding in the absence of any showing that the same are contrary
to law, morals, customs, public order and public policy. Where the
terms of the contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of the stipulations shall
control. In light of the foregoing, there can be no question about the
validity and enforceability of Stipulation No. 7 in the bill of lading. The
twenty-four hour requirement under the said stipulation is, by
agreement of the contracting parties, a sine qua non for the accrual
of the right of action to recover damages against the carrier.
(Provident Insurance Corp., vs. Court of Appeals, G.R. No.
118030, January 15, 2004)
The holding in most jurisdictions has been that a shipper who
receives a bill of lading without objection after an opportunity to
inspect it, and permits the carrier to act on it by proceeding with the
shipment is presumed to have accepted it as correctly stating the

contract and to have assented to its terms. In other words, the

acceptance of the bill without dissent raises the presumption that all
the terms therein were brought to the knowledge of the shipper and
agreed to by him and, in the absence of fraud or mistake, he is
estopped from thereafter denying that he assented to such terms.
This rule applies with particular force where a shipper accepts a bill of
lading with full knowledge of its contents and acceptance under such
circumstances
makes
it
a
binding
contract. (Magellan
Manufacturing
Marketing
Corporation
vs.
Court
of
Appeals, G.R. No. 95529, August 22, 1991)
1. Three-Fold Character
A bill of lading serves two functions: First, it is a receipt for the goods
shipped; Second, it is a contract by which three parties, namely, the
shipper, the carrier, and the consignee undertake specific
responsibilities and assume stipulated obligations. A bill of lading
delivered and accepted constitutes the contract of carriage even
though not signed, because the acceptance of a paper containing the
terms of a proposed contract generally constitutes an acceptance of
the contract and of all its terms and conditions of which the acceptor
has actual or constructive notice (Keng Hua Paper Products Co.,
Inc. vs. Court of Appeals, 286 SCRA 257, 1998).
A bill of lading, aside from being a contract and a receipt, is also a
symbol of the goods covered by it. A bill of lading which has no
notation of any defect or damage in the goods is called a clean bill of
lading. A clean bill of lading constitutes prima facie evidence of the
receipt by the carrier of the goods as therein described. (Lorenzo
Shipping Corp. vs. Chubb and Sons, Inc., G.R. No.
147724, June 8, 2004)
2. Delivery of Goods
a. Period of Delivery
b. Delivery Without Surrender of Bill of Lading
The surrender of the original bill of lading is not a condition precedent
for a common carrier to be discharged of its contractual obligation. If
surrender of the original bill of lading is not possible, acknowledgment
of the delivery by signing the delivery receipt suffices. This is what
respondent did. (National Trucking and Forwarding Corporation
vs. Lorenzo Shipping Corporation, G.R. No. 153563, February
07, 2005)

c. Refusal of Consignee to Take Delivery

3. Period for Filing Claims
The twenty-four-hour period prescribed by Art. 366 of the Code of
Commerce within which claims must be presented does not begin to
run until the consignee has received such possession of the
merchandise that he may exercise over it the ordinary control
pertinent to ownership. In other words, there must be delivery of the
cargo by the carrier to the consignee at the place of destination.
(Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., G.R. No.
147724, June 8, 2004)
In order that the condition therein provided in Article 366 of the Code
of Commerce may be demanded there should be a consignment of
goods, through a common carrier, by a consignor in one place to a
consignee in another place. And said article provides that the claim
for damages must be made "within twenty-four hours following the
receipt of the merchandise" by the consignee from the carrier. In
other words, there must be delivery of the merchandise by the carrier
to the consignee at the place of destination. In the instant case, the
consignor is the branch office of Lee Teh & Co., Inc., at Catarman,
Samar, which placed the cargo on board the ship Jupiter, and the
consignee, its main office at Manila. The cargo never reached Manila,
its destination, nor was it ever delivered to the consignee, the office
of the shipper in Manila, because the ship ran aground upon entering
Laoang Bay, Samar on the same day of the shipment. Such being the
case, it follows that the aforesaid article 366 does not have
application because the cargo was never received by the consignee.
(New Zealand Insurance Co., Ltd., vs. Adriano Choa Joy, Etc.,
G.R. No. L-7311, September 30, 1955)
Under the Code of Commerce, the notice of claim must be made
within twenty four (24) hours from receipt of the cargo if the damage
is not apparent from the outside of the package. For damages that
are visible from the outside of the package, the claim must be made
immediately. Provisions specifying a time to give notice of damage to
common carriers are ordinarily to be given a reasonable and practical,
rather than a strict construction. Understandably, when the goods
were delivered, the necessary clearance had to be made before the
package was opened. Upon opening and discovery of the damaged
condition of the goods, a report to this effect had to pass through the
proper channels before it could be finalized and endorsed by the
institution to the claims department of the shipping company. The call
to Aboitiz was made two days from delivery, a reasonable period
considering that the goods could not have corroded instantly

overnight such that it could only have sustained the damage during
transit. Moreover, Aboitiz was able to immediately inspect the
damage while the matter was still fresh. In so doing, the main
objective of the prescribed time period was fulfilled. Thus, there was
substantial compliance with the notice requirement in this case.
(Aboitiz Shipping Corporation vs. Insurance Company of North
America, G.R. No. 168402, August 6, 2008)
4. Period for Filing Actions
In this jurisdiction, the filing of a claim with the carrier within the time
limitation therefor actually constitutes a condition precedent to the
accrual of a right of action against a carrier for loss of or damage to
the goods. The shipper or consignee must allege and prove the
fulfillment of the condition. If it fails to do so, no right of action
against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it
does not constitute a limitation of action. The requirement of giving
notice of loss of or injury to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to inform the
carrier that the cargo has been damaged, and that it is being charged
with liability therefor; and (2) to give it an opportunity to examine the
nature and extent of the injury. This protects the carrier by affording
it an opportunity to make an investigation of a claim while the matter
is fresh and easily investigated so as to safeguard itself from false
and fraudulent claims. (Federal Express Corporation vs. American
Home Assurance Company, G.R. No. 150094, August 18, 2004)
The Court has construed the 24-hour claim requirement as a
condition precedent to the accrual of a right of action against a
carrier for loss of, or damage to, the goods. The shipper or consignee
must allege and prove the fulfillment of the condition. Otherwise, no
right of action against the carrier can accrue in favor of the shipper or
consignee. (Ucpb General Insurance Co., Inc., vs. Aboitiz
Shipping Corporation, et. Al., G.R. No. 168433, February 10,
2009)
The bills of lading unequivocally prescribes a time frame of thirty (30)
days for filing a claim with the carrier in case of loss of or damage to
the cargo and sixty (60) days from accrual of the right of action for
instituting an action in court, which periods must concur. As the

requirements in Article 366, restated with a slight modification in the

assailed paragraph 5 of the bills of lading, are reasonable conditions
precedent, they are not limitations of action. Being conditions
precedent, their performance must precede a suit for enforcement
and the vesting of the right to file spit does not take place until the
happening of these conditions. (Philippine American General
Insurance Co., Inc. and Tagum Plastics, Inc., vs. Sweet Lines,
Inc., G.R. No. 87434 August 5, 1992)
E. Maritime Commerce
1. Charter Parties
a. Bareboat/Demise Charter
b. Time Charter
Where the agreement executed by the parties was a time charter where the
possession and control of the barge was retained by the owner, the latter is,
therefore, a common carrier legally charged with extraordinary diligence in
the vigilance over the goods transported by him. The sinking of the vessel
created a presumption of negligence and/or unseaworthiness which the
barge owner failed to overcome and gave rise to his liability for the charterer
lost cargo despite the latters failure to insure the same. Oceaneering
Contractrors (Phils), Inc. v. Nestor Barreto, doing business as NNB
Lighterage , GR No. 184215, February 9, 2011
c. Voyage/Trip Charter
It bears stressing that subject Letter of Agreement is considered a
Charter Party. A charter party is classified into (1) bareboat or
demise charter and (2) contract of affreightment. Subject contract
is one of affreightment, whereby the owner of the vessel leases part
or all of its space to haul goods for others. It is a contract for special
service to be rendered by the owner of the vessel. Under such
contract the ship owner retains the possession, command and
navigation of the ship, the charterer or freighter merely having use of
the space in the vessel in return for his payment of the charter hire.
(National Food Authority vs. Court of Appeals, G.R. No. 96453,
August 4, 1999)

A charter party is a contract by which an entire ship, or some

principal part thereof, is let by the owner to another person for a
specified time or use; a contract of affreightment is one by which
the owner of a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods, on a
particular voyage, in consideration of the payment of freight. A
contract of affreightment may be either time charter, wherein
the leased vessel is leased to the charterer for a fixed period of time,
or voyage charter, wherein the ship is leased for a single
voyage. In both cases, the charter-party provides for the hire of the
vessel only, either for a determinate period of time or for a single or
consecutive voyage, the ship owner to supply the ships store, pay for
the wages of the master of the crew, and defray the expenses for the
maintenance of the ship. Under a demise or bareboat charter on
the other hand, the charterer mans the vessel with his own people
and becomes, in effect, the owner for the voyage or service
stipulated, subject to liability for damages caused by negligence. If
the charter is a contract of affreightment, which leaves the
general owner in possession of the ship as owner for the voyage, the
rights and the responsibilities of ownership rest on the owner. The
charterer is free from liability to third persons in respect of the ship. It
is only when the charter includes both the vessel and its crew, as in a
bareboat or demise that a common carrier becomes private, at least
insofar as the particular voyage covering the charter-party is
concerned. (Caltex Philippines, Inc. vs. Sulpicio Lines, Inc., et.
al., G.R. No. 131166, September 30, 1999)
A bareboat or demise charter is where the ship owner turns over
possession of his vessel to the charterer, with the latter undertaking
to provide the crew, victuals, supplies, and fuel during the term of the
charter. In a time charter, the ship owner retains possession and
control of his vessel through the master and crew who remain in his
employ. A voyage charter is simply a contract of affreightment where
the master and crew remain in the employ of the ship owner. In a
demise or bareboat charter, the charterer who is treated ass owner
pro hac vice, and not the general owner, is liable for expenses of the
voyage including wages of seamen. (Lintonjua Shipping Company,
Inc. vs. National Seamen Board, 176 SCRA 189)

Cebu Salvage and MCCII entered into a "voyage charter," also known
as a contract of affreightment wherein the ship was leased for a
single voyage for the conveyance of goods, in consideration of the
payment of freight. Under a voyage charter, the shipowner retains
the possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for his
payment of freight. An owner who retains possession of the ship
remains liable as carrier and must answer for loss or non-delivery of
the goods received for transportation. (Cebu Salvage Corporation
vs. Philippine Home Assurance Corporation, G.R. No. 150403,
January 25, 2007)
2. Liability of Ship Owners and Shipping Agents
The real and hypothecary nature of maritime law simply means that
the liability of the carrier in connection with losses related to maritime
contract is confined to the vessel, which is hypothecated for such
obligations or which stands as the guaranty for their settlement. The
only time the Limited Liability Rule does not apply is when there is an
actual finding of negligence on the part of the vessel owner or agent.
(Aboitiz Shipping Corporation vs. General Accident Fire and
Life Assurance Corporation Ltd., 217 SCRA 359, 1993)
In case of collision of vessels, in order to avail of the benefits of
Article 837 of the Code of Commerce the shipowner or agent must
abandon the vessel. In such case the civil liability shall be limited to
the value of the vessel with all the appurtenances and freight earned
during the voyage. However, where the injury or average is due to
the ship-owner's fault as in this case, the shipowner may not avail of
his right to limited liability by abandoning the vessel. (Luzon
Stevedoring Corporation vs. Court of Appeals, G.R. No. L58897, 3 December 1987)
The term "ship agent" as used in the foregoing provision is broad
enough to include the ship owner. Pursuant to said provision,
therefore, both the ship owner and ship agent are civilly and directly
liable for the indemnities in favor of third persons, which may arise
from the conduct of the captain in the care of goods transported, as
well as for the safety of passengers transported. However, under the
same Article, this direct liability is moderated and limited by the ship
agent's or ship owner's right of abandonment of the vessel and
earned freight. The most fundamental effect of abandonment is the
cessation of the responsibility of the ship agent/owner. The ship
owner's or agent's liability is merely co-extensive with his interest in

the vessel such that a total loss thereof results in its extinction. "No
vessel, no liability" expresses in a nutshell the limited liability rule.
The total destruction of the vessel extinguishes maritime liens as
there is no longer any res to which it can attach. (Chua Yek Hong
vs. Intermediate Appellate Court, G.R. No. 74811, 30
September 1988)
The LIMITED LIABILITY RULE cannot be availed of by the
charterers/sub-charterer in order to escape from their liability. The
Code of Commerce is clear on which indemnities may be confined or
restricted to the value of the vessel and these are the indemnities
in favor of third persons which may arise from the conduct of the
captain in the care of the goods which he loaded on the vessel. Thus,
what is contemplated is the liability to third persons who may have
dealt with the SHIPOWNER, the AGENT or even the CHARTERER in
case of demise or bareboat charter.
The Charterer cannot use the said Rule because the it does not
completely and absolutely step into the shoes of the shipowner or even
the ship agent because there remains conflicting rights between the
former and the real shipowner as derived from their charter
agreement. Therefore, even if the contract is for a bareboat or demise
charter where possession, free administration and even navigation are
temporarily surrendered to the charterer, dominion over the vessel
remains with the shipowner. Ergo, the charterer or the sub-charterer,
whose rights cannot rise above that of the former, can never set up the
Limited Liability Rule against the very owner of the vessel. Dela Torre
vs. Court of Appeals, GR No. 160088, July 13, 2011

a. Liability for Acts of Captain

b. Exceptions to Limited Liability
The limited liability rule, however, is not without exceptions, namely:
(1) where the injury or death to a passenger is due either to the fault
of the ship owner, or to the concurring negligence of the ship owner
and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra);
(2) where the vessel is insured; and (3) in workmen's compensation
claims (Abueg vs. San Diego, supra). In this case, there is nothing in
the records to show that the loss of the cargo was due to the fault of
the private respondent as shipowners, or to their concurrent
negligence with the captain of the vessel. (Chua Yek Hong vs.
Intermediate Appellate Court, G.R. No. 74811, 30 September
1988)

The international rule is not to the effect that the right of

abandonment of vessels, as a legal limitation of a ship owners
liability, does not apply to cases where injury or average was
occasioned by the shipowners fault. Where the ship owner is likewise
to be blamed, Article 587 of the Code of Commerce will not apply,
and such situation will be governed by the provision of the Civil Code
on common carriers (Philippine American General Insurance Co.
vs. Court of Appeals, 273 SCRA 262, 1997).
3. Accidents and Damages in Maritime Commerce
a. General Average
b. Collisions
In American jurisprudence that there is a presumption of fault against
a moving vessel that strikes a stationary object such as a dock or
navigational aid. In admiralty, this presumption does more than
merely require the ship to go forward and produce some evidence on
the presumptive matter. The moving vessel must show that it was
without fault or that the collision was occasioned by the fault of the
stationary object or was the result of inevitable accident. It has been
held that such vessel must exhaust every reasonable possibility which
the circumstances admit and show that in each, they did all that
reasonable care required. In the absence of sufficient proof in
rebuttal, the presumption of fault attaches to a moving vessel which
collides with a fixed object and makes a prima facie case of fault
against the vessel. (Far Eastern Shipping Company vs. Court of
Appeals, G.R. No. 130068, October 1, 1998)
4. Carriage of Goods by Sea Act
a. Application
The law of the country to which the goods are to be transported
governs the liability of the common carrier in case of their loss,
destruction or deterioration" (Article 1753, Civil Code). Thus, the rule
was specifically laid down that for cargoes transported from Japan to
the Philippines, the liability of the carrier is governed primarily by the
Civil Code and in all matters not regulated by said Code, the rights
and obligations of common carrier shall be governed by the Code of
commerce and by laws (Article 1766, Civil Code). Hence, the Carriage
of Goods by Sea Act, a special law, is merely suppletory to the
provision of the Civil Code. (National Development Company vs.
The Court of Appeals, G.R. No. L-49469, August 19, 1988)

Inasmuch as neither the Civil Code nor the Code of Commerce states
a specific prescriptive period on the matter, the Carriage of Goods by
Sea Act (COGSA) which provides for a one-year period of limitation
on claims for loss of, or damage to, cargoes sustained during transit
may be applied suppletorily to the case at bar. This one-year
prescriptive
period also applies to the insurer of the
goods. (Loadstar Shipping Co., Inc., vs. Court of Appeals, G.R.
No. 131621 September 28, 1999)
It is to be noted that the Civil Code does not of itself limit the liability
of the common carrier to a fixed amount per package although the
Code expressly permits a stipulation limiting such liability. Thus, the
COGSA which is suppletory to the provisions of the Civil Code, steps
in and supplements the Code by establishing a statutory provision
limiting the carrier's liability in the absence of a declaration of a
higher value of the goods by the shipper in the bill of lading. The
provisions of the Carriage of Goods by.Sea Act on limited liability are
as much a part of a bill of lading as though physically in it and as
much a part thereof as though placed therein by agreement of the
parties. (Eastern Shipping Lines, Inc., vs. Intermediate
Appellate Court, G.R. No. L-69044 May 29, 1987)
It is settled in maritime law jurisprudence that cargoes while being
unloaded generally remain under the custody of the carrier. In the
instant case, the damage or losses were incurred during the
discharge of the shipment while under the supervision of the carrier.
Consequently, the carrier is liable for the damage or losses caused to
the shipment. Section 2 of the COGSA provides that under every
contract of carriage of goods by sea, the carrier in relation to the
loading, handling, stowage, carriage, custody, care, and discharge of
such goods, shall be subject to the responsibilities and liabilities and
entitled to the rights and immunities set forth in the Act. Section 3 (2)
thereof which states that among the carriers responsibilities are to
properly and carefully load, handle, stow, carry, keep, care for, and
discharge the goods carried. (Philippine First Insurance Co. Inc.,
vs. Wallem Phils. Shipping, Inc., G.R. No. 165647, 26 March
2009)
Carriage of Goods by Sea Act is applicable up to the final port of
destination and that the fact that transshipment was made on an
interisland vessel did not remove the contract of carriage of goods
from the operation of said Act. (Sea-Land Service, Inc.,vs.
Intermediate Appellate Court, G.R. No. 75118 August 31,
1987)

As defined in the Civil Code and as applied to Section 3 (6) paragraph

4 of the Carriage of Goods by Sea Act, "loss" contemplates merely a
situation where no delivery at all was made by the shipper of the
goods because the same had perished, gone out of commerce, or
disappeared that their existence is unknown or they cannot be
recovered. It does not include a situation where there was indeed
delivery but delivery to the wrong person, or a misdelivery, as
alleged in the complaint in this case. (Domingo Ang vs. American
Steamship Agencies, Inc., G.R. No. L-22491, January 27, 1967)
Loss refers to the deterioration or disappearance of goods.
Conformably with this concept of what constitutes loss or
damage,the deterioration of goods due to delay in their
transportation constitutes loss or damage within the meaning of
3(6) of the Carriage of Goods by the Sea Act, so that as suit was not
brought within one year the action was barred. (Mitsui O.S.K. Lines
Ltd. vs. Court of Appeals, G.R. No. 119571, March 11, 1998)
b. Notice of Loss or Damage
COGSA provides that the notice of claim need not be given if the
state of the goods, at the time of their receipt, has been the subject
of a joint inspection or survey. As stated earlier, prior to unloading the
cargo, an Inspection Report as to the condition of the goods was
prepared and signed by representatives of both parties. Moreover,
failure to file a notice of claim within three days will not bar recovery
if it is nonetheless filed within one year. This one-year prescriptive
period also applies to the shipper, the consignee, the insurer of the
goods or any legal holder of the bill of lading. (Belgian Overseas
Chartering and Shipping N.V. vs. Philippine First Insurance
Co., Inc., G.R. No. 143133, June 5, 2002)
Under Section 3 (6) of the COGSA, notice of loss or damages must be
filed within three days of delivery. Under the same provision, however,
a failure to file a notice of claim within three days will not bar recovery
if a suit is nonetheless filed within one year from delivery of the goods
or from the date when the goods should have been delivered. The filing
of an amended pleading does not retroact to the date of the filing of
the original. It is true that, as an exception, an amendment which
merely supplements and amplifies facts originally alleged in the
complaint relates back to the commencement of the action and is not
barred by the statute of limitations which expired after the service of
the original complaint. The exception, however, would not apply to the
party impleaded for the first time after the service of the amended

complaint. In this case, petitioner was not impleaded as a defendant in

the original complaint filed on March 11, 1993. It was only on June 7,
1993 that the Amended Complaint, impleading petitioner as defendant,
was filed. Considering this circumstances, clearly, the suit against the
petitioner was filed beyond the prescriptive period of the filing of
claims as provided in the COGSA. Wallem Philippines Shipping vs
SR Farms, GR No. 161849, July 9, 2010
In any event the carrier and the ship shall be discharged from all liability
in respect of loss or damage unless suit is brought within one year after
delivery of the goods or the date when the goods should have been
delivered: Provided, That if a notice of loss or damage, either apparent or
concealed, is not given as provided for in this section, that fact shall not
affect or prejudice the right of the shipper to bring suit within one year
after the delivery of the goods or the date when the goods should have
been delivered. Asian Terminals Inc., v. Philam Insurance Co. G.R.
NO. 181262 , July 24, 2013

c. Period of Prescription
The one-year period of limitation is designed to meet the exigencies
of maritime hazards. In a case where the goods shipped were neither
lost nor damaged in transit but were, on the contrary, delivered in
port to someone who claimed to be entitled thereto, the situation is
different, and the special need for the short period of limitation in
cases of loss or damage caused by maritime perils does not obtain.
(Mitsui O.S.K. Lines Ltd., represented by Magsaysay Agencies,
Inc. vs. Court of Appeals, G.R. No. 119571, March 11, 1998)
The one-year period within which the consignee should sue the
carrier is computed from "the delivery of the goods or the date when
the goods should have been delivered". The sensible and practical
interpretation is that delivery within the meaning of section 3(6) of
the Carriage of Goods by Sea Law means delivery to the arrastre
operator. That delivery is evidenced by tally sheets which show
whether the goods were landed in good order or in bad order, a fact
which the consignee or shipper can easily ascertain through the
customs broker. To use as basis for computing the one-year period the
delivery to the consignee would be unrealistic and might generate
confusion between the loss or damage sustained by the goods while
in the carrier's custody and the loss or damage caused to the goods
while in the arrastre operator's possession. (Union Carbide

Philippines, Inc. vs. Manila Railroad Co., G.R. No. L-27798,

June 15, 1977)
An action based on misdelivery of the cargo which should be
distinguished from loss thereof. The one-year period provided for in
section 3 (6) of the Carriage of Goods by Sea Act refers to loss of the
cargo. What is applicable in case of misdelivery of the cargo is the
four-year period of prescription for quasi-delicts prescribed in article
1146 (2) of the Civil Code or ten years for violation of a written
contract as provided for in article 1144 (1) of the same Code. As Ang
filed the action less than three years from the date of the alleged
misdelivery of the cargo, it has not yet prescribed. Ang, as indorsee of
the bill of lading, is a real party in interest with a cause of action for
damages. (Domingo Ang vs. Compania Maritima, Maritime
Company of the Philippines)
The one-year prescription period under the COGSA applies to the
insurer of the goods. Otherwise, what the Act intends to prohibit after
the lapse of the one-year prescriptive period can be done indirectly
by the shipper or owner of the goods by simply filing a claim against
the insurer even after the lapse of one year. This could not have been
the intention of the law which has also for its purpose the protection
of the carrier and the ship from fraudulent claims by having "matters
affecting transportation of goods by sea be decided in as short a time
as possible" and by avoiding incidents which would "unnecessarily
extend the period and permit delays in the settlement of questions
affecting the transportation. (Filipino Merchants Insurance
Company, Inc. vs. Honorable Jose Alejandro, Presiding Judge
of Branch XXVI of the Court of First Instance of Manila, G.R.
No. L-54140, October 14, 1986)
Section 3(6) of the Carriage of Goods by Sea Act states that the
carrier and the ship shall be discharged from all liability for loss or
damage to the goods if no suit is filed within one year after delivery of
the goods or the date when they should have been delivered. Under
this provision, only the carrier's liability is extinguished if no suit is
brought within one year. But the liability of the insurer is not
extinguished because the insurer's liability is based not on the
contract of carriage but on the contract of insurance. A close reading
of the law reveals that the Carriage of Goods by Sea Act governs the
relationship between the carrier on the one hand and the shipper, the
consignee and/or the insurer on the other hand. It defines the
obligations of the carrier under the contract of carriage. It does not,
however, affect the relationship between the shipper and the insurer.
The latter case is governed by the Insurance Code. The Filipino
Merchants case is different from the case at bar. In Filipino Merchants,

it was the insurer which filed a claim against the carrier for
reimbursement of the amount it paid to the shipper. In the case at
bar, it was the shipper which filed a claim against the insurer. The
basis of the shipper's claim is the "all risks" insurance policies issued
by private respondents to petitioner Mayer. The ruling in Filipino
Merchants should apply only to suits against the carrier filed either by
the shipper, the consignee or the insurer. When the court said in
Filipino Merchants that Section 3(6) of the Carriage of Goods by Sea
Act applies to the insurer, it meant that the insurer, like the shipper,
may no longer file a claim against the carrier beyond the one-year
period provided in the law. But it does not mean that the shipper may
no longer file a claim against the insurer because the basis of the
insurer's liability is the insurance contract. An insurance contract is a
contract whereby one party, for a consideration known as the
premium, agrees to indemnify another for loss or damage which he
may suffer from a specified peril. (Mayer Steel Pipe Corporation
vs. Court of Appeals, G.R. No. 124050 June 19, 1997)
The general provisions of the new Civil Code (Art. 1155 providing for
the interruption of the prescriptive period) cannot be made to apply in
a case under COGSA, as such application would have the effect of
extending the one-year period of prescription fixed in the law. It is
desirable that matters affecting transportation of goods by sea be
decided in as short a time as possible; the application of the
provisions of Article 1155 of the new Civil Code would unnecessarily
extend the period and permit delays in the settlement of questions
affecting transportation, contrary to the clear intent and purpose of
the law. (Dole Philippines, Inc. vs. Maritime Company of the
Philippines, G.R. No. L-61352 February 27, 1987)
Notwithstanding the fact that the case was filed beyond the one-year
prescriptive period provided under the COGSA, the suit ( against the
insurer ) will not be dismissed of the delay was not due the claimants
fault. Had the insurer processed and examined the claim promptly, the
claimant or the insurer itself, as subrogee, could have taken the judicial
action on time. By making an unreasonable demand for an itemized list
of damages which caused delay, the insurer should bear the loss with
interest, New World International Development Corporation vs
NYK-FilJapan Shipping Corporation, GR No. 171468, August 24,
2011
The term carriage of goods covers the period from the time when the
goods are loaded to the time when they are discharged from the ship;
thus, it can be inferred that the period of time when the goods have been
discharged from the ship and given to the custody of the arrastre
operator is not covered by the COGSA. Under the COGSA, the carrier and

the ship may put up the defense of prescription if the action for damages
is not brought within one year after delivery of the goods or the date
when the goods should have been delivered. However, the COGSA does
not mention than an arrastre operator may invoke the prescriptive
period; hence, it does not cover the arrastre operator. The arrastre
operators responsibility and liability for losses and damages are set forth
in the contract for cargo handling services executed between the
Philippine Ports Authority and Marina Port Services. Insurance
Company of North America vs. Asian Terminals, Inc. GR No.
180784, February 15, 2012

d. Limitation of Liability
Lastly, as to the liability of the carrier, it was reduced to to US$500
per package as provided in the Bill of Lading and by Section 4(5) of
COGSA. Stipulation in the bill of lading limiting to a certain sum the
common carrier's liability for loss or destruction of a cargo -- unless
the shipper or owner declares a greater value -- is sanctioned by
law. There are, however, two conditions to be satisfied: (1) the
contract is reasonable and just under the circumstances, and (2) it
has been fairly and freely agreed upon by the parties.The rationale
for this rule is to bind the shippers by their agreement to the value
(maximum valuation) of their goods. (Belgian Overseas Chartering
and Shipping N.V. vs. Philippine First Insurance Co., Inc., G.R.
No. 143133, June 5, 2002)
F. The Warsaw Convention
1. Applicability
2. Limitation of Liability
The Warsaw Convention however denies to the carrier availment "of
the provisions which exclude or limit his liability, if the damage is
caused by his willful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is considered
to be equivalent to willful misconduct," or "if the damage is (similarly)
caused by any agent of the carrier acting within the scope of his
employment." The Hague Protocol amended the Warsaw Convention
by removing the provision that if the airline took all necessary steps
to avoid the damage, it could exculpate itself completely, and
declaring the stated limits of liability not applicable "if it is proved
that the damage resulted from an act or omission of the carrier, its
servants or agents, done with intent to cause damage or recklessly

and with knowledge that damage would probably result." The same
deletion was effected by the Montreal Agreement of 1966, with the
result that a passenger could recover unlimited damages upon proof
of willful misconduct. (Alitalia vs. Intermediate Appellate Court,
G.R. No. 71929, December 4, 1990)
Under Article 28 ( 1 ) of the Warsaw Convention, the plaintiff may
bring the action for damages before: 1) the court where carrier is
domiciled; 2 ) the court where the carrier has its principal place of
business; 3 ) the court where the carrier has an establishment by
which the contract has been made; or 4 ) the court of the place of
destination. In this case, it is not disputed that respondent is a British
corporation domiciled in London, United Kingdom with London as its
principal place of business. Hence, under the first and second
jurisdictional rules, the petitioner may bring her case before the
courts of London in the United Kingdom. In the passenger ticket and
baggage check presented by both the petitioner and respondent, it
appears that the ticket was issued in Rome, Italy. Consequently,
under the third jurisdictional rule, the petitioner has the option to
bring her case before the courts of Rome in Italy. Finally, both the
petitioner and respondent aver that the place of destination is Rome,
Italy, which is properly designated given the routing presented in the
said passenger ticket and baggage check. Accordingly, petitioner
may bring her action before the courts of Rome, Italy. Thus, the RTC
of Makati correctly ruled that it does not have jurisdiction over the
case filed by the petitioner even though it was based on tort and not
on breach of contract. Lhuillier vs British Airways, G.R. No.
171092, March 15, 2010.

a. Liability to Passengers
In its ordinary sense, "delay" means to prolong the time of or before;
to stop, detain or hinder for a time, or cause someone or something
to be behind in schedule or usual rate of movement in
progress. "Bumping-off," which is the refusal to transport passengers
with confirmed reservation to their planned and contracted
destinations, totally forecloses said passengers' right to be
transported, whereas delay merely postpones for a time being the
enforcement of such right. Consequently, Section 2, Article 30 of the
Warsaw Convention which does not contemplate the instance of
"bumping-off" but merely of simple delay, cannot provide a handy
excuse for Lufthansa as to exculpate it from any liability to Antiporda.
(Lufthansa German Airlines vs. Court of Appeals, G.R. No.
83612, November 24, 1994)

b. Liability for Checked Baggage

While the Warsaw Convention has the force and effect of law in the
Philippines, being a treaty commitment by the government and as a
signatory thereto, the same does not operate as an exclusive
enumeration of the instances when a carrier shall be liable for breach
of contract or as an absolute limit of the extent of liability, nor does it
preclude the operation of the Civil Code or other pertinent laws. The
acceptance in due course by PAL of Mejias cargo as packed and its
advice against the need for declaration of its actual value operated as
an assurance to Mejia that in fact there was no need for such a
declaration. Mejia can hardly be faulted for relying on the
representations of PALs own personnel. In other words, Mejia could
and would have complied with the conditions stated in the air waybill,
i.e., declaration of a higher value and payment of supplemental
transportation charges, entitling her to recovery of damages beyond
the stipulated limit of US$20 per kilogram of cargo in the event of loss
or damage, had she not been effectively prevented from doing so
upon the advice of PALs personnel for reasons best known to
themselves. Even if the claim for damages was conditioned on the
timely filing of a formal claim, under Article 1186 of the Civil Code
that condition was deemed fulfilled, considering that the collective
action of PALs personnel in tossing around the claim and leaving it
unresolved for an indefinite period of time was tantamount to
voluntarily preventing its fulfillment. On grounds of equity, the filing
of the baggage freight claim, which sufficiently informed PAL of the
damage sustained by private respondents cargo, constituted
substantial compliance with the requirement in the contract for the
filing of a formal claim. (Philippine Airlines Inc. vs. Court of
Appeals, G.R. No. 119706, March 14, 1996)
The nature of an airlines contract of carriage partakes of two types,
namely: a contract to deliver a cargo or merchandise to its
destination and a contract to transport passengers to their
destination. A business intended to serve the travelling public
primarily, it is imbued with public interest, hence, the law governing
common carriers imposes an exacting standard. Neglect or
malfeasance by the carriers employees could predictably furnish
bases for an action for damages. American jurisprudence provides

that an air carrier is not liable for the loss of baggage in an amount in
excess of the limits specified in the tariff which was filed with the
proper authorities, such tariff being binding on the passenger
regardless of the passengers lack of knowledge thereof or assent
thereto. This doctrine is recognized in this jurisdiction. (British
Airways vs. Court of Appeals, G.R. No. 121824, January 29,
1998)
Article 19 of the Warsaw Convention provides for liability on the part
of a carrier for damages occasioned by delay in the transportation
by air of passengers, baggage or goods. Article 24 excludes other
remedies by further providing that (1) in the cases covered by
articles 18 and 19, any action for damages, however founded, can
only be brought subject to the conditions and limits set out in this
convention. Therefore, a claim covered by the Warsaw Convention
can no longer be recovered under local law, if the statute of
limitations of two years has already lapsed. Nevertheless, the Court
notes that jurisprudence in the Philippines and the United States also
recognizes that the Warsaw Convention does not exclusively
regulate the relationship between passenger and carrier on an
international flight. The Court finds that the present case is
substantially similar to cases in which the damages sought were
considered to be outside the coverage of the Warsaw Convention.
(Philippine Airlines Inc. vs. Hon. Adriano Savillo, et. al., G.R.
No. 149547, July 4, 2008)
In United Airlines v. Uy, the Court distinguished between the (1)
damage to the passengers baggage and (2) humiliation he suffered
at the hands of the airlines employees. The first cause of action was
covered by the Warsaw Convention which prescribes in two years,
while the second was covered by the provisions of the Civil Code on
torts, which prescribes in four years. Had the present case merely
consisted of claims incidental to the airlines delay in transporting
their passengers, Grios Complaint would have been time-barred
under Article 29 of the Warsaw Convention. (Philippine Airlines
Inc. vs. Hon. Adriano Savillo, et. al., G.R. No. 149547, July 4,
2008)
c. Liability for Handcarried Baggage

3. Willful Misconduct
The Warsaw Convention however denies to the carrier availment of
the provisions which exclude or limit his liability, if the damage is
caused by his willful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is considered
to be equivalent to willful misconduct, or if the damage is similarly
caused by any agent of the carrier acting within the scope of his
employment. Under domestic law and jurisprudence (the Philippines
being the country of destination), the attendance of gross negligence
(given the equivalent of fraud or bad faith) holds the common carrier
liable for all damages which can be reasonably attributed, although
unforeseen, to the non-performance of the obligation, including moral
and exemplary damages. (Sabena World Airlines vs. Court of
Appeals, G.R. No. 104685, March 14, 1996)
VI. The Corporation Code
A. Corporation
1. Definition
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
(Sec. 2, B.P. 68)
2. Attributes of the Corporation
When the corporation ( BB Sportswear, Inc. ) which the plaintiff
erroneously impleaded in a collection case was not the party to the
actionable agreement and turned out to be not registered with the
Securities and Exchange Commission, the judgment may still be
enforced against the corporation ( BB Footwear, Inc. ) which filed
the answer and participated in the proceedings, as well as its
controlling shareholder who signed the actionable agreement in his
personal capacity and as a single proprietorship doing business
under the trade name and style of BB Sportswear Enterprises.
Benny Hung vs BPI Finance Corporation . G.R. No. 182398,
20 July 2010
If the title over the land where the Hidden Valley Springs Resort is
located is registered in the name of the corporation, the heirs of a
stockholder who occupy houses built at the expense of the

corporation cannot claim ownership over said properties. A

stockholder is not the owner of any part of the capital of the
corporation and is not entitled to the possession of any definite
portion of its property or assets. (Rebecca Boyer-Roxas and
Guillermo Roxas vs. Hon. Court of Appeals and Heirs of
Eugenia V. Roxas, Inc., G.R. No. 100866, July 14, 1992)
When negotiations ensued in light of a planned takeover of
company and the counsel of the buyer advised the stockholder
through a letter that he may take the machineries he brought to the
corporation out with him for his own use and sale, the stockholder
cannot recover said machineries and equipment because these
properties remained part of the capital property of the corporation.
It is settled that the property of a corporation is not the property of
its stockholders or members. (Ryuichi Yamamoto vs. Nishino
Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283,
April 16, 2008)
B. Classes of Corporations
By its failure to submit its by-laws on time, the AIIBP may be
considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to
which such corporation may be a party. A corporation which has
failed to file its by-laws within the prescribed period does not ipso
facto
lose
its
powers
as
such.
The
SEC
Rules
on
Suspension/Revocation of the Certificate of Registration of
Corporations, details the procedures and remedies that may be
availed of before an order of revocation can be issued. There is no
showing that such a procedure has been initiated in this case.
(Sappari K. Sawadjaanvs. the Honorable Court of Appeals,
the Civil Service Commission and Al-amanah Investment
Bank of the Philippines, G.R. No. 141735, June 8, 2005)
Where persons associate themselves together under articles to
purchase property to carry on a business, and their organization is
so defective as to come short of creating a corporation within the
statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the
company will be recognized. However, such a relation does not
necessarily exist, for ordinarily persons cannot be made to assume
the relation of partners, as between themselves, when their purpose
is that no partnership shall exist, and it should be implied only when
necessary to do justice between the parties; thus, one who takes no
part except to subscribe for stock in a proposed corporation which is
never legally formed does not become a partner with other

subscribers who engage in business under the name of the

pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution. (Pioneer
Insurance & Surety Corporation vs. the Hon. Court of
Appeals, Border Machinery & Heavy Equipment, Inc.,
(BORMAHECO), Constancio M. Maglana and Jacob S. Lim,
G.R. No. 84197, July 28, 1989)
The plan of the parties to consolidate their respective jeepney
drivers' and operators' associations into a single common
association, if not yet approved by the SEC, neither had its officers
and members submitted their articles of consolidation in
accordance with Sections 78 and 79 of the Corporation Code, is a
mere proposal to form a unified association. Any dispute arising out
of the election of officers of said unified association is therefore not
an intra-corporate dispute. (Reynaldo M. Lozano vs. Hon.
Eliezer R. De los Santos, Presiding Judge, RTC, Br. 58,
Angeles City; and Antonio Anda, G.R. No. 125221, June 19,
1997)
Where there is no third person involved and the conflict arises only
among those assuming the form of a corporation, who therefore
know that it has not been registered, there is no corporation by
estoppel. (Reynaldo M. Lozano vs. Hon. Eliezer R. De los
Santos, Presiding Judge, RTC, Br. 58, Angeles City; and
Antonio Anda, G.R. No. 125221, June 19, 1997)
Under the law on estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without valid existence,
are held liable as general partners. Technically, it is true that
petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons
with whom he previously had an existing relationship, he is deemed
to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. (Lim Tong Lim vs. Philippine
Fishing Gear Industries, Inc., G.R. No. 136448, 3 November
1999)
When the petitioner is not trying to escape liability from the
contract but rather the one claiming from the contract, the doctrine
of corporation by estoppel is not applicable. This doctrine applies to
a third party only when he tries to escape liability on a contract
from which he has benefited on the irrelevant ground of defective
incorporation. (International Express Travel & Tour Services,
Inc. vs. Hon. Court of Appeals, Henri Kahn, Philippine
Football Federation, G.R. No. 119002, October 19, 2000)

The persons who illegally recruited workers for overseas

employment by representing themselves to be officers of a
corporation which they knew had not been incorporated are liable
as general partners for all debts, liabilities and damages incurred or
arising as a result thereof. (People of the Philippines vs. Engr.
Carlos Garcia y Pineda, Patricio Botero y Vales, Luisa
Miraples (at large) & Patricio Botero y Vales, G.R. No.
117010, 18 April 1997)
A Local Water District is a GOCC with an original charter and is not a
private corporation because it is not created under the Corporation
Code. A law enacted by Congress creating a private corporation with
a special charter is unconstitutional because private corporations
may exist only under a general law. (Engr. Ranulfo C. Feliciano,
in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City vs.
Commission on Audit, Chairman CELSO D. GANGAN,
Commissioners Raul C. Flores and Emmanuel M. Dalman,
and Regional Director of COA Region VIII, G.R. No. 147402,
14 January 2004)
The Philippine National Red Cross (PNRC) can neither be classified
as an instrumentality of the State, so as not to lose its character of
neutrality as well as its independence, nor strictly as a private
corporation since it is regulated by international humanitarian law
and is treated as an auxiliary of the State. The PNRC enjoys a
special status as an important ally and auxiliary of the government
in the humanitarian field in accordance with its commitments under
international law. (Dante V. Liban, Reynaldo M. Bernardo and
Salvador M. Viari vs. Richard J. Gordon, G. R. No. 175352,
January 18, 2011)
It is clear that a corporation is considered a government-owned or
-controlled corporation only when the Government directly or
indirectly owns or controls at least a majority or 51% share of the
capital stock. Consequently, RPN was neither a government-owned
nor a controlled corporation because of the Governments total
share in RPNs capital stock being only 32.4%. (Antonio M.
Carandang vs. Honorable Aniano A. Desierto, Office of the
Ombudsman, G.R. No. 153161, January 12, 2011)
Corporation by estoppel results when a corporation represented itself
to the public as such despite its not being incorporated. A corporation
by estoppel may be impleaded as a party defendant considering that it
possesses attributes of a juridical person, otherwise, it can not be held

liable for damages and injuries it may inflict to other persons.

Macasaet vs. Francisco, GR No. 156759, June 5, 2013
C. Nationality of Corporations
1. Place of Incorporation Test
In times of war, the nationality of a private corporation is
determined by the character or citizenship of its controlling
stockholders. The corporation was considered an enemy because
majority of its stockholders were German nationals. (Filipinas
Compaia De Segurosvs. Christern, Huenefeld and Co.,
Inc.,G.R. No. L-2294, May 25, 1951)
2. Control Test
A corporation organized under the laws of the Philippines of which
at least 60% of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines, is considered a
Philippine National. As such, the corporation may acquire disposable
lands in the Philippines. (Marissa R. Unchuan vs. Antonio J.P.
Lozada, Anita Lozada and the Register of Deeds of Cebu
City, G.R. No. 172671, April 16, 2009)
The fact that the religious organization has no capital stock does not
suffice to escape the Constitutional inhibition, since it is admitted
that its members are of foreign nationality. The purpose of the sixty
per centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens.
(Register of Deeds vs. Ung Sui Si Temple, G.R. No. L-6776,
May 21, 1955)
3. Grandfather Rule
D. Corporate Juridical Personality
1. Doctrine of Separate Juridical Personality
FBCIs acquisition of the substantial and controlling shares of
stocks of Esses and Tri-Star does not create a substantial change in
the rights or relations of the parties that would entitle FBCI to
possession of the Calatagan Property, a corporate property of Esses

and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A
corporation has a personality distinct from that of its stockholders.
Properties registered in the name of the corporation are owned by it
as an entity separate and distinct from its members. (Ricardo S.
Silverio, jr., Esses Development Corporation, and Tri-Star
Farms, Inc. vs. Filipino Business Consultants, Inc., G.R. No.
143312, August 12, 2005)
The personality of a corporation is distinct and separate from the
personalities of its stockholders. Hence, its stockholders are not
themselves the real parties in interest to claim and recover
compensation for the damages arising from the wrongful
attachment of its assets. Only the corporation is the real party in
interest for that purpose. (Stronghold Insurance Company, Inc.
vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013)
A corporation has its own legal personality separate and distinct
from those of its stockholders, directors or officers. Hence, absent
any evidence that they have exceeded their authority, corporate
officers are not personally liable for their official acts. Corporate
directors and officers may be held solidarily liable with the
corporation for the termination of employment only if done with
malice or in bad faith.(Rolando DS. Torres v. Rural Bank of San
Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
In order for the Court to hold the officer of the corporation personally
liable alone for the debts of the corporation and thus pierce the veil of
corporate fiction, the Court has required that the bad faith of the
officer must first be established clearly and convincingly. Petitioner,
however, has failed to include any submission pertaining to any
wrongdoing of the general manager. Necessarily, it would be unjust to
hold the latter personally liable. Moreso, if the general manager was
never impleaded as a party to the case. Mercy Vda. de Roxas,
represented by Arlene C. Roxas-Cruz, in her capacity as
substitute appellant-petitioner v. Our Lady's Foundation, Inc.
G.R. No. 182378, March 6, 2013.
Where two banks foreclosed mortgages on certain properties of a
mining company and resumed business operations thereof by
organizing a different company to which the banks transferred the
foreclosed assets, the banks are not liable to a contractor which was
engaged by the re-organized mining company even though the latter is
wholly-owned by the two banks and they have interlocking directors,
officers and stockholders. While ownership by one corporation of all or
a great majority of stocks of another corporation and their interlocking
directorates may serve as indicia of control, by themselves and without

more, however, these circumstances are insufficient to establish an

alter ego relationship or connection between the two banks and the
new mining company on the other hand, that will justify the puncturing
of the latters corporate cover. Mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Likewise, the existence of interlocking
directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations. Development Bank of
the Philippines vs. Hydro Resources Contractors Corporation,
GR. No. 167603, March 13, 2013
The fact that an employee of the corporation was made to resign and
not allowed to enter the workplace does not necessarily indicate bad
faith on the part of the employer corporation if a sufficient ground
existed for the latter to actually proceed with the termination. ABBOT
LABORATORIES VS. ALCARAZ, G.R. No. 192571, July 23, 2013
Other than mere ownership of capital stock, circumstances showing
that the corporation is being used to commit fraud or proof of
existence of absolute control over the corporation has to be proven. In
short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The mere fact that the
same controlling stockholder/officer signed the loan document on
behalf of the corporation does not prove that he exercised control over
the finances of the corporation. Neither is the absence of a board
resolution authorizing him to contract the loan nor the Corporations
failure to object thereto support this conclusion. While he is the
signatory of the loan and the money was delivered to him, the
proceeds of the loan were intended for the business plan of the
corporation. That the business plan did not materialize is also not a
sufficient proof to justify a piercing, in the absence of proof that the
business plan was a fraudulent scheme geared to secure funds from
the lender.
NUCCIO SAVERIOS VS. PUYAT, G.R. No. 186433,
November 27, 2013
a. Liability for Torts and Crimes
A corporation is civilly liable in the same manner as natural persons
for torts, because the rules governing the liability of a principal or
master for a tort committed by an agent or servant are the same
whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or
artificial person. A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express

direction or authority from the stockholders or members acting as a

body, or, generally, from the directors as the governing body.
(Philippine National Bank vs. Court of Appeals, et al., G.R.
No. L-27155, May 18, 1978)
To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance. (Sergio F.
Naguiat, doing business under the name and style Sergio F.
NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations
Commission
(Third
Division),
National
Organization Of Workingmen and its members, Leonardo T.
Galang, et al., G.R. No. 116123, March 13, 1997)
The powers to increase capitalization and to offer or give collateral
to secure indebtedness are lodged with the corporations board of
directors. However, this does not mean that the officers of the
corporation other than the board of directors cannot be made
criminally liable for their criminal acts if it can be proven that they
participated therein. (Gregorio Singian, Jr. vs. the Honorable
Sandiganbayan and the Presidential Commission on Good
Government, G.R. Nos. 160577-94, December 16, 2005)
An employee of a company or corporation engaged in illegal
recruitment may be held liable as principal, together with his
employer, if it is shown that he actively and consciously participated
in illegal recruitment, because the existence of the corporate entity
does not shield from prosecution the corporate agent who
knowingly and intentionally causes the corporation to commit a
crime. The corporation obviously acts, and can act, only by and
through its human agents, and it is their conduct which the law
must deter. (The Executive Secretary, et al. vs. Court of
Appeals, et al., G.R. No. 131719, May 25, 2004)
The Trust Receipts Law recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is
a corporation, the law makes the directors, officers or employees or
other persons responsible for the offense liable to suffer the penalty
of imprisonment. (Edward C. Ong, vs. the Court of Appeals and
the People of the Philippines, G.R. No. 119858, April 29,
2003)

Though the entrustee is a corporation, nevertheless, the law

specifically makes the officers, employees or other officers or
persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The
rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of
the law. (Alfredo Ching vs. the Secretary of Justice, et al., G.
R. No. 164317, February 6, 2006)
b. Recovery of Moral Damages
A corporation whose checks were dishonored by the drawee bank
despite availability of funds and because of the negligence of the
bank employees can recover moral damages for besmirched
reputation. The standing of the corporation was reduced in the
business community because of the banks negligence.(Simex
International, Incorporated vs. Court of Appeals, G.R. No.
88013 March 19, 1990)
Moral damages may be awarded to a corporation whose reputation
has been besmirched. In the instant case, FEMSCO has sufficiently
shown that its reputation was tarnished after it immediately ordered
equipment from its suppliers on account of the urgency of the
project, only to be canceled later by the counterparty in the
contract. (Jardine Davies, Inc. vs. Court of Appeals and Far
East Mills Supply Corporation, G.R. No. 128066, June 19,
2000)
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. Nevertheless, AMECs claim for
moral damages falls under item 7 of Article 2219 of the Civil Code
which expressly authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation. Article 2219(7)
does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages. [Filipinas Broadcasting Network, Inc. vs. AGO
Medical And Educational Center-Bicol Christian College of
Medicine, (AMEC-BCCM) and Angelita F. Ago, G.R. No.
141994, January 17, 2005]

As a rule, a corporation is not entitled to moral damages because,

not being a natural person, it cannot experience physical suffering
or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock. The only exception to this rule is when
the corporation has a reputation that is debased, resulting in its
humiliation in the business realm. But in such a case, it is essential
to prove the existence of the factual basis of the damage and its
causal relation to petitioner's acts. Thus, where the records are
bereft of evidence that the name or reputation of the corporation
has been debased as a result of Meralcos act ( which in this case is
the disconnection without written notice of the disconnection of the
electricity supply to the building of the corporation due to alleged
meter tampering ), the corporation is not entitled to moral
damages. (Manila Electric Company vs. T.E.A.M. Electronics
Corporation,
Technology
Electronics
Assembly
and
Management Pacific Corporation; and Ultra Electronics
Instruments, Inc., G.R. No. 131723, December 13, 2007)
While the Court may allow the grant of moral damages to
corporations, it is not automatically granted; there must still be
proof of the existence of the factual basis of the damage and its
causal relation to the defendants acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for
actual injury suffered and not to impose a penalty on the
wrongdoer. In this case, there being no wrongful or unjust act on the
part of BPI in demanding payment from the spouses and in seeking
the foreclosure of the chattel and real estate mortgages, there is no
lawful basis for award of damages in favor of the spouses. (Herman
C. Crystal, et al. vs. Bank of the Philippine Islands, G.R. No.
172428, November 28, 2008)
2. Doctrine of Piercing the Corporate Veil
The court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate personalities are
disregarded; and the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the
court by way of service of summons or what passes as such service.
Kukan International Corporation vs. Hon. Judge Amor Reyes,
G.R. No. 182729, 29 September 2010
However, in another case involving an action for breach of contract of
carriage resulting to the death of one of the passengers , Supreme
Court ruled that if the RTC had sufficient factual basis to conclude that

the two corporations are one and the same entity as when they have
the same President and controlling shareholder and it is generally
known in the place where they do business that both transportation
companies are one, the third party claim filed by the other corporation
was set aside and the levy on its property held valid even though the
latter was not made a party to the case . The judgment may be
enforced against the other corporation to prevent multiplicity of suits
and save the parties unnecessary expenses and delay. Gold Line
Tours vs. Heirs of Maria Concepcion Lacsa, GR No. 159108, 18
June 2012
The doctrine of piercing the veil of corporate fiction is applicable not
only to corporations but also to a single proprietorship as when the
corporation transferred its employees to the company owned by the
controlling stockholder of the corporation and yet despite the transfer,
the employees daily time records, reports, daily income remittances
and schedule of work were all made, performed, filed and kept in the
corporation. The corporation is clearly hiding behind the supposed
separate and distinct personality of the company. As such, the
corporation and the company should be solidarily liable for the claims
of the illegally dismissed employees. Prince Transport, Inc. vs.
Garcia, GR No. 167291, January 12, 2011
Although the corporate veil between two corporations can not be
pierced for lack of legal basis, it does not necessarily mean that the
corporate officers of such corporations are exempt from liability.
Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in
directing the affairs of the corporation. In this case, the officers of the
corporation who maliciously terminated the employment of certain
employees without any valid ground and in order to suppress their
right to self-organization, having acted in bad faith in directing the
affairs of the corporation, are solidarily liable with the corporation for
the unlawful dismissal. Park Hotel vs. Soriano, GR No. 171118,
September 10, 2012
Where the court rendered judgment against a stock brokerage firm
directing the latter to return shares of stock which it sold without
authority, but the writ of execution was returned unsatisfied, an alias
writ of execution could not be enforced against its parent company
because the court has not acquired jurisdiction over the latter and
while the parent company owns and controls the brokerage firm, there
is no showing that the control was used to violate the rights of the
plaintiff. Pacific Rehouse Corporation vs. Court of Appeals, GR.
No. 199687, March 24, 2014

a. Grounds for Application of Doctrine

When an operator of a bus transportation sold his two certificates of
public convenience to another corporation with the condition,
among others, that he shall not for a period of 10 years from the
date of the sale, apply for any TPU service identical or competing
with the buyer, the organization of a corporation barely 3 months
after the sale with the wife of operator and his brother and sister-inlaw as the incorporators is a clear violation of the condition. A seller
or promisor may not make use of a corporate entity as a means of
evading the obligation of his covenant. Where the Corporation is
substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee.
(Villa Rey Transit, Inc. vs. Eusebio E. Ferrer, Pangasinan
Transportation Co., Inc. and Public Service Commission, G.R.
No. L-23893, October 29, 1968)
Aggravating RANSOM's clear evasion of payment of its financial
obligations is the organization of a "run-away corporation,"
ROSARIO, in 1969 at the time the unfair labor practice case was
pending before the CIR by the same persons who were the officers
and stockholders of RANSOM, engaged in the same line of business
as RANSOM, producing the same line of products, occupying the
same compound, using the same machineries, buildings, laboratory,
bodega and sales and accounts departments used by RANSOM, and
which is still in existence. This is another instance where the fiction
of separate and distinct corporate entities should be disregarded as
the second corporation seeks the protective shield of a corporate
fiction whose veil in the present case could, and should, be pierced
as it was deliberately and maliciously designed to evade its financial
obligation to its employees. (A.C. Ransom Labor Union-CCLU vs.
National Labor Relations Commission, et al., G.R. No. L69494, May 29, 1987)
The fact that the businesses of private respondent and Acrylic are
related, that some of the employees of the private respondent are
the same persons manning and providing for auxilliary services to
the units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is the Courts
considered opinion that these facts are not sufficient to justify the
piercing of the corporate veil of Acrylic. Hence, the Acrylic not being
an extension or expansion of private respondent, the rank-and-file
employees working at Acrylic should not be recognized as part of,
and/or within the scope of the petitioner, as the bargaining
representative of private respondent. (Indophil Textile Mill
Workers Union-PTGWO vs. Voluntary Arbitrator Teodorico P.

Calica and Indophil Textile Mills, Inc., G.R. No. 96490,

February 3, 1992)
The defense of separateness will be disregarded where the business
affairs of a subsidiary corporation are so controlled by the mother
corporation to the extent that it becomes an instrument or agent of
its parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime. (Bibiano O. Reynoso,
IV vs. Hon. Court of Appeals and General Credit Corporation,
G.R. Nos. 116124-25, November 22, 2000)
The sale of Times franchise as well as most of its bus units to a
company owned by Rondaris daughter and family members, right
in the middle of a labor dispute, is highly suspicious. It is evident
that the transaction was made in order to remove Times remaining
assets from the reach of any judgment that may be rendered in the
unfair labor practice cases filed against it. (Times Transportation
Company, Inc. vs. Santos Sotelo, et al., G.R. No. 163786,
February 16, 2005)
Piercing the veil of corporate fiction is warranted when a corporation
ceased to exist only in name as it re-emerged in the person of
another corporation, for the purpose of evading its unfulfilled
financial obligation under a compromise agreement. Thus, if the
judgment for money claim could not be enforced against the
employer corporation, an alias writ may be obtained against the
other corporation considering the indubitable link between the
closure of the first corporation and incorporation of the other.
Livesey vs. Binswanger Philippines, GR No. 177493, March
19, 2014
b. Test in Determining Applicability
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows: 1.) Control, not mere
majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own; 2.) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal rights; and 3.) The aforesaid control
and breach of duty must proximately cause the injury or unjust loss

complained of. (Concept Builders, Inc. vs. the National Labor

Relations Commission, et al., G.R. No. 108734, May 29,
1996)
Concept Builders ceased its business operations in order to evade
the payment to private respondents of backwages and to bar their
reinstatement to their former positions. It is very obvious that the
second corporation seeks the protective shield of a corporate fiction
whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial
obligation to its employees. (Ibid.)
Under a variation of the doctrine of piercing the veil of corporate
fiction, when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same. While the conditions for the
disregard of the juridical entity may vary, the following are some
probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, as laid down in Concept
Builders, Inc. v NLRC: (1) Stock ownership by one or common
ownership of both corporations; (2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and (4)
Methods of conducting the business. (Heirs of Fe Tan Uy,
represented by her heir, Mauling Uy Lim vs. International
Exchange Bank, G.R. No. 166282 & 83, February 13, 2013)
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
corporation.
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to

this transaction had at the time no separate mind, will or existence of

its own
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiffs legal
right; and
3. The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test
requires that the subsidiary be completely under the control and
domination of the parent. It inquires whether a subsidiary corporation
is so organized and controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the parent corporation such
that its separate existence as a distinct corporate entity will be
ignored. In addition, the control must be shown to have been exercised
at the time the acts complained of took place.
The second prong is the "fraud" test. This test requires that the parent
corporations conduct in using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the plaintiff
creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to
show that the defendants control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. A causal
connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will have been treated
unjustly by the defendants exercise of control and improper use of the
corporate form and, thereby, suffer damages. Development Bank of
the Philippines vs. Hydro Resources Contractors Corporation,
GR. No. 167603, March 13, 2013
E. Incorporation and Organization
When the President of a non-existent principal entered into a
contract and failed to pay its obligation, he shall be the one liable to
the aggrieved party. A person acting as a representative of a nonexistent principal is the real party to the contract sued upon, being
the one who reaped the benefits resulting from it.(Mariano A.

Albert vs. University Publishing Co., Inc., G.R. No. L-19118,

January 30, 1965)
Where a national sports association which is not created by a
special law or a general enabling act, through its president, secured
airline tickets for the trips of its athletes and officials to the South
East Asian Games and later on failed to pay the obligation, the
president shall be personally liable. It is a settled principle in
corporation law that any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such
privileges and becomes personally liable for contract entered into or
for other acts performed as such agent.(International Express
Travel & Tour Services, Inc. vs. Hon. Court of Appeals, Henri
Kahn, Philippine Football Federation, G.R. No. 119002,
October 19, 2000)
A corporation created and organized for the purpose of conducting
the business of selling optical lenses or eyeglasses is not engaged
in the practice of optometry because the determination of the
proper lenses to sell to private respondent's clients entails the
employment of optometrists who have been precisely trained for
that purpose. Private respondent's business, rather, is the buying
and importing of eyeglasses and lenses and other similar or allied
instruments from suppliers thereof and selling the same to
consumers. (Samahanng Optometrists saPilipinas, Ilocos SurAbra Chapter, et al. vs. Acebedo International Corporation
and the Hon. Court of Appeals, G.R. No. 117097, 21 March
1997)
1. Promoter
a. Liability of Promoter
b. Liability of Corporation for Promoters Contracts
As a general rule, a corporation should have a full and complete
organization and existence as an entity before it can enter into any
kind of a contract or transact any business. This is subject to the
exception that a contract made by the promoters of a corporation
on its behalf may be adopted, accepted or ratified by the
corporation when organized. (Rizal Light & Ice Co., Inc. vs.the
Municipality of Morong, Rizal and the Public Service
Commission,G.R. No. L-20993, September 28, 1968)
2. Number and Qualifications of Incorporators

It is possible for a business to be wholly owned by one individual

because the validity of its incorporation is not affected when such
individual gives nominal ownership of only one share of stock to
each of the other four incorporators. As between the corporation on
the one hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of
determining who its shareholders are. (Nautica Canning
Corporation, et al. vs. Roberto C. Yumul,G.R. No. 164588,
October 19, 2005)
3. Corporate Name Limitations on Use of Corporate Name
A change in the name of the corporation does not make it a new
corporation and does not affect its properties, right and liabilities. It
is the same corporation with a different name, and its character is in
no respect changed. (Republic Planters Bank vs. Court of
Appeals, G.R. No. 93073, December 21, 1992)
The Court cannot impose on a bank that changes its corporate
name the obligation to notify a debtor of such change absent any
law, circular or regulation requiring it as such act would be judicial
legislation. Unless there is a law, regulation or circular from the SEC
or BSP requiring the formal notification of all debtors of banks of any
change in corporate name, such notification remains to be a mere
internal policy that banks may or may not adopt. (P.C. Javier &
Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et
al., G.R. No. 129552, June 29, 2005)
To fall within the prohibition under Section 18 of the Corporation
Code, two requisites must be proven, to wit: 1.) that the
complainant corporation acquired a prior right over the use of such
corporate name; and 2.) the proposed name is either: (a) identical,
or (b) deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.
Petitioners corporate name which is Industrial Refractories Corp. of
the Phils. and respondents corporate name which is Refractories
Corp. of the Phils. obviously contain the identical words
Refractories, Corporation and Philippines; hence, petitioners
corporate name clearly falls within the prohibition. (Industrial
Refractories Corporation of the Philippines vs. Court of
Appeals,
Securities
and
Exchange
Commission
and
Refractories Corporation of the Philippines, G.R. No. 122174,
October 3, 2002)

It is the SECs duty to prevent confusion in the use of corporate

names not only for the protection of the corporations involved but
more so for the protection of the public, and it has authority to deregister at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion. Clearly
therefore, the present case falls within the ambit of the SECs
regulatory powers.(Ibid.)
A change in the corporate name does not make a new corporation,
whether effected by a special act or under a general law. It has no
effect on the identity of the corporation, or on its property, rights, or
liabilities because the corporation upon such change in its name, is
in no sense a new corporation, nor the successor of the original
corporation.(P.C. Javier & Sons, Inc., et al. vs.Paic Savings &
Mortgage Bank, Inc., et al., G.R. No. 129552, June 29, 2005)
The mere change in the corporate name is not considered under the
law as the creation of a new corporation; hence, the renamed
corporation remains liable for the illegal dismissal of its employee
separated under that guise. Verily, the amendments of the articles
of incorporation of Zeta to change the corporate name to Zuellig
Freight and Cargo Systems, Inc. did not produce the dissolution of
the former as a corporation. (Zuellig Freight and Cargo
Systemsvs. National Labor Relations Commission, et al.,
G.R. No. 157900, July 22, 2013)
4. Corporate Term
When the period of corporate life expires, the corporation ceases to
be a body corporate for the purpose of continuing the business for
which it was organized, but it shall nevertheless be continued as a
body corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and defending
suits by or against it and enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its
assets. There is no need for the institution of a proceeding for quo
warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in
the articles of incorporation. (Philippine National Bank vs.the
Court of First Instance of Rizal, Pasig, et al.,G.R. No. 63201,
May 27, 1992)
5. Minimum Capital Stock and Subscription Requirements
The submission of the Board that the value of the assets of Asturias
Sugar Central, Inc. transferred to MSCI, as well as the loans or

advances made by MTII to MSCI should have been taken into

consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp
of a basic concept in Corporation Law, at worst. Not all funds or
assets received by the corporation can be considered paid-up
capital, for this term has a technical signification in Corporation Law
which is the portion of the authorized capital stock of the
corporation, subscribed and then actually paid up. (MSCI-NACUSIP
Local Chapter vs. National Wages and Productivity
Commission and Monomer Sugar Central, Inc., G.R. No.
125198, March 3, 1997)
In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the
election of directors. To construe broadly the term capital as the
total outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and letter of
the Constitution that the State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos. A
broad definition unjustifiably disregards who owns the all-important
voting stock, which necessarily equates to control of the public
utility. (Wilson P. Gamboa vs. Finance Secretary Margarito B.
Teves, et al., G.R. No. 176579, June 28, 2011)
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but
also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement applies uniformly and across the
board to all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation. Since a specific
class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40
ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the Constitution must apply not only to shares with
voting rights but also to shares without voting rights. (Heirs of
Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves,
et al., G.R. No. 176579, October 9, 2012)
6. Articles of Incorporation
a. Nature and Function of Articles
The best proof of the purpose of a corporation is its articles of
incorporation and by-laws, and in the case at bar, a perusal of the
Articles of Incorporation of Ellice and Margo shows no sign of the
allegedly illegal purposes that petitioners are complaining of. It is

well to note that, if a corporations purpose, as stated in the Articles

of Incorporation, is lawful, then the SEC has no authority to inquire
whether the corporation has purposes other than those stated, and
mandamus will lie to compel it to issue the certificate of
incorporation.(Alicia E. Gala, et al.vs. Ellice Agro-Industrial
Corporation, et al., G.R. No. 156819, December 11, 2003)
b. Contents
The fact that it maintains branch offices in some parts of the
country does not mean that it can be sued in any of these places
because to allow an action to be instituted in any place where a
corporate entity has its branch offices would create confusion and
inconvenience to the corporation. The residence of a corporation is
the place where its principal office is established. (Clavecillia
Radio System vs. Hon. Agustin Antillon, as City Judge of the
Municipal Court of Cagayan de Oro City and New Cagayan
Grocery, G.R. No. L-22238, February 18, 1967)
The venue in this case was improperly laid because the principal
office of Hyatt as stated in the Articles of Incorporation is in Makati
but the case was filed in Mandaluyong where Hyatt transferred its
operations. Since the principal place of business of a corporation
determines its residence or domicile, then the place indicated in
petitioners articles of incorporation becomes controlling in
determining the venue for the filing of a case. (Hyatt Elevators
and Escalators Corporation vs. Goldstar Elevators Phils.,
Inc., G.R. No. 161026, October 24, 2005)
c. Amendment
The Corporation does not necessarily prohibit the transfer of
proprietary shares by its members when its amended Articles of
Incorporation provides that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership
Book unless made in accordance with these Articles and the ByLaws." The authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict the right of a
stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of
Appeals and the American Champer of Commerce of the
Philippines, Inc,, G.R. No. 116631, October 28, 1998)
d. Non-Amendable Items

7. Registration and Issuance of Certificate of Incorporation

8.

Adoption

of

By-Laws

a. Nature and Functions of By-Laws

Every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. Under
section 21 of the Corporation Law, a corporation may prescribe in its
by-laws the qualifications, duties and compensation of directors,
officers and employees. (John Gokongwei, Jr. vs. Securities and
Exchange Commission, et al., G.R. No. L-45911, April 11,
1979)
Corporate powers may be directly conferred upon corporate officers
or agents by statute, the articles of incorporation, the by-laws or by
resolution or other act of the board of directors. Since the by-laws
are a source of authority for corporate officers and agents of the
corporation, a resolution of the Board of Directors of Citibank
appointing an attorney in fact to represent and bind it during the
pre-trial conference of the case at bar is not necessary because its
by-laws allow its officers, the Executing Officer and the Secretary
Pro-Tem - to execute a power of attorney to a designated bank
officer, William W. Ferguson in this case, clothing him with authority
to direct and manage corporate affairs. (Citibank, N.A. vs. Hon.
Segundino G. Chua, et al., G.R. No. 102300, March 17, 1993)
Since the SEC will grant a license only when the foreign corporation
has complied with all the requirements of law, it follows that when it
decides to issue such license, it is satisfied that the applicant's bylaws, among the other documents, meet the legal requirements.
Therefore, petitioner bank's by-laws, though originating from a
foreign jurisdiction, are valid and effective in the Philippines.
(Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R. No.
102300, March 17, 1993)
Non-filing of the by-laws will not result in automatic dissolution of
the corporation. Under Section 6(I) of PD 902-A, the SEC is
empowered to suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of a corporation on the
ground inter alia of failure to file by-laws within the required
period.
(Loyola
Grand
Villas
Homeowners
(South)
Association, Inc. vs. Hon. Court of Appeals, Home

Insurance
And Guaranty Corporation, Emden Encarnacion
and Horatio Aycardo, G.R. No. 117188, August 7, 1997)
Conformably with Section 25 of the Corporation Code, a position
must be expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an office
pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. (Matling Industrial and
Commercial Corporation, et al. vs. Ricardo R. Coros, G.R. No.
157802, October 13, 2010)
b. Requisites of Valid By-Laws
A provision in the by-laws of the corporation stating that of the 15
members of its Board of Directors, only 14 members would be
elected while the remaining member would be the representative of
an educational institution located in the village of the homeowners,
is invalid for being contrary to law. The fact that for fifteen years it
has not been questioned or challenged but, on the contrary,
appears to have been implemented by the members of the
association cannot forestall a later challenge to its validity because,
if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity(Grace Christian High
Schoolvs.the Court Of Appeals, Grace Village Association,
Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No.
108905, 23 October 1997)
The Corporation does not necessarily prohibit the transfer of
proprietary shares by its members when its amended Articles of
Incorporation provides that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership
Book unless made in accordance with these Articles and the ByLaws." The authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict the right of a
stockholder to transfer his shares by means of by-laws provisions,
but merely authorizes the adoption of regulations as to the
formalities and procedure to be followed in effecting transfer.
(Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No.
116631, October 28, 1998)
c. Binding Effects
CBC is not bound by the provision in the by-laws of the VGCCI
granting the VGCCI a preferred lien over the share of stock of a
member for unpaid dues. The by-law restricting the transfer of

shares cannot have any effect on the transferee of the shares in

question as he had no knowledge of such by-law when the shares
were assigned to him. (China Banking Corporation vs. Court of
Appeals, and Valley Golf and Country Club, Inc., G.R. No.
117604, March 26, 1997)
PMI College alleged that the employment contract entered into
between the school and Galvan is invalid because the signatory
thereon was not the Chairman of the Board as required by its bylaws. However, since by-laws operate merely as internal rules
among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge
of the same. (PMI Colleges vs. the National Labor Relations
Commission and Alejandro Galvan, G.R. No. 121466, 15
August 1997)
d. Amendment or Revision
When an amendment to a provision in the Amended By-Laws
requiring the unanimous vote of the directors present at a special or
regular meeting was not printed on the application form for
proprietory membership, and what was printed thereon was the
original provision which was silent on the required number of votes
needed for admission of an applicant as a proprietary member, the
Board of Directors committed fraud and evident bad faith in
disapproving respondents application under Article 31 of the
Corporation Code. The explanation given by the petitioner that the
amendment was not printed on the application form due to
economic reasons is flimsy and unconvincing because such
amendment, aside from being extremely significant, was introduced
way back in 1978 or almost twenty (20) years before respondent
filed his application. (Cebu Country Club, Inc., et al. vs. Ricardo
F. Elizagaque, G.R. No. 160273, January 18, 2008)
F. Corporate Powers
1. General Powers, Theory of General Capacity
The stevedoring services which involve the unloading of the coal
shipments into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the operation of the
plant. A corporation is not restricted to the exercise of powers
expressly conferred upon it by its charter, but has the power to do
what is reasonably necessary or proper to promote the interest or
welfare of the corporation. (National Power Corporation vs.
Honorable Abraham P. Vera, Presiding Judge, Regional Trial

Court, National Capital Judicial Region, Branch 90, Quezon

City and Sea Lion International Port Terminal Services, Inc.,
G.R. No. 83558, February 27, 1989)
It would seem that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in
a joint venture with others. (WolrgangAurbach, John Griffin,
David P. Whittinghamand Charles Chamsay vs. Sanitary
Wares Manufacturing Corporatoin, Ernesto V. Lagdameo,
Ernesto R. Lagdameo, Jr., Enrique R. Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young and Avelino V. Cruz,
G.R. No. 75875, December 15, 1989)
Providing gratuity pay is one of the express powers of the
corporation under the Corporation Code and therefore, resolutions
passed by the board approving the grant of gratuity pay to the
employees of the corporation during a meeting where one of the
directors was not notified thereof are not ultra vires. The grant of
gratuity pay does not require shareholders approval as it is not
tantamount to the sale, lease, exchange or disposition of all or
substantially all of the corporation's assets.(Lopez Realty, Inc.,
and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al.,
and the National Labor Relations Commission, G.R. No.
76801 August 11, 1995)
Lideco Corporation had no personality to intervene since it had
not been duly registered as a corporation. If petitioner Laureano
Investment & Development Corporation legally and truly wanted to
intervene, it should have used its corporate name as the law
requires and not another name which it had not registered.
(Laureano Investment & Development Corporation vs. the
Honorable Court of Appeals and BORMAHECO, Inc., G.R. No.
100468, May 6, 1997)
The power of a corporation to sue and be sued is exercised by the
board of directors. The physical acts of the corporation, like the
signing of documents, can be performed only by natural persons
duly authorized for the purpose by corporate bylaws or by a specific
act of the board. Absent the said board resolution, a petition may
not be given due course.(LigayaEsguerra, et al. vs. Holcim
Philippines, Inc., G.R. No. 182571, September 2, 2013)

The lawyer who signed the pleading, verification and certification

against non-forum shopping must be specifically authorized by the
Board of Directors of the Corporation to make his actions binding on his
principal. Maranaw Hotels and Resort Corporation v. Court of
Appeals, 576 SCRA 463 (2009)
If the real party in interest is a corporate body, an officer of the
corporation can sign the certification against forum shopping so long
as he has been duly authorized by a resolution of its board of directors.
The court did not commit grave abuse of discretion in dismissing the
petition for lack of authority of authority of the officer who signed the
certification of non-forum shopping in representation of petitioner
corporation. San Miguel Bukid Homeowners Association, Inc. vs
City of Mandaluyong, et al, GR no.153653, October 2, 2009;
Republic of the Philippines vs. Coalbrine International
Philippines, et al GR No. 161838, April 7, 2010
The following officers may sign the verification and certification against
non-forum shopping on behalf of the corporation even in the absence
of board resolution,
a)Chairperson
of
the
Board
b)President,
c)General
d)
Personnel
e)
Employment
Specialist
in

of

Directors;
Manager,

Officer,
labor

case.

These officers are in the position to verify the truthfulness and

correctness of the allegations in the petition. Mid Pasig Land and
Development Corporation v. Tablante, G.R. No. 162924,
February 4, 2010; PNCC Skyway Traffic Management and
Security Division Workers Organization vs PNCC Skyway
Corporation, GR No. 171231, February 17, 2010
The general rule is that a corporation can only exercise its powers and
transact its business through its board of directors and through its
officers and agents when authorized by a board resolution or its
bylaws. The power of a corporation to sue and be sued is exercised by
the board of directors. The physical acts of the corporation, like the
signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate bylaws or by a specific act of
the board. Absent the said board resolution, a petition may not be
given due course. Esguerra vs. Holcim Philippines
G.R. No.
182571, September 2, 2013

In a complaint for nullification of mortgage and foreclosure with

damages against the mortgagee-bank, the plaintiff can not compel the
officers of the bank to appear and testify as plaintiffs initial witnesses
unless written interrogatories are first served upon the bank officers.
This is in line with the Rules of Court provision that calling the adverse
party to the witness stand is not allowed unless written interrogatories
are first served upon the latter. This is because the officers of a
corporation are considered adverse parties as well in a case against
the corporation itself based on the principle that corporations act only
through their officers and duly authorized agents. Spouses
Afulugencia vs. Metropolitan Bank and Trust Co. G.R. No.
185145, February 05, 2014
2. Specific Powers, Theory of Specific Capacity
a. Power to Extend or Shorten Corporate Term
Section 11 of Corporation Code provides that a corporation shall
exist for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is
extended. Upon the expiration of the period fixed in the articles of
incorporation in the absence of compliance with the legal requisites
for the extension of the period, the corporation ceases to exist and
is dissolved ipso facto.(Philippine National Bank vs. the Court
of First Instance of Rizal, Pasig, et al.,G.R. No. 63201, May
27, 1992)
b. Power to Increase or Decrease Capital Stock or Incur, Create,
Increase Bonded Indebtedness
Prior to the approval by the Securities and Exchange Commission of
the increase in the authorized capital stock, such payments cannot
as yet be deemed part of a corporations paid-up capital, technically
speaking, because its capital stock has not yet been legally
increased. Such payments constitute deposits on future
subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a
certificate of filing of increase of capital stock is approved and
issued by the SEC. (Central Textile Mills, Inc.vs. National
Wages and Productivity Commission, et al., G.R. No. 104102,
August 7, 1996)
c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets

The sale or disposition of all or substantially all properties of the

corporation requires, in addition to a proper board resolution, the
affirmative votes of the stockholders holding at least two-thirds
(2/3) of the voting power in the corporation in a meeting duly called
for that purpose. No doubt, the questioned resolution was not
confirmed at a subsequent stockholders meeting duly called for the
purpose by the affirmative votes of the stockholders holding at least
two-thirds (2/3) of the voting power in the corporation. (Rosita
Pea vs. the Court of Appeals, Spouses Rising T. Yap and
Catalina Yap, Pampanga Bus Co., Inc., Jesus Domingo,
Joaquin Briones, Salvador Bernardez, Marcelino Enriquez
and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)
Where an asset constitutes the only property of the corporation, its
sale to a third-party is a sale or disposition of all the corporate
property and assets of said corporation falling squarely within the
contemplation of Section 40 of the Corporation Code. Hence, for the
sale to be valid, the majority vote of the legitimate Board of
Trustees, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained.(Islamic
Directorate of the Philippines, Manuel F. Perea and
Securities & Exchange Commission,vs. Court of Appeals And
Iglesia Ni Cristo, G.R. No. 117897, May 14, 1997)
e. Power to Acquire Own Shares
The requirement of unrestricted retained earnings to cover the
shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors.
The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. (Boman
Environmental Development Corporation vs. Hon. Court of
Appeals and Nilcar Y. Fajilan, G.R. No. 77860, November 22,
1988)
f. Power to Invest Corporate Funds in Another Corporation or
Business
A corporation, under the Corporation Code, has only such powers as
are expressly granted to it by law and by its articles of
incorporation, those which may be incidental to such conferred
powers, those reasonably necessary to accomplish its purposes and
those which may be incident to its existence. In the case at bar, a
company engaged in the practice of lending money is categorically
prohibited from engaging in pawnbroking as defined under PD

114.(Pilipinas Loan Company, Inc. vs. Hon. Securites and

Exchange Commission and Filipinas Pawnshop, Inc., G.R. No.
104720, April 4, 2001)
A mining corporation cannot engage in the highly speculative
business of urban real estate development, and could not have
validly acquired real estate property. ((Heirs of Antonio Pael and
Andrea Alcantara and CrisantoPael vs. Court of Appeals,
Jorge H. Chin and Renato B. Mallari, G.R. No. 133547,
February 10, 2000)
g. Power to Declare Dividends
The dividends received by a corporation from corporate investments
in other companies are corporate earnings. As such shareholder, the
dividends paid to it were its own money, which may then be
available for wage increments. (Madrigal & Company, Inc. vs.
Hon. Ronaldo B. Zamora, et al., G.R. NO. L-48237, June 30,
1987)
Dividends cannot be declared for preferred shares which were
guaranteed a quarterly dividend if there are no unrestricted
retained earnings. "Interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are
paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only. (Republic Planters Bank vs. Hon. Enrique A.
Agana, Sr., as Presiding Judge, Court of First Instance of
Rizal, Branch XXVIII, Pasay City, Robes-Francisco Realty &
Development Corporation and Adalia F. Robes, G.R. No.
51765, March 3, 1997)
h. Power to Enter Into Management Contract
i. Ultra Vires Acts
i. Applicability of Ultra Vires Doctrine
ii. Consequences of Ultra Vires Acts
While as a rule an ultra vires act is one committed outside the
object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by
law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if
they are necessary to promote the interest or welfare of the
corporation such as the establishment of the local post office which
is a vital improvement in the living condition of the employees and

laborers who came to settle in a mining camp which is far removed

from the postal facilities. The term ultra vires should be
distinguished from an illegal act for the former is merely voidable
which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. (Republic of the
Philippines vs. Acoje Mining Company, Inc., G.R. No. L18062, February 28, 1963)
The act of issuing the checks was well within the ambit of a valid
corporate act, for it was for securing a loan to finance the activities
of the corporation, hence, not an ultra vires act. (Atrium
Management Corporation vs. Court of Appeals, et al., G.R.
No. 109491, February 28, 2001)
Unlike illegal acts which contemplate the doing of an act that is
contrary to law, morals, or public policy or public duty, and are void,
ultra vires acts are those which are not illegal but are merely not
within the scope of the articles of incorporation and by-laws. They
are merely voidable and may become binding and enforceable when
ratified by the stockholders. (Maria Clara Pirovana, et al.vs.the
De La Rama Steamship Co., G.R. No. L-5377, December 29,
1954)
3. How Exercised
a. By the Shareholders
b. By the Board of Directors
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. Directors must act
as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder; but an action
of the board of directors during a meeting, which was illegal for lack
of notice, may be ratified either expressly, by the action of the
directors in subsequent legal meeting, or impliedly, by the
corporation's subsequent course of conduct.(Lopez Realty, Inc.,
and Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al.,
and the National Labor Relations Commission, G.R. No.
76801 August 11, 1995)
By the express mandate of the Corporation Code (Section 26), all
corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of

the directors, trustees and officers elected. In determining whether

the filing of a suit was authorized by the board of directors, the list
of directors in the latest general information sheet filed with the
Securities and Exchange Commission is controlling.(Premium
Marble Resources, Inc.vs. the Court of Appeals, G.R. No.
96551. November 4, 1996)
Under Section 36 of the Corporation Code, read in relation to
Section 23,it is clear that where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees. In this
case, the petitioner failed to show any proof that he was authorized
or deputized or granted specific powers by the corporations board
of director to sue Victor AngSiong for and on behalf of the firm, and
therefore he had no such power or authority to sue on Concords
behalf.(Tam Wing Takvs. Hon. Ramon P. Makasiar, G.R. No.
122452, January 29, 2001)
c. By the Officers
When the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading
activities for and in behalf of the corporation without prior board
approval, the board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval.
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without
formal authorization of the board of directors. (The Board of
Liquidators, representing the Government of the Republic of
the Philippines vs.Heirs of Maximo M. Kalaw, Juan Bocar,
Estate of the deceased Casimiro Garcia, and Leonor
Moll,G.R. No. L-18805, August 14, 1967)
When a bank, by its acts and failure to act, has clearly clothed its
manager with apparent authority to sell an acquired asset in the
normal course of business, it is legally obliged to confirm the
transaction by issuing a board resolution to enable the buyers to
register the property in their names. It has a duty to perform
necessary and lawful acts to enable the other parties to enjoy all
benefits of the contract which it had authorized. (Rural Bank Of
Milaor (Camarines Sur) vs. Francisca Ocfemia, Rowena
Barrogo, Marife O. Nio, FelicisimoOcfemia, Renato Ocfemia
Jr., and Winston Ocfemia, G.R. No. 137686, February 8,
2000)

If a corporation consciously lets one of its officers, or any other

agent, to act within the scope of an apparent authority, it will be
estopped from denying such officers authority. Since the records
show that Calo, who was an Account Officer, was the one assigned
to transact on petitioners behalf respecting the loan transactions
and arrangements of Inland as well as those of Hanil-Gonzales and
Abrantes, it is presumed that he had authority to sign for the bank
in the Deed of Assignment.(Westmont Bank (formerly
Associated Citizens Bank and now United Overseas Bank,
Phils.) And The Provincial Sheriff of Rizal vs. Inland
Construction and Development Corp., G.R. No. 123650,
March 23, 2009)
Accordingly, the authority to act for and to bind a corporation may
be presumed from acts of recognition in other instances, wherein
the power was exercised without any objection from its board or
shareholders. Undoubtedly, petitioner had previously allowed Atty.
Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent
authority to modify the same via the second letter-agreement. It is
not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power to
bind the corporation. (Associated Bank vs. Spouses Rafael and
MonalizaPronstroller, G.R. No. 148444, 14 July 2008)
Although a branch manager, within his field and as to third persons,
is the general agent and is in general charge of the corporation,
with apparent authority commensurate with the ordinary business
entrusted him and the usual course and conduct thereof, yet the
power to modify or nullify corporate contracts remains generally in
the board of directors. Being a mere branch manager alone is
insufficient to support the conclusion that he has been clothed with
apparent authority to verbally alter terms of written contracts,
especially when viewed against the telling circumstances of this
case: the unequivocal provision in the mortgage contract; the
corporations vigorous denial that any agreement to release the
mortgage was ever entered into by it; and, the fact that the
purported agreement was not even reduced into writing considering
its legal effects on the parties interests. Banate vs. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No.
163825, July 13, 2010
A corporation can not deny the authority of
lawyer when they
clothed him with apparent authority to act in their behalf such as
when he entered his appearance accompanied by the corporations

general manager and the corporation never questioned his acts and
even took time and effort to forward all the court documents to him.
The lawyer may not have been armed with a board resolution but
the doctrine of apparent authority imposes liability not as a result of
contractual relationship but rather because of the actions of the
principal or an employer in somehow misleading the public that the
relationship or the authority exists. Megan Sugar Corporation vs.
RTC of Ilo-ilo Br. 68, GR no. 170352, June 1, 2011
The doctrine of apparent authority provides that a corporation will
be estopped from denying the agents authority if it knowingly
permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as
possessing the power to do those acts.
Apparent authority is derived not merely from practice. Its existence
may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act
or, in other words the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. It is not the
quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the
corporation. When the sole management of the corporation was
entrusted to two of its officers/incorporators with the other officers
never had dealings with the corporation for 14 years and that the
board and the stockholders never had its meeting, the corporation
is now estopped from denying the officers authority to obtain loan
from the lender on behalf of the corporation under the doctrine of
apparent authority.
Advance Paper Corporation vs
Arma
Traders Corporation , G.R. No 176897, December 11, 2013.
4. Trust Fund Doctrine
In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is
allowed. The Trust Fund Doctrine provides that subscriptions to the
capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.
(Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 &
G.R. No. 144629, 8 April 2003)

When negotiations ensued in light of a planned takeover of

company and the counsel of the buyer advised the stockholder
through a letter that he may take the machineries he brought to the
corporation out with him for his own use and sale, the previous
stockholder cannot recover said machineries and equipment
because these properties remained part of the capital property of
the corporation. Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors which are preferred
over the stockholders in the distribution of corporate assets.
(Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and
Ikuo Nishino, G.R. No. 150283, April 16, 2008)
G. Board of Directors and Trustees
1. Doctrine of Centralized Management
2. Business Judgment Rule
The determination of the necessity for additional offices and/or
positions in a corporation is a management prerogative which
courts are not wont to review in the absence of any proof that such
prerogative was exercised in bad faith or with malice.Indeed, it
would be an improper judicial intrusion into the internal affairs of
Filport for the Court to determine the propriety or impropriety of the
creation of offices therein and the grant of salary increases to
officers thereof. (Filipinas Port Services, Inc., represented by
stockholders, Eliodoro C. Cruz and Mindanao Terminal and
Brokerage Services, Inc. vs. Victoriano S. Go, et al., G.R. No.
161886, March 16, 2007)
The Board of Directors of Matling could not validly delegate the
power to create a corporate office to the President, in light of
Section 25 of the Corporation Code requiring the Board of Directors
itself to elect the corporate officers. Verily, the power to elect the
corporate officers was a discretionary power that the law exclusively
vested in the Board of Directors, and could not be delegated to
subordinate officers or agents. (Matling Industrial and
Commercial Corporation, et al. vs. RICARDO R. COROS, G.R.
No. 157802, October 13, 2010)
Under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws the qualifications, duties and compensation
of directors, officers and employees. A provision in the by-laws of
the corporation that no person shall qualify or be eligible for

nomination for elections to the board of directors if he is engaged in

any business which competes with that of the Corporation is valid,
as long as due process is observed. (John Gokongwei, Jr. vs.
Securities and Exchange Commission, et al., G.R. No. L45911, April 11, 1979)
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
The board of directors of corporations must be elected from among
the stockholders or members. Thus, a provision in the by-laws of the
corporation stating that of the fifteen members of its Board of
Directors, only 14 members would be elected while the remaining
member would be the representative of an educational institution
located in the village of the homeowners, is invalid for being
contrary to law as it violates the one-year term limit of the directors.
(Grace Christian High Schoolvs.the Court Of Appeals, Grace
Village Association, Inc., Alejandro G. Beltran, and Ernesto
L. Go, G.R. No. 108905, 23 October 1997)
Both under the old and the new Corporation Codes there is no
dispute as to the most immediate effect of a voting trust agreement
on the status of a stockholder who is a party to its execution from
legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. Any
director who executes a voting trust agreement over all his shares
ceases to be a stockholder of record in the books of the corporation
and therefore ceases to be a director.(Ramon C. Lee and Antonio
DM. Lacdao vs. the Hon. Court of Appeals, Sacoba
Manufacturing Corp., Pablo Gonzales, Jr. and Thomas
Gonzales, G.R. No. 93695, 4 February 1992)
4. Elections
a. Cumulative Voting/Straight Voting
b. Quorum
5. Removal
6. Filling of Vacancies
When an incumbent member of the board of directors continues to
serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the
succeeding term. A vacancy resulting from the resignation of an
officer in a hold-over capacity, by the terms of Section 29 of the
Corporation Code, must be filled by the stockholders in a regular or

special meeting called for the purpose.(Valle Verde Country Club,

Inc., et al. vs. Victor Africa, G.R. No. 151969, 4 September
2009)
7. Compensation
The
proscription
against
granting
compensation
to
directors/trustees of a corporation is not a sweeping rule as worthy
of note is the clear phraseology of Section 30 which states: xxx
[T]he directors shall not receive any compensation, as such
directors, xxx. The unambiguous implication is that members of
the board may receive compensation, in addition to reasonable per
diems, when they render services to the corporation in a capacity
other than as directors/trustees. (Western Institute of
Technology, Inc., et al. vs.Ricardo T. Salas, et al., G.R. No.
113032, 21 August 1997)
8. Fiduciary Duties and Liability Rules
Before a director or officer of a corporation can be held personally
liable for corporate obligations, the following requisites must
concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith. In this case, petitioners
are correct to argue that it was not alleged, much less proven, that
Uy committed an act as an officer of Hammer that would permit the
piercing of the corporate veil as what the complaint simply stated is
that she, together with her errant husband Chua, acted as surety of
Hammer, as evidenced by her signature on the Surety Agreement
which was later found by the RTC to have been forged.(Heirs of Fe
Tan Uy, represented by her heir, Mauling Uy Lim vs.
International Exchange Bank, G.R. No. 166282 & 83,
February 13, 2013)
Article 212(e) of the Labor Code, by itself, does not make a
corporate officer personally liable for the debts of the corporation.
The governing law on personal liability of directors for debts of the
corporation is still Section 31 of the Corporation Code.(Alert
Security and Investigation Agency, Inc. and/or Manuel D.
Dasig
vs.
SaidaliPasawilan,
WilfredoVercelesand
MelchorBulusan, G.R. No. 182397, September 14, 2011)
The rule is still that the doctrine of piercing the corporate veil
applies only when the corporate fiction is used to defeat public

convenience, justify wrong, protect fraud, or defend crime. Neither

Article 212[e] nor Article 273 (now 272) of the Labor Code expressly
makes any corporate officer personally liable for the debts of the
corporation.(Antonio C. Carag vs. National Labor Relations
Commission, et al., G.R. No. 147590, April 2, 2007)
The execution of a document by a bank manager called pagares
which guaranteed purchases on credit by a client is contrary to the
General Banking law which prohibits bank officers from
guaranteeing loans of bank clients. In this case, it is plain from the
guarantee Grey executed that he was acting for himself, not in
representation of UCPB; hence, UCPB cannot be bound by Greys
above undertaking since he appears to have made it in his personal
capacity. (United Coconut Planters Bank vs. Planters
Products, Inc., Janet Layson and Gregory Grey, G.R. No.
179015, June 13, 2012)
To hold the general manager personally liable alone for the debts of
the corporation and thus pierce the veil of corporate fiction, it is
required that the bad faith of the officer be established clearly and
convincingly. Petitioner, however, has failed to include any
submission pertaining to any wrongdoing of the general manager.
Necessarily, it would be unjust to hold the latter personally liable.
(Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R.
No. 182378, March 6, 2013)
A corporation has its own legal personality separate and distinct
from those of its stockholders, directors or officers. Hence, absent
any evidence that they have exceeded their authority, corporate
officers are not personally liable for their official acts. Corporate
directors and officers may be held solidarily liable with the
corporation for the termination of employment only if done with
malice or in bad faith.(Rolando DS. Torres v. Rural Bank of San
Juan, Inc. et al., G.R. No. 184520, March 13, 2013)
Obligations incurred as a result of the directors and officers acts as
corporate agents, are not their personal liability but the direct
responsibility of the corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in the complaint that
the director or officer assented to patently unlawful acts of the
corporation or that the officer was guilty of gross negligence or bad

faith; and (2) there must be proof that the officer acted in bad faith.
The fact that the corporation ceased its operations the day after the
promulgation of the SC resolution finding the corporation liable does
not prove bad faith on the part of the incorporator of the corporation.
Polymer Rubber Corporation vs. Ang, G.R. No. 185160. July 24,
2013
Although joint and solidary liability for money claims and damages
against a corporation attaches to its corporate directors and officers
under R.A. 8042, it is not automatic. To make them jointly and
solidarily liable, there must be a finding that they were remiss in
directing the affairs of the corporation, resulting in the conduct of
illegal activities. Absent any findings regarding the same, the
corporate directors and officers cannot be held liable for the
obligation of the corporation against the judgment debtor.
(Elizabeth M. Gaguivs. Simeon Dejeroand TeodoroPermejo,
G.R. No. 196036, October 23, 2013)
9. Responsibility for Crimes
The Trust Receipts Law recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is
a corporation, the law makes the officers or employees or other
persons responsible for the offense liable to suffer the penalty of
imprisonment. (Edward C. Ong, vs. the Court of Appeals and
the People of the Philippines, G.R. No. 119858, April 29,
2003)
Though the entrustee is a corporation, nevertheless, the law
specifically makes the officers, employees or other officers or
persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The
rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of
the law. (Alfredo Ching vs. the Secretary of Justice, et al., G.
R. No. 164317, February 6, 2006)
10. Inside Information
11. Contracts
a. By Self-Dealing Directors with the Corporation
b. Between Corporations with Interlocking Directors

When a mortgagee bank foreclosed the mortgage on the real and

personal property of the debtor and thereafter assigned the
properties to a corporation it formed to manage the foreclosed
assets, the unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee and the
assignee have interlocking directors.There is no bad faith on the
part of DBP by its creation of Nonoc Mining, Maricalum and Island
Cement as the creation of these three corporations was necessary
to manage and operate the assets acquired in the foreclosure sale
lest they deteriorate from non-use and lose their value.
(Development Bank of the Philippines vs. Honorable Court of
Appeals and Remington Industrial Sales Corporation , G.R.
No. 126200, August 16, 2001)
c. Management Contracts
12. Executive Committee
13. Meetings
The non-signing by the majority of the members of the GSIS Board
of Trustees of the minutes of the meeting does not necessarily
mean that the supposed resolution was not approved by the board.
The signing of the minutes by all the members of the board is not
required because it is the signature of the corporate secretary gives
the minutes of the meeting probative value and credibility.(People
of the Philippines vs. Hermenegildo Dumlao y Castiliano and
Emilio La'o y Gonzales, G.R. No. 168918, March 2, 2009)
a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum
Under Section 25 of the Corporation Code of the Philippines, the
articles of incorporation or by-laws of the corporation may fix a
greater number than the majority of the number of board members
to constitute the quorum necessary for the valid transaction of
business. When only three (3) out of five (5) members of the board
of directors of PAMBUSCO convened on November 19, 1974 by
virtue of a prior notice of a special meeting,there was no quorum to
validly transact business since, under Section 4 of the amended bylaws hereinabove reproduced, at least four (4) members must be
present to constitute a quorum in a special meeting of the board of

directors of PAMBUSCO.(Rosita Pea vs. the Court of Appeals,

Spouses Rising T. Yap and Catalina Yap, Pampanga Bus Co.,
Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478,
February 7, 1991)
d. Rule on Abstention
H. Stockholders and Members
1. Rights of a Stockholder and Members
a. Doctrine of Equality of Shares
2. Participation in Management
a. Proxy
When proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly
seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in
relation to Section 5(c) of Presidential Decree No. 902-A. From the
language of Section 5(c) of Presidential Decree No. 902-A, it is
indubitable that controversies as to the qualification of voting
shares, or the validity of votes cast in favor of a candidate for
election to the board of directors are properly cognizable and
adjudicable by the regular courts exercising original and exclusive
jurisdiction over election cases. (Government Service Insurance
System vs. the Hon. Court of Appeals, G.R. No. 183905, April
16, 2009)
b. Voting Trust
c. Cases When Stockholders Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal

In order to give rise to any obligation to pay on the part of the

corporation, the dissenting stockholder should first make a valid
demand that the corporation refused to pay despite having
unrestricted retained earnings. Otherwise, the corporation could not be
said to be guilty of any actionable omission that could sustain the
action to collect. The collection suit filed by the dissenting stockholder
to enforce payment of the fair value of his shares is premature if at
the time of demand for payment, the corporation had no surplus profit.
The fact that the Corporation subsequent to the demand for payment
and during the pendency of the collection case posted surplus profit
did not cure the prematurity of the cause of action. Turner vs.
Lorenzo Shipping Corporation, G.R. No. 157479, November 24,
2010
c. Right to Inspect
Considering that the foreign subsidiary is wholly owned by the
corporation and, therefore, under its control, it would be more in
accord with equity, good faith and fair dealing to construe the
statutory right of a stockholder to inspect the books and records of
the corporation as extending to books and records of such wholly
subsidiary which are in the corporation's possession and control.
(John
Gokongwei,
Jr.
vs.
Securities
and
Exchange
Commission, et al., G.R. No. L-45911, April 11, 1979)
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of
the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership.(John
Gokongwei, Jr. vs. Securities and Exchange Commission, et
al., G.R. No. L-45911, April 11, 1979)
The only express limitation on the right of inspection, according to
the Court, is that (1) the right of inspection should be exercised at
reasonable hours on business days; (2) the person demanding the
right to examine and copy excerpts from the corporate records and
minutes has not improperly used any information secured through
any previous examination of the records of such corporation; and
(3) the demand is made in good faith or for a legitimate purpose.
(Victor Africa vs. Presidential Commission on Good
Government, et al., G.R. No. 83831, January 9, 1992)
d. Pre-Emptive Right

Even if pre-emptive right does not exist either because the issue
comes within the exceptions in Section 39 of the Corporation Code
or because it is denied in the articles of incorporation, an issue of
shares may still be objectionable if the directors acted in breach of
trust and their primary purpose is to perpetuate or shift control of
the corporation or to freeze out the minority interest. The
issuance of unissued shares out of the original authorized capital
stock pursuant to a rehabilitation plan the propriety and validity of
which was on question by the minority stockholders and
subsequently disapproved by the court amounts to unlawful dilution
of the minority shareholdings. Majority of Stockholders of Ruby
Industrial Corporation vs Lim, GR No. 165887, June 6, 2011
e. Right to Vote
f. Right to Dividends
Stock dividends cannot be issued to one who is not a stockholder of
a corporation for payment of services rendered.(Nielson &
Company, Inc. vs.Lepanto Consolidated Mining Company,
G.R. No. L-21601, December 17, 1966)
Dividends are distributed to stockholders pursuant to their right to
share in corporate profits. When a dividend is declared, it belongs
to the person who is the substantial and beneficial owner of the
stock at the time regardless of when the distribution profit was
earned. (Nora A. Bitongvs. Court of Appeals, et al., G.R. No.
123553, July 13, 1998)
g. Right of First Refusal
A joint venture agreement giving to the shareholders the right to
purchase the shares of their co-shareholders before they are offered
to a third party does not violate the provision of the Constitution
limiting land ownership to Filipinos and Filipino corporations. If the
corporation still owns the land, the right of first refusal can be
validly assigned to a qualified Filipino entity in order to maintain the
60% - 40% ratio.(J.G. Summit Holdings, Inc. vs. Court of
Appeals, et al. G.R. No. 124293, January 31, 2005)
4. Remedial Rights
a. Individual Suit
b. Representative Suit
c. Derivative Suit

A suit to enforce pre-emptive right in a corporation is not a

derivative suit because it was not filed for the benefit of the
coporation. The petitioner was suing on her own behalf, and was
merely praying that she be allowed to subscribe to the additional
issuances of stocks in proportion to her shareholdings to enable her
to preserve her percentage of ownership in the corporation. (Gilda
C. Lim, Wilhelmina V. Joven and Ditas A. Lerios, vs. Patricia
Lim-Yu, in her capacity as a minority stockholder of Limpan
Investment Corporation, G.R. No. 138343, February 19,
2001)
The personal injury suffered by the spouses cannot disqualify them
from filing a derivative suit on behalf of the corporation. It merely
gives rise to an additional cause of action for damages against the
erring directors.(Virginia O. Gochan, et al. vs. Richard G.
Young, et al., G.R. No. 131889, March 12, 2001)
For a derivative suit to prosper, it is required that the minority
stockholder suing for and on behalf of the corporation must allege in
his complaint that he is suing on a derivative cause of action on
behalf of the corporation and all other stockholders similarly
situated who may wish to join him in the suit. A public prosecutor,
by the nature of his office, is under no compulsion to file a criminal
information where no clear legal justification has been shown, and
no sufficient evidence of guilt nor prima facie case has been
presented by the petitioner. (Tam Wing Tak vs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001)
The bare claim that the complaint is a derivative suit will not suffice
to confer jurisdiction on the RTC (as a special commercial court) if
he cannot comply with the requisites for the existence of a
derivative suit. These requisites are: a.) the party bringing suit
should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material; b.) the
party has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief, but the
latter has failed or refused to heed his plea; andc.) the cause of
action actually devolves on the corporation; the wrongdoing or harm
having been or being caused to the corporation and not to the
particular stockholder bringing the suit.(Oscar C. Reyes vs. Hon.
Regional Trial Court of Makati, Branch 142, Zenith Insurance
Corporation, and Rodrigo C. Reyes, G.R. No. 165744, 11
August 2008)
The stockholder filing a derivative suit should have exerted all
reasonable efforts to exhaust all remedies available under the articles

of incorporation, by-laws, laws or rules governing the corporation to

obtain the relief he desires and to allege such fact with particularity in
the complaint. The allegation that the suing stockholder talked to the
other stockholder regarding the dispute hardly constitutes all
reasonable efforts to exhaust all remedies available . The complaint
should also allege the fact that there was no appraisal right available
under for the acts complained of and that the suit was not a nuisance
or harassment suit. The fact that the corporation involved is a family
corporation should not in any way exempt the suing stockholder from
the requirements and formalities for filing a derivative suit. Yu vs.
Yukayguan, 588 SCRA 589 ( 2009 )
Petitioners seek the nullification of the election of the Board of
Directors composed of herein respondents, who pushed through with
the election even if petitioners had adjourned the meeting allegedly
due to lack of quorum. Petitioners are the injured party, whose rights
to vote and to be voted upon were directly affected by the election of
the new set of board of directors. The party-in-interest are the
petitioners as stockholders, who wield such right to vote. The cause of
action devolves on petitioners, not the condominium corporation,
which did not have the right to vote. Hence, the complaint for
nullification of the election is a direct action by petitioners, who were
the members of the Board of Directors of the corporation before the
election, against respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative suit filed by
petitioners in behalf of the condominium corporation is improper.
Legaspi Towers 300, Inc., vs. Muer G.R. No. 170783, June 18,
2012.
A derivative suit is an action brought by a stockholder on behalf of the
corporation to enforce corporate rights against the corporations
directors, officers or other insiders. Under Sections 23 and 36 of the
Corporation Code, the directors or officers, as provided under the bylaws, have the right to decide whether or not a corporation should sue.
Since these directors or officers will never be willing to sue themselves
or impugn their wrongful and fraudulent decisions, stockholders are
permitted by law to bring an action in the name of the corporation to
hold these directors and officers accountable. In derivative suits, the
real party in interest is the corporation while the stockholder is only a
nominal party.
Section 1, Rule 8 of the Interim Rules imposes the following
requirements for derivative suits:
(1) The person filing the suit must be a stockholder or member at the
time the acts or transactions subject of the action occurred and the
time the action was filed;

(2) He must have exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.
The complaint filed by a stockholder to compel another stockholder to settle
his share of the loan because this will affect the financial viability of the
corporation can not be considered as a derivative suit because the loan was
not a corporate obligation but a personal debt of the stockholders. The fact
that the stockholders attempted to constitute a mortgage over their
share in a corporate asset can not affect the corporation where the wordings
of the mortgage agreement reveal that it was signed by the stockholders in
their personal capacity as the owners of the pro-indiviso share in the
corporate property and not on behalf of the corporation. ANG, FOR AND IN
BEHALF OF SUNRISE MARKETING (BACOLOD), INC. V. SPS.
ANG.G.R. No.
201675, June 19, 2013

5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
Quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common
shares. There is no gainsaying that the contents of the articles of
incorporation are binding, not only on the corporation, but also on
its shareholders. (Jesus V. Lanuza, et al.vs. Court of Appeals,
et al., G.R. No. 131394, March 28, 2005)
d. Minutes of the Meetings
I. Capital Structure
1. Subscription Agreements
A subscription contract necessarily involves the corporation as one
of the contracting parties since the subject matter of the transaction

is property owned by the corporation its shares of stock. Hence, a

stockholder cannot, by himself, rescind a pre-subscription contract.
(Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 &
G.R. No. 144629, April 8, 2003)
2. Consideration for Stocks
3. Shares of Stock
a. Nature of Stock
Upon the death of a shareholder, the heirs do not automatically
become stockholders of the corporation and acquire the rights and
privileges of the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate proceedings,
and the transfer of the stocks must be recorded in the books of the
corporation.(JoselitoMusni Puno vs. Puno Enterprises, Inc.,
represented by Jesusa Puno, G.R. No. 177066, September
11, 2009)
The authority granted to a corporation to regulate the transfer of its
stock does not empower it to restrict the right of a stockholder to
transfer his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to be followed in
effecting transfer. (Marsh Thomson vs. Court of Appeals and
the American Champer of Commerce of the Philippines, Inc,,
G.R. No. 116631, October 28, 1998)
The registered owner of the shares of a corporation, even if they are
sequestered by the government through the PCGG, exercises the
right and the privilege of voting on them. The PCGG as a mere
conservator cannot, as a rule, exercise acts of dominion by voting
these shares. The registered owner of sequestered shares may only
be deprived of these voting rights, and the PCGG authorized to
exercise the same, only if it is able to establish that (1) there is
prima facie evidence showing that the said shares are ill-gotten and
thus belong to the State; and (2) there is an imminent danger of
dissipation, thus necessitating the continued sequestration of the
shares and authority to vote thereupon by the PCGG while the main
issue is pending before the Sandiganbayan. (Trans Middle East
(Phils.) vs.Sandiganbayan, G.R. No. 172556, June 9, 2006)
The arrangement provided for in the by-laws of the Corporation
whereby a lien is constituted on the membership share to answer for
dues, assessments and subsequent obligations to the corporation
cannot be upheld unless coupled by a corresponding pledge or chattel

mortgage agreement . Valley Golf and Country Club, Inc. v. Vda.

De Caram, 585 SCRA 218 (2009)
A stock corporation is expressly granted the power to issue or sell
stocks. The power to issue stocks is lodged with the Board of Directors
and no stockholders meeting is required to consider it because
additional issuances of stock ( unlike increase in capital stock ) does
not need approval of the stockholders. What is only required is the
board resolution approving the additional issuance of shares. The
corporation shall also file the necessary application with the SEC to
exempt these from the registration requirements under the SRC.
Majority of Stockholders of Ruby Industrial Corporation vs Lim,
GR No. 165887, June 6, 2011
Under the two-tiered test, the government, thru PCGG, may vote
sequestered shares if there is a prima facie evidence that the shares
are ill-gotten and there is imminent danger of dissipation of assets while
the case is pending. However, the two- tiered test contemplates a
situation where the registered stockholders were in control and had
been dissipating company assets and the PCGG wanted to vote the
sequestered shares to save the company. It does not apply when the
PCGG had voted the shares and is in control of the sequestered
corporation . Africa vs. Hon. Sandiganbayan , G.R. Nos.
172222/G.R. No. 174493/ G.R. No. 184636, November 11, 2013
Since the law does not prescribe a period for registration of shares in
the books of the corporation, the action to enforce the right to have it
done does not begin until a demand for it had been made and was
refused. Africa vs. Hon. Sandiganbayan, ibid.
b. Subscription Agreements
A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and
under the conditions prescribed by the statute or the charter or the
articles of incorporation. Subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look
for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order
to realize assets for the payment of its debt. (Philippine National
Bank vs.Bitulok Sawmill, Inc., et al., G.R. Nos. L-24177-85,
June 29, 1968)

c. Consideration for Shares of Stock

d. Watered Stock
i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks
e. Situs of the Shares of Stock
f. Classes of Shares of Stock
"Interest bearing stocks", on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares
in question and to pay the corresponding dividends, committed
grave abuse of discretion amounting to lack or excess of jurisdiction
in ignoring both the terms and conditions specified in the stock
certificate, as well as the clear mandate of the law.(Republic
Planters Bank vs. Hon. Enrique A. Agana, Sr., as Presiding
Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay
City, Robes-Francisco Realty & Development Corporation
and Adalia F. Robes, G.R. No. 51765, March 3, 1997)
4. Payment of Balance of Subscription
a. Call by Board of Directors
b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency
At the root of the sale of delinquent stock is the non-payment of the
subscription price for the share of stock itself. The stockholder or
subscriber has yet to fully pay for the value of the share or shares
subscribed. In this case, Clemente had already fully paid for the
share in Calatagan and no longer had any outstanding obligation to
deprive him of full title to his share. (Calatagan Golf Club, Inc.
vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009)
ii. Call by Resolution of the Board of Directors
iii. Notice of Sale
iv. Auction Sale and the Highest Bidder
5. Certificate of Stock

a. Nature of the Certificate

While shares of stock constitute personal property, they do not
represent property of the corporation. A share of stock only typifies
an aliquot part of the corporation's property, or the right to share in
its proceeds to that extent when distributed according to law and
equity, but its holder is not the owner of any part of the capital of
the corporation.(Stockholders of F. Guanzon and Sons, Inc.
vs.Register of Deeds of Manila, G.R. No. L-18216, October
30, 1962)
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein. The
certificate is not stock in the corporation but is merely evidence of
the holder's interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of
such ownership. It expresses the contract between the corporation
and the stockholder, but is not essential to the existence of a share
in stock or the nation of the relation of shareholder to the
corporation. (Alfonso S. Tan vs. Securities And Exchange
Commission, G.R. No. 95696 March 3, 1992)
The certificate of stock itself once issued is a continuing affirmation
or representation that the stock described therein is valid and
genuine and is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary. A mere
typewritten statement advising a stockholder of the extent of his
ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of stock.
(Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553,
July 13, 1998)
b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks
The law is clear that in order for a transfer of stock certificate to be
effective, the certificate must be properly indorsed and that title to
such certificate of stock is vested in the transferee by the delivery
of the duly indorsed certificate of stock. Since the certificate of
stock covering the questioned 1,500 shares of stock registered in
the name of the late Juan Chuidian was never indorsed to the
petitioner, the inevitable conclusion is that the questioned shares of
stock belong to Chuidian. (Enrique Razon vs. Intermediate
Appellate Court and Vicente B. Chuidian, in his capacity as

Administrator of the Estate of the Deceased

Chuidian, G.R. No. 74306, 16 March 1992)

Juan

T.

Where a stockholder executed a Special Power of Attorney in favor

of his wife who, by virtue of said SPA, sold the shares, the
corporation cannot refuse to register the shares in favor of the
assignee on the ground that upon the death of the stockholder, the
shares of stock became the property of his estate which should be
settled and liquidated first before any distribution could be made.
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is
ministerial on its part, is to render nugatory and ineffectual the
spirit and intent of Section 63 of the Corporation Code. (Rural Bank
of Salinas, Inc. vs. Securities and Exchange Commission, et
al., G.R. No. 96674, June 26, 1992)
Section 63 of the Corporation Code which provides that "no shares
of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation" does not include
monthly dues. The term "unpaid claim" refers to "any unpaid claim
arising from unpaid subscription, and not to any indebtedness which
a subscriber or stockholder may owe the corporation arising from
any other transaction."(China Banking Corporation vs. Court of
Appeals, and Valley Golf and Country Club, Inc., G.R. No.
117604, March 26, 1997)
Section 63 of the Corporation Code strictly requires the recording of
the transfer in the books of the corporation, and not elsewhere, to
be valid as against third parties. Thus, the transfer of the subject
certificate made by Dico to petitioner was not valid as to the
spouses Atinon, the judgment creditors, as the same still stood in
the name of Dico, the judgment debtor, at the time of the levy on
execution. (Nemesio Garcia vs. Nicolas Jomouad, Ex-Officio
Provincial Sheriff of Cebu, and Spouses Jose Atinon& Sally
Atinon, G.R. No. 133969, 26 January 2000)
For a valid transfer of stocks, there must be strict compliance with
the mode of transfer prescribed by law. The requirements are: (a)
There must be delivery of the stock certificate; (b) The certificate
must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and (c) To be valid
against third parties, the transfer must be recorded in the books of
the corporation. A deed of assignment of shares without
endorsement and delivery is binding only on the parties and does
not necessarily make the transfer effective as against the
corporation.(The Rural Bank of Lipa City, Inc., et al.vs.

Honorable Court of Appeals, G.R. No. 124535,

28, 2001)

September

Without such recording, the transferee may not be regarded by the

corporation as one among its stockholders and the corporation may
legally refuse the issuance of stock certificates in the name of the
transferee even when there has been compliance with the
requirements of Section 64 of the Corporation Code. The situation
would be different if the petitioner was himself the registered owner
of the stock which he sought to transfer to a third party, for then he
would be entitled to the remedy of mandamus.(Vicente C. Ponce
vs. Alsons Cement Corporation, and Francisco M. Giron, Jr.,
G.R. No. 139802, December 10, 2002)
Section 63 of the Corporation Code provides that shares of stock so
issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer. The
failure of the stockholder to deliver the stock certificate to the buyer
within a reasonable time the shares covered by the stock certificate
should have been delivered is a substantial breach that entitles the
buyer to rescind the sale under Article 1191 of the Corporation Code
. It is not entirely correct to say the sale had already been
consummated as the buyer already enjoyed the rights a shareholder
can exercise. The enjoyment of these rights will not suffice where
the law, by its express terms, requires a specific form to transfer
ownership. Fil-Estate Golf and Development vs. Vertex Sales
and Trading Inc., G.R. No. 202079, June 10, 2013
The Corporation whose shares of stock are the subject of a transfer
transaction (through sale, assignment, donation, or any other mode of
conveyance) need not be a party to the transaction, as may be
inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is
necessary that the transfer is recorded in the books of the
corporation. In a share purchase transaction, the parties are the seller
and buyer of the shares. Not being a party to the sale, the Corporation
is in no position to appeal the ruling rescinding the sale of the shares.
If the Seller of the shares filed no appeal against the court decision
declaring the rescission of the sale, then the rescission is deemed
final despite any appeal by the corporation whose shares of stock are
the subject of the transfer transaction. Forest Hills Golf & Country
Club vs. Vertex Sales and Trading Inc.G.R. No. 202205, March
6, 2013.
d. Issuance

i. Full Payment
When a stockholder in a stock corporation subscribes to a certain
number of shares but does not pay the full amount for such shares,
a certificate of stock shall still be issued to him and he shall be
entitled to vote the shares even though they are not fully paid.
(Irineo S. Baltazar vs. Lingayen Gulf Electric Power, Co., Inc.,
G.R. No. L-16236, June 30, 1965)
ii. Payment Pro-Rata
e. Lost or Destroyed Certificates
6. Stock and Transfer Book
a. Contents
A stock and transfer book is necessary as a measure of precaution,
expediency and convenience since it provides the only certain and
accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily
are or should be written therein. (Jesus V. Lanuza, et al.vs. Court
of Appeals, et al., G.R. No. 131394, March 28, 2005)
b. Who May Make Valid Entries
In the absence of any provision to the contrary, the corporate
secretary is the custodian of corporate records. The transferor, even
though he may be the controlling stockholder cannot take the law
into his hands and cause himself the recording of the transfers of
the qualifying shares to his nominee-directors in the stock and
transfer book of the corporation.(Manuel A. Torres, Jr.,
(Deceased), et al. vs. Court of Appeals, et al., G.R. No.
120138, September 5, 1997)
7. Disposition and Encumbrance of Shares
a. Allowable Restrictions on the Sale of Shares
b. Sale of Partially Paid Shares
c. Sale of a Portion of Shares Not Fully Paid
d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares

f. Requisites of a Valid Transfer

g. Involuntary Dealings with Shares
J. Dissolution and Liquidation
An action to correct entries in the General Information Sheet of the
Corporation; to be recognized as a stockholder and to inspect corporate
documents is an intra-corporate dispute which does not constitute a
continuation of corporate business. As such, pursuant to Section 145 of
the Corporation Code, this action is not affected by the subsequent
dissolution of the corporation. The dissolution of the corporation simply
prohibits it from continuing its business. However, despite such
dissolution, the parties involved in the litigation are still corporate actors.
The dissolution does not automatically convert the parties into total
strangers or change their intra-corporate relationships. Neither does it
change or terminate existing causes of action, which arose because of the
corporate ties between the parties. Thus, a cause of action involving an
intra-corporate controversy remains and must be filed as an intracorporate dispute despite the subsequent dissolution of the corporation.
Aguirre vs. FQB +7, Inc, GR No. 170770, January 9 2013.
1. Modes of Dissolution
a. Voluntary
i. Where No Creditors Are Affected
A resolution approved by the Board of Directors is not sufficient to
dissolve a corporation. The Corporation Code establishes the
procedure and other formal requirements a corporation needs to
follow in case it elects to dissolve and terminate its structure
voluntarily and where no rights of creditors may possibly be
prejudiced under Section 118 which should have been strictly
complied with by the members of the club. (Teodoro B. Vesagas
and Wilfred D. Asis vs. the Honorable Court of Appeals and
DelfinoRaniel
and
HelendaRaniel,
G.R.
No.
142924,
December 5, 2001)
ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term
b. Involuntary
i. By Expiration of Corporate Term

Upon the expiration of the period fixed in the articles of

incorporation in the absence of compliance with the legal requisites
for the extension of the period, the corporation ceases to exist and
is dissolved ipso facto. There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the
dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation. (Philippine
National Bank vs.the Court of First Instance of Rizal, Pasig,
et al.,G.R. No. 63201, May 27, 1992)
ii. Failure to Organize and Commence Business Within 2 Years
from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws
2. Methods of Liquidation
a. By the Corporation Itself
b. Conveyance to a Trustee within a Three-Year Period
The word "trustee" as used in the corporation statute must be
understood in its general concept which could include the counsel
to whom was entrusted in the instant case, the prosecution of the
suit filed by the corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its dissolution is more for
the protection of its creditor and stockholders. (Carlos Gelano and
Guillermina Mendoza De Gelano vs. the Honorable Court of
Appeals and Insular Sawmill, Inc., G.R. No. L-39050 February
24, 1981)
The trustee (of a dissolved corporation) may commence a suit which
can proceed to final judgment even beyond the three-year period of
liquidation. No reason can be conceived why a suit already
commenced by the corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the legal personality
of the dissolved corporation, should not be accorded similar
treatment to proceed to final judgment and execution thereof.
Indeed, the rights of a corporation that has been dissolved pending
litigation are accorded protection by Section 145 of the Corporation
Code which provides no right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code
or of any part thereof. (Rene Knecht and Knecht, Inc. vs.

United Cigarette Corp., represented by Encarnacion

Gonzales Wong, and Eduardo Bolima, Sheriff, Regional Trial
Court, Branch 151, Pasig City, G.R. No. 139370, July 4, 2002)
c. By Management Committee or Rehabilitation Receiver
During rehabilitation receivership, the assets are held in trust for
the equal benefit of all creditors to preclude one from obtaining an
advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an
alert creditor, upon learning of the receivership, from rushing
posthaste to the courts to secure judgments for the satisfaction of
its claims to the prejudice of the less alert creditors.
(Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M. Elbinias, in
his capacity as the Presiding Judge of Regional Trial Court,
National Capital Region, Branch CXLI (141), Makati, and G.A.
Yupangco& Co., Inc., G.R. No. 75414 June 4, 1990)
The appointment of a receiver operates to suspend the authority of
a corporation and its directors and officers over its property and
effects, such authority being reposed in the receiver. Thus, a
corporate officer had no authority to condone a debt. (Victor Yam
&Yek Sun Lent, doing business under the name and style of
Philippine Printing Works vs. the Court of Appeals and
Manphil Investment Corporation, G.R. No. 104726, February
11, 1999)
d. Liquidation after Three Years
Although the cancellation of a corporations certificate of
registration puts an end to its juridical personality, Sec. 122 of the
Corporation Code, however provides that a corporation whose
corporate existence is terminated in any manner continues to be a
body corporate for three years after its dissolution for purposes of
prosecuting and defending suits by and against it and to enable it to
settle and close its affairs. Thus, corporations whose certificate of
registration was revoked by the SEC may still maintain actions in
court for the protection of its rights which includes the right to
appeal. (Paramount Insurance Corp. vs. A.C. Ordoez
Corporation and Franklin Suspine, G.R. No. 175109, August
6, 2008)
To allow a creditors case to proceed independently of the
liquidation case, a possibility of favorable judgment and execution
thereof against the assets of the distressed corporation would not
only prejudice the other creditors and depositors but would defeat

the very purpose for which a liquidation court was constituted as

well. The requirement that all claims against the bank be pursued in
the liquidation proceedings filed by the Central Bank is intended to
prevent multiplicity of actions against the insolvent 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.
(Lucia
Barramedavda.
de
Ballesteros vs. Rural Bank of Canaman, Inc., represented by
its liquidator, the Philippine Deposit Insurance Corporation,
G.R. No. 176260, November 24, 2010)
The executed releases, waivers and quitclaims are valid and binding
upon the parties notwithstanding the fact that these documents
were signed six years after the Corporations revocation of the
Certificate of Incorporation. These documents are thus proof that
the employees had received their claims from their employercorporation in whose favor the release and quitclaim were issued.
The revocation of the corporation does not mean the termination of
its liabilities to these employees. Section 122 of the Corporation
Code provides for a three-year winding up period for a corporation
whose charter is annulled by forfeiture or otherwise to continue as a
body corporate for the purpose, among others, of settling and
closing its affairs As such, these liabilities are obligations of the
dissolved corporation and not of the corporation who contracted the
services of the dissolved corporation. Vigilla vs. Philippine
College of Criminology, GR No. 200094, June 10, 2013
K. Other Corporations
1. Close Corporations
a. Characteristics of a Close Corporation
A corporation does not become a close corporation just because a
man and his wife own 98.86% of its subscribed capital stock; So too,
a narrow distribution of ownership does not, by itself, make a close
corporation. The features of a close corporation under the
Corporation Code must be embodied in the Articles of Incorporation.
(San Juan Structural and Steel Fabricators, Inc. vs. Court of
Appeals, Motorich Sales Corporation, Nenita Lee Gruenberg,
ACL Development Corp. and JNM Realty and Development
Corp., G.R. No. 129459, September 29, 1998)
To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties

to each other and among themselves. Said stockholders shall be

personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance. (Sergio F.
Naguiat, doing business under the name and style Sergio F.
NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations
Commission
(Third
Division),
National
Organization Of Workingmen and its members, Leonardo T.
Galang, et al., G.R. No. 116123, 13 March 1997)
b. Validity of Restrictions on Transfer of Shares
c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
d. When Board Meeting is Unnecessary or Improperly Held
When a corporation is classified as a close corporation, a board
resolution authorizing the sale or mortgage of the subject property
is not necessary to bind the corporation for the action of its
president. At any rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed
ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having
knowledge of the meeting which, in this case, petitioner failed to do.
(Manuel
R.Dulay
Enterprises,
Inc.,
VirgilioE.
Dulay
AndNepomucenoRedovanvs.
the
Honorable
Court
of
Appeals, G.R. No. 91889 August 27, 1993)
e. Pre-Emptive Right
f. Amendment of Articles of Incorporation
g. Deadlocks
2. Non-Stock Corporations
a. Definition
b. Purposes
c. Treatment of Profits
d. Distribution of Assets upon Dissolution
The second paragraph of Section 108 of the Corporation Code,
although setting the term of the members of the Board of Trustees
at five years, contains a proviso expressly subjecting the duration to
what is otherwise provided in the articles of incorporation or by-laws
of the educational corporation. In AUPs case, its amended By-Laws
provided that members of the Board of Trustees were to serve a
term of office of only two years; and the officers, who included the
President, were to be elected from among the members of the
Board of Trustees during their organizational meeting, which was
held during the election of the Board of Trustees every two years.

Naturally, the officers, including the President, were to exercise the

powers vested by Section 2 of the amended By-Laws for a term of
only two years, not five years. (PetroniloJ. Barayuga vs.
Adventist University of the Philippines, through its Board of
Trustees, represented by its Chairman, Nestor D. Dayson,
G.R. No. 168008, August 17, 2011)
Section 89 of the Corporation Code pertaining to non-stock
corporations which provides that "the right of the members of any
class or classes (of a non-stock corporation) to vote may be limited,
broadened or denied to the extent specified in the articles of
incorporation or the by-laws," is an exception to Section 6 of the
same code where it is provided that "no share may be deprived of
voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code." The
stipulation in the By-Laws providing for the election of the Board of
Directors by districts is a form of limitation on the voting rights of
the members of a non-stock corporation as recognized under the
aforesaid Section 89. (Rev. Luis Ao-as, et al. vs. Hon. Court of
Appeals, G.R. No. 128464, June 20, 2006)
3. Religious Corporations - Exclude
4. Foreign Corporations
a. Bases of Authority over Foreign Corporations
i. Consent
ii. Doctrine of Doing Business (related to definition under the
Foreign Investments Act, R.A. No. 7042)
A foreign company that merely imports goods from a Philippine
exporter, without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines. Since the
contract between petitioner and NMC involved the purchase of
molasses by petitioner from NMC, it was NMC, the domestic
corporation, which derived income from the transaction and not
petitioner. To constitute doing business, the activity undertaken in
the Philippines should involve profit-making.(Cargill, Inc. vs. Intra
Strata Assurance Corporation, G.R. No. 168266, March 15,
2010)
Participating in the bidding process constitutes doing business
because it shows the foreign corporations intention to engage in
business in the Philippines. The bidding for the concession contract
is but an exercise of the corporations reason for creation or
existence. (Hutchison Ports Philippines Limitedvs.Subic Bay

Metropolitan Authority, International Container Terminal

Services Inc., Royal Port Services, Inc. and the Executive
Secretary, G.R. No. 131367, August 31, 2000)
A contract entered into by a foreign corporation not licensed to do
business in the Philippines is not void even as against the erring
foreign corporation. The lack of capacity at the time of the
execution of the contracts was cured by the subsequent
registration. (The Home Insurance Company vs.Eastern
Shipping Lines, G.R. No. L-34382 July 20, 1983)
The appointment of a distributor in the Philippines is not sufficient
to constitute doing business unless it is under the full control of
the foreign corporation. If the distributor is an independent entity
which buys and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter cannot
be considered to be doing business in the Philippines. (Steelcase,
Inc. vs. Design International Selections, Inc., G.R. No.
171995, April 18, 2012)
b. Necessity of a License to Do Business
The primary purpose of the license requirement is to compel a
foreign corporation desiring to do business within the Philippines to
submit itself to the jurisdiction of the courts of the state and to
enable the government to exercise jurisdiction over them for the
regulation of their activities in this country. If a foreign corporation
operates a business in the Philippines without a license, and thus
does not submit itself to Philippine laws, it is only just that said
foreign corporation be not allowed to invoke them in our courts
when the need arises. (Ibid.)
i. Requisites for Issuance of a License
ii. Resident Agent
c. Personality to Sue
The following principles governing a foreign corporations right to
sue in local courts have long been settled, to wit: a) if a foreign
corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts; b) if a foreign corporation is
not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of
action entirely independent of any business transaction; and c) if a
foreign corporation does business in the Philippines with the

required license, it can sue before Philippine courts on any

transaction.
Apparently, it is not the absence of the prescribed
license but the doing (of) business in the Philippines without such
license which debars the foreign corporation from access to our
courts. (MR Holdings, Ltd.vs. Sheriff Carlos P. Bajar, Sheriff
Ferdinand M. Jandusay, Solidbank Corporation, and
Marcopper Mining Corporation, G.R. No. 138104, April 11,
2002)
A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a
contract with it. The principle is applied to prevent a person
contracting with a foreign corporation from later taking advantage
of its noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract. (Global Business
Holdings, Inc. vs. Surecomp Software, B.V., G.R. No. 173463,
October 13, 2010)
d. Suability of Foreign Corporations
e. Instances When Unlicensed Foreign Corporations May Be Allowed
to Sue Isolated Transactions
A foreign corporation doing business in the Philippines may sue in
Philippine Courts although not authorized to do business in the
Philippines against a Philippine citizen or entity who had contracted
with and benefited by said corporation. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April
18, 2012)
f. Grounds for Revocation of License
L. Mergers and Consolidations
1. Definition and Concept
In the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties
and liabilities are acquired by the surviving corporation.
(Associated Bank vs. Court of Appeals and Lorenzo
Sarmiento, Jr., G.R. No. 123793, June 29, 1998)
There are two types of corporate acquisitions: asset sales and stock
sales. In asset sales, the corporate entity sells all or substantially all of
its assets to another entity. In stock sales, the individual or corporate

shareholders sell a controlling block of stock to new or existing

shareholders.
In asset sales, the rule is that the seller in good faith is authorized to
dismiss the affected employees, but is liable for the payment of
separation pay under the law. The buyer in good faith, on the other
hand, is not obliged to absorb the employees affected by the sale, nor
is it liable for the payment of their claims. The most that it may do, for
reasons of public policy and social justice, is to give preference to the
qualified separated personnel of the selling firm.
In contrast with asset sales, in which the assets of the selling
corporation are transferred to another entity, the transaction in stock
sales takes place at the shareholder level. Because the corporation
possesses a personality separate and distinct from that of its
shareholders, a shift in the composition of its shareholders will not
affect its existence and continuity.
Thus, notwithstanding the stock sale, the corporation continues to be
the employer of its people and continues to be liable for the payment
of their just claims. Furthermore, the corporation or its new majority
shareholders are not entitled to lawfully dismiss corporate employees
absent a just or authorized cause.
The fact that there was a change in the composition of its shareholders
did not affect the employer-employee relationship between the
employees and the corporation, because an equity transfer affects
neither the existence nor the liabilities of a corporation. Thus, the
corporation continued to be the employer of the corporations
employees notwithstanding the equity change in the corporation. This
outcome is in line with the rule that a corporation has a personality
separate and distinct from that of its individual shareholders or
members, such that a change in the composition of its shareholders or
members would not affect its corporate liabilities.
In this case, the corporate officers and directors who induced the
employees to resign with the assurance that they would be rehired by
the new management are personally liable to the employees who were
not actually rehired. However, the officer who did not participate in
the termination of employment and persons who participated in the
unlawful termination of employment but are not directors and officers
of the corporation are not personally liable. SME BANK INC, vs.
GASPAR, G.R. No. 186641, October 8, 2013
Where the purchase and sale of identified assets between two
companies under a Purchase and Sale Agreement does not constitute a

merger, the seller and the purchaser are considered entities different
from one another. Thus, the purchaser company can not be held liable
for the payment of deficiency documentary stamp tax against the
seller company. Commission of Internal Revenue vs, Bank of
Commerce, GR No. 180529, November 25, 2013
2. Constituent vs. Consolidated Corporation
In consolidation, all the constituents are dissolved and absorbed by
the new consolidated enterprise, while in merger, all constituents,
except the surviving corporation, are dissolved. The surviving or
consolidated corporation assumes automatically the liabilities of the
dissolved corporations, regardless of whether the creditors have
consented or not to such merger or consolidation. (John F. McLeod
vs.National Labor Relations Commission (First Division), et
al., G.R. No. 146667, January 23, 2007)
3. Plan of Merger or Consolidation
4. Articles of Merger or Consolidation
5. Procedure
6. Effectivity
A merger is not effective unless it has been approved by the
Securities and Exchange Commission. (Philippine National Bank
& National Sugar Development Corporation vs. Andrada
Electric & Engineering Company, G.R. No. 142936, April 17,
2002)
The issuance of the certificate of merger is crucial because not only
does it bear out SECs approval but it also marks the moment when
the consequences of a merger take place. By operation of law, upon
the effectivity of the merger, the absorbed corporation ceases to
exist but its rights and properties, as well as liabilities, shall be
taken and deemed transferred to and vested in the surviving
corporation.(Mindanao Savings and Loan Association, Inc.,
represented by its Liquidator, the Philippine Deposit
Insurance Corporation vs. Edward Willkom; Gilda Go;
RemediosUy; MalayoBantuas, in his capacity as the Deputy
Sheriff of Regional Trial Court, Branch 3, Iligan City; and the
Register of Deeds of Cagayan de Oro City, G.R. No. 178618,
October 11, 2010)
7. Limitations

8. Effects
Although there is a dissolution of the absorbed corporations, there is
no winding up of their affairs or liquidation of their assets, because
the surviving corporation automatically acquires all their rights,
privileges and powers, as well as their liabilities. The fact that the
promissory note was executed after the effectivity date of the
merger does not militate against petitioner because the agreement
itself clearly provides that all contracts -- irrespective of the date of
execution -- entered into in the name of the absorbed corporation
shall be understood as pertaining to the surviving bank, herein
petitioner. (Associated Bank vs. Court of Appeals and Lorenzo
Sarmiento, Jr.,G.R. No. 123793, June 29, 1998)
It is more in keeping with the dictates of social justice and the State
policy of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in
a merger, even in the absence of an express stipulation in the
articles of merger or the merger plan. By upholding the automatic
assumption of the non-surviving corporations existing employment
contracts by the surviving corporation in a merger, the Court
strengthens judicial protection of the right to security of tenure of
employees affected by a merger and avoids confusion regarding the
status of their various benefits which were among the chief
objections of our dissenting colleagues. (Bank of the Philippine
Islands vs. BPI Employees Union-Davao Chapter-Federation
Of Unions In Bpi Unibank, G.R. No. 164301, October 19,
2011)
Citytrust, therefore, upon service of the notice of garnishment and
its acknowledgment that it was in possession of defendants' deposit
accounts became a "virtual party" to or a "forced intervenor" in the
civil case. As such, it became bound by the orders and processes
issued by the trial court despite not having been properly impleaded
therein. Consequently, by virtue of its merger with BPI , the latter,
as the surviving corporation, effectively became the garnishee, thus
the "virtual party" to the civil case. Bank of Philippine Islands v.
Lee, G.R. No. 190144, August 1, 2012
VII. Securities Regulation Code (R.A. No. 8799)
A. State Policy, Purpose
The rise and fall of stock market indices reflect to a considerable
degree the state of the economy. Securities transactions are

impressed with public interest, and are thus subject to public

regulation; in particular, the laws and regulations requiring payment
of traded shares within specified periods are meant to protect the
economy from excessive stock market speculations, and are thus
mandatory. (Abacus Securities Corporation vs. Ruben Ampil,
G.R. No. 160016, February 27, 2006)
B. Securities Required to be Registered
The issuance of checks for the purpose of securing a loan to finance
the activities of the corporation is well within the ambit of a valid
corporate act. It is one thing for a corporation to issue checks to
satisfy isolated individual obligations, and another for a corporation
to execute an elaborate scheme where it would comport itself to the
public as a pseudo-investment house and issue postdated checks
instead of stocks or traditional securities to evidence the
investments of its patrons. (Betty Gabionza and Isabelita Tan
vs. Court of Appeals, G.R. No. 161057, September 12, 2008)
Corporate registration is just one of the several requirements before
a corporation may deal with timeshares. Prior to fulfillment of all the
other requirements under the Securities Regulation Code, a
corporation is absolutely proscribed from dealing with unregistered
timeshares. (Timeshare Realty vs. Cesar Lao, G.R. No.
158941, February 11, 2008)
For an investment contract to exist, the following elements, referred
to as the Howey test must concur: (1)a contract, transaction, or
scheme; (2)an investment of money; (3)investment is made in a
common enterprise; (4) expectation of profits; and (5)profits arising
primarily from the efforts of others. Network marketing, a scheme
adopted by companies for getting people to buy their products
where the buyer can become a down-line seller, who earns
commissions from purchases made by new buyers whom he refers
to the person who sold the product to him, is not an investment
contract.
(Securities
and
Exchange
Commission
vs.
Prosperity.Com, Inc., G.R. No. 164197, January 25, 2012)
A person is liable for violation of Section 28 of the SRC where, acting
as a broker, dealer or salesman is in the employ of a corporation
which sold or offered for sale unregistered securities in the
Philippines. The transaction initiated by the investment consultant
of a corporation is an investment contract or participation in a profit
sharing agreement that falls within the definition of lawan
investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or

managerial efforts of others. (Securities and Exchange

Commission vs. Oudine Santos, G.R. No. 195542, March 19,
2014)
1. Exempt Securities
The exemption from registration of the securities issued by banking
or financial institutions provided under the law does not imply that
petitioner as a listed corporation, is also exempt from complying
with the reportorial requirements. (Union Bank of the Philippines
vs. Securities and Exchange Commission, G.R. No. 138949,
June 6, 2001)
2. Exempt Transactions
Under the ruling issued by the SEC, an issuance of previously
authorized but still unissued capital stock may, in a particular
instance, be held to be an exempt transaction by the SEC under
Section 6(b) so long as the SEC finds that the requirements of
registration under the Revised Securities Act are "not necessary in
the public interest and for the protection of the investors" by
reason, inter alia, of the small amount of stock that is proposed to
be issued or because the potential buyers are very limited in
number and are in a position to protect themselves. (Nestle
Philippines, Inc. vs. Court of Appeals, G.R. No. 86738,
November 13, 1991)
C. Procedure for Registration of Securities
D. Prohibitions of Fraud, Manipulation and Insider Trading
The trading contract signed by the parties is a contract for the sale
of products for future delivery, in which either seller or buyer may
elect to make or demand delivery of goods agreed to be bought and
sold, but where no such delivery is actually made. The written
trading contract in question is not illegal but the transaction
between the parties purportedly to implement the contract is in the
nature of a gambling agreement; it is not buying and selling and is
illegal
as
against
public
policy.
(Onapal
Philippines
Commodities, Inc. vs. Court of Appeals, G.R. No. 90707,
February 1, 1993)
1. Manipulation of Security Prices
2. Short Sales

3. Fraudulent Transactions
4. Insider Trading
The term insiders now includes persons whose relationship or
former relationship to the issuer gives or gave them access to a fact
of special significance about the issuer or the security that is not
generally available, and one who learns such a fact from an insider
knowing that the person from whom he learns the fact is such an
insider. Insiders have the duty to disclose material facts which are
known to them by virtue of their position but which are not known
to persons with whom they deal and which, if known, would affect
their
investment
judgment. (Securities
and
Exchange
Commission vs. Interport Resources Corporation, et. al.,
G.R. No. 135808, October 6, 2008)
E. Protection of Investors
A public company, as contemplated by the SRC is not limited to a
company whose shares of stock are publicly listed; even companies
whose shares are offered only to a specific group of people, are
considered a public company, provided they fall under Subsec. 17.2
of the SRC, which provides: any corporation with a class of equity
securities listed on an Exchange or with assets of atleast Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least one
hundred (100) shares of a class of its equity securities. Philippine
Veterans Bank meets the requirements and as such, is subject to
the reportorial requirements for the benefit of its shareholders.
(Philippine Veterans Bank v. Callangan, in her capacity
Director of the Corporation Finance Department of the
Securities and Exchange Commission and/or the Securities
and Ex-change Commission, G.R. No. 191995, August 3,
2011)
1. Tender Offer Rule
A tender offer is an offer by the acquiring person to stockholders of
a public company for them to tender their shares; it gives the
minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares at
the same price as those of the majority shareholders.
The
mandatory tender offer is still applicable even if the acquisition,
direct or indirect, is less than 35% when the purchase would result
in ownership of over 51% of the total outstanding equity securities
of the public company. (Cemco Holdings, Inc. vs. National Life

Insurance Company of the Philippines, G.R. No. 171815,

August 7, 2007)
2. Rules on Proxy Solicitation
The right of stockholder
to vote
by proxy is generally
established by the Corporation Code, but it is the SRC which
specifically regulates the form and use of proxies, more particularly
proxy solicitation, a procedure that antecedes proxy validation.
When proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly
seen as an election controversy within the original and exclusive
jurisdiction of the trial courts. (GSIS vs. Court of Appeals, G.R.
No. 183905, April 16, 2009)
3. Disclosure Rule
Section 27 (SRC) penalizes an insiders misuse of material and nonpublic information about the issuer, for the purpose of protecting
public investors; Section 26 widens the coverage of punishable acts,
which intend to defraud public investors through various devices,
misinformation and omissions. Section 23 imposes upon (1) a
beneficial owner of more than ten percent of any class of any equity
security or (2) a director or any officer of the issuer of such security,
the obligation to submit a statement indicating his or her ownership
of the issuers securities and such changes in his or her ownership
thereof. (Securities and Exchange Commission vs. Interport
Resources Corporation, et. al., G.R. No. 135808, October 6,
2008)
Under the law, what is required to be disclosed is a fact of special
significance which may be (a) a material fact which would be likely,
on being made generally available, to affect the market price of a
security to a significant extent, or (b) one which a reasonable
person would consider especially important in determining his
course of action with regard to the shares of stock. (Securities and
Exchange Commission vs. Interport Resources Corporation,
et. al., G.R. No. 135808, October 6, 2008)
F. Civil Liability
Under Section 62 of the SRC, no action shall be maintained to
enforce any liability created under Section 56 of the SRC ( False
registration statement ) and Section 57 ( sale of unregistered
security and liabilities arising in connection with prospectus,

communication and other reports ) unless brought within two ( 2 )

years after discovery of the untrue statement or omission or after
the viola-tion upon which it is based but not more than five ( 5 )
years after the security was bona fide offered to the public or more
than 5 years after the sale, respectively. The prescriptive periods
under the mentioned sections pertain only to the civil liability in
cases of violations of the SRC and not to criminal liability under the
same violations. (Citibank N.A. vs. Tanco-Gabaldon, et al. G.R.
No. 198444, September 4, 2013)
Civil suits falling under the SRC (like liability for selling unregistered
securities ) are under the exclusive original jurisdiction of the RTC
and hence, need not be first filed before the SEC, unlike criminal
cases wherein the latter body exercises primary jurisdiction. (Jose
U. Pua vs. Citibank, N. A. G.R. No. 180064, September 16,
2013)
VIII. Banking Laws
A. The New Central Bank Act (R.A. No. 7653)
1. State Policies
2. Creation of the Bangko Sentral ng Pilipinas (BSP)
3. Responsibility and Primary Objective
The BSP, through the Monetary Board, is the government agency
charged with the responsibility of administering the monetary,
banking and credit system of the country and is granted the power
of supervision and examination over banks and non-bank financial
institutions performing quasi-banking functions, including savings
and loan associations. It is empowered to conduct investigations
and examine the records of savings and loan associations where,
upon discovery of any irregularity, the Monetary Board may impose
appropriate sanctions. (Romeo Busuego vs. Court of Appeals,
G.R. No. 95326, March 11, 1999)

The Bangko Sentral shall have supervision over, and conduct

periodic or special examinations of, banking institutions and quasibanks, including their subsidiaries and affiliates engaged in allied
activities. When the complaint filed by a stockholder of the bank
pertains to the banks alleged engaging in unsafe, unsound, and
fraudulent banking practices, more particularly, acts that violate the
prohibition on self-dealing, it is clear that the acts complained of
pertain to the conduct of banking business, hence, jurisdiction lies
with the BSP (Monetary Board). (Ana Maria Koruga vs. Teodoro
Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19,
2009)
4. Monetary BoardPowers and Functions
The Monetary Board, is vested with exclusive authority to assess,
evaluate and determine the condition of any bank, and finding such
condition to be one of insolvency, or that its continuance in business
would involve a probable loss to its depositors or creditors, forbid
bank or non-bank financial institution to do business in the
Philippines; and shall designate an official of the BSP or other
competent person as receiver to immediately take charge of its
assets and liabilities. When the complaint filed by a stockholder of
the bank pertains to the alleged unsafe and unsound banking
practices, the authority to determine the existence of such is with
the Monetary Board. (Ana Maria Koruga vs. Teodoro Arcenas,
Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)
The actions of the Monetary Board under Sec. 29 and 30 of RA
7653, which pertain to the power to appoint a conservator or a
receiver for a bank, 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. Hence, the issuance
by the RTC of writs of preliminary injunction is an unwarranted
interference with the powers of the Monetary Board. (BSP
Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No.
184778, October 2, 2009)
5. How the BSP handles Banks in Distress
a. Conservatorship
The Monetary Board, upon finding that the bank failed to put up the
required capital to restore its solvency, prohibited a bank from doing
business and instructed the Acting Superintendent of Banks to take
charge of the assets of the bank.
When by reason of this

prohibition, only a portion of the loan approved by the bank was

released to its debtor, it also follows that the bank, in exercising its
right to foreclose the real estate mortgage, can only foreclose up to
the extent of the amount it released. (Central Bank of the
Philippines vs. Court of Appeals, G.R. No. L-45710 October 3,
1985)
The following requisites must be present before the order of
conservatorship may be set aside by a court: 1) The appropriate
pleading must be filed by the stockholders of record representing
the majority of the capital stock of the bank in the proper court; 2)
Said pleading must be filed within ten (10) days from receipt of
notice by said majority stockholders of the order placing the bank
under conservatorship; and 3) There must be convincing proof, after
hearing, that the action is plainly arbitrary and made in bad faith.
(Central Bank of the Philippines vs. Court of Appeals, G.R.
No. 88353, May 8, 1992)
The authority of the conservator under the Central Bank Law is
limited to acts of administration; the conservator merely takes the
place of the banks board of directors and as such, the former
cannot perform acts the latter cannot do. Hence, the conservator
cannot revoke a contract of sale of a property acquired by the bank
entered into by a bank officer even though the price agreed upon is
no longer reflective of the fair market value of the property by
reason of its appreciation of value over time. (First Philippine
International Bank vs. Court of Appeals, G.R. No. 115849,
January 24, 1996)
b. Closure
The express representations made by the Central Bank that it would
support the bank and avoid its liquidation if the latters stockholders
would execute a voting trust agreement turning over the
management of the bank to the CB and mortgage or assign their
properties to CB should not be disregarded. Under the rule of
promissory estoppel, the Central Bank cannot thereafter refuse to
comply with its representations after the undertaking has been
complied with by the bank. (Emerito Ramos vs. Central Bank of
the Philippines, G.R. No. L-29352, October 4, 1971)
The closure and liquidation of a bank may be considered an exercise
of police power. Nonetheless, the validity of such exercise of police
power is subject to judicial inquiry and could be set aside if it is
either capricious, discriminatory, whimsical, arbitrary, unjust, or a
denial of due process and equal protection clauses of the

Constitution. (Central Bank vs. Court of Appeals, G.R. L50031-32, July 27, 1981)
The claim that the Central Bank, by suspending the banking
operations, had made it impossible for the bank to pay its debts, or
the further claim that it had fallen into a "distressed financial
situation," cannot in any sense excuse it from its obligation to remit
the time deposits of its depositors which matured before the banks
closure. (Overseas Bank of Manila vs. Court of Appeals, G.R.
No. L-45866, April 19, 1989)
The Central Bank Act vests authority upon the Central Bank and
Monetary Board to take charge and administer the monetary and
banking system of the country and this authority includes the power
to examine and determine the financial condition of banks for
purposes provided for by law, such as for the purpose of closure on
the ground of insolvency stated in Section 29 of the Central Bank
Act. Nonetheless, the authority given must not be exercised
arbitrarily such as to prematurely conclude that a bank is insolvent
if the basis for such conclusion is lacking and insufficient. (Banco
Filipino Savings and Mortgage Bank vs. Central Bank, G.R.
No. 70054, December 11, 1991)
Under R.A. No. 265, an examination is required to be made before
the Monetary Board could issue a closure order; however, under R.A.
No. 7653, prior notice and hearing are no longer required and a
report made by the head of the supervising and examining
department suffices for a bank to be closed and placed under
receivership. The purpose of the law is to make the closure of the
bank summary and expeditious for the protection of the public
interest. (Rural Bank of San Miguel vs. Monetary Board, G.R.
No. 150886, February 16, 2007)
Under the close now, hear later principle, the BSP can impose the
sanction of closure upon a bank even without prior notice and
hearing, which is grounded on practical and legal considerations to
prevent unwarranted dissipation of the banks assets and as a valid
exercise of police power to protect the depositors, creditors,
stockholders, and the general public. The remedy of the closed
bank is a subsequent one, which will determine whether the closure
of the bank was attended by grave abuse of discretion. (BSP
Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No.
184778, October 2, 2009)
c. Receivership

The Monetary Board, upon finding that the bank failed to put up the
required capital to restore its solvency, prohibited a bank from doing
business and instructed the Acting Superintendent of Banks to take
charge of the assets of the bank.
When by reason of this
prohibition, only a portion of the loan approved by the bank was
released to its debtor, it also follows that the bank, in exercising its
right to foreclose the real estate mortgage, can only foreclose up to
the extent of the amount it released. (Central Bank of the
Philippines vs. Court of Appeals, G.R. No. L-45710, October
3, 1985)
As a rule, the execution of a judgment cannot be stayed. However,
in the present case, the respondent bank was placed under
receivership and to execute the judgment would unduly deplete the
assets of respondent bank; moreover, the assets of the insolvent
banking institution are held in trust for the equal benefit of all
creditors, and after its insolvency, one cannot obtain an advantage
or a preference over another by an attachment, execution or
otherwise. (Spouses Romeo Lipana and Milagros Lipana vs.
Development Bank of Rizal, G.R. No. 73884, September 24,
1987)
When a bank is placed under receivership, the appointed receiver is
tasked to take charge of the banks assets and properties and the
scope of the receivers power is limited to acts of administration.
The receivers act of approving the exclusive option to purchase
granted by the banks president is beyond the authority of the
former and as such, it cannot be considered a valid approval.
(Abacus Real Estate Development Center, Inc. vs. Manila
Banking Corp., G.R. No. 162270, April 06, 2005)
The Monetary Board may forbid a bank from doing business and
place it under receivership without prior notice and hearing it the
MB finds that a bank: (a) is unable to pay its liabilities as they
become due in the ordinary course of business; (b) has insufficient
realizable assets to meet liabilities; (c) cannot continue in business
without involving probable losses to its depositors and creditors;
and (d) has willfully violated a cease and desist order of the
Monetary Board for acts or transactions which are considered
unsafe and unsound banking practices and other acts or
transactions constituting fraud or dissipation of the assets of the
institution. (Alfeo D. Vivas, vs. Monetary Board and PDIC, G.R.
No. 191424, August 7, 2013)
d. Liquidation

Resolutions of the Monetary Board with regard to handling banks in

distress such as appointing a receiver to take charge of the bank's
assets and liabilities; or determining whether the banking
institutions may be rehabilitated, or should be liquidated and
appointing a liquidator towards this end are by law final and
executory. Nonetheless, the same may be set aside by the court
upon proof that the action is plainly arbitrary and made in bad faith,
which may be asserted as an affirmative defense or a counterclaim
in the proceeding for assistance in liquidation. (Apollo M. Salud
vs. Central Bank of the Philippines, G.R. No. L-17620, August
19, 1986)
The pendency of the case questioning the validity of foreclosure did
not diminish thepowers and authority of the designated liquidator to
effectuate and carry on the administration of the bank. As such, the
liquidator has the authority to resist or defend suits instituted
against the bank by its debtors and creditors; it likewise has the
authority to bring actions for foreclosure of mortgages executed by
debtors in favor of the bank. (Banco Filipino Savings and
Mortgage Bank vs. Central Bank, G.R. No. 70054, December
11, 1991)
The court shall have jurisdiction in the same proceedings to
adjudicate disputed claims against the bank and enforce individual
liabilities of the stockholders and do all that is necessary to
preserve the assets of such institution and to implement the
liquidation plan approved by the Monetary Board. Hence, all claims
against the insolvent bank should be filed in the liquidation
proceeding and it is not necessary that a claim be initially disputed
in a court or agency before it is filed with the liquidation court.
(Jerry Ong vs. Court of Appeals, G.R. No. 112830, February
1, 1996)
The rule that all claims against a bank must be filed in the
liquidation proceedings does not apply to actions filed by the bank
itself for the preservation of its assets and protection of its property,
such as a petition for the issuance of a Writ of Possession instituted
by the bank itself. Moreover, a bank ordered closed by the Monetary
Board retains its personality which can sue and be sued through its
liquidator. (Domingo Manalo vs. Court of Appeals, G.R. No.
141297, October 8, 2001)
A bank, which is previously declared in default for failing to file an
answer in a case filed by another bank cannot rely on the rule that a
bank placed under receivership is not liable to pay interest and
penalty on its loan accounts with another bank. By not bothering to

file a motion for reconsideration, the bank is now precluded from

relying on the rule with regard to payment of interests when a bank
has been placed under receivership because to do so would render
nugatory the order of default issued by the court. (Rural Bank of
Sta. Catalina vs. Land Bank of the Philippines, G.R. No.
148019, July 26, 2004)
As a rule, bank deposits are not preferred credits. However, when
the deposits covered by a cashiers check were purchased from a
bank at the time when it was already insolvent, the purchase is
entitled to preference in the assets of the bank upon its liquidation
by reason of the fraud in the transaction. (Leticia G. Miranda vs.
Philippine Deposit Insurance Corporation, G.R. No. 169334,
September 8, 2006)
6. How the BSP Handles Exchange Crisis
a. Legal Tender Power
b. Rate of Exchange
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)
1. Purpose
R.A. No. 1405 hopes to discourage private hoarding and at the same
time encourages the people to deposit their money in banking
institutions, so that it may be utilized by way of authorized loans
and thereby assist in economic development. The absolute
confidentiality rule in R.A. No. 1405 actually aims to give protection
from unwarranted inquiry or investigation if the purpose of such
inquiry or investigation is merely to determine the existence and
nature, as well as the amount of the deposit in any given bank
account. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644,
February 16, 2010)
2. Prohibited Acts
In a case where the money paid by an insurance company for
treasury bills was deposited in a bank account, the examination of
the said bank account is prohibited under R.A. No. 1405 by reason
of the fact that the subject matter of the action filed by the
insurance company against the seller of the treasury bills is the
failure to deliver the treasury bills, not the money deposited.
(Oate vs. Abrogar, G.R. No. 107303, February 23, 1995)

When a collecting bank sued the drawee bank because the latter
had erroneously undercoded the amount of the check it presented
for clearing, the collecting bank cannot be allowed to examine the
account of the drawer of the check absent any showing that the
money in the said account is the subject matter of litigation. The
action filed by the collecting bank is not for the recovery of the
money contained in the deposit but for the recovery of the money
from the drawee bank as a result of the latters alleged failure to
inform the former of the discrepancy. (Union Bank of the
Philippines vs. Court of Appeals, G.R. No. 134699,
December 23, 1999)
3. Deposits Covered
When the account subject of the complaint is in the foreign
currency, such complaint filed for violation of R.A. No. 1405 did not
toll the running of the prescriptive period to file the appropriate
complaint for violation of R.A. No. 6426. The Law on Secrecy of
Bank Deposits (R.A. No. 1405) covers deposits under the Philippine
Currency; a separate and distinct law governs deposits under the
foreign currency (R.A. No. 6426). (Intengan vs. Court of Appeals,
G.R. No. 128996, February 15, 2002)
The deposits covered by the law on secrecy of bank deposits
should not be limited to those creating a creditor-debtor
relationship; the law must be broad enough to include deposits of
whatever nature which banks may use for authorized loans to third
persons. R.A. No. 1405 extends to funds invested such as those
placed in a trust account which the bank may use for loans and
similar transactions. (Ejercito vs. Sandiganbayan, G.R. Nos.
157294-95, November 30, 2006)
4. Exceptions
When pursuant to a court order garnishing the depositors funds, a
bank complied by delivering in check the amount garnished to the
sheriff, the bank cannot be held liable to its depositor. There is no
violation of the law on secrecy of bank deposits when the bank had
no choice but to comply with the court order for delivery of the
garnished amount. (RCBC vs. De Castro, G.R. No. L-34548,
November 29, 1988)
One of the exceptions under R.A. No. 1405 is when a court order is
issued for the disclosure of bank deposits in a case where the
money deposited is the subject matter of litigation. When the
subject matter is the money the bank transmitted by mistake, an

inquiry to the whereabouts of the amount extends to whatever

concealed by being held or recorded in the name of the persons
other than the one responsible for the illegal acquisition. (Mellon
Bank, N.A. vs. Magsino, G.R. No. 71479, October 18, 1990)
The law on secrecy of bank deposits cannot be used to preclude the
bank deposits from being garnished for the satisfaction of a
judgment. There is no violation of R.A. No. 1405 because the
disclosure is purely incidental to the execution process and it was
not the intention of the legislature to place bank deposits beyond
the reach of the judgment creditor. (PCIB vs. Court of Appeals,
G.R. No. 84526, January 28, 1991)
In a case for violation of the Anti-Graft and Corrupt Practices Act,
the Ombudsman can only examine bank accounts upon compliance
with the following requisites: there is a pending case before a court
of competent jurisdiction; the account must be clearly identified,
and the inspection must be limited to the subject matter of the
pending case; the bank personnel and the account holder must be
informed of the examination; and such examination must be limited
to the account identified in the pending case. If there is no pending
case yet but only an investigation by the Ombudsman, any order for
the examination of the bank account is premature. (Marquez vs.
Desierto, G.R. No. 135882, June 27, 2001; Office of the
Ombudsman vs. Ibay, G. R. No. 137538, September 3, 2001)
One of the exceptions under R.A. 1405 is when the inquiry into the
bank deposits is premised on the fact that the money deposited in
the account is itself the subject of the action. Such is not the case
when the respondent was charged with qualified theft and when the
attempt of inquiry serves no other purpose but to establish the
existence of such account, its nature and the amount kept in it.
(BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16,
2010)
In case the bank complies with the provisions of the law and the
unclaimed balances are eventually escheated to the Republic, the
bank shall not thereafter be liable to any person for the same.
However, when the managers check was never negotiated or
presented for payment to the bank, the procurer of the check
retained ownership of the funds; hence, proper notice should have
been given to the latter for compliance with the law. (Rizal
Commercial Banking Corporation vs. Hi-Tri Development
Corporation, 672 SCRA 514 (2012))
5. Garnishment of Deposits, Including Foreign Deposits

The law on secrecy of bank deposits cannot be used to preclude the

bank deposits from being garnished for the satisfaction of a
judgment. There is no violation of R.A. No. 1405 because the
disclosure is purely incidental to the execution process and it was
not the intention of the legislature to place bank deposits beyond
the reach of the judgment creditor. (PCIB vs. Court of Appeals,
G.R. No. 84526, January 28, 1991)
A foreign transient who raped a minor, escaped and was made
liable for damages to the victim cannot invoke the exemption from
court process of foreign currency deposits under R.A. No. 6426. The
garnishment of his foreign currency deposit should be allowed by
reason of equity and to prevent injustice; moreover, the purpose of
the law is to encourage foreign currency deposits and not to benefit
a wrongdoer. (Salvacion vs. Central Bank of the Philippines,
G.R. No. 94723, August 21, 1997)
C. General Banking Law of 2000 (R.A. No. 8791)
1. Definition and Classification of Banks
When a corporation loans out the money obtained from almost
60,000 savings account deposits opened by the public with the said
corporation, it is clear that these transactions partake the nature of
banking, as defined by the law. Accordingly, the corporation has
violated the law by engaging in banking without securing the
administrative authority required in R.A. No. 337. (Republic of the
Philippines vs. Security Credit and Acceptance Corporation,
G.R. No. L-20583, January 23, 1967)
2. Distinction of Banks from Quasi-Banks and Trust Entities
Transactions involving purchase of receivables at a discount, well
within the purview of investing, reinvesting or trading in securities,
which as investment company is authorized to perform, does not
constitute a violation of the General Banking Act. In this case, the
funds supposedly lent have not been shown to have been obtained
from the public by way of deposits, hence, it cannot be said that the
investment company was engaged in banking. (Teodoro Baas vs.
Asia Pacific Finance Corporation, G.R. No. 128703, October
18, 2000)
R.A. No. 8791 or the General Banking Law of 2000 provided that banks
shall refer to entities engaged in the lending of funds obtained in the form
of deposits. Financial intermediaries, on the other hand, are defined as

persons or entities whose principal functions include the lending, investing

or placement of funds or evidences of indebtedness or equity deposited
with them, acquired by them, or otherwise coursed through them, either
for their own account or for the account of others; pawnshops fall under
this category. (First Planters Pawnshop, Inc. vs. Commissioner of
Internal Revenue, G.R. No. 174134, July 30, 2008)
3. Bank Powers and Liabilities
a. Corporate Powers
An alien-owned commercial bank is allowed to purchase and hold
real estate conveyed to it in satisfaction of debts previously
contracted in the course of its dealings such as loans and other
similar transactions. The civil liability arising from the criminal
offense committed by the banks former employee is not a debt
contracted in the course of a banks dealings and thus, the transfer
made by the employee is not allowed. (Register of Deeds of
Manila vs. China Banking Corporation, 4 SCRA 1145 (1962))
Banks are entities engaged in the lending of funds obtained through
deposits from the public and it is for this reason that their viability
depends largely on their ability to return those deposits on demand.
In this case, when the borrower is proven to have committed fraud
by altering and falsifying its financial statements in order to obtain
its credit facilities, the bank has the right to annul any credit
accommodation or loan, and demand the immediate payment
thereof. (Banco de Oro-EPCI, Inc. vs. JAPRL Development
Corporation, G.R. No. 179901, April 14, 2008)
b. Banking and Incidental Powers
An investment management agreement, which created a principalagent relationship between petitioners as principals and respondent
as agent for investment purposes, is not a trust or an ordinary bank
deposit; hence, no trustor-trustee-beneficiary or even borrowerlender relationship existed. Banks may legally exercise investment
management activities but the Monetary Board may regulate such
operations to insure that said operations do not endanger the
interests of the depositors and other creditors of the banks.
(Spouses Raul and Amalia Panlilio vs. Citibank, N.A., G.R.
No. 156335, November 28, 2007)
4. Diligence Required of BanksRelevant Jurisprudence

In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few
hundred pesos or of millions; the bank must record every single
transaction accurately, down to the last centavo, and as promptly
as possible. When the banks negligence caused the dishonor of the
checks issued by its client, which eventually resulted to the latters
embarrassment and financial loss, the bank should be held liable for
damages. (Simex International (Manila) Inc. vs. Court of
Appeals, 183 SCRA 360 (1990))
In the absence of any stipulation, the depositarys responsibility for
the safekeeping of the objects deposited would require the diligence
of a good father of a family; hence, any stipulation exempting the
depositary from any liability arising from the loss of the things
deposited on account of fraud, negligence or delay would be void
for being contrary to law and public policy. The banks negligence in
failing to notify the depositor aggravated the injury or damage to
the stamp collection which was inundated by floodwaters, thus, the
bank should be held liable. (Luzan Sia vs. Court of Appeals, G.R.
No. 102970, May 13, 1993)
The degree of diligence required of banks, which should be more
than that of a good father of a family is grounded on the fiduciary
nature of the relationship between the bank and its depositors on
account of the banks obligation as a depositary of its clients
deposits. Nevertheless, in a sale and issuance of foreign exchange
demand draft, the same degree of diligence is not required because
the nature of the transaction does not involve the banks fiduciary
relationship with its depositors. (Gregorio Reyes vs. Court of
Appeals, G.R. No. 118492, August 15, 2001)
When the bank teller has failed to return the passbook to its owner
or to the authorized representative of the depositor, the bank is
presumed to have failed to exercise and observe a higher degree of
diligence required of it, which makes it liable for the damage done
to the depositor. However, the banks liability can be mitigated by
the depositors contributory negligence when the latter allowed a
signed withdrawal slip to fall into the hands of an unauthorized
person. (Consolidated Bank and Trust Corporation vs. Court
of Appeals, G.R. No. 138569, September 11, 2003)
Allowing the pretermination of the account despite noticing
discrepancies in the signature and photograph of the person
claiming to be the depositor, accompanied by the failure to
surrender the original certificate of time deposit, amounted to
negligence on the part of the bank. A bank that fails to exercise the

degree of diligence required of it becomes liable for damages.

(Citibank, N.A. vs. Spouses Luis & Carmelita Cabamongan,
G.R. No. 146918, May 2, 2006)
No less than the highest degree of diligence is required of banks by
reason of the fact that the banking business is impressed with
public interest. Banks are expected to treat the accounts of its
depositors with meticulous care, hence, when checks are encashed
by the employees of the bank without the necessary documents,
any loss resulting from the transactions should be borne by the
bank by reason of its negligence. (Philippine Savings Bank vs.
Chowking Food Corporation, G.R. No. 177526, July 4, 2008)
A bank that regularly processes checks that are neither payable to
the customer nor duly indorsed by the payee is apparently grossly
negligent in its operations. The degree of responsibility, care and
trustworthiness expected of the banks employees and officials is
far greater than those of ordinary clerks and employees; thus, the
banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees. (Philippine
National Bank vs. Erlando T. Rodriguez, et. al., G.R. No.
170325, September 26, 2008)
The fiduciary relationship between the bank and the depositor
means that the banks obligation to observe high standards of
integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. When the bank failed
to perform a routine verification of the signature affixed in the cash
transfer slip, the bank should be held liable for a withdrawal made
by an unauthorized agent of the depositor. (Central Bank of the
Philippines vs. Citytrust Banking Corporation, G.R. No.
141835, February 4, 2009)
When the drawee bank pays a person other than the payee named
on the check, it does not comply with the terms of the check and
violates its duty to charge the drawers accounts only for properly
payable items. In disregarding established banking rules and
regulations, the bank was clearly negligent, thus, should be made
liable. (Bank of America, NT and SA vs. Associated Citizens
Bank, G.R. No. 141018, May 21, 2009)
The premature debiting of the postdated check by the bank which
resulted to insufficiency of funds that brought about the dishonor of
two checks, which caused the electric supply to be cut-off and
affected business operations, indicates the negligence of the bank.
For its failure to exercise extra-ordinary diligence, which is required

of banks, it should be made liable. (Equitable PCI Bank vs.

Arcelito B. Tan, G.R. No. 165339, August 23, 2010)
A banking institution serving as an originating bank for the Unified
Home Lending Program (UHLP) of the Government owes a duty to
observe the highest degree of diligence and a high standard of
integrity and performance in all its transactions with its clients
because its business is imbued with public interest. (Comsavings
Bank vs. Spouses Danilo and Estrella Capistrano, G.R. No.
170942, August 28, 2013)
As a business affected with public interest and by reason of the
nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.
A bank that
mismanages the trust accounts of its client cannot benefit from the
inaccuracies of the reports resulting therefrom; it cannot impute the
consequence of its negligence to the client which resulted to
miscrediting of funds. (Land Bank of the Philippines vs.
Emmanuel Oate, G.R. No. 192371, January 15, 2014)
The mortgagee, as a banking institution, owed it to Guaria
Corporation to exercise the highest degree of diligence, as well as to
observe the high standards of integrity and performance in all its
transactions because its business was imbued with public interest.
The bank failed in its duty by prematurely foreclosing the
mortgages and unwarrantedly causing the foreclosure sale of the
mortgaged properties despite the mortgagor not being yet in
default. (Development Bank of the Philippines vs. Guaria
Agricultural and Realty Development Corporation, G.R. No.
160758, January 15, 2014)
5. Nature of Bank Funds and Bank Deposits
The fiduciary nature of a bank-depositor relationship does not
convert the contract between the bank and its depositors from a
simple loan to a trust agreement, whether express or implied;
hence, failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. The law simply imposes on
the bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple loan,
beyond those required of non-bank debtors under a similar contract
of simple loan. (Consolidated Bank and Trust Corporation vs.
Court of Appeals, G.R. No. 138569, September 11, 2003)
6. Stipulation on Interests

A banking institution which has been declared insolvent and

subsequently ordered closed by the Central Bank of the Philippines
cannot be held liable to pay interest on bank deposits which
accrued during the period when the bank is actually closed and nonoperational. However, the bank is still liable for the interest on bank
deposits which accrued up to the date of its closure. (Fidelity
Savings and Mortgage Bank vs. Hon. Pedro Cenzon, G.R. No.
L-46208, April 5, 1990)
When the stipulation on the interest rate is void, it is as if there was
no express contract thereon; hence, courts may reduce the interest
rate as reason and equity demand, which would depend on the
circumstances of each case. In the present case, the fact that
petitioner made partial payments makes the stipulated penalty
charge of 3% per month or 36% per annum, in addition to regular
interests, iniquitous and unconscionable. (Ileana Macalinao vs.
Bank of the Philippine Islands, G.R. No. 175490, September
17, 2009)
Section 78 of the General Banking Act requires payment of the
amount fixed by the court in the order of execution, with interest
thereon at the rate specified in the mortgage contract, which shall
be applied for the one-year period reckoned from the date of
registration of the certificate of sale. Nonetheless, when the period
to exercise the right of redemption was effectively extended beyond
one year, it is only fair and just to require the payment of 12%
interest per annum beyond the one-year period up to the date of
consignment of the redemption price with the RTC. (Heirs of
Estelita Burgos-Lipat namely: Alan B. Lipat and Alfredo B.
Lipat, Jr. vs. Heirs of Eugenio D. Trinidad namely: Asuncion
R. Trinidad, et. al., G.R. No. 185644, March 2, 2010)
The General Banking Act applies insofar as the redemption price is
concerned, when the mortgagee is a bank and the latter cannot
dictate or alter the terms of redemption by imposing additional
charges and including other loans. The foreclosure and sale of the
mortgaged property extinguishes the mortgage indebtedness;
hence, the bank can no longer invoke its provisions or even refer to
the 18% annual interest charged in the promissory note, an
obligation allegedly covered by the terms of the Contract. (Asia
Trust Development Bank vs. Carmelo H. Tuble, G.R. No.
183987, July 25, 2012)
The CB Circular No. 905 merely suspended the effectivity of the
Usury Law, thereby allowing the parties to freely stipulate on the

rate of interest. Nonetheless, the lifting of the ceilings for interest

rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest. (Advocates for Truth in
Lending vs. BSP, G.R. No. 192986, January 15, 2013)
7. Grant of Loans and Security Requirements
a. Ratio of Net Worth to Total Risk Assets
b. Single Borrowers Limit
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers,
Stockholders and their Related Interests
Under the law on DOSRI transactions, the following elements must
be present to constitute a violation: 1) the offender is a director or
officer of any banking institution; 2) the offender, either directly or
indirectly, for himself or as representative or agent of another,
borrows from the bank, becomes a guarantor, indorser, or surety or
becomes in any manner an obligor for money borrowed from bank
or loaned by it; 3) the offender has performed any of such acts
without the written approval of the majority of the directors of the
bank, excluding the offender, as the director concerned. The
language of the law is broad enough to encompass either the act of
borrowing or guaranteeing, or both. (Jose C. Go vs. BSP, G.R. No.
178429, October 23, 2009)
The law on DOSRI transactions imposes three restrictions: a) the
approval requirement, which refers to the written approval of the
majority of the banks board of directors, excluding the director
concerned; b) the reportorial requirement, which mandates that the
approval should be entered upon the records of the corporation, and
a copy of the entry be transmitted to the appropriate supervising
department; and c) the ceiling requirement, which limits the amount
of credit accommodations to an amount equivalent to the respective
outstanding deposits and book value of the paid-in capital
contribution in the bank. Failure to observe the three requirements
constitutes commission of three separate and different offenses.
(Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009)
The rule on DOSRI transactions covers loans by a bank director or
officer which are made either: (1) directly, (2) indirectly, (3) for
himself, (4) or as the representative or agent of others. The bank
officers act of indirectly securing a fraudulent loan application by
using the name of an unsuspecting person and without prior
compliance with the requirements of the law would make the officer
liable not only for violation of the law on DOSRI transactions but
also for estafa through falsification of commercial documents.

(Hilario P. Soriano vs. People of the Philippines, et. al., G.R.

No. 162336, February 1, 2010)
There must be competent evidence to establish that the loans
granted were in the nature of DOSRI or were issued in violation of
the Single Borrowers Limit; nonetheless, even assuming that they
were of such nature, the loans would not be void for that reason.
Instead, the bank or the officers responsible for the approval and
grant of the DOSRI loan would be subject to sanctions under the
law. (Republic of the Philippines vs. Sandiganbayan, et. al.,
G.R. No. 166859/G.R. No. 169203/G.R. No. 180702, April 12,
2011)
IX. Intellectual Property Code (Exclude Implementing Rules &
Regulations)
A. Intellectual Property Rights in General
1. Intellectual Property Rights
2. Differences between Copyrights, Trademarks and Patent
A trademark is any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise and shall
include a stamped or marked container of goods; a trade name
refers to the name or designation identifying or distinguishing an
enterprise. Copyright is confined to literary and artistic works which
are original intellectual creations in the literary and artistic domain
protected from the moment of their creation. On the other hand,
patentable inventions refer to any technical solution of a problem in
any field of human activity which is new, involves an inventive step
and is industrially applicable. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15, 2003)
3. Technology Transfer Arrangements
B. Patents
1. Patentable Inventions
A utility model is a technical solution to a problem in any field of
human activity which is new and industrially applicable; it may be,
or may relate to, a product, or process, or an improvement of any of
the aforesaid. Being plain automotive spare parts that must conform
to the original structural design of the components they seek to
replace, the Leaf Spring Eye Bushing and Vehicle Bearing Cushion

are not ornamental; they lack the decorative quality or value that
must characterize authentic works of applied art and in actuality,
they are utility models, useful articles, albeit with no artistic design
or value. (Jessie Ching vs. William Salinas, et. al., G.R. No.
161295, June 29, 2005)
2. Non-Patentable Inventions
3. Ownership of a Patent
a. Right to a Patent
When petitioner never secured a patent for the light boxes, it
therefore acquired no patent rights which could have protected its
invention. The ultimate goal of a patent system is to bring new
designs and technologies into the public through disclosure; hence,
ideas, once disclosed to the public without protection of a valid
patent, are subject to appropriation without significant restraint.
(Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R. No.
148222, August 15, 2003)
b. First-to-File Rule
c. Inventions Created Pursuant to a Commission
d. Right of Priority
4. Grounds for Cancellation of a Patent
5. Remedy of the True and Actual Inventor
6. Rights Conferred by a Patent
The tiles produced from respondents process are suitable for
construction and ornamentation, which previously had not been
achieved by tiles made out of the old process of tile making;
therefore, the said invention having brought about a new and useful
kind of tile, the patent is legally issued. With this, the act of
making, using and selling tiles embodying said patented invention
constitute infringement. (Domiciano Aguas vs. Conrado De
Leon, G.R. No. L-32160, January 30, 1982)
The validity of the patent issued by the Philippine Patent Office and
the question over the inventiveness, novelty and usefulness of the
improved model of the LPG burner are matters which are better
determined by the Patent Office. There is a presumption that the
Philippine Patent Office has correctly determined the patentability of
the model and such action must not be interfered with in the

absence of competent evidence to the contrary. (Manzano vs.

Court of Appeals, G.R. No. 113388, September 5, 1997)
There can be no infringement of a patent until a patent has been
issued, since whatever right one has to the invention covered by the
patent arises alone from the grant of patent. A patent gives the
inventor the right to exclude all others from making, using or selling
his invention. (Creser Precision Systems, Inc. vs. Court of
Appeals, G.R. No. 118708, February 2, 1998)
When the language of its claims is clear and distinct, the patentee is
bound thereby and may not claim anything beyond them. the
language of Letter Patent No. 14561 fails to yield anything at all
regarding Albendazole and no extrinsic evidence had been adduced
to prove that Albendazole inheres in petitioners patent in spite of
its omission therefrom or that the meaning of the claims of the
patent embraces the same. (Smith Kline Beckman Corporation
vs. Court of Appeals, G.R. No. 126627, August 14, 2003)
The patent law has a three-fold purpose: first, it seeks to foster and
reward invention; second, it promotes disclosure of inventions to
stimulate further innovation and to permit the public to practice the
invention once the patent expires; and third, the stringent
requirements for patent protection seek to ensure that ideas in the
public domain remain there for the free use of the public and it is
only after an exhaustive examination by the patent office that
patent is issued. Not having gone through the arduous examination
for patents, petitioner cannot exclude others from the manufacture,
sale or commercial use of the light boxes on the sole basis of its
copyright certificate over the technical drawings. (Pearl & Dean
(Phil.), Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15,
2003)
A patentee shall have the exclusive right to make, use and sell the
patented machine, article or product, and to use the patented
process for the purpose of industry or commerce, throughout the
territory of the Philippines for the term of the patent; and such
making, using, or selling by any person without the authorization of
the patentee constitutes infringement of the patent. The patentees
exclusive rights exist only during the term of the patent, hence,
after the cut-off date, the exclusive rights no longer exist and the
temporary restraining order can no longer be issued in its favor.
(Phil. Pharmawealth, Inc. vs. Pfizer, Inc., G.R. No. 167715,
November 17, 2010)
7. Limitations of Patent Rights

a. Prior User
b. Use by the Government
8. Patent Infringement
a. Tests in Patent Infringement
i. Literal Infringement
To determine whether the particular item falls within the literal
meaning of the patent claims, the court must juxtapose the claims
of the patent and the accused product within the overall context of
the claims and specifications, to determine whether there is exact
identity of all material elements. Viewed from any perspective or
angle, the power tiller of the defendant is identical and similar to
that of the turtle power tiller of plaintiff in form, configuration,
design, appearance, and even
in the manner of operation.
(Pascual Godines vs. Court of Appeals, G.R. No. 97343,
September 13, 1993)
ii. Doctrine of Equivalents
Under the doctrine of equivalents, there is infringement if two
devices do the same work in substantially the same way, and
accomplish substantially the same result, even though they differ in
name, form, or shape. The reason for the doctrine of equivalents is
that to permit the imitation of a patented invention which does not
copy any literal detail would be to convert the protection of the
patent grant into a hollow and useless thing. (Pascual Godines vs.
Court of Appeals, G.R. No. 97343, September 13, 1993)
The doctrine of equivalents provides that an infringement takes
place when a device appropriates a prior invention by incorporating
its innovative concept and, although with some modification and
change, performs substantially the same function in substantially
the same way to achieve substantially the same result; it requires
satisfaction of the function-means-and-result test. In this case,
while both compounds have the effect of neutralizing parasites in
animals, identity of result does not amount to infringement of
patent unless Albendazole operates in substantially the same way
or by substantially the same means as the patented compound,
even though it performs the same function and achieves the same
result. (Smith Kline Beckman Corporation vs. Court of
Appeals, G.R. No. 126627, August 14, 2003)

b. Defenses in Action for Infringement

An invention must possess the essential elements of novelty,
originality and precedence and for the patentee to be entitled to
protection, the invention must be new to the world. When a patent
is sought to be enforced, the questions of invention, novelty or prior
use, and each of them, are open to judicial examination; in cases of
infringement of patent no preliminary injunction will be granted
unless the patent is valid and infringed beyond question and the
record conclusively proves the defense is sham. (Rosario Maguan
vs. Court of Appeals, G.R. L-45101, November 28, 1986)
9. Licensing
a. Voluntary
b. Compulsory
10.

Assignment and Transmission of Rights

C. Trademarks
A "trademark" is any word, name, symbol, emblem, sign or device
or any combination thereof adopted and used by a manufacturer or
merchant to identify his goods and distinguish them from those
manufactured, sold or dealt in by others; it is any visible sign
capable of distinguishing goods. The trademark is not merely a
symbol of origin and goodwill; it is often the most effective agent for
the actual creation and protection of goodwill. (Pribhdas J. Mirpuri
vs. Court of Appeals, G.R. No. 114508, November 19, 1999)
1. Definition of Marks, Collective Marks, Trade Names
2. Acquisition of Ownership of Mark
The name and container of a beauty cream product are proper
subjects of a trademark inasmuch as the same falls squarely within
its definition. In order to be entitled to exclusively use the same in
the sale of the beauty cream product, the user must sufficiently
prove that she registered or used it before anybody else did. The
petitioners copyright and patent registration of the name and
container would not guarantee her the right to the exclusive use of
the same for the reason that they are not appropriate subjects of
the said intellectual rights. (Elidad C. Kho, doing business under
the name and style of KEC Cosmetics Laboratory vs. Court of
Appeals, et. al., G.R. No. 115758, March 19, 2002)

Even if the registration of a mark is prevented with the filing of an

earlier application for registration, this must not, however, be
interpreted to mean that ownership should be based upon an earlier
filing date. While RA 8293 removed the previous requirement of
proof of actual use prior to the filing of an application for
registration of a mark, proof of prior and continuous use is
necessary to establish ownership of a mark, which constitutes
sufficient evidence to oppose the registration of a mark. (E.Y.
Industrial Sales vs. Shien Dar Electricity and Machinery Co. ,
G.R. No. 184850, 20 October 2010)
The cancellation of registration of a trademark has the effect of
depriving the registrant of protection from infringement from the
moment the judgment or order of cancellation has become final.
Accordingly, a distributor has no right to the registration of the
disputed trademarks since the right to register a trademark is based
on ownership. An exclusive distributor who employs the trademark
of the manufacturer does not acquire proprietary rights of the
manufacturer, and a registration of the trademark by the distributor
as such belongs to the manufacturer, provided the fiduciary
relationship does not terminate before application for registration is
filed. (Superior Commercial Enterprises, Inc. vs. Kunnan
Enterprises Ltd. and Sports Concept & Distributor, Inc., G.R.
No. 169974, April 20, 2010)
It is not the application or registration of a trademark that vests
ownership thereof, but it is the ownership of a trademark that
confers the right to register the same. Registration merely creates a
prima facie presumption of the validity of the registration, of the
registrants ownership of the trademark, and of the exclusive right
to the use thereof; it is rebuttable, thus, it must give way to
evidence to the contrary. (Birkenstock Orthopaedie Gmbh and
Co. Kg vs. Philippine Shoe Expo Marketing Corporation, G.R.
No. 194307, November 20, 2013)
3. Acquisition of Ownership of Trade Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing Similarity between Marks
Both Berris (D-10 80 WP) and Abyadangs mark (NS D-10 PLUS)
have D-10 as a common component, which also happened to be
the dominant feature of Berris mark.
In applying both the

dominancy test and holistic test, the likelihood of confusion is

present considering the fact that both marks pertain to the same
type of goods; both products use the same type of material for the
packaging and have identical color schemes. Considering these
striking similarities, the buyers of both products, mainly farmers,
may be misled into thinking that NS D-10 PLUS could be an
upgraded formulation of the D-10 80 WP; hence, Berris properly
opposed
Abyadangs
application
for
registration.
(Berris
Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No. 183404,
October 13, 2010)
A resort to either the Dominancy Test or the Holistic Test shows that
colorable imitation exists between respondent's "Gold Toe" and
petitioner's "Gold Top." An examination of the products in question
shows that their dominant features are gold checkered lines against
a predominantly black background and a representation of a sock
with a magnifying glass; in addition, both products use the same
type of lettering; both also include a representation of a man's foot
wearing a sock and the word "linenized" with arrows printed on the
label; lastly, the names of the brands are similar -- "Gold Top" and
"Gold Toe." (Amigo Manufacturing, Inc. vs. Cluett Peabody
Co., Inc., G.R. No. 139300, March 14, 2001)
a. Dominancy Test
The word MASTER, the dominant feature of the opposers mark, is
neither generic nor descriptive and as such, it cannot be invalidated
as a trademark. When the term MASTER has acquired a certain
connotation to mean the coffee products MASTER ROAST and
MASTER BLEND produced by Nestle, the use by the CFC of the term
MASTER in the trademark for its coffee product FLAVOR MASTER is
likely to cause confusion or mistake or even deception of the
ordinary purchasers. (Societe Des Produits Nestle, S.A. vs.
Court of Appeals and CFC Corporation, G.R. No. 112012,
April 4, 2001)
Respondents have adopted in "Big Mak" not only the dominant but
also almost all the features of "Big Mac." Applied to the same food
product of hamburgers, with both marks aurally and visually the
same, it will likely result in confusion in the public mind.
(McDonalds Corporation vs. L.C. Big Mak Burger, Inc., G.R.
No. 143993, August 18, 2004)
With the predominance of the letter "M," and prefixes "Mac/Mc"
found in both marks, the inevitable conclusion is there is confusing
similarity between the trademarks Mc Donalds marks and "MACJOY

AND DEVICE" especially considering the fact that both marks are
being used on almost the same products falling under Classes 29
and 30 of the International Classification of Goods i.e. Food and
ingredients of food. In this case, the common awareness or
perception of customers that the trademarks McDonalds mark and
MACJOY & DEVICE are one and the same, or an affiliate, or under the
sponsorship of the other is not far-fetched. (McDonalds
Corporation vs. Macjoy Fastfood Corporation, G.R. No.
166115, February 2, 2007)
Both the words PYCNOGENOL and PCO-GENOLS have the same
suffix GENOL which appears to be merely descriptive and furnish
no indication of the origin of the article and hence, open for
trademark registration by the plaintiff thru combination with
another word or phrase such as PYCNOGENOL. Although there were
dissimilarities in the trademark due to the type of letters used as
well as the size, color and design employed on their individual
packages/bottles, still the close relationship of the competing
products name in sounds as they were pronounced, clearly
indicates that purchasers could be misled into believing that they
are the same and/or originates from a common source and
manufacturer. (Prosource International, Inc. vs. Horphag
Research Management SA, G.R. No. 180073, November 25,
2009)
In applying the dominancy test, both confusion of goods and
confusion of business were apparent in both trademarks as the
mark Dermaline Dermaline, Inc. is confusingly similar with the
registered trademark Dermalin.
Dermalines stance that its
product belongs to a separate and different classification from
Myras products with the registered trademark does not eradicate
the possibility of mistake on the part of the purchasing public to
associate the former with the latter, especially considering that both
classifications pertain to treatments for the skin. (Dermaline, Inc.
Vs. Myra Phamaceuticals, Inc., G.R. No. 190065, August 1,
2010)
NANNY is confusingly similar to NAN, the prevalent feature of
Nestles line of infant powdered milk products which is is written in
bold letters and used in all products. The first three letters of
NANNY are exactly the same as the letters of NAN and when
NAN and NANNY are pronounced, the aural effect is confusingly
similar. (Soceite Des Produits Nestle, S.A. vs. Dy, Jr., G.R. No.
172276, August 8, 2010)

The Dominancy Test focuses on the similarity of the prevalent or

dominant features of the competing trademarks that might cause
confusion, mistake, and deception in the mind of the purchasing
public. Respondents use of the stylized S in its Strong rubber
shoes infringes on the mark of the petitioner as it is the dominant
feature of the latters trademark; the likelihood of confusion is
present as purchasers may associate the respondents product as
connected with petitioners business. (Sketchers USA vs. Inter
Pacific Industrial Trading Corporation, GR No. 164321, March
28, 2011)
b. Holistic Test
The similarities of the competing trademarks in this case are
completely lost in the substantial differences in the design and
general appearance of their respective hang tags. The trademarks
FRUIT OF THE LOOM and FRUIT FOR EVE do not resemble each other
as to confuse or deceive an ordinary purchaser, who must be
thought of as having, and credited with, at least a modicum of
intelligence to be able to see the obvious differences between the
two trademarks in question. (Fruit of the Loom, Inc. vs. Court of
Appeals, G.R. No. L-32747, November 29, 1984)
In applying the holistic test, petitioners trademark, STYLISTIC MR.
LEE, which pertains to jeans, should be considered as a whole. The
test of fraudulent simulation is to be found in the likelihood of the
deception of some persons in some measure acquainted with an
established design and desirous of purchasing the commodity with
which that design has been associated. When the casual buyer is
predisposed to be more cautious in his purchase, as in this case
where the products concerned are not inexpensive, the likelihood of
confusion is absent. (Emerald Garment Manufacturing
Corporation vs. Court of Appeals, G.R. No. 100098,
December 29, 1995)
The application of the holistic test entails a consideration of the
entirety of the marks as applied to the products, including the labels
and packaging, in determining confusing similarity. Although the
perceived offending word MARK is itself prominent in petitioners
trademarks MARK VII and MARK TEN, the entire marking system
should be considered as a whole and not dissected, because a
discerning eye would focus not only on the predominant word but
also on the other features appearing in the labels; only then would
such discerning observer draw his conclusion whether one mark
would be confusingly similar to the other and whether or not
sufficient differences existed between the marks. (Philip Morris,

Inc. vs. Fortune Tobacco Corporation, G.R. No. 158589, June

27, 2006)
The gravamen of the offense of infringement of a registered
trademark is the likelihood of confusion. In applying the Holistic
Test, confusion was remote because the jeans made and sold by
Levis Philippines were not only very popular but also quite
expensive, as opposed to Diazs tailored jeans which were acquired
on a made-to-order basis; moreover, since the jeans are
expensive, the casual buyer is predisposed to be more cautious and
discriminating in and would prefer to mull over his purchase.
(Victorio Diaz vs. People of the Philippines, G.R. No. 180677,
February 18, 2013)
7. Well-Known Marks
Respondents BARBIZON as well as its BARBIZON and Bee Design
and BARBIZON and Representation of a Woman trademarks qualify
as well-known trademarks entitled to protection. Hence, Barbizon
cannot be registered as a trademark for ladies underwear.
(Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508,
November 19, 1999)
The Paris Convention for the Protection of Industrial Property does
not automatically exclude all countries of the world which have
signed it from using a tradename which happens to be used in one
country. GALLO cannot be considered a well-known mark within
the contemplation and protection of the Paris Convention in this
case since GALLO wines and GALLO cigarettes are neither the same,
identical, similar nor related goods. (Mighty Corporation and La
Campana Fabrica De Tabaco, Inc. vs. E. & J. Gallo Winery and
the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)
The scope of protection under Article 6bis of the Paris Convention,
wherein both the United States and the Philippines are signatories,
extends to a well-known mark, which should be protected in a
country even if the mark is neither registered nor used in that
country. Respondent, the owner of a well-known mark, has the legal
capacity to sue petitioners for the latters use of the IN-N-OUT
Burger trademark for the name of their restaurant and for the
identical or confusingly similar mark for their hamburger wrappers
and french-fries receptacles, which effectively misrepresent the
source of the goods and services. (Sehwani, Inc. vs. In-N-Out
Burger, Inc., G.R. No. 171053, October 15, 2007)

The essential requirement under the Paris Convention (and the

Intellectual Property Code) is that the trademark to be protected
must be well-known in the country where protection is sought and
the power to determine whether a trademark is well-known lies in
the competent authority of the country of registration or use.
Harvard is a well-known name and mark not only in the United
States but also internationally, including the Philippines; as such,
even before Harvard University applied for registration of the mark
Harvard in the Philippines, the mark was already protected under
the Paris Convention. (Fredco Manufacturing Corporation vs.
President and Fellows of Harvard College, GR No. 185917,
June 1, 2011)
8. Rights Conferred by Registration
Emphasis should be on the similarity of the products involved and
not on the arbitrary classification or general description of their
properties or characteristics. The mere fact that one person has
adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others on unrelated
articles of a different kind. (Hickok Manufacturing, Co., Inc. vs.
Court of Appeals, G.R. No. L-44707, August 31, 1982)
The adoption and use of a trademark on ones goods does not
prevent the adoption and use of the same trademark by others for
products which are of different description. The registered owner of
the trademark Brut for toilet articles such as after shave lotion
and deodorant cannot oppose the registration of the trademark
Brute for briefs, since the two products are unrelated,
notwithstanding the formers pending application for registration.
(Faberge, Inc. vs. Intermediate Appellate Court, G.R. No.
71189, November 4, 1992)
One who has adopted and used a trademark on his goods does not
prevent the adoption and use of the same trademark by others for
products which are of a different description. The GALLO trademark
registration certificates in the Philippines and in other countries
expressly state that they cover wines only, without any evidence or
indication that registrant Gallo Winery expanded or intended to
expand its business to cigarettes. (Mighty Corporation and La
Campana Fabrica De Tabaco, Inc. vs. E. & J. Gallo Winery and
the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)
Section 147 of R.A. No. 8293 provides for the exclusive right of the
owner of a registered mark to prevent third parties not having the
owners consent from using in the course of trade identical or

similar signs or containers for goods or services which are identical

or similar to those in respect of which the trademark is registered
where such use would result in a likelihood of confusion. Berris, as a
prior user and prior registrant, is the owner of the mark D-10 80
WP; hence, it has acquired the rights conferred under the law.
(Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No.
183404, October 13, 2010)
9. Use by Third Parties of Names, etc. Similar to Registered Mark
10.

Infringement and Remedies

In upholding the right of the petitioner to maintain a suit for unfair

competition or infringement of trademarks of a foreign corporation
before the Philippine courts, the duties and rights of foreign states
under the Paris Convention for the Protection of Industrial Property
to which the Philippines and France are parties are upheld.
(Melbarose R. Sasot and Allandale R. Sasot vs. People of the
Philippines, G.R. No. 143193, June 29, 2005)
It is not evident whether the single registration of the trademark
Dockers and Design confers on the owner the right to prevent the
use of a fraction thereof in the course of trade and it is also unclear
whether the use without the owners consent of a portion of a
trademark registered in its entirety constitutes material or
substantial invasion of the owners right. Injunction will not lie when
the petitioners right to injunctive relief has not been clearly and
unmistakably demonstrated and when the right has yet to be
determined. (Levi Strauss & Co., Levi Strauss (Phils.), Inc. vs.
Clinton Apparelle, Inc., G.R. No. 138900, September 20,
2005)
San Miguel claims that it has invested hundreds of millions over a
period of 170 years to establish goodwill and reputation now being
enjoyed by the Ginebra San Miguel mark such that the full extent
of the damage cannot be measured with reasonable accuracy.
Nonetheless, a writ of preliminary injunction cannot be issued in
favor of San Miguel when it failed to prove the probability of
irreparable injury which it will stand to suffer if the sale of Ginebra
Kapitan is not enjoined. Moreover, the right to the exclusive use of
the word Ginebra has yet to be determined in the main case.
(Tanduay Distillers, Inc. vs. Ginebra San Miguel, Inc., G.R.
No. 164324, August 14, 2009)
a. Trademark Infringement

The question is not whether the two articles are distinguishable by

their label when set side by side but whether the general confusion
made by the article upon the eye of the casual purchaser who is
unsuspicious and off his guard, is such as to likely result in his
confounding it with the original. It is not difficult to see that the
Sunshine label is a colorable imitation of the Del Monte trademark;
the predominant colors used in the Del Monte label are green and
red-orange, the same with Sunshine; the word "catsup" in both
bottles is printed in white and the style of the print/letter is the
same; and although the logo of Sunshine is not a tomato, the figure
nevertheless approximates that of a tomato. (Del Monte
Corporation and Philippine Packing Corporation vs. Court of
Appeals, G.R. No. L-78325, January 25, 1990)
The fact that the words pale pilsen are part of ABI's trademark does
not constitute an infringement of SMC's trademark: SAN MIGUEL
PALE PILSEN, for "pale pilsen" are generic words descriptive of the
color ("pale"), of a type of beer ("pilsen"), which is a light bohemian
beer with a strong hops flavor that originated in the City of Pilsen in
Czechoslovakia and became famous in the Middle Ages. Moreover,
ABIs use of the steinie bottle, similar but not identical to the SAN
MIGUEL PALE PILSEN bottle, is not unlawful as SMC did not invent
but merely borrowed the steinie bottle from abroad and it has not
claimed neither patent nor trademark protection for that bottle
shape and design. (Asia Brewery, Inc. vs. Court of Appeals and
San Miguel Corporation, G.R. No. 103543, July 5, 1993)
One who has adopted and used a trademark on his goods does not
prevent the adoption and use of the same trademark by others for
products which are of a different description. Assuming arguendo
that "Poster Ads" could validly qualify as a trademark, the failure of
Pearl & Dean to secure a trademark registration for specific use on
the light boxes meant that there could not have been any
trademark infringement since registration was an essential element
thereof. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc., G.R.
No. 148222, August 15, 2003)
When a trademark is used by a party for a product in which the
other party does not deal, the use of the same trademark on the
latters product cannot be validly objected to. There is no
infringement when the trademark CANON is used by the petitioner
for paints, chemical products, toner and dyestuff while it is used by
the private respondent for footwear (sandals). (Canon Kabushiki
Kaisha vs. Court of Appeals, G.R. No. 120900, July 20, 2004)

Mere unauthorized use of a container bearing a registered

trademark in connection with the sale, distribution or advertising of
goods or services which is likely to cause confusion, mistake or
deception among the buyers/consumers can be considered as
trademark infringement. The petitioners, as directors/officers of
MASAGANA, are utilizing the latter in violating the intellectual
property rights of Petron and Pilipinas Shell; thus, petitioners
collectively and MASAGANA should be considered as one and the
same person for liability purposes. (William C. Yao, Sr., et. al. vs.
People of the Philippines, G.R No. 168306, June 19, 2007)
The trademark Marlboro is not only valid for being neither
generic nor descriptive, it was also exclusively owned by PMPI, as
evidenced by the certificate of registration issued by the Intellectual
Property Office. Infringement of trademark clearly lies since the
counterfeit cigarettes not only bore PMPIs trademark, but they were
also packaged almost exactly as PMPIs products. (Ong vs. People
of the Philippines, GR No. 169440, November 23, 2011)
The mere unauthorized use of a container bearing a registered
trademark in connection with the sale, distribution or advertising of
goods or services which is likely to cause confusion among the
buyers or consumers can be considered as trademark infringement.
Petitioners act of refilling, without the respondents consent, the
LPG containers bearing the registered marks of the respondents will
inevitably confuse the consuming public, who may also be led to
believe that the petitioners were authorized refillers and distributors
of respondents LPG products. (Republic Gas Corporation
(REGASCO), et. al. vs. Petron Corporation, et. al., G.R. No.
194062, June 17, 2013)
The Rules on the Issuance of the Search and Seizure in Civil Actions
for Infringement of Intellectual Property Rights are not applicable in
a case where the search warrants were applied in anticipation of
criminal actions for violation of intellectual property rights under RA
8293. Rule 126 of the Revised Rules of Court would apply and a
warrant shall be validly issued upon finding the existence of
probable cause. (Century Chinese Medicine Co., et. al. vs.
People of the Philippines, G.R. No. 188526, November 11,
2013)
b. Damages
c. Requirement of Notice
11.

Unfair Competition

Mere similarity in the shape and size of the container and label does
not constitute unfair competition. SMC cannot claim unfair
competition arising from the fact that ABI's BEER PALE PILSEN is
sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie bottles
absent any showing that the BEER PALE PILSEN is being passed off
as SAN MIGUEL PALE PILSEN. (Asia Brewery, Inc. vs. Court of
Appeals and San Miguel Corporation, G.R. No. 103543, July
5, 1993)
The essential elements of an action for unfair competition are (1)
confusing similarity in the general appearance of the goods, and (2)
intent to deceive the public and defraud a competitor. The confusing
similarity may or may not result from similarity in the marks, but
may result from other external factors in the packaging or
presentation of the goods. In this case, the intent to deceive and
defraud may be inferred from the fact that there was actually no
notice (on their plastic wrappers) to the public that the Big Mak
hamburgers
are
products
of
L.C.
Big
Mak
Burger,
Inc.(McDonalds Corporation vs. L.C. Big Mak Burger, Inc.,
G.R. No. 143993, August 18, 2004)
Hoarding does not relate to any patent, trademark, trade name or
service mark that the respondents have invaded, intruded into or
used without proper authority from the petitioner nor are the
respondents alleged to be fraudulently passing off their products
or services as those of the petitioner. The respondents are not also
alleged to be undertaking any representation or misrepresentation
that would confuse or tend to confuse the goods of the petitioner
with those of the respondents, or vice versa. What in fact the
petitioner alleges is an act foreign to the Code, to the concepts it
embodies and to the acts it regulates; as alleged, hoarding inflicts
unfairness by seeking to limit the oppositions sales by depriving it
of the bottles it can use for these sales. (Coca-Cola Bottlers
Philippines, Inc. (CCBPI), Naga Plant vs. Quintin Gomez, et,
al., G.R. No. 154491, November 14, 2008)
Unfair competition has been defined as the passing off (or palming
off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the
end and probable effect of deceiving the public. The mere use of the
LPG cylinders for refilling and reselling, which bear the trademarks
"GASUL" and "SHELLANE" will give the LPGs sold by REGASCO the
general appearance of the products of the petitioners. (Republic
Gas Corporation (REGASCO), et. al. vs. Petron Corporation,
et. al., G.R. No. 194062, June 17, 2013)

12.

Trade Names or Business Names

The ownership of a trademark or tradename is a property right

which the owner is entitled to protect since there is damage to him
from confusion or reputation or goodwill in the mind of the public as
well as from confusion of goods. By appropriating the word
"CONVERSE," respondent's products are likely to be mistaken as
having been produced by petitioner. The risk of damage is not
limited to a possible confusion of goods but also includes confusion
of reputation if the public could reasonably assume that the goods
of the parties originated from the same source. (Converse Rubber
Corporation vs. Universal Rubber Products, Inc., G.R. No. L27906, January 8, 1987)
A trade name previously used in trade or commerce in the
Philippines need not be registered with the IPO before an
infringement suit may be filed by its owner against the owner of an
infringing trademark. Nonetheless, respondent does not have the
right to the exclusive use of the geographic word San Francisco or
the generic word coffee. It is only the combination of the words
SAN FRANCISCO COFFEE, which is respondents trade name in its
coffee business, that is protected against infringement on matters
related to the coffee business to avoid confusing or deceiving the
public. (Coffee Partners vs. San Francisco Coffee and
Roastery, Inc., G.R. No. 169504, 3 March 2010)
The Philippines is obligated to assure nationals of countries of the
Paris Convention that they are afforded an effective protection
against violation of their intellectual property rights in the
Philippines in the same way that their own countries are obligated
to accord similar protection to Philippine nationals. Thus, under
Philippine law, a trade name of a national of a State that is a party
to the Paris Convention, whether or not the trade name forms part
of a trademark, is protected without the obligation of filing or
registration.
(Fredco
Manufacturing
Corporation
vs.
President and Fellows of Harvard College, GR No. 185917,
June 1, 2011)
Under the Paris Convention to which the Philippines is a signatory, a
trade name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of a
trademark, is protected without the obligation of filing or
registration. It follows then that the applicant for registration of
trademark is not the lawful owner thereof and is not entitled to
registration if the trademark has been in prior use by a national of a
country which is a signatory to the Paris Convention. (Ecole De

Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs.

Renaus Cointreau & Cie and Le Cordon Bleu Intl, B.V., G.R.
No. 185830, June 5, 2013)
13.

Collective Marks

D. Copyrights
At most, the certificates of registration and deposit issued by the
National Library and the Supreme Court Library serve merely as a
notice of recording and registration of the work but do not confer
any right or title upon the registered copyright owner or
automatically put his work under the protective mantle of the
copyright law; it is not a conclusive proof of copyright ownership.
Hence, when there is sufficient proof that the copyrighted products
are not original creations but are readily available in the market
under various brands, as in this case, validity and originality will not
be presumed. (Manly Sportwear Manufacturing, Inc. vs.
Dadodette Enterprises and/or Hermes Sports Center, G.R.
No. 165306, September 20, 2005)
1. Basic Principles, Sections 172.2, 175 and 181
2. Copyrightable Works
a. Original Works
b. Derivative Works
3. Non-Copyrightable Works
The format or mechanics of a television show is not included in the
list of protected works in Sec. 2 of P.D. No. 49, which is substantially
the same as Sec. 172 of the Intellectual Property Code (R.A. No,
8293). For this reason, the protection afforded by the law cannot be
extended to cover them. (Francisco Joaquin, Jr. vs. Franklin
Drilon, et. al., G.R. No. 108946, January 28, 1999)
Pearl & Deans copyright protection extended only to the technical
drawings and not to the light box itself as the latter does not fall
under the category of prints, pictorial illustrations, advertising
copies, labels, tags and box wraps. The light box was not a literary
or artistic piece which could be copyrighted under the copyright
law; and no less clearly, neither could the lack of statutory authority
to make the light box copyrightable be remedied by the simplistic
act of entitling the copyright certificate issued by the National

Library as "Advertising Display Units. (Pearl & Dean (Phil.), Inc.

vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)
4. Rights of Copyright Owner
5. Rules on Ownership of Copyright
6. Limitations on Copyright
Under Sec. 184.1 (h), the use made of a work by or under the
direction or control of the Government, by the National Library
or by educational, scientific or professional institutions where
such use is in the public interest and is compatible with fair
use will not constitute copyright infringement. The carriage of
ABS-CBNs signals by virtue of the must-carry rule is under the
direction and control of the government through the NTC. The
imposition of the must-carry rule is within the NTCs power to
promulgate rules and regulations, as public safety and
interest may require, to encourage a larger and more effective
use of communications, radio and television broadcasting
facilities, and to maintain effective competition among private
entities in these activities whenever the Commission finds it
reasonably feasible. (ABS-CBN Broadcasting Corporation
vs. Philippine Multi-Media System, Inc., G.R. Nos.
175769-70, January 19, 2009)
PMSI cannot be said to be infringing upon the exclusive
broadcasting rights of ABS-CBN under the IP Code for PMSI does not
perform the functions of a broadcasting organization, thus, it cannot
be said that it is engaged in rebroadcasting Channels 2 and 23.
PMSI is not the origin nor does it claim to be the origin of the
programs broadcasted by the ABS-CBN; the former did not make
and transmit on its own but merely carried the existing signals of
the latter and when PMSIs subscribers view ABS-CBNs programs in
Channels 2 and 23, they know that the origin thereof was the latter.
ibid
a. Doctrine of Fair Use
b. Copyright Infringement
For the playing and singing the musical compositions involved, the
combo was paid as independent contractors; it is therefore obvious
that the expenses entailed thereby are either eventually charged in
the price of the food and drinks or to the overall total of additional
income produced by the bigger volume of business which the
entertainment was programmed to attract. Consequently, it is

beyond question that the playing and singing of the combo in

defendant-appellee's restaurant constituted performance for profit
contemplated by the Copyright Law. (Filipino Society of
Composers, Authors and Publishers, Inc. vs. Benjamin Tan,
G.R. No. L-36402, March 16, 1987)
Infringement of a copyright is a trespass on a private domain owned
and occupied by the owner of the copyright, and, therefore,
protected by law, and infringement of copyright, or piracy, which is
a synonymous term in this connection, consists in the doing by any
person, without the consent of the owner of the copyright, of
anything the sole right to do which is conferred by statute on the
owner of the copyright. Failure to comply with registration and
deposit does not deprive the copyright owner of the right to sue for
infringement but merely limits the remedies available to him
because the copyright for a work is granted from the moment of
creation. (Columbia Pictures, Inc., et. al. vs. Court of Appeals,
G.R. No. 110318, August 28, 1996)
To constitute infringement, it is not necessary that the whole or
even a large portion of the work shall have been copied; if so much
is taken that the value of the original is sensibly diminished, or the
labors of the original author are substantially and to an injurious
extent appropriated by another, that is sufficient in point of law to
constitute piracy. The injury is sustained when respondent lifted
from petitioners book materials that were the result of the latters
research work and compilation and misrepresented them as her
own, even circulating the book DEP for commercial use without
acknowledging petitioners as her source. (Pacita Habana, et. al.
vs. Felicidad Robles and Goodwill Trading Co., Inc., G.R. No.
131522, July 19, 1999)
The gravamen of copyright infringement is not merely the
unauthorized manufacturing of intellectual works but rather the
unauthorized performance of any of the rights exclusively granted
to the copyright owner. Hence, any person who performs any of
such acts without obtaining the copyright owners prior consent
renders himself civilly and criminally liable for copyright
infringement. (NBI-Microsoft Corporation vs. Judy Hwang, et.
al., G.R. No. 147043, June 21, 2005)
E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 103-10-SC)
X. Special Laws

A. The Chattel Mortgage Law and Real Estate Mortgage Law (Excluded
and made a part of Civil Law coverage)
B. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No.
9194)
1. Policy of the Law
2. Covered Institutions
3. Obligations of Covered Institutions
4. Covered Transactions
5. Suspicious Transactions
6. When is Money Laundering Committed
7. Unlawful Activities or Predicate Crimes
Since the account of Glasgow in CSBI was (1) covered by several
suspicious transaction reports and (2) placed under the control of
the trial court upon the issuance of the writ of preliminary
injunction, the conditions provided in Section 12(a) of RA 9160, as
amended, were satisfied. A criminal conviction for an unlawful
activity is not a prerequisite for the institution of a civil forfeiture
proceeding. A finding of guilt for an unlawful activity is not an
essential element of civil forfeiture. (Republic of the Philippines
vs. Glasgow Credit and Collection Services, Inc., G.R. No.
170281, January 18, 2008)
Section 11 allows the AMLC to inquire into bank accounts without
having to obtain a judicial order in cases where there is probable
cause that the deposits or investments are related to kidnapping for
ransom, certain violations of the Comprehensive Dangerous Drugs
Act of 2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder.
Absent any of the mentioned
predicate crimes, a court order is necessary to inquire into bank
deposits. (Republic of the Philippines vs. Hon. Antonio
Eugenio, G.R. No. 174629, February 14, 2008)
NOTE: By virtue of R.A. No. 10168, Anti-Financing of Terrorism is now
included as one of the predicate crimes where a court order is not
necessary to examine or inquire into bank deposits.
8. Anti-Money Laundering Council

9. Functions
10.

Freezing of Monetary Instrument or Property

The amendment by RA 9194 of RA 9160 erased any doubt on the

jurisdiction of the Court of Appeals over the extension of freeze
orders. It is solely the CA which has the authority to issue a freeze
order as well as to extend its effectivity; it also has the exclusive
jurisdiction to extend existing freeze orders previously issued by the
AMLC vis--vis accounts and deposits related to money-laundering
activities. (Republic of the Philippines vs. Cabrini Green &
Ross, Inc., G.R. No. 154522, May 5, 2006)
The primary objective of a freeze order is to temporarily preserve
monetary instruments or property that are in any way related to an
unlawful activity or money laundering, by preventing the owner
from utilizing them during the duration of the freeze order. The
effectivity of the freeze order was limited to a period not exceeding
six months, which may be extended by the CA should it become
completely necessary. Nonetheless, when the Republic has not
offered any explanation why it took six years before a civil forfeiture
case was filed in court, it can only be concluded that the continued
extension of the freeze order beyond the six-month period violated
the partys right to due process. (Ret. Lt. Gen. Jacinto Ligot, et.
al. vs. Republic of the Philippines, G.R. No. 176944, March 6,
2013)
11.

Authority to Inquire Into Bank Deposits

C. Foreign Investments Act (R.A. No. 7042)

1. Policy of the Law
2. Definition of Terms
a. Foreign Investment
b. Doing Business in the Philippines
Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase
"doing business" shall include appointing representatives or
distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred
eighty (180) days or more. Thus, the phrase includes "appointing
representatives or distributors in the Philippines" but not when the

representative or distributor independently transacts business in its

name and for its own account. (Alfred Hahn vs. Court of
Appeals, G.R. No. 113074, January 22, 1997)
Whether a foreign corporation is "doing business" does not
necessarily depend upon the frequency of its transactions, but more
upon the nature and character of the transactions.
Doing
business covers 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 and object of the business
organization. (Eriks Pte. Ltd. vs. Court of Appeals, G.R. No.
118843, February 6, 1997)
To constitute "doing business", the activity to be undertaken in the
Philippines is one that is for profit-making. When the activities of
the foreign corporation were confined to (1) maintaining a stock of
goods in the Philippines solely for the purpose of having the same
processed by the respondent domestic corporation; and (2)
consignment of equipment with the respondent to be used in the
processing of products for export, the foreign corporation cannot be
deemed to be "doing business" in the Philippines. (Agilent
Technologies Singapore (Pte.) Ltd. vs. Integrated Silicon
Technology Philippines Corporation, G.R. No. 154618, April
14, 2004)
The appointment of a distributor in the Philippines is not sufficient
to constitute doing business unless it is under the full control of
the foreign corporation. In the present case, the distributor is an
independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own
account; hence, the latter cannot be considered to be doing
business in the Philippines. (Steelcase, Inc. vs. Design
International Selections, Inc., G.R. No. 171995, April 18,
2012)
c. Export Enterprise
d. Domestic Market Enterprise
3. Registration of Investments on Non-Philippine Nationals
4. Foreign investments in Domestic Market Enterprise
5. Foreign Investment Negative List

The Foreign Investments Act is the basic law governing foreign

investments in the Philippines, irrespective of the nature of business
and area of investment. The concept of a negative list or the Foreign
Investments Negative List provides for two components: List A,
which enumerates the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws; and List
B, which enumerates the areas of activities and enterprises
regulated pursuant to law. (Heirs of Wilson Gamboa vs. Finance
Secretary Margarito Teves, G.R. No. 176579, October 9,
2012)